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TMI Blog2015 (12) TMI 302X X X X Extracts X X X X X X X X Extracts X X X X ..... tribution to employees contribution to Provident Fund 1,73,543/- 4 D Disallowance of following payments : 1) Charges towards late payment fee to Chennai Municipal Corporation Rs. 9,650/- 2) Sales tax charged due to technical error and Stating destination of as Indore even though Consignee's name and address were correctly Written on consignment Rs. 1,22,887/- 3) Compliance fee per Weights and Measurement Rules Rs. 32,000/- 4) Amount paid to High Court in pursuance of High Court order on company's stay petition in respect Of appeal to HC Rs. 10,00,000/- 11,65,749/- 5 E Disallowance of R&D expenses 6,48,912/- 6 F Addition on account of unutilized Cenvat credit 1,44,14,614/- 7 G Addition on account of interest waived by the banks as Financial Institutions 10,14,94,383/- 8 H Transfer Pricing Adjustment on International Transaction with the AE 1,23,86,407/- 9 I Claim for carried forward losses and unabsorbed depreciation 10 J Capital gains arising on sale of flats held as an Assets for more than 5 years whether it can be considered as long term capital gain since the block of assets in which said asset falls as on 01.04.2003 was at ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee's contention that no disallowance is called for cannot be accepted. Although he held that Rule 8D is not applicable, however, he proposed to make the disallowance by adopting the following method/formula :- Expenditure incurred by way of interest during the previous year which is not Directly attributable to any particular income or receipt other than 1 above-A The weighted monthly average value of investment, income from which does not Or shall not form part of the total income, as appearing in the balance sheet of the -B The average of total assets as appearing in the balance sheet of the appellant as on the first day and the last day of the previous year - C An amount equal to one-half per cent of the monthly weighted average of the Value of investment, income from which does not or shall not form part of the total income -D The amount of expenditure directly relating to income which does not form part Of the total income -E The computation of disallowance for the purposes of section 14A was proposed as : A*B/C + D + E". 6. The assessee in response, objected to adopting of aforesaid formula and submitted that in the earlier years, CIT(A) have held t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... held to be applicable at all in the AY 2004-05. What could be the reasonable basis for disallowance has to be worked out from the nature of expenses debited and overall accounts of the assessee. So far as disallowance of interest expenditure is concerned, in the case of the assessee it is an admitted fact, permeating from the earlier years that the investments which have yielded exempt income were out of assessee's own funds and no interest bearing funds were diverted for making the investments. Once that is so, then in view of the ratio laid down by the Hon'ble jurisdictional High Court in the case of CIT vs HDFC Bank (supra), we hold that no disallowance on account of interest can be made in this case. As regards direct expenses are concerned, the AO, has given a categorical finding which has not been rebutted before us, that Demat charges of Rs. 8,25,010/- were directly related to investment made in shares. Accordingly, so far as disallowance of Rs. 8,25,010/- on account of demat charges made by the AO, the same stands confirmed. Regarding balance disallowance, we find that 5% of the exempt income appears to be quite reasonable having regard to the nature of expenses an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... de by the AO and confirmed by the learned CIT(Appeals) on account of contributions made by the assessee to various funds by invoking the provisions of section 40A(9). 11. During the year under consideration, the assessee had contributed the amounts aggregating to Rs. 1,70,218/- to the following funds: Sl.No. Description Amount 1. Contribution to welfare fund at: Petrol Engine Unit, Thoraipakkam 84,206 Heavy Engineering Unit, Chennai 3,900 88,106 2. Contribution to family welfare fund at Light Engines Unit- II, Ranipet 40,580 3. Contribution to disability fund at Petrol Engine Unit, Thoraipakkam. 3,113 4. Contribution to benevolent fund at Petrol Engine Unit, Thoraipakkam. 15,326 5. Contribution to death relief fund at Light Engine Unit - II, Ranipet 10,145 Petrol Engine Unit, Thoraipakkam 6,716 16,861 6. Contribution to Superannuation fund 6,232 (not recognized) Petrol Engine Unit,Thoraipakkam Total 1,70,218/- According to the AO, none of the above funds was covered u/s 36(1)(iv) or section 36(1)(v) and there being n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion of law. The details of such payments were under : 1) Charges towards late payment fee to Chennai Municipal Corporation Rs. 9,650/- 2) Sales tax charged due to technical error and Stating destination of as Indore even though Consignee's name and address were correctly Written on consignment Rs. 1,22,887/- 3) Compliance fee per Weights and Measurement Rules Rs. 32,000/- 4) Amount paid to High Court in pursuance of High Court order on company's stay petition in respect Of appeal to HC Rs. 10,00,000/- Rs.11,65,749/- 16. Before the CIT(A), assessee contended that these payments are neither for penalties nor on account of any infringement of law. Relevant submission with regard to such payment made before the CIT(A) were as under : "(i) Charges of Rs. 9,650/- paid for late payment to Corporation of Chennai towards Health License is not punitive one but compensatory and is allowable as business expenditure. (ii) Sales tax charged of Rs. 1,22,887/- due to technical error of stating destination of consignee as Indore even though consignee's name and address correctly written on consignment is not penalty but compensation for tec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... its, which was claimed as deduction allowable u/s 35. Since assessee's core product are engines, therefore, the assessee has to necessarily carry out research and development for developing efficient engines to stay in market and business. The assessee had decided to develop world class multipurpose engines and for this purpose it embarked upon "Avatar Project" and incurred expenses on technical expert advice, project materials and fees for Technical advisory services. The said project was to be completed in AY 2007-08 and sample products was also tested. Accordingly, the expenditure incurred on such a project was claimed as deduction u/s 35(1)(iv) r.w. sub-section (2)(ia). The Ld. CIT(A) and AO held that since the Auditors have mentioned "nil" amount against the deduction allowable u/s 35D, which means that nothing is qualified for deduction u/s 35. 20. Before us, the Ld. Counsel submitted that all the details were furnished regarding expenses incurred for R & D purpose for the "Avatar Project". Once that is so, then even, if the Auditors have not mentioned or qualified the amount, this does not mean that same is not allowable. On the other hand, Ld. DR strongly relied upon t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee has challenged the addition on account of unutilized CENVAT credit of Rs. 1,44,14,614/-. 23. The AO has made addition on account of unutilized CENVAT credit on the ground that the assessee is following exclusive method of valuation of closing stock and it is contrary to the provisions of section 145A. When assessee is following exclusive method of valuation then while making the adjustment u/s 145A it will be mandatory to increase the valuation of closing stock of inputs by the debit balance of CENVAT credit available account appearing on the asset side of the Balance sheet. It should be further increased by SINVAT credit of raw material utilized in payment of duty of finished goods. The assessee's case before the authorities below was that, it has been following the consistent method of account for valuing the inventory. If addition of CENVAT amount is added to the closing stock, then it would distort the real profit and will disturb the consistency in valuation of inventory. Heavy reliance was placed on the decision of Hon'ble Supreme Court in the case of Indo Nippon Chemicals, 261 ITR 275. The Ld. CIT(A), held that if any adjustment is made on account of unutili ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... less to say that if such certificate is not produced by the assessee, then AO can draw adverse inference. Accordingly, ground G is treated as allowed for statistical purposes. 29. Next issue raised vide ground no. H is addition on account of transfer pricing adjustment of Rs. 1,23,86,407/- in respect of import made from AEs, based on internal comparable transaction with another AE. 30. The assessee has undertaken transaction of import purchase of "kits and spares" from its two AEs namely, BOMAG GmbH, Germany (BOMAG) and CIFA Spa, Italy (CIFA) for sums amounting to Rs. 5,56,07,570/- and Rs. 6,80,36,363/- respectively. For the purpose of benchmarking the arms length price on these international transaction, the assessee adopted 'Resale Price Method' (RPM) as the most appropriate method and has taken external comparables by adopting Profit Before Tax (PBT)/net sales. The assessee's margin on such gross import was declared at 11.75% with BOMAG GmbH, 5.25% with CIFA the average of which was arrived at 8.53%. The details of sales, profit and gross margin are as order :- CIFA % BOMAG % Sales 19,05,60,100 100 16,09,81,100 100 Less: Imports (international tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nal comparables selected by the assessee were also dealing in infrastructural activity, therefore, same were taken as external comparables. The assessee detailed submission giving point-wise rebuttal of TPO's finding has been incorporated by the CIT(A) from pages 40 to 44 of the appellate order. However, Ld. CIT(A), confirmed the action of the TPO as per discussion appearing in para 18.2.3 from pages 45 to 48 of the appellate order on the ground that, firstly, the computation of gross profit submitted by the assessee has not found to be correct on facts and also as per the accounting practice; secondly, internal comparability resorted to by the TPO has not been disputed by the assessee and lastly, the assessee has not identified external comparability and therefore, the internal comparability resorted by the TPO is fully justified. 33. Before us, the Ld. Counsel Ms. Aarti Vissanji submitted that, first of all, the internal comparability resorted by TPO and confirmed by CIT(A) is incorrect on facts and also under the transfer pricing regulation given in Rule 10B. The two transactions with the AE cannot be compared, because both are controlled transactions and any comparability ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on with the third parties, if there are no uncontrolled internal transaction. The assessee has selected two comparables initially and later on added one more comparable i.e. Escorts Ltd. The turnover (in crores); segmental result plus percentage margin of the three comparables were as under :- Greaves Cotton Ltd 31.3.2004 Larsen & Toubro Ltd 31.3.2004 Ingersoll Rand 31.3.2004 Escorts 30.06.2004 1 Turnover 69.1 8,252.2 152.4 146.5 2 Segment Result Margin 5.8 613.1 10.1 2.3 3 % of Margin on Turnover 8.3 7.4 6.6 1.6 Since the TPO as well as CIT(A) has not carried out any comparability analysis vis-à-vis these external comparables, therefore, in the interest of justice, we are of the opinion this matter should be restored back to the file of the TPO/AO for examining the three external comparables and complete gross profit margin for benchmarking the assessee's gross profit margin in the import transaction carried out by the assessee with its AE. Accordingly, ground no. H is treated as partly allowed for statistical purposes. 36. In ground no. I, the assessee has challenged carried forward losses and unabsorbed depreciation. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... term capital gain as the flat had been held by the assessee for more than three years. It has been argued that provisions of section 50 deeming the capital gain as short term capital gain is only for the purposes of section 48 and 49 which relate to computation of capital gain. The deeming provisions has, therefore, to be restricted only to computation of capital gain and for the purpose of other provisions of the Act, the capital gain has to be treated as long term capital gain. The view canvassed by the learned AR is supported by the judgment of Hon'ble High Court of Bombay in case of Ace Builders P. Ltd. (Supra) in which it has been held that for the purpose of other provisions of the Act such as section 54EC the capital gain has to be treated as long term capital gain, if the asset is held for more than three years. The same view has been taken by the Mumbai bench of Tribunal in case of Manali Investments Vs. Assistant Commissioner of Income Tax (139 TTJ 411) in which it has been held that the prescriptions of section 50 are to be extended only to the stage of computation of capital gain and, therefore, capital gain resulting from transfer of depreciable asset which was hel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Goodwill as on 30.06.2003 amount to Rs. 14,82,20,274/- is written off and disclosed as on Extraordinary item in the securities Rs. 14,82,20,476/- Rs.52,72,20,474/- Less :The lending institutions had advised the company to go in for a One Time Settlement to settle the Debts of the erstwhile RPRL which Were taken over by the company. BIFR has also directed all parties to enter into an one time Settlement. The Company entered into an One Time Settlement with the principal and Interest Waived for earlier years amounting to Rs. 20,24,65,688/- is written back and disclosed in the accounts. Extraordinary item(Pg 40 of the audited accounts Rs.32,47,54,786/-" The assessee's case had been that, it has not sold PPRL Unit in AY 2004-05 and instead of estimating sale value of Rs. 11 crores and provided estimated loss of Rs. 37,89,80,137/-. Further the assessee has sold RPRL unit in 2005-06 and not in AY 2004-05. The assessee's clarification in this regard has been incorporated by the CIT(A) from pages 57 to 59 of the appellate order. However, the Ld. CIT(A) rejected the assessee's contention after observing and holding as under :- "In the facts ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ility and therefore this money would be available to the company for any other use till the time of actual sale of the unit. Further, the actual sales anyway resulted into profit or loss which took placed in the previous year relevant to the AY 2005-06, has not been detailed or submitted by the appellant. Further with amendment of Finance Act, 2009, w.e.f. 01.04.2001, the amount or amounts set aside as provision for diminution in value of any assets is required to be added to the profit as shown in the Profit & Loss Account to arrive at the book profit as per clause 'i' of Explanation 1 of Section 115JB(2). Accordingly, such provisions created for diminution in the value of investment in RPRL unit including Goodwill is considered as unascertained liability in the shape of the reserve created and accordingly it is held that the clause 'c' / 'I' of Explanation 1 of Sec 115JB(2) are clearly applicable to the facts of the case and the action of the AO in this regard is therefore upheld. Consequently this sub round of appeal raised by the appellant is dismissed". 45. The assessee before us has now filed a computation of paper book containing additional and petit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o section 115JB(2). Thus, ground no. I is treated as allowed. 49. Ground M, the assessee has claimed that deduction u/s 80HHC should be allowed in the working of MAT and the export profit as per the books to be reduced. 50. The AO in the assessment order held that since assessed profit and business profit, assessee is not eligible for deduction u/s 80HHC. The assessee's case was that as per provisions of section 115JB, there is a book profit and therefore, the deduction for the purpose of eligible profit u/s 80HHC is to be worked out based on such book profit deducted as per explanation (iv) to section 115JB(2). However, the Ld. CIT(A) dismissed the assessee's contention on the following ground :- "I have considered the facts of the case, submission of the appellant as against the observation / findings of the AO in his order passed u/s 143(3) of the I.T. Act. In respect to the submission of the appellant, it is stated that there is no doubt that the deduction of eligible profit u/s 80HHC is to be given from the book profit computed in accordance with the Sec. 115JB of the I.T. Act, 1961. However neither in the Circular No. 680 dated 21.02.1994 of the CBDT not in the de ..... X X X X Extracts X X X X X X X X Extracts X X X X
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