2012 (5) TMI 147 - AT - Income Tax

Tribunal decision favors assessee on profit reduction, foreign travel expenses, lease line charges, and assessment limitation.

The Tribunal partly allowed the appeal by deleting the reduction in eligible profits under sec.10A, deciding in favor of the assessee on the exclusion of ... Arm's Length Price - Transfer Pricing regime and reference to Transfer Pricing Officer - Transactional Net Margin Method - ordinary profits as qualifier for deduction under sec.10A - limitation of deduction under sec.10A(7) read with sec.80IA(10) to instances of arranged transactions - distinction between TP determinations under Chapter X and regular assessment procedures under Chapter XIV - procedure under sec.144C for forwarding draft assessment orderOrdinary profits as qualifier for deduction under sec.10A - Arm's Length Price - limitation of deduction under sec.10A(7) read with sec.80IA(10) to instances of arranged transactions - Reduction of eligible deduction under sec.10A by excluding the excess of actual operating profit over ALP (as computed by the TPO). - HELD THAT: - The TPO's role under Chapter X is confined to computing income from international transactions having regard to ALP; those TP procedures and findings serve the object of sec.92. Sec.10A(7) read with sec.80IA(10) permits limiting deduction to 'ordinary profits' only where a unit has so arranged transactions with another unit as to inflate eligible profits. ALP determined under TP provisions cannot, by itself, be equated to 'ordinary profits' for the purpose of sec.10A(7), particularly because ALP may be derived by diverse methods (price based or profit based) and does not invariably represent the commercial concept of ordinary profits. The Assessing Officer's reliance on the TPO's ALP computation to exclude the excess profit from sec.10A deduction was therefore impermissible; the proper computation under sec.10A(7) requires independent demonstration that profits were arranged to be more than ordinary, which was not made. Consequently, the deduction cannot be reduced on the basis of the TPO's ALP alone. [Paras 25, 26, 28, 29, 30]Adjustment of Rs.4,48,50,795/- from sec.10A deduction on the basis of ALP deleted; issue decided in favour of the assessee.Export turnover adjustments for sec.10A - parity between export turnover and total turnover in computing eligible deduction - Whether foreign travel and lease line charges may be excluded from export turnover while computing sec.10A deduction without corresponding adjustment in total turnover. - HELD THAT: - Following the Special Bench decision in ITO v. Sak Soft Ltd., expenses excluded from export turnover for sec.10A computation must also be reduced from total turnover to preserve parity. The Tribunal applied that precedent and held that the Assessing Officer's adjustments to export turnover alone were unsustainable absent a corresponding reduction in total turnover. [Paras 31]Adjustments excluding foreign travel and lease line charges from export turnover to compute sec.10A deduction are to be reflected in total turnover as well; issue decided in favour of the assessee.Disallowance under sec.14A - inapplicability of Rule 8D for assessment year 2007-08 and reasonableness test for disallowance - Validity and quantum of disallowance under sec.14A in the absence of Rule 8D applicability. - HELD THAT: - Rule 8D was not applicable to the impugned year; nevertheless, where dividend income is substantial, a reasonable portion of expenses attributable to earning such income may be disallowed on principles of reasonableness. The Tribunal found that some disallowance was justified despite absence of Rule 8D quantification and moderated the Assessing Officer's disallowance to a fair sum on the facts of the case. [Paras 32, 33]Disallowance under sec.14A modified from the Assessing Officer's figure to Rs.6,00,000; issue decided partly in favour of the assessee.Procedure under sec.144C for forwarding draft assessment order - distinction between TP reference/draft orders and final assessment for limitation - Whether the Assessing Officer's issuance of a draft assessment order under sec.144C(1), when the TPO made no TP adjustment, rendered the final assessment void and time barred. - HELD THAT: - The Tribunal held that references to the TPO, the TPO's report, the draft assessment under sec.144C and DRP directions are pre assessment procedural steps and not assessment orders; an erroneous inclusion of non TP adjustments in the draft does not strip the Assessing Officer of competence to issue the draft. Such procedural irregularity renders the order irregular but not void ab initio, and does not by itself render the subsequent assessment time barred. Any invalid adjustments can be corrected subsequently (and were so corrected by the Tribunal). Thus the final assessment is not barred by limitation merely because the draft arose from a TP reference that did not result in TP adjustments. [Paras 45, 46, 47, 48, 49]The challenge that the assessment is void and time barred for want of jurisdiction to issue a draft under sec.144C is rejected; assessment held not barred by limitation.Final Conclusion: Appeal partly allowed: deletion of sec.10A adjustment based on ALP and acceptance of export/total turnover parity; sec.14A disallowance reduced to Rs.6,00,000; challenge to validity/limitation of assessment under sec.144C rejected. Issues Involved:1. Reduction of eligible deduction under sec.10A by the Assessing Officer.2. Exclusion of foreign travel expenses and lease line charges from export turnover.3. Disallowance under sec.14A.4. Legal validity of the draft assessment order under sec.144C(1) and its consequences.Detailed Analysis:1. Reduction of Eligible Deduction under sec.10A:The primary issue was whether the Assessing Officer (AO) was justified in reducing Rs. 4,48,50,975 from the eligible deduction under sec.10A based on the difference between the Arm's Length Price (ALP) determined by the Transfer Pricing Officer (TPO) and the actual operating profit reported by the assessee. The assessee argued that the AO and the Dispute Resolution Panel (DRP) erred in invoking sec.10A(7) along with sec.80IA(10) without establishing that the transactions were 'arranged' to yield more than ordinary profits. The Tribunal held that ALP, determined under sec.92, cannot be used as a basis for calculating 'ordinary profits' under sec.10A(7). The Tribunal cited previous decisions, including TweezerMAN (India) (P) Ltd. v. ACIT, to support its conclusion that the AO was not justified in reducing the eligible profits based on the ALP computed by the TPO. Consequently, the adjustment made by the AO in computing the deduction under sec.10A was deleted.2. Exclusion of Foreign Travel Expenses and Lease Line Charges from Export Turnover:The AO had proposed to exclude foreign travel expenses and lease line charges from the export turnover for computing the deduction under sec.10A. The Tribunal referred to the ITAT, Chennai Special Bench decision in the case of ITO v. Sak Soft Ltd., which held that if expenses are to be reduced from export turnover, they must also be reduced from the total turnover to maintain parity. Therefore, the Tribunal decided in favor of the assessee, holding that the adjustments made to the export turnover should also be made to the total turnover.3. Disallowance under sec.14A:The AO had made a disallowance under sec.14A, estimating 0.5% of the investment as expenditure incurred for earning non-taxable income. The assessee contended that Rule 8D was not applicable for the assessment year 2007-08 and that no expenditure was incurred towards earning dividend income. The Tribunal agreed that Rule 8D was not applicable for the impugned assessment year. However, it recognized that a reasonable portion of the top management's time/expenditure could be attributed to earning dividend income. The Tribunal modified the disallowance to Rs. 6 lakhs on a fair basis, partly favoring the assessee.4. Legal Validity of the Draft Assessment Order under sec.144C(1) and its Consequences:The assessee argued that the AO had no jurisdiction to pass a draft assessment order under sec.144C(1) as no transfer pricing adjustment was suggested by the TPO, rendering the final order barred by limitation. The Tribunal examined the procedural aspects and concluded that the reference to the TPO and the draft assessment order were part of the pre-assessment procedures. Any irregularity in these procedures did not make the assessment order illegal but only irregular. Since the Tribunal deleted the adjustments made by the AO, the irregularity was cured, and the assessment order need not be invalidated. Therefore, the argument that the assessment was barred by limitation was not accepted.Conclusion:The appeal was partly allowed, with the Tribunal deleting the reduction in eligible profits under sec.10A, deciding in favor of the assessee on the exclusion of foreign travel expenses and lease line charges, modifying the disallowance under sec.14A, and rejecting the argument that the assessment was barred by limitation.