TaxTMI 
TaxTMI 
2016 (9) TMI 1471
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....tions i.e. CO Nos. 58 & 59/PN/2014 against the appeals filed by the Revenue. Since, the issues raised in the appeals and cross appeals by the assessee and the Revenue in the impugned assessment years are common and are arising from the same set of facts, these appeals and cross objections are taken up together for adjudication and are disposed of by this common order. 2. For the sake of convenience we are taking facts from ITA No. 1081/PN/2013. The brief facts of the case as emanating from records are: The assessee is a company incorporated under the Companies Act, 1956 and is engaged in manufacturing and sale of passenger cars. The assessee filed its return of income for assessment year 2003-04 on 31-10-2003 declaring income of Rs. 10,64,66,730/-under the provisions of section 115JB of the Income Tax Act, 1961 (hereinafter referred to as "the Act"). The case of the assessee was selected for scrutiny and accordingly first notice u/s. 143(2) was issued to the assessee on 18-10-2004. During the course of scrutiny assessment proceedings the Assessing Officer made certain additions/disallowances in the income returned by the assessee and assessed the total income at Rs. 36,26,96,....
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....he appeal, so as to enable the Hon'ble Tribunal to decide this appeal according to the law." In assessment year 2004-05 additions were made by the Assessing Officer in the income returned by the assessee on similar grounds. The appeals of the assessee for assessment years 2003-04 and 2004-05 were decided by the Commissioner of Income Tax (Appeals) vide common order. The assessee in its appeal for assessment year 2004-05 before the Tribunal has raised solitary issue which is identical to ground No. 1 raised in the appeal for assessment year 2003-04. The appeals by the assessee and the Revenue are taken up in seriatim for adjudication. First the appeals of the assessee are taken up for adjudication, followed by the appeals by the Revenue and then the cross objections. ITA Nos. 1081 & 1082/PN/2013 (Appeals by Assessee) 4. Shri R.R. Vora and Shri Pramod Achuthan appearing on behalf of the assessee submitted that the assessee had entered into an agreement with certain suppliers (Four in Numbers) whereby the assessee was required to purchase minimum quantity of material used for manufacturing cars. In case of any shortfall in procuring assured minimum quantity, the assess....
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....s' represent amount set-aside for a known liability even if the amount for same cannot be determined with substantial accuracy. Such amount is specifically excluded from the definition of 'reserve'. In the light of definition of 'Provision' and 'Reserve' given under the provisions of Companies Act, 1956, the 'provision for compensation' to module supplier is a provision as defined in Companies Act, 1956 and not a contingent liability. The ld. AR further submitted that in case of contractual liability where there is dispute with respect to quantum of liability and not with respect to incurrence of liability, the Courts have held that if such liability has been estimated, at least provisionally the same may be allowed for deduction in the year of claim, despite the dispute is not settled. In support of his submissions the ld. AR placed reliance on the following decisions : i. Bharat Earth Movers Vs. CIT, 245 ITR 0428 (SC); ii. CIT Vs. Hewlett Packard India (P) Ltd., 314 ITR 55 (Del. HC); iii. CIT Vs. H.P. Tourism development corporation Ltd., 35 taxmann.com 450 (HP). 4.3 The ld. AR further pointed that the Assessing Officer has made such disallowance only in the a....
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....iture has been debited to the Profit and Loss Account only once in assessment year 2003-04 and the net effect of entries passed by the assessee in assessment years 2004-05 and 2005-06 is Nil, no additional provision was created in assessment years 2004-05 and 2005-06. The ld. AR submitted that the Commissioner of Income Tax (Appeals) has rightly held the provision for octroi to be deductible for the purpose of calculation of MAT liability, however, due to some misunderstanding denied benefit to the assessee. 6. On the other hand Shri Rajeev Kumar representing the Department submitted that the assessee had not furnished complete details in respect of provision of compensation payable to module suppliers. In the absence of compete documents the Assessing Officer was not in a position to ascertain, whether the liability is contingent or ascertained. Further, there is no scientific basis for ascertaining the liability. In respect of ground No. 2 relating to provision for octroi payment, the ld. DR fairly admitted that there seems to be certain confusion in understanding the gamut of payment and the provision created by the assessee. The ld. DR submitted that the issue can be remitte....
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....ment years under appeal on account of compensation payable to module suppliers as under : Assessment year Amount 2003-04 Rs.1,11,33,418/- 2004-05 Rs.78,37,457/- 2005-06 Rs.2,53,03,903/- Thus, as against the provision of Rs. 4,42,74,778/- the assessee has made actual payment of Rs. 4,69,19,753/-. 8. The ld. AR of the assessee has drawn our attention to the definition of 'Provision' and 'reserve' as defined in Interpretations forming Part III to Schedule VI of Companies Act, 1956. The same are reproduced here-in-below : "(a) the expression "provision" shall, subject to sub-clause (2) of this clause, mean any amount written off or retained by way of providing for depreciation renewals or diminution in value of assets, or retained by way of providing for any known liability of which the amount cannot be determined with substantial accuracy; (b) the expression "reserve" shall not, subject as aforesaid, include any amount written off or retained by way of providing for depreciation, renewals or diminution in value of assets or retained by way of providing for any known liability;" A bare perusal of the definition of 'provision' would show ....
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.... as nature of liability is concerned, we have already held that if it is arising from the agreement the same is ascertained. Accordingly, ground No. 1 raised in the appeal by the assessee is allowed for statistical purpose. 11. In ground No. 2 the assessee has assailed the findings of Commissioner of Income Tax (Appeals) in holding that an amount of Rs. 1,39,78,291/- representing provision towards octroi has been deducted twice. It has been asserted that the Commissioner of Income Tax (Appeals) in principle has held that liability in respect of octroi payment is ascertained and is deductable for calculation of MAT liability. The observations of the Commissioner of Income Tax (Appeals) that the assessee has claimed the same amount as provision for octroi as well as expenditure for octroi on approval basis are against facts on record. The ld. AR has contended that the entry in respect of octroi creating provision in the beginning of the financial year has been reversed at the end of the financial year, thus, there is no double claim. The ld. DR has also admitted that there seems to be some error in understanding the issue by the Commissioner of Income Tax (Appeals). 11.1 In vie....
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....7985/Mum/2010 of ITAT Mumbai) 3. Whether on the facts and circumstances of the case and in law, the CIT(A) was justified in treating the royalty payment of Rs. 2,16,00,495/- as revenue expenditure when the assessee has acquired enduring benefit as it was conferred manufacturing rights as well as copyrights for technical product documentation etc and further when the Hon'ble DRP while deciding the case for AY. 2007-08 has also upheld this treatment given to royalty payment i.e. has held that royalty payment is of Capital nature. 4. Whether on the facts and in the circumstances of the case and in law, the Ld.CIT(A) was justified in directing the A.O. to allow Project Assistance Technical charges as deductible expenditure u/s. 37(1) of the Act, when the assessee has not been able to prove the basis of such payment, the nature of service rendered by the expatriates and also when the payment were not made in accordance with the project assistance agreement dated 11/12/1994. 5. Whether on the facts and circumstances of the case and in law, the CIT(A) was justified in deleting addition made on account of homologation expenses, without calling for such details in support of it....
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..... The royalty payment @3%, works out to Rs. 21,600,495/-, as against Rs. 36,000,825/-." Under the provisions of Income Tax Act it is a well settled law that the principle of res judicata does not apply. Each assessment year is to be considered separately and the assessment has to be made on the facts and documents available on record for each assessment year. The ld. DR strongly defended the order of TPO and prayed for reversing the findings of Commissioner of Income Tax (Appeals) with respect to most appropriate method for determining the ALP in the case of assessee. In respect of other grounds raised in the appeal the ld. DR vehemently supported the findings of TPO. 15. Per contra the ld. AR contended that the assessee adopted combined approach and selected TNMM as the most appropriate method to benchmark its international transactions including payment of royalty. Before selecting TNMM as the most appropriate method, the assessee conducted research for selecting comparable companies on widely recognized commercial databases available in public domain. After selecting 7 comparables the assessee computed weighted average margins of comparable companies which is 3.38% as agai....
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....cal know-how. The payment made by assessee to MBPC on account of Project Technical Assistance Fees is in respect of deputation of various experts to assist assessee in development and quality assurance, design adoption, quality assurance, sales & marketing, after sales services etc. In a year where no experts were deputed to assessee by MBPC, no technical service charges were paid. Thus, the payment of technical service charges has correlation to the services provided by MBPC to assessee in a financial year. The expenditure of technical service charges is not for any initial outlay or extension of business, but is incurred in order to conduct business more effectively and profitably. The fixed capital of assessee does not get increased or altered due to incurrence of this expenditure and no new asset or advantage/benefit of enduring nature comes into existence. The Project Technical Assistance Fees is regarded as fee for technical services for tax withholding purposes. The assessee debits the fee paid in the profit and loss account under the head 'Technical Service Charges' in the Manufacturing Expenses Schedule. The expenditure on Technical Service Charges is not in the nature of ....
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....aised in the appeal relating to expenditure on Capitalized cars, the ld. AR submitted that to promote sale of cars, it is required to keep cars for display in various events, photo shoots, road shows, tournaments and advertisement campaigns. Further, the assessee provides cars to top management employees, as well as for the official use by other employees (car pool). The perquisite value of such facility is brought to tax in the hands of respective top management employees in accordance with the provisions of Act. During the assessment year 2003-04, the assessee had capitalized 32 such cars for own use. During the assessment proceedings the assessee was asked to produce details in respect of the capitalized cars. The assessee furnished the details. However, the Assessing Officer observed that the assessee has not been able to produce complete details of the use and utility of the capitalized cars for the business purpose. The Assessing Officer further observed that so many cars are not needed for top management and advertisement purposes. The Assessing Officer made ad hoc disallowance of Rs. 2,00,000/- out of repairs and maintenance expenses and Rs. 5,00,000 out of power and fuel e....
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....us. We find the assessee in the instant case had entered into an agreement dated 12-12-1994 with DCAG to pay royalty for technical knowhow received from DCAG in the following manner : (a) Lumpsum payment of DM 56.6 million, net of taxes payable in 4 instalments periodically from 1995 to 1998. (b) Running royalty @2.75% on value addition in India. 74. We find the assessee and DCAG amended the original agreement to pay royalty for technical knowhow received from DCAG. The copy of the revised agreement dated 21-12-1999 is enclosed at paper book page 557 to 586 according to which running royalty @5% on value addition in India to be paid and waiving of the remaining 2 instalments of lumpsum royalty payment as per the first agreement amounting to DM 19 million. For the impugned assessment year the assessee has paid royalty @5% to DCAG amounting to Rs. 4,61,06,328/- for the technical knowhow received. The assessee adopted combined approach and selected TNMM as the most appropriate method to benchmark its international transaction including the payment of royalty in its TP study report. For the application of TNMM, the assessee had conducted search for comparable compa....
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.... the paper book we find in consideration of the use of technology and technical information received from DCAG for manufacturing activity the assessee has to pay running royalty @5% of the net value added for each contractual value. The royalty is computed by considering the net sales price of the licenced vehicles, which is exclusive of excise duty and cost of standard brought out components and landed cost of the imported materials used for the manufacturing process. The royalty in the instant case is inextricably linked with production and sales activity. In absence of production and sales and sale of products there would be no question arising regarding payment of royalty. We find force in the submission of the Ld. Counsel for the assessee that since the royalty payment is not independent of sales and therefore cannot be examined on standalone basis. Therefore, the assessee has adopted combined transaction approach using TNM method as the most appropriate method to benchmark its international transaction including payment of royalty. 77. We find the Delhi Bench of the Tribunal in the case of Lumax Industries Ltd. Vs. ACIT vide ITA No.5252/Del/2011 has observed as under : ....
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....that for application of CUP it is necessary that transactions being compared should be controlled. In the instant case the TPO has compared the royalty paid by Maruti Udyog Ltd. to Suzuki, vis-a-vis, royalty paid by the assessee to DCAG. However, Maruti Udyog Ltd. and Suzuki are associated enterprises and a controlled transaction cannot be used for benchmarking arm's length price. 80. We find the Pune Bench of the Tribunal in the case of M/s. Bobst India Pvt. Ltd. Vs. DCIT vide ITA No.1380/PN/2010 order dated 09-10- 2014 has observed as under : "7.9 ..... Without prejudice to above we find that according to TPO / AO has not given cogent reasoning for rejecting TNMM identified-by the Appellant as the most appropriate method for benchmarking its international transactions pertaining to domestic operations. The approach adopted by the TPO i.e. using controlled transaction of the Appellant itself (receipt of commission on marketing, of spares) for benchmarking the international transaction pertaining to receipt of commission for marketing of machines is not appropriate as per the Indian TP regulations. Accordingly international transaction of the appellant pertaining to rec....
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....ts AE. It is relevant to note that such payment has been approved or deemed to have been approved by the RBI. When a payment is made after obtaining due approval from the RBI, how its ALP can be computed at `Nil, is anybody's guess. The fact of approval of the payment by the RBI has been succinctly recorded by the TPO in his order as well. He still chose to propose adjustment in respect of full payment. In our considered opinion, when the rate of royalty payment and fee for drawings etc. has been approved or deemed to have been approved by the RBI, then such payment has to be considered at ALP. We, therefore, direct to delete addition of Rs. 4.29 crore made by the A.O. in this regard." 83. We further find in subsequent years also the royalty payment has been benchmarked considering combined transaction approach in TNM method. No separate benchmarking was undertaken to determine the ALP of Royalty. In A.Y. 2007-08 till A.Y. 2011-12 the payment of royalty was held to be at ALP. We therefore find merit in the submission of the Ld. Counsel for the assessee that in view of the rule of consistency the Cit(A) was justified in rejecting the CUP method adopted by the AO and accepting the....
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....held that such Royalty expenditure as capital in nature. We find in appeal the Ld.CIT(A) deleted such addition made by the AO on the ground that assessee has not acquired any ownership of asset or rights for substantially long period and in absence of the same payments made by the assessee have the character of royalty. Since there is no enduring benefit received from it the CIT(A) treated royalty expenditure as revenue and accordingly deleted the addition made by the AO. 98. We find no infirmity in the above decision of the Ld.CIT(A). From the various terms and conditions of the agreement, we find the assessee has neither acquired any asset on an outright basis nor secured any enduring advantage. We find force in the argument of Ld. Counsel for the assessee that the benefit secured by the assessee is essentially a licensed right to use knowhow for the period of the agreement. Therefore, the royalty expenditure in this regard, in our opinion, is revenue in nature. Further royalty being an annual recurring expenditure, directly linked to number of vehicles sold in a financial year, in our opinion, is revenue expenditure fully deductible in computing the taxable income of the asse....
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....s and circumstances in the assessment years under appeal. Thus, in view of the findings of Coordinate Bench of the Tribunal in assessee's own case in immediately preceding assessment year, we find no merit in ground No. 3 raised in the appeal by the Revenue. Accordingly, ground No. 3 is dismissed. 25. The ground No. 4 in the appeal by the Department relates to payment of Project Technical Assistance Fees. The assessee has claimed the payment of charges as deductable u/s. 37(1) of the Act whereas the Assessing Officer has held the same to be capital in nature. We find that this issue was also considered by the Co-ordinate Bench of the Tribunal in assessee's own case in ITA No. 1107/PN/2013. The Co-ordinate Bench of the Tribunal rejected the ground raised by the Department and upheld the order of Commissioner of Income Tax (Appeals). The relevant extract of the findings of Tribunal on this issue reads as under : "49. We have considered the rival arguments made by both the sides, perused the orders of the AO and CIT(A) and the paper book filed on behalf of the assessee. We have also considered the various decisions cited before us. We find the AO disallowed part of the Project A....
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....isallowed. In view of the above discussion and in view of the reasoning given by CIT(A) we uphold the order of the CIT(A) on this issue. The ground raised by the revenue is accordingly dismissed." 26. We observe that the facts leading to payment of Project Technical Assistance Fees are identical in assessment years under appeal. The Assessing Officer has not disputed the payment of charges. The only dispute is with regard to the nature of expenditure. The Co-ordinate Bench of the Tribunal has held expenditure as revenue in nature. The ld. DR has not been able to controvert the findings of Tribunal. Thus, we do not find any merit in the ground raised by the Department. By applying the aforementioned decision of Coordinate Bench in assessee's own case, we dismiss ground No. 4 raised in the appeal by the Revenue. 27. The ground No. 5 raised by the Department in appeal is with respect to deleting of addition made on account of homologation expenses. In assessment year 2003-04 the assessee has incurred expenditure of Rs. 75,44,101/- towards homologation. The Assessing Officer has made ad hoc disallowance of Rs. 10,00,000/-. Similarly, in assessment year 2004-05 the assessee has in....
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....wance in the hands of the company as far as cars used top management executives are concerned. This is because in the hands of company, the expenditure on capitalised car has been incurred for the employees and is incurred for the purpose of its business and hence deductible. 2.6.7 With respect expenditure incurred on balance cars, it is submitted that such cars were either used in the car pool for all the employees or were used for the purpose of business in events such as exhibition etc. The learned AO has stated that the Appellant has not furnished any documentary evidence to substantiate that the cars were used wholly and exclusively used for the purpose of business. The Appellant has stated before me that it has all necessary evidence in support its claim. In view of this assertion, I direct the learned AO to verify the evidence -and decide admissibility of the claim on the basis of evidence furnished before him. I consider fit to remit the matter to the learned AO rather than admitting the same as additional evidence before me and sending the same to the AO for verification under the IT Rule 46A." 30. After considering the submissions of rival sides and perusing the imp....
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....the ld. AR contended that the assessee commenced manufacture of cars in 1995, as a new industrial undertaking. The assessee fulfilled all the conditions for claiming deduction u/s. 80IB(3) of the Act and was thus, eligible to claim deduction u/s. 80IB(3) for the period of 10 years starting from assessment year 1995-96. The assessee had no taxable income during the financial year ended on 31-03-2002 and hence no deduction u/s. 80IB(3) was claimed in the return of income. In the notes to return of income for assessment year 2003-04 the assessee had specifically mentioned that if during the assessment proceedings positive income is determined, then the assessee would claim the deduction u/s. 80IB of the Act. The ld. AR giving the sequence of events pointed that on 18-10-2004 return filed by the by the assessee was selected for scrutiny and notice u/s. 143(2) was issued to the assessee. The assessee participated in the assessment proceedings and furnished the requisite details as required by the Assessing Officer from time to time. The Assessing Officer passed the assessment order u/s. 143(3)on 30-03-2006 disallowing certain expenditure as well as set off of brought forward losses clai....
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....the business of manufacturing cars for sale as well as lease. Hence the leasing income is "derived" from its industrial undertaking only and the same should be eligible for deduction under section 80-IB. b. Trading income on sale of spares and CBU cars - As a part of manufacturing activity, the import of spare parts is necessary to ensure the availability of spare parts for providing after sale services and warranty commitments to customers. Further, Your Honours would appreciate the fact that if the after sales service and warranty is not provided by MB India, the customers would no longer be willing to purchase the cars and there is probability that MB India may lose its market share. Therefore import of spare parts is interlinked with its manufacturing activity. Further, import and sale of CBUs is important for assessing the market condition for a particular range of cars which could be targeted for manufacturing by MB India in future or to bring in niche models which will be sold in few numbers and will never be economically viable to manufacture in India. Further, CBU imports are made to bring new products available with AE as CBU, but will take time to supply the same i....