2014 (2) TMI 1215 - AT - Income Tax

Tribunal decision: Dismissed assessee's appeal, partly allowed revenue's appeal. Upheld disallowance under section 14A.

J.P. Morgan India Private Limited, Versus The Assistant Commissioner of Income Tax, Range 4 (3), Mumbai

J.P. Morgan India Private Limited, Versus The Assistant Commissioner of Income Tax, Range 4 (3), Mumbai - TMI Issues Involved:1. Determination of the most appropriate method for transfer pricing adjustment.2. Disallowance under section 14A for expenditure incurred for earning dividend.3. Disallowance of club membership fees.4. Classification of software, support services, repairs, and maintenance expenses as capital or revenue expenditure.5. General grounds raised by the Revenue.Issue-wise Detailed Analysis:1. Determination of the most appropriate method for transfer pricing adjustment:The primary issue in both the assessee's and the revenue's appeals was the determination of the arm's length price (ALP) for broking services provided by the assessee to related and unrelated parties. The assessee contended that the Transactional Net Margin Method (TNMM) was the most appropriate method, while the Transfer Pricing Officer (TPO) and the CIT(A) favored the Comparable Uncontrollable Price (CUP) method. The TPO rejected the TNMM and applied the CUP method, leading to a transfer pricing adjustment of Rs. 74,79,266/-. The CIT(A) upheld the use of the CUP method but allowed adjustments for differences in functions performed, assets employed, and risks assumed, thereby deleting the addition. The Tribunal agreed with the CIT(A) that the CUP method was appropriate given the availability of internal comparables and upheld the deletion of the transfer pricing adjustment, dismissing both the assessee's and the revenue's appeals on this ground.2. Disallowance under section 14A for expenditure incurred for earning dividend:The AO disallowed Rs. 13,76,355/- under section 14A as expenditure incurred for earning tax-free dividend income. The CIT(A) deleted this disallowance, noting that the assessee did not utilize interest-bearing borrowed funds and incurred no significant expenses to earn the dividend. The Tribunal, referencing its earlier order for the assessment year 2001-02, upheld a nominal disallowance of Rs. 10,000/- under section 14A, thereby partly allowing the revenue's appeal on this ground.3. Disallowance of club membership fees:The AO disallowed Rs. 6,54,000/- claimed by the assessee for club membership fees. The CIT(A) deleted this disallowance, and the Tribunal upheld this decision, referencing the Supreme Court's ruling in CIT vs. United Glass Manufacturing Co. Ltd., which recognized club membership fees for employees as a business expense deductible under section 37(1) of the Income Tax Act, 1961. Thus, this ground of the revenue's appeal was rejected.4. Classification of software, support services, repairs, and maintenance expenses as capital or revenue expenditure:The AO treated expenses amounting to Rs. 33,61,974/- as capital in nature. The CIT(A) deleted this addition, treating the expenses as revenue expenditure. The Tribunal noted that in the immediate preceding year, the AO had accepted similar expenses as revenue in nature following the Tribunal's directions. Consequently, the Tribunal upheld the CIT(A)'s decision, rejecting the revenue's appeal on this ground.5. General grounds raised by the Revenue:The Revenue's general grounds (Ground Nos. 5 and 6) were not specifically argued, and the Tribunal dismissed these grounds as general in nature without further discussion.Conclusion:The Tribunal dismissed the assessee's appeal and partly allowed the revenue's appeal by upholding a nominal disallowance under section 14A. The Tribunal upheld the CIT(A)'s decisions on the appropriate method for transfer pricing adjustment, the disallowance of club membership fees, and the classification of software-related expenses as revenue expenditure.