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2021 (2) TMI 1329 - AT - Income TaxDisallowance u/s 14A r.w.Rule 8D - assessee during the year under consideration had earned tax free interest income from various tax free bonds - HELD THAT - We are of the considered view that no part of the interest expenditure could have been attributed to the earning of the exempt income by the assessee during the year in question. Our aforesaid view is fortified by the judgment of CIT Vs. HDFC Bank Ltd. 2014 (8) TMI 119 - BOMBAY HIGH COURT . Accordingly in terms of our aforesaid observations we herein vacate the disallowance made by the A.O under Sec. 14A r.w Rule 8D(2)(ii). As regards the disallowance made by the A.O under Sec. 14A r.w. Rule 8D(2)(iii) we find substantial force in the claim of the ld. A.R that the investments which had not yielded any exempt income during the year under consideration were liable to be excluded for the purpose of computing the average value of investments within the meaning of Rule 8D(2)(iii). Our aforesaid view is supported by the order of the Special bench of the ITAT Delhi in the case of Vireet Investments 2017 (6) TMI 1124 - ITAT DELHI . As such we herein restore the issue for the limited purpose of computing the disallowance under Sec.14A r.w Rule 8D(2)(iii) to the file of the A.O in terms of our aforesaid observations. The Ground of appeal No. 1 is partly allowed. Disallowing expenditure w.r.t travel hotel and food expenses incurred by the assessee company treated as an unexplained expenditure - HELD THAT - We have given a thoughtful consideration and are of the considered view that as the aforesaid expenses were incurred by an employee of the assessee company viz. Mr. George Joseph sales manager by purportedly using the credit cards of the assessee company the same thus could not have been summarily discarded by the lower authorities. Although we are not oblivious of the fact that the assessee could not substantiate that the expenses in question were incurred wholly and exclusively for the purpose of its business but then we also cannot shut our eyes to the fact that the documentary evidence produced by the assessee before the DRP were considered by the panel with a half hearted approach. On the one hand the panel had declined to admit the documents produced by the assessee as additional evidence while for at the same time it had given general observations as regards the same. Be that as it may in our considered view the matter in all fairness requires to be restored to the file of the A.O for fresh adjudication. Needless to say the A.O shall in the course of the set aside proceedings afford a reasonable opportunity of being heard to the assessee who shall remain at a liberty to substantiate its aforesaid claim on the basis of fresh documentary evidence. The Ground of appeal No 2 is allowed for statistical purposes. Deduction u/s 80IC - including only 75% of the income from scrap sales while quantifying its claim of deduction raised under Sec. 80IC - HELD THAT - We are unable to persuade ourselves to subscribe to the view taken by the lower authorities and thus direct the A.O to include the entire amount of scrap sales in the eligible profits of the assessee for the purpose of quantifying its claim for deduction under Sec. 80IC of the Act. The Ground of appeal No. 3 is allowed. TP Adjustment - addition towards advertisement marketing sales promotion expenditure ( AMP expenses ) for the reason that by incurring the said expenses it had benefitted its Associated Enterprise - HELD THAT - On a perusal of the order passed by the Tribunal while disposing off the assessee s appeal for A.Y. 2005-06 and A.Y. 2007-08 2018 (5) TMI 1790 - ITAT MUMBAI respectively we find that the Tribunal had struck down the TP adjustment that was made w.r.t AMP expenditure - we thus finding no reason to take a different view and adopting a consistent approach therein respectfully follow the same herein vacate the TP adjustment made by the A.O/TPO w.r.t the AMP expenditure. Deduction u/s 80IC w.r.t the foreign exchange gain on raw and packing material - HELD THAT - We are of the considered view that the foreign exchange gain on raw and packing material credited by the assessee before us in its profits and loss account can safely be held to be eligible for deduction under Sec.80IC of the Act. Accordingly we concur with the claim of the assessee that the foreign exchange gain on raw and packing material was duly eligible for deduction u/s 80IC of the Act. We thus direct the A.O to allow the asessee s claim for deduction u/s 80IC w.r.t the foreign exchange gain on raw and packing material - The Ground of appeal No. 2 is allowed in terms of our aforesaid observations. Adjustment to the income of the assessee w.r.t the provision of the research and development/testing services - Comparable selection - HELD THAT - Exclude Alphageo (I) Ltd. from the final list of comparables as functionally not comparable. PCG Life Sciences ltd - On a perusal of the order of the TPO and that of the DRP we find that neither of the said authorities had given any cogent reason for including/upholding the inclusion of the aforementioned company as a comparable in the final list of the comparables for benchmarking the international transactions of the assessee before us. Admittedly as is discernible from the financial statements of the aforementioned company we find that it is inter alia engaged in the business of selling chemical compounds which as observed by us hereinabove constitutes 1/3rd of its total turnover - no segmental information w.r.t the aforementioned company was available the same thus could not have been adopted as a comparable for benchmarking the international transactions of the assessee for the year under consideration - we are of a strong conviction that the lower authorities had erred in including the aforesaid company as a comparable for benchmarking the international transactions of the assessee for the year under consideration. Clinsys Clinical Ltd - TPO/DRP had without giving any cogent reason excluded the aforesaid comparable of the assessee from the final list of comparables. We are unable to concur with such non-speaking observation of the lower authorities and in all fairness and in the interest of justice restore the matter to the file of the A.O/TPO for deciding the aforesaid issue afresh. Fortis Clinical Research Limited -Admittedly it is a matter of fact borne from the record that the TPO/DRP had not given any cogent reason for excluding the aforementioned company selected by the assessee as a comparable from the final list of comparables. In our considered view the matter in all fairness requires to be revisited by the TPO who is thus directed to re-adjudicate the same after affording a reasonable opportunity of being heard to the assessee.
Issues Involved:
1. Disallowance under Section 14A. 2. Disallowance of travel, hotel, and food expenses. 3. Exclusion of income from scrap sales in computing deduction under Section 80IC. 4. Adjustment towards advertisement, marketing, and sales promotion (AMP expenses). 5. Adjustment in respect of provision of research and development/testing services. 6. Alternative claim for revising profit eligible for deduction under Section 80IC by adjusting AMP expenditure. Detailed Analysis: Issue 1: Disallowance under Section 14A The Assessee challenged the disallowance of Rs. 26,92,193 under Section 14A, claiming no direct expenses were incurred for earning tax-free income. The Assessee argued that substantial self-owned funds justified the investments, thus no interest expenditure disallowance was warranted under Rule 8D(2)(ii). The Tribunal found merit in the Assessee’s argument, vacating the disallowance of Rs. 14,30,932 under Rule 8D(2)(ii) and remanded the issue to the AO to exclude investments not yielding exempt income for Rule 8D(2)(iii) computation. Issue 2: Disallowance of Travel, Hotel, and Food Expenses The Assessee contested the disallowance of Rs. 6,87,976 for travel, hotel, and food expenses, which were treated as unexplained by the AO. The Tribunal noted the expenses were incurred by an employee using company credit cards and found the lower authorities’ rejection of the Assessee’s documentary evidence unconvincing. The Tribunal remanded the issue to the AO for fresh adjudication, allowing the Assessee to substantiate its claim with additional evidence. Issue 3: Exclusion of Income from Scrap Sales in Computing Deduction under Section 80IC The Assessee argued against the AO’s exclusion of 25% of income from scrap sales in computing the deduction under Section 80IC. The Tribunal, referencing the Hon’ble High Court of Allahabad’s decision in CIT vs. Modi Xerox Ltd., held that income from scrap sales, being directly linked to the manufacturing process, should be included in the eligible profits for Section 80IC deduction. The Tribunal directed the AO to include the entire amount of scrap sales in the eligible profits. Issue 4: Adjustment Towards Advertisement, Marketing, and Sales Promotion (AMP Expenses) The Assessee contested the TP adjustment of Rs. 31,63,26,783 towards AMP expenses, arguing no agreement existed obliging the Assessee to undertake brand building for its AE. The Tribunal, referencing its previous decisions and various judicial pronouncements, found no basis for the adjustment, noting the absence of any evidence showing the Assessee’s AMP expenses benefited the AE. The Tribunal vacated the TP adjustment towards AMP expenses. Issue 5: Adjustment in Respect of Provision of Research and Development/Testing Services The Assessee challenged the TP adjustment of Rs. 61,55,480, arguing the inclusion of functionally different comparables. The Tribunal noted the inclusion of Alphageo (India) Ltd. and TCG Life Sciences Ltd. was inappropriate due to functional dissimilarity. The Tribunal directed the AO/TPO to exclude these companies from the final list of comparables and reconsider the inclusion of Clinsys Clinical Research Ltd. and Fortis Clinical Research Ltd., remanding the issue for fresh adjudication. Issue 6: Alternative Claim for Revising Profit Eligible for Deduction under Section 80IC by Adjusting AMP Expenditure The Assessee’s alternative claim for revising the profit eligible for Section 80IC deduction by adjusting AMP expenditure was rendered infructuous as the Tribunal vacated the AMP expenditure adjustment. Conclusion: The Assessee’s appeals for A.Y. 2009-10 and A.Y. 2010-11 were partly allowed, with specific issues remanded for fresh adjudication. The Revenue’s appeals for both years were dismissed, as the Tribunal struck down the TP adjustments towards AMP expenditure.
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