9911796707
TMI Blog2006 (7) TMI 258X X X X Extracts X X X X X X X X Extracts X X X X ..... ditions imposed by the Government of India while granting approval to the proposal of joint venture. We find that the increase in shareholding has been duly brought to the knowledge of the CIT(A) and the same is also noted on page 22 of the impugned order for the assessment year 2001-02, and page 24 of the impugned order for the assessment year 2002-03. Thus, here also, the assessee has not violated any conditions laid down by the Government of India while according approval. In case, the tax was not deducted at source or the same was not paid, the revenue was free to take appropriate action under the relevant sections of the Act. However, there was due compliance on these conditions by the assessee. Therefore, the revenue did not feel any need to take such action against the assessee. Now once the Government had accorded approval after due consideration, it is not for the revenue to sit in judgment over such decisions. Such course of action by the revenue authorities would only discourage the foreign investments which are badly needed for the overall economic development of the country. Therefore, the approval granted by one wing of the Government i.e., Ministry of Industry ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fore, the expenditure incurred by the assessee in respect of on going business is a revenue expenditure. Thus, we are of the considered opinion that the ld. CIT(A) was not justified in sustaining the disallowance of the impugned expenditure. Accordingly, we set aside the order of the CIT(A) and direct the Assessing Officer to allow deduction of the same. This ground of appeal is allowed. Custom duty - No doubt from the facts discussed above, it is obvious that the assessee had made the payment of the amount on 31-3-1999 as an advance and had claimed deduction for the assessment year 1999-2000. The assessee's appeal for the assessment year 1999-2000 is pending with the Tribunal. In case, the matter is decided by the Tribunal in favour of the assessee by taking notice of the subsequent events that the liability had become final, the assessee would not be entitled to claim deduction for the same in the assessment year under consideration. However, if the disallowance made is upheld by the Tribunal for the reason that the amount paid was only an advance and was not otherwise payable and hence not allowable u/s 43B, the assessee would be entitled to claim deduction in the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wholly and exclusively for the purpose of business. While dealing with the first two grounds of appeal i.e., lump sum technical fee and royalty payment, we have already rejected the plea of the revenue that payments made to HMCL represented diversion of profit. The same finding would equally hold good to the present issue. Thus, we are of the considered opinion that the impugned expenditure was incurred wholly and exclusively for the purpose of its business for acquiring rights outside the country to export cars/components. Therefore, the ld. CIT(A) was not justified in sustaining the impugned disallowance. The order of the CIT(A) is set aside and the Assessing Officer is directed to allow deduction of the same. This ground of appeal is allowed. Excise Duty refund - The assessee has claimed refund of excise duty on behalf of others and on receipt the same has been passed down to the customers, no income accrues to the assessee and the claim of the assessee deserves to be allowed. However, considering the fact that these details were not furnished before the authorities below and the order of the CIT(A) has been set aside in regard to first-two grounds of appeal, we conside ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d to setting up its plant and, therefore, the impugned expenditure was capital in nature. Similar reasoning was given by the Assessing Officer for treating the royalty payments also as capital expenditure. When the matter was taken in appeals before the CIT(A), the CIT(A) held that the impugned expenditure was indeed diversion of income to the holding company. The action of the CIT(A) has resulted in enhancement of income. As per provisions of sub-section (2) of section 251 of the Act, the CIT(A) was under a statutory duty to issue a show-cause notice to the assessee before enhancing the income. Since the ld. CIT(A) failed to issue such notice, the assessee has contended that the action of the CIT(A) for enhancing the income is illegal, invalid and void ab initio. The assessee has contended that this is purely a legal issue for which relevant facts are already on record. The additional ground raised by the assessee deserves to be admitted. Reliance has been placed on two judgments of Hon'ble Supreme Court in the cases of Jute Corpn. of India v. CIT [1991] 187 ITR 688 and National Thermal Power Co. Ltd v. CIT [1998] 229 ITR 383. 3. The ld. CIT, DR, Sh. P.C.K Solomon, vide his ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... copy of the order sheet entries made by the CIT(A) on 26-7-2005 and 10-8-2005, where the assessee was duly informed about the proposed action of the CIT(A). The reply dated 10-8-2005 filed by the assessee has been duly incorporated by the CIT(A) on pages 6 to 19 of the impugned order for the assessment year 2001-02 and thereafter, the ld. CIT(A) has given his own reasoning for treating the lump sum fee payments and royalty payments as diversion of income to the holding company. Thus, he submitted that the ld. CIT(A) has complied with the statutory requirement of issuing notice before enhancing the income and, therefore, there was no illegality in the action of the ld. CIT(A) as alleged by the assessee. 7. We have heard both the parties and carefully considered the rival contentions with reference to facts, evidence and material on record. The provisions of sub-section (2) of section 251 read as under :- (2) The Commissioner (Appeals) shall not enhance an assessment or a penalty or reduce the amount of refund unless the appellant has had a reasonable opportunity of showing cause against such enhancement or reduction. A bare reading of the above provision shows that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed in time. Regarding dispute custom payment the matter is in Hon'ble ITAT. Further argued that Assessing Officer should have considered the claim irrespective of payment made. Stated that receivable amount from excise was actually to be disbursed to the customs who are entitled for 8 per cent less excise duty. Since Assessing Officer did not ask for actual disbursement, therefore, it was not submitted. Regarding 3 per cent payment to HMCL on the Ports sale to Thailand it was stated that separate agreement was entered to sell the indigenous made out of the designed territorial boundary. Sd/- 10-3-2005 In response to the above show-cause notice, the assessee filed a detailed reply vide his letter dated 10-8-2005. This has also been extracted by the CIT(A) on pages 6 to 19 of the assessment order for the assessment year 2001-02 and also in the order for assessment year 2002-03. The implication of the proposed action of the CIT(A) was clearly brought to the notice of the assessee. Therefore, it is not correct to say that the ld. CIT(A) has not issued any show-cause notice before making the enhancement of income. Since there is no statutory notice prescribed under th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s expenditure. 1.4 Without prejudice, that on the facts and circumstances of the case the CIT(A) erred in not directing allowance of depreciation on the amount of lump sum fee and royalty, treating the same as capital expenditure. The facts of the case are that in the returns of income filed for both the assessment years, the assessee had claimed deductions of Rs. 28,27,00,000 and Rs. 29,20,07,000 being lump sum amount of Technical Guidance Fee paid to M/s. HMCL, Japan for the assessment years 2001-02 and 2002-03 under a Technical Collaboration Agreement (In short 'the TCA'). In addition, the assessee also claimed deductions of Rs. 12,38,27,000 and Rs. 15,60,93,000 being royalty paid to the foreign company under the agreement for the assessment years 2001-02 and 2002-03 respectively. During the course of assessment proceedings, the Assessing Officer called upon the assessee to justify its claim as revenue expenditure. The assessee submitted that it had entered into TCA with M/s. HMCL, Japan, under which the assessee was granted an indivisible, non-transferable and exclusive right and license to use the know-how and technical information provided by MI s. HMCL. I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee being capital expenditure for both the assessment years. 9. Aggrieved, the assessee filed appeals against the assessment orders before the CIT(A) and submitted detailed submissions vide letter dated 10-8-2005. The ld. CIT(A) called for further clarifications on the points noted on page 19 of the impugned order for the assessment year 2002-03. The assessee furnished this information. It was submitted before the CIT(A) that both the lump sum technical fee and royalty were being paid by the assessee to HMCL under the Technical Collaboration Agreement dated 21-5-1996 where the assessee was granted an indivisible, non-transferable and exclusive right and license to use knowhow and technical information for manufacture of automobiles etc. In consideration, the assessee was to pay a sum of US $ 30.5 million payable in 5 equal instalments. Similarly, royalty at the rate of 4 per cent on the net sales (both internal and export sales) was payable by the assessee for the technical information and know-how etc. supplied by HMCL, Japan for a period of 7 years. It was submitted that the business of the assessee was a joint venture between HMCL and Siel Limited, an Indian company where HMCL ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lue of the goods/services. But in this case, such situation did not arise because the agreement was approved by the Government of India. Relying on the judgment of Delhi High Court in the case of CIT v. Shriram Pistons Rings Ltd. [1990] 181 ITR 230, it was submitted that in a case where approval of remuneration to a son of a Director of the assessee was approved by the Company Law Board, no disallowance under section 40A(2) of the Act could be made. Reliance was also placed on the decision of the ITAT, Pune Bench in the case of Kinetic Honda Motor Ltd. v. Jt. CIT [2001] 77 ITD 393 whereby referring to CBDT's Circular No. 6-P, dated 8-7-1968 in the context of section 40A(2)( b), the Tribunal had held that if payments were approved by one wing of the Government, there was no question of being treated as excessive and unreasonable having regard to the legitimate business needs. In this case also, there was change in the pattern of shareholding of a foreign company which had arisen from 28.56 percent to 51 percent. But the agreement was approved by the Government of India. It was held that there was no justification in making any disallowance once the agreement was approved by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee became almost a complete subsidiary to HMCL. He also observed that permission for payment of royalty and lump sum technical guidance fee was with the condition subject to taxes. While these words were incorporated for payment to royalty, but the same were missing in the clause relating to payment of lump sum amount of technical fee. This was contrary to the conditions laid down by the Government of India 'While granting the approval. He also referred to section 16 of the Indian Contract Act, 1872 which deals with the contracts made under undue influence to obtain an unfair advantage over the other. He also observed that HMCL was holding a real or apparent authority as per the spirit of the provisions of section 16(2)(a) of the Indian Contract Act. Thus, he observed that both the lump sum payment of technical guidance fees and royalty were indeed for diversion of profit without paying taxes. He also observed that the TCA agreement with HMCL, Japan was a voidable contract in terms of section 23 of the Indian Contract Act, 1872 read with permission granted by the Government. He also observed that diversion of profit was also established as the money transferred by way of roya ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ransferable and exclusive right and license of manufacture, use and sell, the products and the licensed parts within the territory under the Intellectual Property Rights and by using know-how, and the technical information, provided that the licensee may grant sub-licenses with a prior written consent of licenser. As per article 7.1 of the TCA, the know-how and the other non-public technical or business information of licensor of the M/s. HMCL shall remain the sole and exclusive property of licensor and the same shall be held in trust and confidence for licensor by the assessee. Thus, he submitted that the assessee was merely licensee and not owner of the technical know-how and the business information. He further referred to article 8 on page 107 of the paper book where the assessee was restricted to use the said technical know-how only for the manufacture of its products and the assessee was precluded from allowing the use of such information by any third party. The assessee was directly prohibited from sharing such information with anybody else. He then referred to article 14 of the agreement on page 111 of the paper book which provided the consideration in the form of lump sum ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... formation for manufacture of automobiles was revenue expenditure as the assessee had not acquired ownership right in the technology/information received and had only limited right to use the same. In support of such contention, the ld. counsel relied upon the following judgments : (i) CIT v. Ciba of India Ltd. [1968] 69 ITR 692 (SC); (ii) CIT v. Indian Oxygen Ltd. [1996] 218 ITR 337 (SC); (iii) CIT v. IAEC (Pumps) Ltd. [1998] 232 ITR 316 (SC); (iv) CIT v. Wavin (India) Ltd [1999] 236 ITR 314 (SC); (v) Shriram Refrigeration Industries Ltd v. CIT [1981] 127 ITR 746 (Delhi); (vi) CIT v. Tata Engg. Locomotive Co. (P.) Ltd [1980] 123 ITR 538 (Bom.); (vii) Triveni Engg. Works Ltd. v. CIT 138 ITR 216 (sic); (viii)Addl CIT v. Sharma Engines Values Ltd [1982] 138 ITR 216 (Delhi); (ix) CIT v. Bhai Sunder Dass Sons (P.) Ltd [1986] 158 ITR 195 (Delhi); (x) CIT v. Jyoti Electrical Motors Ltd [2002] 255 ITR 345 (Guj.); (xi) CIT v. Kanpur Cigarettes [2005] 147 Taxman 428 (All.); (xii) IAC v. Bajaj Tempo Ltd [1996] 218 ITR (AT) 147 (Pune)(SB); (xiii) S.R.P. Tools Ltd. v. CIT [1999] 237 ITR 684 (Mad.). Thus, he submitted that the Assessing Officer was not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sum knowhow fee and royalty were remitted only to HMCL after deduction of tax at source in terms of the provisions of the Income-tax Act and Double Taxation Avoidance Act (DTAA) between India and Japan. The details regarding tax deducted at source and deposit of such tax etc. are placed at pages 430 to 440 of the paper book. Thus, he submitted that allegation of the CIT(A) that relevant clauses of the TCA were flouted, was again without any basis. He further stated that the TCA provided payment of lump sum know-how fee in instalments over a period of 5 years starting from 3rd year after the commencement of the commercial production so that the assessee was able to find its feet and establish itself in the market and the payment of lump sum know how technical fee did not drain its financial resources during initial phase, which was capital intensive. The stipulation in the agreement had nothing to do with the profit of the assessee as the payment had to be made from the year specified in the TCA, irrespective of whether the assessee had profit or loss. He submitted that the ld. CIT(A) has also erred in not appreciating that all these payments were made under an agreement approved by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s letters filed by the assessee indicated that various agreements were approved by the Government of India and further RBI had accorded approval for enhancing the equity holding by the HMCL of the assessee-company. He submitted that had these documents been available with the CIT(A), he would have not observed in his orders that change in equity ratio was not as per the spirit of the approval granted by the Government of India. He further stated that since equity holding with the HMCL at the point of time was of 99.9 per cent, it was rightly held by him that payment made by the assessee in the garb of lump sum payment of technical fee and royalty were nothing but diversion of profit. He further submitted that a perusal of TCA entered into between the assessee with the HMCL shows that the use of the license, technical know-how and trademark by the assessee was for a considerable long period of time i.e., 10 years and this resulted in enduring benefit of the assessee. Thus, the Assessing Officer had rightly treated the impugned expenditure as capital in nature. He has also added that without TCA, the assessee could not have started its business and, therefore, this agreement was cruc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... into the TCA and, therefore, such agreement was void under section 16 read with section 23 of the Indian Contract Act, 1972. 13.1 The approval letters placed at pages 403 to 429 of the paper book clearly show that increase in shareholding by HMCL in the assessee-company from time to time was approved by the Government. It is clear from the approval letters issued by the Ministry of Industries and Reserve Bank of India. These letters have already been referred to while discussing the facts of the case and submissions of both the parties. We also do not find any merit in the submissions of the ld. CIT(DR) that had these approval letters been placed before the CIT(A), the CIT(A) would have not recorded in the impugned order that increase in equity shareholding meant flouting the conditions imposed by the Government of India while granting approval to the proposal of joint venture. We find that the increase in shareholding has been duly brought to the knowledge of the CIT(A) and the same is also noted on page 22 of the impugned order for the assessment year 2001-02, and page 24 of the impugned order for the assessment year 2002-03. 13.2 While granting the approval, the Ministry ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t from the first year of its production, it would have resulted in under strain on the financial resources of the assessee-company. After all, the intention of both the parties to joint venture was to ensure its success more so when it involved huge investment. Moreover, it is for the parties to decide as to when the payment should start keeping in view the commercial consideration and it is not for the revenue to dictate its term as to when the payment should be made. Therefore, we also do not find any merit in such objections raised by the CIT(A) when there is nothing in the TCA that the payments of technical know-how fee and royalty were to be made out of profit of the assessee. 13.5 As regards the observations of the CIT(A) that since HMCL was holding 99.9 per cent of shares of assessee-company, the TCA agreement was made under undue influence and as such was void under section 16 read with section 23 of the Indian Contract Act, 1872, we find no merit in the same. As discussed earlier increase in shareholding was duly approved by the Government of India and RBI. Therefore, it was not unilateral that HMCL had increased the shareholding. Once the approval is required to be obt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e light of detailed discussions in the preceding paragraphs and the legal position discussed above, we are of the considered opinion that the ld. CIT(A) was not justified in treating the payment of lump sum technical fee and royalty as diversion of profit to HMCL, Japan. Accordingly, we set aside the orders of the CIT(A) and allow this ground of appeal of the assessee for both the assessment years. 13.7 The next aspect of the case is whether the impugned expenditure was capital or revenue in nature. The assessee has made detailed submissions in this regard. These have been summarised in the earlier paragraphs. However, we find that the ld. CIT(A) has not recorded any finding on the same because he has taken a view that the impugned payments represented diversion of profits to a foreign company. This view has not been approved by the Bench. We, therefore, consider it fair and appropriate to restore this issue to the file of the CIT(A) for deciding the same afresh as per law and after allowing proper opportunity to both the parties. During the course of hearing of the appeals before the CIT(A), the assessee shall be free to raise alternative issue regarding claim of depreciation, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mobile engineer. In order to cater to such requirement, Technical Research Centre (In short TRC ) has been maintained and all expenses related to TRC have been disclosed under the head Research Development to comply with the requirement of Accounting Standard. The Assessing Officer observed that providing of technical know-how was the responsibility of the parent-company for which the assessee was paying lump sum technical fee in view of the agreement made for the purpose. Thus, it was the responsibility of the parent-company to provide technical assistance in removing defects, improving technology to be used by the assessee in its products. He observed that the expenses claimed for Research Development were the additional burden upon the assessee. However, the Assessing officer allowed the expenses related to technical guidance fee, salary of staff, other expenses including expenses in respect of depreciation of building and other research amounting to Rs. 15,76,707, vehicle maintenance expenses of 1,13,865, Courier Services Rs. 34,487, Telephone Rs. 181, Staff Welfare Rs. 33,616, Newspapers Rs. 1,385, Entertainment Rs. 5,633, Repair and Maintenance and Conveyance totalli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , therefore, it was not correct to say that the assessee was not carrying on any research and development activity. The ld. CIT(A) was not impressed with these submissions and accordingly upheld the disallowance on the ground that the assessee was not carrying out any research and development activities. The assessee is aggrieved with the orders of the CIT(A). Hence, these appeals before us. 16. The ld. counsel for the assessee, Sh. Ajay Vohra, drew our attention to page 124 of the paper book which are details of Research and Development Expenditure for the assessment year 2002-03, which include salaries, wages and other related cost for repairs and maintenance, travelling, printing, courier services, training and seminar, vehicle maintenance, miscellaneous expenses, payment made outside bodies for research and development which include rates and taxes, membership fee and technical guidance fee. Besides these expenses included of software, fabric for testing and other miscellaneous expenses etc. 16.1 As regards assessment year 2001-02, the Assessing Officer has observed that the said expenses related to testing and research of car on which part of the expenditure has already ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lementation. TRC also provided assistance and handled complaints of technical nature. This was also part of customer care or after-sale services function of the assessee. This center was also responsible for Homologation of the vehicles according to Indian environment and to co-ordinate for the new model activities. It was no doubt true that HMCL had undertaken to provide technical assistance to assessee, but it was not practicable to approach HMCL for each and every minor defect in the vehicle which was required to be tuned to the Indian environment. It is common knowledge that the automobile Industry in the country is now extremely competitive and in order to survive in the market one is required to continuously monitor and bring improvement in the quality of the products manufactured and to look more attractive and fuel efficient. Therefore, setting of TRC center was absolutely essential for the manufacture and for carrying on business activities of the assessee moreso when the vehicles sold are covered by warranty period. Such center keeps a close watch on the repetitive defects for which complaints are received from the buyers and to bring about improvement with a view to cut ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... launch of new model of car manufactured by the assessee. The facts of the case are that this expenditure was not charged to profit loss account for the assessment year 2001-02. However, in the computation of income, the assessee had claimed deduction of the same as revenue expenditure with a note that impugned expenditure pertained to new model of car in the existing line of business. It was stated that the expenditure was charged to profit loss. account for the assessment year 2002-03. But the same was disallowed while computing income for the subsequent year because expenditure related to this assessment year. The assessee also stated that by incurring such expenditure no new asset in the capital field had been created. The Assessing Officer examined the details and found that the same was for travelling, training seminar and sale promotion of the new model of the car. However, the Assessing Officer disallowed the same on the ground that by incurring such expenditure, the assessee had obtained a benefit of enduring nature by way of establishing a new car model in the automobile market of India. The Assessing Officer also observed that the judgment of Supreme Court in the ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot correct to say that by incurring such expenditure, the assessee had acquired advantage of enduring in nature. Similar issue came up for consideration before the ITAT, Delhi Bench in the case of Asstt. CIT v. Medicamen Biotech Ltd [2005] 1 SOT 347, where it was held that the expenditure incurred on launching of a new pharmaceutical product does not result in benefit of enduring nature and, therefore, the expenditure does not fall in the capital field. It was also held that the said expenditure is revenue in nature and the mere fact that the assessee had treated the expenditure as deferred revenue expenditure over a period of time does not make the expenditure capital in nature. It was also held that the term given by the assessee in the books of account or entries made in the books are not decisive or conclusive in establishing the nature of expenditure. While taking such view, the Tribunal has relied on the judgment of Hon'ble Supreme Court in the case of Kedarnath Jute Mfg. Co. Ltd. v. CIT [1971] 82 ITR 363. The very fact that the expenditure was not debited to the profit loss account of the assessment year under reference would not make any difference so far as the claim ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aid on 31-3-1999 as an advance was shown as loan and advance in the audited accounts in the financial year 31-3-1999 and the claim was made before the CIT(A) under section 43B of the Act for the assessment year 1999-2000 which was not allowed by the CIT(A). This issue was pending before the ITAT. It was submitted that in case it was decided in favour of the assessee, the amount of Rs. 32,63,032 would be required to be added back to the income of the assessment year 2002-03. However, the claim was not accepted by the Assessing Officer on the ground that the same did not relate to the assessment year under consideration. 20.1 The assessee impugned the disallowance in appeal before the CIT(A). The assessee reiterated the submissions made before the Assessing Officer. However, the ld. CIT(A) observed that since the issue was subject-matter of appeal before the ITAT for the assessment year 1999-2000, the disallowance is confirmed for statistical purposes. The Assessing Officer would give appeal effect after receipt of the order of the ITAT. The assessee has now brought this issue in appeal before this Bench. 20.2 The ld. counsel for the assessee, Sh. Ajay Vohra, reiterated the sub ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ear under reference. Thus, we set aside the order of the CIT(A) and direct the Assessing Officer to allow the claim of the assessee only if the said claim is not allowed for the assessment year 1999-2000. This ground of appeal is treated as allowed for statistical purposes. 21. The next ground of appeal for the assessment year 2002-03 relates to upholding the action of the Assessing Officer for disallowing an amount of Rs. 86,38,000 being provision for warranty made by the assessee during the accounting year under reference. The facts of the case are the cars sold by the assessee are covered under warranty. The assessee made provisions of Rs. 86,38,000 for warranty and claimed deduction of the same on the ground that the company was engaged in the business of manufacture and sale of highly competitive premium segment cars and the assessee was contractually bound to provide after-sale services at various intervals and provide one year after-sale warranty for manufacturing defects and thereafter sale service to the customers. It was stated that the liability to provide free after-sale service accrues to the assessee as soon as the car is sold to the customer. It was also submitted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... submitted that the deduction in respect of the impugned amount may be allowed. 21.3 The ld. CIT(DR), on the other hand, heavily relied on the orders of the authorities below and submitted that the liability under consideration was only contingent in nature and, therefore, was not allowable. 21.4 We have heard both the parties and carefully considered the rival submissions, examined the facts, evidence and material placed on record. There is no dispute about the fact that the cars sold to the customers are covered by warranty and after-sale services for repair and replacement for a period of one year. The assessee has been following the same method of accounting and has been making provisions for the same on the basis of actual expenses incurred in the past. It is a fact that in the past such expenses have been allowed by the revenue. Even such claim of the assessee was allowed for the assessment year 2001-02. This is not the case of the revenue that the provisions made far exceeded the actual expenses incurred. In the case of Bharat Earth Movers v. CIT [2000] 245 ITR 428, the Hon'ble Supreme Court has considered the general principles regarding allowance of business expen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... laim of the assessee for deduction of warranty claims and observed that warranty expenses claimed as deduction was not abnormally high and the gap between the warranty provision and warranty expenditure incurred had narrowed down over the years and, therefore, such expenditure was allowable as revenue expenditure and was not a contingent liability. While deciding this case, ITAT, Bangalore Bench also followed the decision of ITAT, Amritsar Bench in the case Jay Bee Industries. This issue also came to be considered by the ITAT, Delhi Bench, in the case of It. CIT v. Modi Olivetti Ltd [2004] 3 SOT 22, where the assessee has made provision for warranty claim at the rate of 1.5 per cent on the cost of sales. The Tribunal by referring to the judgment of Supreme Court in the case of Bharat Earth Movers held that the liability had been incurred on the date when sale was made and was not contingent in nature. Accordingly, the claim of the assessee was allowed. 21.5 Thus, the various judgments cited above support the view that the liability was incurred on the date when sales were made. Therefore, this was ascertained and accrued liability of the assessee and accordingly, the same was al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty which was fully ascertained and accrued liability. However, the same was provided on estimate basis because the bills were not received from the respective parties. These submissions were considered by the CIT(A) but he was not impressed with the same. He observed that there was no proper billing system between the assessee and his clients on regular basis and such a large portion of expenditure on provision basis was not justified. He, therefore, upheld the disallowance of 90 per cent of the provision and allowed the relief to the extent of 10 per cent of Rs. 2,96,50,000. The assessee has now brought this issue in appeal before this Bench. 22.2 The ld. counsel for the assessee reiterated the submissions made before the authorities below and submitted that the assessee had indeed incurred the expenditure and the same was accrued and ascertained liability of the assessment year under consideration. However, he submitted that the provisions were made on estimate basis because the actual bills were not received from the client-Departments till the end of the accounting year. He submitted that as per regular method of accounting followed by the assessee, it provided the liability ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... received indicated expenses incurred of Rs. 2,70,23,000, we are of the opinion that the assessee is entitled to deduction of ascertained liability to the extent of Rs. 2,70,23,000 and not Rs. 2,96,50,000. Therefore, we set aside the order of the CIT(A) and direct the Assessing Officer to allow deduction of expenses of Rs. 2,70,23,000. This ground of appeal is partly allowed. 23. The next ground of appeal relates to upholding the disallowance of Rs. 10,52,277 made by the Assessing Officer being commission paid to HMCL. The facts of the case are that the Assessing Officer found that in the accounting year under reference, the assessee had made export of wheels, assembly steering, and other items to M/s. Honda Automobile, Thailand, who is the associated enterprises within the definition of section 92A of the Income- tax Act. The assessee paid commission at the rate of 3 per cent of the export FOB value claimed at Rs. 10,52,277 and credited to M/s. Honda Motor Company, Japan. The assessee explained that the commission was paid in pursuance of agreement made with HMCL for making export of the parts abroad. However, the Assessing Officer observed that the assessee had made purchases ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ieu of HMCL allowing the assessee to export cars/components to Honda in Thailand. It was not payment for HMCL for procuring any order from its group company for the assessee. Thus, it was submitted that since the expenses have been incurred wholly and exclusively for the purpose of the business, the same were allowable. 23.3 The ld. DR on the other hand relied on the orders of the authorities below. He submitted that since 99.9 per cent equity holdings of the assessee-company are held by M/s. HMCL, the impugned payment was nothing but diversion of its profit to HMCL. Thus, he submitted that the order of the CIT(A) in sustaining the disallowance does not merit any interference. 23.4 We have heard both the parties and carefully considered the rival contentions, examined the facts, evidence and material placed on record. It is clear from article 3 of the TCA that the assessee was authorized to manufacture and sell cars in the territory of India. The assessee was not allowed to sell cars/parts, components outside India except with the approval of the HMCL. Therefore, the impugned payment was not part of TCA. However, for this purpose, the assessee entered into a separate agreemen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the CIT(A). It was submitted before the CIT(A) that amount of Rs. 60,34,370 represented the claim made by the assessee before the Excise Authorities in respect of the car sold by the assessee to certain class of customers who were exempt from the payment of Excise Duty under certain Schemes e.g., Hotels under EPCG Scheme, Taxi Operators etc. However, such claim was made by the assessee on behalf of the purchaser of the cars and is paid to them when the refund claim is accepted by the Excise authorities. Thus, it was submitted that the refund of excise duty does not represent the income of the assessee. It was also submitted that at the time of sale of the car by the assessee, the excise duty charged also included a special excise duty of 24 per cent in respect of sale of cars to be used by taxi operators. At the time when car is sold, the assessee does not know whether or not the car would be used for the purpose of taxi. It was only when the same was registered as taxi by the purchaser of the car, that the purchaser approached the assessee with the relevant documents and requested the assessee to refund special excise duty paid on such car. It was only based on such documents that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... failed to furnish relevant details and supporting evidence on account of excise duty receivable and the fact that the same was actually passed on the customers, the ld. DR contended that the authorities were justified in making the impugned disallowance. 24.4 We have heard both the parties at some length and given our thoughtful consideration to the rival contentions, examined the facts, evidence and material placed on record. From the facts discussed above, it is obvious that the claim of the assessee was that it charged full excise duty at the time of sale of cars to the taxi operators and accounted for the same in its income and expenditure because at that time, the assessee did not know whether the car sold would be used as taxi or not. It is only when the car is registered as taxi, that the taxi operator approached the assessee to claim refund of the same. The assessee has also stated that on receipt of refund of Excise Duty from the Excise Authorities, the same was passed on to car owner. The main objection of the Assessing Officer was that the assessee failed to furnish complete details along with supporting evidence about the excise duty charged, accounted for in the boo ..... X X X X Extracts X X X X X X X X Extracts X X X X
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