2022 (6) TMI 1266 - AT - Income Tax

Tribunal Upholds CIT(A) Decisions on Benchmarking and Expenditure Nature

The Asst. Commissioner of Income Tax, Circle – 8, Pune Versus Atlas Copco (India) Ltd.

The Asst. Commissioner of Income Tax, Circle – 8, Pune Versus Atlas Copco (India) Ltd. - [2022] 96 ITR (Trib) 566 (ITAT [Pune]) Issues Involved:1. Benchmarking of International Transactions2. Sales Commission Adjustment3. Sales Tax Deferral Scheme4. Capital vs. Revenue Expenditure5. Miscellaneous Expenditure6. Commission Expenses7. Disallowance under Section 14AIssue-wise Detailed Analysis:1. Benchmarking of International Transactions:The primary issue was whether the Ld. CIT(A) was correct in holding that only a completely uncontrolled transaction can be used for benchmarking international transactions. The Tribunal upheld the CIT(A)'s decision, emphasizing that the comparison of controlled transactions for benchmarking is flawed. The Tribunal cited the Hon’ble Bombay High Court's decision in PCIT Vs. Audco India Limited, which mandates that the determination of ALP has to be done by comparison between controlled and uncontrolled transactions.2. Sales Commission Adjustment:The Tribunal examined whether the CIT(A) erred in allowing the adjustment made on account of receipt of sales commission. The CIT(A) had deleted the T.P. adjustment by following his decision in the assessee’s own case for earlier years. The Tribunal upheld this decision, noting that the methodology adopted by the assessee had been upheld in earlier years and that the TPO's exclusion of depreciation and material costs from the total cost was not justified. The Tribunal also referenced the jurisdictional Bombay High Court's decision in CIT Vs. Kodak India (P) Ltd., which supports the CIT(A)'s approach.3. Sales Tax Deferral Scheme:The issue was whether the discount received on pre-payment of liability under the Sales Tax Deferral Scheme should be considered a remission or cessation of liability under Section 41(1). The CIT(A) had deleted the addition by applying the ratio laid down by the Hon’ble Bombay High Court in CIT vs. Sulzer India Limited and CIT vs. McDowell & Co Ltd. The Tribunal upheld this decision, noting that the difference between the sales tax liability and its NPV cannot be brought to tax under Section 41(1) as it does not constitute a remission or cessation of liability.4. Capital vs. Revenue Expenditure:The issue was whether the expenditure incurred on interior work in the Bangalore office was capital in nature. The CIT(A) had deleted the addition, holding that no new asset was brought into existence and no enduring benefit accrued. The Tribunal remanded the issue back to the Assessing Officer to verify the true nature of the expenditure and examine the applicability of Explanation (1) to Section 32(1) of the Act.5. Miscellaneous Expenditure:The issue was whether the CIT(A) was justified in restricting the disallowance of miscellaneous expenditure from Rs.2,00,000/- to Rs.1,00,000/-. The CIT(A) had restricted the disallowance based on his order in the assessee’s own case for earlier years. The Tribunal upheld this decision on the principle of consistency.6. Commission Expenses:The issue was whether the CIT(A) was justified in allowing commission expenses when the assessee failed to provide confirmations from the payees. The CIT(A) had deleted the addition, following his decision in the assessee’s own case for earlier years. The Tribunal upheld this decision, noting that the assessee had discharged the onus by filing primary details and that mere inability to furnish confirmation letters cannot be the reason to disallow the commission expenditure without further inquiries by the Assessing Officer.7. Disallowance under Section 14A:The issue was whether the CIT(A) was justified in deleting the disallowance made under Section 14A. The Tribunal noted that the Revenue did not press this ground of appeal, and thus, it was dismissed as not pressed.Conclusion:The Tribunal upheld the CIT(A)'s decisions on most grounds, emphasizing the importance of consistency with earlier years' rulings and the necessity of following established legal principles for benchmarking international transactions and determining the nature of expenditures. The appeal was partly allowed for statistical purposes, with some issues remanded for further verification.