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2018 (10) TMI 51 - AT - Income TaxTPA - ALP determination - upward transfer pricing adjustment - comparable selection - Held that - The net profit margin earned by the Assessee from the controlled international transaction was 22.96% in comparison to the average net profit margin earned by the comparables chosen by the Assessee at 12.78%. If one were to proceed on the basis of the comparable selected by the assessee and apply its profit margin of 12.78%, the Assessee s profit margin of 22.96% is higher. Hence the comparison of the net profit margin of the international transaction of the Assessee in comparison to the net profit margin of the comparables is much better and the addition so made by the TPO & AO is wholly wrong and incorrect and therefore, we delete both the upward transfer pricing adjustment made by TPO/AO Availability of exemption u/s 10A to the assessee is no bar to applicability of sections 92C and 92CA. To conclude, we are of the view that since we accept the comparable companies selected by the assessee ( Zenith Exports and Eastern Silk Ind Ltd)as even though the assessee has got a higher RPT and, however, since the TPO has accepted these comparable for AY 2010-11, we agree with the Ld. CIT(A) that this company should not be excluded as a comparable. We also accept the profit level indicators (PLI) computed by the assessee and we reject the seven comparables selected by the Ld TPO. Therefore, we delete the transfer pricing adjustment made by the TPO in assessment year 2008-09 and 2009-10. Liability to pay MAT u/s 115JB of companies eligible for claiming deduction u/s 10A - Held that - Up to assessment year 2007-08, the 10A, & 10B units were not supposed to pay minimum alternate tax (MAT) under section 115JB of the Act. However, on or after assessment year 2008-09 these 10A & 10B companies should pay minimum alternate tax (MAT) under section 115JB of the Act. Therefore, we note that the companies eligible for claiming deduction u/s 10A are continued to remain liable to Minimum Alternate Tax (MAT) made u/s 115JB of the Act. The issue before us is relating to A.Y. 2008-09 and A.Y. 2009-10, therefore, we are of the view that assessee company is liable to pay MAT. Therefore, we allow this ground raised by the Revenue. Addition u/s 14A - Held that - As relying on the judgment of Hon ble Bombay High Court in the case of CIT vs. Reliance Utilities Power Limited 2009 (1) TMI 4 - BOMBAY HIGH COURT and CIT vs. HDFC Pvt. Ltd. 2014 (8) TMI 119 - BOMBAY HIGH COURT , we delete the addition under Rule 8D (2) (ii). As regards the disallowance made by the Assessing Officer u/s 14A r.w.r 8D(2)(iii) we direct the Assessing Officer to compute the disallowance in line of the judgment of jurisdictional Tribunal in the case of REI Agro India 2013 (5) TMI 582 - ITAT KOLKATA and therefore, Assessing Officer is directed to consider only those shares and investments in respect of dividend income has been earned during the year. Disallowance of depreciation - Held that - The assets on which the company has claimed the depreciation was being used by the Company for keeping records and books of accounts of the company. Therefore, the flat was being used for the purpose of business, hence, the depreciation should be allowed to the assessee company. We note that the same issue of depreciation has been allowed to the assessee in the preceding years hence, to maintain the rule of consistency such depreciation has to be allowed in this year as well especially in the light of the fact that the Assessing Officer has not brought any material on record to prove that such flat was used for the purpose other than the business. That being so, we decline to interfere in the order passed by the ld. CIT(A) Addition on account of unexplained investment - AO disallowed an amount on account of information available in the AIR data, which was treated to be unexplained investment - Held that - This matter has been duly explained by the assessee before the AO and the Assessing Officer had overlooked the explanation submitted by the assessee. CIT(A) has co-terminus power as the Assessing Officer has, that is, the CIT(A) has all the powers as the Assessing Officer has, and in the assessee s case ld CIT(A) had examined the documents. Since the said issue had been explained before the Assessing Officer by the assessee and the CIT(A) accepted the same evidence in continuous of the explanation submitted by the assessee before the Assessing Officer, and the fact that the ld. CIT(A) has co-terminus power, therefore, we do not find any infirmity in the order passed by the ld. CIT(A) and his order on this issue is hereby confirmed.
Issues Involved:
1. Transfer Pricing Adjustments 2. Allocation of Costs between AE and Non-AE Transactions 3. Profit Level Indicator (PLI) and Constituents 4. Miscellaneous Transfer Pricing Issues 5. Minimum Alternate Tax (MAT) Liability for Section 10A Companies 6. Disallowance under Section 14A read with Rule 8D(2)(iii) 7. Disallowance of Depreciation 8. Addition on Account of Unexplained Investment Detailed Analysis: 1. Transfer Pricing Adjustments: The main grievance of the Revenue was that M/s. Zenith Exports Ltd. and M/s. Eastern Silk Ltd. should not be considered as comparable because these companies are not functionally comparable with the assessee company. The Revenue contended that seven comparable companies selected by the TPO should be treated as comparable, and the ALP adjustment of ?12,31,02,132/- should be upheld. The assessee, however, argued that the seven comparable companies selected by the TPO should be rejected. The ITAT accepted the comparables selected by the assessee (Zenith Exports and Eastern Silk Ind Ltd) and rejected the seven comparables selected by the TPO. The ITAT found that the net profit margin earned by the assessee from the controlled international transaction was 22.96%, which was higher than the average net profit margin earned by the comparables chosen by the assessee at 12.78%. Therefore, the ITAT deleted the transfer pricing adjustments made by the TPO for A.Y. 2008-09 and 2009-10. 2. Allocation of Costs between AE and Non-AE Transactions: The Revenue contended that the CIT(A) erred in considering the entity level margin and not the transactional margin only. The ITAT referred to its earlier decision in the assessee’s own case for A.Y. 2007-08, where it was held that only the international transaction should be compared with uncontrolled transactions and not the transaction undertaken by the entity as a whole. The ITAT upheld the CIT(A)'s decision that the TPO could only make adjustments to the costs corresponding to exports made to AE and not to the entire turnover of the assessee. 3. Profit Level Indicator (PLI) and Constituents: The Revenue challenged the PLI as OP/Sales and various constituents of the PLI. The ITAT confirmed the assessee’s PLI as OP/Sales. The ITAT noted that in the computation of PLI, operating profit is the difference between operating revenue and the operating cost. The ITAT directed that export incentives and foreign exchange fluctuations, if part of the sale made to AE, should be included in the operating revenue. 4. Miscellaneous Transfer Pricing Issues: The Revenue contended that expenses like traveling, fair, and exhibition expenses should be part of the operating cost of the AE. The ITAT noted that as per the FAR analysis, the sales and marketing function in respect of the transaction with AE is performed by AE only, and hence such expenses are incurred by AE only. The ITAT also addressed the issue of no Transfer Pricing adjustment required in case of transactions exempt under sections 10A and 10B. The ITAT noted that as per section 92C(4), no deduction under section 10A or 10B shall be allowed in respect of the amount of income by which the total income of the assessee is enhanced after computation of income under section 92C. However, since the TPO had already included the sale of 10A & 10B units to compute the arm’s length price, this ground was considered academic and did not impact the decision. 5. Minimum Alternate Tax (MAT) Liability for Section 10A Companies: The ITAT noted that clause (ii) of explanation 1 of sub-section 2 of section 115JB was amended by the Finance Act 2007, effective from 01.04.2008, to include companies eligible for claiming deduction under section 10A within the purview of MAT. Therefore, for A.Y. 2008-09 and 2009-10, the assessee company was liable to pay MAT, and this ground raised by the Revenue was allowed. 6. Disallowance under Section 14A read with Rule 8D(2)(iii): The ITAT noted that the assessee had sufficient own funds to cover the investments, and thus, the presumption is that the investments were made out of share capital and reserves. Relying on the judgments of the Bombay High Court in CIT vs. Reliance Utilities Power Limited and CIT vs. HDFC Pvt. Ltd., the ITAT deleted the addition under Rule 8D(2)(ii). For disallowance under Rule 8D(2)(iii), the ITAT directed the AO to compute the disallowance in line with the judgment of the jurisdictional Tribunal in the case of REI Agro India. 7. Disallowance of Depreciation: The ITAT upheld the CIT(A)'s decision to allow depreciation on assets used for business purposes, noting that the same issue had been allowed in preceding years and the AO had not brought any material on record to prove otherwise. 8. Addition on Account of Unexplained Investment: The ITAT upheld the CIT(A)'s decision to delete the addition of ?6,43,440/- on account of unexplained investment, noting that the assessee had provided sufficient evidence to explain the investment, which was overlooked by the AO. Conclusion: The ITAT dismissed the appeals filed by the Revenue on transfer pricing grounds and allowed the cross objections filed by the assessee. The ITAT upheld the CIT(A)'s decisions on issues related to section 14A disallowance, depreciation, and unexplained investments. The ITAT allowed the Revenue's ground on MAT liability for section 10A companies.
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