2022 (12) TMI 1078 - AT - Income Tax

TP adjustment on AMP expenditure - TPO show caused the assessee as to why 1% of gross sales be not considered as brand building exercise for AE as done in last year - HELD THAT - From the facts it emerges that this adjustment made by Ld. TPO is primarily guided by adjustment made in the earlier years. Similar issue in AY 2012-13 has been adjudicated by this Tribunal in assessee s favor for the reason that determination as done by Ld. TPO at 1% of gross sales is adhoc figure and not a figure arrived by calculation or method as provided in Sec. 92C(1) much less Rule 10AB of Income Tax Rules 1962. Therefore the adjustment so made without following any prescribed method is not sustainable and accordingly deleted. We find that similar factual matrix exist in this year. TPO has merely presumed that there exist an arrangement between the assessee and its AE for promotion of the brand. No such arrangement has been shown to us. Therefore taking a consistent stand in the matter the impugned adjustment stand deleted. The corresponding grounds stands allowed. Disallowance u/s. 14A u/r 8D(2)(iii) - AO rejecting assessee s plea that it had not availed any loan for investment and the investments were out of own funds - HELD THAT - We find that similar issue in AY 2012-13 thus the issue of disallowance u/r 8D(2)(ii) as well as u/r 8D(2)(iii) stand restored back to the file of Ld. AO on similar lines - AO shall take consistent view as taken on AY 2012-13 on this issue. This ground stand allowed for statistical purposes. Disallowance u/s. 40(a)(ia) - short deduction of tax - assessee paid connectivity expenses for dedicated leased lines provided by various vendors and deducted TDS @ 2% - A.O opined that the tax should have been deducted at 10% - HELD THAT - The Tribunal in latest decision for AY 2012-13 relying upon decision for AY 2009-10 2015 (12) TMI 1328 - ITAT CHENNAI held that disallowance u/s 40(a)(ia) is not attracted in case of short deduction of tax at source. Respectfully following the consistent view of Tribunal the impugned disallowance stand deleted. Disallowance of provision for inventory - assessee created provision towards provision for inventories which was stated to be towards slow moving and obsolete traded goods on account of diminishment in the value of stock held in the course of business - HELD THAT - From the financial statements of the assessee it could be ascertained that the assessee is valuing the inventories at lower of cost price or net realizable value which is prescribed method of valuation of inventories. When the valuation is done on lower of cost or net realizable value then any decrease in value of obsolete or slow moving stock on valuation date would automatically take care of the loss suffered by the assessee on this account. Accordingly a separate provision made in this regard could not be allowed to the assessee. The Ld. AR has cited many case laws to support this deduction. However in the given factual matrix the same are not applicable. Therefore the adjustment made by Ld. AO in this regard could not be faulted with. The corresponding grounds raised by the assessee stand dismissed. Depreciation on software - @60% or 25% - HELD THAT - The bench noticing the entries in Appendix I of Income Tax Rules 1962 held that the rate of depreciation mentioned at III(5) for computers including computer software would be 60%. Considering the same we direct Ld. AO to allow depreciation of 60% on software. Provision for VAT assessment demand - HELD THAT - From the fact it emerges that this liability pertains to earlier years. In such a case the same could be allowed to the assessee only upon crystallization of the liability. From assessee s submissions it is quite clear that the liability has been crystalized only on 04.04.2013 and therefore the deduction of mere provision in this year could not be allowed to the assessee. It is very clear that this is a prior period item and the liability in this respect has not crystallized during this year. Therefore the corresponding grounds stand dismissed. No other ground has been urged in the appeal.

Summary

Issues Involved:
1. Transfer pricing adjustment on advertisement, marketing, and promotion expenditure (AMP)
2. Disallowance under Section 14A of the Income Tax Act
3. Disallowance under Section 40(a)(ia) of the Income Tax Act for short deduction of taxes
4. Provision created towards slow/non-moving and obsolete inventory
5. Depreciation on software
6. Provision for VAT assessment demand
7. Initiation of penalty under Section 271(1)(c) of the Income Tax Act

Detailed Analysis:

1. Transfer Pricing Adjustment on AMP Expenditure:
The Tribunal noted that the Transfer Pricing Officer (TPO) considered advertisement expenditure incurred by the assessee as part of international transactions and proposed an ad-hoc brand promotion fee of 1%. The assessee argued that the AMP expenses were for domestic operations and less than those of comparable companies. The Tribunal found that the TPO's adjustment was based on an ad-hoc figure without following any prescribed method as per Section 92C(1) and Rule 10AB. Therefore, the adjustment was not sustainable and was deleted.

2. Disallowance under Section 14A of the Income Tax Act:
The assessee earned exempt dividend income and incurred interest expenditure. The Assessing Officer (AO) made a disallowance under Section 14A, rejecting the assessee's plea that investments were made from own funds. The Tribunal referred to a similar issue adjudicated by the Madras High Court, which required the AO to independently decide on the matter. The issue was restored to the AO for reconsideration consistent with the decision for AY 2012-13.

3. Disallowance under Section 40(a)(ia) of the Income Tax Act:
The assessee paid connectivity expenses and deducted TDS at 2%, but the AO opined that tax should have been deducted at 10%, leading to a disallowance. The Tribunal found that this issue was covered in the assessee's favor in previous years, where it was held that disallowance under Section 40(a)(ia) is not attracted in case of short deduction of tax. The disallowance was deleted.

4. Provision Created Towards Slow/Non-Moving and Obsolete Inventory:
The assessee created a provision for slow-moving and obsolete inventory. The AO disallowed the deduction, stating there was no specific section allowing such a provision. The Tribunal upheld the AO's action, noting that the valuation method adopted by the assessee (lower of cost or net realizable value) automatically accounts for any decrease in inventory value. Therefore, a separate provision could not be allowed.

5. Depreciation on Software:
The assessee claimed depreciation at 60% on software, but the AO restricted it to 25%. The Tribunal found that software used along with computers is eligible for 60% depreciation, as per the Chennai Tribunal's decision in a similar case. The AO was directed to allow 60% depreciation on software.

6. Provision for VAT Assessment Demand:
The assessee created a provision for VAT demand of earlier years. The AO denied the deduction, and the Tribunal upheld this decision, noting that the liability crystallized only on 04.04.2013. Since it was a prior period item, the provision could not be allowed in the current year.

7. Initiation of Penalty under Section 271(1)(c) of the Income Tax Act:
The Tribunal did not specifically adjudicate on the initiation of penalty under Section 271(1)(c), as it was not a ground requiring specific adjudication.

Conclusion:
The appeal was partly allowed, with adjustments and disallowances being deleted or restored for reconsideration as indicated in the order. The order was pronounced on 30th November 2022.