While granting relief to M/s Hero Moto Corp Ltd, the New Delhi Bench of Income Tax Appellate Tribunal ( ITAT ) held that, With regard to the ground relating to addition of freight inward/ import clearing expenses to cost of closing inventory, the Tribunal has deleted the addition on the ground of materiality i.e. a change in the method of accounting resulted in loss of revenue as the opening stock would require similar adjustment and the cascading effect will be loss to revenue.
In a 127 page order, the ITAT observed that, With regard to the ground relating to addition on account of cost of rejection of semi-finished goods and obsolete items to the value of closing stock was adjudged to be deleted as it was held that such loss was not normal loss and only normal loss is to be added to the cost of closing inventory in consonance with the accounting standard.
The Tribunal also held that keeping into consideration the large size of the assessee company it cannot be expected to keep quantitative tally of miniscule items. Also, it is not practically possible to consider and provide for all expenses, in absence of relevant details/material/information for various reasons like, non-receipt of bills/invoices from the vendors, the contract terms with vendors not being settled, disputes in relation to bills received, services contracted by zonal/regional/branch officer not intimated to the head office, etc.
“The assessee does not procure such components from any other vendor. The Tribunal held that the said parties are not related to assessee, in terms of the provisions of section 40A(2)(b) of the Income Tax Act and hence the ground was allowed in favor of the assessee”, the Tribunal said.
Advisory services availed from Hero Corporate Services Ltd. were held to have a nexus with the business of the assessee. The addition was hence directed to be deleted.
On the ground relating to TDS on quarterly target and turnover discount and Sales Discount, the assessee incurred expenditure on account of various incentives/discounts offered to dealers under various schemes on purchase of spare parts/vehicles from the assessee. It was held that since the assessee had permitted the distributor to sell its products in a specified area. The distributor was to purchase products at a pre- determined price from the assessee for selling them. Both the assessee and the distributor had been collecting and paying their sales tax separately.
With respect to royalty expenditure and model fee, it was held that no proprietary rights in the know how vested in the assessee. The assessee being a mere licensee with limited rights to use the technical assistance during the currency of the agreement, there is no explicit or implied intention to transfer or create ownership in the technical know-how/technical information in the assessee. Hence, the above expenditure incurred by the assessee was allowable revenue deduction.
The depreciation on model fees paid in consonance with the collaboration agreement to obtain design/ know-how to manufacture a new model of two-wheeler was directed to be deleted on the ground that the expenditure was incurred on new model fees prior to the commencement of production of new models of two-wheelers.
On account of the expenses for Corporate Social Responsibility (CSR) which stood debited as “community development expenses” it was held that the same is an allowable business deduction since the role of the assessee was not restricted to merely earning profit, but also discharging certain community related expenses.
The last ground was regarding the disallowance u/s 80IC on account of violation with respect to inter unit transfer. The assessee for the purpose of establishing a factory/plant, as per the Factory Act, 1948, was required to obtain permission/license from the appropriate authority, in accordance with local State Government Factory Rules, i.e., Uttar Pradesh Factory Rules, 1950, which were applicable in the present case. No separate license was required to carry on the business manufacture of two wheelers as also to claim deduction for such activity under section 80IC of the Income Tax Act. Hence, it was held that the assessee had given all the necessary details and fulfilled all statutory conditions for the claim of deduction under Section 80IC of the Act. Furthermore, for the purpose of computing market price of inter-unit transfer of goods, when the non-eligible units procured goods at market price from thirdparty vendors and supplied the same to the eligible unit at the same purchase price as increased by the applicable freight cost, no further substitution of such price is warranted in terms of section 80IA(10) of the Income Tax Act and the transaction was a genuine business transaction borne out of commercial expediency.
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