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TMI Blog2016 (4) TMI 1349X X X X Extracts X X X X X X X X Extracts X X X X ..... e at 6.65% because the total income taken by the assessee and accepted by the CIT(A] included sales of Rs. 21,58,73,267/-, thereby restricting the disallowance out of interest at Rs. 1,50,670/- only and giving a relief ofRs.12,03,804/-. 3. On the facts and circumstance of the case and in law the Ld. CIT(A) has erred in restricting the addition of Arm's Length Price of International Transactions with Associated enterprises from Rs. 2,82,02,588/- to Rs. 71,79,984/-, thereby giving a relief of Rs. 2,10,02,604/-." 3. In ITA No.151/Del/2013 the assessee has raised following two grounds of appeal:- "1. The Id. CIT(A)-XXIX, New Delhi has erred in law as well as on the facts and circumstances of the case in confirming the Transfer Pricing adjustment to the extent of Rs. 71,99,984/-. 2. The Id. CIT(A)-XXIX, New Delhi has erred in law as well as on the facts and circumstances of the case in confirming the addition u/s 14A to the extent of Rs. 1,50,670/-." 4. Now we first take up the appeal of the revenue. 5. The brief fact of the case is that the assessee was incorporated as subsidiary of Gillette Group India Pvt. Ltd which is engaged in the business of manufacturing and trading ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oss of 11.84% on sales, hence an adjustment of Rs. 28202588/- was made by computing the arm's length price of the transaction of Rs. 218437664/-. Against the ALP determined by the assessee of Rs. 190235076/- The other international transactions of purchase of spares, Corporate Support services and reimbursement were accepted by the TPO as per TP study of the assessee. 10. On receipt of the order of TPO the AO passed order u/s 143(3) of the Act on 16th December 2008, wherein addition of Rs. 28202588/- was made being difference between arms length price determined by the assessee and the TPO. The ld AO further made disallowance of Rs. 2 lacs out of repairs and maintenance expenses, Rs. 275259 on account of prior period expenses and Rs. 1305474 u/s 14A of the Act. 11. The assessee being aggrieved with the order of the AO preferred an appeal before the ld CIT(A) raising against all the grounds of disallowance and additions. The ld CIT(A) deleted the disallowance of Rs. 2 lacs on account of repairs and maintenance expenses, Rs. 275259/- on account of prior period expenses. Further out of disallowance of Rs. 13054474/- u/s 14A of the Act ld. CIT(A) deleted the addition to the extent of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hould be disallowed. Regarding other expenditure the AO was of the view that the assessee has not considered many administrative expenses like common services expenses, legal and professional fees for working out disallowance. Therefore the ld. AO determined that out of gross total income 6.66% is dividend income which is exempt and applying the same ratio ld AO determined expenses allocable for earning dividend income amounting to Rs. 2155159/- out of total expenses of Rs. 32344581/-. Hence disallowance u/s 14A of the act offered by the assessee of Rs. 799967/- was rejected and disallowance was worked out at Rs. 2155159/- thereby making further disallowance of Rs. 1354474/-. On appeal before the ld CIT(A) he upheld the disallowance of Rs. 150670/- on account of proportionate interest and deleted the addition of Rs. 1203804/- on account of various expenses holding that these expensed do not appear to be incurred in relation to earning of dividend income. Therefore, the revenue is in appeal before us against deletion of Rs. 1203804/- being various expenses u/s 14A of the Act. 15. Before us, ld DR contended that all such expenses are part of the common expenses of the assessee and t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o.1 and 2 of the appeal of the revenue is dismissed. 18. Ground No.3 the concurrently we also take up the ground No.2 of the appeal of the assessee on the issue of confirmation of disallowance by ld CIT(A) on account of interest expenditure of Rs. 1,50,670/-. 19. The ld AR submitted before us that while working out the disallowance u/s 14A of the Act the assessee has not disallowed any expenditure on account of interest because of the reason that no interest expenditure have been incurred for making an investment in the investment yielding tax free income. He submitted that the assessee has reserve and surplus of Rs. 1,36,15,29,740/- whereas the investment in tax free income earning assets made is Rs. 42,81,98,183/-. It shows that the interest free sources of funds available with the assessee were far more than the amount invested in tax free income yielding securities. He submitted that there is an error in the order of the ld CIT(A) in holding that it would have utilized the funds in more prudent ways as that cannot be the reasons for disallowance of interest u/s 14A of the Act. Therefore he submitted that interest disallowance of Rs. 150670/- made by the AO and confirmed by ld ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... est-free fund generated or available with the company, if the interest-free funds were sufficient to meet the investments. In this case this presumption is established considering the finding of fact both by the Commissioner of Income-tax (Appeals) and the Income-tax Appellate Tribunal." 22. We also get support from Hon'ble Bombay High Court's decision in case of CIT v HDFC bank limited in 366 ITR 505 where identical view has been taken. In view of this, we reverse the decision of the ld. CIT (A) in confirming the disallowance of Rs. 150670/- on account of interest expenditure u/s 14A of the Income Tax Act. In the result ground No.2 of the appeal of assessee is allowed. Transfer Pricing Issues. 23. Now we take up the ground NO.1 of the appeal of the assessee which is against the transfer pricing adjustment confirming to the extent of Rs. 71,99,984/- by ld CIT(A) and we also decided simultaneously ground No.3 of the appeal of the revenue wherein revenue is against the relief of Rs. 2,10,02,604/- granted by the ld CIT(A). The issues are concerning the rejection of one comparable by ld. TPO and confirmed by ld. CIT (A) and on concerning certain income and expenditure included in PL ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thermore neither the ld CIT(A) nor the ld AO had pointed out that how the negative net worth of the comparable make the price of the goods or the profitability arising from such transaction not comparable. Merely because the company is having negative net worth but when the FAR is comparable, it cannot be said to be non comparable unless it is shown that how the negative net worth of the company has impacted the profitability of the comparable company. We have alos noted the issue decided by Special bench in the case of DCIT V Quark Systems Limited in 2010-TII-02-ITAT-CHD-SB-TP where in the negative net worth company was considered and it was held that business organization with negative net worth cannot be treated at par with a normal business organization. However while considering that issue the comparable was also functionally not comparable in that case. Therefore there was no view expressed in that decision that though comparable has similar FAR still negative net worth company is required to be excluded without showing the impact of negative net worth on the profitability of the company. In view of this we direct the inclusion of this Company i.e. Muller & Phipp India Limite ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to exclude the other sales of Rs. 1214675/- to be excluded while working out PLI. Against this no argument have been advanced by the ld DR that how the order of the ld CIT(A) is incorrect. In view of this we direct that other sales amounting to Rs. 1214675/-shall be included as operating income for working out PLI. Corporate support service of Rs. 2187030/-. The ld TPO has excluded this sum without giving any reason and the ld CIT(A) has held that Corporate Support Services are aggregated with the distribution function of the assessee and are insignificant in volume therefore included as operating income of the assessee. Ld. DR has fairly agreed that if that income is to included as operating income then proportionate expenses are also required to be included as operating expenses. In our view there is no expenditure has been excluded pertaining to corporate support services. While working out the entity level PLO in case of TNMM method we are of the view that the Corporate Support service income should be included as operating income and therefore we do not find any infirmity in the order of the ld CIT(A). Liabilities No Longer required written back Rs. 5566871/- This amount ..... X X X X Extracts X X X X X X X X Extracts X X X X
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