Tribunal deletes transfer pricing adjustments on export commission and royalty while allowing signage and sales expenses

ITAT DELHI allowed several claims by the assessee while dismissing one ground. The tribunal deleted TP adjustments on export commission and royalty payments, following its own precedents. Signage expenses and sales tools expenses were allowed as revenue expenditure based on SC and coordinate bench decisions. Royalty capitalization was decided in favor of the assessee following consistent tribunal views. However, education cess deduction was denied following SC precedent and retrospective statutory amendment. Two issues regarding DDT refund and technical know-how expenses were restored to AO for fresh adjudication on merits.

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Issues Involved:
1. Transfer Pricing Adjustment on Export Commission
2. Transfer Pricing Adjustment on Royalty Payment
3. Disallowance of Signage Expenses
4. Disallowance of Sales Tools Expenses
5. Capitalization of Royalty Expenses
6. Disallowance of Education Cess
7. Refund of Excess Dividend Distribution Tax (DDT)
8. Deduction of Technical Know-How Expenses

Issue-wise Detailed Analysis:

1. Transfer Pricing Adjustment on Export Commission
The assessee challenged the addition made on account of transfer pricing adjustment to the arm's length price (ALP) of export commission paid to Honda Motor Co. Ltd., Japan. The Transfer Pricing Officer (TPO) rejected the assessee's benchmarking using the Transactional Net Margin Method (TNMM) and instead used the Comparable Uncontrolled Price (CUP) method, determining the ALP at nil. The Dispute Resolution Panel (DRP) upheld the adjustment, following their earlier directions in the assessee's own cases. The Tribunal found that this issue is a legacy issue and has been consistently decided in favor of the assessee in past assessment years. The Tribunal directed the TPO/AO to delete the adjustment on account of ALP of the export commission payment.

2. Transfer Pricing Adjustment on Royalty Payment
The assessee contested the addition made on account of transfer pricing adjustment of payment of royalty. The TPO benchmarked the payment of royalty separately using the CUP method and determined the ALP of royalty payment at nil. The DRP upheld the adjustment. The Tribunal noted that this issue has been consistently decided in favor of the assessee in past assessment years. Respectfully following the earlier decisions, the Tribunal directed the AO to delete the addition.

3. Disallowance of Signage Expenses
The assessee claimed deduction for expenditure incurred on purchasing glow signboards/signage, which were displayed at dealers' locations. The AO disallowed the claim, treating it as capital expenditure. The DRP directed the AO to verify the Tribunal's decision in favor of the assessee for earlier years. The Tribunal found that this issue has been consistently decided in favor of the assessee in past assessment years and directed the AO to delete the disallowance.

4. Disallowance of Sales Tools Expenses
The assessee claimed deduction for expenses incurred on sales tools/fixtures placed at dealers' outlets. The AO disallowed the claim, treating it as capital expenditure. The DRP directed the AO to follow the directions of the panel in earlier years. The Tribunal found that this issue has been consistently decided in favor of the assessee in past assessment years and directed the AO to delete the disallowance.

5. Capitalization of Royalty Expenses
The AO treated 25% of the royalty expense as capital expenditure, disallowing Rs. 296,11,30,002/- and allowing depreciation @ 25% on such amount. The DRP directed the AO to verify the Tribunal's decision in favor of the assessee for earlier years. The Tribunal found that this issue has been consistently decided in favor of the assessee in past assessment years and directed the AO to allow the assessee's claim.

6. Disallowance of Education Cess
The assessee claimed deduction for education cess amounting to Rs. 29,01,52,420/-. The DRP did not entertain the claim as it was not made in the return of income. The Tribunal noted that the issue is covered against the assessee by the decision of the Hon'ble Supreme Court in JCIT vs. Chambal Fertilizers & Chemicals Ltd., 450 ITR 164, and upheld the decision of the departmental authorities.

7. Refund of Excess Dividend Distribution Tax (DDT)
The assessee claimed that dividends paid to shareholders in Japan and Thailand should be subject to the beneficial rate under the respective Double Taxation Avoidance Agreements. The departmental authorities rejected the claim, stating it was not made in the return of income. The Tribunal restored the issue to the AO for de novo adjudication, considering the submissions of the assessee and the decision of ITAT, Special Bench, in DCIT vs. Total Oil India Pvt. Ltd.

8. Deduction of Technical Know-How Expenses
The AO disallowed the deduction of technical know-how expenses as it was not claimed in the return of income. The DRP also rejected the claim on the same ground. The Tribunal restored the issue to the AO for de novo adjudication, considering the submissions of the assessee and giving due opportunity of being heard.

Conclusion:
The appeal was partly allowed, with the Tribunal directing the deletion of various disallowances and adjustments, while upholding the disallowance of education cess. The Tribunal also restored certain issues to the AO for fresh adjudication. The order was pronounced in the open court on 05/02/2024.

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