2022 (9) TMI 1594 - AT - Income Tax

TPO cannot reject Cost Plus Method for TNMM when complete books produced, corporate guarantees taxable under Section 92B at 0.5% annually

ITAT Mumbai held that TPO's rejection of Cost Plus Method (CPM) in favor of Transactional Net Margin Method (TNMM) was unjustified when complete books ... TP Adjustment - Selection of MAM - CPM or TNMM - TPO rejected the CPM as the most appropriate method and proposes to use the Transactional Net Margin Method [TNMM] at entity level using a set of external comparables belonging to Pharmaceutical segments - HELD THAT:- When the complete set of books of accounts along with necessary supporting were produced , merely saying that certain bill and vouchers with respect to cost is not provide , is merely an attempt to reject the study of assessee. Had that been the case, the ld TPO should have provided the instances and then justified rejection of working given by assessee. There is no requirement of maintaining segmental accounts with respect to AE and Non AEs, maintaining separate quantitative details with respect to quantity dealt with AE and Non AE, or maintaining separate books of accounts under any law applicable to assessee. If a particular requirement is not mandated by law, no fault can be found on the part of assessee and then rejected a method accepted by both the parties over a time. TNMM adopted by TPO also saddled with several flaws for which there is no answer. Assessee claims that if the margins are corrected, margins of assessee is better than comparables is los not looked in to by ld TPO as well as Ld DRP. TPO did not provide basic working of all those 65 comparables and how these comparables are selected and what are the filters applied is also not shown. Therefore, there is no justification for adopting transactional net margin method where in earlier year as well as in subsequent year the cost plus method adopted by the assessee has been accepted. We therefore direct the ld AO/ ld TPO to delete the adjustment made in adopting entity level TNMM but accept CPM as MAM - principal ground of adopting CPM in determining arm’s length price has been adjudicated in favour of the Assessee. Guarantee commission on account of corporate guarantees provided by the assessee to its associated enterprises - international transaction or not? - Assessee contended that providing corporate guarantee the associated enterprise cannot be an international transaction and further the same has been provided for the furtherance of the business of the assessee and therefore the non charging of any guarantee commission is a business decision - HELD THAT:- We find that scope of Section 92B has further been expanded by addition of explanation by the finance act 2012 with retrospective effect from 1/4/2002 which specifically provides that international transaction includes the guarantee. Therefore, it cannot be said that corporate guarantee issued to associated enterprise is not an international transaction. Therefore, we are inclined to agree with the submission of the Ld. DR that providing corporate guarantees to overseas AE’s is an international transaction. Arm’s-length price of the corporate guarantee commission to associated enterprises - Considering the various decisions in this regard, we direct the AO to limit the adjustment to 0.5% p.a. on the amount of corporate guarantee provided based on the period for which the guarantee was operative in respect of each of the AE’s during the year under consideration. The learned transfer-pricing officer is directed to compute the arm’s-length price of the corporate guarantee at the rate of 0.5%. Accordingly ground number 4 of the appeal is allowed with above directions. Imputation of share application money paid to Associated Enterprises (AE’s) - DR could not show us any reason to deviate from the aforesaid orders and no change in facts and law were alleged in the assessment year under consideration. Thus, respectfully following the Orders passed by the Coordinate Bench in assessee’s own case supra, we direct the AO / TPO to delete the adjustment made towards notional interest on Shares and share application money for delayed allotment of shares. Accordingly, ground no. 5 raised in assessee’s appeal is allowed. Disallowance of the deduction u/s 10B of the Act on export profit earned by its unit - HELD THAT:- We find that the Co–ordinate Bench of the Tribunal in assessee’s own case in Strides Pharma Science Ltd. [2018 (6) TMI 512 - ITAT MUMBAI] allowed the deduction claimed by the assessee under Section 10B - we direct the AO to allow the deduction claimed under section 10B of the Act. Accordingly, ground raised in assessee’s appeal is allowed. Disallowance of weighted deduction u/s. 35(2AB) - assessee during the assessment year has incurred certain R&D expenses and claimed the weighted deduction @150% u/s 35(2AB) - same was disallowed by the AO and the DRP stating that the no Form 3CL and 3CM was furnished and only a copy of registration certificate from the competent authority recognising the assessee’s R&D facility has been furnished - HELD THAT:- As stated that the delay in issuing Form No. 3CM and report in Form No. 3CL by the DSIR was due to their administrative reasons. AR also submitted that these forms were submitted with the AO and the DRP after the DRP order but before passing the final assessment order dated 30.10.2012. The learned AR also submitted that this Tribunal in assessee's own case in AY 2002-03 [2016 (1) TMI 752 - ITAT MUMBAI] and in AY 2003-04 & 2004-05 [2016 (4) TMI 1316 - ITAT MUMBAI] and [2018 (6) TMI 512 - ITAT MUMBAI] for the assessment year 2007-08 allowed the deduction claimed by the assessee under Section 35(2AB) of the Act. Disallowance of the rental expenditure u/s. 40A(2)(b) - HELD THAT:- We find that the Co–ordinate Bench of the Tribunal in assessee’s own case in Strides Pharma Science Ltd. [2018 (6) TMI 512 - ITAT MUMBAI] held that rent paid is not falling within the mischief of section 40A(2)(b) of the Act and seems reasonable. We allow the claim of the assessee and this issue of assessee's appeal is allowed. Disallowance of FCCB premium and expenses - HELD THAT:- We find that the Co–ordinate Bench of the Tribunal in assessee’s own case in Strides Pharma Science Ltd. [2018 (6) TMI 512 - ITAT MUMBAI] for the assessment year 2007–08, vide order dated 08.06.2018, had deleted the said disallowances. D.R. could not show us any reason to deviate from the aforesaid order and no change in facts and law were alleged in the relevant assessment year. Thus, respectfully following the order passed by the Co-ordinate Bench of the Tribunal in assessee’s own cases cited supra, we are of the view that the assessee has rightly claimed the liability as expense direct the Assessing Officer to delete the said disallowance u/s 37(1) of the Act. Disallowance u/s 14A r/w rule 8D - expenditure attributable to earning of exempt income - suo–motu disallowance offered by the assessee - HELD THAT:- As in assessee’s own case in Strides Pharma Science Ltd.for the assessment year 2014–15 total investments and investments which yield exempt income is not readily available before us. We, therefore, are of the considered view that ends of justice would be met if the disallowance is made after re- computing average value of investment by considering only those investments which yield exempt income. Hence, the matter is restored to the AO to re-work the disallowance in line of our discussions given hereinabove. Disallowance u/s 14A added back to the profits while computing the book profit u/s 115JB - HELD THAT:- We find that the Co–ordinate Bench of the Tribunal in assessee’s own case in Strides Pharma Science Ltd for the assessment year 2014–15 and for the assessment year 2015-16 [2022 (4) TMI 543 - ITAT MUMBAI] has deleted the addition made to book profit computed under section 115JB. Adjustments made to “book profits” computed in terms of section 115JB of the Act vis-à-vis provision for leave encashment and forex losses on forward contracts - HELD THAT:- Based on the facts and circumstances of this case, we are of the view that Provision for leave encashment is an ascertained liability and accordingly, direct the AO to delete the same for determining the book profits. Further, the amount of forex losses on forward contracts appears to be an oversight since it was rectified by the AO himself only in the normal computation and not from the MAT computation. Accordingly, we direct the AO to give the same treatment and delete the same from the MAT computation as well. Accordingly, ground no.13, raised in assessee’s appeal is allowed in the favour of the assessee. Non-grant of tax credit on the distributed profits u/s 115O/115P and short grant of TDS Credit - As per the Ld AR, proper credit for DDT and TDS has not been granted by the AO. In view of the above, we direct the Assessing Officer to verify the tax credit and allow it as per the records. Accordingly, grounds raised in assessee’s appeal is allowed for statistical purpose. Reworking of deduction under section 10B - HELD THAT:- We find that the Co–ordinate Bench of the Tribunal in assessee’s own case in Strides Pharma Science Ltd. [2018 (6) TMI 512 - ITAT MUMBAI] had allowed the claim of the assessee. The learned D.R. could not show us any reason to deviate from the aforesaid order and no change in facts and law were alleged in the relevant assessment year. Thus we are of the view that the second proviso to Section 10B(1) of the Act was only for assessment year 2003-04 and not for other years. The AO is directed to verify the facts of the case and accordingly, allow the claim of the assessee. This issue of assessee's appeal is set aside to the file of the AO - Accordingly, this ground raised in assessee’s appeal is allowed. Issues Involved:1. Determination of Arm's Length Price (ALP) for International Transactions.2. Imputation of Guarantee Commission on Corporate Guarantees.3. Taxation of Investments in Subsidiaries.4. Disallowance of Deduction u/s 10B.5. Reworking of Deduction u/s 10B due to Allocation of R&D Expenditure.6. Disallowance of Weighted Deduction u/s 35(2AB).7. Disallowance of Rental Expenditure u/s 40A(2)(b).8. Disallowance of FCCB Premium and Expenses.9. Disallowance u/s 14A.10. Adjustment to Book Profit u/s 115JB.11. Levy of Interest u/s 234B and 234D.12. Tax on Distributed Profits u/s 115O/P.13. Short Grant of TDS Credit.14. Initiation of Penalty u/s 271(1)(c).Summary:1. Determination of Arm's Length Price (ALP) for International Transactions:The Tribunal found that the Cost Plus Method (CPM) adopted by the assessee for determining the ALP was consistently accepted in previous and subsequent assessment years. The Tribunal directed the AO/TPO to delete the adjustment made by adopting the Transactional Net Margin Method (TNMM) and accept CPM as the Most Appropriate Method (MAM).2. Imputation of Guarantee Commission on Corporate Guarantees:The Tribunal held that providing corporate guarantees to overseas AEs is an international transaction. It directed the AO to limit the adjustment to 0.5% p.a. on the amount of corporate guarantee provided, based on the period for which the guarantee was operative.3. Taxation of Investments in Subsidiaries:The Tribunal directed the AO/TPO to delete the adjustment made towards notional interest on share application money for delayed allotment of shares, following its own decisions in the assessee's cases for AY 2014-15 and AY 2015-16.4. Disallowance of Deduction u/s 10B:The Tribunal directed the AO to allow the deduction claimed under section 10B, following its decision in the assessee's own case for the preceding assessment year (AY 2007-08).5. Reworking of Deduction u/s 10B due to Allocation of R&D Expenditure:The Tribunal dismissed this ground as not pressed by the assessee.6. Disallowance of Weighted Deduction u/s 35(2AB):The Tribunal directed the AO to allow the claim of deduction, following its consistent view in the assessee's own cases for previous years.7. Disallowance of Rental Expenditure u/s 40A(2)(b):The Tribunal directed the AO to delete the disallowance under section 40A(2)(b), following its decision in the assessee's own case for the preceding assessment year (AY 2007-08).8. Disallowance of FCCB Premium and Expenses:The Tribunal directed the AO to delete the disallowance u/s 37(1) of the Act, following its decisions in the assessee's own cases for AY 2006-07 and AY 2007-08.9. Disallowance u/s 14A:The Tribunal restored the issue to the AO for re-computation of disallowance and directed the AO to delete the addition of disallowance under section 14A while computing book profit under section 115JB.10. Adjustment to Book Profit u/s 115JB:The Tribunal directed the AO to delete the provision for leave encashment from the computation of book profits and to rectify the oversight regarding forex losses on forward contracts.11. Levy of Interest u/s 234B and 234D:The Tribunal dismissed these grounds as they are consequential in nature.12. Tax on Distributed Profits u/s 115O/P:The Tribunal directed the AO to verify the tax credit and allow it as per the records.13. Short Grant of TDS Credit:The Tribunal directed the AO to verify the tax credit and allow it as per the records.14. Initiation of Penalty u/s 271(1)(c):The Tribunal dismissed this ground as pre-mature.Additional Grounds:The Tribunal dismissed the additional ground related to the allowability of education cess under section 37(1) as not pressed. It allowed the additional ground related to reworking of deduction under section 10B and directed the AO to verify the facts and allow the claim.In conclusion, the appeal by the assessee was partly allowed.