2018 (7) TMI 208 - AT - Income Tax

Addition of Transfer Pricing Adjustment u/s 92CA - MAM selection - Held that - Since the operating profit ratio of the assessee @ 10.99% is higher than the average of the operating profit ratio of comparables companies, i.e., 10.79%, the international transactions entered into by the assessee were considered as having been entered at arm s length price, applying TNMM. From the records it can be seen that the assessee has not sold any products to the associated enterprises on which royalty was payable and the entire amount of royalty was paid by the assessee on sales made to independent enterprises. Therefore, the TPO/AO as well as DRP were not correct in determining the arm s length pricing of model fees and payment of royalty. This issue is squarely covered by the earlier Assessment Years in assessee s favour. Addition of freight inward/import clearing expenses to cost of closing inventory - Held that - Adjustment made to total value of closing stock and consumption of stocks is uncalled for. If valuation of closing stock is changed then the value of opening stock should also be changed on the same basis or method. The closing stock of a particular year is the opening stock of the subsequent year. It is not the case of the revenue that the method of valuation of closing stock is materially affecting the accounts and profits disclosed by the assessee. This adjustment sought to be made is revenue neutral and at best may result in preponment or postponement of revenue. The issue is whether such exercise is at all required on the ground of materiality. Materiality is a concept which is well recognized both in accountancy and law. Accounting standards notified by the CBDT u/s 145(2) mandate that the concept of materiality be taken into consideration when finalizing the accounts of an assessee. Addition on account of cost of rejection of semi-finished goods and obsolete items to the value of closing stock - Held that - It is pertinent to note that it is not practically possible for the assessee to segregate normal and abnormal wastages embedded in the aforesaid costs and therefore, the assessee, as per consistent and regular method of accounting, accepted by the Revenue as such in the earlier years, did not consider the aforesaid expenditure for the purposes of valuation of closing inventory of finished goods. The AO/DRP was not correct in making this addition. The issue is squarely covered in assessee s favour by the order of earlier assessment years. Disallowance of provision for increase in price of material - Held that - While price revisions are pending or negotiations are on, the vendors keep on supplying the material provisionally at the agreed rates, with the understanding that pursuant to negotiations being finalized, the arrears of the amount due to them would be paid to them retrospectively. Such price revisions, being an accrued liability at the time of purchase of raw materials, are recorded in the books of accounts by the assessee. At the year end, the company estimates the additional liability on account of price revision under negotiation and makes upward/downward provision, as the case may be, in relation to material supplied until the end of the relevant year. Thus, the Assessing Officer was incorrect in disallowing this claim. Disallowance of cost of scrap material - Held that - The assessee is not dealing in scrap, and/or holding the scrap as inventory, and thus was not required to value the closing stock after taking into account the value of scrap. The Tribunal for A.Y. 2010-11 and 2011-12 while coming to the aforesaid conclusion, laid emphasis on the fact that such transaction was revenue-neutral and held that considering the size of the assessee company, it could not be expected to keep quantitative tally of miniscule items. The facts are identical in the presnt year as well. Disallowance of prior period expense - Held that - It can be seen that the assessee is a large sized manufacturing company which receives services from several vendors, running into hundreds. The assessee made reasonable attempt to quantify the liability incurred towards expenses during the relevant previous years and provide for it which was not doubted by the Assessing Officer. It is not practically possible to consider and provide for all expenses, in absence of relevant details/material/information for various reasons like, non-receipt of bills/invoices from the vendors, the contract terms with vendors not being settled, disputes in relation to bills received, services contracted by zonal/regional/branch officer not intimated to the head office, etc. Therefore, the assessee in our opinion has rightly claimed deduction for miscellaneous expenses aggregating to ₹ 18,01,39,937 pertaining to prior period. Advertisement provisions of Head Office - assessee made provision for various expenses incurred during the year on the basis of reasonable estimate - Held that - The provision for advertisement expenses, has been made on the basis of actual Purchase orders and agreements and thus, has been made on reasonable and scientific basis. Detail of provisions for advertisement was submitted before the lower authorities. Further, The Assessing Officer, in the set-aside proceedings for A.Y. 2008-09, vide order dated 26.02.2015, accepted the claim of the assessee and allowed relief on the aforementioned identical issue by observing that the assessee had computed the provision on the basis of actual Purchase Orders, which was scientific and logical in nature. Disallowance of alleged excessive purchases from related parties as per AS-18 - Held that - The purchase prices of components which are purchased from various suppliers are based upon negotiations with such vendors and are different due to various factors. The assessee also prefers purchasing material from certain suppliers, due to business/commercial expediency. The said parties are not related to assessee, in terms of the provisions of section 40A(2)(b) of the Act. During the relevant previous year, the assessee made total purchases of various raw materials, etc. aggregating to ₹ 17,791.60 crores. Out of the aforesaid total purchases, purchases from related parties, i.e., parties related to the assessee, in accordance with definition given in AS-18 issued by the ICAI and as disclosed in the notes to accounts of the audited accounts of the relevant previous year, but admittedly not related in terms of definition provided in section 40A (2). Deemed dividend addition - payment received on behalf of Hero Honda Fin Corp. Ltd. (HFCL) - Held that - It is pertinent to note that when payments by dealers to HFCL are due to the dealers, due to convenience of facility of collection centers of the assessee available all over India, make payment into the assessee s bank account, for and on behalf of HFCL, which is in turn remitted by the assessee to HFCL in 2- 3 days. Thus, the assessee is mere custodian of the said amount. Thus, Section 2(22)(e) will not be applicable in the present case. Disallowance of payments made for advisory services availed form Hero Corporate Services Ltd. - allowable busniss expenses - Held that - The assessee made elaborate submissions explaining the nature of services received from Hero Corporate Services Ltd. and nexus of same with the business of the assessee. This fact is identical with the earlier Assessment Years. The issue is squarely covered in favour of the assessee by the Tribunal s order for A.Ys. 2010-11 & 2011-12. Besides this the Revenue has accepted this issue and has not challenged the same in Hon ble High Court. Thus, this issue attains finality Disallowance of purchase u/s 40a(ia)for alleged failure to deduct TDS u/s 194C - Assessing Officer held that the assessee by specifying the name of vendors of raw material along with purchase price thereof, was controlling the supply of raw material to the vendors, which was to be deemed as supply of raw-material by the assessee itself, and hence the contract with vendors constituted work contract under section 194C - Held that - The test is to see the fact whether the assessee acquired any title to the raw material purchased by the vendors from the suppliers. The answer to this is no. We are unable to understand as to how the assessing officer as well as the DRP has considered this as a deemed purchase by the assessee. The reason enunciated by the assessee w.r.t identifying the suppliers of the material along with the determination of price of the raw material fixing of payment terms etc., clearly constitutes a matter of business expediency for the assessee - it is a case of contract of sale and not contract of work. Hence, in our view, the provision of Sec. 194C are not applicable and consequently the disallowance made u/s 40(a)(ia) is to be deleted. Disallowance of legal and professional expenses u/s 40(a)(ia) - failure of the assessee to deduct tax at source there from under section 194J - Held that - In the present Assessment Year, the Assessing Officer disallowed the aforesaid expenses, invoking section 40(a)(ia), for the failure of the assessee to deduct tax at source there from under section 194J of the Act. But it is pertinent to note here that the Assessing Officer did not doubt that the payment was made by assessee towards reimbursement of expenses, it was still held that assessee was liable to deduct tax at source under section 194J of the Act. Thus, the issue is squarely covered by the order of the Tribunal for A.Ys. 2010-11 and 2011-12. TDS at lower rate or wrong provision -Payment made to M/s. G2 RAMS India Pvt. Ltd. for event organization - addition us 40(a)(ia) - Held that - Assessee had incurred expenditure on account of display of hoardings for advertisements and arrangement of various events for publicity. All arrangements for this event were done by M/s G2 RAMS India Pvt. Ltd. The said company was entrusted with the overall responsibility for organizing the event. The contract entered into with the said company was a composite contract for organizing an event, involving various arrangements for carrying out work of organizing the event. In view of the above, tax was deducted at source u/s 194C of the Act before remitting the payment under that Section. Thus, the facts are identical to that of the A.Ys. 2010-11 and 2011-12 and therefore, the order of the Tribunal is applicable in the present case. Disallowance of additional depreciation of computers installed at Supervisory Officer - Held that - Remanding back the matter to the file of the Assessing Officer to determine if the computers were used for data processing at industrial premises or not. We direct the Assessing Officer that after taking congnizance of the same pass appropriate order. Gains from sale of investments - busniss income or capital gains - Held that - It is pertinent to note that the assessee invested surplus funds arising in the course of business under various modes of investment like mutual funds/PMS, shares, etc. The gains realized from sale of such various instruments, amounting to ₹ 278.54 crores during the relevant previous year, were disclosed under the head capital gains. The issue is identical in the AY 2010- 11 and 2011-12 wherein the Tribunal allowed this issue in favour of the assessee. Addition u/s 14A as per Rule 8D - Held that - Though the Assessing Officer did not accept the method of disallowance computed by the assessee under section 14A and made further disallowance of ₹ 62.30 lakhs (disallowing interest expense of ₹ 38.91 and administrative expense of ₹ 94.16 lacs) invoking provisions of Rule 8D of the Income Tax Rules, 1962 after reducing the suo moto disallowance of ₹ 70.77 lakhs made by the assessee in the return of income. But the Assessing Officer has not given the proper calculation to that effect. Therefore, the matter is restored back to the file of the Assessing Officer. Disallowance of Royalty expenditure on the ground of being capital in nature and disallowance on account of cess on model fee - Held that - No proprietary rights in the know how vested in the assessee, the assessee being a mere licensee with limited rights to use the technical assistance during the currency of the agreement, there is no explicit or implied intention to transfer or create ownership in the technical know-how /technical information in the assessee. In view of the aforesaid, expenditure by way of royalty, technical guidance fee and model fees incurred by the assessee was allowable revenue deduction as held in the decision given by the Tribunal for A.Ys. 2010-11 and 2011-12 Depreciation on Model Fee - Held that - Expenditure was incurred on new model fees prior to commencement of production of new models of two wheelers, thus, this action is revenue neutral in a broader perspective as the same adjustment would be required to be made to the opening stock of finished goods for the year under consideration. Disallowance of reimbursement of foreign travelling expenses to directors/employees, on the ground of no evidence/proof of actual expense incurred by employees - Held that - It is pertinent to note that for payment of per diem allowance, as per policy, the assessee does not require the expenses to be necessarily supported / backed by bills considering the practical difficulties/impossibilities in producing invoices for petty expenses like local conveyance, telephone bills, etc. The employees are only required to submit details of expenditure incurred in specified form, on basis of which travel bill is settled. The Tribunal in A.Ys. 2010-11 and 2011-12 and earlier years held that disallowance cannot be made merely on the basis that vouchers were not produced by the employees, Expenses incurred on advertisement on death anniversary of Late Shri Raman Munjal - Held that - Expenditure incurred by the assessee on death anniversary of Sh. Raman Kant Munjal was not personal expenditure of the promoter family and satisfied the tests of commercial and business expediency and thus was an allowable business deduction under Section 37(1) of the act. Disallowance of commission paid to Managing Director & CEO u/s 36 - Held that - Commission paid to directors with reference to percentage of profits of the company for the services rendered as per the terms of appointment, constitutes part of the remuneration package, and in the absence of any disallowance on other components of remuneration paid to such director, the commission cannot, ipso facto be classified as payment of profit/dividend covered within the exception provided under Section 36(1)(ii) of the Act. Disallowance of expenses incurred on account of Corporate Social Responsibility - allowable busniss expenditure - Held that - As decided in previous years expenditure incurred by the assessee company on Corporate Social Responsibility, prior to insertion of explanation 2 to Section 37(1) of the Act, was an allowable business deduction under the said provision. The Tribunal, in the said order, further elaborated that the role of the assessee was not restricted to merely earning profit, but also discharging certain community related expenses, which would be considered to have been incurred on account of commercial/ business expediency. Disallowance u/s 80IC on account of job work/ outsourcing of manufacturing activity - Held that -0utsourcing of certain intermediary processes or procurement of finished components in the process of manufacture does not tantamount to outsourcing of manufacturing activities and thus would not hamper the claim of deduction of the assessee company under Section 80 IC of the Act. Disallowance of deduction u/s 80IC - lower consumption of electricity - part of the manufacturing activity(ies) at Haridwar were outsourced on the basis of lower consumption of power per unit at Haridwar plant vis- -vis rate of power consumption at other two plants - Held that - Identical ground in the immediately preceding assessment years, i.e. AY 2010-11 and AY 2011-12 has been deleted by the Tribunal wherein the Tribunal noted that difference in consumption of electricity was on account of the fact that the plant at Haridwar was more energy-efficient and hence certain processes were carried out in said plant. The Tribunal further held that outsourcing of certain intermediary processes or procurement of finished components in the process of manufacture does not tantamount to outsourcing of manufacturing activities and thus would not hamper the claim of deduction of the assessee company under Section 80 IC of the Act. Disallowance of deduction u/s 80IC on account of inter-unit transfer of goods - Held that - For the purpose of computing market price of inter-unit transfer of goods, when the non-eligible units procured goods at market price from third party vendors and supplied the same to the eligible uni t at the same purchase price as increased by the applicable freight cost, no further substitution of such price is warranted in terms of section 80IA(8) of the Act and the transaction was a genuine business transaction borne out of commercial expediency Disallowance of deduction u/s 80IC of the Act on account of inflation of profit by charging higher basic price of ₹ 812 crores (restricted to 556 crores) - Held that - Provisions of section 80 IA (8) of the act do not apply to the assessee on transfer of services of marketing division of the company to the eligible industrial undertaking whose profits are claimed as deductible - Reverse the action of the assessing office in partly disallowing deduction under section 80IC on account of the have profit earned by the assessee in the eligible unit. Eligible deduction under section 80-IC - allocation of head office expenses - profit attributable to advertisement and marketing activities carried out at Head Office - Held that - Head office is not a separate profit centre and, therefore, no profit is to be separately attributed to such activity. It further observed that, for the purpose of working out eligible deduction under section 80-IC of the Act, actual expenses incurred at the head office are to be allocated between various profit centers on a rational and scientific basis Computation of deduction u/s 80IC - inclusion of other income - certain income earned by the eligible unit - Held that - Other incomes in the nature of Interest on loan to employees, interest on loan to vendors for working capital support, freight recovery, sundry sales, cash discounting from vendors and exchange fluctuation gain, etc. earned by a unit eligible for deduction under Section 80IC of the Act shall be considered as incidental to the activity of carrying out manufacturing and thus eligible for deduction under that section. Accordingly, the aforesaid issue stands squarely covered in favour of the assessee Claim of deduction under Section 80IC - Non compliance of Rule 18BBB and nonadherence to condition specified in Industrial Policy of ₹ 1129 crores (restricted to NIL) - Held that - Deduction u/s 80IC cannot be denied for alleged failure to comply with the three conditions specified in the assessment order. As regards compliance of conditions precedent for claiming deduction u/s 80IC, we note that the appellant during the course of set-aside proceedings had point-wise given entire details /information as to how it satisfied each condition precedent for claiming deduction under said section. The claim of deduction of the appellant is also duly supported with the audit report in Form 10CCB issued by the auditors, answering each question in the format and how the appellant satisfied all such conditions. In the final assessment order, the assessing officer has not pointed out violation of any such condition precedent. Disallowance expenses incurred on repair and maintenance of various assets alleging to be capital expenditure - Held that - Expenditure incurred is allowable repairs and maintenance expenditure on the existing assets of the company and is revenue in nature. Expenditure incurred on mobile phones - Nature of expenses - revenue or capital - Held that - As decided in own case in view of the rapid changes/up-gradations in technology, expenditure incurred by the assessee company on acquisition/purchase of mobile phones is a regular business upgradation/ replacement expenditure, which shall be eligible as business deduction u/s 37(1) of the Act.

Summary

Issues Involved:
1. Transfer Pricing Adjustment
2. Addition of Freight Inward/Import Clearing Expenses
3. Addition on account of Cost of Rejection of Semi-Finished Goods and Obsolete Items
4. Disallowance of Provision for Increase in Price of Material
5. Disallowance of Cost of Scrap Material
6. Disallowance of Prior Period Expense
7. Disallowance of Advertisement Provisions of Head Office
8. Disallowance of Alleged Excessive Purchases from Related Parties
9. Deemed Dividend under Section 2(22)(e)
10. Disallowance of Payments Made for Advisory Services
11. Disallowance of Purchase u/s 40a(ia) for Alleged Failure to Deduct TDS u/s 194C
12. Disallowance of TDS on Quarterly Target and Turnover Discount and Sales Discount
13. Disallowance of Legal and Professional Expenses u/s 40(a)(ia)
14. Disallowance of TDS at Lower Rate or Wrong Provision for Event Organization
15. Disallowance of Additional Depreciation of Computers Installed at Supervisory Office
16. Gains from Sale of Investments Income Treated as Business Income
17. Disallowance u/s 14A as per Rule 8D
18. Disallowance of Royalty Expenditure on the Ground of Being Capital in Nature
19. Depreciation on Model Fee
20. Disallowance of Reimbursement of Foreign Travelling Expenses to Directors/Employees
21. Expenses Incurred on Advertisement on Death Anniversary
22. Disallowance of Commission Paid to Managing Director & CEO, and Joint Managing Director u/s 36(1)(ii)
23. Disallowance of Expenses Incurred on Account of Corporate Social Responsibility (CSR)
24. Disallowance of Deduction u/s 80IC on Account of Outsourcing of Manufacturing Activity
25. Disallowance of Deduction u/s 80IC on Account of Profit Attributable to Advertisement and Marketing Activities
26. Disallowance of Deduction u/s 80IC on Account of Certain Income Earned by the Eligible Unit
27. Disallowance of Deduction u/s 80IC for Non-Compliance of Rule 18BBB
28. Disallowance of Expenses Incurred on Repair and Maintenance of Various Assets
29. Disallowance of Expenses Incurred on Mobile Phones as Capital Expenditure

Detailed Analysis:

1. Transfer Pricing Adjustment:
The Tribunal found that the issue of transfer pricing adjustment for model fees and royalty is covered in favor of the assessee by previous decisions of the Tribunal and the High Court. The addition of ?172.08 Crore for model fee and ?3.53 crore for royalty was reversed, as the transactions were at arm’s length price.

2. Addition of Freight Inward/Import Clearing Expenses:
The Tribunal followed its earlier decision that the assessee had consistently followed a method of accounting for freight expenses, which was accepted by the Revenue in the past. The addition of ?170.01 lacs was deleted.

3. Addition on account of Cost of Rejection of Semi-Finished Goods and Obsolete Items:
The Tribunal held that only normal wastages are to be included in the valuation of closing inventory. The addition of ?1469.93 lacs was deleted as the assessee consistently followed this method, which was accepted by the Revenue in previous years.

4. Disallowance of Provision for Increase in Price of Material:
The Tribunal held that the provision for price increase was made on a scientific basis and was revenue neutral. The disallowance of ?60.64 crores was deleted.

5. Disallowance of Cost of Scrap Material:
The Tribunal held that the assessee was not dealing in scrap and thus was not required to value the closing stock of scrap. The addition of ?6.73 lacs was deleted.

6. Disallowance of Prior Period Expense:
The Tribunal followed its earlier decision and held that the assessee made a reasonable attempt to quantify the liability towards expenses. The disallowance of ?18.01 crores was deleted.

7. Disallowance of Advertisement Provisions of Head Office:
The Tribunal held that the provision for advertisement expenses was made on a scientific basis and was revenue neutral. The disallowance of ?22.84 crores was deleted.

8. Disallowance of Alleged Excessive Purchases from Related Parties:
The Tribunal held that the transactions were entered into for commercial expediency and the parties were not related under section 40A(2). The disallowance of ?47.17 crores was deleted.

9. Deemed Dividend under Section 2(22)(e):
The Tribunal held that the assessee was merely a custodian of the amount received from dealers on behalf of HFCL. The addition of ?3.55 crore was deleted.

10. Disallowance of Payments Made for Advisory Services:
The Tribunal held that the advisory services were necessary for the business and the expenditure was reasonable. The disallowance of ?2 crores was deleted.

11. Disallowance of Purchase u/s 40a(ia) for Alleged Failure to Deduct TDS u/s 194C:
The Tribunal held that the contract was for carrying out work and not for professional/technical services. The disallowance of ?5063.08 crores was deleted.

12. Disallowance of TDS on Quarterly Target and Turnover Discount and Sales Discount:
The Tribunal held that the discounts were not in the nature of commission and thus not liable for TDS under section 194H. The disallowance of ?31.44 crores was deleted.

13. Disallowance of Legal and Professional Expenses u/s 40(a)(ia):
The Tribunal held that the reimbursement of expenses did not have any element of income and thus no TDS was required. The disallowance of ?3.60 lacs was deleted.

14. Disallowance of TDS at Lower Rate or Wrong Provision for Event Organization:
The Tribunal held that the contract was for organizing an event and not for professional/technical services. The disallowance of ?44.85 crores was deleted.

15. Disallowance of Additional Depreciation of Computers Installed at Supervisory Office:
The Tribunal remanded the matter back to the Assessing Officer to determine if the computers were used for data processing at industrial premises.

16. Gains from Sale of Investments Income Treated as Business Income:
The Tribunal held that the gains from the sale of investments were to be treated as capital gains and not business income. The addition of ?278 crores was deleted.

17. Disallowance u/s 14A as per Rule 8D:
The Tribunal remanded the matter back to the Assessing Officer to re-examine the disallowance under section 14A as per the Supreme Court decision in Maxopp Investment Ltd.

18. Disallowance of Royalty Expenditure on the Ground of Being Capital in Nature:
The Tribunal held that the royalty expenditure was for the use of technical know-how and not for acquiring any capital asset. The disallowance of ?190.96 crores was deleted.

19. Depreciation on Model Fee:
The Tribunal held that the expenditure on model fees was revenue in nature and thus allowed the depreciation claimed by the assessee.

20. Disallowance of Reimbursement of Foreign Travelling Expenses to Directors/Employees:
The Tribunal held that the disallowance cannot be made merely on the basis that vouchers were not produced by the employees. The disallowance of ?2.07 crores was deleted.

21. Expenses Incurred on Advertisement on Death Anniversary:
The Tribunal held that the expenditure was incurred for business purposes and was not personal expenditure. The disallowance of ?38.92 lacs was deleted.

22. Disallowance of Commission Paid to Managing Director & CEO, and Joint Managing Director u/s 36(1)(ii):
The Tribunal held that the commission was part of the remuneration package and not in lieu of dividend. The disallowance of ?47.98 crores was deleted.

23. Disallowance of Expenses Incurred on Account of Corporate Social Responsibility (CSR):
The Tribunal held that the CSR expenses were incurred for business/commercial expediency and thus allowable under section 37(1). The disallowance of ?35.20 lacs was deleted.

24. Disallowance of Deduction u/s 80IC on Account of Outsourcing of Manufacturing Activity:
The Tribunal held that outsourcing of certain intermediary processes does not mean outsourcing of manufacturing operations. The disallowance of ?26.91 crores was deleted.

25. Disallowance of Deduction u/s 80IC on Account of Profit Attributable to Advertisement and Marketing Activities:
The Tribunal held that the head office was not a separate profit center and thus no profit attribution was required. The disallowance of ?564.13 crores was deleted.

26. Disallowance of Deduction u/s 80IC on Account of Certain Income Earned by the Eligible Unit:
The Tribunal held that other incomes like interest on loan to employees, freight recovery, etc., were incidental to the manufacturing activity and thus eligible for deduction under section 80IC. The disallowance of ?198.23 crores was deleted.

27. Disallowance of Deduction u/s 80IC for Non-Compliance of Rule 18BBB:
The Tribunal held that the assessee had complied with all statutory conditions for claiming deduction under section 80IC. The disallowance of ?1129.63 crores was deleted.

28. Disallowance of Expenses Incurred on Repair and Maintenance of Various Assets:
The Tribunal held that the expenses were incurred on existing assets and were revenue in nature. The disallowance of ?2.57 crores was deleted.

29. Disallowance of Expenses Incurred on Mobile Phones as Capital Expenditure:
The Tribunal held that the expenditure on mobile phones was a regular business expenditure and thus allowable under section 37(1). The disallowance of ?2.77 lacs was deleted.