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TMI Blog2016 (6) TMI 1329X X X X Extracts X X X X X X X X Extracts X X X X ..... s purposes - Held that:- We find the Ld.CIT(A) has already deleted the disallowance out of travelling and telephone expenditure. He has only sustained an amount of ₹ 2,50,000/- out of the miscellaneous expenses and other expenses. No infirmity in the order of the CIT(A). Admittedly, substantial part of petty expenses have been incurred in cash and are not verifiable in nature, therefore, the possibility of booking of expenditure for non business purposes cannot be ruled out. Since the disallowance sustained by the CIT(A) is very nominal considering the huge amount of miscellaneous expenses, staff welfare expenses etc. amounting to ₹ 13.07 crores, therefore, we find no infirmity in the order of the CIT(A) sustaining such disallowance. The submission of the Ld. Counsel for the assessee that no disallowance has been made in earlier year and subsequent year on this issue is not material. It is settled law that every year is separate and distinct and the principle of resjudicata do not apply to income-tax proceedings. In this view of the matter we uphold the order of the CIT(A) and the ground raised by the assessee is dismissed. Addition of car repair charges as a prior p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... P. We therefore find merit in the submission of the 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. Payment of royalty - nature of expenditure - revenue or capital expenditure - Held that:- We find the Hon’ble Bombay High Court in the case of Antifriction Bearings Corporation Ltd. Vs. CIT reported [1977 (11) TMI 37 - BOMBAY HIGH COURT] has held that royalty paid to a Foreign collaborator for provision of technical know-how in a restricted manner for a restricted use during the agreement period, not resulting in absolute transfer of anything or acquisition of any asset of enduring character is a revenue expenditure. Expenses pertaining to the cars allotted to the top executives - allowable busniss expenses - Held that:- No justification for adhoc disallowance on the ground that personal or non business component in the expenses claimed such as sundry expenses, hotel expenses gift articles, employee welfare expenses etc. Similarly, in the case of Bajaj Auto Finance Ltd. [2014 (6) TMI 969 - ITAT PUNE]) has held that in case of a company which is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... total income of the Appellant be deleted and the same be allowed as deductible expenditure under section 37(1). 3. Facts of the case, in brief, are that the AO during the course of assessment proceedings noted that the assessee company has debited Homologation charges at ₹ 77.74 lakhs. From the details of Homologation charges submitted by the assessee the AO noted that the same includes ₹ 54,94,700/- as expenses pertaining to Homologation Transfer Account. On being asked by the AO to submit the complete details of Homologation transfer account of ₹ 54.24 lakhs the assessee explained that the same pertains to the materials supplied to ARAI. The AO asked the assessee to furnish the complete details of the accounts of material supplied to ARAI along with delivery challans. However, the assessee submitted that complete reconciliation of materials supplied to ARAI cannot be submitted. Subsequently, the assessee furnished only 13 challans in support of the transfer of materials to ARAI. The total of these 13 challans comes to ₹ 33,51,269/-. The AO noted that out of the above amount, engines supplied for a total amount of ₹ 16,76,200/- have been written o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an amount of ₹ 37,99,831/- on account of Homologation charges on the ground that the assessee could not substantiate with evidence to his satisfaction regarding the complete details of materials supplied to ARAI and their delivery challan. We find the CIT(A) upheld the action of the AO which has already been reproduced in the preceding paragraphs. It is the submission of the Ld. Counsel for the assessee that given an opportunity the assessee is in a position to furnish the full details of Homologation charges before the AO. Considering the totality of the facts of the case and in the interest of justice we deem it proper to restore this issue to the file of the AO with a direction to give one more opportunity to the assessee to substantiate with evidence to his satisfaction regarding the Homologation charges. Ground raised by the assessee on this issue is accordingly allowed for statistical purposes. 9. Ground of appeal No.2 by the assessee reads as under : 2. The Ld.CIT(A) has erred in upholding ad hoc disallowance to the extent of ₹ 2,50,000/- out of miscellaneous expenses, staff welfare expenses, advertisement and sales promotion expenses based on the possibi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. Relying on various decisions as mentioned at page 40 of order of Ld.CIT(A) it was submitted that the disallowance made by the AO should be deleted. 12. However, the CIT(A) was not fully satisfied with the explanation given by the assessee. He agreed with the assessee that there cannot be any disallowance in the hands of the company as there cannot be any element of personal use by it. Company cannot spend its money for personal use because company is an artificial juridical entity. However, the Ld.CIT(A) sustained an amount of ₹ 2,50,000/- out of Miscellaneous expenses and deleted the balance amount by observing as under : Findings : 2.9.7 I have gone through the assessment order and arguments of the Appellant. I agree with the Appellant that there cannot be disallowance in the hands of the company as there cannot be any element of personal use by it. Company cannot spend money for its personal use because Company is an artificial juridical entity. Taxability of such expenses may be considered in the hands of the employees, if at all any taxability of such expenditure is required to be considered. Moreover, the disallowances were made on ad-hoc basis without any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... IT(A) erred in considering the car repair charges of ₹ 69,876/- as a prior period expenditure crystallised in A.Y. 2001-02 and thereby upholding the addition made by the Ld. AO. The Appellant prays that the above addition made to the total income of the Appellant be deleted and the same be allowed as deductible expenditure under section 37(1). 4. Without prejudice to the above ground, the Ld.CIT(A) erred in not directing the Ld. AO to allow the expenditure of ₹ 69,876/- as a deductible expenditure in A.Y. 2001-02. The Appellant prays that the Ld. AO be alternatively directed to allow ₹ 69,876/- as deductible expenditure in A.Y. 2001-02. 16. Facts of the case, in brief, are that the AO during the course of assessment proceedings noted that the car repair expenses of ₹ 20,85,880/- includes the following prior period expenses : Amount Date Rs.17,140 28-03-01 Rs.19,636/- 02-02-01 Rs.33,100 28-02-01 Rs.69,876/- 17. He observed that even though these expe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bmitted that allowance of these expenses in the current year in respect of the earlier year is a revenue neutral exercise and therefore the AO should allow deduction of these expenses in A.Y. 2002-03. He also relied on the following decisions : 1. CIT Vs. Excel Industries Ltd. reported in 358 ITR 295 (SC) 2. CIT Vs. Nagri Mills CO. Ltd. reported in 33 ITR 681 (Bom.) 3. CIT Vs. Vishnu Industrial Gases Pvt. Ltd. ITR No.229/1988 order dated 06-05-2008 (Delhi High Court) 4. DCIT Vs. M/s. Sicom Ltd. ITA No.8040/Mum/2010 order dated 15-01-2014 (Mumbai ITAT) 21. The Ld. Departmental Representative on the other hand heavily relied on the order of the CIT(A). He submitted that an expenditure is deductible if its liability was crystallized during the year. Since the assessee company in the instant case is following mercantile system of accounting and has debited the expenditure of an earlier year during the current year, therefore, the same cannot be allowed as deduction from the income of the current year. He accordingly submitted that the order of the CIT(A) be upheld. 22. We have considered the rival arguments made by both the sides, perused the orders of the AO and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... proceedings claimed that deduction u/s.80IB may be considered. During the course of assessment proceedings it was submitted that since there was no taxable income during the previous year ended 31-03-2002 the deduction u/s.80IB was NIL. However, if during the assessment proceedings positive income is determined, then the assessee submits its claim for deduction u/s.80IB. It was accordingly submitted that deduction u/s.80IB should be allowed to the assessee on account of the positive income, if assessed. 26. However, the AO held that assessee company has not filed audit report in Form 10CCA duly signed and certified by the auditors. He therefore rejected the claim. The assessee in appeal filed before the CIT(A) had challenged such denial. Subsequently, the AO in an order passed u/s.154 allowed the claim of deduction u/s.80IB. 27. Before CIT(A) the assessee submitted that since the deduction was initially denied for non filing of audit report in Form 10CCB along with return of income and now that the AO in the order passed u/s.154 has allowed such claim, therefore, the assessee does not press this ground. However, the CIT(A) noted that the AO had erroneously granted deduction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecause of loss. I also agree that law does not require a person to do impossible act. However, I do not agree with the Appellant that the deduction can be granted to it after the assessment is over. The reasons for my decision are as under: 2.7.9 Firstly, there is no legal provision, which provides for granting a deduction after the assessment is completed. Therefore, what i not expressively provided in the law cannot be done on the ground of justice or equity. It is held in Krishi Utpadan Mandi Samit Bulandshahar v Union of India (2004) 267 ITR 467 (All) that It is a well-settled principle of interpretation of taxing statutes that there is no equity in tax, and hence considerations of hardship are irrelevant This is true especially for the exemptions and deductions provisions. The Supreme Court in Liberty Oil Mills (P) Ltd v Collector of Excise(1995) 1 SCC 451 has held that the provisions granting exemption should be construed strictly. 2.7.10 Secondly, granting of deduction u/s 80 IB is subject to the satisfaction of certain mandatory conditions on part of the assesse. These mandatory conditions are provided in the Section 801B. Therefore, granting of the deduction is not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a taxable income, then the company reserves its claim for deduction u/s.80IB. He submitted that in view of the above noting in the audited accounts filed along with the return of income the same is to be treated as part of the return of income. For the above proposition, he relied on the decision of the Mumbai Bench of the Tribunal in the case of State Bank of India Vs. DCIT vide ITA Nos. 6817, 6818, 6823 and 6824/Mum order dated 31-08-2015 for A.Yrs. 2001-02 to 2002- 03. Referring to the following decisions he submitted that in case the Ld.CIT(A) is of the view that deduction u/s.80IB was not claimed during assessment proceedings he should have admitted such claim made by the assessee during appellate proceedings : 1. Jute Corporation of India Vs. CIT reported in 187 ITR 688 (SC) 2. National Thermal Power Co. Ltd. Vs. CIT reported in 229 ITR 383 (SC) 3. Ahmedabad Electricity Co. Ltd. Vs. CIT reported in 199 ITR 351 (Bom.) 31. He submitted that the Ld.CIT(A) cannot enhance the tax liability of the assessee when the AO has already applied his mind and accepted the submission of the assessee as the same would amount to revision of the assessment order which is beyond the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... certain mandatory conditions on the part of the assessee. According to him filing of the audit report after the completion of the assessment is meaningless. Further, according to him the claim of deduction can only be made by filing a revised return. Although according to him purely a legal claim can be made without filing of revised return of income even before the appellate authority, however, the admissibility of such claim depends on verification of facts. It is the submission of the Ld. Counsel for the assessee that the claim was already there in the return of income when separate note was given and therefore it should be treated as part of return of income. Further, this ground being purely a legal one the CIT(A) could have admitted such claim filed by the assessee during appeal proceedings. Since the AO in the 154 order has granted the deduction u/s.80IB, therefore, the CIT(A) should not have withdrawn the same. We find merit in the above submission of the Ld. Counsel for the assessee on this issue. Since there was no positive income while filing the return of income, the assessee has not enclosed the prescribed audit report duly signed and verified by the auditors. However, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... authority is vested with all the plenary powers which the subordinate authority may have in the matter. There is no good reason to justify curtailment of the power of the Appellate Assistant Commissioner in entertaining an additional ground raised by the assessee in seeking modification of the order of assessment passed by the Income tax Officer. This court further observed that there may be several factors justifying the raising of a new plea in an appeal and each case has to be considered on its own facts. The Appellate Assistant Commissioner must be satisfied that the ground raised was bona fide and that the same could not have been raised earlier for good reasons. The Appellate Assistant Commissioner should exercise his discretion in permitting or not permitting the assessee to raise an additional ground in accordance with law and reason. The same observations would apply to appeals before the Tribunal also. The view that the Tribunal is confined only to issues arising out of the appeal before the Commissioner of Income tax (Appeals) takes too narrow a view of the powers of the Appellate Tribunal (vide, e.g., CIT v. Anand Prasad [1981] 128 ITR 388 (Delhi), CIT v. Karamchand ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ices rendered by expatriates. From the various details furnished by the assessee he noted that the expatriates in category D named as Mr. Lino, Specialist, After Sales Service and Mr. Tonger, Senior Manager, Pre-owned cars were paid ₹ 33.79 lakhs each. He noted that the Project Assistance Agreement dated 11-12-1994 does not mention category D expatriates. Therefore, according to the AO, these payments have been made in violation of the agreement. On being asked by the AO, it was submitted by the assessee that the agreement was not amended so far and expressed its inability to furnish the details of the working of the payments made to the expatriates stating that the details of working is available with DCPC. Rejecting the various explanations given by the assessee the AO disallowed total amount of ₹ 67,59,428/- paid to both the expatriates u/s.37(1) for not being in compliance with the provisions of the Project Assistant Agreement dated 11-12-1994. 40. So far as payments made to the B category expatriates is concerned, the AO noted that in the agreement only one expatriate is specified whereas the payment has been made to 3 expatriates which according to him was in v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... there cannot be any ground for making the disallowance u/s.37(1) of the I.T. Act. 44. Aggrieved with such order of the CIT(A) the Revenue is in appeal before us. 45. The Ld. Departmental Representative heavily relied on the order of the AO. He submitted that the payments made to the various expatriates categorized as B and D are in violation of the terms and conditions of the Project Assistant Agreement. Similarly in respect of A and B category, the payments made are in excess of the payments prescribed in the agreement. Therefore, the CIT(A) was not justified in deleting the addition made by the AO. 46. The Ld. Counsel for the assessee on the other hand while supporting the order of the CIT(A) submitted that the expenses incurred under Project Assistance Technical Agreement are purely for the purpose of business of the assessee. He submitted that when the TPO has accepted that a certain payment is at Arm s Length Price, then the AO has no power to disallow the same during the assessment proceedings. He submitted that in the TP assessment and corporate tax assessment proceedings, in the subsequent years, the tax authorities have accepted this revised agreement entered int ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e by the assessee. We find no infirmity in the order of the CIT(A) deleting the addition. The submission of the assessee that the DRP in assessee s own case for A.Y. 2007-08 has allowed such project assistance technical fees as deductible business expenditure could not be controverted by the Ld. Departmental Representative. We also find merit in the submission of the Ld. Counsel for the assessee that when the TPO has accepted that certain payment is at ALP, then the AO has no power to disallow the same during the assessment proceedings. 50. The Delhi Bench of the Tribunal in the case of Cushman and Wakefield India Pvt. Ltd. Vs. ACIT reported in 135 ITD 242 has held that once an international transaction has been made subject to determination of ALP by the TPO and he has found that the transaction is at ALP, then it is not permissible for the AO to reexamine that transaction and make disallowance under the normal provisions of the Act. 51. We further find from the submission of the Ld. Counsel for the assessee that in the TP assessment and corporate tax assessment proceedings of the subsequent years, the tax authorities have accepted the revised agreement entered into in May 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... documentation submitted : (as per the ratio laid down in the case of M/s. Onward Technologies vs. DCIT dated 30-04-2013 (appeal No.ITA No.7985/Mum/2010 of ITAT Mumbai). 53. Facts of the case, in brief are that the Assessee computed the ALP of the international transaction carried out by it by applying Transactional Net Margin Method(TNMM). The Assessee justified the royalty payment as having been paid at the arm's length by using TNMM. The TPO noted that the assessee was paying royalty to the parent company Daimler Chrysler AG @ 2.75% for using technical know-how vide agreement dated 12-12-1994. This agreement was revised and new agreement was entered into on 21-12-1999, which revised the rate of royalty payment to 5%. 54. The TPO did not accept the application of TNMM for benchmarking royalty payment transaction. According to him, CUP method is the most appropriate method in the facts of the case. Further, in his detailed Order he did not find any justification for the increase in royalty payment to 5% from 2.75%. The conclusion of the TPO, which has been summarized by the Ld.CIT(A) at para 2.3.2 of his order is as under : (a) As mentioned in the internal documents ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment Promotion Board (FIPB). The revised agreement between the Assessee and the parent company was also approved by the FIPB. The decision of Kinetic Honda Motor Limited vs JCIT 771TD 393 Pune ITAT was relied upon wherein it has been held that the Government approvals cannot be lightly brushed aside. It was submitted that assessee had obtained specific approval from the Government of India for the payment of royalty as royalty payment made by the Assessee is not covered under the automatic route. 58. The assessee contended that the payment has resulted into substantial saving of about ₹ 25 crore because of the revised agreement even though the rate of royalty was increased. Therefore, transfer pricing adjustment is not required. It was stated that no CUP is available to benchmark the international transaction of the payment of royalty. It was submitted by applying the ratio in the case of B. C. Srinivas Shetty reported in 128 ITR 294 SC that the arm's length price of the international transactions relating to payment of royalty cannot be computed because of the failure of machinery provisions of the Act for the computation of the arm's length price. 59. The asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Net Sales (B) 71,322 2,757 72,294 2,684 93,456 4,030 Royalty and R D expenditure as a % of net sales (C=A/B %) 2.:35% 1.67% 1.95% 1.34% 1.63% 1.11 % ** For AY 2002-03, includes lumpsum royalty of ₹ 50 million 61. Lastly, it was submitted that the royalty was held to be at the arm's length for the AY 2007-08 and in the AY 2008-09.in the assessee's own case. The TPO, based on the detailed submissions made by the assessee, has concluded that the assessee's royalty payments were at the arm's length. It was accordingly argued that the arm's length payment of the royalty paid by the Assessee should be calculated at 5% of the net value addition as calculated by the Assessee and the adjustment made by the learned TPO should be set aside. 62. Based on the arguments advanced by the assessee the Ld.CIT(A) deleted the adjustment made by the AO by observing as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the transaction by comparing royalty payment made by the assessee @5% with royalty payment made by MUL to Suzuki, Japan @3%. He submitted that the letter received from DCAG submitted during assessment proceedings referred to the royalty rate at 3% and not at 5%. Further, the net profit margin earned by the company is less than the average net profit margin earned by comparable companies. Royalty rates charged from associated enterprises by DCAG was not submitted despite being asked. He submitted that the various comparables selected by the assessee have hardly paid any royalty. So far as the reliance of consistency is concerned he submitted that the same to be seen in subsequent years but not in preceding years. He also relied on the decision of the Delhi Bench of the Tribunal in the case of LG Electronics India Pvt. Ltd. reported in 153 ITD 591. He submitted that the order of the CIT(A) be reversed and that of the AO/TPO be restored. 65. The Ld. Counsel for the assessee on the other hand heavily relied on the order of the CIT(A). He submitted that the assessee has paid lumpsum payment of ₹ 2.73 crores as royalty out of which 2 instalments are still pending. Referring to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as correct in employing overall TNMM for examining the royalty. He also relied on the decision of the Mumbai Bench of the Tribunal in the case of M/s.Cadbury India Ltd. Vs. ACIT vide ITA Nos. 7408/Mum/2010 and ITA No.7641/Mum/2010 and Air Liquide Engineering Pvt. Ltd. Vs. DCIT vide ITA Nos. 1040, 1159/Hyd/2011 and ITA No.1408/PN/2010. 67. Referring to the decision of Hon ble Delhi High Court in the case of Sony Ericsson Mobile Communications India Pvt. Ltd. Vs. CIT vide ITA No.16/2014 he submitted that the Hon ble High Court in the said decision has held that the expression class of transaction functions performed by the parties in section 92C(1) of the Act illustrates that the meaning or definition of the expression transaction does not prohibit clubbing of closely connected or continuous transactions. In case the tax payer is engaged in single line of business, there is no bar or prohibition from applying the TNMM on entity level basis. Once the comparables pass the functional analysis test and profit margins matches with the comparables, it leads to an affirmation of the transfer price as the arm s length price. After this it is not permissible to make a comparison of a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ected since the controlled transaction has been used to benchmark the payment of royalty. 70. The Ld. Counsel for the assessee submitted that the assessee Mercedes Benz has obtained approval from the Foreign Investment Promotion Board (FIPB) for the original as well as revised agreement. It has also obtained specific approval from Department of Industrial Policy and Promotion (DIPP) for the payment of royalty as royalty payment made by the assessee is not covered under the automatic route. Referring to the following decision he submitted that FIPB approval, Government of India, RBI approval etc. for the royalty rates itself implies that the payments are at Arm s Length : 1. Kinetic Honda Motor Ltd. Vs. JCIT ITA No.31/PN/1999 order dated 23-03-2000 2. M/s. Cadbury India Ltd. Vs. Addl.CIT ITA No.7408/Mum/2010 7641/Mum/2010 order dated 13-11-2013 3. Thyssenkrupp Industries India Pvt. Ltd. Vs. Addl.CIT ITA No.6460/Mum/2012 order dated 27-02-2013 4. Sone Okegawa Precision Forgings Ltd. Vs. Dy.CIT ITA No.5386/Del.2010 order dated 16-12-2011 5. M/s. Hero MotoCorp. Ltd. Vs. Addl.CIT ITA No.5130/Del/2010 order dated 23-11-2012 71. The Ld. Counsel for the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed before us. We find the assessee in the instant case had entered into an agreement dated 12-12-1994 with DCAG to pay royalty for technical knowhow received from DCAG in the following manner : (a) Lumpsum payment of DM 56.6 million, net of taxes payable in 4 instalments periodically from 1995 to 1998. (b) Running royalty @2.75% on value addition in India. 74. We find the assessee and DCAG amended the 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 ₹ 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 com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see in the paper book we find in consideration of the use of technology and technical information received from DCAG for manufacturing activity the assessee has to pay running royalty @5% of the net value added for each contractual value. The royalty is computed by considering the net sales price of the licenced vehicles, which is exclusive of excise duty and cost of standard brought out components and landed cost of the 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see that for application of CUP it is necessary that transactions being compared should be controlled. In the instant case the TPO has compared the royalty paid by Maruti Udyog Ltd. to Suzuki, vis-a-vis, royalty paid by the assessee to DCAG. However, Maruti Udyog Ltd. and Suzuki are associated enterprises and a controlled transaction cannot be used for benchmarking arm s length price. 80. We find the Pune Bench of the Tribunal 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 receip ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is relevant to note that such payment has been approved or deemed to have been approved by the RBI. When a payment is made after obtaining due approval from the RBI, how its ALP can be computed at `Nil, is anybody s guess. The fact of approval of the payment by the RBI has been succinctly recorded by the TPO in his order as well. He still chose to propose adjustment in respect of full payment. In our considered opinion, when the 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 ₹ 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reement approved by the Indian Government or the assessee may disclose information when it is otherwise compelled by law. Further, Article 17.3 states that in the event of any confidential information being disclosed to any unauthorized third party, it will constitute gross breach of the contract unless the assessee prove that it has been in any way responsible thereof. Therefore, the AO held that these stipulations clearly indicate that the assessee has acquired absolute right over the technical know-how for assembly or manufacturing of car or car parts. Rejecting the various explanations given by the assessee and following his order for A.Yrs. 2000-01 and 2001-02 where such royalty has been disallowed by his predecessor, the AO disallowed the balance royalty of ₹ 2,84,63,797/-. 88. Before the CIT(A) the assessee made elaborate submissions which has been summarized by the Ld.CIT(A) which read as under : 2.4.4. The Appellant s submission made against the action of the Learned AO is reproduced as under: i. MB India has not acquired know-how from Daimler AG on an outright basis. MB India has only acquired a license/right to use know-how of Daimler AG in respect of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nment. There was no finding of the Central Government authorities approving this arrangement that the lump sum consideration was inadequate. x. The royalty is regarded by MB India as royalties for tax withholding purposes. xi. The royalty is debited by MB India to its Profit Loss Account under the head Royalty in the Manufacturing Expenses Schedule. The technical service charges are not considered as expenses of capital nature by the auditors in the audited financial statements and the tax audit report filed by MB India along with its return of income. xii. MB India is also paying Service tax on the Royalty under the category Intellectual Property under the reverse charge mechanism since March 2003. 2.4.5 It was submitted that in view of the above explanation on the terms and conditions of the Agreement, it is clear that the Appellant has neither acquired any assets on outright basis nor has secured any enduring advantage. What the Appellant has essentially acquired is the license to use the technical know-how during the period of Agreement. Therefore, royalty payment is in the nature of revenue expenditure. Further, royalty expenditure is an annual recurring expe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an be seen from the above that the Appellant has not acquired ownership of any asset nor it has acquired any rights for substantially long period. The Appellant has acquired right to manufacture and right to use technical know-how for the period of 10 years. This period is in accordance with the normal industry practice according to which, license to use intellectual properties is conferred for the period between 5 to 10 years. Therefore, the period of 10 years cannot be considered as long period for considering it to be benefit of enduring in nature. Further, technical know-how in the present time become obsolete in short time due to fast changing technology. Therefore, normally even in the cases of transfer of technology, acquirer does not get benefit of enduring in nature. This is not even the case of transfer of technology. 2.4.13 In the absence of any ownership of assets, acquisition of right for very long period, the payment made by the Appellant has a character of royalty. If the royalty is treated as a payment giving enduring benefit, then the term 'royalty' would lose its meaning. In my view, Appellant's royalty payment has not given any enduring benefit to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... agreement, MB India is required to immediately discontinue all assembling/ manufacturing and sales operations of the licensed products. Further, it has also been provided that if Daimler AG, the parent company of MB India, reduces its stake to less than 51 % of the capital directly or indirectly in MB India, then also the agreement will cease to exist. 95. The Ld. Counsel for the assessee submitted that the lumpsum technical know-how fees payable under the agreement have already been paid in the initial years as required under the agreement. The same has also been appropriately considered for tax purposes in the relevant years. MB India has sought approval of all royalty agreements from the Central Government. There was no finding of the Central Government authorities approving this arrangement that the lump sum consideration was inadequate. Further, the royalty is regarded by MB India as royalties for tax withholding purposes. He submitted that the royalty is debited by MB India to its Profit Loss Account under the head Royalty in the Manufacturing Expenses Schedule. The technical service charges are not considered as expenses of capital nature by the auditors in the audite ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uired any ownership of asset or rights for substantially long period and in absence of the same payments made by the assessee have the character of royalty. Since there is no enduring benefit received from it the CIT(A) treated royalty expenditure as revenue and accordingly deleted 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 collab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o furnish such details during the course of assessment proceedings, and the assessee could furnish details of only 12 cars meant for executives. 104. Facts of the case, in brief, are that the AO during the course of assessment proceedings noted that the assessee company every year has been capitalizing near about 30 cars manufactured by it. Out of the stock of the capitalized cars, the company sells certain number of cars every year at a price lower than the market price. The AO asked the assessee to produce log book of all the capitalized cars. The assessee submitted that the log books are not maintained. The AO asked the assessee to submit the list of the names and designations of the persons using such capitalized cars. According to the list filed by the assessee, 12 cars were shown as specifically allotted to the executives of the company and other 14 cars have been shown as into car pool. However the assessee failed to produce documents and details in support of its contention that the cars from the car pool were being used wholly and exclusively for the purpose of business. The AO, therefore, was of the view that part of the expenditure incurred on maintaining these cars, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the hands of respective employees. Considering the explanation offered, I agree with the Appellant that there is no case for the disallowance in the hands of the company as far as cars used top management executives are concerned. This is because in the hands of company, the expenditure on capitalized car has been incurred for the employees and is uncured for the purpose of its business and hence deductible. 2.6.7 With respect expenditure incurred on balance cars, it is submitted that such cars were either used in the car pool for all the employees or were used for the purpose of business in events such 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... back to the file of the AO for verification. He submitted that the AO was not justified in making adhoc disallowance out of the genuine business expenditure of the assessee. Since it was categorically submitted that in case of company which is inanimate person there can be no justification for adhoc disallowance for personal or non business component. 113. As regards the query raised by the AO to submit the log book analysis to capitalized cars, he submitted that it was categorically stated before the AO that log book is not maintained and hence could not be submitted, therefore, the AO disallowed 50% of the above expenses. He submitted that mere non maintenance of log book cannot be a ground to disallow genuine business expenditure. 114. Referring to the decision of the Hon ble Gujarat High Court in the case of Sayaji Iron and Engineering Company Vs. CIT reported in 253 ITR 749 he submitted that no disallowance out of motor car expenses can be made in the hands of company for personal use by the Directors. 115. So far as the amount of ₹ 49,19,176/- on account of difference between amounts of capitalized cars as per tax audit report and expenses on capitalized cars t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e case of Sayaji and Iron Engineering Company (Supra) that once the directors of the assessee company were entitled to use the vehicles of the company for their personal use as per the terms and conditions of the agreement, it cannot be said that the assessee company incurred expenditure for the personal use of cars by the Directors and therefore disallowance of part of the expenditure incurred by the company for the maintenance of the vehicles was not justified. The Pune Bench of the Tribunal in the case of Ador Technologies Ltd. (Supra) has held that assessee being company, there can be no justification for adhoc disallowance on the ground that personal or non business component in the expenses claimed such as sundry expenses, hotel expenses gift articles, employee welfare expenses etc. Similarly, the Pune Bench of the Tribunal in the case of Bajaj Auto Finance Ltd. (Supra) has held that in case of a company which is an inanimate person, no adhoc disallowance towards car and telephone expenses for personal use can be made. Similar view has been taken by the Coordinate Benches of the Tribunal in different other cases. We therefore do not find any infirmity in the order of the CIT( ..... X X X X Extracts X X X X X X X X Extracts X X X X
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