2016 (5) TMI 1387 - AT - Income Tax

TPA - comparability - selection procedures - determining the arm s length price of international transactions between associated enterprises if the comparable selected are operating since long and the assessee is in the initial stages of operation - Held that - The losses incurred by the assessee cannot be the basis for finding out the arm s length price without making due adjustments to the operating expenses so as to bring it at the level playing field with the comparables. In the course of hearing the ld. Counsel pointed out that break even was arrived at in next year and ld. TPO has accepted the transactions being at arm s length price in next year. One of the contentions of the ld. CIT DR was that this plea was not taken before ld. TPO but as reproduced earlier before ld. DRP specific objection to this effect had been taken. Therefore merely on the ground that this plea was not taken assessee s claim cannot be denied more particularly because not allowing for this adjustment would go against the very principle of comparability criteria contemplated under Rule 10B of the I.T. Rules. We further find that though ld. DRP had given direction for inclusion of commission income as part of the operating income but except PAE Ltd. all other comparables were not having any commission income. As rightly suggested by the assessee the proper course would be to restore the matter to the file of ld. TPO to find out fresh comparables having trading and commission income both and include the same after making adjustments as mandated by the law. Ld. TPO will also examine the details as per annexure 3 and any further details as may be necessary to consider and will make adjustments to salary and rental income and other adjustments so as to bring the profitability of assessee inconformity with the profitability of the comparable after providing due opportunity of hearing to the assessee. Addition of ROC expenses incurred in connection with increase in authorized share capital - Held that - Hon ble SC in the case of Brook Bond India Ltd. (1997 (2) TMI 11 - SUPREME Court) had considered the expenditure in connection with additional issue of shares and had held that expenditure directly related to expansion of capital base and was therefore capital in nature. This decision is subsequent to the decision relied upon by the assessee in the case of Multi Metals Ltd. 1990 (10) TMI 55 - RAJASTHAN High Court and therefore we are not inclined to accept the additional plea raised by ld. Counsel for the assessee. Allowability of recruitment expenses training expenses and entertainment expenses - this was the first year of assessee s business and the assessee had incurred all these expenses to start its business - Held that - The relevant date for deciding whether an expenditure is pre operative or post operative is the date of setting up of business and not the date of commencement of business. Both the lower revenue authorities have not examined this aspect and therefore we restore this issue to the file of AO to examine the issue afresh with the light of aforementioned decisions. Claim of provision for gratuity - assessee had made this provision as 6% of the sales - Held that - AO correctly disallowed the assessee s claim inter alia observing that estimation was not based on any statistical analysis or any historical data base. He further pointed out that this was the first year operation of the assessee and therefore assessee was not having any prior experience.

Summary

Issues Involved:
1. Transfer Pricing Adjustment
2. ROC Expenses in Connection with Share Capital
3. Expenses Incurred Before Commencement of Operations
4. Disallowance of Provision for Warranty
5. Credit for Taxes Deducted at Source
6. Calculation of Interest under Section 234B

Detailed Analysis:

Transfer Pricing Adjustment:

1. The assessee, a subsidiary of MGE UPS Systems S.A., France, engaged in the distribution and marketing support services for UPS systems, filed an appeal against the AO's order for A.Y. 2007-08. The key issue was the determination of the arm's length price (ALP) for international transactions. The assessee adopted the Resale Price Method (RPM) with a gross profit margin of 28%, while the TPO applied the Transactional Net Margin Method (TNMM) with a margin of 5.18%. The TPO selected four comparables and computed the ALP, resulting in a significant adjustment. The DRP upheld the TNMM application but directed the inclusion of commission income and exclusion of pre-operating expenses in computing the operating income and expenses. The AO's final assessment included a transfer pricing adjustment of Rs. 5,07,55,614.

2. The assessee contested the rejection of RPM, selection of comparables, and non-consideration of start-up phase adjustments. The Tribunal found merit in the assessee’s argument that adjustments should be made for start-up costs and restored the matter to the TPO for fresh comparables and necessary adjustments.

ROC Expenses in Connection with Share Capital:

1. The AO disallowed ROC expenses of Rs. 1,30,500 incurred for increasing authorized share capital, treating them as capital expenditure. The assessee argued for deduction under Section 35D. The Tribunal upheld the AO’s decision, citing the Supreme Court’s ruling in Brook Bond India Ltd. vs. CIT, which treated such expenses as capital in nature.

Expenses Incurred Before Commencement of Operations:

1. The AO disallowed pre-operative expenses of Rs. 10,90,815, treating them as capital in nature. The DRP confirmed this. The Tribunal restored the issue to the AO to determine the date of business set-up, distinguishing it from the commencement date, and reconsider the expenses accordingly.

Disallowance of Provision for Warranty:

1. The assessee's provision for warranty, calculated as 6% of sales, was disallowed by the AO and confirmed by the DRP due to lack of scientific basis. The Tribunal upheld the disallowance, agreeing with the AO’s reasoning.

Credit for Taxes Deducted at Source:

1. The AO did not grant credit for taxes deducted at source amounting to Rs. 6,01,950. The Tribunal directed the AO to examine the claim and pass an order in accordance with the law.

Calculation of Interest under Section 234B:

1. The issue of interest under Section 234B amounting to Rs. 8,240,827 was deemed consequential and dependent on the outcome of the above issues.

Conclusion:

The appeal was partly allowed for statistical purposes, with directions for fresh examination and adjustments on specific grounds, particularly concerning transfer pricing and pre-operative expenses.