TDS deductible on professional & technical services fees for developing of web enabled software

VST Motor Ltd Vs ACIT (ITAT Chennai)

ITAT Chennai held that towards professional and technical services for developing of web enabled software SIBIL for marketing related information, which in our view is payment for technical services and the same is subject to deduction of tax at source.

Facts- The assessee is a limited company engaged in the business of purchase and sale of trucks and motor cars and its spare parts. Income of Rs.5,44,68,360/- declared in the return filed on 29.09.2009 for the AY 2009-10.

Case selected for scrutiny through CASS followed by serving of notice u/s.143(2) & 143(1) of the Income Tax Act, 1961 (in short “the Act”). Ld.AO carried out the assessment proceedings considering the submissions filed by the assessee, made disallowances under various heads which mainly included disallowance of 15% of the total discount offered during the year and accordingly, assessed the income at Rs.9,12,24,765/-.

Aggrieved, the assessee preferred an appeal before the Ld.CIT(A), but failed to succeed on any of the issues.
Now, the assessee is in appeal before this Tribunal.

Conclusion- Held that the discount amount is fairly large and proper documentation of such huge claim is necessary on the part of the assessee. We therefore under the given facts and circumstances of the case, being fair to both the parties considering the factual aspect of the cases and lack of proper details maintained by the assessee, but simultaneously considering that the ad hoc disallowance made by the AO is on much higher side for the AYs 2009-10 and 2010-11 & for 2011-12 disallowing the excess amount of discount passed to the customers over and above the amount received from M/s.Tata Motors Ltd., and also considering that almost 21000 vehicles are sold during the year, we direct the AO to sustain the disallowance @1% of the total discount amount shown by the assessee in the Revenue under the head ‘Revenue from operation’.

Held that since the alleged payment of Rs.16,31,588/- has been paid by the assessee to M/s.Tata Motors Ltd., towards professional and technical services for developing of web enabled software SIBIL for marketing related information, which in our view is payment for technical services and the same is subject to deduction of tax at source, however, since assessee has not deducted TDS and the amount has been adjusted in the overall accounting of other transactions of purchase of goods from M/s.Tata Motors Ltd., we restore this issue to the file of Ld.AO for carrying out necessary verification and examine the issue in the light of the documents to be placed by the assessee demonstrating that the alleged payment has been offered to tax by the recipients i.e. M/s.Tata Motors Ltd., and certificate to that effect from Chartered Accountant as per Rules prescribed under IT Rules needs to be procured. In case, the assessee is unable to file these details, Ld.AO can proceed in accordance with law.

FULL TEXT OF THE ORDER OF ITAT CHENNAI

ITA Nos.968 & 969/Chny/2018 filed by the assessee namely M/s.VST Motors Ltd., for AYs 2009-10 & AY 2011-12 are directed against the separate orders of the Commissioner of Income Tax (Appeals)-13, Chennai, evenly dated 20.09.2017, and ITA No.970/Chny/2018 is filed by another assessee namely M/s.VST Auto Agency Ltd., for AY 2010-11 is directed against the order of the Commissioner of Income Tax (Appeals)-13, Chennai, dated 21.09.2017 and ITA No.19/Chny/2021 is filed by the Revenue pertaining to AY 2010-11 is directed against the order of the Commissioner of Income Tax (Appeals)-13, Chennai, dated 22.09.2020 and pertains to assessment year 2010-11.

2. As the issues raised in these bunch of appeals are common and relates to same group of assessee’s, at the request of both the parties, these appeals were heard together and are being disposed off by way of this common order for the sake of convenience and brevity.

3. We notice that the appeal filed by the Revenue in ITA No.19/Chny/2021 is delayed by 61 days. An affidavit has been filed by the Revenue stating the reasons for the said delay and the application has been made to condone the delay. On perusal of the affidavit, we find that said delay in filing of appeal is mainly due to lockdown imposed by the Govt. on account of spread of Covid-19 infections and which needs to be excluded for computing limitation in view of judgment of the Hon’ble Supreme Court in Miscellaneous Petition No.21 of 2022 in suo motu Writ Petition (C) No.3 of 2020 and if the period of delay is covered within the period specified in the order of the Apex Court , then same needs to be condoned in view of specific problem faced by the public on account of Covid-19 pandemic.

3.1 The learned AR, on the other hand, fairly agreed that delay may be condoned in the interest of justice.

3.2 Having heard both sides and considered reasons given by the learned DR, we find that the Hon’ble Supreme Court in Miscellaneous Petition No.21 of 2022 in suo motu Writ Petition (C) No.3 of 2020, has extended limitation applicable to all proceedings in respect of courts and tribunals across the country on account of spread of Covid-19 infections w.e.f. 15.03.2020, till 28.02.2022. We note that delay noticed by the Registry pertains to the period of general exemption provided by the Hon’ble Supreme Court extending limitation period applicable for all proceedings before Courts and Tribunals and thus, considering facts and circumstances of the case and also in the interest of natural justice, we condone the delay of 61 days in filing of the appeal by the Revenue.

4. The assessee has raised the following grounds of appeal in ITA No.968/Chny/2018 for the AY 2009-10:

1. The order of the Commissioner of Income Tax (Appeals) is contrary to law, facts and in the circumstances of the case.

2. The Commissioner of Income tax (Appeals) erred in confirming the disallowance of Rs.66,730/- u/s.14A r.w.r.SD as expenditure incurred for earning the dividend income.

2.1. The Commissioner of Income tax (Appeals) ought to have appreciated that as per Section 14A only the actual expenditure incurred in relation to exempted income, which is included in the total operational expenditure, would be disallowed under section 14A.

2.2. The Commissioner of Income tax (Appeals) ought to have appreciated that the dividend income were earned on the investments made in the earlier years out of share capital and reserves and surplus. No part of the interest expenditure could be correlated to the earning of the exempt income.

3. The Commissioner of Income tax (Appeals) erred in confirming the disallowance of 15% of the discount offered to the customers amounting to Rs.3,60,56,939/-.

3.1. The Commissioner of Income tax (Appeals) ought to have appreciated that the selling price of the motor vehicles to the customer is fixed by the Principal/Tata Motors.

3.2. The Commissioner of Income tax (Appeals) ought to have appreciated that in order to attract more customers from other competitors, Appellant provided discounts based on the market conditions to the purchaser by way of (a) cash discount (b) Accessories discount charges by providing additional accessories (c) Insurance discount given on the insurance premium.

3.3 The Commissioner of Income tax ought to have appreciated that during this financial year assessee passed on the discount to 13,450 customers by way of credit note to the extent of Rs.23,89,45,387/- which was received from Tata Motors Ltd.

3.4 The Commissioner of Income tax (Appeals) ought to have appreciated that the discount was passed on by way of A/C payee cheques amounting to Rs.1,50,89,0687-to the customers who had paid the full amount, and for customers who had paid lesser amount, to the extent of credit note value, assessee had passed the credit note and adjusted their account.

3.5 The Commissioner of Income tax (Appeals) ought to have appreciated that all the expenses have been incurred to promote the sale of products by the company in the course of their business. Discounts so offered have been accounted in the books of accounts and the amount received by the assessee from the customers from sale of products is only net of these discounts offered to the client.

4. The Commissioner of Income tax (Appeals) erred in confirming the addition of Rs.2,21,635/- as excess of service charges paid to sister concern.

4.1 The Commissioner of Income tax (Appeals) ought to have appreciated that assessee gets reimbursement of service charges from the principal only in respect of trucks and not in respect of cars.

4.2 The Commissioner of Income tax (Appeals) ought to have appreciated that the PDI/Free service charges paid to sister concern consists of payments in respect of trucks and cars hence the addition is unwarranted.

5. The Commissioner of Income tax (Appeals) erred in adding a sum of Rs.2,53,311/-in respect of advertisement and sales expenses.

5.1 The Commissioner of Income tax (Appeals) ought to have appreciated that the expenses were incurred during the year in the course of business and hence the disallowance is unwarranted.

6. The Appellant craves leave to file additional grounds at the time of hearing.

5. The assessee has raised the following grounds of appeal in ITA No.969/Chny/2018 for the AY 2011-12:

1. The order of the Commissioner of Income Tax (Appeals) is contrary to law, facts and in the circumstances of the case.

2. The Commissioner of Income tax (Appeals) erred in confirming the disallowance of Rs.5,49,107/- u/s.14A r.w.r.SD as expenditure incurred for earning the dividend income.

2.1. The Commissioner of Income tax (Appeals) ought to have appreciated that as per Section 14A only the actual expenditure incurred in relation to exempted income, which is included in the total operational expenditure, would be disallowed under section 14A.

2.2. The Commissioner of Income tax (Appeals) ought to have appreciated that the dividend income were earned on the investments made in the earlier years out of share capital and reserves and surplus. No part of the interest expenditure could be correlated to the earning of the exempt income.

2.3 The Commissioner of Income tax (Appeals) ought to have appreciated that though expenditures were incurred with reference to the business activities of the assessee in no way it is related to the investment activities.

2.4 The Commissioner of Income tax (Appeals) ought to have appreciated that he himself in the computation has held that the amount of expenditure directly attributable to earning of exempted income is Nil. He has only computed disallowance of interest and other expenses which is not directly attributable to earning of dividend income.

3. The Commissioner of Income tax (Appeals) erred in confirming the disallowance of the discount offered to the customers by way of credit notes of Rs.2,11,15,594/- over and above the discount offered by TATA Motors.

3.1 The Commissioner of Income tax (Appeals) ought to have appreciated that during the current financial year assessee offered discount to the customers to the extent of Rs.35,28,86,440/- out of which TATA Motors reimbursed their share of Rs.32,51,70,846/-.

3.2 The Commissioner of Income Tax (Appeals) ought to have appreciated that the discount has actually been granted and only the net income after the discount was received on sale of vehicles and only such net income is taxable.

3.3 The Commissioner of Income tax (Appeals) ought to have appreciated that the total margin on sale of 21,443 vehicles is Rs.32,52,17,635/- and the discount passed on from assessee’s margin is Rs.2,77,15,594/- which works out to 8.52% of margin only which is a allowable reasonable normal business expenditure.

3.4 The Commissioner of Income tax (Appeals) ought to have appreciated that all the expenses have been incurred to promote the sale of products by the company in the course of their business. Discounts so offered have been accounted in the books of accounts and the amount recovered by assessee from the customers from sale of products is only net of these discounts offered to the client.

4. The Commissioner of Income tax (Appeals) erred in confirming the disallowance of a sum of Rs.16,31,558/- paid to M/s.Tata Motors Ltd for non-deduction of TDS.

4.1 The Commissioner of Income tax (Appeals) erred in holding that the payment to Tata Motors Ltd is in the nature of professional and technical services and hence provisions of sec.40(a)(ia) are attracted.

4.2 The Commissioner of Income tax (Appeals) ought to have appreciated that M/s.Tata motors Ltd has developed a Web enabled software in Siebel in which all marketing related information can be stored for which charges are collected based on the number of vehicles sold by the dealers

4.3 The Commissioner of Income tax (Appeals) ought to have appreciated that payment is only in the nature of sharing the expenses and does not constitute fee for professional and technical services and hence the provision of section 40(a)(ia) are not attracted.

4.4 The Commissioner of Income tax (Appeals) ought to have appreciated that as per 3rd proviso to sec 40(a)(ia) where an assessee fails to deduct the whole or any part of the tax on any such sum, but is not deemed to be an assessee in default under the first proviso to sub-section (1) of section 201, then, for the purpose of this sub-clause, it shall be deemed that the assessee has deducted and paid the tax on such sum on the date of furnishing of return of income by the resident payee referred to in the said proviso.

5. The Appellant craves leave to file additional grounds at the time of hearing.

6. The assessee has raised the following grounds of appeal in ITA 970/Chny/2018 for the AY 2010-11:

1. The order of the Commissioner of Income Tax (Appeals) is contrary to law, facts and in the circumstances of the case.

2. The Commissioner of Income tax (Appeals) erred in confirming the adhoc / estimated disallowance of 15% of the total amount of Rs.24,74,468/- shown under the head vehicle sales expenses, rebate and discounts offered to the customers.

2.1 The Commissioner of Income tax (Appeals) ought to have appreciated that only a sum of Rs.1,07,62,085/- out of the total sum of Rs.1,64,96,450/- alone represents the discount paid on vehicles sold to the customers. The balance amount represents the payment made to sister concern and other dealers towards warranty and free service charges, expenses paid towards vehicle demonstration and discount paid to customers who have purchased spares parts.

2.2 The Commissioner of Income tax (Appeals) ought to have appreciated that in order to attract more customers from other competitors, Tata Motors Ltd use to announce various discount schemes for each model based on the market conditions to the purchaser by way of cash discount, Accessories discount charges by providing additional accessories, Insurance discount given on the insurance premium.

2.3 The Commissioner of Income tax (Appeals) ought to have appreciated that during the relevant financial year the appellant passed on the discount by way of credit note to the extent of Rs.1,04,18,099/- which was received from Tata Motors Ltd.

2.4 The Commissioner of Income tax (Appeals) ought to have appreciated that all the expenses have been incurred to promote the sale of products by the appellant in the course of their business. Discounts so offered have been accounted in the books of accounts and the amount recovered by the appellant from customers from sale of product is only net of these discounts offered to the client.

3. The Appellant craves leave to file additional grounds at the time of hearing.

7. The Revenue has raised the following grounds of appeal in ITA No.19/Chny/2021 for the AY 2010-11:

1. The order of the learned CIT(A) is contrary to law and facts and circumstances of the case.

2. The CIT(A) erred in not considering the fact that the assessee is not produced any evidences with regard to the customers even in remand state.

3. The CIT(A) erred in giving full relief as the assessee has provided the details with regard to first 10 customers only.

4. For these and other grounds that may be adduced at the time of hearing, it is prayed that the order of the learned CIT (A) may be set aside and that of the Assessing Officer be restored.

8. In this bunch of appeals, we find that ITA Nos.968 & 969/Chny/2018 & ITA No.19/Chny/2021 relates to assessee namely M/s.VST Motor Ltd., and ITA No.970/Chny/2018 relates to another assessee namely M/s.VST Auto Agency Ltd. It was brought to our notice that M/s.VST Auto Agency Ltd., has been amalgamated with M/s.VST Motor Ltd.

9. We will first take ITA No.968/Chny/2018 in the case of M/s. VST Motor Ltd., for AY 2009-10.

10. The facts in brief are that the assessee is a limited company engaged in the business of purchase and sale of trucks and motor cars and its spare parts. Income of Rs.5,44,68,360/- declared in the return filed on 29.09.2009 for the AY 2009-10. Case selected for scrutiny through CASS followed by serving of notice u/s.143(2) & 143(1) of the Income Tax Act, 1961 (in short “the Act”). Ld.AO carried out the assessment proceedings considering the submissions filed by the assessee, made disallowances under various heads which mainly included disallowance of 15% of the total discount offered during the year and accordingly, assessed the income at Rs.9,12,24,765/-.

11. Aggrieved, the assessee preferred an appeal before the Ld.CIT(A), but failed to succeed on any of the issues.

12. Now, the assessee is in appeal before this Tribunal.

13. Ground No.2 raised by the assessee is regarding disallowance u/s.14A of the Act at Rs.66,730/-. At the outset, the Ld.Counsel for the assessee did not press this ground due to smallness of the amount and hence, the same is dismissed as not pressed and the disallowance u/s.14A of the Act, at Rs.66,730/- is confirmed and Ground No.2 raised by the assessee is dismissed.

14. Ground No.4 raised by the assessee is regarding disallowance of free service charges not recovered at Rs.2,21,635/-. We notice that the assessee received Rs.23,08,676/- as service charges, but paid Rs.25,30,311/- as service charges to its sister concerns. Both the lower authorities disallowed the excess amount paid at Rs.2,21,635/- on the ground that no prudent businessmen would disburse the entire receipts towards expenses. We do not find any merits in the observations of the Ld.CIT(A) for the reason that these transactions have been carried out in regular course of business. No defect has been pointed out in the documentary evidence maintained and filed by the assessee. Looking to the quantum of turnover achieved by the assessee and regular procedures followed for carrying out such type of business, we cannot ignore the possibility of excess payment towards service charges as there are many minor repairs, replacement of damaged parts, etc., which are to be carried out by the retailer at their cost. It is also brought to our notice that the assessee gets reimbursement of PDI service charges from the principal only in respect of trucks, but no such reimbursement is granted for cars. Considering these facts, we delete the addition of Rs.2,21,635/- made towards free service charges not recovered. Ground No.4 raised by the assessee is allowed.

15. Ground No.5 raised by the assessee is regarding disallowance of advertisement expenses of Rs.2,53,311/-. At the request of the Ld.Counsel for the assessee requested for not pressing this ground for the reason that it is related to next year. We therefore dismiss Ground No.5 raised by the assessee as not pressed.

16. Ground No.3 raised by the assessee is against disallowance @15% of the discount/subvention paid debited in the P & L A/c. We notice that similar issue has also been raised by one same assessee for the AY 2011-12 in ITA No.969/Chny/2018 and for the AY 2010-11. Revenue has filed the appeal rising the same issue in ITA No.19/Chny/2021. We also notice that almost similar issue has also raised by another group assessee i.e. M/s.VST Auto Agency Ltd., for the AY 2010-11 in ITA No.970/Chny/2018. Since the issues are common, the same are being adjudicated together.

17. Facts in brief are that in the business of selling motor vehicles, selling price of the motor vehicles is fixed by the principal i.e. M/s.Tata Motors Ltd. In order to attract more customers from other competitors, M/s.Tata Motors Ltd., use to announce various discount schemes for each model based on the market conditions for its customers by way of cash discount, accessories discount, charges, insurance discount, etc. The sale price at which various motor vehicle is to be sold by the distributor, is fixed by manufacturer by way of MRP and such discounts announced by M/s.Tata Motors Ltd., are passed on by the assessee to its customers.

18. In the case of M/s.VST Motor Ltd., for the AY 2009-10, the assessee company debited a sum of Rs.24,03,79,590/- as discount/subvention expenditure. The assessee was asked to explain said discount. It was submitted that such discount constitutes various items in which in some cases discount is given outrately in the bills, in some cases, out of the sum received towards sale, the discount portion is given back to the assessee through proper banking channel. It is also stated that against the said total claim of discount, assessee has credited income received from M/s.Tata Motors Ltd., towards discount to be offered to the customers at Rs.11,75,65,765/-. However, for lack of evidences, confirmation, terms & conditions, Ld.AO made an ad hoc disallowance @15% of the total discount of Rs.24,03,79,590/- and disallowed the expenditure at Rs.3,60,56,939/-.

19. So far as AY 2010-11 is concerned, Ld.AO noticed that the assessee i.e. M/s.VST Motors Ltd., has debited P & L A/c of Rs.30,78,73,067/-. The amount passed by the M/s.Tata Motors Ltd., towards discount expenses was Rs.17,92,82,676/-. For the remaining amount of discount expenditure, Ld.AO was not satisfied with the details filed by the assessee and he completed the assessment disallowing 15% of the total amount of discount and addition was made at Rs.4,61,80,960/-.

20. In the case of assessee M/s.VST Motor Ltd. for the AY 2011-12, the discount passed by M/s.Tata Motors Ltd., to the assessee for being further passed on to the customer’s amounts to Rs.3,251,70,846/-, but the discount debited in the P&L A/c is Rs.35,28,86,440/-. The AO noticed that the assessee has passed the additional amount of discount at Rs.2,77,15,594/-. The AO asked the assessee to explain with evidence the genuineness of the claim. However, for lack of sufficient evidences, Ld.AO disallowed the claim of discount expenditure at Rs.2,77,15,594/-.

21. As regards another assessee namely M/s.VST Auto Agency Ltd., for AY 2010-11, the disallowance has not been made towards discount expenditure, but Ld.AO examined the claim of vehicles sales expenses at Rs.1,64,96,450/-, but for lack of necessary details placed before Ld.AO disallowance @15% was made and sum of Rs.24,74,468/- was disallowed.

22. When the matter travelled before the Ld.CIT(A), the assessee namely M/s.VST Motor Ltd. is concerned, the disallowance made for the AYs 200-10 & 2011-12 was confirmed and for the AY 2010-11, the disallowance is deleted by the Ld.CIT(A). However, in the case of M/s.VST Auto Agency Ltd., disallowance has been confirmed by the Ld.CIT(A).

23. Aggrieved, both the assessee and Revenue in appeal before us against the findings of the Ld.CIT(A).

24. The Ld.Counsel for the assessee submitted that full ledger copies of the clients/customers were given. The invoice value offered as income and amount of discount offered by M/s.Tata Motors Ltd., reduced from sales/expenses. Ld.AO has doubted expenses like insurance incurred and actually paid by the assessee under discount scheme stated that difference between the cost and amount realized is the discount passed on to the clients. Reference was also made to the Paper Book dated 22.04.2022 containing the details of discount and for test check purpose some of the copies of tax invoice, debit note, bank receipt, cash receipt, bank payment credit notes were filed for FY 2009-10. It was further submitted that books of accounts of the assessee are duly audited. Ld.AO has not filed any discrepancy in such books and therefore, such ad hoc disallowance should be deleted. It was also submitted that for the AY 2010-11 similar disallowance has been deleted by the Ld.CIT(A) who has dealt the issue in detail and held that the assessee has maintained all necessary details to explain the said expenditure. On the other hand, the Ld.DR submitted that the assessee has failed to file proper details to prove the claim of discount expenditure and there is no proper and regular system for passing such discounts and even the assessee failed to file any confirmation for passing such huge discounts. It was also submitted that the discounts are normally passed on by the M/s.Tata Motors Ltd., to the assessee which is to be further passed on to its customers and to this extent, there is no dispute. However, for the discount passed, over and above, the amount received from M/s.Tata Motors Ltd., needs to be properly documented. Ld.AO is fair enough to make ad hoc disallowance and the same should be confirmed.

25. We have heard rival contentions and perused the materials and record placed before us. The common issue regarding disallowance of discount expenditure /vehicles sales expenses is raised before us by the assessee namely M/s.VST Motor Ltd., for the AYs 2009-10 & 2011-12 by another assessee M/s.VST Auto Agency Ltd., for the AY 2010-11 and by the Revenue in the case of M/s.VST Motor Ltd., for the AY 2010-11.

26. Though, the assessee has submitted that these are common issues, but we find that the said disallowance can be bifurcated into two categories (i) disallowance out of discount expenditure and, (ii) disallowance out of vehicle sales expenses.

27. So far as the first category of disallowance is concerned i.e. disallowance of discount expenses, the same has taken place only in the case of the assessee namely M/s.VST Motors Ltd. In this type of disallowance which is emanating out the discount expenses booked by the assessee for the AYs 2009-10 & 2010-11. Ld.AO made an ad hoc disallowance of 15% of the total amount of discount claimed by the assessee and for the AY 2011-12, Ld.AO disallowed only the amount of discount offered by the assessee in excess of the amount received by it from M/s.Tata Motors Ltd.

28. We notice that for the AYs 2009-10, 2010-11 & 2011-12, the amount of discount claimed as an expenditure i.e. netting off against the Revenue stood at Rs.24,03,79,590/-, Rs.30,78,73,067/- & Rs.35,28,86,440/-respectively.

29. It has been stated by the Ld.Counsel for the assessee that these discounts have been offered to the customers by way of credit notes. It is further submitted that the assessee sell the trucks and motor vehicles of M/s.Tata Motors Ltd., which is principal of the assessee. Goods are sold at the MRP fixed by the manufacture i.e. M/s.Tata Motors Ltd. Further, in order to promote the sales, various discount schemes for each model based on the market conditions are floated by the principal i.e. M/s.Tata Motors Ltd., and such discounts are offered by way of cash discount, accessory discount, additional accessories, insurance discount, loyalty scheme, exchange scheme, corporate scheme, etc. On one end, the principal charges the assessee with MRP of the vehicle and on the other hand, for the discounts offered by M/s.Tata Motors Ltd., the credit notes are given. Ld.AO while examining these details has commonly observed that the assessee has passed discount over and above the discount schemes offered by M/s.Tata Motors Ltd., and for such excess amount booked as an expenditure, assessee has unable to provide proper details. During the course of assessment proceedings, for the AY 2009-10, Ld.AO issued letters to some of the customers, but in some cases, there was no satisfactory reply. For better understanding, we will reproduce the contents of the replies given by some of the customers.

As the assessee has not maintained any evidence to substantiate the credit notes stated to be given to its clients, it is pertinent to note that the claim made by the assessee could not be considered favourably. Even though the assessee could not able to file the evidences, letters were sent to 200 numbers of the clients of the assessee asking them to file the evidences in the form of receipts for credit notes / discounts / cheque obtained from the assessee. Out; of this, 80 letters returned unserved and 120 letters served properly. But only 4 customers filed their letters along with ledger copies. Some of the letters were also sent to the clients who have received the credit note / discount through cheque from the assessee also not responded to the same. The replies of the customers who have responded is as follows:

30. Further, we notice that the assessee except filing the ledger copies has only mentioned the details about the discounts offered by way of giving cheque to the customers or by way of depositing the insurance on its behalf. The overall submission of the Ld.Counsel for the assessee, in this regard, can be summarized in the following manner:

(a) The assessee company stated clearly that the discount offered to the customers is nothing but corresponding discount offered by the manufacturer on their sale price either by ways of Scheme discount or by purchase invoice. In this case the manufacturer is Nl/s. Tata Motors Limited.

(b) The credit notes are passed in Schemes where discounts were announced by M/s.Tata Motors Ltd. (Manufacturer). These discounts are passed on to customer at the time of sale of vehicle by way of credit notes. The balance sum of sale value only collected from the customer. Later, these discounts got reimbursed by M/s.Tata Motors Ltd., upon furnishing all the documents and approvals. Passing of discounts by way of Credit notes is a procedural issue.

(c) The assessee company claims that discounts are passed on to the customers from year to year by following the same procedure of passing credit note separately and got reimbursed from the manufacturer up to assessment year 2011-12. From the Assessment Year 2012-13, the assessee-company started passing these discounts in the sale invoices itself. Passing of discounts by way of Credit notes is a procedural issue.

(d) Further, the assessee-company claims that some discounts are passed on to the customers from its portion of margin.

(e) Hence, the assessee-company claims that the discount passed are genuine.

31. Further, we notice that the AO was not satisfied with these submissions and made 15% ad hoc disallowance for the AYs 2009-10 & 2010-11. However, for the AY 2011-12, it was not ad hoc disallowance, but the excess discount offered by the assessee was disallowed in total. In the impugned order for the AY 2011-12, the Ld.CIT(A) has categoricallydealt with this issue by observing as follows:

The details filed by the assessee-company are carefully examined and the issue is decided as under:-

(i) The analysis of discounts reimbursed by M/s. Tata Motors Limited (Manufacturer) and the discount passed on to the customers, reveals that the assessee-company had accounted discounts passed on to the customers by way of credit notes over and above the discounts reimbursed by M/s. Tata Motors Limited. The details are extracted as under:

From the above, it is clear that the assessee company has passed on discount amount of Rs.2,77,15,594/- over and above the reimbursement by the Manufacturer.

(ii) Passing of discount from its margin to the customers is remote since the profit margin in this industry itself is very thin which is evident from Form-SCO report, i.e., 4.94% (Gross Profit/Turnover) and 0.55%(Net Profit/Turnover).

(iii) The assessee-company has not clearly proved in each and every case about the discount passed on to the customer from its profit margin.

(iv) The assessee-company admits its inability to furnish the confirmation from all the parties since the number of vehicles sold were huge.

(v) The assessee-company failed to take signatures from customers in all the cases at the time of sale in the said credit notes.

(vi) Considering the quantum of vehicles sold during the year (more than 21000) and the assessee-company’s inability to prove in each of the case where it had parted away its profit margin as discount to the customers, it is unlikely that the assessee-company could have passed such discounts out of its profit margin, over and above the reimbursement.

Under these circumstances, the assessee-company’s contention that it had passed on the discounts over and above what the Manufacturer, M/s. Tata Motors Limited had passed on to the assessee-company is not acceptable. Hence, this sum of Rs.2,77,15,594/- relating to discounts claimed by the assessee-company by way of Credit notes over and above the reimbursement is disallowed. (Disallowance: Rs.2,77,15,594/-)

From the above, it is clear that the assessee company has passed on discount amount of Rs.2,77,15,594/- over and above the reimbursement by the manufacturer.

Passing of discount from its margin to the customers is remote since the profit margin in this industry itself is very thin which is evidence from Form 3CD report, i.e. 4.94% (Gross Profit/Turnover) and 0.55% (Net profit/turnover).

The assessee-company has not clearly proved in each and every case about the discount passed on to the customer from its profit margin.

The assessee company admits its liability to furnish the confirmation from all the parties since the numbers of vehicles sold were huge.

The assessee company failed to take signatures from customers in all the cases at the time of sale in the said credit notes.

Considering the quantum of vehicles sold during the year (more than 21000) and the assessee’s company’s inability to prove in each of the case where it had parted away its profit margin as discount to the customers, it is unlikely that the assessee company could have passed such discounts out of its profits margin, over and above the reimbursement.

Under these circumstances, the assessee company’s contention that it had passed the discounts over and above what the manufacturer, M/s. Tata Motors Limited had passed on to the assessee-company is not acceptable. Hence, the sum of Rs.2,77,15,594/-relating to discounts claimed by the assessee company by way of credit notes over and above the reimbursement is disallowed.”

The AO has accordingly analyzed discount reimbursed by M/s. Tata Motors Limited and discount passed on to the customers and has given a clear finding that assessee company had accounted discounts passed on to the customers by way of credit notes over and above the discount reimbursed by M/s. Tata Motors Limited. From such analysis as given in detail in the assessment order the AO clarified that the assessee company has passed on to the discount of Rs.2,77,15,594/- over and above the reimbursement by manufacturer. The assessee company has such has not furnished the confirmation from the parties. That is to say the assessee company has clearly not proved in each and every case about discount passed on to the customers from its profits. Considering this specific finding the reliance on the appellant on case laws do not find any force in the assessee’s case, therefore, as the AO has disallowed the sum of Rs.2,77,15,594/- for want of evidences and during the appeal proceedings the appellant has not substantiated his contention with supporting evidences, therefore, disallowance made by the AO for the sum of Rs.2,77,15,594/- relating to discounts claimed over and above of reimbursement is confirmed. The ground of appeal is therefore not sustainable on facts, hence dismissed.

32. However, for the AY 2010-11, the Ld.CIT(A) has deleted the ad hoc disallowance made by Ld.AO and for coming to the conclusion, firstly he called for Remand Report from Ld.AO, which was not favourable to assessee and thereafter considering rebuttal filed by the assessee, the Ld.CIT(A) held that the assessee has furnished details of discounts given to 12543 customers and there is nothing on record to say that Ld.AO had made enquiries with each one of them or at least with some of them before he made this sweeping comment encompassing every customer.

33. So, on perusal of the findings of the Ld.CIT(A), in different assessment years, one in favour and another is against and also considering the enquiries called for by the AO from some customers, which did not give any favourable results confirming the quantum of discounts allowed by the assessee, we further move on to examine various details filed by the assessee in various Paper Books. Ongoing through these Paper Books, we notice that the some of the documents are relating to the policies of M/s.Tata Motors Ltd., regarding service schedule and other discounts related to offers which we are not doubting, since the company M/s.Tata Motors Ltd., on one hand, directs the assessee to book sales on MRP and on the other hand, direct the assessee to allow various types of discounts as discussed in preceding paras and only the net amount is charged from the assessee. Going through the details i.e. ledger account, cash receipts, details of payments made to various customers on account of discount, we notice that there is no straight jacket formula / method adopted by the assessee. In some ledger accounts, discounts are equivalent to the insurance amount. In some ledger accounts at some places cash is received against sale and this discount is given as a balancing figure to square up the ledger accounts. There is no confirmation of the customers on such ledger accounts. Though, it is claimed by the Ld.Counsel for the assessee that in the subsequent AYs 2014-15, 2015-16 & 2016-17, no such disallowance has been made, but on perusal of the P & L A/c filed by the assessee for FYs 2012-13, 2013-14 & 2014-15, which are not pertaining the year under appeal before us, but since the assessee has referred to the same, we notice that during FY 2011-12, the discount to customers is at Rs.42.36 Cr. and has been shown under the head ‘Revenue from operation’ and reduced from sale figure. But on the very same schedule, income from cash offtake discount has been shown at Rs.4.76 Cr. Similar type of expense head, has been shown for FYs 2012-13 & 2013-14. But during FY 2014-15, the P&L A/c for the previous year i.e. 2013-14 has been re-casted while framing financial statement for FY 2014-15. We observe that for FY 2013-14, discount of 23.34 Cr. was reduced from sale, but in FY 2014-15 for showing the figures of the preceding year, this discount of 33.34 Cr. is missing and it has been adjusted under other heads, also the cash and offtake discount figures has been changed. In other words, for FY 2014-15, the presentation of discount figures has been completely changed and only the net off discount passed on to the customers is shown as income. It is also noticed that major portion of the discount expenditure is the amount received from the principal i.e. M/s.Tata Motors Ltd., but the assessee has failed to prepare proper details of these discounts. The assessee is required to maintain the separate details for the discounts passed on behalf of M/s.Tata Motors Ltd., and the discount it offers from its own side i.e. from the gross profit margin. There is lack of such details. However, it is also not in dispute that the assessee maintains regular books of accounts which are duly audited and the same have not been rejected by Ld.AO. It is also pertinent to note that the amount of discount i.e. Rs.24.03 Cr. for the AY 2009-10, Rs.30.79 Cr. for AY 2010-11 & Rs.35.29 Cr. for the AY 2011-12 approx. almost accounts for 3% of the gross turnover. Considering the fact that gross margin of the assessee is around 5%, the discount amount is fairly large and proper documentation of such huge claim is necessary on the part of the assessee. We therefore under the given facts and circumstances of the case, being fair to both the parties considering the factual aspect of the cases and lack of proper details maintained by the assessee, but simultaneously considering that the ad hoc disallowance made by the AO is on much higher side for the AYs 2009-10 and 2010-11 & for 2011-12 disallowing the excess amount of discount passed to the customers over and above the amount received from M/s.Tata Motors Ltd., and also considering that almost 21000 vehicles are sold during the year, we direct the AO to sustain the disallowance @1% of the total discount amount shown by the assessee in the Revenue under the head ‘Revenue from operation’. To make it more clear, the disallowance of discount expenditure are sustained at the following amount:

34. We thus direct Ld.AO to sustain disallowance to the amount stated hereinabove for the AYs 2009-10, 2010-11 & 2011-12 and accordingly, this issue raised by the assessee for the AYs 2009-10 & 2011-12 and that by the Revenue, for the AY 2011-12 are partly allowed.

35. So far as the disallowance of vehicle sales expenses, in the case of another assessee namely M/s.VST Auto Agency Ltd., for the AY 2010-11, we notice that these are the normal vehicle sales expenses of Rs.1,64,96,450/- which were incurred during the year for selling vehicles. In this case also, the assessee failed to satisfy Ld.AO with necessary evidences, we therefore in order to end the dispute and being fair to both the parties sustaining the disallowance @2% of Rs.16,49,650/-. Thus, disallowance is sustained at Rs.3,29,930/-. The assessee gets part relief and the sole issue for the AY 2010-11 is partly allowed.

36. Now, we take the remaining issues raised in these bunch of appeals. In ITA No.969/Chny/2018 for the AY 2011-12, the assessee has raised the issue regarding disallowance u/s.14A of the Act, at Rs.5,49,107/-. It is claimed before us by the assessee that interest disallowance should not have been made as the assessee has sufficient own funds. However, for the disallowance u/s.14A of the Act r.w.r.8D(2)(iii) of the Income Tax Rules, 1962, @0.5%. the Ld.Counsel for the assessee accepted that the same, may be confirmed.

37. On the other hand, Ld.DR supported the order of the lower authorities.

38. We have heard rival contentions and considered the materials on record placed before us. We notice that the assessee earned exempt income of Rs.75.84 lakhs during the year and in the computation of income, a sum of Rs.60,000/- was disallowed suo moto u/r.8D of the IT Rules. Ld.AO, however, made disallowance at Rs.6,09,107/- which constituted two portions. Firstly, the interest disallowance at Rs.5,70,766/- and disallowance of Rs.39,041/- @0.5% on average investment. However, Ld.AO gone set off of Rs.60,000/- offered by the assessee and made disallowance of Rs.5,49,107/- u/s.14A of the Act. The assessee did not get any relief from the Ld.CIT(A).

39. So far as interest disallowance u/s.14A of the Act, is concerned, we notice that reserves & surplus of the assessee stood at Rs.32.15 Crs. whereas, investment as on 31.03.2010 are only at Rs.78.08 lakhs. It has been consistently held by the Hon’ble Courts that in case surplus funds available with the assessee in the form of capital and reserves & surplus are more than the investments fetching exempt income, then in the absence of nexus being established by Ld.AO that borrowed funds have been applied for the purpose of making investments in tax free funds, then it is to be presumed that interest free surplus funds available with the assessee have been applied for making such investments. Thus, we find no justification in the findings of Ld.AO making interest disallowance of Rs.5,70,066/- under Rule 8D(2)(ii) of the Income Tax Rules, 1962. Therefore, to this extent, the findings of the Ld.CIT(A) is reversed and the interest disallowance u/s.14A of the Act, is deleted.

40. So far as the remaining disallowance of Rs.39,041/- made u/r.8D(2)(iii) of the IT Rules, are concerned the Ld.Counsel for the assessee has not objected for sustaining of the said disallowance. We therefore, confirm the same and thus, in addition to the suo moto disallowance of Rs.60,000/- offered by the assessee in the computation of income, further disallowance of Rs.39,041/- is sustained. In the result, Ground No.2 raised by the assessee for the AY 2011-12 is partly allowed.

41. As regards, Ground No.4 raised by the assessee for AY 2011-12 is concerned, the same relates to disallowance u/s.40(a)(ia) of the Act, for non-deduction of TDS on sum of Rs.16,31,558/- paid by the assessee to M/s.Tata Motors Ltd., towards web enabled software which contains marketing related information.

42. At the outset, Ld.Counsel for the assessee requested for restoring this issue to AO, so that necessary details can be filed and evidence can be placed to prove that alleged sum has been offered to tax by the M/s.Tata Motors Ltd., in their regular return of income. To this request, Ld.DR did not oppose. We therefore under the given facts and circumstances of the case are of the view that since the alleged payment of Rs.16,31,588/- has been paid by the assessee to M/s.Tata Motors Ltd., towards professional and technical services for developing of web enabled software SIBIL for marketing related information, which in our view is payment for technical services and the same is subject to deduction of tax at source, however, since assessee has not deducted TDS and the amount has been adjusted in the overall accounting of other transactions of purchase of goods from M/s.Tata Motors Ltd., we restore this issue to the file of Ld.AO for carrying out necessary verification and examine the issue in the light of the documents to be placed by the assessee demonstrating that the alleged payment has been offered to tax by the recipients i.e. M/s.Tata Motors Ltd., and certificate to that effect from Chartered Accountant as per Rules prescribed under IT Rules needs to be procured. In case, the assessee is unable to file these details, Ld.AO can proceed in accordance with law. In the result, Ground No.4 is raised by the assessee for the AY 2011-12 is allowed for statistical purposes.

43. In the result, appeal filed by the assessee for the AY 2011-12 is partly allowed for statistical purposes.

44. As far as ITA No.19/Chny/2021 for the AY 2010-11 i.e. appeal filed by the Revenue and that of the assessee in the case of M/s.VST Auto Agency Ltd., for the AY 2010-11 as we have already dealt with these issues in the preceding paras while dealing with common ground relating to discount/vehicle selling expenses and partly allowed the said issue, therefore, the effective grounds raised in both the appeals are partly allowed.

45. All the remaining grounds in these bunch of appeals are general and consequential in nature, which need no adjudication

46. In the result, appeal filed by the assessee in ITA No.968/Chny/2018 and ITA No.970/Chny/2018 are partly allowed, appeal filed by the assessee in ITA No.969/Chny/2018 is partly allowed for statistical purposes and appeal filed by the Revenue in ITA No.19/Chny/2021 is partly allowed as per our terms indicated hereinabove.

Order pronounced on the 26^th day of April, 2023, in Chennai.