2015 (11) TMI 580 - AT - Income Tax

Transfer pricing adjustment - determination of arm s length price of the international transaction of sale of old machineries to the associated enterprise - Held that - The assessee selected the CUP method in order to benchmark the sale price of the international transactions. In support assessee also adduced the relevant CUP data namely valuation report from a Chartered Engineer and claimed that the sale price recovered by the asessee from its associated enterprise was commensurate with the values arrived at by the valuer. Assessee also pointed out that the invoice values have been accepted by the Indian Custom authorities also. We find that the TPO has accepted the adoption of CUP method as the most appropriate method for benchmarking the international transaction of sale of old machineries. Out of the eight transactions of such sales the CUP data relied upon by the assessee has also been accepted by the TPO in five cases inasmuch as the sale price stated in the invoices have been accepted. It is only in three sale transactions that such CUP data has not been accepted and the TPO considered the written down value of the machineries as the arm s length sale price. Notably in such three transactions assessee had suffered a loss because sale values based on the valuer s report was lower than the WDV of such machineries. Quite clearly the approach of the TPO is inconsistent. The CUP data which has been found to be acceptable in considering five transactions of sales as being in consonance with the arm s length price cannot be disregarded in case of other three transactions merely because of the resultant loss. In the impugned orders of the authorities below there is no charge against the assessee that the CUP data relied upon by the assessee qua the aforestated three transactions was inconsistent or otherwise unreliable in comparison to the similar data relied upon in the context of the other five transactions. Therefore in our view the lower authorities have mis-directed themselves in making the addition - Decided in favour of assessee. Disallowance of expenditure incurred on account of royalty - revenue v/s capital in nature - Held that - The Tribunal in assessee s own case for assessment year 2009-10 on similar issue decided the assessee was not to disclose to third parties any of the documents made available to the assessee without having received a written authorization from the foreign collaborator. The Tribunal held that the amount paid by the assessee under the agreement constituted revenue expenditure. The High Court concluded that the features of agreement clearly established that what was obtained by the assessee was only a licence and what was paid by the assessee to the foreign collaborator was only a licence fee and not the price for acquisition of any capital asset and therefore the Tribunal was right in treating the amount as revenue expenditure. - Decided in favour of assessee.

Summary

Issues:
1. Addition of loss on sale of machinery to total income
2. Disallowance of royalty expenditure as capital in nature
3. Levy of interest under Section 234B

Issue 1: Addition of loss on sale of machinery to total income
The appellant, a company engaged in insulation processing, sold old machineries to its associated enterprise, resulting in a loss. The Transfer Pricing Officer (TPO) added this loss to the returned income. The appellant contended that the sale value was determined based on a valuation report accepted by Indian Customs. The TPO, however, considered the written down value as the arm's length sale price for three transactions, resulting in the addition of the loss. The Tribunal found the TPO's approach inconsistent, as the Comparable Uncontrolled Price (CUP) method was accepted for five transactions but not for the remaining three. As there was no inconsistency in the CUP data, the addition was deemed unjustified, and the amount was directed to be deleted. The appellant succeeded on this aspect.

Issue 2: Disallowance of royalty expenditure as capital in nature
The appellant incurred royalty expenditure for acquiring technology, claimed as revenue but disallowed by the Assessing Officer as capital expenditure. The Tribunal referred to a previous case where similar expenditure was treated as revenue. Following the precedent, the Tribunal directed the Assessing Officer to allow the royalty payment as revenue expenditure. Consequently, the appellant succeeded on this issue.

Issue 3: Levy of interest under Section 234B
The last ground of appeal related to the levy of interest under Section 234B, deemed consequential and not requiring specific adjudication. Therefore, this issue was not elaborated upon in the judgment.

In conclusion, the Tribunal partly allowed the appeal of the appellant, directing the deletion of the addition related to the loss on sale of machinery and allowing the royalty expenditure as revenue. The interest levy under Section 234B was considered consequential. The judgment provided detailed reasoning for each issue, ensuring a fair and just decision based on the facts and legal provisions presented during the proceedings.