ITAT rules for appellant in Income Tax Act case: rational expense allocation, guarantee as intl transaction

The ITAT ruled in favor of the appellant in a case involving the disallowance of excess deduction claimed under sections 80IB/80IC of the Income Tax Act, re-allocation of overhead expenses, treatment of guarantee as an 'international transaction' under Section 92B, consideration of aggregate rate for guarantee commission, and arbitrariness of adjustments. The ITAT found the appellant's allocation of expenses reasonable, rejecting the AO's adhoc reallocation, and directed the AO to recompute the guarantee commission at 0.5% as the Arm's Length Price. The ITAT instructed the AO to adjust the ALP accordingly, aligning with rates charged by various banks.

---

---

Issues:
1. Disallowance of excess deduction claimed under sections 80IB/80IC of the Income Tax Act.
2. Re-allocation of overhead expenses for eligible and non-eligible undertakings.
3. Treatment of guarantee to a banker as an 'international transaction' under Section 92B of the Act.
4. Consideration of aggregate rate charged by ICICI bank for guarantee commission.
5. Arbitrariness and excessiveness of adjustment made.

Issue 1: Disallowance of Excess Deduction under Sections 80IB/80IC:
The appeal challenged the CIT(A)'s decision regarding the excess deduction claimed under sections 80IB/80IC of the Income Tax Act. The appellant argued for the re-computation of the deduction based on the allocation of overheads adopted in the Return of Income. The ITAT, in a similar case, held that the allocation of expenses by the assessee was reasonable and scientific, rejecting the AO's adhoc reallocation. Consequently, the ITAT deleted the addition made by the revenue authorities.

Issue 2: Re-allocation of Overhead Expenses:
The dispute involved the re-allocation of overhead expenses between eligible and non-eligible undertakings for computing the deduction under sections 80IB/80IC of the Act. The ITAT noted that the expenses related to advertisement, publicity, schemes, and promotions were incurred to promote the brand image, benefiting both segments. The ITAT found the assessee's allocation based on turnover reasonable, rejecting the AO's adhoc reallocation. Citing the decision in Consolidated Coffee Ltd. v. State of Karnataka, the ITAT held that the allocation method was justified, leading to the deletion of the addition by the A.O.

Issue 3: Treatment of Guarantee as an International Transaction:
The dispute centered on treating the guarantee to a banker as an 'international transaction' under Section 92B of the Act. The ITAT, referring to a similar case, directed the AO to recompute the guarantee commission at 0.5% as the Arm's Length Price (ALP), following the decision of the coordinate Bench. The ITAT set aside the CIT(A)'s order and instructed the AO to adjust the ALP accordingly.

Issue 4: Consideration of Aggregate Rate for Guarantee Commission:
Regarding the consideration of the aggregate rate charged by ICICI bank for guarantee commission, the ITAT upheld the decision to adopt a 0.5% guarantee fee as the ALP, aligning with rates charged by various banks. The ITAT directed the AO to recompute the addition for transfer pricing adjustment based on the 0.5% ALP, following the decision of the coordinate Bench.

Issue 5: Arbitrariness and Excessiveness of Adjustment:
The appellant raised concerns about the arbitrariness and excessiveness of the adjustment made. The ITAT, relying on the decisions of the coordinate Bench, partly allowed the appeal, setting aside the CIT(A)'s order and instructing the AO to recompute the ALP as per the directions of the coordinate Bench. The ITAT pronounced the order in favor of the appellant on 19th February 2014.

---