2017 (4) TMI 1527 - AT - Income Tax

Allocation of expenses to the 10A unit by the AO resulting reduction of deduction u/s 10A - HELD THAT - Identical issue was considered by this Tribunal in assessee s own case for the AY 2002-03 to 2004-05 CIT (Appeals) had deleted the allocation following the decisions of the Tribunal in assessee s own case and the Supreme Court. Disallowance of commission expenses - AO noted that the assessee has claimed the commission paid to the sales agents - AO disallowed the commission payment made to the extent the assessee failed to produce the details of the customers however the CIT (Appeals) has estimated the disallowance only to 20% of the amount which was disallowed by the AO - HELD THAT - It is pertinent to note that for the Assessment Year 2004-05 the CIT (A) has observed that the AO to allow the claim of the assessee subject to the verification of names or ascertain more details relating to these payments being furnished by the assessee. Thus the earlier year s order does not give any guidance of restricting the disallowance to 20%. When the assessee has not produced complete details and there is no basis of estimation of restricting the disallowance by the CIT (Appeals) we set aside this issue to the record of the AO for reconsideration and adjudication after verification and examination of the complete details to be filed by the assessee. Transfer Pricing Adjustment - TPO while computing the ALP has apparently taken the gross profit margin of the AMDL at entity level by assuming that the entire activity of AMDL is only trading in the medical equipments - HELD THAT - In the case on hand the international transactions in trading segment is confined only to the purchases made from the AE. Since there are other transactions of import and procurement from domestic market therefore the adjustment cannot be made by considering the entire trading segment of the assessee. Thus on principle we do not find any error on these points however the CIT (Appeals) has undertaken to recompute the margins of the comparable as well as assessee by considering the fresh material which was not available with the TPO/A.O. which it is not permissible to the CIT (Appeals) to do this exercise of recomputation without giving an opportunity to the TPO/A.O. The proper course of action on the part of CIT (Appeals) would have been to ask the TPO/A.O. for remand report by considering all the relevant material. CIT (Appeals) did not choose to issue any remand order but undertaken the entire exercise on his own. Thus it is clear that the TPO/A.O. was not given an opportunity in this process of recomputing the margins of the comparable as well as assessee. We set aside this issue to the record of the TPO/A.O. to consider and verify relevant record and then determine the ALP in the light of our above observations. Payment of royalty - assessee has paid the royalty to its AE @ 2% on sale - AO / TPO held that none of the comparable company has paid royalty for trading segment - HELD THAT - Adjustment of royalty payment made by the Assessing Officer and the CIT (Appeals) has deleted the same. Since this issue is common to the issue involved in the Asst. Year 2005-06. In view of our finding on this issue for the Assessment Year 2005-06 this issue stands set aside to the record of the TPO/A.O. on same terms.

Summary

Issues Involved:
1. Allocation of expenses to 10A unit.
2. Disallowance of commission expenses.
3. Transfer Pricing Adjustment.
4. Payment of royalty.

Detailed Analysis:

1. Allocation of Expenses to 10A Unit:
The revenue challenged the allocation of expenses amounting to ?5,18,57,872/- to 10A units by the Assessing Officer (AO), which resulted in a reduction of the deduction under Section 10A of the Income Tax Act, 1961. The Tribunal noted that an identical issue was previously considered and decided in favor of the assessee for the Assessment Years 2002-03 to 2004-05. The Tribunal held that since the earlier order had not been reversed or set aside by the Hon'ble High Court, it was binding. Consequently, the Tribunal upheld the CIT (Appeals) order and dismissed the revenue's ground.

2. Disallowance of Commission Expenses:
The AO disallowed commission expenses amounting to ?2,42,33,641/- on the grounds that the assessee failed to furnish details of the customers. The CIT (Appeals) restricted the disallowance to 20% of the amount. The Tribunal found that the CIT (Appeals) had no reasonable basis for restricting the disallowance to 20% and set aside the issue to the AO for reconsideration and adjudication after verification of complete details to be filed by the assessee.

3. Transfer Pricing Adjustment:
The AO and Transfer Pricing Officer (TPO) made adjustments under Section 92CA of the Act for the trading segment, comparing the gross profit margin of the assessee with that of Advanced Micronic Devices Ltd. (AMDL). The CIT (Appeals) recomputed the margins and deleted the addition made by the AO. The Tribunal found that the CIT (Appeals) had undertaken a fresh exercise of determining the arm’s length price (ALP) without giving the TPO/AO an opportunity to submit objections, violating the principle of natural justice. The Tribunal set aside the issue to the TPO/AO for reconsideration and verification of relevant records.

4. Payment of Royalty:
The AO/TPO disallowed the entire royalty payment made by the assessee to its Associated Enterprise (AE) on the grounds that none of the comparable companies paid royalty for the trading segment. The CIT (Appeals) deleted the addition by following the Tribunal's decision for the Assessment Year 2002-03. The Tribunal remanded the issue to the AO/TPO for reconsideration in light of the Tribunal's directions for the Assessment Years 2002-03 to 2004-05. If no comparable is found, the AO/TPO may consider the royalty payment as part of the international transactions under the trading segment and determine the ALP accordingly.

Conclusion:
For the Assessment Year 2005-06, the Tribunal upheld the CIT (Appeals) decision on the allocation of expenses to the 10A unit, set aside the disallowance of commission expenses for reconsideration, and remanded the transfer pricing adjustment and royalty payment issues to the AO/TPO for fresh consideration. For the Assessment Year 2006-07, the Tribunal set aside the royalty payment issue to the AO/TPO on the same terms as the previous year. The appeals of the revenue were partly allowed.