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2021 (3) TMI 883 - AT - Income TaxTP adjustment - Adjustment made on recovery of third party expenses - HELD THAT - D.R.P. was right in observing that in an uncontrolled transaction when the assessee is transferring the benefit of ground work done by it on acquisition project to an uncontrolled party, it would have charged a mark up in the normal course since its resources, infrastructure, skills, time, etc. were invested in the said activities. Hence we are unable to accept the contentions of Ld A.R that this transaction itself would fall outside the scope of transfer pricing provisions in the absence of any income element. Accordingly, we are of the view that the Ld. DRP was justified in holding that the transfer pricing adjustment by way of a markup on the amount spent by the assessee and claimed back from CHL is required to be made. As noticed earlier that the Ld. DRP has determined the markup rate at 10% on the basis of financial results of the assessee company. It is well settled proposition that the bench marking of international transactions have to be made under any one of the recognized methods prescribed in the I.T. Rules. Apparently, the Ld. DRP has adopted CUP method for bench marking the international transactions. However, it has not brought on record any external supporting material to substantiate the mark-up rate of 10%. We have noticed earlier that the Ld DRP has arrived at the rate of 10% on the basis of the internal profits declared by the assessee. What is required to be shown is that under same set of facts, what would have been the mark-up if the transactions were between unrelated parties. Accordingly, we are of the view that the determination of rate of markup requires fresh examination. Accordingly, we modify the order passed by Ld. DRP on the issue determination of percentage of markup and restore the same to the file of the A.O./TPO for examining it afresh. After affording adequate opportunity of being heard to the assessee, the AO/TPO may take appropriate decision in accordance with law. Disallowance of Research Development expenses incurred by the assessee - HELD THAT - From the details of expenditure furnished by the assessee, we notice that the assessee has claimed salary wages expenses, repairs expenses, etc. under the head R D expenses . From the annual report furnished by the assessee, we notice that the assessee has duly capitalized the capital expenditure incurred by it. We also noticed that the A.O. has observed that these expenses have resulted in creation of copy right in the hands of the assessee. - A.O. has not brought any material on record to show that these expenses has resulted in creation copy right , meaning thereby, the A.O. has made his observations on surmises and conjectures. We also agree with the contentions of Ld A.R that it is a business necessity to maintain R D department in order to meet the competition and changing business circumstances. Unless it is established that the R D department has undertaken a mission to invent something new which would give a copy right to the assessee, in our view, routine expenses cannot be considered as capital in nature. Accordingly, we are of the view that the A.O. was not justified in treating the above expenses as capital in nature. Accordingly, we direct the A.O. to delete the addition. Disallowance u/s 14A - assessee voluntarily disallowed u/s 14A - HELD THAT - We notice that the issue of disallowance under rule 8D(2)(ii) out of interest expenses have been restored to the file of the A.O. by the coordinate bench in the assessee s own case for assessment years 2006-07 to 2008-09. It is the submission of the Ld. A.R. that the investments have been made by the assessee in the past out of surplus funds and these aspects have been verified by the A.O. in the restored the said proceedings. Accordingly, the A.O. did not make any disallowance out of interest expenditure in the above said year. In view of the above said facts, we are of the view that, consistent with the decision taken by the coordinate bench in the assessee s own case, the issue of disallowance of interest expenditure under rule 8D(2)(ii) requires fresh examination at the end of the A.O. Accordingly, we set aside the order passed by the A.O. on the above said issue and restore the same to the file of the A.O. for examining it afresh. The disallowance made under rule 8D(2)(iii) was out of administrative expenses shall stand sustained. While giving effect, the AO shall give set off of the disallowance voluntarily made by the assessee. Non-granting of full credit of foreign tax credit - HELD THAT - A.O. has not given any reasons as to why he has restricted the foreign tax credit to ₹ 3.89 crores as against ₹ 5.43 crores claimed by the assessee. The Ld. A.R. has submitted that issue relating to foreign tax credit has been explained well in the case of Ittiam Systems Pvt. Ltd. by the Bangalore bench of Tribunal. Accordingly, we are of the view that the claim of the assessee requires fresh examination at the end of the A.O. Accordingly, we restore this issue to the file of the A.O. with the direction to follow the principles laid down by the Bangalore bench in the case of Ittiam Systems Pvt. Ltd. and accordingly, allow credit of foreign tax credit. Short credit of TDS - HELD THAT - It is the claim of the assessee that the A.O. has not granted credit of TDS . Since this matter requires factual verification, we restore this issue to the file of the A.O. Direction given by the Ld. DRP to the A.O. to consider FMV as on 1.4.1981 for computing capital gain - HELD THAT - As find that the facts regarding treatment of shade trees as capital assets is squarely covered by the decision of the Hon'ble jurisdictional High Court in the tax payer's own case apart from the Hon'ble ITAT's order cited. The computation of capital gains and the fair market value of the asset as on 01.04.1981 will be considered by the AO in this regard
Issues Involved:
1. Transfer pricing adjustment made on recovery of third-party expenses. 2. Disallowance of Research & Development Expenses. 3. Disallowance under Section 14A of the Income-tax Act. 4. Non-granting of entire Foreign Tax credit claimed by the assessee. 5. Non-granting of entire TDS claimed by the assessee. 6. Adoption of Fair Market Value as on 01-04-1981 for computing capital gains. Detailed Analysis: 1. Transfer Pricing Adjustment Made on Recovery of Third-Party Expenses: The assessee had shown a sum of ?9,44,00,714/- as an international transaction titled "Reimbursement of expenses received from its AE named Campestress Holdings Ltd." Initially, it was termed as "Refund of Advance," but later changed to "Reimbursement of Expenses." The expenses were incurred for due diligence exercises related to the acquisition of OOO Sunty Limited, Russia, which was later acquired by Campestress Holdings Ltd. The Transfer Pricing Officer (TPO) concluded that the transaction was a transfer of funds without any intra-group services and treated it as a transfer pricing adjustment under the Comparable Uncontrolled Price (CUP) method, resulting in an adjustment of ?9,60,76,131/-. The Dispute Resolution Panel (DRP) directed the TPO to restrict the adjustment to a 10% markup on the amount spent by the assessee. The Tribunal held that the determination of the markup rate requires fresh examination and restored the issue to the file of the AO/TPO for re-examination. 2. Disallowance of Research & Development Expenses: The AO disallowed ?42.95 lakhs claimed towards Research & Development expenses, considering them as capital in nature. The assessee argued that these expenses were routine business activities and should be allowed as revenue expenditure under Section 37(1) of the Act. The DRP concurred with the AO's view. However, the Tribunal found that the AO's observation of the expenses resulting in the creation of copyright was based on surmises and conjectures. The Tribunal directed the AO to delete the addition, recognizing the expenses as revenue in nature. 3. Disallowance under Section 14A of the Income-tax Act: The assessee earned exempt dividend income of ?1.51 crores and voluntarily disallowed ?1,78,013/- under Section 14A. The AO disallowed an additional ?8,11,776/- under Rule 8D of the I.T. Rules. The Tribunal noted that similar disallowances in previous years were restored to the AO for fresh examination, and the AO did not make any disallowance out of interest expenditure. Consistent with the previous decision, the Tribunal restored the issue to the AO for re-examination, sustaining the disallowance under Rule 8D(2)(iii) for administrative expenses. 4. Non-Granting of Entire Foreign Tax Credit Claimed by the Assessee: The assessee claimed foreign tax credit of ?5.43 crores, but the AO restricted it to ?3,89,93,091/-. The AO did not provide reasons for the restriction. The Tribunal directed the AO to re-examine the issue, following the principles laid down in the case of Ittiam Systems Pvt. Ltd., and allow the full credit of foreign tax claimed by the assessee. 5. Non-Granting of Entire TDS Claimed by the Assessee: The assessee claimed that the AO did not grant credit for TDS amounting to ?8,22,566/-. The Tribunal restored the issue to the AO for factual verification. 6. Adoption of Fair Market Value as on 01-04-1981 for Computing Capital Gains: The assessee computed capital gains on the sale of trees by taking the fair market value as on 01-04-1981. The AO treated the gains as normal business income. The DRP accepted the assessee's contention, following the Karnataka High Court's decision in the assessee's own case, and directed the AO to compute capital gains adopting the fair market value as on 01-04-1981. The Tribunal upheld the DRP's direction, finding no infirmity in it. Conclusion: The Tribunal partly allowed the assessee's appeal in IT(TP)A No.568/Bang/2015, allowed the appeal in IT(TP)A No.729/Bang/2015, and dismissed the revenue's appeal in IT(TP)A No.190/Bang/2015. The order was pronounced in the open court on 22nd March 2021.
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