2013 (6) TMI 909 - AT - Income Tax

Tribunal Partly Allows Appeal: Relief on TATA Brand Promotion, Confirms Section 14-A Disallowance, Remands Transfer Pricing.

M/s Tata AutoComp Systems Limited Versus Asstt. Commissioner of Income-Tax-Cir. 2 (3), Mumbai.

The Tribunal partly allowed the appeal, granting relief on the disallowance for TATA brand equity and promotion scheme. It confirmed the disallowance ... Disallowance of payment made on account of subscription towards “TATA” brand equity and business promotion scheme - services to the global automotive industries - disallowance u/s 14A read with rule 8D of the Income Tax Rules, 1962 - Addition by way of transfer pricing adjustment in respect of assesse’s international transactions pertaining to reimbursement of rework charges to its Associated Enterprise - additional ground - credit of tax deducted at source. HELD THAT:- It is pertinent to note that in the case of Tata Steel, another company belonging to TATA group, a similar subscription paid by the assessee company to Tata Sons Ltd. was proposed to be disallowed by the A.O. in the draft assessment order for A.Y. 2008-09 and when the assessee objected to the said disallowance before the DRP by relying on the decision of the Tribunal in the case of Rallis India Ltd.[2011 (8) TMI 1343 - ITAT MUMBAI], the DRP directed the A.O. to allow the said expenditure after verifying as to whether the department has accepted the said decision of the Tribunal. On verification, the A.O. found that no appeal was filed by the department against the order of the Tribunal passed in the case of Rallis India Ltd. giving relief to the assessee on the issue of brand equity subscription and accordingly he allowed similar subscription paid by Tata Steel Ltd. in the final assessment completed u/s 143(3) r.w.s. 144-C of the Act vide order dtd. 27-11-2010. It is thus clear that this issue is squarely covered in favour of the assessee by the decision of the co-ordinate Bench of this Tribunal in the case of Rallis India Ltd. which has also been accepted by the department. Respectfully following the said decision of the Tribunal, we delete the disallowance made by the A.O. on account of subscription paid by the assessee to Tata Sons Ltd. towards brand equity and promotion scheme and allow ground No. 1 of assessee’s appeal. Disallowance u/s 14-A - The disallowance on account of interest was worked out by the assessee at 35% of the total interest adopting the ratio of tax free investment to total investment and this basis was accepted by the TPO in principle. As per the working given by the TPO, the ratio between tax free investment and total investment, however, was 38.47% and not 35% as taken by the assessee and accordingly the disallowance u/s 14-A of the Act on account of interest was increased by him to ₹ 1,41,95,393/- in the draft assessment order. At the time of hearing before us, the ld. Counsel for the assessee has made an attempt to show that the ratio of 38.47% worked out by the TPO is not correct and the same actually is less than 35%. It is, however, observed that in the final assessment order, the disallowance on account of interest u/r 8-D(2)(ii) was made by the assessee only to the extent of ₹ 1.07 crores as per the direction of the DRP and the same being lower than the amount of disallowance offered by the assessee u/s 14-A of the Act on account of interest, we are of the view that the assessee cannot be said to have any grievance on this issue. We are unable to accept this stand of the assessee. The investment activity of the assessee resulting in exempt dividend income of ₹ 16.83 crores was the substantial activity and it cannot be accepted that this entire activity was looked after and handled by one Treasury person drawing the salary of ₹ 6,21,151/-. The administrative expenses incurred by the assessee thus were certainly attributable to the investment activity also which fetched the exempt of dividend income of ₹ 16.83 crores and the same therefore were required to be allocated to the exempt dividend income on some reasonable basis. The basis adopted by the assessee to attribute the administrative expenses only to the extent of salary of one Treasury staff thus was not reasonable and the findings to this effect was recorded by the A.O. in his final order giving specific reasons for not accepting the submissions made by the assessee to justify the quantum of disallowance offered u/s 14-A of the Act. Having found that the disallowance offered by the assessee on account of administrative expenses u/s 14-A of the Act was not reasonable, the A.O., in our opinion, was fully justified in applying the basis or the formula given in Rule 8-D(2)(iii) of the Income Tax rules, 1962 to compute the disallowance u/s 14-A of the Act on account of other expenses. We are, therefore, of the view that the disallowance u/s 14-A as computed by the A.O. is quite reasonable and confirming the same, we dismiss ground No. 2 of assessee’s appeal. Addition by way of transfer pricing adjustment in respect of assesse’s international transactions pertaining to reimbursement of rework charges to its Associated Enterprise - We find merit in this contention of the ld. counsel for the assessee. The same, however, is only an alternative contention and what is relevant to be seen first is the direct evidence to prove that the amount in question was reimbursed by the assessee to the Associated Enterprise on cost to cost basis and the invoices raised by the third party for repair work is a vital evidence in this regard which can clearly establish the arm’s length price of the repair work done. We, therefore, restore this issue to the file of the A.O. for deciding the same afresh in the light of evidence to be produced by the assessee in support of its claim on this issue as discussed above. If the assessee fails to produce such evidence, the A.O. is directed to consider the alternate contention of the assessee on this issue in accordance with law. Ground No. 3 of assessee’s appeal is accordingly treated as allowed for statistical purpose. We admit the additional ground filed by the assessee and direct the A.O. to consider and allow the claim of the assessee for TDS amounting to ₹ 44,96,139/- after necessary verification in accordance with law. The additional ground of the assessee is accordingly treated as allowed. In the result, appeal of the assessee is partly allowed. Issues Involved:1. Disallowance of Rs. 32,42,666/- on account of payment to Tata Sons Ltd. for TATA brand equity and business promotion scheme.2. Disallowance of Rs. 1.06 crores u/s 14-A read with Rule 8-D of the Income Tax Rules, 1962.3. Addition of Rs. 2.61 crores by way of transfer pricing adjustment in respect of reimbursement of rework charges to Associated Enterprise.4. Additional ground for credit of tax deducted at source amounting to Rs. 44,96,139/-.Summary:Issue 1: Disallowance of Rs. 32,42,666/- for TATA Brand Equity and Promotion SchemeThe assessee, a company engaged in providing services to the global automotive industries, claimed a deduction for Rs. 32,42,666/- paid to Tata Sons Ltd. for TATA brand equity and promotion scheme. The A.O. disallowed the claim stating that the assessee had been using the TATA name since its incorporation and did not require prior permission. The A.O. also noted that similar claims were not examined in past assessments. The Tribunal, however, found that the issue was covered in favour of the assessee by a co-ordinate Bench decision in the case of Rallis India Ltd., where such payments were allowed as deductions. Respectfully following this decision, the Tribunal deleted the disallowance and allowed the ground.Issue 2: Disallowance of Rs. 1.06 crores u/s 14-A read with Rule 8-DThe assessee had received dividend income of Rs. 16,83,27,131/- and made a disallowance of Rs. 1,34,95,120/- u/s 14-A. The A.O. computed the disallowance at Rs. 2,94,20,393/- by applying Rule 8-D, but the DRP directed the A.O. to restrict it to Rs. 1.07 crores. The Tribunal found that the A.O. was justified in applying Rule 8-D(2)(iii) as the assessee's allocation of administrative expenses was not reasonable. The Tribunal confirmed the disallowance made by the A.O.Issue 3: Addition of Rs. 2.61 crores by way of Transfer Pricing AdjustmentThe assessee reimbursed rework charges of Rs. 2,67,90,359/- to its AE, TKT. The TPO determined the arm's length price as nil due to lack of evidence of rework and services rendered. The DRP reduced the adjustment by Rs. 6,42,640/- based on evidence provided. The Tribunal restored the issue to the A.O. for fresh consideration, allowing the assessee to produce evidence or consider alternate contentions based on past and future data.Issue 4: Additional Ground for Credit of TDSThe assessee filed an additional ground seeking credit for TDS amounting to Rs. 44,96,139/-. The Tribunal admitted the additional ground and directed the A.O. to allow the claim after necessary verification.Conclusion:The appeal was partly allowed, with the Tribunal providing relief on the disallowance for TATA brand equity and promotion scheme, confirming the disallowance u/s 14-A, and remanding the transfer pricing adjustment issue for fresh consideration. The additional ground for TDS credit was also allowed.