2022 (8) TMI 1345 - AT - Income Tax

TP adjustment towards royalty payment - international transaction under trading segment - c omparison of margins with the comparable company - margin of the assessee is higher than that of the comparable company - HELD THAT - TPO repeated the same what he has done on earlier occasion without considering the direction of the Tribunal where the Tribunal given a direction that in case comparable is not found in respect of payment of royalty by the assessee then the TPO/AO may consider the royalty payment on part of the international transaction under trading segment and determine the ALP by considering the royalty as part of operating cost for the purpose of computing the margin in the trading segment. A.R. submitted that if it is considered as operating cost then the margin of the assessee is higher than the margin of comparable i.e. M/s. Advance Micronic Devices Ltd - AO has to consider this royalty payment as an operating cost and has to verify whether the margin of assessee is higher than the margin declared by the comparable company i.e. M/s. Advance Micronic Devices Ltd. and decide accordingly. The issue in dispute is set aside to the file of AO/TPO for the limited purpose for comparison of margins with the comparable company and decide accordingly. Addition dealer commission u/s 37 - Whether it was wholly and exclusively incurred for the purpose of business? - HELD THAT - The assessee claimed that it has paid a sum towards commission to dealers and according to the assessee it is wholly and exclusively incurred for the purpose of business. Further assessee submitted the list of payments made to various parties and also furnished the details of deductions of TDS at the time of payment of commission to various dealers. It was also noted that in the case of receipt of this commission by those parties the department has accepted it. However in the hands of assessee it was treated as not incurred by the assessee which is incorrect. Further the books of accounts of the assessee is not rejected by challenging the entries in the books of accounts. On this point also we are of the opinion that the claim of assessee is to be allowed as genuine. Accordingly we allow this ground of appeal taken by the assessee.

Summary

Issues Involved:
1. Validity of the orders passed by the AO, TPO, and DRP.
2. Dispute over the total income and tax computed.
3. Violation of judicial discipline by lower authorities.
4. Non-consideration of details and evidence by authorities.
5. Adjustment towards royalty payment.
6. Use of Advanced Micronic Devices Ltd. as a comparable.
7. Disallowance of commission expenditure to dealers.
8. Adoption of assessed income without discussion.
9. Liability for interest under Sections 234B and 234D of the Act.

Detailed Analysis:

1. Validity of Orders:
The appellant contended that the orders of the AO, TPO, and DRP were against the law, facts, circumstances, natural justice, equity, and jurisdiction. The tribunal did not specifically adjudicate on this general ground, as it was considered broad and encompassing other specific issues.

2. Dispute Over Total Income and Tax Computed:
The appellant disputed the total income and tax computed by the authorities. This issue was linked to the specific adjustments and disallowances contested by the appellant, particularly concerning royalty payments and commission expenditures.

3. Violation of Judicial Discipline:
The appellant argued that the authorities violated the principles of judicial discipline by ignoring binding orders from higher appellate authorities. This claim was intertwined with the specific issues of royalty payments and commission expenditures, where previous tribunal directions were allegedly not followed.

4. Non-Consideration of Details and Evidence:
The appellant claimed that the authorities failed to consider the details, evidence, and information furnished before passing the orders. This was particularly relevant to the issues of royalty payments and commission expenditures, where the tribunal noted that the authorities did not fully adhere to previous directions.

5. Adjustment Towards Royalty Payment:
The appellant challenged the TP adjustment of Rs.1,74,04,730/- and Rs.2,76,52,064/- towards royalty payments for AY 2005-06 and 2006-07, respectively. The tribunal noted that the issue was previously set aside for reconsideration, directing the AO/TPO to determine the ALP by considering royalty as part of the trading segment if no comparable transaction was found. The authorities had again failed to identify a proper comparable, leading the tribunal to set aside the issue once more for proper comparison of margins.

6. Use of Advanced Micronic Devices Ltd. as a Comparable:
The appellant contended that Advanced Micronic Devices Ltd. (AMDL) was not a suitable comparable for royalty transactions as it did not incur any royalty payments. The tribunal agreed, noting that the adoption of the CUP method was not appropriate in the absence of a comparable transaction. The tribunal directed the AO/TPO to consider the royalty payment as part of the operating cost in the trading segment and compare margins accordingly.

7. Disallowance of Commission Expenditure to Dealers:
The appellant disputed the disallowance of Rs.2,42,33,641/- under Section 37 of the Act for commission expenditure to dealers. The tribunal noted that the appellant had provided details of the payments and TDS deductions, and the department had accepted these in the hands of the recipients. The tribunal found the disallowance incorrect and allowed the commission expenditure as genuine business expenses.

8. Adoption of Assessed Income Without Discussion:
The appellant argued that the assessed income of Rs.46,46,73,880/- was adopted without any discussion or reasoning, whereas the AO had previously determined the income at Rs.4,33,24,017/-. The tribunal did not provide a specific ruling on this ground, as it was linked to the resolution of the royalty and commission expenditure issues.

9. Liability for Interest Under Sections 234B and 234D of the Act:
The appellant denied liability for interest under Sections 234B and 234D, arguing that interest should only be levied on returned income and that no opportunity was given before the levy. The tribunal did not specifically adjudicate on this ground, as it was consequential to the resolution of the main issues.

Conclusion:
The tribunal set aside the issues related to royalty payments for both assessment years to the AO/TPO for proper comparison of margins. The disallowance of commission expenditure was overturned, allowing it as a genuine business expense. The appeals were partly allowed for statistical purposes, with directions for the authorities to reconsider the issues in line with the tribunal's findings.