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TMI Blog2015 (9) TMI 962X X X X Extracts X X X X X X X X Extracts X X X X ..... - Decided in favour of the assessee. Addition on account of advertisement and sales promotion expenses which ought to have been receivable from the assessee s holding company U/s.92B - Held that:- we hereby accept the concept of Bright Line Test (BLT) as held by our predecessors with respect to the concept of Bright Line Test for distinguishing between the routine and non-routine expenditure incurred on advertisement and brand promotion wherein advertisement and marketing promotion expenses to the extent incurred by uncontrolled comparable distributors is to be regarded within the Bright Line Limit of the routine expenses and the advertisement and market promotion expenses incurred by the distributors beyond such Bright Line Unit constituted non-routine expenditure resulting in creation of economic ownership in the form of marketing intangibles which belong to the owner of the brand. However, in this case even after computing the ALP by following the Bright Line Test the Ld.TPO has deleted the addition ₹ 76.63 crores. - Decided against assessee. Disallowance being royalty paid by the assessee to its Holding Company M/s.HMC Korea - Held that:- TPO has herself accept ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee. Addition on account of export incentives accrued to the assessee on target plus scheme and focus market scheme - Held that:- The export incentive towards target plus scheme is bestowed as a reward in order to encourage the accelerating growth in exports. The incentive on target plus scheme is also nothing but an entitlement for a duty credit based on incremental exports which should be substantially higher than the general annual export target that is fixed. The incentive on focus market scheme is to offset high freight cost and other externalities to select international market with a view to enhance India s export competiveness in these countries. It is pertinent to note that the assessee will be entitled to such benefit only after verification of the claim of the assessee by the relevant Govt. authorities and issuance of the license by such Government authorities. Therefore, the facts of the assessee s case are similar to the facts of the case decided by the Hon ble apex Court Excel Industries Ltd., reported in [2013 (10) TMI 324 - SUPREME COURT], thus we hereby hold that the notional income computed by the assessee cannot be treated as taxable income of the assessee duri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ring the Ld. A.R. did not press this ground and therefore, it is dismissed as such.) (ii) The Ld. Assessing Officer /DRP erred in confirming the order of the Ld.TPO who had held that the appellant ought to have received fees for brand promotion activity undertaken by the assessee to the extent of ₹ 82,12,54,41,380/- from its parent company viz. HMC Korea and the same was added to the income of the assessee under provisions of Section 92C of the Act. (iii) Ld. A.O/DRP has erred in confirming the order of the Ld.TPO, who has held that the expenditure incurred on advertisement was in excess to the extent of ₹ 76.63 crores when compared with other comparable companies in an international transactions and thereby added the excess expenditure to the income of the assessee under provisions of section 92B of the Act. (iv) Ld. A.O/DRP has erred in determining the ALP for royalty payable by the assessee to its AE at ₹ 265.50 crores as against the actual amount paid ₹ 369.77 crores, which was confirmed by the TPO and thereby addition to the extent of ₹ 104,27,36,417/- was made. Corporate Tax Issues:- (v) The DRP has erred in confirming the orde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... India is a vast market for auto makers. India has a huge percentage of middle and upper middle class population that has enough surplus income to buy such movable and immovable assets such as House, cars etc. Further banks have liberally sanctioned auto loans on equated monthly instatement basis to the buyers. It is also relevant to note that India has got a big percentage of population which is not only young but also earns handsome money especially soft ware boom in India. This section of the society is influenced by the brand name. In India in expanding auto market the share of Hyundai is increasing year after year. This has been discussed in Company Profile and Industrial over view given above. In this market, Hyundai brand and Logo has become quite popular. It is due to brand value development on account of efforts made by the assessee company. So far as the Hyundai technology is concerned it is the latest technology and it cannot be said that old technology has been dumped in Indian market. It has promising future that will earn the holding company in coming years huge income by way of royalty on know how supplied by it to the assessee company. It is not an old technology ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ength Price of the International transaction is determined at ₹ 87,62,49,09,000/-. As nothing has been paid on this account by the Holding company to the assessee, addition of ₹ 87,62,49,09,000/- in total income of the assessee is called for in A.Y 2007-08. Thereafter the Learned Members of the DRP confirmed the contentions of the Ld.TPO, however, directed the TPO to exclude the revenue receipts of CKD/Spare parts from value of the sales while computing the notional brand fee @ 1% and thereby upheld the upward revision to ₹ 82,12,54,41,380/-. 4.2 The Ld. A.R. submitted before us that:- (i) The assessee company did not undertake any brand promotion for its parent company M/s.HMC Korea. (ii) The adhoc rate of 1% on sales adopted by the Revenue is not an accepted method in transfer pricing matters. (iii) The benefit of using the brand name Hyundai has resulted in increase of turnover of the appellant. Consequently the profits have also increased which have been offered to tax. The parent company M/s.HMC Korea did not maintain the appellant company to use their brand name as misconstrued by the Ld.TPO. (iv) There was no contractual obligation be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd fees which ought to have been received by the assessee company for the usage of the Holding company s brand Hyundai . The 1% on sales adopted by the Revenue in determining the ALP is purely adhoc and without any basis. It is pertinent to mention here as pointed out by the Ld. A.R. that the Delhi Special Bench of the Tribunal in the case of LG Electronics India Pvt Ltd., mentioned supra has held that Bright-Line- Test (BLT) is the only method to be adopted to arrive at the value of brand development expense receivable by the assessee company from its Holding Company with respect to the promotion of brand of the assessee s Holding Company. 4.5. The brief gist of the case is summarized herein below for reference. Facts: L.G. Electronics India Private Limited ( the assessee ) is a subsidiary of L.G. Electronics Inc., Korea ( the AE ). Pursuant to Technical Assistance and Royalty agreement, the assessee obtained a right from the AE to use technical information, designs, drawings and industrial property rights for the manufacture, marketing, sale and services of agreed products, for which it agreed to pay royalty @ 1 per cent. The AE allowed the assessee to use its bran ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... /value of international transaction, selection of domestic comparable companies not using any foreign brand was relevant in addition to other factors. The Supreme Court of India in Maruti Suzuki s case examined the issue of AMP expenses where it directed the TPO for a de novo determination of ALP of the transaction. The direction by the Supreme Court recognises the fact of brand building for the foreign AE, which is an international transaction and the TPO has the jurisdiction to determine the ALP of the transaction. The expenses incurred in connection with sales are only sales specific. However, the expenses for promotion of sales leads to brand building of the foreign AE, for which the Indian entity needs to be compensated on an arm s length basis by applying the Bright Line Test. With regard to the DRP s approach, of applying a mark-up on cost for determining the ALP of the international transaction, on the ground that the same has sanction of law under Rule 10B(1) (vi) of the Income Tax Rules, 1962 was accepted. The case was set aside and the matter was restored to the file of the TPO for selection of appropriate comparable companies, examining effect of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... isement expenses incurred by the other five comparable companies in the same line of business and worked out the ratio of advertisement expenses to the total sales and determined the average ratio of the comparable at 2.566% as against 3.44% worked out by the assessee. Thus, the excess advertisement expenses incurred over and above the average of the comparables was determined at ₹ 76,63,00,000/- which the Ld.TPO held it to be recoverable from the assessee s parent company. 5.2. Before the DRP, it was argued by the assessee that the advertisement expenses contains certain non advertisement relates expenses being trade discount and therefore, the same has to be excluded from the advertisement expenditure worked out by the Ld.TPO while arriving at the addition of ₹ 76.63 crores. In support of the argument the assessee relied on the Jurisdictional of Madras High Court in the case of CIT Vs. India Pistons Ltd. in 250 ITR 279 in the case CIT Vs. Tuticorin Alkali Chemicals and Fertilizers ltd in 261 ITR 80. The Members of the DRP after considering the issue, held in agreement with the claim made by the assessee by observing as under:- 104.3 The contention of the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this head. 5.4. Before us the Ld. AR submitted that the Ld.TPO had adopted the Bright Line Test and thereby made addition of ₹ 76.63 crores towards excess advertisement and market promotion expenditure being expenses attributable towards Assessee s Holding Company for the tangible benefit derived. Ld. A.R. further submitted that the Members of the DRP though agreed with the concept of such addition, directed the Ld.TPO to exclude volume discount and trade discount from advertisement expenditure while working out the ratio of the advertisement expenses to sales. The Ld.TPO subsequently giving effect to the order of the DRP had deleted the addition of ₹ 76.63 crores because the same was not warranted when the volume discount and trade discount were excluded from the advertisement expenses. Ld. AR further admitted that since the addition of ₹ 76.63 crores was deleted, this ground raised by the assessee need not be considered and dismissed as such. The Ld. D.R conceded to the aforesaid facts presented by the Ld. A.R. 5.5 After hearing both sides and perusing the orders of the Tribunal cited by the Ld. A.R supra, we hereby accept the concept of Bright Line Test ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Maruti Suzuki India Ltd 367.30 14,592.20 2.53% Average 2.36% HMIL 369.77 8,763 4.22% Difference 1.86% Thus arriving at the difference of 1.86%, the Ld.TPO recommended the disallowance of ₹ 165 crores as excess royalty paid to the Holding Company while deciding the ALP of royalty payment. When the matter reached the DRP, the Ld. Members of the DRP accepted the contention of the Ld.TPO that, separate bench marking analysis is necessary for determining ALP of royalty payment, by not accepting the argument of the assessee that the percentage of royalty payment made to the assessee s Holding Company is justifiable since RBI has approved the transaction. However, the Ld. Members of the DRP rejected the comparables viz. General Motors Pvt Ltd Ford India Pvt Ltd., because while selecting the comparables the Related Party Transactions (RPT) were more than 25% and accordingly directed the Ld.TPO to re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 59/Hyd./2011 and 1408/Hyd./2010 (Paper book pg. 370 to 371), ii) Lumax Industrues Ltd. Vs. ACIT in ITA No.4456/Del./2012 (paper book page No.394) and iii) Thyssen Krupp Industries India Pvt Ltd. Vs. Additional CIT, in ITA No.6460/Mum/2012 (paper Book page 433). Further the assessee has relied on the Rule 10B(2)(d) of the Income Tax Rules, 1962 which stipulates as under:- Rule 10B(2) For the purposes of sub-rule(1), the comparability of an international transaction with the uncontrolled transaction shall be judged with reference to the following, namely:- (a) - - - - - (b) - - - - - (c) - - - - (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. 6.5 Further perusing the order of the Ld.TPO in page 40 in para Nos.25 26 the Ld.TPO herself observed that in respect of royalty payment in automotive sector from the study of 35 licenses, the average works out to 4.7% and t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rand awareness. The Holding Company has given to the assessee the exclusive rights of producing the cars in this territory. Each car produced by the assessee becomes the carrier of holding company s brand name and logo ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ Facts being so, it is apparent that the Ld.TPO has herself accepted the high-tech technology passed on to the assessee company by its Holding Company and also after details study of 35 licenses arrived at a conclusion that the royalty payment of 4.7% is prevalent in the automotive sector. Therefore from these circumstances, we do not find it appropriate on the part of the Revenue to make addition on account of ALP of royalty payment. Therefore, we hereby delete the addition of ₹ 104,27,36,417/-made by the Ld.TPO following the directions of Ld. Members of the DRP. Corporate Tax Issues:- 7.1 Ground No.(v) Disallowance of depreciation on capital subsidy amounting to ₹ 7,91,060/- It was observed by the Ld. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ad made investment out of its revenue reserves of 1709.22 crores and therefore disallowance was not called for. It was further contended that the Rule-8D would not be applicable as it had come into force only w.e.f assessment year 2008-09 and not retrospectively. However, the Ld. DRP found the view of the Ld. Assessing Officer to be fortified by the decision in the case of ITO Vs. Daga Capital Management Pvt Ltd reported in 117 ITD 169 (SB)(Mum.) wherein it was held that the sub-section(1) of Section 14A is only a clarificatory and retrospective. Before us, the Ld. A.R relied on the order of the Chennai Bench of the Tribunal in the case of EIH Associated Hotels Ltd. Vs. CIT ITA No.1503/Mds./2012 Paper book Page Nos.465 466. On perusing the order of the Tribunal, we find that in that case the Tribunal had come to such conclusion because the investment was made by the assessee in its subsidy company. However, in the present case before us, the details of investment made were not brought before us. But as pointed out by the assessee Rule 8D was introduced by the Income Tax Fifth Amendment Rules, 2008 with effect from 24.03.2008. Therefore, it would not be applicable to the case of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... In fact, the taxes earned from the Revenue of the assessee company by various government authorities are only spent for the benefit of the public at large. Moreover by extending such gestures by the assessee company would directly or indirectly obtain the following benefits as pointed out by the Ld. A.R. (i) It will help the assessee company to test the performance of the cars manufactured by it. (ii) The extensive usage of the vehicles manufactured by the assessee company will be noticed by the public at large and it will build up the image of the assessee and also Act as advertisement for its products. (iii) The Police Department being over burdened by the large traffic movement in and around the assessee s factory will be at ease for being provided with fast moving vehicles by the assessee company and that will also enhance their efficiency and also soothen the discomfort cause to the public. (iv) It will also help the assessee to fulfill its obligations towards Corporate Social Responsibility . 9.2. Further the assessee has also relied on the decision of Hon ble Apex Court in the case of Sri Venkata Satyanarayana Rice Mill Contractors Co. Vs. CIT in 223 ITR 101 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat amount U/s. 37(1) when such payment had been made for the purpose of assessee s business. Therefore, the payment made by the assessee in the instant case was allowable as deduction. 9.3 In these circumstances, we are of the opinion that such gestures of the corporate houses have to be appreciated and encouraged which will benefit the public at large. Further, since these expenditures have directly or indirectly benefitted the assessee company for its image building and promotion of sales of its products, it should be treated as allowable expenditure U/s. 37(1) of the Act because of the existence of commercial expediency in the conduct of the assessee. Therefore relying on the decision of Hon ble Apex Court supra, we hereby direct the Ld. Assessing Officer to allow the expenditure of ₹ 5,20,97,000/- incurred by the assessee for providing 100 cars to the Tamil Nadu Police Department. 10.1 Ground No.(viii) Addition on account of export incentives accrued to the assessee on target plus scheme ₹ 5,52,26,335/- and focus market scheme ₹ 3 crores. On examining the P L a/c for the relevant to assessment year it was observed by the Ld. Assessing Officer that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s Department. (The detail of the same is enclosed as per annexure-1) Therefore, the contention of the assessee that, the above said export incentives cannot be considered as income unless relevant licenses received from the concerned authorities cannot be accepted. (ii) It is noticed that the assessee has been claiming the expenditure on warranty on provision basis by relying on the decision of Hon ble Supreme Court in the case of M/s.Rotark Control India Private Ltd. Vs. CIT whereas, in the issue of export incentive scheme, even though the same has been accrued, the same has not been offered to the tax even though the same was received completely in the subsequent year. (iii) Reliance is also placed on the ratio laid down by the Hon ble Kerala High Court in the case of CIT Vs. Southern Cables Engineering Works (289 ITR 167). The relevant part of the decision is being reproduced as under:- We are of the view since the assessee was following the mercantile system of accounting, the assessee should have accounted for the penalty by deducting in the accounting year 1989-90 itself to maintain a claim. The Kerala State Electricity Board had made a de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the year the export was made. Ld. D.R. relied on the orders of the Revenue and argued in support of the same. 10.3 We have heard both the parties and carefully perused the materials available on record. In the case cited by the Ld. A.R supra, the advance license benefit receivable by the assessee being the entitlement of Duty Free import of raw materials under the import and export policy were excluded from the total income by the assessee in its statement for computation of income since it was opined by the assessee that such income cannot be treated as accrued until the imports were made by the assessee and consumed. However, the Ld. Assessing Officer treated the same as the income of the assessee while framing the assessment. When the matter came up before the Apex Court, the issued was decided in favour of the assessee. The relevant para of the order is reproduced herein below for reference:- 19. This Court further held, and in our opinion more importantly, that income accrues when there arises a corresponding liability of the other party from whom the income becomes due to pay that amount. 20. It follows from these decisions that income accrues when it becomes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... What has really accrued to the assessee has to be found out and what has accrued must be considered from the point of view of real income taking the probability or improbability of realization in a realistic manner and dovetailing of these factors together but once the accrual takes place, on the conduct of the parties subsequent to the year of closing an income which has accrued cannot be made no income . 26. This Court then considered the facts of the case and come to the conclusion (in Godhra Electricity) that no real income had accrued to the assessee in respect of the enhanced charges for a variety of reasons. One of the reasons so considered was a letter addressed by the Under Secretary to the Govt. of Gujarat, to the assessee whereby the assessee was advised to maintain status quo in respect of enhanced charges for at least six months. This Court took the view that though the letter had no legal binding effect but one has to look at things from a practical point of view . (see R. B.Jodha Mal Kuthiala v. Ld. CIT [1971] 82 ITR 570(SC). This Court took the view that the probability or improbability of realization has to be considered in a realistic manner and it was h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... quite clear that not only was it fruitless (on merits) but also that it may not have added anything much to the public coffers. 10.4. In the case of the assessee, the export incentive towards target plus scheme is bestowed as a reward in order to encourage the accelerating growth in exports. The incentive on target plus scheme is also nothing but an entitlement for a duty credit based on incremental exports which should be substantially higher than the general annual export target that is fixed. The incentive on focus market scheme is to offset high freight cost and other externalities to select international market with a view to enhance India s export competiveness in these countries. It is pertinent to note that the assessee will be entitled to such benefit only after verification of the claim of the assessee by the relevant Govt. authorities and issuance of the license by such Government authorities. Therefore, the facts of the assessee s case are similar to the facts of the case decided by the Hon ble apex Court cited supra. Therefore, respectively following the decision of the Hon ble apex Court we hereby hold that the notional income computed by the assessee cannot be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ------------------------ From the above it is evident that the assessee is entitled to additional depreciation if it has satisfied the condition that it is engaged in the business of manufacture or production of any article or thing. There is no condition stipulated in the Act that additional depreciation shall be allowed only if the asset is deployed in the factory of the assessee and not the office of the assessee. Therefore, we accept the argument of the Ld. A.R. and reject the observations of the Revenue on this regard and accordingly direct the Ld. Assessing Officer to allow the claim of additional depreciation of ₹ 8,52,500/- if the other conditions of the Act remains satisfied. 12.1. Ground No.(x) The Ld. Assessing Officer erred in not granting the credit for the tax deducted at source amounting to ₹ 39,90,609/-. During the course of hearing, the Ld. AR submitted that the Ld. Assessing Officer had denied giving credit to the full value of TDS certificates produced by the assessee. He therefore pleaded that the matter may be remitted back to the file of the Ld. Assessing Officer to examine the certificates and pass speaking orders as per merits and law. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee has explained before the Assessing Officer that in India, Police Department does not use car for patrolling and surveillance purposes and the usage of cars for road safety, removal of traffic bottleneck, reaching the accident spot in time, surveillance, chasing and catching of culprits needs to be addressed and tested. The Hyundai Motor India Ltd. [HMIL in short] has offered 100 Hyundai Accent cars to Tamil Nadu Police Department to test the car market. These patrol cars fitted with the latest electronic equipments would be very useful in controlling crimes and protecting the valuable life of citizens. This expenditure on test marketing has been incurred wholly and exclusively for the purpose of the business of HMIL to find out the new segments of car market. It was also submitted that the expenditure incurred by the assessee was wholly and exclusively for the purpose of business and it is allowable under section 37 of the Act. Further, the assessee has stated that it was also incurred for commercial expediency and relied on the decisions in the case of Sree Meenakshi Mills Ltd. v. CIT 49 ITR 156 (Mad), CIT v. Birla Cotton Spinning Weaving Mills Ltd./Birla Bros (P) Ltd. 82 ITR ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The ld. Counsel for the assessee has submitted that the expenditure incurred by the assessee is for the purpose of advertisement and also corporate social obligation, which is fully allowable under section 37 of the Act. 21. On the other hand, the ld. DR has submitted that the Police Department is being using cars of other companies such as Bolero Scorpio of Mahindra Qualis of Toyota. There was nothing special in using the Hyundai Accent cars. Therefore, it cannot be said that the expenditure incurred is for the purpose of advertisement. 22. Both parties have been heard, perused the materials on record and gone through the orders of authorities below. In this case, the assessee has donated 100 cars to Police Department of Tamil Nadu State Government. It is not a case of the assessee that the Tamil Nadu Police Department has requested the assessee to donate the cars for any particular purposes. The assessee has voluntarily donated these cars to the Police Department. The assessee has chosen to whom the cars have to be donated and accordingly, it has delivered the cars to the Police Department. It is a facility provided by the assessee to the servants of the Government i.e. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lly wider than the expression for the purpose of earning profits. It covers not only the running of the business or its administration but also measures for the preservation of the business and protection of its assets and property. It may legitimately comprehend many other acts incidental to the carrying on of the business. In the present case, the cars given by the assessee to the Police Department is not an incidental to the business of the assessee. Therefore, it is not allowable expenditure under section 37 of the Act. 25. In the case of CIT v. Malayalam Plantations Ltd. [1964] 53 ITR 140 (SC), the Hon ble Supreme Court has held as under: The expression for the purpose of business in section 10(2)(xv) of the 1922 Act [corresponding to section 37(1) of the 1961 Act] is wider in scope than the expression for the purpose of earning profits . Its range is wide; it may take in not only the day-to-day running of a business but also the rationalisation of its administration and modernisation of its machinery, it may include measures for the preservation of the business and for the protection of its assets and property from expropriation or coercive process; ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r section 37 of the Income Tax Act or not? ORDER Per D. Manmohan, V.P. On account of difference of opinion between the Hon ble Accountant Member and Hon ble Judicial Member, the following question was formulated and referred to the Hon ble President for nomination of Third Member under section 255(4) of the Income Tax Act, 1961:- Whether the expenditure incurred by the assessee by giving 100 cars to the Police department of Tamil Nadu is an eligible expenditure under section 37 of the Income Tax Act or not The Hon ble President, ITAT was pleased to nominate me as Third Member in the instant case which was listed for hearing on 19th June, 2015. 2. Before adverting to the arguments of both the parties, the facts necessary for disposal of the issue may be stated in brief. As could be noticed from the assessment order the assessee is engaged in the business of manufacture and sale of motor vehicles and its components. During the previous year relevant to the assessment year under consideration the assessee donated 100 cars of Hyundai Accent model to the police department of Tamil Nadu State Government. The total worth of 100 cars was of ₹ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Secretary, Government of Tamil Nadu, Fort St. George, Chennai-600 009. Dear Sir, Ref : Patrol Cars Market Research. ****** Hyundai Motor India sells cars in many countries across the world and the Group is seventh largest automobile manufacturer in the world. The cars sold by us used by the Police and other security agencies for the purpose of patrolling, surveillance, security and safety related activities. In India, Police Department does not use cars for patrolling and surveillance purposes. The usage of cars for road safety, removal of traffic bottleneck, reaching the accident spot in time, surveillance, chasing and catching of culprits needs to be addressed and tested. These Patrol Cars fitted with the latest electronic equipments would be very useful in controlling crimes and protecting valuable life of citizens. In this direction, we propose to test the market by offering vehicles to Tamil NaduPolice. We request your goodselves to kindly accept our offer of 100 suitably modified Accent cars and provide us with your valuable information on the usage, effectiveness and improvement. We will proceed further on hearing fro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y. In this regard, the Assessing Officer referred to the decision of Hon ble Andhra Pradesh High Court in the case of CIT Vs. Vazir Sultan Tobacco Co. Ltd. (169 ITR 139) wherein the Court observed that even though an expenditure is incurred by an assessee voluntarily, but not obligatory, it can be allowed if it is ultimately designed to further the objects and purposes of the assessee and the object should be real and not remote or illusionary. Reliance was also placed upon the decision of Chennai Bench of the Tribunal in the case of Tamil Nadu Minerals Ltd. Vs. JCIT (95 ITD 294). Thus, the claim of the assessee under section 37(1) of the Act was rejected by the Assessing Officer. 7. When the matter was placed before the Division Bench of the Tribunal, it was contended on behalf of the assessee that it was fulfilling its corporate social responsibility in the form of gifting cars to the Tamil Nadu police department. It was further claimed that usage of the vehicles by the police department would help the assessee to assess the reliability of the vehicles and help the public at large apart from helping the assessee as advertisement to promote sales. The assessee placed reliance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aspect, wherein he observed that the assessee initially claimed it as advertisement and sales promotion expenditure by stating that police department does not use cars for patrolling and surveillance etc. and the usage of cars for road safety, removal of traffic bottleneck, reaching accident spot in time, catching culprits equally needs to be addressed and tested and hence the cars were provided to Tamil Nadu police department to test the car market. The learned Judicial Member also recorded the plea of the assessee that these patrolling cars are fitted with latest electronic equipments which are very useful in controlling crimes and protecting the valuable life of citizens. 11. However, the learned Judicial Member opined that donation of cars has no nexus with the business of the assessee. So far as the test market is concerned, the learned Judicial Member noticed that assessee has not provided any information with regard to usage, effectiveness and improvement of the said vehicles donated and in fact, no information was obtained from the police department with regard to usage of cars. The cars donated were not being used with any advertisement banners, etc. of the assessee-c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... given to the police department is not incidental activity for the purpose of business of the assessee, learned Judicial Member concluded that the expenditure is not allowable as deduction under section 37 of the Act. 14. Learned Judicial Member has also taken into consideration the ratio of the judgement of Hon ble Supreme Court in the case of CIT Vs. Malayalam Plantations Ltd. (53 ITR 140) (SC) wherein the Court observed that though the words for the purpose of business are wider enough to comprehend many other acts incidental to the carrying on of the business, its limits are implicit in it, i.e. for the purpose of business, i.e. to say, expenditure incurred shall be for carrying on of business and the assessee shall incur it in its capacity as a person carrying on the business and cannot include the sums spent as an agent of a third party. The learned Judicial Member also observed that the assessee failed to prove that cars donated by the assessee to police department were wholly and exclusively for the purpose of its business since there was no nexus between the expenditure and business of the assessee. 15. On account of difference of opinion, as already stated hereinab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sulated from unnecessary litigation if they maintain goodwill with the police department. He placed reliance upon the decision of the Hon ble Madras High Court in the case of CIT Vs. Madras Refineries Ltd. (266 ITR 170) to submit that expenditure on social welfare of local residents is a goodwill gesture and monies spent by the assessee for establishing water facilities cannot be regarded as wholly outside the ambit of the business concerns of the assessee. He also relied upon the following decisions in support of his contention that expression wholly and exclusively does not include the expression necessarily and thus even the expenditure incurred voluntarily, in the interest of business, can be considered as expenditure incurred for the purpose of business; even though it may not yield benefit to the assessee, such expenditure can be considered as incidental to carrying on of the business:- i) Patnaik Co. Ltd. Vs. CIT (161 ITR 365) (SC) ii) L.H.Sugar Factory Oil Mills P.Ltd.Vs. CIT (125 ITR 293) (SC) iii) CIT Vs. Coats Viyella India Ltd. (253 ITR 667) (Mad) iv) CIT Vs. Infosys Technologies Ltd. (360 ITR 714) (Karn) v) CIT Vs. Kamal Co. (203 ITR 1038) (Raj) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hose officers who are in need of vehicles i.e., it identified the persons and provided vehicles to them so as to effectively deal with the law order problems and accordingly provided number of vehicles such as Bolero, Scorpio and Qualis etc. and hence it is not correct to state that police department does not have vehicles. The corporate social responsibility is a new concept which has emerged recently whereas in the assessment year under consideration this concept has not gained momentum. Even otherwise, corporate social responsibility refers to an obligation on the part of the Government but not fulfilled i.e., in the event of inability on their part to render proper services, corporates can step in and share government s responsibility as part of their corporate social responsibility. Whereas, in the instant case, how many cars are to be provided to the officers is left to the wisdom of the police department and the assessee cannot assume that police department is unable to provide cars and hence, in the garb of corporate social responsibility, they are not supposed to provide cars. In this regard, he referred to the observations of the learned Judicial Member to submit that i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ase. Learned Departmental Representative also relied upon the decision of the Hon ble High Court of Orissa in the case of CIT Vs. Industrial Development Corporation of Orissa Ltd. (249 ITR 401), wherein the Court observed that if a State owned corporation donates an amount of rupees one lack to Chief Minister s Relief Fund it cannot be treated as expenditure incurred wholly and exclusively for the purpose of business. In this regard, the Court observed that initial onus is upon the party, who claims deduction, to prove that the expenditure was incurred wholly and exclusively for the purpose of business i.e. payment was made with a view to secure benefits for its business. Since there is nothing on record to establish that the donation amount of rupees one lakh to Chief Minister s Relief Fund was related to carrying on of its business, the Hon ble Orissa High Court observed that the expenditure is not allowable as deduction under section 37(1) of the Act. The High Court had taken note of the decision of Supreme Court in the case of Sri Venkata Satyanarayana Rice Mill Contractors Co. Vs. CIT(supra) to clarify that in the aforecited decision the assessee association obtained permits f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n as to whether the management has taken any specific decision in the form of making it as one of the issues in the Board meeting or whether there is any communication between the top management and middle level management, learned counsel submitted that there is no such record available and in fact was not produced before the tax authorities. He also admitted that assessee has not even made any effort till date to draw attention of public by mentioning in their advertisements that cars manufactured by them are best cars designed to protect the interest of public at large and used by police personnel . With regard to additional fittings for the specific use of the police personnel, no material was placed on record; the counsel merely contended that every car will have its logo Hyundai and that itself will have advertisement value. 23. I have carefully considered the rival submissions and perused the record as well as the relevant case law on the subject. The expression wholly and exclusively incurred for the purpose of business , used in section 37(1) of the Act, was subject matter of interpretation by various forums and the Apex Court also had several occasions to explain t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an ₹ 5 crores are given, a decision has to be taken at a major level and such a decision can be taken in a Board meeting followed by minutes of the meeting. No such evidence was furnished at any stage. 26. This apart the company has a robust market research wing and it claims that the cars sold by them were used by the Police and other security agencies elsewhere in which event there was no need to give the cars free of cost to the Police Department in Tamil Nadu. In this background it can be seen that the assessee having claimed to have sold the cars to the Police and other security agencies in other countries/places, the feedback, if any, could have already been obtained and there was no need for the assessee to incur such huge expenditure by giving the cars free of cost to the Police Department of Government of Tamil Nadu, more particularly when the proposal was not accepted in writing and neither the assessee called for their feedback nor did the Police Department deem it fit to give any feedback. 27. Since the assessee reported the expenditure under the head advertisement and sales promotion it may be seen whether the expenditure has helped in advertisement of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th such facility. In such an event of the matter it is not appropriate on the part of the corporate to grab the opportunity to provide luxuries to officials even when not required. For example, a Police Inspector, under law, is provided a motorcycle which can be used effectively to cruise through the busy roads in India whereas the assessee might feel that even a Police Constable should enjoy the luxury of a car and in the garb of allowing them to have more number of cars for patrolling it may gift cars which cannot be equated to corporate social responsibility. In short, it is for the assessee to prove that the cars were provided genuinely under the impression that it is incurring the expenditure as its corporate social responsibility. The assessee could have furnished the relevant data from the government websites or news paper clipping that the Police Department in Tamil Nadu were suffering on account of lack of number of cars for effective discharge of their duties. No such material could be furnished at any stage of the proceedings. Even otherwise Explanation 2 to section 37(1) clarifies the legal position that CSR expenditure cannot be claimed as business expenditure under se ..... X X X X Extracts X X X X X X X X Extracts X X X X
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