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2018 (6) TMI 285 - AT - Income TaxTPA - Rejection of returned income - selection of comparables - application of Safe Harbour Rules - Held that - The safe harbour rule are not arm s length prices, but in the nature of presumptive taxation, which generally enthuse taxpayers to opt for the same, as a compromise for not having to be involved in protracted litigation - thus CIT(A) rejected the plea of the assessee for consideration of safe harbour rules and dismissed the same. Method of determining ALP - Held that - The principle of TNMM class for functional compatibility and not product compatibility - assessee performed the search on Non electrical Machinery and Base Metals and HCL also belonged to the same category of industry - It did not matter whether it manufactured steel or copper - such difference in product would not result in significant divergence in profitability - further TP provisions do not bar from taking Government Company as comparable. Computation of Arm s Length Price - Held that - The borrower was situated in Thailand and there was an economic turmoil in the region which affected borrower s capacity to borrow - this would have increased the credit worthiness and credit rating of the AE in Thailand, enabling to borrow from Siam Bank at a lesser rate - therefore, charging of premium over and above the rate of interest charged by Siam Bank to its AE in Thailand, is justified. Corporate guarantee provided to its AEs - Held that - Following the judgement in case of BARTRONICS INDIA LTD. VERSUS DY. COMMISSIONER OF INCOME TAX, CIRCLE 1 (2) , HYDERABAD. 2017 (9) TMI 1649 - ITAT HYDERABAD it is held that corporate guarantee is not considered as an international transaction. Disallowance of 5% of general expenses - Held that - CIT(A) found that that the expenses under the head General Expenses under the head Miscellaneous Expenses was booked at ₹ 4,10,64,429/- and not the amount of ₹ 6,61,00,053/- as taken by the AO - thus he disallowed 5% of the expenses booked under the head general expenses - we are in agreement with the observations made by the CIT(A) in this regard. Non-deduction of TDS for payment made u/s 40(a)(ia) - Held that - Assessee had neither made an application before the Assessing Officer u/s.195(2) nor had filed the requisite details as mandated u/s.195(6), therefore, in our opinion, the CIT(A) rightly upheld the action of AO - thus appeal of the assessee is dismissed. Disallowance of foreign travel expenses - Held that - We restrict the disallowance on foreign travel expenses to 10% as against 15% made by the AO and confirmed by the CIT(A). Accordingly, this ground of appeal of the assessee is partly allowed. Deduction u/s 80IA - Held that - where any goods manufactured by the eligible undertaking is transferred to the other undertakings of the same assessee then for the purpose of computing the profits and gains of the eligible undertaking which would be allowable as deduction u/s.80IA of the Act. Accordingly, we remit the disputed issue to the file of AO, who shall examine and verify the issue afresh after providing adequate opportunity of hearing to the assessee Nature of income - amount paid by the assessee to UM Cables - Held that - A trading receipt may contain a fraction of sum as taxable income, but in other cases such as interest, commission, transfer of rights of patents, goodwill or drawings for plant and machinery and such other transactions, it may contain large sum as taxable income under the provisions of the Act. It cannot be said that the amount paid by the assessee to UM Cables was in the nature of income in its hands.
Issues Involved:
1. Upward adjustment of income by the Assessing Officer (AO) and Transfer Pricing Officer (TPO). 2. Adjustment on account of international transactions with Associated Enterprises (AEs). 3. Adjustment of arm's length rate of interest on loan given to AE in Thailand. 4. Corporate guarantee provided to AEs in the USA and Singapore. 5. Ad-hoc disallowance of 5% of general expenses. 6. Disallowance of legal fees paid to M/s Hammonds, Belgium under Section 40(a)(i) of the Act. 7. Disallowance of 15% of foreign expenses. 8. Market value adopted for computing claim under Section 80IA of the Act. 9. Selection of Hindustan Copper Limited (HCL) as a comparable company. 10. Deletion of adjustment suggested by the TPO for discount on early payment. 11. Deletion of addition under Section 40(a)(ia) for non-deduction of TDS. 12. Deletion of notional interest on loans and investments. Detailed Analysis: 1. Upward Adjustment of Income by AO and TPO: The AO and TPO made an upward adjustment of ?46,74,10,794/- to the income of the assessee. The CIT(A) upheld an adjustment of ?40,32,34,839/- for international transactions with AEs. The TPO disregarded the Transfer Pricing analysis submitted by the assessee and conducted a fresh search for comparables. 2. Adjustment on Account of International Transactions with AEs: The TPO made adjustments regarding the sale of goods to AEs, including inappropriate filters and factual/computational errors in comparables. The CIT(A) upheld the adjustments, rejecting the corroborative economic analysis performed by the assessee. 3. Adjustment of Arm's Length Rate of Interest on Loan Given to AE in Thailand: The TPO increased the arm's length rate of interest from 7.5% to 15.5%, making an adjustment of ?49,51,777/-. The CIT(A) upheld this adjustment, noting the differences in terms and conditions of the transactions compared using the CUP method. 4. Corporate Guarantee Provided to AEs in the USA and Singapore: The CIT(A) held that the issuance of a corporate guarantee is an international transaction under section 92B of the Act. The CIT(A) dismissed the assessee's claim that it should be treated as a shareholder service, upholding the TPO’s adjustment of ?87,79,502/-. 5. Ad-Hoc Disallowance of 5% of General Expenses: The AO disallowed 5% of general expenses amounting to ?20,53,221/-. The CIT(A) upheld the disallowance, noting that similar disallowances had been upheld in previous assessment years. 6. Disallowance of Legal Fees Paid to M/s Hammonds, Belgium: The AO disallowed legal fees under Section 40(a)(i) for non-deduction of taxes at source. The CIT(A) upheld the disallowance, noting the assessee's failure to make an application under Section 195(2) or file requisite details under Section 195(6). 7. Disallowance of 15% of Foreign Expenses: The AO disallowed 15% of foreign travel expenses on an ad-hoc basis. The CIT(A) upheld the disallowance, but the Tribunal restricted it to 10%. 8. Market Value Adopted for Computing Claim Under Section 80IA: The AO adopted a market value of ?3.90 per unit for computing the claim under Section 80IA. The CIT(A) upheld this valuation. The Tribunal remitted the issue back to the AO for fresh examination. 9. Selection of Hindustan Copper Limited (HCL) as a Comparable Company: The CIT(A) upheld the selection of HCL as a comparable company, noting that both copper and steel fall under the "Base Metal" category and can be considered comparable. 10. Deletion of Adjustment Suggested by the TPO for Discount on Early Payment: The CIT(A) deleted the adjustment of ?5,89,506/- suggested by the TPO, accepting the assessee's policy of charging interest on delayed receivables and granting discounts for early payments. 11. Deletion of Addition Under Section 40(a)(ia) for Non-Deduction of TDS: The CIT(A) deleted the addition under Section 40(a)(ia) for non-deduction of TDS on payments to UM Cables, holding that the payments were reimbursements and not subject to TDS. 12. Deletion of Notional Interest on Loans and Investments: The CIT(A) deleted the notional interest on loans and investments, relying on judicial precedents that if there are sufficient interest-free funds, the presumption is that investments are made out of these funds. Conclusion: The Tribunal partly allowed the appeal of the assessee for statistical purposes and dismissed the appeal of the Revenue. The Tribunal upheld the findings of the CIT(A) on various grounds, including the deletion of adjustments and disallowances made by the AO and TPO. The Tribunal remitted the issue of market value for computing the claim under Section 80IA back to the AO for fresh examination.
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