ASST. COMM. OF INCOME-TAX, NASHIK vs. ATLAS COPCO (INDIA) LTD., PUNE

IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH “C”, PUNE

BEFORE SHRI R.S. SYAL, VICE PRESIDENT AND SHRI PARTHA SARATHI CHAUDHURY, JUDICIAL MEMBER आयकर अपील सं. / ITA No.1676/PUN/2011 िनधा�रण वष� / Assessment Year : 2003-04

Atlas Copco (India) Limited, ACIT, Circle-8, Sveanagar, Dapodi, Vs. Pune Pune – 411 012 PAN : AAACA4074D (Appellant) (Respondent) आयकर अपील सं. / ITA No.54/PUN/2012 िनधा�रण वष� / Assessment Year : 2003-04

ACIT, Circle-8, Atlas Copco (India) Limited, Pune Vs. Sveanagar, Dapodi, Pune – 411 012 PAN : AAACA4074D (Appellant) (Respondent)

Assessee by Shri R. Murlidhar & Shri Prashant Gandhi Revenue by Ms. Kesang Y. Sherpa, CIT Date of hearing 17-07-2019 Date of pronouncement 18-07-2019 आदेश / ORDER PER R.S.SYAL, VP :

These two cross appeals – one by the assessee and the other by the Revenue - arise out of the order passed by the Commissioner of Income-tax (Appeals) on 28-10-2011 in relation to the assessment year 2003-04.

2 ITA No.1676/PUN/2011 and ITA No.54/PUN/2012 Atlas Copco (India) Limited

“1. Without prejudice to the ground raised in the AY 2002- 03 in relation to disallowance for provision of expenses amounting to Rs.8,25,000/-, being held to be assessable in the year of provision, i.e. AY 2002-03, the Appellant prays for allowance of the same in the year of its reversal/utilization.

the order dated 16.07.2019 passed by the Tribunal in assessee’s own

case in ITA No. 1311 and 1414/PN/2011 for the immediately

preceding year, that is, 2002-03. We are, therefore, admitting such

grounds and taking them for disposal on merits.

disallowance of excess provision of Rs.8,25,000/- for the preceding

year by the Tribunal.

provision of Rs.8,25,000/- in its accounts for the preceding year.

Such provision was made for expenses. Since no expenditure was

incurred against such provision, the Tribunal held that no deduction

3 ITA No.1676/PUN/2011 and ITA No.54/PUN/2012 Atlas Copco (India) Limited

could be allowed in respect thereof. The ld. AR contended in the

proceedings for the immediately preceding year that the entry

passed for creation of provision for Rs.8,25,000/- in its accounts for

the A.Y. 2002-03 was reversed in the instant year. Under such

circumstances, we direct the AO to verify the contention of the

assessee. If such a provision of Rs.8,25,000/- made in the preceding

year has been reversed by the assessee and included in its total

income for the year under consideration, then such an amount of

reversal of provision in the instant year should not be charged to

tax, since the deduction itself has not been allowed by the Tribunal

in the preceding year.

Rs.20,10,925/- which was realized in the preceding assessment year

but not offered for taxation. Such amount was treated as

outstanding liability. The Tribunal did not approve the contention

of the assessee in its order for the immediately preceding

assessment year and ordered to include the same in the total income.

The ld. AR contended that a sum of Rs.20,10,925/- which was not

offered for taxation in the preceding year, was, in fact, offered in

the year under consideration. Under these circumstances, we direct

the AO to verify the assessee’s contention regarding inclusion of

4 ITA No.1676/PUN/2011 and ITA No.54/PUN/2012 Atlas Copco (India) Limited

Rs.20,10,925/- in the income from sale of scrap in its accounts for

the year under consideration. If the amount is found to be included

in the total income for the year under consideration and offered for

taxation, then the same should be excluded as it has been directed to

be charged to tax in the preceding year.

deduction for a sum of Rs.1.00 crore, being, payment made to DSP

Merill Lynch Limited (DSPML), towards non-compete and non-

solicitation payment.

net consideration of non-compete/non-solicitation at Rs.9.00 crore

as income. On being called upon to file the details, the assessee

stated that a sum of Rs.2.50 crore was received from Revati

Equipment Limited (REL) on account of non-compete agreement

and a further sum of Rs.7.50 crore on account of non-solicitation

agreement. The assessee furnished a copy of bill of DSP Merill

Lynch dated 23-08-2002 for a sum of Rs.1,74,92,081/- which was a

payment indicted in invoice as “Advisory fee for sale of controlling

stake” in REL. The assessee claimed that out of said sum of

Rs.1.74 crore, an amount of Rs.1.00 crore was towards non-compete

and non-solicitation agreement which was actually reduced from

5 ITA No.1676/PUN/2011 and ITA No.54/PUN/2012 Atlas Copco (India) Limited

receipt of Rs.10.00 crore from REL and net amount of Rs.9.00 crore

was offered. The AO, on perusal of bill of DSPML, observed that

the entire consideration was towards Advisory fee for sale of

controlling stake in REL and there was nothing to show that a sum

of Rs.1.00 crore was attributable to any non-compete or non-

solicitation agreement. The AO, therefore, did not allow any

deduction for sum of Rs.1.00 crore and accordingly considered full

amount of Rs.10.00 crore as non-compete fee. The ld. CIT(A)

required the assessee to produce agreement under which such

payment was claimed to have been made to DSPML. The assessee

failed to produce any such agreement. The ld. CIT(A) noticed that

since the entire amount of Rs.1.74 crore and odd was towards

Advisory fee for sale of controlling stake in REL, the sum of Rs.

1.00 crore was also liable to be allowed as deduction in the

computation of long term capital gain. The assessee is aggrieved by

this direction.

material on record. The assessee sold a larger stake and negotiated

non-compete and non-solicitation agreement with REL. This

offloading was facilitated by DSPML for which they charged

Rs.1.74 crore and odd. The assessee, apart from sale consideration,

6 ITA No.1676/PUN/2011 and ITA No.54/PUN/2012 Atlas Copco (India) Limited

also received a sum of Rs.10.00 crore from REL towards non-

compete and non-solicitation fee. The assessee attempted to reduce

a sum of Rs.1.00 crore from such non-compete fee allegedly on the

ground that it paid non-compete fee to DSPML, which was a part of

payment to DSPML. We have gone through the invoice of

DSPML, whose copy is available at page 233 of the paper book.

This invoice dated 23-08-2002 clearly mentions that the said sum of

Rs.1.74 crore and odd is towards “Advisory fee for controlling stake

in REL” along with the amount of service tax and offered for

taxation. The assessee bifurcated Rs.1.74 crore into two

components. Whereas a sum of Rs.74.92 lakh was considered as

deduction in the computation of long term capital gain arising from

the sale of shares, it considered a sum of Rs.1.00 crore towards non-

compete fee paid to DSPML, thereby reducing the business income

to this extent. The invoice clearly demonstrates that a sum of

Rs.1.74 crore was entirely paid towards Advisory fees for sale of

controlling stake in REL. The assessee tried to fortify its contention

with the help of a letter dated 22-09-2011 received from DSPML.

We are unable to give any weight to this letter since it is contrary to

the own version given by DSPML in the year 2002 as the payment

towards `Advisory fee for sale of controlling stake’. A letter

coming into existence after about 9 years from the date of invoice,

7 ITA No.1676/PUN/2011 and ITA No.54/PUN/2012 Atlas Copco (India) Limited

cannot be taken into consideration at this stage. The ld. AR was

called upon to place on record a copy of the agreement under which

said sum of Rs.1.00 crore was paid. He fairly expressed his

inability to produce such an agreement, which on specific

requisition by the lower authorities also could not be adduced. In

view of the foregoing reasons, we are of the considered opinion that

the ld. CIT(A) was fully justified in treating the entire amount of

Rs.1.74 crore as deductible in the computation of long term capital

gain and not accepting the assessee’s claim of treating Rs.1.00 crore

as deductible from non-compete fee chargeable as business income.

This ground is, therefore, not allowed.

proper deduction u/s.35DDA towards Voluntary Retirement

Scheme (VRS) on accrual basis.

assessee’s own case for the immediately preceding assessment,

which has been discussed on page 9 para 12 of the order. The

Tribunal has held the assessee to be entitled to deduction

u/s.35DDA on the basis of incurring of liability. A further direction

has been given to ensure that the assessee is not allowed deduction

on actual payment basis. The AO is directed to examine this aspect

8 ITA No.1676/PUN/2011 and ITA No.54/PUN/2012 Atlas Copco (India) Limited

and allow deduction only towards incurring of liability, i.e. on

accrual of liability towards VRS u/s.35DDA and no amount should

be allowed as deduction on payment basis. This ground is,

therefore, allowed for statistical purposes.

confirmation of disallowance u/s.35DD of the Act at Rs.2,10,000/-, being, 1/5th of the fees paid to Registrar of Companies for increasing

the authorized capital on amalgamation.

circumstances of the instant ground are mutatis mutandis similar to

those of the preceding year. This issue has been considered by the

Tribunal in its order for the immediately preceding assessment year.

Relevant discussion has been made on page 12 para 17. Such

ground in the assessee’s appeal has been allowed. Following the

precedent, we allow this ground of appeal.

Revenue’s appeal are in respect of deduction towards provision for

warranty.

these grounds are similar to those of preceding year. The Tribunal

9 ITA No.1676/PUN/2011 and ITA No.54/PUN/2012 Atlas Copco (India) Limited

has discussed this aspect in para no.8 to 11 of its order in which it

has been held that provision for warranty should be allowed at 0.4%

of net sales in the Atlas Copco Division. As regards the Chicago

Pneumatic Division, since the actual expenditure was more than the

amount of provision, the Tribunal directed to allow deduction for

the entire amount of provision. Relevant discussion for the year

under consideration has been made at page no.29 of the impugned

order, on which a table has been drawn depicting the position of

provision. As per this table, the actual expenses incurred by the

assessee stand at Rs.2.85 crore. There is a recovery of claim to the

tune of Rs.24.37 lakh. If claims recovered are reduced from the

actual expenses incurred, we get net amount of Rs.2.61 crore and

odd towards expenses incurred for the year, as against that the

amount of provision created by the assessee at Rs.1,59,17,000/-. As

the amount of provision is less than the amount of actual expenses,

following the view taken by the Tribunal in its order for the A.Y.

2002-03 in the CP division, we direct to allow the deduction for the

entire amount of provision for Rs.1,59,17,000/-. However, it is

made clear that no deduction for incurring of actual expenses should

be separately allowed. The contrary view of the Revenue in its

appeal is accordingly dismissed.

10 ITA No.1676/PUN/2011 and ITA No.54/PUN/2012 Atlas Copco (India) Limited

disallowance of certain expenses. The AO discussed this issue at

page 30 onwards of his order. He observed that the assessee

claimed deduction of Rs.8,91,41,639/- under the head

“Miscellaneous Expenses”. Since necessary details were not

available, he disallowed 50% of such expenses and made addition

of Rs.4,45,70,820/-. The assessee furnished certain details before

the ld. CIT(A), who held that a separate amount of warranty

provision amounting to Rs.33,77,762/- was not deductible; an item

amounting to Rs.14,99,816/- towards expenditure on Gifts was not

substantiated and hence was not deductible; donations of

Rs.6,26,628/- were liable to be added; and fees for handling shares

record at Rs.13,53,956/- was also to be disallowed. For the

remaining expenses, he restricted the disallowance at 25% as

against 50% made by the AO.

material on record, we find that the first sum of Rs.33,76,762/- is in

the nature of actual expenses incurred during warranty period.

Since a deduction has been separately allowed to the assessee on

creation of provision for warranty, there can be no question of

allowing any separate deduction for actual expenses incurred in

11 ITA No.1676/PUN/2011 and ITA No.54/PUN/2012 Atlas Copco (India) Limited

accepting the claims under warranty. We, therefore, uphold the

impugned order to the extent of disallowance of Rs.33,76,762/-.

assessee could not produce any evidence to show whether the Gifts

were given for the business purpose or were hit by Explanation 1 to

section 37(1) of the Act. In the absence of furnishing any such

details, we uphold the view taken by the ld.CIT(A) in sustaining

this disallowance.

for which the assessee could not adduce any evidence. The

impugned order is, therefore, upheld to this extent.

records is concerned, we find that the same is in respect of shares

issued by the assessee company and not for handling any

investments of the assessee. Such expenses incurred by the assessee

are deductible in full.

the addition to 25%. Considering the peculiar circumstances

prevailing in the extant case, we are of the considered opinion that it

12 ITA No.1676/PUN/2011 and ITA No.54/PUN/2012 Atlas Copco (India) Limited

would be just and fair if the disallowance is restricted to 15% of

such expenses. We order accordingly.

confirmation of inclusion of commission income of

Rs.7,87,32,730/- as part of total turnover in the computation of

deduction u/s.80HHC. The later part of the ground is towards

confirmation of exclusion of 90% of Service charges and

Miscellaneous income from profits of business for deduction

u/s.80HHC.

the Tribunal in assessee’s own case for the immediately preceding

assessment year. Following the view taken by the Tribunal in

assessee’s own case for still another year, the matter has been

remitted to the AO for a fresh decision. Both the sides are in

agreement that the facts and circumstances of the extant ground are

similar to those for the A.Y. 2002-03. Following the view taken for

the immediately preceding assessment year, we set aside the

impugned order and remit the matter to the file of AO for deciding

this issue in conformity with the directions given by the Tribunal in

its earlier orders.

13 ITA No.1676/PUN/2011 and ITA No.54/PUN/2012 Atlas Copco (India) Limited

confirmation of set-off of long term capital loss on sale of mutual

funds amounting to Rs.31,62,005/- against the long term capital

gain on sale of shares of REL instead of long term capital gain on

sale of property as claimed by the assessee.

long term capital loss amounting to Rs.31,62,005/- on sale of

mutual fund investments. The assessee sought to reduce such

amount from long term capital gain on Mulund property amounting

to Rs.4,20,69,031/-. The AO opined that such loss was liable to be

set off against long term capital gain amounting to Rs.7,09,64,882/-

arising on transfer of Revathi CP Shares. The ld. CIT(A) affirmed

the view taken by the AO against which the assessee has

approached the Tribunal.

relevant material on record. There is no dispute on the assessee

actually suffering long term capital loss on sale of mutual fund

investments amounting to Rs.31,62,005/-. The dispute is only

against the set off from the long term capital gain. Whereas the case

of the assessee is that such loss should be set off against long term

capital gain arising from Mulund property, the authorities below

14 ITA No.1676/PUN/2011 and ITA No.54/PUN/2012 Atlas Copco (India) Limited

have opined that such loss should be set-off against long term

capital gain on Revathi CP shares. The raison détre for the

assessee’s stand is that if the loss is allowed against the long term

capital gain from Mulund property, the amount of long term capital

gain on Revathi CP shares would stand at a higher level, which

would result in lower tax liability and vice-versa.

term capital gains. Clause (d) of section 112(1) provides for the

determination of tax arising from long term capital gain in the hands

of a recipient, who is not an individual or HUF or a domestic

company. The assessee is covered under this clause. Under the

main provision of clause (d), income-tax should be calculated on

long term capital gain @20%. First proviso to section 112 (1) states

that where the tax is payable in respect of income arising from the

transfer of long term capital asset, being the listed securities (other

than a unit), then such amount should be charged to tax at the rate of

10%. Obviously, the mutual fund investments are listed securities.

Now the question arises as to whether loss from listed securities,

being, on mutual fund investments should be reduced from gains

from other listed securities, being, shares of Revathi? It is pertinent

to note that section 112 falls under Chapter XII of the Act with the

15 ITA No.1676/PUN/2011 and ITA No.54/PUN/2012 Atlas Copco (India) Limited

heading “Determination of Tax in certain Special cases”. Thus, it is

vivid that section 112 has application only at the time of

determination of tax. However, in so far as the computation of

income in this regard is concerned, section 70(3) of the Act assumes

significance. This provision states that where the result of

computation in respect of any capital asset (other than a short-term

capital asset) is loss, assessee shall be entitled to have the amount of

such loss set off against the income, if any, as arrived at under a

similar computation made for the assessment year in respect of any

other capital asset not being a short term capital asset. The term

`similar computation’ in this provision refers to computation of

income from long term capital assets, in contrast to short term

capital assets. It does not restrict itself to the computation from

same or similar nature of long-term capital assets. Once there is a

loss from the transfer of any long term capital asset and some long

term capital gain is also available, the assessee is entitled to set off

such loss against gain arising from any long term capital asset of his

choice. The choice is that of the assessee, which is further

substantiated from the words used in the provision, namely, “the

assessee shall be entitled to have……”. It, therefore, implies that it

is the entitlement of the assessee to compute income from long term

capital gains in terms of section 70(3) and as such he can adopt a

16 ITA No.1676/PUN/2011 and ITA No.54/PUN/2012 Atlas Copco (India) Limited

course of action, which is more beneficial to him. The Department

cannot tinker with the same so long as it is otherwise in accordance

with the provision. That is how, the computation of income from

long term capital gain gets concluded u/s.70(3) of the Act. Such

computation is then sent for determination of tax payable in terms

of section 112 of the Act. As section 112 has application only for

the purpose of determination of tax, it cannot apply to determine the

amount of income or prioritize the computation in any manner.

Once the assessee has determined its long term capital gain income

in a particular manner which has sanction of section 70, the AO

cannot disturb such calculation merely because it is less

remunerative from the angle of determination of tax.

assessee set off its long term capital loss from the sale of mutual

funds against the long term capital gain from transfer of Mulund

property. This is absolutely permissible under section 70(3) of the

Act. We, therefore, hold that no exception can be taken to the action

of the assessee and accordingly the amount of long term capital gain

on Revathi CP shares at Rs.7.09 crore should be taxed under

proviso to section 112 of the Act. Ex consequenti, this ground of

appeal is allowed.

17 ITA No.1676/PUN/2011 and ITA No.54/PUN/2012 Atlas Copco (India) Limited

amalgamation expenditure of Rs.49,60,536/- incurred by the

assessee on stamp duty for transfer of immovable assets, which was

held by the CIT(A) to be an allowable expenditure u/s.35DD of the

Act.

up for consideration before the Tribunal in the case of the assessee

for the A.Y. 2002-03. We find that relevant discussion has been

made on page 13 para 22 of the order by which the issue has been

determined in favour of the assessee. Following the view taken for

the immediately preceding year, we dismiss this ground of appeal

by the Revenue.

Dealer Commission. Here again, we find that similar issue has been

determined by the Tribunal at page 37 of its order for the

immediately preceding year. The relevant discussion has been

made from para 64 onwards and eventually the view taken by the ld.

CIT(A) has been approved. Following the same, we countenance

the impugned order on this score. This ground is not allowed.

18 ITA No.1676/PUN/2011 and ITA No.54/PUN/2012 Atlas Copco (India) Limited

of addition on account of Transfer Pricing adjustment on Royalty

payment.

reported certain international transactions. The AO made a

reference to the TPO (Transfer Pricing Officer) for determination of

the Arm’s Length Price (ALP) of such international transactions.

One of the transactions reported by the assessee was “Payment of

Royalty” with transacted value of Rs.2,07,87,581/-. The assessee

paid royalty to its three Associated Enterprises (AEs) @ 5% on

local sales and 6% on export sales. The TPO, in his order dated 03-

03-2006, noticed that the assessee was paying royalty to some AEs

to whom it was making sales. Such amount was worked out at

Rs.1,59,56,359/-. However, he determined NIL ALP of the entire

transaction of payment of royalty at Rs.2.07 crore on the ground

that the assessee could not file any documentary evidence relating to

the discontinuation of production of products by the AEs on which

royalty was paid. The AO made the transfer pricing addition, which

came to be deleted in the impugned order.

material on record. It is found as an admitted position that the

19 ITA No.1676/PUN/2011 and ITA No.54/PUN/2012 Atlas Copco (India) Limited

assessee paid Royalty to its AEs as per the rates approved by the

RBI. The TPO determined NIL ALP simply on the ground that the

AEs to whom the assessee paid Royalty had discontinued

production of such products. In our considered opinion, this is no

ground to determine NIL ALP of an international transaction. The

TPO is required to determine the ALP of an international

transaction under one of the methods mandated under rule 10B of

the Income-tax Rules, 1962. Nothing of the sort has been done in

the instant case. The TPO got influenced with extraneous reasons,

which have no bearing on the determination of the ALP of an

international transaction. It is further observed that similar issue

came up for consideration before the Tribunal in assessee’s own

case for the immediately preceding assessment year. The transfer

pricing addition made in similar circumstances has been deleted.

Relevant discussion has been made on page 39 onwards of the

order. Considering the entire conspectus of the case, including the

fact that the payment of Royalty to AEs was as per RBI norms, we

are satisfied that the view taken by the ld. CIT(A) is unassailable.

This ground, therefore, fails.

direction of the ld. CIT(A) for not charging interest u/s.234D.

20 ITA No.1676/PUN/2011 and ITA No.54/PUN/2012 Atlas Copco (India) Limited

amendment carried out to section 234D by insertion of Explanation

2 by the Finance Act, 2012 with retrospective effect from 01-04-

2003, the ground by the Revenue needs to be allowed. We,

therefore, overturn the impugned order on this issue and uphold the

charging of interest u/s.234D of the Act.

Sd/- Sd/- (PARTHA SARATHI CHAUDHURY) (R.S.SYAL) JUDICIAL MEMBER VICE PRESIDENT पुणे Pune; �दनांक Dated : 18th July, 2019 सतीश आदेश क� क� क� �ितिलिप क� �ितिलिप �ितिलिप अ�ेिषत �ितिलिप अ�ेिषत अ�ेिषत/Copy of the Order is forwarded to: अ�ेिषत आदेश आदेश आदेश अपीलाथ� / The Appellant; 1. ��यथ� / The Respondent; 2. 3. The CIT(A)-V, Pune 4. The CIT-V, Pune िवभागीय �ितिनिध, आयकर अपीलीय अिधकरण, पुणे 5. “सी” / DR ‘C’, ITAT, Pune; 6. गाड� फाईल / Guard file. आदेशानुसार आदेशानुसार आदेशानुसार/ BY ORDER, आदेशानुसार

// True Copy // Senior Private Secretary आयकर अपीलीय अिधकरण ,पुणे / ITAT, Pune

ITA No.1676/PUN/2011 and ITA No.54/PUN/2012 Atlas Copco (India) Limited

Date 1. Draft dictated on 17-07-2019 Sr.PS 2. Draft placed before author 17-07-2019 Sr.PS 3. Draft proposed & placed JM before the second member 4. Draft discussed/approved JM by Second Member. 5. Approved Draft comes to Sr.PS the Sr.PS/PS 6. Kept for pronouncement on Sr.PS 7. Date of uploading order Sr.PS 8. File sent to the Bench Clerk Sr.PS 9. Date on which file goes to the Head Clerk 10. Date on which file goes to the A.R. 11. Date of dispatch of Order. *