2015 (4) TMI 258 - AT - Income Tax

Deduction allowable under S.80HHC - CIT(A) in confirming the action of the Assessing Officer in excluding interest income while computing the profits of the business for the purpose of determining the deduction allowable - Held that - This issue is squarely covered in favour of the Revenue and against the assessee by the decision of the coordinate bench of this Tribunal in assessee s own case for assessment year 2003-04 rendered vide order dated 23.7.2009 passed in ITA No.662/Hyd/2006 and others wherein it was held by following the decision of Hon'ble Delhi High Court in the case of CIT V/s. Shriram Honda Power Equipment Ltd. (2007 (1) TMI 86 - HIGH COURT, DELHI), that interest income received on deposits was chargeable to tax in the hands of the assessee under the head income from other sources and the same, therefore, was liable to be excluded from the profits of the business for the purpose of computing the deduction under S.80HHC allowable to the assessee. Thus uphold the impugned order of the learned CIT(A) - Decided against assessee. Allowing deduction under S.80HHC with reference to the eligible profits of the business as reduced by the amount of deduction allowed under S.80IB - Held that - A similar issue has been decided in favour of the assessee by the Hon'ble Bombay High Court in the case of Associated Capsules P. Ltd. V/s. DCIT (2011 (1) TMI 787 - BOMBAY HIGH COURT) holding that the amount of profit allowable as deduction under S.80IA of the Act is not required to be reduced from the profits of the business of the undertaking, while computing the deduction under any other provisions under Heading C in Chapter VI-A of the Act, which also includes S.80HHC. Also see CIT V/s. Vegetable Products Ltd.(1973 (1) TMI 1 - SUPREME Court). - Decided in favour of assessee. TP adjustment - international transactions of the assessee company with its AE involving export of manufactured goods - Held that - set aside the impugned order of the learned CIT(A) on this issue and restore the matter to the file of the Assessing Officer/TPO with a direction to do the exercise of transfer pricing analysis afresh by comparing the average price (Arithmetic Mean) charged by the assessee company to its non-AEs other than in Sudan with the price charged by the assessee company to its AE for the similar products. The AO/TPO shall determine the Arm s Length Price by taking the arithmetic mean of the prices charged by the assessee company to its non-AEs and apply the same to the relevant international transactions of the assessee company to its AE, in order to determine the transfer pricing adjustment, if any, that is required to be made on account of these transactions - Decided in favour of assessee for statistical purposes. TP adjustment in relation to the international transactions with AE involving payment of commission amounting to ₹ 20,60,722 and disallowance of commission of ₹ 2,70,424 - Held that - We have also gone through the documentary evidence filed by the assessee in the paper book in support of the claim of the assessee on this issue, and find that the same mainly comprising of e-mails and correspondence exchanged with the concerned tow parties is only self serving evidence, which is not sufficient to establish the claim of the assessee of having received the services from the concerned two parties, especially when there is no third party evidence like any correspondence or communication from M/s. Sudan Gezeria Board recognizing the said two parties as the agents of the assessee company or of any services rendered by them in connection with the procurement of the orders by the assessee company from M/s. Sudan Gezeria Board. Thus we find ourselves in agreement with the learned CIT(A) that the claim of the assessee of having paid the commission to the concerned two parties for the services rendered in connection with procurement of export order from M/s. Sudan Gezeria Board was not established either on evidence or even in the facts of the case, and hence, upholding the order of the CIT(A) confirming the disallowance made by the Assessing Officer on this issue, we dismiss grounds of the assessee s appeal. - Decided against assessee.

Summary

Issues Involved:
1. Exclusion of interest income while computing business profits for deduction under S.80HHC.
2. Deduction under S.80HHC with reference to eligible profits reduced by S.80IB deduction.
3. Transfer Pricing (TP) adjustment in respect of international transactions involving export of manufactured goods.
4. TP adjustment on account of payment of agency commission.
5. Disallowance of commission payment due to lack of evidence.

Detailed Analysis:

1. Exclusion of Interest Income:
The assessee challenged the CIT(A)'s decision to exclude interest income of Rs. 2,58,88,833 while computing business profits for deduction under S.80HHC. The Tribunal upheld the CIT(A)'s decision, referencing a coordinate bench's decision for the assessment year 2003-04, which followed the Delhi High Court's ruling in CIT V/s. Shriram Honda Power Equipment Ltd. It was held that interest income on deposits is chargeable to tax under 'income from other sources' and should be excluded from business profits for S.80HHC deduction. Consequently, grounds 1 and 2 of the assessee's appeal were dismissed.

2. Deduction under S.80HHC and S.80IB:
The assessee contested the CIT(A)'s decision to allow deduction under S.80HHC after reducing eligible profits by the S.80IB deduction. The Tribunal observed that similar issues had been decided in favor of the assessee by the Bombay High Court in Associated Capsules P. Ltd. V/s. DCIT and the Karnataka High Court in CIT V/s. Millipore India P. Ltd. The Tribunal followed these precedents, favoring the assessee, and allowed this ground of appeal.

3. Transfer Pricing Adjustment for Export Transactions:
The assessee, engaged in manufacturing and trading packaging material, had international transactions with its AE involving export of finished goods. The TPO used the Transaction Net Margin Method (TNMM) but disagreed with the assessee's entity-level margin comparison. Instead, the TPO compared the margin from AE exports with the domestic segment, leading to a TP adjustment of Rs. 2,45,98,456. The CIT(A) partly agreed with the TPO but included export benefits in the profit, reducing the TP adjustment to Rs. 1,02,47,642. The Tribunal found merit in the assessee's contention that exports to AE should be compared with exports to non-AE due to material differences affecting profitability. The Tribunal set aside the CIT(A)'s order and directed the AO/TPO to re-compute the TP adjustment by comparing the average price charged to non-AEs (excluding Sudan) with the price charged to AE, thus allowing grounds 4.4 to 4.11 for statistical purposes.

4. TP Adjustment for Agency Commission Payment:
The assessee paid Rs. 20,60,722 as commission to its AE, M/s. Signode System Gmbh, Germany, for market support in Sudan. The TPO found no evidence of services rendered by the AE and took the Arm's Length Price (ALP) of the transaction at NIL, leading to a TP adjustment. The CIT(A) confirmed this adjustment, noting the absence of documentary evidence supporting the services rendered. The Tribunal upheld the CIT(A)'s decision, agreeing that the burden of proof was on the assessee to establish the genuineness of the commission payment.

5. Disallowance of Commission Payment:
The AO disallowed Rs. 2,70,424 of the total commission claimed by the assessee, as it was not supported by proper evidence. The CIT(A) confirmed this disallowance, citing insufficient documentation of services rendered by the commission agents. The Tribunal reviewed the evidence and agreed with the CIT(A) that the assessee failed to substantiate the claim, thus upholding the disallowance.

Conclusion:
The assessee's appeal was partly allowed, specifically on the issue of TP adjustment for export transactions, which was remanded for fresh computation. The Revenue's appeal was dismissed as infructuous following the Tribunal's directions on the main TP adjustment issue. The Tribunal upheld the exclusion of interest income from business profits for S.80HHC deduction, allowed the deduction under S.80HHC without reducing S.80IB profits, and confirmed the disallowance of commission payments due to lack of evidence.