2016 (9) TMI 1471 - AT - Income Tax

Liability for payment of compensation to the module supplier has arisen out of agreement entered into between the assessee and module supplier - Held that - The observation made by the Commissioner of Income Tax (Appeals) in the present case are generic and out of context. There is nothing on record to show that there was any dispute between the assessee and module supplier. The liability was ascertained and had to be discharged in view of the agreement between the assessee and the module supplier. The Hon ble Supreme Court of India in the case of Bharat Earth Movers Vs. Commissioner of Income Tax 2000 (8) TMI 4 - SUPREME COURT has held that if a business liability has definitely arisen in the accounting year deduction should be allowed even if the liability may not have been quantified and is discharged at a future date. What should be certain is the incurring of the liability. Actual quantification of liability can be done at a later date. TPA qua payment of royalty - MAM - CIT-A rejecting CUP as the most appropriate method for determining Arm s Length Price of international transaction in respect of payment of royalty - Held that - AR contended that the issue can be remitted back to the file of Assessing Officer to re-examine the facts in the light of the decision of Tribunal. The ld. AR has fairly accepted the proposal made on behalf of the Department. Thus in view of the statement made by the representatives of rival sides we deem it appropriate to remit this issue back to the file of Assessing Officer to reexamine the issue in the light of decision of the Tribunal in assessee s own case in assessment year 2002-03. Characterization of royalty payment - whether revenue or capital in nature? - Held that - We observe that the facts leading to payment of Project Technical Assistance Fees are identical in assessment years under appeal. The Assessing Officer has not disputed the payment of charges. The only dispute is with regard to the nature of expenditure. The Co-ordinate Bench of the Tribunal has held expenditure as revenue in nature. The ld. DR has not been able to controvert the findings of Tribunal. Thus we do not find any merit in the ground raised by the Department. By applying the aforementioned decision of Coordinate Bench in assessee s own case we dismiss ground No. 4 raised in the appeal by the Revenue. Addition made on account of homologation expenses - Held that - Commissioner of Income Tax (Appeals) has observed that there was no basis for making ad hoc disallowance without giving any opportunity of hearing to the assessee to furnish further details and deleted the addition. We are of the considered view that this issue needs a revisit to the file of Assessing Officer for re-consideration and appreciation of the relevant material relating to homologation charges. The Assessing Officer after considering the material furnished and affording sufficient opportunity of hearing to the assessee shall decide this issue afresh in accordance with law. Accordingly ground No. 5 raised by the Revenue in appeal is allowed for statistical purpose. Claim of expenditure on capitalized cars - Held that - After considering the submissions of rival sides and perusing the impugned order we find no error in the findings of CIT(A) in remitting the matter back to AO. We are of the considered view that the AO should reexamine the issue denovo. Here we would like to point out that the AO shall not substitute his judgement over that of the assessee to determine the need and quantum of expenditure. Claim of deduction u/s 80IB - Held that - It is an admitted fact that reassessment proceedings initiated against the assessee in assessment year 2003-04 to disallow the benefit of deduction u/s. 80IB of the Act has already been set aside by the Tribunal in the appeal filed by the assessee. Thus the Commissioner of Income Tax (Appeals) ignorant of the order of Tribunal has erred in holding that in reassessment proceedings the deduction granted u/s. 80IB has been disallowed. Without commenting on merits we are remitting this issue back to the file of Commissioner of Income Tax (Appeals) for denovo adjudication in the light of the fact that reassessment proceedings have already been quashed by the Tribunal and the position as of now is that the order passed by the Assessing Officer in rectification proceedings is live. This issue needs revisit to the file of Commissioner of Income Tax (Appeals) to examine agreement between the assessee and module supplier and determine the veracity of payments made. In so far as nature of liability is concerned we have already held that if it is arising from the agreement the same is ascertained. Accordingly ground No. 1 raised in the appeal by the assessee is allowed for statistical purpose. Amount representing provision towards octroi has been deducted twice - Held that -n view of submissions made by rival sides we are of considered view that this issue needs a revisit to the file of Commissioner of Income Tax (Appeals). The Commissioner of Income Tax (Appeals) shall decide the issue de novo after verification and proper appreciation of facts and records.

Summary

Issues Involved:
1. Computation of book profits under section 115JB.
2. Upward adjustment on account of payment of Royalty.
3. Disallowance of Royalty payment.
4. Deduction for octroi.
5. Classification of Royalty payment as revenue or capital expenditure.
6. Disallowance of Project Technical Assistance Fees.
7. Disallowance of homologation expenses.
8. Expenditure on capitalized cars.
9. Deduction under section 80IB.

Issue-wise Detailed Analysis:

1. Computation of Book Profits under Section 115JB:
The assessee contested the CIT(A)'s decision to consider the provision for compensation payable to module suppliers as not an ascertained liability, thereby upholding the addition made by the Assessing Officer in computing book profits under section 115JB. The Tribunal observed that the liability was contractual and the actual payment made was higher than the provision created. Thus, the Tribunal directed the CIT(A) to revisit the issue and examine the agreement between the assessee and module suppliers to determine the veracity of payments made.

2. Upward Adjustment on Account of Payment of Royalty:
The TPO made an upward adjustment of ?14,400,330 on account of payment of Royalty. The CIT(A) rejected the CUP method adopted by the TPO and accepted TNMM as the most appropriate method for benchmarking the transaction. The Tribunal upheld the CIT(A)'s decision, noting that the TPO's comparison with Maruti Udyog Ltd. was inappropriate as it involved a controlled transaction. The Tribunal emphasized the rule of consistency, noting that in subsequent years, the royalty payment was held to be at ALP using TNMM.

3. Disallowance of Royalty Payment:
The CIT(A) treated the royalty payment of ?2,16,00,495 as revenue expenditure, rejecting the TPO's characterization of it as capital expenditure. The Tribunal upheld this decision, noting that the payment of royalty did not secure any enduring advantage for the assessee and was linked to production and sales activity. The Tribunal cited various case laws supporting the treatment of royalty payments as revenue expenditure.

4. Deduction for Octroi:
The assessee argued that the provision for octroi was deducted twice in computing book profits. The CIT(A) agreed in principle but misunderstood the facts, leading to denial of benefit. The Tribunal remitted the issue back to the CIT(A) for verification and proper appreciation of facts and records.

5. Classification of Royalty Payment as Revenue or Capital Expenditure:
The Tribunal upheld the CIT(A)'s decision to treat the royalty payment as revenue expenditure, noting that the assessee had not acquired any enduring advantage and the payment was linked to production and sales activity. The Tribunal cited various case laws supporting this view.

6. Disallowance of Project Technical Assistance Fees:
The CIT(A) deleted the disallowance of Project Technical Assistance Fees, which the Assessing Officer had characterized as capital expenditure. The Tribunal upheld this decision, noting that the expenditure was for conducting business more effectively and profitably, and was not for acquiring any new asset or enduring benefit.

7. Disallowance of Homologation Expenses:
The Assessing Officer made an ad hoc disallowance of ?10,00,000 for homologation expenses. The Tribunal remitted the issue back to the Assessing Officer for reconsideration and proper appreciation of the relevant material, noting that the disallowance was made without giving the assessee an opportunity to furnish further details.

8. Expenditure on Capitalized Cars:
The CIT(A) remitted the matter back to the Assessing Officer to verify the evidence and decide the admissibility of the claim for expenditure on capitalized cars. The Tribunal upheld this decision, noting that the Assessing Officer should reexamine the issue and decide it afresh after considering the documents furnished by the assessee.

9. Deduction under Section 80IB:
The assessee contended that the CIT(A) erred in not adjudicating the ground relating to the denial of deduction under section 80IB. The Tribunal remitted the issue back to the CIT(A) for denovo adjudication, noting that the reassessment proceedings had been quashed by the Tribunal and the position as of now was that the order passed by the Assessing Officer in rectification proceedings was live.