2019 (1) TMI 345 - AT - Income Tax

Tribunal rulings on Transfer Pricing, Income Tax Act, and Section 10B deductions

Deputy Commissioner of Income Tax Central Circle 2 (2), Ahmedabad Versus Dishman Pharmaceuticals And Chemicals Ltd.

The Tribunal dismissed the AO's appeal and partly allowed the assessee's appeal. The Tribunal upheld the deletion of adjustments in sales price under ... TPA - Addition on account of adjustment in sales price - MAM -mechanism for selecting the most appropriate method - CUP method application - Held that:- A method of determining arm’s length price, to be held as a ‘most appropriate method’ (MAM), should be, as provided in rule 10C(1), a method “which is best suited to the facts and circumstances of each particular transaction” and a method and “which provides the most reliable measure of arm’s length price of the international transaction”. Under rule 10C(2)(c), “the availability, coverage and reliability of data necessary for application of the method” is one of the crucial factors determining suitability of a method of determination of arm’s length price in a particular fact situation. Quite clearly, therefore, unless suitable reliable data inputs necessary for application of a particular method, as CUP in this case, are available, CUP method cannot be said to be most appropriate methods on the facts of this case. What has been relied upon by the TPO is Internal CUP data but then rather than taking the comparable uncontrolled price of the transaction, the TPO has compared average of intra AE transactions and independent transactions. We donot see legally sustainable merits in the case of the learned Commissioner (DR) and we reject his plea that on the facts and in the circumstances of this case, CUP method is required to be applied. In any case, the issue is squarely covered by the decision of the coordinate benches, in favour of the assessee. Addition on account of Guarantee fees - International transactions - Held that:- As decided in assessee's own case issuance of corporate guarantees does not constitute an international transaction with the meanings of section 92B. Learned representatives fairly agree that the issue is thus covered, in favour of the assessee and in assessee’s own cases, by coordinate benches of Tribunal. Addition on account of addition u/s 145A - Held that:- we see no need to interfere with the findings of the CIT(A) on this ground either. The law is by now well settled. There is no impact on profitability whether the assessee follows the exclusive method or inclusive method, and there cannot be an addition, thus, on that score. That is what the coordinate benches of this Tribunal, including in the cases of ITO Vs Mamta Brampton Engineering Pvt Ltd [2016 (10) TMI 694 - ITAT AHMEDABAD] have consistently have consistently relying upon the judgment of Hon’ble Supreme Court in the case of CIT Vs Indo Nippon Chemicals Ltd [2003 (1) TMI 8 - SUPREME COURT] and ACIT Vs Narmada Chematur Petrochemicals [2010 (8) TMI 263 - GUJARAT HIGH COURT]. Learned Departmental Representative does not dispute this position Addition on account of disallowance under section 10B to be deleted relying on assessee’s own cases for the assessment years 2006-07, 2007-08, 2008-09 and 2009-10 Claim of deduction under section 10B to be allowed. Issues Involved:1. Adjustment in sales price under Transfer Pricing.2. Addition on account of Guarantee fees.3. Addition under section 145A of the Income Tax Act.4. Disallowance under section 10B of the Income Tax Act.5. Transfer pricing adjustment concerning interest on loans to Associated Enterprises.6. Disallowance of prior period expenditure.7. Depreciation on electric installation.8. Exclusion of unrealized export from total turnover for section 10B deduction.9. Additional grounds of appeal.Issue-wise Detailed Analysis:1. Adjustment in Sales Price under Transfer Pricing:The Assessing Officer (AO) contested the deletion of an addition of Rs. 1,38,86,837 made by the CIT(A) concerning the adjustment in sales price using the Comparable Uncontrolled Price (CUP) method instead of the Transactional Net Margin Method (TNMM). The Tribunal noted that the issue was already settled in favor of the assessee by previous decisions. The AO argued that sufficient CUP inputs were available for the current year, unlike previous years. The Tribunal, however, upheld the CIT(A)'s decision, emphasizing the need for reliable data and the peculiar facts of each case. The Tribunal found that the CUP method was not appropriate due to the lack of reliable CUP inputs and significant differences in transaction sizes.2. Addition on Account of Guarantee Fees:The AO added Rs. 11,63,68,000 for corporate guarantees extended by the assessee to its associated enterprises without charging any consideration. The CIT(A) deleted this addition, relying on the Tribunal's decision in Micro Ink Ltd. The Tribunal upheld the CIT(A)'s decision, noting that the issue was covered in favor of the assessee for preceding years. The Tribunal agreed that corporate guarantees did not constitute an international transaction under section 92B, and hence, no ALP adjustment was warranted.3. Addition under Section 145A of the Income Tax Act:The AO added Rs. 1,44,29,469 to the closing stock value, which the CIT(A) deleted, citing tax neutrality and consistent Tribunal decisions. The Tribunal upheld the CIT(A)'s decision, noting that the method of accounting (exclusive or inclusive) did not impact profitability and thus did not warrant an addition.4. Disallowance under Section 10B of the Income Tax Act:The AO's addition of Rs. 62,02,470 was deleted by the CIT(A), and the Tribunal upheld this decision, noting that the issue was covered in favor of the assessee for previous assessment years.5. Transfer Pricing Adjustment Concerning Interest on Loans to Associated Enterprises:The AO made an adjustment of Rs. 18,46,660 by adopting higher interest rates for loans to associated enterprises. The Tribunal, following the decision in the assessee's own case for earlier years, deleted this adjustment, noting that the interest rate charged (LIBOR plus 1%) was at market rate and no undue benefit was given to the AEs.6. Disallowance of Prior Period Expenditure:The AO disallowed Rs. 13,32,845 of prior period expenditure while taxing the prior period income. The Tribunal directed the AO to tax only the net income, aligning with the principle that prior period expenditure should be set off against prior period income.7. Depreciation on Electric Installation:The assessee did not press this issue due to the small amount involved, and the Tribunal dismissed it for want of prosecution.8. Exclusion of Unrealized Export from Total Turnover for Section 10B Deduction:The Tribunal directed the AO to exclude unrealized exports from both export turnover and total turnover while computing the deduction under section 10B, following the decision in the assessee's own case for earlier years.9. Additional Grounds of Appeal:The assessee raised additional grounds related to expenses on FCCB redemption premium, share issue expenses, provision for leave encashment, education cess, and debenture redemption reserve. The Tribunal admitted these grounds and remitted them to the AO for adjudication on merits.Conclusion:The Tribunal dismissed the AO's appeal and partly allowed the assessee's appeal, directing appropriate adjustments and remittances for further adjudication.