2020 (9) TMI 1180 - AT - Income Tax

Payment of royalty on sales to its AE - HELD THAT - As no distinguishing decision has been brought to our notice respectively following the decision of the coordinate bench 2015 (5) TMI 350 - ITAT DELHI we direct the AO/ TPO to delete the addition on this account. This ground is accordingly allowed. Disallowance of CSR expenditure - HELD THAT - The assessee has placed on record the list of the expenditure before us. The perusal of the same reflects the expenditure on certain renovation work at Mohindergarh including providing chairs and tables by the assessee. Further expenses are debited on account of Tools for Honda Training Center Lab- Mohindergarh. All the said expenses are incurred for efficiently carrying out the business of the assessee and thus fulfill the condition of wholly and exclusively for the purpose of business. Further, the donation to Brahma Kumaris merits to be disallowed in the hands of the assessee, as it is case of charity. The same may be looked into as per the provision of section BOG of the Act. Further, expenditure incurred towards display of name/logo of the assessee on various items is undoubtedly for the promotion of the business of the assessee as it promotes goodwill. Hence, the expenditure is to be allowed as revenue expenditure.In the light of the above we direct the AO to delete the impugned addition. However, we make it clear that amount being paid to Brahma Kumaris need not be deleted. Disallowance of expenditure on signages - HELD THAT - As decided in own case 2020 (9) TMI 62 - ITAT DELHI the expenditure was incurred on signage for display of the name of the assessee at the dealer s premises. However, once the same is fixed at dealers site then the Courts have held that it does not satisfy the test of ownership with the assessee and the expenditure is to be allowed as revenue expenditure, We find support from the ratio laid down by the Hon ble Delhi High Court in CIT vs Honda Siel Power Products Ltd. 2007 (8) TMI 251 - DELHI HIGH COURT . Thus, we are of the view that the expenditure to the extent claimed by the assessee is to be allowed in the hands of the assessee and not/the entire expenditure. Disallowance of sales tools expenses - whether the assessee is incurring expenditure to maintain standard format of displaying its products all over India in order to induce prospective customers to clearly identify the exclusive dealers of assessee s products in India and expenditure incurred was wholly and exclusively for the purpose of his business? - HELD THAT - The expenditure incurred on Signages expenses was in the nature of advertisement expenditure, which are recurring in nature, incurred for the purpose of business and in the absence of any capital asset being acquired/owned by the assessee, the same was allowable as business deduction under section 37(1) of the Act. AO while disallowing the claim of the assessee has strongly placed reliance on the decision of Hon ble Supreme Court in Honda Siel Cars India Ltd. 2017 (6) TMI 524 - SUPREME COURT . However, the facts of the said case are distinct as in the facts of the said case expenditure was on account of setting up of manufacturing facility and was not for running of the business. The Tribunal in assessee s own case for Assessment Year 2011-12 while deciding the issue in appeal filed against the order passed u /s 263 of the Act had distinguished the said decision and allowed the claim of the assessee. Hence, Ground of appeal raised by the assessee is allowed. Capitalisation of royalty - HELD THAT - The assessee had entered into a technical know-how agreement with Honda Motors Company, Japan under which it was paying lumpsum fee which was the amount in connection with the new models introduced in a year. The total amount paid during the year was ₹ 110.45 crores (approx.) which was capitalized by the assessee in its books of accounts and also in the P L A/c. The assessee also paid running Royalty which was paid for grant of the right to license and manufacturing of two-wheelers in India. The total running Royalty paid was ₹ 378.20 crores (approx.). The said Royalty which is the recurring Royalty paid by the assessee from year to year had been allowed as revenue expenditure in the hands of the assessee in the preceding years. We find no merit in the said exercise carried out by the Assessing Officer and accordingly we direct the Assessing Officer to allow the running Royalty as business expenditure in entirety. Addition on account of payment of export commission - HELD THAT - We find that while making the disallowance the TPO has held that assessee failed to demonstrate the benefits derive by it. This proposition of the TPO / DRP also do not hold any water in the light of the principle laid down by the Hon ble jurisdiction High Court of Delhi in the case of Cushman and Wakefield 2014 (5) TMI 897 - DELHI HIGH COURT - It would not be out of place to Mention here that in earlier assessment years, this quarrel was restored to the files of the TPO to decide the issue afresh in the light principle laid down by the Hon ble High Court in the case of Cushman and Wakefield (supra). As told that in the set aside assessment proceedings the TPO has once again made the addition following the earlier findings that the assessee had failed to provide evidence - we are of the considered view that the assessee has successfully demonstrated not only the benefits but has also shown that the profitability is higher (as per the charts exhibited elsewhere). Considering the totality of the facts we have no hesitation in directing the AO / TPO to delete the impugned addition on account of export commission.

Summary

Issues Involved:
1. Addition on account of export commission
2. Addition on account of royalty on sales to its AEs
3. Disallowance of expenditure incurred under corporate social responsibility (CSR)
4. Disallowance of expenditure on signages
5. Disallowance of sales tools expenses
6. Capitalization of royalty
7. Disallowance of claim of deduction of expenses in respect of technical know-how
8. Claim of TDS

Detailed Analysis:

1. Addition on Account of Export Commission:
The primary issue was whether the assessee benefited from making export sales. The Tribunal found that the average price of exports to AEs was higher than the domestic market price. It was also noted that the profitability from exports was significantly higher than domestic sales. The TPO’s assumption that the assessee was a contract manufacturer was rejected. The Tribunal directed the AO/TPO to delete the addition on account of export commission, stating that the assessee had successfully demonstrated the benefits and higher profitability from exports.

2. Addition on Account of Royalty on Sales to its AEs:
The Tribunal referred to its earlier decision in the assessee’s case for A.Y. 2008-09, where it was held that the payment of royalty as per the technology know-how agreement was justified. The Tribunal directed the AO/TPO to delete the addition, following the decision of the coordinate bench.

3. Disallowance of CSR Expenditure:
The Tribunal referenced its decision in the assessee’s case for A.Y. 2012-13, where it was held that CSR expenditure incurred for the benefit of the employees' children and for promoting the business was allowable as revenue expenditure. However, donations to Brahma Kumaris were disallowed as they were considered charity. The Tribunal directed the AO to delete the impugned addition except for the amount paid to Brahma Kumaris.

4. Disallowance of Expenditure on Signages:
The Tribunal referred to its decision in A.Y. 2012-13, where it was held that expenditure on signages for displaying the name at dealer’s premises was revenue in nature and allowable. The Tribunal followed the coordinate bench’s decision and allowed the expenditure.

5. Disallowance of Sales Tools Expenses:
The Tribunal referred to its decision in A.Y. 2012-13, where it was held that expenditure on sales tools/fixtures placed at dealer’s outlets was for maintaining a standard format for displaying products and was wholly and exclusively for business purposes. The Tribunal allowed the expenditure, following the coordinate bench’s decision.

6. Capitalization of Royalty:
The Tribunal referred to its decision in A.Y. 2012-13, where it was held that running royalty paid for the right to license and manufacture two-wheelers was revenue expenditure and allowable. The Tribunal directed the AO to allow the running royalty as business expenditure in entirety.

7. Disallowance of Claim of Deduction of Expenses in Respect of Technical Know-how:
The Tribunal admitted the additional ground of appeal and referred to its decision in A.Y. 2012-13, where it was held that lumpsum royalty paid for new models should be allowed as business expenditure. The Tribunal allowed the additional ground of appeal, following the coordinate bench’s decision.

8. Claim of TDS:
The Tribunal directed the AO to allow the credit of TDS as per the provisions of law.

Conclusion:
Both appeals filed by the assessee for A.Y. 2013-14 and 2014-15 were allowed, with the Tribunal directing the AO/TPO to delete the respective additions and disallowances, following the decisions of the coordinate benches in earlier assessment years. The order was pronounced in the open court on 30.09.2020.