2020 (10) TMI 834 - AT - Income Tax

Under valuation of stock of work in progress in the form of semi finished goods and unpacked finished goods - valuation of opening inventory of work in progress - Addition by reducing the value of opening work in progress - HELD THAT - As DR could not point out any infirmity in the order of the coordinate bench for immediately preceding year where the corresponding addition has been deleted, we respectfully following the decision of the coordinate bench 2019 (4) TMI 1382 - ITAT DELHI allow ground number 1 of the appeal of the assessee and direct the learned assessing officer to delete the addition on account of adjustment of reduction in the value of opening work in progress for this year. Disallowance of the interest expenditure - AO computed the interest that should have been received by the assessee applying the rate of 12.25% - HELD THAT - As decided in own case 2019 (4) TMI 1382 - ITAT DELHI non-or lower interest-bearing advances given to subsidiary or sister concern are less than interest free funds in form of share capital and reserves and surplus available with assessee, interest disallowance u/s 36 (1) (iii) of The Act cannot be made. Hence, in view of above facts, we reverse finding of lower authorities in disallowing interest expenditure. Addition to the job charges recovered at a lesser rate from sister concern M/s Dharampal Premchand Ltd then prevailing market rate - HELD THAT - As decided in own case 2019 (4) TMI 1382 - ITAT DELHI addition of higher rate of job charges is on hypothetical basis and against concept of real income. Further, it is not open to assessing officer to sit in armchair of assessee and to make business decisions on arbitrary basis. Further, there is no provision in Income tax The Act, 1961 that warrants such adjustment and as such, action of assessing officer in increasing rate of job work charged from sister concern M/s. Dharampal Premchand Ltd. is not sustainable under law. Decided against revenue. Disallowance u/s 14A - assessee has received dividend during the year which is claimed as exempt u/s 10 (34) - assessee itself made voluntary disallowance of ₹ 915,256/ in the computation of total income u/s 14A - HELD THAT - As departmental representative could not show that what is the satisfaction recorded by the learned assessing officer about the correctness or otherwise of the disallowance offered by the assessee on its own, therefore, respectfully following the decision of the coordinate bench in assessee s own case for immediately preceding year, we direct the learned assessing officer to delete the disallowance u/s 14 A of the income tax act applying the provisions of rule 8D. Loss on sale of commodities - Addition holding the same is speculative transaction and hence the loss is a speculative loss - HELD THAT - The assessee has given the details of the transaction entered into by the assessee. Contract notes issued by all brokers were submitted before us. All of them are registered with a stock exchange. They have also shown the forward market commission membership numbers, on their bills/contract notes their permanent account number is also submitted. The contract note shows order number, trade number, trade time, quantity, rate , value, and total of the brokerage charges. It also shows in which commodity assessee has transacted. Therefore, before us assessee has submitted a detail of the commodity transaction with time and date stamp transactions. DRP has held that such details are not available. These details are now available with us but we are not aware whether the complete details were available with the assessing officer or not. We set aside this issue to the file of the learned assessing officer with a direction to verify the bills whether they contain the time and date stamp or not. If, they are found to be in order, and if they are covered by the decision quoted before us, the learned assessing officer is directed to decide this issue afresh in light of our observation as above. Disallowance of deduction u/s 80 IB/IC - Addition by applying the provisions of Section 80 IA (8) in respect of the transfer of Kathha and Supari from Noida Division II the eligible industrial undertaking on which deduction is allowable - HELD THAT - As decided in own case 2019 (4) TMI 1382 - ITAT DELHI addition was partly upheld by the coordinate bench based on the order of the learned CIT A with respect to the profit margin of the goods which are not processed and sent to eligible unit directly. The learned departmental representative could not show us any reason to either increase the above rate neither AR demonstrated that the addition confirmed by coordinate bench in this year is unjustified, therefore, respectfully following the order of the coordinate bench in assessee s own case for that year, we also direct the learned assessing officer to recompute the deduction following the order of the coordinate bench for that year. Disallowance of deduction u/s 80 IB/80 IC by applying the provisions of Section 80 IA (8) in respect of transfer from silver foil division - HELD THAT - In assessee s own case for immediately preceding year at most processing cost of silver is service that has been transferred by noneligible unit to eligible unit, which should have been done at market rate. At present assessee has considered process cost on actual cost basis and has loaded on price of silver - we direct assessing officer to adopt a margin of 2% over process cost of processed silver transferred from non-eligible unit to eligible unit and to sustain disallowance of deduction to that extent only. - we direct the learned assessing officer to recompute the eligible profit following the order of the coordinate bench in earlier years with similar directions. Allocation on account of interest to the eligible unit - reducing the deduction claimed by the assessee by the above sum applying the provisions of Section 80 IA (8) read with Section 80 IB (13) and 80 IC (7) - HELD THAT - AO has merely applied mathematical formula without looking at the nature of interest expenditure which have not been allocated to the eligible unit. He has merely stated that total interest expenditure should have been allocated to the various manufacturing units whether they relate to the eligible unit or not. Such is not the mandate of the law to determine the profit eligible which is derived from manufacturing activity for deduction u/s 80 IB/80 IC of the act. The claim of the assessee is that this allocation of interest which assessee is using for last several years which has been accepted by the coordinate bench also in assessment year 2004 05. This argument of the assessee has not been controverted by the learned departmental representative. In view of this, we hold that the eligible profit of the industrial undertaking should not have been reduced by the assessing officer by the unallocated interest expenditure which are not at all related directly or indirectly to the operations of those unit thereby should not result into reduction of the profit eligible for deduction u/s 80 IB/80 IC of the act. Accordingly ground of the appeal of assessee is allowed. Disallowance of deduction u/s 80 IB/80 IC on account of corporate adjustment in cost of services allocated to the eligible industrial undertaking by head office invoking the provisions of Section 80 IA (8) - HELD THAT - DR could not point out any reason to deviate from the decision of the coordinate bench in assessee s own case for earlier years. He also could not point out any change in the facts and circumstances of the case of that the loading of the mark up on allocated cost of the goods or services is justified or any other reasons. He could not also show that this is not a mere allocation of the third-party cost to the eligible and non-eligible units and there is no value addition is involved therein. Therefore respectfully following the decision of the coordinate bench, the ground number 10 of the appeal of the assessee is allowed and the learned assessing officer is directed to delete the disallowance of deduction u/s 80 IB/80 IC on account of purported adjustment in cost of services allocated to eligible industrial undertaking. Disallowance of deduction u/s 80 IB/80 IC on allocation of depreciation on fixed assets installed at head office and manufacturing units to eligible units - HELD THAT - As in assessee s own case for earlier years, we direct the learned assessing officer to delete the disallowance on account of allocation of depreciation. Calculation of deduction u/s 80 IB/80 IC by applying the provisions of Section 80 IA (8) for use of brand Rajnigandha - HELD THAT - In the present case it is apparent that brand is owned by the assessee company and no royalties paid by the assessee to any outsider or third party. The learned assessing officer has made the addition/reduce the deduction of the assessee u/s 80 I B/80 IC by comparing the brand Rajanigandha with the brand Tulsi Mix . DR could not show us any deviation in the facts or any brand royalty paid by the assessee with respect to the products manufactured in eligible unit. In view of this, respectfully following the decision of the coordinate bench, we direct the learned assessing officer to delete the disallowance of deduction claimed by the assessee. Disallowance of deduction u/s 80 IB/80 IC in respect of royalty paid to such a concern Dharampal Premchand Ltd on the basis of the provisions of Section 80 IA (10) - HELD THAT - As decided in own case 2019 (4) TMI 1382 - ITAT DELHI it may be appreciated that rate approved by Regional Director is maximum rate and there could we no ground or basis for treating same for any adjustment in terms of provisions of section 80IA(10) r.w.s 80IB(13) and 80IC(7) of The Act. It is relevant to note that same rate of royalty @1% is being paid by both eligible as well as non-eligible units and as such, impugned adjustment is on arbitrary and mechanical basis - order of ld CIT(A) deleting adjustment of deduction u/s 80IB/IC on account of notional royalty in respect of Tulsi Brand in excess of 1% being payable by eligible units to M/s. Dharampal Satyapal Sons P. Ltd. Deserves to be upheld as same rate was applied and accepted even by AO in respect of non-eligible units. Accordingly, ground number 5 of appeal of learned assessing officer is dismissed. Ad hoc disallowance is on purchase of sandalwood oil - AO held that this was a camouflaged device of bogus sale of product at a very high rate and the proceeds were returned back to the assessee company - HELD THAT - Respectfully following the decision of the coordinate bench in assessee s own case, we direct the learned assessing officer to delete the disallowance of deduction claimed u/s 80 IC. Transfer pricing adjustment in respect of benchmarking of interest received on foreign currency loan - HELD THAT - The assessee company has given a foreign currency loan to that company in Switzerland. The assessee has provided such loan out of its noninterest- bearing own funds and not out of the interest-bearing borrowed funds. The learned assessing officer as in previous year held that interest rate of 12.6% based on SBI 300 BSP should be at arm s-length level of interest that needs to be charged for the loan advanced by the assessee. However there is no change in the facts compared to earlier year the loan was given to its associated enterprise in Switzerland at the interest rate of 3% per annum. Currency of loan is a foreign currency. The assessee has benchmark the interest rate considering LIBOR. The coordinate bench in earlier year considered the agreement of the loan, the rate of interest, the currency in which the loan is to be repaid and thereafter relying on the decision of JYOTI CNC AUTOMATION PVT LTD. 2018 (8) TMI 757 - GUJARAT HIGH COURT deleted the above addition. Therefore respectfully following the decision of the coordinate bench in assessee s own case for earlier year, we direct the learned transfer pricing officer/learned AO to delete the addition on account of the arm s-length price of the interest income from its associated enterprise in Switzerland. Ground of the appeal is allowed.

Summary

Issues Involved:
1. Addition by reducing the value of opening work in progress.
2. Various additions and disallowances.
3. Disallowance under section 36(1)(iii).
4. Addition due to job work charges from a related party.
5. Disallowance under section 14A.
6. Disallowance of loss on account of sale of commodities.
7. Disallowance of deduction under section 80IB/80IC due to inter-unit transfer pricing.
8. Disallowance of deduction under section 80IB/80IC due to fair market value of goods.
9. Disallowance of deduction under section 80IB/80IC due to short allocation of interest.
10. Disallowance of deduction under section 80IB/80IC due to allocation of common costs.
11. Disallowance of deduction under section 80IB/80IC due to allocation of depreciation.
12. Disallowance of deduction under section 80IB/80IC due to royalty for brand usage.
13. Disallowance of deduction under section 80IB/80IC due to royalty paid to a sister concern.
14. Disallowance of purchase of sandalwood oil.
15. Transfer pricing adjustment on interest received on foreign currency loan.
16. Charging of interest under sections 234A, 234B, and 234C.

Detailed Analysis:

1. Addition by reducing the value of opening work in progress:
The tribunal found that the method of valuation and cost components used by the assessee were consistent with previous years and accepted by the revenue in subsequent years. Thus, the addition of ?4,449,536 on account of reduction in the value of opening work in progress was deleted.

2. Various additions and disallowances:
Ground number 2, challenging the validity of various additions/disallowances, was dismissed as it was general in nature and no specific arguments were advanced.

3. Disallowance under section 36(1)(iii):
The tribunal noted that the assessee had substantial non-interest-bearing funds to cover the advances made to group concerns. Therefore, the disallowance of ?333,157 under section 36(1)(iii) was deleted.

4. Addition due to job work charges from a related party:
The tribunal upheld the deletion of the addition of ?246,100, noting that the addition was based on a notional basis and not on any real income.

5. Disallowance under section 14A:
The tribunal found that the assessing officer did not record any dissatisfaction with the assessee's suo moto disallowance under section 14A. Therefore, the disallowance of ?276,28,704 was deleted.

6. Disallowance of loss on account of sale of commodities:
The tribunal directed the assessing officer to verify the details of the commodity transactions. If found to be in order, the loss of ?57,471,113 should be allowed as a business loss.

7. Disallowance of deduction under section 80IB/80IC due to inter-unit transfer pricing:
The tribunal directed the assessing officer to recompute the deduction, following the order of the coordinate bench for the previous year, allowing substantial relief to the assessee.

8. Disallowance of deduction under section 80IB/80IC due to fair market value of goods:
The tribunal directed the assessing officer to apply a profit mark-up of 2% on processing charges incurred by the assessee, allowing substantial relief to the assessee.

9. Disallowance of deduction under section 80IB/80IC due to short allocation of interest:
The tribunal found that the assessee had allocated the full interest cost to the respective units, supported by a reconciliation chart. Therefore, the disallowance of ?55,03,526 was deleted.

10. Disallowance of deduction under section 80IB/80IC due to allocation of common costs:
The tribunal held that the allocation of common costs was in the nature of reimbursement of expenses, and no profit mark-up should be added. Therefore, the disallowance of ?113,491,501 was deleted.

11. Disallowance of deduction under section 80IB/80IC due to allocation of depreciation:
The tribunal held that depreciation on assets of one unit cannot be allocated to another unit. Therefore, the disallowance of ?1,99,44,908 was deleted.

12. Disallowance of deduction under section 80IB/80IC due to royalty for brand usage:
The tribunal noted that the brand was owned by the assessee company, and no royalty was paid to any outsider. Therefore, the disallowance of ?52,968,064 was deleted.

13. Disallowance of deduction under section 80IB/80IC due to royalty paid to a sister concern:
The tribunal held that the rate approved by the Regional Director was a maximum ceiling and not a fair value for adjustment. Therefore, the disallowance of ?9,509,442 was deleted.

14. Disallowance of purchase of sandalwood oil:
The tribunal found that the seized documents did not pertain to the assessment year in question. Therefore, the disallowance of ?505,920,379 was deleted.

15. Transfer pricing adjustment on interest received on foreign currency loan:
The tribunal directed the assessing officer to delete the addition of ?78,019,356, noting that the interest rate should be benchmarked using LIBOR, not the Indian prime lending rate.

16. Charging of interest under sections 234A, 234B, and 234C:
No specific details were provided regarding this issue in the judgment.