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2012 (11) TMI 1128 - AT - Income TaxTransfer Pricing Adjustment - whether under the TNMM analysis, adjustment is required to be made on total transactions entered as the analysis is on entity level? - Held that - CIT (A) order is in tune with the provisions of the Act as interpreted by the above orders of the ITAT. Since the arms length price has to be determined only with reference to the international transactions, whatever be the method followed or adopted for arriving at the ALP, the ALP can only be considered on the value of international transactions alone and not on the entire turnover of assessee. If this sort of adjustment is permitted this will result in increasing the profit of assessee on the entire non-AE sales also, which is not according to the provisions of Transfer Pricing mandated by the Act for the impugned assessment year. Therefore, the Revenue grounds on this are rejected. Non applying the safe harbor provisions of /- 5% - Held that - As seen from the order of the CIT (A) he has arrived at the difference in ALP at 1.86% and on the AE transactions he confirmed only an amount of ₹ 8,39,245/-. This amount is certainly within the /-5% range as provided under section 92CA(4) of the Income Tax Act. Not only that as submitted by the learned Counsel, the difference in price (operating profits/ sales) the A L P as per the TPO comes to ₹ 4,60,50,228/-. 105% of ALP ( 5% range) on this is at ₹ 4,83,52,739/-. 95% of the ALP determined (-5% range) is at ₹ 4,37,47,717/-. Therefore, the sales to AE at ₹ 4,51,20,741/- is within the safe harbor range. The difference in price (operating profits/ Total costs) ie.the second table, the A L P as per the TPO comes to ₹ 61,9930,280/-. The operating cost considered by TPO in TP report was ₹ 59,09,72,622. 105% of this ( 5% range) is at ₹ 65,09,26,794/-. 95% of this (-5% range) is at ₹ 58,89,33,766/-. Therefore, the operating cost at ₹ 59,09,72,622 is within the safe harbor range. Therefore, there is no need to make any addition under the provisions of the Transfer Pricing. Allocation of Expenses - Held that - As rightly pointed out by the CIT (A) since no evidence was furnished for the argument that most of the expenditure pertains to Mr. Mihir Bhansali was booked in another related firm, the contention of assessee cannot be accepted. No evidence was also placed before us. Since this issue was decided on factual basis, in the absence of justification of expenditure allocated disproportionately, there is no other option than to allocate on prorata basis. Therefore, the order of the CIT (A) is confirmed and assessee s contention on this is rejected. With reference to the miscellaneous expenses, we confirm the order of the CIT (A) as he has considered the issue on factual basis and also on the reason that the allocation to jewellery unit is very meager and there could be booking of expenditure in the unit not eligible for deduction. For these reasons, we upheld the order of the CIT (A) and reject assessee s contentions. With reference to the donations the CIT (A) examined this issue gave relief as it may result in double disallowance. Nothing was brought on record to counter the findings of the CIT (A), therefore, Revenue ground on this issue is rejected. Audit fees - Held that - As rightly pointed out by the CIT (A) assessee has not allocated a single paisa to the jewellery unit, though it claimed both the units are audited separately. The CIT(A) upheld the allocation of audit fees to the jewellery unit as well, as was done by the AO in the same ratio of sales. For these reasons, we uphold the order of the CIT (A) on the above issues and reject the grounds raised by the Revenue. Addition u/s 14A - Held that - Whether they are made with own funds or with borrowed funds and whether there is any expenditure incurred or not was not examined by AO and disallowed amount u/s 14A, invoking Rule 8D. As Rule 8D is not applicable for the impugned assessment year, the matter is restored to the file of AO for examination of the issue afresh and determining the reasonable amount as per the principles laid down by the Hon ble High court or Hon ble Supreme Court if any, after giving due opportunity to assessee. Additional ground is restored to the file of AO.
Issues Involved:
1. Transfer Pricing Adjustment 2. Allocation of Expenses 3. Disallowance under Section 14A Detailed Analysis: 1. Transfer Pricing Adjustment: The primary issue under this heading is the adjustment made by the AO based on the TPO's report, which initially added Rs. 1,20,84,042/- to the assessee's income. The CIT (A) reduced this adjustment to Rs. 8,39,245/-, limiting it to transactions with Associated Enterprises (AE). The Revenue contested this reduction, arguing that the adjustment should be made on the total transactions at the entity level, as per the TNMM analysis. The Tribunal upheld the CIT (A)'s decision, referencing multiple ITAT decisions that support the adjustment being limited to international transactions with AE only. It was noted that applying the adjustment to the entire turnover would inappropriately inflate the profits from non-AE transactions, which is not aligned with the Transfer Pricing provisions. The assessee also argued for the application of the safe harbor provision of +/- 5%. The Tribunal agreed, noting that the difference in the arm's length price (ALP) was within the safe harbor range of 5%, thus negating the need for any addition under Transfer Pricing provisions. Consequently, the Tribunal directed the deletion of the sustained addition of Rs. 8,39,245/-. 2. Allocation of Expenses: The AO reallocated various expenses between the diamond and jewellery units, using a sales ratio of 76:24, leading to a disallowance of Rs. 50,01,097/-. The CIT (A) partially upheld this reallocation, specifically for communication, conveyance, vehicle expenses, miscellaneous expenses, and audit fees, while accepting the assessee's allocation for travelling expenses and deleting the reallocation of donations. The Tribunal reviewed the CIT (A)'s findings: - Travelling Expenses: The Tribunal agreed with the CIT (A) that the allocation of Rs. 50,14,858/- to the jewellery unit was reasonable. - Communication and Conveyance Expenses: The Tribunal upheld the CIT (A)'s decision to allocate these expenses based on the sales ratio, as the assessee failed to provide sufficient evidence for a different allocation. - Miscellaneous Expenses: The Tribunal supported the CIT (A)'s partial reallocation after excluding specific charges related to the diamond unit. - Audit Fees: The Tribunal agreed with the CIT (A) that the audit fees should be allocated proportionately, as both units were audited separately. 3. Disallowance under Section 14A: The assessee raised the issue of disallowance under Section 14A, which was not previously contested before the CIT (A). The Tribunal admitted this as an additional ground and noted that the AO had disallowed Rs. 7,73,425/- based on Rule 8D, which was not applicable for the assessment year in question. The Tribunal directed the AO to re-examine the disallowance, considering whether the investments were made from own funds or borrowed funds and to determine the reasonableness of the expenditure as per the principles established by the Bombay High Court in Godrej & Boyce Mfg. Co. Ltd. vs. DCIT. The matter was restored to the AO for fresh examination and determination. Conclusion: The Tribunal dismissed the Revenue's appeal and partly allowed the assessee's cross-objection for statistical purposes, directing the deletion of the Transfer Pricing addition and remanding the Section 14A disallowance issue back to the AO for re-evaluation. The allocation of expenses was largely upheld as determined by the CIT (A).
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