2018 (1) TMI 329 - AT - Income Tax

Disallowance u/s. 40(a)(i) - Held that - We hold that the proviso to section 40(a)(i)is not having retrospective effect and is not applicable for the year under appeal, that there was no default on behalf of the assessee in deducting or paying the tax as per the provisions prevalent at that point of time. As far as cases relied upon by the DR is concerned, we would like to mention that they lay down general principles, they do not deal with the issue on hand. Words or as well as and can have two different meanings. But, do decide the matter before us, the case of Puthuthotam Estates (1980 (1) TMI 34 - MADRAS High Court) cited by the DR is of no help. Considering these facts, we decide ground no. 1 against the AO. Claim of expenses - determine the arms length price (ALP) of the professional fees paid to BOS - Held that - We find that the assessee had entered in to two separate contracts, that one contract was about fees to be received by it, that the other one was about expenses to be incurred, that the AO mixed those two contracts that he had not doubted the incurring of expenditure, that he was of the opinion that expenditure was to be allowed in the next assessment year, that TPO had not found any defect in the method of determining the ALP of the international transaction(IT) entered in to by the assessee, that mark up of 11. 79% has not be doubted by him. It appears that the TPO, while passing order u/s. 92 took over the role of the AO. As per the provisions of the Act the only role assigned to the TPO is to find out as to whether the IT is at arm s length or not. He is not supposed to take decision about accounting policy to be followed by the assessee, nor he should comment upon as how to compute income if an assessee follows a particular method of accounting. In the case before us, the assessee is following project completion method and showing the income from the project accordingly. Expenditure incurred by it have to considered for arriving at the taxable income of the year under appeal. There in nothing on record to negate the finding of fact given by the FAA that income corresponding to the Pre-FID expenditure was offered for taxation. So, in our opinion, there is no need to interfere with his order. Confirming the same, we decide second ground of appeal

Summary

Issues Involved:
1. Deletion of disallowance made by the AO under section 40(a)(i) of the Income Tax Act.
2. Deletion of disallowance of ?2.70 crores related to transfer pricing adjustments.

Issue-wise Detailed Analysis:

1. Deletion of Disallowance under Section 40(a)(i):

The first ground of appeal concerns the AO's disallowance of ?10.33 crores under section 40(a)(i) due to non-payment of tax deducted at source on technical service fees paid to Bouyhues Offshore, Paris (BOP). The AO observed that the assessee did not deduct tax at source for payments made outside India for technical services, thus disallowing the expenditure.

The assessee appealed to the First Appellate Authority (FAA), arguing that part of the tax was deducted and deposited within the time allowed under section 200 of the Act. The FAA held that if either tax was deducted or paid, no disallowance should be made, directing the AO to verify the claim. The FAA's directive was to confirm disallowance only if no tax was deducted or found outstanding.

During the hearing, the Departmental Representative (DR) argued that the payment was not timely, while the Authorised Representative (AR) cited case laws supporting the assessee's position. The tribunal found that the FAA had directed the AO to verify the tax deduction claim, and the AO did not make any disallowance while giving effect to the FAA's order, indicating the necessary entries were made in the books.

The tribunal referenced the case of Modi Olivetti Ltd., where the Hon’ble Allahabad High Court held that if tax was deducted, the conditions of section 40(a)(i) were satisfied. The tribunal concluded that the proviso to section 40(a)(i) was not retrospective and not applicable for the year under appeal, deciding the ground against the AO.

2. Deletion of Disallowance of ?2.70 Crores Related to Transfer Pricing Adjustments:

The second ground involved the disallowance of ?2.70 crores determined by the Transfer Pricing Officer (TPO) as excess claim of expenses related to professional fees paid to BOS. The AO made this addition as the assessee did not furnish an explanation.

The assessee argued before the FAA that the disallowance was based on the timing of income recognition and that the TPO's role was to determine the arm's length price (ALP) of the transaction, not to disallow expenses. The FAA held that the assessee followed the percentage completion method of accounting and that the contract with the associated enterprise (AE) was at arm's length, deleting the addition made by the AO.

During the hearing, the DR argued for restricting expenses to the income offered for taxation, while the AR contended that the TPO's order was invalid and the assessee had entered into two separate agreements. The AR explained the method of recognizing income and expenses, asserting that the Pre-FID expenses were part of the total project cost and had been offered for tax.

The tribunal found that the AO mixed two separate contracts and that the TPO had not found any defect in the ALP determination. The tribunal concluded that the TPO's role was limited to verifying if the transaction was at arm's length, not commenting on the accounting policy. The tribunal upheld the FAA's order, confirming that the income corresponding to the Pre-FID expenditure was offered for taxation, and decided the second ground against the AO.

Conclusion:

The tribunal dismissed the appeal filed by the AO, confirming the FAA's decisions on both grounds. The order was pronounced in the open court on January 3, 2018.