TaxTMI 
TaxTMI 
2019 (3) TMI 202
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....e price, but are separately debited to profit and loss account, because the invoices of transporters are received after consumption of material. Such freight amount is not included in the valuation of closing stock, as per regularly and consistently followed method of valuation of stock accepted by the Revenue in the past. The AO/DRP held that the assessee's contention that as the method is regularly followed year after year its impact will be revenue neutral, cannot determine the income of the assessee correctly for the year under consideration. The AO/DRP further held that the revenue aspect keeps on changing on year to year basis. Therefore, Assessing Officer further held that impact on noninclusion of freight inward and clearing charges at Rs. 3,17,000/- has to be added to the income of the assessee. 3. The Ld. AR submitted that this issue is decided in favour of the assessee by the recent consolidated order dated 24.10.2016 passed by the Delhi bench of the Tribunal in assessee's own case for assessment year 2010-11 and 2011- 12, wherein the Tribunal, following the order of the coordinate benches of the Tribunal passed in assessee's own case for the assessment year 2....
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....lained by the assessee are that the purchases in question are done under exceptional circumstances (which are well known in this type of industry) for immediate consumption. They are in fact consumed immediately i.e. as soon as raw material enters the factory premises which is not disputed by assessing officer, hence the question of such purchases being part of closing stock does not arise at all. In such a situation, when freight/ import charges are directly debited to the P& L A/c along with the value of the purchases, naturally the question of treating them as part of closing inventory does not arise. The assessee has acted and accounted in a proper and acceptable method. Therefore, the relief should be granted on this count alone. 7.15 Alternatively, the undisputed fact remains that the assessee has consistently following the said method of accounting in the last many years and the Revenue has been accepting these facts and method of accounting without any demur. 7.16 The contention of the DRP that, the principle of res-judicata does not apply in Income tax proceedings and therefore, the Assessing officer is correct to come to independent conclusion and is not....
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....underestimation of profits and is, therefore, rejected. Otherwise, the presumption would be that the entire exercise is revenue neutral. In the instant case, that exercise had never been undertaken. The Assessing Officer was required to demonstrate both the methods, one adopted by the assessee and the other by the department. In the circumstances, there was no reason to interfere with the conclusion given by the High Court." 7.20 The Hon'ble Supreme Court in the case of CIT vs. Bilahari Investment P. Ltd. 299 ITR 1 (SC) held as follows: "Every assessee is entitled to arrange its affairs and follow the method of accounting, which the Department has earlier accepted. It is only in those cases where the Department records a finding that the method adopted by the assessee results in distortion of profits that the Department can insist on substitution of the existing method." 7.21 In the case of CIT vs. Jagatjit Industries Ltd. (2011) 399 ITR 382 (Del.), the Hon'ble Jurisdictional High Court has held as follows: "If a particular accounting system has been followed and accepted and there is no acceptable reason to differ with it, the doctrine of consis....
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....acts and figures in many additions demonstrate that the issue raised is revenue neutral in the long run. Such petty additions should be avoided on the ground of materiality, as AS-1 which talks about materiality, consistency, prudence etc. is part of the I.T. Act after it is notified u/s 145(2). 7.23 In view of the foregoing and proposition laid down by the Hon'ble Supreme Court and the Hon'ble High Courts, we are of the opinion that adjustment of Rs. 31.18 lacs made to total value of closing stock of Rs. 275 crores and consumption of stocks of Rs. 7178 crores is uncalled for. If valuation of closing stock is changed then the value of opening stock should also be changed on the same basis or method. The closing stock of a particular year is the opening stock of the subsequent year. It is not the case of the revenue that the method of valuation of closing stock is materially affecting the accounts and profits disclosed by the assessee. This adjustment sought to be made is revenue neutral and at best may result in preponment or postponement of revenue. The issue is whether such exercise is at all required on the ground of materiality. Materiality is a concept which is well r....
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....iders normal wastages arising in the course of manufacturing for the purposes of allocation to closing inventory. Since, the aforesaid expenditure comprised of abnormal wastages, it was not practically feasible to segregate normal and abnormal wastages and, therefore, the assessee as per the consistent method of accounting did not consider aforesaid costs for purposes of allocation to closing inventory. It is not practically possible for the assessee to segregate normal and abnormal wastages embedded in the aforesaid costs and therefore, the assessee, as per consistent and regular method of accounting, accepted by the Revenue as such in the earlier years, did not consider the aforesaid expenditure for the purposes of valuation of closing inventory of finished goods. But the Assessing Officer disallowed this expenditure and added the same to the income of the assessee. 7. The Ld. AR submitted that the aforesaid issue stands decided in favour of the assessee by the order of the Delhi Bench of the Tribunal in the assessee's own case for the assessment year 2007-08 and 2008-09 whereby similar adjustment made in that year was deleted on the same ground. The Ld. AR pointed out tha....
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....on of closing stock being followed by the assessee company. The quantum of the addition of Rs. 9.24 lacs is less than 0.74% of the value of abnormal rejections. As a percentage of total stocks / turn over / profits declared, this figure is miniscule. 8.13 Accounting Standard-2 stipulates that abnormal wastages should not be considered for valuation of inventory. It reads as follows: "16. Examples of costs excluded from the cost of inventories and recognized as expenses in the period in which they are incurred are: a) Abnormal amounts of wasted materials, labour or other production costs; storage costs, unless those costs are necessary in the production process before a further production stage; administrative overheads that do not contribute to bringing inventories to their present location and condition; and selling costs." 8.14 Keeping in view the treatment prescribed under AS-2 and the fact that the assessee has been regularly following the same method of accounting for valuation of charging such rejection to P&L A/c and its closing inventory, we are of the view the addition in question is uncalled for. The adjustment is not material adjustment. Furthe....
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....cular component/ components shall be supplied by the vendor. Subsequently, vendors are provided supply of component schedule annually. In the business of manufacturing vehicles, the assessee purchases raw material from vendors with the express understanding that the rates would be revised, if there is substantial increase/decrease in cost of materials, at the agreed interval. In the assessment order, the assessing officer held that the aforesaid provision of Rs. 45.66 crores is not allowable business expenditure. The assessing officer held that provisions emanating from retrospective price amendments are contingent in nature and thus, not an allowable business expenditure. 11. The Ld. AR submitted that the provision for the material is worked out as under:- (1) Provision for price increase of Rs. 1,614.03 Lacs in respect of which price amendments were already issued on 31.03.2013: The aforesaid provision was made on the basis of actual supplies made upto the end of the year as per price amendments actually issued as on 31.03.2012. Therefore, the assessee has made provision of Rs. 1614.03 Lacs on the basis of actual PO issued to vendors for the change in prices dur....
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....al. When there is an excess provision on account o price revision made during the year, the assessee reversed the same in subsequent year i.e. when the actual figures are known. Similarly, when there is a short provision for increase in price of raw material supplied in immediately preceding year, the balance is recognized as expenditure during the year. A claim is made based on ascertainment of actual liability. The assessing officer disallowed the reversals of provision on ground that this was a prior period expenditure. 12.12 When provisions are made, what is to be seen is whether the assessee has done a bona fide and genuine exercise to estimate its liability with reasonable certainty. The term reasonable certainty means that the provision in question might be slightly higher or lower than the actual figure.. When the provision is higher, it is reversed in subsequent year, when the actual figures are known. Similarly, when the provision is lower, the same is claimed in the latter assessment year. It cannot be said that these are prior period expenditure. The actual liability in question is ascertained only during the year and hence the liability crystallizes during the....
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....t it is common trade practice to contract with vendors on such express terms for payment of arrears in the event of substantial increase/ decrease in cost, in order to maintain continuous supply of raw materials without being affected by market fluctuations, especially in light of the volume of purchases made by the assessee. In the absence of such understanding/ contract with the vendors, the assessee would not be able to operate and continue manufacturing operations without disruption. This same process is followed when there is reduction in cost elements of component prices, company informs the vendors for reduction in price of components. Accordingly, while price revisions are pending or negotiations are on, the vendors keep on supplying the material provisionally at the agreed rates, with the understanding that pursuant to negotiations being finalized, the arrears of the amount due to them would be paid to them retrospectively. Such price revisions, being an accrued liability at the time of purchase of raw materials, are recorded in the books of accounts by the assessee. At the year end, the company estimates the additional liability on account of price revision under negotiat....
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.... profit and loss account as part of the closing stock. The assessing officer estimated the value of such scrap at an amount of Rs. 6,34,480 (computed on the basis of average scrap sales in the last 15 days of the relevant year and first 15 days of next year, vis-a-vis, after reducing the scrap sale as on the last days of the relevant year) and made addition of the same to the closing stock and consequently to the income of the assessee. 15. The Ld. AR submitted that the aforesaid issue has been decided in favour of the assessee passed by the Tribunal in assessee's own case for the assessment year 2010-11 and 2011-12, wherein the Tribunal accepted the method as followed by the assessee of accounting income on sale of scrap on a consistent basis and deleted the impugned addition on the ground that the assessee was not dealing in scrap and/or holding the scrap as inventory, and thus was not required to value the closing stock after taking into account the value of scrap. The Tribunal, in coming to the aforesaid conclusion, laid emphasis on the fact that such transaction was revenue-neutral and held that considering the size of the assessee company, it could not be expected to keep ....
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....d that assessee should have valued the scrap at the end of the year. Furthermore the accounting policy of the company also states that the scrap is accounted for at the time of its disposal. Therefore, according to us it is not mandatory for an assessee to value scrap as at the end of financial period for working out the true and fair profit or losses of the company. More so as in the previous year this accounting policy of the company has been accepted by the revenue without disturbing the profit on this count. Further, while rendering our decision in the preceding ground of appeal, following the decision of honourable High Courts and Supreme Court, we have held that adjustment should not be made in the assessment order on issues, which are revenue-neutral. The impugned addition under consideration is purely revenue-neutral in as much as addition of the estimated value of the scrap to closing stock would be debited as opening stock in the profit and loss account of immediately succeeding year. Further, the assessing officer will need to carry out the similar exercise in the last year, to estimate stock of scrap which would become opening stock of this year. There is, thus, no esca....
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....ails of the scrap. It is also not the case of the assessee that compared to the earlier years the scrap sold by the assessee is lesser during the year. In view of the above, the addition made by the Ld. Assessing officer on account of estimating the value of scrap lying in closing stock amounting to Rs. 3.02 lakhs is deleted and ground No. 5 of appeal raised by the assesse is allowed." In the present Assessment Year also the assessee is not dealing in scrap, and/or holding the scrap as inventory, and thus was not required to value the closing stock after taking into account the value of scrap. The Tribunal for A.Y. 2010-11 and 2011-12 while coming to the aforesaid conclusion, laid emphasis on the fact that such transaction was revenue-neutral and held that considering the size of the assessee company, it could not be expected to keep quantitative tally of miniscule items. The facts are identical in the presnt year as well. Therefore, Ground No. 6 is allowed in favour of the assessee. 18. As regards to Ground No. 7 to 7.2, relating to disallowance of prior period expenses amounting to Rs. 17.13 crores, it can be seen that the assessee is a large size manufacturing company whic....
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....l for assessment year 2008-09 are as under: "5. On careful consideration of above contention and submissions of both the parties and careful perusal of the record placed before us, inter alia decision in assessee's own case for AY 2007-08 (supra), we observe that the same issue was decided by coordinate bench of this Tribunal in favour of the assessee with following findings and conclusions:- "61.10. The issue herein is year of deductibility. Additional ground of appeal was filed for A. Y. 2006-07 before the Tribunal and this additional ground was not disposed of Misc. application is pending. The assessee's contention is that the correct amount is Rs. 23.86 lakhs and not Rs. 643.05 lakhs as mentioned by the A.O. Details are given in the paper book we find that the D.R.P. has directed the assessing officer to verify the price. This working given by the assessee is not properly verified by the A.O. The AO should have verified the claim of the assessee. We direct the assessing officer to verify the claim of the assessee. Be it as it may, the genuineness of the expenditure is not in doubt and as it is a question of excess/ short provision of discount in respec....
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....ntal representative could not point out any change in the facts and circumstances of the case of the appellant as compared to the assessment year in which the above issue is decided by the coordinate bench. No other contrary decision was also pointed out therefore, respectfully following the decision of the coordinate bench in the appellant's own case for the earlier years. We dismiss ground No. 3 of the appeal of the revenue." It can be seen that the assessee is a large sized manufacturing company which receives services from several vendors, running into hundreds. The assessee made reasonable attempt to quantify the liability incurred towards expenses during the relevant previous years and provide for it which was not doubted by the Assessing Officer. It is not practically possible to consider and provide for all expenses, in absence of relevant details/material/information for various reasons like, non-receipt of bills/invoices from the vendors, the contract terms with vendors not being settled, disputes in relation to bills received, services contracted by zonal/regional/branch officer not intimated to the head office, etc. Therefore, the assessee in our opinion has rightly ....
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....ng year. The Tribunal, in coming to the aforesaid conclusion, also held that the disallowance cannot be made on the issues which are revenue neutral. The aforesaid issue, it would be noted, is also covered in favour of the assessee by the decision of the Tribunal in assessee's own case for the assessment year 2008-09, wherein the Tribunal reversed the action of assessing officer in disallowing provision on the ground that the amount reversed there against in the succeeding year exceeded 15% of the amount of provision. The Tribunal held that the said approach followed by the AO had no valid basis and was purely ad-hoc. The Tribunal also held that the Assessing Officer was bound to follow the practice and stand taken by the Department on this issue in the earlier years and, accordingly, restored the matter back to the file of the Assessing Officer to reconsider the issue, having regard to the method of making provisions followed by the assessee and accepted by the Revenue in preceding years. The Assessing Officer, in the set-aside proceedings, vide order dated 26.02.2015, accepted the claim of the assessee and allowed relief on the aforementioned identical issue by observing that the....
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....ientific basis. Detail of provisions for advertisement was submitted before the lower authorities. Further, The Assessing Officer, in the set-aside proceedings for A.Y. 2008-09, vide order dated 26.02.2015, accepted the claim of the assessee and allowed relief on the aforementioned identical issue by observing that the assessee had computed the provision on the basis of actual Purchase Orders, which was scientific and logical in nature. Thus the issue is squarely covered by the order of the Tribunal in A.Ys. 2010-11 & 2011-12. Therefore, Ground No. 8 to 8.3 are allowed in favour of the assessee. 26. As regards to Ground No. 9 to 9.3 relating to disallowance of alleged excessive purchases from related parties as per AS-18 amounting to Rs. 38.36 crores, it can be seen that in the course of business of manufacturing twowheelers, the assessee, inter alia, procures certain critical components like shock absorbers, carburetors, etc., which are fitted in the two- wheelers manufactured by the assessee, from a single vendor, having the requisite 28 ITA No. 6990/DEL/2017 technology to manufacture the same, in accordance with the specifications given by the assessee. The assessee, does not....
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....ssessee in terms of AS- 18. Accordingly, the AO computed excessive purchase price at Rs. 20,61,38,000/- in respect of purchases from related parties for which internal comparable of similar products purchased from related parties were available. In respect of other category of purchases from related parties for which no internal comparable was available, the AO worked out an amount of Rs. 17,75,18,000/-. in the same proportion as that of purchases for which internal comparable were available alleging the same to be excessive. Thus, AO made total disallowance of Rs. 38,36,56,000/- out of purchases. 27. The Ld. AR submitted that the aforesaid issue is squarely covered in favour of the assessee by the decision of the Delhi Bench of Tribunal in the assessee's own case for Assessment Year 2007-08 and 2008-09, wherein identical disallowance made in that year was deleted on the ground that since in the first place, the parties were not related to the assessee company in terms of section 40A (2), disallowance on ground of excessive purchase price could not have been made under that section. Further, the Tribunal held that the transactions were entered by the assessee on account of comme....
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....able to pay tax at the highest rate prescribed under the Act often seeks to transfer a part of his income to a related person who is not liable to pay tax at all or liable to pay tax at a rate lower than the rate at which the assessee pays the tax. In order to curb such tendency of diversion of income and thereby reducing the tax liability by illegitimate means, section 40-A was added to the Act by an amendment made by the Finance Act, 1968. Clause (b) of section 40A (2) gives the list of related persons. 13.17. In the present case, it is an undisputed fact that none of the parties fall within the persons specified as defined under clause (b) of section 40A (2) of the Act. Related parties are to be considered in terms of provisions of sec. 40A (2) of the Act and not as mentioned in AS-18 issued by the Institute of Chartered Accountant. Thus, we are of the view that the provisions of section 40A (2) do not apply to the present case. Further, there is no provision under the Act which authorizes the Assessing Officer to lift the corporate veil and disallow an expenditure on the ground of reasonableness and commercial expediency unless it is established that the trans....
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....cerns where there is no attempt to evade tax. 13.22. Having held that the provisions of section 40A (2) of the Act does not apply to the facts of the case. We now proceed to answer whether the action of the Assessing Officer in disallowing the expenditure on the ground of commercial expediency is justified. 13.23. The Hon'ble Supreme Court in the case of CIT vs Walchand & Co [1967] 65 ITR 381 in the context of deductibility of expenditure under Section 37(1) of the Income-tax Act, 1961 [Corresponding to section 10(2)(xv) of the Indian Income-tax Act, 1922] held as under: "In applying the test of commercial expediency for determining whether the expenditure was wholly and exclusively laid out for the purpose of the business, reasonableness of the expenditure has to be adjudged from the point of view of the businessman and not of the revenue". 13.24. Further, reference is also drawn to the decision of the Hon'ble Supreme Court in the case of S.A. Builders Ltd. v. CIT (Appeals) [2007] 288 ITR 1 (SC) , where in it was held as under: "....that once it is established that there was nexus between the expenditure and the purpose of the business ....
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....During the relevant previous year, the assessee made total purchases of various raw materials, etc.. Out of the aforesaid total purchases, purchases from related parties, i.e., parties related to the assessee, in accordance with definition given in AS-18 issued by the ICAI and as disclosed in the notes to accounts of the audited accounts of the relevant previous year, but admittedly not related in terms of definition provided in section 40A (2) of the Act. Thus, the issue is squarely covered by the order of the Tribunal for A.Ys. 2010-11 and 2011-12. Therefore, Ground Nos. 9 to 9.3 are allowed in favour of the assessee. 30. As regards to Ground No. 10 to 10.3, relating to payment received on behalf of Hero Honda FinCorp. Ltd. (HFCL) deemed as dividend under Section 2(22)(e) amounting to Rs. 12.69 crores, it can be seen that Hero Fin Corp. Ltd. (HFCL) is a related company in which the assessee holds 30% (approximately) of the share capital, which is engaged primarily in the business of financing of vehicles. In pursuance of the said business HFCL extends to the dealers of the assessee company, facility of financing vehicles purchased by the dealers from the assessee company. The ....
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....ct that it was an advance or loan so as to attract section 2(22)(e). The assessee in this case was holding the money received from dealers as custodian of HHFL. There is no privity of contract between the assessee and HHFL. There is no positive act of granting loan or advance given by HHFL to the assessee. There is neither a stipulation for payment of interest or period of repayment. Further, the assessee has not used the funds for its own purposes, as admittedly the assessee is a cash rich company, not requiring loans. This fact is not disputed by the Revenue. The assessee was used as channel for remittance of money by the dealers to HHFL for the purpose of convenience and from assessee's a standpoint this is business expediency. We are unable to appreciate the conclusions drawn by the assessing officer that this is a deemed loan. In our view, by no stretch of imagination it can be said that there was any amount of advance or loan given by HHFL to the assessee. 16.28.Even assuming that the transaction is in the nature of loan, we have to agree with the arguments of the Ld. AR of the assessee that the transaction cannot be deemed as dividend in terms of exemption provided in clause....
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.... the Assessing Officer observed that the assessee has not explained the business expediency of such expenditure incurred by the assessee. 35. The Ld. AR submitted that the aforesaid issue is squarely covered by the decision of the Delhi bench of the Tribunal in the assessee's own case for the assessment year 2007-08 and 2008-09, wherein the ad-hoc disallowance made out of total expenditure incurred in that year was deleted on the ground that services were rendered by HCSL to the assessee and the Assessing Officer could not sit in the arm chair of a businessmen to decide reasonableness of an expenditure. The aforesaid findings of the Tribunal had been followed and reiterated by the Tribunal in assessee's own case for the immediately preceding assessments years, viz. Assessment Year 2010-11 and 2011-12. It is also pertinent to mention that no appeal has been filed by the department before the High Court. 36. The Ld. DR relied upon the Assessment Order and Order of the TPO, but could not refute the decision of the Tribunal and the Hon'ble High Court. 37. We have heard both the parties and perused the material available on record. The Tribunal in A.Ys. 2010-11 and 2011-12 held....
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....expenditure that is to be incurred for the purpose of running of the business. The expenditure in question cannot be disallowed for the reason that the expenditure was incurred for business and was in the revenue field and was not a personal expenditure. In the result, this ground of the assessee is allowed." Having regards to the facts and circumstances of the case under consideration, and in absence of any contrary decision pointed out by the Ld. departmental representative and any changes in the facts and circumstances of the case in the present assessment year we respectfully following the aforesaid finding given by the coordinate bench in appeal order for AY 2007- 08 in case of appellant. Direct the assessing officer to delete the disallowance made of Rs. 2 crores on account of advisory services expenditure incurred on payment to hero corporate services Ltd. Therefore ground nos. 12 of the appeal of the assessee is allowed." From the records it can be seen that the assessee made elaborate submissions explaining the nature of services received from Hero Corporate Services Ltd. and nexus of same with the business of the assessee. This fact is identical with the earli....
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....s not in the nature of commission but an incentive for higher sale targets. The Ld. AR further submitted that the aforesaid finding was followed by the Tribunal in the AY 2010-11 and 2011-12 wherein similar disallowance made by the Assessing Officer was deleted. 40. The Ld. DR relied upon the Assessment Order and Order of the TPO, but could not distinguish the decision of the Tribunal and the Hon'ble High Court. 41. We have heard both the parties and perused the material available on record. The Tribunal for A.Ys. 2010-11 and 2011-12 held as under: "75) We have heard the rival contentions. As dealership agreement entered between the appellant and dealers is on a principal-to-principal basis and dealers do not act as agents of the appellant while purchasing and further selling the vehicles. Accordingly, the incentives offered at the time of purchase of vehicles do not fall within the meaning of commission u/s 194H of the Act. Further, the issue is squarely covered by the decision of the ITAT in assessee's own case in AY 2008-09 wherein following the ITAT decision in assessee's own case for the year AY 2007-08, it was observed as under - "148. From the bare re....
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....ok delivery of them. They were selling the milk and the other products in their own right as owners. These are two separate legal relationships. The income tax authorities were not justified or correct in law in mixing up the two distinct relationships or telescoping one into the other to hold that because the concessionaires were selling the milk and the other products from the booths owned by the Diary and were using the equipment and furniture in the course of sale of the milk and other products, they were carrying on the business only as agents of the Diary." 45.12. The Hon'ble High Court held that in such circumstances S.194H is not attracted. 45.13. In the case of Jai Drinks (P) Ltd. 336 ITR 383 (Del.), the Hon'ble Delhi High Court has held as follows: "Held, dismissing the appeal, that a perusal of the agreement showed that the assessee had permitted the distributor to sell its products in a specified area. The distributor was to purchase products at a pre- determined price from the assessee for selling them. Both the assessee and the distributor had been collecting and paying their sales tax separately. The CIT(A) and also the Tribunal rightly hel....
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....deletion of disallowance on account of nondeduction of tax on reimbursement of expenses following the order for assessment years 2007-08 and 2008-09. 44. The Ld. DR relied upon the Assessment Order and Order of the TPO, but could not distinguish the decision of the Tribunal. 45. We have heard both the parties and perused the material available on record. The Tribunal held in A.Ys. 2010-11 and 2011-12 as under: "222) We have heard the rival contentions. We note that similar issue relating to disallowance relating to re-imbursement of professional expenses was deleted by the Tribunal in the assessee's own case for assessment year 2007-08 which was followed in assessment year 2008-09. The relevant observations of the Tribunal for assessment year 2007-08 are as under: "35.8. It is the case of the assessee that it had reimbursed the expenses incurred by various consultants and vendors on travelling and out of pocket expenses. It is also claimed that out of an amount of Rs. 10.68 lacs expenses to the extent of Rs. 6.01 lacs were made after verifying the supporting vouchers for claims raised by the vendors. Balance amount of Rs. 4.66 lacs were based on self certifi....
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....d License 'B' agreement, were entered into between the assessee and HM. In terms of the license agreement for License 'A' Products, the assessee received the following rights: • Rights to use the technology, design and drawings for manufacture of 18 specific models of motor cycles till perpetuity • Right to make modifications to the technology, design and drawings • Unrestricted right to export such products in the overseas markets. Since the aforesaid right/license was acquired by the assessee in perpetuity, compensation by way of Royalty and License fee paid under the aforesaid agreement was suo motu capitalized by the assessee. In terms of License B Products Agreement the assessee was provided right to manufacture 4 new models (namely (a) Passion XPRO, (b) Ignitor, (c) Maestro and d) Impulse) using the technology provided by HM on payment of lump sum model fee and royalty. The assessee after separation from Honda Motors Corporation, Japan, was not in a position to independently develop and launch new models of motorcycles immediately. Therefore, in order to survive in a highly competitive market the assessee requested HM to provide right....
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....del Fees are not capital expenditure. There are no ownership rights but only limited right to use in License B Products Agreement. During the currency of the agreement, the assessee only had a limited right to use the technology of Honda. Ownership/proprietary rights in the technical know-how continued to vest in Honda and the assessee was not authorized to transfer, assign or convey the know-how/technical information to any third party as the assessee only acquired limited right to use and exploit the know-how. As regards to Non-exclusive license, the Ld. AR submitted that the said right vested with the assessee was not exclusive in as much as, in terms of Article 2 and article 9 of License B agreement. Honda reserved the right to provide technology to its affiliates to manufacture motorcycles. The Ld. AR further submitted that aforesaid limited right were available to the assessee and the fact of such rights being not exclusive can be gathered from the following clauses of the agreement:- i) ARTCILE 2 - Grant of License and Exclusivity ii) ARTICLE 3-No sublicense iii) ARTICLE 9 - Use and Disclosure of Technical Information iv) ARTICLE 13 - Term....
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....ip rights therein, the payment made would be regarded as revenue expenditure. • CIT v. Ciba India Ltd.: 69 ITR 692 (SC) • CIT vs. British India Corp. Ltd. [1987] 165 ITR 51 (SC) Alembic • Chemical Works Co. Ltd. v. CIT: 177 ITR 377 (SC) • Shriram Refrigeration Industries Ltd. v. CIT: 127 ITR 746 (Del HC) • Triveni Engineering Works Ltd. vs. CIT : 136 ITR 340 (Del) • Addl. CIT vs. Shama Engine Valves Ltd. : 138 ITR 217 (Del) • CIT vs. Bhai Sunder Dass & Sons P. Ltd. : 158 ITR 195 (Del) • CIT vs. Lumax Industries Ltd. : 1'73 Taxman 390 (Del) Shriram Pistons & Rings Ltd. vs. CIT : 171 Taxman 81 (Del)-" • CIT vs. Shri Ram Pistons and Rings Ltd. : 220 CTR 404 (Del) • Goodyear India Ltd. vs. ITO : 73 ITD 189 (Del)(TM) • ITO vs. Shivani Locks : 118 TTJ 467 (Del) Since no proprietary rights in the know how is vested in the assessee, the assessee being a mere licensee with limited rights to use the technical assistance during the currency of the agreement, there is no explicit or implied intention to transfer or create ownership in the technic....
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....as been dismissed by the High Court. In the assessment year 1999-00, appeal filed by the Revenue against the order of the High Court has been dismissed by the Hon'ble Supreme Court. The Delhi Bench of the Tribunal in assessee's own case for assessment year 2001-02. vide order dated 27.03.2009 in ITA No. 2067/Del/2006 allowed the payment of model fee following the same order for assessment year 1996-97. The same treatment has been given by ITAT in respect of AY 2006-07, AY 2007-08, AY 2008-09, AY 2010- 11 and AY 2011-12. The High Court has affirmed the order passed by the Tribunal in assessment year 2000-01 to 2002-03 in 372 ITR 481. The Ld. AR submitted, that when model fees, payment for which is made through the same agreement is accepted as revenue expenditure, the nature of royalty cannot be given any different treatment and therefore, no portion thereof needs to be disallowed as being capital in nature. Thus, the Ld. AR submitted that for the aforesaid cumulative reasons, no portion of the royalty expenditure or Technical Guidance fees incurred by the assessee calls for being disallowed. 49. The Ld. DR relied upon the Assessment Order and Order of the TPO but could n....
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....ical information in the assessee. In view of the aforesaid, expenditure by way of royalty, technical guidance fee and model fees incurred by the assessee was allowable revenue deduction as held in the decision given by the Tribunal for A.Ys. 2010-11 and 2011-12. The issue is squarely covered by the said decision. Therefore, Ground No. 14 to 14.6 are allowed. 51. As regards to Ground No. 15 to 15.2 relating to gains from sale of investments income treated as business income amounting to Rs. 288.01 crores, it can be seen that the assessee invests surplus funds arising in the course of business under various modes of investment like mutual funds/PMS, shares, etc. The gains realized from sale of such various instruments, amounting to Rs. 287,41,73,781/- during the relevant previous year, were disclosed under the head 'capital gains.' The Assessing Officer held that, having regard to the magnitude/volume of total turnover from sale of investments, the aforesaid income was taxable under the head 'business income'. 52. The Ld. AR submitted that the aforesaid issue is squarely covered in favour of the assessee by the decision of the Delhi bench of the tribunal in the assessee's o....
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....2007-08 are as under: "65.20. The issue that emerges for consideration is whether the gains that arose to the assessee from investment in debt mutual funds/PMS/ shares are to be taxed under the head "business income" or under the head "capital gains". .................... 65.28. Now, we proceed to analyze the facts of the present case in the light of the principles laid down by the Courts (Supra) for determining the nature of the transaction vis a vis capital gains vs. business income: Intention of the assessee at the time of the purchase of shares: 65.29. The business of the assessee is not to deal in shares and securities. The investment was made with a view to earn capital appreciation and to use the spare fund optimally instead of keeping it in the banks. For the year under appeal, the assessee earned dividend income of Rs. 22.61 crores from investments held in shares and mutual funds. Treatment in the books of accounts: 65.30. It is an undisputed fact that the assessee had treated the transaction as investment in its books of accounts and not as stock in trade. The assesse has shown the investments in shares both a....
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....he assessee is undertaking the trading of stocks and mutual funds regularly and systematically. However, we observe that there is not much frequency in sale/purchase of investments, from analysis carried out at page 526 of objections in Form 35A. It is not the case that the assessee has indulged in regular trading in shares on day to day basis. 65.38. The Mumbai Bench of the ITAT in the case of Janak S. Rangwala (11 SOT 627) observed that mere volume and magnitude of transaction will not alter the nature of transaction if the intention was to hold the shares as investment and not in stock in trade. Investments in mutual funds - 65.39. Out of the total income earned from mutual funds, almost 67.34% of the total income earned from investments made in mutual funds was for a period of more than one year. Investments in shares - 65.40. Investment in shares was primarily made either through PMS or under Initial Public Offer. Under PMS, the company advances funds to the Portfolio Manager, who in turn makes investment in various shares. In substance the investments under PMS are similar to investment in mutual funds. The assessee, reiterated that it is only inter....
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.... the head 'capital gains.' The issue is identical in the AY 2010- 11 and 2011-12 wherein the Tribunal allowed this issue in favour of the assessee. Therefore, Ground No. 15 to 15.2 are allowed in favour of the assessee. 55. As regards to Ground No. 16 to 16.7 the same are relating to disallowance under Section 14A as per Rule 8D amounting to Rs. 66.35 lacs. During the relevant previous year, the assessee company earned dividend/interest income of Rs. 11.54 crores from investments in shares, bonds, and mutual funds, which was exempt under section 10(34)/10(35)/10(15)(iv)(h) of the Act. In view of the provisions of section 14A of the Act, the assessee suo moto disallowed Rs. 65.23 lacs in the return of income, being salary of two employees of the company who were involved in treasury function along with portfolio management fee. In the assessment order, the Assessing Officer, did not accept the method of disallowance computed by the assessee under section 14A and made further disallowance of Rs. 66.35 lakhs invoking provisions of Rule 8D of the Rules after reducing the suo moto disallowance made by the assessee in the return of income. 56. The Ld. AR submitted that as per secti....
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....xman 370 (Cal) • CIT v. Caroline Investment Ltd.: 87 Taxman 238 (Cal) • CIT v. Kanoria Investment (P) Ltd.: 232 ITR 7 (Cal) • CIT vs. Hotel Savera: 239 ITR 795 (Mad) • Smt. Chanchal Katyal v. CIT: 298 ITR 182 (All.) • CIT v. Reliance Utilities and Power Ltd.: 313 ITR 340 (Bom) Reliance is also placed on the following cases, wherein, the Courts have repeatedly held that interest expenditure cannot be disallowed under section 14A of the Act, where the assessee had sufficient surplus funds and there was no finding by the assessing officer of any direct nexus of borrowed funds with investments: • Godrej & Boyce Manufacturing Co. Pvt. Ltd. VS DCIT 394 ITR 449(SC) • Pr. CIT vs. GMM Pfaulder Ltd.: ITA No. 506 of 2017 dated 31/7/2017(Guj) • CIT v. Max India Ltd.: 388 ITR 81 (P&H) • CIT vs. Suzlon Energy Ltd.:[2013J 215 Taxman 272 (Gujarat) CIT v. Reliance Utilities and Power Ltd.: 313 ITR 340. • CIT vs. M/s. Ashok Commercial Enterprises: ITA No. No.2985 of 2009 (Bom) • Lubi Submeribles Ltd.: ITA No.868 of 2010 (Guj) • CIT vs. K. Rahe....
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....onsistent method of computing disallowance u/s 14A by attributing expenditure incurred at the Treasury Department towards earning of exempt dividend income. The appellant has also given justification of nexus of such expenditure incurred at Treasury Department with portfolio management activity considering that the portfolio management is not the main business function of the appellant. The appellant is a company whose core business function is that of manufacturing and selling two-wheelers, having a turnover of Rs. 16,000 crores approximately. The investments are made by the appellant as part of its cash management policy in order to better utilize the idle / surplus funds. We have also decided on the aforesaid aspect in ground of appeal no. 20 that the investment activity as part of its cash management function does not constitute business. In view of the same, we are of the view that no additional expenditure is required to be incurred more specifically of the management in investing surplus funds as per the cash management policy. The assessing officer has also not, on the basis of any tangible evidence/findings, pointed out incurrence of such expenditure. The legal position qu....
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....ut by the AO, CIT(A) disallowed the entire deduction of expenditure. That view of the CIT(A) was clearly untenable and rightly set aside by the ITAT. Therefore, on facts, the Punjab and Haryana High Court has arrived at a correct conclusion by affirming the view of the ITAT, though we are not subscribing to the theory of dominant intention applied by the High Court. It is to be kept in mind that in those cases where shares are held as 'stock-intrade', it becomes a business activity of the assessee to deal in those shares as a business proposition. Whether dividend is earned or not becomes immaterial. In fact, it would be a quirk of fate that when the investee company declared dividend, those shares are held by the assessee, though the assessee has to ultimately trade those shares by selling them to earn profits. The situation here is, therefore, different from the case like Maxopp Investment Ltd. where the assessee would continue to hold those shares as it wants to retain control over the investee company. In that case, whenever dividend is declared by the investee company that would necessarily be earned by the assessee and the assessee alone. Therefore, even at the time of invest....
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....ssee pays model fee to Honda to obtain design / know-how to manufacture a new model of two-wheeler. The said expenditure is incurred prior to commencement of production of the new model. The assessing officer held that expenditure incurred by the assessee towards model fee is directly related to manufacture of new models of two-wheelers and. therefore, needs to be attributed to the value of closing stock of finished goods of two-wheelers. Accordingly, the assessing officer on proportionate basis, worked out a sum of Rs. 47,79,000/- out of depreciation on model fee debited to the profit and loss account, as attributable to the value of closing stock and made addition of the said amount to the income of assessee. 62. The Ld. AR submitted that the aforesaid issue is squarely covered in favour of the assessee by the decision of the Delhi Bench of the Tribunal in assessee's own case for assessment years 2010-11 and 2011-12 wherein following the order for assessment year 2008-09, similar disallowance of depreciation on model fee was deleted by the Tribunal on the ground that expenditure was incurred on new model fees prior to commencement of production of new models of two wheelers, a....
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....was incurred prior to commencement of production of new model and the same was neither incurred during the manufacturing of new model nor model fee expenditure is directly related to manufacture of new models. In this factual aspect and circumstances, we hold that the assessee incurred expenditure on new model fees prior to commencement of production of new models of two wheelers, even otherwise this exercise would be revenue neutral in a broader perspective as the same adjustment would be required to be done in the opening stock of finished goods for the year under consideration. More so, when the assessee has followed a particular mode of accounting for this expenditure which was accepted by the Revenue, then the department cannot take a different stand in the succeeding year to make an addition in this regard. We are unable to see any valid ground to 'accept' a deviated stand of the Revenue on the issue, which in a broader sense, is revenue neutral, then no adjustment is called for in this regard. We hold that findings of the AO are not sustainable and we set aside the same. Hence, we allow ground no.58 to 58.1 of the assessee." Accordingly, respectfully followi....
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....cient evidence to establish incurrence of actual expenses, which were required to be supported with bills/invoices of factual expenditure incurred by the employees. 66. The Ld. AR submitted that the aforesaid issue is squarely covered in favour of the assessee by the decision of Delhi bench of tribunal in the assessee's own case for the AY 2007-08 and 2008-09, wherein the Tribunal held that disallowance cannot be made merely on the basis that vouchers were not produced by the employees, which has been reaffirmed by the Tribunal in the order dated 24.10.2016 passed for the assessment years 2010-11 and 2011-12. 67. The Ld. DR relied upon the Assessment Order and Order of the TPO, but could not distinguish the decision of the Tribunal. 68. We have heard both the parties and perused the material available on record. The Tribunal held in A.Ys. 2010-11 and 2011-12 as under:- "226) We have heard the rival contentions. We note that similar issue relating to disallowance relating to re-imbursement of foreign travelling expenses to directors/employees was deleted by the Tribunal in the assessee's own case for assessment year 2007-08 which was followed in assessment year....
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....enses like local conveyance, telephone bills, etc. The employees are only required to submit details of expenditure incurred in specified form, on basis of which travel bill is settled. The Tribunal in A.Ys. 2010-11 and 2011-12 and earlier years held that disallowance cannot be made merely on the basis that vouchers were not produced by the employees, Thus, the facts have not changed in this year as well, therefore, the issue is squarely covered by the decision of the Tribunal for earlier Assessment Years. Therefore, Ground No. 18 is allowed in favour of the assessee. 69. Ground No. 19 is relating to expenses incurred on advertisement on death anniversary of Late Shri Raman Munjal amounting to Rs. 42.72 lacs. The assessee incurred expenditure of 38.92 lacs for advertisement in newspaper given to remember the death anniversary of Late Raman Munjal, being the founder of the assessee-company. The Assessing Officer disallowed aforesaid expenditure claimed by assessee on the ground that same was personal expenditure being related to promoters' family and was not incurred for the purpose of business. 70. The Ld. AR submitted that the aforesaid disallowance made by the Assessing Off....
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....me effect is the expenditure incurred for paying tribute to an ex-employee, who had assumed substantial roles and responsibilities to foster the business of the appellant company. Accordingly, any expenditure incurred by the company to pay him homage satisfies the test of business / commercial expediency and, thus, cannot be said to be not incurred for the purpose of business. More so when in past assessment years the similar expenditure have been incurred by the assessee but have not been disallowed by the Ld. assessing officer and this fact has not been controverted by the Ld. departmental representative even on the principle of consistency also we are not inclined to upheld the disallowance. In that view of the matter, we do not agree with the findings of the assessing officer in disallowing the expenditure of Rs. 3 465552/- incurred for giving advertisements in newspaper to commemorate Mr. Munjal's death anniversary. In the result ground No. 24 of the appeal of the assessee is allowed." The aforesaid disallowance made by the Assessing Officer in the preceding years, viz. Assessment Year 2010-11 and 2011-12 has been deleted by the Tribunal vide consolidated order dated 24.10.....
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....the commission paid to directors with reference to percentage of profits of the company for the services rendered as per the terms of appointment, constitutes part of the remuneration package, and in the absence of any disallowance on other components of remuneration paid to such director, the commission cannot, ipso facto be classified as payment of profit/dividend covered within the exception provided under Section 36(1)(ii) of the Act. It is also pertinent to mention that no appeal has been filed by the department before the High Court. The issue is also squarely covered in favour of assessee by the order of Delhi Bench of the Tribunal in the case of group concern of the assessee company, viz. Hero Honda Finlease Ltd. v. Addl. CIT: ITA No 4329/Del/2010 (Del) relating to assessment year 2005-06, which has been further affirmed by the Delhi High Court, vide order dated 12.08.2014 passed in ITA No. 305/2014 wherein the appeal of the Revenue was dismissed. 75. The Ld. DR relied upon the Assessment Order and Order of the TPO, but could not distinguish the decision of the Tribunal. 76. We have heard both the parties and perused the material available on record. The Tribunal held....
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....n section 36(1)(ii) of the Act. In the case of a company, recipient is entitled to dividend with reference to percentage of his/her shareholding in the company. In the present case, Mr. Munjal held 0.02% of shares in the appellant company, for which separate dividend was received as per the total amount of dividend declared by the company to its all shareholders. The provisions of section 36 provides that "36. (1) The deductions provided for in the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in section 28- ii) any sum paid to an employee as bonus or commission32 for services rendered, where such sum would not have been payable to him as profits or dividend if it had not been paid as bonus or commission;' In the present case the assessee has paid Rs. 29.50 crores to the managing director of the company as commission whereas the managing director is just holding shares of the company of 0.02% therefore it cannot be said that a sum of Rs. 29.50 crores would have been paid to that shareholder holding 0.02% as dividend. Therefore The impugned amount of commission was separate and was not ....
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....osition and the factual findings recorded by the Tribunal, we are unable to say that the Tribunal erred in holding that the bonus payment was allowable u/s.36(1)(ii) of the Act. The substantial questions of law are answered in the affirmative, against the revenue and in favour of the assessee for both the years." We also agree with the decision taken by the Tribunal in the case of appellant group company, viz., Hero Honda Finlease Ltd. Vs. Addl. CIT : ITA No.4329/Del/2010 relating to AY 2005-06, wherein the similar disallowance was deleted. In view of this we are of the opinion that in making payment of commission to the managing director of the company of 29.50 crore the provisions of section 36 (1) (ii) of the income tax act cannot be applied. Furthermore regarding the commercial expediency of the above sum the such commission was decided by the remuneration committee constituted by the company in terms of the provisions of the listing agreement entered into with various stock exchanges. Even otherwise the commission's leading to the percentage of the profit earned by the company has for the companies act and there is an outer limit which is also been fixed in the terms ....
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....le asset in the nature of 'business or commercial right' which is eligible for depreciation under Section 32(1)(ii) of the Act. 78. The Ld. AR submitted that the Assessing Officer erred in not giving effect to such binding directions of the DRP. 79. The Ld. DR relied upon the order of the TPO and Assessing Officer. 80. We have heard both the parties and perused all the records. It is pertinent to note that the DRP, allowed the assessee depreciation on the premium paid for acquiring of leasehold rights of land, considering the same as an intangible asset in the nature of 'business or commercial right' which is eligible for depreciation under Section 32(1)(ii) of the Act. This direction was not at all considered by the Assessing Officer. Therefore, we direct the Assessing Officer take into account the direction of the DRP and pass necessary order after giving hearing to the assessee by following principles of natural justice. Therefore, we remand back this issue to the file of the Assessing Officer. Thus, Ground No. 21 is partly allowed for statistical purpose. 81. Ground No. 22 to 22.1 are relating to disallowance of expenses incurred on account of 'Corporate Social Resp....
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.... one of the flagship companies in India. In the course of carrying of business, the role of the appellant is not restricted to merely earning profit but also discharging certain community related obligations, with a larger intent of fostering its goodwill/reputation. We have gone through the details of various expenses incurred by the assesse which were debited under the head "Corporate social responsibility" and elaborated in detail in the submissions made by the Ld. Counsel above. The said expenses although were not incurred towards earning profit, but were incurred out of commercial expediency and were directly/indirectly related to its business like earning goodwill/display of name, employee's welfare, etc. The said expenses therefore, in our view, satisfy the test of being allowable as business deduction under section 37(1) of the Act. We draw support for the aforesaid conclusion from the following decisions of the various Tribunals/High Courts : (i) In the case of Mysore Kirloskar Ltd. vs. CIT: 166 ITR 836 (Kar.), the assessee started school for education of children of its employees for attracting technocrats and men of managerial skill to its industry. Donations ma....
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....ecision in the case of Mahindra & Mahindra (supra) was further followed by the Bombay High Court in the case of CIT vs. Mahindra & Mahindra: 284 ITR 679. (iii) In the case of CIT v. India Radiators Ltd.: 236 ITR 719 (Mad.), the Madras High Court observed as under: "The finding of the Tribunal is that by making the contribution to the Panchayat for upgrading the elementary school, the assessee-company was assured by the school management that it would give preference in the matter of admission to the children of the employees in the said school. The Tribunal placed reliance on a letter from the President of the Building Committee and Parents Teacher Association of the school. It is well settled that if a certain sum of money was expended for the education of the children of the employees of the assessee-company, it should be regarded as staff welfare expenditure, particularly in view of the fact that in these days it is very hard to get admission in educational institutions. The employees of the assessee are given the satisfaction by the donation made by the assessee that their employers have taken full care of the education of their ward and such a mental satisfac....
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....odwill of the local community, as also with the regulatory agencies and the society at large, thereby creating an atmosphere in which the business can succeed in a greater measure with the aid of such goodwill. Monies spent for bringing drinking water as also for establishing or improving the school meant for the residents of the locality in which the business is situated cannot be regarded as being wholly outside the ambit of the business concerns of the assessee, especially where the undertaking owned by the assessee is one which is to some extent a polluting industry. The Tribunal was right in allowing the deduction of the entire expenditure of Rs. 15,32,000 as business expenditure." (vi) In the case of Hindustan Petroleum Corpn. Ltd. Vs. DCIT 96 ITD 186 (Bom.), the assessee company incurred certain expenditure towards implementation of 20 point programme. The expenditure was incurred to improve the conditions of SC/ST in pursuance of national policies and to help acceleration of all round development of villages by providing assistance to educated unemployed to earn a living. The assessing officer held that since the expenditure was in the nature of donation, the same ....
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....was solely for the welfare of the oppressed classes of society, for which even the Constitution of India sanctions positive discrimination and for contribution to all around development of villages, which has always been the central theme of Government's development initiatives. An expenditure of such a nature cannot but be, 'a concrete expression of care and concern for the Society at large and an expenditure to discharge the responsibilities of a 'good corporate citizen which brings goodwill of with the regulatory agencies and society at large, thereby creating an atmosphere in which the business can succeed in a greater measure with the aid of such goodwill' . Just because the expenditure was voluntary in nature and was not forced on the assessee by a statutory obligation, it could not cease to be a business expenditure. 236) Further, the insertion of explanation 2 to section 37(1) has been inserted w.e.f. 01/04/2015 and shall be applicable for the assessment year 2015 - 16 onwards and therefore same does not apply to the assessment year in question before us in this appeal. In view of the above we agree with the findings of the ld DRP and dismiss the gr....
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....the assessee, attributed in the ratio of total profits of the eligible undertaking to total sales of that undertaking, on ad-hoc basis, on the ground that manufacturing activity to the aforesaid extent of sales was outsourced and. therefore, proportionate amount of profit derived there from was not eligible for deduction under section 80IC of the Act. 86. The Ld. AR submitted that the aforesaid issue stands squarely covered in favour of the assessee inasmuch as the Tribunal while adjudicating upon the issue of disallowance u/s 80IC on account of job work/ outsourcing of manufacturing activity in the immediately preceding assessment years, i.e. AY 2010-11 and AY 2011-12, held that outsourcing of certain intermediary processes or procurement of finished components in the process of manufacture does not tantamount to outsourcing of manufacturing activities and thus would not hamper the claim of deduction of the assessee company under Section 80 IC of the Act. It is also pertinent to mention that no appeal has been filed by the Department before the Hon'ble Delhi High Court. 87. The Ld. DR relied upon the Assessment Order and Order of the TPO, but could not distinguish the decisi....
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....AY 2010-11 and AY 2011-12, held that outsourcing of certain intermediary processes or procurement of finished components in the process of manufacture does not tantamount to outsourcing of manufacturing activities and thus would not hamper the claim of deduction of the assessee company under Section 80 IC of the Act. It is also pertinent to mention that no appeal has been filed by the Department before the Hon'ble Delhi High Court. These fact are identical with the present Assessment Years. The issue is squarely covered in favour of the assessee by the Tribunal's order for A.Ys. 2010-11 & 2011-12. Besides this the Revenue has accepted this issue and has not challenged the same in Hon'ble High Court. Thus, this issue attains finality. Therefore, Ground No. 23 to 23.1 and 24 are allowed in favour of the assessee. 89. Ground No. 25 is regarding disallowance u/s 80IC on account of violation with respect to inter unit transfer as per Form No. 10CCB amounting to Rs. 1.18 crores. The assessee company had during the financial year 2008-09 on 07.04.2008 started commercial production at new manufacturing facility at Plot No. 3, Sector 10, Integrated Industrial Estate, Ranipur. S1DCUL, Har....
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....on various grounds, no further disallowance for the aforesaid amount of Rs. 1,18,00,000/- was made in the assessment order. 90. The Ld. AR submitted that identical disallowance made by the Assessing Officer in the immediately preceding Assessment Years, i.e. Assessment Year 2010-11 and Assessment Year 2011-12 has been deleted by the Tribunal vide consolidated order dated 24.10.2016, wherein it was held that the assessee had given all the necessary details and fulfilled all statutory conditions for the claim of deduction under Section 80IC of the Act. Further, the Tribunal held that even otherwise, entire claim of deduction could not be denied if some incomplete details are furnished by the assessee. It is also pertinent to mention that no appeal has been field by the Department before the High Court. 91. The Ld. DR relied upon the Assessment Order and Order of the TPO, but could not distinguish the decision of the Tribunal. 92. We have heard both the parties and perused the material available on record. The Tribunal in A.Ys. 2010-11 and 2011-12 held as under: "136) We have heard the rival contentions. The case of the assessing officer was that the appellant is not....
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....that the DRP had also agreed with the aforesaid view and had directed the assessing officer to not deny the benefit of deduction under section 80IC on the aforesaid ground. The DRP had set aside the matter to the file of the assessing officer to examine whether other conditions precedent for claiming deduction u/s 80IC were satisfied by the appellant or not. The aforesaid findings of the DRP have not been challenged by the assessing officer in appeal before us. Such findings have, thus, become final, which could not have been overridden by the assessing officer in the assessment order. Accordingly, for the aforesaid additional reason also, we hold that deduction u/s 80IC cannot be denied for alleged failure to comply with the aforesaid three conditions specified in the assessment order. As regards compliance of conditions precedent for claiming deduction u/s 80IC, we note that the appellant during the course of set-aside proceedings had point-wise given entire details /information as to how it satisfied each condition precedent for claiming deduction under said section. The claim of deduction of the appellant is also duly supported with the audit report in Form 10CCB issue....
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....le units from third parties and were transferred to the eligible unit at material cost. Freight charges on transfer of the aforesaid items were always booked at the receiving unit. In the assessment order, the assessing officer applied the provisions of section 80IA read with section 80IC of the Act and disallowed deduction under section 80-IC by an amount of 1018,25,50,847/- holding that for the purpose of computing deduction under the latter section, inter-unit transfer of goods should have been recorded at market price, instead of cost price as carried out by the assessee. 94. The Ld. AR submitted that the aforesaid issue stands squarely covered in favour of the assessee, by the order dated 24.10.2016 passed by Tribunal in the immediately preceding assessment years, i.e. AY 2010-11 and AY 2011-12 wherein identical disallowance made by the assessing officer has been deleted. The Tribunal, in allowing the claim of the assessee under section 80-IC of the Act, held that for the purpose of computing market price of inter-unit transfer of goods, when the non-eligible units procured goods at market price from third party vendors and supplied the same to the eligible u n i t at the s....
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....reight cost, which as stated has been borne by the eligible unit. Further, the provisions of section 80IA(8) as discussed in ground of appeal no. 26 (supra) provides for inter unit transfer at market price. The market price of the components procured by the non-eligible units from third parties/independent vendors do not undergo any change at the time of further transfer by the noneligible unit to the eligible unit. In other words, the market price of such components at which the same was procured by non-eligible units remains constant. Accordingly, even by applying the provisions of section 80IA(8), in our opinion, there can be no substitution of the price at which goods are debited by the eligible unit in its independent books of account. Similarly, with respect to components having value of Rs. 6.34 crores, which were transferred by the non-eligible unit to the eligible unit at Haridwar after nominal processing, too, in our opinion, does not result in enhancement of any market price of such goods; in other words, in a free market condition such goods would have also been sold at the same price at which they have been transferred by the non-eligible unit to the eligible unit. In ....
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.... for purpose of computing profits of the eligible unit and corresponding claim of deduction under section 80IC of the Act. The AO held that profits are derived by the assessee-company on account of three assets, viz., (1) manufacturing assets, (2) brand assets and (3) marketing assets whereas deduction under section 80IC is available only on profits derived from business of manufacturing of specified articles or things. It was further observed that the manufacturing and marketing activities were carried out at Head Office and. therefore, the brand developed was not owned by the eligible unit, which came into existence much later than the existence of the assesseecompany as a whole. Thus, part of the profits earned by eligible unit should have been attributed to advertisement/marketing activities carried out by head office. In order to attribute profits to marketing/advertisement activities, AO computed rate of net profit for the financial year 1984-85. 98. The Ld. AR submitted that the issue is squarely covered in favor of the assessee by the order dated 24.10.2016 passed by the Tribunal for immediately preceding assessment years, i.e. AY 2010-11 and AY 2011 -12, wherein identic....
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....e not derived from the business of manufacture of specified articles or things for Rs. 223,25,24,263/-. During the relevant previous year, the eligible unit at Haridwar earned following other incomes, which were credited in the Profit and Loss Account of that unit: S. No. Name/Type of Other Income Amount 1 Interest on loan given at subsidized rates to the employees 779,749 2 Interest on loan provided for working capital support to vendors 24,736,814 3 Interest on Security despotis 1,054,380 4 Freight Recovery from Customers 2,062,946,732 5 Misc Income Vendors-Cash discounting 143,006,588 TOTAL 223,25,24,263 In the return of income, the assessee claimed deduction under section 80IC on the aforesaid 'other incomes' since the said receipts had direct and immediate nexus with the business of manufacturing and selling of specific articles or things. The assessing officer, without considering the nature of each of the aforesaid receipts, held that the aforesaid incomes were not derived from the business of manufacturing of articles or things and were, therefore, taxable under the head "income from other so....
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....come earned from loan given at subsidized rate to employees has first-degree nexus with the business operations carried on by the eligible unit. The appellant is engaged in the business of manufacturing two-wheelers and is not engaged in the activity of giving loans and advances to earn interest income. It is not the case of appellant or the assessing officer that surplus funds were given to the employees to earn interest income. The loans/advances to employees under consideration was a measure of incentive / perquisites to the employees involved in carrying on the business of manufacturing. The source of such income is, thus, not the activity of giving loan, but benefit extended to employees engaged in the business. The first-degree nexus of such income, in our view, is the eligible business carried on by the appellant. Therefore, such income would be eligible for deduction u/s 80IC of the Act. The action of the assessing officer on this account is thus reversed. 2. Interest on loans provided for making capital support to vendors The present issue is similar to the immediately preceding issue. In our view, loan has been given to vendors to provide uninterrupted s....
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....uction under section 80IC on fluctuation gain of Rs. 34,13,666, the appellant has pointed out that there was some mistake in the aforesaid claim which have been rectified by the assessing officer in the order dated 07.05.2015 passed under section 154 of the Act. Accordingly we do not render any finding on the aforesaid issue. As regards gain arising on reinstatement of liabilities in foreign currency against import of goods in our view is similar to the issue of cash discount on purchases dealt supra. Similar to our findings given on the said issue, considering that fluctuation gain on import of goods is going to directly reduce foreign exchange liability to be discharged against import of goods being debited in the profit and loss account to arrive at the profits of the eligible business, such benefit has direct nexus with the said business, which is eligible for deduction under section 80IC of the Act. We draw support for the aforesaid conclusion from the decision of the Bombay High Court in the case of CIT v. Rachna Udyog : 233 CTR 72. Accordingly the action of the assessing officer on this ground is reversed and we hold that assessee is eligible for deduction under section 80 I....
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....on and Pollution Control Board The assessee for the purpose of establishing a factory/plant, as per the Factory Act, 1948, was required to obtain permission/license from the appropriate authority, in accordance with local State Government Factory Rules, i.e., Uttar Pradesh Factory Rules, 1950, which were applicable in the present case. No separate license was required to carry on the business ol manufacture of two wheelers as also to claim deduction for such activity under section 80IC of the Act. The only permission required was the aforesaid license to work as factory, which was submitted along with audit report in Form 10CCB read with Rule 18BBB(4) of the Rules. In view of the aforesaid, the assessee claimed deduction under section 80IC of the Act during the relevant assessment year. In the assessment order, the assessing officer disallowed the entire amount of deduction claimed under section 80IC of the Act. on the ground that the following conditions were not satisfied by the assessee: * The assessee failed to comply with Rule 18BBB of the Rules inasmuch as the assessee did not obtain any approval for carrying on the business of manufacturing two-wheelers in the St....
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....ay, as contained in the factory license. As regards the first condition prescribed in Rule 18BBB regarding approval to carry on the eligible business, it was explained by the appellant that for the purposes of carrying on business of manufacturing two-wheelers other than obtaining factory license as per the Factory Act, 1948, no other approval / permission was required from any Central / State government under any law. No such requirement has even been prescribed by the assessing officer. As regards the factory license, the appellant had obtained the said license from the appropriate state authority which was attached along with audit report in Form 10CCB in compliance of Rule 18BBB(4) of the Rules. Considering that no license was required to be obtained to carry on the eligible business under any law, the appellant could not have been said to violate the provisions of said Rule. As regards the other two failures, relating to state industrial policy alleged by the assessing officer, the satisfactions of such conditions have not been stipulated as a condition precedent under any provision of section 80IC of the Act. The provisions of section 80IC are self-contained....
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....ssessment Years. The issue is squarely covered in favour of the assessee by the Tribunal's order for A.Ys. 2010-11 & 2011-12. Besides this the Revenue has accepted this issue and has not challenged the same in Hon'ble High Court. Thus, this issue attains finality. Therefore, Ground No. 29 to 29.4 are allowed in favour of the assessee. 109. Ground No. 30 to 30.1 are relating to disallowance of expenses incurred on repair and maintenance of various assets alleging to be capital expenditure amounting to Rs. 3.12 crores. During the relevant previous year, the assessee incurred expenses of Rs. 3,34,39,108/- for renovation of its various offices on account of routine repair and maintenance expenses of various existing assets used for the purposes of business, which were claimed revenue deduction. The details of aforesaid expenses were submitted to the Revenue authorities. The AO disallowed aforesaid expenditure aggregating to Rs. 3,34,39,108/-claimed by assessee, after allowing depreciation thereon @ 10% on the ground that the same was not in the nature of "current repairs'" but is capital in nature and thus was not allowable deduction in terms of provisions of section 30(a)(ii) of th....
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....us existing assets which did not result in any manner in increase of production capacity and the expenses were incurred to facilitate a smooth running of existing business operations. Ld. Counsel of the assessee also submitted that the expenses incurred on routine repair and maintenance were in relation to various existing assets of the assessee company used for the purpose of business only. Ld. Counsel of the assessee further submitted that the expenditure of Rs. 3,60,409/- was incurred in respect of existing asset i.e. DGH House by way of renovation which include replacement of roof, brick work, flooring and plastering etc. Ld. Counsel of the assessee further submitted that the said expenditure are revenue in nature and has been accepted by the AO in the earlier years. 52. Ld. DR replied that when the assessee failed to file any vouchers to establish or substantiate the claim of expenditure on repair and maintenance, then the AO has no option but to disallow the same. The DR further submitted that when the assessee is beneficiary of the benefit of enduring nature, then the AO is justified to treat the same expenses as capital in nature. The DR supported the orders of the....
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....e in favour of Revenue. Accordingly, in conformity with the order of DRP, an addition of Rs. 17,10,286 is made to the total income of the assessee. " 54. In view of above conclusion of the AO, we clearly observe that the AO has observed that "though inner items appear to be in the nature of repairs but no vouchers were available to the Special Auditor during the course of audit or submitted to the AO in response to the reply of final show cause." Hence, we are of the opinion that it is a well-settled legal proposition that the repairs and maintenance expenses which does not bring any benefit of enduring nature or create any new asset for the assessee the then the same expenses should be allowed. At the same time, we also observe that the onus is on the assessee to establish that the expenses were incurred on the existing assets of the assessee which did not bring any benefit of enduring nature or create any new asset for the assessee and the assets were used for the purpose of business only. In the present case, the assessee made a claim of Rs. 1800301/- which consist of provision of Rs. 1439892/- for repair expenses and second part of Rs. 360409/- said to be incurred in respect of....
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....t lower rate or wrong provision (payment made to M/s. G2 RAMS India Pvt. Ltd. for event organization) amounting to Rs. 24.40 crores. The assessee had incurred expenditure on account of display of hoardings for advertisements and arrangement of various events for publicity. All arrangements for this event were done by M/s G2 RAMS India Pvt. Ltd. which included arrangement for transfer to hotels from airport, refreshments, F&B etc along with arrangement of various artists, sound & light, decoration, ambulance, live band, etc. The said company was also responsible for staging green rooms, set and pros for theatres, light and sound for theatre, projection systems etc. The said company was entrusted with the overall responsibility for organizing the event. The contract entered into with the said company was a composite contract for organizing an event, involving various arrangements for carrying out work of organizing the event. In view of the above, tax was deducted at source u/s 194C of the Act before remitting the payment under that Section. The Assessing Officer held that by organizing an event, M/s G2 RAMS India Pvt. Ltd. had rendered to the assessee service in the nature of profes....
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....ithin the meaning of contract for carrying out work u/s 194C or within the meaning of technical or professional services u/s 194J of the Act. Firstly, dwelling upon the applicability of section 194J, the words "professional or technical services" used in section 194J have been defined in Explanation thereto. The aforesaid Explanation provides an exhaustive definition of the word "professional services" as services provided in the course of carrying on legal, medical, engineering, architectural, accountancy, technical consultancy, interior decoration, advertising or any other notified profession. The service under consideration is clearly not prescribed in the aforesaid list of certified professions, nor the assessing officer or the ld. DR has pointed out so. Accordingly, the question of the services under consideration falling within the meaning of "professional services" does not arise. As regards 'fee for technical services', which borrows the meaning from Explanation to section 9(1)(vii) of the Act has been explained by Courts in several decisions. The meaning of words 'managerial, technical and consultancy' used in the aforesaid section has been explained by the Hon'ble Delhi H....
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....e, clear that a managerial service would be one which pertains to or has the characteristic of a manager. It is obvious that the expression "manager" and consequently "managerial service" has a definite human element attached to it. To put it bluntly, a machine cannot be a manager.' Reference can be also made to the decision of the Authority for Advance Rulings in Intertek Testing Services India (P.) Ltd., In re [2008] 307 ITR 418/175 Taxman 375, wherein it was elucidated:- 'First, about the connotation of the term "managerial". The adjective "managerial" relates to manager or management. Manager is a person who manages an industry or business or who deals with administration or a person who organizes other people's activity [New Shorter Oxford Dictionary]. As pointed out by the Supreme Court in R. Dalmia v. CIT [1977] 106 ITR 895, "management" includes the act of managing by direction, or regulation or superintendence. Thus, managerial service essentially involves controlling, directing or administering the business." "18. It would be incongruous to hold that the non-resident was providing technical services. To quote from Skycell Communicati....
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....ecial skills or knowledge, the provision of knowledge acquired in fields such as arts or human sciences would not. As an illustration, whilst the provisions of engineering services would be of a technical nature, the services of a psychologist would not. 40. The fact that technology is used in providing a service is not indicative of whether the service is of a technical nature. Similarly, the delivery of a service via technological means does not make the service technical. This is especially important in the e-commerce environment as the technology underlying the internet is often used to provide services that are not, themselves, technical (e.g. offering online gambling services through the internet). 41. In that respect, it is crucial to determine at what point the special skill or knowledge is used. Special skill or knowledge may be used in developing or creating inputs to a service business. The fee for the provision of a service will not be a technical fee, however, unless that special skill or knowledge is required when the service is provided to the customer. For example, special skill or knowledge will be required to develop software and data used in a computer g....
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....t that this data and software could be used by the customer in performing management functions or that the development of the necessary data and software, and the management of the business of providing it to customers, might itself require substantial management expertise is irrelevant as the service provided to the client is neither managing the client's business, managing the supplier's business nor developing that data and software (which may well be done by someone other than the supplier) but rather making the software and data available to that client. The mere provision of access to such data and software does not require more than having available such a database and the necessary software. A payment relating to the provision of such access would not, therefore, relate to a service of a managerial nature. Consultancy services 45. For the Group, "consultancy services" refer to services constituting in the provision of advice by someone, such as a professional, who has special qualifications allowing him to do so. It was recognized that this type of services overlapped the categories of technical and managerial services to the extent that the latter....
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....ervice recipient (ii) Consultancy - Advisory services involving rendered by someone who has special skills and expertise in rendering such advisory (iii) Technical - Services provided through human intervention, involving or concerning applied and industrial science In other words, in short, the services provided by the vendors should predominantly involve specialized skills. Having reached the aforesaid conclusion, it would be pertinent to understand the meaning of contract for carrying out work used in section 194C of the Act. The decision of Hon'ble Delhi High Court in the case of SRF Finance Ltd. v. CBDT : 211 ITR 861, wherein the Court explained the meaning of 'contract for carrying out any work' and distinguished the same with a 'service contract'. The relevant observations of the Court are as under: "The two words convey different ideas. In the former (i.e., `work') the activity is predominantly physical; it is tangible. In the activity referred as `services', the dominant feature of the activity is intellectual, or at least, mental. Certainly, `work' also involves intellectual exercise to some extent. Even a gardener has to be....