TaxTMI 
TaxTMI 
2014 (1) TMI 78
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.... 1. In not appreciating that the AO had not given full and complete opportunity to the appellant to represent its case before incorporating the order under Section 92CA(3) of the Income tax Act, 1961 ('Act') of the Additional Commissioner of Income tax, Transfer Pricing-I ('TPO'), in the assessment order under Section 143(3) of the Act. 2. In no appreciating that the opportunity to represent the case before the AO is an independent opportunity granted to the appellant to submit reasons why the arm's length price determined by the TPO should not be considered as the value of the international transactions. 4. In upholding the addition of the AO/TPO in determining the arm's length price for Export of Lubricants on the basis of price at which lubricants were sold to unrelated parties in India, disregarding the explanations provided by the appellant. The above grounds of the assessee's appeal are accordingly dismissed as not pressed. 4. The issue raised in ground no. 3 relates to the addition of Rs.40,51,486/- made by the AO and confirmed by the ld. CIT(A) on account of TP adjustment in respect of royalty paid by the assessee-company to its associate enterprises. 5. The....
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.....84 Eligible sales on which royalty is payable 109,323.53 Less: Exports 87.60 109,235.93 Royalty @ 3.5% on eligible sales 3,823.26 * Includes traded sales. Royalty based on profit @ 7.5 % (upto June 30, 2002) /10% thereafter Profit before tax 23,577.91 Add: royalty 2,438.73 Profit before tax and royalty 25,260.30 Royalty based on profit @ 7 .5 % (upto June 30, 2002) /10 % thereafter 2,438.73 6. It was also brought to the notice of the TPO by the assessee that the royalty rate of 3.5% was approved by the SIA. From the copy of SIA approval filed by the assessee, it was however noticed by the TPO that the royalty payment was allowed at the specified rate of 3.5% net of taxes on internal sales and there was no mention that the royalty could be paid either at 3.5% of net sales or 10% of book profits. It was also noted by the AO that the royalty was allowed by SIA at 3.5% on internal (domestic) sales and not on exports sales or other income. She therefore held that the royalty on export and other income paid by the assessee was not allowable as per the approval of SIA and the royalty to the extent of Rs.40,51,486/- attributa....
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....rt Sales + Other Income ) / Total Sales" to the royalty payment. The appellant submits that the said methodology adopted by the TPO is arbitrary and inexact. 8. The ld. CIT(A) did not find merit in the submissions made by the assessee on this issue and confirmed the addition made by the AO/TPO on account TP adjustment in respect of royalty payment for the following reasons given in his impugned order:- "The issue has been carefully examined and the plea of the appellant is rejected. It is not understood how the appellant is subjecting the entire approval granted to it and sought by the appellant on different parameter. The entire attempt of the appellant has been to interpret the approval granted to it so as to suit its own claim made regarding the royalty payment. A careful perusal of the approval granted by the Government of India dated 13.11.2002 clearly states that the payment regarding royalty is authorized at the rate of 3.5% of internal sales. The relevant extract of the approval is as under:- "Considering that the current TCA expires on 30.06.2002, in order to ensure that it retians its leading position in the Indian lubricant market CIL would need continuing techn....
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.... ignore the above approval which contains specific direction and categorization and chose to pay the royalty as per its own convenience and as per its own internal agreement, it is the appellant who has to undergo the necessary disallowance as had been made by theA.O./TPO. The plea that the SIA approval had left it to the appellant to remit any amount upto the prescribed CAP is completely irrelevant and is nowhere borne out by the approval so grants. The argument that a sum of Rs.1400 lacs more would have been paid if the royalty had been computed @ 3.5$ of the internal sales is most illogical. The appellant was under a legal statutory obligation to abide by the directions contained in the approval which it failed to do. I do not see any arbitrariness and inexactness in the computation of disallowance made by the A.O./TPO by applying the ration of export sales plus other income/total sales to the royalty payment. The disallowance made by the A.O. amounting to Rs.50,41,486/- is therefore upheld and this ground is decided against the appellant. 9. The ld. Counsel for the assessee submitted that the payment of royalty made by the assessee-company to its AE was benchmarked in the TP....
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....lowable and disallowed the royalty payment to the extent of Rs. 40,51,486/- treating the same as the royalty paid by the assessee in respect of exports sale and other income. We are unable to agree with this strange method followed by the TPO to make a TP adjustment in respect of royalty payment which is not sustainable either in law or on the facts of the case. She has neither rejected the method followed by the assessee to bench-mark the transaction in respect of payment of royalty nor has been adopted any recognized method to determine the ALP of the said transactions. The approval of SIA adopted by the TPO as basis to make TP adjustment in respect of royalty payment was untenable and even going by the said basis wrongly adopted by the TPO, no TP adjustment in respect of royalty payment was liable to be made. As per the said basis, the net sales of the assessee after excluding export sale and other income were to the extent of Rs. 1118.70 crores and the royalty paid thereon at Rs. 24.38 crore being less than the rate of 3.5% approved by SIA, there was no case of any excess payment made of royalty by assessee than approved by SIA to justify its disallowance by way of TP adjustmen....
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....transactions. The TPO asked the assessee-company to furnish certain information and on the basis of the information furnished by the assessee as well as other submissions made from time to time, he accepted certain international transactions as at arm's length but suggested TP adjustment in respect of other such international transactions by observing as under:- "3.1 Global Down Stream & Licenses for Microsoft Professional 2000 USD 17,280 (Rs. 823,869/-). The assess has paid an amount of Rs.823,869/- to BP International Ltd., United Kingdom. The amount in foreign currency is GBP 11,073/-USD 17,280/-. In support, a copy of invoice dated October 15, 2002 is filed. The relevant portion of the invoice reads as" "Global & Downstream Central Chartes for COE3 Deployment in Tata BP India Ltd. 32 Unit @ $279 = $8928 REVEX Microsoft Pro 2000 License. Bought centrally for Tata BP India Ltd. 32 unit @$261 = 8352 CAPEX" The invoice does not covey the proper meaning regarding the Global & Downstream Central Charges for COE-3 Deplyment or for Microsoft Pro 2000 Licenses bought centrally. The assessee submitted no further information. The assessee was required to show cause u/s 9....
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....ation was provided that India region comprises of Castrol India, BP India (Gas and Power) and Tata HP Solar India etc. As the assessee has submitted the details as required by this office, no adverse inference is being drawn. (iii) Quarter 3, 2002 DBQ Infrastructure charges USD 33.800 and USD) 3,100 (Rs. 1.771.075) The invoices of USD 33,800 and USD 3,100 were dated September 28, 2002 and September 20, 2002 respectively read as follows: "Quarter 3, 2002 DBO infrastructure Charges." No further information such as the basis of allocation as required to obtain and maintain as per Clause 5.3 and 5.4 of' the agreement between HP International and Castrol India was submitted by the assessee. The assessee was required to show cause u/s 92C(3) of the IT Act I96~ vide letter dated November 23 2005 why the ALP of the said expense be not computed as NIL as the assessee had not submitted relevant documentation and details for calculation of the said expense However no further clarification / details were submitted by the assessee. Accordingly, the Arm's Length Price of this transaction is computed at NIL and Rs.17,71,075/- will be added to the assessee's income. 3.4 Amount of Rs....
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....ence of any documents the Aim's Length Price of' these transaction is computed at NIL and the amounts detailed above will be added to the income of the assessee. 14. The AO/TPO thus made TP adjustment of Rs. 2,06,73,899/- in respect of international transactions of the assessee-company with its AE involving cost sharing and cost reimbursement by treating arm's length price of the said transactions at nil. On appeal, the ld. CIT(A) confirmed the said TP adjustment observing that no attempt was made by the assessee to explain the anomalies which had been detected by AO/TPO in the relevant invoices filed in support. He held that in the absence of any satisfactory explanation offered by the assessee in this regard addition made on this issue on account of TP adjustment was liable to be confirmed. 15. After considering the rival submissions & perusing the relevant material on record, it is observed that similar issue was involved in the case of the assessee for A.Y. 2002-03 and the same was restored by the Tribunal to the file of the AO/TPO with the following observations/directions as contained in paragraph no.7 of its order dated 14th September 2012 passed in ITA No. 3938/Mum/20....
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.... assessee's appeal is accordingly treated as allowed for statistical purposes." 16. As the issue involved in the year under consideration i.e. 2003-04 as well as all the material facts relevant thereto are similar to A.Y. 2002-03, we respectfully follow the order of the Co-ordinate bench of this Tribunal for A.Y. 2002-03 and restore this issue to the file of the AO/TPO for deciding the same afresh as per the same directions as given by the Tribunal in A.Y. 2002-03. Ground no. 5 of the assessee's appeal is accordingly treated as allowed for statistical purposes. 17. The issue raised in ground no. 6 of the assessee's appeal relates to the addition of Rs.95,12,000/- made by the AO/TPO and confirmed by the ld. CIT(A) on account of TP adjustment in respect the international transactions of the assessee with its AE's involving sharing of cost of the "David Beckham advertising campaign" by taking the arm's length price of the said transaction at nil. 18. During the year under consideration, the assessee-company had reimbursed BP Singapore Pte. Ltd. a sum of Rs.95,12,000/- towards it shares of expenditure incurred on David Beckham advertising campaign. It was explained by the asse....
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.... the assessee submitted that the assessee-company was certainly benefited by the David Beckham advertising campaign in terms of its business volume in India. He submitted that although there was no agreement to share the cost of the campaign, the assessee-company agreed to share the cost of campaign to the extent of Rs. 95.12 lakhs after negotiation taking into consideration the benefit derived by it from the said campaign. He invited our attention to the relevant portion to the TP study report placed at page no. 295-297 of his paper book to show that this transaction was bench- marked by the assessee by following TNMM and since its OP/TC at 22.33% was much more than the average OP/TC of 4.5% of comparables selected, the transaction was proved to be at arm's length. He contended that the TPO has neither rejected the method followed by the assessee nor adopted any other specified method to determine the ALP of this transaction and has taken the same at nil which is totally unjustified. 21. The ld. DR on the other hand invited our attention to the relevant portion of the TPO's order at page no. 256 of the PB and submitted that relevant details and documents were not furnished by t....
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....red u/s 41(1) has not been pressed by the ld. Counsel for the assessee at the time of hearing before us. The same is accordingly dismissed as not pressed. 24. As regards the issue raised in ground no. 8 relating to addition made on account of MODVAT credit by including the same in the value of closing stock, the ld. Representatives of both the sides have agreed that a similar issue has already been decided in assessee's own case for A.Y. 2001-02 wherein the same was restored by the Tribunal to the file of AO vide order dated 30th July 2009 passed in ITA No. 2363/Mum/2005 with a direction to make the adjustment on account of excise duty also to the value of opening stock as well as sales and purchase in accordance with section 145A. Respectfully following the said order of the Tribunal, we restore this issue to the file of AO for deciding the same afresh as per same directions as given by the Tribunal in A.Y. 2001-02. Ground no. 8 of the assessee's appeal is accordingly treated as allowed for statistical purposes. 25. The issue raised in Ground no. 9 relates to the assessee-company's claim for deduction u/s 80IB in respect of the following items of other income. 1. Other....
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....lly following the said decision of Hon'ble Supreme Court, we uphold the order of the learned CIT(Appeals) on this issue confirming the disallowance made by the AO u/s 80IB in respect of first four items of other income." 27. Respectfully following the order of the Tribunal dated 14th September 2012(supra) passed in assessee's own case for A.Y. 2002-03, we uphold the impugned order of the ld. CIT(A) confirming the disallowance made by the AO on account of assessee's claim for deduction u/s 80IB in respect of first four items of other income and delete the said disallowance to the extent it was in respect of income from insurance claim. Ground no. 9 is of the assessee's appeal is partly allowed. 28. The next issue raised in ground no. 10 relates to the disallowance of Rs.200,000/- made by the AO on account of proportionate management expenses incurred by the assessee to earn taxable dividend income. 27. During the year under consideration, deduction was claimed by the assessee u/s 80M on account of dividend income of Rs. 31,15,000/- received from Indrol Cehmicals and specialties Pvt. Ltd. As held by Hon'ble Supreme Court in the case of CIT vs. United General Trust Ltd. 200 I....
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....ustained. On appeal, the ld. CIT(A) confirmed the said allowance following the orders of the Tribunal in assessee's own case on the similar issue for A.Y. 1997-98 and 1998-99. 34. We have heard the arguments of both the sides and also perused the material on record. Although the ld. Counsel for the assessee has contended that the expenditure on the foreign trip of spouse of the employee was incurred as per terms of employment, he has not been able to point out any distinguishing feature involved in the year under consideration vis-à-vis the earlier years wherein the similar disallowance was confirmed by the Tribunal. We therefore, respectfully follow the orders of the Tribunal on the similar issue in assessee's own case for the earlier years and confirm the disallowance made on this issue. Ground no.12 of the assessee's appeal is accordingly dismissed. 35. As regard the issue raised in ground no. 13 of the assessee's appeal relating to disallowance of depreciation on the assets of Silvasa Unit, the ld. Representatives of both the sides have agreed that this issue is squarely covered against the assessee and in favour of the Revenue by the order of the Tribunal dated 13....
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....al and dismiss the same. 39. In its appeal for A.Y. 2003-04 being ITA No.1299/Mum/2007, the Revenue has raised the following two grounds. 1. "On the facts and in the circumstances of the case and in law, the CIT(A) erred in allowing the claim of the assessee for deduction u/s 35(1)(iv) with respect to capital expenditure incurred on computers of Rs.5,26,926/- without appreciating the facts of the case." 2. On the facts and in the circumstances of the case and in law, the CIT(A) erred in deleting the disallowance made by the Assessing Officer of Rs.6,84,225/- on account of advertisement expenditure by treating it as capital expenditure, without appreciating the facts of the case." 40. As regards the issue raised in ground no. 1 related to the assessee's claim for deduction u/s 35(1)(iv), the ld. Representatives of both the sides have agreed that the same is squarely covered in favour of the assessee by the decision of the Tribunal taken consistently on the similar issue in the earlier orders. A similar claim made by the assessee was initially allowed in A.Y. 1998-99 and the same was followed subsequently in A.Y. 2001-02 while deciding the similar issue in favour of the a....
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....e's appeal for A.Y. 2003-04 which has been decided by us in the foregoing portion of this order. The only difference is that out of the total addition of Rs.59,30,378/- made by the AO/TPO, the ld. CIT(A) deleted the disallowance made on this issue to extent of Rs. 42,58,981/- after verifying the details of relevant expenses and basis of allocation furnished by the assessee as per his direction. The balance disallowance of Rs.16,71,397/-however was sustained by him on the ground that in the absence of the details of relevant expenses and basis of allocation furnished by the assessee, the arm's length price of this transactions was rightly taken by the AO/TPO at nil. It is observed that a similar fact situation was involved in assessee's own case for A.Y. 2002-03 relating to identical issue wherein the Tribunal upheld the order of the ld. CIT(A) granting relief to the assessee to the extent the claim of the assessee was dully supported by the relevant details and documents as well as the basis of allocation. As regards the disallowance partly sustained by the ld. CIT(A) on this issue for want of such details and basis of allocation, the issue was restored by the Tribunal to the file ....