2015 (10) TMI 1890 - AT - Income Tax

Transfer pricing adjustment - addition made by the AO on account of difference in arms length price deleted by CIT(A) - Held that - It is clearly established that the assessee is carrying on the business activity other than as per service agreement with the principle. Therefore, the 10% markup is to be made only of ₹ 32,69,372/- in the absence of any comparable transaction. The action of the AO in making addition of ₹ 20,41,412/- is not in order. In view of above, we find that the Ld. CIT(A) has rightly deleted the addition of ₹ 20,41,412/- on this account. Therefore, we are of the view that no interference is called for in the well reasoned order passed by the Ld. CIT(A) - Decided against revenue. Disallowance u/s. 14A - CIT(A)restricted the disallowance - Held that - Even in we consider that expenses incurred on accounting & infrastructure services and auditor s remuneration amounting to ₹ 9,98,524/- and ₹ 2,18,994/- respectively are partly connected with the earning of dividend income and investment. Such disallowance should not be more than 10% of expenses of ₹ 12,17,518/- (i.e. ₹ 1,21,752/-) when the assessee has already disallowed and capitalized in investment a sum of ₹ 3,08,710/-.) - In view of the above discussion the disallowance, we find that the Ld. CIT(A) has rightly restricted to when no director s remuneration has been claimed by the Ld. CIT(A). Therefore, we are of the view that no interference is called for in the well reasoned order passed by the Ld. CIT(A), hence, we uphold the impugned order - Decided against revenue.

Summary

Issues Involved:

1. Deletion of addition of Rs. 20,41,412/- made by the AO on account of difference in arm's length price.
2. Restriction of disallowance u/s. 14A to Rs. 1,21,752/- in accordance with Rule 8D.

Detailed Analysis:

1. Deletion of Addition on Account of Difference in Arm's Length Price:

The primary issues were whether the appellant company solely rendered services to its parent company or engaged in additional business activities, and whether the markup percentage should apply to all expenses or only those related to services for the parent company. The AO referred to a service agreement dated 30.4.2008 with the principal company but did not consider the appellant's claim of other business activities. The AO did not account for the Memorandum of Association while calculating the arm's length price.

The assessee highlighted that the Memorandum of Association allowed for activities beyond the service agreement. The main objectives included manufacturing and dealing in various building materials and mining activities. The assessee also had an agreement with M/s Alps Industries Ltd. and investments in M/s Sagar Cement Ltd.

The sales of Rs. 35,96,309/- were from services rendered to the parent company, with expenses of Rs. 32,69,372/- for these services. The AO's addition of Rs. 20,41,412/- was incorrect as the assessee engaged in other business activities. The CIT(A) rightly deleted this addition, and the Tribunal upheld this decision, rejecting the Revenue's ground.

2. Restriction of Disallowance u/s. 14A:

The AO disallowed Rs. 37,12,429/- under section 14A read with Rule 8D, which was more than the dividend income of Rs. 20,32,762/-. The AO's reasoning was that the funds were primarily invested to earn exempt income. However, this disallowance was contradictory as the same expenses were considered for both arm's length price calculation and section 14A disallowance.

The assessee argued that expenses for consultancy services to the parent company and setting up business in India were distinct. The assessee offered a 10% disallowance on certain expenses, amounting to Rs. 1,21,752/-. The CIT(A) found this reasonable and restricted the disallowance accordingly. The Tribunal upheld this decision, finding no grounds for interference.

Conclusion:

The Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s decisions on both issues, and pronounced the order in the open court on 19.8.2015.