2024 (11) TMI 1520 - AT - Income Tax

ALP adjustment under APA raised business profits deductible under s.10AA; s.92C(4) proviso inapplicable; s.14A/rule 8D no disallowance.

The Deputy Commissioner of Income-tax, Circle 4 (1) (1) Bangalore Versus EYGBS (India) Pvt. Ltd.

ITAT held that the ALP adjustment made pursuant to the APA increased the undertaking's business profits and those increased profits qualify for deduction ... Disallowance deduction u/s. 10AA and disallowance u/s. 14A r.w. rule 8D - AO relying upon the provisions of section 92C (4) denied the claim of deduction u/s. 10A vis-a-vis additional income offered by the assessee under APA proceedings. The also invoked the provisions of section 14A read with rule 8D and made a disallowance HELD THAT:- Similar issues have been considered in assessee’s own case [2020 (9) TMI 68 - ITAT BANGALORE] to hold that the ALP adjustment made pursuant to APA by the assessee in respect of Gurgaon SEZ unit results in increase in profits of the business of the undertaking/unit, the increased profits of the assessee being eligible for deduction under section 10AA of the Act given the wide nature of the expression used in section 10AA i.e. 'Profits of the business of the undertaking/unit' and that the proviso to section 92C(4) is not a bar to allowing such a claim. Further so far as the issue of 14A is concerned we note that the Ld. CIT (A) has categorically noted that the investments made by the assessee were already redeemed in the impugned year and there was no opening or closing balance at the end of year. We don’t find any infirmity in the order of the CIT(A). Therefore we dismiss both the appeals of the Revenue with respect to the issue of disallowance of section 10AA. Appeals filed by the Revenue are dismissed. ISSUES PRESENTED AND CONSIDERED 1. Whether an arm's length price (ALP) adjustment effected pursuant to an Advance Pricing Agreement (APA) or voluntarily declared by the taxpayer is covered by the proviso to section 92C(4) so as to deny deduction under section 10AA for the increment in income arising from such adjustment? 2. Whether disallowance under section 14A read with Rule 8D is justified in respect of exempt-income-related expenditure where investments (mutual funds) were made and redeemed within the same year and there is no opening or closing balance of such investments in the balance sheet? ISSUE-WISE DETAILED ANALYSIS - Issue 1: Applicability of proviso to s.92C(4) to ALP adjustments pursuant to APA or voluntary TP adjustments and claim of deduction under s.10AA Legal framework: Section 92C(4) permits the Assessing Officer to compute total income having regard to arm's length price determined under sub-section (3) and contains a proviso that 'no deduction under section 10A or section 10AA or section 10B or under Chapter VI-A shall be allowed in respect of the amount of income by which the total income of the assessee is enhanced after computation of income under this sub-section.' Section 10AA provides deduction in respect of profits of the business of a unit established in a Special Economic Zone (SEZ). Precedent treatment: Coordinate Bench decisions (including the assessee's own prior ITAT orders) and certain High Court / Tribunal authorities were followed. Decisions referenced and applied treat TP adjustments made by the Transfer Pricing Officer (TPO) under section 92CA as falling within the proviso, whereas voluntary TP adjustments and ALP adjustments pursuant to APA have been held to stand on a different footing and not to be hit by the proviso to section 92C(4). Specific precedents cited by the Court include (inter alia) prior coordinate-bench orders and reported Tribunal decisions applying the principle to APA/voluntary adjustments. Interpretation and reasoning: The proviso to s.92C(4) is directed to adjustments made pursuant to the TPO's determination under the statutory transfer pricing machinery (i.e. under section 92CA and the process culminating in a TP determination). The Court reasons that an adjustment which is voluntary or results from an APA entered into by the taxpayer is not an adjustment 'made by the Assessing Officer under sub-section (3)' in the sense contemplated by the proviso; instead it is an adjustment accepted or declared by the taxpayer (or agreed by mutual settlement in APA) which increases profits of the business/unit. Given the wide phrase in s.10AA - 'profits of the business of the undertaking/unit' - the increased profits arising from voluntary/APA ALP adjustment form part of profits eligible for deduction under s.10AA. The Court relies on earlier orders where similar voluntary adjustments or APA-driven increases were held eligible for s.10AA deduction and observes that departmental appeals were not pursued in some of those earlier instances, reinforcing the precedential position followed. Ratio vs. Obiter: The holding that voluntary transfer pricing adjustments and ALP adjustments pursuant to APA are not barred by the proviso to s.92C(4) for the purpose of claiming s.10AA deduction is treated as the ratio of the decision with direct application to the facts. References to other decisions and to the legislative language serve as supporting ratio; discussion of acceptances of past appellate outcomes by the department is precedent-focused supporting ratio. Any observations about distinctions between TPO adjustments and voluntary/APA adjustments are functional to the ratio rather than mere obiter. Conclusion: ALP adjustment pursuant to APA or voluntary ALP adjustments declared by the taxpayer are not covered by the proviso to section 92C(4) that denies deductions under section 10AA; hence the increment in income resulting from such APA/voluntary adjustments is eligible for deduction under section 10AA. ISSUE-WISE DETAILED ANALYSIS - Issue 2: Disallowance under section 14A read with Rule 8D where mutual fund investments made and redeemed in same year and no opening/closing balance Legal framework: Section 14A governs expenditure incurred in relation to income which does not form part of total income (exempt income), and Rule 8D prescribes the methodology for computing the disallowance attributable to exempt income where direct apportionment is not possible. Precedent treatment: The Commissioner of Income-tax (Appeals) had previously examined similar facts for an earlier assessment year and deleted the s.14A disallowance; that deletion was not contested before the Tribunal by the department, and that factual-legal finding was relied upon as persuasive for the impugned years. The Tribunal followed coordinate decisions accepting that where investments yielding exempt income are made and fully redeemed within the year leaving no opening/closing balances, the mechanics of Rule 8D and the factual matrix may not justify a disallowance. Interpretation and reasoning: The Court accepts the factual finding that investments in mutual funds were both made and redeemed in the relevant year and that the balance sheet shows no opening or closing balance of such investments. In such a factual scenario the basis for imputing expenditure attributable to exempt income under Rule 8D is attenuated. The appellate authority's reasoning that no expenditure with respect to exempt income was incurred, given the absence of carrying balances and the intra-year nature of the transactions, is not found to be infirm. The Court therefore defers to the factual-consequence conclusion reached by the CIT(A) and corroborated by the tribunal's assessment of similar earlier years. Ratio vs. Obiter: The conclusion that s.14A disallowance is not sustainable on these facts is treated as part of the operative ratio to dismiss the Revenue's challenge on disallowance. Observations about the departmental non-pursuit of appeals in earlier years are noted as corroborative precedent rather than pure obiter. Conclusion: Disallowance under section 14A read with Rule 8D is not warranted where mutual fund investments were made and redeemed within the year and there is no opening or closing balance, and the CIT(A)'s deletion of the s.14A addition is upheld. CONSOLIDATED CONCLUSION AND APPLICATION Given the coordinate-bench jurisprudence and the factual findings (including prior acceptance in analogous assessments), the proviso to section 92C(4) does not bar claim of deduction under section 10AA in respect of ALP adjustments pursuant to APA or voluntary TP adjustments; and the deletion of the section 14A disallowance is sustained on the specific factual matrix of intra-year mutual fund investments with no opening/closing balances. Accordingly, the Revenue's appeals were dismissed.