Tribunal rules in favor of assessee, quashes Transfer Pricing adjustment & Section 14A disallowance

Toyota Tsusho India P. Ltd. Versus The Joint / Deputy Commissioner of Income Tax, Circle 7 (1) (1), Bangalore.

Toyota Tsusho India P. Ltd. Versus The Joint / Deputy Commissioner of Income Tax, Circle 7 (1) (1), Bangalore. - TMI Issues Involved:
1. Transfer Pricing (TP) Adjustment
2. Disallowance under Section 14A of the Income Tax Act

Detailed Analysis:

Transfer Pricing (TP) Adjustment:

The assessee challenged the final assessment order passed by the National Faceless Assessment Centre (NFAC), Delhi, for the assessment year 2017-18, which retained a TP adjustment of Rs. 43,03,79,111. The primary contention was that the final assessment order did not comply with the directions of the Dispute Resolution Panel (DRP).

The DRP had directed the Transfer Pricing Officer (TPO) to reconsider the inclusion of certain comparables and exclude others. Specifically, the DRP instructed the TPO to re-examine M/s. Archroma India Pvt Ltd and M/s. Tarak Chemicals Limited based on the trading sales/total sales filter and to exclude M/s. Sirea India Private Ltd, which was functionally dissimilar.

The assessee argued that the final assessment order erroneously stated that the DRP had confirmed the addition made by the TPO, leading to an unchanged TP adjustment figure. The assessee also pointed out that the Joint Commissioner of Income Tax (JCIT), Circle 7(1)(1), Bangalore, had issued an Order Giving Effect (OGE) to the DRP directions, revising the TP adjustment to Rs. 31,38,49,565. However, the jurisdictional AO had become functus officio and had no authority to modify the final assessment order, rendering the OGE infructuous.

The Tribunal found merit in the assessee's contention, noting that the final assessment order was not in accordance with the DRP's directions. Consequently, the TP adjustment in the final assessment order was quashed, and the order dated 28.02.2022 passed by the jurisdictional AO was deemed unsustainable in law.

Disallowance under Section 14A:

The AO had disallowed Rs. 1,03,81,268 under Section 14A of the Income Tax Act, asserting that the assessee had made significant investments in unlisted equity and claimed substantial interest expenditure. The DRP upheld this disallowance.

The assessee contended that no exempt income was earned during the year, and therefore, Section 14A could not be invoked. The assessee also argued that the investments were made from its own funds and no specific expenditure was incurred towards these investments.

The Tribunal referred to the Delhi High Court's ruling in the case of PCIT vs Era Infrastructure (India) Ltd, which held that no disallowance under Section 14A could be made if no exempt income was earned by the assessee. The Tribunal also noted that the amendment to Section 14A introduced by the Finance Act 2022 was prospective and not applicable to the assessment year in question.

Considering that the assessee had not earned any exempt income during the year and following the Delhi High Court's decision, the Tribunal held that no disallowance was warranted under Section 14A and deleted the disallowance made by the AO.

Conclusion:

In conclusion, the appeal was allowed in favor of the assessee, quashing the TP adjustment and deleting the disallowance under Section 14A. The stay petition filed by the assessee was rendered infructuous.