2015 (7) TMI 448 - AT - Income Tax

ITAT directs fresh assessments and verifications on various grounds, including transfer pricing adjustments

The ITAT partly allowed the Assessee's appeal, directing fresh assessments and verifications on various grounds, including the adjustment related to the ... Adjustment in relation to the international transaction of sale of goods to Associated Enterprises - Not allowing range benefits - Disallowance of expenses due to non deduction of TDS - TDS on reimbursement - Held that:- The undisputed facts remain that the Transfer Pricing Officer as well as a DRP have rejected the transfer pricing study conducted by the assessee and comparables adopted for computing the arm’s length price. The TPO carried out his own study restricting the study to a single financial year as per the Rule of 10B(4) of the Income Tax Rules, 1962 .The TPO also rejected the comparables on the basis that the pumps and valves cannot be compared. However, while conducting the transfer pricing study, the AO compared the assessee with industries which were engaged in the manufacturing of valves. During the course of hearing, it was pointed out by the ld.counsel for the assessee that the valves that are sought to be compared by the TPO are functionally different, entirely a different product, although it is named as valve. Although, it is true that the method adopted is TNMM, under this method the product is broadly compared. However, in the present case, the TPO has sought to compare the valves which is a consumer product with the industrial product of the tested party, which in our view, would not give a true picture of the profit. Under these facts, it would subserve the interest of justice if a TPO conduct a fresh study comparing the same or similar product, so that a fair picture of the profit could be arrived in order to ascertain whether the TP adjustment is required to be made or not. Therefore, we hereby set aside the order of the authorities below and restore these issues before the TPO for conducting a fresh transfer price study for the purpose of finding out the nature of product, its market, geographical location, etc. as given under OECD guidelines regarding the comparability of the comparables. While doing so, the TPO would afford opportunity to the assessee for submitting fresh T.P. study comparables. Disallowance of expenses due to non deduction of TDS - Accordingly, the Assessee claimed a deduction for the expenses as shown in the table referred in para 2.4 above in the financial year in which the taxes have been deducted and deposited in the Government Treasury, i.e., in the Assessment Year 2009-10. The Assessee inadvertently mentioned the Assessment Year as A.Y. 2009-10 and not as A.Y. 2008-09, in the challans used for depositing the taxes deducted on the above referred payments. The AO observed that on verification of challans furnished by the Assessee, all the challans were for Assessment Years 2009-10 and 2010-11. Further, the AO also observed that all the TDS payments made by the Assessee during the period under consideration pertains to Assessment Year 2009-10 as per TDS challans produced by the Assessee and that the Assessee has not produced any TDS challan showing Assessment Year 2008-09. The Assessee requests that the AO be directed to allow the deduction claimed amounting to ₹ 45,99,634 being expenses pertaining to Assessment Year 2008-09, but on which, taxes have been deducted and paid for in the financial year relevant to the assessment year under consideration. Since the DRP has directed the AO to verify the claim of the assessee, we do not see any reason to interfere with the order of the DRP, the same is hereby upheld. Thus, ground No.3 of assessee’s appeal is rejected. TDS on reimbursement - There is no dispute with regard to the fact that law is well settled that in case, any payment is in the nature of reimbursement of expenditure, then no tax is required to be deducted. Therefore, we admit the addition ground of the assessee and restore the same to the file of AO for verifying whether the impugned disallowance is in the nature of reimbursement of expenditure. The assessee is directed to place the material evidences before the AO to demonstrate that the impugned disallowance is in the nature of reimbursement. In case, the assessee fails to do so, the AO would will be free to make the disallowance. Thus, this additional ground raised by the assessee is allowed for statistical purposes. - In the result, the appeal of the assessee is partly allowed for statistical purposes. Issues Involved:1. Adjustment in relation to the international transaction of sale of goods to Associated Enterprises (AE).2. Non-allowance of the benefit of +/-5% range as per Section 92C(2) of the Income-tax Act, 1961.3. Disallowance under Section 40(a)(i)/(ia) of the Act.4. Levy of interest under Section 234B of the Act.5. Disallowance of an expense amounting to Rs. 13,65,460 under Section 40(a)(i) of the Act.Issue-wise Detailed Analysis:1. Adjustment in Relation to the International Transaction of Sale of Goods to AE:The Assessee challenged the adjustment of Rs. 4,17,26,088/- made by the Assessing Officer (AO) under the directions of the Dispute Resolution Panel (DRP) concerning the international transaction of sale of goods to AE. The Transfer Pricing Officer (TPO) did not accept the Assessee's Transfer Pricing study and conducted its own study, which led to an initial adjustment of Rs. 3,02,66,356/-. The DRP further enhanced this adjustment to Rs. 4,27,26,088/-. The Assessee objected to the TPO's filters and comparables, particularly the inclusion of Tyco Sanmar Limited and the exclusion of United Drilling Tools Limited. The ITAT found that the TPO had compared functionally different products and directed a fresh study to ensure a fair comparison, setting aside the previous orders and restoring the issue to the TPO for a fresh transfer pricing study.2. Non-allowance of the Benefit of +/-5% Range as per Section 92C(2) of the Income-tax Act, 1961:The Assessee contended that the AO erred in not allowing the benefit of the +/-5% range as per Section 92C(2) in relation to the international transaction of sale of goods to AE. The ITAT directed the TPO to conduct a fresh study and consider the benefit of the +/-5% range during the reassessment.3. Disallowance under Section 40(a)(i)/(ia) of the Act:The Assessee objected to the disallowance of Rs. 45,99,634 under Section 40(a)(i)/(ia) of the Act, claiming that the tax had been deducted and paid during the previous year. The DRP directed the AO to verify the Assessee's claim and allow the deduction as per law. The ITAT upheld the DRP's direction, finding no reason to interfere with the order.4. Levy of Interest under Section 234B of the Act:The Assessee contested the levy of interest under Section 234B of the Act. The ITAT's decision on this issue was not explicitly detailed in the judgment, implying that this ground was not separately adjudicated.5. Disallowance of an Expense Amounting to Rs. 13,65,460 under Section 40(a)(i) of the Act:The Assessee raised an additional ground, arguing that the AO erred in not allowing an expense of Rs. 13,65,460 under Section 40(a)(i) of the Act, as it was a mere reimbursement of expenses. The ITAT admitted this additional ground and restored it to the AO for verification. The AO was directed to verify if the disallowance was indeed a reimbursement and allow the claim if proven.Conclusion:The ITAT partly allowed the Assessee's appeal for statistical purposes, directing fresh assessments and verifications on multiple grounds, including the adjustment related to the international transaction of sale of goods to AE, the benefit of the +/-5% range, and the disallowance under Section 40(a)(i)/(ia) of the Act. The additional ground regarding the reimbursement of expenses was also admitted and remanded for verification.