9911796707
TMI Blog2019 (3) TMI 202X X X X Extracts X X X X X X X X Extracts X X X X ..... fit and loss account, because the invoices of transporters are received after consumption of material. Such freight amount is not included in the valuation of closing stock, as per regularly and consistently followed method of valuation of stock accepted by the Revenue in the past. The AO/DRP held that the assessee's contention that as the method is regularly followed year after year its impact will be revenue neutral, cannot determine the income of the assessee correctly for the year under consideration. The AO/DRP further held that the revenue aspect keeps on changing on year to year basis. Therefore, Assessing Officer further held that impact on noninclusion of freight inward and clearing charges at Rs. 3,17,000/- has to be added to the income of the assessee. 3. The Ld. AR submitted that this issue is decided in favour of the assessee by the recent consolidated order dated 24.10.2016 passed by the Delhi bench of the Tribunal in assessee's own case for assessment year 2010-11 and 2011- 12, wherein the Tribunal, following the order of the coordinate benches of the Tribunal passed in assessee's own case for the assessment year 2007-08 and 2008-09, deleted the aforesaid ad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der exceptional circumstances (which are well known in this type of industry) for immediate consumption. They are in fact consumed immediately i.e. as soon as raw material enters the factory premises which is not disputed by assessing officer, hence the question of such purchases being part of closing stock does not arise at all. In such a situation, when freight/ import charges are directly debited to the P& L A/c along with the value of the purchases, naturally the question of treating them as part of closing inventory does not arise. The assessee has acted and accounted in a proper and acceptable method. Therefore, the relief should be granted on this count alone. 7.15 Alternatively, the undisputed fact remains that the assessee has consistently following the said method of accounting in the last many years and the Revenue has been accepting these facts and method of accounting without any demur. 7.16 The contention of the DRP that, the principle of res-judicata does not apply in Income tax proceedings and therefore, the Assessing officer is correct to come to independent conclusion and is not bound by past acceptance of a factual legal point by the department is untenable. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s revenue neutral. In the instant case, that exercise had never been undertaken. The Assessing Officer was required to demonstrate both the methods, one adopted by the assessee and the other by the department. In the circumstances, there was no reason to interfere with the conclusion given by the High Court." 7.20 The Hon'ble Supreme Court in the case of CIT vs. Bilahari Investment P. Ltd. 299 ITR 1 (SC) held as follows: "Every assessee is entitled to arrange its affairs and follow the method of accounting, which the Department has earlier accepted. It is only in those cases where the Department records a finding that the method adopted by the assessee results in distortion of profits that the Department can insist on substitution of the existing method." 7.21 In the case of CIT vs. Jagatjit Industries Ltd. (2011) 399 ITR 382 (Del.), the Hon'ble Jurisdictional High Court has held as follows: "If a particular accounting system has been followed and accepted and there is no acceptable reason to differ with it, the doctrine of consistency would come into play. The method of accounting cannot be rejected. The assessee was following the mercantile system of accounting. Accordi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ality, as AS-1 which talks about materiality, consistency, prudence etc. is part of the I.T. Act after it is notified u/s 145(2). 7.23 In view of the foregoing and proposition laid down by the Hon'ble Supreme Court and the Hon'ble High Courts, we are of the opinion that adjustment of Rs. 31.18 lacs made to total value of closing stock of Rs. 275 crores and consumption of stocks of Rs. 7178 crores is uncalled for. If valuation of closing stock is changed then the value of opening stock should also be changed on the same basis or method. The closing stock of a particular year is the opening stock of the subsequent year. It is not the case of the revenue that the method of valuation of closing stock is materially affecting the accounts and profits disclosed by the assessee. This adjustment sought to be made is revenue neutral and at best may result in preponment or postponement of revenue. The issue is whether such exercise is at all required on the ground of materiality. Materiality is a concept which is well recognized both in accountancy and law. Accounting standards notified by the CBDT u/s 145(2) mandate that the concept of materiality be taken into consideration when finalizin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ible to segregate normal and abnormal wastages and, therefore, the assessee as per the consistent method of accounting did not consider aforesaid costs for purposes of allocation to closing inventory. It is not practically possible for the assessee to segregate normal and abnormal wastages embedded in the aforesaid costs and therefore, the assessee, as per consistent and regular method of accounting, accepted by the Revenue as such in the earlier years, did not consider the aforesaid expenditure for the purposes of valuation of closing inventory of finished goods. But the Assessing Officer disallowed this expenditure and added the same to the income of the assessee. 7. The Ld. AR submitted that the aforesaid issue stands decided in favour of the assessee by the order of the Delhi Bench of the Tribunal in the assessee's own case for the assessment year 2007-08 and 2008-09 whereby similar adjustment made in that year was deleted on the same ground. The Ld. AR pointed out that the aforesaid issue has been decided in favour of the assessee by the order of the Hon'ble Tribunal in assessment year 2010-11 and 2011-12 wherein the Tribunal held that only normal loss is to be loaded ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le. 8.13 Accounting Standard-2 stipulates that abnormal wastages should not be considered for valuation of inventory. It reads as follows: "16. Examples of costs excluded from the cost of inventories and recognized as expenses in the period in which they are incurred are: a) Abnormal amounts of wasted materials, labour or other production costs; storage costs, unless those costs are necessary in the production process before a further production stage; administrative overheads that do not contribute to bringing inventories to their present location and condition; and selling costs." 8.14 Keeping in view the treatment prescribed under AS-2 and the fact that the assessee has been regularly following the same method of accounting for valuation of charging such rejection to P&L A/c and its closing inventory, we are of the view the addition in question is uncalled for. The adjustment is not material adjustment. Further, for the reasons staged by us on the issue of consistency, while disposing around no. 2 to 2.2, we allow this ground of the assessee." Both the parties have admitted that there is no difference in the facts and circumstances of the case of the appellant in the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be revised, if there is substantial increase/decrease in cost of materials, at the agreed interval. In the assessment order, the assessing officer held that the aforesaid provision of Rs. 45.66 crores is not allowable business expenditure. The assessing officer held that provisions emanating from retrospective price amendments are contingent in nature and thus, not an allowable business expenditure. 11. The Ld. AR submitted that the provision for the material is worked out as under:- (1) Provision for price increase of Rs. 1,614.03 Lacs in respect of which price amendments were already issued on 31.03.2013: The aforesaid provision was made on the basis of actual supplies made upto the end of the year as per price amendments actually issued as on 31.03.2012. Therefore, the assessee has made provision of Rs. 1614.03 Lacs on the basis of actual PO issued to vendors for the change in prices during the year and it involved no estimation. (2) Provision made on best estimate basis of Rs. 2,952.00 lacs of which price amendments were not finalized by the end of the year: The provision for price increase of Rs. 1,614.03 Lacs was made on the basis of per vehicle increase / decrease ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecognized as expenditure during the year. A claim is made based on ascertainment of actual liability. The assessing officer disallowed the reversals of provision on ground that this was a prior period expenditure. 12.12 When provisions are made, what is to be seen is whether the assessee has done a bona fide and genuine exercise to estimate its liability with reasonable certainty. The term reasonable certainty means that the provision in question might be slightly higher or lower than the actual figure.. When the provision is higher, it is reversed in subsequent year, when the actual figures are known. Similarly, when the provision is lower, the same is claimed in the latter assessment year. It cannot be said that these are prior period expenditure. The actual liability in question is ascertained only during the year and hence the liability crystallizes during the year. Estimation of an expense has to be considered in contradiction to actual ascertainment of the expenses. Once the actual expense has been ascertained, the liability accrues in that year to the extent not provided in the earlier year and is to be allowed as revenue expenditure in the year of crystallization. Concept ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the absence of such understanding/ contract with the vendors, the assessee would not be able to operate and continue manufacturing operations without disruption. This same process is followed when there is reduction in cost elements of component prices, company informs the vendors for reduction in price of components. Accordingly, while price revisions are pending or negotiations are on, the vendors keep on supplying the material provisionally at the agreed rates, with the understanding that pursuant to negotiations being finalized, the arrears of the amount due to them would be paid to them retrospectively. Such price revisions, being an accrued liability at the time of purchase of raw materials, are recorded in the books of accounts by the assessee. At the year end, the company estimates the additional liability on account of price revision under negotiation and makes upward/downward provision, as the case may be, in relation to material supplied until the end of the relevant year. Thus, the Assessing Officer was incorrect in disallowing this claim. Therefore, Ground No. 5 to 5.2 are allowed in favour of the assessee. 14. As regards to Ground No. 6, relating to disallowance of c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt year) and made addition of the same to the closing stock and consequently to the income of the assessee. 15. The Ld. AR submitted that the aforesaid issue has been decided in favour of the assessee passed by the Tribunal in assessee's own case for the assessment year 2010-11 and 2011-12, wherein the Tribunal accepted the method as followed by the assessee of accounting income on sale of scrap on a consistent basis and deleted the impugned addition on the ground that the assessee was not dealing in scrap and/or holding the scrap as inventory, and thus was not required to value the closing stock after taking into account the value of scrap. The Tribunal, in coming to the aforesaid conclusion, laid emphasis on the fact that such transaction was revenue-neutral and held that considering the size of the assessee company, it could not be expected to keep quantitative tally of miniscule items. The Ld. AR pointed out that the Tribunal in assessee's own case for the AY 2007-08 and 2008-09 had restored the matter back to the file of the assessing officer to compute the value of closing stock on consistent basis, as per method to be followed by the assessing officer in the set-aide order. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... losses of the company. More so as in the previous year this accounting policy of the company has been accepted by the revenue without disturbing the profit on this count. Further, while rendering our decision in the preceding ground of appeal, following the decision of honourable High Courts and Supreme Court, we have held that adjustment should not be made in the assessment order on issues, which are revenue-neutral. The impugned addition under consideration is purely revenue-neutral in as much as addition of the estimated value of the scrap to closing stock would be debited as opening stock in the profit and loss account of immediately succeeding year. Further, the assessing officer will need to carry out the similar exercise in the last year, to estimate stock of scrap which would become opening stock of this year. There is, thus, no escapement of Revenue on the basis of the impugned addition made by the assessing officer in the assessment order. We have already held in multiple grounds supra that no adjustment should be made to returned income on issues, which are revenue neutral. Having held as above, it is difficult to take any different view for the issue under consideratio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appeal raised by the assesse is allowed." In the present Assessment Year also the assessee is not dealing in scrap, and/or holding the scrap as inventory, and thus was not required to value the closing stock after taking into account the value of scrap. The Tribunal for A.Y. 2010-11 and 2011-12 while coming to the aforesaid conclusion, laid emphasis on the fact that such transaction was revenue-neutral and held that considering the size of the assessee company, it could not be expected to keep quantitative tally of miniscule items. The facts are identical in the presnt year as well. Therefore, Ground No. 6 is allowed in favour of the assessee. 18. As regards to Ground No. 7 to 7.2, relating to disallowance of prior period expenses amounting to Rs. 17.13 crores, it can be seen that the assessee is a large size manufacturing company which receives services from several vendors, running into hundreds. The assessee made reasonable attempt to quantify the liability incurred towards expenses during the relevant previous years and provide for it. It is not humanly possible to consider and provide for all expenses, in absence of relevant details/material/information for various reasons ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng findings and conclusions:- "61.10. The issue herein is year of deductibility. Additional ground of appeal was filed for A. Y. 2006-07 before the Tribunal and this additional ground was not disposed of Misc. application is pending. The assessee's contention is that the correct amount is Rs. 23.86 lakhs and not Rs. 643.05 lakhs as mentioned by the A.O. Details are given in the paper book we find that the D.R.P. has directed the assessing officer to verify the price. This working given by the assessee is not properly verified by the A.O. The AO should have verified the claim of the assessee. We direct the assessing officer to verify the claim of the assessee. Be it as it may, the genuineness of the expenditure is not in doubt and as it is a question of excess/ short provision of discount in respect of sales effected, we are of the considered opinion that method of accounting followed by the assessee need not to be disturbed as it is being consistently followed over the years and as the revenue has accepted the same. The assessee's claim that the amount of Rs. 23.86 lakhs is not prior period expenses is not seriously disputed by the revenue. As to the balance amount Rs. 90 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the appeal of the revenue." It can be seen that the assessee is a large sized manufacturing company which receives services from several vendors, running into hundreds. The assessee made reasonable attempt to quantify the liability incurred towards expenses during the relevant previous years and provide for it which was not doubted by the Assessing Officer. It is not practically possible to consider and provide for all expenses, in absence of relevant details/material/information for various reasons like, non-receipt of bills/invoices from the vendors, the contract terms with vendors not being settled, disputes in relation to bills received, services contracted by zonal/regional/branch officer not intimated to the head office, etc. Therefore, the assessee in our opinion has rightly claimed deduction for miscellaneous expenses aggregating to Rs. 17,13,46,413 pertaining to prior period. The facts are identical in the previous Assessment Year 2010-11 & 2011-12 and squarely covered in favour of the assessee. Therefore, Ground No. 7 to 7.2 are allowed in favour of the assessee. 22. As regards to Ground No. 8 to 8.3, relating to provision of Head office expense reversed in succeedi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on the ground that the amount reversed there against in the succeeding year exceeded 15% of the amount of provision. The Tribunal held that the said approach followed by the AO had no valid basis and was purely ad-hoc. The Tribunal also held that the Assessing Officer was bound to follow the practice and stand taken by the Department on this issue in the earlier years and, accordingly, restored the matter back to the file of the Assessing Officer to reconsider the issue, having regard to the method of making provisions followed by the assessee and accepted by the Revenue in preceding years. The Assessing Officer, in the set-aside proceedings, vide order dated 26.02.2015, accepted the claim of the assessee and allowed relief on the aforementioned identical issue by observing that the assessee had computed the provision on the basis of actual Purchase Orders, which was scientific and logical in nature. 24. The Ld. DR relied upon the Assessment Order and Order of the TPO, but could not distinguish the decision of the Tribunal. 25. We have heard both the parties and perused the material available on record. The Tribunal for A.Ys. 2010-11 and 2011-12 held as under: 1) "33. We have ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd logical in nature. Thus the issue is squarely covered by the order of the Tribunal in A.Ys. 2010-11 & 2011-12. Therefore, Ground No. 8 to 8.3 are allowed in favour of the assessee. 26. As regards to Ground No. 9 to 9.3 relating to disallowance of alleged excessive purchases from related parties as per AS-18 amounting to Rs. 38.36 crores, it can be seen that in the course of business of manufacturing twowheelers, the assessee, inter alia, procures certain critical components like shock absorbers, carburetors, etc., which are fitted in the two- wheelers manufactured by the assessee, from a single vendor, having the requisite 28 ITA No. 6990/DEL/2017 technology to manufacture the same, in accordance with the specifications given by the assessee. The assessee, does not procure such components from any other vendor. The purchase price of components which are purchased from various suppliers are based upon negotiations with such vendors and are different due to various factors, like level of automation of vendor, amount of investment by vendor, age of the plant, capacity utilization (impacting fixed cost recovery), volume of supply, geographical differences (which could impact cost o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... roportion as that of purchases for which internal comparable were available alleging the same to be excessive. Thus, AO made total disallowance of Rs. 38,36,56,000/- out of purchases. 27. The Ld. AR submitted that the aforesaid issue is squarely covered in favour of the assessee by the decision of the Delhi Bench of Tribunal in the assessee's own case for Assessment Year 2007-08 and 2008-09, wherein identical disallowance made in that year was deleted on the ground that since in the first place, the parties were not related to the assessee company in terms of section 40A (2), disallowance on ground of excessive purchase price could not have been made under that section. Further, the Tribunal held that the transactions were entered by the assessee on account of commercial expediency and when the recipients had paid tax on payments received from the assessee company, disallowance could not be made by applying provisions of section 40A(2) of the Act. The Ld. AR pointed out that similar disallowance made in the immediately preceding two Assessment Years, viz. AY 2010-11 and 2011- 12 was also reversed by the Tribunal, following the aforementioned order of the Tribunal for assessment ye ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction 40A (2) gives the list of related persons. 13.17. In the present case, it is an undisputed fact that none of the parties fall within the persons specified as defined under clause (b) of section 40A (2) of the Act. Related parties are to be considered in terms of provisions of sec. 40A (2) of the Act and not as mentioned in AS-18 issued by the Institute of Chartered Accountant. Thus, we are of the view that the provisions of section 40A (2) do not apply to the present case. Further, there is no provision under the Act which authorizes the Assessing Officer to lift the corporate veil and disallow an expenditure on the ground of reasonableness and commercial expediency unless it is established that the transaction is primarily devised to evade tax. 13.18. In the present case, it was submitted by the learned AR of the assessee that the related parties are profit-making companies and are subject to tax to at some less or the same rate of tax. Thus, there is no loss of Revenue. This submission of the assessee has not been controverted before us by the learned DR. Tax benefit alleged is factually wrong as the other compared assesses are profit making companies/ assesses. There ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nding to section 10(2)(xv) of the Indian Income-tax Act, 1922] held as under: "In applying the test of commercial expediency for determining whether the expenditure was wholly and exclusively laid out for the purpose of the business, reasonableness of the expenditure has to be adjudged from the point of view of the businessman and not of the revenue". 13.24. Further, reference is also drawn to the decision of the Hon'ble Supreme Court in the case of S.A. Builders Ltd. v. CIT (Appeals) [2007] 288 ITR 1 (SC) , where in it was held as under: "....that once it is established that there was nexus between the expenditure and the purpose of the business (which need not necessarily be the business of the assessee itself), the revenue cannot justifiably claim to put itself in the arm-chair of the businessman or in the position of the board of directors and assume the role to decide how much is reasonable expenditure having regard to the circumstances of the case. No businessman can be compelled to maximize his profit. The income-tax authorities must put themselves in the shoes of the assessee and see how a prudent business man would act. The authorities must not look at the matter fro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fore, Ground Nos. 9 to 9.3 are allowed in favour of the assessee. 30. As regards to Ground No. 10 to 10.3, relating to payment received on behalf of Hero Honda FinCorp. Ltd. (HFCL) deemed as dividend under Section 2(22)(e) amounting to Rs. 12.69 crores, it can be seen that Hero Fin Corp. Ltd. (HFCL) is a related company in which the assessee holds 30% (approximately) of the share capital, which is engaged primarily in the business of financing of vehicles. In pursuance of the said business HFCL extends to the dealers of the assessee company, facility of financing vehicles purchased by the dealers from the assessee company. The dealers on purchase of vehicles from the assessee, get the bill of purchase raised by the assessee, discounted from HFCL and remit payment to the assessee. The dealers are required to make payment of aforesaid discounted bills to HFCL on maturity thereof. Subsequently, when payments by dealers to HFCL are due to the dealers, due to convenience of facility of collection centers of the assessee available all over India, make payment into the assessee's bank account, for and on behalf of HFCL, which is in turn remitted by the assessee to HFCL in 2-3 days. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... used as channel for remittance of money by the dealers to HHFL for the purpose of convenience and from assessee's a standpoint this is business expediency. We are unable to appreciate the conclusions drawn by the assessing officer that this is a deemed loan. In our view, by no stretch of imagination it can be said that there was any amount of advance or loan given by HHFL to the assessee. 16.28.Even assuming that the transaction is in the nature of loan, we have to agree with the arguments of the Ld. AR of the assessee that the transaction cannot be deemed as dividend in terms of exemption provided in clause (ii) of section 2(22)(e) of the Act, since the loan would be considered as given by HHFL, which is engaged in the business of money lending, in the ordinary course of its business. Therefore, the amount cannot be deemed as dividend in the hands of the assessee. The arguments of the Ld. DR that since no interest was charged/ chargeable thereon from the assessee, the aforesaid loan cannot be said to be given in the ordinary course of business of HHFL is taken to its logical conclusion, supporting our view that this is not a loan or advance. 16.29. Considering the decision of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enditure. The aforesaid findings of the Tribunal had been followed and reiterated by the Tribunal in assessee's own case for the immediately preceding assessments years, viz. Assessment Year 2010-11 and 2011-12. It is also pertinent to mention that no appeal has been filed by the department before the High Court. 36. The Ld. DR relied upon the Assessment Order and Order of the TPO, but could not refute the decision of the Tribunal and the Hon'ble High Court. 37. We have heard both the parties and perused the material available on record. The Tribunal in A.Ys. 2010-11 and 2011-12 held as under: "56) We have carefully considered the rival contentions. We have also noted the documents in relation to various services provided by HCSL, the necessity thereof was explained by the appellant in his submissions discussed above. We have also gone through the order of the Tribunal for AY 2007-08, wherein while following the settled legal propositions that an assessing officer cannot sit in the arm chair of the business man and decide the reasonableness of expenditure incurred or commercial expediency thereof, deleted the impugned disallowance made by the assessing officer as under :- "15 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e bench in appeal order for AY 2007- 08 in case of appellant. Direct the assessing officer to delete the disallowance made of Rs. 2 crores on account of advisory services expenditure incurred on payment to hero corporate services Ltd. Therefore ground nos. 12 of the appeal of the assessee is allowed." From the records it can be seen that the assessee made elaborate submissions explaining the nature of services received from Hero Corporate Services Ltd. and nexus of same with the business of the assessee. This fact is identical with the earlier Assessment Years. The issue is squarely covered in favour of the assessee by the Tribunal's order for A.Ys. 2010-11 & 2011-12. Besides this the Revenue has accepted this issue and has not challenged the same in Hon'ble High Court. Thus, this issue attains finality. Therefore, Ground No. 11 to 11.1 are allowed in favour of the assessee. 38. As regards to Ground No. 12 to 12.5 relating to TDS on quarterly target and turnover discount and Sales Discount amounting to Rs. 63.51 crores, it is seen that during the relevant year, the assessee incurred expenditure of Rs. 63,50,62,359/- on account of various incentives/discounts offered to dealers un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd dealers is on a principal-to-principal basis and dealers do not act as agents of the appellant while purchasing and further selling the vehicles. Accordingly, the incentives offered at the time of purchase of vehicles do not fall within the meaning of commission u/s 194H of the Act. Further, the issue is squarely covered by the decision of the ITAT in assessee's own case in AY 2008-09 wherein following the ITAT decision in assessee's own case for the year AY 2007-08, it was observed as under - "148. From the bare reading of the decision of the Tribunal in assessee's own case for AY 2007-08 (supra), we observe that after dealing with rivals submissions and contentions of both the parties, the tribunal reached to the following finding and conclusion deciding the issue in favour of the assessee. The relevant operative part of the order of the Tribunal for AY 2007-08 in assessee's own case (supra) read as under- "45.11. The facts of this case clearly demonstrate that what is given to the stockiest/ dealers is discount on the purchase price and not any commission. The stockiest/ dealers purchase spare parts/ vehicles from the assessee. They are not commission agents. Sale conside ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... P) Ltd. 336 ITR 383 (Del.), the Hon'ble Delhi High Court has held as follows: "Held, dismissing the appeal, that a perusal of the agreement showed that the assessee had permitted the distributor to sell its products in a specified area. The distributor was to purchase products at a pre- determined price from the assessee for selling them. Both the assessee and the distributor had been collecting and paying their sales tax separately. The CIT(A) and also the Tribunal rightly held that the payments being made by the assessee to the distributor were incentives and discounts and not commission." 45.14. Respectfully following the propositions laid down in the aforementioned cases we allow this ground of the assessee." 76) In that view of the matter, the Ld. departmental representative could not point out any decision contrary to the above finding of the coordinate bench or change in the facts and circumstances of the case, therefore respectfully following the decision of the coordinate bench in the appellant's own case for assessment years 2007-08 and 2008-09 discussed supra, we delete the disallowance made by the Ld. assessing officer on account of expenditure of Rs. 3 6880 2598 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for assessment year 2007-08 are as under: "35.8. It is the case of the assessee that it had reimbursed the expenses incurred by various consultants and vendors on travelling and out of pocket expenses. It is also claimed that out of an amount of Rs. 10.68 lacs expenses to the extent of Rs. 6.01 lacs were made after verifying the supporting vouchers for claims raised by the vendors. Balance amount of Rs. 4.66 lacs were based on self certification. In our view such reimbursement of expenditure has no element of income embodied in it. Thus, we apply the following decisions wherein it is held that payer is not obliged to deduct tax at source from reimbursement of expenses: - United Hotels Ltd. Vs. ITO 93 TTJ 822; - Karnavati Co-op. Bank Ltd. Vs. DCIT 134 TTJ 486 (Ahd.). 35.9. Respectfully following the same, the ground is allowed in favour of the assessee." The Ld. departmental representative could not point out any change in the facts and circumstances of the case of the appellant as compared to the assessment year in which the above issue is decided by the coordinate bench. No other contrary decision was also pointed out therefore, respectfully following the decision of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (c) Maestro and d) Impulse) using the technology provided by HM on payment of lump sum model fee and royalty. The assessee after separation from Honda Motors Corporation, Japan, was not in a position to independently develop and launch new models of motorcycles immediately. Therefore, in order to survive in a highly competitive market the assessee requested HM to provide right and technology for manufacture of four new models of motor cycles, for which the assessee had limited rights. During the relevant previous year, in terms of the aforesaid License B agreement, the assessee incurred expenditure of Rs. Rs. 12,83,66,226 + Rs. 1,08,46,577 towards cess towards model fee and Rs. 9,25,68,658 towards technical guidance fees, which was claimed as revenue deduction. The assessee further made the following payments by way of model fees for certain License A products and all License B products in terms of Model fee agreement(s) dated 06.07.2011 & 08.01.2011, entered separately for both set of products towards limited license to use the know-how provided by Honda for manufacture of various models of motorcycles. Further, the assessee incurred expenditure on the aforesaid model fee. Accordi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the assessee and the fact of such rights being not exclusive can be gathered from the following clauses of the agreement:- i) ARTCILE 2 - Grant of License and Exclusivity ii) ARTICLE 3-No sublicense iii) ARTICLE 9 - Use and Disclosure of Technical Information iv) ARTICLE 13 - Terms of agreement (upto 30.06.2007) v) ARTICLE 21/22 Termination/Effect of Expiry and Termination vi) ARTICLE 25/26 Certain Prohibitions/Maintenance of Secrecy To the same effect are the following clauses placing restrictions on use of knowhow by the assessee under License A Products Agreement in the context of model fee: i) ARTCILE 2 - Grant of License and Exclusivity ii) ARTICLE 4 - N o sublicense iii) ARTICLE 10 - Use and Disclosure of Technical Information iv) ARTICLE 13 - Terms of agreement (upto 30.06.2014) v) ARTICLE 21/22 - Termination/Effect of Expiry and Termination vi) ARTICLE 25/27 - Certain Prohibitions/Maintenance of Secrecy. The Ld. AR further submitted that payment under the agreement is allowable revenue expenditure. As per the various clauses of the agreement, it would be appreciated that the royalty/TGF/model fee payable to Honda is only for the purpose of use o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cy of the agreement, there is no explicit or implied intention to transfer or create ownership in the technical know-how /technical information in the assessee. In view of the aforesaid, expenditure by way of royalty, technical guidance fee and model fees incurred by the assessee was allowable revenue deduction since- * payment was made for limited license to use the know-how provided by Honda, as the proprietary and ownership rights in the same continued to remain vested with Honda at all times and. therefore, there was no absolute parting of knowhow in favour of the assessee resulting in acquisition of any asset. * no benefit of enduring nature in the capital field accrued to the assessee, even if the license to manufacture and sell products in India is assumed to be exclusive, except for grant of license to HMSI, * the subject payment made did not cover consideration paid for setting up of the manufacturing facility in India The aforesaid issue is covered in favour of the assessee by the decision of Tribunal in the assessment years 2000-01, 2001-02, 2002-03, 2006-07, 2007- 08, 2008-09, 2010-11 and 2011-12 wherein the Tribunal has held that annual payment of royalty/techni ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . DR relied upon the Assessment Order and Order of the TPO but could not distinguish the order of the Tribunal for A.Ys. 2010-11 and 2011-12. 50. We have heard both the parties and perused the material available on record. The Tribunal for A.Y. 2010-11 and 2011-12 held as under: "95) We have heard the rival contentions. We have gone through the orders in the appellant's case for the earlier assessment years as was pointed out by the Ld. Counsel. Both the parties admitted before us that there is no change in the facts and circumstances of the case as well as the agreement under which the payments have been made by the assessee. The Ld. departmental representative also could not point out any other judicial precedent on this issue of the higher forum. In this event we are duty bound to follow the order of the coordinate bench passed in the case of the appellant for the beer years. For the sake brevity, we reproduce hereunder the finding in the appeal order for AY 2007-08, which was followed in the order for AY 2008-09 as under: "57. The issue whether the expenditure in question is in the capital field or the revenue field has been decided in favour of the assessee by the ITAT in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bench of the tribunal in the assessee's own case for the AY 2007-08 and 2008-09, wherein after considering the legal position and intention of the assessee company, the Tribunal came to the conclusion that income from sale of shares/mutual funds/PMS etc. would be taxable as capital gains, instead of business income brought to tax by the assessing officer on the basis that the assessee (a) was not a trader in stock; (b) had no intention of holding the shares as stock; (c) sales were effected by delivery (d) that the department had itself in earlier years taxed such transactions under the head capital gains. The Ld. AR pointed out that the Tribunal, vide order dated 24/10/2006 passed in the assessee's own case for AY 2010-11 and 2011-12, reversed the action of AO in changing the head of income and held that in cases where an assessee treats investments made in shares as capital assets, in view of Circular 6/2016 of the Board, gains/profits on sale of such investments shall be treated as capital gains and not income from business/profession. 53. The Ld. DR relied upon the Assessment Order and Order of the TPO, but could not distinguish the decision of the Tribunal. 54. We have heard ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... closing of the year as an investment only and not as stock in trade. 65.31. The assessee has valued the investments at cost as per Accounting standard 13- Accounting for Investments and not in accordance with Accounting Standard -2 which deals with valuation of inventories. 65.32. The assessee has been holding the securities/ shares as investments from year to year and consistently following the same method of accounting for the purpose of disclosure and valuation. This treatment by the assessee was accepted by the Revenue for the past years. 65.33. The assessee had earned income from both long term and short term capital gains which means the assessee has also held shares for a period of more than 12 months. Whether the investments are made out of borrowed funds 65.34. The investments were made from surplus funds of the assessee and there were no borrowings. The investments were made to optimally utilize the spare funds instead of keeping the same idle in the bank accounts. The investments were made in mutual funds (debt and liquid funds) and through portfolio management schemes/ IPOs. 65.35. The co-ordinate bench of the Delhi ITAT in the case of Narendra Gehlaut vs. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as being engaged in business activity. 65.41. In view of the above factual matrix it emerges that assessee is: (i) not a trader in stocks (ii) Intention of holding the shares as investment/ stock is manifest. (iii) Sales are effected by delivery. (iv) Department has itself in earlier years taxed such transactions under the head "Capital Gains". 65.42. Considering these facts and applicable judicial precedents on the issue, we are of the considered opinion that the income in question can be taxed only under the head "Capital Gains" and not under the head business income. This ground of the assessee is allowed." 100) In addition to the aforesaid observations, the appellant in this year also has benefit of the recent Circular No.6 of 2016 dated 29.2.2016 issued by the CBDT, wherein with an idea to reduce litigation on this issue of classification of the head of income arising from sale of shares / mutual funds, etc., the CBDT has opined that gains arising from sale of such shares/securities held for a period of more than 12 months and shown as capital gains by the assessee should not be disputed by the assessing officer. Having regard to the aforesaid intent of the Circu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s in the method of disallowance followed by the assessee. In the absence of any satisfaction recorded in the assessment order, the disallowance as per Rule 8D needs to be deleted. Reliance in this regard is placed on the following decisions: * Godrej & Boyce Manufacturing Company Ltd. VS. DCIT: 394 ITR 449(SC) * Maxopp Investment Ltd: 347 ITR 272 (Del.) * H.T. Media Limited v. PC1T: ITA No.548/2015 (Del.) dated 23.8.2017 * Eicher Motors Ltd. vs. CIT: ITA No. 136/2017 dated 15.09.2017 Even otherwise, there is no nexus of expenses, like interest expenditure and other administrative expenses with investments, warranting disallowance u/s 14A. 57. On interest expenditure, the Ld. AR submitted that the assessee is a cash rich company, which does not borrow funds for making investment. The marginal interest expenditure of Rs. 1190 lakhs was incurred on other temporary loans/dealers deposit, having nexus with main business function. Further, no direct nexus of interest expenditure with investments or earning of dividend income was established by the assessing officer, for which the initial burden was on the assessing officer. The Ld. AR submitted that the assessee had substantia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ss function of manufacturing of vehicles. In the absence of any proximate nexus having been established by the Assessing Officer, the Ld. AR pointed out that the Tribunal in the assessee's own case for the assessment year 2007-08 and 2008-09 set aside the matter to the file of the Assessing Officer to be decided afresh as per law, having regard to the satisfaction to be recorded qua correctness of the suo-moto disallowance made by the assessee in the return of income. The AO, in the set aside proceedings for assessment year 2007-08, vide order dated 30.10.2014 passed under section 254/143(3) of the Act did not make any disallowance in respect of interest expenses since there was no nexus between the income and such expenditure. The AO, however, made disallowance of such administrative expenses under section 14A in the proportion the total profit before tax bears to tax free income, which is upheld by the C1T(A) vide order dated 01.02.2018. The Tribunal, vide consolidated order dated 24/10/2016 passed in ITA Nos. 1545/del/2015 and 914/Del/2016 in assessee's own case for the immediately preceding assessment years AY 2010-11 and 2011-12 decided the issue in favor of the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alid satisfaction was recorded by the assessing officer in the assessment order to reject the method followed by the appellant in computing disallowance u/s 14A, before mechanically resorting to and applying the provisions of Rule 8D of the Rules. In view of such findings, the additional disallowance made by the assessing officer u/s 14A stands deleted on the aforesaid ground at the threshold. That apart, we also agree with the submissions of the appellant that, since the appellant is a cash-rich company, which, in fact, is investing surplus/idle funds in various modes of investments, there could be no nexus of interest-bearing borrowed funds with such investments. The appellant is having substantial free reserves of Rs. 3760.81 crores at the beginning of the relevant year and has generated surplus interest free funds of Rs. 268.64 crores during the year. The assessing officer, too, in the set-aside proceedings for the AY 2007-08 had accepted the aforesaid cash flow position and deleted the disallowance of interest expenditure. In view of this we reverse the finding of the Ld. assessing officer about disallowance of Rs. 145.62 lakhs under section 14 A of the income tax act applying ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... High Court in State Bank of Patiala also fail, though law in this respect has been clarified hereinabove. 41) Having regard to the language of Section 14A(2) of the Act, read with Rule 8D of the Rules, we also make it clear that before applying the theory of apportionment, the AO needs to record satisfaction that having regard to the kind of the assessee, suo moto disallowance under Section 14A was not correct. It will be in those cases where the assessee in his return has himself apportioned but the AO was not accepting the said apportionment. In that eventuality, it will have to record its satisfaction to this effect. Further, while recording such a satisfaction, nature of loan taken by the assessee for purchasing the shares/making the investment in shares is to be examined by the AO." Though the Assessing Officer did not accept the method of disallowance computed by the assessee under section 14A and made further disallowance of Rs. 66,35,000/- invoking provisions of Rule 8D of the Income Tax Rules, 1962 after reducing the suo moto disallowance of Rs. 65.23 lakhs made by the assessee in the return of income. But the Assessing Officer has not given the proper calculation to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... refully considered the rival contentions. In absence of any change in the facts and circumstances of the case or any contrary decision, We have heard the rival contentions. We find that the similar issue was raised in the assessment order for AY 2008-09, which was decided in favour of the appellant by the Tribunal in appeal order for that year by observing as under- "219. On careful consideration of above submissions of both the parties, we are of the view that if the closing stock of the year under consideration. is to be varied, then similar adjustments would need to be made in the opening stock also and corresponding adjustments would also need to be carried out in the opening stock of the succeeding year and if any addition is made in this regard, would be revenue neutral if seen in a macro perspective. From the orders of the authorities below, we clearly observe that the AO has not disputed the mode of valuation of inventory made by the assessee during preceding years and if any kind of adjustment is held to be attributable to the value of finished closing stock, then the said corresponding amount/adjustment would need to be made in the opening stock of the succeeding year a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for the year under consideration. Thus, this issue is covered by the decision of the Tribunal for A.Ys. 2010-11 and 2011-12. Therefore, Ground No. 17 is allowed in favour of the assessee. 65. As regards to Ground No. 18 relating to disallowance of reimbursement of foreign travelling expenses to directors/employees amounting to Rs. 4.51 crores, the same is on the ground of no evidence/proof of actual expense incurred by employees of Rs. 451.00 crores. In the course of discharge of official duties, the employees of the company are required to travel abroad and incur incidental expenses in foreign currency like local conveyance, boarding and lodging expenses, telephone expenses etc. The assessee had introduced a policy fixing per diem allowance payable to employees, depending upon the grade/category of the employees and the place/country of travel. The employees are not entitled to any extra allowance in the event actual expenditure incurred by the employee is in excess of such per diem allowance. For payment of per diem allowance, as per policy, the assessee does not require the expenses to be necessarily supported / backed by bills considering the practical difficulties/impossibili ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the rules of the company and when these D.A. rules are followed by the assessee, in our view, the incurring of expenditure by the employees is not to be doubted. Even in cases where officers of the government of India travel abroad, daily allowance is given and vouchers for such expenditure are not insisted because of practical difficulties in submitting bills/ vouchers of petty expenses. In such circumstances, what is to be examined by the assessing officer is the reasonableness of the expenses incurred as compared to the general rates of expenses and allow the same. The assessee submits that the fixed per diem allowance payable to employees depending on the grade is reasonable. When such rates are reasonable the question of disallowance does not arise unless the revenue demonstrates that the rates are excessive. In this case it is not that the expenses are not incurred for the stated purpose nor is it that the rates are unreasonable. The disallowance in question in our view on the sole ground that vouchers are not produced by the employees cannot be sustained. In the result this ground of the assessee is allowed." The Ld. departmental representative could not point out any cha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t. 71. The Ld. DR relied upon the Assessment Order and Order of the TPO, but could not distinguish the decision of the Tribunal. 72. We have heard both the parties and perused the material available on record. The Tribunal held in A.Ys. 2010-11 and 2011-12 as under: "116) We have considered rival contentions. Under section 37(1) of the Act, expenditure is allowable as deduction if the same is incurred for the purpose of business out of commercial expediency. An expenditure which is personal in nature, is not an allowable business deduction. In the present case, the assessing officer has disallowed the expenditure incurred for making advertisement in newspapers to commemorate the death anniversary of late Shri Raman Munjal, being the founder and ex-managing director of the appellant, on the ground that he was family member of the promoters family, losing sight of the fact he was also ex-employee of the company who served in the capacity of managing director during his lifetime. He was, thus, simply not a distant family member of the promoters, but had strong nexus with the business of the appellant company. The expression "for the purpose of business" used in section 37(1) is no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lating to disallowance of commission paid to Managing Director, Shri Pawan Munjal under Section 36(1)(ii) of the Act amounting to Rs. 52.46 crores. Sh. Pawan Munjal has been appointed as Managing Director & CEO of the assessee company and Sh. Sunil Kant Munjal as Joint Managing Director in the Annual General Meeting of the shareholders and continued to render services in that capacity. The consideration in lieu of services to be rendered by Executive Directors was payable, inter alia, as basic salary per month along with commission payable with reference to profits subject to the condition that the amount of commission shall not exceed 1 % of the net profits of the company in a particular financial year as computed in the manner provided in section 198 of the Companies Act, 1956. The assessee incurred expenditure of Rs. 52,46,00,000/- on account of commission paid to Managing Director and CEO. viz.. Shri Pawan Munjal and Joint Managing Director Shri Sunil Kant Munjal. The same was claimed as revenue deduction while computing the income for the relevant assessment year. AO disallowed the aforesaid total amount of commission paid to Shri Pawan Munjal under section 36(1)(ii) of the Ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ervices rendered by him in the capacity of Managing Director. There is no quarrel or doubt that Mr. Munjal had not been rendering services to the appellant company in the capacity as Managing Director. More so, since the other part of his remuneration package, i.e., basic salary and other benefits given to him have been accepted and allowed as revenue expenditure, there is no valid reason to differently treat the other part of his remuneration package given by way of 1% of net profit. It is not the case of the assessing officer that the total remuneration package comprising of 1% of net profit is unreasonable, having regard to the nature of services provided by Mr. Munjal in his capacity as Managing Director. Having not doubted the same, the assessing officer cannot disallow any part of the total remuneration package agreed between the assessee and an employee/director. Coming back to the provision of section 36(1)(ii), the said section, in fact, enabled deduction of any sum paid to an employee as bonus or commission for services rendered. The exception carved out in the aforesaid section for allowability of bonus or commission is, where such sum was otherwise payable to the employ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under: "19. The revenue's contention that the Tribunal erred in allowing the bonus payment to the directors cannot be accepted. It has not disputed the facts viz., (a) that the payment was supported by board resolutions and (b) that none of the directors would have received a lesser amount of dividend than the bonus paid to them, having regard to their shareholding. Further, the directors are full-time employees of the company receiving salary. They are all graduates from IIM, Bangalore. Taking all these facts into consideration, it would appear that the bonus was a reward for their work, in addition to the salary paid to them and was in no way related to their shareholding. The bonus payment cannot be characterized as a dividend payment in disguise. The Tribunal has found that having regard to the shareholding of each of the directors, they would have got much higher amounts as dividends than as bonus and there was no tax avoidance motive. The quantum of the bonus payment was linked to the services rendered by the directors. It cannot therefore be said that the bonus would not have been payable to the directors as profits or dividend had it not been paid as bonus/commission ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the said order, the Tribunal held that the commission paid to directors with reference to percentage of profits of the company for the services rendered as per the terms of appointment, constitutes part of the remuneration package, and in the absence of any disallowance on other components of remuneration paid to such director, the commission cannot, ipso facto be classified as payment of profit/dividend covered within the exception provided under Section 36(1)(ii) of the Act. It is also pertinent to mention that no appeal has been filed by the department before the High Court. Thus, the Tribunal decision has attained the finality. Therefore, Ground No. 20 to 20.3 are allowed in favour of the assessee. 77. Ground No. 21 is relating to disallowance of proportionate amount of premium paid for land taken on lease for 99 years at Haridwar, Jaipur and Neemrana amounting to Rs. 4.36 crores. The assessee-company was allotted land at Haridwar, Jaipur and Neemrana on lease for a period of 99 years. The aforesaid leases were granted on payment of premium of Rs. 184,10,22,801. In the return of income, the assessee apportioned the amount of premium paid on taking land on lease, over the per ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er the provisions of the Act and that the assessee failed to establish with necessary documentary evidences, the onus cast upon it as per law. 82. The Ld. AR submitted that the disallowance of expenses incurred on account of CSR made by the assessing officer in the preceding years, viz. AY 2010-11 and AY 2011-12 has been deleted by the Tribunal vide recent consolidated order dated 24.10.2016, wherein the Tribunal held that the expenditure incurred by the assessee company on Corporate Social Responsibility, prior to insertion of explanation 2 to Section 37(1) of the Income Tax Act, was an allowable business deduction under the said provision. The Tribunal, in the said order, further elaborated that the role of the assessee was not restricted to merely earning profit, but also discharging certain community related expenses, which would be considered to have been incurred on account of commercial/ business expediency. It is pertinent to point out that no appeal has been filed by the Department in assessment year 2011-12. 83. The Ld. DR relied upon the Assessment Order and Order of the TPO, but could not distinguish the decision of the Tribunal. 84. We have heard both the parties an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r the employees or their children or for the children of the ex-employees. Any expenditure laid out or expended for their benefit, if it satisfies the other requirements, must be allowed as deduction under section 37(1) of the Act. The fact that somebody other than the assessee was also benefited or incidentally took advantage of the provision made, should not come in the way of the expenditure being allowed as a deduction under section 37(1) of the Act. Nevertheless, it is expenditure allowable as deduction under the Act. (ii) That the word "expenditure" primarily denoted the idea of spending or paying out or away. It was something which was gone irretrievably, but should not be in respect of an unascertained liability of the future. It must be an actual liability in praesenti, as opposed to a contingent liability of the future. (iii) The reasons given by the Tribunal for rejecting the claim of the assessee were not sound. Moreover, since the Tribunal had not recorded a finding as to whether the donation made by the assessee to the trust could be considered as "expenditure", the matter had to be remanded to the Tribunal for decision afresh in the light of the observations cont ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ould also be noted that the contribution made to the Panchayat was not in contravention of any law, nor was it opposed to public policy. In this view of the matter, the contribution made by the assessee to the Panchayat for the up-gradation of the elementary school should be regarded as an allowable business expenditure under the provisions of s. 37(1)." (iv) In the case of CIT Vs. Chemicals and Plastics India Ltd. 292 ITR 115 (Mad.), the assessee claimed deduction in relation to contribution to Madras Chamber of Commerce, of which the assessee was a member, as business expenditure. It was contended that since the maintenance of the trade Chamber was for the furtherance of business interests of the constituents of the Chamber, the contribution made had to be treated as business expenditure. The assessing officer rejected the claim for deduction, which was allowed by the Tribunal. The Hon'ble High Court approved the view taken by the ITAT by holding that since activities of the Chamber of Commerce were closely linked with the welfare of corporate entities who were its members and whose interests were taken care of by the Chamber, the expenditure was deductible, irrespective of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 30 Taxman 467 that while the basic requirements for invoking sections 37(1) and 80G are quite different, but nonetheless the two sections are not mutually exclusive. Thus, there are overlapping areas between the* donations given* by* the assessee and the business. In other words, there can be certain amounts, though in the nature of donations, and nonetheless, these amounts may be deductible under section 37(1) as well. Therefore, merely because the expenditure in question was in the nature of donation, or, as per the words of the Commissioner (Appeals), 'prompted by altruistic motives', it did not cease to be an expenditure deductible under section 37(1). In the case of Mysore Kirloskar Ltd. (supra), the High Court observed that even if the contribution by the assessee is in the form of donations, but if it could be termed as expenditure of the category falling in section 37(1), then the right of the assessee to claim the whole of it as a deduction under section 37(1) cannot be declined. What is material in this context is whether the expenditure in question was in question was necessitated by business considerations or not. Once it is found that the expenditure was dictat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is pertinent to point out that no appeal has been filed by the Department in assessment year 2011-12. Thus, the decision of the Tribunal attains finality. Therefore, Ground No. 22 to 22.1 are allowed in favour of the assessee. 85. Ground No. 23 to 23.1 and 24 relating to disallowance u/s 80IC on account of cost to cost sale to Vendor i.e. trading activity amounting to Rs. 28.46 as well as disallowance u/s 80IC on account of Job work/outsourcing of manufacturing activity, The proportionate amount of sales to vendors for processing of semi-finished goods supplied by the assessee, compute on ad-hoc basis, on the ground that manufacturing activity to the aforesaid extent of sales was outsourced. During the year, the assessee claimed a deduction of Rs. 1355.63 crores under section 801C of the Act with respect to profits from manufacturing activity carried out at Haridwar. The assessee had engaged various ancillary units/third parties to carry job-work/processing on the components supplied by the assessee for further consumption of such finished components in the activity of manufacture of two wheelers. In the assessment order, the assessing officer observed that supply/sale of semi-fi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty consumed in other two units. That apart, even assuming that certain intermediary processes were not carried out by the eligible unit at Haridwar and were outsourced to the third parties or non-eligible units, the same cannot lead to the conclusion that the entire profits are not derived from the manufacturing activity for being liable for deduction under section 80IC of the Act. The profit earned by the eligible unit is from manufacturing of two wheelers, which is an eligible activity covered under section 80IC of the Act. Outsourcing of certain intermediary processes or procurement of some finished components for assembly thereof in the vehicle does not, in our view, mean outsourcing of the manufacturing operations. The Courts have in fact repeatedly held that even where the entire manufacturing activities are outsourced or carried out by third party, but the overall supervision, control, and management of the product manufactured is with the assessee, the assessee would be regarded as engaged in manufacture or production of relevant goods. The latest is the decision of Delhi High Court in the case of ITO v AAR ESS Exim (P) Ltd: 372 ITR 111. Thus, disallowance made by the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... priate authority, in accordance with local State Government Factory Rules, i.e., Uttar Pradesh Factory Rules, 1950, which were applicable in the present case. No separate license was required to carry on the business ol manufacture of two wheelers as also to claim deduction for such activity under section 80IC of the Act. The only permission required was the aforesaid license to work as factory, which was submitted along with audit report in Form 10CCB read with Rule 18BBB(4) of the Rules. In view of the aforesaid, the assessee claimed deduction of Rs. 20,89,07,629/- under section 80IC of the Act during the relevant assessment year. In the assessment order, the assessing officer disallowed the entire amount of deduction claimed under section 80IC of the Act on the ground that the following conditions were not satisfied by the assessee: * The assessee failed to comply with Rule 18BBB of the Rules inasmuch as the assessee did not obtain any approval for carrying on the business of manufacturing two-wheelers in the State of Uttaranchal * The assessee failed to comply with the condition of employment of natives of State of Uttaranchal at prescribed percentage as contained in the in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 18BBB regarding approval to carry on the eligible business, it was explained by the appellant that for the purposes of carrying on business of manufacturing two-wheelers other than obtaining factory license as per the Factory Act, 1948, no other approval / permission was required from any Central / State government under any law. No such requirement has even been prescribed by the assessing officer. As regards the factory license, the appellant had obtained the said license from the appropriate state authority which was attached along with audit report in Form 10CCB in compliance of Rule 18BBB(4) of the Rules. Considering that no license was required to be obtained to carry on the eligible business under any law, the appellant could not have been said to violate the provisions of said Rule. As regards the other two failures, relating to state industrial policy alleged by the assessing officer, the satisfactions of such conditions have not been stipulated as a condition precedent under any provision of section 80IC of the Act. The provisions of section 80IC are self-contained and if the condition stipulated therein are satisfied, the benefit therein cannot be denied on the ground ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... & 2011-12. Besides this the Revenue has accepted this issue and has not challenged the same in Hon'ble High Court. Thus, this issue attains finality. Therefore, Ground No. 25 is allowed in favour of the assessee. 93. Ground No. 26 to 26.1 are relating to disallowance u/s 80IC on account of section 80IA(10). The assessee is engaged in the business of manufacturing two- wheelers. For the aforesaid activity, the assessee purchases various components required to be used in the assembly of two- wheelers, like gear box, fuel tank, etc., from third party vendors. In the present transaction, the aforesaid components were first purchased by non-eligible units at Gurgaon or Dharuhera from third parties, due to proximity of location of such units with third parties, business relationship, etc. and were thereafter transferred at the same purchase price to the eligible unit at Haridwar. In such a transaction, no value addition in such components was carried out by the non-eligible units. In the books of accounts of the plant at Haridwar which is eligible for deduction under section 80IC of the Act, goods were shown to have been procured from other units, i.e. Dharuhera and Gurgaon plants. Out ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the Appellant that substantive transfers were made on account of some finished components procured by the non-eligible unit from third party vendors, due to proximity of location/relationship, for further transfer to the eligible unit. The freight charges incurred in relation to the procurement and further transfer from noneligible to eligible unit have been stated to be borne by the eligible unit. We find force in the aforesaid facts stated by the appellant, considering that the unit at Haridwar was a new unit, whereas the other non-eligible units at Gurgaon and Dharuhera were old, established way back in years 1984 and 1997, having up and running operations during the year under consideration. Various ancillary units manufacturing components for such plants were also established near the old plants, which were continuously supplying such components to the non-eligible units. There was thus strong business/commercial reasons for such ancillary units to supply the components to the non-eligible unit first, by virtue of the existing relationship / process for supply of goods in place, which were further transferred at cost to the eligible unit at Haridwar. We do not find any in-g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... applicable freight cost, no further substitution of such price is warranted in terms of section 80IA(10) of the Act and the transaction was a genuine business transaction borne out of commercial expediency. Therefore, Ground No. 26 to 26.1 are allowed in favour of the assessee. 97. Ground No. 27 to 27.7 are relating to disallowance u/s 80IC on account of profit attributable to the brand value and marketing network amounting to Rs. 750.86 corers. In the business of manufacturing and selling two-wheelers, including goods manufactured at eligible unit, the assessee was required to incur marketing expenses. The said expenses were incurred by the Head Office at Delhi. The common expenses, including advertisement/brand creation expenses, etc. incurred at Head Office were allocated to various manufacturing units of the assessee-company. including the unit eligible for deduction under section 80IC, on a rational and scientific basis. In that view of the matter, the expenses on brand /advertisement, etc. incurred at Head Office were duly allocated to manufacturing units and have been deducted, while computing profits of the unit eligible for claim of deduction under section 80IC of the Act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eparate cost centre and expenses incurred thereat needs to be allocated to various profit centers/manufacturing units on a rational and scientific basis, without any element of profit/markup. The issue raised by the assessing officer in the present ground of appeal is categorically similar to that raised in the aforesaid ground. Accordingly following our findings stated above, we reverse the action of the assessing officer and delete the disallowance made under section 80IC. Accordingly, the ground No. 33 of appeal is allowed." The issue is squarely covered in favor of the assessee by the order dated 24.10.2016 passed by the Tribunal for immediately preceding assessment years, i.e. AY 2010-11 and AY 2011 -12, wherein identical disallowance made by the AO has been deleted. The Tribunal, in coming to the aforesaid discussion, reiterated that the head office is not a separate profit centre and, therefore, no profit is to be separately attributed to such activity. It further observed that, for the purpose of working out eligible deduction under section 80-IC of the Act, actual expenses incurred at the head office are to be allocated between various profit centers on a rational and sci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the assessee. Details of correspondences exchanged with vendors establishing working capital support on sample basis were submitted before the Revenue authorities. 103. The Ld. DR relied upon the Assessment Order and Order of the TPO, but could not distinguish the decision of the Tribunal. 104. We have heard both the parties and perused the material available on record. The Tribunal in A.Ys. 2010-11 and 2011-12 held as under: 158) We have heard the rival contentions. Our findings on the various issues raised by the assessing officer are given in seriatim hereunder: 1. Interest on loan given at subsidized rates to employees The Supreme Court in the case of Liberty India vs. CIT: 317 ITR 218, has held that source of income beyond the first degree nexus with the manufacturing operation cannot be considered as derived from such business/activity. Following the aforesaid decision, the Courts / Tribunal in certain cases have held that interest income earned from fixed deposits made by the eligible unit is not eligible for deduction under the relevant provisions of the Act. [Refer: Paswara Electronics (P) Ltd. v. ITO: ITA No. 71/D/2011; Reckit Benckiser India Ltd. v. Addl. CIT: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oes not involve any income element inasmuch as semi-finished components are supplied to ancillary units for further processing and finished components procured there from are subsequently debited at cost in the books. There is no profit element in the aforesaid transaction and therefore the benefit of deduction under section 80IC cannot be denied on above. In that view of the matter, the action of the assessing officer is reversed on this ground. 5) Miscellaneous income - cash discounting from vendors The cash discount availed on early/prompt payment to creditors/supplies of material is also not an independent source of income but a discount towards the purchase price. The purchase price of goods is reduced from the profits of the eligible unit to arrive at profit derived from the manufacturing activity. Accordingly, any benefit towards purchase price would have direct nexus with the computation of the aforesaid profits. The aforesaid income is, thus, directly related to business of manufacturing. Accordingly the action of the assessing officer in disallowing deduction under section 80IC on above was not valid and therefore, the action of the assessing officer on aforesaid grou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uction under that section. Accordingly, the aforesaid issue stands squarely covered in favour of the assessee. Therefore, Ground No. 28 to 28.1 are allowed in favour of the assessee. 105. Ground No. 29 to 29.4 are relating to disallowance of deduction u/s 80IC for non compliance of Rule 18BBB and non-adherence to condition specified in Industrial Policy amounting to Rs. 1355.63. The assessee company had during the financial year 2008-09 on 07.04.2008 started commercial production at new manufacturing facility at Plot No. 3, Sector 10, Integrated Industrial Estate, Ranipur. SIDCUL, Haridwar (UTTARAKHAND) at Khasra Number 545 Village Salempur Mehdood, Haridwar on 07.04.2008. The said plot was notified by Notification No. 177 dated 28.06.2004 as industrial Estate under section 80IC(2)(a)(ii). In this connection, following documents were enclosed by the assessee. * License and registration certificate * Direct tax Notification No. 177 dated 28.06.2004 (relevant extracts) * Khasra no. Certificate * Central Excise Registration Certificate Commercial Tax Registration Certificate * First Sales Invoice * Consent to establish motorcycle unit from Uttaranchal Environment Protect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessment Order and Order of the TPO, but could not distinguish the decision of the Tribunal. 108. We have heard both the parties and perused the material available on record. The Tribunal in A.Ys. 2010-11 and 2011-12 held as under: "136) We have heard the rival contentions. The case of the assessing officer was that the appellant is not eligible for claiming deduction u/s 80IC since it did not satisfy the following conditions: d) The appellant failed to comply with Rule 18BBB of the Rules inasmuch as the appellant did not obtain any approval for carrying on the business of manufacturing two-wheelers in the State of Uttaranchal; e) The appellant failed to comply with the condition of employment of natives of State of Uttaranchal at prescribed percentage as contained in the industrial policy issued by the Government for the State of Uttaranchal; [Communication no.429/lnd. Dev. / Employment /2005-06, dated 19.11.2005, issued by the Secretary, Industrial Development to Director, Industries, Uttranchal] f) The appellant failed to meet the condition of continuous employment of specified number of employees on any given day, as contained in the factory license. As regards the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he appellant during the course of set-aside proceedings had point-wise given entire details /information as to how it satisfied each condition precedent for claiming deduction under said section. The claim of deduction of the appellant is also duly supported with the audit report in Form 10CCB issued by the auditors, answering each question in the format and how the appellant satisfied all such conditions. In the final assessment order, the assessing officer has not pointed out violation of any such condition precedent. We agree with the submissions of the Ld. Counsel that the various errors (assuming without admitting) in submission of complete details/information by the appellant to the assessing officer, as noted in the assessment order, related to the computation of deduction, on the basis of which entire claim could not have been denied. Accordingly, in our view, the assessing officer was not justified in denying the benefit of deduction u/s 80IC to the appellant of Rs. 9972535090/-. In view of this ground No. 29 of the appeal of the assessee is allowed." This fact is identical with the earlier Assessment Years. The issue is squarely covered in favour of the assessee by the T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e TPO, but could not distinguish the decision of the Tribunal. 112. We have heard both the parties and perused the material available on record. The Tribunal in A.Ys. 2010-11 and 2011-12 held as under: 246) We have heard the rival contentions. We have seen the details of expenses incurred by the assessee. The same are routine expenses, which are quite reasonable having regard to the size and magnitude of the company. Such expenses are incurred year after year, which are always allowed deduction. We also note that similar issue was allowed in the assessee's own case for assessment year 2008-09. The relevant observations of the Tribunal for assessment year 2008-09 are as under: 247) "51. We have considered the submissions and arguments of both the parties on the issue. Ld. Counsel of the assessee submitted that the claim of expenses was pertaining to the expenses which were incurred from time to time on miscellaneous repair/maintenance like building maintenance, whitewash, paint work, plastering, enamel and premium work, replacement of roof cladding sheet/ kharanja on the various existing assets which did not result in any manner in increase of production capacity and the expens ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ruction of Air Intake Room DG set. Expenditure is clearly capital in nature. As regard balance of the payment at Rs. 1439892, where the assessee claims them to be in the nature of repairs, the Auditor has reported that vouchers are not available. Only detail submitted by the assessee is a list the provision of capital nature work as on 31.03.08. Though the inner items appear to be in the nature of repairs but no vouchers were available to the Special Auditor during the course of audit or submitted to the AO in response to the reply of final show cause. Therefore, AO is inclined to go by the nature of these expenses as given by the assessee itself i.e. provision for capital nature work'. Entire amount of Rs. 1800301/- is therefore inadmissible being capital in nature. Therefore, after allowing depreciation @10% amounting to Rs. 90015, for the period of 6 months, amount of Rs. 17,10,286/- is added to the income of the assessee. The DRP vide its order dated 28.03.2013 has decided this issue in favour of Revenue. Accordingly, in conformity with the order of DRP, an addition of Rs. 17,10,286 is made to the total income of the assessee. " 54. In view of above conclusion of the AO, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Ld. and assessing officer respectfully following the decision of the coordinate bench in assessee's own case for earlier years and consequent order of the Ld. and assessing officer after examining the complete details in the result, we direct the Ld. and assessing officer to delete the disallowance made of Rs. 1 825 5930/-by holding that expenditure incurred of Rs. 1 976 6172 is allowable repairs and maintenance expenditure on the existing assets of the company and is revenue in nature. In the result ground No. 14 of the appeal of the revenue is dismissed." This fact is identical with the earlier Assessment Years. The issue is squarely covered in favour of the assessee by the Tribunal's order for A.Ys. 2010-11 & 2011-12. Besides this the Revenue has accepted this issue and has not challenged the same in Hon'ble High Court. Thus, this issue attains finality. Therefore, Ground No. 30 to 30.1 are allowed in favour of the assessee. 113. Ground No. 31 to 31.6 are relating to TDS at lower rate or wrong provision (payment made to M/s. G2 RAMS India Pvt. Ltd. for event organization) amounting to Rs. 24.40 crores. The assessee had incurred expenditure on account of display of hoarding ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me would be covered under Section 194C and not as professional/technical service under Section 194J of the Act. While holding as above, the Tribunal elaborately discussed the meaning of 'work contract' u/s 194C vis-à-vis the expression 'technical service' referred in Section 194J of the Act. 115. The Ld. DR relied upon the Assessment Order and Order of the TPO, but could not distinguish the decision of the Tribunal. 116. We have heard both the parties and perused the material available on record. The Tribunal for A.Ys. 2010-11 and 2011-12 held as under: "132) We have carefully considered the rival contentions. The facts are not in dispute that the contract entered by the appellant with G2RAMS India Pvt. Ltd. involved composite services in relation to organizing an event, viz., arrangement of hotels, airport transfers, engagement of various artists, staging of events, etc. The issue that arises is whether such composite services fall within the meaning of contract for carrying out work u/s 194C or within the meaning of technical or professional services u/s 194J of the Act. Firstly, dwelling upon the applicability of section 194J, the words "professional or techni ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tration was distinguished from management, but it is now recognised that management has a role even in civil services. According to the Fontana Dictionary of Modern Thought, page 366, management was traditionally identified with the running of business. Therefore, management as a process is practised throughout every organization from top management through middle management to operational management.' Recently this Court in CIT v. Bharti Cellular Ltd., [ 2009] 319 ITR 139/[2008] 175 Taxman 573 had observed:- 'The word "manager" has been defined, inter alia, as: "a person whose office it is to manage an organization, business establishment, or public institution, or part of one; a person with the primarily executive or supervisory function within an organization, etc., a person controlling the activities of a person or team in sports, entertainment, etc." It is, therefore, clear that a managerial service would be one which pertains to or has the characteristic of a manager. It is obvious that the expression "manager" and consequently "managerial service" has a definite human element attached to it. To put it bluntly, a machine cannot be a manager.' Reference can ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ase. The non-resident had not undertaken or performed "technical services", where special skills or knowledge relating to a technical field were required. Technical field would mean applied sciences or craftsmanship involving special skills or knowledge but not fields such as arts or human sciences (see paragraph 24 below)." "24. The OECD Report on e-commerce titled, Tax Treaty Characterisation Issues arising from e-commerce: Report to Working Party No.1 of the OECD Committee on Fiscal Affairs dated 01st February 2001, has elucidated:- 'Technical services 39. For the Group, services are of technical nature when special skills or knowledge related to a technical field are required for the provision of such services. Whilst techniques related to applied science or craftsmanship would generally correspond to such special skills or knowledge, the provision of knowledge acquired in fields such as arts or human sciences would not. As an illustration, whilst the provisions of engineering services would be of a technical nature, the services of a psychologist would not. 40. The fact that technology is used in providing a service is not indicative of whether the service is of a te ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... managerial nature are services rendered in performing management functions. The Group did not attempt to give a definition of management for that purpose but noted that this term should receive its normal business meaning. Thus, it would involve functions related to how a business is run as opposed to functions involved in carrying on that business. As an illustration, whilst the functions of hiring and training commercial agents would relate to management, the functions performed by these agents (i.e. selling) would not. 44. The comments in paragraphs 40 to 42 above are also relevant for the purposes of distinguishing managerial services from the service of making data and software (even if related to management), or functionality of that data or software, available for a fee. The fact that this data and software could be used by the customer in performing management functions or that the development of the necessary data and software, and the management of the business of providing it to customers, might itself require substantial management expertise is irrelevant as the service provided to the client is neither managing the client's business, managing the supplier's ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l and Consultancy service" would denote seeking of services to cater to the special needs of the consumer/user as may be felt necessary and the making of the same available by the service provider. It is the above feature that would distinguish/identify a service provided from a facility offered. While the former is special and exclusive to the seeker of the service, the latter, even if termed as a service, is available to all and would therefore stand out in distinction to the former." On analysis of the aforesaid cases, the aforesaid three words used in section 9(1)(vii) can be understood in the following manner: (i) Managerial - Services essentially involving controlling, directing or administering the business of the service recipient (ii) Consultancy - Advisory services involving rendered by someone who has special skills and expertise in rendering such advisory (iii) Technical - Services provided through human intervention, involving or concerning applied and industrial science In other words, in short, the services provided by the vendors should predominantly involve specialized skills. Having reached the aforesaid conclusion, it would be pertinent to understand th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t. In the present case, the services provided by the vendor, in our opinion, are predominantly physical or, in other words, predominantly not based on mental or intellectual attributes, being that of organizing an event involving booking of hotel, organizing airport transfers, organizing various artistes and professionals to stage the show, etc. The vendor has acted as a 'one-stop shop' for the appellant for coordinating with all the other thirty- party professionals or service providers. In our opinion, the predominant attributes in the service so provided by the vendor is that of contract for carrying out work, which would more appropriately be covered u/s 194C instead of section 194J of the Act. Accordingly, we hold that there was no error on the part of the appellant in deducting tax at source u/s 194C, instead of section 194J of the Act. In view of above, ground No. 28 of the appeal of the assessee is allowed holding that the Ld. assessing officer has wrongly held that take should be deducted on this payment under the provisions of section 194J of the act and according to us, the assessee has rightly rejected the tax under section 194C of the income tax act. Therefore, these e ..... X X X X Extracts X X X X X X X X Extracts X X X X
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