2016 (11) TMI 1051 - AT - Income Tax

Transfer pricing adjustment - international transactions of appellant pertaining to provision of IT enabled services to its associated enterprise has resulted into a loss originally shown by the assessee at 19.16 % - Held that - As the allocation keys for allocating indirect cost earlier adopted by the appellant was headcount and now also the appellant for most of the indirect expenditure has retained the same allocation key and out of indirect expenses some of the direct expenses have been identified and are allocated to a particular business segment, further when neither the remand report nor before us any infirmity was pointed out with respect to the allocation keys adopted by the appellant before CIT appeal, we see no infirmity in the order of Ld. CIT (A) in arriving at ALP of the international transaction of the appellant. Further we also reject the argument of the Ld. departmental representative that the issue may be set aside to the file of the Ld. assessing officer for verification of the correctness of allocation keys, because in the remand report Ld. assessing officer could not point out any infirmity or irrationality involved in adoption of the allocation keys suggested by the assessee further even the 1st appellate authority is also convinced about the appropriateness of the allocation key and before us the Ld. departmental representative could not point out any error in the order of the keys adopted by the assessee in the order of the Ld. that 1st appellate authority. It is also important to note that even if the business support cost is located on the basis of revenue then also PLI of the assessee is higher than the PLI of comparables. This fact also suggest that original selection of allocation keys without identifying direct cost and indirect cost and also allocation of space cost was erroneous. Further with respect to exclusion of one of the comparable namely Apex Logical data Conversions Private Limited by Ld. Transfer pricing officer without assigning any reason, the Ld. CIT (A) has included this comparable in the final set of comparable companies. Before us Ld. departmental representative could not point out any reason that why this comparable was excluded from the final list without giving any reason. The appellant has also included this comparable into its TP study report and also neither the Ld. transfer pricing officer nor Ld. departmental representative could point out that this company was functionally not comparable with the appellant we find no infirmity in the order of Ld. CIT appeal in including this comparable for the comparability analysis of the international transaction. - Decided against revenue Deduction u/s 10A - exclude expenses on telecommunication charges, subsistence for on-site employees charges, standby and callout charges, travelling expenses paid in foreign currency and LERMS for reducing them from export turnover but not adjusting total turnover - Held that - As the issue has already been decided by the coordinate bench in the assessee‟s own case for assessment year 2003- 2004 wherein it has been held that though the term total turnover has not been defined under section 10 A of the act and items which have been excluded from export turnover in the numerator must also be extruded from total turnover in the denominator for computing deduction under section 10 A of the act. The Ld. departmental representative could not point out any infirmity in the order of Ld. CIT appeal and also could not point out any reason that why decision of the coordinate bench should not be followed by us. Therefore in view of this we are inclined to confirm the order of the Ld. CIT appeal where he followed the decision of the coordinate bench in case of assessee for the previous year and directed the assessing officer to recompute the deduction under section 10 A of the income tax act. Disallowance of 25% of the expenditure on subsistence allowance - Held that - We reject the contention of revenue that balance 25 % expenditure is without any basis and evidence. He also held that the payment is business expenditure as it is paid by way of salary or remuneration to the employees. Similarly he set aside the disallowance for the purpose of verification of the assessing officer in case if the total amount of expenditure on subsistence allowances not related to the previous year and then to make disallowance of the expenditure to that extent, if it is related to the earlier years. Ld. departmental representative could not point out any quantification made by the Ld AO about the amount expenditure related to previous year and earlier years. Therefore when the assessment order does not mention about the vouchers and declaration which are pertaining to earlier years, then in that case that verification needs to be done by the lf AO only, hence there is no infirmity in the order of ld CIT (A) in directing ld AO to verify the claim of the assessee form that aspect and quantify the disallowance, if any. In view of this, we confirm the order of the first appellate authority deleting the disallowance of subsistence allowance expenses. - Decided against revenue Addition u/s 40A - Held that - The provisions of section 40 A (2) (a) speaks that where any expenditure has been incurred by the assessee paid to a specified person and Ld. assessing officer forms an opinion that such expenditure is excessive or unreasonable having regard to the fair market value of the goods for which the payment is made or the legitimate needs of the business of the assessee or the benefit derived by or accruing to him, then he can disallow so much of the expenditure as is considered by him to be excessive or unreasonable. In the present case we do not find any opinion of the Ld. assessing officer that how such expenditure is excessive or unreasonable. The 1st appellate authority has also deleted this addition on the same ground therefore we confirm the finding of the Ld. CIT appeal in deleting the above disallowance. TDS u/s 195 - addition of legal and professional charges expenses by holding that the said payments made to various non-resident was taxable in India invoking the provisions of section 40 (a) (ia) - Held that - n the present case it was not the case of the ld AO that recipient of such income has any permanent establishment in India further the argument of the Ld. AR has also not been disputed that none of the services have been rendered in India. In view of this according to the article 7 of the double taxation avoidance agreement as none of the recipient is carrying on business in India through any permanent establishment same shall also not be taxable in India. Therefore we reject the contention of the revenue on this account. - Decided against revenue Addition of prior period expenses- Held that - It is not possible to ascertain at this stage that when the bills were approved and admitted by the assessee as except the ledger accounts no details are available. Further this argument is also not considered by lower authorities. Therefore in the interest of justice we set aside this issue to the file of the Ld. assessing officer to determine when the bills have been approved and admitted by the appellant, if they are admitted by assessee in the current previous year then though they may pertain to the earlier previous year the expenses are allowable

Summary

Issues Involved:
1. Transfer Pricing Adjustments
2. Deduction under Section 10A
3. Disallowance of Subsistence Allowance
4. Disallowance under Section 40A(2)(b)
5. Disallowance under Section 40(a)(ia)
6. Prior Period Expenses

Detailed Analysis:

1. Transfer Pricing Adjustments:
The primary dispute revolved around the adjustment of ?91,320,537 made by the Transfer Pricing Officer (TPO) concerning the arm's length price (ALP) of international transactions in the ITES segment. The CIT(A) reduced this adjustment to ?11,935,402, accepting the assessee's revised allocation of business support costs and including Apex Logical Data Conversion Pvt. Ltd. as a comparable. The Tribunal upheld the CIT(A)'s decision, noting the appropriateness of the allocation keys and the functional comparability of Apex Logical Data Conversion Pvt. Ltd.

2. Deduction under Section 10A:
The CIT(A) directed the exclusion of certain expenses (telecommunication charges, subsistence for onsite employees, standby and callout charges, traveling expenses paid in foreign currency, and LERMS) from both the export turnover and total turnover for computing the deduction under Section 10A. The Tribunal confirmed this, citing the necessity for consistency in defining 'total turnover' and 'export turnover' as per the ITAT's previous decisions.

3. Disallowance of Subsistence Allowance:
The AO disallowed 25% of the subsistence allowance paid to employees, citing lack of supporting evidence and non-deduction of TDS under Section 40(a)(i). The CIT(A) deleted the disallowance, holding that the payments were mere reimbursements not chargeable to tax in India. The Tribunal upheld this, emphasizing that the payments were supported by employee declarations and did not constitute taxable income in India.

4. Disallowance under Section 40A(2)(b):
The AO disallowed ?827,000 paid to Roto Power Projects Pvt. Ltd. for liaisoning charges, considering it excessive. The CIT(A) deleted the disallowance, and the Tribunal upheld this, noting the AO's failure to establish the market value of the services or the excessiveness of the payment.

5. Disallowance under Section 40(a)(ia):
The AO disallowed ?2,822,882 paid to non-residents for legal and professional services without TDS. The CIT(A) deleted the disallowance, holding that the payments were not chargeable to tax in India under the applicable DTAA. The Tribunal confirmed this, agreeing with the CIT(A)'s interpretation of the DTAA provisions and the nature of the services rendered.

6. Prior Period Expenses:
The AO disallowed ?212,941 as prior period expenses. The CIT(A) confirmed the disallowance. The Tribunal remanded the matter to the AO to verify when the expenses were approved and admitted by the appellant, allowing them if they were admitted in the current year.

Separate Judgments:
The Tribunal issued separate judgments for different assessment years, consistently applying the same principles to similar issues across the years. Each judgment reaffirmed the CIT(A)'s decisions on transfer pricing adjustments, Section 10A deductions, and disallowances under Sections 40A(2)(b) and 40(a)(ia), ensuring uniformity in the application of the law.