2015 (11) TMI 411 - HC - Income Tax

Disallowance of Export Promotion Expenses - as per ITAT foreign travelling expenses incurred by the President, Director and the Executive Director were not incurred wholly and exclusively for the purpose of the business - Held that - Before the authorities including the Tribunal the deduction was sought on the aforesaid travel expenses only on the ground that these expenses have been incurred for the purpose of meeting its foreign buyers. Undisputedly, it has only one buyer who is situated at Singapore. No one cannot dispute the proposition that it is for the assessee concerned to decide as to what expenses is necessary for its business and it is not for the Assessing officer to disallow the expenses which the assessee feels is necessary for its business. In the present facts, the case of the assessee before the Tribunal is that those expenses are necessary to meet the foreign buyers. In this view of the matter, the view taken by the Authorities under the Act to restrict the expenses of travel only to Singapore visit where the foreign buyer of the appellant is situated, cannot be said to be perverse. It is a possible view. The fact that the assessee s expenses on travel have been allowed for subsequent years or have been set aside by the Tribunal in the earlier Assessment Years or subsequent Assessment Years, would not by itself govern the issue. It all depend upon the claim made for deduction and the contention of the assessee with regard to what was that expenditure incurred in that particular year. Transfer pricing adjustment - denial of comparable - Held that - We find that the three comparables which were relied upon by the appellant-assessee before the CIT(A) had not been examined by CIT(A) on merits of its applicability for the subject Assessment Year nor did the TPO, as same was not put before it for the subject Assessment Year. No fault can be found with the order of the Tribunal to the extent it holds that merely because a comparable has been used in the subsequent assessment year for determining the ALP, it would not ispo facto apply to determine the ALP in the subsequent Assessment Year. The issue be restored to TPO to determine whether or not the three comparables companies which have admittedly have been accepted as comparables for subsequent Assessment year can be considered as comparables for the subject assessment year. If the answer is in the affirmative by the TPO, then necessary adjustment would be needed to be done so as to make an appropriate comparison between the sale made by the appellant-assessee to its A.E. and the independent sales made of three comparables, alongwith the four comparables already on record. - Decided in favour of the appellant-assessee

Summary

Issues:
1. Disallowance of 'Export Promotion Expenses'
2. Applicability of comparables for Transfer Pricing determination

Issue 1: Disallowance of 'Export Promotion Expenses'

The appellant-assessee, a 100% Export Oriented Unit, sought a deduction for foreign travel expenses incurred by its President and Directors for marketing and selling goods. The Assessing Officer disallowed a significant portion of the expenses, allowing only the expenses related to the visit to Singapore. The Commissioner of Income Tax (Appeals) upheld this decision, stating that the appellant's responsibility was limited to supplying products to its sole customer. The Tribunal also upheld this decision, allowing expenses only for travel related to meeting the foreign buyer in Singapore. The appellant argued that the expenses were necessary for business as per the agreement terms and commercial expediency, citing relevant legal precedents. The High Court found that the appellant's business model was more of a jobworker manufacturer, converting raw materials to finished products for its Associated Enterprise. The Court held that the Assessing Officer's decision to restrict expenses to Singapore visit was not unreasonable, as the appellant's claim was based on meeting foreign buyers. The Court concluded that the appellant's claim did not raise any substantial question of law and hence was not admitted for consideration.

Issue 2: Applicability of comparables for Transfer Pricing determination

The appellant-assessee submitted three additional comparables to determine the arm's length price (ALP), arguing that these were accepted for subsequent assessment years. The CIT(A) sought a remand report from the Transfer Pricing Officer (TPO) to examine the applicability of these comparables for the subject assessment year. The TPO confirmed that the comparables were used for subsequent years. However, the CIT(A) rejected all three comparables on different grounds. The Revenue appealed to the Tribunal, which rejected the comparables and allowed the Revenue's appeal. The High Court acknowledged that the mere acceptance of comparables for subsequent years does not automatically apply to the subject assessment year. However, the Court found that the comparables submitted by the appellant were not examined on their merits for the subject assessment year. The Court held that the issue should have been restored to the TPO to consider the applicability of the comparables for the subject assessment year to prevent prejudice to the assessee. Consequently, the Court answered the second question in favor of the appellant-assessee and against the Revenue, directing the issue to be reconsidered by the TPO for a fair comparison of sales data.

In conclusion, the High Court addressed the issues of disallowance of 'Export Promotion Expenses' and the applicability of comparables for Transfer Pricing determination in a detailed manner, providing a comprehensive analysis of the legal arguments and precedents involved in each issue.