IN THE ITAT MUMBAI BENCH ‘L’
Dresser Rand India (P.) Ltd.
Deputy Commissioner of Income-tax
IT APPEAL NOS. 3257 & 3509 (MUM.) OF 2008
JULY 31, 2012
P.M. Jagtap, Accountant Member
These two appeals, one filed by the assessee being ITA No.3509/M/2008 and the other filed by the revenue being ITA No.3257/M/2008, are cross appeals which are directed against the order of Ld. CIT(A)-6, Mumbai dated 28.01.2008.
2. First we shall take of the appeal of the assessee, ground no.1 of which relates to the addition of Rs. 21,10,564/- made by the AO and confirmed by the Ld. CIT(A) on account of unutilized Modvat credit in respect of closing stock.
3. The assessee in the present case is a company which is engaged in the business of manufacturing of various types of processed gas compressors including refracting compressors. The return of income for the year under consideration was filed by it on 28.10.2004 declaring total income of Rs. 18.31,88,230/-. During the course of assessment proceedings, it was noticed by the AO that the assessee has followed the inclusive method as a result of which unutilized Modvat credit was not included in the value of closing stock. Since the said method of valuation of closing stock followed by the assessee was not in accordance with the provisions of sec.145A, the AO added the unutilized Modvat credit of Rs. 21,10,564/- to the value of closing stock declared by the assessee. The Ld. CIT(A) confirmed the said addition made by the AO on this issue following the decision of his predecessor in assessee’s own case for the earlier year and directed the AO to verify the claim of the assessee regarding the exact quantum of addition.
4. We have heard the arguments of both the sides and also perused the relevant material on record. It is observed that a similar issue had come up for consideration before the co-ordinate Bench of this Tribunal in assessee’s own case for AY 2001-02 and vide its order dated 7th February, 2008 passed in ITA 6854/M/2002, the same was restored by the Tribunal to the file of the AO with a direction to decide the same afresh after verifying the recast accounts to be prepared and furnished by the assessee in terms of sec.145A of the Act after including tax, duty, cess or fees as provided in the said section. Respectfully following the said order of the Tribunal, we set aside the impugned order of the Ld. CIT(A) on this issue and restore the matter to the file of the AO for deciding the same afresh as per the same direction as given by the co-ordinate Bench for AY 2001-02. Ground no.1 of the assessee’s appeal is accordingly treated as allowed for statistical purposes.
5. Ground no. 2 raised by the assessee relates to the various issues relating to computation of deduction u/s. 80HHC as raised in ground nos.2.1 to 2.8. In so far as ground no.2.1 and 2.2 are concerned, the Ld. Counsel for the assessee has submitted that the same are general in nature seeking no specific decision from us. As regards ground nos.2.3 to 2.6 relating to the assessee’s claim for deduction u/s. 80HHC in respect of income by way of recovery of freight, insurance and packaging expenses as well as sales-tax set off/refund, it is observed that the same are squarely covered against the assessee by the decision of Hon’ble Bombay High Court in CIT v. Dresser Rand India (P.) Ltd.  323 ITR 429 wherein it was held that the recovery of freight, insurance, packaging receipts and sales-tax refund are not profits from business and the same therefore cannot be included in the computation of profits for the purposes of computing the deduction u/s. 80HHC. The Hon’ble Bombay High Court therefore held that 90% on such receipts are liable to be excluded in computing profits from business for the purpose of computing deduction u/s. 80HHC. Respectfully following the said decision of Hon’ble jurisdictional High Court in assessee’s own case for the earlier year, we uphold the impugned order of the Ld. CIT(A) confirming the action of the AO in excluding the recovery of freight, insurance, packaging expenses and sales-tax set off/refund from the profits of business for the purposes of computing the deduction u/s.80HHC allowable to the assessee. We, however, accept the alternative contention of the assessee that the said receipts/income are liable to be included to the extent of 90% of the net amount after deducting the corresponding expenses, if any, in view of the decision of Hon’ble Supreme Court in the case of ACG Associated Capsules (P.) Ltd. v. CIT  343 ITR 89 wherein it was held that 90% of net interest or net rent which is included in the profits to be excluded for the purpose of computing the deduction u/s.80HHC and not of gross interest or gross rent. Accordingly we direct the AO to recompute the deduction u/s.80HHC after verifying the assessee’s alternative claim in relation to the net income from the relevant record. Ground nos.2.3 to 2.6 of the assessee’s appeal are accordingly treated as partly allowed for the statistical purpose.
6. The issue raised in ground nos.2.7 & 2.8 of the assessee’s appeal relates to its claim for deduction u/s. 80HHC in respect of foreign exchange gain.
7. We have heard the arguments of both the sides also perused the relevant material on record. As submitted by the Ld. Counsel for the assessee, the impugned foreign exchange earned in the year under consideration was in respect of export proceeds realized and even the Ld. CIT(A) on page no.6 of his impugned order has given a finding that the foreign exchange gain is related to the export business of the assessee. In assessee’s own case for AY 2002-03, the Hon’ble Bombay High Court has held that what is liable to be excluded from the profits of business for the purpose of computing the deduction u/s. 80HHC is the income which is unrelated to the export activity of the assessee. Since the foreign exchange gain earned by the assessee for the year under consideration in respect of realization of export proceeds is directly relatable to its export activity, we are of the view that the same cannot be excluded from the profits of business for the purpose of computing the deduction u/s. 80HHC keeping in view the ratio of Hon’ble Bombay High Court in assessee’s own case for the AY 2002-03 (supra). We therefore set aside the impugned order of the Ld. CIT(A) on this issue and direct the AO to include the foreign exchange gain in the profits of business for the purpose of computing the deduction u/s. 80HHC as rightly claimed by the assessee. Ground nos.2.7 to 2.8 of the assessee’s appeal are accordingly allowed.
8. The issue raised in ground no. 3 of the assessee’s appeal relates to the disallowance made by the AO and confirmed by the Ld. CIT(A) on account repairs and maintenance expenses amounting to Rs. 20.73,464/-incurred in the year under consideration.
9. In the profit and loss account filed along with its return of income, the assessee had debited a sum of Rs. 14,48,341/- on account of repairs and maintenance of plant and machinery and Rs. 6,25,123/- on account of repairs and maintenance of building. When the assessee was called upon by the AO to explain as to why the said expenditure should not be capitalized, it was submitted on behalf of the assessee that some of the expenses so claimed might be capital in nature which remained to be capitalized inadvertently. Keeping in view this submission of the assessee and after perusing the relevant details filed by the assessee of the repairs and maintenance expenses, the AO held that the said expenses were of capital nature. Accordingly he disallowed the deduction claimed by the assessee for said expenses treating the same as of capital nature and allowed only depreciation thereon. On appeal, the Ld. CIT(A) confirmed the addition made by the AO on this issue observing that the assessee itself had admitted before the AO that certain expenses of capital nature were inadvertently claimed as deduction.
10. We have heard the arguments of both the sides on this issue and also perused the relevant material on record. The Ld. Counsel for the assessee has invited our attention to the copies of relevant bills placed at page nos. 75 to 86 of his paper book and submitted that same are sufficient to show that the expenses incurred by the assessee on repairs and maintenance are revenue in nature. He also took us through the written submission made by the assessee before the Ld. CIT(A) (relevant portion at page no.46 of the paper book) and relied on the same in support of the case on this issue.
11. After perusing the copies of bills filed in the paper book of the assessee as well as written submissions filed by the assessee before the Ld. CIT(A), we find that the same are not sufficient to support and substantiate the case of the assessee that the impugned repairs and maintenance expenses are of revenue in nature. It is not clear from the documents filed by the assessee as to whether the expenditure in question incurred by the assessee on repairs and maintenance is of revenue nature inasmuch as it is very difficult to come to a conclusion on the basis of the said documents that the expenses incurred by the assessee on repairs and maintenance were on purchase of spare parts of plant and machinery and miscellaneous work done to the building and there was no new capital asset acquired by the assessee as a result of incurring of the said expenses. In our opinion, the onus in this regard is on the assessee to establish on evidence that the expenses in question were incurred on current repairs and since the assessee has failed to discharge the said onus satisfactorily, we are of the view that the expenses in question incurred by the assessee were rightly treated by the AO as capital expenditure. We therefore find no infirmity in the impugned order of the Ld. CIT(A) confirming the disallowance made by the AO on this issue and upholding the same, we dismiss ground no.3 of the assessee’s appeal.
12. Ground nos.4 & 5 raised by the assessee in this appeal relating to the disallowance of technical and administrative service charges of Rs. 42,22,348/- and disallowance of leave encashment of Rs. 22,10,026/-respectively are not pressed by the Ld. Counsel for the assessee at the time of hearing before us. The same are accordingly dismissed as not pressed.
13. Now we shall take-up the appeal of the revenue, ground no.1 of which challenges the action of the Ld. CIT(A) in deleting the addition of Rs. 14,79,692/- made by the AO by way of TP adjustments.
14. During the year under consideration, the assessee company had granted 10% discount on sales made to its associated enterprise. On the basis of this discount granted by the assessee company to its associated enterprises, the AO held that price charged by the assessee to its AE was not at Arm’s length and TP adjustment to the extent of discount granted was made by him on the basis of report obtained from TPO. On appeal, the Ld. CIT(A) deleted the addition made by the AO by way of TP adjustment holding that the TPO and the AO had arrived at the price difference not on the basis of any established method of determining the Arm’s length price but simply on the basis of 10% discount granted by the assessee company to its associate enterprise. According to the Ld. CIT(A), there was thus nothing brought on record by the AO or TPO to show that the price charged by the assessee to its associated enterprise was not at arm’s Length. The Ld. CIT(A) therefore deleted the addition made by the AO by way of TP adjustment.
15. We have heard the arguments of both the sides and also perused the relevant material on record. It is observed that this issue is squarely covered by the decision of the co-ordinate Bench of this Tribunal in assessee’s own case for AY 2006-07 rendered vide its order dated 7th September, 2011 passed in ITA No.8753/Mum/2010 wherein a similar issue was decided in favour of the assessee by the Tribunal vide paragraph No.11 as under:
“11. The next adjustment of Rs. 4,70,000, on the ground that the assessee ought not to have allowed discount of 10% to AEs, is also equally devoid of any merits. We have noted that the assessee has followed the TNMM for determination of ALP and the Assessing Officer has not even disputed TNMM being most appropriate method on the facts of this case. The question of applying CUP, even if that be so, can only arise when TNMM is rejected. Even under CUP method, it is not necessary that all sales must take at the same price. There can always be variations of prices for the same product or services on valid grounds, such as quantum of business, risk factors, marketing efforts needed etc. When assessee is dealing with an AE, at least there are no commercial risks, no marketing costs and there could be several other factors as well justifying a normal discount as the assessee could indeed go to many important customers. It hardly needs to be emphasized that even in independent business situations granting discount is a normal occurrence, and unless the Assessing Officer demonstrates that the discount so allowed would not have been allowed in an arm’s length situation, ALP adjustment cannot be made in respect of the same. We are alive to the fact that the discount is allowed by the virtue of status as associated enterprise, but that is not a material factor; in our considered view, the material factor is whether such a discount of 10% is an arm’s length discount i.e. a discount which is given even in a situation in which an enterprise is dealing with independent enterprise. There is nothing on record to even suggest that such a discount is not an arm’s length discount, or that discounts have not been allowed under any other situations. In view of these discussions, and bearing in mind entirety of the case, we delete the impugned disallowance of Rs. 4,70,000 as well.”
16. As issue involved in the year under consideration as well as all the material facts relevant thereto are similar to AY 2006-07, we respectfully follow the order of the Tribunal for AY 2006-07 and uphold the impugned order of the Ld. CIT(A) deleting the addition made by the AO by way of TP adjustment. Ground no. 1 of revenue’s appeal is accordingly dismissed.
17. In ground no. 2, the revenue has challenged the action of the Ld. CIT(A) in deleting the disallowance of Rs. 76,78,511/- made by the AO on account of development expenses.
18. During the course of assessment proceedings, it was noticed by the AO that the assessee has made a payment of Rs. 76,78,511/- to M/s. Dresser Rand company, USA towards development expenses without deducting tax at source. He therefore invoked the provisions of sec. 40(a)(i) and disallowed the development expenses claimed by the assessee. On appeal, the Ld. CIT(A) deleted the disallowance made by the AO u/s. 40(a)(i) after having accepted the stand of the assessee that the amount in question paid to Dresser Rand India Company, USA on account of development expenses not being chargeable to tax in the hands of the said non-resident assessee in India, there was no obligation to deduct tax at source from the said amount and no question of disallowance u/s. 40(a)(i). He also held that Dresser Rand Company, USA was covered by Indo-US DTAA and as per Article 12(4) of the said Treaty, technical and consultancy services were not taxable in India and there was no obligation to deduct tax at source for the payment and such technical and consultancy services. For this conclusion, he relied on the decision of Co-ordinate Bench of this Tribunal in the case of Raymond Ltd. v. Dy. CIT  86 ITD 791 (Mum.).
19. We have heard arguments of both sides and also perused the relevant material on record. Besides supporting strongly the impugned order of the Ld. CIT(A) wherein relief has been given to the assessee on this issue by holding that the amount in question paid by the assessee to Dresser Rand Company, USA toward development expenses is not chargeable to tax in India in the hands of the said non-resident, the Ld. Counsel for the assessee has submitted that the assessee has deducted the tax at source from development charges paid to Dresser Rand Company, USA in the next financial year and the tax so deducted having been paid before the due date of filing return, the disallowance u/s. 40(a)(i) is not sustainable on this ground also as per the amendment made in the relevant provisions which has been held to be retrospective. The Ld. DR has not raised any material contention to controvert this submission made by the Ld. Counsel for the assessee. Keeping in view this submission made by the Ld. Counsel for the assessee as well as specific finding giving by the Ld. CIT(A) about non-taxability of development charges paid by the assessee in the hands of Dresser Rand Company, USA in India which has remained unrebutted by the Ld. DR, we find no justifiable reason to interfere with the impugned order of Ld. CIT(A) deleting the disallowance made by the AO u/s. 40(a)(i). We therefore uphold the same and dismiss ground no.2 of the revenue’s appeal.
20. In the result, appeal of the assessee is partly allowed whereas the appeal of the revenue is dismissed.