2024 (3) TMI 485 - AT - Income Tax

Disallowance u/s 14A - suo-moto disallowance made by assessee - HELD THAT - It is evident from the record that the AO without recording any satisfaction regarding the claim of the assessee in respect of expenditure incurred in relation to exempt income proceeded to compute the disallowance u/s 14A read with Rule 8D of the Rules. Therefore, respectfully following the decision rendered in assessee s own case 2024 (3) TMI 484 - ITAT MUMBAI , we do not find any reason for upholding the disallowance made by the AO under section 14A read with Rule 8D of the Rules. Accordingly, the same is directed to be deleted. As a result, ground no.1 raised in assessee s appeal is allowed. TP adjustment - low markup on support services provided to the associated enterprises - Comparable selection - HELD THAT - Axis Integrated Systems Ltd. is not comparable to the assessee, and accordingly, we direct the exclusion of this company for benchmarking the international transaction of provision of support services and intragroup services. Inmacs Management Services Ltd. - Company has declared its revenue from operations from the professional income. Apart from the above details, there is no description of the activities undertaken by the company during the year under consideration. We find that the TPO has placed reliance upon the services offered by this company as mentioned on its website, however, there are no details as to whether these services were rendered in the year under consideration. Therefore, the nature of the consultancy business is not clear in the case of this company. Accordingly, due to the lack of complete data being available in the public domain, pertaining to the year under consideration, we are of the considered view that this company cannot be considered comparable to the assessee. Therefore, we direct the exclusion of this company for benchmarking the international transaction of provision of support services and intragroup services. TP Adjustment on account of non-recovery of charges for providing the letter of comfort/support - international transaction or not? - HELD THAT - We find that in the year under consideration also the assessee has issued similar letters of credit, as were considered by the coordinate bench in the preceding year, and has also declared the letters of comfort/support issued to the banks on behalf of some of its subsidiaries as its contingent liability in Note-25 of the Notes to Financial Statements. Therefore, respectfully following the decision rendered in assessee s own case 2024 (3) TMI 484 - ITAT MUMBAI we are of the considered view that letters of comfort issued by the assessee constitute an international transaction within the meaning of the Act. We further find that in the aforesaid decision, the coordinate bench upheld the arm s length rate of the letter of comfort to be @0.04% finding the same to be reasonable in the peculiar facts and circumstances of the case. Since undisputedly in the present case, similar facts are involved and both sides have also placed reliance on their submission as made in the preceding year, therefore we upheld arm s length rate of 0.04% computed by the learned CIT(A). Accordingly, ground no.3 rasied in assessee s appeal is dismissed. Allowability of expenditure u/s 35(2AB) - weighted deduction - HELD THAT - We find that while deciding a similar issue the coordinate bench of the Tribunal in assessee s own case in Asian Paints Ltd 2014 (1) TMI 16 - ITAT MUMBAI , for the assessment year 2007-08, restored the issue to the file of the AO with a direction to decide the same afresh after verifying whether the expenditure in question has been incurred by the assessee on research and development, which is eligible for deduction under section 35(2AB) - DR could not show us any reason to deviate from the aforesaid decision and no change in facts and law was alleged in the relevant assessment year. Disallowance of damaged stock in the valuation of the closing stock - CIT(A), following the decision of the coordinate bench of the Tribunal rendered in assessee s own case in earlier years restricted the disallowance to the tune of 0.5% of the value of closing stock for the purpose of valuation of damaged stock - HELD THAT - We find that while deciding a similar issue in assessee s own case the coordinate bench of the Tribunal in Addl. CIT v/s Asian Paints Ltd 2022 (7) TMI 1508 - ITAT MUMBAI wherein as observed that assessee is valuing closing stock for damaged stock taking the value at NIL and however, Assessing Officer makes disallowance to the extent of 0.5% of the value of closing stock and the same was confirmed by the Coordinate Bench in the earlier years from A.Y. 2003-04 to-2006-07 and A.Y. 2008-09. We further observed that following the decision of the ITAT, the Ld.CIT(A) in A.Y 2009-10 and A.Y. 2010-11 had followed the same. Considering the fact on record and also this method is consistently followed by the assessee over the years there is no loss to the revenue. Ground no.3 raised in Revenue s appeal is dismissed. Allowance of balance additional depreciation - Asset put to use in less that 180 days - assessee submitted that as per section 32(1)(iia) of the Act, the assessee is entitled to claim 20% additional depreciation on any new plant and machinery acquired after 31/03/2005 - as submitted that as per the provision to section 32(ii)(b), if the assets are put to use for less than 180 days in the previous year, then the deduction in respect of depreciation shall be restricted to 50% - HELD THAT - We find that similar findings were rendered by the coordinate bench of the Tribunal in assessee s own case in the assessment year 2012-13 2024 (3) TMI 484 - ITAT MUMBAI wherein dismiss the ground raised by the revenue holding that Ld.CIT(A) is correct in allowing the additional depreciation at the rate of 10% for asset purchased in the earlier year - We find that this issue is recurring in nature and has been decided in favour of the assessee in the preceding assessment years. TDS u/s 194H - Expenditure incurred on the Trip Scheme - non deduction of tds - HELD TYHAT - As decided in own case 2022 (2) TMI 1428 - ITAT MUMBAI for the assessment year 2010-11 entire trip scheme is for the purpose of expanding assessee's business by encouraging the dealers and distributors to achieve a specific target of purchase. Thus, the scheme is closely linked to assessee's business activity. It is also a fact that the assessee has not paid any amount to the dealers and distributors, but amount spent has been paid to SOTC for organizing the trip. It is also a fact on record that the amounts paid to SOTC has been subjected to TDS as per the relevant provision. Therefore, the allegation of the Assessing Officer that the amount has not been subjected to deduction of tax is without any basis. As regards the applicability of section 194H of the Act, by no means, the AO has established on record that dealers/distributors are agents of the assessee. Further, as we find, the trip scheme has been introduced by the assessee from past 20 years and the deduction claimed by the assessee on account of such trip scheme has never been disallowed by the AO except for the impugned assessment year. Therefore, even applying the rule of consistency, the expenditure claimed by the assessee has to be allowed. Addition on account of waiver of Royalty received from two subsidiaries - Royalty is calculated @3% of associated enterprises sales as per the agreement duly signed and executed - HELD THAT - We find that while deciding a similar issue in favour of the assessee, the coordinate bench of the Tribunal in assessee s own case cited supra, for the assessment year 2012-13 2024 (3) TMI 484 - ITAT MUMBAI net sale price of the products sold can only be determined at the end of the financial year and accordingly, the amount of Royalty payable to the assessee can only be computed thereafter. Therefore, prior to the end of the financial year, no amount accrues or arises to the assessee outside India. In the present case, prior to the determination of the net sale price of the products sold, the assessee had decided to waive Royalty by 2%. No material has been brought on record to show that there is no understanding between the assessee and its overseas subsidiaries to waive the Royalty. Such being the facts, we are of the considered view when only 1% Royalty is payable by the overseas subsidiaries, therefore the AO has no authority to make an addition of the balance 2% Royalty waived by the parties, which is nothing but a notional income considered taxable by the AO in assessee s hands. Decided in favour of assessee. Allowance of Corporate Social Responsibility ( CSR ) expenses - AO disallowed the aforesaid expenditure on the basis that the assessee has neither proved any commercial expediency nor any obligation towards the school and other purposes - HELD THAT - We find that the Hon'ble Delhi High Court in Pr.CIT v/s PEC Ltd. 2022 (12) TMI 759 - DELHI HIGH COURT held that amendment brought by way of Explanation 2 to section 37(1) by Finance Act, 2014, with effect from 1-4-2015 is prospective in nature and thus, CSR expenditure incurred prior to 1-4-2015 was to be allowed. Since, in the present case, it is undisputed that the aforesaid expenditure incurred by the assessee is towards its Corporate Social Responsibility, therefore we find no infirmity in the findings of the learned CIT(A) in allowing the expenditure in the year under consideration. As a result, ground no.8 raised in Revenue s appeal is dismissed. Sundry balances written off - HELD THAT - We find that the coordinate bench of the Tribunal in assessee s own case for the assessment year 2012-13 2024 (3) TMI 484 - ITAT MUMBAI restored this issue to the file of the AO as held assessee submitted that the expenditure is normal business expenditure and allowable as deductible expenditure. However, from the perusal of the record, we find that neither there is an examination of the aforesaid claim of the assessee nor any details were furnished. Accordingly, we deem it appropriate to restore this issue to the file of the AO for de novo adjudication. The assessee is directed to file necessary details/documents in support of its claim of deduction of sundry balances written off. Ground raised in Revenue s appeal is allowed for statistical purposes. Nature of receipt - Addition of subsidy received from the Government of Maharashtra under Package Scheme of Incentives, 2007 - HELD THAT - Upon analysing the incentives/subsidy received by the assessee under the Package Scheme of Incentives, 2007, in light of the purpose test, as envisaged by the Hon ble Supreme Court in Ponni Sugars and Chemicals Ltd. 2008 (9) TMI 14 - SUPREME COURT and Sahney Steel Press Works Ltd 1997 (9) TMI 3 - SUPREME COURT we are of the considered view that incentives/subsidy granted was only to encourage the setting up of industries in the less developed areas of the State and the same was not for the purpose of running the business more profitably. Accordingly, respectfully following the aforesaid decisions, we find no infirmity in the impugned order passed by the learned CIT(A) on this issue in treating the subsidies as capital in nature. As a result, ground raised in Revenue s appeal is dismissed.

Summary

Issues Involved:
1. Disallowance under section 14A of the Income Tax Act, 1961.
2. Transfer pricing adjustment on account of low markup on support services.
3. Transfer pricing adjustment for non-recovery of charges for providing letter of comfort/support.
4. Ad hoc addition on account of non-inclusion of damaged stock in valuation of closing stock.
5. Allowability of expenditure under section 35(2AB) of the Act.
6. Allowance of balance additional depreciation.
7. Allowance of expenditure incurred on the Trip Scheme.
8. Deletion of addition on account of waiver of Royalty received from two subsidiaries.
9. Allowance of Corporate Social Responsibility (CSR) expenses.
10. Sundry balances written off.
11. Deletion of addition of subsidy received from the Government of Maharashtra under Package Scheme of Incentives, 2007.

Summary:

1. Disallowance under section 14A of the Income Tax Act, 1961:
The Tribunal found that the Assessing Officer (AO) did not record any satisfaction regarding the rejection of the assessee's plea, a prerequisite for invoking section 14A. The AO computed disallowance under Rule 8D without examining the correctness of the assessee's claim. The Tribunal directed the deletion of the disallowance made by the AO under section 14A read with Rule 8D.

2. Transfer pricing adjustment on account of low markup on support services:
The Tribunal excluded Axis Integrated Systems Ltd. and Inmacs Management Services Ltd. from the list of comparables, as their business activities were not comparable to the assessee's support services. Consequently, the transfer pricing adjustment made by the TPO was deleted.

3. Transfer pricing adjustment for non-recovery of charges for providing letter of comfort/support:
The Tribunal upheld that letters of comfort issued by the assessee constitute an international transaction within the meaning of section 92B of the Act. The arm's length rate for letters of comfort was determined at 0.04%, and the Tribunal upheld this rate, dismissing the ground raised by the assessee.

4. Ad hoc addition on account of non-inclusion of damaged stock in valuation of closing stock:
The Tribunal upheld the decision of the learned CIT(A) to restrict the disallowance to 0.5% of the value of closing stock for the purpose of valuation of damaged stock, following the consistent approach adopted in earlier years.

5. Allowability of expenditure under section 35(2AB) of the Act:
The Tribunal directed the AO to verify the nature of the expenditure disallowed by the DSIR. If the expenditure was incurred for R&D purposes, it should be allowed as a deduction under section 35(2AB).

6. Allowance of balance additional depreciation:
The Tribunal upheld the decision to allow the balance additional depreciation claimed by the assessee for assets purchased in the earlier year, following the consistent approach adopted in earlier years.

7. Allowance of expenditure incurred on the Trip Scheme:
The Tribunal found that the expenditure on the Trip Scheme was for business purposes and not in the nature of commission. The expenditure was allowed as it was closely linked to the assessee's business activity.

8. Deletion of addition on account of waiver of Royalty received from two subsidiaries:
The Tribunal held that the AO had no authority to make an addition of the balance 2% Royalty waived by the assessee, as it was a notional income considered taxable by the AO. The waiver was based on the financial position of the subsidiaries.

9. Allowance of Corporate Social Responsibility (CSR) expenses:
The Tribunal allowed the CSR expenses incurred prior to 01/04/2015 as deductible expenditures, following the decision of the Hon'ble Delhi High Court in Pr.CIT v/s PEC Ltd.

10. Sundry balances written off:
The Tribunal restored the issue to the file of the AO for de novo adjudication, directing the assessee to file necessary details/documents in support of its claim of deduction of sundry balances written off.

11. Deletion of addition of subsidy received from the Government of Maharashtra under Package Scheme of Incentives, 2007:
The Tribunal upheld the decision of the learned CIT(A) that the subsidies received under the Package Scheme of Incentives, 2007, were capital in nature, following the purpose test as envisaged by the Hon'ble Supreme Court.

Conclusion:
The appeal by the assessee was partly allowed, and the appeal by the Revenue was partly allowed for statistical purposes.