2016 (4) TMI 204 - AT - Income Tax

Transfer pricing adjustment - adjustment in respect of international transaction relating to export of manufactured IC engines by considering the difference in the gross margin earned by the assessee from sale of IC engines in the domestic market and gross margin earned by the assessee from export of IC engines to AEs - CIT(A) deleted the addition - Held that - We find no infirmity in the order of the CIT(A) who has decided the issue as per the provisions of Rule 10B(e) as well as para 3.26 of the OECD guidelines as well as various other decisions according to which net profit margin of controlled transactions has to be compared with net profit margin of uncontrolled transactions. The Ld. Departmental Representative could not controvert the legal and factual findings given by the CIT(A). In absence of any distinguishable features brought before us by the Ld. Departmental Representative we do not find any infirmity in the order of Ld.CIT(A) deleting the addition. Accordingly, the same is upheld. Since we are dismissing the ground raised by the revenue by upholding the order of CIT(A) on the issue of net margin, the other arguments of the assessee are not considered being academic in nature. Grounds raised by the revenue are accordingly dismissed. Disallowance u/s 14A - Held that - We find the assessee during the impugned assessment year has earned interest and dividend income of ₹ 31,41,04,213/- which it claimed as exempt. We find the AO applying the provisions of Rule 8D disallowed an amount of ₹ 40,36,560/-. In appeal the Ld.CIT(A) following the decision of Hon ble Bombay High Court in the case of Godrej and Boyce Mfg. Company Pvt. Ltd. (2010 (8) TMI 77 - BOMBAY HIGH COURT ) deleted the addition holding that provisions of Rule 8D are prospective in nature and therefore are applicable to A.Y. 2008-09 and on onwards. Since the assessment year involved in the impugned appeal is A.Y. 2005-06, therefore, no disallowance is called for under provisions of Rule 8D as the same is not applicable for the impugned assessment year. However, it cannot be said that no administrative expenses have been incurred by the assessee for earning the huge tax free dividend income. Considering the totality of the facts of the case, disallowance of an amount of ₹ 2 lakhs, in our opinion, will meet the ends of justice Adjustment on account of export of IC engines of LHP Division to AEs - Held that - The lower authorities have not properly considered the submissions made before them. In our opinion, the matter requires revisit to the file of the TPO with a direction to give another opportunity to the assessee to demonstrate as to how the export sales made to AEs is at Arm s length. The ground raised by the assessee in the CO is accordingly allowed for statistical purposes.

Summary

Issues Involved:
1. Delay in filing the appeal by the Revenue.
2. Transfer Pricing Adjustment on export of manufactured IC Engines.
3. Disallowance of expenses for earning exempt income under Section 14A.
4. Adjustment to the value of international transactions in respect of export of IC engines by the LHP Division.

Detailed Analysis:

1. Delay in Filing the Appeal by the Revenue:
The Revenue's appeal was delayed by 87 days. The Departmental Representative explained the reasons for the delay, and after hearing both sides, the delay was condoned.

2. Transfer Pricing Adjustment on Export of Manufactured IC Engines:
The TPO made an adjustment of Rs. 8,23,19,580/- based on the difference in gross margin between domestic sales and export sales to AEs. The assessee argued that the adjustment was against transfer pricing provisions and that the domestic and export markets were significantly different. The CIT(A) deleted the adjustment, noting that TNMM requires comparison of net profit margins, not gross margins, and that the TPO's method was not supported by the legal provisions. The Tribunal upheld the CIT(A)'s order, agreeing that net profit margins of controlled transactions should be compared with those of uncontrolled transactions.

3. Disallowance of Expenses for Earning Exempt Income Under Section 14A:
The AO disallowed Rs. 40,36,560/- under Section 14A, applying Rule 8D. The CIT(A) deleted the disallowance, holding that Rule 8D is prospective and not applicable to the assessment year 2005-06. The Tribunal agreed with the CIT(A) but held that some administrative expenses must have been incurred for earning the exempt income. It directed a disallowance of Rs. 2 lakhs, partially allowing the Revenue's appeal.

4. Adjustment to the Value of International Transactions in Respect of Export of IC Engines by the LHP Division:
The TPO made an adjustment of Rs. 78,72,507/- based on the difference in operating margins between exports to AEs and sales to third parties. The CIT(A) upheld the TPO's adjustment, stating that the assessee did not provide specific facts to support its arguments. The Tribunal found that the lower authorities had not properly considered the assessee's submissions and remitted the matter back to the TPO for reconsideration, allowing the assessee's ground for statistical purposes.

Conclusion:
The Tribunal dismissed the Revenue's appeal and partly allowed the assessee's cross-objection for statistical purposes. The key points were the proper application of TNMM for transfer pricing adjustments and the inapplicability of Rule 8D for the assessment year 2005-06.