AI Drafter 
TaxTMI 
TaxTMI 
2021 (9) TMI 1070
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..../ 'AO') for the aforesaid assessment year on the following grounds: SI. Description Ground ref. a) Transfer pricing adjustment 2 b) Disallowance u/s 14A of the Act r.w.r. 8D of the Rules 3 c) Disallowance of capital subsidy 4 d) Disallowance of performance reward 5 TRANSFER PRICING GROUNDS 2. The directions of the Dispute Resolution Panel (DRP), the Transfer Pricing Order and the Final Assessment order are erroneous in so far as the following issue/adjustment: Attribution of notional income towards deemed brand development 2.1 The DRP failed to appreciate the fact that the Transfer Pricing Officer (TPO) exceeded his jurisdiction by analysing brand building as a separate international transaction though the Assessing Officer (AO) has not referred the same for determination of arm's length price (ALP). 2.2 The DRP ought to have held that the order of the TPO is vitiated inasmuch since it is based on a show cause notice that is void ab initio, as it has not established a prima facie case of brand promotion activity undertaken by the Appellant. 2.3 The DRP ought to have held that the TPO ....
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....) deeming rendition of brand building service is void. 2.12 The AO/TPO failed to appreciate that in view of the rights granted in the agreement between the Appellant and the AE, the former gets the right to use the "Brand". 2.13 The AO/TPO failed to appreciate that as per the principles laid down in Chapter VII of the OECD TP Guidelines, 2017, the incidental benefits if any arising out of the AMP expenses incurred by the Appellant to the AE does not require any compensation. 2.14 The AO/TPO erred in facts and circumstances of the case in having admitted that Hyundai is a global brand, ought to have appreciated that there is no necessity for the Appellant to further promote the brand. 2.15 The AO/TPO has failed to appreciate that the Appellant is not restricted from creating its own brand through the agreement and it is the prudent business decision of the Appellant to use the Brand name of the AE so as to increase its sales in India. 2.16 The AO/TPO failed to appreciate that even an independent entity would have charged for brand building service only if the brand building activity has been actually agreed to/ undertaken as the primary a....
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.... a fresh search and identifying the comparable companies to determine the mark-up to be added to the AMP expenses incurred by the Appellant to charge the AE. 2.27 Without prejudice to the above, the AO/TPO failed to appreciate that the core business activity of the Appellant is manufacturing of passenger cars and not brand promotion whereas the comparable companies identified are engaged in the business of advertisement and media and as such, the comparables are functionally dissimilar. 2.28 Without prejudice to our above arguments, even if the TPO wishes to propose adjustment in respect of the brand promotion, ought to have compared the AMP to sales ratio of the Appellant with that of the comparable companies to determine the ALP of the transaction. Without prejudice to our above arguments, the Appellant while submitting the quantum of advertisement expenses has inadvertently included expenses which are not in the nature of Advertisement and that if the revised quantum of AMP expenses is considered the transfer pricing adjustment will be reduced to Rs. 161.10 crores as against Rs. 212.26 crores proposed by the TPO. The Appellant craves leave/res....
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....ade under section 14A of the Act if there is no exemption claimed in respect of dividend income. 3.10 Without prejudice to the above, the AO ought not to have considered interest on long term loans, working capital, dealers advances/deposits, and bank/financial charges while computing the quantum of disallowance under clause (ii) of Rule 8D(2) of the Rules. 3.11 Without prejudice to the above, the AO / DRP ought to have excluded the investments which did not yield exempt income during the subject AY while computing the quantum of disallowance under Rule 8D(2)(ii) and (iii) of the Rules. 3.12 Without further prejudice to the above, the disallowance under section 14A of the Act by applying Rule 8D of the Rules is erroneous, high and arbitrary. 3.13 Without prejudice to the above, the disallowance should be restricted to Rs. 70,000/- being the amount of dividend received during the subject AY. 3.14 The AO / DRP ought to have appreciated that the provisions of section l4A of the Act r.w.r. 8D of the Rules is not applicable while determining book profits under section 115JB of the Act. 4. Disallowance of depreciation to the extent of....
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....supra as also all consequential relief thereto. 3. The assessee had filed a petition for admission of additional grounds on three occasions i.e.,27.01.2020, 09.06.2020 and 25.02.2021. The relevant additional grounds of appeal raised by the assessee are reproduced as under:- "Without prejudice to the main grounds of appeal, the Appellant prefers the following additional grounds among other grounds of appeal: 1. Subsidy received from Govt. of Tamil Nadu in the form of refund of output/input X AT is a capital receipt not chargeable to tax. 1.1 The DRP ought to have appreciated that the subsidy (refund of VAT) was granted for the purpose of setting up of Phase II manufacturing facility and as such the said subsidy should be treated as a capital receipt' not chargeable to tax. 1.2 The DRP ought to have appreciated that the object of the subsidy (refund of VAT) was not to enhance the profitability of the Appellant or to fund the cost of fixed assets and as such the said subsidy should be treated as a 'capital receipt' not chargeable to tax. 1.3 The DRP ought not to have rejected the Appellant's objections in limine without adjudicating the ....
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.... have appreciated that it is a well settled principle that the "purpose" for which an incentive is granted should be considered to determine whether the nature of subsidy / incentive is revenue or capital. 3.3 The AO/DRP ought to have appreciated that the export incentive under the Focus Market Scheme was provided to enhance India's export potential in the international market and not for running the business of the Appellant more profitably and as such the export incentive is capital in nature. 3.4 The Hon'b1e Tribunal may issue suitable directions to the AO to treat the export incentive under the Focus Market Scheme as a capital receipt not chargeable to tax and re-compute the total income by reducing the amount of incentive for the subject AY 2015-16. 4. The Appellant craves leave to add/ modify/alter any additional grounds. The Appellant submits that the omission to raise the aforesaid Additional Grounds of Appeal in the original grounds of appeal was neither deliberate nor willful and prays that the Hon'ble ITAT may consider it as part of the original Grounds of Appeal." 4. Brief facts of the case are that the assessee M/s. Hyundai Motor ....
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....cing adjustment made towards brand development services. During the year under consideration, the learned TPO has made upward adjustment of Rs. 212,26,60,000/- in relation to brand fees receivable from its AEs towards enhancement of brand value of assessee parent company. The learned TPO used Spearman's Rank Correlation method to conclude that there is positive correlation between the brand value of Hyundai Motor India Limited and market capitalization of Hyundai market Corporation, South Korea. Therefore, by applying Spearman's Rank Correlation method, the ld. TPO has computed incremental brand value and attributed a portion of the same to the assessee in proportionate to its sales. 7.1 The ld.AR for the assessee, at the time of hearing submitted that this issue is covered in favour of the assessee by the decision of ITAT., Chennai in assessee's own case for the assessment years 2009-10 to 2013-14 in ITA Nos.853/Chny/2014, 563/Chny/2015, 842/Chny/2016 & 3192/Chny/2017, and hence, addition made by the Assessing Officer towards brand development services should be deleted. 7.2 The ld. DR on the other hand, fairly agreed that this issue is covered in favour of the assessee. But....
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....nt company cannot be attributable to the assessee by adopting some theory. In this case, facts are identical and pari materia to the facts already considered by the Tribunal for earlier years. Therefore, consistent with a view taken by the coordinate Bench in assessee's own case for earlier assessment years, we are of the considered view that the learned TPO as well as learned DRP were erred in making transfer pricing adjustments towards brand services by adopting Spearman's Rank Correlation method and concluded that there is positive accretion between brand value and market capitalization of HMC Korea and hence, we direct the Assessing Officer/TPO to delete transfer pricing adjustment made towards brand development services." In this view of the matter and consistent with view taken by the Co-ordinate Bench, we direct the AO/TPO to delete transfer pricing adjustment made towards brand development charges. 8. The next issue that came up for our consideration from ground no.3 of assessee appeal is disallowances u/s.14A r.w.r 8D of Income Tax Rules, 1962, amounting to Rs. 86,57,636/-. The facts with regard to impugned dispute are that during the year under consideration, the as....
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....mpt income for impugned assessment year was Rs. 57,826/-, whereas the Assessing Officer has determined disallowance u/s.14A at Rs. 86,54,491/- contrary to settled principle of law. Therefore, considering facts and circumstances of this case and also by following the decisions of Hon'ble Supreme Court and Hon'ble Madras High Court, we direct the Assessing Officer to restrict disallowances u/s.14A to the extent of exempt income earned for the impugned assessment year." In this view of matter and consistent with view taken by the Co-ordinate Bench, we direct the AO to restrict disallowance u/s.14A to the extent of exempt income earned for the impugned assessment year. 9. The next issue that came up for our consideration from ground no.4 of assessee appeal is disallowance of depreciation on capital subsidy. During the financial year 2002-03, the State Industrial Promotion Corporation of Tamil Nadu (SIPCOT) had granted subsidiary of Rs. 100 lakhs to encourage and recognize huge investments made for setting up of mega project viz., passenger car manufacturing unit in Irungattukottai. The assessee has treated subsidy received from SIPCOT as capital receipt and did not reduce the sam....
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....or the year ended March, 2015. However, payment was made only after due date of filing return of income for assessment year 2015-16. The Assessing Officer has disallowed performance incentive paid to staff u/s.43B(c) r.w.s. 36(1)(ii) of the Act, amounting to Rs. 13,63,08,261/- on the ground that as per section 43B(c), any sum referred to in clause (ii) of sub-section (1) of section 36, shall not be allowed as deduction, unless the same is paid on or before due date for furnishing return of income u/s.139(1) of the Act. The Assessing Officer further noted that as per section 36(1)(ii), any sum paid to an employee as bonus or commission for services rendered, where such sum would not have been payable to him as profit or dividend, if it had not been paid as bonus or commission is covered. Therefore, he opined that any payment made to an employee which is in the nature of bonus or commission for services rendered is covered u/s. 36(1)(ii) of the Act, and thus, if such payment is not made on or before due date of filing of return of income u/s.139(1) of the Act, then same cannot be allowed as deduction, as per section 43B(c) of the Act. 10.1 The assessee has filed objections before ....
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....rnishing the return of income for that year. This non-obstante section means that certain deductions even if allowable as per the provisions of any other section of this Act will not be allowed unless the conditions of section 43B are satisfied. Section 43B(c) provides that any sum referred to in section 36(1)(ii) will not be allowed as deduction unless actually paid. Section 36(1)(ii) reads as under: "any sum paid to an employee as bonus or commission for services rendered where such sum would not have been payable to him as profits or dividend f it had not been paid as bonus or commission" 8.3 It is seen that the provision applies for payment of 'bonus' or 'commission' to the employees. The assessee claims that the expenditure incurred is towards 'performance reward which is not in the nature of bonus and hence, will not be covered in section 36(1) (ii). This argument of the assessee is not correct. The payment to the employees on account of performance or payment as commission is in the same nature. It is immaterial if the assessee terms it performance reward This sum would not have been paid to the employees as profits or dividend had it not been paid....
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.... is necessary to examine performance incentive paid to employees in light of provisions of section 36(1)(ii) read with section 43B(c) of the Income Tax Act, 1961. As per section 36(1)(ii) of the Act, any sum paid to an employee as bonus or commission for services rendered, where such sum would not have been payable to him as profits or dividend, if it had not been paid as bonus or commission is allowable as deduction. The provisions of Section 43B(c) provides that any sum referred to in section 36(1)(ii) will not be allowed as deduction, unless actually paid. Therefore, from a combined reading of provisions of section 36(1)(ii) read with section 43B(c), it is seen that provisions of section 36(1)(ii) is not only covers for payment of bonus to staff, but it also applies to commission paid to the employees for services rendered. The assessee claims that expenditure incurred is towards performance reward, which is not in the nature of bonus and hence, will not be covered u/s. 36(1)(ii) of the Act. 24. We have given our thoughtful consideration to facts brought out by the ld. AO in light of arguments of the ld. AR for the assessee and we do not ourselves subscribe to the argum....
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....d its tax returns. However, during the course of assessment proceedings, the assessee has raised a fresh claim to treat incentive as capital receipts not chargeable to tax. The AO has not adjudicated fresh claim made by the assessee. The learned DRP has rejected objections filed by the assessee without giving any specific direction. 11.1 The learned AR for the assessee submitted that this issue is also covered in favor of the assessee by the decision of ITAT., Chennai in assessee's own case for assessment year 2013-14, where under identical circumstances, the Tribunal has remanded the matter to the file of the AO to consider the issue in accordance with law. 11.2 The learned DR, on the other hand, fairly agreed that this issue has been set aside to the file of AO for earlier years and hence, this year also the issue may be remanded back to the file of Assessing Officer. 11.3 Having heard both the parties and considered material on record, we find that the Tribunal had considered an identical issue for assessment years 2011-12 & 2013-14 in ITA Nos.853/Chny/2014 & 3192/Chny/2017, where the issue has been remanded back to the file of AO to consider the issue denovo on merits ....
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....ess are liable for deduction in computing income chargeable under head of 'profits and gains of business or profession'. The Hon'ble Rajasthan High Court in the case of Chambal Fertilizers & Chemicals Ltd. Vs. JCIT 107 Taxmann.com 484 has taken a similar view and held that education cess is not disallowable expenditure under the provisions of section 40(a)(ii) of the Act. Therefore, we are of the considered view that there is merit in the additional grounds filed by the assessee requesting deduction for education cess & secondary and higher education cess, as business expenditure deductible u/s.37(1) of the Act. But, fact remains that assessee has taken up this issue for the first time by filing additional grounds and the Assessing Officer does not have any occasion to examine claim of the assessee. Therefore, we are of the considered view that issue needs to go back to file of the Assessing Officer and hence, we set aside the issue to file of the Assessing Officer and direct him to re-examine claim of the assessee in light of our discussions given herein above and also by considering ratio laid down by the Hon'ble Bombay High Court and Hon'ble Rajasthan High Court in the cases cit....
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....sion of ITAT Chennai, in the case of Eastman Exports Global Clothing Pvt. Ltd. in ITA No.47 & 48/Chny/2016, where the issue relating to taxability of licenses received under Focus Market Scheme was held to be capital in nature. 13.2 The ld.DR, on the other hand, strongly supporting order of learned DRP submitted that the issue is covered against the assessee by the decision of ITAT., Chennai for the assessment years 2007-08 & 2013-14 in ITA Nos.2157/Chny/2007 & 3192/Chny/2017, where the issue has been decided against the assessee. 13.3 We have heard both the parties, perused material available on record and gone through orders of the authorities below. An identical issue has been considered by the Tribunal in assessee's own case for assessment year 2013-14 in ITA No. 3192/Chny/2017, wherein the Tribunal held that duty credit scrips received from Govt. of India under Focus Market Scheme is revenue in nature. The relevant findings of the Tribunal are as under:- "32. We have heard both the parties, perused material available on record and gone through orders of the authorities below. The Government of India, Ministry of Commerce and Industry has come out with Foreign Tr....
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....ermined with respect to the purpose for which the subsidy is given. In other words, in such cases, one has to apply purpose for test. The point of time at which subsidy paid is not relevant. The source is immaterial. The form of subsidy is immaterial. 33. Therefore, in the light of decision of the Hon'ble Supreme Court, in the case of Sahney Steel & Press Works Ltd. Vs. CIT(supra), if we examine facts of the present case, we are of the considered view that duty credit scrips received by the assessee from Govt. of India for export of certain goods to some specified regions is certainly in the nature of revenue receipt, because which is primarily given to offset higher freight cost and other disabilities to select international markets, with a view to enhance our export competitiveness to these countries. We further, are of the opinion that this subsidy was given by way of assistance in carrying on of trade or business and to meet recurring expenses, but it was not for acquiring any capital asset. It was not to meet part of the cost to manufacturing activity. It was not granted for production or bringing into existence any new asset. The subsidy was given year after year....