Titan Industries Limited, Hosur V. JCIT, CHENNAI

ITA 2239/CHNY/2012

• Counselvise Citation: [2022] 106 COUNSELVISE.COM (IT) 8830 (ITAT-CHENNAI)
• Duration Of Justice: 9 year(s) 8 month(s) 29 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 08-09-2022
• Appeal Filed By: Assessee
• Order Result: PartlyAllowed
• Bench Allotted: D
• Assessment Year: 2008-2009
• Appeal Filed On: 10-12-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Business income; Depreciation; Transfer pricing; Business expenditure; International transaction; Earning of tax free income; Additional evidence; Notional interest; Revenue expenditure; Capital expenditure; TDS
• Section: 143(3); 92A; 234B; 14A; 144C; 80IC; 80IC

Judgement Text

आयकर अपीलीय अिधकरण ‘डी’ Ɋायपीठ चेɄई मŐ। IN THE INCOME TAX APPELLATE TRIBUNAL ‘D’ BENCH, CHENNAI माननीय ŵी महावीर िसंह, उपाȯƗ एवं माननीय ŵी मनोज कु मार अŤवाल ,लेखा सद˟ के समƗ। BEFORE HON’BLE SHRI MAHAVIR SINGH, VICE PRESIDENT AND HON’BLE SHRI MANOJ KUMAR AGGARWAL, AM आयकर अपील सं./ ITA No.2239/Chny/2012 (िनधाŊरण वषŊ / Assessment Year: 2008-09) Titan Company Ltd. (earlier Titan Industries Ltd) Number 3, SIPCOT Industrial Complex, Hosur, Krishnagiri (TN) -635 126. बनाम/ Vs. JCIT, Range-III, Chennai. ̾थायी लेखा सं./जीआइ आर सं./PAN/GIR No. AAACT-5131-A (अपीलाथŎ/Appellant) : (ŮȑथŎ / Respondent) अपीलाथŎ की ओरसे/ Appellant by : Shri T. Suryanarayana (Sr. Advocate) for Ms. Manasa Ananthan (Advocate) - Ld. ARs ŮȑथŎ की ओरसे/Respondent by : Dr. S. Palani Kumar (CIT) –Ld. DR सुनवाई की तारीख/Date of Hearing : 22-06-2022 घोषणा की तारीख /Date of Pronouncement : 09-09-2022 आदेश / O R D E R Manoj Kumar Aggarwal (Accountant Member) 1. Aforesaid appeal by assessee for Assessment Year (AY) 2008-09 arises out of the final assessment order dated 15-10-2012 passed by Joint Commissioner of Income Tax, Company Range-III, Chennai (AO) u/s. 143(3) r.w.s. 144C of the Act pursuant to the directions of Ld. Disputes Resolution Panel, Chennai [DRP] dated 21-08-2012. The order by Ld. Transfer Pricing Officer (TPO) was passed on 31.10.2011, ITA No.2239/Chny/2012 - 2 - the proposal of which was incorporated in the draft assessment order dated 27.12.2011. The grounds raised by the assessee read as under: A. Transfer Pricing (Ground 1): The learned Assessing Officer ("AO") has grossly erred in facts and law in upholding the positions taken by the Transfer Pricing Officer ("TPO") in making an adjustment of Rs.55,246,168/, with respect to the imputed cost of interest on interest advances provided by the Appellant and in determining arm's length royalty receipts from affiliates and unrelated third parties under the Income Tax Act, 1961 (the and thereby grossly erred; a. In bringing within the ambit of tax hypothetical income as against real income; b. In not distinguishing between a loan and an advance and thereby not appreciating the facts specific to this case; c. In neglecting the fact that the trade advances granted is by no means a departure from the general practice followed uniformly across all industries wherein regular grants of such advances are made for expenses incurred by one company behalf of another within an MNE group; d. In classifying the non-associated enterprises as deemed associated enterprise without analyzing the evidence and documents provided to substantiate that non associated enterprises to whom the products are sold do not qualify termed as Associated Enterprises (AES) as per the provisions as contained within Section 92A(1) or 92A (2) of the Act; and e. In determining the royalty income and consequently making an adjustment computation of tax. B. Non-transfer pricing adjustments Ground 2: Disallowance under section 14A of the Act Rs. 263,415 a. The leaned DRP has erred in confirming the order of the AO by disallowing expenses under section 14A, on the basis of Rule 8B instead of holding that no disallowance is warranted under section 14A. b. The learned AO ought to have appreciated the fact that the appellant has made the investments in shares and UTI tax free bonds from internal accruals generated from the business and not out of borrowings. Therefore, no interest cost is attributable to dividend income. c. The learned AO ought to have appreciated that the appellant on its own attributed Rs.5,750 as expenditure incurred towards earning of exempt income and disallowed the same in the computation of taxable income. d. The learned AO ought to have observed that the appellant has not incurred any other direct expenses towards earning of the aforesaid exempt income and there is no separate administrative expenditure incurred for the aforementioned purpose. Ground 3: Disallowance of loans written off - Rs. 381,545,088 a. The learned AO has erred in disallowing the amount written off on account of non-recoverability of loans advanced by the appellant to its subsidiary. b. The learned AO has failed to appreciate the fact that the loans advanced by the appellant to its subsidiary Titan International Holdings BV, Amsterdam ("TIHBV") were in turn invested either in preference shares of Titan International Marketing Limited, London ("TIML") or advanced to TIML as loans. c. The learned AO has failed to appreciate the fact that the loans were advanced to meet the cost of advertisement expenditure incurred directly on behalf of the ITA No.2239/Chny/2012 - 3 - appellant by TIML for various international markets where the products of the appellant are sold and with the objective of easing the working capital requirement of the other party. d. The learned AO has erred in not considering the fact that the loans advanced by the appellant is incidental to and for the purpose of the business of the appellant and is therefore, revenue in nature. e. The learned AO has failed to appreciate the fact that the loans can be classified as trading debt since interest received on the said advances have been offered and accepted as business income in the returns of income filed by the appellant for earlier years. Ground 4: Apportionment of common expenses on the basis of turnover for purposes of deduction under section 80IC: Rs.180,228,538 Ground 4.1: Apportionment of corporate overheads (head office expenses) a. The learned AO has erred in allocating/apportioning the following expenditure between Dehradun unit II, Roorkee and Baddi unit on the basis of total turnover as against the method used by the appellant:  Research and development expense;  Assembly overheads; and  Corporate expenditure. b. The learned AO has failed to appreciate that the appellant had already allocated common expenditure in ratio of number of watches produced by each division to the total number of watches produced by the watch division before arriving at the profit eligible for deduction under section 80IC of the Act. c. The learned AO ought to have observed that the design and development costs and assembly share for common facilities incurred at the factory largely represents salaries of the employees and not directly relatable to the value of watches produced. d. The learned AO failed to appreciate that the components transferred are compatible to various watches and it is not possible, at the time of transfer, to identify the final watch variant into which these components would be assembled and thus it is not possible or practical to allocate these expenses based on the value of the watch. e. The learned AO ought to have appreciated that the company has allocated the expenses based on the business requirements of each unit and the appellant's allocation is the closest approximation to the actual expenditure allocable to the unit. Ground 4.2: Apportionment of depreciation on Trademarks a. The learned AO is has erred in allocating depreciation on Trademarks to the units claiming deduction under section 80IC of the Act. b. The learned AO erred in not considering the fact that the trademarks are applicable only in the overseas markets and the goods manufactured from units eligible for deduction under section 80IC of the Act are sold in the domestic market only. Ground 5: Disallowance of application software claimed as revenue expenditure: Rs. 172,099,066 a. The learned AO erred in disallowing expenses relating to annual license use of software like SAP, purchase of software like MS Office, CAD consultancy charges treating the same as capital expenditure. b. The learned AO ought to have appreciated that the application software by the assessee only facilitates the trading operations by enabling the ITA No.2239/Chny/2012 - 4 - to conduct the business of software development more efficiently, while the fixed capital untouched. c. The learned AO ought to have appreciated that the software installed result in an enduring benefit and the same was bound to become obsolete due to fast changes in the technology. d. The learned AO ought to have appreciated that every advantage nature would not bring in a capital asset into existence except when enhancement in the capital structure of the assessee. e. The learned AO ought to have observed that the assessee has acquired license to use the software and there was no outright purchase of software ownership to the assessee of the software so as to treat the same expenditure. f. The learned AO ought to have appreciated the fact that the ownership license vests with SAP and other vendors and not with the appellant appellant does not own the Intellectual Property Rights of the software appellant cannot sell the software nor can it be used in any other computer system. Ground 6: Short grant of Tax deducted at source (‘TDS’) amount: Rs. 1,103,588 a. The learned AO erred in not granting the credit for taxes deducted at source amounting to Rs.1,103,588. b. The learned AO ought to have relied on Form No.16A issued by the deductors while giving effect to the taxes deducted at source. Ground 7: Calculation of Interest on resulting adjustment The learned AO erred in charging the interest under section 234C as consequential in nature and not on the returned income. 2. This appeal was heard along with assessee’s appeal for AYs 2006-07 & 2007-08 on the same day. The appeals for AYs 2006-07 & 2007-08 have separately been disposed-off by us. It was admitted position that the facts as well as issues in this year are substantially the same and adjudication of earlier years would apply to this year also. 3. The assessee being resident corporate assessee is stated to be engaged in trading of watches, jewellery and clocks. As is evident the issues to be adjudicated are – (i) Transfer Pricing Adjustment of notional interest on advances; (ii) Transfer Pricing Addition of Royalty on Sales; (iii) Disallowance u/s 14A; (iv) Disallowance of loans written- off; (v) Apportionment of Expenses including depreciation on trademark to compute deduction u/s 80-IC; (vi) Nature of Application Software expenditure; (vi) TDS Credit; & (vii) Interest u/s 234B / 234C. ITA No.2239/Chny/2012 - 5 - 4. Transfer Pricing Adjustment of Interest and Royalty 4.1 Since the assessee carried out certain international transactions with its Associated Enterprises (AE), the same were referred to Ld. TPO for determination of Arm’s Length Price (ALP). The Ld. TPO, vide order dated 31.10.2011, proposed adjustment of Rs.552.46 Lacs as under: - No. Nature of Transaction Amount (Rs.) 1. Interest on Advertising advances made by assessee to Titan International Marketing Ltd. (TIML) Rs.137.27 Lacs 2. Royalty levied @3% on AEs Rs. 2.75 Lacs 3. Royalty levied @3% on deemed AEs Rs.412.43 Lacs Total Rs.552.46 Lacs 4.2 The assessee had advanced interest free advertising advances in earlier years to one of its AEs i.e., Titan International Marketing Ltd. (TIML), UK who traded in watches, jewellery & clocks. These advances were recovered by the assessee during the year. The Ld. TPO computed benchmarking interest of Rs.137.27 Lacs. The same was confirmed by Ld. DRP. Aggrieved, the assessee is in further appeal before us. 4.3 Following our decision in ITA No.1913/Chny/2011 for AY 2007- 08, we direct Ld. AO / TPO to apply benchmarking interest at LIBOR+2% on such transactions. The ground stand partly allowed. 4.4 Another adjustment as made by Ld. TPO was on account of Royalty on sales to AE as well as non-AEs. This issue has been restored back by us in ITA No.1913/Chny/2011 for AY 2007-08 considering the application filed by the assessee under Rule 29 of Income Tax Appellate Tribunal Rules, 1963 for admission of additional evidences. Similar application has been filed for this year also. Since ITA No.2239/Chny/2012 - 6 - the issue is recurring in nature, the issue of royalty on sales stands restored back to the file of Ld. TPO / AO on similar lines. The corresponding ground stand allowed for statistical purposes. 4.5 The assessee has raised an additional ground for this year and submitted that advertisement expenditure would otherwise be allowable as business expenditure incurred in the course of business or the same being an irretrievable loss. We find that no such issue arises from the order of lower authorities and accordingly, this ground is not admitted. 5. Disallowance u/s 14A 5.1 The assessee earned exempt income of Rs.5.05 Lacs and offered suo-motu disallowance of Rs.5,750/- in the return of income. However, Ld. AO computed aggregate disallowance of Rs.2.69 Lacs u/r 8D(2) which was interest disallowance u/r 8D(2)(ii) for Rs.2.27 Lacs and indirect expense disallowance u/r 8D(2)(iii) for Rs.0.41 Lacs. The Ld. DRP confirmed the same. 5.2 We find that Rule 8D has been applied by Ld. AO without recording any satisfaction as to why the disallowance computed by the assessee was not acceptable having regards to the accounts of the assessee. In the absence of such a satisfaction, no such disallowance could have been made by Ld. AO as per the ratio laid down by Hon’ble Supreme Court in Maxopp Investment Ltd. V/s CIT (91 Taxmann.com 154). Therefore, the additional disallowance of Rs.2.63 Lacs as made by Ld. AO is not sustainable. We order so. Ground No.2 stand allowed. ITA No.2239/Chny/2012 - 7 - 6. Disallowance of Loans Written-off 6.1 In ground No.3, the assessee seeks deduction of foreign currency loans written-off which were granted by the assessee to one of its subsidiaries Titan International Holding BV (TIHBV) for Rs.3815.45 Lacs. The interest accrued on such loans was separately claimed as bad-debts which have already been allowed. 6.2 The assessee explained that loans advanced to TIHBV was further invested either in preference shares of TIML-London or advanced to them as loans, to meet the cost of advertisement expenditure incurred directly on assessee’s behalf for various international markets where the assessee’s products were sold. The objective was to ease-off the working capital requirement of the other party. The advances were to meet the cost of own advertisement expenses. It was submitted that TIML-London, a marketing arm of the assessee in international market, had accumulated losses over the years. Accordingly, part of the loan became unrecoverable and the same was written-off by the assessee in the books of accounts. The losses were stated to be incurred for earning income from foreign operations and were trade related. It was also submitted that interest on advances was offered and accepted as ‘Business Income’ in earlier years. The assessee submitted that interest on loans amounting to Rs.389.42 Lacs was offered to tax in financial years 2006-07 and 2007-08. 6.3 However, Ld. AO opined that most of advances were interest- bearing long-term loans. The assessee was charging interest on those loans. The loans were long term in nature and in capital field and not for any day-to-day business transactions. Therefore, such loans not ITA No.2239/Chny/2012 - 8 - given in the course of business could not be allowed as deduction. The manner in which the loans were utilized by TIHBV was not of concern to the assessee. Rather the assessee had advanced separate advertising advances to its AEs including TIML in earlier years. There was no business exigency and accordingly, the write-off of the loans was disallowed. Further, the TIHBV was integral part of assessee’s group and therefore, the assessee was exercising control over it at every stage. Finally, the interest accrued for Rs.389.42 Lacs as claimed by the assessee as bad-debts written-off was allowed but the principal loan of Rs.3815.45 Lacs was disallowed. The stand of Ld. AO, upon confirmation by Ld. DRP, is in further appeal before us. 6.4 Upon due consideration of material, facts, it could be seen that the assessee is a manufacturing / trading entity and not engaged in the business of making investments. In earlier years, it has granted certain long-term loans on interest to its AE namely TIHBV which is into making investments. The loans so granted by the assessee have been further advanced to other AEs and are mostly in the shape of preference share capital which is in capital field only. The assessee has advanced separate advertising loans to its AEs which are subject matter of determination of ALP by revenue. The loans so granted by the assessee to TIHBV have been stated to have become irrecoverable and accordingly, written-off in the books of accounts. The assessee has accrued interest on these loans in earlier years. However, even this interest has not recovered and deduction of the same has been claimed as well as allowed in terms of provisions of Sec.36(1)(vii). In the given factual matrix, we are of the considered opinion that the loans so granted by the assessee are in the capital ITA No.2239/Chny/2012 - 9 - field only since the same has been further utilized to subscribe to preference share capital which is in the nature of owner’s equity. The assessee has granted independent advertising advances to AE which has separately been benchmarked by Ld. TPO and therefore, to say that the loans were for business purpose or in furtherance of business objectives would not be correct. No business expediency of advancement of loan could be demonstrated by the assessee. For the same reason, the ratio of decision of Hon’ble Supreme Court in the case of S.A.builders V/s CIT (288 ITR 1) as well the decision of Hon’ble High Court of Madras in CIT V/s Spencers & Co. Ltd. (47 Taxmann.com 55) would not apply. The decision of Chennai Tribunal in ACIT V/s W.S. Industries (India) Ltd. is factually distinguishable since the assessee’s subsidiary was executing contracts on behalf of the assessee. The assessee settled the claim of subsidiaries with the bankers. The same is not the case here. The decision of Hon’ble Supreme Court in CIT V/s Mysore Sugars Co. Ltd. (46 ITR 649) is a case of business advances. Therefore, in our considered opinion, no further deduction could be allowed to assessee as rightly held by lower authorities. The corresponding grounds stand dismissed. 7. Apportionment of Expenses u/s 80-IC 7.1 In ground No.4, the assessee is aggrieved by apportionment of expenditure for the purposes of computation of deduction u/s 80-IC. It transpired that the assessee claimed deduction u/s. 80IC with respect to their units at Dehradun (Units I & II) and in Baddi. The method of apportionment of certain corporate overhead expenditure was not accepted in earlier years. The assessee allocated the same on the basis of number of watches produced. However, the same was ITA No.2239/Chny/2012 - 10 - distributed by the revenue on the basis of turnover of the units. The assessee furnished revised working of profits u/s 80IC which was perused by Ld. AO. 7.2 The assessee also claimed depreciation on trade marks as acquired in earlier years. The trademarks were stated to be related to watch division as well as jewellery division. The units availing deduction u/s 80-IC were watch division. The entire deprecation was allocated by assessee to non-eligible unit, which in the opinion of Ld. AO, was to be allocated to eligible units also. 7.3 Accordingly, adjusting the allocation of overhead and depreciation as above, Ld. AO reduced deduction by Rs.18.02 Crores. Aggrieved, the assessee is in further appeal before us. 7.4 We find that similar issue has been adjudicated by us in ITA No.1913/Chny/2011 for AY 2007-08 as under: - 7.2 This issue has been adjudicated by us in ITA No.2192/Chny/2010 order dated 17.08.2022 as under: - 4.2 We find that all the other overhead expenses have been allocated by the assessee on the basis of turnover. Only design and development cost and assembly share of common facilities have been allocated on the basis of number of watches produced. The Ld. AO has apportioned the same on the basis of turnover. In our considered opinion, design and development cost and assembly share of common facilities are not proportional to the number of watches produced. The expenditure is largely salary expenditure of the two departments. It could not be said that the expenditure would be directly proportional to the number of watches produced. Rather, such expenditures would largely depend upon the decision of the management to decide as to how much expenditure was to be incurred to design / develop new products and the same may vary to a great extent in different periods. In such a case, the quantum of expenditure would have no relation with the number of watches and allocating the same on such basis would give absurd results as held by lower authorities. Therefore, the more appropriate method of allocation would be based on turnover as done by the assessee for other overhead expenses. Therefore, we concur with the stand of lower authorities, in this regard and find no reason to interfere in the same. This ground stand dismissed. All the ground stand disposed-off in terms of our above order. ITA No.2239/Chny/2012 - 11 - Facts being pari-materia the same, we substantially confirm the stand of lower authorities in this regard except the issue of allocation of depreciation on trademark. In the paper-book, the assessee has filed an application u/r 29 of Income Tax Appellate Tribunal Rules, 1963 for admission of additional evidences which is supported by the affidavit of Managing Director of assessee company. By way of this application, the assessee seeks production of additional evidences which are in the form of summary of break-up of export sales, details of export sales, sample invoices, annual report etc. It is the submission of the assessee that the units which are eligible to claim deduction u/s 80-IC caters only to the domestic markets and therefore, depreciation on trademark could not be allocated to the said units as the trademark is put to use only in respect of watches exported. Admitting the same, we direct Ld. AO to examine the issue of allocation of depreciation and re-adjudicate the same in the light of submissions made in the application. The corresponding grounds stand partly allowed for statistical purposes. Similar petition u/r 29 has been filed by the assessee for this year as well. Facts being pari-materia the same, our adjudication as above shall mutatis-mutandis apply to this year also. The matter, to a limited extent of allocation of depreciation, stands restored back to the file of Ld. AO on similar lines. The grounds relating to allocation of other overhead expenditure stand dismissed. The corresponding grounds stand partly allowed for statistical purposes. 8. Deduction of Software Expenses 8.1 In Ground No.5, the assessee seeks deduction of application software expenses 4for Rs.430.22 Lacs. The Ld. AO treated the expenditure as capital expenditure and granted depreciation of 60%. The Ld. DRP confirmed the same. Aggrieved, the assessee is in further appeal before us. 8.2 This issue has been decided by us in assessee’s favor in ITA No.1913/Chny/2011 for AY 2007-08. Taking the same view, we direct Ld. AO to allow the expenditure as revenue expenditure and reverse the depreciation granted on the same. The ground stand allowed. ITA No.2239/Chny/2012 - 12 - 9. In ground no.6, the assessee seeks TDS credit of Rs.11.03 Lacs. The Ld. AO is directed to verify the TDS claim and grant TDS credit in accordance with law. 10. In ground No.7, the assessee assails computation of interest u/s 234B / 234C which is merely consequential in nature and do not require specific adjudication. No other ground has been urged before us. 11. The appeal stands partly allowed in terms of our above order. Order pronounced on 09 th September, 2022 Sd/- (MAHAVIR SINGH) उपाȯƗ /VICE PRESIDENT Sd/- (MANOJ KUMAR AGGARWAL) लेखा सद˟ / ACCOUNTANT MEMBER चेɄई / Chennai; िदनांक / Dated : 09-09-2022 EDN/- आदेश की Ůितिलिप अŤेिषत/Copy of the Order forwarded to : 1. अपीलाथȸ/Appellant 2. Ĥ×यथȸ/Respondent 3. आयकर आय ु Èत (अपील)/CIT(A) 4. आयकर आय ु Èत/CIT 5. ͪवभागीय ĤǓतǓनͬध/DR 6. गाड[ फाईल/GF