TMI Blog2022 (10) TMI 182X X X X Extracts X X X X X X X X Extracts X X X X ..... s of s. 92A(2) or the entities become AE in terms of s.92B(2). We find that the additional evidence as furnished by the assessee would have material bearing in deciding this issue. Therefore, we admit the additional evidence and restore the matter of royalty on sales to AEs as well as non-AEs back to the file of TPO / Ld. AO. The lower authorities are directed to appreciate the additional evidences and re-adjudicate the issue of royalty on sale afresh after- 8 - affording reasonable opportunity of hearing to the assessee. The assessee, in turn, is directed to substantiate its stand. The ground thus raised stand allowed for statistical purposes. Disallowance u/s 14A - HELD THAT:- We find that in this year, Rule 8D is not applicable. Therefore, as held by Tribunal in AY 2006-07 [ 2017 (4) TMI 1597 - ITAT CHENNAI] .we direct Ld. AO to restrict the disallowance to the extent of 2% of exempt income. This ground stand partly allowed. Apportionment of Expenses to compute deduction u/s 80-IC - HELD THAT:- We substantially confirm the stand of lower authorities in this regard except the issue of allocation of depreciation on trademark. In the paper-book, the assessee has filed an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt order passed by Ld. Joint Commissioner of Income Tax (AO) on 27.09.2011 pursuant to the directions of Ld. Dispute Resolution Panel (DRP) dated 08.09.2011. The order by Ld. Transfer Pricing Officer (TPO) was passed on 14.10.2010, the proposal of which was incorporated in the draft assessment order dated 29.12.2010 which was subjected to challenge before Ld. DRP. The grounds raised by the assessee read as under: - A. Transfer Pricing adjustments- Rs. 50,529,810/- Ground 1: Error in sustaining the arm's length price The learned AO/TPO/DRP erred in making adjustments to the Arm's Length price as originally determined by the Appellant. Ground 2: Error in imputing notional interest The learned AO/TPO/DRP erred in imputing interest on advances granted by the appellant to the Associated Enterprises Ground 3: Error in computing royalty on sales a. The learned AO/TPO/DRP erred in imputing royalty and consequently making an adjustment for computation of tax. b. The Learned AO/TPO/DRP erred in contenting that the appellant had not established its claim before the panel with proper evidence. B. Corporate Tax adjustments Ground 4: Disallow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nditure incurred towards application software by treating it as capital expenditure. b. The learned AO/DRP ought to have appreciated that the software installed does not result in an enduring benefit and the same was bound to become technically obsolete due to fast changes in the technology. c. The learned AO/DRP ought to have observed that the assessee has acquired merely the license to use the software and there was no outright purchase of software giving ownership to the assessee of the software so as to treat the same as a capital expenditure. d. The learned AO/DRP ought to have appreciated that the application software purchased by the assessee only facilitates the trading operations by enabling the management to conduct the business more efficiently, while leaving the fixed capital untouched. e. The learned AO/DRP ought to have appreciated that every advantage of enduring nature would not bring in a capital asset into existence except when there is enhancement in the capital structure of the assessee. f. The learned AO/DRP ought to have appreciated that the assessee did not acquire any asset of capital nature nor there is any change in the capital field of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rs.344.19 Lacs Total Rs.505.29 Lacs The order of Ld. TPO take note of the fact that during the year, the assessee has acquired the overseas trademark for Titan and Tanishq from Rockbourne Holding BV (RHBV) for Rs.6327.11 Lacs which has been capitalized in the books. By this acquisition, the assessee has acquired the ownership or exclusive rights to trademarks in the overseas market. This fact has led to computation of royalty on export sales made by the assessee to its Associated Enterprises as well as non-Associated Enterprises. 4.2 The assessee advanced interest free advertising advances in earlier years to two of its AEs i.e., Titan International Marketing Ltd. (TIML), UK who traded in watches, jewellery clocks and Titan Brand Holdings NV (TBHNV), Netherland (an investment company). These advances were recovered by the assessee during the year for Rs.630.63 Lacs from TIML and for Rs.109.80 Lacs from TBHNV. The assessee submitted that the advances were for the purpose of expenditure on advertising and related expenses outside India on behalf of the assessee and the said transactions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... were paying royalty to the brand owner in the range of 2% to 3% and therefore, the assessee should have received similar royalty on export sales. 5.2 The assessee submitted that the AEs were not engaged in manufacturing or processing of the products and they merely purchased and resold the assessee s products. The assessee has economic ownership of the brand and AE do not affix the logo of the Titan brand on such products. 5.3 However, rejecting the same, Ld. TPO computed royalty of 3% on AE sale. It was further opined by Ld. TPO that the sale made by the assessee to third parties would also come under the purview of transfer pricing scrutiny and such transactions were also to be treated as international transactions. Accordingly, similar royalty was computed by Ld. TPO on non-AEs sale also and TP adjustment was proposed. The Ld. DRP dismissed assessee s objections against which the assessee is in further appeal before us. 5.4 Before us, the assessee has filed application under Rule 29 of Income Tax Appellate Tribunal Rules, 1963 for admission of additional evidences which is supported by the affidavit of Managing Director of assessee company. By way of this application ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3.04.2017, we direct Ld. AO to restrict the disallowance to the extent of 2% of exempt income. This ground stand partly allowed. 7. Apportionment of Expenses u/s 80-IC 7.1 In ground No.5, the assessee is aggrieved by apportionment of expenditure for the purposes of computation of deduction u/s 80-IC. It transpired that the assessee claimed deduction u/s. 80IC with respect to their units at Dehradun (Units I II) and in Baddi. The method of apportionment of certain corporate overhead expenditure was not accepted in earlier years. The assessee allocated the same on the basis of number of watches produced. However, the same was distributed by the revenue on the basis of turnover of the units. The assessee furnished revised working of profits u/s 80IC and accordingly, the excess claim of Rs.217.03 Lacs was added to the income of the assessee. The Ld. DRP, relying upon DRP order for AY 2006-07, dismissed the assessee s objections. 7.2 This issue has been adjudicated by us in ITA No.2192/Chny/2010 order dated 17.08.2022 as under: - 4.2 We find that all the other overhead expenses have been allocated by the assessee on the basis of turnover. Only design and development cost a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Software Expenses 8.1 In Ground No.6, the assessee seeks deduction of application software expenses of Rs.167.54 Lacs. The assessee incurred software expenditure which were in the nature of maintenance charges for various software on which company operates. A part of the expenditure was incurred on purchase of software like MS Office, CAD/CAM etc. which would not being any enduring benefit to the assessee and therefore, the same was claimed as revenue expenditure. However, the expenditure spent for purchase of software was held by Ld. AO to be payment towards license fees for using the software and the same would have enduring benefit. Therefore, the expenditure of Rs.418.86 Lacs was held to be capital in nature on which the assessee would be entitled for depreciation of 60%. The differential i.e., Rs,.167.54 Lacs was added to the income of the assessee. The Ld. DRP confirmed the stand of Ld. AO. 8.2 We are of the opinion that though the software so purchased by the assessee may bring enduring benefit spreading over various years, however, the assessee acquires limited license to use the software. These are application software which are accessible to the assessee for a l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ountancy of the assessee and to efficiently train the accounting staff of the assessee. The Tribunal, which is decidedly the final fact finding authority has after noticing the material on record observed that the expenditure was incurred under various sub-heads, which included licence fee, annual technical support fee, professional charges, data entry operator charges, training charges and travelling expenses. The final figure was a consolidation of expenses incurred under these sub-heads. The Tribunal, in our view, and rightly so, came to the conclusion that none of these resulted in either creation of a new asset or brought forth a new source of income for the assessee. The Tribunal classified the said expenses as being recurring in nature to upgrade and/or to run the system. 10. In the background of the aforementioned findings, it cannot be said that the expenses brought about in an enduring benefit to the assessee. The Assessing Officer was perhaps swayed by the fact that in the succeeding financial year, i.e., 1997-98 (assessment year 1998-99), the amount spent was large. First of all, the extent of the expenditure cannot be a decisive factor in determining its nature. As ..... X X X X Extracts X X X X X X X X Extracts X X X X
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