2016 (9) TMI 1288 - AT - Income Tax

TPA - non consideration of additional evidences - Held that - Keeping in view the fact that additional evidences brought on record by the assessee before the ld. TPO/ld. DRP have not been considered and the fact that identical issue in assessee s own case has already been restored back for fresh adjudication by the AO qua AY 2007-08 and AY 2008-09 we deem it expedient to restore this issue as to the manufacturing segment to the file of AO who shall adjudicate after providing an opportunity of being heard to the assessee. International transaction relating to contract and R 6, 32, 85, 750/- and recruitment expenditure to the tune of 1, 12, 88, 617/- made by the AO and confirmed by ld. DRP are allowable on the ground that these expenditure have not resulted into acquisition of any asset by the assessee company nor any enduring additions have been accrued to the assessee. So by following the order passed by the coordinate Bench in assessee s own case qua AY 2002-03 and AY 2003-04 grounds no.7 6, 32, 85, 750/- and 4/5th of the expenditure of the recruitment expenditure to the tune of 1, 12, 88, 617/-. However AO to verify the exact period of contract to compute the expenses incurred by the assessee and disallow the expenses if the same are found to be not attributable to the year under assessment. Disallowance of 3/4th of the licences - Held that - Keeping in view the settled principle and the facts and circumstances of the case expenditure incurred by the assessee on licences and permits being necessary to run the business without which assessee s unit would have stopped which are revenue in nature and cannot be deferred to another 5 years. Even otherwise licence fee for one year has been claimed by the assessee in the year under assessment itself. Eligible for exemption u/s 10A - Held that - The ratio of the judgment in case of TEI Technologies (P.) Ltd. (2012 (9) TMI 47 - DELHI HIGH COURT ) is that implication of exemption provisions contained u/s 10A is that the particular income which is exempt from tax does not enter in the field of taxation and is not subject to any computation. So the business loss of non-eligible units could not be set off against profits of the undertaking eligible for exemption u/s 10A as section 10A unit is not taxable at all. However section 10A deduction will not affect for TP adjustment nor this profit is to be deducted. So in these circumstances ground are required fresh consideration by the AO who shall verify the correctness of the claim of the assessee regarding expenses and deduction u/s 10A of the Act

Issues Involved:
1. Transfer Pricing Adjustment in Manufacturing Segment
2. Transfer Pricing Adjustment in Distribution Segment
3. Transfer Pricing Adjustment in R&D Support Services Segment
4. Disallowance of Advertisement and Sales Promotion Expenses
5. Disallowance of Recruitment Expenditure
6. Disallowance of Licenses and Permits Expenditure
7. Deduction under Section 10A
8. Levying of Interest under Sections 234B and 234D
9. Initiation of Penalty Proceedings under Section 271(1)(c)

Detailed Analysis:

1. Transfer Pricing Adjustment in Manufacturing Segment:
The assessee challenged the TP adjustment of ?60,14,65,390/- made by the AO/TPO/DRP, arguing that the transaction-by-transaction approach should be followed for benchmarking international transactions and selecting its AEs as tested parties. The TPO aggregated all manufacturing segments, rejecting the segmentation provided by the assessee, and used contemporaneous data for FY 2008-09 to determine the arm's length price (ALP). The Tribunal noted that additional evidence provided by the assessee was not considered by the TPO/DRP and restored the issue to the AO for fresh adjudication, emphasizing the need to consider the transaction-by-transaction approach and the additional evidence provided.

2. Transfer Pricing Adjustment in Distribution Segment:
The TPO made a TP adjustment of ?37,58,66,000/- for the distribution segment, rejecting the assessee's claim for adjustment due to customs duty and adverse foreign exchange movement. The Tribunal highlighted that the TPO did not consider the foreign currency loss suffered by the assessee, which led to an unhealthy margin. The Tribunal restored the issue to the TPO for fresh adjustment, taking into account the foreign currency fluctuation demonstrated by the assessee.

3. Transfer Pricing Adjustment in R&D Support Services Segment:
The TPO made a TP adjustment of ?4,14,97,971/- for the R&D support services segment, rejecting certain comparables selected by the assessee and using its own set of comparables. The Tribunal noted that the TPO did not adopt a transaction-by-transaction approach and restored the issue to the TPO to decide afresh, considering the additional evidence and the need for a transaction-by-transaction approach.

4. Disallowance of Advertisement and Sales Promotion Expenses:
The AO/DRP disallowed 3/4th of the advertisement and sales promotion expenses amounting to ?6,32,85,750/-, treating them as enduring in nature. The Tribunal, following its earlier decisions in the assessee's own case for AY 2002-03 and AY 2003-04, allowed these expenses, noting that they did not result in the acquisition of any asset or enduring benefit.

5. Disallowance of Recruitment Expenditure:
The AO/DRP disallowed 4/5th of the recruitment expenditure amounting to ?1,12,88,617/-, treating it as enduring in nature. The Tribunal allowed these expenses, following its earlier decisions in the assessee's own case, and directed the AO to verify the exact period of the contract to compute the expenses attributable to the year under assessment.

6. Disallowance of Licenses and Permits Expenditure:
The AO disallowed 3/4th of the licenses and permits expenditure amounting to ?1,69,93,222/-, treating it as leading to an enduring benefit. The Tribunal, relying on the Special Bench decision in Peerless Securities Limited and the decision of the Madras High Court in Southern Roadways Ltd., allowed the expenditure, noting that it was necessary for running the business and could not be deferred.

7. Deduction under Section 10A:
The AO/DRP did not recompute the deduction under Section 10A after making the disallowance of expenses in relation to the Section 10A unit. The Tribunal restored the issue to the AO for fresh consideration, directing the AO to verify the correctness of the claim regarding expenses and deduction under Section 10A.

8. Levying of Interest under Sections 234B and 234D:
The Tribunal did not specifically address this issue in the detailed analysis but mentioned it in the grounds of appeal.

9. Initiation of Penalty Proceedings under Section 271(1)(c):
The Tribunal did not specifically address this issue in the detailed analysis but mentioned it in the grounds of appeal.

Conclusion:
The Tribunal allowed the appeal for statistical purposes, restoring several issues to the AO/TPO for fresh adjudication, emphasizing the need to consider additional evidence and the transaction-by-transaction approach for benchmarking international transactions. The Tribunal also allowed the disallowance of certain expenses, following its earlier decisions in the assessee's own case.

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