Income Tax Appellate Tribunal - Delhi
Goodyear India Ltd., Haryana vs Addl. Cit, New Delhi on 22 January, 2018
IN THE INCOME TAX APPELLATE TRIBUNAL
(DELHI BENCH 'I' : NEW DELHI)
BEFORE SHRI B.P. JAIN, ACCOUNTANT MEMBER
and
SHRI KULDIP SINGH, JUDICIAL MEMBER
ITA No.1516/Del./2015
(ASSESSMENT YEAR : 2010-11)
ITA No.1004/Del./2016
(ASSESSMENT YEAR : 2011-12)
M/s. Goodyear India Limited, vs. DCIT, Circle 10 (1),
Mathura Road Ballabgarh, New Delhi.
District Faridabad - 121 004 (Haryana)
(PAN : AAACG3511H)
ITA No.1706/Del./2017
(ASSESSMENT YEAR : 2012-13)
M/s. Goodyear India Limited, vs. Addl.CIT, Spl. Range 4,
Mathura Road Ballabgarh, New Delhi.
District Faridabad - 121 004 (Haryana)
(PAN : AAACG3511H)
(APPELLANT) (RESPONDENT)
ASSESSEE BY : Shri Ajay Vohra, Senior Advocate
Shri Neeraj Jain, Advocate and
Shri Abhishek Agarwal, CA
REVENUE BY : Shri Sanjay I. Bara, CIT DR
Date of Hearing : 23.11.2017
Date of Order : 22.01.2018
ORDER
PER BENCH :
2 ITA No.1516/Del/2015ITA No.1004/Del/2016 ITA No.1706/Del/2017
Since common questions of facts and law have been raised in the aforesaid appeals, the same are being disposed off by way of consolidated order to avoid repetition of discussion.
2. The Appellant, M/s. Goodyear India Limited (hereinafter referred to as 'the taxpayer') by filing the present appeals sought to set aside the impugned order dated 29.12.2015, Nil & 27.01.2017, passed by the AO in consonance with the orders passed by the ld. DRP/TPO under section 143 (3) read with section 144C of the Income-tax Act, 1961 (for short 'the Act') qua the assessment years 2010-11. 2011-12 & 2012-13 on the grounds inter alia that :-
"ITA No.1516/Del./2015 (AY : 2010-11)
1. That the assessing officer erred on facts and in law in completing assessment under section 144C/143(3) of the Income- tax Act, 1961 ('the Act') at an income of Rs. 134,76,30,400 as against the income of Rs.112,28,90,705 returned by the appellant.
2. That the assessing officer erred on facts and in law in making an addition of Rs.16,65,18,068 allegedly on account of difference from the arm's length price of the international transactions entered into by the appellant with its associated enterprise, on the basis of order passed by the Transfer Pricing Officer ('TPO') under section 92CA(3) of the Act.
3. That the assessing officer/ TPO erred on facts and in law in holding the arm's length price of the international transaction of payment of trademark fee of Rs.7,84,24,000 to the Associated Enterprise ("AE"), The Goodyear Tire & Rubber Company, USA as Nil allegedly holding that no recognizable benefit has been passed on to the appellant and therefore there was no rationale for paying this trademark fees to the AE.
3.1 That the assessing officer/ TPO erred on facts and in law in not appreciating that the international transaction of payment of trademark fees was appropriately benchmarked applying 3 ITA No.1516/Del/2015 ITA No.1004/Del/2016 ITA No.1706/Del/2017 Transactional Net Margin Method CTNMM") as the most appropriate method and was accordingly established to be at arm's length.
3.2 That the assessing officer/ TPO erred on facts and in law in holding that the entire arrangement of the payment of trademark fee is designed to shift profits outside India. 3.3 That the assessing officer/ TPO erred on facts and in law in not appreciating that the trademark fees paid by the appellant to the AE 1 % of the net domestic sales and 2% of the net export sales is within the limits prescribed by the RBI in the earlier year and was a bonafide transaction.
3.4 That the assessing officer/ TPO erred on facts and in law in comparing the other subsidiary, namely, Goodyear South Asia Tyres Private Limited, Aurangabad, Maharashtra of Goodyear USA with the appellant with reference to the payment of trademark fee,
4. That the assessing officer/TPO erred on facts and in law in making transfer pricing adjustment amounting to Rs.7,84,24,000 in relation to the advertisement, marketing and sales promotion expenses (hereinafter referred to as 'the AMP expenses') incurred by the appellant.
4.1 That the assessing officer/TPO erred on facts and in law in making the said addition allegedly holding that the appellant was promoting the brand of the associated enterprise and instead of payment of the trademark fee to the AE of Rs.7,84,24,000, the appellant ought to have received equivalent amount as compensation for creating and developing marketing intangibles in India.
4.2 The assessing officer/TPO erred on facts and in law in not appreciating that the AMP expenses, etc., unilaterally incurred by the appellant in India could not be characterized as an international transaction as per section 92B, in the absence of any proved understanding / arrangement between the appellant and the associated enterprise, so as to invoke the provisions of section 92 of the Act.
4.3 The assessing officer / TPO erred on facts and in law in not appreciating that the only Transfer Pricing adjustment permitted by Chapter X of the Act was in respect of the difference between the arm's length price (ALP) and the contract or declared price, but the said provision could not be invoked to determine the 'quantum' / extent of business expenditure. 4 ITA No.1516/Del/2015 ITA No.1004/Del/2016 ITA No.1706/Del/2017 4.4 The assessing officer/TPO erred on facts and in law in holding that expenditure incurred by the appellant which incidentally resulted in brand building for the foreign AE, was a transaction of creating and improving marketing intangibles for and on behalf of its foreign AE and further that such a transaction was in the nature of provision of a service by the appellant to the AE.
4.5 That assessing officer/TPO erred on facts and in law in not appreciating that such a Transfer Pricing adjustment could not at all be made in respect of AMP expenses which were found to constitute legitimate, bonafide and deductible business expenditure and the appellant was the economic owner of the benefit of such expenses.
4.6 That the assessing officer/TPO erred on facts and in law in not appreciating that the characterization of the appellant being that of a full fledged manufacturer and I or distributor performing all functions and bearing all risks, is the sole beneficiary of the AMP expenditure incurred by it, justified the conduct of the appellant in incurring and bearing the cost of AMP expenditure.
4.7 The assessing officer/TPO erred on facts and in law in not appreciating that such a Transfer Pricing adjustment cannot at all be made in law without determining the Arm's Length Price ("ALP") by applying one of the methods specified in section 92C of the Act.
4.8 Without prejudice that the assessing officer erred on facts and in law in ignoring the fact that, since the appellant earns return commensurate with other brand owners, the appellant is adequately compensated for its functions and AMP expenses. 4.9 Without prejudice that the assessing officer/TPO erred on facts and in law in not appreciating that the AMP expenses incurred by the appellant was appropriately established to be arm's length applying TNMM.
4.10 Without prejudice, the assessing officer/TPO erred on facts and in law in not placing on record any comparables for determining arms length AMP expenditure.
4.11 Without prejudice that the assessing officer/TPO erred on facts and in law in not appreciating that even applying Bright Line Test ("BLT") no adjustment on account of AMP expenditure could be made in as much as AMP expenditure 5 ITA No.1516/Del/2015 ITA No.1004/Del/2016 ITA No.1706/Del/2017 incurred by the appellant was lower than AMP expenditure incurred by comparable companies.
5. That the assessing officer I TPO erred on facts and in law in making an adjustment of Rs.96,70,068 in the arm's length price of the international transaction of export of finished goods entered into by the appellant with its associated enterprise. 5.1 That the assessing officer ITPO erred on facts and in law in not appreciating export incentive, being a compensation for the cost incurred for sale of goods, is required to be reduced from the cost of goods sold for computing gross profit margin for determining the arm's length price.
5.2 That the assessing officer I TPO erred on facts and in law in holding that incentive received in respect of export of finished goods, should not be taken into account for determining the profit/cost in respect of the international transaction of export. 5.3 That the assessing officer I TPO has erred on facts and in law in holding that "if the appellant's method of calculation of 'cost of goods sold' is followed, it would tantamount to a claim that benefit, which has not yet accrued at the time of sale of goods, being treated as a component of cost of goods sold." 5.4 That the assessing officer I IPO erred on facts and in law in ignoring that the Global Transfer Pricing Policy of the group company provides for reducing the cost of merchandise by the export incentives available to the exporting entity. 5.5 That the assessing officer / TPO erred on facts and in law in holding that the export incentive does not form part of invoice price of goods sold and hence the same cannot be reduced from the cost of goods sold.
6. That the assessing offer erred on facts and in law in making disallowance of provision for replacement loss amounting to Rs.61,53,000 allegedly on the ground that the appellant did not incur expenditure on account of replacement of goods in the subsequent years.
7. That the assessing officer erred on facts and in law in making an ad hoc disallowance of Rs.3,80,12,100 being 30% of the total expenditure of Rs.12,67,07,000 incurred by the appellant on advertisement and publicity holding that the expenditure was incurred for brand building for the entities owning the brand. 6 ITA No.1516/Del/2015 ITA No.1004/Del/2016 ITA No.1706/Del/2017 7.1 That the DRP erred on facts and in law in affirming the above disallowance proposed by the assessing officer allegedly following its order in assessment year 2009-10 7.2 That the assessing officer erred on facts and in law in not appreciating that the advertisement and publicity expenses were incurred by the appellant in the course of carrying on of its business and were allowable deduction as business expenditure. 7.3 That the assessing officer erred on facts and in law in not appreciating that when the said expenditure of advertisement has been subjected to benchmarking analysis by the TPO under section 92 of the Act and appropriate arm's length price in this regard has been determined, there cannot be any further disallowance for the said expenditure under section 37 of the Act.
8. That the assessing officer/ DRP erred on facts and in law in making disallowance of Rs.35,84,180 being other miscellaneous charges and Rs.12,74,347 being service tax written off out of miscellaneous expenditure of Rs.12,35,16,000 allegedly holding that (i) the expenditure were not supported by vouchers and the appellant could not substantiate that the expenditure were incurred wholly and exclusively for the purpose of business (ii) the appellant has failed to deduct taxes at source on certain expenditure and (iii) some of the expenditure were in the nature of capital nature.
8.1 Without prejudice, that the assessing officer erred on facts and in not allowing depreciation on the expenses held to be in the nature of capital expenditure.
9. That the assessing officer erred on facts and in law in making disallowance of Rs. 13,05,000 being provision for obsolete stock of shares allegedly on the ground that the same was only a provision and not an actual write off. 9.1 That the assessing offer erred on facts and in law in disallowing provision for obsolete spares and parts amounting to Rs.13,05,000 allegedly holding that the appellant has failed to provide the basis and working of provision of obsolete stores and spares.
10. That the assessing officer erred on facts and in law in making an ad-hoc disallowance of Rs.25,00,000 holding 50% of the salary paid to administrative staff of the appellant which was allegedly attributed to the capital work in progress and was ought to be capitalized along with the capital work in progress. 7 ITA No.1516/Del/2015 ITA No.1004/Del/2016 ITA No.1706/Del/2017
11. That the assessing officer erred on facts and in law in making disallowance of stores and spares written off amounting to Rs. 53,93,000 allegedly holding that such details and supporting evidence of write off of stores and parts were not furnished and also such write off was not verifiable with reference to physical disposal.
12. That the assessing officer erred on facts and in law in under Section 234B and Section 234C of the Act."
"ITA No.1004/Del./2016 (AY : 2011-12)
1. That the assessing officer erred on facts and in law in completing assessment under section 144C/143(3) of the Income-tax Act, 1961 ('the Act') at an income of Rs.132,46,38,800 as against the income of Rs.109,38,32,595 determined by the appellant in its income tax return.
2. That the DRP/assessing officer erred on facts and in law in making an addition of Rs.19,08,88,000 allegedly on account of difference from the arm's length price of the international transactions entered into by the appellant with its associated enterprise, on the basis of order passed by the Transfer Pricing Officer ('TPO') under section 92CA(3) of the Act.
3. That the assessing officer/ TPO erred on facts and in law in holding the arm's length price of the international transaction of payment of trademark fee of Rs.9,54,44,000 to the Associated Enterprise ("AE"), the Goodyear Tire & Rubber Company, USA at Nil allegedly holding that no recognizable benefit has been passed on to the appellant and therefore there was no rationale for paying this trademark fees to the AE.
3.1 That the DRP/assessing officer erred on facts and in law in holding that the entire arrangement of the payment of trademark fee is designed to shift profits outside India.
3.2 That the DRP erred on facts and in law in sustaining the Transfer Pricing adjustment made by the TPO holding the arm's length price of international transaction of payment of royalty as NIL following its orders for assessment years 2007- 08, 2008-09, 2009-10 and 2010-11.
3.3 That the assessing officer / TPO erred on facts and in law in holding that the payment of trademark fee to the AE was a separate international transaction which is required to 8 ITA No.1516/Del/2015 ITA No.1004/Del/2016 ITA No.1706/Del/2017 be bench marked separately rather than aggregating with other transactions under TNMM.
3.4 That the DRP/assessing officer erred on facts and in law in not appreciating that the international transaction of payment of trademark fees was appropriately bench marked applying Transactional Net Margin Method ('TNMM") as the most appropriate method and was accordingly established to be at arm's length.
3.5 That the assessing officer/ TPO erred on facts and in law in comparing the other subsidiary, namely, Goodyear South Asia Tyres Private Limited, Aurangabad, Maharashtra of Goodyear USA with the appellant while holding that there was no justification for payment of the trademark fee.
3.6 That the assessing officer/ TPO erred on facts and in law in not appreciating that the trademark fees paid by the appellant to the AE 1 % of the net domestic sales and 2% of the net export sales is within the limits prescribed by the RBI and was a bonafide payment made as per the trademark license agreement.
3.7 Without prejudice, that the assessing officer/ TPO erred on facts and in law in disregarding the comparable uncontrolled price of royalty submitted during the course of assessment proceedings, for benchmarking the transaction of payment of royalty applying CUP method .
4. That the DRP/assessing officer erred on facts and in law in making transfer pricing adjustment amounting to Rs.9,54,44,000 in relation to the advertisement, marketing and sales promotion expenses (hereinafter referred to as 'the AMP expenses') incurred by the appellant.
4.1 That the DRP/assessing officer erred on facts and in law in making the said additional allegedly holding that the appellant was promoting the brand of the associated enterprise and instead of payment of the trademark fee to the AE of Rs.9,54,44,000, the appellant ought to have received equivalent amount as compensation for creating and developing marketing intangibles in India.
4.2 The DRP/assessing officer erred on facts and in law in not appreciating that the AMP expenses, etc., unilaterally incurred by the appellant in India could not be characterized as an international transaction as per section 92B, in the absence of any proved understanding / arrangement between 9 ITA No.1516/Del/2015 ITA No.1004/Del/2016 ITA No.1706/Del/2017 the appellant and the associated enterprise, so as to invoke the provisions of section 92 of the Act.
4.3 The DRP/TPO erred on facts and in law in not appreciating that the only Transfer Pricing adjustment permitted by Chapter X of the Act was in respect of the difference between the arm's length price (ALP) and the contract or declared price, but the said provision could not be invoked to determine the 'quantum' I extent of business expenditure.
4.4 The DRP/assessing officer erred on facts and in law in holding that expenditure incurred by the appellant which incidentally resulted in brand building for the foreign AE, was a transaction of creating and improving marketing intangibles for and on behalf of its foreign AE and further that such a transaction was in the nature of provision of a service by the appellant to the AE.
4.5 The DRP/assessing officer erred on facts and in law in not appreciating that such a Transfer Pricing adjustment cannot at all be made in law in absence of an international transaction in relation to AMP expense and without determining the Arm's Length Price ("ALP") by applying one of the methods specified in section 92C of the Act.
4.6 Without prejudice that the DRP/TPO erred on facts and in law, in not appreciating that the AMP expenses incurred by the appellant was appropriately established to be at arm's length applying TNMM.
4.7 Without prejudice that the assessing officer/TPO erred on facts and in law in not appreciating that even applying Bright Line Test ("BLT") no adjustment on account of AMP expenditure could be made in as much as AMP expenditure incurred by the appellant was lower than AMP expenditure incurred by comparable companies.
5. That the DRP/assessing offer erred on facts and in law in making disallowance of provision for warranty (replacement loss) amounting to Rs.11,83,493 allegedly holding that the same was contingent in nature.
5.1 That the DRP erred on facts and in law in observing that the provision for warranty is based on estimate and the behavior pattern of customer to claim warranty or not cannot be predicted.
10 ITA No.1516/Del/2015ITA No.1004/Del/2016 ITA No.1706/Del/2017
6. That the assessing officer erred on facts and in law in making an ad hoc disallowance of Rs.3,33,17,400 being 30% of the total expenditure of Rs.11,10,58,000 incurred by the appellant on advertisement and publicity following the finding in the preceding assessment year allegedly holding that the expenditure was incurred for the benefit of the enterprise who owns brand name.
6.1 That the assessing officer erred on facts and in law in not appreciating that the advertisement and publicity expenses were incurred by the appellant in the course of carrying on of its business and were allowable deduction as business expenditure.
6.2 That the assessing officer erred on facts and in law in making disallowance of Rs.54,17,314 allegedly on account of short fall of interest on provident fund.
7. That the assessing officer erred on facts and in law in under Section 234B and Section 234C of the Act."
"ITA No.1706/Del./2017 (AY: 2012-13)
1. That the assessing officer erred on facts and in law in completing assessment under section 144C/143(3) of the Income- tax Act, 1961 ('the Act') at an income of Rs.1,19,58,49,260 as against the income of Rs.92,07,70,135 determined by the appellant in its income tax return.
2. That the DRP/assessing officer erred on facts and in law in making an addition of Rs.22,36,02,000 allegedly on account of difference from the arm's length price of the international transactions entered into by the appellant with its associated enterprise, on the basis of order passed by the Transfer Pricing Officer ('TPO') under section 92CA(3) of the Act.
3. That the assessing officer/ TPO erred on facts and in law in holding the arm's length price of the international transaction of payment of trademark fee of Rs.11,18,01,000 to the Associated Enterprise ("AE"), the Goodyear Tire & Rubber Company, USA at Nil allegedly holding that no recognizable benefit has been passed on to the appellant and therefore there was no rationale for paying this trademark fees to the AE.
3.1 That the DRP/assessing officer erred on facts and in law in holding that the entire arrangement of the payment of trademark fee is designed to shift profits outside India.11 ITA No.1516/Del/2015 ITA No.1004/Del/2016 ITA No.1706/Del/2017
3.2 That the DRP erred on facts and in law in sustaining the Transfer Pricing adjustment made by the TPO holding the arm's length price of international transaction of payment of royalty as NIL following its orders for preceding assessment years 2007-08 to 2011-12.
3.3 That the DRP/assessing officer erred on facts and in law in not appreciating that the international transaction of payment of trademark fees was appropriately benchmarked applying Comparable Uncontrolled Price Method (CUP) as the most appropriate method and was accordingly established to be at arm's length.
3.4 That the assessing officer / TPO erred on facts and in law in holding that the payment of trademark fee to the AE was a separate international transaction which is required to be benchmarked separately not appreciating that the said international transaction was separately benchmarked applying CUP method in the Transfer Pricing study.
3.5 That the assessing officer/TPO erred on facts and in law in disregarding the comparable uncontrolled transactions considered for benchmarking the transaction of payment of royalty applying CUP method, in the Transfer Pricing study and as submitted during the course of assessment proceedings.
3.6 That the assessing officer/ TPO erred on facts and in law in comparing the other subsidiary, namely, Goodyear South Asia Tyres Private Limited, Aurangabad, Maharashtra of Goodyear USA with the appellant while holding that there was no justification for payment of the trademark fee.
4. That the DRP/assessing officer erred on facts and in law in making transfer pricing adjustment amounting to Rs.11,18,01,000 in relation to the advertisement, marketing and sales promotion expenses (hereinafter referred to as 'the AMP expenses') incurred by the appellant.
4.1 That the DRP/assessing officer erred on facts and in law in making the said additional allegedly holding that the appellant was promoting the brand of the associated enterprise and instead of payment of the trademark fee to the AE of Rs.11,18,01,000, the appellant ought to have received equivalent amount as compensation for creating and developing marketing intangibles in India.
4.2 The DRP/assessing officer erred on facts and in law in not appreciating that the AMP expenses, etc., unilaterally incurred by the appellant in India could not be characterized as 12 ITA No.1516/Del/2015 ITA No.1004/Del/2016 ITA No.1706/Del/2017 an international transaction as per section 92B, in the absence of any proved understanding / arrangement between the appellant and the associated enterprise, so as to invoke the provisions of section 92 of the Act.
4.3 The DRP/TPO erred on facts and in law in not appreciating that the only Transfer Pricing adjustment permitted by Chapter X of the Act was in respect of the difference between the arm's length price (ALP) and the contract or declared price, but the said provision could not be invoked to determine the 'quantum' / extent of business expenditure.
4.4 The DRP/TPO erred on facts and in law in characterizing the appellant as a distributor and not a risk bearing manufacturer, not appreciating that around 77% of income earned by the appellant constitutes sale of manufactured goods.
4.5 That the DRP/TPO erred on facts and in law in concluding that the appellant is incurring AMP expenses at the behest and under the control of the AE and primarily for the benefit of the AE, allegedly relying on Article VIII - Infringement clause of the Trademark License Agreement entered between the parties.
4.6 The DRP/TPO erred on facts and in law in summarily concluding existence of an international transaction allegedly holding that the appellant has failed to provide complete information regarding its AMP expenditure and that it has failed to discharge its onus, without pointing out specific details which were not complied by the appellant.
4.7 The DRP/TPO erred on facts and in law in holding that expenditure incurred by the appellant which incidentally resulted in brand building for the foreign AE, was a transaction of creating and improving marketing intangibles for and on behalf of its foreign AE and further that such a transaction was in the nature of provision of a service by the appellant to the AE.
4.8 The DRP/assessing officer erred on facts and in law in not appreciating that such a Transfer Pricing adjustment cannot at all be made in law in absence of an international transaction in relation to AMP expenses and without determining the Arm's Length Price ("ALP") by applying one of the methods specified in section 92C of the Act.
4.9 Without prejudice that the DRP/TPO erred on facts and in law in not appreciating that the AMP expenses incurred by the appellant was appropriately established to be arm's length applying TNMM.13 ITA No.1516/Del/2015 ITA No.1004/Del/2016 ITA No.1706/Del/2017
4.10 Without prejudice, the assessing officer/TPO erred on facts and in law in not appreciating that even applying Bright Line Test ("BLT") no adjustment on account of AMP expenditure could be made in as much as AMP expenditure incurred by the appellant was lower than AMP expenditure incurred by comparable companies.
5. That the DRP erred on facts and in law in making disallowance of provision for warranty (replacement loss) amounting to Rs.1,49,77,293 allegedly holding that the same was contingent in nature.
5.1 That the DRP erred on facts and in law in observing that the provision for warranty is based on estimate and the behavior pattern of customer to claim warranty or not cannot be predicted.
6. That the assessing officer erred on facts and in law in making an ad hoc disallowance of Rs.3,64,99,828 being 30% of the total expenditure of Rs.12,16,66,095 incurred by the appellant on advertisement and publicity following the finding in the preceding assessment year allegedly holding that the expenditure was incurred for the benefit of the enterprise who owns brand name.
6.1 That the assessing officer erred on facts and in law in relying on the decision of Hon'ble Delhi High Court in the case of Maruti Suzuki India Limited to held that if the brand name is not owned by the assessee, such expenditure is incurred for the benefits of the enterprise who own the brand name, not appreciating that the said decision was made redundant by the Hon'ble Supreme Court.
6.1 That the assessing officer erred on facts and in law in not appreciating that the advertisement and publicity expenses were incurred by the appellant in the course of carrying on of its business and were allowable deduction as business expenditure.
7. That the assessing officer erred on facts and in law in under Section 234B and Section 234C of the Act."
2. Briefly stated, for the sake of brevity, the facts of ITA No.1516/Del/2015 for AY 2010-11 are taken for adjudication of the controversy raked in all the aforesaid appeals are : the taxpayer is held by Goodyear USA of 74% and started its operation in 1922 14 ITA No.1516/Del/2015 ITA No.1004/Del/2016 ITA No.1706/Del/2017 and set up a manufacturing facility at Ballabhgarh, Haryana in 1961. The taxpayer is into the business of manufacturing and sale of passenger car, medium commercial truck, light truck and farm tyres. The taxpayer also trades in radial passenger, off-the-road bias, farm and truck tyres. The taxpayer supplies tyres to many leading original equipment manufacturers (OEMs) in India and caters to replacement market as well as export market. The taxpayer is a pioneer in introducing tubeless radial tyres in the passenger car segment.
3. During the year under assessment, the taxpayer entered into international transactions as under :-
S.No. Types of International Transaction Method Total value Selected of transaction 1 Import of Raw Material TNMM 120,315,346 2 Import of Spares Parts 807,826 3 Import of Capital goods 210,783,278 4 Payment of trademark fee 78,424,000 5 Import of finished goods 111,258,218 6 Commission received 3,925,637 7 Export of finished goods 288,779,320 8 Commission paid 1,485,974 9 Payment of regional service charges 54,934,540 10 Cost allocation from group companies 1,075,600 11 Reimbursement of expenses to group 198,852 companies 12 Reimbursement of expenses from CUP 3,365,016 group companies 15 ITA No.1516/Del/2015 ITA No.1004/Del/2016 ITA No.1706/Del/2017
4. The taxpayer in its TP documentation by using Transactional Net Margin Method (TNMM) for Class-1 manufacturing and Class-2 trading with operating profit/sales calculated its margin at 10.99% and 8.41% as against arm's length margin of 6.05% and 1.91% respectively, hence found its international transaction at arm's length as Profit Level Indicator (PLI) of the manufacturing and trading segment are more than that of the comparables. However, TPO by applying the "doctrine of benefit" determined the ALP of trademark payments to be nil and consequently proposed adjustment of Rs.7,84,24,000/-. TPO further held that since the taxpayer was promoting the brand of its Associated Enterprise (AE) for which the taxpayer was not compensated determined the value of compensation on brand building further proposed adjustment of Rs.7,84,24,000/- on this score. TPO also questioned the taxpayer's approach of benchmarking by reducing the export incentive from the total cost and then determined the mark up of 5% on total cost to arrive at the value of export and proceeded to hold that 5% mark up should have been charged on the total cost and thereby proposed an adjustment of Rs.96,70,068/-. Consequently, TPO proposed the determination of ALP relating to export of traded goods at Rs.17,16,20,264/-, 16 ITA No.1516/Del/2015 ITA No.1004/Del/2016 ITA No.1706/Del/2017 relating to payment of trademark fee/creation of marketing intangibles at Rs.7,84,24,000/- and directed the AO to enhance the income of the taxpayer by Rs.96,70,068/- by not allowing the taxpayer to reduce the export incentives to calculate the value of the goods sold and made the total enhancement of taxpayer's income at Rs.16,65,18,068/-.
5. The taxpayer carried the matter before the ld. DRP by filing objections who has disposed of the objections. Feeling aggrieved, the taxpayer has come up before the Tribunal by way of filing the present appeals.
6. We have heard the ld. Authorized Representatives of the parties to the appeal, gone through the documents relied upon and orders passed by the revenue authorities below in the light of the facts and circumstances of the case.
GROUNDS NO.1 & 2 OF ITA No.1516/Del./2015 (AY: 2010-11) ITA No.1004/Del./2016 (AY: 2011-12) ITA No.1706/Del./2017 (AY: 2012-13)
7. Grounds No.1 & 2 of ITA Nos.1516/Del/2015, 1004/Del/2016 & 1706/Del/2017 are general in nature more specifically elaborated in the subsequent grounds, need no adjudication.
17 ITA No.1516/Del/2015ITA No.1004/Del/2016 ITA No.1706/Del/2017 GROUNDS NO.3, 3.1, 3.2, 3.4 OF ITA No.1516/Del./2015 (AY: 2010-11) GROUNDS NO.3, 3.1, 3.2, 3.4, 3.5, 3.6 & 3.7 OF ITA No.1004/Del./2016 (AY: 2011-12) GROUNDS NO.3, 3.1, 3.2, 3.4, 3.5 & 3.6OF ITA No.1706/Del./2017 (AY: 2012-13)
8. At the very outset, the ld. AR for the taxpayer contended that the issue is as to whether determining of ALP of transaction of payment of trademark fees paid by the taxpayer to its AE is squarely covered by the order passed by the coordinate Bench of the Tribunal in assessee's own case decided vide ITA Nos. 5650/Del/2011, 6240/Del/2012 & 916/Del/2014 for AYs 2007-08, 2008-09 & 2009-10 and further been confirmed by the Hon'ble Delhi High Court vide order dated 13.02.2017. The ld. DR for the Revenue drew our attention towards para 5.7 of the TP order and contended that the taxpayer has been mandatorily using Goodyear trademark and logo in India and over the years has made efforts by way of expenditure and human efforts to develop the brand in India and the brand has thereby grown in value and significant economic substance has been added to it and marketing intangibles have been created by the taxpayer benefiting the parent company but no recognizable benefit has been passed to the taxpayer. However, 18 ITA No.1516/Del/2015 ITA No.1004/Del/2016 ITA No.1706/Del/2017 the ld. DR has not controverted the fact that there is no change in the business model of the taxpayer since AYs 2007-08, 2008-09 & 2009-10 when the issue as to payment of trademark fee has been decided.
9. Coordinate Bench of the Tribunal in assessee's own case for AYs 2007-08, 2008-09 & 2009-10 decided identical issue as to determining the ALP of international transaction regarding trademark fee to be nil in favour of the taxpayer by returning following findings :-
8. We have heard the rival contentions in light of the material produced and the decisions relied upon. Ld. Counsel of the assessee has emphasized on the benchmarking of payment of trademark as closely linked transaction with the manufacturing segment. The Ld. Counsel of the assessee has submitted that the royalty relates to the entire turnover/production of the appellant and constitutes an essential part of the cost of sales. The entire business model of the appellant is based on the licenses granted by the associated enterprise to manufacture the tyres which have been highly successful and renowned throughout the world, and for providing all the I.P. rights and technology necessary for the same, for which the royalty payment has been made. Without which, the appellant's business will cease to exist and its entire operations would come to a halt. Accordingly, since the entire operation of the appellant is based on rights and licenses to manufacture the automobile tyres and tubes, for which royalty is being paid, the royalty payments cannot be separately evaluated.
In the case of the appellant, it is nobody's case that the company has entered into diverse activities. The international transactions of the appellant primarily relate to its business of manufacturing of tyres and such international transactions are closely interlinked or inter-twined. It would also not be possible to determine separately profit from the international transactions of payment of trademark fees. Reliance in this regard is placed by the Ld. Assessee counsel on the decision of Hon'ble coordinate Bench of Tribunal, in a similar case of Maruti Suzuki India 19 ITA No.1516/Del/2015 ITA No.1004/Del/2016 ITA No.1706/Del/2017 Limited vs. ACIT (ITA No. 5237/Del/2011), for assessment year 2005-06, too, held as under:
"13.1 Thus, we agree with the submission of the appellant's counsel that the entire business model of the appellant is based on license from SMC, Japan for which royalty has been paid. Without such technology supply the appellant's business will cease to exist and its entire operations would come to a halt. Thus, we agree with the appellant's submission TPO has arbitrarily divided the license agreement of the appellant without appreciating that all the license agreement is a single in severable agreement."
9. Reliance has also been placed by the assessee on the decision of Delhi Bench of Tribunal in the case of Lumax Industries Ltd. vs. ACIT (ITA No. 4456/Del/2012), wherein, in the similar case of payment of royalty, this Tribunal concluded that:
".............the payment of royalty cannot be examined divorced from the production and sales. Royalty is inextricably linked with these activities. In the absence of production and sale of products, there would be no question arising regarding payment of any royalty. Rule 10A(d) of the ITAT Rules defines 'transaction' as a number of closely linked transactions. Royalty, then, is a transaction closely linked with production and sales. It cannot be segregated from these activities of an enterprise, being embedded therein. That being so, royalty cannot be considered and examined in isolation on a standalone basis....................
Royalty is to be calculated on a specified agreed basis, on determining the net sales which, in the present case, are required to be determined after excluding the amounts of standard bought out components, etc., since such net sales do not stand recorded by the assessee in its books of account. Therefore, it is our considered opinion that the assessee was correct in employing an overall TNMM for examining the royalty. The TPO worked out the difference in the PLI of the outside party (the assessee) at 4.09% and the comparables at 7.05%. This has not been shown to fall outside the permissible range." The Hon'ble Tribunal accordingly held that the assessee was correct in applying overall TNMM for examining royalty.
10. The aforesaid decision of this Tribunal has been upheld by the Hon'ble High Court in the case of ACIT vs. Lumax Industries Ltd. (ITA No. 102/2014).
20 ITA No.1516/Del/2015ITA No.1004/Del/2016 ITA No.1706/Del/2017
11. The assessee has also rightly made reference to the decision of Delhi High Court in the case of Sony Ericsson Mobile Communications India Pvt. Ltd vs. CIT (ITA No 16/2014) reported at 374 ITR 118, wherein, the Court has upheld clubbing of closely linked transactions for undertaking benchmarking analysis applying entity wise TNMM. In fact, in the case of CIT vs. Reebok India Co Ltd (ITA no 213/2014), being part of the decision of Hon'ble High Court in the case of Sony Erickson, the Court has held as under:
"185. Royalty payable for availing the right to use would depend upon corresponding price, which would have been paid by an independent or unrelated enterprise. This is judged by applying comparables. TPO has not rejected the quantum of royalty on the said principle. The reasoning given by the TPO is not only erroneous for the reasons stated above, but is also contrary to the Rules. Depending upon the method selected, net profit or gross profit of the assessed has to be compared with profit margins of related enterprise. The formula prescribed under the Rules does not accept the ratiocination adopted and applied by the TPO."
12. Another contention of the TPO that the Goodyear Brand was weak and therefore does not require payment of royalty, is not brought out from the records. The AR of the assessee has made elaborate submission and placed evidence on record to show that 'Goodyear' brand is considered to be one of the top most acclaimed brand across the globe. Therefore, there is no merit in the allegation of the TPO that Goodyear brand has no worth and therefore, the payment made by the assessee for use of Goodyear brand is unwarranted.
13. The DRP has further added that since the sister concern of the assessee, Goodyear South Asia Private Limited, is not making payment of royalty, therefore, there shall be no payment of royalty by the assessee either. We have considered this aspect and found that there is difference in business dynamics and commercial realities in both the companies in as much as 60% of the sales made by Goodyear South Asia Limited is made to its related parties itself. Nevertheless, the AR of the assessee has rightly pointed out that in terms of Rule 10B(1)(a) of the Rules, international transactions entered into by the assessee with its AE, Goodyear Inc. USA cannot be compared with the international transaction entered between another AE, Goodyear South Asia Pvt. Ltd. with Goodyear Inc. USA.
21 ITA No.1516/Del/2015ITA No.1004/Del/2016 ITA No.1706/Del/2017
14. The AR of the assessee has rightly palced reliance on the decision of third Member Bench of the Mumbai Tribunal, in the case of Tecnimont ICB Pvt. Ltd. vs. ACIT (ITA No. 4608 & 5085/Mum/2010), wherein, while explaining the import of clause
(i) of Rule 10B(e) of the Act, held that the Rules strictly provides that an uncontrolled transaction shall be a transaction undertaken between two unrelated parties and cannot be given a wider term to include transaction entered between two other related parties, as under:
"14. What is an 'uncontrolled transaction' has been clearly defined under Rule 10A(a) to mean 'a transaction between enterprises other than associated enterprises whether resident or non-resident'. A plain reading of the meaning given to the expression 'uncontrolled transaction' leaves no room for any doubt that it is a transaction between two non-associated enterprises. If he transaction is between two associated enterprises, it goes out of the ambit of 'uncontrolled transaction' under Rule 10A. When section 92C is read along with Rule 10B(e) and 10A, it becomes abundantly clear that in computing ALP under the transactional net margin method, a comparison of the assessee's net profit margin from international transactions with its AEs has necessarily to be made with that of the net profit margin realized by the same enterprise or an unrelated enterprise from a comparable but definitely uncontrolled transaction, i.e., a transaction between non-associated enterprises. There is no statutory sanction for roping in a comparable controlled transaction for the purposes of benchmarking. When it has been clearly mandated in all the relevant methods for determining ALP that the comparison has to be made by the enterprise's international transaction with comparable uncontrolled transaction, by no sheer logic a comparable controlled transaction can be employed for the purposes of making comparison. There is no warrant for diluting the prescription given by the statute or rules when such prescription itself serves the ends of justice properly and is infallible. If the view of the Revenue that a controlled transaction should not be shunted out for the purposes of benchmarking, is accepted, then all the relevant provisions contained in Chapter X in this regard, will become otiose. If such a contention of making comparison with a comparable controlled transaction is taken to its logical conclusion, then there will never arise any need to take up any case for transfer pricing scrutiny. The reason is obvious. ALP is determined for application in respect of transactions between two AE so that the profit likely to arise from such transactions is not under-22 ITA No.1516/Del/2015 ITA No.1004/Del/2016 ITA No.1706/Del/2017
reported vis-à-vis from similar transactions with third parties. If the comparison is made again with net profit margin realized from transactions between two AEs, instead of third parties, it may demonstrate the same cooked results in both the situations, thereby leaving no scope for any adjustment. In this eventuality, the very object of such provisions will be frustrated. Thus, it follows that the ALP can be determined only by making comparison with a comparable uncontrolled transaction and not a comparable controlled transaction."
15. It is also not acceptable that an international transaction which is not undertaken in the preceding year, cannot be undertaken between parties subsequently. In pursuance to direction of the Bench, the appellant has submitted three documents as additional evidence, i.e. (i) certificate issued by the associated enterprise, i.e. The Goodyear Tire & Rubber Company, USA explaining the reasons for not charging royalty in the earlier years; (ii) Copy of extracts of Minutes of Board of Directors meeting dated 31.07.2006 regarding approval for execution of Trademark License Agreement and (iii) copy of an email exchanged between the appellant and the associated enterprise regarding payment of trade mark fee in July 2006. These evidences are admitted on record. The ld. DR has no objection to admit these evidences on record. In these evidences, the AE has clarified that it did not charge royalty in the earlier years in order to support the appellant who was yet to achieve higher market share, stabilize operations, maintain competitive pricing and was recovering from financial difficulties. Subsequently, when the financial position of the assessee improved, the AE started charging royalty in consideration for allowing the assessee to use its valuable brand name. The reasons given by the AR of the assessee, for not charging royalty by the AE, prior to the year under consideration is duly corroborated from the year to year profits shown by the company. It is valid reason that the AE was not charging royalty prior to financial year 2006-07 was due to the losses incurred by the assessee and prior to year 2000, no Indian companies were allowed to pay trademark fees under automatic route. Nevertheless, the Mumbai Bench of Tribunal has, in the case of Dresser- Rand India Pvt Ltd vs. ACIT (ITA No. 8753/Mum/2010 held that whether the services given by the AE to the assessee, without charging consideration, on gratuitous basis in the preceding year, cannot de bar the AE from charging fee for the same services subsequently. The observations are:
"8......When evaluating the arm'slength price of a service, it is wholly irrelevant as to whether the assessee benefits from it or not; the real question which is to be 23 ITA No.1516/Del/2015 ITA No.1004/Del/2016 ITA No.1706/Del/2017 determined in such cases is whether the price of this service is what an independent enterprise would have paid for the same. Similarly, whether the AE gave the same services to the assessee in the preceding years without any consideration or not is also irrelevant. The AE may have given the same service on gratuitous basis in the earlier period, but that does not mean that arm's length price of these services is'nil'. The authorities below have been swayed by the considerations which are not at all relevant in the context of determining the arm's length price of the costs incurred by the assessee in cost contribution arrangement.
16. In light of the above, we conclude that there exists a direct nexus between the revenue earned by the assessee and the payment of royalty made to the associated enterprise for using brand name, and therefore, it would be incorrect to analyze the transaction of payment of royalty in isolation. Further, the ld. DR had raised a contention that the assessee has not demonstrated how the payment for royalty beneficial to the taxpayer. We are of the opinion that, ascertaining whether a service has actually benefitted the assessee is not within the prerogative of the tax authorities.The Hon'ble Delhi High Court in CIT v. Cushman & Wakefield (India) (P.) Ltd. (2014) 367 ITR 730(Del) has held that the authority of the TPO is limited to conducting transfer pricing analysis for determining the ALP of an international transaction and not to decide if such services exist or benefits did accrue to the assessee. Such later aspects have been held to be falling in the exclusive domain of the AO.
17. Accordingly, in view of the aforesaid, we are of the opinion that since the operating margin of the assessee at 6.96% is higher than the comparables at 2.77%, the international transaction of payment of royalty entered into by the assessee are to be considered being at arm's length applying TNMM as the most appropriate method.
18. We therefore direct the assessing officer to delete the adjustment on this account."
10. So, following the decision rendered by the coordinate Bench of the Tribunal in assessee's own case (supra), confirmed by the Hon'ble Delhi High Court, we are of the considered view that since there is a direct nexus between the revenue earned by the taxpayer 24 ITA No.1516/Del/2015 ITA No.1004/Del/2016 ITA No.1706/Del/2017 and the payment made by the taxpayer on account of royalty, the transaction of payment of royalty cannot be analyzed in isolation. Furthermore, the doctrine of benefit test applied by the TPO cannot be invoked as it is prerogative of the businessman to see if any service is beneficial to the promotion of its business or not. So, consequently, the AO is directed to delete the adjustment made on account of ALP of international transaction of payment of trademark fees of Rs.7,84,24,000/-, Rs.9,54,44,000/- & Rs.11,18,01,000/- for AYs 2010-11, 2011-12 & 2012-13 respectively. Consequently, Grounds No.3, 3.1, 3.2, 3.4 of ITA No.1516/Del./ 2015, Grounds No.3, 3.1, 3.2, 3.4, 3.5, 3.6 & 3.7 of ITA No.1004/ Del./2016 and Grounds No.3, 3.1, 3.2, 3.4, 3.5 & 3.6 of ITA No.1706/Del./2017 are determined in favour of the taxpayer.
GROUNDS NO.4, 4.1, 4.2, 4.3, 4.4, 4.5, 4.6, 4.7, 4.8, 4.9, 4.10 & 4.11 OF ITA No.1516/Del./2015 (AY: 2010-11) GROUNDS NO.4, 4.1, 4.2, 4.3, 4.4, 4.5, 4.6 & 4.7 OF ITA No.1004/Del./2016 (AY: 2011-12) GROUNDS NO.4, 4.1, 4.2, 4.3, 4.4, 4.5, 4.6, 4.7, 4.8, 4.9 & 4.10 OF ITA No.1706/Del./2017 (AY: 2012-13)
11. The issue as to making transfer pricing adjustment of Advertisement, Marketing and Sales Promotion (AMP) has also 25 ITA No.1516/Del/2015 ITA No.1004/Del/2016 ITA No.1706/Del/2017 been dealt with by the coordinate Bench of the Tribunal in taxpayer's own case for AYs 2007-08, 2008-09 & 2009-10 (supra) and decided in favour of the taxpayer. Again, it is not in dispute that there is no change in the business model of the taxpayer so far as AMP expenses are concerned since AYs 2007-08, 2008-09 & 2009-10. The coordinate Bench of the Tribunal in taxpayer's own case (supra) proceeded to hold that incurring of AMP expenses by the taxpayer is not an international transaction of brand building of Goodyear brand undertaken by the taxpayer with AE and as such, no adjustment can be made by returning following findings :-
37. We have considered the arguments of the AR of the assessee and the DR. We agree with the submission of the AR of the assessee that the conclusion drawn by the ld. DR, by referring to the aforesaid clauses of transfer pricing study and trademark license agreement, does not lead to an inference of existence of an international transaction of incurring AMP expense by the assessee. Nevertheless, it is equally important to refer to the following findings of the Delhi High Court in the case of Honda Siel Power Products vs. DCIT (ITA No. 346/2015), wherein, the Court has observed that:
26. The relevant facts are that under a Technical Collaboration Agreement, the Assessee is granted exclusive license to manufacture and sell the products of the foreign AEs against payment of royalty of 4% on sales. Additionally, the Assessee entered into agreement dated 19th March, 2007 for obtaining license to use the trademark HONDA. The consideration for use of such trademark is determined at 1 per cent of the sales of licensed products. The mere existence of such an agreement whereby a license has been granted to the Assessee to use the brand name would not ipso facto imply any further understanding or arrangement between the Assessee and its foreign AE regarding the AMP expense for promoting the brand of the foreign AE.26 ITA No.1516/Del/2015 ITA No.1004/Del/2016 ITA No.1706/Del/2017
27. Turning to the TP report, a reference has been made by the Revenue to para 4.8 thereof which shows that market development is the function of the AE as well as the Assessee in India. Para 4.9 of the TP report has been referred for the purposes of pointing out export market related information for the products and the competitors and other assistance in tapping potential export markets is provided by the Honda Group. It is further pointed out that para 4.47 of the TP report records that HSPP is responsible for "brand building and maintaining brand loyalty in domestic market." Reference is made to the statement that "this brand name has been developed and popularised by HSPP in India." According to the Revenue, therefore, there is no dispute that the Assessee is engaged in "developing and maintenance of brand/trade name in India."
28. A reference is made by the Revenue to the Export Agreement whereunder the Assessee has been granted rights to export products to certain 'permitted countries' for payment of royalty of 8 per cent of the export price, which was subsequently raised to 12.25 per cent from 1st February 2008. Honda, Japan reserved the right to change the permitted countries at any time. According to the Revenue this indicates that the Assessee has not been an independent manufacturer and is only functioning as a contract manufacturer for the AE. It is also pointed out that the list of countries to which export is permitted by Honda, Japan included the countries falling in the same geographical location as India. It is stated that the terms of the agreement with such distributors in other countries "could have worked as a sound comparable" but that the Assessee had not chosen to make any such attempt in its TP documentation.
29. In response, it is pointed out on behalf of the Assessee that the payment of royalty fee for the HONDA trademark are separately benchmarked by the Assessee. That is not the subject matter of the dispute in the present case. It is further pointed out that the agreement whereunder license has been granted to the Assessee, does not contain any stipulation concerning the promotion of the brand name HONDA or for incurring AMP expenses for that purpose. There is, according to the Assessee, no tangible material to show that any arrangement or understanding, even an informal one, exists between the Assessee and its foreign AE in relation to AMP expenses.27 ITA No.1516/Del/2015 ITA No.1004/Del/2016 ITA No.1706/Del/2017
38. Accordingly, in view of the aforesaid, we are of the opinion that the adjustment made by the TPO is squarely covered by the decision of Delhi High Court in the case of Maruti (supra) and Honda Siel Power Products (supra) and therefore, in the absence of any international transaction of brand building of 'Goodyear' brand, undertaken by the assessee with its AE, there cannot be any adjustment under the transfer pricing provisions.
Further, as held by the Hon'ble High Court, Chapter - X of the Act does not authorize the revenue to make quantitative adjustment under the transfer pricing provisions, such as AMP expense. The contention of the ld. DR about abnormal increase in advertisement expenses in comparison to preceding year, does not render any help to the Revenue, keeping in view the proportionate rise in turnover of assessee. We accordingly direct the assessing officer to delete the adjustment made on this account.
39. In the result, the appeal is allowed on this ground."
12. So, following the aforesaid decision in assessee's own case rendered by the coordinate Bench of the Tribunal and confirmed by the Hon'ble Delhi High Court, we are of the considered view that transfer pricing adjustment made by AO/TPO to the tune of Rs.7,84,24,000/-, Rs.9,54,44,000/- & Rs.11,18,01,000/- for AYs 2010-11, 2011-12 & 2012-13 respectively are not sustainable, hence ordered to be deleted. Consequently, Grounds No.4, 4.1, 4.2, 4.3, 4.4, 4.5, 4.6, 4.7, 4.8, 4.9, 4.10 & 4.11 of ITA No.1516/ Del./2015, Grounds No.4, 4.1, 4.2, 4.3, 4.4, 4.5, 4.6 & 4.7 of ITA No.1004/Del./2016 and Grounds No.4, 4.1, 4.2, 4.3, 4.4, 4.5, 4.6, 4.7, 4.8, 4.9 & 4.10 of ITA No.1706/Del./2017 are determined in favour of the taxpayer.
28 ITA No.1516/Del/2015ITA No.1004/Del/2016 ITA No.1706/Del/2017 GROUNDS NO.5, 5.1, 5.2, 5.3, 5.4 & 5.5 of ITA No.1516/Del./2015 (AY 2010-11)
13. The taxpayer during the year under assessment made purchases from Goodyear South Asia Tyres Pvt. Ltd. and resold to AE's overseas. The taxpayer contended that export incentives are a valid source of profit for any exporters. However, TPO taken the view that export incentives does not form part of the invoice price of the goods sold and as such, the taxpayer is not allowed to reduce value of export incentives to calculate the cost of goods sold and thereby determined the ALP regarding this transaction as under :-
Particulars Amount
Purchase price of goods 160,989,991
Add : Freight cost 7,287,579
Less : Rebate received -4,829,700
Total Elective cost 163,447,870
Add : 5% markup 8,172,394
Arms length price of export sales of traded goods 171,620,264
Revenue shown 161,950,196
Difference 9,670,068
14. The TPO accordingly proposed ALP of international transactions relating to export of trading goods at Rs.17,16,20,264/- as against Rs.16,19,50,196/- determined by the taxpayer.
15. This issue has come up before the coordinate Bench of the Tribunal in assessee's own case for AY 2006-07 which has further been followed in AYs 2007-08, 2008-09 & 2009-10 (supra), which 29 ITA No.1516/Del/2015 ITA No.1004/Del/2016 ITA No.1706/Del/2017 has been confirmed by the Hon'ble Delhi High Court. For facility of reference, findings returned by the coordinate Bench of the Tribunal in taxpayer's own case for AY 2006-07 are reproduced as under :-
"11.5 As regards issue of reduction of export incentive from goods sold is concerned, we find that the reasoning adopted by the TPO has considerable cogency. The export benefits are given to the taxpayers to promote and stimulate the growth of exports of goods and services in India. They are also meant to earn valuable foreign exchange for the country. The export incentive was available to the assessee only after trading exports made by the assessee. Global Transfer Pricing policy of the group company mentions cost in inter company transfer before the goods and services are dispatched from the premises of a company to the other company. In the Global Transfer Pricing Policy the future value of benefits which may be available in a few countries cannot be included as this will disturb the very basis/purpose or providing uniform return to teach and every enterprise which is a member of global transfer pricing policy. The very purpose of global transfer pricing is to provide a minimum amount of return to the members of global transfer pricing policy. If India provide tax incentive or other incentive to compensate its taxpayers on the basis of the economic situation, then this benefit is available to Indian taxpayers and the same cannot be transferred or traded to other entity which is not located in India. This kind of shifting of economic and tax incentives offered to local company will disturb the fiscal structure of a country and will result in shifting of profits from one tax jurisdiction to other tax jurisdiction. The economic and tax incentives offered to Indian entities are not meant to subsidize the entity in foreign jurisdiction. The assessee who is involved in controlled transaction this approach actually results in transferring, benefit from Government granted incentives to AE. Moreover, the entities transfer pricing policy cannot override the basic fundamental of transfer pricing analysis. If assessee's method of calculation of cost of goods sold is followed, it would tantamount to a claim of benefit, which has not yet accrued at the time of sale of goods, being treated as a component of cost of goods sold.
11.6 The TPO's reference to the OECD guidelines is also germane. In this regard, we find that in the said guidelines gross profit are defined as "the gross profits from a business transactions are the amount computed by deducting from the 30 ITA No.1516/Del/2015 ITA No.1004/Del/2016 ITA No.1706/Del/2017 gross receipts of the transactions the allocable purchased or production costs of sales, with due adjustment for increases or decreases in inventory or stock in traded, but without taking account of other expenses."
11.7 From the above it follows that while determining the gross profits from sale of goods such incentives cannot be adjusted to determine the cost of goods sold. TPO has rightly observed that export incentives does not form part of the invoice price of goods sold. In such a case, it cannot be reduced from the cost of goods sold. We agree with the TPO that an expenditure that does not form part of the books of accounts cannot be treated as an expense for the purpose of transfer pricing accounting. 11.8 Assessee's reliance of Accounting Standard (AS)-II- Verification of inventories issued by Institute of Chartered Accountant of India (ICAI), for the purpose of determining the cost of purchase is not cogent as the reference to cost of purchase in this is not in the context of arm's length price in transfer pricing.
11.9 Assessee's reliance on the decision of the ITAT in Sony India (P) Ltd., vs. DCIT (Supra) is not applicable on the facts of the present case. The portion of this decision referred by the assessee's counsel was in the context of manufacturing of export to utilize idle facilities to enable the company to improve recovery of its fixed assembly cost. Moreover, in the present case, we are concerned with computation of cost plus markup which was not the case in the Sony India decision.
11.10 In the background of the aforesaid discussion, we are of the opinion that TPO has rightly held that export incentive amounting to ` 7,872,603/- cannot be deducted from cost of goods sold.
12. As regards issue of deduction of rebate /discount received amounting to ` 33,21,586/-, the TPO observed that the assessee in this regard has made the claim for the first time. Assessing Officer further observed as under:- (i) This item of rebate does not find a place in the financials accompanying the TP report.
(ii) In the details forwarded by the Addl. C.I.T. (Transfer Pricing) Pune there is no reference to any rebate being allowed by M/s GSATL. (iii) The rebate claimed does not seem to appear anywhere in the audited financials of the assessee. (iv) The only conclusion that can be arrived at is that the issue / claim of rebate has been raised to offset the freight cost which has entered the cost base at this stage. For these reasons the claim of rebate shall not be allowed.
31 ITA No.1516/Del/2015ITA No.1004/Del/2016 ITA No.1706/Del/2017
12.1 In this regard, we find that as per the agreement assessee is entitled for rebate of 3% on cost of goods purchased for exports to AE as well as to unrelated parties. We find that the above reasoning adopted by the Assessing Officer in disallowing the deduction is not cogent. That the assessee has not made any such claim initially cannot act as estoppel against the proper and valid claim. We agree with the ld. Counsel of the assessee company that the rebate received is inextricably linked with the cost of purchase. We further note that in subsequent assessment years for Assessment Year 2007-08 and 2008-09 the TPO has accepted the contention of the assessee that the rebate received upon purchase of goods is deductible from the value of cost of goods sold. Hence, in our considered opinion, assessee is entitled for deduction of rebate received upon purchase of goods from the value of goods sold.
12.2 We further find that the rebate amount was netted off and net amount of purchase cost shown in the profit and loss account. In this regard, TPO has contended that the said amount was not reflected in the books and accounts of the assessee. In our considered opinion, this factual aspect needs verification. Hence, we remit this issue regarding verification of netting off of rebate from cost of purchase to the file of Assessing Officer. Needless to add that the assessee should be given adequate opportunity of being heard."
16. So, following the decision rendered by the coordinate Bench of the Tribunal for AY 2006-07, the order passed by the TPO is upheld to the extent of netting off of export incentive from the cost of goods sold and set aside the issue of netting off of rebate/ discount from the cost of goods sold to the file of AO/TPO for verification of the claim in view of the decision rendered by the Tribunal for AY 2006-07 by providing an opportunity of being heard to the taxpayer. Consequently, Grounds No.5, 5.1, 5.2, 5.3, 5.4 & 5.5 of ITA No.1516/Del./2015 are allowed for statistical purposes.
32 ITA No.1516/Del/2015ITA No.1004/Del/2016 ITA No.1706/Del/2017 GROUND NO.6 OF ITA No.1516/Del./2015 (AY: 2010-11) GROUNDS NO.5 & 5.1, OF ITA No.1004/Del./2016 (AY: 2011-12) ITA No.1706/Del./2017 (AY: 2012-13)
17. The AO has made disallowance of provision made by the taxpayer for replacement loss on the ground that the taxpayer has not incurred expenditure on account of replacement of goods in the subsequent years; that the same is not ascertained and is contingent in nature. The ld. AR for the taxpayer contended that this issue is again squarely covered in favour of the taxpayer in its own case in AYs 2006-07, 2007-08, 2008-09 and 2009-10 (supra). However, on the other hand, ld. DR for the Revenue relied upon the orders passed by the AO/DRP.
18. The coordinate Bench of the Tribunal in AYs 2007-08, 2008-09 and 2009-10 (supra) by relying upon the findings returned by the coordinate Bench of the Tribunal in AY 2006-07 in assessee's own case decided the issue in favour of the taxpayer. Operative part of the order is reproduced as under :
"During the financial year ended on 31st March 2007 the appellant, had incurred /made provision for warranty claims to the extent of Rs.17,72,000 on the basis of past trend and experience of actual warranty claims. The provision for warranty is made on a scientific and actual basis and not an adhoc provision.33 ITA No.1516/Del/2015 ITA No.1004/Del/2016 ITA No.1706/Del/2017
It will be appreciated, that the provision for warranty is not a future or a contingent liability. The liability towards warranty expenses is incurred as soon as the sale is made by the appellant and, therefore, it is a liability in presenti and has definitely arisen in the accounting year. Deduction therefore should be allowed in the year of sales, to which the liability is attached, although the exact liability may be quantified at a future date.
Reliance is placed in this regard on the recent decision of Supreme Court in the case of Rotork Controls India Ltd. vs. CIT:
223 CTR 425, wherein, the Supreme Court laid down three conditions for allowability of provision for warranty - (a) an enterprise has a present obligation as a result of a past event; (b) it is probable that an outflow of resources will be required to settle the obligation; and (c) a reliable estimate can be made of the amount of the obligation.
Relying on the above decision in the case of Rotork Controls (supra), the Hon'ble Delhi High Court in the case of CIT vs. Whirlpool of India [242 CTR 245], too, dismissed the grounds of the revenue for disallowing provision for warranty. Our attention is also invited to the order passed by the Delhi Bench of the Tribunal in the appellant's own case for the assessment year 2006-07, wherein, similar ad-hoc disallowance of warranty were deleted, as under:
"We agree with the assessee's contention that provision for estimated expenditure to be incurred for warranty obligation in respect of sales made in the relevant previous years is to be accounted as expenditure in the year of sale, in order to match the cost with revenue. The provision for warranty is necessarily required to be made by the companies which are required to follow mercantile system of accounting. In this regard, we further find that Courts have consistently held the view that liability for provision for warranty for replacement on account of manufacturing defects arises at the time of sale and is to be allowed as deduction in that year on the basis of rational /scientific estimate, notwithstanding that the exact amount of liability is ascertained at a later date. We further find that action of the assessee in creating provision for warranty is also in consonance with the decision of the Hon'ble Apex Court in the case of Rotork Controls India Ltd. vs. C.I.T. 314 ITR 62. Similarly, we find that relying on the above decision in the case of Rotork Controls the Hon'ble High court in the case of C.I.T. vs. Whirlpool of India 242 CTR 245 too, dismissed the grounds of the revenue for disallowing provision for 34 ITA No.1516/Del/2015 ITA No.1004/Del/2016 ITA No.1706/Del/2017 warranty. Reliance by the assessee's counsel in other case laws in this regard as mentioned above are also germane and support the case of the assessee. In the background of the aforesaid discussions and precedents, we hold that provision for warranty made by the assessee is allowable."
19. Following the findings returned by the coordinate Bench of the Tribunal and the fact that the taxpayer has filed complete details on the basis of past trends and experience of actual guarantee claims on a scientific and actual basis, which is available at pages 348 to 372 of the paper book, we are of the considered view that provision for warranty made by the taxpayer is allowable one. Consequently, Ground No.6 of ITA No.1516/Del./2015 and Grounds No.5 & 5.1 of ITA No.1004/Del./2016 & ITA No.1706/ Del./2017 are determined in favour of the taxpayer. GROUNDS NO.7, 7.1, 7.2, 7.3 OF ITA NO.1516/DEL./2015 (AY 2010-11) GROUNDS NO.6 & 6.1 OF ITA NO.1004/DEL./2016 (AY 2011-12) GROUNDS NO.6, 6.1 & 6.2 OF ITA NO.1706/ DEL./2017 (AY 2012-13)
20. AO has made ad hoc disallowance of Rs.3,80,12,100/-, Rs.3,33,17,400/- & Rs.3,64,99,828/- for AYs 2010-11, 2011-12 & 2012-13 respectively being 30% of the total expenditure on the grounds that the taxpayer has incurred the said advertisement and 35 ITA No.1516/Del/2015 ITA No.1004/Del/2016 ITA No.1706/Del/2017 publicity expenditure for brand building for the entities owning the brand. The ld. AR for the taxpayer contended that this issue has also been decided by the coordinate Bench of the Tribunal in favour of the taxpayer in AYs 2007-08, 2008-09 and 2009-10 (supra). However, on the other hand, the ld. DR for the Revenue relied on the orders of the AO/DRP.
29. The coordinate Bench of the Tribunal has ordered to delete ad hoc disallowance made by the AO on account of advertisement expenses u/s 37 of the Act by making following observations :-
64. We have heard the rival contentions in the light of the material produced and precedent relied upon. We have already held that the advertisement expenditure incurred by the assessee is incurred wholly for the purpose of its business and profession and ought to be allowed deduction in entirety. Further, the assessing officer has clearly made an ad-hoc disallowance of advertisement expenditure incurred by the assessee, which is not permissible under the law. We are of the considered view that AO was not justified in making such ad-hoc disallowances and therefore, direct the assessing officer to delete the adjustment on this account."
30. Following the order passed by the coordinate Bench of the Tribunal, we are of the considered view that when the Bench has already held that the taxpayer has incurred advertisement expenses wholly for the purpose of business and profession, the same are required to be allowed in full. So, in the given circumstances, ad hoc disallowance of advertisement expenses incurred by the 36 ITA No.1516/Del/2015 ITA No.1004/Del/2016 ITA No.1706/Del/2017 taxpayer is not permissible under law. So, AO is directed to delete the same accordingly. Consequently, Grounds No.7, 7.1, 7.2, 7.3 of ITA N0.1516/DEL./2015, Grounds No.6 & 6.1 of ITA No.1004/DEL./2016 and Grounds No.6, 6.1 & 6.2 of ITA No.1706/ DEL./2017 are determined in favour of the taxpayer GROUNDS NO.6.2 OF ITA NO.1004/DEL./2016 (AY 2011-12)
31. AO made disallowance of Rs.54,17,314/- on account of shortfall on interest of provident fund on failure of the taxpayer to file clarification or supporting documents. This issue was specifically raised by the taxpayer before the ld. DRP as is evident from pages 210 & 211. The taxpayer addressed factual and legal submissions before the ld. DRP as under :-
"10. Factual and legal arguments against the addition proposed by the assessing officer.
During the subject year, assessee has claimed Rs.15,95,33,526 incurred by it on account of Miscellaneous expenses. During the course of assessment hearing on 18 March, 2015, Ld. AO requested the assessee to furnish the details of some of the major heads of miscellaneous expenses. In response to the same, assessee vide its reply dated 25 March, 2015 furnished the sub-head wise breakup of miscellaneous expenses along with supporting vouchers. Details furnished by assessee, inter alia includes Rs.54,17,314 represented as "PF Interest Shortfall".
Ld. AO has proposed to disallow the 'PF Interest Shortfall' of Rs.54,17,314 on the premise that assessee has not produced any supportings to substantiate the same. 37 ITA No.1516/Del/2015 ITA No.1004/Del/2016 ITA No.1706/Del/2017
The detailed break up of 'PF Interest Shortfall' sought by the AO was duly submitted by the assessee along with copies of necessary supportings on sample basis vide its reply dated 25 March 2015. A copy of the reply along with the relevant annexure is enclosed at pages _ to _ of the paperbook.
Basis the above, it is humbly submitted that the Ld. AO has erred in making the proposed disallowance relying on the decisions of the Hon'ble Supreme Court in the cases of Calcutta Agency Ltd. (19 ITR 191) and Lashimara tan Cotton Mills Co. (73 ITR 634). The case laws relied upon by the Ld. AO do not apply to the facts of the case since the assessee has duly filed the break-up of the expense on account of shortfall, as desired by the Ld. AO.
In view of the above discussion, the assessee humbly appeals before the Bench that the said allowance is unsustainable in law and is liable to be deleted."
32. The ld. AR for the taxpayer further contended that this is a purely legal issue and the Hon'ble Delhi High Court has already dealt with the same in ITA No.1208/ OF 2010 & Ors. in CIT vs. Govind Nagar Sugar Ltd. & Ors. vide order dated 19.11.2010 by deciding in favour of the assessee.
33. Undisputedly, the taxpayer has already paid the dues along with interest, as is evident from the details available at pages 254 & 255 of the paper book. This amount has been duly credited in the account of employees. The AO has disallowed this amount u/s 43B of the Act.
34. Ld. AR for the taxpayer contended that since the interest amount is not in the nature of PF, section 43B is not attracted. 38 ITA No.1516/Del/2015 ITA No.1004/Del/2016 ITA No.1706/Del/2017
35. Hon'ble Delhi High Court to decide the identical issue framed the substantive question of law as under :-
"a) Whether the interest paid on the late payment of the provident fund can partake the character or nature of the provident fund?
b) Whether the provisions of Section 43B of the Act are applicable on the interest paid by the assessee on the late payment of provident fund?"
36. Hon'ble High Court decided the aforesaid question in affirmative and operative part of the judgment is as under :-
"11. We now revert back to the moot question, i.e., whether interest on delayed payment partakes the character of PF dues. Learned counsel for the Revenue laid great emphasis on the judgment in the case of Mahalakshmi Sugar Mills Co.(supra) itself and according to them, the Supreme Court clearly stated in that judgment that the interest payable on arrears of cess under Section 3(3) is in reality part and parcel of the liability to pay cess. It was an accretion to the cess. The arrears of cess "carries" interest; if the cess is not paid within the prescribed period a larger sum will become payable as cess. The exact language used by the Court and the context in which it was said is reproduced below:
"10. Now the interest payable on an arrear of cess Under Section 3(3) is in reality part and parcel of the liability to pay cess. It is an accretion to the cess. The arrear of cess "carries" interest; if the cess is not paid within the prescribed period a larger sum will become payable as cess. The enlargement of the cess liability is automatic Under Section 3(3). No specific order is necessary in order that the obligation to pay interest should accrue. The liability to pay interest is as certain as the liability to pay cess. As soon as the prescribed date is crossed without payment of the cess, interest begins to accrue. It is not a penalty, for which provisions has been separately made by Section 3(5). Nor is it a penalty within the meaning of Section 4, which provides for a criminal liability and a criminal prosecution. The penalty payable Under Section 3(5) lies in the discretion of the collecting officer or authority.............(emphasis supplied)"39 ITA No.1516/Del/2015 ITA No.1004/Del/2016 ITA No.1706/Del/2017
12. It is clear from the reading of the aforesaid judgment that when the dues are paid belatedly and it attracts interest, which is statutorily payable, such an interest becomes part and parcel of the cess dues. On the same analogy, when the provident dues are not deposited by the employer in time, interest payable thereupon under the PF Act (which is also a statutory liability), the said interest would become part of the provident fund dues. Thus, even if the interest is not penal in nature but only compensatory, having regard to the fact that it partakes the character of the provident dues itself, Section 43B of the Act would be attracted and unless this interest is actually paid the assessee would not be entitled to claim deduction in respect thereof."
37. The ratio of the judgment (supra) relied upon by the taxpayer is that when the provident fund dues are not deposited by the employer in time, the interest payable thereon would become part of the provident fund dues and section 43B of the Act would be attracted. However, when the taxpayer has actually paid the interest, section 43B would not be attracted and the taxpayer is entitled to claim deduction thereof. So, we are of the considered view that AO/DRP have erred in making disallowance allegedly on account of shortfall of interest of provident fund. Consequently, the AO is directed to allow the same after verifying the facts as to the payment of dues paid along with interest by the taxpayer. So, Ground No.6.2 of ITA No.1004/Del./2016 is determined in favour of the taxpayer.
40 ITA No.1516/Del/2015ITA No.1004/Del/2016 ITA No.1706/Del/2017 GROUND NO.8 & 8.1 OF ITA NO.1516/DEL/2015 (AY 2010-11)
38. AO has made disallowance of Rs.35,84,180/- and Rs.12,74,347/- being the misc. charges and service tax written off out of misc. expenditure of Rs.12,35,16,000/- on the grounds that the expenditure were not supported by vouchers and the taxpayer has failed to prove that the expenditure were incurred wholly and exclusively for the purpose of business; that the taxpayer has failed to deduct tax at source on certain expenditure and that some of the expenditure are in the nature of capital expenditure.
39. The ld. AR for the taxpayer drew our attention towards details of misc. expenditure to the tune of Rs.12,35,16,000/- during the year under assessment, available at page 387 (Schedule 13) of the paper book. The taxpayer further filed the details of expenses disallowed, available at page 415 of the paper book, and details of amount adjusted on account of service tax, available at page 419 of the paper book, and given the break up at page 422 of the paper book.
40. The taxpayer brought on record the detail of expenditure qua disallowance of Rs.35,84,180/-, available at pages 432 to 437 of the paper book, and invoices/ vouchers at pages 438 to 491 of the paper book.
41 ITA No.1516/Del/2015ITA No.1004/Del/2016 ITA No.1706/Del/2017
41. Undisputedly, accounts of the taxpayer are audited by the statutory auditor, tax auditors as well as cost auditors which are substantiated with necessary documents. When the accounts of the taxpayer are duly audited by the statutory auditors and proves to be supported with documents discussed in preceding paras, the Income-tax authorities are not only required to accept auditor's report but also to draw the proper inference from the same. Reliance in this regard is placed on the decision rendered by Hon'ble Delhi High Court in the case of Jay Engineering Ltd. reported in 113 ITR 389.
42. When the taxpayer raised specific objection before the ld. DRP qua disallowance of the aforesaid expenses, the ld. DRP has issued specific direction to the AO to allow these expenses if the same are found to be genuine on filing necessary evidence in support of its claim by the taxpayer. We are of the considered view that when the accounts are audited and duly supported with evidences discussed in the preceding paras, the AO is to allow the same after verifying its genuineness and to proceed accordingly. Consequently, Ground No.8 & 8.1 of ITA No.1516/Del/2015 is determined in favour of the taxpayer.
42 ITA No.1516/Del/2015ITA No.1004/Del/2016 ITA No.1706/Del/2017 GROUND NO.9 & 9.1 OF ITA NO.1516/DEL/2015 (AY 2010-11)
43. AO has made disallowance of Rs.13,05,000/- being the provision for obsolete stocks and spares on the ground that the same was only a provision and not an actual write off and on the ground that the taxpayer has failed to provide the basis and working of the provision of the obsolete stores and spares. The ld. AR for the taxpayer contended that it is consistent policy of the taxpayer to write off obsolete stocks and spares and has never been disallowed earlier and in the last year, amount of Rs.20,36,000/- was written off on this account.
44. The taxpayer has brought on record the complete details of obsolete stocks and spares, available at pages 429 to 431 of the paper book. The ld. DRP directed the AO to allow the provision of obsolete stocks and spares in case the same has been scientifically worked out. However, the AO proceeded to disallow the same on the ground that the taxpayer has failed to produce the details of the stocks and spares written off. When the taxpayer has brought on record details of amount and items of slow moving article and the Revenue has not disputed that this system is being followed bonafidely by the taxpayer, the AO was required to follow the rule of consistency. So, in view of the matter, AO is directed to delete 43 ITA No.1516/Del/2015 ITA No.1004/Del/2016 ITA No.1706/Del/2017 the disallowance on account of stores and spares written off after verifying the documents available at pages 429 to 431 of the paper book. Consequently, Ground No.9 & 9.1 of ITA No.1516/ Del/2015 is determined in favour of the taxpayer GROUND NO.10 OF ITA NO.1516/DEL/2015 (AY 2010-11)
45. AO made ad hoc disallowance of Rs.25,00,000/- being 50% of the salary of administrative staff of the taxpayer on the ground that the same was attributed to capital work-in-progress and was required to be capitalized along with capital work-in-progress. The ld. AR for the taxpayer contended that since the role of Manufacturing Director and Plant Supervisor is to monitor the overall running of the factory and production, the salary paid to them cannot be capitalized on the ground that they were also engaged in supervising the capital work-in-progress along with their regular work. The ld. AR for the taxpayer further contended that since the taxpayer has undertaken extension of its existing business and not setting up a new facility or unit, the revenue expenses incurred for the same cannot be capitalized.
46. We are of the considered view that when it is not disputed by the Revenue that so far as work-in-progress is concerned, it was 44 ITA No.1516/Del/2015 ITA No.1004/Del/2016 ITA No.1706/Del/2017 qua the extension of existing business under the common management, it satisfies the test of unity of control, interlacing of funds, common management etc.. Hon'ble Delhi High Court in case of CIT vs. Relaxo Footwears Limited cited as 293 ITR 231 (Del.) decided the identical issue in favour of the taxpayer by returning the following findings :-
"Held, dismissing the appeal, that the new unit was a part of the existing business and there was no dispute that there was unity of control and interlacing of the units. Thus the expenses incurred by the assessee for the setting up of the new unit which was a part of the existing business were therefore to be allowed as a revenue expenditure."
47. Similarly, Hon'ble Delhi High Court in case of Jay Engineering Works Ltd. vs. CIT cited as 311 ITR 405 (Del.) held as under :-
"Held, that it was clear that the control over the two units was in the hands of the same management and administration. There was no doubt on this score and in fact, the annual report of the assessee made a reference to the project at Hyderabad. The facts on record showed that the new venture was managed from common funds and there was the necessary unity of control leading to an interconnection, interdependence and interlacing of the two ventures such that it would be said that the fuel injection equipment project was only an extension of the existing business of the assessee and, therefore, the expenditure incurred by the assessee on this project was revenue expenditure."45 ITA No.1516/Del/2015 ITA No.1004/Del/2016 ITA No.1706/Del/2017
48. Following the decisions rendered by the Hon'ble Delhi High Court and the fact that the taxpayer carried out the expansion of the existing business for which services of Managing Director and Plant Supervisor who have also monitored and ensured day-to-day running of the factory and production along with capital work-in- progress for expansion of the same unit were availed of, which satisfies the test of unity of control, interlacing of funds, common management etc. and as such, their salary to the extent of 50% capitalized because the salary drawn by them is revenue expenditure. Consequently, we order to delete the disallowance of Rs.25,00,000/- made by the AO and determine this ground in favour of the taxpayer.
GROUND NO.11 OF ITA NO.1516/DEL/2015 (AY 2010-11)
49. The AO made disallowance of Rs.53,93,000/- on account of stores and spares written off on the ground that the details and supporting evidences of the written off stores and spares have not been furnished and the same was not verifiable with reference to physical disposal. The ld. AR for the taxpayer contended that in compliance to the directions issued by the DRP, they have submitted all details of stores and spares written off by reply dated 19.01.2015, available at pages 430 and 431 of the paper book, and 46 ITA No.1516/Del/2015 ITA No.1004/Del/2016 ITA No.1706/Del/2017 its accounts are audited by statutory auditors. When we examine profit and loss account of the taxpayer, available at page 379 of the paper book, it shows that the taxpayer is a growing company having gross sale of Rs.1167 crores as on March 31, 2010 as against Rs.980 crores in the earlier years with gross profit of Rs.734 crores as against Rs.329 crores in the previous year and in the given circumstances, to write off useless stores is a business decision of the management which cannot be questioned particularly when the accounts of the taxpayer are audited one with supporting evidence. Moreover, the taxpayer has brought on record the complete details of the written off stores and spares, available at pages 430 & 431 of the paper book. So, in view of the matter, we are of the considered view that the disallowance of Rs.53,93,000/- made by the AO on account of stores and spares written off is not sustainable, hence disallowance is ordered to be deleted and this ground is determined in favour of the taxpayer. GROUND NO.12 OF ITA No.1516/Del./2015 (AY: 2010-11) GROUNDS NO.7 OF ITA No.1004/Del./2016 (AY: 2011-12) ITA No.1706/Del./2017 (AY: 2012-13)
50. Ground No.12 of ITA No.1516/Del./2015 and grounds no.7 of ITA No.1004/Del./2016 (AY: 2011-12) & ITA 47 ITA No.1516/Del/2015 ITA No.1004/Del/2016 ITA No.1706/Del/2017 No.1706/Del./2017 (AY: 2012-13) need no adjudication as the same are consequential in nature.
51. Resultantly, all the aforesaid three appeals being ITA No.1516/Del./2015, ITA No.1004/Del./2016 and ITA No.1706/Del./2017 are allowed for statistical purposes. Order pronounced in open court on this 22nd day of January, 2018.
Sd/- sd/-
(B.P. JAIN) (KULDIP SINGH)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Dated the 22nd day of January, 2018
TS
Copy forwarded to:
1.Appellant
2.Respondent
3.CIT
4.CIT (A)
5.CIT(ITAT), New Delhi. AR, ITAT
NEW DELHI.