2017 (4) TMI 1281 - HC - Income Tax

Inclusion of Modvat in opening stock in the light of section 145A - addition on account of payment to persons referred to u/s. 40A(2)(b) - depreciation not allowable on the testing equipments not used by the assessee for its business - royalty payment @ @2% or 1%- Held that - It is an agreed position between the parties that the aforesaid questions as urged herein stand concluded against the Revenue and in favour of the Respondent-Assessee in assessee s own case 2017 (3) TMI 1520 - BOMBAY HIGH COURT Addition being the transfer pricing adjustment on account of sales promotion and publicity expenses - Tribunal deleted addition - Held that - TPO is obliged under the law to determine the ALP by following any one of the prescribed methods of determining the ALP as detailed in Section 92C(1) of the Act. In this case there is nothing on record to indicate that the TPO had applied any one of the prescribed methods in Section 92C(1) of the Act to determine the ALP before disallowing the payment of Rs. 200.82 lakhs incurred by the Respondent on account of publicity and sales management as being excessive and/or payable by its parent M/s. Johnson & Johnson USA. The impugned order holds that transfer pricing adjustment done by disallowing the payment on the basis of an assumption that it is excessive is an action completely dehors the provisions of transfer pricing adjustment found in chapter X of the Act. The determination of the ALP has to be done only by following one of the methods prescribed under the Act. The Revenue has not acted in accordance with the clear mandate of law. Appeal admitted on substantial questions at (c) (e) (f) (g) (h) and (k).

Issues involved:
1. Inclusion of Modvat in opening stock
2. Addition on account of payment to persons under section 40A(2)(b)
3. Disallowance of professional sponsorship expenses
4. Allowability of depreciation on testing equipment
5. Disallowance of expenses on free sample distribution
6. Addition on account of tax on brand usage royalty
7. Addition on account of service tax paid on brand usage royalty
8. Addition on account of royalty payment on traded finished goods
9. Allowance of royalty payment at 2% instead of 1%
10. Addition on account of tax and R&D cess on knowhow royalty
11. Addition on account of service tax paid on knowhow royalty
12. Addition on account of publicity and sales promotion expenses
13. Restoration of the matter to the Transfer Pricing Officer

Analysis:

1. Inclusion of Modvat in opening stock:
The Tribunal's decision on this issue was challenged. However, it was found that similar issues had been decided against the Revenue in a previous case. Therefore, the questions raised did not give rise to substantial questions of law and were not entertained.

2. Addition on account of payment to persons under section 40A(2)(b):
The Tribunal had deleted this addition, and the Revenue's challenge was based on the assessee not proving the reasonableness. The Tribunal's decision was upheld as the questions did not present substantial legal issues.

3. Disallowance of professional sponsorship expenses:
The Tribunal reduced the disallowance from 50% to 2% without providing reasons. This issue was admitted for further consideration as it raised substantial questions.

4. Allowability of depreciation on testing equipment:
The Tribunal's decision to allow depreciation on testing equipment not used for business was challenged. The Tribunal's ruling was found to be contrary to the Income Tax Act, and the issue was admitted for further consideration.

5. Disallowance of expenses on free sample distribution:
The Tribunal reduced the disallowance from 75% to 2% without reasons. This issue was admitted for detailed examination due to its significance.

6. Addition on account of tax on brand usage royalty:
The Tribunal deleted this addition without considering certain aspects, leading to questions of law. This issue was admitted for further review.

7. Addition on account of service tax paid on brand usage royalty:
The Tribunal had deleted this addition, which was challenged. The issue was admitted for detailed analysis.

8. Addition on account of royalty payment on traded finished goods:
The Tribunal had deleted this addition, which was challenged. This issue was admitted for further consideration.

9. Allowance of royalty payment at 2% instead of 1%:
The Tribunal's decision to allow royalty payment at 2% instead of 1% as done by the Transfer Pricing Officer was challenged. This issue was admitted for detailed examination.

10. Addition on account of tax and R&D cess on knowhow royalty:
The Tribunal had deleted this addition, which was challenged. This issue was admitted for further review.

11. Addition on account of service tax paid on knowhow royalty:
The Tribunal had deleted this addition, which was challenged. This issue was admitted for detailed analysis.

12. Addition on account of publicity and sales promotion expenses:
The Tribunal had deleted this addition, citing non-compliance with transfer pricing rules. This issue was admitted for further consideration.

13. Restoration of the matter to the Transfer Pricing Officer:
The Tribunal's decision to not restore the matter to the Transfer Pricing Officer for fresh consideration was challenged. The issue was admitted for detailed analysis.

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