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TMI Blog2015 (9) TMI 20X X X X Extracts X X X X X X X X Extracts X X X X ..... in respect of certain items of excise duty and customs duty. I. Excise duty 4.1. Firstly, we shall deal with all the items of excise duty disallowances. The first amount of disallowance of excise duty is Rs. 30,75,821/-, being, the amount of excise duty paid on vehicles and spare parts under PLA (Personal Ledger Account). The assessee paid certain sum under PLA which is nothing, but, excise duty paid inaccount as advance, to be adjusted against actual excise duty required to be paid at the time of removal of goods from bonded warehouse. At the end of the year, there were three balances in PLA, consisting of Rs. 2,32,113/- towards excise duty on vehicles, Rs. 7,29,595/- towards R&D cess on vehicles and Rs. 21,14,113/- towards excise duty on spare parts. The assessee claimed deduction for these amounts u/s 43B on the ground that these stood paid before the close of the financial year relevant to the assessment year under consideration. The AO, following his view taken in earlier years, refused to allow this deduction. The assessee is aggrieved against such disallowance. It has been admitted on behalf of the Revenue that similar issue has been decided by the tribunal in earlier yea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing in force, or (b) to (f) .............. shall be allowed (irrespective of the previous year in which the liability to pay such sum was incurred by the assessee according to the method of accounting regularly employed by him) only in computing the income referred to in section 28 of that previous year in which such sum is actually paid by him : ......'. 4.5. A perusal of the relevant parts of the above provision transpires that it has the following essential elements in so far as the deduction on account of excise duty is concerned : - i. Deduction is permissible in respect any sum payable under any law for the time being in force by the assessee by way of tax, duty, cess or fee, etc. ii. Deduction of tax or duty etc. is to be allowed only in computing the business income of that previous year in which such sum is actually paid by the assessee. iii. Deduction is permissible in the year of payment irrespective of the incurring of liability in any previous year as per the method of accounting regularly employed by the assessee. iv. Deduction is allowable 'only' once and that too in the year of payment. It cannot be allowed twice, that is, firstly in the year of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... incurring liability itself, then deduction is allowed in such year. If, some part of the excise duty for which liability has been incurred is not paid for one reason or the other before the close of the year etc., then the paid part gets deduction in the year of incurring of the liability but the unpaid part becomes eligible for deduction in the later coinciding with the actual payment. Whereas, in the first instance, full deduction is allowable in year one itself, in the second instance, part of the amount not allowed in the first year becomes eligible for deduction in the second year at the time of payment. There can be a converse situation as well in which excise duty is paid in advance, though a specific liability is incurred later. A manufacturer is sometimes obliged to deposit excise duty in advance without availing its actual utilization. In such circumstances, the obligation to pay such amount under the respective excise rules will bring the case within the otherwise deductibility provision and the event of actual payment will grant deduction in the year of payment notwithstanding the fact that the goods have not yet been lifted from the bonded warehouse at the end of the y ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... out of which a sum of Rs. 9/- is adjusted during the year against the excise duty payable on the removal of goods from bonded warehouse. Further suppose that goods corresponding to the excise duty of Rs. 7 are sold during the year and goods corresponding to the excise duty of Rs. 2 are still in stock. In such a situation, when the assessee originally pays Rs. 10/-, he will debit PLA and credit bank account with Rs. 10/-. During the course of the year when excise duty of Rs. 9/- is adjusted against the advance paid under PLA, Excise duty account will be debited and PLA credited with a sum of Rs. 9/-. Amount of excise duty of Rs. 9 debited in the books of account will ultimately find its place in the Profit and Loss account and become eligible for deduction, on which there is no dispute. The assessee on sale of goods with corresponding excise duty of Rs. 7, out of total utilized to the tune of Rs. 9, will show income of Rs. 7 as part of sales. In this way, the assessee gets deduction for Rs. 9 and shows income of Rs. 7 towards excise duty. Thus it is seen that out of total Rs. 10 paid by the assessee in PLA, he has claimed deduction of Rs. 9. The controversy before us is w.r.t. to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r Healthcare Ltd., (2007) 107 ITD 343 (SB) (Chd.), has held that the excess amount of excise duty reflected in the account-current is nothing but actual payment of excise duty even though mentioned as advance payment and, hence, allowable as deduction u/s 43B of the Act in the year of payment. The Special bench further clarified that the allowing of deduction on payment basis should not result in double deduction under any circumstance. The tribunal in assessee's own case has also allowed deduction in the earlier years on account of unutilized PLA at the end of the year. In view of the above discussion, while we hold that the above referred sum of unutilized amount in PLA at the end of the year u/s 43B under 'Exclusive method' qualifies for deduction, we also hold that this amount cannot be allowed deduction once again in the immediately succeeding year and also the similar amount allowed as deduction in the preceding year u/s 43B requires to be included in the computation of income of the current year. 4.10. Having discussed the above position under the 'Exclusive method', which the assessee is following in respect of goods meant for exports, let us see, if th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lusive method', which it has not done. Under such circumstances, we cannot approve the 'Exclusive method' followed by the assessee. It goes without saying that there can be no estoppel against the statute. We, therefore, direct the AO to recast Profit and loss account on the basis of 'Inclusive method'. This would require adopting the figures of purchase, sale and opening as well closing inventories as inclusive of tax or duty etc. 4.12. We have noted above that section 145A starts with a nonobstante clause qua section 145 of the Act and section 43B starts with a non-obstante clause qua 'any other provision of this Act'. The effect of the non-obstante clause in section 145A is that even if the exclusive method of valuing purchase, sale, opening and closing stocks may be generally available, but the assessee will have to compute its 'Business income' by casting its Profit and loss account as per the 'inclusive method', meaning thereby, that the value of purchase, sale and inventories must be accounted in the annual accounts as inclusive of tax or duty etc. The effect of non-obstante clause in section 43B is that even if deduction of tax o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le goods. The amount of duty paid to the supplier of raw material is considered as the amount of central excise duty actually paid by the assessee. Thus, a manufacturer of final product under Modvat/Cenvat Scheme is allowed to get adjustment of excise duty paid by him on any inputs received in the factory to be used in the manufacture of final product. In the year under consideration, the assessee purchased excise duty paid raw material and other inputs and as per the excise rules became entitled to Modvat credit of the excise duty paid on raw material eligible for set off against liability of excise duty on the finished goods at the time of removal of goods from bonded warehouse. 4.15. We have noticed above that the assessee is also following 'Exclusive method'. Under the 'Exclusive method', the total amount of excise duty paid by the assessee on purchase of inputs does not get added to their purchase price, but appears as an asset with the nomenclature of Modvat credit. When goods using the excise duty paid raw material are manufactured, the manufacturer becomes entitled to use Modvat credit against his liability of excise duty on finished products. This utilized ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3-B.' In view of this later development of law, the earlier contrary view taken by the Special Bench in Glaxo (supra) on the question of unutilized Modvat credit now needs to be properly aligned with the ratio decidendi of the judgment in Shri Ram Honda (supra). 4.17. Armed with the above legal position, now the remaining amount of Re.1 in our above example under the 'Exclusive method', which is unutilized Modvat credit in the balance sheet at the end of the year, needs to be treated at 'excise duty paid'. Since this amount is considered as excise duty paid, the same has to be allowed as deduction during the year of payment as per section 43B. Caveat remains that deduction for a sum of Re.1 in the current year, being the Modvat credit unutilized at the end of the year under the exclusive method, also requires enhancement of income of the succeeding year to this extent. In the like manner, the corresponding amount allowed as deduction u/s 43B in the preceding year, if any, also requires separate add back to the income of the current year. It is so because deduction for payment of tax or duty etc. can be allowed only once, and that too, at the time of payment. We ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 45A and 43B under the 'Inclusive method'. In line with our discussion made above while dealing with PLA component of excise duty, we direct the AO to first recast Profit and loss account of the assessee by taking the figures of purchase, sale and opening and closing stocks at the value inclusive of tax or duty etc., so as to give effect to the mandate of section 145A. Once this is done, then it will be the turn of giving effect to the mandate of section 43B, which requires the granting of deduction of tax or duty etc. on payment basis. This can be done by allowing deduction for that part of the Modvat credit separately u/s 43B of the Act, which has not been finally deducted. 4.21. We have understood Modvat credit in three parts in the example given above while discussing it under the exclusive method, viz., Rs. 7 which is utilized Modvat and finished goods sold; Rs. 2 which is utilized Modvat but finished goods in stock at the end of the year; and Re.1 which is unutilized Modvat at the end of the year. Now under the 'Inclusive method', the price of duty paid input/raw material will be taken at full price inclusive of Rs. 10. In that view of the matter, the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... one form or the other, the deduction cannot be said to have been actually allowed on payment, till it is exhausted and gets removed from the balance sheet also. In such circumstances, the amount of unexhausted (not necessarily only unutilized) Modvat credit - i.e. which appears in balance sheet either in the form of increased value of closing stock (Rs.2 in our example) and increased value of raw material representing unutilized Modvat credit (Re.1 in our example) - calls for separate deduction in terms of section 43B. We, therefore, set aside the impugned order and direct the AO to first recast the assessee's Profit and loss account on inclusive basis, then allow deduction for the equivalent amount of Modvat credit as represented by Rs. 3 in our example. The AO should also make sure that the equivalent of Rs. 3 allowed as deduction on payment basis u/s 43B in this year should not get deducted in the next year and further, the corresponding amount of deduction allowed u/s 43B in the preceding year, should also be separately added to the income of the current year. 4.22. The next item of disallowance u/s 43B in dispute is the amount of excise duty paid under protest to the tune ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... asis, inter alia, by including the amount of excise duty paid under protest to the purchase value of goods. If such goods have been consumed during the year and corresponding finished goods manufactured and sold, the matter will end there as it will amount to grant of deduction. If however, the finished goods so manufactured with the use of such protested excise duty paid raw material are in closing stock or in the shape of raw material only, then apart from enhancing the value of purchase and finished goods or raw materials, as the case may be, the assessee will be entitled to separate deduction of this amount u/s 43B. This will be done again with the same rider that in the year of settlement of dispute, this amount of separate deduction allowed in the current year, should be separately offered for taxation and further the corresponding amount of duty paid under protest in earlier years should be separately offered for taxation in the computation of income for the current year, if such earlier disputes on which excise duty was paid under protest, get resolved. II. Customs duty 5.1. Now, we take up the disallowances u/s 43B on items of customs duty. First is customs duty of Rs. 8 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... perused the relevant material on record. The ld. AR contended that this issue has been decided in earlier years in the assessee's favour by the Tribunal. He further referred to the judgment of the Hon'ble Delhi High Court in CIT vs. Samtel Colour Ltd. (2009) 184 Taxman 120 (Del) in which it has been held that advance customs duty paid in the year in question is an admissible deduction u/s 43B. In our considered opinion, there can be no dispute on the otherwise availability of deduction of advance customs duty paid by the assessee, which has to be allowed in the year of payment. In this judgment also, the Hon'ble High Court has noticed vide para 3 that the provisions of section 145A were not applicable as the assessment year under consideration was 1995-96. In view of the detailed discussion supra with reference to the applicability of section 145A to the year in question, there can be no escape from valuation of purchase, sale and inventories under the inclusive method. We, therefore, direct the AO to recast Profit and loss account under 'Inclusive method' as per the mandate of section 145A, thereby, inter alia, increasing the purchase value with the above cust ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y deducted u/s 43B or in the next year with the current year's amount getting separate deduction. III. Adjustments on account of last year's disallowances u/s 43B. 6.1. Now we take up ground no. 3.5 along with ground nos. 4 to 6.1. The amount in dispute as per ground no. 3.5 is Rs. 71,63,89,449 representing the amount of last year's unutilized Modvat credit which was claimed by the assessee as deductible u/s 43B, but disallowed by the AO and such disallowance came to be affirmed by the tribunal. While allowing deduction for the current year's unutilized Modvat credit at the end of the year amounting to Rs. 48,53,55,419, we have noticed that the position of law has undergone change and now this amount is deductible for the year in question. The assessee contends that a sum of Rs. 71,63,89,449 is the amount of deduction claimed by it u/s 43B in the preceding year and simultaneously offered for taxation in the current year voluntarily. However, in view of the sustenance of disallowance of this sum by the tribunal in the preceding year, the assessee claims that the same amount offered for taxation in the current year, be correspondingly reduced from its total income. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ound no. 3.5 in granting deduction of Rs. 71,63,89,449, representing last year's unutilized Modvat credit which was claimed by the assessee as deductible u/s 43B but disallowed by the AO and also the tribunal. B. ROYALTY I. Transfer pricing adjustment of Royalty for licensed trademark 7.1. The assessee has challenged the addition of Rs. 1,27,19,59,816/- made by the AO on account of transfer pricing adjustment. 7.2. Briefly stated, the facts of this ground are that the assessee chose Suzuki Motor Corporation, Japan (SMC) as its partner in 1982 with SMC acquiring 26% equity stake in the company Maruti Udyog Ltd. (MUL). In 1992, SMC increased its share to 50%. SMC held 54.2% in the company in the previous year relevant to the assessment year under consideration. The assessee, MUL, is engaged in manufacturing of passenger cars primarily for sale in Indian market. It also exports vehicles to other countries. The assessee reported certain international transactions which have been enumerated on page 18 of the order of the Transfer Pricing Officer (TPO). The assessee selected the Transactional Net Margin Method (TNMM) as the most appropriate method with the Profit Level Indicator ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d that clauses 3.02 and 3.03 of the Agreement stipulate that improvement and modification of the Products and Parts by the assessee shall be treated as licensed information whose legal ownership will get transferred to the SMC and the assessee will be compensated for such improvements and modifications. He noticed that no such compensation was given despite the assessee incurring huge R&D expenses. The TPO came to hold that 'Suzuki' trademark of the AE was piggybacked on 'Maruti', the trademark of the assessee, without any compensation to the assessee. After going through all the relevant clauses of the Agreement, the TPO held that the total royalty of Rs. 254.39 crore paid by the assessee to SMC was for use of both the 'Licensed Information' as well as 'Licensed trademarks'. Since no bifurcation of royalty payment was given, he segregated it into two equal parts, viz., Rs. 127.195 crore towards manufacturing licence, that is for the use of 'Licensed information' and Rs. 127.195 crore towards sale and after sale service licence, that is for use of 'Licensed trademark'. This 50:50 segregation was done on the ground that both manufactur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o two parts, namely, 50.58% for use of technology and remaining 49.42% for use of brand name, which view has been turned down by the tribunal by holding that the entire payment of royalty under the licence agreement was a consideration for use of both. 7.4. Au contraire, the ld. DR vehemently justified the action of the TPO in drawing a conclusion that 50% of total royalty payment was for use of licensed information and the remaining 50% for use of licensed trademark. He also took us through the same Agreement dated 9.1.2001 and submitted that clause 1.06 provides that the 'Licensed Trademark' shall mean the trademarks owned by Suzuki listed in Exhibit-B and other Indian trademarks which Suzuki may, hereafter, obtain relating to the Products and Parts. It was contended that clause 2.03 of the Agreement provides for use of 'Licensed Trademarks' and co-branded trademark of 'Maruti- Suzuki.' It was, therefore, put forth that it is not only co-branded trade mark of 'Maruti-Suzuki' which has been under the Agreement, but also the 'Licensed Trademarks', which exclusively belong to Suzuki. Once the trademark of SMC has been allowed to be used to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ore towards 'technical/other services' pertain exclusively to the use of 'Licensed information' and Running royalty exclusively pertains to the use of 'Licensed trademark'. He thus argued that the TPO was more than reasonable in apportioning royalty of Rs. 127.195 crore to the use of brand as against the actual running royalty of Rs. 250.81 crore paid by the assessee for use of licensed trademark. In the alternative, he argued that if the tribunal was not satisfied with 50:50 division of royalty by the TPO, then the matter may be sent back for apportioning royalty for use of licensed trademark on some rational basis. The ld. DR contended that since the assessee's own trade mark, namely, 'Maruti' has much higher brand value than the trade mark 'Suzuki' of SMC, which is relatively weak in India, the entire amount of royalty paid by the assessee to its AE towards the use of 'licensed trade marks' was rightly disallowed by the AO as having Nil ALP. 7.5. We have considered the rival submissions and perused the relevant material on record. It can be observed that the TPO has attributed a sum of Rs. 127.195 crore towards royalty for use ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... international renowned global brand. This can be substantiated by the Report of top 500 brands available on internet.' That is how in para 17, the Tribunal deleted the disallowance made by the AO on the basis of the TPO's conclusion that the payment of royalty towards use of licensed trademark was not warranted. 7.6. Thus it is manifest that the tribunal in the immediately preceding year has held two things. First that the payment of royalty under the Agreement is both for the use of licensed information and licensed trademark and there can be no division of royalty payment; and second that brand Suzuki is valuable and not worthless as was held by the TPO. In so far as the first aspect of bifurcation of royalty payment into two parts is concerned, although we find that the arguments put forth by the ld. DR are not absolutely without foundation, yet, the principle of consistency, laid down by the Hon'ble Supreme Court and Hon'ble High Courts in several judgments, persuades us to go with the view taken by the tribunal in its order for the A.Y. 2005-06, more specifically because the TPO has also relied on his finding given for the AY 2005-06 in arriving at the decisi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pitalized the lumpsum royalty subject to depreciation. The assessee also initially claimed deduction for the running royalty and capitalized the lumpsum royalty of Rs. 3.57 crore. However, during the course of assessment proceedings, it was claimed that the entire amount of royalty paid, inclusive of lumpsum royalty, was of the revenue nature and, hence, deductible in full. The AO also deviated from his earlier consistent stand and treated the entire portion of the royalty for use of licensed information as capital expenditure. Now, the question before us is whether the amount of royalty on licensed information, consisting of running and lumpsum royalty, is revenue or capital expenditure? 8.3. Before reaching any conclusion in this regard, it is paramount to note the relevant clauses of the Agreement entered into by the assessee, under which payment of royalty for licensed information has been made during the year in question. Since all these Agreements are, mutatis mutandis, identically worded, we take up Agreement made by the assessee on 25.3.2006 with SMC, a copy of which has been placed at pages 1405 onwards of the paper book. First page of the Agreement provides that Suzuki h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ducts. Clause 3.02 of the Agreement deals with 'Improvements by Maruti'. It states that if at any time during the term of this Agreement, Maruti discovers or acquires any improvement with respect to Products or Parts, it shall give to Suzuki full information, instructions, knowhow and assign ownership of the same to Suzuki and the same shall be considered as 'Licensed Information'. This clause of the Agreement not only stipulates that Suzuki will supply the licensed information only for use by Maruti, but, also that any improvements to such licensed information made by Maruti, will also vest with Suzuki. Clause 3.04 of the Agreement makes it clear that Maruti shall not use the licensed information made available to it by Suzuki pursuant to this Agreement directly or indirectly in connection with the manufacture of any products other than the Products and Parts agreed under this Agreement. Article 3.10 of the Agreement is a Confidentiality clause which provides that all licensed information supplied to and acquired by Maruti under this Agreement shall be kept by Maruti in confidence and shall not disclose the same to any other party at any time during the life of thi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ner'. In this view of the matter, there can be no scope for treating the royalty paid for the 'licensed information' as a capital expenditure. 8.5. The ld. DR has relied on certain decisions, which categorize payment for use of technical know-how etc. as a capital expenditure. Similarly, the ld. AR has also relied on certain decision which mark such payment as a revenue expense. In all these decisions, the dividing line is whether the consideration is for purchase of technical information, know-how information, designs and drawings, etc., or for its use. If it is for use alone, then it is revenue and vice versa. Recently, the Hon'ble jurisdictional High Court in CIT vs. Hero Honda Motors Ltd. (2015) 372 ITR 481 (Del), on consideration of the relevant clauses of the agreement before it, which considerably match with the Agreement under consideration, has held that the payments made for Model fee (which is equivalent of Lumpsum royalty in our case) and Running royalty are revenue expenses. In this judgment, the Hon'ble jurisdictional High Court has considered several judgments of the Hon'ble Supreme Court and Hon'ble High Courts and on consideration of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ally becomes deductible. We, therefore, direct to allow deduction of Rs. 9.68 crore. IV. Royalty paid to non-AE 10.1. The next issue raised through Ground No.18.14 is against the transfer pricing adjustment in respect of royalty paid, inter alia, to M/s Auto Chassis International purely for technology/know-how. The ld. AR contended that total royalty paid by the assessee amounting to Rs. 254.39 crore included a sum of Rs. 1,09,45,172/- towards licence fees paid to Auto Chassis International, which is a non-associated enterprise. It was argued that such payment to non- AE cannot be benchmarked u/s 92 of the Act. 10.2. After considering the rival submissions and perusing the relevant material on record, we agree in principle that the ALP u/s 92 can be determined only of international transactions, which form the basis for making addition towards transfer pricing adjustment. Ordinarily, an international transaction is a transaction between two or more AEs. If there is a transaction with non-AE that automatically goes out of reckoning for the purposes of processing it u/s 92 of the Act. Further, we do not consider it necessary to consider this issue on merits because in earlier para ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt considerations. When the object of subsidy is to encourage an assessee to set up or expand industry, it assumes the character of a capital receipt. Such subsidy may be given in any form, may be by financing investment in capital asset or giving the amount in cash or by means of a waiver of sales-tax, etc. for a particular period. But, when the object is not to encourage industrialisation but to facilitate the carrying on an existing business more efficiently post its set-up, then it becomes a revenue receipt, irrespective of the form of disbursement. The Hon'ble Supreme Court in Ponni Sugars (supra) has held that : 'if the object of the assistance under the subsidy scheme was to enable the assessee to set up a new unit or to expand the existing unit then the receipt of the subsidy was on capital account'. 12.3. At this juncture, it is imperative to note that the Finance Act, 2015, w.e.f. 1-4-2016 has further enlarged the definition of income given u/s 2(24) by inserting sub-clause (xviii), which reads as under:- '(xviii) assistance in the form of a subsidy or grant or cash incentive or duty drawback or waiver or concession or reimbursement (by whatever name cal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an a capital receipt. It has been brought to our notice that the Tribunal, for the immediately preceding assessment year, has also treated similar subsidy as capital receipt. This ground is, therefore, allowed. D. T.P. ADJUSTMENT OF AMP EXPENSES 13.1. The next ground is against the addition on account of transfer pricing adjustment towards advertisement, marketing and promotion (AMP) expenses. 13.2. Briefly stated, the facts of this ground are that the TPO bifurcated AMP expenses into routine advertisement expenses and nonroutine advertisement expenses. Applying the bright line test, the TPO considered three comparables, namely, Hindustan Motors Ltd. (Nil AMP expenses), Mahindra and Mahindra (Rs.54.86 crore advertisement expenses) and Tata Motors Ltd. (Rs.187.25 crore advertisement expenses). He calculated percentage of AMP expenses to gross sales of Hindustan Motors at '0', of Mahindra and Mahindra at 0.61%, and of Tata Motors Ltd. at 0.77%. Average of the percentage of AMP expenses to gross sales of Mahindra and Mahindra and Tata Motors Ltd. was determined at 0.69%. Since the assessee's percentage of AMP expenses to gross sales stood at 1.53%, the TPO proposed TP a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... further relied on the order passed by the Tribunal in the case of Perfetti Van Melle India Pvt. Ltd. vs. DCIT (ITA No.407/Del/2015) in which the Bench has discussed about the TP adjustment of AMP expenses in the case of a manufacturer, as is the case under consideration. 13.4. We have heard the rival submissions and perused the relevant material on record. It is an admitted position that the assessee before us is a 'Manufacturer' and not a 'Distributor'. The Special Bench of the Tribunal in the case of LG Electronics India Pvt. Ltd. Vs. ACIT (supra), by its majority decision, without drawing any distinction between manufacturers and distributors, has held, inter alia, that AMP is a transaction and also an international transaction within the meaning of section 92B of the Act and that the TPO has jurisdiction to compute the ALP of this international transaction despite the same not having been specifically referred to by the AO. On the question of determination of the ALP of this international transaction, the Special bench approved the application of bright line test for working out the amount of non-routine AMP expenses and held that the ALP of AMP expenses should ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee. If there is some difference in the functions under these international transactions, including that of AMP, between the assessee and the comparables, then, suitable adjustment should be made to bring both the transactions at par. If probable comparables are not performing similar functions as done by the assessee and no adjustment is possible for bringing the international transactions of the assessee in an aggregate manner at par with those undertaken by the comparables, then, segregation should be done and the international transaction of AMP spend should be separately processed under the transfer pricing provisions for the purposes of determining its ALP separately. In such a determination of ALP of AMP expenses in a segregated manner, proper set off on account of excess purchase price adjustment should be allowed. The view taken by the Special bench of the Tribunal in segregating routine and non-routine expenses on the basis of bright line test has been set aside by the Hon'ble High Court. Further, the decision taken by the Special Bench to the effect that the expenses concerned with the sales, such as, rebates and discounts etc., should be excluded from the ambi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the comparables on the other. The Hon'ble High Court in Sony Ericson Mobile (supra), has held that AMP expense is a separate international transaction and also bright line test is not applicable for determining the ALP of AMP expenses. The manner for the determination of the ALP of the distribution activity and AMP activity has also been set out by the Hon'ble High Court to be conducted, firstly, in a bundled manner by considering the distribution and AMP functions performed by the assessee as well as the probable comparables, and if probable comparables having performed both the functions are not available, then to determine the ALP of AMP expenses in a segregated manner. As such, it becomes immensely important to separately examine the Distribution activity and AMP functions undertaken by the assessee as well as probable comparables. It is vital to highlight the difference between the AMP expenses and AMP functions. Whereas the AMP functions are the means by which the AMP activity is performed, the AMP expenses are the amount spent on the performance of such means (functions). To put it simply, an examination of AMP functions carried out by the assessee and the probable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rily done in the first instance, which should be then compared with similar functions performed by some probable comparables. If the distribution and AMP functions performed by an assessee turn out to be different from those performed by probable comparables, then, a suitable adjustment should be made to the profits of the comparable so as to counterbalance the effect of such differences. If however differences exist in such functions, but no adjustment can be made, then, such probable comparable should be dropped from the list of comparables. If, in doing this exercise, there remains no company doing comparable distribution and AMP functions, then, both the international transactions are required to be segregated and then examined on individual basis by finding out probable comparables doing such separate functions similarly. For the international transaction of AMP spend, this can be done by, firstly, seeing the AMP functions actually performed by the assessee and then comparing it with the AMP functions performed by a probable comparable. If both are found out to be similar, then the matter ends and a comparable is found and one can go ahead with determining the ALP of such a tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns of Distribution and AMP cannot be determined in a combined manner, then the ALP of AMP function should be separately done. The submission advanced by the assessee of considering the profit on an entity level without making comparison of AMP functions done by the assessee as well as the comparable, will render this alternative approach incapable of compliance. Canvassing such a view as argued on behalf of the assessee amounts to treating AMP spend as a non-international transaction, which is patently incapable of acceptance. The fact remains that as per the verdict of the Hon'ble High Court, the AMP spend is an international transaction, which is required to be processed under Chapter X of the Act by taking into account the AMP functions performed by an assessee and then comparing such functions with those performed by comparable entities. This can be done only by mandatorily making a comparison of the AMP functions performed by the assessee and comparables and then making an adjustment, if any, due to differences between the two, so that the AMP functions performed by the assessee and comparable are brought to a similar platform. In fact, this is also the prescription of Rul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r in writing) of the transactions which lay down explicitly or implicitly how the responsibilities, risks and benefits are to be divided between the respective parties to the transactions; (d) conditions prevailing in the markets in which the respective parties to the transactions operate, including the geographical location and size of the markets, the laws and Government orders in force, costs of labour and capital in the markets, overall economic development and level of competition and whether the markets are wholesale or retail. Sub-rule (3) of Rule 10B stipulates that an uncontrolled transaction shall be comparable to an international transaction if (i) none of the differences, if any, between the transactions being compared, or between the enterprises entering into such transactions are likely to materially affect the price or cost charged or paid in, or the profit arising from, such transactions in the open market; or (ii) reasonably accurate adjustments can be made to eliminate the material effects of such differences. 13.11. A comparative study of sub-rules (1), (2) and (3) of Rule 10B makes it palpable that the international transaction and the uncontrolled transaction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gment, the relevant part of which is reproduced here as under : - '92. The majority judgment refers to an example where the Indian AE may have earned actual profit of Rs. 140/-, but returned reduced net profit of Rs. 120/- as the Indian AE had incurred brand building expenses to the tune of Rs. 20/- for the foreign AE, whereas the net profit on sales declared by comparable uncontrolled transactions was Rs. 100/- only. Thus, it was observed that the costs including AMP expenses are independent of cost of imported raw material/finished products having some correlation with overall profit. The example highlights the weakness of the TNM Method. The reasoning would be equally valid, where no AMP or ‗brand building' expenses are incurred. (See paragraph 21.8 to 22.10 of the majority decision). The net profit margins can be affected by variation of operating expenses. Thus, the requirement to select appropriate comparable and adjustment. It would be inappropriate and unsound to accept comparables, with or without adjustment and apply TNM Method, and yet conjecturise and mistrust the arm's length price. TNM Method would not be the most appropriate method when there are c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nctions with those done by comparables, this issue cannot be decided at our end. Under such circumstances, we set aside the impugned order and remit the matter to the file of the AO/TPO for deciding it afresh as per law. In this fresh exercise, the TPO will follow the parts of the judgment in Sony Ericson (supra) as are common to both Manufacturers and Distributors; apply the parts of the judgment as are applicable to a 'Manufacturer'; and ignore the parts of the judgment which pertain exclusively to a 'Distributor'. Needless to say, the assessee will be allowed a reasonable opportunity of hearing in such fresh proceedings. 13.16. Now we espouse the contention of the ld. AR to send the matter back to the TPO/AO for deciding this issue in conformity with the decision yet to be rendered by the Hon'ble High Court in its own case, for which hearing is still going on. This contention, in our considered opinion, is devoid of any merit. It is axiomatic that there can be no direction to follow a forthcoming judgment which is not in existence at the time of giving direction. A direction can be given by a higher authority to the lower authority to follow only such a deci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly in the relevant department, which, in turn, is based on standard quantity of material required for manufacture of vehicles, sometimes there arises difference between the physical inventory taken and the inventory as per books of account at the end of the year. Some items of stock may be eventually under-consumed while others over-consumed. The net effect of under/over consumption is nothing, but, the deviation from the standard consumption. During the year in question, the variation between physical stock and stock register was Rs. 4.48 crore negative, which means items where stock as per stock register was more than physical stock and Rs. 2.86 crore positive i.e., items where stock as per stock register was less than the physical stock, leaving the net difference of Rs. 1.62 crore. The AO disallowed Rs. 4.48 crore ignoring the excess amount of Rs. 2.86 crore. The assessee is aggrieved against this addition. 14.2. It is manifest that the net difference of Rs. 1.62 crore is nothing, but, excess consumption over the standard consumption. Such shortage of Rs. 1.62 crore is only 0.018% of total consumption of material debited to the Profit & Loss Account. In view of the fact that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 14A has been remitted to the AO for doing it afresh as per law. Respectfully following the precedent, we also set aside the impugned order on this score and send the matter to the file of AO for making disallowance u/s 14A, in accordance with the view taken by the Tribunal in its order for the assessment year 2005-06. III. Disallowance u/s 35DDA 16.1. The next ground is against the disallowance of Rs. 38,63,64,348/- made u/s 35DDA of the Act. 16.2. Succinctly, the facts of this ground are that the assessee claimed deduction for a sum of Rs. 38.63 crore u/s 35DDA being the aggregate of 1/5th of payments made to its employees under VR Scheme during the previous year relevant to the assessment year 2002-03 and 1/5th of the payments made to employees under VR Scheme during the period relevant to the assessment year 2004-05. The AO made disallowance on the ground that the VR Scheme was not in accordance with Rule 2BA of the Income-tax Rules, 1962. The disallowance has been challenged through this ground. 16.3. After considering the rival submissions and perusing the relevant material on record, it is observed that similar issue came up for consideration before the Tribunal in its or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n value of software expenses capitalized in earlier years, we set aside the impugned order and remit the matter to the file of AO for allowing deduction in respect of the written down value of the software expenses capitalized in earlier years. VI. Charging of statutory interest 19. Next ground is against the charging of interest u/ss 234B, 234C and 234D of the Act. This ground is consequential and is, accordingly, allowed except the charging of interest u/s 234C. The ld. AR argued that the AO computed interest u/s 234C on the basis of income finally determined as against the income-tax due on returned income. We find force in the arguments put forth on behalf of the assessee that computation of interest u/s 234C for deferment of advance tax is required to be made on the basis of 'tax due on the returned income' as has been enshrined in the provision itself. We, therefore, direct the AO to verify this aspect of the matter and compute interest u/s 234C as per law. 20. Ground no. 27, against the initiation of penalty u/s 271(1)(c), is premature and, hence, dismissed. 21. In the result, the main appeal of the assessee is partly allowed and the appeal against the order u/s ..... X X X X Extracts X X X X X X X X Extracts X X X X
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