Rule 8D disallowance requires recorded dissatisfaction and cannot automatically increase book profit under minimum alternate tax.
Functional comparability under the Transactional Net Margin Method requires alignment of functions and risk profile; a full-risk advisory and procurement consultant is unsuitable for benchmarking routine, low-risk corporate support services. Deduction for eligible units remains available where prior jurisdictional precedent governs profit allocation despite the absence of separate books. Bank guarantee fees are not commission or brokerage because the bank acts on its own account, without a principal-agent relationship; tax deduction at source and consequential disallowance therefore do not arise. Rule 8D may be applied only after recorded dissatisfaction with the assessee's claim. Rule 8D disallowance also cannot be added to book profit under minimum alternate tax provisions.
Issues: (i) Whether Global Procurement Consultants Ltd. was functionally comparable to the assessee for benchmarking corporate support services under the Transactional Net Margin Method; (ii) Whether deduction under Section 10B was allowable despite the absence of separate books and the Revenue's objection to allocation of profits among eligible units; (iii) Whether bank guarantee charges attract tax deduction at source under Section 194H and consequential disallowance under Section 40(a)(ia); (iv) Whether disallowance under Section 14A read with Rule 8D is sustainable without recorded dissatisfaction with the assessee's suo motu disallowance; (v) Whether a disallowance computed under Section 14A read with Rule 8D may be added to book profit under Section 115JB.
Issue (i): Whether Global Procurement Consultants Ltd. was functionally comparable to the assessee for benchmarking corporate support services under the Transactional Net Margin Method
Analysis: The assessee rendered routine, low-risk corporate and administrative support services to associated enterprises. The proposed comparable undertook valuation consultancy, financial advisory and procurement-related advisory work, and operated as a full-risk consulting entrepreneur. Its functions and risk profile were materially different from those of the assessee.
Conclusion: Global Procurement Consultants Ltd. was not a valid comparable and was rightly excluded from the final comparable set, in favour of the assessee.
Issue (ii): Whether deduction under Section 10B was allowable despite the absence of separate books and the Revenue's objection to allocation of profits among eligible units
Analysis: The same deduction controversy in the assessee's earlier assessment years stood resolved in its favour by coordinate orders that had been affirmed by the jurisdictional High Court. The prior resolution governed the issue for the relevant year.
Conclusion: The deduction under Section 10B was allowable, in favour of the assessee.
Issue (iii): Whether bank guarantee charges attract tax deduction at source under Section 194H and consequential disallowance under Section 40(a)(ia)
Analysis: A bank issuing a guarantee provides a banking service on its own account and does not act as an agent of the customer. The guarantee fee is therefore not commission or brokerage within the meaning of Section 194H, as the essential principal-agent relationship is absent.
Conclusion: Bank guarantee charges did not attract deduction of tax under Section 194H, and no disallowance under Section 40(a)(ia) was permissible, in favour of the assessee.
Issue (iv): Whether disallowance under Section 14A read with Rule 8D is sustainable without recorded dissatisfaction with the assessee's suo motu disallowance
Analysis: Recourse to the prescribed method under Rule 8D requires the Assessing Officer to examine the accounts and record dissatisfaction with the correctness of the assessee's claim concerning expenditure incurred for exempt income. No such satisfaction was recorded before applying Rule 8D.
Conclusion: The Rule 8D-based disallowance made without valid recorded satisfaction was unsustainable, in favour of the assessee.
Issue (v): Whether a disallowance computed under Section 14A read with Rule 8D may be added to book profit under Section 115JB
Analysis: Section 14A operates for computation under Chapter IV, whereas Section 115JB falls under Chapter XII-B. Clause (f) of Explanation 1 to Section 115JB does not incorporate the Rule 8D computation, which also lacks necessary correlation with amounts actually debited to the profit and loss account.
Conclusion: A disallowance computed under Section 14A read with Rule 8D could not be added to book profit under Section 115JB, in favour of the assessee.
Final Conclusion: The exclusion of the functionally dissimilar comparable, the Section 10B deduction, and the treatment of bank guarantee charges remain undisturbed, while the Rule 8D-based additions under both normal computation and minimum alternate tax computation stand removed.