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TMI Blog2022 (8) TMI 482X X X X Extracts X X X X X X X X Extracts X X X X ..... ct without any saving clause therefore the natural corollary would be that it did not exist at all in the statute book. Accordingly, we allow the additional ground of appeal and hold that the impugned transfer pricing adjustment made by the learned assessing officer is not sustainable. Allowability of expenditure in terms of provisions of Section 40A (2) - As in the present case the assessee, itself has stated in its T P study report as well as Report of Accountant in 3CEB stated that these transactions are covered by the provisions of Section 40 (A) (2) of the act. Even otherwise, it is not the fact that revenue is given a second chance. In the present case earlier the impression of the revenue prior to the decision of the coordinate bench and of the honourable Karnataka High Court, was that specified domestic transaction i.e. transactions that are covered by the provisions of Section 40 A (2) are required to be tested in accordance with the provisions of chapter X of the act. However when the judicial precedents show that no such provision exist in the law, the natural corollary would be to examine the allowability of these expenses u/s 40A (2) of the act. Nature of expe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o the controversy Explanation of assessee shows that it is carrying on product development activities. It is also an activity for the extension of knowledge in the field of manufacturing of vehicles. In fact, the activities carried out by the assessee are activities for extension of knowledge in the field of the business of the assessee company. It is also not the case of the revenue that it is not related to the business of the assessee. Hence, these are expenditure incurred by assessee on scientific research in the field of manufacturing of vehicles . Therefore, we do not find any reason to uphold the action AO - Accordingly we direct him to allow deduction u/s 35 (1) (i) -Coming to the deduction u/s 35 (1) (iv) of the act on which the learned assessing officer has allowed depreciation only instead of allowing the whole expenditure in the year in which it is incurred. We have already held assessee is carrying on scientific research in the business of manufacturing of vehicle. Based on same reasons as given by us for allowing the expenditure of the assessee u/s 35 (1) (i) of the act we also direct the learned assessing officer to delete the disallowance of Rs. 7,088,075/-. As w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l vehicles, spare parts and its components. Assessee filed return of income on 26th November, 2013 at a loss of Rs. 335,61,83,066/-, which was picked up for scrutiny and consequently draft assessment order was passed by the learned Assessing Officer, wherein the adjustment proposed by the learned Jt. Commissioner of Income-tax, Transfer Pricing-3(2), Mumbai by order under section 92CA(3) of The Act dated 31st October, 2016, was incorporated. The draft order was objected before Dispute Resolution Panel-3, Mumbai (DRP), who passed direction on 27th September, 2017 and consequently the impugned assessment order was passed wherein the income of the assessee was determined at Rs. 60,32,061/-. 04. Assessee is aggrieved with that order has preferred the appeal before us raising the following grounds of appeal:- Being aggrieved by the order passed by the Deputy Commissioner of Income tax Circle 2 (2) (2) Mumbai (DCIT, for short) the Appellant submits the following grounds of appeal for your sympathetic consideration Expenditure debited to Profit and loss account Rs. 4,78,71,842/ On the facts and in the circumstances of the case and in law the Appellant contends that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e there under for the relevant assessment year, there being thus no subsisting tax liability of the payee which would entitle the Appellant to claim deduction under the proviso to the section at any subsequent point of time. Further in our appeals against this disallowance for Assessment Year 2007-08 2008-09, the Honorable commissioner of Income (Appeals), has allowed our claim of dealer incentive and deleted the disallowance made by D.C.I.T. (Appellate order No. CIT(A)- 5.DIT2(2)/IT-96/2010-11 for Assessment Year 2007- 08 and Appellate order No. CIT(A)-5/JCIT(OSD) 2(2)/IT-252/2011-12 for Assessment Year 2008-9) The addition made by the learned DCIT/Dispute Resolution Panel being contrary to the provisiosn of law be deleted. 3. Disallowance under section 35(1)(i) and 35(1)(iv) of Rs.13,84,28,478/- On the facts and in the circumstances of the case and in law the learned DCIT erred in disallowing expenditure of Rs.13,13,40,403/- claimed under section 35(1)(i) and Rs.70,88,075/- claimed under section 35(1)(iv) rejecting the contention of the Appellant that the said expenditure was indeed incurred on scientific research and instead allowing only depreciation t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erroneously rejected the appellant's claim of no mark-up being levied by the related party on third party vendor costs contending that the appellant has not provided any evidence to prove that no mark-up has been charged. The learned AO / TPO / DRP has erred in not appreciating the fact that the appellant in his additional evidence provided the entire backward trail of evidences to prove that no mark-up has been charged; commencing from consideration paid by appellant to its related party until the third party vendor cost details (including third party invoices) incurred by the related party for manufacturing of Heavy Commercial Vehicles ('HCVs'); factored in the transfer price. Further, the learned AO / TPO / DRP has erred in not limiting the transfer pricing adjustment to cost elements beyond the material cost, which are purely third party vendor costs charged on a back-to-back basis by MVML to the appellant. The learned AO / TPO / DRP erred in disregarding the entire additional evidence of the appellant and misapprehended the fact that profit before tax of INR 430.53 crores as generated by related party, was after debiting entire costs sustained by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... earned AO / TPO/ DRP failed to acknowledge that annual report of Force Motors Limited substantiated the fact of it being engaged in business of manufacturing HCVs. The learned AO / TPO / DRP failed to acknowledge the fact that the appellant had no intentions to erode the taxable base, since in the instant case neither the appellant nor MVML avails tax holiday benefits. Furthermore, with regard to transaction under appeal herein, there were no other tax arbitrage opportunities arising as the appellant was a loss making entity contrary to MVML, a profit making entity. The learned AO/TPO / DRP failed to appreciate the appellant's reliance on principle laid down by the Supreme Court ruling in case of Glaxo Smithkline Asia (P) Ltd (2010/236 CTR (SC) 113). The learned AO / DRP failed to appreciate that the amendment in Section 92BA of the Income Tax Act, 1961, vide Finance Act 2017 (with effect from 1 April 2017, whereby clause (i) of Section 92BA is omitted, is deemed to be omitted from inception and on account of its omission, the impugned transaction would not fall within the definition of specified domestic transactions. The appellant places reliance on th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es to be admitted. The claim of the assessee is further supported by several judicial precedents. Therefore, we admit the additional ground. 011. On the merits of additional ground, The learned authorised representative submitted that additional ground raised is covering the adjustment made u/s 92CA (3) of the Act in in arm s-length price of Rs. 2,196,447,328/ of specified domestic transactions. She submitted that there is no provision which provides for determination of Arm s length price [ ALP] of the specified Domestic Transaction covered u/s 40 A (2) now as clause 92BA (i) is omitted By The Finance Act 2017 without any savings clause , total addition deserves to be deleted on this ground only. Therefore, she submitted that without going into the merits of the addition issue is squarely covered in favour of the assessee by the several judicial precedents. She submitted that decision of SMR Automotive Systems India Ltd versus Asst Commissioner of income tax in ITA number 6614/Del/2017 dated 30 June 2021 covers all those decisions. She referred to paragraph number 15 of the decisions wherein the issue first arose before the Bangalore bench in ITA (TP) number 1722/2017. She ref ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the nature contained in section 6 or in special Acts may modify the position. Thus, the operation of repeal or deletion as to the future and the past largely depends on the savings applicable. In a case where a particular provision in a statute is omitted and in its place another provision dealing with the same contingency is introduced without a saving clause in favour of pending proceedings then it can be reasonably inferred that the intention of the legislature is that the pending proceedings shall not continue but fresh proceedings for the same purpose may be initiated under the new provision. 6. In fact, Co-ordinate Bench under similar circumstances had examined the effect of omission of sub-section (9) to Section 10B of the Act w.e.f. 01.04.2004 by Finance Act, 2003 and held that there was no saving clause or provision introduced by way of amendment by omitting sub-section (9) of section 10B. In the matter of General Finance Co. v. ACIT, which judgment has also been taken note of by the tribunal while repelling the contention raised by revenue with regard to retrospectivity of section 92BA(i) of the Act. Thus, when clause (i) of Section 92BA having been omitted by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in case of Fibre Boards Private Limited 62 taxmann.com 135 (SC) and Shri Bhagwati steel rolling mills versus Commissioner of Central Excise 2015 (326 ELT 209 observed that Section 6A of the general clauses act states that when any act or regulation is made after commencement of the act, such amendment would not affect the ongoing investigation or legal proceedings. She submitted that coordinate bench ruled that the word repeal includes ommission and there is no merit in the objection raised by the taxpayer. She heavily relied on paragraph number 13 21 of that decision and submitted that the additional ground raised by the assessee may be dismissed. 014. Alternatively, she submitted that, if the decision of the honourable Karnataka High Court is followed, even then the provisions of Section 40A (2) of the act still exist on the statute book and therefore , transactions which are covered by the above provisions should be examined according to the rules of provisions of Section 40A (2) of the act. For this proposition she relied on the decision of M/s Sobha City (2021) 127 taxman.com 39 (Bangalore). Therefore, the issue needs to be remitted back to the file of the learned ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee by invoking the provisions of Chapter X of The Income Tax Act to the transactions covered by provisions of Section 92BA (i) for assessment year 2013 14 till it was omitted. This issue has been dealt with by the honourable Karnataka High Court in case of Texport overseas (supra) in favour of the assessee holding that as the provisions of Section 92BA (i) has been omitted from the Income Tax Act without any saving clause therefore the natural corollary would be that it did not exist at all in the statute book. Accordingly, we allow the additional ground of appeal and hold that the impugned transfer pricing adjustment of Rs. 2,196,447,328/ made by the learned assessing officer is not sustainable. 018. However we are also conscious that the provisions of Section 40A (2) of the act still exists in the statute book. The decision of the Texport overseas Ltd of the coordinate bench, which was partly challenged by the revenue before the honourable High Court, also held so. In that case, the coordinate bench held that the adjustment on account of examination of the arm s-length price of the specified domestic transactions is not valid because of deletion of the provisions o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ould be to examine the allowability of these expenses u/s 40A (2) of the act. 020. In view of this ground number 5 of the appeal of the assessee is partly allowed. 021. Now we deal with ground number 1 of the appeal where assessee has challenged treatment of amount of Rs. 4, 78,71,842/ as capital expenditure whereas the assessee says that expenses were incurred wholly and exclusively for the purposes of the business of the assessee, are revenue in nature and therefore are allowable as deduction u/s 37 (1) of the act. The learned assessing officer allowed the depreciation thereon at the rate of 25% and thereby disallowed Rs. 35,903,881/ . Assessee has incurred certain development expenditure, which was claimed as revenue expenditure. The justification given by the assessee during the course of assessment proceedings was that assessee company has set up a manufacturing facility for production of commercial vehicle across various tonnage category by setting up of a complete assembly line for rollout of vehicles comprising of 9 tons to 49 tons. In 2005, assessee has entered into the Master Service agreement wherein Mahindra and Mahindra Ltd and International truck and engine Cor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e learned CIT DR vehemently supported the orders of the lower authorities. 024. We have carefully considered the rival contentions and perused the orders of the lower authorities. The facts clearly show that assessee is engaged in the business of manufacturing of vehicles. It is setting up assembly line for manufacture of different models of the commercial vehicles. The assessee has sold vehicles of Rs. 651 crores during the year. It is just an expansion of the existing line of manufacturing of commercial vehicles. It is not the case that assessee has started a new business. The disallowance by the learned assessing officer is only because of matching principle, as revenue did not come from the setting up of new assembly line. However, the learned AO lost sight of the fact that assessee is showing substantial sales of heavy vehicles. Further, there is nothing, which has resulted into an enduring benefit to the assessee. In the present world, automobile companies are introducing 5 6 variants of different types of vehicles every year , due to frequent changes in the consumer demands as well as change in technology. Ld AO also incorrectly applied matching principle for making dis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... H of the act. Accordingly, he disallowed Rs. 231,859,282/ Under the provisions of Section 40 (a) (i a) of the act. On objections before the learned dispute resolution panel the learned DRP noted that in case of Mahindra and Mahindra Ltd for assessment year 2008 09 the coordinate bench on identical facts and circumstances has held that No tax is required to be deducted on dealer s incentive. This decision of ITAT has been confirmed by honourable High Court vide order dated 6/2/2017. As revenue has filed a special petition before the honourable Supreme Court, which is pending for disposal, therefore panel upheld the action of the AO. Therefore, this is challenged as per ground number 2 of the appeal. 026. The learned authorised representative submitted that now the SLP filed by the Commissioner of income tax against the decision of the honourable High Court has been dismissed, therefore now the argument of the learned dispute resolution panel also does not survive. 027. The learned CIT DR supported the orders of the lower authorities. 028. We find that on identical facts and circumstances the honourable Bombay High Court in case of Mahindra and Mahindra Ltd [Income Tax Ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 88,075 claimed u/s 35 (1) (iv) rejecting the contention of the appellant that the said expenditure was not incurred on scientific research and instead allowing only depreciation thereon at the rate of 25%. The brief facts shows that assessee has claimed deduction of Rs. 131,340,403/ Under the provisions of Section 35 (1) (i) and Rs. 7,088,075/ Under the provisions of Section 35 (1) (iv) of the act. The assessee stated that assessee has incurred product development expenditure during the year, which includes activities of comprising of concept and visibility, business case, design development validation, product readiness, customer trials, freeze development and start of production. To carry out these activities pertaining to product development a lot of application of basic engineering knowledge such as design, CAD CAM, validation etc is carried out. Assessee claims that it involves extension of knowledge in applied science for facilitating the business and therefore it qualifies as a scientific research u/s 43 (4) of the Act. Therefore, it is allowable as deduction under the provisions of Section 35 (1) of the act. 030. The learned assessing officer held that the activities ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t expenses incurred are small in nature and further the assessee has not brought on record the details of research it was carrying on. Assuming that assessee has not brought out complete details on the research and development expenditure incurred by it, otherwise, the expenditure is not capital in nature as per the finding of the learned DRP as it is small, these are otherwise allowable u/s 37 (1) of the act. In view of this, without going into the controversy whether the expenditure incurred by the assessee is on scientific research or not, the expenditure is allowable to the assessee either u/s 37 (1) of the act or u/s 35 (1) (i) of the act to the extent of expenditure incurred. Explanation of assessee shows that it is carrying on product development activities. It is also an activity for the extension of knowledge in the field of manufacturing of vehicles. In fact, the activities carried out by the assessee are activities for extension of knowledge in the field of the business of the assessee company. It is also not the case of the revenue that it is not related to the business of the assessee. Hence, these are expenditure incurred by assessee on scientific research in the fiel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... velopment of the state. Assessee also submitted that the subsidy is not granted for carrying on day-to-day business of the assessee but to provide impetus in the process of development of industry in backward areas. Assessee also relied on several judicial precedents and stated that according to the decision of the honourable Supreme Court in case of Ponni sugar and chemicals Ltd [174 taxmann 87 ] purposes and object of the scheme is required to be seen. However, the learned assessing officer rejected the contention of the assessee and held that the incentives given to assessee for the purpose of compensating for working in the backward areas and not for creating any capital asset. He further held that as assessee is not required to pay the amount of sales tax and assessee is not receiving any subsidy. He was also is of the view that as the benefit is available to assessee only on affecting the sales and therefore assessee is not entitled to any benefit merely because it has made investment in the plant in the backward areas but because of sale. Accordingly, he rejected the claim of the assessee and held that sales tax incentive received by the assessee is a revenue receipt and i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 07 shows that the subsidy has been granted to encourage industrial growth in less developed areas of the State. The quantification of subsidy is linked with the amount of investment made in setting up of the eligible units. Payment of the subsidy is in the form of refund of VAT and CST paid on sale. Assessee claimed before the lower authorities that the subsidy was a capital receipt and, hence, not chargeable to tax which was rejected As held by Hon Supreme court in case of Ponni Sugar (Supra) decisive factor for considering the nature of subsidy as a capital or revenue receipt is the 'purpose' for which the subsidy has been granted and not the manner of its disbursal. Purpose of granting the subsidy, which is nothing but establishment of new industrial units in less developed areas of the State i.e. to develop underdeveloped areas of the state. Further, on identical facts and circumstances the coordinate bench in case of Mahindra vehicles Manufacturers Limited in ITA number 6919/M/2016 for assessment year 2011 12) number 7 (page number 9) wherein it has been categorically held to be a capital receipt. Similarly in ITA number 2808/M/2018 for assessment year 2013 14 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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