2020 (3) TMI 1162 - AT - Income Tax

Disallowance u/s 40 (a)(i) - expenses were incurred towards payments made to a party M/s Hexaware - company failed in its obligations to deduct appropriate tax on such payments before making remittance - HELD THAT - We agree with the proposition made on behalf of the assessee on first principles for reversal of disallowance carried out u/s 40(a)(i) of the Act for the assessment year 2012-13 in the assessment year 2014-15 on actual payment of withholding taxes. The proviso to sec.40(a)(i) of the Act enables the AO to allow deduction of expenses in computing the income of the previous year in which withholding tax have been actually paid by the deductor. Hence, having adjudicated the issue of allowability of expenses claimed in the year of deduction in favour of the assessee on first principles, we however, consider it as just and expedient to restore the issue back to the file of the AO for verification of actual payments of TDS at applicable rates on made to M/s Hexaware as noted above. AO is directed to allow the deduction of expenses on being satisfied that the tax has been deducted and paid during the previous year relating to assessment year 204-15 towards expenses in controversy. It shall be open to the assessee to support its claim before the AO in this regard with proof of payment of taxes in the light of aforesaid observations. The assessee shall also file an undertaking before the AO for withdrawal of claim in AY 2012-13 on its allowability on actual payment basis. - Decided in favour of assessee for statistical purposes.

Issues:
1. Assessment and reference to Transfer Pricing Officer
2. Determination of arm's length price and erroneous data used
3. Non-allowance of appropriate adjustments to comparable companies
4. Variation from the arithmetic mean
5. Disallowance under section 40(a)(i) of the Act in AY 2012-13
6. Short grant of credit in respect of advance tax and TDS
7. Interest under section 234B of the Act
8. Initiation of penalty proceedings

Assessment and reference to Transfer Pricing Officer:
The appeal was filed by the assessee against the final assessment order passed by the Assessing Officer regarding the assessment year 2014-15. The grounds of appeal challenged the assessment and reference to the Transfer Pricing Officer, contending that the addition to the total income was unjustified. The Dispute Resolution Panel was also criticized for not addressing objections raised by the appellant. The Tribunal found that certain grounds were withdrawn by the appellant, and others were dismissed.

Determination of arm's length price and erroneous data used:
The appellant argued against the rejection of filters and processes in the Transfer Pricing Study and the comparison of activities with full-fledged entrepreneurs. Various errors in applying filters and selecting comparable companies were highlighted. The Tribunal noted discrepancies in the data used by the Transfer Pricing Officer and directed for verification of actual payments for expenses in controversy.

Non-allowance of appropriate adjustments to comparable companies:
The Tribunal found errors in not allowing adjustments for differences in accounting practices, marketing expenditure, and risk profile between the appellant and comparable companies. The issue was remitted back to the AO for verification and determination.

Variation from the arithmetic mean:
The appellant claimed benefits under a specific section of the Income Tax Act, which were not granted. The Tribunal directed the AO to verify and determine the alleged short grant of credit on taxes paid.

Disallowance under section 40(a)(i) of the Act in AY 2012-13:
The appellant sought the benefit under a specific section for expenses disallowed in a previous assessment year. The Tribunal agreed with the appellant's contentions and directed the AO to allow the deduction of expenses on actual payment of withholding taxes.

Short grant of credit in respect of advance tax and TDS:
The issue of short grant of credit in respect of TDS was remitted back to the AO for verification and determination.

Interest under section 234B of the Act:
The Tribunal did not adjudicate on the issue of interest under section 234B, considering it consequential and not requiring further adjudication.

Initiation of penalty proceedings:
The issue of penalty proceedings initiated by the AO was noted, but no specific adjudication was provided in the judgment.

Overall, the appeal was partly allowed, with certain grounds being dismissed, withdrawn, or remitted back to the AO for further verification and determination.

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