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2012 (6) TMI 286 - AT - Income TaxTransfer pricing - Computing operating-margin (OP) - eimbursement of advertisement expenses - held that - reimbursement of advertisement expenses by the AEs constitutes the OP to be included for the purpose of determining operating margin. Making adjustment to the arm s length price in respect of difference in functions performed, risks undertaken and the assets employed. - ad-hoc adjustment. - held that - deduction by 20% is a reasonably accurate adjustment. Deduction u/s 35DDA - expenditure on Voluntary Retirement Scheme (the VRS) - held that - the assessee has not discharged the burden that all the units constituted only one business. - it has not been proved that the closed business of manufacturing goods was a part and parcel of the overall business of the assessee. - the assessee is entitled to deduction of one-fifth of the expenditure u/s 35DDA as claimed. Legal and professional charges - Capital or revenue expenditure - held that - although the expenditure grants benefit of enduring nature but it does not lead to creation of an asset and, therefore, it should be allowed in five years, as done in the case of the VRS payments. The AO is directed to allow 1/5th of the expenses in this year and balance in next four years in equal installments. Depreciation of assets - closer of the unit - held that - neither the building nor the machinery or plant in Dharuhera unit were owned by the assessee or used by it on account of closure of the unit and transfer of the assets in this year. - the provisions contained in section 32 regarding ownership and user come into play. As the assessee is neither the owner of the assets nor the assets have been used in the business of the assessee, the assessee is not entitled to deduct depreciation. Advertisement and sales promotion expenses. - held that - there is no allegation that any part of the expenditure relates to products in which the assessee is not dealing in the normal course of its business. The expenses by way of advertisement and sales promotion are revenue in nature. Addition on account of deposit of sales-tax under protest Held that - CIT (Appeals) was right in granting relief to the assessee Provision made by the assessee for import duty payable - held that - this is merely a book entry. - the provision should be excluded for working out the OP in the case of the assessee.
Issues Involved:
1. Validity of the orders passed by the AO, TPO, and CIT(A). 2. Addition to total income on account of arm's length price determination for international transactions. 3. Disallowance of expenses under the Voluntary Retirement Scheme (VRS). 4. Disallowance of legal and professional charges related to business restructuring. 5. Claim of higher depreciation on certain assets. 6. Disallowance of depreciation on factory assets. 7. Partial disallowance of advertisement and sales promotion expenses. 8. Reduction of claims under sections 10A and 10B. 9. Deduction of sales-tax deposited under protest. 10. Depreciation on license fees for computer software. 11. Initiation of penalty proceedings under section 271(1)(c). Detailed Analysis: 1. Validity of the Orders Passed by AO, TPO, and CIT(A) - Issue: The assessee challenged the validity of the orders passed by the AO, TPO, and CIT(A), claiming they were bad in law. - Judgment: The Tribunal decided that these grounds would be resolved automatically upon addressing the other specific grounds raised by the assessee. 2. Addition to Total Income on Account of Arm's Length Price Determination - Issue: The addition of Rs. 38,98,79,056/- for import of finished goods based on arm's length price. - Judgment: The Tribunal found that the reimbursement of advertisement expenses by AEs should be included in the operating profit (OP) for determining operating margin, following earlier Tribunal decisions. Notice-pay and penalty received from staff were excluded from OP. Adjustments for differences in functions, risks, and assets were allowed at 20%. The 5% adjustment from the mean value of comparables was deemed unnecessary due to the favorable decision on advertisement expenses. 3. Disallowance of Expenses Under the Voluntary Retirement Scheme (VRS) - Issue: Disallowance of Rs. 6,70,49,994/- on account of VRS expenses. - Judgment: The Tribunal held that the VRS expenses were deductible under section 35DDA, rejecting the CIT(A)'s view that the scheme needed to comply with section 10(10C) and Rule 2BA. The Tribunal also allowed the deduction under section 37(1), considering the expenses were revenue in nature. 4. Disallowance of Legal and Professional Charges Related to Business Restructuring - Issue: Disallowance of Rs. 1,72,07,000/- incurred for legal and professional charges. - Judgment: The Tribunal held that the expenses were capital in nature as they were incurred for closing the manufacturing business. However, it allowed the expenses to be amortized over five years, similar to VRS expenses. 5. Claim of Higher Depreciation on Certain Assets - Issue: Higher depreciation on printers, UPS, and switches by considering them as parts of computers. - Judgment: The Tribunal allowed the claim, directing the AO to allow depreciation at 60% on these items, following the precedent set by the Kolkata Bench of the Tribunal. 6. Disallowance of Depreciation on Factory Assets - Issue: Disallowance of Rs. 4,42,22,475/- on factory assets after the closure of the Dharuhera unit. - Judgment: The Tribunal upheld the disallowance, stating that the assets were neither owned by the assessee nor used for its business. It directed the AO to compute the loss under section 50(2). 7. Partial Disallowance of Advertisement and Sales Promotion Expenses - Issue: Disallowance of 10% of advertisement and sales promotion expenses. - Judgment: The Tribunal deleted the disallowance, holding that the expenses were revenue in nature and incurred in the course of business. It rejected the notion that incidental benefits to the parent company justified the disallowance. 8. Reduction of Claims Under Sections 10A and 10B - Issue: Reduction of claims by Rs. 1,68,970/- and Rs. 90,795/- respectively. - Judgment: The Tribunal dismissed this ground, following its earlier decision against the assessee in similar cases. 9. Deduction of Sales-Tax Deposited Under Protest - Issue: Deduction of Rs. 15,51,403/- deposited as sales-tax under protest. - Judgment: The Tribunal upheld the CIT(A)'s decision to allow the deduction, noting that the payment was made within the prescribed time, and the technicality of not filing a revised return did not prevent the Tribunal from granting relief. 10. Depreciation on License Fees for Computer Software - Issue: Restriction of depreciation on license fees to 25%. - Judgment: The Tribunal upheld the restriction, noting that licenses are classified as intangible assets with a prescribed depreciation rate of 25%. 11. Initiation of Penalty Proceedings Under Section 271(1)(c) - Issue: Appeal against the initiation of penalty proceedings. - Judgment: The Tribunal dismissed this ground, stating that no appeal lies against the mere initiation of penalty proceedings. Conclusion: The appeals of the assessee for both assessment years were partly allowed, while the appeal of the department for assessment year 2005-06 was dismissed. The Tribunal provided detailed reasoning for each issue, adhering to legal precedents and statutory provisions.
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