2012 (5) TMI 147 - AT - Income Tax

Transfer pricing - Application of Section 144C - eligible assessee - Appellant contended that as the TPO has not prescribed any adjustment in the Transfer Pricing order. So, the Assessing Officer had no jurisdiction to pass a draft order under sec. 144C(1). Therefore, the order is without jurisdiction and liable to be annulled. - held that - it is necessary to see that the reference made to the TPO, the order passed by the TPO, the draft assessment order passed by the Assessing Officer and the directions issued by the DRP are all pre-assessment procedures of aid and guidance provided to the assessing authority by the statute. If any irregularity is committed by the Assessing Officer in following the above set of pre-assessment procedures, such irregularity does not make the assessment order illegal. At the best, it makes the order only irregular. - when the adjustments made by the Assessing Officer are deleted by the Tribunal, that irregularity is automatically cured. In such circumstances, the assessment order need not be invalidated. The assessment order does not become void ab initio. - Decided against the assessee. Regarding deduction u/s 10A - held that - TPO has made a categorical finding that the operating profit reported by the assessee is higher than the profit worked out on the basis of ALP. - ALP is determined on the basis of the most appropriate method. Most appropriate method is chosen either on profit basis method or price basis method. In the latter case, profits are not at all considered. In that method, profit is only a derivative of prices. When profits itself not worked out, how it is justified to adopt ALP profits to determine what is ordinary profits for the purpose of sec. 10A(7)? - Assessing Officer has erred in reducing ₹ 4,48,50,795/- from the eligible profits of the assessee under sec. 10A. - Decided in favor of assessee. Regarding exclusion of foreign travel expenditure - held that - if expenses are to be reduced from export turnover, they have to be reduced from the total turnover also, to maintain the parity. - Decided in favor of assessee. Disallowance made under sec. 14A - held that - As quantification is not permissible under Rule 8D for the impugned assessment year, the disallowance has to be made on the basis of reasonableness and fairness. In the present case, the Assessing Officer has made a disallowance of ₹ 9,81,686/-. We modify the disallowance to a sum of ₹ 6 lakhs on a fair basis. This issue is decided partly in favour of the assessee.

Issues Involved:
1. Reduction of eligible deduction under sec.10A by the Assessing Officer.
2. Exclusion of foreign travel expenses and lease line charges from export turnover.
3. Disallowance under sec.14A.
4. Legal validity of the draft assessment order under sec.144C(1) and its consequences.

Detailed Analysis:

1. Reduction of Eligible Deduction under sec.10A:
The primary issue was whether the Assessing Officer (AO) was justified in reducing Rs. 4,48,50,975 from the eligible deduction under sec.10A based on the difference between the Arm's Length Price (ALP) determined by the Transfer Pricing Officer (TPO) and the actual operating profit reported by the assessee. The assessee argued that the AO and the Dispute Resolution Panel (DRP) erred in invoking sec.10A(7) along with sec.80IA(10) without establishing that the transactions were "arranged" to yield more than ordinary profits. The Tribunal held that ALP, determined under sec.92, cannot be used as a basis for calculating "ordinary profits" under sec.10A(7). The Tribunal cited previous decisions, including TweezerMAN (India) (P) Ltd. v. ACIT, to support its conclusion that the AO was not justified in reducing the eligible profits based on the ALP computed by the TPO. Consequently, the adjustment made by the AO in computing the deduction under sec.10A was deleted.

2. Exclusion of Foreign Travel Expenses and Lease Line Charges from Export Turnover:
The AO had proposed to exclude foreign travel expenses and lease line charges from the export turnover for computing the deduction under sec.10A. The Tribunal referred to the ITAT, Chennai Special Bench decision in the case of ITO v. Sak Soft Ltd., which held that if expenses are to be reduced from export turnover, they must also be reduced from the total turnover to maintain parity. Therefore, the Tribunal decided in favor of the assessee, holding that the adjustments made to the export turnover should also be made to the total turnover.

3. Disallowance under sec.14A:
The AO had made a disallowance under sec.14A, estimating 0.5% of the investment as expenditure incurred for earning non-taxable income. The assessee contended that Rule 8D was not applicable for the assessment year 2007-08 and that no expenditure was incurred towards earning dividend income. The Tribunal agreed that Rule 8D was not applicable for the impugned assessment year. However, it recognized that a reasonable portion of the top management's time/expenditure could be attributed to earning dividend income. The Tribunal modified the disallowance to Rs. 6 lakhs on a fair basis, partly favoring the assessee.

4. Legal Validity of the Draft Assessment Order under sec.144C(1) and its Consequences:
The assessee argued that the AO had no jurisdiction to pass a draft assessment order under sec.144C(1) as no transfer pricing adjustment was suggested by the TPO, rendering the final order barred by limitation. The Tribunal examined the procedural aspects and concluded that the reference to the TPO and the draft assessment order were part of the pre-assessment procedures. Any irregularity in these procedures did not make the assessment order illegal but only irregular. Since the Tribunal deleted the adjustments made by the AO, the irregularity was cured, and the assessment order need not be invalidated. Therefore, the argument that the assessment was barred by limitation was not accepted.

Conclusion:
The appeal was partly allowed, with the Tribunal deleting the reduction in eligible profits under sec.10A, deciding in favor of the assessee on the exclusion of foreign travel expenses and lease line charges, modifying the disallowance under sec.14A, and rejecting the argument that the assessment was barred by limitation.

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