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2022 (10) TMI 26 - AT - Income TaxTP Adjustment - Adjustment made in the international transaction of Payment of Royalty for use of technology - HELD THAT - There is no difference in technology supplied by Cummins Inc. which is used for manufacturing the products meant for sale in domestic market and foreign market. On domestic sales the assessee paid Royalty which is 0.89%; and on export sales the assessee paid Royalty which is 6.13%. Whereas, the view point of the TPO is that the assessee paid royalty on goods meant for sale to its AEs at higher rates so as to reduce its income and the consequential tax incidence in India and accordingly segregated the royalty on domestic sale and exports for separate benchmarking, AR has pitched for aggregating both to be processed as a single transaction for the ALP determination. AR submitted that this issue was also raised before the DRP through objection no.3. On a perusal of the directions of the DRP, it is seen that the assessee did take up this issue by means of objection no.3 as has been mentioned at page 29 of the Direction. The assessee also tendered its explanation in support of the objection. Though the DRP decided the larger issue and upheld the TPO s view in segregating the Royalty transaction from the others in the overall Manufacturing segment, but inadvertently omitted to adjudicate the issue of segregation of domestic sale-based and export-based royalty payment raised through objection no. 3. We are of the considered opinion that the ends of justice would meet adequately if the impugned order on this specific issue is set-aside and the matter is restored to the file of the DRP for limited purpose of disposing of the assessee s objection no.3. Needless to say, the assessee will be allowed reasonable opportunity of hearing in such fresh proceedings. Disallowance of expenses u/s.14A - HELD THAT - As observed that similar issue came up for consideration before the Tribunal in the assessee s appeal for the A.Y. 2013-14. A copy of the order has been placed - Relevant discussion has been made at page 8 onwards of the order and eventually the matter has been restored to the file of the AO for deciding it in conformity with the decision taken by the Tribunal in the assessee s own case for the A.Y. 2013-14. As the facts are admittedly similar, respectfully following the precedent, we set-aside the impugned order on this score and remit the matter to the file of the AO for deciding it in conformity with the directions given by the Tribunal in its order for the A.Y. 2012-13. Disallowance of additional depreciation - HELD THAT - As seen that this issue also came up for consideration before the Tribunal in the case of the assessee for the A.Y. 2013-14. Relevant discussion has been made at page 12 of the order. The Tribunal has followed its own order for the A.Y. 2012-13 in allowing the assessee s claim in respect of such additional depreciation. As the facts and circumstances are mutatis mutandis similar, respectfully following the precedent, we allow this ground of appeal. Capital gain - Addition u/s.50C - provisions of section 50C should not be applied for making addition on account of difference between the stamp value and the declared full value of consideration, the assessee requested for a reference to the DVO - HELD THAT - A difference between the full value of consideration declared by the assessee and the stamp value of the land sold by the assessee. Section 50C, in such circumstances, contemplates that such difference should be brought to tax - an option has been given to assessee to seek the valuation of the property from the DVO. The assessee did exercise this option and the DVO determined the valuation of the land, leading to addition of Rs.3.50 crore. It is seen that the objections raised by the assessee before the DVO, though considered by the DVO, but remained to be adjudicated by the DRP. It goes without saying that the DVO s report is not sacrosanct inasmuch as it is open to adjudication by the higher authorities. If the assessee convinces the higher authorities that the DVO erred in correctly valuing the property, the valuation can be suitably adjusted. Turning to the facts of the instant case, it is seen that though the assessee raised objections before the DRP about certain deficiencies/inconsistencies in the DVO s report, but the same were not adjudicated by the DRP. It would be meet the ends of justice if the impugned order on this count is set-aside and the matter is restored to the file of the DRP for disposing of the assessee s objections against the DVO s report. Needless to say, a reasonable opportunity of hearing will be accorded to the assessee. Disallowance of deduction on Education Cess and Secondary higher education cess has to fail in view of the statutory amendment carried out to section 40(a) with retrospective effect covering the year under consideration - AR was fair enough to accept this position. This ground is, therefore, not allowed.
Issues Involved:
1. Transfer Pricing Adjustment on Payment of Royalty for Use of Technology. 2. Disallowance of Expenses under Section 14A of the Income Tax Act. 3. Disallowance of Additional Depreciation in Subsequent Year. 4. Addition under Section 50C of the Income Tax Act. 5. Disallowance of Deduction on Education Cess and Secondary Higher Education Cess. 6. Initiation of Penalty Proceedings. Detailed Analysis: 1. Transfer Pricing Adjustment on Payment of Royalty for Use of Technology: The primary issue involves a transfer pricing adjustment of Rs. 30.28 crore related to the international transaction of 'Payment of Royalty for use of technology.' The assessee, an Indian company, paid Rs. 62.76 crore to its foreign-based Associated Enterprise (AE), Cummins Inc., for the use of technology. The assessee benchmarked this transaction under the overall "Manufacturing Segment" using the Transactional Net Margin Method (TNMM). However, the Transfer Pricing Officer (TPO) rejected this aggregation approach, noting significant variations in royalty rates for domestic (1% to 5%) and export sales (8%). The TPO determined the Arm's Length Price (ALP) for the royalty payment on export sales separately, leading to the adjustment. The Tribunal upheld the TPO's segregation of the royalty payment from other transactions, citing that cross-subsidization of international transactions is impermissible. The Tribunal referenced the Hon'ble Punjab & Haryana High Court's decision in Knorr Bremse India (P) Ltd. Vs. ACIT, emphasizing that unrelated international transactions should not be combined for ALP determination. The Tribunal also noted a similar stance in Magneti Marelli Powertrain India Pvt. Ltd. vs. DCIT, where the segregation of technical fees from other transactions was upheld. Consequently, the Tribunal supported the TPO's decision to benchmark the royalty payment separately. 2. Disallowance of Expenses under Section 14A of the Income Tax Act: The assessee challenged the disallowance of Rs. 1,00,93,000/- under Section 14A of the Act. The AO applied Rule 8D(2)(iii) to compute the disallowance at 0.50% of the average value of investments, leading to an additional disallowance over the assessee's suo motu offer. The Tribunal referred to its previous decision for the A.Y. 2013-14, where a similar issue was remitted to the AO for reconsideration. Following this precedent, the Tribunal set aside the impugned order and remitted the matter to the AO for a fresh decision in line with the Tribunal's directions for the A.Y. 2012-13. 3. Disallowance of Additional Depreciation in Subsequent Year: The assessee claimed additional depreciation of Rs. 78.54 lakh for plant and machinery acquired in the preceding year but used for less than 180 days. The AO disallowed this claim, relying on the second proviso to Section 32(1). The Tribunal noted that this issue had been previously decided in favor of the assessee for the A.Y. 2013-14, following its order for the A.Y. 2012-13. Consequently, the Tribunal allowed the assessee's claim for additional depreciation. 4. Addition under Section 50C of the Income Tax Act: The AO made an addition of Rs. 3.50 crore under Section 50C, based on the difference between the declared sale consideration and the stamp value of land sold by the assessee. The assessee requested a reference to the DVO, whose report led to the addition. The Tribunal observed that the DRP had not adjudicated the assessee's objections to the DVO's report. Therefore, the Tribunal set aside the impugned order and remitted the matter to the DRP to address the assessee's objections, ensuring a reasonable opportunity for hearing. 5. Disallowance of Deduction on Education Cess and Secondary Higher Education Cess: The Tribunal dismissed the assessee's ground on this issue, acknowledging the statutory amendment to Section 40(a) with retrospective effect, which disallows such deductions. 6. Initiation of Penalty Proceedings: The Tribunal dismissed this ground as premature. Conclusion: The appeal was partly allowed, with specific issues remitted for reconsideration and others decided based on precedents and statutory amendments. The Tribunal's order emphasized adherence to legal principles and judicial precedents in transfer pricing and other tax-related matters.
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