2014 (9) TMI 517 - AT - Income Tax

Transfer pricing adjustment - International transactions Payment of corporate charges Details could not furnished before the authority earlier - Held that - The assessee received various technical, marketing and administrative support service from its AE - The TPO had restricted the payment of service fee to an amount - In terms of application dated 4.7.2014 under Rule 29 of the ITAT Rules, the assessee had sought to place on record the summary of invoices raised on the assessee by its AE during the financial year 2007-08 - The detailed break up of invoices on the basis of nature of services and the summary of the man hours spent by the various divisions of the AE in rendering technical, marketing and administrative service to Contitech group of companies - the specific details or complete break up of how the cost has been allocated could not be furnished before the completion of the proceedings before the TPO/DRP, since these details were to be obtained from its AE Germany - the details now produced have an important bearing for resolving the transfer pricing dispute thus, the matter is remitted back to the AO for fresh adjudication Decided in favour of assessee. Invocation of section 14A r/w Rule 8D Disallowance made for expenses incurred Held that - The assssee received dividend income - For making investment in shares and for earning such huge dividend income, it cannot be said, that the assesee has not incurred any indirect expenses such as management establishment expenses and other office overheads - The AO has given a categorical finding that the assessee s method of calculating expenditure in relation of income not included in the total income is not satisfactory - the AO s disallowance by invoking provisions of section 14A read with 8D (2) (iii) is justified and is in accordance with law Decided against assessee.

Issues Involved:
1. Transfer pricing adjustment on international transactions of payment of corporate charges.
2. Disallowance under section 14A of the Income-tax Act, 1961.

Detailed Analysis:

1. Transfer Pricing Adjustment on International Transactions of Payment of Corporate Charges:

Background:
The assessee, a wholly-owned subsidiary of a Danish company, engaged in manufacturing automotive and industrial power transmission V-Belts, filed a return declaring an income of Rs. 10,93,11,580/-. The assessment was completed, assessing the income at Rs. 12,42,56,100/- after making adjustments including a transfer pricing adjustment of Rs. 1,42,20,920/-.

Assessee's Argument:
The assessee entered into an agreement with its associated enterprise (AE) for availing technical, marketing, and administrative support services, incurring corporate charges of Rs. 1,58,01,022/-. The transaction was benchmarked using the Transactional Net Margin Method (TNMM) with an Operating Profit/Operating Cost (OP/OC) margin of 19%, which was higher than the 12.48% margin of comparable companies.

TPO's Adjustment:
The Transfer Pricing Officer (TPO) rejected the TNMM and applied the Comparable Uncontrolled Price (CUP) method, determining the arm's length price at Rs. 7,20,010/-. The TPO reasoned that the assessee failed to demonstrate the receipt of services, except partially for operations and supply chain management.

DRP's Decision:
The Dispute Resolution Panel (DRP) sustained the TPO's adjustment but increased the deduction from 5% to 10% of the total expenditure on an ad-hoc basis, considering economic factors and the increase in sales.

Tribunal's Findings:
The Tribunal admitted additional evidence provided by the assessee, including detailed invoices and man-hour summaries, which were not available during the TPO/DRP proceedings. The Tribunal found these details crucial for resolving the transfer pricing dispute and restored the matter to the TPO for de novo consideration, ensuring the assessee is given a reasonable opportunity to be heard.

Conclusion:
Grounds 2 to 2.9 were allowed for statistical purposes, with the transfer pricing dispute remanded to the TPO for fresh examination.

2. Disallowance under Section 14A of the Income-tax Act, 1961:

Background:
The assessee received dividend income of Rs. 56,83,646/-, which is exempt under section 10(34) of the Act. The Assessing Officer (AO) disallowed Rs. 5,32,712/- under section 14A read with Rule 8D, stating that the assessee did not account for indirect expenses related to earning the exempt income.

Assessee's Argument:
The assessee contended that no direct or indirect expenses were incurred to earn the exempt dividend income and objected to the proposed disallowance.

AO's Decision:
The AO, dissatisfied with the assessee's claim of nil disallowance, invoked section 14A(2) and applied Rule 8D to compute the expenses related to the exempt income.

DRP's Decision:
The DRP upheld the AO's view, affirming the disallowance.

Tribunal's Findings:
The Tribunal noted that for earning a significant dividend income, indirect expenses such as management and office overheads are inevitable. The AO's finding that the assessee's method of calculating expenditure was unsatisfactory was upheld. Consequently, the AO's disallowance of Rs. 5,32,712/- was deemed justified and in accordance with the law.

Conclusion:
Grounds 3 to 3.2 were rejected, and the disallowance under section 14A was upheld.

Final Decision:
The appeal of the assessee was partly allowed for statistical purposes, with the transfer pricing issue remanded for fresh consideration and the disallowance under section 14A sustained.

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