9911796707
TMI Blog2015 (11) TMI 1737X X X X Extracts X X X X X X X X Extracts X X X X ..... e order passed by the TPO under section 92CA(3) of the Act. 4. Briefly, the facts of the case are that the assessee did detailed transfer pricing study relating to export of manufactured malted food biscuits, export of raw material, IT services received and cost reimbursement to and from group company, during the year under consideration. The said study was not disputed by the TPO and all these international transactions were treated at arms' length. However, the TPO undertook the benchmarking analysis of advertisement, marketing and sales production (AMP) expenses aggregating to Rs. 12847.66 lakh incurred by the assessee on product 'Horlicks' during the year. The bench marking was done applying the 'Bright Line Test'. The TPO was of the view that the AMP expenses to the extent incurred for creating marketing intangibles of 'Horlicks' brand which belongs to the Associated Enterprise (AE), requires consideration along with a mark up for the brand promotion services. For applying Bright Line Test, the TPO compared AMP expenditure of the assessee, being 7.076% of total turnover with average expenditure of 1% of the three comparables, viz. Herman Milk Foods ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... justment on account of AMP activity should be made. 7. The learned D.R. relied upon the orders of the authorities below. However, he did not controvert the findings given by the Hon'ble Delhi High Court in Sony Ericsson Mobile Communications India (P.) Ltd's case (supra), as summarized by the learned counsel for the assessee. Further, he also did not controvert the fact that the assessee is a full-fledged manufacturer. To assist the Bench, he filed before us a copy of the order of the Delhi Bench of the I.T.A.T. in the case of Perfect Van Melle India (P.) Ltd. v. Dy. CIT, ITA No.407/Del/2015, dated 2.6.2015, which was the case of manufacturer. The case was sent back to the TPO to follow the judgment of the Hon'ble Delhi High Court in the case of Sony Ericsson Mobile Communications India (P.) Ltd. (supra). In this background, he prayed to send this case also back to the file of the TPO. 8. We have heard the learned representatives of both the parties, perused the findings of the authorities below and considered the material available on record. In view of the developments happening after the order of the Special Bench in the case of L.G. Electronics India (P.) Ltd. (su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . In that case, the distributor would be entitled to compensation appropriate to its agency activities alone and would not be entitled to share in any return attributable to the marketing intangible. 6.38 Where the distributor actually bears the cost of its marketing activities (i.e. there is no arrangement for the owner to reimburse the expenditures), the issue is the extent to which the distributor is able to share in the potential benefits from those activities. In general, in arm's length transactions the ability of a party that is not the legal owner of a marketing intangible to obtain the future benefits of marketing activities that increase the value of that intangible will depend principally on the substance of the rights of that party. For example, a distributor may have the ability to obtain benefits from its investments in developing the value of a trademark from its turnover and market share where it has a long-term contract of sole distribution rights for the trademarked product. In such cases, the distributor's share of benefits should be determined based on what an independent distributor would obtain in comparable circumstances. In some cases, a distributo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct of sole distribution rights of the trademarked products, thereby acquiring―economic ownership benefit. In some cases, where the distributor bears extraordinary marketing expenses, he would be entitled to additional or higher return, through decreased price or reduction of royalty rate. The difficulty in attributing advertisement and other promotional expenditures towards trademark valuation or towards marketing activities, i.e. contributing to manufacture and current income and the impracticability of division in the case of such attribution is highlighted in paragraph 6.39." 11. It is clear from the above that the case of an entity having economic ownership benefit is on a different footing as there is a long term contract of sole distribution right of the trademark products. Further, on the basis of above-stated para 134, the Hon'ble High Court has held in paras 151 to 153 that the concept of economic ownership being not recognized under the Act, is not a correct finding as recorded by the Special Bench in the case of L.G. Electronics India (P.) Ltd. (supra). 12. In para 124 of the order, the Hon'ble High Court distinguish between functional profile of a limite ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 considerable value additions by the subsidiary AEs. In paragraph 22.9, the majority decision has observed that all costs including the AMP expenses are independent of cost of material. This indicates that the observations have been made with reference to manufacturing activities. It would not be appropriate and proper to apply the TNM Method in case the Indian assessed is engaged in manufacturing activities and distribution and marketing of imported and manufactured products, as interconnected transactions. Import of raw material for manufacture would possibly be an independent international transaction viz. marketing and distribution activities or functions. We have earlier used the term 'plain vanilla distributor'. When we use the words 'plain vanilla distributor' we do not m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n filed by the assessee the Assessing Officer noted that the assessee has calculated an amount of Rs. 5,50,049/- by arriving at the difference between the figures of 31.3.2008 Rs. 32,62,786/- and as on 31.3.2009 Rs. 27,12,737/- on account of excise duty. The assessee had added this amount from the book profit before taxation. The assessee submitted before the Assessing Officer that the assessee had in fact, added this amount of Rs. 5,50,049/- in its return of income. Since the same issue was also there in assessment year 2008-09, the Assessing Officer was of the view that since such claim for deduction was not accepted in the previous year, in order to maintain judicial consistency in the stand taken by the Department in earlier years in assessee's own case, the addition of Rs. 5,50,049/- is not called for in the current assessment year also. Accordingly, he proposed to lessen the returned income by the said amount. Following the order of the DRP in assessment years 2007-08 and 2008-09, the DRP in its order also confirmed the action of the Assessing Officer. 18. The learned counsel for the assessee before us explained that the deduction of closing balance of excise deposit amo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ppeal No.5721 of 2012 vide judgment dated 19.9.2012 had laid down that the credit of the excise duty paid was to be allowed. The learned A.R. for the assessee further referred to the ratio laid down by the Hon'ble Delhi High Court in CIT v. Maruti Suzuki India Ltd. (supra) and pointed out that the only issue raised was in connection with the excess payment made on account of excise duty, which was lying in the PLA Account . 42. The Tribunal vide paras 38 to 42 held as under: 38. We have heard the rival contentions and perused the record. The issue arising vide ground of appeal No.3 is against disallowance made under section 43B of the Act on account of excess payment made on account of excise duty. The assessee during the year under consideration had claimed expenditure of Rs. 36,87,481/- being the difference between the excise deposit with the excise department i.e. the balance in the central excise lying in PLA Account as on 31.3.2007 and as on 31.3.2006. The said sum of Rs. 36,87,481/- represents the excess payment made to the excise authorities, which as per the assessee could be used to offset the payment of excise duty on the final products. The difference in the tota ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uty paid in advance under the provisions of section 43B of the Act and held as under: (ii) That with regard to the deduction of Rs. 14,71,387/- on account of excise duty paid in advance as business expenditure, the procedure envisaged for payment of excise duty envisages such duty to be deposited in advance with the treasury before the goods were removed from the factory premises. The duty, thus, already stood deposited in the accounts of the assessee maintained with the treasury and the amount, thus, stood paid to the State. The submission of the Department that it was only on removal of the goods that the amount credited to the personal ledger account could be claimed as deductible under section 43B of the Income-tax Act, 1961, could not be accepted. 41. Further the Hon'ble Delhi High Court in CIT v. Maruti Suzuki India Ltd. (supra) also deliberated upon the payment made towards excise duty in Personal Ledger Account and consequent allowance under section 43B of the Act and held as under: A plain reading of s. 43B clarifies that : (a) deduction claimed by the assessee must be "otherwise" allowable under the other provisions of the Act; (b) the deduction must relate to a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llowed under s. 43B.- CIT v. Shri Ram Honda Power Equipment Corporation (Civil Appeal No. 5721 of.2012, dt. 19th Sept., 2012) followed; CIT v. C.L Gupta & Sons (2003) 180 CTR (All) 530 : (2003) 259 ITR 513 (All) concurred with. 42. The Hon'ble Delhi High Court in CIT v. Maruti Suzuki India Ltd. (supra) in turn relied upon the ratio laid down by the Supreme Court in CIT v. Shri Ram Honda Power Equipment Corporation (supra), wherein it has been laid down that the PLA credit was excise duty paid. The said observation was made where the assessee was following net method of valuation of closing stock. In view of the abovesaid ratio laid down by the Hon'ble Delhi High Court in CIT v. Maruti Suzuki India Ltd. (supra), CIT v. Modipon Ltd. (supra), Hon'ble Punjab & Haryana High Court in Raj & Sandeeps Ltd. (supra) and also the Special Bench of the Tribunal in assessee's own case, we direct the Assessing Officer to allow the claim of expenditure of Rs. 36,87,481/- claimed under the provisions of section 43B of the Act. The ground No.3 raised by the assessee is thus allowed. 43. Following the abovesaid parity of reasoning we direct the Assessing Officer to allow expenditur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see and did not result in acquisition of any asset. It was submitted that the issue is covered in favour of the assessee by the orders of the Tribunal in assessee's own case for assessment years 1998-99 to 2008-09, wherein the Tribunal allowed the claim holding it to be revenue in nature. Without prejudice, it was prayed that the Assessing Officer has made transfer pricing adjustment to the total AMP expenses, which includes market research expenses also. Accordingly, the disallowance of market research expenses of Rs. 7,19,98,000/- by treating the same to be capital expenditure as well as the entire adjustment of AMP expenses as transfer pricing addition, has resulted in double disallowance and adjustment. 26. The learned D.R. relied upon the orders of the Assessing Officer as well as the DRP. 27. On perusal of the order of the I.T.A.T. for assessment year 2008-09 i.e. the preceding year, we find the issue has been discussed as under : "31. We find that similar issue arose before the Tribunal in assessment year 2007-08 and the Tribunal vide paras 26 to 29 observed as under: 26. The next set of grounds of appeal are ground Nos.2.14 to 2.16 wherein the assessee has raised ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the TPO while determining the ALP included certain expenses which are in relation to the sales made by the assessee and are not related to the brand promotion. The claim of the assessee is with regard to the expenses totalling Rs. 5500.86 lakh as tabulated below: S. No. Name of Expenses Amount (Rs. Lakh) 1. Discount - sales 60.52 2. Market Research 664.24 3. Sales Promotion 3939.90 4. Selling and distribution 826.17 5. Service charges paid to selling agent 10.03 Total 5500.86 29. We find that the Special Bench of the Tribunal (majority view) in M/s L.G. Electronics India (P) Ltd. v. ACIT (supra) held that the expenses in connection with the sales do not lead to brand promotion and thus cannot be brought within the ambit of advertisement, marketing and promotion expenses for determining the cost/value of the international transaction. In view thereof, we direct the Assessing Officer to exclude the expenses incurred by the assessee in connection with the sales totalling Rs. 5500.86 lakh as the same do not fall within the ambit of AMP expenses and hence not to be considered for computing the cost/value of international transaction. The assessee vi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g of employee benefits, on the ground that same is an unascertained liability. 5.1 That the Assessing Officer erred on facts and in law in observing that the aforesaid provision made for post-retirement medical benefits to employees has resulted in double deduction to employees and that the provision has been made by debiting the general reserves." 30. Briefly, the facts of the case are that in the Profit & Loss Account the assessee has claimed expenditure of Rs. 5.97 crore on account of medical reimbursement liability for ex-employees. The assessee filed detailed reply together with the actuarial valuation certificate on the basis of which the liability was shown in the Profit & Loss Account. The Assessing Officer was of the view that reading of this valuation certificate reveals that the purpose of this valuation is to make incremental provisions in the books of account as required under AS-15 on an ongoing basis. He was of the view that the actuary has calculated/estimated liability of the company towards post-retirement medical assistance to the retired employees over a period of time to comply with the revised AS-15. This provision has been made by debiting the general rese ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed by the assessee in terms of the employment agreed upon between the company and the employees at the time of their appointment. In order to meet the said liability of providing medical benefits/assistance to its employees post-retirement, the assessee was contributing towards the insurance policy taken for the said purpose. The assessee prior to the year under consideration had claimed and was allowed deduction in respect of the premium paid for keeping afloat the medical insurance policy taken for the benefit of employees from year to year. Such medi-claim insurance policies were taken by the assessee in order to provide medical assistance post-retirement to the employees. However, during the year under consideration the Institute of Chartered Accountants revised the Accounting Standard-15 which is reproduced at pages 29 to 31 of the assessment order under which the Institute issued revised accounting standard for accounting the employees' medical benefit post-retirement. As per the assessee, the ICAI made the said Accounting Standard to be followed compulsorily w.e.f. 1.4.2006 i.e. assessment year 2007-08 i.e. the year under appeal. The gist of the revised Accounting Standa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 73 of Revised AS-15 it has been laid down that actuarial assumptions are to be worked out and should be more than unbiased and mutually compatible. Further the method of working actuarial benefits is to be laid down under Accounting Standard-15. Further in respect of termination benefits, as per clause 133 it is provided that the termination benefits are to be treated separately from other employee benefits as the event which gave rise to the obligation is the termination rather than employee service. Under clause 134 it is laid down that an enterprise should recognize termination benefits as a liability and an expense when, and only when: (a) The enterprise has a present obligation as a result of a past event; (b) It is probable that an outflow of resources embodying economic benefits will be required to settle the obligation; and (c) A reliable estimate can be made of the amount of the obligation. 55. Clause 137 of Revised AS-15 provides that termination benefits are recognized as an expenses immediately. Under clause 138 it is provided that where an enterprise recognizes termination benefits, the enterprise may also have to account for a curtailment of retirement benef ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Refer Scheme 2) 58. The assessee accordingly made a provision of Rs. 1636.20 lakh on account of employees benefits which included the provisions for post-retirement medical benefits to employees at Rs. 11.09 crore. The abovesaid amount was booked as an expenditure for computation of income in compliance to the mandatory revised Accounting Standard-15. The claim of the assessee in respect of the abovesaid expenditure was as under: (a) The said deduction has been claimed for the first time during the relevant assessment year, in view of compliance of mandatory revised Accounting Standard-15. (b) Since the provision was made by the assessee on the basis of actuarial valuation in respect of an accrued liability for the entitlement earned by the employees while in service, the same was clearly allowable as deduction. (c) Under the mercantile system of accounting, deduction of expenditure is allowable in the year in which liability is quantified and accrued, notwithstanding that the same has to be discharged at a later date. (d) Further, the aforesaid liability incurred towards medical benefits was only an incremental liability after considering/reducing the amount of medical ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lity of leave encashment scheme is to be allowed as deduction, observing as under: The law is settled : if a business liability has definitely arisen in the accounting year, the deduction should be allowed although the liability may have to be quantified and discharged at a future date. What should be certain is the incurring of the liability. It should also be capable of being estimated with reasonable certainty though the actual quantification may not be possible. If these requirements are satisfied the liability is not a contingent one. The liability is in praesenti though it will be discharged at a future date. It does not make any difference if the future date on which the liability shall have to be discharged is not certain. In Metal Box Company of India Ltd. v. Their Workmen (1969) 73 ITR 53 (SC), the appellant-company estimated its liability under two gratuity schemes framed by the company and the amount of liability was deducted from the gross receipts in the profit and loss account. The company had worked out on an actuarial valuation its estimated liability and made provision for such liability not all at once but spread over a number of years. The practice followed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any for meeting the liability incurred by it under the leave encashment scheme proportionate with the entitlement earned by employees of the company, inclusive of the officers and the staff, subject to the ceiling on accumulation as applicable on the relevant date, is entitled to deduction out of the gross receipts for the accounting year during which the provision is made for the liability. The liability is not a contingent liability. The High Court was not right in taking the view to the contrary. The appeal is allowed. The judgment under appeal is set aside. The question referred by the Tribunal to the High Court is answered in the affirmative, i.e., in favour of the assessee and against the Revenue. 61. In the facts of the present case before us the assessee had recognized and accounted for the post-retirement benefit due to its employees, in terms of the scheme of employment and also in terms of the revised/change in Accounting Standard-15 issued by ICAI which was to be followed during the year, is an allowable deduction in the hands of the assessee. The said claim being based on the valuation of the actuary is both scientific and one of the recognized method of accounti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d to be a contingent one. Since the provision has been made on scientific basis and the assessee is following mercantile system of accounting, therefore, in our considered view, the CIT (A) was justified in deleting the addition while deciding ITA No.149/Del/2012. A liability which has already accrued though discharged on a future date would be entitled for deduction. While working out the profit & gain of the business the accrued receipts are brought to the tax, similarly, accrued liabilities due would also be entitled for deduction while working out the profit and gain of the business of the year. Computation of taxable profit for a particular year can be worked out only by deducting the actual payments made to the employees and present value of any payment in respect of the services in that particular year to be made in subsequent year. In view of this, we find the order of CIT (A) in ITA No.149/Del/2012 in order. We set aside the order of CIT (A) in ITA No.4921/Del/2010. For doing so, we also get support from the following decisions of Supreme Court and Hon'ble Delhi High Court. The 5.1 Supreme Court in the case of Metal Box Company of India Ltd. v. Their Workmen - 73 ITR 5 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s and the staff, subject to the ceiling on accumulation as applicable on the relevant date, was entitled to deduction out of the gross receipts for the accounting year during which the provision is made for the liability. The liability is not a contingent liability." Hon'ble Delhi High Court in the case of CIT vs. Insilco Limited - 197 Taxman 55 has held as under :- "Similarly it was held by the Hon'ble Delhi High Court in the case of CIT v. Insilco Ltd. that where the provisions were estimated on the basis of actuarial calculations, the deduction claimed by the assessee has to be allowed. The relevant extracts of the decision is reproduced below for ready reference:- "6. In the case of Shree Sajjan Mills Ltd. (supra), the Supreme Court was examining the provision-made by the assessee towards gratuity under the Income-tax Act, 1961. The Supreme Court, after noticing the judgment in Metal Box Company (supra), crystallized its analysis at page 599 and made the following observations:- "It would thus be apparent from the analysis aforesaid that the position till the provisions of section 40A(7) were inserted in the Act in 1973 was as follows:- 1 xxxx 2 xxxx 3 xxxx 4 xxxx 5 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nature." 37. Briefly, the facts of the case are that the assessee had paid royalty of Rs. 6167.79 lakh to M/s Glaxo Smithkline Asia Pvt. Ltd. for use of trademark 'Horlicks'. The assessee is paying every year royalty @ 5% of the net sales of the products bearing the trademark 'Horlicks' and claiming it as revenue expenditure. On a query raised by the Assessing Officer, the assessee submitted that it has been paying royalty in terms of an agreement with M/s Glaxo Smithkline Asia Pvt. Ltd. dated 7.2.1997, which has always been admitted in all the earlier assessment years treating it as revenue in nature. However, in assessment year 2008-09, the Assessing Officer disallowed the said expenses holding the same to be capital in nature simply on the ground that similar issue has been raised by the Revenue in the case of Swaraj Engines Ltd.309 ITR 443 (SC), wherein the matter has been remitted back to the Punjab & Haryana High Court. Upon filing of objection before the DRP in assessment year 2008-09, the DRP had directed the Assessing Officer to redetermine the issue of allowability of royalty after verification of facts with reference to the agreement entered into by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... year to year as per the terms of agreement dated 7.2.1997. As per the terms of the said agreement the payment was made for the licence/rights to use trademark provided by GSKAP. The copy of the agreement is placed at pages 1 to 17 of the Paper Book and as per clause-12 it is provided as under: "12. In consideration of the right to use the Trademarks granted herein, SBCH shall pay to SB Asia a royalty of upto five (5) per cent of the "Net Sales Value" of the Contract Products sold under the Trademarks. "Net Sales Value" for the purpose of this Clause shall mean sales net of returns/allowances and net of excise duty." 54. The issue arising in the present appeal is whether such royalty paid by the assessee is in the nature of capital or revenue expenditure. The Assessing Officer and DRP had considered the allowability of the expenditure in view of the judgment of the Supreme Court in the case of Swaraj Engines Ltd. (supra) wherein the issue was the applicability of section 35AB of the Act in the context of royalty paid as percentage of the net sale price being revenue and capital in nature. The Supreme Court held that after insertion of section 35AB of the Act, providing for allow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... we direct the Assessing Officer to allow the claim of royalty paid at Rs. 5556.64 lakh. The ground Nos.6 and 6.1 raised by the assessee are thus allowed.' 42. Since no distinguishing features were brought to our notice, respectfully following the order of the Coordinate Bench of the Tribunal, the claim of the assessee is allowed. The ground of appeal No.6 raised by the assessee is decided in its favour. 43. The ground of appeal NO.7 raised by the assessee reads as under : "7. That the Assessing Officer erred on facts and in law in disallowing interest of Rs. 2,03,16,000 as capital expenditure in terms of proviso to section 36(l)(iii) of the Act alleging the same to have been incurred for investment made in capital work in progress ('CWIP'). 7.1 That the Assessing Officer erred on facts and in law in proceeding on a factually incorrect premise that the appellant had borrowed funds and in holding/observing that the appellant failed to furnish complete details in respect of loan funds. 7.2 Without prejudice, that the Assessing Officer erred on facts and in law in not allowing depreciation (in the year of capitalization of the CWIP) on interest expenses of Rs. 2,03, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing Officer proposed to capitalize an amount of Rs. 203.16 lakh. 45. Before the DRP, detailed submissions were made by the assessee. However, rejecting the same and relying on the order of the DRP for assessment year 2008-09, the objection raised by the assessee was rejected by the DRP. In this way, an addition of Rs. 203.16 lakh was made by the Assessing Officer. 46. Before us, the learned counsel for the assessee reiterated the submissions made before the Assessing Officer as well as the DRP. The submissions were basically twofold, firstly, it was submitted that the assessee is a debt free company having no borrowings at all. Therefore, no disallowance on account of interest can be made. Secondly, it was submitted that all the heads of interest expenditure on account of which the said addition has been computed pertain to the regular business of the assessee and has been made on account of business expediency only. Therefore, no such disallowance can be made. 47. Further, it was submitted that similar disallowance has been deleted by the Chandigarh Bench of the Tribunal in assessee's own case for assessment year 2008-09. 48. The learned D.R. relied upon on the orders of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... being paid by the assessee due to the business compulsion. No fresh deposit has been received during the year. Further interest was paid to the bank on cheque discounting at Rs. 83.71 lakh and such interest cannot be said to have been incurred on such borrowed funds which in turn could be presumed to have been parked as investment in CWIP. The balance interest is paid to other at Rs. 3.35 lakh. In the totality of the abovesaid facts and in view of the assessee having earned interest income of Rs. 608.44 lakh as against the interest expenditure of Rs. 474.70 lakh and in the absence of any borrowings made by the assessee for running the business, we find no merit in the disallowance made by the Assessing Officer under the proviso to section 36(1)(iii) of the Act. The basic condition for applying the provisions of proviso to section 36(1)(iii) of the Act is that money should have been borrowed for the purposes of investment in capital assets on which interest had been paid by the assessee, then such interest as relatable to the investment in capital assets is to be disallowed. However, in the absence of any borrowings made by the assessee, we find no merit in the disallowance made by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Assessing Officer. Therefore, the Assessing Officer made a disallowance of Rs. 162.30 lakh. 54. The learned counsel for the assessee submitted before us that the assessee had suo motu disallowed expenses of Rs. 6,38,304/- computed on the basis of salary and overheads of certain employees involved in investment activity, administration and other expenses to be attributed to earning of exempt income. The details of suo motu disallowance were also placed in the Paper Book. The submissions were made before us to the effect that Rule 8D of the Income Tax Rules cannot be applied mechanically. Further, it was reiterated that the assessee is a debt free company and in the business of any borrowings made by the assessee, no disallowance under section 14A of the Act read with Rule 8D can be made on account of interest expenditure. Insofar as the disallowance of administration expenses is concerned, it was submitted that no part of the expenditure has actually incurred for earning dividend income. Still the assessee has made suo motu disallowance of Rs. 6,38,504/- on a scientific and rational basis to cover the expenditure. Further the Assessing Officer has not been able to pinpoint any e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... disallowance of interest expenditure being relatable to the investment in such funds on which the assessee had earned tax free income, is merited. Accordingly, we direct the Assessing Officer to delete the disallowance computed under Rule 8D(ii) of Income Tax Rules. The second aspect of the issue is disallowance under Rule 8D(iii) of Income Tax Rules on account of administrative expenses. Admittedly, the assessee is not maintaining separate accounts in respect of its investment activity and in view thereof the provisions of Rule 8D of Income Tax Rules are squarely applicable and disallowance is to be computed in accordance with the said provisions of Rule 8D of Income Tax Rules for working out disallowance under section 14A of the Act. Accordingly, we uphold the order of the Assessing Officer in this regard. However, the assessee is entitled to the set off of the amount surrendered at Rs. 6,06,977/-. In view thereof, ground Nos.8 to 8.4 raised by the assessee are partly allowed." It is seen from the perusal of the balance sheet that no new investments have been made by the assessee during the year as total investments have reduced from 33,221.23 lakh on 31.3.2008 to Rs. 0.05 lakh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on revaluing the options granted in earlier years by applying the share value as well as the exchange rate as at the end of the year. It was submitted that under the mercantile system of accounting deduction of expenditure is allowable in the year in which liability is quantified and accrued notwithstanding that the same has to be discharged at a later date. Since the liability is in respect of subsisting liability of incentive payable to employees in relation to services rendered until the end of the relevant year, which got accrued during such year, the same is allowable as business deduction in accordance with the mercantile system of accounting. Further, it was also submitted that in assessment year 2005-06, it was the first year of its incentive plan and in all the subsequent assessment years completed w.e.f. assessment years 2006-07 to 2008-09, the said issue was discussed during the assessment proceedings but no disallowance was made by the Assessing Officer. Rejecting the contention of the assessee, the Assessing Officer formed a view that in respect of an amount payable to the employee relatable to the services rendered by him until the end of the relevant year, the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... crystallized liability under the mercantile system of accounting mandatorily to be followed. Reliance was heavily placed on the order of the Special Bench of the Tribunal in the case of Biocon Limited Vs. DCIT, 155 TTJ 649 (SB), copy of which was placed before the Bench, wherein it has been held that the said discount was an ascertained liability since the employer incurs obligation to compensate the employee over the vesting period notwithstanding the fact that the exact amount of discount is quantified only at the time of exercising the options. Further, it has been held in the same order that incurring of liability and the resultant deduction cannot be marred by mere reason of some difficulty in proper quantification of such liability at that stage. The very point of incurring the liability enables the assessee to claim deduction under mercantile system of accounting. The reliance was placed on the judgment of Hon'ble Madras High Court in the case of CIT Vs. M/s PVP Ventures Ltd., 211 Taxman 554 and that of the Chennai Bench of the Tribunal in the case of SSI Ltd. Vs. DCIT, 85 TJ 1049. In view of the above, it was prayed that the disallowance made by the Assessing Officer b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he case of Biocon Ltd. (supra). The basic question in that case also was whether the provision made for ESOP during the year is an ascertained liability under section 37(1) of the Act. The Special Bench dealing with the issue held that the discount in relation to options lapsing during the year cannot be held as contingent liability and such expenditure is on account of an ascertained liability in following terms : "As regards the contention of the revenue about the contingent liability arising on account of the options lapsing during the vesting period or the employees not choosing to exercise the option, it was found that normally it was provided in the schemes of ESOP that the vested options that lapse due to non-exercise and/or unvested options that get cancelled due to resignation of the employees or otherwise, would be available for grant at a future date or would be available for being re-granted at a future date. If it is considered at micro level qua each individual employee, it may sound contingent, but if it is viewed at macro level qua the group of employees as a whole, it loses the tag of 'contingent' because such lapsing options are up for grabs to the other ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (3)/144C of the Act." 64. It is seen that relief of Rs. 2,69,492/- claimed under section 90 of the Act by the assessee in its return of income was allowed by the Assessing Officer in the draft assessment order passed under section 143(3)/144 of the Act. However, while making the final computation, the said relief was not allowed. We hereby direct the Assessing Officer to grant the said relief to the assessee. 65. The ground No.12 is consequential in nature, hence needs not adjudication. 66. The appeal of the assessee in ITA No.290/Chd/2014 is partly allowed. ITA No.208/Chd/2015 : 67. The ground No.1 is general, therefore needs no adjudication. 68. The ground No.2 raised by the assessee in this appeal reads as under : "2. That the Assessing Officer erred on facts and in law in making addition of Rs. 218.47.61.575 on account of arm's length price of alleged international transactions resulting from advertisement, marketing and sales promotion expenses ('AMP expenses') incurred by the appellant on the basis of the order passed by the TPO under section 92CA(3) of the Act." 69. It is relevant to observe here that the issue in this ground is similar to the issue in g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 76. The ground of appeal No.6 raised by the assessee reads as under : "6. That the Assessing Officer erred on facts and in law in disallowing expenditure aggregating to Rs. 73.31,80,000. incurred by the appellant during the relevant previous year on account of royalty, holding the same to be capital in nature." 77. The issue in this ground is similar to the issue in ground No.6 raised by the assessee in ITA No.290/Chd/2014 and the findings given in ITA No.290/Chd/2014 shall apply to this case also with equal force. 78. The ground of appeal No.7 raised by the assessee reads as under : "7. That the Assessing Officer erred on facts and in law in disallowing interest of Rs. 3,08,24,000/- as capital expenditure in terms of proviso to section 36(l)(iii) of the Act alleging the same to have been incurred for investment made in capital work-in-progress ('CWIP'). 7.1 That the Assessing Officer erred in proceeding on a factually incorrect premise that the appellant had borrowed funds which had been utilized for making investment in CWIP, without appreciating that the appellant had no borrowed funds at all. 7.2 Without prejudice, that the Assessing Officer erred on facts a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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