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2022 (8) TMI 482 - AT - Income TaxTP adjustment made in pursuance of Section 92BA (i) - specified domestic transactions - HELD THAT - In the present case there is an adjustment made to the income of the assessee by determining arm s-length price of specified domestic provisions by invoking the provisions of Section 92BA (i) of the act. The impugned assessment year before us is assessment year 2013 14. The above provision i.e. 92BA (i) of the act was inserted by The Finance Act, 2012 with effect from 1/4/2013 and is omitted by The Finance Act , 2017 with effect from 1/4/2017. The issue whether the adjustment can be made to the total income of the assessee by invoking the provisions of Chapter X of The Income Tax Act to the transactions covered by provisions of Section 92BA (i) for assessment year 2013 14 till it was omitted. This issue has been dealt with by the honourable Karnataka High Court in case of Texport overseas 2019 (12) TMI 1312 - KARNATAKA HIGH COURT in favour of the assessee holding that as the provisions of Section 92BA (i) has been omitted from the Income Tax Act without any saving clause therefore the natural corollary would be that it did not exist at all in the statute book. Accordingly, we allow the additional ground of appeal and hold that the impugned transfer pricing adjustment made by the learned assessing officer is not sustainable. Allowability of expenditure in terms of provisions of Section 40A (2) - As in the present case the assessee, itself has stated in its T P study report as well as Report of Accountant in 3CEB stated that these transactions are covered by the provisions of Section 40 (A) (2) of the act. Even otherwise, it is not the fact that revenue is given a second chance. In the present case earlier the impression of the revenue prior to the decision of the coordinate bench and of the honourable Karnataka High Court, was that specified domestic transaction i.e. transactions that are covered by the provisions of Section 40 A (2) are required to be tested in accordance with the provisions of chapter X of the act. However when the judicial precedents show that no such provision exist in the law, the natural corollary would be to examine the allowability of these expenses u/s 40A (2) of the act. Nature of expenses - Expenditure on setting up of a new line of assembly for manufacturing of commercial vehicle - revenue or capital expenditure - HELD THAT - Disallowance by the learned assessing officer is only because of matching principle, as revenue did not come from the setting up of new assembly line. However, AO lost sight of the fact that assessee is showing substantial sales of heavy vehicles - there is nothing, which has resulted into an enduring benefit to the assessee. In the present world, automobile companies are introducing 5 6 variants of different types of vehicles every year , due to frequent changes in the consumer demands as well as change in technology. AO also incorrectly applied matching principle for making disallowance, as he over looked the same line of business of the asessee where sales of vehicles are shown. In view of this, expenditure incurred by the assessee on setting up of a new line of assembly for manufacturing of commercial vehicle when assessee is already engaging in business of manufacturing commercial vehicle cannot be said to be capital expenditure. The learned dispute resolution panel has recorded in the facts that Assessee Company operates in three verticals i.e. heavy commercial vehicle segment, light commercial vehicle segment and spare parts segment. Therefore, it is apparent that expenses are incurred for development in an existing line of business of manufacturing of heavy commercial vehicles. The decision of the coordinate bench in case of Mahindra Navistar automotive Ltd 2016 (7) TMI 164 - ITAT MUMBAI do not apply to the facts of the case as in the present case assessee is contesting that the expenses incurred are revenue in nature as no capital asset or benefit of enduring nature was acquired. Accordingly, we direct the learned assessing officer to delete the disallowance of the expenditure holding that expenditure incurred by the assessee is revenue in nature. The AO is directed to also withdraw the depreciation allowed in consequence of our above decision. Accordingly, ground number 1 of the appeal is allowed. Disallowance of dealers incentive - whether the expenditure incurred by the assessee is on scientific research or not, the expenditure is allowable to the assessee either u/s 37 (1) of the act or u/s 35 (1) (i) of the act to the extent of expenditure incurred? - HELD THAT - As without going into the controversy Explanation of assessee shows that it is carrying on product development activities. It is also an activity for the extension of knowledge in the field of manufacturing of vehicles. In fact, the activities carried out by the assessee are activities for extension of knowledge in the field of the business of the assessee company. It is also not the case of the revenue that it is not related to the business of the assessee. Hence, these are expenditure incurred by assessee on scientific research in the field of manufacturing of vehicles . Therefore, we do not find any reason to uphold the action AO - Accordingly we direct him to allow deduction u/s 35 (1) (i) -Coming to the deduction u/s 35 (1) (iv) of the act on which the learned assessing officer has allowed depreciation only instead of allowing the whole expenditure in the year in which it is incurred. We have already held assessee is carrying on scientific research in the business of manufacturing of vehicle. Based on same reasons as given by us for allowing the expenditure of the assessee u/s 35 (1) (i) of the act we also direct the learned assessing officer to delete the disallowance of Rs. 7,088,075/-. As we have allowed the claim of the assessee u/s 35 (1) of the act the learned assessing officer as a natural corollary should withdraw the grant of depreciation allowance to the assessee. Accordingly, ground number 3 of the appeal of the assessee is allowed. Nature of receipt - Revenue v/s capital receipt - claim of the assessee that industrial promotion subsidy received from government of Maharashtra pursuant to the package scheme of incentives - HELD THAT - As held by Hon Supreme court in case of Ponni Sugar 2008 (9) TMI 14 - SUPREME COURT decisive factor for considering the nature of subsidy as a capital or revenue receipt is the 'purpose' for which the subsidy has been granted and not the manner of its disbursal. Purpose of granting the subsidy, which is nothing but establishment of new industrial units in less developed areas of the State i.e. to develop underdeveloped areas of the state. Further, on identical facts and circumstances the coordinate bench in case of Mahindra vehicles Manufacturers Limited 2018 (12) TMI 629 - ITAT MUMBAI wherein it has been categorically held to be a capital receipt. Thus respectfully following the decision of the coordinate bench in assessee s group concern, where on the same scheme it has been held to be a capital receipt, we also hold that subsidy received by the assessee is a capital receipt. Accordingly, ground number 4 of the appeal of the assessee is allowed.
Issues Involved:
1. Disallowance of expenditure as capital expenditure. 2. Disallowance under section 40a(ia) for dealer incentives. 3. Disallowance under section 35(1)(i) and 35(1)(iv) for scientific research expenditure. 4. Treatment of Industrial Promotional Subsidy Incentive as a capital receipt. 5. Adjustment in Arm's Length Price under Section 92CA(3). 6. Quantification of carry forward losses and unabsorbed depreciation. Issue-wise Detailed Analysis: 1. Disallowance of Expenditure as Capital Expenditure: The assessee contested the disallowance of Rs. 4,78,71,842/- as capital expenditure, arguing that these were revenue expenses incurred for business purposes. The Tribunal concluded that the expenses were for the development of an existing line of business and not for creating a new capital asset. Therefore, the expenditure was deemed revenue in nature and allowable as a deduction under Section 37(1). The Tribunal directed the AO to delete the disallowance and withdraw the depreciation allowed. 2. Disallowance under Section 40a(ia) for Dealer Incentives: The assessee argued that dealer incentives were not subject to TDS under Section 194H as the transactions were on a principal-to-principal basis. The Tribunal noted that similar issues had been decided in favor of the assessee in previous cases, including a decision by the Bombay High Court, which was upheld by the Supreme Court. Consequently, the Tribunal directed the AO to delete the disallowance of Rs. 23,18,59,282/-. 3. Disallowance under Section 35(1)(i) and 35(1)(iv) for Scientific Research Expenditure: The assessee claimed deductions for scientific research expenditure under Sections 35(1)(i) and 35(1)(iv). The AO disallowed these claims, treating them as capital expenditure. The Tribunal found that the expenses were indeed for scientific research related to the business and were not capital in nature. Therefore, the Tribunal directed the AO to allow the deductions as claimed by the assessee and withdraw the depreciation allowed. 4. Treatment of Industrial Promotional Subsidy Incentive as a Capital Receipt: The assessee claimed that the Industrial Promotion Subsidy of Rs. 18,81,19,155/- received from the Government of Maharashtra was a capital receipt. The Tribunal referred to the purpose and object of the subsidy, which was to encourage industrial development in less developed areas. Following precedents, the Tribunal concluded that the subsidy was a capital receipt and directed the AO to exclude it from the taxable income. 5. Adjustment in Arm's Length Price under Section 92CA(3): The Tribunal addressed the adjustment of Rs. 2,19,64,47,328/- made by the AO/TPO/DRP under Section 92CA(3) for specified domestic transactions. The Tribunal noted that Section 92BA(i) had been omitted without a saving clause, rendering the adjustment invalid. However, the Tribunal remanded the issue back to the AO to examine the allowability of these expenses under Section 40A(2). 6. Quantification of Carry Forward Losses and Unabsorbed Depreciation: The Tribunal directed the AO to compute the carry forward of unabsorbed losses and unabsorbed depreciation in accordance with the law. Conclusion: The appeal filed by the assessee was partly allowed, with specific directions provided for each issue. The Tribunal's decision emphasized the importance of adhering to legal precedents and accurately interpreting the purpose of tax provisions.
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