2019 (5) TMI 1932 - AT - Income Tax

TP Adjustment - Addition for guarantee fees for providing a guarantee by the assessee on loan taken by its AEs during the year under consideration - HELD THAT - Since in the case on hand the Guarantee is not having bearing on profits income losses or assets therefore respectfully following the same we are also of the opinion that such guarantee issued by the assessee is not covered under the definition of section 92B of the Act. Accordingly we direct the TPO/AO to delete the addition made by him. Thus the ground of appeal of the assessee is allowed. Disallowance of deduction u/s 35 (2AB) - disallowance of weighted deduction claimed by the assessee - HELD THAT - We note that the issue raised by the assessee is covered against it by order of this tribunal in its case 2012 (7) TMI 273 - ITAT AHMEDABAD thus find that the capital expenditure incurred by the assessee on purchase of motor cars cannot be considered as expenditure incurred by the assessee on in-house research development and therefore the same is not eligible for weighted deduction u/s. 35(2AB) of the Act. Similarly capitalized interest on purchase of car is also not eligible for this benefit for same reasons because it is equal or similar to cost of car. Administrative expenses between the eligible and non-eligible unit based on the turnover - HELD THAT - These expenses are incurred by a company regardless of whether the company produces or sells anything generates income or incurs a loss. Most of these expenses either are fixed or semi-fixed and there is a limited scope to reduce them. The companies that have a centralized management system tend to have higher general and administrative expenses. On the contrary in the case of decentralizing system certain functions are delegated to subsidiaries. Similarly these expenses cannot be linked to any particular undertaking of the company in a case the assessee has more than one undertaking. Thus the dispute arises for the allocation of such expenses among the different unit/ undertaking of the assessee. Regarding the allocation we are of the view that these expenses cannot be allocated based on the turnover. It is because the turnover of any undertaking is very much volatile and keep on changing depending upon the market forces competition Government policies etc. There can be a situation that the turnover of one undertaking is very high in a particular year but in the subsequent year the turnover may go done or vice versa which will affect the pattern and consistency in the allocation of the administrative expenses and distort the presentation of the financial statements for different years. Therefore we are of the considered view that the basis of the allocation of administrative expenses based on the turnover is not advisable. What should be the basis of the allocation of the said expenses in the given facts and circumstances. Generally the human resources working in any of the undertakings of the assessee does not frequently change as the market forces do not regulate it unlike the sales. Therefore in the given facts and circumstances we are of the view that the allocation of the administrative expenses should be done based on the human resources engaged in the different undertaking of the assessee. - Decided in favour of assessee. Addition on account of the expenses for Employee long term compensation plan ( for short ELTCP) - HELD THAT - A.O. had disallowed the provision for leave encashment as no payment has been made against the said provision during the year. In the case of Bharat Earth Movers 2000 (8) TMI 4 - SUPREME COURT has held if a liability has been ascertained with a reasonable certainty and the actual quantification is not material to claim the expenditure.We do not find a reason to interfere in the order of the ld. CIT-A. Hence the ground of appeal raised by Revenue is dismissed. Depreciation at the rate of 60% on the items connected with the VSAT Allowed. Deduction under section 80-IC - assessee in its ROI claimed a deduction u/s 80-IC in respect of its unit located at Baddi - HELD THAT - There is no dispute about the facts of the case. Therefore we are not inclined to repeat the same for the sake of brevity and convenience. The issue in the instant case relates whether the expenditure incurred by the assessee on research under the head discovery cost and capital cost is to be allocated to the unit eligible for deduction under section 80IC of the Act. The provisions of section 80IC of the Act mandates to claim the deduction in respect of eligible unit considering the income from such unit as only the source of income. The assessee in the case on hand has allocated the cost of research expenditure which was directly connected with its eligible unit. The assessee besides the direct cost has also incurred the cost of scientific research activity which did not materialize. Therefore the same was not allocated to the eligible unit as the same was not directly connected with the eligible unit. In our considered view the cost which is directly connected with the eligible unit is eligible for deduction while determining the deduction under section 80 IC of the Act. AO in the subsequent assessment year 2008-09 has not allocated the cost on scientific research under the head discovery and capital cost to the eligible unit. Thus in our considered view the principle of consistency needs to be applied in the case on hand as held by the Hon ble apex court in the case of Radhaswoami Satsang 1991 (11) TMI 2 - SUPREME COURT . Disallowance on account of the donation under section 80G - whether the donation paid by the assessee under section 80G of the Act needs to be allocated to the unit eligible for deduction under section 80-IC? - HELD THAT - The scheme of the Act provides to claim the deduction under section 80G of the Act after claiming all the deduction provided under chapter VI-A of the Income Tax Act. Therefore the assessee can claim the deduction on account of such donation only against the Gross Total Income after claiming all other deduction. We further note that the donation paid by the assessee cannot be claimed as an expense in the profit and loss account as the same has not been incurred wholly and exclusively for the purpose of the business as provided under section 37(1) of the Act. Thus even if the assessee claimed the donation as an expense in the profit and loss account then it has to be disallowed while computing the income under the head business and profession. Thus the only option available to the assessee to claim the deduction on account of such donation is only under the provisions specified under section 80G of the Act which can be claimed in the manner as discussed above. Upward adjustment by the TPO/AO on account of interest on Loan given to AEs - determination of ALP of the interest amount on loan given by the assessee to its AE s - HELD THAT - Addition in the rate of interest on account the credit risk suggested by the TPO is not sustainable. Basis of charging 0.50% margin from the AE - The assessee is charging margin at 37.50 bps from the AE which appears quite low as even the bank charges from the company having high net worth a margin of .50%. Therefore we are inclined to uphold the finding of the TPO for charging the margin at .50% over and above the 6 month average labor rate. In effect the rate of interest charged by the assessee from the AE shall increase by 12.5 bps. Thus the ground of appeal of the assessee is partly allowed. Disallowance in respect of the expenditure incurred on the purchase of a motor car which was claimed as deduction under section 35(2AB) - HELD THAT - CIT (A) has held that entertainment expenses claimed by the assessee were not incurred in connection with the scientific research activity without adducing any reason thereon. As such the submission of the assessee filed before the learned CIT (A) stating that the entertainment expenditures were incurred in respect of the professionals who visited the research center has not been challenged based on any reasoning.AO has allowed 100% deduction in respect of such expenditure which proves that the expenditure incurred in connection with the business activities of the assessee. Such claim of the assessee was allowed under section 35(2AB) of the Act but at the rate of 100% instead of 150% i.e. weighted deduction. Therefore we are not inclined to uphold the finding of the authorities below. Hence we reverse the order of the learned CIT-A and direct the AO to delete the addition made by him. Hence the ground of appeal of the assessee is allowed. Deduction u/s 80IC - whether the miscellaneous income such as Penalty Received from Supplier Discount Received from Vendors and Export Benefits are eligible for the deduction u/s 80IC? - HELD THAT - We hold that the assessee is eligible for deduction in respect of the income as discussed above under section 80 IC of the Act. Accordingly we direct the AO to delete the addition made by him. Hence the ground of appeal of the assessee is allowed and the Revenue is dismissed.

Summary

Issues Involved:
1. Addition of Rs. 60,16,500/- for guarantee fees.
2. Disallowance of deduction u/s 35(2AB) for Rs. 6.68 lakhs on motor vehicles.
3. Disallowance of deduction u/s 80-IC for Rs. 2,55,341/- by changing the method of allocation of administrative expenses.
4. Disallowance of deduction u/s 35(2AB) for Rs. 46,96,73,170/-.
5. Disallowance of deduction u/s 80-IC for Rs. 29,82,93,291/-.
6. Disallowance of Rs. 17,22,481/- on account of garden expenses.
7. Disallowance of Rs. 30,41,061/- for Employee Long-term Compensation Plan (ELTCP).
8. Allowing depreciation @60% on equipment connected to V-SAT.
9. Disallowance of deduction u/s 80G.
10. Upward adjustment of Rs. 5,25,146/- for interest on loan to AE.
11. Disallowance of deduction u/s 35(2AB) for Rs. 3.68 lakhs on entertainment expenditure.
12. Disallowance of deduction u/s 80-IC for Rs. 1,93,24,629/- by changing the method of allocation of administrative expenses.
13. Disallowance of deduction u/s 80-IC for Rs. 21,60,380/- (penalty from suppliers), Rs. 1,33,426/- (cash discount), and Rs. 35,97,000/- (export benefits).
14. Deleting disallowance of Rs. 40,65,794/- on account of garden expenses.
15. Deleting disallowance of Rs. 16,34,173/- on account of ELTCP.
16. Deleting disallowance of Rs. 27,86,287/- on account of donation u/s 80G.
17. Setting aside the matter regarding reducing income computed u/s 115JB.

Issue-wise Detailed Analysis:

1. Addition of Rs. 60,16,500/- for guarantee fees:
The Tribunal held that corporate guarantees are included in the definition of international transactions under section 92B of the Act. However, since the guarantees did not have a bearing on profits, income, losses, or assets, they do not constitute an international transaction for arm's length price adjustment. The addition was deleted.

2. Disallowance of deduction u/s 35(2AB) for Rs. 6.68 lakhs on motor vehicles:
The Tribunal upheld the disallowance, stating that motor cars provided to employees for traveling do not qualify as expenditure on in-house research and development. The ground of appeal was dismissed.

3. Disallowance of deduction u/s 80-IC for Rs. 2,55,341/- by changing the method of allocation of administrative expenses:
The Tribunal reversed the CIT(A)'s order, directing that administrative expenses should be allocated based on the number of employees rather than turnover. The ground of appeal was allowed.

4. Disallowance of deduction u/s 35(2AB) for Rs. 46,96,73,170/-:
The Tribunal upheld the CIT(A)'s decision to allow the deduction based on the DSIR report, except for motor vehicle expenses. The ground of appeal was dismissed for the Revenue and allowed for the assessee in part.

5. Disallowance of deduction u/s 80-IC for Rs. 29,82,93,291/-:
The Tribunal upheld the CIT(A)'s decision that discovery and capital expenditure should not be allocated to the eligible unit for deduction under section 80-IC, as these expenses were not directly linked to the manufacturing activity. The Revenue's appeal was dismissed.

6. Disallowance of Rs. 17,22,481/- on account of garden expenses:
The Tribunal upheld the CIT(A)'s decision, stating that garden expenses were necessary to maintain a good atmosphere and comply with pollution control norms. The Revenue's appeal was dismissed.

7. Disallowance of Rs. 30,41,061/- for Employee Long-term Compensation Plan (ELTCP):
The Tribunal upheld the CIT(A)'s decision, allowing the provision for ELTCP as it was made in accordance with AS-15 and had a reasonable certainty. The Revenue's appeal was dismissed.

8. Allowing depreciation @60% on equipment connected to V-SAT:
The Tribunal upheld the CIT(A)'s decision, allowing depreciation at 60% as V-SAT equipment forms an integral part of the computer system. The Revenue's appeal was dismissed.

9. Disallowance of deduction u/s 80G:
The Tribunal upheld the CIT(A)'s decision, stating that the donation paid by the assessee has no connection with the eligible unit and should be allowed as a deduction from the gross total income. The Revenue's appeal was dismissed.

10. Upward adjustment of Rs. 5,25,146/- for interest on loan to AE:
The Tribunal partly allowed the assessee's appeal, stating that no addition on account of credit risk is warranted, but upheld the addition of 0.50% margin over the 6-month average LIBOR rate.

11. Disallowance of deduction u/s 35(2AB) for Rs. 3.68 lakhs on entertainment expenditure:
The Tribunal allowed the assessee's appeal, stating that entertainment expenses incurred for professionals visiting the research center are eligible for weighted deduction under section 35(2AB).

12. Disallowance of deduction u/s 80-IC for Rs. 1,93,24,629/- by changing the method of allocation of administrative expenses:
The Tribunal upheld the CIT(A)'s decision, directing that administrative expenses should be allocated based on the number of employees rather than turnover. The ground of appeal was dismissed.

13. Disallowance of deduction u/s 80-IC for Rs. 21,60,380/- (penalty from suppliers), Rs. 1,33,426/- (cash discount), and Rs. 35,97,000/- (export benefits):
The Tribunal allowed the assessee's appeal, stating that these incomes are derived from the business activities of the eligible unit and are eligible for deduction under section 80-IC.

14. Deleting disallowance of Rs. 40,65,794/- on account of garden expenses:
The Tribunal upheld the CIT(A)'s decision, stating that garden expenses were necessary to maintain a good atmosphere and comply with pollution control norms. The Revenue's appeal was dismissed.

15. Deleting disallowance of Rs. 16,34,173/- on account of ELTCP:
The Tribunal upheld the CIT(A)'s decision, allowing the provision for ELTCP as it was made in accordance with AS-15 and had a reasonable certainty. The Revenue's appeal was dismissed.

16. Deleting disallowance of Rs. 27,86,287/- on account of donation u/s 80G:
The Tribunal upheld the CIT(A)'s decision, stating that the donation paid by the assessee has no connection with the eligible unit and should be allowed as a deduction from the gross total income. The Revenue's appeal was dismissed.

17. Setting aside the matter regarding reducing income computed u/s 115JB:
The Tribunal upheld the CIT(A)'s decision, stating that the CIT(A) directed the AO to examine the matter in accordance with the law and records, which does not contravene the provisions of section 251. The Revenue's appeal was dismissed.

Conclusion:
The appeals of the assessee were allowed in part, while the appeals of the Revenue were dismissed.