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2016 (5) TMI 334 - AT - Income TaxDisallowance u/s 14A - investments made in the sister concerns - Held that - In view of the judgment of Apex Court in S.A. Builders Ltd. v. CIT (2006 (12) TMI 82 - SUPREME COURT) this Tribunal is of the considered opinion that the investments made by the assessee in the equity shares of the sister concerns, which were established by joint venture, have to be necessarily treated as for business purpose. Therefore, as rightly found by this Tribunal by majority decision in EIH Associated Hotels Ltd. (2013 (9) TMI 604 - ITAT CHENNAI ), the dividend income earned by the assessee, if any, from subsidiary companies, is incidental one, therefore, the investments made by the assessee in its subsidiary companies cannot be reckoned for disallowance under Section 14A of the Act. - Decided in favour of assessee Adjustment of Arm s Length Price - selection of comparable - Held that - Admittedly, the comparable companies selected by the assessee-company are suffering persistent loss in their business activities. The assessee-company is also making losses. However, it is not a persistent loss making company as that of comparables. Except for the year under consideration, the assessee-company is also making positive profit. Therefore, this Tribunal is of the considered opinion that the assessee-company is not a persistent loss making company. The loss suffered by the assessee during one year might not be compared with that of the comparable companies. Since the comparables selected by the assessee-company are admittedly persistent loss making companies, the DRP has rightly rejected the comparables selected by the assessee. Lucas TVS is manufacturing components for every vehicle like cars, two wheelers, etc., whereas, the assessee-company is manufacturing DC micro motors and sub-assemblies only for the cars. Therefore, there is a vast functional difference between the manufacturing activity of the assessee and Lucas TVS. Lucas TVS has no segment wise details for manufacturing components for cars, two wheelers, etc. The TPO or DRP has not taken any effort for taking the segment wise details while preferring Lucas TVS for making adjustment in the assessee s case. Taking the overall profit of Lucas TVS in the TVS group of companies manufacturing automobile products, this Tribunal is of the considered opinion that Lucas TVS cannot be a comparable case at all. Therefore, in the given facts and circumstances of the case, comparing the transaction of the assessee with non-associate enterprise would give the correct picture of the transaction. Therefore, this Tribunal is of the considered opinion that the Arm s Length Price has to be determined on the basis of the transaction made by the assessee with non-associate enterprise. Accordingly, we are unable to uphold the orders of the lower authorities.
Issues Involved:
1. Disallowance under Section 14A of the Income-tax Act, 1961. 2. Adjustment of Arm's Length Price (ALP) for transfer pricing. Issue-wise Detailed Analysis: 1. Disallowance under Section 14A of the Income-tax Act, 1961: The first issue pertains to the disallowance made by the Assessing Officer amounting to ?88,36,545/- under Section 14A of the Income-tax Act, 1961. The assessee had invested in equity shares of Bosh Electrical Drives India Private Ltd. and IJT Plastics and Tools Private Ltd., from which no income was derived during the year under consideration. The assessee argued, citing the Delhi High Court's judgment in Cheminvest Limited v. CIT, that no disallowance under Section 14A should be made if no income was earned from the investments. The assessee further contended that the investments were made for business expediency as the companies were sister concerns and joint ventures, not for earning exempt income. The Departmental Representative countered that Rule 8D of the Income-tax Rules, 1962, was applicable and that disallowance under Section 14A could be made irrespective of whether income was earned or not. The Tribunal considered the arguments and noted that the investments were made for commercial expediency, referencing the Supreme Court's judgment in S.A. Builders Ltd. v. CIT. The Tribunal concluded that the investments in sister concerns for business purposes could not be reckoned for disallowance under Section 14A and deleted the disallowance made by the Assessing Officer. 2. Adjustment of Arm's Length Price (ALP) for Transfer Pricing: The second issue involved the adjustment of the Arm's Length Price (ALP) amounting to ?9,30,00,000/-. The assessee, engaged in manufacturing DC micro motors and sub-assemblies, had compared its transactions using the Transaction Net Margin Method (TNMM) with three companies: Sibar Auto Parts Ltd., K.C. Diesels Ltd., and Suyaan Transmission Ltd. The Transfer Pricing Officer (TPO) rejected these comparables as they were persistently loss-making and instead selected Lucas TVS as a comparable, leading to the adjustment. The assessee argued that it was also persistently loss-making and that internal comparables should be preferred over external ones. The Departmental Representative contended that the functions of the comparables selected by the assessee were different and that the assessee was not persistently loss-making. The Tribunal observed that the comparables selected by the assessee were indeed persistently loss-making, while the assessee was not. It also noted significant functional differences between the assessee and Lucas TVS, including differences in market presence, product application, and business models. The Tribunal concluded that Lucas TVS could not be considered a comparable due to its related party transactions and functional differences. It emphasized that internal comparables should be used in the absence of similarly placed external comparables. The Tribunal set aside the orders of the lower authorities and directed the Assessing Officer to determine the ALP based on the assessee's transactions with non-associate enterprises. Conclusion: The Tribunal allowed the appeal of the assessee, deleting the disallowance under Section 14A and directing the Assessing Officer to reassess the ALP using internal comparables. The judgment emphasized the importance of commercial expediency in investment decisions and the need for appropriate comparables in transfer pricing adjustments.
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