2011 (1) TMI 124 - AT - Income Tax

Addition of income - The main addition in the present appeal is an addition of Rs. 40,67,16,966 on account of variation in income as a consequence of order of Transfer Pricing Officer (TPO) under section 92C (3) of the Act - The assessee had filed objections before the Dispute Resolution Panel (DRP) against the draft order of the Assessing Officer on 31st December, 2009 and the objections of the assessee were disposed of by the Dispute Resolution Panel II Due to technology advancement the assessee had entered into technology transfer agreement with JCB group in March, 2004 for the manufacturing of a range of new/advanced product named as 3DX - Since the assessee has already paid royalty for product 3D and had not changed any royalty from year 1987 to F. Y. 2004-05 no royalty could be paid at arm s length price on the same product with cosmetic changes in this year - The writ petition is allowed to the extent indicated - matter restored back to the file of DRP to pass a detailed order.

Summary

Issues Involved:
1. Transfer Pricing Adjustment
2. Disallowance under Section 14A read with Rule 8D
3. Disallowance of Payment under Section 40(a)(i)
4. Disallowance of Payment under Section 40(a)(ia)
5. Non-issuance of Speaking Order by DRP
6. Penalty Proceedings under Section 271(1)(c)

Detailed Analysis:

Transfer Pricing Adjustment:
The primary issue revolves around an addition of Rs. 40,67,16,966 due to a Transfer Pricing adjustment made by the Transfer Pricing Officer (TPO) under Section 92C(3) of the Income-tax Act, 1961. The TPO concluded that the payment of royalty to associated enterprises (AEs) for the product Wheeled Excavator Loader (3DX) did not satisfy the arm's length principle. The TPO's stance was based on the observation that the 3DX model was merely a cosmetic upgrade from the older 3D model, hence not justifying the royalty payment. The assessee argued that the changes from 3D to 3DX were substantial and not merely cosmetic, supported by a report from the Department of Mechanical Engineering of IIT, Delhi. The Tribunal admitted this report as additional evidence and remanded the issue back to the Dispute Resolution Panel (DRP) for a detailed re-evaluation.

Disallowance under Section 14A read with Rule 8D:
An addition of Rs. 2,627 was made on account of notional disallowance on investments by invoking Section 14A read with Rule 8D. The assessee contended that no exempt income was earned during the year and no expenditure was incurred towards earning such income. This issue was also remanded back for reconsideration.

Disallowance of Payment under Section 40(a)(i):
An addition of Rs. 6,20,230 was made for payments made to non-resident dealers without deduction of tax at source under Section 40(a)(i). The assessee argued that the payments were not chargeable to tax in India as they were made for sales outside India, referencing Circular No. 23 and Circular No. 786 issued by the Central Board of Direct Taxes. This matter was also remanded for further review.

Disallowance of Payment under Section 40(a)(ia):
An addition of Rs. 27,08,000 was made for payments made to TBL Enterprise without deduction of tax at source. The assessee contended that the recipient was exempt from tax under Section 10(26) and had provided a certificate to that effect. This issue was similarly remanded for re-evaluation.

Non-issuance of Speaking Order by DRP:
The Tribunal noted that the DRP had not issued a speaking order detailing the objections raised by the assessee and the reasons for their rejection. The Tribunal referenced a Delhi High Court judgment in the case of Vodafone Essar Ltd., which emphasized the necessity for quasi-judicial authorities to provide cogent reasons for their decisions. The Tribunal directed the DRP to pass a detailed order addressing each of the assessee's objections with specific reasons.

Penalty Proceedings under Section 271(1)(c):
The Assessing Officer initiated penalty proceedings under Section 271(1)(c) for furnishing inaccurate particulars of income. This issue was not specifically addressed in the judgment but was implied to be contingent on the outcome of the reassessment of the aforementioned issues.

Conclusion:
The Tribunal set aside the assessment order passed by the Assessing Officer and remanded the matter back to the DRP for a detailed and reasoned order addressing each of the assessee's objections. The appeal filed by the assessee was treated as allowed for statistical purposes.