TaxTMI 
TaxTMI 
2024 (3) TMI 484
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....84,210. The return filed by the assessee was selected for scrutiny and statutory notices under section 143(2) as well as section 142(1) were issued and served on the assessee. The Assessing Officer ("AO") vide order dated 25/04/2016 passed under section 143(3) read with section 144C(3) of the Act assessed the total income of the assessee at Rs.1373,62,39,166, after making certain additions/disallowances. The learned CIT(A), vide impugned order, granted partial relief to the assessee. Being aggrieved, both the assessee as well as the Revenue are in appeal before us. ITA No.5363/Mum./2017 Assessee's Appeal - A.Y. 2012-13 3. In its appeal, the assessee has raised the following grounds:- "1) The learned Commissioner of Income Tax (Appeals) -55, Mumbai erred in applying Rule 8D and disallowed a sum of Rs. 66.75 lacs u/s 14A of the Income Tax Act, 1961. 2) The learned Commissioner of Income Tax (Appeals) -55, Mumbai disallowed Rs.174 lacs being expenditure incurred on feasibility study report for evaluation of various business opportunities as capital in nature. 3) The learned Commissioner of Income Tax (Appeals) -55, Mumbai erred in disall....
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.... On the other hand, the learned Departmental Representative ("learned DR") vehemently relied upon the order passed by the AO. 8. We have considered the submissions of both sides and perused the material available on record. Undisputedly, in the present case, the assessee earned a dividend income of Rs.40.57 crore, which has been claimed as exempt under section 10 of the Act. Further, there is also no dispute regarding the fact that the assessee while computing its taxable income suo-moto disallowed an amount of Rs.24,45,540 as an expenditure incurred for earning the aforesaid exempt income. As per the assessee, the aforesaid suo-moto disallowance is the salary cost in respect of the time spent by its employees on carrying out the investment-related activity, which has been computed as under: Disallowance u/s 14A of Income Tax Act (Estimated allocable expenses) Employee Designation Chief Financial Officer Senior Manager- Finance Finance Executive Total Proportionate salary Proportionate Interest amount Percentage 5% 25% 50% Cost to Company 1,62,88,500 30,28,400 10,30,600 &n....
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...."41. Having regard to the language of section 14A(2) of the Act, read with rule 8D of the Rules, we also make it clear that before applying the theory of apportionment, the Assessing Officer needs to record satisfaction that having regard to the kind of the assessee, suo motu disallowance under section 14A was not correct. It will be in those cases where the assessee in his return has himself apportioned but the Assessing Officer was not accepting the said apportionment. In that eventuality, it will have to record its satisfaction to this effect. Further, while recording such a satisfaction, the nature of the loan taken by the assessee for purchasing the shares/ making the investment in shares is to be examined by the Assessing Officer." Further, the Hon'ble Supreme Court in Godrej & Boyce Manufacturing Company Ltd. Vs DCIT: [2017] 394 ITR 449 (SC), observed as under: "37. We do not see how in the aforesaid fact situation a different view could have been taken for the Assessment Year 2002-2003. Sub-sections (2) and (3) of Section 14A of the Act read with Rule 8D of the Rules merely prescribe a formula for determination of expenditure incurred in relation to income which....
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....f section 14A(2) of the Act, invocation of Rule 8D is not permissible. The relevant findings of the Hon'ble jurisdictional High Court, in the aforesaid decision, are reproduced as under:- "4. Regarding question no.(c) :- (a) In its return of income, the respondent made a suo-moto disallowance of Rs.15.21 lakhs being the expenditure incurred to earn exempt income under Section 14A of the Act. The Assessing Officer disregarded the same and proceeded to disallow an amount of Rs.1.10 crores under Section 14A of the Act read with Rule 8D of the Rules as expenditure incurred to earn exempt income. Thus, adding Rs.1.10 crores to the income of the respondent. (b) Being aggrieved, the respondent filed an appeal to the CIT(A) but without success. (c) On further appeal, the impugned order of the Tribunal while allowing the appeal held that before invoking the provisions of Rule 8D of the Income Tax Rules, the Assessing Officer has to record his non satisfaction with the suo moto disallowance of expenditure made towards earning exempt income by the respondent. This exercise not having been carried out by the Assessing Officer before applying Rule 8D of the I....
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.... record, are: During the year under consideration, the assessee paid an amount of Rs.1,74,40,000 to M/s Avalon Consulting towards feasibility study report for evaluation of various business opportunities. During the assessment proceedings, the assessee was asked to prove how the said expenditure was related to its business activity. In response thereto, the assessee submitted that the aforesaid amount was paid towards the feasibility study report for evaluation of various business opportunities that can be conveniently/advantageously combined with the existing business of the assessee. The assessee further submitted that it has strategically looked at the home improvement and decor sector as an avenue for future growth especially since it has synergy with the existing line of decorative paint business in India. Accordingly, the assessee claimed that the expenses on exploratory exercises are incurred out of commercial expediency to expand the existing business by exploring new markets, products, etc. The AO vide assessment order did not agree with the submissions of the assessee and held that the assessee is in the field of paints business and based on the feasibility report the ass....
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....icles of Association on 17/12/2012. Further, it is also evident from the aforesaid documents that in January 2013, the assessee's board granted in-principle approval to enter into an arrangement with the promoters of the Sleek Group for acquiring a 51% stake in the Sleek Group, which is engaged in manufacturing, selling, and distribution of modular kitchens as well as kitchen components including wire baskets, cabinets, appliances, accessories, etc., with a pan-India presence. Thus, from the perusal of the documents available on record, it is sufficiently evident that the assessee ventured into altogether a new line of business, which is different from the existing business of manufacturing paints and enamels. We agree with the conclusion of the learned CIT(A) that the new line of business operates completely on different domains, as the infrastructure, expertise, workforce and all other connected things engaged and involved are completely different. During the hearing, the learned DR placed reliance upon the decision of the Hon'ble jurisdictional High Court in CIT v/s Zenit Steel Pipes and Industries Ltd, [2009] 315 ITR 95 (Bom.), wherein following the earlier decision of the Hon'....
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....thin the scope of transfer pricing provisions. Thus, the ALP of the same is not required to be computed on there is no need to recover any charges/fees from overseas associated enterprises in whose favour the assessee has issued the letter of comfort. It was also submitted that the letter of comfort does not keep the assessee financially or legally obligated to bear the costs of repayment of loans to the banks in case the subsidiaries default in repayment. The TPO vide order dated 22/01/2016 passed under section 92CA(3) of the Act did not agree with the submissions of the assessee and held that the letter of comfort is to be regarded as an international transaction, as an intergroup service has been rendered by the assessee to its associated enterprise. Considering the similarity in the facts and circumstances of the case vis-a-vis the issuance of corporate guarantee, the arm's length rate of the letter of comfort was determined at 0.50% (being 50% of 1% fee for guarantee commission). Accordingly, the TPO computed the transfer pricing adjustment of Rs.61,72,873 (i.e. 0.50% of Rs.123.46 crore) in respect of the letter of comfort issued by the assessee. 22. The learned CIT(A), vid....
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.... We, Asian Paints Limited confirm that it is our intention to maintain our majority ownership and management control of this company during the currency of the facilities and that we as and when they fall due. We will also not do anything or take any steps so as to permit the company to enter into liquidation (whether compulsory or voluntary) or any arrangement with its creditors in a manner as to prejudice your rights against the company in respect of the said facilities. We undertake to provide your bank with adequate notice if we decide to divest ourselves of our ownership in the company and/or reduce our management and technical support to this company." (ii) "Re: Facilities extended by Citibank N A to Berger International Limited, Singapore We confirm that we are aware of the facilities amounting to SGD 36.5 mn extended by Citibank N.A to our subsidiary (herein referred to as "the Company") We will continue to lend management and technical support to this Company and will be fully supportive of its operations. We, Asian Paints Limited confirm that it is our intention to maintain our majority ownership and management control of ....
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....ngible or intangible property, or provision of services, or lending or borrowing money, or any other transaction having a bearing on the profits, income, losses or assets of such enterprises, and shall include a mutual agreement or arrangement between two or more associated enterprises for the allocation or apportionment of, or any contribution to, any cost or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to any one or more of such enterprises." 27. From a plain reading of the aforesaid provision, it is evident that for a transaction to be an international transaction it has to be between two or more associated enterprises, either or both of whom are non-residents. Undoubtedly, in the present case, the assessee issued letters of comfort on behalf of its associated enterprises outside India. Thus, in our considered view, the first condition for being an international transaction is satisfied in the present case. The aforesaid provision further requires that the transaction, inter-alia, needs to be of the following nature:- (a) purchase, sale or lease of tangible or intangible property; or (b) prov....
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....2B of the Act. Further, in view of the aforesaid declaration, we find no merits in the submission of the assessee that it is not financially obligated to bear the cost of repayment of loans to the banks in case subsidiaries default in repayment, as the assessee itself has treated the credit facility extended to its subsidiaries pursuant to the letters of comfort as its contingent liability. During the hearing, no material was brought on record to controvert the disclosure made by the assessee in its financial statement. Further, from the document of the credit facility extended to Berger International Ltd, Singapore, forming part of the paper book from pages 4-6, we find that the credit facility was extended on the security/support of the letter of comfort issued by the assessee. 30. During the hearing, the learned AR placed reliance upon the decision of the coordinate bench of the Tribunal in assessee's own case in preceding assessment years, wherein the coordinate bench of the Tribunal held that issuance of a letter of comfort/support is not an international transaction within the meaning of the provisions of the Act. We find that the coordinate bench of the Tribunal in assess....
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....ing years, and thus, the findings of the coordinate bench are not applicable to the present case. 32. As regards the ALP of the letters of comfort, the TPO considered 0.50% as the arm's length rate (being 50% of 1% fee for guarantee commission). While the learned CIT(A) reduced the arm's length corporate guarantee commission to 0.20%, and the arm's length rate for letters of comfort was also reduced to 0.04% (being 20% of 0.20%). During the hearing, the learned AR without prejudice to the main submission that the letters of comfort issued by the assessee are not an international transaction submitted that the corporate guarantee issued by the assessee cannot be compared with the letters of comfort and therefore agreed with the computation of arm's length rate of 0.04%. Agreeing with the submissions of the assessee, we upheld the findings of the learned CIT(A) in computing the arm's length rate of the letter of comfort to be @0.04%, finding the same to be reasonable in the peculiar facts and circumstances of the present case. Accordingly, ground no.3 raised in assessee's appeal is dismissed. 33. Ground no.4 raised in assessee's appeal was not pressed during the hearing. Accord....
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....cs being expenditure incurred on CSR claimed u/s 37(1) of the Act. 9. The Ld. CIT (A) has erred in allowing Rs. 1.80 Crores on account of various sundry balance written off during the year without appreciating the facts of the case. 10. The learned CIT(A) erred in allowing claim u/s 35(2AB) of Rs. 41.56 Crores on account of non-receipt of certificate in Form No 3CL from Department of Scientific & Industrial Research (DSIR). 11. The learned CIT(A) erred in allowing claim u/s 35(2AB) of Rs. 579.81 lacs based on certificate in Form No: 3CL issued by the Department of Industrial and Scientific Research (DSIR). 12. The learned CIT(A) erred in allowing the entire capital expenditure amounting to Rs. 551.46 lacs as deduction u/s 35(2AB), of the Income Tax Act, 1961. 13. The appellant prays that the order of the ld. CIT(A) on the above ground be set aside and that of the Assessing Officer restored. 14. The Appellant craves leave to amend or alter any ground or add a new ground which may be necessary." 37. The issue arising in ground no.1, raised in Revenue's appeal, pertains to restricting the transfer pricing adjustment on account o....
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....DSIR and if upon verification, the AO finds that such expenditure was incurred for the purpose of R&D, then the AO is directed to allow such expenditure to the assessee. However, if the AO finds that such expenditure was not incurred for the purpose of research and development, then the addition made by the AO will stand confirmed. Being aggrieved, the Revenue is in appeal before us. 42. We have considered the submissions of both sides and perused the material available on record. The assessee had a recognised R&D unit situated at Bhandup (Mumbai). Subsequently, the assessee built a new R&D facility at Turbhe (Navi Mumbai). Admittedly, this facility was also approved by DSIR, and a certificate in Form No.3CM was issued. During the year under consideration, the assessee had incurred a revenue expenditure amounting to Rs.30.53 crore and a capital expenditure amounting to Rs.5.51 crore on the in-house R&D facility. Since at the time of passing of the assessment order, the certificate in Form No.3CL was not available, the AO rejected the entire claim of weighted deduction under section 35(2AB) of the Act. However subsequently on receipt of the certificate in Form No.3CL, the AO gran....
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....f the assessee's case on the issue under consideration. In the said case, weighted deduction claimed by the assessee u/s 35(2AB) on account of R & D expenditure was partly disallowed by the AO relying on the figure contained in the certificate issued by DSIR and the same was held to be unsustainable by the Tribunal holding that There was no justification in harping upon the figure contained in the certificate issued by DSIR as was done by the Assessing Officer. It was held by the Tribunal that the relevant provisions of the Act did not contain any specific condition that the deduction u/s 35(2AB) and accordingly the claim of the assessee for deduction u/s 35(2AB) will be restricted to the amount of R & D expenditure as contained in the certificate. The Tribunal found on verification of the relevant details that even the expenditure is not included in the said certificate was eligible for deduction u/s 35(2AB) in respect of the said expenditure was allowed by the Tribunal. In our opinion, the issue involved in the case of Torrent Pharmaceuticals itd. thus is similar to the one involved in the present case and this position is not disputed even by the Id. DR at the time of the he....
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....of such material is considered as Nil while valuing the closing stock. It was further submitted that as and when such goods are disposed of, the consideration is accounted for under the head Sales. The AO vide assessment order held that the assessee has admitted that damaged stock is not entirely in non-saleable condition and sale is recorded, whenever such sale takes place. The AO further held that this method of writing off a part of the stock at the end of the year and then booking the sales in subsequent years gives a distorted picture of the real profits of the business of the assessee, which is not acceptable by any standard of accounting or legal principles. Accordingly, the AO rejected the contention of the assessee of valuing the damaged stock at Nil and considered the actual cost price of the so-called damaged stock for the purpose of taxation. 47. The learned CIT(A), vide impugned order, following the decision of the coordinate bench of the Tribunal rendered in assessee's own case in earlier years restricted the disallowance to the tune of 0.5% of the value of closing stock for the purpose of valuation of damaged stock. Further, the learned CIT(A) directed that the co....
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....ssets acquired during the financial year 2010-11 amounting to Rs.1,64,27,068 under section 32(1)(iia) of the Act. Accordingly, the assessee was asked to explain the allowability of additional depreciation so claimed. In response thereto, the assessee submitted that as per section 32(1)(iia) of the Act, the assessee is entitled to claim 20% additional depreciation on any new plant and machinery acquired after 31/03/2005. It was further submitted that as per the provision to section 32(ii)(b), if the assets are put to use for less than 180 days in the previous year, then the deduction in respect of depreciation shall be restricted to 50%. Accordingly, the assessee could claim only 10% of the additional depreciation for additions made in the second half of the financial year 2010-11 and the balance 10% additional depreciation was claimed in the year under consideration. The AO vide assessment order did not agree with the submission of the assessee and held that there is no such provision in the Act to claim a balance 10% additional depreciation in the year under consideration for additions made in the earlier year. Accordingly, the AO disallowed the additional depreciation of Rs.1,64,....
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....lowance of Rs 1,51,65,251/-. 037. On appeal before the learned CIT -A, he allowed the claim of the assessee based on his own decision for assessment year 2008- 2009 in case of the assessee. We find that the identical issue has been decided in favour of the assessee in the assessee's own case for assessment year 2009-10 in ITA number 2754/M/2014 and ITA number 4203/M/2014 by coordinate bench as Under:- "38. In ground No. 5, revenue has challenged the decision of learned Commissioner (Appeals) in allowing assessee's claim of additional depreciation. 39. Briefly the facts are, in course of assessment proceedings, the Assessing Officer noticed that the assessee has claimed carried over amount of additional depreciation relating to the immediately preceding assessment year. Therefore, he called upon the assessee to justify the claim. However, the assessee furnished a detailed submission stating that the balance portion of additional depreciation, which could not be claimed in the preceding assessment year, has to be allowed in the impugned assessment year; however, the Assessing Officer was not convinced. Accordingly, he disallowed the additional depre....
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.... the earlier year amounting to Rs.151,65,251/- 36. Since the issue is exactly similar and grounds as well as the facts are also identical, respectfully following the above decision in assessee's own case for the A.Y. 2010-11 and also following the principle of "Rule of consistency" we dismiss the ground raised by the revenue holding that Ld.CIT(A) is correct in allowing the additional depreciation at the rate of 10% for asset purchased in the earlier year. Ground raised by the revenue is dismissed." 55. We find that this issue is recurring in nature and has been decided in favour of the assessee in the preceding assessment years. The learned DR could not show us any reason to deviate from the aforesaid decision and no change in facts and law was alleged in the relevant assessment year. Thus, respectfully following the judicial precedents in assessee's own case cited supra, ground no.5 raised in Revenue's appeal is dismissed. 56. The issue arising in ground no. 6, raised in Revenue's appeal, pertains to the allowance of expenditure incurred on the Trip Scheme. 57. The brief facts of the case pertaining to this issue, as emanating from the record, are: The asses....
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....ceedings, the Assessing Officer noticed that the assessee had debited an of amount 16,10,45,094/- towards expenditure incurred on account of trip scheme. Noticing this, he called upon the assessee to justify the claim. After verifying the details furnished by the assessee, the Assessing Officer observed that the amount was paid to SOTC for foreign trip of its dealers. Being of the view that the expenditure incurred was not for the purpose of assessee's business, he held the same as not allowable. Further, he held that since the assessee has not deducted tax at source on the expenditure incurred, which is nothing but in the nature of commission paid to dealers and distributors, the same has to be disallowed under section 40(a)(ia) of the Act. Accordingly, he disallowed the deduction claimed by the assessee. Assessee contested the disallowance before the first appellate authority. considering After the submissions of the assessee in the context of facts and materials on record, learned Commissioner (Appeals) deleted the disallowance made by the Assessing Officer. 45. Strongly relying upon the observations of the Assessing Officer, the learned Departmental Representative ....
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....undertake the trip organized by the assessee through SOTC. Thus, from the aforesaid facts it is very much clear that the entire trip scheme is for the purpose of expanding assessee's business by encouraging the dealers and distributors to achieve a specific target of purchase. Thus, the scheme is closely linked to assessee's business activity. It is also a fact that the assessee has not paid any amount to the dealers and distributors, but amount spent has been paid to SOTC for organizing the trip. It is also a fact on record that the amounts paid to SOTC has been subjected to TDS as per the relevant provision. Therefore, the allegation of the Assessing Officer that the amount has not been subjected to deduction of tax is without any basis. As regards the applicability of section 194H of the Act, by no means, the Assessing Officer has established on record that dealers/distributors are agents of the assessee. Further, as we find, the trip scheme has been introduced by the assessee from past 20 years and the deduction claimed by the assessee on account of such trip scheme has never been disallowed by the Assessing Officer except for the impugned assessment year. Therefore, ev....
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.... the Royalty and therefore during the year has credited 1% of the Royalty amount to the Profit and Loss account instead of 3% as per the agreement. The assessee further submitted that under the Act as well as the Double Taxation Avoidance Agreement ("DTAA") entered with the aforesaid countries, the assessee is liable to pay tax only on the amount of Royalty received by it. The AO vide assessment order did not agree with the submissions of the assessee and by following the approach adopted in the assessment year 2011-12 proceeded to make the addition of the balance Royalty, i.e. 2%, which was waived by the assessee. 63. The learned CIT(A), vide impugned order, held that a similar waiver was granted to the subsidiaries from the assessment year 2008-09 till 2010-11 and the AO/TPO has not made any addition with respect to the same. Following its decision rendered in assessee's own case for the assessment year 2011-12, the learned CIT(A) allowed the ground raised by the assessee on this issue. Being aggrieved, the Revenue is in appeal before us. 64. We have considered the submissions of both sides and perused the material available on record. The assessee provides technical data, ....
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....total income, inter-alia, includes all income from whatever sources derived which accrues or arises to him outside India during the year. As per the assessee, it is entitled to receive the Royalty from its overseas subsidiaries @3% on the net sales price of products sold by the overseas subsidiaries. Thus, the net sale price of the products sold can only be determined at the end of the financial year and accordingly, the amount of Royalty payable to the assessee can only be computed thereafter. Therefore, prior to the end of the financial year, no amount accrues or arises to the assessee outside India. In the present case, prior to the determination of the net sale price of the products sold, the assessee had decided to waive Royalty by 2%. No material has been brought on record to show that there is no understanding between the assessee and its overseas subsidiaries to waive the Royalty. Such being the facts, we are of the considered view when only 1% Royalty is payable by the overseas subsidiaries, therefore the AO has no authority to make an addition of the balance 2% Royalty waived by the parties, which is nothing but a notional income considered taxable by the AO in assessee's....
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....no.9, raised in Revenue's appeal, pertains to sundry balances written off. 69. The brief facts of the case pertaining to this issue, as emanating from the record, are: During the year under consideration, the assessee has written off various old balances lying in its books of accounts. During the assessment proceedings, the assessee was asked to show as to how these expenditures were incurred in the business activity. In response thereto, the assessee submitted that during the year it has written off balances amounting to Rs.1,81,04,593 and debited the same to the profit and loss account. The assessee also furnished the breakup of the same in treatment given in his return of income. The AO vide assessment order noted that in the assessment year 2011-12, the assessee itself is disallowing the sundry balances written off in its books of accounts. However, from the year under consideration, the assessee has changed its practice and started claiming the same as allowable expenditure. It was further held that the assessee could not prove that the alleged advances were made in the ordinary course of the business and such advances written off cannot be treated at par with the bad debts....