2016 (7) TMI 372 - AT - Income Tax

TPA - Arms length price (ALP) - Consultancy charges restricted to the extent of 75% - assessee had not submitted any evidence to justify the payment of consultancy fee to its AE - Held that - Why was the transaction entered in to by the AE with MIT Hungary could not be a basis for arriving at ALP was never discussed by the AO. The assessee has discharged his burden of proof. After that onus had shifted to the assessee and in our opinion he has failed miserably to prove that his action of making disallowance was supported by any logical argument or scientific basis. Whims and fancies of an AO cannot decide tax liability of an assessee. We find that the AO has mentioned that the payment made to the AE was excess and unreasonable. But, not a single word has been uttered in the order as to how it was excess or not reasonable. Any disallowance or addition, whether under chapter IV or chapter X of the Act, cannot be made on ad hoc basis. It has to be backed up by a valid and plausible reason. In the TP matters the rule had to be strictly followed as the Act has provided a special mechanism to deal with determination of ALP of IT. s. In our opinion, the order of the FAA does not suffer from any legal or factual infirmity. So, confirming his order, we decide first effective ground against the AO. - Decided in favour of assessee Business promotion expenses disallowed - payment for expensive gifts of jewellery and watches were made to a sister concern - Held that - We find that the AO had disallowed an amount on an ad hoc basis without assigning any reason. In our opinion the basic approach of the AO is fautly. During the remand report when all the material was available to him he should have conducted fresh inquries to justify the disallowance. Documentary evidence cannot be brushed aside without dealing them logically. In our opinion the FAA has rightly held that the AO. s. are not authorised to enter in to the proverbial shoes of the assessee. In the case before us, the AO had exactly done it. He has not doubted the genuineness of the payment. If the payment was as per the provisions of the Act then irrespective of the figure involved same had to be allowed. We are of the opinion that no interference is required to disturb the order of the FAA - Decided in favour of assessee Disallowance under the head travelling and conveyance expenses - Held that - Ad hoc disallowance without any basis. The assessee had filed necessary details. Secondly, in the case of a corporate entity no disallowance should be made citing personal element of expenditure . So, endorsing the order of the FAA we dismiss fourth ground.- Decided in favour of assessee Disallowance of telephone expenses - Held that - The order of the FAA does not suffer from any legal infirmity. The incurring of expenditure is not doubted. As stated in earlier part our order-it is a case of a company, so, no disallowance can be made on account of personal element of expenditure. - Decided in favour of assessee Addition being PCE mobilisation advance - Held that - FAA does not suffer from any legal infirmity, that the amount in question was received as advance, that the assessee had recognized a portion of the said amount during the year under appeal, that the recognition was based on scientific method, that the assessee had taken into consideration factors like start-up, recruitment etc. , that the AO had disallowed the amount without considering the terms and conditions of the agreement. Therefore, confirming the order of the FAA, we decide the last ground against the AO.

Issues Involved:
1. Deletion of disallowance of ?66.55 lakhs under Section 92C of the Act.
2. Deletion of disallowance of ?4 lakhs under business promotion expenses.
3. Deletion of disallowance of ?1 lakh under travelling and conveyance expenses.
4. Deletion of disallowance of ?75,000 under telephone expenses.
5. Deletion of addition of ?77.49 lakhs as PCE mobilisation advance.

Issue-wise Detailed Analysis:

1. Deletion of disallowance of ?66.55 lakhs under Section 92C of the Act:
The AO disallowed ?66.55 lakhs out of the consultancy charges paid to an AE, M/s. Intertoll Pty. Ltd., South Africa, under Section 92C, deeming it excessive and unreasonable. The AO concluded this without proper justification or following the prescribed transfer pricing methods. The FAA, however, found that the assessee had used the Comparable Uncontrolled Price (CUP) method appropriately and had provided sufficient evidence to demonstrate that the charges were at arm’s length. The FAA criticized the AO for acting arbitrarily and not adhering to TP provisions. The ITAT upheld the FAA's decision, emphasizing that the AO's disallowance lacked a logical or scientific basis and was not backed by valid reasons.

2. Deletion of disallowance of ?4 lakhs under business promotion expenses:
The AO disallowed ?5 lakhs out of ?7.70 lakhs claimed as business promotion expenses, citing insufficient justification from the assessee. The FAA reduced this disallowance to ?1 lakh, stating that the AO did not provide adequate opportunity to the assessee and failed to conduct fresh inquiries during the remand proceedings. The ITAT agreed with the FAA, noting that the AO's disallowance was arbitrary and not based on any substantive evidence, thus confirming the FAA's order.

3. Deletion of disallowance of ?1 lakh under travelling and conveyance expenses:
The AO disallowed ?1 lakh out of ?4.83 lakhs claimed as travelling expenses on an estimated basis, arguing that the assessee did not justify the expenses. The FAA deleted this disallowance, observing that the AO made an ad hoc disallowance without any basis and that the assessee had provided necessary details. The ITAT supported the FAA's view, stating that no disallowance should be made for a corporate entity on the grounds of personal expenditure.

4. Deletion of disallowance of ?75,000 under telephone expenses:
The AO disallowed ?75,000 out of ?3.80 lakhs claimed as telephone expenses, questioning the high expenditure in March 2006. The FAA deleted this disallowance, noting that the nature of the assessee's business required continuous use of mobile phones and that there was no personal element involved. The ITAT upheld the FAA's decision, reiterating that no disallowance should be made for a corporate entity on account of personal expenditure.

5. Deletion of addition of ?77.49 lakhs as PCE mobilisation advance:
The AO treated the entire mobilization advance of ?1.59 crores as income for the year, adding ?77.49 lakhs to the assessee's income. The FAA deleted this addition, finding that the assessee had recognized income of ?81.80 lakhs based on a scientific method and that the remaining amount was a legitimate advance. The ITAT agreed with the FAA, noting that the AO did not consider the terms and conditions of the agreement and that the assessee had properly recognized the revenue.

Conclusion:
The ITAT dismissed the appeal filed by the AO, confirming the FAA's decisions on all grounds. The ITAT emphasized the importance of following prescribed methods and providing valid reasons for any disallowances or additions, criticizing the AO for arbitrary and unsubstantiated actions. The order was pronounced in the open court on 25th May 2016.

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