2015 (12) TMI 1827 - AT - Income Tax

Arms length price of International transaction - corporate services charge paid - HELD THAT - Disallowance on account of corporate services was made for the same reason as in the impugned assessment year. Since this issue has already been adjudicated upon by the Hon'ble Tribunal in the preceding year, respectfully following the same in the impugned assessment year also, we remit the matter back to the file of the AO and direct him to compute the ALP of the corporate services charge paid by reducing 50% of the benefit if any received by the assessee from the financial services received. The AO is directed to examine the amount of benefit as calculated by the assessee and thereafter decide the issue as per the direction given. Disallowance of commission expenses - Rate of commission paid by the assessee - HELD THAT - Rate of commission paid for the transaction cannot be interfered by the Assessing Officer as it is the understanding between the parties at the relevant time which determines the rate of commission to be paid on a particular transaction. In view thereof, we reverse the order of Assessing Officer in restricting the rate of commission to 3% . In any case, the said restriction was made by the Assessing Officer observing that the rate of commission paid by the assessee was 6.6% whereas the assessee claims that it had paid commission @ 4.48%. The other two parties to whom commission had been paid by the assessee and the same has been restricted by the Assessing Officer are M/s Integrated Technology and M/s Aakaar Engineering Manufacturing Co. The commission to the said parties, as alleged by the Assessing Officer are paid @ 6.90% and 6.76% respectively. In line with our observations herein above, we find no merit in the disallowance made by the Assessing Officer restricting to rate of commission to 3% as against the rates agreed upon between the parties. Disallowance u/s 14A - HELD THAT - Admittedly the investment was made in the year 1996 and though the assessee may have received interest and dividend at one stage but for the last over a decade M/s HMGV is before BIFR and has not been paying any interest to the assessee. The investment as is apparent from the facts was made as a business expediency to procure raw material manufactured by M/s Hindustan Max GB Ltd. The Income Tax Appellate Tribunal, therefore, rightly deleted the addition made by the assessing officer, under Section 14A of the Act. Since the disallowance made u/d 14A has been deleted nothing remains for making adjustment to the Book Profits u/s 115JB in respect of Section 14A. Therefore adjustment made to the Book Profit on account of disallowance u/s 14A is also deleted. Interest expenses allowability - Non allowance of depreciation on the amount treated as capital expenditure - HELD THAT - Indirect expenses would constitute revenue expenditure only and would not become capital merely for the reason that such expansion was termed as new project. Therefore we hold that the treatment given by AO to the sum as capital is not in accordance with law and is hereby reversed. Disallowance of interest expenses on account of capital expansion - HELD THAT - If no particular loan has been taken for the asset which has been shown under the head 'capital work in progress' then disallowance could not have been made. However, each loan and its utilization requires fresh examination, therefore, we remand this issue to the file of Assessing Officer with a direction to ascertain details of various loans and how they were fully utilized and then only decide the issue in accordance with law. Respectfully following the same we hold that no disallowance u/s 36(1)(iii) can be made if no loan has been taken for investment in capital work in progress, and further for the verification of this fact, we remit the matter back to the file of the AO with a direction to ascertain the utilization of various loans taken by the assessee and thereafter decide the issue in accordance with law. Deduction u/s 43B r.w.s. 36(1)(ii) - HELD THAT - We hold that ex-gratia payment pertaining to the impugned year only is allowable as business expenditure and since this aspect has not been examined by the AO, we set aside the order and remand the matter back to the file of the A.O. for re-examination in terms of the direction contained in para-43 of the order of Tribunal for A.Y. 2009-10. Disallowance of Royalty expenses incurred by the assessee for the manufacture of its product Purimox - HELD THAT - We hold that the expenditure incurred by the assessee for the payment of Royalty is allowable and we further hold that the depreciation allowed thereon be withdrawn. We therefore, set aside the order of the AO and delete the addition made. Disallowance of expenditure - assessee had failed to produce relevant bills and vouchers during the course of assessment proceedings - HELD THAT - Claim of the assessee that it has not claimed any deduction in respect of impugned prior period expenses, has not been examined by AO or by DRP, despite the fact that specific argument was raised to this effect and books of accounts produced before the AO. Therefore, the AO is directed to verify this fact and if it is found that such amount has not been claimed as deduction during the year no disallowance can be made in respect of such non-claimed deduction. In case any such amount is claimed as deduction, plea of the assessee that liability in respect of such expenses has capitalized in the year under appeal should also be examined as assessing officer has not dealt with this argument of the assessee though specifically raised. AO shall give opportunity of hearing to the assessee and decide the allowability of deduction in accordance with law and in the light of above mentioned direction. As regards the other component of disallowance on account of non-production of supporting documents, it is seen that AO did not give adequate opportunity to the assessee and when evidences were filed before DRP, DRP without assigning any reason, brushed aside the same which in our considered opinion is not justified. Therefore this issue is sent back to the file of AO to decide it after giving reasonable opportunity of being heard to the assessee. Disallowance of expenditure - assessee failed to file satisfactory reply and the said bills pertained to either earlier year or were unsupported with voucher - HELD THAT - Certain expenses have also been disallowed for the reason that the invoice amount does not tally with the supporting voucher. Ld. AR submitted that this issue was clarified to the A.O. wherein it was explained that in certain cases a single purchase order is made for materials /products / items required by different departments of the assessee and in pursuance to which the material is supplied by the vendor raising a single bill, sometimes without mentioning the PO reference no. The SAP system of the assessee, thereafter, posts the purchases in the respective ledger accounts wherein the purchases accounted for do not tally with the consolidated figure mentioned in the purchase order. Ld. AR stated that relevant purchase order and invoices were also placed before the A.O. Despite the submissions and evidences placed by the assessee before the assessing officer, the same has neither been considered nor examined by him. Moreover we find that the DRP also failed to consider the submission of the assessee. In view of the same we find no justification in the order of the A.O. making the disallowance without appreciating the submissions made by the assessee and the evidences filed by it. But in the interest of justice we remit the matter back to the file of the A.O. to examine the issue afresh in the light of submissions and evidences placed by the assessee and thereafter adjudicate thereon in accordance with law. The assessing officer is directed to give adequate opportunity of hearing to the assessee in respect of the above issues. Depreciation on certain civil construction expenses under the head Plant Machinery - HELD THAT - Referring detailed explanation of the assessee that the civil work undertaken pertained to building reinforced foundation for the purpose of installing new plant and machinery has not been rebutted much less with the help of any cogent basis. Therefore such reinforcement even to civil construction would be treated as installation cost of Plant and Machinery and would qualify for depreciation as Plant and Machinery. In view of the same, we allow depreciation on civil construction work in the facts of the present case as applicable to Plant and Machinery.

Summary

Issues Involved:
1. Computation of Loss
2. Transfer Pricing Adjustments
3. Disallowance of Commission Expenses
4. Disallowance under Section 14A
5. Disallowance of Indirect Expenses on New Project
6. Disallowance of Interest Expenses
7. Disallowance of Ex-gratia Payments
8. Disallowance of Royalty Expenses
9. Disallowance of Miscellaneous Expenditure
10. Disallowance of Depreciation on Civil Construction
11. Penalty Proceedings under Section 271(1)(c)

Detailed Analysis:

1. Computation of Loss:
The assessee contested the computation of loss by the AO, which was determined at Rs. 23,72,41,227 against the returned loss of Rs. 50,81,48,052. This issue was general in nature and did not require adjudication.

2. Transfer Pricing Adjustments:
The assessee challenged the adjustments made by the TPO/DRP regarding the arm's length price (ALP) of corporate service fees paid to its associated enterprises. The TPO determined the ALP at Rs. 44,91,480 against the payment of Rs. 8,98,29,606, resulting in an adjustment of Rs. 8,53,38,126. The Tribunal followed its earlier decisions for AY 2007-08, 2008-09, and 2009-10, which concluded that no adjustment should be made for corporate service charges. The matter was remitted back to the AO to compute the ALP by reducing 50% of the benefit received from financial services.

3. Disallowance of Commission Expenses:
The AO disallowed commission expenses amounting to Rs. 2,08,84,673, which included payments to Malachite Chemicals and Edward Keller (Phils) Inc. and commissions paid in excess of 3%. The Tribunal remitted the issue back to the AO for re-examination, directing the AO to verify the relationship with the parties and allow the commission if found legitimate. The disallowance of commission paid in excess of 3% was deleted following the Tribunal's earlier decisions.

4. Disallowance under Section 14A:
The AO disallowed Rs. 18,82,264 under Section 14A read with Rule 8D, which was upheld by the DRP. The Tribunal, following the decision of the Punjab & Haryana High Court in the assessee's own case for earlier years, deleted the disallowance, holding that no expenditure was incurred for earning exempt income.

5. Disallowance of Indirect Expenses on New Project:
The AO disallowed Rs. 8,18,69,666, treating it as capital expenditure. The Tribunal held that the expenses were for the expansion of existing business and should be treated as revenue expenditure. The Tribunal reversed the AO's decision, allowing the expenses as revenue expenditure.

6. Disallowance of Interest Expenses:
The AO disallowed Rs. 1,56,26,683, attributing it to capital work in progress. The Tribunal remitted the matter back to the AO to verify the utilization of interest-bearing loans and decide the issue in accordance with law, following its earlier decision for AY 2009-10.

7. Disallowance of Ex-gratia Payments:
The AO disallowed Rs. 21,03,419, treating it as a prior period expense. The Tribunal remitted the matter back to the AO for re-examination, directing the AO to verify if the ex-gratia payment pertained to the impugned year and allow it as business expenditure if so.

8. Disallowance of Royalty Expenses:
The AO disallowed Rs. 2,53,72,500, treating it as capital in nature. The Tribunal, following its earlier decision for AY 2009-10, held that the royalty payment was for the use of patents and technology and should be treated as revenue expenditure. The Tribunal allowed the expenditure and directed the AO to withdraw the depreciation allowed.

9. Disallowance of Miscellaneous Expenditure:
The AO disallowed Rs. 41,84,904 for want of supporting vouchers and treating some expenses as prior period expenses. The Tribunal remitted the matter back to the AO to verify the claim that prior period expenses were not claimed during the year and to examine the supporting vouchers.

10. Disallowance of Depreciation on Civil Construction:
The AO disallowed excess depreciation of Rs. 11,57,037, treating civil construction work as part of the building. The Tribunal held that the civil work was for building a strong foundation for installing new plant and machinery and should be treated as part of the plant and machinery. The Tribunal allowed the depreciation as claimed by the assessee.

11. Penalty Proceedings under Section 271(1)(c):
The issue of initiation of penalty proceedings under Section 271(1)(c) was considered premature and did not require adjudication.

Conclusion:
The appeal was partly allowed with several issues remitted back to the AO for re-examination and verification. The Tribunal followed its earlier decisions and judicial precedents to adjudicate the issues, ensuring the correct application of law and principles of natural justice.