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2018 (5) TMI 1790 - AT - Income TaxRemission/ cessation of sales tax liability u/s 41(1) - Held that - Disallowance made by AO u/s 41(1) representing gain on repayment of deferral Sales Tax Liability stood covered in assessee s favor in assessee s own case for AY 2003-04 by the order of Hon ble Bombay High Court 2014 (12) TMI 846 - BOMBAY HIGH COURT - Decided against revenue TP adjustment against Advertising Marketing & Sales Promotion Expenses AMP - Held that - In the absence of agreement between the assessee and its AE obliging the assessee to incur AMP expenditure on behalf of its AE no international transaction can be presumed. Even if some indirect benefit has accrued to the AE by aforesaid expenditure it could not be held that the same was incurred to promote the brand of foreign AE. Merely because there is an incidental benefit to the foreign AE it cannot be said that the AMP expenses incurred by the Indian entity was for promoting the brand of the foreign AE. As mentioned in Sassoon J David 1970 (2) TMI 50 - BOMBAY HIGH COURT the fact that somebody other than the Assessee is also benefitted by the expenditure should not come in the way of an expenditure being allowed by way of a deduction under Section 10 (2) (xv) of the Act (Indian Income Tax Act 1922) if it satisfies otherwise the tests laid down by the law - decided in favour of assessee Assessee received an amount from its parent company for providing certain Research & Development Services R & D services - Held that - The export benefits were received by the assessee in connection with export of R & D services and had direct and intimate connection with the said receipts and therefore there was no reason to exclude the same for the purpose of computation of margins from R & D activities. Further the said benefit arose from usual activities carried by the assessee and part & parcel of the same transaction and therefore formed part of operating income only. The revenue has not controverted the stated fact or brought on record any contrary judgment to refute the findings of Ld. first appellate authority. Therefore on factual matrix we find to reason to interfere with the stand of Ld. first appellate authority in this regard. The grounds stands dismissed. Disallowance u/s 14A - as noted that the assessee earned tax free interest income aggregating to Rs. 6.68 Crores which called for disallowance u/s 14A read with rule 8D - Held that - We deem it fit to restore the matter back to the file of Ld. AO to reconsider the assessee s alternative submissions as raised before Ld. first appellate authority qua expense disallowance and also re-adjudicate the issue of interest disallowance in the light of assessee s submissions. The assessee in turn is directed to substantiate his stand in this regard. Needless to add that the provisions of Rule 8D as per settled judicial pronouncements could be applied only from AY 2008-09 and were not applicable in the impugned AY. The assessee s cross-objections stands allowed for statistical purposes.
Issues Involved:
1. Taxation of remission/cessation of sales tax liability under Section 41(1) of the Income Tax Act, 1961. 2. Transfer Pricing adjustment concerning Advertising, Marketing & Sales Promotion Expenses (AMP). 3. Inclusion of export incentives in the computation of margins for R&D services. 4. Disallowance under Section 14A of the Income Tax Act. Detailed Analysis: 1. Taxation of Remission/Cessation of Sales Tax Liability: The revenue contested the decision of the Ld. Commissioner of Income Tax (Appeals) [CIT(A)] regarding the taxation of remission/cessation of sales tax liability of Rs. 7,63,289/- under Section 41(1) of the Income Tax Act, 1961. The Ld. CIT(A) held that the differential amount representing the actual loan amount and the present value of the future liability paid by the assessee is on capital account and not taxable under Section 41(1). The Tribunal found that the disallowance made by the Assessing Officer (AO) was covered in favor of the assessee by the order of the Hon’ble Bombay High Court and the Tribunal for earlier assessment years. Hence, the ground raised by the revenue was dismissed. 2. Transfer Pricing Adjustment - AMP Expenses: The revenue challenged the deletion of the adjustment made by the Transfer Pricing Officer (TPO) concerning AMP expenses. The TPO had proposed an adjustment based on the AMP expenses incurred by the assessee, arguing that the expenses benefited the associated enterprise (AE) and should be shared. The Ld. CIT(A) deleted the adjustment, stating that the expenses were incurred for the assessee's own business in India and there was no agreement with the AE to incur such expenses. The Tribunal upheld the decision of the Ld. CIT(A), noting that there was no evidence of any agreement obliging the assessee to incur AMP expenses on behalf of its AE. The Tribunal relied on various judicial pronouncements, including those from the Hon’ble Delhi High Court and the Hon’ble Bombay High Court, which held that in the absence of an agreement, no international transaction could be presumed. Consequently, the revenue's appeal on this ground was dismissed. 3. Inclusion of Export Incentives in R&D Services: The revenue contested the inclusion of export incentives in the computation of margins for R&D services. The Ld. TPO had excluded the duty benefit received by the assessee under the 'Served for India Scheme' from the computation of margins. The Ld. CIT(A) held that the export benefits were directly related to the provision of R&D services and should be included in the operating income. The Tribunal upheld the decision of the Ld. CIT(A), stating that the export benefits were part and parcel of the usual activities carried out by the assessee and formed part of the operating income. The revenue's appeal on this ground was dismissed. 4. Disallowance under Section 14A: The assessee contested the disallowance made under Section 14A of the Income Tax Act, which pertains to expenses incurred in relation to earning exempt income. The Ld. AO computed the disallowance as per Rule 8D, which was partly confirmed by the Ld. CIT(A). The Tribunal noted that the provisions of Rule 8D were applicable only from AY 2008-09 and remitted the matter back to the file of the Ld. AO for re-adjudication, directing the AO to reconsider the assessee's alternative submissions and re-adjudicate the issue of interest disallowance. The assessee's cross-objections were allowed for statistical purposes. Conclusion: The revenue's appeals were dismissed, and the assessee's cross-objections were partly allowed for statistical purposes. The Tribunal upheld the decisions of the Ld. CIT(A) on various grounds, including the taxation of remission/cessation of sales tax liability, transfer pricing adjustments concerning AMP expenses, and the inclusion of export incentives in the computation of margins for R&D services. The disallowance under Section 14A was remitted back to the AO for re-adjudication.
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