TaxTMI 
TaxTMI 
TaxTMI 
2021 (11) TMI 570
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..... 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 transactions without revealing any basis thereof. 4. That the TPO/DRP erred in making/upholding the adjustme....
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....elation 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. 5.12 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 o....
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....t 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/- being sales tools expenses under section 37 of the Act. 8.1 That the AO/DRP grossly erred in introducing a new condition under section 37 of the Act that for allowance of expenditure, the same should have been incurred only under a pre-existing contractual liability. 8.2 That without prejudice to the above ground, the AO/DRP gro....
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....ction 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 12,23,322/- under section 234C of the Act on the Assessee. The above 'Grounds of Appeals' are all independent and without prejudice to one and another. The Appellant also craves leave to supplement, to cancel, amend, add and/or otherwise alter or modify, any or all, grounds of the appeal stated hereinabove. " 3. Assessee is a subsidiary of Honda motor Co Ltd Japan, engaged in the business of manufacture and sale of motorcycle and Scooters. Assessee has entered into....
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.... 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 the learned assessing officer, order of learned transfer pricing officer and direction of the learned dispute resolution panel. 6. We have carefully considered the rival contention and perused the orders of the lower authorities we have also considered the decision of the coordinate bench in assessee's own case for assessment year 2015 - 16 dated 21/05/2021. Both the parties have confirmed that there is no change in the facts and circumstances of the case for this year compared to ....
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....e 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 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 payme....
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....g 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 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 ....
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....TR 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 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 th....
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....12-13 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'ble Delhi High Court in CIT vs Honda Siel Power Products Ltd.(supra). Thus, we are of the view that the expenditure to the extent claimed by the assessee is to be allowed in the hands of the assessee and not/the entire expenditure. Ground of appeal No. 6 is thus partly allowed." 3.1 Respectfully following the decision of the coordinate bench, we hold accordingly." 14. Therefore, respectfully following the decision of the coordinate bench in assessee's own case ground No. 8 of the appeal of the assessee is allowed holding that signage expenditure of Rs. 1,65,62,386/- is revenue in nature." 13. Therefore respectfully following the decision of the coordinate bench in assessee's own ....
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....n 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 the authorized dealers, post inspection and approval of the ordered items by the Inspecting Officer of the assessee before delivery at dealer's outlet. Such sales tools/fixtures inter-alia includes the following:- * Reception Counter; * Customer Lounge Partition with Monitor Stand; * Shelf Partition for Parts and Accessories; * Frost Glass Partition; * Digital Graphic Panel; * Specifications Panel; * Two-Wheeler Display Base (Window); * Two-wheeler Display Base (Corner); * Sing Ring; * Catalogue Stand. 31. The question which arises is whether the assessee is incurring expenditure to maintain standard format of displaying its products all over India in order to induce prospective customers to clearly identify the ex....
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.... 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 also could not show that why the above logic does not apply to the sales tool expenses incurred by the assessee. Therefore, respectfully following the order of the coordinate bench in assessee's own case ground No. 9 of the appeal we hold that since tool expenses incurred by the assessee amounting to Rs. 2,39,27,651/- is a revenue expenditure allowable to the assessee as deduction. Accordingly, ground number 9 of appeal is allowed." 15. Therefore, respectfully following the decision of the coordinate bench in assessee's own case for assessment year 2015 - 16, we also hold that sales tool expenditure are revenue expenditure in nature and therefore the disallowance made by the learned assessing officer of Rs. 1 92,90,061/- is directed to be deleted. Accordingly, ground number 8 of the appeal is allowed. 16. Ground number 9 is with respect to the capitalizat....
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....enewed 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 Ltd. (supra). 21. We have carefully considered the rival contention and perused the orders of the lower authorities as well as the orders of the coordinate bench in case of the assessee deciding the issue in favour of the assessee. On careful perusal of the order, we find that the coordinate bench on identical facts and circumstances has held that the royalty paid by the assessee to the associated enterprises concern is fully revenue in nature and not the capital expenditure. Thus, the coordinate bench deleted the disallowances erred by the ld. AO that 25% of the royalty paid by the assessee is capital in nature. In that case, the coordinate bench in 2021] 124 taxmann.com 81 (Delhi - Trib.)/[2021] 187 ITD 264... ASSESSMENT YEAR 2012-1....
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....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." 17. With respect to the argument of the learned departmental representative of reliance on the decision of the honourable Supreme Court in case of Honda Seil cars India Limited (82 taxmann.com 212) has also been dealt with by the coordinate bench in case of a sister concern M/S. Honda Cars India Limited . vs DCIT (LTU) , NEW DELHI 2017 (8) TMI 1535 - ITAT DELHI in ITA No. 4491/Del/2014 And ITA No. 5483/Del/2014- August 18, 2017 as Under:- "33. We have considered the rival submission and perused the relevant material on record. In the present case, payments are made pursuant to the agreement dated 01/04/2005. At the time of the agreement was executed, the assessee was in existence in operation for more than 10 years. Thus, it cannot be said that the technical knowhow given under the agreement wa....
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....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 TCA dated 01/04/2005 the technical information provided to the assessee was in respect of addition of the existing product profile already been manufactured by the assessee. The Hon'ble Delhi High Court in the case of CIT Vs. Hero Honda Motors (supra) in para - 16 of the order (reproduced in para -29 of this order) has held the royalty for carrying on the day-to-day business as revenue expenditure. 36. The Hon'ble Supreme Court in the decision in the case of assessee (supra) has further observed as under: "22) When we apply the aforesaid parameters to the facts of the present case, the conclusion drawn by the High Court that expenditure incurred was of capital nature, appears to be unblemished. Admittedly, there was no existing business and, thus, question of improvising the existing technical know-how by borrowing the technical know-how of the HMCL, Japan did not arise. The assessee was not in existence at all and it was the result of joint venture of HMCL, J....
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....CIT [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' from section 40(a)(ii) of the Act is that only taxes paid are to be disallowed and not cess. 20. The learned authorised representative submitted that the additional ground of appeal relates to the claim of deduction/expenditure in respect of primary educational cess and higher and secondary education cess paid during the relevant assessment year. It was stated that it is a legal ground which can be taken up at any time before the higher authority is relying upon the judgement of the honourable Supreme Court in case of National thermal Power Co Ltd versus CIT (1998) 229 ITR 383. He therefore submitted that it needs to be admitted. 21. The learned departmental representative vehemently opposed the additional ground. 22. On careful consideration of the issue raised in the additional ground and the decision of the honourable Supreme Court, absence of any fresh investigation of facts, the additional ground filed by the assessee is accepted. 23. The learned authorised representative submitted that this issue i....