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2013 (11) TMI 667 - AT - Income TaxTransfer pricing adjustment - Nature of transaction - agreement was between the Indian PSU and the Indian subsidiary of two non resident companies, which become one company - Sale of the health imaging division - Domestic transaction or international transaction - Meaning and scope of Associated Enterprises (AE) - Held that - to come within the purview of section 92(1), 92A(1) the transaction must go through the needle hole definition provided in section 92B(1). This, transaction, cannot be presumed to be international transaction, even when the revenue authorities have tried to include it as the deemed transactions, as the case made out by the TPO/AO in the instant case. - there was no international element involved in the sale of imaging segment by the assessee of its business to Carestream Health Ltd. and hold it was a purely a domestic transaction. - Decided in favour of assessee. Determination of arm s length price - Alien method - Purchase parity Interpretation of Section 92C(1) - Held that - It cannot be accepted that the word any has been used in section 92C(1), which could give leeway to the TPO to ascribe to a non specific method. Word any , is founded on the suffix, of the following methods being the most appropriate method . Therefore, the ambit of the word any in section 92C(1) has been restricted within the precinct of the five specific methods. This gathers strength from the fact that even in the Rules, relevant Rule 10B provides with the similar wordings - issue cannot be restored to the TPO because the methods, as prescribed by the legislature are mandatory, not directory. When mandatory provision is either superseded or ignored, it straightaway affects the jurisdiction. It was a case of suo moto reference to the TPO and it is the case of the revenue authorities, to import the provisions of Chapter X. In this circumstance, since the TPO did not adhere to the prescribed methods consciously, another innings to rectify the mistake cannot be allowed, as the TPO infringed the relevant provision of the Income Tax Act and Rules - entire case both on legality and on facts, as developed by the AO/TPO/DRP were initiated on wrong footings and were void and without jurisdiction - Decided in favour of assessee. Disallowance u/s 14A - Application of Rule 8D - Held that - Bald statement, made by the AO that he has referred to the accounts, does not give him an automatic jurisdiction to invoke the provisions of section 14A read with Rule 8D. Disallowance, made on such basis is not permissible. In order to give quietus to the impugned issue, where no expenditure has been attributed to wards the exempt income by the assessee, we, restore the issue of disallowance to the AO for computing the disallowance in accordance with the provisions of section 14A(2), if at all, by giving detailed reasoning and speaking order, needless to say that the AO shall give adequate and reasonable opportunity to the assessee to present its case - Decided in favour of assessee.
Issues Involved:
1. Whether the sale of the health imaging division was an "international transaction" under section 92B. 2. Whether the Transfer Pricing Officer (TPO) had jurisdiction to determine the Arm's Length Price (ALP) for the sale of the health imaging business. 3. The correctness of the Transfer Pricing adjustment of Rs. 79,96,60,415/-. 4. The appropriateness of the Transfer Pricing adjustment of Rs. 9,60,668/- for expenses incurred on behalf of Associated Enterprises (AEs). 5. The validity of the disallowance of Rs. 16,28,733/- under section 14A. Detailed Analysis: 1. Whether the Sale of the Health Imaging Division was an "International Transaction" under Section 92B: The assessee argued that the sale of its health imaging division to another domestic company was purely a domestic transaction and did not qualify as an international transaction under section 92B. The TPO determined otherwise, asserting that the transaction was part of a larger global transaction between the holding companies of the two Indian entities, thus qualifying it as an international transaction. The Tribunal held that the transaction between two domestic companies could not be deemed an international transaction under section 92B(2) because neither of the contracting parties was a non-resident, and there was no direct influence from the holding companies on the terms of the transaction. 2. Whether the TPO had Jurisdiction to Determine the ALP: The TPO assumed jurisdiction over the transaction, treating it as an international transaction and proceeded to determine the ALP. The Tribunal found that the TPO's assumption of jurisdiction was incorrect as the transaction was purely domestic. The Tribunal emphasized that for a transaction to be considered international under section 92B, one of the parties must be a non-resident, which was not the case here. 3. Correctness of the Transfer Pricing Adjustment of Rs. 79,96,60,415/-: The TPO's method of determining the ALP, based on the ratio of revenue, was challenged. The Tribunal noted that the TPO did not use any of the prescribed methods under section 92C(1) and instead adopted an unauthorized method. The Tribunal held that the TPO's computation was void as it did not adhere to the prescribed methods, and thus, the adjustment was not justified. 4. Appropriateness of the Transfer Pricing Adjustment of Rs. 9,60,668/- for Expenses Incurred on Behalf of AEs: The assessee argued that the markup of 10% on the expenses incurred on behalf of its AEs was reasonable and within the permissible range of +/-5% as per section 92C(2). The TPO had applied a 12.5% markup. The Tribunal found that the adjustment made by the TPO fell within the permissible range and thus should not have been made. The Tribunal directed the deletion of the adjustment. 5. Validity of the Disallowance of Rs. 16,28,733/- under Section 14A: The assessee contended that no expenditure was incurred to earn the exempt income and thus no disallowance under section 14A was warranted. The AO applied Rule 8D directly without recording satisfaction regarding the correctness of the assessee's claim. The Tribunal held that Rule 8D could not be invoked automatically and that the AO must first record satisfaction about the correctness of the assessee's claim. The Tribunal set aside the disallowance and directed the AO to re-examine the issue, providing a detailed and reasoned order. Conclusion: The Tribunal concluded that: - The sale of the health imaging division was not an international transaction. - The TPO did not have jurisdiction to determine the ALP for the transaction. - The Transfer Pricing adjustment of Rs. 79,96,60,415/- was void. - The adjustment of Rs. 9,60,668/- for expenses incurred on behalf of AEs was not justified. - The disallowance under section 14A was set aside for re-examination by the AO. The appeal filed by the assessee was allowed.
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