Apax Partners India Advisers (P.) Ltd. Vs DCIT (ITAT Mumbai)
Learned Counsel of the assessee submitted that the above is provision for legal expenses. He submitted that the said provision was reimbursed in the next year and the actual expenses booked and taxed were duly deducted at source. Learned Counsel submitted that assessee is not required to deduct tax at source on estimation of expenses i.e. for the provision made for expenses, tax deduction is not required. For this proposition, learned Counsel placed reliance upon case law from Aditya Birla NUVO Ltd. v. Dy. CIT [IT Appeal No. 8427 (Mum.) of 2010, dt. 17-9-2014].
We find that the ITAT Mumbai Benches in the above said decision has duly upheld the proposition that when the provisions are made and payments are not received and in the subsequent year the provision made is offered for taxation, the impugned amount cannot be disallowed and hence cannot be brought under the ambit of taxation under section 40(a)(ia).
Full Text of the ITAT Order is as follows:-
This appeal by the assessee is directed against the order of assessing officer passed under section 144C read with section 143(3) of the Income Tax Act, 1961, dated 30-11-2012 pursuant to the direction of the Dispute Resolution Panel-I, Mumbai (“DRP” for short) vide direction dated 4-9-2012 pertaining to assessment year 2008-09.
2. The grounds of appeal read as under :–
The grounds stated hereunder are without prejudice to one another.
Ground 1: Transfer Pricing Adjustment relating to international transaction of provision of non-binding investment advisory services of Rs. 86,430,318
1. On the facts and in the circumstances of the case, the learned assessing officer (‘Ld. AO’)/Transfer Pricing officer (‘TPO’) erred on facts and in law in making an addition of Rs. 86,430,318 to the provision of non-binding investment advisory services transaction of the Appellant based on the provisions of Chapter X of the Income Tax Act, 1961 (‘the Act’).
2. The learned AO/TPO erred on facts and in law in not complying with the directions of the Hon’ble Dispute Resolution Panel (‘DRP’).
3. The learned AO/TPO under the directions of the Hon’ble DRP, erred on the facts and in law indisregarding the various submissions made by the Appellant rejecting the benchmarking analysis and most of the comparable companies selected by the Appellant without appreciating the fact that such selection was based on contemporaneous data and the transfer pricing study report prepared and maintained as per section 92D of the Act read with rule 10D of the Income Tax Rules, 1962 (‘the Rules’).
4. The learned AO/TPO under the directions of the Hon’ble DRP erred on facts and in law by arbitrarily classifying the appellant’s services as Knowledge Process Outsourcing (‘KPO’) services, without taking into consideration the differences in the functions performed, assets employed and risks undertaken between the Appellant and the set of KPO comparables.
5. The learned AO/TPO under the directions of the Hon’ble DRP erred on facts and in law in conducting a fresh benchmarking analysis using non contemporaneous data and substituting the Appellant’s analysis with fresh benchmarking analysis based on his own conjectures and surmises. Thus the Appellant prays that the fresh benchmarking analysis conducted by the learned TPO is liable to be quashed.
6. The learned AO/TPO erred on facts and in law in using data obtained using powers available under section 133(6) which was not shared with the Appellant, and which, based on the principle of ‘impossibility of performance’, the Appellant could not possibly have access to as the same was not available in public domain either at the time of carrying out the benchmarking exercise or during the assessment.
Further the Hon’ble DRP erred on facts and in law, in upholding the use of data obtained under section 133(6) of the Act by the TPO, on the assumption that the same was shared with the Appellant
7. The learned AO/TPO under the directions of the Hon’ble DRP erred on facts and in law in not allowing appropriate adjustments namely; risk adjustment to the comparables as is required to be done in accordance with the provisions of rule 10B(1)(e)(iii) of the Income Tax Rules, 1962 to account for difference between the risk profile of the Appellant and the alleged comparables selected by the learned AO/TPO.
8. The learned AO/TPO under the directions of the Hon’ble DRP erred on facts and in law in upholding/confirming the action of the TPO of arbitrarily rejecting the without prejudice contention of the Appellant to provide the benefit/reduction of 5 percent from the arithmetic mean as provided in proviso to section 92C(2) of the Act, while determining the arm’s length price for the international transaction.
9. Without prejudice to the above, the learned AO/TPO erred on facts and in law in not excluding the expenses disallowed by the assessing officer, from the cost base, while computing the Transfer pricing adjustment in connection with the international transaction of provision of non-binding investment advisory services.
The Appellant prays that the adjustment in relation to transfer pricing matters made by the learned AO/TPO and upheld by the Hon’ble DRP in respect of the international transaction of provision of support services be deleted.
Ground 2: Disallowance of Provision for Legal and Professional fees of Rs. 10,00,000
1. The learned assessing officer has erred on facts and in law in disallowing the provision for legal and professional fees of Rs. 10,00,000 incurred by the Appellant for the purposes of taking office premises on leave and licence basis in subject assessment year.
2. The learned assessing officer erred on facts and in law in holding that such expenditure is capital in nature and not allowable under section 37(1) of the Act despite of the clear observation of the Hon’ble DRP in its directions that such expenditure cannot be termed as capital in nature because it represents legal fees payable in relation to acquiring premises on lease.
3. The learned assessing officer erred on facts and in law in holding that the expenses were not incurred before the end of the relevant previous year and were of provision in nature despite the observation of the Hon’ble DRP in its directions that the expenses were actually been incurred by the Appellant, the amount was correctly reflected in the form of a provision in the Profit and Loss Account in accordance with the method of accounting.
4. The Hon’ble DRP erred on facts and law in holding that provision for legal and professional fees is disallowable under section 40(a)(ia) of the Act due to non deduction of tax at source.
5. Without prejudice to the above, if such expenses are disallowed in the subject assessment year due to non deduction of tax at source, such expenses ought to be allowed in the subsequent assessment year i.e., assessment year 2009-10, i.e. the year in which tax has been deducted at source and deposited with the Government.
6. Without prejudice to above, the learned assessing officer has failed to appreciate that the Appellant is operating at cost plus 15 percent model. The learned assessing officer has accepted the revenue returned by the Appellant in its financial statements. Since, the learned assessing officer has disallowed the provision for legal and professional expenses to the tune of Rs. 10,00,000 and the learned assessing officer ought to have reduced the revenue of Appellant by cost plus fifteen percent, i.e., Rs. 11,50,000 made by the learned assessing officer and upheld by the Hon’ble DRP be deleted.
Ground 3: Disallowance of Travel and Conveyance expenses of Rs. 1,50,00,000
1. The learned assessing officer under the directions of Hon’ble DRP erred on facts and in law in disallowing the Travel and Conveyance expenses of Rs. 1,50,00,000.
2. The learned assessing officer under the directions of the Hon’ble DRP erred in holding that the Appellant has made only general statements but has not provided the specific details, disregarding the fact that the Appellant had not only furnished the purpose for travel but also submitted the specific details in the format prescribed by the learned assessing officer.
3. The Hon’ble DRP erred on facts and law in holding that no explanation had been forthcoming from the Appellant as to why the expenses had increased by almost 5 times during the previous year, given the fact that the Appellant was never asked to provide any explanation in this regard.
4. Hon’ble DRP erred on facts and law in comparing the current year’s expenditure with that of the earlier year i.e. financial year 2006-07 (Rs. 4.9 million), given the fact that the Appellant was incorporated on 16-10-2006, hence the expenses incurred during that year were only for 5.5 months and therefore not comparable with financial year 2007-08 (i.e. year under consideration).
5. Without prejudice to above, the learned assessing officer has failed to appreciate that the Appellant is operating at cost plus 15 percent model. The learned assessing officer has accepted the revenue returned by the Appellant in its financial statements. Since, the learned assessing officer has disallowed the travel and conveyance expenses to the tune of Rs. 1,50,00,000 and the learned assessing officer ought to have reduced the revenue of Appellant by cost plus fifteen percent i.e. Rs. 1,72,50,000.
The Appellant prays that the disallowance in relation to travel and conveyance expenses made by the learned assessing officer and upheld by the Hon’ble DRP be deleted.
Ground 4: Initiation of Penalty Proceedings under section 271(1)(c)
1. The learned assessing officer erred on facts and in law in initiating penalty proceedings under section 271(1)(c) of the Act for furnishing inaccurate particulars of income on proposed disallowance for provision for legal and professional expenses and travel and conveyance expenses.
The above grounds of objections are all independent and without prejudice to one another.
The Appellant craves leave to add to, alter, amend or withdraw all or any of the grounds of appeal herein above and to submit such statements, documents and papers as may be considered necessary either at or before the hearing of this appeal as per law.”
3. Ground No. 1, Transfer Pricing Adjustment.
3.1 Brief facts of the case are as under :–
The assessee is engaged in providing non binding investment advisory business to its AE in the UK. During the year the total value of this transaction was declared at Rs. 28.53 crores. In its TP study the assessee bench marked this transaction by the transactional net margin method using operating profit to operating cost (NCP Margin) as the profit level Indicator. The assessee selected 6 companies as comparables and computed the mean NCP margin at 12.91%, using the earlier two year’s data. In the course of proceedings before the TPO, the assessee updated these margins using single year data of the current year and found the mean margin to be 4.99% as under :–
