DCIT (LTU), New Delhi V. M/s. Hero Motors Ltd., New Delhi

ITA 249/DEL/2017

• Counselvise Citation: [2020] 111 COUNSELVISE.COM (IT) 4466 (ITAT-DELHI)
• Duration Of Justice: 3 year(s) 1 month(s) 13 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 26-02-2020
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: C
• Assessment Year: 2012-2013
• Appeal Filed On: 13-01-2017
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: S N MEENA
• Keywords: Depreciation; Earning of tax free income; Rule 8D
• Section: 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH C, NEW DELHI BEFORE SH. H. S. SIDHU, JUDICIAL MEMBER DR. B. R. R. KUMAR, ACCOUNTANT MEMBER ITA NO. 249/DEL/2017 : ASSTT. YEAR : 2012-13 DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE-1, LTU, NEW DELHI-110017 VS M/S HERO MOTORS LTD. 603, INTERNATIONAL TRADE TOWER, NEHRU PLACE, NEW DELHI-110019 (APPELLANTT (RESPONDENT) PAN NO. AAACH8459F ASSESSEE BY : SH. SATISH BANSAL, CA REVENUE BY : SH. S. N. MEENA, SR. DR DATE OF HEARING:25.02.2020 DATE OF PRONOUNCEMENT: 26.02.2020 ORDER PER DR. B. R. R. KUMAR, ACCOUNTANT MEMBER: THE PRESENT APPEAL HAS BEEN FILED BY THE REVENUE A GAINST THE ORDERS OF THE LD. CIT(A)-22, NEW DELHI DATED 02 .11.2016. 2. FOLLOWING GROUNDS HAVE BEEN RAISED BY THE REVENU E: 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AND IN LAW, LD. CIT (A) HAS ERRED IN DIRECTING TO EXCLUDE THE AMOUNT OF RS.2,74,86,627/- BEING THE INVESTMENT MADE BY THE ASSESSEE IN M/S MUNJAL KIRIU INDUSTRIES PVT. LTD., M/S HERO CHASSIS SYSTEM (P) L TD. AND M/S HERO GLOBAL DESIGN LTD. FOR WORKING OUT THE AMOUNT OF AVERAGE INVESTMENT FOR THE PURPOSE OF COMPUTATION OF DISALLOWANCE U/S 14A READ WITH RULE 8D BY HOLDING THAT THERE IS NO NEXUS BETWEEN THE INTER EST PAID BY THE APPELLANT AND THE INVESTMENT MADE IN THESE COMPANIES. 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, LD. CIT (A) HAS ERRED IN DELETING THE ITA NO. 249/DEL/2017 HERO MOTORS LTD. 2 ADDITION OF RS.28,27,564/- MADE BY THE AO ON THE GROUND THAT THE PAYMENT OF EXPENSES MADE TO M/S HERO GLOBAL DESIGN LTD. WERE NOT INCURRED IN ORDINA RY COURSE OF BUSINESS. 3. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, LD. CIT (A) HAS ERRED IN DELETING THE ADDITION ON PAYMENT OF RS.28,27,564/- TO M/S HERO GLOBAL DESIGN, WITHOUT GIVING ANY FINDING IN HIS APPELLATE ORDER WHETHER THE SAME EXPENSES WERE INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS. 3. BRIEF FACTS RELEVANT TO THE CASE ARE THAT THE AS SESSEE INVESTED RS.79.19 CRORES IN THE EQUITY SHARES AND M UTUAL FUNDS AND RECEIVED DIVIDEND INCOME OF RS.1,320/- DURING T HE YEAR UNDER CONSIDERATION. THE ASSESSING OFFICER HAS DISA LLOWED AN AMOUNT OF RS.2.74 CRORES U/S 14A OF THE INCOME TAX ACT, 1961. THE LD. CIT (A) HAS DIRECTED THE ASSESSING OFFICER TO REWORK THE DISALLOWANCE U/S 14A EXCLUDING THE INVESTMENTS MADE IN THE GROUP CONCERNS AND IN THE DEBT ORIENTED MUTUAL FUND S. 4. AGGRIEVED THE REVENUE FILED APPEAL BEFORE US. 5. THE ISSUE OF DISALLOWANCE OF EXPENSES U/S 14A RE LATING TO INCOME NOT INCLUDABLE IN THE TOTAL INCOME OF THE AS SESSEE HAS BEEN DEALT IN VARIOUS CASES BY THE TRIBUNAL AND THE HIGH COURTS WHEREIN IT WAS HELD THAT NO DISALLOWANCE IS WARRANT ED IN CASES WHERE NO EXEMPT INCOME HAS BEEN EARNED BY THE ASSES SEE. THE HONBLE COURTS HAS ALSO RULED THAT, AT THE MOST THE DISALLOWANCE SHOULD BE RESTRICTED TO THE TUNE OF THE DIVIDEND EA RNED. FOR THE SAKE OF READY REFERENCE, THE RELEVANT PORTION OF TH E ORDER OF THE HONBLE JURISDICTIONAL HIGH COURT IN THE CASE OF CH EMINVEST LTD. VS CIT 378 ITR 33 (DEL.) IS REPRODUCED BELOW: ITA NO. 249/DEL/2017 HERO MOTORS LTD. 3 TURNING TO THE CENTRAL QUESTION THAT ARISES FOR CON SIDERATION, THE COURT FINDS THAT THE COMPLETE ANSWER IS PROVIDE D BY THE DECISION OF THIS COURT IN CIT V. HOLCIM INDIA (P.) LTD. [2015] 57 TAXMANN.COM 28. IN THAT CASE A SIMILAR QUESTION ARO SE, VIZ., WHETHER THE ITAT WAS JUSTIFIED IN DELETING THE DISA LLOWANCE UNDER SECTION 14A OF THE ACT WHEN NO DIVIDEND INCOM E HAD BEEN EARNED BY THE ASSESSEE IN THE RELEVANT ASSESSMENT Y EAR? THE COURT REFERRED TO THE DECISION OF THIS COURT IN MAX OPP INVESTMENT LTD.'S CASE (SUPRA) AND TO THE DECISION OF THE SPECIAL BENCH OF THE ITAT IN THIS VERY CASE I.E. CH EMINVEST LTD. V. ITO [2009] 121 ITD 318. THE COURT ALSO REFERRED TO THREE DECISIONS OF DIFFERENT HIGH COURTS WHICH HAVE DECID ED THE ISSUE AGAINST REVENUE. THE FIRST WAS THE DECISION IN CIT V. LAKHANI MARKETING INC. [2014] 226 TAXMAN 45/49 TAXMANN.COM 257 OF THE HIGH COURT OF PUNJAB AND HARYANA WHICH IN TURN REFERRED TO TWO EARLIER DECISIONS OF THE SAME COURT IN CIT V. H ERO CYCLES LTD. [2010] 323 ITR 518/189 TAXMAN 50 AND CIT V. WI NSOME TEXTILE INDUSTRIES LTD. [2009] 319 ITR 204. THE SEC OND WAS OF THE GUJARAT HIGH COURT IN CIT V. CORRTECH ENERGY (P .) LTD. [2014] 223 TAXMAN 130/45 TAXMANN.COM 116 AND THE TH IRD OF THE ALLAHABAD HIGH COURT IN CIT V. SHIVAM MOTORS (P .) LTD. [2015] 230 TAXMAN 63/55 TAXMANN.COM 262. THESE THREE DECISIONS REITERATED THE POSITION THAT WHEN AN ASSE SSEE HAD NOT EARNED ANY TAXABLE INCOME IN THE RELEVANT A Y IN QUESTION 'CORRESPONDING EXPENDITURE COULD NOT BE WO RKED OUT FOR DISALLOWANCE.' 6. HENCE, FOLLOWING THE ESTABLISHED JUDICIAL PRONOU NCEMENT, WE HEREBY DIRECT THAT THE DISALLOWANCE BE RESTRICTE D TO RS.1,320/-. ITA NO. 249/DEL/2017 HERO MOTORS LTD. 4 7. GROUND NOS. 2 & 3 PERTAINS TO DISALLOWANCE OF RS.28,27,564/- PAID TO AN ASSOCIATE CONCERNS M/S HE RO GLOBAL DESIGN LTD. THE ASSESSING OFFICER HELD THAT SINCE M /S HERO GLOBAL DESIGN LTD. IS DERIVING INCOME ONLY FROM THE ASSESSEE AND DOES NOT HAVE BUSINESS EXPERTISE IN PROVIDING E NGINEERING SERVICES, THE EXPENDITURE CLAIMED IS DISALLOWED. AP ART FROM THIS OBSERVATION, NO OTHER REASONING HAS BEEN GIVEN BY T HE AO. 8. IT WAS SUBMITTED BEFORE THE REVENUE AUTHORITIES THAT M/S HERO GLOBAL DESIGN LTD. RENDERED ENGINEERING CONSUL TANCY, CAD/CAM DESIGNING WHICH ARE PROFESSIONAL SERVICES T ECHNICALLY CALLED RE-ENGINEERING SERVICES USING SPECIALIZED SO FTWARE BY WHICH THE FRAGMENTATION OF DRAWINGS SUPPLIED BY THE CUSTOMERS OF ASSESSEE INTO SUB-PARTS IS DONE TO FACILITATE MA NUFACTURING AND COSTING. THREE DIPLOMA ENGINEERS AND ONE ITI IS THE TOTAL STAFF OF M/S HERO GLOBAL DESIGN LTD. AND THE TOTAL SALARY OF THESE PERSONS IN THE BOOKS OF M/S HERO GLOBAL DESIG N LTD IS RS. 26.49 LAKHS, WHILE THE TOTAL EMPLOYEE BENEFIT EXPEN SES ARE RS. 28.22 LAKHS. THE BILLING IS ON MAN HOUR BASIS AND T HE PAYMENT MADE BY THE ASSESSEE ALMOST EQUALS THE SALARY COST OF ABOVE FOUR PERSONS BEING EMPLOYEES OF M/S HERO GLOBAL DES IGN LTD. 9. THE ASSESSEE ALSO EXPLAINED THAT WHEN IT RECEIVE S DESIGNS IN RESPECT OF ORDERS FROM ITS CLIENTS LIKE BMW ETC, THESE PERSONS EXAMINE THE DRAWINGS AND FRAGMENTED DESIGNS ARE ISS UED ON THE BASIS OF WHICH THE MANUFACTURING IS DONE BY SUPPLIE RS. MOREOVER, M/S HERO GLOBAL DESIGN LTD. ALSO RENDERS ASSISTANCE IN COSTING. ITA NO. 249/DEL/2017 HERO MOTORS LTD. 5 10. THE LD. CIT (A) HELD THAT IT IS A FACT THAT M/S HERO GLOBAL DESIGN LTD IS LOCATED IN THE SAME PREMISES AS ASSES SEE AND IS A LESSEE OF THE ASSESSEE. IT WAS DOING THE WORK OF ON LY THE ASSESSEE AND IS RUNNING IN LOSSES MAINLY BECAUSE OF THE INTEREST AND SOFTWARE COST/AMORTIZATION/DEPRECIATION. THE FI NANCE HAS ALSO BEEN PROVIDED BY THE ASSESSEE. THERE IS NO WRI TTEN AGREEMENT BETWEEN THE ASSESSEE AND M/S HERO GLOBAL DESIGN LTD AND THE NATURE OF SERVICES CLAIMED ARE ALSO OF VERY BASIC NATURE AS THE BASIC DESIGNS ARE RECEIVED FROM CLIEN TS AND THE PRODUCT IS TO BE MANUFACTURED AS PER THE SAID DESIG NS. THE NATURE OF SERVICES CAN AT BEST BE CALLED A BRIDGE W ITH THE ANCILLARY SUPPLIERS/MANUFACTURES. THE QUALIFICATION S OF THE PERSONS EMPLOYED ALSO DO NOT ESTABLISH ANY SPECIALI SED TECHNICAL SERVICES AS NONE OF THEM IS EVEN A GRADUA TE ENGINEER. THE QUANTUM OF PAYMENT IS VERY SMALL CONSIDERING TH E TURNOVER OF THE ASSESSEE. MOREOVER, ONCE THE SAMPLE PRODUCTI ON IS APPROVED, THE SAME PRODUCT IS MANUFACTURED AND SUPP LIED TO THE CLIENT IN LARGE NUMBERS WITHOUT ANY FURTHER PAY MENT TO M/S HERO GLOBAL DESIGN LTD. THE WORK DONE BY M/S HERO G LOBAL DESIGN LTD COULD HAVE BEEN DONE BY A SMALL SECTION IN THE ASSESSEE COMPANY WITHIN THE VERY SAME PREMISES BY T HE SAME FOUR EMPLOYEES. HOWEVER, EVEN THEN THE ASSESSEE WOU LD HAVE BEEN REQUIRED TO PAY SALARY TO THOSE FOUR PERSONS. THOUGH THE SERVICES HAVE BEEN RENDERED THROUGH M/S HERO GLOBAL DESIGN LTD, THE PAYMENT MADE BY THE ASSESSEE TO M/S HERO G LOBAL DESIGN LTD JUST MATCHES THE EMPLOYEE COST OF M/S HE RO GLOBAL DESIGN LTD, WHICH WOULD HAVE BEEN INCURRED EVEN IF THOSE PERSONS HAD BEEN EMPLOYED BY THE ASSESSEE. CONSEQUE NTLY, THE LD. CIT (A) HELD THAT THE EXPENDITURE INCURRED IS A LLOWABLE U/S 37(1). ITA NO. 249/DEL/2017 HERO MOTORS LTD. 6 11. HEARD THE ARGUMENTS OF BOTH THE PARTIES AND PER USED THE MATERIAL AVAILABLE ON RECORD. THE COPIES OF THE INV OICES SUBMITTED BY THE HGD LTD. HAVE BEEN EXAMINED. IT IS AN UNDENIABLE FACT THAT HGD LTD. HAS PROVIDED SERVICES TO THE ASSESSEE, THE DESIGN ENGINEERS OF HGD LTD. ARE REGU LARLY AVAILABLE WITHIN IN THE SHOP FLOOR OF THE ASSESSEE COMPANY, THEY HAVE BEEN WORKING FOR THE LAST TEN YEARS WITH THE A SSESSEE AND GETTING PAID REGULARLY AGAINST THEIR SERVICES. IN V IEW OF THIS, WE DECLINE TO INTERFERE WITH THE ORDER OF THE LD. CIT (A) IN DELETING THE ADDITION. 12. IN THE RESULT, THE APPEAL OF THE REVENUE IS DIS MISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 26/02/2020. SD/- SD/- (H. S. SIDHU) (DR. B . R. R. KUMAR) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED: 26/02/2020 *SUBODH* COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(APPEALS) 5. DR: ITAT ASSISTANT REGISTRAR