Toyota Tsusho India P. Ltd Vs Joint/Deputy Commissioner of Income Tax (ITAT Bangalore)
ITAT Bangalore held that no disallowance under section 14A of the Income Tax Act could be made if no exempt income was earned by the assessee.
Facts-
During the course of proceedings, the AO noticed that the assessee has made an investment in unlisted equity for an amount of Rs.271,35,77,670 and the assessee has claimed interest expenditure of Rs.13,06,47,963. The AO therefore invoked the provisions of section 14A and made a disallowance of an amount of Rs.1,03,81,268. The DRP upheld the disallowance made by the AO.
Conclusion-
The Hon’ble Delhi High Court in the case of Era Infrastructure (India) Ltd has considered the issue of disallowance u/s.14A when there is no exempt income and held that no disallowance under section 14A of the Act could be made if no exempt income was earned by the assessee.
FULL TEXT OF THE ORDER OF ITAT BANGALORE
This appeal is against the order of the National Faceless Assessement Centre, Delhi [NFAC] passed u/s.143(3) r.w.s.144(13) of the Income Tax Act 1962 (the Act) dated 11.2.2022 for the assessment year 2017-18.
2. The assessee has raised 13 grounds pertaining to TP adjustment and grounds 14 to 16 are with regard to disallowance u/s. 14A of the Act. Ground No.17 is general. The assessee has also raised additional grounds (No.18 & 19) with regard to the modified assessment order passed by the JCIT, Circle 7(1)(1) (jurisdictional AO), Bangalore modifying the final assessment order passed by NFAC. The additional grounds No.20 to 22 relate to the TP adjustment.
3. During the course of hearing, the ld. AR submitted that the final assessment passed by the NFAC is not in accordance with the directions of DRP and that the modification order passed by the jurisdictional is not tenable. The ld AR prayed for the admission of additional grounds raised in this regard and submitted that if this issue is adjudicated, then the rest of grounds raised by the assessee with regard to the TP adjustment may be left open.
4. The additional grounds raised are pure legal issue, which does not require investigation of new facts. Hence, placing reliance on the judgment of the Hon’ble Apex Court in the case of National Thermal Power Co. Ltd. v. CIT (1998) 229 ITR 383 (SC), we admit the additional grounds.
5. The assessee is engaged in the business of trading in automobile components, operating turnkey projects and logistics, primarily catering to automotive industry. The assessee is a wholly owned subsidiary of Toyota Tsusho Corporation, Japan (AE). The assessee filed return of income for the AY 2017-18 on 28.11.2017 declaring NIL income. The case was selected for scrutiny and notice u/s. 143(2) of the Act was duly served on the assessee. Since the assessee had entered into international transactions with its AE, a reference was made to the TPO to determine the ALP of the transaction. The TPO passed an order proposing TP adjustment of Rs.43,03,79,111. Consequently the AO passed the draft assessment order dated 13.4.2021 incorporating the TP adjustment and also made disallowance u/s. 14A of the Act for an amount of Rs.1,03,81,258 and disallowance towards R&D expenditure of Rs.36,000.
6. Aggrieved the assessee filed the objections before the DRP. The DRP by order dated 18.1.2022 issued directions to the TPO to reconsider the inclusion of certain comparables and also excluded some of the comparables included by the TPO. In the final assessment order dated 11.2.2022, the AO retained the TP adjustment at Rs.43,03,79,111 as in the draft assessment order by stating that the DRP has confirmed the addition made by the TPO. The assessee is in appeal before the Tribunal against the final order of the AO which according to the assessee is not in accordance with the directions of the DRP.
7. During the course of hearing the ld. AR drew our attention to the following directions of the DRP:-
“5.1.1 M/s. Archroma India Pvt Ltd: The argument of the assessee is that this company is involved in manufacture of speciality chemicals and fails the trading sales / total sales filter of 75% applied by the learned TPO and it should be rejected as comparable. In this regard, we direct the TPO to examine whether trading sales / total sales filter is passed by this company.
In case if this filter fails then this company should be excluded as comparable.
5.1.2 M/s. Tarak Chemicals Limited: Having considered the submission of the assessee, we note that as per assessee this company is not a comparable as it is functionally dissimilar and fails trading sales / total sales filter of 75%.
From the perusal of the annual report, we note that the company is into manufacture of oil field chemicals which indicate that the company is involved primarily in manufacturing activities. In this regard, we direct the TPO to examine whether trading sales / total sales filter is passed by this company. In case if this filter fails then this company should be excluded as comparable.
5.1.4 M/s. Sirea India Private Ltd: Having considered the submission of the assessee, we note that as per assessee this company is not a comparable as it is functionally dissimilar and from the perusal of the annual report, we note that the company is into business of trading of paints and varnish. We find that this company is functionally dissimilar and is directed to be excluded.”
8. It is submitted by the ld AR that had the directions of the DRP, been considered the AO/TPO, then the amount of TP adjustment would have undergone change and the revised TP adjustment should have been included in the final assessment order. The ld AR submitted that the TP adjustment is retained in the final assessment order at the same figure as in the draft assessment order and therefore the final assessment order is not in accordance with the directions of the DRP and thus liable to be quashed. The ld. AR further submitted that the AO has wrongly mentioned in para 4.2 of the final assessment order that the DRP had confirmed the addition made by the TPO. In this regard, the ld. AR relied on the decision of the High Court in the case of ESPN Star Sports, Mauritius v. UOI & ANR.
9. The ld. AR also drew our attention to an order passed by the Jt.CIT, Circle 7(1)(1) dated 28.2.2022 as an order giving effect (OGE) to the DRP directions u/s. 143(3) r.w.s. 92CA r.w.s. 144C(13) of the Act wherein the AO has given effect to revised TP adjustment by observing as under:-
“2. Aggrieved by the draft assessment order, the assessee filed an objection before DRP on TP adjustment and disallowance u/s14A, which was disposed on 18.01.2022 giving directions to TPO. The disallowance u/s 14A was upheld by the DRP. Final assessment Order was passed by Faceless Assessment Unit on 11.02.2022. Based on the directions of DRP, TPO passed an OGE dated 15.2.2022 arriving at total adjustment of Rs 31,38,49,565/-.
3. The assessment made u/s 143(3) r.w.s. 144(13) r.w.s. 144B of the Act dated 11.02.2022 is modified as follows to give effect to the T P adjustment revised after DRP directions:
