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2023 (8) TMI 1105 - AT - Income TaxTP adjustment - international transaction of sales made by the assessee with its Associate Enterprise (AEs) - MAM selection - HELD THAT - As agreeing with assessee that the basis of rejecting the segmental accounts by the TPO was totally frivolous and agreeing with him that what mattered for accepting these accounts was whether they had been prepared on a just and reasonable basis and noting the fact that the assessee had not been given an opportunity to submit its justification for the basis of preparation of its segmental accounts nor was it examined by the TPO on this basis it was considered fit to restore the issue to the AO/TPO to examine the basis of preparing segmental accounts by the assessee. Both the parties fairly agreed with the same. Since the entire basis of the TPO for rejecting benchmarking analysis done by the assessee and proposing the adjustment to the international transactions of sale by adopting TNMM method began with the rejection of the segmental accounts of the assessee we deem it fit to restore this issue to the file of the TPO. The entire issue relating to the determination of ALP of international transaction of the sale is restored back to the TPO to be determined afresh after first dealing with the aspect of justifiability of segmental data submitted by the assessee along with the MAM adopted by it for determining the ALP of the transaction. Needless to add the assessee be provided due opportunity of hearing in this regard. Addition u/s 37(1) - payment of Management fees SAP and Opti-mill fees and Business Area Service fees disallowed by concluding that the expenses are not incurred wholly and exclusively for the purpose of business - HELD THAT - The said expenses could not be held as not having been incurred wholly and exclusively for the purpose of business of the assessee. As rightly pointed out by the ld. counsel for the assessee there are several judgments including that of Apex Court laying down the principle to be applied for determining allowability of expenses under section 37(1) of the Act and this principle have emerged over years by virtue of judicial interpretation of expression wholly and exclusively for the purpose of business appearing in section 37(1). As interpreting term wholly and exclusively for the purpose of business no case has been made out by the Revenue showing that the assessee does not fulfill the required parameter to qualify for deduction under section 37(1) - The only basis being that the assessee was unable to establish necessity of incurring the expenses and benefit accrued to it which has been outrightly ruled out by Courts for establishing commercial expediency of incurrence of the expenditure the basis with Revenue authorities therefore for disallowing the impugned expenditure in the present case is found to be not in accordance with law. Once the TPO has given his finding on the issue of determination of ALP of international transactions entered into by the assessee they are to be accepted by the AO and cannot be inquired into by the AO further. In the present case the AO by applying benefit test to the impugned international transaction has attempted to step into the shoes of TPO since the benefit test could have been applied only for the purpose of determining ALP of the transaction as pointed out by the DRP also from the OECD commentary and from the various decision of the ITAT on this issue. Therefore also disallowance made by the AO on the impugned expenses is held to be not sustainable in law and directed to be deleted. Decided in favour of assessee. Disallowance on reimbursement of Bank guarantee commission - HELD THAT - We find that the invoices were raised by the Ahlstrom Corporation Finland on the assessee during the impugned year itself. These facts are all evident from the copies of invoices which were placed before us also in the paper book at page no. There is no iota of doubt therefore that the expenses pertained to the impugned year alone and could not be categorized as prior period expenses. We have noted that basis for the AO for treating it as prior period expenses was that the loan agreement entered into by the assessee with the ICICI Bank which was guaranteed by Pohjola Bank Plc. and commission expenses reimbursed from the assessee to the Ahlstrom Corporation Finland was dated 8.5.2009. From the same we deduced that the bank guarantee commission pertained to the financial year 2009-10 relating to the Asst. Year 2010-11 the preceding year. The assessee has sufficiently demonstrated before us that the invoices were raised during the year by Ahlstrom Corporation Finland on the issue and related to the bank guarantee commission for the impugned year alone. No hesitation in holding that the bank guarantee expenses paid by the assessee pertained to the impugned year and could not disallowed as prior period expenses u/s 37(1) - order of the DRP/ AO holding so is accordingly set aside. Disallowing bank guarantee expenses as being disallowable in terms of section 40(a)(i) of the Act for non-deduction of tax at source - assessee pointed out that despite exhaustive contentions raised by the assessee against the applicability of Article 21 of the DTAA between India and Finland to the transaction of reimbursement of Bank guarantee commission the DRP held Article 21 applicable without dealing with the contentions of the assessee - HELD THAT - As agreed that the issue needed reconsideration by the AO. In view of the same the issue of disallowance of bank guarantee commission is restored back to the AO to be dealt with after considering the arguments raised by the assessee. The AO is directed to pass a speaking order after granting due opportunity of hearing to the assessee.
Issues Involved:
1. Transfer Pricing Adjustment in Relation to International Transaction of Sales to Associated Enterprises (AEs). 2. Disallowance of Payment of Management Fees, SAP and Opti-mill Fees, and Business Area Service Fees. 3. Disallowance on Reimbursement of Bank Guarantee Commission. Summary of the Judgment: 1. Transfer Pricing Adjustment in Relation to International Transaction of Sales to Associated Enterprises (AEs): The primary issue was the transfer pricing adjustment of Rs. 15,83,20,738/- made by the Assessing Officer (AO) under the directions of the Dispute Resolution Panel (DRP) concerning the sales to Associated Enterprises (AEs). The AO and Transfer Pricing Officer (TPO) rejected the audited segmental financials and the Cost Plus Method (CPM) adopted by the assessee, instead selecting the Transactional Net Margin Method (TNMM) as the most appropriate method. The Tribunal found that the TPO had summarily rejected the segmental accounts without examining their basis and restored the issue to the AO/TPO for fresh examination, directing them to consider the justifiability of the segmental data and the method adopted by the assessee. The ground was allowed for statistical purposes. 2. Disallowance of Payment of Management Fees, SAP and Opti-mill Fees, and Business Area Service Fees: The AO disallowed Rs. 1,60,83,722/- under section 37(1) of the Income Tax Act, 1961, stating that the expenses were not incurred wholly and exclusively for business purposes. The Tribunal found merit in the assessee's contention that the expenses were commercially expedient and incurred for business purposes. It was noted that the TPO had not drawn any adverse inference regarding the ALP of these transactions. The Tribunal held that the AO's disallowance was not in accordance with the law and directed the deletion of the disallowance. The ground was allowed. 3. Disallowance on Reimbursement of Bank Guarantee Commission: The AO disallowed Rs. 1,12,29,897/- towards bank guarantee commission, treating it as a prior period expense and also for non-deduction of tax at source under section 40(a)(i). The Tribunal found that the expenses pertained to the impugned year and could not be categorized as prior period expenses. Regarding the disallowance under section 40(a)(i), the Tribunal noted that the DRP had not considered the assessee's arguments against the applicability of Article 21 of the India-Finland DTAA. The issue was restored to the AO for fresh consideration, directing them to pass a speaking order after granting due opportunity of hearing to the assessee. The ground was allowed for statistical purposes. Conclusion: The appeals for the assessment years 2011-12, 2012-13, and 2013-14 were allowed for statistical purposes, with the Tribunal directing fresh examination and consideration of the issues by the AO/TPO.
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