Income Tax Appellate Tribunal - Delhi
Motherson Sumi Systems Ltd., New Delhi vs Assessee
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH : E : NEW DELHI
BEFORE SHRI I.P. BANSAL, JUDICIAL MEMBER
AND
SHRI A.K. GARODIA, ACCOUNTANT MEMBER
ITA No.5061/Del/2010
Assessment Year : 2006-07
Asstt. Commissioner of Vs. M/s Motherson Techno Tools Ltd.,
Income Tax, 2nd Floor, F-7, Block B-1,
Circle 5 (1), Mohan Cooperative Industrial
New Delhi. Estate,
Mathura Road,
New Delhi - 110 044.
PAN : AADCM5685K
ITA No.5062 & 5060/Del/2010
Assessment Years : 2006-07 & 2004-05
Asstt. Commissioner of Vs. M/s Motherson Sumi Systems
Income Tax, Ltd.,
Circle 5 (1), 2nd Floor, F-7, Block B-1,
New Delhi. Mohan Cooperative Industrial
Estate,
Mathura Road,
New Delhi - 110 044.
PAN : AAACK0405A
ITA No.5105/Del/2010
Assessment Year : 2006-07
M/s Motherson Sumi Systems Vs. Asstt. Commissioner of Income
Ltd., Tax,
2nd Floor, F-7, Block B-1, Circle 5 (1),
Mohan Cooperative Industrial New Delhi.
Estate,
Mathura Road,
New Delhi - 110 044.
PAN : AAACK0405A
(Appellant) (Respondent)
Assessee by : Shri Y.K. Sharma, CA
Revenue by : Shri Peeyush Sonkar, Sr. DR
2 ITA Nos.5061,5062,5105&5060/Del/10
ORDER
PER I.P. BANSAL, JUDICIAL MEMBER
ITA Nos.5062/Del/2010 and 5105/Del/2010 are cross appeals and
they are directed against the order of the CIT (A) dated 15th September, 2010 for assessment year 2006-07. ITA No.5060/Del/2010 is an appeal in respect of levy of penalty u/s 271 (1) (c) and it is directed against the order passed by the CIT (A) dated 14th September, 2010 for assessment year 2004-05. ITA No.5061/Del/2010 is an appeal directed against the order of the CIT (A) dated 14th September, 2010 in respect of assessment year 2006-07.
2. ITA No.5061,5062 & 5105/Del/2010 raise common issues. All these four appeals were heard together and, for the sake of convenience, all these appeals are disposed off by this consolidated order. Grounds of appeal in each of the appeal are as under:-
ITA No.5061/Del/2010.1. The order of the learned CIT (Appeals) is erroneous & contrary to fats and law.
2. On the facts and in the circumstances of the case and in law, the learned CIT (Appeals), has erred in deleting the addition made of Rs.8,79,913/- made by the A.O. capitalizing 25% of the expenses on account of royalty paid.
2.1 The Ld. CIT (A) ignored the findings recorded by the A.O. and the fact that the assessee will be deriving long term benefits by paying royalty and the fact that the assessee's case is covered by the judgement of Hon'ble Apex Court in the case of Southern Switch Gears Ltd. reported in 232 ITR 359. TPO and also the fact that the calculation has been correctly done by the TPO.
3. The appellant craves leave to add, to alter, or amend any grounds of the appeal raised above at the time of hearing.3 ITA Nos.5061,5062,5105&5060/Del/10
time of hearing.
ITA No.5062/Del/2010.1. The order of the learned CIT (Appeals) is erroneous & contrary to fats and law.
2. On the facts and in the circumstances of the case and in law, the learned CIT (Appeals), has erred in restricting the addition made u/s 14A to Rs.16,59,876/- as against Rs.51,02,843/- made by the A.O and also in directing the A.O to exclude certain items for calculating disallowance as per Rule 8D of the IT Act.
2.1 The Ld. CIT (A) ignored the fact that the disallowance has been correctly made by the A.O. u/s 14A of the At as per the provisions of the Rule 8D of the IT Act.
3. On the facts and in the circumstances of the case and in law, the learned CIT (Appeals) has erred in deleting the addition made of Rs.73,96,638/- made by the A.O. capitalizing 25% of the expenses on account of royalty paid.
3.1 The Ld. CIT (A) ignored the finding recorded by the A.O. and the fat that the assessee will be deriving long term benefit by paying royalty and the fact that the assessee's case is covered by the judgment of Hon'ble Apex Court in the case of Southern Switchgears Ltd. reported in 232 ITR 359.
4. The appellant craves leave to add, to alter, or amend any grounds of the appeal raised above at the time of hearing ITA No.5060/Del/2010
1. The order of the learned CIT (Appeals) is erroneous & contrary to facts & law.
2. On the facts and in the circumstances of the case and in law, the learned CIT (Appeals) has erred in deleting the penalty Rs.9,75,250/0 levied by the A.O u/s 271(1)(c) of the IT At.
4 ITA Nos.5061,5062,5105&5060/Del/102.1 The Ld. CIT (A) ignored the fat that the assessee furnished inaccurate particulars of its income and concealed taxable income by claiming non-allowable deduction u/s 10B and 80IB of the IT Act.
3. The appellant craves leave to add, to alter or amend any grounds of the appeal raised above at the time of hearing.
ITA No.5105/Del/20101. a) That on the fats and in the circumstances of the case and under the provisions of law, the ld.
Commissioner has erred in directing that interest on proportionate basis be calculated and disallowed as having been incurred in connection with non taxable income for the year under question. This is the method provided U/R 8 d of the Income Tax Rules which is not applicable during the year under appeal.
b) The Assessing Officer has also erred in disallowing an amount of Rs.8,05,331/- as administrative expenses worked out on the basis of average value of investment (without giving any cogent reason) while noting that disallowance in terms of Rule 8 d was not possible in view of the Hon'ble Mumbai High Court decision.
3. The one common issue raised in ITA No.5062 & 5105/Del/2010 is regarding disallowance made on account of applicability of Rule 8D in respect of exempted income by applying Section 14A of IT Act, 1961. The facts relating to this issue are that during the course of assessment proceedings it was noticed by the Assessing Officer that the assessee had claimed exemption of income of dividend of ` 2,63,97,698/-. The assessee was required to explain as to why the disallowance could not be calculated as per Rule 8D u/s 14A of the Act. The assessee objected to the show cause notice given by the Assessing Officer on the ground that the disallowance could not be calculated as per Rule 8D which was inserted w.e.f. 24th March, 2008, hence, could not be applied for assessment year 2006-07 and without 5 ITA Nos.5061,5062,5105&5060/Del/10 prejudice to such argument the assessee submitted the calculation under Rule 8D and the said calculation is given at page 2 of the assessment order. Considering all these submissions, the Assessing Officer has worked out the disallowance by applying Rule 8D at ` 51,02,843/-. The disallowance made by the Assessing Officer was objected to before the CIT (A) and reference was made to the decision of Hon'ble Bombay High Court in the case of Godrej & Boyce Mfg. Pvt. Ltd. 43 DTR 177 (Bom.) Ld. CIT (A) after considering the contentions of the assessee and also considering the decision of Hon'ble Bombay High Court has come to the conclusion that the disallowance was not called for so far as it relates to interest of ` 12,13,22,244/- and ` 1,09,43,374/-. However, with reference to other payments he has observed that no clear evidence was filed by the assessee company to suggest that the same was also incurred for the regular business activity and no part thereof was relating to earning of income not forming part of the taxable income. Thus, learned CIT (A) has directed the Assessing Officer to re-calculate the interest on proportionate basis and disallow the same as having been incurred in connection with non- taxable income. So as it relates to indirect expenses, learned CIT (A) has observed that the disallowance of ` 8,05,331/- regarding indirect expenses is not unreasonable and excessive, therefore, the said disallowance is sustained. The assessee in its appeal is aggrieved by the direction given by the CIT (A) to uphold the part addition with respect to interest as well as disallowance upheld on account of indirect expenses. The department in its appeal is aggrieved with the findings of Ld. CIT (A) in which it has been held that interest of ` 12,13,22,244/- and ` 1,09,43,374/- is not related to the investment made by the assessee for investing in shares from where the interest free income has been earned.
6 ITA Nos.5061,5062,5105&5060/Del/104. Ld. DR, after narrating the facts submitted before us that for arriving at a conclusion that a sum of ` 12,13,22,244/- and ` 1,09,43,374/- was not related to investment made by the assessee in the shares from which the dividend was earned. The learned CIT (A) has relied on the proceedings for assessment year 1999-2000 in which it was found that no loan was utilized for investment in shares. Learned DR stated that the present year is assessment year 2006-07 and, therefore, it has not been verified that whether during the period from assessment year 1999-2000 till the end of the present year whether there was any change or not. He submitted that the department is objecting to such findings of learned CIT (A) vide which such amount was held to be excludible from calculating the disallowance. He submitted that it would have been better for CIT (A) if the matter was restored back to the file of Assessing Officer for recalculation of the disallowance instead of specifically excluding the aforementioned two amounts.
5. On the other hand, it was submitted by Ld. AR that as per the findings recorded by the Assessing Officer in the assessment order for assessment year 1999-2000, the investment made by the assessee in shares was always less than share capital and reserves of the company till the year under appeal and a chart was produced before the CIT (A) to substantiate such contention. Therefore, he pleaded that the value of investment never exceeded its own funds and there was no occasion to utilize borrowed funds for the purpose of making investment in the shares from where the assessee had earned exempted income. Thus, he pleaded that the order of learned CIT (A) that to the extent of the aforementioned two amounts are to be excluded, should be upheld.
6. So as it relates to assessee's appeal, learned AR stated that the disallowance to the extent of ` 8,05,331/- on account of indirect 7 ITA Nos.5061,5062,5105&5060/Del/10 expenses has wrongly been upheld by the CIT (A) and, therefore, the said disallowance should be deleted.
7. We have heard both the parties and their contentions have carefully been considered. According to the decision of Hon'ble Bombay High Court, Rule 8D strictly is not applicable for the assessment year 2006-07, but, at the same time, disallowance has to be made under the main provision i.e., Section 14A (1). The Assessing Officer has calculated the disallowance under Rule 8D and when the Assessing Officer framed the assessment, probably the decision of Hon'ble Bombay High Court was not available. The issue that whether or not investments made by the assessee in the shares from where the dividend has been earned could not be examined by the Assessing Officer as he has simply applied Rule 8D. This matter require examination in depth to calculate the disallowance u/s 14A(1). Therefore, we are of the opinion that no restriction should be imposed upon the Assessing Officer for re-adjudicating the disallowance. Therefore, he is directed to take into account the decision of Hon'ble Bombay High Court in the case of Godrej & Boyce Mfg. Pvt. Ltd. (supra) and also available case laws on the subject and after giving the assessee a reasonable opportunity of hearing re-adjudicate the issue as per directions contained herein.
8. For statistical purposes, the appeal filed by the assessee and ground No.2 of departmental appeal are allowed for statistical purposes in the manner aforesaid.
9. Ground No.2, which is only effective ground in ITA No.5061/Del/2010 is common with the ground No.3 of departmental appeal i.e., ITA No.5062/Del/10. At the outset it was pointed out that in the case of Motherson Sumi Systems Ltd. for immediate preceding assessment year i.e., assessment year 2005-06 vide order dated 31st 8 ITA Nos.5061,5062,5105&5060/Del/10 August, 2010 in ITA No.3728/Del/2009, this Tribunal has decided this issue in favour of the assessee and the disallowance was deleted.
10. The brief facts as culled out in the said order was that the assessee company is engaged in the manufacturing of integrated wiring harness including its components like wires, connectors, terminals, etc and engine cables mainly for automotive industry in India. The assessee is also engaged in the manufacturing of injection moulded and blow moulded plastic and rubber components for automobile industry, which are used for interior finishing and under bonnet in a car. It was found that the assessee company entered into a technical assistance agreement with Sumitomo on 3rd December, 1986 which was extended by Technical Assistance Agreement (Extension) on 20th December, 2001. The object of the agreement was that Sumitomo was to supply and provide licence to manufacture and sell the products as defined in the technical assistance agreement by using such technical information, know how and technical assistance. The Assessing Officer on an analysis of such agreement observed that technical information shall mean all knowledge including design, research findings, know how owned or controlled by Sumitomo in the area of manufacture of the products as on date and acquired during the currency of this agreement. According to the renewed agreement, the assessee company was required to pay Sumitomo running royalty of 2% of the net selling price on all models of Wiring Harnesses subject to taxes. Referring to the judgement of Hon'ble Supreme Court in the case of Southern Switchgear Ltd. 232 ITR 220, the Assessing Officer formed an opinion that the assessee will have certain benefits of enduring nature out of the payment of running royalty to the foreign collaborators and he treated it as a capital expenditure and allowed 25% as depreciation of the said amount and balance amount was disallowed. The Tribunal in its aforementioned order after considering 9 ITA Nos.5061,5062,5105&5060/Del/10 both the parties and after noting that in the case of sister concern of the assessee the Tribunal had treated the said amount as revenue expenditure and the said order of the Tribunal was also upheld by Hon'ble Delhi High Court in ITA No.750 of 2008 and considering all these things, the Tribunal has held this issue in favour of the assessee. Learned CIT (A) has also deleted the disallowance following the said decision of Hon'ble Delhi High Court. In this manner, it was claimed that this issue is covered in favour of the assessee and the departmental appeal relating to this issue should be dismissed.
11. We have heard both the parties on this issue and we have gone through the order passed by this Tribunal dated 31st August, 2010. The relevant observations of the Tribunal while deleting the disallowance are as under:-
"7. We have duly considered the rival contention and gone through the record carefully. On due consideration of the order of the Ld. CIT (A) we find that Ld. First Appellate Authority has made a detailed analysis of the facts and position of law propounded in various authoritative pronouncements. Ld. CIT (A) has almost concurred with the contention of assessee on all aspects except one which is available at serial No.1 of the chart extracted supra. In the case of Southern Switchgear the first factor considered by the Ld. CIT (A) is that factory was being set up whereas in the case of assessee it is a running factory for a number of years. Ld. First Appellate Authority further observed that payment for know-how by the assessee includes for plant layout. This he construed on an appreciation of annexure 1 and 2 attached with the agreement. In the technical agreement the parties have explained meanings of certain words and expressions used in the agreement. Article 1 gives those definitions. Technical information has been explained which read as under:-
1.2 Technical information.
'Technical Information' shall mean all knowledge including designing, research findings, know-how owned, controlled and lincemsable by SUMITOMO and described in Annex 1 attached hereto, in the area of manufacture of the Products both as on the Effective Date and acquired during the currency of this Agreement."
10 ITA Nos.5061,5062,5105&5060/Del/108. In annexure 1, 13 items have been given but we are concerned with the details at S.No.1 which are in relating to building and plant layout. The expression building and plant lay out means machinery and equipment lay out, environment, safety and anti pollution. According to the Ld. CIT (A) this plant layout will give long term/enduring benefit to the assessee and it deserves to be considered for the issue whether assessee made any payment for acquiring capital assets in the garb of royalty payment. In our opinion Ld. CIT (A) failed to look it with this angle. The assessee has a running factory. The plant lay out can be considered as utilization of the technology provided by Sumitomo in a better way. It is not the design and drawing of the factory but demonstrate the lay out of the machinery within the factory premises. So it is not such an important factor which can force the A.O. to unsettle the facts between the department of assessee settled in the last 20 years. This information may be relating to the arrangement of the machinery for giving better production in the line of technical assistance agreements. How it could be segregated from the other technical assistance for which a payment of running royalty is being considered as a revenue in nature. The Tribunal in the case of sister concern has dealt the issue in detail. The finding of the Tribunal report in paragraph 16.2 read as under;-
"We have considered the facts of the case and rival submissions. The agreement is placed in paper book-1 on pages 158-165. It is seen that the assessee was granted a non-exclusive right and licence to manufacture the products in the manufacturing territory and to sell the products in the sales territory. At the same time it become entitled to training facilities by mutual consent for which expenses were to be borne by the assessee. The assessee also become entitled to the technical assistance from the engineers of M/s Sumitomo, the expenditure for which was to be borne by the assessee. The assessee was not entitled to any right or license to use the name of M/s Sumitomo or any trademark owned by M/s Sumitomo etc. The assessee was to pay a lump sum consideration of US dollars 50,000/- in three installments and a running royalty of 3% of net selling price in respect of sales to SWS Group or Sahgal family concerns and 5% in case of other sales. The term of the agreement was fixed at 5 years. The effect of the termination was that all rights and licenses will cease immediately, but the assessee was permitted to dispose off the products in the inventories over a period of 150 days and M/s Sumitomo was entitled to royalties on such sales as if the sales were made 11 ITA Nos.5061,5062,5105&5060/Del/10 prior to the termination of the agreement. On the basis of three provisions, it becomes clear that the assessee was not left with any asset or residuary right on termination of agreement and even inventories were to be sold within 150 days. In the case of Southern Switch Gear Ltd. (supra), the Hon'ble Court found that the assessee derived benefit of enduring nature because it was left with the technical information. However, in the case of IAE Pumps Ltd. (supra), it was pointed out that general tests applicable in this matter have to be applied, namely, whether - (i) there was any acquisition of any capital assets, (ii) whether any benefit of enduring nature ensured to the assessee, or (iii) the expenditure was in capital field. Looking to the terms of agreement, we do not find that any of these tests was satisfied in the instant case. Therefore, we are of the view that the ld. CIT (A) rightly held that the expenditure to be revenue in nature. Thus, this ground is also dismissed."
9. This finding has been upheld by the Hon'ble Delhi High Court in ITA no.750 of 2008. On due consideration of all these facts and circumstances past history of the assessee and the decision of the Hon'ble Delhi High Court in the case of sister concern we allow the appeal of assessee and delete the disallowance."
12. In this view of the situation, respectfully following the aforementioned order of the Tribunal, we find no merit in the sole issue raised by the revenue in ITA No.5061/Del/2010 and ground No.3 raised in ITA No.5062/Del/2010. These grounds are dismissed.
13. Now, coming to ITA No.5060/Del/2010, the assessee had filed return at net income of `39,31,59,520/- in which it claimed exemption u/s 10B and also deduction u/s 80IB. The Assessing Officer reduced the exemption u/s 10B to the extent of ` 26,14,775/- as per following calculation:-
12 ITA Nos.5061,5062,5105&5060/Del/10For Chapter 10B
1. Noida Unit, C-14A & B Interest received interest Rs.12421/- on loans to employees
2. Bangalore Unit Due to scrap sales Misc. Rs.2319480/- Interest received Interest Rs.25681/- on loans to employees.
3. Noida, D-3, Sector-1 Intt. Received on Interest loans to employees Rs.16422/-
Misc. Rs.240771.43 Scraps sales
Rs.2614775/-
And 80IB deduction was also reduced to a sum of ` 3,99,153/-
which amount was calculated as under:-
For Chapter VI, read with Section 80IB
1. BBJ, Noida, C-14A & B Interest received interest Rs.23310/- on loans to employees Misc. Out of this 322343 is due to duty drawback and rest Rs.375843 of 53500/- is due to scrap sales.
Rs.399153/-
14. Accordingly, the income of the assessee was computed at a sum of ` 39,60,53,710/-. The penalty proceedings u/s 271 (1)(c) were initiated with regard to disallowance so made. Learned CIT (A) has deleted the penalty on the ground that the assessee company cannot be charged with the furnishing of inaccurate particulars. The claims of the assessee u/s 10B and 80IB with respect to interest income and scrap sales was rejected purely on legal grounds and there is no mention either in the assessment order or in the penalty order from where it can be gathered that the assessee company has deliberately or knowingly furnished any particulars which were not accurate. The return of income was prepared by the assessee as per guidance/supervision and legal advice extended to it by the tax 13 ITA Nos.5061,5062,5105&5060/Del/10 consultants and the same was duly supported with the requisite audit report. The said legal advice was neither dishonest nor obtained in collusion with the auditor, hence, he has held that penalty levied by the Assessing Officer amounting to ` 9,75,255/- is not leviable. The department is aggrieved, hence, in appeal.
15. Ld. AR has produced before us copy of the order of the Tribunal dated 18th June, 2010 in ITA No.3432/Del/2008 vide which the Tribunal has decided the disallowance in quantum proceedings in an appeal filed by the CIT (A) as the disallowance were upheld by the CIT (A). So as it relates to exclusion sale of scrap for the purpose of exemption u/s 10B, the Tribunal has directed the Assessing Officer that the same has to be allowed in proportion as referred in Section 10B (4) and it has been held that such proportion of sale proceeds of scrap should be added to the total turnover and, thereafter, the amount of deduction allowable to the assessee should be worked out as per sub-section (4) of Section 10B. Thus, so as it relates to exclusion of scrap, certain relief has been given to the assessee. So as it relates to exclusion of interest, it has been held by the Tribunal that the same has necessarily to be treated as a profit not derived from 100% export oriented undertaking. It was observed that the same has rightly been excluded. So as it relates to the aspect of duty drawback, applying the ratio laid down by Hon'ble Supreme Court in the case of Liberty India, it has been held that the same is not eligible for deduction u/s 80IB. It is in this manner the quantum appeal of the assessee has been decided by the aforementioned order.
16. After narrating the facts, it was submitted by Ld. DR that the assessee has made a claim which was not permissible in law, hence, learned CIT (A) was wrong in deleting the penalty. He contended that the penalty maybe reduced only to the extent of the deletion made by 14 ITA Nos.5061,5062,5105&5060/Del/10 the Assessing Officer. Ld. AR informed that the appeal effect has not been given by the Assessing Officer in the quantum proceedings and, therefore, the exact amount of deletion is not known. However, he submitted that it was the legal claim made by the assessee and the issue regarding allowability of such amount was debatable, hence, learned CIT (A) has rightly deleted the penalty and his order should be upheld. He referred to the decision of Hon'ble Supreme Court in the case of CIT vs. Reliance Petro Products Pvt. Ltd. 322 ITR 158 to claim that such deletion of penalty by CIT (A) is in accordance with the law.
17. We have carefully considered the rival submissions in the light of the material placed before us. According to the bona fide belief of the assessee, the sale of scrap, interest income and DEPB were relating to business income, therefore, was considered to be eligible for exemption u/s 10B and 80IB. It has been recorded by Ld. CIT (A) that such claims of the assessee were supported by the auditors. If it is so, then, all the particulars has to be disclosed by the assessee in the enclosed papers with the return. The claim of the assessee regarding sale of scrap which is the major amount of disallowance has partly been accepted by the Tribunal. The return of income filed by the assessee is also running into several crores of rupees. Therefore, it cannot be said that the assessee with an intention to conceal the particulars of its income has made such claims. No material has been brought on record to assail the findings recorded by the CIT (A) that the assessee cannot be charged for furnishing inaccurate particulars and the claim of the assessee is not supported by the report submitted by the auditors. In this view of the situation, we find no infirmity in the order of the CIT (A) vide which the impugned penalty has been deleted. We decline to interfere. This appeal of the revenue is dismissed.
15 ITA Nos.5061,5062,5105&5060/Del/1018. In the result, ITA Nos.5061 & 5060/Del/2010 are dismissed and ITA Nos.5062/D/2010 is partly allowed for statistical purposes and ITA No.5105/Del/2010 is allowed for statistical purposes in the manner aforesaid.
The order pronounced in the open court on 21.01.2011.
Sd/- Sd/-
[A.K. GARODIA] [I.P. BANSAL]
ACCOUNTANT MEMBER JUDICIAL MEMBER
Dated, 21.01.2011.
dk
Copy forwarded to: -
1. Appellant
2. Respondent
3. CIT
4. CIT(A)
5. DR, ITAT
TRUE COPY
By Order,
Deputy Registrar,
ITAT, Delhi Benches
16 ITA Nos.5061,5062,5105&5060/Del/10
Date of Dictation 18.01.2011
Date of Presentation of the draft order 19.01.2011
to the Member
Date of return from the Bench after
pronouncement &signing
Date of dispatch of the order to the
Bench