TaxTMI 
TaxTMI 
2016 (5) TMI 869
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....n computing the income of the appellant at Rs. 39,11,70,920 against the returned total income of Rs. 23,08,71,683. Transfer Pricing Issues: 2. That the assessing officer erred on facts and in law in making addition to the income of the appellant to the extent of Rs. 5,25,76,004 on account of the alleged difference in the arm's length price of international transactions. Advertisement, marketing and sales promotion expenses: 3. That the assessing officer erred on facts and in law in making transfer pricing adjustment in relation to the advertisement, marketing and sales promotion expenses (hereinafter referred to as 'the AMP expenses') incurred by the appellant. 3.1. That on the facts and in the circumstances of the case, the DRP erred in law in upholding, in principle, transfer pricing adjustment made by the assessing officer / TPO in respect of expenditure incurred on AMP expenses. 3.2. The Assessing Officer / TPO erred on facts and in law in not appreciating that the only Transfer Pricing adjustment permitted by Chapter X of the Act was in respect of the difference between the arm's length price (ALP) and the contract or declared price. 3.3. The DRP erred on facts an....
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....ement between the appellant and the associated enterprise, the associated enterprise was under no obligation to reimburse AMP expenses incurred by the appellant for sale of its products in India. 3.10. The DRP/TPO erred on facts and in law in not appreciating that the advertisement and marketing expenses were incurred by the appellant wholly and exclusively for purposes of its business and not on behalf of or for the benefit of the AE; any benefit to the AE being only incidental. 3.11 That the assessing officer erred on facts and in law in not appreciate the A&M expenses incurred by the Assessee were towards the products manufactured and owned by the assessee and not towards the brand, per se; 3.12 That the assessing officer erred on facts and in law in not appreciating that the AMP expenses incurred by the appellant, did not result in creation of any marketing intangibles; much less on account of the AE. 3.13 Without prejudice that the assessing officer erred on facts and in law in ignoring the fact that, since the appellant earns return commensurate with other brand owners, the appellant is adequately compensated for its functions and AMP expenses. 3.14 Without prejudic....
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....ently, the appellant is responsible / eligible for the related risks and reward. 3.22 That the assessing officer/TPO erred on facts and in law in holding that the appellant should have earned a mark-up in respect of the AMP expenses, alleged to have incurred for and on behalf of the associated enterprise. 3.23 Without prejudice that, the assessing officer/TPO erred on facts and in law in holding the AMP expenses incurred by the appellant to be "excessive" on the basis of a "bright line limit" arrived at by considering inappropriate comparables, not having similar product/ brand profile as the appellant. 3.24 Without prejudice that the assessing officer/TPO erred on facts and in law in considering selling and distribution expenses for the purpose of calculating alleged AMP expenditure of the appellant. 3.25 Without prejudice that the assessing officer/TPO erred on facts and in law in considering the following companies as comparable for benchmarking advertisement and publicity expenses: Companies Advertisement expenses (% of sales) 1.Jyoti Ltd. 0.02 2.Powerica Ltd. (in lacs). 0.37 3.Shakti Pumps (India) Ltd. 8.16 4.WPIL Ltd. 2.53 5.Elgi Electric &Inds. Ltd. ....
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....ntangible asset and instead allowing depreciation @25%. 5.1 Without prejudice, that the assessing officer erred on facts in disallowing technical guidance fee of Rs. 1,36,21,453 in place of Rs. 1,00,56,950. 5.2. That the assessing officer 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. 5.3. That the assessing officer erred on facts and in law in holding that in terms of TCA, patent for the new developed project has been transferred to the licensor, i.e., appellant. 5.4. That the assessing officer erred on facts and in law in holding the payment of royalty and technical guidance fee to be capital expenditure on the ground that- (i) In the event of the expiration of the contract, the assessee may continue to use the know-how and the Industrial Property Rights for the purposes of manufacture, assembly, procurement, sale, delivery and service of the products and the parts. (ii) The terms of agreement are quite comprehensive and the whole technical know-how to set up the business of the appellant are provided by Honda. (iii) The asses....
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.... trade mark or provision of technical assistance, for which separate royalty payment was being made on which tax is duly deducted under section 195 of the Act. 6.6. Without prejudice that the assessing officer erred on facts and in law in not appreciating that payment of export commission being for earning income from source outside India, cannot be characterized as royalty or fee for technical service as per section 9(1)(vi)(b) or section 9(1)(vii)(b) of the Act respectively. 7. That the assessing officer erred on facts in not allowing credit for tax deducted at source amounting to Rs. 71,407 from the tax payable without assigning any reason thereof. 8. That the assessing officer erred on facts and in law in levying interest under section 234B of the Act." Grounds raised in A.Y. 2010-11: "General: 1. That the impugned order of assessment framed by the assessing officer in pursuance of the directions of the Dispute Resolution Panel (hereinafter referred to as 'DRP') under Section 143(3) read with Section 144C of the Income-tax Act, 1961 ( 'Act'), is bad in law, violative of principles of natural justice and void ab-initio. 1.1 That assessing officer erred on facts and....
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....ought to have been borne by the appellant. 3.6 That the DRP/TPO erred on facts and in law in not appreciating the fact that since the appellant was bearing the risk related to the marketing activity and was also entitled to retain the profit attributable to such activity, the appellant had rightly borne the expenditure relatable to such marketing function. 3.7 That the DRP/TPO erred on facts and in law in re-characterizing the appellant, a licensed manufacturer, as a limited risk service provider entitled to cost plus remuneration for its marketing efforts. 3.8 The DRP/TPO erred on facts and in law in holding thatexpenditure incurred by the appellant which incidentally resulted in brand building for the foreign AE, was a transaction of creating and improving marketing intangibles for and on behalf of its foreign AE and further that such a transaction was in the nature of provision of a service by the appellant to the AE. 3.9 That the assessing officer erred on facts and in law in not appreciating that the characterization of the appellant being that of a full fledged manufacturer and the sole beneficiary of the AMP expenditure incurred by it, justifies the conduct of the ap....
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....in law in not appreciating that the AMP expenses incurred by the appellant, did not result in creation of any marketing intangibles; much less on account of the AE. 3.19 Without prejudice that the assessing officer erred on facts and in law in ignoring the fact that, since the appellant earns return commensurate with other brand owners, the appellant is adequately compensated for its functions and AMP expenses. 3.20 Without prejudice that the assessing officer erred on facts and in law, in not appreciating that the AMP expenses incurred by the appellant was appropriately established to be at arm's length applying Transactional Net Margin Method (TNMM). 3.21 The DRP/TPO erred on facts and in law in applying Bright Line Test ("BLT") for computing adjustment on account of expenditure on advertisement and brand promotion expenses, without appreciating that in absence of specific provision in the Transfer Pricing statutory provisions in India., adjustment on account of the arm's length price of the advertisement and brand promotion expenses could not be made. 3.22 The DRP/TPO erred on facts and in law in not appreciating thatsuch a Transfer Pricing adjustment cannot at all be ma....
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....ght to have considered the following companies as comparable for benchmarking the advertisement and publicity expenses: Name of the Company AMP/Sales Kirloskar Brothers Ltd. 4.70% Kirloskar Oil Engines Ltd. 4.04% Best and Crompton Engg Ltd 4.42% Average 4.39% 3.31 Without prejudice that the assessing officer/TPO erred on facts and in law, in not appreciating that the AMP expenses incurred by the appellant was appropriately established to be at arm's length applying Transactional Net Margin Method (TNMM).. 3.32 That the assessing officer/TPO erred on facts and in law in holding that incurring of AMP expenses was a separate transaction and is to be evaluated separately. 3.33 That the assessing officer / TPO erred on facts and in law in holding that the appellant has rendered service to the AEs by incurring the AMP expense and by holding that markup has to be earned by the appellant in respect of the AMP expenses, alleged to have incurred for and on behalf of the AE. 3.34 Without prejudice, the assessing officer/TPO erred on facts and in law in not appreciating that markup, if at all, had to be restricted to the value added expenses incurred by the appell....
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.... in holding that the professional and consultancy charges incurred towards shifting of plant and machinery are an integral part of the business of the appellant, and therefore, the same should be treated as Capital in nature. 5.3 That the assessing officer/ DRP erred on facts and in law in holding that the appellant would secure an advantage of enduring nature on account of relocation of the appellant's factory. Re: Disallowance of provision on account of slow moving inventories 6. That the assessing officer/ DRP erred in disallowing provision for slow moving inventory debited in the Profit and Loss statement, amounting to Rs. 11,76,382, being the amount of expenses estimated by the appellant to be incurred on account of obsolescence/ slow moving inventory. 6.1 That the assessing officer/DRP erred on facts and in law in holding the provision for slow moving inventory, estimated by the appellant in accordance with Accounting Standard 2, issued by the Institute of Chartered Accountants of India, to be an unascertained liability, which was not an allowable expense 6.2 Without prejudice, that the assessing officer/DRP erred on facts and in law in making the aforesaid disallow....
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.... the various additions/ disallowances made in the assessment order. 4. Similarly, for Assessment Year 2010-11, the assessee company filed its return for the assessment year 2010-11 on 29.09.2010 declaring total income of Rs. 31,80,76,602. During the course of assessment proceedings, the AO noted that the assessee is paying royalty of Rs. 9,19,05,000 and a technical guidance fee of Rs. 2,00,87,000 to Honda Motor Co. Japan. The AO came to the conclusion that royalty and technical guidance fee were to be capitalised, after allowing depreciation of 25% on the same. 4.1 The AO further made addition of Rs. 1,11,47,000 towards relocation expenses towards shifting of factory of the assessee company, on the ground that such expenditure was capital in nature and had resulted in benefit of enduring nature to the assessee company. The AO also noted that the amount of Rs. 11,76,382 debited in the profit & loss account of the assessee company towards Provision of Slow Moving Inventory was not to be allowed since such expenditure in the nature of provision. 4.2 The AO further noticed that the assessee had entered into international transactions during the year under consideration. The TPO in t....
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....of Expenses to AEs 33,447 Cost Recharges In the Transfer Pricing study report, the international transactions have been benchmarked using Transactional Net Margin Method ("TNMM") as the most appropriate method with Operating Profit/Operating Revenue (OP/OR) ratio as profit level indicator. For the purpose of selecting comparables the appellant has selected companies engaged in manufacturing of engine and generators and the following filters were used for rejecting non-comparable companies: a. Companies for which sufficient information is not available b. Companies that do not have significant (less than 25%) foreign exchange earnings; c. Companies that have substantial (excess of 25%) related party transactions; d. Companies incurring persistent losses Accordingly, the appellant has analysed the OP/TC ratio of the following 10 comparable companies: S. No. Company Name OP/OC % Economic Activity 1 Birla Power Solutions -3.70% Gensets 2 Greaves Cotton Ltd 10.31% Gensets and Engines 3 Gujarat Forgings Ltd 4.56% Diesel Engines, Pumpsets 4 Jaksons Ltd 6.51% Gensets 5 Kirloskar Bros Ltd 7.65% Industrial and Engineering Pumps 6 ....
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....nt of the differential, which resulted in creation of marketing intangibles on account of promotion and development of brand, viz., 'Honda' owned by the associated enterprise. The Transfer Pricing Officer, accordingly, in the order passed under section 92CA(3) of the Act made an adjustment of Rs. 10,98,88,464 on account of the alleged difference in advertisement and promotion expenditure incurred by the appellant and the arm's length price of subsidy received from the associated enterprises (AEs) as follows: Computation of TP adjustment Amount (Rs. In lacs) Value of sales 3,058,005,000 AMP / Sales of the comparables 1% Amount that represents bright line 30,580,000 Expenditure on AMP by assessee 12,62,35,000 Expenditure in excess of bright line 9,56,55,000 Mark-up @ 14.88% 1,42,33,464 Reimbursement that assessee should have received. 10,98,88,464 Adjustment to assessee's income 10,98,88,464 A Special Bench was constituted in the matter of L.G. Electronics India Pvt. Ltd., to consider the above controversy relating to transfer pricing adjustment in relation to AMP expenses. The Special Bench, vide order dated 23-01-2013 in ITA No. 5140/Del/2011,....
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....emark in question, in the case of long term right of use of the same. This principle also squarely covers the present case. The appellant has a long term agreement for the use of the trademark 'Honda' in India. This clearly evidences the fact that the economic benefit arising out of the alleged promotion of the AE's logo is being enjoyed by the appellant. There is a clear opportunity and reasonable anticipation for the appellant to benefit from the marketing activities undertaken by it. This is clearly evidenced by the significantly higher profits made by assessee compared to its industry peers and also the very sizable year on year increase in its turnover. In view of the aforesaid, it is respectfully submitted that the economic ownership of the trademark 'Honda' rests with the appellant. The Hon'ble High Court in the case of Sony Ericsson Mobile Communications India Pvt Ltd vs CIT (ITA No 16/2014) disagreed with the finding of the Special Bench that the concept of economic ownership is not recognized under the Act. As held by the Hon'ble Delhi High Court decision in the case of Sony Ericsson Mobile Communications (supra), if the Indian entity is the economic owner of the brand ....
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....d not a distributor, the entire AMP expense is incurred at its own discretion and for its own benefit for sale of Honda products in India. In such circumstances, there does not result an international transaction and the appellant cannot be expected to seek compensation for the allegedly excess AMP expenditure incurred by it. The appellant, being a full-fledged manufacturer and not a distributor, entire AMP expense is incurred at its own discretion and for its own benefit for sale of Honda products in India. In the case of the appellant, the advertisements are aimed at promoting the sales of the product sold under trademark 'Honda' manufactured by the appellant and not towards promoting the brand name of the AE. In such circumstances, the alleged excess AMP expenditure does not result in an international transaction and the appellant cannot be expected to seek compensation for such expenses unilaterally incurred by it from the AE. 2. Nature of advertisements: It is submitted that advertisement and selling expenses have been incurred by the assessee only on the products dealt in by the appellant in India. The appellant in the advertisement promotes sale of these products dealt....
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....anted. In the present case, the operating profit margin of the appellant at 10.67% is higher than that of the comparable companies at 7.67% and TNMM has undisputedly been satisfied and accepted by the TPO. Since the operating margins of the appellant are in excess of the selected comparable companies, no adjustment on account of AMP expenses is warranted in the case of the appellant. 4. Without prejudice - Selling expenses not to be considered while computing the advertisement and marketing expenses It is respectfully submitted that for purpose of applying the bright line test, the TPO has considered selling and distribution expenses amounting to Rs. 7,13,41,000 as expenses incurred for promotion of 'Honda' brand. Such selling and distribution expenses are expenses incurred in connection with sale and do not lead to brand promotion as held by the Hon'ble Special Bench: S No. Particulars Amount (Rs) 1 Commission on sales 5,02,96,000 2 Sales Discount 2,10,45,000 Total 7,13,41,000 The TPO has not followed the Special Bench decision by not excluding selling and distribution expenses debited to the profit and loss account. It is submitted that the ....
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....of the Tribunal in the case of the LG Electronics. It was also submitted that the decision of the Special Bench in the case of LG Electronics has been considered and over-ruled by the Hon'ble Delhi High Court in the case of Sony Erickson. Relevant portion of the said order reads as follows: "5.2 It is seen that the Special Bench in L.G. Electronics case in para 17.4 has given certain directions on the basis of which the AMP is to be calculated. Para 17.6 further gives specific directions in regard to the comparables. On a consideration thereof, we are of the view that in the peculiar facts and circumstances of the case and the material available on record, it would be appropriate to restore the issue back to the file to the TPO with the direction to pass a speaking order in accordance with law taking into consideration the principles laid down by the Special Bench in L.G. Electronics case and in the eventuality they are modified or substituted by the decision of the Jurisdictional High Court in the case of Canon India Pvt. Ltd., the same shall also necessarily be taken into consideration. In view of the above, Ground No. 3 along with various subgrounds are allowed for statistical ....
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....fit 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 executes its own marketing strategy as it considers necessary and appropriate. Further as an independent manufacturer the Assessee bears all the risks associated with its business of manufacturing and sale of products in India and abroad. The condition in the license agreement that the technology will be used for sale of goods in ....
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....have been paid by the appellant on such sales. In this regard it is respectfully submitted that the TPO has failed to distinguish between the functional profile of a licensed manufacturer and a contract manufacturer. In the case of a licensed manufacturer such as the applicant, the seller is entitled to compensation which includes returns attributable to exploitation of intangibles such technical know- how etc. i.e. market determined prices. On the other hand, in the case of a contact manufacturer, the manufacturer acts in accordance with the instructions of the buyer and is only entitled to routine cost plus returns. It is submitted that the applicant continues to perform various critical functions such as production planning, vendor identification, procurement of raw material etc. irrespective of the fact as to whether the sales are made to third party customers or to the associated enterprises. However, the TPO, disregarding the fact that even with respect to sales made to associated enterprises the applicant is performing all the entrepreneurial functions and is assuming associated risks, arbitrarily characterized the applicant as a contract manufacturer. The difference....
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....nt from the financial results of the assessee that it has independent sales both domestic as well as exports. The assessee has sold the goods to the AEs on principal to principal basis and has received the sales consideration. The royalty is payable on the basis of manufacture of goods. Based on the submissions made before us and also the chart showing the price earned by the assessee from exports of goods to the AEs as well as non-AEs, the assessee has earned a premium which would not be in the case of a contract manufacturer. In case of sister concern of the assessee, identical payment of royalty was held to be allowable by the Tribunal in the case of M/s. Hero MotoCorp Ltd. XXX 13. In view of the above reasoning, we are of the view that there is no justification for disallowance of royalty on the export made to the AEs. Accordingly, the addition made by the AO/TPO by determining the ALP of royalty on exports to the AEs at "nil" is deleted." Reliance in this regard is also placed on the following decisions of the Tribunal: - Applicant's own case for assessment year 2008-09 (ITA No 6023/Del/2012) - Deputy CIT Vs. SonaOkegawa Precision Forgings Ltd. (ITA No. 5386/Del/2010....
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....s on the sales made to the AE, a corresponding reduction in the price charged to the AE would have to be given by the assessee, lest the cost for the sale come down. Such latter methodology was not advisable, for it would create problems in the accounting. Also, the impact on the taxable profits would be nil. 17. It was on taking into consideration all of the above that the ld. CIT(A) deleted the addition wrongly made by the AO. We do not find any reason to record any variance with the well reasoned elaborate findings of fact recorded by the ld. CIT(A). The same are hereby upheld." In the case of the assessee too, it is an admitted fact that the sales were made by the assessee to its associated enterprise at market determined prices. Moreover, the royalty paid under the Technology Agreement comprises an integral part of the cost of production, which has been recovered from the sale price. Accordingly, even applying the criteria laid down by the Hon'ble Tribunal, the assessee is operating as an independent manufacturer even with respect to sales made to AEs. In view of the aforesaid, it is submitted that the contention of the TPO that the assessee, while making sales to its asso....
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....th applying such method. Under the Transfer Pricing regulations contained in sections 92 to 92F of the Act, the mandate of the TPO is to determine the arm's length price of the international transaction, applying the most appropriate method, out of the five methods prescribed. The law does not empower the Transfer Pricing Officer to question the justification of the payment by disputing the genuineness of the agreement itself. The aforesaid has been clarified by CBDT vide Instruction No. 3 of 2003 dated 20-05-2003 as under: "- - - In order to maintain uniformity of procedure and to ensure that work in this important area proceeds smoothly and effectively, the following guidelines are hereby issued: (i) Reference to Transfer Pricing Officer (TPO): The power to determine arm's length price in an international transaction is contained in sub-section (3) of section 92C. However section 92CA provides that where the Assessing Officer considers it necessary or expedient so to do, he may refer the computation of arm's length price in relation to an international transaction to the TPO. Subsection (3) of section 92CA provides that the TPO after taking into account the material availab....
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....id decision of the Hon'ble Tribunal has been upheld by the Hon'ble Bombay High Court in CIT vs CA Computer Associates India Pvt Ltd (ITA no 20/2011). It is pertinent to note here that the royalty constitutes an essential part of the cost of sales relatable to export of products. Accordingly, since the exports of the appellant to the associated enterprise is based on the rights and licenses provided by Honda, for which royalty is being paid, the royalty payments cannot be separately evaluated. In view of the aforesaid, it would be appreciated that the transaction of payment of royalty on exports to AEs is intrinsically linked with the manufacture of goods exported to the AEs and has therefore been appropriately benchmarked by applying TNMM, at the entity level, as the most appropriate method. Reliance in this regard may be placed on the guidance note issued by the Institute of Chartered Accounts of India which states as under: "5.7 The factors referred to above are to be applied cumulatively in selecting the most appropriate method. The reference therein to the terms 'best suited' and 'most reliable measure' indicates that the most appropriate method will have to be selected aft....
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....ibunal in the case of Cummins India Ltd vs Addl CIT (ITA No 1616/PN/2011), wherein, interpreting Rule 10A(d) of the Rules, it was held as under: "26. In view of the ratio laid down by Pune Bench of the Tribunal in Demag Cranes & Components (India) Pvt. Ltd. Vs. DCIT (supra), it is held that where number of transactions are closely linked transactions, then the same can be aggregated and construed as a single transaction for the purpose of determining the arm's length price. In case, there is close link exists between the different transactions, the same should be treated as composite transaction and appropriate method should be applied to work out the transfer pricing analysis. Where two or more transactions emanate from common source being an order or contract or an agreement or an arrangement, then such transactions could be said to be closely linked as the nature, characteristic and terms of such transaction substantially flow from the said common source." In view of the aforesaid, it is submitted that the adjustment made by the TPO to the arm's length price of international transaction of payment of royalty without applying any of the prescribed methods is unlawful and....
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....ance of export commission, we have discussed this issue at length and have noted that even after reducing the export commission, the assessee derived the benefit of Rs. 13.05 crores by export. At the cost of repetition, we would like to mention that the export sale value was more than the domestic sale rate and the assessee has given a detailed working thereof, which is enclosed with this order in the form of Annexure-I. In the above working, the assessee has reduced the export commission. Therefore, by export to the AE of Honda Japan, the assessee has been benefited and was not at a loss. The further finding of the TPO that the position of the assessee company with regard to export was that of a contract manufacturer, in our opinion, is without any basis and in fact contrary to the facts on record. The raw materials have been purchased by the assessee in its own right. It is not the case of the TPO that the raw materials have been supplied by the AE. The assessee has sold the goods to AE on principal to principal basis and has received the sale consideration. In view of the above, in our opinion, there is no justification for disallowance of the royalty on the export. We may reite....
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....on of the Co-ordinate benches of the Tribunal in the assessee's own case for assessment year 2007-08 and 2008-09 in ITA Nos. 5713/Del/2011 and ITA No. 6023/Del/2012, wherein the Co-ordinate benches, after considering the decision rendered in the case of Hero Moto Corp Ltd. v. DCIT in ITA No. 716/Del/2008 and after making a comparison of the various clauses of the agreement was pleased to delete the addition made in the assessment order on account of payment of royalty and technical guidance fee. It was submitted that there is no change in the facts and circumstances of the present case. Copy of the aforesaid decisions of the Coordinate benches was filed. It was further pointed out that the decision of the Co-ordinate bench of the Tribunal in the case of Hero Moto Corp (supra) has been affirmed by the jurisdictional Delhi High Court in the case of CIT v. Hero Moto Corp in 372 ITR 481. It was submitted that the High Court has also held that payment of royalty and technical guidance fee is allowable business deduction. It was further submitted that the DRP in the subsequent assessment year 2010-11 has deleted identical disallowance proposed by the assessing officer on the basis of the....
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....fee and thus, no disallowance under section 40(a)(i) could be sustained. Respectfully following the order of the Coordinate bench in assessee's own case where no change in facts or circumstances has been pointed out, the additions made by applying section 40(a)(i) are directed to be deleted. Accordingly, these grounds of appeal stand allowed. In view of this decision of co-ordinate Bench in the case of assessee, the advance ruling relied on by the ld. DR does not help the revenue, as the said ruling is binding on that applicant and not upon the Tribunal u/s. 245S of the IT Act. 22. By way of ground No. 7 in appeal for A.Y. 2009-10, the assessee has agitated that credit for TDS amounting to Rs. 71,407/- has not been given by the AO without any reason. This issue is restored to the file of AO to verify the stand of assessee and accordingly to give credit thereof as per provisions of law. 23. The issue of interest u/s. 234B is consequential in nature and needs no adjudication. 24. Accordingly, the appeal for A.Y. 2009-10 is partly allowed for statistical purposes. 25. The next issue raised in Ground Nos. 5 to 5.3 in appeal for A.Y. 2010-11 relates to disallowance of Rs. 43,47,750 ....
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....s were incurred for the purpose of running the business of the appellant company as a more technically viable, efficient and profitable unit. The said expenses were incurred only for shifting of factory/machines from one place to the other without any enhancement in the manufacturing capacity. Such relocation, it would be noted, did not result in the establishment of a new/ independent set-up, which would contribute towards the profit making apparatus of the appellant company. It is respectfully submitted that no enduring benefit had accrued to the appellant as a result of such shifting expenses, much less in the capital field, as the appellant had merely consolidated the machines/spares at the Rudrapur factory with the existing factory at Greater Noida. Reference, in this regard, may be made to the following decisions wherein has been held that if the outgoing or expenditure is related to the carrying on, or conduct of the business, it may be regarded as an integral part of the profit making process and therefore revenue in nature: * Empire Jute Co. Ltd. v. CIT: 124 ITR 1 (SC) * CIT v. Associated Cement Companies Ltd.: 172 ITR 257 (SC) * Alembic Chemical Works Co. Ltd. v....
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....ubmitted, the above expenses were incurred on merely reallocation of the factory from Rudrapur to Greater Noida and no new asset has come into existence. Such expenses, therefore, are allowable revenue deduction and cannot be considered as capital in nature for the following cumulative reasons: (i) the expenses were indirect in nature mainly to dismantle, shift and install machines at new location; (ii) no new asset has come into being as a result of shifting expenses; (iii) there was no enhancement in existing manufacturing capacity and expenses were incurred only to shift existing machines from once place to the other." 26. On the other hand, the Ld. CIT/ DR relied on the order of the AO/ DRP to contend that the expenditure in consideration was relating to the shifting of plant and machinery, which being the capital assets of the assessee company, these expenses need to capitalized as per the provisions of law. It was further argued that the assessee company has established a new set-up at Greater Noida which has resulted in enduring benefit and accordingly, expenditure needs to be disallowed as capital in nature. 27. We have heard the rival submissions and perused th....
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....hat since expenditure in respect of the above amount was in the nature of provision, the said provision ought to have been added back to the income of the assessee. In this regard, it is respectfully submitted, that the provision for slow/ non-moving items was made by the assessee as per its internal policy based on industry norms viz., @ 100% of closing stock if inventory is not sold for period of 1 year and 50% of closing stock if inventory is not sold for period of 6 months to 1 year. Such provision was also in accordance with Schedule XIV of the Companies Act, 1956. In fact, neither the statutory nor the tax auditors have found the same to be not ascertainable or a contingent liability. It will be appreciated that in accordance with the Accounting Standard 2 on Valuation of Inventory, prescribed by Institute of Chartered Accountants of India, inventories have to be valued at the cost price or net realizable value, whichever is lower. Reference, in this regard, may be placed on the following cases wherein the aforesaid method of valuing the closing stock at cost or net realizable value, whichever is lower, for the purposes of the Act has been accepted as a recognized method ....