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2018 (12) TMI 1216 - HC - Income TaxDisallowance made under section 14A read with rule 8D(2)(iii) - whether neither the assessing authority nor the Dispute Resolution Panel (DRP) has recorded specific finding as to whether the assessee has incurred specific expenditure or not even when the ingredients of section 14A are satisfied in the case of the assessee? - Held that - As decided in case of M/S. ADVAITH MOTORS PVT. LTD. 2018 (6) TMI 1469 - KARNATAKA HIGH COURT disallowance under Section 14A cannot be a wild guesswork bereft of ground realities. It has to have a reasonable and close nexus with the factually incurred expenses. It is not deemed disallowance under Section 14A of the Act but an enabling provision for assessing authority to compute the same on the given facts and figures in the regularly maintained Books of Accounts. The assessing authority also could not have called upon the Assessee himself to undertake the exercise of computing the disallowance under Section 8D of the Rules. Such abdication of duty in not permissible in law. Since no such exercise has been undertaken by the assessing authority, the case calls for a remand. See Commissioner of Income Tax & Anr. Vs. Microlabs Ltd., 2016 (4) TMI 219 - KARNATAKA HIGH COURT . Also this court in a recent judgment in Principal CIT v. Softbrands India P. Ltd. 2018 (6) TMI 1327 - KARNATAKA HIGH COURT has held that in these types of cases, unless an ex facie perversity in the findings of the learned Income-tax Appellate Tribunal is established by the appellant, the appeal at the instance of an assessee or the Revenue under section 260A of the Act is not maintainable. - decided in favour of assessee.
Issues Involved:
1. Disallowance under section 14A read with rule 8D(2)(iii) of the Income-tax Rules. 2. Exclusion of certain comparables by the Dispute Resolution Panel (DRP). 3. Market risk adjustment by the Transfer Pricing Officer (TPO). 4. Exclusion of Accentia Technologies Limited as a comparable. Issue-wise Detailed Analysis: 1. Disallowance under section 14A read with rule 8D(2)(iii): The Tribunal set aside the disallowance made under section 14A read with rule 8D(2)(iii), noting that neither the Assessing Officer (AO) nor the DRP recorded specific findings on whether the assessee incurred specific expenditure. The Tribunal found that the assessee's investment remained the same from March 31, 2009, to March 31, 2010, and no exempt income was earned. Consequently, the impugned addition was deleted. This decision aligns with the Karnataka High Court's judgment in Principal CIT v. Advaith Motors P. Ltd., which held that disallowance under rule 8D read with section 14A cannot exceed the expenditure directly relatable to earning exempt income. 2. Exclusion of certain comparables by the DRP: The DRP directed the exclusion of ICRA Online Ltd., Infosys BPO Ltd., and Microland Ltd. as comparables. The Tribunal upheld the DRP's decision, noting that the DRP's directions were justified based on the ratios of previous cases. The Tribunal directed the TPO to consider Microland Ltd. as a good comparable for analyzing the pricing of international transactions. This aligns with the Tribunal's decision in ISG Novasoft Technologies Ltd. 3. Market risk adjustment by the TPO: The Tribunal addressed the issue of working capital adjustment, noting that the TPO had agreed to grant the adjustment but restricted it to 1.01% instead of the actual 2.23%. The Tribunal directed the TPO to follow its decision in Moong Controls India P. Ltd., which allowed actual adjustment for differences in working capital positions. The Tribunal dismissed the Revenue's appeal on this ground. 4. Exclusion of Accentia Technologies Limited as a comparable: The Tribunal excluded Accentia Technologies Limited as a comparable, noting its functional differences from the assessee, including its engagement in medical coding, KPO services, and high-end software services. The Tribunal relied on previous cases, including ISG Novasoft Technologies Ltd. and Amba Research (India) Private Limited, to support its decision. General Observations: The Karnataka High Court, in Principal CIT v. Softbrands India P. Ltd., emphasized that appeals under section 260A of the Income-tax Act should only be entertained if there is an ex facie perversity in the Tribunal's findings. The Court held that issues related to the selection of comparables and application of filters do not constitute substantial questions of law. Consequently, the appeals filed by the Revenue were dismissed, reinforcing the Tribunal's findings and decisions on the issues presented.
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