2015 (4) TMI 548 - AT - Income Tax

Transfer pricing adjustment - Payment of export commission and Payment of royalty for export to the Associated Enterprises - Held that - Similar issues were raised in appeals by the assessee determination of ALP in respect of Export commission has been restored to the file of AO/TPO with certain directions and the payment of royalty for exports to AE has been accepted at arm s length price. No distinguishing feature has been brought to our notice in the facts of the instant year vis- -vis those of the above referred earlier two years. We adopt the same reasons for the year under consideration as well and, accordingly, remit the international transaction of Payment of export commission to the file of AO/TPO for a fresh determination as per the guidelines given in our above referred order and delete the addition on account of Payment of royalty in respect of exports made to the AEs. - Decided in favour of assessee for statistical purposes. Disallowance of depreciation on Foreign exchange (forex) loss on the payment of model fees, which was capitalized by the assessee as part of the cost of Intangible assets - AO invoked the provisions of section 40(a)(i) to disallow the proportionate amount of depreciation on Intangible asset towards the additional cost paid by the assessee due to change in the foreign currency rate - Held that - Whether there is a forex loss or gain, deduction of tax at source u/s 195 is contemplated only at the first stage of the credit of income to the account of the payee. The higher or lower liability due to foreign exchange loss or foreign exchange gain is inconsequential in so far as deduction of tax at source u/s 195 is concerned. Once there is no default on the part of the assessee in making deduction of tax at source on the additional amount paid due to foreign exchange loss, there can be no question of making any disallowance u/s 40(a)(i) of the Act. Section 32 of the Act provides for depreciation, inter alia, on intangible assets acquired on or after the 1st day of April, 1998, which are owned, wholly or partly, by the assessee and used for the purposes of the business or profession. It provides that depreciation shall be allowed in the case of any block of assets, at such percentage on the written down value thereof as may be prescribed. Section 43A of the Act is a special provision consequential to changes in rate of exchange of currency. The interpretation as suggested by the Revenue in not considering the adjusted cost as the cost of acquisition of capital asset for allowing depreciation, results into distortion of the provisions of section 43A, which is impermissible. It, therefore, follows that there can be no question of adopting unadjusted cost of acquisition of asset for allowing depreciation by invoking the provisions of section 40(a)(i) of the Act inasmuch as the depreciation is allowable with reference to the adjusted cost of acquisition of the asset in terms of section 43A. - Decided in favour of assessee.

Issues Involved:
1. Transfer pricing adjustment on Payment of export commission and Payment of royalty for exports to Associated Enterprises (AEs).
2. Disallowance of Sales tool expenses.
3. Disallowance of depreciation on Foreign exchange (forex) loss.
4. Disallowance of depreciation on signages.

Issue-wise Detailed Analysis:

1. Transfer Pricing Adjustment:
The first issue concerns the addition of Rs. 22,13,13,283/- towards transfer pricing adjustment for two international transactions: Payment of export commission (Rs. 17,50,15,000) and Payment of royalty for exports to AEs (Rs. 4,62,98,283). The Transfer Pricing Officer (TPO) determined the Arm's Length Price (ALP) of the export commission at Nil, arguing no service was rendered by the AE to justify the commission. For the royalty payment, the TPO considered the assessee a 'Contract manufacturer' and contended that the benefit of producing components was reaped by the AE, thus the royalty payment did not conform to the arm's length principle. The Assessing Officer (AO) adopted the TPO's findings without further evaluation. The Tribunal referred to similar issues raised in the assessee's appeals for AYs 2008-09 and 2009-10, where the question of ALP for Export commission was remitted to the AO/TPO for fresh determination, and the royalty payment for exports to AEs was accepted at arm's length price. Following the same reasoning, the Tribunal remitted the export commission issue to the AO/TPO for fresh determination and deleted the addition for royalty payments.

2. Disallowance of Sales Tool Expenses:
The second issue involves the disallowance of Rs. 55,45,182/- for Sales tool expenses. The Tribunal noted that similar issues had been raised in the assessee's appeals for AYs 2006-07, 2008-09, and 2009-10. In AY 2006-07, the matter was remitted to the AO for decision in conformity with the final view taken in earlier years. Given the similar fact-situation for the instant year and the lack of clarity on the final view taken for earlier years, the Tribunal set aside the impugned order and remitted the matter back to the AO for decision in conformity with the view taken in AY 2006-07.

3. Disallowance of Depreciation on Forex Loss:
The third issue pertains to the disallowance of Rs. 1,30,67,871/- being the depreciation on forex loss of Rs. 5,22,71,487/- on payment of model fees, which was capitalized as part of the cost of Intangible assets. The AO disallowed depreciation on the forex loss amount, arguing that tax was not deducted at source on the additional liability due to exchange rate fluctuation. The Tribunal, however, concluded that tax deduction at source (TDS) is required only once, at the time of credit or payment, whichever is earlier. The Tribunal emphasized that the Act does not require two-phase TDS on a single transaction and that the additional liability due to forex loss does not necessitate further TDS. The Tribunal also referred to Section 43A, which mandates that any increase or reduction in liability due to exchange rate changes should be adjusted to the actual cost of the asset, and depreciation should be allowed on this adjusted cost. Consequently, the Tribunal allowed the assessee's claim for depreciation on the adjusted cost, including the forex loss.

4. Disallowance of Depreciation on Signages:
The last issue involves the disallowance of depreciation of Rs. 2,41,092/- by applying a 10% depreciation rate on signages instead of the 15% claimed by the assessee. This ground was not seriously pressed by the assessee due to the insignificance of the amount involved, and thus, the Tribunal did not allow this ground.

Conclusion:
The appeal was partly allowed, with the Tribunal remitting the issues of export commission and sales tool expenses back to the AO for fresh determination, allowing the claim for depreciation on forex loss, and not allowing the claim for higher depreciation on signages. The order was pronounced in the open court on 13.04.2015.

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