Case Law Details
ITAT MUMBAI BENCH ‘L’
Kansai Nerolac Paints Ltd.
Versus
Deputy Commissioner of Income-tax
IT Appeal No. 3858 (Mum.) of 2006
[ASSESSMENT YEAR 2002-03]
JANUARY 24, 2013
ORDER
P.M. Jagtap, Accountant Member
This appeal filed by the assessee is directed against the order of learned CIT(Appeals)-XXVI, Mumbai dated 14-03-2006.
2. The issue raised in ground No. 1 relates to the disallowance of Rs.1,47,422/- out of depreciation and disallowance of Rs. 1,40,479/- out of travelling, repairs, insurance expenses etc. pertaining to Kavesar factory of the assessee as made by the AO and sustained by the learned CIT(Appeals).
3. The assessee in the present case is a company which is engaged in the business of manufacturing of paints and varnishes. The return of income for the year under consideration was filed by it on 31-10-2002 declaring total income of Rs. 29,83,85,660/-. During the course of assessment proceedings, the AO noticed that the assessee company has discontinued its operation of pigment manufacturing at Kavesar factory and there was no activity of manufacturing carried out in the said factory. He, therefore, disallowed the expenses aggregating to Rs. 16,65,272/- incurred by the assessee in relation to Kavesar factory. Before the learned CIT(Appeals), it was submitted on behalf of the assessee that the factory at Kavesar was one of the several units of the assessee company and the business activities carried on at all these units was controlled from the head office at Lower Parel. It was contended that there being unity of control and management of finance as well as inter-lacing of funds and inter connection of all the business activities, mere discontinuation of one of the units did not amount to discontinuation of the business. Reliance in support of this contention was placed by the assessee on the decision of Hon’ble Supreme Court in the case Veecumsees v. CIT [1996] 220 ITR 185. Keeping in view the said decision of the Hon’ble Supreme Court as well as all the relevant facts of the assessee’s case, the learned CIT(Appeals) directed the AO to allow the expenses claimed by the assessee in respect of Kavesar unit under the head “Power, Fuel and Electricity expenses”, “Rent, Rates and Taxes” and “Watch and Ward expenses”. He, however, disallowed the other expenses claimed by the assessee in respect of Kavesar unit including the depreciation claimed by the assessee holding that the assets of the said unit were not utilized by the assessee for the purpose of its business. For this conclusion, he relied on the decision of his predecessor in assessee’s own case for the earlier years i.e. assessment years 2000-01 and 2001-02.
4. We have heard the arguments of both the sides on this issue and also perused the relevant material on record. It is observed that a similar issue has been decided by the Tribunal in assessee’s own case for the earlier years i.e. assessment years 2000-01 and 2001-02 by its order dated 22nd December, 2010 and 28th March, 2012 passed in ITA No. 6491/Mum/2004 and 2519/Mum/2005 respectively whereby a similar disallowance sustained by the learned CIT(Appeals) on account of depreciation and other expenses of Kavesar factory was deleted by the Tribunal accepting the alternative contention of the assessee that the expenses incurred to protect the business assets should be allowed as deduction as held by Hon’ble Bombay High Court in the case of Hindustan Chemical Works Ltd. v. CIT [1980] 124 ITR 561. It was also held by the Tribunal that the assets of Kavesar Unit having already entered the block of assets of the assessee, depreciation thereon could not be disallowed on the ground of non-user as the use of block of assets was to be considered and not the use of individual assets. Respectfully following the orders of the coordinate bench of this Tribunal on a similar issue in assessee’s own case for assessment years 2000-01 and 2001-02, we delete the disallowance partly sustained by the learned CIT(Appeals) on account of various expenses and depreciation in relation to Kavesar unit and allow ground No. 1 of the assessee’s appeal.
4.1 The issue raised in ground No.2 relates to the disallowance of Rs.14,70,263/- made by the AO and confirmed by the learned CIT(Appeals) on account of assessee’s claim for deduction u/s 35D.
5. The assessee had claimed a deduction of Rs.14,70,263/- u/s 35D being 1/10th of the expenses incurred in relation to the issue of right shares. Since the issue of right shares was not for public subscription, a similar deduction claimed by the assessee u/s 35D was disallowed in the assessments completed in the case of the assessee for the earlier years and following the same, the deduction claimed by the assessee u/s 35D was disallowed by the AO even in the year under consideration. The learned CIT(Appeals) confirmed the said disallowance following the decision of his predecessor in assessee’s own case for the earlier years.
6. We have heard the arguments of both the sides on this issue and also perused the relevant material on record. It is observed that the issue relating to assessee’s claim for deduction u/s 35D came up for consideration before the Tribunal in assessment year 1999-2000 and the same was decided by the Tribunal in favour of the assessee by its order dated 21-09-2006 passed in ITA No. 1330/Mum/2003 holding that the assessee was entitled to deduction u/s 35D. The issue, however, was restored by the Tribunal to the file of the AO for the purpose of quantifying the amount of deduction. As submitted by the learned counsel for the assessee, the AO has already quantified the amount eligible for deduction u/s 35D in assessment year 1999-2000 as per the direction of the Tribunal. We, therefore, direct the AO to allow the deduction claimed by the assessee u/s 35D for the year under consideration keeping in view the expenses eligible for such deduction as quantified by him in assessment year 1999-2000. Ground No. 2 of the assessee’s appeal is accordingly treated as allowed.
7. The issue raised in ground No. 3 relates to the disallowance of expenses made by the AO and confirmed by the learned CIT(Appeals) u/s 14A read with Rule 8D of Income-tax Rules, 1962.
8. During the year under consideration, the assessee had earned dividend income of Rs.3,58,40,888/- and interest on tax-free bonds of Rs.1,17,45,137/- and the said income was claimed to be exempt from tax. The expenses incurred in relation to the earning of the said income, however, were not disallowed by the AO as required by the provisions of section 14A of the Act. The AO, therefore, quantified such expenses at Rs. 83,20,659/- and made a disallowance to that extent u/s 14A. On appeal, the learned CIT(Appeals) confirmed the said disallowance.
9. After considering the rival submissions and perusing the relevant material on record, it is observed that a similar issue has been restored by the Tribunal to the file of the AO in assessment years 2000-01 and 2001-02 with a direction to quantify the expenses to be disallowed u/s 14A by adopting some reasonable method. Respectfully following the decision of the coordinate bench of this Tribunal in assessee’s own case for the earlier years, we restore this issue to the file of the AO with a direction to quantify the expenses to be disallowed u/s 14A by adopting some reasonable method as held by Hon’ble Bombay High Court in the case of Godrej Boyce Mfg. Co. Ltd. v. Dy. CIT [2010] 328 ITR 81. Ground No. 3 is accordingly treated as allowed for statistical purposes.
10. The next issue involved in ground No. 4 relates to the addition of Rs.1,16,44,298/- made by the AO on account of transfer pricing adjustment which has been partly sustained by the learned CIT(Appeals).
11. During the year under consideration, the assessee company had entered into two international transactions with its associate enterprise, namely, Kansai Paint Co. Ltd., Japan. One of the said two transactions involved a payment of royalty for use of technical knowhow by the assessee company to Kansai Paint Co. Ltd., Japan amounting to Rs.5,82,21,494/-. The said royalty was claimed to be paid for supply of technical knowhow as per agreement and the rate of royalty was stated to be 5% of domestic sales and 8% of export. Before the TPO, it was submitted by the assessee that apart from the related party, it had entered into agreements with other non related foreign parties for supply of technical knowhow and since the data relating to the said non related foreign parties was available, the comparable uncontrolled price (CUP) method was considered as the most appropriate method. It was pointed out that a royalty to E.I. Du Pont De Nemours and Co., USA (‘Dupont’ in short) for supply of technical knowhow was agreed to be paid at the rate of 3% on domestic sale and 8% of export sales while royalty to Oshima Japan for supply of technical knowhow was agreed to be paid at the rate of 5% on the domestic sales and at the rate of 8% on export. It was contended that keeping in view this rate of royalty paid to the non-related parties which represented internal CUP, the rate at which royalty was paid by the assessee to its AE, namely, Kansai Japan was at arm’s length calling for no adjustment on account of transfer pricing. The TPO examined all the relevant aspects relating to supply of technical knowhow to the assessee by the related party as well as non-related parties including the terms and conditions of the relevant technology agreements in grater details. On such examination, he found that royalty was paid by the assessee to the related as well as non-related parties only in respect of domestic sales and not exports. He, therefore, proceeded to compare the rate at which royalty was paid by the assessee to the related party and non-related parties on domestic sales. In this regard, he found that royalty for supply of technical knowhow in respect of domestic sales was paid by the assessee to the related party at 5% whereas similar payment of royalty was made by the assessee to the non-related parties on domestic sales to Dupont at the rate of 3% and to Oshima at the rate of 5%. Since the arithmetic mean of the royalty rates of the non-related parties of 3% and 5% worked out at 4%, he adopted the same as arm’s length rate of the royalty payable on domestic sales. He also noted in this regard that the company had paid royalty at the rate of 4% to Nihon Tokushu Toryo Co. Ltd. in the past. He also noted that Oshima Japan in addition to providing technology had given the right to use the trade mark of their product “PYROSIN” manufactured by using their technology and keeping in view that royalty upto 1% of domestic sales is allowed under automatic route as per Government policy for use of trade marks and brand name without technology transfer, he held that out of royalty payable by the assessee to Oshima, Japan at the rate of 5%, royalty at the rate of 1% was for use of trade marks and the balance payment of royalty at 4% was for supply of technical knowhow. Accordingly, arm’s length rate of royalty paid/payable by the assessee to its AE M/s Kansai Japan was taken by the TPO at 4% and since the arm’s length price of the royalty at the rate of 4% worked out to Rs.4,65,77,195/- as against Rs.5,82,21,494/- shown by the assessee, the required TP adjustment was worked out by him at Rs.1,16,44,298/- in the order dated 28-02-2005 passed u/s 92CA(3). As per the said order, addition was made by the AO to the total income of the assessee on account of TP adjustment in the assessment completed u/s 143(3) vide an order dated 07-03-2005.
12. The matter was carried before the learned CIT(Appeals) and it was submitted on behalf of the assessee before him that the technology availed from Kansai Japan and Oshima Japan for which royalty at the rate of 5% was paid, was meant to be used in auto and general industries whereas the technology availed from Depont USA was meant to be used only for Ford India Ltd. and its associate. It was also submitted that the finding given by the learned CIT(Appeals) in his impugned order that the assessee had paid royalty at the rate of 4% to Nihon Tokushu Toryo Ltd., Japan in the past was factually incorrect as the royalty to the said party was paid at the rate of 5%. It was further submitted that out of the royalty of 5% payable to Oshima, royalty at 1% was assumed by the TPO to be for use of trade mark called “PYORSIN” without verifying as to whether the assessee company has manufactured the said product or has merely imported the same from Oshima. It was contended that only the Oshima agreement was comparable with Kansai agreement and, therefore, royalty rate of 5% in Oshima’s agreement should have been regarded as an appropriate benchmark for determining the ALP of the royalty paid by the assessee to Kansai. Keeping in view all these submissions made by the assessee as well as the order passed by the TPO, the learned CIT(Appeals) held that it would be fair and reasonable to take 4.5% as arm’s length rate of the royalty and accordingly he directed the AO to recompute the arm’s length price of royalty paid by the assessee to its AE i.e. Kansai Japan and restricted the addition made on account of TP adjustment. Still aggrieved, the assessee has raised this issue in the present appeal filed before the Tribunal.
13. The learned counsel for the assessee submitted that the terms and conditions of supply of technology are different in case of non-related party Dupont and the associate enterprise of the assessee M/s Kansai Japan. She contended that the case of Dupont, therefore, was not a comparable case and there was no justification in taking the said case into consideration for comparability analysis.
14. The learned DR, on the other hand, submitted that the case of Dupont was taken by the assessee company itself as internal CUP for the comparability analysis and there is no justifiable reason for the learned counsel for the assessee to take a different stand now that the said case is not exactly comparable or similar to that of the assessee. He submitted that 4% rate of royalty was determined as the arm’s length rate by the TPO by adopting the same method i.e. CUP as adopted by the assessee and by following the procedure laid down in section 92CA as well as the relevant rules. He contended that the learned CIT(Appeals) has already allowed substantial relief to the assessee by taking the rate of 4.5% as the arm’s length rate of the royalty and there is no case of any more relief deserved by the assessee on this issue.
15. We have considered the rival submissions and also perused the relevant material on record. It is observed that CUP method was followed by the assessee to determine the arm’s length price of the royalty paid to its AE, namely, Kansai Japan on the ground that there being similar payment of royalty made to two unrelated parties, the internal CUPs are available. These two parties taken by the assessee were Oshima Japan and Dupont USA and since the royalty paid to them on domestic sales for supply of technical knowhow was 3% and 5%, the arithmetic mean of royalty rate was worked out by the TPO at 4% as per the relevant provision of section 92CA. In our opinion, the assessee himself having taken these two non-related parties as comparables in its TP study, it cannot now turn back and say that one of the parties is not comparable without giving any cogent or convincing reason. The only reason given by the assessee in this regard is that the use of technology availed from Dupont has restricted application. It is, however, observed from the relevant figures that the domestic sales generated by the assessee using the technology of Dupont is quite comparable with the domestic sales generated from the use of technology of its AE Kansai Japan. There is thus no merit in the stand of the assessee that Depont is not a comparable case with Kansai Japan.
It is also observed that the rate of 4% taken by the TPO as arm’s length rate of royalty has also been justified/supported by him by pointing out that the royalty of 5% paid to Oshima Japan was also for use of a particular trade mark of that company to which he attributed the royalty payment to the extent of 1% on the basis of Government policy of automatic route. In this regard, the learned counsel for the assessee has submitted that the learned CIT(Appeals) never verified as to whether any product with the said trade mark was actually manufactured by the assessee or the same was simply imported by it from Oshima Japan. In our opinion, this factor is irrelevant in the present context because use of trade mark was undoubtedly allowed by Oshima Japan to the assessee along with supply of technology for a royalty payment of 5% of domestic sales and irrespective of whether the assessee had manufactured the goods with the said trade mark or not, it was entitled to do so on payment of royalty at the rate of 5% as agreed between the parties. As such, considering all the facts of the case, we find that there is nothing brought on record before us to point out any infirmity in the rate of 4% determined by the AO/TPO as arm’s length rate of royalty paid/payable by the assessee to its associate enterprise M/s Kansai Japan and since the learned CIT(Appeals) has already allowed a further relief to the assessee by revising the said rate upwardly at 4.5% holding the same to be fair and reasonable without giving any basis as required by the provisions of section 92CA as well as the relevant rules, we find merit in the contention of the learned DR that no further relief is warranted on this issue as claimed by the assessee in ground No. 4 of this appeal. We, therefore, find no merit in the said ground and dismiss the same.
16. The next issue involved in ground No. 5 relates to the computation of deduction u/s 80HHC and the assessee has challenged the action of the authorities below in this regard in including sale of raw materials amounting to Rs.1,05,39,715/- in the total turnover and exclusion of 90% of insurance claims, sales-tax refund, interest and lease rental receipts from the profits of the business while calculating the deduction u/s 80HHC.
17. At the time of hearing before us, the learned representatives of both the sides have agreed that both the aspects of the matter relating to computation of deduction u/s 80HHC as raised in ground No. 5 are covered against the assessee by the orders of the Tribunal in assessee’s own case for the earlier years i.e. assessment years 2000-01 and 2001-02. As held by the Tribunal in the said orders following the decision of Hon’ble Supreme Court in the case of CIT v. K. Ravindranath Nair [2007] 295 ITR 228, 90% of other income such as, insurance claim, interest, rent etc. was liable to be excluded from the profits of the business while computing deduction u/s 80HHC. As further held by the Tribunal, the amount of sale of raw material was liable to be included in the total turnover of the assessee for the purpose of computation of deduction u/s 80HHC as per the formula given in the statute. Respectfully following the decision of the coordinate bench of this Tribunal on the similar issues in assessment years 2000-01 and 2001-02, we uphold the impugned order of the learned CIT(Appeals) for assessment year 2002-03 on these issues and dismiss ground No. 5 of the assessee’s appeal.
18. The next issue involved in ground No. 6 relates to the disallowance of interest amounting to Rs.10,47,375/- made by the AO and confirmed by the learned CIT(Appeals).
19. During the year under consideration, the assessee company had paid total interest of Rs.3,72,92,846/- on the loans taken from bank as well as on fixed deposits received from public and the same was claimed as deduction. During the course of assessment proceedings, the AO noticed that investment of Rs.85,50,000/- was made by the assessee in the shares of its subsidiary companies for acquiring the controlling interest. According to the AO, the said investment was not made by the assessee company for the purpose of its business and there was thus diversion of borrowed funds for non-business purpose. He, therefore, disallowed proportionate interest expenses attributable to the said investment as worked out by him at Rs.10,47,375/-. Before the learned CIT(Appeals), the assessee submitted that the investment in the shares of its subsidiary companies having been made out of its own funds as well as interest free funds, disallowance out of interest as made by the AO was not justified. According to the learned CIT(Appeals), this submission of the assessee, however, could not be established/verified as the assessee was maintaining common pool of funds. He, therefore, confirmed the disallowance made by the AO out of interest.
20. We have heard the arguments of both the sides on this issue and also perused the relevant material on record. It is observed that a similar issue was involved in assessee’s own case for the immediately preceding year i.e. assessment year 2001-02 and the Tribunal vide its order dated 28th March, 2012 (supra) deleted the disallowance made on account of interest holding that the assessee had sufficient interest free funds at the relevant time to make investment in the shares of its subsidiary company. The Tribunal in this regard relied on the decision of Hon’ble Bombay High Court in the case of CIT Vs. Reliance Utilities & Power Ltd. [2009] 313 ITR 340 wherein it was held that in the case involving common funds, there is a presumption that the investments are made from non interest bearing funds. Respectfully following the decision of the coordinate bench of this Tribunal in assessee’s own case for assessment year 2001-02 on a similar issue, we delete the disallowance made by the AO and confirmed by the learned CIT(Appeals) and allow ground No. 6 of the assessee’s appeal.
21. In the result, the appeal of the assessee is partly allowed.
