2024 (5) TMI 791 - AT - Income Tax

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 ... TP Adjustment - Upward adjustment towards charging of notional interest for 19 days excess credit period for realisation of export sale proceeds of finished pharmaceutical products from AEs (199 days average credit period to AEs as compared to average credit period of 180 days in case of receivables from non- AEs) - HELD THAT:- The working capital adjustment given by the assessee company while fixing the sale price and which has an impact of outstanding trade receivable on profitability while having sale proceeds realisation which is incidental to transaction of sale of finished goods as per the submission of the Ld. AR appears to be not verified by the AO/TPO and in fact the international transaction of export of finished goods which was benchmarked using Transaction Net Margin Method with profit indicator of operating profit by operating cost, wherein assessee company’s margin was 48.31% as compared to comparable entities having margin of 17.71% has to be looked into the export profit margin and this aspect needs to be verified. Therefore, we are remanding back this matter to the file of the TPO for proper adjudication and verification of the issue in consonance with the charging of notional interest for 19 days excess credit period for realisation of export sales proceeds of finished pharmaceutical products from AEs whether has an impact on the profitability of the assessee company and whether the other comparable capitalising the same which was not indicated by the TPO in its order. Ground of assessee’s appeal partly allowed for statistical purpose. Disallowing the claim of deduction u/s 35(2AB) - weighted portion relating to expenditure on exhibit batches and certain other expenses - HELD THAT:- From the perusal of A.Y. 2009-10 order passed by the Tribunal, it can be seen that the aspect of expenditure in nature of Exhibit Batches was not allowed and, therefore, this aspect is settled and hence the same is dismissed. As regards to the aspect of expenses incurred at R&D Center, from the perusal of the Paper Book at page no.81 the approval was granted upto 31.03.2012 and, therefore, the assessee has demonstrated before us that the expenses incurred at R&D Center which was recognised and approved should have been considered by the CIT(A). Hence, as regards expenses amounting to Rs. 501.62 lakhs incurred at R&D Centre recognised in A.Y. 2012-13 are deleted. Ground no.2 of the assessee’s appeal is thus partly allowed. Rejection of books of account - assessee company failed to fully controvert the justification for lower Gross Profit rate (GP rate) and Net Profit rate (NP rate) as compared to GP rate and NP rate of its partnership firm - HELD THAT:- It is pertinent to note that for the three consecutive Assessment Years the assessee has shown that the assessee has not incurred any expenditure due to the policy making and the business models in certain categories and in fact the assessee company calculated the NP rate on the basis of return on capital employee return of asset employee or NP as percentage of sales is equal to or higher than the NP rate of comparable entity of having similar profile. In fact, the CIT(A) has observed that the assessee company made a GP of 48% on the products purchased for trading from partnership as compared to GP of 46% on trading of products purchased from third party. Thus, the observation of the AO that some expenses were shifted from the hands of the firm to the hands of the assessee company are not justifiable from the perusal of the records. Decided in favour of assessee. Addition u/s 35(1)(iv) - expenditure incurred during the year on intangibles and accounted under capital work in progress on which no depreciation has been claimed later on - HELD THAT:- From the perusal of the records, it can be seen that the CIT(A) has followed AY 2011-12 [2024 (2) TMI 223 - ITAT AHMEDABAD] the Tribunal has set aside this issue to the file of the AO - The facts are identical in the present A.Y. and, therefore, the matter is remanded back to the file of the AO for proper verification and adjudication of the issues in respect of expenditure incurred during the year on intangibles and accounted under capital work in progress on which no depreciation has been claimed later on in the context of Income Tax Statute. Assessee be given opportunity of hearing by following the principles of natural justice. Thus, ground of the assessee’s appeal are partly allowed for statistical purpose. Disallowance of commission expenses to non-resident agents u/s 40(a)(i) - HELD THAT:- It is pertinent to note that this issue related to the commission expenses to non-resident agents u/s 40(a)(i) of the Act has not been categorically verified in the context of non-resident agents and the resident agents and needs further verification. Therefore, we are remanding back this issue to the file of the AO for proper verification and adjudication of the said issue. Needless to say, the assessee be given opportunity of hearing by following the principles of natural justice. Upward adjustment in respect of interest on loans and advances - HELD THAT:- It is pertinent to note that this issue is decided against the assessee but the interest quantification/calculation has to be done, therefore, for the limited purpose the issue is remanded back to the file of the AO. Addition u/s 14A - exempt income earned or not? - HELD THAT:- From the perusal of records, no exempt income earned during the year. The Ld. DR also has not pointed out that any exempt income was earned. In fact, the assessee has made suo moto disallowance and the CIT(A) has given a categorical finding to that extent. This issue was also decided in favour of the assessee for the A.Y. 2011-12 [2024 (2) TMI 223 - ITAT AHMEDABAD]. 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.