2019 (11) TMI 1774 - AT - Income Tax

TP Adjustment - adjustment made towards arm s length price of the export of cut and polished diamond to the AEs - applicability of internal TNMM - HELD THAT - We cannot direct the AO to apply internal TNMM by accepting the plea of the assessee. In our considered opinion assessee s claim of applicability of internal TNMM has to be established by furnishing relevant information/data relating to both AE and non AE transactions which as it appears has not been furnished before the Departmental Authorities. Therefore we think it appropriate to restore the issue to the AO/TPO to consider assessee s claim of internal TNMM as the most appropriate method to benchmark the export of diamond to AEs. In case the assessee is able to justify the applicability of internal TNMM through authentic data relating to both AE and non AE segments there should not be any hindrance in applying internal TNMM to benchmark the subject transaction as was directed by the Tribunal while deciding assessee s appeal in the assessment year 2011 12 cited supra. Accordingly the issue is restored back to the file of the Assessing Officer/Transfer Pricing Officer for de novo adjudication after due opportunity of being heard to the assessee. Ground raised is allowed for statistical purposes. Disallowance u/s 14A r/w rule 8D - as submitted by the assessee that since it did not receive any exempt income during the year under consideration no disallowance u/s 14A of the Act can be made - assessee had objected to applicability of section 14A on the plea that it had not earned any exempt income during the year under consideration - HELD THAT - The aforesaid contention of the assessee has remained uncontroverted. No material has been brought on record by the Revenue to suggest that the assessee had earned any exempt income during the year under consideration. Now it is fairly well settled that if any particular assessment year no exempt income has been earned no disallowance under section 14A of the Act can be made. Even the Hon ble Jurisdictional High Court in case of Ballarpur Industries Ltd. 2016 (10) TMI 1039 - BOMBAY HIGH COURT has expressed the aforesaid view. That being the case the disallowance made under section 14A of the Act cannot be sustained. Accordingly the Assessing Officer is directed to delete the disallowance

Summary

Issues involved:
1. Challenge to transfer pricing adjustment on the sale of goods to overseas Associated Enterprises.
2. Disallowance made under section 14A r/w rule 8D for not earning any exempt income during the year.

Detailed Analysis:

1. Transfer Pricing Adjustment:
The appeal arose from the final assessment order under the Income Tax Act, 1961, for the assessment year 2012-13. The assessee challenged the addition of Rs. 17,62,963 on account of transfer pricing adjustment related to the sale of goods to overseas Associated Enterprises (AE). The Transfer Pricing Officer applied the Transactional Net Margin Method (TNMM) since the assessee had not benchmarked the transaction, resulting in an upward adjustment to the arm's length price. The assessee argued for the application of internal TNMM, citing a previous Tribunal decision. However, the Tribunal noted that the assessee did not provide sufficient data to support the claim of internal TNMM. As a result, the issue was restored to the Assessing Officer/Transfer Pricing Officer for further adjudication after providing the assessee with an opportunity to be heard.

2. Disallowance under Section 14A:
The disallowance of Rs. 79,50,776 was made under section 14A r/w rule 8D due to the assessee's investment in exempt income-yielding assets, despite not earning any exempt income during the year. The assessee contended that since no exempt income was earned, section 14A r/w rule 8D should not apply. The Tribunal agreed with the assessee, emphasizing that if no exempt income was earned in a particular year, no disallowance under section 14A could be made. Relying on legal precedents, the Tribunal directed the Assessing Officer to delete the disallowance amount. Consequently, the assessee's appeal was partly allowed.

In conclusion, the Tribunal addressed the challenges related to transfer pricing adjustment and disallowance under section 14A, providing detailed reasoning for each issue and ultimately partially allowing the assessee's appeal.