Regen Powertech Private Lmited, CHENNAI V. DCIT, CHENNAI

ITA 786/CHNY/2016

• Counselvise Citation: [2016] 131 COUNSELVISE.COM (IT) 8853 (ITAT-CHENNAI)
• Duration Of Justice: 4 month(s) 18 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 17-08-2016
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: D
• Next Hearing Date: 14-06-2016
• Assessment Year: 2011-2012
• Appeal Filed On: 30-03-2016
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: ANURAGH SAHAY
• Assessee Lawyers: B RAMAKRISHNAN
• Keywords: Transfer pricing; Business expenditure; Opportunity of being heard; International transaction; Wholly owned subsidiary; Capital receipt; Commercial expediency
• Section: 92D; 142(1); 14A; 37(1); 37

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL D BENCH, CHENNAI , ! . ! ' # , $#% BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SHRI G. PAVAN KUMAR, JUDICIAL MEMBER ./ I.T.A. NO.766/MDS/2016 $ & !'& / ASSESSMENT YEAR : 2011-12 THE DEPUTY COMMISSIONER OF INCOME TAX, CORPORATE CIRCLE 5(1) CHENNAI. VS. M/S. REGEN POWERTECH (P) LTD. SAMSON TOWERS, 3 RD , 4 TH & 5 TH FLOORS, 403L, PANTHEON ROAD, EGMORE, CHENNAI 600 008. ./ I.T.A. NO.786/MDS/2016 $ & !'& / ASSESSMENT YEAR : 2011-12 M/S. REGEN POWERTECH (P) LTD. SAMSON TOWERS, 3 RD , 4 TH & 5 TH FLOORS, 403L, PANTHEON ROAD, EGMORE, CHENNAI 600 008. VS. THE DEPUTY COMMISSIONER OF INCOME TAX, CORPORATE CIRCLE 5(1) CHENNAI. [PAN AADCR 5531M] ( / APPELLANT) ( /RESPONDENT) ASSESSEE BY : SHRI. B. RAMAKRISHNAN, FCA DEPARTMENT BY : SHRI. ANURAGH SAHAY, CIT. ' ! ( ) / DATE OF HEARING : 14-06-2016 *+' ( ) / DATE OF PRONOUNCEMENT : 17-08-2016 ITA NO.766 & 786/MDS/2016 :- 2 -: / O R D E R PER G. PAVAN KUMAR, JUDICIAL MEMBER : THE CROSS-APPEAL FILED BY THE REVENUE AND ASSESS EE RESPECTIVELY, IS DIRECTED AGAINST ORDER OF THE DEP UTY COMMISSIONER OF INCOME TAX, CORPORATE CIRCLE 5(1), CHENNAI DATED 2 9.01.2016 FOR THE ASSESSMENT YEAR 2011-2012 PASSED U/S.143(3) R.W.S. 92CA AND 250 OF THE INCOME TAX ACT, 1961 (HEREIN AFTER REFERRED TO AS THE ACT). SINCE THE ISSUE IN THESE APPEALS ARE COMMON IN NATURE, THESE APPEAL S ARE CLUBBED, HEARD TOGETHER, AND DISPOSED OF BY THI S COMMON ORDER FOR THE SAKE OF CONVENIENCE, FIRST, WE TAKE UP ASSESSEE APPEAL IN ITA NO.786/MDS/2016 OF ASSESSMENT YEAR 2011-2012 FOR AD JUDICATION. 2. THE ASSESSEE HAS RAISED THE FOLLOWING GROUNDS OF A PPEAL:- 1. FOR THAT THE DIRECTION OF THE DISPUTE RESOLUTION PANEL IS CONTRARY TO LAW, FACTS AND CIRCUMSTANCES OF THE CASE. 2. FOR THAT THE DISPUTE RESOLUTION PANEL ERRED IN CONFIRMING THE DOWNWARD ADJUSTMENT TO THE TUNE OF 2,95,08,1 02/- ON PAYMENT OF ROYALTY TO AE FOR USE OF TECHNICAL KNOW-HOW FOR MANUFACTURE OF WIND ELECTRIC GENERATOR. 3. FOR THAT THE DISPUTE RESOLUTION PANEL ERRED IN CONFIRMING THE ACTION OF THE ASSESSING OFFICER IN DISALLOWING THE EXPENDITURE INCURRED TOWARDS CORPOR ATE SOCIAL RESPONSIBILITY AMOUNTING TO RS.4,25,916/- U/ S 37(1) WITHOUT APPRECIATING THE FACT THAT THE AMENDM ENT U/S 37(1) IN THIS REGARD IS PROSPECTIVE IN NATURE. 4. FOR THAT THE DISPUTE RESOLUTION PANEL ERRED IN CONFIRMING THE ACTION OF THE ASSESSING OFFICER IN ADDING THE SUBSIDY OF RS. 7,09,35,162/- RECEIVED FROM ANDH RA PRADESH GOVERNMENT TREATING THE SAME AS REVENUE RECEIPT WITHOUT APPRECIATING THE FACT THAT THE ITA NO.766 & 786/MDS/2016 :- 3 -: AMENDMENT U/S 2(24)(XVIII) IN THIS REGARD IS PROSPECTIVE IN NATURE. 5. FOR THAT THE DISPUTE RESOLUTION PANEL ERRED IN CONFIRMING THE ACTION OF THE ASSESSING OFFICER IN DISALLOWING THE PROVISION FOR OPERATION, MAINTENANC E AND WARRANTY DEBITED TO PROFIT AND LOSS ACCOUNT TO THE TUNE OF RS.29,68,000/- STATING THAT THE SAME IS EXC ESS. 6. FOR THESE GROUNDS AND SUCH OTHER GROUNDS THAT MAY B E ADDUCED BEFORE OR DURING THE HEARING OF THE APPEAL, IT IS PRAYED THAT THE HON'BLE TRIBUNAL MAY BE PLEASED TO PASS SUCH OTHER ORDERS AS THE HON'BLE TRIBUNAL MAY DEEM FIT. 3. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE C OMPANY IS IN THE BUSINESS OF MANUFACTURE OF WIND ENERGY CONV ERTERS AND FILED RETURN OF INCOME FOR THE ASSESSMENT YEAR 2011-12 ON 30.11.2011 WITH TOTAL INCOME =61,00,91,090/- AND SUBSEQUENTLY REVIS ED RETURN OF INCOME WAS FILED ON 30.11.2012 DISCLOSING TOTAL IN COME OF =47,26,67,501/-. THE CASE WAS SELECTED FOR SCRUTIN Y AND NOTICES U/S. 143(2) AND 142(1) OF THE ACT WERE ISSUED. IN COMPL IANCE THE LD. AUTHORISED REPRESENTATIVE OF ASSESSEE APPEARED FROM TIME TO TIME AND FILED INFORMATION. THE LD. ASSESSING OFFICER I N THE ASSESSMENT FOUND THAT ASSESSEE HAS INTERNATIONAL TRANSACTIONS EXCEEDING =15 CRORES AND REFERENCE WAS MADE TO TRANSFER PRICING O FFICER (HEREINAFTER TPO) BY LETTER DATED 13.03.2014 FOR DETERMINING ARMSS LENGTH PRICE (ALP) OF INTERNATIONAL TRANSACTIONS. SUBSEQUENTLY, THE TPO BY ORDER DATED 29.01.2015 MADE A DOWNWARD ADJUSTMENT OF =2, 95,08,102/- OF PAYMENT OF ROYALTY. THE LD. ASSESSING OFFICER PASS ED DRAFT ASSESSMENT ORDER U/S.143(3) R.W.S. 92 CA DATED 30.0 3.2015 WITH ITA NO.766 & 786/MDS/2016 :- 4 -: ADDITIONS. SUBSEQUENTLY, THE ASSESSEE FILED OBJECT IONS BEFORE THE DISPUTE RESOLUTION PANEL (HEREINAFTER DRP) AND THE DRP VIDE PROCEEDINGS DATED 23.12.2005 HAS UPHELD THE ADJUSTM ENT BY THE TPO AND OTHERS ADDITIONS OF THE LD. ASSESSING OFFICER E XCEPT DISALLOWANCE U/S.14A OF THE ACT AND THE LD. ASSESSING OFFICER COMPLETED ASSESSMENT BASED ON THE DIRECTIONS. 4. THE TRANSFER PRICING OFFICER HAS MADE DOWNWARD ADJU STMENT TO THE EXTENT OF =2,95,08,102/- ON PAYMENT OF ROYAL TY TO THE ASSOCIATE ENTERPRISES (ASSOCIATED ENTERPRISE) FOR USE OF TECH NICAL KNOWHOW FOR MANUFACTURE OF WIND ELECTRIC GENERATOR. THE ASSESS EE HAS A ASSOCIATE ENTERPRISES M/S. REGAN RENEWABLE ENERGY GENERATION GLOBAL LIMITED AND THE AMOUNT OF =9,87,05,926/- WAS PAID AS ROYALT Y FOR KNOWHOW FOR MANUFACTURE AND SUPPLY OF GEARLESS WEC IN INDIA AND THE ASSESSEE ENTERED INTO ROYALTY AGREEMENT FOR USE OF TECHNICAL KNOWHOW. FURTHER, THE KNOWHOW IS ORIGINALLY DEVELOPED BY VEN SYS GERMANY AS IN TURN SUB-LICENSED TO REGEN, CYPRUS. AS PER THE AGR EEMENT, THE ASSESSEE FOLLOWED TNMM METHOD FOR CALCULATING ARMS LENGTH PRICE (ARMS LENGTH PRICE). AS PER THE AGREEMENT M/S. REG EN INDIA SHALL PAY 12,50,000 EURO TO LICENSOR ON SIGNING OF THE AGREEM ENT AND THERE IS A DIFFERENCE IN PAYMENT OF ROYALTY IN RESPECT OF SALE S WITHIN INDIA AND OUTSIDE INDIA. THE ASSESSEE ON USAGE OF TECHNICAL KNOWHOW IN THE RELEVANT PERIOD HAS PAID A ROYALTY OF =9,87,05,926/ - TO REGEN CYPRUS. ITA NO.766 & 786/MDS/2016 :- 5 -: IN THE ASSESSMENT PROCEEDINGS, LD. ASSESSING OFFIC ER REFERRED TO THE TRANSFER PRICING OFFICER AND BASED ON ROYALTY PAYM ENTS, THE TPO MADE DOWNWARD ADJUSTMENT BY RESTRICTING PAYMENT OF ROYALTY TO REGEN CYPRUS TO THE EXTENT OF =6,92,00,000/- ONLY A ND EXCESS TREATED FOR THE PURPOSE OF ADDITION AND THE ASSESSEE FILED OBJECTIONS WITH THE DRP AGAINST ASSESSMENT ORDER. 4.1 THE DISPUTE RESOLUTION PANEL HAS CONFIRMED THE ORDER OF THE ASSESSING OFFICER/TRANSFER PRICING OFFICER. AGGRIE VED BY THE ORDER, THE ASSESSEE ASSAILED AN APPEAL BEFORE TRIBUNAL. 4.2 BEFORE US, THE LD. AUTHORISED REPRESENTATIVE S UBMITTED THAT AS PER AGREEMENT THE ROYALTY IS COMPUTED BASED ON NUMBER OF UNITS SOLD AND NOT ON PERCENTAGE OF NET SALE. THE RATE O F ROYALTY COMPUTED AFTER EXCLUDING THE BROUGHT OUT ITEMS BEING 1.14% A S AGAINST THE ARMS LENGTH PRICE (4.61) AS PER TRANSFER PRICING REPORT . UNDER THE ERSTWHILE REGULATORY LAWS PAYMENT OF ROYALTY WAS PE RMITTED TO THE EXTENT OF 5% ON DOMESTIC SALES AND 8% IN RESPECT OF EXPORT SALE. BUT IN THE PRESENT CASE, THE RATE OF ROYALTY HAS WORKED TO 1.14% WHICH IS WELL WITHIN THE REGULATED RATES. THE LD. TPO RELIE D ON THE FEMA PROVISIONS AND COULD NOT DECIDE ON THE BUSINESS OR COMMERCIAL EXPEDIENCY OF THE ASSESSEE. ONCE THE TNMM IS APPLIE D THERE IS NO NECESSITY FOR SEPARATE ANALYSIS AND ADJUSTMENT O F ROYALTY. FURTHER ITA NO.766 & 786/MDS/2016 :- 6 -: THE MARGIN CANNOT EXCEED THE MARGIN OF ASSOCIATED ENTERPRISE (AE) BEING 25% AND FURTHER THE DOWNWARD ADJUSTMENT CANNO T BE CONSIDERED AS ARMS LENGTH PRICE AS PAYMENTS CANNOT BE LOWER THAN THE ACTUAL PRICE PAID BY REGEN CYPRUS TO VENSYS, GE RMANY AND ASSESSEE SUPPORTED HIS GROUNDS WITH SUBMISSIONS AND JUDICIAL DECISIONS OF HYDERABAD TRIBUNAL OF DCIT VS. AIR LIQUID ENGINEERING INDIA (P) LTD IN ITA NO.1040 & 1159/2011 & 1408/201 0 HELD THAT FURTHERMORE, IT IS NOT DISPUTED THAT THE ASSESSEE COMPANY MAINTAINED THE NECESSARY DOCUMENTATION OF THE INTERNATIONAL TRANSACTIONS AS PER SECTION 92D READ WITH RULE 10D. THE ASSESSEE COMPANY HAD ALSO SUBMITTED DETAILS OF THE TECHNOLOGY KNOWHOW IT OBTAINED FROM ITS AE AND THE DETAILS OF THE ROYALTY PAYMENTS MADE.FURTHERMORE, ITAT ARE OF THE OPINION THAT ONCE TNMM HAS BEEN APPLIED TO THE ASSESSEE COMPANY'S TRANSACTION, IT COVERS UNDER ITS AMBIT THE ROYALTY TRANSACTIONS IN QUESTION TOO AND HENCE SEPARATE ANALYSIS AND CONSEQUENT DELETION OF THE ROYALTY PAYMENTS BY THE TPO IN THE INSTANT CASE SEEMS ERRONEOUS. ITAT DRAW SUPPORT FROM THE HON'BLE MUMBAI ITAT DECISION IN CADBURY INDIA LTD VS. ACIT (ITA NO 740B/MUM/2010 AND ITA NO.7641/MUM/2010 DATED 13-11-2013) WHEREIN THE HON'BLE ITAT UPHELD THE USE OF TNMM FOR ROYALTY AS WELL AS RELIED ON MANY OF THE ABOVE DECISIONS TO HOLD ADJUSTMENT BY TPO WAS ERRONEOUS. WITH RESPECT TO ITANO.1408/HYD/2010 FOR THE AY. 2006- 2007 THE FACTS ARE IDENTICAL AND HENCE THE CONCLUSIONS DRAWN IN ITANO.1159/HYD/2011 HAVE TO BE APPLIED. FURTHER, THE LEARNED COUNSEL FOR THE ASSESSEE HAD ALSO INVITED OUR ATTENTION TO PAGE 53 WHEREIN THE OPERATING COST HAS BEEN DECLARED AT RS.98,61,88,320/- AND THE SAME HAS BEEN REFLECTED IN THE P&L ACCOUNT FOR THE YEAR ENDING 31ST MARCH, 2005 AT PAGE 234 OF THE PAPER BOOK. AT PAGE 245 OF THE PAPER BOOK UNDER 'SELLING EXPENSES' THE AMOUNT OF RS. 2, 02, 94,565/- AGAINST ROYALTY HAS ALREADY BEEN TAKEN INTO ACCOUNT. HENCE, WE FIND THAT ROYALTY HAS BEEN ALREADY CONSIDERED AND FACTORED IN AND HENCE, THE ASSESSING OFFICER'S ORDER HAS TO BE ITA NO.766 & 786/MDS/2016 :- 7 -: DISMISSED AS UNJUSTIFIED. SINCE, [TAT FIND FORCE IN THE ARGUMENTS OF THE LEARNED COUNSEL, ITAT ALLOW THE APPEAL OF THE ASSESSEE ITA NO. 1408/HYD/2010. HENCE, FOLLOWING THE RATIO OF THE HONB'LE DELHI HIG H COURT IN CIT VS. EKL APPLIANCES (SUPRA) AND VARIOUS OTHER DECISIONS AS NOTED ABOVE AND GIVEN THE FACTS AND CIRCUMSTANCES OF THE INSTANT CASE, ITAT HOLD THAT THE ADDITION MADE BY THE TPO AND UPHELD BY THE DRP IS UNSUSTAINABLE AND IS TO BE DELETED. HENCE GROUND NO. 2 IS HELD IN FAVOUR OF THE ASSESSEE. HENCE, THE APPEAL OF THE REVENUE ITANO.L040/HYD/2011 IS DISMISSED AND ASSESSEE'S APPEAL IN ITA NO. 1159/HYD/2011 IS ALLOWED. NO DISALLOWANCE CAN BE MADE TOWARDS PAYMENT OF ROYALTY IF PAYMENTS EXCLUSIVELY MADE FOR PURPOSE OF TRADE. IN THE CASE OF AKZO NOBEL CHEMICALS (INDIA) LTD. VS . DCIT IN ITA NO.1477/PN/2010, THE PUNE BENCH HELD THAT TRIBUNAL IN ASSESSEE S OWN CASE VIDE ITA NO.1477/PN/2010 AND ITA NO.1659/PN/2011 DATED 11.02.2014 HELD METHODOLOGY ADOPTED BY REVENUE TO REWORK NET SALES VALUE FOR PURPOSES OF COMPUTING ROYALTY PAYABLE WAS NOT JUSTIFIED. FOLLOWING THE AFORESAID PRECEDENT IN THE ASSESSEE'S OWN CASE, WHICH HAS BEEN RENDERED IN IDENTICAL CIRCUMSTANCES, THE ACTION OF THE ASSESSING OFFICER IN CONSIDERING CERTAIN RAW MATERIALS USED IN THE PRODUCTION PROCES S AS MERE 'CONSTITUENT CHEMICALS' AND EQUATING IT TO STANDARD BOUGHT-OUT COMPONENTS SO AS TO REDUCE THEIR COST FROM THE SALES VALUE FOR THE PURPOSES OF COMPUTING NET SALES VALUE ELIGIBLE FOR ROYALTY PAYMENT IS LIABLE TO BE SET-ASIDE. WE HOLD SO. AS A RESULT, THE ORDER OF THE CIT(A) ON THIS ASPECT IS S ET- ASIDE AND THE ASSESSING OFFICER IS DIRECTED TO DELE TE THE ADDITION OF RS. 19,54,132/- MADE ON ACCOUNT OF EXCESS ROYALTY. IN THE RESULT, THE APPEAL OF THE ASSESSEE FOR ASSESSMENT YEAR 2001-02 VIDE ITA NO. 1169/PN/2011 IS PARTLY ALLOWED. CERTAIN RAW MATERIALS USED IN PRODUCTION PROCESS CANNOT BE STATED AS MERE 'CONSTITUENT CHEMICALS' AND EQUATE I T TO STANDARD BOUGHT-OUT COMPONENT SO AS TO REDUCE THEIR COST FROM SALES VALUE FOR PURPOSES OF COMPUTING NET SALES VALUE. ITA NO.766 & 786/MDS/2016 :- 8 -: IN THE CASE CASTROL INDIA LTD VS. ADDL. CIT 151 ITD 76 (MUMBAI), HELD THAT NET SALES OF ASSESSEE AFTER EXCLUDING EXPORT SALE AND OTHER INCOME WERE TO EXTENT OF RS. 1118.70 CRORES AND ROYALTY PAID THEREON AT RS. 24.38 CRORE BEING LESS THAN RATE OF 3.5% APPROVED BY SIA. THERE WAS NO CASE OF ANY EXCESS PAYMENT MADE OF ROYALTY BY ASSESSEE THAN APPROVED BY SIA TO JUSTIFY ITS DISALLOWANCE BY WAY OF TP ADJUSTMENT. CIT (A) COULD NOT APPRECIATE THOSE INFIRMITIES IN O RDER OF TPO DESPITE SAME WERE SPECIFICALLY BROUGHT TO HI S NOTICE ON BEHALF OF ASSESSEE AND CONFIRMED TP ADJUSTMENT MADE BY TPO IN RESPECT OF ROYALTY PAYMENT WHICH WAS TOTALLY UNJUSTIFIED. THEREFORE, IMPUGNED ADDITION DELETED. ASSESSEE'S GROUND ALLOWED. IN ABSENCE OF EXCESS PAYMENT MADE OF ROYALTY BY ASSESSEE THAN APPROVED BY SIA, DISALLOWANCE BY WAY OF TP ADJUSTMENT IS NOT JUSTIFIED. IN THE CASE OF GLOBAL VANTEDGE (P) LTD VS. DCIT 1 IT R 0326 IT WAS HELD THAT ORDER OF CIT(A) ON THE POINT OF DETERMINATION OF THE ARM'S LENGTH PRICE IN RESPECT OF THE TRANSACTIONS ENTERED INTO BY THE ASSESSEE WITH ITS AE ON THE BAS IS OF AVERAGE OPERATING MARGIN OF COMPARABLES METHOD IS UPHELD, AND RIVAL CONTENTIONS RAISED BY ASSESSEE AS WELL AS CROSS APPEAL BY REVENUE ON THIS ISSUE AR E REJECTED FOR THE ASST. YEAR 2003-04; SIMILARLY FOR ASST. YR. 2004-05, WHILE WORKING ON SAME BASIS, THE RESULTANT ALP DERIVED WAS LOWER THAN BOOK VALUE OF THE INTERNATIONAL TRANSACTION AS DECLARED BY ASSESSEE, THEREFORE, BOOK VALUE OF THE INTERNATIONA L TRANSACTIONS ACCEPTED TO BE AT THE ARM'S LENGTH PRI CE AND CONSEQUENTLY, ENTIRE ADDITION OF RS.5,22,28,112 DELETED BY CIT(A) WAS UPHELD. IN THE CASE OF ACIT VS. KEHIN PANALFA LTD, THE DEL HI TRIBUNAL HELD THAT BESIDES SIMILAR ISSUE OF ROYALTY PAYMENT IS DECIDED IN FAVOR OF THE ASSESSEE IS DECIDED BY THE ITAT IN ITA NO.766 & 786/MDS/2016 :- 9 -: THE CASE OF LUMAX INDUSTRIES LTD. [2013- TII-123- ITAT-DEL- TP} HOLDING THAT: 'PAYMENT OF ROYALTY WAS BEING CLAIMED AND ALLOWED RIGHT FROM 1984 TO ASSESSMENT YEAR 2003-04, AS BUSINESS EXPENDITURE OF THE ASSESSEE AND NO NEW CIRCUMSTANCE HAS BEEN POINTED OUT BY EITHER OF THE AUTHORITIES BELOW TO HOLD THAT IN THE YEARS THEREAFTER, THE BENEFIT ACCRUED TO THE ASSESSEE BY THE PAYMENT OF SUCH ROYALTY HAS DRIED UP. ITAT AFORESAID VIEW IS FORTIFIED BY THE AFORESAID JUDGMENT OF LUMAX INDUSTRIES (SUPRA). SINCE THE ROYALTY WAS BEING PAID FROM 1997 AND WAS CONTINUOUSLY EXAMINED BY THE AO, THEN IN THE ABSENCE OF ANY NEW FACTS TO HOLD THAT THERE WAS NO NEED TO PAY THE ROYALTY WAS UNCALLED FOR. AND PRAYED FOR ALLOWING THE APPEAL. 4.3 CONTRA, , THE LD. DEPARTMENTAL REPRESENTATIVE RELIED ON THE ORDERS OF LD. ASSESSING OFFICER AND DRP AND VEHEMEN TLY OPPOSED TO THE GROUNDS. 4.4 WE HEARD THE RIVAL SUBMISSIONS, PERUSED THE MAT ERIAL ON RECORDS AND JUDICIAL DECISIONS. THE CRUX OF THE IS SUE BEING IN RESPECT OF DOWNWARD ADJUSTMENTS MADE BY THE LD. TPO CONSIDE RING COMPARATIVE STATEMENTS. THE ASSESSEE HAS APPLIED T NMM METHOD WHEREAS ARMS LENGTH PRICE MARGIN (ALP) AS PER TPO S TUDY IS 4.6% INCOME AND PERCENTAGE OF ROYALTY ON SALE IS 1.14%. FURTHER, THE MARGIN CANNOT EXCEED 25% OF MARGIN OF AE REGION. T HE LD. AUTHORISED ITA NO.766 & 786/MDS/2016 :- 10 -: REPRESENTATIVE DREW OUR ATTENTION TO THE ROYALTY AG REEMENT AND ALSO ON THE SUBMISSIONS MADE BEFORE LD. TPO EXPLAINING T HE METHODOLOGY AND TRANSFER PRICING STUDY REPORT ISSUED BY ERNST & YOUNG REFERRED AT PAGE 18 TO 60 OF THE PAPER BOOK AND ALSO HIGHLIG HTENED AUDIT REPORT FORM NO. 3CEB AT PAGE 70 OF PAPER BOOK WERE THE INTERNATIONAL TRANSACTIONS WITH ASSOCIATED ENTERPRISE AND METHOD USED BEING TNMM METHOD DISCLOSED ALONGWITH COMPARATIVE STATEMENTS, ON ROYALTY. THE LD. TPO IS OF THE OPINION THAT ASSESSEE COMPANY HA S PAID EXCESS ROYALTY WERE AS HE CONSIDERED THE DEDUCTION OF BRO UGHT OUT COMPONENTS AND CALCULATED ROYALTY ON SALES AT 8% AN D RELYING ON THE ACTUAL SALES AND WORKED OUT TO =6.92 CRORES. THE CONTENTION OF THE LD. TPO THAT THE ASSESSEE PURCHASED SOME OF THE COMPONE NTS THAT ARE ALREADY MANUFACTURED AND ASSOCIATED ENTERPRISE DOES NOT GIVE ANY MATERIAL BUT ONLY PROVIDE TECHNICAL SPECIFICATION. HENCE, ROYALTY IN RESPECT OF BROUGHT OUT GOODS ARE NOT ALLOWABLE. WE ON PERUSING THE COMPARATIVE STATEMENT SHOWING COMPUTATION OF ROYALT Y, FIND THE ARMS LENGTH PRICE (ALP) AT 4.6% AS AGAINST ROYALTY ON SA LES @1.14% AND THERE IS ALSO A VARIATION OF PERCENTAGE ON SALES A DMITTED BY THE ASSESSEE. CONSIDERING THE APPARENT FACTS AND MATER IAL, WE ARE OF THE OPINION THAT THE MATTER HAS TO BE RELOOKED AS THE P ERCENTAGE COMPUTED BY THE LD.TPO IS 1.14% IN COMPARISON WITH THE ARMS LENGTH PRICE MARGIN BEING 4.60%. THEREFORE, WE REMIT THE DISPUTED ISSUE FOR ITA NO.766 & 786/MDS/2016 :- 11 -: RECALCULATION TO THE FILE OF LD. TPO TO CONSIDER ROYALTY PAYMENT ON BROUGHT OUT COMPONENTS BASED ON TECHNICAL SPECIFIC ATIONS. THE GROUND OF THE ASSESSEE IS ALLOWED FOR STATISTICAL P URPOSE. 5. THE SECOND GROUND RAISED BY THE ASSESSEE IS THAT TH E DRP HAS ERRED IN CONFIRMING THE ACTION OF THE LD. ASSES SING OFFICER IN DISALLOWING EXPENDITURE INCURRED ON CORPORATE SOCIA L RESPONSIBILITY =4,25,916/- UNDER RESIDUAL SEC.37(1) OF THE ACT AND WERE THE AMENDMENT IS PROSPECTIVE IN NATURE. 5.1 THE ASSESSEE HAS CLAIMED EXPENDITURE OF =4,52,9 16/- AS CORPORATE SOCIAL RESPONSIBILITY DEBITED UNDER THE H EAD MISCELLANEOUS EXPENSES. IN REPLY TO SHOW CAUSE NOTICE ISSUED BY THE LD. ASSESSING OFFICER, THE ASSESSEE FILED LETTER DATED 24.03.2015 EXPLAINING THE NATURE OF ASSESSEE COMPANY CONTRIBUTION AND ITS SO CIAL RESPONSIBILITY INITIATIVES TO FOSTER A BETTER FUTURE FOR CHILDREN IN NEIGHBORHOOD COMMUNITIES, BY SIGNIFICANTLY STRENGTHENING THE SOC IAL INSTITUTIONS THAT GENERALLY INFLUENCE WELL BEING OF CHILDREN, FAMILY , SCHOOL AND COMMUNITY IN GENERAL WHICH ARE STRATEGIC AREAS OF FOCUS OF THE COMPANY. THE LD. ASSESSING OFFICER CONSIDERED THE SUBMISSIONS AND NATURE OF EXPENSES INCURRED FOR BUSINESS PURPOSE I S OF THE VIEW THAT EXPENDITURE INCURRED TOWARDS CORPORATE SOCIAL RESP ONSIBILITY IS FOR NON BUSINESS PURPOSES AND NOT AS PER THE SCHEME ENVISA GED UNDER ITA NO.766 & 786/MDS/2016 :- 12 -: INCOME TAX ACT TO ENCOURAGE THE ASSESSEE COMPANY TO CONDUCT ACTIVITIES FOR BENEFIT OF SOCIETY AND IGNORED THE PURPOSE OF EXPENSES INCURRED FOR SOCIAL CAUSE AND ALLEGED THAT THEY WAS NOT INCURRED FOR THE PURPOSE OF BUSINESS AND DISALLOWED THE CLAIM. AGGR IEVED BY THE ORDER, THE ASSESSEE FILED AN APPEAL BEFORE DISPUTE RESOLUT ION PANEL. 5.2 THE DISPUTE RESOLUTION PANEL HAS CONFIRMED THE ORDER OF THE ASSESSING OFFICER. AGGRIEVED BY THE ORDER, THE ASS ESSEE ASSAILED AN APPEAL BEFORE TRIBUNAL. 5.3 BEFORE US, LD. AUTHORISED REPRESENTATIVE SUBMIT TED THAT THE ASSESSEE HAS INCURRED THE EXPENDITURE FOR A SOCIAL CAUSE AND LD. ASSESSING OFFICER ERRED IN OBSERVING THAT THE EXPE NDITURE IS FOR NON BUSINESS PURPOSE WHEREAS THE EXPENSES ARE IN THE NA TURE OF REVENUE AND INCURRED FOR THE PURPOSE OF BUSINESS. THE LD. DRP CONFIRMED THE FINDINGS OF THE LD. ASSESSING OFFICER RELYING ON TH E EXPLANATIONS TO SEC. 37 OF THE ACT WHICH ARE INSERTED BY FINANCE ACT, 2 014. FURTHER, CSR ACTIVITIES EXPENDITURE OFFERED TO FOSTER A BETTER FUTURE FOR CHILDREN IN NEIGHBOURHOOD COMMUNITIES BY STRENGTHENING THE SOCI AL INSTITUTIONS OF WELL BEING OF CHILDREN AND THIS EXPENDITURE IS NOT MANDATORY UNDER COMPANIES ACT 2013 WERE AS THE ASSESSEE COMPANY EXP ENSES ARE RELATED PRIOR TO THE ACT. THE ASSESSEE COMPANY HAS VOLUNTARY INCURRED SUCH EXPENDITURE TO IMPROVE THE BRAND IMA GE, CORPORATE ITA NO.766 & 786/MDS/2016 :- 13 -: BUSINESS AND GOODWILL AND WITHIN THE COMMERCIAL EXP EDIENCY AND PRAYED FOR ALLOWING THE APPEAL. 5.4 CONTRA, THE LD. DEPARTMENTAL REPRESENTATIVE RE LIED ON THE ORDER ASSESSING OFFICER AND DISPUTE RESOLUTION PANE L AND VEHEMENTLY OPPOSED TO THE GROUNDS. 5.5 WE HEARD THE RIVAL SUBMISSIONS, PERUSED THE MAT ERIAL ON RECORDS AND JUDICIAL DECISIONS. THE EXPENDITURE IN CURRED TOWARDS CORPORATE SOCIAL RESPONSIBILITY BY THE ASSESSEE COM PANY IS REVENUE IN NATURE AND THE OBJECTS FOR WHICH IT IS OFFERED I S FOR SOCIAL CAUSE AND AMENDMENT TO SEC. 37(1) OF THE ACT INSERTED WITH FI NANCE ACT, 2014 IS SUBSEQUENT TO ASSESSMENT YEAR. THEREFORE, THE SAME IS NOT APPLICABLE AND ASSESSEE COMPANY RELIED THE JUDICIAL DECISION O F CIT VS. MADRAS REFINERIES LTD 313 ITR 334 . CONSIDERING THE APPARENT FACTS, WE ARE OF THE OPINION THAT THE EXPENDITURE IS FOR A SPECIFIC CAUSE FOR THE BENEFIT OF SOCIETY WAS NOT DISPUTED BY THE REVENUE ON GENU INENESS. SO, WE DIRECT THE LD. ASSESSING OFFICER TO DELETE THE ADDI TION AND THE GROUND OF THE ASSESSEE IS ALLOWED. 6. THE THIRD GROUND RAISED BY THE ASSESSEE IS THAT DR P HAS CONFIRMED THE ADDITION OF =7,09,35,162/- SUBSIDIAR Y RECEIVED FROM ANDHRA PRADESH GOVERNMENT WAS REFLECTED IN THE PR OFIT AND LOSS ACCOUNT AND CLAIMED AS CAPITAL RECEIPT WHILE COMPUT ING TOTAL INCOME. ITA NO.766 & 786/MDS/2016 :- 14 -: 6.1 THE LD. AUTHORISED REPRESENTATIVE EXPLAINED THA T THE COMPANY HAS ACCOUNTED SUBSIDIARY IN THE BOOKS OF A CCOUNT FOR INCOME TAX PURPOSE AND IT IS CAPITAL IN NATURE AND NOT TAXABLE. THE OBJECTS OF THE SCHEME IS TO PROMOTE INDUSTRIALIZATI ON OF THE RURAL AREAS OF THE STATES AND SETTING UP OF INDUSTRY AT THE CO NCEPTUALIZATION STAGE. THE LETTER OF INTENT GRANTED BEFORE SETUP FOR IMPLE MENTATION OF GRANTING OF INCENTIVE AND THE ELIGIBILITY TO RECEI VE INCENTIVE DEPENDS UPON THE SETTING UP OF INDUSTRIES IN BACKWARD AREA AND COMMENCING PRODUCTION BEING ELIGIBLE FOR INCENTIVE UNDER THE P OLICY AND THIS SUBSIDY WAS GRANTED ON SATISFACTION OF CERTAIN ELIGIBILITY OF MINIMUM CAPITAL INVESTMENTS AND RELIED ON JUDICIAL DECISIONS. BUT THE LD. ASSESSING OFFICER CONSIDERED THE OBJECT OF THE COMPANY AND IS OF THE OPINION THAT IT IS ONLY A REFUND OF VAT LIABILITY AND BEING IN THE NATURE OF SUPPLEMENTARY TRADING RECEIPT AND ELABORATELY DEAL T AT PAGE 8 & 9 OF HIS ORDER AND FINALLY CONSIDERED THE SUBSIDY AS RE VENUE RECEIPT AND MADE AN ADDITION. AGGRIEVED BY THE ORDER, THE ASSE SSEE FILED AN APPEAL BEFORE DISPUTE RESOLUTION PANEL. 6.2 THE DISPUTE RESOLUTION PANEL CONFIRMED THE OR DER OF THE LD. ASSESSING OFFICER. AGGRIEVED BY THE ORDER, THE AS SESSEE ASSAILED AN APPEAL BEFORE TRIBUNAL. ITA NO.766 & 786/MDS/2016 :- 15 -: 6.3 BEFORE US, THE LD. AUTHORISED REPRESENTATIVE RE ITERATED THE SUBMISSIONS MADE BEFORE LD. ASSESSING OFFICER AND D RP AND EXPLAINED THAT SUBSIDY ENABLES ASSESSEE TO RUN BUSINESS MORE PROFITABILITY AND SUBSIDIARY IS NOT A TRADING RECEIPT. FURTHER, THE LD. AUTHORISED REPRESENTATIVE RELIED ON THE DECISION OF SUPREME CO URT DISTINGUISHING WITH THE CURRENT FACTS AND EXPLAINED THAT SUBSIDY WAS NOT LINKED TO INVESTMENTS. THE CAPITAL INCENTIVE GIVEN TO THE AS SESSEE BY THE STATE GOVERNMENT IS TO SET UP A NEW UNIT IN STATE AND SHA LL BE A CAPITAL RECEIPT AND SUPPORTED HIS ARGUMENTS WITH DECISION O F CIT VS. KIRLOSKAR OIL ENGINESS LTD (364 ITR 88) WHEREIN HELD THAT CAPITAL INCENTIVE GIVEN TO ASSESSEE BY STATE GOVERNMENT TO ENABLE ASS ESSEE TO SET UP A NEW UNIT IN STATE WOULD BE CAPITAL RECEIPTS. IN THE CASE OF CIT VS. PONNI SUGARS & CHEMICALS LTD (129 TAXMANN 231) THE JURISDICTIONAL HIGH COURT HELD THAT THE SUBSIDY AMOUNT RECEIVED FROM THE STATE GOVERNMENT IS CAPITAL RECEIPT NOT LIABLE TO TAX. IN THE CASE OF SHREE BALAJI ALLOYS VS. CIT (2011) 198 TAXMANN 122 (J& K) IT WAS HELD THAT EXCISE REFUND AND INTEREST SUBSIDY RECEIVED BY TH E ASSESSEES IN PURSUANCE OF THE INCENTIVES ANNOUNCED AND SANCTIONE D VIDE GOVERNMENT OF INDIA, MINISTRY OF COMMERCE AND INDUS TRYS OFFICE MEMORANDUM DATED 14 TH JUNE, 2002 AND CENTRAL EXCISE NOTIFICATION NOS.56 AND 57 DATED 14 TH NOVEMBER, 2002 AND OTHER NOTIFICATIONS ISSUED ON THE SUBJECT, PERTAINING TO THE INDUSTRIAL POLICY FOR THE STATE ITA NO.766 & 786/MDS/2016 :- 16 -: OF JAMMU & KASHMIR, IS CAPITAL RECEIPT. THE CO-ORDI NATE BENCH HAS HELD IN THE CASE OF FORD INDIA (P) LTD VS. DCIT (2013) (156 TTJ 1 ) THAT ASSESSEE RECEIVED CAPITAL SUBSIDY UNDER A SCHEME FO R ACCELERATING INDUSTRIAL DEVELOPMENT IN STATE, SAME COULD NOT BE TAXED AS A REVENUE RECEIPT. FURTHER IN THE CASE OF DCIT VS. RELIANCE INDUSTRIES LIMITED (2004) (88 ITD 273) (MUM) (SB) IT WAS HELD THAT IF SUBSIDY WAS GIVEN FOR EXPANSION/SETTING UP OF INDUSTRY IN BACKWARD AR EA, IT WILL BE CAPITAL IRRESPECTIVE OF MODALITY OR SOURCES OF FUNDS THROUG H FROM WHICH IT IS GIVEN AND THE IN THE CASE OF CIT VS. CHAPHALKAR BROTHERS (33 TAXMANN.COM 431) IT WAS HELD THAT THE PURPOSES FOR WHICH SUBSIDY I S GIVEN IS RELEVANT FACTOR AND IF OBJECT OF SUBSIDY I S TO ENABLE ASSESSEE TO SET UP A NEW UNIT THEN RECEIPT OF SUBSIDY WILL BE O N CAPITAL ACCOUNT AND THE PURPOSE OF ISSUE OF SUBSIDY PLAYS A VERY RELEVANT ROLE AND WERE THE SUBSIDY IS FOR SETUP OF NEW UNIT AND IN THE NATURE OF A CAPITAL RECEIPT PROVIDED FOR EXPANSION OR SETTING U P OF UNIT OF INDUSTRIAL BACKWARD AREA. SUBSIDY IS EXEMPTED FROM TAX BASE D ON THE MODALITY OR SOURCES OF FUNDS AND RELIED ON THE DECISION OF DICT VS. RELIANCE INDUSTRIES LIMITED 88 ITD 273 (MUM) (SB ). THE ASSESSEE RECEIVED CAPITAL SUBSIDIARY UNDER A SCHEME FOR ACCELERATING INDUSTRIAL DEVELOPMENT IN THE STATE AND SAME COULD NOT BE TAXE D AS A REVENUE RECEIPT . FURTHER, THE DECISION RELIED BY THE LD. ASSESSING OFFICER BASED ON SAHNEY STEEL & PRESS WORKS IS CLEARLY DISTINGUISHABLE AND ITA NO.766 & 786/MDS/2016 :- 17 -: SUBSIDIARY IS NOT LINKED TO INVESTMENTS. FURTHER, IN THE CASE OF CIT VS. POONI SUGARS & CHEMICALS LTD (129 TAXMANN 231) THE PURPOSE OF SUBSIDIARY NEEDS TO BE CONSIDERED NOT THE SOURCE OR FORM OF SUBSIDY. IN THE CASE OF EXCISE, LAWS REFUNDS ARE GIVEN AS SU BSIDY FOR THE PURPOSE OF SETTING UP OR EXPANSION OF INDUSTRIES WO ULD AMOUNT TO CAPITAL RECEIPT IN THE HANDS OF THE INDUSTRIAL UNIT EVEN THOUGH IT WAS RECEIVED AFTER COMMENCEMENT OF OPERATIONS. FURTHER ANY SUBSIDY GRANTED TO PROJECT CANNOT BE IN THE CHARACTERISTIC OF REVENUE RECEIPT AND PRAYED FOR ALLOWING THE APPEAL. 6.4 CONTRA, THE LD. DEPARTMENTAL REPRESENTATIVE RE LIED ON THE ORDERS OF LD. ASSESSING OFFICER AND DRP WERE THE DR P HAS CONFIRMED THAT THE LD. ASSESSING OFFICER WAS JUSTIFIED IN T REATING THE VAT SUBSIDY AS REVENUE RECEIPT. 6.5 WE HEARD THE RIVAL SUBMISSIONS, PERUSED THE MAT ERIAL ON RECORD AND JUDICIAL DECISIONS CITED. THE ONLY CON TENTION OF THE LD AUTHORISED REPRESENTATIVE THAT VAT SUBSIDY IS IN TH E NATURE OF CAPITAL RECEIPT AND NOT REVENUE IN NATURE AND RELIED ON TH E LEGAL DECISIONS. THE LD. AUTHORISED REPRESENTATIVE DREW OUR ATTENTIO N TO THE ORDER OF THE LD. ASSESSING OFFICER AND FINDINGS OF THE DRP WERE ASSESSEE CLAIMED SUBSIDY AS CAPITAL RECEIPT. IN THE COURSE OF HEARING, THE LD. AUTHORISED REPRESENTATIVE DREW OUR ATTENTION TO THE PAGE NO. 77 OF THE ITA NO.766 & 786/MDS/2016 :- 18 -: PAPER BOOK FILED GOVERNMENT ORDER DATED 01.11.2007 ISSUED TO THE ASSESSEE COMPANY TO SETUP WIND ELECTRIC GENERATORS MANUFACTURING UNIT IN THE STATE WITH A INVESTMENT OF =500 CRORES AND ALSO ON REQUEST OF THE ASSESSEE COMPANY FOR 100% VAT REIMBURSEMEN T FOR TEN YEARS, GOVERNMENT HAS CONSIDERED TO GRANT 75% VAT REIMBURS EMENT TO THE ASSESSEE COMPANY FOR A PERIOD OF FIVE YEARS BOTH O N OUTPUT AND INPUT VAT AND ENTITLED FOR CONCESSIONS AND INCENTIVES AS PER INDUSTRIAL INVESTMENT POLICY 2005-2010. THE LD. AUTHORISED RE PRESENTATIVE DEMONSTRATED THE LETTER DATED 09.01.2008 ISSUED BY THE GOVERNMENT OF ANDHRA PRADESH, INDUSTRIES AND COMMERCE DEPARTME NT REGARDING CLARIFICATION ON REQUEST FOR REFUND OF CENTRAL SALE S TAX BESIDES VAT AND DOMESTIC SALE. WE PERUSED THE INDUSTRIAL INVESTMENT PROMOTION POLICY REFERRED AT PAGE 159 OF THE PAPER BOOK WHICH CONSI DERED THE INCENTIVES AND SUBSIDY PROVIDED TO THE UNITS ACCOR DING TO THEIR INVESTMENTS CRITERIA. FURTHER, THE FACTS THAT VAT S UBSIDY IS AS PER THE ORDER ISSUED BY THE GOVERNMENT AND FURTHER DUE TO AMENDMENT TO SEC. 2(24) (XVIII) W.E.F. 01.04.2015 SUBSIDY OR A G RANT DEFINED WAS MADE TAXABLE UNDER INCOME TAX. SO, CONSIDERING THE APPARENT FACTS, PROVISIONS OF LAW, INDUSTRIAL POLICY REGULATIONS, A ND RELY ON DECISION OF SHREE BALAJI ALLOYS VS. CIT (2011) 198 TAXMANN 122 (J & K) , SUBSEQUENTLY HONBLE SUPREME COURT HAS UPHELD THE DECISION IN CIVIL APPEAL NO.10061/2011, DATED 19.04.2016 BY DISMISSIN G THE REVENUE ITA NO.766 & 786/MDS/2016 :- 19 -: APPEAL. WE RESPECTFULLY FOLLOWING THE SUPREME COU RT DECISION AND DIRECT THE LD. ASSESSING OFFICER TO DELETE THE ADDI TION OF VAT SUBSIDY AS BEING IN THE NATURE OF CAPITAL RECEIPT AND IT IS TO BE TREATED ACCORDINGLY AND ALLOW THE GROUND OF THE ASSESSEE. 7. THE FOURTH GROUND RAISED BY THE ASSESSEE IS THAT T HE LD. ASSESSING OFFICER DISALLOWED PROVISIONS FOR OPERATI ON, MAINTENANCE AND WARRANTY WERE THE ASSESSEE HAS PROVIDED =18.65 CROR ES IN BOOKS OF ACCOUNT ON ACCOUNT OF PROVISION FOR WARRANTY. 7.1 THE ASSESSEE HAS FILED EXPLANATIONS THAT THE COMP ANY IS IN THE PRACTICE OF CREATING THE PROVISIONS FOR OPERATI ON, MAINTENANCE AND WARRANTY TO COVER EXPECTED EXPENDITURE ON SERVING F AILED PARTS OF WEG OVER THE PERIOD OF WARRANTY AND DURING THE CURR ENT YEAR THE COMPANY HAS CREATED SUCH PROVISION. IN BUSINESS OP ERATIONS CHARTERED ENGINEER ESTIMATED THE COST AT =1,31,000/- PER MAC HINE WHEREAS THE ASSESSEE HAS CLAIMED =1,50,000/- PER MACHINE. THER EFORE, DIFFERENCE OF =19,000/- PER MACHINE IS DISALLOWED BY THE LD. A SSESSING OFFICER AS EXCESS PROVISION AGGREGATING TO =46,33,000/-. THE ASSESSEE FILED LETTER DATED 31.03.2015 EXPLAINING THAT IN EARLIER ASSESSMENT YEAR THERE IS A DISALLOWANCE OF =16,65,000/- ON ACCOUNT OF DIFFERENCE IN VALUATION CERTIFICATE AND ACTUAL PROVISION. HENCE, IT WAS REVERSED IN THE CURRENT ASSESSMENT YEAR AND SAME DIFFERENTIAL AMOUN T SHOULD BE ALLOWED AS DEDUCTION. BUT THE LD. ASSESSING OFFICE R DISALLOWED ITA NO.766 & 786/MDS/2016 :- 20 -: =29,68,000/-. AGGRIEVED BY THE ORDER, THE ASSESSEE FILED AN APPEAL BEFORE DRP. 7.2 THE DISPUTE RESOLUTION PANEL HAS CONFIRMED THE ORDER OF THE LD. ASSESSING OFFICER. AGGRIEVED BY THE ORDER, THE ASSESSEE ASSAILED AN APPEAL BEFORE TRIBUNAL. 7.3 BEFORE US, LD. AUTHORISED REPRESENTATIVE ARGUE D THAT THE LD. DRP HAS ERRED IN CONFIRMING THE ACTION OF THE LD. A SSESSING OFFICER IN DISALLOWING PROVISION OF WARRANTY TO THE EXTENT O F =29,68,000/- THE ACTION OF THE LD. ASSESSING OFFICER IS NOT ACCEPTAB LE AS THERE IS NO NECESSITY TO DISALLOW A PARTICULAR LINE ITEM OR EXP ENDITURE RESULTING IN TIMING DIFFERENCE AND FURTHER TAX RATES ARE SAME IN BOTH YEARS OR ALTERNATIVELY, THE LD. AUTHORISED REPRESENTATIVE EX PLAINED THAT IF THE DIFFERENTIAL SUM IS NOT ALLOWED IN THE YEAR OF CREA TING PROVISION, THE SAME NEEDS TO BE ALLOWED IN THE YEAR OF REVERSAL AN D THE LD. AUTHORISED REPRESENTATIVE RELIED ON THE DECISION O F CIT VS. EXCEL INDUSTRIES LTD 358 ITR 295(SC) AND PRAYED FOR ALLOWING THE APPEAL. 7.4 CONTRA, THE LD. DEPARTMENTAL REPRESENTATIVE R ELIED ON THE ORDERS OF LD. ASSESSING OFFICER AND DRP AND VEHEMEN TLY OPPOSED TO THE GROUNDS. ITA NO.766 & 786/MDS/2016 :- 21 -: 7.5 WE HEARD THE RIVAL SUBMISSIONS, PERUSED THE MAT ERIAL ON RECORD AND JUDICIAL DECISIONS CITED. THE LD. AUTHO RISED REPRESENTATIVE CONTENTION THAT THE DIFFERENCE IN THE VALUE BETWEEN THE PROVISIONS MADE BY THE ASSESSEE AND THE CHARTERED ENGINEER CER TIFICATE IS DISALLOWED BUT THERE IS NO NECESSITY AS TAX RATE FO R BOTH ASSESSMENT YEARS ARE SAME. THE DIFFERENTIAL SUM ALTERNATIVELY IF NOT ALLOWED IT NEEDS TO BE CONSIDERED IN THE YEAR OF REVERSAL BEI NG NEXT YEAR. FURTHER, THIS PROVISIONS ARE REVERSED IN THE NEXT A SSESSMENT YEAR. WE ARE OF THE OPINION THAT THE LD. ASSESSING OFFICER S HALL ALLOW THE CLAIM ON VERIFICATION THAT THE SAID PROVISIONS ARE REVERSED ON THE FIRST DAY OF NEXT FINANCIAL YEAR AND ENTRIES ARE PASSED IN THE B OOKS AND THEREFORE, WE REMIT THE DISPUTED ISSUE FOR LIMITED PURPOSE TO THE FILE OF THE LD. ASSESSING OFFICER FOR VERIFICATION AND EXAMINATION AND ASSESSEE SHOULD BE PROVIDED ADEQUATE OPPORTUNITY OF BEING HEARD BE FORE DECIDING THE ISSUE ON MERITS. THE GROUND OF THE ASSESSEE IS ALL OWED FOR STATISTICAL PURPOSE. 8. THE LAST GROUND RAISED BY THE ASSESSEE IS ON NON GRANT OF TDS CREDIT TO THE EXTENT OF =68,45,307/-. 8.1 THE LD. ASSESSING OFFICER WHILE PASSING THE ORD ER DENIED TDS CREDIT IN THE TAX LIABILITY WITHOUT MENTIONING ANY REASONS. THE LD. ASSESSING OFFICER PROBABLY HAS NOT GRANTED TDS CRED IT AS THIS ITA NO.766 & 786/MDS/2016 :- 22 -: INFORMATION WAS NOT UPDATED OR NON AVAILABLE OF TDS CREDIT IN FORM 26AS ISSUED BY M/S. REGEN INFRA(P) LTD. WE CONSIDE RING THE APPARENT FACTS AND THE TDS CREDIT AVAILABLE WITH THE ASSESSE E, DIRECT THE LD. ASSESSING OFFICER TO VERIFY THE FORM 16A AND INCOM E TAX WEBSITE DISCLOSING CREDIT OF TAX AMOUNT IN 26AS AND OBTAI N CONFIRMATION OF CREDIT FROM M/S. REGEN INFRA (P) LTD. AND THE LD . ASSESSING OFFICER IS DIRECTED TO ALLOW THE TAX CREDIT. THE GROUND OF THE ASSESSEE IS ALLOWED FOR STATISTICAL PURPOSE. 9. NOW, WE TAKE UP DEPARTMENTAL APPEAL IN ITA N O.766/MDS/2015:- 9.1 THE LD. ASSESSING OFFICER BY APPLYING THE PROVI SIONS OF SEC. 14A R.W.R 8D HAS DISALLOWED =1,20,83,593/-. THE AS SESSEE COMPANY HAS MADE INVESTMENTS IN INDIAN SUBSIDIARY RENEWABL E ENERGY GENERATION PRIVATE LIMITED =11,55,00,000/- AND REGE N RENEWABLE ENERGY GENERATION GLOBAL LTD (FOREIGN COMPANY) =24, 12,49,000/-. THE LD. ASSESSING OFFICER COMPUTED DISALLOWANCE U/SEC. 14A R.W.R 8D (2) ON SECOND AND THIRD LIMB IRRESPECTIVE OF THE FACT THAT NO DIVIDEND INCOME WAS RECEIVED BY THE ASSESSEE DURING THE PREVIOUS YE AR. THE ASSESSEE FILED OBJECTIONS BEFORE DRP AND BASED ON THE CO-ORD INATE BENCH DECISIONS THE DRP HELD THAT NO DISALLOWANCE OF EXP ENDITURE U/S.14A R.W.R. 8D OF THE ACT. AGGRIEVED BY THE ORDER, THE REVENUE ASSAILED AN APPEAL BEFORE TRIBUNAL. ITA NO.766 & 786/MDS/2016 :- 23 -: 9.2 BEFORE US, THE LD. DEPARTMENTAL REPRESENTATIVE EXPLAINED THAT DRP HAS ERRED IN NOT CONSIDERING THE BOARD CIR CULAR NO.5/2014 WERE THE PROVISIONS OF SEC.14 ARE MANDATORY AND PRA YED FOR ALLOWING THE APPEAL. 9.3 CONTRA, THE LD. AUTHORISED REPRESENTATIVE SUBMI TTED THAT THE PROVISIONS OF SEC. 14A CANNOT BE APPLIED WHEN THERE IS NO EXEMPTED INCOME EARNED DURING THE YEAR AND RELIED ON THE DEC ISIONS OF CO- ORDINATE BENCH. THE INVESTMENTS ARE MADE IN FOREIG N COMPANY AND DOES NOT FETCH ANY INCOME AND BEING PART OF BUSINE SS STRATEGY AND THE INVESTMENTS IN DOMESTIC AND FOREIGN COUNTRY ON THE BASIS OF COMMERCIAL EXPEDIENCY WERE THE INVESTMENTS ARE MAD E WITH PROFIT MOTIVE BUT NOT TO EARN EXEMPTED INCOME WERE DIVIDEN D INCOME IS INCIDENTAL. THE LD. ASSESSING OFFICER HAS NOT CON SIDERED THE FINANCIAL STATEMENTS THAT THE ASSESSEE COMPANY IS HAVING INT EREST FREE FUNDS OF =132 CRORES WHEREAS INVESTMENTS IN INDIAN SUBSIDIA RIES COMPANY IS ONLY =11.55 CRORES. HENCE, IT IS PRESUMED THAT IN VESTMENTS ARE MADE OUT OF INTEREST FREE FUNDS AND LOANS ARE OBTAINED F OR SPECIFIC PURPOSE AND INTEREST ON LOANS ARE TO BE EXCLUDED FOR CALCUL ATION OF DISALLOWANCE U/SEC. 14A R.W.R. 8D AND RELIED ON THE DECISION OF CO- ORDINATE BENCH IN THE CASES OF ACIT VS. BEST & COMP TON ENGINEERING ITA NO.766 & 786/MDS/2016 :- 24 -: LTD IN ITA NO.1603/MDS/2012 AND BEACH MINERALS COMP ANY (P) LTD VS. ACIT IN ITA NO.2110 & 2188/2014 AND PRAYED FOR ALLO WING THE APPEAL. 9.4 WE HEARD THE RIVAL SUBMISSIONS, PERUSED THE MAT ERIAL ON RECORD AND JUDICIAL DECISIONS CITED. THE CRUX OF T HE ISSUE BEING THE ASSESSEE HAS MADE INVESTMENTS IN SUBSIDIARY/SISTER COMPANIES AND THE CONTENTION THAT OWN FUNDS ARE GENERATED OUT OF BUS INESS AND NO BORROWED FUNDS WERE UTILIZED FOR THE PURPOSE OF IN VESTMENTS. FURTHER, INVESTMENTS IN SUBSIDIARY/SISTER COMPANY SHALL NOT BE CONSIDERED FOR THE PURPOSE OF CALCULATION OF DISALLOWANCE UNDER R ULE 8D(2). THE LD. AUTHORISED REPRESENTATIVE DREW OUR ATTENTION TO THE STATEMENT OF DETAILS OF SUBSIDIARY GROUP COMPANIES AND THE INV ESTMENTS REFLECTED IN FINANCIAL STATEMENTS AND RELIED ON JUDICIAL DECI SIONS. THE ASSESSEE COMPANY MADE INVESTMENTS IN THESE COMPANIES ON BUSI NESS EXPEDIENCY AND NO INCOME HAS BEEN GENERATED BY SI STER/GROUP COMPANIES AND ALSO SHAREHOLDING PATTERN VARIED FRO M COMPANY TO COMPANY. THE PROVISIONS OF SEC. 14A R.W.R. 8D ARE MANDATORILY APPLICABLE FROM ASSESSMENT YEAR 2008-09 BUT WHILE C ALCULATING THE DISALLOWANCE U/SEC. RULE 8D(2), THE LD. ASSESSING O FFICER SHALL CONSIDER THAT THE INVESTMENTS IN SUBSIDIARIES ARE MADE IN O RDINARY COURSE OF BUSINESS. WE FOUND THAT THERE ARE NO FINDINGS IN THE ASSESSMENT ORDER ON THIS SUBSIDIARY/GROUP COMPANIES WHICH ARE CONSIDERED AS INVESTMENTS FOR CALCULATING DISALLOWANCE U/SEC. 14A R.WR.8D(2) AND RELY ITA NO.766 & 786/MDS/2016 :- 25 -: ON THE CO-ORDINATE BENCH DECISION OF M/S. RANE HOLDINGS VS. ACIT, CHENNAI IN ITA NO.115/MDS/2015 , DATED 06.01.2016 WERE IT WAS HELD AS UNDER:- TAKING NOTE OF THE ABOVE DECISIONS AND THE DECISI ON OF THE CHENNAI BENCH OF THE TRIBUNAL IN ITA NO.156/MDS/13 CITED SUPRA, WE HEREBY REMIT THE MATTER BACK TO THE FILE OF LD. ASSESSING OFFICER TO EXAMINE THE ISSUE INVOLVED IN THIS CASE AFRESH A ND PASS APPROPRIATE ORDER AS PER LAW AND MERITS AND IN THE LIGHT OF THE DECISIONS CITED HEREIN ABOVE. WHILE DOING SO, WE AL SO DIRECT THE LD. ASSESSING OFFICER TO CONSIDER THE DECISION OF THE T RIBUNAL IN THE CASE M/S AGILE ELECTRIC SUB ASSEMBLY PVT. LTD. CITE D SUPRA WHEREIN IT WAS HELD AS FOLLOWS:- 7.2 IN REGARD TO APPLICABILITY OF SECTION 14A OF TH E ACT READ WITH RULE 8D ALSO; THE ABOVE VIEW WILL BE APPLICABLE. MO REOVER IN THE CASE EIH ASSOCIATED HOTELS LTD V. DCIT REPORTED IN 2013 (9) TMI 604 IN ITA NO.1503, 1624/MDS/2012 DATED 17TH JULY, 2013, IT HAS BEEN HELD BY THE CHENNAI BENCH OF THE TRIBUNAL AS F OLLOWS :- DISALLOWANCE U/S. 14A RW RULE 8D CIT UPHELD DISALLOWANCE HELD THAT INVESTMENTS MADE BY THE ASSESSEE IN THE SUBSIDIARY COMPANY ARE NOT ON ACCOU NT OF INVESTMENT FOR EARNING CAPITAL GAINS OR DIVIDEND IN COME. SUCH INVESTMENTS HAVE BEEN MADE BY THE ASSESSEE TO PROMOTE SUBSIDIARY COMPANY INTO THE HOTEL INDUSTRY. A PERUSAL OF THE ORDER OF THE CIT(APPEALS) SHOWS THAT OUT OF TOTAL INVESTMENT OF RS.64,18,19,775/-, RS.63,31,25, 715/- IS INVESTED IN WHOLLY OWNED SUBSIDIARY. THIS FACT SUPP ORTS THE CASE OF THE ASSESSEE THAT THE ASSESSEE IS NOT INTO THE BUSINESS OF INVESTMENT AND THE INVESTMENTS MADE BY THE ASSES SEE ARE ON ACCOUNT OF BUSINESS EXPEDIENCY. ANY DIVIDEND EAR NED BY THE ASSESSEE FROM INVESTMENT IN SUBSIDIARY COMPANY IS PURELY INCIDENTAL. THEREFORE, THE INVESTMENTS MADE BY THE ASSESSEE IN ITS SUBSIDIARY ARE NOT TO BE RECKONED F OR DISALLOWANCE U/S. 14A R.W.R. 8D. THE ASSESSING OFFI CER IS DIRECTED TO RE-COMPUTE THE AVERAGE VALUE OF INVESTM ENT UNDER THE PROVISIONS OF RULE 8D AFTER DELETING INVE STMENTS MADE BY THE ASSESSEE IN SUBSIDIARY COMPANY DECIDE D IN FAVOUR OF ASSESSEE. FOR THE ABOVE SAID REASONS, WE HEREBY HOLD THAT IN THE CASE OF THE ASSESSEE THE PROVISIONS OF SECTION 14A READ WITH RULE 8D WILL NOT BE APPLICABLE IN REGARD TO INVESTMENTS MADE FOR ACQUIRING THE SHARES OF THE ASSESSEES SISTER CONCE RNS. ITA NO.766 & 786/MDS/2016 :- 26 -: ACCORDINGLY WE RESTRAIN OURSELVES FROM INTERFERING WITH THE ORDER OF THE LD.CIT(A) ON THIS REGARD. IT IS ORDERED ACCORDINGLY. WE REMIT THE DISPUTED ISSUE TO THE FILE OF THE LD. ASSESSING OFFICER TO VERIFY AND EXCLUDE THE INVESTMENTS IN SUBSIDIARY COMPANIES FOR THE PURPOSES OF CALCULATION OF DISALLOWANCE UNDER R ULE 8D(2) AND THE ASSESSEE SHOULD BE PROVIDED ADEQUATE OPPORTUNITY OF BEING HEARD BEFORE PASSING THE ORDER ON MERITS. THE GROUN D OF THE DEPARTMENT IS ALLOWED FOR STATISTICAL PURPOSE. 10. IN THE RESULT, THE APPEAL OF THE ASSESSE E AND DEPARTMENT ARE ALLOWED FOR STATISTICAL PURPOSE. ORDER PRONOUNCED ON WEDNESDAY, THE 17TH DAY OF AUGUST, 2016, AT CHENNAI. SD/- SD/- ( ) (CHANDRA POOJARI) / ACCOUNTANT MEMBER ( . ! ' # ) (G. PAVAN KUMAR) / JUDICIAL MEMBER / CHENNAI - / DATED: 17.08.2016 KV . ( /$)01 21') / COPY TO: 1 . 34 / APPELLANT 3. ' 5) () / CIT(A) 5. 1!89 /$)$ / DR 2. /:34 / RESPONDENT 4. ' 5) / CIT 6. 9& ; / GF