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2009 (2) TMI 237 - AT - Income TaxDetermination of ALP - Transfer pricing adjustments - CUP or TNMM is the most appropriate method for the purpose of benchmarking of the international transactions - Not furnished the documentation or particulars of negotiations between the AE and the assessee - whether the requirements of s. 92C(3) have been fulfilled in this case - failure to maintain and produce the documents as required by law - failure discharge the onus cast upon it to determine the ALP in accordance with the most appropriate method. Whether the Revenue authorities were right in holding that the assessee has failed to maintain proper documentation in accordance with law? - HELD THAT - Rule 10D specifies the information on documentation to be kept and maintained under s. 92D. It is mandatory for every person, who has entered into an international transaction to keep and maintain such information and documents as may be prescribed and the AO may require such person to furnish any such information or documentation within a particular period of time - non-maintenance or non-furnishing of these individual items pointed out by the Revenue does not negate the claim of the assessee that it had maintained the information and documents statutorily required under r. 10D(1) r/w s. 92D of the Act. In our humble opinion, the Revenue should positively look on the vast data and documentation maintained by the assessee and not only pick up some defects here and there as an excuse to reject the documentation. The sum and substance has to be seen and substantive compliance should be a criteria. Therefore, in our humble opinion, the test should be, as to whether the non-maintenance or deficiency in the maintenance of some records fundamentally effects or distorts the computation of the ALP. If it does not make a material difference to the process, then the defects are not fatal. Thus, this finding of the Revenue authorities that non-furnishing of the abovesaid information is fatal to the TP analysis for determining ALP is not correct. This is a case where the assessee has substantially complied with the law of maintenance of records. Assessee has not furnished the documentation or particulars of negotiations between the AE and the assessee - HELD THAT - A close look at r. 10D(1)(a) reveals that price negotiations, if any, which have critically affected the determination of ALP has to be maintained as an information and document under the rule, if at all such documents are available - The question of maintaining a record of uncontrolled transactions for analyzing the comparability under the CUP method arises only if the assessee finds comparables for bench marking. Thus, the TPO was not justified in invoking cl. (b) to sub-s. (3) of s. 92C as the assessee has kept and maintained the documents specified under s. 92D(1). which, in our opinion. substantially complies with the law. Adoption of TNMM by the assessee - HELD THAT - Sec. 92C(1) refers to ALP in relation to an international transaction. Rule 10B(1)(e) r/w s. 92C deals with TNMM, and it refers to only net profit margin realized by an enterprise from an international transaction or a class of such transaction, but not operational margins of enterprises as a whole - The international transaction or an aggregate of similar international transactions, have to be evaluated, on a stand alone basis and then compared with similar analysis undertaken on independent transactions. Comparison of the operating profits of the assessee-company as a whole, with the overall operating profits of certain other companies, without any adjustments, in our considered opinion, would not satisfy the requirements of evaluating an international transaction under TNMM, for the purpose of arriving at the ALP. In this case, the assessee has taken all the activities of the company as one unit and on an analysis of its P L a/c, arrived at an overall operating profit margin of 27 per cent. This is compared with the chart of overall operating profit margins of identified comparable companies - we agree with the Revenue that provisions of s. 92C(3) are attracted in the instant case on this ground. As we have decided this issue in favour of the Revenue on this ground, we do not feel it necessary to go into other arguments of the Revenue. Once the method adopted by the assessee is rejected, the Revenue is duty bound to compute the ALP by adopting a most appropriate method and it has also to substantiate and justify the use of such a method. Method applied by the Revenue - HELD THAT - The Revenue has applied CUP method and determined the ALP, on the ground that API, are comparable products, which are subject to quality regulations and when certain organizations purchase the very same product at a particular rate, for producing the similar 'FPS', they are comparable transactions which are uncontrolled and the price at which these are traded have to be compared with the prices the AE charged to the assessee company in this case - CUP method is the most direct method for determining ALP. Under this method, the price at which controlled transaction is carried out is compared to the price obtained in comparable uncontrolled transaction. An uncontrolled price is the price agreed between unconnected parties for the transfer of goods or services. The CUP can be either (a) internal CUP or (b) external CUP. In this case on hand, we are concerned with external CUP. The Revenue has failed to discharge the onus placed on them that CUP is the most appropriate method and it has found the right comparable. Thus, for all these reasons the additions made by the Revenue on this issue cannot be sustained. Disallowance of a percentage out of the total sales promotion expenses claimed by the assessee. - HELD THAT - There is no dispute as to the allowability of this expenditure as business expenditure. Only the quantum is being restricted on ad hoc basis. In one year an ad hoc 20 per cent disallowance is made and in the other year an ad hoc 10 per cent of the disallowance is made. The primary reason for making such disallowance is that the assessee has not furnished details of recipients of the gift articles. The AO presumes that, there might be an element of non-business use - the ad hoc disallowance is not based on firm legal ground. There is no dispute that the expenditure incurred on gifts was for the purpose of business. The gifts display the logo of the assessee-company. To assume that 20 per cent or 10 per cent of these gifts might have not been used for the purpose of business, in our considered opinion, is based on mere surmises and presumptions. It is well-settled that no addition can be made merely on the basis of such presumptions and assumptions. Thus, the ad hoc disallowance is hereby deleted for both the assessments. Whether on the bank interest in question, on the facts and circumstances of the case, is assessable under the head Business income ? - HELD THAT - The interest earned on such current account is assessable under the head Profits and gains of business or profession . The assessee has rightly relied upon the decision of the jurisdictional High Court in the case of COMMISSIONER OF INCOME-TAX VERSUS INDO SWISS JEWELS LIMITED AND ANOTHER. 2005 (9) TMI 47 - BOMBAY HIGH COURT , where interest earned on short-term deposits of surplus money kept apart for the purpose of payment towards purchase of machinery has been treated as income earned on business - Once it is held that the interest in question is to be assessed as income from business, 90 per cent of the net interest has to be excluded while computing quantum of exemption under s. 80HHC. - the AO is directed to eliminate only net of interest. Thus, this ground of the assessee is allowed. Inclusion of sales-tax and excise duty on total turnover for the purpose of calculation of relief under s. 80HHC - HELD THAT - This issue is covered in favour of the assessee and against the Revenue by the decision of the Hon'ble Supreme Court in the case of COMMISSIONER OF INCOME-TAX VERSUS LAKSHMI MACHINE WORKS 2007 (4) TMI 202 - SUPREME COURT . Respectfully following the same we allow this ground of the assessee. Appeals for both the assessment years are allowed in part.
Issues Involved:
1. Disallowance of sales promotion expenses. 2. Non-acceptance of Transactional Net Margin Method (TNMM) for determining Arm's Length Price (ALP). 3. Adoption of Comparable Uncontrolled Price (CUP) method for determining ALP. 4. Consideration of +/- 5% variation from ALP under Section 92C(2). 5. Bank interest as business income and its exclusion in computing eligible profits under Section 80HHC. 6. Inclusion of sales tax and excise duty in total turnover for Section 80HHC deduction. Issue-wise Detailed Analysis: 1. Disallowance of Sales Promotion Expenses: The assessee claimed sales promotion expenses, including gifts for doctors, which were disallowed partially by the AO on an ad hoc basis (20% for AY 2002-03 and 10% for AY 2003-04), citing potential non-business use. The Tribunal noted the internal control procedures and the business purpose of these expenses, concluding that the disallowance was based on mere assumptions and should be deleted. 2. Non-acceptance of TNMM for Determining ALP: The assessee used TNMM to determine ALP for international transactions involving the import of APIs, comparing its overall operating profit margins with those of other companies. The Tribunal found that the assessee failed to demonstrate comparability at the transaction level, as required by law. The comparison was made at the entity level, which included different types of transactions and activities. The Tribunal held that the TNMM adopted by the assessee was not appropriate and rejected it. 3. Adoption of CUP Method for Determining ALP: The Revenue adopted the CUP method, comparing the prices at which three Indian companies purchased similar APIs from different sources. The Tribunal noted that the comparability of the products was not established, as there were significant differences in quality, efficacy, and other factors. The Tribunal found that the Revenue failed to demonstrate that the comparables were appropriate and rejected the CUP method as well. 4. Consideration of +/- 5% Variation from ALP Under Section 92C(2): The Tribunal did not specifically address this issue in detail due to the rejection of both TNMM and CUP methods. The matter was remanded to the AO for fresh adjudication, allowing the assessee to present a new TP study and adopt any appropriate method for determining ALP. 5. Bank Interest as Business Income: The assessee earned interest on excess operating cash in current accounts, which was treated as business income. The Tribunal agreed, noting that the interest was earned on circulating capital used for day-to-day operations. Consequently, only the net interest should be excluded while computing the eligible profits for deduction under Section 80HHC. 6. Inclusion of Sales Tax and Excise Duty in Total Turnover for Section 80HHC Deduction: The Tribunal followed the Supreme Court decision in CIT vs. Lakshmi Machine Works, holding that sales tax and excise duty should not be included in the total turnover for calculating the deduction under Section 80HHC. This ground was decided in favor of the assessee. Conclusion: The Tribunal allowed the appeals in part, remanding the issue of determining ALP to the AO for fresh adjudication, permitting the assessee to file a new TP study and adopt any appropriate method. The disallowance of sales promotion expenses was deleted, and the treatment of bank interest as business income was upheld. The inclusion of sales tax and excise duty in total turnover for Section 80HHC deduction was decided in favor of the assessee.
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