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2015 (12) TMI 143 - AT - Income TaxTransfer pricing adjustment - adjustment being notional value of excess credit period allowed by the assessee to its US based associated enterprise, i.e. Micro Inks USA, in respect of sale of semi finished goods, ingredients and raw materials - Held that - The comparison has to be based on real transactions of similar nature, if at all such transactions have taken place. When no such transactions have taken place, as is the case before us, there is obviously no occasion of any comparison. The stand taken by the learned Departmental Representative, therefore, is not only quite detached from commercial reality but also wholly untenable in law. In any case, what can be examined on the touchstone of arm s length principles is the commercial transaction itself, as a result of which the debit balance has come into existence, and the terms and conditions, including terms of payment, on which the said commercial transaction has been entered into. In this view of the matter, learned Departmental Representative s reliance on Aztec decision (2007 (7) TMI 50 - ITAT BANGALORE ) is of no assistance to the case of the revenue. The international transaction is exports of goods which been benchmarked on TNMM basis and which is duly accepted by the TPO. In view of these discussions, and respectfully following the decision of the coordinate bench in assessee s own case for the earlier years, we uphold the grievance of the assessee and direct the Assessing Officer to delete the impugned ALP adjustment - Decided in favour of assessee. Arm s length price adjustment on account of corporate guarantees given by the assessee in respect of its associated enterprises - Held that - The scope of the capital financing transactions, as could be covered under Explanation to Section 92 B read with Section 92B(1), is restricted to such capital financing transactions, including inter alia any guarantee, deferred payment or receivable or any other debt during the course of business, as will have a bearing on the profits, income, losses or assets or such enterprise . This pre-condition about impact on profits, income, losses or assets of such enterprises is a pre-condition embedded in Section 92B(1) and the only relaxation from this condition precedent is set out in clause (e) of the Explanation which provides that the bearing on profits, income, losses or assets could be immediate or on a future date. These guarantees do not have any impact on income, profits, losses or assets of the assessee. There can be a hypothetical situation in which a guarantee default takes place and, therefore, the enterprise may have to pay the guarantee amounts but such a situation, even if that be so, is only a hypothetical situation, which are, as discussed above, excluded. In the present case, we have held that the issuance of corporate guarantees were in the nature of shareholder activities- as was the uncontroverted claim of the assessee, and, as such, could not be included in the provision for services under the definition of international transaction under section 92 B of the Act. We have also held, taking note of the insertion of Explanation to Section 92B of the Act, that the issuance of corporate guarantees is covered by the residuary clause of the definition under section 92 B of the Act but since such issuance of corporate guarantees, on the facts of the present case, did not have bearing on profits, income, losses or assets , it did not constitute an international transaction, under section 92B, in respect of which an arm s length price adjustment can be made. In this view of the matter, and for both these independent reasons, we have to delete the impugned ALP adjustment. - Decided in favour of assessee. Granting deduction u/s. 80IB and 10B - assessee has raised the grievance that the Assessing Officer has erred in not accepting the profits of various units as declared by the appellant company by reducing certain items as adjustments for inter division transfer and adjusting the same to the business income of various units as under while granting deduction u/s. 80IB and 10B - Held that - The issue is covered in favour of the assessee, by the orders of the co-ordinate bench in assessee s own cases for the assessment years 2002-2003 and 2005-06, to the extent that the matter is required to be remitted to the file of Assessing Officer for fresh adjudication in the light of the directions set out in those orders. We are, thus, urged to remit the matter to the file of the Assessing Officer for fresh adjudication in the light of Tribunal s order for the assessment years 2002-03 and 2005-06, even as learned. Departmental Representative dutifully relied upon the stand of the Assessing Officer. - Decided in favour of assessee by way of remand. Addition pertaining to telephone and electricity expenses of Managing Director - Held that - On this issue also, the learned representatives fairly agree that the issue is covered by the order of co-ordinate bench for the assessment year 2005-06 in the sense that, on the same lines, while disallowance in respect of electricity expenses of ₹ 8,83,622/- is to be confirmed, the disallowance of telephone expenses to the tune of ₹ 1,03,272/- is to be deleted. In this issue also, we see no reasons to deviate from the stand taken by the co-ordinate bench in the earlier year and respectfully following the same, we delete the disallowance of telephone expenses and confirm the disallowance of electricity expenses as above. To the limited extent of deleting the disallowance of telephone expenses of ₹ 1,03,272, the assessee gets the relief. - Decided in favour of assessee in part. Addition out of software expenses - Held that - This is a case when ERP has been introduced for the first time and the expenditure is not in the support or maintenance of the existing software.We, therefore, approve the stand of the authorities below on this point and decline to interfere in the matter. - Decided against assessee.
Issues Involved:
1. Arm's Length Price (ALP) Adjustment for Excess Credit Period. 2. ALP Adjustment for Corporate Guarantees. 3. Adjustments for Inter-Division Transfers and Deductions under Sections 80IB and 10B. 4. Calculation of Total Turnover for Section 10B Deduction. 5. Exclusion of Specific Income Items from Section 80IB Deduction. 6. Disallowance of Telephone and Electricity Expenses. 7. Treatment of Software Expenses as Capital Expenditure. Detailed Analysis: 1. ALP Adjustment for Excess Credit Period: The assessee challenged the ALP adjustment of Rs. 2,10,95,246 for the excess credit period allowed to its US-based associated enterprise, Micro Inks USA. The Transfer Pricing Officer (TPO) noted that the assessee allowed an average credit period of 186 days to Micro Inks USA compared to 130 days for independent enterprises. The TPO proposed an ALP adjustment based on the time value of money at 6.38% on a LIBOR plus basis. The assessee argued that the extended credit period was due to the nature of the semi-finished goods sold to Micro Inks USA, which required further processing. The Tribunal found that the issue was covered in favor of the assessee by a previous decision, stating that the credit period for finished goods could not be compared with that for semi-finished goods. The Tribunal upheld the grievance of the assessee and directed the deletion of the impugned ALP adjustment. 2. ALP Adjustment for Corporate Guarantees: The assessee was aggrieved by an ALP adjustment of Rs. 2,23,62,603 for corporate guarantees issued on behalf of its associated enterprises. The TPO computed the arm's length price for these guarantees at 2%, considering it a prevalent market rate. The assessee argued that these guarantees did not involve any cost and were in the nature of quasi-capital. The Tribunal referred to various decisions, including Bharti Airtel Limited Vs ACIT, which held that such guarantees did not constitute an 'international transaction' under Section 92B. The Tribunal noted that the issuance of corporate guarantees was in the nature of shareholder activities and did not have a bearing on the profits, income, losses, or assets of the enterprise. The Tribunal directed the deletion of the impugned ALP adjustment, emphasizing the need for clear legislative guidance on the transfer pricing implications of corporate guarantees. 3. Adjustments for Inter-Division Transfers and Deductions under Sections 80IB and 10B: The assessee's grievance regarding adjustments for inter-division transfers affecting deductions under Sections 80IB and 10B was remitted to the Assessing Officer (AO) for fresh adjudication. The Tribunal directed the AO to follow the directions set out in the orders for the assessment years 2002-03 and 2005-06. 4. Calculation of Total Turnover for Section 10B Deduction: The issue of including excise duty, sales tax, insurance, and freight in the total turnover for Section 10B deduction was remitted to the AO for fresh adjudication on merits by a speaking order, in accordance with the law. 5. Exclusion of Specific Income Items from Section 80IB Deduction: The Tribunal directed the inclusion of income from the sale of scrap in the computation of deduction under Section 80IB, following the order for the assessment year 2005-06. Other items, such as discount on purchase of DEPB, gain on sale of DFRC, insurance claim, and income from DEPB/DFRC, were remitted to the AO for fresh adjudication in line with earlier years' orders. 6. Disallowance of Telephone and Electricity Expenses: The Tribunal confirmed the disallowance of electricity expenses of Rs. 8,83,622 but deleted the disallowance of telephone expenses of Rs. 1,03,272, following the order for the assessment year 2005-06. 7. Treatment of Software Expenses as Capital Expenditure: The Tribunal upheld the treatment of software expenses as capital expenditure, noting that the expenses were incurred on implementing new ERP software and not for maintenance or support of existing software. The Tribunal approved the stand of the authorities below and declined to interfere in the matter. Conclusion: The appeal was partly allowed, with specific issues remitted to the AO for fresh adjudication, and certain disallowances and adjustments were upheld or deleted based on the Tribunal's detailed analysis and previous decisions.
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