2022 (9) TMI 830 - AT - Income Tax

TP adjustment - international transaction on account of guarantee fees - HELD THAT - The Jurisdictional High Court in the case of CIT vs. Everest Kento Cylinders Ltd 2015 (5) TMI 395 - BOMBAY HIGH COURT held that the Corporate Guarantee cannot be treated on par with Bank Guarantees, as the considerations which are applied for issuance of Corporate Guarantee are distinct and separate from bank guarantee and the Hon ble Jurisdictional High Court held that the corporate guarantee fees charged at the rate of 0.5% cannot be called in question. The ratio of this decision was subsequently followed by the Hon ble Bombay High Court in the case of CIT vs. Glenmark Pharmaceuticals Ltd. 2017 (2) TMI 1305 - BOMBAY HIGH COURT No illegality and perversity in the finding of the ld. CIT(A) restricting the TP adjustment on account corporate guarantee commission at the rate of 0.5%. Hence, we do not find any merit in the ground of appeal no.1 filed by the Revenue. Accordingly, ground of appeal no.1 stands dismissed. Addition u/s 14A r.w.r. 8D - necessity of recording a satisfaction as to the incorrectness of the claim of the respondent-assessee that the respondent-assessee incurred expenditure to earn the exempt income - suo-moto addition made by assessee - HELD THAT - Admittedly, the respondent-assessee company made investments, which yielded the dividend income. The respondent-assessee company itself offered suo motu disallowance - The provisions of sub-section (2) of section 14A provides that resort to disallowance u/s 14A can be made only if the AO is not satisfied with the correctness of the claim of assessee in respect of expenditure incurred to earn the exempt income. Therefore, it is incumbent upon the Assessing Officer to record satisfaction, as to the correctness or otherwise of the assessee company that only an expenditure was incurred to earn the exempt income. In the preset case AO has not recorded satisfaction regarding the correctness of suo motu disallowance offered by the assessee u/s 14A and mere rejection of the explanation of the assessee per se, cannot be said to be a satisfaction as envisaged u/s 14A(2). Decided against revenue. Disallowance of foreign travel expenses by holding to be personal expenditure - CIT-A deleted the addition - HELD THAT - In view of the law laid down by the Hon ble Jurisdictional High Court in the case of Alfa Laval (I) Ltd. 2005 (7) TMI 48 - BOMBAY HIGH COURT it cannot be said that the expenditure incurred on foreign travel of the director of the respondent-assessee company and his wife cannot be said to be personal in nature. No illegality and perversity in the finding of the ld. CIT(A) allowing the foreign travel expenses as revenue expenditure. Thus, the ground of appeal no.3 filed by the Revenue stands dismissed. Disallowance of depreciation of items of stainless steel tables, stools, trollies used in the laboratory treating as Plant Machinery as against the treatment of these items as furniture items - HELD THAT - Admittedly, the stainless steel tables, stools, trollies were used in the laboratory i.e. for the purpose of production and processing of chemical test. We find from the order of the Tribunal in assessee s own case (supra) that the Tribunal taking into consideration the ratio of the decision in the case of CIT vs. Parke Devi 1994 (12) TMI 46 - BOMBAY HIGH COURT wherein it was held that if the scientists or lab technicians used the said stainless steel tables, stools, trollies, racks as part of the production of vaccine and other should be classified as plant and machinery, accordingly, the depreciation should be allowed at the rate applicable to plant and machinery. We do not see any illegality and perversity in the decision of this Tribunal . Weighted deduction u/s 35(2AB) in respect of the product development expenditure - HELD THAT - In the light of law laid down by the Hon ble Gujarat High Court in the case of Cadila Healthcare Ltd 2013 (3) TMI 539 - GUJARAT HIGH COURT , we do not find any reason to interfere with the order of ld. CIT(A), as same is in consonance with the law laid down by the Hon ble Gujarat High Court in the case of Cadila Healthcare Ltd. 2013 (3) TMI 539 - GUJARAT HIGH COURT . Therefore, the ground of appeal no.5 filed by the Revenue stands dismissed. Capital expenditure incurred on product development as revenue expenditure u/s 35(1) - allowability of the expenditure incurred on the development of new products in the case of running business - HELD THAT - Admittedly, the expenditure was incurred in the process of development of new product of drugs or vaccine which was not qualified for weighted deduction u/s 35(2AB) of the Act. The mere fact that the absence of approval of prescribed authority u/s 35(2AB) is not a bar for allowance of claim within the ambit of provision of section 35(1)(iv) or u/s 37(1) of the Act, inasmuch as, the expenditure is incurred is revenue in nature for running business. The treatment given in the books of account is not determinative of the allowability or otherwise the expenditure under the provisions of the Act as held in the case of (i) Kedarnath Jute Mfg. Co. Ltd. 1971 (8) TMI 10 - SUPREME COURT and CIT vs. Smifs Securities Ltd. 2012 (8) TMI 713 - SUPREME COURT - The Tribunal had rendered the decision following ratio rendered in those judgment and, therefore, we do not see any reason to interfere with the findings of the ld. CIT(A), inasmuch as, he only followed the decision of the Tribunal in assessee s own case for the assessment year 2008-09 2016 (8) TMI 1047 - ITAT PUNE . Therefore, we do not find any merits in the ground of appeal no.6 filed by the Revenue and hence, dismissed. Deduction u/s 10AA in respect of sales made to United Nations International Children s Emergency Fund (UNICEF) - HELD THAT - The provisions of section 10AA(1) does not require that the goods manufactured in SEZ unit should be exported outside of India. In any event, they need not be a two-way traffic of exporting goods outside India and thereafter importing that goods into India. It is a mere empty useless formality. Therefore, in the light of the foregoing discussion, we are of the considered opinion that the benefit of deduction under the provisions of section 10AA cannot be denied to an assessee merely on the ground that the assessee had not exported the goods outside India despite the fact that the consideration was received in convertible foreign exchange in India. We do not find any fallacy in the reasoning of the ld. CIT(A). Accordingly, this ground of appeal filed by the Revenue stands dismissed. Additional depreciation in respect of civil works and electrical works associated with windmill - HELD THAT - It is trite law as held by the Hon ble Supreme Court in the case of Challapalli Sugars Ltd. 1974 (10) TMI 3 - SUPREME COURT that all the expenses incurred on the civil works to bring an asset into existence should be capitalized. Admittedly, in the present case, the civil works and electrical works are part and parcel of the windmill and cannot be treated separately from the windmill. Without executing civil works and electrical works, the windmill cannot be installed. In the case of CIT vs. K. K. Enterprises, 2015 (2) TMI 508 - RAJASTHAN HIGH COURT had observed that the civil work and foundation is necessary for strong foundation and no windmill could be installed without having a strong foundation. As such depreciation on the cost of civil work should be allowed at the rate applicable to the windmill. Similarly, the electrical items, components and common power evacuation too are integral part of the windmill, as that could have not been operational without electrical works. - Decided against revenue. Addition on account of alleged freebies to doctors - allowability of discount passed on to the doctors on achieving such sales targets - HELD THAT - On mere perusal of the sale campaign programme extracted above, it would reveal that the respondent-assessee company had not indulged in distribution of any freebies, gifts to medical professionals, which amounts to misconduct under the provisions of the provisions of Medical Council (Professional Conducts, Etiquettes and Ethics) Regulation Act, 2002. Therefore, the question of applicability of Explanation 1 to section 37 does not arise and the ratio of the Hon ble Supreme Court in the case of Apex Laboratories (P.) Ltd. 2022 (2) TMI 1114 - SUPREME COURT have no application. Accordingly, we do not find any reason to interfere with the order of the ld. CIT(A). Thus, the ground of appeal no.9 filed by the Revenue stands dismissed. MAT computation u/s 115JB - provisions for wealth tax paid required to be added back to book profit for the purpose of computing the tax under the provisions of section 115JB or not? - CIT-A deleted the addition - HELD THAT - Since the ld. CIT(A) only followed the decision of the Tribunal in assessee s own case for the assessment year 2009-10 2018 (6) TMI 509 - ITAT HYDERABAD and no contrary position of law was brought to our notice, we find no reason to interfere with the order of the ld. CIT(A). Accordingly, the ground of appeal no.10 filed by the Revenue stands dismissed.

Summary

Issues Involved:
1. Disallowance of guarantee fees as an international transaction.
2. Disallowance under Section 14A of the Income-tax Act, 1961.
3. Disallowance of foreign travel expenses as capital expenditure.
4. Disallowance of depreciation on stainless steel tables, stools, and trolleys as Plant & Machinery.
5. Disallowance of Product Development Expenditure under Section 35(2AB).
6. Disallowance of Product Development Expenditure under Section 35(1)/37(1).
7. Disallowance of deduction under Section 10AA on sales to UNICEF.
8. Disallowance of additional depreciation on windmill.
9. Disallowance of freebies to doctors.
10. Increase in Book Profit under Section 115JB.

Detailed Analysis:

1. Disallowance of Guarantee Fees as an International Transaction:
The Tribunal found that the transaction of furnishing a corporate guarantee to subsidiaries constitutes an international transaction under Section 92B of the Act. The Tribunal upheld the CIT(A)'s decision to restrict the TP adjustment on account of corporate guarantee commission to 0.5%, following the Bombay High Court's decision in Everest Kanto Cylinders Ltd. vs. CIT.

2. Disallowance under Section 14A:
The Tribunal held that the Assessing Officer (AO) cannot make a disallowance under Section 14A without recording satisfaction as to how the assessee's suo moto disallowance is incorrect. The AO failed to record such satisfaction, and therefore, the CIT(A)'s decision to delete the addition was upheld.

3. Disallowance of Foreign Travel Expenses:
The Tribunal upheld the CIT(A)'s decision that foreign travel expenses incurred by employees for business purposes are revenue in nature. The AO's view that these expenses should be treated as capital expenditure was rejected. Additionally, the Tribunal found that expenses incurred on the foreign travel of a director's wife, who accompanied the director, are allowable as business expenses.

4. Disallowance of Depreciation on Stainless Steel Tables, Stools, and Trolleys:
The Tribunal upheld the CIT(A)'s decision to treat stainless steel tables, stools, and trolleys used in the laboratory as Plant & Machinery, allowing depreciation at the applicable rate. This decision was based on the Tribunal's earlier order in the assessee's own case for the assessment year 2001-02.

5. Disallowance of Product Development Expenditure under Section 35(2AB):
The Tribunal upheld the CIT(A)'s decision to allow weighted deduction on clinical trial expenses, following the Gujarat High Court's decision in Cadila Healthcare Ltd. The Tribunal found no reason to interfere with the CIT(A)'s order, which allowed the deduction based on the earlier assessment years' decisions.

6. Disallowance of Product Development Expenditure under Section 35(1)/37(1):
The Tribunal upheld the CIT(A)'s decision to allow the product development expenditure as revenue expenditure, following the Tribunal's earlier decision in the assessee's own case for the assessment year 2008-09.

7. Disallowance of Deduction under Section 10AA on Sales to UNICEF:
The Tribunal upheld the CIT(A)'s decision to allow the deduction under Section 10AA for sales made to UNICEF, treating them as "Deemed Exports." The Tribunal found that the provisions of the SEZ Act, 2005, which include deemed exports, should be considered while interpreting Section 10AA of the Income-tax Act, 1961.

8. Disallowance of Additional Depreciation on Windmill:
The Tribunal upheld the CIT(A)'s decision to allow additional depreciation on civil and electrical works associated with the windmill, considering them integral to the windmill's operation. The Tribunal followed the decisions of various High Courts that civil and electrical works are necessary for the windmill's functioning.

9. Disallowance of Freebies to Doctors:
The Tribunal found that the discounts given to doctors under a sales promotion scheme do not amount to freebies or gifts that violate the Medical Council (Professional Conducts, Etiquettes, and Ethics) Regulation Act, 2002. Therefore, the provisions of Explanation 1 to Section 37 do not apply, and the CIT(A)'s decision to delete the addition was upheld.

10. Increase in Book Profit under Section 115JB:
The Tribunal upheld the CIT(A)'s decision that the wealth tax paid should not be added back to book profit for computing tax under Section 115JB. This decision was based on the Tribunal's earlier order in the assessee's own case for the assessment year 2009-10.

Conclusion:
The Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s decisions on all grounds.