Mahindra & Mahindra Limited Corporation Taxation Vs ACIT (ITAT Mumbai)
Conclusion: The ITAT directed the ld. AO directed to consider only those investments which had actually yielded exempt income during the year while working out the disallowance under third limb of Rule 8D(2) of the Rules.
Facts: Cross appeals were filed by the assessee and the revenue as against the final assessement order dated 30/01/2015 passed by the Assessing Officer pursuant to the direction of the Ld. Dispute Resolution Panel (DRP) under section 144C (5) of the income tax Act, 1961 pertaining to Assessment year 2010-11.
The brief facts are that the assessee company is engaged in the business of manufacturing and sale of on-road automobiles, agricultural tractor and implements, engine parts and accessories of motor vehicle, rendering services, property development activity, financing and investment and transport solutions etc. The assessee filed its return of income on 30/09/2010 declaring total income of Rs. 19,13,56,45,771/-and had revised its return of income on 29/03/2012 declaring total income of Rs. 18,99,47,48,506/-. The assessee’s case was selected for scrutiny and draft assessment order under section 143(3) r.w.s.144C (1) of the income tax Act 1961 dated 31/03/2014 was proposed to assess the income at Rs. 25, 07, 36, 09, 270/-. The assessee filed its objection before the DRP-1, Mumbai and was subsequently transferred to DRP-IV, Mumbai. It was observed that the assessee had entered into international transactions including supply of medical and spares, rendering of services, provisions of loans and corporate guarantee on investment in equity shares with its AEs. Subsequent to this, assessee’s case was transferred to the TPO who had made an adjustment of Rs. 31, 74, 04, 647/- and the AO had also proposed various other additions such as, on premium payable on FCCBs, provision for warranty, disallowance under section 14A, addition under section 40(a)(ia), weighted deduction under section 35 (2AB), dealer incentive and service coupon under section 40(a)(ia), disallowance under section 80IC and octroi incentive thereby proposing to assess the income at Rs. 25,07, 36,09,270/-. Aggrieved by the final assessment order both the assessee and the revenue were in appeal before ITAT.
Some of the main Grounds have been analysed below
Ground 5 : Disallowance under section 14A
This ground of appeal raised by the assessee pertains to disallowance of Rs.36,83,10,000/- under section 14A r.w.r. 8D of the I.T. Act. It was observed that the assessee has declared dividend income of Rs.132,75,57,895/- as exempt income under section 10(34) & 10(35) of the I.T. Act. The Assessing Officer has disallowed the same on the ground that borrowed funds have been utilised for the investment which yielded exempt income. The Assessing Officer held that the assessee’s claim of expenditure is unacceptable and has applied Rule 8D for making the said disallowance. The Ld.DRP has confirmed the disallowance made by the Assessing Officer but had directed the Assessing Officer to recompute the disallowance following the decision of the coordinate bench in the case of Godrej Properties Ltd vs DCIT (ITA 6637/Mum/2018). The Ld.AR for the assessee relied on the decision of the co-ordinate bench for assessment year 2013-14 in assessee’s own case wherein it has been held as below:-
“4.1. ……… This issue is now very well settled by the decision of the Hon’ble Supreme Court and accordingly, we direct the ld. AO to consider only those investments which had actually yielded exempt income during the year while working out the disallowance under third limb of Rule 8D(2) of the Rules. Accordingly, the concise ground No.3 raised by the assessee is partly allowed for statistical purposes.”
The Ld.AR for the assessee further submitted that the assessee had computed the disallowance on its own a sum of Rs.672 lakhs including interest of Rs.513 lakhs and other expenses of Rs.159 lakhs. The Ld.AR also stated the disallowance of interest has been computed on a proportionate basis whereas the other expenses / funds computed to be total salary and other expenses incurred which are related to the value of investments in proportion to the total assets. The assessee further stated that the salary forms part of personnel cost of the corporate finance department and other expenses pertained to travelling and various expenses pertaining to the concerned department. The Ld.AR further stated that the assessee has excluded those investments which were made without borrowings by the assessee company before amalgamation which has become part of the investments of the assessee company subsequent to amalgamation. It is stated that the assessee has furnished details pertaining to the investments in trust of Rs.1,548.16 crores and the investment of Mahindra Holdings & Finance Ltd to the tune of Rs.202.58 crores which were excluded as it is acquired as a result of amalgamation where no borrowed funds were used for such investment. The assessee has also furnished details of investment made before 01/04/2007 of Rs.499 crores, which was excluded for the reason that there was no outstanding borrowings prior to 01/04/2007 on which interest was paid. The assessee has also stated that details pertaining to other expenses such as salary, etc. were also furnished.
The ITAT observed that the issue was squarely covered by the earlier decision of the co-ordinate bench for assessment year 2013-14. Respectfully following the same, the ld. AO was directed to consider only those investments which had actually yielded exempt income during the year while working out the disallowance under third limb of Rule 8D(2) of the Rules. With regard to interest disallowance under rule 8D(2)(ii), the assessee was having sufficient interest free funds to make investments which had yielded exempt income. Hence interest disallowance was thereby deleted. This ground was allowed for statistical purpose.
GROUND 9 : DISALLOWANCE UNDER SECTION 40(a)(ia) IN RESPECT OF SERVICE COUPON OF RS.49,83,63,000/-
The assessee has raised this ground of appeal pertaining to disallowance under section 40(a)(ia) of the Act pertaining to service coupon to dealers amounting to Rs.49,83,62,000/- rejecting the assessee’s contention that tax was deductible on service coupon as per section 194C. The assessee submitted that at the time of sale of vehicles to dealers the assessee company provides service coupons which the dealer endorses to the customers by means of which the end-user receives certain number of free services for the vehicle from the dealer, in order to avail this service, the customer presents the service coupons to the dealer which, in turn, is presented to the company which pass the dealer a pre-determined sum of money by way of reimbursement of cost of servicing the vehicle. The assessee contends that the transaction with the dealer is of a sale / purchase transaction wherein the ownership of the vehicle is transferred to the dealer, who in turn, sells it to the ultimate customer. The assessee further states that the dealer becomes the owner once the assessee sells the vehicle and a subsequent sale executed by the dealer is not on behalf of the company, but for the dealer. The assessee further stated that the dealer is not a commission agent and was not acting on behalf of the assessee company for the services rendered thereby indicating the contention that dealer incentive will be covered under section 194C of the Act. This contention of the assessee was not accepted by the Assessing Officer on the ground that service coupon commission are covered by the provisions of section 194C in which the assessee has given a contract of doing free services of the vehicles to the ultimate customer on behalf of the assessee company to the dealers. The Assessing Officer has rejected the assessee’s contention that the relationship with the assessee and the dealer is on principal to principal basis. The Assessing Officer has categorically classified the said transaction as a contract on rendering free service of the vehicles to the end-user by the dealer on behalf of the assessee company. The Assessing Officer had disallowed the same on the above mentioned reasons. The Ld.AR relied on the proposition that no disallowance under section 40(a)(ia) could be made after expiry of time for passing order under section 201 of the Act and in case the disallowance is sustained, the same is liable to be restricted to 30% instead of 100% of the said expenditure. The Ld.AR relied on the decision of the co-ordinate bench in assessee’s own case for .Y. 2007-08 in M.A. No.485/Mum/2019 arising out of ITA No.382/Mum/2017.
The ITAT observed that in a similar disallowance in assessee’s case for A.Y. 2007-08, the co-ordinate bench restored the matter to the Assessing Officer directing to consider the issue that no disallowance under section 40(a)(ia) could be made after the expiry of the time for passing of the order under section 201 of the Act and that in case the disallowance is sustained, the same is liable to be restricted to the extent of 30% of the amount of service coupons. As the issue of the assesse was squarely covered by the decision of the Tribunal, therefore the ITAT respectfully followed the said decision and hereby restore this issue to the file of the Assessing Officer by directing him that no disallowance under section 40(a)(ia) shall be made after the expiry of the time for passing of the order under section 201 of the Act and that in case the disallowance is confirmed, 100% of the said amount should be disallowed in view of the Apex Court decision in Shree Choudhary Transport Co (Civil Appeal No.7865 of 2009) In the result, this ground of appeal filed by the assessee was partly allowed.
On basis of above appeal filed by the assessee was partly allowed and the appeal filed by the revenue was dismissed.
FULL TEXT OF THE ORDER OF ITAT MUMBAI
These are cross appeals filed by the assessee and the revenue as against the final assessement order dated 30/01/2015 passed by the Assessing Officer pursuant to the direction of the Ld. Dispute Resolution Panel (DRP) under section 144C (5) of the income tax Act, 1961 pertaining to Assessment year 2010-11.
2. The brief facts are that the assessee company is engaged in the business of manufacturing and sale of on-road automobiles, agricultural tractor and implements, engine parts and accessories of motor vehicle, rendering services, property development activity, financing and investment and transport solutions etc. The assessee filed its return of income on 30/09/2010 declaring total income of Rs. 19,13,56,45,771/-and had revised its return of income on 29/03/2012 declaring total income of Rs. 18,99,47,48,506/-. The assessee’s case was selected for scrutiny and draft assessment order under section 143(3) r.w.s.144C (1) of the income tax Act 1961 dated 31/03/2014 was proposed to assess the income at Rs. 25, 07, 36, 09, 270/-. The assessee filed its objection before the DRP-1, Mumbai and was subsequently transferred to DRP-IV, Mumbai. It was observed that the assessee had entered into international transactions including supply of medical and spares, rendering of services, provisions of loans and corporate guarantee on investment in equity shares with its AEs. Subsequent to this, assessee’s case was transferred to the TPO who had made an adjustment of Rs. 31, 74, 04, 647/- and the AO had also proposed various other additions such as, on premium payable on FCCBs, provision for warranty, disallowance under section 14A, addition under section 40(a)(ia), weighted deduction under section 35 (2AB), dealer incentive and service coupon under section 40(a)(ia), disallowance under section 80IC and octroi incentive thereby proposing to assess the income at Rs. 25,07, 36,09,270/-. Aggrieved by the final assessment order both the assessee and the revenue appeal before us on various grounds mentioned herein after.
ITA No .1676/MUM/2015 (Assessee’s appeal)
3. This appeal filed by the assessee challenges the assessment order on various grounds which are dealt in as below;
GROUND 1 : EXPENDITURE DEBITED TO PROFIT & LOSS ACCOUNT –
RS.7,89,91,917/-
4. Ground 1 of appeal pertains to the expenditure debited to profit and loss account to the tune of Rs. 7, 89, 91, 917/-. The assessee contends that the LD DRP/ACIT has erred in disallowing the impugned amount by treating the same as capital expenditure by not considering the assessee’s submission that the said expenses were incurred wholly and exclusively for the purpose of business of the assessee and therefore are allowable as deduction as claimed by the assessee. The details of the expenditure incurred by the assessee are tabulated as below:
