Titan Industries Limited, Hosur V. JCIT, CHENNAI

ITA 1913/CHNY/2011

• Counselvise Citation: [2022] 106 COUNSELVISE.COM (IT) 9457 (ITAT-CHENNAI)
• Duration Of Justice: 10 year(s) 9 month(s) 9 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 06-09-2022
• Appeal Filed By: Assessee
• Order Result: PartlyAllowed
• Bench Allotted: D
• Assessment Year: 2007-2008
• Appeal Filed On: 27-11-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Capital asset; Depreciation; Transfer pricing; Business expenditure; International transaction; Earning of tax free income; Additional evidence; Notional interest; Revenue expenditure; Capital expenditure; TDS; Rule 8D
• Section: 37; 234B; 14A; 80IC; 80IC; 43

Judgement Text

आयकर अपीलीय अिधकरण ‘डी’ Ɋायपीठ चेɄई मŐ। IN THE INCOME TAX APPELLATE TRIBUNAL ‘D’ BENCH, CHENNAI माननीय ŵी महावीर िसंह, उपाȯƗ एवं माननीय ŵी मनोज कु मार अŤवाल ,लेखा सद˟ के समƗ। BEFORE HON’BLE SHRI MAHAVIR SINGH, VICE PRESIDENT AND HON’BLE SHRI MANOJ KUMAR AGGARWAL, AM आयकर अपील सं./ ITA No.1913/Chny/2011 (िनधाŊरण वषŊ / Assessment Year: 2007-08) Titan Company Ltd., (earlier Titan Industries Ltd) Number 3, SIPCOT Industrial Complex, Hosur, Krishnagiri (TN) -635 126. बनाम/ Vs. JCIT Company Range-III, Chennai. ̾थायी लेखा सं./जीआइ आर सं./PAN/GIR No. AAACT-5131-A (अपीलाथŎ/Appellant) : (ŮȑथŎ / Respondent) अपीलाथŎ की ओरसे/ Appellant by : Shri T. Suryanarayana (Sr. Advocate) for Shri Manasa Ananthan (Advocate) - Ld. ARs ŮȑथŎ की ओरसे/Respondent by : Dr. S. Palani Kumar (CIT) –Ld. CIT-DR सुनवाई की तारीख/Date of Hearing : 22-06-2022 घोषणा की तारीख /Date of Pronouncement : 07-09-2022 आदेश / O R D E R Manoj Kumar Aggarwal (Accountant Member) 1. Aforesaid appeal by assessee for Assessment Year (AY) 2007-08 arises out of the final assessment 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 - 2 - 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: Disallowance under section 14A of the Act Rs.97,52,724/- a. The learned AO/ DRP has erred in confirming the order of AO by disallowing expenses under section 14A, on the basis of Rule 8D instead of holding that no disallowance is warranted under section 14A. b. The learned AO/ DRP erred in applying Rule 8D for computing the disallowance under Section 14A as Rule 8D is prospectively applicable from March 24, 2008. c. The learned AO/DRP ought to have appreciated the fact that the appellant has made the investments in dividends from the internal accruals generated from the business and not out of borrowings. Therefore, no interest cost is attributable to the dividend income. d. The learned AO/DRP ought to have observed that the appellant has not incurred any direct expenses towards earning of the dividend income and there is no separate administrative expenditure incurred for the aforementioned purpose. e. The learned AO/DRP erred in not directing the AO to observe the fact that disallowance under section 14A towards exempt income cannot exceed the actual income received by the appellant. Ground 5: Apportionment of the common expenses on the basis of turnover for the purpose of deduction under section 801C: Rs.21,703,297 a. The learned AO/DRP erred in confirming the allocation of the common expenses between the various units on the basis of the turnover as against the method adopted by the appellant. b. The learned AO/DRP ought to have appreciated the fact that the assessee has allocated the common expenses on the basis of the number of watches produced as the expenses relate to the salaries of the employees of these departments. c. The learned AO/DRP ought to have observed that the overheads are not directly relatable to the value of watch produced as the expenditure primarily pertains to movements only and hence the number of watches has been considered as the basis for allocation. d. The learned AO/DRP erred in ignoring the fact that the components transferred with regard to which the common costs are incurred, are - 3 - compatible to the various watches and it is not possible to identify the final watch variant into which these components are used and therefore, allocation on value basis would not be appropriate. Ground 6: Application software claimed as revenue: Rs.16,754,619 a. The learned AO/DRP erred in disallowing the expenditure 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 assessee and thus the cost of the software would be revenue in nature and eligible for deduction under section 37 of the Act. Ground 7: Short grant of Tax deducted at source (TDS) amount: Rs. 93,683 The learned AO has erred in granting short credit of TDS amounting to Rs. 93,683/- while passing the assessment order. Ground 8: Calculation of Interest on resulting adjustment a. The learned AO/DRP erred in confirming the order of the AO that the interest under 234C is consequential and shall not be on the returned income. b. The learned AO has erred in incorrectly computing of the interest under 234B as a consequence to the above adjustments. 2. The Ld. AR advanced arguments and drew attention to various documents as placed on record. The Ld. CIT-DR vehemently controverted the arguments of Ld. AR. The arguments advanced by both the sides have been dealt with at appropriate places in this order. Having heard rival submissions, our adjudication would be as under. 3. The assessee being resident corporate assessee is stated to be engaged in trading of watches, jewellery and clocks. As is evident the issues to be adjudicated are – (i) Transfer Pricing Adjustment of notional interest on advances; (ii) Transfer Pricing Addition of Royalty - 4 - on Sales; (iii) Disallowance u/s 14A; (iv) Apportionment of Expenses to compute deduction u/s 80-IC; (v) Nature of Application Software expenditure; (vi) TDS Credit; & (vii) Interest u/s 234B / 234C. 4. Proceedings before Ld. TPO 4.1 Since the assessee carried out certain international transactions with its Associated Enterprises (AE), the same were referred to Ld. TPO for determination of Arm’s Length Price (ALP). The Ld. TPO, vide order dated 14.10.2010, proposed adjustment of Rs.505.29 Lacs as under: - No. Nature of Transaction Amount (Rs.) 1. Interest on Advertising advances made by assessee to Titan International Marketing Ltd. (TIML) Rs.156.52 Lacs 2. Interest on Advertising advances made by assessee to Titan brand holding NV, Netherlands (TBHNV) Rs.1.91 Lacs 3. Royalty levied @3% on AEs Rs. 2.65 Lacs 4. Royalty levied @3% on deemed AEs 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 - 5 - 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 need not be considered as a transaction with the AE. Therefore, these transactions were not international transaction and hence, not benchmarked. 4.3 However, Ld. TPO noted that the assessee charged interest on similar advances from another AE i.e., Tata International Holding BV (TIHBV), Amsterdam. In earlier year, the position of the assessee was accepted to be contract manufacturing and it was held that interest should have been charged on such advances. Applying rate of 6%, Ld. TPO computed aggregate TP adjustment of Rs.158.44 Lacs with respect of advances recovered from TIML and TBHNV and proposed the adjustment. The Ld. DRP, relying upon DRP order for AY 2006-07, dismissed the assessee’s objections. Aggrieved the assessee is in further appeal before us. 4.4 We find that this issue has been decided by us for AY 2006-07 in ITA No.2192/Mds/2010 order dated 17.08.2022 as under: - 3. Interest on advances granted by the assessee to its AE We find that this issue has been decided by the bench for AY 2003-04 in ITA No.1592/Mds/2007 dated 12-05-2016. It was held that non-charging of interest attracts Transfer pricing provisions and it is appropriate to charge interest @LIBOR+2% as held by Mumbai Tribunal in M/s Aurinpro Solutions Ltd. V.s ACIT (27 ITR (Trib.) 276). Respectfully following the same, Ld. AO is directed to compute the interest at LIBOR+2%. This ground stand partly allowed. Taking the same view, 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 - 6 - loans as granted by the assessee to the AEs in earlier years. The grounds thus raised stand partly allowed. 4.5 The assessee has raised an additional ground for this year and submitted that advertisement expenditure would otherwise be allowable as business expenditure incurred in the course of business or the same being an irretrievable loss. We find that no such issue arises from the order of lower authorities and accordingly, this ground is not admitted. 5. Royalty on Export Sales 5.1 This adjustment stem from the observation of Ld. TPO that the assessee acquired overseas ‘TITAN’ trademark rights from another entity. In earlier years, the users of ‘TITAN’ brand, in jurisdiction outside India, 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. - 7 - 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, the assessee seeks production of additional evidences which are in the form of sample distributor agreement entered into by the assessee with its non-AE customers along with website extracts in support of the fact that these were independent parties and therefore, such transactions could not be held to be international transactions. 5.5 After due consideration of factual matrix, we find that the assessee is acting as manufacturer and in this year, it has owned the brand also. The Ld. 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 Ld. 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. 6. Disallowance u/s 14A 6.1 In ground No.4, the assessee is aggrieved by disallowance u/s 14A. The same stem from the fact that the assessee earned exempt income of Rs.61.85 Lacs. The assessee made investments in its subsidiaries but submitted that no expenditure was incurred to earn the exempt income. It was submitted that Rule 8D was not applicable to this year. However, Ld. AO, applying Rule 8D, computed disallowance of Rs.97.52 Lacs which include interest disallowance for Rs.85.80 Lacs and expense disallowance for Rs.11.72 Lacs. The Ld. DRP, relying upon DRP order for AY 2006-07, dismissed the assessee’s objections. 6.2 We find that in this year, Rule 8D is not applicable. Therefore, as held by Tribunal in AY 2006-07 ITA No.2192/Mds/2010 order dated 03.04.2017, 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, - 9 - 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 and assembly share of common facilities have been allocated on the basis of number of watches produced. The Ld. AO has apportioned the same on the basis of turnover. In our considered opinion, design and development cost and assembly share of common facilities are not proportional to the number of watches produced. The expenditure is largely salary expenditure of the two departments. It could not be said that the expenditure would be directly proportional to the number of watches produced. Rather, such expenditures would largely depend upon the decision of the management to decide as to how much expenditure was to be incurred to design / develop new products and the same may vary to a great extent in different periods. In such a case, the quantum of expenditure would have no relation with the number of watches and allocating the same on such basis would give absurd results as held by lower authorities. Therefore, the more appropriate method of allocation would be based on turnover as done by the assessee for other overhead expenses. Therefore, we concur with the stand of lower authorities, in this regard and find no reason to interfere in the same. This ground stand dismissed. All the ground stand disposed-off in terms of our above order. Facts being pari-materia the same, 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 - 10 - 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 Ld. 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. 8. Deduction 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 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 - 11 - the decision Hon’ble Delhi High Court in CIT V/s Asahi India Safety Glass Ltd. (15 Taxmann.com 382) wherein it was held as under: - 9. The revenue in support of its stand has taken recourse to the test of enduring benefit. It is in our view now somewhat trite to say that the test of enduring benefit is not a certain or a conclusive test which the courts can apply almost by rote. What is required to be seen is the real intent and purpose of the expenditure and whether the expenditure results in creation of fixed capital for the assessee. It is important to bear in mind that what is required to be seen is not whether the advantage obtained lasts forever but whether the expense incurred does away with a recurring expense(s) defrayed towards running a business as against an expense undertaken for the benefit of the business as a whole. In other words, the expenditure which is incurred, which enables the profit making structure to work more efficiently leaving the source of the profit making structure untouched, would in our view be an expense in the nature of revenue expenditure. Fine tuning business operations to enable the management to run its business effectively, efficiently and profitably; leaving the fixed assets untouched would be an expenditure in the nature of revenue expenditure even though the advantage may last for an indefinite period. Test of enduring benefit or advantage would thus collapse in such like cases. It would in our view be only truer in cases which deal with technology and software application, which do not in any manner supplant the source of income or added to the fixed capital of the assessee. [See Alembic Chemical Works Co. Ltd. v. CIT [1989] 177 ITR 377 / 43 Taxman 312 (SC); CIT v. J.K. SyntheticsLtd. [2009] 309 ITR 371 / 176 Taxman 355 (Delhi) and Indian Visit.com (P.) Ltd. (supra)]. 9.1 This is the approach which the Supreme Court has applied even in cases where there is a once for all or a lump sum payment. What is to be seen in the facts of this case, as already noticed by us hereinabove, that the Assessing Officer as a matter of fact has returned a finding that the expenditure undertaken was for overhauling the accountancy 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 observed by the Tribunal, the assessee in the relevant assessment year had a turnover of Rs. 150 crores and that even without this expenditure it would have continued to achieve the said turnover; though the expenditure incurred in issue would have enabled it to run its business more efficiently. - 12 - Therefore, the rationale supplied by the Assessing Officer in support of its order which found resonance in submissions of the learned counsel for the revenue is, in our view flawed and, hence it would have to be rejected Therefore, we would hold that the expenditure so incurred by the assessee would be revenue expenditure. The Ld. AO is directed to allow the expenditure as revenue expenditure and reverse the depreciation granted on the same. The ground stand allowed. 9. In ground no.7, the assessee seeks TDS credit of Rs.93,683/-, The Ld.AO is directed to verify the TDS claim and grant TDS credit in accordance with law. 10. In ground No.8, the assessee assails computation of interest u/s 234B / 234C which is merely consequential in nature and do not require specific adjudication. Ground No.1 is general in nature. 11. The appeal stands partly allowed in terms of our above order. Order pronounced on 07 th September, 2022. Sd/- (MAHAVIR SINGH) उपाȯƗ /VICE PRESIDENT Sd/- (MANOJ KUMAR AGGARWAL) लेखा सद˟ / ACCOUNTANT MEMBER चेɄई / Chennai; िदनांक / Dated : 07-09-2022 EDN/- आदेश की Ůितिलिप अŤेिषत/Copy of the Order forwarded to : 1. अपीलाथᱮ/Appellant 2. ᮧ᭜यथᱮ/Respondent 3. आयकर आयुᲦ (अपील)/CIT(A) 4. आयकर आयुᲦ/CIT 5. िवभागीय ᮧितिनिध/DR 6. गाडᭅ फाईल/GF