2013 (7) TMI 441 - AT - Income Tax

Export promotion expenses disallowed - assessee is a 100% export oriented unit engaged in manufacturing (assembly and test) of Switch Mode Power Supplies (SMPS) used in computer industry and information technology application - Held that - When the assessee has to manufacture the product as per the specification provided by the QCS then the only role of the assessee to participate in the joint inspection of the raw material to be supplied by the AE. When the entire finished products was to be supplied to the AE and the assessee is a captive supplier of finished goods to the AE the visit undertaken by the directors of the assessee cannot be said to be in connection with wholly and exclusively for the business purpose of the assessee. Though the assessee has produced the details to show that the assessee is in touch with the ultimate buyer of the products and discuss the requirement and specification of the buyer as it is mentioned in the e-mail exchange between the assessee and the buyers however the foreign visits for the purpose of meeting with the buyers of the assessee s AE/QCS have no direct nexus with the manufacturing activity of the assessee. Against assessee. Transfer Pricing adjustment made by the TPO/AO - CIT(A) included 3 new comparables and thereafter arithmetic means worked out at 5.42% - Held that - The third comparable included by the CIT(A) is Alpha Transformers Ltd which itself shows that the said company is functionally different from the assessee as in the business of transformers which cannot be said to be in the same business as of the assessee M/s BCC Fuba India Ltd which is showing persisting loss from year after year and M/s ECE Industries Ltd as evident from the P&L account that an extra ordinary item of income has been shown on account of sale of business thus all the three cannot be considered as a good comparables of the assessee. Accordingly these comparables are excluded and therefore the arithmetic means computed by the TPO is restored. Against assessee. CIT(A) allowed (-)5% deduction to arrive a Arm s Length Price by invoking the 2nd proviso to section 92C - Held that - On principle assessee has not disputed the legal proposition that the benefit of /- 5% as provided under the proviso to sec. 92C(2) is not standard deduction. Even other wise after the retrospective amendment in sec 92C(2A) whereby an explanation has been inserted there is no ambiguity on this point that this tolerance range of 5% is not a standard deduction for computing ALP but this is a range and if the assessee s price is within -5% of the arithmetic means of more than one price of comparable then no adjustment is required to be made. Hence the TPO/Assessing Officer is directed to compute the ALP accordingly.Against assessee.

Summary

Issues Involved:
1. Disallowance of export promotion expenses.
2. Transfer Pricing adjustment and inclusion of comparables.
3. Application of the 5% tolerance range under section 92C(2) of the Income Tax Act.

Detailed Analysis:

1. Disallowance of Export Promotion Expenses:
The primary issue raised by the assessee was the disallowance of export promotion expenses amounting to Rs. 80,90,907/-. The assessee, a 100% export-oriented unit, claimed these expenses under the head 'export promotion expenses,' which included foreign travel expenses for the family members of the director. The Assessing Officer (AO) disallowed these expenses, reasoning that the assessee's sole purchaser was its Associated Enterprise (AE), M/s Quality Component & Systems P Ltd (QCS), Singapore, and the assessee had no clients in other countries. Consequently, the AO allowed only Rs. 5 lakhs towards business expenditure and disallowed the remaining Rs. 80,90,907/-. The Commissioner of Income Tax (Appeals) [CIT(A)] upheld this disallowance, stating that the assessee had no role in marketing and sales beyond technical/advisory support.

The Tribunal found that the assessee's directors' foreign visits were not wholly and exclusively for the business purpose of the assessee. Despite the assessee's claim that these visits were to discuss product specifications with ultimate buyers, the Tribunal noted that the assessee's role was limited to manufacturing as per the AE's design specifications. Thus, the Tribunal upheld the disallowance of Rs. 80,90,907/-.

2. Transfer Pricing Adjustment and Inclusion of Comparables:
The revenue challenged the CIT(A)'s deletion of a Transfer Pricing adjustment of Rs. 4.90 crores by including three new comparables. The CIT(A) had included these comparables based on their acceptance in subsequent assessment years (2006-07 and 2007-08). The Tribunal emphasized that comparability should be tested independently for each assessment year using contemporaneous data. The Tribunal found that the three additional comparables included by the CIT(A)-M/s Alpha Transformers Ltd, M/s BCC Fuba India Ltd, and M/s ECE Industries Ltd-were not appropriate. Specifically, M/s BCC Fuba India Ltd was a persisting loss-making company, and M/s ECE Industries Ltd had an extraordinary event (sale of business) during the year under consideration. Consequently, the Tribunal excluded these comparables and restored the arithmetic mean computed by the TPO.

3. Application of the 5% Tolerance Range under Section 92C(2):
The revenue also contested the CIT(A)'s allowance of a 5% deduction to arrive at the Arm's Length Price (ALP). The Tribunal clarified that the 5% range is a tolerance limit, not a standard deduction. The Tribunal directed the TPO/AO to compute the ALP accordingly, considering the 5% range as a tolerance limit rather than a standard deduction.

Conclusion:
The Tribunal dismissed the assessee's appeal regarding the disallowance of export promotion expenses and allowed the revenue's appeal concerning the inclusion of comparables and the application of the 5% tolerance range. The Tribunal upheld the disallowance of Rs. 80,90,907/- as export promotion expenses and directed the TPO/AO to recompute the ALP without the three additional comparables and apply the 5% tolerance range correctly.