MAHINDRA TRUCKS AND BUSES LIMITED,MUMBAI vs. DCIT-2(2)(2), MUMBAI

This appeal is filed by Mahindra Two wheelers Limited [ earlier known as Mahindra Trucks and Buses Limited] for AY 2013-14 against the order passed under section 143(3) read with section 144C(13) of The Income-Tax Act, 1961 (the Act) passed by the Dy. Commissioner of Income-tax- 2(2)(2), Mumbai (the Assessing Officer) dated 30th November, 2017.

During the pendency of appeal, there is a change in the name of the appellant from Mahindra trucks and buses Ltd

The assessee is a company engaged in the business of manufacture and sale of commercial vehicles, spare parts and its components. Assessee filed return of income on 26th November, 2013 at a loss of Rs. 335,61,83,066/-, which was picked up for scrutiny and consequently draft assessment order was passed by the learned Assessing Officer, wherein the adjustment proposed by the learned Jt. Commissioner of Income-tax, Transfer Pricing-3(2), Mumbai by order under section 92CA(3) of The Act dated 31st October, 2016, was incorporated. The draft order was objected before Dispute Resolution Panel-3, Mumbai (DRP), who passed direction on 27th September, 2017 and consequently the impugned assessment order was passed wherein the income of the assessee was determined at Rs. 60,32,061/-.

Assessee is aggrieved with that order has preferred the appeal before us raising the following grounds of appeal:-

Disallowance under section 40a(ia) in respect of dealer incentives of ₹23,18,59,282/- rejecting Appellant’s contention that tax was not deductible on dealer incentive under section 194H of the Act.

Disallowance under section 35(1)(i) and 35(1)(iv) of ₹13,84,28,478/-

Disallowance under Section 92CA(3) of Adjustment in Arms Length Price of Rs.2,19,64,47,328/-

Carry forward Losses-

The additional ground raised is as Under:-

It was stated that the failure to raise the additional ground at the time of filing of the original appeal was not deliberate but arising out of the legal position which has come to the notice of the appellant subsequent to filing of the appeal. It was further stated that the facts are not required to be further investigated and are on record. It was stated that this ground goes to the root of the matter, is purely a legal ground, and therefore should be admitted. The application relied upon several judicial precedents.

Learned authorised representative reiterated the same argument as stated in the application and submitted that the additional ground deserves to be admitted.

The learned CIT DR vehemently opposed the additional ground and submitted that it should not be admitted at this stage.

On the merits of additional ground, The learned authorised representative submitted that additional ground raised is covering the adjustment made u/s 92CA (3) of the Act in in arm’s-length price of ₹ 2,196,447,328/– of specified domestic transactions. She submitted that there is no provision which provides for determination of Arm’s length price [ ALP] of the specified Domestic Transaction covered u/s 40 A (2) now as clause 92BA (i) is omitted By The Finance Act 2017 without any savings clause , total addition deserves to be deleted on this ground only. Therefore, she submitted that without going into the merits of the addition issue is squarely covered in favour of the assessee by the several judicial precedents. She submitted that decision of SMR Automotive Systems India Ltd versus Asst Commissioner of income tax in ITA number 6614/Del/2017 dated 30 June 2021 covers all those decisions. She referred to paragraph number 15 of the decisions wherein the issue first arose before the Bangalore bench in ITA (TP) number

In fact, Co-ordinate Bench under similar circumstances had examined the effect of omission of sub-section (9) to Section 10B of the Act w.e.f. 01.04.2004 by Finance Act, 2003 and held that there was no saving clause or provision introduced by way of amendment by omitting sub-section (9) of section 10B. In the matter of General Finance Co. v. ACIT, which judgment has also been taken note of by the tribunal while repelling the contention raised by revenue with regard to retrospectivity of section 92BA(i) of the Act. Thus, when clause (i) of Section 92BA having been omitted by the Finance Act, 2017, with effect from 01.07.2017 from the Statute the resultant effect is that it had never been passed and to be considered as a law never been existed. Hence, decision taken by the Assessing Officer under the effect of section 92BI and reference made to the order

It is for this precise reason; tribunal has rightly held that order passed by the TPO and DRP is unsustainable in the eyes of law. The said finding is based on the authoritative principles enunciated by the Hon'ble Supreme Court in Kolhapur Canesugar Works Ltd. referred to herein supra which has been followed by Co-ordinate Bench of this Court in the matter of M/s. GE Thermometrias India Private Ltd., stated supra. As such we are of the considered view that first substantial question of law raised in the appeal by the revenue in respective appeal memorandum could not arise for consideration particularly when the said issue being no more res integra.”

The learned authorised representative also made a detailed submission on this issue drawing our attention to rational to introduction of the transfer pricing provision and its applicability to domestic transfer pricing provisions. It was also stated that domestic transfer pricing regulations are procedural in nature and they ought to be applied only for non-revenue neutral situations. It also emphasized that clause (i) of Section 92BA was omitted without a saving clause. Therefore, the adjustment made

The learned CIT DR also placed a detailed written submission dated 9 February 2022 on the issue wherein also she discussed the background of the insertion and subsequent omission of Section 92BA (i) of the Act. It was stated that omission has been made by The Finance Act 2017 which clearly shows that the amended provisions were applicable only from assessment year 2017 – 18 onwards and therefore all specified domestic transactions benchmarked at arm’s-length up to that assessment year are valid. It was further submitted that coordinate bench in its own decision in Firemenich Aromatics India private limited (2020) 118 Taxmann.com 3 dated 15/7/2020 relying on the decision of the honourable Supreme Court in case of Fibre Boards Private Limited 62 taxmann.com 135 (SC) and Shri Bhagwati steel rolling mills versus Commissioner of Central Excise 2015 (326 ELT 209 observed that Section 6A of the general clauses act states that when any act or regulation is made after commencement of the act, such amendment would not affect the ongoing investigation or legal proceedings. She submitted that coordinate bench ruled that the word ‘repeal’ includes ‘ommission’ and there is no merit in the objection raised by the taxpayer. She heavily relied on paragraph number 13 – 21 of that decision and submitted

Alternatively, she submitted that, if the decision of the honourable Karnataka High Court is followed, even then the provisions of Section 40A (2) of the act still exist on the statute book and therefore , transactions which are covered by the above provisions should be examined according to the rules of provisions of Section 40A (2) of the act. For this proposition she relied on the decision of M/s Sobha City (2021) 127 taxman.com 39 (Bangalore). Therefore, the issue needs to be remitted back to the file of the learned assessing officer to examine these transactions in accordance with provisions of Section 40A (2) of the act.

In response to that, the learned authorised representative submitted that decisions relied upon by the learned departmental representative are distinguishable. It was stated that in the decision of the coordinate bench in case of Fireminch ITAT was dealing with Department’s ‘substantive right’ being the right of appeal against the order of the learned dispute resolution panel, which was omitted. Further, she referred to several judgments of the coordinate benches wherein the judgment of the honourable Supreme Court in case of Fibreboard (supra) and Shri Bhagwati Rolling Mills (supra) were distinguished.

We have carefully considered the rival contention and perused the orders of the lower authorities. In the present case there is an adjustment made to the income of the assessee by determining arm’s-length price of specified domestic provisions by invoking the provisions of Section 92BA (i) of the act. The impugned assessment year before us is assessment year 2013 – 14. The above provision i.e. 92BA (i) of the act was inserted by The

However we are also conscious that the provisions of Section 40A (2) of the act still exists in the statute book. The decision of the Texport overseas Ltd of the coordinate bench, which was partly challenged by the revenue before the honourable High Court, also held so. In that case, the coordinate bench held that the adjustment on account of examination of the arm’s-length price of the specified domestic transactions is not valid because of deletion of the provisions of Section 92BA (i) of the act with effect from 1/4/2017 without any saving clause, but it held that

We do not agree with the argument of the learned authorised representative that it amounts to giving a second chance to the revenue and therefore no remand is warranted for verification of provisions of Section 40A (2) of the act. Very heavy reliance was placed on the decision of the honourable Bombay High Court in CIT versus V S Dempo and Co (private) Ltd 336 ITR 29 (Bombay). We find that in that particular decision the honourable Bombay High Court has given a categorical answer that the provisions of Section 40A (2) was not attracted in that particular cases because the subsidiary company was not at all related person of the assessee within the meaning of the provisions of Section 40A (2) (b) of the act. No such

In view of this ground number 5 of the appeal of the assessee is partly allowed.

Now we deal with ground number 1 of the appeal where assessee has challenged treatment of amount of Rs. 4, 78,71,842/– as capital expenditure whereas the assessee says that expenses were incurred wholly and exclusively for the purposes of the business of the assessee, are revenue in nature and therefore are allowable as deduction u/s 37 (1) of the act. The learned assessing officer allowed the depreciation thereon at the

The learned authorised representative submitted that identical issue arose in the case of Mahindra Navistar Automotives Ltd versus Deputy Commissioner Of Income Tax in 181 TTJ 271 in assessment year 2007 – 08 and 2008 – 09 dated 13 May 2016. However, she submitted that that in that case it was conceded by the learned authorised representative in paragraph number 2 that the issue was squarely decided against the assessee in the case of associated concern. However, she submitted that when the assessee is already in the line of the manufacturing of vehicles, setting up of an assembly line for a different model of the vehicle, cannot make the expenditure as capital in nature. Therefore, she submitted

The learned CIT DR vehemently supported the orders of the lower authorities.

We have carefully considered the rival contentions and perused the orders of the lower authorities. The facts clearly show that assessee is engaged in the business of manufacturing of vehicles. It is setting up assembly line for manufacture of different models of the commercial vehicles. The assessee has sold vehicles of Rs. 651 crores during the year. It is just an expansion of the existing line of manufacturing of commercial vehicles. It is not the case that assessee has started a new business. The disallowance by the learned assessing officer is only because of matching principle, as revenue did not come from the setting up of new assembly line. However, the learned AO lost sight of the fact that assessee is showing substantial sales of heavy vehicles. Further, there is nothing, which has resulted into an enduring benefit to the assessee. In the present world, automobile companies are introducing 5 – 6 variants of different types of vehicles every year , due to frequent changes in the consumer demands as well as change in technology. Ld AO also incorrectly applied matching principle for making disallowance, as he over looked the same line of business of the asessee where sales of vehicles are shown. In

Ground number 2 is with respect to the disallowance of dealers incentive of ₹ 231,859,282/–. The brief facts of the case show that assessee has claimed deduction of dealer’s incentive of the above sum without deduction of

The learned authorised representative submitted that now the SLP filed by the Commissioner of income tax against the decision of the honourable High Court has been dismissed, therefore now the argument of the learned dispute resolution panel also does not survive.

The learned CIT DR supported the orders of the lower authorities.

We find that on identical facts and circumstances the honourable Bombay High Court in case of Mahindra and Mahindra Ltd [Income Tax Appeal Number 1148 of 2014 dated 6 February 2017] has while deciding the question number 2 (e) , that whether on the facts and in the circumstances of the case and in law, the tribunal was correct in holding that the dealers incentive is not covered by Section 194H as the sale is made on principal to principal basis, ignoring the fact that the relationship between the dealer and the assessee, as clearly brought out by the findings given in the assessment order, is in the nature of principal and agent and that TDS was required to be deducted u/s 194H of The Income Tax Act, 1961 on the payments made as an incentive, or u/s 194C of the income tax act, 1961 as part of contract or performance Under an agreement between the principal and the dealer. The honourable High Court in paragraph number 3 has

The learned assessing officer held that the activities carried on by the assessee is not scientific research as assessee has failed to brought on record evidences to qualify the same for scientific research. Further, the

On objection before the learned DRP, it was confirmed. Therefore, assessee is in appeal as per ground number 3.

The learned authorised representative referred to page number 211 of the paper book where, in the tax audit report the assessee’s claim is explained and further at page number 733 of the paper book which is a letter dated 13 December 2016 wherein para number 3 the claim of the assessee was explained. It was stated that the above claim is allowable to the assessee and is in accordance with the provisions of the law. It was also stated even otherwise these expenditure are allowable us 37 (1) of the Act as revenue expenditure.

The learned CIT DR supported the order of the learned AO by referring specially paragraph number [6] of the order.

We have carefully considered the rival contention and perused the orders of the lower authorities. Facts show

Coming to the deduction u/s 35 (1) (iv) of the act of ₹ 7,088,075, on which the learned assessing officer has allowed depreciation only instead of allowing the whole expenditure in the year in which it is incurred. We have already held assessee is carrying on scientific research in the business of manufacturing of vehicle. Based on same reasons as given by us for allowing the expenditure of the assessee u/s 35 (1) (i) of the act we also direct the learned assessing officer to delete the disallowance of ₹ 7,088,075/-. As we have allowed the claim of the assessee u/s 35 (1) of the act the learned assessing officer as a natural corollary should withdraw the grant of depreciation allowance to the assessee. Accordingly, ground number 3 of the appeal of the assessee is allowed.

The learned authorised representative submitted the copy of the package incentive scheme 2007 issued by the government of Maharashtra. Referring to the above scheme, she referred to the preamble of the scheme stating that the scheme is put into force to encourage the dispersal of industries to the less developed area of the state. It was also stated that assessee is covered by the scheme. As per serial number 5 of legal paper book. Ld AR has listed down several decisions of the coordinate bench where benefits of package incentive scheme 2007 of government of Maharashtra is held to be capital in nature. In view of this, she submitted that the orders of the lower authorities are not correct in holding that the incentive received by the assessee is a revenue receipt. She further submitted that ‘objects and purpose’ of the subsidy clearly shows that it is capital receipt and cannot be charged to tax.

The learned CIT DR vehemently supported the orders of the lower authorities. She specifically referred to the direction of the dispute resolution panel wherein the

We have carefully considered the rival contention and perused the orders of the lower authorities. On Perusal of the PSI, 2007 shows that the subsidy has been granted to encourage industrial growth in less developed areas of the State. The quantification of subsidy is linked with the amount of investment made in setting up of the eligible units. Payment of the subsidy is in the form of refund of VAT and CST paid on sale. Assessee claimed before the lower authorities that the subsidy was a capital receipt and, hence, not chargeable to tax which was rejected As held by Hon Supreme court in case of Ponni Sugar (Supra) decisive factor for considering the nature of subsidy as a ‘capital’ or ‘revenue’ receipt is the 'purpose' for which the subsidy has been granted and not the manner of its disbursal. Purpose of granting the subsidy, which is nothing but establishment of new industrial units in less developed areas of the State i.e. to develop underdeveloped areas of the state. Further, on identical

Ground no 6 is with respect to granting carry forward of losses and unabsorbed depreciation. Ld AO is directed to compute the same in accordance with law. Thus Ground no 6 is allowed.

In the result, appeal filed by the assessee is partly allowed.