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2019 (8) TMI 699

..... ; AY2010-11, in which the amount of regional office expenses were accounted for. Admittedly, during the year ended 31.03.2009, the assessee was allocated total regional office expenses of ₹ 15,612,766/- by ANZ Singapore. Out of this, the assessee paid an amount of ₹ 5,84,506/-. Since the assessee was operating under the ‘cost plus’ remuneration model, the entire costs of ₹ 15,612,766/- was charged by the assessee to ANZ Singapore, along with the mark-up. The assessee realized it in the subsequent year that the balance amount of 15,028,260/- was no long payable by it. Therefore, the assessee reversed an amount of ₹ 15,028,260/- during the subsequent year i.e. AY 2010-11. A perusal of Form 3CEB for AY 2010-11 clearly indicates disclosure of the transaction for reversal of these expenses. Further, it is found that as the assessee had debited such regional office expenses to its P&L account, the same formed part of the ‘cost base’ which was charged to the AE along with a mark-up and the same was offered to tax in AY 2009-10. Thus in the impugned assessment year the assessee-company claimed a deduction for the regional office expenses .....

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..... the present case. Moreover, as reflected in the P&L account of the assessee for the impugned assessment year under the head ‘other income-provision written back’, it has reversed the deduction it had claimed in the earlier year and offered the same to tax during the AY 2010-11. Therefore, the reversal of regional office expenses amounting to ₹ 15,028,260/- while computing the OP/TC margins of the company for AY 2010-11 would be 15.75%, thus the said international transaction would meet arm’s length criteria. Thus the 1st ground of appeal is allowed. Selection of comparable - During the course of hearing it is argued by the Ld. counsel that if the reversal of regional office expenses is considered, while computing the OP/TC margin workings for AY 2010-11, then there is no necessity of adjudicating the above additional grounds of appeal as the OP/TC margins of the assessee-company would be 15.75% and the said international transaction would meet arm’s length criteria. As we have allowed the 1st ground of appeal which relates to the reduction of reversal/written back of the regional office expenses from the cost base, the additional grounds of appeal .....

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..... rcle -3(1), Mumbai ('AO')/ Deputy Commissioner of Income Tax, Transfer Pricing - I(6), Mumbai (TPO ) in disallowing the entire expenditure of ₹ 1,56,12,766 incurred by Appellant, in relation to allocation of regional office expenses and determining the arm's length price of the international transaction at NIL .The Appellant prays that the book value that the said transaction be held to be the arm's length and that the aforesaid adjustment be deleted. 2.1 Briefly stated, the facts are that the assessee operates as a non-banking financial advisory company which facilitates access to specified financial services for its customers in India. Also, it is engaged in the business of rendering marketing support services to its overseas associated enterprises ( AE ) in connection with trade finance and loan provided by AE to its customers in India. It filed its return of income for the assessment year (AY) 2009-10 on 30.09.2009 declaring total income of ₹ 17,84,52,414/-. In the transfer pricing study report ( TP Report ), the assessee determined the arm s length price (ALP) of its international transaction by selecting Transaction Net Margin Method (TNMM) as the .....

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..... cument or any other inter-company invoices were produced during the transfer pricing proceedings by the assessee. Also the assessee has not produced any justification whatsoever for raising of this invoice by the AE during the year under consideration. As per the TPO, it is an admitted fact by the assessee that ₹ 15,612,766/- was not payable to the AE for any corresponding services or benefit. Therefore, the TPO observed that the ALP of the transaction is to be determined. By observing that no corresponding services have been rendered by the AE for which the assessee has debited the profit and loss account (P&L account) for ₹ 15,612,766/-, the TPO determined the ALP as Nil . Accordingly, the TPO required the AO to make an adjustment of the above amount to the total income of the assessee. The AO passed his order in line with the ALP so determined by the TPO. 2.2 In appeal, the Ld. CIT(A) held that : The appellant has not submitted any report of the country of the AE in respect of the cost of such services and as such even the allocation is not authenticated in terms of their actual cost in the open market, leave aside the quantification of the services received by t .....

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..... and the same was offered to tax in AY 2009-10. In this regard, reference was made to the return of income for the AY 2009-10. Thus it is stated by him that for AY 2009-10, it can be seen that the assessee-company claimed a deduction for the regional office expenses and at the same time correspondingly offered to tax the amount recovered from its AE towards such regional expense offices plus the mark-up. Therefore, it is stated that the above addition made by the AO be deleted. 2.4 On the other hand, the Ld. DR submits that as the assessee had not filed documents normally issued in connection with various transactions under the accounting practices followed and also as it failed to submit evidence demonstrating the receipt of services, their quantification, their actual costs etc., the Ld. CIT(A) has rightly confirmed the adjustment made by the TPO/AO. 2.5 We have heard the rival submissions and perused the relevant materials on record. We observe that the assessee vide reply dated 19.09.2013 filed before the TPO ledger extracts of the expenses payable for the AY 2009-10 & AY2010-11, in which the amount of regional office expenses were accounted for. Admittedly, during the year .....

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..... sit were not submitted. Further, the assessee did not mention whether any family member accompanied the person or not on the trip. As recorded by the AO, the assessee did not provide any detail about the work performed during such trips, which would have substantiated that the expenditure was incurred wholly and exclusively for the purpose of business. Therefore, observing that part of the expenses were incurred for non-business purposes, the AO made ad disallowance of 25% of ₹ 17,24,495/- and it comes to ₹ 4,31,124/-. 3.2 In appeal, the Ld. CIT(A) held that : i. The appellant contended that it had submitted the details of foreign travel expenses to the AO. However, as mentioned in assessment order that in its letter dated 22/2/2013 only part details were submitted. Details of foreign travel called for by AO such as the duration of visit, -whether family member accompanied the person or not on the trip made, details of work performed during such trip to substantiate that expenditure was incurred wholly and exclusively for the purpose of business, were not given. ii. These details were not been furnished even during the course of appellate proceedings and hence there is .....

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..... the AO is not based on any inquiry or evidence, we delete the addition of ₹ 4,31,124/- and allow the 2nd ground of appeal. 4. The 3rd ground of appeal On the facts and circumstances of the case, the AO erred by not considering the direction of the Ld. CIT(A) to decide on the pending rectification application filed by the Appellant under Section 154 of the Act. In the assessment order passed for assessment year 2005-06, expenditure of ₹ 57,74251 on severance payments allowed by the AO in five equal instalments u/s 35DDA of the Act. The rectification application was filed by the Appellant (dated 4 May 2013) claiming deduction for ₹ 11,54,850 the year under appeal, being 1/5thof total expenditure of 57,74,251 on severance payments.The Appellant prays that the expenditure of ₹ 11,54,850 be allowed as a deduction. 4.1 The Ld. CIT(A) vide order dated 24.07.2014 has observed that there is no discussion on the above issue in the assessment order passed by the AO, whereas it is the submission of the assessee that it has filed rectification application dated 04.05.2013 before the AO on which no action has been taken so far. Considering the above matter, the Ld. CIT(A .....

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..... gs of the assessee for AY 2010-11. This resulted in revising the assessee s OP/TC margins from 15.75% to 8.50%. The Ld. counsel submits that the TPO s stand resulted in assessee being incorrectly taxed for the same amount in AY 2009-10 as well as AY 2010-11 i.e. (i) not deducting ₹ 15,028,260/- from the cost base of AY 2010-11 would mean that this amount plus mark-up would be taxed again, this amount had already been taxed in AY 2009-10 and (ii) further, the assessee has voluntarily reversed the deduction (₹ 15,028,260/-) it had claimed in the previous year and offered the same to tax during AY 2010-11. Reliance is placed by him on the order of the Tribunal in Logica Pvt. Ltd. v. ACIT (ITA No. 1129/Bang/2011 for AY 2007-08). The Ld. DR reiterates the submission made in this regard for AY 2009-10 and supports the order passed by the Ld. CIT(A). 6.2 We have heard the rival submissions and perused the relevant materials on record. We observe that the assessee vide reply dated 19.09.2013 filed before the TPO ledger extracts of the expenses payable for the AY 2009-10 & AY2010-11, in which the amount of regional office expenses were accounted for. A similar issue arose be .....

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..... f the view that the submissions made by the ld. counsel for the assessee have to be accepted and the operating profit to the total cost of the assessee should be adopted at 9% on the basis of the assessee s operating revenue and operating cost as given in the above chart. The finding of the Tribunal in the case of Logica Pvt. Ltd. (supra) is applicable in the present case. Moreover, as reflected in the P&L account of the assessee for the impugned assessment year under the head other income-provision written back , it has reversed the deduction it had claimed in the earlier year and offered the same to tax during the AY 2010-11. Therefore, the reversal of regional office expenses amounting to ₹ 15,028,260/- while computing the OP/TC margins of the company for AY 2010-11 would be 15.75%, thus the said international transaction would meet arm s length criteria. Thus the 1st ground of appeal is allowed. In the additional grounds of appeal filed for the AY 2010-11, the Ld. counsel submits that Companies like (i) Asian Business & Exhibition and Conferences Ltd., (ii) Empire Industries Ltd. and Priya International Ltd. be excluded from the set of comparables considered for c .....

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..... alized in the books of accounts; the lease rental payment was split into finance charges and principal charges, with the finance charges being charged to the P&L account. Further, it was submitted that the assessee had not claimed depreciation u/s 32 of the Act on cars taken on finance lease due to lack of ownership. However, the AO was not convinced with the above explanation of the assessee and from the total deduction of ₹ 11,46,925/- claimed by the assessee towards car lease rentals disallowed an amount of ₹ 758,609/- towards the principal repayments of such rentals (this is reflected as addition of total lease rental of ₹ 11,46,925/- less interest portion of ₹ 3,88,316/-); disallowed the depreciation on motor cars amounting to ₹ 4,71,375/-. Thus the AO made an adjustment of ₹ 12,30,994/-. In appeal, the Ld. CIT(A) confirmed the above adjustment made by the AO. 8.2 Before us, the Ld. counsel of the assessee submits that the appellant had not claimed any depreciation on leased cars in the return of income and this is evident from the notes appearing in depreciation schedule provided as part of the tax audit report in Form 3CD. Further, it .....

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