2014 (5) TMI 958 - AT - Income Tax

Transfer pricing adjustment Computation of deduction u/s 10B of the Act - Held that - Following M/s. Honeywell Electrical Devices & Systems India Ltd. Versus The Assistant Commissioner of Income Tax 2014 (5) TMI 728 - ITAT CHENNAI - The TPO has accepted the segmental results in assessment year 2005-06 and 2006-07 on the contract manufacturing transactions with AE for arriving at ALP while computing relief u/s 10B of the Act - The TPO/ DRP has not given any valid reasons as to why segmental results shall not be considered for determining ALP of transactions with AE having accepted very same segmental results of the assessee for the purpose of computing deduction u/s 10B of the Act - there is no valid reason for not accepting the segmental reports in determining ALP on the AE sales for the AY 2007-08. TPO/ DRP approach in comparing external comparables margin with entity level margin of the assessee is wrong since segmental results are available and as per the segmental results the margin in contract manufacturing segment was at 20.89% and this margin should have been compared with the margin of external comparables which stood at 8.87% instead of the entity level margin 1.08% since entity sales consists of both contract manufacturing segment which meant for export done and local segment which is engaged in domestic sales - In the current year also i.e. assessment year 2008-09, the net cost plus margin of the assessee in contract manufacturing segment is 10.77% which is more than the net cost plus margin of 9.55% on the external comparables of the Transfer Pricing Officer and therefore there is no need for upward adjustment to be made on the AE sales of the assesse the AO is directed to set aside the addition made towards upward adjustment of purchase price on determination of ALP with AE Decided in favour of Assessee. Provision for discount cessation of liability - Held that - Following M/s. Honeywell Electrical Devices & Systems India Ltd. Versus The Assistant Commissioner of Income Tax 2014 (5) TMI 728 - ITAT CHENNAI - when the liability is ascertained and not quantifiable during the year and is simply a contingent based on estimates, the same cannot be allowed as deduction - the assessee s version clearly states that the only reason for creating a provision and not charging the same as an expenses is because of the fact that the exact quantification could not be undertaken for the various reasons - the basis for the provision is simply adhoc and arbitrary - It depends on the facts of each and every case to come to a conclusion as to whether the liability is ascertained or unascertained one and it cannot be generalized Assessee contended that they had reversed excess provision which was disallowed in earlier year - as the provision was disallowed in earlier year, reversal made during this assessment year ought to be allowed as deduction while computing total income of the year the AO is directed to verify the claim of the assessee. Reduction in personal expenses Expenses incurred in foreign currency Training and marketing/business promotion from export turn over Held that - Following M/s. Honeywell Electrical Devices & Systems India Ltd. Versus The Assistant Commissioner of Income Tax 2014 (5) TMI 728 - ITAT CHENNAI - travel expenses incurred in foreign currency have to be excluded both from export turnover as well as from total turnover for the purpose of computing relief u/s 10A of the Act the AO is directed to exclude the travel expenses incurred in foreign exchange from export turnover as well as total turnover for the purpose of computing relief u/s 10A of the Act Decided in favour of Assessee.

Issues Involved:
1. Addition of Rs. 7,43,00,000/- based on Chapter X of the Act and Rs. 2,44,19,453/- based on other provisions of the Act.
2. Substitution of segmental analysis with an entity-wide approach for testing international transactions.
3. Adoption of entity level approach without considering segmented functions.
4. Reliance on previous year's segmented financials to reject current segmented accounts.
5. Ignoring reasons for differences in common expenses allocation.
6. Adjustment on unrelated third-party transactions instead of related party transactions.
7. Rejection of plea for use of multiple year data under rule 10B(4).
8. Disallowance of provision for discount.
9. Recalculation of profits by allocating expenses based on arm's length sales.
10. Reduction of personal expenses incurred in foreign currency from export turnover.

Issue-wise Detailed Analysis:

1. Addition based on Chapter X and other provisions:
The appeal challenges the addition of Rs. 7,43,00,000/- under Chapter X and Rs. 2,44,19,453/- under other provisions. The Tribunal's decision for the previous year (2007-08) was cited, where segmental details were accepted for computing section 10B benefits, leading to the deletion of transfer pricing additions.

2. Substitution of Segmental Analysis:
The Transfer Pricing Officer (TPO) substituted the segmental analysis with an entity-wide approach. The Tribunal previously upheld the segmental approach for the assessee, noting the comparables' margin was lower than the assessee's contract manufacturing segment. The TPO's comparison of 9.60% comparables margin with the entity level margin of 2.98% was deemed unjustified.

3. Adoption of Entity Level Approach:
The TPO adopted an entity level approach without considering the segmented functions of manufacturing and distribution. The Tribunal noted the inconsistency, as the segmented approach was accepted in the assessment year 2005-06.

4. Reliance on Previous Year's Financials:
The TPO relied on previous year's segmented financials to reject the current year's segmented accounts. The Tribunal found this approach flawed, as the figures used by the TPO/DRP were inaccurate, leading to incorrect conclusions.

5. Ignoring Allocation Differences:
The TPO ignored the reasons for differences in the allocation of common expenses between segments. The Tribunal pointed out that the TPO/DRP's analysis was based on incorrect figures, and the allocation method was consistent with prior years.

6. Adjustment on Unrelated Transactions:
The TPO made adjustments on unrelated third-party transactions instead of related party transactions. The Tribunal directed the deletion of the Rs. 7.43 crores addition, as the net cost plus margin of the assessee's contract manufacturing segment was higher than the comparables.

7. Rejection of Multiple Year Data:
The TPO rejected the plea for using multiple year data under rule 10B(4) without proper justification. The Tribunal's previous decision supported the use of segmental results for determining the arm's length price (ALP).

8. Disallowance of Provision for Discount:
The Tribunal upheld the disallowance of the provision for discount, as it was deemed unascertained and contingent. However, it directed the Assessing Officer to verify and allow the deduction for discounts actually passed on to customers, following the approach in the assessment year 2009-10.

9. Recalculation of Profits:
The issue of reallocating expenses based on arm's length sales became infructuous after the deletion of the Rs. 7.43 crores upward adjustment, and the Tribunal dismissed this ground as infructuous.

10. Reduction of Personal Expenses:
The Tribunal directed the exclusion of personal expenses incurred in foreign currency for training and marketing from export turnover, following the precedent set in the assessment year 2007-08, where such expenses were excluded from both export and total turnover for computing relief under section 10B.

Conclusion:
The appeal was partly allowed, with the Tribunal directing the deletion of the Rs. 7.43 crores addition and the exclusion of personal expenses from export turnover for computing relief under section 10B. The disallowance of the provision for discount was upheld, but the actual discounts passed on to customers were to be verified and allowed. The recalculation of profits based on arm's length sales was dismissed as infructuous.

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