Income Tax Appellate Tribunal - Bangalore
Essilor India Private Limited, ... vs Deputy Commissioner Of Income Tax, ... on 12 January, 2023
IN THE INCOME TAX APPELLATE TRIBUNAL
BANGALORE BENCHES "C", BANGALORE
Before Shri George George K, JM & Ms.Padmavathy S, AM
IT(TP)A No.888/Bang/2022 : Asst.Year 2018-2010
M/s.Essilor India Private Limited The Deputy Commissioner of
10th Floor, Prestige Trade Tower v. Income-tax, Circle 2(1)(1)
46, Palace Road, High Grounds Bangalore.
Sampangi Rama Nagar
Bengaluru - 560 001.
PAN : AAACE4623J.
(Appellant) (Respondent)
Appellant by : Sri.Chavali Narayan, CA
Respondent by : Ms.Neera Malhotra, CIT-DR
Date of
Date of Hearing : 11.01.2023 Pronouncement : 12.01.2023
ORDER
Per George George K, JM :
This appeal at the instance of the assessee is directed against final assessment order dated 28.07.2022 passed u/s 143(3) r.w.s. 144C(13) of the I.T.Act. The relevant assessment year is 2018-2019.
2. The brief facts of the case are as follows:
The assessee is engaged in the trading of ophthalmic lenses, optical meters and processing of semi-finished ophthalmic lenses. For the assessment year 2017-2018, the return of income was filed on 30.11.2018 declaring loss of Rs.50,15,147. The assessment was selected for scrutiny and notice u/s 143(2) of the I.T.Act was issued on 22.09.2019. During the course of assessment proceedings, the Assessing 2 IT(TP)A No.888/Bang/2022.
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Officer referred the case to Transfer Pricing Officer (TPO) for determination of the Arm's Length Price (ALP) of the international transactions entered by the assessee with its Associated Enterprises (AEs). The TPO vide order dated 30.07.2021 passed u/s 92CA of the I.T.Act, proposed TP adjustment of Rs.47,36,21,814 with regard to the international transactions of the assessee with its AEs in respect of Advertising, Marketing and Promotion (AMP) segments. On receipt of the TPO's order, the A.O. passed draft assessment order u/s 143(3) r.w.s. 144C of the I.T.Act (order dated 25.09.2021) by incorporating the above TP adjustment proposed by the TPO and also making certain corporate tax additions / disallowances.
3. Aggrieved by the draft assessment order, the assessee preferred objections before the Dispute Resolution Panel (DRP). The DRP vide its directions dated 27.06.2022, disposed of the objections filed by the assessee. Pursuant to the DRP's directions, the impugned final assessment order was passed on 28.07.2022. In the final assessment order the following adjustments were made:-
Particulars Amount (Rs.)
Advertising Marketing and Promotion 47,36,21,814
(AMP) expenses
Corporate Tax Adjustment
Disallowance of additional depreciation 95,36,887
claimed under section 32(1)(iia) of the
Income Tax Act, 1961 (Act)
Disallowance under section 14A of the Act 2,83,34,332
Disallowance of reversal of provision for 1,94,54,100
inventory written off during the year
143(1) disallowances (an appeal has been 17,19,24,339
3
IT(TP)A No.888/Bang/2022.
M/s.Essilor India Private Limited.
filed before the CIT(A)
Total adjustment 70,28,71,472
4. Aggrieved by the final assessment order, the assessee has filed the present appeal before the Tribunal, raising the following grounds:-
"That on the facts and circumstances of the case and in law:
1. The learned FAO / Transfer Pricing Officer ("TPO") / DRP has erred, in law and on facts, by making total additions of INR 53,09,47,133 to the total income filed by the Appellant.
2. Transfer pricing grounds 2.1. The learned FAO/ TPO/ DRP has erred, in law and in fact, in making TP adjustment of INR 47,36,21,814 with respect to advertisement, marketing and promotion ("AMP") expenses.
2.2. The learned FAO/ TPO/ DRP has erred, in law and in fact, by considering the selling and marketing expenditure of INR 42,40,61,752 incurred by the Appellant during the FY 17-18, towards value added functions under the AMP activity, and treating it as a separate international transaction.
2.3. The learned FAO/ TPO/ DRP has erred in not appreciating that there are no machinery provision in the Act to make adjustment in relation to AMP expenses.
2.4. The learned FAO/ TPO/ DRP has erred, in law and in fact by erroneously concluding that the Appellant has developed intangibles of the associated enterprise CAE") by promoting brand name of the AE.
2.5. The learned FAO/ TPO/ DRP has erred, in law and in fact in stating/ concluding that the vast distribution network created by the Appellant, a distributor, is an intangible asset that benefits its AE.
2.6. The learned FAO/ TPO/ DRP has failed to appreciate that the advertisement and marketing expenses by the Appellant is on its own account and for furtherance of its business and that any benefit to the AE in this regard is purely incidental. Thus, the 4 IT(TP)A No.888/Bang/2022.
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adjustment made by the lower authorities is erroneous.
2.7. Without prejudice to the above grounds, the learned FAO / TPO / DRP has erred, in law and in facts by ignoring the fact that out of the total expenditure amounting to INR 52,68,42,143 incurred by the Appellant on selling and marketing of its products, INR 42,40,61,752 is purely in the nature of selling expenses.
2.8. The learned FAO/ TPO / DRP has erred, in law and in fact by applying the Bright line test ("BLT") approach to determine excessive AMP or non-routine expenditure which is not in accordance with provisions of the Income Tax Act, 1961.
2.9. The learned FAO / TPO / DRP has erred, in law and in fact by not following the decision rendered by the Hon'ble Bangalore ITAT in the Appellant's own case, for following AYs
a) AY 2009-10 reported at IT(TP)A No. 29/Bang/2014
b) AY 2010-11 reported at IT(TP)A No. 227/Bang/2015
c) AY 2011-12 reported at IT(TP)A No. 542(B)/2016 and IT(TP)A No.551(B)/2016
d) AY 2012-13 reported at IT(TP)A No. 358(B)/2017
e) AY 2013-14 reported at IT(TP)A No. 2905(B)/2017
f) AY 2014-15 reported at IT(TP)A No. 3328(B)/2018
g) AY 2016-17 reported at IT(TP)A No. 219/Bang/2021 2.10. Without prejudice to the above grounds, the learned FAO / TPO / DRP erred in law and fact, by considering 'Other method' as the Most Appropriate Method ("MAM") and in not appreciating that TNMM has been considered as the MAM and the operating margin of the Appellant is higher that the operating margins of the comparable companies, thus no separate adjustment for AMP expenditure is required.
2.11. The learned FAO / TPO / DRP has erred, in law and in fact, by making a TP adjustment after applying a markup, of 16.46% on operating cost, on selling and marketing expenditure incurred by the Appellant.
2.12. Without prejudice to the above grounds, the learned FAO / TPO / DRP has erred, in law and in fact, by accepting the following as comparable companies:
5IT(TP)A No.888/Bang/2022.
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Sl. Company Reason for
No. rejection by the
Appellant
1. Goldmine Advertising Ltd. Non-comparable
function
2. Pressman Advertising Ltd. Non-comparable
function
3. Scarecrow Communications Non-comparable
Ltd. function
4. Concept Communication Ltd. Non-comparable
function
5. Majestic Research Services & Non-comparable
Solutions Ltd. function
3. Corporate tax grounds
Disallowance of additional depreciation claimed amounting to INR 95,36,887
3.1. The learned FAOIDRP has erred, in law and on facts, in disallowing INR 95,36,887 claimed as additional depreciation under section 32(1 )(iia) of the Act without appreciating the fact that the Appellant is also into the business of manufacturing (processing of semi-finished ophthalmic lenses) 3.2. The learned FAO/DRP has erred, in law and on facts, in stating that the Appellant has failed to furnish Form 3M (Report from Accountant for claiming additional depreciation) without appreciating the fact that the requirement of filing Form 3M was withdrawn vide Finance Act 2005 with effect from 1 April 2005.
3.3. The learned FAO/DRP has erred, in law and on facts, in not appreciating the fact that Transfer Pricing study clearly states that the Appellant is engaged in the business of trading in finished, semi-finished ophthalmic lenses, optical meters and processing of semi-finished ophthalmic lenses.
3.4. The learned FAO/DRP has erred, in law and on facts, in not considering the Companies Memorandum of Association and Central Excise Registration Certificate which clearly states that the Assessee is in the business of manufacturing (i.e processing of semi-finished ophthalmic lenses.) Disallowance under section 14A of the Act amounting to INR 2,83,34,332 3.5. The learned FAO/DRP, has erred, in law and on facts, in making additional disallowance of INR 2,83,34,332 under section 6 IT(TP)A No.888/Bang/2022.
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14A of the Act by applying Rule 80 of the Rules.
3.6. The learned FAO /DRP, has erred, in law and on facts, in not appreciating the fact that the disallowance under section 14A of the Act is restricted to only those investments which have generated exempt income during the year.
3.7. The learned FAO / DRP, has erred, in law and on facts, in disallowing expenditure under section 14A of the Act by applying Rule 80 of the Rules without appreciating the fact that that the explanation inserted in the provisions of section 14A of the Act by the. Finance Act, 2022 is prospective and not retrospective.
3.8. The learned FAO/DRP, has erred, in law and on facts, in disallowing expenditure under section 14A of the Act by applying Rule 80 of the Rules without considering the prevailing judicial precedents.
Disallowance of expenditure of INR 1,94,54,100 claimed under the head 'any other amount of allowable deduction 3.9. The learned FAO/DRP has erred, in law and on facts, in making disallowance of INR 1,94,54,100 claimed under the head `any other amount of allowable deduction' in the Income Tax Return 3.10. The learned FAO/DRP has failed to appreciate the fact that the reversal of provision claimed as deduction during the year has been offered to tax in the year in which provision was created and therefore, the deduction has been rightly claimed by the Appellant.
3.11. The learned FAO/DRP has failed to consider the details and submission made in this regard by the Appellant during the course of DRP proceedings and therefore, the disallowance made is erroneous and bad in law.
4. General grounds 4.1. The learned FAO has erred, in law and in fact, in initiating penalty proceedings u/s 270A(9) of the Act.
4.2. The learned FAO has erred, in law and in fact, by computing interest liability INR 11,66,26,328 under section 2348 and INR 20,46,826 under section 234C of the Act.
The Appellant submits that each of above grounds is independent and without prejudice to one another.
The Appellant craves leave to add, alter, amend, vary, omit or substitute any of the aforesaid grounds of appeal at any time before 7 IT(TP)A No.888/Bang/2022.
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or at the time of hearing of the appeal, so as to enable the Hon'ble Tribunal to decide on the appeal in accordance with the law."
5. Ground 1 is general in nature and no specific adjudication is called for, hence, the same is dismissed. The learned AR during the course of hearing, did not press grounds 3.1 to 3.4, hence, the same are dismissed. Ground 4.1 is regarding initiation of penalty u/s 270A(a) of the i.T.Act. The said ground is premature and hence dismissed. Ground 4.2 is regarding levy of interest u/s 234B and 234C of the I.T.Act. The levy of interest u/s 234B and 234C of the I.T.Act is consequential, hence, ground No.4.2 is rejected. The surviving grounds, we shall adjudicate as under.
Ground 2 and its sub-grounds (TP Adjustment) (AMP Segment)
6. The TPO considered selling, marketing and promotion expenses of Rs.52,68,42,143 incurred by the assessee during the financial year 2017-2018 as a separate international transaction. The breakup of selling, marketing and distribution expenses incurred by the assessee for the financial year 2017-2018 are detailed below:-
Sl. Nature of expenses FY 2017-
No. 2018
Consumer
1. Advertisement in TV and Radio
2. Awareness
3. Print Media 10,27,80,391
4. Brand ambassador
Sub Total 10,27,80,391
Trade
5. Co-op Advertising 7,00,04,100
6. Research, training and other 80,32,350
promotions
8
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M/s.Essilor India Private Limited.
7. Loyalty program 13,57,83,693
8. Merchandising at optician outlets 3,83,89,280
9. Freight and others 18,16,458
10. Samples and demo sets 5,99,82,351
11. Sales conference and exhibition 3,11,15,672
12. Project expenditure - NVG 43,68,915
13. Others 7,45,68,933
Sub Total 42,40,61,752
Total 52,68,42,143
7. The TPO held that the assessee should be compensated along with a mark-up. The TPO estimated the routine selling, marketing and the distribution expenses by considering unrelated parties (companies considered as comparable by the assessee for benchmarking its distribution segment) and arrived at an estimated routine AMP expenses of 2.27% of sales. Accordingly, the TPO computed excess expenditure for value of added functions under the AMP activities in India in favour of the AEs to be at Rs.40,66,81,963. The TPO accordingly identified the comparable companies and determined the operating margin of 16.46% on operating cost (OC) thereby making an adjustment of Rs.47,36,21,814. The transfer pricing adjustment made by the TPO in respect of AMP segment was calculated as under:-
Particulars Amount
Excess AMP incurred for the benefit of the AE 406,681,963
Arm's length Margin 16.46%
Arm's Length Price (406,681,963*116.46% 473,621,814
Price received 0
Adjustments 473,621,814
8. The DRP rejected the objections raised by the assessee and upheld the TP adjustment proposed by the TPO.
9IT(TP)A No.888/Bang/2022.
M/s.Essilor India Private Limited.
9. Aggrieved, the assessee has raised this issue before the Tribunal. The learned AR submitted that the issue in question is squarely covered in favour of the assessee by various orders of the Tribunal in assessee's own cases, which are detailed in ground 2.9 (supra).
10. The learned Departmental Representative by reading through the DRP's directions strongly relied on the same.
11. We have heard rival submissions and perused the material on record. We find an identical issue was considered by the Tribunal in assessee's own case for assessment year 2009-2010 to 2017-2018. The Tribunal for assessment year 2011-2012 to 2014-2015 (supra) (order dated 06.02.2020) had rejected the findings of the TPO and the DRP by holding that in absence of machinery provisions to ascertain the price incurred by the assessee to promote the brand value of the products of the foreign entity, no transfer pricing adjustment can be made by invoking the provisions of Chapter X of the I.T.Act. It was held by the Tribunal that the onus is on the Revenue to demonstrate existence of international transaction. It was further held by the Tribunal that no TP adjustment can be made if there is no explicit arrangement between the assessee and its foreign AE for incurring such expenditure. It was concluded by the Tribunal that the fact that the benefit of such AMP expenditure would also ensue to its foreign AE is not sufficient to infer existence of international transaction. The relevant finding of the Tribunal 10 IT(TP)A No.888/Bang/2022.
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for assessment years 2011-2012 to 2014-2015 (supra), reads as follows:-
"12. We have heard the submissions of the learned counsel for the assessee as well as the ld.DR. The first aspect which was brought to our notice by the ld. counsel for the assessee is the decision of the ITAT in assessee's own case for assessment year 2009-10 and 2010- 11 on the same issue of AMP expenses. The Tribunal took the following view after extracting the decision of the Hon'ble Delhi High Court in the case of M/s Maruti Suzuki India Ltd. (supra).
"21. Respectfully following the ratio of the decision of the Hon'ble Delhi High Court in the above cases, we hold that no TP adjustment can be made by deducing from the difference between AMP expenditure incurred by assessee-company and AMP expenditure of comparable entity, if there is no explicit arrangement between the assessee - company and its foreign AE for incurring such expenditure. The fact that the benefit of such AMP expenditure would also ensure to its foreign AE is not sufficient to infer existence of international trans action. The onus lies on the revenue to prove the existence of international transaction involving AMP expenditure between the assessee-company and its foreign AE. We also hold that that in the absence of machinery provisions to ascertain the price incurred by the assessee-company to promote the brand values of the products of the foreign entity, no TP adjustment can be made by invoking the provisions of Chapter X of the Act.
22.Applying the above legal position to the facts of the present case, it is not a case of revenue that there existed an arrangement and agreement between the assessee-company and its foreign AE to incur AMP expenditure to promote brand value of its products on behalf of the foreign AE, merely because the assessee-company incurred more expenditure on AMP compared to the expenditure incurred by comparable companies, it cannot be inferred that there existed international transaction between assessee-company and its foreign AE. Therefore, the question of determination of ALP on such transaction does not arise. However, the transaction of expenditure on AMP should 'co treated as a part of aggregate 11 IT(TP)A No.888/Bang/2022.
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of bundle of transactions on which TNMM should be applied in order to determine the ALP of its transactions with its AE. In other words, the transaction of expenditure on AMP cannot be treated as a separate transaction. In the present case, we find from the TP study that the operating profit cost to the total operating cost was adopted as Profit Level Indicator which means that the AMP expenditure was not considered as a part of the operating cost. This goes to show that the AMP expenditure was not subsumed in the operating profitability of the assessee-company. Therefore, in order to determine the ALP of international transaction with its AE, it is sine qua non that the AMP expenditure should be considered a part of the operating cost Therefore, we restore the issue of determination of ALP, on the above lines, to the file of the AO/TPO. The grounds of appeal raised by the assessee-company on this issue are partly allowed."
13. The ld. counsel for the assessee pointed out that none of the reasons given by the TPO in the order for assessment year 2013-14, for not following decision of the ITAT can be sustained. In this regard, the ld. counsel brought to our notice the facts which were highlighted by the assessee before the DRP.
"1. With regard to the stand of the TPO that as per the Distribution Agreement with M/s. Chemiglas Corp Ltd, Korea the Assessee was under obligation to promote the brand of the foreign AE, it was pointed out that the assessee never used the trade mark/brand name of Chemiglas in any of its media advertisement. Secondly the TPO's case is that the AMP expenses promoted the brand name of Essilor International a different entity and not M/S.Chemiglas Corpn.Ltd., Korea. Therefore, the contention of the TPO that the assessee has promoted the brand of Chemiglas is not correct in law. There is no finding by the learned TPO that the assessee has promoted the brand name belonging to Chemiglas Corporation.
2. Without prejudice, it was submitted that the interpretation placed by the learned TPO on clause 3.5 of the Distributorship Agreement was erroneous. Clause 3.5 states that the Distributor agrees to use its best efforts to promote the sale of the products in the territory in accordance with the Supplier's policy and shall protect the Supplier's interest with diligence of a responsible business man. It was submitted that such clauses 12 IT(TP)A No.888/Bang/2022.
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are normal clause entered into between Distributor and Supplier of products. Any purpose of distribution is to increase the sale of the products of the supplier and merely stating this in the agreement would not mean that the Distributor is under an obligation to promote a brand. Clause 3.5 does not even create an obligation on the part of the Distributor to undertake advertisement.
3. On the TPO's reference to clauses 8.1 to 8.6 of the agreement it was submitted that Clause 8.1 gives a limited right to use the trademarks of the Supplier and states that Distributor may do so only for the purpose of identifying and advertising the products in the Supplier's sole interest. This clause only proves that any advertisement if carried out should be in the suppliers sole interest and it does not amount to brand promotion. This clause has to be understood in the context. Clause 8 of the agreement deals with the right of the distributor to use the trademarks and symbols of the supplier and in that context it has placed many restrictions on such use. The restrictions placed in clause 8 are normal restrictions. The other sub clauses of clause 8 are summarized below:
a) Distributor is prohibited from using the trademarks of the supplier with its own commercial name. (Clause 8.1)
b) Distributor shall not represent that it is in ownership of the trade marks. (Clause 8.3)
c) Distributor shall not register the trademarks. (Clause 8.4)
d) Distributor has a limited right to use the trademark for the purpose of advertisement. (Clause 8.5)
e) Distributor has right to use intellectual property which are specifically granted by supplier (Clause 8.6) It was submitted that the above clauses in the agreement do not in any way suggest that assessee is promoting the sole interest of the Supplier through an obligation to ii advertising and promote the brand name of the Supplier.
In any case, the assessee has used the trademarks/brand name belonging to Chemiglas in media advertisement. Therefore, the issue of promoting the brand name of Chemiglas is non- existent.
4. On the aspect of reference to BEPS report by the TPO, it was submitted that BEPS report cannot be preferred over the 13 IT(TP)A No.888/Bang/2022.
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judicial decisions which binding on the TPO. Even otherwise, the BEPS report deals with a case where there is a divergence between the written agreement and the conduct of the associate enterprises. It states that when there are material differences between the contractual terms and the conduct of the associate enterprises in their relations with one another, the functions they actually perform, the assets they actually use, and the risk they actually assume, the ultimate determination should be based on the factual substance and the actual transactions. It was submitted that when the assessee has not entered into any written agreement with Essilor International for brand promotion, the question of variance between the contractual terms and the conduct of the parties does not arise at all. There is no finding by the learned TPO that the assessee has entered into any written contract or other arrangement whereby it is agreed to incur AMP activities to promote the brand name of Essilor International. The learned TPO has simply presumed the existence of international transaction just because the AMP expenses incurred by the assessee are more than the AMP expenses incurred by the comparable entities. This has been held to be impermissible by the Hon'ble Delhi High Court in Maruthi Suzuki's case and Hon'ble ITAT in assessee's own case.
5. With regard to the action of the TPO in drawing inference from legal proceedings instituted in India by the foreign AE for protecting its trade mark, it was submitted that M/s. Essilor International was the owner of the brand and was a party to the proceedings and the Assessee as Indian AE joined the proceedings as agent of the foreign AE became a party to the proceedings. It was submitted that the legal action taken by the assessee as agents of Essilor International for a very limited purpose of ensuring that there is no infringement of the intelle ctual property rights of Essilor International.
6. With regard to the conclusion of the TPO that the assessee has set up a vast distribution network thereby creating marketing intangible for the benefit of its AE, it was submitted that the TPO has failed to recognize the importance of having distributorship network by the assessee. The lenses imported and sold by the assessee are used by individual retail customers. Like any other consumer products, it is necessary 14 IT(TP)A No.888/Bang/2022.
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for the assessee to have an efficient and effective distributor network to ensure that it is able to sell its products. The purpose of setting up the distributor network is to sell the lenses of the assessee and not to promote the brand name of Essillor International. It was submitted that mere creation of a vast distributor network does not mean that it is promoting the brand name.
7. As regards the TPO's contentions in paragraph 9.3,9.4,9.5,9.6 of the order u/s 92CA, it was submitted that these arguments are the same as advanced before the Hon'ble Delhi High Court in Maruti Suzuki's case, Sony Ericsson's case and assessee's own case before the Tribunal. These arguments have been dealt with in an elaborate manner by the court and the Tribunal and the contentions of the revenue have been rejected. The assessee relies on the same."
14. The learned counsel highlighted the fact that the DRP however, upheld the order of AO without dealing with various contentions to be verified by the assessee. He submitted that the order of the Tribunal for assessment year 2009-10 and 2010-11 should be followed and it should be held that there was no international transaction and consequently, there is no requirement for determination of ALP.
15. The ld.DR reiterates the stand of the revenue as contained in the order of the TPO for the assessment year 2013-14.
16. We have given our careful consideration to the rival submissions. The Hon'ble Delhi High Court in the case of Maruti Suzuki India Ltd. (MSIL) v. Addl. CIT, TPO [2010] 328 ITR 210 (Delhi), in the case of a licensed manufacturer incurring AMP expenses it was held that it incurring of AMP expenses would be an international transaction and the issue of determination of ALP was remanded. This decision was however overruled in Maruti Suzuki India Ltd. v. Addl. CIT [2011] 335 ITR 121 (SC) wherein the Hon'ble Supreme Court left the question whether AMP expenses gives raise to international transaction or not open with the following observations:
"In this case, the High Court has remitted the matter to the Transfer Pricing Officer ("the TPO" for short) with liberty to issue fresh show-cause notice. The High Court has further directed the Transfer Pricing Officer to decide the matter in 15 IT(TP)A No.888/Bang/2022.
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accordance with law. Further, on going through the impugned judgment of the High Court dated July 1, 2010, we find that the High Court has not merely set aside the original show cause notice but it has made certain observations on the merits of the case and has given directions to the Transfer Pricing Officer, which virtually conclude the matter. In the circumstances, on that limited issue, we hereby direct the Transfer Pricing Officer, who, in the meantime, has already issued a show cause notice on September 16, 2010, to proceed with the matter in accordance with law uninfluenced by the observations/directions given by the High Court in the impugned judgment dated July 1, 2010.
The Transfer Pricing Officer will decide this matter on or before December 31, 2010.
The civil appeal is, accordingly, disposed of with no order as to costs."
17. The Hon'ble Delhi High Court in an other case of Maruti Suzuki India Ltd. Vs. CIT 381 ITR 117 (Delhi) held that the fact that the benefit of such AMP expenses would also ensure to the AE is itself insufficient to infer the existence of an international transaction. Similar decision was also rendered by the Hon'ble Delhi High Court in the case of CIT (LTU) v. Whirlpool of India Ltd., 381 ITR 154. The bright line test which was applied by the AO in the present case was also applied by the AO in the aforesaid cases. The bright line test which was accepted by the Special Bench of ITAT in the case of L.G. Electronics India Pvt. Ltd. v. ACIT (2013) 22 ITR (Trib.) 1 (Del)(SB) was held by the Hon'ble Delhi High Court to be not correct. In the case of Maruti Suzuki (supra), the facts were Maruti Suzuki India Ltd. (MSIL) was engaged in the manufacture of passenger cars in India. It was a subsidiary of SMC, a Japanese company. MSIL started its business in 1982 as a Government of India owned company. SMC was selected as the business partner independently by MSIL. The co- branded trade mark "Maruti-Suzuki" was used since the inception of MSIL. A licence agreement was entered into between MSIL and SMC in October 1982 for its models M-800, Omni and Gypsy. By the agreement, MSIL was permitted to use the co-branded trade mark "Maruti- Suzuki" on the vehicles. In the assessment of MSIL for assessment year 2005-06, the AO invoked the provisions of section 92CA(1) of the Act and referred the case to the Transfer Pricing Officer for determination of the arm's length price in relation to the international transactions undertaken by MSIL with its associated 16 IT(TP)A No.888/Bang/2022.
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enterprise, SMC. The Transfer Pricing Officer passed an order making an adjustment of Rs. 154.12 crores towards the advertisement, marketing and sales promotion expenses imputing a notional arm's length compensation towards the advertisement, marketing and sales promotion expenses incurred by MSIL for SMC. On the above facts, the Hon'ble Delhi High Court held as follows:
".... when the licence agreements were originally entered into in 1982, MSIL was known as MUL and SMC did not hold a single share in MUL. In 2003 SMC acquired the controlling interest in MSIL. There were various models of Suzuki motor cars manufactured by MSIL and each model was covered by a separate licence agreement. Under these agreements, granted licence to MSIL to manufacture that particular car model and provided technical know-how and information and right to use Suzuki's patents and technical information. It also gave MSIL the right to use Suzuki's trade mark and logo on the product. Pursuant to this agreement, MSIL was using the co-brand, i.e., Maruti Suzuki trade mark and logo for more than 30 years. This co-brand could not be used by SMC and was not owned by it. The clauses in the agreement between MSIL and SMC indicated that permission was granted by SMC to MSIL to use the co- brand "Maruti Suzuki" name and logo. The mere fact that the cars manufactured by MSIL bore the symbol "S" was not decisive as the advertisements were of a particular model of the car with the logo "Maruti- Suzuki". The Revenue had been unable to contradict the submission of MSIL that the co-brand mark "Maruti-Suzuki" in fact did not belong to SMC and could not be used by SMC either in India or anywhere else. The decision in the case of Sony Ericsson requires that the mark or brand should belong to the foreign associated enterprise. The Revenue also did not deny that as far as the brand "Suzuki"
was concerned its legal ownership vested with the foreign associated enterprise, i.e., SMC. Moreover as MSIL was concerned, its operating profit margin was 11.19 per cent. which was higher than that of the comparable companies whose profit margin was 4.04 per cent. Therefore, applying the transactional net margin method it must be stated that there was no question of a transfer pricing adjustment on account of advertisement, marketing and sales promotion expenditure. The advertisement, marketing and sales promotion expenses 17 IT(TP)A No.888/Bang/2022.
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incurred by MSIL could not be treated and categorised as an international transaction under section 92B of the Act."
18. In the case of Whirlpool of India Ltd. (supra), it was held that there had to be an international transaction with a certain disclosed price. The transfer pricing adjustment envisages the substitution of the price of such international transaction with the arm's length price. The transfer pricing adjustment was not expected to be made by deducing from the difference between the excessive advertising, marketing and sales promotion expenditure incurred by the assessee and the advertising, marketing and sales promotion expenditure of a comparable entity that an international transaction existed and then proceeding to make the adjustment of the difference in order to determine the value of such advertising, marketing and sales promotion expenditure incurred for the associated enterprise. Thus, the bright line test had been rejected as a valid method for either determining the existence of an international transaction or for the determination of the arm's length price of such transaction. Although under section 92B read with section 92F(v), an international transaction could include an arrangement, understanding or action in concert, this could not be a matter of inference. There had to be some tangible evidence on record to show that two parties had acted in concert. It was also held that the provisions under Chapter X envisaged a separate entity concept. In other words, there could not be a presumption that the assessee was a subsidiary of the foreign company and that all the activities of the assessee were in fact dictated by the foreign company. Merely because the foreign company had a financial interest, it could not be presumed that advertising, marketing and sales promotion expenses incurred by the assessee were at the instance or on behalf of the foreign company. The initial onus was on the Revenue to demonstrate through some tangible material that the two parties acted in concert and further that there was an agreement to enter into an international transaction concerning advertising, marketing and sales pro-motion expenses."
19. In the light of the law as it exists today, we shall examine the arguments of the rival parties. There has been no agreement between Essilor International which owns the various brands set out by the TPO in his order and the Assessee to incur any Advertisement and Marketing or Sales promotion expenses. None of the other reasons given by the TPO which have been explained by the Assessee and set out in the earlier paragraph can be the basis to hold that there was in 18 IT(TP)A No.888/Bang/2022.
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fact an international transaction in the matter of incurring of AMP expenses by the Assessee. The order of the Tribunal in Assessee's own case for A.Y.2009-10 and 2010-11 in our view requires to be followed and there are no reasons whatsoever to take a different view. Consequently, there could not be any exercise of determining the ALP of the AMP expenses by comparing the expenses incurred by the Assessee with comparable companies. In view of the above conclusions, the other aspects whether the comparable companies chosen by the TPO are in fact comparable in terms of Functions performed, Assets employed and Risks assumed (FAR) analysis and other aspects of determination of ALP does not require any consideration. Therefore the addition made on account of determination of ALP of AMP expenses in AY 2011-12 to 2014-15 is directed to be deleted."
12. Since the facts of the instant case are identical to the facts considered by the Tribunal for above mentioned assessment year (which had considered the same distribution agreement entered between the assessee and its AEs), we delete the transfer pricing adjustment made by the TPO and sustained by the DRP in respect of AMP segment.
13. In the result, ground 2.2 and 2.9 are allowed.
14. The other sub-grounds to ground 2, which are incidental / subsidiary to the issue of transfer pricing adjustment of AMP expenditure are left open and not adjudicated. It is ordered accordingly.
Grounds 3.5 to 3.8 (Corporate Tax Issue) ( Disallowance u/s 14A of the I.T.Act
15. During the relevant assessment year, the assessee received dividend income from Delta Lens Private Limited and GKB Rx Lend Private Limited amounting to Rs.1,61,65,000 19 IT(TP)A No.888/Bang/2022.
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and Rs.10,88,51,000, respectively. The assessee disallowed 1% of the annual average of monthly average of the opening and closing balance of value of investment from which dividend income was generated. The calculation of disallowance u/s 14A of the I.T.Act made by the assessee is as under:-
Name of the investment Amount
Delta Investments 20,93,00,000
GKB Rx 2,33,82,00,000
Total Investment 2,54,75,00,000
Disallowance u/s 14A 2,54,75,000
16. The A.O. however computed the disallowance u/s 14A of the I.T.Act read with Rule 8D of the I.T.Rules for the entire investment of the assessee including those investments which did not generate any exempt income during the assessment year 2018-2019. According to the A.O., annual average of monthly average investment was Rs.538,09,33,225 and 1% of the said amount is disallowed under Rule 8D. Therefore, he disallowed a further amount of Rs.2,83,34,332 (5,38,09,332 - 2,54,75,000)
17. The DRP vide its directions dated 29.06.2022 upheld the disallowance u/s 14A of the I.T.Act on the entire investment by stating that whether the exempt income has materialized or not is irrelevant factor for invoking the provisions of sections 14A of the I.T.Act. Further, the DRP by placing reliance on the Explanation to section 14A inserted by the Finance Act, 2022 concluded that the provisions of section 20 IT(TP)A No.888/Bang/2022.
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14A of the I.T.Act shall always be deemed to have been applicable even in a case where there is no exempt income has been received by the assessee during the year (refer directions of the DRP at para 2.2.4 to 2.2.7).
18. Aggrieved, the assessee has raised this issue before the Tribunal. The learned AR submitted that the A.O. has erred in making additional disallowance of Rs.2,83,34,332. The learned AR submitted that the disallowance u/s 14A of the I.T.Act is to be restricted only those investments which have generated exempt income during the relevant assessment year. Finally it was submitted that Explanation inserted in section 14A of the I.T.Act by Finance Act, 2022 is only prospective and not retrospective in operation. In this context, the learned AR relied on the judgment of the Hon'ble Delhi High Court in the case of PCIT v. Era Infrastructure India Ltd. reported in 448 ITR 674 (Delhi).
19. The learned DR supported the orders of the TPO and the DRP.
20. We have heard rival submissions and perused the material on record. The A.O. while considering the average investments had taken the whole of the investments at the beginning and at the end of the year, whereas only those investments which yield tax free income ought to be considered for the purpose of computing the disallowance under Rule 8D. In this regard, we place reliance on the decision of the Special Bench of the Tribunal in the case of 21 IT(TP)A No.888/Bang/2022.
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ACIT v. Vireet Investment (P.) Ltd. reported in (2017) 82 taxmann.com 415 (Delhi-Trib) (SB). The relevant finding of the Tribunal, reads as follows:-
"11. We have considered the submissions of both the parties and have perused the record of the case. The basic issue for consideration is that the investment, which did not yield any exempt income, should enter or not enter into the computation under Rule 8D, while arriving at the average value of investment, income from which does not or shall not form part of the total income.
11.1 In the present case, our decision is restricted only to the extent of interpretation of language employed in Rule 8(2)(iii). The submission of ld. counsel for the assessee is that this issue is now covered by the decision of the Hon'ble Delhi High Court in the case of CIT v. Hofcin India (P.) Ltd. (supra), wherein it has been held that if no dividend income was earned, section 14A could not be invoked.
The Hon'ble Delhi High Court has referred to the decisions, which we have noted earlier i.e.:
- Shivam Motors (P) Ltd's. case (supra)
- Winsome Textile Industries Ltd's. case (supra)
- Lakhani Marketing Inc. case (supra)
- Corrtech Energy (P.) Ltd's. case (supra).
- CIT v. Hero Cycles Ltd. [2010] 323 ITR 518/189 Taxman 50 (Punj. & Har.).
11.2 The submission of ld. Principal CIT(DR) is that ITAT in the case of Delhi Special Bench in the case of Cheminvest Ltd.
(supra) has specifically held that even if there is no exempt income, the provisions of section 14A are applicable in view of the decision of Hon'ble Supreme Court in the case of Rajendra Prasad Moody (supra). His submission is that the decision of Hon'ble Delhi Court reversing the decision of Special Bench in Cheminvest should not be followed because that is contrary to the principles laid down in Rajendra Prasad Moody's case (supra).
22IT(TP)A No.888/Bang/2022.
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11.3 It is against these submissions, we first refer to the facts as were obtaining in these two decisions.
11.4 In the case of Cheminvest Ltd. (supra), the assessee had borrowed funds of Rs. 8,51,65,000/- and during the previous year relevant to assessment year 2004-05 paid interest of Rs. 1,21,02,367/-thereon. Out of this unsecured loan, the assessee invested a sum in purchase of shares, which was shown as investment for the purpose of long term capital gains. The AO disallowed interest proportionate to the investment in shares, though no exempt income was earned during the year. The CIT(A) affirmed this but held that the net interest debited to the P&L A/c was required to be apportioned and not the interest expenditure. The Tribunal held that interest expenditure incurred by the assessee was for borrowing used for the purposes of investment in shares, both held for trading as well as investment purposes. Irrespective of whether or not there was any yield of dividend on the shares purchased, the interest incurred was relatable to earning of dividend on the shares purchased. The dividend income being exempted from tax by virtue of section 10(34) of the Act, the interest paid on borrowed capital utilized in purchase of shares, being the expenditure incurred in relation to dividend income not forming part of the assessee's total income, was held to be not an allowable deduction. In coming to the conclusion, the Special Bench primarily relied on the ratio laid down by the Hon'ble Supreme Court in the case of Rajendra Prasad Moody (supra).
11.5 In the case of Rajendra Prasad Moody (supra), the facts were that the assessees were brothers and each of them had borrowed. moneys for the purposes of making investment in shares of certain companies. During the relevant assessment year they paid interest on the moneys borrowed but did not receive any dividend on the shares purchased with these moneys. Both of them made a claim for deduction of the amount of interest paid on borrowed moneys but this claim was negated by the ITO and on appeal by the AAC on the ground that during the relevant assessment year the shares did not yield any dividend and, therefore, interest paid on the borrowed moneys could not be regarded as expenditure laid out or expended wholly and exclusively for the purposes of making or earning income chargeable under the head 'income from other sources', so as to be allowable as a permissible deduction u/s 57(iii). The Tribunal.
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however, on further appeal, disagreed with the view taken by the taxing authorities and upheld the claim of each of the two assessees for deduction u/s 57(iii).
11.6 In the backdrop of these facts the Tribunal's order was upheld by the Hon'ble High Court and Hon'ble Supreme Court. The Hon'ble Supreme Court, inter alia, held that it is the purpose of the expenditure that is relevant in determining the applicability of section 57(iii) and that purpose must be making or earning of income. It was further held that section 57(iii) does not require that this purpose must be fulfilled in order to qualify the expenditure for deduction. It does not say that the expenditure shall be deductible only if any income is made or earned. There is in fact nothing in the language of section 57(iii) to suggest that the purpose, for which the expenditure is made, should fructify into any benefit by way of return in the shape of income.
11.7 Thus, in both the decisions viz. in the case of Cheminvest Ltd. (supra), and in the case of Rajendra Prasad Moody (supra), the issue related to allowability of expenditure which had direct nexus with the earning of income. The borrowing in both the cases has not been disputed being for acquiring shares. Hon'ble Delhi High Court has specifically held in para 21 as under:--
"21. There is merit in the contention of Mr. Vohra that the decision of the Supreme Court in Rajendra Prasad Moddy (supra) was rendered in the context of allowability of deduction under Section 57(iii) of the Act, where the expression used is for the purpose of making or earning such income'. Section 14A of the Act on the other hand contains the expression 'in relation to income which does not form part of the total income.' The decision in Rajendra Prasad Moody (supra) cannot be used in the reverse to contend that even if no income has been received, the expenditure incurred can be disallowed under Section 14A of the Act. "
11.8 In the case of Holcin India (P) Ltd. (supra) the facts were that the respondent- assessee was a subsidiary of Holderind Investments Ltd., Mauritius, which was formed as a holding company for 'making downstream investments in cement manufacturing ventures in India. In the return of income filed for the Assessment Year 2007-08, the respondent-assessee declared 24 IT(TP)A No.888/Bang/2022.
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loss of Rs. 8.56 Crores approximately. The respondent-assessee had declared revenue receipts of Rs. 18,02,274/- which included interest of Rs. 726/- from Fixed Deposit Receipts and profit on sale of fixed assets of Rs. 16,52,225/-. As against this, the respondent assessee had claimed administrative and miscellaneous expenditure written off amounting to Rs. 8.75 Crores. For the Assessment Year 2008-09, the assessee had filed return declaring loss of Rs. 6.60 Crores approximately. The assessee had declared revenue receipts in the form of foreign currency fluctuation difference gain of Rs. 12,46,595/-. It had claimed expenses amounting to Rs. 7.02 Crores as personal expenses, operating and other expenses, depreciation and financial expenses.
11.9 In both the assessment orders, the Assessing Officer held that the respondent-assessee had not commenced business activities as they had not undertaken any manufacturing activity or made downstream investments. It was observed that the respondent-assessee, after receiving approval of Foreign Investment Promotion Soard (FIPS) dated 20.12.2000 acquired shares capital of Ambuja Cement India Ltd. This, the Assessing Officer felt, was not sufficient to indicate or hold that the respondent-assessee had started their business. He, accordingly, disallowed the entire expenditure of Rs. 8.75 Crores for the Assessment Year 2007-08 and Rs. 7.02 Crores for the Assessment Year 2008-09.
11.10 Ld. CIT(A) did not agree with the findings of Assessing Officer that the business of the respondent- assessee had not been set up or commenced. The CIT(A) observed that the respondent- assessee had been set up with the business objective of making investment in cement industry after due approval given by the Government of India, Ministry of Commerce and Industry vide letter dated 18.12.2002 and 20.12.2012. It was observed that in fact, the respondent-assessee was not to undertake any manufacturing activity themselves. After considering the FIPS approval and the purchase of shares in the said company of Rs. 1850.91 crores, ld. CIT(A), inter alia, observed that the assessee was engaged in the business of holding of investment and was entitled to claim expenditure provided. There was a direct connection between expenditure incurred and business of the assessee company. However, he pointed out that since the business of the respondent-assessee was to act as a holding 25 IT(TP)A No.888/Bang/2022.
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company for downstream investment and as it was an accepted fact that they had incurred expenses to protect their business and explore new avenues of investment, the provisions of section 14A were applicable.
11.11 The Hon'ble High Court observed that the reasoning given by the CIT(A) was ambiguous and unclear and on clarity being sought from the Revenue it was pointed out that "the stand of the assessee contained a contradiction to the extent that on the issue of setting up of business, it was stated that the assessee had incurred expenditure on acquiring the shares, therefore, the assessee could not now take different stand than the one taken in the first issue".
11.12 The Hon'ble High Court, after considering in detail the decision of ld. CIT(A) finally observed in para 13 as under:
"13. We. are confused about the stand taken by the appellant-Revenue. Thus, we had asked Sr. Standing Counsel for the-Revenue, to state in his own words, their stand before us. During the course of hearing, the submission raised was that the shares would have yielded dividend, which would be exempt income and therefore, the CIT(A) had invoked Section 14A to disallow the entire expenditure. The aforesaid submission does not find any specific and clear narration in the reasons or the grounds given by the CIT(A) to make the said addition. Possibly, the CIT(A), though it is not argued before us, had taken the stand that the respondent-assessee had made investment and expenditure was incurred to protect those investments and this expenditure cannot be allowed under Section 14A."
11.13 Thus, Hon'ble Delhi High Court primarily decided the issue regarding applicability of section 14A even if no dividend income was earned. The Hon'ble High court in paras 14 to 16 of its decision observed as under:
'14. On the issue whether the respondent-assessee could have earned dividend income and even if no dividend income was earned, yet Section 14A can be invoked and disallowance of expenditure can be made, there are three decisions of the different High Courts directly on the issue and against the appellant-Revenue. No contrary decision of 26 IT(TP)A No.888/Bang/2022.
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a High Court has been shown to us. The Punjab and Haryana High Court in Commissioner of Income Tax, Faridabad v. M/s. Lakhani Marketing Incl, ITA No. 970/2008, decided on 02.04.2014, made reference to two ' earlier decisions of the same Court in CIT v. Hero Cycles Limited, [2010] 323 ITR 518 and CIT vs. Winsome Textile Industries Limited, [2009] 319 ITR 204 to hold that Section 14A cannot be invoked when no exempt income was earned. The second decision is of the Gujarat High Court in Commissioner of Income Tax-I v. Corrtech Energy (P.) Ltd. [2014] 223 Taxmann 130 (Guj.). The third decision is Of the Allahabad High Court in Income Tax Appeal No. 88 of 2014, Commissioner of Income Tax II Kanpur, v. M/s. Shivam Motors (P) Ltd. decided on 05.05.2014. In the said decision it has been held:-
"As regards the second question, Section 14A of the Act provides that for the purposes of computing the total income under the Chapter, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under the Act. Hence, what Section 14A provides is that if there is any income which does not form part of the income under the Act, the expenditure which is incurred for earning the income is not an allowable deduction. For the year in question, the finding of fact is that the assessee had not earned any tax free income. Hence, in the absence of any tax free income, the corresponding expenditure could not be worked out for disallowance. The view of the C1T(A), which has been affirmed by the Tribunal, hence does not give rise to any substantial question of law. Hence, the deletion of the disallowance of Rs. 2,03,752/- made by the Assessing Officer was in order"
15. Income exempt under Section 10 in a particular assessment year, may not have been exempt earlier and can become taxable in future years. Further, whether Income earned in a subsequent year would or would not be taxable, may depend upon the nature of transaction entered into in the subsequent assessment year. For example, long term, 27 IT(TP)A No.888/Bang/2022.
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capital gain on sale of shares is presently not taxable where security transaction tax has been paid, but a private sale of shares in an off market transaction attracts capital gains tax:
It is an undisputed position that respondent assessee is an investment company and had invested by purchasing a substantial number of shares and thereby securing right to management. Possibility of sale of shares by private placement etc. cannot be ruled out and is not all improbability. Dividend may or may not be declared. Dividend is declared by the company and strictly in legal sense, a shareholder has no control and cannot insist on payment of dividend. When declared, it is subjected to dividend distribution tax.
16. what is also noticeable is that the entire or whole expenditure has been disallowed as if there was no expenditure incurred by the respondent-assessee for conducting business. The CIT(A) has positively held that the business was set up and had commenced. The said finding is accepted. The respondent-assessee, therefore, had to incur expenditure for the business in the form of investment in shares of cement companies and to further expand and consolidate their business. Expenditure had to be also incurred to protect the investment made. The genuineness of the said expenditure and the fact that it was incurred for business activities was not doubted by the Assessing Officer and has also not been doubted by the CIT(A).' 11.14 Now the position of law as stands is that the decision of Hon'ble Jurisdiction High Court is directly on the point in dispute whereas the decision of Hon'ble Supreme court in the case of Rajendra Prasad Moody (supra) has been rendered in the context of section 57(iii), the applicability of which has been ruled out by Hon'ble Delhi High Court in the case of Cheminvest (supra).
11.15 Under Article 227 of the Constitution of India, the courts function under the supervisory jurisdiction of Hon'ble High Court. The decisions rendered by Hon'ble High Court are binding on all subordinate courts working within its jurisdiction. In this regard we may refer to the following decisions:--
28IT(TP)A No.888/Bang/2022.
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'(i) CIT v. Thana Electricity Supply Ltd. (1994) 206 ITR 727 (Bom.), wherein on the issue of "whose decision is binding on whom", the. Hon'ble Bombay Court considered in detail the hierarchy of the courts and has observed as under:
"It is also well-settled that though there is no specific provision making the law declared by the High Court binding on subordinate courts, it is implicit in the power of supervision conferred on a superior Tribunal that the Tribunals subject to its supervision would conform to the law laid down by it. It is in that view of the matter that the Supreme Court in East India Commercial Co. Ltd. v. Collector of Customs AIR 1962 SC 1893 (at page1905) declared:
"We, therefore', hold that the law declared by the highest court in the State is binding on authorities or Tribunals under its superintendence, and they cannot ignore it. ...."
This position has been summed up by the Supreme Court in Mahadeolal Kanodia v. Administrator General of West Bengal AIR 1960 SC 936 (at page 941) as follows:
"Judicial decorum no less than legal propriety forms the basis of judicial procedure. If one thing is more necessary in law than any other thing, it is the quality of certainty. That quality would totally disappear if judges of co-ordinate jurisdiction in a High Court start overruling one another's decisions. If one Division Bench of a High Court is unable to distinguish a previous decision of another Division Bench, and holding the view that the earlier decision is wrong, itself gives effect to that view, the result would be utter confusion. The position would be equally bad where a judge sitting singly in the High Court is of opinion that the previous decision of another single judge on a question of law is wrong and gives effect to that view instead of referring the matter to a larger Bench."29
IT(TP)A No.888/Bang/2022.
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The above decision was followed by the Supreme Court in Baradakanta Mishra v. Bhimsen Dixit, AIR 1972 SC 2466, wherein the legal position was reiterated in the following words (at page 2469) :
"It would be anomalous to suggest that a Tribunal over which the High Court has superintendence can ignore the law declared by that court and start proceedings in direct violation of it. If a Tribunal can do so, all the subordinate courts can equally do so, for there is no specific provision, just like in the case of Supreme Court, making the law declared by the High Court binding on subordinate courts. It is implicit in the power of supervision conferred on a superior Tribunal that all the Tribunals subject to its supervision should conform to the law laid down by it. Such obedience would also be conducive to their smooth working; otherwise there would be confusion in the administration of law and respect for law would irretrievably suffer,"
(ii) CIT v. Sunil Kumar (1995) 212 ITR 238 (Raj.), it was observed as under:
"The point which has been raised could have been considered to be debatable because other High Courts have taken a different view. But since the view taken by this court is binding on the Tribunal and other authorities under the Act in this State, it could not be considered to be a debatable point in view of the decision of this court in the case of CIT v. M.L., Sanghi [1988] 170 ITR 670."
(iii) Indian Tube Company Ltd. v. CIT & others (1993) 203 ITR 54 (Col.) , it was observed as under:
"In the impugned order, respondent No.1 has rejected the petitioner's contention by stating that, although the Calcutta High Court had held that an assessee was entitled to interest on such refund calculated up to the date of the order passed consequent upon an appeal or revision of the original assessment, this view had not been accepted by the Bombay High Court, the Allahabad High Court and the 30 IT(TP)A No.888/Bang/2022.
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Kerala High Court. Respondent No.1, accordingly, chose to accept the view of the Bombay, Allahabad and Kerala High Courts in preference to the view of the Calcutta High Court.
In my view, the order of respondent No. 1 cannot be sustained on the simple ground that respondent No. 1 is an authority operating within the State of West Bengal and is bound by the decisions of the High Court of this State (see CIT v. Indian Press Exchange Ltd. [1989] 176 ITR 331 (Cal) ; East India Commercial Co. Ltd. v. Collector of Customs AIR 1962 SC 1993, paragraph 29).
In that view of the matter, the impugned order must be set aside and the Commissioner is directed to consider the matter afresh in keeping with the decisions of this court after giving the petitioners an opportunity of being heard. At least 48 hours clear notice must be given to the petitioners. The Commissioner will communicate the final order to the petitioner within eight weeks from the date of hearing.
(iv) CIT v. J.K. Jain [1998] 230 ITR 839 (P&H), observing as under:
"We have carefully examined the records and have heard learned counsel representing the parties. We are in respectful agreement with the view expressed by the Allahabad High Court in Omega Sports and Radio Works' case [1982] 134 ITR 28, as also the decision of this court in Mohan Lal Kansal's case [1978] 114 ITR 583. Following the decision in the two cases referred to above, we hold that it was not a case of divergence of opinion inasmuch as the opinion expressed by this court was binding upon the Tribunal."' 11.16 Therefore, in our considered opinion, no contrary view can be taken under these circumstances. We, accordingly, hold that only those investments are to be considered for computing average value of investment which yielded exempt income during the year.
11.17 As far as argument relating to meaning to be ascribed to the phrase 'shall not' used in Rule 8D(2)(iii) is concerned, the 31 IT(TP)A No.888/Bang/2022.
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Revenue's contention is that it refers to those investments which did not yield any exempt income during the year but if income would have been yielded it would have remain exempt. There is no dispute that if an investment has yielded exempt income in a particular year then it will enter the computation of average value of investments for the purposes of Rule 8D(2)(iii). The assessee's contention that if there is no certainty that an income, which is exempt in current year, will continue to be so in future years and, therefore, that investment should also be excluded, is hypothetical and cannot be accepted.
11.18 In view of above discussion, the matter is restored back to the file of AO for recomputing the disallowance u/s 14A in terms of above observations. Thus, revenue's appeal is dismissed and assessee's cross-objection, on the issue in question, stand allowed for statistical purposes, in terms indicated above."
21. In the instant case, the A.O. has considered the entire investments for the purpose of arriving at the average investments, which is not in conformity with the dictum laid down by the Special Bench decision of the Delhi Tribunal (supra). Moreover, the explanation introduced to section 14A of the I.T.Act with effect from 01.04.2022 has been held to be prospective by the judgment of the Hon'ble Delhi High Court in the case of PCIT v. Era Infrastructure India Ltd. (supra). The relevant portion of the Hon'ble Delhi High Court, reads as follows:-
"5. However a perusal of the Memorandum of the Finance Bill, 2022 reveals that it explicitly stipulates that the amendment made to section 14A will take effect from 1st April, 2022 and will apply in relation to the assessment year 2022-23 and subsequent assessment years. The relevant extract of Clauses 4, 5, 6 & 7 of the Memorandum of Finance Bill, 2022 are reproduced hereinbelow:
"4. In order to make the intention of the legislation clear and to make it free from any misinterpretation, it is proposed to insert an Explanation to section 14A of the Act to clarify that 32 IT(TP)A No.888/Bang/2022.
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notwithstanding anything to the contrary contained in this Act, the provisions of this section shall apply and shall be deemed to have always applied in a case where exempt income has not accrued or arisen or has not been received during the previous year relevant to an assessment year and the expenditure has been incurred during the said previous year in relation to such exempt income.
5. This amendment will take effect from 1st April, 2022.
6. It is also proposed to amend sub-section (1) of the said section, so as to include a non-obstante clause in respect of other provisions of the Income-tax Act and provide that no deduction shall be allowed in relation to exempt income, notwithstanding anything to the contrary contained in this Act.
7. This amendment will take effect from 1st April, 2022 and will accordingly apply in relation to the assessment year 2022-23 and subsequent assessment years."
(emphasis supplied)
6. Furthermore, the Supreme Court in Sedco Forex International Drill. Inc. v. CIT [2005] 149 Taxman 352/279 ITR 310 has held that a retrospective provision in a tax act which is "for the removal of doubts" cannot be presumed to be retrospective, even where such language is used, if it alters or changes the law as it earlier stood. The relevant extract of the said judgment is reproduced hereinbelow:
'9. The High Court did not refer to the 1999 Explanation in upholding the inclusion of salary for the field break periods in the assessable income of the employees of the appellant. However, the respondents have urged the point before us.
10. In our view the 1999 Explanation could not apply to assessment years for the simple reason that it had not come into effect then. Prior to introducing the 1999 Explanation, the decision in CIT v. S.G. Pgnatale [(1980) 124 ITR 391 (Guj.)] was followed in 1989 by a Division Bench of the Gauhati High Court in CIT v. Goslino Mario [(2000) 241 ITR 314 (Gau.)]. It found that the 1983 Explanation had been given effect from 1-4-
1979 whereas the year in question in that case was 1976-77 and said: (ITR p. 318) "[I]t is settled law that assessment has to be made with reference to the law which is in existence at the relevant time. The mere 33 IT(TP)A No.888/Bang/2022.
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fact that the assessments in question has (sic) somehow remained pending on 1-4-1979, cannot be cogent reason to make the Explanation applicable to the cases of the present assessees. This fortuitous circumstance cannot take away the vested rights of the assessees at hand. "
11. The reasoning of the Gauhati High Court was expressly affirmed by this Court in CIT v. Goslino Mario [(2000) 10 SCC 165 : (2000) 241 ITR 312] . These decisions are thus authorities for the proposition that the 1983 Explanation expressly introduced with effect from a particular date would not effect the earlier assessment years.
12. In this state of the law, on 27-2-1999 the Finance Bill, 1999 substituted the Explanation to Section 9(1)(ii) (or what has been referred to by us as the 1999 Explanation). Section 5 of the Bill expressly stated that with effect from 1-4-2000, the substituted Explanation would read:
"Explanation.-For the removal of doubts, it is hereby declared that the income of the nature referred to in this clause payable for--
(a) service rendered in India; and (b) the rest period or leave period which is preceded and
succeeded by services rendered in India and forms part of the service contract of employment, shall be regarded as income earned in India."
The Finance Act, 1999 which followed the Bill incorporated the substituted Explanation to Section 9(1)(ii) without any change.
13. The Explanation as introduced in 1983 was construed by the Kerala High Court in CIT v. S.R. Patton [(1992) 193 ITR 49 (Ker.)] while following the Gujarat High Court's decision in S.G. Pgnatale [(1980) 124 ITR 391 (Guj.)] to hold that the Explanation was not declaratory but widened the scope of Section 9(1)(ii). It was further held that even if it were assumed to be clarificatory or that it removed whatever ambiguity there was in Section 9(1)(ii) of the Act, it did not operate in respect of periods which were prior to 1-4-1979. It was held that since the Explanation came into force from 1-4-1979, it could not be relied on for any purpose for an anterior period.
14. In the appeal preferred from the decision by the Revenue before this Court, the Revenue did not question this reading of 34 IT(TP)A No.888/Bang/2022.
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the Explanation by the Kerala High Court, but restricted itself to a question of fact viz. whether the Tribunal had correctly found that the salary of the assessee was paid by a foreign company. This Court dismissed the appeal holding that it was a question of fact. (CIT v. SR Patton [(1998) 8 SCC 608] .)
15. Given this legislative history of Section 9(1)(ii), we can only assume that it was deliberately introduced with effect from 1-4- 2000 and therefore intended to apply prospectively [See CIT v. Patel Bros. & Co. Ltd., (1995) 4 SCC 485, 494 (para 18) : (1995) 215 ITR 165]. It was also understood as such by CBDT which issued Circular No. 779 dated 14-9-1999 containing Explanatory Notes on the provisions of the Finance Act, 1999 insofar as it related to direct taxes. It said in paras 5.2 and 5.3.
"5.2 The Act has expanded the existing Explanation which states that salary paid for services rendered in India shall be regarded as income earned in India, so as to specifically provide that any salary payable for the rest period or leave period which is both preceded and succeeded by service in India and forms part of the service contract of employment will also be regarded as income earned in India.
5.3 This amendment will take effect from 1-4-2000, and will accordingly, apply in relation to Assessment Year 2000-2001 and subsequent years".
16. The departmental understanding of the effect of the 1999 Amendment even if it were assumed not to bind the respondents under section 119 of the Act, nevertheless affords a reasonable construction of it, and there is no reason why we should not adopt it.
17. As was affirmed by this Court in Goslino Mario [(2000) 10 SCC 165 : (2000) 241 ITR 312] a cardinal principle of the tax law is that the law to be applied is that which is in force in the relevant assessment year unless otherwise provided expressly or by necessary implication. (See also Reliance Jute and Industries Ltd. v. CIT [(1980) 1 SCC 139 : 1980 SCC (Tax) 67].) An Explanation to a statutory provision may fulfil the purpose of clearing up an ambiguity in the main provision or an Explanation can add to and widen the scope of the main section [See Sonia Bhatia v. State of UP., (1981) 2 SCC 585, 598 : AIR 1981 SC 1274, 1282 para 24]. If it is in its nature clarificatory then the Explanation must be read into the main provision with effect from the time that the main provision came into force [See 35 IT(TP)A No.888/Bang/2022.
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Shyam Sunder v. Ram Kumar, (2001) 8 SCC 24 (para 44); Brij Mohan Das Laxman Das v. CIT, (1997) 1 SCC 352, 354; CIT v. Podar Cement (P.) Ltd., (1997) 5 SCC 482, 506]. But if it changes the law it is not presumed to be retrospective, irrespective of the fact that the phrases used are "it is declared" or "for the removal of doubts".' (emphasis supplied)
7. The aforesaid proposition of law has been reiterated by the Supreme Court in M.M. Aqua Technologies Ltd. v. CIT [2021] 129 taxmann.com 145/282 Taxman 281/436 ITR 582. The relevant portion of the said judgment is reproduced hereinbelow:--
"22. Second, a retrospective provision in a tax act which is "for the removal of doubts" cannot be presumed to be retrospective, even where such language is used, if it alters or changes the law as it earlier stood. This was stated in Sedco Forex International Drill Inc. v. CIT, (2005) 12 SCC 717 as follows :
17. As was affirmed by this Court in Goslino Mario [(2000) 10 SCC 165] a cardinal principle of the tax law is that the law to be applied is that which is in force in the relevant assessment year unless otherwise provided expressly or by necessary implication. (See also Reliance Jute and Industries Ltd. v. CIT [(1980) 1 SCC 139].) An Explanation to a statutory provision may fulfil the purpose of clearing up an ambiguity in the main provision or an Explanation can add to and widen the scope of the main section [See Sonia Bhatia v.
State of UP., (1981) 2 SCC 585]. If it is in its nature clarificatory then the Explanation must be read into the main provision with effect from the time that the main provision came into force [See Shyam Sunder v. Ram Kumar, (2001) 8 SCC 24; Brij Mohan Das Laxman Das v. CIT, (1997) 1 SCC 352; CIT v. Podar Cement (P.) Ltd., (1997) 5 SCC 482]. But if it changes the law it is not presumed to be retrospective, irrespective of the fact that the phrases used are "it is declared" or "for the removal of doubts".
18. There was and is no ambiguity in the main provision of section 9(1)(ii). It includes salaries in the total income of an assessee if the assessee has earned it in India. The word "earned" had been judicially defined in SG. Pgnatale [(1980) 124 ITR 391 (Guj.)] by the High Court of Gujarat, in our view, correctly, to mean as income "arising or accruing in India". The amendment to the section by way of an Explanation in 1983 effected a change in the scope of that 36 IT(TP)A No.888/Bang/2022.
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judicial definition so as to include with effect from 1979, "income payable for service rendered in India".
19. When the Explanation seeks to give an artificial meaning to "earned in India" and brings about a change effectively in the existing law and in addition is stated to come into force with effect from a future date, there is no principle of interpretation which would justify reading the Explanation as operating retrospectively." (emphasis supplied)
8. Consequently, this Court is of the view that the amendment of section 14A, which is "for removal of doubts" cannot be presumed to be retrospective even where such language is used, if it alters or changes the law as it earlier stood.
22. Therefore, following the judgment of the Hon'ble Delhi High Court in the case of PCIT v. Era Infrastructure India Ltd. (supra) and the Special Bench order of the Delhi Tribunal in the case of ACIT v. Vireet Investment (P.) Ltd. (supra), we hold that the disallowance u/s 14A of the I.T.Act is to be restricted to only those investments which have generated exempt income during the relevant assessment year. It is ordered accordingly.
23. In the result, grounds 3.5 to 3.8 are allowed.
Ground 3.9 to 3.11 (Disallowance of expenditure of Rs.1,94,54,100 (Corporate Tax Issue)
24. The brief facts of the case are as follows:
The learned AR submitted that the assessee had created a provision on account of obsolete / bad stock amounting to Rs.8,78,53,132. However, the assessee had voluntarily disallowed the provision for inventory amounting to 37 IT(TP)A No.888/Bang/2022.
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Rs.8,78,53,132. In this regard, the learned AR drew our attention to the Income-tax computation statement for assessment year 2015-2016 at page 1798 of the paper book Vol.II submitted by the assessee. It is submitted that subsequently out of the total provision created during the assessment year 2015-2016, the assessee had reversed / written off the provision for inventory amounting to Rs.3,95,34,870, Rs.1,72,98,009 and Rs.1,94,54,000 for assessment years 2016-2017, 2017-2018 and 2018-2019, respectively. The reversal of provision was claimed as deduction u/s 37 of the I.T.Act for tax computation. The A.O. disallowed reversal / write off of provision for inventory. The DRP vide its directions upheld the disallowance on account of reversal provision for inventory amounting to Rs.1,94,54,100 (refer para 2.3.2. of the DRP's directions).
25. Aggrieved, the assessee has raised this issue before the Tribunal. The learned AR submitted that the disallowance of Rs.1,94,54,100 claimed under the head "any other amount of allowable deduction" in the income tax return has been wrongly disallowed by the A.O. and the same was confirmed by the DRP. It was submitted that the A.O. and the DRP has failed to appreciate the fact of reversal of provision claimed as a deduction during the year has been offered to tax in the year in which the provision was created, and therefore, the deduction has been rightly claimed by the assessee. Lastly, it was contended that the A.O. and the DRP have failed to consider the details and the submissions made in this regard 38 IT(TP)A No.888/Bang/2022.
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by the assessee during the course of the proceedings before them. In this context, the learned AR relied on the decision of the Mumbai Bench of the Tribunal in the case of BNP Paribas India Holdings Pvt. Ltd. in ITA No.1496/Mum/2020 (order dated 12.10.2020) and the Bangalore Bench of the Tribunal decision in the case of M/s.Texas Instruments (India) Pvt. Ltd. v. JCIT (LTU) in ITA No.1958/Bang/2018 (order dated 16.12.2020).
26. The learned DR supported the orders of the TPO and the DRP.
27. We have heard rival submissions and perused the material on record. It is claimed that the assessee had created a provision on account of obsolete / bad stock amounting to Rs.8,78,53,132 during the assessment year 2015-2016. However, the assessee voluntarily disallowed the provisions on inventory. It is claimed that the assessee had reversed / written off the provision for inventory for assessment years 2016-2017, 2017-2018 and 2018-2019 at Rs.3,95,34,870, Rs.1,72,98,009 and Rs.1,94,54,100, respectively. The movement of inventory provision as detailed by the assessee are listed below:-
Particulars Amount in INR Remarks Reference to Paper book II Inventory 8,78,53,132 The same has Page No.1798-
provision created been disallowed 1799
during the AY in AY 2015-16
2015-16 tax computation
Less : Reversal / (3,95,34,817) The same has Page No.1800-
39
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write off during been claimed as 1801
the AY 2016-17 deduction in AY
2016-17 tax
computation
Less : Reversal / (1,72,98,009) The same has Page No.1802-
write off during been claimed as 1803
the AY 2017-18 deduct6ion in AY
2017-18 tax
computation
Less : Reversal / (1,94,54,100 The same has Page No.1804-
write off during been claimed as 1805
the AY 2018-19 deduction in AY
2018-19 tax
computation
Closing inventory 1,15,66,206
provision as on
31 March 2018
28. We are of the view that the matter needs to be examined by the A.O. afresh. The main contention of the learned AR is that since the entire amount of provision, i.e., Rs.878,51,132, has already suffered tax in assessment year 2015-2016, taxing the reversal out of the said provision would amount to double taxation. The fact whether the amount of provision has already suffered tax, and whether the reversal of provision pertains to the amount already suffered tax, needs to be verified. We, therefore, remit the issue to the A.O. with a direction to verify the above mentioned fact and allow the deduction if the entire provision have already suffered tax and the reversal during the year under consideration is out of the said provision. Needless to say that the assessee be given a reasonable opportunity of being heard. This ground is allowed for statistical purposes.40
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29. In the result, the appeal filed by the assessee is partly allowed.
Order pronounced on this 12th day of January, 2023.
Sd/- Sd/-
(Padmavathy S) (George George K)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Bangalore; Dated : 12th January, 2023.
Devadas G*
Copy to :
1. The Appellant.
2. The Respondent.
3. The DRP-1, Bangalore.
4. The Pr.CIT-1, Bengaluru.
5. The DR, ITAT, Bengaluru.
6. Guard File.
Asst.Registrar/ITAT, Bangalore