2012 (11) TMI 1 - AT - Income Tax

Disallowance of expenditure arm s length price (ALP) - it is the case of the Revenue that assessee does not require to make any payment with regard to Second Line Support (SLS) obtained by it from its AE. As against that it is the case of the assessee that SLS services have been availed to minimum level where the assessee on its own is not able to resolve the problem as most of the problems have been resolved at the level of the assessee. - Held that - it will be wrong to hold that the expenditure should be disallowed only on the ground that these expenses were not required to be incurred by the assessee. At the same time it has also to be seen that whether the price paid by the assessee is at arm s length The term arm s length price has been defined in section 92F which means a price which is applied or proposed to be applied in the transactions between the persons other then Associate Enterprises in uncontrolled conditions. It is only because of that their Lordships in the aforementioned decision have observed that the quantum of expenditure can no doubt be examined by the TPO as per law but in judging the allowability thereof as business expenditure he has no authority to disallow the entire expenditure or a part thereof on the ground that the assessee has suffered continuous losses. Earlier to this they have observed that Revenue cannot disallow any expenditure on the ground that it was not necessary or prudent for the assessee to have incurred the same or that in the view of the Revenue the expenditure was unremunerative. Looking into observations of their Lordships it has to be held that reasonableness of an expenditure has not been excluded from determination. Decision in CIT v. EKL Appliances Ltd. 2012 (4) TMI 346 - DELHI HIGH COURT relied upon - Decided partly in favor of assessee.

Issues Involved:
1. Validity of the assessment order under sections 143(3) and 144C of the Income Tax Act.
2. Jurisdictional errors in the reference to the Transfer Pricing Officer (TPO).
3. Determination of Arm's Length Price (ALP) for international transactions, specifically secondment-related services.
4. Computation of interest under sections 234B and 234D of the Income Tax Act.

Comprehensive, Issue-Wise Detailed Analysis:

1. Validity of the Assessment Order:
The assessee challenged the assessment order passed by the Assessing Officer (AO) under sections 143(3) and 144C of the Income Tax Act, 1961, arguing that the Dispute Resolution Panel (DRP) erred in confirming the addition made by the TPO without appropriate application of mind and in undue haste. The assessee contended that the assessment order was bad in law and void ab initio.

2. Jurisdictional Errors in Reference to TPO:
The assessee argued that the reference made by the AO to the TPO suffered from jurisdictional errors as the AO did not record any reasons in the assessment order for concluding that it was necessary or expedient to refer the matter to the TPO for computation of the ALP under section 92CA(1) of the Act.

3. Determination of Arm's Length Price (ALP):
The primary issue was the enhancement of the assessee's income by Rs. 31,34,48,369/- on account of secondment-related services, which the TPO determined did not satisfy the arm's length principle. The TPO found that the ALP for "Second line support including software related errors" was nil, contrary to the assessee's reported value. The TPO's decision was based on several factors, including the lack of economic and commercial benefit to the assessee from the services, misinterpretation of shareholder services, and disregard for the Transfer Pricing (TP) documentation provided by the assessee.

The assessee contended that these services were critical for its business operations and that the payments were merely reimbursements of costs without any markup. The assessee also argued that the TPO's approach was contrary to the stand taken by the department in previous assessment years and disregarded established judicial pronouncements.

The Tribunal noted that the assessee provided post-sales support services under Annual Maintenance Contracts (AMC) and that these services were essential for maintaining the telecom network. The Tribunal emphasized that it was the prerogative of the assessee to decide the business expediency of incurring such expenses. Citing the Delhi High Court's decision in the case of EKL Appliances Ltd., the Tribunal held that the TPO could not disallow the expenditure on the grounds that it was not necessary or prudent for the assessee.

However, the Tribunal observed that the formula used to calculate the impugned amount had not been examined by the authorities below. Therefore, the Tribunal remanded the issue back to the AO for redetermination of the ALP in light of the new formula and provided the assessee with an opportunity to present its case.

4. Computation of Interest under Sections 234B and 234D:
The Tribunal held that the levy of interest under sections 234B and 234D was mandatory. However, the AO was directed to recompute the interest amounts after giving effect to the Tribunal's order.

Conclusion:
The appeal filed by the assessee was partly allowed for statistical purposes. The Tribunal remanded the issue of determining the ALP for secondment-related services back to the AO for reconsideration, while upholding the mandatory nature of interest computation under sections 234B and 234D.

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