2016 (6) TMI 1329 - AT - Income Tax

Tribunal's Decision Balances Assessee Rights with Disallowances

The Tribunal remitted the disallowance of homologation expenses back to the AO for re-examination, reduced the ad hoc disallowance of certain expenses, ... Disallowance of the expenditure incurred by the Appellant on homologation based on the possibility that the same could be non-business expenditure/inflated expenditure - Held that:- We find the CIT(A) upheld the action of the AO which has already been reproduced in the preceding paragraphs. It is the submission of the assessee that given an opportunity the assessee is in a position to furnish the full details of Homologation charges before the AO. Considering the totality of the facts of the case and in the interest of justice we deem it proper to restore this issue to the file of the AO with a direction to give one more opportunity to the assessee to substantiate with evidence to his satisfaction regarding the Homologation charges. Ground raised by the assessee on this issue is accordingly allowed for statistical purposes. Addition of miscellaneous expenses, staff welfare expenses, advertisement and sales promotion expenses based on the possibility that the same could have been booked for non-business purposes - Held that:- We find the Ld.CIT(A) has already deleted the disallowance out of travelling and telephone expenditure. He has only sustained an amount of ₹ 2,50,000/- out of the miscellaneous expenses and other expenses. No infirmity in the order of the CIT(A). Admittedly, substantial part of petty expenses have been incurred in cash and are not verifiable in nature, therefore, the possibility of booking of expenditure for non business purposes cannot be ruled out. Since the disallowance sustained by the CIT(A) is very nominal considering the huge amount of miscellaneous expenses, staff welfare expenses etc. amounting to ₹ 13.07 crores, therefore, we find no infirmity in the order of the CIT(A) sustaining such disallowance. The submission of the Ld. Counsel for the assessee that no disallowance has been made in earlier year and subsequent year on this issue is not material. It is settled law that every year is separate and distinct and the principle of resjudicata do not apply to income-tax proceedings. In this view of the matter we uphold the order of the CIT(A) and the ground raised by the assessee is dismissed. Addition of car repair charges as a prior period expenditure - Held that:- Since the assessee in the instant case is following mercantile system of accounting and since the liability has crystallized in the preceding assessment year, therefore, the same cannot be allowed as a deduction in the current year. The various decisions relied on by the Ld. Counsel for the assessee are distinguishable and not applicable to the facts of the present case. Accordingly, ground of appeal No.3 is dismissed. Deduction u/s.80IB as allowed by the AO in the rectification order u/s.154 - Held that:- Since in the instant case the assessee is otherwise entitled to deduction u/s.80IB as granted earlier by the AO in the 154 proceedings and since it is also the settled law that proceedings before the appellate Tribunal are continuation of the assessment proceedings, therefore, respectfully following the decision of the Hon’ble Supreme Court cited [1996 (12) TMI 7 - SUPREME COURT] we set aside the order of the CIT(A) and direct the AO to allow the claim of deduction u/s.80IB. Project Assistant Technical charges as deductible expenditure u/s.37(1) - assessee has not been able to prove the basis of such payment, the nature of service rendered by the expatriates and also when the payment were not made in accordance with the project assistant agreement dated 11-12-1994 - Held that:- DRP in assessment order for A.Y. 2007-08 has directed to allow the project assistance technical fees as deductible business expenditure and the revenue has accepted the same and when in subsequent years the tax authorities have accepted the revised agreement entered into in May 2005 with retrospective effect from 01-01-2002 and since the genuineness of the payments has not been doubted by the AO in the body of the assessment order, therefore, we find no reason as to why part of such project assistance technical fee should be disallowed. In view of the above discussion and in view of the reasoning given by CIT(A) we uphold the order of the CIT(A) on this issue. - decided against revenue TPA - agreement with DCAG to pay royalty for technical knowhow received from DCAG - selection of MAM - Held that:- The royalty payment has been benchmarked considering combined transaction approach in TNM method. No separate benchmarking was undertaken to determine the ALP of Royalty. In A.Y. 2007-08 till A.Y. 2011-12 the payment of royalty was held to be at ALP. We therefore find merit in the submission of the for the assessee that in view of the rule of consistency the Cit(A) was justified in rejecting the CUP method adopted by the AO and accepting the TNM method followed by the assessee. Payment of royalty - nature of expenditure - revenue or capital expenditure - Held that:- We find the Hon’ble Bombay High Court in the case of Antifriction Bearings Corporation Ltd. Vs. CIT reported [1977 (11) TMI 37 - BOMBAY HIGH COURT] has held that royalty paid to a Foreign collaborator for provision of technical know-how in a restricted manner for a restricted use during the agreement period, not resulting in absolute transfer of anything or acquisition of any asset of enduring character is a revenue expenditure. Expenses pertaining to the cars allotted to the top executives - allowable busniss expenses - Held that:- No justification for adhoc disallowance on the ground that personal or non business component in the expenses claimed such as sundry expenses, hotel expenses gift articles, employee welfare expenses etc. Similarly, in the case of Bajaj Auto Finance Ltd. [2014 (6) TMI 969 - ITAT PUNE]) has held that in case of a company which is an inanimate person, no adhoc disallowance towards car and telephone expenses for personal use can be made. Similar view has been taken by the Coordinate Benches of the Tribunal in different other cases. We therefore do not find any infirmity in the order of the CIT(A) holding that the expenses pertaining to the cars allotted to top executives of the company are tax deductible since the same were taxed in the hands of the employees. So far as the amount on account of difference between amount of capitalized cars as per tax audit report and expenses on capitalized cars transferred from profit and loss account to fixed assets in the financial statements is concerned, we find merit in the submission of the assessee that the difference relates to balance sheet items and not profit and loss items such as RTO tax, CBU cars and preowned cars. However, the order of the CIT(A) is silent on this issue. We therefore restore this issue to the file of the AO with a direction to verify the same. In case the same is only due to difference in the balance sheet items, then no disallowance is called for. The AO shall verify the records and decide the issue as per fact and law. Ground of appeal No.5 by the Revenue is accordingly allowed for statistical purposes. Issues Involved:1. Disallowance of homologation expenses.2. Ad hoc disallowance of miscellaneous expenses, staff welfare expenses, advertisement, and sales promotion expenses.3. Disallowance of prior period car repair charges.4. Withdrawal of deduction under section 80IB.5. Disallowance of Project Assistant Technical charges.6. Adjustment of royalty payment using CUP method.7. Treatment of royalty payment as capital expenditure.8. Disallowance of expenses on capitalized cars.Issue-wise Detailed Analysis:1. Disallowance of homologation expenses:The AO disallowed Rs. 37,99,831/- on homologation charges due to insufficient evidence provided by the assessee. The CIT(A) upheld the disallowance, stating the assessee failed to substantiate the expenses. The Tribunal restored the issue to the AO for re-examination, allowing the assessee to provide necessary evidence.2. Ad hoc disallowance of miscellaneous expenses, staff welfare expenses, advertisement, and sales promotion expenses:The AO made ad hoc disallowances totaling Rs. 2,50,000/- due to potential non-business expenditure. The CIT(A) reduced the disallowance to Rs. 2,50,000/- from Rs. 25,00,000/- made by the AO, agreeing that some expenses could be non-business in nature. The Tribunal upheld the CIT(A)'s decision, noting the nominal disallowance was justified given the significant cash expenses.3. Disallowance of prior period car repair charges:The AO disallowed Rs. 69,876/- as prior period expenses. The CIT(A) upheld the disallowance, stating the liability crystallized in the previous year. The Tribunal dismissed the assessee's appeal, agreeing with the CIT(A) that the expense should be claimed in the year it crystallized.4. Withdrawal of deduction under section 80IB:The AO initially denied the deduction due to the absence of Form 10CCB with the return. The CIT(A) directed the AO to withdraw the deduction granted in the rectification order. The Tribunal allowed the assessee's appeal, stating the claim was reserved in the notes to accounts and should be considered if the assessed income is positive.5. Disallowance of Project Assistant Technical charges:The AO disallowed Rs. 1,96,31,398/- paid to expatriates, stating the payments were not in accordance with the agreement. The CIT(A) deleted the disallowance, noting the payments were for business purposes and accepted by the TPO. The Tribunal upheld the CIT(A)'s decision, emphasizing the genuineness and business purpose of the payments.6. Adjustment of royalty payment using CUP method:The TPO used CUP method, comparing the royalty paid by the assessee with Maruti Udyog Ltd., and made a downward adjustment of Rs. 1,84,42,539/-. The CIT(A) rejected the CUP method, noting the comparison was with a controlled transaction. The Tribunal upheld the CIT(A)'s decision, agreeing that TNMM was the appropriate method and the TPO's approach was flawed.7. Treatment of royalty payment as capital expenditure:The AO treated Rs. 2,84,63,797/- of royalty payment as capital expenditure. The CIT(A) held the expenditure as revenue in nature, noting the assessee did not acquire any enduring benefit. The Tribunal upheld the CIT(A)'s decision, citing various judicial precedents supporting the revenue nature of royalty payments.8. Disallowance of expenses on capitalized cars:The AO disallowed 50% of expenses on capitalized cars and an additional Rs. 49,19,176/- due to insufficient evidence. The CIT(A) allowed expenses for cars used by top executives and directed the AO to verify expenses for other cars. The Tribunal upheld the CIT(A)'s decision for executive cars and remitted the issue of Rs. 49,19,176/- to the AO for verification.Conclusion:The Tribunal provided a balanced judgment, addressing each issue with detailed reasoning, ensuring the assessee's rights were protected while upholding necessary disallowances where justified.