2016 (5) TMI 1276 - AT - Income Tax

Tribunal Rules in Favor of Assessee, Disallowances Overturned

The Tribunal allowed the assessee's appeals, overturning disallowances and adjustments made by the AO/TPO based on legal precedents. Disallowance of sales ... Disallowance of sales promotion expenses - Held that:- Respectfully following the decision of the Co-ordinate Bench in assessee’s own case, we delete the adhoc disallowance made by the Assessing Officer in respect of gifts articles Eligible profit for deduction u/s. 80HHC - Disallowance of bank interest as business income and excluding the same while computing the deduction u/s. 80HHC - Held that:- In the case on hand, the assessee has received interest on current account balances. The interest earned on current account balances cannot be said to be derived on business of exports. Earning of interest income from current account balances cannot be construed to be a direct and proximate nexus with the business of exports. Thus we hold that such interest income cannot be considered as income derived from business for the purpose of computing deduction u/s. 80HHC of the Act. However, the alternative argument of the assessee that only the net interest should be eliminated under clause (baa) to Explanation is accepted and this is also the view of the Special Bench in the case of Lalsons Enterprises (2004 (2) TMI 294 - ITAT DELHI-E ) which was approved by the Supreme Court in the case of ACG Associates Capsules (2012 (2) TMI 101 - SUPREME COURT OF INDIA). Thus, we direct the Assessing Officer to exclude only the net interest. Upholding deduction of 90% of (a) insurance claim (b) Miscellaneous income (c) Service charges (d) Cenvat credit (e) Extraordinary income as per clause (baa) of Explanation to Sec. 80HHC - Held that:- In so far as insurance claim and sale of scrap is concerned, in our view, this income is generated from business and therefore 90% of such income cannot be reduced for the purpose of computing deduction u/s. 80HHC of the Act. This also supported by the decision of the Hon’ble Bombay High Court in the case of Pfizer Ltd (2010 (6) TMI 433 - Bombay High Court ). In so far as service charges are concerned, we are of the view that this income is not derived from the business operations of the assessee therefore, we uphold the action of the Assessing Officer in reducing 90% of such income while computing deduction u/s. 80HHC of the Act. Coming to Cenvat credit, it is held that is derived from the industrial undertaking therefore cannot be treated as other income and cannot be reduced 90% of such income while computing deduction u/s. 80HHC. Coming to extraordinary income, it is the submission of the Ld. Counsel for the assessee that this amount is not income at all but should go to capital reserve as this income represents only excess income over liabilities in the process of acquiring the business by the assessee. In the circumstances, we are of the view that this aspect has to be looked into by the Assessing Officer for the reason that if this amount is not income at all, the question of reducing 90% will not arise. Thus, we restore the matter to the file of the Assessing Officer for fresh adjudication. E-connectivity charges - revenue v/s capital - Held that:- On going through the agreement entered into by the assessee, we find that assessee has not acquired any software from its parent company but assessee is paying activity charges for the facility of access/usage of various applications, intranet websites, emails, global resources etc for day today running of the business. We do not find any acquisition of software by the assessee by payment of this activity charges. We also do not find any enduring benefit for the assessee. Thus, we hold that the e-connectivity charges paid by the assessee are of Revenue in nature. Transfer pricing adjustment - MAM - TNMM or CUP - Held that:- Under TNMM all the objections raised by the TPO in his remand report have been addressed by the appellant as discussed and accordingly it is held that the appellant's margin is quite high as compared to arithmetical mean margin of the comparables and hence the adjustment made by the AO/TPO being CUP as MAM is directed to be changed following the decision of the Hon'ble ITAT in appellant's own case for A.Y. 2002-03 and 2003-04. However, the Assessing Officer/TPO would be at liberty to factually verify the benchmarking analysis carried out by the appellant under TNMM on transaction to transaction basis in consonance with directions of IT A T while giving effect to this order. This ground of appeal is therefore allowed subject to verification as above”. As seen from the above, the Ld. CIT(A) adopted the directions given by the DRP for the Assessment Year 2006-07 and 2008-09 for the year under consideration to change the method following the decision of the ITAT. The above findings have not been rebutted by the Revenue, we do not find any infirmity in the order passed by the Ld. CIT(A) for the year under consideration also. Issues Involved:1. Disallowance of sales promotion expenses.2. Disallowance of bank interest as business income for deduction under Section 80HHC.3. Deduction of 90% of various incomes (insurance claim, miscellaneous income, service charges, Cenvat credit, extraordinary income) under Section 80HHC.4. Classification of e-connectivity charges as capital expenditure.5. Transfer pricing adjustments and the appropriate method for benchmarking international transactions.Issue-Wise Detailed Analysis:1. Disallowance of Sales Promotion Expenses:The assessee contested the disallowance of Rs. 10,42,837/- for sales promotion expenses, which included gifts to doctors and sponsoring a trip. The Tribunal noted that similar disallowances in previous years were deleted as they were based on mere surmises and presumptions. The Tribunal held that the CBDT Circular No. 5 of 2012, which disallowed such expenses, was applicable prospectively from 1st August 2012 and not for the Assessment Year 2004-05. Therefore, the disallowance was deleted, allowing the assessee's appeal.2. Disallowance of Bank Interest as Business Income for Deduction under Section 80HHC:The assessee argued that interest on current accounts should be considered business income and only net interest should be excluded under clause (baa) of Explanation to Section 80HHC. The Tribunal referred to its prior decisions and the Supreme Court's ruling in ACG Associates Capsules Pvt. Ltd. vs. CIT, which supported the exclusion of only net interest. However, it upheld that interest on current accounts does not have a direct nexus with the business of exports and thus cannot be considered for deduction under Section 80HHC. The Tribunal directed the AO to exclude only the net interest.3. Deduction of 90% of Various Incomes under Section 80HHC:The Tribunal analyzed various incomes:- Insurance Claim and Sale of Scrap: These were considered business income and thus not to be reduced by 90% for Section 80HHC computation, supported by the decision in Pfizer Ltd.- Service Charges: Upheld as not derived from business operations, thus 90% to be excluded.- Cenvat Credit: Following the decision in ACIT vs. Total Packaging Services, it was held that Cenvat credit is derived from industrial undertakings and should not be reduced by 90%.- Extraordinary Income: The matter was remanded to the AO to verify if this amount should be treated as income or capital reserve.4. Classification of E-Connectivity Charges as Capital Expenditure:The assessee argued that e-connectivity charges were annual payments for services like SAP modules, data security, and email capacity, not for acquiring software. The Tribunal found that these charges did not result in acquiring any software or enduring benefit and were necessary for day-to-day business operations. Thus, it held these charges to be revenue in nature, allowing the assessee's appeal.5. Transfer Pricing Adjustments:The Tribunal reviewed the method for benchmarking international transactions. It rejected the CUP method adopted by the TPO and upheld the segmental TNMM method as the most appropriate, following its previous decisions and the DRP's directions for subsequent years. The Tribunal directed the AO/TPO to verify the benchmarking analysis under TNMM on a transaction-to-transaction basis.Conclusion:The appeals filed by the assessee for the respective years were allowed, and the disallowances and adjustments made by the AO/TPO were largely overturned based on prior Tribunal and Supreme Court rulings. The appeals filed by the Revenue were dismissed. The Tribunal emphasized adherence to established legal precedents and proper verification of facts in transfer pricing matters.