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TMI Blog2024 (3) TMI 484X X X X Extracts X X X X X X X X Extracts X X X X ..... ee was selected for scrutiny and statutory notices under section 143(2) as well as section 142(1) were issued and served on the assessee. The Assessing Officer ("AO") vide order dated 25/04/2016 passed under section 143(3) read with section 144C(3) of the Act assessed the total income of the assessee at Rs.1373,62,39,166, after making certain additions/disallowances. The learned CIT(A), vide impugned order, granted partial relief to the assessee. Being aggrieved, both the assessee as well as the Revenue are in appeal before us. ITA No.5363/Mum./2017 Assessee's Appeal - A.Y. 2012-13 3. In its appeal, the assessee has raised the following grounds:- "1) The learned Commissioner of Income Tax (Appeals) -55, Mumbai erred in applying Rule 8D and disallowed a sum of Rs. 66.75 lacs u/s 14A of the Income Tax Act, 1961. 2) The learned Commissioner of Income Tax (Appeals) -55, Mumbai disallowed Rs.174 lacs being expenditure incurred on feasibility study report for evaluation of various business opportunities as capital in nature. 3) The learned Commissioner of Income Tax (Appeals) -55, Mumbai erred in disallowing Rs.4.93 lacs on account of Transfer Pricing adjustments for non-re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... upon the order passed by the AO. 8. We have considered the submissions of both sides and perused the material available on record. Undisputedly, in the present case, the assessee earned a dividend income of Rs.40.57 crore, which has been claimed as exempt under section 10 of the Act. Further, there is also no dispute regarding the fact that the assessee while computing its taxable income suo-moto disallowed an amount of Rs.24,45,540 as an expenditure incurred for earning the aforesaid exempt income. As per the assessee, the aforesaid suo-moto disallowance is the salary cost in respect of the time spent by its employees on carrying out the investment-related activity, which has been computed as under: Disallowance u/s 14A of Income Tax Act (Estimated allocable expenses) Employee Designation Chief Financial Officer Senior Manager- Finance Finance Executive Total Proportionate salary Proportionate Interest amount Percentage 5% 25% 50% Cost to Company 1,62,88,500 30,28,400 10,30,600 Value of disallowance 8,14,425 7,57,100 5,15,300 20,86,825 3,58,715 Total Section 14A disallowance &n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ficer needs to record satisfaction that having regard to the kind of the assessee, suo motu disallowance under section 14A was not correct. It will be in those cases where the assessee in his return has himself apportioned but the Assessing Officer was not accepting the said apportionment. In that eventuality, it will have to record its satisfaction to this effect. Further, while recording such a satisfaction, the nature of the loan taken by the assessee for purchasing the shares/ making the investment in shares is to be examined by the Assessing Officer." Further, the Hon'ble Supreme Court in Godrej & Boyce Manufacturing Company Ltd. Vs DCIT: [2017] 394 ITR 449 (SC), observed as under: "37. We do not see how in the aforesaid fact situation a different view could have been taken for the Assessment Year 2002-2003. Sub-sections (2) and (3) of Section 14A of the Act read with Rule 8D of the Rules merely prescribe a formula for determination of expenditure incurred in relation to income which does not form part of the total income under the Act in a situation where the Assessing Officer is not satisfied with the claim of the assessee. Whether such determination is to be made on app ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ding question no.(c) :- (a) In its return of income, the respondent made a suo-moto disallowance of Rs.15.21 lakhs being the expenditure incurred to earn exempt income under Section 14A of the Act. The Assessing Officer disregarded the same and proceeded to disallow an amount of Rs.1.10 crores under Section 14A of the Act read with Rule 8D of the Rules as expenditure incurred to earn exempt income. Thus, adding Rs.1.10 crores to the income of the respondent. (b) Being aggrieved, the respondent filed an appeal to the CIT(A) but without success. (c) On further appeal, the impugned order of the Tribunal while allowing the appeal held that before invoking the provisions of Rule 8D of the Income Tax Rules, the Assessing Officer has to record his non satisfaction with the suo moto disallowance of expenditure made towards earning exempt income by the respondent. This exercise not having been carried out by the Assessing Officer before applying Rule 8D of the Income Tax Rules, the disallowance of expenditure to earn exempt income cannot be sustained. (d) This issue is no longer res integra as the Apex Court in Gorej & Boyce Mfg. Co. Ltd. Vs. Dy. CIT, 394 ITR 449 decided the issue ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... asked to prove how the said expenditure was related to its business activity. In response thereto, the assessee submitted that the aforesaid amount was paid towards the feasibility study report for evaluation of various business opportunities that can be conveniently/advantageously combined with the existing business of the assessee. The assessee further submitted that it has strategically looked at the home improvement and decor sector as an avenue for future growth especially since it has synergy with the existing line of decorative paint business in India. Accordingly, the assessee claimed that the expenses on exploratory exercises are incurred out of commercial expediency to expand the existing business by exploring new markets, products, etc. The AO vide assessment order did not agree with the submissions of the assessee and held that the assessee is in the field of paints business and based on the feasibility report the assessee entered into a completely new line of business, i.e. kitchen business, which is nowhere connected to its existing in business. Accordingly, the AO held that the expenditure amounting to Rs.1,74,40,000 paid to Avalon Consulting towards the feasibility ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Sleek Group, which is engaged in manufacturing, selling, and distribution of modular kitchens as well as kitchen components including wire baskets, cabinets, appliances, accessories, etc., with a pan-India presence. Thus, from the perusal of the documents available on record, it is sufficiently evident that the assessee ventured into altogether a new line of business, which is different from the existing business of manufacturing paints and enamels. We agree with the conclusion of the learned CIT(A) that the new line of business operates completely on different domains, as the infrastructure, expertise, workforce and all other connected things engaged and involved are completely different. During the hearing, the learned DR placed reliance upon the decision of the Hon'ble jurisdictional High Court in CIT v/s Zenit Steel Pipes and Industries Ltd, [2009] 315 ITR 95 (Bom.), wherein following the earlier decision of the Hon'ble High Court in CIT v/s JK Chemicals Ltd, [1994] 207 ITR 985 (Bom.) it was held that expenditure incurred on obtaining market survey for setting up new line of business is a capital expenditure. Therefore, respectfully following the aforesaid decision and in v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bmitted that the letter of comfort does not keep the assessee financially or legally obligated to bear the costs of repayment of loans to the banks in case the subsidiaries default in repayment. The TPO vide order dated 22/01/2016 passed under section 92CA(3) of the Act did not agree with the submissions of the assessee and held that the letter of comfort is to be regarded as an international transaction, as an intergroup service has been rendered by the assessee to its associated enterprise. Considering the similarity in the facts and circumstances of the case vis-a-vis the issuance of corporate guarantee, the arm's length rate of the letter of comfort was determined at 0.50% (being 50% of 1% fee for guarantee commission). Accordingly, the TPO computed the transfer pricing adjustment of Rs.61,72,873 (i.e. 0.50% of Rs.123.46 crore) in respect of the letter of comfort issued by the assessee. 22. The learned CIT(A), vide impugned order, by following the orders of its predecessor in assessee's own case in earlier years restricted the arm's length rate of letters of comfort to 0.04% and confirmed the adjustment to the extent of Rs.4,93,840. Being aggrieved, both the assessee as well a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nto liquidation (whether compulsory or voluntary) or any arrangement with its creditors in a manner as to prejudice your rights against the company in respect of the said facilities. We undertake to provide your bank with adequate notice if we decide to divest ourselves of our ownership in the company and/or reduce our management and technical support to this company." (ii) "Re: Facilities extended by Citibank N A to Berger International Limited, Singapore We confirm that we are aware of the facilities amounting to SGD 36.5 mn extended by Citibank N.A to our subsidiary (herein referred to as "the Company") We will continue to lend management and technical support to this Company and will be fully supportive of its operations. We, Asian Paints Limited confirm that it is our intention to maintain our majority ownership and management control of this company during the continuation of the facilities and that we will use are best endeavors to see that the obligations of the company y are met with as and when they fall due. We will also not do anything or take any step so as to permit the company to enter into liquidation (whether compulsory or voluntary) or any arrangement ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be incurred in connection with a benefit, service or facility provided or to be provided to any one or more of such enterprises." 27. From a plain reading of the aforesaid provision, it is evident that for a transaction to be an international transaction it has to be between two or more associated enterprises, either or both of whom are non-residents. Undoubtedly, in the present case, the assessee issued letters of comfort on behalf of its associated enterprises outside India. Thus, in our considered view, the first condition for being an international transaction is satisfied in the present case. The aforesaid provision further requires that the transaction, inter-alia, needs to be of the following nature:- (a) purchase, sale or lease of tangible or intangible property; or (b) provision of services or lending or borrowing money; or (c) any other transaction having a bearing on the profits, income, losses or assets of such enterprises 28. From the perusal of the financial statement of the assessee, forming part of the paper book from pages 1-27, we find that the assessee has declared the letters of comfort/support issued to the banks on behalf of some of its subsidiaries a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... osure made by the assessee in its financial statement. Further, from the document of the credit facility extended to Berger International Ltd, Singapore, forming part of the paper book from pages 4-6, we find that the credit facility was extended on the security/support of the letter of comfort issued by the assessee. 30. During the hearing, the learned AR placed reliance upon the decision of the coordinate bench of the Tribunal in assessee's own case in preceding assessment years, wherein the coordinate bench of the Tribunal held that issuance of a letter of comfort/support is not an international transaction within the meaning of the provisions of the Act. We find that the coordinate bench of the Tribunal in assessee's own case in Asian Paints Ltd v/s Addl.CIT, in ITA No. 2754/Mum./2014, vide order dated 03/02/2021, for the assessment 2009-10, observed as under:- "7. We have considered rival submissions in light of the decisions relied upon and perused materials on record. After going through sample copy of letter of comfort / support given to the bank towards loan availed by the AE, we have noticed that there is no liability or responsibility fastened with the assessee for ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... udice to the main submission that the letters of comfort issued by the assessee are not an international transaction submitted that the corporate guarantee issued by the assessee cannot be compared with the letters of comfort and therefore agreed with the computation of arm's length rate of 0.04%. Agreeing with the submissions of the assessee, we upheld the findings of the learned CIT(A) in computing the arm's length rate of the letter of comfort to be @0.04%, finding the same to be reasonable in the peculiar facts and circumstances of the present case. Accordingly, ground no.3 raised in assessee's appeal is dismissed. 33. Ground no.4 raised in assessee's appeal was not pressed during the hearing. Accordingly the same is dismissed as not pressed. 34. During the hearing, the applications dated 16/03/2021 seeking admission of additional grounds of appeal were not pressed by the assessee. Accordingly, these applications are dismissed as not pressed. 35. In the result, the appeal by the assessee is partly allowed. ITA No.5934/Mum./2017 Revenue's Appeal - A.Y. 2012-13 36. In its appeal, the Revenue has raised the following grounds:- "1 On the facts and in the circumstances of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Department of Industrial and Scientific Research (DSIR). 12. The learned CIT(A) erred in allowing the entire capital expenditure amounting to Rs. 551.46 lacs as deduction u/s 35(2AB), of the Income Tax Act, 1961. 13. The appellant prays that the order of the ld. CIT(A) on the above ground be set aside and that of the Assessing Officer restored. 14. The Appellant craves leave to amend or alter any ground or add a new ground which may be necessary." 37. The issue arising in ground no.1, raised in Revenue's appeal, pertains to restricting the transfer pricing adjustment on account of the letter of comfort. In view of our findings rendered in assessee's appeal on a similar issue, ground no.1 raised in Revenue's appeal is dismissed. 38. The issue arising in grounds no.2, 10, 11, and 12, raised in Revenue's appeal, pertains to allowability of expenditure under section 35(2AB) of the Act. 39. The brief facts of the case pertaining to this issue, as emanating from the record, are: During the assessment proceedings, it was observed that the assessee has claimed weighted deduction under section 35(2AB) of the Act. Accordingly, the assessee was asked to produce the certificate iss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urbhe (Navi Mumbai). Admittedly, this facility was also approved by DSIR, and a certificate in Form No.3CM was issued. During the year under consideration, the assessee had incurred a revenue expenditure amounting to Rs.30.53 crore and a capital expenditure amounting to Rs.5.51 crore on the in-house R&D facility. Since at the time of passing of the assessment order, the certificate in Form No.3CL was not available, the AO rejected the entire claim of weighted deduction under section 35(2AB) of the Act. However subsequently on receipt of the certificate in Form No.3CL, the AO granted partial relief to the assessee and restricted the disallowance to Rs.579.81 lakh vide rectification order dated 06/10/2017. 43. We find that while deciding a similar issue the coordinate bench of the Tribunal in assessee's own case in Asian Paints Ltd v/s Addl. CIT, in ITA No. 2178/Mum./2012, vide order dated 20/12/2013, for the assessment year 2007-08, restored the issue to the file of the AO with a direction to decide the same afresh after verifying whether the expenditure in question has been incurred by the assessee on research and development, which is eligible for deduction under section 35(2AB) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... laim of the assessee for deduction u/s 35(2AB) will be restricted to the amount of R & D expenditure as contained in the certificate. The Tribunal found on verification of the relevant details that even the expenditure is not included in the said certificate was eligible for deduction u/s 35(2AB) in respect of the said expenditure was allowed by the Tribunal. In our opinion, the issue involved in the case of Torrent Pharmaceuticals itd. thus is similar to the one involved in the present case and this position is not disputed even by the Id. DR at the time of the hearing before us. He, however, has contended that the claim of the assessee of having incurred the expenditure in question on R & D which is eligible u/s 35(2AB) has not been examined either by the AO or by the ld. CIT(A). He has urged that the matter may therefore be restored to the file of AO for giving him an opportunity to verify the same. We find merit in this contention of the Id. DR and since the Id. Counsel for the assessee has also not raised any objection in this regard we restore this issue to the file of the AO with a direction to decide the same afresh after verifying whether the expenditure in question has be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ard of accounting or legal principles. Accordingly, the AO rejected the contention of the assessee of valuing the damaged stock at Nil and considered the actual cost price of the so-called damaged stock for the purpose of taxation. 47. The learned CIT(A), vide impugned order, following the decision of the coordinate bench of the Tribunal rendered in assessee's own case in earlier years restricted the disallowance to the tune of 0.5% of the value of closing stock for the purpose of valuation of damaged stock. Further, the learned CIT(A) directed that the consequential effect in the opening stock be given. Being aggrieved, the Revenue is in appeal before us. 48. We have considered the submissions of both sides and perused the material available on record. We find that while deciding a similar issue in assessee's own case the coordinate bench of the Tribunal in Addl. CIT v/s Asian Paints Ltd., in ITA No. 749/Mum./2017, for the assessment year 2011-12, vide order dated 28/07/2022, observed as under:- "32. Considered the rival submissions and material placed on record, we observe that assessee is valuing closing stock for damaged stock taking the value at NIL and however, Assessing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly, the assessee could claim only 10% of the additional depreciation for additions made in the second half of the financial year 2010-11 and the balance 10% additional depreciation was claimed in the year under consideration. The AO vide assessment order did not agree with the submission of the assessee and held that there is no such provision in the Act to claim a balance 10% additional depreciation in the year under consideration for additions made in the earlier year. Accordingly, the AO disallowed the additional depreciation of Rs.1,64,27,068 claimed by the assessee in the year under consideration and added the same to the total income of the assessee. 53. The learned CIT(A), vide impugned order, allowed the ground raised by the assessee on this issue by following the decision of its predecessor in assessee's own case. Being aggrieved, the Revenue is in appeal before us. 54. We have considered the submissions of both sides and perused the material available on record. We find that the coordinate bench of the Tribunal in assessee's own case cited supra, for the assessment year 2011-12, vide order dated 28/07/2022, decided the similar issue in favour of the assessee by followin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee has claimed carried over amount of additional depreciation relating to the immediately preceding assessment year. Therefore, he called upon the assessee to justify the claim. However, the assessee furnished a detailed submission stating that the balance portion of additional depreciation, which could not be claimed in the preceding assessment year, has to be allowed in the impugned assessment year; however, the Assessing Officer was not convinced. Accordingly, he disallowed the additional depreciation claimed of Rs. 1,72,86,752/-. Assessee contested the disallowance before learned Commissioner (Appeals). Taking note of the decision cited by the assessee including the decision of the Tribunal in assessee's own case for Assessment Year 2008 09, learned Commissioner (Appeals) deleted the disallowance made by the Assessing Officer. 40. The learned Departmental Representative supporting the decision of the Assessing Officer submitted, additional depreciation is a onetime allowance granted to the assessee for installing new v plant and machinery. Any unclaimed amount cannot be set off in the subsequent assessment year 41. The learned Counsel for the assessee strongly relying u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on and no change in facts and law was alleged in the relevant assessment year. Thus, respectfully following the judicial precedents in assessee's own case cited supra, ground no.5 raised in Revenue's appeal is dismissed. 56. The issue arising in ground no. 6, raised in Revenue's appeal, pertains to the allowance of expenditure incurred on the Trip Scheme. 57. The brief facts of the case pertaining to this issue, as emanating from the record, are: The assessee is having huge chain of dealers across India and it is incurring expenses under various heads of the consolidated head "advertisement promotion expenses". Further, these expenses are mainly in the nature of providing freebies to the dealer in the form of luxury foreign/local tours and travels. During the assessment proceedings, the assessee was asked to furnish details of advertisement and sales promotion expenses. On perusal of these details, it was observed that the assessee has incurred an expenditure of Rs.75,91,09,528 under its Trip Scheme for its dealers. The AO vide assessment order disallowed the aforesaid expenditure on the basis that in the entire foreign trip of the dealers, there was no conference, exhibition, or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ingly, he disallowed the deduction claimed by the assessee. Assessee contested the disallowance before the first appellate authority. considering After the submissions of the assessee in the context of facts and materials on record, learned Commissioner (Appeals) deleted the disallowance made by the Assessing Officer. 45. Strongly relying upon the observations of the Assessing Officer, the learned Departmental Representative submitted, the expenditure incurred by the assessee for trip scheme is nothing but commission paid to dealers and distributors; hence, subject to deduction of tax under section 194H Act. The assessee having failed to do so, the amount has to be disallowed under section 40(a) (ia) of the Act. 46. The learned Counsel for the submitted, there is no question of payment of any commission to the dealers and distributors as there is no principal agent relationship between the assessee and them. He submitted, the transactions with the distributors were carried out purely on principal-to-principal basis. Therefore, there is no liability to deduct tax under section 194H of the Act. In support, the learned Counsel relied upon the following decisions:- 1. CIT, Pune ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essing Officer has established on record that dealers/distributors are agents of the assessee. Further, as we find, the trip scheme has been introduced by the assessee from past 20 years and the deduction claimed by the assessee on account of such trip scheme has never been disallowed by the Assessing Officer except for the impugned assessment year. Therefore, even applying the rule of consistency, the expenditure claimed by the assessee has to be allowed. Accordingly, we do not find any infirmity in the decision of learned Commissioner (Appeals). Ground raised is dismissed." 042. Therefore respectfully following the decision of the coordinate bench in assessee's case own for assessment year 2009 10, in absence of any contrary evidence, we uphold the order of the learned CIT A deleting the above disallowance of Rs.252,660,686/-. Accordingly, ground number 7 of the appeal is dismissed." 60. We find that similar findings were rendered by the coordinate bench in assessee's own case for the assessment year 2011-12 cited supra. We find that this issue is recurring in nature and has been decided in favour of the assessee in the preceding assessment years. The learned DR could not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng its decision rendered in assessee's own case for the assessment year 2011-12, the learned CIT(A) allowed the ground raised by the assessee on this issue. Being aggrieved, the Revenue is in appeal before us. 64. We have considered the submissions of both sides and perused the material available on record. The assessee provides technical data, together with trademarks and also allied services for the manufacture of decorative paints to its overseas subsidiaries. In this connection, the overseas subsidiaries are charged Royalties depending on the package offered and also taking various factors into consideration. As per the transfer pricing study report, forming part of the paper book, it is claimed that the overseas subsidiaries are charged a Royalty of 1% to 3% on net sales realised product manufactured using the technology transferred by the assessee. The assessee entered into an agreement with its indirect subsidiaries, i.e. Asian Paints (Bangladesh) Ltd and Asian Paints (Lanka) Ltd, according to which the assessee was to receive a Royalty of 3% of net sales. However, considering the financial position of the group companies, the assessee agreed to waive the charges of the Roy ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... its overseas subsidiaries to waive the Royalty. Such being the facts, we are of the considered view when only 1% Royalty is payable by the overseas subsidiaries, therefore the AO has no authority to make an addition of the balance 2% Royalty waived by the parties, which is nothing but a notional income considered taxable by the AO in assessee's hands. Before concluding, it is pertinent to note that in the assessment year 2011-12, the coordinate bench of the Tribunal decided a similar issue in favour of the assessee. Accordingly, in view of the aforementioned findings, we find no basis in the impugned addition made by the AO. As a result, ground no. 7 raised by the Revenue is dismissed. 66. The issue arising in ground no.8, raised in Revenue's appeal, pertains to allowance of Corporate Social Responsibility ("CSR") expenses. 67. We have considered the submissions of both sides and perused the material available on record. During the year under consideration, the assessee claimed the deduction of Rs.21,36,527 under section 37(1) of the Act on CSR expenses. As per the assessee these expenditures are incurred in the vicinity of its manufacturing plants on blood donation camp, repairs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wever, from the year under consideration, the assessee has changed its practice and started claiming the same as allowable expenditure. It was further held that the assessee could not prove that the alleged advances were made in the ordinary course of the business and such advances written off cannot be treated at par with the bad debts written off. 70. The learned CIT(A), vide impugned order, allowed the appeal filed by the assessee on this issue by following the approach adopted in earlier years. Being aggrieved, the Revenue is in appeal before us. 71. We have considered the submissions of both sides and perused the material available on record. As per the assessee, it has changed its practice from the assessment year 2012-13, where sundry balances written off is claimed as deduction, and sundry balances written back is offered for tax in its return of income. The assessee submitted that the expenditure is normal business expenditure and allowable as deductible expenditure. However, from the perusal of the record, we find that neither there is an examination of the aforesaid claim of the assessee nor any details were furnished. Accordingly, we deem it appropriate to restore thi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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