2017 (4) TMI 1193 - AT - Income Tax

Transfer pricing adjustment - brand promotion by the assessee for its foreign parent company - whether the benefit accruing to the HMC Korea, as a result of increased brand value due to sale of Hyundai cars in India by the assessee company, constitutes an international transaction? - Held that - In the present case since no services are performed, the discussion about benefit of the services is academic. We have referred to the above discussions in the OECD Guidelines just to highlight the fact that even in situations in which benefit test is specifically set out in the definition of international transaction, the determination of arm s length price of a service has two components- first, of rendition of service; and- second, of benefit accruing from such services. When the first condition is not satisfied, as in the present case, the matter rests there, and there is no question of benchmarking the benefit in isolation. In our considered view, an incidental benefit accruing to an AE, therefore, cannot be benchmarked unless it is result of a specific service by the assessee. An accretion in the brand valuation of a brand owned by the AE does not result in profit, losses, income or assets of the assessee company, and it cannot, therefore, result in an international transaction qua the assessee. Unless the transaction is such that it affects profits, losses, income or assets of both the enterprises, it cannot be an international transaction between these two enterprises. If the assets of one of the enterprises are increased unilaterally, without any active contribution thereto by the other enterprise, such an impact on assets cannot, in our humble understanding, amount to an international transaction. The accretion in brand value of the AE s brand name is not on account of costs incurred by the assessee, or even by its conscious efforts, and it does not result in impact on income, expenditure, losses or assets of the assessee company. It is not, therefore, covered by the residuary component of definition of international transaction either. As for the emphasis placed by the learned Departmental Representative, as also by the authorities below, on the exhaustive definition of intangibles in Explanation to Section 92B, we may only reiterate that this definition would have been relevant only in the event of there being any transaction in the nature of sale, purchase of lease of intangible assets but then, it is not even the case of the revenue, that there was any sale, purchase or lease of intangibles. In view of these discussions, as also bearing in mind entirety of the case, we are of the considered view that the accretion of brand value, as a result of use of the brand name of foreign AE under the technology use agreement- which has been accepted to be an arrangement at an arm s length price, does not result in a separate international transaction to be benchmarked. The impugned ALP adjustments must, therefore, stand deleted. We hold so. Grievance of the assessee, with respect to ALP adjustments on account of accretion in brand value of the AE due to its use by the assessee, is thus upheld. - Decided in favour of assessee Tax withholding obligation from interest payments to Mauritian entities - TDS u/s 195 - Held that - Once we find that the provisions of article 5 and article 7 donot come into play, as is the situation in this case, the next thing to be examined is the scope of article 11. Article 11(1) provides that interest arising in a contracting state and paid to the resident of the other contracting state may be taxed in that other state . In effect thus interest income is not taxable in source jurisdiction but only in residence jurisdiction. There is, of course, a rider in article 15(6) which provides that, inter alia, article 11(1) shall not apply if the recipient of the interest, being a resident of a contracting state, carried on business in the other contracting stare in which interest arises, through a permanent establishment situated therein . The treaty protection of article 11(1) can thus indeed be denied when recipient of interest has a PE in the source country and the business is being carried on through such PE in the source country. As we have seen in our analysis earlier, this condition is clearly not satisfied on the facts of this case. There is more armoury in store for the revenue. It has been emphasized by the Assessing Officer that the Mauritian entities are part of the global MNE groups and the Mauritian companies, as they apprehend, could at best be front companies or conduit companies, not the beneficial owners. There is no dispute that Mauritian entities in question were carrying out banking business in Mauritius, and there is nothing on record to show, or even indicate, that the beneficial owner of interest income were not these Mauritian entities. In addition to this undisputed position, neither a case has been made for existence of any PE nor for business having been carried out through such a PE. All that is established is the presence of some of the affiliates of the MNE group to which the recipient of interest income belongs, and some peripheral role played by such affiliates, but these facts donot establish, or even indicate, existence of the PE. The protection of article 11(1) cannot, therefore, be declined on the facts of the present case. We are, therefore, of the considered view that the income embedded in these interest payments was not taxable in India. Accordingly, the assessee did not have any tax withholding obligations, under section 195, in respect of these payments, and, as a corollary thereto, disallowance under section 40(a)(i) was not justified.- Decided in favour of assessee Accrual of income - treating the export incentives on account of Focus Market Scheme and Focus Products scheme as income of the year - Held that - In assessee s own case for the assessment year 2007-08 as held The incentive on target plus scheme is nothing but an entitlement for a duty credit based on incremental exports which should be substantially higher than the general annual export target that is fixed. The incentive on focus market scheme is to offset high freight cost and other externalities to select international market with a view to enhance India s export competitiveness in those countries. It is pertinent to note that the assessee will be entitled to such benefit only after verification of the claim of the assessee by relevant governmental authorities and issuance of licence by such governmental authorities. Therefore, the facts of the assessee s case are similar to the facts decided by the Hon ble Apex Court cited supra. Therefore, respectfully following the decision of Hon ble Supreme Court, we hereby hold that the notional income computed by the assessee cannot be treated as taxable income of the assessee during the relevant previous year. However, the same shall be taxed in the previous year in which the assessee has received the licences and derived such income. - Decided in favour of assessee. Disallowance of unrealized loss - Held that - In the absence of applicability of section 43A of the Act to the facts of the case and in the absence of any other provision of the Income Tax Act dealing with the issue, claim of exchange fluctuation loss in revenue account by the Assessee in accordance with generally accepted accounting practices and mandatory accounting standards notified by the ICAI and also in conformity with CBDT notification can not be faulted. No inconsistency with any provision of Act or with any accounting practices has been brought to our notice. Otherwise also, in the light of fact that the conversion in foreign currency loans which led to impugned loss, were dictated by revenue considerations towards saving interest costs etc. we have no hesitation in coming to the conclusion that loss being on revenue account is an allowable expenditure under S. 37(1) of the Act. See Cooper Corporation (P.) Ltd. Versus Deputy Commissioner of Income-tax 2016 (5) TMI 809 - ITAT PUNE Disallowance of depreciation on account of reduction of capital subsidy granted by SIPCOT form the cost of assets - Held that - On identical issue, in respect of the assessment year 2007-08, was remitted to the file of the DRP for fresh adjudication on the nature of the subsidy. Whatever are the findings of the DRP for the assessment year 2007-08 will be equally valid for this assessment year as well. We, therefore, remit the matter to the file of the Assessing Officer for examining the matter afresh in the light of those findings of the DRP. While so deciding the matter, the Assessing Officer will give a due opportunity of hearing to the assessee. Subsidy received from the Government of Tamilnadu in the form of refund of output VAT - revenue of capital receipt - Held that - The assessee has raised an additional ground of appeal that subsidy received from the Government of Tamilnadu in the form of refund of output VAT is a capital receipt not chargeable to tax and to that extent the stand of the authorities below is incorrect and needs to be vacated. While there cannot indeed be any objection to the appellant raising any new issue before the Tribunal, in view of the decision of Hon ble Supreme Court in the case of NTPC Ltd Vs CIT 1996 (12) TMI 7 - SUPREME Court , with the consent of the parties, this matter is required to be remitted to file of the Assessing Officer for adjudication de novo on merits, in accordance with the law, by way of a speaking order and after giving a fair and reasonable opportunity of hearing to the assessee Disallowance of provision for warranty - Held that - As in assessee s own case for the assessment year 2002-03 DRP didn t erred in deleting the disallowance of provision for warranty Guarantee commission paid to the bank etc for purchase of machinery is a revenue expenditure. See ACIT Vs Akkamamba Textiles Ltd 1996 (10) TMI 71 - SUPREME Court Depreciation claimed on assets used for office purpose allowed referring assessee s own case for the assessment year 2007-08 Disallowance u/s 43B in respect of performance reward which is said to be distinct from bonus - Held that - We find that this issue is covered against the assessee by direct decision, on this point, by Hon ble Uttarakhand High Court, in the case of CIT Vs Kisan Sahkari Chini Mills Ltd 2008 (8) TMI 351 - UTTARAKHAND HIGH COURT . No direct decisions, in favour of the assessee and on this point, have been brought to our notice. In this view of the matter, we uphold the stand of the Assessing Officer and decline to interfere in the matter. Depreciation being allowed @ 60% in respect of UPS, Printers and Scanners, and thus treating the same at par with the computers - Held that - This issue is also covered in favour of the assessee by Hon ble Delhi High Court s judgment in the case of CIT Vs BSES Yamuna Powers Ltd 2010 (8) TMI 58 - DELHI HIGH COURT wherein Their Lordships have, inter alia, observed that We are in agreement with the view of the Tribunal that computer accessories and peripherals such as, printers, scanners and server, etc., form an integral part of the computer system. In fact, the computer accessories and peripherals cannot be used without the computer. Consequently, as they are the part of the computer system, they are entitled to depreciation at the higher rate of 60 per cent . In this view of the matter, we approve the conclusions arrived at by the DRP and decline to interfere in the matter.

Summary

Issues Involved:
1. Transfer Pricing Issue
2. Tax Withholding Obligation from Interest Payments to Mauritian Entities
3. Treatment of Export Incentives
4. Disallowance of Unrealized Foreign Exchange Loss
5. Depreciation on Assets Due to Capital Subsidy
6. Additional Depreciation on Assets Used for Office Purposes
7. Disallowance of Performance Reward under Section 43B
8. Depreciation on UPS, Printers, and Scanners
9. Disallowance of Provision for Warranty

Detailed Analysis:

1. Transfer Pricing Issue:
The core issue was whether the Assessing Officer was justified in making arm’s length price adjustments for brand promotion by the assessee for its non-resident parent company. The Tribunal noted that the assessee used the Hyundai brand name as a privilege and marketing compulsion, benefiting the assessee itself. The Tribunal held that the accretion of brand value due to the use of the foreign AE's brand name does not constitute an international transaction under Indian transfer pricing legislation. The ALP adjustments for the assessment years 2009-10, 2010-11, and 2011-12 were deleted.

2. Tax Withholding Obligation from Interest Payments to Mauritian Entities:
The issue was whether the interest payments to HSBC (Mauritius) Ltd and Standard Chartered Bank (Mauritius) Limited were taxable in India. The Tribunal concluded that the interest income was not taxable in India as the Mauritian entities did not have a Permanent Establishment (PE) in India. Consequently, the assessee did not have tax withholding obligations under section 195, and the disallowance under section 40(a)(i) was deleted.

3. Treatment of Export Incentives:
The assessee contested the inclusion of export incentives under the Focus Market Scheme and Focus Products Scheme as income for the relevant assessment years. The Tribunal, following its earlier decision, held that such incentives should be taxed in the year when the assessee receives the licenses and derives the income. The disallowance was deleted.

4. Disallowance of Unrealized Foreign Exchange Loss:
The assessee claimed an unrealized loss on foreign exchange due to the fluctuation in the value of foreign currency loans. The Tribunal, following the decision in Cooper Corporation Pvt Ltd Vs DCIT, held that the loss due to foreign exchange fluctuation on loans converted to foreign currency to save interest costs is allowable as a revenue expense under section 37(1). The disallowance was deleted.

5. Depreciation on Assets Due to Capital Subsidy:
The issue was the reduction of capital subsidy granted by SIPCOT from the cost of assets. The Tribunal remitted the matter to the Assessing Officer for fresh adjudication based on the findings of the DRP for the assessment year 2007-08.

6. Additional Depreciation on Assets Used for Office Purposes:
The Tribunal upheld the assessee's claim for additional depreciation on assets used in regional offices, following its decision in the assessee’s own case for the assessment year 2007-08.

7. Disallowance of Performance Reward under Section 43B:
The assessee argued that the performance reward was not a statutory bonus under the Payment of Bonus Act. However, the Tribunal upheld the disallowance under section 43B, following the decision of Hon’ble Uttarakhand High Court in CIT Vs Kisan Sahkari Chini Mills Ltd.

8. Depreciation on UPS, Printers, and Scanners:
The Tribunal allowed depreciation at 60% on UPS, printers, and scanners, treating them at par with computers, following the decision of Hon’ble Delhi High Court in CIT Vs BSES Yamuna Powers Ltd.

9. Disallowance of Provision for Warranty:
The Tribunal upheld the provision for warranty based on the historical trend and scientific basis, following the decision in the assessee’s own case for the assessment year 2002-03, which was confirmed by Hon’ble Supreme Court.

Conclusion:
The Tribunal provided detailed rulings on each issue, often referring to previous decisions and legal precedents to support its conclusions. The judgments emphasized the importance of adhering to established accounting standards and legal principles in determining tax liabilities and allowable deductions. The appeals were partly allowed in favor of the assessee, with specific issues remitted for further consideration by the Assessing Officer.