2010 (3) TMI 878 - AT - Income Tax

Transfer Pricing adjustments - goods sold to associate entities were valued at a discount of 5 per cent as compared to the goods sold to non-associate entities - CIT deleted the addition made by the AO. The assessee-company is engaged in the business of processing and export of chemicals. The assessee-company has transaction with the associate enterprises as well as non-associated enterprises. The associate enterprise is M/s. Chemical Link LLC, USA with whom the majority of the transaction of sale was entered into by the assessee-company. The method of computation of arm s length price has been stated to be comparable uncontrolled price method. HELD THAT - We heard both the parties. The Ld. DR relied on the order of the L Bench in assessee s own case for the earlier AY 2003-04 wherein the matter has been set aside. The Ld. Counsel for the assessee replied that for the earlier AY 2003-04, the matter was remanded since the AO has not brought on record any evidence to substantiate its calculation of ALP. Further instead of industrial discount of 10 per cent he has allowed 5 per cent and quantitative discount of 20 per cent was not allowed totally. Since no evidences were brought on record for disallowances of 20 per cent of quantitative discount as claimed by the assessee and 5 per cent of industrial discount, the matter was set aside for earlier years whereas in this year all the facts are available and therefore the matter is to be decided by the Tribunal. We find that the following factors have been rightly considered by Ld. CIT(A). Turnover or quantity difference The sale to Non-AE is of 1150 Kgs. Only, whereas there is a sale to the magnitude of 62,000 Kgs. to the AE which will have a bearing on the prices. Volume sold is a significant factor in fixing the price. Geographical difference In the case of Ranbaxy Laboratories Ltd. v. Asstt. CIT 2008 (1) TMI 445 - ITAT DELHI-H it has been held that it could have been appreciated if a particular entity in a particular country was sought to be compared with some similar entity in that very country as geographical situations in several ways influence the transfer pricing. Profile of Customer The transactions with high profile clients such as AKZO Nobel or Isola is different when compared to small sales to small players in South East Asian business. Survival of the appellant In order to capture and maximize its profits of the big and flourishing market of USA and Europe it has to depend on its AE only. Lastly on a simple average it is 8.21 from it to its AE whereas it is 8.87 from its AE to Customers. At the weighted average rate it is 8.20 from it to its AE while it is 8.75 from its AE to customers. If the overheads as identified in the submissions to run the AE is reduced then there would be hardly any profit. In our opinion the transaction with the AE was at Arm s Length and there is no case of making adjustments. We confirm the order of the Ld. CIT(A) deleting the addition made on such adjustments. The Revenue s appeal is dismissed on this issue. Interest on fixed deposit and dividend - disallowed for deduction u/s 80HHC - HELD THAT - We find that The Ld. CIT(A) rightly held that ''it is a 100 per cent exporter and has kept FD in the bank at the Banker s instance to avail OD facility. Thus there is a direct nexus between the interest received and export activity and it is therefore part of the operational income. Further the interest payable on OD facility and receivable on FD are inter-linked having direct nexus with each other. We find no infirmity in the order of the Ld. CIT(A) and we direct the AO to treat the interest income as business income. This ground raised by the revenue is dismissed. Interest income on net basis - HELD THAT - Following the decision of the Special Bench in the case of Lalsons Enterprises v. Dy. CIT 2004 (2) TMI 294 - ITAT DELHI-E , we direct the AO to take the net interest income of Rs. 9,17,208 for calculation of deduction u/s 80HHC and confirm the order of the Ld. CIT(A). Revenue s appeal on this issue is dismissed. In the result, the appeal filed by the revenue is dismissed.

Summary

Issues Involved:
1. Deletion of the addition made by the Assessing Officer on account of transfer pricing.
2. Treatment of interest on fixed deposits and dividend for deduction under section 80HHC.
3. Calculation of deduction under section 80HHC on interest income on a net basis instead of a gross basis.

Issue-Wise Detailed Analysis:

1. Deletion of the Addition Made by the Assessing Officer on Account of Transfer Pricing:

The first ground raised by the Revenue was regarding the deletion of an addition of Rs. 91,47,700 made by the Assessing Officer (AO) on account of transfer pricing. The AO found that the goods sold to the associate enterprise (Chemical Link LLC, USA) were valued at a discount compared to those sold to non-associate enterprises. The AO observed that the sale price of the product should not depend on the end use and that the assessee had not provided sufficient evidence to justify the discounts given.

The assessee argued that the discounts were due to quantity differences and the different end uses of the products. The Ld. CIT(A) held that the transaction with the AE was at arm's length, considering factors like turnover differences, geographical differences, customer profile, and the survival of the appellant. The Ld. CIT(A) also noted that the AE in the USA had shown losses, and there was no tax avoidance motive. The ITAT upheld the Ld. CIT(A)'s decision, confirming that the transaction with the AE was at arm's length and deleting the addition of Rs. 91,47,700.

2. Treatment of Interest on Fixed Deposits and Dividend for Deduction under Section 80HHC:

The second ground raised by the Revenue was regarding the treatment of interest on fixed deposits and dividend for deduction under section 80HHC. The Ld. CIT(A) treated the interest income of Rs. 9,74,002 and dividend income of Rs. 2,800 as business income. The assessee contended that the fixed deposits were kept with the bank to obtain an overdraft facility, and the shares of the bank were purchased to comply with legal requirements. The ITAT upheld the Ld. CIT(A)'s decision, confirming that the interest income and dividend income should be treated as business income.

3. Calculation of Deduction under Section 80HHC on Interest Income on a Net Basis Instead of a Gross Basis:

The third ground raised by the Revenue was regarding the calculation of deduction under section 80HHC on interest income on a net basis instead of a gross basis. The ITAT directed the AO to take the net interest income of Rs. 9,17,208 for the calculation of deduction under section 80HHC, following the decision of the Special Bench in the case of Lalsons Enterprises v. Dy. CIT [2004] 89 ITD 25 (Delhi). The ITAT confirmed the order of the Ld. CIT(A) and dismissed the Revenue's appeal on this issue.

Conclusion:

In conclusion, the ITAT upheld the Ld. CIT(A)'s decisions on all three issues, confirming that the transaction with the AE was at arm's length, treating the interest and dividend income as business income, and calculating the deduction under section 80HHC on a net basis. The appeal filed by the Revenue was dismissed in its entirety.