2023 (1) TMI 827 - AT - Income Tax

TP Adjustment - Determining the arms length price of the international transaction pertaining to reimbursement of expenses by the assessee to Yanfeng China as nil and thereby made a downward adjustment to the transaction value of reimbursement of expenses to the AE - TPO noted that the assessee has not submitted any supporting documents in support of its contention - Whether TPO is justified in determination of arms length price act nil when the assessee is not able to demonstrate that the expenses so incurred have a live nexus with India? HELD THAT - Several instances have come where the assessee has not been able to demonstrate with supporting agreement or evidences to prove that the expenses made to AE are being supported by actual rendition of services or whether these expenses are in relation to services which have any co-relation with the business of the assessee in India. We are in agreement with the Revenue that though the TPO cannot determine arms length price at nil by questioning the necessity of the expenses or questioning the benefits of expenditure incurred, however, at the same time, the onus is on the assessee to prove that there was actual rendition of services by the AE. In a situation the assessee is unable to prove any rendition of services or that the services had any connection with the business of the assessee in India, in our considered view, on such facts, the ld. TPO can determine the arms length price at nil . The onus of proving the actual rendition of services primarily lies on the assessee in respect of an international transaction. In the case of Akzonobel India Pvt. Ltd. 2022 (10) TMI 1056 - DELHI HIGH COURT the High Court held that where assessee has failed to furnish evidence to demonstrate that administrative services were actually rendered by AE and assessee has received such services, the TPO righty determined ALP to service fee at nil . Since in the instant set of facts, the assessee has not been able to prove the actual rendering of services/expenditure in respect of the assessee s business by its oversees associated enterprise either by way of producing the necessary agreement in respect of rendering of services or in the form of any other communication which could convincingly/conclusively establish such rendering of services/incurring of expenditure, we are of the view that the TPO was justified in determining the arms length price at nil . Accordingly, we find no infirmity in the order of ld. TPO/DRP. Appeal of the assessee is dismissed

Summary

Issues Involved:
1. Transfer Pricing Adjustment on Reimbursement of Expenses
2. Disregarding Non-Deductible Expenses in Tax Computation
3. Initiation of Penalty Proceedings under Section 271(l)(c)

Issue 1: Transfer Pricing Adjustment on Reimbursement of Expenses

The primary issue revolves around the transfer pricing adjustment amounting to INR 3,07,64,361 on account of disallowance of reimbursement of expenses made by the assessee to its Associated Enterprise (AE), Yanfeng Global Automotive Interior Systems Co. Limited (Yanfeng China). The assessee, a subsidiary of Yanfeng China, was engaged in manufacturing and selling automotive trim components. During the assessment year 2015-16, the assessee reimbursed expenses incurred by Yanfeng China's employees who assisted in a project with Ford India. The expenses included travel, lodging, air fare, meal expenses, and visa application costs, reimbursed on a cost-to-cost basis without any markup.

The Transfer Pricing Officer (TPO) and the Dispute Resolution Panel (DRP) determined the arms length price (ALP) of the international transaction pertaining to reimbursement of expenses as "nil," making a downward adjustment of Rs. 3,07,69,361. The TPO noted that the assessee failed to provide supporting documents to substantiate the expenses and their connection to the Indian entity. The DRP observed that the evidence provided, mainly emails, did not demonstrate the level and scale of involvement of Yanfeng China's employees in the Indian operations.

The tribunal agreed with the Revenue, emphasizing that the onus is on the assessee to prove the actual rendition of services by the AE. In the absence of an agreement or convincing evidence of services rendered, the TPO was justified in determining the ALP at "nil." The tribunal cited various precedents where similar conclusions were reached when the assessee failed to demonstrate the receipt of services or their relevance to the business.

Issue 2: Disregarding Non-Deductible Expenses in Tax Computation

The assessee argued that the expenses reimbursed to Yanfeng China were not claimed as deductible while computing taxable income for the year under consideration. Therefore, the adjustment to the total income resulting in disallowance of the amount not claimed in the computation of income was erroneous. However, this argument was not elaborated upon in the tribunal's decision, as the primary focus remained on the transfer pricing adjustment and the substantiation of the expenses.

Issue 3: Initiation of Penalty Proceedings under Section 271(l)(c)

The assessee contested the initiation of penalty proceedings under section 271(l)(c) for furnishing inaccurate particulars of income. The tribunal's judgment did not delve into the specifics of the penalty proceedings, as the main issue was the transfer pricing adjustment. The tribunal's decision to uphold the adjustment implicitly supported the initiation of penalty proceedings, as the disallowance was based on the assessee's failure to substantiate the expenses.

Conclusion

In conclusion, the tribunal dismissed the appeal of the assessee, upholding the TPO's determination of the ALP at "nil" for the reimbursement of expenses to Yanfeng China. The tribunal emphasized the necessity for the assessee to provide substantial evidence of actual services rendered by the AE and their relevance to the Indian operations. The decision also implicitly supported the initiation of penalty proceedings under section 271(l)(c) due to the disallowance of the claimed expenses.