Novartis India Limited Vs ACIT (ITAT Mumbai)
Disallowance of excess/ short year end provisions in current year and allowing in subsequent year is revenue neutral
ITAT Mumbai held that provisions made on best estimate basis is allowable as deduction as disallowance of excess and short year end provisions in current year and allowing the same in subsequent year is revenue neutral.
Facts-
During the AY 2007-08, total provisions of ₹.21,88,24,077 have been created for expenses which inter-alia include employee related payables, Central Sales Tax/ VAT expenses, Annual Awards Function, etc. Payments against the provisions during the captioned AY amount to INR 18,76,66,388. From the balance, excess provision for Central Sales Tax/ VAT expenses, provident fund contribution and bonus amounting to ₹.1,51,22,225 have been suo-moto disallowed by the assessee. The remaining excess provision of ₹.1,60,35.464 (representing meager 7.33% of the total provisions) has been disallowed by the Assessing Officer during the assessment proceedings. Further, the Assessing Officer has allowed relief of ₹.2,39,05,469 being excess provision disallowed in AY 2007-08 reversed in the captioned AY and made further disallowance of ₹.48,269 being short provision of AY 2007-08 paid in the captioned AY but allowed in AY 2007-08. The Assessing Officer has failed to appreciate that the adjustments made in relation to the year-end provision are tax neutral since disallowance/ allowance for year 1 is allowed/ disallowed in year 2.
Conclusion-
Held that the assessee regularly follows the procedure of creating provisions and suo moto disallows the expenditure which are excessive in the next assessment year. The historical data shows that the assessee makes the adjustment every year which are in the range of 7-8% and it consistently follows the same and if there is short, it accounts the same in the with next assessment year. It will have tax neutral effect considering the fact that the same rate of tax is applicable.
FULL TEXT OF THE ORDER OF ITAT MUMBAI
1. This appeal is filed by the assessee against direction of the Dispute Resolution Panel –II, Mumbai [hereinafter in short “Ld. DRP”] passed u/s.144C(5) of Income-tax Act, 1961 (in short “Act”) dated 03.09.2012 for the A.Y. 2008-09.
2. Assessee has raised following grounds in its appeal: –
“GROUND NO 1
Based on the facts and circumstances of the case, the learned Assessing Officer (‘AO’) / Additional Commissioner of Income-tax Transfer Pricing – 11(2) (hereinafter referred to as the learned TPO’) have erred in law and in fact:
(a) Disregarding the economic analysis undertaken by the Appellant in accordance with the provisions of the Act read with the Income-tax Rules, 1962 and conducting a fresh economic analysis for the determination of the arm’s length price in connection with the international transaction of Provision of Security support services.
(b) Not providing the detailed search process undertaken for identifying comparable companies
(c) Considering those companies as comparable that are functionally different from the Appellant for the international transaction of provision of Security support services
(d) by erroneously computing the margins of some of the comparable companies identified by the learned TPO
(e) By not adding the comparable companies identified by the Appellants with comparable companies identified by the learned TPO
(f) By not considering the +/- 5% variation from the arm’s length price permitted to the Appellant under the proviso to section 92C(2) of the Act.
(g) By ignoring the provisions of Rule 10B(3) of the Income-tax Rules, 1962, which envisage usage of multiple year data of comparable companies for the purpose of determination of the arm’s length price and using single year data for computing arms length price.
GROUND NO. 2
(a) The learned AO erred in holding that the appellant would not be eligible for depreciation on assets that stood vested in Ciba Specialty Chemicals (India) Ltd., (CSCIL) pursuant to the scheme of demerger.
(b) The learned AO erred in holding that a consideration had flowed to the appellant for the transfer of the assets to CSCIL
(c) Without Prejudice to above, in the event it is held that adjustment for assets transferred on demerger is required to be made, the learned AO erred in considering opening Block of WDV after adjustment of Book WDV of assets transferred instead of Income tax WDV of assets transferred for the purpose of calculating depreciation allowable to the appellants for AY 2008-09
GROUND NO. 3
The learned AO erred in disallowing the expenditure of Rs. 86,77,930 incurred on production of advertisement films on the ground that the same are capital expenditure
GROUND NO. 4
(a) The learned AO erred in disallowing the expenditure on computer software/licence fees of Rs 46.92.440 on the ground that the same is capital expenditure of an enduring nature.
(b) The learned AO further erred in disallowing depreciation on software expenses disallowed in earlier years relating to the demerged unit.
GROUND NO. 5
(a) The learned AO erred in making an addition of Rs. 42,32,548 to the valuation of closing stock of the appellants as at 31.03.2008 on account of estimated pro-rata secondary freight on stocks lying at various locations
(b) Without prejudice to the above, the learned AO ought to have held that the value of opening stock of the subsequent assessment year should be increased by Rs 42,32,548 on account of the addition made to the closing stock for the assessment year 2008-09
GROUND NO. 6
The learned AO erred in disallowing Rs 51,61,020/- on an ad-hoc basis of 25% of total foreign traveling expenses on the ground that these expenses were for non-business purpose
GROUND NO. 7
The learned AO erred in disallowing an amount of Rs.3.91.564/-towards hotel expenses and air face of foreign visitors from Group Company and others coming to India on the ground that these expenses were for non-business purpose.
GROUND NO.8
(a) The learned AO erred in not allowing deduction of Rs 22,17,950/-being the incremental liability on account of pension payable under the erstwhile Voluntary Retirement Scheme of F.Y. 1992-93 (hereinafter referred to as pension) in respect of the workers of the appellants of their erstwhile Bhandup unit in computing the appellants total income.
The learned AO erred in invoking the provisions of section 35DDA in disallowing the above amount.
(b) Without prejudice the learned AO erred in not allowing deduction for Rs 2,92,95,739/ being the amount of actual payment on account of Pension as consistently done in the past
(c) Without prejudice to the above, the appellants submit that the learned AO be directed to allow actual payment out of Rs. 2,92,95,739/- to the extent it relates to the provision created during the year ended 31 March, 1993, but disallowed in assessment as per assessment order for A.Y 1993-94.
GROUND NO. 9
(a) The learned AO erred in disallowing amount of Rs. 1,94,42,427/-on the ground that year end estimates of expenses are excess provision.
(b) Without prejudice to the above, the appellants submit that consistent with the department’s stand, the AO ought to have held that the deduction be allowed in assessment year 2009-10 being the year in which the same were written back and credited to Profit and Loss account in that assessment year and offered to tax
GROUND NO. 10
The Learned AO erred in making a further disallowance of an amount of Rs 6,43.513 under section 14A read with rule 8D of the Act, holding the same as expenditure incurred on earning tax free interest/dividend income without appreciating the fact that the appellants had already offered to tax Rs 1,21,445 being expenses directly incurred towards earning tax free income in Return of Income (ROI)
GROUND NO. 11
(a) The AO erred in adding Rs. 1,16,67,603 to the value of closing stock on account of unutilised CENVAT credit under section 145A of the Act
(b) The learned AO erred in not appreciating that since the appellants were following the treatment with respect to cenvat credit as per the recommendations of the Institute of Chartered Accountant (ICAI), no adjustment was required to be made on this account.
(c) Without prejudice, the AO ought to have given the impact of unutilized CENVAT credit to the opening stock of AY 2008-09 as well, and only the net resultant figure should have been added.
GROUND NO. 12
The learned AO erred in not granting TDS credit amounting to Rs.1,55,05,715/- without giving any reasons for the same.
GROUND NO. 13
The learned AO erred in charging interest under section 234C of Rs.12,51,546/- as against Rs. 617,293/- per ROI
GROUND NO. 14
The learned AO erred in charging interest under section 234B of Rs. 1,16,38,177/
GROUND NO. 15
The learned AO erred in initiating penalty proceedings under section 271(1)(c) of the Act for concealment of income and furnishing of inaccurate particulars of income.
3. Assessee has raised following additional ground in its appeal, which is reproduced below: –
‘The following Grounds of Appeal are independent of, and without prejudice to each other and to the grounds of appeal filed earlier:
Sr no 12 On the facts and in the circumstances of the case, the Appellant prays that the liability of Education Cess and Secondary and Higher Education Cess determined on Income-tax paid for the current year ought to have been granted by the AO as business expenditure under section 37(1) of the Income-tax Act, 1961 while computing the business income.
4. Assessee has further raised modified and additional ground of appeal which are reproduced below: –
‘On the facts and in the circumstances of the case, the Appellant wishes to raise the following additional ground of appeal which is independent of the other grounds of appeal:
Modified Ground No. 1(c) in relation to transfer pricing adjustment in relation to provision of security support services:
(c) The learned TPO/ learned AO have erred in law and in facts by including the following additional companies which are not comparable to the Appellant:
