2015 (5) TMI 1027 - AT - Income Tax

Disallowance u/s 14A - CIT(A) restricted part disallowance - Held that - In the present case, the entire investment has been made by the assessee in the subsidiary company, therefore, it is not a case of reshuffling investment of portfolio by the assessee which requires the involvement of the management in the regular decision making process. It appears that this is a strategic investment and further does not require regular e valuation and re consideration of retaining or reshuffling of the investment. Further, we find that the estimate of disallowance on account of general administrative expenses made by the learned CIT(A) at ₹ 5,00,000, is within the range of 1% to 2% of the exempt income which is found to be reasonable keeping in view of the fact of the case that the entire investment had been made by the assessee in the subsidiary company. Accordingly, we do not find any error or infirmity in the order of the learned CIT(A) qua the present issue. - Decided against revenue Transfer pricing adjustment - clubbing of results of three group companies of Suzlon for the purpose of determining the arm s length price - Held that - Suzlon Energy Ltd. was engaged in the activities of supply alone whereas the assessee is in the business of supply, installation, commissioning as well as development of sites. Thus, it is clear that the business activities carried out by the assessee are not comparable with the Suzlon Energy Ltd., for the purpose of determination of arm s length price. The Transfer Pricing Officer included the Suzlon Energy Ltd. in the computation of arm s length price, however, in view of the fact that the Suzlon Energy Ltd. is not a functional comparable to the assessee, therefore, the inclusion of Suzlon Energy Ltd. in the list of comparable is not proper. The learned CIT(A) accepted the objection of the assessee that Suzlon Energy Ltd. alone is not a good comparison of the assessee and, therefore, clubbed the margins of all the three companies. Further, we note that the Transfer Pricing Officer has determined the arm s length price at 13.39% in the comparison to the operating margin of the assessee @ 11.57%. However, the Transfer Pricing Officer has not given the benefit of tolerance range of 5% while making the adjustment. Without going into the controversy whether the learned CIT(A) is justified in taking the consolidated results of three group companies of Suzlon, we note that when the Suzlon Energy Ltd. is not a comparable and, therefore, cannot be included in the set of comparables for the purpose of determination of arm s length price and further the arm s length price determined by the Transfer Pricing Officer is within the tolerance range of 5%, then the clubbing of results of three group companies by the learned CIT(A) would be inconsequential . - Decided against revenueTherefore, in view of the above facts and circumstances of the case, we do not find any reason to interfere with the order of the learned CIT(A) qua this issue when the action of the Transfer Pricing Officer including Suzlon Energy Ltd. in the list of comparable is not sustainable. - Decided against revenue

Summary

Issues Involved:
1. Disallowance under Section 14A of the Income Tax Act.
2. Transfer Pricing Adjustment under Section 92CA of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Disallowance under Section 14A:

During the assessment year 2005-06, the Assessing Officer (AO) noted that the assessee had invested `107.16 crores in its subsidiary companies and received interest exempt under Section 10(23G) of the Income Tax Act. The AO proposed to disallow expenditure under Section 14A by invoking Rule 8D of the Income Tax Rules, 1962, resulting in a disallowance of `15,64,000. The assessee contended that the investment was made from its own funds and no expenditure was incurred for earning the exempt income. The Commissioner of Income Tax (Appeals) [CIT(A)] held that Rule 8D was not applicable for the year under consideration, as per the judgment in Godrej & Boyce Mfg. Co. Ltd. v/s DCIT, and made a reasonable estimate of disallowance at `5,00,000. The Revenue argued that the CIT(A) did not provide a basis for this restriction. However, the Tribunal found that since the entire investment was made in the subsidiary company and no reshuffling of the portfolio was involved, the disallowance estimate by the CIT(A) was reasonable. Thus, the Tribunal upheld the CIT(A)'s decision and dismissed the Revenue's ground on this issue.

2. Transfer Pricing Adjustment:

The assessee, engaged in manufacturing wind turbine generators and installation of windmills, recorded international transactions, including imports and exports with group entities. The assessee used the Transactional Net Margin Method (TNMM) for benchmarking, selecting 11 comparables and arriving at a mean margin of 7.16% against its operating margin of 11.57%. The Transfer Pricing Officer (TPO) rejected these comparables and included Suzlon Energy Ltd., arriving at a mean margin of 13.39%. The assessee objected, stating Suzlon Energy Ltd. was not functionally comparable as it did not perform installation and commissioning activities. The CIT(A) accepted the assessee's contention, considering the combined margin of Suzlon Energy Ltd. and its associated companies, resulting in a recalculated margin of 11.21%, which was within the tolerance range of 5% compared to the assessee's margin of 11.15%. The Tribunal found that Suzlon Energy Ltd. was not a proper comparable and upheld the CIT(A)'s decision to exclude it. The Tribunal also noted that the TPO did not give the benefit of the 5% tolerance range. Therefore, the Tribunal dismissed the Revenue's appeal on this issue as well.

Conclusion:

The Tribunal upheld the CIT(A)'s decisions on both issues, finding no error or infirmity in the CIT(A)'s orders. The appeal by the Revenue was dismissed in its entirety.