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2015 (9) TMI 20 - AT - Income TaxDisallowance made u/s 43B - certain items of excise duty - amount deposited by the assessee in PLA - Held that:- Under the 'Inclusive method', the figures of purchase, sale and inventories are required to be taken with the element of tax or duty etc. Since the amount of unutilized balance of excise duty under PLA does not form part of purchase, this amount will be eligible for separate deduction u/s 43B. At the same time, the last year's unutilized PLA getting deduction in that year due to the application of section 43B, would be required to be added back to the income of the current year as determined above. We, therefore, set aside the impugned order and direct the AO to firstly recast the assessee's Profit and loss account on inclusive basis and then make suitable deduction in respect of the amount of unutilized PLA at the end of the current year and also the preceding year. Deduction for Modvat credit by means of its inclusion in Purchase value of raw materials can be treated as allowed by way of debit to the Profit and loss account only when it also gets exhausted. If, even after a debit to the Profit and loss account, the amount appears in balance sheet, in one form or the other, the deduction cannot be said to have been actually allowed on payment, till it is exhausted and gets removed from the balance sheet also. In such circumstances, the amount of unexhausted (not necessarily only unutilized) Modvat credit – i.e. which appears in balance sheet either in the form of increased value of closing stock (Rs.2 in our example) and increased value of raw material representing unutilized Modvat credit (Re.1 in our example) - calls for separate deduction in terms of section 43B. We, therefore, set aside the impugned order and direct the AO to first recast the assessee's Profit and loss account on inclusive basis, then allow deduction for the equivalent amount of Modvat credit as represented by ₹ 3 in our example. The AO should also make sure that the equivalent of ₹ 3 allowed as deduction on payment basis u/s 43B in this year should not get deducted in the next year and further, the corresponding amount of deduction allowed u/s 43B in the preceding year, should also be separately added to the income of the current year. Disallowance u/s 43B in dispute is the amount of excise duty paid under protest to the tune of ₹ 45 lac - Held that:- Issuance of notice of demand by the competent Excise authority makes the amount otherwise deductible by means of incurring the liability. This satisfies the condition of section 43B which provides for deduction on actual payment in respect of an otherwise deductible amount. Since the amount in question has been paid during the year, it qualifies for deduction in terms of section 43B under the exclusive method. Thus on one hand deduction for excise duty paid under protest is available in the year of payment under the exclusive method, the same amount cannot be allowed to get deducted once again on the finalization of the dispute with the Excise department on its transfer to Excise duty account. Simultaneously, the amount of excise duty paid under protest in earlier years getting deduction u/s 43B calls for inclusion in the total income of the current year on the removal of the amount from Excise duty paid under protest account. We have noticed above that section 145A is applicable to the year under consideration and accordingly, income is required to be determined by switching over to the 'Inclusive method' and then allowing deduction u/s 43B on payment basis. We, therefore, set aside the impugned order and direct the AO to first recast the assessee's Profit and loss account on inclusive basis, inter alia, by including the amount of excise duty paid under protest to the purchase value of goods. Disallowances u/s 43B on items of customs duty - Held that:- In view of the detailed discussion with reference to the applicability of section 145A to the year in question, there can be no escape from valuation of purchase, sale and inventories under the inclusive method. We, therefore, direct the AO to recast Profit and loss account under 'Inclusive method' as per the mandate of section 145A, thereby, inter alia, increasing the purchase value with the above customs duty. Then the AO will allow separate deduction for the above referred sums to the extent not getting eventually deducted separately by way of increased purchase price, as has been discussed above. At the same time, we also direct the AO to make sure that such amount separately getting deducted in this year does not get deduction once again in the next year. In the like manner, the last year's similar deduction separately allowed should be taxed in the computation of income of the current year. Customs duty paid under protest - Held that:- As discussed similar issue supra while dealing with 'Excise duty paid under protest' by holding that first the Profit and loss account be recast as per 'Inclusive method' in terms of section 145A and then some adjustments as stated above be separately made. Such directions are fully applicable pro tanto to the customs duty paid under protest. The AO is directed to follow the same. Disallowance u/s 43B is customs duty included in closing stock - Held that:- As elaborately discussed this aspect supra in the context of excise duty included in the value of closing stock. In principle, we hold that the amount of customs duty of ₹ 22.52 crore is allowable in the year in question, but, the AO is directed to first verify the argument of following the 'Inclusive method' and then allow deduction u/s 43B in the manner discussed above, if the same did not get eventually allowed. The AO should further make it is sure that no double deduction is allowed on this score, either in the current year with the last year's amount getting separately deducted u/s 43B or in the next year with the current year's amount getting separate deduction. Adjustments on account of last year's disallowances u/s 43B - Held that:- We agree with the argument that since the amount of unutilized Modvat credit stood disallowed in the preceding year by the tribunal on the premise that the same before its set off cannot be treated as tax paid, then the same should be excluded from the total income of the current year, if voluntarily offered by the assessee for taxation. The AO is directed to verify this aspect and allow deduction for this sum, if the same was eventually disallowed in the preceding year and the assessee once again offered it for taxation in the computation of total income for the current year. Certain amounts claimed by the assessee as deductible in the preceding year u/s 43B as excise duty and customs duty and voluntarily offered for taxation in the current year's income - Held that:- As apart from the sustenance of disallowance of ₹ 71.63 crore in the preceding year, there is no other disallowance u/s 43B which has been upheld by the Tribunal. It is overt that all other disallowances made by the AO u/s 43B have been deleted by the tribunal. The ld. AR could not furnish any detail of the remaining amount of ₹ 69.96 crore (Rs.141.59 crore minus ₹ 71.63 crore), allegedly finally disallowed u/s 43B of the Act by the tribunal in the preceding year. It is simple and plain that if the tribunal has allowed deduction for the amounts disallowed by the AO in the preceding year, then the same are rightly chargeable to tax in the current year. This ground is, therefore, dismissed, subject to our decision on ground no. 3.5 in granting deduction of ₹ 71,63,89,449, representing last year's unutilized Modvat credit which was claimed by the assessee as deductible u/s 43B but disallowed by the AO and also the tribunal. Transfer pricing adjustment of Royalty for licensed trademark - Held that:- Addition on account of transfer pricing adjustment can be made by making a comparison between the transacted value of an international transaction and its ALP. Thus it is clear that the availability of the transacted value of an international transaction is sine qua non. If such transacted value is either not separately available or cannot be precisely determined from a combined value of a number of international transactions, then the entire exercise of determining ALP fails. Instantly, we are confronted with such a peculiar situation. There is no separate value of the international transaction of royalty for use of licensed trademark and the tribunal has held in the earlier year that it is a payment of inseparable royalty for use of both the licensed information and the licensed trademarks. In such circumstances and respectfully following the order of the tribunal for the immediately preceding year, we order for the deletion of the addition of ₹ 127.195 crore on account of transfer pricing adjustment of royalty for use of licensed trademark. Royalty for Licensed information whether capital expenditure? - Held that:- Our finding decides the nature of royalty payment for use of licensed information as revenue expenditure and not its quantum part. We have noticed above that the tribunal in its order for the immediately preceding year has also given some observations, which prima facie indicate that the entire amount of royalty is for the use of licensed information. Since we have held the royalty for use of licensed information as revenue expenditure, the quantification aspect becomes irrelevant. It is so because the TPO has held royalty for use of licensed information at ALP. We, therefore, hold that the amount of royalty considered by the AO as capital expenditure should be allowed as a revenue expenditure. At the same time, depreciation allowed by the AO on this amount should be taken back. R&D cess on royalty paid - Held that:- The AO disallowed a sum of ₹ 9.68 crore after proportionately allowing deduction to the extent of depreciation allowed by him on royalty. There is no dispute on the nature of cess, which is on royalty and has been treated both by the assessee as well as the AO as part and parcel of royalty and accordingly claimed/disallowed in line with the treatment of royalty. Since we have allowed deduction for the entire amount of royalty paid by the assessee during the year by deleting the TP adjustment and also overturning the action of the AO in treating the remaining half part as capital expenditure, the consequential amount of cess on royalty payment automatically becomes deductible. We, therefore, direct to allow deduction of ₹ 9.68 crore. Royalty paid to non-AE - Held that:- If there is a transaction with non-AE that automatically goes out of reckoning for the purposes of processing it u/s 92 of the Act. Further, we do not consider it necessary to consider this issue on merits because in earlier paras we have deleted entire royalty addition made by the AO, comprising of transfer pricing adjustment on account of international transaction of payment for use of 'Licensed trademark'; and payment for use of 'Licensed information' treated by him as capital expenditure. The net effect of this deletion is that even if the amount under consideration is paid to AE, still it is deductible. Be that as it may, we find that this ground is otherwise also not sustainable. The reason being that the TPO made transfer pricing adjustment in respect of royalty paid for use of licensed trademark. On the contrary, this amount paid to M/s Auto Chassis International is admittedly for use of know-how and not their trademark. Treatment to subsidy - revenue receipt as against the assessee's claim of capital receipt - Held that:- Assessee was allowed subsidy under Industrial Policy 1999 of the Government of Haryana. Para 7 of the Certificate puts condition for entitlement of subsidy by providing that: 'incentive would be given only in respect of vehicles rolled out of production capacity of 70000 vehicles added as a result of first expansion and not to the production augmented by capacity addition of 30000 vehicles as a result of second expansion.' When we consider section 25A along with Rule 28C of Haryana General Sales-tax Act/Rules, it becomes evident that the object of subsidy is in line with the Industrial Policy of Haryana Government, being 'attracting new investments and growth of existing industry.' In our considered opinion, such subsidy cannot be characterized as anything other than a capital receipt. It has been brought to our notice that the Tribunal, for the immediately preceding assessment year, has also treated similar subsidy as capital receipt. T.P. Adjustment of AMP Expenses - Held that:- Presently, we have the benefit of the judgment of the Hon'ble Delhi High Court in Sony Ericsson (2015 (3) TMI 580 - DELHI HIGH COURT ), which has also dealt with the treatment to be given in the context of a manufacturer.No reasons, except the pendency of the matter in the Hon'ble High Court in assessee's own case, have been given by the ld. AR to claim departure from the view taken by the tribunal in earlier cases. We, therefore, turn down the request of the ld. AR in this regard. With these observations, we send the matter back to the file of TPO/AO for a fresh determination of the ALP of the AMP expenses in accordance with our above observations. In view of our decision in restoring the issue of calculation of ALP of AMP expenses to the TPO/AO, the assessee's appeal against the order passed by the AO/TPO u/s 154, enhancing the amount of TP adjustment, would automatically be taken care of in such fresh proceedings. We want to clarify that in such fresh proceedings, the assessee will be at liberty to lead any fresh evidence in support of its case. Excess consumption of raw materials - Held that:- It is manifest that the net difference of ₹ 1.62 crore is nothing, but, excess consumption over the standard consumption. Such shortage of ₹ 1.62 crore is only 0.018% of total consumption of material debited to the Profit & Loss Account. In view of the fact that this amount has actually been consumed in the manufacturing of goods, it cannot call for any disallowance. There may be production efficiencies or inefficiencies leading to under or over consumption of inputs vis-a-vis standard consumption. Such under or over consumption becomes a part of the cost of production. In our considered opinion, there can be no logic in disallowing such amount, which is nothing but excess consumption of inputs. Similar view has been taken by the Tribunal in the assessee's own case for earlier assessment years including the immediately preceding assessment year. This ground is allowed. Disallowance u/s 14A - Held that:- AO's decision in applying Rule 8D for making disallowance u/s 14A of the Act, cannot be countenanced. It is noted that similar disallowance was made for the immediately preceding year. When the matter came up for consideration before the tribunal, the Bench held that the disallowance u/s 14A cannot be made as per Rule 8D and the question of computation of disallowance u/s 14A has been remitted to the AO for doing it afresh as per law. Respectfully following the precedent, we also set aside the impugned order on this score and send the matter to the file of AO for making disallowance u/s 14A, in accordance with the view taken by the Tribunal in its order for the assessment year 2005-06. Disallowance u/s 35DDA - Held that:- It is observed that similar issue came up for consideration before the Tribunal in its order for the AY 2004-05. After making a thorough discussion on the issue, the Tribunal has held that Rule 2BA is relevant only for the purpose of availing exemption u/s 10 by employees and not for the purpose of allowing deduction to the employer u/s 35DDA of the Act. Resultantly, the disallowance made by the AO came to be knocked down by the tribunal. In the absence of any distinguishing factor having been pointed out by the ld. DR, respectfully following the precedent, we direct to allow deduction u/s 35DDA Disallowance of club membership fee - Held that:- In our considered opinion, this issue is no more res integra in view of the judgment of the Hon'ble Supreme Court in CIT vs. United Glass Manufacturing Company Ltd. [2012 (9) TMI 914 - SUPREME COURT] in which it has been held that no disallowance can be made for club membership in respect of the employees of the company. Similar view has been taken by the Tribunal in the assessee's own case for the earlier assessment years including the immediately preceding year. Respectfully, following the above precedents, we order for the deletion of this addition. Depreciation on software expenses capitalized in earlier years - Held that:- It is obvious that once the AO has refused to grant deduction of software expenses claimed by the assessee and capitalized the same by treating it as capital asset, then depreciation on the written down value of such software expenses is required to be granted as per law. Since no such detail is available about the written down value of software expenses capitalized in earlier years, we set aside the impugned order and remit the matter to the file of AO for allowing deduction in respect of the written down value of the software expenses capitalized in earlier years. Charging of statutory interest u/s 234B, 234C and 234D of the Act.- Held that:- This ground is consequential and is, accordingly, allowed except the charging of interest u/s 234C. The ld. AR argued that the AO computed interest u/s 234C on the basis of income finally determined as against the income-tax due on returned income. We find force in the arguments put forth on behalf of the assessee that computation of interest u/s 234C for deferment of advance tax is required to be made on the basis of 'tax due on the returned income' as has been enshrined in the provision itself. We, therefore, direct the AO to verify this aspect of the matter and compute interest u/s 234C as per law.
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