MAHINDRA TRUCKS AND BUSES LIMITED, MUMBAI V. DCIT-2(2)(2), MUMBAI

ITA 519/MUM/2018

• Counselvise Citation: [2022] 105 COUNSELVISE.COM (IT) 3394 (ITAT-MUMBAI)
• Duration Of Justice: 4 year(s) 3 month(s) 2 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 27-04-2022
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: J
• Assessment Year: 2013-2014
• Appeal Filed On: 24-01-2018
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Capital asset; Business income; Depreciation; Transfer pricing; Additional evidence; Capital receipt; Unabsorbed depreciation; Revenue expenditure; Capital expenditure; TDS
• Section: 37; 143(3); 92D; 194C; 10B; 201; 43; 40a(ia); 13; 22; 92CA

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL “J” BENCH, MUMBAI BEFORE SHRI PRASHANT MAHARISHI, AM AND SHRI SANDEEP SINGH KARHAIL, JM ITA No. 519/Mum/2018 (Assessment Year 2013-14) Mahindra Two Wheelers Ltd, (formerly Mahindra Trucks and Buses Ltd.) Gateway Building, Apollo Bunder, Mumbai-400 001 Vs. The Dy. Commissioner of Income Tax, 2(2)(2), Ayakar Bhavan, M.K. Road, Mumbai- 400 020 (Appellant) (Respondent) PAN No. AAACM7863L Assessee by : Ms. Karishma Phatarphekar & Shri Pratik Podar, ARs Revenue by : Ms. Vatsalaa Jha, CIT DR Date of hearing: 03.02.2022 Date of pronouncement : 28.04.2022 O R D E R PER PRASHANT MAHARISHI, AM: 01. This appeal is filed by Mahindra Two wheelers Limited [ earlier known as Mahindra Trucks and Buses Limited] for AY 2013-14 against the order passed under section 143(3) read with section 144C(13) of The Income-Tax Act, 1961 (the Act) passed by the Dy. Commissioner of Income-tax- 2(2)(2), Mumbai (the Assessing Officer) dated 30 th November, 2017. 02. During the pendency of appeal, there is a change in the name of the appellant from Mahindra trucks and buses Ltd Page | 2 ITA No.519/Mum/2018 Mahindra Trucks & Buses Ltd.; AY 13-14 to Mahindra two wheelers Ltd; assessee has filed revised form number 36 to this effect on 22/02/2021. 03. The assessee is a company engaged in the business of manufacture and sale of commercial vehicles, spare parts and its components. Assessee filed return of income on 26 th November, 2013 at a loss of Rs. 335,61,83,066/-, which was picked up for scrutiny and consequently draft assessment order was passed by the learned Assessing Officer, wherein the adjustment proposed by the learned Jt. Commissioner of Income-tax, Transfer Pricing-3(2), Mumbai by order under section 92CA(3) of The Act dated 31 st October, 2016, was incorporated. The draft order was objected before Dispute Resolution Panel-3, Mumbai (DRP), who passed direction on 27 th September, 2017 and consequently the impugned assessment order was passed wherein the income of the assessee was determined at Rs. 60,32,061/-. 04. Assessee is aggrieved with that order has preferred the appeal before us raising the following grounds of appeal:- Being aggrieved by the order passed by the Deputy Commissioner of Income tax Circle 2 (2) (2) Mumbai (DCIT, for short) the Appellant submits the following grounds of appeal for your sympathetic consideration Expenditure debited to Profit and loss account Rs. 4,78,71,842/ Page | 3 ITA No.519/Mum/2018 Mahindra Trucks & Buses Ltd.; AY 13-14 On the facts and in the circumstances of the case and in law the Appellant contends that the learned DCIT erred in proposing and the DRP erred in confirming disallowance of the following sums treating the same as capital expenditure: Sl No. Nature of Expense Amount A) R&D expenses during the year 1. Direct wages 42,99,332/- 3. R&D – Others 2,50,55,852 4. R & D –Testing & Analysis Charges 1,84,32,732 5. Stores Consumed 1,528 82399/- 6. Tools Consumed – Small 1,528 The learned DCIT/DRP ought to have upheld the Appellant's contention that the expenses were incurred wholly and exclusively for the purpose of business of the Appellant and were revenue incurred wholly and exclusively for the purpose of business of the Appellant and were revenue in nature and therefore were allowable as deduction as claimed instead allowing only depreciation thereon at the rate of 25% resulting in net disallowance of Rs.3,59,03,881/-. The claims of the Appellant be allowed without prejudice to the above and to similar contentions raised in this regard in earlier assessment years the learned DCIT be directed to allow depreciation at the rate of 25% in respect of the block of assets Page | 4 ITA No.519/Mum/2018 Mahindra Trucks & Buses Ltd.; AY 13-14 representing development expenditure similarly disallowed in preceding assessment years. 2. Disallowance under section 40a(ia) in respect of dealer incentives of ₹23,18,59,282/- rejecting Appellant’s contention that tax was not deductible on dealer incentive under section 194H of the Act. In any event, the learned DCIT/Dispute Resolution Panel ought to have appreciated that unless the Appellant is held to be an assessee in default under section 201 of the Act, it cannot be held that the Appellant had failed to deduct tax at source in accordance with the provisions of the Act so as to merit disallowance under section 40a(ia) of the Act. In any event the learned DCIT/Dispute Resolution Panel ought not to have made disallowance under section 40a(ia) in those cases where the payees had filed their returns of income and paid tax due there under for the relevant assessment year, there being thus no subsisting tax liability of the payee which would entitle the Appellant to claim deduction under the proviso to the section at any subsequent point of time. Further in our appeals against this disallowance for Assessment Year 2007-08 & 2008-09, the Honorable commissioner of Income (Appeals), has allowed our claim of dealer incentive and deleted the disallowance made by D.C.I.T. (Appellate order No. CIT(A)- 5.DIT2(2)/IT-96/2010-11 for Assessment Year 2007- Page | 5 ITA No.519/Mum/2018 Mahindra Trucks & Buses Ltd.; AY 13-14 08 and Appellate order No. CIT(A)-5/JCIT(OSD) 2(2)/IT-252/2011-12 for Assessment Year 2008-9) The addition made by the learned DCIT/Dispute Resolution Panel being contrary to the provisiosn of law be deleted. 3. Disallowance under section 35(1)(i) and 35(1)(iv) of ₹13,84,28,478/- On the facts and in the circumstances of the case and in law the learned DCIT erred in disallowing expenditure of ₹13,13,40,403/- claimed under section 35(1)(i) and ₹70,88,075/- claimed under section 35(1)(iv) rejecting the contention of the Appellant that the said expenditure was indeed incurred on scientific research and instead allowing only depreciation thereon at the rate of 25% resulting in net disallowance of ₹10,38,21,359/-. The disallowance, based on an incorrect appreciation of facts be deleted. Without prejudice to the above and to similar contentions raised in this regard in earlier assessment years the learned DCIT be directed to allow depreciation at the rate of 25% in respect of the block of assets representing expenditure on scientific research similarly disallowed in preceding assessment years. Page | 6 ITA No.519/Mum/2018 Mahindra Trucks & Buses Ltd.; AY 13-14 4. Disallowance of claim that Industrial Promotional Subsidy Incentive of Rs. 18,81,19,155/- was a capital receipt. On the facts and in the circumstances of the case and in law the learned DCIT erred in proposing and the DRP erred in not accepting the contention of Appellant that Industrial Promotion Subsidy of Rs. 18,81,19,155/- received from Government of Maharashtra pursuant to the Package Scheme of Incentives was not taxable on the ground that it was a capital receipt. The learned DCIT be directed to exclude the said sum from the income of the Appellant. Without prejudice to the above the said amount be adjusted against the cost of relevant block of fixed assets and the WDV thereof recomputed. 5. Disallowance under Section 92CA(3) of Adjustment in Arms Length Price of Rs.2,19,64,47,328/- The learned Assessing Officer ('AO') / Transfer Pricing Officer ('TPO')/ Dispute Resolution Panel ('DRP') has erred in passing the aforesaid assessment order dated November 30, 2017 which was received by the assessee on November 30, 2017) without appreciating the facts of the case both in essence and substance. Page | 7 ITA No.519/Mum/2018 Mahindra Trucks & Buses Ltd.; AY 13-14 The learned AO / TPO / DRP has misapprehended the entire pricing arrangement of the specified domestic transaction ('SDT') of payment made by the appellant to Mahindra Vehicle Manufacturers Limited ('MVML' / 'related party') for purchase of finished goods. The learned AO / TPO I DRP failed to appreciate that the payment made by the appellant for the purchase of finished goods approximately constitutes of 70 % - 75% towards material and conversion cost incurred by the related party on a back-to-back basis to the appellant. The learned AO / TPO / DRP did not take cognizance of additional evidence filed by the appellant vide submission dated August 23, 2017. Furthermore, learned AO / TPO / DRP erroneously rejected the appellant's claim of no mark-up being levied by the related party on third party vendor costs contending that the appellant has not provided any evidence to prove that no mark-up has been charged. The learned AO / TPO / DRP has erred in not appreciating the fact that the appellant in his additional evidence provided the entire backward trail of evidences to prove that no mark-up has been charged; commencing from consideration paid by appellant to its related party until the third party vendor cost details (including third party invoices) incurred by the related party for manufacturing of Page | 8 ITA No.519/Mum/2018 Mahindra Trucks & Buses Ltd.; AY 13-14 Heavy Commercial Vehicles ('HCVs'); factored in the transfer price. Further, the learned AO / TPO / DRP has erred in not limiting the transfer pricing adjustment to cost elements beyond the material cost, which are purely third party vendor costs charged on a back-to-back basis by MVML to the appellant. The learned AO / TPO / DRP erred in disregarding the entire additional evidence of the appellant and misapprehended the fact that profit before tax of INR 430.53 crores as generated by related party, was after debiting entire costs sustained by it, inclusive of expenses that were being claimed by the appellant on which no mark-up is paid. Incidentally, the learned AO / TPO / DRP failed to acknowledge the fact that the related party is also engaged in another business segment of manufacturing Light Commercial Vehicles ('LCV) which constitutes 90% of its total revenue and the business segment which pertains to the SDT transaction for purchase of finished goods constitutes - HCV segment which only constitutes 10% percent of total revenue. Accordingly, the premise of rejecting the additional evidence taken by learned AO /TPO / DRP is erroneous. The learned AO / TPO / DRP has grossly erred in disregarding the economic adjustments i.e. capacity utilization adjustment being performed and applied by Page | 9 ITA No.519/Mum/2018 Mahindra Trucks & Buses Ltd.; AY 13-14 the appellant to operating margins earned by it under the HCV manufacturing segment on account of its underutilized manufacturing capacity for the year under consideration vis-â-vis the operating margins earned by the comparable companies. The learned AO / TPO / DRP has misconstrued the facts and erroneously believed the appellant of claiming capacity adjustment for under-utilized capacity sustained by the AE. The learned AO / TPO / DRP has failed to appreciate and find merit in the fact that lack or deficiency of requisite information and data cannot be a lucid justification for disregarding the capacity utilization adjustment. The learned AO / TPO / DRP erred in not acknowledging the fact that the losses incurred by the assessee were genuine due to business, commercial and economic reasons and accordingly there was a need to perform capacity utilization adjustment to establish comparability. The learned AO/ TPO / DRP failed to appreciate failed to appreciate verdict of its very own jurisdictional tribunal in case of FIAT India Private Limited ITA No. 1848/Mum/2009 The learned AO / TPO/ DRP erred in rejecting Ural India Limited and Force Motor Limited as a comparable company to the appellant's HCV segment Page | 10 ITA No.519/Mum/2018 Mahindra Trucks & Buses Ltd.; AY 13-14 on the ground that volume of turnover and functionality were incomparable, respectively. The learned AO / TPO /DRP made an arbitrary and subjective application of lower turnover filter for rejection of Ural India Limited as a comparable company and did not apply such filter for companies with higher turnover to establish comparative analysis. The learned AO / TPO/ DRP failed to acknowledge that annual report of Force Motors Limited substantiated the fact of it being engaged in business of manufacturing HCVs. The learned AO / TPO / DRP failed to acknowledge the fact that the appellant had no intentions to erode the taxable base, since in the instant case neither the appellant nor MVML avails tax holiday benefits. Furthermore, with regard to transaction under appeal herein, there were no other tax arbitrage opportunities arising as the appellant was a loss making entity contrary to MVML, a profit making entity. The learned AO/TPO / DRP failed to appreciate the appellant's reliance on principle laid down by the Supreme Court ruling in case of Glaxo Smithkline Asia (P) Ltd (2010/236 CTR (SC) 113). The learned AO / DRP failed to appreciate that the amendment in Section 92BA of the Income Tax Act, Page | 11 ITA No.519/Mum/2018 Mahindra Trucks & Buses Ltd.; AY 13-14 1961, vide Finance Act 2017 (with effect from 1 April 2017, whereby clause (i) of Section 92BA is omitted, is deemed to be omitted from inception and on account of its omission, the impugned transaction would not fall within the definition of specified domestic transactions. The appellant places reliance on the Bangalore Tribunal verdict in case of Texport Overseas Private Limited v. DCIT [IT (TP) A No.1722/Bang/2017] wherein it ruled – “IT would be deemed that clause (i) of section 92BA of the Income Tax Act, 1961 was never on the statute as it has been omitted w.e.f. April 01,2017 vide Finance Act, 2017 and nothing was specified whether the proceedings initiated or action taken on this continue. 6. Carry forward Losses - The learned DCIT erred in not passing a speaking order quantifying carry forward of unabsorbed losses and unabsorbed depreciation for the current as well as the earlier years. Each one of the above grounds of appeal is without prejudice to the other. Your appellant reserves the right to add to, alter or amend any of the above grounds of appeal, if felt necessary. Page | 12 ITA No.519/Mum/2018 Mahindra Trucks & Buses Ltd.; AY 13-14 05. During the course of hearing, on 14 August 2019, assessee filed an application for admission of the additional ground invoking the provisions of Rule 11 of The Income Tax [Appellate Tribunal] Rules 1963. 06. The additional ground raised is as Under:- “7. On the facts and circumstances of the case and in law, no transfer pricing adjustment made in pursuance of Section 92BA (i) of The Income Tax Act, 1961 (Act) can be sustained as the same has been omitted without the saving clause.” 07. It was stated that the failure to raise the additional ground at the time of filing of the original appeal was not deliberate but arising out of the legal position which has come to the notice of the appellant subsequent to filing of the appeal. It was further stated that the facts are not required to be further investigated and are on record. It was stated that this ground goes to the root of the matter, is purely a legal ground, and therefore should be admitted. The application relied upon several judicial precedents. 08. Learned authorised representative reiterated the same argument as stated in the application and submitted that the additional ground deserves to be admitted. 09. The learned CIT DR vehemently opposed the additional ground and submitted that it should not be admitted at this stage. Page | 13 ITA No.519/Mum/2018 Mahindra Trucks & Buses Ltd.; AY 13-14 010. We have carefully considered the rival contentions and find that the assessee has raised the additional ground of appeal, which goes to the root of the matter, is legal ground, does not require any further facts to be investigated, and therefore deserves to be admitted. The claim of the assessee is further supported by several judicial precedents. Therefore, we admit the additional ground. 011. On the merits of additional ground, The learned authorised representative submitted that additional ground raised is covering the adjustment made u/s 92CA (3) of the Act in in arm’s-length price of ₹ 2,196,447,328/– of specified domestic transactions. She submitted that there is no provision which provides for determination of Arm’s length price [ ALP] of the specified Domestic Transaction covered u/s 40 A (2) now as clause 92BA (i) is omitted By The Finance Act 2017 without any savings clause , total addition deserves to be deleted on this ground only. Therefore, she submitted that without going into the merits of the addition issue is squarely covered in favour of the assessee by the several judicial precedents. She submitted that decision of SMR Automotive Systems India Ltd versus Asst Commissioner of income tax in ITA number 6614/Del/2017 dated 30 June 2021 covers all those decisions. She referred to paragraph number 15 of the decisions wherein the issue first arose before the Bangalore bench in ITA (TP) number Page | 14 ITA No.519/Mum/2018 Mahindra Trucks & Buses Ltd.; AY 13-14 1722/2017. She referred to paragraph number 16 further where the decision of the coordinate bench was confirmed by the honourable Karnataka High Court in ITA number 392/2018. She further referred to the decision of the coordinate bench in Amman India (private) Ltd versus ACIT (2022) 134 taxmann.com 10. The crux of the argument was that by The Finance Act 2012 with effect from 1/4/2013 the provisions of Section 92, 92C, 92D and 92E were made applicable to certain specified domestic transactions by introduction of Section 92BA of the act. One of the specified domestic transaction as per Section 92BA (i) was with respect to any expenditure in respect of which payment has been made or is to be made to a person referred to in clause (b) of subsection (2) of Section 40A. This clause i.e. 92BA (i) was omitted by The Finance Act, 2017 with effect from 1/4/2017. Honourable Karnataka High Court in case of principal Commissioner of income tax versus Texport overseas (P) Ltd [2020] 114 taxmann.com 568 (Karnataka) has held as Under:- “5. Having heard learned Advocates appearing for parties and on perusal of records in general and order passed by tribunal in particular it is clearly noticeable that Clause (i) of section 92BA of the Act came to be omitted w.e.f. 01.04.2019 by Finance Act, 2014. As to whether omission would save the acts is an issue which is no more res intigra in the light of authoritative Page | 15 ITA No.519/Mum/2018 Mahindra Trucks & Buses Ltd.; AY 13-14 pronouncement of Hon'ble Apex Court in the matter of Kolhapur Canesugar Works Ltd. v. Union of India AIR 2000 SC 811 whereunder Apex Court has examined the effect of repeal of a statute vis-a-vis deletion/addition of a provision in an enactment and its effect thereof. The import of section 6 of General Clauses Act has also been examined and it came to be held: "37. The position is well known that at common law, the normal effect of repealing a statute or deleting a provision is to obliterate it from the statute-book as completely as if it had never been passed, and the statute must be considered as a law that never existed. To this rule, an exception is engrafted by the provisions of section 6(1). If a provision of a statute is unconditionally omitted without a saving clause in favour of pending proceedings, all actions must stop where the omission finds them, and if final relief has not been granted before the omission goes into effect, it cannot be granted afterwards. Savings of the nature contained in section 6 or in special Acts may modify the position. Thus, the operation of repeal or deletion as to the future and the past largely depends on the savings applicable. In a case where a particular provision in a statute is Page | 16 ITA No.519/Mum/2018 Mahindra Trucks & Buses Ltd.; AY 13-14 omitted and in its place another provision dealing with the same contingency is introduced without a saving clause in favour of pending proceedings then it can be reasonably inferred that the intention of the legislature is that the pending proceedings shall not continue but fresh proceedings for the same purpose may be initiated under the new provision." 6. In fact, Co-ordinate Bench under similar circumstances had examined the effect of omission of sub-section (9) to Section 10B of the Act w.e.f. 01.04.2004 by Finance Act, 2003 and held that there was no saving clause or provision introduced by way of amendment by omitting sub-section (9) of section 10B. In the matter of General Finance Co. v. ACIT, which judgment has also been taken note of by the tribunal while repelling the contention raised by revenue with regard to retrospectivity of section 92BA(i) of the Act. Thus, when clause (i) of Section 92BA having been omitted by the Finance Act, 2017, with effect from 01.07.2017 from the Statute the resultant effect is that it had never been passed and to be considered as a law never been existed. Hence, decision taken by the Assessing Officer under the effect of section 92BI and reference made to the order Page | 17 ITA No.519/Mum/2018 Mahindra Trucks & Buses Ltd.; AY 13-14 of Transfer Pricing Officer-TPO under section 92CA could be invalid and bad in law. 7. It is for this precise reason; tribunal has rightly held that order passed by the TPO and DRP is unsustainable in the eyes of law. The said finding is based on the authoritative principles enunciated by the Hon'ble Supreme Court in Kolhapur Canesugar Works Ltd. referred to herein supra which has been followed by Co-ordinate Bench of this Court in the matter of M/s. GE Thermometrias India Private Ltd., stated supra. As such we are of the considered view that first substantial question of law raised in the appeal by the revenue in respective appeal memorandum could not arise for consideration particularly when the said issue being no more res integra.” 012. The learned authorised representative also made a detailed submission on this issue drawing our attention to rational to introduction of the transfer pricing provision and its applicability to domestic transfer pricing provisions. It was also stated that domestic transfer pricing regulations are procedural in nature and they ought to be applied only for non-revenue neutral situations. It also emphasized that clause (i) of Section 92BA was omitted without a saving clause. Therefore, the adjustment made Page | 18 ITA No.519/Mum/2018 Mahindra Trucks & Buses Ltd.; AY 13-14 by the learned transfer officer on account of the arm’s- length price of domestic transaction u/s 92BA (i) of the act do not survive. 013. The learned CIT DR also placed a detailed written submission dated 9 February 2022 on the issue wherein also she discussed the background of the insertion and subsequent omission of Section 92BA (i) of the Act. It was stated that omission has been made by The Finance Act 2017 which clearly shows that the amended provisions were applicable only from assessment year 2017 – 18 onwards and therefore all specified domestic transactions benchmarked at arm’s-length up to that assessment year are valid. It was further submitted that coordinate bench in its own decision in Firemenich Aromatics India private limited (2020) 118 Taxmann.com 3 dated 15/7/2020 relying on the decision of the honourable Supreme Court in case of Fibre Boards Private Limited 62 taxmann.com 135 (SC) and Shri Bhagwati steel rolling mills versus Commissioner of Central Excise 2015 (326 ELT 209 observed that Section 6A of the general clauses act states that when any act or regulation is made after commencement of the act, such amendment would not affect the ongoing investigation or legal proceedings. She submitted that coordinate bench ruled that the word ‘repeal’ includes ‘ommission’ and there is no merit in the objection raised by the taxpayer. She heavily relied on paragraph number 13 – 21 of that decision and submitted Page | 19 ITA No.519/Mum/2018 Mahindra Trucks & Buses Ltd.; AY 13-14 that the additional ground raised by the assessee may be dismissed. 014. Alternatively, she submitted that, if the decision of the honourable Karnataka High Court is followed, even then the provisions of Section 40A (2) of the act still exist on the statute book and therefore , transactions which are covered by the above provisions should be examined according to the rules of provisions of Section 40A (2) of the act. For this proposition she relied on the decision of M/s Sobha City (2021) 127 taxman.com 39 (Bangalore). Therefore, the issue needs to be remitted back to the file of the learned assessing officer to examine these transactions in accordance with provisions of Section 40A (2) of the act. 015. In response to that, the learned authorised representative submitted that decisions relied upon by the learned departmental representative are distinguishable. It was stated that in the decision of the coordinate bench in case of Fireminch ITAT was dealing with Department’s ‘substantive right’ being the right of appeal against the order of the learned dispute resolution panel, which was omitted. Further, she referred to several judgments of the coordinate benches wherein the judgment of the honourable Supreme Court in case of Fibreboard (supra) and Shri Bhagwati Rolling Mills (supra) were distinguished. Page | 20 ITA No.519/Mum/2018 Mahindra Trucks & Buses Ltd.; AY 13-14 016. To the alternative argument of the learned CIT DR that these transactions in any case needs to be examined in view of provisions of Section 40A (2) of the act, the learned authorised representative vehemently objected to. She submitted that there are many decisions of the tribunal over and above what have been cited above by her, wherein, no such directions to examine transactions in accordance with provisions of Section 40A (2) is given while deleting the adjustment on account of arm’s-length price of specified domestic transactions. For this proposition she relied upon the decision of the honourable Bombay High Court in CIT versus V S Dempo and Co private limited (2011) 196 taxman 193 and submitted that when assessee as well as the recipient of income are in the same tax bracket and pay same rate of tax, it is not a case of tax evasion and there would not be any significant difference in aggregate tax and therefore it should not be remanded to the AO for examination of allowability of these expenses u/s 40A (2) of the act. 017. We have carefully considered the rival contention and perused the orders of the lower authorities. In the present case there is an adjustment made to the income of the assessee by determining arm’s-length price of specified domestic provisions by invoking the provisions of Section 92BA (i) of the act. The impugned assessment year before us is assessment year 2013 – 14. The above provision i.e. 92BA (i) of the act was inserted by The Page | 21 ITA No.519/Mum/2018 Mahindra Trucks & Buses Ltd.; AY 13-14 Finance Act, 2012 with effect from 1/4/2013 and is omitted by The Finance Act , 2017 with effect from 1/4/2017. The issue whether the adjustment can be made to the total income of the assessee by invoking the provisions of Chapter X of The Income Tax Act to the transactions covered by provisions of Section 92BA (i) for assessment year 2013 – 14 till it was omitted. This issue has been dealt with by the honourable Karnataka High Court in case of Texport overseas (supra) in favour of the assessee holding that as the provisions of Section 92BA (i) has been omitted from the Income Tax Act without any saving clause therefore the natural corollary would be that it did not exist at all in the statute book. Accordingly, we allow the additional ground of appeal and hold that the impugned transfer pricing adjustment of ₹ 2,196,447,328/– made by the learned assessing officer is not sustainable. 018. However we are also conscious that the provisions of Section 40A (2) of the act still exists in the statute book. The decision of the Texport overseas Ltd of the coordinate bench, which was partly challenged by the revenue before the honourable High Court, also held so. In that case, the coordinate bench held that the adjustment on account of examination of the arm’s-length price of the specified domestic transactions is not valid because of deletion of the provisions of Section 92BA (i) of the act with effect from 1/4/2017 without any saving clause, but it held that Page | 22 ITA No.519/Mum/2018 Mahindra Trucks & Buses Ltd.; AY 13-14 provisions of Section 40A (2) of the act governs the allowability of those expenditure and therefore coordinate bench set-aside the matter back to the file of the learned assessing officer. The decision of the coordinate bench setting aside the issue back to the file of the learned assessing officer for examination of allowability in accordance with the provisions of Section 40A (2) of the act has not been challenged by either of the parties before the honourable High Court. Further, the decision of the coordinate bench in case of Sobha City (supra) also held so. In view of this we set-aside ground number 5 of the appeal of the assessee back to the file of the learned assessing officer to examine allowability of expenditure in terms of provisions of Section 40A (2) of the act. 019. We do not agree with the argument of the learned authorised representative that it amounts to giving a second chance to the revenue and therefore no remand is warranted for verification of provisions of Section 40A (2) of the act. Very heavy reliance was placed on the decision of the honourable Bombay High Court in CIT versus V S Dempo and Co (private) Ltd 336 ITR 29 (Bombay). We find that in that particular decision the honourable Bombay High Court has given a categorical answer that the provisions of Section 40A (2) was not attracted in that particular cases because the subsidiary company was not at all related person of the assessee within the meaning of the provisions of Section 40A (2) (b) of the act. No such Page | 23 ITA No.519/Mum/2018 Mahindra Trucks & Buses Ltd.; AY 13-14 facts exist in the case. Contrary to that, in the present case the assessee, itself has stated in its T P study report as well as Report of Accountant in 3CEB stated that these transactions are covered by the provisions of Section 40 (A) (2) of the act. Even otherwise, it is not the fact that revenue is given a second chance. In the present case earlier the impression of the revenue prior to the decision of the coordinate bench and of the honourable Karnataka High Court, was that specified domestic transaction i.e. transactions that are covered by the provisions of Section 40 A (2) are required to be tested in accordance with the provisions of chapter X of the act. However when the judicial precedents show that no such provision exist in the law, the natural corollary would be to examine the allowability of these expenses u/s 40A (2) of the act. 020. In view of this ground number 5 of the appeal of the assessee is partly allowed. 021. Now we deal with ground number 1 of the appeal where assessee has challenged treatment of amount of Rs. 4, 78,71,842/– as capital expenditure whereas the assessee says that expenses were incurred wholly and exclusively for the purposes of the business of the assessee, are revenue in nature and therefore are allowable as deduction u/s 37 (1) of the act. The learned assessing officer allowed the depreciation thereon at the Page | 24 ITA No.519/Mum/2018 Mahindra Trucks & Buses Ltd.; AY 13-14 rate of 25% and thereby disallowed ₹ 35,903,881/–. Assessee has incurred certain development expenditure, which was claimed as revenue expenditure. The justification given by the assessee during the course of assessment proceedings was that assessee company has set up a manufacturing facility for production of commercial vehicle across various tonnage category by setting up of a complete assembly line for rollout of vehicles comprising of 9 tons to 49 tons. In 2005, assessee has entered into the Master Service agreement wherein Mahindra and Mahindra Ltd and International truck and engine Corporation would be providing various services to the assessee. During the previous year assessee incurred expenditure of Rs 4,78,71,842 in the nature of research and development expenditure, personal cost, professional fees, rent charges and other administrative expenses for development of medium and heavy commercial vehicle. Professional fees paid comprises of service fee paid to International truck and engine Corporation for development of vehicles. According to the assessee all these expenditure are of revenue nature as company is already in the business of manufacture and sale of vehicles. Assessee claimed these expenditure as allowable u/s 37 (1) of the act. The learned assessing officer did not accept the explanation of the assessee. The learned AO was of the view that activities of heavy and commercial vehicle has not been Page | 25 ITA No.519/Mum/2018 Mahindra Trucks & Buses Ltd.; AY 13-14 started during the assessment year under consideration. Therefore charging of these expenditure to the profit and loss account which have not resulted in the income in the profit and loss account for this year , would fail the matching principle of accounting. Therefore, he held that this expenditure is capital in nature and only depreciation thereon is allowable. Hence he considered these expenditure as capital expenditure and allowed depreciation at the rate of 25% amounting to RS 1,19,67,961/– and a sum of ₹ 31,503,881/– was added as a capital expenditure hence disallowed. The learned dispute resolution panel considered the objections of the assessee in paragraph number 8.2 and dismissed the same. Therefore, assessee is in appeal before us. 022. The learned authorised representative submitted that identical issue arose in the case of Mahindra Navistar Automotives Ltd versus Deputy Commissioner Of Income Tax in 181 TTJ 271 in assessment year 2007 – 08 and 2008 – 09 dated 13 May 2016. However, she submitted that that in that case it was conceded by the learned authorised representative in paragraph number 2 that the issue was squarely decided against the assessee in the case of associated concern. However, she submitted that when the assessee is already in the line of the manufacturing of vehicles, setting up of an assembly line for a different model of the vehicle, cannot make the expenditure as capital in nature. Therefore, she submitted Page | 26 ITA No.519/Mum/2018 Mahindra Trucks & Buses Ltd.; AY 13-14 that the expenditure should be allowed to the assessee as revenue expenditure. 023. The learned CIT DR vehemently supported the orders of the lower authorities. 024. We have carefully considered the rival contentions and perused the orders of the lower authorities. The facts clearly show that assessee is engaged in the business of manufacturing of vehicles. It is setting up assembly line for manufacture of different models of the commercial vehicles. The assessee has sold vehicles of Rs. 651 crores during the year. It is just an expansion of the existing line of manufacturing of commercial vehicles. It is not the case that assessee has started a new business. The disallowance by the learned assessing officer is only because of matching principle, as revenue did not come from the setting up of new assembly line. However, the learned AO lost sight of the fact that assessee is showing substantial sales of heavy vehicles. Further, there is nothing, which has resulted into an enduring benefit to the assessee. In the present world, automobile companies are introducing 5 – 6 variants of different types of vehicles every year , due to frequent changes in the consumer demands as well as change in technology. Ld AO also incorrectly applied matching principle for making disallowance, as he over looked the same line of business of the asessee where sales of vehicles are shown. In Page | 27 ITA No.519/Mum/2018 Mahindra Trucks & Buses Ltd.; AY 13-14 view of this, expenditure incurred by the assessee on setting up of a new line of assembly for manufacturing of commercial vehicle when assessee is already engaging in business of manufacturing commercial vehicle cannot be said to be capital expenditure. Further, the learned dispute resolution panel has recorded in the facts that Assessee Company operates in three verticals i.e. heavy commercial vehicle segment, light commercial vehicle segment and spare parts segment. Therefore, it is apparent that expenses are incurred for development in an existing line of business of manufacturing of heavy commercial vehicles. The decision of the coordinate bench in case of Mahindra Navistar automotive Ltd (supra) do not apply to the facts of the case as in the present case assessee is contesting that the expenses incurred are revenue in nature as no capital asset or benefit of enduring nature was acquired. Accordingly, we direct the learned assessing officer to delete the disallowance of the expenditure holding that expenditure incurred by the assessee of Rs 4,78,71,842/– is revenue in nature. The AO is directed to also withdraw the depreciation allowed in consequence of our above decision. Accordingly, ground number 1 of the appeal is allowed. 025. Ground number 2 is with respect to the disallowance of dealers incentive of ₹ 231,859,282/–. The brief facts of the case show that assessee has claimed deduction of dealer’s incentive of the above sum without deduction of Page | 28 ITA No.519/Mum/2018 Mahindra Trucks & Buses Ltd.; AY 13-14 tax at source. Assessee states that it is selling its vehicles to its dealers on principal-to-principal basis and therefore the transaction with the dealer is a transaction of sale and purchase transaction on which tax is not required to be deducted. Accordingly, assessee states that the dealer’s incentive is not the ‘commission or brokerage’ as has defined in Section 194H of The Income Tax Act. The learned assessing officer rejected the contention of the assessee and stated that dealers of the assessee are in dual role as a buyer of the vehicle and an agent of the assessee. In view of this dealer’s incentive falls within the definition of ‘commission’ as there is a ‘principal and agent’ relationship between the assessee company and dealers and therefore the tax is required to be deducted u/s 194H of the act. Accordingly, he disallowed ₹ 231,859,282/– Under the provisions of Section 40 (a) (i a) of the act. On objections before the learned dispute resolution panel the learned DRP noted that in case of Mahindra and Mahindra Ltd for assessment year 2008 – 09 the coordinate bench on identical facts and circumstances has held that No tax is required to be deducted on dealer’s incentive. This decision of ITAT has been confirmed by honourable High Court vide order dated 6/2/2017. As revenue has filed a special petition before the honourable Supreme Court, which is pending for disposal, therefore panel upheld the action of the AO. Page | 29 ITA No.519/Mum/2018 Mahindra Trucks & Buses Ltd.; AY 13-14 Therefore, this is challenged as per ground number 2 of the appeal. 026. The learned authorised representative submitted that now the SLP filed by the Commissioner of income tax against the decision of the honourable High Court has been dismissed, therefore now the argument of the learned dispute resolution panel also does not survive. 027. The learned CIT DR supported the orders of the lower authorities. 028. We find that on identical facts and circumstances the honourable Bombay High Court in case of Mahindra and Mahindra Ltd [Income Tax Appeal Number 1148 of 2014 dated 6 February 2017] has while deciding the question number 2 (e) , that whether on the facts and in the circumstances of the case and in law, the tribunal was correct in holding that the dealers incentive is not covered by Section 194H as the sale is made on principal to principal basis, ignoring the fact that the relationship between the dealer and the assessee, as clearly brought out by the findings given in the assessment order, is in the nature of principal and agent and that TDS was required to be deducted u/s 194H of The Income Tax Act, 1961 on the payments made as an incentive, or u/s 194C of the income tax act, 1961 as part of contract or performance Under an agreement between the principal and the dealer. The honourable High Court in paragraph number 3 has Page | 30 ITA No.519/Mum/2018 Mahindra Trucks & Buses Ltd.; AY 13-14 held that the coordinate bench has taken a view based on its decision for assessment year 2007 – 08 and held that dealers were found to be on principal to principal basis and therefore not hit by Section 194H of the act. In addition, no appeal against the order of the coordinate bench was filed before honourable High Court for that year. The honourable court further held that as the order for assessment year 2007 – 09 dated 8 June 2012 has been accepted by the revenue that there is no reason to challenge this issue for the impugned assessment year. Further honourable High Court concluded the issue stating that the issue is also covered by the decision of CIT versus Intervet India private limited 364 ITR 238. Against this order, revenue preferred special leave petition before the honourable Supreme Court which has also been dismissed by order dated 12/1/2018 in special leave petition (civil) number 37462/2017. Further, it has been stated by the learned authorised representative that in subsequent years, no disallowance on this account has been made by the learned assessing officer. The learned CIT DR did not controvert this aspect. In view of this, issue is squarely covered in favour of the assessee. Hence we direct the learned assessing officer to delete the disallowance of ₹ 231,859,282 on account of the dealers incentive as no tax is required to be deducted thereon u/s 194 H of the Act. Accordingly, ground number 2 of the appeal is allowed. Page | 31 ITA No.519/Mum/2018 Mahindra Trucks & Buses Ltd.; AY 13-14 029. Ground number 3 is with respect to the disallowance of expenditure of ₹ 131,340,403/– claimed u/s 35 (1) (i) and ₹ 7,088,075 claimed u/s 35 (1) (iv) rejecting the contention of the appellant that the said expenditure was not incurred on scientific research and instead allowing only depreciation thereon at the rate of 25%. The brief facts shows that assessee has claimed deduction of ₹ 131,340,403/– Under the provisions of Section 35 (1) (i) and ₹ 7,088,075/– Under the provisions of Section 35 (1) (iv) of the act. The assessee stated that assessee has incurred product development expenditure during the year, which includes activities of comprising of concept and visibility, business case, design development validation, product readiness, customer trials, freeze development and start of production. To carry out these activities pertaining to product development a lot of application of basic engineering knowledge such as design, CAD CAM, validation etc is carried out. Assessee claims that it involves extension of knowledge in applied science for facilitating the business and therefore it qualifies as a ‘scientific research’ u/s 43 (4) of the Act. Therefore, it is allowable as deduction under the provisions of Section 35 (1) of the act. 030. The learned assessing officer held that the activities carried on by the assessee is not scientific research as assessee has failed to brought on record evidences to qualify the same for scientific research. Further, the Page | 32 ITA No.519/Mum/2018 Mahindra Trucks & Buses Ltd.; AY 13-14 assessee has failed to bring on record as to what research it is carrying on for the purposes of the business. AO noted that these are the expenditure in the nature of small expenses, which do not provide any clue of this being used for scientific research. Accordingly, he disallowed the claim of the assessee. He held that these are the capital expenditure and hence allowed the depreciation thereon at the rate of 25%. Accordingly, the net disallowance of ₹ 103,821,359/– was made. 031. On objection before the learned DRP, it was confirmed. Therefore, assessee is in appeal as per ground number 3. 032. The learned authorised representative referred to page number 211 of the paper book where, in the tax audit report the assessee’s claim is explained and further at page number 733 of the paper book which is a letter dated 13 December 2016 wherein para number 3 the claim of the assessee was explained. It was stated that the above claim is allowable to the assessee and is in accordance with the provisions of the law. It was also stated even otherwise these expenditure are allowable us 37 (1) of the Act as revenue expenditure. 033. The learned CIT DR supported the order of the learned AO by referring specially paragraph number [6] of the order. 034. We have carefully considered the rival contention and perused the orders of the lower authorities. Facts show Page | 33 ITA No.519/Mum/2018 Mahindra Trucks & Buses Ltd.; AY 13-14 that assessee has incurred product development expenses during the year. For product development activities assessee has given a detailed answer by letter dated 13 December 2016 about what are the activities that have been carried out by the assessee. Assessee has stated that all these activities involves extension of knowledge in applied science for facilitating the business and therefore qualifies as a scientific research u/s 43 (4) of the act. Even otherwise, the assessee has stated that these are not capital expenditure at all. Assessee has also stated that it has incurred a capital expenditure of ₹ 7,088,075/– which has been claimed separately Under the provisions of Section 35 (1) (iv) of the act. Deduction u/s 35 (1) (i) of the act is not a weighted deduction claimed by the assessee. The learned DRP has categorically noted that expenses incurred are small in nature and further the assessee has not brought on record the details of research it was carrying on. Assuming that assessee has not brought out complete details on the research and development expenditure incurred by it, otherwise, the expenditure is not capital in nature as per the finding of the learned DRP as it is small, these are otherwise allowable u/s 37 (1) of the act. In view of this, without going into the controversy whether the expenditure incurred by the assessee is on scientific research or not, the expenditure is allowable to the assessee either u/s 37 (1) of the act or u/s 35 (1) (i) of the act to the extent of Page | 34 ITA No.519/Mum/2018 Mahindra Trucks & Buses Ltd.; AY 13-14 expenditure incurred. Explanation of assessee shows that it is carrying on product development activities. It is also an activity for the extension of knowledge in the field of manufacturing of vehicles. In fact, the activities carried out by the assessee are activities for extension of knowledge in the field of the business of the assessee company. It is also not the case of the revenue that it is not related to the business of the assessee. Hence, these are expenditure incurred by assessee on scientific research in the field of manufacturing of vehicles . Therefore, we do not find any reason to uphold the action of the learned assessing officer. Accordingly we direct him to allow deduction u/s 35 (1) (i) of the act of ₹ 131,340,403/–. 035. Coming to the deduction u/s 35 (1) (iv) of the act of ₹ 7,088,075, on which the learned assessing officer has allowed depreciation only instead of allowing the whole expenditure in the year in which it is incurred. We have already held assessee is carrying on scientific research in the business of manufacturing of vehicle. Based on same reasons as given by us for allowing the expenditure of the assessee u/s 35 (1) (i) of the act we also direct the learned assessing officer to delete the disallowance of ₹ 7,088,075/-. As we have allowed the claim of the assessee u/s 35 (1) of the act the learned assessing officer as a natural corollary should withdraw the grant of depreciation allowance to the assessee. Accordingly, ground number 3 of the appeal of the assessee is allowed. Page | 35 ITA No.519/Mum/2018 Mahindra Trucks & Buses Ltd.; AY 13-14 036. Ground number 4 of the appeal of the assessee is with respect to the claim of the assessee that industrial promotion subsidy received of ₹ 188,119,155/– from government of Maharashtra pursuant to the package scheme of incentives is a capital receipt . This claim has been made by the assessee in the computation of income treating it as capital receipt. The assessee was questioned by the learned AO wherein the assessee replied by letter dated 13/12/2016 stating that assessee has invested in plant and machinery at the specified area in the state of Maharashtra and assessee is part of the consortium of companies which falls Under the ‘megaproject’ and have become eligible for sales tax incentive Under the package scheme of incentives announced by the government of Maharashtra. According to that scheme, sales tax incentive is granted. Object of the said scheme is to accelerate industrial development and generation of employment in the state. This incentive is pre-dominantly based on capital investment made by the assessee and is for compensating the company for the additional cost involved in operating from an industrially underdeveloped area. Assessee also stated that it is received based on package scheme of incentives 2007 declared by the government of Maharashtra. Assessee contended that the scheme was meant to improve regional imbalances in the industrial development of the state. Assessee also submitted that the subsidy is not granted for carrying on Page | 36 ITA No.519/Mum/2018 Mahindra Trucks & Buses Ltd.; AY 13-14 day-to-day business of the assessee but to provide impetus in the process of development of industry in backward areas. Assessee also relied on several judicial precedents and stated that according to the decision of the honourable Supreme Court in case of Ponni sugar and chemicals Ltd [174 taxmann 87 ] ‘purposes and object’ of the scheme is required to be seen. However, the learned assessing officer rejected the contention of the assessee and held that the incentives given to assessee for the purpose of compensating for working in the backward areas and not for creating any capital asset. He further held that as assessee is not required to pay the amount of sales tax and assessee is not receiving any subsidy. He was also is of the view that as the benefit is available to assessee only on affecting the sales and therefore assessee is not entitled to any benefit merely because it has made investment in the plant in the backward areas but because of sale. Accordingly, he rejected the claim of the assessee and held that sales tax incentive received by the assessee is a revenue receipt and is chargeable to tax as business income. On objection before the learned DRP, wide para number 11.2, it upheld the view of the learned that AO. The learned DRP further held that assessee has also relied on the decision in the case of special bench however, the judgment of the special bench approved by the honourable Bombay High Court and on appeal before the honourable Supreme Court it was sent back to the Page | 37 ITA No.519/Mum/2018 Mahindra Trucks & Buses Ltd.; AY 13-14 honourable Bombay High Court for reconsideration. In addition, as the issue has not attained finality the action of the AO was upheld. Accordingly, the learned assessing officer held that the government grant received under the above scheme of ₹ 188,119,155/– is a revenue receipt. Assessee is aggrieved. 037. The learned authorised representative submitted the copy of the package incentive scheme 2007 issued by the government of Maharashtra. Referring to the above scheme, she referred to the preamble of the scheme stating that the scheme is put into force to encourage the dispersal of industries to the less developed area of the state. It was also stated that assessee is covered by the scheme. As per serial number 5 of legal paper book. Ld AR has listed down several decisions of the coordinate bench where benefits of package incentive scheme 2007 of government of Maharashtra is held to be capital in nature. In view of this, she submitted that the orders of the lower authorities are not correct in holding that the incentive received by the assessee is a revenue receipt. She further submitted that ‘objects and purpose’ of the subsidy clearly shows that it is capital receipt and cannot be charged to tax. 038. The learned CIT DR vehemently supported the orders of the lower authorities. She specifically referred to the direction of the dispute resolution panel wherein the Page | 38 ITA No.519/Mum/2018 Mahindra Trucks & Buses Ltd.; AY 13-14 decision of the honourable Bombay High Court in decision of special bench in case of Reliance Indusres Limited , has been sent back by the honourable Supreme Court to the file of the honourable Bombay High Court for deciding it afresh. Therefore, she submitted that this issue has not reached finality. In any case it is submitted that the receipt of sales tax incentive by the assessee is based on sales made by the assessee and therefore is revenue in nature. 039. We have carefully considered the rival contention and perused the orders of the lower authorities. On Perusal of the PSI, 2007 shows that the subsidy has been granted to encourage industrial growth in less developed areas of the State. The quantification of subsidy is linked with the amount of investment made in setting up of the eligible units. Payment of the subsidy is in the form of refund of VAT and CST paid on sale. Assessee claimed before the lower authorities that the subsidy was a capital receipt and, hence, not chargeable to tax which was rejected As held by Hon Supreme court in case of Ponni Sugar (Supra) decisive factor for considering the nature of subsidy as a ‘capital’ or ‘revenue’ receipt is the 'purpose' for which the subsidy has been granted and not the manner of its disbursal. Purpose of granting the subsidy, which is nothing but establishment of new industrial units in less developed areas of the State i.e. to develop underdeveloped areas of the state. Further, on identical Page | 39 ITA No.519/Mum/2018 Mahindra Trucks & Buses Ltd.; AY 13-14 facts and circumstances the coordinate bench in case of Mahindra vehicles Manufacturers Limited in ITA number 6919/M/2016 for assessment year 2011 – 12) number 7 (page number 9) wherein it has been categorically held to be a capital receipt. Similarly in ITA number 2808/M/2018 for assessment year 2013 – 14 in case of Mahindra vehicles Manufacturers private limited also vide order dated 24/7/2019 earlier order was followed. In view of this, respectfully following the decision of the coordinate bench in assessee’s group concern, where on the same scheme it has been held to be a capital receipt, we also hold that subsidy received by the assessee amounting to ₹ 188,119,155/– is a capital receipt. Accordingly, ground number 4 of the appeal of the assessee is allowed. 040. Ground no 6 is with respect to granting carry forward of losses and unabsorbed depreciation. Ld AO is directed to compute the same in accordance with law. Thus Ground no 6 is allowed. 041. In the result, appeal filed by the assessee is partly allowed. Order pronounced in the open court on 28.04.2022. Sd/- Sd/- (SANDEEP SINGH KARHAIL) (PRASHANT MAHARISHI) (JUDICIAL MEMBER) (ACCOUNTANT MEMBER) Mumbai, Dated: 28.04.2022 Sudip Sarkar, Sr.PS Copy of the Order forwarded to : 1. The Appellant Page | 40 ITA No.519/Mum/2018 Mahindra Trucks & Buses Ltd.; AY 13-14 2. The Respondent. 3. The CIT(A) 4. CIT 5. DR, ITAT, Mumbai 6. Guard file. BY ORDER, True Copy// Sr. Private Secretary/ Asst. Registrar Income Tax Appellate Tribunal, Mumbai