TaxTMI 
TaxTMI 
2020 (8) TMI 173
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....ce to the above, on the facts and in the circumstances of the case and in law, the AO erred in computing the disallowance as per the method prescribed under Rule 8D(2)(ii) of the Income Tax Rules, 1962 ('the Rules') without considering the specific facts in the Appellant's case. That disallowance amounting to Rs. 37,03,813/- as per Rule 8D(2)(ii) of the Rules be deleted. 3. Briefly stated, the facts of the case are that the appellant filed its return of income for the assessment year (AY) 2008-09 on 29.09.2008 declaring income of Rs. 878,582,710/- under normal provisions and Rs. 2,831,882,739/- under u/s 115JB of the Act. During the course of assessment proceedings, the AO noticed that the appellant has earned tax-free interest income of Rs. 49,908,623/-. This interest was earned from various tax-free bonds like Konkan Railway Corporation, Indian Railway Finance Corporation, HUDCO, Unit Trust of India and NABARD. In response to query raised by the AO to explain why the provisions of section 14A(2) and (3) and Rule 8D shall not be applicable, the appellant filed a reply. However, the AO was not convinced with the said reply on the ground that the appellant has not ....
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.... Court in the case of Godrej & Boyce Mfg. Co. Ltd. v. DCIT (2010) 328 ITR 81 (Mum), the AO is duty bound to adopt Rule 8D for making disallowance u/s 14A, where he is not satisfied with the claim of the assessee. Further, it is stated that in the instant case the appellant has not maintained separate books of accounts for earning the exempt income. Thus the Ld. DR supports the order passed by the AO. 6. We have heard the rival submissions and perused the relevant materials on record. The reasons for our decisions are given below. A perusal of the balance sheet of the appellant as at March 31, 2008 clearly indicates that the Shareholders' Funds (Share Capital and Reserve and Surplus) are at Rs. 162,20.62 Lacs, whereas the investments are at Rs. 72,58.77 Lacs. In HDFC Bank Ltd. vs. DCIT [2016] 67 taxmann.com 42 (Bom), the Hon'ble Bombay High Court referring to the decision in CIT vs. HDFC Bank Ltd. [2014] 366 ITR 505 (Bom) and CIT v. Reliance Utilities & Power Ltd. [2009] 313 ITR 340 (Bom) held as under : "15. It is clear that for the first time in the case of HDFC Bank Ltd. (supra) that this Court took a view that the presumption which has been laid down in Reliance Utiliti....
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....tment rather than the amount of exempt income. Under Portfolio Management Schemes (PMS), the fee charged ranges between 2 and 2.5 per cent of the portfolio value which would be inclusive of a profit element for the portfolio manager. While the fixed administrative expenses were excluded on the ground that in the case of a large corporate taxpayer they would be spread over a large number of voluminous activities, the variable expenses were computed at one-half per cent of the value of the investment." Having considered the facts of the case and following the above decision, we confirm the disallowance of Rs. 29,14,417/- made by the AO. 7. Thus the 1st ground of appeal is partly allowed. 8. The 2nd ground of appeal 2. On the facts and in the circumstance of the case and in law, the AO/ DRP erred in disallowing a sum of Rs. 18,38,936/- incurred in connection with the reduction of share capital of the company considering the same as capital expenditure. That the sum of Rs. 1,86,38,936/- be allowed as business expenditure and the disallowance be deleted. 9. During the year under consideration, the appellant has reduced the face value of its equity share from Rs. 10/- to Rs. 1/....
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....aimed deduction in respect of expenditure incurred for proceeding of implementation of buyback of shares which would not in any manner enhance the capital structure of the assessee but there is outflow of capital and no deduction is claimed for outflow of capital. Therefore, Tribunal has rightly allowed such expenditure as revenue expenditure." In Selan Exploration Technology Ltd. (supra), the AO disallowed the claim of the assessee of Rs. 20,40,000/- incurred for buyback of shares and treated the same as capital expenditure of the assessee and thus added it to the income. In so far as the above amount is concerned, it was paid by the assessee to HSBC Securities and Capital Markets (India) (P.) Ltd. for advisory services. Such payment of advisory services was in connection with buyback of shares and instead of increase in the share capital, it was going to result in the decrease in funds with the buyback of the shares. In these circumstances, the Tribunal held that the assessee had not acquired the benefit or addition of enduring nature and the expenditure was therefore, allowable as revenue expenditure. In further appeal by the revenue, the Hon'ble High Court referring inter alia....
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....t acquire benefit or addition of enduring nature. 11. In the present case, consultancy fee for advisory services was paid by the assessee-company for buyback of shares. Instead of increase in the share capital, it was going to result in the decrease in funds with the buyback of the shares. In these circumstances, the Tribunal rightly held that the assessee had not acquired the benefit or addition of enduring nature because after the buyback, benefit or addition of enduring nature would not arise as capital employed had, in fact, gone down. The expenditure incurred had not resulted into bringing into existence any asset. Therefore, it was rightly held to be an expense of revenue nature. 12. The contention of learned counsel for the Revenue that with lesser capital dividend in future payable shall be less and, therefore, it shall be treated as a benefit of enduring nature cannot be accepted. We further find that in these circumstances the Tribunal rightly held that such an expenditure was allowed under section 37 of the Act as expense incurred for business purpose in the following manner :- "15. Once we decide that the impugned expenditure is not capital in nature, we have to....
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....e by the AO and allow the 2nd ground of appeal. 13. As the appellant has not pressed the 3rd ground of appeal, the same is dismissed. 14. The 4th ground of appeal 4. On the facts and in the circumstances of the case and in law, the AO/DRP erred in confirming the upward adjustment of Rs. 572,554,441/- to the income of the Appellant, in respect of advertisement, marketing and sales promotion ('AMP') expenses incurred by the Appellant, by: a failing to appreciate that the AMP expense which is incurred by way of payments to third parties is incurred 'wholly and exclusively' for purpose of business of the Appellant in India and that the AMP expenses do not benefit Colgate Palmolive Company, U.S.A ('CP USA'); b alleging that there exists an arrangement between the Appellant and CP USA for AMP expenses thereby erred in contending that CP USA needs to compensate the Appellant towards AMP expenses; c applying the bright line test for determining the compensation towards the AMP expenses; d concluding that the AMP expenses of the Appellant, which is incurred by way of payment to the third parties, as an international transaction; e applying Indian transf....
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....e above issue is covered in favour of the assessee by the order of the Tribunal in assessee's own case for AYs 2005-06 & 2007-08, wherein it has been held that (i) there exists no arrangement or agreement between the taxpayer and its AE and accordingly, no addition could be made on mere assumption of certain facts, (ii) the case of the assessee is in accordance with the ratio laid down by the Bombay High Court in Johnson & Johnson Ltd. (80 taxmann.com 269) and Delhi High Court in Maruti Suzuki India Ltd. v. CIT (2015) 64 taxmann.com 150 ; CIT v. Whirlpool of India Ltd. 381 ITR 154; Bausch & Lomb Eyecare (India) (P.) Ltd. v. Addl. CIT 381 ITR 237, (iii) in AY 2011-12, the DRP has decided the issue in favour of the assessee following the decision in the case of Maruti Suzuki (supra). On the other hand, the Ld. DR relies on the order passed by the AO as per the direction of the DRP. 17. We have heard the rival submissions and perused the relevant materials on record. The reasons for our decisions are given below. We find that on similar facts in appellant's own case for AYs 2005-06 & 2007-08, the Tribunal has followed the decision of the Co-ordinate Bench in Johnson & Johnson Ltd. ....
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.... AE obliging the assessee to incur AMP expenditure on behalf of its AE, no international transaction can be presumed. Even if some indirect benefit has accrued to the AE by aforesaid expenditure, it could not be held that the same was incurred to promote the brand of foreign AE. Facts being identical, we follow the above order of the Co-ordinate Bench in appellant's own case for AYs 2005-06 & 2007-08 and delete the upward adjustment of Rs. 572,554,441/- made by the AO. Thus the 4th ground of appeal is allowed. 18. The 5th ground of appeal 5. On the facts and in the circumstance of the case and in law, the AO/DRP erred in confirming the upward adjustment of Rs. 8,659,200/- to the income of the Appellant, in respect of provision of research and development/ testing services, by: a. failing to appreciate that none of the conditions set out in section 92C(3) were satisfied and that the Appellant had prepared the Transfer Pricing documentation bona fide and in good faith in compliance with the Act and the Rules; b. using single year data (i.e. Financial Year 2007-08) as against the multiple year data used by the Appellant for the comparability analysis; c. rejecting 5 comparab....
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.... 4 9 Average 29.20% 19.83% The DRP confirmed the action of the TPO. The AO, following the direction of the DRP made an adjustment of Rs. 86,59,200/-. 20. Before us, the Ld. counsel submits that the appellant has taken into account 9 comparables in the TP study. The TPO excluded 5 comparables and computed single year margin of 4 comparables which comes to 29.20%. It is explained out of 5 comparables rejected by the TPO, 3 comparables are not pressed for inclusion and the appellant submits for inclusion of (i) Dolphin Medical Services Ltd., (ii) Medinova Diagnostic Services Ltd. and exclusion of Alphageo (India) Ltd. Elaborating further, for inclusion of Dolphin Medical Services Ltd., it is stated that the same is engaged in providing and maintaining diagnostic laboratories and equipments for testing and setting up laboratories for medical investigation and research. In this regard, reliance is placed on the decision in Watson Pharma (P.) Ltd. (38 ITR 97). For inclusion of Medinova Diagnostic Services Ltd., it is stated that the same is engaged in the business of diagnostic services and related business. For exclusion of Alphageo (India) Ltd., it is stated that the ....
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....f comparables. 22.1 A perusal of the annual report (2007-08) of Dolphin Medical Services Ltd. clearly indicates that it is a service industry (page 5). It is engaged in the business inter alia of establishing, providing and maintaining diagnostic laboratories and equipments for testing and setting up laboratories for medical investigations and research (page 7). The generic names of 3 principal products/services of Dolphin are 'Diagnostic, Ophthalmic and Software Services' (page 25). The appellant has relied on the decision in Watson Pharma Pvt. Ltd. (supra) in support of its contention for including Dolphin Medical Services Ltd. We find from the order of the Tribunal that Watson Pharma P. Ltd. is a wholly owned subsidiary of Watsons Labs, USA. The assessee (Watson) from its facilities manufactures raw materials, API and intermediates to support its internal product development. It also facilitates development of APIs for third parties as well. On the whole, the assessee (Watson) provides contract manufacture, contract research and development to its parent AE at the US. The parent AE in the US is engaged in development, manufacture, sale and distribution of proprietary and off ....
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.... transactions with uncontrolled transactions. The hon'ble Supreme Court in the case of Morgan Stanley & Company Inc (2007) 292 ITR 416(SC) has placed significant emphasis on FAR (functions performed, assets owned and risks assumed by the associated enterprises involved) analysis for benchmarking exercise, also known as comparability analysis, for determination of arm's length price of a transaction between associated enterprises. Under Rule 10D(1)(e), a taxpayer who has entered into an international transaction is required to keep and maintain a description of the functions performed, risks assumed and assets employed or to be employed by the assessee and by the associated enterprises involved in the international transaction. Under Rule 10C(2)(b) in selecting the most appropriate method, among other factors, the class or classes of associated enterprises entering into the transaction and the functions performed by them taking into account assets employed or to be employed and risks assumed by such enterprises, shall be taken into account. And under Rule 10B(2)(b), the comparability of an international transaction with an uncontrolled transaction shall be judged, among other fac....