2022 (3) TMI 340 - AT - Income Tax

TP Adjustment - corporate guarantee covered under the limb of international transaction or not? - HELD THAT - The provisions of section 92B of the Act defines the parameters of what constitutes an international transaction. Although the ambit of international transaction was wide enough, yet due to judicial interpretation, certain classes of transactions were being left out of the transfer pricing net. To tackle the same, by the Finance Act of 2012 an Explanation to Section 92B 2 of the Act was brought on the statute with retrospective effect from 1st April 2002. The explanation is clarificatory in nature and added certain categories of transactions, inter alia, the transaction as specified under clause (c) of explanation (i) to section 92B of the Act within the ambit of international transactions We find that the Hon ble Madras High Court in the case of PCIT vs. Redington (India) Ltd. 2020 (12) TMI 516 - MADRAS HIGH COURT has held that corporate guarantee is covered under the limb of international and having bearing on profit and loss account. Scope of amendment brought by finance Act 2012 - We hold that the amendment as discussed was brought by the finance Act 2012 but the same is applicable retrospectively i.e. 1-4-2002. Thus the amendment is applicable to the year under consideration. Determination of the benchmarked for working out the ALP of the impugned international transaction - Bombay high court in case of CIT vs. Everest Kento Cylinders Ltd 2015 (5) TMI 395 - BOMBAY HIGH COURT held that while determining the ALP the rate charge by the bank or financial institution cannot be taken as comparable. ALP rate of the commission on corporate guarantee - 0.5% of commission on the value of corporate guarantee will serve the justice to both the assessee and the Revenue. Hence, the contention of the assessee is partly allowed. Adjustment by the TPO/AO on account of interest on Loan given to AEs - As decided in own case 2019 (5) TMI 1932 - ITAT AHMEDABAD we note that the assessee is charging margin at 37.50 bps from the AE which appears quite low as even the bank charges from the company having high net worth a margin of .50%. Therefore we are inclined to uphold the finding of the TPO for charging the margin at .50% over and above the 6 month average labor rate. In effect, the rate of interest charged by the assessee from the AE shall increase by 12.5 bps. Thus the ground of appeal of the assessee is partly allowed. Delay depositing employees contribution to ESI on the ground that the same was not paid within the time limit prescribed under ESI Act - HELD THAT - We find that the ld. CIT(A) while deciding the issue considered section 2(24)(x) read with section 36(1)(va) of the Act and observed that the assessee shall be entitled to deduction of such amount while computing the income referred to in section 28, if said sum has been credited by the assessee to employees account in the relevant fund/(s) on or before due date i.e. date by which the assessee is required as employer to credit the same to the employees account in the relevant fund. It is admitted position that the assessee has not credited the same amount within the prescribed time limit of the relevant Act, and hence following ratio laid down by the Hon ble jurisdictional High Court in the case of Gujarat State Road Transport Corporation 2014 (1) TMI 502 - GUJARAT HIGH COURT the ld. CIT(A) upheld the order passed by the ld. AO in disalowing the said sum of ₹ 3,33,489/- and added the same to the total income of the assessee, which in our considered opinion is without any ambiguity so as to warrant our interference. Non-allocation of R D cost relating to discovery and research expenditure while computing profit eligible for deduction under section 80-IC of the Act in respect of Baddi Unit - HELD THAT - R D expenditure is need not to be allocated to Baddi Unit as the case made out by the assessee are to be viewed this particular fact of not extending any research work by the said unit, and no benefit thereof was being rendered by it. In view of the matter, we delete the impugned addition disallowed by the ld.AO. Hence the ground of appeal of the assessee is allowed. Quantum of eligible income by reallocating administration expenses to Baddi Unit - HELD THAT - Since turnover of any undertaking is volatile depending on varied situations, as has been indicated hereinabove. On the other hand, human resources work in any particular undertaking do not frequently change as the market forces do not regulate the same, unlike sales, and therefore, it is nothing but the human resources engaged in different undertaking of the assessee, that should be the consideration for allocation of administrative expenses, as held by the Coordinate Bench 2019 (5) TMI 1932 - ITAT AHMEDABAD from which we are not inclined to deviate, and hence respectfully following the decision, we delete the addition made by the Revenue in reducing deduction under section 80IC Deduction admissible under section 80IC is to be restricted to the extent of income from business and profession, as against gross total income of the assessee - HELD THAT - As relying on RELIANCE ENERGY LTD. (FORMERLY BSES LTD.) THROUGH ITS M.D. 2021 (4) TMI 1237 - SUPREME COURT we find no justification in restricting the deduction under section 80IC of the Act to the extent of income from business and profession, rather to be extended against the gross total income of the assessee. Thus, we find merit and considerable substance in the case made out by the assessee, and therefore, we direct the ld.AO to work out the deduction available to the assessee keeping in view of the above observation made by us hereinabove, based on the judgment of Hon ble Supreme Court cited (supra). We allow this ground of appeal of the assessee, and set aside the orders of the Revenue authorities on this issue. Disallowance on account of garden expenses - explanation of the assessee was that the said expenditure was required to be incurred regularly for gardening inside the factory premise as per the requirement of Gujarat Pollution Control Board, in order to minimize the effect of pollution arising out of chemical process, and therefore, the same is an allowable deduction - CIT(A) deleted the disallowance made by the AO by observing that in the assessee s own case from the Assessment Year 2003-2004 to 2008-09, the impugned claim allowed consistently right up-to the Tribunal - HELD THAT - We find no disparity on the facts of the present case with that of earlier years. In other words, the fact is same and issue is identical. The Revenue has not disputed factum of allowance of similar claim being allowed consistently in the earlier years. Therefore, following the principle of consistency, we uphold order of the ld. CIT(A) on this issue, and reject the ground no.1 of appeal of the Revenue. Depreciation at the rate of 50% in place of 15% on the basis of notification of the CBDT dated 19.1.2009 - claim of the assessee for higher depreciation was based on the notification of the CBDT circular No. 10/2009 dated 19.01.2009, according to which, new commercial vehicles which were acquired on or after the 1st day of January 2009, but before the 1st day of April, 2009 and put to use 1st day of April, 2009 for the purpose of business or profession, would get 50% depreciation - HELD THAT - We find that the ld. AO has not appreciated whole facts of the case while deciding the applicability of Notification cited (supra). On the contrary, the ld. CIT-A observed that parameters provided in the Notification clearly applicable to the case of the assessee, and therefore, assessee is entitled for higher depreciation. To support his finding, the ld.CIT(A) has also relied upon decision of the ITAT, Ahmedabad Bench in the case of Voltamp transformer 2013 (3) TMI 804 - ITAT AHMEDABAD . The ld. CIT(A) allowed depreciation at 50% on sound footing, based on the above notification. This view of the matter, we do not find any infirmity in the order of the ld. CIT(A) on this issue, which we confirm, and the ground no. 2 of the Revenue s appeal stands rejected. Addition on account of deduction claimed under section 35(2AB) - HELD THAT - Assessee is eligible for weighted deduction on expenditure incurred in connection with rates and taxes and salary to Dr. C. Dutt. Deduction with respect to expenses incurred on account of clinical trial and patient registration - We note this issue also covered in favour of the assessee by the order of special bench of the Tribunal in case of Cadila Healthcare Ltd. 2013 (3) TMI 539 - GUJARAT HIGH COURT - we hold that the assessee is eligible for weighted deduction on expenses incurred on clinical trial and patent registration. Accordingly, we do not find any infirmity in the order of learned CIT(A) and directed the AO to allow weighted deduction. Depreciation @ 60% on computer software instead of at 25% on the value of the assets - whether the software purchased by the assessee is part of computer for purpose of depreciation or the same can be treated as intangible assets? - HELD THAT - Software is part of computer. Hence, the depreciation on the same is allowable at the rate applicable for computer. In this regard we also find support and guidance from the judgment of Hon ble Madras High Court in case of CIT vs. Computer Age Management Services. 2019 (7) TMI 1153 - MADRAS HIGH COURT . Unutilized MODVAT/CENVAT credit under section 145A - HELD THAT - It is not in dispute that the assessee is following exclusive method of accounting for the past several years. In other words, valuing purchase price minus MODVAT credit is permissible method of accounting. The ld. CIT(A) has rightly relied upon the judgment of Hon ble Apex Court in the case of Indo Nippon Chemical Co. Ltd. 2003 (1) TMI 8 - SUPREME COURT wherein it was observed that merely because MODVAT credit was irreversible credit offered to manufacturers upon purchase of duty paid on raw-material, that would not amount to income which was liable to be taxed under the Act. It has further held that whichever method of accounting is adopted, the net result would be same. Considering the proposition of law laid down by the Hon ble Apex Court on this issue, we do not find any justification for the AO to add unutilized MODVAT credit to the closing stock. Disallowance made on account of capital investment subsidy - revenue or capital receipts - whether the WDV of block assets can be reduced by the amount of subsidy or not? - HELD THAT - We find that the WDV is to be actual cost of the assets at which the assessee acquired the same. There is no provision for reducing the value of WDV by any amount of incentive or subsidy. In this regard we also find support and guidance from the judgment of Hon ble supreme court in case of CIT vs. PJ Chemicals 1994 (9) TMI 1 - SUPREME COURT - Decided against revenue. Disallowance u/s 80IC on account of allocation of R D expenses, notice pay and sale of scrap - HELD THAT - As decided in own case direct the AO grant the deduction under section 80-IA of the Act on the items of income as discussed above. Hence, we hereby dismiss the ground of appeal of the Revenue. Disallowance under section 80G - HELD THAT - The assessee is entitled to claim money spent under section 80G while computing Total Taxable Income in accordance with the parameters provided therein. Therefore, since the order of ld.CIT(A) is based on the decision of the Tribunal on similar issue, we do not find any infirmity in his order allowing deduction under section 80G of the Act. We uphold his order, and this ground of Revenue s appeal stands rejected. Disallowance of doctor sponsorship expense/medical expenses - Medical Council of India jurisdiction to pass any order or regulation against any hospital or any health care sector under its 2002 regulation - HELD THAT - Circular issued by the CBDT as under Indian Medical Council Professional Conduct, Etiquette and Ethics) Regulations, 2002 is not applicable for the year under consideration and consequently the disallowance cannot be made in the year under consideration on account of freebies given to the medical practitioners being the AY 2009- 10. Hence, the ground of appeal of the assessee is allowed. Claim of the assessee that while computing deduction under section 80IC that the eligible income ought to be reduced by reallocating administrative expenses allowed Deduction under the provision of MAT while calculating the book profit - whether the assessee is entitled the benefit of reducing the profit of the business eligible for deduction under section 80HHC of the Act while computing the book profit under the provisions of section 115JB? - HELD THAT - Parliament is empowered to bring amendments under the statute that too retrospectively provided it is not detrimental to the assessee. In other words any amendment denying the benefit to the assessee cannot be brought under the statute with retrospective effect. There will be certain classes of assessee who must have claimed the benefit of clause (iv) of explanation 1 to section 115 JB of the Act prior to the amendment by the Finance Act as discussed above. But, assuming their case have not been selected under scrutiny, then such benefit cannot be denied to them. On the contrary the assessees who were subject to scrutiny assessment, if they are denied the benefit, there will be discrimination to them. It is for the reason that there will not be allowed the benefit granted under the statute but withdrawn by way of retrospective amendment. Thus, the impugned amendment will create disharmony among different taxpayers. In view of the above and after considering the facts in totality, we are of the view that the assessee cannot be deprived for the benefit granted to it under the statute by way of retrospective amendment in the given facts and circumstances. Hence, the ground of appeal of the assessee is allowed. Disallowance on account loan given to AE which was written off during the year under consideration - whether the assessee is entitled for the deduction of the working capital loan written off in the books of accounts on the reasoning that the same was not recoverable? - HELD THAT -There are other multiple factors which are strongly suggesting that the amount of loan was not recoverable, particularly, in the situations where the subsidiary company was incurring losses from the operations. At the time of hearing, it was also explained by the learned counsel for the assessee that the purpose of writing off the loan due from the subsidiary company was to make the net-worth of the subsidiary company positive. According to the learned counsel for the assessee, it was not possible to infuse the fund in the subsidiary company without making its net-worth positive as per the Russian Laws.the subsidiary company of the assessee is one of the extended arm of the assessee and the existence of the same depends upon the existence of the assessee company. Admittedly, the assessee has earned huge profit from the subsidiary company over a period of time which was brought to tax and therefore on the same reasoning if any loss is arising to the assessee relating to the same subsidiary company, a different treatment by denying the loss cannot be adopted by the revenue. In the light of the above stated discussion, we hold that the loss claimed by the assessee is an allowable deduction. Thus, we set aside the finding of the learned CIT-A and direct the AO to delete the addition made by him. Hence the ground of appeal of the assessee is allowed. Deduction with respect to provision for leave encashment - HELD THAT - There are certain expenses which are allowed on payment basis in pursuance to the provisions of section 43B of the Act irrespective of the year of incurrence. One of such expenditure is leave encashment. Admittedly, the assessee has not made the payment of the leave encashment and therefore the same can t be allowed as deduction. However, the assessee is at liberty to claim the deduction of such expense in the year of payment. Thus the ground of appeal of the assessee is dismissed in terms of the above. Upward adjustment of TP on account of capital infusion, corporate guarantee and loan and advances provided to AE - HELD THAT - No dispute to the fact that the assessee has advanced money to its AE for acquiring the shares which is a capital account transaction. Therefore, there cannot be any adjustment under the provisions of transfer pricing on account of capital account transaction being the acquisition of shares. Merely, there was a delay in the allotment of shares by the AE to the assessee, such delay cannot change the character of the transaction as loan. No TP adjustment required. Assessee is entitled to weighted deduction in respect of the entire expenditure incurred for the development of in-house R D facility in terms of Section 35(2AB) . Deduction u/s 80IC - Amount of income by way of cash discount cannot be denied for the benefit of the deduction under section 80IC merely on account of the different presentation shown by the assessee. The amount of net income should only be considered while excluding from the amount of deduction available under section 80IC of the Act. Thus the contention of the assessee with respect to income under the head cash discount is allowed. Income shown by the assessee on account of penalty and amount recovered on account of material mishandling under the head miscellaneous income against the purchase orders - We note that it is at Par with the cash discount which we have elaborately discussed in the preceding paragraph. Thus we hold that such income are eligible for deduction under section 80IC. Income shown on account of transfer of goods to other units - We find that it does not contain any element of profit. As such the assessee on one hand claimed an expense and the other hand it has shown income by way of transfer to the other units. This is an internal transaction, having no element of income. Therefore, if we see such transaction on net basis, there will not be any impact as far as deduction under section 80IC is concerned. Accordingly, we hold that such income are eligible for deduction under section 80IC of the Act. Recovery of the cost from the employee - We direct the AO take net income embedded in the impugned transaction. Thus the ground of appeal of the revenue to this extent is dismissed Gain on Foreign Exchange to be allowed. Additional Depreciation on trolley, mobile racket and pallets - whether the assets being Trolleys, Mobile Rackets and pallets used in manufacturing plant for movement and safe storage of goods can be described as plant and machinery or furniture? - HELD THAT - We note that the coordinate of bench Pune Tribunal in case of Serum Institute of India (supra) in similar facts and circumstances observed that nature of the assets used in the business is to be decided on the basis of functional test of the assets and accordingly held that tables, stools, rackets etc. used in laboratories are part and parcel of plant and machinery. We also find that the learned CIT(A) in his order followed the order cited above i.e. order of the Pune Tribunal i.e. Serum Institute of India 2012 (4) TMI 373 - ITAT PUNE The relevant extract of the order has already been reproduced in the order of the ld. CIT-A. Respectfully, following the same, we do not find any infirmity in the order of the learned CIT(A). Hence the ground of appeal of the Revenue is hereby dismissed. Upward adjustment on account of dossier licensing fee - HELD THAT - We note that the profit sharing ratio has already been accepted by the revenue in the earlier years. There is no change in the facts and circumstances for the year under consideration viz a viz the earlier years. It is the same agreement based on which the income has been shared between the assessee and the AE in the year under consideration. As such the agreement was entered dated 18-02-2003 which was still in force in the year under consideration without any modification. Therefore we are of the view that, the principles of consistency should be adopted. At the time of hearing, the learned DR has also not brought anything on record contrary to the finding of the learned CIT-A. Thus the order of the learned CIT(A) is well reasoned and does not require any interference. Hence the ground of appeal of the revenue to the extent of TP adjustment on account of Dossier licensing fee is hereby dismissed. Disallowance made under section 14A r.w.r. 8D cannot be resorted while determining the book profit as mentioned under clause (f) to explanation 1 to section 115JB Disallowance as per the clause (f) to Explanation-1 of Sec. 115JB of the Act independently - There is no mechanism provided under the clause (f) to Explanation-1 of Sec. 115JB of the Act to make the disallowance independently. Therefore our action for restoring back the issue to the file of AO would unnecessarily cause further litigation. Thus we limit the disallowance on an ad-hoc basis @ 1 % of the exempted income as per the clause (f) to Explanation-1 of Sec. 115JB of the Act subject to the maximum adjustment made by the AO. Thus the ground of appeal of the Revenue is partly allowed.

Summary

Issues Involved:
1. Addition on account of Transfer Pricing adjustments.
2. Disallowance of Employees' Contributions to ESI.
3. Allocation of Development Cost for Section 80-IC purposes.
4. Reallocation of Administrative Expenses for Section 80-IC purposes.
5. Exclusion of Miscellaneous, Other, and Export Income for Section 80-IC purposes.
6. Restriction of Deduction under Section 80-IC to Business Income.
7. Allocation of R&D Expenditure to Industrial Units eligible for Section 80-IC Deduction.

Detailed Analysis:

1. Addition on account of Transfer Pricing adjustments:
The assessee challenged the addition of ?1,92,04,765 out of the total addition of ?1,93,56,012 made by the AO based on the TPO's order under section 92CA(3) of the Income Tax Act. The TPO made adjustments on account of Arm's Length Price (ALP) for international transactions, including interest on loans to Associate Enterprises (AEs), guarantee fee charges, and fees paid for liaison services. The TPO argued that services rendered by the assessee to its AEs needed to be benchmarked, and a suitable commission of 3% was considered reasonable. The Tribunal held that the corporate guarantee is an international transaction and should be benchmarked, but the rate should be 0.5%. The Tribunal also addressed the issue of interest on loans to AEs, concluding that the interest rate should be adjusted to LIBOR plus 0.50%.

2. Disallowance of Employees' Contributions to ESI:
The assessee contested the disallowance of ?3,33,478 for not depositing employees' contributions to ESI within the prescribed time limit. The Tribunal upheld the disallowance, citing the jurisdictional High Court's decision in Gujarat State Road Transport Corporation Ltd. Vs. CIT, which mandates that contributions must be credited to the employees' account within the prescribed time limit to be deductible.

3. Allocation of Development Cost for Section 80-IC purposes:
The assessee argued that only the portion of development cost pertaining to products sold in the domestic market should be allocated to the Baddi Unit for Section 80-IC purposes. The Tribunal noted that the assessee had allocated the entire development cost to the Baddi Unit in its return of income but later contended that only domestic market-related costs should be considered. The Tribunal allowed the assessee's claim, citing the jurisdictional High Court's decision that no R&D expenditure, including development cost and capital expenditure, should be allocated to units eligible for Section 80-IC deduction.

4. Reallocation of Administrative Expenses for Section 80-IC purposes:
The AO reallocated administrative expenses based on turnover rather than the number of employees, reducing the deduction under Section 80-IC by ?3,75,57,364. The Tribunal held that administrative expenses should be allocated based on the number of employees, as turnover is volatile and does not accurately reflect the allocation of such expenses. The Tribunal allowed the assessee's claim, reversing the AO's adjustment.

5. Exclusion of Miscellaneous, Other, and Export Income for Section 80-IC purposes:
The AO excluded various incomes, including miscellaneous income, other income, and export income, from the quantum of eligible income for Section 80-IC deduction. The Tribunal allowed the assessee's claim, stating that these incomes are integral to the business and should be included in the eligible profit for deduction under Section 80-IC.

6. Restriction of Deduction under Section 80-IC to Business Income:
The AO restricted the deduction under Section 80-IC to business income, excluding other heads of income. The Tribunal, relying on the Supreme Court's decision in CIT Vs. Reliance Energy Ltd., held that the deduction under Section 80-IC should be extended against the gross total income, not just business income. The Tribunal directed the AO to compute the deduction accordingly.

7. Allocation of R&D Expenditure to Industrial Units eligible for Section 80-IC Deduction:
The Tribunal addressed the issue of allocating R&D expenditure to the Baddi Unit for Section 80-IC purposes. The Tribunal held that R&D expenditure should not be allocated to the Baddi Unit, as no direct service was rendered by the R&D center to the Baddi Unit, and the benefit of discovery research did not accrue to the unit. The Tribunal deleted the addition of ?36,16,40,065 made by the AO on this account.

Conclusion:
The Tribunal provided a detailed analysis and adjudication on various issues raised by the assessee and the Revenue, allowing several claims of the assessee and reversing the adjustments made by the AO. The Tribunal's decision emphasized the importance of accurate allocation methods and the inclusion of all relevant incomes for deductions under Section 80-IC, while also addressing the nuances of transfer pricing adjustments and compliance with statutory timelines for employee contributions.