2015 (6) TMI 1123 - HC - Income Tax

Adjustment restricted only on international transactions where the assessee has selected TNMM and applied the same on entity level by ITAT - Held that - Revenue is unable to show how it arises from the impugned order of the Tribunal. It appears that the question itself is academic. In the above view, there is no occasion to entertain question (a) as substantial question of law. Addition as the adjustment is with 5 per cent - Tribunal deleting the addition as the adjustment is with 5 per cent. as the Income-tax Appellate Tribunal has restricted the adjustment only on associated enterprise transactions which has resulted the adjustment within 5 per cent. - Held that - We find that the decision of the Tribunal is a factual determination of the arm s length price and the same is found within 5 per cent safe harbour range. This is not show to be perverse and/or arbitrary.Accordingly, no occasion to entertain question (b) can arise as it does not give rise to any substantial question of law. Disallowance under section 14A - Tribunal restoring the issue back to the file of the Assessing Officer for fresh consideration in view of the decision of Godrej and Boyce Manufacturing Co. Ltd. 2010 (8) TMI 77 - BOMBAY HIGH COURT - Held that - No fault can be found with the impugned order of the Tribunal inasmuch as it follows the decision of this court in Godrej and Boyce Mfg. Co. Ltd. v. Deputy CIT supra . Accordingly, there is no occasion to entertain question (c) as it does not give rise to any substantial question of law.

Summary

Issues:
1. Interpretation of the arm's length principle in international transactions.
2. Adjustment of income on associated enterprise transactions.
3. Disallowance under section 14A for fresh consideration.

Analysis:

Interpretation of the arm's length principle in international transactions:
The appeal challenged the order of the Income-tax Appellate Tribunal (ITAT) for the assessment year 2006-07 under the Income-tax Act, 1961. The Revenue raised questions regarding the justification of restricting adjustments on international transactions based on the arm's length principle. The Tribunal's decision was questioned on the presumption that if overall margins are below arm's length margins, the shortfall should be attributed only to associated enterprise transactions. However, the court found this question to be academic and not arising from the Tribunal's order, hence not a substantial legal issue.

Adjustment of income on associated enterprise transactions:
Regarding the addition made by the Assessing Officer on the appellant's transactions with associated enterprises, the Commissioner of Income-tax (Appeals) restricted the addition to 1.80% of sales to associated enterprises, amounting to Rs. 8.39 lakhs. Both the Revenue and the respondent-assessee appealed to the Tribunal. The Tribunal determined that the addition fell within the +/-5% range specified in section 92C of the Act, thus no further addition was warranted. The Tribunal's decision was based on factual findings within the safe harbor range, and the court upheld this decision, dismissing the appeal on this issue.

Disallowance under section 14A for fresh consideration:
The Tribunal's decision to restore the issue of disallowance under section 14A back to the Assessing Officer for fresh consideration was upheld by the court. The Tribunal's action was in line with the decision of the Bombay High Court in the case of Godrej and Boyce Manufacturing Co. Ltd. The court found no fault with this decision and concluded that no substantial legal question arose from this issue. Consequently, the appeal was dismissed with no order as to costs.