2014 (1) TMI 921 - AT - Income Tax

Issue of royalty payment Held that - On perusal of the order of the DRP, prima-facie, it gives an impression that they have not considered the submissions of the assessee or the documentary evidences while rejecting the claim of the assessee - The order has been passed in a rather mechanical manner on more than one issues by merely observing that the assessee has not been able to advance any fresh argument or analysis thus, the finding of the TPO has to be accepted - the order of the DRP to be rather cryptic, bereft of reasons and mechanical - Excepting observing that there is no reason to disagree with the position taken by the TPO, the DRP has not expressed any reasons for coming to such a conclusion with regard to the arrangements or materials placed before it by the assessee the contention of the assessee that there is violation of rules of principles of natural justice by not considering the submissions of the assessee and documentary evidences produced to be acceptable - matter remitted back to the DRP for fresh consideration Decided in favour of Assessee. Computation of operating margin Adjustment towards cost of repairs and plant & machinery and incremental depreciation not considered Held that - Various issues raised by the assessee before the DRP in relation to the ground have not at all been considered by the DRP matter remitted back to the DRP for fresh adjudication. Disallowance of depreciation of non-compete fees and marketing network rights Held that - As decided in assessee s own case that the payment towards non-compete fees and marketing networth rights falls within the definition of intangible assets as per section 32(1)(ii) of the Act - the payment made towards non-compete fees would come within the scope and ambit of intangible asset as defined in section 32(1)(ii) of the Act also, the payment made towards acquiring market network rights have also to be treated as payments made for acquiring commercial/business rights akin to know-how, patent, trade mark, license, franchises, etc., which are eligible for depreciation and accordingly directed for allowing depreciation on non-compete fees and marketing network rights - the AO is directed to allow the claim of deprecation on payments made towards non-compete fees and market network rights Decided in favour of Assessee.

Summary

Issues:
1. Royalty payment adjustment in TP study.
2. Consideration of documentary evidence by DRP.
3. Computation of operating margin.
4. Depreciation on non-compete fees and marketing net work rights.
5. Charging of interest u/s 234B and 234C.

Royalty Payment Adjustment in TP Study:
The appeal concerned the assessment order passed u/s 143(3) of the Act for the assessment year 2007-08. Grounds 2.2 to 2.5 related to the issue of royalty payment. The assessee's TP study was based on TNMM with an operating margin of 10.14%, deemed within arm's length. However, the TPO rejected this study, determining the operating margin at 3.59% and treating royalty payment as NIL. The DRP confirmed the draft assessment order, leading to the appeal. The AR argued that the DRP and AO overlooked crucial documentary evidence, necessitating a fresh consideration. The Tribunal found the DRP's order lacking reasoning and remitted the issue to the DRP for a reasoned decision after considering all submissions and evidence.

Consideration of Documentary Evidence by DRP:
The AR contended that the DRP failed to consider documentary evidence related to royalty payment, violating principles of natural justice. The Tribunal observed that the DRP's order lacked reasoning and did not consider the submissions or evidence presented by the assessee. It remitted the issue back to the DRP for a fresh consideration, emphasizing adherence to natural justice principles.

Computation of Operating Margin:
Ground 2.6 raised concerns about the operating margin computation, including adjustments for repairs, plant & machinery costs, and incremental depreciation. The AR argued that the TPO did not allow adjustments for incremental depreciation and repair expenses. The DRP overlooked these contentions. The Tribunal found that the DRP did not consider the issues raised by the assessee and remitted the matter back to the DRP for a reasoned decision after considering all submissions.

Depreciation on Non-Compete Fees and Marketing Net Work Rights:
In Ground 3, the assessee challenged the disallowance of depreciation on non-compete fees and marketing net work rights. The AO and DRP disallowed it, stating it did not fall under intangible assets per section 32(1)(ii) of the Act. The AR cited previous ITAT decisions favoring the assessee's position. The Tribunal, following the consistent view of the ITAT in the assessee's cases, directed the AO to allow depreciation on non-compete fees and marketing net work rights.

Charging of Interest u/s 234B and 234C:
Ground 4 pertained to interest charged u/s 234B and 234C, deemed consequential and not adjudicated by the Tribunal. The appeal was partly allowed, and interest issues were not addressed.

This judgment highlighted the importance of considering documentary evidence, adherence to natural justice principles, and consistent application of legal interpretations in tax assessment matters.