2019 (4) TMI 1382 - AT - Income Tax

Disallowance u/s 40A (3) - payment in excess of INR 20,000 in cash for purchases and reimbursement of expenses to employee - exception of rule 6DD - HELD THAT - On consideration of details of payment made we find that mineral and metal trading Corp (MMTC) is though a government undertaking but a public listed company, therefore it cannot be said that payment is made to government - no business exigency or any other situation falling in to exception of rule 6DD was shown. The question of genuineness does not determine the disallowance u/s 40A (3). Non genuine expenses as such are not allowable u/s 28 and therefore same cannot be question u/s 40A (3). In view of this we do not find any infirmity in confirming disallowance u/s 40A (3) With respect to amount reimbursed to various employees, for purpose of disallowance u/s 40 A (3) both expenditure and payment should exceed INR 20,000/-. As in case of reimbursement of tour bills to various staff each expenditure does not exceed INR 20,000/- , disallowance of INR 966500/ under section 40A (3) is unwarranted. Revenue has not pointed out that any of such expenditure and payment both exceeds specified limit. In view of this, ground of assessee is partly allowed. Valuation of work in progress (WIP) - - method of valuation and its cost components disputed - allegation that inventory classification is not as per requirement of schedule VI of Companies The Act, 1956 - AS-2 - HELD THAT - Undisputed position that in subsequent years learned assessing officer has accepted method of valuation as well as cost component included for inventory valuation of inventory, addition made by learned assessing officer in current year cannot be sustained Disallowance u/s 36 (1) (iii) - interest paid on borrowed funds at higher rate - interest free or interest at lower rate on advances to subsidiary or sister concern - no nexus been proved that amount is advanced out of borrowed funds - HELD THAT - Fact shows that for year ended on 31/3/2011 assessee have given an outstanding loan and advances to sister concern unrelated parties amounting to ₹ 41.27 Crores. However assessee has also stated that it has share capital and reserves and surplus as per audited accounts available as on that date shows that assessee has non-interest-bearing funds available with him of INR 715,00,00,000. Non-or lower interest-bearing advances given to subsidiary or sister concern are less than interest free funds in form of share capital and reserves and surplus available with assessee, interest disallowance u/s 36 (1) (iii) cannot be made. Hence, in view of above facts, we reverse finding of lower authorities in disallowing interest expenditure. Disallowance u/s 14 A r.w.r. 8D - non recording of satisfaction - assessee suo motu disallowance u/s 14A - HELD THAT - As before proceeding to apply provisions of rule 8D or enhancing disallowance, learned assessing officer is required to record a satisfaction that having regard to kind of assessee suo motu disallowance u/s 14A was not correct. In present case, such satisfaction by assessing officer is missing. He has merely proceeded on basis of finding of special auditor under section 142 (2A) of the Act. Therefore, disallowance made by learned assessing officer is not sustainable. Accordingly, we direct learned assessing officer to delete disallowance in excess of disallowance offered by assessee u/s 14 A Disallowance of deduction u/s 80 IB/IC - fair market value of goods transferred from Noida Division to eligible unit is higher in terms of provisions of section 80 IA (8) read with 80 IB (13) and 80 IC (7) - unprocessed goods profit Mark up to extent of 2% instead of 10% as computed by assessing officer was restricted - HELD THAT - in absence of any mandate available that Central Excise valuation rule 8 provides for market price of such goods, same cannot be imported into provisions of section 80 IA (8). However, as assessee himself has stated that profit can be imputed at rate of 1 or 2% of value of transaction price recorded in books of accounts, we direct learned assessing officer in case of processed goods such as Kattha and cardamom to compute 2% on process charges as profit for computation of market price of goods transferred inter-unit. Accordingly, learned assessing officer is directed to consider transaction value of goods, which are not processed and sent to eligible unit, is recorded in books of accounts. With respect to goods, which are processed through job work and transferred to eligible unit, learned AO is directed to impute 2% profit over job work charges i.e. cost incurred by assessee for determination of profit u/s 80 IA. Disallowance of deduction u/s 80 IB/IC by applying provisions of section 80 IA (8) read with section 80 IB (13) and 80 IC (7) - rate of technical knowhow fee on value of goods transferred from perfumery dividend to eligible unit should be 2.75% as against 2.5% declared by appellant - no such adjustment in subsequent year - HELD THAT - This fact has not been controverted by learned departmental representative. Therefore, it is a fact that in subsequent year claim of assessee has been accepted by learned assessing officer and not disputed whereas in this year it has been disputed. Therefore, it is apparent that when claim of assessee has been accepted in subsequent year on identical facts and circumstances, which is not disputed, therefore there is no reason to sustain any such addition during year. Deduction u/s 80IB/80IC - excess profitability in eligible unit for tax holiday - fair market value of goods transferred is higher in terms provisions of section 80 IA (8) read with section 80 IB (13) and 80 IC (7) - HELD THAT - identical issue with respect to applicability of rule 8 of Central Excise valuation rules, ( 2000) has been applied by learned assessing officer to determine fair market value of goods transferred inter-unit. We have already discussed applicability of rule 8 of Central Excise valuation rules, 2000 for purpose of working out market price of goods transferred and rejected same while deciding ground number 8 of appeal of assessee. Therefore, for similar reason we also do not subscribe addition made by learned assessing officer by applying Central Excise valuation rules and imputing 10% profit margin in goods transferred to determine market price of such goods. Allocation of cost of corporate office - profit margin determination - CIT A apply a profit margin of 10% against 26.14% applied by AO - HELD THAT - In absence of any finding that head office, branches or depot are providing any services and are considered as a profit centre by assessee or any finding by learned assessing officer, no further profit can be attributed on actual cost allocated by these units to eligible units. Actual cost charged by 3rd parties are merely allocated to eligible and non eligible units of assessee without making any further noticeable addition to such costs, profit ratio of 10% over and above cost cannot be imputed for working out eligible profit of unit. CIT A followed earlier years order. . Learned CIT DR also did not point out before us that was there any value addition made by these head office or branches to various cost allocated by assessee. In view of this ground, of appeal of assessee is allowed and AO is directed to not to markup any profit element on allocation of common cost to eligible undertaking. Deduction of claim of deduction u/s 80 IB/80 IC - royalty on use of brand name Rajinigandha by eligible units in terms of provisions of section 80 IA (8) read with section 80 IB (13) and 80 IC (7) - HELD THAT - No doubt, there is a service to the eligible unit for using the brand name but its market value is required to be determined. Assessee has not given this brand name for exploitation to any third party. Further for market value in relation to services of user of above brand name would be price that such goods or services would ordinarily fetch in open market. Assessee has also not allowed anybody else to utilize above brand. Ld AO has compared with the brand name Tulsi Mix for which assessee is paying royalty, which is owned by third party. There is no comparison shown by the ld AO that both are similar brands. Further in later on years ld AO himself has not adjusted the legible profit on this account, therefore, it is apparent that ld AO himself do not think that such adjustment is required to be made. Therefore, brand market value is also not determined by learned assessing officer Disallowance of claim of purchase of sandalwood oil - Addition based on seized papers - year of assessment - HELD THAT - Seized document does not belong to AY 2010-11 but for Ay 2011-12. There is no material shown to us by the LD CIT DR, which authorizes us to impute the seized papers pertaining to later years for making addition in the earlier years. Revenue has also not initiated any redressal mechanism provided in the act. No reasons are given by the ld AO or ld CIT (A) to extrapolate those seized documents for AY 2010- 11. We have also taken cognizance of those papers in AY 2011-12 and upheld addition on those papers n appeal of assessee for that year. Therefore, in view of above facts, no addition is warranted in this AY on the basis of the seized papers Transfer pricing adjustment - interest on loan to wholly owned subsidiary in Switzerland - whether ? Swiss LIBOR should be taken for benchmarking interest rate and not Indian rate? - HELD THAT - However in absence of any such clause in agreement it cannot be said that such loan is required to be repaid in Indian Rs. Only and therefore, PLR has been correctly applied where fact shows that loan has been granted in foreign currency. As decided in JYOTI CNC AUTOMATION PVT LTD. 2018 (8) TMI 757 - GUJARAT HIGH COURT held that since AE is situated in France, it is most appropriate to consider mark up on basis of average speed over LIBOR charged in France. Accordingly, orders of learned lower authorities are reversed with respect to applicability of Indian interest rate on such loan for benchmarking interest transaction of loan advanced. No other arguments were advanced by either of parties on other issues involved other than that of applicability of PLR vs. LIBOR. Reduction of claim u/s 80 IB - allocation of expenses - taking into account expenditure such as depreciation of fixed assets of corporate office and expenses of depot incurred by business of assessee for providing services to eligible undertaking - HELD THAT - AO has not made any adjustment on account of allocation of depreciation from AY 2013-14 onwards, which is also supported by order of learned transfer pricing officer for AY 2013-14 and 2014-15. In view of above facts we do not find any infirmity in order of learned CIT A in directing learned assessing officer to not to consider depreciation on various assets for purpose of reduction of claim under section 80 IB and 80 IC. Deduction 80IB/IC inflated due to less royalty payment - Adjustment of claim of deduction u/s 80IB/IC on ground that royalty @ 1% of net sales paid to M/s. Dharampal Satyapal Sons P. Ltd. (Third party) is less than rate approved by Regional Director of Central Government which is 3% and as such profit of eligible units and consequential claim of - HELD THAT - Reasons given by ld CIT (A) for deleting addition are found to be correct. No infirmity was also pointed out by learned departmental representative. It may be appreciated that rate approved by Regional Director is maximum rate and there could we no ground or basis for treating same for any adjustment in terms of provisions of section 80IA(10) r.w.s 80IB(13) and 80IC(7) . It is relevant to note that same rate of royalty @1% is being paid by both eligible as well as non-eligible units and as such, impugned adjustment is on arbitrary and mechanical basis. CIT(A) deleting adjustment of deduction u/s 80IB/IC on account of notional royalty in respect of Tulsi Brand in excess of 1% being payable by eligible units to M/s. Dharampal Satyapal Sons P. Ltd. Deserves to be upheld as same rate was applied and accepted even by AO in respect of non-eligible units. Reduction of claim u/s 80 IB/80 IC on account of processing charges of betel not at rate of 3% in place of 2.5% taken by assessee - HELD THAT - AO has taken an incorrect view that on account of job charges to its associate concern for processing beetling has resulted into over statement of profit of industrial undertaking eligible for deduction u/s. 80IB/80IC. finding of CIT(A) is well reasoned as he has held that rate approved by Regional Director is maximum rate and there could no ground or basis for treating same for any adjustment in terms of provisions of section 80IA(10) r.w.s 80IB(13) and 80IC(7) of The Act. It is relevant to note that same rate of processing charges @ ₹ 2.5 per Kg is being paid by both eligible as well as non-eligible units and as such, impugned adjustment is on arbitrary and mechanical basis. Accordingly, we uphold order of ld CIT (A) and direct assessing officer not to alter deduction u/s. 80IB/80IC of eligible undertaking on account of variation in job charges. Excise duty refund for computation of deduction u/s 80 IC - HELD THAT - We uphold order of learned CIT A in holding that excise duty refund is part of eligible income for deduction u/s 80 IC. Disallowance of prior period expenses - HELD THAT - CIT A correctly deleted disallowance on ground that neither special auditor nor assessing officer has specifically mentioned any details about prior period expenditure and he also considered that assessee himself is also disallowed prior period expenditure of Rs. for 527338/ in return of income itself. Further, as learned assessing officer has not pointed out about time when bills were admitted by assessee has a liability by approving it. Further finding and conclusion of CIT (A) are well reasoned. Special auditor and assessing officer have failed to point out specific expenditure and disallowance is on mechanical basis without appreciating facts of case. Addition on foreign exchange fluctuation - HELD THAT - Loan transaction being on capital account, gain or loss arising on fluctuation of foreign currency is capital in nature and not taxable under Income tax The Act. Learned departmental representative also could not point out any reason to say that order of learned CIT A is incorrect and foreign exchange fluctuation gain arising to assessee on statement of foreign currency loan is not a capital receipt. Lesser rate of job work charges from sister concern in comparison to other related parties - HELD THAT - It is evident that addition of higher rate of job charges is on hypothetical basis and against concept of real income. Further, it is not open to assessing officer to sit in armchair of assessee and to make business decisions on arbitrary basis. Further, there is no provision in Income tax The Act, 1961 that warrants such adjustment and as such, action of assessing officer in increasing rate of job work charged from sister concern M/s. Dharampal Premchand Ltd. is not sustainable under law. Order of CIT (A) is well reasoned and learned departmental representative could not controvert order of learned CIT A therefore, addition in respect of job work has rightly been deleted Profit arising out of sale of shares - Messer s coastal Project s private limited pertains to Messer is SR credits private limited and not to assessee company - HELD THAT - there is no material or evidence on record to establish that consideration received by M/s. S.R. Credits P. ltd. is received or transferred to assessee or has been utilized by assessee and as such, allegation of colourable device is unsubstantiated and uncorroborated. Mere fact that shares have finally been purchased by foreign institutional investors furthermore strengthens fact that transaction is genuine and fully acted upon by respective parties. It is not case of assessing officer that assessee has breached or contravened any provisions of Income tax The Act, 1961 and as such impugned addition is on hypothetical basis and total disregard to principle of real income. In view of above facts we do not find any infirmity in order of learned CIT capital in deleting whole addition on account of profit on sale of shares of Messer s coastal Project private limited which in fact pertains to Messer is SR credits private limited and not to assessee. Disallowance of eligible income u/s 80 IB/80 IC by applying provisions of section 80 IA (8) - fair market value of goods transferred from silver foil division to eligible undertaking was held than that declared by appellant - HELD THAT - silver is a commodity price of which fluctuates every hour therefore approach of learned lower authorities in adopting average purchase price during year cannot substitute market value of silver purchased by assessee for its eligible unit. Therefore, at most processing cost of silver is service that has been transferred by non-eligible unit to eligible unit, which should have been done at market rate. At present assessee has considered process cost on actual cost basis and has loaded on price of silver. Therefore, we direct assessing officer to adopt a margin of 2% over process cost of processed silver transferred from non-eligible unit to eligible unit and to sustain disallowance of deduction to that extent only. Addition on purchase of sandalwood oil - HELD THAT - There is no basis for taking minimum price for purpose of computing above addition. According to us, average price if taken by revenue for purpose of making addition would obliterate to some extent any difference between purchases on various dates, of different quantities, of different qualities, from different parties, from different destination and of different rates. This is also supported from fact that assessee has purchased sandalwood from 4 different parties of 18894.210 KG. In those 4 parties, two parties were alleged bogus bill providers are also included. Total purchases are of ₹ 1436436257/- during year. Average rate of purchases from balance two parties (ignoring 2 parties who provided bogus bills) ranges from ₹ 75882.10 - to INR 28272.38. Average rate of purchases is INR 54156.49 per kg. In view of above facts, we direct learned assessing officer to make addition in hands of assessee for 16702.800 kg by replacing purchase price shown by two parties in their bills by average rate of purchases of INR 54156.49 per kilogram which works out difference of ₹ 41,31,92,185/-. Accordingly addition of ₹ 41,31,92,185/- is confirmed and balance addition is deleted

Summary

Issues Involved:
1. Validity of notice under section 153A.
2. Disallowance under section 40A(3).
3. Disallowance under section 40(a)(ia).
4. Valuation of work in progress.
5. Disallowance of interest under section 36(1)(iii).
6. Disallowance under section 14A.
7. Disallowance under section 80IB/IC.
8. Transfer pricing adjustment.
9. Disallowance of prior period expenses.
10. Foreign exchange fluctuation.
11. Bogus purchases.
12. Interest under sections 234A, 234B, and 234C.

Detailed Analysis:

1. Validity of Notice under Section 153A:
The assessee challenged the validity of the notice under section 153A, arguing that the reassessment proceedings were not based on any incriminating material seized during the search. However, the ground was not pressed during the hearing and was dismissed.

2. Disallowance under Section 40A(3):
The assessee argued that cash payments made for the purchase of silver from MMTC and reimbursements to employees should not be disallowed. The Tribunal held that payments to MMTC were not exempt under Rule 6DD and confirmed the disallowance. However, reimbursements to employees were allowed as they did not exceed the specified limit individually.

3. Disallowance under Section 40(a)(ia):
The assessee did not press this ground, and it was dismissed accordingly.

4. Valuation of Work in Progress:
The Tribunal found that the method of valuation and cost components used by the assessee were consistent with subsequent years, where no adjustments were made by the AO. Therefore, the addition was deleted.

5. Disallowance of Interest under Section 36(1)(iii):
The Tribunal held that the assessee had sufficient non-interest-bearing funds to cover the advances made to sister concerns. Therefore, the disallowance of interest was deleted.

6. Disallowance under Section 14A:
The Tribunal found that the AO did not record the requisite satisfaction before applying Rule 8D. Therefore, the disallowance was restricted to the amount already offered by the assessee.

7. Disallowance under Section 80IB/IC:
The Tribunal directed the AO to consider the transaction value of goods transferred without processing and to impute a 2% profit on job work charges for processed goods. The disallowance related to technical know-how fees was deleted as the AO had accepted the rate in subsequent years. The disallowance related to the transfer of goods from the Canpack Division was also deleted as the Tribunal rejected the application of Central Excise Valuation Rules for determining market value.

8. Transfer Pricing Adjustment:
The Tribunal held that the interest rate for benchmarking the loan to the associated enterprise should be based on LIBOR rather than the SBI prime lending rate. Therefore, the adjustment was deleted.

9. Disallowance of Prior Period Expenses:
The Tribunal found that the AO did not specify the details of prior period expenses and that the assessee had already disallowed such expenses in the return. Therefore, the disallowance was deleted.

10. Foreign Exchange Fluctuation:
The Tribunal upheld the CIT(A)'s decision that foreign exchange fluctuation on a capital account is capital in nature and not taxable.

11. Bogus Purchases:
The Tribunal found that the seized documents pertained to AY 2011-12 and not to earlier years. Therefore, the addition was not warranted for AY 2010-11. For AY 2011-12, the Tribunal directed the AO to make an addition based on the average purchase price rather than the minimum price.

12. Interest under Sections 234A, 234B, and 234C:
The Tribunal did not find any merit in the assessee's arguments and dismissed this ground.

Conclusion:
The Tribunal provided a detailed analysis and directions for each issue, resulting in partial relief for the assessee in several grounds while upholding the AO's and CIT(A)'s decisions in others.