2016 (4) TMI 1349 - AT - Income Tax

Addition u/s 14A - sufficiency of own funds - HELD THAT - On perusal of the balance sheet of the appellant company it is apparent that assessee has its own interest free funds of Rs. 135.15 crore against investment made of only Rs. 482 crores therefore the presumption should be available with the assessee that as funds invested in this investment is out of its interest free funds. See RELIANCE UTILITIES & POWER LTD. 2009 (1) TMI 4 - BOMBAY HIGH COURT - We also get support from Hon ble Bombay High Court s decision in case of CIT v HDFC bank limited 2014 (8) TMI 119 - BOMBAY HIGH COURT where identical view has been taken. In view of this we reverse the decision of the ld. CIT (A) in confirming the disallowance. - Decided in favour of assessee. TP Adjustment - Comparable selection - comparability of international transactions with an uncontrolled transaction - HELD THAT - Merely because the company is having negative net worth but when the FAR is comparable it cannot be said to be non comparable unless it is shown that how the negative net worth of the company has impacted the profitability of the comparable company. The issue decided by Special bench in the case of DCIT V Quark Systems Limited 2009 (10) TMI 591 - ITAT CHANDIGARH where in the negative net worth company was considered and it was held that business organization with negative net worth cannot be treated at par with a normal business organization. However while considering that issue the comparable was also functionally not comparable in that case. Therefore there was no view expressed in that decision that though comparable has similar FAR still negative net worth company is required to be excluded without showing the impact of negative net worth on the profitability of the company. In view of this we direct the inclusion of this Company i.e. Muller & Phipp India Limited as comparable for the purpose of determining arms length price. Other sales exclusion while working out PLI - HELD THAT - No reason that the ld TPO to exclude the other sales of Rs. 1214675/- to be excluded while working out PLI. Against this no argument have been advanced by the ld DR that how the order of the ld CIT(A) is incorrect. In view of this we direct that other sales shall be included as operating income for working out PLI. Corporate support service exclusion - CIT(A) has held that Corporate Support Services are aggregated with the distribution function of the assessee and are insignificant in volume therefore included as operating income of the assessee - HELD THAT - DR has fairly agreed that if that income is to included as operating income then proportionate expenses are also required to be included as operating expenses. In our view there is no expenditure has been excluded pertaining to corporate support services. While working out the entity level PLO in case of TNMM method we are of the view that the Corporate Support service income should be included as operating income and therefore we do not find any infirmity in the order of the ld CIT(A). Liabilities No Longer required written back - This amount has been excluded by the ld TPO without assigning any reason - CIT(A) has confirmed his view as it is an extraordinary item - Argument of the ld DR that safe harbour rules also provides for not considering it as operating income. HELD THAT - We are of the view that safe harbour rules is optional and if the assessee has opted then only he has covered by it otherwise not. Therefore in the present case the assessee cannot precluded from stating that provision returned back written form part of the operating revenue. - Provisions no longer required written back is to be excluded if the assessee makes the provision and also reverses it as a normal business activity. Further if it is on account of revenue nature it should be included. However if the liabilities originally created are on account of capital items then their write back cannot be a normal instances of the business and hence to be excluded as operating income. As the fact for such write back are not available on record we set aside this issue to the file of the Ld. AO/ TPO to examine as per above direction and decide the issue afresh. Needless to say that the assessee may be provided reasonable opportunity for providing these details. Profit on account of foreign exchange / Repairs and maintenance expense - HELD THAT - We are of the view that foreign exchange gain if it is arising out of sales of goods that it should form part of the operating income of the assessee. It was submitted that Forex gain has arisen on account of export of goods. Ld. TPO as well as CIT (A) has not considered this issue and therefore we set aside it to the file of ld. TPO to deal with this issue on merit after giving proper opportunity of hearing to the assessee.

Summary

Issues Involved:
1. Disallowance under Section 14A of the Income Tax Act.
2. Transfer Pricing adjustments.

Detailed Analysis:

1. Disallowance under Section 14A of the Income Tax Act:

a) Deletion of Rs. 12,03,804/- Disallowance:
The Revenue appealed against the deletion of Rs. 12,03,804/- disallowed under Section 14A. The Assessing Officer (AO) had disallowed expenses proportionate to the dividend income, which constituted 6.66% of the total income. The AO calculated the disallowance at Rs. 21,55,159/- against the assessee's self-disallowance of Rs. 7,49,981/-. The Commissioner of Income Tax (Appeals) [CIT(A)] deleted the addition of Rs. 12,03,804/-, holding that the expenses did not relate to earning dividend income. The Tribunal upheld CIT(A)'s decision, noting that the AO could not establish a direct or indirect relationship between the excluded expenses and the exempt income.

b) Confirmation of Rs. 1,50,670/- Disallowance:
The assessee contested the confirmation of Rs. 1,50,670/- disallowed on account of interest expenditure. The assessee argued that it had sufficient interest-free funds to cover the investments in tax-free income yielding assets. The Tribunal agreed, referencing the Bombay High Court's decision in Reliance Utilities Ltd. v. CIT, which presumes investments are made from interest-free funds if such funds are sufficient. Consequently, the Tribunal reversed the CIT(A)'s decision, allowing the assessee's appeal.

2. Transfer Pricing Adjustments:

a) Rejection of Comparables:
The Transfer Pricing Officer (TPO) rejected two comparables, Argus Cosmetic Ltd. and Muller & Phipps India Ltd. The CIT(A) upheld these rejections. The Tribunal confirmed the exclusion of Argus Cosmetic Ltd. due to the unavailability of current financial data. However, it directed the inclusion of Muller & Phipps India Ltd., stating that negative net worth alone does not render a company non-comparable if the functions, assets, and risks (FAR) are similar.

b) Inclusion and Exclusion of Certain Income/Expenses:
The TPO excluded certain incomes from the Profit Level Indicator (PLI), which the CIT(A) partially rectified. The Tribunal addressed each item as follows:

- Other Sales (Rs. 12,14,675/-): The Tribunal upheld the CIT(A)'s inclusion of this amount as operating income.
- Corporate Support Services (Rs. 21,87,030/-): The Tribunal agreed with the CIT(A) that this income should be included as operating income.
- Liabilities No Longer Required Written Back (Rs. 55,66,871/-): The Tribunal set aside this issue for fresh examination by the AO/TPO, directing that only revenue nature write-backs should be included.
- Profit on Account of Foreign Exchange (Rs. 25,12,001/-): The Tribunal remanded this issue to the TPO to determine if the foreign exchange gain arose from trading operations, in which case it should be included as operating income.

Conclusion:
The Tribunal dismissed the Revenue's appeal regarding the deletion of Rs. 12,03,804/- and allowed the assessee's appeal concerning the Rs. 1,50,670/- disallowance. For transfer pricing issues, the Tribunal directed the inclusion of Muller & Phipps India Ltd. as a comparable and remanded the issues of liabilities written back and foreign exchange gain to the TPO for fresh consideration.