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TMI Blog2024 (1) TMI 151X X X X Extracts X X X X X X X X Extracts X X X X ..... inding of the CIT(A) and issue is decided against the revenue. Adjustment for royalty income - TPO/AO had adopted an analogy that the brand value is well established from many years and is not a risky intangible and, therefore, WACC cannot be applied - We fail to find any merit in such observation of the ld. TPO/AO because maintaining of a brand is a consistent activity and to maintain a brand value is always a risky task and a small mistake at the end of the assessee or its AE can damage the brand value drastically. Therefore, since it is a risky intangible and there is a cut throat competition in such field, WACC method is a suitable method for the purpose of computing ALP of royalty income under the given facts and circumstances of the case. Since the assessee has offered royalty income higher than the ALP computed by applying WACC of 11.30% of the brand value, no further upward adjustment is called for. It is also noteworthy that assessee has been consistently showing royalty income since Assessment Year 2008-09 to 2013-14 and the same has never been disputed by the revenue authorities and even in the subsequent years also the same has not been disputed. Therefore, no i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... used for business and part of block of asset if held for more than three years and sold then whether such gain is liable to be taxed as per the tax rates applicable for long term capital gain from sale of long term capital asset? - HELD THAT:- We notice that Section 50 of the Act is a special provision for computation of capital gain in case of sale of depreciable assets and it provides that notwithstanding anything contained in clause 2(24)(xviii) of the Act, where the capital gain is from an asset forming part of the block of asset in respect of which depreciation has been allowed then subject to certain conditions, the capital gain arising from such transfer is deemed to be a short term capital gain. Section 112 of the Act which provides for concessional rate of tax on long term capital gain is only applicable on transfer of long term capital asset. The long term capital asset is defined under Section 2(29A) of the Act as capital asset which is not a short-term capital asset. Since special provision is provided under the Act for computation of capital gain on depreciable assets u/s 50 of the Act and it starts with the line Notwithstanding anything contained in clause (42A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The assessee has filed a cross-objection bearing C.O. No. 09/Kol/2020, against the appeal filed by the revenue. 2. The Registry has pointed out that there is a delay of 355 (three hundred fifty five) days in filing the cross-objection by the assessee. Petition for condonation of delay is placed on record by assessee explaining the reasons. On perusing the same, we are convinced that the assessee was prevented by sufficient cause from filing this appeal in time. Accordingly, we condone the delay and proceed to admit the cross objection for hearing. 3. The revenue has raised the following grounds of appeal:- 1. Whether on the facts and circumstance of the case, the Ld. CIT(A) has erred in law as well as in (facts in deleting the adjustment made by the AO/TPQ amounting to Rs. 4,34,42,803/- for International transaction in respect to the corporate guarantee to it's AE in deleting the adjustment made by the AO/TPO amounting to Rs. 3,09,32,411/- for International transaction on royalty Income. 2. Whether on the facts and circumstance of the case, the Ld.CIT (A) has erred in law as well as facts to direct to re-compute the amount of disallowance u/s 14A. 3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty income at Rs. 3,09,32,411/-. The ld. Assessing Officer while completing the assessment made the aforesaid two additions. Apart from the above two issues, the ld. Assessing Officer also denied the claim of capital receipt of VAT subsidy at Rs. 23,88,62,511/- observing that the assessee had himself stated it to be a revenue receipt and thereafter has claimed the same as a capital receipt during the course of assessment proceedings, however, the same is to be treated as the revenue receipts as there is a direct nexus of the VAT subsidy with the revenue generated and, thus made the addition thereto. The ld. Assessing Officer also made disallowance u/s 14A of the Act applying Rule 8D of the Income Tax Rules, 1962 (hereinafter the Rules ). The ld. Assessing Officer further noticed that during the year assessee has shown short term capital gain of Rs. 9,21,75,000/- and while examining the capital gain it was observed that the assessee has paid taxes treating it to be long term capital asset and paid concessional tax rate as provided u/s 112 of the Act. Income assessed at Rs. 519,61,39,830/-. 5.1. Aggrieved the assessee preferred appeal before the ld. CIT(A) and partly succeeded. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sued a showcause notice to assessee for Assessment Year 2014-15 as to why a corporate guarantee fee of 3% should not be applied for Assessment Year 2014-15. We, find that this Tribunal in the assessee s own case for Assessment Year 2012-13 has restricted the addition of corporate guarantee fee @ 0.25% as against 3% made by the Assessing Officer/TPO. Under similar set of facts, we find that in the instant year, assessee had already offered income of Corporate guarantee fee @ 0.30% which is higher than 0.25% as held by the Tribunal for Assessment Year 2012-13 and, therefore, taking consistent view, we fail to find any inconsistency in the finding of the ld. CIT(A), who has deleted the impugned addition observing that there being no change in the factual matrix during the year and the guarantee fee have been charged at a rate higher than 0.25% which was held to be ALP of this transaction by this Tribunal in the assessee s own case for Assessment Year 2012-13. Thus, no interference is called for in the finding of the ld. CIT(A) and issue is decided against the revenue. 10. Another issue which has been raised in Ground No. 1 relates to deletion of adjustment for royalty income. Ld. A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oyalty rates of other concerns engaged in similar type of activity in the FMCG sector as well as other sectors, observed that royalty income offered by the assessee is better than the average of royalty income offered by various concerns in similar sectors. The ld. CIT(A) also noticed that the assessee has been consistently showing royalty income @ 5% for the preceding year i.e., Assessment Years 2009-10 to 2013-14. The ld. TPO in its order passed u/s 92CA(3) of the Act, had never found any infirmity either in terms of agreement or in Functional Asset and risk (FAR) analysis concerning royalty receipts. The ld. CIT(A) thus held that the TPO erred in departing from accepted basis and no determining the ALP @ 21.84% of the brand value of Rs. 50.04 Crores. 11. Aggrieved, the revenue is now in appeal before this Tribunal. 11.1. The ld. D/R vehemently argued supporting the order of the ld. Assessing Officer and also referred to the written submission stating that OECD guidelines recognised the fact that intangible parts are riskiest components of the business and that weighted average cost of capital method cannot be applied in a blanket matter in each and every case. The ld. D/R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r month thereby computing the ALP of the said transactions @ 21.84% of the brand value of Rs. 50.04 Crores (approx) at Rs. 10,92,85,516/-. Reference has been made to the OECD guidelines. So far as para 6.170 to 6.172 of the OECD guidelines is concerned, the same is reproduced below:- 6.170 The discount rate or rates used in converting a stream of projected cash flows into a present value is a critical element of a valuation model. The discount rate takes into account the time value of money and the risk or uncertainty of the anticipated cash flows. As small variations in selected discount rates can generate large variations in the calculated value of intangibles using these techniques, it is essential for taxpayers and tax administrations to give close attention to the analysis performed and the assumptions made in selecting the discount rate or rates utilised in the valuation model. 6.171 There is no single measure for a discount rate that is appropriate for transfer pricing purposes in all instances. Neither taxpayers nor tax administrations should assume that a discount rate that is based on a Weighted Average Cost of Capital (WACC) approach or any other measure shoul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... such field, WACC method is a suitable method for the purpose of computing ALP of royalty income under the given facts and circumstances of the case. Since the assessee has offered royalty income higher than the ALP computed by applying WACC of 11.30% of the brand value, no further upward adjustment is called for. It is also noteworthy that assessee has been consistently showing royalty income since Assessment Year 2008-09 to 2013-14 and the same has never been disputed by the revenue authorities and even in the subsequent years also the same has not been disputed. Therefore, no interference is called for in the finding of the ld. CIT(A) and the grounds raised by the revenue is dismissed. 12.2. Next issue for our consideration is disallowance u/s 14A of the Act. The ld. Assessing Officer made disallowance at Rs. 41,61,314/- by applying Rule 8D(2)(iii) of the Rules @ 0.5% of the average investment after giving benefit of suo moto disallowance of Rs. 5,74,186/- by the assessee. When the matter came up before the ld. CIT(A), he in view of the judgment of the Hon ble Jurisdictional High Court in the case of Commissioner Of Income Tax vs M/S Ashika Global Securities Ltd on 11 June, 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l pronouncements and held in favour of assessee by placing reliance on the judgment of the Hon ble Supreme Court in the case of CIT v/s. Chaphalkar Brothers Pune [2018] 400 ITR 279 as well as that of the Hon ble Jurisdictional High Court in the case of CIT vs Rasoi Limited [2011] 335 ITR 438 (Cal) (HC). 17.1. On going through the above, and judicial precedents referred in the impugned order and after perusal of the Industrial policies of the Governments of Bihar and Odisha, we find that firstly introduction of amendment in Section 2(24)(xviii) of the Act is prospective in nature and applicable from Assessment Year 2016-17 and onward. Secondly, so far as the nature of the subsidy is concerned, the alleged incentive was assured under the Industrial policy for the purpose of encouraging the assessee to set up new industries in the State. We find that the objective contained in the Industrial policy was not to reduce operation costs of the company or facilitate working of existing undertaking. Therefore, in our view, the subsidy received in form of VAT reimbursement from the State Governments was towards industrialisation in the State and to generate employment and, therefore, the e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be a short term capital gain. 20. Section 112 of the Act which provides for concessional rate of tax on long term capital gain is only applicable on transfer of long term capital asset. The long term capital asset is defined under Section 2(29A) of the Act as capital asset which is not a short-term capital asset. However, since special provision is provided under the Act for computation of capital gain on depreciable assets u/s 50 of the Act and it starts with the line Notwithstanding anything contained in clause (42A) of section 2 .., we are of the considered view that the depreciable asset which forms part of the block of asset even if held for more than three years cannot be brought under the category of long term capital asset for the purpose of concessional rate of tax. Under these given facts and circumstances, we are of the considered view that the alleged gain during the year from sale of depreciable fixed asset is a short term capital gain and is liable for levy of tax at normal tax rates and not under special rate provided u/s 112 of the Act. Thus, Ground No. 4 of the revenue is allowed. 21. Ground No. 5 is general in nature. 22. Now, we take up the grounds ..... X X X X Extracts X X X X X X X X Extracts X X X X
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