2012 (3) TMI 208 - AT - Income Tax

Transfer pricing - Proviso to section 92-C(2) - downward variation of 5 per cent in determining the arm s length price inter alia, include the exclusion from the comparables selected by the TPO - Held that - Assessing Officer should examine the mean margin of left out comparables and of the assessee with reference to the figures adopted by the TPO. If the remaining difference as computed as per our directions, between these two remains less than 5%, then, the benefit of proviso to Section 92C(2) will be given to the assessee and no addition will be called for. Excessive computation of interest under section 234-B by the ld. AO - Held that - restore this issue to the file of the assessing officer to re-compute interest under section 234-B as per law after giving a reasonable opportunity of being heard to the assessee Interest of refund - adjustment u/s 57(iii)- held that - We also do not find force in the contention of the assessee that since the payment of tax was made out of overdraft facility, therefore, interest receipt on income tax refund should be adjusted against interest paid on overdraft facility as according section 57(iii) only such expenditure (not being in the nature of capital expenditure) can be allowed if it is laid down or expanded wholly and exclusively for the purpose of making or earning of such income. Payment of Income tax cannot be said to be made for earning of interest, hence the case of the assessee will also be out of the purview of section 57(iii). - Decided against the assessee. Interest under section 234-B of the Act is not to be calculated on tax on the total income determined under regular assessment under section 143(3) of the Act - Held that - interest on Income Tax refund of ₹ 15,229,404 is to be netted off against the interest payment of ₹ 18,509,964 and since the interest received by the appellant is less than the interest expense for the year under appeal, no part of the interest on Income Tax refund of ₹ 15,229,404 is to be excluded while computing profits of business eligible for deduction under section 10-B of the Act.

Issues Involved:
1. Validity of the orders passed by the AO/TPO.
2. Addition to income under Chapter X of the Income Tax Act.
3. Application of the Proviso to section 92-C(2) of the Act.
4. Computation of interest under section 234-B.
5. Adjudication on the allowability of pre-operative expenses.
6. Reduction of transfer pricing adjustment by the CIT (Appeals).
7. Deletion of addition on account of foreign exchange fluctuation loss.
8. Netting off of interest on Income Tax refund with interest payments.
9. Eligibility of interest tax refund for deduction under section 10-B.

Detailed Analysis:

1. Validity of Orders by AO/TPO:
The assessee contended that the orders passed by the AO/TPO were "bad in law and void ab-initio" due to material illegality and irregularity, including the lack of preconditions for reference to a transfer pricing officer and the absence of opportunity for the assessee to present its case before the reference.

2. Addition to Income under Chapter X:
The assessee challenged the addition of Rs. 12,09,75,346/- under Chapter X, arguing that the economic analysis for determining the arm's length price (ALP) was not properly considered. The CIT (Appeals) partially accepted the assessee's arguments, adjusting the OP/TC of comparables and reducing the transfer pricing adjustment.

3. Application of Proviso to Section 92-C(2):
The CIT (Appeals) did not apply the Proviso to section 92-C(2), which allows for a downward variation of 5% in determining the ALP. The Tribunal directed the AO to verify the mean margin of comparables and the assessee's margin, and if the difference is within 5%, the benefit of the proviso should be given.

4. Computation of Interest under Section 234-B:
The assessee argued that the interest under section 234-B was excessively computed. The Tribunal restored the issue to the AO for re-computation as per law, after giving the assessee a reasonable opportunity to be heard.

5. Adjudication on Pre-operative Expenses:
The CIT (Appeals) deferred the adjudication of pre-operative expenses to the appellate proceedings for assessment year 2003-04. The Tribunal noted that the CIT (Appeals) had allowed the claim for 2003-04, and thus, this issue was dismissed.

6. Reduction of Transfer Pricing Adjustment by CIT (Appeals):
The Revenue argued that the CIT (Appeals) erred in reducing the transfer pricing adjustment from Rs. 15.25 crore to Rs. 12.09 crore without providing an opportunity for examination to the TPO, violating Rule 46-A of the I.T. Rules. The Tribunal directed the AO to verify and recompute the margins of comparables and the assessee's margin.

7. Deletion of Addition on Account of Foreign Exchange Fluctuation Loss:
The CIT (Appeals) deleted the addition of Rs. 40,74,530/- on account of foreign exchange fluctuation loss, relying on the decision in CIT v. Woodward Governors India Pvt. Ltd. The Tribunal upheld this deletion, noting that the Supreme Court had affirmed the High Court's decision.

8. Netting off of Interest on Income Tax Refund with Interest Payments:
The CIT (Appeals) allowed the netting off of interest on Income Tax refund against interest payments, holding that the interest received was less than the interest paid. The Tribunal disagreed, stating that interest on Income Tax refund is not related to business operations and should be assessed under "Income from other sources."

9. Eligibility of Interest Tax Refund for Deduction under Section 10-B:
The CIT (Appeals) held that interest on Income Tax refund should be considered for computing profits of business for deduction under section 10-B. The Tribunal reversed this decision, noting that such interest does not have a direct and proximate nexus with the business and should not be eligible for deduction under section 10-B.

Conclusion:
Both the appeals filed by the assessee and the Revenue were partly allowed for statistical purposes. The AO was directed to re-examine and recompute certain issues as per the Tribunal's directions.

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