2019 (1) TMI 2067 - AT - Income Tax

TP Adjustment - selection of MAM - assessee has adopted TNMM as the most appropriate method for determining ALP. TPO held that the cost plus method is the more suitable than TNMM - HELD THAT - Rhe copies of order of ITAT relates to assessee s own case for assessment year 2010-11 2017 (7) TMI 1263 - ITAT PUNE TPO himself had applied TNMM method in all the earlier years starling from assessment years 2002-03 to 2007-08 and the Tribunal had directed the application of TNMM method in assessment year 2008-09 we hold that for benchmarking the interactional transactions in the equipment division TNMM method is to be applied. Discount received on pre-payment of sales tax liability under the Sales Tax Deferral Scheme constitutes a remission or cessation of liability u/s 41(1) - HELD THAT - As perused the case record and decision of Sulzer India Ltd. 2014 (12) TMI 267 - BOMBAY HIGH COURT we find that this issue is directly covered in favour of the assessee that when there is no cession of a trading liability on account of pre payment of sales tax deferral liability the addition is not justified. Accordingly relief provided to the assessee by the Ld. CIT(Appeal) is sustained. Hence ground no. 2 raised in appeal by Revenue is dismissed. Disallowance of IT services - HELD THAT - We find that in assessee s own case for assessment year 2008-09 and 2010-11 2017 (7) TMI 1263 - ITAT PUNE this issue has been remitted back to the file of Assessing Officer for verification. Disallowance u/s.14A - Mandation of recording satisfaction - HELD THAT - As decided in own case 2017 (7) TMI 1263 - ITAT PUNE AO has failed to record any satisfaction before making the aforesaid disallowance and in the absence of recording of satisfaction the provisions of section 14A of the Act cannot be invoked as the AO has failed to come to a finding as to why the disallowance made by the assessee under section 14A is incorrect.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Tribunal are:

(a) Whether the domestic market segment and the export market segment are distinct and not comparable for transfer pricing purposes, thereby rendering the application of the Cost Plus Method (CPM) by the Transfer Pricing Officer (TPO) incorrect, and whether the Transactional Net Margin Method (TNMM) adopted by the assessee is appropriate for benchmarking international transactions.

(b) Whether the discount of Rs. 72,74,168/- received on pre-payment of sales tax liability under the Sales Tax Deferral Scheme constitutes a remission or cessation of liability under section 41(1) of the Income Tax Act, 1961 (the Act), and is therefore taxable as income.

(c) Whether the disallowance of IT service charges amounting to Rs. 6,22,64,471/- was correctly deleted by the CIT(A), considering the nature of the expenditure and prior Tribunal directions on the issue.

(d) Whether the deletion of the disallowance of IT service charges ignored the fact that in the assessee's own case for assessment year 2008-09, the matter was restored to the Assessing Officer for fresh verification.

(e) Whether the disallowance of Rs. 21,32,932/- under section 14A of the Act was correctly deleted by the CIT(A), despite the Assessing Officer's dissatisfaction with the quantum of expenses allocated against exempt income.

(f) General ground allowing the appellant to add, amend or alter the grounds of appeal.

2. ISSUE-WISE DETAILED ANALYSIS

Issue (a): Appropriateness of TNMM versus CPM for Transfer Pricing of International Transactions

Relevant Legal Framework and Precedents: The Transfer Pricing provisions under the Act require international transactions to be benchmarked at arm's length price (ALP). The selection of the most appropriate method is guided by the facts and circumstances of the case. The Transactional Net Margin Method (TNMM) and Cost Plus Method (CPM) are recognized methods under the Act and OECD Guidelines. The Tribunal's earlier decisions in the assessee's own case for assessment years 2008-09 to 2010-11 have held TNMM as the most appropriate method for the equipment division's international transactions.

Court's Interpretation and Reasoning: The TPO rejected the assessee's TNMM approach and applied CPM based on domestic market comparables, resulting in an upward adjustment of Rs. 15.58 crores. The CIT(A) relied on the Tribunal's earlier rulings which excluded certain non-comparable entities from the comparable set and upheld the aggregation of transactions within the equipment division. The Tribunal observed that the margins of the accepted comparables were significantly lower than those reported by the assessee, negating the need for any adjustment.

Key Evidence and Findings: The Tribunal examined the list of comparables, excluded five entities for reasons such as non-matching turnover, different accounting periods, and functional dissimilarity. The average margin of the remaining comparables was 14.01%, while the assessee's margin was 25.27%.

Application of Law to Facts: Applying the principle of selecting the most appropriate method, the Tribunal found TNMM suitable given the functional profile and prior consistent application. The domestic and export segments were held to be distinct and not comparable for transfer pricing purposes.

Treatment of Competing Arguments: The Revenue's reliance on the TPO's findings was considered but outweighed by the binding precedent of the Tribunal's earlier decisions and the functional analysis of comparables.

Conclusion: The Tribunal dismissed the Revenue's ground, confirming the correctness of TNMM and rejecting the CPM-based adjustment.

Issue (b): Taxability of Discount on Pre-Payment of Sales Tax Deferral Liability under Section 41(1)

Relevant Legal Framework and Precedents: Section 41(1) of the Act provides that if an allowance or deduction has been made in respect of any loss, expenditure, or trading liability, and subsequently any amount is obtained by way of remission or cessation of such liability, the amount obtained is deemed to be income. The Special Bench decision in Sulzer India Ltd. and Pune Tribunal decision in ACIT Vs. Spicer India Ltd. were cited.

Court's Interpretation and Reasoning: The Assessing Officer treated the discount of Rs. 72,74,168/- as taxable income under section 41(1) and section 28(iv), contending it was a remission of liability. The assessee contended that the pre-payment was made at net present value (NPV) as per the amended Bombay Sales Tax Act, and there was no waiver or remission of liability, only an early settlement at present value. The CIT(A) and Tribunal followed the Bombay High Court ruling in Sulzer India Ltd., holding that the difference between the NPV and the future liability credited as capital reserve is a capital receipt and not taxable under section 41(1).

Key Evidence and Findings: The assessee's books showed the deferred sales tax liability as an unsecured loan, and the pre-payment was made voluntarily at NPV without any waiver. The CBDT circular clarifying the treatment of deferred sales tax as paid for section 43B purposes was also considered.

Application of Law to Facts: The Tribunal applied the legal test that section 41(1) applies only when there is remission or cessation of liability resulting in benefit. Here, no remission occurred; the liability was settled at its present value, hence no income arose.

Treatment of Competing Arguments: The Revenue's argument that the discount was a benefit was rejected as lacking merit and contrary to judicial precedent.

Conclusion: The Tribunal upheld the deletion of the addition and dismissed the Revenue's ground on this issue.

Issues (c) and (d): Disallowance of IT Service Charges and Prior Restoration for Fresh Verification

Relevant Legal Framework and Precedents: The nature of expenditure-capital or revenue-is crucial for allowability. The Tribunal's earlier orders in the assessee's case for assessment years 2008-09 and 2010-11 remitted the issue back to the Assessing Officer for fresh consideration.

Court's Interpretation and Reasoning: Both parties agreed that the issue should be remitted for fresh verification in line with the Tribunal's earlier directions. The Tribunal noted the Assessing Officer had disallowed IT service charges treating them as capital expenditure, but the CIT(A) deleted the disallowance treating it as revenue expenditure.

Key Evidence and Findings: The Tribunal relied on the prior case records and directions for reassessment.

Application of Law to Facts: The Tribunal did not decide on the merits but remitted the matter for fresh examination by the Assessing Officer.

Treatment of Competing Arguments: The Revenue's reliance on prior restoration was accepted; the assessee concurred.

Conclusion: Grounds relating to IT service charges disallowance were allowed for statistical purposes and remitted.

Issue (e): Disallowance under Section 14A of the Act for Expenses Related to Exempt Income

Relevant Legal Framework and Precedents: Section 14A read with Rule 8D mandates disallowance of expenses incurred in relation to exempt income. However, the Assessing Officer must record satisfaction before invoking Rule 8D, as held in various Tribunal rulings including Kalyani Steels Ltd. Vs. Addl.CIT.

Court's Interpretation and Reasoning: The Assessing Officer disallowed Rs. 21,32,932/- under section 14A, relying on Rule 8D, without recording requisite satisfaction. The CIT(A) deleted the disallowance following the same approach as in assessment year 2010-11. The Tribunal upheld the deletion, emphasizing the mandatory nature of recording satisfaction before invoking Rule 8D.

Key Evidence and Findings: The assessee had claimed expenses of Rs.4,00,000/-; the Assessing Officer disagreed but failed to provide reasons or record satisfaction. The Tribunal noted the Assessing Officer's failure to address detailed submissions by the assessee.

Application of Law to Facts: Without recorded satisfaction, the disallowance under section 14A cannot be sustained.

Treatment of Competing Arguments: The Revenue's bare assertion that the disallowance was justified was rejected due to lack of reasoned satisfaction.

Conclusion: The Tribunal dismissed the Revenue's ground and upheld the deletion of disallowance under section 14A.

3. SIGNIFICANT HOLDINGS

On the issue of transfer pricing method, the Tribunal held:

"Applying the said ratio to the facts of the present case, where the TPO himself had applied TNMM method in all the earlier years... we hold that for benchmarking the international transactions in the equipment division, TNMM method is to be applied."

The Tribunal established the principle that domestic and export market segments can be distinct and non-comparable for transfer pricing purposes, and that prior consistent application of TNMM with appropriate comparables must be respected.

Regarding the sales tax deferral discount, the Tribunal quoted the High Court ruling stating:

"The difference between the NPV against the future liability credited by the assessee under the capital reserve account in its books of account, is a capital receipt. It cannot be termed as a remission or cessation of a trading liability and consequently, no benefit has arisen to the assessee in terms of the section 41(1)."

This core principle clarifies that pre-payment at net present value does not constitute remission or taxable income under section 41(1).

On section 14A disallowance, the Tribunal emphasized:

"The Assessing Officer has not recorded any objective satisfaction in regard to the correctness of the claim of the assessee, which is mandatorily required in terms of section 14A(2) of the Act and therefore his action of invoking rule 8D of the Rules to compute the impugned disallowance is untenable."

This holding affirms the mandatory procedural requirement of recording satisfaction before invoking Rule 8D.

On the IT service charges issue, the Tribunal did not decide on merits but remitted the matter for fresh verification in line with prior orders, preserving procedural fairness.