2014 (2) TMI 978 - AT - Income Tax

Modvat Excise Duty credit - Closing stock of raw material and packing goods Held that - The decision in ADDL COMMISSIONER OF INCOME TAX Versus M/s JOHNSON & JOHNSON LTD 2013 (6) TMI 286 - ITAT MUMBAI followed - 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 thus, the matter remitted back to the AO for fresh adjudication Decided in favour of Assessee. Disallowance of provision for Executive Retirement Scheme (ERS) Held that - The decision in ADDL COMMISSIONER OF INCOME TAX Versus M/s JOHNSON & JOHNSON LTD 2013 (6) TMI 286 - ITAT MUMBAI followed - the AO is directed to allow the expenses on account of ERS on the basis of actual payment made during the relevant assessment year as business expenses thus, the matter remitted back to the AO to allow the deduction on account of ERS on payment basis as against provision basis claimed by the assessee Decided in favour of Assessee. Disallowance on account of provision for cash discount Disallowance of expenditure on repairs, maintenance - Held that - The decision in ADDL COMMISSIONER OF INCOME TAX Versus M/s JOHNSON & JOHNSON LTD 2013 (6) TMI 286 - ITAT MUMBAI followed the matter remitted back to the AO for fresh adjudication to allow cash discount which has been actually paid by the assessee The Tribunal has allowed the claim of the assessee because the assessee has successfully explained the nature of expenses by filing necessary details the details have not been properly examined by the lower authorities thus, the matter remitted back to the AO for fresh adjudication Decided in favour of Assessee. Disallowance u/s 80HHC of the Act - Liabilities/provisions written back - Gross rental income - Sundry receipts - Held that - The decision in M/s. Johnson & Johnson Limited Versus The Addl. Commissioner of Income-tax 2013 (4) TMI 228 - ITAT MUMBAI followed the Tribunal has remitted the matter back to the AO for fresh adjudication in the light of the decision taken in earlier years following the direction of the Tribunal in assessee s own case For rental income, the Tribunal directed that netting off of rent paid against rent received should be allowed and only 90% of the net rent income should be considered for disallowance u/s. 80HHC of the Act - Decided in favour of Assessee. Transfer pricing adjustment Determination of arm s length price Held that - The application made by the assessee to RBI for brand usage agreement specifically mentions that the royalty to be remitted is net of taxes - the approval was received from the RBI to remit the royalty on brand usage by the assessee @ 1% net of taxes - taxes were liability of J&J India under the terms of agreement - The assessee has entered into a commercial arrangement with J&J US and it has been so arranged that the payment of taxes have to be borne by the assessee being a commercial arrangement, the same should not be questioned while calculating arm s length price Relying upon Dresser Rand India (P.) Ltd. v. Dy. CIT 2012 (10) TMI 127 - ITAT MUMBAI the order of the CIT(A) set aside Decided in favour of Assessee. Enhancement made in respect of brand usage royalty Held that - The CIT(A) erred in ignoring the copy of draft brand usage royalty agreement which was submitted by the assessee alongwith application to RBI on 10.8.2001 - If the assessee which carries on a business find that it is commercially expedient to incur certain expenditure directly or indirectly, it would be open to such an assessee to do so notwithstanding the fact that a formal deed does not precede the incurring of such expenditure Relying upon CIT v. Associated Electrical Agencies 2003 (12) TMI 36 - MADRAS High Court there is no merit in the enhancement made by the CIT(A) thus, the AO is directed to delete the addition made by the CIT(A) Decided in favour of Assessee. Disallowance of tax and R&D cess paid on technical know-how royalty Held that - Royalty payments has been approved by RBI and therefore deserves to be allowed - as the payments have been made in the light of the agreement with J&J US and as per the approval/guidelines of the RBI, there is no reason to disallow the tax and R&D Cess paid on technical royalty - the AO is directed to delete the addition made Decided in favour of Assessee. Deletion of the disallowance on account of royalty payment on sale of traded finished goods - Restriction on technical know-how royalty to 1% instead of 2% - Held that - As it has been held in assessee s appeal, it has already been held that the agreements between J&J India and J&J USA for payment of royalty has to be considered in the light of the approval of the RBI there is no substance in the findings of the TPO that there is no need for paying royalty for technical/marketing know-how - The CIT(A) has rightly considered the relevant clauses of the agreement between J&J India and J&J USA Decided against Revenue. Deletion on account of unaccounted production and sales Deletion of publicity expenses being expenses on advertisement films Held that - The CIT(A) observed that the AO has not pointed out any mistakes or manipulations in the records maintained by the assessee nor he has invoked provisions of Sec. 145 for making the addition - As decided in assessee s own case for the previous years - the production loss depends on number of factors and in absence of any comparable to show that the loss shown by the assessee is excess and decided the appeal in favour of the assessee - no evidence of purchase/sales outside the books of account have been brought on record thus, there is no reason to interfere in the findings of the CIT(A) Decided against Revenue. Disallowance of 10% of payment made to M/s. Crawford Bailey & Co. payment made to Crompton Corporation - Held that - The decision in M/s. Johnson & Johnson Limited Versus The Addl. Commissioner of Income-tax 2013 (4) TMI 228 - ITAT MUMBAI followed - the Tribunal has deleted the addition mentioning that in order to make any disallowance u/s. 40A(2)(b), it is for the AO to bring on record some material to indicate that the payment was in fact excessive having regard to the fair market value of goods or services for the legitimate needs of the business - CIT(A) has deleted the addition holding that for the payments for legal counseling, it is futile to think of comparables because counsels may not charge standard fee but may charge according to the issue involved - there is no reason to interfere with the findings of the CIT(A) Decided against Revenue. Adhoc disallowance of Travelling expenses Held that - The assessee is a company and therefore in such a case disallowance on account of personal expenses cannot be sustained - The AO has made an adhoc disallowance presuming that such expense have personal element there is no logic/basis for making disallowance which are based on presumptions and surmises thus, there is no reason to interfere with the findings of the CIT(A) Decided against Revenue. Deletion made on Club Membership fees 10% adhoc disallowance of expenses incurred on professional sponsorship Held that - As decided in assessee s own case for the previous years, the Tribunal decided in favour of Assessee, Relying upon Otis Elevator Co. (India) Ltd. v. CIT 1991 (4) TMI 53 - BOMBAY High Court - once the expenditure is held to be for business purposes, there is no question of adhoc disallowance of such expenses by treating same as non-business expenditure - Decided against Revenue.

Summary

Issues Involved:

1. Modvat Excise Duty Credit on Closing Stock
2. Disallowance of Provision for Executive Retirement Scheme (ERS)
3. Disallowance of Provision for Cash Discount
4. Disallowance of Repairs and Maintenance Expenditure
5. Disallowance of Liabilities/Provisions Written Back under Section 80HHC
6. Disallowance of Gross Rental Income under Section 80HHC
7. Disallowance of Sundry Receipts under Section 80HHC
8. Transfer Pricing Issues (Royalty Payments, Technical Know-how, etc.)
9. Unaccounted Production and Sales
10. Disallowance of Publicity Expenses on Advertisement Films
11. Ad-hoc Disallowance of Travelling Expenses
12. Disallowance of Club Membership Fees
13. Ad-hoc Disallowance of Professional Sponsorship Expenses
14. Depreciation on Testing Equipment
15. Exclusion of Excise Duty and Trade Discount from Total Turnover for Deduction under Section 80HHC
16. Reduction of 90% of Recovery of Other Expenses from Business Profits while Computing Deduction under Section 80HHC
17. Reduction of 90% of Recovery of R&D Expenses from Business Profits while Computing Deduction under Section 80HHC

Detailed Analysis:

Modvat Excise Duty Credit on Closing Stock:
The auditors noted that the assessee reduced excise duty from sales, and the AO added Rs. 1,65,75,560/- as Modvat credit balance to the closing stock. The Ld. CIT(A) directed adjustments to opening stock, purchase, and sales. The Tribunal restored the issue to the AO for re-adjudication in light of Section 145A, directing corresponding benefits in the opening stock.

Disallowance of Provision for Executive Retirement Scheme (ERS):
The AO disallowed Rs. 6,64,372/- as a contingent liability. The Ld. CIT(A) directed the AO to follow the Tribunal's decision in earlier years, allowing ERS expenses on an actual payment basis. The Tribunal restored the issue to the AO for re-examination.

Disallowance of Provision for Cash Discount:
The AO disallowed Rs. 21,33,679/- out of Rs. 75 lakhs claimed as a contingent liability. The Ld. CIT(A) upheld the disallowance. The Tribunal restored the issue to the AO to allow cash discounts actually paid by the assessee.

Disallowance of Repairs and Maintenance Expenditure:
The AO disallowed Rs. 44,35,997/- as capital expenditure. The Ld. CIT(A) deleted the ad-hoc disallowance but confirmed specific disallowances. The Tribunal restored the issue to the AO for re-examination of details provided by the assessee.

Disallowance of Liabilities/Provisions Written Back under Section 80HHC:
The AO disallowed Rs. 24,11,000/-. The Tribunal restored the issue to the AO to be decided in line with earlier years' decisions.

Disallowance of Gross Rental Income under Section 80HHC:
The Tribunal directed netting off rent paid against rent received and considered only 90% of net rent income for disallowance under Section 80HHC.

Disallowance of Sundry Receipts under Section 80HHC:
The AO treated Rs. 2,25,51,870/- as income from other sources. The Tribunal restored the issue to the AO for re-examination in light of earlier years' decisions.

Transfer Pricing Issues:
The TPO restricted royalty payments and disallowed certain expenses. The Tribunal directed the AO to delete the addition of Rs. 60 lakhs for tax on brand royalty and allowed the technical know-how royalty at 2%. The Tribunal also deleted the enhancement made by the Ld. CIT(A) regarding brand usage royalty and disallowed tax and R&D cess paid on technical know-how royalty.

Unaccounted Production and Sales:
The AO added Rs. 4,44,04,643/- for unaccounted production and sales. The Ld. CIT(A) deleted the addition, and the Tribunal upheld this decision, finding no evidence of purchase/sales outside the books.

Disallowance of Publicity Expenses on Advertisement Films:
The AO disallowed Rs. 3,55,73,542/-. The Ld. CIT(A) deleted the addition, following the Tribunal's decision in earlier years. The Tribunal upheld this decision.

Ad-hoc Disallowance of Travelling Expenses:
The AO made an ad-hoc disallowance of 10%, resulting in Rs. 78,49,766/-. The Ld. CIT(A) deleted the addition, and the Tribunal upheld this decision, finding no basis for the disallowance.

Disallowance of Club Membership Fees:
The Tribunal upheld the Ld. CIT(A)'s decision to delete the addition, following the Jurisdictional High Court's decision.

Ad-hoc Disallowance of Professional Sponsorship Expenses:
The Tribunal upheld the Ld. CIT(A)'s decision to delete the addition, following the Tribunal's decision in earlier years.

Depreciation on Testing Equipment:
The Tribunal upheld the Ld. CIT(A)'s decision to allow depreciation, following earlier years' decisions.

Exclusion of Excise Duty and Trade Discount from Total Turnover for Deduction under Section 80HHC:
The Tribunal upheld the Ld. CIT(A)'s decision to exclude excise duty and trade discount from total turnover, following the Supreme Court's decision.

Reduction of 90% of Recovery of Other Expenses from Business Profits while Computing Deduction under Section 80HHC:
The Tribunal directed the AO to allow netting off expenses incurred against income earned, following the Supreme Court's decision.

Reduction of 90% of Recovery of R&D Expenses from Business Profits while Computing Deduction under Section 80HHC:
The Tribunal directed the AO to allow netting off expenses, following the Supreme Court's decision.

Conclusion:
Both appeals were partly allowed for statistical purposes, with several issues restored to the AO for re-examination and others decided in line with earlier Tribunal and Supreme Court decisions.