ITAT Remands Rs.1.63 Crore Disallowance u/s 40(a)(i) for De Novo Consideration:

ITAT Remands Rs.1.63 Crore Disallowance u/s 40(a)(i) for De Novo Consideration The appeals arose out of a common order passed by the first appellate authority for the relevant assessment year. In the assessment framed u/s 143(3), the AO had made two additions, first, a transfer pricing adjustment of Rs.12,68,82,000 under Section 92CA on account of advertisement and marketing promotion (AMP) expenses, and second, a disallowance of Rs.1,63,36,548 under Section 40(a)(i) for alleged failure to deduct tax at source on payments made to overseas group entities. The payments were stated to be cost allocations for IT support and product design services received from foreign affiliates. During appellate proceedings, it was placed on record that a unilateral Advance Pricing Agreement (APA) had been entered into under Section 92CC on 29.11.2019, covering the period from AY 2016-17 to 2020-21, and subsequently rolled back to AYs 2012-13 to 2015-16. Since the year under consideration fell within the rollback period, the Tribunal observed that the AMP transfer pricing dispute was fully covered under the APA. All grounds raised by both parties on the AMP issue were dismissed as infructuous. Issue Raised: Whether the disallowance under section 40(a)(i) about the payment made to non-resident group entities for IT and product design services was sustainable in light of section 195 and the applicable DTAA provisions. ITAT's Decision: The tribunal analysed the nature of the payments in a total of Rs. 1,63,36,548, allocated towards expenses relating to IT support and "product design" activities. The assessee also maintained that these were reimbursements of reimbursement costs without an income element, and additionally, did not make available, pursuant to Article 12 of the applicable DTAAs, technology or know-how. It was further contended that the foreign recipients had no permanent establishment in India. The Bench observed that the assessee had admitted to a 5% markup on IT service allocations and had not furnished adequate documentation to establish that all payments were pure reimbursements devoid of any income element. The Tribunal noted that conclusive determination of these aspects required factual verification, particularly regarding the cost allocation method, nature of services, existence of any markup, and whether the services rendered satisfied the “make available” condition under the treaty. The Tribunal set aside the orders of the lower authorities on this issue and remanded the matter to the AO for fresh examination in accordance with law, directing that due opportunity of hearing be provided. The Revenue’s appeal was dismissed. Thus, the Tribunal overturned the orders of the lower authorities on this point, and remitted the matter to the AO for fresh examination in accordance with law, with a direction that due opportunity of hearing be given. The Revenue's appeal was dismissed as the AMP issue was resolved under the APA, and the assessee's appeal was partly allowed for statistical purposes, as the AMP issue was settled under the APA, and the assessee’s appeal was partly allowed for statistical purposes. To Read Full Judgment, Download PDF Given Below