2017 (11) TMI 802 - AT - Income Tax

Addition on account of Project Procurement expenses - addition the same were not incurred for the purpose of - business - Held that - On perusal of the documents, we find that these are mainly agreements between the assessee and commission agent, correspondence between the assessee and the commission agent, copy of invoices issued by the commission agent, evidence of payment released by the principal, copy of contract awarded to the assessee, letter by the assessee appointing the commission agent etc. In our opinion, these documents are not sufficient to demonstrate the actual services rendered by the commission agents. The assessee was required to explain the role of the commission agent in procuring contracts from the government agencies and other principle parties. The assessee was required to furnish documentary evidence, whether the commission agent represented before the parties, who awarded contract to the assessee and whether those commission agent participated in any contract awarding activity or any activity provided in the scope of work in the agreement. The documents submitted by the assessee are mostly computer-generated printouts of correspondence between the assessee and the commission agent. No evidence is available in paper book, as how these correspondences exchanged between the assessee and the commission agent, whether it was through post or whether it was through emails. The assessee has not produced any evidences supporting the technical expertise and experience of the commission agents in the field of services rendered. We are of the opinion that the fact of services rendered has to be examined in each year on the basis of the documentary evidences submitted by the assessee and therefore, issue in dispute cannot be treated as covered by the decision of the Tribunal in assessment year 2004-05. The documentary evidences in the year under consideration for establishing the services rendered need to be produced by the assessee and examined by the Assessing Officer afresh. Accordingly, we feel it appropriate to restore the issue to the file of the Assessing Officer to examine copy all the documents produced by the assessee. Accordingly, the ground of the appeal is allowed for statistical purposes. Transfer Pricing Adjustment - TPO accepted the most appropriate method and comparables selected by the assessee, however, he has taken PLI data of comparables for current year only as against multiple year data taken by the assessee - Held that - On the issue of single year data versus multiple year data of comparables is concerned, we are of the opinion that for justifying multiple year data of comparables before the Ld. CIT- (A), the assessee contested variation in net profit of the comparables companies. In our opinion, merely variation in the profit cannot justify use of multiple year data until and unless, the reason for variation in the profit are linked to the cyclic nature of business transactions, having financial impact on more than one year. No factual information was brought on record in respect of the comparables other than presenting theoretical or general arguments supporting adoption of multiple year data. In the year under consideration before us, the Rule 10B(4) of the Income-tax Rules, 1962 (in short the Rules ) has specifically provided for using the data of the relevant financial year and data of the two years prior to the relevant financial year could only be considered, if such data reveals facts which could have influence on the determination of the transfer price in relation to the transaction being compared. Before us, the assessee has not brought on record any evidences showing the influence of the cyclic nature of the transactions of the comparables or having financial impact of operational activity over the subsequent years. Thus learned CIT-(A) was not justified in deleting the transfer pricing addition without giving reasons for taking average of multiple year data for computing PLI of comparables. In view of above discussion, we set aside the finding of the Ld. CIT-(A) on the issue in dispute and restore that of Ld. TPO/AO. The ground of appeal is accordingly allowed. Disallowance out of telephone and car expenses - Held that - In the instant case, the Ld. CIT-(A) has not given any finding on the basis of documents produced by the assessee before him whether the expenditure was incurred wholly and exclusively for the purpose of business or not. Since the Assessing Officer did not get opportunity to examine documents like call registers for telephones and logbook etc. of vehicles as same were neither produced before him in the assessment proceedings nor forwarded to him by the Ld. CIT-(A), the claim of the assessee has remained non-verified by the lower authorities. In the interest of justice, we feel it appropriate to restore the issue to the file of the AO to verify the documentary evidence supporting the claim of the assessee that the expenditures on telephone and car were incurred towards the business purpose only and decide the issue in dispute in accordance with law. The assessee shall be afforded adequate opportunity of being heard. The ground of the appeal is accordingly allowed for statistical purposes.

Summary

Issues Involved:
1. Deletion of addition on account of Project Procurement expenses.
2. Deletion of addition on account of Arm’s Length Price of International Transaction.
3. Deletion of addition on account of disallowance out of telephone and car expenses.

Issue-wise Detailed Analysis:

1. Deletion of Addition on Account of Project Procurement Expenses:
The Revenue challenged the deletion of ?12,62,73,121/- made by the Assessing Officer (AO) on account of project procurement expenses. The AO disallowed these expenses due to the absence of documentary evidence of services rendered by commission agents and alternatively suggested that only part of the commission expenses was allowable based on the percentage completion method. The Commissioner of Income-tax (Appeals) [CIT-(A)] admitted additional evidence provided by the assessee and directed the AO to examine it. The CIT-(A) allowed the commission expenses as genuine based on the assessee's submission and additional evidence. The Tribunal noted that the issue for the assessment year 2004-05 was upheld in favor of the assessee by the Tribunal. However, it emphasized that each assessment year is separate and the assessee must discharge the onus of proving services rendered in each year. The Tribunal restored the issue to the AO to examine the evidence afresh and decide the issue in accordance with the law.

2. Deletion of Addition on Account of Arm’s Length Price of International Transaction:
The Revenue contested the deletion of the Transfer Pricing Adjustment of ?95,47,197/- made by the AO. The Transfer Pricing Officer (TPO) accepted the most appropriate method and comparables selected by the assessee but used single-year data instead of multiple-year data. The CIT-(A) deleted the adjustment, finding the TPO's action unsustainable and the assessee's method fair and reasonable. However, the Tribunal noted that the assessee was not in appeal and could not raise new grounds. The Tribunal found that the CIT-(A) did not provide adequate reasoning for rejecting the single-year data and restored the TPO/AO's finding, emphasizing that the use of multiple-year data must be justified with specific reasons linked to the cyclic nature of business transactions.

3. Deletion of Addition on Account of Disallowance out of Telephone and Car Expenses:
The Revenue challenged the deletion of ?2,52,406/- and ?2,45,572/- made by the AO on account of disallowance out of telephone and car expenses. The AO disallowed these expenses due to the lack of evidence proving they were incurred wholly for business purposes. The CIT-(A) deleted the disallowance, relying on the Tribunal's decision in the case of Haryana Oxygen Ltd., which held that disallowance for non-business use could only be made in the hands of the directors as a perquisite. The Tribunal noted that the CIT-(A) did not provide an opportunity to the AO to examine the evidence and restored the issue to the AO to verify the documents supporting the claim that the expenses were incurred for business purposes only.

Conclusion:
The Tribunal allowed the appeal of the Revenue partly for statistical purposes, restoring the issues related to project procurement expenses and telephone and car expenses to the AO for fresh examination and decision in accordance with the law. The Tribunal upheld the TPO/AO's finding on the issue of the Arm’s Length Price of International Transaction.