2023 (1) TMI 1199 - AT - Income Tax

Nature of expenditure - Vehicle registration expenses - revenue expenditure - AO disallowed the same by holding it to be capital in nature - Disallowance of comprises of two components being as paid by the assessee as earnest money deposit with regards to Government tender applied during the period AND balance is in respect of registration of new vehicles and or vehicles that was transferred from Andhra Pradesh to Karnataka - HELD THAT - In respect being the earnest money deposit there is a categorical observation by the Ld.CIT(A) that these are refundable deposits and therefore has been rightly treated as not revenue in nature which is disallowed by the Ld.CIT(A) u/s. 37(1). It is not in dispute that the said amount has not been expended for the purposes of business. Under such circumstances, the disallowance is not warranted. We therefore direct the Ld.AO to allow as an expenditure incurred by the assessee for the purposes of its business. Coming to the registration expenses incurred by assessee we note that the Ld.CIT(A) has rightly considered the vehicles to be capital asset as these vehicles are admittedly put to use for the purposes of business. Under such circumstances, granting of depreciation is rightly been directed by Ld.CIT(A), which is in accordance with law. We do not find any infirmity in the view taken by Ld.CIT(A) and the same is upheld. Loss as declared in the revised return - AO did not consider the claim disallowance if interest as per the revised return - HELD THAT - As decided in case of Goetze India Ltd. 2006 (3) TMI 75 - SUPREME COURT this issue needs to be remanded to the Ld.AO to consider the loss as declared by the assessee in the revised return. Nature of expenditure - product development expenses - revenue or capital expenditure - HELD THAT - As decided in own case 2022 (2) TMI 1338 - ITAT BANGALORE it is necessary to find out as to whether the assessee has incurred all these expenses on its own account or on behalf of its AE. If the assessee has incurred expenses on behalf of the AE and the benefits of these expenses go the AE, then the Ld DRP was justified in disallowing this claim. If it is not so, then the assessee is required to prove that these expenses are not capital in nature. The facts available on record are not clear as to whether these expenses are routine expenses incurred for expansion of existing business or not. If it is so, then the relevant expenses are allowable as revenue expenditure. In the absence of relevant details, we feel it proper to restore this issue to the file of AO for examining it afresh in the light of discussions made supra and also in accordance with law. - Based on the above, we remand this issue to the Ld.AO for considering it afresh in light of the above observation by the coordinate bench. TP Adjustment - comparable selection - HELD THAT - Inclusion of Bharat Insecticides Ltd. as this comparable is engaged in Pesticides Formulation and therefore is comparable to the assessee. Bharat Rasayan Ltd - This comparable has only segmental head from which, the revenue is generated being gross sales and assessee also has not bifurcated its revenue from the sales in local market and export sales. As far as the products manufactured and sold are concerned, this comparable is also manufacturing similar products(pesticides) like that of assessee. We therefore do not find any reason to exclude this comparable from the final list. The Ld.AR pointed out that in Ground no. 12, assessee seeks to rectify the errors while computing the margins of this comparable. We therefore direct the Ld.AO to compute the margins of this comparable correctly and in accordance with law. Rallis India Ltd - This company is into manufacturing non-pesticide kinds of products which are farmer friendly and in accordance with the changing agricultural needs. The basic raw materials for manufacturing such products are organic compost delivered out of the waste from sugarcane factories and has revealed itself to be a go green branded company. We note that from the functions performed by the assessee, before us, the assessee is into manufacturing of pesticides based on chemicals and formulations imported as raw materials from its AE. The basic ingredients forming part of raw materials are lithium metals etc which are chemical in nature and therefore cannot be compared with that of the present comparable sought for exclusion. We therefore direct the Ld.AO to exclude this comparable from the final list. Non granting of Working Capital Adjustment in respect of the comparables to iron out differences if any - DRP denied the claim as no details regarding the same were not furnished by the assessee - HELD THAT - We direct the assessee to furnish all details to assist the Ld.AO/TPO to compute Working Capital Adjustment on actuals. We also draw support from the observation of Coordinate Bench of this Tribunal in case of Huawei Technologies India (P.) Ltd. 2018 (10) TMI 1796 - ITAT BANGALORE - We thus remand this issue to the Ld.AO/TPO for considering the claim of the assessee of Working Capital Adjustment in accordance with the principles laid down supra. Adopting the foreign exchange revenue filter for excluding comparables having earnings in foreign currency exceeding 40 % as against 25% - HELD THAT - Both sides submitted that Ground No.3-4 in revenue s appeal are also on the issue of arbitrary adoption of foreign exchange currency filter at 40%. It is submitted that this is the only issue raised by the revenue in its appeal. We have perused the submission advanced by both sides in light of records placed before us. As noted that, such filter has not been applied by the Ld.TPO. And there is no basis for adopting 40% filter, applied by the Ld.CIT(A). In the interest of justice, we remand this issue to the Ld.AO/TPO to consider a consistent approach in respect of selecting the range of this filter. In the interest of justice we remand this issue back to the Ld.AO/TPO to consider this claim in accordance with law. Not treating Foreign exchange loss as extra ordinary and therefore to be excluded for computing operating margin - HELD THAT - The reliability and accuracy of adjustments would largely depend on availability of reliable and accurate data. For certain types of adjustment relevant data for comparables may either not be available in public domain or may not be readily determinable based on information available in public domain. Whereas it may be possible to make equally reliable and accurate adjustment of the tested party whose data is easily accessible. The purpose and intent of comparability analysis, is to examine as to whether, or not, the values stated for the international transactions are at arms length. It means, it is an exercise to ascertain, whether the price charged in case of a controlled transaction is comparable to the price charged under the uncontrolled transaction of similar nature. In our view the regulations do not cast any restriction to provide adjustment to be made on the tested party. Therefore if the data in respect of uncontrolled transactions are not sufficiently available in order to iron out the differences, the adjustment is to be made in the hands of the tested party. Accordingly we remand these issues back to the Ld.AO, with the direction to consider the claim of assessee based on the above discussions in respect of the forex loss earned by assessee on ECB loans for year under consideration, as non operative in the hands of assessee. TP adjustment to international transaction - HELD THAT - As we direct the AO/TPO to restrict the transfer pricing adjustment to the international transactions relating to import of raw materials and finished goods entered with its A.Es.

Summary

Issues Involved: Incorrect interpretation of law, disallowance of vehicle registration and other expenses, excess disallowance on account of interest on finance lease, disallowance of product development expenses, transfer pricing adjustments, inclusion/exclusion of comparables, working capital adjustment, foreign exchange revenue filter, treatment of foreign exchange fluctuation loss, computation of ALP, and revised computation of income.

Issue-wise Detailed Analysis:

1. Incorrect Interpretation of Law:
The assessee contended that the order by the AO/CIT(A) was based on an incorrect interpretation of law and should be quashed. The Tribunal did not explicitly address this issue separately, implying it was subsumed under the detailed grounds of appeal.

2. Disallowance of Vehicle Registration and Other Expenses:
The AO/CIT(A) treated INR 2,04,289 spent on RTO charges and vehicle transfer charges as capital expenditure, not allowable under section 37(1) of the Act. The Tribunal upheld the CIT(A)'s decision to treat these expenses as capital in nature but allowed depreciation. The Tribunal directed the AO to allow INR 25,000 incurred as earnest money deposit for business purposes.

3. Excess Disallowance on Account of Interest on Finance Lease:
The assessee claimed an excess disallowance of INR 4,95,359 on interest on finance lease. The Tribunal remanded the issue to the AO to consider the revised return and compute the loss as declared by the assessee.

4. Disallowance of Product Development Expenses:
The CIT(A) disallowed INR 3,28,45,694 as capital expenditure. The Tribunal remanded the issue to the AO for fresh consideration, referencing the assessee's own case for AY 2014-15, where the expenses were incurred for expanding the existing line of business and should be treated as revenue expenditure.

5. Transfer Pricing Adjustments:
The CIT(A) upheld the AO/TPO's order regarding the economic analysis and determination of the ALP. The Tribunal admitted additional grounds raised by the assessee, directing the AO/TPO to restrict transfer pricing adjustments to transactions with Associated Enterprises and to consider the correct impact of foreign exchange fluctuation.

6. Inclusion/Exclusion of Comparables:
The Tribunal upheld the inclusion of Bharat Insecticides Ltd. and Bharat Rasayan Ltd. as comparables but directed the AO to exclude Rallis India Ltd. due to functional dissimilarity. The Tribunal also directed the AO to rectify errors in computing the margins of Bharat Insecticides Ltd.

7. Working Capital Adjustment:
The Tribunal remanded the issue to the AO/TPO to compute the working capital adjustment on actuals, referencing the principles laid down in the case of Huawei Technologies India (P.) Ltd. vs. JCIT.

8. Foreign Exchange Revenue Filter:
The Tribunal noted the inconsistency in adopting the foreign exchange revenue filter and remanded the issue to the AO/TPO to consider a consistent approach for selecting the range of this filter.

9. Treatment of Foreign Exchange Fluctuation Loss:
The Tribunal directed the AO to treat the foreign exchange loss related to ECB loans as non-operating in the hands of the assessee, referencing multiple judicial precedents supporting the exclusion of abnormal forex losses from operating margins.

10. Computation of ALP:
The Tribunal directed the AO/TPO to restrict the transfer pricing adjustment to the international transactions relating to import of raw materials and finished goods entered with its A.Es, following the decisions in Hindustan Unilever Ltd. v. Addl. CIT and CIT v. Tara Jewels Exports (P.) Ltd.

11. Revised Computation of Income:
The Tribunal remanded the issue to the AO to consider the revised return filed by the assessee, following the Supreme Court's decision in Goetze India Ltd. Vs. CIT.

Conclusion:
The Tribunal provided a detailed analysis and directions on each issue, allowing some grounds, remanding others for fresh consideration, and upholding the CIT(A)'s decisions where appropriate. The appeal filed by the assessee was partly allowed, and the appeal filed by the revenue was allowed for statistical purposes.