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2017 (11) TMI 1743 - AT - Income TaxDownward adjustment in respect of payment of royalty to Associated Enterprises (AEs) - royalty payment is in excess of limits prescribed under the provisions of Foreign Exchange Management Act, 1999 - Held that - In this case, the Technology Transfer Agreement has been signed on 1st January, 2009. The assessee utilized the technology of the AE during the preceding year. However, no expenditure was booked by the assessee on the reason that no invoice has been received from its AE during the preceding assessment year. The assessee claimed that all the sales in F.Y 2009-10 were ex-works, installation of which was completed by it in F.Y 2010-11. The assessee paid the royalty in the year in which installation and commissioning was completed. Before TPO, the assessee not furnished the details of product sold date and ex-work details in relation to each supply agreement along with the copies of relevant agreement for the Financial years 2009-10 to 2012-13 and it was also not proved that there was carry forward one year to another year. Before the DRP, there was no details provided by the assessee regarding date of installation and only furnished the product sold date for FY 2009-10 and no such details of other years were provided and the assessee failed to substantiate its own claim. AR made a plea that since the invoice has been received from the AE during the assessment year under consideration, it was subject to TDS and it is to be allowed. In our considered opinion, if the expenditure was crystallized and accrued in the assessment year under consideration, the same is to be allowed subject to deduction of TDS as held by Delhi High Court in the case of CIT v. SMCC Construction India 2010 (1) TMI 10 - HIGH COURT OF DELHI . The assessee has to furnish the details of product sold date and date of completion of installation work with corresponding agreements. The AO/TPO should examine the same and decide the issue in the light of above judgments. This ground is remitted to the file of AO for fresh consideration. Downward adjustment in respect of management fee - Held that - Regarding copy of correspondence with the AE for allocation of cost, it was observed by the DRP that no such document was furnished by the assessee. However, before us the assessee filed additional evidences for the A.Y 2012-13 as discussed in earlier para elsewhere in the order and we are in-principle agree with the contention of the assessee regarding the allowability of management fees and there is no requirement of transfer pricing adjustment on this issue, subject to verification of availing of actual services and allocation of its cost to the assessee. For the A.Y 2011-12, it was stated that all the relevant evidences were already available with the Assessing Officer/TPO and on that basis; it is required to be verified with regard to availing actual services and its allocation of cost to the assessee. Accordingly, this ground relating to Management fees is remitted to the file of ld. Assessing Officer for fresh consideration for both the assessment years and the Assessing Officer after going through the evidences filed by the assessee decide the issue fresh as indicated above. This ground is partly allowed for statistical purposes for both the assessment years. Disallowance u/s. 14A read with Rule 8D - Held that - Isuue is decided in favour of the assessee and there cannot be any disallowance u/s.14A when there is no exempted income. This ground of appeal of the assessee for the A.Y 2012-13 is allowed. MAT - disallowance u/s.14A with Rule 8D while computing book profits u/s. 115JB of the Act - Held that - We are of the opinion that this issue came for consideration before the Special Bench of the Tribunal in the case of Asstt. CIT v. Vireet Investments (P.) Ltd. 2017 (6) TMI 1124 - ITAT DELHI wherein held that Sec.14A r.w. Rule 8D has no application while computing the book profit u/s.115JB of the Act. More so, in this case there is no exempted income, this provision cannot be applied. This ground of the assessee is allowed. Deduction of interest on service tax and TDS - allowable business expenditure - Held that - Interest on delay in payment of service tax, which is only compensatory nature paid on account of delay in these payments and to be allowed as business expenditure. However, interest paid for delay in payment of TDS cannot be allowed as business expenditure. This ground raised by assessee in its appeal for the assessment year 2011-12 is partly allowed. Disallowance of spill over of additional depreciation u/s. 32(1)(iia) on plant and machinery put into use during the preceding year - disallowance of spill over of additional depreciation u/s. 32(1)(iia) on plant and machinery put into use during the preceding year - Held that - Similar issue was considered by the Karnataka High Court in the case of Rittal India (P.) Ltd. 2015 (1) TMI 1248 - KARNATAKA HIGH COURT as held tribunal has rightly held that additional depreciation allowed under section 32(i)(iia) of the Act is a one time benefit to encourage industrialization, and the provisions related to it have to be construed reasonably, liberally and purposively, to make the provision meaningful while granting additional allowance. We are in full agreement with such observations made by the Tribunal - decided in favour of assessee.
Issues Involved:
1. Downward adjustment in respect of payment of royalty to Associated Enterprises (AEs). 2. Jurisdiction of the TPO to determine the commercial expediency of the assessee. 3. Disallowance under section 14A read with Rule 8D for computing total income and book profits under section 115JB. 4. Deduction of interest on service tax and TDS. 5. Disallowance of spill-over additional depreciation under section 32(1)(iia) on plant and machinery. Detailed Analysis: 1. Downward Adjustment in Respect of Payment of Royalty to Associated Enterprises (AEs): The first issue concerns the downward adjustment of royalty payments made by the assessee to its AEs. The TPO recomputed the Arm's Length Price (ALP) of royalty and proposed a downward adjustment, arguing that no technology is required for certain activities and that royalty payments should not include bought-out components. The TPO also contended that under FEMA provisions, no royalty can be paid on bought-out components. The DRP upheld the TPO's adjustments. The assessee argued that the royalty payments were within the arm's length price, supported by TNMM and CUP methods. The assessee contended that the TPO's methodology was not in accordance with Rule 10B and that the TPO had no jurisdiction to interpret FEMA provisions. The Tribunal agreed with the assessee, stating that the TPO cannot disregard actual transactions or substitute other transactions for them. The Tribunal emphasized that the TPO's role is to determine the ALP using prescribed methods, not to question the commercial expediency of the transactions. 2. Jurisdiction of the TPO to Determine the Commercial Expediency of the Assessee: The Tribunal held that the TPO does not have the jurisdiction to question the commercial expediency of the assessee's transactions. The TPO's role is limited to determining the ALP of international transactions using prescribed methods. The Tribunal cited various judgments, including those of the Delhi High Court and the Supreme Court, to support this view. 3. Disallowance Under Section 14A Read with Rule 8D for Computing Total Income and Book Profits Under Section 115JB: The Tribunal addressed the issue of disallowance under section 14A when no exempt income was earned during the year. The Tribunal cited the jurisdictional High Court's decisions, which held that section 14A cannot be applied if there is no exempt income. The Tribunal also noted that the AO's reliance on Circular 5 of 2014 was annulled by the High Court. Consequently, the Tribunal ruled in favor of the assessee, stating that there cannot be any disallowance under section 14A when no exempt income is earned. 4. Deduction of Interest on Service Tax and TDS: The Tribunal allowed the deduction of interest on delayed payment of service tax, considering it compensatory in nature. However, the Tribunal disallowed the interest on delayed payment of TDS, citing the Supreme Court's judgment in Bharat Commerce & Industries Ltd. v. CIT, which held that such interest is not allowable as a business expenditure. 5. Disallowance of Spill-Over Additional Depreciation Under Section 32(1)(iia) on Plant and Machinery: The Tribunal addressed the issue of additional depreciation on plant and machinery put into use for less than 180 days in the preceding year. The Tribunal cited the Karnataka High Court's decision in Rittal India (P.) Ltd. v. CIT, which held that additional depreciation is a one-time benefit and should be allowed in the subsequent year if not fully utilized in the year of acquisition. The Tribunal ruled in favor of the assessee, allowing the claim of additional depreciation in the subsequent year. Conclusion: The Tribunal ruled in favor of the assessee on several grounds, including the downward adjustment of royalty payments, the jurisdiction of the TPO, and the disallowance under section 14A. The Tribunal allowed the deduction of interest on service tax but disallowed the interest on TDS. The Tribunal also allowed the claim of additional depreciation in the subsequent year. The appeals were partly allowed for statistical purposes.
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