2023 (3) TMI 1134 - AT - Income Tax

Tribunal orders deletion of transfer pricing adjustment & disallowance of deductions, stresses consistency in applying methods

The Tribunal allowed the appeal, directing the deletion of the transfer pricing adjustment, the addition under section 69C, and the disallowance of the ... TP Adjustment - MAM selection - TNMM or CUP method - TNMM method selected by the appellant to benchmark transaction - HELD THAT:- We hold that there was no justification in rejecting the TNMM method applied by the assessee as in the preceding year. Since as per the same computation the assessee's margin was found to be at arm's length.We set aside the order of authorities below and decide the issue in favour of the assessee. Since we have already allowed the assessee's appeal on this issue. For lack of justification in changing the method of bench marking we are not dealing with the arguments on other aspects of merits of application of CUP method computation of arm’s length price by the Transfer Pricing Officer in this case. Decided against revenue. Addition u/s 69C - assessee was not able to establish the purchases - HELD THAT:- The assessee has possession of the purchased documents and the payment was made through banking channels. So, this addition cannot be sustained u/s 69C. The ld. Counsel has submitted the catena of judgments with corelated fact of the case. The identity was proved as payment was made by banking channel. Possession of invoice has never been challenged. We find no infirmity in the transaction of assessee. Accordingly, the addition made by the AO is liable to be quashed. Decided against revenue. Disallowance of weighted deduction u/s 35[2AB] - difference between the amount claimed in the return of income and has approved by the DSIR in Form No. 3CL - HELD THAT:- In the terms of provision 35(2AB) needs to be approved by DSIR.Research and Development Facility is approved and prescribed by the authority, DSIR in Form 3 CM then the expenses incurred by the assesseehave to be allowed u/s 35(2AB) and the same cannot be curtailed. To the quantum approved in Form No. 3CL in the pre amendment period. We are fully relied on the order of the coordinate bench. The first step was recognition of facility by the prescribed authority and entering an agreement between the facility and the prescribed authority. The ld. AO cannot curtail the expenses which was contributed to R & D in pre amended period. Accordingly, the addition made by the ld. AO amount is liable to be quashed. - Decided against revenue. Issues Involved:1. Transfer Pricing Adjustment for export of goods.2. Addition under section 69C of the Income Tax Act.3. Disallowance of weighted deduction under section 35(2AB) of the Income Tax Act.Issue-wise Detailed Analysis:1. Transfer Pricing Adjustment for Export of Goods:The assessee challenged the upward adjustment of INR 20,00,44,704 made by the AO/TPO/DRP, arguing that the international transaction with its AE was at arm's length. The assessee used the Transactional Net Margin Method (TNMM) to benchmark the transaction, showing a margin of 23.27% for AE transactions compared to 18.70% for non-AE transactions. The TPO, however, rejected TNMM in favor of the Comparable Uncontrolled Price (CUP) method. The Tribunal found that the TPO did not provide a cogent reason for rejecting the consistently applied TNMM method and emphasized the importance of consistency in applying the most appropriate method. The Tribunal referenced previous cases (ITA No. 638 & 4643/Mum/2017 and ITA 7284/Mum/2018) where TNMM was upheld. The Tribunal concluded that the TPO's switch to the CUP method was unjustified and allowed the appeal, directing the deletion of the adjustment.2. Addition under Section 69C of the Income Tax Act:The assessee contested the addition of INR 41,500 under section 69C, arguing that the genuineness of the transaction was substantiated by confirmations from 18 out of 20 parties. The Tribunal noted that the DRP had already reduced the initial addition from INR 12,45,12,834 to INR 41,500. The Tribunal referenced the Delhi High Court's decision in PCIT vs. Param Dairy and Earth Moving Equipment Service Corporation vs. DCIT, which held that section 69C could not be applied where payments were made through banking channels and were duly recorded in the books of account. The Tribunal found no infirmity in the transaction and directed the deletion of the addition.3. Disallowance of Weighted Deduction under Section 35(2AB) of the Income Tax Act:The issue involved the disallowance of INR 1,87,96,989 out of the total claim of INR 21,20,74,989 under section 35(2AB). The AO disallowed the amount based on the approval granted by the Department of Scientific and Industrial Research (DSIR). The Tribunal referenced its own decision in ITA No. 7284/Mum/2018 and the Pune Tribunal's decision in Cummins India Ltd. V/s DCIT, which held that once a facility is approved by DSIR, the entire expenditure incurred on R&D should be allowed. The Tribunal found that the AO was not justified in curtailing the deduction based on the quantum approved in Form No. 3CL and directed the deletion of the disallowance.Conclusion:The Tribunal allowed the appeal on all grounds, directing the deletion of the transfer pricing adjustment, the addition under section 69C, and the disallowance of the weighted deduction under section 35(2AB). The order emphasized the importance of consistency in applying transfer pricing methods, the proper application of section 69C, and the allowance of R&D expenditure once approved by DSIR.