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Income Tax Appellate Tribunal, “ D ” BENCH, AHMEDABAD
Before: SHRI RAJPAL YADAV & SHRI WASEEM AHMED
Consolidated Appeals (4)
आदेश / O R D E R
PER WASEEM AHMED, ACCOUNTANT MEMBER:
The captioned appeals have been filed at the instance of the Revenue and Assessee (in ITA No.860/Ahd/2016 – for AY 2010-11) against the separate orders of the Commissioner of Income Tax (Appeals)–VIII, Ahmedabad [CIT(A) in short] dated 25/07/2013, 21/05/2014, 27/01/2016 relevant to Assessment Years (AYs) 2008-09, 2009-10 & 2010-11 respectively.
ITA Nos.2399/Ahd/13, 2286/Ahd/14 & 860/Ahd/16 (Revenue) & 931/Ahd/2016 (by assessee) DCIT vs. Hitachi Home& Life Solutions (I) Ltd. Asst.Years – 2008-09, 2009-10, 2010-11 - 2 - 2. Since all these appeals are inter-connected, therefore these are being disposed of by way of this consolidated order for the sake of convenience.
To begin with, we shall address the Revenue’s appeal in ITA No.2339/Ahd/2013 for AY 2008-09 as a lead case.
The Revenue raised the common ground of appeal which reads as under:-
The Ld.CIT(A) has erred in law and on facts in deleting the addition of Rs. 71,57,055/- on account of upward adjustment of international transaction in respect of royalty payment. 2. The ld. CIT(A) has also erred in law and on facts in deleting the disallowance of Rs. 1,100,09,859/- made by the AO on account of provision for warranties without appreciating facts that this amount is a provision and a contingent, unascertained and non-crystallized liability. 3. The Ld. CIT(A) further erred in law and on facts in directing to allow deduction u/s.80IB(10) on Foreign Exchange Fluctuation gain attributable to Jammu Unit. 4. The Ld. CIT(A) further erred in law and on facts in directing to allow deduction of Rs. 5,83,00,000/- u/s. 80IB(4) in respect of Jammu Unit. 5. The ld. CIT(A) also erred in directing to allow MAT credit as increased by surcharge and deduction cess when the said MAT already includes the such charge and cess.
ITA Nos.2399/Ahd/13, 2286/Ahd/14 & 860/Ahd/16 (Revenue) & 931/Ahd/2016 (by assessee) DCIT vs. Hitachi Home& Life Solutions (I) Ltd. Asst.Years – 2008-09, 2009-10, 2010-11 - 3 - 6. On the facts and in the circumstances of the case, the Ld. CIT(A) ought to have upheld the order of the Assessing Officer. 7. It is, therefore, prayed that the order of the Ld.CIT(A) may be set aside and that of the Assessing Officer may be restored to the above extent.
The first issue raised by the Revenue is that the Ld. CIT(A) erred in deleting the addition made by the Assessing Officer for Rs. 71,57,055/- on account of royalty payment to the Associated Enterprises (AEs).
Briefly stated facts are that the assessee is a Limited Company and engaged in the business of manufacturing and trading in Hitachi Brands of Home Appliances. The assessee in the year under consideration has made the royalty payment to its AE in Japan for the technology developed by it. The assessee made the payment of royalty @ 3.75% of the net sales which is worked out as under:
Net Ex-factory Sales Less : Excise duty, Sales tax, cess & any other duty Less : Dealers’ commission, Special Commission and Warranty as per Company Policy Less : Landed cost of imported components Less : Cost of Standard bought out components used in the manufacture of the products Less : Packing Charges Less : Transportation charges and insurance on shipment to customers Balance being Net Sales on which royalty is payable
ITA Nos.2399/Ahd/13, 2286/Ahd/14 & 860/Ahd/16 (Revenue) & 931/Ahd/2016 (by assessee) DCIT vs. Hitachi Home& Life Solutions (I) Ltd. Asst.Years – 2008-09, 2009-10, 2010-11 - 4 -
6.1. However, the TPO found that the other AEs have made the payment of royalty for using the technology @ 3% of the net sales. Accordingly, the TPO found different of 0.75% in the payment of royalty by the assessee to its AE. On a question by the TPO, the assessee submitted that the other AEs while working out the royalty @ 3% of the net sales have not made the following deductions: a) Cost of Standard bought out components used in the manufacture of the products
b) Landed cost of imported components
c) Packing Charges
6.2. In view of the above, the assessee claimed that if the elements above are considered in working out the rate of royalty, the assessee is paying royalty at less than 3% of the net sales value.
6.3. However, the TPO disagreed with the submission of the assessee by observing that the assessee has failed to furnish the royalty agreement as well as the financial statements of the AEs. The TPO was of the view that in the absence of the evidence or details, it was not possible to verify the chart filed by the assessee as detailed above.
6.4. The TPO also noted that there was no detail furnished by the assessee depicting the cost of development of the technology by the AE and the basis of recovery of the same from the other AEs. Accordingly,
ITA Nos.2399/Ahd/13, 2286/Ahd/14 & 860/Ahd/16 (Revenue) & 931/Ahd/2016 (by assessee) DCIT vs. Hitachi Home& Life Solutions (I) Ltd. Asst.Years – 2008-09, 2009-10, 2010-11 - 5 - the TPO disallowed the amount of royalty payment of Rs. 71,57,055/- out of the total royalty payment of Rs. 3,57,85,275/- and added to the total income of the assessee.
The aggrieved assessee preferred an appeal to the Ld. CIT(A) who deleted the addition made by the Assessing Officer by observing as under: “3.3 DECISION I have carefully considered the facts of the case, the assessment order and the written submission of the appellant. The addition has been made on account of upward adjustment of Rs. 71,57,055/- for Royalty paid to the AE. It has been pointed out by the appellant that while deciding the appeal pertaining to AY 2007-08, the similar issue was decided in favour of the appellant by my predecessor CIT(A) VIDE Appeal Number CIT(A)-VIII/DC CIR-4/744/10-11 dated 23-06-11. Since the facts and the issue are identical, respectfully following the decision of my predecessor the addition made on account of upward adjustment for Royalty paid to the AE is directed to be deleted.”
Being aggrieved by order of the Ld. CIT(A), the Revenue is in appeal before us.
Both the parties before us relied on the orders of authorities below as favorable to them.
We have heard the rival contentions and perused the materials available on record. At the outset, we find that the ITAT in assessee’s own case involving identical issue has deleted the addition made by the
ITA Nos.2399/Ahd/13, 2286/Ahd/14 & 860/Ahd/16 (Revenue) & 931/Ahd/2016 (by assessee) DCIT vs. Hitachi Home& Life Solutions (I) Ltd. Asst.Years – 2008-09, 2009-10, 2010-11 - 6 - TPO in ITA No. 2119/Ahd/2011 for AY 2007-08 vide order dated 29/08/2018. The relevant extract of the order is reproduced as under: “6. We have heard both the sides and perused the material on record carefully. The assessing officer has made upward adjustment with reference to international transaction u/s. 92B in respect of royalty payment to associated enterprise as per order passed u/s. 92CA(3) of the IT Act. In respect of payment of royalty by the assess to the associate concerns the TPO has applied the rate of royalty payment 3% in respect of computation of royalty rate as against rate of 3.75% adopted by the assessee. We find that an identical issue in the case of the assessee itself was decided by the Co-ordinate Bench of the ITAT vide ITA No. 182, 216 & 1137/Ahd/2011 against the revenue pertaining to assessment year 2005-06 and 2006-07. The relevant part of the decision of the ITAT is reproduced as under:-
“15. We have considered rival submissions and perused the material available record. We find that the CIT(A) while deleting the addition has noted that facts of the case of the assessee in this year are identical to the earlier years, and he had followed the decision of his predecessor. We further find that in ITA No. 2363/Ahd/2008 for A.Y.2004-05, similar issue was decided by the Co-ordinate Bench of 1TAT in favour of the assesee and the addition was deleted following the order in Revenue's appeal for A.Y.2003-04 in ITA No.2281/Ahd/2007, while deciding the Revenue's appeal, the issue was decided by holding as under:
"36. We have considered rived submissions and perused the material on record, and gone through the orders of the authorities below. We find that the issue regarding payment of royalty at the rate of3.75% to the AE by the assessee, as against the royalty at the rate of 3% by other group entities, it was explained by the assessee before the AO that the royalty at 3.75% was applied after reducing various expenses from ex- factory sale value of the concerned products. It was also explained before the learned CIT(A) that if the effective rate is considered, then the effective rate of royalty is less than the royalty paid by other AEs to Hitachi Limited i.e., parent company. In our considered opinion, only stated rate is not decisive and effective rate has to be considered, and when the
ITA Nos.2399/Ahd/13, 2286/Ahd/14 & 860/Ahd/16 (Revenue) & 931/Ahd/2016 (by assessee) DCIT vs. Hitachi Home& Life Solutions (I) Ltd. Asst.Years – 2008-09, 2009-10, 2010-11 - 7 - amount of royalty paid by the assessee is considered with ex- factory sale value, without deducting various expenses, such as dealer commission, special commission, warranty etc., as has been noted by the learned CIT(A) at page no.4 of his order, then the effective rate worked out is only 2.3% on sale, as against 3% paid by oilier group entities. This finding of the fact given by learned CIT(A) could not be controverted by the learned DR of the Revenue, and hence, on this aspect, we hold that no interference is called for in the order of the learned CIT(A), and accordingly, the ground no.5 of the Revenue is rejected. " Since the facts in the year under appeal are identical to earlier years as admitted by both the parties, we find no reason to interfere with the order of the CIT( A) on this issue, and thus, this ground of the Revenue is dismissed.” Respectfully following the decision of Co-ordinate Bench as cited above on identical facts and issue involved during the year under consideration we do not find any merit in the appeal of the revenue, therefore, the same is dismissed.”
As the issue involved in appeal on hand is identical to the issue as discussed above, therefore respectfully following the same, we do not find any reason to interfere with the order of the Ld. CIT(A). Accordingly, we direct the Assessing Officer to delete the addition made by him as suggested by the TPO. Hence, the ground of appeal of the Revenue is dismissed.
The second issue raised by the assessee is that the Ld. CIT(A) erred in deleting the addition made by the Assessing Officer for Rs. 1,00,09,859/- on account of provisions for warranty.
ITA Nos.2399/Ahd/13, 2286/Ahd/14 & 860/Ahd/16 (Revenue) & 931/Ahd/2016 (by assessee) DCIT vs. Hitachi Home& Life Solutions (I) Ltd. Asst.Years – 2008-09, 2009-10, 2010-11 - 8 - 12.1. The assessee in the year under consideration has claimed expenses of Rs. 3,26,14,162/- on account of sales and warranty provision. The said amount was towards the cost of 5-year warranty of compressor amounting to Rs. 33,75,124/- and a one-year comprehensive warranty on Air Conditioner amounting to Rs. 2,92,39,038/- only.
12.2. The Assessing Officer during the assessment proceedings noticed that the period of warranty extends the period beyond the financial year under consideration. Thus, he was of the view that the amount of provision for the warranty beyond the financial year under consideration is not eligible for deduction as per the mercantile system of accounting. Accordingly, the Assessing Officer issued a show-cause notice to the assessee for its explanation.
12.3. In compliance with it, the assessee submitted that the provision for warranty is made on the sale of the air conditioner to the party. As such, the sale price of the air conditioner comprises the warranty expenses. The provision for the warranty was made on a scientific basis which is accordingly allowable as held by the Hon’ble Apex Court in the case of Rotork Controls India Pvt. Ltd. vs. CIT reported in 314 ITR 62.
12.4. Without prejudice to the above, the assessee also claimed that if the provision for warranty expense is disallowed, then the corresponding income booked in the form of sales should also be allowed as a deduction in its proportion.
ITA Nos.2399/Ahd/13, 2286/Ahd/14 & 860/Ahd/16 (Revenue) & 931/Ahd/2016 (by assessee) DCIT vs. Hitachi Home& Life Solutions (I) Ltd. Asst.Years – 2008-09, 2009-10, 2010-11 - 9 -
12.5. However, the Assessing Officer disregarded the contention of the assessee by observing that the provision for the warranty has not been calculated on a scientific basis. As the assessee is following mercantile accounting system, then the expenses should be allowed in the year in which the liability of the same accrues. Accordingly, the Assessing Officer held that the provisions for the warranty of one year for AC should be allowed in proportion to nine months only in the year under consideration. Thus, the Assessing Officer worked out the provision for warranty expenses pertaining to three months for Rs. 73,09,760/- being Rs. 2,92,39,038 x 3 ÷ 12.
12.6. Similarly, the Assessing Officer was of the view that the compressor warranty expenses for five years should be allowed only for one year. Accordingly, the Assessing Officer worked out the expenses of Rs. 27,00,099/- being Rs. 33,75,124 x 4 ÷ 5. Thus, the sum of Rs. 1,00,09,859/- (Rs. 73,09,760 + 27,00,099) was disallowed and added to the total income of the assessee.
The aggrieved assessee preferred an appeal to the Ld. CIT(A) who deleted the addition made by the Assessing Officer by observing as under:
“6.3. DECISION
ITA Nos.2399/Ahd/13, 2286/Ahd/14 & 860/Ahd/16 (Revenue) & 931/Ahd/2016 (by assessee) DCIT vs. Hitachi Home& Life Solutions (I) Ltd. Asst.Years – 2008-09, 2009-10, 2010-11 - 10 - I have carefully considered the facts of the case, the assessment order and the written submission of the appellant. It has been pointed out by the appellant that while deciding the appeal pertaining to A.Y. 2007-08, the similar issue was decided in favour of the appellant by my predecessor CIT(A) vide Appeal Number CIT(A)-VIII/DC CIR-4/744/10-11 dated 23-06-11. Since the facts and the issue are identical, respectfully following the decision of my predecessor the addition made on account warranty expenses of Rs. 1,00,09,859/- is directed to be deleted.”
Being aggrieved by order of the Ld. CIT(A), the Revenue is in appeal before us.
Both the Ld. AR and the Ld. DR relied upon the orders of the authorities below as favorable to them.
We have heard the rival contentions and perused the material available on record. At the outset, we find that the ITAT in assessee’s case involving identical issue has deleted the addition made by the AO in ITA No. 2119/Ahd/2011 for AY 2007-08 vide order dated 29/08/2018. The relevant extract of the order is reproduced as under:-
“12. We have heard the rival contention and perused the materials on record carefully. We have noticed that the Co-ordinate Bench of the ITAT vide ITA 2303 & 2420/Ahd/2015 for assessment year 2000-01 to 2001-02 has decided the identical issue in favour of the assessee. The relevant part of the decision of the Co-ordinate Bench is reproduced as under:- 5. Learned Department Representative fails to controvert the fact that the assessee has been following consistent method in
ITA Nos.2399/Ahd/13, 2286/Ahd/14 & 860/Ahd/16 (Revenue) & 931/Ahd/2016 (by assessee) DCIT vs. Hitachi Home& Life Solutions (I) Ltd. Asst.Years – 2008-09, 2009-10, 2010-11 - 11 - creating similar warranty provision in subsequent assessment years as well. Relevant assessment order in such a case dated 30.04.2015 for assessment year 2011-12 indicates that there is no such disallowance made at the Revenue’s behest. The assessee is assessed at the same rate throughout. All the above narrated facts therefore make it crystal clear that the assessee has satisfied the relevant conditions for claiming the impugned warranty provisions as deduction as envisaged in hon’ble apex court’s decision(supra). We accordingly accept assessee’s substantive ground seeking to claim the impugned warranty provision qua both five years and one year (supra) as computed on scientific basis as per its forgoing experience. Its identical substantive grounds in both cases ITA Nos. 2303 & 2304/Ahd/2015 as well as the main cases stand accepted whereas Revenue’s corresponding substantive grounds are dismissed. Respectfully following the decision of Co-ordinate Bench as cited above we do not find any error in the decision of the Ld. CIT(A), therefore, the appeal of the revenue on this issue is dismissed.”
As the issue involved in appeal on hand is identical to the issue as discussed above, therefore, respectfully following the same, we do not find any reason to interfere in the order of the Ld. CIT(A). Accordingly, we direct the Assessing Officer to delete the addition made by him.
17.1. We also note that the Revenue preferred an appeal against the order of ITAT which was decided by the Hon’ble Gujarat High Court in the Tax Appeal No. 1236 of 2018, dated 09/10/2018, in favor of the assessee. The relevant extract is reproduced as under:
ITA Nos.2399/Ahd/13, 2286/Ahd/14 & 860/Ahd/16 (Revenue) & 931/Ahd/2016 (by assessee) DCIT vs. Hitachi Home& Life Solutions (I) Ltd. Asst.Years – 2008-09, 2009-10, 2010-11 - 12 - “5. Quite apart from the Tribunal’s observations on the issue of consistency which seem to be commencing, independently also we do not think that the disallowance was justified on merits. The assessee who was engaged in the business of manufacturing and selling air conditioned units would provide five year warranty to the customer. The expenditure was estimated on the basis of date of past five years of failure of the compressors which obviously in all air conditioned units would be the main concern. The principle of allowing expenditure on the basis of estimation which is derived through some scientific exercise, which in statistical terms used as actuary is well established.”
17.2. The issue in Revenue’s appeal is also identical to the issue as discussed above. Hence, the ground of appeal of the Revenue is dismissed.
The third ground raised by the Revenue is that the Ld. CIT(A) erred in allowing the deduction u/s 80IB(10) of the Act on account of Foreign Exchange Fluctuation gain in respect of its Jammu Unit.
The assessee in the year under consideration has shown foreign exchange fluctuation gain of Rs. 1,97,47,523/- only. As per the assessee, it has earned such gain in respect of raw-material purchased on credit as well as the working capital borrowed in foreign currency. The assessee further claimed that these income is arising in the course of business and accordingly, deduction u/s. 80IB(10) of the Act is available to it.
19.1. However, the Assessing Officer disregarded the contention of the assessee by observing that the gain shown by the assessee is not arising
ITA Nos.2399/Ahd/13, 2286/Ahd/14 & 860/Ahd/16 (Revenue) & 931/Ahd/2016 (by assessee) DCIT vs. Hitachi Home& Life Solutions (I) Ltd. Asst.Years – 2008-09, 2009-10, 2010-11 - 13 - from its business activities. Therefore, the same should be treated as income from other sources. Accordingly, the Assessing Officer held that the impugned gain is not subject to deduction u/s 80IB(10) of the Act. Thus, the same was disallowed and added to the total income of the assessee.
Aggrieved assessee preferred an appeal before the Ld. CIT(A).
The assessee before the Ld. CIT(A) submitted that the Assessing Officer had accepted such kind of gain as business income in respect of other units of the assessee. Thus, the Assessing Officer has taken a contrary view by holding such gain as income from other sources.
21.1. The assessee also submitted that it has been showing such gain as business income from the last several years consistently. As such, in the subsequent year, it has incurred a loss on account of exchange fluctuation amounting to Rs. 4,20,47,705/- and accordingly it claimed less deduction u/s 80IB(10) of the Act.
The Ld. CIT(A) after considering the submissions of the assessee held that the impugned gain is arising to the assessee in the course of its business activities. Therefore, the same is eligible for deduction u/s 80IB (10) of the Act.
ITA Nos.2399/Ahd/13, 2286/Ahd/14 & 860/Ahd/16 (Revenue) & 931/Ahd/2016 (by assessee) DCIT vs. Hitachi Home& Life Solutions (I) Ltd. Asst.Years – 2008-09, 2009-10, 2010-11 - 14 - 23. Being aggrieved by order of Ld. CIT(A), the Revenue is in appeal before us.
Both the parties relied upon the orders of the authorities below as favorable to them.
We have heard the rival contentions and perused the materials available on record. In the instant case, the assessee claimed that it had earned foreign exchange gain in connection with the raw-material imported and working capital borrowed in foreign currency and the Assessing Officer has not doubted this fact. Therefore, we can safely presume that assessee has earned foreign exchange gain from the activities carried out in connection with the business. The purchase of raw materials and working capital loan are an integral part and has direct nexus with the business. Therefore, any gain arising in the course of business are eligible for deduction u/s 80IB(10) of the Act.
25.1. It is also important to note that the assessee in the succeeding year has incurred a loss of Rs. 4,20,47,705/- which was accepted as a business loss by the Revenue. Therefore, we hold that the impugned gain is a business income and eligible for deduction u/s. 80IB(10) of the Act. In this regard, we find support and guidance from the judgment of Hon’ble Gujarat High Court in the case of Metrochem Industries Ltd. reported in 389 ITR 181 wherein it was held as under:
ITA Nos.2399/Ahd/13, 2286/Ahd/14 & 860/Ahd/16 (Revenue) & 931/Ahd/2016 (by assessee) DCIT vs. Hitachi Home& Life Solutions (I) Ltd. Asst.Years – 2008-09, 2009-10, 2010-11 - 15 -
“33. Learned counsel Mr. Nitin Mehta for the Revenue, however, contended that the foreign exchange fluctuation gain may arise under various circumstances, not all of them may be covered under section 80HHC of the Act. Primarily, we do not see any distinction possible on the basis of different situations under which foreign exchange fluctuation may result. We are conscious that law permits hedging of foreign exchange fluctuation risk to an importer or an exporter. The exporter may, therefore, take steps as found commercially prudent to safeguard himself against drastic foreign exchange rate fluctuations and in the process may also limit the possibility of gain in case of favourable currency rate trends. Nevertheless, the resultant gain in foreign exchange rate would still be due to the export made by the assessee. In any case, no such facts are recorded by the Assessing Officer in any of these cases. We would, therefore, not entertain such speculative contention. 34. In the result, the question is answered in favour of the assessees and against the Revenue. All Tax Appeals are dismissed."
25.2. In view of the above, we do not find any reason to disturb the findings of the Ld. CIT(A). Accordingly, we direct the Assessing Officer to delete the addition made by him. Hence, the ground of Revenue’s appeal is dismissed.
The next issue raised by the Revenue is that the Ld. CIT(A) erred in allowing the deduction u/s 80IB(4) of the Act for Rs. 5,83,00,000/- in respect of Jammu Units.
At the outset, we find that the assessee has filed an application dated 28/06/2018 under Rule 27 of the Income Tax Appellate Tribunal Rules, 1963 claiming that the excise duty refund should be treated as capital receipts.
ITA Nos.2399/Ahd/13, 2286/Ahd/14 & 860/Ahd/16 (Revenue) & 931/Ahd/2016 (by assessee) DCIT vs. Hitachi Home& Life Solutions (I) Ltd. Asst.Years – 2008-09, 2009-10, 2010-11 - 16 - 28. The assessee during the year has claimed to have received a refund of excise duty amounting to Rs. 5,83,00,000/- which was shown as business income. Accordingly, the assessee claimed the deduction u/s. 80IB(4) of the Act in respect of such refund of excise duty.
Without prejudice to the above, the assessee also claimed that refund of excise duty should be treated as a capital receipt which is not chargeable to tax.
29.1. However, the Assessing Officer was of the view that the refund of excise duty income is not arising from the activities of the business of the eligible unit. Therefore, the same is ineligible for deduction u/s 80IB(4) of the Act. The Assessing Officer was also of the view that the refund of excise duty income is in the nature of Revenue Receipts. Therefore, the same cannot be treated as a capital receipt in the hands of the assessee.
The aggrieved assessee preferred an appeal to the Ld. CIT(A) who has deleted the addition made by the Assessing Officer by observing as under: “8.3. DECISION
I have carefully considered the facts of the case, the assessment order and the written submission of the appellant. The AO has held that the Excise Duty refund received by the appellant was not a profit derived from the business of industrial undertaking but it was a result of establishment of industrial undertaking in industrially backward area. He held that it was an incentive and not the profit derived from any
ITA Nos.2399/Ahd/13, 2286/Ahd/14 & 860/Ahd/16 (Revenue) & 931/Ahd/2016 (by assessee) DCIT vs. Hitachi Home& Life Solutions (I) Ltd. Asst.Years – 2008-09, 2009-10, 2010-11 - 17 - business and accordingly, it was not eligible for deduction under section 80-IB. The appellant has submitted that the excise duty refund is an integral part of business activity and therefore, it should be allowed deduction under 80IB on the same.
After considering the facts it is noted that the appellant at the time of manufacturing and clearing the goods pays the excise duty from its P&L account after taking the due credit of CENVAT which is available on account of purchase of raw material. The excise duty which cannot be adjusted from the credit available to it is paid by the company. The statement including the total excise duty, the credit taken for CENVAT and the excise duty paid is submitted to the excise authorities claiming the refund. The authorities after verifying the details grant the refund of the Excise Duty. Therefore, the whole process clearly shows that the excise duty which is paid is refunded to the appellant. Therefore, there is no net gain to the appellant. The excise duty which is paid is refunded and therefore, the resultant effect is NIL. The payment of Central Excise Duty has a direct nexus with the manufacturing activity and similarly the refund of Central Excise Duty also has a direct nexus with the manufacturing activity. Therefore, there was an inextricable link between the manufacturing activity, the payment of Central Excise Duty and its refund. Therefore, it is “derived” from the business of the industrial undertaking and eligible for deduction under section 80IB.
It is further noted that the issue is squarely covered in the favour of appellant by several judgements of High Court as well as ITAT. Recently, the honourable B Bench of Ahmedabad ITAT in the case of Electro-Ferro Alloys ITA no.4523 to 4527/Ahd/2007 and CO No.171/Ahd/2008 has taken a similar view and decided the issue in favour of the assessee.
In view of the above mentioned discussion and the judicial pronouncements it is held that the excise duty referred is entitled for deduction under section 80IB. The disallowance made by the A.O. is directed to be deleted.”
Aggrieved by order of the Ld. CIT(A), the Revenue is in appeal before us.
ITA Nos.2399/Ahd/13, 2286/Ahd/14 & 860/Ahd/16 (Revenue) & 931/Ahd/2016 (by assessee) DCIT vs. Hitachi Home& Life Solutions (I) Ltd. Asst.Years – 2008-09, 2009-10, 2010-11 - 18 -
The Ld. DR vehemently supported the order of Assessing Officer.
On the other hand, the Ld. AR submitted that the excise duty refund is directly linked with his business activities. Therefore, the same should be eligible for deduction u/s 80IB(4) of the Act.
Without prejudice to the above, the Ld. AR also submitted that the refund of excise duty should be treated as a capital receipt as it relates to the promotion of the industries in the backward area.
We have heard the rival contentions and perused the materials available on record. In our considered view, the excise duty refund has a live link with the business activities of the assessee. Therefore, we hold that the excise duty refund is eligible u/s. 80IB(4) of the Act. In this regard, we support and guidance from the judgment of Hon’ble Supreme Court in the case of Meghalaya Steel Ltd. reported in 383 ITR 217, wherein it was held as under: “Section 28(iii)(b)* specifically states that income from cash assistance, by whatever name called, received or receivable by any person against exports under any scheme of the Government of India, will be income chargeable to income tax under the head "profits and gains of business or profession". If cash assistance received or receivable against exports schemes are included as being income under the head "profits and gains of business or profession", it is obvious that subsidies which go to reimbursement of cost in the production of goods of a particular business would also have to be included under the head "profits and gains of business or profession", and not under the head "income from other sources".”
ITA Nos.2399/Ahd/13, 2286/Ahd/14 & 860/Ahd/16 (Revenue) & 931/Ahd/2016 (by assessee) DCIT vs. Hitachi Home& Life Solutions (I) Ltd. Asst.Years – 2008-09, 2009-10, 2010-11 - 19 - 36. We also find support and guidance from the order of this Tribunal in the case of M/s. Cadila Pharmaceuticals Ltd. Vs. DCIT in ITA No.1117/Ahd/2012 vide order dated 11/09/2017, wherein it was held as under:
“21. The assessee’s fifth substantive ground challenges Section 80IB deduction disallowance of Rs. 16,34,58,692/- out of total claim of Rs. 53,25,79,553/; as made by the lower authorities. The above disallowance figure involves excise duty refund amount of Rs. 8,12,71,702/-. The DRP quoted hon’ble apex court’s decision in Liberty India vs. CIT (2009) 317 ITR 218 in concluding the above excise refund to be not an income derived from the eligible industrial undertaking. We find that earlier co-ordinate bench in assessment year 2007-08(supra) had followed hon’ble Apex court’s recent decision in CIT vs. Meghalaya Steel Ltd. Civil Appeal no.7622/2014 in holding that such a refund by way of an incentive subsidy results in reimbursement of cost of production as covered u/s.28 of the Act. The Revenue fails to rebut this factual and legal position. We therefore treat assessee’s above excise refund component to be an income eligible for Section 80IB deduction.”
In view of the above, we hold that the assessee is eligible for deduction u/s 80IB(4) of the Act in respect of excise duty refund. Accordingly, we do not find any reason to interfere with the order of the Ld. CIT(A).
Coming to the application filed by the assessee under Rule 27 of ITAT Rules, 1963.
In this regard, we note that the assessee has received the refund of excise duty in terms of Notification No. 56/2002 and 57/2002 dated 14.11.2002 which has been held as capital subsidy by the judgment of
ITA Nos.2399/Ahd/13, 2286/Ahd/14 & 860/Ahd/16 (Revenue) & 931/Ahd/2016 (by assessee) DCIT vs. Hitachi Home& Life Solutions (I) Ltd. Asst.Years – 2008-09, 2009-10, 2010-11 - 20 - Hon’ble High Court of Jammu & Kashmir in the case of Shree Balaji Alloys vs. CIT reported in 333 ITR 335, wherein it was held as under: “30. For all what has been said above, the finding of the Tribunal on the first issue that the Excise Duty Refund, Interest Subsidy and Insurance Subsidy were Production Incentives, hence revenue Receipt, cannot be sustained, being against the law laid down by Hon'ble Supreme Court of India in Sahney Steel & Press Works Ltd.'s case (supra) and Ponni Sugars & Chemicals Ltd.'s case (supra). 31. The finding of the Tribunal that the incentives were Revenue Receipt is, accordingly, set aside holding the incentives to be Capital Receipt in the hands of the assessees.”
38.1. We further note that the Hon’ble Supreme Court upheld the above judgment of Hon'ble J&K High Court in the case of CIT vs. Shree Balaji Alloy reported in 80 taxmann.com 239.
38.2. From the above, there remains no ambiguity that the amount of excise duty is capital receipt not chargeable to tax.
38.3. In view of the above, we do not find any reason to disturb the findings of the Ld. CIT(A), therefore the ground of appeal raised by the Revenue is dismissed, and the ground of appeal of the assessee in the application filed under Rule No. 27 of ITAT is allowed.
The last issue raised by the Revenue is that the Ld. CIT(A) erred in directing to allow MAT credit u/s 115JAA of the Act as increased by the amount of surcharge and education cess.
ITA Nos.2399/Ahd/13, 2286/Ahd/14 & 860/Ahd/16 (Revenue) & 931/Ahd/2016 (by assessee) DCIT vs. Hitachi Home& Life Solutions (I) Ltd. Asst.Years – 2008-09, 2009-10, 2010-11 - 21 - 40. The assessee while working out the tax liability under the normal provisions of Act has claimed the credit of the tax paid under MAT along with the surcharge and education cess. However, the Assessing Officer did not allow the benefit of MAT credit to the assessee by the amount of surcharge and education cess.
The aggrieved assessee, preferred an appeal to the Ld. CIT(A) who held that the meaning of tax as defined under the provisions of section 2(43) of the Act r.w. the explanation 2 to section 115JB of the Act includes the amount of surcharge and education cess. Accordingly, the Ld. CIT(A) allowed the MAT credit to the assessee including surcharge and education cess.
Being aggrieved by the order of Ld. CIT(A), Revenue is in appeal before us.
Both the parties before us have relied on the orders of the authorities below as favorable to them.
We have heard both the parties and perused the material available on record. At the outset, we note that the issue of MAT credit u/s. 115JAA of the Act has been settled by the judgment of Hon’ble Calcutta High Court in the case of Shree S.R.EI Infrastructure Finance reported in 395 ITR 291 (Cal.), wherein it was held as under:
ITA Nos.2399/Ahd/13, 2286/Ahd/14 & 860/Ahd/16 (Revenue) & 931/Ahd/2016 (by assessee) DCIT vs. Hitachi Home& Life Solutions (I) Ltd. Asst.Years – 2008-09, 2009-10, 2010-11 - 22 - “Therefore, the Tribunal was right in confirming the set off of MAT Credit under section 115JAA brought forward from earlier years against tax on total income including surcharge and education cess instead of adjusting the same from tax on total income before charging such surcharge and education cess.”
The issue in the case on hand is identical to the issue as discussed above. Therefore, respectfully following the same, we do not find any reason to interfere with the order of the Ld. CIT(A). Hence, the ground of appeal raised by the Revenue is dismissed.
Remaining grounds are general in nature which requires no independent adjudication.
In the result, the appeal of the Revenue is dismissed, and the issue raised by the assessee in the application under Rule 27 of ITAT Rules is allowed.
Revenue’s appeal in ITA No.2286/Ahd/2014 for AY 2009-10
The Revenue has raised the following grounds of appeal:
The Ld.CIT(A) has erred in law and on facts in deleting the addition of Rs. 98,58,674/- made on account of upward adjustment for royalty payment made to the AE, without properly appreciating the facts of the case and the material brought on record. 2. The Ld.CIT(A) has erred in law and on facts in deleting the addition of Rs. 2,44,01,506/- made on account of warranty
ITA Nos.2399/Ahd/13, 2286/Ahd/14 & 860/Ahd/16 (Revenue) & 931/Ahd/2016 (by assessee) DCIT vs. Hitachi Home& Life Solutions (I) Ltd. Asst.Years – 2008-09, 2009-10, 2010-11 - 23 - expenses, without properly appreciating the facts of the case and the material brought on record. 3. The Ld.CIT(A) has erred in law and on facts in deleting the addition of Rs. 4,62,45,307/- made u/s.80IB of the Act, without properly appreciating the facts of the case and the material brought on record.
So far as ground Nos.1 & 2 are concerned, the same are identical to the facts of ground Nos.1 & 2 in ITA No.2399/Ahd/2013 for AY 2008-09 of Revenue’s appeal(supra). Since identical issues are involved in this year also, therefore, taking a consistent view and respectfully following the order passed in ITA No.2399/Ahd/2013, ground Nos.1 & 2 of Revenue’s appeal are dismissed.
Likewise, ground No.3 is also identical to the facts of ground No.4 in ITA No.2399/Ahd/2013 for AY 2008-09 of Revenue’s appeal (supra). Respectfully following the order passed in ITA No.2399/Ahd/2013, ground No.3 of Revenue’s appeal is dismissed.
Remaining grounds are general in nature which requires no independent adjudication.
Revenue’s appeal in ITA No.931/Ahd/2016 for AY 2010-11
Revenue has raised following grounds of appeal:
ITA Nos.2399/Ahd/13, 2286/Ahd/14 & 860/Ahd/16 (Revenue) & 931/Ahd/2016 (by assessee) DCIT vs. Hitachi Home& Life Solutions (I) Ltd. Asst.Years – 2008-09, 2009-10, 2010-11 - 24 -
The Ld.CIT(A) has erred in law and on facts in deleting the addition of Rs. 1,59,20,901/- on account of upward adjustment of international traction in respect of royalty payment. 2. The Ld.CIT(A) erred in deleting the addition made to book profit under 115JB consequent to the upward adjustment made u/s.92CA. 3. The Ld.CIT(A) has also erred in law and on facts in deleting the disallowance of Rs. 2,86,64,963/- made by the AO on account of provision for warranties without appreciating facts that this amount is a provision and a contingent, unascertained and non-crystallized liability, which is not scientifically arrived at. 4. The Ld.CIT(A) erred in deleting the 115JB adjustment made consequential to the addition of warranty expenses. 5. The Ld.CIT(A) further erred in law and on facts in directing to allow deduction of Rs. 3,94,53,426/- u/s. 80IB(4) in respect of Jammu Unit. 6. The Ld.CIT(A) also erred in directing to allow MAT credit as increased by surcharge and education cess when the said MAT already includes the surcharge and cess.
Apropos to Ground No.1 of Revenue’s appeal, the issue is similar to ground No.1 of ITA No. 2399/Ahd/2013 for AY 2008-09. Thus, for parity of reasons noted above, our view in ITA No.2399/Ahd/2013 for AY 2008-09 above shall apply mutatis mutandis to the ground captioned above. As a result, the ground of appeal of the Revenue in ITA No.931/Ahd/2016 for AY 2010-11 is dismissed.
ITA Nos.2399/Ahd/13, 2286/Ahd/14 & 860/Ahd/16 (Revenue) & 931/Ahd/2016 (by assessee) DCIT vs. Hitachi Home& Life Solutions (I) Ltd. Asst.Years – 2008-09, 2009-10, 2010-11 - 25 -
Ground No.2 of Revenue’s appeal for the disallowance of royalty expenses is connected with the adjustment on account of transfer pricing under section 92CA(4) which has also been added in determining the income under section 115JB of the Act. However, the upward adjustment on account of royalty payment has already been deleted by us in the Para No. 53 of this order. Therefore, in our considered view, there is no need to make any addition in the book profit under section 115JB of the Act. Hence the ground of appeal of the Revenue being consequential in nature is dismissed.
Ground Nos.3, 5 & 6 are similar to Ground Nos. 2, 4 & 5 of Revenue’s appeal in ITA No.2399/Ahd/2013 for AY 2008-09(supra). For the parity of reasons noted above, our view in ITA No.2399/Ahd/2013 for AY 2008-09 above shall apply mutatis mutandis to the grounds captioned above. Thus, ground Nos. 3, 5 & 6 raised by the Revenue in its appeal are dismissed.
Ground No.4 of Revenue’s appeal for the addition of warranty expenses in the book profit is connected with the disallowance of the warranty expenses under normal computation of income which has already been deleted by us under normal computation of income vide Para No. 55 of this order. Therefore, in our considered view, there is no need to make any addition in the book profit under section 115JB of the
ITA Nos.2399/Ahd/13, 2286/Ahd/14 & 860/Ahd/16 (Revenue) & 931/Ahd/2016 (by assessee) DCIT vs. Hitachi Home& Life Solutions (I) Ltd. Asst.Years – 2008-09, 2009-10, 2010-11 - 26 - Act on account of warranty expenses. Hence the ground of appeal of the Revene being consequential in nature is dismissed.
In the result, Revenue’s appeal in ITA No.931/Ahd/2016 for AY 2010-11 is dismissed.
Assessee’s appeal in ITA No.860/Ahd/2016 for AY 2010-11
The Assessee has raised the following grounds of appeal:
1.1. In law and in the facts and circumstances of the appellant’s case, the learned CIT(A) has grossly erred in partly upholding the disallowance on account of provision for warranty expenses amounting to Rs. 91,44,050 (out of total disallowance of Rs. 3,78,09,013) which pertained to providing five year warranty on the compressors used in the Air Conditioners sold during the present assessment year. He ought to have appreciated, inter alia, that the appellant’s method for estimating such warranty expenses yielded a reliable estimate and in terms of the ratio of the Supreme Court decision in Rotork Controls (India) P.Ltd. vs. CIT (180 Taxman 422), the same deserved to be allowed. 1.2. Without prejudice to the foregoing, in law and in the facts and circumstances of the appellant’s case, the learned CIT(A) ought to have appreciated that it was an incontrovertible fact that the appellant was providing a five year warranty on the compressors used in the Air Conditioners sold by it and, therefore, it was not open to the learned CIT(A) to uphold the impugned disallowance of Rs. 91,44,050 in its entirety but instead, he ought to have granted deduction or directed for granting deduction for such amount as would be worked out on the basis of what he thought was a method yielding a reliable estimate for making provision on
ITA Nos.2399/Ahd/13, 2286/Ahd/14 & 860/Ahd/16 (Revenue) & 931/Ahd/2016 (by assessee) DCIT vs. Hitachi Home& Life Solutions (I) Ltd. Asst.Years – 2008-09, 2009-10, 2010-11 - 27 - this account, if indeed he had concluded that the appellant’s method of estimate was not reliable. 2. In law and in the facts and circumstances of the appellant’s case, the learned CIT(A) has grossly erred in upholding the learned Assessing Officer’s action of making an addition of the amount disallowed by him on account of provision for warranty expenses while computing the appellant’s normal total income, also while computing the appellant’s book profit u/s.115JB on the ground that it was not for an ascertained liability and in sustaining an addition of Rs. 91,44,050 to the appellant’s book profit on that account.
In law and in the facts and circumstances of the appellant’s case, the learned CIT(A) has grossly erred in disposing of Ground No.4.2 of the appellant’s appeal before him ostensibly in favour of the appellant but in an ambiguous manner as under:
“5.6. ------- ddd Now with regard to the disallowance of the deduction u/s.80IB on the warranty expenses this issue is similar to that of the previous assessment year, following the finding given for AYRs. 2009-10 & 2008-09 the same is deleted. Thus the sub ground No.4.2 is allowed in favour of the appellant”
The learned CIT(A) ought to have upheld the appellant’s aforesaid ground in a categorical manner so as not to leave any doubt about the same having been decided in the appellant’s favour.
3.2. Without prejudice to the foregoing, in law and in the facts and circumstances of the appellant’s case, the learned CIT(A) ought to have appreciated that any addition or disallowance that was made while computing the appellant’s income under the head “Profits and Gains of Business or Profession” in respect of which the appellant was eligible to deduction u/s.80IB was bound to result into a corresponding increase in the quantum of deduction to
ITA Nos.2399/Ahd/13, 2286/Ahd/14 & 860/Ahd/16 (Revenue) & 931/Ahd/2016 (by assessee) DCIT vs. Hitachi Home& Life Solutions (I) Ltd. Asst.Years – 2008-09, 2009-10, 2010-11 - 28 - which the appellant was eligible under that provision and therefore, he ought to have decided the aforesaid Ground No.42 of the appellant’s appeal before him in favour of the appellant and that too, in a categorical manner.
In law and in the facts and circumstances of the appellant’s case, the learned CIT(A) has grossly erred in dismissing Ground No.8 of the appellant’s appeal before him challenging the levy of interest u/s.234B. He ought to have appreciated, inter alia, that the appellant had challenged the very levy of this interest and, in the peculiar facts and circumstances of its case, even if the impugned disallowance came to be ultimately sustained, the ratio of the decision of the Gujarat High Court in Bharat Machinery and Hardware Mart’s case (136 ITR 875) and of the decision of the ITAT, Delhi Bench in Haryana Warehousing Corporation v. DCIT [252 ITR (A.T.) 34] was attracted and the levy deserved to be cancelled.
In law and in the facts and circumstances of the appellant’s case, the learned CIT(A) has grossly erred in dismissing Ground No.9 of the appellant’s appeal before him challenging the initiation of penalty proceedings u/s.271(1)(c), as premature. He ought to have appreciated, inter alia, that in the peculiar facts and circumstances of the appellant’s case, there being absolutely no warrant/justification for initiating the penalty proceedings, he ought to have ordered for their being dropped, thereby saving both the appellant and the Department from long drawn unnecessary litigation.
Ground No.1.1 & 1.2 is similar to Ground No.1 of Revenue’s appeal in ITA No. 2399/Ahd/2013 for AY 2008-09(supra) wherein we have decided the issue against the Revenue and in favor of the assessee. For the parity of reasons noted above, our view in ITA No.2399/Ahd/2013 for AY 2008-09 above shall apply mutatis mutandis
ITA Nos.2399/Ahd/13, 2286/Ahd/14 & 860/Ahd/16 (Revenue) & 931/Ahd/2016 (by assessee) DCIT vs. Hitachi Home& Life Solutions (I) Ltd. Asst.Years – 2008-09, 2009-10, 2010-11 - 29 - to the ground captioned above. Thus, ground No.1.1 and 1.2 raised by the assessee in its appeal is allowed.
Ground Nos. 2 of the Assessee’s appeal is similar to Ground No.4 of Revenue’s appeal in ITA No. 931/Ahd/2016 for AY 2010-11(supra) wherein we have decided the issue against the Revenue and in favor of the assessee. For the parity of reasons noted above, our view in ITA No. 931/Ahd/2016 for AY 2010-11 above shall apply mutatis mutandis to the ground captioned above. Thus, ground No. 2 and 1.2 raised by the assessee in its appeal is allowed.
The issues raised in Ground Nos.3.1 & 3.2 by the assessee is that the ld. CIT-A has decided the issue raised before him in the ground no. 4.2 in favor of it but in an ambiguous manner, as well as the disallowance made, will be subject to deduction under section 80-IB of the Act.
61.1. There is no dispute that the assessee is eligible for deduction under section 80 IB of the Act. Thus if any disallowance is made on account of the expenses claimed by the assessee then the income of the assessee shall increase with the corresponding amount. However, the assessee will be eligible for deduction under section 80 IB of the Act on the income enhanced due to such disallowance. Regarding this, we find relevant to reproduce the necessary portion of Circular No.37 of 2016 issued by CBDT dated 02.11.2016 which is reproduced below:-
ITA Nos.2399/Ahd/13, 2286/Ahd/14 & 860/Ahd/16 (Revenue) & 931/Ahd/2016 (by assessee) DCIT vs. Hitachi Home& Life Solutions (I) Ltd. Asst.Years – 2008-09, 2009-10, 2010-11 - 30 - “3. In view of the above, the Board has accepted the settled position that the disallowances made under sections 32, 40(a)(ia), 40A(3), 43B, etc. of the Act and other specific disallowances, related to the business activity against which the Chapter VI-A deduction has been claimed, result in enhancement of the profits of the eligible business, and that deduction under Chapter VI-A is admissible on the profits so enhanced by the disallowance.”
61.2. In view of the above, we are of the view that even the amount disallowed then the assessee would be eligible for deduction u/s 80IB of the Act for the enhanced amount. In view of above proposition, we do not find any reason to interfere in the order of Ld. CIT(A). We uphold the same. Hence, this ground of Revenue’s appeal is dismissed.
Ground No. 4 is also consequential as no addition is left. Therefore we do not find any reason to adjudicate the same. Hence the ground of appeal of the assessee is dismissed as infructuous.
Ground No. 5 is pre-mature which does not require any independent adjudication.
In the result, Assessee’s appeal in ITA No.860/Ahd/2016 for AY 2010-11 is partly allowed.
ITA Nos.2399/Ahd/13, 2286/Ahd/14 & 860/Ahd/16 (Revenue) & 931/Ahd/2016 (by assessee) DCIT vs. Hitachi Home& Life Solutions (I) Ltd. Asst.Years – 2008-09, 2009-10, 2010-11
In the combined result, all the three appeals of the Revenue are dismissed, whereas Assessee’s appeal is partly allowed.
This Order pronounced in Open Court on 04 /03/2019
Sd/- Sd/- ( RAJPAL YADAV ) ( WASEEM AHMED ) JUDICIAL MEMBER ACCOUNTANT MEMBER
Ahmedabad; Dated 04/03/2019 ट�.सी.नायर, व.�न.स./T.C. NAIR, Sr. PS
आदेश क� ��त�ल�प अ�े�षत/Copy of the Order forwarded to : 1. अपीलाथ� / The Appellant 2. ��यथ� / The Respondent. 3. संबं�धत आयकर आयु�त / Concerned CIT 4. आयकर आयु�त(अपील) / The CIT(A)-VIII, Ahmedabad �वभागीय ��त�न�ध, आयकर अपील�य अ�धकरण, अहमदाबाद / DR, ITAT, Ahmedabad 5. 6. गाड� फाईल / Guard file. आदेशानुसार/ BY ORDER, स�या�पत ��त //True Copy// उप/सहायक पंजीकार (Dy./Asstt.Registrar) आयकर अपील�य अ�धकरण, अहमदाबाद / ITAT, Ahmedabad 1. Date of dictation (9.2.2019dictation pad 44- pages attached at the end of this appeal-file) 2. Date on which the typed draft is placed before the Dictating Member 12.2.2019 3. Other Member… 4. Date on which the approved draft comes to the Sr.P.S./P.S … 5. Date on which the fair order is placed before the Dictating Member for pronouncement…… 6. Date on which the fair order comes back to the Sr.P.S./P.S…….4.3.19 7. Date on which the file goes to the Bench Clerk…………………4.3.19 8. Date on which the file goes to the Head Clerk…………………………………... 9. The date on which the file goes to the Assistant Registrar for signature on the order…………………….. 10. Date of Despatch of the Order……………