2021 (4) TMI 805 - AT - Income Tax

Transfer pricing adjustment on the ground that the assessee company has shifted profits from non-eligible unit to the eligible unit in order to claim higher deduction under section 80IC - HELD THAT - The issue stands squarely covered in favour of the assessee by order dated 24.10.2016 passed by Tribunal in the immediately preceding assessment years, i.e. AY 2010-11 and AY 2011-12 2017 (1) TMI 266 - ITAT DELHI wherein identical disallowance made by the assessing officer has been deleted. The Tribunal, while allowing the claim of the assessee under section 80-IC of the Act, held that for the purpose of computing market price of inter-unit transfer of goods, when the non-eligible units procured goods at market price from third party vendors and supplied the same to the eligible unit at the same purchase price as increased by the applicable freight cost, no further substitution of such price is warranted in terms of section 80IA(8) of the Act and the transaction was a genuine business transaction borne out of commercial expediency. Addition of freight inward/import clearing expenses to cost of closing inventory - HELD THAT - As decided in own case 2017 (1) TMI 266 - ITAT DELHI tribunal deleted the aforesaid addition on the ground that in those years it has been held that the assessee was following consistent system of accounting, which was unnecessarily disturbed by the Revenue, without change in facts. It was further held that tinkering with the accounting method was unjustified when the exercise did not materially alter the profits of the assessee company. Addition on account of cost of rejection of semi-finished goods and obsolete items to the value of closing stock - HELD THAT - As decided in own case 2017 (1) TMI 266 - ITAT DELHI on reading of the assessment order as well as the direction of the Ld. Dispute resolution panel it was not found that how the loss of the assessee was found to be normal when the assessee submitted that it is an abnormal loss incurred by it during the course of manufacturing process. Further the Ld. dispute resolution panel has also stated that both the cost of normal and abnormal losses have to be loaded to the value of the closing stock is devoid of any merit as it is contrary to the accounting standard issued by the Institute of chartered accountants of India which has been mandated by the Ministry of corporate affairs, which only says that, only normal losses are required to be included and abnormal losses are required to excluded for the purpose of the valuation of the closing stock of the finished goods and semi finished goods. In view of the above, we respectfully following the decision of the coordinate bench in the appellant s own case for the previous year allow ground of the appeal of the assessee Disallowance of provision for increase in price of material - HELD THAT - As the provision for the material is worked out in respect of price amendments which were already issued on 31.03.2009 which was made on the basis of actual supplied made upto the end of the year as per price amendments actually issued on 31.03.2009. The provision was made on the basis of actual PO issued to the vendors for change in the prices during the year and thus, does not involved any estimation. Therefore, the Assessing Officer was not right in making adjustments which are not consistent with the explanation to Section 115JB. Disallowance of cost of scrap material - HELD THAT - In the present Assessment Year also the assessee is not dealing in scrap, and/or holding the scrap as inventory, and, thus, was not required to value the closing stock after taking into account the value of scrap. This Tribunal, for A.Y.s 2010-11 and 2011-12 2017 (1) TMI 266 - ITAT DELHI while coming to the aforesaid conclusion, laid emphasis on the fact that such transaction was revenue-neutral and held that considering the size of the assessee company, it could not be expected to keep quantitative tally of miniscule items Disallowance of prior period expenses - HELD THAT - As decided in own case 2017 (1) TMI 266 - ITAT DELHI Assessing Officer has nowhere disputed the genuineness of the expenditure claimed by the assessee and if assessee is denied deduction, then it would never get deduction for such expenses. From DRP Order, we also observed that the DRP has followed its decision in respect of immediately preceding year. At the same time, we observe that the mistake of totaling and the working given by the assessee has not been properly verified at the end of Assessing Officer and the same should have been verified by the Assessing Officer. Under above circumstances, we hold that the issue is squarely covered in favour of the assessee Allowability of provision of Head office expense reversed in succeeding year - AR submitted that the aggregate provision for advertisement expenses incurred at the head office made at the end of the relevant previous year, which was reversed in succeeding year - HELD THAT - In the present Assessment Year, detail of provisions for advertisement was submitted before the lower authorities. Further, the Assessing Officer, in the set-aside proceedings for A.Y. 2008-09, vide order dated 26.02.2015, accepted the claim of the assessee and allowed relief on the aforementioned identical issue by observing that the assessee had computed the provision on the basis of actual Purchase Orders, which was scientific and logical in nature. Thus, the Assessing Officer was not right in disallowing the said expenses and also adding back the same while computing book profit, holding the same to be unascertained liability. Thus, the issue is squarely covered by the orders the Tribunal in A.Ys. 2008-09 to 2013-14. Disallowance of alleged excessive purchases from related parties as per AS-18 - HELD THAT - Tribunal order for A.Ys. 2010-11 and 2011-12 2017 (1) TMI 266 - ITAT DELHI held that failure on part of the revenue to controvert any of the findings in the earlier order of the tribunal or pointing out any contrary decisions on this issue, the respectfully following the order of the coordinate bench to not inclined to uphold the disallowance made by the Ld. Assessing officer on account of the purchases made from the parties who are related parties in terms of accounting standard 18 issued by the Institute of chartered accountants of India but not in terms of provisions of section 40A (2) of the income tax act. In the result ground of the appeal of the assessee is allowed. Payment received on behalf of Hero Honda Fin Corp. Ltd. (HFCL) deemed as dividend under Section 2(22)(e) - HELD THAT - As decided by the Tribunal order for A.Ys. 2010-11 and 2011-12 2017 (1) TMI 266 - ITAT DELHI assessee s intention did not reflect that the amount was received as loan or advance so as to attract the provisions of section 2(22)(e) of the Act. The Tribunal further held that the assessee was holding the money as a custodian and the amount would be exempted in terms of clause (ii) section 2(22)(e) since the amount was given in the ordinary course of business - decided in favour of assessee. TDS u/s 194H - non deduction of TDS on quarterly targets and turnover discount and Sales Discount - HELD THAT - This issue is also covered in favour of the Assessee by the Tribunal order for A.Ys. 2010-11 and 2011-12 2017 (1) TMI 266 - ITAT DELHI as well as the decision of the Hon ble High Court in case of Mother Dairy Ltd. 2012 (2) TMI 80 - DELHI HIGH COURT holding that the discount in question is not in the nature of commission but an incentive for higher sale targets TDS u/s 194J - no deduction of tds on legal and professional charges - HELD THAT - In the present Assessment Year, the Assessing Officer disallowed the aforesaid expenses, invoking section 40(a)(ia), for the failure of the assessee to deduct tax at source there from under section 194J of the Act. But, it is pertinent to note here that the Assessing Officer did not doubt that the payment was made by assessee towards reimbursement of expenses. It was still held that assessee was liable to deduct tax at source under section 194J of the Act. Thus, the issue is squarely covered by the order of the Tribunal for A.Ys. 2010-11 and 2011-12. 2017 (1) TMI 266 - ITAT DELHI Gains from sale of investments income treated as business income - HELD THAT - In the year under consideration, the issue is identical to the AYs 2010- 11 and 2011-12 wherein the Tribunal allowed this issue in favour of the assessee after considering the legal position and intention of the assessee company, the Tribunal came to the conclusion that income from sale of shares/mutual funds/PMS etc. would be taxable as capital gains, instead of business income brought to tax by the assessing officer on the basis that the assessee (a) was not a trader in stock; (b) had no intention of holding the shares as stock; (c) sales were effected by delivery (d) that the department had itself in earlier years taxed such transactions under the head capital gains - Decided in favour of assessee. Addition u/s 14A r.w.r. 8D - HELD THAT - Ends of justice would be met if in this year also, the issue is re-examined by the Assessing Officer in light of judgment of the Hon ble Apex Court in the case of Maxopp Investment Ltd. vs. CIT 2011 (11) TMI 267 - DELHI HIGH COURT . Accordingly, the matter is restored to the file of the Assessing Officer. We direct the Assessing Officer to pass appropriate orders in accordance with law after duly considering the judgment of the Hon ble Apex Court in the case of Maxopp Investment Ltd. vs. CIT (supra) after giving proper opportunity to the assessee to present its case. Addition of disallowance made under section 14A read with Rule 8D of the Rules while computing book profits under section 115JB - We find that the said issue is squarely covered in favour of the assessee by the order of the Hon ble Delhi High Court in the case of PCIT v. Bhushan Steel Ltd. 2015 (9) TMI 1424 - DELHI HIGH COURT and by the order of the Special Bench of the Tribunal in the case of ACIT vs Vireet Investments (P.) Ltd 2017 (6) TMI 1124 - ITAT DELHI , accordingly the addition made in this regard is deleted. Depreciation on Model Fee - assessee manufactures two-wheelers under technical collaboration agreement entered into with Honda Motor Co. Ltd., Japan ( Honda ). In accordance with the above collaboration agreement, the assessee pays model fee to Honda to obtain design/know-how to manufacture a new model of two-wheeler - HELD THAT - As the expenditure was incurred on new model fees prior to commencement of production of new models of two wheelers, thus, this action is revenue neutral in a broader perspective as the same adjustment would be required to be made to the opening stock of finished goods for the year under consideration. Thus, this issue is covered in favour of the assessee by the decision of the Tribunal for A.Ys. 2010-11 and 2011-12 2017 (1) TMI 266 - ITAT DELHI Disallowance of reimbursement of foreign travelling expenses to directors/employees - disallowance was made on the ground of non-submission of evidence/proof of actual expenses incurred by employees - HELD THAT - This Tribunal in A.Ys. 2010-11 and 2011-12 2017 (1) TMI 266 - ITAT DELHI and earlier years has held that disallowance cannot be made merely on the basis that vouchers were not produced by the employees. We also find that the Tribunal has in the appeal for the assessment yea₹ 2009-10, 2012-13 and 2013-14, decided the issue in favor of the assessee company following the aforesaid order passed for assessment yea₹ 2010-11 and 2011-12. As, the facts have not changed in this year as well, therefore, the issue is squarely covered by the decision of the Tribunal for earlier Assessment Years. Disallowance of Royalty Expenditure on the ground of being capital in nature - HELD THAT - As relying on own case of assessee 2017 (1) TMI 266 - ITAT DELHI Royalty paid in terms of license B agreement is held to be an allowable revenue deduction. Disallowance u/s 80IC on account of profit attributable to the brand value and marketing network - HELD THAT - As decided in own case 2017 (1) TMI 266 - ITAT DELHI head office is not a separate profit centre and, therefore, no profit is to be separately attributed to such activity. It further observed that, for the purpose of working out eligible deduction under section 80-IC of the Act, actual expenses incurred at the head office are to be allocated between various profit centers on a rational and scientific basis. Disallowance u/s 80IC on account of other income - Addition on the ground that such incomes were not derived from the business of manufacture of specified articles or things - HELD THAT - Similar disallowance made by the assessing officer in assessment yea₹ 2010-11 and 2011-12 has been deleted by the Tribunal vide consolidated order 2017 (1) TMI 266 - ITAT DELHI . The Tribunal, after examining the nature of the aforesaid incomes, held that other incomes in the nature of interest on loan to employees, interest on loan to vendors for working capital support earned by a unit eligible for deduction under Section 80IC of the Act shall be considered as incidental to the activity of carrying out manufacturing and, thus, eligible for deduction under that section. Accordingly, the aforesaid issue stands squarely covered in favour of the assessee. Allowability of weighted deduction u/s 35(2AB) with respect to scientific research and development expenses incurred during the year -aforesaid claim of weighted deduction has been disallowed in the assessment order on the ground that the said claim was not raised by the assessee in the return of income filed for the relevant year - HELD THAT - When the assessee receives notice for assessment and is asked to file the documents in support of the return of income including computation of income, such documents and computation of income are deemed to have been filed at the time of filing the original return of income, rendering the original return to be a valid return and not a defective return under section 139(9) of the Act. In view of the same, computation of income is deemed to be filed along with return of income and notes of such computation of income as per the undisputed practice and ratio laid down by the aforesaid decisions are to be deemed as forming integral part of the return of income, which are required to be considered by the assessing officer, while completing the assessment of an assessee. As considering that the AO after examining the facts and legal position with respect to the impugned weighted claim of deduction under section 35(2AB), did not dispute the same on merits, erred in not granting the benefit to the assessee merely on the ground that the same was made through note to computation of income and not in the return form. Accordingly, we reverse the action of the AO and direct him to allow the weighted deduction to the assessee. Considering that, we have allowed the claim on the principal contention raised by the assessee, alternate contentions as well as the additional ground of appeal are rendered academic in nature. Depreciation @ 25% on leasehold rights acquired in lands at Haridwar and Neemrana u/s 32(1)(ii) - HELD THAT - Assessee is eligible for depreciation at 25% on lease hold rights acquired in Haridwar and Neemrana. As regards the land at Haridwar, the AO is directed to allow the claim of depreciation as per opening WDV carry forward from the earlier years. In so far as the depreciation of land at Neemrana is concerned the same shall be allowed after verification of the relevant payments claimed to have been made by the assessee.

Summary

Issues Involved:
1. Transfer pricing adjustment and deduction under section 80IC.
2. Addition of freight inward/import clearing expenses to closing inventory.
3. Addition on account of cost of rejection of semi-finished goods and obsolete items.
4. Disallowance of provision for increase in price of material.
5. Disallowance of cost of scrap material.
6. Disallowance of prior period expenses.
7. Disallowance of provision for advertisement expenses.
8. Disallowance of purchases from related parties.
9. Addition under section 2(22)(e) on account of deemed dividend.
10. Disallowance under section 40(a)(ia) for non-deduction of TDS on discounts and reimbursements.
11. Treatment of gains from sale of investments as business income.
12. Disallowance under section 14A.
13. Depreciation on model fee.
14. Disallowance of reimbursement of foreign travel expenses.
15. Disallowance of royalty expenditure.
16. Disallowance under section 80IC on account of profit attributable to brand value and marketing network.
17. Disallowance under section 80IC on account of other income.
18. Allowability of weighted deduction under section 35(2AB).

Detailed Analysis:

1. Transfer Pricing Adjustment and Deduction Under Section 80IC:
The Tribunal found that the AO/TPO erred in making a transfer pricing adjustment by applying a markup to inter-unit transfers between non-eligible and eligible units. The Tribunal held that the transactions were at arm's length, as the non-eligible units procured goods at market price and transferred them at the same price to the eligible unit. The Tribunal followed its earlier decisions for AYs 2010-11 and 2011-12, allowing the assessee's claim under section 80IC.

2. Addition of Freight Inward/Import Clearing Expenses to Closing Inventory:
The Tribunal noted that the assessee consistently followed a method of accounting where exceptional freight costs were not included in inventory valuation. This method was accepted by the Revenue in previous years. The Tribunal found no justification for the AO's adjustment and allowed the assessee's appeal, following its decisions for earlier years.

3. Addition on Account of Cost of Rejection of Semi-Finished Goods and Obsolete Items:
The Tribunal held that only normal wastages should be included in inventory valuation, as per Accounting Standard-2. The abnormal wastages were rightly excluded by the assessee. The Tribunal followed its earlier decisions and deleted the addition made by the AO.

4. Disallowance of Provision for Increase in Price of Material:
The Tribunal observed that the provision for price increase was made on a scientific basis and was consistent with trade practices. The AO's disallowance was found to be unjustified, and the Tribunal allowed the assessee's claim, following its decisions for earlier years.

5. Disallowance of Cost of Scrap Material:
The Tribunal held that the assessee, not being a dealer in scrap, was not required to value scrap as part of closing inventory. The Tribunal noted that the transaction was revenue-neutral and deleted the addition made by the AO, following its decisions for earlier years.

6. Disallowance of Prior Period Expenses:
The Tribunal found that the expenses crystallized during the relevant year and were not prior period expenses. The Tribunal followed its earlier decisions and allowed the assessee's claim.

7. Disallowance of Provision for Advertisement Expenses:
The Tribunal held that the provision was made on a scientific basis and was revenue-neutral. The AO's disallowance was deleted, and the Tribunal followed its earlier decisions, allowing the assessee's claim.

8. Disallowance of Purchases from Related Parties:
The Tribunal found that the parties were not related under section 40A(2), and the transactions were commercially expedient. The disallowance made by the AO was deleted, following the Tribunal's earlier decisions.

9. Addition Under Section 2(22)(e) on Account of Deemed Dividend:
The Tribunal held that the amount received by the assessee was not a loan or advance but was held as a custodian. The transaction was in the ordinary course of business, and the addition made by the AO was deleted, following the Tribunal's earlier decisions.

10. Disallowance Under Section 40(a)(ia) for Non-Deduction of TDS on Discounts and Reimbursements:
The Tribunal held that the discounts were not in the nature of commission and were not subject to TDS under section 194H. The disallowance made by the AO was deleted, following the Tribunal's earlier decisions.

11. Treatment of Gains from Sale of Investments as Business Income:
The Tribunal found that the investments were held as capital assets, and the gains were taxable as capital gains, not business income. The Tribunal followed its earlier decisions and allowed the assessee's claim.

12. Disallowance Under Section 14A:
The Tribunal noted that the AO did not record satisfaction regarding the incorrectness of the assessee's disallowance method. The Tribunal restored the matter to the AO for re-examination, following the Supreme Court's decision in Maxopp Investment Ltd.

13. Depreciation on Model Fee:
The Tribunal held that the expenditure on model fee was incurred prior to production and was revenue-neutral. The Tribunal followed its earlier decisions and deleted the addition made by the AO.

14. Disallowance of Reimbursement of Foreign Travel Expenses:
The Tribunal found that the disallowance was unjustified as the expenses were reasonable and incurred in the normal course of business. The Tribunal followed its earlier decisions and deleted the disallowance.

15. Disallowance of Royalty Expenditure:
The Tribunal held that the royalty was for the use of technology and did not result in the acquisition of any capital asset. The Tribunal followed its earlier decisions and allowed the assessee's claim.

16. Disallowance Under Section 80IC on Account of Profit Attributable to Brand Value and Marketing Network:
The Tribunal held that the head office was not a separate profit center and expenses were allocated on a rational basis. The disallowance made by the AO was deleted, following the Tribunal's earlier decisions.

17. Disallowance Under Section 80IC on Account of Other Income:
The Tribunal found that the other incomes were incidental to the manufacturing business and eligible for deduction under section 80IC. The disallowance made by the AO was deleted, following the Tribunal's earlier decisions.

18. Allowability of Weighted Deduction Under Section 35(2AB):
The Tribunal held that the notes to the computation of income formed part of the return, and the claim should have been allowed by the AO. The Tribunal directed the AO to allow the weighted deduction, following the decisions of various High Courts.