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2018 (12) TMI 1515 - AT - Income TaxAdjustment made on account of income tax on brand usage royalty - Held that - We find that the application made by the assessee to RBI for brand usage agreement specifically mentions that the royalty to be remitted is net of taxes. Further, the approval was received from the RBI to remit the royalty on brand usage by the assessee @ 1% net of taxes. Considering the brand usage agreement vis- -vis the approval granted by RBI, it can be safely inferred that taxes were liability of J&J India under the terms of agreement. The assessee has entered into a commercial arrangement with J&J US and it has been so arranged that the payment of taxes have to be borne by the assessee being a commercial arrangement, the same should not be questioned while calculating arm s length price. Reliance by the assessee on the decision of the Tribunal in the case of Dresser Rand India Pvt. Ltd. 2012 (10) TMI 127 - ITAT MUMBAI is well founded. Considering the entire facts in totality in the light of the brand usage agreement and the approval of the RBI, the findings of the Ld. CIT(A) is set aside. The AO is directed to delete the addition. Addition on account of unrecorded production - Held that - The special auditor after extensive study of production process did not find any issue against the assessee. Based on the Audit Report, no addition was made in A.Y. 1993-94. Copy of Assessment Order and Audit Report is placed on record. Further, based on the said Audit Report, no addition was made in A.Y. 1993-94. The ld. AR further submits that similar addition was made for A.Y. 2002-03 and the Tribunal on the basis of decision of A.Y. 1991-92 deleted the addition. By following the order of Tribunal, similar issue was decided in favour of assessee by Tribunal in A.Y. 2003-04 & A.Y. 2004-05. Copy of which placed on record. The ld. DR for the Revenue after going through the various as referred by ld. AR not disputed the factual position canvassed by ld. AR of the assessee. MODVAT credit relating to opening stock - Held that - CIT(A) allowed relief to the assessee by following the decision of Hon ble High Court in Mahalaxmi Glass Works 2009 (4) TMI 182 - BOMBAY HIGH COURT which was also followed by his predecessors in A.Y. 2003- 04 & A.Y. 2004-05. Considering the consistent view on the issue which was followed by ld. CIT(A), therefore, we do not find any justification to interfere in his order. Disallowance of depreciation on testing equipment - Held that - As decided in assessee s own case in A.Y. 2000- 01 Depreciation should be allowed on the testing equipment provided to laboratories and hospitals free of charge as the said equipments have been provided to the laboratories and hospitals for making profit from the sale of slides. The learned Departmental Representative did not contravene this position. Respectfully following the Tribunal order passed in another group concern of the assessee, whose facts have not been distinguished by the ld. DR, we uphold the impugned order on this issue. disallowance of 10% of payment made to Crawford Bailey & Co. - addition u/s 40A - Held that - As decided in assessee s own case for A.Y. 2002- 03 AO has disallowed invoking provisions of Sec. 40A(2)(b) on fees paid for legal counseling. We find that the Ld. CIT(A) has deleted the addition holding that for the payments for legal counseling, it is futile to think of comparables because counsels may not charge standard fee but may charge according to the issue involved. The Ld. CIT(A) further observed that if the AO wanted to disallow on the ground of excessive payment, he ought to have established excessiveness of the payment. This has not been done. Considering the decision of the Tribunal in assessee s own case, in the light of the observations made by the Ld. CIT(A), we do not find any reason to interfere with the findings of the Ld. CIT(A).
Issues Involved:
1. Deletion of adjustment on account of income tax on brand usage royalty. 2. Deletion of adjustment on account of service tax paid on brand usage royalty. 3. Deletion of adjustment on account of service tax paid on know-how royalty. 4. Deletion of adjustment on account of payment of royalty on traded finished goods. 5. Allowance of technical know-how royalty payment at 2%/4% instead of 1%. 6. Deletion of adjustment on account of tax, R&D cess on know-how, royalty on traded finished goods, and manufactured products. 7. Deletion of adjustment on account of sales and promotion expenses. 8. Deletion of addition on account of unaccounted production and sale. 9. Direction to grant credit in respect of retained MODVAT credit relating to opening stock. 10. Allowance of depreciation on testing equipment provided to laboratories and hospitals. 11. Deletion of addition on account of payment to M/s Crawford Bailey & Co under Section 40A(2)(b). Detailed Analysis: 1. Income Tax on Brand Usage Royalty: The Tribunal confirmed the deletion of the adjustment made on account of income tax on brand usage royalty, citing the assessee's previous case for AY 2002-03, where it was established that the royalty was net of taxes as per the agreement approved by the RBI. The Tribunal reiterated that the commercial arrangement should not be questioned while calculating the arm's length price. 2. Service Tax on Brand Usage Royalty: The Tribunal upheld the deletion of the adjustment for service tax paid on brand usage royalty, referencing the assessee's case for AY 2006-07. It was noted that the liability of service tax is on the recipient of services, and thus, the adjustment by the TPO was unjustified. 3. Service Tax on Know-How Royalty: Similar to the brand usage royalty, the Tribunal confirmed the deletion of the adjustment for service tax paid on know-how royalty, following the same reasoning and precedent as in the previous years' cases. 4. Royalty on Traded Finished Goods: The Tribunal upheld the deletion of the adjustment on royalty paid on traded finished goods, referencing the assessee's case for AY 2002-03. It was determined that the royalty payments were in line with the agreement and RBI approval, and thus, should not be disallowed. 5. Technical Know-How Royalty Rate: The Tribunal confirmed the allowance of technical know-how royalty payment at 2%/4% instead of 1%, citing the assessee's case for AY 2006-07. The Tribunal found no reason to interfere with the CIT(A)'s findings, which were based on the agreement between the assessee and J&J USA. 6. Tax and R&D Cess on Know-How Royalty: The Tribunal upheld the deletion of the adjustment on account of tax and R&D cess on know-how royalty, following the precedent set in the assessee's case for AY 2002-03. The payments were made in accordance with the agreement and RBI guidelines. 7. Sales and Promotion Expenses: The Tribunal confirmed the deletion of the adjustment on sales and promotion expenses, referencing the assessee's case for AY 2006-07. It was noted that the TPO did not follow any prescribed method under section 92C(1) of the Act, making the adjustment unjustified. 8. Unaccounted Production and Sale: The Tribunal upheld the deletion of the addition on account of unaccounted production and sale, citing the assessee's case for AY 2002-03. It was determined that no evidence of purchase/sales outside the books of account was brought on record. 9. MODVAT Credit Relating to Opening Stock: The Tribunal confirmed the direction to grant credit for retained MODVAT credit relating to opening stock, following the High Court's decision in Mahalaxmi Glass Works Pvt. Ltd. and consistent rulings in the assessee's previous cases. 10. Depreciation on Testing Equipment: The Tribunal upheld the allowance of depreciation on testing equipment provided to laboratories and hospitals, referencing the assessee's case for AY 2001-02 and subsequent years. It was determined that the equipment was used for business purposes, justifying the depreciation claim. 11. Payment to M/s Crawford Bailey & Co: The Tribunal confirmed the deletion of the addition on account of payment to M/s Crawford Bailey & Co under Section 40A(2)(b), citing the assessee's case for AY 2002-03. It was established that the payments were not excessive or unreasonable. Cross Objection: The cross objections raised by the assessee were dismissed as they became infructuous following the dismissal of the revenue's appeal. Conclusion: The Tribunal dismissed the appeal of the Revenue and the cross objection of the assessee, upholding the CIT(A)'s order in favor of the assessee on all grounds.
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