AO cannot invoke sec. 40A(2) if payment made by assessee was accepted at ALP by TPO: ITAT

Case details:  ACIT v. Lifestyle International (P.) Ltd. - [2021] 128 taxmann.com 146 (Bangalore - Trib.)

Judiciary and Counsel Details

• • George George K | Judicial Member and B.R. Baskaran | Accountant Member
  • Ms. Neera Malhotra | CIT-DR for the Appellant
  • K.R. Vasudevan | Adv. for the Respondent

Facts of the Case

Assessee made payment as professional fees to its Associated Enterprises (AE). Assessing Officer (AO) disallowed the professional fees paid by assessee by stating that the payments made were unreasonable and excessive and without the legitimate need of business. AO stated that assessee had a full-fledged management team with the expertise needed to execute such operations, and there was no such necessity to procure services of AE.
Aggrieved by order of AO, assessee preferred an appeal before the CIT(A). The CIT(A) held that there could not be unwarranted deviation when the international transactions are declared at arm’s length price. The CIT(A) further held that AO had erroneously disallowed professional fees under Section 40A(2) without specifying what was excess or unreasonable in the payments made. AO failed to bring on record fair market value analysis for making such disallowance. Accordingly, CIT(A) directed AO to delete the disallowance.

ITAT Held

On further appeal, Bangalore ITAT held that assessee considered professional fees paid by assessee to its AE as an international transaction in its transfer pricing study. It had also disclosed the same in Form 3CEB. AO referred the said international transaction to the Transfer Pricing Officer (TPO) for determining the arm’s length price during the assessment proceedings. TPO, by orders, concluded that no adjustment was required as the transaction was at arm’s length. AO had not relied on the order of the TPO and had gone ahead by disallowing the professional fees paid under Section 40A(2). In the case of Oracle India (P.) Ltd. v. Addl. CIT [2011] 16 taxmann.com 317 (Delhi), the Delhi ITAT held that AO was required to compute the assessee’s total income in regard to the arm’s length price determined by the TPO. When payments were accepted at arm’s length by TPO, then there was no justification on the part of AO to hold that the expenditure is unreasonable and invoke the provisions of section 40A(2).

Thus, ITAT held that AO had erred in invoking the provisions of Section 40A(2) to disallow the claim of expense as excessive and not legitimate to the business needs, especially in view of the fact that TPO, in its transfer pricing orders had held the transaction is at arm’s length.

Cases Referred to

• • DRHL India Services (P.) Ltd. v. Dy. CIT [2019] 102 taxmann.com 334 (Bang. – Trib.) (para 4.3)
  • Gemplus India (P.) Ltd. v. Asstt. CIT [2010] 3 taxmann.com 755 (Bang. Trib.) (para 4.3)
  • Manipal Health Systems (P.) Ltd. v. Jt. CIT [IT Appeal Nos. 1667 and 1668 (Bang.) of 2016, dated 27-6-2018] (para 4.4)
  • Cisco Systems Capital India (P.) Ltd. v. Addl. CIT[2014] 52 taxmann.com 17 (Bang. – Trib.) (para 4.4)
  • Oracle India (P.) Ltd. v. Addl. CIT [2011] 16 taxmann.com 317/[2012] 49 SOT 49 (URO) (Delhi) (para 4.5)
  • Herbalife International India (P.) Ltd. v. Asstt. CIT [2016] 65 taxmann.com 143 (Bang. – Trib.) (para 4.5)
  • CIT v. Nestle India Ltd. [2011] 11 taxmann.com 106/199 Taxman 321 (Mag.)/337 ITR 103 (Delhi) (para 4.5.1)
  • CIT v. Dalmia Cement (P.) Ltd. [2002] 121 Taxman 706/254 ITR 377 (Delhi) (para 4.5.5)
  • S.A. Builders Ltd. v. CIT (Appeals) [2007] 158 Taxman 74/288 ITR 1 (SC) (para 4.5.6)
  • CIT v. Britannia Industries Ltd. [2015] 63 taxmann.com 16/235 Taxman 259/376 ITR 299 (Cal.) (para 5.5)
  • Munjal Showa Ltd v. Dy. CIT [2005] 147 Taxman 69 (Mag.) (Delhi) (para 5.10)