Rule 8D, revenue expenditure, and non-resident commission issues were partly allowed; 80-IC unit loss set-off was disallowed.

Rule 8D applied from assessment year 2008-09, but interest disallowance under Rule 8D(2)(ii) was not sustainable where the assessee had sufficient own and interest-free funds to cover investments; the administrative disallowance under Rule 8D(2)(iii) was nevertheless upheld because substantial investments required managerial effort. Dies and moulds expenditure was treated as replacement cost in manufacturing and allowed as revenue expenditure, and product launch expenses for new vehicles were held deductible as business expenditure. Foreign agency commission paid to non-resident agents for export procurement services rendered outside India did not attract disallowance under section 40(a)(i). Loss of the 80-IC unit could not be set off against profits of other units.

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Issues: (i) whether disallowance under section 14A read with Rule 8D of interest and administrative expenditure was sustainable for assessment year 2008-09, (ii) whether expenditure on dies and moulds and product launch expenses was allowable as revenue expenditure, (iii) whether foreign agency commission attracted disallowance under section 40(a)(i) for non-deduction of tax at source, and (iv) whether loss of the 80-IC unit could be set off against the income of other units.

Issue (i): whether disallowance under section 14A read with Rule 8D of interest and administrative expenditure was sustainable for assessment year 2008-09.

Analysis: The assessee had earned exempt income and had not separately excluded any expenditure relatable to such income. Rule 8D was applicable from assessment year 2008-09. On the facts, the assessee had sufficient own and interest-free funds to cover investments, so interest could not be disallowed under Rule 8D(2)(ii). However, the investments were substantial and necessarily involved administrative and managerial effort, so the formula under Rule 8D(2)(iii) applied and the ad hoc restriction suggested by the assessee was not accepted.

Conclusion: The interest disallowance under Rule 8D(2)(ii) was deleted, but the administrative disallowance under Rule 8D(2)(iii) was sustained. The issue was decided partly in favour of the assessee.

Issue (ii): whether expenditure on dies and moulds and product launch expenses was allowable as revenue expenditure.

Analysis: The dies and moulds expenditure was treated as replacement expenditure connected with manufacturing activity and, following the earlier view in the assessee's own case, was held to be revenue in nature. The product launch expenditure was incurred for introduction, advertisement and sales promotion of new vehicles and was held to be deductible as business expenditure; amortisation under section 35D was not warranted on the facts.

Conclusion: Both claims were allowable as revenue expenditure. The issue was decided in favour of the assessee.

Issue (iii): whether foreign agency commission attracted disallowance under section 40(a)(i) for non-deduction of tax at source.

Analysis: The commission was paid to non-resident agents for procuring export orders and the services were rendered outside India. Such commission was treated as commission simpliciter and not as income chargeable in India so as to require deduction of tax at source. Consequently, the corresponding disallowance under section 40(a)(i) could not survive.

Conclusion: The disallowance under section 40(a)(i) was rightly deleted. The issue was decided in favour of the assessee.

Issue (iv): whether loss of the 80-IC unit could be set off against the income of other units.

Analysis: Loss of an eligible unit has to be computed and dealt with as if it were the only source of income for the statutory purpose of the deduction provision. The loss of the Himachal unit therefore could not be adjusted against the profits of other units. The Assessing Officer's view was restored on this point.

Conclusion: The set-off of the 80-IC unit loss against other unit income was disallowed. The issue was decided in favour of the Revenue.

Final Conclusion: The assessee succeeded on the major expenditure and TDS issues, while the Revenue succeeded on the inter-unit loss set-off issue; the appeals were thus disposed of with mixed results.

Ratio Decidendi: Where Rule 8D applies, interest disallowance cannot be made if own funds are sufficient to cover investments, but statutory administrative disallowance may still follow; commission paid to non-resident agents for export procurement services rendered abroad is not subject to disallowance under section 40(a)(i) when not chargeable in India, and loss of an eligible deduction unit cannot be set off against profits of other units for the statutory computation.

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