Tribunal modifies transfer pricing, disallowance, and remands for fresh adjudication.

Ciba India Ltd. (Through their successors BASF India Ltd.) Versus Jt. Commissioner of Income Tax (OSD) Range–8 (1), Mumbai

Ciba India Ltd. (Through their successors BASF India Ltd.) Versus Jt. Commissioner of Income Tax (OSD) Range–8 (1), Mumbai - TMI Issues Involved:
1. Addition on account of transfer pricing adjustment.
2. Disallowance under section 14A of the Income Tax Act.
3. Disallowance under section 43B of the Income Tax Act.
4. Disallowance of depreciation claimed on the WDV of the royalty expenditure.

Issue-wise Detailed Analysis:

1. Addition on Account of Transfer Pricing Adjustment:
The assessee challenged the addition of Rs. 3,72,46,953 on account of transfer pricing adjustment. The Transfer Pricing Officer (TPO) questioned the arm's length nature of the payment made towards the SAP ERP system, implemented by the Associated Enterprise (AE). The TPO was not convinced by the assessee's application of the Transactional Net Margin Method (TNMM) and issued a show-cause notice to explain why the cost recharge should not be treated as nil. Despite furnishing the ERP systems cost sharing agreement and other documentary evidence, the TPO found the evidence insufficient to establish the benefit received from the payment and determined the arm's length price at nil. The Commissioner of Income Tax (Appeals) upheld this adjustment.

The Tribunal found that the assessee had provided sufficient documentary evidence, including agreements and debit notes, to prove the implementation and benefits derived from the SAP ERP system. The Tribunal held that the TPO cannot determine the arm's length price at nil on an ad-hoc basis and emphasized that it is not the TPO's role to evaluate the business expediency of a cost incurred. The Tribunal deleted the addition made on account of transfer pricing adjustment.

2. Disallowance under Section 14A of the Income Tax Act:
The assessee challenged the disallowance of Rs. 43,96,080 under section 14A. The Assessing Officer (AO) noticed that the assessee received exempt income but did not disallow any expenditure for earning it. The AO computed the disallowance at Rs. 68,21,468 by applying rule 8D. The Commissioner (Appeals) upheld this disallowance.

The Tribunal noted that the assessee had sufficient interest-free funds to cover the investments and directed that no disallowance of interest expenditure should be made under rule 8D(2)(ii). For administrative expenditure under rule 8D(2)(iii), the Tribunal directed the AO to compute the disallowance by considering only those investments that yielded exempt income during the year and to verify the correctness of the disallowance computed by the assessee.

3. Disallowance under Section 43B of the Income Tax Act:
The assessee contested the disallowance of Rs. 14,94,029 on account of leave encashment paid by Huntsman International India Pvt. Ltd. The AO disallowed this deduction based on the assessment order for the previous year, which was upheld by the Commissioner (Appeals).

The Tribunal restored the issue to the AO for fresh adjudication, following the decision in the assessee's own case for the assessment year 2007-08 where a similar issue was remanded back to the AO.

4. Disallowance of Depreciation Claimed on the WDV of the Royalty Expenditure:
The assessee challenged the disallowance of depreciation on the written-down value (WDV) of the royalty expenditure. In the assessment year 2001-02, the royalty expenditure was treated as capital expenditure, and depreciation was allowed by the Tribunal.

The Tribunal directed that since depreciation had been allowed on the royalty expenditure in the preceding years, the consequential benefit of depreciation should be allowed in the impugned assessment year as well.

Conclusion:
The appeal was partly allowed, with the Tribunal deleting the transfer pricing adjustment, modifying the disallowance under section 14A, remanding the issue under section 43B for fresh adjudication, and allowing the depreciation on the royalty expenditure.