2013 (12) TMI 139 - AT - Income Tax

Tribunal Decision: Expenditure Classification, FCCBs, Development Costs, Warranties Reevaluation

The Tribunal upheld the disallowance of most expenditures as capital expenditure, remanding some issues back to the Assessing Officer for fresh ... Capital expenditure versus revenue expenditure - allowability under section 35D for scientific research consultancy - treatment of premium and foreign exchange difference on FCCBs as revenue expenditure - remand for fresh verification and adjudication - application of rule 8D in computing disallowance under section 14A - weighted deduction for in house R&D under section 35(2AB) - deductibility and timing of provisions under the mercantile system and section 40(a)(ia) - transfer pricing: guarantee fee benchmarking and application of LIBOR for notional interest - subsidy characterisation by purpose testCapital expenditure versus revenue expenditure - allowability under section 35D for scientific research consultancy - treatment of premium and foreign exchange difference on FCCBs as revenue expenditure - Disallowance of various expenditures treated as capital; specific claims for professional fees to D.S. Partnership under section 35D and exchange difference on FCCB. - HELD THAT: - Most heads of expenditure debited to profit and loss were held capital in nature by the Tribunal in assessee's earlier years and are confirmed. The payment to D.S. Partnership, asserted to be for scientific research and consultancy for engine development (eligible under section 35D), was not examined by the AO on that statutory basis; the Tribunal therefore set aside that part for fresh consideration. As to foreign exchange difference on revaluation of FCCB loan liability, the Tribunal's earlier treatment of FCCB premium as revenue necessitates treating the exchange loss on revaluation as revenue as well; that loss is allowed as revenue expenditure.Ground partly allowed: most additions confirmed as capital; professional fees to D.S. Partnership remanded for fresh adjudication under section 35D; FCCB exchange difference allowed as revenue expenditure.Capital expenditure versus revenue expenditure - Disallowance of development expenditure for Back Hoe Loader (BHL) treated as capital. - HELD THAT: - On facts and following the Tribunal's decisions in assessment years 2006-07 and 2007-08, technical consultancy and development expenditure resulting in acquisition of technical know how having enduring benefit are capital in nature. The bench follows the earlier co ordinate reasoning.Ground dismissed; expenditure held capital.Treatment of premium and foreign exchange difference on FCCBs as revenue expenditure - Allowability of pro rata premium payable on FCCBs as revenue expenditure. - HELD THAT: - The Tribunal's precedent in assessee's own case and reliance on various High Court decisions establish that the premium on FCCBs issued by the company is deductible as revenue expenditure. Applying that precedent, the pro rata premium claimed in AY 2008-09 is treated as revenue in nature and allowed.Ground allowed; FCCB premium treated as revenue expenditure.Addition of unutilized CENVAT credit to closing stock - Addition on account of unutilized CENVAT credit not offered to taxation. - HELD THAT: - The matter was set aside to the AO for fresh consideration consistent with earlier proceedings; the Tribunal's earlier directions require the AO to give effect and re examine the computation. Accordingly the ground is treated as allowed for statistical purposes and remitted.Ground allowed for statistical purposes and remanded to AO for fresh adjudication.Provisions for warranties - contingent liability versus ascertained liability - Disallowance of a portion of provisions for warranties as not allowable business expenditure. - HELD THAT: - In view of authoritative Supreme Court guidance (Rotork Controls) and the Tribunal's directions in assessee's earlier years, the issue is remitted to the AO to decide afresh and in accordance with the Tribunal's earlier directions for verification of facts and application of law to provisions.Ground allowed for statistical purposes and remanded to AO for fresh adjudication.Deductibility under section 40A(9) - Disallowance under section 40A(9) relating to contribution to Mahindra Academic. - HELD THAT: - Following the Tribunal's treatment in prior assessment years, the matter is remitted for de novo consideration by the AO in accordance with earlier findings; the appeal is allowed for statistical purposes to enable fresh adjudication.Ground allowed for statistical purposes and remanded to AO.ESOP cost - valuation and applicability of Special Bench decision - Deductibility of employee cost claimed as difference between FMV and exercise price under ESOP. - HELD THAT: - Earlier co ordinate decisions were adverse to the assessee, but a Special Bench decision in Biocon Ltd. on the issue requires reconsideration. The Tribunal directs restoration to the AO to decide in the light of the Special Bench holding.Ground partly allowed for statistical purposes and remanded to AO for reconsideration following the Special Bench decision.Application of rule 8D in computing disallowance under section 14A - Disallowance under section 14A for exempt dividend income and invocation of rule 8D. - HELD THAT: - The AO did not examine whether investments were funded out of surplus (interest free) funds or borrowed funds; no satisfaction under section 14A(2) was recorded. Absent such enquiry, the mechanical application of rule 8D is inappropriate. The matter is remitted to the AO to examine accounts and the source of funds and then apply rule 8D only if warranted.Ground partly allowed for statistical purposes and remanded to AO for fresh examination.Capital versus revenue treatment of club membership fees - Disallowance of membership and entrance fees to clubs as capital. - HELD THAT: - The Tribunal in earlier years set the issue aside for AO to consider certain High Court precedents, and the assessee has relied on a Full Bench decision favouring revenue treatment. The matter is remitted for the AO to consider relevant High Court full bench authority and decide accordingly.Ground partly allowed for statistical purposes and remanded to AO for fresh consideration.Transfer pricing: guarantee fee benchmarking and application of LIBOR for notional interest - TP adjustments: guarantee fee and notional interest on loans to associated enterprises. - HELD THAT: - For guarantee fee the Tribunal relies on consistency with prior year decisions where 3% was applied for this assessee; the TPO's higher 4.66% is set aside and 3% is directed to be applied. For notional interest the Tribunal restores the matter to AO to apply LIBOR prevailing at the relevant time; if LIBOR is less than 6% the assessee's charged 6% should be taken as ALP.Ground partly allowed for statistical purposes: guarantee fee to be benchmarked at 3%; notional interest remanded to AO to apply LIBOR and determine ALP.Tax treatment on sale of assets on which 100% R&D deduction was earlier claimed - Capital loss on sale of R&D assets where 100% deduction under section 35(1)(iv) was earlier claimed. - HELD THAT: - Following the Tribunal's prior decisions, allowing indexation on such assets after granting 100% deduction would produce double benefit; capital gain provisions cannot be invoked to grant additional deduction. The bench follows earlier adverse view to the assessee.Ground dismissed; addition sustained.Application of proviso to section 40(a)(ia) and timing of TDS - Disallowance under section 40(a)(ia) for year end provisions where TDS was not deducted. - HELD THAT: - Tribunal's prior decisions in assessee's case held in favour of the assessee, interpreting the timing of TDS and the effect of the Finance Act amendment; consistent with those findings the disallowance is rejected.Ground allowed; disallowance under section 40(a)(ia) reversed.Weighted deduction for in house R&D under section 35(2AB) - Disallowance of weighted deduction under section 35(2AB) for scientific research expenditure due to lack of Form 3CL. - HELD THAT: - Once DSIR approval in Form 3CL is understood to have been granted and DSIR's failure to communicate timely does not disentitle the assessee, and following the Tribunal's earlier favourable conclusions, the assessee is entitled to the weighted deduction for the specified expenditure subject to verification.Ground allowed; weighted deduction under section 35(2AB) allowed for specified expenditure.Deductibility of dealer incentives and service coupons and TDS obligations - Disallowance under section 40(a)(ia) for dealer incentives and service coupons. - HELD THAT: - The Tribunal in the earlier year held dealer incentives were not subject to TDS under section 194H where sale is on principal to principal basis; that view is followed and dealer incentives are allowed. The issue of service coupons requires further inquiry and is remitted to the AO for fresh adjudication.Ground partly allowed: dealer incentives allowed; service coupon issue remanded to AO.Depreciation on intangible asset - use requirement - Disallowance of depreciation on acquired know how not put to use. - HELD THAT: - Consistent with Tribunal's earlier decision, mere existence of an agreement to acquire technology does not permit depreciation unless there is active or passive use of the know how during the year. The assessee's claim is not supported and is rejected.Ground dismissed; depreciation disallowed.Reversal of earlier disallowed provision - prevention of double taxation - Tax treatment of reversal of provisions for medical benefits previously disallowed. - HELD THAT: - An amount disallowed in an earlier year which is reversed in the current year gives rise to relief to avoid double taxation; the AO is directed to allow deduction for the reversed amount.Ground allowed; reversal of medical benefit provision to be allowed.Subsidy characterisation by purpose test - Treatment of octroi incentives under a package scheme of incentives as revenue or capital receipt. - HELD THAT: - The Supreme Court's purpose test (Ponni Sugar) requires classifying a subsidy by the object for which it is given. The Tribunal finds the scheme's preamble emphasises dispersal of industry to underdeveloped areas and therefore the characterisation was not examined sufficiently; matter is remitted to the AO to consider the scheme purpose and decide in light of controlling precedents.Ground allowed for statistical purposes and remanded to AO for fresh consideration of the scheme's purpose and characterisation of incentive.Reversal and taxation of earlier disallowed FCCB premium - Claim to ignore reversal of FCCB premium offered for taxation on ground of prior disallowance. - HELD THAT: - The assessee contends reversal was already considered/taxed in earlier years and should not be taxed again. The Tribunal directs the AO to verify which amounts have been taxed previously and to ensure there is no double taxation, granting relief as appropriate.Ground partly allowed for statistical purposes and remanded to AO to verify earlier taxation and grant appropriate relief.Duplication in offering sale proceeds of R&D assets and ability to raise new claim before appellate authorities - Addition of sale proceeds of R&D assets alleged to be duplicate of an earlier adjustment. - HELD THAT: - Following the Tribunal's subsequent miscellaneous application order and the jurisdictional High Court's view that appellate authorities have jurisdiction to admit new claims, the Tribunal allowed the assessee's claim subject to verification of evidence by the AO.Ground allowed subject to verification by the AO.Deduction under section 35DDA - spread over five years - Allowance of deduction for special pension where department consistently allowed only one fifth. - HELD THAT: - Assessee conceded departmental stance and the Tribunal directs the AO to allow one fifth of the claimed special pension deduction consistent with prior years; AO to verify quantum.Ground partly allowed; AO to allow 1/5th of the claimed deduction.Taxation of difference in rent where stock in trade is let and sub let - Addition of difference between rent received by assessee and higher rent obtained by its lessee on sub letting. - HELD THAT: - Rent has been assessed as business income since earlier years; once income from letting to the group lessee was assessed as business income, additional rent realized by the lessee from third parties does not accrue to the assessee. The Tribunal follows this reasoning and rejects attribution of the differential to the assessee.Ground allowed; addition deleted.Credit for TDS upon production of details before final assessment - Direction to allow TDS credit if supporting details are filed before finalisation. - HELD THAT: - Consistent with prior directions in assessee's case, AO to verify details and grant TDS credit if proofs are submitted before completion of assessment proceedings.Ground allowed; AO directed to give TDS credit after verification.Eligibility for deduction under section 80IC and quantification of loss - Claim for deduction under section 80IC for unit set up at Haridwar and related loss quantification. - HELD THAT: - Issue already before the Tribunal in earlier years was remitted to AO to determine whether the unit was set up in January 2006 and to quantify loss. Following that direction, the Tribunal gives similar directions and remits the matter to AO for quantification and decision in accordance with law.Ground partly allowed for statistical purposes and remanded to AO to quantify loss and determine eligibility.Final Conclusion: The appeal for AY 2008-09 is disposed of partly allowing, partly dismissing and partly remitting various grounds. Several issues are decided in favour of the assessee (notably treatment of FCCB premium as revenue, weighted R&D deduction, rejection of certain TDS disallowances, allowance for reversal of earlier provisions and deletion of rent differential), while multiple matters are set aside to the Assessing Officer for fresh verification and adjudication in accordance with the Tribunal's directions and relevant precedents; the result is reflected as partly allowed for statistical purposes. Issues Involved:1. Disallowance of expenditure as capital expenditure.2. Disallowance of development expenditure as capital expenditure.3. Disallowance of pro-rata premium payable on FCCBs.4. Addition of unutilized CENVAT credit on raw material.5. Disallowance of provisions for warranties as contingent liability.6. Disallowance under section 40A(9) for employee welfare contributions.7. Disallowance of ESOP-related employee costs.8. Disallowance under section 14A for exempt income.9. Disallowance of club membership fees.10. Transfer pricing adjustments.11. Disallowance of capital loss on sale of R&D assets.12. Disallowance under section 40a(ia) for year-end provisions.13. Disallowance of weighted deduction under section 35(2AB).14. Disallowance under section 40(a)(ia) for dealer incentives and service coupons.15. Disallowance of depreciation on intangible assets.16. Disallowance of deduction for reversal of provisions for medical benefits.17. Treatment of octroi incentive as revenue receipt.18. Disallowance of deduction for reversal of FCCB premium.19. Disallowance of deduction for sale proceeds of R&D assets.20. Disallowance of deduction for special pension.21. Addition of difference in rent received by a group company.22. Allowance of credit for TDS.23. Disallowance of deduction under section 80IC.Detailed Analysis:1. Disallowance of Expenditure as Capital Expenditure:The assessee's claim of Rs. 10,74,91,437 as revenue expenditure was disallowed by the Assessing Officer (AO) and confirmed by the DRP, treating it as capital expenditure. The Tribunal upheld this disallowance for most expenditures, citing previous years' decisions. However, the professional fees paid to D.S. Partnership for scientific research were remanded back to the AO for fresh examination under section 35D. The difference in exchange on FCCBs was allowed as revenue expenditure.2. Disallowance of Development Expenditure as Capital Expenditure:The AO treated Rs. 54,59,350 spent on developing construction equipment as capital expenditure, which was confirmed by the Tribunal based on prior years' decisions, stating that the technical consultancy acquired had enduring benefits.3. Disallowance of Pro-Rata Premium Payable on FCCBs:The AO disallowed Rs. 39,43,78,178 claimed as expenditure on FCCB premium. The Tribunal followed its earlier decisions, treating this expenditure as revenue in nature and allowed the assessee's claim.4. Addition of Unutilized CENVAT Credit on Raw Material:The AO added Rs. 1,12,20,603 of unutilized CENVAT credit to the closing stock. The Tribunal remanded this issue back to the AO for fresh adjudication, consistent with earlier years' orders.5. Disallowance of Provisions for Warranties:The AO disallowed Rs. 21,09,63,000 as contingent liability. The Tribunal remanded the issue back to the AO to decide afresh in light of the Supreme Court's decision in Rotrok Control India Pvt. Ltd.6. Disallowance under Section 40A(9) for Employee Welfare Contributions:The AO disallowed Rs. 27,47,447 for contributions to Mahindra Academic. The Tribunal remanded the issue back to the AO for fresh adjudication, following earlier years' orders.7. Disallowance of ESOP-Related Employee Costs:The AO disallowed Rs. 2,90,34,761 claimed as employee costs under ESOP. The Tribunal remanded the issue back to the AO to decide in light of the Special Bench decision in Biocon Ltd.8. Disallowance under Section 14A for Exempt Income:The AO disallowed Rs. 39,76,50,000 under section 14A. The Tribunal remanded the issue back to the AO to examine if investments were made out of surplus funds and to apply Rule 8D for other expenditures.9. Disallowance of Club Membership Fees:The AO disallowed Rs. 1,55,25,601 as capital expenditure. The Tribunal remanded the issue back to the AO to consider the Full Bench decision of the Punjab & Haryana High Court in Groz Beckert Asia Ltd.10. Transfer Pricing Adjustments:The AO made an upward adjustment of Rs. 3,80,63,602 for guarantee fee and notional interest. The Tribunal directed the AO to apply a 3% rate for guarantee fee and to decide the notional interest based on the LIBOR rate.11. Disallowance of Capital Loss on Sale of R&D Assets:The AO disallowed Rs. 1,98,44,153 claimed as capital loss. The Tribunal upheld this disallowance, consistent with earlier years' decisions.12. Disallowance under Section 40a(ia) for Year-End Provisions:The AO disallowed Rs. 9,00,35,392 for year-end provisions. The Tribunal allowed the assessee's claim, following earlier years' decisions that TDS provisions are not applicable to year-end provisions.13. Disallowance of Weighted Deduction under Section 35(2AB):The AO disallowed Rs. 128,39,81,081 claimed under section 35(2AB). The Tribunal allowed the claim, following earlier years' decisions that the failure of DSIR to inform the IT authorities cannot deny the deduction.14. Disallowance under Section 40(a)(ia) for Dealer Incentives and Service Coupons:The AO disallowed Rs. 149,26,14,000 for dealer incentives and service coupons. The Tribunal upheld the disallowance for dealer incentives but remanded the issue of service coupons back to the AO.15. Disallowance of Depreciation on Intangible Assets:The AO disallowed Rs. 22,92,344 claimed as depreciation. The Tribunal upheld this disallowance, consistent with earlier years' decisions.16. Disallowance of Deduction for Reversal of Provisions for Medical Benefits:The AO disallowed Rs. 28,39,000 for reversal of provisions for medical benefits. The Tribunal allowed the deduction, stating it would otherwise lead to double taxation.17. Treatment of Octroi Incentive as Revenue Receipt:The AO treated Rs. 92.89 crores of octroi incentive as revenue receipt. The Tribunal remanded the issue back to the AO to examine the scheme's purpose and decide in light of the Supreme Court and Jurisdictional High Court decisions.18. Disallowance of Deduction for Reversal of FCCB Premium:The AO disallowed Rs. 1,24,41,145 for reversal of FCCB premium. The Tribunal directed the AO to verify and ensure no double taxation occurs.19. Disallowance of Deduction for Sale Proceeds of R&D Assets:The AO disallowed Rs. 69,35,208 claimed as sale proceeds of R&D assets. The Tribunal allowed the claim, subject to verification by the AO.20. Disallowance of Deduction for Special Pension:The AO disallowed Rs. 25,55,112 claimed as special pension. The Tribunal directed the AO to allow 1/5th of the claim, consistent with earlier years.21. Addition of Difference in Rent Received by a Group Company:The AO added Rs. 7.43 crores as the difference in rent received by Ridge Business Centre. The Tribunal allowed the assessee's claim, stating the rental income should be assessed as business income.22. Allowance of Credit for TDS:The Tribunal directed the AO to give credit for TDS after verifying the necessary details.23. Disallowance of Deduction under Section 80IC:The AO disallowed the deduction under section 80IC. The Tribunal remanded the issue back to the AO to quantify the loss and verify the commencement of the Haridwar unit.Conclusion:The Tribunal's decision involved a mix of upholding, remanding, and allowing various claims based on precedents, detailed examination of facts, and adherence to legal principles. The judgment reflects a comprehensive analysis of multiple issues, ensuring that the principles of law are applied consistently while addressing the specific facts of each case.