IN THE ITAT MUMBAI BENCH ‘B’
Mahindra Navistar Automotives Ltd.
Deputy Commissioner of Income-tax, 2 (2), Mumbai
AND SANJAY ARORA, ACCOUNTANT MEMBER
IT APPEAL NOS. 3324 & 4645 (MUM.) OF 2013
[ASSESSMENT YEARS 2007-08 AND 2008-09]
MAY 13, 2016
H.P. Mahajani for the Appellant. N.P. Singh for the Respondent.
Sanjay Arora, Accountant Member – These are a set of two Appeals by the Assessee agitating its assessments, i.e., as modified by the first appellate authority, for two consecutive years being assessment under the Income Tax Act, 1961 (‘the Act’ hereinafter) for the assessment years (A.Ys.) 2007-08 and 2008-09. The appeals raising common issues were listed for and are accordingly heard together, and are being disposed of, by the common, consolidated order.
2. Ground 1 for both the years relates to the disallowance of claim for deduction of development expenditure u/s. 37(1) of the Act, or, in the alternative, u/s. 35(1) of the Act, allowing depreciation thereon instead. The said expenditure is admittedly toward setting up a project, i.e., a manufacturing facility (at Chakan, near Pune) for production of medium and heavy commercial vehicles (MCVs and HCVs), i.e., in gross tonnage categories of 9 MT to 49 MT. The expenditure, capitalized in books, was however claimed as deductible u/s. 37(1) as the company was already in the business of manufacture and sale of vehicles. That is, the entire activity of development of new types of vehicles constituted an integral part of its existing business and existing line of business. In the Revenue’s view, however, the expenditure was toward setting up a new, dedicated unit to roll out new types of vehicles, which commenced commercial production in May, 2010. The expenditure was accordingly capital expenditure, entitled to depreciation u/s.32(1)(i) of the Act. The company was here-in-before manufacturing only Light Commercial Vehicles (LCVs) (at Zaheerabad, Andhra Pradesh), and the new project entailed transfer of the technical know-how, again, a capital asset depreciable u/s. 32(1)(ii) and, accordingly, allowed depreciation thereon. At the outset, the ld. AR would concede that the issue stands squarely covered against the assessee by the order by the Tribunal in the case of its’ associate concern, i.e., Mahindra & Mahindra Ltd. v. Dy. CIT  54 SOT 146 (Mum.).
3. We have heard the parties, and perused the material on record.
In our view, the Revenue’s stand, upheld by the tribunal in the cited decision, is in consonance with the first accounting and legal principles. We, accordingly, endorse same. The Hon’ble Apex Court has time and again clarified that in the absence of any specific provision, it is the principles of commercial accounting that would hold (viz. Challapalli Sugars Ltd. v. CIT 98 ITR 167 (SC)). Accounting Standard (AS) 10 issued by ICAI, titled ‘Accounting for Fixed Assets’, clearly states that :
’20. The cost of a fixed asset should comprise its purchase price and any attributable cost of bringing the asset to its working condition for its intended use.
21. The cost of a self-constructed fixed asset should comprise those costs that relate directly to the specific asset and those that are attributable to the construction activity in general and can be allocated to the specific asset.’
Further, as depreciation is being already allowed on the said development expenditure from year to year, no separate direction to the Assessing Officer (A.O.) is called for. We decide accordingly, and the Revenue succeeds. The foregoing shall also dispose, in like manner, the claim for deduction u/s. 35(1) of the Act in respect of expenditure on R&D activity, on which depreciation stands nevertheless allowed by the Revenue. No separate arguments were in fact advanced before us in respect of this issue, constituting the second limb of the assessee’s Ground 1 for A.Y. 2007-08. We decide accordingly.
4. The only other and the second ground for both the years is the disallowance u/s. 40(a)(ia) on what is called ‘service coupon commission’ allowed by the assessee, a manufacturer and seller of commercial vehicles, to its’ authorized dealers. While the Revenue has made the disallowance – the non-deduction of tax at source being admitted, on the basis of application of section 194C of the Act to the impugned payments/credits, the assessee relies on the order by the Tribunal inHero Motorcorp Ltd. v. Addl. CIT  60 SOT 25 (Delhi – Trib.).
5. Before us, the ld. Authorized Representative (AR), the assessee’s counsel, would firstly take us through the relevant part (paras 4.3 and 4.4) of the impugned order, so as to inform us of the respective cases of both the sides. He would then place reliance on the order by the tribunal in the case of Hero Motocorp Ltd. (supra). The matter, he would continue, may be considered as settled, as far as the tribunal is concerned, in view of the said order by the tribunal, holding, in sum, that the services, being repairs, carried out by the authorized dealers (of the vehicle manufacturer- company) to the customer’s vehicles, paid for by them by service coupons, which stand paid for by the company (at fixed, predefined rates for different vehicles) on their presentation thereto by the dealers, is neither availed by the assessee nor can be regarded as payment for services to itself.
The ld. Departmental Representative (DR) would, on the other hand, place reliance on the orders by the Revenue authorities, further submitting that the tribunal’s order (supra) is rendered in the context of section 194J, which concerns payment for technical services, while the section invoked by the AO, and the disallowance as confirmed by the ld. CIT(A), is qua non-deduction of tax at source u/s. 194C.
6. We have heard the parties, and perused the material on record.
6.1 We would firstly be required to see if the tribunal’s order in Hero Motocorp Ltd. (supra) can be said to cover the assessee’s case in-as-much as, where it is found as so, we may not be required to issue any independent findings. We may firstly begin by reproducing the relevant paras of the impugned order, delineating the respective cases of both the sides, as under:
‘4.3 As regards service coupon commission disallowed by the AO u/s 40(a)(ia) r.w.s. 194C, the facts as stated by the appellant are as under :-
|(i)||Service coupon amount is fixed class of vehicle-wise. During 2006-07, only LCVs were sold for which the amount of service coupon per vehicle was Rs.2500, as already stated in our earlier communications.|
|(ii)||For HCVs, the sale of which started in subsequent years, the amount of service coupon is Rs.5000/- (Rs.6000/- from June’12 onwards).|
|(iii)||Accounting for service coupon amount happens as under:|
|(iv)||The value of service coupon recovered as part of the Sale Price shown in the Sales invoice is credited to an Income Account styled Service tax Coupon Account. This entry is passed at the time of recording sales to the dealer. A snap shot of the accounting entry passed in the SAP system is given below.|
|(v)||Since full amount of credit is already taken to the P&L Account at the time of booking the sale, a provision is made for the unexpired service coupons at the end of the year.|
|(vi)||In respect of free services the dealer is obliged to render only free service to the customer. In the case of service coupons the customer redeems the service coupon with the dealer on servicing the vehicle. Replacement of parts does not form part of free service. The service coupon is surrendered to the company for payment purposes.|
|(vii)||In the case of a vehicle covered under warranty, the customer brings the vehicle at dealer’s location for replacing the defective part. The dealer then replaces that spare-part from his own stock and uses his own labor for replacing same. Later, the dealer recovers cost of spare as well as labor cost from the assessee through a Warranty claim Debit Note. Presently the dealer can file his claim through the company’s portal which is subsequently settled by the company’s customer care department. Warranty claims when settled are debited to Warranty Provision account and credited to Dealer’s account.|
|(viii)||Where the vehicle is not in warranty, such costs are recovered from the customer.|
|(ix)||Thus the fact remains that the entire amount of recovery for service coupon is offered for tax at the time of booking the sale. A provision is made for unexpired service coupons at the end of the year. Value of such service coupons being part of the sale price itself, it is the customer himself who pays the dealer for the value of the service coupon when he buys the vehicle purchased by the dealer from the company. The provisions of s 194C are not therefore applicable. The dealer does not carry out any work for the company when he services the customer’s vehicle at his service station.|
|(x)||Snap Shot of the accounting entry passed in the SAP system is as under:|
|Augusta Motors Pvt. Ltd||579,943.13|
|Sales – Vehicle||445,022.00|
|Sales – Vehicle Service||2500.00|
|Sales – Vehicle – Ware||10,750.00|
|Vat Payable – Maharashtra||64,438.13|
|Service Coupon – Domes||2500.00|
|Coupon – Domestic||2500.00|
|Prov Warranty – Domestic||4500.00|
4.4 The facts of the case have been considered:
|•||A perusal of the aforesaid facts clearly shows that amount given by the manufacturer to the dealer in respect of free service coupon is fixed amount as per class of vehicle wise, i.e.,|
|(i)||LCVs – Rs. 2500/- per vehicle,|
|(ii)||HCVs – Rs. 5000/- per vehicle (Rs. 6000 from June 2012 onwards)|
|•||As per the contract, the dealer is obliged to render the requisite services against the free services coupons reimbursable to him at amount of Rs. 2500/- per LCV vehicle and Rs. 5000/- per HCV vehicle (Rs. 6000 from June 2012 onwards).|
|•||Therefore, the said payment of Rs. 2500/- per LCV vehicle and Rs. 5000/- per HCV vehicle (Rs. 6000 from June 2012 onwards), is for carrying out the work by way of contract between the assessee company and the dealer. Hence, a payment for works contract.|
|•||The appellant’s argument that the said amount represents part of the price at which it sells its vehicles to the dealers is not maintainable under the facts and circumstances of the case.|
4.6 Since the payment of Rs.213,46,000/- is in the nature of payment to contractor for work assigned by the assessee company to the dealer – the same is certainly covered u/s. 40(a)(ia) r.w.s. 194C.
4.7 The payment of Rs.213,46,000/- made by the appellant to the dealers being in violation of sec. 40(a)(ia) r.w.s. 194C – the disallowance made by the AO is upheld.’ [Emphasis, Ours]
The relevant part of the tribunal’s order in Hero Motocorp Ltd. (supra), containing its findings, and to which our attention was drawn during hearing, is as under:
‘29.33 When the assessee sells vehicles to its dealers for the ascertained price, the cost of free service obligation on the part of the assessee is embedded in the concluded sale contract and sale price of the vehicle. The dealer, in turn, makes onward sales to the customers at a price which includes free service obligations. The contract between dealer and customer is independent and separate contract. The customer in terms of the sale contract with the dealer approaches the dealer for these free services. It is the customer who avails the service for the cost paid by him as part of the sale price of the vehicle he purchases from dealer during the warranty period. It is the dealer who renders the service to the customer pursuant to independent contract. The fact that the customer can approach any dealer for obtaining free service does not alter the position as it is a case of convenience and mutual arrangement drawn by the company. The reimbursement is not for services rendered by the dealer to the customer but in discharge of the warranty obligation included in the sale price. It is in term of a independent contract of sale which stipulates that the assessee should reimburse the cost incurred by the dealer if and when it performs free services to the ultimate customer. On this factual matrix, it would be wrong to hold that the dealer has rendered technical services as contemplated u/s. 194J to the assessee for which the assessee paid a particular amount to the dealer and non-deduction of tax at source on such payments attracts disallowance u/s. 40(a)(ia).
29.34 The assessing officer relied on Section 194J which reads as follows:
. . . . . . . . . . . . . . .
29.42 We also find force in the argument of the assessee that the services in this case are availed by the ultimate customer who has paid the consideration by way of sale price to dealer by a separate transaction of purchase of two wheeler. Service is neither availed by the assessee nor is the payment made by the assessee in consideration of availing a service for itself. As already stated, even if taken as a service availed by the assessee, sec. 194J is not attracted as this is not a technical service.’
In para 29.43, the tribunal considers the Revenue’s reliance on Circular 8 of 2009 dated 24.11.2009, concerning tax deductible at source u/s. 194-J, wherein it stood clarified by the Board that the payments made by TPA on behalf of Insurance Company to hospitals are liable for tax deduction at source, before concluding at para 29.45 of its order, which reads as under:
‘29.45 On this factual matrix, and as Sec. 194J is not attracted in this case, we uphold the contentions of the assessee and allow this ground of appeal.’
Clearly, the said decision stands rendered with reference to whether the impugned payment falls within the purview of section 194J of the Act or not. All the observations by the tribunal must be considered and viewed in that perspective. We may though add that the tribunal also considered the discharge of the payment by the service recipient, in-as-much as it found that the payment was in fact made by the customer, i.e., the person availing the service, as a relevant consideration toward application of s. 194J.
6.2 Section 194C, which stands invoked and applied in the instant case, is reproduced as under (in its relevant part):
‘Payments to contractors.
194C. (1) Any person responsible for paying any sum to any resident (hereafter in this section referred to as the contractor) for carrying out any work (including supply of labour for carrying out any work) in pursuance of a contract between the contractor and a specified person shall, at the time of credit of such sum to the account of the contractor or at the time of payment thereof in cash or by issue of a cheque or draft or by any other mode, whichever is earlier, deduct an amount equal to—
(i) . . . . . . . . . . ;
(ii) . . . . . . . . . .
of such sum as income-tax on income comprised therein.
(2) Where any sum referred to in sub-section (1) is credited to any account, whether called “Suspense account” or by any other name, in the books of account of the person liable to pay such income, such crediting shall be deemed to be credit of such income to the account of the payee and the provisions of this section shall apply accordingly.
Explanation.—For the purposes of this section,—
|(i)||“specified person” shall mean,—|
|(a)||the Central Government or any State Government; or|
|(d)||any company; or|
|(ii)||. . . . . . . . . . ;|
|(iii)||“contract” shall include sub-contract;|
|(iv)||“work” shall include—|
|(b)||broadcasting and telecasting including production of programmes for such broadcasting or telecasting;|
|(c)||carriage of goods or passengers by any mode of transport other than by railways;|
|(e)||manufacturing or supplying a product according to the requirement or specification of a customer by using material purchased from such customer,|
but does not include manufacturing or supplying a product according to the requirement or specification of a customer by using material purchased from a person, other than such customer.’
As apparent, its scope is materially different (from s. 194J), and envisages:
|(a)||a contract between a resident (contractor) and a specified person in pursuance to which some work is carried out; and|
|(b)||credit or payment to the contractor by any person responsible for such work.|
6.3 In the present case, we are completely unable to see as to how the terms of the provision, or its’ parameters, are not met. The customer is charged for the value of some services – in the nature of repairs and maintenance of his vehicle, to be undertaken on it reaching different milestones (reckoned in terms of mileage, lapse of time, etc.), i.e., qua the vehicle purchased from the company manufacturing and selling the vehicles, as the assessee-company, which (services) are though only through its’ authorized dealers. Clearly, what is carried out, even as held by the ld. CIT(A), is ‘work’ within the scope of the term as defined u/s. 194C. The authorized dealers through whom the vehicle is sold, are not paid for the services (value of which is embedded in the sale price of the vehicle sold to the customer) at the time of it’s sale. The reason is simple. It is not certain as to which dealer and, rather, from which place – the dealers being spread across the country, the customer may avail all or any of the stipulated services, usually three is number. The customer cannot be bound to a particular dealer, seriously impairing the flexibility and the practicality of the scheme for the provision of such ‘free’ services. Why, a customer may sell his vehicle to another, so that there is no privity of contract even between the person (who comes for the servicing of his vehicle) and the vehicle manufacturer. The company selling the vehicle, to honor it’s commitment made to the customer at the time of sale, enters, in turn, in a back-up contract (arrangement) with it’s dealers. Under this manufacture- dealer contract, which in fact forms part of the specimen dealer agreement (PB pgs. 16-35), the dealer is obliged to provide services (in the nature of repair and maintenance services) to the vehicle (from whom-so-ever dealer purchased) that satisfies the conditions of warranty (qua services), against service coupons. The customer thereby only redeems his coupons. Payment/credit is allowed by the vehicle manufacturer on presentation of the service coupons – value of which is predefined, issued by it and received by the dealers from the vehicle owners. It is the vehicle owner who has paid for, and is accordingly the recipient of these services. However, having already paid for the same upfront, i.e., as a composite cost of the vehicle, as evidenced by the service coupons received by him, he is not required to pay for the services again, so that the payment for carrying out the work thereon by the dealer, is made by the manufacturer (assessee-company), who has already received the consideration in its respect from the customer as a part of its’ (vehicle’s) sale price. That is, the assessee-company is the person responsible for making the payment to the dealer (contractor) under the circumstances. That it is also the specified person u/s.194C(1) is another matter. How, we wonder, are the ingredients of the section not satisfied. It is not necessary that the payer or the specified person should also be the recipient of the services, i.e., the work carried out in pursuance to a contract, for which payment is being made and received. Equally, it is not incorrect to say that the vehicle manufacturer is the beneficiary of the services in-as-much as the same operate to discharge its’ liability or obligation under the contract of sale, and which, being an incident of the sale of vehicle, would extend to who-so-ever is the owner of the vehicle for the time being. Whether it could be, strictly speaking, termed as a product warranty; the obligation for undertaking repairs being independent of the sale of vehicle, though incurred at the time of or as a part of the contract of sale, and is accordingly to be honored, is of little moment. As afore-stated, the vehicle manufacturer, as the assessee-company, is the beneficiary of the value of these services in-as-much as the consideration for the same is already received by it in advance, making it is a part of the sale arrangement (of the vehicle). We, accordingly, see no reason as to why the provision of section 194C is not applicable, or how could it be said as not so.
6.4 Section 194J requires deduction of tax at source on fees for technical services, in contradistinction to payment under a work contract u/s. 194C and, thus, is on an altogether different footing. The tribunal found the nature of the repairs as not qualifying for being considered as ‘technical services’ and, accordingly, the consideration therefor as ‘fees for technical services’, for which reference stands made to Explanation 2 to section 9(1)(vii). Each of the decisions relied upon by the tribunal in Hero Motocorp Ltd. (supra) are also in the context of section 194J, and not applicable in the instant case. True, the observation in Hero Motocorp Ltd. (supra) with regard to the service recipient (customer) being not the payer for those services, could be said to hold even for the contractual arrangement, but, as stated, each of the observations by the tribunal has to be considered from the stand point and perspective of section 194J. The same, in any case, does not represent the ratio of the decision. As clarified in, inter alia, Goodyear India Ltd. v. State of Haryana  188 ITR 402 (SC), a precedent is an authority only for what it actually decides and not what may remotely or even logically follow from it. In fact, the customer receiving the services is the person who finally pays for the same, i.e., at the time of and alongwith the sale price of the vehicle, wherein the cost of the services is embedded. The payer, however, is the vehicle manufacturer (assessee-company), which is the person responsible for making the payments to the dealers, and on whom the law casts an obligation to deduct tax at source u/s. 194C(1), as well as is the person contractually bound to pay the dealer undertaking the services, i.e., for carrying out the work in pursuance of contract therewith (Dealer Agreement). Reference in this context may also be made to answer to Q. No. 9 of Circular 715 dated 08.8.1995 issued by the CBDT.
6.5 Be that as it may, section 40(a)(ia) stands amended by Finance Act, 2012 w.e.f. 01.4.2013 to provide (vide secondproviso thereto) that where an assessee fails to deduct the whole or any part of the tax in accordance with the provisions of Chapter XVII-B, but is not deemed to be in default under first proviso to section 201, he shall for the purpose of this clause (s. 40(a)(ia)), be deemed to have deducted and paid the tax on the relevant sum on the date of furnishing the return of income by the resident payee (dealer). That is, provides an exception to the operation of section 40(a)(ia). Section 201 also stands amended by way of first proviso thereto (by Finance Act, 2012 w.e.f. 1.07.2012) to the effect that any person failing to deduct in whole or in part the tax in accordance with the provisions of the relevant Chapter on the sum paid to a resident or credited to his account shall not be deemed as an assessee in default in respect of such tax, if such a resident (read contractor or dealer) has furnished his return u/s. 139; has taken into account such sum for computing the income in such return of income; and has paid tax due on the income declared by him in such return of income, on furnishing a certificate to this effect from an Accountant in the form prescribed. In other words, the law seeks to put in place a system to implement and operationalize the decision by the Hon’ble Apex Court in the case of Hindustan Coca Cola Beverages (P.) Ltd. v. CIT 293 ITR 226wherein it stands clarified that tax deduction at source, being a mode of payment of tax, where the same stands deposited with the Exchequer by the payee, the same discharges the payer from the obligation to deduct the same. The said amendment has been held by the Hon’ble Delhi High Court in the case of CIT v. Ansal Landmark Township (P.) Ltd.  377 ITR 635 as retrospective. Accordingly, even for other years prior to A.Y. 2013-14, or for the periods prior to 01.7.2012, as the case may be, where the conditions of the amended section 201 are met, and the assessee-payer, consequently, not deemed to be an assessee in default, the provision of section 40(a)(ia) shall not apply. This, in fact, represents the current and the consistent approach by the tribunal in the matter, and for which we make reference to the decision by it in the case of Trusted Shares & Investment Ltd. v. ITO [IT Appeal No. 648 (Mum.) of 2015, dated 27-11-2015].
6.6 Under the circumstances, we only consider it fit and proper that the matter is restored back to the file of the AO for allowing an opportunity to the assessee to satisfy him of being not in default under the amended section 201. That is, in respect of the tax deductible on the payment against service coupons, which it was liable to deduct u/s. 194C and has admittedly failed to deduct in whole. The burden of proof is clearly on the assessee, even as the AO shall decide the matter by issuing definite findings of fact and, further, separately for each dealer, whose cases could well be different in-as-much as the date of furnishing of return of income (for the relevant year) could be different, and may have perhaps also accounted for the income (on services) for different years. We decide accordingly.
7. In the result, the assessee’s appeals are partly allowed for statistical purposes.