2014 (10) TMI 469 - AT - Income Tax

Transfer pricing adjustment Computation of ALP Advances made to overseas subsidiaries Held that - Assessee has not complied to the notice issued by the TPO calling for various informations and evidences, which led to the rejection of the TP study and ultimate determination of arm's length interest by applying the rate of 17.2% - Further, assessee's claim that the investments are towards equity to a great extent is borne out from the fact that shares have actually been allotted to the assesse - If that is the case investments made by the assessee cannot be treated as loan - relationship between the assessee and its step down subsidiary Micro USA was simply that of a lender and a borrower - Not only the Micro USA was a significant part of the marketing apparatus of the assessee, and the assessee and the Micro USA had significant commercial relationship on that count, the assessee was a de facto and de jure promoter of the Micro USA - the transaction is at best for advance of money by holding to step down subsidiary - CUP method can be applied and the LIBOR or other bank rate linked rate is generally taken as a rate for comparable uncontrolled transaction - there is a difference in the nature of transaction and there is also a difference in the nature of the enterprises, including their inter se commercial relationship, entering into this transaction - The differences are so fundamental that these differences, to use the phraseology employed in Rule 10 B (1)(a)(ii), could materially affect the price in the open market - the application of LIBOR plus rate or, for that purpose, any bank rate will be inappropriate to this case. Price of interest free advances - What would be the price at which such interest free advances could be given in comparable uncontrolled transactions Held that - If the investments are in the nature of equity, then, they cannot be treated as loans and advances - for coming to a definite conclusion in this regard necessary details need to be examined from the books of account and other related documents. Since this aspect has not been properly examined either by the TPO or by the DRP, the matter is to be remitted back to the AO/TPO for fresh adjudication Decided in favour of assesse. Non-deduction of TDS Held that - In the original audit report in Form 3CD auditors did give a note that the amount of ₹ 25,16,90,008/- is inadmissible u/s 40(a) of the Act - the assessee has taken a specific stand before the DRP that no such expenditure was either incurred by the assessee or routed through the books of account - In view of the conflicting claim of the assessee and the department it needs to be established on record whether the assessee has in fact incurred the expenditure of ₹ 25,16,90,008/- by verifying the books of account and other related document the matter is required to be remitted back to the AO for fresh examination Decided in favour of assesse. Payment made to M/s Kedia Silk House Held that - The matter needs to be examined afresh by the AO - If the amount paid to M/s Kedia Silk towards logo expenses is on principal to principal basis then section 194C would not be applicable - the contract order between the assessee and the party concerned needs to be examined - thus, the matter is to be remitted back to the AO for adjudication Decided in favour of assessee. Employees contribution towards provident fund u/s 36(1)(va) r.w.section 2(24)(x) Held that - The disallowance has been made solely on the ground that it was not remitted within the due date prescribed under the PF Act - the entire amount was paid to the Govt. account before the due date of filing of return of income - As per proviso to section 43B of the Act, if the employees contribution towards provident fund is paid within the due date of filing of return of income, then the same has to be allowed as a deduction the AO is directed to verify this aspect and allow the deduction claimed, if it is found that the amount has been remitted before the due date of filing of return of income Decided in favour of assesse.

Issues Involved:
1. Transfer Pricing Adjustment on Advances to Overseas Subsidiaries
2. Disallowance for Non-Deduction of Tax at Source (TDS)
3. Disallowance of Operating Expenditure
4. Disallowance from Deduction Claimed under Section 10A
5. Disallowance of Advances Written Off
6. Disallowance of Employee's Contribution to Provident Fund

Detailed Analysis:

1. Transfer Pricing Adjustment on Advances to Overseas Subsidiaries:
The primary issue revolves around the addition made on account of Transfer Pricing Adjustment by computing the Arm's Length Price (ALP) of the interest to be charged on advances made to overseas subsidiaries. The TPO observed that the assessee did not charge any interest on such advances and determined the ALP interest rate at 17.2%, resulting in an addition of Rs. 6,11,64,105/-. The DRP directed the TPO to adopt the interest rate at LIBOR+2%. The Tribunal remitted the matter back to the TPO/AO to verify if the investments were indeed towards equity, which cannot be treated as loans and advances. The TPO/AO was also directed to consider the assessee's claim that the entire investment was out of internal accruals and not borrowed funds.

2. Disallowance for Non-Deduction of Tax at Source (TDS):
The AO disallowed Rs. 25,16,90,008/- for non-deduction of TDS as per the auditor's report. The assessee contended that no such expenditure was incurred, and a revised audit report was submitted. The Tribunal remitted the issue back to the AO to verify the books of account and other related documents to establish whether the expenditure was indeed incurred.

3. Disallowance of Operating Expenditure:
The AO disallowed Rs. 62.60 lakhs for operating expenses due to a lack of supporting evidence. The Tribunal noted that the expenditure was towards travel and conveyance and considering the turnover of the assessee, the claim was not unreasonable. However, considering potential inflation of expenses, the Tribunal disallowed 10% of the claimed amount, allowing the rest.

4. Disallowance from Deduction Claimed under Section 10A:
The AO disallowed Rs. 99,86,33,523/- from the deduction claimed under Section 10A. The DRP directed the AO to allow the full claim. The Tribunal noted that the AO, in an order passed under Section 154, granted relief by deleting the addition, rendering the issue of academic interest.

5. Disallowance of Advances Written Off:
The AO disallowed Rs. 7,57,95,072/- for advances written off due to the lack of supporting evidence. The Tribunal remitted the matter back to the AO, directing the assessee to substantiate its claim with necessary supporting evidence.

6. Disallowance of Employee's Contribution to Provident Fund:
The AO disallowed Rs. 6,60,655/- for late remittance of employees' contribution to the provident fund. The Tribunal directed the AO to verify if the amount was remitted before the due date of filing the return of income and allow the deduction accordingly.

Conclusion:
The Tribunal allowed the appeal for statistical purposes, remitting several issues back to the AO/TPO for fresh examination and verification based on the detailed guidelines provided. The Tribunal emphasized the need for proper verification of facts and adherence to legal provisions in determining the correct tax liability.

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