Hero Motocorp Ltd. Vs ACIT (ITAT Delhi)
In the present year, the Assessing Officer has made disallowance under section 14A by invoking provisions of Rule 8D of the Income Tax Rules, 1962. Since Rule 8D is not retrospective, the same is not applicable in the present assessment year and accordingly, we hold that the assessing order erred in invoking the provisions of Rule 8D of the Rules. We find that the assessee had been consistently following a method of disallowance in the succeeding years commencing from AY 2006-07 onwards. The said method has been accepted by the Tribunal in AY 2010-11, 2011-12 and 2006-07 (set aside proceedings) in the absence of any dissatisfaction by the AO qua inaccuracy of the same. We have also upheld the said method in the appeal for AY 2015-16, in the absence of any dissatisfaction by the AO. We accordingly restore the matter back to the file of the AO to compute disallowance on the same basis in the year under consideration after taking requisite details from the assessee and giving opportunity of hearing by following the principle of natural justice. The ground is allowed for statistical purposes.
FULL TEXT OF THE ORDER OF ITAT DELHI
These are cross appeals filed by the Assessee and the Revenue against the order of the Ld. Commissioner of Income Tax (Appeals)-44, New Delhi {CIT (A)} vide order dated 28.08.20 15 for Assessment Year 2005-06. ITA 6282/Del/2015 is the appeal filed by the assessee whereas ITA 6302/Del/2015 is the appeal of the Department.
2.0 The respective grounds raised by the parties are as under:
2.1 ITA No. 6282/Del/2015 (Assessee appeal):
“1. That the CIT (A) erred on facts and in law in sustaining the disallowance of administrative expenses made by the assessing officer to the extent of Rs. 3,26,03,500 invoking the provisions of section 14A of the Income Tax Act, 1961 (‘the Act) alleging the same to have been incurred for earning exempt dividend income.
1.1 That the CIT (A) erred on facts and in law in affirming the action of the assessing officer in computing disallowance of administrative expenses, by allocating 0.5% of the total investments made by the appellant during the relevant previous year, on the assumption that certain administrative expenses must have been incurred to earn the exempt income without appreciating that only expenses having proximate nexus with the earning of exempt income could have been disallowed under section 1 4A of the Act.
1.2 That the CIT (A) erred on facts and in law in not deleting the disallowance of interest expenditure of Rs. 78,55,100 made by the assessing officer under section 14A of the Act.
1.3 That the CIT (A) erred on facts and in law in directing the assessing officer to disallow interest expenditure incurred on borrowed funds utilized for making investment in shares/mutual funds on the basis of bank statement under section 14A, without appreciating that the appellant had mixed pool of funds wherein surplus funds were sufficient for making investments in shares/ mutual funds.
2. That the CIT (A) erred on facts and in law in sustaining the disallowance of deduction of Rs. 2,30,53,828/- claimed by the appellant under section 80IA of the Act in respect of captive power generating unit situated at Gurgaon.
2.1 That the CIT (A) erred on facts and in law in affirming the action of the assessing officer in computing income of the power generating unit by considering the rate of Rs. 3.99 per unit, at which power was supplied by Haryana State Electricity Board (“HSEB”), as the ‘market price’ of the power, as against rate of Rs. 6.30 per unit (cost of generation of power at Rs. 5.48 per unit + mark-up of 15%) adopted by the appellant.
2.2 That the CIT (A) erred on facts and in law in not appreciating that the price at which electricity was supplied by HSEB was not reflective of ‘market price’ since electricity supply was not adequately available from HSEB at Gurgaon as per the appellant’s requirement and other manufacturers in the vicinity were procuring power from the prime supplier, viz., Maruti at a higher price.
3. That the CIT (A) erred on facts and in law in not deleting the disallowance of additional depreciation of Rs. 14.93 crores claimed by the appellant under section 32(1)(iia) of the Act with respect to plant and machinery acquired during the year.
3.1 That the CIT (A) erred on facts and in law in holding that new plant and machinery must directly result in increase in installed capacity of the manufacturing plant for the purposes of claiming additional depreciation thereon under section 32(1)(iia) of the Act, without appreciating that no such condition existed in the said section for entitling additional depreciation.
4. That the CIT (A) erred on facts and in law in sustaining disallowance of portfolio management expenditure of Rs. 27,68,039 on the ground that the same related to investment activity of the appellant.
4.1 That the CIT (A) erred on facts and in law in not allowing the alternate claim of the appellant for deduction of portfolio management charges against income under the head ‘capital gains’ on the ground that the said expenditure was relatable to earning of exempt income.
5. That the CIT (A) erred on facts and in law in sustaining disallowance of professional fee of Rs. 14.74 paid to Prof. Tarun Khanna, a non-resident, for rendering consultancy services for scenario planning exercises of the appellant, under section 40(a)(i) for alleged failure on the part of appellant in not deducting tax at source therefrom.
5.1 That the CIT (A) erred on facts and in law in holding that the skills/ experience utilized by the consultant for rendering services would amount to ‘make available’ within the meaning of Article 12(4) of the India-USA DTAA.
6. That the CIT (A) erred on facts and in law in upholding the action of the assessing officer / TPO in making addition to the extent of Rs. 6,57,195/- on account of alleged difference in arm’s length price of international transaction of import of components, spare parts etc., applying CUP method instead of TNMM applied by the appellant as the most appropriate method.
6.1 That the CIT (A) erred on facts and in law in not holding that having regard to nature and class of the international transactions of purchase of spare parts and components, TNMM was correctly applied as the most appropriate method, as per section 92C of the Act.
6.2 That the CIT (A) erred on facts and in law in holding that for determining the arm’s length Price of international transaction of purchase of spare parts and components, CUP method would be the most appropriate method.
6.3 That the CIT (A) erred on facts and in law in not appreciating that since operating profit margin of the appellant was within an acceptable range vis-a-vis unrelated parties, no further adjustment of arm’s length price of any other international transaction, including the impugned import of components, was warranted.
6.4 That the CIT (A) erred on facts and in law in sustaining the order of the TPO / assessing officer in applying CUP method in respect of international transaction of import of components from the AE by comparing incomparable transactions, viz., price of the international transaction with prices of purchase of similar components from the domestic vendors.
6.5 That the CIT (A) erred on facts and in law in not appreciating that the TPO in the succeeding assessment year(s) had accepted that price for import of components in the facts of the appellant’s case cannot be compared with price for procurement of similar components from the domestic vendors.”
2.2 ITA 6302/Del/2015 (Department’s Appeal:
“1. Whether on the facts & that circumstances of the case, Ld. CIT (A) erred in deleting the addition of Rs. 1250773885 on account of disallowance of royalty and technical guidance fee?
2. Whether on the facts & that circumstances of the case, Ld. CIT (A) erred in deleting the addition of Rs. 198530762 on account of disallowance of model fee?
3. Whether on the facts & that circumstances of the case, Ld. CIT (A) erred in deleting the addition of Rs. 86926848 on account of disallowance of export commission due to non deduction of TDS?
4. Whether on the facts & that circumstances of the case, Ld. CIT (A) erred in deleting the addition of Rs. 51800000 on account of disallowance of warranty provisions?”
3.0.0 Arguing for the appeal filed by the assessee, the Ld. Authorised Representative (AR) submitted that ground nos. 1 to 1.3 are relating to disallowance under Section 14A of the Income Tax Act, 1961 (‘the Act’) read with Rule 8D of the Income Tax Rules, 1962 (‘the Rules’) amounting to Rs.3,26,03,500/- It was submitted by the learned AR that in the return of income, the assessee had shown to have earned exempt dividend income of Rs. 14,41,51,497/- from investments held in shares and mutual funds, as under:
