2016 (11) TMI 1513 - AT - Income Tax

ITAT Mumbai: Upholds Transfer Pricing, Rejects TPO's Risk Premium, Disallows Section 14A - Key Takeaways

M/s. S.B. & T International Ltd. Versus DCIT-Circle-11 (2) (1) And Vice Versa.

M/s. S.B. & T International Ltd. Versus DCIT-Circle-11 (2) (1) And Vice Versa. - TMI Issues:1. Transfer Pricing Adjustment - Addition in Arm's Length Price (ALP)2. Disallowance under Section 14A of the ActTransfer Pricing Adjustment - Addition in Arm's Length Price (ALP):The Assessing Officer (AO) challenged the directions of the Dispute Resolution Panel (DRP) regarding the adjustment in the income of the assessee. The AO found that the assessee, engaged in the business of manufacturing studded jewelry and trading cut and polished diamonds, had entered into International Transactions (ITs). The Transfer Pricing Officer (TPO) made an upward adjustment of Rs. 2.48 Crores in relation to the ITs, leading to the AO passing a draft assessment order. The primary issue in appeal was the addition of Rs. 1.91 Crores in the Arm's Length Price (ALP) due to the provision of an interest-free loan to an overseas entity. The TPO compared the interest rate on loans in Indian currency with loans in foreign currency, leading to the proposed adjustment. The DRP upheld the adjustment, citing that an independent party would not provide an interest-free loan while incurring interest costs, resulting in profit shifting. The DRP directed to adopt the Prime Lending Rate (PLR) of the State Bank of India for the adjustment without any markup, rejecting the 3% risk premium added by the TPO.Disallowance under Section 14A of the Act:The second ground of appeal pertained to the disallowance of Rs. 69.44 lakhs under Section 14A of the Act. The AO disallowed the amount, noting that the assessee had made investments without attributing any expenditure incurred for earning tax-exempt income. The DRP upheld the disallowance, emphasizing that even without exempt income, not all expenditure necessarily relates to taxable income. The DRP referred to relevant cases and upheld the disallowance. However, the assessee argued that the disallowance was not applicable as no exempt income was earned during the year, and the investments were made from its own funds, not borrowed funds. The Tribunal, while deciding the appeal for the AY 2011-12, held that no disallowance under Section 14A could be made if no exempt income was earned. The Tribunal directed the AO to reexamine the issue considering the observations made. The Tribunal decided the second ground in favor of the assessee, stating that the facts were identical to the earlier case and the cases cited by the DR were not relevant to the current issue.In conclusion, the Appellate Tribunal ITAT, Mumbai, in the given judgment, addressed the transfer pricing adjustment issue and the disallowance under Section 14A of the Act. The Tribunal partly allowed the appeal filed by the assessee and dismissed the appeal of the AO. The judgment provided detailed analysis and reasoning for each issue, ensuring a fair and comprehensive decision based on the facts and legal principles presented during the proceedings.