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2015 (7) TMI 42 - AT - Income TaxTransfer pricing adjustment on account of provision of support service provided by the assessee to its AE - selection of comparable challenged - Held that - Having regard to the nature of functions and activities performed by the Rites Ltd., we find that this company cannot be regarded as a good comparable for determining the arms length price in respect of the services rendered by the assessee to its AE. Vapi Waste & Effluent Mgmt. Co. Ltd. is undisputedly is a non equity company as the capital is contributed by its members and Government of India. The major portion of the income of this comes from its members, therefore the price of this company cannot be treated as an independent and uncontrol price when the majority of the Revenue is earned from the members who have contributed to the capital of the company. In view of the findings of this Tribunal in the case of Actis Advisors Pvt. Ltd. 2013 (8) TMI 753 - ITAT DELHI as well as the nature of functions performed by this company, we find that this company cannot be considered as a good comparable of the assessee. WAPCOS Limited company provides consultancy in the domestic and international water and power sector. WAPCOS Limited is a government company with a Mini Ratna-I status and the primary function of the company is to provide consultancy in the field of water, power and infrastructure development for a total project solution. This company is not functionally comparable with the service providing companies in the other fields. As it is apparent from the nature of functions and activities performed by this company that the functions of the company are not comparable with the services provided by the assessee to its AE. Thus we direct the TPO/AO to recompute/determine the arms length price after exclusion of three companies as discussed above. Addition made under section 41(1) on account of creditors outstanding for more than three years - Held that - The Ld. A.R. of the assessee has pointed out that out of these four creditors the amount of ₹ 7,32,698/- in respect of M/s. Wander Pvt. Ltd. is involved in the dispute and a legal case is going on with the said party. Since this aspect has not been properly examined and verified by the authorities below, therefore if the said amount is part of a dispute between the parties, then till the dispute is settled it cannot be said that any part of the liability in respect of the said amount ceased to exist. The Ld. A.R. has further pointed out that a sum of ₹ 25,340/- is payable to an employee of the assessee and the settlement is pending. We are of the view that the relevant record in this respect is required to be examined before arriving to a decision whether the said amount is no more payable to the employee and therefore can be treated as ceased liability of the assessee. As regards the remaining two parties namely Scientico Instruments and Electrolab, the assessee has claimed that the outstanding amount has already been paid on 08.10.09 and the assessee has produced before the AO the relevant ledger extract to show the said payment made to the parties. Since all these facts as well as the relevant record has not been properly examined by the authorities below, therefore we are of the considered view that the AO shall verify and examine the relevant record and details to be filed by the assessee and then decide the issue in the light of the various decisions as relied upon by the assessee. - Decided in favour of assessee for statistical purposes. Disallowance of annual license fee/computer software expenditure - revenue v/s capital expenditure - Held that - It is not in dispute that the expenditure has been incurred on application software. The Hon ble Delhi High Court in the case of Asahi Safety Glass ltd 2011 (11) TMI 2 - DELHI HIGH COURT has held that application software are of revenue in nature as the AO has not doubted that the expenses were on application software therefore respectfully following the decision of the Hon ble Delhi High Court, findings of the CIT(A) are confirmed. - Decided in favour of assessee. Assessment of the amount received from sale of brand - business income OR long term capital gain - Held that - In the case in hand, the amount in question has been received as consideration for transfer of trade mark/brand and not in lieu of restricting the assessee from selling the said trade mark for any other purpose and with some other person. Further, the proviso to clause (va) makes it clear that this clause shall not apply to any sum received or receivable on account of transfer of right to manufacture, produce or process any article or things or right to carry on any business which is chargeable under the head Capital gain . Therefore, in our view, the AO as well as the DRP has committed an error by misinterpreting the provisions of section 28(va) as well as the clauses of the deed of assignment dated 01.07.07 whereby the assessee has transferred the trade mark SPERT to the assignee. It is a simple case of transfer of trade mark and not the case of receipt of any non compete fee. As following the judgment of CIT vs. Mediworld Publications Pvt. Ltd 2011 (4) TMI 503 - DELHI HIGH COURT we hold that the amount in question received by the assessee as a consideration for transfer/assignment of trade mark to the assignee is in the nature of capital receipt and to be taxed as capital gain and not as business income. - Decided in favour of assessee. Non granting of TDS credit - Held that - Objection was raised by the assessee before the DRP seeking directions for grant of TDS credit of ₹ 13,44,25,277. The DRP has directed the AO to allow the TDS claim after due verification. Before us the assessee has further pleaded the TDS credit amounting to ₹ 9,86,392/- and submitted that the AO has not granted the TDS credit to the extent of this amount without giving any reason for the same. Since the authorities below have not discussed anything about the claim of the assessee, therefore we direct the AO to consider the claim of the assessee of granting TDS credit amounting to ₹ 9,86,392/-. Non grant of MAT credit - Held that - We find that vide letter dated 08.11.12 the assessee is seeking rectification under section 154 of the Act inter-alia in respect of MAT credit amount to ₹ 60,72,371/-. Accordingly, the AO is directed to consider the claim of the assessee in the light of the MAT tax liability revised by the AO in the A.Y. 2007-08.
Issues Involved:
1. Transfer pricing adjustment on account of provision of support services. 2. Addition under section 41(1) of the Income Tax Act for creditors outstanding for more than three years. 3. Disallowance of expenditure on annual license fee and computer software as capital expenditure. 4. Treatment of income from the sale of a brand as business income versus long-term capital gains. 5. Non-granting of TDS credit. 6. Non-granting of MAT credit. 7. Initiation of penalty proceedings under section 271(1)(c). Detailed Analysis: 1. Transfer Pricing Adjustment: The assessee challenged the assessment order concerning transfer pricing adjustments for pharma support services provided to its associated enterprise (AE). The assessee used the Transactional Net Margin Method (TNMM) with a profit level indicator (PLI) of 9.15% and claimed a 15% markup on operating costs. The Transfer Pricing Officer (TPO) rejected the assessee's comparables and selected different ones, arriving at a mean margin of 22.49%, leading to an upward adjustment. The Tribunal focused on three disputed comparables: Rites Ltd., Vapi Waste & Effluent Mgmt. Co. Ltd., and WAPCOS Limited. The Tribunal concluded that these companies were not functionally comparable to the assessee's pharma support services, referencing previous Tribunal decisions. The Tribunal directed the TPO/AO to exclude these companies and recompute the arm's length price. 2. Addition Under Section 41(1): The AO added Rs. 8,00,869 under section 41(1) for creditors outstanding for more than three years, treating it as cessation of liability. The assessee contended that the liabilities had not ceased, pointing out ongoing disputes and eventual payments to creditors. The Tribunal directed the AO to verify the assessee's claims regarding the disputes and payments. If the liabilities had not ceased or were still payable, no addition under section 41(1) should be made. 3. Disallowance of Expenditure on Annual License Fee and Computer Software: The AO treated Rs. 28,17,425 spent on computer software as capital expenditure, providing enduring benefits. The assessee argued that these were annual maintenance and license fees, thus revenue in nature. The Tribunal referred to its earlier decision in the assessee's case and the Delhi High Court's ruling in "Asahi India Safety Glass Ltd.," concluding that such software expenses were revenue in nature. The Tribunal allowed the assessee's claim. 4. Treatment of Income from Sale of Brand: The AO treated Rs. 1,17,50,000 from the sale of the brand "SPERT" as business income under section 28(va), while the assessee claimed it as long-term capital gains. The Tribunal found that the sale was a transfer of an intangible asset, not a non-compete fee, and thus should be treated as capital gains. The Tribunal referenced the Delhi High Court's decision in "CIT vs. Mediworld Publications Pvt. Ltd." and concluded that the amount received was capital in nature, directing the AO to treat it as long-term capital gains. 5. Non-Granting of TDS Credit: The assessee claimed that the AO did not grant TDS credit of Rs. 9,86,392. The Tribunal directed the AO to verify and grant the TDS credit after due verification. 6. Non-Granting of MAT Credit: The AO did not allow MAT credit of Rs. 54,12,096 due to ongoing disputes regarding MAT liability for the A.Y. 2007-08. The assessee sought MAT credit of Rs. 60,72,371 based on a subsequent letter. The Tribunal directed the AO to consider the MAT credit claim in light of the revised MAT liability for A.Y. 2007-08. 7. Initiation of Penalty Proceedings Under Section 271(1)(c): The Tribunal noted that the initiation of penalty proceedings is not appealable and dismissed this ground as premature. Conclusion: The appeal was partly allowed, with directions to the AO/TPO to re-evaluate certain aspects based on the Tribunal's findings and grant appropriate credits where due.
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