2024 (7) TMI 828 - AT - Income Tax

Nature of expenses - Expenditure on software - Revenue or capital expenditure - HELD THAT - In assessee's case out of the total software expenses, the assessee has incurred substantial portion of the expenditure towards license fee which are to be paid periodically. Therefore it cannot be said that the payment is resulting in a benefit of enduring nature. Accordingly following the above decision of Amway India Enterprises 2008 (2) TMI 454 - ITAT DELHI-C which is affirmed by the Hon'ble Delhi High Court 2011 (11) TMI 4 - DELHI HIGH COURT , we hold that the expenses incurred towards payment of software license fees is revenue in nature and should allowed as a deduction. This ground of the assessee is allowed. Disallowance u/s.14A r.w.r.8D - AO re-computed the disallowance by invoking rule 8D, wherein he has disallowed a sum towards interest under rule 8D(2)(ii) and a sum under rule 8D(2)(iii). The CIT(A) upheld the disallowances - HELD THAT - It is a settled position now that when own funds are more than the investments earning exempt income, no disallowance under rule 8D(2)(ii) towards interest is warranted. Similar is the position that for the purpose of disallowance under rule 8D(2)(iii), only the those investment that earn tax free income should be considered. On perusal of records we notice that the assessee is having sufficient own funds which is more than the tax free investments and therefore we hold that no disallowance under rule 8D(2)(ii) can be made and the disallowance made by the assessing officer is hereby deleted. Disallowance made u/r 8D(2)(iii) we direct the AO to recomputed the disallowance by considering only those investment that earn tax free income and exclude investments in growth funds. AO is further directed to consider the suo moto disallowance made by the assessee while re-computing the disallowance under rule 8D(2)(iii). Needless to say that the assessee be given a proper opportunity of being heard. It is ordered accordingly. Addition of unutilized Modvat Credit - Assessee follows 'exclusive' method of accounting for MODVAT / CENVAT credit with regard to inventory, purchases and consumption - HELD THAT - We notice that the coordinate while considering the similar issue for AY 2007-08 2019 (6) TMI 31 - ITAT MUMBAI , discussed the amended provisions of section 145A (which is relevant for the year under consideration) wherein matter restored back to the file of the AO for denovo determination of the issue. TP Adjustment - notional interest for counter guarantee given to AE - international transaction or not? - HELD THAT - As in assessee's own case for AY 2007-08 hold that providing counter guarantee to AE is an international transaction within the meaning of section 92B of the Act and that ALP on the shall be calculated at 0.5%. The TPO is directed to recompute the ALP accordingly. Notional Interest for delayed payment from AEs - since the assessee was the tested party, the TPO adopted the interest rate which the assessee would have earned by advancing such loan to an unrelated party in India - TPO held that as unsecured loan is like an unrated bond and the risk is very high in such circumstances and considered the least rating and determined at a rate of 15,68% and calculated notional interest on delay in receipt of service fees and export proceeds which has led to proposing disallowance - HELD THAT - It is settled positions that delay in receipt of receivables from AE is an international transaction. The Hon'ble Bombay High Court in the case of Tecnimont (P.) Ltd. 2018 (7) TMI 490 - BOMBAY HIGH COURT has held that the delay in receivables is in substance amounts to granting of loan to an AE so as to enjoy the funds, which the AE would otherwise have to repay and that interest needs to be charged based LIBOR rates as the rate prevailing in country where the loan is received/consumed by the AE. We therefore direct the assessing officer to charge interest at the rate of LIBOT 100 basis points after considering a credit period of 60 days. This ground of the assessee is partly allowed. Disallowance of provision for warranty - business of the assessee consists of two kinds of products, viz. decorative and industrial. The said claim was made in respect of expected future claims on performance warranty up to 7 years, given by the assessee on its exterior decorative paints and expected claims from industrial customers on account of quality issues - HELD THAT - Assessee has incurred actual expenditure during FY 2008-09 and therefore there is merit in the submission that the provision is resulting in actual expenditure in subsequent years. As noticed that the assessing officer has not taken cognizance of the actual expenditure incurred in the later years and also it is not clear how the expenditure is allowed in subsequent year i.e. whether actual amount incurred is allowed as a deduction. In case the amount is allowed in the year in which actually incurred then allowing the provision in the current year would amount to double deduction. We therefore remit the issue back to the assessing officer with a direction to examine the basis of provision, the actual expenditure incurred and allow the claim in accordance law with after giving a reasonable opportunity of being heard to the assessee. Allowability of amalgamation expenses of which 1/5th had been claimed under sec. 35DD - as per DR as per the provisions contained in Sec. 35DD only 1/5 deduction in each of 5 successive previous years can be claimed beginning with the year in which amalgamation took place and there is no such provision to change the quantum of deduction from 1/5th to 1/4th as claimed by the assessee - HELD THAT - In assessee's case it is an undisputed fact that the amalgamation took place in the previous year 2006-07 and therefore 1/5th of the expenses incurred towards amalgamation has to be claimed from the said year for 5 years. The claim of the assessee is that the expenses incurred in the subsequent year i.e. 2007-08 need to be allowed in 4 installments since the assessee cannot claim the expenditure beyond 5 years from the year of amalgamation. We are unable to appreciate this contention of the assessee for the reason that there is no provision under section 35DD to claim 1/4th of the expenditure incurred towards amalgamation and that the assessee could claim only 1/5th of the expenditure from AY 2007-08 for 5 years. Therefore we see no reason to interfere with the decision of the CIT(A). This ground of the assessee is rejected. TDS u/s 194H - non deduction of TDS on commission payable to the Managing Director - as per assessee, the allowability of commission in the subsequent year has not been questioned by the department and that since the provision has been reversed credited to the P L A/c disallowance in the year under consideration would amount to double taxation - HELD THAT - As the submissions of the assessee with regard to provision made, subsequent reversal and tax deduction on actual payment etc., needs to be factually verified in order to decide the allowability of the claim. Therefore we deem it fit to remit the issue back to the assessing officer for a de- novo verification of the issue by calling for the relevant details as may be required in this regard. The assessee is directed to submit the details and cooperate with the proceedings. It is ordered accordingly. Delayed payment of ESIC u/s 36(1)(va) - whether the assessee is entitled for deduction claimed towards contribution of sum to provident fund on behalf of the employees deposited after due date prescribed under the Act but before the date of filing the return? - HELD THAT - By following the decision rendered by Hon ble Supreme Court in case of Checkmate Services P. Ltd. 2022 (10) TMI 617 - SUPREME COURT we are of the considered view that Ld. CIT(A) has rightly decided the issue against the assessee as the employees contribution on account of ESI lying deposited with the employers has to be deposited before the due date prescribed under the Act. Since the assessee has failed to comply with the condition precedent for depositing the employees contribution on account of PF ESI before the due date prescribed under the Act he is not entitled for any deduction. Treaty rate to be applied for dividend distributed instead of rate prescribed in sec 115O - HELD THAT - Issue is covered by the decision of the Special Bench decision in the case of Total Oil (P) Ltd. 2023 (4) TMI 988 - ITAT MUMBAI (SB) against the assessee. Respectfully following the decision of special bench we dismiss the additional ground raised by the assessee. Depreciation on UPS - 15% OR 60% - AO has calculated depreciation on UPS by applying general rate of 15% for plant and machinery whereas 60% claimed by assessee - HELD THAT - It is noticed, in the case of PCIT vs Goa Tourism Development Ltd. 2019 (3) TMI 287 - BOMBAY HIGH COURT has held that UPS being a part/accessory of computer is eligible for depreciation at 60%. The same view has been expressed in case of CIT vs Orient Ceramics and Industries Ltd. 2011 (1) TMI 26 - DELHI HIGH COURT In view of the ratio laid down in the judicial precedents referred to above, we allow assessee s claim of depreciation on UPS @ 60%. This ground is allowed. Adjustment towards sale of goods to AE - Selection of MAM - TPO rejected the bench marking and applied CUP to make an additional TP adjustment assessee exported manufactured water based paints name Acrylic CED Shd-40 Black Resin Emulsion to its AE in Philippines - HELD THAT - In assessee's case we notice that the TPO has made a direct comparison without making any adjustments to the domestic price charged for the similar product in a non-AE transaction. Applying the ratio laid down in Dow Chemicals International 2020 (10) TMI 1240 - ITAT MUMBAI in our considered view the TPO is not correct in applying CUP which requires strict comparability and given that the geographical location would have an impact on the pricing the bench marking done by the TPO is not tenable. Accordingly we see no infirmity in the decision of CIT(A) and uphold the decision of the CIT(A). This ground of the revenue is dismissed.

Summary

Issues Involved:
1. Expenditure on software to be allowed as revenue expense.
2. Disallowance under Section 14A read with Rule 8D.
3. Addition on account of unutilized MODVAT credit.
4. Depreciation on UPS.
5. Transfer Pricing Adjustment: (a) Notional interest for counter guarantee given to associate concern, (b) Notional interest for delayed payment from AEs.
6. Disallowance of the provision for warranty.
7. Allowability of amalgamation expenses under Section 35DD.
8. Disallowance of commission payable to the Managing Director under Section 40(a)(ia).
9. Disallowance for delayed payment of ESIC under Section 36(1)(va).
10. Disallowance for excess depreciation claim on assets eligible for 100% depreciation.
11. Treaty rate to be applied for dividend distributed instead of rate prescribed in Section 115-O.
12. TP Adjustment towards sale of goods to AE.

Detailed Analysis:

1. Expenditure on Software to be Allowed as Revenue Expense:
The assessee incurred software expenditure of Rs. 35,37,723/-. The AO treated it as capital expenditure and allowed depreciation of Rs. 17,11,188. The CIT(A) upheld this disallowance. The Tribunal, referencing the Delhi High Court's decisions in CIT v. Amway India Enterprises and CIT v. Asahi India Safety Glass Ltd., held that such software expenses are revenue in nature as they upgrade the system without creating a new asset. The Tribunal deleted the disallowance and allowed the expenditure as revenue in nature.

2. Disallowance under Section 14A Read with Rule 8D:
The assessee earned tax-free income and made a suo moto disallowance of Rs. 7,73,439/- under Section 14A. The AO recomputed the disallowance to Rs. 98,83,000/-. The CIT(A) upheld this. The Tribunal noted that the assessee's own funds exceeded the investments and thus, no disallowance under Rule 8D(2)(ii) was warranted. The Tribunal directed the AO to recompute the disallowance under Rule 8D(2)(iii) by considering only those investments that earned tax-free income and excluding growth funds.

3. Addition on Account of Unutilized MODVAT Credit:
The AO added Rs. 3,28,76,516/- to the total income for non-inclusion of CENVAT credit in the closing stock. The CIT(A) upheld this. The Tribunal remitted the issue back to the AO to re-examine in light of the amended Section 145A and the Bombay High Court's decision in CIT v. Diamond Dye Chem Limited, which held that the tax impact is neutral under both inclusive and exclusive methods.

4. Depreciation on UPS:
The AO allowed depreciation on UPS at 15% instead of the claimed 60%. The CIT(A) upheld this. The Tribunal, referencing the Delhi High Court in CIT v. Orient Ceramics & Industries Ltd. and PCIT v. Goa Tourism Development Ltd., allowed depreciation on UPS at 60%, treating it as part of the computer system.

5. Transfer Pricing Adjustment:
(a) Notional Interest for Counter Guarantee Given to AE: The AO made a TP adjustment of Rs. 1,06,23,299/- for counter guarantee. The CIT(A) upheld this. The Tribunal, following its decision in the assessee's own case for AY 2007-08, held that the ALP for the counter guarantee should be 0.5% and directed the AO to recompute accordingly.
(b) Notional Interest for Delayed Payment from AEs: The AO made a TP adjustment of Rs. 11,95,587/- for delayed payments. The CIT(A) upheld this. The Tribunal directed the AO to charge interest at LIBOR + 100 basis points after considering a credit period of 60 days, following the Bombay High Court's decision in Tecnimont.

6. Disallowance of the Provision for Warranty:
The AO disallowed the provision of Rs. 25,00,000/- for warranty as a contingent liability. The CIT(A) upheld this. The Tribunal remitted the issue back to the AO to examine the basis of the provision and actual expenditure incurred, referencing the Supreme Court's decision in CIT v. Rotork Controls India Ltd.

7. Allowability of Amalgamation Expenses under Section 35DD:
The AO disallowed Rs. 4,65,524/- of the claimed amalgamation expenses. The CIT(A) upheld this. The Tribunal noted that Section 35DD allows only 1/5th of the expenses incurred in the year of amalgamation and subsequent four years, and rejected the assessee's claim for a different treatment.

8. Disallowance of Commission Payable to the Managing Director under Section 40(a)(ia):
The AO disallowed Rs. 75,00,000/- for commission payable to the MD for non-deduction of tax under Section 194H. The CIT(A) upheld this. The Tribunal remitted the issue back to the AO for verification, noting that the commission was part of salary and tax was deducted under Section 192 when paid.

9. Disallowance for Delayed Payment of ESIC under Section 36(1)(va):
The AO disallowed Rs. 30,715/- for delayed payment. The CIT(A) upheld this. The Tribunal, following the Supreme Court's decision in Checkmate Services P Ltd vs CIT, dismissed the assessee's claim.

10. Disallowance for Excess Depreciation Claim on Assets Eligible for 100% Depreciation:
This ground was not pressed by the assessee for AY 2010-11 and was dismissed as not pressed.

11. Treaty Rate to be Applied for Dividend Distributed Instead of Rate Prescribed in Section 115-O:
The Tribunal dismissed this additional ground following the Special Bench decision in Total Oil (P) Ltd.

12. TP Adjustment towards Sale of Goods to AE:
The AO made a TP adjustment of Rs. 17,57,731/- using CUP method. The CIT(A) deleted this adjustment. The Tribunal upheld the CIT(A)'s decision, noting that domestic sales cannot be directly compared with export sales due to different FAR, referencing the decision in Dow Chemicals International (P) Ltd. vs DCIT.

Conclusion:
The appeals for AY 2008-09 to 2011-12 were partly allowed, and the revenue's appeal for AY 2011-12 was partly allowed. The Tribunal provided detailed directions for each issue, ensuring compliance with relevant judicial precedents and statutory provisions.