2022 (1) TMI 1338 - AT - Income Tax

TP adjustment - grant of mark-up on recovery transactions - assessee argued before the lower authorities that there was mark-up on these expenses which are incurred at the instance and behest of the AE and expenses by the assessee for administrative convenience are recovered on a cost to cost basis - AR alternatively argued the additional grounds stating that as per OECD guidelines and Indian Transfer Pricing provisions, aggregation of transactions could be made - HELD THAT - As considering the alternative submissions of the ld. AR, the issue is covered by the Pune Bench of the Tribunal in the case of Cummins India Ltd. 2015 (1) TMI 520 - ITAT PUNE export value was less and these parties were one of customers and therefore, the risk involved was high. Further, the frequency of such transactions was very low. In view of the above facts and circumstances, the comparison between the export to associated enterprises and export to third parties would not provide accurate results as economic value of the transactions, risk involved were different. We find merit in the plea of the assessee in this regard. We uphold the aggregation of transactions in the TP study carried on by the assessee where the said transactions after benchmark were at arm's length price, no adjustment was to be made. In view thereof, we find no merit in the analysis carried out by the TPO by benchmarking the transactions of exports to third parties with exports to associated enterprises resulting in addition. In view of our discussion herein above, we delete the addition. Deduction u/s. 10AA - travelling and conveyance expenses and other expenditure incurred in foreign currency from the export turnover while computing the deduction u/s. 10AA of the Act and making a corresponding reduction in the total turnover - HELD THAT - This issue is covered in favour of the assessee in the case of CIT v. HCL Technologies Ltd. 2018 (5) TMI 357 - SUPREME COURT wherein it was held that when object of formula in section 10A for computation of deduction is to arrive at profit from export business, expenses excluded from export turnover have to be excluded from total turnover also; otherwise, any other interpretation makes formula unworkable and absurd and hence, such deduction shall be allowed from total turnover in same proportion as well. Hence this issue is decided in favour of the assessee and against the revenue. Short grant of MAT credit u/s. 115JAA - HELD THAT - AO is directed to give appropriate tax credit.

Summary

Issues Involved:
1. Validity of the Assessment Order, Directions by the Dispute Resolution Panel, and Transfer Pricing Order.
2. Mark-up on recovery transactions.
3. Reduction in deduction under section 10AA of the Income-tax Act.
4. Short grant of MAT credit under section 115JAA.
5. Directions issued by the Dispute Resolution Panel.
6. Penalty proceedings.

Detailed Analysis:

1. Validity of the Assessment Order, Directions by the Dispute Resolution Panel, and Transfer Pricing Order:
The assessee challenged the assessment order issued by the Assessing Officer (AO), the directions issued by the Dispute Resolution Panel (DRP), and the Transfer Pricing Order issued by the Transfer Pricing Officer (TPO) as "bad in law." The assessee contended that an addition of INR 15,224,686 to the total income on account of adjustment to the arm's length price for recovery of expenses was erroneous. The draft/assessment order was also claimed to be in violation of the principles of natural justice.

2. Mark-up on Recovery Transactions:
The TPO determined the transfer pricing adjustment by charging a mark-up on recovery transactions with associated enterprises, treating them as pass-through transactions. The TPO compared the transactions to the net operating margin of companies in the tours and travel agent services industry, which the assessee argued was inappropriate. The Tribunal referenced the Pune Bench of the Tribunal in the case of Cummins India Ltd. and held that closely linked transactions could be aggregated for benchmarking, thereby allowing the alternative ground raised by the assessee.

3. Reduction in Deduction under Section 10AA:
The AO reduced travelling and conveyance expenses and other expenditure incurred in foreign currency from the 'export turnover' while computing the deduction under section 10AA but did not make a corresponding reduction in the 'total turnover.' The Tribunal cited the Supreme Court judgment in the case of CIT v. HCL Technologies Ltd., which ruled that expenses excluded from export turnover must also be excluded from total turnover to avoid making the formula unworkable. Thus, this issue was decided in favor of the assessee.

4. Short Grant of MAT Credit under Section 115JAA:
The AO was directed to grant appropriate MAT credit under section 115JAA, as the assessee contended that the credit was not appropriately granted.

5. Directions Issued by the Dispute Resolution Panel:
The assessee argued that the DRP did not take cognizance of the objections filed in relation to the draft assessment order and confirmed the draft order of the AO. However, this issue was not separately adjudicated in the judgment.

6. Penalty Proceedings:
The penalty proceedings initiated by the AO under Section 274 read with Section 271 were claimed by the assessee to be without basis and bad in law. This issue was not separately adjudicated in the judgment.

Conclusion:
The Tribunal partly allowed the appeal, admitting additional grounds for adjudication and ruling in favor of the assessee on key issues such as the aggregation of closely linked transactions for benchmarking and the correct computation of deduction under section 10AA. The AO was directed to grant appropriate MAT credit, and certain general grounds did not require adjudication.