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 were produced, directing acceptance of CPM as most appropriate method. Corporate guarantees to associated enterprises constitute international transactions under Section 92B, with arm's length price fixed at 0.5% per annum. Tribunal allowed deductions under Section 10B for export profits and Section 35(2AB) for R&D expenses, following previous orders in assessee's own case. Various disallowances including rental expenditure, FCCB premium, and Section 14A were deleted or remanded for re-computation based on coordinate bench precedents.

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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.

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