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Issues: (i) whether the transfer pricing adjustment on export of cut and polished diamond to associated enterprises should be benchmarked by internal TNMM and remanded for fresh consideration; (ii) whether disallowance under section 14A could be sustained when no exempt income was earned during the year.
Issue (i): whether the transfer pricing adjustment on export of cut and polished diamond to associated enterprises should be benchmarked by internal TNMM and remanded for fresh consideration
Analysis: The assessee sought application of internal TNMM on the basis of similar non-AE transactions. The record, however, did not show that adequate segmental and comparative data for AE and non-AE transactions had been furnished before the Transfer Pricing Officer or the Dispute Resolution Panel. Although internal TNMM had been accepted in an earlier year, that conclusion rested on the availability of supporting factual material, which was not shown to exist in the present year. The issue therefore could not be finally decided on the existing record and required fresh examination with relevant authentic data.
Conclusion: The matter was restored to the Assessing Officer and the Transfer Pricing Officer for de novo adjudication. The assessee's claim of internal TNMM was kept open for verification on proper material, and the issue was decided in favour of the assessee for statistical purposes.
Issue (ii): whether disallowance under section 14A could be sustained when no exempt income was earned during the year
Analysis: The assessee had consistently objected to the disallowance on the ground that no exempt income had been received in the relevant year. That position remained uncontroverted, and no material was brought by the Revenue to show the receipt of exempt income. On that basis, the settled principle applied that section 14A cannot be invoked in the absence of exempt income for the year under consideration.
Conclusion: The disallowance under section 14A was deleted and the issue was decided in favour of the assessee.
Final Conclusion: The appeal succeeded in part. The transfer pricing issue was remanded for fresh consideration, while the disallowance under section 14A was deleted.
Ratio Decidendi: A transfer pricing claim based on internal TNMM must be supported by relevant segmental and comparative data, and a disallowance under section 14A cannot be sustained for a year in which no exempt income is shown to have been earned.
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