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2021 (11) TMI 1218 - AT - Income TaxTransfer Pricing Adjustment u/s 92CA relating to inter unit transfer - disallowing claim of deduction u/s 80IC by reducing profits of the eligible undertaking by making transfer pricing adjustment on inter-unit transfer price of goods procured by the eligible unit from non-eligible unit during the relevant previous year - HELD THAT - Goods were not purchased by the eligible unit at Haridwar from non-eligible unit(s) owned by the appellant since in respect of inter-unit transfer of goods what had happened is that the aforesaid components were first purchased by non-eligible units at Gurgaon Neemrana and Dharuhera from third parties and were thereafter transferred at the same purchase price to the eligible unit at Haridwar. In such a transaction no value addition in such components was carried out by the non-eligible units. The non-eligible units in the aforesaid transaction merely incurred the cost of purchase on behalf of the eligible unit which was subsequently debited to such unit. Accordingly the aforesaid transaction was not in the nature of inter-unit purchase and sale of goods covered within the provisions of section 80IA(8) read with section 80IC(7) - in the absence of any enhancement in the market price of the aforesaid component no substitution of actual material cost was warranted by applying provision of section 80IA(8) read with section 80IC(7) of the Act for the purpose of computing deduction under the latter section. The aforesaid issue stands squarely covered in favour of the assessee by the order passed by Hon ble Tribunal in the preceding assessment years i.e. AY 2010-11 to AY 2013-14 wherein identical disallowance made by the assessing officer has been deleted as 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 no further substitution of such price is warranted in terms of section 80IA(8) of the Act and the transaction was a genuine business transaction borne out of commercial expediency. Decided the issue in favor of the assessee. Inclusion of the freight amount in the valuation of the closing stock - It would be pertinent to point out that the aforesaid issue stands decided in favour of the assessee by the order of the Delhi Bench of the Tribunal in the assessee s own case for the assessment year 2007-08 2008-09 2010-11 and 2011-12 wherein deleted the impugned addition on the ground that the assessee was following consistent system of accounting which was unnecessarily disturbed by the Revenue without change in facts. It was further held that tinkering with the accounting method was unjustified when the exercise did not materially alter the profits of the assessee company. Decided the issue in favor of the assessee. Estimation of scrap value - appellant has erred in not estimating the value of scrap lying in the factory premises as on the last date of the previous year viz. 31.3.2016 which should have been credited to profit and loss account as part of the closing stock - HELD THAT - As in appellant s own case for the assessment year 2010-11 and 2011-12 wherein the Tribunal accepted the method as followed by the appellant of accounting income on sale of scrap on a consistent basis and deleted the impugned addition on the ground that the appellant was not dealing in scrap and/or holding the scrap as inventory and thus was not required to value the closing stock after taking into account the value of scrap. The Tribunal in coming to the aforesaid conclusion laid emphasis on the fact that such transaction was revenue-neutral and held that considering the size of the appellant company it could not be expected to keep quantitative tally of miniscule items. Decided the issue in favor of the assessee. Disallowance of the prior period expenditure - Issue is covered by the order passed by the Hon ble Tribunal in the appellant s own case for assessment year 2008-09 wherein the Hon ble Tribunal taking into consideration the finding of the DRP principally decided the issue in favor of the appellant and remanded the matter to the file of the assessing officer for correcting calculation errors. Decided the issue in favor of the assessee. Disallowance of advertisement expenditure - It would be pertinent to point out that the Hon ble Tribunal in the immediately preceding assessment years viz. AY 2010-11 and 2011-12 has decided the issue in favour of the appellant following the order for assessment year 2008-09 holding that the provision was made on rational and scientific basis and thus the same was to be allowed as business deduction notwithstanding that part thereof was reversed in the succeeding year. Tribunal also held that the disallowance cannot be made on the issues which are revenue neutral. The aforesaid issue it would be noted is also covered in favour of the appellant by the decision of the Hon ble Tribunal in appellant s own case for the assessment year 2008-09 wherein the Tribunal reversed the action of assessing officer in disallowing provision on the ground that the amount reversed there against in the succeeding year exceeded 15% of the amount of provision. The Tribunal held that the said approach followed by the AO had no valid basis and was purely ad-hoc. The Tribunal also held that the assessing officer was bound to follow the practice and stand taken by the Department on this issue in the earlier years and accordingly restored the matter back to the file of the assessing officer to reconsider the issue having regard to the method of making provisions followed by the appellant and accepted by the Revenue in preceding years. Also in the order passed for assessment year 2009-10 and 2015-16 the Hon ble Tribunal has decided the issue in favor of the appellant by following the orders passed for the assessment year 2010-11 to 2013-14. In the aforesaid order the Tribunal also held that the provision for advertisement expenses was also allowable while computing book profit u/s 115JB of the Act. Decided the issue in favor of the assessee. Disallowance of the excessive purchase consideration paid to the related parties - Delhi Bench of Tribunal in the appellant s own case for assessment year 2007-08 and 2008-09 wherein identical disallowance made in that year was deleted on the ground that since in the first place the parties were not related to the appellant company in terms of section 40A (2) disallowance on ground of excessive purchase price could not have been made under that section. Further the Tribunal held that the transactions were entered by the appellant on account of commercial expediency and when the recipients had paid tax on payments received from the appellant company disallowance could not be made by applying provisions of section 40A(2).Decided the issue in favor of the assessee. Payment received on behalf of Hero Honda FinCorp. Ltd. (HFCL) deemed as dividend u/s 2(22)(e) - In AY 2007-08 the Hon ble Tribunal decided the issue in favour of the appellant holding that appellant s intention did not reflect that the amount was received as loan or advance to as to attract the provisions of section 2(22)(e) of the Act. The Hon ble Tribunal further held that the appellant was holding the money as a custodian and the amount would be exempted in terms of clause (ii) section 2(22)(e) since the amount was given in the ordinary course of business. Decided the issue in favor of the assessee. TDS u/s 194H - Disallowance u/s 40(a)(ia) for alleged default of non-deduction of TDS on quarterly target and turnover discount and Sales Discount - We find that the identical issue has been decided by the coordinate bench in assessee s own case for earlier years holding that no disallowance u/s 40 a(ia) could have been made for non-deduction of tax in the hence of the assessee. The coordinate bench followed the decision of the honourable jurisdictional High Court. No distinguishing features were shown to the assessee which shows that there are changes in the facts and circumstances of the case or under the provisions of the law. Therefore the judicial precedent deserves to be followed as above sum is not in the nature of discount on which tax is required to have been deducted by the assessee Under the provisions of Section 194H . Decided the issue in favor of the assessee. Gains from sale of investments income treated - business income or capital gains - DR could not show that the facts in this case are different from the facts for which the coordinate benches have decided the issue in favour of the assessee for several earlier years. It was also not shown to us that the assessee has changed the it s characteristics from investor to the trader or holding those shares on mutual funds as stock in trade. Further when the Department had itself in earlier years taxed such transaction Under the head capital gains respectfully following the decision of the coordinate bench in assessee s own case for earlier years we also hold that the income is chargeable to tax Under the head the capital gains and not income from business of profession. Decided the issue in favor of the assessee. Disallowance u/s 14A with respect to the computation of such disallowance under rule 8D of the income tax rules 1962 - We find that the issue is squarely covered in favour of the assessee by the order of the coordinate bench wherein for assessment year 2007 08 and 2008 09 the issue is set-aside to the file of the learned assessing officer to decide the issue afresh with respect to the satisfaction recorded by the learned assessing officer with respect to the SUO Moto disallowance made by the assessee in the returned income. The learned assessing officer is further directed to consider the arguments raised by the assessee. AO is also required to note the fact that the assessee has huge interest free funds available more than the amount invested in the securities that resulted into earning of tax-free income during the year therefore no interest disallowances u/s 14 A read with rule 8D of the income tax rules could be made. Further if the learned assessing officer crosses the threshold of showing that the satisfaction was recorded with respect to the disallowance offered by the assessee about its correctness then also the learned assessing officer is further directed to only take into consideration those investments which resulted into tax free income during the year for purpose of working out any further disallowance Under this Section. Proportionate cost of Model Fee considered in valuation of closing stock - This issue is squarely covered in favour of the assessee for the assessment year 2010 11 and 2011-12 and further for assessment year 2012 13 and 2013 14 no distinguishing features were pointed out before us. It was not shown before us that the expenditure incurred by the assessee is for any new line of business. In view of this respectfully following the decision of the coordinate bench in assessee s own case for earlier years we allow this ground of appeal and direct the learned assessing officer to delete the disallowance. Disallowance of reimbursement of foreign traveling expenses to directors/employees - We find that the identical issue has been decided in favour of the assessee deleting the above disallowance for the earlier assessment year. The learned departmental representative could not point out that any of such expenditure are incurred which are disallowable u/s 37 (1) of the act or after in nature. Disallowance of expenditure on account of Royalty on the ground of being capital in nature on the ground that the appellant had received benefit of enduring nature - This issue has been considered by the coordinate bench in assessee s own case for assessment year 2011 12 to 2013 14 and 2015 16 where the royalty payment made in terms of license agreement has been held to be an allowable revenue deduction. Disallowance u/s 80IC on account of profit attributable to advertisement and marketing activities carried out at Head Office - We find that identical issue has been decided by the coordinate bench in the case of the assessee for assessment year 2000 11 in assessment year 2011 12 where the coordinate bench has held that for the purpose of working out eligible deduction u/s 80 IC of the income tax act the actual expenses incurred at the head office are to be a located between various profit centres on a rational and scientific basis accordingly the coordinate bench deleted the disallowance. Disallowance of deduction u/s 80-IC in respect of interest income earned by eligible unit on loans given to employees/vendors - Tribunal in AY 2010-11 and AY 2011-12 after examining the nature of the aforesaid incomes 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 of the Act shall be considered as incidental to the activity of carrying out manufacturing and thus eligible for deduction under that section. Accordingly the aforesaid issue stands squarely covered in favour of the appellant. Disallowance of depreciation of CED Paint Shop - Put to use test not satisfied - Merely the accounting entry in the books of accounts of the capitalisation of the asset is at the end of the financial year the depreciation cannot be disallowed. Even otherwise the assessee has claimed depreciation for half of the year and looking at the number of the units produced by the assessee it cannot be said that the CED plant was not setup/installed/put to use on or before 31/3/2016. The assessee has produced overwhelming evidences of setting up of and putting the asset to use on or before 31/3/2016. In view of this we direct the learned assessing officer to delete the disallowance of the depreciation. Disallowance of excess depreciation on intangible assets in form of software - We find that the assessee has purchased the software used it on computers. Merely because the software so purchased independently of the computer they cannot be held to be not called software eligible for depreciation at the rate of 60%. Accordingly we allow ground number 19 of the appeal of the assessee and direct the learned assessing officer to allow the depreciation on the computer software at the rate of 60%. Ground of the appeal of the assessee is allowed. Disallowance of deduction u/s 80-IC because of interest income earned by eligible unit from loan to employees/vendors and security deposit - Interest on loans given to subsidized rate to the employees and interest on loan provided for working capital support to the vendors as well as interest income on security deposit couldn t be considered as other income. The identical issue has been considered by the coordinate bench in assessee s own case for assessment year 2011 12 to assessment year 2013 14 and decided in favour of assessee. Non-allowance of depreciation on lease-hold rights in land - allowability of legitimate claim though not claimed in the original return of income - As the purpose of assessment is to compute the correct taxable income of the assessee as per the provisions of the Act and even if any deduction/ claim is not made in the return of income by the assessee it is open to the assessee to resile from the said position. The assessing officer was duty bound to consider and allow such claim suo moto while framing the draft assessment order - Thus AO ought to have allowed depreciation claimed by the appellant under section 32(1)(ii) of the Act on leasehold rights acquired in land in accordance with the finding of the Hon ble Tribunal in appellant s own case for earlier years. Claim of education cess as a deductible expenditure - We find that the above issue is squarely covered in favour of the assessee by the decision of CHAMBAL FERTILISERS 2018 (10) TMI 589 - RAJASTHAN HIGH COURT and Sesa Goa . 2020 (3) TMI 347 - BOMBAY HIGH COURT wherein education cess has been allowed as deduction. Not allowing credit for TDS - We direct the learned assessing officer to verify the tax deduction at source credit claimed by the assessee and grant credit of the same in accordance with the law.
1. ISSUES PRESENTED and CONSIDERED
The Tribunal considered several key issues in this judgment, including:
2. ISSUE-WISE DETAILED ANALYSIS Transfer Pricing Adjustment under section 92CA The Tribunal examined whether inter-unit transactions were conducted at arm's length price. The assessee argued that transfer pricing adjustments were unwarranted as the transactions were genuine and based on commercial expediency. The Tribunal agreed, citing previous decisions in the assessee's favor, and allowed the appeal. Inclusion of Freight Inward/Import Clearing Expenses The Tribunal considered whether freight costs should be included in the valuation of closing stock. The assessee contended that these costs were not typically included due to their exceptional nature. The Tribunal found in favor of the assessee, referencing consistent accounting practices previously accepted by the Revenue. Scrap Generated During the Year The Tribunal addressed the addition of Rs. 1,40,000 for estimated scrap value. The assessee maintained that scrap was not held as inventory and was accounted for as part of material costs. The Tribunal sided with the assessee, noting the revenue-neutral nature of the transaction. Disallowance of Prior Period Expenses The Tribunal reviewed the disallowance of expenses related to services availed in the previous year. The assessee argued that liabilities crystallized upon receipt of bills. The Tribunal ruled in favor of the assessee, citing previous decisions supporting the claim. Disallowance of Advertisement Provisions The Tribunal evaluated the disallowance of provisions for advertisement expenses. The assessee claimed these were based on reasonable estimates. The Tribunal agreed, referencing earlier judgments that supported the scientific basis of the provisions. Excessive Purchases from Related Parties The Tribunal examined disallowances for purchases from related parties. The assessee argued that the transactions were commercially justified. The Tribunal ruled in favor of the assessee, noting that the parties were not related under section 40A(2)(b). Deemed Dividend under section 2(22)(e) The Tribunal considered whether payments received on behalf of Hero Honda FinCorp Ltd. constituted deemed dividends. The assessee argued these were not loans or advances. The Tribunal agreed, referencing past decisions that supported the assessee's position. Disallowance under section 40(a)(ia) The Tribunal reviewed disallowances for non-deduction of TDS on discounts and reimbursements. The assessee contended these were not commissions subject to TDS. The Tribunal ruled in favor of the assessee, citing previous cases that distinguished discounts from commissions. Gains from Sale of Investments The Tribunal addressed the classification of gains from investments as business income. The assessee maintained these were capital gains. The Tribunal agreed, citing consistent treatment in prior years. Disallowance under section 14A The Tribunal evaluated additional disallowances under section 14A. The assessee argued that no nexus existed between expenses and exempt income. The Tribunal set aside the issue for further examination, emphasizing the need for satisfaction regarding the disallowance method. Depreciation on Model Fee and Foreign Traveling Expenses The Tribunal examined disallowances related to model fee and travel expenses. The assessee argued these were business expenses. The Tribunal ruled in favor of the assessee, citing previous decisions supporting the claims. Royalty Expenses as Capital Expenditure The Tribunal considered whether royalty payments were capital expenditures. The assessee argued these were revenue expenses. The Tribunal agreed, referencing past judgments that classified such payments as revenue deductions. Deduction under section 80IC The Tribunal reviewed disallowances for profit attributable to brand value and interest income. The assessee contended these were part of manufacturing profits. The Tribunal ruled in favor of the assessee, citing previous decisions that supported the deductions. Depreciation on Leasehold Rights The Tribunal examined the non-allowance of depreciation on leasehold rights. The assessee argued these were intangible assets eligible for depreciation. The Tribunal agreed, referencing past judgments that allowed such claims. Deduction of Education Cess The Tribunal considered the deductibility of education cess. The assessee argued this was an allowable expense. The Tribunal agreed, citing recent High Court decisions that supported the deduction. 3. SIGNIFICANT HOLDINGS The Tribunal's significant holdings include:
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