The DCIT, Central Circle-2, Vadodara V. M/s. HK Ispat Pvt. Ltd., Godhra

ITA 188/AHD/2021

AI Insights

The case involves an appeal by the Deputy Commissioner of Income Tax against M/s. H.K. Ispat Pvt. Ltd. concerning transfer pricing adjustments and other tax-related issues for the assessment year 2014-15. The primary contention was about the adjustment of Rs.2,05,23,752 on account of the purchase of MS ingots from an associated enterprise, which the CIT(Appeals) had deleted. The Tribunal also addressed issues related to the disallowance of depreciation on expenses for increasing authorized capital and the taxation of interest income. The Tribunal's decision focused on the qualitative differences in the products involved and the appropriate accounting treatment of capitalized expenses.

• Counselvise Citation: [2023] 140 COUNSELVISE.COM (IT) 131521 (ITAT-AHMEDABAD)
• Duration Of Justice: 1 year(s) 7 month(s) 13 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 13-03-2023
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: D
• Next Hearing Date: 12-02-2023
• Assessment Year: 2014-2015
• Appeal Filed On: 29-07-2021
• Other Referred Cases: International Computers Indian Manufacture Ltd. vs. CIT, Autolite India Ltd vs CIT, CIT vs Mahindra Ugine and Steel Co Ltd
• Laws Referred To: Income Tax Act
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Depreciation; Transfer pricing; Revenue expenditure; Set aside; FORM 26AS
• Section: 143(3); 264

Judgement Text

THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD “D” BENCH Before: Shri Waseem Ahmed, Accountant Member And Shri Siddhartha Nautiyal, Judicial Member Deputy Commissi oner of In co me Tax, Central Circle-2 , 608, 6 t h Flo or, Aaykar Bhav an, Race Cou rse Circle, Vadodara-3 90007 (Appellant) Vs M/s. H. K. Ispat Pv t. Ltd. R. S. No. 3 80, Vejalpur Road, Village-Chikhod ra, Go dhra-389 009 PAN: AACCH096 6K (Resp ondent) M/s. H. K. Isp at Pvt. Ltd. R. S. No. 380, Vejalpur Ro ad, Village-Chikho dra, God hra-389009 PAN: AACC H0966K (Appellant) Vs Deputy Co mmis sioner of Inco me Tax, Central Circle-2, 608, 6 t h Floor, Aaykar Bhavan, Race Course Circle, Vadodara-3900 07 (Resp ondent) Asses see b y : Shri Dhrun al Bha tt, A.R. Revenue by : Shri Umesh Sinha, S r. D. R. ITA No. 188/Ahd/2021 Assessment Year 2014-15 Cross Objection No. 29/Ahd/2021 (In ITA No. 188/Ahd/2021) Assessment Year 2014-15 I.T.A No. 188 & CO No. 29/Ahd/2021 A.Y. 2014-15 Page No. DCIT vs. M/s. H.K. Ispat Pvt. Ltd. 2 Date of hearing : 13-02 -2 023 Date of pronouncement : 14-03 -2 023 आदेश /ORDER PER : SIDDHARTHA NAUTIYAL, JUDICIAL MEMBER:- The appeal filed by Revenue and Cross Objection filed by the assessee are against the order of the ld. Commissioner of Income Tax (Appeals)-13, Ahmedabad vide order dated 02/03/2021 passed for the assessment year 2014-15. 2. The Department has taken the following grounds of appeal: “1. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in deleting the adjustment/addition of Rs.2,05,23,752/- on account of purchase of MS Ingots. 2. On the facts and in the circumstances of the case and in law, the Id. CIT(A) has erred in allowing quality adjustment to the assessee without appreciating the finding of the TPO that, no evidence, to substantiate that the sale to Non- AE of up to 12% of production in January-2014 was sale of scrap alone, was furnished by the assessee company during transfer pricing proceeding. 3. On the facts and in the circumstances of the cases and in law, the Ld.CIT(A) has erred in observing that no addition on account of sales made to appellant or un-related parties were made without appreciating the fact that the issue under dispute was not quantity of stock but the nature of quality of material sold to Non-AE which was considered as comparable. I.T.A No. 188 & CO No. 29/Ahd/2021 A.Y. 2014-15 Page No. DCIT vs. M/s. H.K. Ispat Pvt. Ltd. 3 4. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in holding that no discrepancies or other material evidences were brought on record which can prove that contentions of the appellant regarding quality difference were incorrect without appreciating the fact that the TPO has clearly stated that no evidence to substantiate that the sales to Non-AE of up to 12% of production in January-2014 was sale of scrap alone was furnished by the assessee company during transfer pricing proceeding. 5 It is, therefore, prayed that the order the Ld. CIT(A)- 13.Ahmedabad may be set aside and that of the AO may be restored to the above extent. 6. The appellant craves leave to add, alter, amend and/or withdraw any round(s) of appeal either before or during the course of hearing of the appeal.” 3. The assessee has taken the following grounds of appeal: “1 In law and in the facts and circumstances of the case, the learned CIT (Appeals) has erred in directing the AO to disallow depreciation on the amount of expenses for increase in authorised capital 1.1 Assessing Officer ought to have appreciated that such expenses are incurred prior to commencement of business and hence the Appellant has justifiably capitalized the same as part of cost of assets and, thus, the same cannot be ignored from cost of assets for the purpose of depreciation. 2 In law and in the facts and circumstances of the case, the learned CIT (Appeals) has erred in not deleting the addition of Rs.2,16,920 made by the AO on account of interest on the basis of Form 26AS offered for tax in subsequent year. I.T.A No. 188 & CO No. 29/Ahd/2021 A.Y. 2014-15 Page No. DCIT vs. M/s. H.K. Ispat Pvt. Ltd. 4 2.1 The addition result into double taxation. The leaned CIT (Appeals) ought to have appreciated that rate of tax in Appellant's case is same in the two years and, thus, there is no loss of revenue in the facts of the case and hence the addition ought to have been deleted. 3. The Appellant craves leaves to add, to amend or alter any of the ground, as maybe necessary.” We shall first discuss the department’s grounds of appeal. 4. However at the outset, we observe that the appeal filed is barred by limitation and there is a period of 21 days delay in filing of the appeal by the Department. However, it has been brought to our notice that the period of delay is covered by the Covid pandemic, and therefore looking into the above facts, the minor delay of 21 days period in filing of the instant appeal is hereby being condoned. 5. On merits, we observe that the Department has primarily taken one Ground of Appeal which is regard to Ld. CIT(Appeals) deleting the adjustment/addition of 2,05,23,752/ - on account of purchase of MS ingots. Ground number 1-5: deletion of adjustment/addition of 2,05,23,752/- on account of purchase of MS ingots 6. The brief facts in relation to this ground of appeal are that the assessee company had commenced its operations during the year under consideration and was engaged in the business of manufacturing of TMT bars. The I.T.A No. 188 & CO No. 29/Ahd/2021 A.Y. 2014-15 Page No. DCIT vs. M/s. H.K. Ispat Pvt. Ltd. 5 assessee purchased mild steel (MS) ingots from its associated Enterprise (AE) KSL and such transaction was reported in Form 3CEB. The assessee had adopted CUP Method while benchmarking these transactions. During the course of transfer pricing assessment, the TPO noted that the AE was charging higher price from the assessee than prices charged by it from non- related parties. The assessee submitted before the TPO that material purchased by it from its AE was of a different quality as compared to the sales made by the AE to non-related parties. The argument of assessee was partially accepted by the AO for the purchases made by the assessee in the months of December 2013, February 2014 and March 2014. The AO disputed purchases made only for the month of January 2014 on the ground that the sales made by AE’s to non-related parties was 12.31% and such percentage was significantly higher in comparison with other months. Accordingly, the AO made a downward adjustment of purchases made from the AE by 2,05,23,752/-. 7. The assessee filed appeal before Ld. CIT(Appeals) who allowed the appeal of the assessee on the ground that the assessee submitted confirmation from third parties, who purchased MS ingots from the AE of the assessee and they stated that the reason behind variation in prices are on account of high content of carbon and random size of MS ingots. The Ld. CIT(Appeals) observed that the details submitted by the assessee clearly proves that non-related parties who made purchases from the AO are not in the business of manufacture of TMT bars whereas assessee is in the business of manufacture of TMT bars. Therefore, there was a qualitative difference between the sales made by the AE to non-related parties as compared to the I.T.A No. 188 & CO No. 29/Ahd/2021 A.Y. 2014-15 Page No. DCIT vs. M/s. H.K. Ispat Pvt. Ltd. 6 assessee. The assessee also submitted factory test reports from independent laboratories to substantiate that there was a substantial difference between the quality of products sold by the AE to non-related parties and those sold by the AE to the assessee. Accordingly, the Ld. CIT(Appeals) allowed the appeal of the assessee on this ground with the following observations: “3.3.1 It is observed that the appellant has mainly contended that KSL has sold superior quality of MS Ingots to the appellant as against inferior quality supplied to non-related parties. As stated herein above, this explanation of appellant was accepted by the AO in three months and the AO disputed purchase price only for January 2014. During the course of assessment proceedings, the appellant has explained manufacturing process of TMT Bars as well as MS Ingots manufactured by the AE which is not disputed by the TPO. So far as difference in quality of goods and .scrap material sold to non-related parties by the AE in comparison with proper MS Ingots sold to the appellant, the appellant in its written submission filed before the AO has submitted confirmation and purchase orders from all the parties who have purchased material from the AE at lower price. In the confirmation submitted by the third parties, it is clearly stated that reason behind variation in prices are mainly on account of high content of carbon and random size of MS ingots. The appellant in its written submission dated 16 th August, 2017 has also explained usage of such material by third party. The appellant has also explained end use of the product being mild steel ingots and TMT bars. These details clearly prove that non-related parties who have purchased goods from the AE are not in the business of manufacture of TMT bars whereas appellant is in the business of manufacture of TMT Bars. The appellant has also submitted chemical analysis report for goods sold by KSL to non-related parties and the appellant in support of its claim that there was qualitative difference between such sales and such facts are not disputed by AO. The appellant has also submitted factory testing report from M/s. Geomin Laboratories to substantiate the quality of their products. These facts are accepted by AO in the order and no discrepancies or other material evidences were brought on record which can prove that contentions of the appellant regarding I.T.A No. 188 & CO No. 29/Ahd/2021 A.Y. 2014-15 Page No. DCIT vs. M/s. H.K. Ispat Pvt. Ltd. 7 quality difference were incorrect. When the AE is selling goods to non-related parties, such parties are confirming quality of the material., the appellant establishing the fact that non-related parties are purchasing scrap quality product from KSL, the TPO was not justified in not accepting purchase price only in one month only by comparing sales made by KSL to the appellant and KSL to non- related parties. The copies of relevant bills and other evidences, as discussed herein, above for the month of January 2014 are similar with details of other months and there being no other material on record which can prove evidences submitted by appellant are not reliable, downward adjustment made by the TPO cannot be sustained. 3.3.2 It is observed that during the course of assessment proceedings, the appellant has also submitted certificate from M/s. Steel Tech Engineers & Consultants along with statement of party wise chemical proportion with physical properties and remarks describing the chemical proportion as mentioned in the chemical analysis report. As per such report sub-standard ingots are sold at discounted value. These material evidences were also on record of the AO and not found to be incorrect. It is observed that the appellant has also explained how change in chemical portion of carbon, manganese and silicon or change in size of MS Ingots make fluctuation in rate of product and such evidences are not found to be incorrect by the TPO. 3.3.4 It is pertinent to note that the assessment order in the case of the AE was passed under Section 143(3) of the Act on 15 September 2016 wherein no addition on account of sales made to appellant or un- related parties were made. During the course of assessment proceedings appellant has also submitted month wise production register of the AE to prove that the stock was piled and same was sold gradually from December 2013 to March 2014 It is observed that the quantity sold to third party during the period of four months was only 3 by the AE. These details are not found to be incorrect either in the assessment proceedings of the AE or by the TPO. It is observed that no such adjustment is made in subsequent years while passing the transfer pricing orders. There is no material difference in nature of transactions in the months which are extracted by the TPO in comparison with transactions made January 2014. These I.T.A No. 188 & CO No. 29/Ahd/2021 A.Y. 2014-15 Page No. DCIT vs. M/s. H.K. Ispat Pvt. Ltd. 8 circumstantial details also support the contention of the appellant that the purchases are made at prevailing market rates, there was quality difference in goods purchased by the appellant from its AE and the goods sold by the AE to non related parties. 3.3.5 Considering the above facts and on the basis of evidences on record it is observed that the AO has not got any materially relevant evidences to prove that the transactions made in the month of January 2014 are different than the transactions made in remaining three months. On the contrary the appellant has brought sufficient evidences on record to prove that there a qualitative difference in the goods sold by the AE to the appellant. As a word of caution, it may be a practice in steel industry to make products of non standard sizes and non standard specifications Le different from the ISI/BIS) without there being any significantly change in subsequent manufacturing and utility of the finished goods leading to sale at the rates lower than the market rates, I am of the considered view that still there would not be a case of doubting the transactions and making adjustment on account of arm’s length pricing (ALP). In view of the circumstances in the case under consideration, the downward adjustments made by the TPO for Rs. 2,05,23,753/- is found not sustainable and is directed to be deleted. The related ground of appeal is allowed.” 8. The Department is in appeal before us against the order passed by Ld. CIT(Appeals) deleting the additions made on account of downward adjustment of purchase price of MS ingots purchased by the assessee from its AE for the month of January 2014. Before us, the DR primarily relied on the observations made by the TPO/AO in the assessment order. In response, the assessee primarily reiterated the submissions made before Ld. CIT(Appeals) and also filed copy of written submissions for our perusal. We observe that Ld. CIT(Appeals) gave relief to the assessee primarily on the ground that assessee had submitted confirmation by third parties which attributed the price difference to variation in carbon content and random size I.T.A No. 188 & CO No. 29/Ahd/2021 A.Y. 2014-15 Page No. DCIT vs. M/s. H.K. Ispat Pvt. Ltd. 9 of MS ingots purchased by the third parties from its AE as compared to products purchased by the assessee from its AE of the assessee company. The end use of the assessee was different from the products sold to other third parties since the assessee was manufacturer of TMT bars and hence there was qualitative difference between the two products. While the TPO had accepted the purchase price for other months, he had issue only with for the month of January 2014, which was not acceptable in the instant set of facts. Further, the AO has not disputed the evidences produced on record. Accordingly, Ld. CIT(Appeals) gave relief to the assessee in light of the aforesaid observations made in the appellate order. Further, counsel for the assessee also submitted before us that both the assessee and the AE pay tax at the same tax rates under MAT and therefore there was no motive to purchase/sell material at higher/lower rate. Accordingly, in the instant facts, Ld. CIT(Appeals) has correctly deleted the additions against the assessee on this issue. 9. We have heard the rival contentions and perused the material on record. In our considered view, we find no infirmity in the order of Ld. CIT(Appeals) in the instant set of facts. The Ld. CIT(Appeals) has categorically observed that there is a qualitative difference between the MS ingots sold by the AE to the assessee as compared to those sold by the AE to third parties. Further, the assessee has been able to produce substantial evidence to prove that the difference in prices is due to the quality of products sold. Further, the TPO has accepted the contention of the assessee for the months of December 2013, February 2014 and March 2014 and the TPO has not made any addition, and TPO has made addition only for the I.T.A No. 188 & CO No. 29/Ahd/2021 A.Y. 2014-15 Page No. DCIT vs. M/s. H.K. Ispat Pvt. Ltd. 10 month of January 2014 and that too only on the basis that during the month of January 2014 sales made by the AE to third parties were significantly higher as compared to other months, and therefore, there is in our view no rationale in making the adjustment only for the month of January 2014. Accordingly, we find no infirmity in the order of Ld. CIT(Appeals),who after detailed discussion in the order, has deleted the adjustment made by the TPO on this issue. 10. In the result, the appeal of the Department is dismissed. Now we shall take up the assessee’s cross appeal. Grounds Number 1: Depreciation on expenses incurred for increase in share capital for 5,24,023/- 11. The brief facts in relation to this ground of appeal are that the assessee incurred expenditure of 5,24,023/- in connection with the increase in authorised capital. The assessee claimed that such expenditure was incurred prior to commencement of commercial production and same was transferred to asset account along with the financial charges. The claim was not accepted by the AO on the ground that once expenditure is capitalised, the depreciation would be indefinitely claimed by the assessee which would result into charge on taxable profit every year. According to the AO, the methodology adopted by the assessee was not in consonance with the provisions of the Act as the assessee was required to charge such expenditure as revenue expenditure and the A.O. disallowed such I.T.A No. 188 & CO No. 29/Ahd/2021 A.Y. 2014-15 Page No. DCIT vs. M/s. H.K. Ispat Pvt. Ltd. 11 expenditure while computing taxable income. Accordingly, the AO made addition of 5,24,023/ -. 12. In appeal, the Ld. CIT(Appeals) partly allowed the assessee’s appeal by holding that the AO cannot compel the assessee to complete such expenditure as revenue expenditure and thereby make disallowance, when the assessee had capitalised expenditure in its books of accounts. However, since the assessee admitted that such expenditure was treated as part of fixed assets and depreciation has been claimed of such expenditure, since expenditure is not allowed as revenue expenditure on increase in authorized capital, the assessee cannot claim such expenditure by capitalising the same and claiming depreciation thereon. While passing the order, Ld. CIT(Appeals) made the following observations: “DECISION: 4.2. The submission of the appellant is considered. On careful consideration of the findings given by the AO in the assessment order and the submissions filed by the appellant, it is observed that the AO has not disputed the fact that expenditure towards increase in the authorised capital was not claimed as revenue expenditure. Once the expenditure is not claimed as revenue expenditure, the AO cannot compel the appellant to treat such expenditure as revenue expenditure and thereby make disallowance. On this basis, the disallowance of expenditure made by AO is required to be deleted. However, the appellant has admitted that such expenditure was treated as part of fixed asset and consequently depreciation has been claimed on such expenditure. Once an expenditure is not allowable as revenue expenditure itself, same cannot be claimed as .part, of depreciation. Oh this basis, the depreciation claimed on above expenditure of Rs. 5,24,203 is directed to be disallowed while giving effect to this order. This ground of appeal is partly allowed.” I.T.A No. 188 & CO No. 29/Ahd/2021 A.Y. 2014-15 Page No. DCIT vs. M/s. H.K. Ispat Pvt. Ltd. 12 13. The assessee is in appeal before us against the aforesaid addition confirmed by Ld. CIT(Appeals). In the case of International Computers Indian Manufacture Ltd.[2015] 56 taxmann.com 151 (Bombay), the Bombay High Court held that Depreciation is not allowable on capitalised expenditure on issue of shares; such expenditure would fall within provision of section 35D. Similar view was held in the cases of Autolite India Ltd Vs CIT 264 ITR 117 and CIT Vs Mahindra Ugine and Steel Co Ltd (2001) 250 ITR 84 (Bom) where the Courts have denied depreciation on such expenses which were capitalised. Accordingly, we find no infirmity in the order of Ld. CIT(Appeals) on this issue so as to call for any interference. 14. In the result, ground number 1 of the assessee’s appeal is dismissed. Ground number 2: addition of 2,16,920/- on account of interest on the basis of Form 26AS offered to tax in subsequent year 15. The brief facts in relation to this ground of appeal are that assessee received interest income of 2,16,920/- which was not offered to tax in the return of income. During the course of assessment proceedings, the assessee agreed for such additions and additions were made by the AO. In appeal before Ld. CIT(Appeals), the assessee took the alternative contention that since interest income has been offered to tax in the subsequent year i.e. assessment year 2015-16, it would amount to double taxation in case this interest income is taxed in assessment year 2014-15 as well. Ld. CIT(Appeals) dismissed the appeal of the assessee with respect to this ground on the basis that since the assessee is following mercantile system of I.T.A No. 188 & CO No. 29/Ahd/2021 A.Y. 2014-15 Page No. DCIT vs. M/s. H.K. Ispat Pvt. Ltd. 13 accounting, interest income is required to be taxed on accrual and hence it cannot be accepted that it should not be subject to tax in assessment it 2014- 15 simply on the basis that assessee has offered the same to tax in the subsequent year. The Ld. CIT(Appeals) while dismissing the assessee’s appeal observed as below: “DECISION: 6.2 The submission is considered. On careful consideration of the findings given by the AO in the assessment order and the submissions filed by the appellant, it is observed that the AO has made addition of interest income on the ground that the appellant has not offered such amount for taxation even though same was reflected in form 26AS. As the appellant has already agreed for this addition before the AO, same is upheld. So far as claim of appellant that such amount is already offered to tax in subsequent year, it is observed that such claim was not made before the AO, As the appellant is following mercantile system of accounting, interest income is required to be taxed on accrual basis hence the contentions of the appellant that such amount 'was offered to tax in subsequent year, cannot be the reason for not making addition in current year. The appellant can seek appropriate remedy as per the provisions of the Act in subsequent year on the ground that above amount is already subject matter of addition in current year. Subject to this observation, the addition is confirmed and this ground of appeal is rejected.” 16. We are in agreement with the view of the Ld. CIT(Appeals) that since the assessee follows mercantile system of accounting, this interest income should have been offered to tax in assessment year 2014-15 as well. However, in the interest of justice, once this interest income is subject to tax in assessment year 2014-15, then consequential relief may be allowed to the assessee by the Revenue if the said interest income has been offered to tax I.T.A No. 188 & CO No. 29/Ahd/2021 A.Y. 2014-15 Page No. DCIT vs. M/s. H.K. Ispat Pvt. Ltd. 14 by the assessee in assessment year 2015-16, after carrying out the necessary verifications. 17. In the result, ground number 2 of the assessee’s appeal is partly allowed. 18. In the combined result, the appeal of the Department is dismissed and the cross objection of the assessee is partly allowed. Order pronounced in the open court on 14-03-2023 Sd/- Sd/- (WASEEM AHMED) (SIDDHARTHA NAUTIYAL) ACCOUNTANT MEMBER JUDICIAL MEMBER Ahmedabad : Dated 14/03/2023 आदेश क त ल प अ े षत / Copy of Order Forwarded to:- 1. Assessee 2. Revenue 3. Concerned CIT 4. CIT (A) 5. DR, ITAT, Ahmedabad 6. Guard file. By order/ आदेश से, उप/सहायक पंजीकार आयकर अपील य अ धकरण, अहमदाबाद