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2013 (5) TMI 852 - AT - Income TaxTPA - payment of royalty by the assessee to its AE - Held that - Royalty payment cannot be disallowed on the basis of the so-called benefit test and the domain of the TPO is only to examine as to whether the payment based on the agreement adheres to the arm s length principle or not See Ericsson India 2012 (11) TMI 1 - ITAT, DELHI . That being so, the action of the TPO in the present case, to make the disallowance mainly on the ground of the benefit test, is unsustainable in law. - Decided in favour of assessee Disallowance of provisions of warranty u/s 37(1) - Held that - Undisputedly, the assessee was making the provisions on actual warranty basis for the unexpired warranty period, providing warranty of one year on the products which it was selling. It created provision for warranty for the unexpired period of warranty as at the end of the year, on a percentage of the actual warranty expenses during the immediately prior period, on the sales made. It has not been shown as to how this basis of making provision for warranty is not scientific. Moreover, similar provision for warranty was not disallowed in the earlier years, upto Assessment Year 2005-06.- Decided in favour of assessee Disallowance of provisions for leave encashment u/s 43B - Held that - As to whether there has indeed been a double addition, needs to be verified by the Assessing Officer by confirming as to whether or not the assessee had made the disallowance itself and the amount had not been carried to the Profit & Loss Account. For this purpose, the matter is remitted to the file of the Assessing Officer, to be decided afresh in accordance with the law, on affording adequate and due opportunity to the assessee Disallowance u/s 14A of the Act read with Rule 8D - assessee has contended before us that the assessee had itself worked out a disallowance of ₹ 12,61,008/-; that however, neither the Assessing Officer, nor the DRP adjudicated on the aspect as to how such disallowance made by the assessee itself was incorrect or not acceptable - Held that - The matter needs verification by the Assessing Officer, for which purpose, it is remitted to the file of the Assessing Officer. The Assessing Officer shall re-adjudicate the matter in accordance with law on affording adequate opportunity to the assessee, particularly verifying the aforesaid averments made by the assessee. Disallowance of depreciation on computer peripherals @ 60%, is erroneous. See BSES Yamuna Power 2010 (8) TMI 58 - DELHI HIGH COURT
Issues Involved:
1. Addition of Rs. 8,03,58,167/- to the total income. 2. Determination of arm's length price (ALP) for royalty payment. 3. Disallowance of provisions for warranty. 4. Disallowance of provisions for leave encashment. 5. Disallowance under section 14A read with Rule 8D. 6. Adjustment of depreciation on computer peripherals. 7. Charging of interest under sections 234B, 234C, and 234D. Detailed Analysis: 1. Addition of Rs. 8,03,58,167/- to the total income: The assessee contested the addition made by the Assessing Officer (AO) on the grounds that it was based on erroneous and untenable grounds. The Tribunal found that the AO's addition lacked proper justification and was not based on substantial evidence. Therefore, the addition was deleted. 2. Determination of arm's length price (ALP) for royalty payment: The TPO suggested an upward adjustment of Rs. 5,32,07,016/- to the assessee's income, determining the ALP of royalty payment as NIL. The AO and DRP upheld this adjustment, citing the assessee's failure to provide sufficient information to justify the royalty rate. The Tribunal found that the royalty payment was in accordance with the Technical Collaboration Agreement approved by the Government since 1984. The Tribunal observed that the royalty rate of 3% was consistent with industry standards and had been accepted in similar cases. Therefore, the disallowance of royalty payment was found to be uncalled for and was deleted. 3. Disallowance of provisions for warranty: The AO disallowed Rs. 84,48,000/- on the grounds that the provision for warranty was a contingent liability without a scientific basis. The Tribunal found that the provision was made based on actual warranty expenses for the unexpired warranty period, which was a scientific method. The Tribunal also noted that similar provisions had not been disallowed in earlier years. Therefore, the disallowance was deleted. 4. Disallowance of provisions for leave encashment: The AO disallowed Rs. 1,75,26,309/- based on the decision in 'Exide Industries vs. UOI', which was stayed by the Supreme Court. The assessee contended that it had already disallowed the amount itself and had not taken it to the Profit & Loss Account. The Tribunal remitted the matter back to the AO for verification of whether there had been a double addition. 5. Disallowance under section 14A read with Rule 8D: The AO made a disallowance of Rs. 11,26,737/- under section 14A read with Rule 8D, attributing interest and administrative expenses to the earning of exempt income. The assessee argued that it had sufficient own funds for investments and that no borrowed funds were used. The Tribunal remitted the matter back to the AO for verification of the assessee's claims. 6. Adjustment of depreciation on computer peripherals: The AO restricted the depreciation on computer peripherals to 15% instead of 60%. The Tribunal found that the matter was covered in favor of the assessee by the decision in 'BSES Yamuna Power Ltd.' and allowed the depreciation at 60%. 7. Charging of interest under sections 234B, 234C, and 234D: These issues were found to be consequential in nature and were to be recalculated based on the final determination of the assessee's income. Conclusion: The appeal of the assessee was partly allowed. The Tribunal deleted the disallowances related to royalty payment and provision for warranty, remitted the issues of leave encashment and section 14A disallowance back to the AO for verification, and allowed the higher depreciation rate for computer peripherals. The interest charges under sections 234B, 234C, and 234D were to be recalculated based on the revised income.
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