2016 (7) TMI 1245 - HC - Income Tax

Transfer pricing adjustment - justification on application of Arms Length Price (ALP) only to A.E. transactions and not to all transactions - Held that - Issue raised herein with regard to transfer pricing adjustments stand concluded against the revenue and in favour of the respondent assessee Allowable deduction under Section 80IB and 80IC - Held that - We find that the impugned order of the Tribunal allowed the respondent assessee s appeal before it by following a decision of this Court in Zandu Pharmaceuticals Works Ltd. V. CIT 2012 (9) TMI 620 - BOMBAY HIGH COURT held that so far as research and interest expenses are concerned it can only be allowed to the extent it has nexus to the unit claiming the deduction. The grievance of the revenue before us is that the aforesaid decision would have no application to the present facts as it is distinguishable. However besides stating the above nothing has been pointed out in support of its submission that the Zandu Pharmaceuticals Works Ltd. (supra) has no application. In the above view as the impugned order of the Tribunal has followed the binding decision of this Court no substantial question of law. Expenditure termination of a contract - Held that - The view taken by the Tribunal on facts before it that the expenditure was incurred on account of the commercial expediency and same is eligible to deduction under Section 37(1) of the Act is a possible view. Set off of brought forward depreciation losses of amalgamating company for the period prior to amendment in sub section (2) of Section 32 - Held that - We find that the impugned order of the Tribunal while allowing the Assessee - respondents claim follows the decision of the Gujarat High Court in General Motors India Pvt. Ltd. Vs. DCIT 2012 (8) TMI 714 - GUJARAT HIGH COURT wherein on identical facts it was held that the unabsorbed depreciation for the Assessment Year 1997-98 upto Assessment Year 2001-02 could be allowed to be set off if it was still unabsorbed on 1st April 2001. The above decision also placed upon the CBDT circular No.14 of 2001 dated 22nd November 2001 to hold that any unabsorbed depreciation which is available on 1st day of April 2001 would be dealt with in accordance with the provisions of Section 32(2) of the Act as amended by the Finance Act of 2001. Moreover the Circular No.14 of 2001 issued by the CBDT clarifies that restriction of eight years to carry forward and set off the unabsorbed depreciation has been dispensed with. Consequently unabsorbed depreciation for the intervening periods between assessment 1997-98 upto 2001-02 if available in the assessment year 2002-03 would be allowable as part of carried forward depreciation from Assessment Year 2002-03 onwards. No decision contrary to the decision of the Gujarat High Court has been shown to us. No substantial question of law. Appeal admitted on question no.6. - Whether on facts and in circumstances of the case and in law the Tribunal was justified in directing to delete the disallowance of expenditure under Section 40(a)(ia) r.w.s. 194C(2) made by the Assessing Officer on account of short deduction of tax ?

Summary

Issues involved:
1. Transfer pricing adjustments
2. Allocation of research and interest expenses for deductions under various sections of the Income Tax Act
3. Nature of expenses related to termination of contracts
4. Disallowance of expenditure under Section 40(a)(ia) r.w.s. 194C(2)
5. Set off of brought forward depreciation losses of amalgamating company

Transfer pricing adjustments:
The appeal challenged the order of the Income Tax Appellate Tribunal (the Tribunal) regarding the addition of a substantial amount on account of transfer pricing adjustments for Assessment Year 2006-07. The questions of law raised included the application of Arms Length Price (ALP) only to Associated Enterprise (A.E.) transactions, bench marking for A.E. transactions only, and the safe harbor limit. The Tribunal's decision was influenced by previous judgments favoring the taxpayer, concluding that no substantial questions of law arose.

Allocation of research and interest expenses:
The Tribunal's decision to not allocate research and interest expenses to various units for deductions under Section 80IB, 80IC, 10A, and 10B of the Act was based on the principle that such expenses should only be allowed if they have a nexus to the claiming unit, following a precedent set by the High Court. The revenue's argument against this decision lacked substantial support, leading to the rejection of the questions raised on this issue.

Nature of expenses related to termination of contracts:
The dispute revolved around whether expenses incurred for termination of contracts were capital or revenue in nature. The Tribunal upheld the revenue's contention that such payments were revenue expenditures under Section 37(1) of the Act, citing various judicial precedents. The principles applied by the Tribunal were found to be justifiable, and hence, no substantial questions of law were entertained on this matter.

Disallowance of expenditure under Section 40(a)(ia) r.w.s. 194C(2):
The Tribunal's decision to delete the disallowance of expenditure under Section 40(a)(ia) r.w.s. 194C(2) was challenged. However, the Tribunal's reasoning for allowing the deduction was found to be reasonable and in line with the commercial expediency, leading to the conclusion that no substantial question of law arose in this regard.

Set off of brought forward depreciation losses:
The issue of allowing the set off of brought forward depreciation losses of the amalgamating company for Assessment Years 1996-97 and 1997-98 was raised. The Tribunal's decision to permit such set off was supported by a decision of the Gujarat High Court and a CBDT circular, clarifying that the restriction on carrying forward unabsorbed depreciation had been dispensed with. As no contradictory decisions were presented, the Tribunal's decision was upheld, and no substantial question of law was entertained on this issue.

Conclusion:
The High Court addressed various complex issues related to transfer pricing adjustments, allocation of expenses, nature of termination expenses, disallowance of expenditure, and set off of depreciation losses in a detailed and comprehensive manner. The judgments and reasoning provided by the Court were based on legal principles, precedents, and the specific facts of the case, leading to the dismissal of substantial questions of law on most issues.