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2022 (10) TMI 182 - AT - Income TaxTransfer Pricing Adjustment of notional interest on advances - HELD THAT - We direct Ld. AO to compute interest at LIBOR 2% on such transactions. The fact that the assessee has acquired trademarks during the year would not materially change the adjudication since in this year, the assessee has merely recovered the loans as granted by the assessee to the AEs in earlier years. The grounds thus raised stand partly allowed. Transfer Pricing Addition of Royalty on Sales - HELD THAT - We find that the assessee is acting as manufacturer and in this year, it has owned the brand also. TPO has alleged that the assessee should received royalty from AEs as well as from non-AEs also. Similar royalty was being paid by other AEs in the past to the erstwhile brand owners. We are of the considered opinion that simpliciter sale transactions with non-AEs could not be held to be international transactions for the simple reason that Transfer Pricing (TP) provisions would not apply under such circumstances provided it could be shown that the case fall under clauses 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 application u/r 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, the assessee seeks production of additional evidences which are in the form of summary of break-up of export sales, details of export sales, sample invoices, annual report etc. It is the submission of the assessee that the units which are eligible to claim deduction u/s 80-IC caters only to the domestic markets and therefore, depreciation on trademark could not be allocated to the said units as the trademark is put to use only in respect of watches exported. Admitting the same, we direct AO to examine the issue of allocation of depreciation and re-adjudicate the same in the light of submissions made in the application. The corresponding grounds stand partly allowed for statistical purposes. Nature of Application Software expenditure - Revenue or capital expenditure - HELD 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 limited period of time. It could not be said that the capital base of the assessee has widened by acquiring such software. Rather the softwares are part of its trading operations only. Our view is fortified by the decision Hon ble Delhi High Court in CIT V/s Asahi India Safety Glass Ltd. 2011 (11) TMI 2 - DELHI HIGH COURT . - we would hold that the expenditure so incurred by the assessee would be revenue expenditure - AO is directed to allow the expenditure as revenue expenditure and reverse the depreciation granted on the same. The ground stand allowed. TDS Credit - HELD THAT - AO is directed to verify the TDS claim and grant TDS credit in accordance with law.
Issues Involved:
1. Transfer Pricing adjustments 2. Corporate Tax adjustments 3. Disallowance under section 14A 4. Apportionment of common expenses for deduction under section 80-IC 5. Nature of application software expenditure 6. Short grant of Tax deducted at source (TDS) amount 7. Calculation of interest under sections 234B and 234C Issue-wise Detailed Analysis: 1. Transfer Pricing Adjustments Error in sustaining the arm's length price and imputing notional interest: The assessee challenged the adjustments made by the AO/TPO/DRP to the Arm's Length Price (ALP) of international transactions. The TPO proposed adjustments of Rs. 505.29 Lacs, including interest on advances to Associated Enterprises (AEs) and royalty on sales. The Tribunal directed the AO to compute interest at LIBOR+2% on such transactions, following the precedent set in AY 2006-07. The Tribunal also admitted additional evidence related to royalty on sales and remanded the matter back to the TPO/AO for fresh adjudication. 2. Corporate Tax Adjustments Disallowance under section 14A: The AO applied Rule 8D to compute disallowance of Rs. 97.52 Lacs, which included interest and expense disallowance. The Tribunal held that Rule 8D was not applicable for the year under consideration and directed the AO to restrict the disallowance to 2% of exempt income, following the decision in AY 2006-07. Apportionment of common expenses for deduction under section 80-IC: The AO allocated common expenses based on turnover, which the assessee disputed. The Tribunal upheld the AO's method except for the allocation of depreciation on trademarks. The Tribunal admitted additional evidence and remanded the issue of depreciation allocation back to the AO for re-adjudication. 3. Nature of Application Software Expenditure The AO treated software expenses as capital expenditure, while the assessee claimed it as revenue expenditure. The Tribunal held that the software expenses were revenue in nature as they did not result in the creation of a new asset or a new source of income. The Tribunal directed the AO to allow the expenditure as revenue and reverse the depreciation granted on the same. 4. Short Grant of TDS Amount The assessee claimed a short credit of TDS amounting to Rs. 93,683/-. The Tribunal directed the AO to verify the TDS claim and grant credit in accordance with the law. 5. Calculation of Interest under Sections 234B and 234C The assessee disputed the computation of interest under sections 234B and 234C. The Tribunal noted that these issues were consequential and did not require specific adjudication. Conclusion The appeal was partly allowed, with directions for fresh adjudication on certain issues and specific instructions for the AO to follow established precedents and verify claims. The order was pronounced on 07th September 2022.
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