2016 (1) TMI 1280 - AT - Income Tax

TPA - adjustments in respect of Advertising, Marketing and Promotion (AMP) expenditure - Held that - AO / TPO relied heavily on the Special Bench decision of ITAT, Delhi in the case of L.G. Electronics India Pvt Ltd (2013 (6) TMI 217 - ITAT DELHI) in making the adjustments and in applying the BLT in benchmarking the AMP expenditure. It is an undisputed fact that the Hon ble Delhi High Court has rendered a judgment in the case of Sony Ericsson Mobile Communications India Pvt Ltd (2015 (9) TMI 484 - ITAT DELHI), reversing the said Special Bench decision in the case of L.G. Electronics (supra). As on today, the BLT is not to be applied in such benchmarking exercise of the AMP expenditure. AP / TPO is statutorily bound to apply the existing methods mentioned in the IT Act, 1961 / IT Rules, 1962. We, accordingly, remand the issue, that revolves around the TP adjustment of ₹ 133.02 (rounded of), to the file of the AO / TPO to benchmark these transactions De novo TP adjustment to the entire international transactions - Held that - On considering the undisputed fact that the assessee obtained concessions from the J&J USA , in lieu of AMP expenditure contributing to the brand development, we are of the opinion that the AO s jurisdiction in this regard should revolve around all the assessee s explanations justifying the AMP expenditure of the assessee. Further, we have also considered the remand guidelines issued by the Tribunal in this regard, in connection with many other cases placed before us and find the said guidelines shall apply equally and AO should restrict his remand jurisdiction to the guidelines issued by the Tribunal in those cases. Accordingly, all the grounds relating to the TP issues are allowed for statistical purposes. Disallowance of interest expenditure claimed u/s 36(1)(iii) - Held that - We find it relevant to remand the matter to the file of the AO for fresh adjudication on this issue after analysing existence of the interest free funds and applying the ratio of the jurisdictional High Court judgment in the case of Reliance Utilities (2009 (1) TMI 4 - BOMBAY HIGH COURT). In any case, in principle, we cannot approve the charging of notional interest when the assessee has raised the invoice to receive the amount relatable to the subsidiary company without rejecting the books of accounts of the assessee. Accordingly, this part of the grounds is allowed for statistical purposes. Disallowance of tax on brand usage royalty - Held that - It is not for the AO to question the commercial arrangements entered into by the assessee. As well, the RBI has approved the payment of brand royalty net of taxes and in this regard the RBI‟s approval dated 14th March, 2002 is relevant. Accordingly, considering the above, we allow the Ground of the appeal. Disallowance of service tax paid on brand usage royalty - Held that - We have perused the cited decisions of the Tribunal in assessee s own cases in general and for the AY 2006-07 in particular, wherein the Tribunal held that the taxes are liability of the assessee based on the terms of agreement. Further, the Tribunal observed that the liability of payment of service tax is of recipient of the services and since, assessee is receiver of the services, it is assessee s liability to bear the service tax and hence no disallowance is called for service tax paid by the assessee. Considering the above as well as keeping in view the commonality of the issues involved in the appeals decided by the Tribunal (supra) and that of the ones raised in Ground no.4 and 5 of the instant appeal, we allowed these grounds in favour of the assessee. Technical know-how royalty payment on sale of traded finished goods - Held that - In assessee s own case for the AY 2002-03 Tribunal dismissed the Departmental appeal on this issue, relying on the earlier decision of the ITAT, by holding that the royalty payments have to be considered in the light of the agreement between the assessee and the J&J US and upheld the order of the CIT (A). We of the opinion that the royalty payments have to be considered in the light of the above cited agreements (Exhibits 1 to 4) between the assessee and J&J US. - Decided in favour of assessee R&D cess and tax cannot be treated as international transactions. Disallowance made on account of service tax paid on brand royalty deleted. Teat the expenses incurred on production of advertisement films as revenue expenditure Disallowance of provision for reserve for cash discount - Held that - Tribunal in assessee s own case for the AY 2008-2009 wherein the Tribunal, while restoring the matter to the file of the AO, directed the AO to decide the alternative grievance of the assessee that if the cash discount reserve was not allowed in the earlier assessment year, the right back of the same would amount to double taxation, therefore, the same should be deleted after due verification. Considering the same, remand this matter to the file of the AO with identical directions. Disallowance of depreciation on testing equipment - Held that - The depreciation should be allowed on the testing equipment provided to laboratories and hospitals free of charge as the said equipments have been provided to the laboratories and hospitals for making profit from the sale of slides. Short grant of credit of TDS - Held that - When an assessee approaches the Assessing Officer with requisite details and particulars in the form of TDS certificate as an evidence against any mismatched amount, the said Assessing Officer will verify whether or not the deductor has made payment of the TDS in the Government Account and if the payment has been made, credit of the same should be given to the assessee. Considering the same, we direct the AO to grant the balance credit of the TDS ie ₹ 7,428/- after verification of the relevant record as per the provisions of the Act and in accordance with law.

Summary

Issues Involved:
1. Transfer Pricing (TP) adjustments related to Advertising, Marketing, and Promotion (AMP) expenditure.
2. Adjustments on account of royalty and technical know-how payments.
3. Disallowance of interest expenditure under section 36(1)(iii).
4. Disallowance of tax on brand usage royalty.
5. Disallowance of service tax paid on brand usage royalty.
6. Disallowance of technical know-how royalty on traded finished goods.
7. Restriction of technical know-how royalty on manufactured goods.
8. Disallowance of tax and R&D cess on technical know-how royalty.
9. Disallowance of service tax on technical know-how royalty.
10. Disallowance of cost of production of advertisement films.
11. Disallowance of MODVAT credit attributable to closing stock.
12. Disallowance of provision for reserve for cash discount.
13. Disallowance of depreciation on testing equipment.
14. Short grant of credit of TDS.
15. Levy of interest under sections 234B and 234D.
16. Penalty proceedings under section 274 r.w.s 271(1)(c).

Detailed Analysis:

1. Transfer Pricing Adjustments related to AMP Expenditure:
The assessee challenged the TPO's adjustments of Rs. 133.02 Crs related to AMP expenditure, arguing that these expenses were for creating product awareness and increasing sales in India, not for brand development. The TPO had relied on the "Bright Line Test" (BLT) and the Special Bench decision in L.G. Electronics India Pvt Ltd. The Tribunal noted that the Delhi High Court in Sony Ericsson Mobile Communications India Pvt Ltd had rejected the BLT. Therefore, the Tribunal remanded the issue to the AO/TPO for fresh benchmarking in light of the Delhi High Court's guidelines.

2. Adjustments on Account of Royalty and Technical Know-How Payments:
The TPO suggested adjustments of Rs. 57.35 Crs on account of royalty. The Tribunal directed the AO/TPO to re-examine these transactions in accordance with the principles laid down by the Delhi High Court in Maruti Suzuki India Limited vs. CIT.

3. Disallowance of Interest Expenditure under Section 36(1)(iii):
The AO disallowed Rs. 1.27 Crs out of interest expenditure. The Tribunal noted that the assessee had excess funds and relied on the Supreme Court's decision in S.A. Builders Limited vs. CIT. The matter was remanded to the AO for fresh adjudication.

4. Disallowance of Tax on Brand Usage Royalty:
The AO disallowed Rs. 2.21 Crs of tax on brand usage royalty. The Tribunal allowed the assessee's appeal, referencing the Tribunal's previous decisions in the assessee's own case and the RBI's approval of net-of-tax payments.

5. Disallowance of Service Tax Paid on Brand Usage Royalty:
The AO disallowed Rs. 1.82 Crs of service tax paid on brand usage royalty. The Tribunal, following its earlier decisions, held that the service tax liability was on the recipient of the services (the assessee) and allowed the appeal.

6. Disallowance of Technical Know-How Royalty on Traded Finished Goods:
The AO disallowed Rs. 15.82 Crs of technical know-how royalty on traded goods. The Tribunal allowed the appeal, citing previous decisions that the royalty payments should be considered in light of the agreements between the assessee and J&J US.

7. Restriction of Technical Know-How Royalty on Manufactured Goods:
The AO restricted the royalty on manufactured goods to 1% of net sales, disallowing Rs. 25.26 Crs. The Tribunal allowed the appeal, noting that the TPO is not authorized to disallow the expenditure based on information from the SIA website.

8. Disallowance of Tax and R&D Cess on Technical Know-How Royalty:
The AO disallowed Rs. 8.22 Crs of tax and R&D cess on technical know-how royalty. The Tribunal allowed the appeal, following its earlier decisions that R&D cess and tax cannot be treated as international transactions.

9. Disallowance of Service Tax on Technical Know-How Royalty:
The AO disallowed Rs. 4.02 Crs of service tax on technical know-how royalty. The Tribunal allowed the appeal, following its earlier decisions that the service tax liability is on the recipient of the services.

10. Disallowance of Cost of Production of Advertisement Films:
The AO treated Rs. 6.05 Crs of expenses on advertisement films as capital expenditure. The Tribunal allowed the appeal, following its earlier decisions that such expenses are revenue expenditure.

11. Disallowance of MODVAT Credit Attributable to Closing Stock:
The AO added Rs. 3.89 Crs towards MODVAT credit attributable to closing stock. The Tribunal remanded the matter to the AO for re-working the amount in light of section 145A and the jurisdictional High Court's judgment in CIT vs. Mahalaxmi Glass Works P. Ltd.

12. Disallowance of Provision for Reserve for Cash Discount:
The AO disallowed Rs. 1,224/- of provision for cash discount. The Tribunal remanded the matter to the AO, directing him to exclude the excess provision for cash discount for AY 2008-09 while computing income for the current year.

13. Disallowance of Depreciation on Testing Equipment:
The AO disallowed Rs. 2.62 Crs of depreciation on testing equipment. The Tribunal allowed the appeal, following its earlier decisions that depreciation should be allowed on testing equipment provided to laboratories and hospitals free of charge.

14. Short Grant of Credit of TDS:
The AO granted TDS credit short by Rs. 7,428/-. The Tribunal directed the AO to grant the balance credit after verification.

15. Levy of Interest under Sections 234B and 234D:
The Tribunal dismissed these grounds as consequential to the main issues.

16. Penalty Proceedings under Section 274 r.w.s 271(1)(c):
The Tribunal dismissed this ground as consequential to the main issues.

Conclusion:
The appeal of the assessee was partly allowed for statistical purposes. The Tribunal remanded several issues to the AO/TPO for fresh adjudication in light of relevant precedents and guidelines.