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TMI Blog2016 (5) TMI 1469X X X X Extracts X X X X X X X X Extracts X X X X ..... ical issue in the appeal for the assessment year 2006-07, we set aside the matter to the file of the Assessing Officer to decide the issue afresh as per the above decision of the ITAT after affording opportunity of being heard to the assessee Duty draw back accrues in the year in which rate is fixed by the competent authority after verification of claim of the assessee and amount is quantified and not in the year of export, we direct the Assessing Officer to decide the issue afresh. Disallowance regarding balance in RG 23A Part-II - Held that:- We set aside the matter to the file of the Assessing Officer to decide the issue afresh in view of the above decision of the ITAT in the case of assessee itself in the appeal for the assessment year 2006-07 after affording opportunity of being heard to the assessee. Disallowance of advance payment, liability in respect of which has not crystallized and, therefore, not allowable as deduction under sec. 43B - Held that:- Identical issue under similar set of facts has been decided by the ITAT in the appeal for the assessment year 2006-07 AO is directed to first verify the argument of following the 'Inclusive method’ and then allow ded ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Tribunal in the assessee’s own case for the earlier assessment years including the immediately preceding year. Respectfully, following the above precedents, we order for the deletion of this addition. Validity of disallowance of royalty paid - Held that:- identical issue in the case of assessee itself for the assessment year 2006-07, we hold that the amount of royalty considered by the Assessing Officer as capital expenditure should be allowed as a revenue expenditure. At the same time, depreciation allowed by the Assessing Officer on this amount should be taken back. The Assessing Officer is directed accordingly. Disallowance of R & D Cess paid - assessee treated the amount of royalty and cess on royalty as revenue expenditure - Held that:-There is no dispute on the nature of cess, which is on royalty and has been treated both by the assessee as well as the AO as part and parcel of royalty and accordingly claimed/disallowed in line with the treatment of royalty. Since we have allowed deduction for the entire amount of royalty paid by the assessee during the year by deleting the TP adjustment and also overturning the action of the AO in treating the remaining half part ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ustified in claiming ₹ 77 lacs on account of expenditure on excise duty on payment basis under sec. 43B of the Act. The Assessing Officer is accordingly directed to allow the claim. Adjustment on account of alleged AMP expenses, and relating to transfer pricing (royalty, royalty paid to non-AE and error in computing royalty) - Held that:- MP expenses unilaterally incurred by the appellant does not result in an international transaction so as to invoke the provisions of Chapter X of the Act. We thus set aside the matter to the file of the Assessing Officer to decide the issue as per above finding of the Hon'ble High Court after affording opportunity of being heard to the assessee. Validity of adjustment made by the TPO on account of royalty - Held that:- Addition on account of transfer pricing adjustment can be made by making a comparison between the transacted value of an international transaction and its ALP. Thus it is clear that the availability of the transacted value of an international transaction is sine qua non. If such transacted value is either not separately available or cannot be precisely determined from a combined value of a number of international transac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case the impugned assessment completed vide order dated 29.11.2011 under section 143(3) read with section 144C of the Income-tax Act, 1961 ( the Act ), is illegal and bad in law. 1.1 That on the facts and circumstances of the case, the impugned assessment having been completed on the basis of directions issued by the Dispute Resolution Panel ( DRP ) under section 144C(5) of the Act without judiciously and independently considering the factual and legal objections to the draft assessment order, is illegal and bad in law. 1.2 That the DRP erred on facts and in law in not interfering with the draft order passed by the assessing officer holding that since appeals have been filed by the appellant and the Department on various issues, there is no warrant to interfere with the proposed additions/ disallowances. 1.3 That the DRP erred on facts and in law in not directing the assessing officer to delete various additions/ disallowance, which were squarely covered in favour of the appellant by the appellate orders for the earlier years. 2.0 That the assessing officer erred on facts of the case and in law in completing the impugned assessment at an income of ₹ 25,76,67,35,6 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in RG 23A Part II. 3.4.1 That the Assessing Officer failed to appreciate that the aforesaid balances represented the amount of excise duty actually paid by the appellant to the suppliers of raw materials and other inputs for which liability had already been incurred and thus could not be considered as advance payment of excise duty. 3.4.2 The Assessing Officer erred on facts and in law in not allowing deduction on the ground that the claim of deduction of unutilized balance in RG23A was revenue neutral by virtue of the provisions of section 145A of the Act. 3.5 That the Assessing Officer erred on facts and in law in not allowing deduction under section 43B of the Act for a sum of ₹ 17,76,35,117/- representing the custom duty paid and included in valuation of closing stock. 3.6 That the Assessing Officer erred on facts and in law in not allowing deduction under section 43B of the Act for a sum of ₹ 28,48,36,339/- representing custom duty (CVD) paid to be adjusted against excise duty payable on finished products.. 3.7 That the Assessing Officer erred on facts and in law in not allowing deduction under section 43B of the Act for a sum of ₹ 10,83,22,55 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y on the basis of method/ formula prescribed in Rule 8D of the I.T. Rules without appreciating that: (a) the said Rule was not at all applicable to the year under consideration; (b) there is nothing on record to dispute the contention of the appellant that no expenditure was actually incurred in relation to exempt income; (c) disallowance under that section cannot be made simply on the basis of assumption of some expenditure having been incurred in relation to exempt income; (d) preconditions for applying Rule 8D as prescribed in sub-sections (2)/ (3) of section 14A of the Act were not satisfied. 6.2 That the Assessing Officer erred on facts and in law in not appreciating that there was no direct nexus between expenditure incurred and exempt dividend income. 6.3 That the Assessing Officer erred on facts and in law in not following the binding orders of the jurisdictional Tribunal in the appellant s own case for AY s 1999-2000 and AY 2000-2001 wherein the Tribunal deleted the disallowance made u/s 14A of the Act. 6.4 Without prejudice to above, that the assessing officer erred on facts and in law in computing the disallowance of expenditure under section 14A of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ogy, technical know how and Trade Mark are linked to the core right to manufacture and sell licensed products and was therefore, revenue in nature. 10.2 That the Assessing Officer erred on facts and in law in not appreciating that payment of royalty is directly linked and correlated with the production/ sales of cars and spares by the assessee company and if there is no production/ sale of cars and spares, there will be no royalty payable by MSIL to SMC. 10.3 That the Assessing Officer erred on facts and in law in not appreciating that royalty payment (including cess) was held to be revenue expenditure in all the preceding assessment years and that there being no change in facts during the year under consideration, there was no warrant or justification to take a totally contradictory view in holding the same to be capital expenditure. 10.4 That the Assessing Officer erred on facts and in law in not allowing the claim of the assessee that lumpsum royalty paid should also be considered as revenue expenditure. 10.5 Without prejudice to the above grounds, the Assessing Officer erred on facts and in law in making a computational error while determining the amount of disallow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was to promote industrial growth/ development, to generate employment, etc., the subsidy received was in the nature of capital receipt not liable to tax under the provisions of the Act. 11.5 That the Assessing Officer erred on facts and in law in not appreciating that the fact that assessee is a cash rich company or that it was granted subsidy under prestigious unit category or that the assessee could utilize the subsidy amount without any prerestricted object, had no bearing on deciding the issue in question. 11.6 That the Assessing Officer erred on facts and in law in not considering the Memorandum dated 18.10.01 issued by the Prohibition, Excise and Taxation Commissioner, Haryana, which was the competent authority and part of High Powered Committee, certifying the aforesaid amount retained as per entitlement certificate as capital subsidy. 12 That the Assessing Officer erred on facts and in law in not allowing the depreciation on written down value of software expenditures capitalized in earlier years. That the Assessing Officer further erred on facts and in law in not even adjudicating the said claim made by appellant during the course of assessment proceedings. 13 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... covered by section 43B and the Appellant was accordingly entitled to statutory deduction in respect to that amount. 14.3 The AO has failed to appreciate that for determining whether the Appellant was entitled to claim the said deduction of ₹ 77,00,000/- under section 43B, the only two questions, which had to be asked were; (a) whether the amount had actually been paid by the assessee; and (b) whether that payment had been made during the relevant previous year. The AO has failed to appreciate that, as in the present case, the answer to both these questions were in the affirmative, the deduction of ₹ 77,00,000/- under section 43B necessarily had to be allowed by the AO. 15 That the assessing officer erred on facts and in law in making addition to the income of the appellant to the extent of ₹ 463.12 on account of the alleged difference in the arm s length price of international transactions. 15.1 That the assessing officer erred on facts and in law in adopting a completely contradictory position of accepting Transactional Net Margin Method ( TNMM ) as the most appropriate method on the one hand, and yet seeking to question appropriateness of individual ele ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... were towards the products manufactured and owned by the Assessee and not towards the brand, per se; 15.11 Without prejudice to the all other grounds, AO failed to appreciate that full disallowance of excessive A M expenditure is not appropriate as the excessive expenditure will lead to Brand building of both Maruti and Suzuki. That the assessing officer erred on facts and in law in holding that the appellant incurred extraordinary / non routine expenses of promotion and development of Suzuki brand and, therefore, helped in creation of marketing intangible in India. 15.12 That the assessing officer erred on facts and in law in not appreciating that the AMP expenses incurred by the appellant, did not result in creation of any marketing intangibles; much less on account of the AE. 15.13 That the assessing officer erred on facts and in law in not appreciating that the power of the TPO is restricted to the determination of arm s length price of international transactions by applying any of the prescribed method and not to make disallowance of business expenses incurred by the appellant. 15.14 That the assessing officer erred on facts and in law in applying Bright Line Test ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... That the assessing officer erred on facts and in law in holding that the appellant should have earned a mark-up in respect of the AMP expenses, alleged to have incurred for and on behalf of the associated enterprise. 15.23 That the assessing officer erred on facts and in law in adopting an inconsistent approach for computing the AMP expenses incurred by the appellant and by the comparable companies. 15.24 Without prejudice, the assessing officer erred on facts and in law by considering sales promotion expenses of appellant as contributory to the alleged brand building exercise. 15.25 Without prejudice that, the assessing officer erred on facts and in law in holding the AMP expenses incurred by the appellant to be excessive on the basis of a bright line limit arrived at by considering inappropriate comparables, not having similar product/ brand profile as the appellant. 15.26 Without prejudice that the assessing officer erred on facts and in law in not considering the following alternate set of comparable companies in passenger automobile industry identified by the appellant for benchmarking of advertisement and brand promotion expenses (Amounts in Rs. Crores) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rred on facts and in law in artificially splitting the single and inseverable license agreement entered into by the applicant into two separate agreements for use of technology and for use of brand name failing to appreciate that the License Agreement constituted a single/ in severable/ indivisible contract/ package, which provided appellant the exclusive right and license to manufacture and sell licensed product in India using SMC technology, all others rights vested in the license agreement are linked to the core right to manufacture and sell licensed products. 15.34 That the assessing officer erred on facts and in law in failed to appreciate that the methods used by the Ld. TPO to compute the arm s length royalty is not a method prescribed in TP regulations under Income tax Act,1961,therefore the addition made by TPO is void-ab initio. 15.35 That the assessing officer erred on facts and in law in failing to appreciate that the decision to obtain the licensed trademarks was taken solely/ exclusively by the appellant for its business purposes since its inception [as against being imposed on it by SMC Motor Corporation ( AE or SMC )]. 15.36 That the assessing officer er ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... I for the payment of the brand royalty i.e. 5% on domestic sales and 8% on exports for composite royalty (both brand and technology ) and 1% and 2% if only for brand resulting is a maximum 20-25% of royalty attribution towards brand as against the 48.33% computed by the TPO. 15.45 Without prejudice, the assessing officer erred on facts and in law in not appreciating that if compensation for AMP expenses was to be received by the assessee from its AE, it will effectively transfer the economic ownership of the brand to the associated enterprise, and in which case it would be grossly unjustified to disallow the payment of royalty for use of brand name. 15.46 Computation Error 15.46.1 The Ld. AO/TPO erred in considering the incorrect figures of Running Royalty and Lump sum Royalty while calculating the disallowance in TP provisions 15.46.2 The Ld. AO/TPO erred in disregarding the observation of the DRP that on adjustment on account of Lumpsum royalty to be restricted to the depreciation charged to P/L account. 15.47 That the assessing officer erred on facts and in law in making various statements/ averments merely based on conjectures/ surmises and unsound presumptions, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee in its return of income had claimed ₹ 1,18,83,44,986 in respect of various statutory duties paid during the year under consideration under sec. 43B of the Act and simultaneously offered for tax of ₹ 1,10,53,05,940 claimed as deduction in earlier years (s). The duties so paid included excise duty, customs duty on import/purchase of inputs/components and also an amount of duty paid in PLA account. The Assessing Officer following the assessment orders of earlier years proposed disallowance of ₹ 1,18,83,44,986 on the ground that deduction under sec. 43B of the Act is allowable only where the amount claimed as deduction on actual payment basis is charged to the profit and loss account. He was of the view that amount paid by the assessee is in the nature of advance payment of duty, liability in respect of which has not accrued/crystallized and subsequently, such advance payments is not allowable as deduction. The Assessing Officer accordingly made disallowance of ₹ 8,30,39,046 (net of amount offered during the year by the assessee i.e. ₹ 1,18,83,44,986 ₹ 1,10,53,05,940 in the final assessment order. The same has been upheld by the first ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uction in the return of income. The assessing officer has, however, disallowed the same following the assessment order for the assessment year 2005-06. In the assessee s own case for the assessment year 1999-2000, the ITAT allowed the claim subject to incurring of liability on manufactured goods. The liability incurred by the assessee as on 31.3.07 was ₹ 42.98 Crores crores, which was much more than the amount deposited in PLA. Consequently, the balance in PLA was allowable deduction under section 43B of the Act. Further reliance is placed on the decision of Special Bench of the Tribunal in the case of DCIT v Glaxo Smith Kline Consumer Health Care Ltd reported in 107 ITD 343 (SB) (Chd.), wherein it has been held that PLA balance is an allowable deduction. Further, the issue stand covered in favour of the assessee, in view of Hon'ble Delhi High Court Decision in the case of CIT vs Modipon Ltd. (No. 2) (334 ITR 106). 8.3 The Learned CIT(DR) on the other hand tried to justify the orders of the authorities below and placed reliance upon them. 8.4 Having gone through the decisions relied upon, we find that under the similar set of facts in the case of asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ired to be taken with the element of tax or duty etc. Since the amount of unutilized balance of excise duty under PLA does not form part of purchase, this amount will be eligible for separate deduction u/s. 43B. At the same time, the last year s unutilized PLA getting deduction in that year due to the application of section 43B, would be required to be added back to the income of the current year as determined above. We, therefore, set aside the impugned order and direct the A.O. to firstly recast the assessee s profit and loss account on inclusive basis and then make suitable deduction in respect of the amount of unutilized PLA at the end of the current year and also the preceding year. 8.5 We find that the ITAT under similar set of facts has decided an identical issue after discussing in detail and following the decision cited before it including the decision of special Bench of the ITAT in the case of DCIT vs. Glaxo Smith Klin Consumer Health Care Ltd. (supra) holding that the excess amount of excise duty reflected in the account-current is nothing but actual payment of excise duty even though mentioned as advance payment and hence allowable as deduction under sec. 43B of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he provisions of Section 145A and Section 43B of the Act. While the provisions of Section 145A mandate the appellant to include the value of tax, duty, cess or fee in the value of its closing stock, the provisions nowhere requires the appellant to go a step further and curtail the operation of Section 43B by not claiming the deduction of such duties, etc. in the year of payment but in the year in which such stocks are consumed by the appellant. Even if the aforesaid amount has to be added to purchases and closing stock by virtue of Section 145A, thereby being income neutral in so far as the P L Account is concerned, even thereafter, the said amount will be separately deductible while computing the taxable income u/s 43B. It is submitted that the Hon ble Supreme Court, in the case of Berger Paints ltd. v. CIT: 266 ITR 99(SC) held that customs and excise duties are allowable in the year of payment u/s 43B, and even if such duties are included in the value of closing stock, they would be separately allowable. In that case, the question before the Hon ble Calcutta High Court for the AY 1984-85 was as follows: Whether, on the facts and in the circumstances of the case, the Tri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r the similar reason the custom duty paid by the appellant has been added to the cost of raw material and the same has been shown in the closing stock and carried forward to the next year in the form of opening stock. Therefore it cannot be said that the expenditure on account of customs duty stands allowed to the appellant in the year under consideration . Therefore following the decision of the Special Bench, the appellant is entitled to deduction of the aforesaid amount u/s 43B in the year under consideration. The Delhi Bench of the Tribunal in the case of Purolator India Ltd. v. DCIT: ITA No. 1441/Del/2003 decided similar issue in favour of appellant by accepting the valuation of closing stock on net of MODVAT basis. The Tribunal relied upon the decision of the Supreme Court in the case of CIT v. Indo Nippon Chemicals Ltd.: 261 ITR 275 (SC) wherein the non inclusive method of accounting for MODVAT followed by the appellant was approved by the Apex Court. The relevant findings are reproduced hereunder: As agreed by the learned representatives of both sides this issue is squarely covered in favour of the appellant by the decision of the Hon ble Supreme Court in the case o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lusive method as mandatorily required u/s 145A. We, therefore, direct the AO to recast Profit and loss account as per `Inclusive method as discussed above and then allow deduction in respect of the customs duty paid in accordance with section 43B, if not getting deducted in such recast. Customs duty paid on import of components for which exports had/had not been made by the year end under the inclusive method would now stand included in the value of imports and accordingly get deducted. Customs duty of ₹ 8,65,07,635/- paid on import of components for which exports had been made by the year end would not require any separate deduction as the same will be debited to the Profit and loss account and also get exhausted. As regards the other amount of customs duty for which exports had not been made by the year end would represent the amount though debited to the Profit and loss account by means of increased input cost but not getting exhausted as the same also appearing in the balance sheet through the enhanced value of closing stock. Separate deduction is required to this extent u/s 43B of the Act. At the same time, we also direct the AO to make sure that such amount separately ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hile affirming the finding of the Tribunal held that duty drawback accrues in the year in which rate is fixed by the competent authority after verification of claim of the assessee and amount is quantified and not in the year of export. Similar view has been held in the case of CIT v. Manav Tools (India) P. Ltd: 336 ITR 237 (P H). 10.2 The Learned CIT(DR) on the other hand placed reliance on the orders of the authorities below. 10.3 We find that the ITAT has decided an identical issue in favour of the assessee in its appeal for the assessment year 2006-07 (supra) dealing with the same in para No. 5.1 and 5.2, reproduced hereunder: 5.1. Now, we take up the disallowances u/s 43B on items of customs duty. First is customs duty of ₹ 8,65,07,635/- paid on import of components for which exports had been made by the year end and ₹ 1,47,142/- for which exports had not been made by the year end. These amounts claimed by the assessee as allowable u/s 43B of the Act, were disallowed by the AO. It is common submission that the tribunal has allowed deduction in respect of these amounts in the preceding years. 5.2. Here again it is noticed that the assessee has also f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iles. The assessee claimed that under Central Excise Law, it is entitled to claim modvat credit in respect of the amount of Central Excise Duty so paid on raw-material and inputs purchase for manufacture of excisable goods. The said amount of duty paid to the supplier of the raw-material and inputs was regarded as amount of central excise duty actually paid by the assessee under the excise law, claimed the assessee. The Assessing Officer, however, disallowed the aforesaid amount following the assessment order for the assessment year 2005-06. 12. Before the ITAT, the Learned AR submitted that the issue raised is fully covered by the following decisions: i) Shri Ram Honda Power Equipment Ltd. (SLP No. 23461/2012); ii) Maruti Suzuki India Ltd. 225 CTR 140 (Del.); iii) Maruti Suzuki India Ltd. vs. ACIT ITA No. 5120/Del/2010 Ors. (A.Y. 2006-07) order dated 24.8.2015; 12.1 The Learned AR also furnished following submissions: The Special Bench of the Tribunal in the case of DCIT v Glaxo SmithKline Consumer Healthcare Ltd: 107 ITD 343/ 299 ITR (AT) 1 (Chd.) (SB), has held that, unutilized MODAT credit is not an allowable deduction, since such credit does not amoun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... et off against liability of excise duty onthe finished goods at the time of removal of goods from bonded warehouse. 4.15. We have noticed above that the assessee is also following `Exclusive method . Under the `Exclusive method , the total amount of excise duty paid by the assessee on purchase of inputs does not get added to their purchase price, but appears as an asset with the nomenclature of Modvat credit. When goods using the excise duty paid raw material are manufactured, the manufacturer becomes entitled to use Modvat credit against his liability of excise duty on finished products. This utilized part of the Modvat credit goes to the Excise duty account in the same manner as utilized PLA discussed above. Suppose, an assessee has Modvat credit of ₹ 10 and has utilized duty paid raw material in its production during the year for corresponding sum of ₹ 9, out of which finished goods corresponding to Modvat utilized of ₹ 7 are sold and the finished goods corresponding to Modvat utilized of ₹ 2 are in stock. The assessee will get deduction for ₹ 9 under the exclusive method. Simultaneously the assessee will offer income of ₹ 7 embedded in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d as deduction during the year of payment as per section 43B. Caveat remains that deduction for a sum of Re. 1 in the current year, being the Modvat credit unutilized at the end of the year under the exclusive method, also requires enhancement of income of the succeeding year to this extent. In the like manner, the corresponding amount allowed as deduction u/s 43B in the preceding year, if any, also requires separate add back to the income of the current year. It is so because deduction for payment of tax or duty etc. can be allowed only once, and that too, at the time of payment. We, therefore, hold that the amount of unutilized Modvat credit is deductible in the computation of income for the current year under the exclusive method. But such amount also requires add back in the computation of income of the immediately next year and also the corresponding amount of unutilized Modvat credit of the preceding year, if allowed as deduction in such earlier year, requires a separate addition to the income of the current year. It is the treatment of Modvat credit under the `Exclusive method . 4.18. We have noticed supra that the use of `Exclusive method is no more permissible in the y ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not been finally deducted. 4.21. We have understood Modvat credit in three parts in the example given above while discussing it under the exclusive method, viz., ₹ 7 which is utilized Modvat and finished goods sold; ₹ 2 which is utilized Modvat but finished goods in stock at the end of the year; and Re. 1 which is unutilized Modvat at the end of the year. Now under the `Inclusive method , the price of duty paid input/raw material will be taken at full price inclusive of ₹ 10. In that view of the matter, the assessee can be said to have initially claimed deduction for ₹ 10. Out of total Modvat credit of ₹ 10 received during the year, a sum of ₹ 3 has two components, viz., ₹ 2 as a part of purchases of raw materials and also simultaneously a part of the corresponding finished goods in closing stock; and Re. 1 as a part of purchases of raw materials and also simultaneously a part of the corresponding raw materials in closing stock. Though apparently it appears that the assessee gets deduction of ₹ 3 also by way of higher value of purchase of raw material, but the reality is different. When the figures of closing stock of finished good ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ast the assessee s Profit and loss account on inclusive basis, then allow deduction for the equivalent amount of Modvat credit as represented by ₹ 3 in our example. The AO should also make sure that the equivalent of ₹ 3 allowed as deduction on payment basis u/s 43B in this year should not get deducted in the next year and further, the corresponding amount of deduction allowed u/s 43B in the preceding year, should also be separately added to the income of the current year . 12.4 Following the above decisions on the issue, we set aside the matter to the file of the Assessing Officer to decide the issue afresh in view of the above decision of the ITAT in the case of assessee itself in the appeal for the assessment year 2006-07 after affording opportunity of being heard to the assessee. The grounds are thus allowed for statistical purposes. 13. Ground No. 3.5: The Assessing Officer disallowed ₹ 17,76,35,117 holding the same as merely advance payment, liability in respect of which has not crystallized and, therefore, not allowable as deduction under sec. 43B of the Act. 13.1 The Learned AR pointed out that the issue is squarely covered in favour of the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .3 The Learned CIT(DR) on the other hand placed reliance on the orders of the authorities below. 13.4 Considering the above submissions, we find that an identical issue under similar set of facts has been decided by the ITAT in the appeal for the assessment year 2006-07 (supra). Relevant para Nos. 5.6 and 5.7 of the above order dated 24.8.2015 are being reproduced hereunder: 5.6. The last aspect of disallowance u/s 43B is customs duty included in closing stock amounting to ₹ 22,52,46,693/-. The assessee claimed deduction for this sum, which was denied by the AO. The ld. AR stated that the assessee followed `Inclusive method of accounting on this issue. The claim of the assessee is that the amount of ₹ 22.52 crore, being the amount of customs duty paid on the import of raw material/inputs, was included in the cost of material and also as a part of closing stock, thereby levelling both the debit and the credit sides of the Profit Loss Account. The ld. AR contended that such amount of customs duty is separately deductible in terms of section 43B of the Act. He also submitted that this issue is settled in the assessee s favour in earlier years. 5.7. We have ela ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n which it has been held that advance customs duty paid in the year in question is an admissible deduction u/s 43B. In our considered opinion, there can be no dispute on the otherwise availability of deduction of advance customs duty paid by the assessee, which has to be allowed in the year of payment. In this judgment also, the Hon ble High Court has noticed vide para 3 that the provisions of section 145A were not applicable as the assessment year under consideration was 1995-96. In view of the detailed discussion supra with reference to the applicability of section 145A to the year in question, there can be no escape from valuation of purchase, sale and inventories under the inclusive method. We, therefore, direct the AO to recast Profit and loss account under `Inclusive method as per the mandate of section 145A, thereby, inter alia, increasing the purchase value with the above customs duty. Then the AO will allow separate deduction for the above referred sums to the extent not getting eventually deducted separately by way of increased purchase price, as has been discussed above. At the same time, we also direct the AO to make sure that such amount separately getting deducted in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Mumbai Bench of the Tribunal in the case of Euro RSCG Advertising (P) Ltd v. ACIT : [2013] 154 TTJ 389 (Mum) held that wherein the service tax liability along with the interest was paid on the basis of show cause notice issued by the service tax authorities, the same was allowable under section 43B in the year in which the payment was made irrespective of the fact that such demand was paid under protest and the matter was subjudice before the authorities. The issue stands covered in favour of the appellant by the order of the Tribunal in the appellant s own case for A.Y s 1999-00, 2000-01, 2001-02, 2002-03, 2005-06 and 2006-07 . 15.2 We find that an identical issue has been decided by the ITAT in its recent decision in the appeal for the assessment year 2006-07 (supra), relevant para No. 5.5 thereof is being reproduced hereunder: 5.5. Next item is Customs duty paid under protest amounting to ₹ 1,34,25,787. We have discussed similar issue supra while dealing with `Excise duty paid under protest by holding that first the Profit and loss account be recast as per `Inclusive method in terms of section 145A and then some adjustments as stated above be separately made. S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ial to the manufacturing process. - On daily basis, a consolidated entry is passed for consumption of various materials on the basis of Bill of Material (`BOM ), which basically contains the standard quantity of material required for manufacture of a vehicle. Accordingly, on the basis of the number of vehicles manufactured and the material required to manufacture each vehicle as per BOM, the consumption is booked in the books of the assessee. - However, in case of certain material, such as paint, consumption is recorded on actual basis as against consumption of other material being recorded on the basis of standard bills of material. - At the year end, actual physical verification of the inventories is carried out by the assessee. Thereafter, stock reconciliation is prepared for the variation between physical stock and the stock as per computerized books of account. For the purposes of financial accounting, the assessee debits to the profit and loss account figure of consumption at the year end, which is derived on the basis of the following formula: Opening stock (as per physical inventory) + purchases closing stock (as per physical inventory) For the year unde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the Cost Auditor while conducting cost audit under section 233B of the Companies Act, 1956 and also the Statutory Auditor as well as the Tax Auditor pursuant to tax audit under section 44AB of the Act. (d) The difference between the stock as per the stock register and physical inventory may be on account of several reasons, such as posting errors, estimation of consumption based on standard BOM, etc. (e) The excise show cause notice issued by the excise authority was merely for the purpose of verifying the claim of CENVAT Credit, which was not at all relevant for the purpose of allowability of consumption of raw material/inputs for computing taxable income of the assessee. (f) The consumption actually debited to the profit loss account represented the entire actual consumption of the assessee, which is clearly allowable as deduction while computing the business profits under the provisions of the Act. The difference between the stock as per book record and the inventory as per physical verification merely represented the difference between actual consumption as against standard consumption booked on the basis of BOM. The difference between the standard consumption and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rounds are that the assessee is following Just-in-time system for management and reorder of inventory, in which inventories are ordered just in time when their requirement arises. The material so required is delivered straight to the shop floor in the relevant department. As a result of this, though the purchases are recorded as per actual bills upon the arrival of goods in the premises, the inventories are procured by considering the standard consumption of various raw materials for manufacture of vehicles. Due to this difference in the making of entry in the books of account and actual receipt of goods directly in the relevant department, which, in turn, is based on standard quantity of material required for manufacture of vehicles, sometimes there arises difference between the physical inventory taken and the inventory as per books of account at the end of the year. Some items of stock may be eventually under-consumed while others overconsumed. The net effect of under/over consumption is nothing, but, the deviation from the standard consumption. During the year in question, the variation between physical stock and stock register was ₹ 4.48 crore negative, which means ite ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (i) proportionate interest as per Rule 8D (ii) 8.18 (ii) % of average investment as per Rule 8D(iii) 40.39 Total 48.57 The assessing officer, however, has failed to appreciate that in terms of section 14A of the Act only expenditure incurred in relation to exempt income can be disallowed under that section. 17.1 The Learned AR pointed out that the provisions of section 14A of the Act clearly postulates disallowance of expenditure only in a case where it is proved that the expenses incurred have a real relationship with the income which does not form part of the total income. Our attention was drawn on the decision of Supreme Court in the case of CIT vs. Walfort Share Stock Brokers 326 ITR 1 wherein it has been held that by the apex Court that there must be a proximate relationship of expenditure with exempt income, for the purposes of making disallowance of same under section 14A of the Act. 17.2 In the case of Godrej Boyce Mfg. Co. Ltd. v. DCIT: 328 ITR 81 the Bombay High Court, while deciding the issue of disallowance under section 14A of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 17.5 On perusal of the aforesaid it will, thus, kindly be appreciated that disallowance under section 14A cannot be made unless there is proximate connection between the exempt income and the actual expenditure incurred. In order to justify disallowance of any part of the expenditure under the said section, the onus is on the Revenue to bring on record nexus between the expenditure and the exempt income. 17.6 Furthermore, Rule 8D of the Rules inserted w.e.f. 24.5.2008, has been held to be applicable prospectively from assessment year 2008-09 by the Bombay High Court in the case of Godrej Boyce (supra). 17.7 It is also pertinent to mention here that in the aforesaid decision in the case of Godrej Boyce (supra), Their Lordships of the Bombay high Court have reversed the decision of the Special Bench of the Tribunal in the case of Daga Capital management (supra) wherein Rule 8D of the Rules was held to be applicable retrospectively to all pending assessments. In this regard, it is further pleaded to the decision of the Division Bench of the Delhi High Court in the case of Maxopp Investment Ltd. : 347 ITR 272, wherein the High Court while referring to the decision of Bombay High ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld in the case of mixed pool of funds, a presumption of utilization of borrowed funds or interest free funds can be made in favour of the assessee: East India Pharmaceutical Works Ltd. v. CIT: 224 ITR 627 (SC) Indian Explosives Ltd. V. CIT: 147 ITR 392 (Cal.), Woolcombers of India Ltd. v. CIT: 134 ITR 219 (Cal.) approved by Supreme Court in the case of East India Pharmaceutical Works Ltd. v. CIT: 224 ITR 627 CIT v. Reliance Utilities and Power Ltd.: 313 ITR 340 (Bom.) CIT v. M/s Ashok Commercial Enterprises: ITA No. 2985 of 2009 (Bom) Alkali Chemical Corp. of India v. CIT (1986) 161 ITR 820 (Cal.) CIT v. Suzlon Energy Ltd.: 215 Taxman 272 (Guj.) 17.12 The Gujarat High Court in the case of CIT v. UTI Bank Ltd: 215 Taxman 8 held that where there are sufficient interest free funds to meet tax free investments, they are presumed to be made from interest free funds and not loaned funds and no disallowance can be made under section 14A of the Act. 17.13 The Supreme Court has dismissed the revenue s SLP vide order dated 07.02.2014 in Civil Appeal No. 468/2014 against the aforesaid decision. While following the ratio emanating from the aforesaid decisions, it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... now stands reversed by the Bombay High Court) was directed to be deleted in the absence of any positive finding by the assessing officer of incurring of any expense by the appellant: Minda Investments Ltd: 138 TTJ 240 (Del.) Om Era Engineering (P) Limited: ITA No. 3913/ Del/ 2010 17.17 The Bombay High Court in the case of CIT v. K. Raheja Corporation Ltd.: ITA No. 1260/2009 held that in the absence of any material or basis to hold that the interest expenditure directly or indirectly was attributable for earning the dividend income, the disallowance of interest on borrowed funds u/s 14A cannot be made. In the aforesaid circumstances, the assessing officer erred in disallowing ₹ 4,85,68,020/- in the proposed assessment order and the same, therefore, calls for being deleted. 17.18 On the other hand, Learned CIT(DR) supported the orders of the authorities below. 17.19 Considering the above submissions, there is no doubt that Rule 8D was not applicable during the year under consideration, however, the application of the provisions laid down under sec. 14A of the Act is justifiable when the Assessing Officer is not satisfied that there is proximate cause for disallo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n favour of assessee by the order of the ITAT for AY 2004-05, AY 2005-06 and AY 2006-07. 18.1 Further reliance is placed on the following decisions where it has been held that compliance with the conditions of rule 2BA is mandatory only to avail the exemption under section 10(10C) by employees and not for the purposes of deduction under section 35DDA: CIT v. Sony India (P.) Ltd. : 210 Taxman 149 (Del)(HC)(Mag.) State Bank of Mysore v. CIT: 356 ITR 468 (Kar.)(HC) 18.2 The Learned CIT(DR) on the other hand placed reliance on the orders of the authorities below. 18.3 We find that an identical issue has been decided by the ITAT in the earlier assessment years in the case of assessee itself and lastly in the appeal for the assessment year 2006-07 (supra), the ITAT has given following finding: 16.2. Succinctly, the facts of this ground are that the assessee claimed deduction for a sum of ₹ 38.63 crore u/s 35DDA being the aggregate of 1/5th of payments made to its employees under VR Scheme during the previous year relevant to the assessment year 2002-03 and 1/5th of the payments made to employees under VR Scheme during the period relevant to the assessment year 200 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Revenue against the order of Delhi High Court (referred infra) allowing the claim for deduction representing expenditure incurred on club membership. Reliance is placed on the following judicial pronouncements: Nestle India Limited: 296 ITR 682 (Del.) CIT v. Samtel Color Ltd.: 326 ITR 425 (Del.) Otis Elevators Co. (India) Ltd v CIT 195 ITR 682 (Bom); American Express International Banking Corporation v CIT 258 ITR 601 (Bom); CIT vs Citibank N.A.: 264 ITR 18 (Bom) CIT vs Force Motors Ltd.: ITA No. 5296 of 2010 (Bom) CIT v Sundharam Industries Ltd 240 ITR 335 (Mad); Gujarat State Export Corporation Ltd. vs. CIT: 209 ITR 649 (Guj.) CIT vs Infosys Technologies Ltd.: 205 Taxman 59 (Kar) Assam Brook Ltd. vs CIT: 267 ITR 121 (Cal) DCIT v Max India Ltd (2007) 112 TTJ (Asr.) 726 The aforesaid issue is also covered in favour of the assessee by the decisions of the Tribunal in the appellant s own case for the AY s 2001- 02, 2002-03, 2004-05, 2005-06 and 2006-07. 19.1 The Learned CIT(DR) on the other hand tried to justify the orders of the authorities below on the issue. 19.2. We find that an identical issue has been decided by the ITAT in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cr Depreciation on above ₹ 47.54 cr Proposed disallowance ₹ 142.61 cr. 20.3 In support of the grounds, the Learned AR made following submissions: The assessing officer has, however, failed to appreciate that on perusal of the agreements (refer paper book V), it is patently clear that: the nature and purpose for which the royalty has been paid to SMC is only the use of licensed information for the engineering, design and development, manufacture, testing, quality control, sale and after sales service of Products and Parts. The duration of the agreement has been specified as 10 years (kindly refer clause 7.01 of the agreement) and was subject to Termination at earlier date for breach (refer clause 7.04 of the agreement). the license agreements between the assessee company (MSIL) and Suzuki Motor Corporation, Japan (SMC) does not transfer to MSIL any specific patents or copyrights or other secret or protected information or knowhow so as to make MSIL a proprietor of the same or so as to enable MSIL to exercise proprietary rights such as unrestricted rights of tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... T) Hero MotoCorp Ltd v. ACIT : ITA No. 5130/Del/2010 (Del) Hero Honda Motors Limited v. DCIT : ITA Nos. 716 to 718/Del/2008 for the assessment years 2000-01 to 2002-03 Fenner (India) Ltd v. ACIT : [2012] 139 ITD 406 (Chennai) The assessing officer, in the proposed order, has disallowed the royalty as capital expenditure on the following grounds: Car is a fast moving consumer product with a life cycle of 5 years whereas the licence agreement is for 10 years, which is more than enduring benefit to the assessee; The License Agreement is for 10 years, extendable by 5 years and even thereafter the assessee can produce the said model of car, whereas int the aforesaid decisions, agreement was for 5 years; The licence Agreement led to the assessee setting up a new factory based on new technology The aforesaid findings/ observations of the assessing officer are erroneous, based on incorrect appreciation of the facts and the settled legal position, as discussed hereunder: Re (1): Firstly, the observation of the assessing officer about life cycle of a car is nothing but conjectures and surmises. That apart, it is further submitted that even assuming (without ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... : 309 ITR 371 @ pg 391, while culling out legal principles based on various decisions observed as under: xxxx (vi) the fact that assessee could use the technical knowledge obtained during the tenure of the License for the purposes of its business after the agreement has expired, and in that sense, resulting in an enduring advantage, has been categorically rejected by the Courts. The Courts have held that this, by itself, cannot be decisive because knowledge by itself may last for a long period even though due to rapid change of technolody and huge strides made in the field of science, the knowledge may with passage of time become obsolete; The SLP filed by the Revenue against the aforesaid decision has been dismissed by the Supreme Court vide order dated 16.11.2009 in S.L.P.(C) No.17346 of 2009 Re (3): The observation of the assessing officer that the licence Agreement led to the assessee setting up a new factory based on new technology is factually incorrect. No new plant/ factory was setup by the assessee on the basis of the agreement entered into for use of technical knowledge/ information. The assessing officer failed to appreciate that the assessee is engag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the disallowance amounting to ₹ 95,98,09,735/- made by the AO on account of royalty paid. We have noticed above that out of total royalty of ₹ 254.39 crore paid by the assessee during the year, the TPO attributed ₹ 127.195 crore to the use of licensed trade marks, for which he made transfer pricing adjustment. This issue has been discussed hereinabove. The remaining amount of ₹ 127.195 crore was attributed by the TPO to the use of licensed information, which was accepted at ALP. However, the AO treated this amount as an expenditure of capital nature. After allowing suitable depreciation, the AO made disallowance of ₹ 95.98 crore. The assessee is aggrieved against this addition. 8.2. We have heard the rival submissions and perused the relevant material on record. It is noticed that in all the earlier years before assessment year 2005-06, the AO has consistently considered running royalty as deductible in full and capitalized the lumpsum royalty subject to depreciation. The assessee also initially claimed deduction for the running royalty and capitalized the lumpsum royalty of ₹ 3.57 crore. However, during the course of assessment proceedings, i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ti shall have the right to sub-license the rights granted as per this Agreement to other entities, who will manufacture parts for supplying them only to Maruti for the manufacture of Products of Maruti, and, that too, with the prior written consent of Suzuki. This Article, therefore, makes it clear that the licence given by Suzuki for use of licensed information is on non-exclusive basis and further Maruti has no authority to sub-licence the same except for getting the parts manufactured by other entities for supply to Maruti alone for the manufacture of Products in accordance with this Agreement. Clause 2.02 of the Agreement states that : `Maruti recognizes and acknowledges Suzuki s ownership and validity of the Licensed Information .... . Article 3 of the Agreement provides that Suzuki agrees to make available to Maruti such licensed information which is to be utilized for manufacture of products. Clause 3.02 of the Agreement deals with `Improvements by Maruti . It states that if at any time during the term of this Agreement, Maruti discovers or acquires any improvement with respect to Products or Parts, it shall give to Suzuki full information, instructions, knowhow and assign o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee is not entitled to the use of Licensed Information and is obliged to return the same to Suzuki. All the above features of the Agreement make it unequivocal that what the assessee has acquired under this Agreement is a right to use the `Licensed Information . There is no outright purchase by the assessee of the `Licensed Information . In fact, such licensed information is required to be returned to Suzuki upon termination of the Agreement. The `right to use the licensed information, has certain restrictions put on by Suzuki, which the assessee cannot violate. The assessee is under obligation to maintain confidentiality of the Licensed Information. A bird s eye view of all the above clauses makes it vivid that the royalty payment is `for use of the Licensed Information and not `for acquisition as its owner . In this view of the matter, there can be no scope for treating the royalty paid for the `licensed information as a capital expenditure. 8.5. The ld. DR has relied on certain decisions, which categorize payment for use of technical know-how etc. as a capital expenditure. Similarly, the ld. AR has also relied on certain decision which mark such payment as a revenue ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d that the amount of royalty considered by the Assessing Officer as capital expenditure should be allowed as a revenue expenditure. At the same time, depreciation allowed by the Assessing Officer on this amount should be taken back. The Assessing Officer is directed accordingly. Ground Nos. 9 to 10.5 are thus allowed. 21. Ground Nos. 10.6 to 10.8: It is regarding disallowance of R D Cess paid. The Learned AR submitted that the issue is fully covered by the recent decision of the ITAT in the appeal for the assessment year 2006-07. He submitted that as per provisions of Research Development Cess Act, 1986, R D cess is imposed on import of technology by the Government of India, which is definitely not a related party of the appellant company. The appellant has been instructed by the Government of India s approval for remittance of royalty to pay R D cess on the payment of royalty. Such, R D cess, being a statutory payment, is governed by section 43B, which is a separate code in itself and overrides other provisions of the Act. It is not in dispute that the said R D cess has not actually been paid to the Government within the time limits prescribed by section 43B. The contention ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ubmitted before the Assessing Officer that the aforesaid receipt being in the nature of capital receipt, may be reduced from the total income. The Assessing Officer did not agree and made the disallowance. 24. In support of the grounds, the Learned AR furnished following submissions: Section 25A of The Haryana General Sales Tax Act, 1973 empowers the State Government to grant sales tax concession and, also convert sales tax concession into capital subsidy. In pursuance to the above, Rule 28C of Haryana General Sales Tax Rules 1975 (page 660 of paper book III) provided for concession of tax payable under the Act to an eligible industrial unit. The eligible unit has been defined in clause (c) of Rule 28C(3) of Haryana General Sales Tax Rules 1975 to include a new industrial unit or unit undertaking expansion or diversification subject to fulfillment of other conditions. Expansion too has been defined in clause (f) of Rule 28C(3) of Haryana General Sales Tax Rules 1975 as under: expansion means an industrial capacity set up or installed during the operative period which creates additional production facilities for manufacture of the same product (s) as of the unit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... whereas, if the subsidy is given to the assessee for assisting him in carrying out the business operations and is given only after and conditional upon commencement of production, such subsidy is to be treated as assistance for the purpose of the trade and would constitute revenue receipt. 24.5 The aforesaid principle has been reiterated by the Supreme Court in the case of Ponni Sugars (supra) wherein Their Lordship held that the purpose for which subsidy is given is only relevant for determining its nature. 24.6 It is, therefore, of the utmost importance to note that the object of grant of the subsidy by way of sales-tax concession under Rule 28C of the Haryana Sales Tax Rules is to give assistance to the assessee for establishment of a new industrial unit or for substantial expansion of an existing industrial unit. 24.7 This is absolutely clear, firstly from the fact that only new industrial units/ substantially expanded units are entitled to the benefit of the said sales-tax concession and secondly, because the quantum of the benefit conferred also depends on the amount of fixed capital investment in setting up the new industrial unit or in the substantial expansion of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5 and 635/JP/2010 (Jpr. ITAT) (v) Ford India (P) Ltd. v. DCIT: 59 SOT 221 (Chennai ITAT) (w) ITO v. Shree Balaji Alloys: ITA No. 143(Asr)/2012 (Asr. ITAT) 24.11 Kind attention is invited to the decision of the Jammu and Kashmir High Court in the case of M/s Shree Balaji Alloys v. CIT: 239 CTR 70 wherein the High Court has decided the similar issue in favour of the assessee by holding the subsidy given for setting up unit in the state of Jammu for employment generation was in the nature of a capital receipt, not liable to tax under the provisions of the Act. 24.12 Reliance in further placed on the decision of the Punjab and Haryana High Court in the case of CIT v. Siya Ram Garg (HUF): 237 CTR 321 wherein the High Court while following decision of the Supreme Court in the case of Ponni Sugars (supra) held that the subsidy received by the assessee for setting up industrial unit in backward area which was determined with reference to capital investment, was a capital receipt. 24.13 It may also be pointed out that Finance Act, 2015, has w.e.f 01.04.2016 amended the definition of income defined under section 2(24) of the Act to include within its ambit, subsidy granted t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the amount in cash or by means of a waiver of sales-tax, etc. for a particular period. But, when the object is not to encourage industrialization but to facilitate the carrying on an existing business more efficiently post its set-up, then it becomes a revenue receipt, irrespective of the form of disbursement. The Hon ble Supreme Court in Ponni Sugars (supra) has held that : `if the object of the assistance under the subsidy scheme was to enable the assessee to set up a new unit or to expand the existing unit then the receipt of the subsidy was on capital account . 12.3. At this juncture, it is imperative to note that the Finance Act, 2015, w.e.f. 1-4-2016 has further enlarged the definition of income given u/s 2(24) by inserting sub-clause (xviii), which reads as under:- `(xviii) assistance in the form of a subsidy or grant or cash incentive or duty drawback or waiver or concession or reimbursement (by whatever name called) by the Central Government or a State Government or any authority or body or agency in cash or kind to the assessee other than the subsidy or grant or reimbursement which is taken into account for determination of the actual cost of the asset in accordance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essment year 2006-07 (supra), we hold that the sales tax subsidy claimed as capital receipt from the total income cannot be characterized as anything other than a capital receipt. It is ordered accordingly to allow the claim as capital receipt. Ground Nos. 11 to 11.6 are thus allowed. 25. Ground No.12: It is regarding non-allowance of depreciation on written down value of software expense capitalized by the Assessing Officer in the preceding years. The relevant facts are that in AY 1999-2000 to AY 2002-03, the Assessing Officers had made the following additions to the income of the assessee company by treating the expenditure on purchase and development of software as a capital expenditure. AY 1999-2000 Rs.48,54,526/- AY 2000-01 Rs.1,82,71,588/- AY 2001-02 Rs.3,54,28,689/- AY 2002-03 Rs.95,22,835/- 25.1 The assessee claimed that the written down value of the software expenses so capitalized as on 31.03.2007 is ₹ 6,17,614/- on which depreciation allowable @ 60% for AY 2006-07 works out to ₹ 3,70,568/- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o consumption of raw material and components in the profit and loss account in accordance with mercantile system of accounting. The same was claimed as business deduction in the computation of income. 26.2 The assessing officer however, disallowed the aforesaid claim of the assessee on the ground that assessee has quantified the liability without acknowledging the quantified liability to the creditors. 26.3 In support of the above grounds, learned AR submitted that the aforesaid practice was in consonance with the provisions of the companies Act and generally accepted accounting principles and practices of Institute of Chartered Accountants of India. 26.3.1 He submitted that liability for FPI was provided in the books of accounts on a scientific analysis of increase in price of components due to change in input cost. 26.3.2 The liability of FPI was estimated by the purchase department with substantial degree of accuracy as they are in constant touch with suppliers and have knowledge of the claims of suppliers, trend of the cost of inputs, etc. The personnel in the purchase department updates the foreseen price of each component for each supplier and effective date, base ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ry. 26.3.7 The liability on account of FPI was an ascertained liability representing additional purchase price of the goods. Since the liability accrued during the relevant assessment year, even though was finally paid in the following assessment years, the same was allowable deduction. 26.3.8 Reliance in this regard has been placed on the following decisions wherein it has been held that liability which has arisen in the relevant accounting year is an allowable deduction even though its actual quantification and discharge is deferred to a future date: a) Assessee s own case decided in favour by CIT (A) for AY 2003-04 b) Calcutta Discount Co. Ltd. 37 ITR 1 (SC) c) Metal Box (1969) 73 ITR 53 (SC) d) United Commercial Bank v. CIT 240 ITR 355 (SC) e) Bharat Earth Movers 245 ITR 428 (SC). f) Kelvinator of India Ltd. reported in 256 ITR 1 confirmed by SC in 320 ITR 561 g) CIT v. Vinitec Corpn. (P) Ltd. : 278 ITR 337 (Del.) h) National Mineral Development Corporation Ltd. v. JCIT : 98 ITD 278 (Hyd. ITAT) 26.3.9 The Hon ble Supreme Court in the case of CIT vs Woodward Governor India (P) Ltd. 312 ITR 254 has held that:- 21. In conclusion, we may state t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rence should not be used to disturb the method of accounting and books of accounts of a tax payer consistently maintained and accepted year after year. 26.3.13 It was further submitted that the aforesaid method of accounting has been regularly followed by assessee and claims were accordingly made which has been duly accepted by Revenue in all preceding except in assessment year AY 2003-04. There has been no change in method of accounting or estimation. 26.3.14 It was submitted that, as discussed supra, it is a well settled position of law that while the principle of res judicata does not apply to the income-tax proceedings, the Courts have emphasized there must be consistency in the position that the Revenue takes on an issue in different assessment years. 26.3.15 It was also pointed out that for the assessment years 2004-05 and 2005-06, the issue of deductibility of this amount has been examined by the assessing officer and the claim has been accepted in full and no disallowance whatsoever has ever been made by the Assessing Officer in respect thereof. During the course of assessment proceedings for both these years, the assessing officer had made specific queries on the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e that the provision had been made in respect of a contingent liability. 26.5.1 On perusal of sample copies of the invoices placed at pages 1876 to 1880 of the appellant s paper book, it is also noticed that the bills clearly contain the endorsement the amount indicated is provisional as additional consideration will be received from buyer on account of price escalation . There is thus, clear commercial understanding between the appellant and the vendors that price mentioned in the invoices is merely provisional in nature and is subject to further increase on account of price escalation. At this stage, we may refer to the fact that a notification dated 28.7.2003 had been issued by the Excise Authorities on the subject of charging of interest under section 11AB wherein the excise authorities recognized prevailing commercial practice of supplementary invoices being made in addition to the original invoices. In the said notification it is noted that Available intelligence indicate that there is a practice in many industries specially in motor vehicles and parts thereof and their vendors, that many a time they are raising supplementary invoices in addition to the original invoi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lized liability for the material actually purchased, which cannot be regarded as continent liability inasmuch as there is no contingency with regard to such liability of the appellant towards the vendor, but such provision also represents amount quantified on a reasonable/ scientific basis. The law with regard to the accrual of liability is now fairly well settled. The Hon ble Supreme Court in the case of Bharat Earthmovers vs. CIT: (2000) 245 ITR 428 (SC) held that the law is settled that 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. The Hon ble Court held that what should be certain is the incurring of the liability and it should also be capable of being estimated with reasonable certainty though actual quantification may not be possible. If these requirements are satisfied the liability is in praesenti though it will be discharged at a future date. The Hon ble Court while referring to the earlier decision of the Supreme Court in the case Metal Box of India Ltd vs. Their Workmen(1969) 73 ITR 53(SC) held that the following principles were ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... igation. If these conditions are not met, no provision can be recognized. 11. Liability is defined as a present obligation arising from past events, the settlement of which is expected to result in an outflow from the enterprise of resources embodying economic benefits. 12. A past event that leads to a present obligation is called as an obligating event. The obligating event is an event that creates an obligation which results in an outflow of resources. It is only those obligations arising from past events existing independently of the future conduct of the business of the enterprise that is recognized as provision. For a liability to qualify for recognition there must be not only present obligation but also the probability of an outflow of resources to settle that obligation. Where there are a number of obligations (e.g., product warranties or similar contracts) the probability that an outflow will be required in settlement, is determined by considering the said obligations as a whole. In this connection, it may be noted that in the case of a manufacture and sale of one single item the provision for warranty could constitute a contingent liability not entitled to deduction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... invoice is subject to further escalation on the basis of the price prevailing the market. The provision towards foreseen price increase has been, as noticed above, made by the appellant on the basis of precise vendor-wise and item-wise calculation, which is placed in the appellant s paper book. The provision has thus been, in our view, not only been made in respect of the present obligation or an accrued liability but such provision has also been made with substantial degree of accuracy and is undoubtedly scientific in nature and therefore, we do not find any merit in the disallowance made by the assessing officer. 26.5.7 Moreover, it is also important to note that similar claims made in the earlier years had always been allowed by the Revenue, except for the deviation in the assessment year 2003-04 when such provision was disallowed for the first time by the assessing officer. The said disallowance was deleted by the CIT(A), against which the Revenue is in appeal before the Tribunal, which is presently pending adjudication. Pertinently in the assessment years 2004-05 and 2005-06, the claim was again allowed by the assessing officer in the regular assessment order. Similar clai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce increase in the year under consideration, despite similar claim being allowed in earlier assessment years. Taking into consideration the entirety of the circumstances, we are of the considered view that provision for foreseen price increase made by the appellant during the relevant year in respect of component/material supplied by the vendors for the escalation in price, which is clearly supported by detailed item-wise working placed in the paper book, clearly represent an accrued/crystallized liability allowable as business deduction. Being so, disallowance made by the assessing officer is directed to be deleted. The ground Nos. 13 to 13.5 are thus allowed. 27. Ground Nos. 14 to 14.3: It is regarding validity of disallowance of ₹ 77 lacs made on account of expenditure on excise duty. During the year, the assessee had paid excise duty of ₹ 77 lacs being provisions for modvat on quantity difference on inputs disallowed in earlier years and claimed during the year on payment basis under sec. 43B of the Act. The Assessing Officer disallowed the claim on the basis that assessee would not have been liable to make the aforesaid payments of ₹ 77 lacs to the exci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aised by the Revenue on this issue stands dismissed. 27.4 In view of the above finding of the ITAT on the issue and of the Excise Tribunal in the assessment year 2000-01 that shortage of stock of raw-material and the minor discrepancy was the result of accounting error due to use of large quantity of inputs procured from several hundred suppliers, we hold that the assessee was justified in claiming ₹ 77 lacs on account of expenditure on excise duty on payment basis under sec. 43B of the Act. The Assessing Officer is accordingly directed to allow the claim. Ground Nos. 14 to 14.3 are thus allowed. 28. Ground Nos. 15 16: These grounds are relating to adjustment on account of alleged AMP expenses, and relating to transfer pricing (royalty, royalty paid to non-AE and error in computing royalty). 28.1 In ground Nos. 15 to 15.31, issue of TP adjustment on account of allegedly excessive AMP expenses has been raised. The Learned AR pointed out that the order of the ITAT on the issue for the assessment year 2006-07 has been reversed by the Hon'ble Delhi High Court vide its order dated 11.12.2015 in ITA 110/2014 and 710/2015, a copy whereof has been made available. 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... substantive or procedural provisions of Chapter X of the Act apply, cannot be held to be permitted by Chapter X. In other words, with neither the substantive nor the machinery provisions of Chapter X of the Act being applicable to an AMP TP adjustment, the inevitable conclusion is that Chapter X as a whole, does not permit such an adjustment. 28.4 We thus find that the Hon'ble High Court has been pleased to hold that the AMP expenses unilaterally incurred by the appellant does not result in an international transaction so as to invoke the provisions of Chapter X of the Act. We thus set aside the matter to the file of the Assessing Officer to decide the issue as per above finding of the Hon'ble High Court after affording opportunity of being heard to the assessee. The ground Nos. 15 to 15.31 are thus allowed. 28.5 Ground Nos. 15.32 to 15.46: It is regarding the validity of adjustment made by the TPO on account of royalty, which has been upheld by the learned DRP. The Assessing Officer/TPO proposed to enhance the income of the assessee by ₹ 249,73,66,232 by holding that the assessee s international transaction in the nature of payment of royalty does not satisfy ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... C) as its partner in 1982 with SMC acquiring 26% equity stake in the company Maruti Udyog Ltd. (MUL). In 1992, SMC increased its share to 50%. SMC held 54.2% in the company in the previous year relevant to the assessment year under consideration. The assessee, MUL, is engaged in manufacturing of passenger cars primarily for sale in Indian market. It also exports vehicles to other countries. The assessee reported certain international transactions which have been enumerated on page 18 of the order of the Transfer Pricing Officer (TPO). The assessee selected the Transactional Net Margin Method (TNMM) as the most appropriate method with the Profit Level Indicator (PLI) of Operating Profit/Sales (OP/S). The assessee computed its OP/S at 11.19%, as against (-) 4.43% of certain comparables chosen by it. The assessee is a licensed manufacturer of cars in India. For use of the licence given by SMC, the assessee paid a total royalty of ₹ 254,39,19,633/- divided into two parts, namely, Running royalty of ₹ 250.84 and Lump sum royalty of ₹ 3.57 crore. Apart from that, the assessee also paid ₹ 20.00 crore to its AE towards Technical/other services. The assessee treated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... compensation to the assessee. After going through all the relevant clauses of the Agreement, the TPO held that the total royalty of ₹ 254.39 crore paid by the assessee to SMC was for use of both the `Licensed Information as well as `Licensed trademarks . Since no bifurcation of royalty payment was given, he segregated it into two equal parts, viz., ₹ 127.195 crore towards manufacturing licence, that is for the use of `Licensed information and ₹ 127.195 crore towards sale and after sale service licence, that is for use of `Licensed trademark . This 50:50 segregation was done on the ground that both manufacturing and sale functions were equally important for running a business. He took up the determination of the ALP of the royalty paid for use of `Licensed trademark . It was noticed that the assessee used co-branded trade mark i.e., Maruti-Suzuki. Considering the fact that the assessee s trademark of Maruti has acquired status of a super brand, whereas Suzuki is relatively weak brand in the Indian market, the TPO held that the ALP of royalty paid to the AE was Nil. In his opinion, the assessee ought to have been compensated by SMC for use of its trade mark ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rks owned by Suzuki listed in Exhibit-B and other Indian trademarks which Suzuki may, hereafter, obtain relating to the Products and Parts. It was contended that clause 2.03 of the Agreement provides for use of Licensed Trademarks and co-branded trademark of Maruti-Suzuki. It was, therefore, put forth that it is not only co-branded trade mark of `Maruti-Suzuki which has been under the Agreement, but also the Licensed Trademarks , which exclusively belong to Suzuki. Once the trademark of SMC has been allowed to be used to the assessee on its products, either separately or as a part of co-brand, and further a part of the royalty has been admittedly also paid for the use of licensed trademark, he argued that it could not be said that there was no separate consideration for use of licensed trademark embedded in total royalty payment. It was stated that if some part of royalty is relatable to the use of licensed trademark, then that cannot be lost sight of. He insisted that the Agreement impliedly provides for separate royalty for use of the licensed trademark. This was corroborated by stating that the Agreement itself divides payment of royalty as per Article 6 into two parts, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... trade mark, namely, Maruti has much higher brand value than the trade mark Suzuki of SMC, which is relatively weak in India, the entire amount of royalty paid by the assessee to its AE towards the use of licensed trade marks was rightly disallowed by the AO as having Nil ALP. 7.5. We have considered the rival submissions and perused the relevant material on record. It can be observed that the TPO has attributed a sum of ₹ 127.195 crore towards royalty for use of licensed trademarks, whose ALP has been determined at Rs. Nil. In doing so, he relied on his order passed for the immediately preceding year. In such earlier year, the TPO bifurcated total royalty into two parts, namely, 50.58% for use of licensed information and 49.42% for use of licensed trade mark. It is not disputed that all the Agreements under which the assessee paid royalty to its AE during the year are identically worded. Clause 6 of the Agreement dated 25.3.2006 deals with the consideration to be paid, which is in two parts, namely, Lumpsum royalty and Running royalty. The bifurcation between lumpsum and running royalty is not based on use of licensed information and licensed trademark. It is a quid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... although we find that the arguments put forth by the ld. DR are not absolutely without foundation, yet, the principle of consistency, laid down by the Hon ble Supreme Court and Hon ble High Courts in several judgments, persuades us to go with the view taken by the tribunal in its order for the A.Y. 2005-06, more specifically because the TPO has also relied on his finding given for the AY 2005-06 in arriving at the decision taken against the assessee in the extant year. As regards the second aspect, the ld. DR has not brought on record any further material to demolish the finding given by the tribunal in the earlier year about the brand `Suzuki having substantial value and the royalty payment at ALP. 7.7. Addition on account of transfer pricing adjustment can be made by making a comparison between the transacted value of an international transaction and its ALP. Thus it is clear that the availability of the transacted value of an international transaction is sine qua non. If such transacted value is either not separately available or cannot be precisely determined from a combined value of a number of international transactions, then the entire exercise of determining ALP fails. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd No. 17: It is regarding disallowance of credit of TDS certificate claimed through revised return. In support of this ground, the Learned AR submitted that the claim was valid and justified and hence the Assessing Officer may be directed to allow the credit of TDS certificate claimed through the revised return of ₹ 3,55,99,213 and during the course of assessment proceedings amounting to ₹ 6,73,540. He submitted that appellate authority is empowered to direct the Assessing Officer to entertain the revised ground for the consideration of just claim. 29.1 The Learned CIT(DR) on the other hand opposed the ground. 29.2 In the interest of justice, the matter is set aside to the file of the Assessing Officer to consider the claimed TDS credit on the basis of revised return after affording opportunity of being heard to the assessee. Ground No.17 is accordingly allowed for statistical purpose. 30. Ground No. 18: It is regarding charging of interest under sec. 234B, 234C and 234D of the Income-tax Act, 1961 which is general in nature as specific issue has been raised in ground Nos. 19 and 19.1, hence, it does not need independent adjudication. 31. Ground No. 19 and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t shall be adjusted against the tax payable. In this case, the tax payable under section 140A also included interest payable under section 234B. The issue is whether the interest payable under section 234B which has to be first adjusted against the payment made under section 140A has to be calculated with respect to total income as declared in the return or total income determined in the regular assessment. We find that the section 140(1B) provides that interest payable under section 234B, has to be computed on the amount by which the advance paid falls short of assessed tax and the assessed tax for the purpose of this sub-section has been defined in the Explanation to mean the tax on total income as declared in the return as reduced by tax deducted/collected at source etc. Therefore, we agree with the submission made by ld. A.R that the interest payable under section 234 B for the purpose of adjustment against the tax paid under section 140A has to be computed with respect to assessed tax determined on the basis of total income declared in the return. But this is only for the limited purpose of adjustment of payment made u/s. 140A against interest payable under section 234B while ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... view of the finding of the ITAT on the issue in the appeal for the assessment year 2006-07 (supra) in para No. 19 thereof is reproduced below: 19. Next ground is against the charging of interest under sections 234B, 234C and 234D of the Income-tax Act, 1961. This ground is consequential and is, accordingly, allowed except the charging of interest under sec. 234C. The Learned AR argued that the Assessing Officer computed interest under sec. 234C on the basis of income finally determined as against the income-tax due on returned income. We find force in the arguments put forth on behalf of the assessee that computation of interest under sec. 234C for deferment of advance tax is required to be made on the basis of tax due on the returned income as has been enshrined in the provision itself. We, therefore, direct the Assessing Officer to verify this aspect of the matter and compute interest under sec. 234C as per law . 32.3 Ground No. 20 is accordingly allowed for statistical purposes. 33. In result, the appeal is partly allowed. 34. ITA No.2564/Del/2014: The has questioned rectification order dated 24.2.2014 on the following grounds: 1. That on the facts and in the c ..... X X X X Extracts X X X X X X X X Extracts X X X X
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