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2023 (3) TMI 189 - AT - Income TaxTP Adjustment - Adjustment done to manufacturing segment - Non-consideration of Internal TNMM Analysis undertaken by the appellant - HELD THAT - As decided in assessee s own case 2022 (2) TMI 1351 - ITAT BANGALORE direct the Ld.TPO to carry out detailed analysis of the international transactions using TNMM as MAM, based on the materials filed by assessee related to internal comparables. In the event the details filed are satisfactory, the determination must be confined to the internal comparables so filed by assessee. In the event, the details filed by assessee is not verifiable or not in accordance with law, the Ld.AO/TPO is open to carry out analysis in accordance with law. Thus we send back this issue to the file of AO/TPO for de-novo consideration in the above terms and decide the issue as per law. Needless to say reasonable opportunity of hearing to be given to the assessee and the assessee is directed not to seek unnecessary adjournments for early disposal of the case. Delayed trade receivables from AEs - Assessee contested interest on delayed receivables should not be considered as international transactions and notional interest computed by the AO/TPO/DDRP which is libor 450 basis points, therefore the adjustment should not be made for the interest on delayed receivables - HELD THAT - We reject the plea of the assessee that the interest on receivable is not an international transactions after relying on the judgments as cited by the DRP in his order and the order of the coordinate bench in the case of Outsource partners International (P.) Ltd.. 2022 (6) TMI 1361 - ITAT BANGALORE We also uphold that the interest on delayed receivables is an international transactions, accordingly the adjustment should be made on those receivables which were not realized within the agreements period.. During the course of hearing, it was brought into the notice of both the parties that in respect of rate for calculation of interest is to be considered by the AO/TPO/DRP at libor 350 basis points considering the nature of business and location of the receivables with the consent of AR. Accordingly this issue is also remitted back to the file of the AO. Deduction u/s 35(2AB) - weighted average deduction - HELD THAT - ITR was filed on the basis of certificate issued by the auditors. The form No.3CL was issued in the month of December 2019 and the DSIR certified sum of Rs.1104.60 lakhs was admissible for deduction. Accordingly the difference was not approved by the DSIR which relates to certain miscellaneous revenue expenditure incurred in connection with research and development work, therefore, the AO disallowed the weighted average deduction and added into the total income of the assessee - we are remitting this issue back to the file of the AO for verification of the nature of expenditure incurred by the assessee in terms of sec.37(1) of the Act, if the AO finds that these expenditures are covered u/s 37(1), he may allow the actual expenditure incurred by the assessee which is not part of the weighted average deduction allowed as per sec.35(2AB) of the Act. The assessee had undertaken during the course of hearing that assessee will be able to prove with the necessary documents for substantiating his case. Accordingly, the assessee is directed to produce necessary documents. This issue is allowed for statistical purposes.
Issues Involved:
1. Non-consideration of the internal TNMM analysis. 2. Rejection of comparables by TPO and DRP. 3. Adjustment for interest on delayed receivables. 4. Denial of deduction of R&D expenditure under section 35(1)(i) or 37(1). 5. Computation of interest under sections 234A and 234B. Issue-wise Detailed Analysis: 1. Non-consideration of Internal TNMM Analysis: The appellant argued that the Transfer Pricing Officer (TPO) and Dispute Resolution Panel (DRP) erred by not considering the internal Transactional Net Margin Method (TNMM) analysis. The appellant compared the net operating margin from Associated Enterprises (AEs) with third-party customers, which showed a higher margin for AE transactions. The DRP directed the TPO to verify whether the segmental financials submitted were audited. However, the TPO did not follow this direction. The appellant cited previous judgments, including their own case for AY 2013-14 and AY 2014-15, where internal comparables were preferred over external ones. The tribunal directed the TPO to carry out a detailed analysis using internal comparables if sufficient data is available. 2. Rejection of Comparables by TPO and DRP: The appellant contested the rejection of several comparables by the TPO and DRP on various grounds, such as functional differences and turnover filters. The tribunal noted that the TPO had rejected the internal TNMM analysis and instead used external comparables from the pharmaceutical and chemical industries, which the appellant argued were not appropriate. The tribunal remanded the issue back to the TPO for de novo consideration, directing the TPO to use internal comparables if sufficient data is available. 3. Adjustment for Interest on Delayed Receivables: The TPO imputed interest on delayed receivables from AEs, treating them as unsecured loans and using LIBOR plus 450 basis points for computation. The appellant argued that outstanding receivables should not be considered as international transactions and cited various judicial precedents to support their claim. The tribunal upheld that interest on receivables is a separate international transaction but directed the TPO to consider a lower rate of LIBOR plus 350 basis points for computation, remanding the issue back to the TPO. 4. Denial of Deduction of R&D Expenditure: The appellant claimed a deduction for R&D expenditure under section 35(2AB), but the AO disallowed Rs. 3,86,332/- not approved by the DSIR. The appellant argued that this amount should be allowed under sections 35(1)(i) or 37(1) as it was incurred wholly and exclusively for business purposes. The tribunal remanded the issue back to the AO for verification of the nature of the expenditure and directed the AO to allow the actual expenditure if it qualifies under section 37(1). 5. Computation of Interest under Sections 234A and 234B: The appellant contested the computation of interest under sections 234A and 234B, arguing that there was no delay in furnishing the return of income. The tribunal did not provide a specific ruling on this issue but noted that it would be consequential to the main issues being remanded back to the AO/TPO. Conclusion: The tribunal remanded the main issues back to the TPO and AO for de novo consideration, directing them to use internal comparables for TNMM analysis and to verify the nature of R&D expenditure. The tribunal upheld the adjustment for interest on delayed receivables but directed a lower rate for computation. The issues related to the computation of interest under sections 234A and 234B were noted as consequential. The appeal was partly allowed for statistical purposes.
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