M/s Toyota Kirloskar Motors (P) Ltd , Bangalore V. The Assistant commissioner of Income Tax LTU Circle-1 , Bangalore

MA 100/BANG/2023

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The case involves M/s. Toyota Kirloskar Motor (P) Ltd., which filed miscellaneous petitions seeking rectification of the Tribunal's order dated 02.12.2022 concerning the assessment years 2012-13 and 2014-15. The primary issues pertained to the treatment of provisions for employees' long-term benefits and the double disallowance of royalty expenditure. The Tribunal acknowledged the need to correct its earlier oversight in not issuing final directions on certain issues and addressed the double disallowance of royalty by clarifying the independent nature of the claims under sections 40(a)(i) and 92CA of the Income Tax Act. Additionally, the Tribunal modified the computation method for RPT to align with its previous decisions in the assessee's own cases.

• Counselvise Citation: [2023] 140 COUNSELVISE.COM (IT) 124608 (ITAT-BANGALORE)
• Duration Of Justice: 6 month(s) 8 day(s)
• Appeal Type: Miscellaneous Application
• Pronouncement Date: 05-11-2023
• Appeal Filed By: Assessee
• Order Result: PartlyAllowed
• Bench Allotted: A
• Next Hearing Date: 05-10-2023
• Assessment Year: 2012-2013
• Appeal Filed On: 27-04-2023
• Other Referred Cases: Sony India Ltd. vs. 114 ITD 448 (Delhi)
• Laws Referred To: Income Tax Act
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Non-deduction of tax; TDS
• Section: 40(a)(ia); 37(1); 92CA

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL “A” BENCH : BANGALORE BEFORE SMT. BEENA PILLIA, JUDIIAL MEMBER AND SHRI LAXMI PRASAD SAHU, ACCOUNTANT MEMBER MP Nos.100 & 101/Bang/2023 [in IT(TP)A No.150/Bang/2017 & IT(TP)A No.350/Bang/2019] Assessment years : 2012-13 & 2014-15 M/s. Toyota Kirloskar Motor (P) Ltd., Plot No.1, Bidadi Industrial Area, Ramanagar Taluk, Bidadi. Bangalore Rural Dist. 562 109 PAN : AAACT 5415B Vs. The Assistant Commissioner of Income Tax, LTU, Circle-1, Bangalore. APPLICANT RESPONDENT Applicant by : Shri Padamchand Khincha, CA Respondent by : Shri Nischal, Addl.CIT(DR)(ITAT), Bengaluru. Date of hearing : 06.10.2023 Date of Pronouncement : 06.11.2023 O R D E R Per Laxmi Prasad Sahu, Accountant Member These miscellaneous petitions are filed by the assessee seeking rectification in the order of the Tribunal dated 02.12.2022 for the AYs 2012-13 & 2014-15. 2. The first issue raised in the MP for AY 2012-13 is that the Tribunal decided the issue of Provision for Employees Long Term Benefit in para 14.3 following the decision of the coordinate Bench in MP Nos.100 & 101/Bang/2023 Page 2 of 12 the assessee’s own case in ITA No. 1972/Bang/2018 for AY 2013-14 and extracted the observations, however, no final direction was issued. After perusing the record, we therefore insert the following paragraph 14.3.1 in the order of the Tribunal dated 02.12.2022 :- “14.3.1 Following the decision of the coordinate Bench of the Tribunal for the AY 2013-14, we restore this issue to the AO in the same terms.” 3. In view of the above, for AY 2014-15 also, this issue is accordingly restored to the AO. 4. The next issue raised in the MP for AY 2012-13 is ground No.18 with respect to double disallowance of royalty expenditure of Rs.57,53,23,147. 5. The ld. AR submitted a brief note with reference to royalty as follows:- 1 During the Assessment Year 2011-12, the total royalty payment by the Petitioner was Rs 179,98,19,708.00 A 2 Out of the above, the following were the adjustments made in the assessment order passed: • Disallowed voluntarily by the Petitioner u/s 40(a) at the time of filing the return of income for non-deduction of tax at source. Rs 57,53,23,147.00 B • Disallowed by the Assessing Officer consequent to the Order u/s 92CA, being royalty payment in excess of the ALP. Rs 107,98,91,825.00 C ------------------------------- The net amount allowed as a deduction was therefore [A-(B+C)] Rs 14,43,04,936.00 ------------------------------- MP Nos.100 & 101/Bang/2023 Page 3 of 12 3. During the Assessment Year 2012-13, the Petitioner discharged the TDS amount and accordingly claimed a deduction for the same u/s 40(a). This deduction of Rs 57,53,23,147/- was denied by the AO/DRP largely for the reason that the amount gets subsumed into the ALP disallowance and hence constitutes a permanent disallowance. 4. The ALP of the Royalty payment for AY 2011-12 was initially determined by the AO at Rs 71,99,27,883/-. This deduction was constricted (ie further reduced) by the AO, on account of non- compliance of TDS provisions. 5. At page 87, para 16.5 of the ITAT order for AY 2012-13, the findings are as under: " The addition made u/s 92CA cannot be correlated with the disallowance u/s 40(a) / 37(1) of the Act. Therefore, we do not find substance on the submissions of the learned AO." “.......... If there is no separate adjustment for royalty u/s 92CA, no addition can be made during the year because the assesse has complied the provisions of 40(a) ............ .” 6. As per the TP order giving effect to the order of the ITAT for AY 2011-12, the royalty adjustment has been reduced to Rs 26,04,67,200/- (Refer the note below the table @ pg 5 of the Miscellaneous Application for AY 2012-13). As per the OGE therefore, ALP of royalty payment would be Rs 153,83,52,508/- (Rs 179,98,19,708/- less Rs 26,04,67,200/-). 7. The deduction for the above amount of Rs 153,83,52,508/- would be granted in two years: - To the extent TDS is discharged in AY 12-13, in that year ie AY 2012-13. - The remaining amount of "ALP royalty" in AY 2011-12 itself. 8. The order of the ITAT for AY 2012-13 may be rectified to the extent of incorporating the above, and the observations in para 16.5 be modified accordingly.” MP Nos.100 & 101/Bang/2023 Page 4 of 12 6. The ld. AR further submitted that sum of Rs.57,53,23,147 was suo motu disallowed by the assessee u/s. 40(a)(i) and thus this claim is independent of adjustment u/s. 92CA. The details of disallowance of royalty submitted by the assessee is given below:- AY 2011-12 Particulars Amount in Rs. Total Royalty Expenditure debited to P&L in AY 2011-12 [A] 179,98,19,708 Suo moto disallowance made by the Petitioner u/s 40(a)(i) in the return of income [B] 57,53,23,147 Net royalty expenditure claimed in the return of income [C=A-B] 1,22,44,96,561 Royalty Adjustment made u/s 92CA [ALP determined at Rs.71,99,27,883/-] [Refer Note below] [D] 107,98,91,825 Net royalty expenditure allowed as per the Final Assessment Order [E=C-D] 14,46,04,736 Note: Royalty adjustment has been reduced to Rs.26,04,67,200/- vide TP OGE to ITAT order dated 29.01.2023. AY 2012-13 Particulars Amount in Rs. Royalty expenditure claimed u/s 40(a)(i) in the return of income [A] 57,53,23,147 Royalty expenditure disallowed by the AO in the Final Assessment order on the premise that the deduction u/s 40(a)(ia) is not admissible as it pertains to the disallowance of royalty under ALP principle and not 40(a)(ia) [B] 57,53,23,147 Net Amount allowed as expenditure [A-B] Nil 7. The ld. AR submitted that on a cumulative basis, the net royalty expenditure allowed to the Petitioner in both the years is only Rs.14,46,04,736/- despite the arm's length royalty being MP Nos.100 & 101/Bang/2023 Page 5 of 12 Rs.71,99,27,883/-. The assessee had submitted that allowance of Rs.57,53,23,147/- is not dependent on the adjustment u/s 92CA. The above facts are also recorded in para 16.1 of the Order. However, while giving directions at para 16.5 of the Order, the Tribunal directed to verify the status of adjustment u/s 92CA for AY 2011-12 in order to allow the claim of Assessee. It is submitted that this constitutes mistake apparent from record and that the claim of deduction of Rs. 57,53,23,147/- is attributable to disallowance of royalty u/s 40(a)(i) of the Act and is not dependent on TP adjustment u/s 92CA. Therefore, Ground 18 should be allowed as claim is attributable to disallowance of royalty u/s 40(a)(i) of the Act and TDS has been remitted subsequently in AY 2012-13, which is not in dispute. 8. We have heard the ld. DR. After considering the rival submissions and perusing the material on record, we note that vide para 16.5 of the order, the Tribunal directed as follows:- “16.5 ................ The ld. AR submitted that the ITAT has decided this issue in favour of the assessee for the AY 2011-12 wherein it has been held that if the assessee has applied TNMM at entity level then no separate adjustment can be made for Royalty payments u/s 92CA, but no copy of the order was produced before us for the AY 2011-12 on this issue. Therefore, the assessee is directed to produce the order of the ITAT for the AY 2011-12 on this issue and if there is no separate adjustment for royalty u/s 92CA, no addition can be made during the year because the assessee has complied the provisions of section 40(a). Considering the facts of the case we are remitting this issue to the AO for verification. This ground is allowed for statistical purposes.” MP Nos.100 & 101/Bang/2023 Page 6 of 12 9. During the course of hearing appeal, the ld. AR did not produce the order of Tribunal for AY 2011-12, therefore we have directed the assessee to file the same before the AO. Neither it was produced during the course of hearing of MP also. Therefore, the plea of the assessee on this issue is dismissed. 10. The next issue for AY 2012-13 is ground No.5(c) inter alia contending that Customs Duty Adjustment should have been granted. Before the Tribunal the assessee submitted that it has higher import component of raw materials (53.22%) vis-à-vis the average import ratio of 10.88% of the comparables selected by the TPO. Higher imports results in higher custom duty. Higher customs duty increases the cost of raw materials. Since sale price is market driven, higher material cost impacts net margin. Comparables procure components from local manufacturers, who levy excise duty. However, input is available for excise duty. So, in order to eliminate the impact on margins due to duty differential, custom duty should be excluded from operating cost. 11. At para 8.9 of the Order, it is stated that the assessee did not request such an adjustment for AY 2007-08, AY 2008-09, and AY 2010-11. In this regard, the ld. AR submitted that it has made customs duty adjustment for all the years in its TP study report. In AY 2007¬08 it had raised ground for custom duty adjustment. However, on aggregation, since transactions are at ALP, the question of customs duty adjustment is not discussed in the order. In AY 2008-09 and AY MP Nos.100 & 101/Bang/2023 Page 7 of 12 2010-11, only royalty adjustment was made in Order u/s 92CA. Thus, issue of custom duty adjustment did not arise for discussion before the Tribunal. Thus, the statement that custom duty adjustment was not requested in AY 2007¬08, AY 2008-09 and AY 2010-11 is not correct and such statement should be expunged from the order. 12. Further, at Para 8.11 of the order, the Tribunal has held that the Petitioner has not substantiated that there is variation in the rate of custom duty paid by the Petitioner and comparables and accordingly, remitted the matter back to the file of AO for fresh consideration and directed the assessee to prove that the rate of custom duty paid by it is higher than the rate of custom duty paid by the comparables in order to be eligible for custom duty adjustment. 13. In this regard, the ld. AR submitted that the ground raised before Tribunal is that the import component of the assessee is higher than the average import component of the comparables. This is accepted by the Tribunal is para 8.7 of the order. Since, the import component of the assessee is higher, the quantum of custom duty paid by the assessee is higher than that paid by the comparables. Comparables procure the raw materials and components from the local market and the excise duty/VAT is paid on such purchases and same is claimed as input credit, which does not have any impact on the overall cost. In case of the assessee, custom duty paid on imports is not allowed as input credit resulting into increased costs and reduced margins. MP Nos.100 & 101/Bang/2023 Page 8 of 12 14. The ld. AR further submitted that rate of customs duty is not relevant factor, but the quantum of customs duty is the relevant factor. This aspect has been missed in the Tribunal Order. In assessee’s own case for AY 2003-04, the above contention was accepted by the coordinate bench and the matter was remanded back to the file of TPO to examine the allowance of custom duty adjustment in light of the above contentions. The relevant findings of the Tribunal are at Pg no.1464 and 1465 of PB-II and same was relied upon during the hearing and in written synopsis. No reasons are given by the Tribunal in the impugned order for not following the Tribunal order in assessee’s own case for AY 2003-04. It is prayed that same directions should be given for current assessment year. 15. After hearing the ld. DR and considering the rival submissions and perusing the material on record, firstly we note that in para 8.9 of the order, the first sentence is mentioned as “In the assessee’s own case for the assessment year 2007-08, 2008-09 and 2010-11, no such adjustment have been sought for, whereas the business model of the assessee is same.” The words “no such adjustment have been sought for” is modified and substituted to read as “no such adjustment has been made.” 16. The ld. AR submitted that rate of customs duty is not relevant factor, but the quantum of customs duty is relevant and this contention has been accepted by the coordinate Bench in assessee’s own case for AY 2003-04 and the issue remanded to the TPO for examination. It is MP Nos.100 & 101/Bang/2023 Page 9 of 12 submitted that the order for earlier AY 2003-4 is not followed and same directions should be given for current AY. We are not convinced with the submissions of the ld. AR because FAR analysis carried out every year independently and in assessment year 2007-08, 2008-09 and 2010-11 no adjustment has been made for the customs duty. It is to be noted that the claim of assessee for exclusion of differential amount of Customs duty is based on the premise that it made more imports with the resultant increased cost of import because of higher incidence of Customs duty paid as against the comparables paying less amount of custom duties. In our considered opinion, this argument is devoid of merits. It is not a case of payment of Customs duty by the assessee at a higher amount vis- a-vis comparables. It is just fundamental that if a person uses better quality of raw materials, obviously, the corresponding sale price also has definitely premium price and vice- versa. Given the fact that the assessee imported more items from its AE, it is a natural corollary that corresponding sale price would also have been on higher side, thereby nullifying the effect of higher payment of Customs duty, forming a part of the Operating cost base on the overall basis. It is not the case of the assessee that it is paying higher customs duty than others, which would have necessitated for adjustment to have a level playing. In Sony India Ltd. reported in 114 ITD 448 (Delhi), it is held that “a higher import content of Raw- material does not warrant an adjustment in operating margins.”. Hence, we do not find any error in the order of the Tribunal on this issue for AY 2012-13. On similar issue of Customs Duty Adjustment MP Nos.100 & 101/Bang/2023 Page 10 of 12 and on identical facts, we hold and direct accordingly for AY 2014-15 also. 17. The next issue regarding margin computation was not pressed and dismissed as not pressed for both the years under consideration. 18. For AY 2014-15, the assessee has raised a ground relating to RPT that the CIT(A) has erred in directing the TPO to recompute the RPT by adopting ‘total RPT divided by total sales plus total expenditure’ as the ratio. A ground was also raised that Tata Motors Ltd., Mahindra & Mahindra Ltd. and Maruti Suzuki Ltd. fails RPT filter of 25% on sales. In relation to above grounds, the Tribunal at para 28 of the order has referred to the decision of coordinate Bench in assessee’s own case for AY 2013-14 where it is held that RPT ratio has to be calculated on aggregate basis by taking ratio of RPT income plus RPT expenditure by sales. At para 28.1 of the order, it is stated that the CIT(A) following the order in assessee’s own case for AY 2013-14 has directed the AO for fresh consideration and directed the AO/TPO to calculate RPT ration in terms of the decision for AY 2013-14 in assessee’s own case. 19. In this regard, the ld. AR submitted that the CIT(A) in his order for AY 2014-15 did not refer to the decision of the Tribunal for AY 2013-14 in assessee’s own case dated 18.8.2021 and the order of the CIT(A) for AY 2014-15 was passed on 31.12.2018. The CIT(A) in fact referred to the order of the CIT(A) for AY 2013-14 and had drawn an incorrect inference by directing the TPO to recompute the RPT as MP Nos.100 & 101/Bang/2023 Page 11 of 12 per the said ratio. Therefore, there is an apparent mistake in the order of Tribunal and it is submitted that the TPO may be directed to follow the Tribunal decision for AY 2013-14 in assessee’s own case for computing the RPT ratio without reference to CIT(A)’s order for AY 2014-15. 20. After considering the rival submissions and perusing the material on record, we accept the above submissions of the ld. AR that the CIT(A)’s order for AY 2014-15 was passed on 31.12.2018, whereas the Tribunal’s order for AY 2013-14 is dated 18.8.2021. We accordingly modify and substitute para 28.1 of the order of the Tribunal dated 2.12.2022 to read as under:- “28.1 Respectfully following the order of the Tribunal in assessee’s own case for AY 2013-14, we direct the AO/TPO to calculate the RPT ratio in the same terms.” 21. In the result, the miscellaneous petition for both the years are partly allowed. Pronounced in the open court on this 06 th day of November, 2023. Sd/- Sd/- ( BEENA PILLAI ) (LAXMI PRASAD SAHU ) JUDICIAL MEMBER ACCOUNTANT MEMBER Bangalore, Dated, the 06 th November, 2023. / Desai S Murthy / MP Nos.100 & 101/Bang/2023 Page 12 of 12 Copy to: 1. Applicant 2. Respondent 3. CIT 4. CIT(A) 5. DR, ITAT, Bangalore. By order Assistant Registrar ITAT, Bangalore.