2019 (6) TMI 31 - AT - Income Tax

Tribunal ruling on expenses, depreciation, Section 14A, transfer pricing, and Cenvat Credit upheld.

DCIT Circle -6 (2), Mumbai Versus M/s. Kansai Nerolac Paints Ltd. And M/s. Kansai Nerolac Paints Ltd. Versus Addl. CIT Circle -6 (2), Mumbai

The Tribunal dismissed the Revenue's appeal challenging disallowance of expenses and depreciation for Kavesar Unit, insurance expenses, and expenditure on ... Allowability of expenses and depreciation of closed unit - assessee has closed operations at its manufacturing unit at Kavesar factory situated at Thane since 1.4.1999 - HELD THAT:- We have observed that this issue is a recurring issue before the tribunal in the case of the assessee. It is also observed that the tribunal in the preceding year AY 2004-05 had held that expenses incurred by the assessee ( including deprecation ) with respect to Kavesar Unit situated at Thane which was lying closed since 01.04.1999 is to be allowed as revenue expenses. The facts being identical in this year and we have no reason to take divergent view than what was taken by tribunal in preceding year AY 2004-05 and also with a view to maintain consistency. ( Ref: Hon‟ble Supreme Court decision in the case of Radhasoami Satsang v. CIT [1991 (11) TMI 2 - SUPREME COURT] ), we hold these expenses be allowable as business expenses. Thus, we hold that these expenses including depreciation with respect to Kavesar Unit located at Thane be allowed as Revenue Expenses. Disallowance of expenditure on account of purchase of application software - Revenue or capital expenditure - HELD THAT:- Respectfully following the decision of tribunal in assessee's own case for AY 2004-05 and with a view to maintain consistency, we hold that expenditure incurred by the assessee for purchase of application software to the tune of ₹ 8,65,032/- be allowed as Revenue expenses. We have while taking decision has also noted that these are not operating software but are application software. Disallowance u/s 14A - expenditure incurred in relation to earning of an exempt income - HELD THAT:- No reason to take a different view than what was taken by tribunal in assessee‟s own case for AY 2004-05 as facts are similar and also with a view to maintain consistency, we uphold disallowance of expenditure to the tune of 2% of exempt income. Disallowance on account of valuation of stock u/s 145A - differential Cenvat Credit in opening and closing stock - exclusive method of accounting OR inclusive method of accounting - HELD THAT:- The assessee is following exclusive method of accounting for valuing closing stock wherein unutilised MODVAT/Cenvat Credit is not added to the value of closing stock. We have observed that Section 145A stipulates that the duties, taxes, fees and cess (by whatever name called) paid to bring the inventory to present location is to be added to value inventory as on the date of valuation. We have observed that the Mumbai-tribunal has passed an elaborate order in the case of Sunshield Chemicals Private Ltd. v. ITO [2015 (12) TMI 767 - ITAT MUMBAI] of which one of us was part of DB pronouncing the said order, wherein tribunal held that per Section 145A it is mandatory for taxpayers to follow inclusive method. We are inclined to restore this matter back to the file of the AO for denovo determination of the issue in the light of our above discussions as well decision referred to above.The assessee will be allowed to raise its defence in denovo proceedings. The AO shall provide proper and adequate opportunity of being heard in the set aside proceedings. The grounds of appeal are allowed for statistical purposes We order accordingly. TP Adjustment - guarantee fee for counter guarantee given by assessee to its associated concern(AE) - HELD THAT:- issuance of corporate guarantee by a taxpayer in favour of its AE within meaning u/s 92A is an international transaction which is covered u/s 92B of the 1961 Act. What emerges is that providing of corporate guarantee by a taxpayer to its AE within meaning of Section 92A is an international transaction u/s 92B which need to be benchmarked using CUP method to compute ALP of the said transaction of furnishing of corporate guarantee. ALP to be computed will vary depending upon several internal as well external factors. In our considered view, end of justice will be met if the ALP be determined @ 0.5% p.a. of corporate guarantee issued by assessee in favour of Kansai Paint Company Limited, Japan. We are not inclined to accept the plea of the assessee that providing of corporate guarantee by tax-payer to its AE within meaning of Section 92A can be taken as international transaction u/s 92B only with effect from AY 2013-14 as the insertion of explanation to Section 92B By Finance Act, 2012 is w.e.f. 01.04.2002. The said explanation was declared to be clarificatory in nature. Issues Involved:1. Disallowance of expenses and depreciation for Kavesar Unit.2. Disallowance of insurance expenses for Kavesar Unit.3. Disallowance of expenditure on purchase of application software.4. Disallowance under Section 14A for expenditure related to exempt income.5. Addition under Section 145A for differential Cenvat Credit in opening and closing stock.6. Transfer pricing adjustment for notional guarantee fee for counter guarantee given to an Associated Concern.Detailed Analysis:1. Disallowance of Expenses and Depreciation for Kavesar Unit:The Revenue challenged the deletion of disallowance of Rs. 8,91,860 incurred by the assessee for Kavesar Unit expenses and Rs. 77,948 for depreciation. The Tribunal noted that the assessee had discontinued its pigment operations at Kavesar since 01.04.1999 but continued to claim these expenses. The Tribunal referred to its previous decisions for AY 2000-01 and AY 2004-05, which allowed these expenses as business expenses. The Tribunal upheld the CIT(A)'s decision to allow these expenses, including depreciation, as revenue expenses, thereby dismissing the Revenue's appeal.2. Disallowance of Insurance Expenses for Kavesar Unit:The assessee contested the disallowance of Rs. 41,696 for insurance expenses related to the discontinued Kavesar Unit. The Tribunal upheld the CIT(A)'s decision, which followed the Tribunal's earlier ruling that implicitly disallowed insurance expenses for AY 2000-01. The Tribunal affirmed the disallowance of insurance expenses, agreeing with the CIT(A)'s interpretation.3. Disallowance of Expenditure on Purchase of Application Software:The assessee challenged the disallowance of Rs. 8,65,032 for application software expenses, which the AO treated as capital expenditure. The Tribunal referred to its decision for AY 2004-05, where it allowed similar expenses as revenue expenditure. The Tribunal followed the decisions of the Hon'ble Delhi High Court in CIT v. Amway India Enterprises and CIT v. Asahi India Safety Glass Ltd., which treated software expenses as revenue expenditure. The Tribunal allowed the assessee's appeal, treating the software expenses as revenue expenditure.4. Disallowance Under Section 14A for Expenditure Related to Exempt Income:The AO disallowed Rs. 68,04,816 under Section 14A, which was enhanced by the CIT(A) by Rs. 9,88,935. The assessee had voluntarily disallowed Rs. 1,50,725. The Tribunal noted that Rule 8D of the Income-tax Rules, 1962, was not applicable for AY 2007-08, following the Supreme Court's decision in CIT v. Essar Teleholdings Ltd. The Tribunal also noted that the assessee had sufficient interest-free funds to cover the investments, following the Bombay High Court's decisions in CIT v. Reliance Utilities and Power Limited and CIT v. HDFC Bank Limited. The Tribunal restricted the disallowance to 2% of the exempt income, consistent with its decision for AY 2004-05.5. Addition Under Section 145A for Differential Cenvat Credit in Opening and Closing Stock:The AO added Rs. 5,12,27,909 under Section 145A for differential Cenvat Credit. The Tribunal referred to its decision for AY 2004-05 and the Bombay High Court's decision in CIT v. Diamond Dye Chem Limited, which held that unutilized Cenvat credit should not be added to the closing stock. The Tribunal restored the matter to the AO for re-determination, considering the Tribunal's observations and the relevant decisions.6. Transfer Pricing Adjustment for Notional Guarantee Fee for Counter Guarantee Given to an Associated Concern:The AO made an adjustment of Rs. 53,16,420 for notional guarantee fee, which the CIT(A) upheld. The Tribunal noted that providing a corporate guarantee is an international transaction under Section 92B, following the Bombay High Court's decisions in CIT v. Glenmark Pharmaceuticals Limited and CIT v. Everest Kento Cylinders Limited. The Tribunal determined the ALP at 0.5% of the corporate guarantee, consistent with other Tribunal decisions. The Tribunal partly allowed the assessee's appeal, reducing the adjustment to 0.5% of the guarantee amount.Conclusion:The Tribunal dismissed the Revenue's appeal and partly allowed the assessee's appeal, providing relief on several grounds while upholding some disallowances and adjustments. The Tribunal's decisions were based on consistency with previous rulings and relevant judicial precedents.