SUNDARAM CLAYTON LIMITED,CHENNAI vs. DCIT CORPORATE CIRCLE 6(2), CHENNAI

The assessee has more or less raised common grounds of appeal for both assessment years, therefore, for the sake of brevity, grounds of appeal filed for the assessment year 2013- 14 in are reproduced as under:-

Brief facts of the case extracted from for the assessment year 2013-14 are that the assesse company is engaged in the business of manufacture of automotive components and application. The assessee has filed its return of income for the assessment year 2013-14 on 30.11.2013 and for assessment year 2014-15 on 30.11.2014 declaring total loss of Rs.26,13,44,210/- and total income of Rs.5,67,16,260/- for the assessment year 2014-15.

The assessee carried matter in appeal before the first appellate authority and challenged various additions made by the Assessing Officer. The learned CIT(A) vide its appellate order dated 27.12.2017 has partly allowed appeal filed by the assessee, where he has allowed partial relief in respect of additions made towards disallowance of expenditure u/s.14A of the Act, deleted additions made towards disallowance of balance 50% of additional depreciation and further deleted additions made by the Assessing Officer towards disallowance of capital expenditure incurred on R&D u/s.35((1)(iv) of the Act.

The first issue that came up for consideration for both assessment years from the appeal of Revenue as well as the assessee is disallowance of expenditure incurred relatable to exempt income u/s.14A of the Income Tax Act, 1961.During financial year relevant to the assessment year 2013-14 and 2014-15, the assessee has earned dividend income, which was claimed exempt u/s.10(34) of the Income Tax Act, 1961. The assessee had also made suo motu disallowance of expenditure relatable to exempt income, as identified by the assesse. The Assessing Officer had invoked Rule 8D of Income Tax Rules,1962 and determined disallowances of direct expenditure, interest expenditure and other expenditure at Rs.2,70,38,767/- for the assessment year 2013-14 and Rs.2,50,46,342/- for the assessment year 2014-15. The learned CIT(A), on appeal, has allowed partial relief where he has confirmed additions made towards disallowance of direct expenditure under Rule 8D(2)(i). However, recomputed disallowance of interest expenditure under Rule 8D(2)(ii), after excluding investments in subsidiary companies from total investments. Similarly, the learned CIT(A) has also directed the Assessing Officer to recompute disallowances under Rule 8D(2)(iii) by excluding investments in subsidiary companies.

The learned AR for the assesse, at the time of hearing, submitted that issue is squarely covered in favour of the assessee by the decision of the Tribunal in assessee’s own case for assessment year 2012-13 in where under identical set of facts the Tribunal has deleted additions made by the Assessing Officer towards interest expenditure under Rule 8D(2)(ii) and further directed the Assessing Officer to recompute disallowance of other expenditure under Rule 8D(2)(iii) by considering only those investments which earned exempt income for the year by following the decision of ITAT., Delhi Special Bench in the case of ACIT Vs. Vireet Investments Pvt .Ltd. ( 165 ITD 27)(SB ) .

The learned DR, on the other hand, submitted that although the issue is covered in favour of the assessee by decision of the ITAT, Chennai in assessee’s own case, but fact remains that assessee itself has computed suo motu disallowances of direct expenditure of Rs.42.49 lakhs in the original return of income filed for relevant assessment year.

We have heard both the parties, perused materials available on record and gone through orders of the authorities below. As regards direct expenses relatable to exempt income, as required to be computed under Rule 8D(2)(i), the assessee itself has computed total disallowance of Rs.42.49 lakhs and hence, question of reduction of disallowance computed by the assessee in its original return of income does not arise.

As regards disallowance of interest under Rule 8D(2)(ii), it was claim of the assessee that it has sufficient own funds in the form of share capital and reserve, which is over and above total investments made in dividend bearing investments. We find that co-ordinate Bench of ITAT., Chennai in assessee’s own case has considered identical issue and after considering relevant facts and has also by following decision of Hon’ble (366 ITR 505) held that no disallowance could be made towards interest expenditure, when assessee has sufficient own funds, which is over and above the amount of investments in exempt bearing investments. We further noted that the Hon’ble Bombay High Court in the case of CIT Vs. Reliance Utilities &Power Ltd. ( 33 ITR 340) has held that when mixed funds are used for making investments in exempt bearing investments, then it would have to be presumed that investments made in exempt bearing investments are out interest free funds available with the assessee. In this case, the assessee has filed necessary details to prove that it has own funds in excess of investments made in shares and securities which yielded exempt income.

As regards disallowance of other expenditure @ 0.5%, average value of investments under Rule 8D(2)(iii), we find that it is well settled principle of law that only those investments which yield exempt income for the relevant assessment year needs to be considered for computation of disallowance of other expenses under section 14A r.w.r 8D(2)(iii) of IT Rules, 1962. We further noted that the coordinate Bench has taken similar view in assessee’s own case for the assessment year 2012-13 in where the Tribunal by following the decision of ITAT., Delhi Special Bench in the case of ACIT vs. Vireet Investments Pvt.Ltd. (supra) has directed the Assessing Officer to consider only those investments which yielded exempt income for the relevant previous year to compute disallowance under Rule 8D(2)(iii) of IT Rules, 1962.

The next issue that came up for our consideration for assessment year 2013-14 is disallowance of R&D expenditure u/s.35(2AB) and section 35(1)(iv) of the Act. During the year under consideration, the assessee has incurred capital expenditure other than building a sum of Rs.86,75,846/- and revenue expenditure of Rs.6,09,24,237/- for research & development expenditure and claimed 200% weighted deduction u/s.35(2AB) of the Act amounting to Rs.13,92,00,166/-. In support of its claim, the assessee has produced certificate from the Department of Scientific and Industrial Research in form 3CL, in which DSIR has certified a sum of Rs.85,81,000/- for capital expenditure other than building and a sum of Rs.5,89,43,000/- for revenue expenditure and thus, out of total expenditure claimed by the assessee of Rs.6,09,24,237/-, the DSIR has certified and quantified a sum of Rs.6,75,24,000/-. The Assessing Officer has allowed weighted deduction of 200% under section 35(2AB) on the basis of certificate issued by DSIR in form 3CL and accordingly, disallowed a sum of Rs.41,52,000/- out of total deduction claimed by the assessee u/s.35(2AB) of the Act. Further, the assessee has also claimed 100% deduction of R&D expenditure incurred towards building construction amounting to Rs.1,02,85,856/-. Since the capital expenditure is not entitled for weighted deduction u/s.35(2AB) of the Act, the Assessing Officer has disallowed capital expenditure on R&D on building amounting to Rs.1,02,85,856/-.

The learned AR for the assessee submitted that learned CIT(A) has erred in confirming disallowance of capital expenditure on R&D u/s.35(1)(iv) amounting to Rs.1,02,85,856/- without appreciating fact that any capital expenditure, which was not claimed as deduction u/s.35(2AB) can be claimed u/s.35(1)(iv) of the Act.In this regard, the assessee has relied upon decision of Hon’ble Madras High Court in the case of M/s.Tube Investments Ltd. Vs. CIT 216 ITR

The AR further submitted that as regards disallowance of weighted deduction claimed u/s.35(2AB), any uncertified portion of R&D expenditure is not eligible for only weighted deduction u/s.35(2AB) of the Act. However, actual expenditure incurred towards R&D expenditure can be claimed as deduction either u/s.35(1) or 37 of the Act, because said expenditure was wholly and exclusively incurred for business of the assessee.

The learned DR, on the other hand, strongly supporting order of the Assessing Officer submitted that authority for certifying eligible deduction u/s.35(2AB) is DSIR and hence, the Assessing Officer has rightly allowed weighted deduction u/s.35(2AB),as per certificate of DSIR in Form 3CL. As regards disallowance of capital expenditure on R&D Building, the Assessing Officer has brought out clear facts to the effect that any expenditure relating to R&D building is claimed u/s.35(2AB) cannot be considered u/s.35(1)(iv) of the Act.

We have heard both the parties, perused materials available on record and gone through orders of the authorities below. As regards disallowance of uncertified portion of expenditure incurred towards R&D u/s.35(2AB) of the Act, we find that although, DSIR has not certified expenditure for the purpose of section 35(2AB), but the assessee has placed on record various evidences to prove that said expenditure is incurred wholly and exclusively for purpose of business of the assessee. Once a particular expenditure was incurred wholly and exclusively for purpose of business of the assessee, then such expenditure needs to be allowed either under specific head of expenditure or under residual head of expenditure u/s.37(1) of the Act. If any expenditure is not certified by DSIR in Form 3CL, then the same is not entitled for weighted deduction u/s.35(2AB) of the Act, but there is no restriction under law to claim such expenditure u/s.35(1) / 37(1) of the Act.

As regards disallowance of capital expenditure incurred on R & D building u/s.35(1)(iv), it was claim of the assessee that capital expenditure on R&D building has not been claimed u/s.35(2AB) of the Act and hence, same is very much allowable u/s.35(1)(iv) of the Act. We find that the Hon'ble Jurisdictional High Court of Madras in the case of M/s. Tubes Investments Ltd vs. CIT(supra), has considered an identical issue and held that in order to claim deduction u/s.35(1)(iv), approval of the authority prescribed u/s.35(2AB) is not an essential pre-requisite, if it is found that a part of the claim falls within ambit of section 35(1)(iv) of the Act. Further, mere fact of a claim not having been found admissible u/s.35(2AB) will not constitute a bar to allow an expenditure u/s.35(1)(iv), if that expenditure is capital expenditure and falls squarely within ambit of section 35(1)(iv) of the Act. In this case, the assessee has filed necessary evidence to prove that capital expenditure on R&D building has not been claimed u/s.35(2AB) of the Act.

The next issue that came up for our consideration from ground no.3 of revenue appeal for assessment year 2013-14 is disallowance of balance 50% of additional depreciation claimed on assets acquired and put to use for less than 180 days during the preceding previous years. The facts with regard to impugned dispute are that the assessee has acquired and put to use certain new plant and machinery, which are eligible for additional depreciation of 20%, as per clause (iia) of section 32(1) of the Act. Since assets acquired and put to use are used for less than 180 days in the year of acquisition, the assessee has claimed 50% of actual depreciation and balance 50% of depreciation was brought forward and claimed during impugned assessment year. The Assessing Officer has disallowed balance 50% of additional depreciation claimed on plant and machinery on the ground that there is no provision, under the Act to carry forward additional depreciation to subsequent years.

The learned DR submitted that the learned CIT(A) has erred in directing the Assessing Officer to allow balance of additional depreciation carry forward from earlier assessment year, without appreciating fact that as per proviso to section 32(1)(iia) of the Act, where an asset is acquired and put to use for the purpose of business for a period of less than 180 days in that previous year deduction under this sub-section will be restricted to 50% of such asset.

The learned AR for the assessee, on the other hand, strongly supporting order of the learned CIT(A) submitted that additional depreciation should be allowed based on the amount of investments made in new plant and machinery and further, if such plant and machinery was used for less than 180 days during preceding previous year, then balance 50% of additional depreciation should be allowed in subsequent years, because there is no bar under the Act to claim full additional depreciation, if other conditions prescribed for claiming additional depreciation are fulfilled.

We have heard both the parties, perused material available on record and gone through orders of the authorities below. There is no dispute with regard to fact that the assessee has acquired additional plant and machinery over and above prescribed limit, which is eligible for 20% additional depreciation as per section 32(1(iia) of the Act. The only dispute is with regard to period of acquisition of said asset and claiming depreciation as per proviso (iia) to section 32(1) of the Act. The Assessing Officer has disallowed balance 50% of additional depreciation on the ground that there is no provision under the Act to carry forward balance additional depreciation to subsequent years. It was claim of the assessee that additional depreciation should be allowed, if conditions prescribed for claiming additional depreciation are fulfilled. We find that the Hon’ble Karnataka High Court in the case of CIT Vs. Rittal India Pvt .Ltd. (2016) 380 ITR 423 (Kar) has considered an identical issue and held that if plant and machinery is eligible for additional depreciation u/s.32(1)(iia) and such plant and machinery is put to use for less than 180 days in said financial year, then balance of additional depreciation can be claimed in subsequent years. The Hon’ble Madras High Court in the cases of Brakes India Ltd. vs. DCIT (2017 – TIOL 710-HC- MAD-IT) and TVS Motors Company Ltd. Vs.ACIT (2017 – TIOL 553-HC-MAD-IT) has considered an identical issue and held that balance of 50% of additional depreciation can be claimed in subsequent years, provided conditions for claiming additional depreciation is satisfied. In this case, there is no dispute with regard to fact that assessee has satisfied conditions prescribed for claiming additional depreciation.

The next issue that came up for our consideration for assessment year 2013-14 and 2014-15 of assessee appeal is disallowance of various payments made to non-residents u/s. 40(a)(i) of the Act for non-deduction of tax deducted at source u/s.195 of the Act. The Assessing Officer has disallowed warehousing & logistic service charges paid to non-residents u/s. 40(a)(i) of the Act on the ground that the impugned payment is in the nature of fees for technical services and said payment is directly relatable to income earning activity situated in India and hence, it falls under definition of fees for technical services as defined u/s. 9(1)(vii)(b) of the Act. Similarly, the Assessing Officer has disallowed professional fees paid to Tileke & Gibbins International Ltd. towards professional services on the ground that said payment is in the nature of fees for technical services . Likewise, the Assessing Officer has disallowed payments made to Mr. Yoshikazu Tsuda towards consultancy charges by holding that period of stay of the consultant in India is more than 183 days and hence, same is taxable in India, as per section 9(1)(i) of the Act, since he becomesa resident in India u/s. 6(1)(a) of the Act. Similarly, for assessment year 2014-15, the Assessing Officer has disallowed rework charges and subscription charges paid to non-residents on the ground that payment is in the nature of fees for technical services, which falls under definition as per section 9(1)(vii)(b) of the Act . The Assessing Officer has also made disallowance towards fees paid to Michigan University and Centre for creative leadership towards tuition fee for course conducted by them to the employees of the assessee on the ground that same was covered by definition of royalty in Explanation 2 to section 9(1)(vi) of the Act. It was claim of the assessee before the Assessing Officer that payments to warehousing and logistic service charges and export commission is covered by Article 7 of DTAA and hence, which is in the nature of business profits and not liable to tax in India, consequently, requirement of deduction of TDS u/s.195 does not arise. The assessee further claimed that professional fees paid to Tileke & Gibbins International Ltd. is also covered by Article 7 as business profits and hence, is not taxable in India.

We have heard both the parties, perused material available on record and gone through orders of the authorities below. As regards warehousing and logistic service charges paid to four parties amounting to Rs.89,82,340/-, we find that warehousing & logistic service charges is covered by Article 7 of DTAA as business profits of the respective DTAAs and hence, is outside scope of definition of section 9(1)(vii)(b) of the Act. We further noted that in order to bring any payment within the ambit of royalty or fees for technical services under section 9(1)(vii)(b) of the Act, recipient of service should be made available for technical knowledge of such service . In this case, payments made by assessee towards warehousing and logistic service charges and also rework & subscription charges is a mere payment for rendering services by non-residents in the territory of outside India. Therefore, we are of the considered view that said payment is not in the nature of fees for technical services which can be brought to tax u/s.9(1)(vii)(b) of the Act.

As regards professional fees paid to Tileke & Gibbins International Ltd., we find that Article 12 of the India-Thailand DTAA does not cover fees for technical services. Further, payment made for professional services is covered by Article 7 as business profits and hence, is not taxable in India, because service provider does not have permanent establishment in India. Since the payment is not liable tax in India, the assessee is not required to deduct TDS as per section 195 of the Act and consequently, payments cannot be disallowed u/s.40(a)(i) of the Act.

Insofar as payment made to Mr.Yoshikazu Tsuda towards consultancy charges amounting to Rs.87,056/-, we find that the assessee has placed on record necessary evidence to prove that Consultant stay in India is less than 183 days and hence, said payment is not taxable in India, as per Article 14 of DTAA between India and Japan. Since payment is outside scope of tax in India, the assessee is not required to deduct TDS u/s.195 of the Act and consequently, said payment cannot be disallowed u/s.40(a)(i) of the Act.

As regards tuition fee paid to Michigan University and Center for Creative Leadership for assessment year 2014-15 amounting to Rs.11,79,390/-, we find that payments made for teaching in/by educational institutions are excluded from the definition of fees for technical services as per Article 12(5)(c) of respective DTAAs and hence, said payments are outside scope of taxation in India. Since the impugned payment is not liable to tax in India, the assessee is not liable to deduct TDS u/s.195 of the Act and consequently, payment cannot be disallowed u/s.40(a)(i) of the Act. The Assessing Officer as well as the learned CIT(A) without appreciating relevant facts has simply made additions towards various payments u/s.40(a)(i) of the Act. Hence, we direct the Assessing Officer to delete additions made towards payments made to non-residents u/s.40(a)(i) of the Act.

In the result, appeals filed by Revenue and the assessee for assessment years 2013-14 & 2014-15 are partly allowed.