2019 (4) TMI 1509 - AT - Income Tax

Transfer Pricing Adjustment u/s 92CA - payment of model fee - royalty - export commission - operating profit/sales ratio of the assessee @ 12.91% is higher than the average of the operating profit ratio of comparable companies, i.e., (-) 21.97% - TNMM - HELD THAT:- The facts of the present assessment year are identical with that of the [2018 (7) TMI 208 - ITAT DELHI] . No distinguishing facts were placed on record by the Ld. DR.

The payment of model fee is a consideration in terms of agreement with the associated enterprises for availing license to use their proprietary technology and it is a necessity for the assessee for manufacturing of the products to have knowledge of know-how from the associated enterprise.

Payment of royalty is made in consideration for right to manufacture products and using the technical know-how owned by the associated enterprises. As regards royalty on sales to AEs, from the records it can be seen that the assessee is an independent manufacturer of products in respect of two wheelers and not a contractor manufacturer. The sale of such products made to the AE on principal to principal basis, at price agreed upon by the parties.

As regards payment of export commission, the assessee paid this export commission for providing access by HMCL to the assessee for procuring export orders using their network and infrastructure in relation to export. In fact the export agreement with HMCL impart the consent to the assessee for export of specific models of two wheelers to certain countries on payment of export commission @ 5% of the FOB value of such export. It is noted here that by virtue of the said payment the assessee gained the access to new market for its products, which enabled it to enhance sales. Thus, the TPO/DRP was not correct in disallowing these three components in the Transfer pricing additions and we are allowing Ground No. 1 to 12 of the assessee’s appeal.

Addition of freight inward/import clearing expenses - assessee ordinarily purchases raw material on CIF basis and, therefore, freight cost for delivery of goods is ordinarily included in purchase price and are factored in the value of closing inventory - HELD THAT:- The assessee is following consistent system of accounting which was without any reasons was disturbed by the Assessing Officer despite that the facts remains same in this year as well. There is no alteration in the profit of the assessee company. Therefore, the issue is squarely covered by the order of the Tribunal in earlier years [2018 (7) TMI 208 - ITAT DELHI]

Addition on account of cost of rejection of semi-finished goods and obsolete items to the value of closing stock - assessee had debited to the profit and loss account ₹ 1,356.22 lacs representing the cost of material / semi-finished goods rejected in the course of manufacturing or obsolete items - aforesaid rejections comprised of abnormal rejections arising in the course of manufacturing, like rejections on account of obsolescence, etc - Scope of principles of accounting (AS-2) - HELD THAT:- It is pertinent to note that it is not practically possible for the assessee to segregate normal and abnormal wastages embedded in the aforesaid costs and therefore, the assessee, as per consistent and regular method of accounting, accepted by the Revenue as such in the earlier years, did not consider the aforesaid expenditure for the purposes of valuation of closing inventory of finished goods. The AO/DRP was not correct in making this addition. The issue is squarely covered in assessee’s favour by the order of earlier assessment years.

Disallowance of provision for increase in price of material - adjustments which are not consistent with the explanation to Section 115JB - assessee has appointed various vendors for supply of material to be used in the process of manufacturing of vehicles. The assessee at the time of issuing of purchase order, negotiates the price at which the particular component/ components shall be supplied by the vendor. Subsequently, vendors are provided supply of component schedule annually - HELD THAT:- From the records it can be seen that the provision for the material is worked out in respect of price amendments which were already issued on 31.03.2009 which was made on the basis of actual supplied made upto the end of the year as per price amendments actually issued on 31.03.2009. The provision was made on the basis of actual PO issued to the vendors for change in the prices during the year and thus, does not involved any estimation. AO was not right in making adjustments which are not consistent with the explanation to Section 115JB.

Disallowance of prior period expenses - assessee is a large size manufacturing company which receives services from several vendors, running into hundreds and made attempt to quantify the liability incurred towards expenses during the relevant previous years and provide for it - HELD THAT:- From the records it can be seen that the assessee made reasonable attempt to quantify the liability incurred towards expenses during the relevant previous years and provide for it. But it was not humanly possible to consider and provide for all the expenses, in absence of relevant details/material/information for various reasons like non-receipt of bills/invoices from the vendors, the contract terms with vendors not being settled, disputes in relation to bills received, services contracted by zonal/regional/branch officer not intimated to the head office, etc. Therefore, assessee in our opinion rightly claimed miscellaneous expenses aggregating to ₹ 17,83,68,791 pertaining to prior period.

Advertisement provisions of Head Office - at the end of year, the assessee makes provision for various expenses incurred during the year on the basis of reasonable estimate since in the absence of receipt of bills/invoices from the vendors, which are received in the succeeding year, the exact amount payable there against was not ascertainable - HELD THAT:- It is pertinent to note that the provision for advertisement expenses was made on the basis of actual Purchase orders and agreements and thus, has been made on reasonable and scientific basis in this year as well. Thus, the Assessing Officer was not right in disallowing the said expenses. In the present Assessment Year also the facts are similar and are squarely covered with the decision of the Tribunal for A.Ys. 2010-11, 2011-12, 2012-13 and 2013-14.

Addition u/s 40A(2)(b) - Disallowance of excessive purchase from related parties as per AS- parties - HELD THAT:- The purchase prices of components which are purchased from various suppliers are based upon negotiations with such vendors and are different due to various factors. The assessee also prefers purchasing material from certain suppliers, due to business/commercial expediency. The said parties are not related to assessee, in terms of the provisions of section 40A(2)(b). During the relevant previous year, the assessee made total purchases of various raw materials, etc. aggregating to ₹ 9366.88 crores. Out of the aforesaid total purchases, purchases from related parties, i.e., parties related to the assessee, in accordance with definition given in AS-18 issued by the ICAI and as disclosed in the notes to accounts of the audited accounts of the relevant previous year, but admittedly not related in terms of definition provided in section 40A (2)

Deemed dividend u/s 2(22)(e) - payment received on behalf of Hero Honda Fin Corp. Ltd. (HFCL) - HELD THAT:- In this Assessment Year as well when payments by dealers to HFCL are due to the dealers, due to convenience of facility of collection centers of the assessee available all over India, make payment into the assessee's bank account, for and on behalf of HFCL, which is in turn remitted by the assessee to HFCL in 2- 3 days. Thus, the assessee is mere custodian of the said amount. Thus, Section 2(22)(e) will not be applicable in the present case.

Disallowance of payments made for advisory services availed from Hero Corporate Services Ltd.(HCSL) - During the relevant previous year, the assessee paid retainer ship fee in connection with availing advisory services for the purposes of business. - HELD THAT:- Services were rendered by HCSL to the assessee and the assessee explained the nature of services received from Hero Corporate Services Ltd. and nexus of same with the business of the assessee before the Assessing Officer. AO was not right in disallowing the payments made for advisory services availed from HCSL.

TDS u/s 194H - TDS on quarterly target and turnover discount and Sales Discount - HELD THAT:- From the perusal of records it can be seen that as dealership agreement entered between the appellant and dealers is on a principal-to-principal basis and dealers do not act as agents of the appellant while purchasing and further selling the vehicles. Accordingly, the incentives offered at the time of purchase of vehicles do not fall within the meaning of commission u/s 194H. AO was not correct in holding that the assessee was liable to deduct tax from discounts/incentives u/s 194H.

TDS u/s 194J - disallowance of legal and professional expenses u/s 40(a)(ia) - re-imbursement of professional expenses - HELD THAT:- In the present Assessment Year, the Assessing Officer disallowed the aforesaid expenses, invoking section 40(a)(ia), for the failure of the assessee to deduct tax at source there from under section 194J . But it is pertinent to note here that the Assessing Officer did not doubt that the payment was made by assessee towards reimbursement of expenses, it was still held that assessee was liable to deduct tax at source under section 194J of the Act. Deletion of disallowance on account of non-deduction of tax on reimbursement of expenses following the order for assessment years 2007-08 and 2008-09

Disallowance of Royalty Expenditure/ model fee/cess on model fee - capital in nature - HELD THAT:- As during the currency of the agreement, the assessee only had a limited right to use the technology of Honda. Ownership/proprietary rights in the technical know-how continued to vest in Honda and the assessee was not authorized to transfer, assign or convey the know-how/technical information to any third party as the assessee only acquired limited right to use and exploit the know-how. Thus, royalty/TGF/Model fee payable to Honda is only for the purpose of use of technical assistance in the manufacture and sale of products and the assessee has not acquired any capital asset. Thus, the payment made to simply use the technical know-how/knowledge provided by the foreign collaborator as opposed to acquisition of ownership rights therein are revenue expenditure only and the same should have been allowed by the Assessing Officer/TPO. The model fees is also allowable as revenue expenditure in previous years.

Gains from sale of investments - capital gain vs business income - assessee invests surplus funds arising in the course of business under various modes of investment like mutual funds/ PMS, shares etc - gains realized from sale of such various instruments during the relevant previous year, were disclosed under the head ‘capital gains’ - HELD THAT:- AO overlooked the fact that the assessee was not a trader in stock and had no intention of holding the shares as stock. Besides the Assessing Officer also overlooked the aspect that sales were effected by deliver and revenue in earlier years taxed such transactions under the head capital gains.

Disallowance u/s 14A as per Rule 8D - assessee company earned dividend/interest income from investments in shares, bonds, and mutual funds, which was exempt under section 10(34)/l 0(35)/l0( 15)(iv)(h) - assessee made suo moto disallowance - HELD THAT:- AO did not accept the method of disallowance computed by the assessee under section 14A and made further disallowance of ₹ 124.88 lakhs invoking provisions of Rule 8D after reducing the suo moto disallowance made by the assessee in the return of income. But the Assessing Officer has not given the proper calculation to that effect. Therefore, the matter is restored back to the file of the AO. AO that after taking congnizance of the Apex Court decision in case of Maxopp Investment Ltd. [2018 (3) TMI 805 - SUPREME COURT OF INDIA] , pass the appropriate order.

Disallowance of additional depreciation of model fee - incurred prior to commencement of production of the new model - HELD THAT:- It is pertinent to note that in the present year expenditure was incurred on new model fees prior to commencement of production of new models of two wheelers, and even otherwise this is revenue neutral exercise as the same adjustment would be required to be made to the opening stock of finished goods for the year under consideration. Thus, the facts are similar to the subsequent Assessment years and are squarely covered with the decision of the Tribunal for A.Ys. 2010-11, 2011-12, 2012-13 and 2013-14.

Disallowance of reimbursement of foreign travelling expense to directors/employees - allowable business expenditure - no evidence/proof of actual expense incurred by employees - HELD THAT:- The details were given by the assessee company to the Assessing Officer in specified form for the expenditure on basis of which travel bill was settled. But AO simply disallowed the same stating that there is no sufficient evidence to establish incurrence of actual expense. AO is not correct in disallowing this expenses as the employees will not get the extra allowance in case of excess expenditure.

Expenses incurred on advertisement on death anniversary of Late Shri Raman Munjal being the founder of the assessee company - personal expenditure being related to promoters’ family and was not incurred for the purpose of business - HELD THAT:- It is pertinent to note that such expenditure incurred by the assessee on death anniversary of Sh Raman Kant Munjal was not personal expenditure of the promoter family and satisfied the tests of ‘commercial and business expediency’ and thus was an allowable business deduction under Section 37(1) of the Act.

Disallowance of commission paid to Managing Director & CEO, Shri Pawan Munjal and Joint Managing Director, Shri Sunil Kant Munjal u/s 36(1)(ii) - HELD THAT:- In the preceding years the Tribunal held that the commission paid to directors with reference to percentage of profits of the company for the services rendered as per the terms of appointment, constitutes part of the remuneration package, and in the absence of any disallowance on other components of remuneration paid to such director, the commission cannot, ipso facto be classified as payment of profit/dividend covered within the exception provided u/s 36(1)(ii).

Disallowance of proportionate amount of premium paid for land taken for 99 years at Haridwar - HELD THAT:- It is pertinent to note that the DRP, allowed the assessee depreciation on the premium paid for acquiring of leasehold rights of land, considering the same as an intangible asset in the nature of ‘business or commercial right’ which is eligible for depreciation u/s 32(1)(ii). This direction was not at all considered by AO. Direct the AO take into account the direction of the DRP and pass necessary order after giving hearing to the assessee by following principles of natural justice. Therefore, we remand back this issue to the file of the Assessing Officer.

Disallowance of expenses incurred on account of ‘Corporate Social Responsibility’ (CSR) - HELD THAT:- The role of the assessee was not restricted to merely earning profit, but also discharging certain community related expenses, which would be considered to have been incurred on account of commercial/ business expediency.

Disallowance of deduction u/s 80IC - being the proportionate amount of sales to vendors for processing of semi-finished goods supplied by the assessee , computed on ad-hoc basis, on the ground that manufacturing activity to the aforesaid extent of sales was outsourced - HELD THAT:- We fully agree with the findings of the Tribunal in A.Ys. 2010-11 to 2013-14 that outsourcing of certain intermediary processes or procurement of finished components in the process of manufacture does not tantamount to outsourcing of manufacturing activities and thus would not hamper the claim of deduction of the assessee company u/s 80 IC. It is also pertinent to mention that no appeal has been filed by the Department before the Hon’ble Delhi High Court.

Disallowance of deduction u/s 80IC - part of the manufacturing activity (ies) at Haridwar were outsourced on the basis of lower consumption of power per unit at Haridwar plant vis-à-vis rate of power consumption at other two plants - HELD THAT:- In the present Assessment Year also difference in consumption of electricity was on account of the fact that the plant at Haridwar was much more energy efficient than other plants and therefore, certain processes were carried out in said plant. Thus, outsourcing of certain intermediary processes or procurement of finished components in the process of manufacture does not tantamount to outsourcing of manufacturing activities and therefore claim of deduction under Section 80IC is just and proper.

Disallowance of deduction u/s 80IC on account of inter-unit transfer of goods - assessee is engaged in the business of manufacturing two-wheelers - HELD THAT:- Allowing the claim of the assessee under section 80-IC of the Act, held that for the purpose of computing market price of inter-unit transfer of goods, when the non-eligible units procured goods at market price from third party vendors and supplied the same to the eligible unit at the same purchase price as increased by the applicable freight cost, no further substitution of such price is warranted in terms of section 80IA(8) and the transaction was a genuine business transaction borne out of commercial expediency

Disallowance of deduction u/s 80IC on account of inflation of profit by charging higher basic price - assessee is engaged in the business of manufacturing two-wheelers - HELD THAT:- Section 80IA(10) is applicable to transactions entered with related parties whereas the prices charged by the assessee was from customers/dealers. Thus the final price charged to the end customer was the same irrespective of the unit of manufacture. Therefore, the Assessing Officer was not correct in disallowing the claim of the assessee.

Disallowance u/s 80IC on account of profit attributable to advertisement and marketing activities carried out at Head Office - HELD THAT:- The Head office is not a separate profit centre and therefore, no profit is to be separately attributed to such activity. For the purpose of working out eligible deduction under Section 80IC of the Act, actual expenses incurred at the head office are to be allocated between various profit centers on a rational and scientific basis which has been rightly done by the Assessee company. AO was not correct in disallowing the said expenses.

Disallowance of certain incomes earned by the eligible unit, on the ground that such incomes were not derived from the business of manufacture of specified articles or things - HELD THAT:- Other incomes in the nature of Interest on loan to employees, interest on loan to vendors for working capital support, freight recovery, sundry sales, cash discounting from vendors and exchange fluctuation gain, etc. earned by a unit eligible for deduction under Section 80IC has to be considered as incidental to the activity of carrying out manufacturing and thus eligible for deduction

Disallowance of deduction u/s 80IC for non compliance of Rule 18BBB and non-adherence to condition specified in Industrial Policy - HELD THAT:- The assessee company has given all the necessary details to the Assessing Officer and fulfilled all statutory conditions for the claim of deduction u/s 80IC.

Disallowance of purchase u/s 40(a)(ia) for alleged failure to deduct TDS u/s 194C - HELD THAT:- In the present case the recipient have discharged their tax liability and certificate of Chartered Accountant to that effect was provided by the parties, therefore, no disallowance can be made u/s 40(a)(ia). Thus, this issue is squarely covered in case of Ansal Land Mark Township P. Ltd [2015 (9) TMI 79 - DELHI HIGH COURT]

Disallowance of commission paid to dealers on institutional sales alleging failure of deduction of tax at source u/s 194H - HELD THAT:- Since the payees have also paid tax on the income received/receivable from the assessee, no disallowance could be made under Section 40(a)(ia). We agree with the findings of the Tribunal for A.Y. 2007-08 that tax is not required to be deducted u/s 194H on payments made to dealers on account of sales by dealers on principal to principal basis

TDS u/s 194J - Disallowance of payment made to dealers under free service coupons for non deduction of tax - HELD THAT:- Tribunal in earlier years deleted the disallowance made u/s 40(a)(ia) on the ground that - (i) repair services do not fall within the meaning of professional services defined u/s 194J and (ii) no service was, in any case, availed by the assessee from dealers; service, if any, was availed by customers from the dealers, necessitating obligation on the assessee to deduct tax at source.

Disallowance of additional depreciation of computers installed at Supervisory Office - HELD THAT:- we are remanding back the matter to the file of the Assessing Officer to determine if the computers were used for data processing at industrial premises or not. We direct the Assessing Officer that after taking congnizance of the same pass appropriate order. Needless to say, the assessee be given opportunity of hearing by following principles of natural justice

Disallowance of deduction u/s 80IA in relation to generation of power - HELD THAT:- Issue is squarely covered with the decision of the Tribunal in earlier years. In fact here also price of power charged by State Electricity Board is not reflective of market price for computing deduction u/s 80IA (4).

Disallowance of provision for warranty holding the same to be unascertained - HELD THAT:- In assessee's own case for earlier assessment year decided the issue in favour of the assessee and accepted the method of accounting for warranty claim. The departmental appeal has not been entertained by the High Court against said orders. AR pointed out that the Revenue has not preferred appeal against the order passed by the CIT(A) on the aforesaid issue for the assessment year 2003-04 which is pending before the Tribunal. Thus the Revenue accepted the aforesaid claim made by the assessee. AO was not correct in disallowing the provision for warranty holding the same to be unascertained as the provision for warranty was made by the assessee since A.Y. 1996-97 on the basis of weighted average cost for the actual claims received in the past two years which was a scientific and rational basis and accepted by the revenue in past.

Disallowance of export commission paid to Honda Motor Co. Ltd. of Japan, u/s 40(a)(ia) - HELD THAT:- similar issue was decided in favor of the assessee by Tribunal, holding that by way of export agreement, Honda has only permitted the assessee to export the specified goods to the specified countries and the assessee has not acquired any asset/intangible right in the nature of a capital asset.

Ad-hoc disallowance on the ground that the assessee had allegedly engaged in shifting of profits and/or losses through Client Code Modification (CCM) - HELD THAT:- AO did not bring any document and/or evidence on record to support the adverse inferences drawn in respect of genuineness of the impugned transactions or suggesting mala fide client code modifications in the case of the assessee - disallowance has been made purely on the basis of assumptions and surmises. There was no adverse material on record which shows that the assessee has shifted the profits and/or losses through Client Code Modification (CCM) - Assessee is partly allowed for statistical purpose.