2024 (5) TMI 1355 - AT - Income Tax

Adjustment on account of allocation of Royalty earned - Scope of Mutual Agreement Procedure (MAP) application between Competent Authorities of India and the UK - HELD THAT - As CBDT has conveyed to the assessee that in accordance to Rule 44G(6) of the Rules, the Competent Authorities of India and the UK have agreed to resolve the MAP application filed by assessee s UK AE i.e. M/s. Unilever Plc regarding TPA made in India pertaining to the international transaction of provision of R D services by India to the UK. Pursuant to the communication from CBDT, the assessee seeks withdrawal of the TP grounds i.e, Adjustment on account of allocation of Royalty earned by Unilever. DR does not object to the withdrawal of TP ground, and, therefore, we allow the request of the assessee in the light of the MAP order dated 11.10.2023. Therefore, ground nos. 2 to 6 stands dismissed. Disallowance u/s 14A read with Rule 8D - limited plea of the assessee is that the disallowance be restricted to the extent of exempt income earned by assessee - HELD THAT - Hon ble Bombay High Court in the case of M/s. Nirved Traders Pvt. Ltd. 2019 (4) TMI 1738 - BOMBAY HIGH COURT held that the disallowance u/s 14A of the Act r.w.r. 8D of the Rules need not exceed assessee s exempt income - we direct the AO to restrict the disallowance u/s 14A of the Act read with Rules 8D of the Rules. Thus, the assessee s grounds of appeal is partly allowed.

Summary

Issues:
1. Transfer Pricing Adjustment on account of allocation of Royalty earned by Unilever
2. Disallowance under section 14A of the Income Tax Act, 1961

Detailed Analysis:

1. Transfer Pricing Adjustment on account of allocation of Royalty earned by Unilever:
The appeal was against the Assessing Officer's order related to the allocation of royalty earned by Unilever to the assessee company for providing scientific and technical services. Grounds 2 to 6 raised issues regarding significant functions performed by the assessee, arm's length pricing, and allocation of gross royalty. The assessee applied for resolution under Mutual Agreement Procedure (MAP) with the UK, leading to the withdrawal of these grounds based on a CBDT letter dated 11.10.2023. The DR did not object, and the grounds were dismissed. This issue was resolved through the MAP process, resulting in the withdrawal of the TP grounds by the assessee.

2. Disallowance under section 14A of the Income Tax Act, 1961:
Grounds 7 to 12 challenged the AO's disallowance under section 14A read with Rule 8D concerning tax-free dividend income. The assessee argued for restricting the disallowance to the extent of exempt income, citing relevant court decisions. The judgment referred to decisions by various High Courts emphasizing that disallowance cannot exceed the exempt income earned by the assessee. The Hon'ble Bombay High Court held that the disallowance under section 14A need not surpass the assessee's exempt income. Consequently, the AO was directed to limit the disallowance to Rs. 12,500, which was the amount of exempt income. Therefore, the appeal on this issue was partly allowed, and the overall appeal of the assessee was partly allowed.

In conclusion, the judgment addressed the two main issues of transfer pricing adjustment and disallowance under section 14A, providing detailed analysis and referencing relevant legal principles and court decisions to arrive at a reasoned decision in favor of the assessee on both issues.