Case Law Details
ITAT Lucknow held In the case of JCIT vs. M/s Super House Leather Ltd. that following the judgment of Bombay High Court in the case of Godrej And Boyce Mfg. Co. Ltd. vs. DCIT [2010] 328 ITR 81 (Bom), it is clear that Rule 8D is prospective and therefore, applicable from assessment year 2008-09 and afterwards. Therefore, Rule 8D is not applicable in the present year.
In the matter of transfer pricing adjustment, no reasons have been given by the present TPO to reject the method of Cost Plus basis adopted by the assessee and accepted by the Department in earlier year(s). Although principle of res-judicata does not apply to the Tax proceedings yet, one cannot left aside the “Principle of Consistency”, which requires that when the facts & circumstances continue to remain the same, then there should not be any variation in the treatment from earlier year.
Facts of the Case
Grounds of appeal:
1. The Ld. CIT (A) has erred in law and on facts in deleting the addition of Rs.13,61,713/- made u/s 14A without appreciating the fact-
(a) It was onus of the assessee to furnish the details of source of investment in shares however, the assessee had not discharged its onus.
(b) The provisions of sub section (2) & (3) to sec. 14A has been instituted by the Finance Act 2006 and was effective from 01.04.2007 i.e. from A.Y. 2007-08, assessment in question. Hence, the provisions of Rule 8D are applicable.
2. The Ld. CIT(A) has erred in law and on facts in deleting the addition of Rs.1,29,19,127/- on account of adjustment of arms length price without appreciating the fact of the case as discussed by the T.P.O in order u/s 92CA(3).”.
Contention of the Assessee
The learned counsel for the assessee supported the order of CIT (A). He also submitted that as per decision of Hon’ble Bombay High Court rendered in the case of Godrej And Boyce Mfg. Co. Ltd. vs. DCIT And Another [2010] 328 ITR 81 (Bom), Rule 8D is not applicable prior to assessment year 2008-09.
Contention of the Revenue
The ld counsel of the revenue supported the assessment order issued by AO.
Held by CIT (A)
CIT (A) confirmed the deletion of disallowance of interest expenditure u/s 14A. It was held that as per the judgment of Hon’ble Bombay High Court rendered in the case of CIT vs. Reliance Utilities and Power Ltd. [2009] 313 ITR 340 (Bom), when mixed funds are used for making investment, there should be presumption that the investments were made out of interest free funds.
On the issue of deletion of adjustment in Arm length price, CIT (A) held that on going through the records produced by the appellant before the TPO, it is seen that the appellant has done a very thorough study of the transfer pricing and no convincing reasons have been given by the TPO for not accepting such a study. The assessee had adopted cost plus method, which had been duly accepted by the erstwhile TPO(s) for earlier year(s). No reasons have been given by the present TPO to reject the method of Cost Plus basis adopted by the assessee and accepted by the Department in earlier year(s). I am aware that principle of res-judicata does not apply to the Tax proceedings; yet, one cannot brush aside the “Principle of Consistency”, which requires that when the facts & circumstances continue to remain the same, then there should not be any variation in the treatment from earlier year.
Also it is very clear that Resale Price Method does not apply to the assessee as Resale Price Method applies to imports into the country. Thus, the resale price method as adopted by the TPO, per-se is not correct. However, after going through the order of the TPO, it is seen that the TPO has actually applied internal CUP method, but wrongly nomenclated it as Resale Price Method. The TPO has adopted the gross margin of the A.Es. @ 5%, which as per the TPO was the commission available to a commission agent. This assumption of 5% is by itself incorrect as the records shows that the average commission paid by the appellant to the AEs/non AEs on similar product is upto 20% and average being 7.2%.
The TPO has while dealing with international transactions with the AEs himself accepted the commission rates upto 10% given to the US-(AE) on referred sales and upto the 8% to UK-(AE). In this view of the matter, the gross margin available to the AE, should have been benchmarked at 8% and not at 5% as the TPO has himself treated all these commission payment at arms length and has made no adjustment in the commission transactions of the appellant.
Held by ITAT
It is admitted position of law as per the judgment of Hon’ble Bombay High Court in the case of Godrej And Boyce Mfg. Co. Ltd. vs. DCIT [2010] 328 ITR 81 (Bom) that Rule 8D is prospective and therefore, applicable from assessment year 2008-09 and afterwards. Therefore, Rule 8D is not applicable in the present year. At the same time, even prior to assessment year 2008-09 from when Rule 8D is applicable, some reasonable disallowance has to be made u/s 14A of the Act. The disallowance of Rs.12,000/- for average investment of Rs.491.08 lac is not reasonable and therefore, we hold that disallowance should be made of Rs.50,000/- on account of administrative expenses.
In relation to deletion of disallowance of interest expenditure u/s 14A, we are agreed with the CIT (A) order that when mixed funds are used for making investment, there should be presumption that the investments were made out of interest free funds.
In relation to ground no. 2 related to transfer pricing adjustment, we find that the CIT (A) has deleted this disallowance mainly on two basis. One basis is that the principle of res judicata is not applicable in Income tax proceedings but principle of consistency cannot be brushed aside. He has given a clear finding that the assessee has followed cost + method and no reasons have been given to reject the same. The second basis given by him is that the resale price method does not apply in the assessee’s case as resale price method is applicable to imports into the country.
From the provisions of clause (b) of sub Rule 1 of Rule 10B of Income-tax Rules, it is seen that resale price method is applicable where there is purchase of property or service from associate enterprise but in the present case, the assessee is not purchasing the goods from the associate enterprises but the assessee is selling the goods to associate enterprise.
We are agree with that the order of CIT (A) is after detailed examination of facts and no infirmity could be pointed out by ld counsel of the revenue in these findings of CIT(A) and therefore, we decline to interfere in the order of CIT(A).
Accordingly, appeal of the revenue partly allowed.
