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2022 (11) TMI 363 - AT - Income TaxTP Adjustment - transaction of payment of royalty - HELD THAT - As in not in dispute that Sony Corp has invested significant amount and efforts in developing, manufacturing intangibles and for which it should be suitably remunerated and since the assessee has received license to use these value intangibles during the course of its operations in India, the assessee was duty bound to pay royalty for the simple reason that Sony Corp would not allow any third party to use its intangible properties created through large amount of investment without receiving any sort of consideration. It is also not in dispute that the assessee has licensed technology and trade mark from Sony Corp and further licensed them to OEMs and the OEMs manufacture these goods based on technology sub licensed by the assessee and sells them back to the assessee for which the assessee pays royalty at an agreed percentage of net selling price and this payment of royalty by the assessee instead of OEMs is due to commercial necessity and payment of royalty transaction is already bench marked under TNMM. Considering the facts of the case in totality, we do not find any merit in the TP adjustment in respect of transaction of payment of royalty and accordingly direct the Assessing Officer to delete the adjustment - This ground with all its sub-grounds is allowed and accordingly, grievances raised vide Ground Nos. 1 to 40.6 become otiose. TP adjustment in respect of transaction of provision of Advisory Services - We find force in the concession made by the ld. counsel for the assessee and the ld. DR. We find that the DRP has, in fact, summarily rejected the contentions/objections of the assessee without giving any detailed findings on facts. Therefore, we restore this issue to the file of the DRP. The DRP is directed to decide the objections raised by the assessee by a detailed and speaking order after affording reasonable and adequate opportunity of being heard to the assessee. Accordingly, Ground Nos. 41 and 42 with all its subgrounds are allowed for statistical purposes. TP adjustment in respect of outstanding receivables - We find that the objections of the assessee have been suitably addressed by the DRP by extending credit period from 30 days to 60 days, netting off payables and charging of interest of net receivables and acceptance of LIBOR instead of SBI base rate. We, therefore, do not find any reason to interfere with the findings of the DRP. AO is directed to follow the directions of the DRP in letter and spirit and apply LIBOR rate without any further addition. Grounds Nos. 43 to 46 are accordingly decided as per our above directions. Disallowance of stock valuation loss - As we have to state that the observations/comments by the Assessing Officer on application of Accounting Standard 2 is without any merits and, in fact, uncalled for. Secondly, it is an undisputed fact that the assessee has been consistently following the same method of valuation of closing stock which was cost or net realizable value, whichever is lower. Thus we direct the Assessing Officer to delete the impugned addition/disallowance. Disallowance of expenses on corporate social responsibility u/s 115JB of the Act by treating it as apportion of profits - None of the clauses above provides that CSR expenses have to be added to book profit. Except for the wild imagination of the Assessing Officer by no stretch of imagination, it can be said expenditure on CSR expenses is a transfer to/from reserve. Hon'ble Apex Court in Apollo Tyers 2002 (5) TMI 5 - SUPREME COURT have clearly laid down that the AO or assessee, none can tinker with book profit disclosed in audited account. It is not the case that the accounts have not been prepared as per accepted accounting principle. Once the accounts have been prepared in accordance with standards in this regard, this tinkering by the Assessing Officer has no sanction of law. We have no hesitation in setting aside the addition to book profit in this regard. MAT computation u/s 115JB - As provision for warrantee is an ascertained liability, therefore, we direct the Assessing Officer to consider it as an allowable deduction in computing the book profit u/s 115JB. Non grant of deduction u/s 80G - We direct the Assessing Officer to consider the same as per the provisions of law. The assessee is directed to furnish necessary evidences in support of its claim and the Assessing Officer is directed to examine the same and decide the issue after affording reasonable and adequate opportunity of being heard to the assessee. This issue is allowed for statistical purposes.
Issues Involved:
1. Transfer Pricing adjustment in respect of transaction of payment of royalty. 2. Transfer Pricing adjustment in respect of transaction of provision of advisory services. 3. Transfer Pricing adjustment in respect of outstanding receivables. 4. Disallowance of stock valuation loss. 5. Disallowance of expenditure on corporate social responsibility u/s 115JB of the Act. 6. Disallowance of royalty expenses by holding that the assessee had no liability to pay such royalty. 7. Disallowance of provision for warranty. 8. Non-grant of deduction u/s 80G of the Act. Issue-wise Detailed Analysis: 1. Transfer Pricing Adjustment in Respect of Transaction of Payment of Royalty: The assessee, a distributor of Sony products, paid royalty to its AE, which was disallowed by the TPO. The TPO argued that the products manufactured by CTTL under license from Sony Corp did not justify the royalty payment. The DRP upheld this view. The Tribunal, however, found that the TPO erred in his assessment, noting that the agreements did not license technology to MBIL and CTTL but only set out terms for transactions. The Tribunal emphasized that the TPO's role is to determine the ALP, not to question the commercial expediency of royalty payments. The Tribunal directed the deletion of the adjustment of Rs. 146,989,634/-. 2. Transfer Pricing Adjustment in Respect of Transaction of Provision of Advisory Services: The TPO rejected the comparables selected by the assessee for benchmarking advisory services, leading to an adjustment. The DRP summarily dismissed the objections raised by the assessee. The Tribunal found that the DRP did not provide detailed findings and restored the issue to the DRP for a detailed and speaking order after affording the assessee an opportunity to be heard. 3. Transfer Pricing Adjustment in Respect of Outstanding Receivables: The TPO treated receivables outstanding for more than 30 days as unsecured loans and applied the PLR for benchmarking. The DRP extended the credit period to 60 days, netted off payables, and directed the use of LIBOR instead of the SBI base rate. The Tribunal upheld the DRP's directions and instructed the Assessing Officer to apply the LIBOR rate without further additions. 4. Disallowance of Stock Valuation Loss: The Assessing Officer disallowed the stock valuation loss, arguing that the goods were still in the assessee's possession. The Tribunal found the Assessing Officer's comments on Accounting Standard - 2 to be without merit and noted that the assessee consistently followed the same valuation method. Citing the Supreme Court's decision in Woodward Governor India [P] Ltd, the Tribunal directed the deletion of the disallowance. 5. Disallowance of Expenditure on Corporate Social Responsibility u/s 115JB of the Act: The Assessing Officer added CSR expenses to book profit, treating them as a transfer to reserves. The Tribunal, following the decision in GE Power System India Pvt Ltd, found no provision in section 115JB for adding CSR expenses to book profit and directed the deletion of the addition. 6. Disallowance of Royalty Expenses by Holding that the Assessee had No Liability to Pay Such Royalty: This issue was addressed in the first issue regarding the payment of royalty. The Tribunal's detailed discussion in that context rendered these grounds otiose. 7. Disallowance of Provision for Warranty: The Assessing Officer disallowed a portion of the provision for warranty, arguing that it was not created on a scientific basis. The Tribunal, citing the Delhi High Court's decision in the assessee's own case, held that the provision for warranty is an allowable deduction and directed the deletion of the disallowance. The Tribunal also directed the Assessing Officer to consider it as an allowable deduction in computing book profit u/s 115JB. 8. Non-Grant of Deduction u/s 80G of the Act: The assessee claimed a deduction u/s 80G, which was not granted. The Tribunal directed the Assessing Officer to examine the claim as per the provisions of law, allowing the issue for statistical purposes. Conclusion: The appeal was allowed in part for statistical purposes, with several disallowances and adjustments being deleted or remanded for further consideration.
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