2021 (1) TMI 405 - AT - Income Tax

Accrual of income in India - Addition in respect of income from investment in free zone entity in Ajman Free Zone - international transaction with Vega UAE, FZE - Alternatively the said amount would have been added to income of assessee under the provision of transfer pricing - CIT - A deleted the addition - HELD THAT - CIT(A) has granted relief to the assessee after following the decision of own case 2006-07 2012 (4) TMI 354 - ITAT AHMEDABAD . DR was fair enough not to controvert this undisputed facts and findings that the issue is covered in favour of the assessee by the aforesaid decision - the same issue has been adjudicated in favour of the assessee as per finding of the ITAT elaborated in the decision of ld. CIT(A) incorporated as above in this order following the decision of the Co-ordinate Bench for the A.Y. 2006-07 in the case of the assessee itself wherein it is held that Vega UAE was an independent corporate body, therefore, we do not find any infirmity in the decision of ld. CIT(A). Accordingly, this ground of appeal of the revenue is dismissed. Also no merit in the alternative contention of the Revenue for adding under the TP adjustment following the decision of assessee itself for A.Y. 2006-07 as held Vega ME was a full-fledged distributor to the appellant and not marketing service provider during the year. Once if is held that the AE is a distributor, the ALP has is to be determined on the basis of profit on sale of goods rather than operating margin to value added expenses. Like earlier years, this year also appellant had margin of 20.3% as against average margin of comparable companies of 12.63%. Therefore the profit margin of the appellant is much higher than the average operating margin of comparable companies. In view of this, no TP adjustment can be made this year also. Disallowance u/s. 35D - On query the assessee explained that it has incurred expenses in connection with the issue of public subscription of shares and under the provision of section 35D an amount of equal to 1/5 of said expenditure will be allowed as business expenditure for each of the five successive previous years - HELD THAT - After going through the findings of ld. CIT(A) we consider that Assessing Officer has incorrectly computed the disallowance u/s. 35D - Assessee has claimed public issue expenses on the basis of 5% of the cost of the project to the amount of ₹ 7,20,05,356/- as against public issue expenses of ₹ 7,55,92,199/-. The Assessing Officer has worked out eligible public expenses to the total amount of ₹ 7,00,43,777/- after reducing the ineligible expenses of ₹ 55,48,422/- out of total public issue expenses of ₹ 7,55,92,199/-. In the light of the above facts and findings, we do not find any error in the findings of the ld. CIT(A) holding that difference of ₹ 7,20,05,356/- and ₹ 7,00,43,777/- is to be considered for the purpose of disallowance as against disallowance of ₹ 55,48,421/- made by the Assessing Officer. Therefore, we consider that ld. CIT(A) is justified in restricting the disallowance to the extent of ₹ 3,92,316/- as against disallowance of ₹ 11,09,684/- made by AO. Disallowance towards burning loss - AO noticed assessee has shown loss of 3019 MT of raw materials in the manufacturing process and materials cannot be destroyed in the process of manufacturing and material changes only the form - CIT(A) has allowed the appeal of the assessee - HELD THAT - CIT(A) in his finding has elaborated that the burning loss claimed by the assessee in various years was varied between 2.5% to 8.19% and the same was accepted by the department and the product of the assessee is subject to excise duty and the excise department has not disputed the burning loss of the assessee in any of the year. Even in the case of Reclamation Welding Ltd a subsidiary concern of the assessee now merged with the assessee company, the Co-ordinate Bench of the ITAT on similar facts has considered that burning loss in excess of even 10% is allowable and the Assessing Officer while passing order u/s. 143(3) r.w.s. 254 of the act in the case Reclamation Weilding Ltd. accepted the burning loss in excess of 10%. The action of the Assessing Officer in restricting the burning loss @ 2% in a general manner is not justified. In the light of the above facts and circumstances, we do not find any infirmity in the decision of ld. CIT(A). Therefore, the appeal of the revenue on this issue is dismissed. MAT addition u/s. 115JB - adjustment on account of product warranty expenses treating the same as unascertained liabilities - assessee explained that there was no provision with respect to addition of warranty expenses as well as expenses disallowable u/s. 14A - CIT(A) has deleted the impugned addition - HELD THAT - Hon ble Supreme Court in the case of Rotark Controls India (P) Ltd. 2009 (5) TMI 16 - SUPREME COURT held that provision of warranty is an allowable expenditure in the year of provision. The ld. CIT(A) has also considered the reliance made by the assessee on the decision of Himalaya Machinery P. Ltd. 2010 (2) TMI 682 - GUJARAT HIGH COURT that when actual expenditure is more than provision made by an assessee it can be concluded that provision made by assessee is capable of being estimated with reasonable certainty. In the light of the above facts, we do not find any infirmity in the decision of ld. CIT(A) holding that assessee has claimed warranty expenses on the basis of actual claim and the same is not required to be added u/s. 115JB of the Act. Disallowance u/s. 14A - AO observed that assessee had made substantial investment out of which it had earned substantial income claimed as exempt from tax - exempt income was constituted 11% of the total profit earned by the assessee company however the assessee has not disallowed any amount according to the provision of section 14A - HELD THAT - AO has not specifically considered the nature of expenses reflected in the annual accounts of the assessee before invoking the provision of rule 8D in computing the disallowance for earning exempt income. In the light of the above facts and finding given in the judicial pronouncement as referred supra in this order, we consider that Assessing Officer is not justified in computing the disallowance without recording specific satisfaction and examination of the detailed account of the assessee company. In view of the facts and finding and considering the nature of the investment and the main activities carried out by the assessee company, we consider that it would be appropriate to restrict the disallowance of administrative expenditure towards earning exempt income to the amount of ₹ 15 lacs. Since the assessee has itself made disallowance to the extent of ₹ 9,32,487/-, therefore, we restrict the administrative expenditure disallowance to the extent of ₹ 5,67,513/- (15,00,000- 9,32,487). Accordingly, this ground of appeal of the assessee is partly allowed. Addition of disallowance u/s. 14A for the purpose of computation of book profit u/s. 115JB - HELD THAT - We consider that this issue has been adjudicated by the Special Bench of the ITAT Delhi in the case of the VIREET INVESTMENT (P.) LTD. 2017 (6) TMI 1124 - ITAT DELHI wherein it is held that disallowance u/s. 14A is not to be considered for computing book profit u/s. 115JB of the Act. Therefore, this ground of appeal of the assessee is allowed. Disallowance of excess claim of depreciation - AO has not allowed the claim of the assessee of higher depreciation @ 50% stating that vehicle was not registered by the RTO as commercial vehicle - CIT-A allowed claim - HELD THAT - As perused the decision of the Co-ordinate Bench in the case of Shree Balaji Product vs. ITO 2016 (11) TMI 443 - ITAT AHMEDABAD wherein issue decided in favour of the assessee holding that there is no such condition that vehicle would qualify as commercial vehicle when licensed to be used as public transport. Decided against revenue. TP Adjustment - corporate guarantee - international transaction of not? - HELD THAT - As gone through the decision of Co-ordinate Bench of the ITAT in the case of Micro Ink Ltd. 2015 (12) TMI 143 - ITAT AHMEDABAD holding that the issue of corporate guarantee were in the nature of share holder activity and the same could not be included in the provision for services under the definition of international transaction u/s. 92B of the Act. The Co-ordinate Bench has also stated that when an assessee extends assistance to AE which does not cost anything to the assessee and particularly for which the assessee could not have realized money by giving it to someone else during the course of normal business such an assistance or accommodation does not have any bearing on its profit, income, loses or asset and therefore it is outside the ambit of international transaction u/s. 92B of the Act. It is also held that these guarantee do not have any impact on profit, loses or assets of the company. It is further held that there can be a hypothetical situation in which a guarantee default takes place and therefore the enterprise may have to pay the guarantee amount but such a situation, even if that be so is only a hypothetical situation. Respectfully following the decision of the Co-ordinate Bench as supra, this ground of appeal of the Revenue is dismissed. Unutilized CENVAT credit - AO stated that assessee has followed exclusive method for accounting of CENVAT as against inclusive method required u/s. 145A - CIT(A) deleted the said addition and the similar addition was also deleted in the earlier assessment year in the case of the assessee for assessment year 2006-07 - HELD THAT - The assessee has followed exclusive method of accounting. The ld. counsel has also placed reliance on the decision of Hon ble Supreme Court in the case of CIT vs. Indo Nippon Chemical Ltd. 2003 (1) TMI 8 - SUPREME COURT decision of Hon ble Gujarat High Court in the case of ACIT vs. Narmada Chemmatur Petrochemical 2010 (8) TMI 263 - GUJARAT HIGH COURT and decision of ITAT Ahmedabad in the case of the assessee itself 2017 (9) TMI 1753 - ITAT AHMEDABAD . With the assistance of ld. authorized representatives, we have gone through the decision of Hon ble ITAT Ahmedabad in the case of the assessee itself for assessment year 2006-07 wherein similar issue on identical fact has been decided in favour of the assessee. Additional depreciation on electric installation - assessee has shown addition under the head electric installation claiming depreciation @ 15% and additional depreciation @ 20% - HELD THAT - From facts and finding of ld. CIT(A) it is noticed that during the year under consideration the assessee had installed new plant and machinery and also incurred electric installation expenditure. Since the electric fitting and installation was part and parcel of the plant and machinery without which the plant and machinery cannot be operated therefore we consider that decision of ld. CIT(A) is justified in holding that electric installation was part and parcel of plant and machinery and the same cannot be considered separately. Therefore, we do not find any error in the decision of ld. CIT(A). Accordingly, this ground of appeal of the Revenue stands dismissed. Levy of interest u/s. 234B is mandatory according to provisions of law

Summary

Issues Involved:
1. Deletion of addition regarding income from investment in a free zone entity.
2. Restriction of disallowance under Section 35D.
3. Deletion of disallowance towards burning loss.
4. Deletion of addition under Section 115JB for product warranty expenses.
5. Disallowance under Section 14A.
6. Deletion of addition regarding income of Vega Industries Ltd.
7. Deletion of disallowance of excess depreciation on vehicles.
8. Deletion of addition on account of upward revision on arm's length price in respect of international transactions.
9. Deletion of TP adjustment in respect of corporate guarantee.
10. Deletion of addition of unutilized CENVAT credit.
11. Deletion of disallowance of higher depreciation on electrical fittings.
12. Levy of interest under Section 234B.

Issue-Wise Detailed Analysis:

1. Deletion of Addition Regarding Income from Investment in a Free Zone Entity:
The Tribunal upheld the deletion of the addition made by the Assessing Officer (AO) treating Vega Industries (Middle East) FZE as a proprietary concern of the assessee. It was held that Vega UAE is an independent corporate entity, and its income cannot be taxed in the hands of the assessee. This decision was based on the ITAT's earlier ruling for the assessment year 2006-07, which was followed by the CIT(A).

2. Restriction of Disallowance Under Section 35D:
The Tribunal agreed with the CIT(A) in restricting the disallowance under Section 35D to ?3,92,316 instead of ?11,09,684. The AO had incorrectly computed the disallowance, and the CIT(A) rectified it based on the actual eligible public issue expenses.

3. Deletion of Disallowance Towards Burning Loss:
The Tribunal upheld the CIT(A)'s decision to delete the addition made by the AO on account of burning loss. The burning loss claimed by the assessee was found to be reasonable and within industry norms, and the AO's restriction to 2% was deemed unjustified.

4. Deletion of Addition Under Section 115JB for Product Warranty Expenses:
The Tribunal confirmed the CIT(A)'s decision to delete the addition made by the AO under Section 115JB for product warranty expenses. It was held that these were actual expenses and not unascertained liabilities, supported by the Supreme Court's ruling in Rotark Controls India (P) Ltd. vs. CIT.

5. Disallowance Under Section 14A:
The Tribunal partially allowed the assessee's appeal by restricting the disallowance of administrative expenses towards earning exempt income to ?15 lakhs. The AO's computation under Rule 8D without specific satisfaction and examination of accounts was found unjustified.

6. Deletion of Addition Regarding Income of Vega Industries Ltd.:
Similar to the first issue, the Tribunal upheld the deletion of the addition made by the AO treating Vega Industries Ltd. as a proprietary concern of the assessee, following the ITAT's earlier ruling for the assessment year 2006-07.

7. Deletion of Disallowance of Excess Depreciation on Vehicles:
The Tribunal upheld the CIT(A)'s decision to allow higher depreciation on vehicles, following the Co-ordinate Bench's decision in similar cases, where it was held that there is no condition that a vehicle would qualify as a commercial vehicle only when licensed to be used as public transport.

8. Deletion of Addition on Account of Upward Revision on Arm's Length Price in Respect of International Transactions:
The Tribunal upheld the CIT(A)'s decision to delete the upward adjustment made by the TPO regarding international transactions with Vega UAE, following the ITAT's ruling for the assessment year 2006-07, which treated Vega UAE as a distributor, not a marketing service provider.

9. Deletion of TP Adjustment in Respect of Corporate Guarantee:
The Tribunal upheld the deletion of the TP adjustment for corporate guarantees, following the ITAT's decision in Micro Link Ltd. vs. ACIT, where it was held that such guarantees are in the nature of shareholder activities and not services, thus outside the scope of international transactions under Section 92B.

10. Deletion of Addition of Unutilized CENVAT Credit:
The Tribunal upheld the CIT(A)'s decision to delete the addition of unutilized CENVAT credit, following the ITAT's ruling in the case of the assessee itself for the assessment year 2006-07, where it was held that the exclusive method of accounting followed by the assessee was tax-neutral.

11. Deletion of Disallowance of Higher Depreciation on Electrical Fittings:
The Tribunal upheld the CIT(A)'s decision to allow higher depreciation on electrical fittings, considering them part and parcel of plant and machinery, necessary for its operation.

12. Levy of Interest Under Section 234B:
The Tribunal dismissed the assessee's appeal regarding the levy of interest under Section 234B, stating that it is mandatory according to the provisions of law.

Conclusion:
The Tribunal dismissed the revenue's appeals and partly allowed the assessee's appeals, upholding the CIT(A)'s decisions on various issues, primarily based on earlier ITAT rulings and judicial precedents.