2019 (5) TMI 678 - AT - Income Tax

Disallowance of sales tax component of the bad debts written off - allowable as business loss under Section 28 or not? - HELD THAT - As decided in assessee's own case the sales tax component of the debts written off, was allowable as business loss u/s 28 of the Act being in the nature of loss incidental to business. Ground No. 1 is accordingly dismissed. Disallowance u/s 14A read with Rule 8D(2)(ii) - disallowance of interest with reference investment in shares of the subsidiary - HELD THAT - As in assessee's own case 2016 (10) TMI 1258 - ITAT KOLKATA CIT-A found that the assessee invested only in its wholly owned subsidiary DIC Coating India Limited which was acquired in 1997 in terms of the scheme approved by the Hon ble High Court of Calcutta. Undisputedly, the Revenue did not carry the first appellate order for A.Y. 2005-06 in appeal to the higher forums having jurisdiction. Therefore, we find no infirmity in the order impugned before us and the said order passed by the CIT-A is justified in deleting the disallowance of interest made on account of borrowed funds Addition of travelling expenses reimbursed to the assessee s parent company, M/s DIC Corporation, Japan - HELD THAT - Once the assessee established business connection with the visits undertaken by the executives of the foreign parent then the conditions prescribed u/s 37(1) for allowing deduction for expenditure were fulfilled. In such case it was not open for the AO to decide whether or not incurring of such expenditure was necessary for the assessee s business. All that the assessee was required to show was that the expenditure was incurred or laid out wholly and exclusively for its business purposes. On the facts of the present case we find that the assessee had established that the expenditure was incurred for it s business purposes and therefore the Ld. CIT(A) was justified in allowing the relief to the assessee. Ground No. 3 is therefore dismissed. Additional depreciation disallowed - addition on the ground that the depreciation did not pertain to plant machinery but in respect of furniture fixtures - HELD THAT - Tribunal in its order 2019 (2) TMI 1619 - ITAT KOLKATA directed the AO to follow the directions of DRP and pass a speaking order. The Ld. AR for the assessee pointed out that in the order u/s 254 the AO accepted the assessee s contention that the electrical installations were installed at factory premises and these were not in the nature of furniture fixtures but formed part of plant machinery block qualifying for depreciation @ 15% and also additional depreciation u/s 32(1)(iia) of the Act. Since the factual matrix of the assessee scase during the year is found to be same and the Ld. DR was unable to controvert the findings of the Ld. CIT(A) which were recorded after going through the specifications of the electrical installations; we do not find any reason to interfere with the order of the Ld. CIT(A). This ground is therefore dismissed. Transfer pricing adjustment - international transactions with AEs involving payment of royalty, purchase of material export of finished goods - payments made pursuant to the cost contribution agreements - HELD THAT - Rates at which the royalty was paid was pursuant to the agreement approved by the Dept. of Industrial Policy Promotion, Ministry of Commerce Industry. Such rates were also within the rates prescribed by SIA FIPB in respect of the technical collaboration agreements between residents of India and the nonresidents under the automatic route i.e. 5% 8% in respect of domestic sales export sales respectively. In view of the foregoing facts we hold that the rate of royalty adopted by the assessee for making royalty payments were within the prescribed parameters and therefore at arm s length. In the circumstances therefore we do not find any infirmity in the Ld. CIT(A) s order in granting relief. In this regard, we find support from the decision of the coordinate Bench of this Tribunal in the case of ACIT Vs Dow Agrosciences India Pvt Ltd 2016 (12) TMI 936 - ITAT MUMBAI . Also see M/S. OWENS CORNING INDUSTRIES (INDIA) PVT. LTD. 2014 (10) TMI 651 - ITAT HYDERABAD We uphold the Ld. CIT(A) s order deleting the downward adjustment made by the TPO in respect of royalty payments Adjustment made by the TPO in respect of international transactions involving purchase/sale of materials/goods - HELD THAT - AR of the assessee very fairly conceded at the beginning that foreign exchange gain could not be considered to be forming part of the operating income in the given set of facts. We therefore direct the AO to re-work the PLI of the tested party i.e. the assessee company, being OP/OR after excluding the foreign exchange gain. Ground No. 5(iii)(a) of the Revenue s appeal therefore stand allowed. Comparability analysis - grounds of the Revenue is that the CIT(A) had undertaken exact product comparability instead of a broader product comparability which is otherwise permitted under the TNMM - HELD THAT - We do not see any merit in the Ld. DR s submission that the entire issue should be restored to the file of TPO for consideration afresh because the Ld. DR could not pin point any glaring factual mistake or legal infirmity in the Ld. CIT(A) s findings nor any fresh material was brought to our attention on the basis of which we could be persuaded to hold that the entire issue needs to be de novo examined by the TPO. However from the facts as discussed above, it is evident that the Ld. CIT(A) himself adopted broader product comparability criteria and not exact product comparability by adopting the broader segment of specialty chemicals as opposed to only printing inks. The Ld. DR could not controvert this fact.We therefore do not find any in-principle merit in the grievance raised by the Revenue. Application of TNMM - Asessee is engaged in the business of manufacture of printing inks, which by itself is a major industry segment in which several companies are engaged. In the circumstances ideally for application of TNMM; the industry specific data pertaining to printing inks industry alone should have been taken into consideration (since sufficient and reliable data was available) as was rightly done by the TPO in his initial SCN. No infirmity in the Ld. CIT(A) s order wherein he rejected the comparables identified by the TPO which were functionally not similar. The approach of the Ld. CIT(A) in considering companies found to be functionally comparable under the broad segment of specialty chemicals cannot be faulted with.

Summary

Issues Involved:
1. Disallowance of sales tax component of bad debts written off.
2. Interest disallowance under Section 14A read with Rule 8D(2)(ii).
3. Disallowance of travelling expenses reimbursed to the parent company.
4. Disallowance of additional depreciation on electrical installations.
5. Transfer pricing adjustments regarding royalty payments and transactions involving purchase and sale of materials/goods.

Issue-wise Detailed Analysis:

1. Disallowance of Sales Tax Component of Bad Debts Written Off:
The Revenue appealed against the disallowance of the sales tax component of bad debts written off amounting to ?11,11,054/-. The Tribunal upheld the CIT(A)’s order, referencing the previous year’s decision, which allowed the sales tax component as a business loss under Section 28 of the Income Tax Act, being incidental to business. The Tribunal directed the claim to be allowed, dismissing Ground No. 1.

2. Interest Disallowance Under Section 14A Read with Rule 8D(2)(ii):
The Revenue objected to the relief allowed by the CIT(A) regarding interest disallowance of ?14,37,394/- under Section 14A read with Rule 8D(2)(ii). The Tribunal noted that the investment in shares was made from the sale consideration of a business undertaking, not borrowed funds. The Tribunal upheld the CIT(A)’s decision, referencing earlier years where similar disallowances were deleted, and dismissed Ground No. 2.

3. Disallowance of Travelling Expenses Reimbursed to the Parent Company:
The Revenue contested the relief allowed by the CIT(A) for travelling expenses of ?16,44,313/- reimbursed to the parent company, DIC Corporation, Japan. The Tribunal found that the expenses were incurred for business purposes, promoting the assessee’s business interests, and were reported in Form 3CEB. The Tribunal upheld the CIT(A)’s order, emphasizing that business expenditure under Section 37(1) should be viewed from a businessman’s perspective, not the tax authority’s. Ground No. 3 was dismissed.

4. Disallowance of Additional Depreciation on Electrical Installations:
The Revenue appealed against the relief allowed by the CIT(A) for additional depreciation of ?39,65,345/-. The Tribunal noted that the electrical installations were integral to the plant and machinery, used within the factory premises, and should be classified under ‘plant & machinery’ for depreciation purposes. The Tribunal upheld the CIT(A)’s decision, referencing earlier years where similar disallowances were deleted. Ground No. 4 was dismissed.

5. Transfer Pricing Adjustments:
- Royalty Payments: The Revenue challenged the CIT(A)’s decision to uphold the CUP Method for benchmarking royalty payments. The Tribunal noted that the royalty rates were within the prescribed parameters of SIA & FIPB and were consistent with past assessments. The Tribunal upheld the CIT(A)’s decision, emphasizing judicial consistency and the arm’s length nature of the transactions. Ground Nos. 5(i) & 5(ii) were dismissed.
- Purchase/Sale of Materials/Goods: The Revenue contested the CIT(A)’s decision on the broader product comparability criteria and inclusion of foreign exchange gains in operating income. The Tribunal directed the exclusion of foreign exchange gains from operating income for computing PLI but upheld the CIT(A)’s broader product comparability approach. The Tribunal found no merit in the Revenue’s argument for a de novo examination by the TPO. Ground No. 5(iii)(a) was allowed, while Ground Nos. 5(iii)(b) & 5(iii)(c) were dismissed.

Conclusion:
The Tribunal partly allowed the Revenue’s appeals, directing specific adjustments but largely upholding the CIT(A)’s decisions on disallowances and transfer pricing adjustments. The Tribunal emphasized judicial consistency, proper classification of business expenses, and appropriate benchmarking methods in transfer pricing.