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TMI Blog2016 (9) TMI 1471X X X X Extracts X X X X X X X X Extracts X X X X ..... the appeals filed by the Revenue. Since, the issues raised in the appeals and cross appeals by the assessee and the Revenue in the impugned assessment years are common and are arising from the same set of facts, these appeals and cross objections are taken up together for adjudication and are disposed of by this common order. 2. For the sake of convenience we are taking facts from ITA No. 1081/PN/2013. The brief facts of the case as emanating from records are: The assessee is a company incorporated under the Companies Act, 1956 and is engaged in manufacturing and sale of passenger cars. The assessee filed its return of income for assessment year 2003-04 on 31-10-2003 declaring income of Rs. 10,64,66,730/-under the provisions of section 115JB of the Income Tax Act, 1961 (hereinafter referred to as "the Act"). The case of the assessee was selected for scrutiny and accordingly first notice u/s. 143(2) was issued to the assessee on 18-10-2004. During the course of scrutiny assessment proceedings the Assessing Officer made certain additions/disallowances in the income returned by the assessee and assessed the total income at Rs. 36,26,96,920/- under the normal provisions of the Act a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al according to the law." In assessment year 2004-05 additions were made by the Assessing Officer in the income returned by the assessee on similar grounds. The appeals of the assessee for assessment years 2003-04 and 2004-05 were decided by the Commissioner of Income Tax (Appeals) vide common order. The assessee in its appeal for assessment year 2004-05 before the Tribunal has raised solitary issue which is identical to ground No. 1 raised in the appeal for assessment year 2003-04. The appeals by the assessee and the Revenue are taken up in seriatim for adjudication. First the appeals of the assessee are taken up for adjudication, followed by the appeals by the Revenue and then the cross objections. ITA Nos. 1081 & 1082/PN/2013 (Appeals by Assessee) 4. Shri R.R. Vora and Shri Pramod Achuthan appearing on behalf of the assessee submitted that the assessee had entered into an agreement with certain suppliers (Four in Numbers) whereby the assessee was required to purchase minimum quantity of material used for manufacturing cars. In case of any shortfall in procuring assured minimum quantity, the assessee was required to compensate the suppliers for shortfall. As the quantity pu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... annot be determined with substantial accuracy. Such amount is specifically excluded from the definition of 'reserve'. In the light of definition of 'Provision' and 'Reserve' given under the provisions of Companies Act, 1956, the 'provision for compensation' to module supplier is a provision as defined in Companies Act, 1956 and not a contingent liability. The ld. AR further submitted that in case of contractual liability where there is dispute with respect to quantum of liability and not with respect to incurrence of liability, the Courts have held that if such liability has been estimated, at least provisionally the same may be allowed for deduction in the year of claim, despite the dispute is not settled. In support of his submissions the ld. AR placed reliance on the following decisions : i. Bharat Earth Movers Vs. CIT, 245 ITR 0428 (SC); ii. CIT Vs. Hewlett Packard India (P) Ltd., 314 ITR 55 (Del. HC); iii. CIT Vs. H.P. Tourism development corporation Ltd., 35 taxmann.com 450 (HP). 4.3 The ld. AR further pointed that the Assessing Officer has made such disallowance only in the assessment years 2003-04 to 2005-06 only. Thereafter no disallowance has been made in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the net effect of entries passed by the assessee in assessment years 2004-05 and 2005-06 is Nil, no additional provision was created in assessment years 2004-05 and 2005-06. The ld. AR submitted that the Commissioner of Income Tax (Appeals) has rightly held the provision for octroi to be deductible for the purpose of calculation of MAT liability, however, due to some misunderstanding denied benefit to the assessee. 6. On the other hand Shri Rajeev Kumar representing the Department submitted that the assessee had not furnished complete details in respect of provision of compensation payable to module suppliers. In the absence of compete documents the Assessing Officer was not in a position to ascertain, whether the liability is contingent or ascertained. Further, there is no scientific basis for ascertaining the liability. In respect of ground No. 2 relating to provision for octroi payment, the ld. DR fairly admitted that there seems to be certain confusion in understanding the gamut of payment and the provision created by the assessee. The ld. DR submitted that the issue can be remitted back to the Commissioner of Income Tax (Appeals) for verification. 7. We have heard the submis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment of Rs. 4,69,19,753/-. 8. The ld. AR of the assessee has drawn our attention to the definition of 'Provision' and 'reserve' as defined in Interpretations forming Part III to Schedule VI of Companies Act, 1956. The same are reproduced here-in-below : "(a) the expression "provision" shall, subject to sub-clause (2) of this clause, mean any amount written off or retained by way of providing for depreciation renewals or diminution in value of assets, or retained by way of providing for any known liability of which the amount cannot be determined with substantial accuracy; (b) the expression "reserve" shall not, subject as aforesaid, include any amount written off or retained by way of providing for depreciation, renewals or diminution in value of assets or retained by way of providing for any known liability;" A bare perusal of the definition of 'provision' would show that the provision includes any amount set apart for any known liability. The amount thereof may not have been determined with substantial accuracy but incurrence of liability is must. 9. In the present case, the liability for payment of compensation to the module supplier has arisen out of agreement entered in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... peals) in holding that an amount of Rs. 1,39,78,291/- representing provision towards octroi has been deducted twice. It has been asserted that the Commissioner of Income Tax (Appeals) in principle has held that liability in respect of octroi payment is ascertained and is deductable for calculation of MAT liability. The observations of the Commissioner of Income Tax (Appeals) that the assessee has claimed the same amount as provision for octroi as well as expenditure for octroi on approval basis are against facts on record. The ld. AR has contended that the entry in respect of octroi creating provision in the beginning of the financial year has been reversed at the end of the financial year, thus, there is no double claim. The ld. DR has also admitted that there seems to be some error in understanding the issue by the Commissioner of Income Tax (Appeals). 11.1 In view of submissions made by rival sides, we are of considered view that this issue needs a revisit to the file of Commissioner of Income Tax (Appeals). The Commissioner of Income Tax (Appeals) shall decide the issue de novo after verification and proper appreciation of facts and records. Accordingly, ground No. 2 raised in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... when the Hon'ble DRP while deciding the case for AY. 2007-08 has also upheld this treatment given to royalty payment i.e. has held that royalty payment is of Capital nature. 4. Whether on the facts and in the circumstances of the case and in law, the Ld.CIT(A) was justified in directing the A.O. to allow Project Assistance Technical charges as deductible expenditure u/s. 37(1) of the Act, when the assessee has not been able to prove the basis of such payment, the nature of service rendered by the expatriates and also when the payment were not made in accordance with the project assistance agreement dated 11/12/1994. 5. Whether on the facts and circumstances of the case and in law, the CIT(A) was justified in deleting addition made on account of homologation expenses, without calling for such details in support of its claim and remanding the matter to the A.O. 6. Whether on the facts and circumstances of the case and in law, the CIT(A) was justified in directing the A.O. to verify the evidences furnished before him and decide the admissibility of the claim of expenditure of capitalized cars, when the assessee was given sufficient opportunity to furnish such details during ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... trongly defended the order of TPO and prayed for reversing the findings of Commissioner of Income Tax (Appeals) with respect to most appropriate method for determining the ALP in the case of assessee. In respect of other grounds raised in the appeal the ld. DR vehemently supported the findings of TPO. 15. Per contra the ld. AR contended that the assessee adopted combined approach and selected TNMM as the most appropriate method to benchmark its international transactions including payment of royalty. Before selecting TNMM as the most appropriate method, the assessee conducted research for selecting comparable companies on widely recognized commercial databases available in public domain. After selecting 7 comparables the assessee computed weighted average margins of comparable companies which is 3.38% as against margin of assessee at 4.16%. Since, the net profit margin earned by the assessee was higher than the weighted average margin of comparable companies, the transactions including payment of royalty were concluded to be at arm's length price. The ld. AR further submitted that similar addition was made in assessment year 2002-03. In first appeal the Commissioner of Income Tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Thus, the payment of technical service charges has correlation to the services provided by MBPC to assessee in a financial year. The expenditure of technical service charges is not for any initial outlay or extension of business, but is incurred in order to conduct business more effectively and profitably. The fixed capital of assessee does not get increased or altered due to incurrence of this expenditure and no new asset or advantage/benefit of enduring nature comes into existence. The Project Technical Assistance Fees is regarded as fee for technical services for tax withholding purposes. The assessee debits the fee paid in the profit and loss account under the head 'Technical Service Charges' in the Manufacturing Expenses Schedule. The expenditure on Technical Service Charges is not in the nature of Capital expenditure and the Auditors in the Audit report have not qualified the expenditure as Capital. The assessee is paying Service Tax on the technical service charges under the category "Management Consultants" under the reverse charge mechanism since March, 2003. The ld. AR further submitted that the issue relating to Project Technical Assistance Fees- Whether capital or rev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lue of such facility is brought to tax in the hands of respective top management employees in accordance with the provisions of Act. During the assessment year 2003-04, the assessee had capitalized 32 such cars for own use. During the assessment proceedings the assessee was asked to produce details in respect of the capitalized cars. The assessee furnished the details. However, the Assessing Officer observed that the assessee has not been able to produce complete details of the use and utility of the capitalized cars for the business purpose. The Assessing Officer further observed that so many cars are not needed for top management and advertisement purposes. The Assessing Officer made ad hoc disallowance of Rs. 2,00,000/- out of repairs and maintenance expenses and Rs. 5,00,000 out of power and fuel expenses. The ld. AR contended that it is the prerogative of the assessee to decide the number of cars required for advertisement purpose and for the use of management. The Assessing Officer cannot substitute his commercial judgment over the needs and requirements of assessee. The Assessing Officer in an irrational and unjustified manner has made ad hoc disallowance which has been righ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e original agreement to pay royalty for technical knowhow received from DCAG. The copy of the revised agreement dated 21-12-1999 is enclosed at paper book page 557 to 586 according to which running royalty @5% on value addition in India to be paid and waiving of the remaining 2 instalments of lumpsum royalty payment as per the first agreement amounting to DM 19 million. For the impugned assessment year the assessee has paid royalty @5% to DCAG amounting to Rs. 4,61,06,328/- for the technical knowhow received. The assessee adopted combined approach and selected TNMM as the most appropriate method to benchmark its international transaction including the payment of royalty in its TP study report. For the application of TNMM, the assessee had conducted search for comparable companies on widely recognized commercial information database for obtaining publicly available financial information. For the purpose of margin of computation, in addition to financial data for the relevant financial year, the assessee also used data for 2 previous financial years as per the TP study conducted on the search of comparable. The weighted average margin of comparable companies was 2.48% whereas the mar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he imported materials used for the manufacturing process. The royalty in the instant case is inextricably linked with production and sales activity. In absence of production and sales and sale of products there would be no question arising regarding payment of royalty. We find force in the submission of the Ld. Counsel for the assessee that since the royalty payment is not independent of sales and therefore cannot be examined on standalone basis. Therefore, the assessee has adopted combined transaction approach using TNM method as the most appropriate method to benchmark its international transaction including payment of royalty. 77. We find the Delhi Bench of the Tribunal in the case of Lumax Industries Ltd. Vs. ACIT vide ITA No.5252/Del/2011 has observed as under : "33. The TPO has made the disallowance in question mainly on the basis of the benefit test. In this regard, it is seen that the payment of royalty cannot be examined divorced from the production and sales. Royalty is inextricably linked with these activities. In the absence of production and sale of products, there would be no question arising regarding payment of any royalty. Rule 10A(d) of the IT Rules defines & ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nal in the case of M/s. Bobst India Pvt. Ltd. Vs. DCIT vide ITA No.1380/PN/2010 order dated 09-10- 2014 has observed as under : "7.9 ..... Without prejudice to above we find that according to TPO / AO has not given cogent reasoning for rejecting TNMM identified-by the Appellant as the most appropriate method for benchmarking its international transactions pertaining to domestic operations. The approach adopted by the TPO i.e. using controlled transaction of the Appellant itself (receipt of commission on marketing, of spares) for benchmarking the international transaction pertaining to receipt of commission for marketing of machines is not appropriate as per the Indian TP regulations. Accordingly international transaction of the appellant pertaining to receipt of commission for marketing of machines benchmarked by assessee by aggregating the same with other international transactions pertaining to domestic operations using TNMM should not be-rejected." 81. The various other decisions relied on by the assessee on this issue also support its case to the proposition that TNM method applied by the assessee is the appropriate method and the CUP method applied by the TPO is not corre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he rate of royalty payment and fee for drawings etc. has been approved or deemed to have been approved by the RBI, then such payment has to be considered at ALP. We, therefore, direct to delete addition of Rs. 4.29 crore made by the A.O. in this regard." 83. We further find in subsequent years also the royalty payment has been benchmarked considering combined transaction approach in TNM method. No separate benchmarking was undertaken to determine the ALP of Royalty. In A.Y. 2007-08 till A.Y. 2011-12 the payment of royalty was held to be at ALP. We therefore find merit in the submission of the Ld. Counsel for the assessee that in view of the rule of consistency the Cit(A) was justified in rejecting the CUP method adopted by the AO and accepting the TNM method followed by the assessee. 84. In view of the above discussion and in view of the detailed reasoning given by the CIT(A) we find no infirmity in his order. Accordingly, the same is upheld and the grounds raised by the revenue on this issue are dismissed." 22. The ld. DR has not been able to controvert the findings of Tribunal on the issue. However, the ld. AR contended that the issue can be remitted back to the file of Ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the addition made by the AO. 98. We find no infirmity in the above decision of the Ld.CIT(A). From the various terms and conditions of the agreement, we find the assessee has neither acquired any asset on an outright basis nor secured any enduring advantage. We find force in the argument of Ld. Counsel for the assessee that the benefit secured by the assessee is essentially a licensed right to use knowhow for the period of the agreement. Therefore, the royalty expenditure in this regard, in our opinion, is revenue in nature. Further royalty being an annual recurring expenditure, directly linked to number of vehicles sold in a financial year, in our opinion, is revenue expenditure fully deductible in computing the taxable income of the assessee. 99. We find the Hon'ble Supreme Court in the case of CIT Vs. IAEC Pumps Ltd. reported in 232 ITR 316 has held that amount paid by the assessee to the collaborator for using its patents and design under an agreement was only a license fee and constituted revenue expenditure. The Hon'ble Bombay High Court in the case of CIT Vs. Essel Propack Ltd. reported in 325 ITR 185 has held that the assessee did not acquire an asset of a capital natu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s deductable u/s. 37(1) of the Act whereas the Assessing Officer has held the same to be capital in nature. We find that this issue was also considered by the Co-ordinate Bench of the Tribunal in assessee's own case in ITA No. 1107/PN/2013. The Co-ordinate Bench of the Tribunal rejected the ground raised by the Department and upheld the order of Commissioner of Income Tax (Appeals). The relevant extract of the findings of Tribunal on this issue reads as under : "49. We have considered the rival arguments made by both the sides, perused the orders of the AO and CIT(A) and the paper book filed on behalf of the assessee. We have also considered the various decisions cited before us. We find the AO disallowed part of the Project Assistance Technical fees of Rs. 1,96,31,398/- on the ground that same is non business expenditure due to not being in consonance with the original agreement. We find the Ld.CIT(A) deleted the disallowance on the ground that these payments are neither capital expenditure nor personal in nature and there is no case for considering it to have been made for non business purpose. Further, he held that the AO has not questioned regarding the genuineness of payments ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ordinate Bench of the Tribunal has held expenditure as revenue in nature. The ld. DR has not been able to controvert the findings of Tribunal. Thus, we do not find any merit in the ground raised by the Department. By applying the aforementioned decision of Coordinate Bench in assessee's own case, we dismiss ground No. 4 raised in the appeal by the Revenue. 27. The ground No. 5 raised by the Department in appeal is with respect to deleting of addition made on account of homologation expenses. In assessment year 2003-04 the assessee has incurred expenditure of Rs. 75,44,101/- towards homologation. The Assessing Officer has made ad hoc disallowance of Rs. 10,00,000/-. Similarly, in assessment year 2004-05 the assessee has incurred expenditure of Rs. 63,10,716/- towards homologation. The Assessing Officer made ad nhoc disallowance of Rs. 10,00,000/- in assessment year 2004-05 as well. The disallowance has been made by the Assessing Officer on the ground that the assessee has not furnished specific bills etc and the details of stock submitted to ARAI during the course of assessment proceedings. On the other hand the contention of the assessee is that all relevant details were furnished ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch as exhibition etc. The learned AO has stated that the Appellant has not furnished any documentary evidence to substantiate that the cars were used wholly and exclusively used for the purpose of business. The Appellant has stated before me that it has all necessary evidence in support its claim. In view of this assertion, I direct the learned AO to verify the evidence -and decide admissibility of the claim on the basis of evidence furnished before him. I consider fit to remit the matter to the learned AO rather than admitting the same as additional evidence before me and sending the same to the AO for verification under the IT Rule 46A." 30. After considering the submissions of rival sides and perusing the impugned order, we find no error in the findings of CIT(A) in remitting the matter back to AO. We are of the considered view that the AO should reexamine the issue denovo. Here, we would like to point out that the AO shall not substitute his judgement over that of the assessee to determine the need and quantum of expenditure. The Assessing Officer after considering the documents furnished by the assessee shall decide this issue afresh, in accordance with law after affording o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... return of income for assessment year 2003-04 the assessee had specifically mentioned that if during the assessment proceedings positive income is determined, then the assessee would claim the deduction u/s. 80IB of the Act. The ld. AR giving the sequence of events pointed that on 18-10-2004 return filed by the by the assessee was selected for scrutiny and notice u/s. 143(2) was issued to the assessee. The assessee participated in the assessment proceedings and furnished the requisite details as required by the Assessing Officer from time to time. The Assessing Officer passed the assessment order u/s. 143(3)on 30-03-2006 disallowing certain expenditure as well as set off of brought forward losses claimed by assessee in the return of income for assessment year 2003-04, thereby determining positive taxable income of the assessee. Further, the Assessing Officer rejected the claim of deduction u/s. 80IB(3) on the basis that the Audit Report in the prescribed form was not filed in the return of income. On 30-08-2006 the assessee filed rectification application u/s. 154 of the Act. The Assessing Officer passed rectification order on 28-02-2007 accepting the claim of deduction u/s. 80IB of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ervice and warranty is not provided by MB India, the customers would no longer be willing to purchase the cars and there is probability that MB India may lose its market share. Therefore import of spare parts is interlinked with its manufacturing activity. Further, import and sale of CBUs is important for assessing the market condition for a particular range of cars which could be targeted for manufacturing by MB India in future or to bring in niche models which will be sold in few numbers and will never be economically viable to manufacture in India. Further, CBU imports are made to bring new products available with AE as CBU, but will take time to supply the same in SKD/CKD/Parts level and also some times to bridge a sudden gap of demand and manufacturing capacity. Hence the trading income is "derived" from its industrial undertaking only and the same should be eligible for deduction under section 80-IB. Reliance in this regard is placed on Ashok Leyland Ltd [1997] 224 ITR 122 (SC) (Refer page 821 to 823 of Paper book- II) which held that profits and gains from trading of spares cannot be disassociated from main activity carried on by the assessee, viz, manufacture and sale o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eady quashed the reassessment proceedings. 37. Both sides heard. It is an admitted fact that reassessment proceedings initiated against the assessee in assessment year 2003-04 to disallow the benefit of deduction u/s. 80IB of the Act has already been set aside by the Tribunal in the appeal filed by the assessee. Thus, the Commissioner of Income Tax (Appeals) ignorant of the order of Tribunal has erred in holding that in reassessment proceedings the deduction granted u/s. 80IB has been disallowed. Without commenting on merits, we are remitting this issue back to the file of Commissioner of Income Tax (Appeals) for denovo adjudication, in the light of the fact that reassessment proceedings have already been quashed by the Tribunal and the position as of now is that the order passed by the Assessing Officer in rectification proceedings is live. Therefore, the ground No. 1 raised by the assessee in cross objections is allowed for statistical purpose. 38. The assessee has filed cross objections in assessment year 2004- 05 on similar grounds. The findings given by us in assessment year 2003-04 would mutatis mutandis apply to the grounds raised in cross objections for assessment year 20 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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