DCIT, NEW DELHI vs. M/S MINDA AUTOGAS LTD., NEW DELHI

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ITA 3644/DEL/2012Status: DisposedITAT Delhi17 March 2016AY 2008-098 pages
AI SummaryDismissed

What did the Tribunal hold?

The Tribunal upheld the decision of the CIT(A) and dismissed the appeal of the Revenue. The Tribunal noted that the CIT(A) had dealt with the issue at length, following his own order for AY 2007-08. The CIT(A) found that the reduction in the royalty rate from 5% to 2.5% indicated the genuineness of the commercial arrangement and that it was not an attempt to pass profits to M/s Minda Industries Ltd. The CIT(A) also agreed with the assessee that the AO's reasoning for invoking Section 40A(2)(b) lacked legal backing, as both entities were taxable in the same tax bracket. The Tribunal observed that the Department had not presented any fresh material to controvert the CIT(A)'s findings and there was no change in the factual matrix compared to AY 2007-08. Therefore, the Tribunal found no reason to interfere with the CIT(A)'s findings and directed the deletion of the disallowance.

What were the facts?

The assessee, M/s Minda Autogas Ltd. (MAGL), engaged in manufacturing CNG/LPG kits, filed its return for AY 2008-09. The Assessing Officer (AO) completed the assessment under Section 143(3) of the Income Tax Act, 1961, making additions including Rs. 1,81,91,663 on account of royalty payments and Rs. 77,517 on account of depreciation on printers. The assessee appealed to the CIT(A), who deleted all three additions. The Department (Revenue) appealed to the ITAT against the deletion of the royalty payment addition and the printer depreciation addition. The Revenue did not press the ground related to printer depreciation. The core dispute concerns the disallowance of royalty payments made by MAGL to M/s Minda Industries Ltd. (MIL).

What were the issues?

1. Whether, on the facts and in the circumstances of the case and in law, the learned CIT (Appeals) has erred in deleting the addition of Rs. 1,81,91,663 out of royalty payments, invoking the provisions of Section 40A(2)(a)/(b) of the Income Tax Act, 1961? Assessee's contentions: The assessee argued that the royalty payment was a genuine business arrangement based on commercial and business considerations. The reduction in royalty rate from 5% to 2.5% during the year indicated it was not a device to pass on profits to a group company. The AO wrongly invoked Section 40A(2)(b) as both entities were large tax-paying companies, taxed at the same rate and assessed in the same Range-6. The businessman decides what is required for business, and the AO should only check if expenses were incurred wholly and exclusively for business. Reliance was placed on *Chandulal Keshavlal v. CIT*, *J.K. Woolen Mills v. CIT*, *Panipat Woolen & General Mills v. CIT*, *Sassoon J. David & Co. v. CIT*, and *S.A. Builders Ltd. v. CIT*. Revenue's contentions: The Revenue argued that the royalty payment was not a business expenditure because MAGL already had the 'Minda' prefix in its name, even when it was Minda Impco Ltd. Therefore, no payment was required for the goodwill or brand name of MIL. The expenditure was not incurred for earning revenue during the year and thus not allowable. The Revenue also pointed out that Mr. Nirmal K. Minda was a common director with substantial shareholding in both companies, and MIL had substantial interest in MAGL, suggesting a close relationship that negated the need for royalty payments to procure sales from Maruti Udyog Ltd. (MUL).

Which sections of the Income-tax Act were involved?

Section 40A(2)(a),Section 40A(2)(b),Section 2(24)(x),Section 143(1),Section 143(3)

AI-generated summary — verify with the full judgment below

Income Tax Appellate Tribunal, DELHI BENCH ‘E’ NEW DELHI

Before: SHRI J.S. REDDY

For Appellant: Shri P. Damkanunja, Sr. DR
For Respondent: Shri Pradeep Dinodia, CA, R.K. Kapoor, CA
Hearing: 23.12.2015

PER SUDHANSHU SRIVASTAVA, JUDICIAL MEMBER The present appeal has been preferred by the Department against the order passed by the Ld. CIT (A)-IX, New Delhi for assessment year 2008-09.

2.

The brief facts of the case are that the assessee is engaged in the business of manufacturing CNG/LPG Kits and other alternative fuel solutions for various OEMs and the replacement market. The company has been supplying LPG Kits to Maruti Udyog Ltd. The return of income in this case was filed on 25.9.2009 declaring an income of Rs.7,89,84,290/-. The case I.T.A. 3644/Del/2012 Assessment Year 2008-09 was processed u/s 143(1) of the Income-tax Act and subsequently selected for scrutiny.

3.

The assessee company was incorporated in India on July 24, 2004 in the name of M/s. Minda Impco Ltd., as a joint venture between the Minda Group of India and Impco of USA.

1.

The company was incorporated to manufacture and trade in CNG and LPG kits and parts thereof in the automotive sector. In the early part of 2006, the partnership broke and the stake from the foreign partner was acquired by the Minda Group. Consequently, the name of the company was changed to M/s. Minda Autogas Ltd., pursuant to a fresh Certificate of Incorporation issued by the Registrar of Companies on 5.9.2006.

4.

The assessment in this case was completed by the Id. AO u/s 143(3) of the Act vide order dated 02.12.2010 determining the total income at Rs.7,94,68,030/-. As per the computation of income appearing at the end of the assessment order, the following additional were made: i) On account of depreciation disallowed on Goodwill Rs.2,70,025/- ii) On account of disallowance on printers Rs. 77,517/- iii) On account of disallowance u/s 2(24)(x) Rs.1,36,797/- Total Taxable Income (Rounded off) Rs.7,94,68,030/-”

I.T.A. 3644/Del/2012 Assessment Year 2008-09

5.

Aggrieved, the assessee preferred an appeal before the First Appellate Authority in which all the three additions were deleted and the appeal of the assessee was allowed.

6.

Now, the Department is in appeal before us and has raised the following grounds of appeal:-

“1. The order of Learned CIT (A) is erroneous & contrary to facts & law. 2. On the facts and in the circumstances of the case and in law, the learned CIT (Appeals) has erred in deleting the addition of Rs. 1,81,91,663/- out of royalty payments. 3. On the facts and circumstances of the case and in law, the learned CIT (Appeals) has erred in deleting the addition of Rs. 77,517/- out of depreciation of printers.”

7. The Ld. DR, at the outset, submitted that ground no. 3 regarding depreciation on printers was not being pressed. Hence, the same is dismissed.

8.

The only issue remaining for adjudication now is the issue of royalty amounting to Rs. 1,81,91,663 disallowed by the Assessing Officer under the provisions of section 40A(2)(a)/(b) of the Income Tax Act, 1961. Ld. DR submitted that this payment is not business expenditure because Minda Autogas Ltd. already has title 'Minda' prefixed to it. This title was there even when it was I.T.A. 3644/Del/2012 Assessment Year 2008-09 functioning under the name of Minda Impco Ltd. So there is no question of making any payment for the Goodwill or Brand name of Minda Industries Ltd. As this expenditure has not been incurred for earning revenue during this year i.e. it has not been incurred for the business purpose it is not an allowable (MAGL) was incorporated in India on July, 2001 as Minda Impco Ltd. The name was changed to Minda Autogas Ltd. in F.Y. 2006-

7.

This is contrary to the submission of the assessee that it being a new entity, Maruti Udyog Ltd. (MUL) was reluctant to give orders to MAGL. It was further submitted that the fact is that it was only recently that MUL started manufacturing cars such as WagonR, Maruti Van etc. with factory fitted Autogas Kits. This is the reason that there was spurt in the sales of the same in this year. The Ld. DR submitted that the key person in both the companies i.e. MIL and MAGL is Mr. Nirmal K. Minda who is the common Director and has major share holding 22.05 percent.

Besides Minda Industries Ltd. has substantial interest in the company. It was further submitted that MUL has long and cordial relation with Minda Industries Ltd., knowing fully well that the Directors are common and it is the same group company with I.T.A. 3644/Del/2012 Assessment Year 2008-09 substantial interest of Minda Industries Ltd., there is no reason why MUL would hesitate to procure Gas kits from MAGL. The submission of the assessee is mere fiction and not a fact and therefore the disallowance u/s 40A(2)(a)/(b) was rightly made by the AO.

9.

The Ld. AR, in response, placed heavy reliance on the impugned order.

10.

We have heard the rival submissions and perused the documents on record. A perusal of the impugned order shows that the Ld. CIT (A) has dealt the issue at length in Paras 6.2 to a 6.6 of his order which are being reproduced below:-

“6.2 The appellant also filed a copy of the order passed by me for A.Y. 2007-08 in appeal no. 113/09-10, wherein this issue has been discussed in detail on pages 9 to 15 in para nos. 6.0 to 6.10. 6.3 on being asked about the reduction in the rate of royalty from 5% to 2.5%, the Id. AR submitted that in the A.Y. 2007-08, the rate of 5% was agreed because the initial efforts put in by M/s. Minda Industries Ltd. were much more to get an entry into Maruti Udyog Ltd. However, during the year under consideration, there were routine technical and supervisory services which were important for the appellant apart from continued patronage of Maruti Udyog Ltd. It was also explained that payment of reduced royalty @ 2.5% during the year, further proves that it is not a device to pass on the profits I.T.A. 3644/Del/2012 Assessment Year 2008-09 of the appellant to its group company i.e. M/s. Minda Industries Ltd. as has been alleged by the AO, but it is a genuine business arrangement acceptable to two entities on commercial and business considerations. The Ld. AR further argued that the AO merely proceeded to disallow the claim by holding that no expenditure was required for procuring sales from M/s Maruti Suzuki India Ltd. and has invoked the provisions of section 40A (2)(b) of the Act., The Ld. AR further submitted that it is for the businessman to decide as to what is required to be done for its business and the AO has only to see as to whether the expenses have been incurred wholly and exclusively for the business or not. The AR cited following judgments for this proposition of law:

(i) Chandulal Keshavlal v. CIT 38 ITR 601 (SC). (ii) J.K. Woolen Mills v. CIT 72 ITR 612 (SC). (iii) Panipat Woolen & General Mills v. CIT 103 ITR 66 (SC). (iv) Sassoon J. David & Co. v. CIT 118 ITR 261(SC). (v) S.A. Builders Ltd. v. CIT 288 ITR 1 (SC). 6.4 As regards applicability of section 40A (2)(b), the AR has submitted that these provisions have been wrongly invoked and the same are not attracted because M/s Minda Industries Ltd. is also a large tax paying company and both the entities are taxable at the same tax rate and are assessed in the same Range-6 of the Income Tax Department at New Delhi. xxxxxxxx

6.5 I have carefully gone through the written submissions of the AR, reasoning of the AO and the facts of the case on the record. Since, the facts and the circumstances I.T.A. 3644/Del/2012 Assessment Year 2008-09 under which the royalty was paid by the appellant to one of the group concerns as well as the reasoning of the Ld. AO and the submissions of the Ld. AR are identical. I find no reason to differ from my own decision on this issue in the appellant’s own case for the A.Y. 2007-08 in appellant no. 113/09-10. I also agree with the contention of the Ld. AR that reduction in the rate of royalty from 5% to 2.5% on the sales made to M/s Suzuki India Ltd. during the year also indicates the genuineness of commercial arrangement and it is not an attempt to pass profits from the appellant to M/s Minda Industrial Ltd. and further that the AO’s reasoning to invoke section 40A(2)(b) do not have legal backing because both the entities are taxable in the same tax bracket. 6.6. I may add that there is no change in law on this issue for the year under consideration. Therefore, following my own order for A.Y. 2007-08, the disallowance made by the AO in the body of the order, although not shown in the computation of income, as discussed above is directed to be deleted for the detailed reasons given in the aforesaid order. The ground no. 2 of the appeal is accordingly allowed.”

11.

It is seen that the Ld. CIT (A) has followed the first appellate order for AY 2007-08. The Department has not brought any fresh material on record to controvert the findings of the Ld. CIT (A). It is also not the case of the Department that there has been any change in the factual matrix of the case as compared to that of I.T.A. 3644/Del/2012 Assessment Year 2008-09 AY 2007-08.Hence, we find to reason to interfere with the findings of the Ld. CIT (A) and we uphold the same.

12.

In the result the appeal of the revenue is dismissed.

Order pronounced in the Open Court on 17th of March, 2016.

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