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2015 (5) TMI 852 - AT - Income TaxTransfer pricing adjustment - addition on Service fee received - Held that - The assessee simply rendered agency services under this segment by co-ordinating between customers and its AEs. By no standard, the assessee can be said to have dealt with the goods of its AEs as an absolute owner. Once position is such, we fail to comprehend as to how financial results of the commission segment can be adjusted for making a comparison with trading segment. The ld. AR has drawn our attention towards the Tribunal orders passed in assessee s own case for the earlier years reversing similar stand of the Revenue authorities on the international transaction of receipt of Service fee. As such, we set aside the impugned order on this score and remit the matter to the TPO/AO for a fresh determination of ALP of the international transaction of receipt of Service fee as per law after allowing a reasonable opportunity of being heard to the assessee. In doing so, the assessee will initially propose comparable instances having undertaken activity similar to it under this segment. Then it will be for the TPO to decide on their comparability or otherwise and determine the ALP of this transaction as per law. We further add that in doing so, the TPO will consider the figures of the comparables for the current year alone and not the multiple-year data as has been held by the Hon ble jurisdictional High Court in ChrysCapital Investment Advisors (India) P. Ltd. VS. DCIT 2015 (4) TMI 949 - DELHI HIGH COURT . Disallowance under section 40(a)(i) - TDS u/s 195 - Held that - the assessee is seeking the benefit of article 24 qua the disallowance u/s 40(a)(i) and not in respect of any transfer pricing adjustment made by bringing transactions between two AEs at arm s length price. Disallowance u/s 40(a)(i) is an independent component of the computation of total income which is distinct from any transfer pricing adjustment. Article 24 read with Article 9 albeit prohibits the deletion of enhancement of income due to the making of transactions at ALP, but permits the deletion of enhancement of income due to disallowance u/s 40(a)(i) of the Act. Be that as it may, we find that the TPO has not proposed any transfer pricing adjustment in respect of Trading segment of the assessee under which the purchases in question were made. The addition on account of TP adjustment is in respect of Service fee received , which was earned by the assessee without making purchases of the goods from its AEs. As disallowance u/s 40(a)(i) is in respect of purchases made from the AEs, which is in no manner connected with the Commission segment, we hold that the assessee is entitled to the benefit provided by article 24 of the DTAA and cannot be visited with the disallowance u/s 40(a)(i) of the Act. The foregoing discussion divulges that there existed no liability on the assessee to deduct tax at source from the payments made by it to the listed seven foreign AEs, either because of non-chargeability of income under the Act from sale of such goods to the assessee or because of the application of non-discrimination clause. The natural corollary which follows is that the provision of section 195 cannot apply and, resultantly, there can be no disallowance u/s 40(a)(i) of the Act. We, therefore, order for the deletion of this disallowance - Decided in favour of assesse. Disallowance u/s 14A - Held that - It as an admitted position that the assessee did not earn any exempt income during the year. The Hon ble jurisdictional High Court in CIT vs. Holcim India Pvt. Ltd. (2014 (9) TMI 434 - DELHI HIGH COURT) has held that no disallowance u/s 14A can be made in the absence of any exempt income. In Joint Investments Pvt. Ltd. Vs. CIT (2015 (3) TMI 155 - DELHI HIGH COURT) it has been held that disallowance u/s 14A cannot exceed the exempt income. Since the assessee admittedly did not earn any exempt income during the relevant year, respectfully following the precedents, we hold that no disallowance u/s 14A can be made - Decided in favour of assessee.
Issues Involved:
1. Transfer Pricing Adjustment 2. Disallowance under Section 40(a)(i) 3. Disallowance under Section 14A Issue-wise Detailed Analysis: 1. Transfer Pricing Adjustment: The primary issue concerns the addition of Rs. 9,62,59,809/- due to transfer pricing adjustment. The assessee, an Indian subsidiary of Mitsubishi Corporation, Japan, reported an international transaction of "Service fee received" amounting to Rs. 2,66,29,622/-. The assessee used the Transactional Net Margin Method (TNMM) to demonstrate that its transactions were at Arm's Length Price (ALP). The Transfer Pricing Officer (TPO) rejected the use of multiple-year data and restricted it to the current year alone. The TPO proposed to treat the "Service commission" segment as equivalent to the Trading segment, leading to a transfer pricing adjustment. The Dispute Resolution Panel (DRP) approved the TPO/AO's actions. The tribunal found that the assessee did not purchase and sell goods under the "Service fee" segment, acting merely as an agent. The TPO's attempt to recharacterize the commission transaction as a trading transaction was deemed unacceptable. The tribunal cited the Hon'ble jurisdictional High Court in CIT VS. EKL Appliances Ltd. (2012) 345 ITR 241 (Delhi), emphasizing that the authorities should not disregard the actual transaction or substitute other transactions. The tribunal set aside the impugned order and remitted the matter to the TPO/AO for fresh determination of ALP, instructing the use of current year data alone. 2. Disallowance under Section 40(a)(i): The second issue involves the disallowance of Rs. 70,37,18,502/- under section 40(a)(i) of the Income-tax Act. The assessee made purchases from its AEs without deducting tax at source. The AO held that the assessee was required to deduct tax under section 195, leading to disallowance. The tribunal examined whether the non-resident AE sellers were liable to tax in India. It was found that the assessee's transactions with six AEs did not attract tax as these AEs did not have a Permanent Establishment (PE) in India. The tribunal referenced previous decisions, including CIT vs. R.D. Aggarwal & Co. and Another (1965) 56 ITR 20 (SC), concluding that offshore sales by non-residents without operations in India do not generate taxable income in India. For purchases from Mitsubishi Corporation, Japan (MCJ), the tribunal considered the non-discrimination clause under Article 24 of the DTAA between India and Japan. It was held that the disallowance under section 40(a)(i) could not be applied due to the non-discrimination clause, which mandates that transactions with a Japanese enterprise should be treated as if they were with an Indian enterprise. The tribunal ordered the deletion of the disallowance. 3. Disallowance under Section 14A: The final issue pertains to the disallowance of Rs. 1,38,410/- under section 14A of the Act. The AO made this disallowance despite the assessee not earning any exempt income during the year. The tribunal referenced the Hon'ble jurisdictional High Court in CIT vs. Holcim India Pvt. Ltd. (2014) 90 CCH 081 Del-HC, which held that no disallowance under section 14A can be made in the absence of exempt income. Consequently, the tribunal allowed this ground, ruling that no disallowance under section 14A was warranted. Conclusion: The appeal was partly allowed, with the tribunal directing a fresh determination of ALP for the transfer pricing issue, deleting the disallowance under section 40(a)(i), and ruling out the disallowance under section 14A.
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