Tribunal upholds CIT(A)'s decision on arm's length price & disallowance under section 14A

The Tribunal upheld the CIT(A)'s decision to delete the addition of Rs. 20,41,412/- made by the AO on account of a difference in arm's length price, as the appellant engaged in other business activities beyond services to the parent company. Additionally, the Tribunal agreed with the CIT(A) in restricting the disallowance under section 14A to Rs. 1,21,752/-, finding the appellant's arguments reasonable and dismissing the Revenue's appeal.

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Issues Involved:

1. Deletion of addition of Rs. 20,41,412/- made by the AO on account of difference in arm's length price.
2. Restriction of disallowance u/s. 14A to Rs. 1,21,752/- in accordance with Rule 8D.

Detailed Analysis:

1. Deletion of Addition on Account of Difference in Arm's Length Price:

The primary issues were whether the appellant company solely rendered services to its parent company or engaged in additional business activities, and whether the markup percentage should apply to all expenses or only those related to services for the parent company. The AO referred to a service agreement dated 30.4.2008 with the principal company but did not consider the appellant's claim of other business activities. The AO did not account for the Memorandum of Association while calculating the arm's length price.

The assessee highlighted that the Memorandum of Association allowed for activities beyond the service agreement. The main objectives included manufacturing and dealing in various building materials and mining activities. The assessee also had an agreement with M/s Alps Industries Ltd. and investments in M/s Sagar Cement Ltd.

The sales of Rs. 35,96,309/- were from services rendered to the parent company, with expenses of Rs. 32,69,372/- for these services. The AO's addition of Rs. 20,41,412/- was incorrect as the assessee engaged in other business activities. The CIT(A) rightly deleted this addition, and the Tribunal upheld this decision, rejecting the Revenue's ground.

2. Restriction of Disallowance u/s. 14A:

The AO disallowed Rs. 37,12,429/- under section 14A read with Rule 8D, which was more than the dividend income of Rs. 20,32,762/-. The AO's reasoning was that the funds were primarily invested to earn exempt income. However, this disallowance was contradictory as the same expenses were considered for both arm's length price calculation and section 14A disallowance.

The assessee argued that expenses for consultancy services to the parent company and setting up business in India were distinct. The assessee offered a 10% disallowance on certain expenses, amounting to Rs. 1,21,752/-. The CIT(A) found this reasonable and restricted the disallowance accordingly. The Tribunal upheld this decision, finding no grounds for interference.

Conclusion:

The Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s decisions on both issues, and pronounced the order in the open court on 19.8.2015.

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