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2014 (2) TMI 555 - AT - Income TaxPurchase cost of films and other production materials Capital or Revenue - Held that:- Relying upon the decision in ADDL COMMISSIONER OF INCOME TAX Versus M/s JOHNSON & JOHNSON LTD [2013 (6) TMI 286 - ITAT MUMBAI] - The said expenditure is revenue expenditure - Decided in favour of assessee. MODVAT credit attributable to the closing stock Held that:- Relying upon the decision in ADDL COMMISSIONER OF INCOME TAX Versus M/s JOHNSON & JOHNSON LTD [2013 (6) TMI 286 - ITAT MUMBAI] The issue has been restored for fresh adjudication. Disallowance u/s 40A(2)(b) Held that:- Relying upon the decision in M/s. Johnson & Johnson Limited Versus The Addl. Commissioner of Income-tax [2013 (4) TMI 228 - ITAT MUMBAI] - For the payments for legal counseling, it is futile to think of comparables because counsels may not charge standard fee but may charge according to the issue involved Also the AO have failed to establish the excessiveness of the payment Decided in favour of assessee. Adhoc disallowance of travelling expenses and professional sponsorship Held that:- The disallowance on the ground that the expenditure being personal in nature cannot be made in the case of a company Relying upon the decision in case of Sayaji Iron & Engg. Co Versus Commissioner of Income Tax [2001 (7) TMI 70 - GUJARAT High Court] - DRP has not pointed out the expenses which are not in connection with business activity of the assessee inspite of facts that the details were filed by assessee before DRP Decided in favour of assessee. Professional sponsorship In earlier years the expenditure were Rs.2.23 crores and Rs.4.36 crores in assessment year 2001-02 and assessment year 2002-03 respectively under the head "Professional Sponsorship" - Whereas in the assessment year under consideration the total expenditure incurred is of Rs.23,11,26,595 - The assessee filed only scanty details of the foreign visits of doctors etc - The addresses of doctors and the organizers have not been given in the details filed by assessee even before us - The assessee was not able to justify with documentary evidence that entire expenditures had been incurred by the assessee for the purpose of its business - The earlier orders as referred to by ld. AR could not be considered as precedent in the assessment year under consideration - It will be fair and reasonable to make an adhoc disallowance of 2% of the expenditure claimed by assessee which comes to Rs.46,22,500/- as against Rs.11,55,63,298/- disallowed by AO - Payment of FBT does not establish that expenditure was for business purpose Partly allowed in favour of assessee. Depreciation on testing equipment Held that:- Relying upon the decision in M/s. Johnson & Johnson Limited Versus The Addl. Commissioner of Income-tax [2013 (4) TMI 228 - ITAT MUMBAI] - The Tribunal passed an order in another group concern of the assessee, whose facts have not been distinguished by the DR is followed - The depreciation should be allowed on the testing equipment provided to laboratories and hospitals free of charge as the said equipments have been provided to the laboratories and hospitals for making profit from the sale of slides Decided in favour of assessee. Adhoc disallowance of expenditure towards free samples Held that:- The assessee is required to furnish requisite details to the satisfaction of AO to justify that the expenditure has been incurred for business purpose Relying upon the decision in the case of Goodyear India Ltd. V/s CIT [2000 (7) TMI 32 - DELHI High Court] - "The details of expenditures, which are not substantiated by vouchers and assessee was unable to furnish the detail to justify the claim, the disallowance made by AO is justified and availability of tax audit report does not preclude AO from calling for supporting materials". Even though it is a commercial practice in the line of business of the assessee, to give free samples to promote its product, the assessee is expected to maintain details to enable the AO to verify as to whether the said samples had been given by assessee wholly and exclusively in connection with its business - Payment of Fringe Benefit Tax (FBT) does not establish that expenditure has been incurred by the assessee for its business purpose - It will be fair and reasonable to restrict disallowance to 2% of the claim of assessee which comes to Rs.31,61,000/-as against Rs. Rs.11,85,03,996/- disallowed by AO Partly allowed in favour of assessee. TPA - Disallowance of royalty paid Held that:- Payment of royalty at the rate of 4% is as per RBI formula and the average royalty rate for comparable technical know-how /marketing know-how approval worked out to 4.84% on sales and therefore royalty of 4% paid by assessee to J&J US is lesser than Arm's Length of 4.84% - No disallowance can be made by TPO on the basis that there was no necessity by the assessee to pay royalty at the enhanced rate of 4% as it was excessive and unnecessary. Rule 10B(1) of Income Tax Rules, 1962 does not authorize the TPO to make disallowance of any expenditure on the ground that it was not necessary or prudent for the assessee to have incurred the same - Such kind of observations and thereafter to make disallowance by TPO while considering the price at Arm's Length are outside his purview - The quantum of expenditure can be examined by TPO as per law but in judging the allowbility thereof as business expenditure, TPO has no authority to disallow the entire expenditure or part thereof on the ground that the said expenditure is excessive - The TPO has to examine whether price paid or the amount paid was at Arm's length under the provisions of Transfer Pricing and its Rules - It is relevant to state that the Ld.AR stated that the average royalty paid by assessee is comparable and it is lower than the Arm's Length rate of 4.84% as per information available on "website" of SIA which provides rate which is approved by SIA/RBI - The TPO cannot suggest the disallowance merely because as per his assumption it is excessive though the payment is at Arm's length Decided in favour of assessee. Publicity and sales promotion expenses Held that:- The TPO has suggested disallowance on the ground that the AE of the assessee viz J&J US is reaping the benefit of higher royalty amount as a result of higher sales realized by assessee by incurring higher expenses by way of publicity and sales promotion undertaken by assessee and therefore the parent company of the assessee-company should share some of the expenses - The TPO is to determine the Arm's length by following one of the method and /or most appropriate method as prescribed in section 92C(1) of the Act - The TPO cannot suggest adjustment/disallowance on the basis of his assumptions that the payment is excessive though it is at arm's length Relying upon the decision in the case of Kodak India Pvt. Ltd. V/s Addl. Commissioner of Income Tax [2013 (11) TMI 667 - ITAT MUMBAI] - Rule 10B specifically provides the procedure to be followed for determining Arm's Length Price. No specific submissions were made made by the TPO regarding excessiveness of the expenses incurred by following any of the method specified - Considering the fact that the assessee justified the payment of technical know-how royalty at the rate of 4% of net sales which is lower than Arm's length rate of 4.84%, the payment of royalty by assessee to its parent company is at Arm's Length - Decided in favour of assessee.
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