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 of construction contract provisions as non-operating, leverage consideration, and margin computation errors. For trading segment, tribunal directed adoption of operating profit/operating revenue as profit level indicator. Management and marketing fees were ordered to be treated as operating costs allocated proportionally. Section 14A disallowance was restricted to 10% of exempt dividend income since Rule 8D couldn't apply with nil opening/closing investment values. TDS credit, education cess deduction, and dividend distribution tax rate issues were restored to AO for examination following relevant judicial precedents.

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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 fee
4. Disallowance under Section 14A of the Income-tax Act
5. Short credit of TDS
6. Deduction of education cess and secondary & higher education cess
7. Dividend distribution tax rate as per DTAA

Detailed 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.

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