Assessee wins partial relief on transfer pricing, R&D expenses, and book rejection challenges

ITAT Ahmedabad partially allowed the assessee's appeal on multiple grounds. The tribunal remanded the transfer pricing adjustment for notional interest on 19-day excess credit period to TPO for proper verification of impact on profitability. Regarding section 35(2AB) deduction, exhibit batch expenses were disallowed following previous tribunal order, but Rs. 501.62 lakhs R&D center expenses were allowed. The rejection of books of account was decided in favor of assessee as no justification existed for expense shifting allegations. Issues regarding intangible expenditure, commission to non-resident agents, and interest on loans were remanded to AO for verification. Section 14A addition was deleted as no exempt income was earned.

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Issues Involved:

1. Upward adjustment of notional interest for excess credit period for export sale proceeds.
2. Disallowance of claim of deduction u/s 35(2AB) for R&D expenses.
3. Disallowance related to Gross Profit and Net Profit rates comparison.
4. Rejection of claim u/s 35(1)(iv) for expenditure on intangibles.
5. Disallowance of commission expenses to non-resident agents u/s 40(a)(i).
6. Deletion of upward adjustment for interest on loans and advances.
7. Deletion of disallowance u/s 14A.
8. Deletion of disallowance u/s 36(1)(iii).
9. Deletion of disallowance u/s 40A(2)(b).
10. Deletion of disallowance u/s 37.

Summary:

1. Upward Adjustment of Notional Interest:
The Tribunal remanded the issue back to the TPO for verification of the impact of charging notional interest for the 19 days excess credit period on the profitability of the assessee company. The assessee's margin of 48.31% was compared to the comparable entities' margin of 17.71%, and the issue needed further verification.

2. Disallowance of Claim of Deduction u/s 35(2AB):
The Tribunal partly allowed the appeal, disallowing the expenditure in nature of exhibit batches but deleting the disallowance of Rs. 501.62 lakhs incurred at the R&D Centre, as it was recognized and approved.

3. Disallowance Related to Gross Profit and Net Profit Rates Comparison:
The Tribunal allowed the appeal, noting that the assessee's GP and NP rates were justified and the observation of the AO that some expenses were shifted from the firm to the assessee company was not justifiable.

4. Rejection of Claim u/s 35(1)(iv):
The Tribunal remanded the issue back to the AO for verification and adjudication of the expenditure incurred on intangibles and accounted under capital work in progress.

5. Disallowance of Commission Expenses to Non-Resident Agents u/s 40(a)(i):
The Tribunal remanded the issue back to the AO for verification and adjudication of the commission expenses to non-resident agents.

6. Deletion of Upward Adjustment for Interest on Loans and Advances:
The Tribunal remanded the issue back to the AO for interest quantification/calculation, as the issue was decided against the assessee but required proper verification.

7. Deletion of Disallowance u/s 14A:
The Tribunal upheld the CIT(A)'s deletion of the disallowance, noting that no exempt income was earned during the year and the assessee had made a suo moto disallowance.

8. Deletion of Disallowance u/s 36(1)(iii):
The Tribunal upheld the CIT(A)'s deletion of the disallowance, noting that the funds were used for business purposes and the issue was decided in favor of the assessee for A.Y. 2011-12.

9. Deletion of Disallowance u/s 40A(2)(b):
The Tribunal upheld the CIT(A)'s deletion of the disallowance, noting that the issue was decided in favor of the assessee for A.Y. 2011-12 and no discrepancy was pointed out.

10. Deletion of Disallowance u/s 37:
The Tribunal partly allowed the appeal, noting that the observations made in the assessee's appeal regarding GP and NP rates were applicable, and remanded the issue back to the AO for further verification.

Conclusion:
Both the appeals filed by the Assessee and the Revenue were partly allowed for statistical purposes.

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