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2019 (8) TMI 699 - AT - Income TaxTP Adjustment - allocation of regional office expenses - HELD THAT - The assessee vide reply dated 19.09.2013 filed before the TPO ledger extracts of the expenses payable for the AY 2009-10 AY2010-11, in which the amount of regional office expenses were accounted for. Admittedly, during the year ended 31.03.2009, the assessee was allocated total regional office expenses of ₹ 15,612,766/- by ANZ Singapore. Out of this, the assessee paid an amount of ₹ 5,84,506/-. Since the assessee was operating under the cost plus remuneration model, the entire costs of ₹ 15,612,766/- was charged by the assessee to ANZ Singapore, along with the mark-up. The assessee realized it in the subsequent year that the balance amount of 15,028,260/- was no long payable by it. Therefore, the assessee reversed an amount of ₹ 15,028,260/- during the subsequent year i.e. AY 2010-11. A perusal of Form 3CEB for AY 2010-11 clearly indicates disclosure of the transaction for reversal of these expenses. Further, it is found that as the assessee had debited such regional office expenses to its P L account, the same formed part of the cost base which was charged to the AE along with a mark-up and the same was offered to tax in AY 2009-10. Thus in the impugned assessment year the assessee-company claimed a deduction for the regional office expenses and at the same time correspondingly offered to tax the amount recovered from AE towards such regional office expenses plus the mark-up - we direct the AO to delete the disallowance of ₹ 15,612,766/- made towards transfer pricing adjustment. Thus the 1st ground of appeal is allowed. Ad-hoc basis 25% of foreign travel expenses - HELD THAT - It is found that in response to the query raised by the AO, the assessee vide submission dated 22.02.2013 had filed the details with respect to foreign travel expenses incurred by it. After receipt of the above details, the AO could have made inquiry and verified the contentions of the assessee. He has not done so. Without finding any fault in the details submitted by the assessee, the AO has resorted to an ad-hoc disallowance @ 25% of the foreign travel expenses. As the disallowance made by the AO is not based on any inquiry or evidence, we delete the addition of ₹ 4,31,124/- and allow the 2nd ground of appeal. Severance payments allowed by the AO in five equal instalments u/s 35DDA - rectification application filed by the Appellant under Section 154 - HELD THAT - There is no discussion on the above issue in the assessment order passed by the AO, whereas it is the submission of the assessee that it has filed rectification application dated 04.05.2013 before the AO on which no action has been taken so far. Considering the above matter, the Ld. CIT(A) directed the AO to dispose off the petition of the assessee expeditiously pending before him. As crystal clear from the above, there is a specific direction from the Ld. CIT(A) to the AO to dispose off the rectification application expeditiously pending before him. Therefore, the 3rd ground of appeal is allowed for statistical purposes. Allowing the reduction of reversal / write back of the regional office expenses from the cost base while computing the Appellant's operating margin in respect of provision of services of marketing of financial products to its Associated Enterprise - Appellant prays that appropriate deduction should be allowed from the cost base in respect of reversal / write back of the regional office expenses and the resulting operating margin i.e. 15.75% as computed by the Appellant should be restored instead of 8.5% as computed by the AO / TPO - HELD THAT - The finding of the Tribunal in the case of Logica Pvt. Ltd. (supra) is applicable in the present case. Moreover, as reflected in the P L account of the assessee for the impugned assessment year under the head other income-provision written back , it has reversed the deduction it had claimed in the earlier year and offered the same to tax during the AY 2010-11. Therefore, the reversal of regional office expenses amounting to ₹ 15,028,260/- while computing the OP/TC margins of the company for AY 2010-11 would be 15.75%, thus the said international transaction would meet arm s length criteria. Thus the 1st ground of appeal is allowed. Selection of comparable - During the course of hearing it is argued by the Ld. counsel that if the reversal of regional office expenses is considered, while computing the OP/TC margin workings for AY 2010-11, then there is no necessity of adjudicating the above additional grounds of appeal as the OP/TC margins of the assessee-company would be 15.75% and the said international transaction would meet arm s length criteria. As we have allowed the 1st ground of appeal which relates to the reduction of reversal/written back of the regional office expenses from the cost base, the additional grounds of appeal becomes academic in nature. Disallowing expenses on foreign travel including the accommodation and meals expenses on an ad-hoc basis - HELD THAT - During the AY 2010-11, the assessee has claimed expenses amounting to ₹ 54,43,579/- on account of foreign travel, accommodation and meals, air fare other miscellaneous expenses etc. On the same reasons on the basis of which disallowance was made for AY 2009-10, the AO made a disallowance of ₹ 13,60,895/- (25% of ₹ 54,43,579/-) in AY 2010-11. It is found that similar details as for AY 2009-10 were filed by the assessee before the AO for AY 2010-11. Facts being identical, we follow our decision for AY 2009-10 mentioned at para 3.5 hereinabove and delete the ad-hoc disallowance of ₹ 13,60,895/- made by the AO and allow the 2nd ground of appeal. Depreciation on leased motor cars - HELD THAT - We find that in the instant case the assessee has split the lease rental payment into finance charges and principal charges, with the finance charges being charged to the P L account. The assessee has not claimed depreciation u/s 32 of the Act on cars taken on finance lease due to lack of ownership. This is evident from the depreciation schedule which is a part of the tax audit report in Form No. 3CD. We direct the AO to delete the disallowance made by him towards depreciation on leased motor cars. Accordingly, the 3rd ground of appeal is allowed.
Issues Involved:
1. Disallowance of regional office expenses and determination of arm's length price. 2. Disallowance of foreign travel expenses on an ad-hoc basis. 3. Pending rectification application under Section 154 of the Act. 4. Reversal/write-back of regional office expenses in the subsequent year. 5. Disallowance of depreciation on leased motor cars. Issue-wise Detailed Analysis: 1. Disallowance of Regional Office Expenses and Determination of Arm's Length Price: The first ground of appeal concerns the disallowance of ?1,56,12,766 related to regional office expenses and the determination of the arm's length price (ALP) of the international transaction at NIL. The assessee, a non-banking financial advisory company, allocated these expenses to its associated enterprise (AE) and charged them along with a mark-up. However, the Transfer Pricing Officer (TPO) determined the ALP as NIL, citing the lack of evidence for corresponding services or benefits. The Commissioner of Income Tax (Appeals) [CIT(A)] upheld this adjustment. The Tribunal observed that the assessee had reversed ?15,028,260 in the subsequent year and offered it to tax. It was concluded that the assessee had correctly accounted for the expenses and the corresponding income, thus directing the Assessing Officer (AO) to delete the disallowance. 2. Disallowance of Foreign Travel Expenses on an Ad-hoc Basis: The second ground of appeal pertains to the disallowance of 25% of foreign travel expenses amounting to ?4,31,124 on an ad-hoc basis. The AO made this disallowance due to the lack of detailed information about the trips. The CIT(A) upheld this disallowance. The Tribunal found that the assessee had provided sufficient details regarding the foreign travel expenses and that the AO had not conducted any further inquiry. Consequently, the Tribunal deleted the ad-hoc disallowance. 3. Pending Rectification Application under Section 154 of the Act: The third ground of appeal involves the AO's failure to consider the CIT(A)'s direction to decide on the pending rectification application filed by the assessee under Section 154 of the Act. The rectification application sought a deduction for ?11,54,850, being 1/5th of the total expenditure on severance payments allowed by the AO in five equal installments u/s 35DDA of the Act. The Tribunal directed the AO to dispose of the rectification application expeditiously. 4. Reversal/Write-back of Regional Office Expenses in the Subsequent Year: The first ground of appeal for AY 2010-11 concerns the non-allowance of the reversal/write-back of regional office expenses from the cost base while computing the operating margin. The assessee had reversed ?15,028,260 during AY 2010-11, which was initially included in the cost base for AY 2009-10. The TPO did not consider this reversal, resulting in a lower operating margin. The Tribunal, following the precedent set in the case of Logica Pvt. Ltd. v. ACIT, directed the AO to consider the reversal and adjust the operating margin accordingly. 5. Disallowance of Depreciation on Leased Motor Cars: The third ground of appeal for AY 2010-11 involves the disallowance of ?4,71,375 as depreciation on leased motor cars. The AO disallowed this amount, considering it as depreciation on leased cars, while the assessee claimed it was not claimed due to lack of ownership. The Tribunal found that the assessee had correctly accounted for the lease payments and had not claimed depreciation. Therefore, the Tribunal directed the AO to delete the disallowance. Summary: The Tribunal allowed the appeal for AY 2009-10 partly by deleting the disallowances related to regional office expenses and foreign travel expenses. For AY 2010-11, the Tribunal allowed the appeal by directing the AO to adjust the operating margin considering the reversal of regional office expenses and deleting the disallowance of depreciation on leased motor cars. The Tribunal also directed the AO to dispose of the pending rectification application expeditiously.
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