2019 (12) TMI 1628 - AT - Income Tax

TP Adjustment - Addition in respect of technical know-how fees - international transaction was benchmarked by using TNMM as the most appropriate method - HELD THAT - We noted that the above issue has already been considered by Tribunal in assessee s own case 2019 (11) TMI 705 - ITAT MUMBAI and there is no distinguishable facts rather facts are exactly identical and the same agreement i.e. consultancy agreement dated 16.03.2008 was under consideration by virtue of which the assessee has made payment of technical know-how fee to its AE or group concerns Merck KGAA. In view of the above we direct the AO to delete this addition. This issue of assessee s appeal is allowed. Disallowance of expenses relatable to exempt income u/s 14A read with Rule 8D(2)(ii) and under Rule 8D(2)(iii) - HELD THAT - Assessee stated that the assessee has earned dividend income of Rs.86, 979/- and disallowance more than this cannot be made in view of the decision of the Hon ble Delhi High Court in the case of Joint Investment Pvt. Ltd. 2015 (3) TMI 155 - DELHI HIGH COURT wherein it is held that the window for disallowance was indicated in section 14A of the Act and was only to the extent of disallowing expenditure incurred by the assessee in relation to the exempt income. This proportion or portion of the exempt income surely cannot swallow the entire amount. In view of the above Delhi High Court decision the learned Counsel for the assessee fairly conceded that the disallowance under Rule 8D(2) can be retained only to Rs. 86, 979/- to the extent of dividend income. As the issue is covered by Hon ble Delhi High Court (supra) respectfully following the said decision we direct the AO to restrict the disallowance of expenses qua the exempt income at Rs.86, 979/-. We direct the AO accordingly. This issue of assessee s appeal is partly allowed. Disallowing depreciation in respect of intangible assets purchased by the assessee - HELD THAT - This issue is also covered by Tribunals decision in assessee s own case wherein the same set off of intangible assets purchased was under consideration and Tribunal 2017 (1) TMI 1692 - ITAT MUMBAI opined that in the interest of justice matter should be restored back to the file of the FAA for fresh adjudication. He is directed to decide the issue afresh after affording a reasonable opportunity of hearing to the assessee. AO disallowing the merger expenses and allowing only 20% of the total amount - HELD THAT - We remit this issue to the file of the AO/ DRP for re-adjudication the same. This issue of assessee s appeal allowed for statistical purposes.

Summary

Issues Involved:
1. Addition in respect of technical know-how fees.
2. Disallowance of expenses related to exempt income under section 14A.
3. Disallowance of depreciation on intangible assets.
4. Non-granting of deduction under section 145A.
5. Disallowance of merger expenses.

Issue-wise Detailed Analysis:

1. Addition in respect of technical know-how fees:
The first issue concerns the addition of Rs. 1,26,84,500/- for technical know-how fees paid by the assessee to its AE, Merck KGAA. The assessee used the Transactional Net Margin Method (TNMM) to benchmark this transaction. The Assessing Officer (AO) and the Dispute Resolution Panel (DRP) rejected this method, concluding that the services provided were general in nature and did not benefit the assessee. The DRP directed the Transfer Pricing Officer (TPO) to adjust the amount to nil. The Tribunal, however, found that similar issues were previously decided in favor of the assessee by the ITAT in the case of Merck Limited for the same assessment year. The Tribunal held that the services were indeed rendered and the payment was justified. Therefore, the addition of Rs. 1,26,84,500/- was deleted.

2. Disallowance of expenses related to exempt income under section 14A:
The second issue involves the disallowance of Rs. 47,38,638/- under section 14A read with Rule 8D. The assessee argued that the disallowance should not exceed the exempt income earned, which was Rs. 86,979/-. The Tribunal agreed, citing the Delhi High Court's decision in Joint Investment Pvt. Ltd. vs. CIT, which states that disallowance should not exceed the exempt income. Consequently, the Tribunal directed the AO to restrict the disallowance to Rs. 86,979/-.

3. Disallowance of depreciation on intangible assets:
The third issue is the disallowance of depreciation amounting to Rs. 6,93,16,406/- on intangible assets purchased from Merck Limited. The Tribunal noted that this issue was previously remitted back to the DRP for fresh adjudication. The Tribunal directed the DRP to re-examine the matter, considering the valuation reports and the specifics of the intangible assets in question.

4. Non-granting of deduction under section 145A:
The fourth issue pertains to the non-granting of a deduction of Rs. 53,30,473/- under section 145A. The assessee did not press this ground, and the Tribunal dismissed it as not pressed.

5. Disallowance of merger expenses:
The fifth issue involves the disallowance of Rs. 3,20,840/- out of total merger expenses of Rs. 4,01,050/-. The Tribunal remitted this issue back to the AO/DRP for re-adjudication, as the AO had not gone into the details.

Conclusion:
The Tribunal allowed the appeal of the assessee partly, directing the deletion of the addition for technical know-how fees, restricting the disallowance under section 14A to the amount of exempt income, and remitting the issues concerning depreciation on intangible assets and merger expenses back to the AO/DRP for fresh consideration. The ground related to the deduction under section 145A was dismissed as not pressed.