ITO vs. Intertoll ICS India Private Limited (ITAT Mumbai)

The assessee entered into agreements with three companies for executing projects namely Ahmedabad-Mehsana Highway; Mumbai-Pune Expressway and Delhi Gurgaon Expressway. It made payment to its AE for providing it consultancy. It selected CUP method for determining the ALP of the IT. The AO directed the assessee to justify the basis of determination of the ALP. It furnished an agreement entered in to between its AE and an independent Hugarian entity. The agreement clearly proved that the rates charged by the AE were much less than the rates charged from the independent party. The scope of the agreement entered in to with the assessee was wider as compared to the agreement of the MIT-Hungary. Without assigning any reason the AO disallowed 25% of the consultancy charges. The CIT(A) forwarded additional evidences for the AO’s comments as he had alleged that the assessee had not produced any documentary evidences during assessment proceedings. The AO did not offer any comments about the additional evidences and justified the disallowance. The CIT(A) deleted the disallowance holding it to be arbitrary. On appeal by the department HELD dismissing the appeal:

(i) Transfer Pricing (TP) is a systematic, logical and step by step approach, it envisages an in-depth analysis commencing with screening of data for choice of comparables through statistical tools and application of the Most Appropriate Method (MAM), the provisions of Chapter-X of the Act require that a certain discipline is maintained by the assessee as well as the AO while computing the ALP of an IT. For determining the ALP of a transaction particular method should be followed so that assesses cannot reduce their tax liability while entering in to transactions with their AEs (Maruti Suzuki India Ltd.(328 ITR 210) referred);

(ii) Elaborate procedure has been laid down in the Act and in the Income tax Rules, 1962 (Rules). The AO is empowered to question the method employed by the assessee or the comparables selected by it. He can make adjustment rejecting the TP study conducted by the assessee. But, his rights are not unbridled. It is said that rights and duties are two sides of the same coin. In other words, rights demand that a person using his rights should also observe his duties. In taxation matters discretionary powers have been given to the AO’s but they are expected to use the power in a fair and just manner. State as an institution can levy and collect only due taxes from its subjects. So, if the AOs determine the tax liability in an unfair manner and if the demand is not of the DUE taxes appellate authorities are expected to allow relief to the assessee. It is what the FAA has done in the case before us. He found that the assessee had selected CUP method one of the valid methods. If the AO had some reservations that the method adopted by the assessee was not MAM, he should have give reasons for rejecting it. He had two chances to rebut the claim of the assessee – during the assessment proceedings and during the remand proceedings. He very well knew that the assessee had objected to the ad hoc disallowance and rejection of the CUP method. But, he stuck to his guns while submitting the remand report and supported the estimated disallowance. His approach goes against the very basis of the TP provisions. Either he was ignorant of the TP provisions or he was adamant to make the disallowance at any cost. But, his action cannot be endorsed. Why was the transaction entered in to by the AE with MIT Hungary could not be a basis for arriving at ALP was never discussed by the AO. The assessee has discharged his burden of proof. After that onus had shifted to the assessee and in our opinion he has failed miserably to prove that his action of making disallowance was supported by any logical argument or scientific basis. Whims and fancies of an AO cannot decide tax liability of an assessee. We find that the AO has mentioned that the payment made to the AE was excess and unreasonable. But, not a single word has been uttered in the order as to how it was excess or not reasonable. Any disallowance or addition, whether under chapter IV or chapter X of the Act, cannot be made on ad hoc basis. It has to be backed up by a valid and plausible reason. In the TP matters the rule had to be strictly followed as the Act has provided a special mechanism to deal with determination of ALP of IT.s.