2024 (10) TMI 250 - AT - Income Tax

Adhoc disallowances on employee training expenses and printing and stationery expenses - Assessee submits before your kind Honour that the Assessee is a captive service entity, and the business model of the Assessee works on Cost plus profit model. Without admitting, even if there is unreasonable increase in expenses, then the same results in additional income being offered to tax and would be in the interest of revenue - HELD THAT - We observe that DRP while deciding this issue against the assessee has not at all discussed these arguments in its order and has simply gone away by observing that the assessee had failed to submit necessary documentary evidence, which in our view, is not correct for the reason that there is corresponding increase in revenue from operations as well as profits of the impugned year and hence without appreciating this aspect the ad hoc disallowances are legally not permissible. Therefore, we restore this matter to the AO for deciding afresh considering all the main and alternative arguments of the assessee. Non Consideration of returned income by AO - AO despite the directions of Ld DRP has not considered the returned income and has considered the income determined while processing the return of income u/s 143(1). We observe that the Ld DRP has categorical held that the AO is directed to consider the determination of income as the return of income instead of determining the income as per intimation u/s 143(1). Therefore, the AO is directed to follow the directions of the DRP, we order accordingly. Credit of TDS as claimed by assessee - We direct the AO to examine this issue and decide the same as per law. TP adjustment - Rate of interest on outstanding of receivable - As per own decision in assessee's case, we hold that Libor 200 would be the rate to be applied for bench marking the transaction of interest receivable on outstanding.

Summary

Issues:
1. Adhoc disallowances on employee training expenses and printing and stationery expenses
2. Consideration of returned income by Assessing Officer
3. Credit of TDS claimed by the assessee
4. Benchmarking of interest receivable on outstanding towards AE

Adhoc Disallowances on Employee Training Expenses and Printing and Stationery Expenses:
The appeal arose from the Assessing Officer's order under Income Tax Act, 1961 for the Assessment Year 2018-19. The assessee, engaged in software development and ITES, contested adhoc disallowances of Rs. 1.54 Crores on employee training and printing expenses. The DRP partly affirmed the TPO's order, prompting the appeal. The assessee argued that the expenses were justified due to increased business activities, supported by financial data. The Tribunal found the DRP's decision lacking as it failed to consider the revenue and profit increase, directing the AO to reevaluate the matter comprehensively.

Consideration of Returned Income by Assessing Officer:
The grievance centered on the AO's failure to consider the returned income as directed by the DRP, instead of relying on the income determined under section 143(1). The DRP's explicit instruction was for the AO to follow the returned income determination. The Tribunal upheld the DRP's direction, ordering the AO to adhere to the returned income for assessment purposes.

Credit of TDS Claimed by the Assessee:
The contention involved the credit of TDS claimed by the assessee. The Tribunal directed the AO to examine this issue and make a decision in accordance with the law, providing an opportunity for the matter to be properly addressed and resolved.

Benchmarking of Interest Receivable on Outstanding Towards AE:
Regarding the benchmarking of interest on outstanding receivables towards the AE, the Tribunal referred to prior decisions. Citing precedents, the Tribunal determined LIBOR +200 points as the appropriate rate for benchmarking such transactions. Relying on its own previous decision, the Tribunal directed the AO to apply LIBOR +200 points adjustment without further modification to benchmark the interest on receivables. Consequently, the appeal of the assessee was allowed based on the specified terms.