Tribunal grants relief on disallowances, determines arm's length price & allows deductions on scrap sales.

The Tribunal partly allowed the assessee's appeal, providing relief on disallowances related to gifts and sales promotions, section 14A disallowance, and determining the arm's length price for corporate guarantees. Additionally, deductions on the full turnover of scrap sales were directed to be allowed. The Revenue's appeal contesting deductions on scrap sales was dismissed.

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Issues Involved:
1. Disallowance of expenditure on gifts and sales promotions.
2. Disallowance under section 14A of the Income Tax Act.
3. Determination of arm's length price for corporate guarantee.
4. Deduction claimed under section 10B on the turnover of scrap sales.

Issue-wise Detailed Analysis:

1. Disallowance of expenditure on gifts and sales promotions:
The assessee, engaged in manufacturing and sales of pharmaceutical products, claimed an expenditure of Rs. 2,26,34,864 towards gifts and sales promotions. The Assessing Officer (AO) disallowed Rs. 50,17,890, reasoning that gifts to doctors are prohibited under the CBDT circular no.5/2012 and Indian Medical Council regulations. The assessee argued that the prohibition applies to doctors, not pharmaceutical companies, and the circular is not retrospective. The Tribunal agreed with the assessee, referencing prior decisions (DCIT v/s PHL Pharma Pvt. Ltd. and Solvay Pharma India Ltd.), and deleted the disallowance, allowing the expenditure as sales promotion.

2. Disallowance under section 14A of the Income Tax Act:
The AO disallowed Rs. 7,36,702 under section 14A r/w rule 8D for expenses related to earning exempt income (dividends). The assessee contended sufficient interest-free funds were available, and no administrative expenses were incurred for old investments. The Tribunal found the assessee had sufficient interest-free funds and directed the AO to compute administrative expenses disallowance under rule 8D(2)(iii), excluding investments not yielding exempt income.

3. Determination of arm's length price for corporate guarantee:
The AO added Rs. 17,18,941 to the assessee’s income, determining an arm's length price for a corporate guarantee given to an overseas AE at 1.5% per annum. The assessee argued that corporate guarantees are not international transactions under section 92B. The Tribunal noted differing views but followed the jurisdictional High Court decision in Everest Kanto Cylinders Ltd., directing the AO to apply a 0.5% rate for the arm's length price.

4. Deduction claimed under section 10B on the turnover of scrap sales:
The AO disallowed deductions on scrap sales turnover under sections 80IB and 10B, which the Commissioner (Appeals) partially allowed for Rs. 3,92,091. The assessee argued for inclusion of Rs. 51,51,738 related to the 10B unit. The Tribunal upheld the assessee's claim, referencing prior Tribunal decisions that scrap sales are integrally connected to business activities, directing the AO to allow deductions on the full turnover of scrap sales for both units.

Revenue’s Appeal:
The Revenue’s appeal contested the allowance of deductions under sections 10B/80IB for scrap sales. The Tribunal dismissed the appeal, consistent with its decision on the assessee's appeal, confirming the eligibility for deductions on scrap sales.

Conclusion:
The assessee's appeal was partly allowed, with the Tribunal providing relief on disallowances related to gifts and sales promotions, section 14A disallowance, and the determination of the arm's length price for corporate guarantees. The Tribunal also directed the allowance of deductions on the full turnover of scrap sales. The Revenue's appeal was dismissed.

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