Kodak India Pvt. Ltd. v. Addl. CIT

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The Tax Publishers2013 TaxPub(DT) 1738 (Mum-Trib) : (2013) 155 TTJ 0697 : (2013) 088 DTR 0242 Income Tax Act, 1961 --Transfer pricing--Computation of ALP Adjustment of reimbursement expenses vis-a-vis opportunity of hearing --Assessee incurred certain expenses on behalf of its AE. As expenses were to be reimbursed to assessee, receipt on account of reimbursement was recorded on cost plus 10 per cent mark up on expenses pertaining to employees, advertisements and award sponsorship. TPO/AO proposed to mark-up at the rate of 12.5 per cent and made an adjustment accordingly. DRP sustained order of TPO/AO. *Held:* Not rightly so. After going through facts and relevant proviso to section 92C(2) that adjustment sought by the TPO and sustained by the DRP was falling within the margin provided by the proviso. Addition/adjustment needs to be knocked down, as the adjustment had been made by applying 12.5% mark up as against 10% mark up shown by the assessee. Orders of the DRP and TPO were set aside on this issue and the assessing officer was directed to delete addition on account of adjustment suggested by TPO. Income Tax Act, 1961 Section 92C Income Tax Act, 1961 --Business expenditure--Disallowance under section 14A Expenditure against exempt income--In assessment proceedings, assessing officer noticed that assessee had received certain amount as dividend income and had claimed same as exempt. Assessee contended that it had not attributed any expense against exempt income. Since it was a case of debt-free company, no interest could be attributable towards investment made by it from its own funds, from which it had generated impugned exempt income, and hence, no disallowance was called for. Assessing officer rejected assessee's contention and made disallowance under rule 8D(2)(iii) being one-half per cent of average value of investment. DRP upheld order of assessing officer. Issue in this appeal was with reference to invoking of provisions of section 14A(2) and rule 8D. *Held:* Rule 8D could not be invoked directly and mechanically, i.e., without giving a detailed and speaking reasons. Bald statement made by assessing officer that he had referred to accounts, does not give him an automatic jurisdiction to invoke the provisions of section 14A read with Rule 8D. Disallowance, made on such basis is not permissible. It is imperative that the assessing officer can invoke rule 8D only when he records satisfaction in regard to the correctness of the claim of the assessee, having regard to the accounts of the assessee. The condition precedent for the assessing officer entering upon a determination of the amount of the expenditure incurred in relation to exempt income is that the assessing officer must record that he is not satisfied with the correctness of the claim of the assessee in respect of such expenditure. While rejecting the claim of the assessee with regard to the expenditure or no expenditure, as the case may be, in relation to exempt income, the assessing officer would have to indicate cogent reasons for the same. Therefore, it was all more necessary that assessing officer had to examine accounts of assessee first and if, he was not satisfied with correctness of claim, only then he could invoke Rule 8D. No such examination was made or satisfaction was recorded by assessing officer in this case. It was noticed that assessing officer had not considered claim of assessee at all and he had straightway embarked upon computing disallowance under rule 8D. Disallowance under section 14A required, a finding, of incurring of expenditure, and where no expenditure had been incurred, disallowance under section 14A would depend upon the facts, evidenced by the assessee and examination of those facts by the assessing officer. [Para 104] assessing officer has not examined the reasons for not attributing any expenditure towards income claimed as exempt. Whereas, the DRP in the impugned order, has held that the disallowance as not arbitrary, and that some expenditure has obviously been incurred to manage and monitor the investments, yielding the dividend income. The observation, 'that some expenditure has obviously been incurred to manage and monitor ........' made by the DRP, is per se, hypothetical. [Para 105] Rule 8D is not automatic, it is for the assessing officer to examine, at the outset, the correctness of the claim of the assessee, whether he has incurred any expenditure or not and has to give a definite finding, as to how the claim of the assessee is unacceptable. If, on examination, it is found that such expenditure is lower than the disallowance, as computed under Rule 8D, then actual expenditure, as estimated by the assessing officer would have to be disallowed. If, on the other hand, the assessee was able to substantiate on facts, that exempt income does not bear any cost/expenditure, in such cases, disallowance under section 14A, would become invalid. Rule 8D could not be invoked directly and mechanically, i.e., without giving a detailed and speaking reasons. Bald statement made by assessing officer that he had referred to accounts, does not give him an automatic jurisdiction to invoke the provisions of section 14A read with Rule 8D. Disallowance made on such basis is not permissible. In order to give quietus to the impugned issue, where no expenditure has been attributed to wards the exempt income by the assessee, Tribunal restores the issue of disallowance to the assessing officer for computing the disallowance in accordance with the provisions of section 14A(2), if at all, by giving detailed reasoning and speaking order, needless to say that the assessing officer shall give adequate and reasonable opportunity to the assessee to present its case. [Para 107] In these circumstances, the order of the DRP is set aside and the assessing officer is directed to compute the disallowance in accordance with the provisions of section 14A(2), as per observations in the above para. [Para 109]. SUBSCRIBE FOR FULL CONTENT

The Tax Publishers2013 TaxPub(DT) 1738 (Mum-Trib) : (2013) 155 TTJ 0697 : (2013) 088 DTR 0242

Income Tax Act, 1961

--Transfer pricing--Computation of ALP Adjustment of reimbursement expenses vis-a-vis opportunity of hearing --Assessee incurred certain expenses on behalf of its AE. As expenses were to be reimbursed to assessee, receipt on account of reimbursement was recorded on cost plus 10 per cent mark up on expenses pertaining to employees, advertisements and award sponsorship. TPO/AO proposed to mark-up at the rate of 12.5 per cent and made an adjustment accordingly. DRP sustained order of TPO/AO. Held: Not rightly so. After going through facts and relevant proviso to section 92C(2) that adjustment sought by the TPO and sustained by the DRP was falling within the margin provided by the proviso. Addition/adjustment needs to be knocked down, as the adjustment had been made by applying 12.5% mark up as against 10% mark up shown by the assessee. Orders of the DRP and TPO were set aside on this issue and the assessing officer was directed to delete addition on account of adjustment suggested by TPO.

Income Tax Act, 1961 Section 92C

Income Tax Act, 1961

--Business expenditure--Disallowance under section 14A Expenditure against exempt income--In assessment proceedings, assessing officer noticed that assessee had received certain amount as dividend income and had claimed same as exempt. Assessee contended that it had not attributed any expense against exempt income. Since it was a case of debt-free company, no interest could be attributable towards investment made by it from its own funds, from which it had generated impugned exempt income, and hence, no disallowance was called for. Assessing officer rejected assessee's contention and made disallowance under rule 8D(2)(iii) being one-half per cent of average value of investment. DRP upheld order of assessing officer. Issue in this appeal was with reference to invoking of provisions of section 14A(2) and rule 8D. Held: Rule 8D could not be invoked directly and mechanically, i.e., without giving a detailed and speaking reasons. Bald statement made by assessing officer that he had referred to accounts, does not give him an automatic jurisdiction to invoke the provisions of section 14A read with Rule 8D. Disallowance, made on such basis is not permissible.

It is imperative that the assessing officer can invoke rule 8D only when he records satisfaction in regard to the correctness of the claim of the assessee, having regard to the accounts of the assessee. The condition precedent for the assessing officer entering upon a determination of the amount of the expenditure incurred in relation to exempt income is that the assessing officer must record that he is not satisfied with the correctness of the claim of the assessee in respect of such expenditure. While rejecting the claim of the assessee with regard to the expenditure or no expenditure, as the case may be, in relation to exempt income, the assessing officer would have to indicate cogent reasons for the same. Therefore, it was all more necessary that assessing officer had to examine accounts of assessee first and if, he was not satisfied with correctness of claim, only then he could invoke Rule 8D. No such examination was made or satisfaction was recorded by assessing officer in this case. It was noticed that assessing officer had not considered claim of assessee at all and he had straightway embarked upon computing disallowance under rule 8D. Disallowance under section 14A required, a finding, of incurring of expenditure, and where no expenditure had been incurred, disallowance under section 14A would depend upon the facts, evidenced by the assessee and examination of those facts by the assessing officer. [Para 104] assessing officer has not examined the reasons for not attributing any expenditure towards income claimed as exempt. Whereas, the DRP in the impugned order, has held that the disallowance as not arbitrary, and that some expenditure has obviously been incurred to manage and monitor the investments, yielding the dividend income. The observation, 'that some expenditure has obviously been incurred to manage and monitor ........' made by the DRP, is per se, hypothetical. [Para 105] Rule 8D is not automatic, it is for the assessing officer to examine, at the outset, the correctness of the claim of the assessee, whether he has incurred any expenditure or not and has to give a definite finding, as to how the claim of the assessee is unacceptable. If, on examination, it is found that such expenditure is lower than the disallowance, as computed under Rule 8D, then actual expenditure, as estimated by the assessing officer would have to be disallowed. If, on the other hand, the assessee was able to substantiate on facts, that exempt income does not bear any cost/expenditure, in such cases, disallowance under section 14A, would become invalid. Rule 8D could not be invoked directly and mechanically, i.e., without giving a detailed and speaking reasons. Bald statement made by assessing officer that he had referred to accounts, does not give him an automatic jurisdiction to invoke the provisions of section 14A read with Rule 8D. Disallowance made on such basis is not permissible. In order to give quietus to the impugned issue, where no expenditure has been attributed to wards the exempt income by the assessee, Tribunal restores the issue of disallowance to the assessing officer for computing the disallowance in accordance with the provisions of section 14A(2), if at all, by giving detailed reasoning and speaking order, needless to say that the assessing officer shall give adequate and reasonable opportunity to the assessee to present its case. [Para 107] In these circumstances, the order of the DRP is set aside and the assessing officer is directed to compute the disallowance in accordance with the provisions of section 14A(2), as per observations in the above para. [Para 109].