2014 (2) TMI 1215 - AT - Income Tax

Transfer pricing adjustment - whether in case of availability of internal CUP method TNMM could not be applied as per CIT(A) - Held that - We are in agreement with the observations of Ld. CIT(A) that in case of availability of internal CUP method TNMM could not be applied. What was necessary was that assessee should have been allowed the relief as per difference in the activities in the services rendered by it to related and unrelated parties. The said difference has been described in the tables submitted by the assessee to the TPO vide letter dated 29/11/2004. However TPO did not discuss those figures in his order but these figures are discussed in the order of Ld. CIT(A). The TPO did not point out any defect in such calculation of the assessee. It has been described in the above submission that assessee had to incur additional cost to the tune of 0.29% in relation to services rendered by it to unrelated parties when the same is compared to the similar services rendered to the related parties. In view of these facts we are of the opinion that Ld. CIT(A) was right in granting relief to the assessee and we decline to interfere in his findings on this issue.- Decided in favour of assessee Disallowance under section 14A - CIT(A) deleted the entire addition - Held that - Respectfully following the order of the Tribunal in assessee s own case for A.Y 2001-02 we hold that Rs. 10, 000/- should be disallowed under section 14A of the Act. Accordingly this ground of the revenue is partly allowed. Disallowance in respect of Club Membership Fees - CIT(A) deleted the entire addition - Held that - This issue is covered in favour of the assessee by the decision of Hon ble Supreme Court in the case of CIT vs. United Glass Manufacturing Co. 2012 (9) TMI 914 - SUPREME COURT holding that club membership fees for employees incurred by the assessee is business expense under Section 37 - Decided in favour of assessee. Addition considered as capital in nature in respect of software support services repairs and maintenance - CIT(A) deleted the entire addition - Held that - Similar disallowance was allowed in respect of assessment year 2001-02 to held that such expenditure was revenue expenditure.- Decided in favour of assessee.

Summary

Issues Involved:
1. Determination of the most appropriate method for transfer pricing adjustment.
2. Disallowance under section 14A for expenditure incurred for earning dividend.
3. Disallowance of club membership fees.
4. Classification of software, support services, repairs, and maintenance expenses as capital or revenue expenditure.
5. General grounds raised by the Revenue.

Issue-wise Detailed Analysis:

1. Determination of the most appropriate method for transfer pricing adjustment:
The primary issue in both the assessee's and the revenue's appeals was the determination of the arm's length price (ALP) for broking services provided by the assessee to related and unrelated parties. The assessee contended that the Transactional Net Margin Method (TNMM) was the most appropriate method, while the Transfer Pricing Officer (TPO) and the CIT(A) favored the Comparable Uncontrollable Price (CUP) method. The TPO rejected the TNMM and applied the CUP method, leading to a transfer pricing adjustment of Rs. 74,79,266/-. The CIT(A) upheld the use of the CUP method but allowed adjustments for differences in functions performed, assets employed, and risks assumed, thereby deleting the addition. The Tribunal agreed with the CIT(A) that the CUP method was appropriate given the availability of internal comparables and upheld the deletion of the transfer pricing adjustment, dismissing both the assessee's and the revenue's appeals on this ground.

2. Disallowance under section 14A for expenditure incurred for earning dividend:
The AO disallowed Rs. 13,76,355/- under section 14A as expenditure incurred for earning tax-free dividend income. The CIT(A) deleted this disallowance, noting that the assessee did not utilize interest-bearing borrowed funds and incurred no significant expenses to earn the dividend. The Tribunal, referencing its earlier order for the assessment year 2001-02, upheld a nominal disallowance of Rs. 10,000/- under section 14A, thereby partly allowing the revenue's appeal on this ground.

3. Disallowance of club membership fees:
The AO disallowed Rs. 6,54,000/- claimed by the assessee for club membership fees. The CIT(A) deleted this disallowance, and the Tribunal upheld this decision, referencing the Supreme Court's ruling in CIT vs. United Glass Manufacturing Co. Ltd., which recognized club membership fees for employees as a business expense deductible under section 37(1) of the Income Tax Act, 1961. Thus, this ground of the revenue's appeal was rejected.

4. Classification of software, support services, repairs, and maintenance expenses as capital or revenue expenditure:
The AO treated expenses amounting to Rs. 33,61,974/- as capital in nature. The CIT(A) deleted this addition, treating the expenses as revenue expenditure. The Tribunal noted that in the immediate preceding year, the AO had accepted similar expenses as revenue in nature following the Tribunal's directions. Consequently, the Tribunal upheld the CIT(A)'s decision, rejecting the revenue's appeal on this ground.

5. General grounds raised by the Revenue:
The Revenue's general grounds (Ground Nos. 5 and 6) were not specifically argued, and the Tribunal dismissed these grounds as general in nature without further discussion.

Conclusion:
The Tribunal dismissed the assessee's appeal and partly allowed the revenue's appeal by upholding a nominal disallowance under section 14A. The Tribunal upheld the CIT(A)'s decisions on the appropriate method for transfer pricing adjustment, the disallowance of club membership fees, and the classification of software-related expenses as revenue expenditure.