TaxTMI 
TaxTMI 
2021 (5) TMI 949
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....cing Adjustment/s 2. That the TPO/DRP grossly erred in law in making adjustments of INR 48,48,62,986/- being payment of Export Commission and 1NR 12,00,22,040/- on payment of royalty on exports to Associate Enterprises. 3. That the TPO/DRP have erred in rejecting the transfer pricing methodology adopted by the Appellant for benchmarking its international transactions without revealing any basis thereof. 4. That the TPO/DRP erred in making/upholding the adjustments while applying the principles of "commercial expediency", which approach had been rejected judicially and is not mandated under the provisions of section 92CA of the Act. 5. That the order of the TPO is void ab initio being undated and passed beyond the period of limitation as mandated under section 92CA(3A) read with section 153 of the Act. Re : Payment of Export Commission - INR 48,48,62,986/- 6. That the TPO/DRP erred in determining the arm's length price of the international transaction relating to payment of export commission and hence making an adjustment of INR 48,48,62,986/-. 6.1 The TPO/DRP erred in rejecting the 'combined transaction approach....
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....lly flawed and was applied in a very convoluted manner to determine the ALP of international transaction relating to export commission at NIL. 6.11 That the TPO/DRP completely failed to apply the correct transfer pricing approach for determining the ALP of this international transaction and further failed to bring any evidence on record that the payment of export commission was in any way excessive as compared to independent transactions of similar nature. 6.12 That the TPO/DRP erred in rejecting the alternate analysis submitted by the Appellant using CUP as a most appropriate method on the basis of lack of similar comparable/s and stressing on the need of product similarity in applying CUP on one hand and on the other hand applied CUP in a manner which is fundamentally flawed. 6.13 That without prejudice, the TPO/DRP erred in applying the CUP method and the "benefit test" for determining the ALP in respect of Export Commission at NIL. 6.14 That the TPO/DRP completely failed to appreciate that the provisions of section 92CA do not mandate application of the benefit test and as such the application of CUP and the determination of transaction value....
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....d as such was an expenditure in the nature of trading activity and allowable as revenue expenditure. 8.2 That the AO/DRP failed to appreciate that the expenditure on Signage's did not result in any enduring benefit or bring into existence any asset. 8.3 Without prejudice to the grounds above, the AO/DRP has erred in not allowing the depreciation on the carrying value of the Signage expenditure which was capitalised by the AO during the previous assessment proceedings for AY 2012-13, AY 2013-14 and AY 2014-15. Re: Sales tools Expenses - INR 2,39,27,651/- 9. That the AO/DRP grossly erred in disallowing an amount of INR 2,39,27,651/- being sales tools expenses under section 37 of the Act. 9.1 That the AO/DRP grossly erred in introducing a new condition under section 37 of the Act that for allowance of expenditure under that provision there must exist a contractual liability. 9.2 That without prejudice to the above ground, the AO/DRP grossly erred in not appreciating the fact that the Assessee was entitled to make payments to the dealers in respect of advertising material as per the dealer agreement. 9.3 That the AO/DRP....
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....- in respect of Technical know' how duly claimed before the AO and DRP. 11.1 That the AO/DRP have erred in not allowing deduction of expenses of 231,80,0,000/- in respect of Technical know' how in utter disregard to circular no. 14(XL-35) dated 11.04.1955. Re: Consequential Grounds 12. That the AO has erred in initiating penalty proceedings under Section 271(1)(c) of the Act. 13. That the AO has erred in levying interest of INR 70,20,586/- under section 234A of the Act on the Assessee. 12.1 Without prejudice to the above, AO has erred in levying excess interest of 70,20,586 under section 234A 14. That the AO has erred in levying interest of INR 31,59,26,370/- under section 234B of the Act on the Assessee. 15. That the AO has erred in levying interest of INR 44,23,468/- under section 234D of the Act on the Assessee. 15.1 Without prejudice to the above, the AO has erred in levying excess interest of 14,07,467 under section 234C." 3. The brief facts of the case show that the assessee is a subsidiary of Honda Motor Co Japan and is engaged in business manufacturing and sale of motorcycles and scooters. It....
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....of signage as revenue expenditure. The ld. AO treated it as capital expenditure granted depreciation @15% and disallowed a balance sum of Rs. 1,12,79,914/-. Further, disallowance of Rs. 2,39,27,651/- was made on account of sales tool expenses debited by the assessee. The above disallowance was made based on the orders of the earlier years. The ld. AO noted that ITAT in earlier years 2003-04, 2004-05, 2005-06, and 2007-08 as well as Assessment Year 2010-11 has confirmed the disallowances. The assessee has also claimed on deduction of royalty expenditure of Rs. 8,23,30,80,343/-. This royalty was paid to its parent company in lieu of technology know how and technical assistance. The assessee considered it as revenue expenditure whereas the ld. AO was of the view that it is capital expenditure. He noted after reading of the agreement that the payment because of royalty expenditure is with respect of having of enduring nature and therefore, is a capital expenditure. He held that it could not be allowed as revenue expenditure to the assessee. Thus, out of total royalty expenditure of Rs. 8,23,30,80,343/- he held that 25% of the royalty expenditure is of nature of capital expenditure. Thu....
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....n'ble Supreme Court. He further relied on Article 15 and Article 17 of the above agreement. Therefore, he submitted that the above argument might be considered where the royalty is considered as capital expenditure. 10. We have carefully considered the rival contentions and perused the orders of the lower authorities. Ground number 2 - 5 and challenging the rejection of the transfer pricing methodology adopted by the assessee for benchmarking international transaction as well as the application of the principles of commercial expediency and need test applied by the learned transfer pricing officer and confirmed by the learned dispute resolution panel. The ground number 6 along with its sub- grounds (14 in number) is in substance challenging the determination of the arm's-length price of international transaction of export commission of Rs. 484,862,986 at Rs. nil. The ground number seven is with respect to the payment of royalty to its associated enterprise of Rs. 120,022,040/- to Honda Motors Japan for export, which is also determined by the learned transfer pricing officer at Rs. nil holding that there is a failure of benefit test. The claim of the assessee before us th....
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....gth TNMM. 7.2 The TPO held that the assessee has not received any services that an independent entrepreneur would be willing to pay for and accordingly considered the arms length price of the said transaction of payment of export commission of nil. 7.3 While treating the ALP as nil the TPO held that the assessee is a contract manufacturer and further held that by its export activities the assessee is developing the brand of the AE and actually has carried out service to the AE. 7.4 It was also pointed out that the assessee has made export to AE's related parties in Chile, Peru and Mexico and such exports are apparently for the benefit of the AE's of parent company. 7.5 The TPO/DRP/DR were of the strong belief that the services rendered by the AE for facilitating exports were unclear. 7.6 At the very outset we have to state that the observations of the TPO/DRP that the assessee was only a contract manufacturer has been out rightly rejected by the Tribunal in assessee's own case in earlier assessment years. 7.7 The primary issue which needs to be examined is whether the assessee was benefited by making such export sale....
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....the issue afresh in the light principle laid down by the Hon'ble High Court in the case of Cushman and Wakefield (supra). 7.16. We have been told that in the set aside assessment proceedings the TPO has once again made the addition following the earlier findings that the assessee had failed to provide evidence. 7.17 Considering the facts of the case as mentioned elsewhere we are of the considered view that the assessee has successfully demonstrated not only the benefits but has also shown that the profitability is higher (as per the charts exhibited elsewhere). Considering the totality of the facts we have no hesitation in directing the AO/TPO to delete the impugned addition on account of export commission. 7.18 This ground is accordingly allowed." 12. Thus, we find that the both the issues of transfer pricing adjustment with respect to determination of ALP of Rs. Nil on export commission and payment of royalty are decided in favour of the assessee. The ld. DR could not show as well as the ld. AR vehemently submitted that there is no change in the facts and circumstances of the case. In view of this Ground Nos. 2 to seven of the appeal are allowed.....
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....ee u/s. 37(1) of the Act. This decision of the coordinate bench followed the earlier decision of the tribunal in assessee's own case reported in 2021] 124 taxmann.com 81 (Delhi - Trib.)/[2021] 187 ITD 264 Dated 31 August 2024 assessment year 2012 - 13 wherein the issue of disallowance of sales tools expenses is discussed as Under:- "27. Now coming to the Ground of appeal No. 7 raised by the assessee against the disallowance of sales tools expenses of Rs. 2,72,32,757/-. 28. Briefly in the facts of the case, the assessee incurred the said expenditure on sales tools expenses. The assessee explained that it required its authorized dealers to use specified quality of sales tools fixtures at their showrooms which was to ensure that such exclusive authorized dealers maintain uniformity in advertising assessee's brand effectively across India and maintaining the high prescribed standards. The Assessing Officer was of the view that the there was no obligation to incur the said expenses; hence, the same were disallowed in the hands of the assessee. 29. The Ld. AR for the assessee pointed out that the expenditure were incurred in order to make the showrooms ....
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.... wherever applicable, which support the dealer's advertising and sales promotion efforts for the products, in accordance with the provisions of the policy, guidelines, and operations standards with regard to advertising issued by the Company from time to time. The company may at discretion, provide subsidy on the advertising material." 34. Clause 7.2 of the Dealership Agreement states as follows:- 7.2 "The Dealer agrees to comply at all times during the validity of this agreement with the minimum requirements concerning the dealership premises including inter alia sales office, showroom, workshop, spare parts and accessories shop and other necessary equipment, machinery, tools specified by the company from time to time. The list of equipments, machinery and tools with detailed specifications and quantities based on dealer's sales/service capacity will be issued by the Company to the dealer from time to time alongwith guidelines and procedures for procuring the same. This may include recommended purchase prices for such equipments, machinery and tools based on arrangement for bulk purchases/quantity discounts etc. with the suppliers and on training, after s....
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.... also copy of the technical know-how agreement dated 13 July 2000 between the assessee and M/s. Honda motor Co Ltd. Japan. The relevant paragraphs number 23 - 25 of the above judgment of the honourable Supreme Court in article 15 and article 17 of the above agreement as an relied upon by the learned and CIT DR may be considered properly while deciding the matter. Therefore, the argument of the learned CIT DR was that in view of the decision of the honourable Supreme Court the decisions relied upon by the learned authorised representative does not apply to the facts of the case. He extensively read article 15 of the agreement, which is terms of agreement stating that the agreement is for a period of 10 years, and would be automatically renewed four successive 10 year period. Therefore, he submitted that assessee has the benefit of enduring nature. He further referred to article 17 of the agreement, which is in effect of expiry on termination of the agreement to support his case. In view of this, he submitted that the issue is not covered in favour of the assessee but is covered in favour of the revenue by the decision of the honourable Supreme Court in case of Honda sale cars India ....
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....ayments made once the manufacturing process has already began. In the former case, royalty expenditure for setting up the manufacturing facility is capital in nature while in the latter case, the royalty expense is revenue in nature." 48. The SLP filed against the said decision has been dismissed by the Hon'ble Supreme Court. Applying the said ratio, we are of the view that the assessee was entitled to claim the aforesaid expenditure as revenue expenditure in the hands of the assessee. 49. Coming to the stand of the Revenue that where the assessee itself had not claimed as deductible in its hands, then the same cannot be allowed by the additional ground of appeal. We find no merit in the stand of the Ld. DR for the Revenue as there is no estoppel in law; especially where the issue has been decided by the Jurisdictional High Court on similar facts. Accordingly, we allow the additional ground of appeal raised by the assessee. There is no change in the facts and circumstances of the case therefore, respectfully following the orders of the assessee's own case for Assessment Year 2012-13 s ground No. 10 of the appeal is allowed. 22. Ground No. 11 is with ....