DCIT (LTU), New Delhi V. M/s. Sharda Motor Industries Ltd., New Delhi

ITA 2588/DEL/2013

• Counselvise Citation: [2016] 121 COUNSELVISE.COM (IT) 4301 (ITAT-DELHI)
• Duration Of Justice: 3 year(s) 7 month(s) 12 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 13-12-2016
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: G
• Next Hearing Date: 04-10-2016
• Assessment Year: 2009-2010
• Appeal Filed On: 01-05-2013
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: UMESH CHANDER DUBEY
• Assessee Lawyers: R K KAPOOR
• Keywords: Capital expenditure
• Section: 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH G, NEW DELHI BEFORE SHRI H.S. SIDHU, JUDICIAL MEMBER AND SHRI T.S. KAPOOR, ACCOUNTANT MEMBER ITA NO. 2588/DEL/2013 ASSESSMENT YEAR: 2009-10 DEPUTY COMMISSIONER OF VS. M/S SHARDA MOTOR INDU STRIES LTD. INCOME TAX (LTU), D-188, OKHLA INDSTRIES AREA, NBCC PLAZA, PHASE-I, NEW DELHI -20 PUSHP VIHAR, SECTOR-III, NEW DELHI 17 (PAN: AAACS6855J) (APPELLANT) (RESPONDENT) DEPARTMENT BY : SH. UMESH CHANDER DUBE Y, SR. DR ASSESSEE BY : SH. R.K. KAPOOR, ADV . DATE OF HEARING : 04-10-2016 DATE OF ORDER : 13-12-2016 ORDER PER H.S. SIDHU, J.M. THE DEPARTMENT HAS FILED THE APPEAL AGAINST THE IM PUGNED ORDER DATED 28.2.2013 OF LD. CIT(A)-LTU, NEW DELHI PERTAINING TO ASSESSMENT YEAR 2009-19. THE GROUNDS RAISED IN THE REVENUES APPEAL READS AS UNDER:- 1. ON THE FACTS AND THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT(A) HAS ERRED IN DELETING THE ADDIT ION OF RS. 92,39,520/- MADE BY THE AO ON ACCOUNT OF DISALLOWANCE OF TECHNICAL FEES BEING CAPITAL EXPENDITURE. 2. ON THE FACTS AND THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT(A) HAS ERRED IN RESTRICTING ADDITI ON OF 2 RS. 29,65,939/- MADE BY THE AO ON ACCOUNT OF DISALLOWANCE U/S. 14A TO RS. 6,56,227/-. 3. THE APPELLANT CRAVES LEAVE TO, ADD TO, ALTER, AMEND OR VARY FROM THE ABOVE GROUNDS OF APPEAL AT OR BEFORE THE TIME OF HEARING. 2. THE BRIEF FACTS OF THE CASE ARE THAT THE ASS ESSEE HAD FILED THE ORIGINAL RETURN OF INCOME ON 29.9.2009 DECLARING TO TAL INCOME OF RS. 8,37,43,100/-. THE AO OBSERVED THAT THE ASSESSEE H AS DEBITED AN AMOUNT OF RS. 92,39,520/- TOWARDS TECHNICAL FEE/ C ONSULTATION FEE FOR DESIGNING OF THE INDEPENDENT FRONT SUSPENSION (IFS) SYSTEM, WHICH WAS PAID TO ONE OF ITS CLIENTS M/S MAHINDRA & MAHINDRA. THE AO WAS OF THE VIEW THAT THE EXPENDITURE INCURRED FO R PREPARING DESIGN OF IFS SYSTEM, GIVES IT THE BENEFIT OF ENDUR ING NATURE AND THEREFORE, HELD IT AS CAPITAL IN NATURE. THE AO ALS O OBSERVED THAT THE ASSESSEE HAD EARNED DIVIDEND INCOME OF RS. 45,04,9 37/- WHEN HE ASKED THE ASSESSEE TO EXPLAIN WHY DISALLOWANCE UNDE R SECTION 14A MAY NOT BE MADE. THE ASSESSEES CONTENTION THAT IT HAD ALREADY DISALLOWED AN AMOUNT OF RS. 5,95,006/- UNDER RULE 8D, WHICH WAS DULY CERTIFIED BY THE AUDITOR VIDE SUBMISSION DAT ED 21.2.2011 WAS NOT FOUND CORRECT BY THE AO WHO INVOKED THE PROVISI ONS OF RULE 8D AND DISALLOWED AN AMOUNT OF RS. 29,65,939/- AND A SSESSED THE INCOME OF THE ASSESSE AT RS. 9,59,68,245/- U/S. 143 (3) OF THE I.T. ACT, 1961 VIDE HIS ORDER DATED 22.12.2011. 3 3. AGGRIEVED WITH THE AFORESAID ORDER, ASSESSEE PR EFERRED AN APPEAL BEFORE THE LD. CIT(A), WHO VIDE HIS IMPUGNED ORDER DATED 28.2.2013 HAS PARTLY ALLOWED THE APPEAL OF THE ASS ESSEE. 4. NOW THE REVENUE IS AGGRIEVED AGAINST THE IMPUGNE D ORDER AND FILED THE PRESENT APPEAL BEFORE THE TRIBUNAL. 5. LD. DR RELIED UPON THE ORDER OF THE AO AND REITE RATED THE CONTENTIONS RAISED BY THE REVENUE IN THE GROUNDS OF APPEAL. 6. ON THE CONTRARY, LD. COUNSEL OF THE ASSESSEE HAS RELIED UPON THE ORDER OF THE LD. CIT(A). HE STATED THAT LD. CIT (A) HAS PASSED A WELL REASONED ORDER WHICH DOES NOT NEED ANY INTERFE RENCE ON MY PART, HENCE, THE SAME MAY BE UPHELD AND ACCORDINGLY , THE APPEAL OF THE REVENUE MAY BE DISMISSED. 7. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE RECORDS, ESPECIALLY THE IMPUGNED ORDER PASSED BY THE LD. CI T(A). WE FIND THAT LD. FIRST APPELLATE AUTHORITY HAS ELABORATELY DISCUSSED THE ISSUES IN DISPUTE BY CONSIDERING THE SUBMISSIONS OF THE ASSESSEE AND ADJUDICATED THE ISSUE NO. 1 VIDE PARA NO. 6.2 AT PAGE NO. 6 TO 9 OF THE IMPUGNED ORDER. THE SAID RELEVANT PARAS ARE REPRODUCED AS UNDER:- 6.2 REGARDING THE GROUND NO.1 OF THE APPEAL RELATI NG TO TREATMENT OF THE TECHNICAL FEES PAID TO M/S MAHI NDRA & MAHINDRA FOR USE OF DESIGN, DRAWING PRODUCTION TO OLING FOR MANUFACTURING OF INDEPENDENT FRONT SUSPENSION F OR SCORPIO CAR AS CAPITAL IN NATURE, THE APPELLANT CLA IMS 4 THAT THE ABOVE EXPENSES WERE REVENUE IN NATURE, WHI CH WERE PAID TO M&M FOR THE PURPOSE OF USE OF PROTOTYP E TOOLING DEVELOPED BY M/S SAMLIP FOR M&M, WHICH WAS THE SOLE PROPERTY OF M&M. IN THIS REGARD MY ATTENTION W AS DRAWN TO THE TRIPARTITE AGREEMENT DATED 21 MARCY, 1 998 AMONGST THE APPELLANT (THEN CALLED AS KORIN), M/S SAMLIP AND M/S MAHINDRA & MAHINDRA. THE CLAUSE (15) OF THE SAME, READS AS UNDER:- THE CLAUSE (15) OF THE SAME, READS AS UNDER:- '15. TOOLINGS SUBJECT TO THE PROVISIONS OF THIS AGREEMENT, THE PROTOTYPE TOOLINGS DEVELOPED AND MANUFACTURED BY SAMLIP AND THE PRODUCTION TOOLINGS DEVELOPED AND MANUFACTURED KORIN, FOR THE PURPOSE OF THIS AGREEME NT, SHALL BECOME THE SOLE AND EXCLUSIVE PROPERTY OF M&M . IF SO DESIRED BY M&M, SAMLIP SHALL DELIVER TO M&M THE PROTOTYPE TOOLING DEVELOPED AND MANUFACTURED BY SAM LIP. M&M SHALL BEAR THE COST OF TRANSPORTATION OF SUCH TOOLINGS. FURTHER, IMMEDIATELY UPON EXPIRATION OR TERMINATION, WHICHEVER IS EARLIER OF THIS AGREEMENT , KORIN SHALL, AT NO COST TO M&M, DELIVER TO M&M, A COMPLETE SET OF PRODUCTION TOOLINGS REQUIRED FOR TH E MANUFACTURE OF THE PRODUCT OF THE SAME QUALITY, AND RELATED DOCUMENTATION AND INFORMATION. 5 THE COST OF PRODUCTION TOOLINGS REQUIRED FOR THE MANUFACTURE OF THE PRODUCTS IS ESTIMATED AT RS.4,OO,OO,OOO/- (RUPEES FOUR CRORE ONLY). M&M SHAL L PAY TO KORIN AS AN ADVANCE, AT THE TIME OF THE PLAC EMENT OF THE ORDER FOR SUCH PRODUCTION TOOLINGS, RS.4,OO,OO,OOO/-OR THE ACTUAL COST, WHICHEVER IS LOWER. KORIN SHALL MANUFACTURE OR ARRANGE TO MANUFACTURE THE PRODUCTION TOOLINGS. IT IS AGREED BETWEEN THE PARTIES THAT THE FULL AMOUNT PAID BY M& M TOWARDS SUCH DEVELOPMENT DRAWING SHALL BE RECOVERAB LE BY M&M FROM KORIN, AND FOR THE PURPOSE, KORIN SHALL DEDUCT AN AMOUNT ARRIVED AT BY DIVIDING THE TOTAL AMOUNT ACTUALLY PAID BY M&M BY 500,000 FROM THE SUPPLY PRICE OF EACH IFS SYSTEM IN RESPECT OF THE F IRST 500,000 NUMBERS OF IFS SYSTEM SUPPLIED TO M&M, PURSUANT TO THIS AGREEMENT.' THE CLAUSE (21) OF THE SAID AGREEMENT RELATING TO INTELLECTUAL PROPERTY RIGHT ARISING FROM SAID AGREE MENT READS AS UNDER: '21. INTELLECTUAL PROPERTY /TITTLE THE DESIGN DATA, DRAWINQS, AND OTHER TECHNICAL INFORMATION GENERATED/DEVELOPED/ OBTAINED BY SAMLIP PURSUANT TO THIS AGREEMENT SHALL BECOME THE SOLE AN D EXCLUSIVE PROPERTY OF SAMLIP TILL PAYMENT BY M&M OF KWO 3,521,000,000/-. ON PAYMENT OF FULL AMOUNT OF 6 KWO 3,521,000,000/-/- BY M&M TO SAMIIP, SAMLIP'S RIGHTS AND TITLE IN SUCH DESIGN DATA, DRAWINGS AND OTHER TECHNICAL INFORMATION SHALL AUTOMATICALLY STAND TRANSFERRED TO M&M SOLELY AND EXCLUSIVELY. SAMLIP AND KORIN SHALL NOT USE/TRANSFER TO ANY THIR D PARTY, SUCH DESIGN, DATA, DRAWING AND OTHER TECHNIC AL INFORMATION AT ANY TIME FOR ANY PURPOSE OTHER THAN THE PURPOSE OF THIS AGREEMENT. ' PERUSAL OF THE AGREEMENT DATED 21 MARCH, 1998 CLEARLY SHOW THAT DEVELOPMENT OF DRAWING, WHICH IS MAIN PRODUCT OF THE PROTOTYPE AGREEMENT IS CLEARLY SHOWN TO BE PROPERTY OF MIS MAHINDRA & MAHINDRA {M&M}. FURTHER, THE AGREEMENT CLEARLY PROVIDES THAT IN TER MS OF THE AGREEMENT, DESIGN AND DRAWING TAKEN INTO MANUFACTURING OF THE PRODUCTS, AND THE RELATED DOCUMENTS SHALL BE HANDED OVER TO M/S MAHINDRA & MAHINDRA ON TERMINATION OF THE AGREEMENT. KEEPING I N VIEW THE SAME, IT IS EVIDENT THAT THE APPELLANT COM PANY WAS GIVEN ONLY LIMITED RIGHTS BY M&M TO USE THE PROTOTYPE TOOLING AND DRAWING DEVELOPED BY M/S SAML IP BY M&M FOR WHICH PURPOSE THE PAYMENT WAS PAID BY MI S M&M TO THE SAID M/S SAMLIP IN LIEU OF WHICH PAYMENT OF TECHNICAL FEE TO MIS MAHINDRA & MAHINDRA WAS MADE FOR THE 7 PURPOSE OF MANUFACTURING THE IFS SYSTEM FOR M/S MAHINDRA & MAHINDRA. IT IS OBVIOUS THAT THE APPELLANT COMPANY, BEING AUTO PART MANUFACTURER FOR M/S MAHINDRA & MAHINDRA IS SOLELY DEPENDENT UPON THE BUSINESS GIVEN TO IT BY M/S MAHINDRA & MAHINDRA. IN VIEW OF THE REQUIRED MODERNIZATION IN THE IFS SYSTEM, THE SAID M/S MAHINDRA & MAHINDRA MADE PAYMENT TO THE KOREAN COMPANY, M/S SAMLIP FOR DEVELOPING THE PROTOTYPE TOOLING AND ALLOWED THE APPELLANT TO USE THE SAME FOR MANUFACTURING THE IFS COMPONENTS AS PER THE REQUIREMENT OF M/S MAHINDRA & MAHINDRA ON PAYMENT OF TECHNICAL FEE. CLEARLY IN SUCH A CASE, M/S MAHINDRA & MAHINDRA GOT THE OWNERSHIP OVER THE ASSET AND THE APPELLANT WAS GRANTED LIMITED RIGHTS BY MAHINDRA & MAHINDRA TO USE THE SAME TO MANUFACTUR IFS SYSTEM, IN ACCORDANCE WITH THEIR REQUIREMENT, ON PAYMENT OF TECHNICA1 FEE'. IN VIEW OF THE SAME, THE PAYMENT IS HELD TO BE REVENUE IN NATURE. I FIND THAT THE APPELLANT HAS BEEN MAKING SUCH PAYMENT FROM AY 1999-2000 ONWARDS, WHICH HAVE BEEN ACCEPTED AS REVENUE IN NATURE BY THE DEPARTMENT IN THE EARLIER YEARS. 7.1 AFTER GOING THROUGH THE FINDINGS OF THE LD.CIT( A), WE FIND THAT 8 THE ASSESSEE COMPANY, BEING AUTO PART MANUFACTURER FOR M/S MAHINDRA & MAHINDRA IS SOLELY DEPENDENT UPON THE BU SINESS GIVEN TO IT BY M/S MAHINDRA & MAHINDRA AND IN VIEW OF THE REQUIRED MODERNIZATION IN THE IFS SYSTEM, THE SAID M/S MAHIN DRA & MAHINDRA MADE PAYMENT TO THE KOREAN COMPANY, M/S SAMLIP FOR DEVELOPING THE PROTOTYPE TOOLING AND ALLOWED THE ASSESSEE TO U SE THE SAME FOR MANUFACTURING THE IFS COMPONENTS AS PER THE REQUIRE MENT OF M/S MAHINDRA & MAHINDRA ON PAYMENT OF TECHNICAL FEE. CL EARLY IN SUCH A CASE, M/S MAHINDRA & MAHINDRA GOT THE OWNERSHIP OVE R THE ASSET AND THE ASSESSEE WAS GRANTED LIMITED RIGHTS BY MAH INDRA & MAHINDRA TO USE THE SAME TO MANUFACTUR IFS SYSTEM, IN ACCORDANCE WITH THEIR REQUIREMENT, ON PAYMENT OF TECHNICA1 FEE '. IN VIEW OF THE SAME, THE DECISION OF THE LD. CIT(A) IN TREATIN G THE PAYMENT AS HELD TO BE REVENUE IN NATURE IS CORRECT ONE. EVEN O THERWISE, THE ASSESSEE HAS BEEN MAKING SUCH PAYMENT FROM AY 1999 -2000 ONWARDS, WHICH HAVE BEEN ACCEPTED AS REVENUE IN NAT URE BY THE DEPARTMENT IN THE EARLIER YEARS. ACCORDINGLY, WE A RE OF THE VIEW THAT THE LD. CIT(A) HAS PASSED A WELL REASONED ORDE R, WHICH DOES NOT NEED ANY INTERFERENCE ON OUR PART, HENCE, WE U PHOLD THE ORDER OF THE LD. CIT(A) ON THE ISSUE IN DISPUTE AND DECI DE THE ISSUE IN DISPUTE AGAINST THE REVENUE. 8. WITH REGARD TO ISSUE NO. 2 RELATING TO RESTRIC TING ADDITION OF RS. 29,65,939/- MADE BY THE AO ON ACCOUNT OF DISALL OWANCE U/S. 14A TO RS. 6,56,227/- IS CONCERNED, WE FIND THAT LD . CIT(A) HAS ADJUDICATED THIS ISSUE PARA NO. 6.3 AT PAGE NO. 9 TO 10 OF THE IMPUGNED ORDER WHICH IS REPRODUCED HEREUNDER:- 6.3 REGARDING GROUND NO. 2 OF THE APPEAL, I FIND T HAT THERE IS NO DISPUTE THAT RULE 8D OUGHT TO HAVE BEEN APPLIED FOR WORKING OUT OF DISALLOWANCE UNDER SECTION 14A. THE ONLY DISPUTE IS WITH RESPECT TO 9 CALCULATION THEREIN, PARTICULARLY IN RESPECT OF RUL E 8D(2)(II). THE APPELLANT HAD SUBMITTED THAT THE COMPANY HAS SIGNIFICANT OWN FUNDS AVAILABLE WITH IT. ON THE BASIS OF A DAY-TO-DAY AVAILABILITY OF CA SH FLOW FN THE CC ACCOUNT, THE APPELLANT FURNISHED WORKING BEFORE ME THAT OUT OF THE-TOTAL INVESTMENT OF RS.20 CRORES, IN RESPECT OF INVESTMENT OF 9.72 CRORES, THE APPELLANT HAD REALIZED ADEQUATE INCOME FROM SALES TO COVER SUCH BORROWING ON THE SAME DAY AND HENCE THE CONTENTION THAT NO INTEREST OUGHT TO HAVE BEEN CHARGED FOR SUCH INVESTMENTS IS FOUND TO BE CORRECT. SIMILARLY, THE APPELLANT'S CONTENTION THAT FOR MAKING INVESTMENT ON DIFFERENT DATES AGGREGATING TO RS.8.63 CRORES, THE DEBIT BALANCE IN THE CC ACCOUNT WAS DULY SQUARED UP WITHIN 2 DAYS ON RECEIPT OF INCOME FROM SALE, IS ALSO FOUND TO BE CORRECT ON PERUSAL OF SUCH CASH FLOW STATEMENT. THE ASSESSEE ACCORDINGLY MADE ADDITIONAL DISALLOWANCE BEFORE ME OF FURTHER AMOUNT OF RS. 61,271/- IN RESPECT OF THE EXACT PERIOD FOR WHICH BORROWED FUNDS WERE USED IN THE CC ACCOUNT FOR MAKING INVESTMENTS. IN VIEW OF THE ABOVE, THE TOTAL DISALLOWANCE UNDER SECTION 14A IS WORKED OUT AT RS. 6, 56,277/. 10 IN VIEW OF THE SAME, THE APPELLANT GETS A RELIEF OF RS.23,09,662/-. 8.1 AFTER GOING THROUGH THE FINDINGS OF THE LD.CIT( A), WE FIND THAT THERE IS NO DISPUTE THAT RULE 8D OUGHT TO HAVE BEE N APPLIED FOR WORKING OUT OF DISALLOWANCE UNDER SECTION 14A. THE ONLY DISPUTE IS WITH RESPECT TO CALCULATION THEREIN, PARTICULARLY I N RESPECT OF RULE 8D(2)(II). THE ASSESSEE HAD SUBMITTED BEFORE THE L D. CIT(A) THAT THE COMPANY HAS SIGNIFICANT OWN FUNDS AVAILABLE WIT H IT. ON THE BASIS OF A DAY-TO-DAY AVAILABILITY OF CASH FLOW FN THE CC ACCOUNT, THE ASSESSEE FURNISHED WORKING BEFORE ME THAT OUT OF TH E TOTAL INVESTMENT OF RS.20 CRORES, IN RESPECT OF INVESTMEN T OF 9.72 CRORES, THE ASSESSEE HAD REALIZED ADEQUATE INCOME FROM SALE S TO COVER SUCH BORROWING ON THE SAME DAY AND HENCE THE CONTENTION THAT NO INTEREST OUGHT TO HAVE BEEN CHARGED FOR SUCH INVEST MENTS IS FOUND TO BE CORRECT. SIMILARLY, THE ASSESSEE CONTENTION THAT FOR MAKING INVESTMENT ON DIFFERENT DATES AGGREGATING TO RS.8.6 3 CRORES, THE DEBIT BALANCE IN THE CC ACCOUNT WAS DULY SQUARED UP WITHIN 2 DAYS ON RECEIPT OF INCOME FROM SALE, IS ALSO FOUND TO BE CORRECT ON PERUSAL OF SUCH CASH FLOW STATEMENT. THE ASSESSEE ACCORDIN GLY MADE ADDITIONAL DISALLOWANCE BEFORE THE LD. CIT(A) OF FU RTHER AMOUNT OF RS. 61,271/- IN RESPECT OF THE EXACT PERIOD FOR WHI CH BORROWED FUNDS WERE USED IN THE CC ACCOUNT FOR MAKING INVESTMENTS. IN VIEW OF THE ABOVE, THE TOTAL DISALLOWANCE UNDER SECTION 14A WAS WORKED OUT AT RS. 6,56,277/. IN VIEW OF THE SAME, THE LD. CIT(A) GAVE A RELIEF OF RS.23,09,662/- TO THE ASSESSEE. IN THE BACKGROUND O F THE AFORESAID 11 DISCUSSIONS, WE ARE OF THE VIEW THAT THE SAID CALC ULATIONS / QUANTIFICATIONS NEEDS TO BE EXAMINED AT THE LEVEL O F THE AO, BECAUSE LD. CIT(A) HAS NOT GIVEN ANY CHANCE TO THE AO FOR MAKING SUCH CALCULATIONS/ QUANTIFICATIONS WHICH IN THE INTEREST OF JUSTICE IS VERY ESSENTIAL. ACCORDINGLY, IN THE INTEREST OF JUSTICE , WE SET ASIDE THE ISSUE IN DISPUTE TO THE FILE OF THE AO FOR FRESH CO NSIDERATION AND DECIDE THE SAME IN VIEW OF THE LAW LAID DOWN BY THE HONBLE DELHI HIGH COURT IN ITS DECISION DATED 2 ND SEPTEMBER, 2015 IN THE CASE OF CHEMINVEST LTD. VS. COMMISSIONER OF INCOME TAX REPO RTED IN (2015) 378 ITR 33 (DELHI). 9. IN THE RESULT, THE APPEAL OF THE REVENUE IS PA RTLY ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 13/12/2016 . SD/- SD/- (T.S. KAPOOR) (H.S. SIDHU) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED: 13/12/2016 *SR BHATNAGAR* COPY FORWARDED TO: - 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR, ITAT TRUE COPY BY ORDER, ASSISTANT REGISTRAR