2014 (6) TMI 6 - AT - Income Tax

Tribunal upholds CIT(A) decisions on royalty, model fee, and software expenses, remands transfer pricing and DEPB issues.

ACIT Circle-12(1), New Delhi Versus Hero Honda Motors Ltd.

ACIT Circle-12(1), New Delhi Versus Hero Honda Motors Ltd. - TMI Issues Involved:1. Deletion of addition on account of royalty expenses.2. Deletion of addition on account of model fee for obtaining use of technical know-how.3. Deletion of addition on account of expenditure on software claimed under section 37(1).4. Deletion of addition on account of Transfer Pricing Adjustment.5. Denial of benefit of deduction under section 80HHC on the custom duty benefit under DEPB Scheme.6. Treatment of interest income as 'income from other sources' and netting of interest expenditure.7. Disallowance of deduction under section 80IA for the captive power generating unit.8. Levy of interest under section 234D.Detailed Analysis:1. Deletion of Addition on Account of Royalty Expenses:The assessee, engaged in manufacturing and sale of motorcycles, paid royalty to its joint venture partner, Honda Motor Company, Japan, under a Technical Collaboration Agreement. The Assessing Officer (AO) treated 25% of the royalty as capital expenditure, relying on the Supreme Court decision in Southern Switchgear Ltd. Vs. CIT. The CIT(A) deleted the disallowance, treating the expenditure as revenue expenditure. The Tribunal upheld the CIT(A)'s decision, following previous Tribunal orders in the assessee's own case for earlier years, where similar payments were allowed as revenue expenditure.2. Deletion of Addition on Account of Model Fee for Obtaining Use of Technical Know-How:The assessee paid a model fee to Honda for the use of technical know-how for new models. The AO disallowed 25% of the fee, treating it as capital expenditure. The CIT(A) allowed the expenditure as revenue expenditure, consistent with previous Tribunal decisions in the assessee's own case. The Tribunal upheld the CIT(A)'s decision, citing the principle of consistency and previous rulings.3. Deletion of Addition on Account of Expenditure on Software Claimed under Section 37(1):The assessee incurred expenditure on software licenses, claiming it as revenue expenditure. The AO treated the expenditure as capital in nature. The CIT(A) deleted the addition, holding that the expenditure facilitated day-to-day operations and did not provide an enduring benefit. The Tribunal upheld the CIT(A)'s decision, following its previous order in the assessee's own case for the Assessment Year 2002-03.4. Deletion of Addition on Account of Transfer Pricing Adjustment:The AO applied the Comparable Uncontrolled Price (CUP) method to determine the arm's length price of imported components, comparing it with prices of locally sourced components. The CIT(A) rejected the CUP method, favoring the Transactional Net Margin Method (TNMM) used by the assessee. The Tribunal remanded the issue back to the AO for re-adjudication, directing verification of the availability of raw materials from domestic sources, consistent with its decision in the assessee's case for Assessment Year 2006-07.5. Denial of Benefit of Deduction under Section 80HHC on the Custom Duty Benefit under DEPB Scheme:The AO excluded 90% of the DEPB benefit from profits, treating it as 'other receipts' under clause (baa) of Explanation to section 80HHC. The CIT(A) upheld this treatment. The Tribunal set aside the issue to the AO for verification in light of the Supreme Court decision in Topman Exports Vs. CIT and other relevant case law, directing re-computation of the deduction under section 80HHC.6. Treatment of Interest Income as 'Income from Other Sources' and Netting of Interest Expenditure:The AO treated interest income as 'income from other sources,' excluding it from business profits for section 80HHC deduction. The CIT(A) upheld this treatment. The Tribunal remanded the issue to the AO for verification and re-computation, following the Delhi High Court decision in Shriram Honda Power Equipment, which mandates netting of interest expenditure against interest income.7. Disallowance of Deduction under Section 80IA for the Captive Power Generating Unit:The AO computed profits of the power generating unit using the rate at which power was supplied by the State Electricity Board, not the rate adopted by the assessee. The CIT(A) upheld this approach. The Tribunal dismissed the assessee's appeal, following its decision in the assessee's case for Assessment Year 2006-07, which held that the market rate for power should be the rate at which it is supplied by the State Electricity Board.8. Levy of Interest under Section 234D:The AO levied interest under section 234D, which the CIT(A) upheld. The Tribunal confirmed the levy, following the amendment by the Finance Act, 2012, which made section 234D applicable retrospectively to assessment years before 1st June 2003, if the assessment was completed after that date.Conclusion:The Tribunal upheld the CIT(A)'s decisions on royalty expenses, model fee, and software expenditure, following consistency and previous rulings. It remanded the issues of transfer pricing adjustment and DEPB benefit deduction to the AO for verification and re-adjudication. The Tribunal confirmed the AO's treatment of interest income and the disallowance of section 80IA deduction, following established case law. It also upheld the levy of interest under section 234D, following the retrospective amendment. The appeals were partly allowed for statistical purposes.