2019 (2) TMI 796 - AT - Income Tax

TPA - transaction of freight forwarding and cargo handling services - TPO held that since the freight cost is a key driver as such, same should be used as diagnostic tool for selection of the comparable and therefore he applied a filter of freight cost/freight income - Held that - TPO held that since the freight cost/freight income of the assessee is 80.90% as such, he applied a range of 75%-85% (freight cost/freight income) for selection of the comparables. While doing so, the TPO has not looked into the functions of the comparable i.e. Balmer, Lawrie & Co. Ltd. In fact, the TPO s own filters are not in proportionate with the range of 75%-85% (freight cost/freight income) for selection of the said comparable. Therefore, we direct the TPO/AO to exclude this comparable from the list of the comparables. Addition u/s 14A - Held that - The assessee claimed that no expenditure was incurred to earn the exempt income. In fact, assessee could not establish that it has not claimed any expenditure on exempt income. Therefore, we do not see any valid ground to interfere in the findings given by the Assessing Officer. Ground No. 2 is dismissed. Tansfer pricing relating to intra group services - Held that - TPO accepted that services were rendered and received by the assessee. Once the rendering and receiving of the services were not disputed which is supported by the evidences, the TPO is not correct in holding that arms length value of the management fee is Nil and accordingly making an upward adjustment. Therefore, the finding of the TPO is not correct and this addition does not sustain. Ground No. 1 is allowed. Disallowance u/s 14A - AR submitted that no further investment has been made and therefore no expense incurred. The change in investment balance is on account of re-investment of dividend income - Held that - It is pertinent to note that no further investment has been made and therefore no expense incurred. The change in investment balance is on account of re-investment of dividend income, since the ABN AMRO Cash Mutual Fund plan was a Dividend Reinvestment Plan. Thus, Ground No. 2 is allowed.

Summary

Issues Involved:
1. Transfer Pricing Adjustment
2. Corporate Tax Adjustment
3. Disallowance under Section 14A
4. Levy of Interest under Sections 234B and 234D
5. Withdrawal of Interest under Section 244A
6. Initiation of Penalty Proceedings under Section 271(1)(c)

Issue-wise Detailed Analysis:

1. Transfer Pricing Adjustment:
- A.Y. 2007-08: The assessee challenged the addition of ?179,778,755. The TPO segregated the management consultancy services payment from freight forwarding transactions, applying the CUP method and assigning a NIL value to the management fee, leading to an upward adjustment. The TPO also applied a freight cost-to-freight income ratio filter, resulting in the selection of only two comparables. The Tribunal found the TPO's application of the filter arbitrary and directed the exclusion of Balmer, Lawrie & Co. Ltd. from the comparables list.
- A.Y. 2009-10: The TPO treated the payment of management fees as a separate transaction and assigned a NIL value. The Tribunal held that the TPO ignored the evidence provided by the assessee and incorrectly benchmarked the management fee transaction, allowing the appeal.
- A.Y. 2010-11: Similar to A.Y. 2009-10, the Tribunal allowed the appeal, finding the TPO's approach incorrect.
- A.Y. 2011-12 and 2012-13: The Tribunal applied the same reasoning as in A.Y. 2009-10 and allowed the appeals.

2. Corporate Tax Adjustment:
- A.Y. 2007-08: The assessee challenged the disallowance of ?100,000 under Section 14A. The Tribunal upheld the disallowance, noting that the assessee could not establish that no expenditure was incurred for earning exempt income.
- A.Y. 2009-10: The Tribunal allowed the appeal, noting that no further investment was made and the change in investment balance was due to reinvestment of dividend income.
- A.Y. 2010-11: The Tribunal applied the same reasoning as in A.Y. 2009-10 and allowed the appeal.
- A.Y. 2011-12 and 2012-13: The Tribunal remanded the issue back to the Assessing Officer for reconsideration.

3. Disallowance under Section 14A:
- The Tribunal found that the Assessing Officer did not record any satisfaction that the assessee incurred expenditure to earn exempt income. Therefore, the disallowance under Section 14A was not justified in A.Y. 2009-10 and 2010-11 but was upheld for A.Y. 2007-08. For A.Y. 2011-12 and 2012-13, the issue was remanded back to the Assessing Officer.

4. Levy of Interest under Sections 234B and 234D:
- The Tribunal did not specifically adjudicate on this issue, as it was considered consequential to the main issues.

5. Withdrawal of Interest under Section 244A:
- Similar to the levy of interest, the Tribunal did not specifically address this issue, considering it consequential.

6. Initiation of Penalty Proceedings under Section 271(1)(c):
- The Tribunal did not specifically adjudicate on this issue, as it was considered consequential to the main issues.

Judgment Summary:
- The appeals for A.Y. 2007-08, 2011-12, and 2012-13 were partly allowed for statistical purposes, with specific directions to exclude certain comparables and reconsider disallowances.
- The appeals for A.Y. 2009-10 and 2010-11 were fully allowed, with the Tribunal holding that the TPO's benchmarking of management fees and disallowance under Section 14A were incorrect.