2018 (10) TMI 1630 - AT - Income Tax

Appeal partly allowed with directions on benchmarking, royalty fees, Diwali gifts, gift articles.

The appeal was partly allowed for statistical purposes, with directions for fresh examination on several issues. The Tribunal emphasized the need for ... Royalty and Technical knowhow expenses - assessee could not explain as to how these transactions are inextrically connected - tax authorities have considered the assessee as a “Contract Manufacturer” and accordingly disallowed the Royalty and Technical knowhow expenses - Held that:- The facts available on record would show that the assessee has been selling goods to Non-AEs also. Accordingly we hold that the assessee should be considered as a Licence Manufacturer in the facts and circumstances of the case. Since we have held that the assessee is licenced manufacturer, the basic foundation on which the disallowances of royalty and technical knowhow expenses were made would fail. The assessee has also pointed out that the TPO has not adopted any of one of the prescribed methods for benchmarking the transactions and the aggregation of intrically connected transactions and determining the ALP of the transactions at entity level under TNMM method was justified. We notice that the TPO had no occasion to examine all these contentions, since he considered the assessee to be a contract manufacturer. Accordingly the issues relating to Royalty and Technical knowhow requires fresh examination at the end of the AO/TPO. Disallowance of Annual charges of Microsoft licence fees - determine the ALP at NIL - Held that:- The reasoning given by the tax authorities to determine the ALP at NIL is not justified. The Ld A.R submitted that the Sulzer management AG and Sulzer Management Ltd are one and same company. The Tax authorities were under the impression that there is variation between the transactions reported in Form 3CEB and the actual agreement submitted by the assessee due to existence of different names, which according to assessee refers to same company, referred above. The assessee has furnished a document from Commercial Register of the Canton of Zurich to show that both the names refer to the same company. In any case, this transaction has also not been benchmarked under any of the recognised methods by the TPO. Accordingly we restore this issue also to the file of AO/TPO for examining it afresh. Disallowance of Provision for Diwali gifts to employees - allowable business expenditure - AO took the view that this expenditure is akin to bonus and hence it is allowable only on payment basis u/s 43B - Held that:- We notice that the assessee has not given any valid reason for making provision towards diwali gifts payable to employees as at 31.3.2008, i.e., for the diwali 2008, which normally falls in Oct/Nov 2008, the assessee has made provisions as on 31.3.2008. Accordingly we are of the view that the disallowance made by the AO was justified on the reasoning that it may not relate to the year ending 31.3.2008. We find merit in the alternative submissions of the assessee. The assessee claims to have reversed the provision in the succeding year, meaning thereby, the assessee has offered the amount of ₹ 9.00 lakhs as its income in AY 2009-10. Since the disallowance has been confirmed by us, the same would result in double assessment of same item of income, if the income of ₹ 9.00 lakhs voluntarily offered by the assessee in AY 2009-10 is not reduced. Accordingly we direct the AO to examine the claim of the assessee and reduce the amount of ₹ 9.00 lakhs in AY 2009-10, if he is satisfied with the claim of the assessee. The assessee may also move appropriate petition before the AO in this regard. Disallowance of gift articles - AO noticed that they consisted of expenses on purchase of dry fruits, purchase of sony camera, decorative pieces etc. and how these gifts would benefit the company - Held that:- We notice that the AO has disallowed a portion of expenses on estimated basis, since the assessee could not give explanations to the satisfaction of the AO. The Ld CIT(A) also was not convinced with the contentions of the assessee and hence he has confirmed the disallowance. Since the disallowance has been made on estimated basis on certain short falls, we do not find any infirmity in the disallowance so made. Accordingly we confirm the order passed by Ld CIT(A) on this issue. Addition made on the basis of 26AS statement - Held that:- Before us the assessee has filed a reconciliation statement, which requires examination at the end of AO. Accordingly we set aside the order passed by Ld CIT(A) on this issue and restore the same to the file of the AO for examining it afresh. Royalty and Technical knowhow expenses - assessee could not explain as to how these transactions are inextrically connected - tax authorities have considered the assessee as a “Contract Manufacturer” and accordingly disallowed the Royalty and Technical knowhow expenses - Held that:- The facts available on record would show that the assessee has been selling goods to Non-AEs also. Accordingly we hold that the assessee should be considered as a Licence Manufacturer in the facts and circumstances of the case. Since we have held that the assessee is licenced manufacturer, the basic foundation on which the disallowances of royalty and technical knowhow expenses were made would fail. The assessee has also pointed out that the TPO has not adopted any of one of the prescribed methods for benchmarking the transactions and the aggregation of intrically connected transactions and determining the ALP of the transactions at entity level under TNMM method was justified. We notice that the TPO had no occasion to examine all these contentions, since he considered the assessee to be a contract manufacturer. Accordingly the issues relating to Royalty and Technical knowhow requires fresh examination at the end of the AO/TPO. Disallowance of Annual charges of Microsoft licence fees - determine the ALP at NIL - Held that:- The reasoning given by the tax authorities to determine the ALP at NIL is not justified. The Ld A.R submitted that the Sulzer management AG and Sulzer Management Ltd are one and same company. The Tax authorities were under the impression that there is variation between the transactions reported in Form 3CEB and the actual agreement submitted by the assessee due to existence of different names, which according to assessee refers to same company, referred above. The assessee has furnished a document from Commercial Register of the Canton of Zurich to show that both the names refer to the same company. In any case, this transaction has also not been benchmarked under any of the recognised methods by the TPO. Accordingly we restore this issue also to the file of AO/TPO for examining it afresh. Disallowance of Provision for Diwali gifts to employees - allowable business expenditure - AO took the view that this expenditure is akin to bonus and hence it is allowable only on payment basis u/s 43B - Held that:- We notice that the assessee has not given any valid reason for making provision towards diwali gifts payable to employees as at 31.3.2008, i.e., for the diwali 2008, which normally falls in Oct/Nov 2008, the assessee has made provisions as on 31.3.2008. Accordingly we are of the view that the disallowance made by the AO was justified on the reasoning that it may not relate to the year ending 31.3.2008. We find merit in the alternative submissions of the assessee. The assessee claims to have reversed the provision in the succeding year, meaning thereby, the assessee has offered the amount of ₹ 9.00 lakhs as its income in AY 2009-10. Since the disallowance has been confirmed by us, the same would result in double assessment of same item of income, if the income of ₹ 9.00 lakhs voluntarily offered by the assessee in AY 2009-10 is not reduced. Accordingly we direct the AO to examine the claim of the assessee and reduce the amount of ₹ 9.00 lakhs in AY 2009-10, if he is satisfied with the claim of the assessee. The assessee may also move appropriate petition before the AO in this regard. Disallowance of gift articles - AO noticed that they consisted of expenses on purchase of dry fruits, purchase of sony camera, decorative pieces etc. and how these gifts would benefit the company - Held that:- We notice that the AO has disallowed a portion of expenses on estimated basis, since the assessee could not give explanations to the satisfaction of the AO. The Ld CIT(A) also was not convinced with the contentions of the assessee and hence he has confirmed the disallowance. Since the disallowance has been made on estimated basis on certain short falls, we do not find any infirmity in the disallowance so made. Accordingly we confirm the order passed by Ld CIT(A) on this issue. Addition made on the basis of 26AS statement - Held that:- Before us the assessee has filed a reconciliation statement, which requires examination at the end of AO. Accordingly we set aside the order passed by Ld CIT(A) on this issue and restore the same to the file of the AO for examining it afresh.- Appeal filed by the assessee is treated as partly allowed for statistical purposes. Issues Involved:1. Disallowance of expenses of Royalty, technical knowhow fees, and annual charges of Microsoft licensing fee by determining the ALP at NIL.2. Disallowance of Provision for Diwali Gifts.3. Disallowance of Gift articles.4. Addition of receipts of Rs. 3.32 lakhs reported in 26AS.Detailed Analysis:1. Disallowance of Expenses of Royalty, Technical Knowhow Fees, and Annual Charges of Microsoft Licensing Fee:- Royalty Payments: The assessee characterized itself as a 'License Manufacturer' and used the TNMM method to benchmark transactions. The TPO determined the ALP at NIL, arguing the assessee was a contract manufacturer without exclusive rights to sell goods without AE's approval. The CIT(A) upheld this view. The assessee contended it was indeed a licensed manufacturer, exporting goods to third parties, and that the royalty rate was approved by RBI. The Tribunal found merit in the assessee's arguments, noting that the assessee sold goods to non-AEs, indicating it was not a contract manufacturer. The Tribunal directed the AO/TPO to re-examine the issue, accepting that the assessee was a licensed manufacturer.- Technical Knowhow Fees: The TPO determined the ALP at NIL, considering the assessee a contract manufacturer. The CIT(A) also disallowed the fees, noting the payments exceeded RBI limits. The Tribunal, agreeing with the assessee's licensed manufacturer status, directed a fresh examination by the AO/TPO, highlighting that the TPO did not use prescribed methods for benchmarking.- Microsoft Licensing Fee: The TPO determined the ALP at NIL, citing discrepancies in the agreement and reporting. The assessee clarified that Sulzer Management AG and Sulzer Management Ltd were the same entity. The Tribunal found the tax authorities' reasoning unjustified and directed a fresh examination by the AO/TPO.2. Disallowance of Provision for Diwali Gifts:- The AO disallowed Rs. 9.00 lakhs for Diwali gifts, considering it akin to a bonus and contingent in nature. The CIT(A) upheld this view. The assessee argued the provision was reversed in the succeeding year, offering it as income. The Tribunal found the disallowance justified but directed the AO to reduce the amount in AY 2009-10 to avoid double taxation.3. Disallowance of Gift Articles:- The AO disallowed 20% of Rs. 6.06 lakhs for gift articles due to insufficient justification from the assessee. The CIT(A) confirmed this disallowance. The Tribunal upheld the disallowance, finding no infirmity in the estimated basis used by the AO.4. Addition of Receipts of Rs. 3.32 Lakhs Reported in 26AS:- The assessee provided a reconciliation statement requiring examination by the AO. The Tribunal set aside the CIT(A)'s order and directed the AO to re-examine the issue afresh.Conclusion:The appeal was partly allowed for statistical purposes, with directions for fresh examination on several issues. The Tribunal emphasized the need for proper benchmarking methods and justified the assessee's status as a licensed manufacturer, impacting the disallowance of royalty and technical knowhow fees. The disallowance of Diwali gifts was upheld with directions to avoid double taxation, and the disallowance of gift articles was confirmed. The addition based on 26AS required further examination.