2021 (9) TMI 1013 - AT - Income Tax

Disallowances u/s.14A r.w.r 8D - assessee has earned dividend income from mutual funds, which is exempt from tax but did not made any suo-motu disallowance of expenditure relatable to exempt income - HELD THAT - The Hon ble Jurisdictional High Court of Madras in the case of Marg Ltd 2020 (10) TMI 102 - MADRAS HIGH COURT has taken a similar view and held that disallowances under Rule 8D r.w.s 14A can never exceed exempt income earned by the assessee during particular assessment year. Also see STATE BANK OF PATIALA 2018 (11) TMI 1565 - SC ORDER - In this case, admittedly, exempt income for impugned assessment year was ₹ 57,826/, whereas the Assessing Officer has determined disallowance u/s.14A at ₹ 86,54,491/- contrary to settled principle of law. Therefore we direct the Assessing Officer to restrict disallowances u/s.14A to the extent of exempt income earned for the impugned assessment year. Depreciation on capital subsidy - HELD THAT - An identical issue in assessee s own case for assessment year 2006-07 2019 (2) TMI 1962 - ITAT CHENNAI and after considering nature of subsidy has allowed claim of the assessee by observing that for earlier years, the CIT(A) has allowed claim of the assessee and the Assessing Officer has accepted decision of the CIT(A) and deleted additions, while passing order giving effect to the order of the CIT(A). Therefore, consistent with the view taken by the coordinate Bench, we direct the Assessing Officer to delete additions made towards disallowance of depreciation on capital subsidy received from SIPCOT. Addition towards VAT incentive received from Government of Tamil Nadu - assessee has treated above incentive as revenue receipt both for its books of account and its tax returns, but during the course of asessment proceedings, the assessee has raised a fresh claim to treat incentive as capital receipts not chargeable to tax - HELD THAT - We find that the Tribunal had considered an identical issue for assessment year 2011-12 2017 (4) TMI 1193 - ITAT CHENNAI where the issue has been remanded back to the file of Assessing Officer to consider the issue denovo on merits in accordance with law. Facts being identical for the year under consideration by following the decision of Tribunal in assessee s own case for assessment year 2011-12, we set aside the issue to file of the Assessing Officer and direct him to reconsider the issue in accordance with law. Disallowance u/s.43B(c) in respect of performance incentive paid to employees - HELD THAT - In this case, it is in the nature of bonus or commission and such payment is for services rendered by employees. Just because nomenclature was changed to some other name, a particular expenditure would not change its original character. In this case, sum was paid to employees for services rendered and further, this sum would not have been paid as profits or dividend had it not been paid as commission or performance reward. Therefore, we are of the considered view that provisions of section 36(1)(ii) of the Act is squarely applicable and consequently, mischief of section 43B(c) would come into play, if such payment is not made on or before due date of furnishing of return of income. In this case, admittedly, the assessee has paid performance incentive only after due date of filing of income-tax return. Insofar as case laws relied upon by the assessee, we find that facts those case laws are different from facts of present case and has no application to case of the assessee - there is no error in the reasons given by the Assessing Officer as well as learned DRP to disallow performance reward u/s.43B(c) of the Act. Hence, we are inclined to uphold the order of Assessing Officer as well as directions of learned DRP and reject ground taken by the assessee. TP adjustment made towards brand development services - brand fees receivable from its AEs towards enhancement of brand value of assessee parent company - TPO used Spearman s Rank Correlation method to conclude that there is positive correlation between the brand value of Hyundai Motor India Limited and market capitalization of Hyundai market Corporation, South Korea - HELD THAT - For the purpose of definition of international transaction, in Indian context rendering of service is what needs to be considered and not benefits. Since, there is no formal agreement or arrangement between the assessee and its AEs for rendering of service in the alleged brand promotion activity, the accretion in global brand value of its parent company cannot be attributable to the assessee by adopting some theory. In this case, facts are identical and pari materia to the facts already considered by the Tribunal for earlier years. Therefore, consistent with a view taken by the coordinate Bench in assessee s own case for earlier assessment years, we are of the considered view that the learned TPO as well as learned DRP were erred in making transfer pricing adjustments towards brand services by adopting Spearman s Rank Correlation method and concluded that there is positive accretion between brand value and market capitalization of HMC Korea and hence, we direct the Assessing Officer/TPO to delete transfer pricing adjustment made towards brand development services. Characterization of income - Revenue or capital receipt - Focus Market Scheme to be treated as capital in nature and exclude from total income - HELD THAT - We are of the considered view that duty credit scrips received from Govt. of India under Focus Market scheme is revenue in nature and further, same was given to offset higher cost of freight and other disabilities of exporters to be more competitive in exports to certain regions. Thus, the same cannot at any stretch of imagination be considered as capital in nature. Hence, we reject the ground taken by the assessee. Deduction towards education and secondary education cess u/s.37(1) - HELD THAT - We find that the Hon ble Bombay High Court has considered an identical issue in the case of Sesa Goa Ltd. 2020 (3) TMI 347 - BOMBAY HIGH COURT and held that education cess secondary and higher education cess are liable for deduction in computing income chargeable under head of profits and gains of business or profession . As in the case of Chambal Fertilizers Chemicals Ltd. 2018 (10) TMI 589 - RAJASTHAN HIGH COURT has taken a similar view and held that education cess is not disallowable expenditure under the provisions of section 40(a)(ii) of the Act. Therefore, we are of the considered view that there is merit in the additional grounds filed by the assessee requesting deduction for education cess secondary and higher education cess, as business expenditure deductible u/s.37(1) of the Act. But, fact remains that assessee has taken up this issue for the first time by filing additional grounds and the Assessing Officer does not have any occasion to examine claim of the assessee. Therefore, we are of the considered view that issue needs to go back to file of the Assessing Officer. TP adjustment made by the AO towards international transactions of the assessee with its Associated Enterprises - TPO rejected TP study conducted by the assessee and re-characterized TP study by segregating domestic car sale segment on a standalone basis and made TP adjustment - HELD THAT - We find merit in the arguments of the ld.AR for the assessee for the simple reason that when the ld TPO is considering a particular segment on a standalone basis, then it is the duty of the TPO to benchmark relevant segment by selecting appropriate comparables, whose functions performed, asset employed and risk assumed are also similar to FAR analysis of the assessee s segment. In this case, the TPO having segregated domestic car sale segment on a standalone basis, has failed to select appropriate comparables or to carved out domestic sale segment of comparables to compare margins of the assessee with comparable companies. Therefore, we are of the considered view that the approach of the TPO is inconsistent and needs to be reconsidered. Re-computation of margin of the assessee by considering certain operating / non-operating incomes - We find that the AO has considered royalty income received from Mobis, commission / discount income and insurance claim received by the assessee as non-operating. The TPO has given his own reasons for reaching to a conclusion that all these incomes are non-operating in nature. The assessee has received royalty income from Mobis under similar agreement for sharing technology and know-how, but the same has been considered as non-operating by the TPO. When the TPO has considered royalty payment by the assessee to its parent company as operating in nature, then there is no reason for the TPO to consider royalty income received from Mobis as non-operating income. Therefore, we are of the considered view that the ld.TPO was erred in considering royalty received from Mobis as non-operating. Hence, we direct the ld. TPO to consider Royalty income as operating income for computing operating margin. Commission / discount income, incentives and insurance claim income - We find that all these incomes are generated from main business activity of the assessee of manufacturing and sales of cars. The assessee has received commission / discount on procurement of raw materials and insurance claim is received towards damaged cars manufactured by the assessee. When the assessee is recognizing income from sale of cars as operating in nature, then insurance claim received towards damaged cars is also operating in nature and hence, we are of the considered view that the ld. TPO has erred in considering commission / discount income, incentives and insurance income as non-operating income. Hence, we direct the ld. TPO to consider commission / discount income, incentives and insurance claim as operating income for the purpose of computing operating margin. Forex loss - Reason given by the assessee to treat forex gain / loss as non-operating in nature that most of the loss / gain is arised from repayment of External Commercial Borrowings, which is a finance activity and not related to business activity of the assessee -loss arised on account of fluctuation in foreign currency for payment made to suppliers of materials or receipts from buyers of assessee product is also arised out of main business activity of the assessee and thus, the same cannot be considered as non-operating in nature. As regards, the claim of the assessee in light of principle of consistency, we find that although the AO requires to follow principles of consistency in giving treatment of particular item of income or expenditure, but res judicata is not applicable to Income-tax proceedings. Moreover, the law is evolving day by day, based on various factors including amendment to the Act and judgments of various courts and tribunals, as per which it is difficult for the AO to give a particular treatment for any item of income or expenditure, when the law has been substantially changed in subsequent assessment years - it is a well settled principle of law that forex gain or loss is revenue in nature and operating income/expenditure - no merit in the arguments taken by assessee that forex loss should be considered as non-operating in nature. Hence, we reject arguments taken by the assessee. Working capital adjustment - Since assessee has taken additional ground, the facts with regard to claim of the assessee was not before the TPO. Hence, this issue needs to go back to the file of the TPO to examine the claim of the assessee in light of facts related to working capital adjustment. Proportionate adjustment t - TPO has made TP adjustment in respect of international transactions pertains to domestic car sale segment, whereas the ld.DRP has enhanced said adjustment by adjusting the margins to entire transactions of the assessee, which predominantly consist of third party cost. We find that as per the provisions of Section 92 of the Act and Rule 10B(1)(e) of the Rules, it is very clear that any income arising from an international transaction shall be computed having regard to arm s length price, that means, very purpose of said provisions is to establish arm s length nature of the international transactions only. The transactions with non AE s has to be presumed to be at arm s length, because there is no relationship which is likely to influence pricing..DRP is erred in making TP adjustment at entity level and hence, we direct the TPO to restrict TP adjustment only to international transactions pertain to domestic car sales segment. We are of the considered view that the whole issue of transfer pricing adjustment in respect of import of goods pertains to domestic car sales segment needs to go back to the file of the TPO to reconsider the issue in light of our discussions given herein above in preceding paragraphs. Appeal filed by the assessee is treated as partly allowed for statistical purposes.

Summary

Issues Involved:
1. Disallowance under Section 14A
2. Disallowance of subsidy received towards capital expenditure
3. Disallowance of Bonus/Performance reward under Section 43B
4. Tax Treatment of Output VAT Incentive
5. Excess levy of interest under Section 234C
6. Adjustment for Brand development services
7. Downward adjustment to the value of imports to the extent included in the domestic car sales segment

Detailed Analysis:

1. Disallowance under Section 14A:
The issue pertains to the disallowance of ?86,54,491/- under Section 14A of the Income Tax Act, 1961. The assessee argued that the disallowance cannot exceed the exempt income earned, which was ?57,826/-. The Tribunal, referencing the Supreme Court decision in Pr.CIT Vs. State Bank of Patiala, held that disallowance under Section 14A should be restricted to the amount of exempt income. Consequently, the Tribunal directed the Assessing Officer to limit the disallowance to ?57,826/-.

2. Disallowance of Subsidy Received Towards Capital Expenditure:
The assessee received a subsidy of ?100 lakhs from SIPCOT, which was treated as a capital receipt and not reduced from the cost of assets. The Assessing Officer contended that the subsidy should reduce the cost of assets as per Explanation 10 to Section 43 of the Act. The Tribunal, following its earlier decision in the assessee's case for AY 2006-07, directed the deletion of the disallowance, confirming that the subsidy was a capital receipt not liable to tax.

3. Disallowance of Bonus/Performance Reward under Section 43B:
The assessee paid performance rewards to employees but made payments after the due date for filing the return of income. The Assessing Officer disallowed the performance reward under Section 43B(c) read with Section 36(1)(ii). The Tribunal upheld the disallowance, stating that performance rewards are akin to bonus or commission for services rendered and must be paid on or before the due date for filing the return to be allowable.

4. Tax Treatment of Output VAT Incentive:
The assessee received a VAT refund of ?32,75,60,000/- from the Government of Tamil Nadu, initially treated as revenue receipt but later claimed as a capital receipt during assessment proceedings. The Tribunal, following its earlier decision for AY 2011-12, remanded the issue back to the Assessing Officer for reconsideration in accordance with the law.

5. Excess Levy of Interest under Section 234C:
This issue was not specifically adjudicated in the detailed judgment provided.

6. Adjustment for Brand Development Services:
The TPO made an upward adjustment of ?76,99,17,331/- for brand development services using the Spearman’s Rank Correlation method. The Tribunal, referencing its earlier decisions for AY 2009-10 to 2011-12, held that there was no international transaction for brand development in the absence of a mutual agreement or arrangement. The Tribunal directed the deletion of the adjustment.

7. Downward Adjustment to the Value of Imports to the Extent Included in the Domestic Car Sales Segment:
The TPO segregated domestic car sales and made a TP adjustment of ?102,08,60,000/-. The Tribunal found merit in the assessee’s argument that the TPO should have selected new comparables or segregated the domestic segment of comparables. The Tribunal also directed the TPO to consider royalty income, commission/discount income, incentives, and insurance claim as operating income while computing the operating margin. The Tribunal remanded the issue back to the TPO for reconsideration, directing that TP adjustments should be restricted to international transactions pertaining to the domestic car sales segment only.

Conclusion:
The Tribunal provided relief to the assessee on several grounds, including restricting disallowance under Section 14A to the amount of exempt income, deleting disallowance of depreciation on capital subsidy, and directing the reconsideration of TP adjustments. The Tribunal upheld the disallowance of performance rewards under Section 43B and remanded several issues back to the Assessing Officer/TPO for further examination.