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TMI Blog2018 (8) TMI 1851X X X X Extracts X X X X X X X X Extracts X X X X ..... es - HELD THAT:- The assessee claims that it kept highly technical and supervisory staff to oversee these activities including reviewing of assembly operation sheets supplied by Lockheed Martin Aerostructure Corporation, USA but in our considered view these are normal requirements in connection with setting up of manufacturing / assembly unit at Hyderabad for manufacturing/assembly of center wing box and empennages for C130/C130J aircraft , which is highly technical and complex activity requiring highly specialised technical staff. The activities of assembly and manufacturing of center wing box and empennages for C130/C130J aircraft being highly complex , technologically sophisticated activity involving guarded technology need highly specialised , experienced and technical personnels , and the assessee cannot afford to appoint necessary staff only after the unit becomes operational as by the time unit goes into production, the assessee ought to have all specialised, trained, experience and technical staff with it ready and well versed/trained to handle actual manufacturing/assembly of center wing boxes and empennages for C130/C130J aircrafts. The appointing of technical and spec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -hoc allowance u/s 14A. 1.(b) Whether on the facts and in the circumstances of the case and in law, the Id.CIT(A) erred in making ad-hoc estimation of disallowance u/s 14A and directing the AO to disallow 20% of the exempt income and thereby failing to appreciate that once the principle of the expenditure incurred for earning tax free income is accepted, then the disallowance u/s 14A is necessarily required to be computed by the methodology provided by Rule 8D. 2.(a) Whether on the facts and in the circumstances of the case and in law, the ld.CIT(A) erred in allowing deduction of an amount of ₹ 2,10,11,032/- which has been disallowed by the AO as pre-operative expenditure. 2.(b) Whether on the facts and in the circumstances of the case and in law, the ld.CIT(A) erred in holding that the business of the assessee has commenced during the previous year and overruling the findings of the AO that the activities of the assessee were at pre-operative stage. 2.(c) Whether on the facts and in the circumstances of the case and in law, the ld.CIT(A) erred in holding that the business of the assessee has commenced during the previous year ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... submitted before the AO during assessment proceedings conducted u/s 143(3) r.w.s. 143(2) of the 1961 Act that expenses were incurred wholly and exclusively for the purposes of business of the assessee. It was also submitted by the assessee before the AO that total expenses of ₹ 3,38,41,890/- were incurred while expenses amounting of ₹ 1,28,62,629/- were voluntarily disallowed in the computation of income filed with Revenue while rest of the expenses to the tune of ₹ 2,10,11,032/- were revenue expenses incurred wholly and exclusively for the purposes of business of the assessee which ought to be allowed as deduction while computing income within the provisions of the 1961 Act. It was submitted that these expenses have direct nexus with the business of the assessee company and these expenses have not been incurred in relation to holding of investments in shares, the income whereof being exempt from the tax. The AO rejected the contentions of the assessee and observed that that assessee has not attributed any expenses which have been incurred to earn exempt income and some expenses must necessarily had to be incurred to earn an exempt income , which needed to be disa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... part of the total income, as appearing in the balance sheet of the assessee on the first day and the last day of the previous year C= the average of total assets as appearing in the balance sheet of the assessee, on the first day and the last day of the previous year -Rule 8D(2}(ii) 3. i. Average value of investments- Opening balance of investments + Closing balance of investments / 2 NIL + 1593687282 = ₹ 796843641 2 - 8D (2)(iii) ii. Disallowance An amount equal to one half per cent of the average of the 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 assessee on the first day and the last day of the previous year. iii. 0.5% of ₹ 796843641/- 39,84,218 4. Total disallowance 39,84,218 5. Aggrieved by the assessmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wards the administrative expenses. Therefore, disallowance of ₹ 22,37,456/- is disallowed towards administrative expenses instead of ₹ 39,84,218/-. Hence, Ground No. 1 is partly allowed. 6. Aggrieved by the part relief granted by learned CIT(A), the Revenue is in appeal before the tribunal . The ld. Counsel for the assessee as well as Ld. DR have both submitted that the matter is covered by the decision of the tribunal in assessee‟s own case in ITA no. 2144/Mum/2016 for AY 2011-12 vide orders dated 12-01-2018, wherein the tribunal restored the matter to the file of AO with specific directions which are reproduced as hereunder:- 4. We have heard counsels for both the parties at length and we have also perused the material placed on record as well as the orders passed by revenue authorities. As per the facts of the present case, the assessee has received dividend income of ₹ 11,87,282/- which has been claimed exempt u/s 10(34) of the I.T. Act. As the assessee had not made any disallowance against the dividend income and the AO while invoking rule 8D(2)(iii) of I.T. Rules had made disallowance of ₹ 39,84,218/-. Ld. AR s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e prescribed, f the Assessing Officer, having regard to the accounts of the assessee, is not satisfied with the correctness of the claim of the assessee in respect of such in relation to income which does not form part of the total income under this Act. Further the Mumbai Tribunal has also in the case of M/s Auchtel Products Ltd. (2012) 52 SOT 39 has held that no disallowance can be made by the AO without recording a satisfaction that the explanation given by the assessee is not proper. The operative para is reproduced below. 15. A bare perusal of the above provisions indicates that the AO shall determine the amount disallowable as per Rule 8D, if he, is not satisfied with the correctness of the claim of the assessee in respect of such expenditure in relation to exempt income. Even if the assessee claims that no expenditure was incurred in respect of exempt income, the AO is supposed to follow the mandate of Rule 8D if he is not satisfied with the correctness of the assessee's claim. To put it simply, the further disallowance u/s.14A is called for when the AO is not satisfied with the assessee's claim of having incurred no expenditure or some amou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... since the AO has not recorded its satisfaction by giving specific reasons as to the correctness of the claim of the assessee, therefore, we set aside the order of Ld. CIT(A) and remit the matter back to the file of AO with a direction to verify regarding the claim of assessee that no expenses were incurred for earning the exempt income, having regard to the accounts of the assessee. The AO shall also verify any other claim if so raised by the assessee, and thereafter pass afresh order of assessment. It is needless here to mention that before passing the order of assessment, the AO shall provide sufficient opportunity of hearing to the assessee. Before parting, we may make it clear that our decision to restore the matter back to the file of AO shall in no way be construed as having any reflection or expression on the merits of the dispute, which shall be adjudicated by the AO independently in accordance with law. Resultantly, this ground is allowed for statistical purposes. Thus , keeping in view aforesaid decision for AY 2011-12 itself, the end of justice will be met in the instant appeal if the issue concerning disallowance of expenditure u/s 14A of the 1961 Act is se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed in the assembly process and also acts as tracker for various functions involved in the process i.e. provides knowledge/technique of production. (c) Revenue expenses charged off to the Profit and Loss Account have no connection with the setting-up of the Project but had direct nexus/ connection with execution of PO's for tooling and production of finished goods, being both revenue generating activities. (d) It had started the activity of planning the production of center wing box and empennage (finished products) by making the employees go through the steps involved in assembling the finished products (i.e. review of Assembly Operation Sheets), being an essential activity for carrying on the business of the assessee company. (e) The expenditure which has been incurred during the year is for the activities as mentioned in para No. (b)(ii) to (v) which related to the carrying on or conduct of the business as the same related to profit earning process and not for acquisition of any asset. (f) The assessee company had commenced the work for production of finished products. (g) Hence, the above factors clearly establish that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (d) Legal and professional charges 5757293 Fees paid for management consultancy, legal consultancy, chartered accountant services, company secretary services etc. (e) Travelling and conveyance expenses 4405805 Travelling expenses, boarding lodging expenses of employees on official tours. (f) Communication expenses 124879 Telephone, mobile and internet charges (g) Audit fees 75000 Statutory audit fee (h) Business promotion expenses 43644 Expenses incurred towards business promotion etc. (i) Printing and stationery 221104 Printing and stationery expenses incurred. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Crore as pre-operative expenses and disallowed in the computation of income; as expenses incurred towards share application expenses etc. The remaining ₹ 2.10 Crore are the expenses of revenue nature which is allowable as business expenses. The appellant submitted that the company has acquired purchase order on 18.02.2011 and TAMAL has acquired orders on 28.02.2011. The company has started the digitized process on 05.03.2011 and raised invoice on 05.05.2011. The appellant has submitted that for commencement of business the company had appointed the various technical and non-technical staff, acquired software and created infrastructure for the operation of business and it is incorrect to say that the business was not commenced during the previous year relevant to the AY 2011-12. The appellant has already capitalized the pre-operative expenses and there is nothing left which is to be capitalized further whatever expenses debited in the P L A/c are very much revenue in nature and the accounts are duly audited. 7.2 I have carefully considered the rival submissions and the facts of the case. The details submitted revealed that the company has started its business during ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tivity. Our attention was drawn to Provisions of Section 3 of Act and it was submitted that all the expenses which are incurred post-setting up of the business are to be allowed as business expenses which is mandate of Section 3 of the 1961 Act and commencement of business has no relevance . Our attention was also drawn to page no. 83 to 85 of the paper book wherein detailed nature of activities carried out by the assessee during the year ended 31st March, 2011 were detailed. The said note on activities were submitted by the assessee vide written submissions dated 22-12-2015 filed by the assessee before learned CIT(A) . Our attention was also drawn to page no 70 of the paper book wherein purchase order dated 28.02.2011 raised in favour of M/s. Tal Manufacturing Solutions Ltd. by the assessee namely M/s Tata Aerostructue Ltd. is placed . The learned counsel for the assessee submitted that the assessee company is in fact earlier known as Tata Aerostructures Ltd.‟ and consequent to name change , the assessee is now known as Tata Lockheed Martin Aerostructures Limited‟ . It was submitted by learned counsel for the assessee that assessee received order dated 18-2-2011 from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wherein both of us were the members of the Division Bench who passed the aforesaid consolidated order dated 08.02.2017. Reliance was also placed by learned counsel for the assessee onto the decision of ITAT, Mumbai in the case of ACIT v. Reliance Defence Offshore Engineering Co. Ltd. in ITA no. 4692/Mum2014 and ITA no. 372/Mum/2015 for AY 2008-09 2009-10, vide consolidated order dated 31.08.2017. It was submitted by learned counsel for the assessee that tools were acquired by the assessee from Lockheed Martin Aeronautics , USA which was manufactured indigenously by said Lockheed Martin Aeronautics, USA wherein the order in turn for indigenous manufacturing of tools was placed by said Lockheed Martin Aeronautics , USA by sub-contracting in favour of the assessee, while assessee in turn placed sub-sub contracts with TCS, Tata Technologies Limited etc to get the manufacturing of tools done indigenously . The main contract was firstly awarded by assessee in favour of Lockheed Martin Aerostructure Corporation, USA and thereafter sub-contract and sub-sub contract followed. It was submitted that even where the activities are preparatory in nature to the attainment of main activities, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... C130J aircraft structural articles i.e. empennages and center wing box (finished products). The assessee is a J.V company formed by Tata Advanced Systems Ltd. and Lockheed Martin Aerostructure Corporation(LMAC), wherein Tata‟s hold 74% and Lockheed Martin Aerostructure Corporation, USA holds 26% of the equity of the assessee company. The assessee company is setting up manufacturing unit at Adibatla Village, Hyderabad to assemble, manufacture and supply to Lockheed Martin Aerostructure Corporation,USA or its affiliates of C-130/C130J aircraft structural articles consisting of empennages and center wing boxes. The aforesaid project for setting up manufacturing/assembly unit at Hyderabad is under construction/implementation up to the end of the previous year relevant to the impugned assessment year.So far so good. The assessee has claimed as per its JV agreement that the JV partners and the assessee company has executed definitive agreements‟ , which includes supply agreement for supply of finished goods consisting of center wing boxes and empennages for C130/C130J aircrafts to Lockheed Martin Aerostructure Corporation, USA and/or its affiliates. The copies of supply agre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (a) Rent 1552580 Rent paid in respect of office in bengumpet. Hyderabad. (b) Electricity charges 185770 Electricity charges incurred for begumpet, Hyderabad (c) Rates and taxes 104485 Taxes paid to government and local authorities, ROC filing fee (d) Legal and professional charges 5757293 Fees paid for management consultancy, legal consultancy, chartered accountant services, company secretary services etc. (e) Travelling and conveyance expenses 4405805 Travelling expenses, boarding lodging expenses of employees on official tours. (f) Communication expenses 124879 Telephone, mobile and internet ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... poration USA issued Purchase Orders for Center Wing Box and Empennage Tooling on 18th February 2011 for US$ 25,93,697/- and US $ 1,27,68,133/- respectively(pb/page 5) in favour of the assessee company . The copies of the said PO‟s were enclosed and are as part of paper book(pb/page 12 and 40). The assessee company instead of manufacturing the said tools and jigs itself initiated the tool/jigs manufactured/assembled by outsourcing the same to indigenous manufacturers and suppliers viz. TAL Manufacturing Solutions Limited, Tata Technologies Limited and Tata Consultancy Services Limited. The said sub-sub-contracts awarded by the assessee company to these three vendor companies are part of paper book filed by the assessee with the tribunal(pb /page 70-74). Lockheed Martin Aerostructure Corporation,USA shared necessary engineering drawings , drawings and specifications along with source book for manufacturing/assembling of tools/jigs, based on which assembly operation sheets are prepared. These assembly operation sheets are categorized in sub assembly, major assembly and final integration. These assembly operation sheets are required in assembly processes for Center Wing Box and E ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r Page Nos. 34 to 91 of Paper Book No.I]. (b) Accordingly, the appellant initiated the process of tool building by outsourcing the same to various-indigenous manufacturers and suppliers, which is explained as under:- (i) Placed orders with TAL Manufacturing Solutions Limited for manufacture, supply, installation and commissioning of tools required for both Center Wing Box and Empennage Structures on 28th February 2011 for 477.32 lakhs. Accordingly, the appellant paid an advance of ₹ 84.85 lakhs to TAL Manufacturing Solutions Limited on 7th March 2011 as per the PO terms to start the tool manufacturing activity [Refer Page No. 92 of Paper Book \ No.1]. (ii) Tool design and digitization of drawings is a part of tooling activity for both Center Wing Box and Empennage Structures and the appellant has placed orders for this activity on Tata Technologies Limited and Tata Consultancy Services Limited on 5th March, 2011[Refer Page Nos. 93 to 96 of Paper Book No.I]. Note: On 4lh May, 2011, the appellant has raised its first invoice against Center Wing Box Tooling for US$ 18,15,587.90. By end of March 2013, the appellant has completed tooling ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction of finished products by making the employees go' through the steps involved in assembling the finished products (i.e. review of Assembly Operation Sheets), being an essential activity for carrying on the business of the appellant. (d) The expenditure which was incurred during the year is for the activities as mentioned in Para No. (b)* (ii) to (v) which related to the carrying on or conduct of the business as the same related to profit earning process and not for acquisition of any asset. (e) The appellant had commenced the work for production of finished products. (f) Hence, the above factors clearly established that the appellant had set-up and commenced its business during the year. 6. Process flow chart is enclosed to explain the flow of activities carried out during the year ended 31st March, 2011 So , in nutshell what transpires in short is that the assessee company is a JV company formed by Tata Advanced Systems Limited and Lockheed Martin Aerostructure Corporation, USA, wherein Tata‟s hold 74% of equity capital while 26% is held by Lockheed Martin Aerostructure Corporation, USA. The JV agreement provid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... up its assembly/manufacturing unit for center wing box and empennages for C130/C130J aircraft was also,inter- alia, required to supply tools and jigs. These tools and jigs being supplied at the time of or before setting up of the project are part of capital assets which needs to be capitalised. The said Lockheed Martin Aerostructure Corporation, USA who was , inter-alia, under an obligation to supply engineering designs, drawings, tools , jigs etc. but Lockheed Martin Aerostructure Corporation , USA instead of supplying some of the tools and jigs itself instead awarded the work to manufacture/assemble these tools and jigs to the assessee indigenously by way of sub-contract for which necessary designs and drawings were supplied by Lockheed Martin Aerostructure Corporation, USA. The ultimate responsibility for execution of the agreement for setting up manufacturing/assembly unit at Hyderabad rested with Lockheed Martin Aerostructure Corporation, USA under the main contract awarded by the assessee to Lockheed Martin Aerostructure Corporation, USA but certain portion of the contract within the main contract was carved out and assigned by Lockheed Martin Aerostructure Corporation, USA t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct from Lockheed Martin Aerostructure Corporation, USA are directed towards setting up of the main assembly/manufacturing unit for manufacture/assembly of center wing box and empennages for C130/C130J aircraft at Hyderabad for which main contract was awarded by the assessee in favour of the same Lockheed Martin Aerostructure Corporation, USA. Under these circumstances, can it be said that the assessee company who participated in the setting up of its own manufacturing/assembly unit at Hyderabad under a sub-contract from Lockheed Martin Aerostructure Corporation, USA for which main contract was awarded by the assessee itself in favour of the same Lockheed Martin Aerostructure Corporation , USA wherein the assessee by getting some of the tools/jigs manufactured/ assembled by further sub-sub-contracting to TCS, Tata Technologies Limited and TAL Manufacturing Supplies Limited ever intended to enter into an business of manufacturing /assembly or supplies of tools and jigs rather its activities and efforts were all directed towards the business of setting up of manufacturing /assembly unit being set up at Hyderabad for manufacturing/assembly of center wing box and empennages for C130/C13 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eration sheets for manufacturing/assembly of center wing boxes and empennages for C130/C130J aircraft for which order was already received by the assessee from Lockheed Martin Aerostructure Corporation, USA, as all these are pre-operative expenses which needed to be capitalised as part of the cost of the project because there was no possibility of commencing production/manufacturing/assembly unless the unit is ready to commence production which in the instant case even by the year end unit was neither installed nor trial runs commenced. We have carefully gone through the case laws cited by learned counsel for the assessee and we have observed that those case laws were decided on their own factual matrix which has no applicability so far as peculiar factual matrix as is applicable to the assessee in the instant case . However, for the sake of completeness , we will now refer to all the case laws relied upon by the assessee : a) The decision of Hon‟ble Bombay High Court in the case of Western India Vegetable Products Limited v. CIT reported in (1954) 26 ITR 151(Bom.) . In this decision the Hon‟ble High Court of the Bombay held that the previous year of the busi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lidated order dated 31.08.2017. In this case the taxpayer was engaged in the business of development of ship building and ship repairing yard. The taxpayer received orders and advance payments for supplies of ship building for which the taxpayer purchased steel for ship building . Various activities started towards ship building and on those factual matrix , it was held that the assessee has set up the business and expenses were allowed. But in the instant case before us, it is observed that the assessee is to indigenously supply tools and jigs under a sub-contract from Lockheed Martin, USA which supplies are to be utilised/consumed by the assessee itself in its manufacturing/ assembly unit being set up at Hyderabad which was under implementation as at the year end and not even trial run commenced till the end of previous year. Thus, on that factual matrix it is held that the assessee never intended to set up any business for supply of tools and jigs for its own units as its efforts for supply of tools and jigs are directed towards setting up its own manufacturing/assembly units for manufacture and assembly of center wing boxes and empennages for C130/C130J aircraft and not for set ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to set up this business of manufacturing tools and jigs. e) The decision of Hon‟ble Bombay High Court in the case of CIT v. Ralliwolf Limited (1978) 121 ITR 262(Bom. HC). In this case, Hon‟ble Court distinguished between set up of business and commencement of business and held that expenses shall be allowable from the date business is set up. This case we are afraid is of no help to the assessee as in the instant case before us , we have held that the assessee never intended to set up business of manufacturing/assembling of tools and jigs. f) The decision of Hon‟ble Gujarat High Court in the case of Prem Conductors P. Ltd. v. CIT (1976) 108 ITR 654(Guj. HC). The strong reliance is placed by learned counsel for the assessee on this case. In this case the assessee took over running concern from its promoters. It was not a case of setting of new industrial undertaking. The taxpayer secured orders from Electricity Boards, purchased raw material etc to keep things ready for production once the machineries are installed etc. . Under these circumstances Hon'ble Gujarat High Court held that business shall be deemed to be set up and expenses allo ..... 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