2014 (11) TMI 552 - AT - Income Tax

Addition of interest received on income tax refund Held that - As decided in assessee s own case for the earlier assessment year, the decision in Avada Trading Co. (P.) Ltd. Versus Assistant Commissioner of Income-tax, Spl. Circle 18(1) 2006 (1) TMI 465 - ITAT MUMBAI relied upon wherein it has been held that the interest on refund under section 244A(1) would be assessable in the year in which it is granted and not in the year in which proceedings under section 143(1)(a) attain finality the order of the CIT(A) is upheld Decided against assessee. Treatment of repairing expenses Capital expenses or not Held that - As decided in assessee s own case for the earlier assessment year, it has been decided that certain explanations were furnished before the AO but those were not supported by the requisite evidences - assessee has furnished certain details of the bills of repairs and details of replacement of furnace - The assessee was under strict obligation to furnish the proof and evidences in support of the repairs and replacement of furnace - the natural justice demands to provide an opportunity to this assessee to furnish full details along with bills and vouchers to demonstrate the nature of expenditure incurred, before the AO, so that after proper investigation about the nature of expenditure can be determined thus, the matter is remitted back to the AO for fresh consideration Decided in favour of assessee. Treatment of software expenses capital expenses or not Held that - The fact of incurring of expenditure for SAP on account of user licencee fee and on account of reimbursement is not in dispute in CIT vs. Asahi India Safety Glass Ltd. 2011 (11) TMI 2 - DELHI HIGH COURT it has been concluded that the expenditure incurred by assessee on software is allowable as Revenue expenditure more so as the expenditure acquired by the assessee was an application software which enable it execute tasks in the field of accounting, purchases and inventory maintenance also in IBM India Ltd. vs. ACIT 2006 (3) TMI 196 - ITAT BANGALORE-B the same is held that the expenditure on purchase of application software is allowable as revenue expenditure as it is an aid in manufacturing process rather than the tool and though there is an enduring benefit there is no acquisition of capital asset - the expenditure incurred by the assessee has to be allowed as revenue expenditure Decided in favour of assessee. Lump sum payments on account of know how fees Capital expenses or not Held that - As decided in assessee s own case for the earlier assessment year, it has been held that the know-how as such was not the property of the assessee - The know-how remained the property of the said Collaborator because the Indian Company was not permitted to make use of know-how other than the purpose for which it had intended in terms of the agreement - the know-how was not the property of the assessee - Rather, the said Collaborator has imposed a condition of confidentiality and secrecy which leads to an inference that the property belonged to the said Collaborator - the transfer of know-how was restricted for the use rather than its acquisition - the payment of ₹ 43.10 lacs was in the nature of revenue expenditure Decided in favour of assessee. Transfer pricing adjustment International transaction of Royalty and fees for technical services paid invocation of section 40A(2)(b) Held that - The Artificial Bifurcation of DTA and EOU is de hors the provisions of Law, DTA Segment has no exports but comparable companies has exports and incorrect computation by the CIT(A) - the TPO artificially divided the manufacturing segment into two sub-segments, i.e. for exports and for domestic sales, but however kept the set of comparable companies same for both EOU and DTA - There is no fault can be found from the order of the CIT(A) so far as restricting the addition on account of differential operating margin to the international transactions is concerned - the figure as worked out by the CIT(A) is not correct, therefore this issue is required to be restored to the file of CIT(A) for re-computation of the international transactions Decided in favour of assessee. CIT(A) in its order has held that royalty @ 1.5% only represent reasonable royalty - This finding is on the basis of the appellate order pertaining to AY 2001-02 - It is also held that the benchmarking of royalty is to be done for EOU as well as DTA - The contention of the assessee is that the fundamental principle of CUP is that the comparable transaction has to be uncontrolled Transaction , meaning thereby that it has to be a transaction between two parties who are not related to each other. SKF transaction is not eligible to be treated as CUP as it is with related party - The another contention of the assessee is that the TPO and CIT(A) has relied upon the rates of royalty paid by the assessee during the earlier years - this transaction is also with related parties as it is given to a related party of the assessee for the earlier period - no material is available on record that any enquiry of any nature has been carried out by any person including TPO to conclude that the transactions of SKF and for the earlier years for the assessee were the correct ALP or were done in circumstances so as to be at the ALP - The contention is that the only available option is to adopt TNMM as the method for determination of the ALP - CIT(A) and TPO were not justified in adopting the CUP method and the CIT(A) is upheld to adopt the method of TNMM for determination of the ALP and recompute the ALP in respect of the royalty Decided in favour of assessee. Expenses incurred on repairs to building Held that - Following the decision in B.V.Ramachandrappa & Sons 1991 (1) TMI 67 - KARNATAKA High Court wherein it was held that Tribunal was right in holding that expenditure incurred on replacement of the barbed wire fence with compound wall was revenue expenditure - sustenance of shed or building, etc. is definitely in the nature of current repairs as prescribed u/s. 31 Decided in favour of assessee. Interest expenses paid in foreign supply credit TDS not deducted u/s 195 Held that - As decided in assessee s own case for the earlier assessment year, it has been held that the conditions for supply of goods by the non-resident to the assessee in that case were that the payment of purchase price in instalments was to be made with the condition that the assessee will compensate the supplier by means of interest on the unpaid instalments - the unpaid instalment was not the same as loan and therefore, interest paid could not be treated as paid on-the loan and hence, deduction of tax at source was not attracted - the interest as defined u/s 2(28A) of the Act was paid in foreign currency on foreign suppliers credit - There is nothing to suggest that payment of purchase price has been made in installments nor it has been brought to our notice there was any such condition that the assessee will compensate the supplier by means of interest on the unpaid installments - There is no material before us suggesting that amount was paid to the bank nor any such findings has been recorded in the impugned orders thus, the order of the CIT(A) is upheld Decided against assessee.

Summary

Issues Involved:
1. Addition of Rs. 84.32 lakhs on account of interest received on Income Tax Refund.
2. Treatment of repairing expenses of Rs. 133.77 lakhs and Rs. 120.16 lakhs as capital expenses.
3. Treatment of software expenses of Rs. 104.99 lakhs as capital expenditure.
4. Treatment of lump sum payment of Rs. 44.21 lakhs on account of Knowhow Fees as capital expenditure.
5. Transfer Pricing adjustments in respect of international transactions.
6. Treatment of repairs to building amounting to Rs. 40.18 lakhs as capital expenditure.
7. Treatment of software expenses of Rs. 14.91 lakhs as capital expenditure.
8. Disallowance under section 14A.
9. Disallowance on account of diminution in the value of investments.
10. Disallowance of interest paid on Foreign Supply Credit due to non-deduction of TDS.
11. Charging of interest under sections 234B and 234D.

Detailed Analysis:

1. Addition of Rs. 84.32 lakhs on account of interest received on Income Tax Refund:
The Tribunal upheld the addition of Rs. 84.32 lakhs on account of interest received on Income Tax Refund, citing the Special Bench decision in the case of Avada Trading Company and the Tribunal's decision for A.Y. 2001-02. The assessee's argument that the interest had not become final during the year was rejected.

2. Treatment of repairing expenses of Rs. 133.77 lakhs and Rs. 120.16 lakhs as capital expenses:
The Tribunal remitted the issue of treating repairing expenses of Rs. 133.77 lakhs and Rs. 120.16 lakhs as capital expenses back to the file of the A.O. for re-examination, following the Tribunal's decision in the assessee's own case for A.Y. 2001-02. The Tribunal directed the assessee to furnish all required details to the A.O.

3. Treatment of software expenses of Rs. 104.99 lakhs as capital expenditure:
The Tribunal allowed the software expenses of Rs. 104.99 lakhs as revenue expenditure, relying on the decisions of the Delhi High Court in CIT vs. Asahi India Safety Glass Ltd. and other Tribunal decisions. The Tribunal held that the expenditure incurred for SAP software was for application software aiding in manufacturing processes and did not result in the acquisition of a capital asset.

4. Treatment of lump sum payment of Rs. 44.21 lakhs on account of Knowhow Fees as capital expenditure:
The Tribunal decided in favor of the assessee, stating that the lump sum payment of Rs. 44.21 lakhs on account of Knowhow Fees should be treated as revenue expenditure. The Tribunal followed its decision in the assessee's own case for A.Y. 2001-02, where it was held that the payment was for the use of know-how and did not result in the acquisition of a capital asset.

5. Transfer Pricing adjustments in respect of international transactions:
The Tribunal addressed several aspects:
- Artificial Bifurcation of DTA and EOU: The Tribunal found the bifurcation of DTA and EOU segments by the TPO to be unjustified and directed the CIT(A) to recompute the ALP for international transactions using the TNMM method.
- Royalty Payments: The Tribunal directed the CIT(A) to adopt the TNMM method for determining the ALP of royalty payments, rejecting the CUP method used by the TPO and CIT(A).

6. Treatment of repairs to building amounting to Rs. 40.18 lakhs as capital expenditure:
The Tribunal allowed the expenditure of Rs. 40.18 lakhs on repairs to the building as revenue expenditure, following its decisions in the assessee's own case for earlier years. The Tribunal held that the expenditure was for replacement and maintenance and did not result in the acquisition of a new asset.

7. Treatment of software expenses of Rs. 14.91 lakhs as capital expenditure:
The Tribunal allowed the software expenses of Rs. 14.91 lakhs as revenue expenditure, following its decision in the assessee's own case for A.Y. 2001-02. The Tribunal held that the expenditure for obtaining licenses for MS Office was for maintaining and upgrading software, not acquiring a capital asset.

8. Disallowance under section 14A:
The assessee did not press this ground, and it was dismissed as not pressed.

9. Disallowance on account of diminution in the value of investments:
The assessee did not press this ground, and it was dismissed as not pressed.

10. Disallowance of interest paid on Foreign Supply Credit due to non-deduction of TDS:
The Tribunal upheld the disallowance of Rs. 8.05 lakhs on account of interest paid on Foreign Supply Credit due to non-deduction of TDS, following its decision in the assessee's own case for A.Y. 2000-01.

11. Charging of interest under sections 234B and 234D:
The charging of interest under section 234B was held to be consequential. The issue of charging interest under section 234D was covered against the assessee by the explanation inserted by the Finance Act, 2012, with retrospective effect from 01.06.2003. The ground was dismissed.

Conclusion:
The Tribunal provided a thorough analysis of each issue, with several matters remitted back to the A.O. for re-examination. The Tribunal's decisions were largely based on precedent cases, ensuring consistency in the application of legal principles.