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2021 (7) TMI 948 - AT - Income TaxTP adjustment - inclusion of the assessee s DEPB incentives in rule 10(B)(1)(a)(ii) of Income Tax Rules as an adjustment in the Comparable Un-controlled Price CUP method for the purpose of arriving at arm s length price ALP under the provisions of the Act - HELD THAT - The assessee s argument seeking to include DEPB as an adjustment for ALP computation because it is in the nature of an operating income, ought not be accepted as it tends to have an overriding effect on application of chapter-X of the Act as per stricter interpretation rule. We therefore accept the Revenue s instant former substantive grievance. Corporate guarantee adjustment - HELD THAT - As it come on record that the assessee had itself recorded comparable guarantee commission @8.75% i.e. much more than that that decided by the tribunal - We therefore adopt judicial consistency and decline Revenue s instant latter substantive ground for this precise reason alone.
Issues Involved:
1. Inclusion of DEPB incentives in comparability analysis for arriving at arm's length price (ALP). 2. Deletion of adjustment on corporate guarantee fees. Detailed Analysis: Issue 1: Inclusion of DEPB Incentives in Comparability Analysis The primary issue revolves around whether DEPB (Duty Entitlement Passbook) incentives should be considered for comparability analysis under Rule 10B(1)(a)(ii) of the Income Tax Rules for determining the arm's length price (ALP). The Revenue argued that DEPB incentives are export incentives provided by the Government and are not direct profits derived from business activities. Therefore, including them in comparability analysis would shift incentives to foreign territories, contradicting the objectives of Transfer Pricing Law. The assessee, a company engaged in manufacturing and other activities, included DEPB and FPS (Focus Product Scheme) benefits as adjustments under Rule 10B(1)(a)(ii) in its international transactions with its Associated Enterprises (AEs). The Transfer Pricing Officer (TPO) rejected this inclusion, citing that such export incentives are unique to India and cannot be transferred to entities outside the country. The CIT(A) directed the Assessing Officer to verify and consider the DEPB benefits for comparability analysis, referencing judicial precedents like CIT vs. Welspun Zucchi Textiles Limited, which supported the inclusion of DEPB benefits in operating profits for comparability analysis. Upon review, the tribunal disagreed with the CIT(A) and held that DEPB benefits should not be included in the comparability analysis for ALP computation. The tribunal emphasized that Chapter-X of the Income Tax Act, which deals with avoidance of tax, requires strict interpretation. The tribunal referenced the Supreme Court's decision in Commissioner of Customs vs. Dilip Kumar, which mandates strict construction of taxing and exemption provisions. The tribunal concluded that including DEPB benefits would violate the arm's length price definition and the legislative scheme of Chapter-X. Issue 2: Deletion of Adjustment on Corporate Guarantee Fees The second issue pertains to the deletion of an adjustment amounting to ?3,51,06,335/- on corporate guarantee fees by the CIT(A). The Assessing Officer had made an adjustment based on the TPO's determination that the corporate guarantee commission should be 2%, which was higher than what the assessee charged. The CIT(A) deleted this adjustment, noting that the assessee had charged a reasonable commission rate of 0.875%, which was consistent with tribunal decisions in similar cases. The tribunal upheld the CIT(A)'s decision, acknowledging that the assessee's charged rate was reasonable and aligned with judicial precedents. Therefore, the Revenue's appeal on this ground was dismissed. Conclusion: The tribunal partly allowed the Revenue's appeal. It upheld the Revenue's position on the exclusion of DEPB incentives from the comparability analysis for ALP computation. However, it dismissed the Revenue's appeal regarding the adjustment on corporate guarantee fees, maintaining the CIT(A)'s deletion of the adjustment.
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