2022 (12) TMI 106 - AT - Income Tax

Allowable revenue/business expenditure - expenditure debited to profit and loss account - assessee contends that the DRP/ACIT has erred in disallowing the impugned amount by treating the same as capital expenditure by not considering the assessee s submission that the said expenses were incurred wholly and exclusively for the purpose of business - HELD THAT - It is evident that the impugned expenditure claimed by the assessee company are mostly recurring in nature which has existed even in the earlier years wherein the co-ordinate bench has decided the said expenditure to be capital in nature and shall form part of cost of investment in which the assessee was at liberty to claim the same at the time of sale of investment. It is pertinent to point out that the impugned expenditure are found to be part of cost of investment through various subsidiaries, viz. Zippaero Pty Ltd, Aero Star, Australia Pty Ltd, Bak systems Plc. Etc. In respect of other expenditure, in view of the earlier Tribunal order in assesse s own case on the impugned issue of treatment of capital expenditure and revenue expenditure of the assessee, the Ld.AO is hereby directed to decide this issue in the light of decision given by this Tribunal for A.Ys 2011-12 to 2013-14 2020 (6) TMI 564 - ITAT MUMBAI - Ground 1 raised by the assessee is partly allowed for statistical purpose. Provision for warranties - provision in respect of warranty pertaining to certain products - contingent liability OR ascertained liability - disallowance of provision for warranties treating the same as a contingent liability and not an ascertained liability - HELD THAT - It is observed that the co-ordinate bench in assessee s case for AYs 2011-12 to 2013-14 has allowed the expenditure towards provision for warranty 2020 (6) TMI 564 - ITAT MUMBAI . Assessee ground 2 is allowed. Disallowance u/s 40A(9) - actual expense incurred and contribution to Mahindra Academy - addition of expenditure on employee welfare fund and Rs.18 lakhs paid to Mahindra Academy under section 40A(9) on the ground that the same was not for business purpose - HELD THAT - We are of the view that as this issue has already been covered by the decision of the co-ordinate bench in the earlier years, as the same is squarely covered in assessee s favour, we allow this ground of appeal filed by the assessee. Disallowance of deduction in respect of stock option granted to employees under the ESOP scheme - As observed that the amount is the difference between the fair market value of shares offered to employees on the date of grant of option and price at which they were offered to employee - HELD THAT - As decided in own case for A.Y. 2013- 14 2020 (6) TMI 564 - ITAT MUMBAI AR fairly submitted that in principle, this issue is decided in favour of the assessee by the Special Bench in the case of Biocon Ltd 2013 (8) TMI 629 - ITAT BANGALORE but still in the interest of justice, a specific direction need to be given to the ld. AO to allow deduction in respect of all options exercised during the year equal to the difference between the exercise price and the market price at the time of exercise of the option, as held in the case of Biocon Ltd, instead of the market price at the time of grant of option - Decide in favour of assessee. Disallowance u/s 14A r.w.r.8D - HELD THAT - As relying on assessee own case 2020 (6) TMI 564 - ITAT MUMBAI assessment year 2013-14 we direct the ld. AO to consider only those investments which had actually yielded exempt income during the year while working out the disallowance under third limb of Rule 8D(2) of the Rules. With regard to interest disallowance under rule 8D(2)(ii), we find that assessee is having sufficient interest free funds to make investments which had yielded exempt income. Hence interest disallowance is hereby deleted. This ground is allowed for statistical purpose. TP Adjustment - adjustment for corporate guarantee - HELD THAT - As observed for A.Y. 2009-10 2019 (4) TMI 1867 - ITAT MUMBAI that the co-ordinate bench in earlier years has upheld the rate of 3% to be the fee charged on corporate guarantee and we find no infirmity in the arm s length guarantee fees on the guarantee provided to AEs. We hereby confirm the addition made as arm s length price of the international transaction being adjustment for corporate guarantee provided by the assessee company to its AEs. In the result, we dismiss this ground of appeal filed by the assessee. Disallowance u/s 40(a)(ia) in respect of year-end provisions - assessee company has not deducted TDS on year-end provisions on the pretext that the liability for deduction of TDS arises in subsequent year as and when the bill of the party is booked, as per Form 3CD - HELD THAT - Having considered the rival submissions and perused the materials on record and also the order of the Tribunal for A.Y. 2012-13 2020 (6) TMI 564 - ITAT MUMBAI , we respectfully following the above cited order of the Tribunal, allow this ground of appeal filed by the assessee and delete the disallowance made by the Assessing Officer under section 40(a)(ia) of the Act. Weighted deduction u/s 35(2AB) on scientific expenditure - non-receipt of form 3CL from DSIR - Claim restriction as allowed by DSIR in Form 3CL instead of granting deduction under section 35(2AB) of the Act based on the claim made by the assessee in its return of income - HELD THAT - Issue decided in favour of assessee as relying on the case of Glennmark Pharmaceuticals Ltd. 2019 (8) TMI 1649 - ITAT MUMBAI and the Pune Bench of the Tribunal in the case of Cummins India Ltd 2018 (5) TMI 1314 - ITAT PUNE as directed to allow the claim for deduction u/s.35(2AB) as non-receipt of form 3CL from DSIR is not determinative of the issue. - Decided in favour of assessee. TDS u/s 194C - disallowance u/s 40(a)ia) - service coupon to dealers - non deduction of TDS - HELD THAT -It is observed that in a similar disallowance in assessee s case for A.Y. 2007-08 2020 (1) TMI 1612 - ITAT MUMBAI the co-ordinate bench restored the matter to the Assessing Officer directing to consider the issue that no disallowance under section 40(a)(ia) could be made after the expiry of the time for passing of the order under section 201 of the Act and that in case the disallowance is sustained, the same is liable to be restricted to the extent of 30% of the amount of service coupons. Thus we respectfully follow the said decision and hereby restore this issue to the file of the Assessing Officer by directing him that no disallowance under section 40(a)(ia) shall be made after the expiry of the time for passing of the order under section 201 of the Act and that in case the disallowance is confirmed, 100% of the said amount should be disallowed in view of the Apex Court decision in Shree Choudhary Transport Co 2020 (8) TMI 23 - SUPREME COURT - Decide partly in favour of assessee. Nature of receipt - octroi incentive - Revenue or capital receipt - AR contended that the impugned octroi incentive received under the package scheme of incentives 1993 announced by the Government of Maharashtra for moving industries to certain backward areas of Maharashtra in order to develop the under developed and developing areas of the state - HELD THAT - As relying on assessee own case A.Y. 1996-97 in Tribunal, we hold that the said subsidy is to be treated as capital receipt. We thereby allow this ground of appeal filed by the assessee. Rental income on property let out - business income or house property - assessee contended that the co-ordinate bench has deleted the disallowance for the reason that the property in question being stock in trade, provisions of section 28 will apply and not the provisions of section 24 - HELD THAT - As decided in own case 2019 (4) TMI 1867 - ITAT MUMBAI it is not in dispute that the income from letting out the property to Ridge Business Centre has been assessed as business income right from the earlier years and the same position has been accepted by the Department. Once the income -which has been derived from stock-in-trade and has been accepted as business income, then the - computation has to be made under section 28 and not under section 23. The assessee has duly shown the income received / accrued from Ridge Business Centre as business income, then any further rent realized by Ridge Business Centre form the third party cannot be said to have been earned / received or accrued to the assessee company. Thus, we are inclined to agree with the contention of the learned Counsel for the assessee that no further income can be attributed to the assessee once the rental income has been assessed as business income and not from the income from house property. Claim for deduction of gain on difference in exchange - gain on difference in exchange arising out of the repayment of foreign currency loans / revaluation of foreign currency loans as on 31/03/2010 - HELD THAT - As in assessee s case for A.Y. 2013-14 2020 (6) TMI 564 - ITAT MUMBAI where the Assessing Officer is directed to allow depreciation on exchange difference. Disallowance of deduction u/s 80IC - assessee had made detailed submission with regard to the methodology adopted for calculation of deduction under section 80IC and that the assessee has provided the basis of allocation of overheads - HELD THAT - AO is directed to recompute deduction under section 80IC in view of the of the order of Tribunal for A.Y. 2009-10 2019 (4) TMI 1867 - ITAT MUMBAI . In the result, this ground of appeal raised by the assessee is allowed for statistical purpose. Disallowance of credit for TDS - HELD THAT - We hereby direct the Assessing Officer to verify the claim of TDS raised by the assessee and allow credit of the same after due verification for the impugned year. This ground of appeal is allowed for statistical purpose. Interest on tax free bonds - assessee submitted that the assessee company has inadvertently included the impugned interest income in its return of income under the head Income from other sources - HELD THAT - As decided in own case A.Ys 2011-12 and 2013-14 the said interest income included interest earned on tax free bonds in the sum which is not liable for taxation at all both under normal provisions of the Act as well as in the computation of book profits u/s.115JB - Merely because, the assessee had erroneously offered the same in the return of income, the same cannot be brought to tax by the revenue. The law is now well settled that only just and right tax should be collected from the right person by the revenue. Hence, we deem it fit and admit the additional ground and direct the ld. AO to reduce the sum towards interest income on tax free bonds both under normal provisions of the Act as well as in the computation of book profits u/s.115JB. Disallowance of pro-rata premium payable on redemption of FCCB - HELD THAT - Evident that the claim of priority deduction of premium on convertible debentures was allowable in terms of the propositions laid down in the above cited decisions. It is also undisputable fact that the Tribunal has allowed the assessee s claim by treating the same as revenue expenditure on identical facts. We hold that the DRPs decision in allowing the impugned expenditure as revenue expenditure is justifiable. In this regard, we dismiss this ground of appeal filed by the revenue. Bond yield approach followed by the TPO to arrive at the ALP rate of interest of Rs.14.73% per annum - HELD THAT - DR submitted that let the Id. TPO be directed to adopt LIBOR 300 basis points for benchmarking international transaction in respect of loan given to AE. But we find that this Tribunal in assessee's own case for the A.Y.2009-10 in para 21 had specifically directed to consider only LIBOR rate at the relevant time and determined the ALP of the said transaction accordingly. Respectfully following the said judicial precedent, we direct the Id. AO accordingly. Adjustment made by the TPO in respect of receipt of technical services - HELD THAT - We are of the view that the assessee has furnished the complete details of foreign AE as tested party as being less complex entity. The assessee further to this, has given a plausible explanation as to why the assessee requires the technical service in order to develop its export market with the support of its AE to design the vehicles for markets outside the country. We are convinced with the submission of the assessee that the AE is a high end service provider for manufacture, designing, style, prototyping and other technical service and it also was assisting the assessee in launching successful modes like Xylo Refresh, Bolero Refresh, Quanto and Genio. The allegation that since assessee has its own R D centre at Nasik and hence it will not be in need of third party service is not acceptable, in our view. From the above observation, we are of the considered opinion that the Ld.DRP has rightly deleted the impugned adjustment made by the AO / TPO. These grounds of appeal filed by the revenue are dismissed. TDS u/s 194H - dealers incentive for which tax was deductible - HELD THAT - DRP relying on the decision of this Tribunal in assessee s case for A.Y. 2007- 08 has allowed the said expenses to be claimed. We would like to place our reliance on the decision of the co-ordinate bench 2020 (6) TMI 564 - ITAT MUMBAI since the dealer is merely an intermediary between the assessee and final customer, the provisions of Section 194H of the Act are applicable and since the assessee had failed to deduct the tax at source, disallowance u/s.40(a)(ia) of the Act need to be made in respect of dealer incentive. The said action of the Id. AO was upheld by the Id. DRP. We find that this issue has been consistently decided in favour of the assessee by this Tribunal in its own case in various assessment years.

Summary

Issues Involved:
1. Expenditure Debited to Profit & Loss Account
2. Provision for Warranties
3. Disallowance under Section 40A(9)
4. Expenses on Employees' Stock Option
5. Disallowance under Section 14A
6. Adjustment to Arm's Length Price of International Transaction
7. Disallowance under Section 40(a)(ia) for Year-End Provisions
8. Weighted Deduction under Section 35(2AB)
9. Disallowance under Section 40(a)(ia) for Service Coupons
10. Deduction of Octroi Incentive
11. Rental Income from Property Let Out
12. Claim for Deduction of Gain on Exchange Difference
13. Deduction under Section 80IC for Rudrapur Unit
14. Deduction under Section 145A for Unutilized CENVAT Credit
15. Short Credit of TDS
16. Interest on Tax-Free Bonds
17. Disallowance of Pro-Rata Premium on Redemption of FCCB
18. ALP Rate of Interest for Loans to AE
19. Adjustment for Receipt of Technical Services
20. Dealers' Incentive under Section 194H

Issue-wise Detailed Analysis:

1. Expenditure Debited to Profit & Loss Account:
The assessee contested the disallowance of Rs. 7,89,91,917/- as capital expenditure. The AO considered these expenses as capital investments, including legal expenses for joint ventures and acquisitions, and foreign travel expenses for project development. The Ld.DRP upheld the AO's decision, treating the expenses as capital in nature. The Tribunal directed the AO to decide this issue in light of its earlier decisions, partly allowing the assessee's appeal for statistical purposes.

2. Provision for Warranties:
The assessee challenged the disallowance of Rs. 42,15,66,402/- for warranty provisions, treated as contingent liabilities by the AO. The Tribunal allowed the claim, referencing its earlier decisions and the Hon'ble Supreme Court's ruling in Rotork Controls Ltd., confirming the provision as scientifically calculated and allowable as revenue expenditure.

3. Disallowance under Section 40A(9):
The assessee contested the disallowance of Rs. 2,59,650/- for employee welfare and Rs. 18 lakhs paid to Mahindra Academy. The Tribunal allowed the claims, citing earlier decisions and the nature of the expenses as actual expenditure for employee benefits.

4. Expenses on Employees' Stock Option:
The assessee appealed against the disallowance of Rs. 4,50,62,836/- for ESOP expenses. The Tribunal allowed the claim, referencing the Special Bench decision in Biocon Ltd. and directing the AO to allow the deduction based on the difference between the exercise price and market price at the time of exercise.

5. Disallowance under Section 14A:
The assessee contested the disallowance of Rs. 36,83,10,000/- under section 14A. The Tribunal directed the AO to consider only those investments that yielded exempt income during the year and deleted the interest disallowance, confirming sufficient interest-free funds for the investments.

6. Adjustment to Arm's Length Price of International Transaction:
The assessee challenged the addition of Rs. 1,27,73,700/- for corporate guarantee adjustments. The Tribunal upheld the AO/TPO's determination of a 3% fee for corporate guarantees, dismissing the assessee's appeal.

7. Disallowance under Section 40(a)(ia) for Year-End Provisions:
The assessee contested the disallowance of Rs. 17,06,78,943/- for not deducting TDS on year-end provisions. The Tribunal deleted the disallowance, referencing its earlier decision that such provisions were not mere ad hoc but fairly ascertainable.

8. Weighted Deduction under Section 35(2AB):
The assessee appealed against the restriction of weighted deduction based on DSIR's Form 3CL. The Tribunal allowed the claim, following its earlier decisions that failure to receive Form 3CL in time should not affect the deduction.

9. Disallowance under Section 40(a)(ia) for Service Coupons:
The assessee contested the disallowance of Rs. 49,83,62,000/- for service coupons to dealers. The Tribunal restored the matter to the AO, directing no disallowance after the expiry of the time for passing an order under section 201.

10. Deduction of Octroi Incentive:
The assessee appealed against the treatment of Rs. 72,48,94,000/- as revenue receipt. The Tribunal treated the subsidy as a capital receipt, following its earlier decisions and the Hon'ble Supreme Court's rulings.

11. Rental Income from Property Let Out:
The assessee challenged the addition of Rs. 11.38 crores as rental income. The Tribunal allowed the claim, confirming the income as business income from stock-in-trade, not rental income.

12. Claim for Deduction of Gain on Exchange Difference:
The assessee contested the inclusion of Rs. 138.72 crores as gain on exchange difference. The Tribunal allowed depreciation on the exchange difference, following its earlier decision.

13. Deduction under Section 80IC for Rudrapur Unit:
The assessee appealed against the disallowance of deduction under section 80IC. The Tribunal directed the AO to recompute the deduction, following its earlier decisions.

14. Deduction under Section 145A for Unutilized CENVAT Credit:
This ground was not pressed by the assessee and was dismissed as not pressed.

15. Short Credit of TDS:
The assessee contested the short credit of TDS of Rs. 11,17,74,514/-. The Tribunal directed the AO to verify and allow the credit after due verification.

16. Interest on Tax-Free Bonds:
The assessee raised an additional ground for interest on tax-free bonds amounting to Rs. 1,05,99,342/-. The Tribunal allowed the claim, following its earlier decisions.

17. Disallowance of Pro-Rata Premium on Redemption of FCCB:
The Revenue contested the allowance of Rs. 32.41 crores as revenue expenditure. The Tribunal upheld the Ld.DRP's decision, treating the expenditure as revenue, following its earlier decisions and judicial precedents.

18. ALP Rate of Interest for Loans to AE:
The Revenue challenged the rejection of the bond yield approach by the TPO. The Tribunal upheld the Ld.DRP's decision, confirming LIBOR as the ALP rate, following its earlier decisions.

19. Adjustment for Receipt of Technical Services:
The Revenue contested the deletion of Rs. 13,84,48,284/- adjustment for technical services. The Tribunal upheld the Ld.DRP's decision, confirming the reasonableness of the hourly rate and the necessity of the services.

20. Dealers' Incentive under Section 194H:
The Revenue contested the allowance of Rs. 208,07,11,000/- for dealer incentives. The Tribunal upheld the Ld.DRP's decision, confirming the incentives as not subject to TDS under section 194H, following its earlier decisions and judicial precedents.

Conclusion:
The appeal filed by the assessee was partly allowed, and the appeal filed by the revenue was dismissed.