2014 (2) TMI 1229 - AT - Income Tax

Transfer pricing adjustment - mam selected - CUP v/s TNMM - Held that - As relying on earlier AY 2007-08 with regard to transfer pricing adjustment the appropriate method to be adopted was CUP in place of TNMM applied by the assessee. - Decided against assessee Addition on account of transfer pricing adjustment without granting the benefit of volume risk adjustments and other qualitative factors - Held that - As on account of various factors which inter-alia include an element of bad debt risk involved in the case of three parties which is much less probable in the case of related parties the assessee was entitled to get discount of approximately 11%. . If the same is taken into consideration according to the facts mentioned above no addition on this issue will survive. The impugned addition is deleted. - Decided in favour of assessee Addition on notional interest income on alleged delay in collection of invoices - Addition made on the ground that the average realization period from the AE exceeds similar period in respect of non-AE transaction - Held that - As the assessee did not charge any interest on non-AE transactions and in some cases the realization period of non-AE transactions was more than the similar realization period of AE transactions hence no addition was called for.- Decided in favour of assessee Disallowance under section 14A - Held that - It has been shown that assessee has its own sufficient funds which are sufficient to cover the investment from where the assessee has earned tax free income. Moreover on the major portion of the interest the AO has accepted the submissions of the assessee in subsequent year therefore we are of the opinion that addition on interest component is not called for. We confirm the addition to the extent of 90, 000/- and delete the addition of 10, 34, 917/- - Decided in favour of assessee partly

Summary

Issues Involved:
1. Transfer Pricing Adjustment using CUP Method vs. TNMM.
2. Transfer Pricing Adjustment without Volume, Risk Adjustments, and Qualitative Factors.
3. Notional Interest Income on Delayed Collection of Invoices.
4. Disallowance under Section 14A.

Issue-wise Detailed Analysis:

1. Transfer Pricing Adjustment using CUP Method vs. TNMM:
The Tribunal examined the appropriateness of the Comparable Uncontrolled Price (CUP) method versus the Transactional Net Margin Method (TNMM) for determining the arm's length price. The Tribunal upheld the use of the CUP method over TNMM, as applied by the Transfer Pricing Officer (TPO), citing that the CUP method requires a high degree of comparability in products and conditions. The Tribunal noted that in the diamond industry, differences in product features such as size, weight, and clarity make the application of the CUP method challenging. Despite these challenges, the Tribunal agreed with the TPO's application of the CUP method, dismissing the assessee's appeal on this ground.

2. Transfer Pricing Adjustment without Volume, Risk Adjustments, and Qualitative Factors:
The Tribunal considered the assessee's argument that adjustments should be made for volume, risk, and other qualitative factors. The Tribunal referenced its previous order, recognizing that factors such as volume differences, marketing expenses, and bad debt risks materially affect pricing. The Tribunal concluded that the assessee was entitled to an 11% discount for these factors, leading to the deletion of the impugned addition. Consequently, the Tribunal allowed the assessee's appeal on this ground.

3. Notional Interest Income on Delayed Collection of Invoices:
The Tribunal addressed the issue of notional interest income on delayed payments from Associated Enterprises (AEs). The TPO had calculated an adjustment based on a 70-day delay, resulting in an addition of Rs. 30,79,477/-. The Commissioner of Income Tax (Appeals) [CIT(A)] had partially upheld this adjustment, reducing it to Rs. 8,77,651/-. The Tribunal, referencing its earlier decision, noted that the assessee did not charge interest on delayed payments from third parties, and the volume of transactions with AEs was significantly higher. The Tribunal found no basis for the notional interest adjustment and deleted the entire addition, allowing the assessee's appeal and dismissing the revenue's appeal on this ground.

4. Disallowance under Section 14A:
The Tribunal reviewed the disallowance under Section 14A, calculated with reference to Rule 8D. The assessee argued that it had sufficient own funds to cover the investments yielding tax-free income, and the major portion of interest paid was on working capital. The Tribunal accepted the assessee's argument, supported by sufficient own funds and consistent with the AO's acceptance in subsequent years. The Tribunal confirmed the addition of Rs. 90,000/- but deleted the remaining Rs. 10,34,917/-, partly allowing the assessee's appeal on this ground.

Conclusion:
The Tribunal's judgment resulted in the following outcomes:
- The appeal concerning the use of the CUP method over TNMM was dismissed.
- The appeal for adjustments considering volume, risk, and qualitative factors was allowed.
- The appeal against the notional interest income adjustment was allowed, deleting the entire addition.
- The appeal on the disallowance under Section 14A was partly allowed, confirming Rs. 90,000/- and deleting Rs. 10,34,917/-.

Final Order:
The assessee's appeal was partly allowed, and the revenue's appeal was dismissed. The order was pronounced in open court on 04/02/2014.