2019 (11) TMI 705 - AT - Income Tax

Tribunal allows appeal, orders deletion of disallowances & re-adjudication. Emphasizes consistent approach.

M/s. Merck Specialties Pvt. Ltd. Versus DCIT-Range 6 (3), Mumbai.

M/s. Merck Specialties Pvt. Ltd. Versus DCIT-Range 6 (3), Mumbai. - TMI Issues Involved:1. Transfer Pricing Adjustments2. Disallowance under Section 14A3. Depreciation on Intangible Assets4. Application of Section 145A5. Disallowance under Section 43B6. Charging Interest under Sections 234B and 234D7. Initiation of Penalty under Section 271(l)(c)Issue-wise Detailed Analysis:1. Transfer Pricing Adjustments:The primary issue was the addition of Rs. 1,12,36,000 in respect of technical consultancy fees paid by the assessee to its Associated Enterprise (AE). The Transfer Pricing Officer (TPO) and the Dispute Resolution Panel (DRP) concluded that the arm's length price (ALP) of the technical know-how fees was Nil, asserting that no tangible benefit was derived from the services. The Tribunal found that similar issues were covered in favor of the assessee by the Tribunal's decision in the case of its group concern, Merck Limited, where the adjustment was deleted. The Tribunal noted contradictions in the findings of the authorities below and held that the payment for the right to receive a package of services should not be questioned based on the actual use of individual services. The Tribunal emphasized that the benefit test is irrelevant in ALP determination and directed the deletion of the impugned additions.2. Disallowance under Section 14A:The assessee earned dividend income of Rs. 13,656, which was claimed to be exempt under Section 10(35). The Assessing Officer (AO) computed a disallowance of Rs. 1.16 Lacs under Rule 8D, which included interest and expense disallowances. The Tribunal found that the additional disallowance of Rs. 2,404 was unsustainable as the assessee had already offered a suo-moto disallowance exceeding the exempt income earned. Therefore, the Tribunal deleted the additional disallowance.3. Depreciation on Intangible Assets:The assessee claimed depreciation of Rs. 924.21 Lacs on intangible assets. The AO disallowed the claim, citing that the assets were fictitious, a stance confirmed by the DRP. The Tribunal directed the AO to re-adjudicate the issue de-novo, following the directions given in the assessee's own case for AYs 2007-08 and 2008-09.4. Application of Section 145A:The AO invoked Section 145A, mandating the inclusive method of accounting, and proposed an adjustment of Rs. 110.43 Lacs due to CENVAT credit receivables. The assessee argued that it followed the net method of accounting, which had no overall impact. The Tribunal directed the AO to re-adjudicate the issue de-novo, in line with the Tribunal's directions in the assessee's own case for AYs 2007-08 and 2008-09.5. Disallowance under Section 43B:The AO disallowed a provision for leave encashment amounting to Rs. 57.32 Lacs under Section 43B. The assessee contended that there was a write-back of Rs. 7.55 Lacs during the year, which was not considered. The Tribunal directed the AO to re-adjudicate the issue de-novo, considering the submissions made by the assessee.6. Charging Interest under Sections 234B and 234D:The AO charged interest of Rs. 21,87,732 under Section 234B and Rs. 82,49,678 under Section 234D. The Tribunal noted that these grounds were consequential and directed the AO to compute interest in accordance with the law.7. Initiation of Penalty under Section 271(l)(c):The AO initiated penalty proceedings under Section 271(l)(c) in respect of transfer pricing adjustments, disallowance of depreciation on intangibles, adjustment under Section 145A, and disallowance of leave salary under Section 43B. The Tribunal did not provide a specific adjudication on this issue, as it was consequential to the other findings.Conclusion:The appeal was partly allowed, with directions for re-adjudication on several issues and deletion of certain disallowances. The Tribunal emphasized the need for a consistent approach in line with previous decisions in the assessee's own cases and related group concerns.