Disallowance under Rule 8D(2) can be made on investments which had actually yielded exempt income

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:

No	Particulars	Amount	Amount
A	Automotive Division Marketing
1	Legal charges for joint ventures	2,16,476
2	Prov for legal & prof fees for M&A Projects	27,00,000	29,16,476
B	Automotive Division Kandivali
1	Foreign Travel New Projects	1,04,36,519	1,04,36,519
C	Head Office
	Legal   fees –  Acquisition       related  – Gippsland	27,37,820
	Legal fees – Acquisition related	83,872
	Professional fees foreign  consultancy fees – Acquisition related	31,04,430
	Professional fees other – Acquisition and Project related	2,28,17,370
	Foreign travel – Acquisition relate	41,95,180
	Foreign exchange for foreign travel – acquisition related	26,43,759
	Foreign travel – acquisition relate	4,13,238	3.59,95,669
D	Farm Equipment Sector
	Legal Fees for Proposed JV (Project Alchemy)	22,11,856
	Professional fees for Project Spray	70,00,000
	Professional fees for CHINA Project	1,01,77,643	1,1963,89,499
E	CHAKAN
	Foreign Tour Expenses	61,58,046
	Professional fees	15,24,460	76,82,506
F	Mahindra Defence Services
	Professional fees paid in relation to JV agreement & due diligence	25,71,248	25,71,248
	TOTAL		7,89,91,917

5. It is observed that the AO has considered the above mentioned expenses as capital investments in nature which include legal expenses incurred on entering into joint venture with Renault S.A.France and Rs. 27 lakhs towards legal and professional charges incurred in connection with the acquisition of Reva Electric car company private limited, foreign travel expenses of Rs. 104,36,519/- incurred on various project relating to product development all its products like Xylo Refresh,Genio Pickup,Compact Xylo etc. cetera and professional fees of Rs. 101, 77, 643/-in connection with Chinese tractor manufacturer company Yeuda Tractor co.ltd with whom the assessee company had entered into a joint venture. The said expenditure was incurred with regard to the setting up of joint venture for which the impugned professional fees was paid by the assessee company for the purpose of promoting the business of manufacturing and selling of tractors by the assessee company in India. The assessee company contends that the impugned expenditures incurred by the assessee is for the purpose of expanding the operations/manufacturing activities. The AO had rejected the said contention of the assessee for the reason that these expenses are incurred to acquire entities regarding similar business activities and that these expenses are in the nature of facilitating enduring benefit to the assessee. Further to this the AO has held that impugned expenditure is for the expansion of the future business of the assessee and that the profits of the acquired company is not taxable in the hands of the assessee and the expenses are for the business of the acquired companies and not for that of the assessee.

6. Further to this, the Assessing Officer has held that the expenses are specified as capital expenses in the auditor’s report and on these grounds, the Assessing Officer has disallowed the said expenses. The Ld.DRP has relied upon the decision of Assessing Officer for A.YS 2008-09 and 2009-10 similar to that of A.Y. 2006-07 wherein the said expenditure was disallowed on the ground that the assessee had enduring benefit by way of acquisition of profit making apparatus and that the impugned expenditure was incurred by the assessee for the acquired company. The Ld.DRP has further stated that the co­ordinate bench has upheld the impugned expenditure to be capital in nature for AYs 2006-07 & 2007-08. The Ld.DRP, on the objection filed by the assessee has proposed that the same should form part of cost of investment and had not considered the assessee’s objection pertaining to the disallowance of the impugned expenditure. The assessee, without prejudice to the above ground for allowing the expenditure to be in the nature of revenue has claimed for depreciation on the impugned expenditure. The assessee has claimed depreciation on treating the same as capital asset whether tangible or intangible as per the provisions of section 32 of the I.T.Act. The Ld.DRP has held that the assessee has failed to show what capital asset has come into existence on incurring of the impugned expenses and further to this, the Ld.DRP has stated that the depreciation under section 32 of the Act can be claimed only when the capital asset comes into existence and for which definite cost of acquisition of such asset is determined. This pre-requisite for claiming depreciation has not been satisfied in assessee’s case and that the co­ordinate bench of this Tribunal has decided in favour of the Revenue on similar issue pertaining to AYs 2006-07 & 2007-08. However, the AO / DRP has allowed the expenses to be treated as addition to cost of investment and has disallowed the expenses which were claimed by the assessee as revenue expenses. The assessee is in appeal before us as against the order of the AO / DRP.

7. The Ld.AR for the assessee contended that the expenditure pertaining to legal charges for joint venture and provision for legal and professional fees for M&A projects has been held to be capital expenditure in nature by the Tribunal for AYs 2009-10 & 2011-12 to 2013-14 by the Tribunal vide order in ITA No.1449/Mum/2016, ITA 719/Mum/2017 and ITA No.7382/Mum/2017 wherein it has been held that the impugned expenditure is capital in nature and that it should form part of cost of investment which the assessee company can claim at the time of sale of investment. The relevant portion of the decision is as under:-

“2.3. Aggrieved, the assessee is in appeal before us. We find that the Id. AR made the following submissions before us:-

(a) In so far as expenditure aggregating to Rs. 7,71,46,633 being expenditure incurred in connection with acquisitions, the issue is covered against the assessee vide order of the ITAT in ITA 1956/ Mum/ 2014 for AY 2009-10 (Page 8-10, Para 4 to 6) wherein, following order for A.Y. 2006-07 &. 2007-08 the expenditure has been confirmed to be capital in nature. It has however been held that it should form part of cost of investment. Hence, disallowance of Rs. 7,71,16,633 would stand confirmed.

b) The second aspect of the ground concerns following expenditure aggregating to Rs. 9,74,09,230 :-

• Legal fees for Project Strike & Project Bamford – Rs. 6,61,44,351
• Professional Fees – Rs. 28,80,399
• Legal / Professional fees for Project Bamford – Rs. 2,83,84,48

This expenditure was incurred in respect of acquisitions which never materialized. It is the contention of the assessee that the said expenditure should be allowed as revenue expenditure since it has not resulted in the generation of any capital asset unlike the first set of expenditure which resulted in acquisition of investments and hence the expenditure incurred could be added to the cost of investments as directed by the Tribunal in AY 2009-10 and earlier years.

c) For this proposition reliance is placed on the following two decisions:-

(i) Commissioner of income tax v/s. M/s. Magnese Ore India Limited (Income tax Reference No. 150 of 1993). The relevant paras of the order are Para 8 in which facts have been set out. The expenses were incurred for setting up a plant but which was never set up. The disputed expenditure was towards travelling expenses which was held by the Department to be capital in nature (para 14). In Para 20 the High Court has referred to the order of the SC in the case of Madras Auto Services (P) Ltd. (233 ITR 468) in which certain expenditure was held to be revenue in nature because no capital asset was generated by spending the amount in question. Concluding the issue in para 23 and applying the ratio in the case of Madras Auto (supra), the High Court held that the subject expenditure could not be directly related with the acquisition of any capital asset (because no capital asset resulted from the said expenditure).

In the assessee’s case also, since no acquisitions actually happened, no capital asset resulted as a result of the expenditure and hence the expenditure was not capital in nature.

(ii) Further, in A.Y. 1999-2000, in the assessee’s own case, expenses of consultancy fees, preparation of plans, drawings and design for the setting-up of foundry was allowed by the Tribunal as business expenditure even though the foundry project was abandoned subsequently (ITA No 2344/Mum/200E), Page 3-5, para 2) . The Hon’ble Jurisdictional High Court dismissed the Department’s appeal (ITA 450 of 2017) in Para 7 there against.

(iii) The ratio of that decision – expenditure which does not result in acquisition of a capital asset is not capital in nature – should be applied to the expenditure of Rs. 9,74,09,230 which did not result in acquisition of any entity/investment.

d) The last item of expenditure is Rs. 30,000 incurred towards showroom design charges which are routine expenses incurred in the course of business of the assessee and therefore should be allowed as revenue expenditure.

2.4. Per contra, the Id. DR vehemently relied on the order of the Id. AO.

2.5. We find that on perusal of the facts narrated hereinabove and by placing reliance on the various judicial precedents relied upon hereinabove in assessee’s own case and in the case of other parties, we hold:

(a) A sum of Rs.771,46,633/- shall have to be treated as capital expenditure and shall form part of cost of investment which the assessee could claim as cost at the time of sale of investment.

(b) A sum of Rs.9,74,09,230/- represent expenditure incurred in respect of acquisitions which never materialised and hence, squarely allowable as revenue expenditure in as much as no capital asset came into existence of the assessee which would derive enduring benefit of the assessee.

2.6. Accordingly, the concise ground No.1 raised by the assessee is partly allowed.”

8. The Ld.AR further stated that the expenditure specified in D1 & D2 pertaining to the legal fees for proposed joint venture project (Alchemy) and professional fee for project Spray pertaining to farm equipment sector, it has been held by the co-ordinate bench for A.Y. 2011-12 to 2013-14 vide order dated 19/06/2020 in ITA No.1449/Mum/2016, ITA 719/Mum/2017 and ITA No.7382/Mum/2017 held that the said expenditure incurred in respect of acquisition are to be treated as revenue expenditure as the same did not materialise and that no capital asset has come into existence, resultantly the assessee did not derive any enduring benefit. The Ld.AR submitted that expenses on consultancy fees, preparation of plans and drawings and designs for setting off of foundry expenditure were allowed by the co-ordinate bench as business expenditure in assessee’s case for A.Y. 1999-2000 vide ITA No.2344/Mum/2009 on the ground that the said foundry project was abandoned.

9. The Ld.AR further stated that expenses pertaining to B1 & E1 & E2 pertaining to foreign tour expenses and professional fees are to be allowed as revenue expenditure as the same was incurred for the purpose of upgradation or for the development of existing products. The Ld.AR further stated that the same should be treated as revenue in nature as it forms part of the existing business of the assessee company. The Ld.AR relied on the decision in the case of Tejas Networks India Pvt Ltd vs CIT 52 com 513 (Kar).

10. The Ld.DR, on the other hand, controverted the same and relied on the decision of Assessing Officer.

Having heard both the rival submissions and perused the materials on record, it is evident that the impugned expenditure claimed by the assessee company are mostly recurring in nature which has existed even in the earlier years wherein the co-ordinate bench has decided the said expenditure to be capital in nature and shall form part of cost of investment in which the assessee was at liberty to claim the same at the time of sale of investment. It is pertinent to point out that the impugned expenditure are found to be part of cost of investment through various subsidiaries, viz. Zippaero Pty Ltd, Aero Star, Australia Pty Ltd, Bak systems Plc. Etc. In respect of other expenditure, in view of the earlier Tribunal order in assesse’s own case on the impugned issue of treatment of capital expenditure and revenue expenditure of the assessee, the Ld.AO is hereby directed to decide this issue in the light of decision given by this Tribunal for A.Ys 2011-12 to 2013-14 vide order dated 19/06/2020. Accordingly, ground 1 raised by the assessee is partly allowed for statistical purpose.

Ground 2 : Provision for warranties Rs. 42,15,66,402/-.

12. This ground raised by the assessee challenges the disallowance of provision for warranties by the Ld.DRP / ACIT by treating the same as a contingent liability and not an ascertained liability. It is observed that the assessee has claimed the provision in respect of warranty pertaining to certain products, the estimated cost of which accrued at the time of sale. It was observed that the assessee has claimed the provision for warranty to the tune of Rs.1,05,58,52,861/- for which the Assessing Officer has treated the same to be contingent in nature and has disallowed an amount of Rs..42,15,66,402/-and added the same to the total income of the assessee. The assessee had contended before the Assessing Officer that the assessee company sells all the vehicles / tractors which is covered by a warranty clause which is entitled to be claimed with specific period / mileage provided the defects in vehicle / tractors are noticed by the buyer within the period of warranty. It is observed that the assessee had stated that the provision for warranty are determined based on the past analysis of claims settled by the assessee company along with other factors such as the number of defects, nature of defects that had occurred in the past. The assessee further states that the provision of Rs.16,58,00,000/- towards warranty was made by the assessee company and that the actual utilisation was Rs.63,43,00,000/- pertaining to current as well as the past provision. The assessee further stated that there is an incremental provision for warranty Rs..42,15,00,000. The provision for warranty made by the assessee company is tabulated as below:-

Division Provision for warranty		Provision for warranty	Provision for warranty	Incremental
		Made in the preceding year	For the year i.e.	Provision for
		i.e. A.Y. 2009-10	A.Y. 2010-11	Warranty
Automotive Division		8349.23	11879.42	3530.19
Tractor Division		5257.38	5739.48	482.10
Swaraj Division		138.37	341.74	203.37
Total		13744.98	17960.65	4215.67

13. It is observed that the assessee has made the said provision for warranty based on the actual expenses incurred on settlement of warranty claims incurred for earlier years on specific models of vehicles / tractors, which according to the assessee has facilitated in determining the average rate of warranty expenditure incurred on each of such model. This data has been used by the assessee for impugned year to calculate the warranty expenditure for the year under consideration. The assessee further stated that to determine the provision for warranty expenditure, the assessee has calculated current year amount of settlement of warranty claims related to the sale of the impugned year was deducted from the gross warranty expenditure as specified in the tabulation above, the balance of which is determined as provision for warranty expenditure. The Assessing Officer has rejected the said claim of the assessee and has allowed the deduction on actual basis thereby disallowing the excess of provisions. Further to this, the Assessing Officer has contended that the assessee’s determination of the provision does not have any scientific basis. The Assessing Officer has also distinguished the decision of Hon’ble Apex Court in the case of Rotork Controls Ltd (supra) which was relied upon by the assessee. The Ld.DRP has also rejected the objection raised by the assessee on this ground.

14. The Ld.AR contended that this issue has been covered by the decision of the co-ordinate bench for A.Ys 2011-12 to 2013-14 vide order dated 19/06/2020 in ITA No.1449/Mum/2016, ITA 719/Mum/2017 and ITA No.7382/Mum/2017 wherein the co-ordinate bench has allowed the claim for provision for warranty as revenue expenditure. The Ld.AR further to this, relied upon the decision of the Hon’ble jurisdictional Bombay High Court in assessee’s own case for A.Y. 1997-98 vide order dated 15/04/2014 in Income Tax Appeal No.901 of 2011. The Ld.AR also stated that the said claim of the assessee was allowed for A.Y. 2015-16 by the Ld.Assessing Officer.

15. The Ld.DR controverted the same and relied on the decision of the Ld.Assessing Officer.

16. Having heard both the rival submissions and perused the materials on record, it is observed that the co-ordinate bench in assessee’s case for AYs 2011-12 to 2013-14 has allowed the expenditure towards provision for warranty vide order in ITA No.1449/Mum/2016, ITA 719/Mum/2017 and ITA No.7382/Mum/2017. The relevant portion of the said order is as below:-

3.3.We find that there is no dispute that the product sold by the company carry the warranty obligation, cost of which is already included / embedded in the sale price. We find from the workings for provision of warranty submitted by the assessee before the lower authorities, that the said extensive workings duly demonstrate the scientific basis carried out by the assessee for making such provision. We further find that out of the available opening balance of provision for warranties, a sum of Rs.216.34 Crores had been settled / utilised during the year which worked out to 80% of the opening provision. We also find from the accounts of the assessee with regard to the provision for warranty, that the sum of Rs.30.56 Crores has been reversed towards provision by the assessee during the year. It is not in dispute that the sale of vehicles were carried out on a daily basis and incurrence of warranty expenditure thereon was also carried out on a daily basis. Hence, it could be safely concluded that the assessee making provision for warranty is done on a regular basis year on year in respect o f vehicle/tractor sold during each year; such claims getting settled / utilised during each year as and when the warranty clause is enforced by the buyers pointing out specific defects contained in the warranty clause within the warranty period and wherever the existing provision already made requires reversal due to the fact that the claim is made beyond the warranty period or the claim is not covered within the warranty clause etc, the same is reversed. This scientific exercise of making provision for warranty clause for each and every vehicle / tractor sold is made on a regular basis year on year by the assessee which is duly proved in the extensive workings provided before the lower authorities and hence, we find that the issue is squarely covered by the decision of the Hon’ble Supreme Court in the case of Rotork Controls India Pvt. Ltd., vs CIT in 314 ITR 62. We also find that this issue has been allowed by the Tribunal in assessee’s own case for the A.Y.1989-1990 to A.Y.1998-1999. Later in A.Y.2009-10, this issue was remitted back to the file of the ld. AO to decide the same in the light o f the aforesaid Supreme Court decision. We find that the decision for A.Y.2009-10 was rendered by this Tribunal by placing reliance on the decision rendered in assessee’s own case for the A.Y.2006-07 to 2008-09. For A.Y.2006-07 to 2008­09, the ld. AR submitted that the ld. AO had duly accepted the fact that the provision for warranty schemes have been made based on the analysis of past data of actual warranty expenditure incurred but repeated the same disallowance on the reason that details of reversal of provision made in earlier years were not provided. The appeal against that order is pending. Meanwhile, against the order passed by this Tribunal for A.Y.1997-98 allowing the claim of warranty, the revenue had preferred the appeal to the Hon’ble Jurisdictional High Court and the same was dismissed in ITA No.901/11 dated 15/04/2014. Following this order o f Hon’ble Jurisdictional High Court, the ld. AO himself had allowed the claim of the assessee for warranty in the scrutiny assessment proceedings framed in the hands of the assessee for the A.Y.2015-16 on 31/10/2019. In view of this, it could be safely concluded that there is no dispute with regard to the claim o f deduction for provision for warranty based on scientific working and analysis made by the assessee and in order to avoid multiplicity of proceedings and especially in view of the fact that the issue is squarely covered by the decision o f the Hon’ble Supreme Court and Hon’ble Jurisdictional High Court supra, we are inclined to allow the claim of provision for warranty in the sum o f Rs.50,11,63,331/- at our end itself. Accordingly, the concise ground No.2 raised by the assessee is allowed. ”

Respectfully following the above decision of the co-ordinate bench on identical facts, we allow this ground of appeal raised by the assessee. In the result ground 2 is allowed.

Ground 3 : Disallowance u/s 40A(9) – Rs.2,59,650/- representing the actual  expense incurred and Rs.18 lakhs being contribution to Mahindra Academy.

18. The assessee company has challenged the disallowance of deduction of Rs.2,59,650/- being actual expenditure on employee welfare fund and Rs.18 lakhs paid to Mahindra Academy under section 40A(9) on the ground that the same was not for business purpose. The assessee has stated that the assessee company has claimed Rs.2,59,650/- as amount spent from an internal fund created by the assessee by means of transfer entry which the company has claimed as deductible expenditure incurred out of the employee welfare fund account. It is observed that Rs.3,42,870/- has been shown as disallowable as company’s contribution to employee benefit fund as per the tax audit report for which the assessee has contended that it was a mere transfer of entry of a specific earmarked sum to a separate ledger account for employee welfare of the tractor division (at Kandivli) of the company. The assessee further stated that the impugned amount of Rs.2,59,650/- is deduction for the amount spent from the said fund account. The assessee claimed the said amount as allowable as deductible expenditure on actual incurrence basis as per the provisions of section 37 of the Income-tax Act. The Assessing Officer has rejected the claim of the assessee on the ground that as per section 40A(9) “contribution to any fund” does not mean a separate entity and that if the assessee has created a fund even in its books of account, the amount is said to be transferred to a ‘fund’. On this ground, the Assessing Officer disallowed the claim of the assessee, an amount of Rs.2,59,650/- which is transferred to employees’ benefit fund to be not allowable expenditure as per section 40A(9) of the Act.

19. The Ld.AR submitted that the assessee’s claim for deduction of similar actual expenditure was allowed by the co-ordinate bench for A.Y. 1996-97 in ITA No.3659/Mum/2012 which has been followed in A.Y. 2000-01 in ITA No.3998/Mum/2010 and A.Y. 2001-02 in ITA 7581/Mum/2012 and in subsequent years.

20. The Ld.DR relied on the decision of the Assessing Officer.

21. Having heard the rival submissions and perused the materials on record, we are of the view that as this issue has already been covered by the decision of the co-ordinate bench in the earlier years, as the same is squarely covered in assessee’s favour, we allow this ground of appeal filed by the assessee.

22. With regard to the disallowance of Rs.18 lakhs paid to Mahindra Academy, the Ld.AR contended that in A.Y. 2007-08, in the second round of litigation, this claim of the assessee was allowed by the CIT(A) vide order dated 03/11/2015 in ITA No.35/Mum/2014-15 and order dated 06/10/2016 in ITA No.34/14-15 The Ld.AR further stated that the DRP has accepted the claim of the assessee for A.Y. 2011-12 and allowed the ground and thereafter there was no disallowance in respect of both the impugned expenses. Further to this, the Ld.AR relied on the decision of State Bank of India in ITA No.4736/Mum/2010 and Paradip Phosphates Ltd in ITA No.560/CTK/2013 and State Bank of India in ITA No.718/Mum/2017. It is observed that the Ld.CIT(A) in assessee’s case for A.Y. 2006-07 has allowed the claim of the assessee for payment made to Mahindra Academy on the ground that the same is for the benefit of children of company’s employees as per the agreement entered upon by the assessee company with the employees’ union. The Ld.CIT(A) has further relied on the decision of the co-ordinate bench of ITAT in assessee’s own case in ITA No.8597/Mum/2020 for the A.Y.2008-09 where the ITAT has set aside the issue to the file of the Assessing Officer and in the second round of litigation the Ld.CIT(A) has allowed the claim. The Ld.DRP has accepted the claim in AY 2011-12 and no disallowance was made thereafter.

23. The Ld.DR objected to the contention of the assessee and relied upon the order of the lower authorities.

24. Having considered the rival submissions and perused the materials on record, we are in agreement with the Ld.AR of the assessee that the issue is squarely covered by the earlier decisions of the Tribunal and even the Ld.DRP has accepted the claim of the assessee for A.Y. 2008-09. Therefore, consistent with the precedents, we decide the issue in favour of the assessee. This ground of appeal is allowed.

GROUND 4 : EXPENSES ON EMPLOYEES’ STOCK OPTION – RS.4,50,62,836/-

25. Ground 4 pertains to expenses on employees’ stock option. This ground of appeal challenges the disallowance of deduction of Rs.4,50,62,837/- in respect of stock option granted to employees under the ESOP scheme. It is observed that the amount is the difference between the fair market value of shares offered to employees on the date of grant of option and price at which they were offered to employee. The assessee company had granted 41,790 ESOP out of which 20,850 were lapsed during the year under consideration. It was further observed that the exercise price of option granted on 04/11/2009 amounted to Rs.724 whereas the market price was Rs.842.30 for which the assessee company claimed Rs.4,50,62,836/- as the difference between market price and option exercise price and claimed the same as deduction in computation of income. The Assessing Officer disallowed the same on the ground that the expenses incurred are for the purpose of increasing the share capital base of the company and are, therefore, capital in nature. Further to this, the employees’ stock option will provide enduring benefit to the assessee company from the employees who have availed the scheme and that the mere approval of SEBI is not for the admissibility of the expenditure which are not for the purpose of business. The Assessing Officer relied on the decision of the Apex Court in the case of Punjab State Industrial Development Corporation Ltd vs CIT 225 ITR 796 (SC); Brooke Bond India Ltd vs CIT 225 ITR 798 (SC).

26. The Ld.AR before us relied on the decision of the co-ordinate bench in the case of BIOCON Ltd vs DCIT (T.S. 322 ITAT 2013 (Bangalore) and the judgement of Hon’ble Madras High Court in the case of PVP Ventures Ltd 211 Taxman 554 (Mad). The Ld.AR further stated that the decision of the Tribunal in assessee’s case for A.Y. 2013-14 shall cover the issue for the impugned year also.

27. The Ld.DR, on the other hand, relied on the decision of he Apex Court in the case of Punjab State Industrial Development Corporation Ltd (supra).

28. Having heard the rival submissions and perused the materials on record, it is observed that the assessee’s case pertaining to this issue is squarely covered by the decision of the Tribunal in assessee’s own case for A.Y. 2013­14. The relevant extract of the said decision is herebelow:-

“13.2. This sum of Rs.47,03,67,525/- was claimed as deduction by the assessee in the return of income, which was sought to be disallowed by the ld. AO in the assessment on the ground that the said expenditure was incurred for increasing share capital of the assessee company. The ld. AO also observed that employees stock option will give enduring benefit to the assessee company from the employees who have availed the scheme. The ld. AO by placing reliance on the decision of Hon’ble Supreme Court in the case of Punjab State Industrial Development Corporation Ltd., reported in 225 ITR 792 and Brooke Bond India Ltd., reported in 225 ITR 798 held that the said expenditure would be capital in nature. This action was upheld by the ld. DRP. We find that this issue is now settled by the Special Bench of the Bangalore Tribunal in the case of Biocon Ltd., in favour of the assessee, wherein it has been held that the deduction is to be allowed for the difference between the exercise price of the option and the market price at the time of exercise of the option. We find that in the return of income, the assessee had claimed deduction for the difference between the exercise price and the market price on the date of grant of option. This Tribunal while rendering the decision for the A.Y.2009-10 in assessee’s own case had restored this issue to the file of the ld. AO to consider the claim of deduction in the light of the Special Bench decision in the case of Biocon Ltd., We find that the ld. AR fairly submitted that in principle, this issue is decided in favour of the assessee by the Special Bench in the case of Biocon Ltd., but still in the interest of justice, a specific direction need to be given to the ld. AO to allow deduction in respect of all options exercised during the year equal to the difference between the exercise price and the market price at the time of exercise of the option, as held in the case of Biocon Ltd, instead of the market price at the time of grant of option. We find lot of force in the said argument of the ld. AR and direct the ld. AO accordingly. Accordingly, the concise ground No.11 raised by the assessee is allowed for statistical purposes.”

Respectfully following the above decision of the co-ordinate bench, we hereby allow this ground of appeal filed by the assessee as the issue would be squarely covered by the said decision.

Ground 5 : Disallowance under section 14A

28. 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 is 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).

29. Before us, 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.We have heard rival submissions. We find that the assessee had claimed exempt income of Rs.39,21,13,994/-. We find that the assessee had disallowed a sum of Rs.20.94 Crores in the return of income which was supported by workings filed along with return of income and was also filed during the assessment proceedings. The ld. AO ignored the said workings and resorted to make disallowance by applying the third limb of Rule 8D(2) of the Rules and arrive at the disallowance in the sum of Rs.39,21,14,000/- which was confirmed by the ld. DRP. At the time of hearing, both the parties before us fairly agreed that only those investments which had actually yielded exempt income during the year to the assessee are to be considered for the purpose of working out the disallowance made in the third limb of Rule 8D(2) of the Rules. 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.”

30. 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 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.

31. The Ld.DR, on the other hand relied on the orders of authorities below.

32. Having considered rival submissions and perused the materials on record we find that the issue is squarely covered by the earlier decision of the co-ordinate bench for assessment year 2013-14, the relevant portion of which has been quoted above. Respectfully following the same, 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. With regard to interest disallowance under rule 8D(2)(ii), we find that assessee is having sufficient interest free funds to make investments which had yielded exempt income. Hence interest disallowance is hereby deleted. This ground is allowed for statistical purpose.

GROUND 6 : ADJUSTMENT UNDER SECTION 92CA(3) TO ARM’S LENGTH PRICE  OF INTERNATIONAL TRANSACTION FOR ARM’S LENGTH PRTICE ADJUSTMENT OF RS.1,27,73,700/-.

33. This ground of appeal raised by the assessee is on addition of the impugned amount as adjustment for corporate guarantee rejecting the assessee’s contention. It is observed that the assessee had executed corporate guarantee in favour of Mahindra Overseas Investment Co. (Mauritius) Ltd (MOICML) for the purpose of obtaining loan from Standard Chartered Bank (Mauritius) Ltd for the purpose of acquiring shares and to make investment in companies. The total corporate guarantee was for USD 20 lakhs with further enhancement of USD 75 lakhs. The assessee’s contention was that the said guarantee was in the nature of shareholder activity and does not amount to an international transaction. The said guarantee was given to facilitate the Associated Entertprise (AE)to avail term loan from Standard Chartered Bank (Mauritius) Ltd for which the Transfer Pricing Officer ((TPO) found that the assessee had not charged any amount for providing corporate guarantee. Based on the guarantee provided by the assessee company, term loan was advanced to AE at a subsidised rate of LIBOR + 50 base points per annum by the Standard Chartered Bank (Mauritius) Ltd. The TPO arrived at 3% by relying on various decisions of the Tribunal wherein it was held that corporate guarantee fees should be less than 3% thereby determining the value of guarantee adjustment of Rs.1,27,73,700/-. The assessee has controverted the same by stating that the same does not warrant an international transaction by relying on the OECD guidelines and various other decisions and without prejudice, the guarantee fees should be within a range of 0.5% to 1% citing various judicial precedents for the same.

34. The Ld.DRP relied on the provisions of section 92D and held that the same is an international transaction and the same adjustment was confirmed in assessee’s case in preceding years. The AO / DRP relied on various decisions of the Tribunal in upholding the rate of 3% as corporate guarantee commission for the international transaction.

35. The Ld.AR relied on the decision of the Tribunal in assessee’s own case for A.Y. 2009-10 which followed preceding years’ decisions. The Ld.AR also relied on various decisions of the Hon’ble jurisdictional Bombay High Court which upheld rates lesser than 1% in various decisions pertaining to corporate guarantees.

36. The Ld.DR, on the other hand relied on the decision of the Ld.DRP in upholding 3% commission on corporate guarantee and relied on the order of the AO.

37. Having heard the rival submissions and perused the materials on record, it is observed that the co-ordinate bench in earlier years has upheld the rate of 3% to be the fee charged on corporate guarantee and we find no infirmity in the arm’s length guarantee fees on the guarantee provided to AEs. We hereby confirm the addition made to the tune of Rs.1,27,73,700/- as arm’s length price of the international transaction being adjustment for corporate guarantee provided by the assessee company to its AEs. In the result, we dismiss this ground of appeal filed by the assessee.

GROUND 7 : DISALLOWANCE UNDER SECTION 40(a)(ia) OF THE ACT IN RESPECT OF YEAR-END PROVISIONS OF RS.17,06,78,943/-.

38. The Assessing Officer observed that the assessee company has not deducted TDS on year-end provisions on the pretext that the liability for deduction of TDS arises in subsequent year as and when the bill of the party is booked, as per Form 3CD. The Assessing Officer made a disallowance of the impugned amount under section 40(a)(ia) rejecting assessee’s contention. The Assessing Officer has rejected the contention of the assessee that it is not crediting the party’s account during the year which would have made the payment liable to TDS, is not tenable on the ground that once the assessee is debiting its P&L Account, it automatically credits the party’s account, on matching principles. The Assessing Officer disallowed the same on this ground. The Ld.DRP upheld the AO’s action even for preceding years, i.e. AYs 2008-09 and 2009-10. The AO further state that if the assessee has actually paid any such amount before the due date for filing the return of income, then that amount will be allowed as deduction and the amount which remain unpaid till the due date of filing of return is, liable to be disallowed.

39. The Ld.AR for the assessee relied on the decision of the Tribunal in assessee’s case for A.Y. 2012-13 ITA No.1449/Mum/2016 & Ors wherein it has been held as under:-

“7.3. This action of the ld. AO was upheld by the ld. DRP. We find that this Tribunal in assessee’s own case for the A.Y.2009-10 vide para 23 had deleted the disallowance made u/s.40(a)(ia) of the Act. The copy of the order was placed on record by the ld. AR. The ld. DR submitted that the assessee has not submitted the break-up of Rs.33.78 Crores being year end provision made for various expenses. But we find that the entire break-up had been duly submitted by the assessee before the lower authorities and the same are enclosed in page 234 of the paper book and the figures mentioned thereon are fairly ascertainable and are not mere adhoc provisions. Respectfully following the said decision of the Tribunal in assessee’s own case for A.Y.2009-10, we have no hesitation in directing the ld. AO to delete the disallowance u/s. 40(a)(ia) in the sum of Rs.33,78,54,976/-. Accordingly, the concise ground No.5 raised by the assessee is allowed.”

40. Having considered the rival submissions and perused the materials on record and also the order of the Tribunal for A.Y. 2012-13 ITA No.1449/Mum/2016 & Ors, we respectfully following the above cited order of the Tribunal, allow this ground of appeal filed by the assessee and delete the disallowance made by the Assessing Officer under section 40(a)(ia) of the Act.

GROUND 8 : DISALLOWNCE OF WEIGHTED DEDUCTION UNDER SECTION 35(2AB) OF THE ACT.

41. This ground of appeal of the assessee pertains to the restriction of claim for weighted deduction under section 35(2AB) on scientific expenditure as allowed by DSIR in Form 3CL instead of granting deduction under section 35(2AB) of the Act based on the claim made by the assessee in its return of income. The assessee submits that its R&D units at Nasik and Kandivli are recognised by DSIR and obtained necessary approval in Form 3CM. The application pertaining to Mohali unit was pending. The assessee company merged with erstwhile Punjab Tractors Ltd and application for extension was filed by the assessee. The assessee claims weighted deduction of Rs.6,17,68,62,000/- in respect of scientific expenditure of Rs.4,11,79,08,000/-@150% as per the provisions of section 35(2AB) of the Act. The assessee had furnished form 3CL in which DSIR has quantified Rs.3,152.90 lakhs as revenue expenditure eligible for weighted deduction. The Assessing Officer has disallowed the claim for earlier assessment year on the ground that assessee company has not submitted form 3CL wherein, on appeal, the Tribunal held that if Form 3CL is not received, it should be considered that the application of the assessee is correct and the claim should be allowed. The AO / DRP distinguished the facts of earlier assessment year with that of impugned year for disallowing an amount of Rs.50,13,09,000/- on the ground that the amounts approved are different and less than that claimed by the assessee. The Assessing Officer further held that the DSIR is the approved authority for adjudging the research activity of the assessee and also the cost on the activity. Ld.DRP upheld the action of the AO. Aggrieved, the assessee is in appeal before us.

42. The Ld.AR contended that the AO / DRP restricted the claim for weighted deduction under section 35(2AB) on scientific expenditure allowed by DSIR in Form 3CL instead of granting deduction under section 35(2AB) as claimed by the assessee. The Ld.AR relied on the decision of the co-ordinate bench in the case of Glennmark Pharmaceuticals Ltd vs ACIT in ITA 5651/Mum/2017 and the Pune Bench of the Tribunal in the case of Cummins India Ltd TS 250 ITAT 2018 (Pune). The Ld.AR further stated that this issue is covered in favour of the assessee by the decision of the Tribunal for the earlier assessment years.

43. The Ld.DR, on the other hand, controverted the same and relied on the decision of the AO.

44. Having considered the rival submissions and perused the materials on record and also the order of the Tribunal. The relevant portion of the order of the Tribunal is as follows:-

“24. On this issue the disallowance was made on the ground that form 3CL has not been furnished. We note that in earlier year i.e., for A.Y.2008-09. Tribunal has noted the submission from assessee that once the R & D facilities are approved and DSIR has not rejected the application submitted by the assessee, it could be presumed that the application has been accepted. Further that failure on the part of DSIR to confirm the authorities in time cannot be reason for taking back deduction to the assessee. Noting the above and following judicial precedents from earlier year, the Tribunal had directed that assessee is entitled to grant of better deduction u/s.35(2AB). Referring to these case laws from ITAT and also from Cummins India Ltd., (ITAT Pune) and Sri Biotech Laboratories India Ltd., (ITAT Hyderabad), assessee has requested that AO be directed to allow the claim for deduction u/s.35(2AB) as non-receipt of form 3CL from DSIR is not determinative of the issue.

25. Respectfully following the decision as above, we accede to the assessee’s request in the light of the above and directed accordingly.”

45. Respectfully following the above decision, we allow this ground of appeal filed by the assessee as the same has been squarely covered by the earlier decision of the Tribunal for A.Y. 2009-10.

GROUND 9 : DISALLOWANCE UNDER SECTION 40(a)(ia) IN RESPECT OF  SERVICE COUPON OF RS.49,83,63,000/-

46. 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.

47. 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.

48. The Ld.DR, on the other hand, relied on the decision of the Assessing Officer.

49. Having heard both the learned representatives and perused the materials on record, it is 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. The relevant extract of the said order is reproduced herebelow:-

“4. We have heard the authorized representatives for both the parties and perused the records before us. Admittedly, the assessee had Inter alia assailed the validity of the disallowance under Sec.40(a)(ia) also on the aforesaid two grounds, viz, (i) that, as the time limit for passing an order under Sec.201 had already expired, therefore, no disallowance was warranted under Sec.40(a)(ia) of the Act; and (ii) that, in case if the disallowance under Sec,40(a)(ia) was to be sustained, the same was liable to be restricted to the extent of 30% of the total amount of the service coupons. We have perused the order passed by the Tribunal while disposing off the aforesaid appeal in ITA No.382/Mum/2017, vide its order dated 14.05.2019. As can be gathered from a perusal of the Page 6 – Para 6 of the aforesaid order, we find that the assessee had specifically assailed the disallowance under Sec.40(a)(ia) on both of the aforesaid issues. We find that the assessee had also assailed the validity of the disallowance under section 40(a)(ia) on the ground that now when the payees had filed their returns of income and paid the tax due for the relevant assessment year, therefore, in the absence of any subsisting tax liability of the payees the assessee would duly be entitled to claim deduction of the amounts paid to them. As the Tribunal had principally found favour with the aforesaid claim of the assessee, therefore, it had restored the matter to the file of the A.O, therefore, in all fairness we direct him to also consider the aforesaid claims of the assessee in the course of the ‘set aside’ proceedings viz.(i) that, no disallowance under Sec.40(a)(ia) could be made after the expiry of the time for passing of order under Sec.201 of the Act; and (ii) that, in case the disallowance is sustained, the same is liable to be restricted to the extent of 30% of the total amount of service coupons. Needless to say, the A.O shall afford a reasonable opportunity of being heard to the assessee in the course of the ‘set aside’ proceedings, wherein the latters shall remain at a liberty to substantiate its claim on the basis of fresh documentary evidence. On the basis of the aforesaid observations our order passed while disposing off the appeal of the assessee i.e Mahindra & Mahindra Ltd. Vs, DCIT. Range 2(2), Mumbai in ITA 382/Mum/2017, dated 14,05.2019 is modified to the said extent.”

50. As the issue of the assesse is squarely covered by the decision of the Tribunal, we respectfully follow 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 is partly allowed.

GROUND 10 : DISALLOWANCE OF DEDUCTION OF OCTROI INCENTIVE OF RS.72,48,94,000/-.

51. The assessee has stated that it had received octroi incentive of Rs.72.48 crores which was treated as capital receipt by the assessee and revenue receipt by the Assessing Officer. It is observed that the said incentive was received as package scheme of incentives declared by Government of Maharashtra which, according to the assessee, is only a yardstick to determine the quantum of incentive and not as mitigating the operational cost of the business. The assessee relied on the decision of Special Bench of the ITAT, Mumbai Bench in DCIT vs Reliance Industries Ltd (2004) 88 ITD 273 (Mum). The Assessing Officer considered the same to be in the nature of revenue receipt which incentive, according to the Assessing Officer, is in the nature of subsidy. The Assessing Officer has disallowed the same on the ground that the said incentive has to be determined whether it is revenue or capital only with regard to the purpose for which the subsidy is offered. The Assessing Officer further stated that as the said subsidy was given as assistance to carry on the assessee’s business, the Assessing Officer held it to be a trading incentive. The Assessing Officer also relied on the decision in A.Ys. 2008-09. 2009-10 where the DRP has confirmed the action of the Assessing Officer in making the said addition and also the Tribunal’s decision in assessee’s case for A.Ys 2006-07 & 2007-08. The Assessing Officer also relied on the decision of Hon’ble Supreme Court in the case of Sahney Steel & Press Works Ltd 228 ITR 253 (SC) & Ponni Sugars & Chemicals Ltd 306 ITR 392 which held that subsidy received in respect of octroi is not a capital receipt.

52. The Ld.AR contended that the impugned octroi incentive received under the “package scheme of incentives 1993”announced by the Government of Maharashtra for moving industries to certain backward areas of Maharashtra in order to develop the under developed and developing areas of the state. The Ld.AR further stated that under this scheme, the assessee company was entitled to refund of octroi payable / paid to the local authority on import of all the items required by the eligible units. And that it was entitled to the maximum loan of 100% of the fixed capital expenditure. The Ld.AR relied on the decision of the co-ordinate bench in assessee’s case for A.Y. 2013-14 in ITA 1449/Mum/2016, ITA No.719/Mum/2017 and ITA No.7382/Mum/2017 which deleted the said disallowance of similar addition under the “package scheme of incentives 2001 & 2007” by treating the same as capital receipt. The Ld.AR also relied on the decision of the Tribunal for A.Y. 1996-97 in ITA No.3173/Mum/2001. The relevant extract of the said decision is as below:-

“10.3. We find that the ld. AO placed reliance on the decision of Hon’ble Supreme Court in the case of Sahney Steel and Press Ltd., reported in 228 ITR 253 and the decision of Hon’ble Punjab and Haryana High Court in the case of Abhishek Industries Ltd., reported in 286 ITR 1 and rejected the claim of the assessee of treating the industrial promotion subsidy as capital receipt.

10.4. The ld. AO also observed that this subsidy was available to the assessee from the date of commencement of commercial production suggesting that the subsidy was not given for the setting up of business but for carrying on of its business. He also observed that similar additions were made in assessee’s own case for A.Yrs. 2008-09 to 2011-12. With these observations, the ld. AO treated the receipt of subsidy as the revenue receipt. This action was upheld by the ld. DRP. We find that the ld. AR before us submitted that the same Maharashtra 2001 package scheme of incentives has been examined by the Co-ordinate Bench of Delhi Tribunal in the case of LG Electronics India Pvt. Ltd., in ITA No.2163/Del/2015 dated 19/04/2017 wherein by placing reliance on the decision of the Hon’ble Supreme Court in the case of CIT vs. Ponni Sugars and Chemicals Ltd., reported in 306 ITR 392 had held that Industrial Promotion Subsidy received under Maharashtra 2001 package scheme of incentives to be capital receipt. The copy of the said Delhi Tribunal decision was placed on record by drawing specific reference to paras 4-7 thereof by the ld. AR. We are in agreement with the argument advanced by the ld. AR herein that the purpose for which subsidy was given under Maharashtra 2001 package scheme of incentives has been duly examined by the Delhi Tribunal and they had held that the purpose for which the subsidy was given is relevant and not the form in which it is given or the source from which it is given nor the time at which it is given, would be relevant for the purpose of determining the taxability of receipt of the said subsidy. We also find that this issue has been addressed in the following decisions of Hon’ble Supreme Court in favour of the assessee as under:-

(a) Chaphalkar Brothers, case reported in (2017) 88 com 178 (SC)

(b) Shree Balaji Alloys and others, case reported in (2017) 80 com 239 (SC)

10.5. Respectfully following the said decision, we hold that the subsidy in the sum of Rs.45,36,95,084/- is to be treated as capital receipt. Accordingly, the concise ground No.8 raised by the assessee is allowed.”

53. Respectfully following the above decision of the Tribunal, we hold that the said subsidy of Rs.72,48,94,000/- is to be treated as capital receipt. We thereby allow this ground of appeal filed by the assessee.

GROUND 11 : RENTAL INCOME ON PROPERTY LET OUT TO RIDGE BUSINESS CENTRE P. LTD AMOUNTING TO RS.11.38 CRORES.

54. It is observed that the assessee had let out certain properties to its group enterprises, M/s Ridge Business Centre P. Ltd for an annual rent of Rs.97.13 lakhs. The said property was sublet for a total consideration of Rs.12.35 crores per annum. This income from letting out was shown as business income of the assessee and not as rental income. The Assessing Officer determined the difference in both the consideration i.e. Rs.12.35 crores (-) Rs.0.97 crores and determined Rs.11.38 crores and added the same as rent received from third parties. The assessee submitted that the said income was accepted as income from business in the preceding years by the department and was not treated as rental income and the assessee also contended that the rent received from third parties of M/s Ridge Business Centre P. Ltd is not to be considered as income earned by the assessee. This contention of the assessee was rejected by the Assessing Officer on the ground that the said property was let out to the sister concern at a rate lesser than the market rate and has not considered the heads of income classified by the assessee in its books of account pertaining to the impugned income. The Assessing Officer further made addition of the said income on the fact that res judicata is not applicable in Income Tax proceedings on assessee’s contention that it was not objected by the department in the preceding years.

55. The Ld.AR for the assessee contended that the co-ordinate bench has deleted the disallowance for the reason that the property in question being stock in trade, provisions of section 28 will apply and not the provisions of section 24 for A.Y. 2009-10 in ITA No.1956/Mum/2014, wherein it has been held as follows:-

“33. Upon careful consideration, we note that ITAT in ITA No.586/Mum/2013 for A. Y. 2008-09 has decided the issue as under:-

“94. We have carefully considered the submissions of the parties and also perused the relevant findings of the Assessing Officer. It is not in dispute that the income from letting out the property to Ridge Business Centre has been assessed as business income right from the earlier years and the same position has been accepted by the Department. Once the income -which has been derived from stock-in-trade and has been accepted as business income, then the – computation has to be made under section 28 and not under section 23. The assessee has duly shown the income received / accrued from Ridge Business Centre as business income, then any further rent realized by Ridge Business Centre form the third party cannot be said to have been earned / received or accrued to the assessee company. Thus, we are inclined to agree with the contention of the learned Counsel for the assessee that no further income can be attributed to the assessee once the rental income has been assessed as business income and not from the income from house property.”

34. Respectfully following the precedent, we decide the issue in favour of assessee.”

56. As this issue has been squarely covered by the decision of the co­ordinate bench, respectfully following the said decision, we allow this ground of appeal filed by the assessee.

GROUND 12 : CLAIM FOR DEDUCTION OF GAIN ON DIFFERENCE IN EXCHANGE OF RS.138.72 CRORES

57. It is observed that the assessee has offered to tax in its return of income, the gain on difference in exchange arising out of the repayment of foreign currency loans / revaluation of foreign currency loans as on 31/03/2010 totalling to Rs.13,872.40 lakhs. The assessee states that the assessee has been following the same since A.Y. 2009-10 during which the assessee claimed revenue expenditure as there was loss on difference in exchange and that as per Accounting Standard 11 which deals with accounting treatment for effects of changes in foreign exchange rates. It is also observed that the claim of the assessee in A.Y. 2009-10 has been disallowed by treating the same as capital expenditure. The Assessing Officer has rejected the claim of the assessee on the ground that the gain or loss on re-statement at the year end is notional and the real gain or loss occurs only when the actual remittance is made. The Assessing Officer further held that the assessee has not furnished details to substantiate whether such gain or loss is revenue or capital in nature. The Assessing Officer has relied on the decision of Hon’ble Supreme Court in the case of Goetze India Ltd vs CIT (2006) 284 ITR 323 (SC).

58. The Ld.AR contended that as the revenue has held the loss in A.Y. 2009­10 to be capital in nature and a consistent view should also be taken in case of gain in the impugned year.

59. The Ld.AR relied on the decision of the Tribunal in assessee’s case for A.Y. 2013-14 where the Assessing Officer is directed to allow depreciation on exchange difference. The relevant portion of the said order is reproduced hereunder:-

“12.13. The another related issue involved in this regard is what is the period for which such loss should be capitalised. In this regard, the ld. AR argued that under the Income Tax Act, any item that is added to the fixed asset need to be capitalised till the asset is put to use. This is supported by Explanation 8 to Section 43(1) and proviso to Section 36(1)(iii) of the Act. Any cost incurred beyond that period should be charged off as revenue expenditure. Accordingly, he argued that irrespective of the accounting treatment given by the assessee in the books, the exchange loss could be added to the cost of fixed assets only til l such time, the assets were not put to use. Thereafter, such exchange loss should be allowed as revenue expenditure. We find that this line of argument was not taken up by the assessee for A.Y.2009-10 while addressing this issue before the Tribunal for A.Y.2009-10. Accordingly, there was no occasion for this Tribunal to adjudicate this aspect of the issue. The ld AR submitted that this exchange loss that is debited to FCMITA is not related to acquire fixed assets and hence, the same should be allowed as revenue expenditure. The ld. AR further stated that, in any event, the process of capitalisation of such exchange loss should end with the commencement of overseas investments utilizing foreign currency loans. Exchange loss for the period after acquisition of investments and therefore, be allowed as revenue expenditure according to the ld. AR. We find that the decision taken by this Tribunal in A.Y.2009-10 may not be fully applicable to the facts of the instant case and we hold that the said decision would hold good with some modifications as suggested below based on factual developments that had happened later:-

(a) Foreign currency loans utilised for acquiring fixed assets and overseas investments is to be capitalised and correspondingly depreciation need to be granted to the assessee. In this, the exchange loss pertaining to the period till the asset was put to use should alone be capitalised and thereafter, the same should be allowed as revenue expenditure.

(b) Foreign exchange loss attributable to other monetary items debited to FCMITA as per AS 11 of ICAI should be allowed as revenue expenditure.

Accordingly, the concise ground No.10 raised by the assessee is disposed off in the aforesaid manner. ”

60. Respectfully following the precedent we hereby allow (dispose off) this ground of appeal raised by the assesse in the aforesaid manner.

GROUND 13 : DISALLOWANCE OF DEDUCTION UNDER SECTION 80IC RUDRAPUR UNIT

61. The assessee has submitted that the assessee had made detailed submission with regard to the methodology adopted for calculation of deduction under section 80IC of the Act and that the assessee has provided the basis of allocation of overheads. It is observed that the claim of deduction under 80IC for Rudrapur unit has been fully disallowed in A.Y. 2009-10 for the reason that the DRP has concluded that the profits of Rudrapur unit were inflated due to variation in cost, variation in sale price, defective allocation of expenses, etc. The DRP has rejected the unit-wise accounts prepared by the assessee company on the ground that they do not disclose true and fair results of the units of the assessee company pertaining to A.Y. 2009-10. The Assessing Officer was directed by the Ld.DRP to determine business profit of Rudrapur unit by allocating the business income assessed in proportion to the turnover of the Rudrapur unit to the total turnover. It is pertinent to point out that the Assesing Officer has followed the same methodology prescribed by the DRP in the preceding year for computation of deduction under section 80IC for the impugned year.

62. The Ld.AR relied on the decision of the Tribunal in A.Y. 2011-12 in ITA No.1449/Mum/2016 directing the Assessing Officer to recomputed the deduction following the directions of the Tribunal in A.Y. 2009-10 in ITA No.1956/Mum/2014. The relevant extract of the said decision is as follows:-

“23. The concise ground No.9 raised by the assessee for A.Y.2011-12 is with regard to disallowance of deduction u/s.80IC of the Act in respect of Rudrapur unit. We find that for A.Y.2011-12, the transaction of Rudrapur unit were not subjected to transfer pricing adjustment under the category (Specified Domestic Transactions) as the same was not provided in the statute. Hence, we deem it fit and appropriate to follow the directions given by this Tribunal for A.Y.2009-10 in ITA No.1956/Mum/2014 dated 10/04/2019 vide para 55-59 thereon. Accordingly, the concise ground No.9 raised by the assessee is allowed for statistical purposes.”

63. Respectfully following the said decision, the Assessing Officer is directed to recompute deduction under section 80IC in view of the of the order of Tribunal for A.Y. 2009-10. In the result, this ground of appeal raised by the assessee is allowed for statistical purpose.

GROUND 14 : DEDUCTION UNDER SECTION 145A – UNUTILISED CENVAT CREDIT OF RS.3,51,28,100/-.

64. This ground was not pressed by Ld.AR at the time of hearing. This is reckoned as a statement made from the Bar and hence, dismissed as not pressed.

GROUND 15 : SHORT CREDIT OF TDS OF RS.11,17,74,514/-

65. This ground of appeal raised by the assessee challenging the disallowance of credit for TDS of Rs.11,17,74,514/- by the Assessing Officer.

66. The Ld.AR relied on the decision of the Tribunal in assessee’s case for A.Y. 2008-09 wherein the Tribunal has directed the Assessing Officer to give credit of TDS after verification.

67. We hereby direct the Assessing Officer to verify the claim of TDS raised by the assessee and allow credit of the same after due verification for the impugned year. This ground of appeal is allowed for statistical purpose.

ADDITIONAL GROUND OF APPEAL:

68. The additional ground raised by the assessee pertains to interest on tax free bonds amounting to Rs.1,05,99,342/-. The assessee submitted that the assessee company has inadvertently included the impugned interest income in its return of income under the head “Income from other sources”. The assessee further submitted that the said interest pertains to tax free bonds which were offered to tax inadvertently and which ought to be excluded as interest income from “Income from other sources”. The Ld.AR relied on the decision of the Tribunal in assessee’s case for A.Ys 2011-12 to 2013-14 in ITA No.1449/Mum/2016 and ITA 719/Mum/2017. The Ld.DR relied on the order of the AO.

69. Having heard both the rival submissions and perused the materials on record, it is evident that the Tribunal has dealt with the issue in A.Ys 2011-12 o 2013-14. The relevant portion of the decision of the co-ordinate bench is reproduced below:-

“26.1. We have heard rival submissions and perused the materials available on record. At the outset, we find that this additional ground deserves to be admitted as it does not involve verification of the primary facts on record and more especially in view of the undisputed fact that the entire details of interest income had been duly filed before the ld. AO by the assessee during the course of assessment proceedings. Admittedly, the said interest income included interest earned on tax free bonds in the sum of Rs.3,47,19,107/- which is not liable for taxation at all both under normal provisions of the Act as well as in the computation of book profits u/s.115JB of the Act. Merely because, the assessee had erroneously offered the same in the return of income, the same cannot be brought to tax by the revenue. The law is now well settled that only just and right tax should be collected from the right person by the revenue. Hence, we deem it fit and admit the additional ground and direct the ld. AO to reduce the sum of Rs.3,47,19,107/- towards interest income on tax free bonds both under normal provisions of the Act as well as in the computation of book profits u/s.115JB of the Act. We also place reliance on the decision of Hon’ble Jurisdictional High Court in the case of Pruthvi Brokers and Shareholders Pvt. Ltd., reported in 349 ITR 336 (Bom) in support of the proposition. Accordingly, the additional ground No.2 raised by the assessee is allowed.”

70. Respectfully following the decision of the Tribunal, we hereby allow this ground of appeal raised by the assessee by following the precedents.

71. In the result, the appeal filed by the assessee is partly allowed.

ITA No.1739/Mum/2015 – Revenue’s appeal

72. This appeal has been filed by the Revenue challenging the order of the Ld. DRP on various grounds:-

GROUND NO.1 : DISALLOWANCE OF PRO-RATA PREMIUM OF RS.32,41,78,246/- PAYABLE ON REDEMPTION OF FCCB

72. Ground 1 pertains to expenditure of Rs.32.41 crores incurred by the assessee company in relation to the issue of foreign currency convertible bonds (FCCB) which are fully convertible into equity shares of the company and to be treated as capital expenditure which enhances the capital structure of the company. It is observed that the assessee had issued zero coupon FCCB on USD 200 million dated 13/04/2006. The assessee submits that the bonds are convertible into equity shares or GDRs at initial conversion price of Rs.922.04 per share with fixed exchange rate of Rs.44.42 per dollar at the option of bond holders accessible any time on or after 7^th May, 2006 and before 7^th March, 2011. The assessee further submits that the bond may be redeemed any time on or after 13/04/2008 at the option of the issuer. The bond shall be redeemed @128.03% of its principal value on maturity but unless they are prematurely redeemed / converted / purchased / cancelled on maturity. The claim of deduction of priority premium payable on such redemption of bonds by the assessee was disallowed by the Assessing Officer for the reason that the said bonds are convertible into shares and cannot be treated as borrowing and that the holder of bonds on option of redemption and in the preceding years such bonds have been converted into shares by the assessee company. The Assessing Officer further held that the liability of premium is uncertain until the date of redemption. The Assessing Officer held the same to be capital expenditure for the reason that it enhances the capital base of the assessee company. The Assessing Officer relied on the decision of Apex Court in the case of Punjab State Industrial Development Corporation vs Brooke Bond India Ltd 225 ITR 792 (SC). The Ld.DRP on the other hand, has allowed the said expenditure for the reason that the assessee has no control over the decision of the subscriber of the bonds and that the assessee cannot refuse the choice of the holder in exercising conversion. Further to this, the Ld.DRP held that the redemption of premium on maturity is an only possibility which is merely contingent in nature. The Ld.DRP further stated that in 2011 all the bonds were finally converted into equity and the premium claimed in earlier years was written back. Considering these facts, the Ld.DRP allowed the claim of the assessee on the facts that it was premature of the assessee to have claimed the premium as deduction on priority basis as it was merely contingent in nature.

73. Having heard both the learned representatives and perused the materials on record, it is observed that the Ld.DRP has relied on the decision of the Tribunal in assessee’s case for A.Y. 2006-07 and 2007-08 wherein the said expenditure was treated as revenue expenditure. The Ld.DRP has also relied on the decision of CIT vs Secure Importers Ltd (2010) 321 ITR 611 (Raj) and also the decision in the case of CIT vs ITC Hotels (2011) 334 ITR 109 (Kar), CIT vs SM Holdings & Finance Pvt Ltd (2003) 264 ITR 370 (Bom). From the above observation it is evident that the claim of priority deduction of premium on convertible debentures was allowable in terms of the propositions laid down in the above cited decisions. It is also undisputable fact that the Tribunal has allowed the assessee’s claim by treating the same as revenue expenditure on identical facts. By respectfully following the above decisions we hold that the Ld.DRPs decision in allowing the impugned expenditure of Rs.32.41 crores as revenue expenditure is justifiable. In this regard, we dismiss this ground of appeal filed by the revenue.

GROUNDS 2 & 3:

74. These grounds pertain to the action of the Ld.DRP in rejecting the bond yield approach followed by the TPO to arrive at the ALP rate of interest of Rs.14.73% per annum.

75. The assessee submits that the assessee has extended its AE, loans at a rate of LIBOR plus 100 bps or 6% whichever is higher. Loans were given to AEs Bristlecone Ltd, Mahindra Automobile, Australia Pty Ltd, Mahindra Overseas Investment Co (Mauritius) Ltd and Mahindra USA Ltd. The TPO has determined the ALP of interest at 14.73% per annum for the imputed bond yield for (BB) grade bonds thereby making an addition of Rs.16,61,82,663/- for the incremental interest being 8.73% (14.73% – 6%). In an objection raised by the assessee, the Ld.DRP allowed the claim of the assessee on the ground that the co-ordinate bench for A.Y. 2007-08 held that the Libor would be the ALP thereby deleting the additional interest determined by the TPO.

76. The Ld.DR relied on the TPOs determination of ALP interest @14.73% per annum. The Ld.AR relied on the order of the DRP.

77. Having heard the rival submissions and perused the materials on record, it is evident that the co-ordinate bench has decided this issue in favour of the nassessee on similar facts. The relevant portion of the order in ITA No.1449/Mum/2016 is as under:-

“6.1. We have heard rival submissions and perused the materials available on record. We find that assessee company had given loans to Bristlecone UK Ltd., Mahindra Overseas Investment Company (Mauritius) Ltd, Mahindra Gears International Ltd, at the rate of 6%, 6.20-6.6%, 9% and 6.25%, as the case may be. The assessee company benchmarked the loans using LIBOR rate by using external Comparable Uncontrolled Price Method (CUP). The Id. TPO applied LIBOR for the year of loan and further added the average spread of comparable unsecured loans given in the said year and made ALP adjustment accordingly. We find that the Id. DRP directed the Id. AO to adopt LIBOR rate of the year in which the loan was given in case the loan had been granted at fixed rate for the entire tenure of the loan. However, if the loan had been granted for a floating / flexible rate of interest, the Id DRP directed the Id AO that LIBOR rate to be applied would be LIBOR for the year under consideration. The Id. DRP also directed the Id. AO to adopt the LIBOR as directed above and further add 5% towards basis points.

6.2. Aggrieved by this direction, the assessee is in appeal before us. The Id. DR submitted that let the Id. TPO be directed to adopt LIBOR + 300 basis points for benchmarking international transaction in respect of loan given to AE. But we find that this Tribunal in assessee’s own case for the A.Y.2009-10 in para 21 had specifically directed to consider only LIBOR rate at the relevant time and determined the ALP of the said transaction accordingly. Respectfully following the said judicial precedent, we direct the Id. AO accordingly. Accordingly, the concise ground No.4B raised by the assessee is partly allowed.”

78. Respectfully following the said decision, we hereby dismiss this ground of appeal filed by the Revenue.

GROUNDS 4 TO 7

79. These grounds pertain to deletion of adjustment of Rs.13,84,48,284/-made by the TPO in respect of receipt of technical services. It is observed that the assessee has claimed to have availed technical services from its AE, viz. Mahindra Graphic Research Design S.r.l (MGRD), Italy for which payment of Rs.18.45 crores was made. The assessee submits that the assessee has entered into an asset purchase agreement with G.R. Graphica Ricerca Design S.r.l (GR Design) to purchase its assets and business. Pursuant to the agreement GR Design was converted to MGRD. It is stated that prior to the AE becoming wholly owned subsidiary of the assessee, the assessee was availing design and engineering services from GR/MRGD. The assessee has availed technical services from its AE, viz. style feasibility, engineering feasibility, detailing activities and assembling activities. The assessee has treated the foreign AE as tested party and selected comparables accordingly. The TPO objected to the tested parties selected by the assessee for the reason that the AE was incurring losses and the comparables were earning high margin. The relevant submission of the assessee and the observation of the TPO alongwith direction of DRP are as under:-

“13.3.0. Objection No. 7(a)(iii) is in respect of receipt of Technical Services for which adjustment of Rs. 13,84,48,2847- is made by TPO.

13.3.1. The TPO noted that the tax payer had claimed to have availed technical services from its AE, Mahindra Graphic Research Design S.r.l. (MGRD) Italy for which payment of Rs. 18.45 crores was made. The assessee explained that it is an Indian Multinational Company and to develop its export market it had availed of research and development from its AE to design the vehicles for the export market. The AE had expertise in automobiles and industrial vehicle design. The AE is incurring heavy losses and there is no question of shifting of profits. The assessee has availed the technical services from its AE such as style feasibility, engineering feasibility, detailing activities and assembling activities.

13.3.2. The assessee treated the foreign AE as a tested party on the grounds that it is the less complex entity in the transaction. It selected comparables based on search using the AMADEUS Database. It adopted OP/TC as the PLI.

The assessee submitted that the AE is a high end service provider for Manufacturing designing, style, prototyping and other technical services and assisted the assessee in launching successful models like Xylo Refresh, Bolero Refresh, Quanto and Genio.

13.3.4. The TPO observed that the assessee had selected its AE as the tested party just because it was incurring losses and the comparables were earning high margin. The assessee has its own research and development facility based in Nashik and had not only availed technical services from MGRD and also from other third party service providers inspite of having a full-fledged R & D Centre of its own at Nashik. Assessee argued that it is a business decision of the assessee to avail technical services for design of vehicles. However, the TPO noted that the assessee had spent Rs. 275.72 crores on R & D with 3000 skilled engineers working on the same. Therefore, the justification for availing the technical services from the AE was not established. The assessee could not quantify the benefit arrived at in respect of receiving the services from AE. The copy of the service agreement between MGRD and the assessee was not submitted before the TPO. The assessee had informed the TPO that the billing is based on average hourly rate of Euro 42 per hour but did not furnish the basis of negotiations for this rate. The actual number of ‘Man Hours’ spent by MGRD for charging Rs. 18.45 crores was also not furnished. From the documents made available to the TPO, it was not clear whether papers related to Intra Group Services or technical services. Not being satisfied with documentation, the TPO proceeded to consider 20% (typographical error and should read as 25%) of the fees paid of technical services tc be at Arm’s length of the international transaction and made a adjustment for Rs. 13,84,48,2847- being 75% of the technical services fees paid.

13.3.5. Before the Panel the assessee pointed out that the TPO had proposed application of CUP method but did not proceed with the same. The assessee reiterated its submissions made before the TPO and placed reliance on certain case laws placed before the TPO and contended that the TPO had no jurisdiction to Question tangible benefits arising out of the services rendered by Mahindra Graphic Design. The average 3 years (F.Y. 2008-2010) net cost + margin of the 9 comparables was computed at 9.34% as against the AEs NCP of (-) 21.05%. The Database used is an authentic Database. The foreign AE was selected as tested party since it was the less complex party in the transaction. The revenue of the AE is controlled whereas the cost base is uncontrolled. Therefore, OP/TC was selected as PLI for the transaction. It is the assessee’s business decision to avail of technical services for design of vehicles which it plans to launch in the European market as a part of its expansion strategy. It relied on the case laws for the proposition that TPO is not competent to hold whether the expenditure incurred by the assessee has resulted into benefit to the assessee or not.

Directions of DRP

13.3.6. MGRD was incorporated on 12/02/2008. The assessee in FY 2007-08, through Mahindra Overseas Investment Co (Mauritius) Ltd., a wholly owned subsidiary of the assessee, had entered into an asset purchase agreement with G.R. Graphical Ricerca Design S.r.l. to purchase its assets and business. Pursuant to the agreement, G R Design became Mahindra Graphic Research Design S.r.l. Even prior to its acquisition, the assessee had approached this company for design and engineering services. This company was purchased from G.R.Grafica Ricerca Design S.r.l. The remuneration to MGRD is based on hourly rates which was Euro 42 per hour, which is less than the rate when this company was not an AE and the quotations received then was based on Euro 48 per hour. It was also stated that during the year MGRD provided services to third parties such as Pilkington and SEKURIT which were based on hourly rates of Euro 46.50 and 44.HO and invoices were sought to be filed. However, since this was not produced before the TPO, the same is not admitted. The assessee furnished to the TPO documents indicating the assignments such as Development of Sun shade concept along with an estimate of hours required on the project. Similar details were provided in respect of projects such as Development of instrumental panel, vent duct, front bumper, door trim. MGRD has a team that has worked on and for FIAT models in Italy. The company was started in 1996 by persons who had several years of experience of working with The details of experience of personnel of this company filed before TPO that they have long experience in design and engineering with FIAT. The Copies of e mails furnished to TPO shows the discussion in respect of the development projects, the time plan for the development sought. They do substantiate the receipt of services. The data is contemporaneous.

13.3.7. The argument that the AE is incurring losses and there is no motive to shift profits is not germane to the transfer pricing rules. In fact, this argument goes against the assessee, since tax can be reduced by shifting profit from a profit making entity to a loss making entity. However the argument that similar payments of about Rs 14 crores in preceding year was not disturbed by the TPO has some persuasive value.

13.3.8. The assessee has been able to compete with General Motors, Ford and Volkswagen. The benefits has been submitted as relating to the models XYLO 500 and its variants, LTV MPV, Genio, Bolero

13.3.9. Merely because the assessee has a large R & D facility does not mean that it will not be necessary or it is precluded from seeking technology or design services from others. Italy is known for design innovation. Indian companies have usually taken collaboration with and technology assistance from European, Japanese and American companies in the automobile sector. The assessee has furnished contemporaneous records of services sought and services received from MGRD /AE. While it is difficult to establish the value of benefit received, in the facts of the present case, it is not in doubt that services were received. The TPO has substituted his own estimate by allowing a part of the expenditure claimed. While he has stated that he considers 20% of fees paid to be at arm’s length, he has actually computed 75% as not to be at arm’s length. However, it is only a subjective estimate with no basis to support the adhoc percentage applied. The only relevant number available is the hourly rate considered for invoicing which is Euro 42 per hour. Considering that this is a technical service, the rate is not unreasonable. Further, comparing it to bid based on Euro 48 per hour to assessee before it became an AE, suggests that it is reasonable. The adjustment made is therefore deleted.”

80. The Ld.DR contended that the assessee has failed to establish the benefit test and that the TPO has rightly held that it was a mere duplication of job. The Ld.DR further contended that the Ld.DRP has erroneously applied CUP data and deleted the adjustment made by the TPO. The Ld.DR relied on the AO / TPO’s order.

81. The Ld.AR, on the other hand, contended that the TPO has not determined the ALP by following any of the prescribed method nor has he challenged the selection of AE as the tested party. The Ld.AR further stated that simply because the assessee has a large R & D facility does not imply that it will not require any technology or design services from external sources. This reasoning of TPO to make adjustment on the impugned transaction is not warranted on this ground. The Ld.AR relied on the order of the Ld.DRP in deleting the adjustment.

82. Having heard the rival submissions and perused the materials on record, we are of the view that the assessee has furnished the complete details of foreign AE as tested party as being less complex entity. The assessee further to this, has given a plausible explanation as to why the assessee requires the technical service in order to develop its export market with the support of its AE to design the vehicles for markets outside the country. We are convinced with the submission of the assessee that the AE is a high end service provider for manufacture, designing, style, prototyping and other technical service and it also was assisting the assessee in launching successful modes like Xylo Refresh, Bolero Refresh, Quanto and Genio. The allegation that since assessee has its own R & D centre at Nasik and hence it will not be in need of third party service is not acceptable, in our view. From the above observation, we are of the considered opinion that the Ld.DRP has rightly deleted the impugned adjustment made by the AO / TPO. In the result, these grounds of appeal filed by the revenue are dismissed.

GROUND 8:

83. This ground of appeal pertains to the dealers’ incentive of Rs.208,07,11,000/- for which tax was deductible under section 194H, the Ld.DRP relying on the decision of this Tribunal in assessee’s case for A.Y. 2007­08 has allowed the said expenses to be claimed. We would like to place our reliance on the decision of the co-ordinate bench in ITA No.1449/Mum/2016. The relevant extract of the decision is as follows:-

“9.1. We have heard rival submissions and perused the materials available on record. We find that the limited issue involved herein is whether provisions of 194 H are applicable in respect of dealer incentives in the form of discounts / rebates paid by the assessee to the dealers on meeting certain criteria. We find that the assessee had contended that the transaction between the dealer and the assessee manufacturer is of a sale of the vehicle on a principal to principal basis, whereas the revenue had been holding that the dealers are agents of the assessee, who had rendered services in the course of buying and selling of goods. According to the revenue, since the dealer is merely an intermediary between the assessee and final customer, the provisions of Section 194H of the Act are applicable and since the assessee had failed to deduct the tax at source, disallowance u/s.40(a)(ia) of the Act need to be made in respect of dealer incentive. The said action of the Id. AO was upheld by the Id. DRP. We find that this issue has been consistently decided in favour of the assessee by this Tribunal in its own case in various assessment years. We also find that in respect of assessment year 2008­09, the revenue had preferred an appeal before the Hon’ble Jurisdictional High Court against the order of this Tribunal and the same was dismissed by the Hon’ble Jurisdictional High Court in ITA No.ll48/Mum/2014 dated 06/02/2017. We also find that the Hon’ble Supreme Court had even dismissed the Special Leave Petition (SLP) preferred by the Revenue against the order of Hon’ble Bombay High Court vide SLP No.37462/2017 dated 12/01/2018. In view of the same, the concise ground No.7 is hereby directed to be allowed.”

84. Respectfully following the above decision, we hereby dismiss this ground of appeal filed by the Revenue.

85. In the result, appeal filed by the Revenue is dismissed.

86. As a result, appeal filed by the assessee is partly allowed and the appeal filed by the revenue is dismissed.

Order pronounced in the open court on 04/10/2022.