Tribunal Upholds Transfer Pricing Decisions, Emphasizes Arm's Length Pricing

M/s. Titan Industries Ltd. Versus Assistant Commissioner of Income Tax, Company Circle III (2), Chennai

M/s. Titan Industries Ltd. Versus Assistant Commissioner of Income Tax, Company Circle III (2), Chennai - TMI Issues Involved:
1. Addition of Rs. 8,03,34,404/- in respect of advertisement expenditure incurred overseas.
2. Transfer Pricing addition on account of interest of Rs. 1,20,41,897/- in respect of interest-free advertisement advances.
3. Computation of deduction u/s 80HHC with reference to DEPB receipts.
4. Allocation of head office expenses and consultancy expenditure while computing eligible profit from the jewellery division for the purpose of Sec. 80-IB.
5. Non-granting of export incentives u/s 80-IB.
6. Exclusion of deduction claimed and allowed u/s 43B while computing deduction u/s 80-IB.
7. Disallowance of claim of deduction u/s 80-IB in respect of profits of Euro Watch division.

Detailed Analysis:

1. Addition of Rs. 8,03,34,404/- in respect of advertisement expenditure incurred overseas:
The assessee claimed Rs. 8,03,34,404/- as advertisement expenditure incurred by its subsidiary TIML, London. The Transfer Pricing Officer (TPO) determined the Arm's Length Price (ALP) of this expenditure as zero, arguing that the economic burden of advertisement should be borne by the Associate Enterprises (AEs) and not the assessee. The CIT(A) supported this view, stating that the benefits of these expenses accrued directly to the AEs, and the assessee's interest was indirect and inadequate. The Tribunal upheld the TPO's determination, noting that the expenditure did not benefit the assessee directly and was not its economic function.

2. Transfer Pricing addition on account of interest of Rs. 1,20,41,897/- in respect of interest-free advertisement advances:
The assessee advanced interest-free funds to TIML for brand building and advertisement. The TPO computed ALP interest on these advances based on RBI-prescribed bank rates, resulting in an addition of Rs. 1,20,41,897/-. The CIT(A) upheld this view, emphasizing that such transactions between AEs should be at arm's length. The Tribunal agreed, stating that the transaction should be tested as if it were with an unrelated third party, and upheld the application of LIBOR plus 2% as the appropriate rate.

3. Computation of deduction u/s 80HHC with reference to DEPB receipts:
The AO excluded 90% of export incentives from business profits under Explanation (baa) to Sec. 80HHC. The CIT(A) supported this exclusion. The Tribunal directed the AO to re-compute the deduction u/s 80HHC by applying the Supreme Court's decision in Topman Exports, which states that only the profit on transfer of DEPB should be considered, not the entire sum received.

4. Allocation of head office expenses and consultancy expenditure while computing eligible profit from the jewellery division for the purpose of Sec. 80-IB:
The AO allocated head office expenses based on turnover, reducing the profits of the jewellery division by Rs. 5,45,29,000/-. The CIT(A) upheld this allocation method, stating it was more appropriate than the assessee's method. The Tribunal agreed, citing the jurisdictional High Court's decision in TTK Firm Ltd., and dismissed the assessee's ground.

5. Non-granting of export incentives u/s 80-IB:
The AO excluded export incentives from business profits for computing deduction u/s 80-IB, stating they were not derived from manufacturing activities. The CIT(A) upheld this exclusion, referencing various judicial decisions. The Tribunal agreed, applying the Supreme Court's decision in Liberty India, which held that such incentives are not profits derived from eligible business.

6. Exclusion of deduction claimed and allowed u/s 43B while computing deduction u/s 80-IB:
The AO excluded deductions claimed u/s 43B while computing eligible profits for Sec. 80-IB. The CIT(A) upheld this view. The Tribunal agreed, stating that profits for Sec. 80-IB should be computed after considering all expenses claimed under sections 30 to 43D, and dismissed the assessee's ground.

7. Disallowance of claim of deduction u/s 80-IB in respect of profits of Euro Watch division:
The AO denied the deduction u/s 80-IB for the Euro Watch division, stating the profits were notional and not actual. The CIT(A) supported this view. The Tribunal remitted the issue to the AO to re-compute the profits of the Euro Watch division on a standalone basis by apportioning necessary expenses proportionate to turnover and determining the market value of the products.

Conclusion:
The Tribunal upheld the TPO's and CIT(A)'s views on most issues, emphasizing the need for arm's length pricing in transactions with AEs and proper allocation of expenses. The Tribunal provided specific directions for re-computation in certain cases, ensuring compliance with judicial precedents and statutory provisions.