Travel expenses abroad that are related to business are not deducted
Fact and issue of the case
The present appeal has been filed by assessee against the order of ld. CIT(A)-44, New Delhi dated 16.09.2016.
Following grounds have been raised by the assessee:
That the impugned order of CIT (A)-44, New Delhi is bad in law and wrong on the facts and in the circumstances of the case and legal position.
That on the facts and in the circumstances of the case and the legal position, the learned CIT (A) has erred in confirming the additions of Rs.11,62,00,000/- to the appellant’s income on account of the alleged difference in arm’s length price of international transactions undertaken by the appellant on the basis of finding in the order passed by the Transfer Pricing Officer (TPO) under section 92CA(3) of the Act.
That on the facts and in the circumstances of the case and the legal position, the learned CIT (A) has erred in confirming an addition of Rs.11,62,00,000/- allegedly on the ground that no commission has been charged by the appellant for providing corporate guarantee to the lenders on behalf of its associated enterprises.
That on the facts and in the circumstances of the case and the legal position, the learned CIT(A) has erred in arriving at the arm’s length price of service provided by the appellant in the form of corporate guarantee to AES; whereas:-
i) Providing corporate guarantee is in the nature of shareholders’ activities and is not an ‘international transaction’ as investment in subsidiary Company is not an ‘international transaction as held in the case of Vodafone India Services Private Limited and Shell India Markets Private Limited.
ii) The appellant has not incurred any cost for issuing corporate guarantee and such transaction has no bearing on the profits, income, losses or assets of the appellant and it cannot be considered as an ‘international transaction’ in terms of section 92B of the Act.
iii) The corporate guarantee issued by the appellant was purely on the commercial consideration with anticipation of significant benefit in the form of profit income in the later years and to protect the interest of the appellant Company.
iv) The providing bank guarantee and corporate guarantee are different and distinct matters and cannot be compared with.
v) That on the facts and in the circumstances of the case and the legal position, the learned CIT (A) has erred in confirming the disallowance of Rs.23,99,12,383/- in respect of provision made for sales incentive under “Shahenshah Scheme” and holding that the provision made by the appellant under the aforesaid scheme was not being made on a scientific or logical basis and therefore the provision, is not allowable as deduction.
That on the facts and in the circumstances of the case and the legal position, the learned CIT (A) has erred in confirming the reduction of the deduction allowable u/s 801C of the Act in respect of the units at Baddi-I and Haridwar-1, to the extent of 25,86,916/-, by excluding interest income earned by the said units, while computing the eligible profits. 4.02 That on the facts and circumstances of the case, the learned CIT(A) has erred in alleging that the appellant has not substantiated the claim of interest of Rs. 11,60,074/-received by the units eligible under section 80-IC of the IT Act, 1961.
That on the facts and in the circumstances of the case and the legal position, the learned CIT (A) has erred in not allowing the deduction of education cess and secondary and higher education cess of Rs.1,77,23,880/-.
That on the facts and in the circumstances of the case and the legal position, the learned CIT (A) has erred in confirming addition of Rs.54,500/- in respect of short deduction of TDS u/s 40(a)(ii) of the IT Act, 1961.
That on the facts and in the circumstances of the case and the legal position, the learned CIT (A) has erred in confirming addition of Rs. 31,81.736/- on account of the foreign travelling expenses incurred on Research and Development activities; whereas once facility is approved by DSIR, the entire expenditure so incurred is eligible for weighted deduction.
That on the facts and in the circumstances of the case and the legal position, the learned CIT (A) has erred in confirming the additions on account of Research and Development expenses of Rs.1,68,25,752/- incurred at seven units on R&D activities claimed u/s 35(1)(i) of the IT Act, 1961.
That on the facts and in the circumstances of the case and the legal position, the learned CIT (A) has erred in confirming the addition of Rs.15,91,369/- on account of depreciation and additional depreciation on machinery purchased on 17.02.2011 and 18.02.2011 and installed on 04.03.2011.”
Ground No. 1 is general in nature.
Ground No. 2.01, 2.02 & 2.03
Corporate Guarantee:
This issue stands covered by the Co-ordinate Bench of ITAT in assessee’s own case in ITA No. 6509/Del/2018 for A.Y. 2014-15 vide order dated 09.05.2022. The relevant part of the said order is reproduced as under:
Rebutting the argument of the ld. DR, the ld. AR alternatively argued that determination of the corporate guarantee at 1.3% is on a higher side and relied on the judgment of Hob’ble High Court of Bombay in the case of CIT Vs. Everest Ken to Cylinders Ltd. 58 Taxmann 254 and also on the judgment of Hon’ble High Court of Bombay in the case of CIT Vs Thomas Cook (India) Ltd. in ITA No. 712 of 2017 order dated 26.08.2019. Keeping in view, the judgments of the Hon’ble Bombay High Court and in the absence of any other judgment contrarily brought to our notice, we hereby direct that the adjustment in respect of corporate guarantee provided to AEs be determined at date of 0.5% instead of 1.3% determined by the revenue.”
Ground No. 3 Shahenshah Scheme:
This issue stands covered by the Co-ordinate Bench of ITAT in assessee’s own case in ITA No. 6509/Del/2018 for A.Y. 2014-15 vide order dated 09.05.2022. The relevant part of the said order is reproduced as under: “
This issue stands covered in the case of the assessee by the order of the Co-ordinate Bench of the Tribunal in ITA No. 6194/Del/2015 and ITA No. 463/Del/2016 vide order dated 19.01.2021. The relevant part of the said order is reproduced for ready reference: “
Ground No.3 is with respect to disallowance of Rs.2,47,68,964/- in respect of provision made for sales incentive under “Shahenshah Scheme”.
During the course of assessment proceedings, AO noticed that assessee had made provision in respect of “Shahenshah Scheme” and the assessee was asked to furnish the details of the same. Assessee inter alia submitted that it had made provision of Rs.5,67,26,847/- in respect of “Shahenshah Scheme” towards sales incentive payable to dealers and distributors and had paid Rs.2,61,14,170/- in respect to the said scheme and Rs.58,43,713/- was written back and credited to Excess Provisions of bad debts/sales incentive written back. The assessee also pointed to the relevant features to the “Shahenshah Scheme” and it was further submitted that the provision made for the scheme is not a contingent liability but rather a contractual liability which is legally enforceable by the dealers and distributors. The submissions made by the assessee were not found acceptable to AO. AO considering the fact that as against the provision of Rs. 5,67,26,847/-, the actual payment made by the assessee was Rs.2,61,14,170/- and Rs.58,43,713/- was written back, concluded that the provision made by the assessee was not based on any scientific method but was in the nature of contingent liability. He also noted that CIT(A) while deciding the issue in assessee’s own case for A.Y. 2008-09 had analyzed scheme and had confirmed the addition made by the AO. He therefore disallowed Rs.2,47,68,964/- [5,67,26,847 – 2,61,14,170 – (5843713/-)].
Aggrieved by the order of AO, assessee carried the matter before the CIT(A), who following the order of his predecessor in assessee’s own case for A.Y. 2008-09, upheld the action of the AO. Aggrieved by the order of CIT(A), assessee is now before us.
Before us, Learned AR reiterated the submissions made before the AO and CIT(A) and further submitted that against the order of CIT(A) for A.Y. 2008-09, assessee had carried the matter before the Tribunal. The Tribunal vide order dated 30.09.2019 in ITA No.4695/Del/2012 has decided the issue in favour of the assessee by holding that the provision made in respect of “Shahenshah Scheme” is on a scientific basis. He further submitted that the Coordinate Bench of Tribunal had deleted the similar additions made by AO in A.Y. 2007-08 & 2006-07. He pointed to the relevant findings in the synopsis filed by him. He therefore submitted that since the issue in the year under consideration is identical to that of earlier years, therefore following the order of tribunal in earlier years, the additions made by AO be deleted.
Learned DR on the other hand supported the order of AO in CIT(A).
We have heard the rival submissions and perused all the materials available on record. The issue in the present ground is with respect to the disallowance of provision made with respect to the sales incentive payable under “Shahenshah Scheme”. The AO had disallowed the provision by holding that the provision made by the assessee was not based on any scientific method and there is an element of contingent liability and therefore the sum is not allowable. We find that identical issue arose in assessee’s own case in AY 2006-07, 2007-08 and 2008-09 before the co-ordinate Bench of Tribunal. The Co-ordinate Bench of Tribunal in earlier years has decided the issue in favour of the assessee by holding that the provision made by the assessee in respect to “Shahenshah Scheme” to be on scientific basis. Before us, no material has been placed by the Revenue to point out any ITA No.6194/Del/2015 ITA No.463/Del/2016 M/s. Havells India Ltd. vs DCIT A.Y. 2009-10 14 distinguishing feature in the facts of the case in the year under consideration and that of earlier years. Further Revenue has also not placed any material to demonstrate that the decision of the Tribunal in assessee’s own case in A.Y. 2006-07, 2007-08, 2008- 09 has been set aside/ stayed or over ruled by the higher judicial forum. Considering the totality of the aforesaid facts and following the order of the Co-ordinate bench in the assessee’s own case and for similar reasons, we hold that the Revenue was not justified in making the addition. We therefore set aside the action of AO. Thus the ground of the assessee is allowed.”
As a result, the appeal of the assessee on this ground is allowed and it is to be kept outside the purview of Section 115JB.”
Ground No. 4.01 & 4.02 Interest on FDRs/Deduction u/s 80-IC:
This issue stands covered by the Co-ordinate Bench of ITAT in assessee’s own case in ITA No. 6509/Del/2018 for A.Y. 2014-15 vide order dated 09.05.2022. The relevant part of the said order is reproduced as under: “11. This issue stands covered in the case of the assessee by the order of the Co-ordinate Bench of the Tribunal in ITA No. 6194/Del/2015 and ITA No. 463/Del/2016 vide order dated 19.01.2021. The relevant part of the said order is reproduced for ready reference:
Ground No.4 is with respect to the denial of claim of deduction u/s 80IC on interest income.
AO noticed that assessee had credited Rs.16,725/- and Rs.6,334/- on account of interest income in the accounts of Baddi Unit and Haridwar Unit. The assessee was asked to show cause as to why the deduction u/s 80IC not be disallowed on such interest income as it was not derived from the business activity of the industrial undertaking. Assessee made the submissions which were not found acceptable to AO. AO was of the view that as per the provisions of Section 80IC, deduction is available only on income derived from business activity of industrial undertaking and since interest has been derived from fixed deposits, the interest was not eligible for deduction. He accordingly denied the claim of deduction u/s 80IC on such interest income.
Aggrieved by the order of AO, assessee carried the matter before the CIT(A) who upheld the order of AO. Aggrieved by the order of CIT(A), assessee is now before us.
Before us, Learned AR reiterated the submissions made before the lower authorities and further submitted that interest income was earned on the fixed deposits which was required to be maintained as per the statutory requirements of the respective state. He submitted that since the interest income was inextricably linked to the main business activity of the assessee, it should be considered to be treated as eligible for claiming deduction. In support of its claim for interest being eligible for deduction, he also relied on the decision of Hon’ble Delhi High Court in the case of PCIT vs. Bharat Sanchar Nigam Ltd. in ITA No.477/2016 dated 01.08.2016 and the decision of ITAT in the case of M/s. NHPC Ltd vs. ACIT in ITA No.3738/Del/2015 in order dated 08.05.2019.
Learned DR on the other hand supported the order of lower authorities.
Observation of the court
We have heard the rival submissions and perused all the materials available on record. The issue in the present ground is with respect to the denial of claim of deduction u/s 80IC on the interest income earned by the assessee. Before us it is Learned AR’s contention that the interest income earned is inextricably linked to the main business activity of the assessee as it was earned from fixed deposits which was required to be maintained as per the statutory requirements. The aforesaid contentions of the assessee have not been controverted by the Revenue. We find that the Hon’ble Delhi High Court in the case of PCIT vs. Bharat Sanchar Nigam Ltd. (supra) and the Co-ordinate Bench of Tribunal in the case of M/s. NHPC Ltd. (supra) has held that the Revenue was not justified in denying the claim of deduction on such income. Before us, Revenue has not pointed any contrary binding decision in its support. We therefore, hold that AO not justified in denying the claim of deduction u/s 80IC of the Act and thus direct the AO to grant deduction u/s 80IC on the interest income earned by the assessee. Thus the ground of the assessee is allowed.”
As a result, the appeal of the assessee on this ground is allowed.”
Ground Nos. 5 & 6 Education cess and TDS
Not pressed.
Ground No. 7 Foreign Travel Expenditure:
The assessee has claimed Rs.40,68,334/- on account of travelling expenses, vehicle maintenance expenses. The amount includes foreign travel expenses of Rs.15,90,860/-, inland travelling expenses of Rs.10,03,380/- and vehicle maintenance & conveyance expenses of Rs.14,74,086/-. The expenses have been incurred in connection with travel to China by the staff of the company. The details have been mentioned at page no. 137 of the paper book which gives details of starting date, ending date, fair, boarding, lodging, conveyance, telephone and other expenses. In total 15 trips have been made by the employees of the company. Since, the expenses are incurred in connection with business of the assessee, we hold that no disallowance on this account is called for.
Ground No. 8 R&D Expenses:
The R&D expenses consist of establishment expenses incurred at R&D units for which application for approval has not been filed during the year. The expenses are detailed at page no. 138 & 139 of the paper book which consists of employee remuneration 42 employees who are engineers and managers placed at 7 different R&D units. The payments made of Rs.1,50,82,425/- consists of basic salary, HRA, Transport Allowance, Special Allowance, Mediclaim Allowance, LTA and ex-gratia . Further, an amounts of Rs.17,43,376/- has been incurred on account of consumables and material costs incurred at R&D units which consists of rotary, file, moulded box, Cjx2-09A Te Type, busbar for testing fixture, job work charges L.R, Pp edge protector, button B2, material for R&D, Pcb design charges, vernier depth gauge and Allen key etc. The expenses are not covered u/s 35(2) of the Income Tax Act, 1961. The assessee has not claimed the same u/s 35(2) but the expenses are allowable u/s 35(1) @ 100%. Since, the ratio of incurring of expenses per se is not in dispute, we hold that the assessee is eligible to claim expenses u/s 35(1). The approval of the DSIR is not required for claim u/s 35(1)(i). The appeal of the assessee on this ground is allowed.
Ground No. 9 Depreciation:
The assessee filed an installation report in respect of the machinery which states that the machinery has been installed on 03.04.2011 and put to use on 04.2011 before the AO. The AO asked the assessee as to why the claim of depreciation and additional depreciation should not be disallowed being pertaining to A.Y. 2012-13.
The assessee company vide letter dated 18.02.2015 has explained that the date of installation is 03.2011.This is on account of computerized format in the Alwar factory. The machinery has been installed on 04.03.2011 and used during the year and chance depreciation and additional depreciation has been claimed.
After consideration the submissions, the AO has held as under:
”Primarily it is seen that the installation report is also seen that the bill date is 02.04.2011 with his bill date, assessee has no objection in respect of computerized format. The objection of the assessee is only in respect of date of installation. How it can be possible to use two different format for writing dates, if objection of the assessee is considered. Accordingly, Rs.15,91,369/- is disallowed and added back to the total income of the assessee company as under: Amount of additions in machinery Rs. 90,93,540 Dep. @ half of 15% (below 180 days) Rs. 6,82,015 Additional dep. @ half of 20% below 180 days Rs. 9,09,354 Total disallowance Rs. 15,91,369/-
During the appellate proceedings before the ld. CIT(A), Ld. AR has filed written submission on this issue.
The main arguments of the Ld. AR on this issue is reproduced as under:
That the AO has disallowed depreciation and additional depreciation on the basis that the date of installation is after the date of the accounting year i.e. 03.04.2011 while the date of installation is 04.03.2011 on account of computerized format. The copies of invoices No. 79 and 80 in respect of machinery purchased from M/s Supermac Industries (India) Limited are enclosed. In the invoice No. 79, the date of purchase order has wrongly been mentioned as 02/04/2011 instead of 02.04.2010. A copy of purchase order is enclosed. The machine was received on dated 19.02.2011 in the factory premises. The copies of Inward material register dated 19.02.2011 alongwith the copy of Invoice and Transporters’ GR are also enclosed. The machine was installed and put to use on 4th March, 2011. In the installation report, the date of installation has been stated as 3/4/2011. The same is to be read as 4th March 2011 as per computerized format in the Alwar factory during the year. The same is also evident from the installation report at SI. No. 17 (copy enclosed) of letter filed on 16.02.2015 where the date of installation has been stated as 10/31/2010 which is to be read as 31/10/2010. The aforesaid machines have been installed on March 2011 and hence depreciation and additional depreciation was to be allowed on the same as per the provisions of section 32 and 32(1)(iia) of the IT Act, 1961. On the basis of the above, the additions made by the AO may be deleted.”
The ld. CIT(A) concurred with the findings of the Assessing Officer.
Before us, the ld. AR submitted the bill no. 79 at page no. 156 & 157 of the paper book. The ld. AR has filed copies of the invoice no. 79 and 80 in respect of machinery purchased from Supermac Industries India Ltd. The Ld. AR has argued that installation dated 04.03.2011 which is in computer format was shown as 03.04.2011 as the first two digits shows month format and subsequent two digits shows date format. The Ld. AR has enclosed invoice no. 79 and 80 which are dated 17.02.2011 and 18.02.2011 respectively.
We have gone through the page no. 156, fixed assets installation report giving the details of date of installation, date of put to use and also the invoice nos. 79 & 80 dated 17.02.2011 and 18.02.2011. We have also gone through the transport bill for the invoice no. 79 dated 17.02.2011 and also for the invoice no. 80 dated 18.02.2011 along with in word material register and fixed assets installation report. From examination of the format of the fixed assets installation report, we find that the date of installation and date of put to use is in the format of month, date and year. The page no. 168 of the paper book reflects the date of installation 10/31/2010 which reinforces the month, date and year the format and hence, we hold that the revenue authorities have fallen into error in interpreting the date of installation as April 3rd instead of 4th March. The appeal of the assessee on this ground is allowed.
In the result, the appeal of the assessee is allowed.
Order Pronounced in the Open Court on 11/10/2023.
