2019 (9) TMI 1065 - AT - Income Tax

Tribunal ruling: TP adjustments deleted, provisions allowed, disallowances upheld.

The Tribunal allowed the assessee's appeal in part and dismissed the revenue's appeal. The Transfer Pricing (TP) adjustment related to Advertising, ... TP adjustments - advertising, marketing and promotion expenses (AMP Expenses) - HELD THAT:- Transfer Pricing Officer (TPO) held that by incurring such expenses, the assessee has provided services to its Associate Enterprises (AE). Though a number of arguments were advanced by both the parties on this issue, the primary argument of the assessee is that, the transaction in question is not an international transaction. AMP Expenses cannot be regarded as an international transaction as per Section 92B of the Act, in the case of the assessee so as to invoke provisions of Section 92 of the Act. As we have held that the that the AMP expenditure in question is not an international transaction, the TP adjustment made in this regard is hereby deleted and these grounds of the assessee are allowed. TP adjustment with respect to research and training expenditure (‘R & T Expenditure’) - HELD THAT:- Assessee has not carried out any R&T activities. The expenditure in question is incurred only for its manufacturing operations and local environmental compliance from HSE perspective. The assessee submitted that ICT also does not carry out any research and development activities for development of any new project/technology. It is primarily a captive support centre for the local India operation of the assessee. Thus, we are of the considered opinion that the expenditure on research and training does not constitute any international transactions on facts. We also find that the TPO/AO has not considered this expenditure incurred in the earlier years towards R&T expenses, as international transactions. Thus, in view of the above discussion, we hold that the expenditure incurred on R&T is not an international transaction as per Section 92B of the Act, so as to enable invocation of provision of Section 92 TP Adjustment made with regard to the International Transaction pertaining to “Intra Group Services” - HELD THAT:- As Consistent with the view taken therein, as agreed by both the parties, we restore this issue to the file of the Assessing Officer, for fresh adjudication, in accordance with law. Accordingly, this ground of the assessee is allowed for statistical purposes. Provisions made for meeting liabilities is an ascertained liability - HELD THAT:- DRP on the ground that the provision was made based on data of past activities and on the ground that the provision was made in a systematic and scientific manner directed the Assessing Officer to allow the same by applying the propositions of law laid down by the Hon’ble Supreme Court in the case of Rotork Controls India (P.) Ltd. v. Commissioner of Income-tax, Chennai [2009 (5) TMI 16 - SUPREME COURT] Disallowance by the DRP, of normal depreciation and additional depreciation opertaining to Colour Soluble Machine - HELD THAT:- Colour solution machines, have rightly been classified as plant and machinery by the DRP. It correctly held that these are operational tools and cannot be called furniture and that the test must be as to whether these machines are owned by the assessee and have been used for the purpose of business of the assessee. These tests were satisfied for claim of depreciation as “plant and machinery” We find not infirmity in this order of the ld. DRP. Thus, we uphold the same and dismiss this ground of the revenue. Disallowance u/s 14A r.w.r. 8D - HELD THAT:- The assessee suo moto disallowed ₹ 7,61,500/- u/s 14A r.w.r. 8D, in its computation of income under the normal provision of the Act. The Assessing Officer enhanced the disallowance by ₹ 5,34,41,354/-. The DRP directed the Assessing Officer to follow the judgment of the Hon’ble Delhi High Court in the case of Cheminvest Ltd. vs. CIT [2015 (9) TMI 238 - DELHI HIGH COURT] and recompute the disallowance. Disallowance u/s 14A r.w.r. 8D while computing the book profits u/s 115JB - HELD THAT:- Directions of the DRP are that the Assessing Officer has to strictly construe Section 115JB of the Act and not to make a similar disallowance therein. See VIREET INVESTMENT (P.) LTD. [2017 (6) TMI 1124 - ITAT DELHI] Issues Involved:1. Transfer Pricing (TP) adjustments regarding Advertising, Marketing, and Promotion (AMP) expenses.2. TP adjustment concerning Research and Training (R&T) expenditure.3. TP adjustment related to Intra Group Services.4. Provision for meeting liabilities as an ascertained liability.5. Depreciation on Colour Soluble Machines.6. Disallowance under Section 14A read with Rule 8D.7. Adjustment of disallowance under Section 14A while computing book profits under Section 115JB.8. Initiation of penalty proceedings under Section 271(1)(c).9. Levy of interest under Sections 234A, 234B, 234C, and 234D.Detailed Analysis:1. Transfer Pricing (TP) Adjustments Regarding AMP Expenses:The primary issue was whether AMP expenses constitute international transactions. The Tribunal referred to the ITAT Kolkata Bench decision in the case of DCIT vs. M/s Philips India Ltd., which held that AMP expenses do not represent international transactions. The Tribunal also cited the Hon'ble Delhi High Court's judgment in Maruti Suzuki India Limited vs. CIT, concluding that AMP expenses cannot be regarded as international transactions under Section 92B of the Act. Consequently, the TP adjustment related to AMP expenses was deleted.2. TP Adjustment Concerning Research and Training (R&T) Expenditure:The jurisdictional issue was whether R&T expenses could be considered international transactions. The expenses related to service fees paid to ICT India Research & Technology Centre (ICT), a not-for-profit entity providing technical support and training. The Tribunal found that the expenses were for local manufacturing operations and environmental compliance, not for research and development activities. Thus, the R&T expenses were not deemed international transactions under Section 92B, leading to the deletion of the TP adjustment.3. TP Adjustment Related to Intra Group Services:The Tribunal referred to its earlier decision in the assessee’s own case, where it was held that the TPO had not carried out the necessary exercise to compute the arm's length price due to the alleged non-submission of an agreement. The matter was remanded back to the TPO for fresh consideration and a speaking order after providing an opportunity to the assessee.4. Provision for Meeting Liabilities as an Ascertained Liability:The issue was whether provisions made for meeting liabilities were ascertained liabilities. The DRP directed the Assessing Officer to allow the provision based on past activities and systematic estimation, following the Supreme Court's decision in Rotork Controls India (P.) Ltd. v. CIT. The Tribunal found no reason to disagree with the DRP's directions and dismissed the revenue's grounds.5. Depreciation on Colour Soluble Machines:The dispute was whether Colour Soluble Machines should be classified as 'plant and machinery' or 'furniture and fixtures.' The DRP classified them as 'plant and machinery,' considering them operational tools owned and used by the assessee for business purposes. The Tribunal upheld this classification and dismissed the revenue's grounds.6. Disallowance Under Section 14A Read with Rule 8D:The assessee had earned exempt income and made a suo moto disallowance under Section 14A. The Assessing Officer enhanced this disallowance, but the DRP directed the Assessing Officer to follow the Delhi High Court's judgment in Cheminvest Ltd. vs. CIT and recompute the disallowance. The Tribunal found no infirmity in the DRP's direction and dismissed the revenue's grounds.7. Adjustment of Disallowance Under Section 14A While Computing Book Profits Under Section 115JB:The DRP directed the Assessing Officer not to make a similar disallowance under Section 115JB. The Tribunal referred to the Special Bench decision in ACIT vs. Vireet Investment (P.) Ltd., which aligned with the DRP's direction. The Tribunal upheld the DRP's order and dismissed the revenue's grounds.8. Initiation of Penalty Proceedings Under Section 271(1)(c):The Tribunal dismissed this ground as premature.9. Levy of Interest Under Sections 234A, 234B, 234C, and 234D:The Tribunal dismissed this ground as consequential in nature.Conclusion:The appeal of the assessee was allowed in part, and the appeal of the revenue was dismissed.