TaxTMI 
TaxTMI 
2015 (3) TMI 1320
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.... the ALP by inappropriately applying the CUP method based on presumptions and surmises. CORPORATE TAX MATTERS 4. That the Assessing officer/DRP erred on facts & in law in making a disallowance of finance expenses of Rs. 9,85,67,574 alleging that borrowed funds were utilized for giving interest free advances to its joint venture company 'Hindustan Max-GB Ltd'. 5. That the Ld. AO/DRP erred on facts & in law in making a disallowance of Rs. 8,284,573 out of commission expenses for the year under consideration based on a view formed in the immediately preceding assessment year on following transactions:- 5.1 disallowing sums of Rs. 4,54,744 and Rs. 44,09,664 paid as commission to Malachite Chemicals and Edward Keller (Phils)Inc. 5.2 disallowing commission expense of Rs. 34,20,165 being excessive and unreasonable by arbitrarily fixing an average rate of commission paid to Indian agents at 3%. 6. That the Ld. Assessing officer/DRP erred on facts & in law in making a disallowance of expenditure of Rs. 21,15,375 by invoking the provisions of section 14 A of the Act read with Rule 8 D of the Income Tax Rules, 1962. 7. That the Ld. AO/DRP erred on facts & in law in making a disallowanc....
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....tal expenditure. 14.1 Without prejudice to the above, the Ld. DRP and AO has erred in not even allowing depreciation on the said amount of Rs. 3,74,470 after considering it as capital expenditure. 15. That the Ld. AO/DRP erred on facts & in law in making a disallowance of Rs. 5,07,730being amount written off as discount allowed to the customers on the alleged ground that the amount of discount allowed does not pertain to current year, the same is not allowable. 16. That the Ld. AO/DRP erred on facts & in law in making a disallowance of Rs. 14,82,137under section 40(a)(i) of the Act on the alleged ground that the appellant was liable to deducttax under section 195 of the act on expenses incurred towards training of employees, treating the same as professional services. 17. That the Ld. DRP and AO erred on facts and in law in charging interest under sections 234B and 234C of the Act. 18. The Ld. DRP and AO also erred in proposing to initiate penalty proceedings under section271(i)(c) of the Act for concealment of income or funishing inaccurate particulars of income. 19. That the Ld. AO/DRP erred on facts & in law in not....
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...., the Tribunal further held that amount paid has to be reduced by the amount of benefit received by the assessee on account of financial services. According to him, this is contrary to the findings recorded in para s 95 and 102. 6. On a query by the Bench that how much benefit the assessee has received in this year on account of financial services, he referred to page 5 of the synopsis of the case and pointed out that on account of financial services assessee has received benefit of Rs. 8.8 crores. 7. On the other hand Ld. DR submitted that basically the issue is covered by the order of Tribunal in ITA No. 1139/Chd/2011 and 1290/Chd/2012 for assessment years 2007-08 and 2008-09. He also referred to various paras like 95, 98, 102 & 110 and submitted that Tribunal has given a clear finding in para 110 that payment for total corporate services have to be restricted to the extent of 50% of the financial service benefit received by the assessee because assessee should have retained atleast 50% of the benefits on account of such financial service. He pointed out that assessee has moved an Misc. Application also in this regard and the Tribunal has dismissed that M.A. No. 06 & 07/Chd/201....
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....ssessee. This position was admitted by Shri K.M. Gupta who was present during the hearing of this appeal and who was also present during the original hearing of the appeal. The issue was finally adjudicated vide para 110 of the consolidated order in assessment years 2007-08 and 2008-09 which reads as under:- "110. In view of the abovesaid principles laid down, we find no merit in the adjustments made by the TPO. Another aspect is to be kept in mind while deciding the issue. The plea raised by the ld. AR for the assessee was that savings to the assessee as result of services provided by the AE should be considered while holding the transaction to be at arm's length. It was fairly conceded by the ld. AR for the assessee that under internationally accepted norms, savings are to be shared between the parties in the ratio of 50 : 50. The ld. AR for the assessee further pointed out that the savings on account of guarantee fee in assessment year 2007-08 were Rs. 1.40 Cr and the total savings in assessment year 2008-09 were Rs. 9.29 Cr. The TPO in assessment year 2007-08 has made an adjustment of Rs. 2,91,95,471/- and in the assessment year 2008-09 has made an adjustment of Rs. 6,14,13,98....
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....e the reason for such a big jump in the corporate service charges. At this stage, the Ld. Counsel has pointed out that the main reason for substantial increase in the amount of Corporate Services amount paid was on account of financial services. The assessee has started receiving financial services in the form of corporate guarantee as well as sanctions of the limit by banks on the recommendation of holding company because of which the assessee got the limits sanctioned from the bank at much lower rates than the market rates. At the instance of Bench the Ld. Counsel has also quantified the amounts of benefits received by the assessee company during these two years. The amounts of corporate service charges in various assessment years are as under:- Assessment year Amount (in Rs. ) 2007-09 22,700,000 2008-09 63,970,136 2009-11 79,931,741 2010-12 89,829,606 6. From the above figures the Bench agreed with the contention of the Revenue that service charges paid on account of corporate services had increased manifold in the later years. Therefore, assessee was asked why there is such a huge increase in the total corporate service charges. The assessee in reply ha....
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....owever, on a conservative basis, the interest savings availed by the appellant, due to guarantee provided by the associated enterprise has been computed on the basis of prevailing PLR. The PLR prevailing during financial year 2006-07 was 10.75% whereas the PLR during financial year 2007-08 was the relevant period was 12.75% whereas the appellant had borrowed money at 8.10%. Considering the above factors, the interest cost savings enjoyed by the appellant due to guarantee provided by the associated enterprise for financial year 2006-07 and 2007-08 is as under: Financial Year Amount of loan (INR in Cr) Interest rate PLR Savings % Savings (INRE in Cr) 2006-07 52.63 8.10% 10.75% 2.65% 1.39 2007-08 52.63 8.10% 12.75% 4.65% 2.45 Further, the associated enterprise has also provided guarantee to enable the appellant to avail Letter of Credit ('LC') facility from Royal Bank of Scotland ('RBS') without providing any security. During financial year 2007-08 the appellant availed letter of Credit ('LC') facility from Royal Bank of Scotland ('RBS'). The said facility was issued by the bank on the basis of a corporate guarantee amounting to EUR30 million issued ....
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....e funding of DSM group companies. A power of attorney executed by DSM NV authorizing DSM Finance BV to sign any obligation / arrangement in the field of cash management is attached as Annexure 5. It is further submitted that the name of DSM NV was changed to Royal DSM NV on completion of 100 years of its existence in 2004. An extract from the Chamber of Commerce for Limburg, Netherland is attached as Annexure 6. In view of the aforesaid, it is respectfully submitted that the guarantee was issued by DSM Finance B.V. at the directions/instruction of DSM N.V. and accordingly, an arm's length guarantee fee was payable by the appellant to DSM N.V. in consideration for issuance of such guarantee." 7. From the above it become clear that assessee had started receiving some financial services also from the holding company which explained the increase in total payments on account of corporate services. The assessee had tried to justify the payment on account of such financial services but when again it was confronted that if assessee had saved Rs. 100/- and if he pays the entire amount of Rs. 100/- to the holding company and in that case there would be no savings to the assessee. In respon....
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....ndia has also been submitted by the assessee to the Ld. TPO as Appendix 6B to the submission dated August 16, 2012 (placed at pages 300 to 303 of paperbook). Furthermore a letter by Royal Bank of Scotland, providing the details of credit facilities existing for DSM India in various financial years wherein security has been provided by Koninklijke DSM NV, was also submitted with the Ld. TPO as appendix 6 to the submission dated September 17,2012(placed at page 338 of the paperbook). * The detailed benchmarking report along with credit rating analysis is provided as Appendix 2. It is respectfully submitted that as per the analysis conducted by the appellant, the credit rating was calculated in a scientific manner and the same was determined at B3. * The results of the aforesaid benchmarking are as under:- Nature of facility Amount of facility Equivalent INR Guarantee fee Benefit to the appellant(INR in Cr) Packing Credit EUR to million 68 Crores 2.56% 1.74 LC/Guarantee EUR 30 million 204 Crores 3.50% 7.14 Total 8.88 * Your honour would appreciate from the above that the services availed by DSM India resulted in benefit ....
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....ted during the previous year relevant to the assessment year 2003-04 under consideration:- Particulars Quantity in Kg % of total purchases Penicillin G- Imported (A) 1012686 38.37% Penicillin G Domestic *from HMGB Limited 120256 0 45.56% *Other suppliers 424098 16.07% (B) 1626658 61.63% Total(A+B) 2639344 100% It is seen from the above that the purchases of Penicillin BG from HMGB Limited constitutes about 45.56% of total purchases and about 73.93% of total domestic purchases, therefore, by advancing the sum of money, the appellant has in fact secured its own business and ensured that it meets up its own production schedule. It is also observed that if the appellant would not have provided the advances to the HMGB Limited the production capacity of the appellant would have been reduced considerably because of not receiving the raw material supplied by HMGB Limited in timely manner. In view of the above, it is held that the advance made to HMGB Limited were for the purposes of the business of the appellant.....
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....e year, have been made out of the interest bearing loan from the parent company. In any case we are not going into this aspect. In our view, there is sufficient material to show that the relationship of the assessee with its subsidiary, HMGB was based on commercial expediency and the advancing of the amount was for business purpose. In this regard, we may make a reference to the order of the CIT(A) for assessment year 2004-05 which is also subject mater of appeal before us. The CIT(A) has tabulated the price advantage to the assessee on purchases made from HMGB, an uncontroverted fact, which clearly indicates commercial prudence apart from ensuring continuous and timely supplies. Thus, on the grounds of consistency and commercial expediency, the deduction claimed by the assessee company is in accordance with law and the CIT)(A) correctly allowed the claim of the assessee. In such circumstances, the interest paid on the borrowings of Rs. 76,21,436/- is an allowable deduction under section 36 (1)(iii) of the Act in terms of the la lders (supra) whrein it has been observed as under:- It is true that the borrowed amount in question was not utilised by the assessee in its own business....
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....ly supported the order of CIT(A). 23. After considering the rival submissions we find that this issue was adjudicated vide paras 86 & 87 of the order of Tribunal in ITA No. 1455/Chd/2010, which reads as under:- "86. We have heard the rival contentions and perused the record. The issue raised vide ground No. 4 is against the disallowance of commission expenses totaling Rs. 96,15,144/-. During the year under consideration, the assessee had claimed total expenditure of Rs. 2.60 crores under the head 'commission'. The said commission included both commission paid on account of exports and also the commission paid on domestic sales. The case of the revenue is that the assessee had made sales to certain parties, to whom commission was also paid and the same being not relatable to the business of the assessee, was not to be allowed as an expenditure. However, the case of the assessee before us is that the said commission has been paid against the purchase orders booked by the said concern, who were engaged in trading and were also commission agents. The two transactions were claimed to be different and without any connection to each other. The assessee has placed on record the det....
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....iture under the head 'commission' relates to the commission paid on domestic sales. The Assessing Officer noted that the assessee had paid commission at varying rates starting from about 1% to 5%. The assessee has filed on record the details of the abovesaid commission totaling Rs. 155,27,136/-The assessee has tabulated the names of the parties alongwith the details of same value of sales, commission paid and the rates at which paid. The perusal of the said details reflect the commission @ 4.48% being paid to M/s Ace Corporation. The total amount paid to the said party is Rs. 1351,250/-. The Assessing Officer, on the other hand, vide para 5.12 has noted that the commission to the said party has been made @ 6.6% vide para 5.12 at page 32 of the assessment order. The assessee, on the other hand, has furnished the details of commission at pages 291 and 292 of the Paper Book in which the commission to M/s Ace Corporation has been shown at Rs. 13,51,250/-. We are in conformity with the submission of the assessee that the rate of commission paid for the transaction cannot be interfered by the Assessing Officer as it is the understanding between the parties at the relevant time which dete....
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....2008 (O&M) has clearly held that if there is no exempt income then provisions of section 14A cannot be invoked. Therefore, in our opinion, if there was no income during the year then no disallowance is called for. Since in the case before us investment itself has been written off, therefore, there could not be any income. Accordingly we delete this addition. 30. Ground No.7: After hearing both the parties we find that during assessment proceedings it was noticed that there is an outstanding capital work in progress as on 31.3.2009 amounting to Rs. 142.45 millions. Further, the assessee has paid interest amounting to Rs. 165.71 million on loan of Rs. 2056 million. Assessee was asked why proportionate interest should not be capitalized. In response the assessee filed various details but ultimately Assessing Officer disallowed proportionate interest in terms of provisions of section 36(1)(iii) because the same was required to be capitalized. 31. Before us Ld. Counsel for the assessee referred to various documents and pointed out that whatever fresh loans were taken were foreign loans for specific investment which are not part of the capital work in progress, there....
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....arges, therefore, we remit this matter back to the file of Assessing Officer with a direction to verify whether assessee has paid bank charges to different banks, then no disallowance is required to be made otherwise the issue may be decided in accordance with the law. 38. Ground No. 9: After hearing both the parties we find that during assessment proceedings the Assessing Officer noticed that assessee has claimed a sum of Rs. 98,90,766/- from taxable income on account of ex. gratia paid for earlier years u/s 43B read with section 36(1)(ii). According to Assessing Officer, ex. gratia was not covered u/s 43B, therefore, the sum of Rs. 98,90,766/- was disallowed in the draft assessment. 39. Before DRP, the assessee made the following submissions "9. That on facts and circumstances of the case and in law 9.1 The Ld. Assessing Officer has erred in proposing a disallowance of Rs. 9,890,766/- claimed by the assessee company on payment basis under section 43B of the Act on the alleged ground that ex.gratia is not covered under section 43B read with section 36(1)(ii) of the Act and treating the same as being prior period expense. 9.2 The Ld. Assessing Officer has erred in....
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....me was required to be allowed on accrual basis as part of the business expenditure. Since this aspect has not been examined by the Assessing Officer, therefore, we set aside his order and remand the matter back to his file for reexamination of the computation of the ex.gratia payment and if some of the ex.gratia payment pertains to the assessment before us i.e. Assessment year 2009-10, then the same should be allowed on accrual basis as business expenditure otherwise the issue may be decided in accordance with law. 44. Ground No.10: After hearing both the parties we find that during assessment proceedings the assessee has reduced a sum of Rs. 1,05,26,246/- from taxable income on account of provisions written back. On appeal, it was mainly submitted that Assessing Officer has failed to appreciate the fact that this amount was originally not claimed as expenditure and, therefore, could not be made taxable now. The DRP simply held that this amount was taxable and accordingly Assessing Officer made addition of Rs. 1,05,26,246. 45. Before us Ld. Counsel for the assessee reiterated the submissions made and emphasized that this amount was never claimed as expenditure when the provision ....
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....ing Officer. 51. After considering the rival submissions we find that the following amount is shown under the head 'contingent liability':- (iii) Penalty on custom duty amounting to Rs. 0.20 (previous year Rs. 0.20) due to import of the duty free material against DEPB Licenses which was not in order." The above clearly shows that firstly the amount is Rs. 0.2 million i.e Rs. 2 lakhs and not Rs. 20 lakhs. Secondly, a contingent liability represents a liability which may arise or not arise on happening of a particular event and it is not the actual liability. Therefore, it cannot be said that assessee has claimed this amount as expenditure. Accordingly the amount mentioned under the head 'contingent liability' cannot be disallowed, therefore, we set aside the order of Assessing Officer and delete this addition. 52. Ground No.12: After hearing both the parties we find that during assessment proceedings it was noticed by Assessing Officer that assessee has claimed the expenditure to the tune of Rs. 4,67,30,000/- on account of payment for royalty. It was further noticed that in the earlier years the deduction under the same head was only Rs. 4,15,10,000, therefore, asses....
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....752 (Guj.) 55. On the other hand Ld. DR strongly supported the order of the Assessing Officer. 56. We have considered the rival submissions carefully. We find force in the submissions of Ld. Counsel for the assessee. The license agreement between the DAI BV and the assessee has been entered on 10.03.2006. Clause (2) of this agreement reads as under:- "2. LICENCE 2.1 For the duration of this Agreement and subject to the terms and conditions contained herein, DAIBV herby grants DAI-INDIA hereby accepts from DAIBV, a non-dividable, non exclusive, non transferable and non-sublicensable the Patents and the Technology solely to use the patents and the Technology at the Purimox Plant for the manufacture of the Product and for the subsequent sale of the Product within the Territory. 2.2. DAI_INDIA shall use the Technology solely for the manufacture of the Product at the Purimox Plant and the sale of the Product in accordance with the terms of conditions contained herein. Any other use of the Technology by DAI-INDIA shall be deemed a material breach of DAI-INDIA hereunder and shall entitle DAIBV to terminate the Agreement pursuant to Article 8.3 below, in addition to any other remedies....
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....per principles of law and had rightly held that the expendi-ture incurred by the assessee was only revenue expenditure." 59. In our opinion the case of the assessee is identical to the above noted case of the Supreme Court and the principle laid down by Hon'ble Supreme Court is clearly applicable. Therefore, we set aside the order the Assessing Officer and hold that expenditure incurred for payment of royalty is allowable and therefore, delete the addition. 60. Ground No. 13 : After hearing both the parties we find that during assessment proceedings the assessee was asked to furnish details of misc. expenses amounting to Rs. 7,70,21,133/-. On verification of these details, it was found that proper bills, vouchers were not available in respect of certain items of expenditure. The assessee was again given opportunity but assessee could not furnish the proper bills etc. The details of these expenses has been incorporated by Assessing Officer at page 104 of the assessment order. 61. On appeal, it seems that assessee filed additional evidence before the DRP which has not been considered and DRP confirmed the action of the Assessing Officer, therefore, the Assessing ....
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....arties and could not be recovered. The Ld. Counsel submitted that at best this could be treated as short and excess recoveries and assessee could have easily claimed the same as bad debts because no recoveries could be made from these customers. 68. On the other hand Ld. DR strongly relied on the order of Assessing Officer. 69. After considering the rival submissions we agree with the submission of Ld. Counsel of the assessee. If amount could not be recovered from the customers despite efforts and the same could have been easily claimed as a bad debt which are clearly allowable, by writing off such amounts because simply an amount has been shown as discount the same cannot be disallowed. Therefore, we set aside the order of Assessing Officer and delete this addition. 70. Ground No.16: After hearing both the parties we find that during assessment proceedings the Assessing Officer noticed that assessee has incurred expenses of Rs. 14,82,137/- on training of its employee at Netherlands by the holding company. On enquiry it was explained that a special course meant to enhances the professional skill of the employee of the assessee was undertaken at Netherlands. According to A....
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.... Raymond Ltd v DCIT 86 ITD 791 (Mum.) 72. On the other hand Ld. DR strongly supported the order of Assessing Officer 73. After considering the rival submissions carefully we agree with the contention of Ld. Counsel for the assessee. Merely reimbursement of expenses incurred on the training of a particular employee abroad cannot be termed as fee for technical services. Even if, assuming for the argument sake that this would amount to fee for technical services, then it is to be seen that such service was rendered in India, which has not happened. Therefore, in our opinion this amount of reimbursement of expenses does not attract provisions of section 195 and tax was not deductible. Accordingly we set aside the order of Assessing Officer and delete this addition. 74. Ground No.17 Through this ground the assessee has raised the issue of charging of interest u/s 234B and 2234C which is consequential in nature and therefore, we direct the Assessing Officer to charge the interest as per the provisions of law. 75. Ground No.18: Through this ground the issue of initiation of penalty proceedings u/s 271(1)(c) has been raised. 76. Both the parties agreed that this is pre-mature a....
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....een reproduced by us above, therefore, we set aside this order of Assessing Officer and delete this addition. 81. Ground No. 21: The Ld. Counsel for the assessee submitted that Assessing Officer wrongly made adjustment of wealth tax amounting to Rs. 52,493/- and provision of FBT amounting to Rs. 72 lakhs. He contended that this amount could not be treated as part of income tax. In this regard he relied on the decision of Hon'ble Bombay High Court in the case of CIT v Echjay Forgings Pvt. Ltd 251 ITR 15 and in JCIT v Usha Martin Industries Ltd, Balmer Lawrie and Co. Ltd vs ACIT & ACIT v Balmer Lawrie and Co. Ltd and DCIT v India Container Leasing Co Ltd. 288 ITR (AT) 63. 82. On the other hand Ld. DR supported the assessment order. 83. After considering the rival submissions carefully we find force in the contentions of Ld. Counsel for the assessee. The Special Bench of the Tribunal in the cases of JCIT v Usha Martin Industries Ltd, Balmer Lawrie and Co. Ltd vs ACIT & ACIT v Balmer Lawrie and Co. Ltd (supra) has clearly held that provision for Wealth Tax is not enumerated in the provision to section 115JB, therefore, the same cannot be added to the book profits. This position ....