1
Greaves Cotton Ltd.
(formerly Greaves Ltd)
ITA No. 7356/Mum/2011
""
IN THE INCOME TAX APPELLATE TRIBUNAL
MUMBAI BENCH "G", MUMBAI
,
,
BEFORE SHRI G S PANNU, ACCOUNTANT MEMBER
AND SHRI AMIT SHUKLA, JUDICIAL MEMBERITA
ITA No. : 7356/Mum/2011
(Assessment year: 2004-05)
Greaves Cotton Ltd. Vs Income Tax Officer-6(3)-1,
(formerly Greaves Ltd), Aayakar Bhavan,
Industry Manor, Appasaheb Marathe Mumbai
Marg, Prabhadevi,
Mumbai -400 025
.:PAN: AAACG 2062 M
(Appellant) (Respondent)
Appellant by : Miss Aarti Visanji
Respondent by : Shri N K Chand
/Date of Hearing
: 29-06-2015 & 09-10-2015
/Date of Pronouncement : __ -10-2015
ORDER
, . .:
PER AMIT SHUKLA, AM:
The aforesaid appeal has been filed by the assessee against
impugned order dated 24.08.2011, passed by CIT(A) -15, Mumbai
for the quantum of assessment passed u/s 143(3) for the
assessment year 2004-05. In various grounds of appeal, the
assessee has challenged following additions/disallowances :-
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Greaves Cotton Ltd.
(formerly Greaves Ltd)
ITA No. 7356/Mum/2011
Sr. Ground Issue Amount
No. No.
1 A Disallowance u/s 14A which has been enhanced
by the CIT(A) at Rs. 3,25,89,130/- from Rs.
9,98,374/- made by the AO 3,25,89,130/-
2 B Disallowance of professional fee paid to Majumdar
& Co. for registration of copyrights of designs of
engines manufactured by the assessee claimed as
revenue expenditure which has been disallowed as
capital expenditure. Alternatively, depreciation has
been claimed if it is treated as capital expenditure 1,13,350/-
3 C Disallowance on account of contribution to
employees contribution to Provident Fund 1,73,543/-
4 D Disallowance of following payments :
1) Charges towards late payment fee to Chennai
Municipal Corporation Rs. 9,650/-
2) Sales tax charged due to technical error and
Stating destination of as Indore even though
Consignee's name and address were correctly
Written on consignment Rs. 1,22,887/-
3) Compliance fee per Weights and Measurement
Rules Rs. 32,000/-
4) Amount paid to High Court in pursuance of High
Court order on company's stay petition in respect
Of appeal to HC Rs. 10,00,000/- 11,65,749/-
5 E Disallowance of R&D expenses 6,48,912/-
6 F Addition on account of unutilized Cenvat credit 1,44,14,614/-
7 G Addition on account of interest waived by the
banks as Financial Institutions 10,14,94,383/-
8 H Transfer Pricing Adjustment on International
Transaction with the AE 1,23,86,407/-
9 I Claim for carried forward losses and unabsorbed
depreciation
10 J Capital gains arising on sale of flats held as an
Assets for more than 5 years whether it
can be considered as long term capital gain
since the block of assets in which said asset falls
as on 01.04.2003 was at `Nil' 4,19,85,605/-
11 K Addition on account of book profit u/s 115JB on
extraordinary items 52,73,20,474/-
12 L Deduction from books profit u/s 115JB the
Revaluation Reserve of Rs. 6,80,317/-
which was withdrawn and credited to the Profit
& Loss Account 6,80,317/-
13 M Deduction of the amount eligible for deduction
u/s 80HHC from the book profit ---
14 N Deduction of carried forward losses and
Unabsorbed depreciation whichever is less from
Book profit worked out u/s 115JB ---
15 O General ---
2. The assessee is a Public Limited Company engaged in the
business of manufacture and sale of marine and industrial gear
boxes, diesel engines, generating sets, Tandem Rollers, Transit
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Greaves Cotton Ltd.
(formerly Greaves Ltd)
ITA No. 7356/Mum/2011
Mixture, Vibratory Compactors etc. and also trade in steam traps,
pumps, fluid coupling and crucibles etc.
3. The first issue raised vide ground no. A is enhancement of
disallowance u/s 14A made by CIT(A).
4. The brief facts are that the assessee has earned following
exempt income during the previous year; (a) dividend income of Rs.
28,56,000/- and (b) interest on tax free bonds of Rs. 21,000/- and
Rs. 5,90,825/-. In response to the show cause notice as to why the
expenditure attributable to earning of exempt income should not
be disallowed, the assessee submitted that, firstly, the dividend
received on shares were from the investment made in shares of
Griever Morgwite Crucible Ltd., which was purchased long time
back out of assessee's own funds. Similarly, the investment in UTI
Bonds and Kokan Railway Bonds were also made from assessee's
own funds. Hence, no expenditure can be said to have been
incurred or can be attributed for the purpose of making these
investments, especially no interest expenditure can be disallowed.
The AO noted that similar submissions were made by the assessee
during the course of assessment proceedings for the AYs 2001-02,
2002-03 & 2003-04, wherein 5% of the exempt income was treated
as expenditure disallowable u/s 14A and accordingly, he made the
disallowance of Rs. 1,73,364/- being 5% of the total exempt
income of Rs. 34,67,285/- Besides this, he further made the
disallowance of Demat charges of Rs. 8,25,010/- debited under the
head "other sundry expenses" which was a direct expenditure.
Accordingly, aggregate disallowance of Rs. 9,98,374/- was made.
5. In the first appellate proceedings, Ld. CIT(A) held that the
assessee's contention that no disallowance is called for cannot be
accepted. Although he held that Rule 8D is not applicable,
however, he proposed to make the disallowance by adopting the
following method/formula :-
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Greaves Cotton Ltd.
(formerly Greaves Ltd)
ITA No. 7356/Mum/2011
Expenditure incurred by way of interest during the previous year which is not
Directly attributable to any particular income or receipt other than 1 above-A
The weighted monthly average value of investment, income from which does not
Or shall not form part of the total income, as appearing in the balance sheet of
the B
The average of total assets as appearing in the balance sheet of the appellant
as on the first day and the last day of the previous year C
An amount equal to one-half per cent of the monthly weighted average of the
Value of investment, income from which does not or shall not form part of the
total income D
The amount of expenditure directly relating to income which does not form part
Of the total income -E
The computation of disallowance for the purposes of section 14A
was proposed as : A*B/C + D + E"
6. The assessee in response, objected to adopting of aforesaid
formula and submitted that in the earlier years, CIT(A) have held
that 2.5% of the exempt income should be disallowed u/s 14A.
However, Ld. CIT(A), worked out the disallowance as per the
aforesaid method and accordingly, the disallowance was worked
out to Rs. 3,25,89,130/- and thereby, enhancement of
disallowance u/s 14A was made at Rs. 3,15,90,756/-.
7. Before us, Ld. Counsel Ms. Aarti Vissanji, submitted that
though CIT(A) has not mentioned about Rule 8D while making the
enhancement, however, his method is exactly similar to the
formula prescribed in Rule 8D which is untenable in law for the
period prior to 2008-09. She further submitted that so far as the
interest disallowance is concerned, the same cannot be made in
the case of the assessee, because the investments which have
yielded exempt income were made out of assessee's own funds and
which fact has been accepted by the AO not only in this year but
also by the AO and CIT(A) in the earlier years. The Tribunal in
assessee's own case for the AY 1999-2000 has noted the fact that
investments were made at Rs. 39.02 crores, whereas, the
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Greaves Cotton Ltd.
(formerly Greaves Ltd)
ITA No. 7356/Mum/2011
assessee's own funds were more than Rs. 85.5 crores. In AY 2002-
03, no disallowance of interest was made and this fact has been
accepted till the stage of the Tribunal. In any case, now this issue
stands covered by decision of jurisdictional High Court in the case
of CIT vs HDFC Bank, 366 ITR 505 and Delhi High Court in the
case of Taikisha Engineering, 370 ITR 338.
8. On the other hand, Ld. CIT DR, submitted that the Ld.
CIT(A) has only tried to work out a reasonable basis for
disallowance for which he has taken a same clue from formula laid
down in Rule 8D. It is the onus of the assessee to prove the nexus
between the investment made and interest free funds and also the
expenditures debited in the P&L Account. In support of his
contention he relied upon the decision of Delhi High Court in the
case of Maxbopp Investments, 347 ITR 272 and drew our specific
attention to para 24 & 25 of the judgment.
9. We have considered the rival contentions and also perused
the relevant finding given in the impugned order as well as
material referred to before us. The Ld. CIT(A) has enhanced the
disallowance u/s 14A to Rs. 3,25,89,130/- as against the
disallowance made by the AO at Rs. 9,98,374/-.The formula
adopted by the Ld. CIT(A) for making the disallowance u/s 14A is
quite akin to formula laid down in Rule 8D which admittedly
cannot be held to be applicable at all in the AY 2004-05. What
could be the reasonable basis for disallowance has to be worked
out from the nature of expenses debited and overall accounts of
the assessee. So far as disallowance of interest expenditure is
concerned, in the case of the assessee it is an admitted fact,
permeating from the earlier years that the investments which have
yielded exempt income were out of assessee's own funds and no
interest bearing funds were diverted for making the investments.
Once that is so, then in view of the ratio laid down by the Hon'ble
jurisdictional High Court in the case of CIT vs HDFC Bank (supra),
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Greaves Cotton Ltd.
(formerly Greaves Ltd)
ITA No. 7356/Mum/2011
we hold that no disallowance on account of interest can be made in
this case. As regards direct expenses are concerned, the AO, has
given a categorical finding which has not been rebutted before us,
that Demat charges of Rs. 8,25,010/- were directly related to
investment made in shares. Accordingly, so far as disallowance of
Rs. 8,25,010/- on account of demat charges made by the AO, the
same stands confirmed. Regarding balance disallowance, we find
that 5% of the exempt income appears to be quite reasonable
having regard to the nature of expenses and accounts of the
assessee. Accordingly, we uphold the disallowance to the extent of
Rs. 9,98,374/- which was made by the AO. Thus, ground no. A is
treated as partly allowed.
10. Second issue relates to disallowance of professional fees of
Rs. 1,18,350/-, paid to `Majumdar and Co.' for registration of copy
rights of designs and engines which has been claimed as revenue
expenditure by the assessee.
11. The AO has treated the said expenditure to be capital in
nature as the same is covered u/s 32. The assessee's case was that
the payment was made for protecting the company's business for
registering the copyright of the products made/ manufactured by
the assessee. Alternatively, it was pleaded that if it is treated as
capital expenditure then depreciation @ 25% should be allowed.
12. The Ld. CIT(A) rejected the assessee's contention on the
ground that the expenditure has been incurred for getting the
designs patented which adds to the value of the new asset which
has an enduring benefit and accordingly, it is capital in nature.
13. After considering the rival contentions and on perusal of the
impugned orders, it is an undisputed fact that payment has been
made for getting the engine designs patented, which the assessee
produces/manufactures. Such a copyright and patent will only go
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Greaves Cotton Ltd.
(formerly Greaves Ltd)
ITA No. 7356/Mum/2011
to enhance the cost of such an intangible asset and accordingly, it
has been rightly disallowed as capital expenditure by the Ld. AO
and CIT(A). However, we agree with the alternate contention of the
Ld. Counsel that if it is treated as capital expenditure for a capital
asset then, depreciation has to be allowed on such an intangible
asset, which specifically finds mention in section 32(1)(ii).
Accordingly, we direct the AO to allow depreciation as per relevant
rules provisions on such a capital expenditure. Accordingly,
ground no. B is treated as partly allowed.
14. As regards ground no. C relating to addition on account of
contribution to employees welfare fund of Rs. 1,73,543/-. It has
been admitted by the Ld. Counsel that this issue has been decided
against the assessee by the Tribunal in AY 2003-04. On perusal of
the Tribunal order for the AY 2003-04. We find that this issue has
been dealt in detail by the Tribunal in the following manner :
10. The issue raised in ground No.4 of the assessee's
appeal relates to the disallowance of Rs.1,70,218/- made by
the AO and confirmed by the learned CIT(Appeals) on account
of contributions made by the assessee to various funds by
invoking the provisions of section 40A(9). 11. During the year
under consideration, the assessee had contributed the
amounts aggregating to Rs.1,70,218/- to the following funds:
Sl.No. Description Amount
1. Contribution to welfare fund at:
Petrol Engine Unit, Thoraipakkam 84,206
Heavy Engineering Unit, Chennai 3,900 88,106
2. Contribution to family welfare
fund at Light Engines Unit II, Ranipet 40,580
3. Contribution to disability fund at
Petrol Engine Unit, Thoraipakkam. 3,113
4. Contribution to benevolent fund at
Petrol Engine Unit, Thoraipakkam. 15,326
5. Contribution to death relief fund at
Light Engine Unit II, Ranipet 10,145
Petrol Engine Unit, Thoraipakkam 6,716 16,861
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Greaves Cotton Ltd.
(formerly Greaves Ltd)
ITA No. 7356/Mum/2011
6. Contribution to Superannuation fund 6,232
(not recognized) Petrol Engine Unit,Thoraipakkam
------------------
Total 1,70,218/-
__________
According to the AO, none of the above funds was covered u/s
36(1)(iv) or section 36(1)(v) and there being nothing to show
that the contributions made by the assessee to the said funds
was as per the requirement of any law, he therefore,
disallowed the entire amount paid by the assessee as
contributions to the various funds by invoking the provisions
of section 40A(9). Before the learned CIT(Appeals), it was
submitted by the assessee that all the contributions made to
the various funds other than the contributions to unrecognized
superannuation funds were as per the agreement with
workers' union and since the same was done as per the
Industrial Dispute Act, 1947, the provisions of section 40A(9)
were not applicable. The learned CIT(Appeals), however, did
not find merit in these contentions of the assessee. According
to him, all the contributions having been made by the
assessee to non statutory funds, the same were not eligible
for deduction in view of the express provisions contained in
section 40A(9). 12. We have heard the arguments of both the
sides on this issue and also perused the relevant material on
record. The learned counsel for the assessee has reiterated
before us the submissions made before he learned
CIT(Appeals) to the effect that most of the contributions having
been made by the assessee as per the settlement arrived at
with the workers' union, the same are covered by the
Industrial Dispute Act, 1947 and provisions of section 40A(9)
of the Act cannot be invoked. However, she has not been able
to produce any evidence in the form of the copy of agreement
with the workers' union to support and substantiate her stand
taken on this issue and in the absence of the same, we find
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Greaves Cotton Ltd.
(formerly Greaves Ltd)
ITA No. 7356/Mum/2011
no justifiable reason to interfere with the impugned order of
the learned CIT(Appeals) confirming the disallowance made
by the AO on this issue by invoking the provisions of section
40A(9). Ground No. 4 of the assessee's appeal is accordingly
dismissed. 13. Now we shall take up the appeal of the
Revenue, ground No. 1 of which involves the issue relating to
addition of Rs.39,75,000/- made by the AO by way of TP
adjustment in respect of the transactions of the assessee
company with its AE involving import of components.
Accordingly, following the earlier years' precedence, this issue is
decided against the assessee and thus, ground no. C is treated as
dismissed.
15. Next issue raised vide ground no. D is disallowance of
various payments on the ground of infraction of law. The details of
such payments were under :
1) Charges towards late payment fee to Chennai
Municipal Corporation Rs. 9,650/-
2) Sales tax charged due to technical error and
Stating destination of as Indore even though
Consignee's name and address were correctly
Written on consignment Rs. 1,22,887/-
3) Compliance fee per Weights and Measurement
Rules Rs. 32,000/-
4) Amount paid to High Court in pursuance of High
Court order on company's stay petition in respect
Of appeal to HC Rs. 10,00,000/-
Rs.11,65,749/-
16. Before the CIT(A), assessee contended that these payments
are neither for penalties nor on account of any infringement of law.
Relevant submission with regard to such payment made before the
CIT(A) were as under :
"(i) Charges of Rs. 9,650/- paid for late payment to
Corporation of Chennai towards Health License is not
punitive one but compensatory and is allowable as
business expenditure.
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Greaves Cotton Ltd.
(formerly Greaves Ltd)
ITA No. 7356/Mum/2011
(ii) Sales tax charged of Rs. 1,22,887/- due to technical
error of stating destination of consignee as Indore even
though consignee's name and address correctly written
on consignment is not penalty but compensation for
technical error.
(iii) Charges of Rs. 32,000/- for compliance of weights &
Measurement Rules is not punitive and hence allowable
is business expenditure.
(iv) Amount paid to High Court of Rs. 10,00,00/- in
pursuance of High Court order on company's stay
petition in respect of appeal to High Court is not a
penalty".
The Ld. CIT(A) confirmed the said addition on the ground that
these payments were made by the assessee on account of error
committed for non-compliance of certain regulations; interest for
the delayed statutory payment and also penalty. Accordingly, such
payments cannot be compensatory in nature but in the nature of
infraction of law.
17. After considering the submissions made by the parties and
also the relevant findings given in the impugned orders, we find
that so far as late payment of fee to Chennai Municipal
Corporation is concerned it is on account of late payment of Health
License, it is not for any kind of penalty or infraction of law.
Accordingly, the payment made to Chennai Municipal Corporation
is treated as business expenditure. As regards the payment on
account of sales tax, it was due to technical error wherein assessee
has stated that the destination of consignee as Indore despite the
fact that name of consignee, destination and address were
correctly written. This again cannot held to be in the nature of
penalty or infraction of law. Next, amount of charges of Rs.
32,000/- for compliance of Weights and Measures is not for any
violation which can be suggestive of any infringement of law, hence
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Greaves Cotton Ltd.
(formerly Greaves Ltd)
ITA No. 7356/Mum/2011
it cannot be held to be punitive in nature and accordingly, the
same is held to be allowable. Lastly, as regard the amount paid to
the High Court for sum of Rs. 10,00,000/-, this was on account of
direction given by the High Court for granting Stay of demand on
Company's Stay Petition in respect of appeal filed before the High
Court. The said direction for depositing the amount was to be
allowed in the year where it will get adjusted against the demand.
Accordingly, this payment cannot be held to be for any infraction of
law or penalty. Accordingly, the same is treated as allowed. Thus
ground D is treated as allowed.
18. Next issue relates to disallowance of claim of deduction of R
& D expenses of Rs. 6,48,912/-.
19. The assessee has incurred capital expenditure of Rs.
6,48,912/- for the research of multipurpose light engine Units,
which was claimed as deduction allowable u/s 35. Since assessee's
core product are engines, therefore, the assessee has to necessarily
carry out research and development for developing efficient engines
to stay in market and business. The assessee had decided to
develop world class multipurpose engines and for this purpose it
embarked upon "Avatar Project" and incurred expenses on
technical expert advice, project materials and fees for Technical
advisory services. The said project was to be completed in AY
2007-08 and sample products was also tested. Accordingly, the
expenditure incurred on such a project was claimed as deduction
u/s 35(1)(iv) r.w. sub-section (2)(ia). The Ld. CIT(A) and AO held
that since the Auditors have mentioned "nil" amount against the
deduction allowable u/s 35D, which means that nothing is
qualified for deduction u/s 35.
20. Before us, the Ld. Counsel submitted that all the details
were furnished regarding expenses incurred for R & D purpose for
the "Avatar Project". Once that is so, then even, if the Auditors
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Greaves Cotton Ltd.
(formerly Greaves Ltd)
ITA No. 7356/Mum/2011
have not mentioned or qualified the amount, this does not mean
that same is not allowable. On the other hand, Ld. DR strongly
relied upon the order of the CIT(A). The Ld. CIT(A) has dismissed
the assessee's claim in the following manner :-
"I have considered the fact of the case and submissions of the
appellant as against the observation/finding of the AO in this
regard. The only explanation given by the appellant about the
mention of the Auditors, that the project was kept on hold due
to huge losses incurred by the appellant in the earlier three
years' This alone cannot be the reason taken by the auditors
to not mention any amount which is otherwise qualified for
deduction under section 35 of the act. The job of the auditors
is to examine the facts of the case and given appropriate
certificate and qualifications where ever required. The very
fact that the auditors have mentioned NIL against the
deduction allowable u/s 35 of the act, would mean that there
is no such amount in the books of accounts of the appellant.
Further but for submission as above, the appellant has not
submitted details of capital expenses incurred by it, which
would qualify for deduction under section 35 of the Act.
Further the appellant has not even furnished any clarification
from their auditors to this effect that they mentioned NIL
against deduction u/s 35 for the reason that the appellant
kept on hold the project due to huge losses incurred by the
Appellant in earlier three years. Taking into consideration all
the facts of the case, the action of the AO is considered
justified and his action is upheld. Accordingly this ground of
appeal is dismissed".
21. After considering the rival submissions and on perusal of the
impugned orders, it is seen that assessee has taken a plea that it
had incurred expenditure on research and development for
developing a world class multipurpose engine for which it has
embarked on "Avatar Project", which got completed in AY 2007-08
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ITA No. 7356/Mum/2011
and sample products were also tested. Since AO and CIT(A) have
solely gone by the fact that that in the tax audit the amount under
R & D has not been qualified therefore, in the interest of justice, we
are of the opinion that this matter should go back to the file of the
AO to verify the details of expenses incurred by the assessee and if
the same are for R&D purpose, as claimed by the assessee, then
the same should be allowed as deduction u/s 35(1)(iv).
Accordingly, ground E is treated as allowed for statistical purposes.
22. In ground no. F, the assessee has challenged the addition on
account of unutilized CENVAT credit of Rs. 1,44,14,614/-.
23. The AO has made addition on account of unutilized CENVAT
credit on the ground that the assessee is following exclusive
method of valuation of closing stock and it is contrary to the
provisions of section 145A. When assessee is following exclusive
method of valuation then while making the adjustment u/s 145A it
will be mandatory to increase the valuation of closing stock of
inputs by the debit balance of CENVAT credit available account
appearing on the asset side of the Balance sheet. It should be
further increased by SINVAT credit of raw material utilized in
payment of duty of finished goods. The assessee's case before the
authorities below was that, it has been following the consistent
method of account for valuing the inventory. If addition of CENVAT
amount is added to the closing stock, then it would distort the real
profit and will disturb the consistency in valuation of inventory.
Heavy reliance was placed on the decision of Hon'ble Supreme
Court in the case of Indo Nippon Chemicals, 261 ITR 275. The Ld.
CIT(A), held that if any adjustment is made on account of
unutilized CENVAT credit in the closing stock then proper effect of
section 145A should be given and corresponding adjustment is to
be made in the opening stock. For coming to this conclusion, he
relied upon the decision of Bombay High Court in the case of CIT
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Greaves Cotton Ltd.
(formerly Greaves Ltd)
ITA No. 7356/Mum/2011
vs. Mahalakshmi Glass Works Private Limited, reported in 318 ITR
116. Accordingly, this addition was restricted to Rs. 53,14,543/-.
24. Before us, the Ld. Counsel merely submitted that the full
effect of section 145A has to be given and purchases made during
the year should also be given effect to.
25. After going through the relevant finding given in the
impugned order, we find that the Ld. CIT(A) has rightly directed the
AO to make corresponding adjustment of CENVAT credit in the
opening stock also in accordance with the decision of jurisdictional
High Court. However, the Ld. CIT(A) has not referred to purchases
made during the year as similar treatment has to be given for the
purchases also. Accordingly, we direct the AO to give effect of
adjustment in the purchases made during the year and work out
the relief. Thus ground no. F is treated as partly allowed for
statistical purposes.
26. As regards, the issue in ground G with regard to the interest
waiver of CIT(A) Rs. 10,14,94,385/-, the addition has been made
by the AO on the ground that CBDT has not any issued certificate
till date on waiver application filed by the assessee u/s 41(1) as per
the order of the BIFR. The assessee has shown an amount of Rs.
10,14,94,385/- on account of interest waived by the bank as
taxable, however, in the loss shown in the return, the said amount
was not reduced. The reason being, the assessee had filed an
application before the CBDT seeking exemption u/s 41(1) for the
waiver of interest.
27. The CIT(A) has confirmed the said addition on the ground
that CBDT has not issued any certificate till date. The Ld. Counsel
submitted that suitable direction should be given that, as and
when the CBDT grants certificate, then effect should be given.
28. We agree with such a proposition of Ld. Counsel that, as and
when certificate is issued by the CBDT then corresponding effect
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Greaves Cotton Ltd.
(formerly Greaves Ltd)
ITA No. 7356/Mum/2011
should be given to the assessee for not taxing the interest amount
which has been waived. Accordingly, this matter is restored back
to the file of the AO so as to give effect to the CBDT's certificate if it
has been or would be issued by the CBDT. Needless to say that if
such certificate is not produced by the assessee, then AO can draw
adverse inference. Accordingly, ground G is treated as allowed for
statistical purposes.
29. Next issue raised vide ground no. H is addition on account of
transfer pricing adjustment of Rs. 1,23,86,407/- in respect of
import made from AEs, based on internal comparable transaction
with another AE.
30. The assessee has undertaken transaction of import purchase
of "kits and spares" from its two AEs namely, BOMAG GmbH,
Germany (BOMAG) and CIFA Spa, Italy (CIFA) for sums amounting
to Rs. 5,56,07,570/- and Rs.6,80,36,363/- respectively. For the
purpose of benchmarking the arms length price on these
international transaction, the assessee adopted `Resale Price
Method' (RPM) as the most appropriate method and has taken
external comparables by adopting Profit Before Tax (PBT)/net
sales. The assessee's margin on such gross import was declared at
11.75% with BOMAG GmbH, 5.25% with CIFA the average of
which was arrived at 8.53%. The details of sales, profit and gross
margin are as order :-
CIFA % BOMAG %
Sales 19,05,60,100 100 16,09,81,100 100
Less: Imports
(international
transaction) 6,80,36,363 35.70 5,56,07,570 34.54
Gross Profit of
International
Transaction 12,25,23,737 64.30 10,53,73,530 65.46
Less:
Indigenous cost
(Local transactions) 11,24,62,164 59.02 8,54,09,950 53.69
Total Gross Profit 1,00,61,573 5.28 1,89,63,574 11.78
The gross margin of external comparables i.e. L & T Ltd., at 7.42%
and Ingersoll India Rand Ltd. was 6.6%. Hence it was stated that,
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(formerly Greaves Ltd)
ITA No. 7356/Mum/2011
the assessee's gross margin was much better and accordingly, it
was submitted that the margin of import with AE was at arm's
length price.
31. However, the Ld. TPO observed that assessee is showing its
transfer pricing result by adopting TNMM to justify the margins.
He also rejected the external comparables selected by the assessee.
He further observed that since assessee is carrying out transaction
with 2 AEs, therefore, there is an internal comparability and if
internal RPM is applied and gross margin of BOMAG GmbH,
Germany which was at 11.7% and transaction with SIFA Spa,
Italy, which was 5.28% is applied to benchmark the assessee's
margin, then it can be seen that there is huge variation and
therefore adjustments has to be made. Thus, he held that 11.78%
should be taken as arm's length gross profit margin for
benchmarking the margin with SIFA Spa, Italy. Accordingly, an
adjustment of Rs. 1,23,86,407 was made on account of transaction
with SIFA Spa, Italy.
32. Before the CIT(A), the assessee clarified that it has adopted
RPM as most appropriate method for benchmarking the import
transaction with its two AEs and had not resorted to TNMM as
observed by TPO. Regarding two external comparables, the
assessee submitted that segmental result of L&T are comparable
with the assessee and it was found so in the earlier years, wherein
it was held to be as a good comparable. Further, the assessee
imports Tailor made spare components and the imported items
purchased from AE are not sold in the Indian market. The assessee
imports from BOMAG GmbH, Germany tailored made spares,
components and kits for manufacture of Tandem Rollers and
Vibratory Compactors and similarly, the imports from CIFA, Italy
are also tailor made components and kits for manufacture of
transit /Concrete Mixtures. Both these items are used for
infrastructural equipments like road construction equipments and
17
Greaves Cotton Ltd.
(formerly Greaves Ltd)
ITA No. 7356/Mum/2011
transit mixture for supplying concrete mixture. Since two external
comparables selected by the assessee were also dealing in
infrastructural activity, therefore, same were taken as external
comparables. The assessee detailed submission giving point-wise
rebuttal of TPO's finding has been incorporated by the CIT(A) from
pages 40 to 44 of the appellate order. However, Ld. CIT(A),
confirmed the action of the TPO as per discussion appearing in
para 18.2.3 from pages 45 to 48 of the appellate order on the
ground that, firstly, the computation of gross profit submitted by
the assessee has not found to be correct on facts and also as per
the accounting practice; secondly, internal comparability resorted
to by the TPO has not been disputed by the assessee and lastly,
the assessee has not identified external comparability and
therefore, the internal comparability resorted by the TPO is fully
justified.
33. Before us, the Ld. Counsel Ms. Aarti Vissanji submitted that,
first of all, the internal comparability resorted by TPO and
confirmed by CIT(A) is incorrect on facts and also under the
transfer pricing regulation given in Rule 10B. The two transactions
with the AE cannot be compared, because both are controlled
transactions and any comparability for benchmarking arm's length
price has to be done by uncontrolled transactions. Thus, she
submitted that entire determination of arm's length price
submitted by the AO is erroneous. She further submitted that
external comparables, as submitted by the assessee should be
adopted and in case of L & T, the same has held to be a good
comparable in the earlier year, which has been upheld by the
Tribunal also, therefore, TPO should be directed to accept the
assessee's external comparables.
34. On the other hand Ld. DR, argued that it is not in dispute
that Resale Price Method (RPM) should be adopted and PLI should
be the gross margin. If there are no internal comparables having
uncontrolled transactions then matter should be restored back to
18
Greaves Cotton Ltd.
(formerly Greaves Ltd)
ITA No. 7356/Mum/2011
the file of the TPO for carrying out fresh comparability analysis by
selecting external comparables, to benchmark the gross margins.
35. We have considered the rival submissions also perused
relevant finding in the impugned orders. The transfer pricing
adjustment has been made in relation to the import of spare part
and equipments made from one AE, with the margin made from
similar transaction with another AE. Thus, the comparability
analysis as made by the AO/TPO and confirmed by CIT(A) by
comparing two uncontrolled transactions, cannot be sustained.
Under the transfer pricing regulations, a comparability analysis is
a comparison of a controlled transaction with uncontrolled
transaction and they are comparable if none of the difference
between transactions could effect the factors like price or margin.
If there are some differences then a reasonable accurate
adjustment can be made to eliminate the material effect of any
such difference. Here in this case, it is an undisputed fact that
RPM should be adopted as Most Appropriate Method, wherein the
gross margins i.e. gross profit over the sales are earned in the
transactions are compared between the related and unrelated
parties for the determination of arm's length price. The TPO has
carried out comparative analysis by adopting internal transactions
with two AEs, which are completely controlled and related party
transactions, hence, such a comparability analysis at the threshold
is liable to be rejected. Accordingly, the entire approach of the TPO
as well as CIT(A) is rejected because appropriate comparison has to
be made from comparable uncontrolled transaction with the third
parties, if there are no uncontrolled internal transaction. The
assessee has selected two comparables initially and later on added
one more comparable i.e. Escorts Ltd. The turnover (in crores);
segmental result plus percentage margin of the three comparables
were as under :-
19
Greaves Cotton Ltd.
(formerly Greaves Ltd)
ITA No. 7356/Mum/2011
Greaves Larsen & Ingersoll Escorts
Cotton Ltd Toubro Ltd Rand
31.3.2004 31.3.2004 31.3.2004 30.06.2004
1 Turnover 69.1 8,252.2 152.4 146.5
2 Segment Result
Margin 5.8 613.1 10.1 2.3
3 % of Margin on
Turnover 8.3 7.4 6.6 1.6
Since the TPO as well as CIT(A) has not carried out any
comparability analysis vis-à-vis these external comparables,
therefore, in the interest of justice, we are of the opinion this
matter should be restored back to the file of the TPO/AO for
examining the three external comparables and complete gross
profit margin for benchmarking the assessee's gross profit margin
in the import transaction carried out by the assessee with its AE.
Accordingly, ground no. H is treated as partly allowed for statistical
purposes.
36. In ground no. I, the assessee has challenged carried forward
losses and unabsorbed depreciation.
37. At the time of hearing, the Ld. Counsel submitted that this is
a general ground and hence same is not pressed. Accordingly,
ground I is not adjudicated upon.
38. In ground no. J, the assessee has challenged the
computation of long-term-capital-gain on sale of flat held for more
than 3 years.
39. Brief facts are that, the assessee has sold residential flats
which were acquired prior to 5 years. As per the depreciation
statement in the block of assets, residential building was shown at
"nil". Accordingly, the Assessing Officer treated gain on sale of
these flats as short-term-capital-gain u/s 50. The assessee's case
before the authorities below was that since these flats were held for
more than 5 years, hence held to be capital arising from sale of
20
Greaves Cotton Ltd.
(formerly Greaves Ltd)
ITA No. 7356/Mum/2011
flats were long-term capital gain. It was submitted that fiction
created in section 50 is only to restricted to mode of computation
of capital gain contained in sections 48 & 49 and does not apply to
other provisions of the sections. Accordingly, assessee contended
that the capital of Rs. 4,19,85,805/- should be treated as long-
term-capital-gain and not short term. In support, the assessee had
relied upon the decision of Bombay High Court in the case of [CIT v
Ace Builders (P.) Ltd 281 ITR 210] and CIT v Legal Heir of Later
Mrs. S R Pandit (ITA No. 775/2005 dated 30.08.2005). However,
the Ld. CIT(A) rejected the assessee's contention and affirmed the
order of the AO.
40. Before us, the Ld. Counsel strongly relied upon, the decision
of ITAT Mumbai Bench in the case of Smita Conductors Ltd. vs
ACIT reported in [2015] 152 ITD 417 wherein the decision of
Hon'ble Bombay High Court in the case of S A Builders Ltd. has
been relied upon.
41. On the other hand Ld. DR submitted that section 50 is non-
obstinate clause wherein it is deemed that an asset, which was
part of the block of asset is deemed to be short-term-capital-gain.
Thus, it has to be treated as short-term-capital-gain.
42. We have heard the rival contentions and also perused the
relevant material on record. The deeming provisions as contained
in section 50 is to be restricted only to the computation of capital
gain, as held by Hon'ble Bombay High Court in the case of Ace
Builders Pvt Ltd. (supra). Further, in the case of Smita Conductors
Ltd., the Tribunal held as under :-
Capital gain in case of the assessee has to be assessed as
long term capital gain as the flat had been held by the
assessee for more than three years. It has been argued that
provisions of section 50 deeming the capital gain as short term
capital gain is only for the purposes of section 48 and 49
21
Greaves Cotton Ltd.
(formerly Greaves Ltd)
ITA No. 7356/Mum/2011
which relate to computation of capital gain. The deeming
provisions has, therefore, to be restricted only to computation
of capital gain and for the purpose of other provisions of the
Act, the capital gain has to be treated as long term capital
gain. The view canvassed by the learned AR is supported by
the judgment of Hon'ble High Court of Bombay in case of Ace
Builders P. Ltd. (Supra) in which it has been held that for the
purpose of other provisions of the Act such as section 54EC
the capital gain has to be treated as long term capital gain, if
the asset is held for more than three years. The same view
has been taken by the Mumbai bench of Tribunal in case of
Manali Investments Vs. Assistant Commissioner of Income
Tax (139 TTJ 411) in which it has been held that the
prescriptions of section 50 are to be extended only to the stage
of computation of capital gain and, therefore, capital gain
resulting from transfer of depreciable asset which was held
for more than three years would retain the character of long
term capital gain for the purpose of all other provisions of the
Act. In this case the Ld. AR for the assessee submitted that
flat had been held for 15 to 20 years which is supported by
the fact that cost of the flat as shown in the balance sheet
was only Rs. 1,30,000/-. Therefore, if the flat is held for than
three years the tax rate has to be applied as provided in
section 112 of the IT Act applicable in respect of capital gain
from transfer of long term capital asset.
2.6 We, therefore, held that, for the purpose of computation of
capital gain, the flat has to be treated a short term capital
gain u/s 50 of the IT Act, but for the purpose of applicability of
tax rate it has to be treated as long term capital gain if held
for more than three years. We accordingly direct the AO to
compute the capital gain from the sale of flat and apply the
appropriate tax rate after necessary verification in the light of
observations made in this order
22
Greaves Cotton Ltd.
(formerly Greaves Ltd)
ITA No. 7356/Mum/2011
Accordingly, on similar line we direct the AO to compute the
capital gain from sale of flat and apply appropriate tax rate.
Accordingly, ground no. J should be treated as allowed.
43. Ground No. K, the assessee has challenged the addition to
the book profit on account of extra ordinary items of Rs.
2,73,20,474/-.
44. In this regard, the assessee has filed a separate compilation
of paper book with a petition for admissions of additional evidence
and submitted that the same should be admitted and matter can
be restored back for proper verification and adjudication. The
relevant facts are that, the AO while calculating book profit u/s
115JB has made the addition of following extraordinary items as
discussed in Schedule "T" note 11 of Audited Financial accounts,
which are as under :-
"R.1 Extraordinary item (Net) as described in
Schedule T note 11
(i) The company obtained permission of
Share holder Rs.37,90,00,000
On 25./2/2003 for disposal of RPRL
undertaking under section 293(1)(a)
of the Companies Act, 1956 through
postal ballot. As per notice to the
shareholders the directors estimated
the sale value of the undertaking to be
Rs. 11,00,00,000/-. Accordingly the
Estimated loss of Rs. 37,90,00,000/- has
been provided and disclosed as
extra ordinary in the accounts
(ii) Pending disposal of RPRL undertaking
Unamortized Balance of Goodwill as on
30.06.2003 amount to Rs. 14,82,20,274/-
is written off and disclosed as on Extra-
ordinary item in the securities
Rs. 14,82,20,476/- ___________________
Rs.52,72,20,474/-
Less :The lending institutions had advised
the company to go in for a One
Time Settlement to settle the
23
Greaves Cotton Ltd.
(formerly Greaves Ltd)
ITA No. 7356/Mum/2011
Debts of the erstwhile RPRL which
Were taken over by the company.
BIFR has also directed all parties
to enter into an one time Settlement.
The Company entered into an One Time
Settlement with the principal and Interest
Waived for earlier years amounting to Rs.
20,24,65,688/- is written back and
disclosed in the accounts.
_____________________
Extraordinary item(Pg 40
of the audited accounts Rs.32,47,54,786/-"
=================
The assessee's case had been that, it has not sold PPRL Unit
in AY 2004-05 and instead of estimating sale value of Rs. 11 crores
and provided estimated loss of Rs. 37,89,80,137/-. Further the
assessee has sold RPRL unit in 2005-06 and not in AY 2004-05.
The assessee's clarification in this regard has been incorporated by
the CIT(A) from pages 57 to 59 of the appellate order. However, the
Ld. CIT(A) rejected the assessee's contention after observing and
holding as under :-
"In the facts of the case, the appellant only acquired
permission from the shareholders without any concrete
proposals to sell the RPRL Unit and estimated the sale value
of the undertaking at Rs. 11 crores and provided estimated
loss of Rs. 37.90 crores and disclosed the same as
extraordinary item. The appellant has made such provisions
for losses based on the Valuation Report of approved valuer
M.C. Dalal & Co. It is seen from the copy of the valuation
report attached with the submissions that it clearly mentions
valuation is based on the existing ground reality and could
vary depending upon the actual time of sale. The valuation
report is dt. 29.06.2003. However it is mentioned here that the
sale of RPRL unit did not take place in the AY 2004-05. As per
the facts submitted by the appellant, the unit was sold in the
previous year pertaining to AY 2005-06. Accordingly, the
provisions for such losses by the appellant could only be
24
Greaves Cotton Ltd.
(formerly Greaves Ltd)
ITA No. 7356/Mum/2011
considered as reserve created for the future losses on account
of diminution in value of investment in RPRL Unit including for
the Goodwill. The provision for such losses would therefore
come within the ambit of unascertained liabilities as it is the
fact of the case that during the year under consideration, only
permission from the shareholders were received by the
appellant, there was nothing on record to prove that the
appellant had any concrete proposal from the buyers. Further
the sale of the plant only took placed in the previous year
pertaining to AY 2005-06 and not in the year under
consideration and the charge of income is therefore merely on
the basis of estimation. However, it could be said that the
estimation is based on the valuation report but such valuation
report had clearly qualified its finding that there may not be
any buyers for the purchase of assets on going concern basis,
given the limited alternate use for the facilities and that the value
are based on existing grounds realities and could vary depending
upon the actual time of sale. The actual time of sale
per se was not the year under consideration but only took
place in the next year.
Such provisions for loss on account of diminution in the
investment in RPRL unit could be considered as reserve
created for future losses on the basis of certain estimation.
Such reserve for future losses created are the amount of
money which is not committed towards any ascertained
liability and therefore this money would be available to the
company for any other use till the time of actual sale of the
unit. Further, the actual sales anyway resulted into profit or
loss which took placed in the previous year relevant to the AY
2005-06, has not been detailed or submitted by the appellant.
Further with amendment of Finance Act, 2009, w.e.f.
01.04.2001, the amount or amounts set aside as provision for
diminution in value of any assets is required to be added to
25
Greaves Cotton Ltd.
(formerly Greaves Ltd)
ITA No. 7356/Mum/2011
the profit as shown in the Profit & Loss Account to arrive at
the book profit as per clause `i' of Explanation 1 of Section
115JB(2). Accordingly, such provisions created for diminution
in the value of investment in RPRL unit including Goodwill is
considered as unascertained liability in the shape of the
reserve created and accordingly it is held that the clause `c' /
`I' of Explanation 1 of Sec 115JB(2) are clearly applicable to
the facts of the case and the action of the AO in this regard is
therefore upheld. Consequently this sub round of appeal
raised by the appellant is dismissed".
45. The assessee before us has now filed a computation of paper
book containing additional and petition for admission of such
additional evidences which are in the form of lease agreement dated
06.11.2003 and sale agreement dated 30th June 2004, both
pertaining to RPRL Unit which was available on the date of the
Balance Sheet for the relevant previous year. These additional
evidence go to the very root of the issue involved and therefore, we
are of the opinion that same should be admitted and this entire
matter should be restored back to the file of the AO to examine
these additional evidence and decide this issue afresh and in
accordance with the provisions of the law. Accordingly, ground no.
K is treated as allowed for statistical purposes.
46. In ground no. L, the assessee has challenged addition on
account of revaluation of reserve of Rs. 6,80,317/- made in the
book profits. The AO observed that assessee has reduced an
amount of Rs. 6,80,317/- on account of transfer from revaluation
reserve, from the book profit. This revaluation is allowed to be
reduced from the book profit of the year, when the said provision
was made, and has been increased by these reserve or provision as
per the proviso to sub-clause (i) under Explanation to section
115JB(2). The AO observed that since no details or brief has filed
therefore it is not allowed as deduction.
26
Greaves Cotton Ltd.
(formerly Greaves Ltd)
ITA No. 7356/Mum/2011
47. Before the CIT(A), the assessee submitted that the assessee
has withdrawn to revaluation reserve sum of Rs. 6,80,317/- and
credited to the P&L account and hence the same is to be reduced
from book profit. Further, the audited account were available on the
income-tax records, which shows the withdrawal made from
revaluation reserve and simultaneously credit in the P&L account
by deducting it from depreciation and hence such a withdrawal
from revaluation should be reduced from the book profit. The Ld.
CIT(A), however, uphold the action of the AO.
48. After hearing both the parties and on perusal of the material
placed on record, it is seen that depreciation of Rs. 16,10,62,604/-
has been reduced by the amount transferred from revaluation
reserve and only the net depreciation has been debited i.e. Rs.
6,80,317/- and accordingly, this net depreciation which has been
transferred and reduced from revaluation reserve credited to the
P&L account, ought to be excluded. Accordingly, AO is directed to
reduce the net amount of Rs. 6,80,317/- on account of depreciation
from the book profit in view of Explanation (i) to section 115JB(2).
Thus, ground no. I is treated as allowed.
49. Ground M, the assessee has claimed that deduction u/s
80HHC should be allowed in the working of MAT and the export
profit as per the books to be reduced.
50. The AO in the assessment order held that since assessed
profit and business profit, assessee is not eligible for deduction u/s
80HHC. The assessee's case was that as per provisions of section
115JB, there is a book profit and therefore, the deduction for the
purpose of eligible profit u/s 80HHC is to be worked out based on
such book profit deducted as per explanation (iv) to section
115JB(2). However, the Ld. CIT(A) dismissed the assessee's
contention on the following ground :-
27
Greaves Cotton Ltd.
(formerly Greaves Ltd)
ITA No. 7356/Mum/2011
"I have considered the facts of the case, submission of the
appellant as against the observation / findings of the AO in
his order passed u/s 143(3) of the I.T. Act. In respect to the
submission of the appellant, it is stated that there is no doubt
that the deduction of eligible profit u/s 80HHC is to be given
from the book profit computed in accordance with the Sec.
115JB of the I.T. Act, 1961. However neither in the Circular
No. 680 dated 21.02.1994 of the CBDT not in the decision of
Hon'ble Supreme Court in the case of Ajanta Pharma Ltd. vs
CIT (2010) 327 ITR 305 (SC), it is mentioned that for the
purposes, the eligible profit u/s 80HHC is to be worked out
based on the book profit as computed in accordance with the
Sec 115JB of the Act. The AO's stand that the profits and
gains of the business of the appellant is NIL and hence the
appellant is not eligible for deduction u/s 80HHC from the
book profit computed in accordance with the Sec. 115JB of the
Act is therefore found to be justified and accordingly, this sub
ground of appeal is dismissed".
51. Admittedly, now the decision of the Hon'ble Supreme Court in
the case of Ajanta Pharma, reported in 327 ITR 305, clinches this
issue in favour of the assessee. The Ld. CIT(A) finding that a
decision of Hon'ble Supreme Court does not mention that eligible
profit u/s 80HHC is to be worked out based on book profit as in
accordance with 115JB is completely misplaced. Hon'ble Supreme
Court has categorically held that for computing the book profit u/s
115JB, the relief will be computed u/s 80HHC(3)/3A subject to
conditions under sub-clauses (4) and (4A) of that section. Thus, this
issue is squarely covered by the decision of Hon'ble Supreme Court
and accordingly ground no. M is treated as allowed.
52. In ground no. N, the assessee has raised that Ld. CIT(A)
should have directed the AO to deduct book profit carried forward
on loss or unabsorbed depreciation, whichever is less.
28
Greaves Cotton Ltd.
(formerly Greaves Ltd)
ITA No. 7356/Mum/2011
53. After hearing both the parties, we agree with the contention of
the Ld. Counsel that the loss or depreciation should be adjusted as
per the earlier/past MAT assessment i.e. the book profit determined
by the AO in the earlier years and not as per the book figures. The
assessee has given the working at page 368 of the paper book.
Accordingly, the AO is directed to verify the working and give
deduction of carried forward losses and unabsorbed depreciation on
the basis of assessment completed by the AO under MAT in the
earlier years. Accordingly, ground no. N is treated as allowed.
54. In the result, appeal of the assessee is partly allowed.
Order pronounced in the open court on 13th October, 2015.
Sd/- Sd/-
( ) ( )
(G S PANNU) (AMIT SHUKLA)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Mumbai, Date: 13th October, 2015
/Copy to:-
1) /The Appellant.
2) /The Respondent.
3) The CIT(A) -15, Mumbai.
4) The CIT 6, Mumbai.
5) "", , /
The D.R. "G" Bench, Mumbai.
6)
Copy to Guard File.
/By Order
/ / True Copy / /
/
,
Dy./Asstt. Registrar
I.T.A.T., Mumbai
* ..
*Chavan, Sr.PS
|
