By TIOL News Service

MUMBAI, DEC 09, 2015: THE issue is - Whether, for purpose of quantifying interest expenditure to be disallowed under Rule 8D, bank & other financial charges are to be excluded. YES is the answer.

Facts of the case

The assessee company is engaged in the business of manufacturing/marketing of mosquito repellent, mats, coils, mat fitting machine, air freshener and trading of hair care and household care products. For the year under consideration, the assessee-company filed its return of income declaring a total income of Rs.52,87,89,996/-, which was subject to a scrutiny assessment. In an assessment finalized under section 143(3) r.w.s. 144C(1) dated 30/12/2013 in accordance with the directions of the DRP dated 30/10/2013, the total income has been assessed at Rs.68,31,94,653/-, after making certain additions/disallowances, which were subject matter of controversy in the cross appeals of the assessee and the Revenue.

Disallowance u/s 14A

Assessee was found to have earned exempt dividend income, and in the draft assessment order dated 28/02/2013 passed u/s 143(3) r.w.s. 144C(1), the AO applied the provisions of Rule 8D and computed a disallowance of Rs.17,40,847/-. The DRP directed AO to reduce the bank charges and other financial expenses, which were not in the nature of interest, while computing the disallowance under rule 8D(2)(ii) of the Rules. Accordingly, in the final assessment order dated 30/12/2013, the disallowance was scaled down to Rs.14,25,150/-. Assessee submitted that in the preceding AY 2008-09, similar issue came up before the Tribunal and vide order dated 11/3/2015 in ITA No.598/Mum/2013 = 2015-TII-108-ITAT-MUM-TP, the matter has been restored back to the file of the AO.

Disallowance for reimbursement of advertisement expenses

Assessee company paid Rs. 20,00,000/- to Koninklinjke Douwe Egberts, Netherlands, towards reimbursement of advertising expenses. TPO observed that the assessee could not substantiate the basis on which the amount was reimbursed to AE. He determined the ALP of the said payment at 'Nil' on account of non-furnishing of any supporting document. The AO passed the draft assessment order in conformity with the order of the TPO. Before the DRP, assessee raised objections against the proposed disallowance by contending that –(a) it paid the impugned amount as its share in the advertisement expenses incurred at the group level; and (b) the reimbursement of cost was based on assessee-company's proportionate share in net sales value of the global business, in relation to the costs of such services incurred under each of the brands of the group. The DRP affirmed the addition proposed by AO for the reason that the assessee had failed to establish how the price of Rs.20,00,000/- was determined by it as an ALP. Additionally, the DRP observed that the assessee company had failed to demonstrate that the amount was incurred wholly and exclusively for the purpose of business and thus, it was disallowable u/s 37(1) also. On the basis of the aforesaid reasons, the AO had made an addition of Rs.20,00,000/- in the final assessment order dated 30/12/2013.

Recomputation of profits of manufacturing units

The assessee company has various manufacturing units spread over Assam, Meghalaya, Tamil Nadu, Pondicherry, etc. Some of the manufacturing units are eligible for deduction under section 80-IC/80-IE of the Act @100% and some are eligible for deduction under section 80-IB @ 30% and some of the units are non-eligible. In this context, the AO examined the profit to sale ratio of the different units and found that the profit margin of the two units situated at Guwahati was abnormally high as compared to the profit margin of the units situated at Pondicherry. Therefore, in the draft assessment order dated 28/2/2013, the claim for deduction under section 80-IC in respect of the two units in Guwahati was allowed to the extent of Rs.8,36,17,721/- as against the claim of Rs.61,15,40,758/- made by the assessee, thereby resulting in the disallowance of the claim u/s 80-IC to the extent of Rs. 52,79,23,037/-. Before DRP, assessee pointed out that the action of the AO was misplaced in as much as the AO mistakenly assumed that Guwahati unit was manufacturing mosquito repellent coils, whereas the Guwahati unit was manufacturing mosquito repellent mats and liquid, which was not comparable with the financial results of Pondicherry unit, which was manufacturing mosquito repellent coils. The assessee also pointed out before the DRP that the adjustment was proposed by the AO without appreciating the submissions made and by merely following the stand in the assessment year 2008-09. The DRP found that the aforesaid dispute was similar to the AY 2008-09 and it upheld the stand of the assessee. As per DRP, on facts, such an addition was not merited. Accordingly, in the final assessment order no such disallowance has been made but Revenue is in appeal against such direction of the DRP.

Having heard the matter, the Tribunal held that,

Disallowance u/s 14A

++ regarding the issue in Revenue's appeal in Cross-Ground Nos. 2.& 2.1, the DRP directed the Assessing Officer to exclude bank charges and other financial charges while determining the figure of the interest expenditure for quantifying the disallowance under Rule 8D of the Rules. The Revenue has challenged the aforesaid direction of the DRP. After considering the rival stands, we find no infirmity in the decision of the DRP, which is in conformity with the phraseology of Rule 8D(2)(ii) of the Rules. As a result, the Ground Nos. 2 & 2.1 raised by the Revenue are dismissed;

Disallowance for reimbursement of advertisement expenses

++ we find that the prime reason weighing with the income tax authorities to disallow the impugned sum was failure on the part of the assessee to establish the incurrence of such expenditure wholly and exclusively for the purposes of business. Apart therefrom, the TPO has also recorded a finding that the assessee-company could not substantiate the basis on which the impugned amount of Rs.20.00 lacs has been reimbursed to its AE, so as to determine as to how the stated expenditure of Rs.20.00 lacs could be considered as an ALP. The explanation rendered by the assessee before us is on the same lines as was made before the lower authorities. In our considered opinion, the explanation rendered by the assessee continues to suffer from the same vices, as has been noted by the income tax authorities. Apart from making bald assertions, there is no cogent material brought on record by the assessee to substantiate the incurrence of the impugned expenditure wholly and exclusively for the purposes of business and, thus, such an expenditure is clearly disallowable in terms of section 37(1) of the Act. On this preliminary aspect itself we uphold the stand of the AO and accordingly, the assessee fails in Ground of appeal No.6;

Recomputation of profits of manufacturing units

++ we find that the factual findings of the DRP clearly belie the action of the AO in partially denying the claim of deduction under section 80-IC in respect of the two units at Guwahati manufacturing mosquito repellent mats and liquid. Factually speaking, the results of the Guwahati unit could not be compared with the results of the Pondichery unit since the products being manufactured at two places were different. The Pondichery unit was manufacturing mosquito repellent coils, whereas the Guwahati units were manufacturing mosquito repellent mat and liquid and, therefore, the two situations were not comparable. Furthermore, we notice that in the current year the DRP has been guided by the detailed discussions made by it in its order for the assessment year 2008-09 dated 7/09/2012, a copy of which has also been placed in the Paper Book filed before us at pages 148 to 157. The relevant discussion in the order of DRP reveals that apart from the difference in the products being manufactured, it has also been brought out that the manufacturing process involved in manufacture of mosquito repellent coils is different than the process required for manufacturing mosquito repellent mat and liquid. These factual aspects have not been negated by the Revenue and, therefore, the decision of the DRP cannot be faulted with. Apart from the aforesaid, we have carefully perused the discussion made by the AO in the draft assessment order and find that no specific reason has been propounded to demonstrate that the profits declared in the Guwahati unit was otherwise untrue except by comparing it with the level of profit of the Pondicherry unit, which ostensibly was not manufacturing the same commodity. Under these circumstances, in our view, there is no merit in the ground raised by the Revenue challenging the direction of the DRP for allowing the claim for deduction under section 80-IC for Guwahati units in accordance with the claim made in the return of income. Thus, Revenue fails on Ground of appeal No.3 also. In the result, whereas the appeal of the assessee is partly allowed, that of the Revenue is dismissed.

(See 2015-TIOL-2037-ITAT-MUM)