Tribunal directs Transfer Pricing Officer to re-examine interest rate and royalties

The tribunal partly allowed the appeal, providing specific directions on various issues. The Transfer Pricing Officer was directed to apply a benchmarking interest rate and re-examine royalty on sales. Disallowance under Section 14A was reduced as the AO lacked satisfaction. Loans written-off for subsidiary equity were disallowed. Allocation of expenses for Section 80-IC deduction was adjusted, pending re-examination of trademark depreciation. Application software expenses were treated as revenue, reversing depreciation. TDS credit was to be verified and granted. Interest computation under Sections 234B/234C was noted as consequential.

---

---

Issues Involved:
1. Transfer Pricing Adjustment of Interest and Royalty
2. Disallowance under Section 14A
3. Disallowance of Loans Written-off
4. Apportionment of Expenses including Depreciation on Trademark to Compute Deduction under Section 80-IC
5. Nature of Application Software Expenditure
6. TDS Credit
7. Calculation of Interest under Section 234B/234C

Detailed Analysis:

1. Transfer Pricing Adjustment of Interest and Royalty:
The assessee's international transactions with its Associated Enterprises (AEs) were referred to the Transfer Pricing Officer (TPO) for determination of Arm's Length Price (ALP). The TPO proposed an adjustment of Rs.552.46 Lacs, which included Rs.137.27 Lacs for interest on advertising advances to Titan International Marketing Ltd. (TIML) and Rs.415.18 Lacs for royalty levied on AEs and deemed AEs. The tribunal directed the AO/TPO to apply a benchmarking interest rate of LIBOR+2% on the advertising advances and restored the issue of royalty on sales to the file of the AO/TPO for re-examination, similar to the previous year's adjudication.

2. Disallowance under Section 14A:
The AO computed a disallowance of Rs.2.69 Lacs under Rule 8D(2), which was confirmed by the Dispute Resolution Panel (DRP). However, the tribunal found that the AO did not record any satisfaction regarding the disallowance computed by the assessee, as required by the Supreme Court's decision in Maxopp Investment Ltd. V/s CIT. Therefore, the additional disallowance of Rs.2.63 Lacs was deemed unsustainable and was ordered to be deleted.

3. Disallowance of Loans Written-off:
The assessee sought deduction for foreign currency loans written-off, amounting to Rs.3815.45 Lacs, advanced to its subsidiary Titan International Holding BV (TIHBV). The AO disallowed the write-off, considering the loans as long-term and in the capital field, not for day-to-day business transactions. The tribunal upheld the AO's decision, noting that the loans were utilized for subscribing to preference share capital, which is in the nature of owner's equity, and not for business purposes.

4. Apportionment of Expenses including Depreciation on Trademark to Compute Deduction under Section 80-IC:
The AO reallocated certain corporate overhead expenditures and depreciation on trademarks for computing deduction under Section 80-IC, reducing the deduction by Rs.18.02 Crores. The tribunal confirmed the AO's method of allocation based on turnover for overhead expenses but directed the AO to re-examine the allocation of depreciation on trademarks, considering additional evidences submitted by the assessee.

5. Nature of Application Software Expenditure:
The AO treated the application software expenses of Rs.430.22 Lacs as capital expenditure and granted depreciation of 60%. The tribunal, following its previous decision for AY 2007-08, directed the AO to allow the expenditure as revenue expenditure and reverse the depreciation granted.

6. TDS Credit:
The assessee claimed a short grant of TDS credit amounting to Rs.11.03 Lacs. The tribunal directed the AO to verify the TDS claim and grant the credit in accordance with the law.

7. Calculation of Interest under Section 234B/234C:
The assessee contested the computation of interest under Sections 234B and 234C. The tribunal noted that the interest computation is consequential in nature and does not require specific adjudication.

Conclusion:
The appeal was partly allowed, with the tribunal providing specific directions on each issue, including re-examination of certain matters by the AO/TPO and allowing certain claims made by the assessee.

---