2014 (6) TMI 363 - AT - Income Tax

Determination of Arm s Length Price - Royalty payment to AEs Held that - Following ACIT Cir. 5(1), New Delhi Versus M/s. Kehin Panalfa Ltd. 2014 (6) TMI 317 - ITAT DELHI - the royalty was being paid from 1997 and was continuously examined by the AO, then in the absence of any new facts to hold that there was no need to pay the royalty was uncalled for - Decided in favour of Assessee. Disallowance of contribution to Group Gratuity Fund Held that - Following Commissioner of Income Tax vs. Textool Co. Ltd. 2009 (9) TMI 66 - SUPREME COURT - from a bare reading of section 36(1)(v), it is manifest that the real intention behind the provision is that the employer should not have any control over the funds of the irrevocable trust created exclusively for the benefit of the employees - the assessee had absolutely no control over the fund created by the LIC for the benefit of the employees of the assessee and further all the contribution made by the assessee in the said fund ultimately came back to the assessee s employees gratuity fund, approved by the Commissioner - the conditions stipulated in section 36(1)(v) stood satisfied - assessee had made the payment to the LIC and the payments were made before the filing of the Income Tax Return thus, the claim of the assessee is allowable Decided in favour of Assessee. Accordingly, we set aside the order of the AO and decide the issue in favor of the assessee. Difference in the balance of one of the parties Held that - The AO has not given any opportunity to the assessee to file the reconciliation and the reconciliation filed before the DRP was not examined thus, the matter is required to be remitted back to the AO for adjudication Decided in favour of Assessee. Disallowance u/s 43B of the Act - Unutilised Modvat Credit Outstanding at the end of the year Held that - Following Eicher Motors Ltd. vs. Union of India 1999 (1) TMI 34 - SUPREME COURT OF INDIA - the set off of excise duty against Modvat credit available to the assessee is to be treated as payment of excise duty at the time of set off the amount of excise duty adjusted against the Modvat available before the due date of filing of income tax return has to be treated as payment made u/s. 43B and the same is allowable thus, the matter is remitted back to the AO for examination of adjustments Decided in favour of Assessee. Addition u/s 40A(2)(a) of the Act Held that - As decided in assessee s own case for the earlier assessment year, it has been held that there was no excessiveness or unreasonableness regarding this expenditure - AO has not brought any cogent material on record to come to a conclusion that this expenditure is excessive or unreasonable Decided in favour of Assessee.

Summary

Issues:
1. Determination of Arm's Length Price (ALP) of royalty payment to AEs.
2. Disallowance of contribution to Group Gratuity Fund.
3. Addition on account of alleged difference in the balance of a party.
4. Disallowance of unutilized Modvat Credit Outstanding.
5. Addition under section 40A(2) of the I.T. Act.

Analysis:

1. Arm's Length Price (ALP) of Royalty Payment:
The issue revolved around the determination of ALP of royalty payment to AEs. The Tribunal referred to past judgments in the assessee's own case for the years 2004-05 and 2005-06, where it was held that the necessity of royalty payment cannot be questioned. Citing the case of Lumax Industries Ltd., the Tribunal concluded that since the royalty payments were consistently made and examined by the AO, there was no basis to dispute the need for such payments. Consequently, the Tribunal decided the issue in favor of the assessee.

2. Disallowance of Contribution to Group Gratuity Fund:
Regarding the disallowance of contribution to Group Gratuity Fund, the Tribunal noted that similar claims were allowed by the DRP in a previous year and were in line with the decision in the case of Commissioner of Income Tax vs. Textool Co. Ltd. The Tribunal held that the conditions stipulated in the relevant section were satisfied, and thus, the claim of the assessee was deemed allowable based on precedent.

3. Alleged Difference in Balance of a Party:
The issue of addition due to an alleged difference in the balance of a party was raised for one of the assessment years. The AO had added a specific amount to the income of the assessee without providing an opportunity to reconcile the difference. The Tribunal found this approach flawed and remitted the issue back to the AO, directing a proper examination of the reconciliation submitted by the assessee.

4. Disallowance of Unutilized Modvat Credit Outstanding:
The disallowance of unutilized Modvat Credit Outstanding was challenged by the assessee, citing various judgments to support their claim that the amount had been paid or adjusted before the due date of filing the income tax return. The Tribunal agreed with the assessee's argument, remitting the issue to the AO for examination based on the decision of the Hon'ble Apex Court and other relevant case laws.

5. Addition under Section 40A(2) of the I.T. Act:
The issue of addition under section 40A(2) of the I.T. Act was raised, challenging the AO's decision. The Tribunal referred to past judgments in the assessee's own case for previous years and found no infirmity in the expenses incurred. Following the precedent, the Tribunal decided the issue in favor of the assessee, setting aside the AO's order.

In conclusion, all three appeals filed by the Assessee were allowed for statistical purposes, with the Tribunal providing detailed analyses and referencing relevant legal precedents to support its decisions.