2013 (1) TMI 623 - AT - Income Tax

Disallowance of club membership fee - Held that - It is clear from the details that the expenditure is only towards entrance fee, subscription and other services of the club. AO has allowed the expenditure incurred for the services availed from the club and has not doubted the payment of the entrance fee and service charges for the club membership. Therefore,no discrepancy in the details of the expenditure which is towards entrance fee and subscription of member ship and not for any resort. Thus as similar disallowance made AO for the AYs 2004-05 to 2006-07 has been deleted by the CIT (A) and the revenue has accepted such orders - As AO has not brought out on record that there is a change in the facts and circumstances with respect to the claim of the assessee for the current AY rule of consistency has to be followed - in favour of assessee. Disallowance of sale discount u/s 40(a)(ia) - Held that - Though the assessee has claimed that the discount was given to the distributor under the sale scheme expenses however, when this amount is not as per the obligation under the contract, then the assessee was required to produce the relevant records and material in support of its claim that such scheme of giving the benefit/incentive to the distributor was duly approved by the Board of Directors of the assessee company. As the assessee has failed to produce any material such as the scheme under which the benefit has been given to the distributors set aside this issue to the record of the AO to verify and examine the relevant record as to be filed by the assessee and then to decide this issue as per law - in favour of assessee for statistical purposes. Disallowance of depreciation claim on Foster s Brand u/s 40(a)(i) - Held that - As decided in case of M/s Mark Auto Industries Ltd. 2013 (1) TMI 448 - PUNJAB AND HARYANA HIGH COURT deduction u/s 32 is not in respect of the amount paid or payable which is subjected to TDS, but is a statutory deduction on an asset which is otherwise eligible for deduction of deprecation - Revenue was unable to substantiate that in the absence of any requirement of law for making deduction of tax out of the expenditure on technical know-how which was capitalized and no amount was claimed as revenue expenditure, the deduction could be disallowed u/s 40(a)(i). There was also no reason to disallow depreciation on such capitalized amount as the aforesaid provision does not deal with deduction of depreciation - In favour of assessee. Disallowance for not withholding of taxes on payment made on account of license fees u/s 40(a)(i) - Held that - Following the decision of Sonata Information Technology Ltd. Versus Deputy Commissioner of Income-tax 2012 (9) TMI 335 - ITAT MUMBAI and accordingly held that when the royalty for transfer of right to use of computer software does not fall under Explanation 2 to sec. 9(1)(vi), but the same falls under Explanation 4 to sec. 9(1)(vi), then in view of the Explanation to sec. 40(a)(i), the said amount cannot be disallowed under the provisions of sec. 40(a)(i) - in favour of assessee. Disallowance of interest for diversion of funds to the group companies u/s 36(1)(iii) - Held that - This issue has not been examined on the aspect whether the assessee was having its own sufficient funds other than the borrowed funds to advance these amounts to the group companies namely M/s SAB Miller (A&A) Pty Ltd., and M/s MBL Investment Ltd. Hence, this issue is set aside to the record of the AO with the direction to examine the issue by taking into account all the relevant facts and availability of the assessee s owned funds as well as the above observations - in favour of assessee for statistical purpose. Arms length Price - when the payment of royalty is within the prescribed limit of press note no.9 of 2000 FDI policy, the same is at ALP - Held that - As the assessee did not furnish the comparable data in respect of uncontrolled transactions which are similar to the transaction of the assessee as to that of AE has merely relied upon the Press Note no.9 of 2000 issued by the Ministry of Commerce and Industry in respect of FDI policy allowing the percentage of royalty in foreign exchange. Thus in agreement with the contention of the DR that the press note issued regarding FDI policy and prescribing the percentage of the royalty to the sales allowed under automatic route and cannot substitute as ALP to be determined under the provisions of the Act and Rules. FDI policy permitting certain percentage of payment of royalty is only for remittance of the amount in foreign exchange and therefore, such permission given in an entirely different context and purpose cannot be considered as relevant for determination of the ALP. See Nestle India Ltd 2011 (5) TMI 566 - DELHI HIGH COURT - no substance or merit in the assessee s stand that when the payment of royalty is within the prescribed limit of press note no.9 of 2000 FDI policy, the same is at ALP - against assessee. Adjustment made by the TPO by determining the ALP - Held that - It is manifest from the order of the TPO that the adjustment was made on the basis of comparing entity level result of the assessee with the entity level result of the comparables by applying TNMM method. There is no dispute that the international transaction in the case of the assessee constitutes only 3.93% of the total operating cost.Therefore, comparing the entity level result of the assessee with the entity level result of the comparables is absolutely in contravention of the provisions of the Transfer Pricing regulations as provided under the I T Act. In any case the international transaction has to be compared with the benchmarking as arrived at by taking into consideration the comparables of uncontrolled transaction. Therefore, the TPO proceeded in total disregard to the relevant provisions of the TP regulations by comparing entity level results of the assessee instead of comparing only the international transactions. Also in the subsequent year i.e 2008-09 & 2009-10 the cup method as adopted by the assessee for benchmarking its international transactions has not been disputed by the revenue, thus it is appropriate to determine the ALP by adopting the same method as it was accepted in the subsequent year - set aside the issue of determination of the ALP to the record of the AO to decide the same by adopting the cup method - in favour of assessee

Summary

Issues Involved:
1. Validity of the assessment order.
2. Disallowance of club membership fees.
3. Disallowance under section 40(a)(ia) for discounts treated as commission.
4. Disallowance of depreciation on Foster's Brand under section 40(a)(i).
5. Disallowance of payment for software license fees under section 40(a)(i).
6. Disallowance of interest under section 36(1)(iii) for diversion of borrowed funds.
7. Transfer Pricing adjustment on Arm's Length Price (ALP).
8. Initiation of penalty proceedings under section 271(1)(c).

Detailed Analysis:

1. Validity of the Assessment Order:
The assessee contended that the assessment order dated July 29, 2011, framed on the directions of the Dispute Resolution Panel (DRP) under section 144C(5) is bad both on facts and in law. However, the Tribunal did not provide a specific finding on this issue as it was deemed general and consequential to the main grounds.

2. Disallowance of Club Membership Fees:
The Assessing Officer disallowed the club membership fees treating them as capital expenditure. The assessee argued that these expenses were for business purposes, citing previous years where similar expenses were allowed. The Tribunal found that the details provided by the assessee were sufficient to establish that the expenses were for club services and not for holiday resorts. It was noted that similar disallowances were deleted in earlier years, and the principle of consistency should be followed. The Tribunal allowed the claim, reversing the disallowance.

3. Disallowance under Section 40(a)(ia) for Discounts Treated as Commission:
The Assessing Officer treated the sale price discounts given to distributors as commission and disallowed them under section 40(a)(ia) for non-deduction of TDS. The assessee argued that the discounts were given on a principal-to-principal basis and not as commission. The Tribunal found that the relationship between the assessee and distributors was on a principal-to-principal basis, and the discounts were not commission. However, the Tribunal set aside the issue to the Assessing Officer for verification of relevant records and to decide as per law.

4. Disallowance of Depreciation on Foster's Brand under Section 40(a)(i):
The Assessing Officer disallowed depreciation on Foster's Brand, treating the payment as attracting TDS under section 195, which was not deducted. The Tribunal held that section 40(a)(i) does not apply to capital expenditure and depreciation is a statutory deduction under section 32. The Tribunal allowed the claim for depreciation, reversing the disallowance.

5. Disallowance of Payment for Software License Fees under Section 40(a)(i):
The Assessing Officer disallowed the payment for Syspro License fees, treating it as royalty under section 9(1)(vi) and applicable for TDS under section 195. The Tribunal found that the payment for software does not fall under the definition of royalty as per Explanation 2 to section 9(1)(vi) and therefore, section 40(a)(i) is not applicable. The Tribunal allowed the claim, reversing the disallowance.

6. Disallowance of Interest under Section 36(1)(iii) for Diversion of Borrowed Funds:
The Assessing Officer disallowed interest for funds diverted to group companies at a lower rate of interest. The assessee argued that the advances were for business purposes and not from borrowed funds. The Tribunal found that the opening balance of advances was not diverted during the year and directed the Assessing Officer to reconsider the issue, taking into account the availability of own funds and other relevant facts.

7. Transfer Pricing Adjustment on Arm's Length Price (ALP):
The TPO made adjustments to the ALP for royalty payments using TNMM instead of CUP method adopted by the assessee. The Tribunal noted that the CUP method was accepted in subsequent years and directed the Assessing Officer to adopt the CUP method for determining the ALP, considering appropriate comparables.

8. Initiation of Penalty Proceedings under Section 271(1)(c):
The Tribunal found the initiation of penalty proceedings under section 271(1)(c) as premature and did not admit this ground.

Conclusion:
The appeal was partly allowed, with the Tribunal reversing several disallowances and setting aside certain issues for reconsideration by the Assessing Officer. The Tribunal emphasized the need for consistency in tax treatment and proper verification of records.