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TMI Blog2016 (5) TMI 869X X X X Extracts X X X X X X X X Extracts X X X X ..... oned basis year after year and such provision would be reduced completely when the obsolete stock is written off in subsequent years, no disallowance can be made on the assessee company. provision for slow moving inventory would be allowed as revenue deduction and therefore, the disallowance made in the assessment order for A.Y. 2010- 11 on this account has to be deleted. X X X X Extracts X X X X X X X X Extracts X X X X ..... oreign AE, was a transaction of creating and improving marketing intangibles for and on behalf of its foreign AE and further that such a transaction was in the nature of provision of a service by the appellant to the AE. 3.6. That the assessing officer erred on facts and in law in not appreciating that the characterization of the appellant being that of a full fledged manufacturer and the sole beneficiary of the AMP expenditure incurred by it, justifies the conduct of the appellant in incurring and bearing the cost of AMP expenditure. 3.7. The DRP erred on facts and in law in not holding that expenditure on advertisement and brand promotion, unilaterally incurred by the appellant, could not be regarded as a 'transaction' in the absence of any proved understanding / arrangement between the appellant and the associated enterprise. 3.8. The Assessing Officer/TPO erred on facts and in law in not appreciating that the AMP expenses, etc., unilaterally incurred by the appellant in India could not be characterized as an international transaction as per section 92B, in the absence of any proved understanding / arrangement between the appellant and the associated enterprise, so as to i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of the appellant was better than the corresponding net profit rate of comparable companies, would not lead to the conclusion that incurring of AMP expenses for the AE was at arm's length. 3.18 That the assessing officer/TPO erred on facts and in law in ignoring that "bright line limit" is not a prescribed method under the purview of section 92C of the Act. 3.19 Without prejudice that the assessing officer/TPO erred on facts and in law in not appreciating that for determining whether the AMP expenses incurred by the appellant could be said to be excessive, only the appropriate comparables having similar product / brand profile as the appellant could be considered in terms of Rule 10B(2) of the Income-tax Rules, 1962 read with section 92C of the Act. 3.20 That the assessing officer/TPO erred on facts and in law in failing to appreciate that the appellant has long-term rights to use the trademark/ licensed intangibles and reaps all the benefits of the said AMP expenses and is thus the economic owner of any related marketing intangible. 3.21 That the assessing officer/TPO erred on facts and in law in failing to appreciate that all the key decisions with respect to advertising ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sociated enterprises of ₹ 45,67,000 was nil. 4.1 . That the assessing officer/TPO erred on facts and in law in holding that the assessee was acting as a contract manufacturer and hence royalty paid as percentage of sale to the associated enterprises is not at arm's length as it amounts to collecting royalty on the sale to itself. 4.2. That the assessing officer/TPO erred on facts and in law in holding that where the appellant is making part of its sales to related parties and the benefit of purchasing components is reaped by the associated enterprise, the payment of royalty do not confirm to arm's length price. 4.3. That the assessing officer/TPO erred in not appreciating that the royalty paid in terms of agreement duly approved by the Central Government, cannot be referred as a non bonafide payment not satisfying the arm's length test. 4.4. That the assessing officer/TPO erred in not appreciating that payment of royalty is a necessary cost incurred by the appellant for manufacture of goods. Corporate Tax Issues: 5. That the assessing officer erred on facts and in law in disallowing royalty amounting to ₹ 5,08,52,635 and technical guidance fee amounting to & ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act. 6.1. That the assessing officer erred on facts and in law in law in holding that the payments of export commission was towards royalty/fee for technical services as the same was in consideration for (i) right to use trademark, (ii) permission to export and (iii) in lieu of managerial and technical services provided by Honda, and accordingly the appellant was under obligation to deduct tax at source there from as per section 195 of the Act. 6.2. That the assessing officer erred on facts and in law in not appreciating that payment of export commission to Honda does not result in an income accruing or arising in India in terms of section 9(1) of the Act and hence is not liable to tax in India. 6.3 That the assessing officer erred on facts and in law in not appreciating that the payment of export commission was made to Honda in consideration of according consent for ceding overseas territory permitting export of motorcycle and spares by the appellant. 6.4 That the assessing officer erred on facts and in law in not appreciating that services / assistance provided by Honda were incidental to the right for exploiting the foreign territory and were not in the nature of 'fee f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rred on facts and in law in not appreciating that the only Transfer Pricing adjustment permitted by Chapter X of the Act was in respect of the difference between the arm's length price (ALP) and the contract or declared price. 3.3 The DRP erred on facts and in law in not appreciating that the Transfer Pricing adjustment sought to be made by the TPO in the present case was a mere quantitative adjustment, on the footing that the Appellant had incurred an excessive amount of AMP expenditure , and not on the footing that there was a difference between the ALP and the contract or declared price, and that a Transfer Pricing adjustment was not at all permitted or authorized by Chapter X of the Act. 3.4 The DRP erred on facts and in law in not holding that merely because the Indian company has incurred expenditure on product advertisements including the foreign brand and the AMP expenses incurred by the taxpayer, which are proportionately higher than those incurred by comparable cases, it does not lead to the inference of "transaction" between the taxpayer and the foreign AE for creating marketing intangibles on behalf of the later. 3.5 That the DRP/TPO erred on facts and in law in n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act, 2012. 3.13 The DRP/TPO erred on facts and in law in not appreciating that in absence of any understanding / arrangement between the appellant and the associated enterprise, the associated enterprise was under no obligation to reimburse AMP expenses incurred by the appellant for sale of its products in India. 3.14 That the DRP/TPO erred on facts and in law by questioning the commercial expediency of AMP expenditure incurred by the appellant and assuming that benefit has accrued to AE on account of AMP expenses incurred by the appellant in India. 3.15 The DRP/TPO erred on facts and in law in not appreciating that the advertisement and marketing expenses were incurred by the appellant wholly and exclusively for purposes of its business and not on behalf of or for the benefit of the AE; any benefit to the AE being only incidental. 3.16 That the DRP/TPO erred on facts and in law in not appreciating that no adjustment on account of allegedly excess AMP expenditure is warranted in the case of the appellant as such expense have been found to constitute bonafide and deductible business expenditure. 3.17 That the assessing officer erred on facts and in law in not appreciate th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ficer erred on facts and in law in holding that the appellant should have earned a mark-up in respect of the AMP expenses, alleged to have incurred for and on behalf of the associated enterprise. 3.27 Without prejudice that, the assessing officer erred on facts and in law in holding the AMP expenses incurred by the appellant to be "excessive" on the basis of a "bright line limit" arrived at by considering inappropriate comparables, not having similar product/ brand profile as the appellant. 3.28 Without prejudice that the assessing officer erred on facts and in law in considering selling and distribution expenses amounting to ₹ 7,13,41,000 for the purpose of calculating alleged AMP expenditure of the appellant 3.29 Without prejudice that the assessing officer/TPO erred on facts and in law in considering the following companies as comparable for benchmarking advertisement and publicity expenses: Companies Advertisement expenses (% of sales) 1. Birla Power Solutions Ltd. 1.43% 2. Greaves Cotton Ltd 0. 32% 3. Gujarat Forgings Ltd 1.61% 4. Jaksons Ltd 0.60% 5. Kirloskar Brothers Ltd 1.25% 6. Powerica Ltd 0.22% 7. Shakti Pumps Ltd 2.74% 8. Southern Agr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee company is making a part of its sales to its related parties and the benefit of producing components is reaped by AE, the payment for charges for royalty does not confirm to the arm's length principle". 4.4 That the assessing officer erred on facts and in law in not appreciating that the royalty is paid by the appellant on net sales after deducting the cost of imported components, standard bought out components and export commission. 4.5 That the assessing officer/TPO erred in not appreciating that the royalty paid in terms of agreement duly approved by the Central Government, cannot be referred as a non bonafide payment not satisfying the arm's length test. 4.6 That the assessing officer/TPO erred in not appreciating that payment of royalty is a necessary cost incurred by the appellant for manufacture of goods. Corporate Issues Re: Disallowance of relocation expenses 5. That the assessing officer/ DRP erred on facts and in law in treating expenditure amounting to ₹ 51,15,000/-, incurred on account of relocation of appellant's factory as capital expenditure. 5.1 That the assessing officer/ DRP erred on facts and in law in holding that the aforesaid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e is paying royalty of ₹ 6,78,03,514 and a technical guidance fee of ₹ 1,81,61,938 to Honda Motor Co. Japan. The AO came to the conclusion that royalty and technical guidance fee were to be capitalised, after allowing depreciation of 25% on the same. 3.1. On the issue of export commission, the AO found that the export commission is in the nature of royalty/ fees for technical services. As no tax was deducted at source, the payment of ₹ 4,32,49,149 was not allowed as deduction by invoking section 40(a)(i) of the Act. Alternately, the AO held that the expenditure in question is purely for the use of license acquired by the assessee, which was for a long period of time and thus would constitute a capital asset. Accordingly, the payment of export commission was disallowed. 3.2. The AO also noticed that the assessee had entered into international transactions during the year under consideration. The TPO in the order dated 14.12.2012 made an adjustment of ₹ 4,80,08,814 on account of the difference in advertisement and promotion expenditure of the assessee company and the arm's length price of subsidy received from the associated enterprises. The AO further made ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... einabove. 6. As is specified in the grounds of appeals itself, the ld. AR of the assessee submitted that Ground Nos. 1 & 1.1 raised in A.Y. 2009-10 and grounds Nos. 1 to 2 raised in A.Y. 2010-11 may be treated as general in nature and do not require any specific adjudication. 7. Grounds Nos. 2, 3 to 3.28 raised in A.Y. 2009-10 and grounds Nos. 3 to 3.34 raised in A.Y. 2010-11 are identical and relate to the issue of transfer pricing additions on account of advertising, marketing and promotion expenses amounting to ₹ 4,80,08,814 and ₹ 10,98,88,464 respectively. 8. The relevant submissions made by the ld. Counsel for the assessee on this issue are common for both the years. Therefore, the submissions made by way of written synopsis for the A.Y. 2010-11 are reproduced as under : "The appellant in the relevant previous year entered into the following international transactions with the associated enterprises: Sl. No. International transactions Amount Payment (Rs.) Method Applied 1. Import of raw material, and components 328,338,399 TNMM 2. Export of spares 81,60,405 TNMM 3. Import of Finished Goods 258,942,760 TNMM 4. Export of Finished Goods 114 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing the relevant previous year, as follows: Particulars Amount (Rs.) Commission on sales 5,02,96,000 Advertisement and publicity 1,76,58,000 Sales Promotion 3,72,36,000 Total 12,62,35,000 The Transfer Pricing Officer (TPO) had undertaken benchmarking analysis of AMP expenses incurred by the appellant allegedly applying the Bright Line Test. The TPO has held that the AMP expenses to that extent were incurred for creating marketing intangible of 'Honda' brand which belongs to the associated enterprise and, therefore, requires compensation along with a mark-up for the brand promotion services. For applying bright line test, the TPO compared AMP expenditure of 4.13% (as a percentage of total turnover) incurred by the appellant with average AMP expenditure of 1% of the following comparable companies: Name of company AMP/sales Birla power solutions 1.43% Greaves Cotton 0.32% Gujarat Forgings Ltd 1.61% Jaksons Ltd 0.60% Kirloskar Brother Ltd 1.25% Powerica Ltd 0.22% Shakti Pumps Ltd 2.74% SudhirGensets Ltd 0.28% Supernova Engineers Ltd 0.51% Arithmetic Mean 1.00% The TPO accordingly, held that, since the ratio of AMP expenses as a percenta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rked under the Transfer Pricing Regulations. 1. No international transaction The said decision of Special Bench of the Tribunal recently was considered by the Hon'ble Delhi High Court in the case of Sony Ericsson Mobile Communications India Pvt. Ltd. Vs. CIT 374 ITR 118. In the said decision the Hon'ble Delhi High Court considered the case of limited risk distributors, i.e., Sony Ericsson, Canon and Reebok, etc., wherein, the existence of international transaction on account of AMP expenditure was admitted and reported. The Delhi High Court in the said decision upheld TP adjustment in respect of AMP expenses only in respect of limited risk distributors and not in respect of full risk manufacturers. The High Court followed and applied para 6.38 of the OECD Transfer Pricing Guidelines. It is of vital importance to note that the Guidelines apply only to limited risk distributors and not to full risk manufacturers like the appellant Further, at para 124 of the order, the Hon'ble High Court has distinguished between the functional profile of a limited risk distributor and a full risk distributor. The Hon'ble High Court in the case of Sony Ericsson Mobile Communications India Pvt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ising essentially of finished good purchases) to sales is a significant percentage. In case of manufacturer, any expenditure incurred on account of advertisement and marketing expenses are borne by it and the related benefits also accrue to the manufacturer. The functions performed by the manufacturer in India are significant and value adding and accordingly the returns for such functions vests with the Indian manufacturer. With respect to the manufacturing and sales of all the different variants of the product "Honda" (which Trademark is owned by the AE), the following operations are exclusively done/borne by the appellant without any intervention of the AE: - Strategic business planning - Manufacturing and packing operations - Raw material procurement - Specifications of the final product - Quality Testing - Technology and legal compliance - Selling and Distribution - Marketing and promotional strategy - Annual advertisement spends - Choice of media - Scope of marketing - Product recall - Risk of product expiry/loss - Consumer complaints - Financial Risks (Working capital, Inventory, Credit risk/bad debt, etc.) - Employment of asset ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed that in case of a full risk distributor or a full risk manufacturer, running an independent business, no compensation on account of AMP expenses is warranted. 3. Bright Line Test is not the prescribed method: The "Bright Line Test" approved by the Special Bench in the case of LG Electronics India Pvt. Ltd. (ITA No 5140/Del/2011) is not one of the five methods provided under the Act. In other words, while embarking on benchmarking of AMP expenses, none of the five prescribed methods are applied by the Revenue. The Hon'ble High Court in the case of Sony Ericsson Mobile Communications (supra) upheld the aforesaid contention that Bright Line Test has no mandate under the Act. In view of the aforesaid, it is respectfully submitted that the Bright Line Test has no mandate under the Act and accordingly the same cannot be resorted to for the purpose of ascertaining if there exists an international transaction of brand promotion services between the appellant and the associated enterprise. The Hon'ble Delhi High Court in the case of Sony Ericsson Mobile Communications India Pvt Ltd vs CIT (ITA No 16/2014) held that if the Indian entity has satisfied Transactional Net Margin Metho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to establish that the AMP expenditure were incurred pursuant to arrangement, understanding or action in concert so as to conclude as a transaction in terms of section 92(F)(2) of the Act so as to give rise to an international transaction. It was submitted that Delhi Bench of Tribunal in assessee's own case for A.Y. 2008-09 in ITA No. 6023/Del./2012 vide order dated 12.12.2014 remitted this issue back to the file of TPO. This order of ITAT was assailed before the Hon'ble Delhi High Court where, the Hon'ble Court has decided the issue in favour of the assessee vide order dated 23.12.2015. 9. The learned D.R. relied upon the orders of the authorities below. The ld. DR also relied on the orders of ITAT in the case of Cranes Software International Ltd. vs. DCIT 52 Taxman.com 19 (Bang. Tribunal) and of Delhi High Court in CIT vs. Amadues India Pvt. Ltd. in ITA No. 535/2014 and 729/2014 dated 15.04.2015 and ITA No. 23/2015 & 55/2015 dated 21.09.15 in the case of Rebok India Co. vs. CIT 10. We have considered the rival submissions in the light of material available on record and we find that the Delhi bench of the Tribunal in the assessee's case for assessment year 2008-09, bearing ITA N ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o the transfer pricing adjustment exercise. 38. The Court is satisfied that in the present case, the Assessee is carrying on business as an independent enterprise and is incurring AMP expenses for its own benefit and not at the behest of the AE. The benefit of creation of marketing intangibles for the foreign AE on account of AMP expenses can at best said to be incidental. The decision in Sony Ericsson (supra) acknowledges that an expenditure cannot be disallowed wholly or partly because it incidentally benefits the third party. This was in context of Section 37(1) of the Act. Reference was made to the decision in Sassoon J David & Co Pvt. Ltd. v. CIT (1979) 118 ITR 26 (SC). The Supreme Court in the said decision emphasised that the expression 'wholly and exclusively' used in Section 10 (2) (xv) of the Act (Indian Income Tax Act, 1922) did not mean 'necessarily1. It said: "The fact that somebody other than the Assessee is also benefitted by the expenditure should not come in the way of an expenditure being allowed by way of a deduction under Section 10 (2) (xv) of the Act (Indian Income Tax Act, 1922) if it satisfies otherwise the tests laid down by the law." ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Jurisdictional High Court in the appellant's own case (supra), we decide this issue in favour of assessee and delete the adjustment made by the TPO on account of AMP expenses for both the years under appeal. In view of this decision rendered by Hon'ble jurisdictional High Court in the case of assessee itself, the decisions relied upon by the ld. DR will be of no help to the Revenue on this point. 11. Ground Nos. 4 to 4.4 in A.Y. 2009-10 and Grounds Nos. 4 to 4.6 in A.Y. 2010-11 relate to transfer pricing addition on payment of royalty of ₹ 45,67,000/- and ₹ 37,79,000 on sales to associated enterprises. Common submissions have been made by the Ld. AR, through synopsis filed at the time of hearing, which are reproduced hereunder from the appeal for A.Y. 2010-11 for ready reference: "The appellant is engaged in the manufacture and distribution/sale of power products like generator sets, engines, tillers etc and in India as well as outside India, including to its overseas related parties. It performs all manufacturing, selling & distribution, and other management functions in this regard and assumes typical entrepreneurial risks associated with the carrying on its busines ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ectfully submitted that even with respect to sales made to associated enterprises, the applicant is acting in the capacity of an entrepreneur/licensed manufacturer and was therefore justified in paying royalty on such sales. Reliance is placed in this regard on the decision of the Hon'ble Delhi Bench of the Tribunal in the case of Hero Motocorp Limited vsAddl CIT (ITA No 5130/Del/2010) wherein the Hon'ble Tribunal held as under: "The further finding of the TPO that the position of the assessee company with regard to export was that of a contract manufacturer, in our opinion, is without any basis and in fact contrary to the facts on record. The raw materials have been purchased by the assessee in its own right. It is not the case of the TPO that the raw materials have been supplied by the AE. The assessee has sold the goods to AE on principal to principal basis and has received the sale consideration. In view of the above, in our opinion, there is no justification for disallowance of the royalty on the export." Further, the Hon'ble Delhi Bench of the Tribunal in the case of Honda Motorcycle and Scooters India Pvt Ltd vs ACIT (ITA No 132/Del/2013) while deleting a similar adjus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ue authorities cannot restructure/recharacterize the legitimate. In view of the aforesaid, it is respectfully submitted that in the absence of any evidence, the TPO was not justified in arbitrarily re-characterizing the assessee as a contract manufacturer. Further, the TPO in the order has stated that the Hon'ble Tribunal in the case of ACIT vs Sona Okegawa Precision Forging Ltd held that payment made by contract manufacturer on account of royalty is not at arm's length. However, the Hon'ble Delhi Bench of the Tribunal in the aforesaid case while dismissing the appeal of the department with respect to a similar addition made by the TPO, held as under: "As such, the fee was paid on the sales made to the AE also. There was no material brought by the TPO to demonstrate that the price on sales made to the AE was not at an arm's length . That being so, it was at market determined prices that the sales were made by the assessee. Moreover, it goes unchallenged that the fees paid under the Technology Agreement comprises an integral part of the cost of production, which was recovered from the sale price. It was thus, that so far as regards the sales made to the AE, the amount of fee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wa Precision Forging Ltd (ITA No: 260/Del/2010) In view of the aforesaid, it is respectfully submitted that the payment of royalty by the assessee to Honda was justified, the same was made on account of commercial expediency and cannot be disputed. The TPO has further stated that since the purchase price of the component bought from the associated enterprises included the return for technology and therefore, no separate royalty was payable. In this regard, it is respectfully submitted that the TPO has failed to appreciate that for the purpose of computing the royalty, the value of imported components and export commission is reduced from the sales price. Accordingly, the payment of royalty is only on the value addition done by the applicant utilizing the technical know provided by the associated enterprises and no royalty is being paid on the cost of components imported from the AEs. In view of the aforesaid, it is submitted that the addition made by the TPO is bad in law and is liable to be deleted. Re: Benchmarking of international transactions of payment of royalty applying TNMM: It is submitted that the appellant has applied Transactional Net Margin Method (TNMM) for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... - - - - - The price has to be determined by any one of the methods stipulated in subsection (1) of section 92C and by applying the most appropriate method referred to in sub-section (2) thereof.- - - -" (emphasis supplied) Reliance is also placed on the decision of Mumbai Bench of the Tribunal in the case of CA Computer Associates Pvt. Ltd. vs. DCIT (ITA Nos. 5420 and 5421/Mum/2006), wherein, while deleting the adjustment made by the TPO by holding payment of royalty to be unjustified, the Hon'ble Tribunal held as under: "8. The manner in which the A.L.P. is to be determined by any of the method prescribed in Sec. 92C in provided in Rule 10B of the I.T. Rules, 2961. After examining the parameters prescribed in Rule 10B, it can be seen that bad debts written off cannot be factor to determine the arm's length price of any international transaction. In our opinion, the TPO has exceeded his limitation by following the method which is not authorized under the Act or rules. We, therefore, hold that the Arm's Length Price determined by the TPO and adopted by the Assessing Officer to the extent of royalty payable to the CA Inc Management, USA is not as per the procedure prescribed and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rice of royalty paid on sales to AEs at Nil without applying any comparable transactions. The appellant has applied TNMM and compared its operating margins with the margins of comparable companies and on that basis arrived at the arm's length price of transaction of payment of royalty on sales to AEs. However, the TPO, without following any of the methods prescribed under the Act, arbitrarily determined the arm's length price of royalty on sales to AES at Nil. Further, the Hon'ble Delhi High Court in the case of Sony Ericsson Mobile Communications India Pvt Ltd vs CIT (ITA No 16/2014) held that clubbing of closely linked (including continuous transactions) is permissible in appropriate cases. The assessee, too benchmarked the transaction of payment of royalty applying TNMM and aggregating the same with closely linked transactions. The Hon'ble Court further held that once the Revenue accepts the TNMM as the most appropriate method, then it would be inappropriate for the Revenue to treat a particular expenditure as a separate international transaction. Such an exercise, the Hon'ble Court held, would lead to unusual and absurd results. Reliance is also placed in this regard on the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h the parties and perused the material placed before us. We have already considered similar issue while considering the disallowance of royalty and the export commission. While considering the disallowance of the export commission, we have noted that the payment of royalty and the export commission are for two different purposes. The assessee is paying royalty as per technical know-how agreement dated 02- 06-2004 with HMCL. As per this agreement, the assessee is entitled to use technical know-how provided by HMCL for manufacture and sale of two wheelers and parts. Royalty is to be paid for the goods manufactured by the assessee, whether sold within India or outside India. It is not in dispute that the motorcycles which were exported by the assessee, were manufactured by using the technical know-how provided by HMCL under the technical know-how agreement dated 02-06-2004. Therefore, royalty is payable on such manufacturing of goods. The contention of the learned TPO that the goods are exported to subsidiaries of the Associated Enterprise, i.e. AE of Honda Japan and the assessee also paid export commission, would be no ground for disallowance of the royalty or determining arm's lengt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the AE inasmuch as the terms and conditions impacting the issue are materially similar and accordingly thereafter considering the decision of the Coordinate Bench in the case of sister concern, he shall pass a speaking order in accordance with law after giving the assessee a reasonable opportunity of being heard. The assessee consequently would be at liberty to place relevant facts in support of its claim before the TPO." Following the order of the Co-ordinate bench, the additions on account of Transfer Pricing adjustment of ₹ 45,67,000 and ₹ 37,79,000 in A.Yrs. 2009- 10 and 2010-11 are, therefore, set aside to the file of the TPO to consider the claim of the assessee in the light of the findings of the co-ordinate bench in assessment year 2008-09 (supra). These grounds are, therefore, allowed for statistical purposes. 14. The next issue raised by assessee by way of grounds Nos. 5 to 5.4 in appeal for A.Y. 2009-10 relate to disallowance of payment of royalty and technical guidance fee holding the same to capital expenditure. The relevant facts are that the assessee paid royalty of ₹ 6,78,03,514 and technical guidance fee of ₹ 1,81,61,938 to Honda Motor C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ground Nos 5 to 5.4 in appeal for A.Y. 2009-10 are, thus, allowed. 18. The next issue raised in appeal for A.Y. 2009-10 by way of ground Nos. 6 to 6.6 relate to disallowance of export commission amounting to ₹ 4,32,49,149 paid to Honda Motor Co. Japan under section 40(a)(i) by holding such payments to be in the nature of royalty/ technical guidance fee on the ground of failure to deduct tax at source therefrom. 19. The Ld. AR submitted that the aforesaid issue is squarely covered in favour of the assessee by the order of the Co-ordinate bench in assessee's own case for assessment years 2007-08 and 2008-09. 20. The Ld. CIT DR has placed reliance upon the orders of the authorities below. The ld. DR also relied on the order of Authority for Advance Rulings in the case of Gaunghou Usha International Ltd., Chia(coply placed on record) in AAR No. 1508 of 2013. 21. We have heard the rival submissions. We find that the aforesaid issue is covered by the orders of Co-ordinate bench of the Tribunal in assessment years 2007-08 and 2008-09 wherein referring to the earlier detailed findings that the technical collaboration agreement in the case of Hero Honda Motors (supra) are parimate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al work 3,07,000 7. Publicity 7,66,000 8. Stores, spares and tools 6,36,000 9. Repair expenses 4,90,000 10. Joining expenses 4,94,000 11. Miscellaneous expenses 3,73,000 TOTAL 1,11,47,000 Out of the aforesaid, the assessing officer, vide impugned order dated 16.12.2014 disallowed the following expenditure aggregating to ₹ 51,15,000, holding the same to be capital expenditure on the ground that such expenditure had resulted in benefit of enduring nature to the appellant: S. No. Particulars Amount (in Rs.) 1. Freight on transfer of machines 34,55,000 2. Professional Charges 10,24,000 3. Stores, spares and tools 6,36,000 Total 51,15,000 The assessing officer, however, allowed depreciation @ 15% on the aforesaid amount, thereby restricting the disallowance on account of shifting expenditure to ₹ 43,47,750. In this regard, it is submitted that the aforesaid expenses incurred by the appellant represent expenses incurred in dismantling the existing plant, transportation cost of machines at new site and reinstallation cost of such machines at new premises, comprising of civil works cost, cost of new stores and spare parts, and profession ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Industries.: 127 ITR 409 (AP) Further, attention is invited to following decisions wherein it has been held that shifting/ relocation expenses incurred by the assessee in the course of business are allowable revenue expenditure and cannot be treated as capital in nature: * CIT v. Karanpura Development Co. Ltd.: 144 ITR 538 (Cal.) * CIT v. Brakes India Ltd.: 161 Taxman 47 (Chenn.) * CIT v. Loyal Super Fabrics: 304 ITR 78 (Chenn.) * Madura Coats Ltd. v. ITO: 26 ITD 152 (Mad.) * Hindustan Times Ltd. v. ITO: 3 ITD 525 (Del.) * JCIT v. ITC Ltd.: 299 ITR(Trib.) 341 (Kol.)(SB)(AT) The decision in the case of Bimetal Bearings(supra), relied upon by the assessing officer, has been distinguished in the subsequent decision of the Hon'ble Madras High Court in the case of CIT v. Loyal Super Fabrics: 304 ITR 78 (Mad.). Further, it is respectfully submitted that the decision of Bombay High Court in the case of Otis Elevator (supra), also relied upon by the assessing officer, is per incuriam, since the same has been rendered without considering the decision of the apex Court in the case of Empire Jute Co. v. CIT: 124 ITR 1. The decision of the Patna High Court in the case of Jamshedp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and would be held as revenue in nature. 28. The decisions relied upon by the AO/ DRP are distinguishable from the facts canvassed by the assessee company and have been duly considered and distinguished by Courts subsequently. We are in agreement with the decisions relied upon by the Ld. AR in the case of Karanpura Development (Cal.), Loyal Super Fabrics (Mad.) and Madura Coats (Mad.) which, according to us, are similar to the case of the assessee. Accordingly, we hold that the expenses on relocation and shifting are revenue in nature and would be allowed as business deduction and the disallowance made by the AO on this count is deleted. 29. The last issue raised in appeal for A.Y. 2010-11 by way of ground Nos. 6 to 6.2 relate to disallowance of ₹ 11,76,382 on account of provision for slowmoving inventory. The Ld. AR has submitted as under: "During the relevant year under consideration, the appellant had, in its books of accounts, debited a sum of ₹ 11,76,382 on account of slow and non-moving inventory under the head 'other expenses'. The method of valuation of inventory was duly reflected at paragraph 12(a) of the Tax audit report and reference to the accounting poli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) * CIT v. Hughes Communication India Ltd.: 215 Taxman 136 (Del. HC) * CIT v Becton Dickinson India (P.) Ltd.: 214 Taxman 636 (Del. HC) * CIT v Bharat Commerce & Industries Ltd.: 107 Taxman 135 (Del. HC) * JetAirways India (P) Ltd. vs CIT (in 4228/M/2000 for assessment year 1997-98 and other years) (Mum. ITAT) * Emersons Process Management India (P) Ltd. vs Addl. CIT: IT Appeal No. 8118 (Mum.) of 2010 (Bom. Trib.) * Digital Equipment India Ltd. vs CIT: ITA No. 6623 and 6624(Bom.)/2008 (Bom. Trib.) * CIT v Nuware India Ltd.: 118 ITD 70 (Del. Trib.) In view of the above, it is respectfully submitted, that the action of the assessing officer in disallowing the aforesaid provision on account of slow moving expenses is erroneous and based on incorrect appreciation of facts and the settled legal principles. That apart, and without prejudice to the aforesaid, it is respectfully submitted that even otherwise no disallowance is warranted under the provisions of the Act inasmuch as the provision for slow moving inventory of ₹ 11,76,382, debited to the profit and loss account for the year under consideration, would be reduced to 'Nil' when the inventory is actually writt ..... X X X X Extracts X X X X X X X X Extracts X X X X
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