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2020 (1) TMI 1031 - AT - Income TaxTP Adjustment - comparable selection - HELD THAT - Referring to Engineering services rendered by the assessee to its AE companies functionally dissimilar with that of assessee need to be deselected from final list. ALP adjustment in relation to Reimbursement of management fees expenses - HELD THAT - As decided in ow case 2020 (1) TMI 1008 - ITAT AHMEDABAD Section 92C prescribes the manner of determination of the arm's length price and sub-section (1) thereof specifically lays down various methods by which the determination of arm's length price has to be made. It is quite clear that there is no adhocism permissible in the manner of computation of arm's length price of an international transaction, whereas the action of the Transfer Pricing Officer in considering the arm's length price @10% of the expenses recovered is not only adhoc but it also does not conform to any of the methods prescribed in section 92C(1) of the Act. On this count itself, the action of the TPO is suspect, even if, it is to be understood that the impugned transaction was an international transaction requiring computation of income having regard to its arm's length price. TPO has erred by making the disallowance on ad hoc basis. Arm length price of the insurance expenses claimed by the assessee has disallowed such expenses by observing that the same is prohibited under the insurance Act - HELD THAT - There is no power available to the TPO to verify the allowability of any business expense. As such the role of the TPO is limited to the extent of determining the arm length price of the transaction carried out by the assessee with the AE. However in the case on hand, the TPO without determining the arm length price of the insurance expenses claimed by the assessee has disallowed such expenses by observing that the same is prohibited under the insurance that. Admittedly, such expenses are prohibited under the insurance Act. But the controversy arises whether such expenses can be disallowed by the TPO in the given facts and circumstances. In this regard we note that the role of the TPO is to determine the arm length price of the transactions of insurance premium as the impugned payment was prohibited, therefore the TPO has made the disallowance after considering the fact that there was no benefit derived by the assessee out of such expenses. AR also before us has not brought anything on record suggesting that the assessee has derived any benefit against such expenses. Thus, we feel that the assessee fails in the benefit test for such expenses. Hence, we do not find any reason to interfere in the order of the authorities below. Thus the ground of appeal of the assessee is dismissed. Denying the benefit of range ( /-5%) - HELD THAT - As decided in own case 2020 (1) TMI 1008 - ITAT AHMEDABAD assessee made a specific ground of appeal for the benefit of adjustment of 5% to be given while determining the Arm Length Price, the ld. counsel for the assessee has not been point out as to how and in what manner, the order of ld. DRP in rejecting this claim of the assessee is improper and unjustified. Since both the parties have not been able to controvert the findings recorded by the ld DRP or point out any material to enable us to take a view other than view taken by the ld. DRP, we do not want to interfere in the order of the ld. DRP. Benefit to the assessee for the deduction under section 10B allowed.
Issues Involved:
1. Arm's Length Price (ALP) adjustments for international transactions. 2. Reimbursement of management fee expenses. 3. Reimbursement of insurance premium. 4. Benefit of range (+/- 5%) under proviso to Section 92C(2) of the Income Tax Act. 5. Deduction under Section 10B of the Income Tax Act. Detailed Analysis: 1. Arm's Length Price (ALP) Adjustments for International Transactions: The primary issue raised by the assessee involved the confirmation of an ALP adjustment of ?1,91,90,781 related to engineering design services. The Tribunal noted that similar issues were raised in the assessee's case for the assessment year 2007-08. The Tribunal reiterated its previous decision, stating that certain comparables, such as Rolta India Ltd., should be rejected as they were not suitable for comparison due to their consolidated financial statements including international operations. Similarly, Powersoft Global Solutions Ltd. was excluded as it was not a service company using CAD/CAM. On the other hand, Ace Software Exports Ltd. was included as a comparable, following the precedent from the previous year. 2. Reimbursement of Management Fee Expenses: The assessee contested the ALP adjustment of ?17,15,967 related to the reimbursement of management fee expenses. The Tribunal referenced its earlier decision, which held that the Transfer Pricing Officer (TPO) does not have the authority to make ad hoc disallowances. The Tribunal emphasized that the TPO's role is limited to determining the arm's length price of international transactions, not to question the allowability of business expenses. Consequently, the Tribunal directed the deletion of the addition. 3. Reimbursement of Insurance Premium: The TPO disallowed ?6,97,049 claimed by the assessee for reimbursement of insurance premium, stating that such payments to foreign companies are prohibited under the Insurance Act. The Tribunal agreed that the TPO overstepped his jurisdiction by disallowing the expense without determining its arm's length price. However, the Tribunal upheld the disallowance, noting that the assessee did not demonstrate any benefit derived from the expense, thus failing the benefit test. 4. Benefit of Range (+/- 5%) Under Proviso to Section 92C(2) of the Income Tax Act: The assessee sought the benefit of the +/- 5% range while determining the arm's length price. The Tribunal, following its earlier decision, dismissed the claim, stating that neither party provided sufficient material to challenge the findings of the Dispute Resolution Panel (DRP). The Tribunal upheld the DRP's decision, denying the benefit of the range adjustment. 5. Deduction Under Section 10B of the Income Tax Act: The Revenue appealed against the CIT(A)'s decision to allow a deduction of ?14,63,59,948 under Section 10B for the Chennai unit. The Tribunal noted that this issue had been previously decided in favor of the assessee. It was established that the Chennai unit was not formed by splitting up or reconstructing an existing business and that the machinery in question was not an outright purchase but taken on lease. The Tribunal confirmed the CIT(A)'s order, allowing the deduction under Section 10B. Conclusion: The Tribunal partly allowed the assessee's appeal by directing the exclusion of unsuitable comparables and deleting the ad hoc disallowance of management fee expenses. However, it upheld the disallowance of the insurance premium reimbursement and denied the benefit of the +/- 5% range adjustment. The Tribunal dismissed the Revenue's appeal, affirming the CIT(A)'s decision to allow the Section 10B deduction for the Chennai unit.
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