2014 (3) TMI 254 - AT - Income Tax

Tribunal Partially Allows Appeal, Rejects Penalty Initiation

The Tribunal partly allowed the appeal, deleting various disallowances and adjustments made by the AO and DRP. Several grounds were allowed for ... Disallowance of tax on Brand Usage Royalty – Held that:- The decision in Johnson & Johnson Ltd. Versus Assistant Commissioner of Income-tax [2014 (2) TMI 978 - ITAT MUMBAI] followed - The CIT(A) erred in ignoring the copy of draft brand usage royalty agreement which was submitted by the assessee alongwith application to RBI - If the assessee which carries on a business find that it is commercially expedient to incur certain expenditure directly or indirectly, it would be open to such an assessee to do so notwithstanding the fact that a formal deed does not precede the incurring of such expenditure - there is no merit in the enhancement made by the CIT(A) – thus, the AO is directed to delete the addition made by the CIT(A) – Decided in favour of Assessee. Disallowance of service tax – Held that:- The decision in Johnson & Johnson Limited Versus Commissioner of Income Tax-LTU [2014 (2) TMI 555 - ITAT MUMBAI] followed - the taxes were liability of the assessee- company under the terms of agreements and accordingly disallowance made by AO were deleted - liability of payment of service tax is of recipient of services and since assessee is the receiver of services, it is the liability of the assessee company to bear service tax – Decided in favour of Assessee. Disallowance of technical know-how royalty payment on traded goods – Restriction of technical know-how royalty to 1% in respect of manufactured goods - Held that:- The decision in Johnson & Johnson Limited Versus Commissioner of Income Tax-LTU [2014 (2) TMI 555 - ITAT MUMBAI] followed - Royalty payments has been approved by RBI and therefore deserves to be allowed - as the payments have been made in the light of the agreement with J&J US and as per the approval/guidelines of the RBI, there is no reason to disallow the tax and R&D Cess paid on technical royalty - the AO is directed to delete the addition made – Decided in favour of Assessee. Disallowance of tax and R&D Cess paid on technical know-how royalty – Held that:- The decision in Johnson & Johnson Ltd. Versus Assistant Commissioner of Income-tax [2014 (2) TMI 978 - ITAT MUMBAI] followed - Royalty payments has been approved by RBI and therefore deserves to be allowed - as the payments have been made in the light of the agreement with J&J US and as per the approval/guidelines of the RBI, there is no reason to disallow the tax and R&D Cess paid on technical royalty - the AO is directed to delete the addition made – Decided in favour of Assessee. Disallowance of service tax paid on know-how royalty – Held that:- The decision in Johnson & Johnson Limited Versus Commissioner of Income Tax-LTU [2014 (2) TMI 555 - ITAT MUMBAI] followed - the disallowance made by TPO on account of cess service tax is not justified – Decided in favour of Assessee. Advertising, marketing and promotion (AMP) expenditure – Held that:- The assessee reiterated that AMP expenditure is not an international transaction - The additional supporting documents need to be verified by the TPO –the matter remitted back to the TPO - The TPO is directed to decide this issue denovo after considering the documents filed by the assessee and after giving reasonable opportunity of being heard to the assessee – Decided in favour of Assessee. Disallowance of expenditure incurred on production of advertisement films – Held that:- The decision in Johnson & Johnson Limited Versus Commissioner of Income Tax-LTU [2014 (2) TMI 555 - ITAT MUMBAI] followed - the expenditure on production of advertisement films is revenue in nature - the expenditure on production of advertisement films is revenue in nature and accordingly direct the AO to delete the same – Decided in favour of Assessee. Adjustments made u/s. 145A of the Act – Held that:- The decision in Johnson & Johnson Limited Versus Commissioner of Income Tax-LTU [2014 (2) TMI 555 - ITAT MUMBAI] followed – the matter remitted back to the AO for fresh adjudication – Decided in favour of Assessee. Reserve for cash discount of the previous year written back during the current year – Held that:- The decision in ADDL COMMISSIONER OF INCOME TAX Versus M/s JOHNSON & JOHNSON LTD [2013 (6) TMI 286 - ITAT MUMBAI] followed - reserves which were not allowed in the earlier assessment year was written back during the current year – thus, the matter remitted back to the AO to decide the alternative grievance of the assessee – Decided in favour of Assessee. Disallowance of 1% of travelling expenditure – Held that:- The decision in Johnson & Johnson Limited Versus Commissioner of Income Tax-LTU [2014 (2) TMI 555 - ITAT MUMBAI] followed – the adhoc disallowance deleted on travelling expenses – Decided in favour of Assessee. Disallowance of depreciation claimed on testing equipments – Held that:- The decision in Johnson & Johnson Limited Versus Commissioner of Income Tax-LTU [2014 (2) TMI 555 - ITAT MUMBAI] followed - the claim of depreciation on the testing equipments allowed – thus, the AO is directed to allow the claim of depreciation on testing equipments – Decided in favour of Assessee. Short grant of credit for TDS – Held that:- The issue needs verification at the assessment stage – thus, the AO is directed to verify the TDS certificates and then allow the correct claim as per the provisions of the law – Decided in favour of Assessee. Issues Involved:1. Disallowance of tax on Brand Usage Royalty2. Disallowance of service tax3. Disallowance of technical know-how royalty payment on traded goods4. Restriction of technical know-how royalty to 1% for manufactured goods5. Disallowance of tax and R&D Cess paid on technical know-how royalty6. Disallowance of service tax paid on know-how royalty7. Adjustment in respect of Advertising, Marketing, and Promotion (AMP) expenditure8. Disallowance of expenditure on production of advertisement films9. Adjustments made under Section 145A10. Non-grant of relief for reserve for cash discount11. Disallowance of 1% of traveling expenditure12. Disallowance of depreciation on testing equipment13. Short grant of credit for TDS14. Charging of interest under Sections 234B and 234D15. Initiation of penalty proceedings under Section 271(1)(c)Detailed Analysis:1. Disallowance of tax on Brand Usage Royalty:The DRP upheld the adjustment made by the AO, stating the issue was recurring from earlier years. The Tribunal, referencing its decisions from A.Y. 2002-03 and A.Y. 2006-07, deleted the adjustment of Rs. 182.34 lakhs, allowing this ground.2. Disallowance of service tax:The DRP confirmed the AO's action, noting the issue was from earlier years. The Tribunal, referencing its decision from A.Y. 2006-07, deleted the addition of Rs. 150.25 lakhs, allowing this ground.3. Disallowance of technical know-how royalty payment on traded goods:The DRP upheld the AO's adjustments, citing earlier years. The Tribunal, referencing its decision from A.Y. 2006-07, deleted the addition of Rs. 1172.64 lakhs, allowing this ground.4. Restriction of technical know-how royalty to 1% for manufactured goods:The DRP upheld the TPO's adjustments, citing earlier years. The Tribunal, referencing its decisions from A.Y. 2002-03 and A.Y. 2006-07, deleted the addition of Rs. 2221.16 lakhs, allowing this ground.5. Disallowance of tax and R&D Cess paid on technical know-how royalty:The DRP confirmed the TP adjustments made by the AO, citing earlier years. The Tribunal, referencing its decisions from A.Y. 2002-03 and A.Y. 2006-07, deleted the addition of Rs. 678.78 lakhs, allowing this ground.6. Disallowance of service tax paid on know-how royalty:The DRP upheld the TPO's adjustments, citing earlier years. The Tribunal, referencing its decision from A.Y. 2006-07, deleted the disallowance, allowing these grounds.7. Adjustment in respect of Advertising, Marketing, and Promotion (AMP) expenditure:The TPO identified AMP expenses as a deemed international transaction and applied the residual Profit Split Method (PSM) and Bright Line standard to compute adjustments. The DRP agreed with the TPO on the international transaction aspect but preferred the Bright Line test over PSM. The Tribunal restored the issue to the TPO for a denovo assessment, considering new documents and following the decision in L.G. Electronics India Pvt. Ltd. Grounds were allowed for statistical purposes.8. Disallowance of expenditure on production of advertisement films:The DRP confirmed the AO's action, citing earlier years. The Tribunal, referencing its decisions from multiple years, held the expenditure as revenue in nature and directed the AO to delete the disallowance, allowing these grounds.9. Adjustments made under Section 145A:The DRP followed its findings from earlier years. The Tribunal, referencing its decision from A.Y. 2006-07, restored the issue to the AO for a fresh decision, allowing this ground for statistical purposes.10. Non-grant of relief for reserve for cash discount:The DRP upheld the AO's action but directed the AO to allow actual cash discounts. The Tribunal restored the issue to the AO to verify and avoid double taxation, allowing this ground for statistical purposes.11. Disallowance of 1% of traveling expenditure:The DRP confirmed the AO's action, citing earlier years. The Tribunal, referencing its decision from A.Y. 2006-07 and following the Gujarat High Court's decision, deleted the adhoc disallowance, allowing this ground.12. Disallowance of depreciation on testing equipment:The DRP followed its findings from earlier years. The Tribunal, referencing its decision from A.Y. 2006-07, directed the AO to allow the claim of depreciation, allowing these grounds.13. Short grant of credit for TDS:The Tribunal directed the AO to verify TDS certificates and allow the correct claim, allowing this ground for statistical purposes.14. Charging of interest under Sections 234B and 234D:The Tribunal noted the levy of interest is mandatory but consequential, directing the AO to charge interest per law, allowing this ground for statistical purposes.15. Initiation of penalty proceedings under Section 271(1)(c):The Tribunal dismissed this ground as premature.Conclusion:The appeal was partly allowed for statistical purposes, with several issues restored to the AO/TPO for fresh consideration and verification.