2013 (7) TMI 971 - AT - Income Tax

Additions made on arm s length price u/s 92CA(3) on payment of royalty to AE - whether assessee is benefited on payment of royalty - whether assessee is able to show that it derived economic benefit from the know how received from the AE - Held that - the royalty is related to transfer of technical assistance and know how in the automotive industry - the agreement between the assessee and Stanley was not merely a paper transaction, rather it was approved by the RBI for genuineness of its transaction - The assessee applied the CUP method for ALP - the royalty payment was a revenue expenditure incurred wholly and exclusively for the benefit of the assessee - Royalty, then, is a transaction closely linked with production and sales - the disallowance made on account of royalty is found to be totally uncalled for and it is deleted as such - Decided in favor of assessee Disallowance of provisions for warranty u/s 37(1) - Held that - provision had been made based on the past factor of actual expenses incurred towards warranty liability - Decided in favor of assessee Disallowance of provisions for leave encashment u/s 43B - Held that - Matter needs to be verified by the AO by confirming the amount of disallowance - Remanded back for statistical purposes Disallowance of depreciation on computer peripherals - UPS and projector - Held that - every computer system is accompanied by a UPS and, therefore, a UPS is these days considered an integral part of a computer system - thus entitled to 60% depreciation - assessee has not been able to show as to how a projector forms an integral part of a computer - regarding projector the order of DRP is upheld

Issues Involved:
1. Addition on account of arm's length price under section 92CA(3) of the Income Tax Act.
2. Disallowance of provisions for warranty under section 37(1).
3. Disallowance of provisions for leave encashment under section 43B.
4. Disallowance of depreciation on computer peripherals.
5. Charging of interest under section 234B.

Detailed Analysis:

1. Addition on Account of Arm's Length Price under Section 92CA(3):
The assessee challenged the addition of Rs. 3,92,71,137/- made by the Assessing Officer (A.O.) based on the findings of the Transfer Pricing Officer (TPO) and the directions of the Dispute Resolution Panel (DRP). The TPO had determined the arm's length price (ALP) of the royalty payment to the associated enterprise (AE) as NIL, asserting that the assessee failed to demonstrate economic benefit from the know-how received. The TPO applied the "benefit test" and concluded that the technology did not provide any benefit to the assessee, thus no independent entity would pay such royalty.

The Tribunal referred to its previous decisions for Assessment Years 2008-09, 2004-05, and 2005-06, where similar additions were deleted. The Tribunal held that the royalty payment was at arm's length and supported by the Technical Collaboration Agreement approved by the Government of India. The royalty rate of 3% was consistent with industry standards and comparable companies. Therefore, the addition on account of royalty was deleted.

2. Disallowance of Provisions for Warranty under Section 37(1):
The A.O. disallowed Rs. 56,99,275/- on account of the provision for warranty, considering it a contingent liability. The DRP accepted the assessee's contention that the net liability should be Rs. 35,06,410/- after adjusting the amount utilized for claims.

The Tribunal, following its decision for Assessment Year 2008-09, held that the provision for warranty was made on a scientific basis, based on actual warranty expenses for the unexpired warranty period. The provision was consistent with the Supreme Court's decision in 'Rotork Controls India Pvt. Ltd. vs. CIT'. Consequently, the addition was deleted.

3. Disallowance of Provisions for Leave Encashment under Section 43B:
The A.O. proposed a disallowance of Rs. 1,63,98,913/- for leave encashment provision. The DRP reduced the disallowance to Rs. 1,52,21,430/- after considering the payment made during the financial year.

The Tribunal remitted the issue back to the A.O. for verification, directing that the disallowance be restricted to Rs. 1,52,21,430/- after adjusting the payment made. This decision was consistent with the Tribunal's approach for Assessment Year 2008-09.

4. Disallowance of Depreciation on Computer Peripherals:
The A.O. restricted depreciation on UPS and projectors to 15% instead of the claimed 60%. The DRP upheld the disallowance for projectors but allowed 60% depreciation for UPS.

The Tribunal held that UPS is an integral part of a computer system and allowed 60% depreciation. However, it upheld the disallowance for projectors, as they do not form an integral part of a computer system. The A.O. was directed to re-compute the disallowance accordingly.

5. Charging of Interest under Section 234B:
The issue of charging interest under section 234B amounting to Rs. 1,09,94,967/- was deemed consequential in nature and dependent on the outcome of the other issues.

Conclusion:
The Tribunal allowed the appeal of the assessee partly, deleting the additions related to royalty payment and warranty provision, remitting the issue of leave encashment provision for verification, allowing 60% depreciation on UPS, and upholding the disallowance for projectors. The interest under section 234B was to be recalculated based on the revised assessments.

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