2017 (10) TMI 1145 - AT - Income Tax

TPA - selection of comparable - Held that - Assessee is providing advisory services where high level of knowledge is required, thus comparables functionally dissimilar with that of assessee need to be deselected from final list. Non deduction of tds - Disallowance of provision for legal and professional fees - Held that - When the provisions are made and payments are not received and in the subsequent year the provision made is offered for taxation, the impugned amount cannot be disallowed and hence cannot be brought under the ambit of taxation u/s 40(a)(ia). - Decided in favour of assessee Disallowance of Travelling and Conveyance Expenses - Held that - DRP has rightly observed that reimbursement of expenses cannot be a reason for the non-examination of the expenditure booked as expenses by the IT authorities. De hors providing necessary details assessee cannot seek full allowance of expenditure. We find that the interest of justice would meet adequately if the matter is remitted to the file of the Assessing Officer. The Assessing Officer is directed to give the assessee an opportunity to give the details and canvass the veracity of expenses

Issues Involved:
1. Transfer Pricing Adjustment relating to international transaction of provision of non-binding investment advisory services.
2. Disallowance of Provision for Legal and Professional fees.
3. Disallowance of Travel and Conveyance expenses.
4. Initiation of Penalty Proceedings under section 271(1)(c).

Detailed Analysis:

1. Transfer Pricing Adjustment:
Facts:
The assessee, engaged in providing non-binding investment advisory services to its AE in the UK, declared the transaction value at ?28.53 crores. The assessee used the transactional net margin method (TNMM) for benchmarking, selecting six comparables with a mean NCP margin of 4.99%. The TPO rejected these comparables and classified the assessee's services as Knowledge Process Outsourcing (KPO), selecting six new comparables and determining an adjustment of ?8,64,30,318.

DRP Directions:
The DRP found the filters used by the TPO relevant but directed the exclusion of Coral Hubs Ltd. and the inclusion of IDC (India) Ltd. It also directed the exclusion of Triton Corporation Ltd. if it failed the export filter.

ITAT Judgment:
The ITAT noted the TPO's contradictory observations and found the comparables selected by the TPO inappropriate due to functional differences. It directed the exclusion of four comparables (Eclerx Services Ltd., Mold-Tek Technologies Ltd., Crossdomain Solutions Ltd., and Acropetal Technologies) and the inclusion of two comparables (ICRA Management Consultancy Pvt. Ltd. and Informed Technologies India Ltd.). The TPO was instructed to recompute the adjustment accordingly.

2. Disallowance of Provision for Legal and Professional Fees:
Facts:
The assessee made a provision of ?10,00,000 for legal and professional fees payable to M/s. Amarchand Mangaldas & Suresh A. Shroff & Co. for services related to acquiring office premises on lease. The AO disallowed the expense, treating it as capital in nature, while the DRP disallowed it under section 40(a)(ia) for non-deduction of tax at source.

ITAT Judgment:
The ITAT referenced the case law from Aditya Birla NVVO Limited v. DCIT, which held that provisions for expenses, when subsequently offered for taxation, cannot be disallowed under section 40(a)(ia). The ITAT set aside the disallowance, ruling in favor of the assessee.

3. Disallowance of Travel and Conveyance Expenses:
Facts:
The AO disallowed ?2,42,94,545 in travel and conveyance expenses due to insufficient details provided by the assessee, who had only nine employees. The DRP upheld a partial disallowance of ?1.5 crores, noting the significant increase in expenses compared to the previous year and the lack of specific details.

ITAT Judgment:
The ITAT agreed with the DRP that reimbursement by the AE does not justify non-examination of expenses. It remitted the matter back to the AO, directing the AO to allow the assessee to provide necessary details and verify the expenses, ensuring the assessee is given an adequate opportunity to be heard.

4. Initiation of Penalty Proceedings under Section 271(1)(c):
Facts:
The AO initiated penalty proceedings under section 271(1)(c) for furnishing inaccurate particulars of income related to the disallowances of legal and professional expenses and travel and conveyance expenses.

ITAT Judgment:
The ITAT did not provide a specific ruling on the initiation of penalty proceedings within the provided judgment text, focusing instead on the substantive issues of disallowances and transfer pricing adjustments.

Conclusion:
The ITAT partly allowed the appeal, directing specific adjustments to the comparables for transfer pricing, setting aside the disallowance of legal and professional fees, and remitting the travel and conveyance expenses issue back to the AO for further verification.

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