2016 (7) TMI 28 - AT - Income Tax

Transfer pricing adjustment - MAM - Held that - TP provisions were introduced in the Act to prevent the practice of transferring the profit to the AE by adopting certain dubious methods. Naturally, the target should be the transactions with the AE.s and not the all the transactions. The assessee had challenged the exclusion and inclusion of certain comparables. The DRP has not considered any of these basic issues. As stated earlier, it passed a two line order and the order is not assigning any reason for arriving at the conclusion. It is a fact that in the subsequent years the TPO has accepted the internal TNMM for TS also. We are not aware as to what distinguishing factors were there in the later years as compared to the facts of the year under consideration that the TPO had taken a diagonally opposite view. The DRP has not considered this vital issue. We agree that res-judicata is not applicable to the taxation proceedings, but, rule of consistency is very much applicable. Therefore, the DRP should have considered all the above facts and should have passed a reasoned order. In our opinion, matter needs further verification. So, in the interest of justice we are restoring back the matter to the file of the DRP who would decide the issue after hearing the assessee. It may call for comments from the TPO. Disallowance of payment made to clubs - Held that - The action of the AO is highly objectionable and not as per the provisions of the law. The AOs have to follow the directions of the DRP-they had no choice as far as following the directions of the DRP is concerned. They are authorised to challenge the directions before the Tribunal but they cannot refuse to carry out the directions. Therefore, only on this count the appeal of the assessee has to be allowed. But, even on merits the issue is covered in favour of the assessee by several judgements relied upon by the assessee. - Decided in favour of the assessee. Disallowance made u/s. 14A r.w.r.8D - Held that - We find that during the year under consideration the assessee had received dividend income of ₹ 37.51 lakhs, that it explain to the AO that dividend warrants were deposited into bank accounts in a routine manner along with the other checks, that the assessee had sufficient own funds to make investment, that it had made investments in subsidy companies, that on its own it had disallowed and amount of rupees 2.33 lakhs, that the AO had not given any reason as to why the calculation given by the assessee was not acceptable. He had simply applied the formula as envisaged by Rule 8D of the Rules. We are of the opinion that approach of the AO was contrary to the provisions of law.- Decided in favour of the assessee. Disallowance of product trial expenses - Held that - While dealing with the objections filed by the assessee for the a why 2007-08 the DRP had allowed the direction under section 35 of the Act. In our opinion, the test to decide the nature of the expenditure i.e. capital or revenue expenditure the basic thing to be seen is as to whether the expenditure is for running the business of the assessee smoothly. If the expenditure is incurred for day-to-day business activities of the assessee and not for acquiring some asset it has to be allowed as revenue expenditure. In the case before us, it is a fact that no new asset came into existence. Secondly, the expenditure incurred was basically for carrying out the business. Payment to government agencies would not make any expenditure capital/revenue.- Decided in favour of the assessee. Disallowance being computer software expenses - Held that - Expenditure incurred by the assessee on account of software and professional expenses was revenue expenditure - Decided in favour of the assessee. Disallowance of compensation paid by the assessee to Punjab Pesticides Industrial Corporation Society Limited (PPICSL) - Held that - The expenditure was incurred considering the old relation with the PPICSL and to avoid future business complications. If an assessee makes payment which is compensatory nature, it has to be allowed. In the case before us, the payment was made in pursuance of an agreement and that was of compensatory nature i.e.it was not penal. The Hon ble Calcutta High Court upheld the order of the Tribunal. It referred to the case of G Scammell & Nephew Ltd. (1939 (1) TMI 12 - COURT OF APPEAL) wherein it was held that the expenditure incurred for termination of a trading relationship in order to avoid losses occurring in the future through the relationship, whether pecuniary losses or commercial inconveniences, was just as much for the purpose of the trade is the making or the carrying into effect of trading agreement. Disallowance of gift expenses - Held that - We find that the assessee had filed objections before the DRP with regard to proposed addition by the AO. However, the DRP did not adjudicate the issue. Therefore, in the interest of Justice, we are restoring that the matter to the file of the DRP to decide the issue afresh after hearing the assessee Adjustment of opening stock - Held that - In our opinion the basic principle of taxation jurisprudence stipulate that no item can be taxed twice. Considering the fact and circumstance of the case, the AO is directed to make further verification and to allow the adjustment as per the provisions of section 145A of the Act. He is to ensure that assessee does not suffer taxation for the same amount in two different assessment years

Issues Involved:
1. Transfer Pricing Adjustments
2. Disallowance of Payment Made to Clubs
3. Disallowance Under Section 14A
4. Disallowance of Product Trial Expenses
5. Disallowance of Computer Software Expenses
6. Disallowance of Compensation Paid to Punjab Pesticides Industrial Corporation Society Limited (PPICSL)
7. Disallowance of Gift Expenses
8. Adjustment of Opening Stock

Transfer Pricing Adjustments:
The first ground of appeal concerns Transfer Pricing (TP) adjustments of ?2.80 crores. The assessee engaged in various international transactions with its Associated Enterprises (AEs) and used the Transaction Net Margin Method (TNMM) for determining the Arm’s Length Price (ALP). The Transfer Pricing Officer (TPO) rejected the internal TNMM applied by the assessee, citing issues with the allocation of costs and the identity of products. The TPO made adjustments based on external comparables, leading to an addition of ?2.80 crores to the total income. The Dispute Resolution Panel (DRP) upheld the TPO's adjustments without providing detailed reasoning. The Tribunal found that the DRP failed to consider the assessee's arguments and noted the acceptance of internal TNMM in subsequent years. The matter was remanded to the DRP for reconsideration after hearing the assessee.

Disallowance of Payment Made to Clubs:
The second issue involves the disallowance of ?8.58 lakhs paid towards club membership and services. The Assessing Officer (AO) deemed the expenditure as capital in nature, which was contrary to the DRP's direction to allow the expense after verification. The Tribunal found the AO's action objectionable and contrary to the law, emphasizing that the DRP's directions are binding. The Tribunal allowed the assessee's claim, referencing several judgments, including the Supreme Court's decision in United Glass Manufacturing Co Ltd., which recognized club membership fees as business expenses under section 37 of the Income Tax Act.

Disallowance Under Section 14A:
The third issue pertains to the disallowance of ?22.87 lakhs under section 14A read with Rule 8D. The AO proposed the disallowance without providing reasons or objective satisfaction. The DRP granted partial relief, but the AO did not allow the relief in the final order. The Tribunal noted that the assessee had sufficient own funds for investments and had already disallowed ?2.80 lakhs on its own. The Tribunal found the AO's approach contrary to the law and decided the issue in favor of the assessee.

Disallowance of Product Trial Expenses:
The fourth issue concerns the disallowance of ?2.40 crores claimed as product trial expenses. The AO treated the expenses as capital in nature, providing enduring benefit. The DRP upheld this view. The Tribunal, however, found that the expenses were incurred for testing existing products for new uses, which did not result in the creation of a new asset. The Tribunal reversed the AO's decision, treating the expenses as revenue in nature, and allowed the alternative claim under section 35 of the Act.

Disallowance of Computer Software Expenses:
The fifth issue involves the disallowance of ?2.25 lakhs claimed as computer software expenses. The AO treated the expenditure as capital in nature, which was upheld by the DRP. The Tribunal, referencing the Delhi High Court's decision in Asahi India Safety Glasses Ltd., held that software expenses facilitating business operations should be treated as revenue expenditure. The Tribunal allowed the assessee's claim.

Disallowance of Compensation Paid to PPICSL:
The sixth issue pertains to the disallowance of ?2.96 crores paid as compensation to PPICSL. The AO and DRP treated the payment as capital expenditure, generating goodwill. The Tribunal found that the compensation was for non-lifting of agreed quantities of raw material, which was compensatory in nature and incurred for business expediency. The Tribunal allowed the expenditure as revenue in nature.

Disallowance of Gift Expenses:
The seventh issue involves the disallowance of ?22.49 lakhs towards gift expenses. The DRP did not adjudicate the issue. The Tribunal remanded the matter to the DRP for fresh consideration after hearing the assessee.

Adjustment of Opening Stock:
The eighth issue concerns the adjustment of opening stock by ?5.53 crores. The assessee argued that the AO failed to allow consequential adjustments to the value of opening stock, leading to double taxation. The Tribunal directed the AO to verify and allow the adjustment as per section 145A of the Act, ensuring no double taxation.

Other Grounds:
The initiation of penalty proceedings and the levy of interest under section 234D were deemed premature and consequential, respectively. Both grounds were decided accordingly.

Conclusion:
The appeal was partly allowed, with several issues remanded for reconsideration and others decided in favor of the assessee.

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