DCIT (LTU), NEW DELHI vs. M/S. HERO MOTORS LTD., NEW DELHI

The present appeal has been filed by the revenue against the orders of the ld. CIT(A)-22, New Delhi dated 02.11.2016.

Following grounds have been raised by the revenue:

Brief facts relevant to the case are that the assessee invested Rs.79.19 crores in the equity shares and mutual funds and received dividend income of Rs.1,320/- during the year under consideration. The Assessing Officer has disallowed an amount of Rs.2.74 crores u/s 14A of the Income Tax Act, 1961. The ld. CIT (A) has directed the Assessing Officer to rework the disallowance u/s 14A excluding the investments made in the group concerns and in the debt oriented mutual funds.

Aggrieved the revenue filed appeal before us.

The issue of disallowance of expenses u/s 14A relating to income not includable in the total income of the assessee has been dealt in various cases by the Tribunal and the High Courts wherein it was held that no disallowance is warranted in cases where no exempt income has been earned by the assessee. The Hon’ble Courts has also ruled that, at the most the disallowance should be restricted to the tune of the dividend earned. For the sake of ready reference, the relevant portion of the order of the Hon’ble Jurisdictional High Court in the case of Cheminvest Ltd. Vs CIT 378 ITR 33 (Del.) is reproduced below:

Hence, following the established judicial pronouncement, we hereby direct that the disallowance be restricted to Rs.1,320/-.

It was submitted before the revenue authorities that M/s Hero Global Design Ltd. rendered Engineering Consultancy, CAD/CAM designing which are professional services technically called Re-Engineering Services using specialized software by which the fragmentation of drawings supplied by the customers of assessee into sub-parts is done to facilitate manufacturing and costing. Three diploma engineers and one ITI is the total staff of M/s Hero Global Design Ltd. and the total salary of these persons in the books of M/s Hero Global Design Ltd is Rs. 26.49 lakhs, while the total employee benefit expenses are Rs. 28.22 lakhs. The billing is on man hour basis and the payment made by the assessee almost equals the salary cost of above four persons being employees of M/s Hero Global Design Ltd.

The assessee also explained that when it receives designs in respect of orders from its clients like BMW etc, these persons examine the drawings and fragmented designs are issued on the basis of which the manufacturing is done by suppliers. Moreover, M/s Hero Global Design Ltd. also renders assistance in costing.

The ld. CIT (A) held that it is a fact that M/s Hero Global Design Ltd is located in the same premises as assessee and is a lessee of the assessee. It was doing the work of only the assessee and is running in losses mainly because of the interest and software cost/amortization/depreciation. The finance has also been provided by the assessee. There is no written agreement between the assessee and M/s Hero Global Design Ltd and the nature of services claimed are also of very basic nature as the basic designs are received from clients and the product is to be manufactured as per the said designs. The nature of services can at best be called a bridge with the ancillary suppliers/manufactures. The qualifications of the persons employed also do not establish any specialised technical services as none of them is even a graduate engineer. The quantum of payment is very small considering the turnover of the assessee. Moreover, once the sample production is approved, the same product is manufactured and supplied to the client in large numbers without any further payment to M/s Hero Global Design Ltd. The work done by M/s Hero Global Design Ltd could have been done by a small section in the assessee company within the very same premises by the same four employees. However, even then the assessee would have been required to pay salary to those four persons. Though the services have been rendered through M/s Hero Global Design Ltd, the payment made by the assessee to M/s Hero Global Design Ltd just matches the employee cost of M/s Hero Global Design Ltd, which would have been incurred even if those persons had been employed by the assessee. Consequently, the ld. CIT (A) held that the expenditure incurred is allowable u/s 37(1).

Heard the arguments of both the parties and perused the material available on record. The copies of the invoices submitted by the HGD Ltd. have been examined. It is an undeniable fact that HGD Ltd. has provided services to the assessee, the design engineers of HGD Ltd. are regularly available within in the shop floor of the assessee company, they have been working for the last ten years with the assessee and getting paid regularly against their services. In view of this, we decline to interfere with the order of the ld. CIT (A) in deleting the addition.