2015 (9) TMI 20 - AT - Income Tax

Disallowance 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 Rs. 3 in our example. The AO should also make sure that the equivalent of Rs. 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 Rs. 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 Rs. 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 Rs. 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 Rs. 69.96 crore (Rs.141.59 crore minus Rs. 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 Rs. 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 Rs. 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 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 Rs. 1.62 crore is nothing but excess consumption over the standard consumption. Such shortage of Rs. 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.

Summary

Issues Involved:
1. Disallowances under Section 43B of the Income-tax Act, 1961.
2. Transfer pricing adjustments related to royalty payments.
3. Treatment of subsidy as revenue or capital receipt.
4. Transfer pricing adjustment of Advertisement, Marketing, and Promotion (AMP) expenses.
5. Miscellaneous grounds including excess consumption of raw materials, disallowance under Section 14A, disallowance under Section 35DDA, disallowance of club membership fees, depreciation on software expenses, and charging of statutory interest.

Detailed Analysis:

A. DISALLOWANCES UNDER SECTION 43B

I. Excise Duty:
- PLA (Personal Ledger Account) Payments: The assessee claimed deductions for excise duty paid under PLA. The Tribunal noted that similar issues were previously decided in favor of the assessee and allowed the deduction under Section 43B, with a direction to the AO to verify the voluntary add-back of these amounts in subsequent years.
- Modvat Credit: The Tribunal upheld the disallowance of unutilized Modvat credit at the end of the year, following the precedent set by the Special Bench in Glaxo Smithkline Consumer Healthcare Ltd.
- Excise Duty Paid Under Protest: The Tribunal allowed the deduction of excise duty paid under protest, citing the Supreme Court's decision in CIT vs. Bharat Carbon and Ribbon Manufacturing Company Pvt. Ltd., which held that statutory liability accrues on issuance of demand notice.

II. Customs Duty:
- Customs Duty on Imports: The Tribunal directed the AO to recast the Profit and Loss account using the 'Inclusive method' as required by Section 145A and allow deductions under Section 43B for customs duty paid.
- Customs Duty Paid Under Protest: Similar to excise duty, the Tribunal allowed the deduction of customs duty paid under protest, directing the AO to follow the 'Inclusive method.'

III. Adjustments on Account of Last Year's Disallowances:
- The Tribunal directed the AO to verify and allow deductions for amounts disallowed in the preceding year but offered for taxation in the current year, ensuring no double taxation.

B. ROYALTY

I. Transfer Pricing Adjustment for Licensed Trademark:
- The Tribunal followed its previous decision, rejecting the TPO's bifurcation of royalty payments into licensed information and licensed trademarks. The Tribunal held that the entire royalty payment was a single, indivisible consideration for both.

II. Royalty for Licensed Information as Capital Expenditure:
- The Tribunal held that the royalty payments for licensed information were revenue expenditures, not capital expenditures, and allowed the deduction in full.

III. R&D Cess on Royalty Paid:
- The Tribunal allowed the deduction of R&D cess on royalty payments, treating it as part of the royalty expenditure.

IV. Royalty Paid to Non-AE:
- The Tribunal agreed that payments to non-associated enterprises (non-AE) do not fall under transfer pricing provisions and thus cannot be benchmarked under Section 92 of the Act.

V. Error in Computing Disallowable Amount of Royalty:
- This issue became infructuous as the Tribunal allowed the deduction of royalty payments in full.

C. SUBSIDY

- The Tribunal treated the sales-tax subsidy received by the assessee as a capital receipt, aligning with the objective of the subsidy to encourage industrial investment and expansion.

D. T.P. ADJUSTMENT OF AMP EXPENSES

- The Tribunal remitted the issue back to the AO/TPO for fresh determination of the ALP of AMP expenses, following the principles laid down by the Delhi High Court in Sony Ericsson Mobile Communications India Pvt. Ltd. vs. CIT, which disapproved the bright line test and emphasized the need for a functional analysis.

E. MISCELLANEOUS GROUNDS

I. Excess Consumption of Raw Materials:
- The Tribunal allowed the deduction for excess consumption of raw materials, noting that the net difference was minimal and part of the cost of production.

II. Disallowance under Section 14A:
- The Tribunal set aside the AO's application of Rule 8D for disallowance under Section 14A, directing a fresh computation as per the reasonable method of apportionment.

III. Disallowance under Section 35DDA:
- The Tribunal allowed the deduction under Section 35DDA for payments made under the Voluntary Retirement Scheme (VRS), following its earlier decision.

IV. Disallowance of Club Membership Fee:
- The Tribunal deleted the disallowance for club membership fees, following the Supreme Court's decision in CIT vs. United Glass Manufacturing Company Ltd.

V. Depreciation on Software Expenses:
- The Tribunal directed the AO to allow depreciation on the written down value of software expenses capitalized in earlier years.

VI. Charging of Statutory Interest:
- The Tribunal allowed the ground against the charging of interest under Sections 234B and 234D, directing the AO to verify and compute interest under Section 234C as per the tax due on the returned income.

Premature Penalty:
- The Tribunal dismissed the ground against the initiation of penalty under Section 271(1)(c) as premature.

Conclusion:
- The main appeal was partly allowed, and the appeal against the order under Section 154 was allowed for statistical purposes.