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2014 (1) TMI 78 - AT - Income TaxTP adjustment in respect of royalty paid by the assessee-company to its associate enterprises Held that - The strange method followed by the TPO to make a TP adjustment in respect of royalty payment is not sustainable in law - She has neither rejected the method followed by the assessee to bench-mark the transaction in respect of payment of royalty nor has been adopted any recognized method to determine the ALP of the said transactions - The approval of SIA adopted by the TPO as basis to make TP adjustment in respect of royalty payment was untenable - As per the said basis, the net sales of the assessee after excluding export sale and other income and the royalty paid thereon were less than the rate of 3.5% approved by SIA, there was no case of any excess payment made of royalty by assessee than approved by SIA to justify its disallowance by way of TP adjustment - The ld. CIT (A) could not appreciate these infirmities in the order of the TPO Decided in favour of assessee. Arm s length price in respect of COE-3 related expenses Held that - Following assessee s own case for A.Y. 2002-03 - It is incumbent upon the TPO to work out the ALP of the relevant transactions by following some authorized method and the entire cost borne by the assessee cannot be disallowed by taking the ALP at Nil, keeping in view the facts and circumstances of the case and the relevant details furnished by the assessee - The exercise of ascertaining ALPs has to be done by the TPO keeping in view the well laid down scheme in the relevant provisions of the Act The issue was restored for fresh adjudication. TP adjustment in respect of sharing of cost advertising campaign Held that - The total cost of David Beckham advertising campaign was clearly stated by the assessee in its submissions made before the TPO as 25,00,000/- and its share in the said cost was stated to be USD 2 lakhs - The basis of this cost allocation has not been explained by the assessee by producing relevant documentary evidence either before the authorities below or before the Tribunal - The share was agreed after due negotiation considering the benefits of the campaign - The onus in this regard is on the assessee to produce the relevant documentary evidence to support and substantiate the said claim - It is also incumbent upon the TPO to work out the ALP of the relevant transactions following some specified method on the basis of details and documents available on record - The entire cost borne by the assessee cannot be disallowed by simply taking the ALP at NIL The issue was restored for fresh adjudication. Deduction u/s 80IB Held that - Following assessee s own case for A.Y. 2002-03 - The provisions of section 80IB are code by themselves as they contain both substantive as well as procedural provisions. The word derived from is narrower in connotation as compared to the words attributable to . By using the expression derived from Parliament intended to cover sources not beyond the first degree. The assessee has claimed deduction u/s 80IB in respect of receipts which are incidental to the business and so beyond the first degree - The disallowance on account of assessee s claim for deduction u/s 80IB in respect of first four items of other income is confirmed - The disallowance to in respect of income from insurance claim is deleted Partly allowed in favour of assessee. Proportionate management expenses Held that - Following CIT vs. Central Bank of India 2003 (4) TMI 49 - BOMBAY High Court - Deduction u/s 80M is allowable on net dividend arrived at after taking into account actual expenditure incurred for the purposes of earning such dividend and not the estimated proportionate expenditure The issue was restored for fresh adjudication. Travel expenses of spouse of employees Held that - Following assessee s own case for A.Y. 1997-98 The expenses are disallowed Decided against assessee. Depreciation at higher rate of 80% - Held that - The copy of certificate of the engineer of vendor is not sufficient to allow the claim of assessee at higher rate of 80% - The assessee has failed to furnish the product catalogue and certificate from the competent authorities to establish the nature and use of the asset to show that it is energy saving device eligible for depreciation at higher rate of 80% - The assessee has also not produced any evidence in support of its alternative claim of depreciation at the rate of 60% applicable to computer systems - Decided against assessee. Advertisement expenses Held that - Following assessee s own case for A.Y. 2001-02 - The advertisement expenses were treated as capital expenditure Decided against Revenue.
Issues Involved:
1. Transfer Pricing (TP) adjustments on royalty payments. 2. Disallowance of COE-3 related expenses. 3. TP adjustments on David Beckham advertising campaign expenses. 4. Addition on account of bad debts recovered under Section 41(1). 5. Addition on account of MODVAT credit. 6. Deduction under Section 80IB for various incomes. 7. Disallowance of management expenses related to dividend income. 8. Disallowance of bad debts. 9. Disallowance of travel expenses for employees' spouses. 10. Disallowance of depreciation on assets of Silvassa Unit. 11. Higher depreciation claim on energy-saving devices. 12. Deduction under Section 35(1)(iv) for capital expenditure on computers. 13. Disallowance of advertisement expenses as capital expenditure. Detailed Analysis: 1. TP Adjustments on Royalty Payments: The assessee's appeal on TP adjustments for royalty payments was allowed. The Tribunal found that the TPO's method of disallowing royalty payments for exports and other income was unsustainable. The TPO did not reject the comparables selected by the assessee nor provided new comparables. The Tribunal concluded that the royalty paid was within the approved rate by SIA and deleted the addition. 2. Disallowance of COE-3 Related Expenses: The Tribunal restored the issue of disallowance of COE-3 related expenses to the AO/TPO for fresh consideration. It noted that the TPO had arbitrarily taken the ALP of these transactions at nil without proper evaluation. The Tribunal directed the AO/TPO to follow the authorized method to ascertain the ALP and make adjustments accordingly. 3. TP Adjustments on David Beckham Advertising Campaign Expenses: The Tribunal restored this issue to the AO/TPO for fresh evaluation. It noted the absence of detailed documentation and the basis of cost allocation for the advertising campaign. The Tribunal instructed the AO/TPO to determine the ALP using specified methods and make adjustments only after proper examination. 4. Addition on Account of Bad Debts Recovered under Section 41(1): This ground was dismissed as it was not pressed by the assessee during the hearing. 5. Addition on Account of MODVAT Credit: The Tribunal restored this issue to the AO for fresh consideration. It directed the AO to adjust the value of opening stock, sales, and purchases in accordance with Section 145A, following the Tribunal's order for A.Y. 2001-02. 6. Deduction under Section 80IB for Various Incomes: The Tribunal upheld the disallowance of the assessee's claim for deduction under Section 80IB for other income related to Silvassa, interest received, miscellaneous income, and reversal of doubtful debts. However, it allowed the deduction for income from insurance claims, following the Tribunal's order for A.Y. 2002-03. 7. Disallowance of Management Expenses Related to Dividend Income: The Tribunal restored this issue to the AO for fresh consideration. It directed the AO to determine the actual expenditure incurred for earning dividend income, following the Bombay High Court's decision in CIT vs. Central Bank of India. 8. Disallowance of Bad Debts: The Tribunal allowed the assessee's claim for bad debts written off, following the Supreme Court's decision in TRF Ltd. 9. Disallowance of Travel Expenses for Employees' Spouses: The Tribunal confirmed the disallowance of travel expenses for employees' spouses, following its own orders in the assessee's case for earlier years. 10. Disallowance of Depreciation on Assets of Silvassa Unit: The Tribunal dismissed the assessee's appeal on this issue, following its own order and the Bombay High Court's decision in Scope Industries Pvt. Ltd. 11. Higher Depreciation Claim on Energy-Saving Devices: The Tribunal dismissed the assessee's claim for higher depreciation on energy-saving devices due to insufficient evidence. It upheld the normal depreciation rate of 25%. 12. Deduction under Section 35(1)(iv) for Capital Expenditure on Computers: The Tribunal upheld the CIT(A)'s order allowing the assessee's claim for deduction under Section 35(1)(iv) for capital expenditure on computers, following its own orders in the assessee's case for earlier years. 13. Disallowance of Advertisement Expenses as Capital Expenditure: The Tribunal upheld the CIT(A)'s order deleting the disallowance of advertisement expenses treated as capital expenditure by the AO, following its own orders in the assessee's case for earlier years. Conclusion: The Tribunal provided a detailed analysis and directions for each issue, ensuring adherence to legal principles and precedents. The appeals of the assessee were partly allowed, while the appeals of the Revenue were dismissed.
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