2022 (3) TMI 1332 - AT - Income Tax

Addition on account of ALP - CIT(A) deleted the adjustment made by the TPO in connection with international transaction on account of - TPO held that the case of the assessee failed on need, benefit and rendition test to justify any payment for reimbursements paid to the parent entity payments expatriates - HELD THAT - This issue stands adjudicated for the A.Y. 2007-08, A.Y. 2008-09, A.Y. 2009-10 and A.Y. 2010-11 wherein it was held that there was no meaningful analysis or evidence provided by the TPO to hold that entire payment made by the assessee to expatriate should be reduced to zero. Since, the matter squarely covered by the order of the Tribunal, the vehement arguments of the ld. DR have been duly considered. However, in the absence of any material change in the factual matrix and legal proposition, we decline to interfere with the order of the ld. CIT(A). Security deposit written off - assessee has entered into a letter of intent for obtaining shops on lease. As per this letter, the assessee was required to pay security deposits at the time of executing this letter of intent. As per the termination clause of the letter, in case the lease has been terminated by the lessee, the entire amount of security deposit shall be forfeited by the lessor - HELD THAT - As gone through the judgment in the case of Badridas Daga 1958 (4) TMI 2 - SUPREME COURT wherein it was held that the profit to be assessed are the real profits and they must be ascertained on ordinary principles of commercial training and commercial accounting. The profit should be computed after deducting losses and expenditure incurred for the purposes of business unless such losses or expenditure are expressly, or by necessary implication, disallowed by the Act. Hon'ble Supreme Court in the case of CIT vs. Nainital Bank Ltd. 1964 (9) TMI 11 - SUPREME COURT wherein it was held that under section 28, the trading loss of a business is deductible in computing the profits earned by a business. Every loss is not deductible unless it is incurred in carrying out the operation of the business and is incidental to the operation. Whether loss is incidental to the operation of a business or not, is a question of fact to be decided on facts of each case, having regard to the nature of the operation carried on and the nature of risk involved in carrying them out. The degree of the risk or its frequency is not much relevant but its nexus to the nature of the business is material. Having gone through the entire judgments quoted by both the parties, provisions of the Act pertaining to interplay between Section 28 and Section 37 and facts of the case, we have no hesitation to hold that the assessee be allowed to claim the loss incurred in forfeiture of security deposits given for lease of rental premises as the expenses are incurred wholly and exclusively for the purpose of business. - Decided against revenue.

Summary

Issues Involved:
1. Addition on account of ALP (Arm's Length Price) for payments to expatriates.
2. Security deposit written off.

Detailed Analysis:

Addition on account of ALP:

The Revenue appealed against the deletion of adjustments made by the Transfer Pricing Officer (TPO) regarding international transactions involving payments to expatriates. The TPO argued that the assessee failed to justify the payments based on need, benefit, and rendition tests. However, the CIT(A) deleted the adjustment, finding no meaningful analysis or evidence from the TPO to justify reducing the payment to zero. This issue had been adjudicated in previous assessment years (2007-08 to 2010-11), consistently favoring the assessee.

The Tribunal referenced its prior order for A.Y. 2011-12, where it was held that the assessee's business operations were significantly dependent on the use of the "Benetton" trademark and technical know-how provided by the associated enterprise. The CIT(A) found that the entire sales of the assessee were due to the use of this brand name, and any breach in royalty payment would hinder the business operations. The Tribunal upheld the CIT(A)'s findings, emphasizing the consistent view taken in previous years that the CUP (Comparable Uncontrolled Price) method employed by the taxpayer was appropriate, and the TPO's analysis lacked merit. Consequently, the Tribunal dismissed the Revenue's appeal, affirming the CIT(A)'s decision.

Security deposit written off:

The assessee entered into letters of intent for leasing shops, requiring security deposits. Upon termination of these leases, the security deposits were forfeited, and the assessee wrote off these advances, claiming them as business expenses. The Assessing Officer (AO) disallowed this claim, arguing that it was capital in nature and not a revenue expense.

The assessee contended that the write-off was incidental to its business operations and should be considered a business expenditure. The AO and the ld. DR relied on judgments from the Hon'ble Delhi High Court in the case of Triveni Engineering and the ITAT Delhi in the case of Raj Khosla, which held that such write-offs were capital losses.

The Tribunal examined the relevant judgments, including those cited by both parties. The Tribunal noted that in the case of Raj Khosla, the CIT(A) held that the security deposits were capital in nature and not allowable as business losses. However, the Tribunal also considered judgments such as Fab India and Social Media India, which allowed similar write-offs as business losses, considering them intimately connected with business operations.

The Tribunal acknowledged the jurisdictional High Court's decision in Triveni Engineering, which treated security deposits as capital assets. However, it also considered the Supreme Court's stance that business losses should be deductible if incurred in the ordinary course of business and incidental to business operations.

Ultimately, the Tribunal concluded that the forfeiture of security deposits for leased premises should be allowed as business expenses, as they were incurred wholly and exclusively for business purposes. The Tribunal dismissed the Revenue's appeal, allowing the assessee to claim the loss incurred from the forfeiture of security deposits.

Conclusion:

The Tribunal upheld the CIT(A)'s decision on both issues, dismissing the Revenue's appeals. The adjustments on account of ALP for expatriate payments were not sustained due to lack of evidence and consistency with previous rulings. The security deposit write-offs were allowed as business expenses, recognizing them as incidental to the assessee's business operations.