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2021 (9) TMI 635 - AT - Income TaxTP Adjustment - payment of royalty - TPO determined the ALP of the royalty payment at 3% of the sales by taking it as appropriate benchmark - HELD THAT - Admittedly, the royalty was paid @ 5% of domestic sales and 8% of the export sales in consideration of receipt of technology in the form of know-how, technical training and technical assistance for the purpose of manufacturing the compressors. TPO determined the ALP of the royalty payment at 3% of the sales by taking it as appropriate benchmark. TPO adopted this benchmark considering the transaction of payment of royalty by it s A.E. i.e., Wuxi Atlas Copco Compressor Co Ltd., which is undisputedly controlled transactions, and the difference between two and the actual price was suggested as TP adjustment u/s 92CA of the Act without even going into the issue whether the approval of payment of RBI will constitute a CUP method or not. The present issue can be decided in favour of the assessee by holding that comparison in order to determine if the ALP cannot be done by comparing the prices charged to by A.E. which is controlled transaction, as the provisions of I.T. Act, mandates that the determination of ALP has to be done by comparison between controlled and un-controlled transactions. An identical issue has been dealt in the case of PCIT Vs. Audco India Limited 2019 (5) TMI 694 - BOMBAY HIGH COURT on identical facts had confirmed the decision of Tribunal by dismissing the appeal filed by the Revenue by holding that TPO has to arrive at ALP of the transaction only comparing it with uncontrolled transactions and the Hon'ble High Court had found fault with the approach of the TPO by holding that it is contrary to the clear provisions of the Act as per Rule 10A(d) of the Rules. ALP adjustment on account of receipt of commission for Marketing Services - main contention of the appellant is that the functions undertaken by the assessee for selling the product is significantly different from what is undertaken for the purpose of earning the commission income from A.E and profit earned from independent activity of marketing function cannot be compared with the integrated marketing function of a fully integrated manufacturer - HELD THAT - TPO was not justified in excluding the depreciation and cost of the material consumed in denominator of total costs. Further, we find that the methodology adopted by the TPO does not fall into any of the appropriate methods prescribed under Rule 10(b) of the I.T. Rules, 1962. We must also mention that clause (f) of clause (1) of Rule 10(b) prescribing any other method was inserted with retrospective effect from 01.04.2013 is not applicable for the year under consideration. Therefore, the ratio of the jurisdictional Bombay High Court in the case of CIT Vs. Kodak India (P) Ltd. 2016 (7) TMI 677 - BOMBAY HIGH COURT is applicable in the present set of facts. When the TPO had not adopted any of methods prescribed u/s 92CA of the I.T. Act, no adjustment on account of ALP can be made by TPO. Therefore, the order of the ld.CIT(A) though does not contain independent reasoning, keeping in view of the order of the Tribunal for earlier years on identical issue in assessee s own case on the principle of consistency and ratio of decision of Hon ble Bombay High Court in the case of CIT Vs. Kodak India (P) Ltd. (supra), we uphold the order of ld.CIT(A). Addition on account of Software Development Expenses - CIT(A) deleted the addition by holding that there is no customized software. Mere up-gradation of the software does not result in any enduring benefit when the life of software is less than two years - HELD THAT - From details on record, it is evident that the expenditure was paid to M/s Radix Business Models Pvt. Ltd., in order to upgrade the application software on contract basis for Lotus Notes Developer. The Hon'ble High Court in the case of CIT Vs. Geoffrey Manners Co., Ltd. . 2014 (6) TMI 958 - BOMBAY HIGH COURT that in view of the rapid advancement in the recent technology, it cannot be said that there is any enduring benefit to the assessee. Since the decision of the ld.CIT(A) is in line with the decision of jurisdictional High Court, we do not find any reason to interfere with the decision of ld.CIT(A). Accordingly, ground No.3 of the Revenue stands dismissed. Nature of expenses - expenditure incurred on the renovation of lease premises - HELD THAT - As in view of the above legal position, the expenditure incurred on rented premises cannot be treated as revenue in view of the plain provisions of Explanation 1 to Sec.32 of the Act. CIT(A) is in total ignorance of the provisions of Explanation 1 of Sec.32 of the Act held it to be revenue in nature. The decision relied upon by the learned counsel has no application after insertion of Explanation 1 of Sec.32 of the Act. In the above circumstances, we reverse the order of ld.CIT(A) and restore the issue in this ground to the file of Assessing Officer. Thus, this ground of the Revenue is allowed for statistical purposes. Addition of miscellaneous expenses - assessee could not produce supporting documents, details, vouchers - HELD THAT - During the course of assessment proceedings, the respondent / assessee company could not furnish the evidence, bills, vouchers etc to the extent of ₹ 2,59,407/- out of the total Miscellaneous Expenditure. On appeal before ld.CIT(A), ld.CIT(A) restricted the disallowance to ₹ 1,00,000/- which is in accordance with the decision of his order in assessee s own case for the earlier assessment years. On the principle of consistency, we uphold the order of ld.CIT(A). Accordingly, this ground of appeal stands dismissed. Allowance of commission expenditure - HELD THAT - CIT(A) following the decision of his order in assessee s own case in earlier years has deleted the addition. From the material on record, it is clear that the respondent / assessee had discharged the onus cast upon it by filing the primary details. Mere inability to furnish the confirmation letters from the recipients cannot be the reason to disallow the commission expenditure without causing any further enquiries by the Assessing Officer as to the genuineness or otherwise of the expenditure. Admittedly, there is no material on record exhibiting the non-genuineness of the expenditure. Hence, respectfully following the decisions of this Tribunal and Hon ble Bombay High Court in respondent / assessee s own case, we hold that ld.CIT(A) is justified in deleting the commission expenditure and accordingly, this ground of appeal is dismissed.
Issues Involved:
1. Benchmarking of International Transactions 2. Adjustment on Account of Sales Commission 3. Allowance of Software Expenses 4. Allowance of Repair and Maintenance Expenditures 5. Restriction of Miscellaneous Expenditure Addition 6. Allowance of Commission Expenses Detailed Analysis: 1. Benchmarking of International Transactions: The primary issue was whether the CIT(A) was justified in holding that only a completely uncontrolled transaction can be used for benchmarking. The CIT(A) deleted the TP adjustment on account of royalty payment by following his order in the assessee’s own case for earlier assessment years, holding that the methodology adopted by the TPO in comparing controlled transactions was flawed. The Tribunal upheld this decision, stating that ALP determination must be done by comparing controlled and uncontrolled transactions, as mandated by the I.T. Act and supported by the Bombay High Court in the case of PCIT Vs. Audco India Limited. 2. Adjustment on Account of Sales Commission: The CIT(A) deleted the addition on ALP adjustment for receipt of sales commission, following his decision in the assessee’s own case for earlier years. The Tribunal agreed, noting that the TPO's exclusion of material costs and depreciation from total costs was unjustified. The Tribunal cited its earlier decision in the assessee's case and the Bombay High Court's ruling in CIT Vs. Kodak India (P) Ltd., which held that ALP adjustments must follow prescribed methods under Section 92C of the Act. 3. Allowance of Software Expenses: The CIT(A) allowed software expenses of ?1,26,000/- as revenue expenditure, relying on decisions from various High Courts. The Tribunal upheld this decision, agreeing that the expenditure on software upgradation does not result in enduring benefit and is thus revenue in nature, in line with the Bombay High Court's ruling in CIT Vs. Geoffrey Manners & Co., Ltd. 4. Allowance of Repair and Maintenance Expenditures: The CIT(A) allowed expenditure incurred on repair and maintenance of ?96,776/-, stating no new asset was created and no enduring benefit accrued. However, the Tribunal reversed this decision, holding that such expenditures on rented premises are capital in nature under Explanation 1 to Section 32 of the Act, as supported by the Madras High Court in CIT Vs. ETA Travel Agency Pvt. Ltd. and CIT Vs. Viswams. 5. Restriction of Miscellaneous Expenditure Addition: The CIT(A) restricted the disallowance of miscellaneous expenditure from ?2,59,407/- to ?1,00,000/-, following his order in the assessee’s own case for earlier years. The Tribunal upheld this restriction on the principle of consistency, despite the lack of supporting documents for the full amount. 6. Allowance of Commission Expenses: The CIT(A) deleted the addition of ?39,60,335/- on account of commission expenses, following his earlier decision. The Tribunal upheld this deletion, noting that the assessee had provided primary details like names, addresses, invoices, and payments, and the mere absence of confirmation letters from recipients did not justify disallowance. The Tribunal cited its earlier decisions and the Bombay High Court's ruling in the assessee’s favor. Conclusion: The Tribunal upheld the CIT(A)'s decisions on most issues, emphasizing the necessity of comparing controlled and uncontrolled transactions for ALP determination, the revenue nature of software expenses, and the need for consistency in adjudicating miscellaneous expenditure. However, it reversed the CIT(A)'s decision on repair and maintenance expenditures, classifying them as capital in nature under Explanation 1 to Section 32 of the Act. The appeal was partly allowed for statistical purposes.
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