Appeal partly allowed, transfer pricing issue set aside for reassessment, CIT(A)'s decision upheld on disallowance under Section 14A.

The Tribunal partly allowed the appeal, setting aside the transfer pricing adjustment issue for reassessment, upholding the CIT(A)'s decision on the disallowance under Section 14A, and confirming the higher depreciation rate on UPS. The order was pronounced on 02.05.2018.

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Issues Involved:
1. Transfer Pricing Adjustment
2. Disallowance under Section 14A
3. Depreciation on UPS

Detailed Analysis:

1. Transfer Pricing Adjustment:
The first issue revolves around the addition of Rs. 1,11,72,735/- on account of transfer pricing adjustment. The assessee, engaged in manufacturing sheet metal components and other products, declared international transactions totaling Rs. 5.26 crore. The Transfer Pricing Officer (TPO) disputed only the commission payment to its associated enterprise (AE), M/s Bull Moose Tube. The assessee justified the commission payment under the Profit Split Method (PSM), but the TPO found no substantial evidence supporting the arm's length price (ALP) and determined the ALP at Nil using the Comparable Uncontrolled Price (CUP) Method. The CIT(A) allowed 75% of the commission as a deduction, reducing the disallowance to Rs. 27,93,184/- and providing relief of Rs. 83,79,551/-.

Upon review, the Tribunal found no basis for the 75% deduction allowed by CIT(A). The Tribunal highlighted that the TPO's use of the "Benefit test" was inappropriate, referencing the Punjab & Haryana High Court's ruling in Knorr-Bremse India P. Ltd. vs. ACIT, which stated that the arm's length nature of a transaction is not contingent on profit increase. The Tribunal also noted that the TPO failed to provide comparable uncontrolled instances as required by rule 10B(1)(a)(i). The Tribunal set aside the impugned order and remanded the matter to the AO/TPO for reassessment in line with the jurisdictional High Court's ruling in CIT v. Cushman & Wakefield (India) (P.) Ltd., emphasizing the AO's role in determining the deductibility under section 37(1) of the Act.

2. Disallowance under Section 14A:
The second issue pertains to the disallowance under Section 14A, where the assessee earned exempt dividend income of Rs. 20,11,752/- but offered no disallowance. The AO invoked Rule 8D, resulting in a disallowance of Rs. 51,47,448/-, which included an interest component of Rs. 45,86,464/-. The CIT(A) restricted the disallowance to Rs. 5,60,984/-.

The Tribunal upheld the CIT(A)'s decision, referencing the Bombay High Court's ruling in CIT vs. Reliance Utilities and Power Ltd., which established that if an assessee has sufficient interest-free funds, it can be presumed that investments were made from these funds. The Tribunal also cited the Karnataka High Court's ruling in CIT & Anr vs. Microlabs and the Supreme Court's judgment in Godrej & Boyce Manufacturing Company Ltd. vs. DCIT, reinforcing that no disallowance of interest can be made if interest-free funds exceed the investments. Given that the assessee's shareholders' funds were significantly higher than the investments, the Tribunal found no basis for the disallowance of interest and dismissed the Revenue's appeal on this ground.

3. Depreciation on UPS:
The final issue concerns the disallowance of depreciation on UPS. The assessee claimed depreciation at 60% on UPS worth Rs. 1,39,428/-, but the AO restricted it to 15%, resulting in a disallowance of Rs. 48,460/-. The CIT(A) deleted this addition.

The Tribunal upheld the CIT(A)'s order, referencing the Delhi High Court's ruling in CIT vs. BSES Yamuna Powers Ltd. and the ITAT Special Bench decision in DCIT vs. Data Craft India Ltd., which affirmed the entitlement to a higher rate of depreciation on computer peripherals. Consequently, the Tribunal allowed the higher depreciation rate as claimed by the assessee.

Conclusion:
The Tribunal partly allowed the appeal for statistical purposes, setting aside the transfer pricing adjustment issue for reassessment, upholding the CIT(A)'s decision on the disallowance under Section 14A, and confirming the higher depreciation rate on UPS. The order was pronounced in the open court on 02.05.2018.

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