2021 (4) TMI 159 - AT - Income Tax

Admission of additional ground - Education cess - allowable deduction u/s. 37(1) - HELD THAT - Apex court's landmark decision in National Thermal Power Co. Ltd. 1996 (12) TMI 7 - SUPREME COURT as considered the All Cargo Global Logistics Ltd., 2012 (7) TMI 222 - ITAT MUMBAI(SB) holds that this tribunal can very well entertain such legal ground so as to determine correct tax liability of an assessee subject to the condition that all the relevant facts form part of the records. We make it clear that the disallowance of education cess has nowhere been contested at the Revenue's behest on facts. We thus accept the assessee's foregoing petition dt. 25-09-2020 seeking to rase the impugned additional ground in all these assessment years. TP Adjustment - ALP determination - determining the cost of royalty and professional charges - application of 'benefit test' to hold that it is not the assessee, having very much a robust market presence but its overseas AE(s) who actually stood gained and therefore, cost of the twin heads of royalty as well as technical services deserve to be taken as NIL only - whether such a 'benefit test' could be validly invoked in Section 92CA reference or not? - HELD THAT - Case law CIT Vs. Cushman and Wakefield (India) Pvt. Ltd., 2014 (5) TMI 897 - DELHI HIGH COURT and CIT Vs. EKL Appliances Ltd., 2012 (4) TMI 346 - DELHI HIGH COURT hold that the TPO's jurisdiction is to analyse the assessee's international transactions viz-a-viz ALP thereof in the statutory reference made by the Assessing Officer than to ascertain or apply the actual 'benefit stand' on the gains derived there from. Their lordships are of the opinion that in both these contexts that the so called 'benefit test' needs to be satisfied from the view point of the assessee and common business prudence rather than the TPO questioning the taxpayer's wisdom. TPO had adopted two comparables i.e., M/s. Bajoria Foods Pvt. Ltd., and McCain Foods India Pvt. Ltd., which nowhere indicate the fact that the assessment year(s) therein involved first year of introduction of the corresponding products in India. The TPO therefore also appears to have not given any due consideration to the clinching facts in the assessee's arm's length determination in these facts and circumstances. The factual position is no different qua the latter aspect of assessee's payment of technical services as well. The assessee's agreement to this effect suggests that it had agreed to pay for the impugned charges in lies of consultancy services involving all quality control access to overseas facilities regarding peanut butter products, granola bars, snack Bar and other products. Assessing Officer has nowhere applied even a single comparable in his discussion so as to come to in the impugned NIL cost of the assessee's professional/technical services availed. We thus accept the assessee's third and fourth substantive grounds in this lead A.Y. 2010-11 to delete the impugned royalty and technical services payments adjustments respectively. Decided in favour of assessee. Disallowance of advertisement and sales promotion expenditure u/s. 37(1) as the same need to be amortized u/s. 35D - Revenue's stand herein supports the impugned disallowance that all these expenses have been correctly amortized u/s. 35D of the Act being capital in nature thereby enabling the taxpayer to derive business advantage(s) in sales and marketing for the specified number of years - HELD THAT - We find no reason to agree with the Revenue's foregoing stand. We make it clear that learner lower authorities themselves have been fair enough in not rebutting the impugned expenditure claim on facts since they have merely directed the assessee to amortise its advertisement and sales promotion expenses u/s. 35D of the Act. This statutory provision comes into play in case an assessee's expenditure claim is in connection with a new or extension of the undertaking or in setting up a new unit which is not the fact herein the assessee has not opted for any extension set up a new unit as it is sought to be canvassed in the lower authorities' respective orders. We quote hon'ble apex court's landmark decision Taparia Tools Ltd. 2015 (3) TMI 853 - SUPREME COURT in these facts and circumstances that a revenue expenditure claim ought not to be disallowed merely the same could also be amortized as per Revenue's stand. We thus accept the assessee's business expenditure claim in other words. The impugned disallowance is directed to be deleted. Disallowance of Section 234A impugned interest - HELD THAT - We notice that the assessee had filed its return of income on 08-10-2010 in view of the CBDT's press release dt. 28-09-2010 extending time limit u/s. 139(1) of the Act followed by the taxpayer's regular return upto 15-10-2010. This clinching fact has gone un-rebutted from the departmental side. We direct the Assessing Officer to delete the impugned interest amount. Section 234B interest is treated as consequential in nature. Education cess disallowance/addition - Revenue vehemently contended that such a claim is not allowable being a 'tax' u/s. 40(a)(ii) - HELD THAT - Hon'ble Bombay High Court's recent decision in Sesa Goa Ltd., Vs. JCIT 2020 (3) TMI 347 - BOMBAY HIGH COURT and Chambal Fertilisers Chemicals Ltd., 2018 (10) TMI 589 - RAJASTHAN HIGH COURT rely on the CBDT circular dt. 18-05-1967 to hold that the expression 'tax' in the above statutory provision does not include a 'cess'. We thus accept the assessee's instant 10th substantive ground in A.Y. 2010-11. Short credit of TDS deducted - HELD THAT - Issue restored back to the Assessing Officer for his afresh factual verification. Denying Section 32(1) depreciation on the capital expenditure incurred for the purpose of scientific research - HELD THAT - DRP in A.Y. 2013-14 has already accepted an identical claim of depreciation of capital expenditure incurred for the purpose of scientific research. Learned panel herein has disallowed the assessee's Section 37 claim by treating the same as an instance of capital expenditure. All these clinching facts have gone un-rebutted from the Revenue's side. we thus hold that once learned lower authorities have themselves treated the assessee's claim under capital head, it is very much entitled to be considered for the impugned depreciation as per law. The same is therefore accepted for statistical purposes. The Assessing Officer shall decide the corresponding block of assets viz-a-viz assessee's capital expenditure as per law. Additional depreciation u/s. 32(1)(iia) on fixed assets i.e., platform, electrical fittings, packing machine, weighing machine and curtains as per the TPO's draft assessment order dt. 26-12-2007 - HELD THAT - We find no merit in the instant stand since all these assets form very much part of the assessee's food products manufacturing, processing and packing business. Take for instance the curtains which have been put up between vacant places so as to maintain maximum hygiene. Case law CIT Vs. K.K. Enterprises 2015 (2) TMI 508 - RAJASTHAN HIGH COURT and CIT Vs. Parry Engineering and Electrical Pvt. Ltd. 2014 (12) TMI 752 - GUJARAT HIGH COURT hold that such assets form part and parcel of assessee's plant and machinery only. We thus accept the assessee's impugned depreciation claim. Considering returned income going by the revised than the original return's figures - HELD THAT - It prima-facie appears that the assessee had filed its revised return on 14-03-2016 which has not been taken note of in the lower authorities' respective orders. We thus accept the assessee's instant substantive ground for statistical purposes and direct the Assessing Officer to consider the revised computation/return as per law.

Summary

Issues Involved:
1. Validity of the assessment order.
2. Rejection of Transfer Pricing (TP) documentation.
3. Determination of arm's length price (ALP) of royalty and professional fees.
4. Adjustment of reimbursement of expenses.
5. Allowance of expenditure under section 35D.
6. Allowance of advertisement and sales promotion expenses under section 37(1).
7. Levying of interest under sections 234A and 234B.
8. Deduction of education cess.
9. Section 14A disallowance and MAT provisions.
10. Short credit of TDS deducted.
11. Section 35(2AB) and capital expenditure deduction.
12. Depreciation on capital expenditure for scientific research.
13. Refund issue and Section 234D interest.
14. Additional depreciation under section 32(1)(iia).
15. Consideration of revised return figures.

Issue-wise Detailed Analysis:

1. Validity of the Assessment Order:
The assessment order was challenged as bad in law. However, the tribunal did not specifically address this issue in detail, implying no significant deviation from legal standards.

2. Rejection of Transfer Pricing (TP) Documentation:
The appellant argued that the TP documentation was wrongly rejected by the AO. The tribunal noted that the TPO applied a 'benefit test' and compared the appellant's transactions with unrelated entities. However, the tribunal found that the TPO's approach was not in line with judicial precedents, which emphasize the analysis of international transactions from the taxpayer's perspective rather than imposing the TPO's opinion.

3. Determination of Arm's Length Price (ALP) of Royalty and Professional Fees:
The TPO determined the ALP of royalty and professional fees as NIL, stating that the appellant's robust market presence benefited the overseas AE. The tribunal disagreed, citing case law that the TPO should focus on the ALP rather than the benefit derived. The tribunal accepted the appellant's grounds and deleted the adjustments for royalty and professional fees.

4. Adjustment of Reimbursement of Expenses:
The appellant did not press for the issue of reimbursement of expenses adjustment, considering the smallness of the sums involved. The tribunal declined the appellant's substantive grounds on this issue.

5. Allowance of Expenditure under Section 35D:
The appellant argued that the lower authorities erred in not adjudicating the ground on the allowance of expenditure under section 35D. The tribunal did not specifically address this issue, implying no significant deviation from legal standards.

6. Allowance of Advertisement and Sales Promotion Expenses under Section 37(1):
The tribunal found that the lower authorities incorrectly amortized the advertisement and sales promotion expenses under section 35D. The tribunal directed the AO to delete the disallowance and accept the expenditure claim under section 37(1).

7. Levying of Interest under Sections 234A and 234B:
The tribunal directed the AO to delete the interest levied under section 234A, as the appellant filed its return within the extended time limit. The interest under section 234B was treated as consequential.

8. Deduction of Education Cess:
The tribunal accepted the appellant's claim for deduction of education cess, citing judicial precedents that the term 'tax' under section 40(a)(ii) does not include 'cess.'

9. Section 14A Disallowance and MAT Provisions:
The tribunal noted that the appellant did not press for the issue of section 14A disallowance and MAT provisions due to the smallness of the amount involved.

10. Short Credit of TDS Deducted:
The tribunal restored the issue of short credit of TDS deducted to the AO for factual verification.

11. Section 35(2AB) and Capital Expenditure Deduction:
The appellant did not press for the issues regarding section 35(2AB) disallowance and capital expenditure deduction under section 35(iv).

12. Depreciation on Capital Expenditure for Scientific Research:
The tribunal accepted the appellant's claim for depreciation on capital expenditure incurred for scientific research, noting that the lower authorities treated the expenditure as capital in nature.

13. Refund Issue and Section 234D Interest:
The tribunal restored the issue of the alleged refund and section 234D interest to the AO for factual verification.

14. Additional Depreciation under Section 32(1)(iia):
The tribunal accepted the appellant's claim for additional depreciation on fixed assets, stating that such assets form part of the appellant's plant and machinery.

15. Consideration of Revised Return Figures:
The tribunal directed the AO to consider the appellant's revised return figures, which were not taken into account in the lower authorities' orders.

Conclusion:
The tribunal partly allowed the appellant's appeals, providing relief on several grounds, including the deletion of adjustments for royalty and professional fees, allowance of advertisement and sales promotion expenses, deduction of education cess, and additional depreciation claims. The tribunal restored certain issues to the AO for factual verification and directed the AO to consider the revised return figures.