ITAT allows deduction on scrap income, rejects Tsunami relief expenses, upholds transfer pricing benchmarking

The ITAT Mumbai ruled on multiple issues involving computation of deductions under sections 80IB/80IC and 10B. The tribunal directed the AO to allocate both common expenses and common income to eligible units while computing deductions, following previous ITAT orders. Income from sale of scraps and by-products was held eligible for deduction as it reduces manufacturing costs. The tribunal rejected claims for Tsunami relief expenses as business expenditure, finding the dominant objective philanthropic rather than business-related. On WDV enhancement, the tribunal modified the CIT(A)'s order regarding insurance claims. Capital subsidy amounts were held not deductible from WDV for depreciation computation. The tribunal upheld entity-level benchmarking under TNM method for transfer pricing adjustments, following coordinate bench precedents.

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Issues Involved:

1. Computation of deduction under sections 80IB/80IC and 10B.
2. Eligibility of miscellaneous income from sale of scraps and by-products for deduction under sections 80IB/80IC.
3. Adjustment of CENVAT credit.
4. Disallowance under section 14A.
5. Deduction of costs for relief materials given to Tsunami victims.
6. Enhancement of Written Down Value (WDV) of assets due to insurance claim not received.
7. Reduction of capital subsidy from WDV of assets.
8. Rate of tax applicable to dividend distributed to non-resident shareholders.
9. Transfer Pricing adjustments on various international transactions.

Issue-wise Detailed Analysis:

1. Computation of Deduction under Sections 80IB/80IC and 10B:
- The assessee did not allocate common expenses incurred at the Head Office to eligible units while computing deductions. The AO allocated these expenses, reducing the deduction amount. The ITAT directed the AO to allocate both common expenses and income to eligible units, following earlier ITAT directions.

2. Eligibility of Miscellaneous Income for Deduction:
- The AO denied deductions for income from the sale of scraps and by-products without specific discussion. ITAT directed the AO to allow deductions, referencing cases where such income was deemed eligible for deduction under sections 80IB/80IC, as it is connected to manufacturing activities.

3. Adjustment of CENVAT Credit:
- The AO assessed unutilized CENVAT credit as income, which the Ld.CIT(A) confirmed. The ITAT restored the issue to the AO for fresh examination, noting that the net profit remains unaffected under both Exclusive and Inclusive accounting methods.

4. Disallowance under Section 14A:
- The assessee did not press this ground, leading to its dismissal as not pressed.

5. Deduction of Costs for Relief Materials:
- The AO disallowed the claim for Rs. 5.00 crores spent on Tsunami relief, viewing it as not wholly and exclusively for business purposes. The ITAT upheld the disallowance, determining the expenditure as philanthropic and not connected to business promotion or CSR under the Companies Act.

6. Enhancement of WDV of Assets:
- The ITAT held that WDV could not be increased by the insurance claim amount not received, as it does not constitute the acquisition of a new asset. The WDV should be adjusted based on the actual insurance claim received, which was Rs. 8.00 crores, not the initially claimed Rs. 22.44 crores.

7. Reduction of Capital Subsidy from WDV:
- The ITAT ruled that the state capital investment subsidy should not be deducted from WDV, as its purpose was to promote industrialization in backward areas, not to fund asset costs, aligning with previous tribunal decisions.

8. Rate of Tax on Dividend to Non-residents:
- The ITAT rejected the assessee's claim that DDT should be charged at treaty rates for non-resident shareholders, following a Special Bench decision against the assessee.

9. Transfer Pricing Adjustments:
- The ITAT upheld the Ld.CIT(A)'s decision, which followed the tribunal's earlier ruling in the assessee's case for AY 2006-07, accepting entity-level benchmarking under TNMM and subsuming other adjustments. The decision has attained finality as it was not challenged by the Revenue in higher courts.

The appeals by the assessee and Revenue were partly allowed, and the Cross Objection filed by the assessee was dismissed.

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