2018 (4) TMI 1934 - AT - Income Tax

Tribunal remits transfer pricing issue, overturns disallowance under section 14A, and allows assessee's appeal.

The Tribunal remitted the transfer pricing adjustment and comparable issues back to the Transfer Pricing Officer for reevaluation based on provided ... Transfer pricing comparable selection - internal TNMM versus external TNMM - remand to transfer pricing officer - disallowance under section 14A - attribution of expenditure to exempt incomeTransfer pricing comparable selection - internal TNMM versus external TNMM - remand to transfer pricing officer - Comparables relied on by the parties were remitted to the TPO/AO for fresh examination and verification; assessee to furnish comparable data where directed. - HELD THAT: - The Tribunal observed that the assessee had furnished particulars and relied on authorities to challenge inclusion or exclusion of certain comparables (including Cosmic Global Limited, Fortune Infotech Limited, Jeevan Scientific Technologies Limited, Caliber Point Business Solutions Limited and R Systems International Limited). In view of the factual and functional disputes raised and the material placed before it, the Tribunal remitted the matter to the TPO/AO for fresh examination in accordance with law. The TPO/AO is directed to decide whether the identified comparables are to be included or excluded after affording adequate opportunity to the assessee; for Caliber Point and R Systems the assessee shall furnish comparables data for verification. The Tribunal treated the corresponding grounds as allowed for statistical purposes. [Paras 6]Issues relating to selection, inclusion or exclusion of the specified comparables remitted to the TPO/AO for fresh consideration; assessee to supply data; grounds treated as allowed for statistical purposes.Disallowance under section 14A - attribution of expenditure to exempt income - no exempt dividend income - Addition made under section 14A was deleted because the assessee did not earn any exempt dividend income during the year. - HELD THAT: - The assessee contested the notional attribution of expenses to earning exempt dividend income, pleading that no dividend income was earned in the relevant year and that investments were made as business decisions without administrative overheads attributable to them. Having regard to the facts that no exempt dividend income arose in the year, and following the relevant precedents relied upon by the Tribunal, the addition made by the AO was deleted and the assessee's grounds on this point were allowed. [Paras 9]Disallowance under section 14A deleted and the assessee's ground in this regard allowed.Final Conclusion: The appeal is treated as allowed for statistical purposes: transfer pricing comparables remitted to the TPO/AO for fresh examination (with directions to the assessee to provide data where required) and the addition under section 14A deleted as no exempt dividend income was earned in ay 2010-11. Issues:1. Transfer pricing adjustments based on TNMM methodology.2. Inclusion and exclusion of comparables for ALP determination.3. Disallowance made under section 14A.Issue 1: Transfer pricing adjustments based on TNMM methodology:The assessee, a subsidiary of a UK company, adopted internal TNMM for ALP determination, but the TPO chose external TNMM leading to an upward adjustment in the TP study. The assessee challenged the inclusion of certain comparables, exclusion of others chosen by it, and disallowances made u/s. 14A. The AR argued that certain comparables were functionally different based on outsourcing activities and unique software ownership. The AR also highlighted inconsistencies in RPT ratios. The Tribunal remitted the issues concerning comparables back to the TPO for fresh examination based on furnished particulars and relevant case laws.Issue 2: Inclusion and exclusion of comparables for ALP determination:The AR argued against the inclusion of Cosmic Global Limited, Fortune Infotech Limited, and Jeevan Scientific Technologies Limited as comparables. Cosmic Global was deemed functionally different due to outsourcing activities. Fortune Infotech was considered unique due to extraordinary events, unique software, and failing RPT filters. Jeevan Scientific's segmental data classification was challenged. The AR relied on various tribunal decisions to support the exclusion of certain comparables. The DR supported the lower authorities' decisions based on lack of information. The Tribunal remitted the issues back to the TPO for fresh examination based on furnished particulars and relevant case laws.Issue 3: Disallowance made under section 14A:The AR contested the disallowance under section 14A, arguing that no exempt dividend income was earned during the year, and investments were not made to earn exempt income. The AR highlighted that investments were made from surplus funds, and no administrative overheads were attributable to the investments. The DRP and AO's decision to disallow expenses were challenged. The DR supported the lower authorities' order citing precedents. The Tribunal, following jurisdictional High Court decisions, deleted the addition made by the AO, as no exempt income was earned during the year, thereby allowing the assessee's grounds in this regard.In conclusion, the Tribunal remitted the issues related to transfer pricing adjustments and comparables back to the TPO for fresh examination based on furnished particulars and relevant case laws. The disallowance made under section 14A was deleted as no exempt income was earned during the year. The assessee's appeal was treated as allowed for statistical purposes.