2015 (5) TMI 861 - AT - Income Tax

Disallowance of Community Development Expenses - Held that - It is not proper to disallow the entire amount on the basis of non-availability of few vouchers even though assessee has provided evidence by way of ledger accounts and payment details. AO does not have any right to disallow the amount stating that business necessity was also not proved beyond doubt. This issue was also decided by the DRP, so AO cannot again come to the same point which was held in favour of assessee. In view of this, we in the interest of justice, restore the issue to the file of AO to examine the vouchers only along with other Books of Accounts and other details to verify whether the expenditure was spent for the purpose of corporate social responsibility of assessee-company which was allowed as a business expenditure u/s.37(1) by the DRP itself - Decided in favour of assesse for statistical purposes. Disallowance is giveaways - Held that - If we pursue the orders, it is very clear that expenditure was incurred for purchase of gifts to advocates marriages, purchase of coolers gifted to Joint Director (Mines), purchase of gifts to M.V.Mysoora Reddy s son s marriage function, purchase of silver plate gifted to Inspector of Factories, purchase of gifts to Railway employees, purchase of gift for ESI official daughter s marriage, purchase of gifts to other Govt. employees etc. Except the purchase of gold coins from Corporation Bank, Bangalore on 16-02-2008 for ₹ 3,85,166/- vide Invoice No.120 for which no details were furnished, rest of the expenditure has same identity etc. Since the business necessity was already decided by the DRP, AO s duty is only to examine the vouchers. In our opinion, except the amount of ₹ 3,85,166/- for which details were not available, rest of the expenditure cannot be disallowed on the reasons stated by AO. We therefore, direct the AO to allow the expenditure, except the amount of ₹ 3,85,166/ - Decided partly in favour of assesse. Disallowance of Contribution to Zuari School - Held that - We were surprised about the reasoning given by the AO. He was directed by the DRP only to examine the necessary vouchers, AO should not question the wisdom of the DRP in allowing the expenditure u/s.37(1), subject to verification of the availability of vouchers. In our opinion, AO exceeded his jurisdiction in examining the MOU itself. Not only that, assessee also made contributions to another school at Sitapuram. This was being contributed earlier by SVCL which was later merged with assesseecompany. In both the places of Yerraguntla and Sitapuram, the school is being run mainly for the benefit of employees. Since, the DRP already decided to allow the expenditure u/s.37(1) and assessee furnished the vouchers, the reasons assigned by AO to disallow the expenditure cannot be accepted. - Decided in favour of assesse. Transfer pricing adjustment - rejection of TNMM as most appropriate method - Held that - As far as the royalty payment on sales is concerned, as rightly pointed out by the Ld.Counsel, there are no comparable companies which are offering similar services. The TPO s comparison on transactions of assessee subsidiary company much prior to the year under consideration cannot be justified. Therefore, on that basis itself, the comparison cannot be considered as an internal CUP. Moreover, the need for not charging royalty from SVCL was also explained as the subsidiary company was a sick company and in the process of reviving the company, assessee has not charged any royalty to its subsidiary company. Therefore, on FAR analysis, SVSL s past record with that of present transactions of assessee-company is not correct. Then, coming to external comparables, we were surprised to note that the TPO considered the technical fee payments without analyzing the nature of the payments. In some cases, it is royalty for acquiring the lime stone from Govt., which is not a royalty for getting the technology from foreign AE. There is foreign exchange expenditure also considered as technical know-how fee . A detailed objections of the assessee were not even considered or discussed either by the TPO or by the DRP. Therefore, on the basis of an external CUP ALP of 0.91% itself is not correct. Therefore, the entire exercise undertaken by the TPO on this issue is erroneous and cannot be justified. Transfer of economic value of Zuari trade mark to Italcementi Group trade mark - Under the guise of TPO provisions, the TPO cannot determine the ALP at NIL as held by the Hon ble Delhi High Court in the case of CIT Vs. EKL Applicances Ltd., (2012 (4) TMI 346 - DELHI HIGH COURT ). Therefore, rejecting the entire payment without there being any analysis on the CUP method cannot be accepted. In the guise of analyzing the transactions in the CUP method, the TPO has not brought any evidence on record to reject the 1% payment made to Italcementi Group. Moreover, while determining the price at NIL on the issue, the TPO surprisingly holds that assessee has transferred its Zuari Brand to Italcementi Group . We are unable to understand this logic. Italcementi Group never obtained, acquired or used Zuari Brand anywhere in the world, so that this cannot be considered for Transfer Pricing analysis. It is the Italcementi Group brand which is used by assessee-company. The TPO s analysis of AMP expenses are also not correct. The orders of the TPO/DRP on the TP issues are therefore set aside and the entire issue on TP analysis is restored to the file of AO for fresh consideration. - Decided in favour of assesse for statistical purposes. Allowability of depreciation of goodwill - additional ground raised - Held that - As rightly held by the Hon ble Supreme Court in the case of S.A. Builders Ltd., 2006 (12) TMI 76 - SUPREME COURT OF INDIA , additional ground cannot be considered, in the absence of any facts on record.In view of this, since the issue did not arise in the year under consideration and the facts pertaining to the quantification of the claim are not on record, we cannot entertain the additional ground, just because law on this was settled on legal principles. If at all assessee s claim to depreciation was allowed in AY.2007-08, then, assessee can claim consequential depreciation in this assessment year, before the AO, the additional ground is accordingly rejected. - Decided against assesse.

Summary

Issues Involved:
1. Disallowance of Community Development Expenses
2. Disallowance of Giveaways
3. Disallowance of Contribution to Zuari School
4. Transfer Pricing Issues
5. Additional Ground on Depreciation of Goodwill

Detailed Analysis:

1. Disallowance of Community Development Expenses:
The assessee contested the disallowance of Rs. 76,36,096 incurred on community development activities like medical camps and infrastructure development in nearby villages. The AO disallowed the expenses citing lack of concrete evidence, business necessity, and identity of payees. The assessee argued that these expenses were part of corporate social responsibility and necessary for smooth operations. The DRP accepted the business purpose but directed the AO to verify the books of accounts and vouchers. The Tribunal restored the issue to the AO for re-examination, emphasizing the need to verify whether the expenses were incurred for corporate social responsibility.

2. Disallowance of Giveaways:
The AO disallowed Rs. 14,06,559 spent on gifts, stating it had no business nexus and lacked evidence. The Tribunal noted that most expenditures were for gifts to various officials and employees, except Rs. 3,85,166 for which details were unavailable. The Tribunal directed the AO to allow the expenditure except for Rs. 3,85,166, as the business necessity was already established by the DRP.

3. Disallowance of Contribution to Zuari School:
The AO disallowed Rs. 13,43,496 contributed to Zuari School, questioning the clarity of the MOU. The Tribunal criticized the AO's reasoning, noting that the DRP had already allowed the expenditure under Section 37(1) subject to voucher verification. The Tribunal directed the AO to allow the expenditure, emphasizing that the school's operation benefited the employees.

4. Transfer Pricing Issues:
The assessee, a wholly-owned subsidiary of a foreign company, had several transactions with its AEs. The TPO rejected the TNMM method used by the assessee and applied the CUP method, leading to various disallowances:

- Technical Know-How Fees: The TPO disallowed Rs. 1,65,64,219, comparing it with SVCL's past transactions and external comparables. The Tribunal found the comparison flawed and the external CUP analysis incorrect, setting aside the TPO's order.

- Sub-License Agreement: The TPO disallowed Rs. 6,26,62,000 for using the trade mark, arguing the ZCL brand was well-established. The Tribunal found the TPO's analysis faulty and rejected the determination of ALP at NIL.

- Procurement and Consultancy Fees: The TPO disallowed Rs. 7,11,82,000 and other consultancy fees, questioning the necessity and benefit. The Tribunal found no valid reason for disallowance and set aside the TPO's order.

- Reimbursement of Expenses: The TPO disallowed Rs. 51,72,995, which the Tribunal also set aside, directing a fresh analysis by the AO.

The Tribunal criticized the TPO's approach and directed a fresh consideration of the entire order, emphasizing the need to determine the most appropriate method and analyze the transactions correctly.

5. Additional Ground on Depreciation of Goodwill:
The assessee raised an additional ground for depreciation on goodwill amounting to Rs. 17,991.99 Lakhs, arising from an amalgamation. The Tribunal noted that the merger took place in AY 2007-08 and the facts needed examination in that year. Since the issue did not arise in the year under consideration, the Tribunal rejected the additional ground, stating it could not be entertained without facts on record.

Conclusion:
The appeal was partly allowed for statistical purposes, with the Tribunal directing fresh consideration of certain issues and rejecting the additional ground on depreciation of goodwill.