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2013 (12) TMI 241 - AT - Income TaxAddition on account of sale of films The assessee was involved in export to various countries - As regards U. S. and U. K. markets are concerned, the assessee has set-up wholly owned subsidiary namely GPIL in U. K. (Garware Polyester International Ltd.) GPF, U. S. A., (Global Pet Films IMC), to undertake the marketing, promotion, business development and distribution of the assessee s products Held that - The approach of the Transfer Pricing Officer of comparing high volume associate enterprises transactions with low volume solitary transactions of the appellant with its non-associate enterprises customers does not meet with comparability standards required under the comparable uncontrolled price method The comparison done by the Transfer Pricing Officer is not permissible in terms of law and on facts Decided against Revenue. Adjustment on account of commission paid to associated enterprise The Transfer Pricing Officer has made the adjustment in commission rate of 12.5 percent paid to the associate enterprises - The commission rate paid to the non-associate enterprises foreign agents which were ranging from three percent to 10 percent - Held that - The arm s length rate of commission @ 10% has been determined with regard to several agency arrangements of appellant with its non-associate enterprises foreign agents - Internal comparable uncontrolled price - Rate of 10 percent is quite reasonable when it is analysed with a case where there is less risk and commission rates ranges between three percent and 10 percent The CIT(A) has given the benefit of arm s length range of /- five percent in terms of the proviso to section 92C - The statute does not provide any kind of standard deduction - The benefit of /- five percent given by the learned Commissioner (Appeals) is set aside Partly allowed in favour of Revenue. Disallowance of interest related to capital work-in progress under section 36(1) (iii) Held that - Following assessee s own case for the assessment year 2004-05 - The proviso of section 36(1) (iii) as amended by the Finance Act, 2003, with effect from April 1, 2004 - Proportionate interest has to be disallowed in view of the amended provisions The issue restored to the files of AO. Levy of interest u/s 234B - Shortfall of payment of advance tax payable under section 115JB Held that - Following Emami Ltd 2011 (6) TMI 163 - CALCUTTA HIGH COURT - any provisions which has been amended retrospectively, no interest under section 234B is chargeable - The amended provision of section 115JB having come into force with effect from April 1, 2001 - The assessee cannot be branded as a defaulter in payment of advance tax Decided in favour of assessee. Deduction under section 80HHC on the book profit under section 115JB Held that - Following Ajanta Pharma Ltd. v. CIT 2010 (9) TMI 8 - SUPREME COURT - If the dichotomy between eligibility of profit and deductibility of profit is not kept in mind then Section 115JB will cease to be a self-contained code. In Section 115JB, as in Section 115JA, it has been clearly stated that the relief will be computed under Section 80HHC(3)/(3A), subject to the conditions under sub-clauses (4) and (4A) of that Section. The conditions are only that the relief should be certified by the Chartered Accountant. Such condition is not a qualifying condition but it is a compliance condition. Therefore, one cannot rely upon the last sentence in clause (iv) of Explanation to Section 115JB (subject to the conditions specified in sub-clauses (4) and (4A) of that Section) to obliterate the difference between eligibility and deductibility of profits as contended on behalf of the Department. - We need to keep in mind the Upward and Downward Adjustments and if so read it becomes clear that clause (iv) covers full export profits of 100% as eligible profits and that the same cannot be reduced to 80% by relying on Section 80HHC(1B) Decided in favour of assessee. Depreciation on know-how fees Held that - Following assessee s own case for the assessment year 2002-03 - The learned Commissioner of Income tax (Appeals) has not examined the issue - The Assessing Officer should examine as to whether depreciation claimed on technical know-how is different from the one-sixth deduction of expense on technical know-how claimed by the assessee under section 35AB The issue was set aside for fresh adjudication.
Issues Involved:
1. Transfer Pricing Adjustment for Sale of Films. 2. Transfer Pricing Adjustment on Commission Paid to Associate Enterprises. 3. Disallowance of Interest Related to Capital Work-in-Progress. 4. Deduction under Section 80HHC for Book Profit under Section 115JB. 5. Depreciation on Technical Know-How Fees. 6. Levy of Interest on Shortfall of Payment of Advance Tax under Section 115JB. Detailed Analysis: 1. Transfer Pricing Adjustment for Sale of Films: The primary issue was the transfer pricing adjustment made by the Transfer Pricing Officer (TPO) regarding the sale of films to associate enterprises (AEs). The TPO compared the prices charged to AEs with those charged to non-AEs, leading to an adjustment of Rs. 3,38,93,862. The assessee contended that the TPO failed to consider geographical, economic, and market differences between the markets where AEs and non-AEs operate. The Commissioner of Appeals (CIT(A)) accepted the assessee's arguments, noting that the TPO's approach was erroneous as it did not account for these differences. The CIT(A) held that the transactions with AEs were at arm's length and deleted the adjustment. However, the Tribunal found that both the TPO and CIT(A) failed to apply the Comparable Uncontrolled Price (CUP) method correctly and remanded the matter back to the TPO to re-examine the arm's length price using the Transactional Net Margin Method (TNMM). 2. Transfer Pricing Adjustment on Commission Paid to Associate Enterprises: The TPO had adjusted the commission paid to AEs, reducing it from 12.5% to 5%, leading to an adjustment of Rs. 61,12,532. The assessee argued that the commission paid to AEs was justified due to the differences in the agency arrangements with AEs and non-AEs. The CIT(A) partially accepted the assessee's arguments, determining that a 10% commission was appropriate but erroneously allowed a +/- 5% range. The Tribunal upheld the 10% commission rate but set aside the +/- 5% range benefit, concluding that the commission rate of 10% was reasonable given the functional differences and risks assumed by AEs. 3. Disallowance of Interest Related to Capital Work-in-Progress: The issue involved the disallowance of interest of Rs. 28.52 lakhs related to capital work-in-progress under section 36(1)(iii). Both parties agreed that a similar issue had been decided by a coordinate Bench of the Tribunal in the assessee's favor for an earlier year, where the matter was remanded to the Assessing Officer (AO) for verification. The Tribunal followed the same approach and remanded the issue back to the AO for verification and calculation of interest. 4. Deduction under Section 80HHC for Book Profit under Section 115JB: The CIT(A) had allowed the deduction under section 80HHC while computing book profit under section 115JB. The Revenue challenged this, but both parties agreed that the issue was covered by the Supreme Court's decision in Ajanta Pharma Ltd. v. CIT, which held that the deduction under section 80HHC should be allowed without reducing it to 80% as per section 80HHC(1B). The Tribunal directed the AO to compute the deduction in line with this judgment. 5. Depreciation on Technical Know-How Fees: The CIT(A) had allowed the assessee's claim for depreciation on technical know-how fees subject to verification by the AO. Both parties agreed that this issue was covered by a previous Tribunal decision in the assessee's favor. The Tribunal directed the AO to verify the claim and allow the depreciation as per the Tribunal's earlier order. 6. Levy of Interest on Shortfall of Payment of Advance Tax under Section 115JB: The assessee challenged the levy of interest under section 234B for shortfall in payment of advance tax under section 115JB. The Tribunal noted the Supreme Court's decision in Joint CIT v. Rolta India Ltd., which held that interest under sections 234B and 234C is applicable for shortfall in advance tax under section 115JB. However, the Tribunal also referred to the Calcutta High Court's decision in Emami Ltd. v. CIT, which held that no interest should be levied on retrospective amendments. The Tribunal followed the Calcutta High Court's decision and held that no interest should be charged on amounts added retrospectively. Conclusion: The Tribunal's judgment addressed multiple complex issues involving transfer pricing adjustments, disallowance of interest, deductions under section 80HHC, depreciation on technical know-how, and levy of interest on advance tax shortfall. The Tribunal remanded certain issues back to the TPO and AO for re-examination and verification, while providing clear guidance on the application of relevant legal principles and judgments.
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