2017-TII-INSTANT-ALL-437
16 March 2017   

CASE LAWS

2017-TII-17-HC-MUM-TP

CIT Vs JOHNSON AND JOHNSON LTD : BOMBAY HIGH COURT (Dated: March 7, 2017)

Income Tax - Sections 40A(2)(b), 80HHC, 92B, 143(3), 145 & 145A

Keywords: brand usage royalty - Modvat - valuation of closing stock - technical know how - unaccounted production - legal counseling - R&D cess on Royalty & travelling expenses

The assessee is a manufacturing concern and had paid technical know-how royalty of 2% to its AE. The Transfer Pricing Officer (TPO) by order dated 24th March, 2005 restricted the technical know how royalty paid by the respondent assessee to its AE at 1% instead of 2%, as claimed. In terms of the determination dated 24th March, 2005 of the TPO on the above issue amongst others, an assessment order dated 28th March, 2005 for the subject Assessment Year was passed by AO u/s 143(3). On appeal, CIT(A) allowed the appeal and held that restricting the royalty paid on account of technical know how to 1% was arbitrary and adhoc. Inasmuch as, there were no reasons justifying the restriction of the technical know how royalty paid by assessee to its AE at 1%. Moreover, it also recorded the fact that the TPO did not determine ALP of technical know how royalty by adopting any of the methods prescribed u/s 92C. On further appeal, Tribunal dismissed the Revenue's appeal upholding the order of CIT(A).

AO disallowed professional fees paid to Crawford Bailey & Co. (Advocate & Solicitor) to the extent of 10% of the fees paid. This was by invoking Section 40A(2)(b). On appeal, CIT(A) held that the fees paid for legal advice / consultation / assistance / representation to a professional advocates firm, cannot by itself be considered to be excessive as there is no standard rate of fees charged by Advocates firm available. The fees would differ depending upon the nature of the services, the complexity of the issues involved and the time available with the advocate concerned. In the above view, it would be impossible for assessee to furnish comparables. CIT(A) held that onus in such a situation would necessarily be upon the Revenue to establish that the payment was excessive. As the Revenue not been able to discharge its above onus, the appeal of the respondent assessee was allowed. On further appeal, Tribunal upheld the order of CIT(A). The impugned order also relied upon an earlier order passed by it in the case of assessee for A.Y. 200102 in respect of the payments made by assessee to its holding company where it was held that the onus was on AO to form an opinion that the expenditure claimed was excessive as compared to the market value.

During the course of assessment proceedings, the AO on the basis of the percentage of yield and consumption, made an addition of Rs.4.44 crores in the assessment order dated 28th March, 2005. On appeal CIT(A) held that the accounts prepared by assessee had not been challenged by AO nor the provisions of Section 145 invoked, before disregarding the accounts prepared by the respondent assessee. Therefore, the addition of Rs.4.45 crores on account of unaccounted production and sales was held to be unsustainable by the CIT(A). Besides, the impugned order placed reliance upon an earlier order of its coordinate bench for AY 1992-93 while allowing the appeal. On further appeal, Tribunal dismissed the Revenue's appeal upholding the order of the CIT(A).

On appeal, the High Court held that,

Whether restricting royalty payment for technical know-how to AE from 2% to 1% without any justification is arbitrary - YES: HC

++ we find that the impugned order of the Tribunal upholding the order of the CIT(A) in the present facts cannot be found fault with. The TPO is mandated by law to determine the ALP by following one of the methods prescribed in Section 92C of the Act read with Rule 10B of the Income Tax Rules. However, the aforesaid exercise of determining the ALP in respect of the royalty payable for technical know how has not been carried out as required under the Act. Further, as held by the CIT(A) and upheld by the impugned order of the Tribunal, the TPO has given no reasons justifying the technical know how royalty paid by the Assessing Officer to its Associated Enterprise being restricted to 1% instead of 2%, as claimed by assessee. This determination of ALP of technical know how royalty by the TPO was adhoc and arbitrary as held by the CIT(A) and the Tribunal. In the above view, the question as proposed does not give rise to any substantial question of law. Thus, not entertained;

Whether Tribunal is right in deleting the addition on account of payment to persons referred u/s 40A(2)(b) on adhoc basis without making any attempt to establish that payment made as professional services is excessive in nature - NO: HC

++ counsel for the Revenue submits that the order passed by Tribunal in respect of AY 2001-02 which has been relied upon in the impugned order was a subject matter of appeal before HC in Income Tax Appeal No.2441 of 2013. This Court by an order dated 4th July, 2016 2016-TIOL-1401-HC-MUM-IT did not disturb the findings of Tribunal in respect of the applicability of Section 40A(2)(b) in the context that the onus to prove unreasonableness of payments made to persons covered thereunder. However, according to him, the above case would not apply to the present facts as that was case where the payments were made by the respondent to its holding company. The principle laid down in the above case to our mind would apply with greater force as the dealing here is with an independent party except its one director being a partner of the firm receiving the fees. In any case, in terms of Section 40A(2), the burden is upon AO to form an opinion that the payment is excessive. Besides the above, as held by impugned order that in the absence of any standard fees charged by the advocates / solicitors in respect of the services rendered by them, it would be impossible for assessee to prove the reasonableness of the fees charged by the advocate. The onus would necessarily first be upon the Revenue before it disallows the payment made to persons covered u/s 40A(2)(b) in respect of professional services to establish that the payment was excessive. This it could do by calling for the details of the services rendered and making enquiries of the fees for such services in comparable cases i.e. taking into account the Advocates involved i.e. the experience and expertise. Thereafter, it would be for the assessee to show why the comparison is not proper. No such exercise was done. Therefore, the disallowance of 10% is adhoc. Thus, in the present facts, the Revenue has not even remotely attempted to establish that the payment made to the Advocates for professional services was excessive. In the circumstances, no fault can be found with the orders of the CIT(A) and the Tribunal. Therefore, the question as proposed does not give rise to any substantial question of law. Thus, not entertained;

Whether in absence of any evidence that there were purchase and sales outside the regular books of accounts, it is permissible to disregard the normal books of accounts - NO: HC

++ addition on account of unaccounted production and sales has been made in the absence of the regular books of accounts maintained by the assessee, being found to be defective in any manner. More particularly, in the absence of any evidence that there were purchase and sales outside the regular books of accounts, it is not permissible to disregard the normal books of accounts. So far as the production loss is concerned, the CIT(A) as well as the impugned order of the Tribunal has followed an earlier order of its coordinate bench in respect of the same respondent assessee for A.Y. 199192 to hold that the production loss depends on number of factors and in the absence of any comparable data to show that the loss claimed was in excess, the same cannot be disallowed. We note that the finding of the CIT(A) as well as the Tribunal are essentially findings of facts. The same has not been shown to be perverse in any manner so as to give rise to any substantial question of law. Thus, the proposed question is not entertained. Registry is directed to communicate a copy of this order to the Tribunal. This would enable the Tribunal to keep the papers and proceedings relating to the present appeal available, to be produced when sought for by the Court.

Revenue's appeal partly admitted

2017-TII-16-HC-DEL-TP

PR CIT Vs DLF HOTEL HOLDING LTD: DELHI HIGH COURT (Dated: March 14, 2017)

Income tax - Sections 14A, 92C(3), 92CA(7), 133(6), 143(3) & 144C

Keywords - ALP - AE - CUP - capitalization of opportunity cost - conversion of loan into equity - interest free loan - international transaction - TP adjustment & quasi debt

The assessee as per its own claim had advanced certain loans to its AE, DLF Global Hospitality Limited Cyprus (DGHL)/DLF Cyprus. It had offered a disallowance of Rs. 2,28,777/-. The Assessing Officer did not expressly record reasons for rejection of that figure and instead proceeded to disallow a sum in excess of Rs. 5,61,02,732/-. The DRP reduced this figure to Rs. 2,56,62,215/- which was ultimately rejected by the ITAT by placing reliance upon the judgment of this Court in Cheminvest Limited v. CIT-VI 2015-TIOL-2070-HC-DEL-IT and ACB India Limited v. ACIT 2015-TIOL-872-HC-DEL-IT.

On appeal, the High Court held that,

Whether the revenue can decide otherwise when the issue has been settled by the similar jurisdictional High Court - NO: HC

++ this Court is of the opinion that since the ITAT has relied upon the judgments of this Court which have explained the scope of Section 14A in such circumstances, no question of law arises. The appeal is accordingly dismissed along with the pending applications.

Revenue's appeal dismissed

 

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