2013 (1) TMI 310 - AT - Income Tax

Tribunal Grants Partial Appeals, Remands Issues for Further Review

The Tribunal partly allowed both appeals for statistical purposes, remanding key issues back to the AO for further verification and consideration. In the ... Arm's length price - comparability analysis - comparable uncontrolled price (CUP) method - transaction net margin method (TNMM) - arithmetic mean for determination of ALP - adjustments under Rule 10B(1)(a)(ii) - transfer pricing adjustment - disallowance under section 14A - application of Rule 8D - interest under section 234D - allowability of business loss / write offComparability analysis - comparable uncontrolled price (CUP) method - transaction net margin method (TNMM) - arm's length price - arithmetic mean for determination of ALP - Adoption of CUP as the most appropriate method and rejection of TNMM; arithmetic mean (simple average) is to be used for computing ALP rather than a weighted average. - HELD THAT: - The Tribunal held that, on the facts of the case and given availability of internal comparable uncontrolled prices, the CUP method is the most appropriate method for determination of the arm's length price and therefore the AO/TPO was justified in adopting CUP instead of the TNMM applied by the assessee. The Tribunal further interpreted the statutory requirement to take the arithmetic mean under the proviso to section 92C and concluded there is no mandate to compute a weighted average based on volumes; simple arithmetic mean is therefore appropriate for the purpose of determining ALP. [Paras 12, 13]CUP adopted as most appropriate; simple arithmetic mean to be used for ALP computation; TNMM rejected.Adjustments under Rule 10B(1)(a)(ii) - marketing function adjustment - research function adjustment - volume difference adjustment - transfer pricing adjustment - Claims for adjustments (marketing, research and volume) to the comparable uncontrolled price are remanded to the Assessing Officer for verification and fresh consideration. - HELD THAT: - While acknowledging that comparable uncontrolled prices may be adjusted under Rule 10B(1)(a)(ii) to account for material differences, the Tribunal found that the assessee had produced working papers and documentary material but that the AO/TPO must verify those particulars. Both parties agreed verification was permissible; accordingly the Tribunal restored the matter to the file of the AO with directions to examine the assessee's claimed adjustments on merits after verification of the details and documentary evidence. The claim is treated as partly allowed for statistical purposes pending that fresh examination. [Paras 14, 21]Issue remanded to the AO to verify and decide on adjustments for marketing, research and volume differences; claim treated as partly allowed for statistical purposes.Transfer pricing adjustment - arm's length price - For assessment year 2005-06 the TP issue is decided consistently with the decision in 2003-04 and remanded to the AO for the same verification of adjustments. - HELD THAT: - The Tribunal recorded that the facts and arguments for AY 2005-06 mirror those in AY 2003-04 and, following its earlier reasoning, directed that the AO consider the assessee's claims for marketing, research and volume adjustments afresh after verification. Consequently the TP claim for AY 2005-06 is restored to the AO for reconsideration and is treated as partly allowed for statistical purposes. [Paras 21]TP issue for 2005-06 remanded to the AO for verification and fresh decision in line with the 2003-04 ruling.Allowability of business loss / write off - Disallowance of the claimed write off of an irrecoverable employee loan upheld; not allowable as business loss in the year under consideration. - HELD THAT: - The Tribunal agreed with the authorities below that the assessee failed to demonstrate that the loss was incurred in the year under consideration or to show efforts to recover the loan or enforcement of any security. The counsel conceded the conditions for bad debt under section 36(1)(vii) read with section 37(2) were not satisfied. On the material before it, the Tribunal found the amount could not be allowed as a business loss for that year and upheld the disallowance confirmed by the CIT(A). [Paras 15, 16, 17]Disallowance of the irrecoverable loan write off sustained; ground dismissed.Interest under section 234D - Levy of interest under section 234D upheld (applicable retrospectively where Explanation 2 applies and, for AY 2005-06, conceded applicable). - HELD THAT: - For the assessment year commencing before 1 6 2003 (AY 2003 04), the Tribunal held Explanation 2 to section 234D (inserted by the Finance Act, 2012) applies retrospectively from 1 6 2003 and thereby makes section 234D applicable to assessments completed after that date; accordingly the levy was sustained. For AY 2005 06 the assessee's counsel conceded that section 234D applies and the Tribunal decided the issue against the assessee. [Paras 18, 25]Interest under section 234D sustained; grounds dismissed.Disallowance under section 14A - application of Rule 8D - Disallowance under section 14A (computed under Rule 8D by the AO) set aside for recomputation on a reasonable basis; AO directed to consider the assessee's claim that no expenditure was incurred. - HELD THAT: - The Tribunal followed the Bombay High Court position that Rule 8D is applicable prospectively from AY 2008 09 and for earlier years disallowance under section 14A must be made on some reasonable basis. Accordingly, the Tribunal restored the matter to the AO to recompute the disallowance for AY 2005 06 on a reasonable basis and directed the AO to consider the assessee's contention that no expenditure was incurred in relation to exempt dividend income. The ground was treated as allowed for statistical purposes. [Paras 24]Disallowance under section 14A set aside for recomputation by the AO on a reasonable basis; matter restored.Final Conclusion: Both appeals are treated as partly allowed for statistical purposes: the Tribunal upheld the adoption of CUP and use of simple arithmetic mean for ALP, upheld disallowance of the written off employee loan and the levy of interest under section 234D, directed recomputation under section 14A for AY 2005 06, and remanded the claims for marketing, research and volume adjustments (for both years) to the Assessing Officer for verification and fresh decision. Issues Involved:1. Transfer Pricing Adjustment for Assessment Year 2003-042. Disallowance of Irrecoverable Loan for Assessment Year 2003-043. Charging of Interest under Section 234D for Assessment Year 2003-044. Transfer Pricing Adjustment for Assessment Year 2005-065. Disallowance under Section 14A for Assessment Year 2005-066. Charging of Interest under Section 234D for Assessment Year 2005-06Issue-Wise Detailed Analysis:1. Transfer Pricing Adjustment for Assessment Year 2003-04:The assessee, engaged in broking and trading in shares, provided stock broking services to its Associated Enterprise (AE) and earned brokerage at 0.24%. The AO referred the matter to the TPO to determine the arm's length price (ALP). The TPO observed that the average brokerage rate from top 10 FIIs was 0.408%, while the rate from the AE was only 0.24%. The TPO rejected the assessee's arguments for lower rates based on volume, client relationship, and marketing efforts, and applied the CUP method, determining an ALP of 0.36%. The AO made an upward adjustment of Rs.2,13,25,474/- to the assessee's income. The CIT(A) upheld the AO's decision, rejecting the assessee's claims for adjustments on account of volume, marketing, and research functions. The Tribunal found CUP to be the most appropriate method but remanded the matter back to the AO for verification of adjustments for marketing, research functions, and volume differences.2. Disallowance of Irrecoverable Loan for Assessment Year 2003-04:The AO disallowed Rs.2,58,801/- claimed by the assessee as irrecoverable loan, as there was no evidence of efforts made to recover the loan. The CIT(A) upheld the AO's decision. The Tribunal agreed with the authorities below, noting that the assessee failed to demonstrate that the loss was incurred in the relevant year, and thus upheld the disallowance.3. Charging of Interest under Section 234D for Assessment Year 2003-04:The AO charged interest under Section 234D, which was upheld by the CIT(A). The Tribunal noted that Explanation 2 to Section 234D, inserted retrospectively, applied to the case, and thus upheld the levy of interest.4. Transfer Pricing Adjustment for Assessment Year 2005-06:Similar to the issue in Assessment Year 2003-04, the AO made an upward adjustment of Rs.5,88,62,098/- based on the CUP method. The Tribunal remanded the matter back to the AO for verification of adjustments for marketing, research functions, and volume differences, following its decision for Assessment Year 2003-04.5. Disallowance under Section 14A for Assessment Year 2005-06:The AO disallowed Rs.72,116/- under Section 14A, applying Rule 8D. The CIT(A) upheld the disallowance. The Tribunal noted that Rule 8D applies prospectively from Assessment Year 2008-09 and directed the AO to recompute the disallowance on a reasonable basis, considering the assessee's claim that no expenditure was incurred for making the investment.6. Charging of Interest under Section 234D for Assessment Year 2005-06:The AO charged interest under Section 234D, which was upheld by the CIT(A). The Tribunal noted that the provisions of Section 234D were applicable for the relevant year and upheld the levy of interest.Conclusion:Both appeals were partly allowed for statistical purposes, with key issues remanded back to the AO for further verification and consideration.