Tribunal allows deduction for scrap sales, rejects transfer pricing markup; partly favors Revenue on disallowance under Section 14A.

The Tribunal dismissed the Revenue's challenge on the deduction under Section 80IC and transfer pricing adjustment, upholding the deduction for income from scrap sales and rejecting the transfer pricing markup. However, the Tribunal allowed the Revenue's disallowance under Section 14A due to the AO's recorded satisfaction for the disallowance. The appeal was partly allowed in favor of the Revenue.

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Issues Involved:

1. Deduction under Section 80IC on income from the sale of scrap.
2. Disallowance under Section 14A of the Act.
3. Transfer pricing adjustment for the allocation of common expenses.

Summary:

Issue 1: Deduction under Section 80IC on Income from Sale of Scrap

The Revenue challenged the assessee's claim for deduction under Section 80IC on income earned from the sale of scrap. The AO argued that the income from the sale of scrap does not qualify as "derived from" the eligible business activities, citing the Supreme Court's decision in Liberty India vs. CIT. The AO reduced the deduction amount by excluding the scrap sale proceeds from the net profit. However, the CIT(A) allowed the deduction, relying on the Pune Tribunal's decision in the assessee's own case for previous years, which allowed the deduction for scrap sales. The Tribunal upheld the CIT(A)'s decision, emphasizing the principle of consistency and noting that the Revenue could not provide any contradictory higher forum judgment.

Issue 2: Disallowance under Section 14A

The AO disallowed Rs. 1,13,63,123/- under Section 14A, arguing that the assessee did not segregate expenses incurred for earning tax-free income. The CIT(A) provided relief to the assessee by relying on the Tribunal's decision in the assessee's own case for earlier years, which found no satisfaction recorded by the AO for disallowance under Section 14A. However, the Tribunal noted that the CIT(A) failed to examine the specific facts for the current year, where the AO had indeed recorded satisfaction. Consequently, the Tribunal reversed the CIT(A)'s decision, allowing the Revenue's grounds.

Issue 3: Transfer Pricing Adjustment

The AO made a transfer pricing adjustment by adding a markup of 7.48% on the cost allocated to the Roorkee unit, arguing that the assessee did not demonstrate that the transaction was at arm's length. The CIT(A) provided relief, noting that the allocation of corporate expenses was on an actual basis and not a transfer of services requiring a markup. The Tribunal upheld the CIT(A)'s view, stating that the allocation was based on revenue earned by the units and did not involve any service transfer necessitating an arm's length markup.

Conclusion:

The Tribunal dismissed the Revenue's grounds on the deduction under Section 80IC and transfer pricing adjustment while allowing the Revenue's grounds on the disallowance under Section 14A. The appeal of the Revenue was partly allowed.

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