2014 (4) TMI 520 - AT - Income Tax

Restriction of assessee s claim for excess deduction u/s 80IB/80IC of Act Held that - Re-allocation made by A.O. on adhoc basis cannot be sustained having regard to all facts that expenditure on advertisement & publicity and schemes was in nature of selling expenses - Allocation made by assessee of said expenses on basis of turnover was quite reasonable - Allocation so made by assessee also cannot be said to have resulted in allocation of large amount of expenses to non-eligible business as alleged by A.O. - Since gross profit ratio as shown by assessee in trading segment was 12.92% and even after allocating advertisement, schemes and promotions expenses on basis of turnover, profit of trading segment was 6.59%. - Reallocation of said expenses made by A.O. on adhoc basis was not supported or substantiated by him and same, cannot be accepted as reasonable basis - Keeping in view decision of Supreme Court in Consolidated Coffee Ltd. v. State of Karnataka 2000 (11) TMI 136 - SUPREME Court allocation of expenses made by assessee between eligible business and non-eligible business for purpose of computing deduction u/s 80IB/80IC of Act was reasonable - No justifiable reason for A.O. to disturb same and make re-allocation on adhoc basis Delete addition made by A.O. by restricting claim of assessee for deduction u/s 80IB/80IC of Act by re-allocating common indirect expenses - Decided partly in favour of Assessee. Transfer pricing adjustment - Transfer pricing adjustment in respect of guarantee given by Appellant on behalf of its Associated Enterprises Held that - Similar issue relating to determination of Arm s Length Rate of guarantee commission was involved in case of M/s Nimbus Communications Ltd. 2013 (9) TMI 204 - ITAT MUMBAI - A.O. is accordingly directed to recompute addition to be made on account of transfer pricing adjustment in respect of guarantee commission by taking Arm s Length Rate of guarantee commission at 0.5% - Decided partly in favour of Assessee.

Summary

Issues Involved:
1. Restriction of assessee's claim for deduction u/s 80IB/80IC of the Income Tax Act.
2. Transfer pricing adjustment in respect of guarantee fees.

Detailed Analysis:

1. Restriction of Assessee's Claim for Deduction u/s 80IB/80IC:

The assessee, engaged in manufacturing and marketing household insecticides and air fresheners, claimed deductions under sections 80IB/80IC of the Income Tax Act for its manufacturing units located in backward areas. The common administrative and selling expenses were allocated by the assessee between eligible and non-eligible units based on sales ratio. The Assessing Officer (A.O.) questioned the allocation of certain expenses, including miscellaneous expenses, conveyance and traveling expenses, rent, rates and taxes, advertisement and publicity, and schemes and promotions, suggesting they should be entirely allocated to the eligible segment.

The A.O. reallocated 50% of these expenses to the eligible units, reducing the deduction claimed by the assessee. The Dispute Resolution Panel (D.R.P.) upheld this reallocation. The assessee argued that the allocation method based on turnover was reasonable and had been consistently used in previous assessments, citing the Supreme Court decision in Consolidated Coffee Ltd. v. State of Karnataka.

The Tribunal found the allocation method based on turnover to be reasonable and scientific. It noted that the expenses on advertisement and publicity, schemes, and promotions were incurred to promote the brand, benefiting both manufactured and traded goods. The reallocation by the A.O. on an ad-hoc basis was deemed unsustainable. The Tribunal deleted the addition made by the A.O. and allowed the assessee's appeal on this issue.

2. Transfer Pricing Adjustment in Respect of Guarantee Fees:

The assessee provided a bank guarantee on behalf of its subsidiary in Bangladesh, which was considered an international transaction. The Transfer Pricing Officer (T.P.O.) determined the Arm's Length Price (ALP) for the guarantee commission at 3% of the guarantee amount, leading to a proposed adjustment. The D.R.P. directed the A.O. to rework the rate by considering the average rates charged by ICICI Bank, resulting in an ALP of 1.77% and an adjustment of Rs. 10,05,360/-.

The assessee argued that the rate was excessive and referenced a Tribunal decision in Nimbus Communications Ltd., where the ALP for guarantee commission was set at 0.5%. The Tribunal, agreeing with the assessee, directed the A.O. to recompute the addition using a 0.5% rate, following the precedent set in Nimbus Communications Ltd.

Conclusion:

The Tribunal allowed the assessee's appeal partly, deleting the addition related to the reallocation of expenses for the 80IB/80IC deduction and directing a recomputation of the transfer pricing adjustment for guarantee fees at a 0.5% rate. The order was pronounced on 22nd November 2013.