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TMI Blog2017 (8) TMI 841X X X X Extracts X X X X X X X X Extracts X X X X ..... vious year was for expansion of existing business or stating a new business is not clear from the records. Though the ld Assessing Officer has mentioned that the expenditure was for setting up units at Chennai and Limda (Vadodara), there is no finding whether it was for expansion of existing line of business or starting a new business. No doubt, as held by the Tribunal, if it was for expansion of existing business the expenditure had to be considered as a business outgo. This aspect, in our opinion, requires a careful verification. We, therefore, set aside the order of the authorities below on this issue and remit it back to the Assessing Officer for consideration afresh Addition u/s 14A - Held that:- If assessee had suo-motu disallowed ₹ 1,08,996/- u/s 14A of the Act in its own computation then the addition of ₹ 98,103/- made by Assessing Officer will be subsumed in it. However, whether such suo-motu disallowance was done by assessee in the original return or revised return has not been looked into by the lower authorities. Therefore, we are of the opinion that this issue also requires fresh consideration by Assessing Officer Disallowance of weighted deduction u/ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8,459/- out of this has been booked as income in the subsequent year and taxes paid. Tribunal in assessee’s own case for assessment year 2010-11 and 2011-12 had deleted the addition.Accordingly, we delete the addition to the extent of ₹ 32,68,459/- out of the total addition of ₹ 50,26,767/- . Ground no.8 is treated as partly allowed. Disallowance of provision for commission on which TDS was not deducted at source - Held that:- Similar provision was disallowed by the Assessing Officer in preceding assessment year also and assessee’s appeal before this Tribunal on this issue was unsuccessful. Facts and circumstances for the impugned assessment year also being similar; we are of the opinion that provision for commission on which TDS was not deducted was rightly disallowed by the lower authorities. We do not find any error in the orders of the lower authorities Disallowance of claim u/s 80IA - Held that:- For preceding assessment tears 2010-11 and 2011-12 also assessee had made similar claims on the same windmills, through a letter filed during the course of the assessment proceedings, which was not considered by the lower authorities. In the current year as same occu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to Minimum Alternative Tax (MAT) and these will be dealt with separately. Other Grounds relating to corporate tax are taken first for adjudication. 3 Vide its ground no.2, assessee is aggrieved that the Assessing Officer while computing its income had started with the income of ₹ 3,96,40,290/- declared by it in the original return ignoring the income of ₹ 1,67,86,870/- declared by it in a revised return. Ld AR submitted that assessee which was engaged in the business of manufacture and sale of automotive tyres, had filed two returns of income for the impugned assessment year on the same day. As per the ld AR, assessee had filed a return declaring total income of ₹ 3,96,40,290/- and another return declaring total income of ₹ 1,67,86,870/- on 26th Nov 2012. Contention of the ld AR that both these returns were acknowledged by Assessing Officer in the assessment order. However,, according to him, while computing the income, ld AO had started with income shown in the original return. As per the ld AR, assessee did not raise a ground in this regard before DRP; but still the issue being clear from record and needing no specific debate has to be considered by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e capitalized was only interest paid on borrowals taken for acquiring new assets. Further, according to the ld AR, this Tribunal in assessee s own case for the AYs 2010-11 and 2011-12 ( ITA Nos. 223/Coch/2015 and 189/Coch/2016 dated 10.1.2017) had considered the very same issue and decided it in favour of the assessee. Per contra, ld DR supported the orders of the income tax authorities. 7 We have heard the rival submissions and perused the material on record. We find that expenses aggregating to ₹ 26,97,79,538/- was incurred by the assessee in the previous year relevant to assessment year 2010-11, and claimed as pre-operative revenue expenditure. Assessee had argued that these were incurred for expansion of its existing business of manufacture of tyres and allowable for tax purposes. In the said year also, it was disallowed by the ld AR as pre-operative in nature. Breakup of the expenses for the previous year relevant to Asst Year 2010-11 read as under: Particulars Amount (Rs/Million) Raw material consumed 33.86 Salaries, wages and bonus 114.98 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has averred that the business organization, the administration and the funds of both the existing as well as the new plant in Chennai are the same and controlled by common management of the appellant company. It was further submitted that common books of accounts are maintained and also the existing as well as the new unit is engaged in the manufacturing of tyres. The said factual scenario has not been disputed by the A.O. or the DRP. This clearly shows that the expenditure incurred was for expansion of an already existing business and not for setting up a new business. Section 37 provides for deduction of expenditure incurred wholly and exclusively for the purpose of business of an assessee provided that the expenditure should not be in the nature of a capital expenditure. In the present case, the expenses by its very nature are revenue expenses like salary, traveling, conveyance, provident fund, postage etc. 10. In the case of CIT Vs. Sakthi Sugars Ltd. (339 ITR 400), the Hon'ble Madras High Court held as under:- 34. From the above decisions the test for identifying an expenditure as to whether it is a revenue expenditure or capital expenditure can be stated as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t is for the expansion of the business, namely, to start new unit which is same as earlier business and there is unity of control and a common fund, then such an expense is to be treated as business expenditure 12. In view of the aforesaid position of law the aforesaid expenses are treated as revenue in nature and deduction is permissible under section 37 of the Act. Ground No. 3 and 3.1 are allowed. Though it has been allowed by this Tribunal in the preceding year, whether the expenditure incurred in relevant previous year was for expansion of existing business or stating a new business is not clear from the records. Though the ld Assessing Officer has mentioned that the expenditure was for setting up units at Chennai and Limda (Vadodara), there is no finding whether it was for expansion of existing line of business or starting a new business. No doubt, as held by the Tribunal, if it was for expansion of existing business the expenditure had to be considered as a business outgo. This aspect, in our opinion, requires a careful verification. We, therefore, set aside the order of the authorities below on this issue and remit it back to the Assessing Officer for consider ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... In any case, according to him, Form No. 3CL dated 28.10.2016 was submitted by the assessee through a rectification application dated 7.5.2017. Reliance was placed on the judgment of Hon ble Gujarat High Court in the case of CIT vs Cadila Healthcare Ltd (214 taxman 672). The claim, as per ld AR, included R D expense of ₹ 3.27 crores for clinical trial outside India, ₹ 4.92 crores being salary reimbursement of the employees of M/s Apollo Vredestein BV Netherlands Apollo Germany and R D expenses of ₹ 1.89 crores for testing and certification before clinical trials. According to him, similar expenses were incurred by assessee for R D in assessment years 2010-11 2011-12 were initially denied by the Assessing Officer, but on assessee s objection ld DRP allowed such claims in these years. Further, as per ld AR, revenue had carried this issue before the Tribunal for these years and Tribunal had held that section 35(2AB) could not be given a restrictive interpretation and the term in-house was to be given wider interpretation. 15 Per contra, ld DR submitted that for the impugned assessment year, assessee had not filed Form 3CL which was mandatory in nature along ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ubmissions and perused the records and the judgments relied upon. Section 35(2AB) provides for weighted deduction of expenditure on scientific research by a company in the business of manufacture or production of any article or thing provided that the expenditure incurred is on in-house research and development facility of the assessee, which is approved by the prescribed authority. The only question that is to be determined is whether the expenditure incurred was on inhouse R D facility. The approved R D facility of the appellant company is in Baroda. The tyres produced as a result of R D activities in the said facility are tested in Germany. The said fact is not disputed by the AO that the tyres which are tested in Germany upon which the expenditure'is incurred by the appellant company relate to the tyres produced by the R D facility of the appellant company in India. The intention of legislature is not to oust such expenditures made by an assessee and the same is evident from the explanation to section 35(2AB) which provides that expenditure on scientific research in relation to drugs shall include expenditure incurred on clinical drug trial. In the case of CIT Vs. Ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e liberally construed in view of the decision of Hon'ble Supreme Court in Bajaj Tempo Ltd. Vs. CIT, 62 Taxman 480. The AO and the DRP have misdirected themselves in not appreciating the true intent and purport of section 35(2AB) of the Act. Having not disputed the fact that these tests are part of R D activities conducted by the appellant in Baroda, the disallowance in the present facts is not permissible. We therefore, hold that the appellant is entitled for deduction under section 35(2AB) of the Act. Ground No. 7 and 7.1 are allowed. By virtue of the above order of the Tribunal, the claim for weighted deduction for clinical trial expenditure is allowance. However, we are of the opinion that the amount which is eligible for such weighted deduction have to be computed considering Form 3CLand if the figures in Form 3CL is at variance with the claim the Assessing Officer has to carefully check whether each of the item included in such claim is coming within the purview of section 35(2AB) of the Act. Issue is remitted back to the Assessing Officer for this purpose. 17 Second part of the R D expenses of ₹ 4,92,42,256/- were incurred by assessee by way of reimburseme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d to Sh. Peter Becker was entitled for deduction under section 35(2AB) of the Act. 53. The Ld. DR has relied upon the draft assessment order to canvas his submissions that the deletion of disallowance was not in accordance with law. The Ld. AR on the other hand has reiterated the submissions made by the assessee before the DRP. We have heard the rival submissions. We are not in agreement with the view of the department. Admittedly, in the present case the nature of the expenditure for R D is not disputed by the department. The Department has further not disputed the fact that the said employee of the assessee company is overall in-charge of the R D activities at Baroda. The mere fact that the said employee was paid by Apollo Tyres Germany and thereafter, reimbursed by the assessee company would not ipso facto lead to a conclusion that the expense on R D is made outside India. The deduction is therefore within the parameters of Section 35(2AB) of the Act. In view thereof, ground no. 3 raised by the department is dismissed. Assessing Officer while making the disallowance of the claim u/s 35(2AB) in the impugned assessment year had specifically noted that the facts w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... penditure claimed by the assessee is allowable. Thus there was no justification in harping upon the figure contained in Form No.3CL as is done by the Assessing Officer. The provisions of the Act it does not contain any specific conditions for the allowance of expenditure to the effect that it will be restricted that contained in Form No.3CL. Needless to point out that such allowable expenditure etc. is reported by the DSIR to DG (Income-tax Exemption), Kolkata without giving an opportunity of being heard to the assessee wherever he quantifies the expenditure which is less than that claimed by the assessee. We further find that the assessee has included a sum of ₹ 51.26 lakhs as eligible expenditure being Revenue expenditure relating to building and another sum of ₹ 133.92 lakhs being revenue expenditure other than building, which was considered as revenue by the assessing officer himself. These items clearly are within the purview of allowable u/s 35(2AB) of the Act as weighted deduction. The security expenses are also directly related to in-house research as proper security is required to avoid leakage and only in-house staff will have assessed to building. Accordingly ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -12 in ITA No. 223/Coch/2015 and 189/Coch/2015 and it was decided in favour of the assessee. Per contra, ld DR supported the order of the authorities below. 22 We have heard the rival submission and perused the material on record. Addition in question is on account of difference in reconciliation of tax deducted at source as reflected in Form 26AS. As per ld AR, a sum of ₹ 32,68,459/- out of this has been booked as income in the subsequent year and taxes paid. Tribunal in assessee s own case for assessment year 2010-11 and 2011-12 had deleted the addition. 32. Ground No. 11 relates to the addition of ₹ 27,96,245/- to the total income of the appellant on the basis of amount reflected in Form 26AS. It was submitted during the course of assessment proceedings that an amount of ₹ 19,75,315/- out of the aforesaid amount of ₹ 27,96,245/- has been offered to tax in the subsequent A.Y. 2011-12. Rejecting the said submission of the appellant, the A.O and the DRP were of the view that the income is to be taxed in A.Y. 2010-11 only. 33. We have heard the rival submissions and perused the record of the case. Admittedly, the amount of ₹ 19,75,315/- is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e submissions and the audit report were not considered by Assessing Officer. In other words, the Assessing Officer did not consider the fresh claims u/s 80IA of the Act made through the letter mentioned above. 27 Before the DRP the assessee did raise a specific ground on this. However, the DRP ruled that its powers were limited to resolving issues arising from additions made on the returned income/loss and it could not consider any fresh claims. 28 Now before us the ld AR assailing the orders of the lower authorities. Submitted that the claim of deduction ought not have been disallowed. As per AR, DRP had given an erroneous ruling that it could deal only with variances in income or loss returned and proposed in the draft assessment order. As per ld AR, DRP wrongly interpreted the judgment of the Hon ble Apex Court in the case of Goetze India Ltd vs CIT reported in 284 ITR 323. According to him, this judgment of the Hon ble Apex Court had no application in the facts and circumstances of the case. Further, as per the ld AR, this Tribunal in assessee s own case for assessment year 2010-11 and 2011-12 had held that a fresh/additional claim u/s 80IA could be preferred by the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd category viz. where the ground became available on account of change of circumstances or law. 46. In the aforesaid judgment it is clearly expressed that an assessee apart from raising an additional ground can raise an additional claim before the appellate forum. In view thereof, the AO is directed to examine the matter on merits after considering the evidence produced by the appellant with regard to the claim of deduction under section 80IA. The additional ground is allowed for statistical purposes. These appeals of the assessee in ITA No. 223/Coch/2015 is partly allowed for statistical purposes. Following the above decision, for the impugned assessment year also we direct the Assessing Officer to examine the claim afresh in accordance with law. Ground no.10 is allowed for statistical purpose. 31 While dealing with the claim for deduction u/s 801A, it will be appropriate to deal with one other issue raised by the assessee which is on denial of its claim of deduction of ₹ 4,87,02,504/- u/s 80IA in respect of Gas Turbine Power Generation Units at Limda Plant, which was preferred in the return of income itself. Though the claim was allowed by DRP while passing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d v ACIT (ITA No. 2873/Ahd/10) -Manugraph India Ltd v DCIT (ITA No.2631/Mum/2015) 34 As per ld AR, assessee had given corporate guarantee to its Associated Enterprises (AEs) for a five year term loan obtained from Standard Chartered Bank. According to him, there was no benefit for the assessee. Viz-a-viz adjustment of ₹ 25 lakhs on IT enabled services , it was submitted that facts were similar to an adjustment done by the TPO for the preceding Assessment Year. As per ld AR, this Tribunal on assessee s appeal for those years had remanded the issue back to the Assessing Officer for selecting comparables which were having functional similarity to the assessee and to exclude dis- similar comparables. Per contra, ld DR submitted that TPO had correctly applied the TNM method for determining the arms length price of IT enabled services rendered to its AE. Viz-a-vs corporate guarantee as per ld DR it was nothing but an international transaction and susceptible to TP adjustment. 35 We have heard the rival submissions and perused the material on record. It is an admitted position that some of the comparables selected by assessee in its study were excluded by TPO whereas c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ansactions with AE. The TPO substituted his own comparables and determined the adjustment at ₹ 12,50,380/-. The DRP rejected the objections raised by the appellant in the rectification order. 79. The Ld. AR submits that the comparable companies rejected by the TPO are without any reason and though the companies are functionally comparable, the comparables have been excluded. It is seen from the chart prepared by the AR and the functional profile produced thereof of the comparable companies, the companies which are functionally similar to that of the appellant have been excluded. For example in the case of Mindtree Ltd., the said company has been excluded only because it has under gone merger. Similarly in the case of R Systems International Ltd. and Helios Metheson Information Technology Ltd., though the companies are functionally comparable, the same have been excluded only for the reason that they follow different accounting year ending in December. The exclusion made on this basis is not permissible and is not accordance with law. Similarly, while choosing his own comparables, the TPO has ticked up companies having functions of high end IT services, IT consulting, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... submitted that there was no charge of these amounts in the P L account. Further, as per ld AR, proposed dividend was not a part of P L account but offered only in P L appropriation account. According to him, unless there was a debit in the P L account there could be no addition while computing MAT. Ld AR submitted that similar items were considered for addition while computing MAT for preceding assessment year also. As per ld AR in the said year, on assessee s objection, DRP had given a finding that no such addition could be made. Ld AR submitted that for the assessment year 2011-12, the department had not filed any appeal against such directions of DRP. Further, as per the ld AR, similar addition proposed in subsequent year 2013-14 were dropped in the final assessment. Thus, according to him, by applying principles of consistency, no such addition could have been made in the impugned year as well. Ld DR, on the other hand supported the orders of the authorities below. 39 We have heard the rival submissions and perused the material on record. As for additional depreciation of ₹ 38,65,25,852/-, DRP had deleted such addition and Assessing Officer had passed the final assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ers of the lower authorities with regard to the treatment of above items while computing MAT tax and remit it back to the ld Assessing Officer for consideration afresh in accordance with law. 42 Submitting his argument on the last of the addition, made for MAT computation which is a provision of ₹ 99,08,80,000/- for sales related objections, ld AR stated that it was a crystallized and scientifically computed provision. Submissions of the ld AR was that the provision of ₹ 99,08,80,000/- was an ascertained contractual obligation. Ld AR was also brought to our attention to pages 68 92 of the annual report. According to him, provision consisted of annual special incentive, dealer programme expenses, business development incentive and warranty claims provision. Ld AR also pointed out that addition of similar provision made in assessment year 2011-12 was deleted by DRP and department never appealed against it. As per ld AR, even in the subsequent assessment year 2013-14, no such additions were proposed or done by the Assessing Officer while computing MAT. Reliance was placed on the judgments of the Hon ble Apex Court in the case of Bharat Earth Movers vs CIT (245 ITR 428 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unt for the relevant year, otherwise the matching concept fails. In such a case the second option is also inappropriate. Under the circumstances, the third option is the most appropriate because it fulfils accrual concept as well as the matching concept. For determining an appropriate historical trend, it is important that the company has a proper accounting system for capturing the relationship between the nature of the sales, the warranty provisions made and the actual expenses incurred against it subsequently. Thus, the decision on the warranty provision should be based on past experience of the company. A detailed assessment of the warranty provisioning policy is required particularly if the experience suggests that warranty provisions are generally reversed if they remained unutilised at the end of the period prescribed in the warranty. Therefore, the company should scrutinise the historical trend of warranty provisions made and the actual expenses incurred against it. On this basis a sensible estimate should be made. The warranty provision for the products should be based on the estimate at the year end of future warranty expenses. Such estimates need reassessment every year. ..... 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