2013 (9) TMI 306 - AT - Income Tax

Addition u/s 145- Unutilised modvat credit in closing stock - Held that - valuation of purchases and sale of goods and inventory is required to be made in accordance with method of accounting regularly employed by assessee and further adjustment is required to be made to include amount of any tax, duty cess or fees actually paid or incurred by assessee to bring goods to place of its location and condition as on date of valuation . It is therefore clear that adjustment on account of tax, duty etc. is required to be made not only to closing stock but also in purchases, sales and opening stock. In present case, AO had made adjustment only in closing stock. CIT (A) has directed him to make adjustment in opening stock also in addition to closing stock. He has however omitted to consider aspect that adjustment is also required to be made to purchases and grievance of assessee is only on this account. We therefore modify order of CIT (A) by holding that adjustment on account of tax duty will also be made in purchases - Decided in favour of assessee. Disallowance of bad debt - Held that - It is settled legal position as held by Hon ble Supreme Court in case of TRF Ltd.(2010 (2) TMI 211 - SUPREME COURT) that after amendment of provisions from assessment year 1998-99, burden is no longer on assessee to establish that debt has actually become irrecoverable. only conditions which are required to be fulfilled for allowance of bad debt is that debt should have been taken into account in computation on inomce of earlier year and should have been written off in books of accounts. There is no dispute that bad debt had actually been written off in books of accounts. CIT (A) has held that assessee had not produced any detail and evidence to show that such debts had been taken into account in computating income of ealier year. Issue is restored to file of AO for fresh decision after allowing opportunity of hearing to assessee to show that debt had been taken into account in computation of income of earlier year - Decided in favour of assessee. Disallowance of discount and commission expenses - Held that - assessee could not submit complete details along with names and addresses of parties with supporting evidence which was specifically requisitioned by AO. Such details were also not been filed before CIT(A), and, therefore, he upheld disallowance. Merely because no disallowance had been made in earlier years or in subsequent year cannot be basis for making claim for relief in this year, because it is not possible for AO to make detailed examination of each and every issue relating to assessment every year. This year he has taken up matter for detailed examination and found that expenses were not supported by details and evidences. It is however settled legal position that even in cases where details and evidences are not available, AO is required to compute disallowance on an objective basis on basis of material available on record. In this case from comparative details of expenses filed we find that expenses on account of discount and commission have been claimed at .55% total sales of ₹ 344 crore compared to .43% on turnover of ₹ 345 crore in immediate preceding year. Therefore, if we compute expenditure this year at same percentage as in immediate preceding year, expenditure comes to ₹ 1.47 crore against claim of ₹ 1.89 crore. Thus on basis of claim in preceding year, there is an excess claim of about 42 lakhs. AO has made estimated disallowance of only ₹ 5,00,000/- - Decided against assessee. Computation of deduction u/s 80HHC - 90% exclusion of net interest/rent or gross interest/rent Held that - Ninety per cent of not gross interest/rent but only net interest/rent, which has been included in profits of business of assessee as computed under heads PGBP is to be deducted under clause (1) of Explanation (baa) to Section 80HHC for determining profits of business. Matter remanded back to A.O. to work out deductions Following decision of M/s ACG Associated Capsules Pvt. Ltd. (Formerly M/s Associated Capsules Pvt. Ltd.) Others Versus Commissioner of Income Tax, Central-IV, Mumbai Others 2012 (2) TMI 101 - SUPREME COURT OF INDIA - Decided in favor of assessee. Transfer pricing adjustment - Import of Bisoprolol Fumarate - Admission of additional evidence - Held that - certificate dated from factory manager of assessee had been produced which had been rejected by authorities below as being not contemporary. Quality of product is important as it affects comparability of transactions and it influence pricing of product. There was however no independent evidence produced before lower authorities to show superior quality of assessee s product. assessee vide letter has filed an additional evidence before Tribunal in form of quality certificate from Bee PharmLabs (Pvt.) Ltd. an independent accredited third party and also comparative selling rate of same product produced by Torrent Pharmand Unichem Laboratories Ltd has been filed and it has been requested that additional evidence may be submitted. It was argued that assessee was made aware of these additional evidence only after passing of order by CIT (A) and accordinlgy it has been requested for admission of same. In our view an independent evidence regarding quality of products and comparative prices will be useful in deciding issue - Decided in favour of assessee. Import of pigments - Held that - assessee had placed sufficient material on record in support of its plethat low margin in case of pigment was not because of high import price but because of low selling price in domestic market which was highly competitive. comparison made by AO of pigment segment with non AE trading which had no pigment, in our view is not justified on facts of case. best comparison would have been with an independent party importing pigments from same foreign market and trading in local market but no such comparative case has been placed on record by TPO. though it was TPO who separated pigment segment for purpose of transfer pricing study - Addition of TPO deleted - Decided in favour of assessee. Payment of technical know how fees - Held that - law is quite clear on subject that TP adjustment is required to be made by applying one of prescribed methods. TPO has not applied any prescribed method and has only disallowed part of expenses as done in normal assessment, which is not permitted under tranfer pricing regulation as per which adjustment on account of any internationl transaction is required to be made as per method prescribed. TPO thus had applied CUP method and made adjustment on account of nine services on average basis - agreement listed certain services on which assessee requires guidance/assistance from time to time. assessee was thus entitled to any of services as and when required. Therefore, applying CUP method to service not availed by assessee during year is not justified. It would have been appropriate if AO had applied CUP method to payment made during year by assessee for three services and compared with similar payment for such services by an independent party. No efforts have been made by TPO/AO to determine market value of services received by assessee during year relating to SAP implementation and quality control to show that assessee had paid more compared to any independent party for same services. assessee had submitted that in case assessee had paid to AE at man hour rate for technical services provided during year in relation to SAP implementation, fees payable would have been significantly higer - Following decision of McCann Erickson IndiPvt. Ltd., Versus Addl. Commissioner of Income Tax Range 6 2012 (7) TMI 728 - ITAT, DELHI - Decided in favour of assessee.

Summary

Issues Involved:
1. Addition on account of unutilized MODVAT credit.
2. Disallowance of royalty payment.
3. Disallowance of bad debt.
4. Disallowance of closing stock due to free samples.
5. Disallowance of discount and commission expenditure.
6. Disallowance of sales promotion expenses.
7. Disallowance of traveling, conveyance, and vehicle expenses.
8. Disallowance of loss on sale of current investments.
9. Deduction under section 80-IB for DEPB income.
10. Deduction under section 80HHC for various receipts.
11. Exclusion of interest on FD and income tax refund from profit.
12. Reduction of reversal of revaluation loss on assets.
13. Reduction of deduction allowed under section 80-IB from profit.
14. Levy of interest under sections 234B, 234C, and 234D.
15. Disallowance of depreciation in respect of SAP expenses.
16. Set off of long-term capital loss on sale of Goa property.
17. Transfer pricing adjustment for import of Bisoprolol Fumarate.
18. Transfer pricing adjustment for import of pigments.
19. Transfer pricing adjustment for technical know-how fees.

Detailed Analysis:

1. Addition on Account of Unutilized MODVAT Credit:
The assessee contested the addition of Rs. 83,32,055 made by the AO for not including unutilized MODVAT credit in the closing stock under section 145A. The CIT(A) directed the AO to make adjustments in the opening stock as well. The Tribunal modified the order, holding that adjustments should also be made in purchases.

2. Disallowance of Royalty Payment:
The AO disallowed Rs. 56,47,627 as the assessee did not deduct tax at source. The CIT(A) allowed the deduction in the subsequent year after tax was deducted. The Tribunal upheld the CIT(A)'s decision, directing the AO to allow the deduction in the next year.

3. Disallowance of Bad Debt:
The AO disallowed Rs. 58,91,675 as the assessee did not prove that the debt was taken into account in computing income of earlier years. The Tribunal restored the issue to the AO for fresh verification.

4. Disallowance of Closing Stock Due to Free Samples:
The AO added Rs. 5,32,69,000 for under-statement of closing stock due to free samples. The Tribunal restored the issue to the AO for fresh examination after verifying the details of free samples distributed.

5. Disallowance of Discount and Commission Expenditure:
The AO disallowed Rs. 5,00,000 out of Rs. 1,89,87,006 claimed for discount and commission due to lack of supporting evidence. The Tribunal upheld the disallowance as reasonable based on comparative details.

6. Disallowance of Sales Promotion Expenses:
The AO estimated a disallowance of Rs. 20,00,000 out of Rs. 5,45,77,106 claimed for sales promotion due to lack of full details. The Tribunal deleted the addition, noting that the claim was lower than the previous year.

7. Disallowance of Traveling, Conveyance, and Vehicle Expenses:
The AO disallowed Rs. 10,00,000 out of Rs. 11,21,56,760 claimed due to lack of full details. The Tribunal deleted the addition, noting that the claim was not excessive and no personal use was involved as the assessee is a company.

8. Disallowance of Loss on Sale of Current Investments:
The AO disallowed Rs. 1,66,054 due to lack of details. The Tribunal restored the issue to the AO for fresh verification.

9. Deduction Under Section 80-IB for DEPB Income:
The AO disallowed the claim for DEPB income following the Supreme Court's judgment in Liberty India Ltd. The Tribunal upheld the disallowance.

10. Deduction Under Section 80HHC for Various Receipts:
The AO excluded 90% of various receipts from the profit of business. The Tribunal directed the AO to exclude only the net amount of such receipts after necessary verification.

11. Exclusion of Interest on FD and Income Tax Refund from Profit:
The Tribunal held that 100% of interest on income tax refund should be excluded and only net FD interest should be excluded from the profit of business.

12. Reduction of Reversal of Revaluation Loss on Assets:
The AO reduced 90% of the reversal of revaluation loss from the profit of business. The Tribunal held that the reversal was not a receipt and should not be reduced as per Explanation (baa).

13. Reduction of Deduction Allowed Under Section 80-IB from Profit:
The AO reduced the deduction allowed under section 80-IB from the profit of business while computing deduction under section 80HHC. The Tribunal directed the AO to compute the deduction without reducing the amount allowed under section 80-IB.

14. Levy of Interest Under Sections 234B, 234C, and 234D:
The Tribunal held that the levy of interest is consequential and directed the AO to recompute the interest while giving effect to the order.

15. Disallowance of Depreciation in Respect of SAP Expenses:
The AO treated SAP expenses as capital expenditure but did not allow depreciation. The Tribunal restored the issue to the AO for fresh consideration following the decision in the assessee's own case for the previous year.

16. Set Off of Long-Term Capital Loss on Sale of Goa Property:
The AO disallowed the claim in the previous year and the assessee made the claim in the current year. The Tribunal restored the issue to the AO for fresh consideration.

17. Transfer Pricing Adjustment for Import of Bisoprolol Fumarate:
The TPO used the CUP method and made an adjustment based on the price from a local party. The Tribunal admitted additional evidence regarding the quality of the product and restored the issue to the CIT(A) for fresh examination.

18. Transfer Pricing Adjustment for Import of Pigments:
The TPO compared the margin of pigment segment with non-AE segment and made an adjustment. The Tribunal held that the comparison was not proper and deleted the adjustment.

19. Transfer Pricing Adjustment for Technical Know-How Fees:
The TPO made an adjustment by disallowing part of the fees. The Tribunal held that the adjustment was not made by following the prescribed methods and deleted the addition.