ASK RESOURCES INDIA PVT. LTD.,CHENNAI vs. DCIT CORPORATE CIRCLE 1(1), CHENNAI

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ITTPA 1/CHNY/2019Status: DisposedITAT Chennai18 December 2024AY 2014-1512 pages
AI SummaryPartly Allowed

What did the Tribunal hold?

The Tribunal held that M/s. ASK Re Ltd., Hong Kong, is an associate enterprise of the assessee. While the assessee declared the entity as an AE in Form-3CEB, the Tribunal found that the assessee-company is controlled by Shri A.S. Rama Rao and Smt. A. Samanthakamani, who are 50% shareholders and directors. The judgment implies that this control, along with other factors not fully detailed in the excerpt, established the AE status, dismissing this ground of appeal. Regarding the transfer pricing adjustment, the Tribunal held that the CUP method is the Most Appropriate Method (MAM) and the adjustment made by the TPO/DRP is uncalled for. The Tribunal agreed with the assessee that the purchase price from the AE was comparable to third-party prices, with a minimal markup for handling and advance payment, and therefore, the CUP method should have been applied. This ground of appeal was allowed. Concerning the Section 14A disallowance, the Tribunal deleted the disallowance of Rs. 7,85,500/-. Following the Delhi High Court in PCIT v. Era Infrastructure (India) Ltd. and ITAT Chennai in M/s. Maxivision Eye Hospital Pvt. Ltd., the Tribunal held that disallowances under Section 14A cannot exceed the exempt income and that the explanation inserted by the Finance Act, 2022, is prospective. Since the assessee had no exempt income, no disallowance could be made. This ground of appeal was dismissed.

What were the facts?

The assessee, ASK Resources India Pvt. Ltd., filed an appeal for Assessment Year 2014-15 against the assessment order dated 26.11.2018 passed by the Assessing Officer (AO) under Section 143(3) r.w.s. 144C(5) r.w.s 92CA of the Income-tax Act, 1961. This order was passed pursuant to directions from the Dispute Resolution Panel (DRP). The assessee is engaged in commodity trading and reported purchases of Rs. 43,11,06,020/- from M/s. ASK Re Ltd., Hong Kong, which it declared as Associated Enterprises (AEs). The AO referred the matter to the Transfer Pricing Officer (TPO) who made a downward adjustment of Rs. 5,42,65,839/-. The DRP confirmed the TPO's findings. The AO also made a disallowance of Rs. 7,85,500/- under Section 14A read with Rule 8D. The assessee objected to these actions before the DRP, which were rejected.

What were the issues?

1. Whether M/s. ASK Re Ltd., Hong Kong, is an Associated Enterprise (AE) of the assessee under Section 92A of the Income-tax Act, 1961. The assessee argued that merely declaring an entity as an AE in Form-3CEB does not make it so, and that neither company controls the other's capital or management directly or indirectly. The assessee relied on ITAT Delhi in DLF Holding Ltd. v. DCIT and Karnataka High Court in PCIT v. Page Industries Ltd. The revenue contended that Section 92A is applicable as the assessee itself declared the entity as an AE in Form-3CEB. 2. Whether the Comparable Uncontrolled Price (CUP) method should have been adopted as the Most Appropriate Method (MAM) for benchmarking international transactions, or if the Transaction Net Margin Method (TNMM) adopted by the AO/TPO was correct, leading to a downward adjustment of Rs. 5,42,65,839/-. The assessee argued that CUP was readily available as the AE's purchase price from third parties and sale price to the assessee showed a minimal margin of 1.09%, making CUP the MAM. The revenue relied on lower authorities' orders. 3. Whether the disallowance of Rs. 7,85,500/- under Section 14A read with Rule 8D was justified, especially when the assessee claimed no exempt income was earned. The assessee argued that disallowance under Section 14A is uncalled for without exempt income and relied on Delhi High Court in PCIT v. Era Infrastructure (India) Ltd. and ITAT Chennai in M/s. Maxivision Eye Hospital Pvt. Ltd. v. DCIT. The revenue relied on lower authorities' orders.

Which sections of the Income-tax Act were involved?

Section 92A,Section 92CA,Section 14A,Section 143(3),Section 144C(5),Section 144C(1),Section 234A,Section 234B

AI-generated summary — verify with the full judgment below

Income Tax Appellate Tribunal, ‘D’ BENCH: CHENNAI

Before: SHRI SS VISWANETHRA RAVI & SHRI JAGADISH

Hearing: 25.09.2024Pronounced: 18.12.2024

आदेश / O R D E R

PER JAGADISH, A.M : Aforesaid appeal by assessee for Assessment Year (AY) 2014- 15 arises out of assessment order dated 26.11.2018 passed by Ld. Assessing Officer (AO) u/s 143(3) r.w.s.144C(5) r.w.s 92CA of the Income-tax Act, 1961 (hereinafter “the Act”) pursuant to the directions dated 24.09.2018 of Ld. Dispute Resolution Panel-2, Bangaluru (hereinafter “DRP”) u/s. 143(3) r.w.s 92CA r.w.s 144C(1) of the Act.

IT(TP)A No.01/Chny/2019 :- 2 -:

2.

The grounds of appeal raised by the assessee are as under:

“1. For that the order of the Assessing Officer is contrary to law, facts and circumstances of the case to the extent prejudicial to the interest of the appellant and at any rate is opposed to the principles of equity, natural justice and fair play.

2.

For that the order of the Assessing Officer is without jurisdiction. L

3.

For that the assessment is barred by limitation.

4.

For that the reference made to the Transfer Pricing Officer is not accordance with law and consequently the entire proceedings are void ab initio.

5.

For that the Assessing Officer erred in concluding that the appellant company and M/s. Ask Re Ltd., Hong Kong are Associated Enterprises as per the provisions of the section 92A.

6.

For that without prejudice, the Assessing Officer ought to have adopted "Comparable Uncontrolled Price Method" as the Most Appropriate Method for benchmarking the international transactions especially when direct internal comparable data was provided by the appellant.

7.

For that the Assessing Officer erred in adopting "Transaction Net Margin Method for benchmarking the international transactions.

8.

For that the Assessing Officer consequently erred in making a downward adjustment of Rs.5,42,65,839/- to the international transactions.

9.

For that without prejudice to the above, the Assessing Officer erred in the computation of the Arm's Length Price and consequently making entity level downward adjustment instead of restricting the same to the international transactions.

10.

For that the Assessing Officer erred in disallowing a sum of Rs.7,85,500/- u/s.14A read with rule 8D.

11.

For that the provisions of section 14A r.w.Rule 8D are not invocable in the facts and circumstances of the case.

12.

For that there is no satisfaction of the Assessing Officer that any expenditure was in fact incurred so as to attract the provisions of section 14A read with Rule 8D. 13. For that the Assessing Officer erred in applying the third limb of Rule 8D in working out the disallowance u/s. 14A.

IT(TP)A No.01/Chny/2019 :- 3 -:

14.

For that the Assessing Officer failed to appreciate that no exempt income was earned by the appellant in the impugned assessment year. 15. For that without prejudice to the above, the Assessing Officer failed to appreciate that disallowance u/s.14A read with rule 8D was not warranted as no expenditure was incurred by the appellant for earning exempt income. 16. For that without prejudice to the above, the Assessing Officer erred in applying Rule 8D on entire investments without considering the fact that all the investments did not yield any return in the form of dividend during the impugned assessment year. 17. For that without prejudice to the above, the Assessing Officer failed to appreciate that the disallowance cannot exceed the exempt income. 18. For that the appellant objects to the levy of interest u/s.234A and 234B. PRAYER For these grounds and such other grounds that may be urged before or during the hearing of the appeal it is most humbly prayed that the Hon'ble Tribunal may be pleased to: (a) Delete the downward adjustment of Rs.5,42,65,839/- made by the Assessing Officer and / or (b) Delete the disallowance of Rs.7,85,500/- made u/s. 14A and/or (c) Pass such other orders as the Hon'ble Tribunal may deem fit.”

3.

The brief facts of the case are that the assessee-company is

engaged the business of trading in commodities like coal and coke,

agricultural produce, metals, alloys etc. During the year, the assessee

has purchased goods from related concern M/s. ASK Re Ltd., Hong

Kong and reported in Form-3CEB as Associated Enterprises (AEs) of

Rs.43,11,06,020/-. The A.O made reference to the Transfer Pricing

IT(TP)A No.01/Chny/2019 :- 4 -:

Officer (TPO) for determination of Arm’s Length Price with reference to

the transactions reported in Form-3CEB. The TPO vide order u/s

92CA(2) dated 31.10.2017 after considering submissions of the

assessee made adjustment in respect of purchase of goods of

Rs.43,11,06,020/- from M/s. ASK Re Ltd., Hong Kong by downward

adjustment of Rs. 5,42,65,839/-. The TPO has rejected the

assessee’s claim that M/s. ASK Re Ltd., Hong Kong is not AE and

CUP as most appropriate method (MAM) and applied TNMM as MAM

to make the adjustment in respect of purchases from the AE. The A.O

forwarded a draft of the proposed order of assessment proposing TP

adjustment of Rs.5,42,65,839/- on the international transactions and

disallowances of Rs.7,87,500/- u/s. 14A of the Act r.w Rule 8D of the

Income Tax Rules, 1962. The assessee objected the proposed

addition before Ld. DRP. The Ld. DRP in the direction issued dated

24.09.2018 has confirmed draft assessment order rejecting

assessee’s objections and holding M/s. ASK Re Ltd., Hong Kong as

AE and TNMM as Most Appropriate Method. The A.O has passed the

final assessment order in conformity to the directions of Ld. DRP.

4.

Ground Nos.1 to 4 are not pressed by the assessee therefore,

no adjudication is required.

IT(TP)A No.01/Chny/2019 :- 5 -:

5.

Ground No.5 is against upholding M/s. ASK Re Ltd., Hong Kong

as Associated Enterprises as per Section 92A of the Act.

6.

The Ld. Authorized Representative of the assessee (AR) has

argued that M/s. ASK Re Ltd., Hong Kong is not an AE and merely

because assessee in Form-3CEB filed has shown M/s. ASK Re Ltd.,

Hong Kong as AE, it does not become an AE as per section 92A. The

Ld. AR relied on the order of ITAT, Delhi in the case of DLF Holding

Ltd. v. DCIT [2016] 51 ITR (T) 499 (Delhi-Trib.) in support of his

contention. The Ld. AR further submitted that the provisions of Section

92A of the Act are not applicable since, neither of the enterprises i.e.,

assessee and M/s. ASK Re Ltd., Hong Kong participate in the manner

of control or capital of the other enterprises either directly or indirectly

or through intermediary. Further, the provisions of Section 92A(2)(j) of

the Act are not applicable to the instant case as, neither the assessee-

company nor M/s. ASK Re Ltd., Hong Kong are controlled by any

individual. The Ld. AR submitted that even if it is held that the

provisions of Section 92A(2)(j) of the Act are applicable, the same

does not operate unless the basic rule in section 92A(1) of the Act are

fulfilled which has not been fulfilled in assessee’s case. The Ld. AR

has relied on the order of ACIT v. Veer Gems [2017] 49 CCH 0010

(Ahd-Trib.), which is subsequently confirmed by the Hon’ble Supreme

IT(TP)A No.01/Chny/2019 :- 6 -:

Court. The Ld. AR further relied on the decision of Hon’ble Karnataka

High Court in the case of PCIT v. M/s. Page Industries Ltd. [2021] 431

ITR 0409 (Kar.) and other case laws.

7.

The Ld. Departmental Representative (DR), Mr. A. Sasikumar,

CIT, on other hand, has supported the order of TPO and Ld. DRP and

argued that the assessee itself in filled Form-3CEB has declared M/s.

M/s. ASK Re Ltd., Hong Kong as AE and reported the transactions

with AEs. The Ld. DR has submitted that Section 92A of the Act is

clearly applicable as held by TPO/Ld. DRP.

8.

We have heard the rival submissions, and perused the materials

available on record. The assessee has filed Form-3CEB on

29.11.2014, where in coloumn No.10 has mentioned M/s. ASK Re

Ltd., Hong Kong as AE and in coloumn No.11B has shown purchase

from the AE of Rs. 43,11,06,020/-. The assessee has also mentioned

that for benchmarking comparable uncontrolled method has been

used. The assessee-company is controlled by Shri A.S. Rama Rao

and Smt. A. Samanthakamani, who are 50% shareholder each and

Directors of the company. Further, their son Shri Attaluri Venkateswara

Prasad and daughter-in-law Smt. Attaluri Surekha holds 50% share

each and are Directors in XLAT Ltd. which is 100% holding company

IT(TP)A No.01/Chny/2019 :- 7 -:

of M/s. ASK Re Ltd., Hong Kong. Therefore, M/s. ASK Re Ltd., Hong

Kong is controlled jointly by relatives of controlling shareholder of the

assessee-company and falls u/s. 92A(2)(j) of the Act. The case law

relied on by Ld. AR are distinguishable of facts as in the case of ACIT

vs. Veer Gems, supra, the Tribunal has held that it was partnership

firm and it was not proved that common Director or these relatives

were controlling both the companies. We therefore, are of the opinion

that M/s. ASK Re Ltd., Hong Kong is associate enterprises of the

assessee-company. Thus, this ground of appeal of the assessee is

dismissed accordingly.

9.

Grounds Nos.6, 7 & 8 are relating to rejecting the CUP as MAM

and applying TNMM as MAM and making adjustment of Rs.

5,42,65,839/- in respect of purchases from the AE.

10.

The Ld. AR has argued that the assessee-company has

purchased goods from M/s. ASK Re Ltd., Hong Kong of

Rs.43,11,06,020/- and has adopted CUP method as MAM. The Ld. AR

has submitted that M/s. ASK Re Ltd., Hong Kong has purchased

goods from third parties and sold to the assessee-company at margin

of 1.09%, which is mark up for handling and advance payment made

IT(TP)A No.01/Chny/2019 :- 8 -:

by them. The Ld. AR has argued that price charged by the AE is

comparable to the price charged by the third party, had the assessee

company directly purchased from third party and therefore,

comparable price is readily available. The Ld. AR has further

submitted that when CUP method is readily available, there is no

occasion to reject the CUP as MAM and adopt TNMM methods. The

Ld. AR has relied on the order of ITAT, Mumbai in the case of Star

India Pvt. Ltd. v. ACIT [2023] (6) TMI 348 (Mumbai-Trib.).

11.

The Ld. DR, on the other hand, has relied on the orders of lower

authorities.

12.

We have heard the rival submissions, and perused the

materials available on record. The assessee-company has adopted

CUP method as MAM and taken M/s. ASK Re Ltd., Hong Kong as the

tested party. The purchase price for M/s. ASK Re Ltd., Hong Kong

from the third party and the corresponding sale price to assessee

company are comparable as there is only transaction difference

1.09%, which is a mark up to AE for handling and advance payment.

The TPO has rejected the CUP methods giving the reason that the

assessee has neither used internal CUP nor external CUP and

questioned the markup of 1.09%. We are not in agreement to TPO and

IT(TP)A No.01/Chny/2019 :- 9 -:

Ld. DRP as the price at which assessee has purchased the goods

from AE is comparable to price at which third party have sold goods

and if price from independent party is available, CUP is the most

appropriate method to bench mark the transaction. In view of the

above, we hold that CUP method is the MAM and the adjustment

made by the TPO/Ld. DRP is uncalled for. Thus, these grounds of

appeal of the assessee are allowed

13.

Grounds No.10 to 17 are relating against the disallowance of

Rs. 7,85,500/- u/s. 14A of the Act r/w Rule 8D of the Rules.

14.

The A.O has made disallowance u/s. 14A of the Act as per Rule

8D of the Rules of Rs. 7,87,500/- on the ground that the assessee has

made investment to the extent of 15,75,00,000/-, which is capable of

earning income exempt from tax. Therefore, relying on the decision of

Hon’ble Bombay High Court in the case of Godrej & Boyce vs. CIT has

made the disallowance as per Rule 8D of the Rules.

15.

The Ld. AR has argued that the assessee does not have any

exempt income and the A.O has made the disallowance without

recording any reason and therefore, disallowance u/s. 14A of the Act is

uncalled for. The Ld. AR in this respect relied on the decision of

IT(TP)A No.01/Chny/2019 :- 10 -:

Hon’ble Delhi High Court in the case of PCIT v. Era Infrastructure

(India) Ltd. [2022] 141 taxmann.com 289 (Del) and the order of ITAT,

Chennai in the case of M/s. Maxivision Eye Hospital Pvt. Ltd. v. DCIT

in ITA No.139/Chny/2020 (Chennai-Trib.).

16.

The Ld. Departmental Representative (DR), on the other hand,

has relied on the orders of lower authorities.

17.

We have heard the rival submissions, and perused the materials

available on record. The A.O has made disallowance u/s. 14A of the

Act for the reason that the assessee has made investment which is

capable of earning exempt income. The Ld. AR has submitted that

there is no exempt income during the year. It has been consistently

held by the court disallowances under section 14A cannot exceed the

exempt income. The Honorable Delhi High Court in the case of Ear

Infrastructure (India) Ltd. Has held that subsequent amendment made

by Finance Act, 2022 for Section 14A of the Act by inserting non-

obstante clause and explanation cannot be presumed to have a

retrospective effects. The ITAT, Chennai Bench in the case of M/s

Maxivision Eye Hospital Pvt. Ltd., supra, where there is no exempt

IT(TP)A No.01/Chny/2019 :- 11 -:

income and disallowances under section 14A as Rule 8D has been made , has held as under:

“7. After hearing rival contentions and going through the decision of Hon’ble Delhi High Court in the case of Era Infrastructure (India) Ltd., supra, we are of the view that the explanation inserted in the provisions of section 14A of the Act by the Finance Act, 2022 is prospective and not retrospective. Accordingly, since the assessee has not earned any exempt income, no disallowance can be resorted by invoking the provisions of section 14A of the Act read with Rule 8D(2) of the Rules. The appeal of the assessee is allowed.”

18.

In view of the above, the disallowance made by A.O u/s. 14A of the Act as per Rule 8D of the Rules is deleted. Thus, these grounds of appeal of assessee are dismissed.

19.

In the result, the appeal filed by the assessee is partly allowed.

Order pronounced on 18th December, 2024.

Sd/- Sd/- (यस यस िव�ने� रिव) (जगदीश) (Jagadish) (SS Viswanethra Ravi) लेखा लेखा सद�य लेखा लेखा सद�य सद�य /Accountant Member सद�य सद�य / Judicial Member �याियक �याियक सद�य �याियक �याियक सद�य सद�य चे�नई/Chennai, �दनांक/Dated: 18th December, 2024. EDN/-

IT(TP)A No.01/Chny/2019 :- 12 -:

आदेश क� �ितिल�प अ�े�षत/Copy to: 1. अपीलाथ�/Appellant 2. ��थ�/Respondent 3. आयकर आयु�/CIT, Chennai 4. िवभागीय �ितिनिध/DR 5. गाड� फाईल/GF

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