2014 (10) TMI 505 - AT - Income Tax

Transfer pricing adjustment Inclusion and exclusion of comparables Functionally different - Held that - CIT(A) rightly was of the view that M/s. Spectrum Infotek Pvt. Ltd. was found to be engaged in the business of manufacturing as well as research & development, but no segmental details were available - the company was found to be mainly in the domestic business, whereas the assessee was 100% EOU - there was no functional comparability found between assessee company and M/s. Seven Gentech Pvt Ltd., and it cannot be treated as comparable with that of the assessee company - CIT(Appeals) was fully justified in taking 8 comparables selected by the Tribunal in the case of Tevapharm (P.) Ltd. Versus Additional Commissioner of Income-tax - 10(3), Mumbai 2011 (12) TMI 284 - ITAT MUMBAI - as the difference between the Transfer price and the value determine doesnot exceed 5% of Transfer price thus no need to dispute the price - as the final comparables for the purpose of TP analysis in the assessee's case and in directing the AO to restrict the addition made on account of TP adjustment by applying the average OP/OC of the said comparables at 19.08% - the order of the CIT(A) is upheld partly the addition made by the AO/TPO on account of TP adjustment Decided partly in favour of assessee. Deduction on profit derived from 100% EOU by allocating the expenditure on director's remuneration u/s 10B Held that - The assessee company had only one working director during the year under consideration to whom the remuneration of ₹ 1.93 crores was paid - the export turnover of the EOU during the year under consideration was ₹ 25.63 crores and the profit shown by the assessee of the EOU was ₹ 5.12 crores - it is difficult to accept the contention raised on behalf of the assessee that the only working director was not at all involved in the affairs of the EOU, especially when there is no evidence brought on record to support and substantiate this contention - the involvement of the only working director in the affairs of the EOU in the facts and circumstances of the case was inevitable, especially when both its domestic unit and EOU were managed by the assessee company - the working furnished by the assessee giving segmental details, was for specific purpose and it was prepared by the assessee and appreciated by the TPO in the context of TP analysis - the segmental details were furnished by the assessee for the enterprise as a whole and there was no bifurcation made on the basis of export and domestic turnover - the director's remuneration was liable to be allocated to the EOU for the purpose of computing profit of the said EOU eligible for deduction u/s. 10B and since the allocation thereof was made by the AO on a reasonable basis i.e., turnover, we find no infirmity in the order of the CIT(A), upholding the action of the AO Decided against assessee. Treatment of expenses Expenses incurred on repairs to building Capital or revenue in nature Held that - As decided in assessee s own case for the earlier assessment year, it has been rightly held that civil works to be treated as capital expenditure - The exact nature of expenditure during the year under consideration, however, is not clear either from the order of the AO or from the order of the CIT(A) - Even the details furnished by the assessee in the paper book are not sufficient to ascertain the exact nature of expenditure incurred by the assessee on civil works so as to decide whether the same are capital in nature or revenue thus, the matter is to be remitted back to the AO for fresh consideration Decided in favour of assessee.

Summary

Issues Involved:
1. Addition on account of Transfer Pricing (TP) adjustment.
2. Restriction of claim for deduction under Section 10B.
3. Disallowance of expenditure on repairs to building as capital expenditure.
4. Levy of interest under Sections 234B and 234C.

Detailed Analysis:

1. Addition on account of Transfer Pricing (TP) adjustment:
The primary issue in both appeals was the TP adjustment of Rs. 27,26,115 made by the Assessing Officer (AO) and partly sustained by the Commissioner of Income Tax (Appeals) [CIT(A)]. The assessee, engaged in providing custom-engineered purification systems, had entered into various international transactions with its Associated Enterprises (AEs). The AO referred the matter to the Transfer Pricing Officer (TPO) to determine the arm's length price (ALP) using the Transactional Net Margin Method (TNMM). The TPO found the profit margin of the assessee in the manufacturing segment to be at arm's length but made adjustments in the R&D services segment.

The TPO applied specific filters and selected comparables, but the assessee raised objections. The CIT(A) excluded certain comparables selected by the TPO, citing functional dissimilarities, and instead used comparables from a similar case (Tevapharm Pvt Ltd v. Addl. CIT). The CIT(A) directed the AO to recompute the ALP using an average OP/OC of 19.08%. The Tribunal upheld this decision, finding no infirmity in the CIT(A)'s order and rejecting the comparables selected by both the assessee and the TPO.

2. Restriction of claim for deduction under Section 10B:
The assessee's claim for deduction under Section 10B was restricted by allocating director's remuneration to the 100% Export Oriented Unit (EOU). The AO allocated Rs. 44,47,467 of the director's remuneration to the EOU based on the turnover ratio, which was confirmed by the CIT(A). The assessee contended that the director's remuneration was exclusively for the domestic unit, but the Tribunal found no evidence to support this claim. The Tribunal upheld the allocation of director's remuneration to the EOU, affirming the CIT(A)'s decision.

3. Disallowance of expenditure on repairs to building as capital expenditure:
The AO treated the expenditure of Rs. 29,38,953 on repairs to the building as capital in nature, allowing depreciation instead. This was upheld by the CIT(A) based on a similar decision in the assessee's case for a previous assessment year. However, the Tribunal noted that the exact nature of the expenditure was not clear and remanded the issue back to the AO for fresh verification. The AO was directed to ascertain the nature of the expenditure and decide accordingly, providing the assessee an opportunity to be heard.

4. Levy of interest under Sections 234B and 234C:
The issue of levy of interest under Sections 234B and 234C was acknowledged as consequential. The Tribunal directed the AO to allow consequential relief to the assessee based on the outcomes of the other issues.

Conclusion:
The Tribunal dismissed the revenue's appeal and partly allowed the assessee's appeal for statistical purposes, providing detailed directions for each issue. The decision emphasized the importance of functional comparability in TP analysis, the necessity of allocating common expenses reasonably, and the need for clear evidence to substantiate claims regarding the nature of expenditures.