2016 (9) TMI 146 - AT - Income Tax

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

M/s. Marico Ltd. Versus ACIT-6 (3), Range-9 (2), Mumbai and Vice-Versa

The Tribunal dismissed the AO's appeal and allowed the assessee's appeal, providing relief on various grounds related to transfer pricing adjustments, ... Transfer pricing adjustment - adjustment under the head interest - Held that:- TPO was not justified in making adjustment under the head interest to be charged. The rate of interest was higher than LIBOR, so, we hold that the IT in question was at arm’s length. Allowability of expenditure - Held that:- AO/FAA had not given any plausible reasoning for making the ad hoc addition. The assessee had filed audited accounts and the auditors had not qualified any item for disallowance out of the Miscellaneous Expenses. The AO had also not rejected the books of accounts of the assessee. It is also not clear from the order that as what was the basis for adopting 10% of the expenditure as not allowable. There is finding to show that the expenditure in question was not incurred wholly and exclusively for the business purposes. We find that the FAA had simply followed the order of his predecessor and had not met any of the arguments advanced by the assessee before him. Therefore, reversing his order, we decide ground in favour of the assessee. Computation of deduction u/s.80IB/80IC - Held that:- Gain on account of fluctuation in foreign exchange rate is entitled for deduction u/s.80IB of the Act. So, confirming the order of the FAA, issue is decided against the AO. Order of the FAA does not suffer from any legal infirmity as far as claim with regard to insurance receipt is concerned FAA was not justified in denying the 80IB/80IC deduction to the assessee on sale of scrap. Lease rent income of blow moulding machine - Held that:- It is a fact that the machine was not used by the assessee, that it was given to a contractor, that the contractor was performing certain activities that were related to the manufactured goods of the assessee. In our opinion for claiming deduction u/s.80IB/80IC there should be close nexus of the income and the business carried out by an industrial undertaking. Anything and everything indirectly linked to the business of the assessee cannot be held to an eligible activity for claiming deduction. Confirming the order of the FAA, we decide the issue before us, against the assessee. Disallowance made under section 14 A - Held that:- We find that the AO had made a disallowance of ₹ 4.45 lakhs, that the FAA had restricted the disallowance, that the assessee had claimed that it had not incurred an expenditure to earn the exempt income, that the AO/FAA had not brought on record any fact to prove that certain expenditure was incurred for earning dividend income. Therefore, the action taken by both the authorities cannot be endorsed. However, considering the judgement of Godrej Boyce and Mgf. Company Ltd.[2010 (8) TMI 77 - BOMBAY HIGH COURT ] we are of the opinion that a reasonable disallowance could be made for the year under consideration also with regard to disallowance to be made under section 14A of the Act. We are of the opinion that in the interest of justice the disallowance should be restricted to 5% of the dividend income, as held in the case of Godrej Agrovet (2014 (8) TMI 457 - BOMBAY HIGH COURT ). Ground number seven is allowed in favour of the assessee, in part. 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.