TaxTMI 
TaxTMI 
2026 (2) TMI 980
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.... the assessment order for the captioned AY as erroneous and prejudicial to the interest of the revenue, treating the same as passed without any enquiry. 2. The Learned PCIT erred in not appreciating the fact that, on some of the issues, due enquiry was made by the Learned Assessing Officer ('Learned AO') and there was due application of mind by the learned AO, and hence, the action of the Learned PCIT to assume jurisdiction under section 263 of the Act is bad in law. 3. The Learned PCIT erred in not appreciating the fact that when two views are possible on a given issue and the Learned AO has adopted one possible view, the order passed by the AO cannot be said to be erroneous and prejudicial to the interest of revenue within meaning of section 263 of the Act and any attempt made by the Learned PCIT to revise the assessment order would be without jurisdiction. 4. The Learned PCIT erred in not appreciating the fact that Explanation 2 to section 263 of the Act can be applied only when there was lack of enquiry, or no enquiry made by the AO, and cannot be applied for inadequate enquiry by the AO, and that para 2 of the impugned order itself states tha....
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....d provisions; 11. In not appreciating the fact that the aforesaid provisions of Rs. 174,12,05,965 constitute less than 1% of the total expenditure of Rs. 25,538.11 crores debited to the Profit and Loss account, and hence the provisions ought to be allowed being reasonable. 12. In holding that the entire amount of provision should have been disallowed under section 37(1) without even examining the facts or basis of the provision, which according to the learned PCIT himself ought to have been thoroughly examined by the learned AO. Ground No. 13 to 25: Disallowance under section 40(a)(ia) in respect of target discount, consistency discount and cash discount provided to spare parts dealers: Rs. 46,32,27,674: 13. On the facts and in the circumstances of the case and in law, the learned PCIT has erred in directing the Learned AO to make a disallowance under section 40(a)(ia) of the Act, of a sum of Rs. 46,32,27,674, computed at 30% of the target discount of Rs. 64,98,79,896, consistency discount of Rs. 70,16,14,802 and cash discount of Rs. 19,25,97,550 provided to the dealers of spare parts. In doing so, the learned PCIT erred in the following....
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....s given only upon purchase of certain quantities over a particular period, which cannot be ascertained at the time of sale, i.e. when a particular invoice is issued; 19. In observing that since the target discount and consistency discount was not part of the invoice as in the case of cash discounts given by the appellant, it should be treated as commission without appreciating the fact that even cash discount does not form part of the invoice and accordingly, the target discount and consistency discount ought to be treated on par with the cash discount; 20. In observing that the discount was not reduced from the invoice value for GST purposes, ignoring the fact that under Section 15(3)(b) of the CGST Act, 2017, post-sale discounts agreed upon before or at the time of supply and passed through credit notes remain valid trade discounts. The fact that these discounts are provided after meeting sales targets does not change their nature to commission, nor does it create any additional GST liability, as they are not separate consideration for services but rather a reduction in the price of goods; and in any case whether or not discount is reduced for the purpose of pay....
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....rt for the production of which the aforesaid dies and moulds have been used and hence ought to be allowed as a deduction. 29. In not appreciating the fact that the Hon'ble Tribunal and the Hon'ble Commissioner of Income-tax (Appeals) have, in the appellant's own case for earlier years, consistently decided the aforesaid issue in favour of the appellant. 30. Without prejudice to the above grounds of appeal, the learned PCIT, while directing the learned AO to treat the expenditure on dies and moulds as capital expenditure, erred in not directing the learned AO to allow depreciation thereon. Ground No. 31 to 35: Disallowance of expenditure incurred on jigs and fixtures: Rs. 37,59,92,362: 31. On the facts and in the circumstances of the case and in law, the learned PCIT has erred in directing the Learned AO to make a disallowance of Rs. 37,59,92,362 in respect of expenditure incurred on jigs and fixtures treating the said expenditure as capital expenditure. In doing so, the learned PCIT erred in the following respects: 32. In merely relying on the assessment order for the earlier year wherein similar disallowance was mad....
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....e Assessing Officer passed the final assessment order on 27.05.2022 under section 143(3) read with section 144C(3) of the Act. Aggrieved thereby, the assessee preferred an appeal before the National Faceless Appeal Centre, Delhi which remained pending. 2.3 Meanwhile, the learned Principal Commissioner of Income-tax ("PCIT") called for and examined the assessment records. Upon such examination, he formed a prima-facie view that the assessment order dated 27.05.2022 was erroneous insofar as it was prejudicial to the interests of the Revenue, on the ground that the Assessing Officer had failed to carry out certain enquiries which, according to the PCIT, ought to have been conducted in the facts and circumstances of the case. Invoking Explanation 2 to section 263 of the Act, the ld. PCIT issued a show-cause notice dated 23.01.2025 calling upon the assessee to explain as why the assessment order should not be revised in respect of the following four issues: (i) failure to examine provisions created towards commission payable to directors and towards advertisement, freight and other expenses, which, according to the ld PCIT, were in the nature of unascertained liabilities and....
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....omprising target discounts (Rs. 64,98,79,896) ; consistency discounts (Rs. 70,16,14,802) and cash discounts (Rs. 19,25,97,550) granted to spare parts dealers. It was explained that these discounts were granted in terms of commercial schemes linked to achievement of sales targets and were computed as a percentage of turnover. It was submitted that primarily the transaction of supply of spare parts to the authorized dealers was in the nature of buy and sale agreement, wherein the ownership in the property was duly transferred to the dealer and hence, the transactions with dealers were on a principal-to-principal basis and, not in the nature of principal-to-agent and therefore, the trade discounts allowed to the dealers on achieving certain amount of the sales performance was in the nature of the discounts only and therefore, was not liable for deduction of tax at source u/s 194H of the Act characterizing the payment as 'commission'. 2.8 In support, the assessee placed reliance on the dealership agreement and judicial precedents including the judgment of the Hon'ble Supreme Court in Bharti Cellular Ltd. v. Asst. CIT [2024] 160 taxmann.com 12 (SC) and the decision of the....
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....spect of the claim of deduction of education cess amounting to Rs. 67.94 crore, the Ld. PCIT recorded that the assessee had filed Form 69 withdrawing the claim. The Assessing Officer was therefore directed to verify the withdrawal and take action in accordance with law. 3.3 Thirdly, regarding discounts of Rs. 154.40 crore given to dealers, the Ld. PCIT rejected the assessee's contention that these were trade discounts not attracting section 194H. He held that discounts linked to achievement of sales targets and granted through post- sale credit notes constituted commission in substance. Relying on judicial precedents, he concluded that the assessee had camouflaged commission as discounts and, since tax was not deducted under section 194H, directed disallowance of 30% under section 40(a)(ia). 3.4 Lastly, the Ld. PCIT held that expenditure on dies and moulds (Rs. 57.01 crore) and jigs and fixtures (Rs. 37.59 crore) was capital in nature. He observed that these items formed an integral part of plant and machinery, provided enduring benefit, and their replacement could not be treated as revenue expenditure. Accordingly, the Assessing Officer was directed to disallow the entir....
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.... is seen that the assessee itself has suo-motu cancelled the claim of deduction u/s 40(a)(ia) in respect of the adhoc year-end provisions and offered the entire amount to tax by disallowing u/s 37(1). Hence, the entire amount of Rs. 174,12,05,965/- should have been disallowed u/s 37(1) instead of 30% of amount disallowed u/s 40(a)(ia) of the Act. Therefore, this office is revising the order u/s 143(3) r.w.s 144C(3) of the Act on 27.05.2022 passed by the AO. The AO is directed to disallow the amount of Rs. 121,88,44,175/- (remaining 70%). 5.1 Before us, the learned counsel for the assessee assailed the revisionary order on two counts. Firstly, it was contended that no effective show-cause notice was issued to the assessee on the issue of year-end provisions and, therefore, the impugned order stood vitiated for violation of principles of natural justice. Secondly, it was submitted that, on merits, the provisions were ascertained liabilities and were allowable under the mercantile system of accounting. 5.2 On the issue of lack of opportunity, it was submitted that the ld PCIT referred to year-end provisions in paragraph 2 of the show- cause notice dated 23.01.2025, but in paragr....
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....e an year end provision of Rs. 174,12,05,965/- on 31.03.2023 for Commission Payable to Directors of Rs. 2,11,50,000/- and Advertisement Freight and Other Provisions of Rs. 172,00,55,965/-. As per the Tax Audit Report the said payments were classified to the payment on which tax had not been paid. The assessee had claimed disallowance of 30% of expenditure u/s. 40(a)(ia) for this provision. 2.1 It is further seen that these are not the actual payments i.e. not actually expended by the assessee in the previous year but the ad-hoc year end provisions created for future payments. The aforesaid expenditure being an unascertained liability, are not allowable to the assessee. Hence, the same may qualify for disallowance u/s. 37(1). Also, from the computation of income provided by the assessee, in its own case for AY 2021-22 to the Income Tax Department, it is seen that the assessee itself has suo-moto cancelled the claim of deduction u/s. 40(a)(ia) in respect of the adhoc year-end provisions and offered the entire amount to tax by disallowing u/s. 37(1). Hence, the entire amount of Rs. 174,12,05,965/- should have been disallowed u/s. 37(1) instead of 30% of amount disallowed u/s.....
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....e basis of the Tax Audit Report (TAR), wherein, against clause 21(b)(ii) requiring details of payment on which tax was not deducted, yearend provisions of Rs. 2,11,50,000/- for commission payable to directors and Rs. 1,72,00,965/- for advertisement, freight and other provisions was mentioned. The Ld. counsel submitted that no further details were available with the Ld. PCIT or called out from the assessee. It was submitted that in Tax Audit Report against clause 21(g) requiring details of any liability of contingent nature debited to the profit and loss account, the amount is mentioned as NIL only. 6.2 The Ld. counsel submitted that in the return of income filed for the year under consideration, a sum of Rs. 52,23,61,790/- (being 30% of the amount mentioned in point 21(b)(ii) of the Tax Audit Report in respect of year end provisions of Rs. 174,12,05,965/-) was disallowed u/s 40(a)(ia) of the Act for non-deduction of tax at source. 6.3 It was submitted that the assessee follows the mercantile system of accounting and that the provisions were made in respect of expenses incurred up to 31st March for which invoices had not been received by the year-end. Detailed reliance was pla....
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....d perused the relevant materials on record. Before us, the Ld. Departmental Representative (DR) submitted that whether on the merit said liability was ascertained or unascertained could be discharged only after making inquiry on the issue in dispute by the Assessing Officer. 6.6 While above submissions of the assessee may be relevant in the course of assessment proceedings, the limited question before us, in the context of section 263, is whether the Assessing Officer examined the issue at all. On this aspect, it is an admitted position that the Assessing Officer did not conduct any enquiry to determine whether the year-end provisions represented ascertained liabilities or were in the nature of contingent or unascertained liabilities. Before us, in the paper book also no evidence to support that any inquiry was conducted by the Assessing Officer during the assessment proceedings for examining the year end provisions from the angle of unascertained liability was carried out. No material has been placed before us to demonstrate that the issue was examined during the assessment proceedings. The assessee's learned counsel, fairly and candidly, also conceded that no such enquiry ....
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....ext issue concerns the claim of deduction of education cess amounting to Rs. 67,94,69,345/-, which was made by the assessee in the revised return of income by placing reliance on the decision of the Hon'ble Jurisdictional High Court. 7.1 Subsequently, the Finance Act, 2022 amended section 40(a)(ii) of the Act retrospectively, clarifying that the expression "tax" includes surcharge and cess, thereby rendering education cess not allowable as a deduction. Further, by the same Finance Act, sub- section (18) was inserted in section 155 of the Act, providing a mechanism for re-computation of income where deduction of surcharge or cess had been claimed and allowed in earlier years, subject to the assessee filing an application in the prescribed form and within the prescribed time for withdrawal of such claim. The relevant extract is reproduced as under: "(18) Where any deduction in respect of any surcharge or cess, which is not allowable as deduction under section 40, has been claimed and allowed in the case of an assessee in any previous year, such claim shall be deemed to be under-reported income of the assessee for such previous year for the purposes of sub-section (3) ....
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.... that the assessee company has filed form 69 to withdraw its claim for deduction of education cess. Accordingly, the AO is directed to verify and take necessary action as per the Income Tax Act, 1961. 7.6 We note that, after considering the submissions of the assessee, the learned PCIT, in paragraph 15.2 of the impugned order, did not set aside the assessment on this issue nor did he record any finding that the assessment order was erroneous and prejudicial to the interests of the Revenue. The ld PCIT merely directed the Assessing Officer to verify the assessee's contention regarding filing of Form No. 69 and to take action in accordance with law. 7.7 Thus, the PCIT has not exercised revisional jurisdiction to revise or set aside the assessment on the issue of education cess. The direction issued is in the nature of a consequential verification, leaving the assessment order intact on this aspect. 7.8 In these circumstances, no live grievance survives for adjudication before us on this issue. Accordingly, the challenge raised by the assessee on the issue of deduction of education cess has become infructuous and is dismissed as such. Issue No. 3 Disallowance under sec....
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.... directly passed through credit notes. The assessee is offering above discounts on completion of periodic targets and is computed as a percentage of sales turnover. Hence, it is established that the assessee has paid commission to its dealers under the garb of sale price discount in the form of credit notes. 15.3.4 The assessee has adopted the modus-operandi in dolling out commission under the nomenclature of 'various discounts schemes', which is other than the discounts mentioned in the invoice. The discount in question has been given by issuing credit notes to the beneficiaries, who are the assessee's dealers; therefore, the ailed discount given to its dealers in the form of credit notes is nothing but commission on sale. There is no explanation by the assessee as to why the credit note was issued for the alleged discounts and why it has not shown in the invoice. 15.3.5 The assessee does some kind of performance evaluation of the distributors and accordingly decides to reward them with credit notes described as sales discount. The assessee has given Various Discount schemes namely Target discount-spare parts, Consistency discount -spare parts and Cas....
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....he dealers by the manufacturer were held to be liable to be deducted from the price charged to the dealers for the purpose of arriving at the excisable value of the goods; but the commissions given to the agents were held to be not deductible from the price for the purpose of arriving at the excisable value of the goods. It is clear from the various decisions that a discount is given from the gross price and it occur at the instance of sale and purchase between the manufacturer and the distributor/ dealer. Whereas the commission is in the nature of refund or compensation for performing some task or business by one person on behalf of the other and in case of sale and purchase of goods, the commission is accrued at the instance of further sales by the dealer or distributor. Thus, the discount given to the trader or distributor by the manufacturer would be liable to be deducted from the price charged to the dealer or distributor for the value of the goods under the sales tax and excise Act. In the case in hand, the undisputed fact is that the amount of so called discount has not been reduced from the value of price charged by the assessee from the distributor for th....
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....mes; however, when this amount is not as per the obligation under any contract, then the assessee was required to produce the relevant records and material in support of its claim that such scheme of giving the benefit/incentive to the distributor was duly approved by the Board of Directors of the assessee company. Reliance is also placed upon following judicial pronouncement in support of our above- mentioned arguments: SKOL Breweries Ltd Vs. ACIT ITA No. 6175/Mum/2011 (ITAT Mumbai "K" Bench) Decision of Apex court in the case of Lakshminarayan Ram Gopal and Son Ltd. vs. Government of Hyderabad reported in 25 ITR 449. Decision of the Hon'ble Delhi High Court in the case of Commissioner of Income-tax v. Idea Cellular Ltd. reported in 325 ITR 148. 15.3.11 Based on the above facts and arguments, it is clearly established that amount of 154,40,92,249 debited and/or charged to its profit and loss account on account of 'various sale discount schemes' is nothing but in the nature of 'commission' only. Hence, Therefore, this office is revising the order u/s 143(3) r.w.s 144C(3) of the Act on 27.05.2022 passed by the AO. The AO is directed to disallow the amoun....
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....r is that of principal to principal and not that of an agent and the transaction between the assessee and the dealers is purely in the nature of a sale transaction and hence the provisions of section 194H are not applicable. 8.6 Reliance was placed on the decision of the Hon'ble Supreme Court in the case of Bharti Cellular Ltd. vs. Assistant Commissioner of Income-tax [2024] 160 taxmann.com 12 (SC) wherein it is held that where assessees, telecom service providers entered into agreements with distributors/franchisees for sale of their prepaid products, however, contractual obligations of distributors/franchisees did not reflect a fiduciary character of relationship, or business being done on principal's account, they would not be under a legal obligation to deduct tax at source on income/profit component in payments received by distributors/franchisees from third parties/customers, or while selling/transferring prepaid coupons or starter-kits to distributors. 8.7 The ld counsel submitted that issue of cash discount and target incentive is covered in favour of the assessee by the decision of Tribunal in the case of assessee for AY 2021-22. 8.8 Reliance was also plac....
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....elationship between the assessee and its dealers, as well as the character of the impugned payments, notwithstanding the substantial magnitude of the amounts involved. Such omission, according to the learned DR, renders the assessment order erroneous and prejudicial to the interests of the Revenue. It was further argued that, having regard to the typical features of dealership arrangements in the automobile Original Equipment Manufacturer (OEM) sector, and the extensive contractual and practical controls exercised over dealers, the relationship bears the clear indicia of a principal-agent arrangement. Consequently, the so-called "discounts", in substance, represent commission or incentive paid for services rendered by the dealers in the course of promoting and selling the assessee's products, and therefore squarely fall within the ambit of section 194H of the Act. 8.13 Under section 194H, "commission or brokerage" has been defined widely to include any payment, directly or indirectly, to a person acting on behalf of another for: * services rendered (other than professional services), or * any services in the course of buying or selling goods, or * ....
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.... (ii) The dealer is required to provide warranty and free- service obligations to customers on behalf of the OEM, using genuine parts and trained manpower. (d) Branding and infrastructure obligations :- (i) The showroom, signage, workshop layout and staff uniforms are to conform strictly to OEM brand guidelines. (ii) The dealer is often required to invest in specified equipment, training, IT interfaces and reporting systems mandated by the OEM. (e) Sales promotion and reporting :- (i) Dealers are required to implement promotional campaigns, display vehicles, conduct "melas", test-drive events and other activities as per OEM instructions. (ii) Detailed sales / inventory / customer data are periodically reported in formats prescribed by the OEM, enabling the OEM to monitor performance and market share. (f) Monitoring and termination :- (i) The OEM retains wide powers of inspection and audit of dealer operations. (ii) Failure to meet sales targets, maintain standards, or comply with instructions typically entitles the OEM to terminate the dealership. 8.18 These features demonstrate that, notwith....
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....ission" than to an upfront trade discount embedded in the invoice itself. 8.20 In light of the above, inference can be drawn that the incentives to authorised spare parts dealers are essentially payments for services rendered by the dealers to the OEM in the course of buying and selling goods, squarely falling within the inclusive definition of "commission or brokerage" in the Explanation to section 194H. 8.21 The assessee has contended that the unsold stock is not returnable to it and that it is not privy to the dealer's sale to the ultimate customer. In our opinion, these factors, by themselves, are not conclusive. Even in well-recognised agency arrangements, agents may, for reasons of commercial convenience, purchase and hold goods in their own name; the mere incidence of inventory risk does not, ipso facto, transform an agent into an independent trader. What is of real significance is whether, in economic and contractual terms, the dealer is obliged to operate in close alignment with the instructions of the OEM in matters relating to pricing discipline, incentive schemes, customer interface, branding and market representation, and whether the impugned payments are int....
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....ll the conditions of brand and advertisement fixed by the assessee, which is evident from various clauses from 5.1 to 5.11 of the dealer's agreement. 8.25 Further, the clause 7.4 of the agreement specifies that the facilities and infrastructure of the dealer shall remain exclusive to the Bajaj and can't be used in any manner to display, service or sell goods competitive with the products, without written consent of Bajaj. This clause reflects the control of the assessee over the dealer. 8.26 As per clause 6.12 of dealer agreement, the dealer is required to give written confirmation that the products sold by the dealer have not been sold /marketed outside the territory, which is contrary to the claim of the assessee that he is not privy to the sales of the dealer. Not only this, the clause 9.2 requires that the dealer has to maintain its showroom and workshop as per the standard of the assessee. The relevant clause is reproduced as under: "9.2 The DEALER shall maintain the level of Products' Quality and take care of distribution of the Products in the Territory specified in this Agreement and particularly, as found necessary, and shall: 9.2.1. mai....
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....s an over-simplification which ignores the commercial and contractual realities of the dealership arrangement. 8.30 The assessee relies on Bharti Cellular Ltd. v. ACIT (supra) and decisions such as Ahmedabad Stamp Vendors Association (supra) etc., where discounts to distributors were held not to be commission. Those decisions turned on their own specific factual matrices, where: * distributors purchased products at a discounted price and were largely free to resell at any price to any customer; * there were no significant territorial, branding or service obligations imposed on them in favour of the principal; * incentives were essentially embedded trade discounts without post-facto performance conditions of the type seen in automobile dealership contracts. 8.31 In contrast, automobile dealers, as indicated earlier, are deeply integrated into the OEM's sales and service network, are required to represent the OEM to customers, and are bound by extensive contractual controls. Target and consistency incentives are designed to incentivise and compensate these services, and not merely to pass on a lower purchase price. 8.32 Thus, the ratio of Bhart....
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.... on substance over nomenclature; and * the difference between an upfront trade discount embedded in the invoice and a post-facto, performance-linked payment. 8.34 No such examination is reflected either in the assessment order or in the assessment records. The mere fact that certain Tribunal decisions in other years are claimed to be favourable to the assessee does not absolve the Assessing Officer of his duty to conduct independent, year-specific enquiry, especially when: * the quantum involved is substantial; and * The assessing officers in earlier years have disallowed the said incentives. 8.35 In our considered view, the Assessing Officer was duty-bound to conduct a detailed, year-specific enquiry into the dealership agreements, the incentive schemes, their actual mode of operation, and the nature of services rendered by the dealers, before arriving at a conclusion on the applicability of section 194H and the consequential disallowance under section 40(a)(ia). The complete absence of such enquiry vitiates the assessment. 8.36 Having regard to the magnitude of the amounts involved and the prima facie nature of the payments, the failure of the ....
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....ase of dies and moulds by the assessee represents Jigs and fixture was also treated in capital in nature by the department. Further, the assessee has stated that in the some of the years CIT(A) has allowed the claim of the assessee. Further, in some of the years, ITAT has also upheld the claim of the assessee. In this regard it is pertinent to mention that the department has filed further appeal against the said orders. Both the issues of the assessee are recurring in nature and pending for final adjudication. Therefore, this office is revising the order 143(3) r.w.s 144C(3) of the Act on 27.05.2022 passed by the AO. The AO is directed to disallowed the expenditure claimed in respect of Dies and Moulds' amounting Rs. 57,01,42,237 and Jigs and Fixture amount to Rs. 37,59,92,362/-. " 9.2 Before us, the Ld. counsel for the assessee submitted that 'Dies and Moulds' are used with die casting machines/moulding machine/sheet metal presses to produce the parts used in manufacture of the products viz. two wheelers and three wheelers. The said die and moulds used by the assessee are capable of producing about 50,000 to 1,00,000 units of a part of a motorcycle. 'Dies and mo....
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....ajaj Auto Limited, prior to demerger): a. ITAT-AY 2003-04 (ITA No. 1420/Mum/2007) b. ITAT-AY 2002-03 (ITA No. 2899/Mum/2010) c. ITAT-AY 2001-02 (ITA No. 4236/ Mum/ 05) d. ITAT-AY 1999-00 (ITA No. 2125/Mum/05) e. ITAT-AY 2000-01 (ITA No. 3055/ Mum/ 05) f. ITAT-AY 1998-99 (ITA No. 8952/Mum/2004) g. ITAT-AY 1997-98 (ITA No. 5030/Mum/2001) h. ITAT-AY 1996-97 (ITA No. ITA No. 1781/Mum/2000) i. ITAT-AY 1995-96 (ITA No. 3493/Mum/ 1999) j. ITAT-AY 1994-95 k. ITAT-AY 1993-94 l. ITAT-AY 1991-92 9.4 The Ld. counsel further submitted that in assessee's own case (post demerger) the Ld. CIT(A) has allowed the claim of the assessee in assessment year 2008-09 to assessment year 2014-15. The ld Counsel submitted that once the issues in respect of which a proposed action under section 263 is contemplated, have already been decided on merits in favour of the assessee, action under section 263 itself becomes without jurisdiction. 9.5 We have heard rival submissions of the parties and perused the relevant materials on record. It is undisputed that no inquiry has been made by the Ld. Ass....