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Income Tax Appellate Tribunal, DELHI BENCH : I-1 : NEW DELHI
Before: SHRI R.K. PANDA & SHRI KULDIP SINGH
ORDER
PER R.K. PANDA, AM:
The above batch of appeals filed by the Revenue and the assessee are directed against the common order dated 26th October, 2015 of the CIT(A)-44,
ITA Nos.1026 to 1028/Del/2016 (By the Revenue) & 990/Del/2016 (By the assessee) New Delhi, relating to assessment year 2007-08, 2008-09 and 2009-10, respectively.
Since common issues are involved in all these appeals, therefore, these were heard together and are being disposed of by this common order.
The first issue raised by the Revenue in all the three appeals relate to the order of the CIT(A) in deleting the addition on account of transfer pricing adjustment of Rs.2,52,45,103/- for the assessment year 2007-08, Rs.2,67,83,126/- for assessment year 2008-09 and Rs.2,35,08,815/- for assessment year 2009-10.
Facts of the case, in brief, are that the assessee is a company engaged in the business of manufacturing precision parts, namely, dials for wrist watches, wrist hands press tools, etc. For assessment year 2007-08, it filed its return of income on 31.10.2007 declaring an income of Rs.4,95,75,210/-. Similarly, for assessment year 2008-09, it filed its return of income on 30th September, 2010, declaring the total income of Rs.1,03,89,260/- and for assessment year 2009-10, the return was filed on 01.10.2009, declaring the total income of Rs.44,43,150/-. Since the assessee had entered into international transaction with its AE, the Assessing Officer referred the matter to the file of the TPO for determination of the ALP of the international transaction entered into by the assessee. The TPO proposed upward adjustment of Rs.2,52,45,103/- for assessment year 2007-08, Rs.2,67,83,126/- for assessment year 2008-09 and Rs.2,35,08,815/- for assessment year 2009-10. The Assessing Officer accordingly made addition of the same in the 2
ITA Nos.1026 to 1028/Del/2016 (By the Revenue) & 990/Del/2016 (By the assessee) assessment order. In appeal, the ld.CIT(A) deleted the TP adjustments made by the assessee for all the three years by observing as under:-
“6.3 Decision 1 have considered assessment order, transfer pricing order u/s 92CA(3), written submission and oral arguments of the Ld AR (A) Adjustment on account of discount on export sales Ld TPO has made the adjustment in ALP in respect of two transactions namely discounts for export to the AE and commission paid to the AE on export sale made to third parties. White making the adjustment, Ld TPO has rejected the most appropriate method applied by the appellant in transfer pricing study made on the basis of TNMM on the grounds of product dissimilarity. I agree with the agreement of Ld AR and considered various judicial pronouncements relied by the Ld AR that for application of profit method of comparability, there is more flexibility in comparing the products provided that there is broad similarity of functions, assets applied and risk assumed. The appellant in its TP documentation has chosen precision equipment for searching the comparables. Ld TPO without commenting on broad similarity of products and analysis of FAR rejected the entire documentation made on the grounds of dissimilarity of products. It may be stated here that the appellant is not manufacturing one type of watch components i.e. dials, watch arm’s etc. Therefore, in the profit method of comparable one has to go broader product similarity. Considering the detailed written submission of the Ld AR and following various judicial pronouncements in my view TNMM used by the appellant for benchmarking the exports made to the AE appears to be proper. Now coming to the application of internal CUP by the Ld TPO I agree with the arguments of the Ld AR that the TPO has not analyzed exact item to item sold to AE and non-AE exports. Ld TPO has gone on broad based discount allowed to the AE, Even for the application of internal CUP the discount allowed has to be factored into causing of sales made to the AE. As in the case of non-AE sales the appellant pays commission of equal amount. Whereas, in the ease of sale made to AE there is no commission payment but the discount is allowed. The discount allowed and commission paid are exactly same in quantum. Therefore, the realization for export made in the case of AE as well as non-AE remains the same. Accordingly, in my view even the internal CUP applied by the Ld TPO required adjustments has not been made for the commission paid to third party as per the agreement entered into between the AE and the appellant. It may be mentioned here that my predecessor for assessment year 2005-06 on similar facts has allowed TNMM as most
ITA Nos.1026 to 1028/Del/2016 (By the Revenue) & 990/Del/2016 (By the assessee) appropriate method and deleted the addition on account of adjustment made in sales to the AE. Considering the entire facts and circumstances of the case in my view the arm’s length price determined by the appellant tor the export sales made to the AE by using TNMM is at arm’s length. Accordingly, addition made on account of adjustment made in arm’s length for export sales to the AE arc deleted for all the assessment years under consideration. (B) Commission paid to the AE Ld TPO has made the addition on account of treating ALP of commission paid to the AE in respect of unrelated export sales by applying CUP at nil. The basic contention of the Ld TPO is that there is no significant services rendered by its AE to get the commission ranging at the rate between 5-15% as per the agreement entered into between the appellant and its AE. Ld AR main contention against in finding of the TPO are that the appellant have no overseas branch to procure the export order, realize the export proceeds and function as a coordinator for issuing the goods from airport etc. Ld AR has further argued that the specification of dial, watch arms vary from manufacturer to manufacturer and design of watches. Therefore, the continuous coordination is required with the manufacture of the watches which the AE performs. The AE also takes care of rejection of items to the extent of 5% of invoice value. In view of the above facts, 1 agree with the arguments of Ld AR that the functions by AE needs compensation in form of commission. Now coming to the quantification of commission, the same is made as per the agreement entered between the AE and the appellant. In the present case since under the TNMM method of benchmarking the appellant operating profit margin is higher than those of comparables. No separate adjustment may be required for the commission paid. It may further be mention here that Ld, TPO has not done any comparability analysis for the commission rate, with independent parties. Ld. TPO is comparing commission paid to third party with AE which are controlled transaction. Further, appellant allows discount to AE of equal amount. Only nomenclature is different i.e. In one case it is called commission & in other case, it is called discount. Considering the entire facts and circumstances of the case I here by direct the AC)/TPO to delete the addition made on account of arms length price adjustment for the commission paid. As a result, these grounds of appeal are allowed.”
ITA Nos.1026 to 1028/Del/2016 (By the Revenue) & 990/Del/2016 (By the assessee) 5. Aggrieved with such order of the CIT(A), the Revenue is in appeal before the Tribunal.
The ld. counsel for the assessee, at the outset, filed an application for admission of additional evidence in terms of Rule 29 of the Income-tax (Appellate Tribunal) Rules, 1963 for all the three years in the shape of an affidavit of Mr. Ernst Huber, Director of Taratec SA, Switzerland, regarding the arrangement between the parties and services rendered in terms of marketing service agreement entered into with the assessee. Referring to the copy of the order of the Tribunal in assessee’s own case for assessment year 2005-06 and 2006-07, vide and 5567/Del/2010, order dated 30th May, 2016, he submitted that the Tribunal in the said order has admitted the additional evidence and thereafter, restored the issue to the file of the A.O./TPO to decide the ALP of the commission paid by the assessee after taking into consideration the affidavit of Mr. Ernst Huber, Director, Taratec SA, Switzerland. He, however, submitted that the matter should be decided here and should not be restored to the file of the A.O./TPO.
The ld. DR, on the other hand, submitted that since the Tribunal in assessee’s own case for the immediately preceding two assessment years has restored the issue to the file of the A.O./TPO for determination of the ALP of the commission paid, he has no objection if the matter is restored to the file of the A.O./TPO.
ITA Nos.1026 to 1028/Del/2016 (By the Revenue) & 990/Del/2016 (By the assessee) 8. We have considered the rival arguments made by both the sides and perused the orders of the authorities below. We find, in the immediately preceding two assessment years, the Tribunal in assessee’s own case, vide and 5567/Del/2010, order dated 30th May, 2016, has admitted the additional evidence in the shape of the affidavit of Mr. Ernst Huber, Director, Taratec SA, Switzerland and has restored the issue to the file of the A.O./TPO for determination of the ALP of the commission paid. The relevant observations of the Tribunal at para 20 reads as under:- “20. After going through the decision in the case of Hughes Systique (supra), we are of the opinion that it would be in the interest of justice to admit the additional evidence filed by assessee in the form of affidavit because this affidavit has come in possession of assessee after the proceedings were over for both the assessment years in question. We, therefore, set aside the order of ld. CIT(A) for AY 2005-06 and restore the matter to the file of ld. AO/TPO to decide the ALP of the commission paid by assessee after taking into consideration the affidavit of Ernst Huber, Director of Taratec SA. Accordingly, department's appeal for AY 2005-06 stands allowed for statistical purposes.”
Respectfully following the decision of the Tribunal in assessee’s own case for the immediately preceding two assessment years, we admit the additional evidence filed by the assessee in the form of affidavit and restore the issue to the file of the A.O./TPO to determine the ALP of the commission paid by the assessee, after considering the affidavit of Mr. Ernst Huber, Director, Taratec SA, Switzerland and in the light of the decision of the Tribunal in assessee’s own case in the immediately two preceding assessment years. The appeals filed by the Revenue for all the three years are accordingly allowed for statistical purposes.
ITA Nos.1026 to 1028/Del/2016 (By the Revenue) & 990/Del/2016 (By the assessee) 10. The other issue that has been taken by the Revenue for assessment year 2007-08 reads as under:- “That whether on the facts and in law, the ld.CIT(A) was right in deleting the disallowance of Rs.12,84,473/- made by the A.O. on account of Section 14A r.w. rule 8D for the A.Y. 2007-08 by ignoring fact that as per the CBDT’s instruction No.5/2014 dated 11.02.2014, Rule 8D read with section 14A of the Act provides for disallowance of the expenditure even where tax payer in a particular year has not earned any exempt income.”
After hearing both the sides, we find, the Assessing Officer, applying the provisions of section 14A r.w. Rule 8D, disallowed an amount of Rs.12,84,473/- out of the total expenditure of Rs.3,30,30,484/- debited by the assessee in its Profit & Loss Account in respect of various expenditure.
In appeal, the ld.CIT(A) deleted the addition on the ground that the assessee has not received any dividend income during the year and, therefore, in view of the decision of the Hon'ble Delhi High Court in the case of Cheminvest Ltd. vs. CIT, vide and the decision of the Hon'ble Delhi High Court in the case of CIT vs. Holcim India Ltd., 272 ITR 277, deleted the addition. It is the submission of the ld. DR that in view of the CBDT Instruction No.05/2014 dated 11th February, 2014, disallowance of expenditure can be made u/s 14A r.w. Rule 8D where the assessee has not earned any exempt income. It is the submission of the ld. counsel for the assessee that in view of the binding decision of the Hon'ble Delhi High Court in the case of Holcim India Ltd. (supra), since the assessee has not received any dividend income during the year, therefore, the order of the CIT(A) on this issue has to be upheld. We find merit in the argument of the ld.
ITA Nos.1026 to 1028/Del/2016 (By the Revenue) & 990/Del/2016 (By the assessee) counsel. The ld. DR could not controvert the factual finding given by the ld.CIT(A) that the assessee has not received any exempt income during the year. Therefore, in view of the decision of the Hon'ble Delhi High Court in the case of Holcim India Ltd. (supra) where it has been held that no disallowance u/s 14A r.w. Rule 8D can be made when the assessee has not received any exempt income during the year, we uphold the order of the CIT(A) and the ground raised by the Revenue is dismissed.
So far as & 990/Del/2016 filed by the assessee are concerned, the common issue raised by the assessee in both the appeals are relating to the disallowance u/s 14A r.w. Rule 8D of the IT Act of Rs.5,50,945/- and Rs.11,81,011/- for the assessment years 2008-09 and 2009-10 respectively made by the Assessing Officer and upheld by the CIT(A).
Facts of the case, in brief, are that the Assessing Officer, during the course of assessment proceedings, noted that the assessee has made investments in shares the income from which is exempt. On being questioned by the Assessing Officer as to why disallowance in terms of Rule 8D may not be made, the assessee filed a computation computing such disallowance at Rs.5,50,945/- u/s 14A r.w. Rule 8D for assessment year 2008-09. The Assessing Officer accordingly disallowed Rs.5,50,945/- u/s 14A. Similarly, he disallowed an amount of Rs.11,81,011/- for assessment year 2009-10. Before the CIT(A), it was argued that these investments are strategic investments in subsidiary companies and joint ventures for the ITA Nos.1026 to 1028/Del/2016 (By the Revenue) & 990/Del/2016 (By the assessee) furtherance of its business and not to earn any exempt income. Further, there is no finding to the effect that there is wrong claim of exemption for generating exempt income in the books of account of the assessee. However, the ld.CIT(A) was not convinced with the arguments advanced by the assessee. He noted that the assessee has received exempt income by way of dividend and there is no dispute to this. Further, when there was investment as on 31.03.2007 in M/s Satva Jewellery & Design Ltd. and M/s Karol View Developers Pvt. Ltd. Further, as on 31.03.2008, investment in M/s Karol View Developers Pvt. Ltd. is not appearing. Similarly, in the case of M/s Satwa Jewellery & Desing Ltd. the investment is reduced. These two investments are not appearing at all in the balance sheet as on 31.03.2009. Similarly, investment in Pylania A.G. Switzerland as on 31.03.2008 is not appearing as investment in the balance sheet of the assessee as on 31.03.2009. Similarly, Kamla Retails Ltd. increased from Rs.1 crore to Rs.4.5 crore from 31.03.2008 to 31.03.2009. According to the ld.CIT(A), analysis of the investment pattern reveals that the investments are not static in nature and, over the years, investments are changing. Therefore, he rejected the claim of the assessee regarding strategic investment for furtherance of business. So far as the argument of the assessee that there is no finding to the effect that there is wrong claim of exemption for generating exempt income in the books of account of the assessee is concerned, he observed that since the investment in shares are not static one, therefore, there is bound to have some administrative and financial expenditure relatable to these investments. He accordingly upheld the action of the Assessing 9
ITA Nos.1026 to 1028/Del/2016 (By the Revenue) & 990/Del/2016 (By the assessee) Officer in disallowing the amount of Rs.5,50,945/- for assessment year 2008-09 and Rs.11,81,011/- for assessment year 2009-10.
The ld. counsel for the assessee, at the outset, submitted that the Assessing Officer, during assessment year 2010-11 has made no disallowance. So far as both the assessment years are concerned, the Assessing Officer has not proved the nexus between any expenditure incurred for earning of the exempt income. Referring to the letter addressed to the Assessing Officer on 25th December, 2011 for assessment year 2008-09, copy of which is placed at page 125 of the paper book, he submitted that it was categorically submitted before the Assessing Officer that no expenditure has been incurred to earn the exempt income and, therefore, disallowance made out of interest expenses by applying Rule 8D is unjustifiable as there is no nexus between the exempt income and the expenditure. He submitted that no new investments were made during the relevant two assessment years and, therefore, in absence of incurring any administrative expenditure, the CIT(A) was not justified in sustaining the disallowance made by the Assessing Officer. Referring to page 181 of the paper book, the ld. counsel for the assessee drew the attention of the Bench to the balance sheet of the assessee as on 31st March, 2009 and submitted that the assessee has substantial own capital and reserves and surpluses to the tune of Rs.35.80 crore as on 31.03.2009 and Rs.34.42 crore as on 31.03.2008. Referring to the schedule of investments, copy of which is placed at page 186 of the paper book, he drew the attention of the Bench to the investments
ITA Nos.1026 to 1028/Del/2016 (By the Revenue) & 990/Del/2016 (By the assessee) which are basically in the group companies only. He accordingly submitted that in absence of any satisfaction recorded by the Assessing Officer, the disallowance made by him and sustained by the CIT(A) is not justified.
The ld. DR, on the other hand, heavily relied on the order of the Assessing Officer and the CIT(A). Referring to para 6.3 of the order of the CIT(A), he submitted that the ld.CIT(A) has categorically found that the investments are not static, but, are changing and it cannot be said that no administrative expenditure have been incurred by the assessee. He accordingly submitted that the order of the CIT(A) be upheld.
We have considered the rival arguments made by both the sides; perused the orders of the Assessing Officer and the CIT(A); and the paper book filed on behalf of the assessee. We have also considered various decisions cited before us. We find the Assessing Officer disallowed an amount of Rs.5,50,945/- and Rs.11,81,011/- for assessment years 2008-09 and 2009-10, respectively u/s 14A r.w. Rule 8D. It is the submission of the ld. counsel that the assessee has not incurred any expenditure for earning the exempt income and, therefore, no disallowance u/s 14A r.w. Rule 8D is called for. It is the submission of the ld. DR that the investments made by the assessee are not static, but, are changing and it cannot be said that the assessee has not incurred any administrative expenditure. We find some force in the argument of the ld. DR on this issue. It cannot be said that there is no satisfaction of the Assessing Officer in the instant case. He had ITA Nos.1026 to 1028/Del/2016 (By the Revenue) & 990/Del/2016 (By the assessee) categorically asked the assessee and the assessee has computed such disallowance as per the provisions of section 14A r.w. Rule 8D of the Act. We, therefore, do not find any infirmity in the order of the Assessing Officer in making a disallowance of Rs.5,50,945/-. The ld.CIT(A) has rightly disallowed the same. We, therefore, uphold the action of the CIT(A) in sustaining the addition of Rs.5,50,945/-.
So far as assessment year 2009-10 is concerned, it is seen from the computation statement filed at page 96 of the paper book that the actual dividend received by the assessee during the year is Rs.4,21,566/- only. It has been held in various decisions that the disallowance u/s 14A r.w. Rule 8D cannot exceed the actual exempt income received. We, therefore, modify the order of the CIT(A) and direct the Assessing Officer to restrict the disallowance u/s 14A r.w. Rule 8D to the actual dividend income received during the year. The ground raised by the assessee for the A.Y. 2008-09 is accordingly dismissed and the ground raised for the A.Y. 2009-10 is partly allowed.
There is one more issue in assessment year 2009-10 i.e., regarding disallowance of Rs.27,919/- on account of club membership and club service charges.
After hearing both the sides, we find the Assessing Officer disallowed an amount of Rs.27,919/- on account of club membership fees and for the club service charges on the ground that the assessee did not file any reply on this issue. In appeal, the ld.CIT(A) upheld the action of the Assessing Officer on the ground that 12
ITA Nos.1026 to 1028/Del/2016 (By the Revenue) & 990/Del/2016 (By the assessee) the assessee, during the assessment proceedings as well as the appeal proceedings has not filed any evidence in support of the claim of expenses. It is the submission of the ld. counsel that given an opportunity, the assessee is in a position to substantiate its case. Considering the totality of the facts and in the interest of justice, we deem it proper to restore the issue to the file of the Assessing Officer with a direction to give one final opportunity to the assessee to substantiate the claim of expenses on account of club membership and club service charges. This ground raised by the assessee for assessment year 2009-10 is accordingly allowed.