2015 (1) TMI 773 - AT - Income Tax

Tribunal remits transfer pricing issue for re-adjudication, allows deduction under Section 10A

M/s. Safran Aerospace India Pvt. Ltd. Versus Deputy Commissioner of Income-tax

The Tribunal remitted the transfer pricing adjustment issue back to the Assessing Officer/Transfer Pricing Officer for re-adjudication, emphasizing the ... Transfer pricing adjustment - payment of management fee unwarranted - Held that:- When the assessee claims that the assessee has paid the management fee to the AE, no doubt the burden is on the assessee to prove that it has received services from its AE. But when the assessee has produced such material before any of the authorities below it is also the duty of the authorities to consider the same before coming to any conclusion on merits. In view of the same, without verification of proper evidence, it not justified to come to the conclusion that payment of management fee of ₹ 1.55 crore is unwarranted. In view of the same, we set aside the order of the AO on this issue and remit the issue to the file of the AO/TPO for readjudication of the issue and re-determination of the arm’s length price in accordance with law. The assessee shall also be given an opportunity to produce all the relevant materials before the AO and the assessee shall co-operate with the AO for early determination of the arm’s length price by the AO/TPO. Decided in favour of assessee for statistical purposes. Disallowances in computation of deduction u/s 10A - Held that:- When two reasonable constructions are possible, then the construction in favour of the assessee must be adopted. Thus the decision of the Hon’ble Karnataka High Court in the case of Yokogawa India Ltd.(2011 (8) TMI 845 - Karnataka High Court ) holds the field stating that the income of the section 10A unit has to be excluded before arriving at the gross total income of the assessee - The issue of reducing expenditure incurred on telecommunication, insurance and in foreign currency both from the export turnover as well as total turnover is covered by the decision of the jurisdictional High Court in the case of Tata Elexsi (2011 (8) TMI 782 - KARNATAKA HIGH COURT ). - Decided in favour of assessee. Addition of various amounts as ‘income from other sources’ - Held that:- Interest on deposits which are deposited to obtain bank guarantee issued to the customs authorities, reimbursement of expenses by the customers on account of certain bills produced by the company on their behalf and recovery from the employees leaving the company without the giving notice period are part of the business income of the assessee and have to be considered for computation of deduction u/s 10A of the Act. - Decided in favour of assessee. Issues Involved:1. Transfer Pricing Adjustment.2. Computation of Deduction under Section 10A.3. Addition of Various Amounts as 'Income from Other Sources'.Issue-wise Detailed Analysis:1. Transfer Pricing Adjustment:The primary issue revolves around the payment of management fees by the assessee to its Associated Enterprises (AEs). The Transfer Pricing Officer (TPO) had determined that the assessee failed to produce sufficient evidence regarding the expenditure incurred by the AE and the tangible benefits derived from it. Consequently, the TPO treated the entire sum of Rs. 1,55,10,767/- as unjustified and made an arm's length adjustment. The Disputes Resolution Panel (DRP) confirmed this adjustment. The Tribunal, however, noted that the Assessing Officer (AO) cannot disallow the entire expenditure solely on the ground that the assessee has not proved the commercial benefit. The Tribunal cited the Delhi High Court's decision in M/s. EKL Appliances, which states that the expenditure should be incurred wholly and exclusively for business purposes. The Tribunal remitted the issue back to the AO/TPO for re-adjudication and re-determination of the arm's length price, giving the assessee an opportunity to produce relevant materials.2. Computation of Deduction under Section 10A:The assessee claimed a deduction of Rs. 4,60,96,559/- under Section 10A. The AO observed that the assessee had brought forward losses and depreciation from earlier years, which were not adjusted before claiming the deduction. The AO computed the deduction after setting off these brought forward losses, arriving at a profit of Rs. 2,55,40,802/-. The assessee contended that the deduction should be computed on a stand-alone basis, relying on the Karnataka High Court's decision in CIT vs. Yokogawa India Ltd. The Tribunal noted conflicting judgments from the Karnataka High Court and followed the later judgment in Yokogawa India Ltd., which favored the assessee. Consequently, the Tribunal allowed the assessee's ground of appeal.3. Addition of Various Amounts as 'Income from Other Sources':The AO categorized certain incomes, such as interest on deposits, reimbursement of expenses, and recovery from employees, as 'income from other sources,' thereby reducing the business income eligible for deduction under Section 10A. The assessee argued that these should be considered as business income. The Tribunal referred to the Mumbai Tribunal's decision in Livingstone Jewellery (P) Ltd. and the Karnataka High Court's decision in CIT vs. Motorola India Electronics (P) Ltd., which supported the assessee's contention. The Tribunal held that these incomes have a direct nexus with the business and should be considered for deduction under Section 10A. Thus, the Tribunal allowed the assessee's grounds of appeal on these issues.Conclusion:The Tribunal provided a detailed analysis of each issue, often referring to relevant case laws and judgments. The decision emphasized the necessity of verifying evidence before making disallowances and upheld the principle that deductions under Section 10A should be computed favorably for the assessee when reasonable interpretations are possible. The Tribunal remitted the transfer pricing issue back to the AO/TPO for re-evaluation, allowing the assessee to present additional evidence.