2016 (11) TMI 1734 - AT - Income Tax

TP Adjustment - research and development support services provided by the assessee to its associated enterprises - Comparable selection - HELD THAT - Assessee provided assistance to its associated enterprises in conducting and co-ordinating testing, trials and experiments; interpretation of results of various such trials; assistance in literature search and any other services required by the associated enterprises with respect to the above. It is also emerging from record that in order to perform such functions, assessee is maintaining laboratory premises and employing necessary infrastructure suitable for such research and analytical testing., thus Companies functionally dissimilar with that of assessee need to be deselected. Addition of interest on delay in realisation of dues from associated enterprises - HELD THAT - As decided in assessee own case 2013 (1) TMI 60 - ITAT MUMBAI we find that the assessee has no interest liability and it does not have any external borrowings. Even if the payments have been made by the A.E. beyond the normal credit period, there is no interest cost to the assessee. Moreover, there is no such agreement whereby interest is to be charged on such a delayed payment. From the summary of payment submitted it is seen that the billing is done on quarterly basis and, accordingly, the payment is being received. Therefore, the delay is not wholly on account of late payment by the A.Es only. Moreover, the T.P. adjustment cannot be made on hypothetical and notional basis until and unless there is some material on record that there has been under charging of real income. Thus, on the facts and circumstances of the case, we are of the opinion that addition an account of notional interest relating to alleged delayed payment in collection of receivables from the A.Es, is uncalled for on the facts of the present case and is, accordingly, deleted. Addition of foreign travel expenses - HELD THAT - As entire disallowance is based on mere conjectures and surmises. In fact, what the DRP records that the details of expenses are inadequate and not fully satisfactory . In our considered opinion, the aforesaid inference of the DRP is not based on any factual support and, in fact, not even a single instance has been brought out which would show non-business purposes of the expenditure. Quite clearly, even the adhoc disallowances are also required to be founded on certain specific discrepancies, an aspect which is conspicuous by its absence in the orders of authorities below for the year under consideration. Therefore, in our view, no disallowance can be upheld in this year on the basis of the order of Tribunal for Assessment Year 2009-10, which has been rendered in the background of specific findings of the lower authorities in that year. In the absence of any specific discrepancy/infirmity having been brought out by the lower authorities, the adhoc disallowance of 25% of foreign travel expenses is untenable - Decided in favour of assessee.

Summary

Issues Involved:
1. Upward adjustment of Rs. 1,28,41,639/- to the income of the appellant in respect of provision of testing and analytical services.
2. Notional addition of Rs. 14,49,180/- towards interest on perceived delay in collection of receivables from associated enterprises.
3. Disallowance of foreign travel expense of Rs. 27,00,124/- (being 25% of the total foreign travel expense of Rs. 1,08,00,496).

Issue-wise Detailed Analysis:

1. Upward Adjustment of Rs. 1,28,41,639/-:
The appellant, a wholly-owned subsidiary of Evonik Degussa GmbH, Germany, contested the upward adjustment made by the Assessing Officer (AO) based on the Transfer Pricing Officer’s (TPO) analysis. The appellant provided support services in connection with research and development, which were classified as 'international transactions' under Sec. 92B of the Income Tax Act. The appellant adopted the Transaction Net Margin (TNM) method, showing a margin of 19.05% on operating costs, while the TPO selected six comparables with an average margin of 36.70%, leading to an adjustment of Rs. 1,28,41,639/-.

The appellant argued against the inclusion of M/s. Celestial Labs Ltd. and M/s. TCG Lifesciences Ltd. as comparables, citing functional dissimilarity. The Tribunal referenced its previous decision for Assessment Year 2007-08, which excluded Celestial Labs Ltd. due to its engagement in software development, unlike the appellant’s testing and analytical services. Similarly, TCG Lifesciences Ltd. was excluded because a significant portion of its revenue came from the sale of chemical compounds, making it incomparable to the appellant's services.

The Tribunal directed the AO to exclude these companies from the final set of comparables, which would place the appellant’s margin within the permissible +5% range, thus nullifying the need for the adjustment. Consequently, the addition of Rs. 1,28,41,639/- was ordered to be deleted.

2. Notional Addition of Rs. 14,49,180/-:
The AO made a notional addition for interest on delayed receivables from associated enterprises. The Tribunal had previously addressed a similar issue for the appellant in Assessment Year 2007-08, where it was concluded that the appellant, being a zero-debt company with no interest liability, should not be charged notional interest. The Tribunal emphasized that transfer pricing adjustments should not be hypothetical and must be based on material evidence of undercharging. Consistent with this precedent, the Tribunal directed the deletion of the Rs. 14,49,180/- addition.

3. Disallowance of Foreign Travel Expense of Rs. 27,00,124/-:
The AO disallowed 25% of the foreign travel expenses, questioning the business benefit derived from such expenditures. The Dispute Resolution Panel (DRP) upheld this disallowance. The appellant provided detailed submissions justifying the expenses, which were incurred by employees for business purposes. The Tribunal found the disallowance to be based on conjectures without specific evidence of non-business usage. Unlike the previous year’s decision where some discrepancies were noted, no such findings were present for the current year. Thus, the Tribunal directed the deletion of the 25% disallowance, amounting to Rs. 27,00,124/-.

Conclusion:
The Tribunal allowed the appeal of the appellant, directing the deletion of the upward adjustment of Rs. 1,28,41,639/-, the notional interest addition of Rs. 14,49,180/-, and the disallowance of foreign travel expenses amounting to Rs. 27,00,124/-. The judgment emphasized the need for functional comparability in transfer pricing and the requirement for specific evidence in disallowing expenses.