DCIT, NEW DELHI vs. M/S. MAHLE FILTER SYSTEMS PVT. LTD., NEW DELHI

During the course of scrutiny assessment proceedings, the Assessing Officer noticed that the assessee has debited Rs. 3,14,148/- as gift. The Assessing Officer was of the opinion that the payment of gift cannot be said to be incurred wholly and exclusively for the purpose of business as per the provisions of section 37(1) of the Act. The Assessing Officer found that the assessee has disclosed 50% as Fringe Benefit and accordingly, disallowed the balance 50% of the expenditure.

The assessee carried the matter before the CIT(A) but without any success.

Before us, the ld. AR vehemently contended that since the assessee has paid Fringe Benefit Tax [FBT], therefore, expenditure cannot be disallowed. It is the say of the ld. AR that once a FBT has been paid, no disallowance can be made.

On the other hand, the ld. DR strongly supported the findings of the AO.

We have given a thoughtful consideration to the orders of the authorities below. The Assessing Officer, at para 11.1 of his order, has himself accepted that 50% of the gift as eligible expenditure and, therefore, we fail to understand why balance 50% has been disallowed. Moreover, there is no dispute that the assessee has paid FBT @ 50%. Now it is a settled position of law that no disallowance can be made once expenses are exigble to FBT. Our view is supported by the decision of the co-ordinate bench in the case of BG Shirke Construction Technology [P] Ltd Vs. CIT /2010 vide order dated 17/07/2012 wherein it has been held as under:

Respectfully following the same, we direct the Assessing Officer to delete the addition of Rs. 1,57,074/-.

Ground No. 3 relates to the treatment of ‘rental income’ as ‘income from other sources’.

While scrutinising the Return of Income, the Assessing Officer noticed that the assessee has disclosed rental receipts from its factory building at Gurgaon amounting to Rs. 47,26,510/- and after deducting 30% as per provisions of section 24 of the Act, income from house property has been disclosed at Rs. 33,08,557/-. The Assessing Officer found that the assessee has entered into a ‘Leave and License’ Agreement and not ‘Lease Rental’ Agreement. According to the Assessing Officer, ‘Lease Rental Agreement’ is different from ‘Leave and License Agreement’ and therefore, rental income received by the assessee cannot be treated as income from house property. Accordingly, the Assessing Officer taxed the entire receipts as income from other sources.

Aggrieved, the assessee carried the matter before the CIT(A), but without any success.

Before us, the ld. AR stated that by letting out its factory building at Gurgaon, the assessee has received rental income and the same has to be taxed under the head ‘income from house property’ eligible for deduction @ 30%.

On the other hand, the ld. DR supported the findings of the Assessing Officer and reiterated that ‘leave and licence agreement’ is not similar to ‘lease rental agreement’.

We have given a thoughtful consideration to the orders of the authorities below. There is no dispute that the factory building owned by the assessee was let out to M/s Anand Engines Component Ltd., for which the assessee earned rental income of Rs. 47.26 lakhs. Whether there existed ‘leave and licence’ agreement and not ‘rental agreement’ would not change the colour of receipts in the hands of the assessee. The undeniable fact is that the assessee has earned rental income from letting out its property and the same has to be taxed under the head ‘income from house property’ eligible for deduction as per the provisions of section 24 of the Act. We, accordingly, direct the Assessing Officer to tax rental income under the head ‘income from house property’ as per provisions of law. Ground No. 3 is, accordingly, allowed.

Ground No. 4 relates to MAT credit claimed amounting to Rs. 72,30,482/-.

We are of the considered opinion that MAT credit has to be allowed to the assessee as per the provisions of law and after considering the provisions and the assessment history of the assessee. We, accordingly, direct the Assessing Officer to allow MAT credit as per provisions of law after considering the provisions and the assessment history of the assessee. Ground No. 4 is allowed for statistical purposes.

As a result, the appeal filed by the assessee is partly allowed for statistical purposes.

Representatives of both the sides were heard at length, the case records carefully perused and with the assistance of the ld. Counsel, we have considered the documentary evidences brought on record in the form of Paper Book in light of Rule 18(6) of ITAT Rules. Judicial decisions relied upon were carefully perused.

First ground raised by the assessee relates to the deletion of disallowance of Rs. 2.96 crores u/s 80IC of the Act.

Elements of Ground No. 1 and Ground No. 4 have the same issue.

We are of the considered opinion that the Assessing Officer has not appreciated the underlying facts in issue in true perspective. Correct facts are that the manufacturing unit at Parwanoo, Himachal Pradesh was eligible for deduction u/s 80IC of the Act. The said undertaking belongs to M/s Purolotor India Ltd. The Assessing Officer proceeded by wrong assumption of facts that M/s Purolator India Ltd got amalgamated with M/s Mahle Filter Systems [India] Ltd whereas the fact of the matter is that Mahle Filter systems [India] Ltd was the transferor company and amalgamated with M/s Purolator India Ltd which was the transferee company by order of the Hon'ble High Court of Delhi in the matter of Scheme of Amalgamation of Company Petition No. 53/2008 connected with Company Application No. 172/2007. Subsequently, the name of M/s Purolator India Ltd was changed to M/s Mahle Filter Systems [India] Ltd.

According to the ld. DR, this is nothing but a sham transaction to take the benefit of section 80IC of the Act. We do not find any force in this contention of the ld. DR. The Scheme of Amalgamation has been approved by the Hon'ble High Court of Delhi and, therefore, by no stretch of imagination, the transaction of amalgamation can be considered as a colourable device or a sham transaction. There is no dispute that the manufacturing unit at Parwanoo was eligible for deduction u/s 80IC of the Act the same always belonged to the assessee, previously known as M/s Purolator India Ltd.

Provisions of section 80IA(12) of the Act have been wrongly applied by the Assessing Officer because the said provision is applicable where any undertaking which is entitled to the deduction u/s 80IA is transferred before expiry of the period specified therein to another India company in a scheme of amalgamation or demerger, whereas the facts of the case in hand show that the manufacturing unit at Parwanoo, HP continued to belong to the assessee and it is only M/s Mahle Filter systems [India] Ltd which amalgamated with the assessee M/s Purolator India Ltd and only the name has been changed to M/s Mahle Filter systems [India] Ltd. Accordingly, even consequent to the amalgamation, the unit at Parwanoo was still owned and managed by the assessee in the same manner as it was managed prior to amalgamation. Considering the correct facts in true perspective, we do not find any error or infirmity in the findings of the CIT(A). Ground Nos. 1 and 4 raised by the revenue stand dismissed.

Ground No. 2 relates to the deletion of disallowance of Rs. 64,23,771/- for the purpose of calculating deduction u/s 80IC of the Act.

During the course of scrutiny assessment proceedings, on perusal of the profit and loss account of the Purwanoo Unit, the Assessing Officer observed that the assessee has disclosed ‘Other Income’ of Rs. 64,23,771/- which consisted of rent receipts, interest receipts, scraps as well as discount received and foreign exchange gain. The Assessing Officer was of the firm belief that the expression ‘derived from’ in the language of section 80IC of the Act shows that the income must directly result from the eligible business and hence it should have a direct nexus with the eligible business. The Assessing Officer, accordingly, disallowed the claim of deduction u/s 80IC of the Act.

The assessee carried the matter before the CIT(A) and furnished the details of ‘Other income’ which read as under:

Out of the above, rental income and income on fixed deposits was offered to tax under the head ‘Income from other sources’. Other items of income are inevitably linked and have direct nexus to the industrial undertaking. Therefore, these incomes are eligible for benefit of deduction u/s 80IC of the Act. We, therefore, do not find any reason to interfere with the findings of the CIT(A). Ground No.2 is dismissed.

Ground No. 3 relates to the enhancement of deduction claimed u/s 80IC from Rs. 2,64,42,825/- to Rs. 2,96,26,413/-.

During the year under consideration, the assessee has transferred stock amounting to Rs. 25.55 crores at final selling price to the Head Office from where the goods were sold to retail customers. The cost incurred by the Head Office in the undertaking such sales were allocated to the Parwanoo unit. While scrutinising the return of income, the Assessing Officer was of the firm belief that the assessee has shifted the profit of the head office to the Parwanoo unit. Since the head office may have incurred such expenses in selling such goods, the Assessing Officer was of the opinion that the stock transfer price is required to be recomputed to derive correct profit from the undertaking as per provisions of section 80IC(7) r.w.s 80IA(10) of the Act. Accordingly, the Assessing Officer recomputed the profit derived from the Parwanoo unit at Rs. 8 crores and recomputed the deduction u/s 80IC of the Act.

Before the CIT(A), the assessee strongly contended that the finding of the Assessing Officer regarding net profit earned by the head office is on the basis of assumption that sale is accounted in the head office. It was explained that the head office is only facilitating the sales for respective units. It was further explained that he expenses incurred in the head office are allocated to three units based on their ratio of sale. The assessee also filed comparative analysis.

After considering the facts, detailed submissions and accounts, the CIT(A) was convinced that the Head office has allocated the expenses and, therefore, no addition is called for and deleted the disallowance made by the Assessing Officer.

The ld. DR repeated the finding of the Assessing Officer.

Per contra, ld. AR reiterated what has been stated before the lower authorities.

The allocation of expenditure can be understood from the following chart:

The above extracted charts are part of the annual audited accounts of the assessee. It can be seen from the above chart that the head office has allocated the expenditure to three units based on their ratio of sale. Therefore, the findings of the Assessing Officer are ill- founded. We, accordingly decline to interfere with the findings of the CIT(A). Accordingly, Ground No. 3 stands dismissed.

Ground No. 5 relates to the deletion of disallowance of Rs. 33,27,126/- on account of royalty payments.

The Assessing Officer noticed that the assessee has claimed royalty payment of Rs. 33,27,126/- to the following two persons of the Mahle Group:

The assessee strongly agitated the matter before the CIT(A) and explained that it is engaged in the business of manufacturing and trading of automotive and industrial filters where technology is constantly changing and evolving and for which it entered into Technical Assistance Agreement with Mahle Filter Systems GmbH and Mahle Tennex Corp, Japan for obtaining know-how to manufacture automotive and industrial accessories, for which it paid royalty of Rs. 32,34,071/-. It was explained that pursuant to such agreement, the assessee only acquired limited rights to use the information for the purpose of production of the products in India. It was brought to the Notice of the CIT(A) that grant of license is non transferable and without the right to sublicense. Since the payment of royalty in terms of the agreement was for mere use of the technical know-how, and day to day technical assistance not resulting in any enduring benefit in capital field or acquisition or creation of capital asset, the same was consistently treated as revenue expenditure.

After considering the facts and detailed submissions of the assessee and after drawing support from various judicial decisions discussed by the CIT(A) in his appellate order, the CIT(A) was convinced that the payment of royalty in terms of agreement was for use of technical know-how and technical assistance, which was necessary to carry on and run the business from day to day. The CIT(A) was of the opinion that such expenditure is related to carry on business and is for efficient running of business for better profitability. Therefore, the same is clearly allowable as revenue expenditure.

Before us, the ld. DR read the relevant operative part of the assessment order.

On the other hand, the ld. AR reiterated what has been stated before the lower authorities.

We have given a thoughtful consideration to the orders of the authorities below. The undisputed fact is that by virtue of agreement with its AEs, the assessee has only acquired limited rights to use the information for the purpose of production of products in India. There is also no dispute that the assessee merely acquired a right to use technical information provided by the owners of the technical know- how. The ownership/proprietary rights in the technical know-how continue to vest in lithe censor and the assessee is not authorised to transfer, assign or convey the know how/technical information to any third party and therefore, the assessee acquired a limited right to use and exploit the know-how. In our considered opinion, payment of royalty was for mere use of technical know-how, not resulting in any enduring benefit in the capital field, the same has to be allowed as revenue expenditure.

Similar view was considered by the Tribunal in the case of Hero Motocorp in ITA No. 5130/DEL/2012. The relevant findings read as under:

This decision of the co-ordinate bench has been upheld by the Hon'ble High Court of Delhi in 372 ITR 481 wherein the Hon'ble High Court has, in detail, considered the decision given in the case of J.K. Synthetics [supra]. Considering the facts of the case in totality, we do not find any reason to interfere with the findings of the CIT(A). However, depreciation allowed by the Assessing Officer has to be withdrawn since the impugned payment is being allowed as revenue expenditure. Ground No. 5 of the revenue stands dismissed.

In the result, the appeal of the assessee in is partly allowed for statistical purposes and that of the Revenue in is dismissed.