Tribunal allows appeal, directs reconsideration of Transfer Pricing based on cost under Section 37(1)

The Tribunal partially allowed the appeal, vacating the disallowance of expenses under Section 37(1) and directing the A.O. to consider risk adjustment and recalculate the Transfer Pricing adjustment based on cost. Other issues raised were dismissed or deemed irrelevant.

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Issues Involved:
1. Disallowance of pre-commencement expenditures.
2. Deduction of expenses under Section 35D.
3. Transfer Pricing (TP) adjustments and exclusion of comparable companies.
4. Risk adjustment in computing Arm’s Length Price (ALP).
5. Calculation of adjustment under Section 92C.

Detailed Analysis:

1. Disallowance of Pre-commencement Expenditures:
The assessee claimed expenses incurred between 20.04.2009 to 31.07.2009 as business expenses under Section 37(1) of the Income Tax Act. The A.O. disallowed these expenses, treating them as pre-commencement expenses under Section 35D. The CIT(A) upheld the disallowance but allowed 1/10th of the expenses as a deduction over 10 years. The Tribunal held that the assessee had "set up" its business by incurring expenses on salaries, rent, electricity, etc., and thus, these expenses were allowable under Section 37(1). The Tribunal vacated the disallowance of Rs. 12,26,063/-.

2. Deduction of Expenses under Section 35D:
The CIT(A) directed the A.O. to allow the pre-commencement expenses over 10 years as per Section 35D. The assessee argued that the expenses should be spread over 5 years. The Tribunal, having allowed the expenses under Section 37(1), rendered this ground infructuous.

3. Transfer Pricing Adjustments:
The A.O. excluded M/s Cethar Consultancy Services Pvt. Ltd. from the list of comparables, treating it as a persistent loss-making company. The assessee contended that the company had made a profit in one of the three years. The Tribunal upheld the A.O.'s decision, agreeing that bad debts should be considered as operational expenses, making the company a persistent loss-maker. The Tribunal also dismissed the assessee's claim to exclude M/s En Pointe Technologies India Pvt. Ltd. due to its high profit margin, as no extraordinary circumstances were demonstrated.

4. Risk Adjustment in Computing ALP:
The assessee claimed a 2% risk adjustment, arguing it operated in a risk-free environment as a captive unit. The A.O. rejected this claim due to lack of quantification. The Tribunal found merit in the assessee's claim and directed the A.O. to consider the risk adjustment while benchmarking the international transactions.

5. Calculation of Adjustment under Section 92C:
The assessee argued that the adjustment should be calculated on the cost of Rs. 90,48,051/- instead of the sale turnover of Rs. 94,87,509/-. The Tribunal agreed and directed the A.O. to rework the adjustment based on the cost.

Conclusion:
The Tribunal allowed the appeal partly, vacating the disallowance of Rs. 12,26,063/- under Section 37(1), and directed the A.O. to consider risk adjustment and rework the TP adjustment based on cost. Other grounds were dismissed or rendered infructuous.

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