ITAT Delhi Approved Amalgamation And Consistent Expense Allocation Cannot Be Used To Deny Section 80-IC Deduction

The Delhi Bench of Income Tax Appellate Tribunal has upheld substantial tax relief granted to Mahle Filters Systems (India) Ltd. for Assessment Year 2010–11, rejecting the Revenue's challenge to the company's deduction claimed under Section 80-IC of the Income Tax Act. A Bench comprising Vice President Mahavir Singh and Accountant Member Krinwant Sahay, while deciding cross-appeals filed by the assessee and the Revenue, held that the tax department was not justified in treating the assessee's amalgamation as a sham or in tinkering with the method of allocation of after-market trading expenses. The ITAT reiterated that approved amalgamations and consistently followed accounting methods cannot be disregarded merely on suspicion, and that tax authorities must demonstrate concrete statutory violations before denying profit-linked deductions. The Tribunal accepted the assessee's contention that after-market trading expenses must be allocated on the basis of after-market trading sales, and not total sales. It held that since such expenses were incurred exclusively to generate after-market sales, the allocation method consistently followed by the assessee and accepted in earlier years could not be disturbed. Accordingly, the Bench set aside the large disallowance made by the Assessing Officer and restored the assessee's computation of eligible profits for deduction under Section 80-IC. Rejecting the Revenue's allegation that the amalgamation was a colourable device to claim tax benefits, the Tribunal noted that the scheme had been approved by the High Court. It held that the Parwanoo manufacturing unit continued to belong to and be operated by the assessee even after amalgamation and change of name, and therefore did not amount to reconstruction of business under Section 80-IC(4). On the issue of disallowance under Section 40(a)(i), the Bench upheld the deletion of addition relating to reimbursements made to overseas group companies for global insurance cover and IT services. The Bench held that since the payments were pure reimbursements and not income chargeable to tax in India, no tax was deductible at source under Section 195. The Tribunal also agreed with the Commissioner (Appeals) that royalty payments made for limited use of technical know-how did not result in any enduring benefit or capital asset. The royalty expenditure was therefore held to be revenue in nature, and the Revenue's plea for capitalization was rejected. Allowing the assessee's appeal on this issue, the Bench further held that the Assessing Officer was not justified in applying a notional 10% mark-up on costs allegedly attributable to head-office marketing services. It observed that ad-hoc estimations cannot replace a method consistently followed and accepted in earlier years. In view of the above, the Bench allowed the Revenue's appeal was dismissed in entirety. Case Title: DCIT Vs. Mahle Filters Systems (India) Ltd. Case No.: ITA No. 4240/Del/2016 (AY 2010-2011) Appearance for the Assessee: Sh. Neeraj Jain Adv. & Sh. Tavish Verma, Adv. Appaerance for the revenue: Ms. Harpreet Kaur Hansra, Sr. DR. Click Here to Read/Download Order

ITAT Delhi Approved Amalgamation And Consistent Expense Allocation Cannot Be Used To Deny Section 80-IC Deduction

Rajnandini Dutta

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