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TMI Blog2018 (4) TMI 1735X X X X Extracts X X X X X X X X Extracts X X X X ..... xpenses (hereinafter referred to as 'the AMP expenses') incurred by the appellant. 2.1 That on the facts and in the circumstances of the case, the DRP erred in law in making transfer pricing adjustment in respect of expenditure incurred on advertising, marketing and publicity ("AMP expenses"). 2.2 That on the facts and in the circumstances of the case and in law, the DRP erred in directing the assessing officer to determine the Transfer Pricing adjustment in respect of AMP expenses unilaterally incurred by the appellant when the same was duly examined / considered by the TPO in the course of Transfer Pricing assessment proceedings. 2.3 That on the facts and in the circumstances of the case and in law, the DRP erred in imputing the Transfer Pricing adjustment without confronting to the assessee the material sought to be relied to construe an international transaction in respect of AMP expenses and erred in not providing opportunity in terms of section 92C(3) of the Income-tax Act ('the Act'). 2.4 2.4. The Transfer Pricing adjustment, made by the DRP, in respect of AMP expenses without providing an opportunity as per the requirement of section 92C(3) of the Act is unlawfu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lant even if AMP expenses incurred by the appellant are separately benchmarked applying the guidelines prescribed by the Hon'ble Delhi High Court in the case of Sony Ericsson Mobile Communications India Pvt Ltd 374 ITR 118. 2.13 The DRP/TPO erred on facts and in law in not appreciating that such a Transfer Pricing adjustment cannot at all be made in law without determining the Arm's Length Price ("ALP") by applying one of the methods specified in section 92C of the Act. 2.14 Without prejudice that the DRP/TPO erred on facts and in law, in not appreciating that the AMP expenses incurred by the appellant were appropriately established to be at arm's length applying Transactional Net Margin Method ('TNMM'). 2.15 Without prejudice, that the DRP erred on facts and in law in rejecting benchmarking of AMP expense by applying TNMM, allegedly holding that the assessee has failed to show that the transactions are 'closely linked' in terms of Rule 10A(d) and that it has not been able to discharge its burden of proof and substantiate its claim that only entity level margin can be seen in such circumstances. 2.16 Without prejudice, the DRP/TPO erred on facts and in law in applying a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not appreciating that the royalty is paid by the appellant on net sales after deducting the cost of imported components, standard bought out components and export commission and is a necessary cost incurred by appellant for manufacture of goods. 3.5 That the assessing officer/TPO erred in not appreciating that payment of royalty is a necessary cost incurred by the appellant for manufacture of goods. Corporate tax Issues: Disallowance of Royalty and Technical guidance fees: 4. That the assessing officer/ DRP erred on facts and in law in disallowing royalty amounting to Rs. 18,31,67,000 and technical guidance fee amounting to Rs. 10,20,44,000 paid to Honda Motor Company, Japan as per the 'Technical Collaboration Agreement' ("TCA") as capital expenditure incurred for acquisition of intangible asset and instead allowing depreciation @25%. 4.1. That the assessing officer/ DRP erred on facts and in law in holding that in terms of the Technical Collaboration Agreement, intellectual property right developed by Honda, Japan has been transferred to the appellant. 4.2 That the assessing officer/ DRP erred on facts and in law in holding that in terms of TCA, patent for the ne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fter year and was revenue neutral in nature. 5.2 Without prejudice, that the assessing officer/ DRP erred on facts and in law in not allowing expenses amounting to Rs. 20.83 lakhs, being expenses other than provision of service coupons debited under the head 'service expenses'. 5.3 That the assessing officer/ DRP erred on facts and in law in not allowing the claim of the assesse amounting to Rs. 45.82 lakhs, being the amount of last year's closing provision expended during the current year, which was disallowed in that year, resulting in double taxation. Disallowance of provision for warranty: 6. That the assessing officer/ DRP erred on facts and in law in disallowing provision for warranty debited in the Profit and Loss statement, amounting to Rs. 11,13,000, being the amount of expenses estimated by the assessee to be incurred on account of after sales warranty of power products sold during the relevant previous year, on the ground that same is an unascertained liability. 6.1 That the assessing officer/ DRP erred on facts and in law in allegedly holding that estimate of provision for warranty by the assessee was not based on any scientific method and excessive and t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns of Rs. 19,54,80,6000/- on account of Transfer Pricing Adjustment, Rs. 18,31,67,000/- on account of capitalization of Royalty which is not allowable u/s 37(1) being not wholly and exclusively for the purpose of assessee's business. Further the Assessing Officer made addition of Rs. 10,20,44,0000/- on account of capitalization of Technical Guidance Fees and disallowance of Rs. 103,15,000/- in respect of provision of service coupon as well as Rs. 11,13,000/- in respect of provision of warranty. 4. Being aggrieved by the Assessment Order passed u/s 143(3) r.w.s. 144C(13) of the Income Tax Act, 1961, the assessee filed present appeal before us. 5. The Ld. AR submitted that as relates to Ground No.1, the same is general in nature. The Ld. AR submitted that Ground Nos. 2 to 2.19 relates to Transfer Pricing Adjustment Rs. 10,54,80,600/-. For the relevant assessment year, no adjustment on account of AMP expenses was made by the Transfer Pricing Officer ('TPO') while passing order under section 92CA(3) of the Act. However, the DRP directed the TPO to make the adjustment on account of AMP expenses applying Cost Plus Method following the order for AY 2011-12. This issue is covered in favo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion under Section 10 (2) (xv) of the Act (Indian Income Tax Act, 1922) if it satisfies otherwise the tests laid down by the law." 39. The OECD Transfer Pricing Guidelines, para 7.13 emphasises that there should not be any automatic inference about an AE receiving an entity group service only because it gets an incidental benefit for being part of a larger concern and not to any specific activity performed. Even paras 133 and 134 of the Sony Ericsson judgment makes it clear that AMP adjustment cannot be made in respect of a full-risk manufacturer. 40. Certain additional facts have been mentioned by the Assessee in its written note of submissions. It is pointed out that during the financial year 2007-2008 relevant to the AY in question, of the total turnover of Rs. 251.06 crore only Rs. 9.57 crore, constituting 3.81 per cent, is towards distribution activity whereas the balance revenue of Rs. 241.48 crore was from the manufacturing activity. Further it is pointed out that the contention of the Revenue that market development in India is the function of the AE is factually incorrect. It is pointed out that para 4.30 of the TP documentation has stated that the assessee plans and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s related to Ground Nos. 3 to 3.5, the Ld. DR relied upon the Assessment Order and order of the TPO as well as directions of the DRP. 10. We have heard both the parties and perused the material available on record. The submission of the Ld. AR that this issue is also covered in favour of the assessee, is justified by the order passed in ITA No. 5713/Del/2011, 6023/Del/2012, orders dated 25/07/2014 & 12/12/2014 respectively as well as the Hon'ble High Court decision in assessee's own case for Assessment Year 2008-09 being ITA No. 538/2015 order dated 14/1/2016. The finding given by the Tribunal which was sustained by the Hon'ble High Court for Assessment Year 2008-09 is as follows:- "9. The next issue agitated by the assessee vide Ground No. 5 to 5.4 is found discussed in the draft assessment order at Pages 3 to 13 and in the DRP's order at Page 7 para 5.1. The relevant facts are that the assessee paid royalty of Rs. 8,77,14,255/- and technical grounded fee of Rs. 1,74,64,000/- to M/s Honda r Company, Japan. The AO held the expenditure to be capital expenditure disallowed the same. The assessee before the DEP placed reliance upon so- treatment given by the AO in 2007- 08 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ITA No.-5713/Del/2011 the Co-ordinate Bench following the view taken in M/s Hero Motor Corp Ltd. Vs ACIT order dated 23.11.2012 in ITA No.- 5130/Del/2010 rendered by the Delhi "C" Bench of the Tribunal by detailed finding in paras 7.4 to 7.7 pages 22 to 40 confirmed the relief granted by the CIT(A) holding that the comparative clauses based on the agreement in the case of the assessee and its' sister concern_were pari materia and-consequently the payments were revenue in nature. Respectfully following the order of the Co-ordinate Bench in the immediately preceding assessment year, Ground Nos.-5 to 5.4 are allowed. 13. The next issue agitated by the assessee in the present appeal is addressed by Ground-Nos.-6 to 6.8. "A perusal ofnhe record shows that the payment of Rs. 5,19,96,673/- paid to-M/s Honda Motors Company, -Japan was di sal lowed, by the AO who held it to be in the nature of royalty and as such a disallowance of the above amount was made as TDS thereon was not deducted. The issue challenged before the DRP was confirmed on the reasoning that it has not been finally' settled as such it was considered not appropriate to interfere. The Ld. AR relies upon the order ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urisdictional High Court in the case of CIT v. Hero Honda Motors Ltd. 372 ITR 481 was concerned with similar agreement qua payment of royalty to Honda Motor Co., Japan. On examining the terms of the agreement under consideration, the Court was pleased to dismiss the appeal of the Revenue authorities and conclusively hold that expenditure incurred for payment of royalty shall be revenue in nature. Referring to the aforesaid decision, in assessee's own case for assessment years 2007-08 and 2008-09, this issue has been confirmed by the Hon'ble Delhi High Court in ITA No. 312/2015 & 538/2015 vide order dated 14.01.2016, wherein the Court has not admitted the question on issue whether payment of royalty and technical guidance fees is revenue in nature or not. Similarly, in assessment year 2009- 10, the Hon'ble Delhi High Court in ITA No. 118/2017 vide order dated 01.03.2017 has not admitted the question on issue whether payment of royalty and technical guidance fees is revenue in nature or not. Similarly, In assessment year 2010-11, the DRP, vide order dated 21.11.2014, had deleted the addition proposed by the assessing officer, following which no disallowance was made in the final asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of the Hon'ble High Court dated 14/01/2016 in case of the assessee wherein for assessment year 2008- 2009, Hon'ble high court did not admit similar question. He further submitted that for assessment year 2010- 2011 the assessing officer himself has accepted the claim of the assessee and did not make any disallowance on the aforesaid issue. He further submitted that issue is also squarely covered in favour of the appellant in assessee's own case for assessment year 2009 - 10 and 2010 - 11 by order of tribunal. 18. Ld. departmental representative relied upon the orders of the lower authorities, however, did not controvert that Hon'ble high court has not admitted this issue in case of the assessee for assessment year 2008 - 09 and therefore the issue is now conclusively decided in favour of the appellant. 19. We have carefully considered the rival contentions and also perused relevant materials on record. On identical issue, Hon'ble Delhi High Court in assessee's own case in ITA No. 538/2015 dated 14-1-2016 has not admitted the question on issue whether the payment of royalty and technical guidance fees is revenue in nature or not. Hon'ble high court ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the parties and perused the material available on record. As per the submissions of the Ld. AR, this issue is also covered by the decision of the Tribunal in the assessee's own case for Assessment Year 2011- 12 being ITA No. 1573/Del/2016 order dated 26/8/2016. The Tribunal held as under: "25. Therefore in view of the above decision of the Hon'ble Supreme Court in Rotork Controls India (P) Limited vs. CIT (supra) wherein the warranty provisions, which are similar to the after sales service provisions, are held to be allowable expenditure as such provisions are not contingent but definite and are based on the past history of the claims arising, therefore allowable as deductions under section 37(1) of the income tax act. We do not find any difference in the claim of after sales service and warranty expenditure as both are arising out of the obligating event of sales made by the assessee. In the case of the appellant the provision of after sales services has also been made based on the past business history of the appellant and therefore, it cannot be said that it is made on arbitrary basis. Further the contention of the Id. AO is not correct stating that assessee claims excess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e. 21. As relates to Ground Nos. 6 to 6.2, the Ld. DR relied upon the assessment order and DRP directions. 22. We have heard both the parties and perused the material available on record. The warranty provisons were disallowed in subsequent years for 1997- 98, 1998-99 & 2001-02 which was deleted by the Tribunal vide order dated 31/7/2006 since no disallowance of provisions for warranty was made in any of the preceding year and the said provision was consistently allowed by the Revenue due to the decision of the Tribunal. This issue is also covered in favour of the assessee. Ground Nos. 6 to 6.2 is allowed. 23. As relates to Ground No. 7 regarding short credit of advance tax of Rs. 2,27,300/-, the Ld. AR submitted that the direction may be issued to the Assessing Officer to allow the claim after verification. 24. As relates to Ground No. 7, the Ld. DR relied upon the assessment order. It can be seen that short credit of advance tax was not at all verified by the Assessing Officer. Therefore, it will be appropriate to remand this issue to the file of the Assessing Officer for further verification. Needless to say, the assessee be given full opportunity of hearing by following pri ..... X X X X Extracts X X X X X X X X Extracts X X X X
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