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2019 (8) TMI 698 - AT - Income TaxTP Adjustment - determination of arm's length price of AMP expenditure by applying BLT - HELD THAT - While deciding identical nature of dispute in assessee s own case for the assessment year 2011 12, learned DRP in direction dated 28th December 2015, have deleted the adjustment made by the Transfer Pricing Officer on account of AMP expenditure by recording a factual finding that the Transfer Pricing Officer has failed to demonstrate that there is an agreement/arrangement between the assessee and the AE for incurring AMP expenditure. While doing so, DRP has relied upon the decision of the Hon'ble Delhi High Court in Maruti Suzuki India Ltd. 2015 (12) TMI 634 - DELHI HIGH COURT . Thus, viewed in the light of the ratio laid down in the decisions cited by the learned Authorised Representative, including the decision of the Hon'ble Delhi High Court in Martuti Suzuki India Ltd. (supra), it has to be concluded that the AMP expenditure incurred by the assessee in India cannot come within the purview of the international transaction. Hence, the Transfer Pricing Officer has no jurisdiction to determine the arm's length price of AMP expenditure. Having held so, it is now necessary to deal with the contention of the learned Departmental Representative to restore the issue to the Assessing Officer for keeping it pending till the issue is settled by the Hon'ble Supreme Court. In our view, the aforesaid contention of the learned Departmental Representative is not acceptable. As per the prevailing legal position, the AMP expenditure incurred by the assessee in India cannot come within the purview of international transaction. That being the case, the adjustment made by the Transfer Pricing Officer cannot survive. Therefore, we do not find any necessity to restore the issue to the Assessing Officer. Grounds are allowed. Adjustment to the arm's length price of royalty paid to the A.E. - HELD THAT - Undisputedly, in the impugned assessment year the assessee has benchmarked the royalty payment by applying CUP method. It is observed, the Transfer Pricing Officer has rejected the benchmarking of the assessee with some general observations. If the benchmarking done by the assessee is not acceptable to the Transfer Pricing Officer, he must provide the basis/reasoning on which he found it unacceptable. Even assuming that the benchmarking done by the assessee was not correct, TPO should have benchmarked the royalty payment by applying any of the prescribed methods. However, without applying any prescribed method he has simply determined the arm's length price of royalty payment at nil. Transfer Pricing Officer is not in accordance with statutory provisions, hence, unsustainable. In any case of the matter, except the impugned assessment year the payment of royalty in all other assessment years has been accepted by the TPO to be at arm's length. Therefore, applying the rule of consistency also, the payment of royalty @ 5%, as was paid in the earlier and subsequent assessment years, has to be accepted. More so, when the relevant facts relating to royalty payment permeating through different assessment years remain unchanged. In view of the aforesaid, we hold that royalty paid to the assessee by the AE has to be accepted. The ground raised is allowed. Unutilized MODVAT/CENVAT credit - HELD THAT - Undisputedly, the unutilized MODVAT credit has been added only to the closing stock by the Departmental Authorities by invoking the provision of section 145A of the Act. However, now it is fairly well settled that adjustment, if any, under section 145A of the Act has to be made both to the opening stock and closing stock as well as purchases and sales. In fact, in assessee s own case for the assessment year 2004 05, the Tribunal 2011 (5) TMI 967 - ITAT MUMBAI has held that adjustment on account of MODVAT credit has to be made both in respect of closing stock, opening stock, purchases and sales. The same view has been expressed by the Tribunal while deciding assessee s appeal for the assessment years 2006 07, 2007 08 and 2008 09 Re computation of depreciation by reducing from Written Down Value (WDV) the amount of depreciation which was not actually allowed to the assessee - HELD THAT - DRP while considering the objections of the assessee has also directed the Assessing Officer to compute deprecation on the basis of WDV as on 1st April 2002, after reducing the deprecation actually allowed in the preceding assessment years. As it appears, the Assessing Officer has not carried out the aforesaid direction of learned DRP. In our view, the aforesaid proposition also applies to the assessee s claim of depreciation in the impugned assessment year. Accordingly, we direct the AO to compute depreciation keeping in view the decision of the Tribunal in the assessment year 2002 03. Thus, ground is allowed for statistical purpose. Disallowance of product development expenditure - HELD THAT - While deciding assessee s appeal on identical issue in assessment year 2002 03, 2010 (1) TMI 1271 - ITAT MUMBAI the Tribunal has allowed assessee s claim of deduction by treating the expenditure as revenue in nature. The same view was expressed by the Tribunal while deciding the appeals for the assessment years 2004 05, 2005 06 and 2008 09. In fact, while deciding Revenue s appeal against the decision of the Tribunal for the assessment year 2004 05, the Hon'ble Jurisdictional High Court 2014 (7) TMI 96 - BOMBAY HIGH COURT has upheld the decision of the Tribunal. Therefore, respectfully following the consistent view of the Tribunal and the decision of the Hon'ble Jurisdictional High Court on the disputed issue, we delete the addition made by the Assessing Officer. This ground is allowed. Nature of expenses - expenditure on Legal and professional fees - revenue or capital expenditure - HELD THAT - Undisputedly, relying upon the past assessment orders the Assessing Officer has disallowed the payment made to Strategic Systems Pvt. Ltd., by treating it as capital in nature. However, while considering the issue relating to similar disallowance made towards payment made to the very same party in the assessment year 2008 09 has allowed assessee s claim by treating it as revenue in nature. Disallowance u/s 40(a)(i) - HELD THAT - disallowance made under section 40(a)(i) of the Act was deleted since the assessee had fulfilled the conditions of section 10(6A) of the Act. In fact, in the impugned assessment year also, learned DRP has directed the Assessing Officer to verify whether conditions of section 10(6A) of the Act have been fulfilled and thereafter allow relief to the assessee. It is the contention of the learned Authorised Representative before us that in the impugned assessment year the assessee has fulfilled the conditions of section 10(6A) of the Act. In view of the aforesaid, we direct the Assessing Officer to verify the aforesaid claim of the assessee and if assessee s claim is found to be correct, in the sense that all the conditions of section 10(6A) of the Act have been fulfilled, no disallowance under section 40(a)(i) of the Act can be made, as held by the Tribunal in the assessment year 2007 08 (supra). This ground is allowed subject to verification. Treating the interest income as income from other sources - HELD THAT - No details of bank deposits could be provided by AR despite specific request being made by the bench due to which we are unable to ascertain the fact that whether these deposits have direct nexus with the business of the assessee, The Ld. AR has attributed the parking of funds to general credit float enjoyed by the assessee without brining anything on record to substantiate the same. Hence, we deem it fit to restore the matter back to the file of AO to examine the nature of Bank FDR particularly the tenure of the deposit and also verify the fact of 'credit float' enjoyed by the assessee and decide the issue afresh in accordance with law. The assessee is directed to cooperate with the lower authorities forthwith to substantiate his submissions. The ground of revenue's appeal is allowed for statistical purposes Set off of brought forward business loss before setting off unabsorbed depreciation - HELD THAT - As it appears, this issue was not raised by the assessee before learned DRP. When a query to this effect was raised to the learned Authorised Representative, he conceded that the issue was not raised before learned DRP and further submitted that the assessee would file a rectification petition before the Assessing Officer in respect of the said issue. In view of the aforesaid submissions of the learned Authorised Representative, this ground is dismissed. Claimed set off of brought forward business loss against the interest income which was treated as income from other source - HELD THAT - While deciding ground no.12 relating to characterization of interest income as income from other sources, we have restored the issue to the Assessing Officer for fresh adjudication. Thus, the issue raised in this ground is consequential to the decision to be taken by the Assessing Officer on the characterization of interest income. Therefore, this issue is also requires to be restored back to the Assessing Officer. It is relevant to observe, in the course of hearing, the learned Authorised Representative made a without prejudice submission that irrespective of the head under which the interest income is assessed, the character and essence of the interest income is in the nature of business income, hence, the brought forward business loss has to be set off against such income. In support of such contention, he relied upon the decision of the Hon'ble Jurisdictional High Court in Sham Progretti S.P.A. v/s ACIT, 1981 (2) TMI 50 - DELHI HIGH COURT . In our view, in course of proceedings before the Assessing Officer the assessee can raise such contention and if such contention is raised by the assessee, the Assessing Officer has to consider the same on merit.With the aforesaid direction, this ground is allowed for statistical purpose. Set off of unabsorbed depreciation against the interest income assessed under the head income from other sources - HELD THAT - It is observed, while deciding the objection of the assessee on the aforesaid issue, learned DRP in Para 12.5 of its directions has held that unabsorbed depreciation being part of current year s depreciation is eligible for set off against income under any other head including income from other sources. Accordingly, the Assessing Officer was directed to allow set off of unabsorbed depreciation. However, as it appears, the Assessing Officer has not implemented the aforesaid direction of learned DRP which, in our view, is unacceptable. Accordingly, we direct the Assessing Officer to implement the direction of learned DRP on the issue and allow set off of unabsorbed depreciation. This ground is allowed. In the result, assessee s appeal is partly allowed.
Issues Involved:
1. Transfer pricing adjustment relating to AMP expenditure. 2. Adjustment to the arm's length price of royalty paid to the AE. 3. Addition on account of unutilized MODVAT/CENVAT credit. 4. Re-computation of depreciation by reducing WDV. 5. Disallowance of product development expenditure. 6. Disallowance of legal and professional fees. 7. Disallowance under section 40(a)(i) of the Act. 8. Treatment of interest income as income from other sources. 9. Set-off of brought forward business loss before unabsorbed depreciation. 10. Set-off of brought forward business loss against interest income. 11. Set-off of unabsorbed depreciation against interest income. Issue-wise Detailed Analysis: 1. Transfer pricing adjustment relating to AMP expenditure: The assessee challenged the addition of ?17,68,29,302 on AMP expenditure. The Transfer Pricing Officer (TPO) applied the Bright Line Test (BLT) method, which was not a prescribed method in the statute. The Tribunal held that the AMP expenditure incurred by the assessee in India cannot come within the purview of international transaction as defined under section 92B of the Act. The TPO's approach was deemed fallacious as he did not provide any factual basis for inferring an arrangement between the assessee and the AE. The Tribunal concluded that the adjustment made by the TPO cannot survive and allowed the grounds in favor of the assessee. 2. Adjustment to the arm's length price of royalty paid to the AE: The TPO determined the arm's length price of royalty payment at nil, which was benchmarked using the CUP method by the assessee. The Tribunal noted that the payment of royalty in past and subsequent years was accepted at arm's length by the TPO. The Tribunal held that the TPO's approach of determining the arm's length price at nil without applying any prescribed method was unsustainable. The Tribunal allowed the ground, accepting the royalty payment as at arm's length. 3. Addition on account of unutilized MODVAT/CENVAT credit: The assessee objected to the inclusion of unutilized CENVAT credit in the cost of inventory. The Tribunal held that adjustments under section 145A should be made to opening stock, closing stock, purchases, and sales. Following earlier decisions, the Tribunal directed necessary adjustments to be made, allowing the grounds for statistical purposes. 4. Re-computation of depreciation by reducing WDV: The Assessing Officer reduced the WDV by the depreciation allowable for earlier years. The Tribunal directed the Assessing Officer to compute depreciation based on WDV as on 1st April 2002, after reducing depreciation actually allowed in preceding years, following the Tribunal's earlier decision. The ground was allowed for statistical purposes. 5. Disallowance of product development expenditure: The Assessing Officer treated the product development expenditure as capital in nature. The Tribunal, following earlier decisions, held the expenditure to be revenue in nature and allowed the assessee's claim, deleting the addition. 6. Disallowance of legal and professional fees: The Assessing Officer disallowed the payment to Strategic Systems Pvt. Ltd. as capital expenditure. The Tribunal, following its decision for the assessment year 2008-09, treated the expenditure as revenue in nature and deleted the addition. 7. Disallowance under section 40(a)(i) of the Act: The Assessing Officer disallowed ?1,85,73,320 for non-deduction of tax at source on royalty payment. The Tribunal directed the Assessing Officer to verify if the conditions of section 10(6A) were fulfilled and, if so, no disallowance should be made. The ground was allowed subject to verification. 8. Treatment of interest income as income from other sources: The Assessing Officer treated interest income as income from other sources. The Tribunal restored the issue to the Assessing Officer to examine the nature of bank deposits and verify the credit float enjoyed by the assessee, following earlier decisions. The ground was allowed for statistical purposes. 9. Set-off of brought forward business loss before unabsorbed depreciation: The assessee did not raise this issue before the DRP. The Tribunal dismissed the ground, allowing the assessee to file a rectification petition before the Assessing Officer. 10. Set-off of brought forward business loss against interest income: The Tribunal restored the issue to the Assessing Officer for fresh adjudication, allowing the ground for statistical purposes. The assessee can raise the contention of treating interest income as business income during proceedings. 11. Set-off of unabsorbed depreciation against interest income: The Tribunal directed the Assessing Officer to implement the DRP's direction to allow set-off of unabsorbed depreciation against income from other sources. The ground was allowed. Revenue’s Appeal: The effective grounds raised by the Revenue regarding the disallowance under section 40(a)(i) were dismissed as infructuous in view of the Tribunal's decision on the assessee's appeal. Conclusion: The assessee's appeal was partly allowed, and the Revenue's appeal was dismissed.
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