Case Note & Summary
The case pertains to an appeal filed by the Commissioner of Income Tax, Mumbai (the revenue) against the order of the Income Tax Appellate Tribunal (ITAT) Mumbai Bench 'K' dated 23.11.2012 for Assessment Year 2007-08. The assessee, M/s. Everest Kento Cylinders Ltd., was engaged in manufacturing high pressure gas cylinders and compressed natural gas cylinders, and had a subsidiary company in Dubai. The assessee filed its return on 31.10.2007 declaring total income of Rs.71,90,77,156/- under the Income Tax Act, 1961 and book profit of Rs.70,18,79,265/- under Section 115JB. The return was processed under Section 143(1) on 3.12.2008, and the case was selected for scrutiny. Notice under Section 143(2) was served on 10.9.2008. Subsequently, the case was transferred to the DCIT with effect from 1.9.2010. The Assessing Officer (AO) made additions including disallowance under Section 14A read with Rule 8D and a transfer pricing adjustment on guarantee commission. The ITAT restricted the disallowance under Section 14A to Rs.1,00,000/- and deleted the TP addition of Rs.28,50,353/-. The revenue appealed to the High Court proposing three substantial questions of law: (1) whether the ITAT's order was perverse for ignoring Rule 8D, (2) whether ITAT was justified in restricting disallowance to Rs.1,00,000/- when assessee itself had disallowed Rs.4,47,649/-, and (3) whether ITAT was right in deleting the TP addition. The High Court, after hearing both sides, held that no substantial question of law arose. The court noted that the ITAT had correctly applied the law regarding Section 14A, as the AO had not recorded satisfaction that expenditure was incurred for earning exempt income. Regarding the TP adjustment, the court found that the ITAT's decision was based on facts and no perversity was shown. The appeal was dismissed with no order as to costs.
Headnote
A) Income Tax - Section 14A Disallowance - Rule 8D Applicability - The Assessing Officer must record satisfaction that expenditure was incurred for earning exempt income before invoking Rule 8D; mere fact that assessee made voluntary disallowance does not preclude ITAT from restricting disallowance if no nexus is established. Held that ITAT's restriction to Rs.1,00,000/- was justified as no substantial question of law arose (Paras 1-6). B) Transfer Pricing - Guarantee Commission - TP Adjustment - Where the assessee provided corporate guarantee to its subsidiary without charging commission, the TP adjustment must be based on proper benchmarking and comparable uncontrolled price; ITAT's deletion of addition was upheld as no perversity shown. Held that the revenue failed to demonstrate any substantial question of law (Paras 1-6).
Issue of Consideration
Whether ITAT was justified in restricting disallowance under Section 14A to Rs.1,00,000/- when assessee itself had disallowed Rs.4,47,649/-, and whether ITAT was right in deleting addition of Rs.28,50,353/- on account of TP adjustment on guarantee commission.
Final Decision
Appeal dismissed with no order as to costs. No substantial question of law arises.
Law Points
- Section 14A disallowance requires satisfaction of AO regarding expenditure incurred for exempt income
- Rule 8D not automatically applicable
- TP adjustment on guarantee commission requires benchmarking of transaction
