2015 (5) TMI 398 - AT - Income Tax

Transfer pricing adjustment - DRP holding that the internal comparability does not provide meaningful benchmarking - Held that - - As decided in assessee s own case for the earlier assessment year 2014 (8) TMI 64 - ITAT DELHI , it has been held that the assessee was justified in undertaking internal bench marking analysis on standalone basis by placing on record working of operating profit margin from international transactions with AEs and transactions with unrelated parties undertaken in similar functional and economic scenario, and the same should be the basis for determination of arm s length price in respect of international transactions undertaken with the associated enterprise - the matter is remitted back to the AO for fresh adjudication and for the purpose of determining the arm s length price in respect of the international transactions undertaken with the associated enterprise by making internal comparison of profitability form the international transactions with associated enterprise and profitability from the international transactions with unrelated parties after allocating respective revenues and expenses to both the segments Decided in favour of Assessee by way of remand. Deduction u/s 10A - disallowance of miscellaneous income considering the same as part of business income - Held that - As relying on assessee's own case 2014 (8) TMI 64 - ITAT DELHI the amount received by the assessee towards notice period is to be treated as income derived from the eligible undertaking and deduction u/s 10A shall be allowed accordingly. The Assessing Officer shall modify the assessment order in the light of the aforesaid direction and allow the deduction u/s 10A of the Act in terms of this order - Decided in favour of assessee. Adhoc disallowance of interest expenses - Held that - As decided in assessee s own case 2014 (8) TMI 64 - ITAT DELHI interest expenditure on the utilization of borrowed funds for the acquisition of new assets, from the date of its acquisition till the date when the asset is put to use, is to be disallowed - the interest paid on the capital borrowed for acquisition of an asset for extension of existing business, shall not be allowed as deduction, from the date on which the capital was borrowed for acquisition of the asset till the date on which the asset was first put to use - no efforts has been done by the AO to find out the date on which the assessee borrowed the fund for acquisition of asset in the relevant AY and we also find that no attempt has been made by the AO to find out on which date the asset thus procured with the said borrowed fund have been put to use - Only after the dates has been found out then only one can compute the disallowance as prescribed by the proviso to section 36(1)(ii) of the Act thus, the matter is remitted back to the AO with a direction to AO to find out the date on which the assessee borrowed the fund for acquisition of asset and also to find out on which date the asset for extension of business thus procured has been put to use - Decided in favour of assessee for statistical purposes.

Summary

Issues Involved:
1. Adjustment of Rs. 30,08,43,288 to the income of the appellant on account of the alleged difference in the arm's length price of international transactions.
2. Disallowance of miscellaneous income amounting to Rs. 30,76,102 by considering it as income from other sources.
3. Ad-hoc disallowance of interest expenses amounting to Rs. 1,58,70,000.
4. Levying of interest under Section 234B and Section 234C of the Income-tax Act.

Issue-wise Detailed Analysis:

1. Adjustment of Rs. 30,08,43,288 to the Income of the Appellant:
The appellant contested the adjustment made by the Assessing Officer (AO) on account of the difference in Arm's Length Price (ALP) amounting to Rs. 30,08,43,288. The appellant argued that the issue was covered in their favor by earlier orders of the ITAT in their own case, with the latest order dated 28.07.2014 for the assessment year 2009-10. The Tribunal had previously held that the appellant was justified in undertaking internal benchmarking analysis on a standalone basis by placing on record the working of operating profit margin from international transactions with AEs and unrelated parties. The Tribunal directed the AO/TPO to determine the ALP by making an internal comparison of profitability from international transactions with AEs and unrelated parties after allocating respective revenues and expenses to both segments. The current facts being identical to those in the earlier years, the Tribunal set aside the issue to the file of the AO/TPO to be decided as directed for the assessment year 2009-10.

2. Disallowance of Miscellaneous Income Amounting to Rs. 30,76,102:
The AO treated the notice pay earned by the appellant as income from other sources and held that it did not form part of business income for the claim of exemption under Section 10A of the Income Tax Act. The appellant argued that this issue was covered by earlier orders of the Tribunal in their own case, where the Tribunal had held that the amount received towards notice period pay was to be treated as income derived from the eligible undertaking. The Tribunal, following its earlier orders, decided this issue in favor of the appellant, holding that the amount received towards notice period pay should be treated as income derived from the eligible undertaking and allowed the deduction under Section 10A accordingly.

3. Ad-hoc Disallowance of Interest Expenses Amounting to Rs. 1,58,70,000:
The AO disallowed interest expenses on the grounds that the interest paid on short-term loans, which were invested in the acquisition of fixed assets, should be capitalized along with the fixed assets. The appellant argued that this issue was also covered by the Tribunal's order dated 28.07.2014 for the assessment year 2009-10. The Tribunal noted that the AO had not undertaken the necessary exercise to find out the date on which the fund was borrowed for the acquisition of assets and the date on which the assets were put to use. The Tribunal remanded the issue back to the file of the AO with directions to determine these dates and capitalize the interest incurred for the period between the date of borrowing and the date the asset was put to use, and allow interest deduction from the date the asset was put to use.

4. Levying of Interest under Section 234B and Section 234C:
The appellant raised a general ground against the levying of interest under Section 234B and Section 234C of the Income Tax Act. The Tribunal did not provide specific comments on this ground as it was general in nature.

Conclusion:
The appeal of the appellant was partly allowed for statistical purposes, with specific issues being remanded back to the file of the AO/TPO for fresh adjudication in accordance with the directions provided in the Tribunal's earlier orders. The Tribunal consistently followed the principle of internal benchmarking for determining the ALP and treated notice period pay as income derived from the eligible undertaking for the purpose of Section 10A deduction.