2013 (9) TMI 339 - AT - Income Tax

Section 14A disallowance upheld without exempt income; rental income taxed under Other Sources; transfer pricing rules applied

The ITAT Mumbai held that disallowance under section 14A is justified even if no exempt income is realized, aligning with precedent. Rental income from ... Disallowance u/s 14A - reasonable basis - no exempt income was realized - Held that:- It is observed that the Special Bench of the Tribunal in the case of Cheminvest Ltd. v. ITO [2009 (8) TMI 126 - ITAT DELHI-B] has held that the disallowance u/s 14A is warranted even if there is no exempt income - In the case of Godrej & Boyce Mfg. Co. VS. DCIT [2010 (8) TMI 77 - BOMBAY HIGH COURT] - had held that the disallowance u/s 14A was required to be made as per Rule 8D in relation to the assessment year 2008-09 and subsequent years - For the earlier years, the direction was to compute the disallowance on some 'reasonable basis' - The disallowance u/s 14A was warranted even if there was no exempt income. Treatment of Rental Income – Sub-letting of property - Held that:- The assessee was neither the owner nor the deemed owner of the house property, applying the provisions of section 22, the annual value of such property could not have been charged to tax under the head 'Income from house property' - As it was a case of simple subletting or property, not facilitating the carrying on of the assessee's business in any manner, the rental income so realized by the assessee in the present circumstances cannot be considered as 'Business income' - In such a situation, it was directed that the same should be included under the head 'Income from other sources' - The impugned order on the issue was set aside and the matter was restored to the file of the AO for doing the needful accordingly - The Assessing Officer will allow eligible deductions and allowances as per the relevant provisions under Chapter IV-F - While allowing such deductions, the Assessing Officer will also ensure that no deduction is doubly claimed/allowed, firstly, in computing of income under the head 'Profits and gains of business or profession' and then under the head 'Income from other sources'. Transfer pricing adjustments – ALP - Reimbursement of expenses - Held that:- A pure reimbursement of expenses by one AE to another AE is very much a 'transaction' as per section 92F(v) and consequently was equally an international transaction as per section 92B requiring consideration as per section 92 of the Act - Be that as it may, the learned Departmental Representative could not demonstrate the fact that such reimbursement of expenses was without any markup - As the so called comparable case of Datamatics Financial Services Limited was included by the TPO in the final list of comparables, in our considered opinion, the same was liable to be excluded as it involves related party transactions at much higher level, as against the filter adopted by the TPO himself, being companies with less than 25% related party transactions – Following Assistant Commissioner of Income-tax, Circle 6(3) Versus Maersk Global Service Center (India) (P.) Ltd. [2011 (11) TMI 465 - ITAT MUMBAI] - the assessment order on this comparable case was also set aside and the matter was directed to be decided afresh by the AO/TPO in consonance with our ibid observations. The relevant factor in choosing comparable cases is to find out similarity in the nature of services rendered - In that view of the matter a case in which services are outsourced and then provided to its customers cannot be compared with the rendering of in-house services. The pertinent criteria for selection of comparable cases should be similarity in the nature of services and not the higher or lower margin of profit in one case vis-à-vis the other. As there is a vast difference in the cases where the services are outsourced or provided in-house, in our considered opinion, there cannot be any comparison between such types of cases. - matter remanded back - Decided in favor of assessee. Issues Involved:1. Disallowance under Section 14A.2. Classification of rental income.3. Classification of interest income.4. Transfer pricing adjustment.Detailed Analysis:Disallowance under Section 14A:The first issue pertains to the disallowance of Rs. 16,55,850 under Section 14A. The assessee had made past investments in Infowayaz International Private Limited but did not earn any exempt income during the relevant year. The Assessing Officer (AO) computed the disallowance based on Rule 8D, which was later upheld by the Dispute Resolution Panel (DRP). However, the Tribunal noted that as per the Hon'ble jurisdictional High Court in Godrej & Boyce Mfg. Co. VS. DCIT, Rule 8D is applicable from the assessment year 2008-09 onwards. For earlier years, the disallowance should be computed on a 'reasonable basis'. The Tribunal upheld the principle of disallowance under Section 14A even in the absence of exempt income, following the Special Bench decision in Cheminvest Ltd. v. ITO. The computation of the disallowable amount was remanded back to the AO to follow the jurisdictional High Court's decision.Classification of Rental Income:The second issue involves the treatment of rental income earned from subletting a floor to M/s. Accenture Services Private Limited. The AO classified this income as 'Income from house property,' which the assessee contested, claiming it as business income. The Tribunal observed that Section 22 applies to properties owned by the assessee, and since the assessee was neither the owner nor the deemed owner, the rental income could not be classified under 'Income from house property.' Instead, it should be classified under 'Income from other sources.' The matter was remanded back to the AO for reclassification and allowing eligible deductions under Chapter IV-F, ensuring no double deduction occurs.Classification of Interest Income:The third issue regarding the classification of interest income of Rs. 7,77,291 as 'Income from other sources' was not pressed by the assessee's counsel and was therefore dismissed.Transfer Pricing Adjustment:The fourth issue concerns a transfer pricing adjustment of Rs. 2,20,39,947. The assessee challenged the inclusion of certain comparable cases used by the Transfer Pricing Officer (TPO) to determine the Arm's Length Price (ALP). The Tribunal examined objections against four comparables:1. Datamatics Financial Services Limited: The Tribunal found that the company's related party transactions exceeded the 25% threshold set by the TPO, warranting its exclusion.2. Goldstone Infratech Limited: The Tribunal noted that this company did not meet the export revenue filter of more than 25% of revenues. The case was remanded to the AO/TPO to verify the figures and reconsider its inclusion.3. Maple eSolutions Limited: The Tribunal directed its exclusion based on precedents from the Delhi and Hyderabad Benches, which had excluded this company due to data reliability issues.4. Vishal Information Technologies Limited (VITL): The Tribunal found that VITL outsourced a significant portion of its services, making it incomparable to the assessee, which provided services in-house. The Tribunal directed the AO/TPO to reconsider its inclusion.The Tribunal concluded that if the four contested comparables are excluded, the total margin of OP/TC might fall within the permissible range under Section 92C(2). However, since two cases were remanded for reconsideration, the final decision on the mean OP/TC was deferred. The AO/TPO was directed to re-evaluate the comparables and provide the assessee an opportunity for a hearing.Conclusion:The appeal was partly allowed for statistical purposes, with specific directions for re-evaluation and reclassification of income and comparables. The Tribunal emphasized the importance of following jurisdictional High Court decisions and ensuring accurate classification and computation of income and transfer pricing adjustments.