Tribunal adjusts expense allocation for tax deduction, sets new transfer pricing rate.

The Tribunal partially allowed the assessee's appeal, rejecting the reallocation of expenses for the 80IB/80IC deduction and directing a recomputation of the transfer pricing adjustment for guarantee fees at a 0.5% rate. The decision was issued on 22nd November 2013.

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Issues Involved:
1. Restriction of assessee's claim for deduction u/s 80IB/80IC of the Income Tax Act.
2. Transfer pricing adjustment in respect of guarantee fees.

Detailed Analysis:

1. Restriction of Assessee's Claim for Deduction u/s 80IB/80IC:

The assessee, engaged in manufacturing and marketing household insecticides and air fresheners, claimed deductions under sections 80IB/80IC of the Income Tax Act for its manufacturing units located in backward areas. The common administrative and selling expenses were allocated by the assessee between eligible and non-eligible units based on sales ratio. The Assessing Officer (A.O.) questioned the allocation of certain expenses, including miscellaneous expenses, conveyance and traveling expenses, rent, rates and taxes, advertisement and publicity, and schemes and promotions, suggesting they should be entirely allocated to the eligible segment.

The A.O. reallocated 50% of these expenses to the eligible units, reducing the deduction claimed by the assessee. The Dispute Resolution Panel (D.R.P.) upheld this reallocation. The assessee argued that the allocation method based on turnover was reasonable and had been consistently used in previous assessments, citing the Supreme Court decision in Consolidated Coffee Ltd. v. State of Karnataka.

The Tribunal found the allocation method based on turnover to be reasonable and scientific. It noted that the expenses on advertisement and publicity, schemes, and promotions were incurred to promote the brand, benefiting both manufactured and traded goods. The reallocation by the A.O. on an ad-hoc basis was deemed unsustainable. The Tribunal deleted the addition made by the A.O. and allowed the assessee's appeal on this issue.

2. Transfer Pricing Adjustment in Respect of Guarantee Fees:

The assessee provided a bank guarantee on behalf of its subsidiary in Bangladesh, which was considered an international transaction. The Transfer Pricing Officer (T.P.O.) determined the Arm's Length Price (ALP) for the guarantee commission at 3% of the guarantee amount, leading to a proposed adjustment. The D.R.P. directed the A.O. to rework the rate by considering the average rates charged by ICICI Bank, resulting in an ALP of 1.77% and an adjustment of Rs. 10,05,360/-.

The assessee argued that the rate was excessive and referenced a Tribunal decision in Nimbus Communications Ltd., where the ALP for guarantee commission was set at 0.5%. The Tribunal, agreeing with the assessee, directed the A.O. to recompute the addition using a 0.5% rate, following the precedent set in Nimbus Communications Ltd.

Conclusion:

The Tribunal allowed the assessee's appeal partly, deleting the addition related to the reallocation of expenses for the 80IB/80IC deduction and directing a recomputation of the transfer pricing adjustment for guarantee fees at a 0.5% rate. The order was pronounced on 22nd November 2013.

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