2013 (6) TMI 286 - AT - Income Tax

Valuation of products sold to the subsidiary company - Sales made to 100% subsidiary at the rates much lower than the printed price list of the products i.e. the rate at which these products were sold to the third parties - Held that - Considering various types of expenses which as per the assessee are not required for determining the sale price of a product sold to the subsidiary certain adjustment of expenses do require to be made in case of sales made to the subsidiary company. However the basis of such adjustment of expenses has to be demonstrated so far as possible on actual expenses whether they are directly or indirectly embedded in the cost of products. At the same time it is undisputed that the assessee has under priced its sales made to the subsidiary as there cannot be a huge differential of pricing of the same product sold to the subsidiary on one hand and to the other parties on the other hand. On perusal of the orders passed by AO as well as by the Commissioner (Appeals) it is seen that no one has examined as to what is the price margin on which the sales have been made to the other parties and what is the difference between the sale price made to the subsidiary. Therefore looking to the entirety of the facts the issue is to be remitted to the file of the AO for examining the price difference which has been sold to the third parties as per the actual sales of the products and the sale price made to the subsidiary company & verify the actual expenditure attributable to the products and the sale made to the subsidiary will take into consideration the fact that the assessee had shown cost plus 15% mark-up. Provisions for Executive Retirement Scheme (ERS) disallowed as it is only contingent liability - Held that - AO directed to allow the said expenses on the basis of actual payment made during the relevant assessment year as business expenses. Disallowance on account of MODVAT credit - Held that - This issue stands covered in favour of the assessee as relying on CIT v/s Indo Nippon Chemicals Co. Ltd. 2003 (1) TMI 8 - SUPREME Court wherein held that view of the AO that merely because Modvat credit is an irreversible credit available to the manufacturers upon purchase of duty paid raw material it would amount to income which is liable to be taxed under the Act is not acceptable. Against revenue. Disallowance of foreign travel expenses incurred on the wife of the Executive Officer of the assessee - Held that - As decided in assessee s own case as relying on case of Bhor Industries Ltd 2005 (8) TMI 75 - BOMBAY High Court that such claim of the assessee cannot be allowed unless it is shown that the tour of the spouse of the employee was for the purpose of business. Against assessee. Exclusion of excise duty and trade discount from the total turnover for deduction under section 80HHC - Held that - As decided in CIT v/s Lakshmi Machine Works 2007 (4) TMI 202 - SUPREME Court the excise duty is not includible in the total turnover in the formula contained in section 80HHC - in favour of assessee. Charging price over and above the amount fixed by the NPPA under Para 8 of the DPCO - appellant has violated the provisions of law and expenditure is not allowable as deduction u/s 37(1) - Held that - After going through various notifications and relevant provisions of The Essential Commodities Act 1955 we find that there are separate provisions for penalty and interest and the sum of Rs. 1.50 crores which has been paid is the refund of excess price paid by the assessee to NPPA. Hence there is no violation and infringement of any law or Government s order. The assessee has been kept on representing before the NPPA for the justification of the cost for which no reply or order was passed by the NPPA in respect to the same. Finally the amount was determined at Rs. 1.56 crores which only include the principal amount of the refund. Thus the payment of Rs. 1.50 crores made on 10th December 1998 which falls in assessment year 1999-2000 is an allowable expenditure under section 37(1) and therefore the same is allowed as revenue expenditure.

Summary

Issues Involved:
1. Addition on account of sales to a subsidiary.
2. Disallowance of provisions for Executive Retirement Scheme (ERS).
3. Disallowance of foreign travel expenses.
4. Disallowance of various entertainment expenses.
5. Deduction under section 80IA.
6. Ad-hoc disallowance of 2% of dividend income.
7. Disallowance of expenditure on production of advertising films.
8. Addition on account of MODVAT credit.
9. Exclusion of excise duty and trade discount from the total turnover for deduction under section 80HHC.
10. Validity of re-assessment under section 147.
11. Disallowance of payment to NPPA.
12. Levy of interest under section 220(2).

Detailed Analysis:

1. Addition on account of sales to a subsidiary:
The assessee sold products to its 100% subsidiary at lower rates compared to third parties. The Assessing Officer (AO) found this under-pricing resulted in a loss of Rs. 3,19,77,685. The Commissioner (Appeals) (CIT(A)) reduced the disallowance to Rs. 1,62,37,205 after considering certain expenses not incurred for subsidiary sales. The Tribunal restored the issue to the AO to re-examine the price difference and actual expenses attributable to the subsidiary sales.

2. Disallowance of provisions for Executive Retirement Scheme (ERS):
The AO disallowed Rs. 1,56,59,547 as a contingent liability. The Tribunal, following earlier decisions, directed the AO to allow the expenses based on actual payment made during the relevant assessment year.

3. Disallowance of foreign travel expenses:
The AO disallowed Rs. 1,68,597 incurred on the wife of an executive officer. The CIT(A) confirmed the disallowance, and the Tribunal upheld this decision, citing the Jurisdictional High Court's decision in Bhor Industries Ltd.

4. Disallowance of various entertainment expenses:
The AO made several disallowances under various heads, and the CIT(A) confirmed most of them. The Tribunal, following earlier decisions, upheld 80% of the disallowance confirmed by the CIT(A) and allowed certain expenses like conference expenses and training expenses as business expenses.

5. Deduction under section 80IA:
The AO reduced the deduction under section 80IA. The Tribunal, following earlier decisions, upheld the AO's action, determining that the profit attributed to the Dharavi unit was reasonable.

6. Ad-hoc disallowance of 2% of dividend income:
The AO estimated 2% of the gross dividend as expenses for earning the dividend income. The Tribunal, following the Jurisdictional High Court's decision in CIT v/s Emrald Co. Ltd., held that no such ad-hoc disallowance could be made for computing deduction under section 80M.

7. Disallowance of expenditure on production of advertising films:
The AO treated the expenditure on advertising films as capital expenditure. The Tribunal, following earlier decisions, allowed the expenditure as revenue expenditure.

8. Addition on account of MODVAT credit:
The AO added unutilized MODVAT credit to the total income. The Tribunal, following earlier decisions and the Supreme Court's judgment in CIT v/s Indo Nippon Chemicals Co. Ltd., allowed the assessee's claim.

9. Exclusion of excise duty and trade discount from the total turnover for deduction under section 80HHC:
The Tribunal, following the Supreme Court's judgment in CIT v/s Lakshmi Machine Works, held that excise duty and sales tax do not form part of the total turnover under section 80HHC.

10. Validity of re-assessment under section 147:
The Tribunal did not adjudicate on the validity of re-assessment as the issue became academic after allowing the assessee's appeal on merits.

11. Disallowance of payment to NPPA:
The AO disallowed Rs. 1.5 crores paid to NPPA, treating it as a penalty. The Tribunal allowed the payment as revenue expenditure, noting it was a refund of excess price charged and not a penalty.

12. Levy of interest under section 220(2):
The Tribunal directed the AO to compute the interest component in accordance with law, leaving the issue un-adjudicated due to lack of arguments from both parties.

Conclusion:
The Tribunal provided detailed directions and remanded certain issues back to the AO for re-examination, while upholding or reversing other disallowances based on earlier decisions and legal precedents.