2013 (9) TMI 336 - AT - Income Tax

Disallowance as per the provisions of section 14A r.w Rule 8D of Income Tax Rules Held that - Following GODREJ AND BOYCE MFG. CO. LTD. Versus DEPUTY COMMISSIONER OF INCOME-TAX AND ANOTHER 2010 (8) TMI 77 - BOMBAY HIGH COURT - Rule 8D of Income-tax Rules, 1962 is applicable only from assessment year 2007-08. As further held by Hon ble High Court, the disallowance u/s 14A for the years prior to assessment year 2007-08 has to be made by adopting some reasonable method the order of the CIT(Appeals) was set aside on this issue and restore the matter to the file of the AO with a direction to recompute the disallowance of expenses to be made u/s 14A by applying some reasonable method after giving the assessee an opportunity of being heard. Addition made by Way of Transfer Pricing Adjustment It was contended that since the price charged to AEs was more than the price charged to non AEs, the international transactions with AEs involving export of bathrobes should be considered at arms length. - Held that - average price of bathrobes is likely to vary in a wide range depending on the type of bathrobes supplied and their product mix and in the absence of exact data made available by the assessee to compare the prices of similar products supplied to AEs and non-AEs, CUP cannot be applied as most appropriate method for the transfer pricing exercise. Moreover, there was also a difference in geographical location and size of the markets also in as much as the AEs of the assessee were in Italy whereas the non-AEs i.e. Wal Mart was based in USA having much bigger market than Italy. We, therefore, find no infirmity in the impugned order of the learned CIT(Appeals) confirming the action of the AO in rejecting the CUP method for benchmarking and applying the TNMM - Decided against the assessee. Consideration of DEPB benfits for working out profit margin - Held that - DEPB benefit received during the year under consideration should be considered as part of the turnover of the assessee for working out the profit margin to make the comparison of like to like and similar to similar. Since the profit margin of the assessee after taking into consideration the DEPB benefit as part of its turnover comes to 12.30% as against the average net profit margin of 13.05% of the comparables which is within the safe limit of 5%, we find ourselves in agreement with the learned CIT(Appeals) that no TP adjustment in respect of transactions made with the associated enterprises was required to be made in the case of the assessee - Decided against the revenue.

Summary

Issues Involved:
1. Disallowance under Section 14A read with Rule 8D.
2. Transfer Pricing Adjustment.

Detailed Analysis:

1. Disallowance under Section 14A read with Rule 8D:

The first issue pertains to the disallowance of Rs.1,45,192/- made by the Assessing Officer (AO) under Section 14A read with Rule 8D of the Income Tax Rules, which was confirmed by the Commissioner of Income Tax (Appeals) [CIT(A)]. The assessee, a company engaged in manufacturing bathrobes, had declared a total income of Rs.2,91,83,540/- and claimed dividend income of Rs.3,17,224/- as exempt under Section 10(38) of the Act without making any disallowance for expenses incurred in earning the said income. The AO applied Rule 8D to compute the disallowance, which was upheld by the CIT(A) based on the Special Bench decision in ITO v. Daga Capital Management (P.) Ltd. However, the Tribunal noted that the issue was covered by the Bombay High Court's decision in Godrej Boyce Manufacturing Co. Ltd. (2010) 234 CTR (Bom) 1, which held that Rule 8D is applicable only from the assessment year 2007-08 and disallowance for prior years should be made using a reasonable method. Consequently, the Tribunal set aside the CIT(A)'s order and directed the AO to recompute the disallowance using a reasonable method after giving the assessee an opportunity to be heard. Ground No. 1 of the assessee's appeal was thus allowed for statistical purposes.

2. Transfer Pricing Adjustment:

The second issue, common to Ground No. 2 of the assessee's appeal and Ground No. 4 of the Revenue's appeal, involves the addition made by the AO/Transfer Pricing Officer (TPO) by way of transfer pricing (TP) adjustment, which was deleted by the CIT(A). The assessee had exported bathrobes to its associated enterprises (AEs) in Italy and benchmarked the transactions using the Comparable Uncontrolled Price (CUP) method. The AO referred the matter to the TPO, who rejected the CUP method, arguing that the markets in Europe and America were different, and instead applied the Transactional Net Margin Method (TNMM) using comparables from the "Textiles - Terry Towels" industry. The TPO identified 11 comparables and found the average net profit margin to be 13.05% against the assessee's 5.04%, resulting in a TP adjustment of Rs.2,41,32,238/-.

The CIT(A) upheld the rejection of the CUP method due to geographical market differences but accepted the assessee's contention that the DEPB benefit should be included in the turnover for profit margin calculation. This inclusion brought the assessee's profit margin to 12.30%, which was within the safe harbor limit of 5% compared to the average margin of 13.05% of the comparables. The CIT(A) also noted that no TP adjustment was made in earlier years under similar circumstances and deleted the addition.

The Tribunal upheld the CIT(A)'s decision, agreeing that the DEPB benefit should be considered part of the turnover for comparability analysis and that no TP adjustment was necessary as the profit margin was within acceptable limits. The Tribunal dismissed both the Revenue's and the assessee's appeals, confirming the CIT(A)'s order.

Conclusion:

The Tribunal concluded by dismissing both the Revenue's and the assessee's appeals, upholding the CIT(A)'s decisions on both issues. The order was pronounced on 11/01/2013.