TaxTMI 
TaxTMI 
2023 (10) TMI 1012
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....erits and are contrary to facts on record and applicable law and has been completed without adequate inquiries and as such is liable to be quashed. 1.2. The lower authorities have finalized their order with improper adjustments to the reported taxable profits of the Appellant, as a result of misapplying the provisions of the Act and by adopting faulty assessment procedure to finalize the adjustment, such as but not limited to, application of filters, analysis of the functions carried out by the Appellant and those of the comparable companies, analysis of the economic circumstances experienced by the Appellant, selection of comparable companies, computation of profit margins of the Appellant and comparable companies, usage of appropriate adjustments, and consideration of the information, arguments and evidence provided by the Appellant. 2. Disallowance under section 14A of the Act 2.1. The lower authorities have, in the facts and circumstances of the case and in law, erred in disallowing a sum of INR 93,44,170 under section 14A of the Act by applying provisions of Rule 8D of the Income tax Rules, 1962 ("Rules"). 2.2. The lower authorities have, in....
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.... The lower authorities have, in the facts and circumstances of the case and in law, erred in disallowing expenditure incurred by the Appellant towards "performance reward" as it is not in the nature of "bonus". 5.2. Without prejudice to the above, the lower authorities ought to have appreciated that the employees of the Appellant are not covered by the provisions of Payment of Bonus Act, 1965 and as such the said expenditure cannot be disallowed under Section 43B read with section 36(i)(ii) of the Act. 6. Inadvertent addition of foreign exchange loss 6.1. The lower authorities have, in the facts and circumstances of the case and in law erred in not considering the claim of the Appellant regarding the inadvertent addition of INR 35,92,42,476 to its total income for the subject AY thus, resulting in payment of taxes on the escalated total income. 7. Tax Treatment of Output VAT Incentives 7.1. The lower authorities have, in the facts and circumstances of the case and in law, failed to appreciate that the output VAT incentive (Investment Promotion subsidy) granted for the purpose of setting up/expansion of its manufacturing facility is a cap....
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.... allowed as an eligible business expenditure. 9.3. On the facts and in circumstances of the case, the Ld. AO had failed to appreciate that it is a settled principle that the education cess is an allowable expenditure under section 37(1) of the Act. 9.4. On the facts and in circumstances of the case, the Ld. AO failed to note that the legislature had specifically dealt with the disallowance of cess in section 43B of the Act which denotes that cess is otherwise an allowable expenditure under section 37 of the Act. 9.5. On the facts and in circumstances of the case, the Ld. AO has erred in not considering the various judicial precedence in favour of the Appellant wherein it has been held that the education cess paid is an expenditure allowable under section 37(1) of the Act. 10. Adjustment for Brand development services 10.1. The lower authorities have, in the facts and circumstances of the case and in law, erred in making in adjustment towards brand building activity amounting to INR 304,76,47,898. 10.2. The lower authorities have, in the facts and circumstances of the case and in law, while acknowledging that the facts and circum....
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....asis of Spearman's Rank Correlation method. 11. Downward adjustment to the value of imports to the extent included in the domestic car sales segment 11.1. The Ld. TPO erred in rejecting the transfer pricing study carried out by the Appellant without cogent reasons and erred in analyzing domestic segment on a standalone basis. 11.2. The Ld. TPO has erred in benchmarking the international transactions entered into by the Appellant with its AEs on the basis of the segment wise profitability details obtained during the assessment proceedings, without appreciating that the international transactions entered into by Appellant are closely linked and integrated and cannot be viewed in terms of separate segments for Transfer Pricing benchmarking. 11.3. The Ld. TPO has erred in benchmarking on the basis of the segment wise profitability details pertaining to 'Domestic car sales' obtained during the assessment proceedings, without appreciating that the 'Domestic car sales' is not considered as a separate reportable segment as per the Appellant's audited financial statements and that the Appellant does not maintain segment wise books ....
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....er Ultra Mega Integrated Automobile Projects within Tamil Nadu and incentives received under Focus Market Scheme, as operating while computing the operating margins of the tested party. 12.4. The Ld. TPO and Hon'ble DRP erred in not considering the discounts from suppliers towards early payment for purchases and also the commission received towards car finance referrals and car insurance referrals as operating while computing the operating margins of the tested party. 12.5. The Ld. TPO and Hon'ble DRP erred in provision for doubtful advances/ deposits and contingencies as operating while computing the operating margins of the tested party. 13. Excess levy of interest under section 234C 13.1. The Ld. TPO and Hon'ble DRP erred in excluding certain items of income which are operating in nature while computing the operating income and operating profits and erred in including certain items of expense/ losses, which are not operating in nature while computing the operating costs and operating profits. 14. Short credit of Tax deducted at source 14.1. The Ld. AO has erred in giving credit for TDS to the extent of INR 22.11 c....
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....u/s. 43B(c) of the Income Tax Act, 1961. The assessee has filed objections before learned DRP against draft assessment order, but the learned DRP vide its directions dated 13.12.2016 has rejected objections filed by the assessee. The Assessing Officer, in pursuant to the directions of the learned DRP has passed final assessment order incorporating directions of the ld. DRP. Aggrieved, the assessee has filed present appeal before the Tribunal. 5. Ground No.1 filed by the assessee is general in nature and does not require specific adjudication and hence, the same is dismissed. 6. The next issue that came up for our consideration from Ground No.2 of assessee appeal is disallowances u/s. 14A r.w.r.8D of Income Tax Rules, 1962, amounting to Rs. 93,44,170/-. The facts with regard to impugned dispute are that during the year under consideration, the assessee has earned dividend income from mutual funds, which is exempt from tax amounting to Rs. 50,000/-, however, did not made any suomotu disallowance of expenditure relatable to exempt income. Therefore, the Assessing Officer has invoked provisions of Rule 8D of Income Tax Rules, 1962, and determined disallowances of Rs. 93,44,170/- ....
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.... to the extent of exempt income earned for the impugned assessment year. 6.4 In this view of the matter and considering the facts and circumstances of the case, we direct the AO to restrict disallowance u/s. 14A of the Act, to the extent of exempt income earned for the impugned assessment year. 7. The next issue that came up for our consideration from Ground No.3 of assessee appeal is disallowance of depreciation on capital subsidy. During the financial year 2002-03, the State Industrial Promotion Corporation of Tamil Nadu (SIPCOT) had granted subsidiary of Rs. 100 lakhs to encourage and recognize huge investments made for setting up of mega project viz., passenger car manufacturing unit in Irungattukottai. The assessee has treated subsidy received from SIPCOT as capital receipt and did not reduce the same from cost of assets, as it was not directly or indirectly used to purchase any asset. The Assessing Officer has held that capital subsidy received from SIPCOT being utilized by the assessee for capital expenditure, same ought to have been reduced from the cost of asset added in that year by contending that subsidy was directly or indirectly used to purchase asset and as per....
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....Therefore, we are of the considered view that the assessee is entitled for higher rate of 60% depreciation on UPS, printers & scanners, and thus, we direct the AO to delete disallowance of excess depreciation on UPS, printers & scanners. 9. The next issue that came up for our consideration from Ground No.5 of the assessee's appeal is disallowance u/s. 43B(c) of the Act, towards performance incentives paid to employees. Facts with regard to impugned dispute are that for the financial year relevant to the assessment year 2012-13, the assessee has paid performance reward to employees in the cadre of Executives and Senior Executives. The assessee has provided for expenses for the period beginning from January to March, 2011. However, payment was made only after due date of filing return of income for assessment year 2012-13. The Assessing Officer has disallowed performance incentive paid to staff u/s. 43B(c) r.w.s.36(1)(ii) of the Act, amounting to Rs. 13,08,30,410/- on the ground that as per section 43B(c), any sum referred to in clause (ii) of sub-section (1) of section 36, shall not be allowed as deduction, unless the same is paid on or before due date for furnishing return of in....
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....r services rendered by employees. Just because nomenclature was changed to some other name, a particular expenditure would not change its original character. In this case, sum was paid to employees for services rendered and further, this sum would not have been paid as profits or dividend had it not been paid as commission or performance reward. Therefore, we are of the considered view that provisions of section 36(1)(ii) of the Act is squarely applicable and consequently, mischief of section 43B(c) would come into play, if such payment is not made on or before due date of furnishing of return of income. In this case, admittedly, the assessee has paid performance incentive only after due date of filing of income-tax return. Insofar as case laws relied upon by the assessee, we find that facts those case laws are different from facts of present case and has no application to case of the assessee. Therefore, we are of the considered view that there is no error in the reasons given by the Assessing Officer as well as learned DRP to disallow performance reward u/s. 43B(c) of the Act. Hence, we are inclined to uphold the order of Assessing Officer as well as directions of learned DRP and....
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....at unless authority of law no tax can be collected. In other words, only legitimate tax payable by the assessee needs to be collected. Further, even in a case where the assessee has failed to make a claim towards any expenditure or allowance, it is the duty of the AO to compute correct taxable income after allowing deductible losses/expenses. Since, the assessee claims that foreign exchange loss on restatement of loans availed for purchase of domestic assets is allowable deduction, in our considered view, the AO ought to have admitted claim made by the assessee towards deduction for expenditure and decide the issue in accordance with law. Therefore, we admit the fresh claim made by the assessee and restore the issue to the file of the Assessing Officer. We, also direct the AO to verify the issue with reference to relevant materials that may be filed by the assessee and decide the issue in accordance with law. 11. The next issue that came up for our consideration from Ground No.7 of the assessee's appeal is Investment Promotion Subsidy (in short "IPS") received from Government of Tamil Nadu is capital receipt and not liable to tax. The facts with regard to impugned dispute are th....
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.... the subsidy receivable in the form of IPS of INR 4,023.36 crores. During the year under consideration, based on the sales, the assessee accrued refund of Output VAT amounting to INR 33 crores from the Government of Tamil Nadu and credited the same to P&L a/c under the head 'Other Operating Revenue'. The assessee has included the above incentives as Revenue receipt in the original return of income filed for the impugned assessment year. However, the assessee has made an additional claim before the AO vide letter dated 27.09.2021, wherein, it was claimed that the IPS received from the Government of Tamil Nadu was capital in nature and not taxable. The AO after considering relevant submissions of the assessee and also by following certain judicial precedents, including the decision of the Hon'ble Supreme Court in the case of Sahaney Steel& Press Works Ltd.& Ors. v. CIT reported in [1997] 228 ITR 253 (SC) observed that IPS accrued to the assessee in the form of refund of Output VAT is Revenue in nature and the assessee has rightly treated it as income in the return of income filed for the relevant assessment year. Therefore, the Assessing Officer has rejected additional claim of the a....
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....at whether any subsidy/incentive given in relation to new industrial undertakings or subsequent expansion of existing capacities, from the state govt., inter alia, in the form of refund of sales tax paid on machinery or finished goods and subsidy on power consumed and an exemption or refund of water rate, would be an income. (Delhi High Court verdict in the case of Commissioner of Income Tax vs. Steel Authority of India Ltd. on 14th March, 2002). In this regard, the judgment of Hon'ble Apex Court in the case of Sahney Steel and Press Works Ltd. and Ors. v. CIT (1997) 228 ITR 253 is relevant which is given as below: it was held by Hon'bie Supreme Court that On the facts of that case and on the basis of the analyses of the Scheme therein that the subsidy given was on revenue account because it was given by way of assistance in carrying on of trade of business. On the facts of that case, it was held that the subsidy given was to meet recurring expenses. It was not for acquiring the capital asset. It was not to meet part of the cost. It was not granted for production of or bringing into existence any new asset The subsidies In that case were granted year after yea....
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....d as the financial assistance rendered by the S1PCOT for the purpose of running its business and we are therefore of the opinion that the Tribunal was correct in holding that the subsidy amount received by the assessee should be treated as revenue receipt. This court in Saroja Mills Ltd. v. CST [1996] 220 ITR 626, has taken the view that the subsidy amount given to the assessee to meet the revenue expenditure should be assessable as revenue receipt. The apex court in Shaney Steel and Press Works Ltd, v. CiT[1997] 228 1TR 253, has taken a similar view and held that the subsidy granted to the assessee for the purpose of carrying on the business should be treated as revenue receipt. 3. Following the decision of the apex court in Sahney Steel and Press Works Ltd. v. CIT [1997] 228 ITR 253, and the decision of this court in Saroja Mills Ltd. v. CIT [1996] 220 ITR 626, we hold that the subsidy received by the assessee in the instant case by way of reimbursement of revenue expenditure, is a Revenue receipt and it was rightly taxed as such". Conclusion Thus in the light of above discussion, case laws, facts and merit of the case of the assessee, it is concluded t....
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....India Cements Limited - ITA 2210/CHNY/2017 (Page 184 of CLC) * Ruling of this Hon'ble Tribunal in the case of Ford India Private Limited (156 TTJ 1) (Page 192 of CLC) * Ruling of the Delhi Tribunal in the case of Ulflex Limited - ITA 1329/061/2015 (Page 205 of CLC) * Ruling of the Mumbai Tribunal in the case of Mahindra & Mahindra Ltd. (117 taxmann.com 518) (Page 250 of CLC) * Ruling of the Mumbai Tribunal in the case of JSW Steel Limited ((2020) 180 ITD 505) (Page 266 of CLC) * Ruling of the Kolkata Tribunal in the case of Ankit Metal & Power Ltd. (92 LTR(T) 599) (Page 274 of CLC) 11.3. The Ld. Counsel for the assessee further referring to provisions of explanation 10 to Sec.43(1) of the Act, submitted that provisions of Sec.43(1) of the Act is not applicable to incentives received in the form of IPS, because, said incentive is not given to offset the cost of any particular asset and is merely issued with an objective of accelerating the industrial development. Though, for the purpose of determining the amount of subsidy to be given, the cost of eligible investment was taken as the basis, but the subsidy was not specifically inte....
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....itional claim before the AO and argued that subsidy received from the Government of Tamil Nadu is capital in nature and not liable for tax. According to the assessee, the GO issued by the Government of Tamil Nadu clearly envisages Formulation of Ultra Mega Integrated Automobile Projects to encourage setting up of Major Integrated Automobile Projects in Tamil Nadu. Even, the Memorandum of Understanding between the assessee and the Government of Tamil Nadu dated 22.01.2008 clearly state that the subsidy is given as incentive for the purpose of setting up/expansion of its manufacturing facilities. Further, SIPCOT had also issued a final eligibility Certificate quantifying the amount of investment and also subsidy receivable in the form of IPS. Therefore, from the Scheme and subsequent Certificate issued by the Nodal Agency i.e. SIPCOT, it is clear that subsidy has been given to encourage setting up/expansion of existing manufacturing facility, even though, such subsidy has been quantified in terms of refund of Output VAT payable by the assessee after commencement of production. 11.6. In light of above factual position it is necessary to examine the claim of the assessee with refere....
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.... the form of subsidy. Thus, we set aside the issue to the file of the Assessing Officer for verification. 11.7. Coming back to another argument of the Ld. Counsel for the assessee in light of Explanation-10 to Sec.43(1) of the Act that IPS is not given to offset cost of any particular asset and is merely issued with an objective of accelerating the industrial development. As per the provisions of Sec.43(1) and Explanation-10 actual cost means the actual cost of the assets to the assessee, reduced by that portion of the cost thereof, if any, as has been made directly or indirectly by anyother person or authority. Explanation-10 explained the provisions of Sec.43(1) and as per which, where a portion of the cost of the asset acquired by the assessee has been made directly or indirectly by the Central Government or State Government or any authority established under any law or by any other person in the form of subsidy or grant or reimbursement (by whatever name called), then, so much of cost is relatable to such subsidy or grant or reimbursement shall not be included in the actual cost of the asset to the assessee. If you go by the provisions of Explanation-10 to Sec.43(1), it is c....
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....f the cost of an asset acquired by the assessee or is merely issued with an objective of accelerating the industrial development. The AO is further directed to examine the issue in light of our discussions given hereinabove and decide the issue in accordance with law. 12. The next issue that came up for our consideration from Ground No.8 of the assessee's appeal is amounts received under the Focus Market Scheme - capital in nature - to be excluded from the total income. Facts with regard to impugned dispute are that Government of India with an intention to promote exports to certain regions / countries introduced Focus Market Scheme which provides incentive of 2.5% of FOB value for each licensing year commencing from 1st April, 2006. The export of products to those countries which are covered under list of countries in Schedule 37C would be entitled for duty credit scrip equivalent to 2.5% of FOB value of exports. During the year under consideration, the assessee was eligible for above scheme, as it makes export to specified markets. Accordingly, the assessee has received an amount of Rs. 90,57,29,308 as incentive from Govt. of India. The license under the scheme was given only ....
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....mpt from tax, one has to understand objectives of Focus Market Scheme announced by Govt. of India. As per Foreign Trade Policy document, the objective of the scheme is to offset high freight cost and other disabilities to select international market with a view to enhance our competitiveness to these countries. On the basis of objectives of the scheme alone, it can be easily concluded that amounts received under the scheme is revenue in nature, because it is primarily focusing to reduce cost of our exporters to compete with other export markets to these regions. However, various courts including Hon'ble Supreme Court in number of cases has examined nature of subsidy received from Govt. of India on the basis of purpose test and has held capital or revenue in nature depending upon purposes for which said subsidy was given. In our considered view, this controversy can be resolved if we apply test laid down in the judgement of Hon'ble Supreme Court in the case of Sahney Steel & Press Works Ltd. Vs. CIT (228 ITR 253). The importance of judgement of Hon'ble Supreme Court in the above case lies in the fact that it has discussed and analyzed the entire case laws on the issue an....
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....market with a view to enhance our export competitiveness to these countries. The expenditure incurred by the assessee under this scheme for exploring new market across the globe is mainly freight cost and other recurring expenses like sales promotion expenses, including manpower cost of staff employed in marketing department. Those expenses are generally in the nature of revenue expenditure and thus, can be considered as revenue expenditure. Since, the assessee got duty credit scrip benefit to offset cost incurred for exploring new market including higher freight cost and further, said expenditure is in the nature of revenue expenditure, then any subsidy including duty credit scrips given by Govt. of India for such purpose is definitely in the nature of revenue receipt. Thus, at any stretch of imagination, the amount received under Focus Market Scheme cannot be considered as capital in nature, which is given to offset cost or part of cost of any asset or facility created by the assessee. Moreover, in this case, the assessee itself had considered amount received under Focus Market Scheme as revenue receipts and offered to tax, considering nature and purpose of receipt of subsidy fro....
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.... 13. The next issue that came up for our consideration from Ground No.9 of the assessee's appeal is Education and Secondary Education Cess allowable as deduction. 13.1. The Ld. Counsel for the assessee has withdrawn the ground relating to deduction towards Education and Secondary Education Cess, and thus, Ground No.9 of the assessee's appeal is dismissed as withdrawn. 14. The next issue that came up for our consideration from Ground No.10 of the assessee's appeal is additions towards brand adjustment. During the year under consideration, the learned TPO has made upward adjustment of Rs. 304,76,47,898/- in relation to brand fees receivable from its AEs towards enhancement of brand value of assessee parent company. The learned TPO used Spearman's Rank Correlation method to conclude that there is positive correlation between the brand value of Hyundai Motor India Limited and market capitalization of Hyundai market Corporation, South Korea. Therefore, by applying Spearman's Rank Correlation method, the ld. TPO has computed incremental brand value and attributed a portion of the same to the assessee in proportionate to its sales. 14.1. The Ld. Counsel for the assessee submitted....
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....otion activity, the accretion in global brand value of its parent company cannot be attributable to the assessee by adopting some theory. In this case, facts are identical and parimateria to the facts already considered by the Tribunal for earlier years. Therefore, consistent with a view taken by the coordinate Bench in assessee's own case for earlier assessment years, we are of the considered view that the learned TPO as well as learned DRP were erred in making transfer pricing adjustments towards brand services by adopting Spearman's Rank Correlation method and concluded that there is positive accretion between brand value and market capitalization of HMC Korea and hence, we direct the Assessing Officer/TPO to delete transfer pricing adjustment made towards brand development services. 14.4. In this view of the matter and consistent with view taken by the co-ordinate Bench, we direct the AO to delete the addition made towards brand adjustment. 15. The next issue that came up for our consideration from Ground Nos.11 to 12.4 of the assessee's appeal is Transfer Pricing adjustment in respect of international transactions of the assessee with its AE. The assessee is engaged in t....
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....argin of comparable companies in respect of domestic transactions alone and then compare with assessee's margin. The Ld. Counsel for the assessee further submitted that in so far as adjustment made towards total transactions of the assessee including domestic transactions at entity level, it was held that adjustment needs to be carried out only with reference to international transactions of the assessee but not to domestic transactions. The ld. Counsel for the assessee further submitted that the Tribunal has also directed the Assessing Officer to recomputed PLI by considering findings on other income, and thus, a similar direction may be given for this year also. 15.3. The Ld.DR on the other hand, fairly agreed that this issue has been decided by the Tribunal in the assessee's own case for earlier assessment years. However, he strongly supported the order of the TPO/the DRP. 15.4. We have heard both the parties, perused the materials available on record and gone through orders of the authorities below. We find that an identical issue had been considered by the Tribunal in the assessee's own case in light of TP adjustment carried out by the TPO by considering total margins of....
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....opriate method by the TPO is in accordance with law and thus, the approach of the TPO in segregating domestic car sale segment on a standalone basis is both logical and legal. We, further noted that the assessee is having different margins for different segments of business, as per which, its margin from domestic car sale segment is 2.36% whereas, its margin from export sale segment is 6.04%. Further, revenue-wise domestic segment contributed more revenue, when compared to export segment. Both segment involved substantial AE's transactions affecting operating cost. Therefore, we are of the considered view that separate benchmarking of transactions on segment-wise was is very much required, because the FAR profile of two segments are different. We, further, noted that OECD Guidelines also require that arm's length principle should be applied on a transaction by transaction basis for arriving at the most precise approximation of fair market value. Therefore, we are of the considered view that there is no error in reasons given by the TPO to segregate domestic car sale segment on a standalone basis and benchmarked transactions of the assessee with its AE's. As regards, case laws relie....
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....e segment of comparables to compare margins of the assessee with comparable companies. Therefore, we are of the considered view that the approach of the TPO is inconsistent and needs to be reconsidered. 51. As regards re-computation of margin of the assessee by considering certain operating / non-operating incomes, we find that the AO has considered royalty income received from Mobis, commission / discount income and insurance claim received by the assessee as non-operating. The TPO has given his own reasons for reaching to a conclusion that all these incomes are non-operating in nature. We have given our thoughtful consideration to the reasons given by the TPO in light of various arguments advanced by the assessee and we ourselves do not subscribe to the reasons given by the TPO for the simple reason that the assessee right from financial year 2007-08 onwards appointed Mobis Ltd to take up after sales service activities carried on by the assessee by transferring its business to Mobis. As per the agreement between the assessee and Mobis, Mobis agreed to pay license fee at 8.5% on the domestic sales value. The assessee has considered royalty income received from Mobis as op....
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.....TPO in light of arguments advanced by the ld.AR for the assessee and find that there is no merit in arguments of the ld.AR of the assessee for the simple reason that mere treatment of the assessee in its books of accounts is not a sufficient reason for treating a particular item of expenditure / income is operating or non-operating in nature. But, what is to be seen is the nature of income. In this case, the assessee has derived forex loss on account of fluctuation in foreign currency and said loss is arised during the course of business of the assessee, either for import of raw materials or export of goods or borrowings from external sources. Further, loss arised on account of fluctuation in foreign currency for payment made to suppliers of materials or receipts from buyers of assessee product is also arised out of main business activity of the assessee and thus, the same cannot be considered as nonoperating in nature. As regards, the claim of the assessee in light of principle of consistency, we find that although the AO requires to follow principles of consistency in giving treatment of particular item of income or expenditure, but res judicata is not applicable to Income-tax p....
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....he decision of Hon'ble High Court of Madras in assessee's own case for assessment year 2012-13 in W.A No.1344 of 2017, where it was clearly held that transfer pricing adjustment can be done only in respect of international transactions and cannot be done on the basis of entity level values. Therefore, we are of the considered view that the ld.DRP is erred in making TP adjustment at entity level and hence, we direct the TPO to restrict TP adjustment only to international transactions pertain to domestic car sales segment. 56. In this view of the matter and considering facts and circumstance of this case, we are of the considered view that the whole issue of transfer pricing adjustment in respect of import of goods pertains to domestic car sales segment needs to go back to the file of the TPO to reconsider the issue in light of our discussions given herein above in preceding paragraphs. Hence, we set aside the issue to the file of the TPO and direct him to reconsider the issue after affording reasonable opportunity of hearing to the assessee. 15.5. In this view of the matter and consistent with view taken by the co-ordinate Bench, we set aside the order of the TPO/AO and ....