2018 (3) TMI 1199 - AT - Income Tax

Tribunal's ruling on development expenses, technical fees, and warranties emphasizes scientific approach

M/s. Mahindra And Mahindra Ltd. Versus DCIT- Circle-2 (2), Mumbai

M/s. Mahindra And Mahindra Ltd. Versus DCIT- Circle-2 (2), Mumbai - TMI Issues Involved:1. Development Expenses2. Technical Services Fees3. Expenditure on Licence Fee4. Consultancy Charges5. Prior Period Expenses6. Disallowance under Section 40A(9)7. Provisions for Warranties8. Premium on Redemption of Debentures9. Special Pension Deduction10. Employees Compensation Expenses on Account of ESOP11. Disallowance under Section 14A-115 JB12. Provision for Pending Labour Demand13. Disallowance of Appreciation on Sale of Undertakings14. Transfer Pricing Adjustment15. Write-off of Capital Advances16. Addition of Provision for Doubtful Debts under Section 115JB17. Addition of Provision for Warranty under Section 115JB18. Expenditure on Payment to Clubs19. Capital Expenditure Debited to P&L Account20. Interest on Income Tax RefundIssue-wise Detailed Analysis:1. Development Expenses:- Horizon III Project Expenses: Rs. 8.96 crore (including staff cost, material of Rs. 4.67 crores) was decided against the assessee.- In-house Revenue Expenditure: Staff cost and material of Rs. 4.67 crores incurred as part of Development Projects were decided in favor of the assessee.- Euro II Project: Rs. 47.66 lakhs was decided against the assessee.- Euro III Project: Rs. 5.14 lakhs was decided against the assessee.- Horizon II and IV Project Expenses: Rs. 6.14 crore (including staff cost, material of Rs. 5.30 crores) was decided against the assessee.- In-house Revenue Expenditure: Staff cost and material of Rs. 5.30 crores incurred as part of Development Projects were decided in favor of the assessee.2. Technical Services Fees:- Rs. 65,00,50,757 (including staff cost, material of Rs. 15.55 crores) was decided against the assessee.- In-house Staff Cost and Material Consumption: Rs. 15.55 crore incurred as part of Development Project were decided in favor of the assessee.3. Expenditure on Licence Fee:- SAP Asia Systems: Rs. 2.89 crore was decided in favor of the assessee.4. Consultancy Charges:- Transport Solution Group: Rs. 1.70 crore was decided in favor of the assessee.- Business Customer Centric: Rs. 1.51 crore was decided in favor of the assessee.5. Prior Period Expenses:- Rs. 57.15 lakhs were set aside for reconsideration.6. Disallowance under Section 40A(9):- Rs. 9.13 lakhs was decided in favor of the assessee.7. Provisions for Warranties:- Rs. 6.84 crore was set aside for reconsideration.- Provision for Warranty Costs: Rs. 23.48 crore for AY 2003-04 was set aside for reconsideration.8. Premium on Redemption of Debentures:- Rs. 3 lakhs was decided in favor of the assessee.9. Special Pension Deduction:- Based on actuarial valuation of Rs. 1.26 crore was decided in favor of the assessee.10. Employees Compensation Expenses on Account of ESOP:- Rs. 6.67 crore was set aside for reconsideration.11. Disallowance under Section 14A-115 JB:- Rs. 7.85 crore was decided in favor of the assessee.12. Provision for Pending Labour Demand:- Rs. 4.80 crore was decided against the AO.13. Disallowance of Appreciation on Sale of Undertakings:- Decided against the AO.14. Transfer Pricing Adjustment:- The adjustment on account of Transfer Pricing (TP) was partly allowed and the matter was restored back to the TPO/AO for fresh adjudication. The TPO/AO was directed to afford a reasonable opportunity of hearing to the assessee and consider the Circular while deciding the appeal.15. Write-off of Capital Advances:- Rs. 28.06 lakhs under the head capital advances was decided in favor of the assessee. The Tribunal followed the analogy of allowing write-off by considering the real nature of the transaction.16. Addition of Provision for Doubtful Debts under Section 115JB:- Rs. 6.16 crore was decided against the assessee due to retrospective amendment to the section.17. Addition of Provision for Warranty under Section 115JB:- Rs. 14.75 crore was decided in favor of the assessee. The Tribunal followed the principles laid down by the Supreme Court in Rotork Controls India Pvt. Ltd. and the Madras High Court in Luk India Private Ltd., determining that the provision for warranty was based on a scientific method and historical data.18. Expenditure on Payment to Clubs:- Rs. 39.83 lakhs for AY 2003-04 was decided in favor of the assessee.19. Capital Expenditure Debited to P&L Account:- Rs. 6.12 lakhs representing foreign travel expenses in connection with the acquisition which did not materialize was decided against the assessee.20. Interest on Income Tax Refund:- Rs. 1.26 crore for AY 2003-04 was decided against the assessee.Conclusion:The Tribunal's judgment involved multiple issues related to development expenses, technical services fees, consultancy charges, prior period expenses, provisions for warranties, and transfer pricing adjustments, among others. The Tribunal decided several issues in favor of the assessee, set aside some for reconsideration, and ruled against the assessee on a few points. The judgment emphasized the need for a scientific approach and historical data in determining provisions and expenses, particularly in transfer pricing and warranty provisions. The matter of transfer pricing was restored back to the TPO/AO for fresh adjudication, considering the Circular issued by the CBDT.