Tribunal Partially Allows Assessee's Appeal, Deletes Disallowances Under Section 37, Remands Transfer Pricing Issues for Re-evaluation

The Deputy Commissioner of Income Tax, Circile-1 (1), Pune. Versus Carraro India Private Limited And Carraro India Private Limited Versus The Deputy Commissioner of Income Tax, Circile-1 (1), Pune.

The Deputy Commissioner of Income Tax, Circile-1 (1), Pune. Versus Carraro India Private Limited And Carraro India Private Limited Versus The Deputy ... Issues Involved:
1. Disallowance under Section 37 of the Income Tax Act.
2. Transfer pricing adjustment related to payment of brand royalty.
3. Transfer pricing adjustment related to payment of professional fees.
4. Disallowance under Section 14A read with Rule 8D.
5. Disallowance due to failure to deduct TDS under Section 195.

Detailed Analysis:

1. Disallowance under Section 37 of the Income Tax Act:
The assessee challenged the disallowance of Rs. 8,17,28,763/- on account of brand royalty and royalty for technical know-how, Rs. 2,28,567/- for amortization of lease charges, and Rs. 9,13,87,792/- for legal and professional fees. The Tribunal referred to its previous judgments for the assessment years 2009-10 and 2010-11, where it was held that the royalty payments were incurred wholly and exclusively for business purposes. The Tribunal reiterated that the royalty for technical know-how and brand was necessary for the assessee's manufacturing processes and business operations. Consequently, the disallowance under Section 37 was deleted, and the appeal on this ground was allowed.

2. Transfer Pricing Adjustment Related to Payment of Brand Royalty:
The Transfer Pricing Officer (TPO) had determined the Arm's Length Price (ALP) for brand royalty as NIL, arguing that the brand royalty was not justified since the company had been in existence for years without such charges. The Tribunal, following its previous year’s decisions, remanded the matter back to the TPO. It was directed to re-determine the ALP, considering that the assessee had indeed benefited from using the brand name and logo, which helped in increasing turnover and acquiring new customers. The Tribunal emphasized that the TPO should not disregard the actual benefits derived by the assessee from the brand royalty payments.

3. Transfer Pricing Adjustment Related to Payment of Professional Fees:
The TPO had also determined the ALP for professional fees as NIL, claiming insufficient evidence of services rendered by the Associated Enterprises (AEs). The Tribunal, referencing its earlier orders, held that the assessee had provided sufficient evidence, including emails and other documents, proving that services were availed from AEs. The Tribunal directed the TPO to re-evaluate the ALP, acknowledging that the services were indeed rendered and were necessary for the assessee's business operations. The Tribunal rejected the notion that the lack of perceived benefit could justify a NIL ALP.

4. Disallowance under Section 14A read with Rule 8D:
The Assessing Officer had disallowed Rs. 4,22,929/- under Section 14A, arguing that the assessee failed to demonstrate that non-interest-bearing funds were used for investments. The Tribunal upheld the DRP’s decision, which relied on the Delhi High Court’s ruling in Holcim India Pvt. Ltd., stating that no disallowance under Section 14A can be made if no exempt income is received during the year. The Tribunal also referenced the Bombay High Court’s decisions, which supported this view. Thus, the disallowance under Section 14A was deleted.

5. Disallowance due to Failure to Deduct TDS under Section 195:
The Assessing Officer had disallowed Rs. 1,61,03,794/- for commission payments to overseas agents, citing non-deduction of TDS under Section 195. The Tribunal agreed with the DRP’s findings that the commission payments were for services rendered outside India and did not fall under the purview of fees for technical services under Section 9(1)(vii). Therefore, there was no obligation to deduct TDS. The Tribunal upheld the deletion of this disallowance.

Conclusion:
The assessee’s appeal was partly allowed for statistical purposes, and the Revenue’s appeal was dismissed. The Tribunal directed re-evaluation of certain transfer pricing adjustments while upholding the deletion of disallowances under Sections 37 and 14A, and for non-deduction of TDS under Section 195. The judgment emphasized adherence to previous Tribunal decisions and higher court rulings, ensuring consistency in legal interpretations.