TaxTMI 
TaxTMI 
2023 (10) TMI 1012
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....w 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 the facts and circumstances of the case and in law, erred in applying the provisions o....
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....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 capital receipt and hence, cannot be treated as income under the provisions of Income Tax Act applicable for the subject year. 7.2. The lower authorities have failed to note that the eligible amount o....
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....s 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 circumstances are similar to the previous years, erred in not following the binding order of this Hon'ble Tribunal in the Appellant's own case from AY 2007-08 to AY 2011-12 wherein similar adjustment towards brand adjustment has been deleted. It is also to be noted that the impugned adjustment was deleted by thi....
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....PO 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 of accounts. 11.4. The Ld. TPO has erred in benchmarking on the basis of the segment wise profitability details pertaining to 'Domestic vehicle sales' obtained during the assessment proceedings, without appreciating that more than 62 % of the total costs (other than raw material cost) were common costs not identifiable with any particular segment and these were only al....
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....ating 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 crores, whereas the actual amount of TDS claimed by the Appellant in its return is INR 22.86 crores The Appellant prays that directions be given to grant all such relief arising from the grounds of appeal mentioned supra and all consequential relief thereto. The grounds of appeal raised by the Appellant herein are without prejudice to each other. The Appellant craves leave to add to and/or to alter, amend, rescind, modify the grounds herein above or produce further documents bef....
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....e 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/- u/s. 14A of Income Tax Act, 1961. 6.1 The Ld. Counsel for the assessee submits that this issue is covered in favour of the assessee by the order of the ITAT Chennai Benches for AYs 2013-14 to 2016-17, where, disallowance u/s. 14A of the Act, is restricted to exempt income. 6.2 The Ld.DR fairly agreed that this issue is covered in favour of the assessee by the decision of the ITAT Chennai Benches in the assessee's own case for earlier assessment years. 6.3 We have heard both the parties and perused th....
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....amil 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 explanation (10) to section 43 of the Act, the same needs to be deducted from cost of assets and consequently, reworked depreciation by reducing amount of subsidiary and disallowed a sum of Rs. 2,38,665/-. 7.1 The learned AR for the assessee submitted that this issue is covered in favour of the assessee by the decision of ITAT Chennai, in assessee's own case for assessment year 2006-07, where, it was held that subsidiary received from SIPCOT is capital receipt not liable for tax. 7.2 The learned DR, on the other hand....
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....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 income u/s. 139(1) of the Act. The Assessing Officer further noted that as per section 36(1)(ii), any sum paid to an employee as bonus or commission for services rendered, where such sum would not have been payable to him as profit or dividend, if it had not been paid as bonus or commission is covered. Therefore, he opined that any payment made to an employee which is in the nature of bonus or commission for services rendered is covered u/s. 36(1)(ii) of the Act, and thus, if such payment is not made on or before due date of filing o....
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....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 reject ground taken by the assessee. 9.4 In this view of the matter and by following the decision of the ITAT Chennai Benches for AYs 2013-14 to 2016-17, we are inclined to uphold the findings of the DRP and reject the ground taken by the assessee. 10. The next issue that came up for our consideration from Ground No.6 of the assessee's appeal is fresh claim of deduction towards foreign exchange loss on restatement of loans utilized for purchase of domestic assets to the extent of INR 17.96 Crs. Facts with regard to impugned dispute are that ....
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....ssessee 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 that the Government of Tamil Nadu has issued a GO on 26.02.2007 for Formulation of Ultra Mega Integrated Automobile Projects Policy, to bring out an exclusive policy for encouraging set up of major Integrated Automobile Projects in Tamil Nadu. The assessee had entered into a Memorandum of Understanding with the Government of Tamil Nadu on 22.01.2008 for setting up/expansion of its manufacturing facility. As per said Policy, incentive was granted for the purpose of setting up of Phase- II manufacturing facility (expansion along with a new engine and transmiss....
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.... 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 assessee for considering IPS as capital in nature and not liable for tax. The relevant findings of the AO are as under: VAT expenditure is purely revenue expenditure. The assesseee company was not required to expend VAT refund money for any particular purpose as evident from the MoU between the state Govt. & HMIL. The assessee company had to invest Rs. 4000/- crore in eligible fixed assets within 7 years, SIPCOT started payment of incentive in the form of refund of output VAT from 1st year of investment in fixed asset on the basis of interim eligibility cer....
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....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 year only after setting up of the new industry and only; after commencement of production and, therefore, such a subsidy could only be treated as assistance given for the purpose of carrying on the business of the assessee, Consequently, the contentions raised on behalf of the assesses on the facts of that case stood rejected and it was held that the subsidy received by Sahney Steel and Press Works Ltd, could not be regarded as anything but a revenue receipt. Order of Ld. 1TAT Madras Chennai in the case of the M/s. Eastman Exports Global Clothing (P) Ltd in I.T.A. Nos.47 & 48/Mds/2016 is also relevant in the case ....
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....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 that refund of output VAT is revenue in nature only and assessee rightly treated it as income in its return of income. Thus, the claim of assessee the receipt of Rs. 32,75,60,000/- from Govt. as capital receipt is hereby rejected". In view of above, the claim of assesses that the "Output VAT subsidy of Rs. 33,00,82,506/- received by the assessee should be treated as a capitalreceipt not chargeable to tax" is not tenable at all and it was rightly treated by assessee as revenue receipt. 11.2. The Ld. Counsel for the assessee submitted that in order to treat any subsidy received from Central/State Government, the primary condition is purpose test. If any subsidy is primarily grant....
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....) 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 intended to subsidized the cost of asset. Therefore, it is submitted that since the incentive in the form of IPS is not a payment received directly or indirectly to meet any portion of the actual cost, it falls outside the purview of Explanation 10 to Sec. 43(1) of the Act. In this regard, the assessee relied upon the decision of the Hon'ble Bombay High Court in the case of PCIT v.Welspun Steel Ltd. reported in 264 Taxman 252. The assessee had also relied upon the following judicial precedents: * P.J. Chemicals - Supreme Court-210 ITR830 * Electrosteel Castings Ltd. - Kolkata ITAT - 189 LTD 183 * Bhagwati Sponge P. Ltd. - Kolkata LTAT - 72 taxmann.com 40 * Everest Industries Ltd. - Mumbai ITAT - 192 TTJ 904 11.4 The Ld.DR supporting the order of the AO and ld. DRP submitte....
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.... 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 reference to legal position settled by various courts including the Hon'ble Supreme Court of India. It is a settled principle of law by various Courts, including the Hon'ble Supreme Court in the case of CIT v. Chaphalkar Brothers Pune, reported in (2018) 400 ITR 279 (SC), that subsidy received towards accelerating industrial investment/setting up of units is to be treated as capital in nature, even if such subsidy has been quantified in terms of reimbursement of expenses or VAT, etc.,. Further, CBDT Circular No.142 dated 01.08.1974, which deals with characterization of subsidy received under 10% Central Outright Grant of Subsidy Scheme, 1971, states that classification of a subsidy as capital or revenue depends on whether the subsidy has been granted for helping the growth of the industries or for supplementing their pro....
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....ate 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 clearly states that the cost of an asset acquired by the assessee has been directly or indirectly met by any Central Government or State Government in the form of subsidy or grant or reimbursement, then, the same shall not be included in the actual cost of the asset. In the present case, IPS Scheme given by the Government of Tamil Nadu aims reimbursing cost of infrastructure of setting up/expansion of manufacturing facility in Mega Automobile Industry. If you go by the Scheme, it aims to reimburse cost incurred by an entity to set up a manufacturing facility which consists of various forms of assets. Although the Scheme does not specify any particular asset on which reimbursement is granted, but it aims to provide reimbursement towards total cost incurred by an entity for setting up/expansion of manufacturing facility....
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.... 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 for exports to potential new markets / specified products and not for all exports or all products to all markets. The assessee has treated amount received under Focus Market Scheme as revenue in nature and has offered to tax. Based on certain subsequent decisions, the assessee has raised additional ground and argued that subsidy received under Focus Market Scheme is capital in nature and not chargeable to tax. 12.1 The Ld.AR submits that this issue is covered against the assessee by the decision of the ITAT Chennai Benches in the assessee's own case for AY 2013-14 in ITA No.3192/Chny/2017. 12.2 The Ld. DR fairly agreed that this issue is decided against the assessee. 12.3 We have heard both the parties and perused the materials available on record. We find that an identical issue had been considered by the Tribunal ....
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.... 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 and it has laid down basic test to be applied in judging the character of subsidy. That test is the character of receipt in the hands of the assessee has to be determined with respect to the purpose for which the subsidy is given. In other words, in such cases, one has to apply purpose for test. The point of time at which subsidy paid is not relevant. The source is immaterial. The form of subsidy is immaterial. 33. Therefore, in the light of decision of the Hon'ble Supreme Court, in the case of Sahney Steel & Press Works Ltd. Vs. CIT(supra), if we examine facts of the present case, we are of the considered view that duty credit scrips received by the assessee from Govt. of India for export of certain goods to some specified regions is certainly in the nature of revenue receipt, because which is primarily given to offset higher ....
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....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 from the Govt. of India. It is a well-known fact that the assessee is best judge to decide a particular item of income or expenditure, because it is well aware facts of its case. In this case, the assessee, after considering nature and purpose of amount received under Focus Market Scheme, has very well considered the same as revenue receipt and offered to tax. Therefore, based on some judgements of higher forum making a claim for excluding said receipt from tax by claiming that it is in the nature of capital receipt is not correct, unless the assessee demonstrates that facts of those case laws considered by appellate forum and facts of assessee's case are similar in nature. As regards various case laws relied upon by the assessee including the decision of ITAT., Chennai in the case of Eastman Exports Global Clothing Pvt.Ltd. in ITA No.47 & 48/Chny/....
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.... 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 that this is covered in favour of the assessee by the decision of the ITAT Chennai Benches for AYs 2013-14 to 2016-17, where adjustment made by the TPO has been deleted. 14.2. The Ld.DR supporting the order of the AO & the DRP, fairly agreed that this issue has been decided in favour of the assessee by the ITAT Chennai Benches for earlier assessment years. 14.3. 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 for AY 2013-14, where the Tribunal by following the decision of the ITAT Chennai Benches in the assessee's own case for earlier assessment years, decided the issue in favour of the assessee. The relevant findings of the Tribunal are as under: 28. We have heard both the parties, peruse....
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....ch, 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 the business of manufacture and sale of passenger vehicles in domestic as well as export market. The sourcing, purchasing, manufacturing and warehousing facility of the assessee is common for cars manufactured for all geographies. The various stages involved in the manufacturing process is explained by the assessee as per which the process up to the stage of trial run and pre-delivery inspection is common for both export and domestic sales. Further, inputs for manufacture, such as import of raw materials, domestic purchase of raw materials, spares, etc., are also common for domestic and export sales. Based on the functional analysis of process, in the TP documentation, the assessee has tested its international transactions with its AE at entity level by applying Transaction Net Margin Method (TNMM) as the most appropriate method. The assessee's margin was at 5.01% on sales whil....
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.....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 the assessee including margins earned from domestic transactions and after considering relevant facts held that the whole issue of TP adjustment in respect of import of goods pertains to domestic sale segment needs to go back to the file of the TPO to reconsider the issue in light of directions given therein. The relevant findings of the Tribunal are as under: 49. We have heard both the parties, perused materials available on record and gone through orders of the authorities below. We have also carefully considered various case laws cited by the ld.AR for the assessee. The assessee is a wholly owned subsidiary of Hyundai Motor Company, South Korea. The assessee is engaged in manufacturing and selling cars in India and exporting them to AE's abroad. The assessee has entered in to various international transactions with its AE's and claimed it as tested party and benchmarked the same....
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....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 relied upon by the ld.AR for the assessee, we find that there are divergent views on the issue, where some appellate forums have held that international transactions that are closely linked are to be aggregated and benchmarked, whereas some appellate forums had held that arm's length price should be determined on a transaction by transaction basis, based on functions performed, asset employed and risk assumed by the assessee. Further, the Act is very clear, as per which each international transaction has to be benchmarked based on the nature of transactions by applying most appropriate method. There is no common rule for applying TNMM as most appropriate method for all transactions. Some international transactions have to be tested by applying CUP method, resale price method or cost plus method and selection of appropriate method is depends upon nature of transactions. Therefore, we are of the co....
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.... 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 operating in nature, because revenue received from Mobis for after sales service business in inextricably linked with car sales made by the assessee. Further, the assessee has paid royalty to its parent company HMC, Korea for sharing technology and know-how and same has been treated as operating expenses by the TPO. The assessee has received royalty income from Mobis under similar agreement for sharing technology and know-how, but the same has been considered as non-operating by the TPO. When the TPO has considered royalty payment by the assessee to its parent company as operating in nature, then there is no reason for the TPO to consider royalty income received from Mobis as non-operating income. Therefore, we are of the considered view that the ld.TPO was erred in considering royalty received from Mobis as non-operating. Hence, we direct the ld. TPO to consider Royalty income as operating income for compu....
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....e. 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 proceedings. Moreover, the law is evolving day by day, based on various factors including amendment to the Act and judgments of various courts and tribunals, as per which it is difficult for the AO to give a particular treatment for any item of income or expenditure, when the law has been substantially changed in subsequent assessment years. Further, it is a well settled principle of law that forex gain or loss is revenue in nature and operating income/expenditure. Therefore, we are of the considered view that there is no merit in the arguments taken by the ld.AR for the assessee that forex loss should be considered as non-operating in nature. Hence, we reject arguments taken by the assessee. 54. As regards working capital adjustment claimed by the assessee by filing additional ground, we find that the issue is now settled by various decisions including the decision f ITAT, Chennai in the case of Doosan Power Systems ....