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2023 (6) TMI 866 - AT - Income TaxTP Adjustment - determination of Arm's Length Price - intra group services transactions as Cross-charges - payment made for corporate services such as illegal, advisory, technical and financial direction and support - HELD THAT - We find that the nature of the services rendered to the assessee are with respect to IT network, legal services and risk management, planning and development and certain cost locations. As based on email submitted before the lower authorities, it cannot be said that the arm's-length price of the services is nil. It is not the case of the TPO that the values of the services provided by the associated enterprises to the assessee are Nil. Documents submitted by the assessee also do not conclusively fulfill (1) need test, (2) rendition test, (3) benefit test, (4) duplicative test and (5) shareholders activity test. On looking at the services it is apparent that some of the services have overlapped these tests. It cannot be said that even the IT network services should have a nil arm's-length price. As looking at most of the services it is found that they are low value adding services and therefore the focus should be more to the process adopted by the assessee and associated enterprises then evaluation of evidences such as email, reports as well as other correspondences. But that does not mean that even in absence of such details the low value adding services cannot be tested with respect to its arm's-length price. It is the duty of the assessee to substantiate that international transaction entered into is at arm's-length. In view of this we set-aside this issue back to the file of the learned transfer pricing officer/AO with a direction to the assessee to substantiate all the above five tests before the learned assessing officer/TPO and justify that they are at arm's-length. AO/TPO is directed to verify the claim of the assessee and then determine the arm's-length price of such transaction.Ground number one of the appeal is allowed for statistical purposes. Accrual of income - Addition on account of on unbilled receivable shown by the assessee - double addition - HELD THAT - Before us the annual accounts are placed in the paper book. According to schedule P (A) (VI) clearly shows that unbilled receivable consisting of work in progress in respect of unfinished contracts are valued on the basis of percentage of the completion method, whereby the revenue is realized by reference to the stage of completion of the contract activity at the end of the accounting year. Provisions are made for anticipated losses for contracts to be completed in future. Revenue recognition is shown that it is recognized as per percentage of completion method on looking at the income from services rendered shown in the profit and loss account it is apparent that assessee has credited the same amount to the income and expenditure account. Therefore it is clear that, in addition once again by the learned assessing officer will result into double addition. Accordingly we direct the learned AO to delete the addition after the verification to ascertain whether the amount of unbilled services have been included in the gross income of the assessee or not.Ground number two is allowed for statistical purposes. Addition on account of difference between the financial statements of the assessee and form number 26AS with respect to the interest income - HELD THAT - We find that assessee has placed before us complete details of the reconciliation - Merely because the reference between the income shown in financial statement and income shown in tax deduction at source statement (26AS) should not arise generally as an addition unless it is found that assessee has failed to account for certain income which are reflected in tax deduction at source statement. There is a difference between these two statements, it is also the duty of the assessee to show reconciliation before the assessing officer and demonstrate that no income accrued during the year has not been shown in the profit and loss account/offered for income. This ground number three is set-aside to the file of AO with a direction to the assessee to produce the reconciliation statement.
Issues Involved:
1. Adjustment of Arm's Length Price (ALP) for payment of management charges. 2. Addition of unbilled receivables. 3. Addition due to mismatch between financial statements and Form 26AS. 4. Non-granting of tax credit. Comprehensive, Issue-wise Analysis: 1. Adjustment of Arm's Length Price (ALP) for Payment of Management Charges: The primary issue involves the determination of the Arm's Length Price (ALP) for the payment of management charges by the assessee to its associated enterprises. The Transfer Pricing Officer (TPO) had determined the ALP of these services at nil, which was confirmed by the Dispute Resolution Panel (DRP). The assessee contended that these charges were for various corporate services such as legal, advisory, technical, and financial support. The Tribunal found that the evidence provided by the assessee, including agreements, emails, and invoices, was insufficient to conclusively fulfill the need, rendition, benefit, duplicative, and shareholder activity tests. The Tribunal set aside this issue back to the TPO/AO for fresh determination, directing the assessee to substantiate these tests and justify that the transactions were at arm's length. 2. Addition of Unbilled Receivables: The second issue pertains to the addition of unbilled receivables as income. The AO and DRP had added unbilled receivables to the income, assuming that these were not accounted for. The assessee argued that these amounts were already considered as income under the percentage of completion method. The Tribunal agreed with the assessee, noting that the unbilled receivables were indeed part of the income and that adding them again would result in double addition. However, for verification, the Tribunal directed the AO to ascertain whether the unbilled receivables were included in the gross income of the assessee. 3. Addition Due to Mismatch Between Financial Statements and Form 26AS: The third issue involves the addition made due to a mismatch between the interest income reported in the financial statements and the amount shown in Form 26AS. The Tribunal found that the assessee had provided a reconciliation statement, but the AO and DRP had not considered it. The Tribunal set aside this issue back to the AO, directing the assessee to produce the reconciliation statement and the AO to verify it. 4. Non-granting of Tax Credit: The final issue involves the non-granting of tax credit. The Tribunal directed the AO to examine the assessee's claim for tax credit and grant it if found in accordance with the law. Separate Judgments: The Tribunal delivered a common order for all the assessment years (2010-11 to 2017-18), setting aside the issues back to the AO/TPO for fresh determination and verification. The Tribunal provided similar directions for each assessment year, ensuring that the issues are addressed consistently across all years. Conclusion: In conclusion, the Tribunal allowed the appeals for statistical purposes, directing the AO/TPO to re-examine the issues related to the ALP of management charges, addition of unbilled receivables, mismatch between financial statements and Form 26AS, and non-granting of tax credit. The Tribunal emphasized the need for proper substantiation and verification of the claims made by the assessee.
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