2021 (11) TMI 570 - AT - Income Tax

TP Adjustment - payment of export commission on payment of royalty on export to associated enterprises - HELD THAT - As respectfully following the decision of the coordinate bench in assessee s own case for assessment year 2015 16 2021 (5) TMI 949 - ITAT DELHI we allow ground number 5 of the appeal and thereby direct the learned transfer pricing officer/learned assessing officer to delete the adjustment on account of the arm s-length price of the export commission payment Disallowance of expenditure of signage - HELD THAT - As respectfully following the decision of the coordinate bench in assessee s own case 2021 (5) TMI 949 - ITAT DELHI we also hold that signage expenditure is revenue in nature. Accordingly the disallowance is deleted and ground number 7 of the appeal of the assessee is allowed. Disallowance of the sales tool expenses - HELD THAT - As respectfully following the decision of the coordinate bench in assessee s own case for assessment year 2015 16 2021 (5) TMI 949 - ITAT DELHI we also hold that sales tool expenditure are revenue expenditure in nature and therefore the disallowance made by the learned assessing officer is directed to be deleted. Accordingly, ground number 8 of the appeal is allowed Sales tool expenditure are revenue expenditure in nature and therefore the disallowance is directed to be deleted. Accordingly, ground number 8 of the appeal is allowed. Capitalization of the royalty expenses - HELD THAT - Assessee was already engaged in the manufacturing of motorcycle and Scooter and payment of royalty expenses was not with respect to setting up of manufacturing facility. Therefore we also allow ground of the appeal of the assessee and direct the learned AO to delete the addition on account of capitalisation of royalty expenses holding it to be revenue in nature. Deduction/expenditure in respect of primary educational cess and higher and secondary education cess paid - HELD THAT - All the arguments has allowed the claim of the assessee - we direct the ld AO to allow assessee the deduction of cess u/s 37 (1) of the act. Accordingly, additional ground of appeal is allowed.

Issues Involved:
1. Transfer Pricing Adjustments
2. Disallowance of Signage Expenditure
3. Disallowance of Sales Tool Expenditure
4. Capitalization of Royalty Expenditure
5. Claim of Deduction of Technical Know-How Expenses
6. Consequential Grounds (Penalty Proceedings and Interest Levy)
7. Additional Ground (Deduction of Education Cess)

Detailed Analysis:

1. Transfer Pricing Adjustments:
The primary issue involved the transfer pricing adjustments on payments of export commission and royalty to associated enterprises (AEs). The assessee argued that the Transfer Pricing Officer (TPO) and Dispute Resolution Panel (DRP) erred in determining the Arm’s Length Price (ALP) of these transactions at NIL, rejecting the transfer pricing methodology and the principles of commercial expediency applied by the assessee.

The Tribunal referred to its earlier decision in the assessee’s own case for AY 2015-16, where it was held that the TPO/DRP had failed to appreciate the functional profile of the assessee and the intrinsic link of these transactions with the main activity of manufacturing and sale of products. The Tribunal reiterated that the export commission and royalty payments were justified and should not be benchmarked separately. The Tribunal directed the deletion of the adjustments made by the TPO, thereby allowing the assessee's appeal on these grounds.

2. Disallowance of Signage Expenditure:
The issue was whether the expenditure on signage should be treated as capital or revenue in nature. The assessee argued that these expenses were for sales promotion and did not result in any enduring benefit.

The Tribunal, following its earlier decision for AY 2015-16, held that the signage expenditure was revenue in nature. The Tribunal noted that the signage was fixed at dealers’ premises and did not satisfy the test of ownership with the assessee. Therefore, the disallowance by the AO was deleted, and the appeal was allowed in favor of the assessee.

3. Disallowance of Sales Tool Expenditure:
The assessee incurred expenses on sales tools provided to dealers to ensure uniformity in advertising and maintaining high standards across showrooms. The AO disallowed these expenses, stating there was no obligation to incur them.

The Tribunal, referring to its decision for AY 2015-16, held that the sales tool expenses were revenue in nature and allowable under Section 37(1) of the Act. The Tribunal noted that these expenses were incurred wholly and exclusively for the business purpose of the assessee. Consequently, the disallowance was deleted, and the appeal was allowed.

4. Capitalization of Royalty Expenditure:
The AO treated 25% of the running royalty expenditure as capital in nature, arguing it resulted in an enduring benefit. The assessee contended that the royalty was for upgradation of technology and linked to the trading activity.

The Tribunal, following its earlier decision for AY 2015-16, held that the royalty payments were revenue in nature. The Tribunal distinguished the facts from a Supreme Court decision cited by the Revenue, which related to setting up a new manufacturing facility. The Tribunal directed the deletion of the addition made by the AO, allowing the appeal in favor of the assessee.

5. Claim of Deduction of Technical Know-How Expenses:
The assessee claimed deduction of expenses related to technical know-how, which was disallowed by the AO.

The Tribunal, referring to its earlier decisions, held that the expenses on technical know-how were allowable as revenue expenditure. The Tribunal directed the AO to allow the deduction, thus allowing the appeal on this ground.

6. Consequential Grounds (Penalty Proceedings and Interest Levy):
The appeal included grounds related to the initiation of penalty proceedings under Section 271(1)(c) and the levy of interest under Sections 234B and 234C.

Given the Tribunal’s decisions on the substantive issues, these consequential grounds became infructuous and were dismissed.

7. Additional Ground (Deduction of Education Cess):
The assessee raised an additional ground claiming deduction of education cess as an allowable expenditure.

The Tribunal admitted the additional ground, noting that it involved a legal issue that could be raised at any time. The Tribunal referred to decisions of the Bombay High Court and Rajasthan High Court, which held that education cess is not part of income tax and is allowable as a deduction. Following these precedents, the Tribunal directed the AO to allow the deduction of education cess, thereby allowing the additional ground.

Conclusion:
The Tribunal allowed the appeal of the assessee on multiple grounds, directing the deletion of various disallowances and adjustments made by the AO and TPO. The appeal was partly allowed, and the stay application became infructuous.

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