2020 (5) TMI 20 - AT - Income Tax

TP Adjustment - transaction benchmarked by using internal Transactional Net Margin Method (TNMM) - whether the arm s length price of international transaction with the AE is to be determined by applying external or internal TNMM? - HELD THAT - In the facts of the present case the assessee has furnished the audited segmental accounts of both AE and non AE transactions. Pertinently even the TPO has also not applied CUP but has determined the arm s length price by applying external TNMM. There is nothing wrong in determining the arm s length price of the transaction with the AE by applying internal TNMM if relevant information relating to both the segments is available. The decisions relied upon by the learned Authorised Representative also support our aforesaid view. Net cost plus margin of the transaction with the AE is 10.35% as against margin of similar transaction with non AE at ( ) 5.33%. Even adopting the methodology of the TPO of allocating operating cost and depreciation on the basis of sales turnover the margin of the transaction with the AE @ 5.94% compares favourably with the margin of non AE transaction @ ( ) 8.69% - looked at from any angle the price charged for transaction with the AE undoubtedly appears to be at arm s length requiring no further adjustment. In view of the aforesaid we uphold the decision of the Commissioner (Appeals) on the issue by dismissing the grounds no.1 and 2 raised by the Revenue. Claim of foreign exchange fluctuation loss - AO disallowed assessee s claim of foreign exchange loss arising out of external commercial borrowing (ECB) merely on the ground that they are contingent in nature - HELD THAT - As could be seen from the material on record identical issue came up for consideration before the Tribunal in assessee s own case for the assessment year 2007 08. ECB was availed for the purpose of expansion of three existing industrial units hence not on capital account and further taking note of Accounting Standard/11 r/w Accounting Standard/16 ultimately concluded that assessee s claim of loss is allowable. The contention of the learned Authorised Representative that in subsequent assessment years the Revenue has accepted similar claim of loss by the assessee remains uncontroverted. Disallowance u/s14A r/w rule 8D - AO disallowed comprising of interest expenditure under rule 8D(2)(ii) and administrative expenditure under rule 8D(2)(iii) - HELD THAT - Assessee has stated that it has not incurred any administrative expenditure for earning the dividend income however in our considered opinion some amount of expenditure must have been incurred as the investment requires constant monitoring. It is also observed in similar circumstances disallowance under rule 8D(2)(iii) was made in assessment year 2007 08 which appears to have been accepted by the assessee. Some disallowance under section 14A r/w rule 8D(2)(iii) has to be made. However such disallowance has to be restricted to the average value of only those investments which have yielded dividend income during the year. AO is directed to verify the aforesaid aspect and compute disallowance under rule 8D(2)(iii) accordingly. This ground is partly allowed for statistical purposes. Disallowance of the expenditure incurred towards repairs to plant and machinery - HELD THAT - Before the first appellate authority the assessee had furnished various additional evidences to prove its claim. Though such evidences were forwarded to the AO he has not offered any comment. Commissioner (Appeals) after perusing the details has made an observation that such expenditures were incurred on replacement of spare parts. Nevertheless he upheld the disallowance by stating that detailed narration of materials / items purchased are not available. We fail to understand the aforesaid reasoning of Commissioner (Appeals). Once he accepts that the expenditures are incurred on replacement of spare parts he cannot contradict himself by stating that the detailed narration of materials / items purchased are not available. As observed earlier on a purely ad hoc basis a part of the expenditure incurred by the assessee has been treated as capital in nature. There is absolutely no basis for coming to such conclusion. When the expenditure incurred by the assessee has not been doubted such disallowance purely on ad hoc basis without being backed by proper reasoning cannot be sustained. Accordingly we delete the disallowance made by the Assessing Officer. This ground is allowed. Addition u/s 41 - outstanding / payable for more than three years - HELD THAT - No enquiry has been conducted by the Assessing Officer to demonstrate that there is a cessation of liability. Merely because the liability is pending for more than three years it cannot be presumed that it has ceased in terms of section 41(1) of the Act. Further it is evident before the first appellate authority the assessee had submitted that a part of the outstanding liability was paid in subsequent assessment year and the balance amount has been written back and offered to tax. However learned Commissioner (Appeals) without examining the aforesaid facts has sustained the addition made by the AO. The fact that the assessee has paid part of the liability in the subsequent assessment year demonstrates that the liability has not ceased to exist in the impugned assessment year. Further the balance amount which remained to be paid is stated to have been offered to tax in the assessment year 2009 10. If the aforesaid is the factual position no addition can be made by invoking the provisions of section 41(1) of the Act. Subject to verification of assessee s claim that part of the amount was paid to the creditors and the balance amount has been written back and offered as income in the assessment year 2009 10 the Assessing Officer is directed to delete the addition. Provision made for loss arising on sales return - HELD THAT - In its accounts the assessee has debited an amount of Rs. 40.90 lakh towards provision of likely loss on sales return however in the course of assessment proceedings it has admitted that the amount is erroneously left out from being added in the computation of income and requested the AO to treat the return of income to have been modified to that extent. On the basis of such submission of the assessee the AO added back to amount to the income of the assessee. That being the case we are unable to appreciate the grievance of the assessee. Even otherwise also it is evident the amount in dispute is a provision made for likely loss on sales return - it is quite clear that the expenditure has not crystallized during the year and is an anticipated loss. That being the case it cannot be allowed. However if such loss has actually arisen in the subsequent assessment year due to sales return the AO is directed to verify and grant consequential relief. This ground is allowed for statistical purposes.

Summary

Issues Involved:

1. Deletion of transfer pricing adjustment.
2. Allowance of foreign exchange fluctuation loss.
3. Disallowance under section 14A r/w rule 8D.
4. Disallowance of expenditure incurred towards repairs to plant and machinery.
5. Addition under section 41 of the Act.
6. Provision made for loss arising on sales return.

Issue-wise Detailed Analysis:

1. Deletion of Transfer Pricing Adjustment:

The Revenue challenged the deletion of a transfer pricing adjustment of Rs. 1,34,69,853 by the Commissioner (Appeals), who held that the transaction should be benchmarked using the internal Transactional Net Margin Method (TNMM). The assessee, a manufacturer of agrochemical products, had used TNMM with net cost plus (NCP) as the profit level indicator (PLI) to benchmark its international transactions. The Transfer Pricing Officer (TPO) disagreed with the assessee's allocation of expenses and exclusion of loss-making comparables, resulting in an upward adjustment. The Commissioner (Appeals) found no defects in the audited segmental accounts provided by the assessee and concluded that the margin earned on AE sales was higher than on non-AE sales, thus deleting the adjustment. The Tribunal upheld this decision, noting that internal TNMM was appropriate given the available segmental information and that product similarity is not a requirement under TNMM.

2. Allowance of Foreign Exchange Fluctuation Loss:

The Assessing Officer (AO) disallowed the assessee's claim of Rs. 1,63,72,105 for unrealized foreign exchange loss, considering it contingent. The Commissioner (Appeals) allowed the claim, following the Tribunal's earlier decision in the assessee's case for the assessment year 2007-08, which allowed the loss as it related to external commercial borrowing (ECB) for expansion, not capital account. The Tribunal upheld this decision, noting that similar claims were accepted in subsequent years.

3. Disallowance under Section 14A r/w Rule 8D:

The AO disallowed Rs. 2,87,536 under section 14A, including interest and administrative expenses, for earning exempt dividend income. The Commissioner (Appeals) deleted the interest disallowance but upheld the administrative expense disallowance of Rs. 1,26,044. The Tribunal directed the AO to compute the disallowance based on the average value of investments yielding dividend income, acknowledging that some expenditure must have been incurred for monitoring investments.

4. Disallowance of Expenditure Incurred Towards Repairs to Plant and Machinery:

The AO disallowed 20% of the assessee's claimed expenditure on repairs to plant and machinery, treating it as capital expenditure due to lack of detailed narration. The Commissioner (Appeals) upheld this disallowance. The Tribunal found the disallowance ad-hoc and unsupported by evidence, noting that the expenditures were for replacement of spare parts. The Tribunal deleted the disallowance, emphasizing that the expenditure incurred was not doubted.

5. Addition under Section 41 of the Act:

The AO added Rs. 64,185 as cessation of liability under section 41(1), as the amount was outstanding for more than four years. The Commissioner (Appeals) sustained this addition. The Tribunal found no evidence of cessation of liability or benefit received by the assessee and noted that part of the liability was paid in subsequent years, with the balance written back and offered to tax. The Tribunal directed the AO to delete the addition, subject to verification of the assessee's claims.

6. Provision Made for Loss Arising on Sales Return:

The AO disallowed Rs. 40,90,000 claimed by the assessee as provision for sales return, based on the assessee's own admission of an error. The Commissioner (Appeals) dismissed the assessee's additional ground for deduction. The Tribunal upheld the disallowance, noting that the provision was for an anticipated loss and not crystallized during the year. The Tribunal directed the AO to verify and grant relief if the loss actually arose in subsequent years.

Conclusion:

The Tribunal dismissed the Revenue’s appeal and partly allowed the assessee’s appeal, providing detailed directions on each issue based on the merits of the case and the evidence presented.