2021 (2) TMI 1135 - AT - Income Tax

TP Adjustment - payment made towards SAP ERP implementation - HELD THAT - Cost paid by the assessee for implementation of SAP ERP system without any mark up cannot be treated as nil by applying the benefit test. It is for the assessee to decide whether a particular system or investment would be beneficial to him or not. The Transfer Pricing Officer certainly cannot step into the shoes of the assessee or the Assessing Officer to evaluate the business expediency of a cost incurred for business purpose and the benefit derived. His job is to determine the arm's length price by adopting any one of the prescribed methods. In the facts of the present case, though, the Transfer Pricing Officer has stated that he has adopted CUP method for determining the arm's length price, however, in reality, he has determined the arm's length price at nil on purely ad hoc basis by stating that the assessee has not derived any benefit. Moreover, the allegations of the Transfer Pricing Officer and learned Commissioner (Appeals) that the assessee has failed to furnish supporting evidence to establish its claim is found to be baseless as the assessee has furnished sufficient documentary evidences not only to prove the implementation of SAP ERP system but also the benefit derived by it from such system. Moreover, when the Transfer Pricing Officer has accepted the payment made towards SAP ERP implementation in the earlier years, there is no reason to deny the same in the current year by determining the arm's length price at nil. In any case of the matter, it is a fact on record that the assessee has implemented the SAP ERP system and is utilizing it for its business purpose. The Transfer Pricing Officer has also stated that SAP ERP system is a necessary tool for carrying out business works. That being the case, the determination of arm's length price at nil, that too, on ad hoc basis is unsustainable. Accordingly, we have no hesitation in deleting the addition made on account of transfer pricing adjustment. Disallowance u/s 14A - disallowance of interest expenditure under rule 8D(2)(ii) - HELD THAT - No interest disallowance should be made when the assessee has surplus interest free fund available with it. Secondly, only those investments which have yielded exempt income during the year should be considered for disallowance under rule 8D(2)(iii). On a perusal of impugned order of learned Commissioner (Appeals), we find that the assessee had made a submission that as against the interest free surplus funds available of ₹ 281,90,44,000, investment stood at ₹ 150,85,55,000 - assessee had sufficient interest free fund available with it to take care of the investment. Therefore, as per the settled legal principles, no disallowance of interest expenditure can be made under rule 8D(2)(ii). Hence, the disallowance made under rule 8D(2)(ii) has to be deleted. As regards disallowance of administrative expenditure under rule 8D(2)(iii), we direct the Assessing Officer to compute such disallowance by taking into account only those investments which have yielded dividend income during the year. In this regard, the Assessing Officer is directed to verify the correctness of disallowance computed by the assessee at ₹ 3,91,961.79. This ground is disposed off accordingly. Disallowance u/s 43B - leave encashment paid - HELD THAT - We find that while deciding the issue in assessee s own case for the assessment year 2007 08, the Tribunal 2016 (5) TMI 1546 - ITAT MUMBAI has restored the issue to the Assessing Officer for fresh adjudication. Facts being identical, following the aforesaid decision of the Co ordinate Bench, we restore the issue to the Assessing Officer for fresh adjudication. Ground is allowed for statistical purposes. Disallowance of depreciation claimed on the WDV of the royalty expenditure - HELD THAT - We find that the royalty expenditure incurred by the assessee in the assessment year 2001 02 was held to be of capital in nature. However, the Tribunal directed the Assessing Officer to allow depreciation on such expenditure. Therefore, when depreciation has been allowed to the assessee on the expenditure incurred on royalty in the preceding assessment years, consequential benefit of depreciation has to be allowed to the assessee in the impugned assessment year as well. The ground raised by the assessee is allowed.

Summary

Issues Involved:
1. Addition on account of transfer pricing adjustment.
2. Disallowance under section 14A of the Income Tax Act.
3. Disallowance under section 43B of the Income Tax Act.
4. Disallowance of depreciation claimed on the WDV of the royalty expenditure.

Issue-wise Detailed Analysis:

1. Addition on Account of Transfer Pricing Adjustment:
The assessee challenged the addition of ?3,72,46,953 on account of transfer pricing adjustment. The Transfer Pricing Officer (TPO) questioned the arm's length nature of the payment made towards the SAP ERP system, implemented by the Associated Enterprise (AE). The TPO was not convinced by the assessee's application of the Transactional Net Margin Method (TNMM) and issued a show-cause notice to explain why the cost recharge should not be treated as nil. Despite furnishing the ERP systems cost sharing agreement and other documentary evidence, the TPO found the evidence insufficient to establish the benefit received from the payment and determined the arm's length price at nil. The Commissioner of Income Tax (Appeals) upheld this adjustment.

The Tribunal found that the assessee had provided sufficient documentary evidence, including agreements and debit notes, to prove the implementation and benefits derived from the SAP ERP system. The Tribunal held that the TPO cannot determine the arm's length price at nil on an ad-hoc basis and emphasized that it is not the TPO's role to evaluate the business expediency of a cost incurred. The Tribunal deleted the addition made on account of transfer pricing adjustment.

2. Disallowance under Section 14A of the Income Tax Act:
The assessee challenged the disallowance of ?43,96,080 under section 14A. The Assessing Officer (AO) noticed that the assessee received exempt income but did not disallow any expenditure for earning it. The AO computed the disallowance at ?68,21,468 by applying rule 8D. The Commissioner (Appeals) upheld this disallowance.

The Tribunal noted that the assessee had sufficient interest-free funds to cover the investments and directed that no disallowance of interest expenditure should be made under rule 8D(2)(ii). For administrative expenditure under rule 8D(2)(iii), the Tribunal directed the AO to compute the disallowance by considering only those investments that yielded exempt income during the year and to verify the correctness of the disallowance computed by the assessee.

3. Disallowance under Section 43B of the Income Tax Act:
The assessee contested the disallowance of ?14,94,029 on account of leave encashment paid by Huntsman International India Pvt. Ltd. The AO disallowed this deduction based on the assessment order for the previous year, which was upheld by the Commissioner (Appeals).

The Tribunal restored the issue to the AO for fresh adjudication, following the decision in the assessee's own case for the assessment year 2007-08 where a similar issue was remanded back to the AO.

4. Disallowance of Depreciation Claimed on the WDV of the Royalty Expenditure:
The assessee challenged the disallowance of depreciation on the written-down value (WDV) of the royalty expenditure. In the assessment year 2001-02, the royalty expenditure was treated as capital expenditure, and depreciation was allowed by the Tribunal.

The Tribunal directed that since depreciation had been allowed on the royalty expenditure in the preceding years, the consequential benefit of depreciation should be allowed in the impugned assessment year as well.

Conclusion:
The appeal was partly allowed, with the Tribunal deleting the transfer pricing adjustment, modifying the disallowance under section 14A, remanding the issue under section 43B for fresh adjudication, and allowing the depreciation on the royalty expenditure.