2019 (3) TMI 1741 - AT - Income Tax

Transfer-pricing addition on royalty deleted; 2.3% effective royalty accepted; warranty and excise refunds allowed; s.80IB and s.115JAA relief upheld

ITAT AHMEDABAD deleted the transfer-pricing addition to royalty, finding the effective royalty rate (2.3% of ex-factory sale) acceptable. Warranty ... Royalty payment to the Associated Enterprises (AEs) - HELD THAT:- We find that the ITAT in assessee’s own case involving identical issue has deleted the addition made by the TPO [2018 (8) TMI 1943 - ITAT AHMEDABAD] as held that only stated rate is not decisive and effective rate has to be considered, and when the amount of royalty paid by the assessee is considered with exfactory sale value, without deducting various expenses, such as dealer commission, special commission, warranty etc., as has been noted by the learned CIT(A) at page no.4 of his order, then the effective rate worked out is only 2.3% on sale, as against 3% paid by oilier group entities. Addition on account of provisions for warranty - HELD THAT:- As decided in own case the assessee has satisfied the relevant conditions for claiming the impugned warranty provisions as deduction. We accordingly accept assessee’s substantive ground seeking to claim the impugned warranty provision qua both five years and one year (supra) as computed on scientific basis as per its forgoing experience. Deduction u/s 80IB(10) on account of Foreign Exchange Fluctuation gain in respect of its Jammu Unit - HELD THAT:- In the instant case, the assessee claimed that it had earned foreign exchange gain in connection with the raw-material imported and working capital borrowed in foreign currency and the Assessing Officer has not doubted this fact. Therefore, we can safely presume that assessee has earned foreign exchange gain from the activities carried out in connection with the business. The purchase of raw materials and working capital loan are an integral part and has direct nexus with the business. Therefore, any gain arising in the course of business are eligible for deduction u/s 80IB(10) It is also important to note that the assessee in the succeeding year has incurred a loss of ₹ 4,20,47,705/- which was accepted as a business loss by the Revenue. Therefore, we hold that the impugned gain is a business income and eligible for deduction u/s. 80IB(10) of the Act. In this regard, we find support and guidance from the judgment of Hon’ble Gujarat High Court in the case of Metrochem Industries Ltd. [2016 (7) TMI 1374 - GUJARAT HIGH COURT] Deduction u/s 80IB(4) in respect of Jammu Units - HELD THAT:- Excise duty refund has a live link with the business activities of the assessee. Therefore, we hold that the excise duty refund is eligible u/s. 80IB(4) - Assessee is eligible for deduction u/s 80IB(4) of the Act in respect of excise duty refund. Accordingly, we do not find any reason to interfere with the order of the Ld. CIT(A). There remains no ambiguity that the amount of excise duty is capital receipt not chargeable to tax. No reason to disturb the findings of the Ld. CIT(A), therefore the ground of appeal raised by the Revenue is dismissed, and the ground of appeal of the assessee in the application filed under Rule No. 27 of ITAT is allowed. Allow MAT credit u/s 115JAA of the Act as increased by the amount of surcharge and education cess - HELD THAT:- We note that the issue of MAT credit u/s. 115JAA of the Act has been settled by the judgment of Hon’ble Calcutta High Court in the case of Shree S.R.EI Infrastructure Finance [2016 (8) TMI 967 - CALCUTTA HIGH COURT] wherein it was held as Tribunal was right in confirming the set off of MAT Credit under section 115JAA brought forward from earlier years against tax on total income including surcharge and education cess instead of adjusting the same from tax on total income before charging such surcharge and education cess. Disallowance of royalty expenses is connected with the adjustment on account of transfer pricing under section 92CA(4) which has also been added in determining the income under section 115JB - HELD THAT:- upward adjustment on account of royalty payment has already been deleted by us in the Para No. 53 of this order. Therefore, in our considered view, there is no need to make any addition in the book profit under section 115JB of the Act. Hence the ground of appeal of the Revenue being consequential in nature is dismissed. No addition in the book profit under section 115JB of the Act on account of warranty expenses. No eligible for deduction u/s 80IB of the Act for the enhanced amount Issues Involved:1. Deletion of addition on account of upward adjustment of royalty payment.2. Deletion of disallowance made on account of provision for warranties.3. Allowing deduction u/s 80IB(10) on Foreign Exchange Fluctuation gain.4. Allowing deduction u/s 80IB(4) in respect of Jammu Unit.5. Allowing MAT credit as increased by surcharge and education cess.Summary:1. Deletion of addition on account of upward adjustment of royalty payment:The Revenue contended that the CIT(A) erred in deleting the addition of Rs. 71,57,055/- made by the Assessing Officer (AO) for royalty payments to Associated Enterprises (AEs). The AO had found that the royalty rate paid by the assessee was higher than that paid by other AEs. The CIT(A) deleted the addition, following a previous decision for AY 2007-08. The ITAT upheld the CIT(A)'s decision, referencing a similar case where the ITAT had ruled in favor of the assessee, noting that the effective rate of royalty payment was less than 3% when considering all deductions.2. Deletion of disallowance made on account of provision for warranties:The AO disallowed Rs. 1,00,09,859/- out of the total provision for warranty expenses of Rs. 3,26,14,162/-, arguing that the provision was not calculated on a scientific basis and extended beyond the financial year. The CIT(A) deleted the addition, referencing a previous decision for AY 2007-08. The ITAT upheld this decision, citing similar cases where the provision for warranty expenses was allowed as a deduction, as it was based on a scientific method and consistent past practice.3. Allowing deduction u/s 80IB(10) on Foreign Exchange Fluctuation gain:The AO disallowed the deduction on foreign exchange fluctuation gain of Rs. 1,97,47,523/-, treating it as income from other sources. The CIT(A) allowed the deduction, considering it as business income. The ITAT upheld the CIT(A)'s decision, noting that the foreign exchange gain was directly linked to the business activities and supported by consistent treatment in previous years.4. Allowing deduction u/s 80IB(4) in respect of Jammu Unit:The AO disallowed the deduction on excise duty refund of Rs. 5,83,00,000/-, treating it as revenue receipt. The CIT(A) allowed the deduction, considering it as an integral part of business activity. The ITAT upheld the CIT(A)'s decision, referencing judgments from higher courts that treated such refunds as business income eligible for deduction u/s 80IB(4).5. Allowing MAT credit as increased by surcharge and education cess:The AO did not allow MAT credit to include surcharge and education cess. The CIT(A) allowed the MAT credit, including surcharge and education cess, referencing the definition of tax under section 2(43) and explanation 2 to section 115JB. The ITAT upheld the CIT(A)'s decision, citing a judgment from the Calcutta High Court that confirmed the inclusion of surcharge and education cess in MAT credit.Conclusion:The ITAT dismissed the Revenue's appeals and partly allowed the assessee's appeal, affirming the CIT(A)'s decisions on all the issues. The judgments consistently followed precedents and higher court rulings, ensuring that the deductions and credits were correctly applied as per the Income Tax Act and judicial interpretations.