2015 (1) TMI 520 - AT - Income Tax

Tribunal allows partial appeal on disallowance and transfer pricing adjustment

Cummins India Limited Versus The Addl. Commissioner of Income Tax Range – 1, Pune

Cummins India Limited Versus The Addl. Commissioner of Income Tax Range – 1, Pune - TMI Issues Involved:1. Disallowance under Section 14A of the Income-tax Act.2. Transfer pricing adjustment related to international transactions.Issue-wise Detailed Analysis:1. Disallowance under Section 14A of the Income-tax Act:The assessee challenged the disallowance of Rs. 4,47,010 under Section 14A of the Income-tax Act. The assessee argued that there was no dominant and immediate connection between the expenditure incurred and the exempted income, thus no adhoc disallowance out of general expenses should be made. The assessee cited several precedents including CIT v Hero Cycles Ltd and CIT v Printers House (P.) Ltd to support their claim. The CIT(A) had reduced the disallowance made by the Assessing Officer by 50%, following the ratio laid down by the Hon'ble Bombay High Court in Godrej Boyce Manufacturing Co. Ltd. Vs. CIT, which held that proportionate disallowance out of administrative and personnel expenses may be made for years prior to 01.04.2008.The Tribunal noted that the provisions of Rule 8D of the Rules were introduced w.e.f. 01.04.2008 and are not applicable to the years prior to the said insertion. However, the Hon'ble Bombay High Court had considered the issue of applicability of Rule 8D for years prior to its introduction and concluded that proportionate disallowance could be made. Consequently, the Tribunal directed a disallowance of Rs. 2 lakhs out of administrative expenses, partly allowing the ground of appeal raised by the assessee.2. Transfer Pricing Adjustment:The issue involved a transfer pricing adjustment of Rs. 22.49 lakhs. The assessee, engaged in the business of sale of spares and after-sales service of engines, had entered into various international transactions with its Associated Enterprises (AEs). The assessee used the Transactional Net Margin Method (TNMM) to benchmark these transactions, aggregating different international transactions. The Transfer Pricing Officer (TPO) objected to this aggregation, arguing that the transactions were distinguishable and should be benchmarked individually. The TPO proposed an adjustment based on the difference in profit margins between exports to AEs and third parties, resulting in an adjustment of Rs. 22.49 lakhs.The CIT(A) upheld the TPO's approach, rejecting the assessee's method of aggregation and the external TNMM adopted by the assessee. The CIT(A) emphasized the preference for internal TNMM method for comparability.The Tribunal analyzed whether aggregation of transactions was permissible under OECD guidelines and Indian Transfer Pricing provisions. It referred to the Pune Bench of the Tribunal's decision in Demag Cranes & Components (India) Pvt. Ltd. Vs. DCIT, which allowed aggregation of closely linked transactions. The Tribunal found that the assessee's various international transactions were closely linked and should be aggregated for transfer pricing analysis. It held that the TPO's approach of segregating transactions and comparing them individually was flawed. Consequently, the Tribunal upheld the aggregation of transactions by the assessee and deleted the addition of Rs. 22.49 lakhs, allowing the grounds of appeal raised by the assessee.Conclusion:The Tribunal partly allowed the appeal regarding disallowance under Section 14A, directing a disallowance of Rs. 2 lakhs out of administrative expenses. It fully allowed the appeal on the transfer pricing adjustment, deleting the addition of Rs. 22.49 lakhs. The appeal by the assessee was thus allowed.