2016 (11) TMI 326 - AT - Income Tax

Use of technical know-how and trademarks is a Revenue expenditure and cannot be treated as a capital expenditure. Therefore, the disallowance after allowing depreciation @ 25% made by the AO is hereby deleted. In the result, this ground of the assessee is allowed. Dsallowance u/s 14A - Held that - As in view of the submissions made by the Ld. AR and the calculations submitted, we restore the issue to the file of the AO with the direction that the disallowance u/s 14A be recomputed after duly considering the correct figures. The AO shall afford a proper opportunity to the assessee of being heard in this issue. In the result, this ground is allowed for statistical purposes.

Issues Involved:
1. Transfer Pricing - Management Consultancy and Business Auxiliary Services
2. Transfer Pricing - Trademark Sub-License Fee
3. Corporate Tax - Royalty & Trademark Sub-License Fee
4. Corporate Tax - Disallowance u/s 14A of the Act
5. Penalty Proceedings u/s 271(1)(c) of the Act
6. Levy of Interest u/s 234B of the Act
7. Levy of Interest u/s 234C of the Act
8. Credit of Tax Deducted at Source

Detailed Analysis:

1. Transfer Pricing - Management Consultancy and Business Auxiliary Services:
The assessee withdrew ground no. 1, which pertained to the determination of the arm’s length price of the international transaction for management consultancy and business auxiliary services. The Addl. Commissioner of Income Tax, Ld. Transfer Pricing Officer (TPO), and Deputy Commissioner of Income Tax (AO) had determined the arm’s length price as Nil against INR 210,653,579 as determined by the assessee. The assessee also argued that the TPO and AO disregarded the Global Service Agreement, Cost Allocation Audit Certificate, and other documentary evidence.

2. Transfer Pricing - Trademark Sub-License Fee:
The assessee also withdrew ground no. 2. Initially, the TPO and AO had determined the arm’s length price of the international transaction for the payment of a license fee as INR 20,698,069 instead of INR 62,094,207, disallowing INR 41,396,138. The assessee later stated that the disallowance was reduced to INR 9,775,821 after MAP proceedings, and thus, this ground was not pressed.

3. Corporate Tax - Royalty & Trademark Sub-License Fee:
3.1 The AO treated the royalty payment of ?16,931,247 as capital in nature, disallowing ?12,698,435 after allowing 25% depreciation. The assessee argued that the royalty was for the use of technical know-how and trademarks, essential for manufacturing and selling CVJs, and should be treated as a revenue expenditure. The ITAT referred to its earlier decision in the assessee’s case for AY 2008-09, where similar payments were treated as revenue expenditure. The ITAT ruled in favor of the assessee, holding that the payment for the use of technical know-how and trademarks is a revenue expenditure, deleting the disallowance of ?12,698,435.

3.2 The AO treated the license fee of ?62,094,207 as capital in nature. The ITAT noted that the disallowance was reduced to ?9,775,821 after MAP proceedings, and the assessee did not contest this disallowance. Hence, this ground was dismissed as not pressed.

4. Corporate Tax - Disallowance u/s 14A of the Act:
The AO disallowed ?1,444,726 u/s 14A read with Rule 8D for expenditure incurred for earning tax-exempt income. The assessee argued that the correct disallowance should be ?2,677. The ITAT restored the issue to the AO for recomputation of the disallowance after considering the correct figures, directing the AO to provide the assessee with a proper opportunity to be heard.

5. Penalty Proceedings u/s 271(1)(c) of the Act:
The assessee stated that the initiation of penalty proceedings u/s 271(1)(c) was either consequential or premature.

6. Levy of Interest u/s 234B of the Act:
The assessee contended that the AO erred in levying interest u/s 234B, but this ground was either consequential or premature.

7. Levy of Interest u/s 234C of the Act:
The assessee argued that the AO erred in charging interest u/s 234C on the assessed income, but this ground was either consequential or premature.

8. Credit of Tax Deducted at Source:
The assessee claimed that the AO erred in not granting full credit of tax deducted at source on the income of the appellant, but this ground was either consequential or premature.

Conclusion:
The appeal was partly allowed. The ITAT ruled in favor of the assessee on the issue of treating royalty payments as revenue expenditure and directed the AO to recompute the disallowance u/s 14A. Other grounds were either withdrawn, not pressed, or deemed consequential/premature. The order was pronounced in the open court on 28.09.2016.

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