2021 (4) TMI 661 - AT - Income Tax

Disallowance u/s 14A r.w.r. 8D - CIT (A) confirmed the disallowance made by the assessing officer u/s 14A being 0.5% of the total investments on the assumption that certain administrative expenses must have been incurred to earn exempt income - HELD THAT - In the present year, the AO has made disallowance under section 14A by invoking provisions of Rule 8D of the Income Tax Rules, 1962. Since Rule 8D is not retrospective, the same is not applicable in the present assessment year and accordingly, we hold that the assessing order erred in invoking the provisions of Rule 8D of the Rules. Assessee had been consistently following a method of disallowance in the succeeding years commencing from AY 2006-07 onwards. The said method has been accepted by the Tribunal in AY 2010-11, 2011-12 and 2006-07 (set aside proceedings) in the absence of any dissatisfaction by the AO qua inaccuracy of the same. We have also upheld the said method in the appeal for AY 2015-16, in the absence of any dissatisfaction by the AO. We accordingly restore the matter back to the file of the AO to compute disallowance on the same basis in the year under consideration after taking requisite details from the assessee and giving opportunity of hearing by following the principle of natural justice. The ground is allowed for statistical purposes. Disallowance of deduction claimed under section 80IA in respect of captive power generating unit situated at Gurgaon - HELD THAT - As relying on own case 2018 (12) TMI 1613 - ITAT DELHI we hold that the disallowance made by the Assessing Officer (AO) under 80IA of the Act in relation to the generation of power cannot be sustained. We, accordingly, allow this ground of appeal raised by the assessee. Additional depreciation on new plant and machinery acquired and installed during the year - AO disallowed the aforesaid claim of additional depreciation holding that there was no correlation between installed capacity and installation of machine - HELD THAT - No condition requiring nexus of the relevant plant and machinery acquired and installed during the year with the increase in installed capacity of the relevant industrial undertakings during the year. As per our reading, the requirement of the section is that in case of an existing industrial undertaking, additional depreciation shall be available on new plant and machinery acquired and installed during the previous year, if such industrial undertaking achieves substantial expansion by way of increase in installed capacity by not less than 10%. Accordingly, if there is an increase in installed capacity of the relevant industrial undertaking, the new plant and machinery acquired and installed during such year shall be eligible for additional depreciation at the rate prescribed in that section. There is no further condition of drawing operational nexus of such plant and machinery with increase in installed capacity. - said condition, has even been removed in section 32(1)(iia) by the Finance Act, 2005, w.e.f. 01.04.2006, although said amendment is not applicable during the year under consideration, but re-enforces the intent of the legislature, that the same was not relevant even in the earlier year, warranting nexus of plant machinery with increase in installed capacity - there is no condition of the relevant plant and machinery resulting in the increase in production of the relevant industrial undertaking. What the AO and the Ld. CIT (A) have held in the impugned order(s), is drawing nexus of the installed plant and machinery with increase in production from such machinery, which is clearly not the requirement in law. - we find that, the AO and the Ld. CIT (A) have travelled to an extraneous territory, while examining and disallowing the aforesaid claim of additional depreciation under section 32(1)(iia) - Thus we delete the disallowance made by the AO and hence the ground of appeal is allowed. Disallowance of portfolio management expenditure claimed by the assessee as deduction against business income - HELD THAT - We find that the aforesaid issue has been decided against the assessee by the Tribunal in the assessee s own case for the assessment year 2008-09, 2021 (1) TMI 1109 - ITAT DELHI wherein it has been held that the portfolio management expenditure is not allowable as business expenditure. We also find that if the expenditure is not allowed as business deduction, then the same ought to be allowed as deduction under either clause (i) or clause (ii) of section 48 of the Act while computing income arising from investments under the head capital gains. The Tribunal in the aforesaid order has also accepted the aforesaid alternate plea of the assessee. We, however, further find that the nexus of the aforesaid expenditure with earning of exempt dividend cannot be completely ruled out. Accordingly, we accept the alternate contention of the assessee and direct the assessing officer to disallow part of the aforesaid expenditure in the ratio of dividend income to capital gains under section 14A and the balance expenditure to be allowed as deduction under section 48 from income declared by the assessee under the head capital gains. Such expenditure can be further apportioned by the assessing officer in the ratio of short term or long term capital gain declared by the assessee. Disallowance under Section 40(a)(i) - Disallowance of professional fee paid to resident of USA for want of TDS or alternatively as capital expenditure - HELD THAT - The foreign national had only made available its findings of the scenario planning exercises conducted by him as a professional, but did not make available his knowledge, which was used for conducting the aforesaid exercise.The legal position in this regard is no longer res integra and is settled by catena of decisions referred to by the Ld. Counsel of the assessee supra with regard to the meaning of expression make available used in the Treaty. Useful reference can be made to the decision of the Hon ble Delhi High Court in the case of DIT vs Guy Carpenter Co Ltd 2012 (5) TMI 31 - DELHI HIGH COURT Accordingly, the impugned payment made was not taxable in India. Accordingly, the assessee did not commit any error in not deducting tax at source while making the remittance and, therefore, the same did not warrant any disallowance under Section 40(a)(i) of the Act. No force in the alternate contention of the assessing officer to treat the said payment as capital expenditure. The assessee is a large sized company already existing in the business of manufacturing two wheelers since past several years. The impugned expenditure constitutes a miniscule part of the total expenses incurred by the assessee in the course of carrying on the said business. The aforesaid expenditure did not result in providing any benefit of enduring nature leave alone the benefit by way of accretion to the profit earning apertures or in the capital field. The said expenditure is part and parcel of the existing business, incurred to gain some insight of the future outlook of the two-wheeler industry and, therefore, the same formed integral part of the existing business, which cannot, in our view, be sought to be capital in nature. Transfer Pricing adjustment on account of international transaction of import of components - CIT (A) upheld the transfer pricing adjustment holding that the associated enterprise charged excessively high price for the two components which cannot be attributed to geographical variation - HELD THAT - Referring to Co-ordinate Bench of the Tribunal in assessment year 2004-05 2019 (7) TMI 1770 - ITAT DLEHI we hold this issue in favour of the assessee and hold that the transfer pricing adjustment made by the TPO cannot be sustained and accordingly while allowing the grounds delete the same. Annual payment of Royalty/technical guidance fee as allowable as revenue expenditure Disallowance of net expenditure incurred on account of model fee by holding the same to be capital in nature after allowing depreciation @ 25% - HELD THAT - We have perused the record. It is, clear that for quite a long time there is consistency in the view taken by the Tribunal as upheld by the Hon ble jurisdictional High Court and Hon ble Apex court. Therefore, the issue is no longer res integra and is in favour of the assessee. We uphold the findings of the Ld. CIT (A). Accordingly, we dismiss the ground of appeal raised by the Revenue. TDS u/s 195 - Disallowance of export commission paid to Honda Motor Company Ltd. (Honda), Japan under Section 40(a)(i) - addition on ground that the same constituted royalty/fee for technical services on which the assessee was obliged to deduct tax at source - HELD THAT - We find that the issue is squarely covered in favour of the assessee by the order passed by the Tribunal in AY 2006-07 2018 (12) TMI 1613 - ITAT DELHI . Disallowance being provision for warranty made in respect of sales made during the year - HELD THAT - We find that the issue has been decided in favor of the assessee company by order passed by the Tribunal in the earlier years and since appeal filed by the Revenue has not been admitted by the High Court, the issue has attained finality. We find that the order passed by the CIT (A) is correct in law. We accordingly uphold the order of the Ld. CIT (A) and dismiss the ground of appeal raised by the Revenue.

Summary

Issues Involved:

1. Disallowance of administrative expenses under Section 14A.
2. Disallowance of deduction under Section 80IA for captive power generating unit.
3. Disallowance of additional depreciation under Section 32(1)(iia).
4. Disallowance of portfolio management expenditure.
5. Disallowance of professional fee under Section 40(a)(i) for non-deduction of TDS.
6. Transfer pricing adjustment for international transaction of import of components.
7. Disallowance of royalty and technical guidance fee.
8. Disallowance of model fee.
9. Disallowance of export commission.
10. Disallowance of warranty provisions.

Detailed Analysis:

1. Disallowance of Administrative Expenses under Section 14A:
The assessee contested the disallowance of ?3,26,03,500 made by the Assessing Officer (AO) under Section 14A read with Rule 8D, arguing that Rule 8D is prospective and not applicable for the assessment year 2005-06. The Tribunal agreed, citing precedents such as CIT v. Essar Teleholdings Ltd and Maxxop Investment Ltd. The Tribunal restored the matter to the AO to compute disallowance based on the method followed in subsequent years, which had been accepted by the Tribunal in earlier assessments.

2. Disallowance of Deduction under Section 80IA:
The assessee claimed a deduction of ?2,30,53,828 for a captive power generating unit, which the AO disallowed, using the rate at which Haryana State Electricity Board supplied power. The Tribunal, following its earlier orders, held that the market price for power should be the rate most favorable to the assessee, including the rate charged by private suppliers like Maruti Udyog Ltd. The Tribunal allowed the assessee's claim.

3. Disallowance of Additional Depreciation under Section 32(1)(iia):
The AO disallowed additional depreciation of ?14.93 crores, arguing that the new plant and machinery did not directly increase production capacity. The Tribunal found no requirement in Section 32(1)(iia) for a direct nexus between new machinery and increased production capacity. The Tribunal allowed the depreciation claim, supported by decisions like CIT v. VTM Ltd and CIT v. Hindustan Newsprint Ltd.

4. Disallowance of Portfolio Management Expenditure:
The AO disallowed ?27,68,039 as business expenditure, which the Tribunal upheld. However, the Tribunal allowed the alternate claim to deduct this expenditure under Section 48 against capital gains, following its earlier decision in the assessee's case for the assessment year 2008-09.

5. Disallowance of Professional Fee under Section 40(a)(i):
The AO disallowed ?14.74 lakhs paid to a non-resident for consultancy services, arguing it was taxable in India. The Tribunal found that the services did not "make available" technical knowledge, thus not taxable under the India-USA DTAA. The Tribunal also rejected the AO's alternate view that the expenditure was capital in nature, allowing the assessee's claim.

6. Transfer Pricing Adjustment:
The AO made an adjustment of ?6,57,195 using the CUP method, comparing prices of imported components with domestic prices. The Tribunal, following its earlier decisions, held that if goods were not available indigenously, domestic prices could not be used for benchmarking. The Tribunal deleted the adjustment.

7. Disallowance of Royalty and Technical Guidance Fee:
The AO disallowed ?12507.73 lacs as capital expenditure, allowing depreciation at 25%. The Tribunal, following its consistent view and the Delhi High Court's decision in the assessee's case, allowed the expenditure as revenue expenditure.

8. Disallowance of Model Fee:
The AO disallowed ?19,85,30,762 as capital expenditure. The Tribunal, following its earlier decisions and the Delhi High Court's affirmation, allowed the model fee as revenue expenditure.

9. Disallowance of Export Commission:
The AO disallowed ?8,69,26,848, treating it as royalty/fee for technical services. The Tribunal, following its decision in the assessee's case for the assessment year 2006-07, held that the export commission was neither royalty nor fee for technical services and allowed the expenditure.

10. Disallowance of Warranty Provisions:
The AO disallowed ?5.18 crores as an unascertained liability. The Tribunal, following its earlier decisions and the Supreme Court's ruling in Rotork Controls India Ltd. v. CIT, allowed the provision for warranty.

Conclusion:
The Tribunal partly allowed the assessee's appeal and dismissed the Revenue's appeal, adhering to its consistent decisions and higher judicial authorities' rulings.