2016 (5) TMI 1469 - AT - Income Tax

Disallowance u/s 43B - statutory duties paid during the year like excise duty, customs duty on import/purchase of inputs/components and also an amount of duty paid in PLA account - Held that - Under similar set of facts has decided an identical issue after discussing in detail and following the decision cited before it including the decision of special Bench of the ITAT in the case of DCIT vs. Glaxo Smith Klin Consumer Health Care Ltd. (2007 (7) TMI 334 - ITAT CHANDIGARH) holding that the excess amount of excise duty reflected in the account-current is nothing but actual payment of excise duty even though mentioned as advance payment and hence allowable as deduction under sec. 43B of the Act in the year of payment. The special bench has further clarified that the allowing of deduction on payment basis could not result in double deduction under any circumstance. Thus we set aside the matter to the file of the Assessing Officer to decide the issue afresh. Customs duty paid on import of components for export purposes for which exports had not been made - Held that - Identical issue in the appeal for the assessment year 2006-07, we set aside the matter to the file of the Assessing Officer to decide the issue afresh as per the above decision of the ITAT after affording opportunity of being heard to the assessee Duty draw back accrues in the year in which rate is fixed by the competent authority after verification of claim of the assessee and amount is quantified and not in the year of export, we direct the Assessing Officer to decide the issue afresh. Disallowance regarding balance in RG 23A Part-II - Held that - We set aside the matter to the file of the Assessing Officer to decide the issue afresh in view of the above decision of the ITAT in the case of assessee itself in the appeal for the assessment year 2006-07 after affording opportunity of being heard to the assessee. Disallowance of advance payment, liability in respect of which has not crystallized and, therefore, not allowable as deduction under sec. 43B - Held that - Identical issue under similar set of facts has been decided by the ITAT in the appeal for the assessment year 2006-07 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. Disallowance of excess consumption of raw-material and component - Held that - Identical issue under similar set of facts has been decided in favour of the assessee by the ITAT in the appeal for the assessment year 2006-07 (supra) in the case of assessee itself, holding that there can be no logic in disallowing such amount which is nothing but excess consumption of inputs. Disallowance made under sec. 14A - Held that - Before making disallowance under sec. 14A of the Act, it is mandatory on the part of the Assessing Officer to record his satisfaction that explanation made by the assessee on the applicability of the provisions under sec. 14A of the Act. We thus in the interest of justice set aside the matter to the file of the AO to decide the issue afresh following the ratios laid down by the Hon ble jurisdictional High Court in the case of Maxopp Investment Ltd. (2011 (11) TMI 267 - DELHI HIGH COURT) after affording opportunity of being heard to the assessee. The ground is accordingly allowed for statistical purposes. Validity of disallowance of deduction claimed under sec. 35DDA - Held 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. Validity of disallowance of expenditure incurred on club membership - Held that - 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. Validity of disallowance of royalty paid - Held that - identical issue in the case of assessee itself for the assessment year 2006-07, we hold that the amount of royalty considered by the Assessing Officer as capital expenditure should be allowed as a revenue expenditure. At the same time, depreciation allowed by the Assessing Officer on this amount should be taken back. The Assessing Officer is directed accordingly. Disallowance of R & D Cess paid - assessee treated the amount of royalty and cess on royalty as revenue expenditure - Held that -There is no dispute on the nature of cess, which is on royalty and has been treated both by the assessee as well as the AO as part and parcel of royalty and accordingly claimed/disallowed in line with the treatment of royalty. Since we have allowed deduction for the entire amount of royalty paid by the assessee during the year by deleting the TP adjustment and also overturning the action of the AO in treating the remaining half part as capital expenditure, the consequential amount of cess on royalty payment automatically becomes deductible. We, therefore, direct to allow deduction. Disallowance of sales-tax subsidy claimed as capital receipts from the total income - Held that - Respectfully following the above decision of the ITAT for assessment year 2006-07 (supra), we hold that the sales tax subsidy claimed as capital receipt from the total income cannot be characterized as anything other than a capital receipt. It is ordered accordingly to allow the claim as capital receipt. Non-allowance of depreciation on written down value of software expense capitalized - Held that - We set aside the matter to the file of the Assessing Officer for allowing deduction in respect of the written down value of the software expenses capitalized in earlier years after affording opportunity of being heard to the assessee in this regard. Disallowance on account of provisional liability Expenditure on account of FPI-OE Components - Held that - It is the case of appellant that consistent method of making provision for aforesaid price increase is being followed for last many assessment years. As noticed, the claim has always been allowed by the Revenue, except in assessment year 2003-04. It was therefore not appropriate on the part of the assessing officer to have disallowed claim for provision for the foreseen price increase in the year under consideration, despite similar claim being allowed in earlier assessment years. Taking into consideration the entirety of the circumstances, we are of the considered view that provision for foreseen price increase made by the appellant during the relevant year in respect of component/material supplied by the vendors for the escalation in price, which is clearly supported by detailed item-wise working placed in the paper book, clearly represent an accrued/crystallized liability allowable as business deduction. Being so, disallowance made by the assessing officer is directed to be deleted. Validity of disallowance on account of expenditure on excise duty - Held that - ITAT on the issue and of the Excise Tribunal in the assessment year 2000-01 that shortage of stock of raw-material and the minor discrepancy was the result of accounting error due to use of large quantity of inputs procured from several hundred suppliers, we hold that the assessee was justified in claiming ₹ 77 lacs on account of expenditure on excise duty on payment basis under sec. 43B of the Act. The Assessing Officer is accordingly directed to allow the claim. Adjustment on account of alleged AMP expenses, and relating to transfer pricing (royalty, royalty paid to non-AE and error in computing royalty) - Held that - MP expenses unilaterally incurred by the appellant does not result in an international transaction so as to invoke the provisions of Chapter X of the Act. We thus set aside the matter to the file of the Assessing Officer to decide the issue as per above finding of the Hon ble High Court after affording opportunity of being heard to the assessee. Validity of adjustment made by the TPO on account of royalty - 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 ₹ 127.195 crore on account of transfer pricing adjustment of royalty for use of licensed trademark. Disallowance of credit of TDS certificate claimed through revised return - Held that - The matter is set aside to the file of the Assessing Officer to consider the claimed TDS credit on the basis of revised return after affording opportunity of being heard to the assessee. Ground allowed for statistical purpose. Computation of interest payable by the assessee under sec. 234B - Held that - Charging of interest under sections 234B, 234C and 234D. This ground is consequential and is, accordingly, allowed except the charging of interest under sec. 234C. The Learned AR argued that the Assessing Officer computed interest under sec. 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 under sec. 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 Assessing Officer to verify this aspect of the matter and compute interest under sec. 234C as per law. Royalty considered by the Assessing Officer as capital expenditure should be allowed as Revenue expenditure.

Summary

Issues Involved:
1. Legality of the assessment order.
2. Disallowance under Section 43B of the Income-tax Act.
3. Disallowance of expenditure under Section 14A.
4. Disallowance under Section 35DDA.
5. Disallowance of club membership fees.
6. Disallowance of royalty payments.
7. Disallowance of sales tax subsidy.
8. Disallowance of depreciation on software expenses.
9. Disallowance of foreseen price increase.
10. Disallowance of excise duty expenditure.
11. Transfer pricing adjustments on AMP expenses.
12. Transfer pricing adjustments on royalty payments.
13. Computation of interest under Sections 234B, 234C, and 234D.
14. Credit of TDS certificates.

Detailed Analysis:

1. Legality of the Assessment Order
The assessee challenged the legality of the assessment order dated 29.11.2011 under Section 143(3) read with Section 144C of the Income-tax Act, 1961, claiming it was illegal and bad in law. The tribunal found that the assessment order was completed based on directions issued by the Dispute Resolution Panel (DRP) without independently considering the factual and legal objections raised by the assessee. The tribunal noted that the DRP erred in not directing the assessing officer to delete various additions/disallowances, which were covered in favor of the appellant by appellate orders for earlier years.

2. Disallowance under Section 43B
The assessee claimed deductions under Section 43B for various statutory duties paid during the year. The Assessing Officer disallowed ?1,18,83,44,986, stating that deductions under Section 43B are allowable only when the amount is charged to the profit and loss account. The tribunal found that the issue was covered in favor of the assessee by several decisions, including Berger Paints India Ltd. v. CIT and CIT v. Modipon Ltd. The tribunal set aside the matter to the Assessing Officer to decide afresh following the cited decisions.

3. Disallowance of Expenditure under Section 14A
The Assessing Officer disallowed ?4,85,68,020 under Section 14A, applying Rule 8D of the Income-tax Rules. The tribunal noted that Rule 8D was not applicable for the year under consideration and that the Assessing Officer failed to record satisfaction that the expenditure had a proximate relationship with the exempt income. The tribunal set aside the matter for fresh adjudication following the jurisdictional High Court's decision in Maxopp Investment Ltd.

4. Disallowance under Section 35DDA
The assessee claimed a deduction under Section 35DDA for payments made under a voluntary retirement scheme. The Assessing Officer disallowed the claim, stating the scheme was not in accordance with Rule 2BA of the Income-tax Rules. The tribunal found that compliance with Rule 2BA is mandatory only for exemption under Section 10(10C) and not for deduction under Section 35DDA. The tribunal directed the Assessing Officer to allow the claimed deduction.

5. Disallowance of Club Membership Fees
The Assessing Officer disallowed ?39,50,780 incurred on club membership fees. The tribunal found that the expenditure was incurred for business purposes and allowed the deduction, following the Supreme Court's decision in Samtel Color Ltd.

6. Disallowance of Royalty Payments
The Assessing Officer disallowed ?142.61 crores, treating the royalty paid by the assessee as capital expenditure. The tribunal found that the royalty payment was for the use of licensed information and not for acquisition. The tribunal allowed the deduction as revenue expenditure, following the jurisdictional High Court's decision in CIT v. Hero Honda Motors Ltd.

7. Disallowance of Sales Tax Subsidy
The assessee claimed sales tax subsidy as a capital receipt. The Assessing Officer treated it as revenue receipt. The tribunal found that the subsidy was for industrial development and employment generation, thus a capital receipt. The tribunal allowed the claim, following the Supreme Court's decision in CIT v. Ponni Sugars & Chemicals Ltd.

8. Disallowance of Depreciation on Software Expenses
The assessee claimed depreciation on software expenses capitalized in earlier years. The tribunal directed the Assessing Officer to allow the depreciation, following the decision in the assessee's case for the assessment year 2006-07.

9. Disallowance of Foreseen Price Increase
The Assessing Officer disallowed ?34,83,64,435 on account of foreseen price increase. The tribunal found that the liability was an ascertained liability and allowable as a business deduction. The tribunal allowed the claim, following the Supreme Court's decision in Bharat Earth Movers v. CIT.

10. Disallowance of Excise Duty Expenditure
The Assessing Officer disallowed ?77 lacs paid as excise duty. The tribunal found that the payment was in the nature of excise duty and allowable under Section 43B. The tribunal allowed the claim, following the decision in the assessee's case for earlier years.

11. Transfer Pricing Adjustments on AMP Expenses
The Assessing Officer made adjustments on account of AMP expenses. The tribunal found that AMP expenses do not result in an international transaction and set aside the matter for fresh adjudication, following the Delhi High Court's decision.

12. Transfer Pricing Adjustments on Royalty Payments
The Assessing Officer made adjustments on royalty payments. The tribunal found that the royalty payment was for the use of licensed information and not for acquisition. The tribunal set aside the matter for fresh adjudication, following the decision in the assessee's case for the assessment year 2006-07.

13. Computation of Interest under Sections 234B, 234C, and 234D
The assessee claimed errors in the computation of interest under Sections 234B, 234C, and 234D. The tribunal directed the Assessing Officer to recompute the interest as per law, following the decision in the assessee's case for the assessment year 2006-07.

14. Credit of TDS Certificates
The assessee claimed credit of TDS certificates through a revised return. The tribunal set aside the matter to the Assessing Officer to consider the claimed TDS credit on the basis of the revised return.

Conclusion:
The tribunal allowed the appeal partly, directing the Assessing Officer to reconsider various disallowances and adjustments following the cited judicial precedents and decisions in the assessee's own case for earlier years.