2017 (5) TMI 1491 - AT - Income Tax

Appeal partially allowed: Assessee wins on Transfer Pricing, Section 35, and depreciation carry-forward.

New Holland Fiat (I) Pvt. Ltd. (Now CNH Industrial (India) Private Limited) Versus DCIT, Range-10 (1), Mumbai.

The Tribunal partly allowed the appeal, ruling in favor of the assessee on various grounds such as Transfer Pricing adjustments, disallowance under ... TP adjustments - Held that:- The proportionate adjustment, as presented before us during the hearing of appeal, is within permissible limits of 5% and hence no TP adjustment is required to be made. Accordingly, we decide the first effective ground of appeal in favour of the assessee Disallowance u/s. 35 - Held that:- This issue should be restored back to the file of the AO for fresh adjudication, in the interest of Justice. He is directed to verify the claim made by the assessee in light of the evidences produced before us. In case he is of the opinion that the claim made by the assessee cannot be allowed u/s. 35, then he should consider the availability of the expenditure u/s. 37 or section 32 of the Act. Second effective ground of appeal is decided in favour of the assessee, in part. Disallowance of of bad debts - AO did not allow the claim made by the assessee holding that the sale proceeds of the assessee were reduced from the block off assets and were never treated as revenue receipt - Held that:-The AO had given a finding of fact that the sale proceeds were never treated as revenue receipt in books of accounts. Nothing was brought over notice to controvert the fact. Therefore, in our opinion the amount should be added back to the WDV and the assessee should be allowed depreciation accordingly. Fourth effective ground of appeal (GOA-9 and 18) is allowed, in part. Addition of liquidated damage - Held that:- Liquidated damage received by the assessee were penal in nature and has been rightly assessed under the head income from other sources. - Decided against the assessee. Allowability of unabsorbed depreciation and un-utilised scientific research allowance of the amalg-amating company and set off and carry-forward of business losses and unabsorbed depreciation of the earlier years in case of amalgamated company - Held that:- We decide the issue of carry forward of losses/unabsorbed depreciation of the AY. s. 1997-98 to AY. 2001-02 in favour of the assessee. Similarly, we hold that losses of the amalgamated company for the preceding eight assessment years has to be allowed as per the law and the unabsorbed depreciation is to be allowed as per amended provision of section 32 (2) and in line with the decision of the Hon’ble Bombay High Court in the case of Hindustan Unilever (2016 (7) TMI 1245 - BOMBAY HIGH COURT). Last effective ground of appeal is decided in favour of the assessee. Issues Involved:1. Transfer Pricing (TP) Adjustments2. Disallowance under Section 35 for in-house research3. Disallowance of expenses under Section 404. Disallowance of bad debts5. Taxability of liquidated damages6. Allowability of unabsorbed depreciation and un-utilized scientific research allowance of the amalgamating companyIssue-wise Detailed Analysis:1. Transfer Pricing (TP) Adjustments:The first effective ground of appeal concerns TP adjustments. The AO made an addition of Rs. 27.48 crores at the entity level based on the TPO's computation. The AR argued that TP adjustments should only apply to international transactions with the AE, not at the entity level, referencing the Alstom Projects India Ltd. (APIL) case. The DR contended that the assessee did not provide necessary segmental data, thus justifying the entity level adjustments. The Tribunal, following the APIL judgment, held that TP adjustments should be restricted to transactions with the AE and not at the entity level. Consequently, the proportionate adjustment within permissible limits of 5% was accepted, and no TP adjustment was required.2. Disallowance under Section 35 for In-house Research:The AO disallowed Rs. 8.51 crores claimed under Section 35 for in-house research, stating the organization ARAI did not have Central Government approval, and the assessee did not provide necessary documents. The DRP directed the AO to verify the evidence provided by the assessee. The Tribunal restored the issue to the AO for fresh adjudication, allowing the AO to verify the claim and consider its availability under Sections 37 or 32 if not allowable under Section 35.3. Disallowance of Expenses under Section 40:The AO disallowed Rs. 8.25 lakhs paid to Fiat India Automobiles Ltd. (FIAPL) for not deducting tax at source, despite the assessee claiming it was a reimbursement. The DRP upheld the AO's decision. The Tribunal restored the matter to the AO for limited verification to check if FIAPL included the payment in its total income, noting that reimbursements do not require tax deduction at source.4. Disallowance of Bad Debts:The AO disallowed Rs. 48.03 lakhs claimed as bad debts, stating the amount was capital in nature and not considered part of the assessee's income. The AR argued for adding the amount back to the WDV and allowing corresponding depreciation. The Tribunal agreed with the AR, directing the AO to add the amount back to the WDV and allow depreciation accordingly.5. Taxability of Liquidated Damages:The AO taxed Rs. 8.20 crores received as liquidated damages under the head 'income from other sources,' considering it penal in nature. The assessee argued it should be part of the capital gains. The Tribunal held that liquidated damages were penal and should be taxed as income from other sources, differentiating between compensatory and penal receipts.6. Allowability of Unabsorbed Depreciation and Un-utilized Scientific Research Allowance:The AO partially allowed and partially disallowed the set-off of unabsorbed depreciation and scientific research expenses for the assessment years 1997-98 to 2001-02, following the Times Guarantee Ltd. decision. The Tribunal, referencing the Bombay High Court's decision in Arc Fine Chemicals Pvt. Ltd. and Hindustan Unilever Ltd., held that unabsorbed depreciation for the earlier years should be allowed as per amended Section 32(2). The Tribunal decided in favor of the assessee, allowing the carry-forward and set-off of unabsorbed depreciation and scientific research expenses.Conclusion:The appeal was partly allowed, with the Tribunal ruling in favor of the assessee on several grounds, including TP adjustments, disallowance under Section 35, and the carry-forward of unabsorbed depreciation. The Tribunal restored some issues to the AO for fresh adjudication, ensuring compliance with legal precedents and proper verification of claims.