2021 (11) TMI 1178 - AT - Income Tax

ITAT restores transfer pricing claims to AO for fresh examination on construction contracts and trading margins

ITAT Bangalore ruled on multiple transfer pricing and tax issues. The tribunal restored several claims to AO/TPO for fresh examination including treatment ... TP Adjustment - “Provision for estimated loss on construction contracts” debited by the assessee in its profit & loss account and reversal of such provision credited to the Profit and Loss account should be treated as Non-operating in nature - HELD THAT:- We notice that the assessee is raising this plea for the first time before us. The assessee has taken the plea before us on the reasoning that the provision for estimated loss from construction contracts and reversal of said provision was treated as non-operating in nature in assessment year 2015-16 and hence the same treatment should be given in this year also. First of all, it is not clear as to whether the treatment given by Ld DRP in AY 2015-16 has been accepted by the assessee or not, since such kind of provisions was made as per the mandate of Accounting Standards year after year. Hence it is required to be examined as to whether it is appropriate to treat the provision for expected loss as “non-operating” in nature when such provisions are created as per accounting principles and in compliance of accounting standards. Secondly, it is not clear as to whether such kind of provision made by the comparable companies was also considered as non-operating in nature in AY 2015-16 in their hands, since it is quite possible that the comparable companies would also be debiting the profit and loss account with such kind of provisions as mandated by the Accounting standards. There should not be any dispute that identical treatment for an item of expenditure should be given both in the hands of the assessee as well as in the hands of the comparable companies. Accordingly, this claim of the assessee requires examination. In any case, this claim has been raised first time before us, meaning thereby, there was no occasion for the authorities below to examine this claim of the assessee in the year under consideration. Accordingly, we restore this claim of the assessee to the file of AO/TPO for examining it in accordance with law. Manufacturing segment is regarding consideration of leverage of 5% - AO/TPO shall examine this claim of the assessee in accordance with law. Manufacturing segment relates to computation of margin in the case of comparable company named M/s. Gansons Ltd - It is the contention of Ld. A.R. that the TPO has computed margin of this comparable company erroneously - HELD THAT:- Since the claim of the assessee requires examination, we restore this issue also to the file of the AO/TPO. TP Adjustment of trading segment - TPO has adopted operating profit/operating cost as PLI in the case of trading segment - It is the contention of the assessee that the correct PLI should be taken as “Operating profit/Operating revenue” - HELD THAT: - We direct the AO/TPO to adopt “operating profit/operating revenue” as PLI and determine the ALP of trading segment accordingly. TP adjustment made in respect of payments of Global Sales & Marketing activity fee and Management fee - assessee did not benchmark these payments made to its AE separately, since it adopted TNM method at entity level. However, the TPO bench marked the same separately and accordingly proposed TP adjustment - HELD THAT:- Following the decision rendered in the assessee’s own case in AY 2010-11[2017 (6) TMI 1392 - ITAT BANGALORE] wherein held that the assessee is having multiple and diversified international transactions involving receipt as well as payment, we are of the considered view that the payment in respect of management fees as well as Global Sale and Marketing Activity Fees shall be considered as operating cost and has to allocated in the ratio of turnover of the other international transactions and then the ALP of the other international transactions has to be determined under TNMM analysis. Hence we set aside the entire issue of determination of ALP and TP Adjustment to the record of the TPO/A.O. for carrying out fresh exercise of determination of ALP in respect of international transactions by considering the payment in respect of management fees and Global Sale and Marketing Activity Fees as part of the operating cost and allocating the same in the ratio of the turnover of the other international transactions. Disallowance u/s 14A r.w.r. 8D - A.R. submitted that the A.O. has not recorded dis-satisfaction on the disallowance made by the assessee. Hence, the A.O. could not be resorted to provisions of Rule 8D - HELD THAT:- We noticed earlier that the assessee has made investments during the course of the year and has sold the same before the end of the year. Accordingly, the value of investments as on beginning of the year and as on end of the year were Nil. In this fact situation, the provisions of Rule 8D cannot be applied since computations prescribed in those rules are not possible in the absence of opening and closing value of investments, i.e., computational provisions of rule 8D would fail in this case. We noticed earlier that against exempted dividend income of Rs.24,86,000/-, the assessee has disallowed a sum of Rs.48,573/- only u/s 14A of the Act. The said disallowance does not appear to be correct when compared with the peak value of investments of Rs.72.09 crores - Thus disallowance may be estimated to meet the requirements of section 14A of the Act. Accordingly, we are of the view that an estimated disallowance of 10% of the dividend income would meet the requirements of provisions of Section 14A of the Act and the same will put this issue at rest. Accordingly, we direct the A.O. to restrict the disallowance u/s 14A of the Act to 10% of exempt dividend income. He may work out the addition accordingly. Non-granting of proper TDS credit - Since this issue requires examination at the end of the A.O., we restore to his file with the direction to allow credit for correct amount of TDS. Deduction of education cess and secondary & higher education cess paid during the year as expenditure - A.R. took support of the decision of Sesagoa Ltd [2020 (3) TMI 347 - BOMBAY HIGH COURT] and certain other decisions to contend that the education cess does not fall under the category of Income tax and hence the same should be allowed as deduction against the profits of the assessee - HELD THAT:- Since the claim of the assessee gets support from the decision rendered by Hon’ble Bombay High Court in the case of Sesagoa Ltd. (supra) and since this issue is urged for the first time before us, we restore this issue to the file of AO for examining the claim of the assessee. Dividend distribution tax rate - to be confined to the rate as per DTAA for the dividend distributed to non-resident assessees - AR submitted that the assessee has raised the above said ground on the basis of decision rendered by Delhi bench of Tribunal and this issue has been referred to a special bench and accordingly pleaded that this claim of the assessee may be restored to the file of the A.O - HELD THAT:- Having regard to the submissions made by the Ld. AR., we restore this issue to the file of the A.O. with the direction to follow the decision that may be rendered by special bench of Tribunal on this issue in due course. Issues Involved:1. Manufacturing segment- Non-operating nature of provision for estimated losses on construction contracts- Computation of operating profit margin for M/s. Gansons Ltd.- Granting of leverage of 5%2. Trading segment- Adopting PLI as OP/OC instead of OP/OR- Computation of margin for M/s. Telecommunication Consultants India Ltd.3. Global sales and marketing activity fee/Management fee4. Disallowance under Section 14A of the Income-tax Act5. Short credit of TDS6. Deduction of education cess and secondary & higher education cess7. Dividend distribution tax rate as per DTAADetailed Analysis:Manufacturing Segment:1. Non-operating Nature of Provision for Estimated Losses on Construction Contracts:- The assessee argued that the provision for estimated losses on construction contracts and its reversal should be treated as non-operating in nature, citing consistency with the treatment in the assessment year 2015-16.- The Tribunal noted that this plea was raised for the first time and required examination to ensure consistency with accounting standards and comparable companies.- The issue was restored to the AO/TPO for examination in accordance with the law.2. Computation of Operating Profit Margin for M/s. Gansons Ltd.:- The assessee contended that the TPO computed the margin of M/s. Gansons Ltd. erroneously.- This claim required examination and was restored to the AO/TPO for verification.3. Granting of Leverage of 5%:- The Tribunal directed the AO/TPO to examine the claim of leverage of 5% in accordance with the law.Trading Segment:1. Adopting PLI as OP/OC Instead of OP/OR:- The assessee argued that the correct PLI should be 'Operating profit/Operating revenue' (OP/OR) instead of 'Operating profit/Operating cost' (OP/OC).- The Tribunal referred to the decision of the Hyderabad Bench in the case of Deputy Commissioner of Income-tax Vs. St. Jude Medical India Pvt. Ltd., which supported the assessee's contention.- The AO/TPO was directed to adopt OP/OR as PLI and determine the ALP of the trading segment accordingly.2. Computation of Margin for M/s. Telecommunication Consultants India Ltd.:- The assessee claimed that the TPO incorrectly computed the margin of M/s. Telecommunication Consultants India Ltd.- This issue required verification and was restored to the AO/TPO.Global Sales and Marketing Activity Fee/Management Fee:- The assessee did not benchmark these payments separately, adopting TNM method at the entity level, while the TPO benchmarked them separately, proposing adjustments.- The Tribunal referred to its decision in the assessee's own case for AY 2010-11, which held that such expenses should be part of operating costs and allocated in the ratio of turnover of other international transactions.- The issue was restored to the AO/TPO with similar directions.Disallowance under Section 14A of the Income-tax Act:- The AO disallowed a sum higher than the assessee's disallowance, based on peak investments during the year.- The Tribunal noted that the AO was not satisfied with the assessee's computation, justifying the application of Rule 8D.- However, since the computations under Rule 8D were not possible due to the absence of opening and closing values of investments, the Tribunal directed an estimated disallowance of 10% of the dividend income.Short Credit of TDS:- The issue required examination and was restored to the AO for allowing credit for the correct amount of TDS.Deduction of Education Cess and Secondary & Higher Education Cess:- The assessee claimed deduction of education cess based on the decision of the Hon’ble Bombay High Court in the case of Sesagoa Ltd.- The issue was raised for the first time and was restored to the AO for examination in accordance with the relevant decisions.Dividend Distribution Tax Rate as per DTAA:- The assessee argued that the dividend distribution tax rate should be confined to the rate as per DTAA for dividends distributed to non-resident assessees.- The issue was referred to a special bench, and the Tribunal restored it to the AO with the direction to follow the special bench's decision.Conclusion:The appeal filed by the assessee was partly allowed for statistical purposes, with several issues restored to the AO/TPO for further examination and determination in accordance with the law and relevant judicial decisions.