Emerson Electric Company (India) Pvt. Ltd. Vs Addl. Commissioner of Income Tax National Faceless Appeal Centre (ITAT Mumbai)
ITAT Mumbai held that since the assessee has not earned any dividend income from its equity investment during the year disallowance of expenditure under section 14A of the Income Tax Act read with Rule 8D of the Income Tax Rules is not sustainable.
Facts- The assessee is engaged in the business of developing and exporting software, providing engineering services and IT enabled services, and manufacturing of horns and electric motors for elevator application.
Notably, AO vide draft assessment order, observed that though the assessee has not earned any exempt income from such dividends, it remains a fact that such investments are long-term investments and the basic purpose of equity investments is to increase the stake in companies and therefore being claimant of the profits of the said companies by way of dividends. It was further observed that equity investments made by the assessee being long-term investments, they do not necessarily result into dividend every year. Accordingly, the AO computed the disallowance of Rs.75,18,750, under section 14A read with Rule 8D. The learned DRP vide its directions rejected the objections filed by the assessee. In conformity with the learned DRP’s directions, the AO passed the impugned final assessment order. Being aggrieved, the assessee has preferred the present appeal.
Conclusion- Held that during the year the assessee received no dividend income from its investments. The aforesaid fact has also not been disputed by the Revenue. We find that the Hon’ble Delhi High Court in Cheminvest Ltd. v. CIT has held that section 14A will not apply if no exempt income is received or receivable during the relevant previous year. Since, in the present case, the assessee has not earned any dividend income, therefore, respectfully following the aforesaid judicial pronouncements, disallowance of expenditure under section 14A read with Rule 8D is not sustainable.
FULL TEXT OF THE ORDER OF ITAT MUMBAI
1. The present appeal has been filed by the assessee challenging the impugned final assessment order dated 29/01/2022, passed under section 143(3) read with section 144C(13) of the Income Tax Act, 1961 (“the Act”), pursuant to the directions dated 27/12/2021, issued by the learned Commissioner of Income Tax (DRP–1), Mumbai–3, [“learned DRP”], issued under section 144C(5) of the Act for the assessment year 2017–18.
2. The brief facts of the case are: The assessee is engaged in the business of developing and exporting software, providing engineering services and IT enabled services, and manufacturing of horns and electric motors for elevator application. For the year under consideration, the assessee filed its return of income on 30/11/2017, declaring gross total income of Rs. 203,94,21,362. The return filed by the assessee was selected for scrutiny and statutory notices under section 143(2) as well as section 142(1) of the Act were issued and served on the assessee. Pursuant to the reference by the Assessing Officer (“AO”) under section 92CA(1) of the Act, the Transfer Pricing Officer (“TPO”) proposed a total transfer pricing adjustment of Rs. 12,42,61,908 vide order dated 19/01/2021, passed under section 92CA(3) of the Act. In conformity, the AO passed the draft assessment order dated 28/03/2021, under section 143(3) r/w section 144C(1) of the Act after making various additions/disallowances. While deciding assessee’s objections against the addition/disallowances made by the TPO/AO, the learned DRP vide its directions dated 27/12/2021, granted partial relief to the assessee. In conformity with the directions issued by the learned DRP, the AO passed the impugned final assessment on 29/01/2022 under section 143(3) r/w section 144C(13) of the Act. Being aggrieved, the assessee has raised the following grounds:-
“1. Ground no. 1 General ground
On the facts and in the circumstances of the case and in law, the Learned Assessing Officer (Ld. AO) based on the directions of the Dispute Resolution Panel (DRP), erred in making total addition of Rs. 14.52.72,061 as per the order passed by the Ld. AO (Rs. 14,93.58.395 as per computation sheet) to the total income of the Appellant.
2. Ground no. 2 Income from business or profession – Transfer pricing adjustment
On the facts and circumstances of the case and in law, the Ld. AO has erred in overstating the total income of the Appellant by Rs. 40,86,334 in the computation sheet to the order, even though the LA. DRP had granted relief of Rs. 40,86,332 in the transfer pricing adjustment made by the Ld. TPO. The Appellant prays that the AO be directed to compute the total taxable income as Rs. 2.18,46,93.421/-instead of Rs. 2,18,87.79,755.
3. Ground no. 3 TP adjustment on account of provision of IT Support and related services (ITeS) segment – INR 4,56,43,738
On the facts and in the circumstances of the case and in law, the Learned AO/ TPO erred in making an adjustment for provision of ITeS by:
a) Disregarding the TP Study maintained by the Appellant in good faith and with due diligence;
b) Rejecting the search process carried out by the Appellant in the TP Study;
c) Not following a structured search process and thus resorting to cherry picking of comparable companies;
d) Applying filters for selecting companies by disregarding the reasoning provided by the Appellant;
e) Selection of companies which are functionally not comparable and rejection of functionally comparable companies selected by the Assessee;
f) Inconsistency in use of updated margins of comparable companies. The Appellant prays that the aforesaid adjustment be deleted.
4. Ground no. 4-TP Adjustment on account of provision of facilitation support services (Marketing support services (MSS)) – INR 65,62,162
On the facts and in the circumstances of the case and in law, the Learned AO/TPO erred in making an adjustment for provision of MSS by:
a) Disregarding the TP Study maintained by the Appellant in good faith and with due diligence;
b) Rejecting the search process carried out by the Appellant in the TP Study:
c) Not following a structured search process and thus resorting to cherry picking of comparable companies: d) Selection of companies which are functionally not comparable and rejection of functionally comparable companies selected by the Assessee;
e) Inconsistency in use of updated margins of comparable companies. The Appellant prays that the aforesaid adjustment be deleted.
5. Ground no. 5 – TP Adjustment on account of provision of engineering and related services (Engineering) segment – INR 6,79,69,676
On the facts and in the circumstances of the case and in law, the Learned AO/TPO erred in making an adjustment for provision of engineering and related services by:
a) Disregarding the TP Study maintained by the Appellant in good faith and with due diligence; and
b) Disregarding the aggregation approach adopted by the Appellant by segregating the three divisions of the Appellant within the engineering and related services segment and thereafter applying the same benchmarking analysis to such segregated three divisions.
The Appellant therefore submits and prays that the aforesaid adjustment be deleted.
6. Ground no. 6 – Disallowance of expenses under Section 14A of the Act r.w. Rule 8D – INR 75.18,750
a) The Ld. AO erred in facts, circumstances and in law in disallowing expenses amounting to Rs.75.18,750 under section 14A of the Actr.w. Rule 8D(2) by considering such expenses related to exempt income.
b) Without prejudice to above, the Ld.AO erred in not appreciating that the Appellant has not earned any exempt income during the year and accordingly no disallowance u/s 14A of the Act is warranted
The Appellant prays that the aforesaid addition be deleted.
7. Ground no. 7- Addition under provisions of Section 36(1)(va) of the Act 1.75-77-735 INR
On the facts and circumstances of the case and in law, in treating the contributions of the employees towards the provident fund amounting to INR 1,75.77.375, not remitted within the due date prescribed by respective Act as income of the Appellant without appreciating the fact that the amounts were deposited before the due date of filing of return of income for AY 2017-18 and hence should be allowable under section 43B of the Act.
The Appellant prays that the aforesaid addition be deleted.
8. Ground no. 8 – Incorrect computation of interest under Section 234B
On the facts and circumstances of the case and in law, the Ld. AO has erred in computing and levying interest of Rs. 3,41,68,010 under section 234B of the Act. The Appellant prays that the Ld. AO be directed to recompute the interest under Section 234B as per law.
9. Ground no. 9 – Incorrect computation of interest under Section 234C
On the facts and circumstances of the case and in law, the Ld. AO erred in levying interest of Rs. 13.98,175 under Section 234C instead of Rs.11,91,466. The Appellant prays that the Ld. AO be directed to recompute the interest under Section 234C as per law.
10. Ground no. 10- Penalty proceedings
On the facts and circumstances of the case and in law, the Ld. AO erred in initiating penalty proceedings under section 270A of the Act. The Appellant prays that the Ld. AO be directed to drop the penalty proceedings.
All of the above Grounds of Appeal are independent of and without prejudice to each other.
Furthermore, the Appellant craves leave to add to, alter, amend, delete, modify or withdraw all or any of the Grounds of Appeal herein and to submit such statements, documents and papers as may be considered necessary either at or before the appeal hearing.”
3. Ground no.1, raised in assessee’s appeal is general in nature and therefore, needs no separate adjudication.
4. The issue arising in ground no.2, raised in assessee’s appeal, is pertaining to overstating the total income of the assessee in the computation sheet forming part of the final assessment order.
5. During the hearing, the learned Authorised Representative (“learned AR”) submitted that the AO computed the total taxable income on page 17 of the final assessment at Rs.218,46,93,421, however, while computing the total demand payable in the computation sheet annexed along with the final assessment order, the AO has considered the total income of Rs.218,87,79,755. We find that pursuant to the DRP’s direction the total transfer pricing adjustment was reduced to Rs.12,01,75,576 from the original adjustment of Rs.12,42,61,908, accordingly the total taxable income as proposed by the AO vide draft assessment order of Rs 218,87,79,753, was reduced to Rs.218,46,93,421, vide final assessment order. Since while computing the total demand payable by the assessee, the AO has considered the total taxable income of 218,87,79,755, therefore, we direct the AO to consider the correct amount of total taxable income for computing the total demand payable. Accordingly, ground no.2, raised in assessee’s appeal is allowed for statistical purposes.
6. The issue arising in ground no.3, raised in assessee’s appeal is pertaining to transfer pricing adjustment in relation to the provision of IT support and related services (ITeS) segment.
7. The brief facts of the case pertaining to this issue, as emanating from the record, are: The assessee is a subsidiary of Emerson Electric (Mauritius) Ltd which is the wholly owned subsidiary of Emerson Electric Co, USA. The assessee is, inter-alia, engaged in providing Information Technology and related support services (“ITeS”) for the in-house consumption of the associated enterprises. The services rendered by the assessee under the aforesaid segment are primarily in the nature of database management, administration, and helpdesk support service. In its transfer pricing study, the following functions have been stated to have been performed by the assessee in relation to the aforesaid international transaction:-
“8.1.1.2. Functions performed by Emerson India
Emerson India is engaged in providing IT and related support services (hereinafter referred as ‘ITeS’) for the in-house consumption of the AES
The services rendered by Emerson India are primarily in the nature of database management, administration and help desk support services. The services provided by the Company includes the following:
i. Application support, database support and maintenance, IT helpdesk support, support integration portals etc.
ii. Email server administration and management of applications such as Unix, Linux etc.
iii. Operating systems and network administrations
iv. Oracle ERP application database administration and management services
v. Oracle ERP application usage and troubleshooting support services and product lifecycle management applications.
vi. Datacentre support such as Unix admin services, Windows admin services, messaging support service, support for administration of server hosting and related services, etc.”
8. For benchmarking this transaction, the assessee used Transactional Net Margin Method (“TNMM”) as the most appropriate method with the Profit Level Indicator (“PLI”) of Operating Profit to Total Cost (“OP/TC”). By considering itself as the tested party, the assessee identified 10 comparable companies which had a working capital adjusted range of weighted average OP/TC of 6.16% to 15.15%, with a median of 10.03%. As the assessee computed its own PLI at 13.87%, accordingly, it claimed that the international transaction of “Provision of IT support and related services” is at arm’s length price (“ALP”).
9. During the transfer pricing assessment proceedings, the TPO objected to the selection of filter of turnover less than Rs. 1 crore and introduced three new filters, i.e. (i) turnover filter of minimum 1/10th and maximum 10 times the turnover of tested party, (ii) export filter of more than 75%, (iii) availability of segmental account. By applying the aforesaid 3 additional filters, the TPO rejected three comparable companies selected by the assessee finding them same to be not satisfying the turnover filter. The TPO also introduced five new comparable companies, i.e. Comviva Technologies Ltd, XS Cad India Private Limited, Nihilent Ltd, Infobeans Technologies Ltd, and Cygnet Infotech Pvt. Ltd, claiming them to be satisfying all the filters. By rejecting the contentions raised by the assessee against the selection of aforesaid new filters as well as the companies included/excluded, the TPO vide order dated 19/01/2021, passed under section 92CA(3) of the Act arrived at a set of following 12 comparables for benchmarking the international transaction of “Provision of IT support and related services”:-
