2015 (9) TMI 325 - AT - Income Tax

Transfer pricing adjustment - CIT(A) deleted the addition - Held that - For A.Y.04-05, similar issue has been decided by ITAT in favour of assessee following case of associate concern viz. M/s Dishman Pharmaceuticals & Chemicals Ltd. In view of above, CIT(A) was justified to direct the Assessing Officer to delete the adjustment made in assessment order in respect of Arm s Length Price because PBIT of 17.13% is very much comparable and better than the industry average of 12.87%. Even margins with AE at 16.66% are better than overall PBIT. TPO was not justified in applying comparable Uncontrolled Price method and compare the purchase of 72,000kgs. Worth ₹ 5,25,69,297/- made from Germany with meager quantity of 2,000 kgs. Worth of ₹ 10,40,000/- made from Indian Party. Domestic and international rates cannot be compared. Fundamental requirement, in any of the method selected, is selection of comparables for benchmarking international transaction. Assessing Officer ought to have taken into consideration FAR analysis and should also take into account various factors such as, quality, quantity, pricing factors, government policy and transportation cost before comparing controlled transaction with uncontrolled transaction. Assessing Officer ought to have evaluated all the methods of transfer pricing, however, he selected directly CUP method being easy in apply. Assessing Officer has taken price from Database without pointing out any comparable cases. The industry average is not a comparable instance as held by the Special Bench in case of Aztec Software & Technology Services Ltd. Vs. ACIT (2007 (7) TMI 50 - ITAT BANGALORE). In view of above decision, order of CIT(A) on the issue is upheld. - Decided against revenue. Additions on account of deficit/excess consumption of raw materials - CIT(A) deleted the addition - Held that - As going through the order of ITAT for A.Y. 2002-03, wherein issue has been decided in favour of assessee wherein the appellant had shown less consumption of certain input raw material of ₹ 63,04,605/- and the only inference is the same have been purchased from outside the books of account and the same is liable to be added as the investment from undisclosed sources and the appellant has shown more consumption of certain items to the extent of ₹ 1,32,57,449/- which has not been consumed and therefore, the purchased to this extent have been inflated to reduce the profit of the company. Thus the total addition which is liable to be made is ₹ 1,95,62,054/-. After considering the addition of ₹ 89,10,074/-, the income which is to be further enhanced is ₹ 1,06,51,333/-. Therefore, the AO is directed to enhance the income by ₹ 1,06,51,980/- Accordingly this ground is dismissed with direction to enhance the income by ₹ 1,06,51,980/- - Decided against revenue Interest expenditure disallowed u/s 36(I)(iii) - CIT(A) allowed claim - Held that - CIT(A) granted relief to assessee by observing that issue is directly covered by the decision of S. A. Builders 2006 (12) TMI 82 - SUPREME COURT wherein it has been held that money advance to sister concern can be considered as out of commercial expediency. In present case, money has been advanced to sister concern out of commercial expediency and therefore, following the decision of S. A. Builders (supra), no disallowance is called for. In any case, assesse has substantial interest free funds at its disposal so as to justify the advance to Associate concern as per accounts, obtaining balance of M/s. Dishman Pharmaceutical & Chemicals Ltd. was outstanding at ₹ 4 crore against which paid up capital and surplus of assesse was at ₹ 1,50,00,000/- and ₹ 6,98,59,670/- respectively. Further during year under consideration, assesse has given sum of ₹ 2,70,00,000/- to M/s. Dishman Pharmaceutical & Chemicals Ltd. against which they have returned amount of ₹ 3,85,90,000/- and therefore, on contrary, amount has been repaid during year under consideration. In view of this, disallowance was correctly deleted. - Decided against revenue Deemed dividend u/s 2(22)(e) - CIT(A) delted the addition - Held that - As assessee and M/s Dishman Pharmaceuticals & Chemicals Ltd, both are engaged in business of manufacturing bulk drugs and chemicals. One of the condition for invoking provisions of Section 2(22)(e) of the Act is that money should be paid either by way of loans or advances. CIT(A) has rightly observed that these amounts are in nature of Inter Corporate Deposits (ICD), which has been given one corporate to another corporate and therefore, no loan or advance as contemplated u/s.2(22)(e) of the Act. CIT(A) from the ledger accounts observed that such accounts are in nature of deposits. Assessing Officer failed to appreciate that term deposit cannot means loan or advance . Accordingly, CIT(A) was justified in observing that Inter Corporate Deposits (ICD) being different from loans or advances, will not come under the purview of deemed dividend u/s.2(22)(e). See Bombay Oil Industries Ltd. vs. DCIT 2009 (1) TMI 519 - ITAT MUMBAI - Decided against revenue

Summary

Issues Involved:

1. Adjustment of Arm's Length Price (ALP)
2. Addition on account of deficit/excess consumption of raw materials
3. Disallowance of interest expenditure
4. Deemed dividend and tax deduction at source

Issue-wise Detailed Analysis:

1. Adjustment of Arm's Length Price (ALP):

The primary issue in the Revenue's appeal pertained to the addition of Rs. 1,59,51,605/- on account of adjustments in respect of ALP made under section 92CA(6) of the Income Tax Act. The assessee, engaged in the manufacturing and trading of chemicals, had sold products to two associate enterprises. The Transfer Pricing Officer (TPO) rejected the assessee's method of determining ALP using the Transactional Net Margin Method (TNMM) and instead adopted the Comparable Uncontrolled Price (CUP) method. The CIT(A) granted relief to the assessee, following the ITAT's previous decision in the assessee's own case, which upheld the TNMM method as the most appropriate. The ITAT reaffirmed this decision, noting that the TNMM method was correctly applied by the assessee, and the TPO's application of the CUP method was unjustified due to the lack of comparable transactions.

2. Addition on account of deficit/excess consumption of raw materials:

The second issue involved the addition of Rs. 2,52,05,652/- for deficit/excess consumption of raw materials. The Assessing Officer (AO) made this addition based on the difference between actual consumption and the standard consumption prescribed under Exim Input and Output Norms. The CIT(A) deleted this addition, referencing the ITAT's decision in the assessee's case for A.Y. 2002-03, which held that the standard input-output ratio should not be strictly applied. The ITAT upheld the CIT(A)'s decision, noting that the assessee's actual consumption was in line with the prescribed norms and that the AO's reliance on the standard input-output ratio without considering the specific circumstances of the assessee's operations was inappropriate.

3. Disallowance of interest expenditure:

The third issue concerned the disallowance of Rs. 54,13,383/- of interest expenditure under section 36(1)(iii) of the Act. The AO disallowed this expenditure, arguing that the assessee had given an interest-free deposit to its parent company, which constituted a diversion of borrowed funds. The CIT(A) granted relief to the assessee, citing the Supreme Court's decision in S.A. Builders, which held that advances to sister concerns for commercial expediency should not be disallowed. The CIT(A) also noted that the assessee had substantial interest-free funds to justify the advance. The ITAT upheld the CIT(A)'s decision, confirming that the interest-free advance was made out of commercial expediency and that the assessee had sufficient interest-free funds.

4. Deemed dividend and tax deduction at source:

The final issue involved the deletion of orders passed under sections 201(1) and 201(1A) of the Act for deemed dividend and failure to deduct tax at source. The AO contended that the assessee's transactions with its sister concern constituted loans or advances subject to deemed dividend provisions under section 2(22)(e). The CIT(A) disagreed, finding that the transactions were in the nature of Inter Corporate Deposits (ICD), not loans or advances. The CIT(A) observed that the transactions were part of a current adjustment accommodation account, characterized by mutual fund transfers rather than loans or advances. The ITAT upheld the CIT(A)'s decision, reiterating that ICDs do not fall under the purview of deemed dividend and thus do not require tax deduction at source.

Conclusion:

The ITAT dismissed the Revenue's appeals for all years and the assessee's appeal for one year, upholding the CIT(A)'s decisions on all issues. The ITAT confirmed that the TNMM method was appropriate for determining ALP, the addition for raw material consumption was unjustified, the interest expenditure disallowance was incorrect, and the transactions with the sister concern did not constitute loans or advances subject to deemed dividend provisions.