2016 (9) TMI 1362 - AT - Income Tax

Tribunal decisions on tax appeals: key issues remitted, disallowances adjusted, and guidance on transfer pricing & Section 14A

The Tribunal partly allowed the appeals for both assessment years, remitting several issues back to the AO for reconsideration. Disallowances under ... Transfer pricing regulation - value of international transactions undertaken by the assessee to its AE - adoption of TNM method for benchmarking - Claim of the assessee that its transactions should be segregated between domestic and international, and its own PLI for comparability purpose should be computed from its international transactions - Held that:- When TNM method is applied, comparison of net profit margin realized by an enterprise from an international transaction or an aggregate of international transactions has to be done and not comparison of operating margin as such of an enterprise. This is the rule laid down by the Mumbai Bench of the Tribunal in the case of Tej Diam (2010 (1) TMI 806 - ITAT, Mumbai). A reading of sec. 92C also would justify this view. Arm’s Length pricing is to be determined on the international transactions by the assessee with its AEs. Hence, PLI, if considered on an aggregate basis, including both international as well as domestic transactions, it would give a distorted figure. In our opinion, the lower authorities fell in error in considering the PLI as a whole of the assessee for the purpose of comparability. Nevertheless, it is to be added that such segregation is also to be done in relation to the comparables that are selected so that the average PLI of the comparables are also worked out on a similar footing. In the facts and circumstances of the case, we are of the opinion that the matter needs a fresh look by the lower authorities. Disallowance u/s 14A r.w.r 8D - Held that:- There is no dispute that Rule 8D was not applicable for the impugned assessment year. Nevertheless we also find that assessee had itself agreed for disallowance of 2% of the exempt income. Even when Rule 8D is not applicable, in our opinion, a disallowance u/s 14A could be made for the simple reason that assessee would have incurred some expenditure for earning the exempt income. Co-ordinate Benches of this Tribunal has been taking a consistent view that prior to the period when Rule 8D could be applied, disallowance of 2% of exempt income would suffice. Accordingly, we restrict the disallowance to 2% of the exempt income. Disallowance of interest on a loan advanced to is subsidiary - business expediency - Held that:- The Apex Court in the case of S.A Builders (2006 (12) TMI 82 - SUPREME COURT) had clearly held that advances given to subsidiary company could only be considered as one for commercial expediency. In the case before us assessee had advanced loan to its subsidiary and it was out of compulsion and not voluntary. In such circumstances, we are of the opinion that the disallowance of proportionate interest was not called for. Such disallowance stands deleted. Disallowance of bad debts - as per assessee the amount advanced could not be recovered since the company had become sick and the assessee written off the debts during the relevant previous year - Held that:- DRP took a view that assessee had claimed the deduction on a premise that for the year ended 31.3.2005 the provision was added back while computing its income for assessment year 2005-06. However, as per the ld. DR in the copy of the return filed for assessment year 2005-06 no such add back was there. We are of the opinion that the issued requires a fresh look by the Assessing Officer. If the assessee had written off the debts in its books of account and if the debt had came out of its trading transactions, then the claim has to be allowed. Disallowance of 20% of commission and discounts paid to customers - Held that:- It is not in dispute that assessee had claimed discount of ₹ 3,19,55,499/-. The details filed by the assessee was only in relation to 11 parties totalling to ₹ 1,75,48,192/-. Assessee was given number of opportunities by the Assessing Officer as well as DRP for proving its claim of discount of ₹ 3,19,55,499/-. In our opinion, claim of the ld. AR that Assessing Officer did not call for the details to prove the expenditure is incorrect. This is because of the reason that Assessing Officer had specifically required the assessee to give details of the claim in the format provided by him, but assessee failed to furnish it. In such circumstances, we find that the lower authorities were justified in making the disallowance of 20% of such discount Disallowance of export promotion expenses - share of expenditure of London Liaison Office - assessee could not produce any evidence towards expenditure by the said London Liaison Office - Held that:- Explanation of the assessee was that Liaison Office worked on behalf of all the group companies and M/s Amalgamations Pvt Ltd one of the group companies made payment to London Liaison Office and recovered share of expenditure from the individual companies. We are of the opinion that except for giving this explanation, which was not supported by any evidence, assessee had not given any details of the services rendered by the London Liaison Office nor any correspondence with them. Assessee also could not show the need of Liaison Office and why the payments were routed through a holding company. In such circumstances, the disallowance was rightly made. We do not find any reason to interfere with the orders of the lower authorities. Disallowance of 10% of the expenditure incurred towards marketing incentives - Held that:- As per the assessee, dealer was required to give the cash discount to such customers. Though the assessee claimed that it was having evidence in this regard it could not produce dealerwise details of the reimbursement and how the sum of ₹ 2,41,62,616/- was arrived at. When no evidence in support of the claim was produced by the assessee, lower authorities, in our opinion, was justified in making a disallowance of 10%. We do not find any reason to interfere with the orders of the lower authorities. Disallowance of additional depreciation - Held that:- It is not disputed that the disallowance was on disallowance of the balance of the additional depreciation of ₹ 72,87,449/- carried forward from the earlier year since assessee had put the new assets in use for a period less than 180 days in such earlier year. In view of the judgment of the Karnataka High Court in Rittal India Pvt. Ltd (2016 (1) TMI 81 - KARNATAKA HIGH COURT) we find that the assessee is entitled to claim the balance amount in the succeeding year. Issues Involved:1. Addition towards transfer pricing regulation.2. Disallowance under Section 14A of the Income-tax Act.3. Disallowance of interest on a loan to a subsidiary.4. Disallowance of bad debts.5. Disallowance of commission and discounts paid to customers.6. Disallowance of export promotion expenses.7. Disallowance of marketing incentives.8. Disallowance of additional depreciation.Detailed Analysis:1. Addition towards Transfer Pricing Regulation:Assessment Year 2006-07:The assessee contested an addition of Rs. 41,36,103/- made under transfer pricing regulations. The Assessing Officer (AO) rejected the Comparable Uncontrolled Price (CUP) method adopted by the assessee and substituted it with the Transactional Net Margin (TNM) method. The AO calculated the Profit Level Indicator (PLI) without segregating the international transactions, leading to an erroneous adjustment. The Tribunal found that the PLI should be calculated based on international transactions alone, not on an aggregate basis, and remitted the issue back to the AO for reconsideration.Assessment Year 2007-08:The same issue arose, and the Tribunal directed the AO to follow the same approach as in the previous year, i.e., to consider the PLI of international transactions alone.2. Disallowance under Section 14A:Assessment Year 2006-07:The assessee claimed exemption on dividend income and the AO disallowed Rs. 70,00,666/- under Section 14A, applying Rule 8D. The Tribunal noted that Rule 8D was not applicable for the impugned year and restricted the disallowance to 2% of the exempt income.Assessment Year 2007-08:The same issue was raised, and the Tribunal applied the same reasoning, restricting the disallowance to 2% of the exempt income.3. Disallowance of Interest on a Loan to a Subsidiary:Assessment Year 2006-07:The AO disallowed interest of Rs. 17,16,611/- on a loan advanced to a subsidiary. The Tribunal, relying on the Apex Court judgment in S.A. Builders vs CIT, held that the advance was for commercial expediency and deleted the disallowance.Assessment Year 2007-08:The same issue arose, and the Tribunal applied the same reasoning, deleting the disallowance.4. Disallowance of Bad Debts:Assessment Year 2006-07:The AO disallowed a write-off of Rs. 24,00,000/- as bad debts. The Tribunal found that the facts were not clear and remitted the issue back to the AO for reconsideration.Assessment Year 2007-08:A similar issue arose with a disallowance of Rs. 31,89,221/-, and the Tribunal remitted the issue back to the AO for reconsideration.5. Disallowance of Commission and Discounts Paid to Customers:Assessment Year 2006-07:The AO disallowed 20% of the commission and discounts claimed by the assessee, amounting to Rs. 3,19,55,499/-. The Tribunal upheld the disallowance as the assessee failed to furnish adequate details.Assessment Year 2007-08:A similar disallowance was made, and the Tribunal upheld it, finding no reason to interfere with the AO's decision.6. Disallowance of Export Promotion Expenses:Assessment Year 2006-07:The AO disallowed Rs. 17,58,965/- claimed as export promotion expenses. The Tribunal upheld the disallowance due to lack of evidence supporting the claim.Assessment Year 2007-08:A similar disallowance of Rs. 21,00,000/- was made, and the Tribunal upheld it for the same reasons.7. Disallowance of Marketing Incentives:Assessment Year 2006-07:The AO disallowed 10% of the marketing incentives claimed by the assessee, amounting to Rs. 2,41,62,616/-. The Tribunal upheld the disallowance due to lack of evidence.Assessment Year 2007-08:A similar disallowance was made, and the Tribunal upheld it, finding no reason to interfere with the AO's decision.8. Disallowance of Additional Depreciation:Assessment Year 2007-08:The AO disallowed additional depreciation of Rs. 20,15,922/- carried forward from the previous year. The Tribunal, relying on the Karnataka High Court's judgment in CIT vs Rittal India Pvt. Ltd., held that the assessee was entitled to claim the balance amount in the succeeding year and deleted the disallowance.Conclusion:The appeals for both assessment years were partly allowed, with several issues remitted back to the AO for reconsideration and some disallowances upheld or adjusted as per the Tribunal's directions.