2017 (1) TMI 1086 - AT - Income Tax

Tax Tribunal Decision: Assessee wins on Transfer Pricing, brand promotion; Appeal dismissed, Section 14A remitted

The Tribunal allowed the assessee's appeal on various grounds, including Transfer Pricing (TP) adjustments on corporate guarantees, export agency ... Transfer Pricing (TP) adjustment on payment of corporate fee observing it as an international transaction - Held that:- The corporate guarantee fee provided by the assessee in respect of loan taken from IFC and extended LOC for working capital facility from SBI, Indonesia to the AE. It cannot fall under the purview of international transactions in terms of sec.92B of the Act so as to make the adjustment. The similar view was taken by Delhi Bench of Tribunal in the case of Bharti Airtel Ltd. Vs. ACIT reported [2014 (3) TMI 495 - ITAT DELHI]. In view of this decision, we are inclined to decide the issue in favour of the assessee and accordingly this ground taken by the assessee is allowed. TP adjustment - brand promotion expenses incurred by the assessee in promoting the market as the international transactions - Held that:- The legal and economic ownership of the brand of TVS in Indonesia was exploited by AE, PT TVS Indonesia and risk associated with marketing distribution was to be borne by PT TVS Indonesia. The AMP expenditure to be borne by PT TVS Indonesia only and the TVSM India is not connected with the sales of the AE, PT TVS Indonesia. All the risks associated with the sales of AEs is to be borne by AE only. In such circumstances, assessee is not required to incur any expenditure towards AMP. More so, when there is no stipulation by way of any agreement between the assessee and the A.E, it is borne in mind the assessee has sold similar goods to other non-AE, assessee would not have incurred such expenditure The benefit derived from impugned expenditure is not at all for the assessee and it goes directly to the AE only. In our opinion, AMP expenditure incurred in Indonesia, the benefit accrued to only AE and assessee cannot claim any such expenditure and the AE is in different tax jurisdiction constituted distinct and independent entity subject to the law of the Indonesia and TVSM is a parent company cannot be claimed the benefit of the A.E’s business or may claim beneficial ownership treating the A.E as virtual non entities. - Decided against assessee Disallowance u/s.14A r.w.Rule 8D - Held that:- AO has to consider the assessee’s own fund i.e. capital and reserves as available on the date of investment which yields exempted income and thereafter he shall apply the Formula in Rule 8D and also exclude investments in subsidiaries.With this observation, we remit the issue to the file of AO for fresh consideration. Hence, this ground is allowed for statistical purposes. Charging of notional royalty to tax - Held that:- In this case, assessee following the mercantile system of accounting, there is no question of deferment of receipt of income since the assessee was in a position to create the document as the transaction with AE which cannot be appreciated. It is only afterthought so as to postpone the liability of taxation. Accordingly, we are of the opinion that lower authorities were justified treating the accrued royalty as income of assessee. Thus, this ground is rejected. Disallowance of export agency commission paid to non-residents u/s.40(a)(i) - Held that:- As decided n assessee's own case for assessment year 2008-09 what was the nature of technical service that the nonresident agents had provided abroad to the assessee was not clear from the order of the Assessing Officer. The opening of letters of credit for the purpose of completing the export obligation was an incident of export and, therefore, the non-resident agent was under an obligation to render such services to the assessee, for which commission was paid. The non-resident agent did not provide technical services for the purposes of running of the business of the assessee in India. Therefore, the commission paid to the nonresident agents would not fall within the definition of “fees for technical services” and the assessee was not liable to deduct tax at source on payment of commission. Hedging loss - whether is allowable only on the basis of actual realization as termination of the contracts before 31.03.2011? - Held that:- Since the transaction is relating to acquisition of fixed assets and the profit or loss to be treated in capital field and it cannot be in Revenue in nature as held by Special Bench in the case of Oil & Nature Gas Corporation Ltd. Vs. DCIT (2002 (8) TMI 802 - ITAT DELHI). Hence, this ground of the appeal is rejected. Actual loss on exchange difference in repayment of ECB loan relating to non-imported assets - treated as “capital” in nature and allowed only depreciation on such loss - Held that:- In the absence of applicability of section 43A of the Act to the facts of the case and in the absence of any other provision of the Income Tax Act dealing with the issue, claim of exchange fluctuation loss in revenue account by the Assessee in accordance with generally accepted accounting practices and mandatory accounting standards notified by the ICAI and also in conformity with CBDT notification cannot be faulted. No inconsistency with any provision of Act or with any accounting practices has been brought to our notice. Otherwise also, in the light of fact that the conversion in foreign currency loans which led to impugned loss, were dictated by revenue considerations towards saving interest costs etc. we have no hesitation in coming to the conclusion that loss being on revenue account is an allowable expenditure under S. 37(1) of the Act. - Decided in favour of assessee Additional depreciation - remainder of depreciation from the earlier year on which only 50% of the eligible depreciation was claimed by the assessee - Held that:- Admittedly, similar issue came up for consideration in the case of ACIT Vs. M/s.Rittal IndiaPvt Ltd. [2016 (1) TMI 81 - KARNATAKA HIGH COURT] held nothing would not restrain the assessee from claiming the balance of the benefit in the subsequent assessment year. The Tribunal, in our view, has rightly held that additional depreciation allowed under Section 32(i) (iia) of the Act is a onetime benefit to encourage industrialization, and the provisions related to it have to be construed reasonably, liberally and purposively, to make the provision meaningful while granting additional allowance. - Decided in favour of assessee Issues Involved:1. Transfer Pricing (TP) adjustment on payment of corporate fee.2. TP adjustment regarding brand promotion expenses.3. Disallowance under Section 14A read with Rule 8D.4. Charging of notional royalty to tax.5. Disallowance of export agency commission paid to non-residents under Section 40(a)(i).6. Allowability of hedging loss.7. Treatment of actual loss on exchange difference in repayment of ECB loan.8. Disallowance of additional depreciation claimed.Detailed Analysis:1. Transfer Pricing (TP) Adjustment on Payment of Corporate Fee:The assessee provided a corporate guarantee to its associated enterprises (AEs) without charging any fee. The Transfer Pricing Officer (TPO) imputed a guarantee fee of 2% based on the commission charged by banks. The Dispute Resolution Panel (DRP) upheld this, citing the Finance Act 2012 and OECD guidelines, asserting that the transaction should be at arm’s length. However, the Tribunal referenced the case of Redington (India) Ltd. and Bharti Airtel Ltd., concluding that the corporate guarantee does not involve any cost to the assessee and is outside the ambit of international transactions for arm's length price adjustment. Thus, the Tribunal decided in favor of the assessee, allowing the appeal on this ground.2. TP Adjustment Regarding Brand Promotion Expenses:The TPO considered the brand promotion expenses incurred by the assessee in Indonesia as an international transaction, requiring TP adjustments. The assessee argued that these expenses were for building brand recognition in a new market and should not be considered an international transaction. The Tribunal, however, noted that the benefit of these expenses accrued to the AE in Indonesia and not to the assessee. Therefore, the Tribunal upheld the TPO's adjustment, rejecting the assessee's appeal on this ground.3. Disallowance Under Section 14A Read with Rule 8D:The DRP confirmed the AO's disallowance under Section 14A, stating that the assessee had not maintained separate accounts for investments generating exempt income. The Tribunal, referencing prior decisions, remitted the issue back to the AO for fresh consideration, directing the AO to exclude interest on borrowings used for specific business purposes and investments in subsidiaries. Hence, this ground was allowed for statistical purposes.4. Charging of Notional Royalty to Tax:The TPO charged notional royalty to tax, which the assessee contested, citing an amendment to the agreement due to the AE's continuous losses. The Tribunal upheld the TPO's decision, stating that the assessee, following the mercantile system of accounting, could not defer income recognition. Thus, the appeal on this ground was rejected.5. Disallowance of Export Agency Commission Paid to Non-Residents Under Section 40(a)(i):The AO disallowed export agency commission payments for non-deduction of TDS. The Tribunal, referencing the jurisdictional High Court's decision in CIT vs. Faizan Shoes Pvt Ltd., held that the commission paid to non-resident agents for services rendered outside India does not attract TDS. Therefore, the Tribunal allowed the assessee's appeal on this ground.6. Allowability of Hedging Loss:The DRP treated hedging losses as speculative and not allowable until actual realization. The Tribunal, referencing the Supreme Court's decision in CIT vs. Woodward Governor India Pvt Ltd., held that such losses are revenue in nature and allowable. Hence, the appeal on this ground was allowed.7. Treatment of Actual Loss on Exchange Difference in Repayment of ECB Loan:The AO treated the actual loss on exchange difference as capital in nature. The Tribunal, referencing the Pune Tribunal's decision in Cooper Corporation, held that such losses are revenue in nature and allowable. Thus, the appeal on this ground was allowed.8. Disallowance of Additional Depreciation Claimed:The AO disallowed additional depreciation claimed on assets for which only 50% depreciation was claimed in the previous year. The Tribunal, referencing the Karnataka High Court's decision in ACIT vs. M/s. Rittal India Pvt Ltd., allowed the claim, stating that the balance of the benefit can be claimed in the subsequent year. Thus, the appeal on this ground was allowed.Summary:The Tribunal allowed the assessee's appeal on several grounds, including TP adjustments on corporate guarantees, export agency commission, hedging losses, actual loss on exchange differences, and additional depreciation. However, it upheld the TP adjustment on brand promotion expenses and the charging of notional royalty to tax. The issue under Section 14A was remitted back to the AO for fresh consideration. The Revenue's appeal was dismissed as it became infructuous.