THE PRINCIPAL COMMISSIONER OF INCOME TAX vs. M/S APOLLO TYRES LTD

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ITA/39/2017HC KeralaKLHC01026115201722 September 2021Bench: HONOURABLE MR.JUSTICE S.V.BHATTI,HONOURABLE MR.JUSTICE VIJU ABRAHAM11 pages
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What did the High Court hold?

The High Court addressed each substantial question by referring to its judgment in ITA No. 44 of 2017 and other cited cases. For Questions 1, 1.1, 1.2, 3, 3.1, and 3.2, the Court followed the reasoning in ITA No. 44 of 2017 and an unspecified case (ITA No. 249 of 2015), answering them in favour of the assessee and against the revenue. This implies the Court upheld the ITAT's decision to treat the Chennai unit expenditure as revenue and the foreign exchange gains as capital, to be adjusted as per Section 43A. For Question 4, concerning prepaid expenses, the Court noted that the same expenditure was claimed in AY 2010-11, where it was rejected. However, for AY 2011-12, the Court found the assessee entitled to claim these expenses, confirming the ITAT's allowance of Rs. 5,15,34,726/-, answering this question in favour of the assessee. For Questions 2, 2.1, and 2.2, relating to weighted deduction under Section 35(2AB) for R&D expenses outside India, the Court followed the reasoning in ITA No. 44 of 2017, answering these questions in favour of the revenue and against the assessee. This indicates the Court did not allow the deduction for R&D expenses incurred outside India. For Additional Questions 5 and 6, concerning the Tribunal's competence to remit issues and its decision on transfer pricing adjustment, the Court followed the judgment in CIT v. Assam Travels Shipping Service, Dibrugarh, answering these questions in favour of the assessee and against the revenue. The appeal was allowed in part.

What were the facts?

The Revenue, Principal Commissioner of Income Tax, Kochi-1, appealed against the order of the ITAT, Cochin Bench, for Assessment Year 2011-12. The assessee, M/s. Apollo Tyres Ltd., had filed its return declaring a total income of Rs. 11,40,85,979/-. The assessment was referred to the Transfer Pricing Officer (TPO). A draft assessment order was issued, and the assessee objected, leading to directions from the Dispute Resolution Panel (DRP). The final assessment order was passed by the Assessing Officer. The ITAT had accepted the assessee's case on several additions/disallowances, including disallowance of preoperative expenditure, additional weighted deduction under Section 35(2AB), unrealized foreign exchange fluctuation gain, and prepaid expenses. The Revenue's appeal raised substantial questions of law regarding these decisions.

What were the issues?

The Tribunal had to decide the following substantial questions of law: 1. Whether the ITAT was right in holding expenditure on setting up a new unit at Chennai as revenue expenditure, deleting the disallowance of Rs. 25,96,83,876/- (Question 1). 1.1. Whether the ITAT was right in deleting this addition based solely on the assessee's contention of routine administrative expenses, especially when a similar issue for AY 2009-10 was remitted for ascertaining the exact nature of expenditure (Question 1.1). 1.2. Whether the ITAT was right in holding loan processing fees and bank charges as administrative expenses without appreciating that they were claimed as part of setting up the new unit (Question 1.2). 2. Whether the ITAT was legally right in deleting the weighted deduction of Rs. 4,90,41,754/- under Section 35(2AB) claimed by the assessee for R&D expenses incurred outside India (Question 2). 2.1. Whether the ITAT was correct in applying CIT v. Cadila Healthcare Ltd. to the facts of the assessee's case, which were distinguishable (Question 2.1). 2.2. Whether the ITAT was correct in holding that Section 35(2AB) should be liberally interpreted and deduction allowed based on Bajaj Tempo Ltd. without the prerequisite of a DSIR certificate (Question 2.2). 3. Whether the ITAT was right in deleting unrealized foreign exchange fluctuation gain of Rs. 71,59,329/- and Rs. 4,72,34,591/- on the grounds that they were suo motu offered in a subsequent year and should be treated on capital account as per Section 43A (Questions 3, 3.1, 3.2). 4. Whether the ITAT was correct in directing the deletion of prepaid expenses of Rs. 5,15,34,726/- when no such disallowance was made in the draft or final assessment order (Question 4). 5. Whether the Tribunal was competent to remit issues back to the DRP for fresh directions (Question 5). 6. Whether the Tribunal erred in remitting the transfer pricing adjustment of Rs. 12,50,380/- to the TPO for reconsideration without properly applying comparables, by agreeing with the assessee that the TPO rejected comparables without reasons (Question 6). Assessee's Contentions: - Expenditure on setting up the new unit at Chennai was revenue expenditure, routine administrative expenses, not related to capital asset acquisition. - Loan processing fees and bank charges were administrative in nature. - Foreign exchange fluctuation gains were on capital account and to be adjusted against asset cost as per Section 43A. - Prepaid expenses were allowable. - TPO rejected comparables without reasons. Revenue's Contentions: - Expenditure on setting up the new unit was capital expenditure. - The ITAT's decision in AY 2009-10 regarding similar expenditure involved remission. - The ITAT erred in applying Cadila Healthcare Ltd. and Bajaj Tempo Ltd. to Section 35(2AB) claims for R&D expenses incurred outside India, especially without a DSIR certificate. - The disallowance of prepaid expenses was not proposed in the draft assessment order.

Which sections of the Income-tax Act were involved?

Section 143(3),Section 92CA(1),Section 143B,Section 144C(1),Section 144C(5),Section 35(2AB),Section 43A,Section 260A

AI-generated summary — verify with the full judgment below

IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT THE HONOURABLE MR.JUSTICE S.V.BHATTI & THE HONOURABLE MR.JUSTICE VIJU ABRAHAM WEDNESDAY, THE 22ND DAY OF SEPTEMBER 2021 / 31ST BHADRA, 1943 ITA NO. 39 OF 2017 AGAINST THE ORDER IN ITA 189/Coch/2016 OF I.T.A.TRIBUNAL,COCHIN BENCH, ERNAKULAM APPELLANT/Respondent: THE PRINCIPAL COMMISSIONER OF INCOME TAX KOCHI-1, KOCHI, INCOME TAX OFFICES, CENTRAL REVENUE BUILDING, I S PRESS ROAD, KOCHI-682018. BY ADVS. SRI.P.K.R.MENON,SENIOR COUNSEL, GOI(TAXES) JOSE JOSEPH, SC, FOR INCOME TAX CHRISTOPHER ABRAHAM, INCOME TAX DEPARTMENT K.M.V.PANDALAI, INCOME TAX DEPARTMENT RESPONDENT/APPELLANT: M/S APOLLO TYRES LTD 6TH FLOOR, CHERUPUSHPAM BUILDING, SHANMUGHAM ROAD, ERNAKULAM,682031, PRESENT ADDRESS 3RD FLOOR, AREEKAL MANSION, NEAR MANORAMA JUNCTION, PANAMPILLY NAGAR, KOCHI-682036. BY ADVS. SRI.V.ABRAHAM MARKOS SRI.ABRAHAM JOSEPH MARKOS SRI.HARAN THOMAS GEORGE SRI.ISAAC THOMAS SRI.JOSEPH MARKOSE SR. THIS INCOME TAX APPEAL HAVING COME UP FOR ADMISSION ON 22.09.2021, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING:

ITA No.39 of 2017 2 ITA No.39 of 2017 JUDGMENT S.V.Bhatti, J.

The Principal Commissioner of Income Tax, Kochi-1/Revenue is the appellant. M/s.Apollo Tyres Ltd., Kochi/Assessee is the respondent. The Revenue being aggrieved by the order in ITA No.189/Coch/2016 dated 10.01.2017 for the Assessment Year 2011-12 has filed the instant appeal. 2. The instant appeal was tagged and listed for hearing along with ITA No.44 of 2017. The substantial questions raised in these two appeals, to a great extent, are similar. For convenience, we are dictating a separate judgment in ITA No.39 of 2017. 3. Heard the learned Standing Counsel Mr.Christopher Abraham and learned Senior Adv.Mr.Joseph Markose for the parties. 4. On 18.11.2011, the assessee filed return of income for the assessment year 2011-12 declaring total income of Rs.11,40,85,979/-. The assessment has been taken up for scrutiny under Section 143(3) of the Income Tax Act (for short 'The Act'). The assessment was referred

ITA No.39 of 2017 3 to the Transfer Pricing Officer, Kochi (TPO) for determining the Arms Length Price under Section 92CA(1) of the Act. The Assessing Officer on 31.3.2015 communicated draft assessment order under Section 143B read with Section 144C(1) of the Act. The assessee objected to the proposed draft assessment and the matter was referred to the Dispute Resolution Panel (DRP) under Section 144C(5) of the Act. DRP, vide order dated 23.12.2015, issued directions to the Assessing Officer for completing the assessment. A.O., vide order dated 23.2.2016, issued final assessment order under Section 143(3) read with Section 144C of the Act. The assessee filed ITA No.189/Coch/2016 before the ITAT, Cochin Bench. The Tribunal accepted the case of assessee on the following additions/disallowances. Sl.No. Particulars of Additions/Disallowances Amount of Additions/ Disallowances 1 Disallowance of claim of preoperative expenditure 25,96,83,876/- 2 Disallowance out of claim of additional weighted deduction u/s 35(2AB) of Rs.9,34,82,760/- 4,90,41,754 3 Disallowance out of claim of unrealized foreign exchange fluctuation gain of Rs.4,00,75,262/- deleted from total income for adjustment against cost of assets as per Section 43A on actual payment. 71,59,329 4 Hon'ble ITAT holding unralized foreign exchange fluctuation gain as not on revenue account but on capital account to be adjusted against cost of asset as and when realized 4,72,34,591

ITA No.39 of 2017 4 5 Disallowance of claim of prepaid expenses 5,15,34,726/- Hence the appeal under Section 260A of the Act. SUBSTANTIAL QUESTION NO.1 1. Whether the Hon’ble ITAT, in the facts and circumstances of the case as well as in law, is right in holding that the expenditure on setting up of new unit at Chennai as revenue expenditure, thereby directing to delete the disallowance of Rs.25,96,83,876/- which was held to be capital expenditure in the impugned assessment order?

1.1 Whether the Hon’ble ITAT, in the facts and circumstances of the case as well as in law, is right in directing to delete the above addition purely on the basis of assessee’s contention that impugned expenditure were of routine administrative expenses not relating to acquisition and installation of any capital asset in relation to setting up of the new unit at Chennai, in the light of Hon’ble ITAT’s decision in assessee’s case for A.Y.2009-10, wherein similar matter was involved and the Hon’ble ITAT remitted the issue back to the file of the Assessing Officer for ascertaining the exact nature of the impugned expenditure and decision afresh? 5. The substantial questions referred to above are similar to the question Nos.1 and 1.2 in Assessee’s own case for the assessment year 2010-11 considered and disposed of in the accompanying judgment rendered in ITA No.44 of 2017. Hence substantial question Nos.1 and

ITA No.39 of 2017 5 1.1 are answered in favour of the assessee and against the revenue by following the reasons and conclusions recorded while answering substantial question Nos. 1 and 1.2 in ITA No.44 of 2017. SUBSTANTIAL QUESTION No.1.2 1.2 Whether the Hon’ble ITAT, in the facts and circumstances of the case as well as in law, is right in holding without appreciating the fact that the assessee company had claimed loan processing free and bank charges as forming part of expenditure incurred in connection with setting up of new unit at Chennai before coming to the conclusion that the above expenditure was administrative nature as contended by the assessee?

6.

Substantial Question No.1.2 is similar to Question No.2 in ITA No.44 of 2017. By following the discussion and reasoning recorded while answering Question No.2 in ITA No.44 of 2017, substantial question No.1.2 is answered in favour of assessee and against the revenue. SUBSTANTIAL QUESTION No.2 2. Whether the Hon’ble ITAT in the facts and circumstances of the case, is legally right in deleting the weighted deduction of Rs.4,90,41,754/- u/s 35(2AB) claimed by the assessee in respect of expenditure claimed on R & D expenses met outside India?

7.

Substantial Question No.2 is similar to Substantial Question No.3

ITA No.39 of 2017 6 ITA No.44 of 2017. By following the reasoning recorded while answering Question No.3 in ITA No.44 of 2107, substantial question No.2 is answered in favour of revenue and against the assessee. SUBSTANTIAL QUESTION No.2.1 Whether the Hon’ble ITAT, in the facts and circumstances of the case as well in law, is correct in applying the decision of Gujarat High Court in CIT v Cadila Healthcare Ltd. reported in 31 Taxmann. Com 300 to the facts of the assessee’s case, which are entirely distinguishable from the said decision?

8.

Substantial Question No.2.1 is similar to Question No.3.1 in ITA No.44 of 2017. By following the reasoning recorded while answering Question No.3.1 in ITA No.44 of 2017, substantial question No.2.1 is answered in favour of revenue and against assessee. SUBSTANTIAL QUESTION NO.2.2 2.2 Whether the Hon’ble ITAT, in the facts and circumstances of the case, is correct to hold that being an incentive provision, Section 35(2AB) should be liberally interpreted and deduction allowed in view of Hon’ble Supreme Court decision in Bajaj Tempo Ltd. reported in 62 Taxmann.480 bereft of the prerequisite of a certificate of DSIR?

9.

Substantial Question No.2.2 is similar to Question No.3.2 in ITA No.44 of 2017 and by following the reasoning recorded while answering

ITA No.39 of 2017 7 Question No.3.2 in ITA No.44 of 2017, substantial question No.2.2 is answered in favour of revenue and against the assessee. SUBSTANTIAL QUESTION Nos.3, 3.1 and 3.2 3. Whether the Hon’ble ITAT is right in the facts and circumstances of the case as well as in law to delete unrealized foreign exchange fluctuation gain of Rs.71,59,329/- on the ground that the same has been suo motu offered by the assessee in computation of total income for subsequent year? 3.1 Whether the Hon’ble ITAT is right in the facts and circumstances of the case and in law to also hold that such unrealized foreign exchange fluctuation gain is to be treated on capital account to be adjusted against cost of asset as and when realized as per Section 43A? 3.2 Whether the Hon’ble ITAT is correct in holding that unrealized foreign exchange gain of Rs.4,72,34,591/- is to be treated as capital receipt and on actual realization to be adjusted against cost of asset as per Section 43A?

10.

Substantial Question Nos.3, 3.1 and 3.2 are similar to Question No.(e) in ITA No.249 of 2015. By following the discussion and reasoning recorded while answering Question No.(e) in ITA No.249 of 2015, substantial question Nos.3, 3.1 and 3.2 are answered in favour of assessee and against the revenue. SUBSTANTIAL QUESTION No.4 4. Whether the Hon’ble ITAT is correct in directing to delete the

ITA No.39 of 2017 8 so-called disallowance of prepaid expenses of Rs.5,15,34,726/- when in fact no such disallowance had apparently been proposed in the draft assessment order nor made in the final impugned assessment order?

11.

Substantial Question No.4 relates to pre-paid expenses/advance payment made by the assessee about the expenses to be incurred in future. The assessee claimed pre-paid expenses for a sum of Rs.5,15,34,726/- in the assessment year 2010-11. 12. ITA No.44/2017 has considered the entitlement of assessee to book the pre-paid expenses of the advance expenses paid as expenses incurred for the assessment year 2010-11. The same expenditure is claimed in the present year as well. The claim of assessee since is rejected for the assessment year 2010-11, we are of the view that the assessee is entitled to claim expenses for the assessment year 2011-2012. The Tribunal has allowed the claim of assessee amounting to Rs.5,15,34,726/- during the assessment year 2011-12. The claim is finally interdicted by us while answering Substantial Question No.7 in ITA No.44 of 2017. In the case on hand, the Tribunal, in paragraph-83 has recorded the following finding. “Ground No. 11 pertains to the disallowance of

ITA No.39 of 2017 9 prepaid expenses of Rs. 5,15,34,726/- claimed by the appellant. In ITA No. 223/C/2015, A.Y. 2010-11, we have allowed an identical ground no. 12 raised by the appellant therein. In terms of the aforesaid order, we allow ground no. 11.” 13. It may be noticed that the expenses claimed by the assessee are same in assessment year 2010-11 and 2011-12. For the assessment year 2010-11, it has been found that advance expenses cannot be booked for the previous year ending 31.3.2010. The assessee since has incurred the expenditure in the subsequent year i.e. during the assessment year 2011- 12 is entitled to claim allowances and the said question is answered confirming that the disallowance of pre-paid expenses amounting to Rs.5,15,34,726/- claimed in assessment year 2010-11 is being allowed in the assessment year 2011-12. Substantial Question is answered accordingly in favour of assessee and against the revenue. ADDITIONAL QUESTION Nos.5 and 6 5. Whether on the facts and in the circumstances of the case, is the Tribunal competent to remit issues back to the file of the Dispute Resolution Panel for issuance of directions afresh? 6. Whether on the facts and in the circumstances of the case, did not the Tribunal err in remitting the issue of transfer

ITA No.39 of 2017 10 pricing adjustment of Rs.12,50,380/- to the file of the Transfer Pricing Officer for reconsideration by properly applying the comparables in sheer agreement with the assessee's contention that the Transfer Pricing Officer rejected certain comparable companies without assigning any reasons?

14.

The substantial questions are covered by the judgment reported in Commissioner of Income Tax, Shillong v Assam Travels Shipping Service, Dibrugarh1. By following the same, questions are answered in favour of assessee and against the revenue. Appeal is allowed in part as indicated above.

sd/- S.V.BHATTI JUDGE sd/- VIJU ABRAHAM JUDGE css/ 1 199 ITR (1)

ITA No.39 of 2017 11 APPENDIX OF ITA 39/2017 PETITIONER ANNEXURE ANNEXURE A TRUE COPY OF THE ORDER U/S. 92CA(3) DATED 30/01/2015. ANNEXURE B TRUE COPY OF THE ORDER U/S. 144C R.W.S. 143(3) DATED 31/03/2015. ANNEXURE C TRUE COPY OF THE ORDER U/S. 144C(5) DATED 23/12/2015. ANNEXURE D COPY OF THE ORDER U/S. 143(3) R.W.S. 144C OF THE INCOME TAX ACT, DATED 23/02/2016. ANNEXURE E COPY OF THE ORDER OF THE INCOME TAX APPELLATE TRIBUNAL DATED 10/01/2017.

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