2018 (5) TMI 147 - AT - Income Tax

Disallowance of prior-period royalty payments - Use of trademark pursuant to license agreement - assessee has not claimed the same in AY 2004-05 but claimed the same as prior period items in AY 2005-06 which has been denied by the revenue on the premise that the same had already crystallized in AY 2004-05 - Held that - The payment pertains to AY 2004-05 and the liability had already crystallized in that AY only and therefore, the assessee, following mercantile system of accounting, was eligible to claim the same in AY 2004-05 only. The tax neutrality plea raised before us by Ld. AR could not be accepted since there was no justifiable reason which prevented the assessee to claim the same or make provision thereof in AY 2004-05. Therefore, in our opinion, the deduction thereof has rightly been denied to the assessee in the impugned AY. However, as a logical consequence, since the expenditure is a legitimate claim of the assessee and the assessee was entitled to claim the same in AY 2004-05, Ld. AO is directed to verify and consider the claim of the assessee for AY 2004-05. Technically, the grounds stands dismissed, however, the assessee shall get consequential relief in AY 2004-05. Adjustment of interest on Income Tax demand with interest on Income Tax refund received by the assessee - Held that - The claim of the assessee has been allowed on the premise that between two persons, there could only be one account and therefore, the benefit of netting was available to the assessee. See DIT Vs. Bank of America NT & SA 2014 (12) TMI 551 - BOMBAY HIGH COURT Disallowance u/s 14A - Held that - The bare perusal of the financials of the assessee reveal that Shareholders funds of more than ₹ 500 crores far exceeds the meager investment of ₹ 9.37 crore made by the assessee. Further the opening investments stood at ₹ 8.91 crores which demonstrate that fresh investment were marginal in the impugned AY and therefore, interest disallowance, in our opinion, is not justified. The expenses disallowance is estimated at 5% of exempt income earned by the assessee. AO is directed to re-compute the same Provision of leave encashment - Held that - The same was initially suo-moto disallowed by the assessee u/s 43B(f) in computation of income but later on claimed during assessment proceedings in view of the judgment of Hon ble Calcutta High Court rendered in Exide Industries Ltd. Vs. UOI & Ors. 2007 (6) TMI 175 - CALCUTTA High Court . The same has been denied by the lower authorities since the revenue s appeal against the same was pending before Hon ble Apex Court and the Hon ble Court, by way of interim order, stayed the operation of the cited judgment of the Hon ble Calcutta High Court. Both the representative converged on the point that suitable directions may be given to the lower authorities to apply the ruling whenever rendered by Hon ble Apex Court in the aforesaid matter. Thus Isuue restored back TP adjustment on account of Sale of finished goods - MAM - CUP Method or TNMM - Held that - AR submission that the adjustment are primarily related with sale made by assessee to its AE situated at Hong Kong and therefore, the CUP rates for Hong Kong only should be compared to work out the said disallowance as against average rates of various countries taken by Ld. TPO is acceptable. We hereby reduce the impugned TP adjustment to ₹ 43,620/- as per the computations placed before us. This ground stands partly allowed. It is agreed between the representatives that this approach shall remain valid only for this impugned AY and would not be applicable in any other AY.

Issues Involved:
1. Prior Period Expenditure
2. Interest on Income Tax Refund
3. Disallowance u/s 14A
4. Provision for Leave Encashment
5. Transfer Pricing Adjustment
6. General in Nature

Detailed Analysis:

1. Prior Period Expenditure:
The assessee contested the disallowance of prior-period royalty payments of ?57.27 Lacs paid to Fujiwasa Pharmaceuticals Co. Ltd., Japan. The payment pertained to sales made in March 2004, with royalty payable within 60 days from the end of the quarter. The assessee claimed the expenditure in AY 2005-06 instead of AY 2004-05. The Tribunal found that the liability had crystallized in AY 2004-05, and the assessee, following the mercantile system of accounting, should have claimed it in that year. The deduction for AY 2005-06 was rightly denied, but the AO was directed to verify and consider the claim for AY 2004-05.

2. Interest on Income Tax Refund:
The assessee received ?3.01 Crores as interest on Income Tax refunds and paid ?99.11 Lacs as interest on Income Tax demand, offering the net interest to tax. The AO denied the netting-off, stating no nexus between the interest paid and received, supported by the Pune Tribunal's order in Sandvik Asia. The Tribunal, referencing the Bombay High Court's judgment in DIT Vs. Bank of America NT & SA and past Tribunal decisions, allowed the netting-off, stating that between two persons, there could only be one account, and thus, the net interest should be taxed.

3. Disallowance u/s 14A:
The AO disallowed ?7.10 Lacs under Rule 8D, comprising interest disallowance and expense disallowance, as the assessee earned tax-free income of ?14.33 Lacs. The Tribunal noted that the assessee's own funds far exceeded the investments, and fresh investments were marginal. Hence, interest disallowance was unjustified. The expense disallowance was estimated at 5% of exempt income, and the AO was directed to re-compute accordingly.

4. Provision for Leave Encashment:
The assessee claimed a provision for leave encashment of ?79.55 Lacs, initially disallowed u/s 43B(f) but later claimed based on the Calcutta High Court's judgment in Exide Industries Ltd. The lower authorities denied the claim as the revenue's appeal was pending before the Supreme Court, which had stayed the Calcutta High Court's judgment. The Tribunal restored the issue to the AO to apply the Supreme Court's ruling once rendered, directing the AO to compute tax as if Section 43B(f) was in force.

5. Transfer Pricing Adjustment:
The TP adjustment against the purchase of raw material was not pressed due to the small amount involved. The adjustment of ?8 Lacs on the sale of finished goods to AEs in Thailand and Hong Kong was challenged. The Tribunal accepted the assessee's contention that only Hong Kong CUP rates should be compared, reducing the TP adjustment to ?43,620/-.

6. General in Nature:
Ground Numbers 11 & 12 were general and disposed of in terms of the above order.

Conclusion:
The assessee's appeal was partly allowed, with specific directions and adjustments made for each issue. The order was pronounced in the open court on 27th April 2018.

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