2017 (4) TMI 1484 - AT - Income Tax

Tribunal upholds disallowance under Income-tax Act, directs AO to add back disallowed amount to business income for relief

G.E India Exports Pvt. Ltd. Versus The Dy. Commissioner of Income-tax, Circle-11 (3), Bangalore.

G.E India Exports Pvt. Ltd. Versus The Dy. Commissioner of Income-tax, Circle-11 (3), Bangalore. - TMI Issues Involved:1. Disallowance under Section 14A of the Income-tax Act, 1961.2. Grant of relief under Section 10A on enhanced income.3. Exclusion of certain companies as comparables for Transfer Pricing analysis.4. Re-computation of deduction allowable under Section 10A after reducing communication expenses from total turnover.Issue-Wise Detailed Analysis:1. Disallowance under Section 14A of the Income-tax Act, 1961:The primary issue raised by the assessee was the disallowance of Rs. 19,40,000 under Section 14A of the Act, which was upheld by the Commissioner of Income-tax (Appeals) [CIT(A)]. The assessee contended that no expenditure was incurred in earning the exempt dividend income. However, the Assessing Officer (AO) applied Section 14A read with Rule 8D of the Income-tax Rules, disallowing Rs. 19,40,000 as expenditure related to exempt income. The Tribunal observed that the AO did not provide detailed reasons for his dissatisfaction with the assessee's claim of nil expenditure. However, it was noted that the AO followed the prescribed method under Rule 8D after recording his dissatisfaction. The Tribunal upheld the AO's application of Rule 8D, finding no error in the calculation of the disallowed amount.2. Grant of Relief under Section 10A on Enhanced Income:The assessee argued that if the disallowance under Section 14A is upheld, the disallowed amount should be added back to the business income, and the deduction under Section 10A should be allowed on the enhanced income. The CIT(A) had noted that any adjustment made during the computation of business income increased the profit of the business undertaking eligible for tax holiday benefits. The Tribunal agreed with the assessee's contention, directing the AO to add back the disallowed amount to the business income and allow the deduction under Section 10A on the enhanced income.3. Exclusion of Certain Companies as Comparables for Transfer Pricing Analysis:The Revenue challenged the CIT(A)'s exclusion of certain companies from the list of comparables used for Transfer Pricing analysis. The Tribunal examined the functional profiles and circumstances of the excluded companies:- Aditya Birla Minacs, Jindal Intellicom, and Allsec Technologies Ltd.: The assessee had no objection to including these companies as comparables. The Tribunal directed their inclusion.- Coral Hubs: The Tribunal upheld the exclusion of Coral Hubs, noting its functional dissimilarity and the direction from a previous year's decision.- eClerx Services Limited and Mold-Tek Technologies Limited: The Tribunal noted that these companies were functionally different from the assessee, providing high-end services. Following the decision in Tesco Hindustan Service Centre Pvt. Ltd., the Tribunal upheld their exclusion due to abnormal profits and failing the employee cost filter.- Genesys International Corporation Ltd.: The CIT(A) excluded Genesys for being functionally different and having abnormal results. The Tribunal remanded the issue back to the CIT(A) for a detailed comparison of the functional profiles of Genesys and the assessee.4. Re-computation of Deduction Allowable under Section 10A after Reducing Communication Expenses from Total Turnover:The Revenue contended that telecommunication expenses should be excluded from the export turnover but not from the total turnover. The Tribunal referred to the Karnataka High Court's decision in Tata Elxsi, which held that if an amount is excluded from export turnover, it should also be excluded from total turnover. The Tribunal found no infirmity in the CIT(A)'s order directing the AO to re-compute the deduction under Section 10A by reducing the communication expenses from the total turnover.Conclusion:The Tribunal partly allowed the appeals of both the Revenue and the assessee for statistical purposes. The AO was directed to re-compute the deduction under Section 10A on the enhanced income and to include/exclude certain companies as comparables based on the Tribunal's findings. The issue regarding Genesys International Corporation Ltd. was remanded to the CIT(A) for further examination.