Tribunal directs AO to recompute disallowance, upholds TP adjustment deletion

The Tribunal allowed the assessee's appeal for statistical purposes regarding the disallowance under Section 14A read with Rule 8D, directing the AO to recompute the disallowance using a reasonable method. In the transfer pricing adjustment issue, the CIT(A)'s deletion of the TP adjustment was upheld by the Tribunal, emphasizing the inclusion of the DEPB benefit in turnover for profit margin calculation. Both the Revenue's and the assessee's appeals were dismissed, affirming the CIT(A)'s decisions on both issues.

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Issues Involved:
1. Disallowance under Section 14A read with Rule 8D.
2. Transfer Pricing Adjustment.

Detailed Analysis:

1. Disallowance under Section 14A read with Rule 8D:

The first issue pertains to the disallowance of Rs.1,45,192/- made by the Assessing Officer (AO) under Section 14A read with Rule 8D of the Income Tax Rules, which was confirmed by the Commissioner of Income Tax (Appeals) [CIT(A)]. The assessee, a company engaged in manufacturing bathrobes, had declared a total income of Rs.2,91,83,540/- and claimed dividend income of Rs.3,17,224/- as exempt under Section 10(38) of the Act without making any disallowance for expenses incurred in earning the said income. The AO applied Rule 8D to compute the disallowance, which was upheld by the CIT(A) based on the Special Bench decision in ITO v. Daga Capital Management (P.) Ltd. However, the Tribunal noted that the issue was covered by the Bombay High Court's decision in Godrej Boyce Manufacturing Co. Ltd. (2010) 234 CTR (Bom) 1, which held that Rule 8D is applicable only from the assessment year 2007-08 and disallowance for prior years should be made using a reasonable method. Consequently, the Tribunal set aside the CIT(A)'s order and directed the AO to recompute the disallowance using a reasonable method after giving the assessee an opportunity to be heard. Ground No. 1 of the assessee's appeal was thus allowed for statistical purposes.

2. Transfer Pricing Adjustment:

The second issue, common to Ground No. 2 of the assessee's appeal and Ground No. 4 of the Revenue's appeal, involves the addition made by the AO/Transfer Pricing Officer (TPO) by way of transfer pricing (TP) adjustment, which was deleted by the CIT(A). The assessee had exported bathrobes to its associated enterprises (AEs) in Italy and benchmarked the transactions using the Comparable Uncontrolled Price (CUP) method. The AO referred the matter to the TPO, who rejected the CUP method, arguing that the markets in Europe and America were different, and instead applied the Transactional Net Margin Method (TNMM) using comparables from the "Textiles - Terry Towels" industry. The TPO identified 11 comparables and found the average net profit margin to be 13.05% against the assessee's 5.04%, resulting in a TP adjustment of Rs.2,41,32,238/-.

The CIT(A) upheld the rejection of the CUP method due to geographical market differences but accepted the assessee's contention that the DEPB benefit should be included in the turnover for profit margin calculation. This inclusion brought the assessee's profit margin to 12.30%, which was within the safe harbor limit of 5% compared to the average margin of 13.05% of the comparables. The CIT(A) also noted that no TP adjustment was made in earlier years under similar circumstances and deleted the addition.

The Tribunal upheld the CIT(A)'s decision, agreeing that the DEPB benefit should be considered part of the turnover for comparability analysis and that no TP adjustment was necessary as the profit margin was within acceptable limits. The Tribunal dismissed both the Revenue's and the assessee's appeals, confirming the CIT(A)'s order.

Conclusion:

The Tribunal concluded by dismissing both the Revenue's and the assessee's appeals, upholding the CIT(A)'s decisions on both issues. The order was pronounced on 11/01/2013.

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