Tata AutoComp v ACIT
Recently, the Mumbai
Bench of the Tax Tribunal has held that the documentary evidence (in the form
of back to back invoices) is a critical requirement to substantiate the cost to
cost nature of reimbursements.
The taxpayer in this
case had made reimbursements to its Associated enterprises (“AEs”) and claimed
them to be at arm’s length as the payments were to the extent of actual costs.
During the TP assessment, the Transfer Pricing Officer (“TPO”) disallowed the
reimbursements in entirety holding the Arm’s Length Price (“ALP”) as NIL as the
taxpayer failed to provide with documentary evidence that the reimbursements
were limited to actual costs.
Before the Tribunal,
the taxpayer argued that similar reimbursement expenses incurred in the earlier
and subsequent years were accepted by the TPO, based on records and submissions
furnished by the taxpayer. The taxpayer also pleaded that it would be difficult
to obtain the documentary evidences from the AE at this stage, as the AE was in
the course of being liquidated. However, the Tribunal directed the assessee to
obtain the records / details from the Liquidator of the AE or the third parties
to whom the payments were made by the AEs and furnish the same before the TPO.
It further directed the TPO to determine the ALP based on such documentary
evidences furnished by the taxpayer.
The aforesaid ruling
reiterates the point that necessary supporting documents should be obtained for
any payments towards reimbursement or cross‑charges made to AEs. Any inadequacy
in supporting records could result in a Transfer Pricing adjustment. This
apart, it could also create difficulties in defending the taxpayer’s position on
withholding of taxes, if tax was not withheld on the payments for the reason
that it was a pure reimbursement. Hence, it would be useful to have a system in
practice wherein the necessary supporting documents are also diligently
obtaining for any reimbursement or cross charge invoices raised by the
AEs.
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