2021 (4) TMI 202 - AT - Income Tax

Assessee prevails in income adjustments appeal; Revenue's appeal dismissed.

The Tribunal ruled in favor of the assessee, allowing various grounds related to adjustments in income, disallowances, and levies. The appeal filed by the ... Advertising, Marketing and Promotion (AMP) expenditure not constituting international transaction under 92B - Bright line test not permissible for AMP under transfer pricing - Remand for fresh adjudication where voluminous material was not examined - Interest free funds and disallowance under 36(1)(iii) - TDS credit subject to verification - Education cess deductible as business expenditure under 37 - Brand usage royalty governed by commercial agreement and RBI approval - Service tax and R&D cess on royalties borne by recipient allowable - Technical know how royalty to be considered in light of agreement/RBI approval - Depreciation on testing equipment allowableAdvertising, Marketing and Promotion (AMP) expenditure not constituting international transaction under 92B - Bright line test not permissible for AMP under transfer pricing - Whether AMP expenditure incurred in India constituted an international transaction and whether transfer pricing adjustment by bright line test was permissible - HELD THAT: - The Tribunal followed its Coordinate Bench decision in the assessee's earlier year holding that AMP expenditure incurred in India and paid to third parties in India is not an international transaction with associated enterprises unless an arrangement exists with the AE to incur such expenditure. The Tribunal also held that quantification of AMP expenditure by resort to a bright line test or similar method is not authorised by the statute and cannot be applied. On this basis, the Tribunal allowed the assessee's grounds challenging the AMP adjustments, noting that the revenue had not established an arrangement with the AE and that the bright line method was disapproved by higher authority relied upon in the Coordinate Bench decision. [Paras 5, 7, 8]Grounds Nos. 2, 3 and 5 allowed; AMP adjustment set asideRemand for fresh adjudication where voluminous material was not examined - Whether adjustments relating to technical support services, other support services and pass through cost required fresh adjudication - HELD THAT: - The Tribunal found that the TPO and DRP did not examine the voluminous information submitted by the assessee and merely recorded conclusions without verifying the material, including observations that clinical trials were not conducted on its own. Because the authorities had not applied their mind to the data and the factual foundation remained untested, the Tribunal concluded that the matter should be restored to the AO/TPO for fresh adjudication on merits and allowed the assessee's grounds for statistical purposes. [Paras 9, 11]Grounds Nos. 17 to 25 allowed for restoration to AO/TPO for fresh adjudicationInterest free funds and disallowance under 36(1)(iii) - Whether disallowance under 36(1)(iii) was warranted in view of existence of interest free funds - HELD THAT: - Relying on the Coordinate Bench's earlier decision in the assessee's own case and the Jurisdictional High Court's approach in Reliance Utilities, the Tribunal examined the AO's finding and the assessee's position that sufficient interest free funds existed. For the year under consideration the assessee had sufficient interest free funds relative to advances. Applying the precedent and factual finding of availability of funds, the Tribunal held that no disallowance under 36(1)(iii) was warranted and allowed the relevant grounds. [Paras 13, 16]Grounds Nos. 27 to 28 allowed; no disallowance under 36(1)(iii)TDS credit subject to verification - Credit for short grant of TDS - HELD THAT: - The Tribunal directed the AO to consider the assessee's submissions and to allow TDS credit after verification in accordance with law, effectively restoring the matter to the assessing authority for compliance with statutory verification procedures. [Paras 17]Ground No. 29 allowed for statistical purposes; AO to verify and grant TDS credit as per lawEducation cess deductible as business expenditure under 37 - Deductibility of education cess as business expenditure under Section 37 - HELD THAT: - The Tribunal noted the assessee's submissions and followed the decision of the Bombay High Court in Sesa Goa which concluded that the term 'cess' is not included within the expression in Section 40(a)(ii) and that cess, when paid in relation to business, is allowable as a deductible expenditure under Section 37. Applying that precedent, the Tribunal allowed the assessee's additional ground that education cess is deductible. [Paras 20, 23]Additional Ground No. 33 allowed; education cess held deductible under Section 37Brand usage royalty governed by commercial agreement and RBI approval - Revenue's challenge to deletion of adjustment for brand usage royalty - HELD THAT: - The Tribunal followed its Coordinate Bench decisions in the assessee's earlier years which examined the brand usage agreement and RBI approval showing royalty to be remitted 'net of taxes' and held that, as a commercial arrangement approved by RBI, taxes were the assessee's liability under the agreement. In light of the prior Tribunal rulings in the assessee's own case, the Tribunal dismissed the revenue's ground and upheld deletion of the adjustment. [Paras 25, 26]Revenue's Ground No. 1 dismissed; adjustment on brand usage royalty upheld in favour of assesseeService tax and R&D cess on royalties borne by recipient allowable - Disallowance of service tax and R&D cess paid on brand usage and know how royalties - HELD THAT: - Relying on earlier Tribunal decisions in the assessee's own case, the Tribunal observed that service tax liability is on the recipient of services and that the agreements and RBI approvals showed taxes to be the assessee's liability. The Tribunal therefore held that disallowance by the TPO/AO of service tax and R&D cess on royalties was not justified and dismissed the revenue's grounds. [Paras 27, 28]Revenue's Grounds Nos. 2 and 6 dismissed; disallowances of service tax and R&D cess deletedTechnical know how royalty to be considered in light of agreement/RBI approval - Disallowance of technical know how royalty on traded goods and restriction of royalty rate - HELD THAT: - The Tribunal followed its prior orders in the assessee's earlier assessment years holding that royalty payments must be assessed in light of the underlying agreements and RBI approvals. Applying those precedents, the Tribunal found no basis to treat the royalty as included within brand royalty or to restrict the royalty to 1% for manufactured goods where the agreement and approvals permitted the royalty paid, and therefore dismissed the revenue's grounds challenging the know how royalty. [Paras 29, 31, 32]Revenue's Grounds Nos. 3 and 4 dismissed; technical know how royalty sustained as per agreement/RBI approvalTax and R&D cess on technical know how royalty allowable where approved - Disallowance of tax and R&D cess on technical know how royalty - HELD THAT: - Following earlier Tribunal decisions in the assessee's own case, the Tribunal held that taxes and R&D cess paid on technical know how royalty were incurred pursuant to agreements and RBI approvals and thus were not disallowable. Consequently, the Tribunal dismissed the revenue's challenge to deletions of such disallowances. [Paras 33, 34]Revenue's Ground No. 5 dismissed; tax and R&D cess on know how royalty allowableDepreciation on testing equipment allowable - Allowability of depreciation claimed on testing equipment - HELD THAT: - The Tribunal followed Coordinate Bench decisions in earlier assessment years which had allowed depreciation on testing equipment after considering the facts and earlier findings. Applying those precedents, the Tribunal directed the AO to allow the claim of depreciation on testing equipment for the year under appeal. [Paras 35, 36]Revenue's Ground No. 7 dismissed; depreciation on testing equipment allowedFinal Conclusion: The assessee's appeal is partly allowed-AMP adjustments set aside, certain service/royalty/tax related disallowances deleted, technical service matters remanded for fresh adjudication, education cess and depreciation claims allowed, and TDS credit directed to be verified and granted; the revenue's appeal is dismissed in its entirety. Issues Involved:1. Adjustment to the total income2. Adjustment in respect of Advertising, Marketing, and Promotion (AMP) expenditure3. Adjustment in respect of technical support services, other support services, and pass-through cost4. Adjustment u/s. 145A of the Act5. Disallowance u/s. 36(1)(iii) of the Act6. Short grant of credit of TDS7. Levy of interest u/s. 234B and 234D8. Initiating penalty u/s. 274 r.w.s. 271(1) of the Act9. Levy of interest u/s. 234B and 234D (additional ground)10. Disallowance of tax deduction on brand usage royalty11. Service Tax paid on brand usage royalty and know-how royalty12. Disallowance of entire technical know-how royalty payment on traded goods13. Restricting technical know-how royalty to 1% in respect of manufactured goods14. Disallowance of Tax and R & D Cess paid on technical know-how royalty15. Depreciation on testing equipmentDetailed Analysis:1. Adjustment to the total income:The ground raised by the assessee is general in nature and requires no specific adjudication.2. Adjustment in respect of Advertising, Marketing, and Promotion (AMP) expenditure:The assessee's grounds 2, 3, and 5 were considered effective, while the remaining grounds were deemed alternative pleas. The Tribunal referenced the decision of the Hon'ble Delhi High Court in Maruti Suzuki India Ltd., which clarified that without an arrangement between the assessee and the AE for incurring AMP expenditure, it cannot be considered an international transaction under section 92B of the Act. The Tribunal ruled in favor of the assessee, allowing grounds 2, 3, and 5.3. Adjustment in respect of technical support services, other support services, and pass-through cost:The Tribunal noted that the TPO and DRP had not examined the voluminous data submitted by the assessee. Consequently, the matter was restored to the AO/TPO for fresh adjudication on merits, allowing these grounds for statistical purposes.4. Adjustment u/s. 145A of the Act:This ground was not pressed by the assessee and thus became infructuous.5. Disallowance u/s. 36(1)(iii) of the Act:The Tribunal followed the decision of the Jurisdictional Bombay High Court in Reliance Utilities, which observed that the assessee had interest-free funds, thus no disallowance u/s. 36(1)(iii) was warranted. The grounds raised by the assessee were allowed.6. Short grant of credit of TDS:The Tribunal directed the AO to consider the submissions of the assessee and allow the TDS credit after verification as per law, allowing this ground for statistical purposes.7. Levy of interest u/s. 234B and 234D:These grounds were consequential in nature and thus dismissed as infructuous.8. Initiating penalty u/s. 274 r.w.s. 271(1) of the Act:This ground was deemed premature and dismissed as infructuous.9. Levy of interest u/s. 234B and 234D (additional ground):The Tribunal referenced the Hon'ble Bombay High Court's decision in Sesa Goa Ltd., which clarified that education cess is not included in the expression 'any rate or tax levied' as per Section 40(a)(ii) of the IT Act. Therefore, the ground raised by the assessee was allowed.10. Disallowance of tax deduction on brand usage royalty:The Tribunal followed the decision of the Coordinate Bench in the assessee's own case for previous assessment years, rejecting the revenue's contention and dismissing this ground.11. Service Tax paid on brand usage royalty and know-how royalty:The Tribunal followed the decision in the assessee's own case for previous assessment years, rejecting the revenue's contention and dismissing these grounds.12. Disallowance of entire technical know-how royalty payment on traded goods:The Tribunal followed the decision in the assessee's own case for previous assessment years, rejecting the revenue's contention and dismissing this ground.13. Restricting technical know-how royalty to 1% in respect of manufactured goods:The Tribunal followed the decision in the assessee's own case for previous assessment years, rejecting the revenue's contention and dismissing this ground.14. Disallowance of Tax and R & D Cess paid on technical know-how royalty:The Tribunal followed the decision in the assessee's own case for previous assessment years, rejecting the revenue's contention and dismissing this ground.15. Depreciation on testing equipment:The Tribunal followed the decision in the assessee's own case for previous assessment years, rejecting the revenue's contention and dismissing this ground.In conclusion, the appeal filed by the assessee was partly allowed, and the appeal filed by the revenue was dismissed.