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2020 (5) TMI 631 - AT - Income TaxTP Adjustment - Enhancement of adjustment/disallowance without show cause notice - Principles of natural justice violated - HELD THAT - In the present case, the ALP adjustment has been made by the TPO and the DRP has enhanced the same. In the DRP order itself, it has been stated that the TPO has suggested that the adjustment/ disallowance Emphasis, by underlining, supplied by us now of .. is justified . That, however, is factually incorrect and legally unsustainable in law. Neither the ALP adjustments can be equated with disallowances of expenses, even though effect may be same, nor the TPO has the authority to disallow the expenses. Clearly, the impugned ALP adjustments are vitiated in law for this short reason alone. In any case, the observations with respect to the lack of evidence in support of the benefits is based on sweeping generalizations and is incapable of sustaining legal scrutiny. All the three ALP adjustments namely Research Development expenses, Management fees and Tender cost stand deleted. Pronouncement of orders within 90 days - Covid-19 epidemic - Worldwide lockdown - HELD THAT - The extraordinary steps taken suo motu by Hon ble jurisdictional High Court and Hon ble Supreme Court also indicate that this period of lockdown cannot be treated as an ordinary period during which the normal time limits are to remain in force. In our considered view, even without the words ordinarily , in the light of the above analysis of the legal position, the period during which lockout was in force is to excluded for the purpose of time limits set out in rule 34(5) of the Appellate Tribunal Rules, 1963. Viewed thus, the exception, to 90-day time-limit for pronouncement of orders, inherent in rule 34(5)(c), with respect to the pronouncement of orders within ninety days, clearly comes into play in the present case. Of course, there is no, and there cannot be any, bar on the discretion of the benches to refix the matters for clarifications because of considerable time lag between the point of time when the hearing is concluded and the point of time when the order thereon is being finalized, but then, in our considered view, no such exercise was required to be carried out on the facts of this case.
Issues Involved:
1. Enhancement of adjustment/disallowance without show cause notice - Principles of natural justice violated. 2. Disallowance of Research & Development expenses. 3. Disallowance of management fees. 4. Disallowance of tender cost. Issue-Wise Detailed Analysis: 1. Enhancement of Adjustment/Disallowance Without Show Cause Notice - Principles of Natural Justice Violated: The assessee contended that the Dispute Resolution Panel (DRP) enhanced the adjustments/disallowances suggested by the Transfer Pricing Officer (TPO) without issuing a show cause notice, violating the principles of natural justice. The Tribunal had earlier remitted the matter to the DRP, emphasizing the need for providing a reasonable opportunity to the assessee to present its case. The DRP, however, enhanced the adjustments without proper notice, leading to the assessee's appeal. The Tribunal noted that the DRP's actions were factually incorrect and legally unsustainable, as they failed to provide the necessary opportunity to the assessee, thus violating the principles of natural justice. 2. Disallowance of Research & Development Expenses: The AO disallowed ?47,72,982/- as Research & Development (R&D) expenses, which the DRP upheld, stating that the services provided were vague and it was not shown whether the assessee received any benefit. The Tribunal observed that the TPO's adjustment was not based on arm's length price considerations but rather on the provision for another year. The Tribunal emphasized that the TPO's jurisdiction is limited to determining the arm's length price and not the genuineness of the expenditure, which is the AO's domain. The Tribunal deleted the disallowance of ?47,72,982/- on account of R&D expenses, finding the adjustment vitiated in law. 3. Disallowance of Management Fees: The AO disallowed ?22,52,219/- as management fees, which the DRP upheld, arguing that the assessee failed to justify the benefits accrued from such expenses. The Tribunal noted that the TPO had not disputed the arm's length price but suggested the adjustment based on the provision for another year. The Tribunal reiterated that the TPO's role is to determine the arm's length price, not to question the commercial wisdom of the assessee’s decisions. The Tribunal deleted the disallowance of ?22,52,219/- on account of management fees, emphasizing that the DRP's observations were based on irrelevant grounds for determining the arm's length price. 4. Disallowance of Tender Cost: The AO disallowed ?28,61,598/- as tender cost, which the DRP upheld, stating that the evidences furnished were insufficient to establish that any services were rendered or that the assessee benefited from these services. The Tribunal found that the TPO's adjustment was not based on arm's length price considerations but on the lack of evidence of service rendition. The Tribunal reiterated that the TPO's jurisdiction is to determine the arm's length price, not to verify the existence of services or benefits. The Tribunal deleted the disallowance of ?28,61,598/- on account of tender cost, finding the adjustment legally unsustainable. Additional Appeals: The Tribunal also addressed similar issues for the assessment years 2010-11 and 2011-12, where the AO had disallowed R&D expenses and management fees. The Tribunal applied the same reasoning as in the 2007-08 assessment year, deleting the disallowances for both subsequent years. Procedural Issue: The Tribunal acknowledged the delay in pronouncing the order due to the nationwide lockdown imposed to prevent the spread of Covid-19. The Tribunal justified the delay by referring to the exceptional circumstances and the extensions granted by the Hon’ble Supreme Court and High Court, emphasizing the need to interpret the time limits pragmatically. Conclusion: The appeals were allowed, and the disallowances on account of R&D expenses, management fees, and tender costs were deleted. The Tribunal underscored the limited jurisdiction of the TPO to determine the arm's length price and not to question the commercial wisdom or genuineness of the expenditures.
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