2014 (6) TMI 640 - AT - Income Tax

Non-speaking order - Transfer pricing adjustment Royalty payment to AE Held that - The order of the DRP is a laconic order - the speaking order has not been passed by the DRP - It has not given any reason for disposal of the assessee s objections and far reaching its conclusions - It has also not adopted the reasons contained in the draft assessment order nor even the reasons that are contained in the order of the TPO - The assessee has a right to know the reason and Appellate Tribunal also can scrutinize the correctness of the said order only if reasons thereto are contained in the order - In the absence of any reasoning the order so passed is set aside the matter is remitted back for the fresh adjudication Decided in favour of Assessee. Disallowance u/s 14A r.w. Rule 8D of the Act Held that - Assessee claimed that the investment in mutual funds was made out of the surplus funds - This fact needs to be examined and a finding has to be returned by the Assessing Authority thus, the matter is to be remitted back to the Assessing authority for fresh adjudication with respect to the Maxopp Investment Ltd. & Others Versus Commissioner of Income Tax 2011 (11) TMI 267 - Delhi High Court Decided in favour of Assessee. Disallowance of royalty and technical fees Held that - The AO did not have benefit of THE COMMISSIONER OF INCOME TAX-II Versus MUNJAL SHOWA LTD. 2010 (9) TMI 121 - DELHI HIGH COURT - thus, the matter is required to be remitted back to the AO for fresh adjudication Decided in favour of Assessee.

Summary

Issues Involved:
1. Transfer Pricing Adjustments
2. Disallowance of Expenses under Section 14A
3. Disallowance of Royalty and Technical Fees

Detailed Analysis:

1. Transfer Pricing Adjustments

Assessment Year 2006-07:
The assessee contested the addition of Rs. 4,89,58,700 on account of transfer pricing adjustments. The AO noted payments of Rs. 14,21,48,282 as royalty to Showa Corporation and applied the CUP method to claim it was at arm's length. The assessee identified two comparables, Renowned Auto Products Manufacturing Ltd. and Gabriel India Ltd., using the TNMM method. The TPO rejected Renowned Auto Products due to its smaller turnover and used Gabriel India Ltd. for benchmarking, leading to an adjustment of Rs. 4,89,58,700. The DRP approved the draft assessment order without providing detailed reasoning, which was criticized for lack of a speaking order. The Tribunal set aside the DRP's order, directing a fresh hearing with a speaking order.

Assessment Year 2007-08:
The assessee challenged an addition of Rs. 19,47,11,585 on account of transfer pricing adjustments. The TPO determined the royalty at NIL, rejecting the CUP method and applying TNMM. The DRP upheld the TPO's decision, stating the transaction was not at arm's length. The Tribunal noted that the assessee did not get an effective opportunity to substantiate its claim and remitted the matter back to the AO for a fresh decision, ensuring a reasonable opportunity for the assessee to be heard.

2. Disallowance of Expenses under Section 14A

Assessment Year 2006-07:
The AO disallowed Rs. 1,24,746 under Section 14A read with Rule 8D, related to dividend income of Rs. 72,62,474 exempt under Section 10(35). The assessee argued that the expenses should have a proximate nexus with the exempt income and relied on various judgments. The Tribunal set aside the disallowance and remitted the matter back to the AO for a fresh decision, considering the judgment in Maxopp Investments Ltd. vs. CIT.

Assessment Year 2007-08:
The AO made an ad-hoc disallowance of Rs. 88,782 related to dividend income of Rs. 14,25,370. The Tribunal followed the reasoning from the 2006-07 assessment year and remitted the matter back to the AO for a fresh decision.

3. Disallowance of Royalty and Technical Fees

Assessment Year 2006-07:
The AO disallowed Rs. 14,21,48,282 paid as royalty to Showa Corporation, treating it as capital expenditure. The assessee argued it had only a limited right to use Showa's technology, with no transfer of ownership of the technical know-how. The Tribunal noted similar disallowances were deleted in earlier years by the Delhi High Court and remitted the matter back to the AO for a fresh decision, considering the High Court's judgment.

Assessment Year 2007-08:
The AO disallowed Rs. 18,22,69,037 as royalty, treating it as non-business expenditure. The Tribunal noted the assessee's arguments and previous judgments allowing such expenses as business expenditure. It remitted the matter back to the AO for a fresh decision, ensuring the assessee gets a reasonable opportunity to be heard.

Conclusion:
In both assessment years, the Tribunal found procedural lapses and lack of detailed reasoning in the AO and DRP's orders. It remitted the matters back to the AO for fresh decisions, ensuring compliance with legal standards and providing the assessee a fair opportunity to present its case. The appeals were allowed for statistical purposes, emphasizing the need for a thorough and reasoned approach in tax assessments.