ITAT Decision: Assessee's Appeal Allowed on Several Grounds

The ITAT allowed the assessee's appeal in relation to disallowance under section 40(a)(i) of the Act for payments to a foreign entity without TDS, disallowance of provision for sales incentive under "Shahenshah Scheme," denial of deduction under section 80IC on interest income, and denial of deduction for education cess and secondary and higher education cess. However, the ITAT upheld the AO's decision regarding the denial of deduction for interest expenses capitalized for new units and partially upheld the transfer pricing adjustments, directing the exclusion of certain companies as comparables. The appeals were partly allowed and dismissed accordingly.

---

---

Issues Involved
1. Disallowance u/s 40(a)(i) of the Act.
2. Disallowance of provision for sales incentive under "Shahenshah Scheme".
3. Denial of claim of deduction u/s 80IC on interest income.
4. Deduction of education cess and secondary and higher education cess.
5. Denial of claim of deduction of interest expenses.
6. Transfer Pricing Adjustments.

Detailed Analysis

1. Disallowance u/s 40(a)(i) of the Act
The AO disallowed Rs. 17,59,124/- paid to a foreign entity for certification services without TDS, treating it as "fees for technical services." The CIT(A) upheld the AO's decision. The assessee argued that the services were rendered and utilized outside India, falling under the exemption u/s 9(1)(vii)(b) of the Act. The ITAT found that similar issues in earlier years (A.Ys. 2005-06, 2006-07, 2007-08, and 2008-09) were decided in favor of the assessee, holding that the payments were not taxable in India. Thus, the ITAT allowed the assessee’s appeal, setting aside the AO's action.

2. Disallowance of provision for sales incentive under "Shahenshah Scheme"
The AO disallowed Rs. 2,47,68,964/- provision for sales incentives, considering it contingent. The CIT(A) upheld the AO's decision. The assessee argued that the provision was based on a scientific method and legally enforceable. The ITAT noted that similar issues in earlier years (A.Ys. 2006-07, 2007-08, and 2008-09) were decided in favor of the assessee, holding the provision to be on a scientific basis. Thus, the ITAT allowed the assessee’s appeal, setting aside the AO's action.

3. Denial of claim of deduction u/s 80IC on interest income
The AO denied the deduction on interest income earned from fixed deposits, considering it not derived from the business activity of the industrial undertaking. The CIT(A) upheld the AO's decision. The assessee argued that the interest income was inextricably linked to the main business activity. The ITAT found that similar issues were decided in favor of the assessee in earlier years, holding that the interest income was eligible for deduction u/s 80IC. Thus, the ITAT allowed the assessee’s appeal, directing the AO to grant the deduction.

4. Deduction of education cess and secondary and higher education cess
The AO denied the claim of deduction for education cess and secondary and higher education cess of Rs. 54,75,037/-, citing the lack of a revised return. The CIT(A) upheld the AO's decision. The ITAT noted that similar issues in earlier years (A.Y. 2008-09) were decided in favor of the assessee, holding that the cess is allowable as a deduction. Thus, the ITAT allowed the assessee’s appeal, setting aside the AO's action.

5. Denial of claim of deduction of interest expenses
The AO denied the deduction of Rs. 1,57,80,709/- interest expenses capitalized for land at Greater Noida and Neemrana, considering it as capital expenditure. The CIT(A) upheld the AO's decision, noting that the products manufactured at the new units were different, thus constituting an extension of business. The ITAT found no fallacy in the CIT(A)'s findings and upheld the denial of the deduction, dismissing the assessee’s appeal.

6. Transfer Pricing Adjustments
The AO made an adjustment of Rs. 36,04,286/- for business support services provided to associated enterprises, using a different set of comparables than the assessee. The CIT(A) partially upheld the AO's decision. The ITAT excluded Piramal Enterprises Ltd. and WAPCOS Ltd. as comparables, noting functional dissimilarity and extraordinary events affecting their financials. Thus, the ITAT allowed the assessee’s appeal, directing the exclusion of these companies as comparables.

Conclusion
- ITA No. 463/Del/2016: Partly allowed.
- ITA No. 6194/Del/2015: Dismissed.

Order Pronouncement
The order was pronounced in the open court on 19.01.2021.

---