2025 (1) TMI 325 - AT - Income Tax

Hong Kong entity deemed Associated Enterprise under Section 92A(2)(j) due to relative control relationships

ITAT Chennai held that Hong Kong entity qualified as Associated Enterprise under Section 92A(2)(j) being controlled by relatives of assessee's controlling ... TP Adjustment - upholding M/s. ASK Re Ltd., Hong Kong as Associated Enterprises as per Section 92A - HELD THAT:- M/s. ASK Re Ltd., Hong Kong is controlled jointly by relatives of controlling shareholder of the assessee-company and falls u/s. 92A(2)(j) of the Act. Selection of MAM - rejecting the CUP and applying TNMM as MAM and making adjustment in respect of purchases from the AE - HELD THAT:- TPO has rejected the CUP methods giving the reason that the assessee has neither used internal CUP nor external CUP and questioned the markup of 1.09% but we are not in agreement to TPO and Ld. DRP as the price at which assessee has purchased the goods from AE is comparable to price at which third party have sold goods and if price from independent party is available, CUP is the most appropriate method to bench mark the transaction. CUP method is the MAM and the adjustment made by the TPO/Ld. DRP is uncalled for. Thus, these grounds of appeal of the assessee are allowed. Disallowance u/s. 14A r/w Rule 8D - assessee has made investment which is capable of earning income exempt from tax - AR has argued that the assessee does not have any exempt income and the A.O has made the disallowance without recording any reason - HELD THAT:- It has been consistently held by the court disallowances u/s 14A cannot exceed the exempt income. As decided in the case of Era Infrastructure (India) Ltd. [2022 (7) TMI 1093 - DELHI HIGH COURT] that subsequent amendment made by Finance Act, 2022 for Section 14A of the Act by inserting non-obstante clause and explanation cannot be presumed to have a retrospective effects. Also in the case of M/s Maxivision Eye Hospital Pvt. Ltd. [2022 (7) TMI 1450 - ITAT CHENNAI] since the assessee has not earned any exempt income, no disallowance can be resorted by invoking the provisions of section 14A of the Act read with Rule 8D(2) of the Rules. Decided in favour of assessee. 1. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered in this judgment are:Whether M/s. ASK Re Ltd., Hong Kong qualifies as an Associated Enterprise (AE) under Section 92A of the Income-tax Act, 1961.Whether the Comparable Uncontrolled Price (CUP) method should be used as the Most Appropriate Method (MAM) for benchmarking international transactions instead of the Transaction Net Margin Method (TNMM).Whether the disallowance under Section 14A of the Income-tax Act, read with Rule 8D of the Income Tax Rules, 1962, is justified in the absence of exempt income.2. ISSUE-WISE DETAILED ANALYSISIssue 1: Associated Enterprise StatusRelevant legal framework and precedents: Section 92A of the Income-tax Act defines an AE based on control, capital, or management. The appellant argued against the AE status by referencing cases such as DLF Holding Ltd. v. DCIT and ACIT v. Veer Gems.Court's interpretation and reasoning: The Tribunal considered the shareholding and control structure, noting that relatives of the controlling shareholders of the appellant company also controlled M/s. ASK Re Ltd., Hong Kong.Key evidence and findings: The appellant had declared M/s. ASK Re Ltd., Hong Kong as an AE in Form-3CEB, and the Tribunal found sufficient control linkage under Section 92A(2)(j).Application of law to facts: The Tribunal concluded that M/s. ASK Re Ltd., Hong Kong was an AE due to the control exerted by relatives of the appellant's shareholders.Treatment of competing arguments: The Tribunal distinguished the appellant's cited cases based on factual differences in control and shareholding.Conclusions: The Tribunal upheld the AE status of M/s. ASK Re Ltd., Hong Kong.Issue 2: Most Appropriate Method for Transfer PricingRelevant legal framework and precedents: The choice of MAM for transfer pricing is governed by the Income-tax Rules, which prioritize methods based on the availability of comparable data.Court's interpretation and reasoning: The Tribunal evaluated the appropriateness of the CUP method versus TNMM, considering the availability of comparable prices.Key evidence and findings: The appellant argued that the AE's markup was minimal (1.09%) and comparable prices were available, supporting the use of the CUP method.Application of law to facts: The Tribunal found that the CUP method was more appropriate given the availability of comparable third-party prices.Treatment of competing arguments: The Tribunal disagreed with the TPO's rejection of the CUP method, emphasizing the availability of comparable data.Conclusions: The Tribunal ruled in favor of using the CUP method as the MAM and dismissed the adjustment made using TNMM.Issue 3: Disallowance under Section 14ARelevant legal framework and precedents: Section 14A disallows expenses related to earning exempt income, and Rule 8D prescribes the method for calculating such disallowance.Court's interpretation and reasoning: The Tribunal considered whether disallowance under Section 14A is justified when no exempt income is earned.Key evidence and findings: The appellant reported no exempt income for the assessment year, challenging the disallowance under Section 14A.Application of law to facts: The Tribunal referenced decisions such as PCIT v. Era Infrastructure (India) Ltd., which held that disallowance cannot exceed exempt income.Treatment of competing arguments: The Tribunal rejected the A.O's reliance on Rule 8D without evidence of exempt income.Conclusions: The Tribunal deleted the disallowance under Section 14A, aligning with the principle that disallowance should not exceed exempt income.3. SIGNIFICANT HOLDINGSPreserve verbatim quotes of crucial legal reasoning: 'The price at which assessee has purchased the goods from AE is comparable to price at which third party have sold goods and if price from independent party is available, CUP is the most appropriate method to benchmark the transaction.'Core principles established: Disallowance under Section 14A cannot exceed the actual exempt income earned; the CUP method is preferred when comparable prices are available.Final determinations on each issue: M/s. ASK Re Ltd., Hong Kong is confirmed as an AE; CUP method is the MAM for transfer pricing; disallowance under Section 14A is deleted.In conclusion, the Tribunal's judgment addresses the complexities of transfer pricing and disallowance under Section 14A, emphasizing the importance of factual accuracy and adherence to legal precedents in determining tax liabilities.