2022 (12) TMI 1078 - AT - Income Tax

Tax Appeal Outcome: Adjustments deleted, some upheld for review. Transfer Pricing & Section 14A disallowed.

The Tribunal partly allowed the appeal, deleting certain adjustments and disallowances while restoring others for reconsideration. The Transfer Pricing ... Arm's Length Price - Transfer Pricing adjustment on AMP expenditure - Determination of arm's length price under Section 92C read with Rule 10AB - Disallowance under Section 14A and computation under Rule 8D - Disallowance under Section 40(a)(ia) for short deduction of tax - Deductibility of provision for obsolete/slow moving inventory - Rate of depreciation on computer software - Allowability of prior period provision for VAT/tax demandArm's Length Price - Transfer Pricing adjustment on AMP expenditure - Determination of arm's length price under Section 92C read with Rule 10AB - Deletion of transfer pricing adjustment of 1% of gross sales on advertisement, marketing and promotion (AMP) expenditure. - HELD THAT: - The Transfer Pricing Officer estimated an adhoc brand promotion fee at 1% of relevant sales without identifying any uncontrolled comparable or applying any prescribed method under Section 92C read with Rule 10AB. The Tribunal noted that a similar adhoc determination in an earlier year was held to be unsustainable where no calculation or method as provided in the statute/rules was followed. No binding arrangement was produced to show that AMP expenses generated chargeable benefits to the AEs. On these facts and by applying consistent precedent, the adjustment based on an unsubstantiated 1% figure was treated as adhoc and therefore deleted. [Paras 4]Transfer pricing adjustment on AMP expenses (1% of sales) deleted.Disallowance under Section 14A and computation under Rule 8D - Remand of the disallowance under Section 14A computed under Rule 8D to the Assessing Officer for fresh consideration. - HELD THAT: - The Assessing Officer applied Rule 8D to compute disallowance in respect of expenditure allegedly in connection with exempt dividend income. The Tribunal referred to the Madras High Court direction in the assessee's earlier year, which required the Assessing Officer to decide independently whether the interest on debentures was incurred for acquisition (and not for investments) and to consider the assessee's specific factual contentions. Following that authority, the Tribunal restored the issue to the file of the AO for reconsideration on consistent lines. [Paras 5]Issue of disallowance under Section 14A/Rule 8D remitted to the Assessing Officer for fresh decision in accordance with the Madras High Court direction.Disallowance under Section 40(a)(ia) for short deduction of tax - Deletion of disallowance under Section 40(a)(ia) in respect of connectivity charges. - HELD THAT: - The Assessing Officer disallowed connectivity expenses on the basis of short deduction of tax, asserting a higher TDS rate ought to have been applied. The Tribunal relied on its earlier decisions in the assessee's own case and held that disallowance under Section 40(a)(ia) is not attracted for short deduction of tax in the circumstances before it. Applying that consistent view, the Tribunal deleted the disallowance. [Paras 6]Disallowance under Section 40(a)(ia) deleted.Deductibility of provision for obsolete/slow moving inventory - Upholding the disallowance of the additional provision for slow moving and obsolete inventory. - HELD THAT: - The assessee valued inventories under the accounting principle of lower of cost or net realizable value. The Tribunal observed that where inventories are valued on that basis any diminution in value is reflected in valuation and consequently a separate provision for obsolete/slow moving stock would not be admissible in addition. The AO's disallowance of the incremental provision was therefore sustained on the facts of the case. [Paras 7]Provision for slow/non-moving and obsolete inventory disallowance upheld.Rate of depreciation on computer software - Allowing depreciation on software at 60%. - HELD THAT: - The Tribunal examined entries in the relevant Appendix of the Income-tax Rules and relied on earlier Tribunal authority holding that computer software, being necessarily used with computers, is eligible for depreciation at the 60% rate specified. Applying that view, the Tribunal directed the Assessing Officer to allow depreciation at 60% on software, reversing the AO's restriction to 25%. [Paras 8]Depreciation on software allowed at 60%.Allowability of prior period provision for VAT/tax demand - Denying deduction for a provision made in respect of prior-year VAT demands which had not crystallized in the relevant year. - HELD THAT: - The provision related to demands pertaining to earlier financial years and the Tribunal held that deduction for such a prior period liability is admissible only upon crystallization of the liability. As the liability crystallized on the date when notices were served (after the relevant accounting year) and the provision in the assessment year was not a crystallized liability, the separate deduction of the provision in the year was not allowable. [Paras 9]Provision for VAT assessment demand disallowance sustained.Final Conclusion: Appeal partly allowed: transfer pricing adjustment on AMP and disallowance under Section 40(a)(ia) deleted; depreciation on software allowed at 60%; disallowance of provision for inventories and denial of provision for VAT demand upheld; disallowance under Section 14A/Rule 8D remitted to the Assessing Officer for fresh consideration in accordance with the Madras High Court direction. Issues Involved:1. Transfer pricing adjustment on advertisement, marketing, and promotion expenditure (AMP)2. Disallowance under Section 14A of the Income Tax Act3. Disallowance under Section 40(a)(ia) of the Income Tax Act for short deduction of taxes4. Provision created towards slow/non-moving and obsolete inventory5. Depreciation on software6. Provision for VAT assessment demand7. Initiation of penalty under Section 271(1)(c) of the Income Tax ActDetailed Analysis:1. Transfer Pricing Adjustment on AMP Expenditure:The Tribunal noted that the Transfer Pricing Officer (TPO) considered advertisement expenditure incurred by the assessee as part of international transactions and proposed an ad-hoc brand promotion fee of 1%. The assessee argued that the AMP expenses were for domestic operations and less than those of comparable companies. The Tribunal found that the TPO's adjustment was based on an ad-hoc figure without following any prescribed method as per Section 92C(1) and Rule 10AB. Therefore, the adjustment was not sustainable and was deleted.2. Disallowance under Section 14A of the Income Tax Act:The assessee earned exempt dividend income and incurred interest expenditure. The Assessing Officer (AO) made a disallowance under Section 14A, rejecting the assessee's plea that investments were made from own funds. The Tribunal referred to a similar issue adjudicated by the Madras High Court, which required the AO to independently decide on the matter. The issue was restored to the AO for reconsideration consistent with the decision for AY 2012-13.3. Disallowance under Section 40(a)(ia) of the Income Tax Act:The assessee paid connectivity expenses and deducted TDS at 2%, but the AO opined that tax should have been deducted at 10%, leading to a disallowance. The Tribunal found that this issue was covered in the assessee's favor in previous years, where it was held that disallowance under Section 40(a)(ia) is not attracted in case of short deduction of tax. The disallowance was deleted.4. Provision Created Towards Slow/Non-Moving and Obsolete Inventory:The assessee created a provision for slow-moving and obsolete inventory. The AO disallowed the deduction, stating there was no specific section allowing such a provision. The Tribunal upheld the AO's action, noting that the valuation method adopted by the assessee (lower of cost or net realizable value) automatically accounts for any decrease in inventory value. Therefore, a separate provision could not be allowed.5. Depreciation on Software:The assessee claimed depreciation at 60% on software, but the AO restricted it to 25%. The Tribunal found that software used along with computers is eligible for 60% depreciation, as per the Chennai Tribunal's decision in a similar case. The AO was directed to allow 60% depreciation on software.6. Provision for VAT Assessment Demand:The assessee created a provision for VAT demand of earlier years. The AO denied the deduction, and the Tribunal upheld this decision, noting that the liability crystallized only on 04.04.2013. Since it was a prior period item, the provision could not be allowed in the current year.7. Initiation of Penalty under Section 271(1)(c) of the Income Tax Act:The Tribunal did not specifically adjudicate on the initiation of penalty under Section 271(1)(c), as it was not a ground requiring specific adjudication.Conclusion:The appeal was partly allowed, with adjustments and disallowances being deleted or restored for reconsideration as indicated in the order. The order was pronounced on 30th November 2022.