2015 (9) TMI 1518 - HC - Income Tax

Disallowance u/s. 14A - Rule 8D applicability - Held that - Questions stands concluded against the Revenue by the decision of this Court in Godrej & Boyce Manufacturing Co. Ltd. v/s. DCIT 2010 (8) TMI 77 - BOMBAY HIGH COURT . TPA - determining its Arms Length Price (ALP) - Respondent had adopted the Comparable Uncontrolled Price (CUP) method - grievance of the Revenue before us is that the impugned order ought to have not disturbed the findings of the TPO and Assessing Officer by adding the DEPB benefits obtained by the Respondent-Assessee to its turnover - Held that - We find no fault with the order of the Tribunal, comparing the profit margin of the Respondent-Assessee with those of the Comparable companies after adding in the DEPB benefit obtained by it. This was particularly so as the comparison has to be between comparables and the Respondent on a like measure. The contention of the Revenue to ignore the DEPB in case of Respondent-Assessee when the same is taken into account for determining the price of comparables leads to distortion in comparison. On facts, two authorities have come to a concurrent finding of fact that no Transfer Pricing adjustment is called for as the difference between the profit of comparables and Respondent-Assessee is less then 5% i.e. well within the safe harbor Rules. This finding of fact has not been shown to be perverse and/or arbitrary.

Summary

Issues:
1. Challenge to the order of the Income Tax Appellate Tribunal under Section 260A of the Income Tax Act, 1961 for Assessment Year 2005-06.
2. Questions of law raised by the Revenue regarding disallowance under section 14A, application of Rule 8D, and transfer pricing adjustments.
3. Dispute over the application of the Comparable Uncontrolled Price (CUP) method and the Transaction Net Margin Method (TNMM) for determining Arms Length Price (ALP).
4. Allegation of misdirection by the Tribunal in agreeing with Commissioner (Appeals) without considering all relevant comparables in transfer pricing analysis.

Analysis:
The High Court of Bombay heard an appeal challenging the order of the Income Tax Appellate Tribunal for Assessment Year 2005-06. The Revenue raised questions regarding the disallowance under section 14A, specifically concerning the application of Rule 8D based on the judgment in Godrej & Boyce Manufacturing Co. Ltd. The Court noted that the issue had been settled against the Revenue by previous decisions, including the Supreme Court's dismissal of a Special Leave Petition (SLP) related to the matter. Consequently, the questions related to Rule 8D were not entertained.

Regarding the transfer pricing issue, the Respondent-Assessee, engaged in exporting bathrobes to Associated Enterprises, had adopted the Comparable Uncontrolled Price (CUP) method for determining the Arms Length Price (ALP). The Transfer Pricing Officer (TPO) disagreed with the CUP method and used the Transaction Net Margin Method (TNMM) instead. The Court observed discrepancies in the treatment of export benefits like Duty Drawback received by the Respondent and the comparables. The Assessing Officer made a Transfer Pricing adjustment, which was upheld by the CIT(A).

Upon appeal, the Tribunal confirmed the application of TNMM and dismissed both the Revenue's and the Assessee's appeals. The Tribunal emphasized the importance of considering DEPB benefits in turnover for accurate comparison. The Court agreed with the Tribunal's decision, stating that the inclusion of DEPB benefits in the turnover of the Respondent was necessary for a fair comparison with the comparables. The Court found no fault with the Tribunal's decision, as the profit margin differences were within the safe harbor limit of 5%, indicating no need for Transfer Pricing adjustment.

In conclusion, the Court dismissed the appeal, upholding the Tribunal's decision on the transfer pricing matter. The Court found no substantial question of law arising from the issues raised by the Revenue, ultimately rejecting the Revenue's contentions and affirming the Tribunal's order.