TaxTMI 
TaxTMI 
2015 (8) TMI 1506
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....d in confirming the order of the Ld. TPO who had held that the appellant ought to have received fees for brand promotion activity undertaken by the assessee to the extent of Rs. 82,12,54,41,380/- from its parent company viz, HMC Korea and the same was added to the income of the assessee under provisions of Section 92C of the Act. (iii) Ld. A.O./DRP has erred in confirming the order of the Ld. TPO, who has held that the expenditure incurred on advertisement was in excess to the extent of Rs. 76.63 crores when compared with other comparable companies in an international transactions and thereby added the excess expenditure to the income of the assessee under provisions of section 92B of the Act. (iv) Ld. A.O./DRP has erred in determining the ALP for royalty payable by the assessee to its AE at Rs. 265.50 crores as against the actual amount paid Rs. 369.77 crores, which was confirmed by the TPO and thereby addition to the extent of Rs. 104,27,36,417/- was made. Corporate Tax Issues:-- (v) The DRP has erred in confirming the order of the Assessing Officer who had reduced the capital subsidy granted by SLPCOT from the cost of the assets of the assessee and consequently disallowe....
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....ts such as House, cars etc. Further banks have liberally sanctioned auto loans on equated monthly instatement basis to the buyers. It is also relevant to note that India has got a big percentage of population which is not only young but also earns handsome money especially software boom in India. This section of the society is influenced by the brand name. In India in expanding auto market the share of Hyundai is increasing year after year. This has been discussed in Company Profile and Industrial overview given above. In this market, Hyundai brand and Logo has become quite popular. It is due to brand value development on account of efforts made by the assessee company. So far as the Hyundai technology is concerned it is the latest technology and it cannot be said that old technology has been dumped in Indian market. It has promising future that will earn the holding company in coming years huge income by way of royalty on know how supplied by it to the assessee company. It is not an old technology about which it may be said that it does not have bright future and hence the sales will decrease and therefore brand development will not be advantageous to the holding company. It would....
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....9,000/- in total income of the assessee is called for in A.Y. 2007-08." Thereafter the Learned Members of the DRP confirmed the contentions of the Ld. TPO, however, directed the TPO to exclude the revenue receipts of CKD/Spare parts from value of the sales while computing the notional brand fee @ 1% and thereby upheld the upward revision to Rs. 82,12,54,41,380/-. 3.2 The Ld. A.R. submitted before us that:-- "(i) The assessee company did not undertake any brand promotion for its parent company M/s. HMC Korea. (ii) The ad hoc rate of 196 on sales adopted by the Revenue is not an accepted method in transfer pricing matters. (iii) The benefit of using the brand name "Hyundai" has resulted in increase of turnover of the appellant. Consequently the profits have also increased which have been offered to tax. The parent company M/s. HMC Korea did not maintain the appellant company to use their brand name as misconstrued by the Ld. TPO. (iv) There was no contractual obligation between the appellant company and its parent company regarding any brand building services to be rendered by the assessee company. (v) The appellant company had only incurred products specific advertisemen....
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.... ad hoc and without any basis. It is pertinent to mention here as pointed out by the Ld. A.R. that the Delhi Special Bench of the Tribunal in the case of LG Electronics India (P.) Ltd. (supra), mentioned supra has held that Bright-Line-Test (BLT) is the only method to be adopted to arrive at the value of brand development expense receivable by the assessee company from its Holding Company with respect to the promotion of brand of the assessee's Holding Company. 3.5 The brief gist of the case is summarized hereinbelow for reference. "Facts: * L.G. Electronics India Private Limited ("the assessee") is a subsidiary of L.G. Electronics Inc., Korea ("the AE"). Pursuant to Technical Assistance and Royalty agreement, the assessee obtained a right from the AE to use technical information, designs, drawings and industrial property rights for the manufacture, marketing, sale and services of agreed products, for which it agreed to pay royalty @ 1 percent. The AE allowed the assessee to use its brand name and trademarks to products manufactured in India "without any restriction". * The Transfer Pricing Officer ("TPO") concluded that the assessee was promoting LG brand as it had incu....
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.... Suzuki's case examined the issue of AMP expenses where it directed the TPO for a de novo determination of ALP of the transaction. The direction by the Supreme Court recognises the fact of brand building for the foreign AE, which is an international transaction and the TPO has the jurisdiction to determine the ALP of the transaction. * The expenses incurred "in connection with sales" are only sales specific. However, the expenses "for promotion of sales" leads to brand building of the foreign AE, for which the Indian entity needs to be compensated on an arm's length basis by applying the Bright Line Test. * With regard to the DRP's approach, of applying a mark-up on cost for determining the ALP of the international transaction, on the ground that the same has sanction of law under Rule 10B(1)(c)(vi) of the Income-tax Rules, 1962 was accepted. * The case was set aside and the matter was restored to the file of the TPO for selection of appropriate comparable companies, examining effect of various relevant factors laid down in the decision and for the determination of the correct mark-up." 3.6 Further, in the case Ford India (P.) Ltd. cited by the Ld. A.R. (supra), ....
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....comparable at 2.566% as against 3.44% worked out by the assessee. Thus, the excess advertisement expenses incurred over and above the average of the comparables was determined at Rs. 76,63,00,000/- which the Ld. TPO held it to be recoverable from the assessee's parent company. 4.2. Before the DRP, it was argued by the assessee that the advertisement expenses contains certain non-advertisement relates expenses being trade discount and therefore, the same has to be excluded from the advertisement expenditure worked out by the Ld. TPO while arriving at the addition of Rs. 76.63 crores. In support of the argument the assessee relied on the Jurisdictional of Madras High Court in the case of CIT v. India Pistons Ltd. [2001] 250 ITR 279 & in the case CIT v. Tuticorin Alkali Chemicals & Fertilizers [2003] 261 ITR 80 (Mad.). The Members of the DRP after considering the issue, held in agreement with the claim made by the assessee by observing as under:-- "104.3 The contention of the assessee is carefully considered. The trade and volume discount are essentially given to push the quantum of sales and as an incentive to dealers to increase sales. These discounts may or may not be passed....
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....reed with the concept of such addition, directed the Ld. TPO to exclude volume discount and trade discount from advertisement expenditure while working out the ratio of the advertisement expenses to sales. The Ld. TPO subsequently giving effect to the order of the DRP had deleted the addition of Rs. 76.63 crores because the same was not warranted when the volume discount and trade discount were excluded from the advertisement expenses. Ld. AR further admitted that since the addition of Rs. 76.63 crores was deleted, this ground raised by the assessee need not be considered and dismissed as such. The Ld. D.R conceded to the aforesaid facts presented by the Ld. A.R. 4.5 After hearing both sides and perusing the orders of the Tribunal cited by the Ld. A.R supra, we hereby accept the concept of Bright Line Test (BUT) as held by our predecessors with respect to the concept of Bright Line Test for distinguishing between the routine and non-routine expenditure incurred on advertisement and brand promotion wherein advertisement and marketing promotion expenses to the extent incurred by uncontrolled comparable distributors is to be regarded within the "Bright Line Limit" of the routine expe....
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.... the transaction. However, the Ld. Members of the DRP rejected the comparables viz. General Motors Pvt. Ltd. & Ford India Pvt. Ltd., because while selecting the comparables the Related Party Transactions (RPT) were more than 2596 and accordingly directed the Ld. TPO to rework the adjustment after removing these two companies from the comparables. Thus, the addition was restricted to Rs. 104.27 crores as against Rs. 165.05 crores. 5.2 Ld. AR argued before us by stating as follows:-- "(i) The Ld. TPO/DRP were not justified in holding that the royalty payment should be benchmarked separately. It was contended that the appellants "whole entity" approach of benchmarking royalty payments along with all other transactions by adopting TNM method at the entity level is justifiable. (ii) Since the operating margin of the appellant company was 7.6196 which is higher than the comparable companies selected in the TP study being 2.9096, there was no necessity for addition on account of excess royalty. (iii) The royalty paid by the comparable company's viz. Maruti Suzuki India Ltd., is only for "imparting technology" while as the royalty paid by the appellant company is for the use of ....
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....e wholesale or retail." 5.5 Further perusing the order of the Ld. TPO in page 40 in para Nos. 25 & 26 the Ld. TPO herself observed that in respect of royalty payment in automotive sector from the study of 35 licenses, the average works out to 4.7% and the median works out to 4% which is higher than the appellant's average rate of royalty payment of 4.22%. Further the Ld. TPO has observed that the assessee company has been bestowed with the latest technology by its Holding Company and it cannot be said that old technology has been dumped in the Indian market (para 27 of the TPO's order). The relevant portion of the Ld. TPO's order is extracted hereinbelow for reference:-- "26. In the table given above it is seen that in automotive sector on study of 3 5 licenses in respect to royalty payment minimum royalty payment was 196 maximum was 15% royalty payment. Average comes to 4.7% and the median royalty rate was 4.0%. 27. In the case of the assessee what will be the right percentage of royalty that would compensate the assessee suitably. In this connection it is relevant to discuss certain relevant facts. As discussed earlier, India is a vast market for auto makers. Ind....
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....as observed by the Ld. Assessing Officer that the assessee has received 100 lakhs subsidy from State Industries Promotion Corporation of Tamilnadu (SIPCOT) during the previous year 2003-04. The assessee claimed that the subsidy was not related to any fixed assets; however the assessee has not produced the purpose for which the above subsidy was received. Therefore, the explanation offered by the assessee was not accepted by the Ld. Assessing Officer in the relevant previous year and also for the earlier previous years. Accordingly, the Ld. Assessing Officer reduced the capital subsidy granted by SIPCOT from the cost of the assets installed in the plant and allowed depreciation only on the reduced WD V for all the earlier years. Similarly for the relevant assessment year also, the Ld. Assessing Officer disallowed the depreciation amounting to Rs. 7,91,060/-. 6.2 Before us, the Ld. A.R. submitted that for the assessment year 2003-04 the Ld. CIT (A) has directed the Ld. Assessing Officer to re-examine the issue in the light of Supreme Court decision Sahney Steel & Press Works Ltd. v. CIT [1997] 228ITR253 and CIT v. P.J. Chemicals Ltd. [1994] 210 ITR 830 (SC). Ld. A.R. further submitt....
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.... to the case of the assessee for the assessment year 2007-08. Moreover under such circumstances, various judicial authorities have held that 296 to 5% of the dividend earned may be disallowed in order to justify the provisions of Section 14A of the Act. However, in the present case before us, the Ld. A.R. has claimed that the assessee had not received any dividend during the year, which has not been rebutted by the Ld. D.R. Therefore, we hereby hold that disallowance of Section 14A of the Act for Rs. 5,29,910/- is not warranted and accordingly, we direct the Ld. Assessing Officer to delete the same. 8.1 Ground No. (vii) Disallowance of expenditure of Rs. 5,20,97,000/- towards 100 cars given to Police Department The assessee had contested before the Revenue for disallowance of expenditure of Rs. 5,20,97,000/- being the cost of 100 cars gifted by the assessee to the Tamil Nadu Police Department. The assessee had justified the action as fulfilment of obligation towards "Corporate Social Responsibility". It was further claimed that the use of these vehicles by the Police Department would help the assessee to assess the reliability of the vehicles and also help the public at large. It....
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....CIT [1997] 223 ITR 101 wherein it was held that: "The principles for determining whether the payment of the kind made by assessee could be regarded as a business expenses are well settled. What is to be seen is not whether it was compulsory for the assessee to make the payment or not but the correct test is that of commercial expediency. As long the payment which is made is for the purposes of the business, and the payment made is not by way of penalty for infraction of any law, the same would be allowable as a deduction. The contribution which was made by the assessee could under no circumstances be regarded as illegal payments or payments which were opposed to public policy. This was not a case where the assessee was paying any bribe to any person nor is this a case where money was being contributed to any private fund or for the benefit of any individual which could be regarded as a form of illegal gratification. By a voluntary scheme, with which the District Collector was associated, the District Welfare Fund had been established for the benefit of the general public. The payment to such a fund which was openly made by all the millers and which Fund was being used for public ....
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..... Assessing Officer that the assessee had shown income by way of export incentives towards target plus scheme amounting to Rs. 5,52,26,325/- and focus market scheme Rs. 3 crores, however while computing tax the assessee had excluded these amounts. On query by the Ld. Assessing Officer, the assessee explained as follows:-- "The objective of the scheme is to accelerate growth in exports by rewarding Star Export Houses who have achieved a quantum growth in exports. High performing Star Export Houses shall be entitled for a duty credit based on incremental exports substantially higher than the general annual export target fixed. HMIL has accrued for Rs. 26 crores as on 31.03.2006 pertaining to exports benefits under the target plus scheme for the financial year 2005-06 exports. This amount was revised during the current financial year i.e. in 2006-07 to Rs. 31.52 crores and accordingly, a further accrual of Rs. 5.52 crores pursuant to filing the application with the authorities for the same. Therefore, an amount of Rs. 31.52 crores was shown as export benefits under the loans and advances for the financial year ending 31.03.2007. The License for the above amount has not yet been re....
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....d supplies and the penalty deduction related to the accounting year 1989-90 relevant to assessment year 1990-91. The fact would show that the Kerala State Electricity Board had deducted a sum of Rs. 4,24,851/- from supply bills for delay in supply during the year 1989-90. Subsequently, the Board refunded a sum of Rs. 2,18,529/- to the assessee during the accounting period 1990-91. The liability for the penalty accrued during the accounting period 1989-90 relevant to the assessment year 1990-91. Even if it is true that part of the amount was refunded by the Electricity Board, the actual liability relates only to the assessment year 1990-91. The assessee was following the mercantile system of accounting. Hence, the assessee should have claimed the same in the year 1989-90. The contention that the assessee was trying their best to get the penalty waived by the Kerala State Electricity Board and only after exhausting all steps the assessee could claim deduction cannot be sustained. Mere protest or opposition by a subject to the levy of tax or other duties payable to the Government cannot carry with it the implication that there is no proper levy legally recoverable till such protest or....
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....of the other party to pay the amount. Only then can it be said that for the purposes of taxability that the income is not hypothetical and it has really accrued to the assessee. 21. Insofar as the present case is concerned, even if it is assumed that the assessee was entitled to the benefits under the advance licenses as well as under the duty entitlement pass book, there was no corresponding liability on the customs authorities to pass on the benefit of duty free imports to the assessee until the goods are actually imported and made available for clearance. The benefits represent, at best, a hypothetical income which may or may not materialize and its money value is therefore not the income of the assessee. 22. In Godhra Electricity Co. Ltd. v. Ld. CIT [1997] 225 ITR 746 (SC) this court reiterated the view taken in Shoorji Vallabhdas & Co.(supra) and Morvi Industries Ltd. (supra) 23. Godhra Electricity is rather instructive. In that case, it was noted that the High Court held that the assessee would be obliged to pay tax when the profit became actually due and that income could not be said to have accrued when it is based on a mere claim not backed by any legal or contract....
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....spect of the disputed enhanced charges for supply of electricity. The decision of the High Court was, accordingly, set aside. 27. Applying the three test laid down by various decisions of this Court, namely, whether the income accrued to the assessee is real or hypothetical; whether there is a corresponding liability of the other party to pass on the benefits of duty free import to the assessee even without any imports having been made; and the probability or improbability of realization of the benefits by the assessee considered from a realistic and practical point of view (the assessee may not have made imports), it is quite clear that in fact no real income but only hypothetical income had accrued to the assessee and section 28(iv) of the Act would be inapplicable to the facts and circumstance of the case. Essentially, the Assessing Officer is required to be pragmatic and not pedantic. 28. Secondly, as noted by the Tribunal, a considered view has been taken in favour of the assessee on the questions raised, starting with the assessment year 1992-93, that the benefits under the advance licenses or under the duty entitlement pass book do not represent the real income of the as....
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....sallowance of additional depreciation amounting to Rs. 8,52,500/- in respect of assets used in regional offices. During the course of assessment, the Ld. Assessing Officer observed that the assessee claimed additional depreciation towards its fixed assets of Rs. 42,64,535/- which was procured during the relevant assessment year for the purpose of the assessee's regional offices. The Ld. Assessing Officer opined that as per provisions of section 32(1)(iia) of the Act the additional depreciation is allowable only on the asset which has been utilized by the assessee for its manufacturing activity. The Ld. Members of the DRP also accepted the view of the Ld. Assessing Officer. Accordingly, the Ld. Assessing Officer in his final assessment order disallowed the additional claim of depreciation of Rs. 8,52,500/-. 10.2 The Ld. A.R before us argued stating that as per provisions of Section 32(1)(iia) of the Act, the assessee will be entitled to the claim of additional depreciation since the assessee is engaged in the business of manufacture of production of any article or thing. He further submitted that the "Act" has not distinctly provided that the assets have to be utilized in the ....
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....ack to the file of the Ld. Assessing Officer for examining the relevant documents furnished by the assessee and pass appropriate speaking order as per merits and law after giving opportunity to the assessee of being heard. We further make it clear that the assessee is at liberty to produce before the Revenue any relevant documents supporting its claim. 12.1 Ground No. (xi). The Ld. Assessing Officer has erred in levying interest U/ss. 234B & 234D of the Act. The charging of interest U/ss. 234B & 234D is consequential in nature and dismissed as such. 13. In the result, the appeal of the assessee is partly allowed for statistical purposes. V. Durga Rao, Member (J) 14. I have carefully gone through the order of ld. Accountant Member. Despite discussion and deep study of the order, though, I am fully agreed with the observations and conclusions drawn by the ld. Accountant Member with regard to ground Nos. (z) to (vi) & (via) to (xi), I am unable to persuade myself and agree with his views & conclusions drawn with respect to the only Ground No. (va) Disallowance of expenditure of Rs. 5,20,97,000/- towards 100 cars gifted to Police Department. Hence, I am giving my findings and conc....
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....age, effectiveness and improvement of the said vehicles donated. The assessee has not provided any information to the Assessing Officer, whether the assessee has obtained the information from the Police Department with regard to the usage of the cars. The Assessing Officer has further observed that the donated cars to the Police Department are not being used with any advertisement features of the assessee company. Further, it was nothing different from other vehicles [vehicles like Bolero & Scorpio of Mahindra & Qualis of Toyota] which are being used by the same Tamil Nadu Police Department for the patrolling and surveillance purposes. Therefore, the Assessing. Officer has observed that the cars donated to the Police Department were not for advertisement purposes. The Assessing Officer, further observed that the assessee has been incurring huge expenditure for the purpose of its R&D facility every year in order to ascertain and evaluate the usage, effectiveness and improvement of the cars manufactured by the assessee. The Assessing Officer has denied that 100 cars donated by the assessee to the Police Department was not real as to ascertain and evaluate the usage, effectiveness and....
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....y of the State Government to provide proper protection to the public, maintain law and order and control the crimes. Simply providing 100 cars to the Police Department, it cannot be termed as Corporate Social Responsibility and therefore, it cannot be treated as an allowable expenditure. The assessee has failed to explain as to how donating cars to the Police Department can be treated as an advertisement to the assessee company. Insofar as to ascertain and evaluate usage and effectiveness of cars manufactured by the assessee is concerned, after donating the cars to the Police Department, it appears that the assessee has not made any enquiry with the Police Department as to how efficiently the cars are working. The assessee has failed to file such report either before the Assessing Officer or before the ld. DRP or before the Tribunal. Therefore, it cannot be said that cars given to the Police Department for the purpose of evaluating the usage, effectiveness and improvements of the cars. 22. So far as case law relied on by the assessee before the Assessing Officer in the case of Sree Meenakshi Mills Ltd. (supra), the Hon'ble Madras High Court has considered the allowability of e....
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....ness. It cannot include sums spent by the assessee as agent of a third party, whether the origin of the agency is voluntary or statutory; in that event, he pays the amount on behalf of another, and for a purpose unconnected with the business." In the present case, the assessee has voluntarily donated cars to the Police Department. It is a facility provided by the assessee to the servants of the State Government. It is a prime duty of the State Government to provide necessary facilities to its servants. The assessee has undertaken the duty of the State Government. The expenditure incurred by the assessee by donating 100 cars to Police Department is unconnected with the business of the assessee. The above judgment of the Hon'ble Supreme Court in the case of Malayalam Plantations Ltd. (supra) squarely applies to the facts of the present case. Therefore, it cannot be said that the cars donated by the assessee is for the purpose of business. 25. Further, the assessee has failed to prove that the cars donated by the assessee to the Police Department is wholly and exclusively for the purpose of the business. It has also failed to prove that there is nexus between the expenditure and....
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....the cars to police department and hence issued show cause notice, calling upon the assessee to furnish explanation as to why the same should not be disallowed as per the provisions of section 37 of the Income-tax Act. 29. In response thereto, the assessee replied that in India police department does not use cars for patrolling and surveillance purposes. The usage of cars for road safety, removal of traffic bottlenecks, reaching the accident spot in time, surveillance, chasing and catching of culprits need to be addressed and tested. The assessee-company therefore offered 100 Hyundai Accent model cars to police department to test the car market. It was also stated that these cars were fitted with latest electronic equipments which are useful in controlling crimes and protecting valuable life of citizens. Since it was an expenditure incurred on test market, it has to be considered as expenditure wholly and exclusively for the purpose of business, i.e. to find out new segment of car market. The assessee also relied upon several case law in support of its contention that the expression "wholly and exclusively" signify that it should be intended for the purpose of business so long as c....
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....e management had collectively taken a decision by recording the same in writing in the form of minutes of meeting etc. But it was stated that no such information is on record. However, it was stated that the assessee has gifted cars only as part of goodwill gesture and they were given for the purpose of patrolling and surveillance purpose with latest electronic equipments which are useful in controlling crimes and protecting valuable life of citizens. 32. In the backdrop of these facts, the Assessing Officer observed that the assessee could not furnish any information received from the police department with reference to effectiveness, usage and improvement of cars donated to the Tamil Nadu police department. Despite several opportunities, no evidence could be furnished by the assessee in this regard. Therefore, the Assessing Officer was of the view that expenditure was not incurred for the purpose of business and the same is not an allowable expenditure, as per provisions of section 37 of the Act. He further observed that donated vehicles are not used with any advertisement features of the assessee-company and it is nothing different from other vehicles namely Bolero, Scorpio and....
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....ctor and the Rice Millers Association, the members of the association have to deposit an amount of 0.50 paise per quintal of rice, if they propose to export rice from Andhra Pradesh. In order to export rice, the members of the Rice Millers Association deposited the stipulated amount in District Welfare Fund and accordingly collected permits. The Hon'ble Court observed that expenditure was wholly and exclusively incurred for the purpose of business as the payment is not opposed to public policy. 34. Summary of the arguments of the assessee are:-- "(a) Gift of cars will help the assessee-company to test the performance of cars manufactured by it. (b) Extensive usage of vehicles will be noticed by the public at large and it will build the image of the assessee and also act as an advertisement for its products. (c) The police department being over burdened by large traffic movement, in and around assessee's factory, vehicles provided by the assessee-company will enhance their efficiency and also soothe the discomfort caused to the public/assessee. (d) It will help the assessee to fulfil its obligations towards 'corporate social responsibility." 35. The learned Acc....
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....penditure was incurred towards corporate social responsibility, learned Judicial Member observed that Tamil Nadu police department never requested the assessee to donate cars for any particular purposes and they were in fact, already utilising similar cars and thus there was no need to donate cars to police department, since such facility would be provided by the State Government. It is for the State Government to decide as to what facility has to be provided to their officers whereas corporate social responsibility is a concept which concerns the liability which otherwise could have been provided by the Government but not provided; in this case cars were provided by the State Government wherever required and hence 'corporate social responsibility' has no role here. The Government has already taken a decision to provide vehicles as per the requirement. Therefore, the principle of corporate social responsibility does not come into play. On the contrary, supply of cars would be against the public policy and hence cannot be allowed as business expenditure. 39. The learned Judicial Member particularly emphasised the fact that assessee failed to prove what is the advertisement ....
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....attention to page 218 of the paper book to submit that assessee-company addressed a letter to the Home Secretary, Government of Tamil Nadu mooting the proposal that they would intend to test the market by offering vehicles to Tamil Nadu police and hence they would like to offer 100 suitably modified Hyundai Accent cars to police department. Learned counsel, therefore, submitted that the main purpose was to test the market i.e., Market Research since it benefits the assessee in many ways and also enable the assessee to claim cost of cars as business expenditure inasmuch as the cars tested by police department would be useful in getting a proper feedback for improvement and also satisfy the conditions of advertisement since the cars would be used by police department which will be in the notice of the public at large and going by speed and effectiveness of the cars, company's sales may increase. 43. Another facet of his argument is that it can also be termed as 'corporate social responsibility' of the assessee-company; presenting the cars to police department who are ill equipped in the matter of surveillance, chasing and catching of culprits because police department do....
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.... allowable as deduction under section 37(1) of the Act. He thus strongly relied on the order passed by the learned Accountant Member. Further, he submitted that learned Judicial Member was not justified in taking into consideration the ratio laid down by the Supreme Court in the case of Malayalam Plantations Ltd. {supra) since the decision was rendered in peculiar facts of the said case, whereas similar case was discussed by the Hon'ble Madras High Court in the case of CIT v. Amalgamations Ltd. [1995] 214 ITR 399 (pages 431 & 432) wherein the Court observed that though the judgment in the case of Malayalam Plantations Ltd. (supra), at a first glance, appears to support the Revenue, but the Hon'ble Supreme Court, in the aforesaid case, proceeded on assumption that the assessee paid estate duty to the State as an agent which could not be recovered from the legal representative of the deceased and in that context the expression 'for the purpose of such business' was analysed to hold that expenditure incurred for the purpose of business cannot include sums spent by the assessee as an agent of the third party. He also relied upon the decision of ITAT, Calcutta, Special B....
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....e of the proceedings. It is also not in dispute that cars did not carry any kind of advertisement features on the cars donated to the police department. In addition to this the assessee has a robust research and development wing, wherein substantial amounts have been spent on yearly basis and thus the purpose, in the instant case, cannot be said to be real and effective, in which event it cannot be said that assessee has incurred expenditure wholly and exclusively for the purpose of business or expenditure is incidental to the carrying on of the business and, in fact, no direct or indirect benefit was obtained by the assessee. The case law relied upon by the learned counsel of the assessee are distinguishable on facts. The Departmental Representative relied upon the decision of Delhi Bench of the Tribunal in the case of Oil Industry Development Board v. Asstt. CIT [2010] 123 ITD 67/[2009] 31 SOT 226 wherein the Bench observed that the essential condition of allowance is that the expenditure should have been laid out or expended wholly and exclusively for the purpose of such business i.e. to enable a person to carry on and earn profit in that business. It is not enough that disburse....
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....ant case, expenditure incurred by the assessee was not allowable as deduction under section 37(1) of the Act. 47. Joining the issue, learned counsel for the assessee submitted that the case law relied upon by the Departmental Representative are distinguishable on facts. When called upon to furnish evidence as to whether there is any letter in writing from the police department or Home Secretary mentioning about shortage of cars or need for more cars, learned counsel submitted that there is no such material on record. He merely stated that letter dated 14th August, 2006 addressed to Home Secretary, Government of Tamil Nadu, Chennai proves that assessee sought permission before providing suitably modified Hyundai Accent cars. But the assessee-company did not either obtain a letter in writing or feedback after the usage of cars; still the assessee presented 100 cars on the assumption that they are discharging corporate social responsibility or it carries advertisement value which helps the research and development wing of the assessee-company in understanding the effectiveness of the vehicles for future improvements. He also fairly admitted that police department has not given any r....
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....oluntary payment can be considered for claim of deduction so long as it is incurred for the purpose of business. There need not be a direct link between earning of profit and the expenditure incurred. But, at the same time, the expression 'wholly and exclusively' needs to be given an appropriate meaning and in that context the courts have held that the expenditure should be incidental to carrying on of the business and the object should be real In other words, there should be either a direct or indirect relationship between the expenditure and the object of the business, though it was incurred voluntarily. 51. It is well settled that with regard to any expenditure claimed as deduction the onus is upon the assessee to prove that it was incurred wholly and exclusively for the purpose of business. In the instant case the assessee-company initially claimed that it has donated 100 cars to the Police Department to test the efficacy of their vehicles and to obtain feedback, as could be seen from the letter addressed to the Home Secretary (letter dated 14th August, 2006). In the schedule forming part of the accounts it was treated as "advertisement and sales promotion expenditure"....
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....fficient in several respects as compared to the other cars. Mere logo in every car cannot be considered as having any advertisement value since it does not attract the attention of common man or the potential buyers. It is also not the case of the assessee that they have given any advertisement on any subsequent occasion that the cars donated to the Police Department were specially fitted with certain features for speed and efficiency. 54. Though an expenditure voluntarily incurred can be classified as business expenditure, it is subject to fulfilling the essential condition that it is wholly and exclusively incurred for the purpose of business even though the assessee has not gained immediate benefit by incurring such expenditure. In other words, business nexus has to be established. In this case the assessee tried to establish business nexus on the ground that it helped in market research and it has advertisement value. In my humble opinion, the assessee could not effectively prove that the cars were given for market research and the manner in which the cars were given also did not indicate that there is any advertisement value. 55. At a later stage the assessee-company raised ....