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2018 (1) TMI 450 - AT - Income TaxTransfer Pricing Adjustment - Held that - We find that the Tribunal had dealt with all the issues of TP adjustments in detail that the TPO had benchmarked the IT s of the assessee at entity level that the Tribunal found that the benchmarking was within the permissible limit( /- 5%) that the IT s were held to be at arm s length that it was further held that all other adjustments like payment of royalty receiving of royalty advertisement and sales promotion and advertisement adjustment out of R 2178 lakhs and expenditure of 2064 lakhs was incurred on export packing credit and export bills discounting that the interest-expenditure pertained to exports that the DRP directed to the AO to allocate the same to Section 10A and Section 10 B units. As the units claiming deduction u/s. 80 IB and 80IC were not engaged in exports and therefore no interest could be allocated to those units. While deciding the appeal filed by the assessee for the AY. 2006-07 the Tribunal 2012 (12) TMI 458 - ITAT MUMBAI held interest could not be allocated to 80IB and 80 IC units also confirmed by HC. Adjusted value of closing stock - Held that - We are of the opinion that the directions of the DRP do not suffer from any legal infirmity. Closing Balance of an year automatically becomes Opening Balance for the later year. Therefore we are unable to comprehend the logic behind raising the ground. Secondly the AO as per the judgment of Goetz India cannot entertain a new claim without filing a fresh return of income. But the appeallate authorities can allow the new claim made for the first time before them as held by the Bombay High Court in the case of Pruthvi Brokers & Shareholders (2012 (7) TMI 158 - BOMBAY HIGH COURT) Non allocating interest for working disallowance u/s. 14A - Held that - As we have endorsed the views of the DRP that the interest expenses had to be allocated to Section 10A and Section 10B units having direct nexus with exports business. Therefore in our opinion the DRP had rightly held that same could not be again considered for disallowance u/s. 14A of the Act.
Issues Involved:
1. Transfer Pricing Adjustment 2. Disallowance of Deductions under Sections 80IB, 80IC, 10A, and 10B 3. Allocation of Research Expenses 4. Disallowance of Provision for Retirement Pension 5. Disallowance under Section 14A 6. CENVAT on Closing Stock 7. Disallowance of Expenses on Shifting of Office 8. Incorrect Disallowance under Section 36(1)(va) 9. Interest Income as Income from Other Sources Detailed Analysis: 1. Transfer Pricing Adjustment: The assessee challenged the AO's order which included a transfer pricing adjustment of ?3.68 crores. The AO, based on the TPO’s report, made adjustments for various international transactions with associated enterprises. The DRP upheld these adjustments, including a 30.56% mark-up for business auxiliary services and royalty adjustments. The Tribunal noted that in AY 2006-07, the TPO's entity-level benchmarking approach was accepted by the Tribunal and upheld by the High Court. Since the facts for the current year were similar, the Tribunal decided in favor of the assessee, following previous judgments. 2. Disallowance of Deductions under Sections 80IB, 80IC, 10A, and 10B: The AO disallowed deductions under these sections, which the assessee contested. The Tribunal referenced previous years (AY 1985-86 to 1997-98 and 2006-07) where similar issues were partly allowed in favor of the assessee. The Tribunal directed the AO to reconsider the issue in light of these previous orders, partly allowing the ground. 3. Allocation of Research Expenses: The AO's allocation of research expenses was contested. The Tribunal noted that in AY 2006-07, the issue was decided in favor of the assessee and the department did not appeal this decision. Following this precedent, the Tribunal decided in favor of the assessee. 4. Disallowance of Provision for Retirement Pension: The AO disallowed the provision for retirement pension. The Tribunal referenced earlier years (AY 1991-92 to 1997-98 and 2006-07) where this issue was decided in favor of the assessee and the department did not appeal. The Tribunal followed these precedents and decided in favor of the assessee. 5. Disallowance under Section 14A: The AO disallowed ?2.85 crores under Section 14A, attributing it to earning exempt income. The DRP and Tribunal found that the AO did not provide a clear rationale for rejecting the assessee's suo-motu disallowance. Citing cases like Godrej & Boyce Manufacturing Co. Ltd. and Aditya Birla Finance Ltd., the Tribunal held that disallowance under Rule 8D should not be applied mechanically and decided in favor of the assessee. 6. CENVAT on Closing Stock: The AO made adjustments to the closing stock based on CENVAT. The Tribunal noted that in AY 2006-07, the issue was remanded back to the AO. Following this, the Tribunal directed the AO to reconsider the issue afresh, allowing the ground in part. 7. Disallowance of Expenses on Shifting of Office: The AO treated expenses on shifting office as capital expenditure. The Tribunal found the factual position unclear and remanded the issue back to the AO for further verification, directing the assessee to provide necessary details. The ground was allowed in part. 8. Incorrect Disallowance under Section 36(1)(va): The AO disallowed PF/ESIC dues paid within the grace period. The Tribunal, citing cases like WMI Cranes Ltd. and Pruthvi Brokers & Shareholders, decided that such payments should not be disallowed and ruled in favor of the assessee. 9. Interest Income as Income from Other Sources: The AO categorized interest income as income from other sources. The DRP upheld this, noting the assessee was not in the money-lending business. The Tribunal agreed, stating that interest from surplus funds should not be taxed as business income, and decided against the assessee. Appeal by AO: The AO's appeal included TP adjustments and allocation of interest expenses. The Tribunal dismissed the TP adjustments, reiterating that the issue had attained finality in AY 2006-07. On interest allocation, the Tribunal upheld the DRP's direction that interest expenses related to exports should be allocated to Section 10A and 10B units, not to 80IB and 80IC units, and confirmed the DRP's directions on adjusted value of closing stock and disallowance under Section 14A. Conclusion: The appeal by the assessee was partly allowed, and the appeal by the AO was dismissed. The order was pronounced on January 5, 2018.
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