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2023 (6) TMI 1065 - AT - Income TaxNature of expenditure - Machinery repairs consumption of spares - revenue v/s capital expenditure - HELD THAT - AO in the remand report has not given any specific findings as to how the said expenditure has given any enduring benefit to the assessee - no infirmity in the order of Ld. CIT(Appeals) while holding that machinery repairs / consumption of spares crores qualifies as revenue expenditure. With respect to payment to NUOVO PIGNONE, in our view, CIT(A) has correctly observed that the same does not qualify as capital expenditure and further, on perusal of the details of expenditure, it is seen that these are annual maintenance charges paid by the assessee company and hence they are not on capital account. Finally, with respect to plant repairs and maintenance expenditure expenses it is seen that majority of the expenses are below 25,000/-. Even CIT(Appeals) has not given any specific finding as to why the aforesaid expenditure should be treated on capital account and what enduring benefit has accrued to the assessee by way of the aforesaid expenditure. We further observe that the aforesaid expenditure towards plant repairs and maintenance constitutes only 2.48% of the Gross Block of Plant and Machinery and further this percentage is lower as compared to the previous two assessment years i.e. AY 2006-07 (2.63%) and AY 2007-08 (2.62%). Accordingly, we are of the considered view that the aforesaid expenditure is allowable as revenue expenditure. Loss accrued on foreign exchange derivatives - assessee entered into contracts to convert its export realization in Euro into USD to pay for its imports in USD.held that losses of foreign exchange derivatives on outstanding contracts are notional and contingent in nature and cannot be allowed as per Instruction No. 2/2020 issued by CBDT on 23.03.2010 - HELD THAT - We observe that this issue is directly covered in favour of the assessee by order of ITAT Ahmedabad in assessee s own case for A.Y. 2009-10, 2010-11 and 2011-12 in 2021 (11) TMI 766 - ITAT AHMEDABAD wherein the ITAT has allowed the assessee s appeal. Disallowance on account of expenses claimed in respect of turnkey project - AO held that the assessee has only claimed the expenses on an estimated basis on percentage of completion of project and therefore, the said expenses were required to be capitalized since the assessee is following project completion method - HELD THAT - The assessee has been consistently following the percentage completion method in earlier assessment years and also in the subsequent assessment years, and no defects have been pointed out in such method of accounting. During the course of assessment proceedings, the assessee has given complete details regarding income earned from such project and which was also accepted by Assessing Officer as taxable income on current year basis upon method of accounting regularly followed by the assessee. Accordingly, considering the facts of the instant case we are of the considered view that CIT(Appeals) has not erred in facts and in law in holding that the aforesaid expenditure is allowable as revenue expenditure. Disallowance u/s 14A - assessee earned exempt dividend income and made a suo moto disallowance - HELD THAT - CIT(Appeals) has not erred in facts and in law in restricting the addition made under section 14A of the Act to the amount of exempt income earned by the assessee. Addition u/s 115JB - AO disallowed the expenditure computed u/s 14A while calculating book profit u/s 115JB - HELD THAT - It is a well settled principle that the amounts disallowed under Section 14A r.w.r. 8D cannot be added to net profit while computing books profits under Section 115JB of the Act. Recently, in the case of Atria Power Corporation Ltd. 2022 (8) TMI 1322 - SC ORDER dismissed the SLP of the Department against High Court ruling that disallowance made u/s14A could not be added in assessee-company's income for purpose of computation of income under section 115JB Also in the case of J.J. Glastronics (P.) Ltd. 2022 (4) TMI 1187 - KARNATAKA HIGH COURT held that amounts disallowed under section 14A could not be added to net profit while computing book profit under section 115JB of the Act. Also in the case of Vireet Investment (P.) Ltd 2017 (6) TMI 1124 - ITAT DELHI held that computation under clause (f) of Explanation 1 to section 115JB(2), is to be made without resorting to computation as contemplated under section 14A read with rule 8D. Addition u/s 41(1) as deemed income of the assessee - HELD THAT - Since there was noting on record to indicate that there was cessation of liability during the year under consideration. Therefore, this ground of appeal of the revenue is dismissed. Disallowance u/s 40(a)(i) - sales commission expenses and recruitment expenses on the ground that assessee has not deducted TDS on the aforesaid payments - HELD THAT - We observe that with respect to payments towards recruitment charges similar issue has been decided in favour of the assessee, in assessee s own case 2021 (11) TMI 766 - ITAT AHMEDABAD by ITAT Ahmedabad for A.Ys. 2009-10, 2010-11, 2011-12 as held since the Assessing Officer has not disproved the fact that assessee has made payment on account of reimbursement of expenditure on which no TDS is deductable. Therefore, this ground of appeal of the Revenue stands dismissed. No TDS was required to be deducted on payments made towards reimbursement of recruitment charges. With respect to commission paid to various parties for services carried out outside of India and is related to earning of income outside of India and hence, such payment falls within the Exceptions provided in Section 9(1)(vii)(b) of the Act. We observe that the Ld. D.R. has not brought anything to controvert the findings given by Ld. CIT(Appeals). It is a well settled law that sales commission paid to agents outside of India, who are having no permanent establishment in India, in respect of services rendered outside of India and related to earning of income outside of India by the assessee cannot be subject to TDS under the Act. Accordingly, CIT(Appeals) has not erred in facts and in law in deleting the aforesaid addition. Disallowance u/s 92CA - assessee had granted loans to various Associated Enterprises and assessee had calculated arms length interest of LIBOR plus 2.5% i.e. 7.69% in USD terms and notional interest income was offered to tax - HELD THAT - In the instant case, the assessee has worked out the ALP at LIBOR plus 2.5%. Further, the Ld. CIT(Appeals) has also not appreciated the fact that the mark-up of 3.72% computed by the TPO works out to nearly 72% of LIBOR which in our view, is quite excessive. Accordingly, we are of the considered view that the assessee is justified in computing the ALP at 7.69% (i.e. at LIBOR plus 2.5%) and the appeal of the assessee is allowed with respect to this Ground of Appeal. Disallowance in respect of late payment of employees contribution to PF ESI - HELD THAT - As in the case of Checkmate Services (P.) Ltd. 2022 (10) TMI 617 - SUPREME COURT wherein the Supreme Court held that for assessment years prior to AY 2021-22, non obstante clause under section 43B could not apply in case of amounts which were held in trust as was case of employee's contribution which were deducted from their income and was held in trust by assessee-employer as per section 2(24)(x), thus, said clause would not absolve assessee-employer from its liability to deposit employee's contribution on or before due date as a condition for deduction. Where assessee-company failed to pay employees contribution towards EPF and ESI within due date prescribed in respective Acts, deduction under section 36(1)(va) was not allowable.The issue is decision in case of Gujarat State Road Transportation Corporation 2014 (1) TMI 502 - GUJARAT HIGH COURT wherein it was held that where assessee did not deposit employees' contribution to employees' account in relevant fund before due date prescribed in Explanation to section 36(1)(va), no deduction would be admissible even though he deposits same before due date under section 43B of the Act.
Issues Involved:
1. Disallowance of capitalisation of repairs and maintenance expenditure. 2. Disallowance of loss accrued on foreign exchange derivatives. 3. Disallowance of expenses claimed in respect of turnkey project. 4. Disallowance under Section 14A of the Income Tax Act. 5. Addition under Section 115JB of the Income Tax Act. 6. Addition under Section 41(1) of the Income Tax Act. 7. Disallowance under Section 40(a)(i) of the Income Tax Act. 8. Transfer Pricing adjustment under Section 92CA of the Income Tax Act. 9. Disallowance for late payment of employees' contribution to PF & ESI. Summary: 1. Disallowance of Capitalisation of Repairs and Maintenance Expenditure: The assessee incurred Rs. 37.50 crores on machinery repairs, which the Assessing Officer (AO) capitalized, resulting in a net disallowance of Rs. 34.36 crores. The CIT(A) allowed Rs. 21.11 crores as revenue expenditure and Rs. 1.50 crores paid to NUOVO PIGNONE as revenue expenditure but upheld Rs. 14.82 crores as capital expenditure. The Tribunal found no enduring benefit from the expenditure and allowed it as revenue expenditure, dismissing the Department's appeal and allowing the assessee's appeal. 2. Disallowance of Loss Accrued on Foreign Exchange Derivatives: The AO disallowed Rs. 12.56 crores as notional and contingent losses on foreign exchange derivatives. The CIT(A) deleted the disallowance, following ITAT decisions. The Tribunal upheld CIT(A)'s decision, dismissing the Department's appeal. 3. Disallowance of Expenses Claimed in Respect of Turnkey Project: The AO disallowed Rs. 2.02 crores as capital expenditure. The CIT(A) allowed the expenditure as revenue expenditure, noting the AO accepted the income from the projects. The Tribunal upheld CIT(A)'s decision, dismissing the Department's appeal. 4. Disallowance under Section 14A: The AO disallowed Rs. 3.60 crores under Rule 8D. The CIT(A) restricted the disallowance to Rs. 16.86 lakhs, the amount of exempt dividend income. The Tribunal upheld CIT(A)'s decision, dismissing both the Department's and assessee's appeals. 5. Addition under Section 115JB: The AO added disallowance under Section 14A to book profit under Section 115JB. The Tribunal, following Supreme Court and High Court rulings, held that disallowance under Section 14A cannot be added to book profit under Section 115JB, dismissing the Department's appeal. 6. Addition under Section 41(1): The AO added Rs. 72.65 lakhs as deemed income for outstanding sundry creditors. The CIT(A) deleted the addition, citing Gujarat High Court decisions. The Tribunal upheld CIT(A)'s decision, dismissing the Department's appeal. 7. Disallowance under Section 40(a)(i): The AO disallowed Rs. 25.02 lakhs for non-deduction of TDS on sales commission and recruitment expenses. The CIT(A) deleted the disallowance, noting no TDS was required for services rendered outside India and reimbursement of expenses. The Tribunal upheld CIT(A)'s decision, dismissing the Department's appeal. 8. Transfer Pricing Adjustment under Section 92CA: The AO added Rs. 23.50 lakhs for loans to Associated Enterprises, calculating interest at LIBOR plus 4.22%. The CIT(A) upheld the AO's decision. The Tribunal, following judicial precedents, accepted the assessee's rate of LIBOR plus 2.5%, allowing the assessee's appeal. 9. Disallowance for Late Payment of Employees' Contribution to PF & ESI: The Tribunal, following Supreme Court and Gujarat High Court decisions, upheld the disallowance for late payment of employees' contributions, dismissing the assessee's appeal. Conclusion: The Department's appeal is dismissed, and the assessee's appeal is partly allowed.
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