2013 (8) TMI 669 - AT - Income Tax

ITAT upholds CIT (A) decisions for 2004-05 and 2005-06 assessments, rejects department's appeals.

The ITAT dismissed the department's appeals for Assessment Years 2004-05 and 2005-06, upholding the CIT (A)'s decisions. The additions to book profit for ... Book profit adjustment - MAT u/s 115JB - Addition made by the A.O. for calculating the book profit being the provision for retirement benefits – Held that:- Clause (f) in Section 43B of the Act. As per this clause (f), the expenses of leave encashment are allowable on an actual payment basis. No corresponding amendment, however, was brought about in Section 115JB of the Act, with the result that the provisions for expenses accrued and ascertained shall be allowed while computing book profits under MAT - Computation of retirement benefits, having been made on the basis of actuarial valuation, is based, undoubtedly, on a scientific basis - Ld. CIT (A) has correctly held that the provision for retirement benefit, as duly certified by the actuarial valuation, cannot be treated as a contingent or unascertained liability and it is a definite liability in present, which is to be discharged at a future date - Decided in favor of Assessee. Computation of Transfer price on comparables - Apropos Phoenix Lamps was situated in an SEZ and it was enjoying certain benefits and was, thus, in more advantageous position as compared to the assessee – Held that:- Phoenix were to be retained as a comparable, certain adjustments were required to be made to its statistics – There are remaining three comparables, i.e., Indo-Japan Lightings, Fiem Industries Ltd. and Jagan Lamps Ltd. - The PLI’s of these comparables were 8.1%, 2.69% and 1.91% respectively, amounting to a total of 12.77%. - Average PLI of these comparables at 4.26%. The assessee’s margin, at 6.5%, it is seen, is higher than the above average PLI of 4.26% and the assessee’s margin, therefore, does not call for any adjustment on account of ALP concerning royalty payment on purchase of raw material - The CIT (A)’s order in this regard is found to be fully justified as against that of the TPO, who initially observed that an FAR convergence was mandatory and then, simply rejected the comparables on the basis of turnover, without checking out the FAR convergence, and thereafter, chose a single comparable which too (according to him) was not comparable to the assessee company, which observation has correctly been subverted by the Ld. CIT (A) - Since Phoenix Lamps, as found by the Ld. CIT (A), was operating in an SEZ, it, in order to be retained as a comparable, would have required adjustments to be made for the purpose, which, undeniably, was not done by the TPO. As such, Phoenix was rightly rejected as a comparable by the CIT (A). Even otherwise, undisputedly, the product manufactured by Phoenix is entirely different from that produced by the assessee. Whereas the assessee manufactures the complete lamp, i.e., the full lighting assembly or headlight/tail-light used in automobiles, Phoenix is making only the bulb contained therein - Phoenix nowhere qualifies as a ‘comparable’ to the assessee. Adjustment in the Arm’s Length Price – There is agreement between the assessee and Stanley - Assessee was into a commercial relationship with Stanley and the expatriate engineers had been sent to ensure that the technology supplied was properly applied – Held that:- Mere obtaining of moulds, designs and drawings could not lead to disallowance of the royalty payment, since the technology for use thereof was what required the payment of royalty; that from the fact that the assessee’s turnover had increased over the years and that the assessee was establishing its own R&D Centre and thereby trying to absorb the technology the company received from its AE, went to show that it could not be said that there was no transfer of intangible, or that no technology had actually been received, or was required to be received. Since Phoenix Lamps was an entity situated in an SEZ, enjoying certain benefits, being in an advantageous position as compared to the assessee, if it were to be retained as a comparable, certain adjustments were required to be made to it; that in Assessment Year 2006-07, the TPO had himself rejected Phoenix Lamps as a comparable; that so, Phoenix Lamps was being rejected as a comparable; that the remaining three comparables gave a PLI of 6.07% on the current year’s basis; and that the assessee’s PLI was at 6.50% and so, no adjustment was required to the arm’s length results - CIT (A) has correctly deleted the addition made – Decided against the Revenue. Expenditure on account of foreign tour of the Director of the assessee company - Assessee’s Director, Shri D.K. Jain had incurred an expenditure of ₹ 1,11,497/- on his visit to the USA on 15.08.2003 and that of ₹ 1,47,937/- on his visit to Dubai on 01.10.2003 – Contended by Revenue that no import from the two countries, there was no business connection and the expenditure incurred was not commercially expedient- Held that:- As per Section 37(1) of the Act, it is not necessary that the incurrence of the expenditure should always result in earning of profits and it can be for any purpose, even incidental or ancillary to the business, for which the expenditure may have been incurred, in order to be allowable under the provision – Expenditure allowed – Decided against the Revenue. Issues Involved:1. Deletion of addition for calculating book profit being the provision for retirement benefits.2. Deletion of addition under section 92CA of the Act being the TPO adjustment.3. Deletion of addition on account of foreign tour expenses of the director.Detailed Analysis:1. Deletion of Addition for Calculating Book Profit Being the Provision for Retirement Benefits:The Assessing Officer (A.O.) added Rs. 2,27,23,781/- to the book profit under Section 115JB of the Income Tax Act, considering it a contingent liability. The CIT (A) deleted this addition, referencing the Supreme Court judgments in 'Apollo Tyres Ltd. vs. CIT' and 'Bharat Earth Movers vs. CIT'. The Supreme Court held that the A.O. has limited power to examine the books certified under the Companies Act and cannot go behind the net profit declared, except as provided in the Explanation to Section 115J. The CIT (A) also noted that the provision was based on actuarial valuation, making it a definite liability and not contingent. Consequently, the ITAT upheld the CIT (A)'s decision, rejecting the department's ground.2. Deletion of Addition under Section 92CA of the Act Being the TPO Adjustment:The TPO made an adjustment of Rs. 2,51,88,406/- on account of the difference in arm's length price of international transactions, including royalty payments and raw material purchases. The CIT (A) deleted the addition, observing that the royalty was paid based on long-standing agreements and was consistent with past practices. The CIT (A) also rejected the TPO's reliance on a single comparable (Phoenix Lamps Ltd.), noting it operated in an SEZ and required adjustments. The CIT (A) accepted three other comparables, finding the assessee's PLI higher than the average PLI of these comparables. The ITAT upheld the CIT (A)'s decision, agreeing that the TPO's adjustments were not justified and the assessee's transactions were at arm's length.3. Deletion of Addition on Account of Foreign Tour Expenses of the Director:The A.O. disallowed Rs. 2,59,434/- incurred by the director on foreign tours to the USA and Dubai, deeming them non-business expenses. The CIT (A) deleted this addition, noting that the assessee had provided details of exports to these countries, establishing a business connection. The ITAT upheld the CIT (A)'s decision, stating that the expenditure was incidental to the business and allowable under Section 37(1) of the Act.Conclusion:The ITAT dismissed the department's appeals for both Assessment Years 2004-05 and 2005-06, upholding the CIT (A)'s decisions on all contested grounds. The provisions for retirement benefits were deemed definite liabilities, the TPO adjustments were found unjustified, and the foreign tour expenses were recognized as business-related.