TaxTMI 
TaxTMI 
2021 (11) TMI 570
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....essee was assessed at Rs. 1,769,70,93,900/-. By this assessment order following adjustments/additions were made to the total income of the assessee:- a. transfer pricing adjustment of Rs. 586,946,764/- b. disallowance of signage of Rs. 7,545,398/- c. disallowance of sales tool expenditure of Rs. 1 9290061/- d. disallowance of royalty expenditure of Rs. 1,591,781,250/- 2. Assessee, aggrieved with that order, In ITA. No. 477/Del/2021, raised following grounds of appeal:- " 1. That on the facts and in the circumstances of the case and in law, the order passed by the Assessing Officer ["AO"] under section 143(3) of the Income-tax Act, 1961 ("Act"), to the extent prejudicial to the Appellant, is bad in law and void ab-initio. A. Transfer Pricing Adjustment/s 2. That the TPO/DRP grossly erred in law in making/sustaining TP adjustments of INR 49,53,48.444/- being payment of Export Commission and INR 9,15,98,320/- 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 transacti....
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....was in itself a benefit for which payment of export commission was warranted. 5.8 That the TPO/DRP also grossly erred in law in understanding the supply chain model in relation to the payment of export commission and also completely failed to appreciate that merely because orders were received from the AEs in those territories would not render the assessee as a contract manufacturer. 5.9 That the TPO/DRP also completely failed to appreciate that the profit margins from the export business were significantly higher even after incurring the expenditure on account of export commission. 5.10 That without prejudice, even the application of the CUP method by the lower authorities was fundamentally flawed and was applied in a very convoluted manner to determine the ALP of international transaction relating to export commission at NIL. 5.11 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. ....
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....ire them to apply the benefit test and as such the application of CUP and the determination of transaction value at NIL was required to be rejected. B. Corporate tax grounds Re: Expenditure of Signage's - INR 75,45.398/- 7. That the AO/DRP erred in treating an Amount of INR 75,45,398/- Incurred on Signage:s as being capital in nature. 7.1 That AO/DRP erred in not appreciating that expenditure on Signage's displayed at the location of the dealers of the Assessee were for sales promotion and as such was an expenditure in the nature of trading activity and allowable as revenue expenditure. 7.2 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. 7.3 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 to 2015-16. Re: Sales tools Expenses - /NR 1,92,90,061/- 8. That the AO / DRP grossly erred in disallowing an amount of INR 1,92,90,061/- be....
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....ant did not acquire any proprietary' rights in the know-how and was merely granted the right to use the technology for the purposes of manufacturing two-wheelers. 9.6 Without prejudice to the grounds above, the AO/DRP has erred in not allowing the depreciation on the carrying value of the royalty which was capitalised by the AO during the assessment proceedings for AY 2012-13 to 2015-16. Re: Claim of Deduction of expenses of INR 250,17,14,636/- in respect of Technical Know how. 10. That the AO/DRP have erred in not allowing deduction of expenses of INR 250,17,14,636/- in respect of Technical know-how duly claimed before the AO and DRP. 10.1 That the AO/DRP have erred in not allowing deduction of expenses of 250,17,14,636/- in respect of Technical know-how in utter disregard to circular no. 14(XL-35) dated 11.04.1955. Re: Consequential Grounds 1I. That the AO has erred in initiating penalty proceedings under Section 271 (1)(c) of the Act. 12. That the AO has erred in levying interest of INR 40,62,02,820/- under section 234B of the Act on the Assessee. 13. That the AO has erred in levying interest of INR 12,2....
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....penditure being spent towards acquisition of a capital asset as it gives rise to an enduring benefit which can be enjoyed by the assessee over a number of years. Depreciation on the same at the rate of 20% was allowed to the extent of Rs. 530,593,750. Accordingly a sum of Rs. 1,591,781,250 was added back to the total income of the assessee. Consequently the draft assessment order was framed. Assessee filed an objection before The Dispute Resolution Panel who gave its direction on 17/11/2020 upholding the action of the learned assessing officer. Consequent to that final assessment order was passed on 30/3/2021 , which is Under challenge in this appeal. 4. The learned authorised representative submitted a chart stating that ground number 2-5, 6, 7, 8, 9 and 10 are covered in favour of the assessee by the decision of the coordinate bench dated 21/05/2021 in assessee's own case for assessment year 2015 - 16 bearing ITA number 9073 del 2019. Therefore, these issues are required to be decided in favour of the assessee. He submitted a copy of the decision of the coordinate bench for that assessment year. 5. The learned departmental representative vehemently supported the order of th....
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....upon the decision of the coordinate bench in assessee's own case in ITA No. 7963 and 7964/Del/2019 for Assessment Year 2013-14 and 2014-15. Thus, he submitted that this issue is fully covered in favour of the assessee by the order of the coordinate bench in assessee's own case and therefore this ground should be allowed. 9. The ld. DR vehemently supported the orders of the lower authorities. He submitted that the coordinate bench while deciding the case of the assessee has not considered the decision of the Hon'ble Supreme Court in case of Honda Seil Cars Ltd. 319 ITR 713 but coordinate bench has mainly relied upon the Article 2, 13 and 11 of the technology know how agreement. He extensively relied on paragraph 23 to 25 of the orders of the Hon'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....
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....sale of two wheelers and parts in India and was not authorized to sell its products or part in any other territory than in India without prior written consent of HMJ. The assessee entered into a separate export agreement dated 13.07.2000 under which HMJ accorded consent to the assessee to export specific models of two wheelers to certain countries on payment of export commission @ 5% of the FOB value of such exports. 7.1 Under TNMM analysis the operating profit ratio of the assessee @ 4.60% was higher than average of operating margin of -2.24% earned by the comparables companies. Considering that the operating profit margin of the selected comparable companies was lower than the OPM of the assessee, such international transactions were considered as being at arms length 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 asse....
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.... own case in ITA No. 132/Del/2013 held as under:- 7.13 A similar decision was taken by the Tribunal in the case of Hero Motocorp Limited in ITA No. 5130/Del/2010 wherein the Tribunal has held as under:- 7.14. In the light of the above the first limb of finding of the TPO/DRP is removed. 7.15. We find that while making the disallowance the TPO has held that assessee failed to demonstrate the benefits derive by it. This proposition of the TPO/DRP also do not hold any water in the light of the principle laid down by the Hon'ble jurisdiction High Court of Delhi in the case of Cushman and Wakefield (367 ITR 730). It would not be out of place to mention here that in earlier assessment years, this quarrel was restored to the files of the TPO to decide 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 con....
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....his issue is squarely considered the coordinate bench in ITA No. 7463 and 7064/Del/2018 at para No. 3 of the order. In that para the coordinate bench held that the order of ITAT in assessee's own case for Assessment Year 2012-13 in ITA No. 7714/Del/2017 wherein, as per para No. 26 the coordinate bench held that the expenditure on the signage is allowable to the assessee as revenue expenditure signage are fixed at dealers premises and it dies bit satisfy the test of ownership with the assessee. Thus it was held that same is revenue expenditure as under:- "3. Disallowance of expenditure on signages - A similar issue was considered and decided by the Tribunal in A.Y. 2012-13 in ITA No. 7714/Del/2017. The relevant findings read as under:- "26. We have heard the rival contentions and perused the record. The expenditure was incurred on signage for display of the name of the assessee at the dealer's premises. However, once the same is fixed at dealers site then the Courts have held that it does not satisfy the test of ownership with the assessee and the expenditure is to be allowed as revenue expenditure, We find support from the ratio laid down by the Hon'bl....
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....ligation 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 of the dealer look alike and the assessee incurred 50% of the expenses. The assessee during the course of hearing was asked to file copy of Agreement entered into with the dealer/s and also the No. of dealer appointed by it. The Ld. AR for the assessee duly filed the same and pointed out that the turnover of the assessee had increased from Rs. 64 crores in the preceding year to Rs. 8,539 crores during the year. 30. We have heard the rival contentions and perused the record. The expenditure incurred by the assessee on sales tools/fixtures which are placed at dealer's outlets are specifically manufactured by third party manufacturers in accordance with the specifications provided by the assessee. As per the terms of the agreement between the assessee and the third party manufacturers, 50% of the price of the sales tools is directly paid by the assessee as advance to the third party manufacturer at the time of placement of order and balance 50% is paid by th....
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.... 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 sales service infrastructure/support etc. provided by the Supplier." 35. In view of the aforesaid, we are of the view that the expenditure incurred on Signages expenses was in the nature of advertisement expenditure, which are recurring in nature, incurred for the purpose of business and in the absence of any capital asset being acquired/owned by the assessee, the same was allowable as business deduction under section 37(1) of the Act. 17. On careful consideration of the above decision, we find that though the tribunal has considered the material facts for allowance of sales tool expenses however in para number 35 inadvertently, as we could understand referred to the signage expenses. However, in respect of the above apparent error, we find that the logic given by the coordinate bench equally applies to the sales tool expenses also. The above decision was also followed by the coordinate bench in subsequent year. The learned departmental representative....
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....ench has directed to file a copy of the judgment of Honourable Supreme Court in case of Honda Sivakasi India Ltd. versus CIT (395 ITR 713 (2017) (SC) and 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 co....
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....Cars (supra) observed that the Supreme Court has carved out the distinction between the payments at the time of setting up of the manufacturing facility and the payments 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 therefo....
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....heelers and three wheelers and the purpose was to introduce 'new models' of the said product developed by the Japanese Company, the High Court noted that the agreement specifically recorded that the respondent assessee was already engaged in the business of manufacturing, assembling, selling and otherwise dealing with two/three wheelers and their parts as a joint venture. It. referred to the earlier collaboration agreement dated January 24, 1984 and the subsequent amendment thereto which conferred and had granted to the respondent assessee a right and licence to manufacture, assemble, sell, distribute, repair and service two/three wheelers. The aforesaid distinction between the two Agreements has made all the difference in the results. As a consequence, we find no merit in these appeals which are dismissed with coast." 35. The Hon'ble Supreme Court has carved out the distinction between the payments at the time of setting up of the manufacturing facility and the payments made once the manufacturing process has already begun. We observe from the facts available on record that the assessee had commenced manufacturing activity in the year 1998 itself and by virtue of the new ....
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....penditure as revenue. Accordingly, we dismiss the ground of appeal of the Revenue." 18. The fact also shows that assessee was already engaged in the manufacturing of motorcycle and Scooter and payment of royalty expenses was not with respect to setting up of manufacturing facility. Therefore respectfully following the decision of the coordinate bench, we also allow ground number 9 of the appeal of the assessee and direct the learned AO to delete the addition of Rs. 1,591,781,250/- on account of capitalisation of royalty expenses holding it to be revenue in nature. 19. During the course of hearing the assessee has raised an additional ground of appeal by an application for admission of additional evidences dated 23 June 2021 as Under:- Ground 14 14.1. That the deduction of to Education Cess amounting to INR 15,45,96,296/- paid on Income tax is an allowable expenditure in the year of payment in light of the decision of the Hon'ble Bombay High Court in the case of Sesa Goa Ltd v. JCIT [423 ITR 426]. 14.2. That the Education Cess is actually paid on Income Tax, it is not a part of the Income Tax and that the effect of omission of the word 'cess'....