Hyundai Motor India Ltd Vs ACIT (ITAT Chennai)
Conclusion: Disallowances u/s.14A could not exceed amount of exempt income, therefore, AO was directed to restrict disallowances u/s.14A to the extent of exempt income earned for the impugned assessment year.
Held: During the year under consideration, assessee had earned dividend income from mutual funds, which was exempt from tax amounting to Rs.57,826/-, however, did not made any suo-motu disallowance of expenditure relatable to exempt income. Therefore, AO had invoked provisions of Rule 8D of Income Tax Rules, 1962, and determined disallowances of Rs.86,54,491/- u/s.14A. It was well settled principles of law that disallowances u/s.14A could not exceed amount of exempt income. The Hon’ble Supreme Court in the case of Pr.CIT Vs State Bank of Patiala, while dismissing SLP filed by the Revenue against order of the Hon’ble Punjab & Haryana High Court in the case of Pr.CIT Vs State Bank of Patiala, held that disallowance u/s.14A could be restricted to amount of exempt income only. In this case, admittedly, exempt income for impugned assessment year was Rs.57,826/-, whereas AO had determined disallowance u/s.14A at Rs.86,54,491/- contrary to settled principle of law. Therefore, AO was directed to restrict disallowances u/s.14A to the extent of exempt income earned for the impugned assessment year.
FULL TEXT OF THE ORDER OF ITAT CHENNAI
This appeal filed by the assessee is directed against final assessment order passed by the Assessing Officer u/s.143(3) r.w.s 144C(13) of Income Tax Act, 1961 dated 30.10.2017, in pursuant to the directions of the learned DRP-2, Bengaluru dated 16.09.2017 u/s.144C(5) of Income Tax Act, 1961 for the assessment year 2013-14.
2. The assessee has raised following grounds of appeal:-
“1. The order of the Learned Assessing Officer (“Ld. AO)”, the Learned Transfer Pricing Officer (“Ld. TPO”) and the direction issued by the Hon’ble Dispute Resolution Panel (“Hon’ble DRP”) are not in accordance with the law, contrary to the facts and circumstances of the present case and made in violation of principle of equity and natural justice.
2. Disallowance under section 14A
2.1 On the facts and circumstances of the case, the Ld. AO and Hon’ble DRP erred in disallowing a sum of INR 86,54,491/- under section 14A of the Act by applying provisions of Rule 8D of the Income tax Rules, 1962 (“Rules”)
3. Disallowance of subsidy received towards capital expenditure.
3.1 The Ld. AO and Hon’ble DRP ought to have appreciated that the subsidy was a capital receipt not chargeable to tax and that it cannot also be adjusted against the cost of fixed assets in computing the depreciation allowable to the Appellant.
4. Disallowance of Bonus/ Performance reward under section 43B of the Act
4.1 The Ld. AO and Hon’ble DRP have failed to appreciate that the expenditure incurred by the Appellant towards “performance reward” is not in the nature of “bonus” and cannot be disallowed under section 43B read with section 36(i)(ii) of the Act — should we have an alternative claim that it should be allowed at least in year of payment.
5. Tax Treatment of Output VAT Incentive
5.1 On facts and circumstances of the case, the Ld. AO and Hon’ble DRP erred in not adjudicating and not allowing the claim made by the Appellant to treat Output VAT Incentive offered to tax for the subject AY, as a capital receipt not chargeable to tax.
6. Excess levy of interest under section 234C
6.1 The Ld. AO erred in levying excess interest under section 234C of the Act amounting to INR 14,605 without appreciating the fact that levy of section 234C interest should be computed only on the returned income and not on the assessed income.
7. Adjustment for Brand development services
7.1 The Ld. Transfer Pricing Officer (“Ld. TPO”) and Hon’ble DRP have exceeded their jurisdiction and erred in making the adjustment towards a fees for a purported brand development service alleged to be provided by the Appellant to its AE, without first establishing that there was any international transaction in this regard between the Appellant and its AE, which can be subject to section 92 of the Act and without appreciating that there is no intention to shift the profits outside India.
7.2 The Ld. TPO and Hon’ble DRP failed in not following the order of this Hon’ble Tribunal in the Appellant’s own case from AY 2007-08 to AY 2011-12 wherein similar adjustment towards brand adjustment has been deleted by this Tribunal.
7.3 The Ld. TPO erred in making the adjustment and the Hon’ble DRP erred in upholding the adjustment towards brand development fees without first establishing that a third party manufacturer in India would have received a similar fees from a third party owner of the brand, which is used by the former for the manufacture and sale of goods. In the absence of any comparable transaction, the entire approach of the authorities fails the basic requirement of Transfer Pricing and the charging of the brand development fees in comparable circumstances is not even an arm’s length practice.
7.4 Without prejudice to the other grounds, the Ld. TPO and Hon’ble DRP erred in imputing the adjustment under section 92 of the Act towards brand development fees on the basis of Spearman’s Rank Correlation method.
7.5 The Ld. TPO/AO and Hon’ble DRP have erred in imputing an adjustment under section 92 of the Act towards brand development fees, when it is acknowledged by the TPO himself that the advertisement and marketing expenditure incurred by the Appellant as a proportion of its sales is not excessive as compared to the similar levels of expenditure incurred by comparable companies.
8. Downward adjustment to the value of imports to the extent included in the domestic car sales segment
8.1 The Ld. TPO erred in rejecting the transfer pricing study carried out by the Appellant without cogent reasons and erred in analyzing domestic segment on a standalone basis.
8.2 The Ld. TPO has erred in benchmarking the international transactions entered into by the Appellant with its AEs on the basis of the segment wise profitability details obtained during the assessment proceedings, without appreciating that the international transactions entered into by Appellant are closely linked and integrated and cannot be viewed in terms of separate segments for Transfer Pricing benchmarking.
8.3 The Ld. TPO has erred in benchmarking on the basis of the segment wise profitability details pertaining to ‘Domestic car sales ’ obtained during the assessment proceedings, without appreciating that the ‘Domestic car sales’ is not considered as a separate reportable segment as per the Appellant’s audited financial statements and that the Appellant does not maintain segment wise books of accounts.
8.4 The Ld. TPO erred in excluding certain items of income which are operating in nature while computing the operating income and operating profits and erred in including certain items of expense/losses, which are not operating in nature while computing the operating costs and operating profits.
8.5 The Ld. TPO erred in not considering the royalty income received by the Appellant in consideration for the license of the trademarks and know-how transferred to MOBIS in relation to the distribution of after sales products, as operating income while computing the operating margins of the tested party.
8.6 The Ld. TPO erred in not considering the incentives received from the Government of Tamil Nadu for its Phase II investments under Ultra Mega Integrated Automobile Projects within Tamil Nadu, as operating while computing the operating margins of the tested party.
8.7 The Ld. TPO erred in not considering the insurance income, discount received from suppliers towards early payment of bills, and commission received towards car finance referrals and car insurance referrals as operating while computing the operating margins of the tested party.
8.8 The Ld. TPO erred in considering foreign exchange loss suffered by the appellant as operating while computing the operating margins of the tested party.
8.9 The Hon’ble DRP erred in upholding the actions of the Ld. TPO.
8.10 The Hon’ble DRP and Ld. AO erred in computing the transfer pricing adjustment beyond the scope and jurisdiction of section 92 of the Act by not restricting the value of the adjustment to the Appellant’s international transactions with its Associated Enterprises (“AE)”.
8.11. The Hon’ble DRP and Ld. AO erred in proposing the transfer pricing adjustment to the entire cost base of the Appellant which predominantly includes third party costs, on wrong basis and assumption of facts without giving an opportunity to the Appellant.
3. The assessee had filed a petition for admission of additional grounds on three occasions i.e., 07.08.2018. 27.11.2019 and 16.01.2020. The relevant additional grounds of appeal raised by the assessee are reproduced as under:-
“1. On the facts and circumstances of the case and in law, We pray that Eicher Motors Limited be held as functionally not comparable with our company and therefore to be excluded from the final set of comparable companies;
2. On the facts and circumstances of the case and in law, the lower authorities ought to have granted adjustment for difference in working capital of HMIL vis-à-vis the comparable companies selected in determining the arm’s length price as claimed in the TP documentation.
3. On the facts and circumstances of the case and in Jaw, we pray that the amount received under the Focus Market Scheme is capital in nature and ought to be excluded from the computation of total income of the Appellant for the subject AY;
4. On the facts and circumstances of the case and in law, we pray that education cess and Secondary Education Cess be allowable as a business expenditure in the computation of total income of the Appellant.”
4. Brief facts of the case are that the assessee M/s. Hyundai Motor India Ltd., is wholly owned subsidiary of M/s. Hyundai Motor Company Ltd., South Korea. The assessee is engaged in the business of manufacturing and selling passenger cars in domestic and export market. The assessee company has filed its return of income for assessment year 2013-14 on 28th November, 2013 admitting total income of Rs.1717,21,91,860/-under normal provisions of the Act, and book profit u/s. 115JB of the Act at Rs.2145,05,22,193/-. The assessee had entered into various international transactions with its AEs and international transactions were duly reported in Form 3CEB filed in accordance with provisions of Indian Transfer Pricing Regulations contained in section 92, 92A to 92F of the Income Tax Act, 1961. The case was taken up for scrutiny and during the course of assessment proceedings, a reference was made to JCIT (Transfer Pricing) for determination of arm’s length price of international transactions of the assessee with its AEs. The learned TPO vide its order dated 31.10.2016 has suggested certain transfer pricing adjustments towards downward adjustment to the value of imports and upward adjustment for brand development services.
5. The Assessing Officer, in pursuant to directions of the ld. TPO, has passed draft assessment order u/s.143(3) r.w.s 144C(1) of the Income Tax Act, 1961 on 30.12.2016 and made transfer pricing adjustments as suggested by the TPO at Rs.179,07,77,331/-. The Assessing Officer had also proposed certain corporate tax adjustments including disallowances u/s.14A, r.w.r 8D of IT Rules, 1962, disallowance of subsidy received towards capital expenditure, disallowance of focus marketing scheme expenses, and disallowance of bonus / performance reward u/s.43B(c) of the Income Tax Act, 1961. The assessee has filed objections before learned DRP against draft assessment order, but the learned DRP vide its directions dated 16.09.2017 has rejected objections filed by the assessee. The Assessing Officer in pursuant to the directions of the learned DRP has passed final assessment order incorporating directions of the ld. DRP. Aggrieved, the assessee has filed present appeal before the Tribunal.
6. Ground no.1 filed by the assessee is general in nature and does not require specific adjudication and hence, the same is dismissed.
7. The next issue that came up for our consideration from ground no.2 of assessee appeal is disallowances u/s.14A r.w.r 8D of Income Tax Rules, 1962, amounting to Rs.86,54,491/-. The facts with regard to impugned dispute are that during the year under consideration, the assessee has earned dividend income from mutual funds, which is exempt from tax amounting to Rs.57,826/-, however, did not made any suo-motu disallowance of expenditure relatable to exempt income. Therefore, the Assessing Officer has invoked provisions of Rule 8D of Income Tax Rules, 1962, and determined disallowances of Rs.86,54,491/- u/s. 14A of Income Tax Act, 1961.
8. The learned AR for the assessee submitted that the learned DRP has erred in sustaining additions made by the Assessing Officer towards disallowance u/s. 14A, without appreciating fact that disallowances contemplated u/s.14A cannot exceed amount of exempt income. In this case, exempt income for impugned Asst. Year is Rs.57,826/-, whereas the Assessing Officer has determined disallowance u/s. 14A at Rs.86,54,491/- . In this regard, he relied upon decision of the Hon’ble Supreme Court in the case of Pr.CIT Vs State Bank of Patiala, 99 com 286.
9. The learned DR, on the other hand, supporting order of learned DRP submitted that although, the assessee has earned exempt income, but could not made suo-motu disallowance of expenses relatable to exempt income u/s.14A of the Act. Therefore, the Assessing Officer has invoked Rule 8D of Income Tax Rules, 1962 and determined disallowance and hence, there is no merit in the arguments of the assessee that disallowance u/s.14A cannot exceed amount of exempt income.
10. We have heard both the parties, perused materials available on record and gone through orders of the authorities below. It is well settled principles of law that disallowances u/s.14A cannot exceed amount of exempt income. The Hon’ble Supreme Court in the case of Pr.CIT Vs State Bank of Patiala (supra), while dismissing SLP filed by the Revenue against order of the Hon’ble Punjab & Haryana High Court in the case of Pr.CIT Vs State Bank of Patiala, held that disallowance u/s.14A could be restricted to amount of exempt income only. The Hon’ble Jurisdictional High Court of Madras in the case of Marg Ltd Vs.CIT (2020) 120 Taxmann.com 84, has taken a similar view and held that disallowances under Rule 8D r.w.s 14A can never exceed exempt income earned by the assessee during particular assessment year. In this case, admittedly, exempt income for impugned assessment year was Rs.57,826/-, whereas the Assessing Officer has determined disallowance u/s.14A at Rs.86,54,491/- contrary to settled principle of law. Therefore, considering facts and circumstances of this case and also by following the decisions of Hon’ble Supreme Court and Hon’ble Madras High Court, we direct the Assessing Officer to restrict disallowances u/s.14A to the extent of exempt income earned for the impugned assessment year.
11. The next issue that came up for our consideration from ground no.3 of assessee appeal is disallowance of depreciation on capital subsidy. During the financial year 2001-02, the State Industrial Promotion Corporation of Tamil Nadu (SIPCOT) had granted subsidiary of Rs.100 lakhs to encourage and recognize huge investments made for setting up of mega project viz., passenger car manufacturing unit in Irungattukottai. The assessee has treated subsidy received from SIPCOT as capital receipt and did not reduce the same from cost of assets, as it was not directly or indirectly used to purchase any asset. The Assessing Officer has held that capital subsidy received from SIPCOT being utilized by the assessee for capital expenditure, same ought to have been reduced from the cost of asset added in that year by contending that subsidy was directly or indirectly used to purchase of asset and as per explanation (10) to section 43 the same needs to be deducted from cost of assets and consequently, reworked depreciation by reducing amount of subsidiary and disallowed a sum of Rs.2,02,865/-.
12. The learned AR for the assessee submitted that this issue is covered in favour of the assessee by the decision of ITAT., Chennai, in assessee’s own case for assessment year 2006-07, where it was held that subsidiary received from SIPCOT is capital receipt not liable for tax.
13. The learned DR, on the other hand, fairly agreed that this issue is covered in favour of the assessee.
14. Having heard both the sides and considered material on record, we find that the Tribunal had considered an identical issue in assessee’s own case for assessment year 2006-07 in IT(TP)A. No. 14/Chny/2018 and after considering nature of subsidy has allowed claim of the assessee by observing that for earlier years, the CIT(A) has allowed claim of the assessee and the Assessing Officer has accepted decision of the CIT(A) and deleted additions, while passing order giving effect to the order of the CIT(A). Therefore, consistent with the view taken by the coordinate Bench, we direct the Assessing Officer to delete additions made towards disallowance of depreciation on capital subsidy received from SIPCOT.
15. The next issue that came up for our consideration from ground no.5 of assessee appeal is addition towards VAT incentive received from Government of Tamil Nadu. During the year under consideration, the assessee has received refund of output VAT amounting to Rs.32,75,60,000/- from Govt. of Tamil Nadu and credited to profit and loss account under the head income from other sources. The assessee has treated above incentive as revenue receipt both for its books of account and its tax returns. However, during the course of assessment proceedings, the assessee has raised a fresh claim to treat incentive as capital receipts not chargeable to tax. The Assessing Officer has not adjudicated fresh claim made by the assessee. The learned DRP has rejected objections filed by the assessee without giving any specific direction.
16. The learned AR for the assessee submitted that this issue is also covered in favor of the assessee by the decision of ITAT., Chennai in assessee’s own case for assessment year 2011-12, where under identical circumstances, the Tribunal has remanded the matter to the file of the Assessing Officer to consider issue in accordance with law.
17. The learned DR, on the other hand, fairly agreed that this issue has been set aside to the file of Assessing Officer for earlier years and hence, this year also the issue may be remanded back to the file of Assessing Officer.
18. Having heard both the parties and considered material on record, we find that the Tribunal had considered an identical issue for assessment year 2011-12 in ITA No.853/Chny/2014, where the issue has been remanded back to the file of Assessing Officer to consider the issue denovo on merits in accordance with law. Facts being identical for the year under consideration by following the decision of Tribunal in assessee’s own case for assessment year 2011-12, we set aside the issue to file of the Assessing Officer and direct him to reconsider the issue in accordance with law.
19. The next issue that came up for consideration from ground No.4 of assessee appeal is disallowance u/s.43B(c) of the Act, in respect of performance incentive paid to employees. Facts with regard to impugned dispute are that for the financial year relevant to the assessment year 2013-14, the assessee has paid performance reward to employees in the cadre of executives and senior executives. The assessee has provided for expenses for the period beginning from January to March, 2013. However, payment was made only after due date of filing return of income for assessment year 2013-14. The Assessing Officer has disallowed performance incentive paid to staff u/s.43B(c) r.w.s. 36(1)(ii) of the Act, amounting to Rs.13,01,51,983/- on the ground that as per section 43B(c), any sum referred to in clause (ii) of sub-section (1) of section 36, shall not be allowed as deduction, unless the same is paid on or before due date for furnishing return of income u/s.139(1) of the Act. The Assessing Officer further noted that as per section 36(1)(ii), any sum paid to an employee as bonus or commission for services rendered, where such sum would not have been payable to him as profit or dividend, if it had not been paid as bonus or commission is covered. Therefore, he opined that any payment made to an employee which is in the nature of bonus or commission for services rendered is covered u/s. 36(1)(ii) of the Act, and thus, if such payment is not made on or before due date of filing of return of income u/s.139(1) of the Act, then same cannot be allowed as deduction, as per section 43B(c) of the Act.
20. The assessee has filed objections before learned DRP and challenged additions made by the Assessing Officer. The learned DRP vide its directions dated 16.09.2017 has rejected objections filed by the assessee and confirmed additions made by the Assessing Officer. The relevant findings of the ld. DRP is as under:-
“7. Ground of objection 6 – contentions against Disallowance of Bonus/Performance reward U/S 43B
The learned AO erred in disallowing “Performance reward” amounting to INR 13,01,51,983/- u/s.43B of the Act.
The Ld. AO ought to have appreciated that the expenditure incurred towards “performance reward” is not in the nature of “bonus” and therefore the provisions of Section 43B(c) of the Act is not applicable.
