2016 (9) TMI 146 - AT - Income Tax

Tribunal rules in favor of assessee, granting relief on transfer pricing, deductions, and disallowances

The Tribunal dismissed the AO's appeal and allowed the assessee's appeal, providing relief on various grounds related to transfer pricing adjustments, ... Arm's Length Price - transfer pricing adjustment - comparability and internal controlled transactions - use of LIBOR as bench mark for foreign currency loans - corporate guarantee as an international transaction - entitlement to advance claims before appellate authorities without revised return - deduction under section 80IB/80IC - nexus of receipts with industrial undertaking - disallowance under section 14A - attributable expenditureArm's Length Price - transfer pricing adjustment - comparability and internal controlled transactions - Deletion of transfer pricing adjustments made by TPO/AO in respect of royalty received from associated enterprises. - HELD THAT: - The Tribunal upheld the order of the First Appellate Authority deleting the TPO/AO adjustment to royalty receipts. It found material differences between the controlled transactions - including geographic markets, products and brands - and observed that the Revenue failed to demonstrate any material change in facts from earlier years when the royalty had been accepted. The TPO's use of the royalty charged to another associated enterprise as an internal CUP without distinguishing these material differences was not justified. On the facts of the year under appeal the FAA's deletion of the TP adjustment was endorsed. [Paras 6]TP adjustment in respect of royalty payments deleted; ground decided in favour of the assessee.Use of LIBOR as bench mark for foreign currency loans - Arm's Length Price - Validity of TPO/AO adjustment increasing interest income by replacing LIBOR based rates with a higher internal rate. - HELD THAT: - The Tribunal held that for loans made and received in foreign currency LIBOR is the appropriate base to determine arm's length interest. Having regard to precedents and the facts (loan and interest being in USD and the assessee charging interest higher than LIBOR), the TPO was not justified in benchmarking the interest to the higher rate charged to another AE. The FAA's reliance on ECB rates to limit the adjustment was noted, and the Tribunal held in favour of the assessee on the interest issue. [Paras 6]Adjustment in respect of interest disallowed; interest on foreign currency loans to be tested against LIBOR based benchmark - held for the assessee.Corporate guarantee as an international transaction - transfer pricing adjustment - Whether charges for issuance of corporate guarantees (GC) to banks for benefit of associated enterprises constitute an 'international transaction' under Chapter X and attract TP adjustment. - HELD THAT: - Applying the statutory test that an 'international transaction' must have a bearing on profits, income, losses or assets of the enterprise, the Tribunal followed judicial reasoning that guarantees which do not have a real, non contingent impact on those items fall outside section 92B(1). On the facts the assessee's guarantee issuance did not demonstrate such bearing and the Revenue failed to discharge onus to show material impact. Accordingly the Tribunal held that GC was not an international transaction and Chapter X provisions were not applicable. [Paras 6]Corporate guarantee fee not subject to transfer pricing adjustment; grievance of the assessee allowed.Entitlement to advance claims before appellate authorities without revised return - Admissibility of claims (depreciation on intangible assets and non compete fee) raised by assessee by revised computation without filing a revised return. - HELD THAT: - Relying on precedent the Tribunal held that appellate authorities have jurisdiction to consider and adjudicate claims raised in appeal even if not included in the original return, although the Assessing Officer cannot allow such claims without a revised return. In the interest of justice the Tribunal restored these claims to the file of the First Appellate Authority for fresh adjudication on merits. [Paras 10, 11]Matters remitted to the First Appellate Authority for fresh adjudication; issues restored for determination.Deduction under section 80IB/80IC - nexus of receipts with industrial undertaking - Admissibility of various items for deduction under section 80IB/80IC (allocation of rent and storage charges; inclusion of sale of by products and scrap; exchange gains; insurance claims; lease rent of blow moulding machine). - HELD THAT: - The Tribunal examined each category: (a) rent and storage allocation - FAA's allowance was endorsed as AO failed to distinguish facts from earlier years; (b) exchange gain - held to form part of turnover and eligible; (c) insurance claims - treated as akin to sale proceeds of stock in trade and eligible; (d) sale proceeds of by products/scrap - following precedents held to form part of industrial undertaking receipts and eligible; (e) lease rent for blow moulding machine - lacked sufficiently close nexus as machine was not used by the assessee, and the lease receipts were held not eligible under section 80IB/80IC. The Tribunal applied relevant case law to determine nexus and eligibility. [Paras 12]Rent/storage, exchange gains, insurance claims and sale of by products/scrap allowed for deduction under section 80IB/80IC; lease rent disallowed.Ad hoc disallowance - Sustenance of 10% ad hoc disallowance of miscellaneous expenses by AO/FAA. - HELD THAT: - The Tribunal found no plausible reasoning or factual basis in the orders of AO/FAA for making an ad hoc 10% disallowance. The assessee had produced audited accounts without qualifications and there was no finding that expenses were not wholly and exclusively for business. The FAA had merely followed predecessor's order without addressing the assessee's arguments. [Paras 9]Ad hoc 10% disallowance of miscellaneous expenses deleted; ground decided in favour of the assessee.Disallowance under section 14A - attributable expenditure - Correct quantum of disallowance under section 14A in respect of exempt dividend income. - HELD THAT: - The Tribunal noted absence of any material demonstrating expenditure incurred to earn dividend income. While finding AO/FAA actions unsupported by record, the Tribunal applied judicial guidance to reach a reasonable figure and directed that disallowance be restricted to 5% of dividend income for the year under appeal. [Paras 13]Disallowance under section 14A restricted to 5% of dividend income; ground allowed in part for the assessee.Use of ECB/LIBOR rates - Assessee's separate appeal (ITA/8858) challenging FAA's partial allowance on interest - correctness of limiting adjustment. - HELD THAT: - The Tribunal observed that FAA should not have partly upheld the TPO where the assessee charged interest higher than LIBOR; following its reasoning on LIBOR as appropriate benchmark for foreign currency loans, the Tribunal allowed the assessee's ground and decided it in favour of the assessee. [Paras 8]Assessee's ground allowed; interest adjustment deleted in favour of the assessee.Final Conclusion: The Tribunal dismissed the Revenue's cross appeal and allowed the assessee's appeals in substantial part: transfer pricing adjustments in respect of royalty and interest were deleted, corporate guarantee charges were held not to be an international transaction, certain 80IB/80IC deduction disputes were decided largely for the assessee (with lease rent disallowed), the ad hoc miscellaneous disallowance was deleted, section 14A disallowance was restricted to 5% of dividend income, and specified claims raised by revised computation were remitted to the First Appellate Authority for fresh adjudication. Issues involved:1. Transfer Pricing (TP) adjustments: royalty charged, interest on loan, and guarantee fee.2. Deduction under section 80IB/80IC.3. Disallowance of miscellaneous expenses.4. Claims made by revised computation.5. Depreciation on non-compete fees.6. Disallowance under section 14A.Issue-wise Detailed Analysis:1. Transfer Pricing Adjustments:- Royalty Charged:The TPO found discrepancies in the royalty rates charged to different AEs and proposed an adjustment. The FAA held that the TPO did not consider geographical differences and the subject matter of royalty, and thus, the benchmarking was not sustainable. The Tribunal upheld the FAA's decision, noting that the TPO/AO failed to prove material changes in facts compared to earlier years.- Interest on Loan:The TPO proposed an adjustment based on a higher interest rate charged to one AE. The FAA partially agreed but used ECB rates for adjustment. The Tribunal held that LIBOR should be the base for ALP for foreign loans, following precedents and the Bombay High Court's decision in Tata Autocomp Systems Ltd. Consequently, the Tribunal found the interest rate charged by the assessee to be at arm's length.- Guarantee Fee:The TPO proposed a higher guarantee fee based on a mark-up on bank rates. The FAA reversed this, accepting the assessee's rate of 0.8%. The Tribunal supported the FAA, referencing several cases that held corporate guarantees are not international transactions under section 92B. Thus, the provisions of chapter X were not applicable.2. Deduction under Section 80IB/80IC:- Rent and Storage Charges:The FAA allowed the deduction, following the method accepted in earlier years. The Tribunal upheld this decision, noting no change in facts.- Miscellaneous Sales (By-products and Scrap):The FAA denied the deduction based on the Pandian Chemicals Ltd. case. The Tribunal reversed this, citing the Delhi High Court's decision in Sadhu Forging, allowing the deduction for sale of scrap as part of the manufacturing process.- Insurance Claim:The FAA allowed the deduction, referencing Pfizer Ltd. The Tribunal upheld this, noting the insurance claim was directly related to the business.- Lease Rent Income:The FAA denied the deduction, as the machine was not used by the assessee but given to a contractor. The Tribunal agreed, stating the income was not directly linked to the business of the industrial undertaking.- Exchange Gain and Money Received from Material Return to Vendor:The FAA allowed the deduction, and the Tribunal upheld this, referencing Raghunath Exports Pvt. Ltd., which considered such gains as part of the export turnover.3. Disallowance of Miscellaneous Expenses:The FAA upheld the AO's ad hoc disallowance of 10% of miscellaneous expenses. The Tribunal reversed this, noting the AO/FAA did not provide a plausible reasoning or evidence that the expenses were not incurred for business purposes.4. Claims Made by Revised Computation:The FAA rejected claims made by revised computation without a revised return, referencing Goetz India. The Tribunal restored the matter to the FAA for fresh adjudication, referencing the Bombay High Court's decision in Prithvi Brokers, which allows appellate authorities to consider new claims.5. Depreciation on Non-compete Fees:The FAA rejected the claim for depreciation on non-compete fees. The Tribunal restored the matter to the FAA for fresh adjudication, following the Prithvi Brokers case.6. Disallowance under Section 14A:The AO disallowed 50% of the dividend income under section 14A. The FAA reduced this to Rs. 2.10 lakhs. The Tribunal further reduced the disallowance to 5% of the dividend income, following the Bombay High Court's decision in Godrej Agrovet Ltd.Conclusion:The Tribunal dismissed the AO's appeal and allowed the assessee's appeal, providing relief on several grounds while upholding certain disallowances.