2023 (2) TMI 518 - AT - Income Tax

Disallowances of engineering expenses paid by the assessee to its head office - Expenditure duly and exclusively for the purpose of business of PE - HELD THAT - As the name of the employees along with the nature of duties and number of hours apportioned have been have been made part of the debit note. Tax Authorities below have over stressed on non-production of time log sheets without finding any shortcoming and fallacy into the information already available and provided. The bench is of considered opinion that to discredit an expense questioning whether it was duly and exclusively for the purpose of business of PE the information that was available should be considered deficient before questioning intention of the assessee to not have produced time log sheet. When the Tax Authorities below are not questioning that execution of projects as PE then discrediting one of the expenses of the nature of engineering expenses crucial to the accomplishment of the project was not justified. Particularly in regard to Assessment Year 2005-06 when transactions were reported to be at arm s length by the ld TPO and the ld TPO study included examination of engineering services than that all the more required material reasons to discredit the debit note for lack of corroboration. The bench is of considered opinion that findings of the ld Tax Authorities below in regard to the disallowance of engineering expenses cannot be sustained. - Decided in favour of assessee.

Summary

Issues:
Appeal against order of Ld. Commissioner of Income Tax (Appeals) - Disallowance of expenses under Section 40(a)(i) - Disallowance of engineering expenses paid to head office - Set off of brought forward business losses.

Analysis:
1. The appellant, a non-resident company, challenged the order of the Ld. Commissioner of Income Tax (Appeals) regarding the disallowance of expenses under Section 40(a)(i) for non-deduction of withholding tax on payments made to certain entities. The Tax Authorities disallowed engineering expenses and head office expenses, leading to assessment at Nil income and computation of tax under Section 115JB. The appellant disputed these additions for Assessment Years 2005-06 and 2006-07 before the Ld. CIT(A).

2. The appellant raised specific grounds in the appeals related to the disallowance of expenses and the set off of business losses. The arguments presented highlighted the arbitrary nature of stressing on time sheets for engineers, the impact on business profitability if expenses were disallowed, and the essential nature of engineering work for project completion. The appellant emphasized that the Tax Authorities failed to appreciate the significance of engineering expenses for the business.

3. During the hearing, the appellant's representative contended that the Tax Authorities wrongly focused on the absence of time log sheets, overlooking the details provided in debit notes. The bench carefully examined the evidence presented, including employee details and work allocation in the debit notes. It was observed that the Tax Authorities excessively emphasized on non-production of time log sheets without valid reasons, leading to unjustified disallowance of engineering expenses crucial for project execution.

4. The bench concluded that the findings of the Tax Authorities regarding the disallowance of engineering expenses were not sustainable. Particularly for Assessment Year 2005-06, where transactions were deemed arm's length by the Transfer Pricing Officer, discrediting engineering expenses lacked justification. The decision favored the appellant, allowing the appeal partially in one case and dismissing it in another.

5. In the final judgment, the bench pronounced the decision on 13/02/2023, allowing one appeal partly and dismissing the other. The detailed analysis of the issues related to disallowance of expenses under Section 40(a)(i) and the set off of business losses provided clarity on the legal arguments and reasoning leading to the judgment.