Income Tax Appellate Tribunal - Delhi
Hero Honda Motors Ltd., New Delhi vs Assessee on 27 September, 2010
IN THE INCOME TAX APPELLATE TRIBUNAL
(DELHI BENCH "C" NEW DELHI)
BEFORE SHRI R. P. TOLANI : JUDICIAL MEMBER
And
SHRI J.S. REDDY : ACCOUNTANT MEMBER
ITA No. 1980 /Del/ 2012
Assessment Year: 2007-08
Hero MotoCorp Ltd. Vs. Addl. Commissioner of
(Formerly known as Income Tax, Range-12,
Hero Honda Motors Ltd.) New Delhi.
24, Basant Lok, Vasant Vihar,
New Delhi.
PAN: AAACH0812J
(Appellant ) (Respondent)
Appellant By : Shri Ajay Vohra Adv.
Shri Gaurav Jain FCA
Shri Upvan Gupta ACA
Shri Neeraj Jain Adv.
Respondent by : Shri Peeyush Jain CIT (DR) TP
ORDER
PER BENCH :
The Assessee is a company engaged in the manufacturing and selling of two-wheelers. The assessee maintains regular books of accounts, which are duly audited u/s 44AB. The accounting policies, method of accounting, excepting one instance, are the same as in earlier years. Assessee is assessed to tax since past so many years. There was a joint venture between Hero Group, India and Honda Motor Company, Japan. During the Financial Year ('FY') 2006-07, relevant to Assessment Year ('AY') 2007-08, the assessee 2 had 45.7% share of the motor cycle market and 39.4% share of two wheeler market, in India.
2. For the year under appeal, the assessee filed its return of income on 31.10.2007, declaring an income of Rs. 11,98,61,43,972. The return of income was revised on 05.03.2009, wherein increased amount of TDS was claimed. The return was processed u/s 143(1) of the Income-tax Act, 1961 ('the Act') on 24.03.2010. The case was selected for scrutiny and notice u/s 143(2) was issued. During assessment proceedings the assessing officer referred the case to the Transfer Pricing Officer ('TPO'), as there were certain international transactions with its associate concerns (AEs). The TPO passed an order dated 27.9.2010.
3. Though the accounts were duly audited, the assessing officer was of the view that that there were complexities in the accounts as maintained by the assessee, which involved substantial revenue implications, therefore, a show cause notice u/s 142(2A) of the Act was issued and served upon the assessee on 08.06.2010, proposing special audit u/s 142(2A) of the Act.
3.1. The assessee vide letter dated 23.07.2010, opposed the Special Audit, citing the correctness, completeness and reliability of its account. However, for the detailed reasons given at para 2 of the assessment order, the assessing officer referred the matter for Special Audit. Special Auditor was appointed on 20-12-2010 with set terms of reference and was asked to submit its report within 60 days. This time limit was extended for a further period of 20 days at the request of the special auditor. The assessee had challenged the order of reference for special audit u/s 142(2A) before the Hon'ble Delhi High Court and by order dated 24.12.2010 Hon'ble Delhi High Court directed that any 3 action taken by the special auditors or the assessing officer shall be subject to final decision of the writ petition.
3.2. The Special Auditor submitted their report on 10.03. 2011, pointing out many instances of non compliances with the provisions of the Income tax Act and also pointed out that the assessee was not following various accounting standards.
3.3. After examining the report of the Special Auditor, the assessing officer issued a show cause notice to the assessee u/s 142(1) of the Act on 24-3-2011. In response, the assessee made detailed submissions on various dates raising objections on special auditors recommendation and supporting its own accounts, policies and method of accounts. The assessing officer after considering the same, passed draft assessment order u/s 144C of the Act computing the income at Rs. 4485,91,57,334/-.
3.4. The assessee filed objections before the DRP-I, New Delhi. The DRP vide order dated 29-2-2012 disposed of these objections and issued certain directions to the assessing officer. Thereafter, the assessing officer passed an order u/s 143(3) red with se. 144C on 4-4-2012. Aggrieved, the assessee filed this appeal before us on various grounds, which we would be considering in seriatum.
4. Shri Ajay Vohra, Sr. Advocate, appeared on behalf of the assessee and Mr. Piyush Jain CIT (DR) appeared on behalf of the Revenue.
5. The assessee moved an application under Rule 11 of the ITAT Rules 1963 for the admission of following additional grounds of appeal:
4"1. That on the facts and circumstances of the case, miscellaneous expenses, aggregating to Rs. 7,15,91,826/- incurred in respect of services availed from vendors during the relevant year, but were claimed as deduction in the immediately succeeding assessment year i.e. 2008-09, at the time of receipt of bills or ascertainment/ recognition of liability of theb vendors, which have been disallowed in the draft assessment order passed under section 144C of the Income-tax Act, 1961 ('the Act') for the assessment year 2008-09, be directed to be allowed as deduction during the relevant year.
2. That on the facts and circumstances of the case, expenditure of Rs. 7,23,161 claimed as deduction in immediately succeeding assessment year i.e. 2008-09 on account of reversal of GENVAT credit/ excise duty paid in relation to obsolete/ dead stock written off in books of accounts of the relevant year, which has been disallowed in the draft assessment order passed under section 144C of the Act for the assessment year 2008-09, be directed to be allowed as deduction during the relevant year."
5.1. Ld. Counsel for the assessee filed a detailed petition and explained the facts necessitating the filing of the above additional grounds. Apropos additional ground no. 1 i.e. misc. expenses it is submitted that in the draft assessment order dated 13-6-2012 passed u/s 144C of the Act for the assessment year 2008-09, the assessing officer has disallowed the aforesaid expenses on the ground that the same pertained to prior period i.e. the relevant year and are not allowable revenue expenditure against income of the assessment year 2008-09.
5.2. Apropos additional ground no. 2 i.e. reversalof cenvat credit, it is submitted that in the draft assessment order dated 13-6-2012 passed u/s 144C of the Act for the assessment year 2008-09, the assessing officer has disallowed the aforesaid expenses on the ground that the same pertained to stock written off in the books of accounts of the relevant year and was 5 therefore, prior period expenditure, which is not allowable deduction against income of the assessment year 2008-09.
5.3. Mr. Vohra thus contends that these additional grounds arose pursuant to the finding in the draft assessment order dated 13-6-2012 for assessment year 2008-09 received on 14-6-2012. It was pointed out that this draft assessment order was not available with the assessee at the time of filing of the original memo of appeal before the ITAT. It was further submitted that no fresh investigation into facts is called for.
5.4. The ld. CIT (DR) Mr. Peeyush Jain objected to the admission of additional ground no. 2 i.e. reversal of CENVAT on the ground that it is not clear as to which year VAT in question prtains. It is pleaded that this issue may require verification of some facts.
5.5. On a query from the Bench he submitted that admission of these additional grounds of appeal is being opposed by him on technical grounds as the assessee has not made the claim while filing its return of income.
5.6. After hearing rival contentions, we are of the considered opinion that the additional grounds of appeal have to be admitted as all the facts are on record. No fresh investigation into the facts is required. The assessing officer while passing the assessment order for assessment year 2008-09 came to a conclusion that the expenditure in question pertains to assessment year 2007-08, which gives rise to a consequential issue. Thus additional grounds of appeal have been raised pursuant to the finding in the draft assessment order dated 13-6-2012 for assessment year 2008-09. Thus the assessee was prevented by sufficient cause from raising this ground earlier.As these are legal grounds on the issue of year of allowbility of the said expenditure and 6 as all the facts are already on record, respectfully following the decision of Hon'ble Supreme Court in the case of NTPC 229 ITR 386 we admit these additional grounds of appeal.
5.7. The assessee has moved another application for admission of additional evidence under Rule 29 of the ITAT Rules 1963. The additional evidence is relevant to ground of appeal nos. 9 to 9.7. It consists of copy of certificate issued by the Chartered Accountant certifying that the parties mentioned therein have duly accounted for sales made by them to the assessee during F.Y. 2006-07 in the books of account and that such sales are credited in the books of account and further that tax which was due is paid on the income declared in the return paid on the basis of such P&L A/c and returns of income prepared on the basis of these books of account.
5.8. The assessee is in the business of manufacturing of reputed brand two-wheelers, popularly known as Hero Honda Motor Cycles. During the course thereof it places purchase orders on various vendors providing specifications of the products to be purchased. It also specifies the name of parties, from whom the vendor is required to purchase, raw materials/ components etc., which are to be used in manufacture of customized intermediary products. As a consistent policy, the prices are also negotiated by the assessee with such suppliers.
5.9. Assessee claimed these transactins to be of purchase/ sale on principal to principal basis. According to assessing officer, these supplies constituted work contract subject to TDS u/s 194C. As no tax has been deducted at source u/s 194C, the said supplies were disallowed u/s 40(a)(ia) of the Act, resulting in huge additons.
75.10. The assessee persistently claims that these are cases of purchase of goods and not works contracts. Various other contentions were raised by the assessee, which we would be dealing when we dispose of the particular ground.
5.11. One of the contentions of the assessee is that no disallowance could be made u/s 40(a)(ia) of the Act for default in deduction of tax at source, when the recipient of income had already paid tax on the income earned from such supplies. It is claimed that this legal position is endorsed by legislatue by amendment to Finance Act 2012 which was passed on 28-5-2012. In support of this contention, the assessee is now filing certificates issued by a Chartered Accountant, who after examining the accounts of the assessee and the books and return of income of the vendors, has certified that the vendors have duly paid the tax due on the income declared in the return of income after accounting for the sale made to the assessee during the F.Y. 2006-07 along with copy of the return of income of the vendor. This is to support its contention that it would fall within the ken of the aforesaid Finance Act 2012. It was pleaded that the aforesaid evidences are crucial for adjudication of the grounds of appeal and that they go to the root of the matter. Reliance is placed on the decision of Hon'ble Jurisdictional Delhi High court in the case of CIT Vs. Text Hundred Industries Ltd. 239 CTR 263, wherein the Hon'ble Court has held that additional evidences which are necessary to render substantial justice have to be admitted by the ITAT. It was submitted that for the reasons already stated, these evidence could not be filed before the lower authorities and hence the application was rightly made for admission of the additional evidence deserves to be accepted.
85.12. Ld. CIT (DR) strongly opposed the admission of additional evidence and urged that the ld. AR has not taken up the issue before the DRP. He submitted that in case the Bench is inclined to admit the additional evidence then the same should be done without commenting on the merits of the evidence for the reason that the assessing officer has not examined the same.
5.13. In reply, the ld. Counsel for the assessee further justifies the application on the plea that specific objections on this legal issue were already taken before the DRP.
5.14. After hearing rival submissions we are of the considered view that the additional evidence in question have to be admitted, as in our opinion, these documents are crucial for the adjudication of the grounds raised by the assessee on disallowance made u/s 40(a)(ia) of the Act, specifically in view of amendment made by the Finance Act 2012, which was passed on 28-5- 2012. Thus evidence becomes relevant to a legal issue, which was raised before DRP also. The assessment order in this case was passed on 4-4-2012 and hence, in our view, the assessee is justified in claiming that he was prevented by sufficient cause in filing these evidences before the assessing officer. We allow this application of the assessee.
6. There are numerous grounds raised by the assessee. We have heard Mr. Ajay Vohra Advocate on behalf of the assessee and Mr. Piyush Jain ld. CIT DR on behalf of the Revenue at length on the various issues that have been raised in this appeal. We have also perused all the papers on record, orders of the authorities below as well as case laws cited.
6.1. The assessee as well as ld. CIT (DR) have filed written submissions. There are numerous issues that arise out of 327 pages of order of the 9 assessing officer. The order of the assessing officer contains the observations of the assessing officer and the directions of DRP u/s 144C thereon. The directions given by DRP are concise and fairly covers the controversies in question. The order of the assessing officer is matter of record and can be referred to easily, therefore, for the sake of brevity we are following the method of explaining the facts and submissions etc. as under:
(i) Reproduction of DRP directions.
(ii) Brief facts.
(iii) Submissions of the assessee, ld. CIT(DR), rejoinder of assessee if
any.
(iv) Our findings and conclusion.
6.2. Thus, for the sake of convenience we adjudicate this appeal ground- wise in above mentioned manner.
7.1. Ground no. 2 to 2.2: (Addition of freight inward/ import clearing expenses to cost of closing inventory):
DRP Directions:
7.2. The DRP in its order has sustained the additions so made by the assessing officer. Findings of the DRP are given as under;
"Directions:The objections of the assessee have been considered. There cannot two opinions on the fact that the value of closing inventory must include freight and import clearing charges. The assessee has tried to justify its position by stating that the department had accepted this method of valuation in the past. As is well known, the principle of res-10
judicata does not apply in Income tax proceedings and therefore, the AO is correct to come to independent conclusion and is not bound by past acceptance of a factual legal point by the department.
The other contention of the assessee is that the transaction would be revenue neutral in the long run. While in some years, there may be no impact of such adjustment but in some years the impact will be very high. As it is the duty of the AO to determine the true income of the year, the action of the AO is upheld."
In conformity with the directions of the DRP addition of Rs. 31.38 lacs is made to the income of the assessee". (Addition of Rs. 31.38 Lacs) Facts:
7.3. Assessee purchases material on CIF basis. Therefore, freight, cost of delivery of goods is ordinarily included in purchase price. In exceptional circumstances, where assessee has to immediately lift material, transport charges are paid, which are not loaded to the purchase price, but are separately debited to profit and loss account, since invoices of transporters are received after consumption of material. The freight amount is not included in the valuation of closing stock, as per the method of accounting for valautaion of stock consistently followed by the assesse and accepted by the Revenue in the past.
Assessee's Submissions:
7.4. It was submitted by the Ld.AR of the assessee that Freight expenses of Rs. 31.38 lacs were incurred on account of purchases under exceptional situation, for immediate consumption. There is no time lag between the entry of raw-material in the factory premises and consumption thereof in the 11 process of manufacturing. Since the invoice is received after receipt and consumption of material in the manufacturing process, the said expenditure is not, therefore, attributable to closing inventory. The fact that aforesaid cost was incurred in exceptional circumstances is clear having regard to the pettiness of the said amount, when compared to the total quantum of freight expenditure.
7.5. That apart, the assessee follows a consistent and regular method of not considering the aforesaid expenditure for purposes of valuing closing stock, which has always been accepted by the Revenue in past.
7.6. Since, the method of valuation of closing stock, without including such cost in the valuation of closing stock having been consistently followed and accepted by the Revenue, no adjustment is called for in the year under appeal. Reliance was placed on the decision of the Hon'ble Supreme Court in the case of UCO Bank v. CIT: 240 ITR 355.
7.7. Further considering that the assessee is a high tax paying company, subjected to uniform rate of tax, no adjustment is even otherwise called for in view of the following:
7.8. If the closing stock of the year is to be varied, similar adjustments would need to be made to the opening stock, too. Reliance placed on the decision of the Delhi High Court in the case of K.G. Khosla & Co. Ltd. v.
CIT: 99 ITR 574. Further, corresponding adjustment would need to be carried out in the opening stock of the succeeding year. The addition, if any, is revenue neutral, if seen in a macro perspective and, therefore, no adjustment is called for. Reliance was placed on the following decisions 12 Nagri Mills Company Ltd.: 33 ITR 681 (Bom.); Triveni Engineering Industries Ltd.: 336 ITR 374 (Del).
DR's submissions:
7.9. The method of accounting followed by the assessee do not consider expenditure incurred on account of freight/ import clearing charges and hence this is not in accordance with the accepted principles of accountancy and is, therefore, not a correct approach. Accordingly, the adjustment made by the assessing officer was justified.
7.10. As regards the contention of the assessee that the method of valuation of closing stock cannot be disturbed by the Revenue considering- (i) such method has been consistently followed, which has always been accepted by the Revenue in the past, and (ii) since closing stock of one year becomes opening stock of next year, there is no loss to revenue warranting impugned adjustment, it is submitted, that the same is not acceptable for the following reasons:
An incorrect method of accounting / valuation cannot be accepted, even on grounds of consistency. Consistency in following a particular accounting method, which is incorrect, cannot override accuracy. Accordingly, the aforesaid contention of the assessee is untenable The assessee is wrong to contend that there is no loss to revenue, since following such incorrect method results in deferment in payment of tax, which results in loss of interest to the revenue.
c. Further, reliance is placed on the assessment order and order passed by DRP.13
AR's Rejoinder:
7.11. The Ld. DR's contention that the aforesaid accounting treatment would result in loss of revenue to tax department on account of interest, it is submitted, that the assessee had followed the similar accounting treatment in the earlier year(s) as well and, therefore, no such amount was included in the value of opening stock of the year under consideration. If the said amount (which as submitted in the submissions before assessing officer and DRP amounts to Rs. 36 lacs) is considered, there would be no loss to revenue; on the contrary, the tax liability determined upon the assessee would be excessive.
7.12. In view of the aforesaid, taking into account the facts of the case, the adjustment made by the AO calls for being reversed. The Ld. DR's contentions, it was submitted, are untenable, incorrect and accordingly, not required to be considered for adjudicating the present issue.
Our findings and conclusion:
7.13. We have considered the submissions and the material filed by both the parties. The issue in question is regarding method of valuation of closing stock. The primary contention of the assessee is that it had to make emergency purchases and that these stocks so purchased were immediately consumed. In such exceptional situations, the assessee has directly accounted the freight and import clearing charges to the profit and loss account. This means that such raw material stocks are not part of closing stock at all. Further, this fact is not rebutted by the DR.14
7.14. Though technically it can be argued that the value of closing inventory must include freight/ import clearing charges, the facts explained by the assessee are that the purchases in question are done under exceptional circumstances (whicha re well known in this ttype of industry) for immediate consumption. They are in fact consumed immediately i.e. as soon as raw material enters the factory premises which is not disputed by assessing officer, hence the question of such purchases being part of closing stock does not arise at all. In such a situation, when freight/ import charges are directly debited to the P&L A/c along with the value of the purchases, naturally the question of treating them as part of closing inventory does not arise. The assessee has acted and accounted in a proper and acceptable method. Therefore, the relief should be granted on this count alone.
7.15. Alternatively, the undisputed fact remains that the assessee has been consistently following the said method of accounting in the last many years and the Revenue has been accepting these facts and method of accounting without any demur.
7.16. The contention of the DRP that, the principle of res-judicata does not apply in Income tax proceedings and therefore, the Assessing officer is correct to come to independent conclusion and is not bound by past acceptance of a factual legal point by the department is untenable.
Technically the principle of res judicata may not apply to the income tax proceedings as each year is is an independent year, yet there ought to be uniformity in treatment and consistency as propounded by Hon'ble Supreme Court in the case of Radhasoami Satsang Vs. CIT 193 ITR 321, when the facts and circumstances are identical. It is a judicially accepted principle that when the facts are same, a uniform view should be adopted for the 15 subsequent years in the income tax proceedings. Unless there is a material change in the facts, which is neither demonstrated by assessing officer nor DRP, the view which is taken earlier, should not be changed, as held by various courts. We now discuss some of the case laws.
7.17. The Hon'ble Supreme Court in the case of Radhasoami Satsang (supra), on the theory of consistency, has held as under:
" ..Strictly speaking, res judicatta does not apply to the income tax proceedings. Though, each assessment year being a unit, what was decided in one year might not apply in the following, year , where a fundamental aspect permeating through different assessment years has been found as afact one way or the other and parties have allowed that position to ne sustained by not challenging the order, it would not be at all appropriate to allow the position to be changed in a subsequent year".
7.18. This view has been followed by the Hon'ble Delhi High Court in the case of CIT vs. Neo Ploy Pack (P) Ltd [2000] 245 ITR 492 and the Hon'ble Bombay High Court in the case of CIT vs. Gopal Purohit [2011] 336 ITR
287. 7.19. Further, the Hon'ble Supreme Court in the case of CIT vs. Realest Builders and Services Limited (2008) 307 ITR 202 held that:
"In cases where the department wants to tax an assessee on the ground of the liability arising in a particular year, it should always ascertain the method of accounting followed by the assessee in the past and whether change in method of accounting was warranted on the ground that profit is being underestimated under the impugned method of accounting. If the Assessing Officer comes to the conclusion that there is underestimation of profits, he must give facts and figures in that regard and demonstrate to the Court that the impugned method of accounting adopted by the assessee results in underestimation of 16 profits and is, therefore, rejected. Otherwise, the presumption would be that the entire exercise is revenue neutral. In the instant case, that exercise had never been undertaken. The Assessing Officer was required to demonstrate both the methods, one adopted by the assessee and the other by the department. In the circumstances, there was no reason to interfere with the conclusion given by the High Court"
7.20. The Hon'ble Supreme Court in the case of CIT Vs. Bilahari Investment P. Ltd. 299 ITR 1 (SC) held as follows:
"Every assessee is entitled to arrange its affairs and follow the method of accounting, which the Department has earlier accepted. It is only in those cases where the Department records a finding that the method adopted by the assessee results in distortion of profits that the Department can insist on substitution of the existing method."
7.21. In the case of CIT Vs. Jagatjit Industries Ltd. (2011) 399 ITR 382 (Del.), the Hon'ble Jurisdictional High Court has held as follows:
"If a particular accounting system has been followed and accepted and there is no acceptable reason to differ with it, the doctrine of consistency would come into play. The method of accounting cannot be rejected.
The assessee was following the mercantile system of accounting. According to past business practice, the expenditure spilled over the next year and was debited in the second year and was allowed by the Assessing officer. The Assessing officer for the assessment year in question disallowed Rs. 13,46,299 claimed as expenditure of prior period allowable in the current year. The Commissioner (Appeals) deleted the disallowance and this was upheld by the Tribunal. On appeal to the High Court:
Held, dismissing the appeal, that the assessee had claimed prior period expenses on the ground that the vouchers for such expenses from the employees/ branch employees were received after March 31st 17 of the financial year. It had branch offices throughout the country. It debited the expenditure spill over the subsequent years and the Assessing officer had been allowing it in the past. The accounting practice had been consistently followed by it and accepted by the Revenue. Nothing had been brought on record to show that there had been distortion of profits or that the books of account did not reflect the correct picture. In the absence of any reason whatsoever, there was no warrant or justification to depart from the previous accounting system which was accepted by the Department in respect of the previous years."
7.22. In the present case, the Revenue has rejected the method of accounting which is consistently followed by the assesseee on the ground that there may be chance where in a particular year, the method adopted by the assessee may result in underestimation of profits. However, the Revenue failed to demonstrate with facts and figures that the impugned method of accounting may result in material underestimation of profits. On the contrary, the assessee has demonstrated that the change in the method of accounting for year under appeal would result in loss to the revenue as the opening stock would also require similar adjustment and the cascading effect will be loss to revenue. We observe that in many of the additions made in this case by the revenue, the consistent method of accounting is unnecessarily disturbed, though it has been accepted in many years. In our view such tinkering with the method is unjustified when the exercise does not materially alter the profits. The facts and figures in many additions demonstrate that the issue raised is revenue neutral in the long run. Such petty additions should be avoided on the ground of materiality, as AS-1 which talks about materiality, consistency, prudence etc. is part of the I.T. Act after it is notified u/s 145(2).
187.23. In view of the foregoings and proposition laid down by the Hon'ble Supreme Court and the Hon'ble High Courts, we are of the opinion that adjustment of Rs. 31.38 lacs made to total value of closing stock of Rs. 275 crores and consumption of stock of Rs. 7178 crores is uncalled for. If valuation of closing stock is changed then the value of opening stock should also be changed on the same basis or method. The closing stock of a particular year is the opening stock of the subsequent year. It is not the case of the revenue that the method of valuation of closing stock is materially affecting the accounts and profits disclosed by the assessee. This adjustment sought to be made is revenue neutral and at best may result in preponment or postponement of revenue. The issue is whether such exercise is at all required on the ground of materiality. Materiality is a concept which is well recognized both in accountancy and law. Accounting standards notified by the CBDT u/s 145(2) mandate that the concept of materiality be taken into consideration when finalizing the accounts of an assessee.
7.24. Further, the Hon'ble Supreme Court in the case of Berger Paints India Ltd. Vs. CIT (2004) 266 ITR 99 at page 103 (SC), has noted with approval, the observations of the Special Bench of the ITAT in the case of Indian Communication Network Pvt. Ltd. Vs. IAC (1994) 206 ITR (AT) 96 (Delhi). At page 114 it observed that:
"Before we part with the ground, we cannot help feeling that the litigation between the parties could have been avoided since it was quite immaterial, whether full deduction was allowed in one year or partly in one year and partly in the next, since the assessee is a company and rate of tax is uniform. The gain to one and the loss to the other is illusory since what is deferred in one year, would have to be discharged in the next. In that sense, nobody has won and nobody has lost."
7.25. Even on this plea also, the assessee succeeds. We have dealt with this issue elaborately as, in a number of grounds, this issue would become 19 applicable. In view of above discussion, we allow this ground of the assessee.
8.1. Ground no. 3 to 3.2: (Addition on account of cost of rejection of semi finished goods and obsolete items):
DRP Directions:
8.2. The DRP in its order under reference has decided the issue with following directions;
"The assessee has objected the enhancement of the value of closing inventory by Rs. 9.24 lacs on account of cost of rejection. The arguments of the assessee are similar to the one taken at objection No. 1 i.e. the method of accounting has been consistently followed by the assessee in the past and accepted by the department and secondly, that the adjustment would be revenue neutral in the long run'.
Based on the reasons given in the finding to objection No. 1, it is held that as it was the duty of the AO to determine the correct and true income of the year, the adjustment made by the AO is upheld."
Facts:
8.3. The assessee had debited to the profit and loss account Rs. 12.49 crores representing the cost of material / semi-finished goods rejected in the course of manufacturing or obsolete items. The aforesaid rejections comprised of abnormal rejections arising in the course of manufacturing, like rejections on account of obsolescence, etc. 8.4. Accordingly to principles of accounting (AS-2), as also the consistent, regular and accepted method of accounting, the assessee only considers 20 normal wastages arising in the course of manufacturing for purposes of allocation to closing inventory. Since, the aforesaid expenditure comprised of abnormal wastages, it was not practically feasible to segregate normal and abnormal wastages and, therefore, the assessee as per the consistent method of accounting did not consider the aforesaid costs for purposes of allocation to closing inventory.
Assesse's Submissions:
8.5. AS-2 on valuation of inventory stipulates that abnormal wastages should not be considered for valuation of inventory. Since, the impugned write off on account of rejection of material, in the nature of abnormal rejections, the assessee, as per consistent, regular and accepted method of accounting, charged the same to profit and loss account, without any allocation to the value of closing inventory.
8.6. The adjustment made by the Assessing officer is therefore contrary to the mandatory accounting standard consistently and regularly followed by the assessee and accepted by the Department.
8.7. In any case, considering that the assessee is a high tax paying company, subjected to uniform rate of tax, no adjustment is even otherwise called for in view of the following:
a. If the closing stock of the year is to be varied, similar adjustments would need to be made to the opening stock, too. Reliance is placed on the decisions of the Delhi High Court in the case of K.G. Khosla & Co. Ltd. v. CIT: 99 ITR 574 (Del.) 21 b. Corresponding adjustment would need to be carried out in the opening stock of the succeeding year.
c. The addition, if any, is revenue neutral, if seen in a macro perspective and, therefore, no adjustment is called for. Reliance was placed on Nagri Mills Company Ltd.: 33 ITR 681 (Bom.); Triveni Engineering Industries Ltd.: 336 ITR 374 (Del).
DR's submissions:
8.8. DR relied on the order of the assessing officer as well as on the DRP and repeated the arguments taken in grounds of appeal no. 2-2.2 Our findings and conclusion:
8.9. The issue in question is whether the cost of abnormal rejections have to be considered for the purpose of valuation of closing stock. The assessee relied on Accounting standard-2 - Valuation of Inventories which is a notified accounting standard by the Companies Act which stipulates that abnormal wastages should not be considered for valuation of inventory.
8.10. It was submitted by the Ld.AR of the assesse that it is in the manufacturing of precision and quality product and in case of unfit material it has been consistently following the method of charging the abnormal rejection of material to its profit and loss account, without any allocation to the value of closing inventory.
8.11. The assessing officer's case is that cost of rejections needed to be included in the value of closing stock. Assessing officer worked out an amount of Rs. 9.24 lacs as attributable to closing stock out of total 22 expenditure of Rs. 12.49 crores and closing stock value of Rs. 275 crores.
The assessee as a consistent accounting policy has been claiming the cost of abnormal rejections as revenue expenditure for the previous years and this has been regularly accepted by department in past.
8.12. The amount of Rs. 9.24 lacs attributed by the assessing officer, in our view, is materially inconsequential so as to warrant disturbing the regular method of valuation of closing stock being followed by the assessee company. The quantum of the addition of Rs 9.24 lacs is less than 0.74% of the value of abnormal rejections. As a percentage of total stocks / turn over/ profits declared, this figure is miniscule.
8.13. Accounting Standard-2 stipulates that abnormal wastages should not be considered for valuation of inventory. It reads as follows:
"16. Examples of costs excluded from the cost of inventories and recognised as expenses in the period in which they are incurred are:
a) Abnormal amounts of wasted materials, labour or other production costs;
storage costs, unless those costs are necessary in the production process before a further production stage; administrative overheads that do not contribute to bringing inventories to their present location and condition; and selling costs."
8.14. Keeping in view the treatment prescribed under AS-2 and the fact that the assessee has been regularly following the same method of accounting for valuation of charging such rejection to P&L A/c and its closing inventory, 23 we are of the view the addition in question is uncalled for. The adjustment is not material adjustment. Further, for the reasons stated by us on the issue of consistency, while disposing ground no. 2 to 2.2, we allow this ground of the assessee.
9.1. Ground nos. 4 to 4.3: (Addition of provision for increase in price of material to the value of closing inventory)-
DRP Directions:
9.2. The DRP has issued following directions to the Assessing Officer on this issue:
"The assessee has objected to the addition of Rs. 4.84 crores to the income on account of the enhancement of value of closing inventory by proportionate amount of provision for increase in prices of raw materials made in the end of the year. According to the assessee, the AO failed to appreciate the following:
(a) That it had followed the same system of value closing inventory in past several years which has been accepted by the department. (b) The aforesaid system of accounting is revenue neutral in the long run. (c) The method of accounting is followed regularly and the same cannot be rejected as improper. Lastly without prejudice the assessee has held that the addition should be restricted to Rs. 3 lacs if at all which could be attributed/allocated to the value of closing inventory".
The objections of the assessee have been examined. It seen that as regards inclusion of the raw materials cost, in valuing of closing inventory, the explanation at (a), (b) & (c) above are similar in nature to the two objections (1) and (2) above. The DRP has already given a finding that it was the duty of the AO to determine the true income of the year and therefore, the objections are not sustainable. On merits also it is seen that it is difficult to accept that the whole of the raw materials purchase 24 during the year has been consumed. Therefore, some amount has to be attributed to the value of closing inventory. Therefore, the amount of Rs. 4.84 crores representing the proportionate amount in respect of closing inventory lying at the end of the year considering all the above stated provisions made by the assessee taken together is found to be justified. The assessee without prejudice has contended that approximately Rs. 3 lacs only should be considered against Rs. 4.84 crores is also not found acceptable as the assessee has not stated as to how it reached this figure. "
Therefore, in conformity with the directions issued by the DRP, addition of Rs. 484 lacs is made to the income of the assessee. (Addition to income - Rs. 484 lacs) Facts:
9.3. In the business of manufacturing vehicles, the assessee purchases raw material from vendors with the express understanding that the rates would be revised, if there is substantial increase/decrease in cost of materials, at the agreed interval.
9.4. Accordingly, while price revisions are pending or negotiations are on, the vendors keep on supplying the material provisionally at the agreed rates, which is recorded in the books of accounts by the assessee.
9.5. At the year end, the company estimates the additional liability on account of price revision under negotiation and makes upward/downward provision, as the case may be, in relation to material supplied until the end of the relevant year.25
9.6. During the year under appeal, the company had debited the profit and loss account with adjustment on account of upward revision in price at Rs. 31.31 crores. (wrongly taken in the assessment order at Rs. 31.69 crores.) Assessee's Submissions:
9.7. The aforesaid provision for increase in price of raw material related to material already supplied by the vendors, which stood consumed in the course of manufacturing. The fact that raw material supplied during the year was almost fully consumed by the assessee at the end of the year is evident from the fact that the closing inventory of the company was only 4% of the total consumption during the year. Any goods / material lying in the closing inventory, in relation to which provision for increase in revision of price was made by the assessee, if at all, would be minuscule.
9.8. Accordingly, considering the principle of materiality, the assessee, as per consistent and regular method of accounting followed since past several years, which has been accepted by the Revenue as such in all those years, does not consider the aforesaid provision for purposes of valuation of closing inventory.
9.9. The assessee in this regard relies upon the arguments and case laws in relation thereto, discussed under Ground of Appeal No. 2.
9.10. Since, the assessee has been following consistent, regular and accepted method of not considering the aforesaid provision for valuation of closing stock, the same could not have been disturbed by the assessing officer;26
9.11. In any case, considering that the assessee is a high tax paying company, subjected to uniform rate of tax, no adjustment is even otherwise called for in view of the following:
If the closing stock of the year is to be varied, similar adjustments would need to be made to the opening stock, too. ( K.G. Khosla & Co. Ltd. v. CIT: 99 ITR 574 (Del.). Futher, corresponding adjustment would need to be carried out in the opening stock of the succeeding year.
b. The addition, if any, is revenue neutral, if seen in a macro perspective and, therefore, no adjustment is called for. Reliance placed on Nagri Mills Company Ltd.: 33 ITR 681 (Bom.); Triveni Engineering Industries Ltd.: 336 ITR 374 (Del.).
9.12. Further, without prejudice, the assessing officer has erred in apportioning the entire amount of provision for price increase towards closing stock, without appreciating that substantial part of the provision related to material already consumed in the course of manufacturing and was not lying in closing stock. The actual apportionment out of the aforesaid provision relating to closing stock works out to Rs. 3 lakhs only for which detailed reasons have been given at page 21-22 of Form 35A.
Our findings and conclusion:
9.13. The issue in this case is adjustment to value of closing stock of the provision made by the assessee for increase in the price of material purchased. Due to revision of price, the assessee debited Rs. 31.31 crores to 27 the profit & loss a/c. It is the submission of the assessee that all the material stood consumed and that there is no closing stock to which a portion of this adjustment can be attributed. This claim is not controverted by specific finding of the assessing officer or the DRP. The addition is made based on surmise that it is not possible to consume all the purchases. When the assessee states that the stocks so purchased are consumed, the explanation cannot be rejected without further verification and bringing on record contrary evidence. The 'Just in time' system of inventory adopted by the assessee is not disputed by the Revenue. The assessee worked out and pointed out that the actual apportionment is about Rs. 3 lacs and submitted the calculation before the DRP. However, this claim has not been verified by the Revenue. Therefore, on the ground of consistency and materiality for the reasons given while disposing off ground nos. 2 to 2.2 and also for the reason that the revenue failed to contradict the claim of the assessee with evidence, we all this ground of appeal.
10.1. Ground nos. 5 to 5.1 (Disallowance of cost of scrap material):
DRP Directions:
10.2. The directions of the DRP on this issue are reproduced as under;
"The assessee has objected to the disallowance of Rs. 12.53 crores claimed in respect of cost of material/obsolete items rejected in the course of manufacturing which was debited to the profit and loss account. The assessee has objected on the following grounds:-
(a) It has not maintained scrap register at the shop floor containing item wise details of scrap generated in the course of manufacturing. (b) Deduction has been claimed on account of actual cost above of such items incurred by the assessee 28 whereas the obsolete/rejected items were sold at prevailing market price of scrap items and were sold by weight. (c) It has pointed out that Rs. 11.43 crores has been realized against the aforesaid loss of Rs. 12.53 crores which is not disproportionate.
The objections of the assessee have been considered. It is seen that the special auditor at page no. 72 of Annexure (iii) of the audit report has mentioned that the assessee has not maintained any stock register at scrap yard showing how much scrap has been received and its subsequent disposal. It is also noted that in the scrap stock register the extent of generation of scraps in sales cannot be verified. Also the assessee has not maintained any third party evidence that those items are actually obsolete and rejected and also no such evidence was provided during the course of assessment proceedings. The DRP finds that the assessee's contention that loss of Rs. 12.53 crores is compensated with revenue of Rs. 11.43 crores not to be correct as the scrap is not generated from one single activity and also includes rejection during inspection and rejection of obsolete items as well. In view of the above, the objections of the assessee are not sustained."
Therefore, in conformity with the directions issued by the DRP, addition of Rs. 1253 lacs is made to the income of the assessee. (Addition- Rs. 1,253 lacs) Facts:
10.3. During the relevant previous year, the assessee claimed deduction of Rs.12.53 crores on account of rejection of material, processed by the assessee in the course of manufacturing and rejection of certain obsolete components, spare parts, etc. The assessee realized Rs. 11.43 crores from sale of scrap generated in the course of manufacturing, which was credited to the profit and loss account and shown as income.29
Assessee's Submissions 10.4. It is an admitted position that the assessee has not maintained register containing itemwise details of scrap generated in the course of manufacturing.
10.5. The assessee cannot be expected to keep quantitative tally of each nut and bolt, which gets scrapped in the course of manufacturing. Such a requirement from the assessing officer is highly impracticable and not in consonance with the business realities.
10.6. There is no finding that the aforesaid loss claimed by the assessee is unreasonable, having regard to the size/operations or past history of the assessee nor the aforesaid cost has disturbed the gross profit earned by the assessee during the relevant year vis-à-vis earlier years.
10.7. The assessing officer has itself noted in the assessment order, the earlier years' history of expenditure on account of wastage/scrap vis-à-vis the total turnover, which has not been found to be excessive in this year.
10.8. There is an accepted history of trading results. For the relevant year as well, the books of account have not been rejected and the trading results has been accepted on the basis of books of accounts, which are accepted to be true and complete. Under such circumstances, the assessing officer erred in disallowing the loss arising on account of wastage.
10.9. The assessee has also realized an amount of Rs.11.43 crores as against the aforesaid loss of Rs.12.53 crores which again is not disproportionate to cost of scrap.
3010.10. The assessing officer cannot blow hot and cold at the same time, by accepting revenue realized from sale thereof, aggregating to Rs. 11.43 crores, on the one hand, and disallowing the entire expenditure as non- genuine, on the other hand.
10.11. In the assessment for immediately succeeding assessment years, both the special auditor and assessing officer have accepted generation of such scrap and while allowing deduction claimed on account of rejections debited to profit and loss account, made addition only of the estimated value of scrap, that may be lying in the stores on the last day of the previous year, on an estimate basis.
10.12. In that view of the matter, it is not in doubt that scrap is generated in the course of manufacturing by the assessee. In the absence of any evidence in the possession of the assessing officer, despite special audit, that the amount debited by the assessee in the books was not genuine, the impugned disallowance needs to be deleted.
DR's submission:
10.13. Reliance is placed on the assessment order and order passed by DRP.
Our Findings & conclusion:
10.14. The disallowance in question relates to claim on account of scrap generated. On examination of the order of the assessing officer as well as the DRP, we find that an adverse inference, by the Assessing officer and the DRP, was drawn since the assessee has not maintained a scrap register. The assessee has to substantiate its claim for deduction. At the same time, when the assessee discloses income from sale of this scrap, it is not correct on the 31 part of the assessing officer and DRP to infer on surmises that this sales revenue is not due to sale of scrap but for something else. It has to be appreciated that the assessee produces exciseable goods and all the sales are monitored by excise authorities. There is no proof that the assessee has indulged in making unaccounted sales. The scrap is either sold or is on the scrap floor. No other logical inference can be drawn on these undisputed facts without contrary evidence.
10.15. The assessee has realized an amount of Rs. 11.43 crores on sale of scrap as against the aforesaid claim of Rs. 12.53 crores which was on account of scrap. The fact that the assessee could not maintain quantitative details of scrap does not lead to a conclusion that the entire claim should be disallowed. Assessing officer should have, in our opinion, considered the reasonableness of the claim based on the size of the company, its operations or on the basis of similar comparable cases and also by keeping in view the past history of the assessee. When the Assessing officer does not dispute the realization from the sale of scrap, the disallowance of the entire value of scarp is not justified. At best an estimated value of scrap items, lying in the floor of stores on the last day of the previous year can be made as was done by the assessing officer in the subsequent year.
10.16. In view of the above, as an estimate has to be made of the stock of scrap at the shop floor and the same be taken into account, we set aside the issue to the file of the assessing officer for fresh adjudication by keeping in view our discussion on the above issue. In the result this ground is allowed for statistical purposes.32
11.1. Ground no. 6 to 6.3: (Disallowance of provision for price increase reversed in the next year):
DRP Directions:
11.2. The DRP vide above order has issued following directions to the Assessing Officer;
"The assessee has objected to the disallowance of Rs. 345.71 lacs in respect of provisions created at the end of the year towards accepted increase in prices of raw materials received during the relevant previous year on the ground that the same was not crystallized liability in as much as the said provision was reversed in the succeeding year. According to the assessee, it had following this method of accounting consistently. The provision was created on the basis of reasonable estimate and the said basis is followed regularly by the assessee. The assessee has stated actual amount of disallowance should be Rs. 301.11 lacs at all".
The objection of the assessee are not found to be consistent with the accounting method described under the Income tax Act wherein only such expenses are allowed which have actually crystallized during the year. In the instant case, the provisions have been made in the accounts which may be as per the requirements of the Companies Act, but the AO is required to determine the true income of the assessee under the Income tax Act alone. Based on the above principle, all provisions whether subsequently reversed or not are disallowable. Therefore, the action of the AO is upheld The assessee has without prejudiced contended that the figure of Rs. 345.71 lacs adopted in the assessment order may if at all be substituted by the correct amount of Rs. 301.11 lacs. The DRP has considered but it is seen that as per the provision of section 144C(8) of the Income Tax Act, the DRP cannot issue any direction for further enquiry before passing of the assessment order and therefore, this objection for statistical purpose is treated as rejected."
33Therefore in conformity with the order of the DRP amount of Rs. 345.71 lacs is liable to be disallowed on account of liability not crystallized during the year and the same is added towards assessee's income. (Addition to income - Rs. 345.71 lacs) Facts:
11.3. Out of the provision for price revision in material of Rs. 31.31 crores, Rs. 3.01 crores (incorrectly assumed in the assessment order at Rs. 3.45 crores) was reversed in the next year.
Assessee's Submissions:
11.4. Provisions are made on the basis of managements' best estimate in light of undergoing price negotiations with the vendors, which were not finalized until the end of year.
11.5. It is not in doubt that the liability existed as the end of the relevant year, which was provided on the basis of management's best estimate, in as much as the provision made has been upheld to be an allowable deduction and it only the excess amount of provision, which was reversed in the succeeding year, that has been disallowed on the ground of the same being an unascertained liability.
11.6. It is a settled law that where liability has accrued during the previous year, the same needs to be provided in the books provided the same is capable of being estimated with reasonable certainty, even if the liability is quantified and discharged at a future date. Reliance placed on Bharat Earth Movers v. CIT: 245 ITR 428 (SC); Bayer Bio Science (P) Ltd.: 148 TTJ 73 (Mum).34
11.7. The assessee had been consistently and regularly following the accounting practice of creating provision and reversing any excess or shortfall therein in the succeeding year and offering the same to tax in that year accordingly.
11.8. The said method of accounting having been always accepted by the Revenue in the past could not have been disturbed by it without justified and sufficient reason to overcome the theory of consistency.
11.9. Without prejudice, the aforesaid adjustment was not warranted, since the same is a revenue neutral exercise and would require the income of the next year to be reduced by the aforesaid amount offered to tax next year.
DR's submission:
11.10. Reliance is placed on the assessment order and order passed by DRP.
Our Findings and conclusion:
11.11. The finding of the assessing officer is based on the submissions of the assessee that the liability does not pertain to F.Y. 2006-07 and that these pertain to earlier assessment year. This is not disputed by the assessee. The supplementary invoices belong to the next year. Hence it is not correct to say that the liability for which provision is made has crystallized during the year.
The assessee has not demonstrated the same. The company in this case makes a provision for increase in material cost on estimate basis, based on price fixation with the vendors. These provisions have been made in the consistent manner year after year. It is not denied by the Revenue that the price revision in question is on the material already supplied by the vendor to the assessee company, which is either consumed or lying in closing stock.
35Thus, the expenditure in question has to be definitely allowed. The only issue is the year of allowability. Only excess provision written back is added by the assessing officer. Out of total provision for price revision for material of Rs. 31.31 crores, excess provision of Rs. 3.01 crores was reversed in the next year, which was added by the assessing officer. When the provision itself is doubted as not belonging to this particular year by the assessing officer, we do not understand as to how only the excess provision is sought to be reversed.
11.12. In view of the above discussions, as it is not proved by the assessee that the provision for price revision for material purchased is for material consumed during the year or that it pertains to the stock of material in closing stock, we uphold the disallowance.
11.13. As regards, the quantum of disallowance, the assessing officer is directed to verify the claim of the assessee on the correct reversal of provision and pass appropriate orders. In the result, this ground is dismissed.
12. Ground nos. 7 to 7.1. (Adjustment on account of provision for increase in price of material as prior period expenditure or preponement of revenue):
DRP Directions:
12.2. The DRP vide above order has issued following directions to the Assessing Officer;
"The assessee has objected to the disallowance of Rs. 498.09 lacs on account of short provision for increase in prices of materials created in the immediately preceding year on the ground that the same is prior expenditure. The assessee has 36 also objected to the disallowance of Rs. 978.76 lacs on account of short provision for decrease in prices of materials to income on the ground that the same has been resulted in excess booking of expenditure on account of consumption of raw materials during the relevant previous year. Lastly without prejudice the assessee has contended that the figures adopted by the AO are not correct".
The objection of the assessee has been considered. It is seen that the AO after due consideration of the assessee's reply has held that the actual quantification though possible was not considered by the assessee. The assessee has also not been able to provide any evidence to substantiate its submissions that the special auditor has erred in making various additions with regard to the amount of provisions and prior period expenses. In any case, expenses which do not pertain to the year under consideration cannot be allowed to the assessee. Therefore, the prior period expenditure amounting to Rs. 498.09 lacs has been correctly disallowed by the AO and hence the objection cannot be sustained. Similarly, the addition made on account of short provision for decrease in prices of materials which was accounted for income in the succeeding year cannot be allowed as it has resulted in excess booking of expenditure on account of consumption of raw materials during the relevant previous year. Therefore, the objection of the assessee on this account is not sustained.
The assessee has contended that the amounts of Rs. 498.76 lacs and Rs. 978.76 lacs adopted in the assessment year may be substituted with the correct amount of Rs. 326.70 lacs and Rs. 739.98 lacs respectively. The DRP has considered this, but it is seen that as per the provision of section 144C(8) of the Income Tax Act, the DRP cannot issue any direction for further enquiry before passing of the assessment order and therefore, this objection suggestion for statistical purposes is treated as rejected."
Therefore in conformity with the order of the DRP prior period expenses amounting to Rs. 498.09 lacs and amount of Rs. 978.76 lacs, on account of booking of short income/ excess raw material consumption during the year 37 are disallowed & added towards assessee's income. (Addition of Rs. 1476.85 Lac ( Rs. 498.09 lacs+ Rs. 978.76 lacs) Facts:
12.3. During the relevant year, the assessee claimed deduction of Rs. 3.26 crores (incorrectly adopted in the assessment order at Rs. 4.98 crores) on account of short provision for increase in price of raw material supplied in the immediately preceding year. Similar to provision for increase in price of material supplied by the vendors, the assessee also recognized additional income of Rs. 7.39 crores (incorrectly adopted in the assessment order at Rs. 9.78 crores) in the succeeding year on account of decrease in price of material supplied during the relevant year, on account of short estimation.
Assessee's Submissions:
12.4. The provision for increase / decrease in prices of material supplied by vendors during the relevant year was created by the assessee as at the end of the relevant year, on the basis of reasonable estimate.
12.5. Merely because the liability provided in this regard in the earlier year was less than the amount of liability actually devolving on the assessee, does not mean that the differential liability accounted for and claimed during the relevant previous year becomes a prior period expense. The additional liability crystallized /accrued in the year under appeal on finalization of price negotiations. Reliance is placed on Saurashtra Cement and Chemical Ltd. v.
CIT: 213 ITR 523 (Guj.).
12.6. As per consistent, regular and accepted method of accounting followed by the assessee, any excess or shortfall in such provision is 38 reversed in the succeeding year and offered for tax accordingly. The aforesaid method of accounting of accounting has been consistently and regularly followed by the assessee, which has been accepted by the Revenue as such in all the years.
12.7. It needs to be appreciated that when such a method is consistently and regularly followed, any aberration would even out over the years, and, therefore, no tinkering with such method is required, more so when the assessee is subjected to uniform rate of tax. Reliance is place on Nagri Mills Company Ltd.: 33 ITR 681 (Bom.); Triveni Engineering Industries Ltd.: 336 ITR 374 (Del.).
12.8. Without prejudice, the amount of Rs. 4.98 crores and Rs. 9.78 crores adopted in the assessment order are incorrect, which needs to be substituted with correct amount of Rs. 3.26 crores and Rs. 7.39 crores, respectively.
12.9. Further without prejudice to the above, in so far as the amount of Rs. 4.98 crores is concerned, the assessee had filed an application for admission of additional ground of appeal in the appeal for assessment year 2006-07, to, alternatively, allow the said amount as expenditure in that year, which was admitted by the Hon'ble Tribunal, vide interim order dated 28.5.2012. The aforesaid additional ground, however, inadvertently remained to be adjudicated by the Hon'ble Tribunal in the final order, for which the assessee is in the process of filing a Miscellaneous Application. In view thereof, your Honour may decide the aforesaid issue, subject to the amount being allowed in either of the two years, depending upon the outcome of adjudication of additional ground of appeal in that year.
39DR's arguments:
12.10. Reliance is placed on the assessment order and order passed by DRP.
Our Findings and conclusion:
12.11. The addition in question is on account of provision for increase in price of material. When there is an excess provision on account of price revision made during the year, the assessee reversed the same in subsequent year i.e. when the actual figures are known. Similarly, when there is a short provision for increase in price of raw material supplied in immediately preceding year, the balance is recognized as expenditure during the year. A claim is made based on ascertainment of actual liability. The assessing officer disallowed the reversals of provision on the ground that this was a prior period expenditure.
12.12. When provisions are made, what is to be seen is whether the assessee has done a bona fide and genuine exercise to estimate its liability with reasonable certainty. The term reasonable certainty means that the provision in question might be slightly higher or lower than the actual figure. When the provision is higher, it is reversed in subsequent year, when the actual figures are known. Similarly, when the provision is lower, the same is claimed in the latter assessment year. It cannot be said that these are prior period expenditure. The actual liability in question is ascertained only during the year and hence the liability crystallizes during the year. Estimation of an expense has to be considered in contradiction to actual ascertainment of the expenses. Once the actual expense has been ascertained, the liability accures in that year to the extent not provided in the earlier year and is to be allowed as revenue expenditure in the year of crystallization. Concepts of going 40 concern, accrual and consistency have to be taken into account by the revenue authorities while evaluating such provisions and making such adjustments. The assessee is disputing the figures of disallowance and the DRP is also expressing its inability to correct the figures. In our view the DRP is not helpless and could have directed the assessing officer to verify the figures and correct the mistakes, if any. In view of the above discussion, we allow this ground of assessee for statistical purpose and direct the assessing officer to properly verify the figures and allow the claim of the assessee.
13. Ground nos. 8 to 8.2: (Disallowance of alleged excessive purchases price paid to related parties as per AS-18):
DRP Directions:
13.2. The DRP has issued following directions to the Assessing Officer;
"Assessee has objected to proposed addition of Rs. 16.60 crores in respect of purchases from related parties on account of excessive purchase price determined by the AO on the basis of the internal comparables available for similar products purchased from unrelated parties, and the proposed addition of Rs. 33.95 crores in the same proportion as that of purchases for which internal comparables were not available. It was contented on behalf of the assessee that the purchase price from these related parties was justified because of various business consideration mainly the level of automation of vendor, the amount of investment, the edge of the plant and the prestige utilization of the vendor; the volume of supply of each vendor; the geographical differences of each vendor which impacts the cost of freight labour etc.; the lead time and the indirect tax cost etc. as well as the assessee preference for purchasing material from more than one suppliers due to business commercial expediency namely, De risking supply chain to reduce dependence on one vendor. It was also contended on behalf of the assessee that these related 41 parties related only as per the accounting standard 18 and are not related parties in terms of provisions of section 40A(2) of the Income Tax Act".
The objection of the assessee cannot be accepted. Even if the contention of the assessee that the parties are not strictly related parties in terms of section 40A(2b) of the Income Tax Act, the fact remains that these parties are close associates of the assessee and the assessee has paid higher price for the goods purchased for these parties than the goods available in the market, which fact is proved by the availability of certain internal comparables i.e. other parties from which the assessee has actually required these goods at lesser rates. Since the assessee has paid higher price than the market price of the goods, the difference between the market price i.e. price paid to internal comparable and price paid to these parties have been correctly disallowed by the AO."
Therefore in conformity with the order of the DRP, amount of Rs. 50.11 cr. is hereby disallowed and added towards assessee' s income. (Amount disallowed -Rs. 50.11 crores (16.16 Cr + 33.95 Cr) Facts:
13.3. During the relevant previous year, the assessee made total purchases of various raw materials, etc. aggregating to Rs.7175.17 crores. Out of the aforesaid total purchases, purchases from related parties, i.e., parties related to the assessee, in accordance with definition given in AS-18 issued by the Institute of Chartered Accountants of India (ICAI) and as disclosed in the notes to accounts of the audited accounts of the relevant previous year, but admittedly not related in terms of definition provided in section 40A (2) of the Act, amounted to Rs.2108.40 crores.
13.4. The Assessing Officer after comparing purchase price of certain products, which were purchased from the aforesaid related parties as also 42 from unrelated parties, alleged that the purchases price from related parties was excessive in order to reduce the taxable income.
13.5. Accordingly, it was observed that the assessing officer had the power to lift the corporate veil, to disallow excessive purchase price paid to the aforesaid parties, notwithstanding that the said parties were not related, in terms of provisions of section 40A(2) of the Act.
13.6. Accordingly, the AO computed excessive purchase price for which internal comparable was available at Rs. 16.16 crores and estimated the balance excessive price at Rs. 33.95 cr. and made total disallowance of Rs. 50.11 cr, out of purchases.
Assesee's Submissions:
13.7. The purchases are made at higher rate from such parties on account of commercial/business expediency, like, derisking the supply chain to reduce dependence, inability of existing supplier to meet demand increase etc. 13.8. It was not that purchases were made from related parties at prices higher than purchase price paid to unrelated parties. There are several instances attached at page Nos. 1523 to 1523.18 of the paper book, wherein it has been demonstrated that purchases were made from related parties even at a price lower than the prices paid to unrelated parties.
13.9. The instances of higher purchase price were, therefore, only on account of commercial factors/business considerations, the reasonableness of which is to be seen from the point of view of the businessman and cannot be dictated by the Revenue. Reliance placed on SA Builders Ltd: 288 ITR 1 (SC).43
13.10. Apart from the provisions of section 40A (2), there is no provision under the Act, which clothes the assessing officer with the power to go into the issue of reasonableness of the expenditure incurred by an assessee.
Where the party is not related in terms of 40A(2), there is no scope for the assessing officer to examine the reasonableness of the expenditure and to disallow any part thereof. Reliance is place on Shaw Wallace Distilleries Ltd. vs. ACIT: 85 TTJ 236 (Del.); DCIT vs ICICI Web Trade Ltd.: ITA No. 6559/M/2006 (Mum.) Pgs. 27-37 & 1197-1202 of Case Laws PB.
13.11. Further without prejudice, the exercise of comparison of price of related party with unrelated party is also not correct as in certain instances, the assessing officer has made comparison of transaction of a related party with the transaction entered with another related party, wrongly assumed as unrelated party. The details of such mistake are elaborately dealt at page 255 to 256 of Form No.35A.
13.12. Further without prejudice, in any case since such unrelated parties are profit making and taxpaying companies and subject to less or same rate of tax as applicable to the assessee, even assuming that purchases made from them is at higher price, the excessive income having been subject to tax in their hands and there is no loss of Revenue, no further disallowance is, in any case, called for in the hands of assessee under section 40A(2) of the Act. Reference in this regard can also be made to the recent decision of Bombay High Court in the case of CIT vs. V. S. Dempo & Co. P. Ltd.: 196 Taxman 193/336 ITR 209; and the Mumbai bench of Tribunal in the case of Indo Bearing Traders [TS-780-ITAT-2012(Mum)].
44DR's Submissions:
13.13. Reliance is placed on the assessment order and order passed by DRP Our findings and conclusion:
13.14. The basic requirement for the applicability of section 40A(2) of the Act is that the payment should be made to a related person i.e. to a person referred to in clause (b), of sub-section (2) of section 40A of the Act.
13.15. In the present case, it is an undisputed fact that the payments are not made to a person mentioned in clause (b) of section 40A (2) of the Act.
13.16. Clause (a ) of sub-section (2) of section 40A of the Act provides that where the assessee incurs any expenditure in respect of which payment has been or is to be made to any person referred to in clause (b) of the sub-
section and the Assessing Officer is of the opinion that such expenditure is excessive or unreasonable having regard to the fair market value of the goods, services or facilities for which the payment is made or the legitimate needs of the business or profession of the assessee or the benefit derived by or accruing to him therefrom, so much of the expenditure as it so considered by him to be excessive or unreasonable, shall not be allowed as a deduction. The object of section 40A (2) is to prevent diversion of income. An assessee who has large income and is liable to pay tax at the highest rate prescribed under the Act often seeks to transfer a part of his income to a related person who is not liable to pay tax at all or liable to pay tax at a rate lower than the rate at which the assessee pays the tax. In order to curb such tendency of diversion of income and thereby reducing the tax liability by illegitimate means, section 40-A was added to the Act by an amendment made by the 45 Finance Act, 1968. Clause (b) of section 40A (2) gives the list of related persons.
13.17. In the present case, it is an undisputed fact that none of the parties fall within the persons specified as defined under clause (b) of section 40A (2) of the Act. Related parties are to be considered in terms of provisions of sec. 40A (2) of the Act and not as mentioned in AS-18 issued by the Institute of Chartered Accountant. Thus, we are of the view that the provisions of section 40A (2) do not apply to the present case. Further, there is no provision under the Act which authorizes the Assessing Officer to lift the corporate viel and disallow an expenditure on the ground of reasonableness and commercial expendiency unless it is established that the transaction is primarily deviced to evade tax.
13.18. In the present case, it was submitted by the learned AR of the assessee that the related parties are profit making companies and are subject to tax to at some less or the same rate of tax. Thus there is no loss of Revenue. This submission of the assessee has not been controverted before us by the learned DR. Tax benefit alleged is factually wrong as the other compared assessees are profit making companies/ assessees. There is no loss to the revenue if only the excess payment of price is taken, but this situation is not considered by the Revenue. Except for allegation that excess price is paid to reduce profit, no other evidence is gathered by assessing officer to prove that the assessee had in fact evaded or saved tax by such exercise. The argument of the Revenue fails. The allegation that the assessee has structured his associate concern so as to avoid sec. 40A (2) is also devoid of merit, as the revenue has failed to demonstrate as to how it ha come to such a conclusion. The allegation means that profit is transferred to third parties, where the 46 share holding of the assessee is not a major share holding. The allegation means that the assessee is distributing profits to companies with majority holding by unrelated parties for the purpose of reducing taxes. Such wild allegation cannot be endorsed by us.
13.19. The assessee does not dispute the fact that certain purchases are made at a rate higher than the rate paid to certain other parties for the same periods. The assessee at pages 1523 to 1523.18 of the paper book also furnished instances where purchases were made from these parties at price lower than the purchases made from unrelated parties. Further, the disallowance was made on adhoc basis without setting any bench mark for the disallowance.
13.20. Not withstanding the above view, even assuming for a moment that the provisions of the section 40A (2) would apply to the present case, then the following propositions laid down by various courts have to be considered.
13.21. The Hon'ble Bombay High Court in the case of CIT v. Indo Saudi Services (Travel) (P.) Ltd. [2009] 310 ITR 306 relying on CBDT Circular No. 6-P, dated 6-7-1968 held that no disallowance should be made under section 40A(2) of the Income-tax Act in respect of the payments made to the relatives and sister concerns where there is no attempt to evade tax.
13.22. Having held that the provisions of section 40A (2) of the Act does not apply to the facts of the case. We now proceed to answer whether the action of the the Assessing Officer in disallowing the expenditure on the ground of commercial expendiency is justified.
4713.23. The Hon'ble Supreme Court in the case of CIT vs Walchad & Co [1967] 65 ITR 381 in the context of deductibility of expenditure under Section 37(1) of the Income-tax Act, 1961 [Corresponding to section 10(2)(xv) of the Indian Income-tax Act, 1922] held as under:
"In applying the test of commercial expediency for determining whether the expenditure was wholly and exclusively laid out for the purpose of the business, reasonableness of the expenditure has to be adjudged from the point of view of the businessman and not of the revenue".
13.24. Further, reference is also drawn to the decision of the Hon'ble Supreme Court in the case of S.A. Builders Ltd. v. CIT (Appeals) [2007] 288 ITR 1 (SC) , where in it was held as under:
"....that once it is established that there was nexus between the expenditure and the purpose of the business (which need not necessarily be the business of the assessee itself), the revenue cannot justifiably claim to put itself in the arm-chair of the businessman or in the position of the board of directors and assume the role to decide how much is reasonable expenditure having regard to the circumstances of the case. No businessman can be compelled to maximize his profit. The income-tax authorities must put themselves in the shoes of the assessee and see how a prudent business man would act. The authorities must not look at the matter from their own view point but that of a prudent businessman...."
13.25. It is a well settled principle that Commercial expediency cannot be judged by the Revenue from its point of view. In the present case, we are of the view that the assessing officer has made this disallowance based on surmises and conjectures without properly examining the facts on record and without bringing any evidence that the purchases were made at an excessive price compared to fair market value to evade tax.
4813.26. In view of the above discussions, and bearing in mind entirety of the case, we are of the considered view that the impugned disallowance was indeed uncalled for on the facts of this case. Hence, we uphold the grounds of the assessee.
14. Ground nos. 9 to 9.7: (Disallowance of purchase under section 40(a)(ia) for alleged failure to deduct TDS u/s 194C):
DRP Directions:
14.2. The DRP has issued following directions to the Assessing Officer;
"Assessee has objected to disallowance of Rs. 2487.46 crores made by the AO by applying provisions of section 40(a)(ia) for failure to deduct TDS.
In the course of business of manufacturing two wheelers, the assessee places purchase orders on vendors of certain customized intermediary products like wheel assembly, seat assembly, etc. While placing the aforesaid purchase orders to the vendors, the assessee also provides the specifications of the products to be purchased, as also the names of suppliers, from whom the vendor is required to purchase raw materials/components to be used in manufacture of customized intermediary products at the price negotiated by the assessee with such suppliers.
The counsel for the assessee contended that the provisions of section 194C are not applicable in assessee's case as the assessee has only entered into a contract part purchase of goods. The objection of the assessee is not acceptable. The assessee by specifying the names of the vendors of raw material along with the purchase price of the raw material was actually controlling the supply of the raw material to the vendors which would mean that assessee was itself supplying the raw material to the vendors. By arranging its affairs in the manner of selection of the raw material, determining the price at which 49 the raw material is to be supplied to the vendors, the assessee has tried to circumvent the provision of section 194C of the Income Tax Act by showing the contract to be contract for purchase of goods whereas the contract actually is a works contract. It is a fact that the assessee provides the specification of the product to be supplied, the specification of the raw material to be used and also settles these prices at the raw material is to be supplied to the vendors. All these facts looked at from the totality of the circumstances clearly shows that the assessee has placed a works contract with the vendors. The assessee is indirectly supplying the material to the vendors by passing on the purchase price of the raw material to the suppliers of the raw material through the channel of the vendors, who are for the major part of their business dependent upon the assessee and are thus agreeable to the terms dictated by the assessee. The objection of the assessee is therefore rejected."
Therefore, in conformity with the order of DRP, amount of Rs. 2487.64 crores is added to the income of the assessee.(Amount disallowed - Rs. 2487.64 crores) Facts:
14.3. In the course of business of manufacturing two wheelers, the assessee places purchase orders on vendors of certain customized intermediary products like wheel assembly, seat assembly, etc. While placing the aforesaid purchase orders to the vendors, the assessee also provides the specifications of the products to be purchased, as also the name of suppliers, from whom the vendor is required to purchase raw materials/components to be used in manufacture of customized intermediary products at the price negotiated by the assessee with such suppliers.50
14.4. The AO held that, that the assessee, by specifying the name of vendors of raw material along with purchase price thereof, was controlling the supply of raw material to the vendors, which was to be deemed as supply of raw-material by the assessee itself, and hence the contract with vendors constituted 'work contract' under section 194C, as amended by Finance (No.
2) Act, 2009. In view of the assessee's failure to deduct tax at source under section 194C, the Assessing officer disallowed purchases, aggregating to Rs.2487.46 crores, under section 40(a)(ia) of the Act.
Assessee's Submissions 14.5. The provisions of section 194C of the Act are applicable to a contract for carrying out any work and not to a contract for sale of goods.
14.6. A contract shall be regarded a contract of sale, if the title in goods passes to the purchaser after the manufacture and delivery of goods to the purchaser, whereas if the title to the goods passes to the purchaser at any time anterior to manufacture and delivery of goods to the purchaser, the same shall be regarded as contract for carrying out work/works contract. The directions that goods are manufactured according to specifications of the purchaser is neither decisive for ascertaining the time of pasing of title in the goods nor in determining the nature of contract as a contract of sale or works contract.
14.7. The aforesaid proposition is well settled and reference in this regard can be made to the decision of the Supreme Court in the case of CIT vs. Silver Oak Laboratories P. Ltd.: SLP No.18012/2009, which is placed at Pages 78-80 of Case Laws PB filed by assessee.
5114.8. It is further pleaded that section 194C has also been amended, w.e.f 1- 10-2009, to clarify that contract of manufacturing customized goods, without using material procured from the customer would be outside the scope of work contract under section 194C.
14.9. Raw-materials are purchased by the vendors from the suppliers on their own account, after negotiating other relevant terms of payment and delivery schedule, payments of excise duty and VAT, etc. The raw materials are delivered to the vendors and are at the risk and title of the vendors. The vendors who are independent legal entities with their own manufacturing establishments, employing huge labour, utilize the raw materials purchased for producing customized finished goods for the assessee. The title in the finished goods, passes to the assessee only after the goods have come into existence and are supplied by the vendor to the assessee. Excise duty is paid by the vendors in their own right, as an independent manufacture and not as a job worker in respect of goods manufactured and sold to the assessee. Further, the vendor has charged and assessee has paid sales tax/VAT, as the case maybe, for the goods purchased from the vendors; all these parameters clearly demonstrate that the transactions are in the nature of purchase and sale only.
14.10. In this connection, the assessee has referred to various pages of the paper book being the sample purchase orders raised by the vendors and invoices issued by the suppliers for the e-purchase/sale transaction entered between them, which clearly establish independence of transaction between the aforesaid two parties, without any involvement, much less control, or transfer of ownership in the hands of assessee only on the final delivery thereof.
5214.11. It was submitted that the assessing officer has assumed by the fact that the assessee had specified to the vendors the source of supply of raw materials/components and the prices to be paid therefore tobe conclusive by itself for holding the impugned purchase contract simpliciter as contract for carrying out works. The assumption is too far fetched and unsubstantiated as the assessing officer failed to appreciate the business realties and consideration behind such stipulation in high precision markets of two wheelers.
14.12. The aforesaid assumptions by the assessing officer are further belied by the fact that the assessee has paid the vendors the price and taxes for sale of such goods including the cost of raw materials / components (alleged to be supplied by the assessee to the vendors), which establish them to be transactions of purchase and sale. The vendors have in their tax assessments being assessed have offered them as sales on the full purchase price received from the assessee. If the assessee had supplied the raw material / components required by the vendors for fabrication / manufacture of customized intermediary products, the assessee would have been required to pay only conversion charges to the vendors and not the full purchase price for the customized intermediary products / components. Similarly VAT would not have been charged thereon.
14.13. The supply of raw material by the supplier to the vendors, even if the price therefor has been negotiated/fixed by the assessee, cannot by any stretch of imagination be considered as purchase of such material by the vendors from the assessee, so as to constitute contract of sale of goods by the vendor to the assessee, as a contract of work under the amended provisions of section 194C of the Act. The fact of the matter and the position in law as 53 it emerges from impugned transaction is demonstrally clear that the raw material is purchased by the vendors from the suppliers, and not from the assessee, under a legally valid commercial contract between the vendor and the supplier. There is no privity of contract between the assessee and the suppliers.
14.14. It is also pleaded that the special auditor has in the audit report under section 142(2A) of the Act for the succeeding year has held such transaction to be in the nature of contract of sale of goods.
14.15. In these circumstances, even the amended provisions of section 194C of the Act do not cover the case of the assessee. In any case, the said provision operates prospectively and cannot have retrospective operation, as held by the Supreme Court in the case of Silver Oak Laboratories P. Ltd. (supra).
14.16. The allegation made by the assessing officer that the assessee had arranged the said purchase transaction in the aforesaid manner simply to hoodwink the Revenue in order to avoid deduction of tax at source isbereft of any basis and based on incorrect appreciation of facts and the position in law as pointed above. The disallowance made on the aforesaid basis has, therefore, no legs to stand and needs to be deleted.
14.17. The assessing officer has also failed to appreciate the basic distinction between contract of sale and works contract and on pure surmises and conjectures has assumed and without any basis, alleged that the vendors never acquired title in raw materials purchased from supplier specified by the assessee.
5414.18. That apart from and without prejudice to the above, the assessee has incurred similar expenditure in the past several years as well, treating the aforesaid transaction of supply of goods from the vendors as contract of sale of goods, without deducting tax at source. The aforesaid position was never disputed by the Revenue in such years, making it a consistent and settled ever view. Considering the aforesaid undisputed and consistent practice being followed by the assessee, which stands accepted by the Revenue in every case, the assessee had a bonafide belief that tax was not deductible at source on aforesaid transaction of supply of goods. Under such circumstances also, no disallowance can be made under section 40(a)(i) of the Act. Reliance is placed on CIT v. Kotak Securities Ltd. 245 CTR 3.
14.19. Since these are transactions of purchase and sale simpliciter, the assessee would not be deducting tax at source, in future as well (out of such expense payment), as there is no legal liability, consequently in terms of the proviso as held by department, would mean that the assessee will never ever be entitled to deduction of purchase price in all later years. Section 40(a)(ia) of the Act would, in such circumstances operate as a perpetual bar to deny deduction for the expense for all times to come. In other words, deduction for the amount of expense would be lost forever, notwithstanding that the deductee / recipient of income out of whose income tax had to be deducted at source, has already paid tax on such income. This supposition on the part of department defeats every logic of accountancy and legal interpretation.
14.20. It is submitted that, in situations of bonafide difference of opinion between the tax deductor and the Revenue regarding the liability to deduct tax at source, the interpretation of provisions of section 40(a)(ia) of the Act as proposed by revenue, are harsh and confiscatory. They seek to 55 discriminate against an assessee, who has failed to deduct tax altogether vis- à-vis another assessee who has defaulted in depositing tax deducted at source in time. Although, the latter default is more serious in as much as the tax payer enjoys moneys legitimately belonging to Government, the provisions of section 40(a)(ia) of the Act in such cases only seek to defer deduction for expenditure in the hands of such payer to the year(s) in which tax deducted is ultimately deposited, whereas in the case of a payer who has failed to deduct tax at source, the deduction or expenditure is lost in perpetuity. Thus the revenue interpretation lends to incongruous results.
14.21. The aforesaid legal position has been set right by the Finance Act, 2012 (passed on 28.5.2012) whereby, section 40(a)(ia) has been amended to provide that the assessee shall be deemed to have deducted and deposited tax, on the amount on which tax was deductible but was, in fact, not deducted, on the date of furnishing of return of income by the resident payee, if the resident payee has included the said amount in its taxable income and has furnished certificate from a Chartered Accountant in the prescribed form, to this effect.
14.22. It is submitted, that considering the legislative intent, the provisions of section 40(a)(ia) of the Act needs to be liberally construed and no disallowance could be made under that section, where tax has been paid by the recipients. Reliance is placed on Nemichand v. ACIT: 93 TTJ 564 (Bang.); Starline Ispat & Alloys Ltd. v. DCIT: 108 TTJ 321 (Mum.), for the proposition that in such circumstances the Tribunal has power to liberally construe the section to achieve a harmonious interpretation.
5614.23. Since the recipients had discharged their tax liability qua receipt from the assessee, for which certificates obtained from Chartered Accountants are placed on the record as additional evidence, no disallowance under section 40(a)(ia) is called for, having regard to the intent/object for which the same was introduced.
14.24. Further without prejudice to above it is pleaded that since the outstanding liability against the aforesaid expenditure at the end of year amounted to Rs. 127.43 crores only, the disallowance under section 40(a)(ia) could not have exceeded the said amount. Reliance is placed on Marilyn Shipping and Transport v. ACIT: 146 TTJ 1 (Vishak.)(SB).
DR's submissions:
14.25. Reliance is placed on the assessment order and order passed by DRP.
14.26. In addition to above, it was submitted that it needs to be emphasized that, although the assessee did not supply the material to the vendors directly, but the impugned arrangement is in the nature of indirect supply of material to the vendors, which is covered within the provisions of section 194C of the Act.
14.27. In the impugned arrangement of purchase of material, the assessee, apart from giving name of the supplier, from whom the vendor is required to purchase the raw material/ components to be used in manufacturing such customized intermediary products and fixing the purchase price, also fixes the other terms of payments by the vendor to the supplier.
14.28. The payment terms are deliberately arranged in a manner, that, the assessee first pays the amount for purchase of material to the vendor or 57 arranges loan for such amount and, the vendor, thereafter, makes payment to the material supplier. The vendors only act as agents of the assessee, especially considering that the vendors do not have liberty to negotiate the price of the new material, which is carried out by the assessee. The vendors were practically captive units of the assessee in as much as 98%-100% of the sales were made by vendors to the assessee.
14.29. In view of the aforesaid, it is submitted that the arrangement with the vendors was in the nature of contract for carrying out work, which was subject to TDS under section 194C of the Act.Reliance, in this regard, is placed on the decision of Karnataka High Court in the case of CIT and ITO vs Nova Nordisk Pharma India Ltd.: 341 ITR 451. In that case, the assessee was an indirect subsidiary of a Denmark based company and was engaged in selling pharma products, like insulin. The Denmark Company was supplying raw material, know-how and trade mark to certain Indian manufacturers and such manufacturers were obliged to sell their manufactured products to the assessee. The payment for purchase of such manufactured products was made by assessee, without deduction of any tax at source.
14.30. The assessing officer held that the contracts between the assessee and the Indian manufacturing companies and that between the Indian manufacturing companies and Denmark were interlinked and ultimately the assessee was supplying the raw material, know-how etc. to the Indian manufacturing companies for manufacturing the specified products. In view thereof, the assessing officer held that the assessee was liable to deduct tax at source under section 194C of the Act from the aforesaid payment. On appeal, the CIT(A) and Tribunal decided the issue in favour of the assessee.58
14.31. On further appeal, the High Court, reversing the decision of the Tribunal held that, considering the parent foreign company was supplying material to the Indian manufacturers, it was a case of indirect supply of material by the assessee and, therefore, the arrangement was in the nature of contract for carrying out work, which was subject to TDS under section 194C of the Act. The relevant observations of the High Court are as under:
"21. On a perusal of all the agreements which have a bearing on the transaction of sale of the product or sale or supply of the product by the supplier/manufacturer of the assessee company, we find this is not simply a situation of a product manufactured to the specifications of the assessee, being sold to the assessee at the price fixed by the supplier but this is a situation where a product manufactured out of raw materials supplied by a foreign company who had direct interest in the assessee company so manufactured to the specification of the assessee company utilising the technical know-how supplied by it also labelling the product with the brand name of the assessee and supplying the entire product only to the assessee company and not to anyone else and it is throughout to be held as a specific contract for manufacturing of a particular product notwithstanding the fact that the supplier had paid the price for the raw-material directly to the foreign company which supplied the raw material to the manufacturer, but had interest in the assessee company in India while bearing the trade mark of the foreign supplier, but having a definite communication and in such a situation one has to really look into the real nature of the transaction that emerges on the conjoint reading of the three agreements and the assessing officer in fact having undertaken this exercise and having arrived at the conclusion that the assessee company is one who fits into the definition and situation contemplated u/s.194C of the which on an examination is found is a proper reasoned approach and in consonance with the statutory provision. We answer the questions posed for our examination in the negative and in favour of the revenue.59
22. We are also of the view that the situation contemplated u/s.194C of the Act i.e. the payment being carrying out any work which is to improve the situation of such nature and of course proceeded between the contract between the assessee and the manufacturer company."
14.32. It is submitted, that the ratio emanating from the aforesaid decision is squarely applicable to the case of the assessee in as much as the nature of arrangement of the assessee was also that of indirect supply of material to the vendor, which is in the nature of contract for carrying out work and, therefore, the payment made by the assessee to the vendors was subject to TDS under section 194C of the Act.
14.33. Since, the assessee has failed to deduct tax at source under the aforesaid section, the expenditure incurred calls for being disallowed under section 40(a)(ia) of the Act. Accordingly the assessment order on this issue needs to be upheld and the ground of appeal raised by the assessee calls for being dismissed. It is further pleaded that the ITAT Special Bench judgment in the case of Marilyn Shipping & Transport (supra) has not been approved by Karnataka High Court.
Assessee's Rejoinder:
14.34. The Ld. DR's contention that the assessee was indirectly supplying material to the vendors and, therefore, the impugned arrangement was to be regarded as 'contract for carrying out work', covered within the provisions of section 194C of the Act is incorrect for the following reasons:
At the outset, it is submitted that provisions of section 194C of the Act are applicable to a contract for carrying out any work and not to a contract for sale of goods.60
A contract shall be regarded as a contract of sale, if the title in goods passes to the purchaser after the manufacture and delivery of goods to the purchaser, whereas if the title to the goods passes to the purchaser at any time anterior to manufacture and delivery of goods to the purchaser, the same shall be regarded as contract for carrying out work/works contract. The fact that goods are manufactured according to specifications of the purchaser is not relevant in determining the nature of contract as a contract of sale or works contract.
14.35. The aforesaid position is well settled and reference in this regard can be made to the decision of the Supreme Court in the case of CIT vs. Silver Oak Laboratories P. Ltd.: SLP No.18012/2009.
14.36. In the present case, the assessee was merely providing necessary specifications to the vendors for manufacturing requisite products. Although, the assessee also specified the rate for purchase of raw material and particular parties from whom such raw material was to be purchased, the said specifications had no bearing on the transaction for purchase of finished products by the assessee from vendors.
14.37. The assessee company is engaged in manufacture of reputed two-
wheelers, a product requiring high precision engineering. The components to be fitted in the two-wheelers have to be standardized and must conform to the specifications of the motorcycles to be manufactured by the assessee company. Furthermore, the quality of components used in the assembly of Motorcycles, which are sourced from several vendors has not only to be uniform but top grade as well. In order to ensure that the vendors use quality material in fabrication / manufacture of the intermediary products / 61 components supplied to the assessee, the assessee company after extensive research and investigation zeroes in on credible and reputable manufacturers and insists that the vendors source the raw material / components required from such manufacturers only. Further, in view of the sheer magnitude and size of its operations, the assessee is able to negotiate with the manufacturers of raw material / components for best prices. The assessee advices the vendors who supply intermediary products to the assessee, of the prices negotiated by the assessee with the manufacturers of raw material / components, to be sourced by such vendors. Since the price paid by the assessee to the vendors of intermediary products / components is, in turn dependent on prices of inputs paid by the vendors to suppliers of raw material / components, it is in the best interest of the assessee to ensure that the prices of raw material / components sourced by the vendors from independent manufacturers are kept to the minimum. It is in this background that the assessee seeks to leverage its strength, given the magnitude of its business and requirement of intermediary products to extract the best prices from the manufacturers of raw material or components. The benefit of lower prices enjoyed by the vendors is, in turn, passed on to the assessee when the assessee purchases intermediary products / components from the vendors, utilizing raw materials / components sourced from independent manufacturers at best prices negotiated by the assessee.
14.38. In case, the rate of raw material was not negotiated by the assessee, the suppliers could have charged higher prices for new material purchased by the vendors. Besides, the business purpose of assessee behind specifying name of the parties from whom raw material was to be purchased, was to 62 maintain trust and confidence of the customers/ dealers of assessee. A consistent quality of parts conveys a loudable message to them that even the raw material used in manufacturing of parts of motor vehicles, are purchased from trusted and well known brands.
14.39. It was for the aforesaid reasons; the quality of the products and the name of the supplier and price to be paid by the vendor to such supplier were specified by the assessee company.
14.40. That apart, the vendors were purchasing raw material and other ingredients for manufacturing finished products on their own account and not on behalf of the assessee company, after negotiating other relevant terms of payment and delivery schedule, payments of excise duty and VAT, etc. The raw materials are delivered to the vendors and are at the risk and title of the vendors. The vendors, who are independent legal entities with their own manufacturing establishments, employing huge labour, utilize the raw materials purchased for producing customized finished goods for the assessee. The title in the finished goods passes to the assessee only after the goods have come into existence and are supplied by the vendor to the assessee. Excise duty is paid by the vendors in their own right, as an independent manufacturer and not as a job worker in respect of goods manufactured and sold to the assessee. Further, the vendor has legally charged and assessee has paid sales tax/VAT due thereon, as the case maybe, for the goods purchased from the vendors.
14.41. The contention of the Ld. DR/assessing officer that the assessee was financing the purchase of raw material made by the vendors is incorrect/ baseless, simply based on surmises and conjectures. The same is 63 emphatically denied. There is no evidence brought on record to suggest that payment to be paid by vendors to the suppliers of material was financed by the assessee. It is submitted, that the payment schedule was agreed between the vendors and their suppliers on their own account and the assessee was not privy to the aforesaid transaction.
14.42. In view of the above, it is submitted that in absence of any evidence being brought on record by the Ld. DR/assessing officer in support of the aforesaid allegation, the same needs to be ignored.
14.43. As regards the contention of the Ld. DR that vendors were practically captive units of the assessee in as much as 98%-100% of the sales were made by them to the assessee, it is submitted that the same is also based on surmises, conjectures and contrary to record.
14.44. In this regard, the assessee is adducing herewith relevant extract of audited financial statements of following vendors, which are listed companies and are available on the internet, in public domain:
Rico Auto Industries Limited Omax Autos Limited 14.45. Further, a chart showing comparison of total sales made by aforesaid vendors and sales made to assessee is enclosed as under:64
Name of the Total sales Sales made Total sales Sales made to vendor during AY to assessee during AY assessee 2007-08 (Rs. during AY 2008-09 (Rs. during AY In crores) 2007-08 (Rs. In crores) 2008-09 (Rs.
In crores) In crores) Rico Auto 770.40 286.54 708.71 286.05 Industries Omax Autos 689.54 206.40 714.35 289.16 Li8mited
14.46. The aforesaid comparative chart, clearly establishes that the listed companies/ vendors were not supplying material to assessee company only, but were supplying products/components to other leading automotive companies as well.
14.47. In that view of the matter, the contention of the Ld. DR that, since the aforesaid vendors were mainly supplying products to the assessee and, therefore, the said parties were acting like work contractors for the assessee is incorrect, contrary to record, and based solely on conjectures and surmises.
14.48. As regards, the reliance placed by the Ld. DR on the decision of the Karnataka High Court in the case of CIT and ITO vs Nova Nordisk Pharma India Ltd.: 341 ITR 451, it is submitted that the same is distinguishable and not applicable to the facts of the present case for the following reasons:
14.49. In that case, the assessee was an indirect subsidiary of a Denmark-
based foreign company, which was supplying raw material to the vendor of the assessee company and, thus, had a direct interest in the assessee 65 company. The vendor was to supply the entire products manufactured through the use of raw material procured from the Denmark-based foreign company to the assessee company only, as also fixing the brand name of the assessee company. It is important to note that the technical know-how for the manufacture of products by the vendor, using the raw material supplied by the foreign company was also supplied by the foreign company free of cost. The price arrangement between the assessee and the vendor was such that the assessee company was to only pay 19% of the landed cost of the raw material supplied by the foreign company and consumed in the production of the product. It was in the background of the aforesaid peculiar facts and circumstances of that case that the nature of arrangement was held to be in the nature of contract for carrying out work, falling within the meaning of section 194C of the Act.
14.50. Unlike the facts of the aforesaid case, in the case of the assessee company, the suppliers of raw material to the vendors are not holding companies of the assessee and are independent third parties, which are independently engaged in the business of manufacturing of such raw materials. It is to be appreciated that the case of supply of raw material through one's holding/subsidiary company can be regarded as supply of raw material by self, unlike the supply of material by an independent third party at a price agreed on an arm's length basis. In the case of assessee, it cannot, therefore, be said that the material procured by the vendors from independent suppliers was supplied by the assessee. It was only on account of business exigencies discussed above that the name of raw material suppliers and purchase price thereof was stipulated by the assessee by the vendors supplying the finished products. It is to be further appreciated that, 66 unlike facts of the case before the Karnataka High Court, the assessee is not supplier of any know-how to the vendors who manufacture goods supplied to the assessee using their own know-how, manufacturing establishment / labour, etc. 14.51. Further, in the facts of the aforesaid case, it was only a single vendor / manufacturer engaged by the assessee to whom raw material was supplied by the foreign company, unlike the case of assessee where the assessee had entered into several contracts for purchase of similar kinds of finished products / components from different vendors, as also specified various raw material suppliers to the vendors.
14.52. For the aforesaid cumulative reasons, it is submitted, that the facts of the aforesaid case are distinguishable from the case of assessee and ratio emanating therefrom cannot be applied to the facts of the present case, in order to allege that the impugned arrangement entered into by the assessee was in the nature of contract for carrying out work, subject to TDS under section 194C of the Act.
14.53. That apart and without prejudice to the above, it is submitted, that the definition of "work" contained in section 194C, prevalent at the relevant time, did not include manufacture of a product according to the specification of a customer by using material purchased from such customer.
14.54. The definition of work was amended to include the aforesaid activity as well, only prospectively w.e.f. 1-10-2009. The Supreme Court in the case of Silver Oak (supra) has held that the aforesaid amended definition of 'work' under section 194C is only applicable prospectively and does not have retrospective application.
6714.55. Even assuming without admitting that, the aforesaid amendment has retrospective application, as argued by the Ld. DR, in view of the submissions above, that the contract between the vendors and the suppliers was independent, it cannot even under the amended definition be said that the material was indirectly supplied by the assessee to the vendors to be covered within the amended provisions of section 194C of the Act.
14.56. For the aforesaid cumulative reasons, it is submitted that, the contentions of DR are incorrect, unsustainable and not applicable to the facts of the present case.
14.57. The assessee relies on submissions made in chart of issues already submitted before the Hon'ble bench, which are not repeated for the sake of brevity, and, therefore, the impugned disallowance made under section 40(a)(ia) of the Act needs to be deleted.
Our findings and conclusion:
14.58. The issue before us for adjudication is whether on the facts and circumstances of the case, the customized intermediatery products like wheel assembly, seat assembly etc. sourced by the assessee from the vendors is a contract of sale by the vendors or a contract of work.
14.59. The assessing officer issued summons u/s 131 to nine vendors and recorded their statements. This exercise resulted in the assessing officer gathering information from the vendors that they have procured material from the sources specified by the assessee and at rates specified by the assessee. Based on the statements from nine vendors, the assessing officer came to the conclusion that the assessee has termed the "contract of work"68
as "contract for sale". The reasons in details for arriving at such conclusion by the Assessing officer and as confirmed by the DRP are discussed in the above paragraphs (supra).
14.60. With the above background, we examine the legal position in this regard.
14.61. Section 194-C was brought to the statute book by Finance Act 1972 w.e.f. 1-4-1972.
Provisions of Section 194 C of the Act 14.62.Section 194 C of the Act requires any person responsible for paying any sum to any resident for carrying out any work (including supply of labour for carrying out any work) in pursuance of a contract, has to deduct tax at source at the rates prescribed.
14.63.Explanation to section 194C of the Act defines the expression "work"
to include contracts for (a)advertsing, (b)broadcastings and telecasting; (c) carriage of goods and passengers by any mode of transportation other than railways and (d) catering.
14.64.Finance Act 2009 w.e.f 1.10.2009 had inserted clause (e) to the definition of "work" which reads as under:
(e) "manufacturing or supplying a product according to the requirement or specification of a customer by using material, purchased from such customer, but does not include manufacturing or supplying a product according to the requirement or a specification of a customer by using material purchased from a person, other than such customer."69
14.65 Thus Clause (e) makes it clear that the expression "work" will cover manufacturing or supplying a product according to the requirement or specification of a customer by using material purchased from the customer only.
14.66. Initially Circular no. 86 dated 29-5-1972 was issued which provided as under:
"The deduction of income-tax will be made from sums paid for carrying out any work or for supplying labour for carrying out any work. In other words, the new provision will apply only in relation to 'works contracts' and 'labour contracts' and will not cover contracts for sale of goods.
Since contracts for the construction of buildings or dams or laying of roads and air-fields or railway lines or erection or installation of plant and machinery are in the nature of contracts for work and labour, income-tax will have to be deducted from payments made in respect of such contracts. Similarly, contracts granted for processing of goods supplied by Government or any other specified person, where the ownership of such goods remains at all times with the Government or such person, will also fall within the purview of the new section. The same position will obtain in respect of contracts for fabrication of sea and river crafts where materials are supplied by the Government or any other specified person and the fabrication work is done by a contractor. Where, however, the contractor undertakes to supply any sea or river crafts fabricated according to the specifications given by Government or any other specified person and the property in such sea and river crafts passes to the Government or such person only after such crafts are delivered, the contract will be a contract for sale and, as such, outside the purview of the new provision."70
14.67. Thereafter Circular no. 93 dated 26-9-1972 was issued clarifying that transport contract cannot ordinarily be regarded as a contract for carrying out any work. This Circular further provided that any contract with element of labour provided for loading and unloading is negligible no income tax will be deducted.
14.68. With effect from 1-7-1995 new Explanation 2 has been inserted to Section 194 C of the Act to include carriage of goods and passengers by any mode other than railways within the meaning of working.
14.69. The CBDT vide Circular No. 681 dated 8-3-1994 withdrew its earlier Circulars Nos 86 dated 29-5-1972, Circular No.83 dated 26-9-1972 and Circular No. 108 dated March 20, 1973 and provided that Section 194C would apply to all types of contracts for carrying out any work including transport contracts, service contracts, advertisement contracts, broadcasting contracts, telecasting contracts, labour contracts, material contracts and works contracts. Further, the circular continues to assert that "the provisions of this section will not cover contracts for sale of goods". The Circular further reiterated that where the contractor undertakes to supply any article or thing fabricated according to the specifications given by Government or any other specified person and the property in such article or thing passes to the Government or such person only after such article or thing is delivered, the contract will be a contract for sale and as such outside the purview of Section 194C of the Act.
14.70.For ready reference we extract part of the Circular in this regard.
14.71.The Central Board of Direct Taxes ('CBDT') vide Circular no.681 dt. 8-3-1994 clarified the position in this regard as under:
71"7. The conclusion flowing from the aforesaid judgments of the Supreme Court and the Patna High Court is that the provisions of section 194C would apply to all types of contracts including transport contracts, labour contracts, service contracts, etc. In the light of these judgements, the Board have decided to withdraw their above mentioned Circulars nos. 86 and 93 and para 11 of Circular no.108 and issue the following guidelines in regard to the applicability of the provisions of section 194C:-
(i) The provisions of section 194C shall apply to all types of contracts for carrying out any work including transport contracts, service contracts, advertisement contracts, broadcasting contracts, telecasting contracts, labour contracts, materials contracts and works contracts.
....................................
(vi) The provisions of this section will not cover contracts for sale of goods.
(b) Where, however, the contractor undertakes to supply any article or thing fabricated according to the specifications given by the Government or any other specified person and the property in such article or thing passes to the Government or such person only after such article or thing is devliered, the contract will be a contract for sale and as such outside the purview of this section.
14.72. In subsequent Circular no.13/2006, dated 13.12.2006, the CBDT has further clarified as follows:
"1. Representations have been received in the Board seeking clarification on the applicability of section 194C on such transactions, where the assessee has outsourced certain work relating to fabrication or manufacturing of article or thing in accordance with the specifications given by the assessee. Circular no.681, dated 8.3.1994 of the Board clarifies in para 7(vi) that the provisions of section 194C would not apply to contracts for sale of goods and 72 further clarifies that where the property in the article or thing so fabricated apsses from the fabricator-contractor to the assessee only after such article or thing is delivered to the assessee, such contract would be a contract for sale and so outside the purview of section 194C. However, in reply to question no.15 in Circular no.715, dated 8.8.1995 on the subject of applicability of section 194C, in respect of contract for supply printed material as per prescribed specifications, it has been said that such contracts would also be covered under section 194C. It has been represented that the views expressed in these two circulars, to the extent as pointed out above, are in contradiction to each other.
2. The matter has been examined by the Board and it is considered that exclusive reliance on question/Answer no.15 of Circular no.715, without taking into account the principles laid down in Circular no.681 is not justified. Before taking a decision on the applicability of TDS under section 194C on a contract, it would have to be examined whether the contract in question is a contract for work or a contract for sale and TDS shall be applicable only where it is contract of work.
3. It is, therefore, clarified that the provisions of section 194C would apply in respect of a contract for supply of any article or thing as per prescribed specifications only if it is contract for work and not a contract for sale as per the principles in this regard laid down in para 7(vi) of Circular no.681, dated 8.3.1994."
14.73.On perusal of the above mentioned CBDT Circulars, it can be appreciated that the fact that the goods sold are manufactured according to specifications of the buyer is not relevant in determining whether the contract is a contract of sale or works contract. What is relevant to determine the stage of passing of property/title in the goods from the vendor to the buyer. Where title to the goods passes to the buyer at the time goods are manufactured and transported, the contract would be one for sale of goods, notwithstanding that the goods are manufactured according to the specifications of the buyer.
7314.74.The principal test to be applied to determine whether the contract is works contract or contract for sale is examined whether title to the goods passes to the purchaser at any time anterior to the manufacture and delivery of goods to the purchaser. If the answer to the aforesaid query is in the negative, then, the contract is one of sale, when the vendor manufactures goods in his own right, as principal, and not as job worker.
14.75.The legal position is well settled that in case title/ownership in goods passes to the buyer on transfer of goods by the vendor, even though goods are manufactured according to the specifications and design supplied by the purchaser, the contract cannot be regarded as contract for carrying out work falling under section 194C of the Act.
14.76. The Bombay High Court in the case of CIT vs. Gelnmark Pharmaceuticals Ltd [2010] 324 ITR 199 held that Clause (e) was introduced "to bring clarity on this issue" or, in other words, to remove the ambiguity on the question. Clause (e) as introduced contains a positive affirmation that the expression "work" will cover manufacturing or supplying a product, according to the requirement or specification of a customer, by using material purchased from such a customer. Clause (e) has placed the position beyond doubt by incorporating language to the effect that the expression "work" shall not include manufacture or supply of a product according to the requirement or specification of a customer by using material which is purchased from a person other than such customer. When the material is purchased from the customer who orders the product, it constitutes a contract of work while on the other hand, where the manufacturer has sourced the material from a person other than the customer, it would constitute a sale. What is significant is that in using the 74 words which clause (e) uses in the Explanation, Parliament has taken note of the position that was reflected in the circulars issued by the Central Board of Direct Taxes since May 29, 1972. The Revenue always understood section 194C to mean that where a product or thing is manufactured to the specifications of a customer, the agreement would constitute a contract for sale, if (i) the property in the article or thing passes to the customer upon delivery ; and (ii) the material that was required was not sourced from the customer/purchaser, but was independently obtained by the manufacturer from a person other than the customer. The Legislature which intends to bring clarity to a legislative provision or to remove an ambiguity is inferred to do so at the inception.
14.77.The expression "contract of work" and "contract of sale" has been subject matter of interpretation by the Hon'ble Supreme Court under the Sales Tax Act for considering the applicability of sales tax Act in the following cases:
14.78. In Govt. of Andhra Pradesh v. Guntur Tobaccos Ltd., AIR 1965 SC 1396;16 STC 240, the Supreme Court held that in the execution of a contract of work some materials may be used and property in the goods so used passes to the other party. However, the contractor who undertakes to do the work will not necessarily be deemed on that account to sell the materials. The Supreme Court noted that a contract for work in the execution of which goods are used may take one of three forms. Those three forms were elaborated as follows (page 1404 of AIR 1965 SC and page 255 of 16 STC) :
"The contract may be for work to be done for remuneration and for supply of materials used in the execution of the works for a price : it 75 may be a contract for work in which the use of materials is accessory or incidental to the execution of the work : or it may be a contract for work and use or supply of materials though not accessory to the execution of the contract is voluntary or gratuitous. In the last class there is no sale because though property passes it does not pass for a price. Whether a contract is of the first or the second class must depend upon the circumstances : if it is of the first : it is a composite contract for work and sale of goods : where it is of the second category, it is a contract for execution of work not involving sale of goods."
14.79.In State of Himachal Pradesh v. Associated Hostels of India Ltd. [1972] 29 STC 474, the Supreme Court observed that where the principal objective of work undertaken by the payee of the price is not the transfer of a chattel qua chattel, contract is of work and labour. The test is whether or not the work and labour bestowed end in anything that can properly become the subject of sale; neither the ownership of the materials nor the value of skill and labour as compared with the value of the materials is conclusive although such matters may be taken into consideration in determining in the circumstances of a particular case, whether the contract is, in substance, one of work and labour or one for the sale of a chattel. A building contract or a contract under which a movable is fixed to another chattel or on the land where the intention plainly is not to sell the article but to improve the land or the chattel and the consideration is not for the transfer of the chattel, but for the labour and work done and the material furnished, the contract will be one of work and labour.
14.80. Himachal Pradesh vs. Associated Hotels of India Ltd. 29 STC 474 made the following relevant observations in this regard:
"....................... The difficulty which the Courts have often to meet with in construing a contract of work and labour, on the one hand, 76 and a contract for sale, on the other, arises because the distinction between the two is very often a fine one. This is particularly so when the contract is a composite one involving both a contract of work and labour and a contract of sale. Nevertheless, the distinction between the two rests on a clear principle.
A contract of sale is one whose main object is the transfer of property in, and the delivery of the possession of, a chattel as a chattel to the buyer. Where the principal object of work undertaken by the payee of the price is not the transfer of a chattel qua chattel, the contract is one of work and labour. The test is whether or not the work and labour bestowed end in anything that can properly become the subject of sale; neither the ownership of materials, nor the value of the skill and labour as compared with the value of the materials, is conclusive, although such matters may be taken into consideration in determining, in the circumstances of a particular case, whether the contract is in substance one for work and labour or one for the sale of a chattel."
14.81. In the case of State of Tamil Nadu v. Anandam Viswanathan [1989] 73 STC 1 (SC), the assessee had supplied printed question papers to universities and other educational institutions in the country. The question was whether it was a "works contract", or "contract for sale" for the purposes of payment of sales tax under the Tamil Nadu General Sales Tax Act. In para. 27, the court stated (page 14 of [1989] 73 STC 1 and page 972 of AIR 1989 SC):
"In our opinion, in each case the nature of the contract and the transaction must be found out. And this is possible only when the intention of the parties is found out. The fact that in the execution of a contract for work some materials are used and the property in the goods so used, passes to the other party, the contractor undertaking to do the work will not necessarily be deemed, on that account, to sell the materials. Whether or not and which part of the job-work relates to that depends, as mentioned hereinbefore, on the nature of the transaction. A contract for work in the execution of which goods are used may take any one of the three forms as mentioned by this court 77 in Government of Andhra Pradesh v. Guntur Tobaccos Ltd., AIR 1965 SC 1396."
14.82. The above case laws though rendered in the context of Sales Tax Act, has been referred to by various Judicial Authorities while adjudicating the matters under the Income tax Act 1961 only with a view to emphasise the distinction between contract for work and a contract for sale.
14.83.The Bombay High Court in the case of BDA Ltd vs. ITO [2006] 281 ITR 107 held that deduction of TDS under section 194C is converse to the payments of sales tax Act framed by the States. In asmuch as if the contract is not covered for payment of sales tax, it is covered for deduction of TDS under section 194C of the Act and vice versa. Accordingly, the Court relied on the above decisions of the Hon'ble Supreme Court rendered in the context of Sales Tax Act to determine the nature of the contract for applicability of TDS provisions under the Act.
14.84.The Hon'ble Supreme Court in the case of CIT vs. Silver Oak Laboratories P.Ltd. SLP no.18012/2009, while dismissing the batch of appeals filed by the Revenue, observed as under:
"...........................on examining the terms and conditions and also on examination of the invoices, purchase orders as well as the challans indicating payment of excise duty, we are of the view that there is no material on record to indicate that the transaction in question is a 'contract for carrying out works'. Hence, Section 194C of the Income Tax Act, 1961, ('Act' for short) is not attracted. Our attention, in fact, is invited to the amendment in section 194C of the Act vide Finance (no.2) Act, 2009, with effect from 1st October, 2009, which defines "work" to include manufacturing or supplying a product according to the requirement or specification of a customer by using material purchased from such customer. In fact, it is clarified that the definition of the work "work" will not include 78 manufacturing or supplying a product according to the requirement or specification of a customer by using material purchased from a person other than such customer. However, this amendment came into force only with effect from 1st Ocotber,2009, which will not apply to the period in question in the present case(s)."
14.85.Reliance is also placed on the following decisions:
- Wadilal Dairy International Ltd vs. Asst. CIT [2002] 81 ITD 238 ;
- CIT vs Reebok India Co[2008] 306 ITR 124 (Delhi HC)
- CIT vs. Dabur India Ltd [2006] 283 ITR 197 (Delhi HC) 14.86.Whether a particular contract constitutes "contract for sale" or "contract for work" is based on facts of each case. The same would depend upon the intention and conduct of the parties as evidenced by the terms of the contract. It is a settled judicial preposition that the substance and not the form of the contract is material in determining the nature of transcations.
14.87.Applying the principals laid by the Courts to the facts of the present case, we now proceed to examine whether the contract in the case on hand is "contract for sale" or "contract for work".
Facts (1) All the nine parties are independent legal establishments engaged in the manufacturing of finished products and are not captive units of the assessee.
(2) The vendors have their own manufacturing establishments, employing huge labour; utilize the raw materials purchased by them, for producing customized finished goods for the assessee.
79(3) The assessee has issued purchase orders for supply of components as per the assessee's specification. The assessee has filed copies of the purchase orders/ invoices. The same finds place in the paper book filed by the assessee.
(4) The raw materials are delivered to the vendors by the suppliers and are at the risk and title of the vendors. The suppliers collect from the vendors, sales tax, VAT etc. on sale of raw material and the vendor paid the same.
(5) Excise duty is paid by the vendors in their own right, as an independent manufacturer and not as a job worker in respect of goods manufactured and sold to the assessee.
(6) The assessee has paid sales tax/VAT, as the case maybe, for the goods purchased from the vendors.
14.88. Further on perusal of the sample purchase orders produced before us and the terms and conditions on which the purchase order is placed, we observe that the transaction is on a principal to principal basis. The relevant terms and conditions are extracted hereinbelow:
3. Delivery challans/ invoice (in Quadruplicate) made separately for each order, should accompany all supplies.
Drawing Number part Number and description should be shown exactly as specified. More than one invoice should not be made for items delivered against a single challan. An additional copy of invoice will be sent separately to Hero Honda Motors Ltd. Accounts Section. Copies of bills which are normally submitted to bankers should also be sent in advance in duplicate along with the challans indicating these bills have been/would be presented to the bankers for payment.
804. All drawings samples or technical data supplied to you by us shall be kept as secret and will not be sold or disclosed and these shall be returned to us as and when demanded. Failure to comply with this shall make you liable for breach of trust and other actions as may be deemed fit by us.
5. Items manufactured by you for us from the data provided by us must not be sold in open market or to other manufacturers/ distributor unless permitted by us in writing. In case the supplier commits the breach of this condition in addition to rights of the purchaser the suppliers shall also be liable to pay all the purchaser liquidated damages and not as penalty for each product or part thereof sold to or through any one else.
7. Supply Quality Assurance:
The Supplier shall be subject to SUPPLY QUALITY ASSURANCE which entails free access to inspectors detailed by us for purpose of inspecting manufacturing and inspection procedures of your site and for assisting in delivery schedules and inspection of raw material machines, tools, fixtures, jigs or any other items in connection with the manufacture of components for us.
8. SAMPLE INSPECTION:
The purchase order stands valid only on acceptance of samples to be confirmed by us in writing, unless otherwise provided in purchase order itself.
9. DELIVERY SCHEDULE:
We reserve the right o return the material at supplier's cost or cancel the Purchase order(s) in the event of non-compliance of delivery schedule.
10. SHIPPING DOCUMENTS:
Demurrage and penalties etc. becoming leviable on account of delay in delivery of dispatch of Railway Receipts. Goods 81 Receipt or any other shipping documents will be to the vendor's account and recoverable from him.
11. PAYMENT:
Subject to the proper settlement of the transaction involved, Vendors bill will be paid by the company within 30-45 days of the receipt of material in our plant. Unless alternative terms of payment are agreed and stated on the order. In case of Company's agreement to accept documents through Bank, the bank charges will be borne by the vendor. Failure by vendor to advise his/ their Bankers to recover all the bank charges from vendor will result in non-retirement of bills by us.
12. REJECTION:
Suppliers, whose samples of one particular type of component, if rejected twice by us, are liable to the cancellation of our purchase order without assigning any further reasons and without us being liable to any cost, that may have been incurred by the supplier towards the manufacture of the item for us.
13. Material, if rejected after inspection at our factory by us, must be lifted from our premises, within 10 days from the date of intimation. We will not be responsible for any rejection if not removed within stipulated period. The same would be dispatched to you at your risk and cost. It may be noted that even while assembling, or processing, if any further defects not arising from mishandling are noticed, we reserve the right to reject such materials as line rejection. Our decision on such rejection shall be final.
14. Rejection must be replaced within the delivery schedule and will be invoiced separately and not as replacements. All charges inclusive of freight and handling on replacement of rejections shall be borne by the supplier. For outstation suppliers where requested the rejected material will be dispatched at the risk of the supplier.
17. Warranty extended by us on our product has to be honoured by you as per prevailing policy of HHML from time to time. The warranty for product supplied by you will start 82 from the period our final product is SHIPPED OUT. You will warrant that all the new goods supplied by you are free of all defects in materials and workmanshsip. Its liability under such warranty being limited to taking goods at the factory of HERO HONDA MOTORS LTD. GURGAON/ DHARUHERA any part(s) which within 6 calendar months from the date when the product was delivered now to the representative and which by HHML is satisfied on its examination of part(s) to have been defective in material of workmanship. The defective part(s) received by HHML from field under the terms of warranty can be inspected by supplier if so desired at HHML premises of Gurgaon/ Dharuhera on dates specified by HHML. Warranty Officer in case supplier fails to inspect the part(s) HHML will have full authority in finalizing the claim. Failed parts after inspection will be wrapped by HHML and it will be their sole discretion to ask the supplier to send the credit note or the parts replacement in settlement of the failed parts, which must reach HHML premises within one month from the date of receiving intimation from HHML."
14.89. On examination of the above terms and conditions mentioned in the purchase order, we observe as under:
(a) The purchase order is valid only on acceptance of sample of goods.
(b) If delivery schedule is not adhered to, the vendor can cancel the purchase order and return the material supplied.
(c) Demurrages and penalties due to delay in delivery is leviable on the vendor.
(d) In case of rejection of goods, the cost of sample is on account of vendor only.
(e) All charges relating to replacement/ rejection are on account of vendor.
(f) Vendor shall provide warranty for replacement of defective goods.83
14.90. Combined reading of all the terms and conditions of the purchase order takes us to the conclusion that the vendors supply finished goods to the assessee at their risk and cost. Title to the finished goods was transferred to the appellant when the supplier/ vendor completed production of the finished goods and dispatched the same to the assessee and only when the assessee approves and accepts the said goods i.e. title passes on acceptance of goods. Until that stage of acceptane on delivery, there is no transfer of title as per the intention of the parties gathered from the purchase order. The transfer of title at the stage of acceptance of deliveries by the purchaser would be, in our opinion, only a sale of goods but not work contract.
14.91. The test laid down by the courts is to examine the intention of the parties as to the point of time when they want to transfer of title in the goods. In this case, the title in the goods vests in the assessee on delivery of the goods. The assessee never acquired any title prior to the point of delivery.
14.92.We are unable to appreciate the conclusion drawn by the assessing officer as approved by the DRP that the assessee has made a deemed purchase of the raw material and in turn made a deemed supply of the same to the vendors. This is nothing but a presumption unsupported by facts. The assessing officer accepts that all the vendors purchase raw material and components from their supplier after paying sales tax, excise duty etc. wherever applicable. The purchases are made on a principal to principal basis. Title in the goods passes to the vendors from the supplier on delivery of the raw material and the assessee does not in any way acquire any title to the goods i.e. raw material. The argument of the Ld. DR that the nature of arrangement of the assessee is that of indirect supply of material to the vendor, which is in the nature of contract for carrying out work is far 84 fetched, devoid of merit and not supported by evidence. It is not the case of revenue that there are any financial transactions between the assessee and the raw material suppliers of the vendors. The test is to see the fact whether the assessee acquired any title to the raw material purchased by the vendors from the suppliers. The answer to this is no. We are unable to understand as to how the assessing officer a well as the DRP has considered this as a deemed purchase by the assessee. The reason enunciated by the assessee w.r.t identifying the suppliers of the material along with the determination of price of the raw material fixing of payment terms etc., clearly constitutes a matter of business expediency for the assessee.
14.93. Further, in the statement recorded from the vendors after summoning them u/s 131 of the Act, the vendors have confirmed that this is a case of sale of goods and not a works contract. Mr. Yogesh Kumar Jindal has explained the purpose for which the assessee specifies the suppliers and the rate.
14.94. We have carefully gone through the decision of the Karnataka High Court in the case of Nova Pharma LLtd. (supra) relied by the Ld.DR and are of the view that the fact of the case is clearly distinguishable and cannot be applied to the facts of the present case. The assessee has rightly distinguished the case. As the same is brought out in the earlier part of the order, for sake of brevity we do not repeat the same.
14.95. In this case, there is no supply of raw material by the assessee to the vendors either directly or indirectly. In laying down the quality specification of the products, the assessee is ensuring the required quality of its purchases which in turn ensures the quality of its two wheelers. Considering the 85 magnitude of the total requirements, the assessee was able to negotiate the price and hence is controlling its input costs. The low price enjoyed by the vendors, in turn would be passed on to the assessee. This is a case where the vendors were purchasing raw material on their own account by payment of excise duty, VAT etc. The goods were manufactured by the vendors to the specification and other terms and conditions spelt out in the purchase orders and in their own right as independent manufactures. On this factual matrix, we have no hesitation in holding that it is a case of contract of sale and not contract of work. Hence, in our view, the provision of Sec. 194C are not applicable and consequently the disallowance made u/s 40a(ia) is to be deleted.
14.96. It would be pertinent to point that section 194C was amended by the Finance (2) Act, 2009 w.e.f. 1.10.2009, whereby the definition of "work" was enlarged to include contract for manufacturing or supplying a product according to the requirement or specification of a customer by using material purchased from such customer. The said amendment also provided that contract for carrying out work shall not include contract for manufacturing or supplying of product according to the requirement or specification of a customer by using material purchased from a person other than such customer.
14.97. In case of the assessee, the finished goods are manufactured by the supplier as per the prescribed specifications of the assessee. The raw material and other ingredients required for manufacture are specified by the appellant, in order to ensure proper quality of the finished products. The rates are negotiated to achieve economy of scale and to leverage the position of the assessee, which leads to reduction in cost of production. Such raw 86 materials are however acquired by the vendor on their own account and not on behalf of the assessee.
14.98. The right of ownership passes to the assessee only after the goods come into existence, on manufacture and are supplied to the assessee as finished goods. Prior thereto, the risk in the goods vests with the vendor/supplier. All the other terms of purchase/sale between the vendor and supplier, like payment terms, period of delivery etc. is for acquisition of ascertained goods - the contract is thus one of sale and not a contract for carrying out work.
14.99. In view of the above finding, we are not adjudicating on the other arguments raised by the assessee on this issue, though we find force in the argument of the assessee that since all the vendors have filed their returns of income and paid taxes on the receipts from the assessee, no disallowance under section 40(a)(ia) is warranted. Hence the additional evidence and additional argument is not adjudicated as it would be an academic exercise. In the result, this ground of the assessee is allowed.
15. Ground nos. 10 to 10.1: (Disallowance of advisory services availed from Hero Corporate Services Ltd. (HCSL):
DRP Directions:
15.2. The DRP has issued following directions to the Assessing Officer;
"The assessee has objected to disallowance of Rs. 1.50 crores proposed by the AO in respect of assessee's claim regarding expenditure for advisory/supervisory services from M/s Hero Corporate Services Ltd. (HCSL).87
The Counsel have contended that HCSL is a company engaged in the business of providing various corporate services like management of treasury and finance functions, human resources development and strategic planning and projects, IP support etc. The assessee has agreed to pay a retainer-ship fee of Rs. 2 crores per annum for availing advisory services in relation to corporate service like human resources, IP and Rs. 10 lakhs per month in relation to supervisory service for evaluating data processing work carried out by a third party M/s Results Mecann (P) Ltd. under passport schemes launched by the assessee company. The objection of the assessee is not acceptable. Since the assessee has been launching passport schemes in the past also, it must have been managing these areas itself or by certain payments to some parties other than HCSL. In order to justify the payment to HCSL, the assessee was required to show that the expenditure incurred on these activities before entering into the agreement with HCSL are not being incurred after entering into this agreement, and that there is a corresponding reduction in assessee's expenditure under various heads on this account. Moreover, when the assessee has been managing with these services of HCSL till the date of agreement with HCSL, the assessee has not justified a separate payment for this purpose to HCSL which is a party closely associated with the assessee company. Assessee's objection is accordingly rejected."
Therefore, in conformity with the order of DRP, amount of Rs. 150 lacs is added to the income of the assessee. (Amount disallowed - Rs. 150 lacs) Facts:
15.3. During the relevant previous year, the assessee paid Rs. 1.70 cr. to Hero Corporate Services Ltd (HCSL) in connection with availing advisory/supervisory services for the purposes of business.
15.4. The AO disallowed Rs 1.50 cr. Out of the total amount paid on the ground that (i) nexus of advisory services rendered by HCSL with the business of the assessee could not be ascertained; and (ii) the assessee failed 88 to explain as to how it was commercially expedient to avail the aforesaid services from HCSL.
Assessee's Submissions:
15.5. The assessee entered into service agreement with HCSL for availing advisory services in relation to various corporate services like human resource, I.T., etc., and availing supervisory services for evaluating data processing work carried out by M/s Results Mcann Pvt. Ltd. under passport scheme launched by the assessee company.
15.6. HCSL during the relevant previous year, provided following services to the assessee company:
Advise on training programs to be conducted for employees and evaluating performance of employees thereafter;
Updation/evaluation of Information technology support/upgradation required by the assessee; HCSL during the year also developed supporting software programmes to streamline support functions of the assessee.
HCSL acted as a communication channel between the assessee and various investors, wanting interaction with the top management/senior staff of the assessee about growth plan, etc. Evaluation of data of passport scheme.(Evidences of services attached at pages attached at page no. 1524 to 1561 of the paper book) 89 15.7. The services were, therefore, provided by the aforesaid company, which was related to the business of the assessee company.
15.8. The AO has also admitted that the services were availed from HCSL inasmuch as the expenditure of Rs.20 lacs out of the total payment of Rs.1.70 crores has been allowed as deduction.
15.9. Only part of the total expenditure has been disallowed on the ground of the same being excessive, having regard to the services availed. It is a settled position that reasonableness of the expenditure has to be seen from the point of view of businessman and not that of the Revenue. [Refer S.A. Builders: 288 ITR 1 (SC)].
15.10. Further, since the aforesaid party was not related to the assessee in terms of section 40A (2)(b) of the Act, there was no scope for the Revenue to examine the reasonableness of the expenditure incurred and to disallow any part thereof for that reason. In any case, no evidence has been brought on record by the Revenue to substantiate that the amount paid was excessive, having regard to the legitimate needs of business.
DR's Submissions 15.11. Reliance is placed on the assessment order and order passed by DRP.
Our findings & conclusion:
15.12. The assessing officer in this case made an ad hoc disallowance by allowing an amount of Rs. 20 lacs as expenditure for the services availed by the assessee from HCSL and disallowing the rest. The assessing officer has by observing in his order that various reports have been provided by HCSL 90 admitted the fact that certain services were rendered in this case. His only doubt is how these services were needed in the business of the assessee. We also note that the parties are not related to each other in terms of sec.
40A(2)(b). While it is so, the action of the Revenue in disallowing the certain portion of the expenditure is not justified unless the revenue demonstrates that the transaction is primarily a device to evade tax.
15.13. The Hon'ble Supreme Court in the case of CIT v. Walchand & Co. (P.) Ltd. [1967] 65 ITR 381 held that the Income-tax authorities have to decide whether the expenditure claimed as an allowance was incurred voluntarily and on grounds of commercial expediency. In applying the test of commercial expediency for determining whether the expenditure was wholly and exclusively laid out for the purpose of the business, the Supreme Court laid down that the reasonableness of the expenditure has to be adjudged from the point of view of the businessman and not of the Revenue.
15.14. The Hon'ble Supreme Court in the case of CIT v. Dharamraj Giriji Riya Narsingiriji 91 ITR 544 held that "it is not open to the Department to prescribe what expenditure an assessee should incur and in what circumstances he should incur that expenditure. Every businessman knows its interest best".
15.15. It is well settled that the assessing officer cannot place himself in the arm chair of businessman and decide the amount of expenditure that is to be incurred for the purpose of running of the business. The expenditure in question cannot be disallowed for the reason that the expenditure was incurred for business and was in the revenue field and was not a personal expenditure. In the result, this ground of the assessee is allowed.
9116. Ground nos. 11 to 11.2:- (Payment received on behalf of Hero Honda Fin lease Ltd. (HHFL) deemed as dividend u/s 2(22)(e):-
DRP Directions:
16.2. The DRP has issued following directions to the Assessing Officer;
"The assessee has objected to addition of Rs. 64.45 crores as redeemed dividends. The addition has been made as deemed dividends in the hands of the assessee u/s 2(22)(e) of the Act on account of the payments received by assessee from various dealers on behalf of hero Honda Finlease Ltd. of which assessee is a shareholder. The facts regarding this addition stated by the assessee are as follows:
Hero Honda Finlease Limited (HHFL) is a related company in which assessee holds 30% (approximately) of the share capital, which is engaged primarily in the business of financing of vehicles.
In pursuance of the said business, HHFL extends to the dealers of the assessee company, a facility of financing vehicles purchased by the dealers from the assessee company. The dealers on purchase of vehicles from the assessee, get the bill of purchase raised by the assessee, discounted from HHFL and remit payment to the assessee. The dealers are required to make payment of aforesaid discounted bills to HHFL on maturity thereof.
The interesting fact however is that the dealers who have discounted the bills with M/s Hero Honda Finlease Ltd., instead of returning the amounts to M/s Hero Honda Finlease Ltd actually to make the payments to the assessee and the assessee in turn, after enjoying the funds for certain days later on passes on these funds to M/s Hero Honda Finlease Ltd. There is no logic for the dealers who have discounted the bills with M/s Hero Honda Finlease Ltd. give the billed discounted amount to the assessee. it is in fact, an arrangement dictated by the assessee being the principal associate in which the payment is 92 sent to assessee who uses these funds for certain days and returns it to M/s Hero Honda Finlease Ltd. this infact, is an arrangement under which M/s hero Honda Finlease Ltd. gives loans to the assessee, which under the deeming provision of section 2(22)(e) of the Income Tax Act is dividends in assessee's hands. The AO has therefore correctly proposed to tax deemed dividend in assessee's hand.
The alternate submission of the counsel that since M/s hero Honda Finlease Ltd is in the business of money lending, the provision of section 2(22)(e) are not applicable in assessee's case, can also not be accepted. The money which has been indirectly lent by M/s Hero to the assessee is not a transaction in the business of money lending, but is loan provided to the assessee in a scheme devise to circumvent the provisions of section 2(22)(e) of the I. T. Act. Moreover, it is not the assessee's case that it has paid an interest in the regular course of borrowing money on interest. The objection of the assessee is rejected."
Therefore, in conformity with the order of DRP, amount of Rs. 6,445 lacs is added to the income of the assessee. (Addition - Rs. 6,445 lacs) Facts:
16.3. Hero Honda Finlease Limited (HHFL) is a related company in which the assessee holds 30% (approximately) of the share capital, which is engaged primarily in the business of financing of vehicles.
16.4. In pursuance of the said business, HHFL extends to the dealers of the assessee company, facility of financing vehicles purchased by the dealers from the assessee company. The dealers on purchase of vehicles from the assessee get the bill of purchase raised by the assessee, discounted from HHFL and remit payment to the assessee. The dealers are required to make payment of aforesaid discounted bills to HHFL on maturity thereof.93
Subsequently, when payments by dealers to HHFL are due, the dealers, due to convenience of facility of collection centers of the assessee available all over India, make payment into the assessee's bank account, for and on behalf of HHFL, which is in turn remitted by the assessee to HHFL in 2-3 days.
16.5. The Assessing Officer held the aforesaid amount received by assessee from dealers as loan/advance given by HHFL to assessee and consequently deemed the same as dividend income under section 2(22)(e) of the Act.
Assessee's Submissions:
Payment is sent by customers of HHFL to the assessee, for and on behalf of HHFL, solely on account of convenience of facility of numerous collection centres of the assessee.
There is no instruction, express or implied, either by the assessee or HHFL to the dealers/customers, directing the customers to make payment against liability of HHFL to the assessee company. The assessee receives aforesaid payment from the customers/dealers as trustee/custodian/agent of HHFL and remits the same to the latter company, immediately, in a short span of 2-3 days, which was the processing time taken inter alia, for identifying/segregating from out of the payments received, those which relate to HHFL, issuing instructions to the bank to transfer the funds to account of HHFL and the time taken by the bank in carrying out such instructions, in transmitting funds to the bank account of HHFL.
There was, thus, no loan or advance given by HHFL to the assessee.94
Section 2(22)(e) of the Act warrants a positive act of granting loan or advance by a company to its shareholders to fall within the rigours of the aforesaid section. Payment made by a third party, at its own volition, and purely for reasons of its own convenience, with the understanding of forwarding the same to HHFL, cannot be regarded as payment made by a company (HHFL ) to its shareholders, to be covered within the mischief of section 2(22)(e) of the Act.
16.10.That apart, in order to invoke provisions of section 2(22)(e) of the Act, it must be established that the recipient shareholder enjoys the loan or advance given by the company to be taxed as deemed dividend in the hands of such recipient shareholder. In the case of assessee, as pointed above, the payment sent by the customers of HHFL is forwarded to HHFL immediately and the aforesaid funds are neither available nor actually utilized by the assessee in its business.
16.11.That apart, the assessee is, otherwise a cash rich company, and as discussed in detail infra, infact invests surplus funds in short term investments, in order to properly utilize the funds. It cannot, thus, be said that assessee avails short form advances from HHFL in the aforesaid manner, as assessee does not require such advances.
16.12. Without prejudice to the above, even assuming that the aforesaid amount was given by way of advance to the assessee, the same cannot be deemed as dividend in terms of exemption provided in clause (ii) of section 2(22)(e) of the Act, since the same would be considered as being given by HHFL, which is engaged in the business of money 95 lending, in the ordinary course of its business and therefore, cannot be deemed as dividend in the hands of the assessee.
16.13.Reliance, in this regard, is placed on the following decisions:
CIT v. F. Praveen: 220 CTR 639 (Mad.), CIT v. Ambassador Travels (P) Limited: 220 CTR 475 (Del.), Pradeep K. Malhotra v. CIT: 338 ITR 538 (Cal.) Nagindas M. Kapadia v. CIT: 177 ITR 393 (Bom.) CIT v. Parle Plastics Ltd.: 332 ITR 63 (Bom.) 16.14. The aforesaid payment was made by dealers on behalf of the HHFL and, therefore, the same was in the nature of loan/advance given by HHFL to the assessee, which should be deemed as dividend, in accordance with the provisions of section 2(22)(e) of the Act.
DR's Submissions:
16.15. Reliance for the aforesaid contention is placed on the assessment order and order passed by DRP.
16.16. As regards, the contention of the assessee that, even assuming without admitting that the aforesaid payment made by dealers was in the nature of loan/advance by HHFL to the assessee, since HHFL was engaged in the money lending business, the aforesaid loan/advance could be said to be given in the ordinary course of that business, which is ousted from the application of the provisions of section 2(22)(e) of the Act, it is submitted, that since no interest was charged/ chargeable thereon from the assessee, the 96 aforesaid loan cannot be said to be given in the ordinary course of business of HHFL. It is not the business of the assessee to give loan free of cost.
16.17. Accordingly, the action of the assessing officer in deeming the aforesaid receipt as dividend under section 2(22)(e) of the Act needs to be upheld and the ground of appeal raised by the assessee, calls for being dismissed.
Assesse's Rejoinder :
16.18. It would be pertinent to point out that the assessee receives money from the customers/dealers and not from HHFL. Further, the assessee remits the aforesaid payment received in the assessee's bank accounts, on account of HHFL, immediately to HHFL, without any time lag. The short delay of 2- 3 days is on account of processing time taken inter alia, for identifying/segregating from out of the payments received, those which relate to HHFL, issuing instructions to the bank to transfer the funds to the account of HHFL and the time taken by the bank in carrying out such instructions, in transmitting funds to the bank account of HHFL.
16.19. Under such circumstances, it is submitted that the amount received by the assessee, which is transmitted to HHFL immediately, cannot be said to be loan or advance given by HHFL to the assessee. The provisions of section 2(22)(e) of the Act are, therefore, not applicable.
16.20. As regards, the contention of the Ld. DR that, since no interest was charged by HHFL from the assessee, the aforesaid amount could not be said to be given in the ordinary course of business of lending money by HHFL, it is submitted, that it is undisputed that HHFL is in the money lending 97 business. Merely because, no interest was charged by HHFL to the assessee would not lead to the inference that the amount allegedly advanced by HHFL was not in the ordinary course of its business, since charging interest is not sine qua non of carrying on money lending business, for purposes of applying exclusion contained in clause (ii) of section 2(22)(e) of the Act.
16.21. An assessee is free to give interest free loans and advances on account of commercial expediency. Reference, in this regard, can be made to the decision of Supreme Court in the case of S.A. Builders Ltd.: 288 ITR 1, wherein the transaction of interest free loan to a company on account of commercial expediency has been upheld to be business transaction.
16.22. For the aforesaid cumulative reasons, the arguments of the Ld. DR needs to be rejected and the ground of appeal raised by the assessee calls for being allowed.
Our findings & conclusion:
16.23. On a careful consideration of the factual matrix we find that the assessee has received money from its dealers for on ward remittance to HHFL. It is an undisputed fact that the money was remiited to the HHFL within a span of 2-3 days. It is not a case of HHFL giving a loan to the assessee company. It is a case where dealers have given funds to the assessee company for the purpose of being remitted to HHFL. This money admittedly was remitted by the assessee company to HHFL within 2/3 days of receipt of payment from the dealers. Thus there is no money receivd from HHFL by the assessee as loan.98
16.24. Further, there is no assertive conclusion either by the Assessing Officer or by the DRP as to whether the transaction is in the nature of loan or an advance. While the Assessing officer has concluded that amount given to the assessee by HHFL is in the nature of loan/ advance, the DRP has held it to be in the nature of loan. Thus, there is disconnect in the conclusion arrived by both the Authorities. In our view, the transaction cannot take the color of either a loan and advance.
16.25. The Hon'ble Delhi High Court in the case of CIT vs. Rajkumar [2009] 318 ITR 462 at page 473 held as under:
"A bare reading of the recommendations of the Commission and the speech of the then Finance Minister would show that the purpose of the insertion of sub-clause (e) to section 2(6A) in the 1922 Act was to bring within the tax net monies paid by closely held companies to their principal shareholders in the guise of loans and advances to avoid payment of tax.
Therefore, if the said background is kept in mind, it is clear that sub- clause (e) of section 2(22) of the Act, which is in parimateria with sub- clause (e) of section 2(6A) of the 1922 Act, plainly seeks to bring within the tax net accumulated profits which are distributed by closely held companies to its shareholders in the form of loans. The purpose being that persons who manage such closely held companies should not arrange their affairs in a manner that they assist the shareholders in avoiding the payment of taxes by having these companies pay or distribute, what would legitimately be dividend in the hands of the shareholders, money in the form of an advance or loan.
If this purpose is kept in mind then, in our view, the word "advance" has to be read in conjunction with the word "loan".
Usually attributes of a loan are that it involves positive act of lending coupled with acceptance by the other side of the money as loan: it generally carries an interest and there is an obligation of repayment. On the other hand, in its widest meaning the term 99 "advance" may or may not include lending. The word "advance" if not found in the company of or in conjunction with a word " loan" may or may not include the obligation of repayment. If it does, then it would be a loan. Thus, arises the conundrum as to what meaning one would attribute to the term "
advance" . The rule of construction to our minds which answers this conundrum is noscitur a sociis. The said rule has been explained both by the Privy Council in the case of Angus Robertson v. George Day [1879] 5 AC 63 by observing " it is a legitimate rule of con- struction to construe words in an Act of Parliament with reference to words found in immediate connection with them" and our Supreme Court in the case of Rohit Pulp and Paper Mills Ltd. v. CCE, AIR 1991 SC 754 and State of Bombay v. Hospital Mazdoor Sabha, AIR 1960 SC 610.
It is important to note that Rohit Pulp, AIR 1991 SC 754 was the case dealing with taxation. In brief in the said case the assessee was seeking to take benefit of an exemption notification. The Department denied the benefit of the " notification" on the ground that the paper manufactured by the assessee was "
coated paper" to which as per the proviso to the said notification the concession was not available. The Supreme Court in coming to the conclusion that the assessee' s case did not fall within the proviso and was thus entitled to the benefit of the notification applied the rule of construction of noscitur a sociis.
Importantly, the broad principles which emerge from the judgment of the Supreme Court with regard to the applicability of the said rule of con-struction are briefly as follows :
(i) does the term in issue have more than one meaning attributed to it, i.e., based on the setting or the context one could apply the narrower or wider meaning ;
(ii) are words or terms used found in a group totally "dissimilar"
or is there a " common thread" running through them ;
(iii) the purpose behind the insertion of the term.
100Let us examine as to whether based on the aforesaid tests the said rule of construction noscitur a sociis ought to be applied in the instant case.
(i) the term ' advance' has undoubtedly more than one meaning depending on the context in which it is used ;
(ii) both the terms, that is, advance or loan are related to the " accu- mulated profits" of the company ;
(iii) and last but not the least the purpose behind the insertion of the term " advance" was to bring within the tax net payments made in the guise of loan to shareholders by companies in which they have a substantial interest so as to avoid payment of tax by the shareholders ;
Keeping the aforesaid rule in mind we are of the opinion that the word "advance" which appears in the company of the word " loan"
could only mean such advance which carries with it an obligation of repayment. Trade advance which are in the nature of money transacted to give effect to com mercial transactions would not, in our view, fall within the ambit of the provisions of section 2(22)(e) of the Act. This interpretation would allow the rule of purposive construction with noscitur a sociis, as was done by the Supreme Court in the case of LIC of India v. Retired LIC Officers Association [2008] 3 SCC 321. The observation in para 24 of the report being apposite are extracted herein below :
" Each word employed in a statute must take colour from the purport and object for which it is used. The principle of purposive interpretation, herefore, should be taken recourse to".
A close examination of the judgment of the Bombay High Court in the case of Nagindas M. Kapadia [1989] 177 ITR 393 would show that the court excluded from the ambit of "dividend", monies which the assessee had received towards purchases. In our view, both the Commissioner of Income-tax (Appeals) and the Tribunal have correctly appreciated this aspect of the matter in the said judgment of 101 the Bombay High Court. The relevant portion of the judgment of the Bombay High Court which sets out this aspect of the matter is already extracted by us in the narrative given by us hereinabove. We are also in agreement with the view of the Tribunal that the judgment of the Supreme Court in the case of P. Sarada [1998] 229 ITR 444 and Smt. Tarulata Shyam [1977] 108 ITR 345 has no applicability to the present case. Both the judgments establish the principle that once the payment made to a shareholder is deemed as dividend then the mere fact that it is repaid would not take it out of the ambit of the tax net. In the instant case, however, a discussion with respect to which has been made hereinabove, the issue is whether the payment received by the shareholder would at all fall within the four corners of the provisions of section 2(22)(e) of the Act. Having held otherwise, the said judgments of the Supreme Court, in our view, will have no applicability to the facts of the instant case" (Emphasis supplied).
16.25.1. The above view of the Jurisdictional High Court was followed and confirmed by another division bench of the jurisdictional High Court in the case of CIT vs. Creative Dyeing and Printing P. Ltd [2009] 318 ITR
476. 16.26. The Hon'bel Calcutta High Court in the case of Pradeep K.Malhotra vs. CIT [2011] 338 ITR 538 held that the phrase "by way of advance or loan" appearing in sub-clause (e) of section 2(22) of the Income- tax Act, 1961, must be construed to mean those advances or loans which a shareholder enjoys simply on account of being a person who is the beneficial owner of shares (not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profits) holding not less than ten per cent. of the voting power ; but if such loan or advance is given to such shareholder as a consequence of any further consideration which is beneficial to the company received from such a share-holder, in such case, such advance or loan cannot be said to be deemed dividend within the 102 meaning of the Act. Thus, gratuitous loan or advance given by a company to those classes of shareholders would come within the purview of section 2(22) but not cases where the loan or advance is given in return to an advantage conferred upon the company by such shareholder.
16.27. Section 2(22)(e), is a deeming section and it is well settled that it should be strictly interpreted. In the present case, the intention of the parties did not reflect that it was an advance or loan so as to attract section 2(22)(e). The assessee in this case was holding the money received from dealers as custodian of HHFL. There is no privity of contract between the assessee and HHFL. There is no positive act of granting loan or advance given by HHFL to the assessee. There is neither a stipulation for payment of interest or period of repayment. Further, the assessee has not used the funds for its own purposes, as admittedly the assessee is a cash rich company, not requiring loans. This fact is not disputed by the Revenue. The assessee was used as channel for remittance of money by the dealers to HHFL for the purpose of convenience and from assessee's a standpoint this is business expediency. We are unable to appreciate the conclusions drawn by the assessing officer that this is a deemed loan. In our view, by no stretch of imagination it can be said that there was any amount of advance or loan given by HHFL to the assessee.
16.28. Even assuming that the transaction is in the nature of loan, we have to agree with the arguments of the Ld. AR of the assessee that the transaction cannot be deemed as dividend in terms of exemption provided in clause (ii) of section 2(22)(e) of the Act, since the loan would be considered as given by HHFL, which is engaged in the business of money lending, in the ordinary course of its business. Therefore, the amount cannot be deemed as 103 dividend in the hands of the assessee. The arguments of the Ld. DR that since no interest was charged/ chargeable thereon from the assessee, the aforesaid loan cannot be said to be given in the ordinary course of business of HHFL is taken to its logical conclusion, supporting our view that this is not a loan or advance.
16.29. Considering the decision of the Hon'ble Delhi High Court and the intent of the Legislature in introduction of Section 2(22)(e) of the Act, we are of the view that the transaction in question would not fall within the provisions of section 2(22)(e) of the Act. Accordingly, this ground of the assessee is allowed.
17. Ground nos. 12 to 12.1: (Disallowance of deduction u/s 80-IA in relation to generation of power):-
DRP Directions:
17.2. The DRP has issued following directions to the Assessing Officer;
"Assessee has objected to disallowance of deduction u/s 80IA of the Income Tax Act. The brief facts in this regard stated by the assessee are as follows:
In view of the power supply constraints in the area of Gurgaon, Haryana, where the assessee had set-up its manufacturing facility, the assessee had also set up a power plant in order to meet the captive consumption requirements of power.
The assessee claimed deduction under section 80IA of the Act at Rs. 426.38 lakhs in respect of power generated at the aforesaid unit and captively consumed by the assessee. The deduction claimed was duly supported by Chartered Accountant's Report.104
For the purposes of computing deduction under section 80IA, the assessee adopted the transfer price of power, captively consumed, at the cost of generation power per unit with mark- up of 15%. The cost of generation of power was adopted at Rs. 5.92, which was based on cost certified in the cost audit report.
Accordingly, the assessee adopted the rate of transfer of power @ Rs. 6.81 per unit (Rs. 5.92 + 15% of Rs. 5.92).
The AO held that the inter unit transfer of power from the power plant should have been at a price at which Haryana State Electricity Board, a Government Company is supplying assessee's own Daruheda/Gurgaon plant i.e. at Rs. 4.60 per unit. The Counsels of the assessee have submitted the rate at which power has been supplied M/s HSEV to the assessee cannot be taken as the market value.
The objection of the assessee cannot be accepted. The AO was justified in taking the market value of the power at Rs. 4.60 per unit which is the rate at which the assessee is itself purchasing the power from HSEV. In any case, the captive power plant of the assessee has been installed as a source of the power supply to the assessee in its business of manufacturing two wheelers, it cannot be seen as a profit making proposition that too from the assessee itself who has installed the power plant as a captive power unit. Thus, at best, the power could have been transferred at the cost of generation of power at Rs. 5.92 which is based on a cost certified in the cost audit report. Charging of any mark up by the assessee on the cost of generation from itself in order to create an income which is exempt from taxes i.e. on which a deduction is allowable u/s 80IA of the Income Tax Act and in turn reducing it's taxable income from the manufacturing unit, cannot be justified on any ground. The objection of the assessee is rejected."
Therefore, in conformity with the order of DRP, amount of Rs. 426.38 lacs is not allowed as deduction. No addition to the income is warranted since the computation to income as per this order begins before giving effect to the claim of assessee for deduction under section 80IA.
105Facts:
17.3. In view of the power supply constraints in the area of Gurgaon, Haryana, the assessee had set-up a power plant within the factory premises, in order to meet the captive consumption requirements of power, which is eligible for deduction under section 80IA of the Act. No power is drawn from the Electricity Board.
17.4. For the purposes of computing deduction under section 80IA, the assessee adopted the transfer price of power, captively consumed, at the cost of generation power per unit with mark-up of 15%.
17.5. The AO rejected the transfer price computed by the assessee as fair market price and substituted the same with rate of power supplied by local State Electricity Board. Since, the rate of SEB was less than the cost of production of electricity by the assessee, no deduction under section 80 IA of the Act was allowed in the assessment order.
Assessee's Submissions:
17.6. Ld. Counsel contends that the aforesaid issue has been decided against the assessee by the Hon'ble ITAT in the appeal for A.Y. 2006-07 on the mistaken belief that independent supplier of electricity in the area, i.e. Maruti Udyog Ltd., was supplying power only to related parties and not to independent parties. Accordingly, it was held that the rate of supply of electricity by Maruti was not reflective of market price, which needed to be adopted as the rate of supply of power by SEB.
17.7. The assessee has filed Miscellaneous Application to rectify the aforesaid mistake, which is pending disposal.106
DR's arguments:
17.8. Reliance is placed on the assessment order and order passed by DRP as well as the findings of the ITAT in the assessee's own case for the earlier year.
Our findings & conclusion:-
17.9. Admittedly the Tribunal in its order for A.Y. 2006-07 in ITA no.
5130/Del/2010 dated 23-11-2012 on the very same issue held as follows:
39. We have carefully considered the submissions of both the sides and perused the material placed before us. Sub-section (8) of Section 80IA reads as under:-
"(8) Where any goods [or services] held for the purposes of the eligible business are transferred to any other business carried on by the assessee, or where any goods [or services] held for the purposes of any other business carried on by the assessee are transferred to the eligible business and, in either case, the consideration, if any, for such transfer as recorded in the accounts of the eligible business does not correspond to the market value of such goods [or services] as on the date of the transfer, then, for the purposes of the deduction under this section, the profits and gains of such eligible business shall be computed as if the transfer, in either case, had been made at the market value of such goods [or services] as on that date :
Provided that where, in the opinion of the Assessing Officer, the computation of the profits and gains of the eligible business in the manner hereinbefore specified presents exceptional difficulties, the Assessing Officer may compute such profits and gains on such reasonable basis as he may deem fit.
[Explanation. - For the purposes of this sub-section, "market value", in relation to any goods or services, means the price 107 that such goods or services would ordinarily fetch in the open market.]."
40. From the above, it is evident that where the goods or services held for the purposes of eligible business are transferred to another business, carried on by the assessee, then for the purpose of deduction under this Section, the profits and gains of such eligible business shall be computed as if transfer had been made at the market value of such goods or services as on date. In the case under appeal before us, it is not in dispute that in the eligible business, the assessee is generating the power which is being consumed by the assessee company's manufacturing facility. Therefore, the profit of the eligible business is to be computed at the market rate of supply of power. It is the assessee's contention that Maruti Udyog Limited is supplying the power to its AE at the rate of `8.50 per unit while the assessee has computed the profit of the eligible business by taking the rate of power at `7.08 per unit. The assessee has computed the rate of power by the cost of generation per unit with mark up of 15%. However, the Assessing Officer has pointed out that the government undertaking i.e. Haryana State Electricity Board has supplied the power to the assessee and other industrial units in the area at the rate of `3.90 per unit.
Now, the question is, what is the market rate at which power is being supplied. In our opinion, the rate at which power is being supplied by the Haryana State Electricity Board, to each and every industrial unit situated in the area, in which assessee's manufacturing unit is situated, is the market rate at which power is available. The rate at which Maruti Udyog Limited is claimed to supply the power to its AE cannot be said to be the market rate of the power in that area because as per assessee's own claim, Maruti Udyog Limited is supplying the power to its AE and not to unrelated parties in general. In view of the above, we hold that the Assessing Officer was fully justified in arriving at the conclusion that there was a loss in the power generation undertaking of the 108 assessee and therefore, there was no eligible profit for allowing deduction under Section 80IA. Accordingly, we dismiss ground Nos.8 & 8.1 of the assessee's appeal.
17.10. The filing of a miscellaneous application u/s 254(2) by assessee of this ITAT order does not deter the fact that as on today the issue stands decided against assessee. Following the order of the coordinate Bench of the Tribunal on the very same issue for the previous assessment year in the case of assessee, we uphold the order of assessing officer on this issue and dismiss the ground. In the result this ground of the assessee is dismissed.
18. Ground no. 13-13.1: (Addition on account of difference in amount of excise duty in inter unit transfer price of goods):-
DRP Directions:
18.2. The DRP has issued following directions to the Assessing Officer;
"The assessee has objected to addition on account of difference in excise duty in the inter unit transfer price of goods. The AO has made an addition of Rs. 1.88 crores on account of excise duty payable in respect of inter unit transfer of goods on the ground that the assessee has failed to adduce any evidence for payment of the same.
The counsel of the assessee submitted that the relevant ledger accounts of both the input division and output division show that the excise duty is deemed to have been paid through PLA i.e. the ledger account or through available CENVAT credits. It is seen from pages 57 to 58 of the draft assessment order that the assessee has been claiming before the Assessing Officer that the excise duty has been actually paid. However, the assessee has changed its stand before this panel and the counsel has now stated that the excise duty is deemed to have been paid through PLA i.e. the ledger account or through available through CENVAT credits. The contentions of the counsel have 109 to be verified before the same can be accepted. The best proof or verification regarding the payment of the excise duty can be through a confirmation from the relevant excise authorities that the excise duty of Rs 1.88 crores in question has been deemed to have been paid through the PLA or the available CENVAT credits before the relevant dates permitted by section 43B income of the Act. The assessee shall produce such confirmation/certificate from the relevant excise authorities, before the AO. Who will allow /disallow the claim on the basis of the confirmation/certificate of the relevant excise authorities."
However, the assessee has not provided any document from Excise Authority evidencing the claim made. Copies of other documents provided to the Assessing Officer do not substantiate this claim. Therefore, no interference is being made to the original findings as per the draft assessment order. Addition of Rs. 188 lacs is accordingly made to the income of the assessee.
(Addition - Rs. 188 lacs) Facts:
18.3. Assessee claims to be liable to pay excise duty, arising on manufacture of intermediate goods, transferred inter unit in the course of manufacturing vehicles 18.4. The Assessing Officer made addition of Rs. 1.88 crores, with respect to excise duty payable on inter unit transfer of goods on the ground that the assessee failed to establish that the excise duty had been paid by the assessee. The DRP directed the AO to verify the evidence and allow the claim. The AO maintained the disallowance, even after direction of the DRP, despite the assessee furnishing confirmatory evidence.110
Assessee's Submissions:
18.5. The assessee has attached evidence of payment of excise duty through PLA at pages 2495-2512 (Vol-13) in paper book. Reliance is placed on CIT v. Maruti Suzuki Ltd.: ITA No. 903/20011 (Del.) (HC), wherein it has been held that payment though PLA constitutes effective payment of excise duty.
18.6. The AO has erred in not appreciating the evidence, placed on record.
DR's arguments:
18.7. The assessee is liable to pay excise duty arising on manufacturing of intermediary goods, which are transferred inter-unit in the course of manufacturing vehicles. In this regard, as held by the assessing officer, the assessee has not produced any evidence/ certificate from excise authorities evidencing payment of excise duty in respect of aforesaid inter-unit transfer of goods. Accordingly, the action of the assessing officer in making addition on account of excise duty payable needs to be upheld.
Assessee's Rejoinder:
18.8. It is submitted, that pursuant to the directions of the DRP, the assessee had duly submitted, the entire documents furnished before the excise authorities establishing payment of excise duty on intermediate production of goods, through PLA or adjustment against available CENVAT credit.
18.9. In view of the above, the contention of the LD. DR is not correct and, therefore, needs to be rejected and the ground of appeal raised by the assessee calls for being allowed Our findings & conclusion:111
18.10. The DRP in this case directed the assessing officer to verify the claim of the assessee with regard to payment made through PLA. The Hon'ble Delhi High court in the case of CIT Vs. Maruti Suzuki Ltd. (supra) held that payment through PLA constitutes effective payment of excise duty. The assessing officer is bound by this decision. The assessee had already placed all necessary evidences before the assessing officer. On the factual matrix, in the interest of justice, we set aside the matter to the file of assessing officer for fresh adjudication in accordance with law. The assessing officer is directed to consider payment through PLA as effective payment of excise duty and decide the issue accordingly. In the result, this ground of the assessee is allowed for statistical purposes.
19. Ground no. 14 to 14.3: (Addition to value of closing stock on the basis of value reported in cost audit report):-
DRP Directions:
19.2. The DRP has issued following directions to the Assessing Officer;
"In the draft assessment order, the AO has enhanced the value of closing inventory by an amount of Rs. 19 lacs on account of higher value thereof reported in the cost audit report and made consequential addition to the income of the assessee.
The ld counsel of the assessee have submitted that the assessee has valued closing stock in accordance with regular and consistent method of accounting followed by the assessee since past several years which has been accepted by the revenue.
Objection o the assessee cannot be accepted. There can be no better value of the closing stock than the value reported in the cost audit report, in a case where the assessee is valuing the closing on the basis of cost or market value whichever is 112 lower. Assessee has not disputed the correctness of the value in the cost audit report. In the name of consistency, a wrong method followed by he assessee cannot be allowed to perpetuate. Objection of the assessee is rejected."
Therefore, in conformity with the order of DRP, amount of Rs. 19 lacs is added to the income of the assessee.
(Addition - Rs. 19 lacs) Facts:
19.3. The AO enhanced the value of closing inventory by an amount of Rs.19 lacs on account of higher value thereof reported in the cost audit report vis-a-vis that disclosed in the books of accounts and made consequential addition to the income of the assessee.
Assessee's Submissions 19.4. The value of closing stock reported in the cost audit report, which was higher by Rs.19 lacs vis-à-vis the value disclosed in the audited statement, was on the basis of different method of valuation of closing stock followed by the cost auditors, as mandated in law for that purpose, vis-à-vis method of valuation followed for audited financial statements.
19.5. The cost auditors have themselves in the cost audit report explained the aforesaid difference in value of closing stock of finished goods as arising on account of different method of valuation followed for purposes of cost audit vis-a-vis reporting in the audited financial statements.
19.6. It is nobody's case that the aforesaid difference has arisen on account of difference in the quantity of closing stock of finished goods as verified by 113 the cost auditors or as reported by the assessee in the audited financial statements.
19.7. The assessee has valued closing stock in accordance with regular and consistent method of accounting followed by the assessee since past several years which has always been accepted by the Revenue in the past. The same cannot be substituted during the relevant year, for the aforesaid reason.
19.8. Further considering that the assessee is a high tax paying company, subjected to uniform rate of tax, no adjustment is even otherwise called for in view of the following:
19.9. If the closing stock of the year is to be varied, similar adjustments would need to be made to the opening stock, too. (Refer: K.G. Khosla & Co. Ltd. v. CIT: 99 ITR 574 (Del.)) 19.10. Corresponding adjustment would need to be carried out in the opening stock of the succeeding year.
19.11. The addition, if any, is revenue neutral, if seen in a macro perspective and, therefore, no adjustment is called for. [Refer: Nagri Mills Company Ltd.: 33 ITR 681 (Bom.); Triveni Engineering Industries Ltd.: 336 ITR 374 (Del.)] DR's submissions:
19.12. Reliance is placed on the assessment order and order passed by DRP.114
Our findings & conclusion:
19.13. The addition of Rs. 19 lacs has been made on account of particular method of valuation of closing stock followed by the cost auditors.
Admittedly the method of valuation followed by the cost auditors was statutory requirement. There is no change in the method of valuation of closing stock consistently followed by the assessee over the years for the purpose of financial accounting. There is no finding by the assessing officer that method of valuation of closing stock of the assessee is defective or that it does not disclose true profits of the assessee's business. It is not the case of the assessing officer that the assessee should change his method of valuation of closing stock so that in all future years the stock value decided by the cost auditor is to be adopted by the assessee. The addition has been made just because the cost auditor has arrived at a particular valuation of closing stock. It is well settled that valuation is an opinion based on certain methods. Minor variations do occur. Hence for the reasons stated while disposing Ground No 2 (Supra), we allow this ground of appeal.
20. Ground no. 15-15.1: (Disallowance u/s 14A as per Rule 8D):
DRP Directions:
20.2. The DRP has issued following directions to the Assessing Officer;
"During the relevant previous year, the assessee earned dividend income of rs. 22.61 crores from investments held in shares and mutual funds. In the return of income, the assessee made suo-moto disallowance of Rs. 12.58 lakhs, in respect of proportionate amount of salary paid to employees involved in treasury functions, under section 14A of the Act.115
The AO has proposed a disallowance of Rs. 86.74 lakhs being out of the salary paid to two directors namely, Shri Brij Mohan Lal Munjal, and Pawan Kumar Munjal computed in the ratio of exempted income vis-a-vis taxable income. The AO has further proposed a disallowance of Rs. 9.16 lakhs out of interest expenditure apportioned in the ratio of average value of investment vis-a-vis the average value of total asset and a further disallowance of half percent of the average value of investment during the year amounting to Rs. 115.61 lakhs.
Firstly, the counsel has submitted that provisions of rule 8D of the Income tax rules for making disallowance u/s 14A of the Income tax Act are applicable from A.Y 2008-09 on wards and as such these provisions cannot made applicable for making disallowance u/s 14A in the assessment year under consideration i.e. A.Y 2007-08. This being a legal issue, which is being contested by the department before various appellate authorities, the objection of the assessee cannot be accepted. The same is rejected.
Secondly, the counsel has submitted that the disallowance on account of interest and the disallowance of half percent of average value of investment have been made without linking this expenditure to the activity of earning the exempt income. This objection of the assessee deserves to be rejected. The disallowance made by the AO is purely on the basis of formula provided in rule 8D of the Income Tax rules and therefore cannot be faulted with. The objection of the assessee is rejected.
Thirdly, the counsel has objected that once the half percent of the average value of investment has been disallowed for the reason of administrative effort for earning the exempt income the AO was not justified in separately making the disallowance of Rs. 86.74 lakhs out of the salary of the two directors. This objection of the assessee is justified. Once the AO has made a disallowance of half percent of the average value of investment during the year for the administrative effort for making investment for earning exempt income he was not justified in making a further disallowance out of the salary of two directors. The AO is directed not to make the separate disallowance of 86.74 lakhs out of the salary of the directors."116
Respectfully following the directions issued by the DRP addition of Rs. 86.74 lacs is deleted from the income of the assessee. Therefore, addition on this account is confined to Rs. 112.19 lacs. (Addition - Rs. 112.19 lacs) Facts:
20.3. During the relevant previous year, the assessee earned exempt dividend income of Rs.22.61 crores from investments held in shares and mutual funds. In the return of income, the assessee made suo-moto disallowance of Rs.12.58 lacs under section 14A of the Act, in respect of proportionate amount of salary paid to employees involved in treasury functions.
20.4. The AO made further disallowance of Rs. 112.19 lacs by applying provisions of Rule 8D of the Rules.
Assessee's Submissions:
20.5. At the outset, the assessing officer has erred in enhancing the amount of disallowance under section 14A by applying provisions of Rule 8D of the Rules, which are applicable only with effect from assessment year 2008-09 and onwards. Reliance is placed on Godrej Boyce Mfg. Co. Ltd: 328 ITR 81 (Bom) and Maxopp Investment : 347 ITR 272 (Del.).
20.6. Without prejudice, as per section 14A(2), disallowance under that section as per Rule 8D can be made only if the assessing officer records satisfaction/finding as to the incorrectness in the method of disallowance followed by the assessee. Reliance is placed on Maxopp Investment Ltd: 347 ITR 272 (Del.). In the absence of any satisfaction recorded in the assessment order, the disallowance as per Rule 8D needs to be deleted 117 20.7. Even otherwise, there is no nexus of expenses, like interest expenditure and other administrative expenses with investments, warranting disallowance under section 14A.
Interest Expenditure 20.8. The assessee is a cash rich company, which does not borrow funds for making investment. The marginal interest expenditure of Rs. 1.60 crores was incurred on other temporary loans/dealers deposit, having nexus with main business function. Further, no direct nexus of interest expenditure with investments or earning of dividend income established by the assessing officer, for which the initial burden was on the assessing officer. Reliance is placed on CIT vs. Hero Cycles: 323 ITR 518 (P&H).
20.9. That apart, the assessee had substantial free reserves of Rs. 1969.39 crores at the beginning of the relevant previous year and had also generated substantial surplus/interest free funds of Rs. 625.05 crores during the year, which were sufficient to make investments of Rs. 273 crores during the year. In such circumstances, it is to be presumed that only interest free funds have been utilized for making investments during the year. Reliance is placed on East India Pharmaceuticals Works Ltd: v. CIT: 224 ITR 627 (SC).
Administrative expenses 20.10. All the expenses, other than, the suo-moto disallowance by the assessee, related to main business function of manufacturing vehicles. In the absence of any proximate nexus having been established by the assessing officer and considering that provisions of Rule 8D of the Rules are not 118 applicable to the assessment year, the disallowance of administrative expenses made by the assessing officer, needs to be deleted.
DR submissions:
20.11. Reliance is placed on the assessment order and order passed by DRP.
Our Findings & conclusion:
20.12. The dispute is regarding disallowance of expenses relating to exempt income under section 14A of the Act read with Rule 8D. Under the said provisions, the disallowance of expenses relating to exempt income is required to be computed as per Section 14A (2) and (3) read with Rule 8D.
Rule 8D was introduced vide Notification No.45/2008 dated 24.03.2008.
20.13. After considering the submissions of the Parties and perusing the relevant material on record, we find that the Hon'ble jurisdictional High Court in the case of Maxopp Investment Ltd. (supra) has held that the disallowance u/s 14A is required to be made as per Rule 8D in relation to the assessment year 2008-09 and subsequent years. For the earlier years, the direction is to compute the disallowance on 'reasonable basis'. The operative part of the order is reproduced below:
On the restospectivity of Rule 8D "We are of the view that Rule 8D would operate prospectively. We agree with the submissions made by Dr Rakesh Gupta that if the said Rule were to have retrospective effect, nothing prevented the Central Board of Direct Taxes from saying so, particularly, in view of the fact that it had the power to make a rule retrospective by virtue of Section 295(4) of the said Act. Instead of making Rule 8D retrospective, clause 1(2) of the Income-tax (Fifth Amendment) Rules, 2008 made it clear that the rules would come into force from the date of their 119 publication in the Official Gazette. It is, therefore, clear that Rule 8D, which was introduced by virtue of the Notification No.45/2008 dated 24.03.2008, was prospective in operation and cannot be regarded as being retrospective. We may also point out that we have had the benefit of the decision of the Bombay High Court in Godrej & Boyce Mfg. Co. Ltd. v Dy. CIT [2010] 328 ITR 81 / 194 Taxman 203, wherein it has, inter alia, been held that the provisions of Rule 8D of the said Rules has prospective effect and shall apply with effect from assessment year 2008-09 onwards.
How Section 14A to be worked for the period prior to the introduction of Rule 8D:
" 41. Sub-section (2) of section 14A, as we have seen, stipulates that the Assessing Officer shall determine the amount of expenditure incurred in relation to income which does not form part of the total income "in accordance with such method as may be prescribed". Of course, this determination can only be undertaken if the Assessing Officer is not satisfied with the correctness of the claim of the assessee in respect of such expenditure. This part of section 14A(2) which explicitly requires the fulfillment of a condition precedent is also implicit in section 14A(1) [as it now stands] as also in its initial avatar as section 14A. It is only the prescription with regard to the method of determining such expenditure which is new and which will operate prospectively. In other words, section 14A, even prior to the introduction of sub-sections (2) & (3) would require the assessing officer to first reject the claim of the assessee with regard to the extent of such expenditure and such rejection must be for disclosed cogent reasons. It is then that the question of determination of such expenditure by the assessing officer would arise. The requirement of adopting a specific method of determining such expenditure has been introduced by virtue of sub-section (2) of section 14A. Prior to that, the assessing was free to adopt any reasonable and acceptable method.
42. Thus, the fact that we have held that sub-sections (2) & (3) of section 14A and Rule 8D would operate prospectively (and, not retrospectively) does not mean that the assessing officer is not to satisfy himself with the correctness of the claim of the assessee with regard to such expenditure. If he is satisfied that the assessee has 120 correctly reflected the amount of such expenditure, he has to do nothing further. On the other hand, if he is satisfied on an objective analysis and for cogent reasons that the amount of such expenditure as claimed by the assessee is not correct, he is required to determine the amount of such expenditure on the basis of a reasonable and acceptable method of apportionment. It would be appropriate to recall the words of the Supreme Court in Walfort Share & Stock Brokers (P.) Ltd. (supra) to the following effect:-
"The theory of apportionment of expenditure between taxable and non-taxable has, in principle, been now widened under section 14 A."
So, even for the pre-Rule8D period, whenever the issue of section 14A arises before an Assessing Officer, he has, first of all, to ascertain the correctness of the claim of the assessee in respect of the expenditure incurred in relation to income which does not form part of the total income under the said Act. Even where the assessee claims that no expenditure has been incuured in relation to income which does not form part of total income, the assessing officer will have to verify the correcteness of such claim. In case, the assessing officer is satisfied with the claim of the assessee with regard to the expenditure or no expenditure, as the case may be, the assessing officer is to accept the claim of the assessee insofar as the quantum of disallowance under section 14A is concerned. In such eventuality, the assessing officer cannot embark upon a determination of the amount of expenditure for the purposes of section 14A(1). In case, the assessing officer is not, on the basis of objective criteria and after giving the assessee a reasonable opportunity, satisfied with the correctness of the claim of the assessee, he shall have to reject the claim and state the reasons for doing so. Having done so, the assessing officer will have to determine the amount of expenditure incurred in relation to income which does not form part of the total income under the said Act. He is required to do soon the basis of a reasonable and acceptable method of apportionmen".
20.14. In view of the above decision, we uphold the arguments of the assessee that disallowance under section 14A for the subject AY cannot be computed as per Rule 8D and the disallowance is required to be on some reasonable basis and not as per rule 8D.
12120.15. As the assessing officer has not applied the proposition as laid down by the Hon'ble Delhi High Court in the case of Maxopp Investment Ltd. (supra), we restore the determination of the disallowable amount of expenses under Section 14A to the file of the Assessing Officer to be done in accordance with provisions of section 14A read with the decision of the Jurisdictional High Court, keeping in mind all the reasonableness of suo motu disallowance offered by assessee in the return.
20.16. Further, we direct the Assessing Officer to determine the amount of expenditure only if the Assessing officer, having regard to the accounts of the assessee, is not satisfied with the correctness of the claim made by the assessee in respect of such expenditure incurred in realtion to dividend income. The assessing officer shall consider all the contentions raised by the assessee as well as the proposition laid down by various courts and decide the issue de novo. Ground is allowed for statistical purposes.
21. Ground no. 16- 16.1: It comprises of two additions: (i) Disallowance of Rs. 4.26 crores on account of payment to LIC to cover leave encashment on the ground that same is allowable on actual payment of leave encashment under section 43B(f) of the Act; and (ii) Disallowance of Rs. 2.08 crores being the actual amount of leave encashment to employees during the year, on account of no evidence establishing such payment.
DRP Directions:
21.2. The DRP has issued following directions to the Assessing Officer;
"A disallowance of Rs. 4.26 crores of the payment to LIC covers leave encashment by application of section 43B of the I. T. Act. During the relevant previous year, the assessee incurred aggregate expenditure 122 of Rs. 6.33 crores on account of leave encashment paid/payable to employees, which comprised of Rs. 4.26 crores on account of payment to LIC towards master policy taken to cover leave encashment payment to employees; and Rs. 2.08 crores incurred on account of actual payment of leave encashment to employees during the year. The counsel argued that payment of premium to LIC towards master cover policy amounts to actual payment of leave encashment. The objection of the assessee is not acceptable. In the case of Udaipur distillery company Limited 268 ITR 305 (Raj.) has held that the bank guarantee does not amount to actual payment. The High Court further clarified the actual payment requires money to flow from the assessee to the exchequer. In the case of Rajasthan Patrika 258 ITR 300 (Raj.), the Rajasthan High Court held that in a case, where excise duty is selected by the assessee but it is disputed and the amount of the excise duty is deposited with the bank under the order of the High Court, the deposit of the money with the bank does not amount to payment of excise duty. Similar are the findings of the Ahmedabad Tribunal in the case of Mugat Dying and Printing Mills Ltd. 87 ITD 215 (Ahd.), The objection of the assessee is therefore, rejected. "
Therefore, in conformity with the order of DRP, amount of Rs. 137.36 lacs is added to the income of the assessee. (Amount disallowed - Rs. 137.36 lacs) On the issue of leave encashment, DRP Directions are as under:
"A disallowance of Rs. 4.26 crores of the payment to LIC covers leave encashment by application of section 43B of the I. T. Act. During the relevant previous year, the assessee incurred aggregate expenditure of Rs. 6.33 crores on account of leave encashment paid/payable to employees, which comprised of Rs. 4.26 crores on account of payment to LIC towards master policy taken to cover leave encashment payment to employees; and Rs. 2.08 crores incurred on account of actual payment of leave encashment to employees during the year. The counsel argued that payment of premium to LIC towards master cover policy amounts to actual payment of leave encashment.123
The objection of the assessee is not acceptable. In the case of Udaipur distillery company Limited 268 ITR 305 (Raj.) has held that the bank guarantee does not amount to actual payment. The High Court further clarified the actual payment requires money to flow from the assessee to the exchequer. In the case of Rajasthan Patrika 258 ITR 300 (Raj.), the Rajasthan High Court held that in a case, where excise duty is selected by the assessee but it is disputed and the amount of the excise duty is deposited with the bank under the order of the High Court, the deposit of the money with the bank does not amount to payment of excise duty. Similar are the findings of the Ahmedabad Tribunal in the case of Mugat Dying and Printing Mills Ltd. 87 ITD 215 (Ahd.), The objection of the assessee is therefore, rejected."
Therefore, in conformity with the order of DRP, amount of Rs. 496 lacs is added to the income of the assessee. {Addition Rs. 496 lacs ( Rs. 288 lacs + Rs. 208 lacs) } Facts:
21.3. During the relevant previous year, the assessee incurred aggregate expenditure of Rs. 6.33 crores on account of leave encashment paid/payable to employees, which comprised of Rs. 4.26 crores on account of payment to LIC towards master policy taken to cover leave encashment payment to employees; and Rs. 2.08 crores incurred on account of actual payment of leave encashment to employees during the year.
21.4. The Assessing Officer disallowed Rs. 4.26 crores, incurred on account of payment to LIC towards master policy taken to cover leave encashment payment to employees on the ground that such payment was covered by the provisions of section 43B(f) of the Act and, accordingly, was allowable deduction in the year of actual payment of leave encashment to employees and not on the date of contribution to trust or otherwise. The amount of Rs 124 2.08 crores was disallowed on the ground that the assessee has not filed necessary evidences establishing the aforesaid payment to employees.
Assessee's Submissions 21.5. The assessee had taken master policy with LIC to fund payment of leave salary to employees as and when the same becomes due. In such circumstances, the assessee pays premium to LIC and leave salary is paid by LIC directly to the employees and no deduction is claimed by the assessee at that point of time. Since, there is no direct payment of leave encashment by the assessee, the same is not covered under section 43B(f) of the Act 21.6. The aforesaid amount of premium being expenditure incurred by the assessee wholly and exclusively for the purposes of business viz., employees welfare, the same is allowable business deduction under section 37(1) of the Act. [Refer decision of the Kerela High Court in the case of CIT v. Hindustan Latex Ltd.: ITA No. 64/2012].
21.7. Without prejudice, assuming that section 43B(f) is applicable, since the assessee has already made payment and no further payment would be made by assessee in future, the same should be allowed as deduction in the year of payment of premium under the said section itself.
21.8. Further without prejudice, section 43B(f) has been held to be unconstitutional by the Calcutta High Court in the case of Exide Industries Ltd.: 292 ITR 470. The said decision has been followed in the following decisions, wherein disallowance of provision of leave encashment by applying section 43B(f) has been deleted, on the ground that same has been held to be unconstitutional:
125CIT v. Hindustan Latex Ltd.: ITA No. 64 of 2012 (Ker.) Universal Cables Ltd. vs. DCIT:ITA No.954/K/2010 (Kol.)(ITAT) 21.9. Furthermore, section 43B(b) of the Act provides that deduction otherwise allowable under this Act on account of, interalia, sum payable by the assessee as an employer by way of contribution to, inter alia, any other fund for the welfare of employees, shall be allowable deduction in the year in which such sum is actually paid.
21.10. The fund created with LIC to make payments for employee benefit, viz., leave encashment, would be covered within the aforesaid clause as 'any other fund for the welfare of employee' and contribution made thereto have been specifically covered as allowable deduction in the year of payment.
21.11. As regards the amount of Rs. 2.08 crores, the assessee had specifically filed evidences of the aforesaid aggregate payment during the course of assessment proceedings, vide letter dated 21.4.2001, which have been ignored by the assessing officer and are again attached at page no. 2076-
2089 of the paper book.
DR submissions:
21.12. Reliance is placed on the assessment order and order passed by DRP.
Our Findings & conclusion:
21.13. Section 43B reads as follows:
"43B Notwithstanding anything contained in any other provision of this Act, a deduction otherwise allowable under this Act in respect of (a)...............126
(b) any sum payable by the assessee as an employer by way of contribution to any provident fund or superannuation fund or gratuity fund or any other fund for the welfare of employees;
(c)......................
(d)..........................;
(e).........................;
(f ) any sum payable by the assessee as an employer in lieu of any leave at the credit of his employee.
Shall be allowed (irrespective of the previous year in which the liability to pay such sum was incurred by the assessee according to the method of accounting regularly employed by him) only in computing the income referred to in section 28 of that previous year in which such sum is actually paid by him."
21.14. A plain reading of the section makes it clear that the above provision starts with the non-obstante clause. However, at the same time the above provision is not for allowance of any claim, and rather only puts certain restrictions on allowability of an expenditure which is "otherwise allowable under the Act". That means an expenditure which is otherwise allowable under any provisions of the Act, would not be allowed if such expenditure has not been actually paid as laid down in the section. This would mean that if any expenditure is found to be allowable under other provisions of the Act, section 43B prescribes further conditions of allowability if the fact when payment has actually been made in that particular year.
21.15. In the present case, the assesse had made payments to LIC / Trust by way of premium. It cannot be denied that the payment is incurred wholly 127 and exclusivedly for the purpose of business i.e. employee's welfare and hence is allowable u/s 37(i) of the Act.
21.16. Under the scheme of the Act, the deductions from business expenditure are dealt under Section 30 to 36. Section 37 is a residuary section for deduction of expenses which are not covered under section 30 to 36 and are incurred wholly and exclusively for the purpose of the business. Sections 40 to 44 deal with disallowance under the Act. Section 43(f) or Sec. 43(b) cannot be invoked unless an expense is allowable under sections 30 to
37. 21.17. Hence, we do not find merit in the arguments of the Revenue that the assessee has claimed deduction under 43B; therefore, it cannot claim deduction under section 37 of the Act.
21.18. Clause (f) of section 43B was introduced by Finance Act 2001.w.e.f from 1.4.2002 to nullify the decision of the Hon'ble Supreme Court in the case Bharat Earth Movers vs CIT 245 ITR 428 wherein the Hon'ble Supreme Court held that provision for leave encashment is an accrued liability and not a contingent liability.
21.19. In view of the above decision, provision for leave encashment which is otherwise allowable under section 37 of the Act is allowed under section 43B of the Act only on actual payment.
21.20. In the present case, the company has created a fund under a separate trust which has entered into a master policy with LIC for payment of leave encashment to the employees. The company makes annual contribution to the trust/ LIC to keep the policy in force. The assessee pays annual premium 128 to LIC and leave salary is paid by LIC directly to the employees and no deduction is claimed by the assessee at that point of time. Hence, we agree with the arguments of the Ld.AR of the assessee that, as there is no direct payment of leave encashment by the assessee, the same is not covered under section 43B(f) of the Act.
21.21. Our view is further supported by the Hon'ble Supreme Court in the case of CIT, CBE vs. M/s. Taxtol Co. Ltd in C.A.No 447 of 2003 dated 09.09.2009 while interpreting the provisions relating to contribution to LIC towards gratuity fund held that once payment was made to LIC the assesse did not have control over the funds and therefore the expenditure was deductible under section 28/ 37 of the Income Tax Act 1961.
21.22. Even though ld. CIT(DR) contended that the payment is not covered by section 43B (b), we do not think the contention is tenable because admittedly the leave encashemnt fund is maintained for the benefit of the employees and the payment of premium was to the fund operated by the LIC. Therefore, section 43B(b) is squarely attracted to the payment involved.Thus, an amount of Rs. 4.26 crores cannot be disallowed as the amount is actually paid during the year.
21.23. In view of the above discussions, we are of the view that the payment is allowable under section 37(1) and no disallowance under section 43B is warranted since the assesse has paid the premium to the LIC and the question of any payment in future to the employees towards leave encashment does not arise. Accordingly, we allow this ground of the assesse.
21.24. In respect of the amount of Rs. 2.08 crores, the assessee claims that it has specifically filed evidence during the assessment proceedings vide letter 129 dated 21-4-2001 and that the assessing officer ignored the same. A copy of the letter is filed before us. As we have held that the payment is allowable u/s 37(1) and as no disallowance can be made u/s 43B(f) and as it is the case of revenue that sec. 43B(b) therefore any calculation mistake has no consequence. Hence the disallowance to be deleted as the same is not in accordance with law. In the result, this ground of the assessee is allowed.
22.1. Ground no. 17: (Disallowance of additional depreciation of computers installed at supervisory office):
DRP Directions:
22.2. The DRP has issued following directions to the Assessing Officer;
"Disallowance of additional depreciation of Rs. 38.61 lakhs on computers installed at the supervisory office at assessee's factory premises at Gurgaon/Daruhera.
The counsel argued that the computers installed at the supervisory offices located in the factory compound are entitled to additional depreciation u/s 32(iia) of the Act as these supervisory offices formed integral part of the factory. The objection of the assessee is not acceptable. The computers even though installed at the factory premises cannot be treated as plant as these are not involved in the manufacturing process. In the cases of M/s Kirloskar Cummins ITA No. 1287/90 order dated 29th January, 1987 and in the case of Sunny Gold Winery ITA No. 1288/93, have held that computers and Xerox machines are not entitled to investment allowance. Objection of the assessee is rejected."
Therefore, in conformity with the order of DRP, amount of Rs. 38.61 lacs is added to the income of the assessee. (Addition - Rs. 38.61 lacs) Facts:
13022.3. Under section 32(1)(ii) additional depreciation is available on actual cost of plant and machinery, other than plant and machinery installed in any office premises, acquired and installed by an assessee engaged in the business of manufacture or production of any article or thing after 31st March, 2005.
22.4. During the relevant previous year, the assessee claimed additional depreciation of Rs.38.61 lacs, on computers installed at supervisory offices located in the compound of factory at Gurgaon / Dharuhera, on the ground that such offices formed integral part of the factory.
22.5. The AO disallowed the aforesaid claim of additional depreciation on the ground that supervisory offices located in the compound of factory, where computers, being plant and machinery, were installed, constituted office premises, which were not eligible for additional depreciation under section 32(1)(ii) of the Act Assessee's Submissions:
22.6. Section 32(iia) of the Act was introduced with an intent to give boost to the manufacturing sector and accordingly the said benefit has been extended to assets installed in the manufacturing premises and not in the office premises.
22.7. Supervisory offices located in the compound of factory at Gurgaon / Dharuhera Plant, being dedicated to supervision of manufacturing activity, constituted integral part of factory and cannot be said to be office premises for the purposes of section 32(iia).131
22.8. Reliance, in this regard, is placed on the following decisions wherein it has been held that electrical installations like cables, overhead cables, etc. are part and parcel of plant and machinery itself and are, therefore, entitled to benefit/depreciation/ allowances available to plant and machinery:
CIT v Tajmahal Hotel : 82 ITR 44 (SC) CIT v. Tribeni Tissues Ltd: 206 ITR 92 (Cal) CIT v. Indian Turpentine Ltd. : 75 ITR 533 (All.) CIT v. Jagadees Chandran :75 ITR 697 (Mad.) CIT v. Tea Estate: 207 ITR 311 (Cal) 22.9. In view of the above, computers installed at supervisory/administrative offices within the factory area would be regarded as being installed at factory only and not in any office premises, and hence entitled for additional depreciation under section 32(iia) of the Act.
DR submissions:
22.10. Reliance is placed on the assessment order and order passed by DRP.
Our findings & conclusion:
22.11. The fact is that the computers in question are located in the office of supervisor and administrative building located in the compound of the factory, is not supported by any evidence.The burden of proof is on the assessee and the assessee has failed to discharge the same as pointed out by the assessing officer. The finding of the assessing officer that office premises are located at Gurgaon and Dharuhera plants for administrative, finance and human resources, as pointed out by the Special auditor is not 132 disputed. We do not find merit in the arguments of the assesse that Supervisory offices located in the compound of factory at Gurgaon / Dharuhera Plant, being dedicated to supervision of manufacturing activity, constituted integral part of factory and cannot be said to be office premises for the purposes of section 32(iia). The case laws relied by the assesse are clearly distinguishable on facts.
22.12. In view of the above discussions, this ground of assessee is dismissed.
23.1. Ground no. 18: (Disallowance of deduction u/s 35(1)(iv) in respect of R&D assets):
23.2. The DRP has issued following directions to the Assessing Officer;
"During the relevant previous year, the assessee claimed deduction of Rs. 97,86,496/- under section 35(10)(iv) of the Act in respect of assets acquired and used for the purpose of scientific research and development. In the draft assessment order, out of the aforesaid total deduction, the assessing officer has disallowed deduction of Rs. 71.54 lakhs on the ground that relevant assets were used for testing of raw material received and finished products sold and were not used for R&D purpose.
The counsel have submitted that the aforesaid assets were used for the purpose of testing various materials supplied by the vendors to verify as to whether the material was as per the specification given in the order placed on the vendor for supply of the material, before such material could be used in the manufacturing activity carried on by the assessee company. It has been also contended on behalf of the assessee before the AO that even though the testing equipment was installed at the manufacturing shop floor and not in the R&D facility, it was nevertheless entitled of less deduction u/s 135(1)(4) of the I. T. Act.133
The position thus emerges that the testing equipment purchased by the assess in this assessment year is installed at the manufacturing shop floor and not in research and development facility and is used only for testing the specification given to the vendors for supply of the material to verify that the material supplied is as per the ordered specification. The equipment is not utilized for carrying out any research. Thus, the equipment in question is not entitled for deduction u/s 135(1)(iv) allowed in respect of capital expenditure on research development. "
Therefore, in conformity with the order of DRP, amount of Rs. 71.54 lacs is added to the income of the assessee.
(Addition - Rs. 71.54 lacs) Facts:
23.3. During the relevant previous year, the assessee claimed deduction of Rs. 97,86,496 under section 35(1)(iv) of the Act in respect of assets acquired on the ground that it is used for purposes of scientific research and development.
23.4. The details of aforesaid expenditure, containing description of assets acquired and use of each asset, which was submitted during the course of assessment proceedings, is attached at page no.1611 of the paper book.
23.5. The AO disallowed deduction under section 35(1)(iv) claimed on assets used for R&D purposes, on the ground that relevant assets were used for testing of raw material received and finished products sold and were not used for the purposes of R&D. Assessee's Submissions:134
23.6. During the relevant year, the assessee manufactured vehicles on the basis of technical know-how provided by the foreign collaborator, viz.
Honda.
23.7. The assessee simultaneous to manufacture of two wheelers under the brand, technology and assistance of foreign collaborator also has a mandate of indigenizing various components, which are otherwise imported from outside India, on the basis of drawings and designs of such parts supplied by the foreign collaborator. The assessee gets certain components indigenously developed on sample basis, which are to be approved by the collaborator for indigenous production. For this process, the assessee purchased certain R&D assets to analyze and check, various materials/components procured from vendors (engaged in production of indigenous components as per design and specification provided by the assessee), to confirm, whether the same meet the specification given by the assessee, before giving the go ahead for mass production of such indigenously developed components.
23.8. As stated earlier, the R&D assets were used for the purposes of testing various materials/components supplied by the vendors, for which specification was provided after research was carried out by the assessee and before such material/components could have been used in the main line manufacturing activities carried out by the assessee company. Such testing helps the assessee to find deficiencies and improve the quality of inputs, by taking appropriate measures. Accordingly, the aforesaid testing carried out through use of such assets, was in the course of research and development activity carried out by the assessee.
13523.9. Reference, in this regard, can also be made to the relevant portion of the Director's Report for the relevant year, where the Director's have highlighted the areas of Research and Development carried out by the assessee company and benefits derived therefrom (@Pg. 360, Volume 2).
23.10. The entire process of absorption of foreign collaborator's technology and production of two wheeler, without assistance of foreign collaborator/Honda, results in extension and improvement of knowledge in technology of manufacturing different models of two-wheelers, which falls within the meaning of 'scientific research', defined in section 43(4)(i) of the Act, which includes activity undertaken by an assessee for extension of knowledge in the field of science and includes all expense incurred for prosecution of such research.
23.11. Further, deduction on similar assets purchased in the earlier year(s) has always been accepted and allowed in the completed assessments for such years.
DR's argument:
23.12. The assessee has claimed deduction under section 35(1)(iv) of the Act in respect of assets acquired and used for purposes of scientific research and development.
23.13. It is submitted that, the aforesaid deduction claimed by the assessee is misplaced and not allowable, as the assets in respect of which aforesaid deduction has been claimed are testing/ quality control equipments, used for testing of raw material and finished products. The said assets cannot be said 136 to be used for scientific research purposes to be eligible for deduction under section 35(1)(iv) of the Act 23.14. In view of the aforesaid, as held by the assessing officer and the DRP, the aforesaid deduction has rightly been disallowed to the assessee and, therefore, the ground of appeal raised by the assessee needs to be dismissed.
Assessee's Rejoinder :
23.15. The contention of the Ld. DR that deduction under section 35(1)(iv) of the Act is not available in respect of testing/quality control equipment is incorrect and unsustainable for the following reasons:
23.16. It is submitted that assets used for purposes of scientific research and development cannot be denied deduction under section 35(1)(iv) of the Act, merely on the basis that such assets were used for testing of raw material and finished products.
23.17. The testing undertaken by aforesaid equipments helps the assessee to find deficiencies and improve the quality of inputs, by taking appropriate measures. Accordingly, the testing carried out through use of such assets, was in the course of research and development activity carried out by the assessee and, therefore, the cost of such assets was allowable deduction under section 35(1)(iv) of the Act.
23.18. Even in terms of section 43(4)(i) of the Act, the term "scientific research" means any activity undertaken by an assessee for extension of knowledge in the field of science and includes all expense incurred for prosecution of such research.137
23.19. Therefore, the aforesaid assets used in execution of scientific research, would fall in the meaning of "scientific research" as defined in section 43(4) of the Act.
23.20. The assessee relies on submissions made in chart of issues already submitted before the Hon'ble bench, which are not repeated for the sake of brevity, and, therefore, the ground of appeal raised by the assessee in this regard needs to be allowed Our Findings & conclusioin:
23.21. Section 35(1)(iv) reads as follows:
"35(1) In respect of expenditure on scientific research, the following deductions shall be allowed -
.....
(iv) in respect of any expenditure of a capital nature on scientific research related to the business carried on by the assessee, such deduction as may be admissible under the provisions of sub-section (2)."
23.22. The requirement of the section is that the expenditure should be of a capital nature on scientific research related to the business carried on by the assessee. There is factual dispute between the parties.
23.23. Assessing officer was of the view that the assets in question were used for testing of raw material received and finished products sold. There is a finding that these machineries are located in the shop floor and not in any separate R&D area. The presumption is that these are testing equipments. It is for the assessee to lead evidence that these machineries are used for research. No such evidence is given.
13823.24. The Ld. DR submits that these are quality control equipments and not the equipments used for the purpose of scientific research and development.
23.25. The assessee relies on the definition of scientific research given in sec. 43(4)(i), which is extracted here for ready reference:
"scientific research" means any activities for the extension of knowledge in the fields of natural or applied science including agriculture, animal husbandary or fisheries."
23.26. The assessee also relies upon report of Board of Directors and also to the requirement imposed on it to indigenise various components.
23.27. It cannot be denied that the assessee has to necessarily carry out R&D activities without which it would not be in a position to indigenize various components which are otherwise imported from outside India.
23.28. Even in R&D facilities, equipments if required for testing of raw material and finished products, in principle cannot be denied. Nevertheless evidence has to be filed to identify whether a particular asset is used for the purpose of scientific research and development. As no evidence has been adduced by the assessee, we uphold the order of the assessing officer and dismiss this ground of the assessee.
24. Ground no. 19: (Disallowance of first car insurance premium on the ground of capital in nature relating to acquisition of car):
DRP Directions:
24.1. The DRP has issued following directions to the Assessing Officer;
"During the relevant previous yea, the appellant incurred expenditure of Rs. 11.90 lakhs on account of first insurance 139 premium paid at the time of purchase of vehicles used for purpose of business. In the return of income, the aforesaid expenditure was claimed as revenue deduction. The counsel argued that the expenditure involved in revenue as even the first insurance premium operates only for 12 months and has to be renewed every year.
The objection of the assessee is not acceptable. It is to be observed that it is a settled position that all the expenditure incurred in relation to bringing on asset to use is to be treated as capital expenditure. For example, the expenditure on license fee to establish a factory has been held to be of capital nature by the High Court in 227 ITR 878 and 139 CTR 245.
Assessee's objection is rejected."
Therefore, in conformity with the order of DRP, amount of Rs. 10.27 lacs is added to the income of the assessee. (Addition - Rs. 10.27 lacs) Facts:
24.2. During the relevant previous year, the assessee incurred expenditure of Rs.11.90 lacs on account of first insurance premium paid at the time of purchase of vehicles used for purposes of business, which were claimed as revenue deduction.
24.3. The AO disallowed the aforesaid expenditure on the ground that the same is capital in nature, having been incurred for putting the vehicle to use as per provision of Motor Vehicles Act. The Assessing officer made net disallowance of Rs.10.27 lacs, after allowing depreciation.
Assessee'sSubmissions 24.4. Insurance premium is paid is to cover loss on happening of specified events, for the specified period after the date of purchase, and is to be 140 renewed annually. The same is not in relation to acquisition of car. Thus, premium paid either before/at the time of purchase of car cannot be capitalized as part of the cost of car and is allowable revenue expenditure.
DR's submissions:
24.5. Reliance is placed on the assessment order and order passed by DRP.
Our Findings & conclusion:
24.6. Under the Act, depreciation has to be computed on the actual cost of the assesse.
24.7. The expression "actual cost" has been defined under section 43(1) of the Act to mean the actual cost of the assets to the assesse, reduced by that portion of the cost thereof, if any, as has been met directly or indirectly by any other person or authority.
24.8. In the case of Challapalli Sugars Ltd vs. CIT [1975] 98 ITR 167, the expression "actual cost" came for consideration before the Hon'ble Supreme Court, it was held that all the expenditure necessary to bring assets into existence and to put these assets in working condition was part of actual cost of the assets to the assesse.
24.9. The principal though rendered in the context of section 10(5) of the 1922 Act would equally govern even under the 1961 Act.
24.10. Payment of vehicle insurance premium is mandatory as per the provisions of the Motor Vehicles Act. Practically, the insurance premium is paid by customers before taking the delivery of the car.141
24.11. Applying the above principle, we are of the view that the "actual cost"
of vehicles not only includes its price but also all other expenses like registration fees, first time insurance and other cost incurred to acquire the vehicle. Accordingly, we hold that the first payment of insurance premium is in the nature of capital expenditure .Thus, we dismiss this ground of the asseeee.
25. Ground no. 20 to 20.2: (Disallowance of repair/ maintenance expenses of existing assets as capital expenditure):
Assessing officer's order:-
DRP Directions:
The DRP has issued following directions to the Assessing Officer;
"Disallowance of retail and maintenance of assets by treating the same as capital expenditure. This disallowance is discussed by the AO from page 77 to 79 of the draft assessment order. In all there are five items were disallowed and these are discussed as follows:
1. Payment made towards ground water study, consent fee paid to pollution control board for water and air, and associated travel expenses in relation to existing land Rs. 10,46,052/-
It is seen that the AO in this regard as observed that no supporting evidences have been provided to substantiate as to which a plot of land i.e. whether Gurgaon/Daruhera, Haridwar or Shamalka, this expenditure relates. In view of this the AO was correct in not allowing these expense as genuine expenditure as the assessee has not substantiated the purpose for which the expenses were incurred. From the nature of the payment given above as submitted by the assessee on page 43 of the synopsis of the objection, the expenditure in connection a feasibility study for setting up certain plant. Any expenditure on feasibility study for setting up a new plant is of capital nature. In this regard, reference can be made to the judgement of the Ahmedabad 142 ITAT in the case of Gujarat Alkali Ltd. 82 ITD 135 (Ahd.) and to the judgements of the Gujarat High court 159 ITR 253 (Guj.) and 236 ITR 929 (Guj.) and 196 ITR 237 (Guj.). The expenditure of Rs. 10,46,052/- is there of capital nature and has been rightly disallowed by the AO. The objection of the assessee is therefore rejected.
It is seen that the AO has allowed depreciation on this expenditure. This is an error on the part of the AO. Since in the present year, the expenditure has been merely incurred on a feasibility study and no depreciable assets have been created and brought into use, the assessee is not entitled any depreciation in respect of this expenditure. The AO is accordingly directed to withdraw the depreciation allowed in respect of this expenditure of Rs. 10,46,052/-.
2. Payments made towards maintenance expenses of existing land at Samalka agricultural land Rs. 59,74,781/-.
The objection of the assessee in this regard is not acceptable. Any expenditure on maintenance of agricultural land by the assessee cannot be allowed as a business expenditure as the income from agricultural land is not chargeable to tax. This part of assessee's objection is rejected.
It is seen that the AO has allowed depreciation in respect of this expenditure. As the income from agricultural lands is not chargeable to Income Tax, no depreciation is allowable to the assessee on agricultural land. The AO is accordingly directed to withdraw the depreciation allowed in respect of this expenditure of Rs. 59,74,781/-.
3. Replacement/up-gradation expenses of existing softwares and licenses for software not resulting in any accretion to the capital field Rs. 41,68,196/-
The assessee has filed the details of the expenditure in annexure-IV with its letter dated 24/02/12 submitted during the hearing of the objection, before us. The perusal of the details show that the expenditure is incurred on 38 software licenses for autocad, on implementation charges of mobile excess application for messaging from SAP and on development and implementation of software for barcoding to be used in accounting/recording. From the nature of the expenditure, it is clear that the expenditure is on licensing etc. for day 143 to day use over a period in assessee's business and no capital asset has been brought into existence. The AO is directed not to make the disallowance of Rs. 41,69,196. Since the AO has allowed depreciation on this expenditure, he is directed to withdraw the same.
4. Repair, replacement and maintenance expenses of various existing assets. Rs. 33,54,670/-.
The AO has held this expenditure to be of capital in nature on page 78 of the draft assessment order further reason that the expenditure is on replacement of pipes and for bringing in new transformers against the old one which has increased the life of the asset or the production capacity of the asset. The AO however is not justified in holding this expenditure to be of capital nature. Replacement of existing pipes and replacement of old transformers does not lead to increase in the production capacity of the assessee. The replacement of the pipes and the transformers which are no more service-able, is regular maintenance expenditure in a production facility and is an allowable revenue expenditure. The AO is accordingly directed not to make the disallowance of Rs. 33,54,670/- on this account. Since the Assessing officer has allowed depreciation by capitalizing this expenditure, he is directed to withdraw the depreciation allowed in respect of these expenses.
5. Office maintenances expenses, which was already reversed subsequently during the year and, accordingly, not claimed as deduction. Rs. 8,45,183/-.
The counsel had submitted that this expenditure has been returned back subsequently during the assessment year itself and the expenditure has not been actually claimed. The necessary evidence showing reversal of this expenditure has been enclosed at paper book page no. 1612 in vol. 6 of the paper book. The AO is directed by the panel to verify the reversal entry and if this expenditure has been already reversed and not claimed as submitted by counsel, the AO shall not make the disallowance of Rs. 8,45,183/-. The assessee will render necessary evidence to the AO in the matter of verification of the reversal of this expenditure. Since the AO has already allowed deprecation in respect of this expenditure. If the AO comes to a conclusion as above, that the expenditure has been already reversed and not claimed by the assessee, the depreciation which is already 144 allowed to the assessee in respect of this expenditure shall be withdrawn."
Therefore, as per the findings of the DRP, on paragraphs 21.1 to 21.4, relief to the assessee is given hereunder. Further, as regards expenditure of Rs. 8.45 lacs, same is verifiable and no addition of this amount is being made. Net effect is given below;
Sl. No. Ref. Para Amount Confirmed Deleted
1. Para 22.3 a) Rs. 10,46,052
2. Para 22.3 b) Rs. 59,74,781
3. Para 22.3 c) Rs. 10,72,539
4. Para 22.3 d) Rs. 41,69,196
5. Para 22.3 e) Rs. 33,54,670
6. Para 22.3 f) Rs. 8,45,183
Net Addition Rs. 80,93,372 Rs. 83,69,049
Net addition on this issue will be at Rs. 80.93 lacs resulting in net relief of Rs. 83.70 lacs. This amount of addition also negates the effect of depreciation at Rs. 23.25 lacs originally allowed as per the draft order.
(Addition - Rs. 80.93 lacs) Facts:
25.2. During the relevant previous year, the assesse incurred expenditure of Rs. 70,20,833 on account of certain items which were claimed revenue deduction, the details of which would be given latter.145
25.3. The AO disallowed - (a) Feasibility study of existing land at Neemrana, on the ground that same related to setting-up new plant and, therefore, was capital in nature ; (b) maintenance expenses of existing agricultural land at Samalka, on the ground that the same was not allowable business expenditure, considering that agricultural income is exempt from tax Assessee's Submissions:
25.4. The expenditure on account of ground water study was incurred in connection with feasibility study for putting up plant on existing land at Neemrana. No new plant came into existence as a result of the aforesaid expenditure, as the idea to put up the plant was shelved at that time. The Delhi High Court in the case of Indo Rama Synthetics Ltd.: 333 ITR 18 has held that expenditure incurred on feasibility studies in connection with setting up of a new unit in existing line of business would constitute revenue expenditure, if the project is abandoned, since no asset comes into being.
25.5. Without Prejudice to the above, in any case, since the new plant to be set-up was to be engaged in the existing business of manufacture of vehicles, under the control and supervision of existing management as also by deployment of funds generated from the existing business, the same was for extension of existing business. Further, since no new asset/profit earning apparatus, came into being, to regard the same as capital expenditure, the expenditure was allowable revenue deduction.
25.6. As regards, the agricultural land at Samalka, the assessee was not carrying on agricultural operation at that land. The said land was purchased in order to construct factory plant thereon as soon as permission to construct 146 factory on such land was accorded to the assessee. The said land being acquired for the purpose of business, maintenance expenditure incurred thereon is allowable business deduction.
DR's arguments 25.7. Reliance is placed on the assessment order and order passed by DRP.
Our findings & conclusion:
25.8. The expenditure in question is two fold- one incurred in connection with the feasibility study for putting up plant on existing land at Neemrana and the other is the expenditure on agricultural land which was purchased for construction of a factory plant at some future date.
25.9. We shall consider the case laws relied upon by both the parties.
25.10. In the case of Jay Engineering Works Vs. CIT 311 ITR 405, the Hon'ble Jurisdictional High Court was considering the expenditure in the nature of testing charges, interest/ commitment charges, bank commission, L.C. Opening, salary/perquisites/motor car upkeep, foreign traveling, consultancy fees etc. The Hon'ble High court in paras 14, 15 and 16 held as follows:
"14. On an appreciation of the law laid down by the various decisions referred to above, it is clear that the nature of the new business is not a decisive test for determining whether or not there is an expansion of an existing business. The nature of the business could be as distinct as a jewellery business and a business of cinematographic films; it could be as different as manufacture of metal alloys and manufacture of rubber products,. What is of importance is that the control of both the ventures, the existing venture as well as the new venture, must 147 be in the hands of one establishment or management or administration. The place of business of the existing business and the new business may not be in close proximity - It could be as far apart as Baroda and Bangalore. However, the funds utilized for the management of both the concerns must be common as reflected in the balance-sheet of the company.
15. In other words, there may be several permutations and combinations that may arise for determining whether the expenditure is revenue or capital and each case must, of course, be dealt with on the broad principles that have been accepted by the courts as are mentioned above.
16. Applying these principles to the present case, it is quite clear to us that the control over the two units is in the hands of the same management and administration. There is no doubt on this score and in fact, the annual report of the assessee, which has been shown to us by learned counsel, makes a reference to the project at Hyderabad. There can be no dispute from the facts that have been placed before us on record that the new venture was managed from common funds and there is the necessary unity of control leading to an interconnection, interdependence and interlacing of the two ventures such that it can be said that the fuel injection equipment project is only an extension of the existing business of the assessee and, therefore, the expenditure incurred by the assessee on this project is a revenue expenditure."
25.11. In the case of CIT Vs. Relaxo Footwears Ltd. (2007) 293 ITR 231 (Del), the Jurisdictional High Court was considering a case wherein the assessee had claimed pre-operative expenses of Rs. 41,24,481/-, being the expenses incurred on a new factory . In para 6, the Hon'ble High Court applying the test of unity of control and interlacing of the un its, upheld the order of the Tribunal, holding that expenses incurred by the assessee for the setting up of a new unit, was a part of the existing business, allowable as a revenue expenditure.
14825.12. Ld. DR relied upon the decision of Hon'ble Bombay High Court in the case of CIT Vs. Great Eastern Shipping Co. Ltd. (1979) 118 ITR 772 (Bom.). The Hon'ble Court in that case was considering the issue as to what was actual cost for the purpose of computing depreciation allowable. The proposition laid down is that all expenditure incurred directly or indirectly or intimately on the capital assets acquired by the assessee can be included in the term "capital cost" of the asset. It held that term "actual cost" does not mean only the cost paid to the vendors for the asset.
25.13. In the case on hand, disallowance of claim was made as the assessee had failed to give any evidence to the assessing officer as to which land was this expenditure incurred. Hence we confirm the disallowance of Rs. 10,46,052 for the reason that the assessee has not discharged the burden of proof. Further, we confirm disallowance towards the claim of Rs. 59,74,781 as the expenditure is incurred on agricultural land, and the AO and the DRP rightly disallowed the same on the ground that income from agriculture is not taxable. Further, Rs. 10,72,539/- is confirmed due to admission of the assessee before assessing officer. This ground of appeal is dismissed.
26. Ground no. 21: (Disallowance of expenditure incurred in connection with expansion of business at Hardwar):-
DRP Directions:
26.1. The DRP has issued following directions to the Assessing Officer;
"The assessee company had been carrying on business of manufacturing motorcycles at its manufacturing facilities located at Gurgaon and Dharuhera. During the relevant previous year, the 149 company, in order to expand the manufacturing facilities, was in the process of establishing new manufacturing facility at Haridwar. The capital assets acquired in relation to aforesaid new manufacturing facility as also direct and indirect expenses incurred in relation to acquisition/installation of such assets were capitalized in the books of accounts of the assessee company. General overhead and administrative expenses, which were not relatable, either directly or indirectly, in connection with the acquisition of any fixed assets or setting up of the plant at Haridwar, aggregating to Rs. 1.87 crores, were debited to the profit and loss account and claimed as revenue deduction.
The counsels have argued that the new plant being set up at Haridwar was only an extension of the existing business and thus constituted part of the existing business as such allowable as revenue expenditure. The assessee's objection is not accepted. Perusal of the details of the expenditure on page 1614 and 1615 from vo. 7 of the paper book shows that an expenditure 9210549/0 is incurred on foundation stone laying ceremony at Haridwar plant. In its judgement reported in 118 ITR 772 (Bom.), the Bombay High Court has held that the opening ceremony expenses for launching of the ship is the part of the expenditure on ship building and is therefore capital in nature. The further expenses include expenses on topographical survey of land for plant. Expenditure on consultation for the plant, expenditure for providing services to the plant, expenditure on developing strategies for the plant, professional fee for the plant etc. This expenditure is on acquiring a new capital asset in the shape of manufacturing plant at Haridwar. Moreover, this expenditure is of the nature of preoperative expenses which was necessary before the capital asset in the shape of plant at Haridwar could be brought into use.
The assessee's objection is accordingly rejected."
Therefore, in conformity with the order of DRP, amount of Rs. 187.72 lacs is added to the income of the assessee.(Addition - Rs. 187.72 lacs) Facts:
15026.2. During the year, the assessee was in the process of setting-up new plant at Haridwar; Direct expenses in relation to acquisition of assets, were capitalized and indirect expenses, aggregating to Rs. 1.87 crores, were claimed as revenue expenditure.
26.3. The Assessing officer disallowed the aforesaid expenditure on the ground that, since the same were incurred in relation to setting-up new plant, the same are capital expenditure Assessee's Submissions:
26.4. The aforesaid aggregate expenditure of Rs.1.87 crores was in the nature of administrative and general overhead expenses like conveyance, staff welfare, legal and professional charges, puja etc., incurred in connection with the plant proposed to be set up at Hardwar but were not directly or indirectly related to acquisition of any fixed assets or setting up of that plant.
26.5. It would be noted that the total expenditure of Rs.1.87 crores included expenditure of Rs.92.10 lacs incurred on puja ceremony, organized at the time of laying of foundation stone at Hardwar.
26.6. The assessee had already capitalized direct and indirect expenditure relatable to acquisition of fixed assets at Hardwar plant amounting to Rs.83.50 lacs.
26.7. The impugned indirect expenditure did not result in acquisition of any fixed assets/capital asset at the Hardwar plant and was, therefore, not capital in nature.151
26.8. The said expenditure being incurred for expansion of existing business, would be allowable revenue expenditure in entirety.
26.9. Reliance, in this regard, is placed on the following decisions, wherein it has been held that revenue expenditure incurred in connection with expansion/extension of business, involving setting up of new unit, which satisfies the test of unity of control, interlacing of funds, common management, etc. would be allowable revenue deduction:
CIT v. Relaxo Footwears Ltd: 293 ITR 231 (Del.) Jay Engineering Works Ltd. v. CIT: 311 ITR 405 (Del.) CIT v. Havells India Ltd.: 253 CTR 271 (Del.) DR's submissions:
26.10. The assessee, during the relevant previous year, was in the process of setting up a new plant at Hardwar and indirect expenses incurred in relation thereto were claimed as revenue expenditure.
26.11. In this regard, as held by the assessing officer, the aforesaid indirect expenses, being incurred in relation to setting up of new plant were capital expenditure.
26.12. Further, the said expenses include expenditure incurred in relation to puja ceremony organized at the time of laying of foundation stone at Hardwar 26.13. Reference in this regard is made to the decision of the Bombay High Court in the case of CIT vs Great Eastern Shipping Co. Ltd.: 118 ITR 772, wherein the Court had held that all direct and indirect expenses, 152 including ceremonial expenses, incurred in relation to capital assets, are capital in nature.
26.14. In view of the aforesaid, the appeal of the assessee in relation to aforesaid issue needs to be rejected.
Assessee's Rejoinder:
26.15. The decision of the Bombay High Court in the case of CIT vs Great Eastern Shipping Co. Ltd.: 118 ITR 772, relied upon by the Ld. DR is not applicable to the facts of the assessee's case and has been wrongly relied upon.
26.16. In the said case, the assessee had incurred expenditure, including ceremonial expenses, on purchase and installation of new assets. In that case, the issue for consideration in Revenue's appeal before the High Court was whether such expenses could be capitalized as part of cost of assets for the purposes of allowing depreciation to the assessee under section 32 of the Act or not. The Court, while following the decision of the Supreme Court in the case of Challapalli Sugars Ltd. 77 ITR 392, decided the issue in favour of assessee and held that expenditure incurred in connection with installation of assets was to be capitalized as part of cost of the assets. The issue, whether the aforesaid expenses were indirect in nature and were incurred in connection with the extension of existing business of the assessee, was not for consideration before the Court and was not even raised by the assessee.
26.17. In that view of the matter, the aforesaid decision is distinguishable from the facts of the assessee's case and has been wrongly relied upon by the Ld. DR.153
26.18. The decisions relied upon by the assessee support its claim and are squarely applicable to the present case and, therefore, the contentions of the Ld. DR need to be rejected and the ground of appeal of the assessee calls for being allowed Our findings & conclusion:
26.19. The case laws on this issue are discussed while disposing off ground no. 20. The issue is covered by the judgments of the jurisdictional High Court in the case of JAY Engineering Works (supra) and Relax O Footware Ltd. (supra) relied by the assesse and is in favour of the assessee. Thus, we respectfully follow the same and allow this ground of the assessee.
27. Ground no. 22 : This is a general ground taken by assessee challenging disallowance made u/s 40(a)(ia) of various expenditure on the ground that tax was not deducted at source as required by law. This ground has as many as twenty sub grounds. We would deal with them in seriatim.
27.1. Common arguments for all grounds taken by assessee in respect of 40(a)(ia) are:- No disallowance under section 40(a)(ia), if TDS was nto made based on bonafide belief that no TDS need be made. Without prejudice, since the recipients have paid tax, no disallowance under section 40(a)(ia) can be made in the hands of assessee. Further, without prejudice, disallowance to be restricted to outstanding liability only. Reliance is placed on arguments taken in GOA 9 (supra).
27.2. On these general arguments, we hold that the issue of bona fide belief is an issue of fact and cannot be generally applied. Coming to the argument 154 that the recipient have paid the tax, it is for the assessee to lead evidence. Wherein no evidence led, the argument of the assessee fails.
28. Ground no. 22.1 (payment of passenger tax to Government on behalf of transporters):
DRP Directions:
28.1. The DRP has issued following directions to the Assessing Officer;
"The assessee avails transport facilities from various vendors for transportation of employees to the factories/office premises to specific pick up/drop points. The transporters were liable for payment of passenger tax to the Government. During the relevant previous year, the assessee paid passenger tax of Rs 36,02,885/- to the Government directly on behalf of the transporters, pursuant to Notification issued by the Government specifying that such passenger tax should be paid by the customers on behalf of transporters directly to the Government. The aforesaid payments were made by the assessee directly to the government on behalf of the transporters without any deduction of tax at source.
In the draft assessment order, the AO has made disallowance under section 40(a)(ia) for alleged failure to deduct tax at source under section 194C, the disallowance deserves to be deleted for the following reasons:
The counsel submitted that u/s 194C a person is liable to deduct tax at source on income price in the amount payable to contractors and therefore, the element of passenger tax payable to government by the transporter did not constitute the income of the transporters and as such the assessee was not liable to deduct TDs from the same. The objection of the assessee is not acceptable. What the assessee is required to pay to the transporters for the services rendered by the transporters is the lump-sum transport charges. It is the responsibility of the transporters to discharge his duty of incurring various expenditure like expenditure on petrol, expenditure on salary of the driver, road tax for the vehicle insurance for the vehicle and 155 passenger tax etc. If the argument of the counsel was to be accepted, then the assessee would be required to deduct TDS only from the net profit of the assessee as all the expenditure including the passenger tax payable by the transporters would not constitute any element of income in the hands of the transporters. This will amount to complete negation of the legal provision of section 194C of the Income Tax Act. Section 194C requires an assessee to deduct TDS on the gross amount of the payments to the transporters. It is irrelevant that the part of this payment is paid by the assessee on behalf of the transporter to some other agency. Objection of the assessee is rejected."
Therefore, in conformity with the order of DRP, amount of Rs. 36.03 lacs is added to the income of the assessee. (Addition - Rs. 36.03 lacs) Facts:
28.2. The assessee avails transport facilities for pick-up/drop of employees to factories/office premises. Transporters are liable to pay passenger tax on the revenue collected from customers. The Government issued Notification directing the customers to pay passenger tax directly to Government on behalf of transporters. Accordingly, during the relevant year, the assessee paid passenger tax of Rs.36,02,885 to the Government directly on behalf of the transporters.
28.3. The AO held that the assessee failed to deduct tax at source under section 194C from passenger tax, in relation to a transport contract and consequently made disallowance under section 40(a)(ia) of the Act.
Assessee'e Submissions:
28.4. Under section 194C of the Act a person is liable to deduct tax at source at specified rate on income comprised in amount payable to a 156 contractor. Thus liability to deduct tax at source arises only if the payment includes any element of income.
28.5. The passenger tax levied by Government on the transporters, which is deposited directly with the Government, is not income of the contractor/transporter and considering that, in the present case, the aforesaid payment of tax was made directly to Government on behalf of the transporter, the same was not liable to TDS under the provisions of section 194C of the Act.
28.6. Reference can be made to Circular No.4 of 2008 dated 28.04.2008 issued by CBDT, stating that a lessee is not obliged to deduct tax at source from the amount of service tax paid to the landlord, as the same does not constitute income of the landlord.
DR's Arguments 28.7. Reliance is placed on the assessment order and order passed by DRP.
Our findings & conclusion:
28.8. The assessee in this case has paid passenger tax to the government on behalf of the transporters who provide facility for pick-up/drop of the employees to factories/ office premises. This is done in pursuance to government notification. Prior to such notification, the assessee was deducting tax on bran amount inclusive of the cost of tax and the transporter was paying the tax in question. Now as stated, the assessee under the amended State law is required to pay the tax directly to the government on behalf of the transporters. The assessing officer disallowed the same on the ground that no tax has been deducted at source on this amount. The 157 undisputed fact is that there is no element of income in this particular transaction. The passenger tax is levied by the government on the transporters, which is to be paid directly by the assessee. Under these circumstances, in our considered opinion, no tax is to be deductable at source by applying the judgment of the Hon'ble Supreme Court in the case of GE India Technology Cen.(P) Ltd vs. CIT [2010] 327 ITR 456 wherein in the context of composite payments, the Hon'ble Supreme Court held that the obligation to deduct tax is limited to the appropriate proportion of the income chargeable under the Act.
28.9. Futher, the CBDT Circular no. 4 of 2008 dated 28-4-2008, on a similar analogy, states that no TDS need to be made from the amount of service tax paid to the landlord as the same does not constitute income of the landlord. The same analogy applies to the case on hand. Hence, we uphold the contentions of the assessee and allow this ground of appeal.
29. Ground nos. 22.2 & 22.2.1:- (Reimbursement of free service coupons to dealer for repair of vehicle):
29.1. As per the following para Assessing Officer in the draft assessment order proposed addition of Rs. 6,827.06 lacs under section 40(a)(ia) on account of default to make TDS on reimbursement of free service coupons. Part of the DRP order is as under;
DRP Directions:
29.2. The DRP has issued following directions to the Assessing Officer;
"Reimbursement of free service coupons to dealers for repair of vehicle. In the course of business of manufacture and sale of 158 motorcycles the assessee issues free service coupons to customers for service/repair of vehicles so The free services for aforesaid vehicle is carried out by dealers for which reimbursement of expenses incurred by dealer is made by the assessee on presentation of free service coupons handed over by the customers to the dealer. In the draft assessment order, the assessing officer has made disallowance of such expenditure, aggregating to Rs. 68.27 crores under section 40(a)(ia) for alleged failure to deduct tax at source under section 194J.
The main thrust of the argument of the counsel in this regard was that the assessee was only reimbursing the expenditure incurred by the dealers for the free services provided by them to assessee's customers and further that the dealers was not rendering in technical services and the provisions of section 194J are not applicable to the facts. The objection of the assessee is not acceptable. In the scheme of the assessee's business model the assessee provided a certain model to the customer and for this purpose, the responsibility of rendering the free services is entrusted to it's dealers all over the country. The customer can chose to go to any of these dealers for getting these free services. The assessee is providing training to the technical persons appointed by the authorized dealers on how to carry out the services. Thus, it is clear that a responsibility is cast on the assessee to provide these free services to the customers at its own cost. For this purpose the assessee has in turn entered into agreement to its authorize dealers to carry out the actual services and for which the assessee makes payment to the dealers. The payment made by the assessee to its dealer is an contractual payment for obtaining technical services from the dealers for servicing the two wheelers. The service of the two wheelers is a technical service. It involves the persons what are doing the service of the vehicles have to be technical expert in the field of auto industry that is the working with the two wheeler. It is also a fact that assessee is proving technical training to the technicians of the dealer who actually carry out the services. Thus it cannot be denied that the services rendered by the dealer are technical services. There is no contract for rendering free services between the dealer and the customers. The contract for providing free service is between the assessee and the customers and the further contract for carrying these services are between the assessee and the dealer for which the assessee makes payment to the dealers. The nomenclature used that it is the reimbursement of the expenditure of the dealer is wrong and 159 also irrelevant. The fact is that the assessee is making to the dealer for getting services and u/s 194J of the Income Tax Act. It is obliged to deduct tax from the payment. Assessee's objection is rejected."
Therefore, in conformity with the order of DRP, amount of Rs. 6,827.06 lacs is added to the income of the assessee.
(Amount disallowed - Rs. 6,827.06 lacs) Facts:
29.3. The assessee issues free service coupons to customers for service/repair of vehicles alongwith the vehicles sold. Free service is carried out by dealers for which reimbursement is made by assessee to dealers on presentation of free service coupons handed over by the customers to dealers.
29.4. The AO held that dealers rendered technical service of repairing the vehicle to assessee and, therefore, the assessee was liable to deduct tax therefrom under section 194J. Accordingly, the AO made disallowance of Rs. 68.27 crores, under section 40(a)(ia) of the Act.
Assessee's Submissions:
29.5. The agreement entered into between the assessee and dealers is on a principal to principal basis, in other words, the dealers do not act as agent of assessee.
29.6. The dealers purchase products from the company on principal to principal basis, ownership for which passes on to the dealers and the same is subsequently sold by the dealers at profit in the market.160
29.7. It has been specifically provided that the dealers shall not have any right or authority to, and shall not incur any debt or liabilities or transact any business whatsoever in the name of or for and on behalf of the company nor give any warranty nor make any representation, on behalf of the company and in no way describe or represent themselves as the agent of the company.
29.8. It is the obligation of the dealer to handle the business of dealership at its own expense as also to efficiently and promptly service the vehicles of the customers.
29.9 The products sold by the company to the dealers and further sale by the dealers to the customers are with free service coupons i.e. the sale price of the vehicles has embedded therein free service obligation.
29.10. On sale of vehicle by the dealer to the customer, it is the obligation of the dealer to service products sold to the customer, on customer bringing the vehicle to the dealer for free service. The payment in lieu of service provided by the dealers is made by the customers in the form of free service coupons received at the time of purchase of vehicles. The company honours such free service coupons when the same are presented by the dealers to the company, in terms of the reciprocal obligation of the company towards the dealers, incurred by the company at the time of sale of products to the dealers.
29.11. The liability to deduct tax, if any, in law is on the service recipient viz., the customer and cannot be shifted on to the company merely because payment is made by the customer not in cash but by way of prepaid coupon, the liability whereunder is discharged by the company.161
29.12. The aforesaid transaction can be equated with transaction entered through a credit card where the physical payment of cash to the vendor is paid by the credit card issuing company to the vendor for and on behalf of the customer/service recipient, who in law may be liable to deduct tax at source from amount payable to the vendor and not the credit card issuing company making the actual payment, which in the present case can be equated with the assessee company.
29.13. In view of the above, there is no failure on the part of the assessee in not deducting tax at source from the reimbursement of expenses to the dealers on account of free service and therefore no portion of the impugned expenditure can be disallowed under section 40(a)(ia) of the Act.
29.14. That apart and without prejudice to the above, even otherwise the assessee cannot be said to have defaulted in not deducting tax at source under section 194J, since the repair/maintenance services provided by the dealer to the customers was not in the nature of "technical service", as defined in section 9(1)(vii) read with section 194J of the Act. Reliance, in this regard, is placed on the following decisions:
- Lufthansa Cargo India Pvt. Ltd. DCIT: 91 ITD 133 (Del.)
- Kandla Port Trust v. DCIT: ITA No. 771/Rjt./2010 (Rajkot)(ITAT)
- Addl. DIT v. BHEL-GE-Gas Turbine Servicing (P)Ltd.: ITA No.976 to 981 /Hyd/2011 (Hyd.)(ITAT) (@Pgs. 1133-1147 of Case Laws PB- III) 29.15. Without prejudice, since the outstanding liability against the aforesaid expenditure at the end of year amounted to Rs. 8.31 crores only, the 162 disallowance under section 40(a)(ia) could not have exceeded the said amount;
DR's Submissions 29.16. The assessee issues free service coupons to customers for service/ repair of vehicles along with the vehicles sold. Free service is carried out by dealers, for which payment is made by the assessee to dealers. Accordingly, the assessee had made payment for technical service of repairing vehicle of customers, obtained from dealers, which is subject to TDS under section 194J of the Act. Since, the aforesaid payment received by the dealer from the assessee involved income, in the form of labour charges, the same was subject to deduction of tax at source by the assessee. The payer as well as payee are both identified. Reliance is placed on DRP directions and AO's order.
29.17. In view of the assessee's failure to deduct tax at source therefrom under section 194J, the assessing officer had rightly disallowed the impugned expenditure under section 40(a)(ia) of the Act, which needs to be upheld and the ground of appeal raised by the assessee calls for being dismissed.
Assessee's Rejoinder:
29.18. The assessee issues free service coupons to customers for service/repair of two wheelers at the time of sale. Free service is carried out by dealers for which reimbursement is made by assessee to dealers on presentation of free service coupons handed over by the customers to dealers.163
29.19. The contention of the DR that assessee was liable for deduction of TDS under section 194J on reimbursement made by the assessee is not correct and unsustainable for the following reasons:
29.20. The agreement entered into between the assessee and dealers is on a principal to principal basis; in other words, the dealers do not act as agent of assessee.
29.21. It is the obligation of the dealer to handle the business of dealership at its own expense. The products sold by the company to the dealers and further sale by the dealers to the customers has condition of free service coupons, i.e., the sale price of the vehicles has embedded therein the free service obligation 29.22. The liability to deduct tax, if any, in law is technically on the recipient of services i.e. the customer and cannot be shifted on to the assessee merely because no cash payment is made but by way of prepaid coupon.
29.23. As stated earlier, in the present case, the responsibility for making payment or not to dealer for repair/ maintenance services provided by it was on the customer and not the assessee. The customers make the payment for aforesaid service in the form of service coupon provided by earlier completed sale contract; which is honored by the assessee company. The same in terms of the reciprocal arrangement of the assessee towards the dealers, made at the time of sale of products to the dealers. Thus after the sale contract is completed on delivery to dealer, assessee's obligation ends.
29.24. The aforesaid transaction can be equated with transaction entered through a credit card where the physical payment of cash to the vendor is 164 paid by the credit card issuing company to the vendor for and on behalf of the customer/service recipient, who in law may be liable to deduct tax at source from amount payable to the vendor and not the credit issuing company making the actual payment, which in the present case can be equated with the assessee.
29.25. In view of the above, there is neither liability nor failure on the part of the assessee in not deducting tax at source from the reimbursement to dealers on account of free service coupons presented by customers and therefore no portion of the said expenditure can be disallowed under section 40(a)(ia) of the Act.
29.26. As regards the contention of the Ld. DR, that the impugned payment cannot be deemed to be pure re-imbursement as the same involved an element of income to the dealers on account of labour charges, it is submitted, that there is no quarrel to the proposition that impugned payment on account of re-imbursement of free service coupon may constitute income of the dealers. It is not the argument of the assessee that since the impugned payment is pure re-imbursement of expenses of the dealers, the same does not constitute income of the dealers and, therefore, the assessee is not liable to deduct tax at source. The Ld. DR has not appreciated the contention of the assessee properly.
29.27. It is thus pleaded that the person responsible for making the payment by coupon or cash if it is not presented towards service of vehicles to the dealers is the service recipient i.e. customer and not the assessee; it merely honors the payment to be made by the customer through re-imbursement of 165 valid free service coupon. No service has been obtained by the assessee which obligates it to withhold tax under the provisions of the Act.
29.28. That apart and without prejudice to the above, even otherwise the assessee cannot be said to have defaulted in not deducting tax at source under section 194J, since the repair/maintenance services provided by the dealer to the customers was not in the nature of "technical service", as defined in section 9(1)(vii) read with section 194J of the Act.
29.30. Reliance is placed on the decision of the Delhi bench of the Tribunal in the case of Lufthansa Cargo India Pvt. Ltd. DCIT: 91 ITD 133, wherein it has been held that payment made towards maintenance/repair services do not fall within the meaning of 'fees for technical services' as defined in Explanation 2 to section 9(1)(vii) of the Act.
29.31.This view is further supported by the following decisions:
• Kandla Port Trust v. DCIT: ITA No. 771/Rjt./2010 (Rajkot)(ITAT) • Addl. DIT v. BHEL-GE-Gas Turbine Servicing (P)Ltd.: ITA No.976 to 981 /Hyd/2011 (Hyd.)(ITAT) 29.32. The assessee relies on submissions made in chart of issues already submitted before us, which are not repeated for the sake of brevity Our findings & conclusion:
29.33. When the assessee sells vehicles to its dealers for the ascertained price, the cost of free service obligation on the part of the assessee is embedded in the concluded sale contract and sale price of the vehicle. The dealer, in turn, makes onward sales to the customers at a price which 166 includes free service obligations. The contract between dealer and customer is independent and separate contract. The customer in terms of the sale contract with the dealer approaches the dealer for these free services. It is the customer who avails the service for the cost paid by him as part of the sale price of the vehicle he purchases from dealer during the warranty period. It is the dealer who renders the service to the customer pursuant to independent contract. The fact that the customer can approach any dealer for obtaining free service does not alter the position as it is a case of convenience and mutual arrangement drawn by the company. The reimbursement is not for services rendered by the dealer to the customer but in discharge of the warranty obligation included in the sale price. It is in term of a independent contract of sale which stipulates that the assessee should reimburse the cost incurred by the dealer if and when it performs free services to the ultimate customer. On this factual matrix, it would be wrong to hold that the dealer has rendered technical services as contemplated u/s 194J to the assessee for which the assessee paid a particular amount to the dealer and non-deduction of tax at source on such payments attracts disallowance u/s 40(a)(ia).
29.34. The assessing officer relied on Section 194J which reads as follows:
[Fees for professional or technical services 194J(1) Any person, not being an individual or a Hindu undivided family, who is responsible for paying to a resident any sum by way of-
(a) fees for professional services, or
(b) fees for technical services, or (ba) any remuneration or fees or commission by whatever name called, other than those on which tax is deductible under section 192 to a director of a company, or 167
(c) royalty, or
(d) any sum referred to in clause (va) of section 28.
Shall, at the time of credit of such sum to the account of the payee or at the time of payment thereof in cash or by issue of a cheque or draft or by any other mode, whichever is earlier, deduct an amount equal to ten percent of such sum as income tax on income comprised therein."
29.35. Clause (ba) was inserted by the Finance Act, 2012 w.e.f. 1-7-2012. Prior to such insertion what is covered in this clause is fees for professional service or fees for technical services or royalty or any sum referred to in clause (va) of section 28.
29.36. In our view, the payment in question does not fall in any of the above conditions. The term "professional service" is defined in Explanation (a) to mean services rendered by a person in the course of carrying on legal, medical, engineering or architectural profession or the profession of accountancy or technical consultancy or interior decoration or advertising or such other profession as is notified by the Board. The term "Technical Services" is defined in Explanation (b).
29.37. In Explanation (b), "fees for technical services" has been defined as having the same meaning as in Explanation 2 to clause (vii) of sub-section (1) of Section9, which reads as follows:
"Explanation 2 - For the purposes of this clause, "fees for technical services" means any consideration (including any lump sum consideration ) for the rendering of any managerial, technical or consultancy services (including the provision of services of technical or other personnel) but does not include consideration for any construction, assembly, mining or like project undertaken by the recipient or consideration which 168 would be income of the recipient chargeable under the head "salaries".
29.38. A plain reading of Explanation 2 shows that the payment should be for rendering of managerial, technical or consultancy services. We now examine the views taken by the ITAT on this issue.
29.39. In the case of Lufthansa Cargo India P.Ltd. vs. DCIT (2004), 91 ITD 133 : the ITAT Delhi "B" Bench held as follows.
"The technik contract was primarily for carrying out routine maintenance of components, the use of material being incidental to the execution of work. Technik carried out these activites in the normal course of its business at its facilities in Germany without any involvement of the assessee. Therefore, there was absence of human element as there was no interaction between the technicians of Technik and the assessee's personne. That was further supported by the fact that the components were sent for repairs along with air way bills and were redelivered in the same manner and the invoices were raised by Technik with reference to specific job works and supply of parts, etc. The payments by the assessee were clearly business receipts in the hands of Technik (para 30) Clarification given in question no.29 of the CBDT Circular no.715, dated 8.8.1995 deals not only with section 194C, but also section 194J. Section 194J clearly includes within its ambit the fees for technical services as defined in Explanation 2 to section 9(1)(vii(b). The said circular excludes routine maintenance repairs from the scope of section 194J which deals with TDS on 'fees for technical services'. Section 9(1)(vii) and section 194J, rely on the definition given in Explanation 2 to section 9(1)(vii). Therefore, the clarification issued by the Board in the context of section 194J with respect to normal maintenance repairs would be relevant for understanding the import of the said Explanation in the context of section 9(1)(vii)(b). (Para 35)."169
29.40. In the case of Kandla Port Trust vs.Dy.CIT(2011) 16 Taxman.com 273 (Rajkot-Trib.)the ITAT Rajkot Bench held as under:
"From the meaning of 'fees for technical services', as provided in Explanation (2) of section 9(1)(vii), it is apparent that fee for technical services includes payment of consideration for rendering of following services:
(a) Managerial
(b) Technical
(c) Provision of services of technical or other personnel (Para 15) 'Fee for technical services' does not include following consideration:
(i) Construction
(ii) Assembly
(iii) Mining or like project.
From a perusal of annual maintenance contract it is noticed that the AM contractor shall carry out all repairs as per detailed description in the agreements. From those agreements, it was found that those contracts were not in respect of managerial or technical or consultancy services. Thus, it is clear that those agreements were related to annual maintenance of machineries and not for technical services. The revenue in view of the fact that the contractors have utilized services of technical persons presumed that the assessee made payments for technical services which cannot be agreed. It may be technical services for contractor but not for the assessee. The case of the assessee is simply a case of annual maintenance of machineries for which section 194J is applicable.
The ITAT Hyderabad "A" Bench in the case of ADIT vs. BHEL-GE- Gas Turbine Servicing P.Ltd. (2012) 53 SOT 460/24 taxmann.com 25 (Hyd.Trib.) held as under:
"16. The above activities involve assembly, disassembly, inspection, reporting and evaluation. CIT(A) examined every activity enlisted above and came to the conclusion on that none of the above works involve services of technical nature. The discussion given by the CIT(A) in para 5.4.2 is relevant. We agree with the same considering the settled legal position that routine maintenance repairs are not FTS as held by the Delhi Bench of the Tribunal in the case of Lufthansa Cargo India (P) Ltd. (supra). For the purpose of completeness of this order, we reproduce below the relevant paragraph of the said decision in the context of the questions raised in the said decision -170
"In conclusion, Technik carried out the repair work in the normal course of its business in Germany, without any involvement or participation of the assessee's personnel. The overhaul repairs involved were routine maintenance repairs. It cannot therefore be said that Technik rendered any managerial, technical or consultancy service to the assessee. In this view of the matter, we hold that the payments made by the assessee to non residents workshops outside India do not constitute payment of fees for managerial, consultancy of technical services as defined in Explanation 2 to section 9(1)(vii). The assessee succeeds on this ground."
Regarding the decision of the Hyderabad in the case of Mannesmann Demag Lauchhammer (supra) which involves deputing of technicians to India for supervision of repairs to be carried out at the plant and machinery purchased by the NMDC, we find that the said decision is distinguishable on facts. Such deputation, whether deputation or supervision, is absent in both instant cases as well as the case before it, as observed by the Delhi Bench of the Tribunal in the cited case. The relevant para of the order of the Tribunal in that case reads as follows:
"We find that in Demag's case, the foreign company rendered 'technical consultancy' by way deputing a technician to India for supervising repairs to be carred out on the plant and machinery purchased by National Mineral Development Corporation. It is not the repair work per se which has been held to be technical services but it is the provision of the consultant technician deputed to India for supervising the repairs which has been treated as consultancy services. The foreign technician stayed on in India for 44 days to advise and supervise repair work which was obviously carried out by the engineers and workers of the Indian company. Thus, the nature of services rendered by the foreign company was consultancy of technical nature through the provision of its technician deputed to India. Our conclusion is supported by the decision of Andhra Pradesh High Court in the same case reported in 238 ITR 861, wherein Hon'ble High Court affirming the aforesaid decision of the Tribunal held that the Explanation 2 has expanded the scope of section 9(1)(vii)(b) by providing that the services of technical or other personnel would be taxable. It has been repeatedly stated by the assessee that no foreign technician was ever deputed of India. The lower authorities and the DR have not pointed out any instance of a 171 technician having been assigned of India. This decision therefore is of no assistance to the Revenue."
Thus, the above decisions of the Tribunal are relevant for the proposition that the routine repairs do not constitute 'FTS' as they are merely repair works and not technical services. Technical repairs are different from 'technical services'. Thus, the payments made for 'technical services' alone attract the provisions of s.9(1)(vii) and its Explanation 2. Further, it is also a settled issue at the level of the Tribunal that every consideration made for rendering of services do not constitute income within the meaning of S.9(1)(vii) of the Act and for considering the same, first of all the said consideration is for the FTS. Therefore, considering the above, decision of Delhi Bench of the Tribunal, which explained the scope of the provisions, we are of the view that the impugned orders of the CIT(A), for the years under consideration, on this aspect of the matter, do not call for interference. Accordingly, the grounds raised in these appeals of the revenue are dismissed."
29.41. In the case on hand, the obligation incurred by the assessee at the time of sale to pay the cost of free services and is not payment made in consideration for the rendering of any managerial, technical or consultancy services as defined for the purpose of S.194J. Routine repairs which includes supply of spares does not attract Sec. 9(1)(vii) of the Act and hence no TDS need be done u/s 194J. As sec. 194J does not apply, disallowance u/s 40(a)(ia) on the ground that no deduction of tax at source is made u/s 194J is bad in law and has to be deleted.
29.42. We also find force in the argument of the assessee that the services in this case are availed by the ultimate customer who has paid the consideration by way of sale price to dealer by a separate transaction of purchase of two wheeler. Service is neither availed by the assessee nor is the payment made by the assessee in consideration of availing a service for 172 itself. As already stated, even f it taken as a service availed by the assessee, sec. 194J is not attracted as this is not a technical service.
29.43. Revenue has placed reliance in Circular No. 8/2009 dated 24-11-2009. In this circular it was clarified that payments made by TPA on behalf of insurance company to Hospitals are liable for deduction of tax at source. The view in this case is that the service is a professional service in the field of medical service. Hence Sec. 194J was made applicable. The same does not apply here. Even otherwise, this proposition as a matter of fact supports of the case of the assessee. In the case of the assessee, the dealer is playing a role similar to that of the TPA in as much it is making payment to the person doing the repair job. This payment made for service rendered is only being made by the dealer. Applying the proposition laid out in the Board Circular, technically it is the dealer who is liable to deduct tax at source on payments made to the service provided for doing the repair jobs but not the assessee. The subsequent reimbursement made by the assessee to the dealer cannot be covered under the provisions of sec. 194J of the Act.
29.45. On this factual matrix, and as Sec.194J is not attracted in this case, we uphold the contentions of the assessee and allow this ground of appeal.
30. Ground no. 22.3 (Disallowance of car rental charges):
DRP Directions:
30.1. The DRP has issued following directions to the Assessing Officer;
"During the relevant previous year, the assessee took car on lease from Hero Honda Finlease Ltd., which was used by employees in the course of discharging administrative functions for the purpose of business, against which the assessee paid rental charges of Rs. 107.39 173 lakhs. In the draft assessment order, the assessing officer held that since the assessee was in exclusive possession of car taken on lease from Hero Honda Finlease ltd, the payment of hire charges made there against fall within the meaning of 'rent' prescribed under section 194J of the Act. Further, the assessing officer held that 'car' has been included in the meaning of 'plant' as defined in section 43(3) and therefore, on harmonious construction of various provisions, car also falls within the meaning of 'plant' for the purpose of section 194I of the Act. In view of the above, the assessing officer held that the assessee was liable to deduct tax at source under section 194(I) and in view of assessee's failure to deduct tax at source under the said section, expenses incurred were disallowed under section 40(a)(ia) of the Act.
The counsel have argued that the cars taken on lease are being used for the normal administrative functions and do not constitute machinery plant or equipment prescribed in section 194I of the Act. The objection of the assessee are not acceptable. Section 43(3) of the Income tax Act stipulates that plant include ships vehicles and books etc for the purpose of business or profession.The objection of the assessee is therefore rejected."
Therefore, in conformity with the order of DRP, amount of Rs. 107.39 lacs is added to the income of the assessee. (Addition - Rs. 107.39 lacs) Facts:
30.2. During the relevant previous year, the assessee took car on lease from Hero Honda Finlease Ltd., which was used by employees in the course of discharging administrative functions for the purpose of business, against which the assessee paid rental charges of Rs.107.39 lacs 30.3. The Asssessing Officer held that assessee was liable to deduct tax therefrom under section 194I, as car falls within the meaning of 'plant', as 174 defined in section 43(3), and, therefore, disallowed the aforesaid expenditure under section 40(a)(ia) of the Act.
Assessee's Submissions:
30.4. Under section 194I of the Act, a person making payment of rent, under any lease arrangement, for use of, inter alia, machinery or plant or equipment, is required to deduct tax at source at the applicable rate.
30.5. The 'car' does not fall within the category of assets viz., machinery, plant or equipment prescribed in the aforesaid section. The aforesaid three assets, have not been defined under section 194I of the Act, nor does the said section make any reference to any other provision for meaning thereof.
Accordingly, the ordinary meaning and the context in which these assets have been included in the said section, would have to be adopted.
30.6. It is submitted that the ordinary meaning of the words 'machinery' or 'equipment' implies that the same are in the nature of assets, which are used as tool in the physical operations of the business. Accordingly, the word 'plant', has to be read in context, and in a sense cognate to the words with which it finds company, viz., 'machinery' and 'equipment', applying the well recognized principles of interpretation of statutes, viz. 'ejusdem generis' and 'Noscitur a Sociis'.
30.7. In view of the above, the word 'plant', as used in section 194I means such assets, which are used as tool in the course of physical business operations of an assessee.
30.8. In the present case, since car on which impugned lease rental has been paid has been used by employees in the course of discharging administrative 175 functions as part of regular business activities, such car is not used as a tool in the course of main business function of manufacturing two wheelers. Accordingly, car taken on lease does not fall within the meaning of "machinery, plant or equipment" as prescribed in section 194I of the Act.
30.9. The provision of section 43(3), giving definition of word 'plant', is restricted to use of that word for purposes of sections 28 to 41 and cannot be imported for interpretation of any other provisions including section 194I of the Act, more so in the absence of any reference or link in the latter section.
30.10. Reference can be made to the decision of Andhra Pradesh High Court in the case of Hyderabad Deccan Cigarettes Factory v. CIT: 236 ITR 615, wherein it has been held that vehicle cannot be included within the meaning of 'plant' for the purposes of section 32A of the Act.
DR's Submissions 30.11. Reliance is placed on the assessment order and order passed by DRP/AO.
Our findings & conclusion:
30.12. The question to be decided is whether the provisions of section 194I would be attracted in respect of lease rentals paid by the assesse to Hero Honda Finlease Ltd for lease of car. The fact remains that the assessee has taken a car on lease from Hero Honda Finlease Ltd. and paid rental charges of Rs. 107.39 lacs. The submission of the assessee that the definition of plant does not include car for the purposes of Section 194I, does not find merit.
The term "plant" is defined u/s 43(3) of the Act and reads as follows:
176"43(3) - "plant" includes ships, vehicles, books, scientific apparatus and surgical equipments used for the purposes of the business or profession but does not include tea bushes or livestock or building or furniture and fittings."
U/s 194-I, "rent" means any payment, by whatever name called, under any lese, sub-lease, tenancy or any other agreement or arrangement for the use of, among other things, machinery or plant or equipment".
30.13. In our view, car does fall within the category of machinery, plant or equipment and payment made for the use of the same would fall within the definition of "Rent" under sec. 194 of the Act. Accordingly, non-deduction of tax at source, in our view, attracts the provisions of sec. 40(a)(ia).
30.14. The judgment of the Hon'ble Andhra Pradesh High Court in the case of Hyderabad Deccan Cigarettes Factory v. CIT 236 ITR 615 is not applicable to the facts of the case as what was considered in that case was sec. 32A wherein the section referred the term ship, aircraft, machinery or plant specified in sub-section (2). Under sub-section (2) plant and machinery does not include vehicle.
30.15. In the case on hand, we are not considering investment allowance u/s 32A. Hence, the definition given u/s 43(3), in our view, applies in this case. Thus, the issue is decided against the assessee.
30.16. Nevertheless the assessee has raised an alternate contention that M/s Hero Honda Finlease Ltd. has paid all the taxes and filed its return of income and thus it is not assessee in default in terms of proviso to sec. 201 inserted by the Finance Act, 2012 w.e.f. 1-7-2012 and consequently disallowance u/s 40(a)(ia) is not warranted in as much as corresponding amendment was made to this section as well. This plea deserves to be considered. Since this 177 issue is not examined by the lower authorities we set aside the matter to the file of assessing officer for fresh adjudication. This ground of the assessee is allowed in part for statistical purposes.
31. Ground no. 22.4 to 22.4.3: (Payment to dealers on account of reimbursement of advertisement expenses):
DRP Directions:
31.1. The DRP has issued following directions to the Assessing Officer;
"During the relevant previous year, the assessee, incurred expenditure of Rs.186.10 lakhs, inter alia, in relation to payments made to dealers in respect of advertisements viz, putting up the hoardings, participation in various fairs and events, etc. In the draft assessment order, the assessing officer disallowed the aforesaid entire expenditure under section 40(a)(ia) on the ground that the assessee failed to deduct tax at source under section 194C, since the dealers had entered into advertising contracts with various vendors on behalf of the assessee and therefore, liability to deduct tax at source from such payments was that of assessee itself.
The counsels have argued that there was no element of income to the dealers reimbursement of the expenses made to them.; It was submitted that there was principal to principal agreement of the dealers in order to promote their sales the dealers have to incur advertisement expenses and the assessee has only agreed to reimburse certain cost incurred by the dealers towards advertisement and publicity.
The objection for the assessee is not acceptable as stated by the AO in the draft assessment order, the payment to the dealer are made either for saving the cost of advertisement or for making advertisement on behalf of the assessee. The fact is that the Dealer is placing the hoardings/ advertisements on behalf of the assessee and for that assessee is making payment to the dealers. It is also a fact that the assessee is the prime owner of the brand "Hero Honda" and it is to promote the name and the product manufactured by the assessee that the advertisements are placed. No individual dealer stands to make any particular gain in his business by placing the advertisement. The advertisements are placed on behalf of and as required 178 by the assessee. It is only through a complex arrangement that the payments are routed through the dealers, primarily to circumvent the provisions of TDS and to avoid deduction of TDS. Since the payments are made for advertisement, the provisions of section 194C of the income tax act are clearly applicable. The objection of the assessee is overruled."
Therefore, in conformity with the order of DRP, amount of Rs. 186.10 lacs is added to the income of the assessee.( Addition - Rs. 186.10 lacs) Facts:
31.2. During the relevant previous year, the assessee, incurred expenditure of Rs.186.10 lacs in respect of reimbursement of advertisement expenses, like, putting up the hoardings, participation in various fairs and events, etc. incurred by dealers.
31.3. The Assessing officer disallowed the aforesaid expenditure under section 40(a)(ia), on the ground that the assessee failed to deduct tax at source from the re-imbursement of advertisement expenses to dealers under section 194C of the Act.
Assessee's Submissions:
31.4. The assessee enters into principal to principal agreement with dealers, whereby the dealers purchases vehicles from the assessee on its own account and further sell the same to the customers. The dealers, in order to promote sales have to incur advertisement expenses, for which re-imbursement of certain portion thereof is subsequently sought from the assessee, pursuant to a sales promotion scheme introduced by the assessee.
31.5. In such circumstances, since the contract of advertisement is between the dealers and the contractor, the obligation to deduct tax at source, if any, 179 from the payments made under such advertisement contracts is that of the dealer(s). The assessee simply reimburses the actual cost incurred by the dealer, in proportion of its share, as per the terms of arrangement/scheme.
31.6. Further, since the assessee only re-imburses portion of total expense, which did not constitute income of the recipient dealers, the same was not subject to TDS under section 194C of the Act, for reasons discussed in detail in GOA 22.1 (supra).
31.7. That apart, out of the total expenditure of Rs. 186.10 lacs, expenditure to the extent of Rs. 20,11,095/- related to purchase of gift items from the vendors, to be used for the purposes of publicity, etc. Since, the aforesaid payment was simply for purchase of goods and not against any work contract, the same was not subject to TDS under the provisions of the Act.
A sample copy of document to evidence each type of payment is enclosed at page no. 1622-1776 of the paper book.
31.8. Reliance, in this regard, is placed on the decision of Delhi Bench of Tribunal in the case of Eastern Medikit Ltd.: 146 TTJ 551, wherein it has been held that purchase of advertisement material, without the customer supplying any material used in preparation of said material, cannot be termed as 'works contract' and, therefore, the provisions of section 194C of the Act are not applicable to such purchase.
31.9. Expenditure to the extent of Rs. 5,07,615, was on account of gifts given by the assessee to various winners under the passport scheme, on which tax was duly deducted at source by the assessee, for which evidences were duly verified by auditors. (Sample copy submitted during assessment proceedings, enclosed at page no. 1622 to 1776 of the paper book). In view 180 of the same, the question of any disallowance under section 40(a)(ia) of the Act in respect of expenditure to the extent of Rs.5,07,615 does not arise.
DR's Submissions 31.10. Reliance is placed on the assessment order and order passed by DRP.
Our findings & conclusion:
31.11. The assessee's case is that only cost of advertisement is reimbursed to the dealers and hence no tax to deduct at source. In other words the claim is that it is mere reimbursement of expenditure.
31.12. U/s 194C, tax is to be deducted at source for any work which in turn includes advertising. The reimbursement to the dealer in this case, in our view, is for the purpose of advertising and argument of the assessee that the expenditure in question is not incurred for the purpose of advertisement is devoid of merit.
31.13. The argument that only cost is reimbursed and this has no element of income has no force, as it is not supported by evidence. The general argument of the assessee that proviso inserted to Sec. 201 by Finance Act 2012 w.e.f. 1-7-2012 applies to the case on hand, has to be examined by the assessing officer.
31.14. The second argument of the assessee is that they were purchasing gift items from the vendors to be used for the purpose of publicity and as this is amount for the purchase of goods, it is not a payment against work contract and the same cannot be subjected to TDS also has force in view of the decision of the Hon'ble Delhi High Court in the case of Eastern Medikit Ltd.181
146 TTJ 551. This aspect also requires examination of facts. Thus, we set aside the mater to the file of assessing officer for fresh adjudication in accordance with law considering the material filed by the assessee. This ground of appeal is treated as allowed for statistical purposes.
32. Ground no. 22.5 to 22.5.1 (TDS on motorbikes gifted to various winners of contestants at TV shows):
DRP Directions:
32.1. The DRP has issued following directions to the Assessing Officer;
"During the relevant previous year the assessee incurred expenditure of Rs. 7.49 lakhs on accounts of distribution of motor vehicles to winners of contestants in game shows organized by the TV channels. In the draft assessment order, the assessing officer has disallowed the aforesaid expenditure under section 40(a)(ia) on the ground that the assessee failed to deduct tax at source there from under section 194B of the Act.
It was submitted by the counsel that various television companies had organized a game show on TV in relation to which sponsorship agreement was entered with the assessee company. It was further submitted that the assessee was mere sponsor of the game show and had no responsibility/contract with the participants of such shows to give prizes in cash or any kind to the winner and that a motorcycles were given by the assessee to the winner on behalf of the organizers of the shows by virtue of sponsorship agreement entered between the assessee and such organizer. It was further submitted that u/s 194B of the I. T. Act, the liability to deduct tax at source arise only when a person makes payment to any person of any income and that by way of distribution of gift to organizer of show for further distribute the winner would not constitute income of such organizer and therefore, provision of section 194 would not be attracted.
The objection of the assessee is not accepted. What has actually happened is that the assessee has incurred certain expenditure by way 182 of advertisement on the game show and the expenditure is incurred by way of handing over motorcycles to the game show organizer. The game show organizer are earning income by organizing these game shows including the receipt of gifts from the sponsors by not taking money from the sponsors, the organizer of the game shows received payment for advertising the products of the assessee on the TV show in kind in the shape of motorcycles. The further distributions of these motorcycles to the winners of the game show is a kind of expenditure of the game show organizer deductible from the income of the organizer from the activity of the organizing of the TV show. Any payment for advertising the products of the assessee and its brand name will attract the provisions of assessment 194B of the I. T. act. In the case of Kanchenjanga Sea Food Ltd., 265 ITR 644 (AP) the Andhra Pradesh High Court has held that the payment contemplated u/s 194I includes not only the cash payments or payment by cheque or draft but also payment by any other mode and therefore, the payment of higher charges made by the assessee by giving 85% of the catch of fish will attract provisions of TDs u/s 195 of the I. T. Act. The objection of the assessee is accordingly rejected."
Therefore, in conformity with the order of DRP, amount of Rs. 7.49 lacs is added to the income of the assessee.(Addition - Rs. 7.49 lacs) Facts:
32.2. During the relevant previous year, the assessee incurred expenditure of Rs.7.49 lacs on account of distribution of motor vehicles to winners of game shows organized by TV channels.
32.3. The Assessing Officer disallowed the aforesaid expenditure under section 40(a)(ia) on the ground that the assessee failed to deduct tax at source therefrom under section 194B of the Act.
Assessee's Submissions:
18332.4. Under section 194B an assessee is liable to deduct tax at source from payment to any person of income by way of winnings from, inter alia, any game. The liability to deduct tax at source under the aforesaid section arises where an assessee has a contract with the participants in a game organized by the assessee and is responsible for making payment, in cash or kind, to the winner or to any person as income.
32.5. The various television companies had organized a game show on TV, in relation to which sponsorship agreement was entered into with the assessee company. The responsibility/contract for giving the prize, in cash or in kind, to the winning participant was that of the organizer of the show.
The assessee was merely a sponsor of the game show and had no responsibility/contract with the participants of such show to give prize, in cash or in kind, to the winner. The motorcycles were given by the assessee to the organizer of the show, who were under obligation to award the same to the winner.
326. The aforesaid motorcycles were thus, not given by way of gift by the assessee, to the winner of the game show organized by the TV company, warranting obligation of TDS under section 194B of the Act. The liability of TDS, if any, was that of the organizer of the show.
32.7. The DRP accepted that the distribution made by the assessee was in the nature of sponsorship /advertisement of the products. Despite the aforesaid finding, the DRP held that the assessee was liable to deduct tax at source under section 194B from such payment towards advertisement/sponsorship, which in our respectful submission, is grossly contrary to express provisions of said section. Section 194B, it is 184 respectfully reiterated, is applicable on distribution of gifts on winning in specified games and not on payment towards advertisement/sponsorship.
32.8. Reliance on the decision of Andhra Pradesh High Court in the case of Kanchenjanga Sea Food Ltd. v. CIT: 265 ITR 644 (AP), subsequently approved by the Supreme Court in 325 ITR 540, wherein it was held that an assessee is liable to deduct tax at source from eligible payments, even if the same are not paid by way of cash/cheque, but by any other mode, is misplaced.
32.9. There is no quarrel to the proposition that an assessee is liable to deduct tax at source from eligible payments, notwithstanding that the same are paid by a mode, other than cash/cheque. If the provisions of section 194B are not applicable, the question of withholding tax from distribution in kind, also does not arise.
DR's Submissions:
32.10. During the relevant previous year, the assessee incurred expenditure on account of distribution of motor vehicles to winners of game shows organized by TV channels.
32.11. It is submitted that, although the aforesaid game show was organized by TV channels, since, the distribution of gift to winners of such game show, viz., motor vehicle, was provided by the assessee, it can be said that the aforesaid game show was organized on behalf of the assessee only. In that view of the matter, it is submitted that the assessee was responsible for deduction of TDS on gift of motor vehicle to winners of game show under section 194B of the Act.185
32.12. In view of the aforesaid, the ground of appeal raised by the assessee needs to be dismissed Assessee's Rejoinder:
32.13. As regards the contention of the Ld. DR, that it should be deemed that show was organized by the assessee, it is submitted, that the said plea is contrary to record and has been raised for the first time.
32.14. In this connection, pursuant to the query raised by the Hon'ble Bench, the assessee had adduced agreement entered between the organizer of the show, viz., MTV ASIA LDC and the assessee company, on sample basis. On perusal of the same, it is patently clear that the game show was organized by the organizer and the assessee was granted sponsorship rights to the same.
As part of the sponsorship obligation, the assessee was required to give motor cycles, free of cost, to the organizer for the purposes of further distribution to the winner of the game show. In that view of the matter, the bikes were distributed on behalf of the organizer and the assessee cannot, in any circumstances, be said to be the organizer or deemed organizer of the show to attract the mischief of section 194B of the Act.
32.15. For the aforesaid cumulative reasons, the contention of the Ld. DR needs to be rejected and the ground of appeal of the assessee calls for being allowed.
Our findings & conclusion :-
32.16. The assessee's argument is that the TV channel had organized a game show and it is the responsibility of organizer of the show to deduct the tax at source thereon. However, the fact remains that the assessee has sponsored 186 gift for this particular TV show and this may be a mode of advertising. The entire show was organized by the TV channel for and on behalf of the assessee for advertising its products. It is not a case where the motorcycles were given to the company which owned the TV channel and thereafter the T.V. Channel gifted the same as its own asset. The T.V. channel organizing the game show is just a conduit through which the assessee gifts the motorcycles to various winners of the contest of the TV show.
32.17. Section 194B reads as follows:
"194B. The person responsible for paying to any person any income by way of winning from any lottery or crossword puzzle or card game and other game of any sort in an amount exceeding ten thousand rupees shall, at the time of payment thereof, deduct income-tax thereon at the rates in force."
32.18. In our view a reading of the above leads to the conclusion that the assessee was liable u/s 194B to deduct tax at source and having not done so attracts disallowance u/s 40(a)(ia). This ground of the assessee is dismissed.
33. Ground no. 22.6: (TDS on use of catering services provided by hotels and room rent to hotels):
DRP Directions:
33.1. The DRP has issued following directions to the Assessing Officer;
"During the relevant previous year, the assessee incurred expenditure of Rs. 6.72 lakhs towards booking of banquet halls/space in hotel to convene various meetings. The aforesaid amount included charges for snacks/refreshments served during the course of meetings. The assessee has incurred expenditure of Rs. 1,01,582/- towards hire charges of banquet hall on certain days for carrying out training activities of staff. The assessee also incurred expenditure of Rs. 15.99 187 lakhs in respect of room taken on hire in a hotel, for providing temporary lodging facility to foreign professionals/experts engaged by the assessee. In the draft assessment order, the assessing officer has disallowed the aforesaid payments, aggregating to Rs 22.71 lakhs and Rs. and Rs. 1.02 lakhs under section 40(a)(ia) on the ground that the assessee failed to deduct tax at source under section 194C of the Act, since the said payments were made for availing catering services provided by the hotels and therefore, fall within the meaning of work contract as defined under that section.
The counsels submitted that the TDs are not deductible on payment to hotel for booking of banquet hall including provisions of snacks, refreshments etc. and also on payments for booking rooms in a hotel. The objection of the assessee is not acceptable, a reference in this regard can be made to an article published on page 238 of the magazine section of 98 taxman which shows that the payments to a hotel are covered under the TDS provisions and non deduction of tax from payments made to a hotel for booking of a banquet hall along with catering facility and for booking of rooms will accordingly attract application of section provisions of section 40(a)(ia) of the I. t. Act . Assessee's objection is accordingly rejected."
Therefore, in conformity with the order of DRP, amount of Rs. 22.71 lacs is added to the income of the assessee. (Addition - Rs. 22.71 lacs) Facts:
33.2. The assessee incurred expenditure of Rs. 6.72 lacs & Rs. 1.01 lacs towards booking of banquet halls/space in hotel for convening meetings, and the bill included charges for snacks/refreshments, etc. The assessee also incurred Rs. 15.99 lacs in respect of hire charges of room for lodging facility provided to foreign professional.
33.3. The Assessing Offiver held that the assessee was liable to deduct tax at source from above payments under section 194C of the Act and accordingly made disallowance under section 40(a)(ia) of the Act.188
Assessee's Submissions:
33.4. The predominant purpose was to take the banquet hall on hire for the purposes of meeting and not to avail catering services, to be considered as 'work contract' under section 194C of the Act.
33.5. As regards, hire charges towards room taken on hire for providing lodging facility to visiting professionals, it was submitted that there was no contract for carrying out any work entered with the hotel, so as to be covered within the meaning of section 194C of the Act.
DR's Submisisons:
33.6. Reliance is placed on the assessment order and order passed by DRP.
Our findings & conclusion:
33.7. The distinction put forth by the assessee that the predominant purpose was to conduct a meeting and not to avail catering services does not appeal to us. Explanation III to Section 194 C interalia defines the expression "work" to include catering contracts.
33.8. In the present case, since the assessee has availed catering services from the hotel and also paid hire charges for use of banquet halls, in our view, the assessee ought to have deducted as TDS u/s 194C for the catering services availed and u/s 194I for banquet halls taken on hire. Violation of the same would result disallowance u/s 40(a)(ia). This ground of the assessee is dismissed.
34. Ground nos. 22.7 & 22.7.1 (Reimbursement of repair and maintenance cost of Omax Auto Ltd.):189
DRP Directions
34.1. The DRP has issued following directions to the Assessing Officer;
"The assessee has a manufacturing plant located at Dharuhera, which is adjacent to the manufacturing plant of another company, viz, Omax Auto Ltd. ('Omax'). The assessee and Omax share a common road leading to their respective plants. As the said road was in a poor state/damaged, both the companies decided to rebuild the road and carry out incidental work in order to facilitate smooth and efficient transportation of material, personnel and there by reduce costs. However, it was decided that the aforesaid work shall be carried out by Omax. Accordingly, during the relevant previous year, the appellant made a payment of Rs. 8.22 lakhs on account of reimbursement of its share of cost borne by Omax. In the draft assessment order, the assessing officer has disallowed the aforesaid deduction claimed by the assessee on the ground that the assessee failed to prove that the payment was made on cost to cost basis. The AO also observed that the assessee had failed to provide reconciliation regarding tax deducted at source from payment made by Omax to the contractor.
The counsels have submitted that the obligation to deduct tax at source from payment made to the contractor of that of Omax who have deducted tax on full payment.
The objection of the assessee is not acceptable. Firstly, the expenditure on a common road has been incurred by Omax and the assessee, so it cannot be the responsibility of Omax to deduct tax at source on behalf of the assessee. Assessee is responsible for his part of payment and accordingly for deduction of tax from his part of payment. Further, as stated by the AO in the draft assessment order, the assessee has not furnished any evidence to show that the proper TDs has been deducted from M/s Omax on the entire payment for construction of road.
The object of the assessee accordingly rejected."
Therefore, in conformity with the order of DRP, amount of Rs. 8.22 lacs is added to the income of the assessee. (Addition - Rs. 8.22 lacs) 190 Facts:
34.2. The assessee and Omax share a common road, leading to respective plants. Since, the said road was in a poor state/damaged condition, both the companies decided to rebuild the road. Contractors were engaged for the necessary work by Omax and payments were made by them. The assessee subsequently reimbursed their share of expenditure to Omax, amounting to Rs. 8.22 lacs.
34.3. The Assessing Officer held that the assessee was liable to deduct tax under section 194C from the aforesaid reimbursement and, accordingly, disallowed the same under section 40(a)(ia) of the Act.
Assessee's Submissions:
34.4. Since, the contractors were engaged by Omax, the liability to deduct tax at source from payment to them was that of Omax. The assessee only re-
imbursed portion of total expense, which did not constitute income of Omax, nor was subject to TDS. The TDS on whole payment was otherwise deducted by Omax, for which details were available with the assessee before making reimbursement.
DR's Submission:
34.5. Reliance is placed on the assessment order and order passed by DRP.
Our findings & conclusion:-
34.6. Section 194Cof the Act is applicable to payments for carrying out any work in pursuance of a contract.191
34.7. In the case on hand, we observe that there is no contract for carrying out work between the assessee and Omax. It is the case of pure reimbursement of expenses incurred by Omax on behalf of the assessee. It is a settled position in law that withholding tax provisions do not apply to payments in the nature of reimbursements of cost for the reason that there is no element of income for the recipient of the money from this payment.
Therefore, we are of the view that provisions of Sec. 194C of the Act are not applicable to reimbursements of actual expenses and the assesse company was not liable to deduct tax at source on payments made to Omax. Consequently disallowance u/s 40(a)(ia) is bad in law. Therefore, we allow the grounds of appeal of the assesse.
35. Ground no. 22.8 (TDS on reimbursement of out of pocket/ traveling expenses to consultant/ vendors):
DRP Directions:
35.1. The DRP has issued following directions to the Assessing Officer;
"In the course of business, the assessee avails services from various vendors. The invoices raised by such vendors include claims towards reimbursement of out of pocket/travelling expenses. During the relevant previous year, the assessee made payments, aggregating to Rs. 11.13 lakhs, to various consultants/vendors towards out of pocket/travelling expenses in the draft assessment order. The AO has disallowed the aforesaid expenditure under section 40(a)(ia) on the ground that the assessee failed to deduct tax at source therefrom under the relevant provisions of Chapter XVIIB of the Act. The counsels have submitted that the assessee has duly deducted tax at source from the payment of Rs 45,000/- which has been disallowed by the AO by saying that no evidence for deduction tax at source was filed, and the evidence for the same is enclosed at page nos 1804A and 1804B of vol. 7 the paper book filed before DRP. The AO is 192 directed to verify from the said pages whether or not the TDs has been duly deducted from the payment of Rs. 45,000 and if it is found that the TDs has been duly deducted and paid to the government account in time, the AO shall not make the disallowance of Rs. 45,000/-.
The Counsel further submitted that the remaining payments aggregating to Rs. 6,01,015/- was made after verifying the complete supporting document and voucher for actual expenditure incurred by the vendors for which reimbursement was sought from the assessee. This submission however, cannot be of much help to the assessee as the evidence for proper deduction of tax has to be produced before the AO who also satisfied himself about the nature of the payment which can be done only after the necessary evidence for the expenditure etc has been seen by the AO. This part of the assessee is accordingly rejected.
The assessee has further submitted that the balanced payment of Rs. 4,66,659/- related to petty expenses like, conveyance, local travel and telephone for which it was not practically possible. To provide invoices in support of evidence and therefore, the reimbursement was made on the basis of declarations. As already stated above, the AO cannot give the benefit without making verification of the facts which is not possible, if the assessee does not furnish evidence in that regard. This part of the assessee's objection is also rejected."
Assessee has submitted evidence with regard to payment of Rs. 45,000/-. Accordingly addition by this amount is reduced from the total addition made as per the draft order. This will result into addition of Rs. 10.68 lacs. (Addition - Rs. 10.68 lacs) Facts:
35.2. The assessee made payments, amounting to Rs.10.68 lacs, to various consultants/vendors towards out of pocket / traveling expenses, incurred by them in the course of carrying out assignment and included in the invoice.193
35.3. The Assessing officer held that assessee was also liable to deduct tax from such expenses under the relevant provision of Chapter XVII-B under which tax was deducted from fees paid to the vendor.
AR's Submissions:
35.4. Re-imbursement of out of pocket/travelling expenses at actuals does not constitute income of the recipient professionals, warranting deduction of tax at source, which is obligatory only qua income element in the payment made.
35.5. Reliance, in this regard, is placed on the following decisions, wherein it has been held that the payer is not obliged to deduct tax at source from re-
imbursement of expenses under any provision of Chapter XVII-B of the Act, since the same does not constitute income of the payee:
- ITO v. Dr. Willmar Schwabe India (P) Ltd.: 95 TTJ 53 (Del.) (Further, appeal dismissed by the Delhi High Court).
- United Hotels Ltd. v. ITO: 93 TTJ 822 (Del)
- Karnavati Co-op. Bank Ltd. V. DCIT: 134 ITD 486 (Ahd.)
- Mahyco Monsanto Biotech (India) Ltd. v. Addl. CIT: ITA NO. 5842/MUM/2012 (Mum.)(ITAT) 35.6. Out of total expenditure, reimbursement of expenses to the extent of Rs. 6.01 lacs were made after verifying the supporting vouchers for claims raised by the vendors. For balance expenses (Rs. 4.66 lacs), the same were reimbursement of petty expenses like, conveyance, local travel, telephone etc., for which it was not practically possible for the vendor to provide invoices and, therefore, reimbursement was made on the basis of details/declaration from vendors.194
DR's Submissions:
35.7. Reliance is placed on the assessment order and order passed by DRP.
Our findings & conclusion:-
35.8. It is the case of the assessee that it had reimbursed the expenses incurred by various consultants and vendors on travelling and out of pocket expenses. It is also claimed that out of an amount of Rs. 10.68 lacs expenses to the extent of Rs. 6.01 lacs were made after verifying the supporting vouchers for claims raised by the vendors. Balance amount of Rs. 4.66 lacs were based on self certification. In our view such reimbursement of expenditure has no element of income embodied in it. Thus, we apply the following decisions wherein it is held that payer is not obliged to deduct tax at source from reimbursement of expenses:
- United Hotels Ltd. Vs. ITO 93 TTJ 822;
- Karnavati Co-op. Bank Ltd. Vs. DCIT 134 TTJ 486 (Ahd.). 35.9. Respectfully following the same, the ground is allowed in favor of the assessee.
36. Ground no. 22.9: (TDS on rental of leased lines from MTNL/BSNL):
DRP Directions:
36.1. The DRP has issued following directions to the Assessing Officer;
"During the relevant previous year, the assessee had made payments of Rs. 13,20,750/- on account of lease line rentals paid to MTNO and BSNL. In the draft assessment order, the AO has disallowed the 195 aforesaid expenditure on the ground that the aforesaid payment made towards rental of lease line from MTNL/BSNL falls within the meaning of 'rent' under section 194I and since the assessee failed to deduct the tax at source under the aforesaid section, the entire expenditure was disallowed under section 40(a)(ia) of the Act.
The ld counsel have submitted that payment for taking lines from MTNL/BSNL on lease does not amount to payment of rent and as such the provision of deduction of tax were not applicable in assessee's case.
It is however to be observed that MTNL/BSNL has provided leased line facility i.e. network infrastructure to the assessee for which it is charging per month rentals. A lease line is a service contract between a provider and a customer, whereby the provider agrees to deliver a symmetric telecommunications line connecting two or more locations in exchange for a monthly rent. Lease lines are used by business to connect geographically distant offices. Unlike dial-up connections, a leased line is always active. The fee for the connection is a fixed monthly rate. The primary factors affecting the monthly fee are distance between end points and the speed of the circuit. Because the connection doesn't carry anybody else's communications, the carried can assure a given level of quality. Since, the infrastructure is dedicatedly provided for the user therefore it is chargeable to TDS.
The objection of the assessee is accordingly, rejected."
Therefore, in conformity with the order of DRP, amount of Rs. 13.21 lacs is added to the income of the assessee. (Addition - Rs. 13.21 lacs) Facts:
36.2. The assessee made payments of Rs.13,20,750 on account of rentals towards leased line obtained from MTNL/BSNL.
36.3. The Assessing officer held that assessee was liable to deduct tax from aforesaid rental payment under section 194I 196 Assesee's Submissions:
36.4. Under the impugned arrangement, the assessee was making payment for use of telecommunication services/connectivity for transmission of voice/data facility provided by vendors and not for use of any asset, involved in provision of such facility/service, covered in section 194I of the Act 36.5. The word 'use' employed in section 194I of the Act suggests that there should be a right to possession or custody of the equipment and enjoyment thereof over a stipulated period of time in order that a payment can be said to be rent.
36.6. Reliance in this regard is placed on the following decisions wherein it has been held that payments made towards use of standard facility without the lessee having any dominion or control or possessory rights over such facility cannot be categorized as use of asset for purposes of the Act:
Dell International Services India (P) Ltd. v. CIT: 305 ITR 37 (AAR) ISRO Satellite: 307 ITR 59 (AAR) Asia Satellite v. CIT: 332 ITR 340 (Del.) Skycell Communication Ltd. v. DCIT: 251 ITR 53 (Mad) Vodafone Essar Ltd. v. DCIT: 2010 TIOL 789 (Mum) Infosys Technologies Ltd. v. DCIT: 139 TTJ 18 (Bang.) 36.7. Without prejudice to the above, out of aforesaid total payment, the assessee duly deducted tax from payment of Rs.2,23,545 which was paid in advance. The proof of aforesaid payment is attached at page 1805 to 1807 of the paper book.197
DR's Submissions 36.8. Reliance is placed on the assessment order and order passed by DRP.
Our findings & conclusion:
36.9. The issue whether tax should be deducted at source for payment towards the standard facility provided by MTNL/BSNL by way of leased lines is covered in favour of the assessee by following decisions:
Asia Satelite Vs. CIT 332 ITR 340 (Del) Skycell Communication Ltd. Vs. DCIT 251 ITR 53 (Mad), 36.10.These ratios being squarely applicable to present case, respectfully following the same we allow this ground of the assessee.
37. Ground no. 22.10 (TDS on hire charges of generator used at the corporate office) DRP Directions:
37.1. The DRP has issued following directions to the Assessing Officer;
"During the relevant previous year, the assessee incurred total expenditure of Rs. 2,02,500/- towards hire charges of generator used at the corporate office. In the draft assessment order, the AO disallowed the aforesaid expenditure incurred towards hire charges of generator used at the corporate office on the ground that the assessee failed to deduct tax at source there from under section 1941 of the Act.
The ld counsel has submitted that the generator in this case was utilized by the assessee company at the corporate office and that the generate utilized at the corporate office cannot be regarded as machinery plant or equipment as such, the provision of section 194(I) for deduction of tax at source are not attracted.198
The SC in 248 ITR 175 (SC), while deciding the issue of eligibility of investment allowance has held that the generators installed by an industrial company is entitled to investment allowance as plant and machinery. The objection of the assessee is therefore rejected."
Therefore, in conformity with the order of DRP, amount of Rs. 2.03 lacs is added to the income of the assessee. (Addition - Rs. 2.03 lacs) Facts:
37.2. During the relevant previous year, the assessee incurred total expenditure of Rs.2,02,500 towards hire charges of generator used at the corporate office 37.3. The Assessing Officer held that the assessee was liable to deduct tax at source therefrom under section 194I, as use of generator fell in the category of use of plant and machinery.
Assessee's Submissions:
37.4. Generator used at office premises does not fall within the meaning of plant/machinery prescribed under section 194I, which should be in the nature of tool of trade of manufacturing business. The generator at office premises, being not used in the business of manufacturing vehicles, does not fall within the meaning of plant/machinery covered under section 194I of the Act. Reliance is placed on arguments in GOA 22.3 (supra) DR Submissions:
37.5. Reliance is placed on the assessment order and order passed by DRP.
Our findings & conclusion:
19937.6. The arguments of the assessee are same as those which were made while dealing ground no. 22.3, wherein it was claimed that car does not fall within the meaning of plant for the purpose of Sec. 194I. Consistent with the view taken therein we hold that such argument that a generator does not fall into the category of plant and machinery is devoid of merit. Thus, we uphold the finding of assessing officer and dismiss this ground of the assessee.
38. Ground no. 22.11 (TDS on rent paid towards property taken on lease):
DRP Directions:
38.1. The DRP has issued following directions to the Assessing Officer;
"The AO has made the disallowance for Rs. 1,29,600/- for the period 1/4/06 till 18/5/06 by applying the provision of section 40(a)(ia) as the TDS was not deducted for this period and the certificate of exemption from TDs issued u/s 197 of the Act was dated 18/5/06.
The ld counsel have submitted that though the aforesaid certificate was dt. 18/5/06 but the same was effective for the full financial year and therefore the assessee was exempt from deducting tax at source from the payment of rent even up to 18/5/06. A copy of the certificate is enclosed that page 1815 of vol. 7 of the paper book furnished before us. We have careful perused the said certificate which is issued on 18/5/06. The certificate is saying that the assessee is authorized for payment of rent without TDS at the time of payment for credit thereof. This certificate is not made applicable on retrospective basis. Since it has been issued only on 18/5/06, it will be only applicable for the period after this date. Any document to be applicable retrospectively has to clearly specify the same. The objection of the assessee is rejected."
Therefore, in conformity with the order of DRP, amount of Rs. 4.32 lacs is added to the income of the assessee. (Amount disallowed - Rs. 4.32 lacs) 200 Assessee's Submissions:
38.2. Though the certificate was dated 18.5.2006, however, the same was effective for the full year. The assessee was, therefore, exempted from TDS and there was no failure on the part of the assessee in deducting tax at source from the impugned rental payment. Certificate is attached at page No. 1815 of the paper book.
DR's Submissions:
38.3. Reliance is placed on the assessment order and order passed by DRP.
Our findings & conclusion:
38.4. After due considera tion, we do not find much force in the argument of the assesse that the though the certificate u/s197 was issued on 18.05.2006 it was effective for the full assessment year. Thus, on this ground we hold the issue against the assessee.
38.5. Nevertheless, the amendments made to the provisions of S.201 and S.40(a)(ia) by the Finance Act 2012 .we.f. 1-7-2012 and its impact on the present payment have not been considered by the assessing officer.
Therefore, we set aside the issue to the file of assessing officer for fresh adjudication in accordance with law.
39. Ground nos. 22.12 & 22.12.1( TDS on purchase of flowers):
DRPDirections:
39.1. The DRP has issued following directions to the Assessing Officer;201
"The AO has made a disallowance of Rs. 6 lakhs incurred towards purchase of flowers by applying provision of section 40(a)(ia) of the Act as no TDS has been deducted out of this payment. It was submitted by counsel that the payment in question was not for any contract for flower decoration. It was submitted that the assessee has only purchased flower form the vendors against which impugned payment of Rs. 6 lakhs was made to the vendors. The relevant invoice in this regard is placed at page 1825 of vol. 7 of the paper book. A perusal of the said invoice shows that there it is clearly mentioned that the payment of Rs. 6 lakhs is for flower arrangement at dealers press conference. In this background the contention on behalf of the assessee the payment was made for purchase of flower and not for decorating contract is wrong The assessee has not shown that any other agency like the owners of the hotel or the banquet hall where the press conference was organized have actually charged expenses from the assessee in respect of making flower arrangement with the flowers claimed to have been supplied by the assessee. The objection of the assessee is therefore rejected."
Therefore, in conformity with the order of DRP, amount of Rs. 6 lacs is added to the income of the assessee. (Addition - Rs. 6 lacs) Assessee's Submissions:
39.2. There was no contract for carrying out work of flower decoration.
Payment was made for purchase of flowers only. The invoice from the party clearly stated that the bill was for purchase of flowers. Accordingly, there was no contract for carrying out work, necessitating deduction of tax at source.
DR's Submissions 39.3. Reliance is placed on the assessment order and order passed by DRP Our findings & conclusion:
20239.4. The description in the invoice that the vendor raised the bill for flower arrangement is not disputed. Service rendered in the form of flower arrangement or flower decoration is different from mere sale of flowers.
Therefore, we do not find much force in the contention of the assessee that the payment in question is for the purchase of flowers and not for carrying out any work. In our considered view, the payment towards flower arrangement does warrant deduction of tax at source u/s 194C. Since, the assessee failed to deduct at source, the expenditure claimed has to be disallowed u/s 40(a)(ia) of the Act. This ground of the assessee is dismissed.
40. Ground no. 22.13 (TDS on stitching charges of uniform for employees) DRP Directions:
40.1. The DRP has issued following directions to the Assessing Officer;
"The AO in this regard has held that since the invoice has raised by the vendors separately for supply of material/clothes and separately for stitching, the contact with the vendor in the nature of work contract which was subject to TDs u/s 194C of the Act. The AO has made a disallowance of 54000/- in view of the assessee's failure to deduct tax at source. The AO disallowed the expenditure of Rs. 54000 u/s 40(a)(ia) of the act. It was submitted by the ld counsel that the contract with the vendor was a composite contract for purchase of uniform for which vendor was to use his own clothes for stitching the uniform of staffs in accordance with size and specification of each employee/staff. The relevant bill and the voucher in this regard are placed at page 1827 and 1828 of vol. 7 of the paper book. The narration on the voucher at page 1827 clearly shows that the payment is for suits and stitching charges for staff. The copy of the bill at page 1828 also indicates that the charges were for the fabric for suit shirt and pants and stitching charges. Since the payment has been made for supply of clothes by the tailors and drapers and the stitching charged for the same this has to be regarded as a works contract which was 203 liable for deduction of tax at source. The objection of the assessee is accordingly rejected."
Therefore, in conformity with the order of DRP, amount of Rs. 0.54 lacs is added to the income of the assessee. (Addition - Rs. 0.54 lacs) Facts:
40.2. The assessee entered into contract for purchase of uniform for staff.
The vendor was to use own cloth for stitching and no material was supplied by the assessee. The assessee paid Rs. 54,000 to the vendors for purchase of uniforms, which was recorded in the books of accounts as stitching charges paid for uniform of employees.
40.3. The Assessing officer held that since the vendor raised separate invoice for cloth and for stitching charges, therefore, the same was in the nature of work contract. Accordingly, the assessee was liable to deduct tax under section 194C of the Act.
Assessee's Submissions:
40.4. The assessee did not enter into any work contract/job contract for stitching of uniform with the vendors.
40.5. The assessee entered into a composite contract for purchase of uniform, for which the vendor was to use own cloth for stitching the uniform of staff in accordance with size and specification of each employee/staff.
40.6. The assessee in this regard relies upon the submission in ground of appeal no. 9 supra, wherein the distinction between contract of purchase and contract for job work has been explained in detail.204
40.7. Where the vendor supplies the product according to the requirements, specification of a customer, without using material purchased from such customer, the same does not fall within the meaning of 'work contract' specified in section 194C of the Act. Accordingly, in the present case the aforesaid contract cannot be regarded as works contract for the purpose of section 194C of the Act DR's comments 40.8. Reliance is placed on the assessment order and order passed by DRP.
Findings of the Tribunal:
40.9. It is an undisputed fact that the payment in question was made seperatly towards purchase of cloth and for stitching charges. If the arguments of the assessee it is to be accepted that it was purchase of goods and not contract for work, we do not see a reason as to why the vendor has to raise a separate bill for sitching charges. Though the assessee submitted that this is a composite contract, no evidence is led in this direction. Thus, we uphold the findings of the assessing officer and dismiss this ground of the assessee.
41. Ground no. 22.14: (TDS on management fee under a portfolio management scheme):
DRP Directions:
41.1. The DRP has issued following directions to the Assessing Officer;
"The AO has disallowed expenditure of Rs. 3.75 lakhs allegedly incurred on account of Management fee paid in connection with 205 subscription to Reliance Capital PMS. The counsel of the assessee merely submitted that the amount of Rs. 3.75 lakhs paid was the entry loan @.75% of the capital introduced in the scheme and it was not management fees. The ld counsel however could not establish as to how entry loan of Rs. 3,75000 was not in the nature of management fee. The relevant document in this regard are placed at pag3 1828A to 1830L. On page 1828A, it is clearly mentioned that the payment of Rs. 3,75000 is entry charges. This page does not talk of any entry load as submitted by the counsel. The next page in the paper book is a document titled discretionary portfolio management agreement between the assessee and reliance Capital Asset Management Ltd. The very title of the agreement is that it is for the portfolio management of the assessee. It is further mentioned in the agreement that M/s Reliance Capital Asset Management Ltd. will act as portfolio managers for the funds and handed to it for investing in securities. Under this agreement as per Article no. 2 Reliance Port Folio Asset Management Ltd are appointed a portfolio manager for managing the portfolio on a discretionary basis and to provide administrative services to the clients. Thus there is no doubt the payment in question is an agreement fee which was subject to deduction at tax at source. Since TDS has been deducted from the same, the amount has been correctly proposed to be disallowed by the AO. The objection of the assessee is rejected."
Therefore, in conformity with the order of DRP, amount of Rs. 3.75 lacs are added to the income of the assessee. (Addition - Rs. 3.75 lacs) Facts:
41.2. The assessee paid entry load fees of Rs. 3.75 lacs at the time of subscription of PMS. No management fee was paid. The Assessing officer misconstrued the aforesaid payment as towards management fees and held that the assessee was liable to deduct tax therefrom under section 194J of the Act.206
Assessee's Submissions:
41.3. The disallowance has been made by the assessing officer purely on misconception of facts. Since, no management fees was paid and only entry load was paid, which is not subject to TDS, no default by the assessee. Copy of the relevant pages of the PMS agreement are attached at page 1828A to 1830L of the paper book, wherein the amount payable against column of management fees has been stated to be NIL.
DR's Submissions:
41.4. Reliance is placed on the assessment order and order passed by DRP.
Our findings & conclusion:
41.5. Nature of payment in this case is placed on record by way of agreement at paper book pages 1828A to 1830L. The same is not reproduced for the sake of brevity.
41.6. We have perused the PMS agreement which is at page 1828A to 1830L of the paper book. Perusal of the above clearly demonstrates that the assessing officer wrongly construed the aforesaid payment as one that was made towards management fees. What was actually paid, was entry load fees at the time of subscription of portfolio management scheme ("PMS"). Thus, there is no such liability on part of the assessee to deduct tax at source u/s 194J of the Act. In the result, this ground of the assessee is allowed.
42. Ground no. 22.15 to 22.15.3 (TDS on provisions of various miscellaneous expenses made at the end of relevant year):207
DRP Directions:
42.1 The DRP has issued following directions to the Assessing Officer:
"As at the end of the relevant previous year, the assessee, inter alia, created provision, aggregating to Rs. 1663 lakhs, in respect of various expenses incurred during the year for which bills were not received from the vendors before the finalization of the books of account for the year ending 31st march, 2007. Accordingly, the assessee on the basis of best estimate of the amount payable for various services rendered during the relevant previous year provided for liability towards such expenses in the provision account. The aforesaid aggregate provision, inter alia, comprised of Rs. 42.49 lakhs towards wages/bonus payable to casual labour and Rs. 1344 lakhs in respect of various expenses like portfolio management fees, sales commission/incentives payable to dealers under various sales promotion schemes, etc. on the basis of best estimate in relation to services rendered during the year. In the draft assessment order, the AO made disallowance of Rs. 1386.50 lakhs of total provisions of Rs 1663 lakhs on the ground that the assessee failed to deduct tax at source therefrom. In so far as the provisions to the extent of Rs. 42.50 lakhs made towards wages/bonus payable to casual labour, the AO observed that the said provision was qua labour taken on contract from a contractor and, therefore, the assessee was liable to deduct tax therefrom under section 194C instead of section 192 of the Act.
The counsels have submitted that the provision for deduction of tax are not applicable at the time of making provision for expenses on estimate basis at the end of the previous year for which the bills have not been received, for the reason that the amount of the provision is not paid or credited to any party. The objection of the assessee is not acceptable since as per the reading of section 40(a)(ia) of the I. T. Act, the deduction in respect expense will be allowable to the assessee in the year of actual deduction and payment of TDS. It has to be interpreted that the section 40(a)(ia) is application to deduction claimed on the basis of provision made for expenditure even though the amount of the provision is not credited to or paid to any party. If the contention of the counsels was to be accepted, then it will become the easiest way of circumventing the rigours of the TDS provision read with section 40(a)(ia) of the I. T. Act. The assessee will cleverly 208 start claiming deduction only on provision given by postponing the receipt of the actual bill to the latter years because in that scenario, on receipt of the bills and on making actual payment or giving credit to the parties assessee will not bother about deduction of tax as the expenditure in question would have been already allowed to the assessee on provisioning basis.
The objection of the assessee accordingly is rejected. An alternate contention has been raised by the counsel that the TDS on aforesaid provisioning to the extent of Rs. 1344 lakhs has been actually deposited by the assessee before the due date of filing of the return of income and as such this amount cannot be disallowed by applying section 40(a)(ia) of the act. This contention of the assessee has already dealt with by the AO in the draft assessment order wherein it has been held that the concession from disallowance u/s 40(i)(ia) is available to the assessee only when the TDS has already been deducted within the due time though paid before the before the due date for filing of the return. This is stand of the AO is supported by clear wording of the first proviso below section 40A of the I. T. Act. The provision clearly says that where the TDS is deducted in any subsequent year or after deducting in the relevant previous year, has been paid after the due date for filing of the return, the deduction shall be allowed in the assessment year relevant to the previous year in which the TDS has been deducted. This clearly means that where the TDS has been deducted after the relevant previous year the deduction shall be allowed only in the relevant previous year when it has been paid after deduction. This means that in those cases, where the TDS has been deduced after the relevant previous year but has been paid within the due time for filing of return u/s 139(1) of I. T. act for the assessment year relevant to the previous year in which the tax was to be deducted, the deduction shall be allowed only in the next previous year when the TDS has been deducted and paid or in the following assessment year when the TDS has been actually paid. Meaning thereby that if the teds is not deducted in the relevant previous year, the deduction will not be allowed in the assessment year relevant to that previous year even though the TDS has latter on deducted and paid before the due date for filing of the return for the assessment year relevant to the previous year in which the TDS was to be deducted. "209
Therefore, in conformity with the order of DRP, amount of Rs. 1,386.50 lacs is added to the income of the assessee. {Addition Rs. 1,386.50 lacs ( Rs. 42.50 lacs + 1344 .00 lacs)} Facts:
42. The assessee created provision of Rs. 1663 lacs at the year end for various misc. expenses incurred during the year, for which bills were not received before the end of the year and, therefore, the exact name of the recipient/vendor and amount payable to them was not known. The aforesaid aggregate amount also comprised of provision of Rs. 42.50 lacs towards wages/bonus payable to casual labour.
42.2. The Assessing officer held that the assessee was liable to deduct tax from the aforesaid provision under respective section of Chapter XVII-B and for casual labour under section 194C of the Act.
Assessee's Submissions:
42.3. As regards provision of Rs. 42.50 lacs, the same was for casual labour, as even noted by the special auditor, and not for contract labour.
There was, therefore, no liability to deduct TDS under section 194C of the Act. The assessee deducted tax from the payments made to casual labour under section 192 of the Act. Section 40(a)(ia) did not cover failure of non- deduction under section 192 and, therefore, the aforesaid amount of provision was not disallowable under the former section.
42.4. As regards, the balance provision of Rs.1344 lacs, the same were created on the basis of reasonable estimate of the liability accrued at the end 210 of the year, wherein the (i) exact amount payable to the vendor was not known and; (ii) in certain situations, the exact vendor was also not known.
42.5. In case of amounts payable to various dealers/stockists under different sales promotion schemes, it may be noted that the relevant dealers entitled to receive the aforesaid incentives (quantified on the basis of reasonable estimate) were not even identified, in view of exact details of sales made by each dealer not being available with the assessee company. The aforesaid provision on account of incentives payable to dealers was created on the basis of overall/macro details of sales made by the dealers in a region / zone, as provided by regional / zonal offices of the assessee company located at various places, which was not supported by the information / details of exact number of vehicles sold by each dealer.
42.6. Since the payee was not identified and the amount payable party-wise was not quantified, the assessee was not obliged to deduct tax at source from the provision created for the aforesaid expenses / liability under any provision of Chapter XVII-B of the Act. The liability to deduct tax at source arises only when following two conditions are satisfied:
i) credit to the account of identified payee, and
ii) the credit results in accrual of income in the hands of the
recipient.
42.7. Reliance, in this regard, is placed on the following decisions, wherein while approving the aforesaid legal position, it has been held that an assessee is not liable to withhold tax under the provisions of Chapter XVII-B from the amount of provision, where, the exact amount receivable by the payee is not known or the payee is not identified:
211Industrial Development Bank of India v. ITO: 104 TTJ 230 (Mum.) Pfizer Ltd. v. ITO: ITA NO. 1667/Mum./2010 (Mum.) 42.8. In the present case, it is submitted that the aforesaid twin conditions are not satisfied, since the relevant dealer, entitled to receive payment from the assessee is not identified and, therefore, the machinery provisions of Chapter XVII-B relating to deduction of tax at source cannot be applied.
Secondly, the provision has been created only on the basis of reasonable estimate, pending receipt of bill/invoice from the vendor, and, therefore, the exact amount payable to the vendor is not known, nor is any vendor vested with the right to receive income from the assessee in absence of receipt of claim and its acceptance by the assessee. Accordingly, the provisions of Chapter XVII-B of the Act relating to deduction of tax at source do not get triggered in relation to the aforesaid provision for liability and the assessee cannot be said to be in default for not deducting tax at source therefrom.
42.9. Without prejudice to the above, it is submitted, that in terms of section 40(a)(ia) of the Act, no disallowance can be made under that section, if the amount of TDS is deposited before the due date of filing the return of income for the relevant assessment year under section 139(1) of the Act. In view thereof, in the present case, since the assessee deposited TDS before the due date of filing the return of income, after receipt of invoice from vendors or identifying the exact party and, therefore, for the aforesaid reason as well, the said amount cannot be disallowed under section 40(a)(ia) DR's Submissions 42.10. Reliance is placed on the assessment order and order passed by DRP.
212Findings of the Tribunal:
42.11. The provision in question was made towards various expenses. An amount of Rs. 42.50 lacs was a provision made for likely payments to casual labour. It is not a provision for contract labour. Hence, we agree with the submission of the assessee that it is not liable to deduct TDS u/s 194C of the Act. The balance payment was estimated liability of amount payable to vendors. We have dealt this issue on payments to vendors while disposing of ground nos. 9 to 9.7. Consistent with the view taken therein, we hold that no deduction of tax at source is warranted on the balance provision of Rs. 1344 lacs created towards estimated payment to vendors.
42.12. The next provision is towards amount payable to various dealers/ stockists under different sales promotion schemes. The claim of the assessee is that receivers of the incentives are not identified. It is also stated that the provision created was on overall basis. Be that as it may, the fact remains that the payment in question is towards sales promotion. As estimates made on reasonable basis, tax should have been deducted at source based on party-
wise liability. Decision in the case of Industrial Development Bank of India v. ITO 104 TTJ 230 (Mum.) does not apply to the facts of the case in as much the facts in that case were that the assessee failed to deduct tax at source in respect of interest provision made on certain bonds that can be transferred simply by endorsement and delivery. As such, the payees could not be identified till the registration date that is subsequent to closure of books of account. In the present case, the identity of the dealers is not in doubt. It is only the exact amount payable to each dealer that could not be ascertained before the closure of accounts. Similarly, decision of the ITAT in the case of Pfizer Ltd. Vs. ITO (ITA no. 1667/Mum/2010 (Mum.) is also 213 on different footing. Therefore, this argument of the assessee in our view is not acceptable.
42.13. Nevertheless the submission of the assessee that the amount of TDS is deducted before the due date of filing of the return for the relevant assessment year u/s 139(1) deserves consideration. As the assessing officer has not verified this contention of the assessee, we are of the considered opinion that the issue needs to be set aside to the file of the assessing officer for fresh adjudication in accordance with law. This ground of appeal is treated as allowed for statistical purposes.
43. Ground no. 22.16.1 (TDS on payments exceeding exemption limit specified under 197 certificate):
DRP Directions:
43.1. The DRP has issued following directions to the Assessing Officer;
"In the draft assessment order, the AO has disallowed expenditure of Rs. 3.48 crores under section 40(a)(ia) on the ground that such payments exceeded the exemption limit specified under the certificate issued under section 197 of the Act to the recipient and therefore alleged that the assessee failed to deduct tax at source from such excessive payments. Counsel have submitted that the recipient of income from the assessee, applied for exemption certificate under section 197 of the Act, providing inter alia, details of income estimated to be received from the assessee. After verification of same, the AO issued certificate under section 197 of the Act at lower rate of TDS mentioning the estimated amount receivable, inter alia, from the assessee. In the said certificate, it was nowhere stipulated that the assessee was to apply the rate as per such certificate only in respect of payment upto a certain limit. On the contrary, the said certificate unequivocally permitted the assessee to withhold tax at the rates prescribed therein on payments to be made to the payee. Accordingly, the allegation that the assessee has failed in not deducting tax at 214 source from the payments made to the recipients in excess of amount stipulated in the certificate is not correct and therefore disallowance on that ground under section 40(a)(ia) of the Act is not called for.
The copy of the relevant certificate is placed at page 1878 and 1879 of vol. 8 of assessee's paper book. Page 1879 is the part of the application on the basis of which the certificate placed at 1879 is issued by the AO for deduction of TDS at lower rates. Perusal of the annexure-a of the application at page 1879, shows that the TDS certificate at lower rates of TDS is granted upto certain amounts mentioned in the Annexure-A. The certificate issued to M/s Chetak Logistic Ltd. is in respect of some of Rs. 593 intimated by M/s Chetak Logistic that was expected to be credited/paid during the F.Y 06-07. Thus it is clear that any payment by the assessee to M/s Chetak Logistic beyond the sum mentioned in Annexure-A of the application of M/s Chetak is not covered by the certificate issued by the AO for lower rate of tax to be deducted at source.
Thus the objection of the assessee is rejected."
Therefore, in conformity with the order of DRP, amount of Rs. 348.13 lacs is added to the income of the assessee. (Addition - Rs. 348.13 lacs) Facts:
43.2. The assessee made payment of certain expenses, after deducting TDS at discounted/NIL rate on the basis of exemption certificate under section 197 provided by the vendors.
43.3. The said vendors/recipients, at the time of making application for exemption certificate under section 197 before the assessing officer, provided inter alia, details of income estimated to be received by them from various payers, including assessee. After verification of same, the assessing officer issued certificate under section 197 of the Act at discounted/NIL 215 lower rate of TDS, enclosing annexure of estimated amount receivable from various payers, including the assessee.
43.4. The total payments made by the assessee, however, exceeded the aforesaid limit estimated by the recipient, on which tax was deducted at the concessional rate prescribed under section 197.
43.5. The AO held the assessee to be in default for making payments exceeding the limit specified in the Annexure to 197 certificate issued by the tax department to such recipients, at concessional/NIL rate of TDS, and, accordingly, made disallowance of such excess payments, aggregating to Rs 3.48 crores, under section 40(a)(ia) of the Act.
Assessee's Submissions:
43.6. There is no provision under section 197 or Rules thereto, nor the purported certificates stipulated that the assessee was to apply the concessional rates only in respect of payments made upto a certain limit. On the contrary, the said certificates unequivocally permitted the assessee to withhold tax at the rates prescribed therein on payments to be made to the payees.
43.7. Accordingly, there was no default on the part of assessee, warranting disallowance of expenditure under section 40(a)(ia) of the Act.
DR's submissions 43.8. Reliance is placed on the assessment order and order passed by DRP.
Our findings & conclusion:
21643.9. This is not a case of non-deduction of tax. It is a case where the assessee deduced tax at a rate prescribed in the certificate issued u/s 197.
The finding of the revenue is that the payment in question was in excess of the amount specified in the certificate issued u/s 197 for deduction of lower rate of tax. The Hon'ble Calcutta High Court in the case of CIT Vs. S.K. Tekriwal (ITA no. 183 of 2012 has held as follows:
"We are of the view that the provisions of section 40(a)(ia) of the Act has two limbs one is where, inter alia, assessee has to deduct tax and the second where after deducting tax, inter alia, the assessee has to pay into Government Account. There is nothing in the said section to treat, inter alia, the assessee as defaulter where there is a short fall in deduction. With regard to the short fall, it cannot be assumed that there is a default as the deduction is not as required by or under the Act, but the facts is that this expression, 'on which tax is deductible at source under Chapter XVII-B and such tax has not been deducted or, after deduction has not been paid on or before the due date specified in sub section(1) of section 139. This section 40(a)(ia) of the Act refers only to the duty to deduct tax and pay to government account. If there is any shortfall due to any difference of opinion as to the taxability of any item or the nature of payments falling under various TDS provisions, the assessee can be declared to be an assessee in default u/s 201 of the Act and no disallowance can be made by invoking the provisions of section 40(a)(ia) of the Act.
Accordingly, we confirm the order of CIT(A) allowing the claim of assessee and this issue of revenue's appeal is dismissed."
We find no substantial question of law is involved in this case and therefore, we refuse to admit the appeal. Accordingly, the appeal is dismissed."
43.10. The assessee further relied on the following decisions:
DCIT v. Chandabhoy & Jossobhoy (ITA no. 20/Mum/2010(Mum.) UE Trade Corporation (India) Ltd. V. DCIT 28 Taxmann.com 77 (Del.) and other cases.217
43.11. As this is not a case of non-deduction of tax but a case where tax has been deducted at a lower rate that too under the bona fide belief that deduction was properly made, we accept the contention of the assessee.
Respectfully following the judgement of the Hon'ble Calcutta High Court in the case of S.K.Tekrisal (supra) this ground is allowed deleting the disallowance made u/s 40(a)(ia).
44. Ground no. 22.16.2 to 22.16.2.1: (TDS at lower rate or wrong provision) DRP Directions:
44.1. The DRP has issued following directions to the Assessing Officer;
"In the draft assessment order, the assessing officer has made disallowance of s. 43,750/- being the proportionate amount attributable to short deduction of tax in respect of the following parties on the grounds that the assessee has deducted tax at source @ 11.22% being the rate of TDs applicable to a non-corporate recipient under section 194A, whereas the said recipients are corporate assessee and, therefore, the assessee should have deducted tax at source @ 22.44%, being the rate applicable to a corporate recipient:
1. Fortpoint Automotive Pvt. Ltd.
2. Benz Auto Distributors
3. Koyenco Mobikes
4. Satkar Automobiles Similarly, the AO has made disallowance of Rs. 55.74 lakhs out of aggregate payment of Rs. 1,47,52,354/- made to one party viz. Results Services Pvt. Ltd. on the ground that assessee should have deducted tax at source therefrom under the provisions of section 194J, instead of section 194C (2.24%) applied by the assessee. In view of the same, the AO worked out the proportionate amount of Rs. 55.74 lakhs and disallowed the same under section 40(a)(ia) of the Act.218
The counsels have submitted that the parties to whom the payments were made were non corporate assessee, the assessee deducted tax at source that the correct rate applicable to non corporate assessees. It was further submitted that the payment made to m/s Results services (P) ltd. in respect of the passport scheme of the assessee was not in a lieu of any profession or technical services obtained but was in lieu of contract for carrying out work which falls within the ambit of section 194C of the Act and the AO has wrongly applied the TDS provision of section 194J of the Act. The objection of the assessee is considered carefully. M/s Fort Point Automotive Pvt. Ltd. is clearly a corporate party and assessee's objection with regard to this party is rejected.
Whether or not these parties are Corporates or not is a matter of fact which can be verified by the AO. The assessee will render necessary assistance in this regard and produce all the relevant evidence. After verification of the fact, the AO will decide whether the remaining parties are corporate or not. If it is found that the remaining parties are not corporate parties, the AO shall not make the disallowance in respect of these parties.
The contention of the ld counsel that the services rendered by m/s Results Services Pvt. Ltd. was not professional or technical services but the payment to these parties has been made under a work contract is not acceptable. Under a work contra tithe payment is always made on the basis of the quantity of the job carried out. In the present case, M/s results service are entitled to fixed retainer-ship fees per month. In addition to Rs. 7.15, per passport supervised by this party per month, no job work execution is involved in this contract. The activity like maintaining the record of customer and role for the scheme, keeping that of relevant transaction of the customers, keeping data of points against the each customer, preparing and bringing passport booklet of each customer and issuing letter and mails to each customer are definitely in the natural profession services. The assessee's objection is therefore rejected."
From the directions as issued by DRP it is seen that verification is to be made in the payments made to Benz Auto Distributors, Koyenco Mopikes, Satkar Automobiles and Karan Automobiles as to whether these are corporate entities. As per the directions of the DRP assessee company was to 219 provide necessary assistance to the A.O. with regard to the verification of the issue. No such assistance in the form of additional evidence has been provided. Nature of facts as marshaled during the course of assessment proceedings has not been altered. With same set of facts conclusion cannot be changed. Therefore, in conformity with the order of DRP, amount of Rs. 56.18 lacs is added to the income of the assessee. (Addition 404.31 Lacs (Rs. 348.13 lacs+ 56.18 lacs ) Facts:
44.2. In the assessment order, the AO made disallowance of Rs. 43,750 being the proportionate amount attributable to short deduction of tax in respect of payments made to the following parties, on the ground that the assessee applied lower rate of TDS applicable to non-corporate assessees, whereas the said parties were corporate assessees:-
1. Fortpoint Automotive Pvt. Ltd.
2. Benz Auto Distributors
3. Koyenco Mobikes
4. Satkar Automobiles
5. Karan Automobiles 44.3. The AO also made disallowance of Rs.55.74 lacs out of aggregate payment of Rs.1,47,52,354/- made to a party, viz., Results Services Ltd. in lieu of services obtained for managing the data of customers under passport scheme, where assessee had deducted tax under section 194C, on the ground that the assessee was liable to deduct tax therefrom under section 194J, since the services obtained were technical services.220
Assessee's Submissions:
44.4. As regards party mentioned at serial No.1 viz., Fort Point Automotive Pvt. Ltd, the said party was a partnership firm in customer master of the assessee, which was subsequently updated in the said master as a private limited company and on account of said bonafide mistake, tax was deduced at wrong rate.
44.5. In so far as parties mentioned at serial No.2 to 5 are concerned, the invoice raised by the said parties disclosed the status of such recipients as non-corporate in as much as the words 'private limited' or 'limited' was not affixed to their name. In view thereof, the assessee deducted tax at source at the correct rate applicable thereto and there was no default on the part of assessee in deducting tax at source at the rate applicable to non-corporate assesses.
Re: Results Service (P) Ltd.
44.6. The assessee had launched scheme called "Passport Scheme", whereby the customers of assessee using two wheelers were eligible to enroll for such scheme on payment of membership fees and the customers were entitled to certain points for each transaction undertaken with the assessee/dealers like service of vehicles, purchase of spares parts, tools, purchase of new vehicle, etc. The customers were entitled to redeem the points so earned, in lieu of certain discounts or gifts or cash compensation, as the case may be, depending upon the scheme.
44.7. Since, the assessee has a large data base of customers enrolling for the aforesaid Scheme, to the tune of 34.23 lacs, the assessee entered into a 221 contract with Results Service Pvt. Ltd. in order to, interalia, maintain the record of customers and data of transactions entered by them.
44.8. The aforesaid contract entered with Results Service Pvt. Ltd., was not in lieu of any professional or technical services obtained from that party but was in lieu of contract for carrying out work, which falls within the ambit of section 194C of the Act. The work carried out by Results Service (P) Ltd. being predominantly of manual nature, not requiring any specialized knowledge/skill or intellectual inputs for carrying out the same, the provisions of section 194J of the Act did not, therefore, apply 44.9. Reliance, in this regard, is placed on the following decisions, wherein the meaning of the word 'technical' as used in section 194J and contract for carrying out any work under section 194C has been explained:
- SRF Finance Ltd. v. CBDT: 211 ITR 861 (Del)
- Skycell Communication Ltd. v. DCIT: 251 ITR 53 (Mad)
44.10. In view of the above, the assessee has deducted tax at the correct rate and no disallowance was warranted under section 40(a)(ia) of the Act.
44.11. Without prejudice to the above, since the assessee, has in any case deducted tax at source under a different provision under a bonafide belief, no disallowance could be made under section 40(a)(ia) of the Act.
44.12. Reliance, in this regard, is placed on the following decisions, wherein it has been held that, where a tax has been deducted under a different provision under a bonafide belief, no disallowance could be made under section 40(a)(ia) of the Act:
222- CIT v. S.K Tekriwal : ITA No. 183 of 2012 (Kol.)(HC) o DCIT v. Chandabhoy & Jassobhoy : ITA No.20/Mum/2010 (Mum.) o Sunbell Alloys Company of India Ltd [TS-642-ITAT- 2012(Mum)]
- M/s. Saralee Household & Bodycare India Pvt. Ltd. (Mum.) o UE Trade Corpn. (India) Ltd. v. DCIT: 28 taxmann.com 77 (Del.) DR's Submission 44.13. Reliance is placed on the assessment order and order passed by DRP.
Finding of the Tribunal:
44.14. This is also a case of deduction of tax at a lower rate, as the assessee was under a bona fide belief that TDS has to be made at a rate applicable to non-corporate assessees. Applying the proposition laid down by Hon'ble Calcutta High Court in the case of CIT Vs. S.K. Tekriwal (ITA no. 183 of 2012), supra, and consistent with the view taken by us while disposing of ground no. 26.16.1 we allow this ground of the assessee.
45. Ground no. 22.17 to 22.10 (TDS on incentive/ discount to dealers):
DRP Directions
45.1. The DRP has issued following directions to the Assessing Officer;
"The brief facts as stated by the assessee on this issue are as follows:
In the course of business of selling two wheelers, the assessee appoints various dealers and provides various incentives/discounts from time to time under various schemes in order to increase sales to 223 dealers and ultimate customers. During the relevant previous year, the assessee has incurred expenditure of Rs. 2211 lakhs on account of various incentives/discounts given to dealers. The aforesaid expenditure, aggregating to Rs. 2211 lakhs, relates to amount of discounts offered by the company to various stockists/dealers on purchase of space parts made by the latter from the assessee company, in accordance with sales incentive/discount scheme prevalent during the relevant previous year.
The counsels of the assessee have in this regard repeated their submission made before the AO that the payments made are in the nature of discount and not commission. The objection of the assessee cannot be accepted. The discount always refers to a lesser amount received from a party than the settled sale value. In the present case, however the assessee not sold anything to these parties to whom the incentive has been paid. The payment of incentive is directly related to performance achieved in turnover etc. by these parties. The incentive which is based on achievement turnover targets is actually turnover commission allowed by the assessee to these parties. At such the provision of TDS were applicable in assessee's case. The objection of the assessee is rejected."
Therefore, in conformity with the order of DRP, amount of Rs. 2,211 lacs is added to the income of the assessee.(Addition- Rs. 2,211 lacs) Facts:
45.2. During the relevant year, the assessee incurred expenditure of Rs.
2211 lacs on account of various incentives/discounts offered to dealers under various schemes on purchase of spare parts/vehicles from the assessee.
45.3. The Assessing officer held that the assessee was liable to deduct tax from aforesaid discounts/incentives under section 194H of the Act.
Assessee's Submissions:
22445.4. For the purpose of selling vehicles/spare parts, the assessee company had entered into agreements with stockists/dealers at various locations in India, on a principal to principal basis. Under such agreements, stockists/dealers, inter alia, purchase spare parts from the assessee-company at a predetermined price and sell the same on their own account at price negotiated with the customers, subject to MRP.
45.5. The company, in order to promote sales of spare parts to such stockists/dealers, offers various schemes, whereby stockists/dealers are eligible for discounts, which are to be allowed with reference to the progressive amount of purchases made by such stockists/dealers from the company. Thus, higher the amount of purchase orders placed by the stockists/dealers, higher is the amount of discounts, to which the dealers are entitled. Cash discount is also offered on timely payments by the dealers/stockists against aforesaid purchases.
45.6. The provisions of section 194H are applicable, where payment by way of commission or brokerage is made for any services rendered by a person in the capacity of an agent.
45.7. In the present case, in the absence of any principal-agent relationship between the company and the stockists/dealers, the discount received by such stockists/dealers, was not in the nature of 'commission' or 'brokerage', subject to TDS under section 194H of the Act.
45.8. Reliance, in this regard, is placed on the following decisions wherein it has been held that the provisions of section 194H are not applicable where the payment is made to a dealer or distributor in a principal to principal contract:225
CIT v. Ahemedabad Stamp Vendors Association: C.A. No. 10270/2003 (SC) Kerala State Stamp Vendors Associations Vs. Office Of The Accountant-general and Others: 282 ITR 7 (Ker.) CIT v. Mother Dairy Ltd.: ITA No. 1925/2010 (Del.)(HC) Jai Drinks (P) Ltd.: 336 ITR 383 (Del.) S.R.L. Ranbaxy v. ACIT: 143 TTJ 265 (Del.) 45.9. In view of the above, the disallowance made by the AO calls for being deleted.
DR's Submissions:
45.10. Reliance is placed on the assessment order and order passed by DRP.
Our finding & conclusion:
45.11. The facts of this case clearly demonstrate that what is given to the stockists/ dealers is discount on the purchase price and not any commission.
The stockists/ dealers purchase spare parts/ vehicles from the assessee. They are not commission agents. Sale consideration is paid by these parties to the assessee. As a matter of incentive for higher sale the assessee grants discount if the stockits/ dealers achieve a particular volume of transaction. Thus, in our view the discount in question is not in the nature of commission or the brokerage which attracts sec. 194H. In the case of CIT Vs. Mother Dairy Ltd. (ITA no. 1925/2010(Del) the Hon'ble Delhi High Court was considering similar case and held as follows:
"3. The assessee explained in writing that it sold the products to the concessionaires on a principal to principal basis, that the concessionaires buy the products at a given price after making full 226 payment for the purchases on delivery, that the milk and other products once sold to the concessionaires became their property and cannot be taken back from them, that any loss on account of damage, pilferage and wastage is to the account of the concessionaires and that in these circumstances the payment made to the concessionaires cannot be treated as "commission" for services rendered and consequently there was no liability on the part of the assessee to deduct tax.
13. It is ireelevant that theconcessionaires were operating from the booths owned by the Dairy and were also using the equipment and furniture provided by the Dairy. That fact is not determinative of the relationship between the Dairy and the concessionaires with regard to the sale of the milk and other products. They were licensees of the premises and were permitted the use of the quipment and furniture for the purpose of selling the milk and other products. But so far as the milk and the other products are concerned, these items became their property the moment they took delivery of them. They were selling the milk and the other products in their own right as owners. These are two separate legal relationships. The income tax authorities were not justified or correct in law in mixing up the two distinct relationships or telescoping one into the other to hold that because the concessionaires were selling the milk and the other products from the booths owned by the Diary and were using the equipment and furniture in the coruse of sale of the milk and other products, they were carrying on the business only as agents of the Diary. 45.12. The Hon'ble High Court held that in such circumstances S.194H is not attracted.
45.13. In the case of Jai Drinks (P) Ltd. 336 ITR 383 (Del.), the Hon'ble Delhi High Court has held as follows:
Held, dismissing the appeal, that a perusal of the agreement showed that the assessee had permitted the distributor to sell its products in a specified area. The distributor was to purchase products at a pre- determined price from the assessee for selling them. Both the assessee and the distributor had been collecting and paying their sales tax separately. The CIT(A) and also the Tribunal rightly held 227 that the payments being made by the assessee to the distributor were incentives and discounts and not commission."
45.14. Respectfully following the propositions laid down in the aforementioned cases we allow this ground of the assessee.
46. Ground nos. 23 -23.3 (TDS on clearing charges paid towards import consignments):
DRP Directions 46.1. The DRP has issued following directions to the Assessing Officer;
" The AO has disallowed expenditure of Rs.78.48 lacs incurred on account of clearing charges paid towards import consignments, on the ground that the assessee failed to deduct tax at source therefrom, invoking provisions of section 40(a)(i)of the Act. The Applicant has objected to this and the observations of AO regarding failure by it to prove that these payments were made to non-resident shipping companies and were thus not subject to TDS, and also in observing that receipts/invoices provided by the assessee were of clearing agents and not shipping companies or their agents. Applicant has claimed that payments made to non-resident shipping companies are not subject to TDS under the provisions of the Act and that dispute raised relates to substantiating with evidence/bills that payments have been made to non-resident shipping companies or other agents. Invoices have thus been filed and applicant has claimed that payments made to non-resident shipping companies or their agents are not taxable in India and thus there was no obligation to deduct tax at source. The aforesaid expenditure is thus allowable in entirety. The following details have been submitted by the applicant.228
Party Name Name of Shipping Country
Liner
NYK Lines NYK Lines Japan
APL APL Singapore
Mitsui OSK Lines Mitsui Line Japan
CMA CGM CMA CGM France
Global(India)
OOCL OOCL Hong Kong
Hyundai Merchant Hyundai South Korea
Marine .
P L Shipping & Logistic M+R SPEDAG SWITZERLAND
GROUP
MSC Agency Mediterranian Shipping Geneva
Company
Alltrans Shipping Alltrans Shipping USA
Agencies
Neptune Container Nova Marine Lines USA
German Express German Express Germany
Shipping Agency Germany
Wan Hai Lines Wan Hai Lines USA
United Liner Agency ULA USA
Samsara Samsara USA
229
46.2. DRP has examined the invoices furnished by the applicant and placed at Paper book Volume 8 from Pg 1886 to 1913. The details of the invoices have been tabulated below alongside the type of charges and the taxability of the said profits as per Clause 8 of the relevant DTAA for ready reference.
Part Nam Cou Invoice issued by Charge Type Treaty Details
y e of ntr with respect
Nam Ship y to Profits
e ping from Shipping
Line business-
r Clause 8 of
relevant
DTAA
NYK NY Japa NYK Line(India) Ltd., LCL/SCH- Source based
Line K n Mumbai, Ist Floor, IMP taxation for 10
s Line Navel House, JN Heridia years of
s Marg, Ballard Estate, Documentatio convention;
Mumbai-400 038, n fees-IMP thereafter
Service Tax Regn. No. residence
Edu Cess on
AAACT3273NST002 based taxation
S. Tax-
THC/IHC
Service Tax,
Edu Cess on
S. Tax-Doc.
Fees, Service
Tax-THC-IHC
APL APL Sin APL (India) Pvt. Ltd., Residence
Akruti Trade Centre, based taxation
gap
402, 4th Floor, Road No.
ore 7, M.I.D.C.
Andheri(East), Mumbai
- 400 093. Service Tax
No.
Mits Mits Japa Mitsui OSK Source based
230
ui ui n Lines(India) Pvt. Ltd., taxation for 10
OSK Line years of
Line convention;
s thereafter
residence
based taxation
CM CM Fra CMA CGM Global Equipment Source based
A A nce (India) Pvt. Ltd., import taxation for 10
CG CG Hamilton House, 8 J.N. demurrage years of
M M Herdia Marg, Ballaard charge & convention;
Glob Estate, Mumbai - 400 exchange rate thereafter
al(In 038 difference residence
dia) based taxation
46.3. Perusal of the table compiled above will show the following factual inaccuracies in the applicant's submissions
1. The payments have not been made to non-resident shipping companies but to Indian entities ie Pvt Ltd Companies registered in India.
2. The entities have a service tax number and service tax has been billed in the invoices alongwith other taxes thus substantiating the fact that services have indeed been rendered by them to the Indian entities.
3. The invoices are not for freight alone but a bouquet of services including washing charges, documentation charges, detention and demurrage charges, import documentation charges, imports THC charges, Factory destuffing imports, terminal handling, cleaning and container charges etc some or all of which have been provided by the Indian entities. That the Indian entities are liable to tax in India is beyond dispute.
4. Even if the position was that the payments were collected by the resident assessee as an agent of a non-resident who would like to claim the benefit of the beneficial position in DTAAs, perusal of the table above will show that with several countries there is no DTAA, hence the Non-resident shipping company would be liable to tax on goods booked in India especially since it has regular operations in India.231
5. Further in a composite payment which may comprise taxable and exempt receipts what would be required would be to determine such part of the sum which would be income not chargeable to tax in the hands of the non-resident for which it was incumbent upon the applicant to approach the ITO TDS u/s 195(2) because the resident companies to whom cheques have been issued have also rendered services which are undoubtedly taxable. Since the payments were made to resident taxpayers, it was incumbent upon the applicant to comply with the TDS provisions in order to claim such payments under the provisions of section 40(a)(i) of the I T Act.
6. DRP has also perused the following decisions of the Hon'ble Apex Court and the broad conclusions following from which are as under:
In Transmission Corp. 239 ITR 587, the Hon'ble Supreme Court had held TDS was liable to be deducted by the Payer on the gross amount but if payer want to deduct TDS on lesser amount on the footing that only a portion of payment made represented 'income chargeable to tax in India', then it was necessary for him to make an application u/s 195(2) of the Act to the ITO (TDS) and obtain his permission for deducting tax at lesser amount.
In the case of GE Technology Centre Pvt. Ltd. vs. CIT 327 ITR 456 Apex Court has laid down the rationale that section 195(1) imposes a statutory duty on any person responsible for paying to non- resident "any sum chargeable under the provisions of the Act" to deduct tax at the rates in force, and that section 195(2) and 195 (3) are safeguards. It has also explained that-
"The payer is also an assessee under the ordinary provisions of the Income-tax Act. When the Payer remits an amount to a non-resident out of India he claims deduction or allowances under the Income-tax Act for said sum as an 'expenditure'. Under section 40(a)(i), inserted vide Finance Act, 1988 w. e. f. 1.4.89, payment in respect of royalty, fees for technical services or other sums chargeable under the Income-tax Act would not get the benefit of deduction if the assessee fails to deduct TAX in respect of payments outside India which are chargeable under the I.T. Act. This provision ensures effective compliance of Section 195 of the Income-tax Act relating to tax deduction at source in respect of payments outside India in respect of 232 royalties, fees or other sums chargeable under the Income-tax Act, 1961. In a given case where the payer is an assessee he will definitely claim deduction under the Income-tax Act, 1961 for such remittance and on enquiry if the AO finds that the sums remitted outside India comes within the definition of royalty or fees for technical service or other sums chargeable under the IT Act then it would be open to the AO to disallow such claim for deduction."
On a conjoint perusal of the above it is clear that even if the entities had been non-residents or their agents, if the applicant had not wanted to deduct TDS on payments made by it, since he did not think these were taxable, then he was duty bound to approach the Assessing Officer for the certificate U/S 195 (2) of the Act. To summarize, in view of the facts collated in the table above, it was incumbent upon the applicant, who is fully acquainted with these facts to comply with the TDS provisions in order to be able to claim such payments under the provisions of section 40(a)/ 40(a)(i) of the I T Act. As a result of this default, the payments made to residents are correctly disallowed u/s 40(a) of the Act. The objection of the applicant on these grounds is thus rejected."
Therefore, in conformity with the order of DRP, amount of Rs. 78.48 lacs is added to the income of the assessee. (Amount disallowed - Rs. 78.48 lacs) Facts:
46.3. During the year under appeal, the assessee made payment of Rs.78,48,210 to agents of non-resident shipping companies towards clearing charges of certain import consignments. The assessee did not deduct tax at source from the aforesaid payments, on the ground that same were paid to/for and on behalf of non-resident shipping companies, shipping income whereof was exempt from tax in India under the relevant provisions of the DTAA.233
46.4. The AO held that, since the aforesaid payments were made to agents of non-resident shipping companies and not to the non-resident companies, the assessee was liable to deduct tax at source therefrom under the provisions of the Act.
Assessee's Submissions:
46.5. The payments were made to agents of non-resident shipping companies, for and on behalf of non-residents. The liability of TDS was, therefore, to be determined on the basis of provisions of DTAA entered with the country of residence of non-resident shipping companies.
46.6. In terms of the relevant provisions of the DTAA, profits from business of the shipping companies was exempt from tax in India under the relevant Article of the DTAA and, therefore, the assessee was not liable to deduct tax at source from remittance of clearing charges to agents.
46.7. Reliance, in this regard, is also placed on the decision of Kolkata bench of Tribunal in the case of Taj Leather Works v. CIT: 23 Taxmann.com 58, wherein it has been held that where assessee-exporter made payments to Indian agents of foreign airlines on account of air-freight, assessee did not have TDS obligations either under section 194C or section 195 of the Act.
46.8. In view of the above, the assessing officer has made disallowance on mis-appreciation of facts and position in law and, therefore, the disallowance made needs to be deleted.
DR's submission:
23446.9. Reliance is placed on the assessment order and order passed by DRP.
Our findings & conclusion:
46.10. The assessee claims that the payment in question was made to non-
resident shipping companies through its agents. The assessing officer is of the view that the payments were made to the agents of non-resident company and not to the resident shipping company per se and as such held that assessee was liable to deduct tax at source. These facts cannot be addressed unless the agreements between the non-resident shipping company and the assessee or assessee and the agents have been examined. If the payment has been made only to the non-resident company, then the claim of the assessee can be sustained. If the payment is made to the agent and the agent in turn does not remit the whole amount to the non-resident company on behalf of the assessee, then also the provisions of sec. 195 are not attracted as it would be a payment to resident. What is to be seen is whether there is an element of income earned by the agent out of these payments. As the facts are not clear, we deem it fit and proper to set aside the issue to the file of assessing officer for fresh adjudication in accordance with law after giving the assessee adequate opportunity.
47. Ground nos. 24 to 24.2 (TDS on reimbursement of cost of gifts distributed to customers by FX Enterprise Solutions Pvt. Ltd.) DRP Directions:
47.1. The DRP has issued following directions to the Assessing Officer;
"The assessee company had launched a scheme called "Passport Scheme", wherein the customers of assessee using two wheelers were eligible to become members on payment of membership fees. The 235 members of such scheme were entitled to certain points for each transaction undertaken with the assessee/dealers, like service of vehicles, purchase of spares parts, tools, purchase of new vehicle, etc. Under the aforesaid scheme, the customers were inter alia, entitled to get gifts on redemption of points earned under that scheme. It would be pertinent to point out that under the aforesaid scheme; the responsibility of distributing gifts to the eligible customer was that of the dealers. Under the scheme, the assessee was obliged to bear cost of gift given to the customers at the time the customers became member of the passport scheme. Further, in a case where the member accumulated more than 20,000 points and redeemed the same for gift, 50% of the cost of gift to be given by the dealers was to be borne by the assessee. The assessee having introduced the scheme and in order to control and manage the distribution of gifts by various dealers to customers, decided to appoint FX enterprise Solutions India Pvt. Ltd. ('the vendor'), for sourcing and distributing the gift items to dealers for further distribution to customers. In this connection, the Memorandum of Understanding entered into between the assessee and the vendor is attached at page no. 1937-1940 of the paper book. Under the MOU, the vendor was to procure specified gift items and supply the same on a principal to principal basis to dealers for further distribution to the customers under the passport scheme.
The AO in the draft assessment order has held that the payments made to the vendor could not be said to be for the purchase of gifts, but was against services rendered by such vendor and that the 1.55 profit margin over the landed cost price of the product was in the nature of service charges by such vendor. The AO has held that the total payments made to these vendors ware against a composite product price including service charges which was subject to TDS u/s 194C of the I. T. Act. Since the assessee has not deducted tax at source, the AO has proposed a disallowance of Rs. 213 lakhs by invoking the provision of section 40(a)(ia) of the Act. The counsel of the assessee have submitted that it was only for the purpose of facilitation and control of the passport scheme that the assessee appointed the vendor as sourcing and distributing agent of the gift items and that the assessee was not liable to make any payments to the vendors or to the dealers in relation to supplies made by vendor to the dealers.
The objection of the assessee is not acceptable.236
Under the MOU, the members were entitled to points for each transaction undertaken with the assessee for the dealers. The assessee had the choice of going to separate dealers for various requirements like service of vehicle purchase of spar tool, purchase of new vehicles still he would be entitled to gift on the total points scored by it. It was the assessee, who introduces this scheme, and the scheme was under direct control of the assessee. Therefore, the substance of the scheme is that the scheme was operated under the direct control of the assessee and the vendor was rendering services of procuring the gifts and supply the same to various dealers who are interested the responsibility of distributing the gifts. Thus, what the assessee getting for the vendors were the services running the entire scheme. For this purpose, the payment which was required to be made by the assessee was determined on the basis of the cost of the gifts and an addition sum of 1.5% of the same. Thus the composite scheme definitely falls in the category of a service contract and the assessee was liable to deduct tax at source u/s 194C of the income tax. The objection of the assessee rejected."
Therefore, in conformity with the order of DRP, amount of Rs. 213 lacs is added to the income of the assessee.(Addition - Rs. 213 lacs) Facts:
47.2. The assessee had launched a scheme termed as passport scheme, wherein the customers became members on payment of membership fees and were entitled to certain points for each transaction, like service of vehicles, purchase of parts, etc, which were redeemable against gifts. Under the aforesaid scheme, the responsibility of distributing gifts to the eligible customer was that of the dealers and, therefore, the cost of gifts was to be borne by the dealers. The assessee was liable to share the portion of cost, only if the points exceeded a specified limit or of the cost of gift to be given at the time of enrolment of membership of the customer.237
47.3. The assessee appointed FX Enterprise Solution to manage the procurement and distribution of gifts. During the relevant previous year, the assessee made payment of Rs.2.13 crores to FX Enterprise Solutions India Pvt. Ltd. on account of purchase of gifts or re-imbursement of cost of gifts sent by the vendor to the dealers.
47.4. The AO held that the arrangement with FX Enterprise was in the nature of work contract, which was liable for TDS under section 194C of the Act.
Assessee's Submissions:
47.5. The assessee had appointed FX Enterprise in order to control the distribution of gifts under the Passport scheme. The liability of purchasing and distributing gifts was not that of the assessee, but was that of dealers.
The assessee was only to share partial cost of gifts. The gifts were procured by FX Enterprises on its own account and the assessee never got title to the same. The title of ownership in goods passed to dealers after supply of same by FX Enterprise. The contract was, therefore, was contract of sale and not a works contract, on which assessee was not liable to deduct tax at source.
47.6. Reliance, in this regard, is placed on arguments taken in GOA 9 (supra) 47.7. In view of the above, the disallowance made in the assessment order calls for being deleted.
DR's submissions:
47.8. Reliance is placed on the assessment order and order passed by DRP.238
Our findings & conclusion:
Terms of contract between FX Enterprises Solutions and assessee have to be examined prior to come to the conclusion whether FX Enterprises Solutions has undertaken the work contract with the assessee. The claim of the assessee is that FX Enterprises Solutions was managing the procurement and distribution of gifts. The gifts are to be given by the dealer. The title of ownership in goods passed to the dealer and the dealers in turn distribute the gifts under this scheme. If this version is supported by the contract, then the claim of the assessee has to be allowed. As the contract document is not available on record as the assessing officer or the DRP have not placed any finding on this agreement, the interest of justice will be met if the issue is set aside to the file of the assessing officer for fresh adjudication in accordance with law. Ground is allowed for statistical purposes.
48. Ground no. 25 to 25.1 (Disallowance of incorrect deduction on account of additional depreciation reversed in succeeding year):
DRP Directions:
48.1. The DRP has issued following directions to the Assessing Officer;
"In the books of account of the relevant previous year, the assessee claimed additional depreciation of Rs. 82.17 lakhs (correct figure is Rs. 82.07 lakhs) in accordance with accounting norms, which was not admissible deduction from taxable income under the provisions of the Act. The AO has proposed to disallow this deduction. The counsels have submitted that the claim was incorrect but inadvertently it remains to be added back in the computation/return of income. It was further submitted that when the mistake came to the notice of the assessee the same was reversed while filing the return for A.Y 09-10 and the amount of deduction claimed in A.Y 07-08 was offered for taxation in A.Y 09-10. In the course of hearing, the members of the 239 panel require the assessee to furnish the details as to whether the reverse in question was made after the wrong claim has been already noticed by the income tax department. No such details had been furnished by the assessee. It appears that the reversal of the claim of depreciation has been made by the assessee after the department has already selected the assessment for A.Y 07-08 for scrutiny. Thus, the reversal of the claim by offering the depreciation for taxation in A.Y 09-10 appears to circumvent the legal consequences of making a wrong claim in A.Y 07-08. In this background, the disallowance the wrong claim of depreciation and corresponding addition to assessee's income for A.Y 07-08 has to be upheld for A.Y 07-08. The objection of the assessee is rejected.
The assessee has the option of getting his assessment for A.Y 09-10 rectifying under law on the ground that the amount of Rs. 82.17 lakhs on account of additional depreciation has been taxed for A.Y 07-08."
Therefore, in conformity with the order of DRP, amount of Rs. 82.07 lacs is added to the income of the assessee. (Amount disallowed - Rs. 82.07 lacs) Facts 48.2. In the books of account of the relevant previous year, the assessee claimed additional depreciation of Rs.82.07 lacs in accordance with accounting norms, which was not admissible deduction from taxable income under the provisions of the Act.
48.3. The aforesaid amount, however, inadvertently remained to be added back in the computation/return of income of the relevant assessment year.
48.4. The aforesaid mistake came to the notice of the assessee subsequently and, therefore, the said amount was reversed in the books of account for the financial year 2008-09, relevant to assessment year 2009-10, and accordingly offered for tax in the return of income for that year.
24048.5. The AO has added the aforesaid amount on the ground that the same was incorrect.
Assessee's Submissions 48.6. Since the aforesaid mistake has been rectified in the succeeding year and said amount has been offered to tax, the aforesaid claim need not be disallowed in this year as the same would result in double taxation Without prejudice to the above, it is respectfully prayed that in the event the aforesaid disallowance is confirmed, the assessing officer may be directed to issue necessary directions to remove the aforesaid income from the return of income for the assessment year 2009-10.
DR's Submission:
48.7. Reliance is placed on the assessment order and order passed by DRP.
Our findings & conclusion:
48.8. Admittedly the claim for additional depreciation of Rs. 82.07 lacs is inadmissible under the provisions of the Income-tax Act. Under these circumstances the order of the assessing officer disallowing the depreciation for the current assessment year to the extent of this claim is to be necessarily upheld. Just because the assessee reversed the entry in a subsequent financial year and offered the same to tax, is of no consequence. Deduction which is not admissible as per law has to be disallowed. So far as alternative plea of the assessee to issue necessary directions to the assessing officer to reduce the income for A.Y. 2009-10 to the extent of this additional depreciation, is concerned, we express our inability to give such direction. The assessee is 241 free to approach the appropriate authorities as per the provisions of law. In the result this ground of the assessee is dismissed.
49. Ground nos. 26 & 26.1 (Addition on account of non-recognition of royalty income during the relevant previous year):
DRP Directions:
49.1. The DRP has issued following directions to the Assessing Officer;
"The assessee, it is submitted, has an arrangement with various petroleum/oil companies, which are engaged in the business of selling lubricants/oils to be used in the two-wheelers, whereby such companies were entitled to use the brand name of assessee with its products in order to attract customers and increase sales of products of such oil companies. In consideration thereof, the oil companies were required to pay to the assessee, royalty with reference to certain percentage of sale price of products sold with brand name of the assessee. As at the end of the relevant previous year, the assessee company on the basis of past experience estimated the amount of royalty income receivable from such companies with reference to products that would have been sold by oil companies before the end of the relevant previous year, and booked income receivable of Rs. 69 lakhs. Against the aforesaid provision of income of Rs. 69 lakhs, the assessee actually received royalty income of Rs. 97.29 lakhs in the immediately succeeding previous year. The differential amount of Rs. 28.29 lakhs was offered to tax in the year of receipt. In the assessment order, the AO has brought to tax additional royalty income, amounting to Rs. 28.29 lakhs, which was received in the immediately succeeding year on the ground that such income pertains to sales made by oil/lubricant companies during the relevant previous year.
The counsels of the assessee have submitted that it takes time for the lubricants and oil companies selling products using brand name of the assessee to collate details of products sold at various outlets across the country. Therefore, there is a difference in recognition of the royalty income.242
The objection of the assessee cannot be accepted. The gap between the actual royalty income and the royalty income recognized by the assessee is quite big out of 97.29 lacs of the actual income, the assessee has recognized 69 lacs as income leaving out a big amount of Rs. 28.29 lacs in percentage terms. This, itself is enough to show that the assessee has not adopted a scientific method for recognizing royalty income. As can be seen elsewhere in this order, the assessee has been always over estimating the provisioning for its expenditure, but has under estimated the recognition of royalty income. The objection of the assessee is rejected."
Therefore, in conformity with the order of DRP, amount of Rs. 28.29 lacs is added to the income of the assessee. (Addition - Rs. 28.29 lacs) Facts:
49.2. The assessee has an arrangement with various petroleum/oil companies, engaged in the business of selling lubricants/oils to be used in two-wheelers, which uses assessee's brand alongwith their products against payment of royalty. At year end, the assessee estimated royalty receivable and offered royalty income of Rs. 69 lacs.
49.3. In the succeeding year, the assessee actually received total royalty income of Rs. 97.29 lacs; the additional receipt of Rs. 28.29 lacs was offered to income in that year.
49.4. The Assessing officer made addition of the aforesaid additional income in the year under consideration, on the ground that same pertained to sales made by oil companies during the relevant year.
Assessee's Submissions:
49.5. Royalty income receivable from oil companies for use of assessee's brand name with their products was recognized in the books of account on 243 the basis of management's best estimate, since intimation of sales was not provided by the oil companies until the year end, since it takes time to collate details of products sold at various outlets across the country and consequently determining the amount of royalty payable to the assessee.
49.6. It would be pertinent to point out that royalty due for the products sold during the period Jan to March 2007 (ending 31.3.2007) was received from BPCL in the month of July, 2007, after almost 3 months from the end of the relevant previous year.
49.7. The assessee, therefore, as per consistent, regular and accepted method of accounting, accounted income on the basis of estimate and any excess or short provision thereto is recognized in the succeeding year. Since, such method was always accepted in the past, no adjustment was warranted in the year under appeal.
49.8. Without prejudice, the addition, if any, is revenue neutral, if seen in a macro perspective and, therefore, no adjustment is called for.
DR's Submissions:
49.9. Reliance is placed on the assessment order and order passed by DRP.
Our findings & conclusion:
49.10. This is a case of estimation of income based on the information available with the assessee at the time of closing of accounts. Though the income in question pertains to this particular assessment year the assessee due to some practical difficulties in receiving data and information from oil companies, accounted for the income on estimate basis as a matter of 244 consistent policy since past. The excess / short provision of income has been taken care of in the subsequent assessment year. The issue is revenue neutral. This method of accounting of income has been consistently followed and revenue has also accepted the same over the number of years. Under these circumstances, consistent with the view taken by us while disposing of ground nos. 2.2.2 and ground no. 3 & 3.2.2, we uphold the claim of the assessee and allow this ground.
50. Ground no. 27: (Addition on account of non-recognition of membership under the passport scheme):
DRP Directions:
50.1. The DRP has issued following directions to the Assessing Officer;
"The assessee has introduced a passport scheme, wherein the customer who were the member of the scheme were entitle to get gifts on redemption of certain points earned by them under the scheme. The assessee charged membership fee from the customer at the time of becoming member. The vendor appointed to operate this scheme also issues birthday cards to the customer/member of the scheme. Under this scheme, the cost of the birthday cards distributed to the vendor is to be borne by the assessee's dealer. In the first place, the assessee spends money in respect of the cost of the birthday cards sand the same is reimbursed to it by the dealers. Income in the shape of membership fees and the reimbursement of the cost of birthday cards reimbursed by the dealers amounting to Rs. 230.51 lakhs has not been recognized by the assessee in the assessment year under consideration. The AO has proposed addition of Rs. 230.51 lakhs on this account.
The counsels of the assessee have submitted that the vendors have taken time in processing the data of transactions entered during the particular month and sending intimation thereof to the assessee, which resulted in non recognition of this income. Objection of the assessee cannot be accepted. As mentioned elsewhere in this order, 245 the assessee has been very prompt in making provisions on certain estimate basis for booking expenditure under various head for which the exact detailed/particular/computation or bills/voucher are not received in the previous year, but it has been quite relaxed in the matter of recognizing income in the shape of membership fees and reimbursement scheme and cost of birthday cards reimburse under passport scheme,. Objection of the assessee is rejected."
Therefore, in conformity with the order of DRP, amount of Rs. 230.51 lacs is added to the income of the assessee. (Addition - Rs. 230.51 lacs) Facts:
50.2. Under the said passport scheme discussed above, the assessee charges membership fees from the customers at the time of becoming member.
Further, as submitted earlier, the responsibility of distributing gifts/birthday cards to the customers is that of dealers. Under the scheme, the assessee makes payment of the cost of birthday cards at the first instance and, thereafter, seeks reimbursement of the same from the dealers.
50.3. The aforesaid amounts receivable by the assessee for a particular month comes to the knowledge of the assessee on receipt of intimation/information from the administrator of the scheme, viz., Results Services (P) Ltd., who takes time in processing the date of transactions and sending intimation thereof to the assessee.
50.4. Accordingly, the assessee realized income of Rs. 230.51 lacs on account of above two items for the month of March, 2007 in the immediately succeeding assessment year, on receipt of information from the vendor and offered the same to tax in that year.
24650.5. The AO made addition of the aforesaid income in the year under consideration, on the ground that same pertained to the relevant assessment year.
Assessee's Submissions:
50.6. Subscription fees from various customers enrolling under the passport scheme for the month of March, 2007 could not be estimated, in the absence of information available about the number of customers becoming members of the passport scheme, upto the date of closure of accounts. The same was recognized in the immediately succeeding assessment year on receipt of intimation from the vendor.
50.7. Such method is followed consistently and regularly since past several years and accepted as such. Since, such method was always accepted in past, no adjustment was warranted in the assessment order.
50.8. Without prejudice, the addition, if any, is revenue neutral, if seen in a macro perspective and, therefore, no adjustment is called for.
DR's Submissions 50.9. Reliance is placed on the assessment order and order passed by DRP.
Our findings & conclusion:
50.10. This is also an issue of method of accounting. The assessee had not recognized income from the above scheme for the month of March, for the reason that information was not received from the vendor. As and when the information was received the assessee offered the same to tax. It is only an issue of timing difference taken for crystallization of income. Assessee has 247 been consistently following this method of recognition of income. For the reasons given while disposing of ground no. 26 & 26.1, we allow ground no. 27 in favour of the assessee.
51. Ground no. 28: (Disallowance of reimbursement of foreign traveling expenses to directors/ employees, on the ground of no evidence/ proof of actual expense incurred by employees):
DRP Directions:
51.1. The DRP has issued following directions to the Assessing Officer;
"In the course of official duties the employees/directors of the company are required to travel abroad and incur incidental expenses in foreign currency like local conveyance, boarding and lodging expenses, telephone expenses etc. In order to compensate the employees for such overseas, the assessee had introduced a policy fixing per diem allowance payable to employees depending upon the grade/category of the employees and the place/country of travel. The employees are not entitled to any extra allowance in the event actual expenditure incurred by the employee is in excess of such per diem allowance. The aforesaid rates per diem allowance were not applicable to Managing Director/Directors, considering their status and business exigencies requiring their overseas travel and incurrence of expenses in foreign currency. The reimbursement o aforesaid expenses is made by the assessee on the basis of details of expenditure submitted by the employees in specified form, which may not be necessarily supported/backed by bills considering the practical difficulties/impossibilities in producing invoices for petty expenses like local conveyance, telephone bills, etc. In the draft assessment order, the AO has disallowed the aforesaid expendi9ture aggregating to Rs. 155.52 lakhs incurred on account of reimbursement of foreign travel expenses to employees/directors on the ground that the aforesaid reimbursement are not backed by bills/invoices of actual expenditure incurred by the employees, which is necessary in law before allowing deduction of foreign travel expenditure.248
The counsels have submitted that the amount of Rs. 155.52 lakhs is eligible for deduction in view of Supreme Court's judgment in the case of Larsen and Toubro 313 ITR 1 (SC). The objection of the assessee is not acceptable. 'The judgment of the Hon'ble Supreme Court in the case of Larsen and Toubro (SUPRA) is applicable only with regard to leave travel concession and conveyance allowance. The assessee in the present case has not claimed any deduction on account of transport allowance given to the employee, but it is claiming deduction on account of business expenditure incurred on foreign travel by the employees and the directors. As such the assessee can not get the benefit of the Supreme Court's judgement in the case of Larsen supra. It is settled law that the onus is on the assessee to establish with relevant evidenced the fact of actual incurring of expenditure. In this case the assessee has failed to give any evidence of this expenditure incurred by these employees/director on foreign travel. The objection of the assessee is rejected."
Therefore, in conformity with the order of DRP, amount of Rs. 155.52 lacs is added to the income of the assessee. (Amount disallowed - Rs. 155.52 lacs) Facts:
51.2. In the course of discharge of official duties, the employees/directors of the company are required to travel abroad and incur incidental expenses in foreign currency like local conveyance, boarding and lodging expenses, telephone expenses etc. 51.3. The assessee had introduced a policy fixing per diem allowance payable to employees, depending upon the grade/category of the employees and the place/country of travel. The employees are not entitled to any extra allowance in the event actual expenditure incurred by the employee is in excess of such per diem allowance.249
51.4. The aforesaid rates of per diem allowance were not applicable to Managing Director/Directors, considering their status and business exigencies requiring their overseas travel and incurrence of expenses in foreign currency.
51.5. For payment of per diem allowance, as per policy, the assessee does not require the expenses to be necessarily supported / backed by bills considering the practical difficulties/impossibilities in producing invoices for petty expenses like local conveyance, telephone bills, etc. 51.6. The employees are only required to submit details of expenditure incurred in specified form.
51.7. The Assessing Officer disallowed the aforesaid expenditure, aggregating to Rs.155.52 lacs, on the ground that the aforesaid reimbursements were not backed by bills/invoices of actual expenditure incurred by the employees, which is necessary in law before allowing deduction of foreign travel expenditure.
Assessee's Submissions:
51.8. Per diem allowance payable by the assessee is reasonable, having regard to the cost of lodging, boarding, etc. in decent hotels in foreign countries, and the assessee has no reason to doubt the incurrence of such amount by the employees in actuality during the course of foreign travel.
51.9. The assessee does not insist on production of bills against expenses declared by the employees, considering the practical difficulties/impossibilities in submitting invoices/bills for petty expenses like conveyance, telephone, meals, etc. 250 51.10. In respect of foreign travel expenses of the directors, too, it will be appreciated that the average foreign currency utilized per day is only USD 923, which having regard to their status and functions, cannot be said to be unreasonable and excessive. (Refer Page 1945) 51.11. The reasonableness of the expenses incurred by the various employees and the policy of the assessee has not even been doubted by the assessing officer in the assessment order.
51.12. In view of the above, it is submitted, that the practice followed by the assessee to reimburse expenses on the declarations of the employees was in order and the expenditure cannot be disallowed simply on the ground that declarations of the employees were not backed by invoice/bills of expenses incurred.
51.13. Reliance, in this regard, is placed on the decision of Supreme Court in the case of CIT v. Larsen & Toubro: 313 ITR 1, wherein it was held that declaration submitted by the employees, which may not be backed with supporting evidences, is sufficient for the assessee to make re-imbursement of expenses, like leave travel concession, to employees.
51.14. Reliance is placed on the assessment order and order passed by DRP/AO.
Our findings & conclusion:
51.15. The assessing officer in this case has not doubted the fact that employees/ directors of the company travelled abroad and the fact that they have incurred incidental expenses in foreign currency. The reason for disallowance is that employees have not furnished to the assessee evidence 251 in support of the fact that they have incurred conveyance, boarding and lodging expenses etc. When reasonable amount of daily allowance is fixed as per the rules of the company and when these D.A. rules are followed by the assessee, in our view, the incurring of expenditure by the employees is not to be doubted. Even in cases where officers of the government of India travel abroad, daily allowance is given and vouchers for such expenditure are not insisted because of practical difficulties in submitting bills/ vouchers of petty expenses. In such circumstances, what is to be examined by the assessing officer is the reasonableness of the expenses incurred as compared to the general rates of expenses and allow the same. The assessee submits that the fixed per diem allowance payable to employees depending on the grade is reasonable. When such rates are reasonable the question of disallowance does not arise unless the revenue demonstrates that the rates are excessive. In this case it is not that the expenses are not incurred for the stated purpose nor is it that the rates are unreasonable. The disallowance in question in our view on the sole ground that vouchers are not produced by the employees cannot be sustained. In the result this ground of the assessee is allowed.
52. Ground nos. 29 to 29.2: (Disallowance of advertisement expenses on the ground of being capital in nature):
DRP Directions:
52.1. The DRP has issued following directions to the Assessing Officer;
" During the relevant previous year, the assessee incurred expenditure of Rs. 241.14 crores on advertisement. Out of aforesaid total expenditure, Rs. 54.61 crores was incurred towards sponsorship of events, alleged to be non-product specific expenditure, resulting in 252 brand building of the assessee company and Rs. 26.92 crores towards advertising of launch of new models of two wheelers during the year. In the draft assessment order, the AO treated the aforesaid latter two expenses, to the extent of Rs. 54.61 crores allegedly towards brand building and Rs. 26.92 crores towards launch of new models off vehicles as capital expenditure.
The counsels have submitted that the objective behind incurring advertisement expenses at time of launch of new models of two wheelers is to increase the sale of vehicle and consequential increase in a turnover/profits of the assessee company, and the purpose is to constantly remaining the buying public about the name of the company so that it remains in public memory and is readily recall by the prospective customers whenever he considers buying a motorcycle.
The objection of the assessee is not acceptable.
It remains a fact that non product specific advertisement expenses go a long way in building the brand name. Brand name being an intellectual property is a capital asset. Any expenditure on building a capital asset is to be regarded as capital in nature. The objection of the assessee is rejected."
Therefore, in conformity with the order of DRP, amount of Rs. 3174.81 lacs is added to the income of the assessee. (Addition - Rs. 3,174.81 lacs) Facts:
52.2. Out of total advertisement expenses incurred during the year, the assessee incurred expenditure of Rs. 54.61 crores towards sponsorship of events, which was not in the nature of product specific expenditure and Rs. 26.92 crores towards advertising launch of new models of two wheelers.
52.3. The AO treated the aforesaid expenses as capital in nature on the ground that sponsorship expenses/non-product specific expenses resulted in 253 brand building and the launch of new vehicles resulted in enduring benefit to the assessee.
Assessee's Submissions:
52.4. Advertisement expenses, having been incurred for the purposes of business/sales promotion, does not result in creation of any capital asset or enduring benefit in the capital field/profit earning apparatus and is, therefore, allowable revenue expenditure in entirety.
52.5. The object of advertisement expenses is to increase sales and repeated expenditure is required to constantly remain in public memory, as advertisements are short lived and have to be constantly revised/updated to retain the funk and stay ahead of the competition.
52.6. Reliance, is placed on the following decisions, wherein it has been successively held that advertisement expenditure is allowable revenue deduction and cannot be treated as capital in nature:
CIT v. Salora International Ltd. [2009] 308 ITR 199 (Del. HC)) CIT v. Pepsico India Holdings (P) Ltd.: ITA No.319,1185,1448,1822 & 2091 of 2010 (Delhi HC) CIT v. Monto Motors Ltd.: ITA No. 978/2011 (Del.) CIT v. Bonanza Portfolio Ltd.: ITA No. 833/2011 (Del.) CIT v. Sony India P. Ltd. : 1285/2009 (Del.) CIT v. Citi Financial Consumer Finance Ltd.: 335 ITR 29 (Del.) CIT vs. Orient Ceramics & Industries Ltd. (2011) 56 DTR 397 (Del)( High Court) CIT v. Casio India Ltd.: 335 ITR 196 (Del.) 254 CIT v. Berger Paints (India) Ltd.: 254 ITR 503 (Cal. HC) Spice Communications Ltd.: (2010) 35 SOT 78 (Del.) DR's Submissions:
52.7. Reliance is placed on the assessment order and order passed by DRP.
Our findings & conclusions:
52.8. The issue whether the expenditure in question is in the capital field or in the revenue field has to be decided on the facts of the case. This is a case where the assessee has incurred an amount of Rs. 26.92 crores towards advertising, launch of new models of two wheelers. In our view, launch expenses cannot be held to be in the capital field. It does not result in assessee having enduring benefit in the form of the capital asset. Similarly, expenditure of Rs. 54.61 crores incurred towards sponsorship of events cannot be considered as incurred in the capital field. In coming to such conclusion we rely on the following decisions of the Jurisdictional High Court:
- CIT Vs. Salora International Ltd. (2009) 308 ITR 199 (Del.);
- CIT v. Pepsico India Holdings (P) Ltd. (ITA no. 319 of 2010 & others) (Del.);
- "For the Assessment Year 2001-02, the assessee had incurred advertising expenditure of about Rs.3.08 crores for launching of its products and the Assessing Officer held that the expenditure was of an enduring nature and treated one-third of it as capital expenditure. The Tribunal, confirming the findings of the CIT(A) that the expenditure was revenue expenditure, held that there was a direct nexus between the advertising expenditure and the business of the 255 assessee and that unless the assessee made its products known in the market, its business would suffer. On appeal by the Department -
- Held, that no interference was necessary in the issue in regard to advertising expenditure."
52.6. Applying the proposition laid down in these cases which are squarely applicable to the facts of this case, we uphold the submissions of the assessee. Ground is allowed.
53. Ground no.30 to 30.8 Finding:-
53.1. DRP's directions:
The DRP has issued following directions to the Assessing Officer;
"Grounds of objection No 31 to 31.3: These are clubbed together for convenience as they deal with objections pertaining to disallowance of Rs.220.85 lakhs paid by the assessee to Nimbus Sport International Pte Ltd, Singapore ("Nimbus") on the ground that the assessee had failed to deduct tax at source therefrom invoking the provisions of section 40(a)(i) of the Act, and that the said payment did not constitute royalty or fees for technical services and the same was not liable to tax in India in absence of PE of Nimbus in India. Applicant has mainly relied upon the CA's certificate issued to them.
The AO on the other hand has held that the above payment of Rs.220.85 lakhs were made for sponsorship of ICC events and that these formed an integral part of sponsorship agreement, and were thus liable to tax in India, and that the payments to Nimbus for logo, signages, delivery and implementation etc is an inseparable part of the sponsorship agreement and that assessee had entered into two separate agreements in order to avoid tax liability in respect of the above payment. He has also relied upon the letter issued by GCC to the applicant dt 26-01- 2007 where it has been mentioned by GCC that the AO in the case of GCC (refer AO's order para 33.5 (iv)) has 256 characterized the payments to GCC to be in the nature of Royalty as defined under S 9 of the IT Act 1961 and DTAA. Grounds of objection No 31.4 to 31.8: These objections are clubbed together for convenience and relate to disallowance of a sum of Rs 979.50 lakhs and Rs.2720.40 lakhs paid by the applicant to Global Cricket Corporation Pte. Ltd., Singapore ("GCC") on the ground that the applicant had failed to deduct tax at source therefrom and thus disallowance of these u/s 40(a)(i) of the Act.
The applicant holds that the above payments have been made purely for advertisement and publicity of assessee's name and products, and not for use of any proprietary trademark/logo of ICC, the same did not constitute "royalty" or "fees for technical services" under the Act and it has thus not deducted tax on the said remittances.
DRP has perused the Global Partnership Agreement dt. 14th June, 2004 (GPA) of the applicant with GCC and World Sport Nimbus PTE Ltd dt 14 June 2004. Perusal of this reveals the following facts relevant to determination of the character of the payments:
1. IDI is the company formed by member countries of ICC to own and control the commercial rights. IDI as the owner of commercial rights granted by way of contract dt 20 th July 2000 as subsequently novated/ amended/ or supplemented certain of such rights to GCC for exploitation including the right to appoint third party sponsors, suppliers, broadcasters and other licensees.
( Clause Introduction A at Page 1 of the Global Partnership Agreement dt. 14th June, 2004).
2. Global Cricket Corporation (GCC) Pte. Ltd, a company incorporated in Singapore has the exclusive right to grant the global partnership rights to the Global Partner for use solely within the Brand sector in the licensed territory.
3. World Sports Nimbus (WSN) Pte Ltd, a company incorporated in Singapore has been appointed by GCC to 257 conduct negotiations with commercial partners in relation to the Global Partnership Rights and to deliver all rights and benefits granted to the global partner hereunder on behalf of GCC in accordance with the provisions of the agreement.
These are reproduced since one of the objections of the applicant is that AO has come to a conclusion that Nimbus was the sole marketing and sales agent of GCC based on uncertified information available from website www.selvam.com.sg and that the AO proceeded on a totally erroneous factual premise which has vitiated the conclusions arrived at by him. Bare perusal of the above facts reproduced from the Global Partnership Agreement dt. 14th June, 2004) will show that the AO's conclusions are correctly drawn and thus the objection of the Applicant that the conclusions are vitiated as based on erroneous facts, is unacceptable and rejected. Global Partnership Agreement dated 14-06-2004: - A tripartite agreement to transfer of right to use/commercial knowledge for exploitation of the ICC mark, event mark, official status mark .
IDI Owner Ownership of commercial rights of ICC Mark, event mark and official status mark to GCC for exploitation.
GCC Licensee Exclusive right to grant partnership rights to Global Partner based on transfer of right to use and exploit marks and commercial knowledge pertaining to exploitation of ICC marks/ event marks/ WSN To conduct negotiation with commercial partners.258
The AO's conclusion that there are two separate agreements is however erroneous, since there is only one Tripartite Agreement . The payments received have however been split so that the payment to Nimbus is towards cost of pitch logo, signages, perimeter board, etc. This however as discussed in detail hereunder, with reference to commercial clauses is an artificial segregation and flowing as it does from one tripartite agreement in consequence of the 'Global Partnership Rights', the segregation of payment for deliverables does not alter the character of the payment which will have to be seen wholistically as depicted in diagram above.
To ascertain the correctness of applicants submissions vice AO's arguments for characterization of the payment remitted as Royalty both under the Income-tax Act, 1961 and Clause 12 of the Indo-Singapore DTAA as being for the use or right to use any trademark, process or commercial experience the following clauses of the Global Partnership Agreement dt. 14th June, 2004 are reproduced for ready reference:
Extract from Global Partnership Agreement dt. 14th June, 2004 Regarding Right to use Event Marks, the ICC Marks and the Official Status in connection with the Commercial Rights. GCC hereby informs the Global Partner that IDI is the owner of the Proprietary interests and that GCC is the appropriate party to authorize use of the Event Marks, the ICC Marks and the Official Status in connection with the Commercial Rights. The Global Partner shall seek permission to use any of the Event Marks and the Official Status only from GCC. The Global Partner further acknowledges and agrees that IDI/GCC are in the process of reviewing and developing the ICC Marks and the Event Marks and the Global Partner agrees to use such new ICC Marks and Event Marks as are notified to it by GCC and shall use no other marks or logos (save for the Global Partner Marks) in relation to the Global Partnership Rights. 6.4 The Global Partner shall not use or apply the ICC Marks, the Event Marks or the Official Status in any way save as expressly permitted in this Agreement and/or approved in 259 writing by GCC and the Global Partner shall not use the ICC Marks and the Event Marks otherwise than in conjunction with the Official Status.
6.5 The Global Partner shall not use any of the ICC Marks, the Official/Status or the Event Marks in combination or conjunction with any other mark or logo save for the Global Partner Marks and in a manner and form approved by GCC. 6.6 The Global Partner shall notify GCC in writing of any infringement (whether actual or suspected) of any of the Proprietary interests by any third party forthwith upon such infringement coming to the attention of the Global Partner, but shall not take any steps or action whatsoever in relation to such infringement unless requested to do so in writing by GCC. 6.7 The Global Partner shall not itself apply for registration of any part of the ICC Marks, the Event Marks or the Official Status or any marks or logos confusingly similar thereto as a trade mark for any goods or services.
6.8 The Global Partner shall not use any of the ICC Marks, the Event Marks or the Official Status or any part thereof in any trading or corporate name.
6.9 The Global Partner shall not use any marks o r name or words capable of being confused with any part of the ICC Marks, the Event Marks or the Official Status.
6.10 The Global Partner shall execute such further documentation as may be specified by GCC which may, in the reasonable opinion of GCC, be required in order to record the terms of this Agreement on any trade mark or other register or which may, in the reasonable opinion of GCC, be necessary in order to protect the validity and/or ownership of the ICC Marks, the Event Marks, the Official Status, or the Proprietary interests.
6.11 The Global Partner shall comply fully in every respect with the terms of the applicable Brand Manual throughout the Term and shall include on all Advertising Material and Premiums featuring the ICC Marks and/or any of the Event 260 Marks appropriate copyright and trade mark notices as notified by GCC and/or ICC/IDI.
6.12 The Global Partner shall not do or permit there to be done any act which may in any way denigrate or diminish the value of or render invalid, any of the Proprietary interest or which may endanger the title of IDI thereto.
6.13 Whilst the parties acknowledge that it is not intend that any goodwill or any right, title or interest in the ICC Marks, the Event Marks or the Official Status become or be vested in the Global Partner, should the same occur, then the Global Partner shall forthwith assign unconditionally free of charge any such goodwill, right, title or interest to IDI and execute any documents and do any thing at its cost which is or which GCC reasonably deems to be necessary in connection therewith. NB Emphasis supplied Perusal of the above extract from Global Partnership Agreement (GPA henceforth) dt. 14th June, 2004 will show that the use of the Event Marks and the Official Status is both granted and protected by this Agreement. Event Marks are thus notified to Global Partner by GCC and it shall use no other marks or logos (save for the Global Partner Marks) in relation to the Global Partnership Rights, execute such further documentation as may be specified by GCC which may, in the reasonable opinion of GCC, be required in order to record the terms of this Agreement on any trade mark or other register or which may, in the reasonable opinion of GCC, be necessary in order to protect the validity and/or ownership of the ICC Marks, the Event Marks, the Official Status, or the Proprietary interests. While the intellectual property of the ICC marks, event marks, and official status marks continues to vest with the ICC/GCC the right to use and protect the intellectual property is conferred by the GPA agreement a characteristic typical of Royalty payments.
Regarding Characterisation of payment for "Use of the Services of WSN's event management and Implementation team in relation to the delivery of the Global Partnership Rights" as a part of the Global Partnership Agreement 2004 261 Going Forward the Global Partnership Rights are granted under Clause 3.1 of the GPA on an exclusively basis within the brand sector only, throughout the licensed territory subject to and in accordance with the provisions of Clause 4 and schedule 2 of GPA. As per Clause 4.2 the " Global Partner irrevocably acknowledges and agrees that (subject to the provisions of this agreement) its obligation to pay the Global Partnership fee in its entirety arises upon signatures of this agreement.......".
At Clause 4 sub clause 4.3 it is stated that 4.3 The Global Partner shall use the services of WSN's event management and implementation team in relation to the delivery of the Global Partnership Rights PROVIDED THAT such services are provided at competitive market rates (defined as no more than 15% variance from the price at which the Global Partner is able to procure the said services from our bonafide and reputable independent third party) for services of a comparable nature and quality. The payment of such services by the Global Partner shall be agreed in good faith in advance of each event and WSN shall invoice the Global Partner at least 15 days prior to the agreed payment date.
Perusal of the above, will show that the Global Partner having signed the GPA 2004, shall use the services of WSNs event management and implementation team in relation to the delivery of the Global Partnership Rights. Thus it was observed supra that the agreement is one but the payment is split and the Global Partner has no choice but to use the services of Nimbus as a part of the overall Global Partnership Rights conferred under the said tripartite GPA. It is merely a means of billing the variable component of what is effectively a part of the overall Global Partnership Fee Package. It is thus an artificial segregation flowing as it does from rights conferred by one tripartite agreement in consequence of the 'Global Partnership Rights', the segregation of payment for deliverables does not alter the character of the payment which will have to be seen wholistically wrt commercial clauses of governing GPA.
262Regarding TDS and Withholding of taxes as per Para 4.9 of the GPA 2004 From the perusal of the said para 4.9, it is apparent that the Global Partner shall be permitted to withhold from the designated account the relevant payment or part thereof to which the applicable rule or order relates in accordance with the terms of such rule or order.
Regarding Global Partnership Rights Extract from Schedule 4 Global Partnership Rights 1 Right to use official status 1.1 The Global Partner has the right to use the Official Status conjunction only with the Global Partner Marks and in accordance with the provisions of this Agreement being the following designations:
(a) Official Global Partner of ICC:
(b)
2 Official Global Advertising andPartner of the (rights promotional E'ent before Title) and at each Event 2.1 Subject always to paragraph 6 below and the provisions of this Agreement, the Global Partner shall have the right, subject to applicable laws, regulations and codes of practice, to display the Global Partner Marks on certain Advertising Sites, and elsewhere, immediately before, during and after each March at the venue as described below:
(a) The right to 12.5% of all ground level perimeter advertising comprising no less than eight (8) ground level perimeter boards (indicative size:20 feet x 3 feet or 6 meters x 0.90 meters and in any event to be no smaller than those provided to other Global Partners) at all Stadia the exact position of which shall be based on an equitable distribution with other Global Partners in accordance with a formula to be developed by GCC and communicated to the Global Partner in advance which is intended to ensure that all Global Partners receive an equal share of prime sites for television exposure.263
(b) Four (4) ground level perimeter boards at all warm-up Matches in the ICC Cricket World Cup 2007, the exact size and position of which shall be based on an equitable distribution with other Global Partners:
(c) Subject to availability and on an equal basis amongst Global Partners, an option to by further Advertising Sites in the Stadium at cost;
(d) Two (2) outfield pitch logos in the form of pitch mats or grass painted logos (from a total of eight (8) irrespective of the number of Global Partners represented at any of the Events) at all Stadia, on which the Global Partner may display the Global Partner Marks which display shall be equal in prominence with the logo of three (3) other Global Partners on similar outfield logos and the lay out of which shall be communicated to the Global Partner in advance. Such logos shall be of the maximum size allowed by the ICC from time to time and, for the avoidance of doubt shall not, other than behind either wicket on each end, be in the form of pitch mats.
(e) The Global Partner Marks shall appear, in rotation (minimum of 25% in total) with the logo of each of the other Global Partners on the sight screens (if logistically available) at each stadium.
(f) The Global Partner Marks shall appear in advertisements on the electronic screens at each Stadium which has such facility in rotation with advertisements for the other Official Sponsors. The form and other relevant details of such advertisements shall be mutually agreed by the parties.
(g) The global partner Marks shall appear, together with the logo of the other Global Partners and Official Sponsors (Worldwide), on the reverse side of all tickets to Matches and in or on all official Event materials which GCC notifies to the Global Partner are available for branding:
(h) The Global Partner Marks shall appear in rotation with other Official Sponsors on any official website for each Event and shall contain a hyperlink to the internet website of the Global Partner;
(i) The Global Partner Marks shall be displayed, together with the logo of each of the other Global Partners and Official Sponsors (Worldwide), on a "Welcome Board" located 264 prominently by the main entrance of each Stadium, on a media backdrop at all press conference and on the winner's podium;
(j) The Global Partner Marks shall be displayed on at least one flag in any designated "flag court" at each venue (where available), together with flags bearing the logo of each of the other official sponsors, exact details of which shall be mutually determined in good faith by the parties and provided that each Global Partner (including the Global Partner) shall be entitled to the same number of flags;
(k) Subject to prevailing local rules, regulations, restrictions and/or legislation, the Global Partner Marks shall be displayed, together with the logo of each of the other Global Partners and Official Sponsors (Worldwide) on such Venue and host city dressings as are agreed between the parties.
(l) The Global Partner Marks shall be exclusively displayed on any sun umbrellas that may be utilized by the television production team for the purpose of providing shade to television cameras at each Stadium during each Match.
(m) The non-exclusive right but exclusive within the Brand Sector, at the Global Partner's own cost to conduct in Stadia contests and promotions using the Event Marks and the ICC Marks during the Term provided that all aspects of all such promotions are subject to the prior written approval of GCC, such approval not to be unreasonably withheld or delayed, and shall in-Stadia contest and promotions are subject to restrictions prescribed by GCC, at its sole discretion, at each Event. For the purpose of clarity, the Global Partner acknowledges and undertakes to GCC that the above referenced contests and promotions shall be conducted at the Global Partner's own cost and risk; and;
(n) The non-exclusive right but exclusive within the Brand Sector, and only where space are prevailing local rules, regulations, restrictions and/or legislation permit, to locate a reasonable number of displays and product sampling stands at the Stadia during each Event. For the purpose of clarity, the Global Partner acknowledges and undertakes to GCC that the above referenced displays and product sampling stands shall be undertaken at the Global Partner's own cost and risk.
2.2 The Global Partner shall have the right to:
265(a) One (1) full page of colour advertising space in the official souvenir programme (where available) for each Event;
(b) One (1) full page of colour advertising space in the official Match programme for each Event where such programmes are produced;
(c) Have the Global Partner Marks featured in all official publications relating to each Event;
PROVIDED THAT the Global Partner provides and submits to GCC, at its own expense camera-ready artwork for Advertising Materials previously approved by GCC (or such third party as GCC may nominate) at least three (3) weeks in advance of the applicable publisher's publication deadlines. For the avoidance of doubt, the Global Partner shall solely bear any and all Additional costs and expenses incurred by GCC as a result of any late/delayed provision or submission by the Global Partner of any such artwork.
3 Rights regarding the Marks a. Subject always to the terms of this Agreement the Global Partner shall have the non-exclusive right but exclusively within the Brand Sector during the Term to use, reproduce and publish or to authorize its sub-contractors to use, reproduce and publish the Event Marks and the ICC Marks throughout the Licensed Territory in or on Advertising Materials and Premiums in accordance with the provisions of this Agreement. For the avoidance of doubt, the Global Partner irrevocably acknowledge and agrees that IDI/ICC may, at any time during the Term, grant to any Competitor the right and/or license to use and/or reproduce the ICC/Marks provided always that such right and/or license does not in any way relate to, and/or arise in connection with, any of the Events.
4 Rights regarding Footage, Photographs and Player Attributes 4.1 The Global Partner shall have the non-exclusively right to access such footage relating to the Events and/or to ICC events or matches which IDI and/or GCC owns or controls, strictly for advertising and promotional purposes only (which may include television commercials for the Global Partner's 266 products) and only for use during the Term and in accordance with the terms of this Agreement, provided that;
(a) The Global Partner shall not acquire any rights in any such footage other than the limited license hereunder;
(b) The Global Partner shall not distort, add to, delete from or interfere with any such footage or any part thereof without the prior written consent of GCC.
(c) The Global Partner shall not make such footage available for reception via the Internet or any other on-line form of delivery;
(d) Any single use of such footage shall be no longer than thirty (3) seconds in duration;
(e) The Global Partner shall be responsible for obtaining all required approvals and consents (other than copyright related approvals and consents to be granted by IDI and/or GCC) for the use of such footage;
(f) The Global Partner may not use such footage in a manner which may, in the reasonable opinion of GCC and ICC/IDI, express or imply any endorsement of the Global Partner's product whether by any Team or Team member or otherwise; and
(g) The Global Partner may only use such footage in accordance with ID/ICC guidelines issued from time to time.GCC shall use its reasonable endeavors where it does not act as host broadcaster for any Event to procure that the designated host broadcaster provides free access (subject to payment of reasonable duplication costs) for the Global Partner to use footage of the Events for promotional purposes including the right to include excerpts of such footage not exceeding thirty(30) seconds duration for use in television commercials advertising the Global Partner's Products and services during the Term provided that the provisions set out in paragraphs 4.1(a)-(g) above shall apply equally to the footage so accessed.
Without prejudice to paragraph 4.1(f) in this Schedule 4, if any footage from and of the Events (including the above accessed footage) is used or to be used by the Global Partner in a manner which suggests an endorsement of the Global Partner and/or its products by any third party or any other association with the Global Partner by the same, then the Global Partner 267 shall be solely and unconditionally responsible for acquiring from any necessary source (including, without limitation, Teams and members of Teams) consents and/or approvals required for the use of such footage in such manner prior to such use provided however, that the Global Partner shall not be required to seek copyright approval where footage is owned by GCC and/or IDI/ICC.
All out of pocket expenses including tape costs, transfer costs and shipping costs arising in relation to the access of any footage referred to herein shall be for the account of the Global Partner.
4.2 The Global Partner shall be entitled, during the Term, to incorporate still images of the Events in or on Advertising Materials and Premiums for use in accordance with this Agreement provided that the Global Partner shall acquire from any necessary source all copyright consents and/or approvals in relation to the use of such still images and further PROVIDED THAT, without prejudice to paragraph 4.2(e) below, if the still images are used or to be used by the Global Partner in a manner which suggests and endorsement of the Global Partner and/or its products or services by any third party or any other association with the Global Partner by the same, then the Global Partner shall be solely and conditionally responsible for acquiring from any necessary source (including, without limitation, Teams and members of Teams) all consents and/or approvals required for the use of such still images in such manner prior to publication 0r other distribution or exploitation thereof. For the avoidance of doubt and further to the above, the Global Partner shall have the non- exclusive right to access such still images relating to the Events and/or to ICC events or matches which IDI and/or GCC owns or controls, strictly for advertising and promotional purposes only (which may include television commercials for the Global Partner's products) and only for the use during the Term in accordance with the terms of this Agreement, provided that in relation to the same:
(a) The Global Partner shall not acquire any rights in any such still images other than the limited license granted hereunder:268
(b) The Global Partner shall not distort, add to, delete from or interfere with any such still images or any part thereof without the prior written consent of GCC.
(c) The Global Partner shall not make such still images available for reception via the internet or any other on-line form of delivery;
(d) The Global Partner shall be responsible for obtaining all required approvals and consents (other than copyright related approvals and consents) for use of such still images.
(e) The Global Partner may not use such
(f) The Global Partner may only use such still images in accordance with IDI/ICC guidelines issued from time to time.
All out of pocket expenses including copying, transfer costs and shipping costs arising in relation to the access of any still images referred to herein shall be for the account of the Global Partner.
4.3 Subject always to:
(a) Prevailing general applicable law on personal endorsement; and/or
(b) To any lawful and binding agreement or arrangement between the Global Partner and the applicable player, The Global Partner may only use a player's image or attributes in its advertising and promotional materials as set out in this paragraph 4 for the period commencing one (1) month prior to the commencement, and ending three (3) months after the conclusion, of the Event in which that player participate and in relation to which that player has signed a player participation agreement subject in each case to such use not implying a personal endorsement by the applicable player(s) of the Global Partner's products or services and provided that the Global Partner will not be entitled to use the player attributes of any player who has entered into a pre-existing contract with any Competitor. In this context, a pre-existing contract" means a contract between a player and a Competitor which has been both entered into in writing between the parties, and is 269 effective, at least 6 months prior to the Event to which the advertising and promotional materials relate. For the purpose of this paragraph 4.3, the Event shall be deemed to commence on the date of the first competitive Match of the applicable Event, not including any warm-up Match. The Global Partner will accept that a contract is pre-existing for the purpose hereof where the Global Partner is or has been notified in writing by GCC that IDI has provided to GCC written confirmation that a player is party to a pre-existing contract in accordance with this provision.
Perusal of the above Schedule will show that Global Partnership Rights conferred by the GPA 2004 is a bundle of Commercial Rights at the essence of which is the exploitation of the "ICC mark", "Event mark", and "Official Status". GCC has exclusive right to exploit the ICC mark and all the commercial rights flow from the exclusive ownership/right to exploit the said mark and the imparting of the technical and commercial knowledge of exploiting these events and marks.
Applicant having signed the GPA is liable to pay the "Global Partnership Fee" for Global Partnership Rights as laid out in Schedule 4 which includes a bundle of commercial rights that document the imparting of the technical and commercial knowledge concerning the commercial exploitation of these events and marks. The Intellectual property of the ICC and the technical and commercial knowledge acquired from conduct of the following events ie ICC Champions Trophy 2004, ICC Trophy 2005, ICC Under 18 Cricket World Cup 2006, ICC Cricket World Cup 2007 pertaining to advertisement on the ground, electronic screens, tickets, official websites, welcome boards, flags, official souvenir, in-stadia and ex-stadia, contests, displays, footage, photographs, players attributes, tickets, corporate hospitality, still images, promotional products, advertising material and premiums, use of rights by affiliates airtime purchase, exclusive sponsorship of official 270 licensed broadcast/transmissions and other "exclusive rights within the brand sector during the Term to use, reproduce and publish or to authorize its sub-contractors to use, reproduce and publish the Event Marks and the ICC Marks throughout the Licensed Territory in or on Advertising Materials and Premiums in accordance with the provisions of this Agreement." All of which represent and as enumerated and documented in Schedule 4 i.e. global partnership rights embodying the imparting of the technical and commercial knowledge concerning the commercial exploitation of these events and marks.
At issue here is the question of the characterisation of the payment and whether TDS ought to have been deducted thereon. The characterisation of the payment on careful examination of the commercial clauses of the Global Partnership Agreement as discussed supra can be summarized with reference to the following observations set down earlier in the order and collated hereunder for ready reference:
1. the use of the Event Marks and the Official Status is both granted and protected by this Agreement. While the intellectual property of the ICC marks, event marks, and official status marks continues to vest with the ICC/GCC the right to use and protect the intellectual property is conferred by the GPA agreement a characteristic typical of Royalty payments.
2. Regarding Characterisation of payment for "Use of the Services of WSN's event management and Implementation team in relation to the delivery of the Global Partnership Rights" as a part of the Global Partnership Agreement 2004 it is clear that the Global Partner having signed the GPA 2004, shall use the services of WSNs event management and implementation team in relation to the delivery of the Global Partnership Rights. Thus it was observed supra that the agreement is one but the payment is split and the Global Partner has no choice but to use the services of Nimbus as a part of the overall Global Partnership Rights conferred under the said tripartite GPA. It 271 is merely a means of billing the variable component of what is effectively a part of the overall Global Partnership Fee Package and intended to enable the full use of the commercial knowledge transferred under the GPA 2004. It is thus an artificial segregation flowing as it does from rights conferred by one tripartite agreement in consequence of the 'Global Partnership Rights', the segregation of payment for deliverables does not alter the character of the payment which will have to be seen wholistically wrt commercial clauses of governing GPA.
3. Applicant having signed the GPA is liable to pay the "Global Partnership Fee" for Global Partnership Rights as laid out in Schedule 4 which includes a bundle of commercial rights that document the imparting of the technical and commercial knowledge concerning the commercial exploitation of these events and marks.
The characterization of such receipts is squarely covered both under section 9 (1)(vi) rw explanation 2 thereunder and clause 12 of the Indo-Singapore Treaty quite clearly as royalty. DRP also observes that the default of the applicant in non deduction of TDS on the payments made to both; GCC and Nimbus is contumacious and deliberate for the following reasons.
• in the letter dated 26.01.2007 issued by GCC to the applicant, and relied upon by the AO (refer AO order Para 33.5), GCC has quite clearly informed that the receipts have been characterized as royalty in the hands of GCC and • that the GPA 2004 quite clearly incorporates a clause for withholding taxes.
Further the Applicants reliance on Notification no 204 of 2006 dt 31 July 2006 is misplaced since this effectively exempts income of ICC Development International or IDI to the extent of Rs 42 crores only. Applicants assertion that GCC only acted for and on behalf of IDIL is an after-thought and contradictory to the CA certificate relied upon by them which quite clearly states that, " payment to be made constitutes business profits in the hands of GCC to which article 7 of the Indo-Singapore DTAA would apply....." The tripartite GPA 272 2004 reaffirms that the GCC is the exclusive licensee of the commercial rights owned by IDI (Clause 3.3) On these facts the DRP concludes that the action of the AO in holding that applicant was bound to deduct tax or take a certificate from the AO under section 195(2) of the Act in view of the decision of the Supreme Court in the case of Transmission Corporation of India Ltd. Vs. CIT 239 ITR 587, before remitting the payment to GCC and in absence of such certificate is correct as per Law. Disallowance of these u/s 40(a)(i) of the Act is thus correctly made. The DRP, thus, declines to interfere in the Draft order of the AO." Therefore, in conformity with the order of DRP, amount of Rs. 3,920.74 lacs is added to the income of the assessee.
{Addition Rs. 3,920.74 lacs( Rs. 220.84 lacs + 979.50 Lac + Rs. 2720.40 lacs)} Facts:
53.2. During the relevant previous year the assessee made following payments aggregating to Rs.3920.74 lacs to foreign parties in relation to sponsorship of sports events organized by ICC:
Amount in Lacs
1. GCC Pte Ltd., Singapore ('GCC')
- ICC Trophy, 2006 India Rs. 979.50
- ICC World Cup, 2007 West Indies Rs. 2720.39
1. Nimbus Sport Intnl', Singapore ('Nimbus')
- ICC Trophy, 2006 India Rs. 32.79
- ICC World Cup, 2007 West Indies Rs. 188.05 Total Rs. 3920.74 273 Assessee's submissions:
Regarding payments to GCC 53.3. The assessee was appointed as one of the 'Global Partner' of the cricketing events organized by ICC, wherein the assessee was entitled for certain sponsorship rights, like, getting the right to advertise on billboards at the venue, color advertisement space in official brochure/website of ICC, etc. 53.4. The agreement for sponsorship was purely for advertisement and publicity of the brand name of the assessee and for promotion of its products during the cricketing events of ICC.
53.5. The term 'royalties' as used in paragraph (3) of Article 12 of the DTAA means payments of any kind received as consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work including cinematograph films, any patent, trade mark, design or model, plan, secret, formula or process or for information concerning industrial, commercial or scientific experience.
53.6. It is to be appreciated that events like the ICC World Cup, which are held once in four years, are eagerly awaited and is the biggest competition for the cricket playing nations. Such events due to their name, reputation, popularity and substantial viewership worldwide offer tremendous advertising opportunity and the sponsorship consideration so paid by the assessee was to capitalize on such opportunity, to exploit the same to the fullest, to publicize and promote its brand name and products.
53.7. It was with that purpose in mind that the assessee entered into the aforesaid agreement. It is to be appreciated that the payment made by the 274 assessee is not for use of any proprietary trademarks/logo of ICC or its events and even if the agreement provides for the ICC marks to be put alongside the assessee's logo, etc., the same is only incidental to the predominant purpose of the agreement, i.e., appointing the assessee as one of the Global Partners of the ICC cricketing events, for advertisement and promotion of the name/brand of the assessee and its products.
53.8. In view of the above, the impugned payment made towards sponsorship, did not constitute 'royalty' within the terms of Article 12 of Indo-Singapore DTAA or under section 9(1)(vi) of the Act.
53.9. Reliance, in this regard, is placed on the decision of Delhi High Court in the case of DIT v. Sahara India Financial Corporation: 189 Taxman 102 (Del.)(HC), wherein under similar arrangement of payment towards obtaining official sponsorship rights of sport event, it has been held, that the same did not constitute royalty under the provisions of the Act or under the relevant Article of the DTAA.
53.10. Similarly, the Delhi High Court in the case of DIT v. Sheraton International Inc.: 313 ITR 267 (Del.), held that revenue from marketing services was not in the nature of 'royalty' or fees' for technical services', as defined in section 9(1)(vi)/(vii) of the Act or Article 7 of Indo-USA DTAA, notwithstanding use of the brand name/logo of the foreign party in India.
53.11. In view of the above, the total payments made to GCC, being for sponsorship of sport event, was not taxable in India and, consequently, the assessee was not liable to withhold tax therefrom.
53.12. For the aforesaid reason itself, without prejudice to the submissions infra that payment to Nimbus was for different purposes and did not 275 constitute royalty, even assuming without admitting that payments to Nimbus were in essence for sponsorship of event, as held by the assessing officer, the assessee was not liable to deduct tax at source therefrom, since such sponsorship payment, for reasons discussed above, is not taxable in India.
53.13. The Delhi Bench of Tribunal in the case of Nimbus Sport International PTE Ltd. v. DCIT: 145 TTJ 186, held that advertisement revenue collected by the assessee company form an Indian company in relation to matches played abroad cannot be taxed in India.
53.14. It may be pertinent to point that the aforesaid issue was raised by the International Taxation Division of the Income tax Department in the year 2003, and the assessee was asked to show cause as to why the assessee should not be considered as an assessee in default under section 201(1) of the Act for not deducting tax from payment of sponsorship consideration to GCC. After considering the detailed reply of the assessee on the aforesaid lines, proceedings under section 201(1) were not pursued by the Department and no order under that section was passed. Thus, after due examination it was accepted by the Department that the payment made to GCC is not in the nature of royalty and thus not subject to TDS.
53.15. Without prejudice, payment of Rs.979.50 lakhs paid to GCC for sponsoring Champions Trophy, 2006- Not taxable in view of Notification of Government:
53.16. That apart, payment of Rs.979.50 lakhs relating to sponsorship of ICC Champions Trophy, 2006, was not taxable in India, by virtue of Notification No. SO 1230(E) dated 31.07.2006 as amended by Notification No. SO 276 1445(E) dated 06.09.2006, which notified payments to ICC in relation to such Trophy as exempt under Section 10(39) of the Act and read as under :
"Notification No. 204 dated 31 July 2006 [S.O. 1230(E)] In exercise of the powers conferred by clause (39) of section 10 of the Income-tax Act, 1961 (43 of 1961), the Central Government hereby notifies,
(a) the ICC Development (International) Ltd., Craigmuir Chambers, Road Town, Tortola, British Virgin islands, as the person;
(b) the ICC Champions Trophy, 2006 to be held in India, as the International sporting event;
(c) the income arising to ICC Development (International) Ltd.
from ICC Champions Trophy, 2006 on account of sale of media and sponsorship rights, received or receivable from Global Cricket Corporation Pte. Limited, 8 Shenton Way, 30-01, Temasek Tower, Singapore 068811, amounting to $42 million, as the specified income, for the purposes of the said clause. "
53.17. In the assessment order, the AO held that, since payment had been received by GCC and not by ICC Development (International) Ltd ("IDIL") (even though GCC had received payment for onward payment to IDIL), the said payment did not fall within the above Notification and accordingly the same was not exempt from tax in India.
53.18. In coming to the aforesaid conclusion, the assessing officer clearly glossed over the fact that GCC had received payment only for onward payment to IDIL and that it was the latter to which income had arisen, as contemplated in the above Notification. The assessing officer failed to appreciate that GCC only acted for and on behalf of IDIL.277
53.19. Since all payments relatable to IDIL were to be made to GCC, and the amounts received by GCC were ultimately to the account of the former, if the payment to GCC could be brought to tax in India in the hands of GCC, the aforesaid exemption would be of no consequence, and there would be little point in issuing the above Notification.
53.20. It is settled position that no provision of the Act is to be read in a manner so as to render it otiose. The aforesaid exemption cannot be rendered nugatory or inapplicable on such a hyper-technical interpretation and flimsy argument advanced by the assessing officer. Income of IDIL, being not chargeable to tax in India, no deduction of tax under Section 195 of the Act was called for.
53.21. In view of the above, for the aforesaid reason as well, the assessee was not liable to deduct tax from the aforesaid payment to GCC.
Re: Nimbus 53/22. The GP Agreement contemplated two sets of deliverables. The first set of deliverables was the grant of "Global Partnership Rights" (being advertising rights) (explained supra) by GCC. The other set of deliverables, being event management services for delivery and implementation of Global Partnership Rights, were to be provided by Nimbus.
53.24. In terms of Article 4.3 read with Schedule 4 to the GP Agreement, separate consideration was recognized for each of the above sets of deliverables.
53.25. In terms of the aforesaid clause of the GP Agreement, the assessee made payment of Rs.220.85 lacs to Nimbus towards cost of pitch logo, signages delivery and implementation, perimeter boards, etc. at cricket 278 grounds which were used for display of assessee's name and logo. It was Nimbus which was to carry out all advertising related work at the ground location, like painting the pitch, logo, delivery and putting up of signages of the advertisers, etc. in order to ensure common standards and quality of advertisements throughout the course of the cricket events.
53.26. The said payments, it will be appreciated, cannot, by any stretch of imagination, be said to relate to use of, or the right to use, any copyright of literary, artistic or scientific work including cinematograph films, any patent, trade mark, design or model, plan, secret, formula or process or for information concerning industrial, commercial or scientific experience, so as to constitute "royalty" in terms of Article 12 of DTAA with Singapore. The payments constitute "business profits" in the hands of the payee to which Article 7 of the DTAA would apply, which in the absence of permanent establishment of the payee in India is not chargeable to tax in India.
53.27. In view of the above disallowance made by the AO is not based on correct appreciation of facts and position in law and, therefore, the same calls for being deleted.
Without prejudice 53.28. Without prejudice to the above, it is submitted, that in so far as payment made to GCC and Nimbus for sponsorship and other expenses, in connection with cricket matches played outside India, viz. ICC- World Cup, 2007, West Indies, the same cannot, in any case, be brought to tax in India, since income therefrom does not accrue or arise in India under section 5, to be brought to tax in India.279
53.29. Reliance in this regard is placed on the recent decision of Delhi Bench of Tribunal in the case of Nimbus Sport International Pte Ltd.:
145 TTJ 186 (Del.), wherein it has been held that advertisement revenue collected by the non-resident, in relation to event happening outside India, could not be taxed in India.
DR comments 53.30. Reliance is placed on the assessment order and order passed by DRP.
Our findings & conclusion:
53.31. The first issue that has to be adjudicated is whether the payment in question constitutes royalty within the terms of Article 12 of Indo-
Singapore DTAA or u/s. 9(1)(vi) of the act. The assessee has relied on two judgments of the jurisdictional High Court on this issue.
53.32. In the case of Sheraton International Inc. the factual matrix considered was that a non resident was engaged in providing services to hotels in various parts of the country. It entered into one such agreement with ITC for providing services to 3 of its hotels. The scope of the services envisaged in the agreement was publicity, advertisements and sales including reservation services. The tenure was a period of 10 years. ITC was to pay a fee @ 3% of the room sales, for services rendered by the assessee. Similar agreements were entered into by the assessee with Adayar Hotels as well as Hotel Windsor Manore, Bangalore due to reorganization of the rights and liabilities of ITC hotels. The assessee`s case was that the payment in question was business income and as the assessee has no P/E in India, the income is not taxable in India. This view was accepted by the Revenue and `No Objection Certificate` was given on 28th October,1991 and the assessee 280 was permitted remittance of the fee earned in India without deduction of tax at source. In the year 1999 ITC hotels was treated as a representative assessee u/s.163 of the Act and notice was issued u/s.142 of the act. As the assessee did not comply with the notice the AO made a best judgment assessment wherein he concluded that:
1. That payments were fees for included services as provided in article 12 (4) (d) of the DTAA on the ground that an analysis of the agreement shows that payments were made for:-
a. Technical and consultancy services b. Provision for training to its employees.
c. The use of its trade mark d. Making available technical Knowhow.
e. Documents and manuals for which while the assessee was not charging a lump sum fee.
f. The consideration received by the assessee was relatable to the business concluded by client hotels.
2. That the assessee has a business connection in India.
3. Alternatively the assessing officer held that the assessee's income was taxable under the provisions of Article 12 of the DTAA.
53.33. Thus the AO held that the amount received by Sheraton International Inc. was taxable in India as Royalty and fee for included services. The Ld.CIT (A) had deleted the additions.281
53.34. On an appeal by the Revenue the Tribunal has held as follows:
(i) the main purpose of the agreement entered into between the assessee and its clients-hotels was to promote business keeping in mind their mutual interests, through worldwide publicity, marketing and advertisement. All other services rendered by the assessee as encapsulated in various articles of the agreement were incidental and/or ancillary to its main object. The permission to use the trade mark, brand name, as well as the stylized " S" given by the assessee to its clients-hotels was examined by the Tribunal. It returned a finding that there was nothing on record for it to come to conclusion that the real transaction was other than what was stated in the agreement, that is, the use of the trade mark, etc., was not free of cost but was camouflaged in the composite payment made for various services ;
(ii) the assessee, ITC Ltd. had its own brand by the name of "
Welcomegroup" which, as noted in the impugned judgment, was used along- side the assessee` s brand name ` Sheraton`. Furthermore, ITC Hotels Ltd., like the assessee also had its own network by the name of " Welcomenet" which was used for reservations within the country;
(iii) the entire transaction entered into between the assessee and its clients-hotels was an " integrated business arrangement" under which the main purpose was to carry out advertisement, publicity and sales promotion for mutual benefit, in this context all other services, i.e., use of trade mark, trade name, computer reservations were incidental to the main purpose as stated above ;282
(iv) it found as a matter of fact that the payments received by the assessee were neither in the nature of royalty under section 9(1)(vi) read with Explanation 2 or article 12(3) of the DTAA nor fee for technical services or fee for included services under section 9(1)(vii) read with Explanation 2 or article 12(4) of the DTAA. See observations in paragraph 85 of the impugned judgment. The relevant portion of the finding is extracted below :
" As such, considering all the facts of the case, the relevant provisions of the Income-tax Act, 1961, as well as that of the DTAA between India and the USA and keeping in view the legal position emanating from various judicial pronouncements discussed above, we are of the opinion that the amount received by the assessee from the Indian hotels/clients for the services rendered under the relevant agreements was not in the nature of ` royalties` within the meaning given in section 9(1)(vi) read with Explanation 2 thereto of the Income-tax Act, 1961, or as given in article 12(3) of the Indo-American DTAA. The same was also not ` fees for technical services` or ` fees for included services` as defined in section 9(1)(vi) read with Explanation 2 thereto of the Income-tax Act, 1961, or article 12(4) of the Indo-American DTAA respectively. Having regard to the integrated business arrangement between the assessee- company and the Indian hotels/clients as evident from the relevant agreements as well as the nature of the assessee` s own business, the said amount clearly represented its ` business profit` which was not liable to tax in terms of article 7 of the Indo-American DTAA. We, therefore, allow the relevant grounds raised in the assessee` s appeals on this issue and dismiss the additional grounds raised by the Revenue in its appeals."
53.35. When the matter reached the Honb'le High Court it upheld the findings of the Tribunal. The Hon'ble High Court held as under:
"In view of the aforesaid findings of the Tribunal that the main 283 service rendered by the assessee to its clients-hotels was advertisement, publicity and sales promotion keeping in mind their mutual interest and, in that context, the use of trade mark, trade name or the stylized " S" or other enumerated services referred to in the agreement with the assessee were incidental to the said main service, it rightly concluded, in our view, that the payments received were neither in the nature of royalty under section 9(1)(vi) read with Explanation 2 or in the nature of fee for technical services under section 9(1)(vii) read with Explanation 2 or taxable under article 12 of the DTAA. The payments received were thus, rightly held by the Tribunal, to be in the nature of business income. And since the assessee admittedly does not have a permanent establishment under article 7 of the DTAA " business income" received by the assessee cannot be brought to tax in India. The findings of the Tribunal on this account cannot be faulted. The Tribunal pointedly observed that there was no evidence brought on record by the Revenue to enable them to hold that the agreement was a colourable device, in particular, that the payments received were for use of trade mark, brand name and stylized mark "S". We agree with reasoning adopted by the Tribunal."
53.36. In the case of CIT Vs Sahara India Financial Corporation the Hon`ble Delhi High Court held as follows:
"The assessee had entered into an agreement with IMG Canada, as per which IMG was to provide to the assessee the tile sponsorship benefits in connection with the cricket tournaments set out in the schedule. The Schedule to the said agreement specified the details of the Title Sponsor package, which included the right that all the matches and the tournaments would be referred to as Sahara Cup. It also provided for incorporation of the Sahara name and logo as the official tournament logo. The Sahara name and logo were to be prominently displayed at either end of the cricket ground on the out field as also on the stumps and the score boards. The players clothing was also required to display the Sahara logo. Apart from those rights, certain other rights, such as provision for certain number of VVIP tickets, VIP tickets and season tickets were also part of the Title Sponsor Package. The official awards and trophies also required to carry the Sahara name and/or logo. The AO held that the payment made by the assessee to IMG Canada for the said rights of title 284 sponsorship amounted to a royalty payment under article 13(3) of the said appeal, the Tribunal, however, held that the payment made by the assessee to IMG Canada could not be called as royalty as contemplated under article 13(3) of the DTAA."
On the revenue's appeal: Held "On examination of the terms of the agreement between the assessee and IMG Canada it was clear that what had been paid by the assessee was for the right of title sponsorship and the benefits connected therewith. Article 13(3) describes the term royalties to mean payments of any kind including rentals received as a consideration for the use of or the right to use:
a) any patent, trade mark, design or model, plan, secret formula or process;
b) industrial, commercial or scientific equipments or information concerning industrial, commercial or scientific experience; and
c) any copyright of literary, artistic or scientific work, cinematographic films and films or tapes for radio or television broadcasting, Unless and until the payment is in connection with the right to use or is by way of a consideration for the right to use any of the afore said three categories, the payment cannot be termed as a royalty (Para 6) Before any payment could be termed as royalty under article 13(3)©, it had to be either as a consideration for the copy right or for the right to use a copy right in any of the four categories of works mentioned therein, namely, i) literary; ii) artistic; iii) scientific work; and iv) cinematographic films and films or tapes for radio or television broadcasting. What the CIT(A) failed to note in the instant case was that there was no transfer of copy right or right to use the copy right flowing from IMG Canada to the assessee and, therefore, any payment made by the assessee to IMG Canada would not fall within article 13(3)(c) of the DTAA. The reference in article 13(3)(c) is to any copy right and it is not a reference to any right. In those circumstances, the findings of fact and law and the conclusions arrived at by the Tribunal were correct. (Paras 8 and 9)."285
53.37. In the case of Nimbus Sport International Pte Ltd. Vs. DyCIT, 145 TTJ 186, the Delhi 'F' Bench of the Tribunal in its order dt. 30th September,2011 to which one of us is a party held as follows.
"87. Coming to the issue about the advertisement revenue received by the assessee in Singapore for matches played abroad, it has not been disputed that the matches in question for which advertisements were given by the Indian company, were all played in foreign countries. The assessee does not have a PE in India. In this eventuality, the revenue collected by it for the matches played overseas and telecast at overseas will not attract the theory of force of attraction for taxing them in India. The force of attraction can not apply on an assumption that some percentage of the viewers may be Indian and the advertisement made have some incremental value in India for the advertising companies. The clincher to the issue is that the assessee does not have a PE in India, the matches were not played in India, the telecast of the matches was not in India and the indirect benefit which might have been derived by some of the Indian viewers cannot be held to be incremental for Indian companies on assumption. The dominant object of the payment by the Indian companies to assessee's Singapore office was to advertise their products in foreign territory in foreign cricket matches and the dominant object emerges to be the advertisement in foreign territories. The advertisement revenue has no attribution to India and in the absence of any PE, this revenue cannot be taxed in India. Luthansa Cargo India (P) Ltd. Vs. DyCIT (2005) 92 TTJ (Del) 837, Set Satellite (Singapore)Pte Ltd. Vs. DyDIT (2008) 218 CTR (Bom) 452 2008) 11 DTR (Bom) 313 2008) 307 ITR 205(Bom) and Specialty Magazines P.Ltd. in re (2005) 194 CTR (AAR) 108 2005) 274 ITR 310 (AAR) relied on."
53.38. Applying the propositions laid down in these case laws to the facts of the case, we are of the considered view that the claim of the assessee that the payment was purely for advertisement and publicity of the brand name of the assessee and for promotion of its product during the Cricketing events of ICC and not the payment of royalty as defined used in para 3 of Article 12 of 286 DTAA between India and Singapore has much force. The agreement in question includes sponsorship rights like advertising on bill boards, advertisement in official brochure, Web site of ICC etc., which is purely incurred for the promotions, advertisement and publicity of the assessee's brand name and products. If incidentally, the proprietary trade mark or logo of ICC is put alongside the assesssee's logo it is only incidental to the main services obtained by the assessee. The ratio of the Judgment in the case of Sheraton International Inc .(supra), and the judgment of Sahara India Financial Corporation (supra), in our view squarely apply to the facts of the case. Thus the amount in question paid to Nimbus Sports International and GCC PTE Ltd., Singapore is not royalty as the payment was not for use of any trade mark, brand name. As both these organizations do not have any P/E in India the income is not taxable in India and consequently there is no requirement of deduction of tax at source.
53.39. Even otherwise, in case of payments to GCC for sponsorship of Championship Trophy 2006, we find that the Central Govt. vide notification No. S0 1230(E) dt 31.7.2006 as amended by notification No. SO 1445(E) 6- 9-2006 and notified that payments to ICC in relation to such Trophy as exempt u/s 10 (39) of the Act. A perusal of the notification demonstrates that amounts received or receivable from Global Cricket Corporation PEE Ltd., by ICC(development) International Ltd. (IDIL) are exempt. The payments were received by GCC, only for onward payment to IDIL. In our view the overall objective of the notification and the mechanism employed by IDIL for sale of media and sponsorship rights have to be taken into consideration for deciding the matter. When so considered, it is clear that the payments 287 made to GCC are tax exempt, having no element of income and hence there is no requirement of withholding tax u/s.195 of the Act.
53.40. In view of the above discussion, we come to a conclusion that the payments in question made to GCC and PTE Ltd. and Nimbus Sports International are not taxable in India and thus no tax need be deducted at source u/s.195. Consequently no disallowance can be made u/s.40(a)(ia) of the Act. The ground of appeal of the assessee is allowed.
54. Ground nos. 31 to 31.1( Disallowance of provisions for advertisement expenses under section 40(a)(ia):
DRP Directions:
54.1. The DRP has issued following directions to the Assessing Officer;
"This issue is similar in facts and legal submission by the assessee to the issue with regard to objection no 23.17. Assessee's objection regarding objection no 23.17 have already been rejected above, for the same reasons assessee's objection to the disallowance of provision for advertisement expenses u/s 40(a)(a) is also rejected."
Therefore, in conformity with the order of DRP, amount of Rs. 5,893 lacs is added to the income of the assessee.(Addition - Rs. 5,893 lacs) Facts:
54.2. At the year end, the assessee created provision of Rs. 58.93 crores for advertisement expenses incurred during the year but invoice for exact amount of expenses was not received from the vendor.288
54.3. The Assessing officer held that the assessee was liable to deduct tax at source from the aforesaid provision under the relevant provision of Chapter XVII-B of the Act.
Assessee's Submissions:
54.4. The assessee had arrangement with various media agencies for organizing/carrying out advertisements of the company in different print/electronic media, at stipulated date/time, etc. 54.5. The role of media agency is to ensure that the desired/stipulated number of advertisements in various print/electronic media is finally carried out.
54.6. Accordingly, the assessee issues purchase order to various media agencies for the requisite number of advertisements to be executed in the stipulated period of time.
54.7. Subsequently, the media agency on the basis of submission of proof of carrying out of the advertisement on the designated date/time, raises invoice upon the company.
54.8. On receipt of invoice from the media agency, the account of such agency is credited in the books of accounts.
54.9. At the year end, the assessee estimates on the basis of purchase orders issued to agencies during the year, the advertisement expenditure incurred during the year and creates provision therefor. However, in the absence of confirmation from media agencies qua actual number of advertisements carried out in the electronic media, the exact amount receivable by each 289 party was not ascertainable and, therefore, no income accrued in the hands of the party during the relevant year.
54.10. In the absence of accrual of income, the assessee was not liable to deduct tax at source. Reliance, in this regard, is placed on the arguments taken for Ground of Appeal No. 22.15 (supra).
54.11. Without prejudice, the assessee having deducted tax at source, in the immediately succeeding year, at the time of crediting the account of the media agency, and having paid the same before the due date of filing the return of income for the relevant year, no disallowance could have been made under section 40(a)(ia) DR arguments 54.12. Reliance is placed on the assessment order and order passed by DRP.AO.
Our findings & conclusion:
54.13. We agree with the finding of the Assessing Officer that tax is deductible at source on the facts and circumstances of the case. Non deduction attracts S.40(a)(ia) in this case. The disallowance has been made on two grounds (i) that the expenditure is neither ascertained expenditure nor crystallized income; ii) alternatively, if it is held that the expenditure is either ascertained or crystallized then the provisions of S.40(a)(ia) gets attracted as no TDS was made. We have already held that TDS has to be deducted on these payments. As regards provision for the reasons given in ground nos. 38.2 to 38.3 and 39.1 to 39.3 of this order, we uphold the contention of the assessee. This is ascertained expenditure and provison has 290 been made on a bona fide estimate. The assessee ahs been consistently following this method of provisioning.
54.14. In the case on hand the assessee claims that tax has been deducted at source, in the immediately succeeding year when the account of the media agency is credited. It is also submitted that TDS amount has been paid before the due date of filing of return of income of the relevant year.
54.15. Under these circumstances we set aside the issue to the file of the A.O. for verification as to whether tax has been deducted and paid before due date of filing of the return of income. The assessing officer shall decide the issue de novo in accordance with law. This ground is allowed for statistical purposes.
55. Ground no. 31.2 (Disallowance of certain payments under section 40(a)(ia) for alleged failure of TDS):
DRP Directions:
55.1. The DRP has issued following directions to the Assessing Officer;
"Disallowance of reimbursement of advertisement expenses of Rs. 83000/- to two dealers, namely, Jagdish Motors, Rs. 40000 and Bikes Auto, Rs. 43000/- u/s 40(a)(ia) of the IT Act . Similar objection o the assessee has been upheld above with regard to objection no. 23.17. For the same reason the AO is directed not to make disallowance or Rs. 83,000/-.
Disallowance of payments u/s 40(a)(ia) of the Act.
The assessee claimed that the payments of Rs. 9,12,243/- to PMC officers' mess air forces station, Chandigarh. The French embassy (foreign government) and the Indian Institute of Technology, Delhi were exempt under circulars 4/2002, dated 16/07/2002 and u/s 196 291 respectively. As far as the payment of Rs. 4 lakhs to French embassy is concerned, this payment is exempt u/s 196 of the income tax act. The AO is directed not to make the disallowance of Rs. 4 lakhs in respect of payment to French embassy.
As regard the payment of Rs. 1 lakhs to PMC officer's mess and Rs. 4,12,243 is concerned, in the course of the hearing, the panel required the assessee to furnish the copy of the circular no. 4/2002 dated 16/7/2002. The assessee however has not furnished the required circular. The assessee is therefore, directed to produce the circulars before the AO. The AO will re-determine this issue after examination of the circular.
As far as the payment of Rs. 30 lakhs to Indian school of business is concerned, the counsel claimed that this payment is covered by an exemption certificate issued u/s 197 provided by the Indian school of business. We have perused the certificate u/s 197 of the I. T. Act issued by the AO to Indian school of business placed at page 2025 of vol. 8 of the paper book. The perusal of the certificate shows that the certificate is not applicable to payments made for sponsorship to ISB. Since the payment made by the assessee to ISB is for sponsorship the disallowance proposed by the AO on this account is to be upheld. Assessee's objection is rejected."
As per the order of the DRP addition of Rs. 40,000- and Rs. 43,000/- being the reimbursement to M/s Jagdish Motors and M/s Bikes Auto have been deleted. Similarly expenditure of Rs. 4 lacs being payments to French Embassy has also been deleted. These amounts will therefore be excluded from the income. As regards PMC Officers Mess Airforce Station Chandigarh where the payment of Rs.1 lac was made, it has been directed that AO should verify whether this institution is exempt as per circular no.4/2002 dated 16.07.2002 issued by CBDT. Similar is the direction in respect of payments of Rs.4,12,243/- made to IIT, Delhi ,which is claimed to be exempt u/s 10(23C) vide same circular. Case of the assessee with regard to IIT, Delhi stands covered as per section 10 (23C) (iiiab) read with clause 292
(ix) of circular No. 4/2002 dated 16.07.2002 issued by CBDT. This amount will also be excluded from the income of the assessee. However assessee has not been able to provide necessary verification is respect of payment to PMC Officers Mess Airforce Station Chandigarh on the lines as directed by the DRP. No relief is hence being given on this point. Therefore after giving effect of Rs. 8,95,243, net addition is now confined to Rs.31 lacs.
(Addition - Rs. 31 lacs) Facts:
55.2. During the relevant previous year, the assessee claimed deduction of Rs.31 lacs on account of following expenses against which tax was not deducted at source, since the parties were either exempted from tax deduction at source or were not subject to income-tax under the provisions of the Act:
(i) PMC Officers Mess Air Force Station, Chandigarh - Rs. 1 Lakh
(ii) India School of Business, Hyderabad - Rs. 30 Lacs 55.3. The AO disallowed the aforesaid payments on the ground that assessee did not deduct tax at source therefrom.
55.4. As regards, PMC Officers Mess, Air Force Station - Chandigarh, the AO observed that the assessee did not file any evidence to substantiate that income of said party was exempt from tax.
55.5. As regards payment to Indian School of Business, the assessing officer observed that certificate under section 197 provided by the aforesaid party exempted only payments towards professional services, interest and 293 insurance commission, from deduction of tax at source and the same did not cover payments made under, inter alia, advertisement contract falling under section 194C of the Act.
Assessee' s Submissions:
Re: PMC Officers Mess, Air Force Station - Chandigarh 55.6. Under section 196 of the Act, any payment made to, inter alia, the Government is exempt from deduction of tax at source by the payer.
In view of the same, since PMC Officers Mess Air Force Station, Chandigarh is part of Government; the assessee was exempted from deducting tax at source before remitting payments under the aforesaid section.
Re: ISB 55.7. The payments receivable by ISB, either on account of sponsorship of events or otherwise, were taxable as professional fees and, therefore, exemption from deduction of tax at source, as per certificate issued under section 197 was available qua payment made by the assessee towards sponsorship of event. The assessee rightly, therefore, did not deduct tax at source on the basis of such exemption certificate.
DR's Submissions:
55.8. Reliance is placed on the assessment order and order passed by DRP.
Our findings & conclusion:
29455.9. The payment made to PMC Officers Mess, Air Force Station at Chandigarh is payment to government and the question of deduction of tax at source, in our opinion, does not arise. Thus, the disallowance of Rs. 1 lac is hereby deleted.
55.10. Coming to payment made to India School of Business, Hyderabad, undisputed fact is that certificate u/s 197 was provided by ISB. The Assessing officer's case is that payment in question is not covered under this particular certificate. The assessee's case is that payment towards sponsorship of events is towards professional services and hence exempt from TDS as per certificate issued u/s 197 of the Act. In our considered view, once certificate u/s 197 is issued by the department, either for non-
deduction of tax or for deduction of tax at a lower rate, the assessee can claim that based on this certificate it has a bona fide belief that tax need not be deducted at source. Further, the claim of the assessee that payments receivable by ISB have to be verified from the correspondence with ISB. If ISB's income is exempt under the Act either u/s 10(23) or S.11 to 13, then also, in our view the assessee would be justified in taking a view that no T.D.S. need to be made. The matter requires further investigation into the facts, keeping in view our observations. Thus in the interest of justice, we set aside this issue to the file of the A.O. for fresh adjudication. This ground is allowed for statistical purposes.
56. Ground no. 31.3 (Disallowance of provision for warranty):
DRP Directions:
56.1. The DRP has issued following directions to the Assessing Officer;295
"The assessee has claimed expenditure of Rs. 5.73 crores by making a provision for royalty in respect of products sold during the relevant previous year. The AO found that the basis of making provision is not as per the Supreme court judgemet in the case of Rotork Controls India Ltd. 314 ITR 62 (SC). The AO has mentioned that the SC in its above refereed judgment has held the method of creating provisions on the basis of last year's average is a rational method, whereas the assessee has made provision on weighted average of two years.
The counsels of the assessee submitted that the provision of warranty made being on the basis of weighted average of two years is quite scientific and it has been following this method consistently. The objection of the assessee cannot be accepted.
The very fact that always the provisions of warranty being made by the assessee is higher than the actual expenditure of warrant itself shows that the method adopted by the assessee to make provision for warranty is not scientific. Moreover as already pointed out by the AO the method adopted by the assessee is not in terms of the Hon'ble Supreme Court judgement Rotork Controls India Ltd. (supra). As already mentioned elsewhere in the order, even though a wrong method has been consistently followed, it cannot be a reason to perpetuate the mistake. Objection of the assessee is rejected."
Therefore, in conformity with the order of DRP, amount of Rs. 573 lacs is added to the income of the assessee. (Addition - Rs. 573 lacs) Assessee's Submissions:
56.2. Covered in favour of the assessee by the decision in assessee's own case for earlier years, including the latest order of Hon'ble ITAT for the AY 2006-07, where the method of computing provision for warranty each year on the basis of average of actual claims in the past has been accepted DR's Submission:296
56.3. Reliance is placed on the assessment order and order passed by DRP/AO.
Our findings & conclusion:
56.4. Admittedly the issue is decided in favour of the assessee by the ITAT in the assessee's own case for A.Y. 2006-07. The issue is disputed on the method of computing the warranty, liability by the assessee. The A.O. disallowed the whole claim on the ground that the provision is excessive.
The A.O. finds fault with the assessee taking weighted average of two years expense but does not give an alternative computation of liability. The assessing officer is wrong in coming to the conclusion that the Hon'ble Supreme Court in the case of Rotork Controls India Ltd. (supra) has laid down that the only basis of making a provision is last years average and that all other methods are not rational. Just because some excess provision is made, the method cannot be termed as irrational. Last year excess provision is reversed in this year and so on. As long as the basis is logical and consistent, it cannot be rejected. Just because the estimate is excessive in the view of the A.O. the entire claim cannot be disallowed. Respectfully following the order of the coordinate Bench on the same issue, we allow this ground of the assessee.
57. Ground nos. 34 to 35.6.4: (Disallowance of royalty/ technical guidance fee on the following grounds: a. capital expenditure; (b) applying section 40(a)(ia) for failure to deduct tax at source at rate applicable to business profits.):
DRP Directions:297
57.1. DRP has adjudicated the issue as under:
"DRP has carefully perused the detailed submissions of the applicant and the draft assessment order. It is observed that most of the objections raised by the applicant have been duly considered by the AO and discussed in detail in the draft assessment order under reference.
The objections of the applicant regarding existence of PE of Honda Motor Co. Ltd., Japan and the arguments discussed by the AO at page 174 to 180 of the draft order under reference have been carefully perused. DRP has also perused the agreement for Technical Collaboration, Renewal agreement dated 02.06.2004, alongwith 2nd Supplementary Agreement dated 20.09.2005 and Technical Assistance agreement dated 21.06.2004.
The factual findings of the AO that various technicians have worked in India for 370 man days i.e. 191 days during relevant FY 2006-07 is not controverted by the applicant. What is objected to is that technical guidance by dispatching to licensee technical experts of licensor cannot be aggregated since separate agreement are for obtaining supervision for different line of activities which are claimed to be independent in nature and the argument that this is for an assembly project undertaken in India is also objected to. Before DRP, as indeed before AO, the onus lay on the applicant to substantiate this argument which it has failed to do. Perusal of the agreements filed and referred to supra show that these are entered into for two wheelers manufactured by the assessee and there is no specification regarding manufacture of separate parts to justify disaggregation of period of stay of various technicians. The Delhi High Court in a recent case has laid down the rationale that employees of a non-resident parent visiting India frequently and working under the control and supervision of the parent at a fixed place of work to which they have regular access, constitute a PE. As per the Memorandum on Exchange of Technicians (MOET) dated 21st June 2004, the lodging and living condition of licensor's technical experts (Article 7 of MOET) shall be arranged by the Licensee and medical care treatment during stay and other measures for health and 298 safety of the engineers at the licensee's premises or facilities as under:
"Whereas according to Article 4 of the Agreement the Parties agreed to enter into a MEMORANDUM ON EXCHANGE OF TECHNICIANS ("Memorandum" or "this Memorandum") to formalize the arrangements(s) for exchange of Technicians whereby Licensor will impart technical guidance and training to Licensee's engineer(s) (either at Licensor's facilities or at Licensee's facilities) and instruct and advise Licensee's engineer(s) as to the application to the Technical Information."
As per Technical Collaborations and Technical Assistance agreement, brief extracts from which are reproduced below to show the supervision and quality control exercised by Honda through its technicians:
Regarding Technical Information and Technical experts.
"4.1 During the term of this Agreement, LICENSOR shall furnish LICENSEE with all the Technical Information deemed necessary by LICENSOR for the manufacture of the Products and the parts, by disclosing it in documentary form and/or by dispatching LICENSOR's technical experts(s) to LICENSEE and/or accepting LICENSEE's engineer(s) at LICENSOR's facilities to instruct and as to the application of the Technical Information and or/otherwise, in the manner advice them mentioned in this Article 4.1."
Regarding Quality compliance "20.2 .....(1) LICENSOR may from time to time inspect the Products and the Domestic Parts. For such inspection, LICENSEE shall, at the request of LICENSOR, submit to LICENSOR such reasonable quantity of the Products or the Domestic Parts as may be designated by LICENSOR, and/or permit LICENSOR or its agents to inspect the manufacturing/assembling process and the Manufacturing Facilities of LICENSEE and approved Subcontractors. In such event LICENSEE shall give full cooperation to LICENSOR and its agents.
Regarding- supply of Manufacturing Facilities.
299"16.1 The Manufacturing Facilities to be supplied to LICENSEE by or through LICENSOR shall be determined by LICENSOR after consultation with LICENSEE subject to the import policy of the Government of India and to the granting of import licenses. The trms and conditions of such supply by or through LICENSOR or the Manufacturing Facilities (including the prices therefore) shall be separately agreed upon by LICENSOR and LICENSEE by entering into specific purchase contract.
DRP is thus in agreement that the various business premises of the applicant constituted a fixed place of business {clause 5(1) of DTAA} at applicant's offices and factories {clause 5(2) of DTAA} to which the technicians deputed under the 'Memorandum of Exchange of Technician' had regular access over 191 days during the relevant previous year are facts in relation to an assembly project undertaken in India {clause 5(3) of DTAA} for manufacture of two wheelers in India at applicants business premises. DRP thus confirms the finding of the AO regarding existence of PE of Honda Motor Co and the consequential actions taken in pursuance of this finding and thus declines to interfere with the order.
Alternatively Royalty and technical guidance fees paid to Honda Motor Co, Japan, ('Honda') under the 'License and Technical Assistance Agreement' ("LTAA") have been held to be capital in nature and not allowable as a deduction by the AO @ 25% of similar expenditure in earlier years. During the year the AO has treated 100% of expenditure incurred on royalty and technical guidance fees as capital expenditure.
It is observed that this issue stands decided in favour of the assessee however the Department is in appeal before High Court as per Addl CITs report in this regard. Since the matter apropos the capital nature of this payment is sub-judice, and has not attained finality, the DRP declines to interfere in this matter. The objection of the applicant on these grounds is thus rejected."
Therefore, in conformity with the order of DRP, amount of Rs. 26824.59 lacs is added to the income of the assessee.[Addition of Rs. 26824.59 lacs] Facts:
30057.2. The assessee is engaged in the business of manufacture and sale of motorcycles using technology licensed by Honda Motor Co. Ltd, Japan ("Honda"). The assessee makes payment of royalty to Honda for use of know-how and technical guidance fee, as per agreed per diem rates, for technicians visiting the assessee for rendering services as required by the assessee, in accordance with License and Technical Assistance Agreement, ('LTAA') dated 02.06.2004, read with Memorandum for exchange of technicians, applicable during the relevant year. The assessee also pays model fees in lump sum on launch of any new model.
57.3. During the relevant previous year, in terms of the aforesaid agreement, the assessee paid Rs. 26,709.21 lacs (including cess thereon of Rs. 1271.87 lacs) as royalty, Rs. 138.37 lacs (including cess thereon of Rs. 6.59 lacs) as technical guidance fee, and Rs. 4712.96 lacs as model fee to Honda, which were claimed revenue deduction. The aforesaid payments were made after deducting tax at source @10% being the rate of tax applicable in relation to payment of royalty and fees for technical services under Article 12 of Indo- Japan DTAA.
57.4. While framing the assessment order, the Assessing officer treated the aforesaid expenditure incurred by way of royalty, technical guidance fee and model fees paid to Honda as capital expenditure on the ground that
(i) the same results in enduring benefit, while following the assessment order(s) for the earlier years; and 57.5. the technicians of Honda had stayed in India during the relevant previous year for 191 days, excluding the common period of stay and Honda had a PE in India, in terms of Article 5(4) of the Treaty, since the 301 supervisory/consultancy services provided by such technicians in relation to manufacture of vehicles constituted supervisory services in relation to assembly project in India. Therefore, the AO held, that the assessee was liable to deduct tax @40%, instead of 10%. Since, the assessee deducted tax at lower rate, the AO disallowed the entire expenditure under section 40(a)(i) of the Act Assessee's Submissions:
57.6. (i) Re: Capital Expenditure: Covered in favour of the assessee by the decision of ITAT in the assessment year 2000-01; 2001-02; 2002-03 and 2006-07;
57.7. (ii) Re: Disallowance u/s 40(a)(i) 57.8. The payment made to Honda for services of foreign technicians was taxable as fees for technical services, under Article 12 of the DTAA on which tax was duly deducted at source by the assessee @10% 57.9. At the outset, the issue whether Honda had a PE in India, due to continuous presence of its technicians, deputed in India, was examined in detail by CBDT and it was clarified vide letter dated 1.3.1996 that the Income-tax Department's contention was not sustainable under the provisions of the Treaty. In light of the aforesaid categorical clarification issued by the CBDT, it was not open to the assessing officer to examine afresh the same issue and hold that Honda had PE in India during the relevant previous year.302
57.10. That apart, it is respectfully submitted, that even otherwise, on facts and in law, Honda did not have PE in India in terms of Article 5(4) of the Treaty between India and Japan for the following reasons:
A. No assembly project 57.11. In terms of Article 5 of the Indo-Japan Treaty, foreign enterprise is deemed to have constituted PE in the other contracting State if the foreign enterprise carries on supervisory activities in relation to construction, installation or assembly project for a period of more than six months in the other contracting State (in India).
57.12. The words "assembly project", referred to in Article 5(4) of the Treaty means "setting up of assembly project", which would be clear from the fact that the words "assembly project" have been used along with construction, installation project, which denotes an activity of long duration requiring substantial presence of the foreign enterprise executing or supervising the project.
57.13. In the present case, the supervisory activities availed from Honda were not in relation to any assembly project in India. The assessee already had an existing plant/manufacturing facility and no new facility was set-up during the relevant previous year. The services of technicians of Honda was availed for providing technical guidance/assistance, trouble shooting etc., in relation to manufacture of various models of two wheelers at the already existing plant/manufacturing facility.
57.14. The manufacturing activity carried out by the assessee involves assembly of motorcycles. In case, technicians of the foreign enterprise 303 supervise the manufacturing process on such assembly lines on need basis, the same would not tantamount to supervision of assembly project, as referred to in Article 5(4) of the Treaty.
B. Foreign visit of technicians - not covered under Article 12(5) 57.15. Without prejudice to the above, subject payments, being towards obtaining consultancy/technical services from Honda, were covered under Article 12 relating to Fees for Technical Services under Indo-Japan DTAA.
57.16. Para 5 of Article 12 provides that income in the nature of, inter alia, fees for technical services would not be taxable under that Article, if the payment made is 'effectively connected with the already existing Permanent Establishment of the foreign enterprise' in India. In such a situation, it is provided that fees would be taxable as business profits under Article 7 of the DTAA.
57.17. In view thereof, payment in the nature of Fees for technical services is taxable as business profits under Article 7, only if the same is effectively connected with pre-existing PE of foreign enterprise.
57.18. The phrase "effectively connected with such permanent establishment" in paragraph 5 of Article 12 of the Treaty implies that the permanent establishment of a foreign enterprise must first be existing or situated in the other Contracting State, and the earning of fees for technical services must be effectively connected with such existing PE. The rendering of technical services resulting in earning of technical service fees, which may be the cause of constitution of PE of the foreign enterprise in the other Contracting State, would not trigger the provisions of paragraph 5 of Article 304 12 and such royalty/FTS would continue to be taxable in accordance with paragraphs, 1, 2 and 3 of Article 12.
57.19. In the present case, since no PE of Honda existed in India, prior to the visit of personnel of Honda to India, which has been alleged by the assessing officer, as resulting in constitution of PE of Honda in India, the aforesaid royalty/FTS cannot be said to be "effectively connected" to any pre-existing PE and hence the provisions of paragraph 5 of Article 12 had no application. Consequently, subject payments were taxable @10% only, in terms of Article 12(2) of the Treaty.
C. The period of stay was less than 180 days/six months 57.20. That apart and without prejudice to the above, the supervisory services rendered by technicians of Honda did not exceed the stipulated period of six months. The assessee had requisitioned services of technicians of Honda in relation to different activities, viz., assistance, trouble shooting of different problems arising from time to time in connection with manufacturing various models of motorcycles.
57.21. Each requisition of foreign technician for which separate purchase order/request was placed had no relation/coherence with the other purchase order issued by the assessee and, therefore, the period of stay of foreign technicians under different and separate purchase orders could not be aggregated to determine the period of stay for purposes of Article 5(4) of the DTAA.
57.22. For example, if a technician comes for few days to provide consultancy in relation to production of engines, another technician comes at 305 some other point of time for 80 days to address difficulties being faced in the gear shop and yet another technician comes at a different point of time for 40 days to supervise/ advise on assembly of final product, the time spent by various technicians for various jobs, as aforesaid, are not to be aggregated to determine the period of stay, to apply the duration test in Article 5(4) of the Act 57.23. Reliance, in this regard, is placed on the following decisions, wherein it has been held that where different purchase orders / contracts were issued for various different activities, unless there is commercial/geographical coherence between the said activities, the duration test of six months has to be applied with reference to each activity.
- Sumitomo Corporation v. DCIT : 114 ITD 61 (Del ITAT)
- ADIT v. Krupp Uhde GmbH : (2008) 28 SOT 254 (Del ITAT)
- ADIT v. Valentine (Mauritius) Ltd.: 130 TTJ 417 (Mum.)
- Ray McDerrmott Eastern Hemisphere Limited [TS-766-ITAT- 2012(Mum)] 57.24. In view of the above, the observations made by the assessing officer are not based on correct appreciation of facts and position in law and, therefore, Honda could not, even otherwise be said to have PE in India, in terms of Article 5(4) of the Treaty, on account of the aforesaid visits of technicians of Honda.
Without Prejudice 306 57.25. Further without prejudice, since tax was already deducted @10% under bonafide belief/difference of opinion, no disallowance could be made under section 40(a)(ia) of the Act.
DR comments 57.26. Reliance is placed on the assessment order and order passed by DRP.
Our findings & conclusion:
57.27. The issue whether the expenditure in question is in the capital field or the revenue field has been decided in favour of the assessee by the ITAT in assessee's own case for earlier assessment years 2000-01, 2001-02, 2002-03 and 2006-07. The ITAT Delhi Bench 'C' in assessee's own case for A.Y. 2006-07 in ITA no. 5130/Del/2010 vide order dated 23-11-2012 has held that the annual payment of royalty was a revenue expenditure. In doing so the ITAT has relied on various judicial pronouncements including the decision of Jurisdictional High Court in the case of Climate Systems India Ltd. And Sharda Motors Industrial Ltd. No change in facts and circumstances has been pointed out by the ld. DR. Therefore, respectfuly following the same, we allow this ground of the assessee.
57.28.Now coming to the disallowance u/s 40(a)(i) the allegation against the assessee is that there was short deduction of tax i.e,. TDS was deducted @ 10% instead of 40%. It is not a case of non-deduction of tax at source. It is a case of short deduction of tax of source due to application of lower rate.
While disposing of similar issue above we have followed the decision of the Hon'ble Calcutta High Court in the case of CIT Vs. S.K. Tekriwal (ITA no 183 of 2012) and decided the issue in favour of the assessee. Consistent with 307 the view taken therein, we decide this issue also in favour of the assessee, on the sole ground that, disallowance u/s 40(a)(i) cannot be made in the case of short deduction of tax at source. The other arguments pressed by the parties are not adjudicated upon as they are of academic nature only.
58. Ground no. 36 to 36.10 (Disallowance of export commission for alleged failure to deduct tax at source):
58.1. DRP's Observations For the purpose of convenience the objections are clubbed and the gist of these is that the applicant holds that • the AO erred in not appreciating that services/assistance provided by Honda were incidental to the right for ceding overseas territory and were incidental to exploring foreign territory and were not in the nature of 'fee for technical services' while the AO has held that applicant was bound to take a certificate from the AO under section 195(2) of the Act in view of the decision of the Supreme Court in the case of Transmission Corporation of India Ltd. Vs. CIT,:239 ITR 587, before remitting export commission to Honda and in absence of such certificate the assessee was required to withhold tax on export commission paid to Honda.
• The alternate argument of AO to hold that export commission constitutes capital expenditure on the ground that the same was incurred for acquiring permission/license for making export and was not allowable under section 37(1) of the Act and allowance of depreciation thereon has also been strongly objected to.
The applicant has made comprehensive submissions before the DRP which have been carefully perused. We have also noted that most of these have been incorporated in the draft assessment order and dealt with in some details, consequently, these are not reproduced or discussed herein except to draw attention to page 182 to 195 of the draft assessment order where the AO has laid down his arguments for characterization of the payment remitted as Royalty both under the Income-tax Act, 1961 and Clause 12 of the Indo-Japan DTAA as 308 being for the use or right to use any trademark, process or commercial experience.
DRP has also perused • the Export Agreement dt 15 January 2005, and it is observed that the Export Agreement is an integral part of and emanates from • Article 3 of the broader LTAA (License and Technical Assistance Agreement) dt 2nd June 2004 for manufacture, sale, distribution, repair and service within a specified territory.
Article 3 of this LTAA agreement originally provides that the applicant can sell or export outside the specified territory of Republic of India, the products manufactured/ procured by the licensee and utilize licensors distribution network for this purpose subject to a separate Export Agreement. Hence the character of the payment has admittedly to be determined with reference to the LTAA. That the payment made under the LTAA is in the nature of Royalty/ FTS for the territory of India is conceded by the applicant having paid TDS @ 10% on this remittance under the LTAA.
Now that under the same LTAA, a payment is being made for the same commercial rights to be exercised albeit in a different territory, the characterization of the payment cannot change. On these facts the DRP concludes that the action of the AO in characterization of payment termed as 'export commission' is correct and his finding that applicant was bound to take a certificate from the AO under section 195(2) of the Act in view of the decision of the Supreme Court in the case of Transmission Corporation of India Ltd. Vs. CIT 239 ITR 587, before remitting export commission to Honda and that in absence thereof required to withhold tax on export commission paid to Honda is correct as per Law. The disallowance u/s 40(i)a is also thus correct and reinforced by the decision of the Hon'ble Apex Court at 327 ITR 456 (SC). The objection of the applicant on these grounds is thus rejected.
On the alternative argument of treating payment made as export commission as capital expenditure disallowable u/s 37(1) of the Income-tax Act, 1961, DRP refuses to interfere as discussed in Objection no 35 since on this issue the Department is in appeal before 309 High Court as per Addl CITs report in this regard. Since the matter apropos the capital nature of this payment is sub-judice, and has not attained finality, the DRP declines to interfere in this matter.
In light of discussion above, the objection of the applicant on these grounds is thus rejected."
[Addition Rs. NIL - To be considered separately in the para hereunder where TPO's disallowances have been discussed]"
Facts 58.2. During the relevant previous year, the assessee paid export commission of Rs.12.58 crores @ 5% of the FOB value of export sales in accordance with agreement, dated 15.01.2005 (effective from 21.06.2004), as consideration for according consent to the assessee to export motor cycle and their spares to certain countries, where supplies were being made by Honda or its affiliates hitherto.
58.3. The Assessing Officer held that the payment of export commission to Honda was towards royalty/fee for technical services on the ground that same was consideration for right to use trademark and managerial and technical services, which was taxable in India in terms of section 9(1)((vi)/(vii) of the Act and accordingly the assessee was under obligation to deduct tax under section 195 of the Act on such payment. In view of the failure of the assessee to deduct tax at source from the aforesaid payment, the assessing officer disallowed the entire amount of export commission paid by the assessee, invoking provision of section 40 (a)(i) of the Act.
58.4. The AO also held that since the whole arrangement between the assessee and Honda revealed that Honda directed export to specified territories and the said exports were more for the purpose of Honda than the 310 assessee company, the same could not, therefore, be allowed under section 37(1) of the Act. According to the assessing officer, the expenditure was purely in the nature of license acquired by the assessee for the purpose of making export to the countries where Honda had exclusive privilege to operate.
Assessee's submissions:
58.5.All the aforesaid issues have been decided in favour of the assessee by the Tribunal in the assessee's own case for the assessment year 2006-07.
DR arguments 58.6. Reliance is placed on the assessment order and order passed by DRP.
Our findings & conclusion:
58.7. This issue admittedly is covered in favour of the assessee and against the revenue by earlier decision of the Tribunal in assessee's own case for A.Y. 2006-07. The Tribunal therein has held as follows:
"75. The Assessing Officer has alternatively held the payment of export commission to be capital expenditure. After considering the arguments of both the sides and the facts of the case, we are unable to accept this view of the Assessing Officer. By way of export agreement, HMCL has only permitted the assessee to export the specified goods to the specified countries, that too, subject to running payment of the export commission. The assessee has not acquired any asset or even the intangible right in the nature of a capital asset. The Assessing Officer has disallowed the royalty payment paid by the assessee by way of technical know-how agreement holding the same to be capital expenditure. From paragraph No.7 to paragraph No.29, we have discussed at length and have come to the conclusion that the payment of running royalty cannot be said to be capital 311 expenditure. While doing so, we have also relied upon several decisions of Hon'ble Jurisdictional High Courts at pages 17 to
24. For the sake of brevity, we are not reproducing the same again but, we reiterate that the ratio of those decisions in the cases of Lumax Industries Ltd. (supra), Shriram Pistons & Rings Ltd. (supra), Sharda Motor Industrial Ltd. (supra), J.K.Synthetics Ltd. (supra), Climate systems India Ltd. (supra) and Munjal Showa Ltd. (supra) would also be applicable so as to arrive at the conclusion that the payment of running export commission paid as a percentage of export amount every year cannot be said to be capital expenditure. In view of the above, we delete the disallowance of export commission made by way of transfer pricing adjustment and also by way of general provisions of the Income-tax Act."
58.8. Respectfully following the same we allow this ground of the assessee.
59. Ground no. 37 (Transfer pricing adjustments) DRP Directions:
59.1. DRP has adjudicated the matter as under;
"Addition of Rs. 59,88,25,615/- on account of difference between the arm's length price of international transactions based on the order passed by the TPO. Following Transfer Pricing adjustments have been proposed by the TPO:
S. no. International Amount of Arm's Difference
Transactions international length price
transaction of the
shown by the international
assessee transaction
determined
by TPO
1. Payment of 12,58,87,677 NIL 12,58,87,677
Export
Commission
312
2. Payment of 47,12,95,747 NIL 47,12,95,747
Model Fee
3. Royalty paid on 16,42,191 NIL 16,42,191
exports made to
the AEs
Total Rs.
59,88,25,615
Findings: All these transactions were benchmarked last year also and were considered by the DRP for AY 06-07. The assessee is in ITAT against these adjustments. The facts are same for this year, hence the logic of DRP decisions for last year is relevant this year also. However since resjudicata is not applicable , as each tax year is different, the facts and submissions for this year have been considered in depth by the DRP esp. in light of some new ITAT decisions.
a. Payment of export commission According to assessee payment of commission was made to HMCL in view of theirof agreeing to cede the overseas market. According to assessee by making this payment, it gained access to new overseas markets for its products, which enabled it to enhance its sale. In its submission the assessee has analysed the additional income from exports over domestic sales .Assessee has relied upon various case laws including ITAT Mumbai decision in Dresser Rand India regarding business decisions as well as DRP decision in Honda Seil Power Products regarding export commission. The panel has considered all arguments and submissions, including those dated 22nd & 24th Feb. 2012, of the assessee. Panel is of the view that the TPO has passed a detailed speaking order. Yet DRP has considered all the details on record to arrive at its conclusions.
It is needless to say that Transfer Pricing is highly fact intensive and transactions need to be considered with reference to the business circumstances of the assessee. Since facts of Honda Seil power product are different, that decision cannot be applied to assessee's case. It would suffice to say in Honda Seil power products, based on facts, export commission was allowed and royalty was disallowed. Further, Transfer Pricing by nature is about comparability and comparability would include analysis of economic 313 circumstances and business choices made leading up to the rationale for a particular decision.
The Transfer Pricing Officer was also asked by the DRP to verify the details and agreements .A copy of TPO's report dated 21.02.2012 was given to assessee. The Export agreement was verified during the hearing ,there is no mention about ceding of territories . Further Technical know-how agreement was renewed 2nd June, 2004 and within 19 days export agreement was operationalised. (Agreement dated15.1.2005 is retrospectively effective from 21.6.2004) It is obviously a contrived agreement. A plain reading of relevant articles from the agreement, as extracted below and assessee's submission before DRP will make this apparent.
"Under the technical know-how agreement dated 02.06.2004, the assessee was entitled to use technical know-how provided by HMCL for manufacture and sale of products only in India and was not authorized to sell its products or parts in any other county without the prior written consent of HMCL. In order to gain access to foreign territories it was necessary for the assessee to obtain consent from HMCL, in consideration of which export commission was paid by the assessee. The relevant extract of the technical know-how agreement dated 02.06.2004 is reported below:
"Article 2 (Grant of license and exclusivity) Subject to the terms and conditions herein contained, licensor hereby grants to licensee an indivisible, non transferable and exclusive right and licenses, without the right to grant sub-licenses, to manufacture, assemble, sell and distribute the products and the parts during the term of this agreement within the territory under the intellectual rights and by using the technical information.
Article 1 (Definitions) (6) The terms "Territory" shall mean the Republic of India"
Further, Article 2 of the export agreement states as under"
"Article 2 (Consent to export) Subject to the terms and conditions herein contained, licensor hereby gives consent to the export to designated country by licensee, however, without a right to re-export."
In view of the aforesaid, it is respectfully submitted that foreign markets were ceded by HMCL by allowing the assessee to sell its products in those markets. Export of products to foreign territory without the consent of HMCL would have amounted to violation of the terms of technical know- how agreement. It is further submitted that the export realization of the assessee, after taking into account the export commission in higher than the 314 domestic sale price of motorcycles, which clearly establishes the arm's length nature of the international transaction of payment of export commission. "
Further according to assessee, "From the above table, it is clear that the assessee has realized additional profit of Rs. 15,61,64,909/- from export of goods as compared to profits which could have been realized form the sale in domestic markets. In consideration for payment of export commission the assessee is also able to procure export orders using the distribution network and infrastructure of HMCL. "
After considering all the submissions, the DRP is of the view that the assessee has attempted to make out a case that it has gained a higher income from the export of certain models of motorcycles as compared to the domestic sale of these motorcycles. The assessee must appreciate that the income/profit realised from exports cannot be compared to domestic transactions. This has been decided by the case of Indo American Jewellery Ltd. (2010-TII-24-ITAT-Mum-TP) and also in the case of Vedaris Technology (ITAT Delhi). The comparison that the assessee has made is also faulty as it seems to give the impression that royalty and export commission are the only factors that create pricing differentials between a domestic sale and an export sale. This is incorrect as there are many other factors like differences in freight and transportation charges etc. that will be factored into the cost of exports that will lead to higher realizations. It is due to these reasons that the Tribunals have held that a comparison between an export sale and a domestic sale is not a good comparison for the purpose of benchmarking.
The assessee has also pointed out that the products sold by the assessee are different from the products sold by HMCL. This implies that HMCL is also making sales in these territories. In fact ceding territory according to assessee as explained during DRP hearing does not mean no presence but implies that Indian entity was also allowed henceforth to do business in those territories. This being the case, the assessee has punctured its own argument that this payment was made as HMCL has 'ceded' these territories to the assessee. From the facts that have now been mentioned by the assessee no 'ceding' has taken place. If the assessee had sell some products not sold by HMCL in these territories, it would have to set up fresh service/technical infrastructure for these products in these territories. Hence, the possibility that it would have been able to use the existing service/technical infrastructure is remote. The assessee would have to do so 315 by its own effort. It has therefore, only expanded the reach of the network of the AE in these countries. It should not be asked to make a payment when the eventual beneficiary of its efforts is the AE.
Thus in the light of above discussion, DRP is of the view that the analysis of TPO is correct and so no interference is called for in the TP order.
Royalty Before the DRP the assessee has submitted that, "The technical assistance agreement and each of the subsequent amendments thereto, have been approved by the Central Government (SIA, Ministry of Industry).
In view of the approval granted by the central government, the transaction of payment of royalty and model fee was consideration to be at arm's length. Reliance in this regard may also be placed on the decision of the Hon'ble Delhi Bench of the Tribunal in the case of Sona Okegawa Precision Forgings Ltd vs Addl CIT (ITA No. 4781/Del/2010) (attached as Annexure III), wherein the Hon'ble Tribunal relying upon the approval granted by the Central Government, considered the transaction of payment of royalty to be arm's length. The Hon'ble Tribunal held as under:
"The assessee has placed on record a copy of the letter dated 30.040.1993 written by the Reserve Bank of India, Exchange Control Department, to Sona Steering Systems Ltd., in which payment of royalty @ 3% on domestic sales was allowed to be paid for a period of five years. There are similar other correspondences which have been placed on record. The assessee has also placed on record a press note issued by the Government of India, Ministry of Commerce and Industries, Department of Industrial Policy & Promotion, issued in 2003, under which royalty payment @ 8% on export on export sales and 5% n domestic sales have been referred t be reasonable for the purpose of processing approval of payments. On the other hand, the AO failed to bring any material on record that payment of royalty @ 3% was not at arm's length. Therefore, the payment stands justified under the CUP method.
It is submitted that royalty and technical know-how fee is paid by the assessee on the basis of the approval granted by Central Government, which implies that such payments are as per industry norms and are comparable to payment of royalty and technical know-how fee by other industries in the segment. It is respectfully submitted that the central government is expected to grant approval for payment of royalty after taking into consideration the 316 reasonability of such payments and the benefit expected to be derived by the licensee as well as by the industry at large. The aforesaid criteria for evaluation a license agreement would by itself ensure compliance with the arm's length standard. "
DRP has noted that the Assessee has relied upon SIA approval and the approval dated 6.9.04 has been perused by the DRP. A scanned copy of the said agreement is placed as Annexure to this order. The SIA approval by Dept of Industrial Policy and Promotion (DIPP) is for foreign collaboration for manufacture of two and three-wheelers.The terms & conditions for calculation of royalty as listed in para 8 of the approval are briefly summarised below.
i. Royalty to be paid as per Foreign Exchange Control Manual of RBI and relevant GOI instructions ii. Payment restricted to licensed capacity plus 25% excess and in the event of excess production fresh SIA approval required.
Panel finds that royalty calculation by SIA is with reference to production. Further para 18 of SIA approval clearly states, "The agreement shall be subject to Indian Laws." So, whether it is at arm's length is neither given nor can it be assumed. It must be established with reference to Indian Laws & in this case under TP Laws. So SIA approval cannot suo moto be considered as at arm's length. The TPO by his analysis has established that it is not at arm's length. Assesse has relied upon Hon'ble Delhi Bench of the Tribunal in the case of Sona Okegawa Precision Forgings Ltd vs Addl CIT .But here the Hon'ble ITAT had accepted the contention of assessee as AO had not placed any contrary material on record. But the facts of assessee's case have been analysed by DRP and it is clear from analysis of SIA approval itself that it cannot be considered to be at arm's length . The DRP has perused the SIA approval and finds royalty is to be paid model wise, at differing rates for different periods, so it can not reflect industry norms as claimed by assessee. Since there is no homogeneity payments cannot be considered as at being at Arms Length under the CUP . In Perot Systems TSI (India) Ltd. (2010-TIOL-15-Del), M/s CABOT INDIA LTD (2011-TII-58-ITAT-MUM-TP), Coca Cola Pvt. Ltd. [309 ITR 194 (P&H)] it has generally been held that approvals given by government authorities were not a test to decide the arm's length nature of international transactions.
317Further, RBI approval is for purpose of remittance of foreign exchange under Foreign Exchange Control Manual of RBI & is not a determinant of Arm's Length Price.
In view of the above discussion, the DRP finds no infirmity in the action of TPO and no interference is called for by the DRP.
i. Model Fee Payment Before the DRP ,the assessee has claimed, " with regard to the Transfer Pricing adjustment in respect of the entire amount of model fee paid to the associated enterprise, viz Honda Motor Company, Japan of Rs. 47,12,95,747/- without prejudice to our contention that the said adjustment is unlawful and is not sustainable and is liable to dropped for the reasons elaborately submitted in the objections filed before your Honour, it is respectfully submitted that the TPO in the preceding previous year has held that only 75% of payment towards model fee to be excessive and, therefore, liable to be disallowed, therefore, consisted with finding of the TPO in the preceding year, in the relevant precious year, too. The adjustment in respect of the model fee may kindly be restricted to the extent of 75% as against 100% of the model fee paid. "
Model fee is the third transactions benchmarked by the TPO. SIA has approved lump sum payment being model fee for 2 new models of Japanese Yen 900 million in 3 instalments subject to tax. But whether as discussed above, this is at arm's length has to be seen by the TPO. Model fee is being paid but without regard to R&D being out by the assessee. On one hand 96% indigenization has been claimed & on the other model fee is being paid. Assessee has no where established what is new in these models and how this rate is arm's length rate. In the circumstances DRP funds no reason to interfere with order of TPO and cannot accept the argument of assessee that the adjustment be restricted to only 75%.
To conclude all these 3 transactions had been considered by DRP last year also & a detailed order was issued. The assessee is already before ITAT on these issues. The facts and circumstances are same, hence the logic of earlier DRP order of A.Y. 2006-07 is valid. However the additional arguments and facts for this year have been considered by the DRP. According to DRP no interference in the order of TPO is called for at present."318
In view of the discussions made above and directions of the DRP amount of Rs. 59.88 crores is added to the income of the assessee.
[Addition Rs. 59.88 crores] Assessee's submissions:
59.2. The Transfer Pricing Officer (TPO), in his order passed under section 92CA(3) of the Act, made adjustment on account of the arm's length price of the following international transactions disregarding the bench marking analysis applying TNMM carried out by the appellant:
Arm's Amount of length price international of the International S.No. transaction international Difference Transactions shown by the transaction appellant determined by TPO
1. Payment of 12,58,87,677 NIL 12,58,87,677 Export Commission
2. Payment of Model 47,12,95,747 NIL 47,12,95,747 Fee
3. Royalty paid on 16,42,191 NIL 16,42,191 exports made to the AEs.
Total 59,88,25,615 319 The assessing officer accordingly enhanced income of the appellant by a sum of Rs.59,88,25,615 allegedly on account of difference in the arm's length price international transactions.
Re: Payment of export commission:
59.3. Under Technical Know How Agreement June 2, 2004 the appellant was entitled to use technical know-how provided by Honda Motor Co. Ltd, Japan (HMCL) for manufacture and sale of two wheelers and parts in India and was not authorized to sell its products or parts in any other territory than in India without the prior written consent of HMCL. The agreement was approved by the Secretariat for Industrial Assistance, Ministry of Industrial Policy and Promotion through approval dated September 6, 2004. It is submitted that such terms & conditions are normally prevalent in technology agreements between uncontrolled entities wherein the licensor of the technology, in order to protect its market share/territory incorporates such conditions in the technology agreements.
59.4. Considering the constraint in the technical know-how agreement, appellant entered into a separate Export agreement dated 21.06.2004, pursuant to which the AE accorded consent to the appellant to export specific models of two wheelers to certain countries on payment of export commission @ 5% of the FOB value of such exports.
59.5. The appellant during the relevant previous year earned additional contribution of Rs.15.61 crores to profit after taking into account the export commission and payment of royalty from exports (refer page 2194-95 of the paper book No. 10).320
59.6. The Tribunal, in the appellate order passed for assessment year 2006-
07, deleted similar addition on account of international transactions of payment of export commission (at pages 59 to 61 and paragraphs 65 to 66), holding that export agreement was for the benefit of the appellant and was not detrimental to the interest of the appellant.
Re: Model Fee:
59.7. The TPO held the arm's length price of international transactions of payment of model feel of Rs.47,12,95,747 to be NIL, allegedly applying CUP method by concluding that no independent party would pay such fee in similar circumstances.
59.8. The Hon'ble Tribunal, in the appellate order passed for assessment year 2006-07 (at page 88 and paragraph 90) deleted the addition made on account of Transfer Pricing adjustment in respect of model fee in that year.
Re: Royalty paid on exports 59.9. The TPO has held arm's length priced of payment of royalty in respect of exports amounting to Rs.16,42,199 to NIL. Similar addition on account of Transfer Pricing adjustment was deleted by the Hon'ble Tribunal in the appellant's case for assessment year 2006-07 (at page 94 and paragraph 91).
DR's Submissions:
59.10. Reliance is placed on the assessment order and order passed by DRP.
59.11. In respect of royalty paid on exports it is submitted that the ld. AR has erred in relying on the order of the Hon'ble Tribunal in assessee's own 321 case for assessment year 2006-07 in respect of the aforesaid issue, without appreciating that the agreement entered into by the assessee on account of which aforesaid payment was made during the relevant assessment year was not considered by the Tribunal while passing the said order. The approval given by other authorities is not relevant for transfer pricing purposes.
59.12. In view of the aforesaid, the order of the Tribunal for assessment year 2006-07 cannot be relied upon.
Assessee's Rejoinder 59.13. The following technical know-how agreements have been entered into by the appellant with its associated enterprises:
1. Technical know-how agreement dated 2.6.2004. The agreement has been approved by the Central Government vide approval dated 6.9.2004
2. First supplementary agreement dated 30.11.2004. The agreement has been approved by the Central Government vide approval dated 6.6.2005. The agreement and the approval have been considered by the Hon'ble Tribunal at pages 82-83 of the order for assessment year 2006-07
3. Second supplementary agreement dated 20.9.2005. The agreement has been approved by the Central Government vide approval dated 26.7.2006. The terms of the approval are similar to the approval relating to first supplementary agreement and specifically allows payment of royalty on exports 322 59.14. Since the facts of the case for assessment year 2007-08 are pari-
materia with the facts of assessment year 2006-07, wherein the Hon'ble Tribunal deleted the adjustment made by the TPO on account of payment of royalty on exports, it is respectfully submitted that the adjustment proposed by the TPO for assessment year 2007-08 is liable to be deleted Our findings & conclusion 59.15. The Tribunal considered these very same T.P. adjustments while disposing of the case of the assessee for A.Y. 2006-07. Paras 65 to 66, paras 88& 89 and 90 & 91 of the Tribunal's cover all the three issues, as reproduced below.
65. In the details filed before the Assessing Officer, the assessee has given model-wise details to show that the sale consideration of the export of each model was more than the domestic rate and even after considering the export commission, it was more than the domestic rate. The TPO has also held that under the export agreement, the assessee has agreed to various conditions which are detrimental to the assessee and, therefore, the assessee is not required to pay any export commission. The first point mentioned by the Assessing Officer to arrive at this conclusion is that the assessee is not able to export any model which it wants to export but it was required to export certain prescribed models. However, without the export agreement, the assessee was not able to export any of the models. It is only because of the export agreement the assessee is permitted to export the specified models to the specified countries. Therefore, the export agreement has benefited the assessee and not detrimental to the assessee as alleged by the Assessing Officer. The second condition pointed out by the TPO is that the assessee cannot use any other distributor except the group companies and the subsidiaries. We have already pointed out that in fact the assessee is benefited by using the marketing network of the subsidiaries of HMCL because the assessee has not paid any amount to the subsidiaries of AEs. If the assessee utilizes the services of any other person, it would have been required to pay for those services. The TPO has also mentioned that the 323 assessee is expected to bear the warranty cost. However, such warranty cost is to be borne by the assessee even in the case of domestic sale. Even otherwise, the warranty cost is always to be borne by the manufacturer. The TPO has also referred to paragraph 7.7 of the export agreement to point out that the assessee is required to conduct service campaign of its products in those countries. Paragraph 7.7 reads as under:-
"7.7 If reasonably requested by any Distributor, LICENSEE shall at its discretion conduct a service campaign, in respect of the Products and in the relevant Designated Country. Any reasonable costs/expenditure to be incurred or spent in this regard shall be duly decided by the LICENSEE at its sole discretion."
66. From the above, it is evident that first of all it is to be requested by the distributor that a service campaign is required and then the assessee has a discretion to conduct or not to conduct such campaign. In case any such campaign is conducted, then the expenditure in this regard would be borne by the assessee. In our opinion, this clause cannot be said to be a detrimental condition as stated by the TPO in his order. The TPO has disallowed the entire export commission on the ground that the export agreement was not for the benefit of the assessee but detrimental to the interest of the assessee. Therefore, no export commission is required to be paid. After considering the entire facts, we are of the opinion that the export agreement was for thebenefit of the assessee and not detrimental to the interests of the assessee. By virtue of the export agreement, the assessee was able to export the specified models of the two wheelers to the specified countries. It is true that by virtue of the export agreement, the assessee was not permitted to export any of the models to any of the countries. However, even by export of specified models to the specified countries, the assessee has benefited and the assessee has given the detailed working of such benefit which is also enclosed as Annexure-1 to this order. As per this working, the assessee derived the benefit of `13.05 crores by the export. The export sale rate was more than the domestic sale rate even after considering the export commission. In view of the above, we are unable to uphold the disallowance of commission by the Assessing Officer by way of transfer pricing adjustment.
32488. In our opinion, the ratio of the above decision would be applicable to the facts of the assessee's case because in this case also, there is no dispute about the genuineness of the payment, namely, that the payment was in fact made by the assessee to the recipient foreign company. The assessee has furnished the entire information asked for by the AO/TPO. It is not even the allegation of the Revenue that any information is not furnished by the assessee. The technical assistance received by the assessee by way of development of new model was essential for the purpose of assessee's business. It is also not in dispute that the assessee was benefited from the know-how and technical assistance by way of model development by HMCL. The said technical assistance was all pervasive in the operation of the assessee's business.
89. Now, the only question remains whether the assessee has been able to discharge the initial onus to justify that the quantum of remuneration was reasonable. In our opinion, the assessee has been able to discharge the said onus - (i) by producing the copy of the correspondence between the assessee and the Government of India, Ministry of Heavy Industries by which it is evident that the Government has given approval only after examining in detail the reasonableness of the payment. In the letter dated 12.05.2005 written to the Ministry of Heavy Industries, the assessee has also specified how the negotiation took place between the assessee and HMCL and the model fee proposed to be paid by the assessee was arrived at after due negotiations between the assessee and HMCL. (ii) model development fee is being paid by the assessee since past many years and in none of the earlier years, it was held by the Revenue that the model development fee is excessive or unreasonable. In fact, in the earlier two years i.e. 1996-97 & 1999-2000, the expenditure by way of model development fee was treated as capital expenditure but the appellate authorities have held it to be revenue expenditure.
90. From the above, in our opinion, the assessee has duly discharged the initial onus which lay upon the assessee. Thereafter, the burden shifted to the Revenue to show that the payment of model development 325 fee was excessive and unreasonable and therefore, arm's length price should have been less than what is actually paid by the assessee. We find that the TPO has not specified how the model development fee paid by the assessee was excessive or unreasonable. It is only his subjective assessment that the arm's length price of the model development fee should have been 25% of the payment made by the assessee. While taking this view, he has held that there was a joint activity of development of new model by the assessee and HMCL. The contribution of the assessee is much more than the HMCL and therefore, he attributed only 25% of the model development fee as arm's length price of the transaction. However, we have already discussed above that there was no such joint activity of the model development. The activity of the assessee of the market research and market study was for ascertaining the specifications of the model/technology required by it. Therefore, it was prior to the actual research and development undertaken by HMCL. The next activity of the assessee started only after the model is developed by HMCL and technology is handed over to the assessee. Then the assessee undertook the research and development activity for absorption of such technology and for indigenization of the spare parts. Thus, the activity of research and development of the model was undertaken by HMCL and not jointly by the assessee and HMCL. No other reason is given by the TPO for determining the arm's length price at 25% of the model fee paid by the assessee. He has not applied any method for determining the arm's length price prescribed under Section 92C(1) of the Income-tax Act. In view of the above, the decision of Hon'ble Jurisdictional High Court in the case of Nestle India Ltd. (supra) would support the case of the assessee rather than the Revenue. In view of the totality of above facts, we are unable to uphold the view of the TPO that the arm's length price of model development should be to the extent of 25% of the payment towards model fee. The same is set aside and the addition made on this count is accordingly directed to be deleted.
91. The next issue is disallowance of royalty paid on exports made to associate enterprise amounting to `4,08,32,068/- by determining the arm's length price at nil.
The TPO made the disallowance with the following observations:-
"11.1 During the year under consideration the assessee has paid a royalty of Rs.212,40,40,877/- to the AE. It is seen from 326 the details furnished and the agreements that the royalty has been paid on the Exports also. It has already been discussed that the exports have been made only to the AEs. This implies that the royalty has been paid on all the exports made to the AEs. The data furnished by the assessee shows that following payment of royalty has been done on the exports made to the AEs.
Models Export Quantity Royalty rate Amount of royalty
Ambition 24 781 18744
CBZ 8010 1653 13240530
CD 100 SS 32891 0 0
CD 100 SS DLX 757 916 693412
CD DAWN DLX 2721 741 2016261
Glamour 1878 940 1765320
Karizma 53 1324 70172
Passion Plus 14968 1042 15492456
Pleasure 15 1109 16635
Splendor Plus 19339 300 5801700
Super Splendor 2039 842 1716838
4,08,32,068
11.2 On analysis of the above facts following points are noticed:
1. The assessee is paying royalty to Honda Japan.
2. The exports are made to the subsidiaries or group companies of Honda Japan.
3. The assessee, in a way is paying royalty to Honda Japan for the exports made to the subsidiaries and group companies of Honda Japan.
4. The assessee is also paying Export Commission to Honda Japan @ 5% for the exports made to the AEs.
5. In a way the price of exports made to AEs have been reduced by the amount of royalty and export commission as compared to the sale in the domestic market.
11.3 The position of the assessee company with regard to manufacturing for the AEs is that of a Contract Manufacturer.
The assessee company is purchasing raw material from the AEs. The royalty paid as a percentage of sales to the associated enterprise is not at arm's length because it amounts to 327 collecting royalty on the sales to itself. All the AEs are typically within the broad umbrella of the multinational corporation. Even though, it appears that the technical knowhow is commercially exploited in India, in realty the price for these activities are not fixed by market forces. Whether the sales of the assessee are made within India to its AE or to the parent company does not make much difference to the principles of arm's length transactions. In this case the capacity and other parameters are tied to the AE capacity and it cannot act like an entrepreneur. Therefore, both the risk and rewardare like a contract manufacturer. No contract manufacturer would like to make this kind of transactions with an independent third party."
We respectfully follow the decision of coordinate Bench of the Tribunal.
59.16. The submission of the ld. DR that the Tribunal has not considered the agreement while disposing of the mater in the previous year is devoid of merit. Ld. DR has not pointed out as to what are the clauses and as to how he has come to the conclusion that the Tribunal has not considered certain aspects while disposing of the matter in the earlier year. In the absence of any specific submission in this behalf, we are inclined to follow the coordinate Bench order, which has considered the technical know how agreement dated 2-6-2004 which is approved by the Central government on 6-9-2004 as well as the supplementary agreement dated 30-1-2004 and 20-9- 2005, both of which were approved by the Central government and had come to the conclusion referred to above. In view of the above discussion, we allow this ground of the assessee.
59.17. Accordingly, this ground is allowed.
32860. Ground no. 38.1 (Disallowance of alleged prior period expenses amounting to Rs. 489.07 lacs).
Finding: Ld. Counsel for the assessee did not press this ground raised on the issue of disallowance of prior period expenses of rs. 497.07 lacs, as the relief in question was allowed in pursuance to the direction of the DRP. In view of these submissions, this ground of disallowance of Rs. 489.07 lacs is hereby dismissed.
61. Ground no. 38.2 to 38.2.2. (Disallowance of expenditure on discount to dealers under sales promotion scheme as prior period expenditure):
DRP Directions:
61. The DRP has issued following directions to the Assessing Officer;
"The assessee had introduced certain schemes in the immediately preceding financial year, viz., 2005-06. At the year end, the assessee made provision for discount to be given to dealers on such schemes in respect of sales made to dealers in that year, which were to be finalized and passed in the immediately succeeding year. To the extent, the aforesaid provisions was sought, the deduction for excess claim was taken during the relevant previous year.
The AO has proposed to disallow Rs. 643.05 lakhs.
The counsels have submitted that the AO was wrongly computed the account of excess claim at Rs. 643.05 lakhs whereas the correct amount was only Rs. 26.86 lakhs and the detail working of the same is set up at page 482 to 486 of the objection in form no. 35A. the counsel further submitted that the correct amount of 23.86 laksh was not prior period expenditure and it was allowable in the current assessment year because Rs. 22.96 lakhs related to additional scheme of discount which got finalized and accepted by the assessee during the current previous year only. It was further submitted that the balance amount of 90000 was on account of claim recorded against provisions of Rs. 3.38 crores under the festival offer scheme which 329 arose on account marginal variance qua the amount of liability towards sales discount to be given to the dealer estimated by the assessee at the end of the last year. It was submitted that the excess amount recorded in the succeeding year is because of the difficulty in estimating exact liability in previous year. Considering the fact that the excess expenditure has been provided on finalization of the accounts and on account of addition of scheme of discount which got finalized this year. No disallowance on this account is required to be made as the expenditure has crystallized this year. The AO, however may verify the submission of the assessee regarding incorrect figure of Rs. 643.05 lakhs adopted by the assessee."
From the directions of DRP as reproduced above it is seen that only amount of Rs.26.86 lacs has adequately been explained by the assessee company. DRP has accordingly directed the AO not to make this addition. However assessee has contested the figure of Rs.643.05 lacs as adopted by the AO in the draft order u/s 144C stating that same is incorrect and the correct figure is 23.86 lacs. A chart giving details thereof has been furnished. But no primary additional evidence or copy thereof has been brought on record to falsify the figure taken by the AO. Therefore relief will be confined only to Rs.23.86 lacs resulting in addition of Rs.619.19 lacs (643.05 lacs - 23.86 lacs). Amount of Rs.619.19 lacs is thus added in the income of the assessee.
(Total Addition - Rs. 619.19 lacs ) Facts:
61.2. The assessee had introduced certain schemes in the immediately preceding financial year, viz., 2005-06. At the year end, the assessee made provision for discount to be given to dealers on such schemes in respect of sales made to dealers in that year, which were to be finalized and passed in the immediately succeeding year. To the extent, the aforesaid provision was 330 short, deduction for excess claim was taken during the relevant previous year.
61.3. The Assessing officer worked out an amount of Rs. 619.19 lacs towards the excess claim made during the year, in respect of short provision for discount made in respect of sales effected in the last year and made disallowance thereof.
Assessee's Submissions:
61.4. At the outset, the computation of Rs.643.05 lacs made in the assessment order is incorrect. The correct amount of excess claim vis-à-vis short provision made in the last year works out to Rs.26.86 lacs only, for which detailed explanation qua working is set out at pages 482 to 486 of the Objections in Form 35A before the DRP, which are not repeated for the sake of brevity.
61.5. The aforesaid correct amount of Rs.23.86 lacs was not prior period expenditure and was allowable deduction during the relevant previous year for the following reasons: Out of aforesaid total amount, expenditure to the extent of Rs.22.96 lacs under cash discount scheme accrued during the relevant previous year only, since the same related to additional scheme of discount, which got finalized and accepted by the assessee during the relevant year only.
61.6. As regards the balance amount of Rs.90,000, the same was on account of claim recorded against provision of Rs.3.38 crores under the festival offer scheme, which arose on account of marginal variance qua the amount of liability towards sales discount to be given to the dealer, as estimated by the 331 assessee as at the end of the last year. It is submitted that the difficulty in estimation of the exact liability cannot qualify the excess amount recorded in the succeeding year as prior period expenditure.
61.7. Without prejudice, since the aforesaid adjustment is revenue neutral, if seen in a macro perspective, no adjustment is called for.
61.8. Further without prejudice, it may be pointed out that the assessee had filed additional ground of appeal for allowance of said expenditure in appeal for AY 2006-07, which has been admitted by the Hon'ble Tribunal. No decision was rendered thereon in the final order, for which M.A. has been filed, which is pending disposal.
DR's Submissions 61.9. Reliance is placed on the assessment order and order passed by DRP.
Our findings & conclusion 61.10. The issue herein is year of deductibility. Additional ground of appeal was filed for A.Y. 2006-07 before the Tribunal and this additional ground was not disposed of. Misc. application is pending. The assessee's contention is that the correct amount is Rs.23.86 lakhs and not Rs.643.05 lakhs as mentioned by the A.O. Details are given in the paper book we find that the D.R.P. has directed the assessing officer to verify the price. This working given by the assesee is not properly verified by the A.O. The A.O. should have verified the claim of the assessee. We direct the assessing officer to verify the claim of the assessee. Be it as it may, the genuineness of the expenditure is not in doubt and as it is a question of excess/ short provision of discount in respect of sales effected, we are of the considered opinion that 332 method of accounting followed by the assessee need not to be disturbed as it is being consistently followed over the years and as the revenue has accepted the same. The assessee's claim that the amount of Rs.23.86 lakhs is not prior period expenses is not seriously disputed by the revenue. As to the balance amount Rs. 90,000 under the festival offer scheme, it was marginal variation that arose due to estimation of liability towards sales discount to be given to dealers. Thus the disallowance cannot be sustained both on the grounds of materiality as well as consistency. Similar issues were dealt by us while disposing of ground nos. 7 and 7.1. Consistent with the view taken therein, we allow this ground of the assessee for statistical purposes.
62. Ground nos. 39.1 to 39.3: (Disallowance of excess provision for discounts/ incentives payable to dealers at the end of the relevant year, which was recovered in next year on receipt of actual bills from the dealers).
Assessing officer's order:
43 Point No. 50: This issue pertains to addition made on account of excess provision. The issue has been discussed by the Assessing Officer in the draft assessment order as under;
"43.1 The assessee during the year has made certain provisions with regards to expenses, since the provisions are not crystalised during the year the assessee was thus asked that "Para 25.4 of Annexure - III to the Special Audit Report states that excess provision pertaining to various expenses such as Sales promotion, Early payment benefit scheme, Gwaliar Mela Scheme have been made during financial year 2006-07, which are not crystallized during the subsequent year. In this regard, you are requested to show cause as to why the amount of Rs. 239.15 lacs should not be disallowed."
43.2 In response to the above point, the assessee vide its letter dated 21.04.2011 has submitted that the aforesaid provision was based on 333 the best estimate of the management regarding fulfilment of the conditions/ targets by dealers/ stockist under the sales promotion scheme, in respect of purchases made until the year ending 31.03.2007. It has been further stated that the variance between the actual expense and the provision was not material and hence the provision made cannot be said to be unreasonable or excessive, far removed from reality.
43.3 Reliance in this regard, has been placed by the assessee on the judgment of Hon'ble Supreme Court in the case of Bharat Earthmovers v. CIT (245 ITR 248), wherein it was held that difficulty in estimation of an accrued liability cannot convert such ascertained liability into a contingent one.
43.4 The assessee has further submitted that any short/ excess provision is recognized as income/ expense in the books of accounts of the succeeding year and that the method of provisioning for expenses under the sales promotion schemes is as per the consistent/ regular method of accounting followed by the assessee, which has been accepted by the revenue in the earlier years.
43.5 In the above context, attention is drawn to the fact that the assessee is in practice of finalising the accounts and preparation of Balance Sheet within 1 month from the end of the financial year and the liabilities of the assessee are crystallized after the preparation of Balance Sheet. Even at the time of preparation of the Tax Audit Report, all the relevant information is available with the assessee.
43.6 Further, as per the provisions of Income Tax Act, 1961, the return of income for assessment year 2007-08 was required to be filed by 31st day of October, 2007 as per the provisions existing at that time. Accordingly, the uncrystallized liability could be considered for disallowance while preparation of computation of income and thereafter filing of return of income. Without prejudice to the above, even if it is presumed that the liability was not crystallized at the time of filing of return, the assessee always has an option to revise the return. But since the assessee is not following any such practice, it can be said that the assessee is not following the provisions of the law properly and following past practices for the sake of convenience.
33443.7 Further, the contentions of the assessee that the provision has been made on a best estimate basis, cannot be accepted since the basis of estimate cannot be said to be reasonable since in the relevant assessment year, there is a difference of 12.86% between the amount booked as provision and the amount actually expended, i.e., Rs. 2.39 crores and Rs. 18.59 crores (2.39/ 18.59 = 12.86%). The best estimate should not call for such a high amount of difference in estimation.
43.8 As regards contention of the assessee that method of accounting is on the basis of estimate and reversing the excess provision or recognizing income by virtue of short provision in the succeeding assessment year since past many years, which has been accepted by the Revenue in the past, it is to be noted that the method of accounting of the assessee has not been challenged, however, the question arises regarding the degree of estimation.
43.9 In this regard it is to be noted that the above contention of the assessee that it is consistently following such method of accounting from past many years and accordingly the same should not be disallowed is not tenable since the method of accounting followed by the assessee is not appropriate and past mistakes cannot be carried on throughout, especially when the same has been identified.
43.10 As regards further contention of the assessee that such accounting treatment has been accepted by the Revenue since past many years and the same cannot be rejected subsequently if the same has been accepted in the past in view of various case laws cited by the assessee. By stating that the assessee tries to justify the mistake committed by the assessee in earlier years. There is no two opinion on the facts that the value of closing inventory must include the freight and import clearing charges. The Assessee has accepted the same but has justified it as it was not earlier pointed out by the Department. Hon'ble Supreme Court in its decision in the case of 41 ITR 191 Court has clearly stated that mere production of evidences before the Income-tax officer was not enough, that there may be omission or failure to make a true and full disclosure, if some material for the assessment lay embedded in the evidence which the revenue could 335 have uncovered but did not, then it is the duty of the assessee to bring it to the notice of the assessing authority. It is the duty of the assessee to point out all the relevant material and facts which might be hidden and embedded in the books of accounts. It has also been pointed out that mere production of books of accounts and various details does not mean that the Assessing Officer has framed its decision on the aspects which might have escaped the eye of the revenue. The onus is on the assessee and he has a duty to tell the Assessing Officer the exact nature of the transaction. The Assessee has failed to do so in the past. But when the assessing Officer finds out the faults of the assessee on its own then he cannot take the shelter of the past assessments framed. The true income of the assessee has to be calculated on the basis of present year facts and figures. 43.11 In view of the above the assessee's claim of provisions of Rs. 239.15 lacs based upon wrong estimation is not sustainable and the same are hereby disallowed and treated as assessee's income during the year and added to its income accordingly."
The DRP has issued directions on the issue at two places which are not in conformity with each other. Pending further instructions from them no interference is made in the draft order and Rs. 2.39 crores is added to the income of the assessee. (Addition - Rs. 239.15 lacs) Facts:
62. As at the end of the year, the assessee estimated and provided for the amount of discount/incentives payable to dealers, in respect of various sales promotion schemes prevalent during the year.
62.3. Out of the aforesaid total provision, aggregating to Rs.18.59 crores made at the end of the year, the actual claim paid to the dealers amounted to Rs.16.19 crores only in the succeeding year and, therefore, the excess amount of provision of Rs.2.39 crores was reversed and offered for tax in the immediately succeeding financial year.
AO 336 62.4. The AO disallowed the aforesaid excess provision on the ground that same was an unascertained liability.
Assessee's Submissions 62.5. The reason for excess provision qua each scheme has been explained in detail at pages 499 to 500 of the objection/form 35A which are not repeated for the sake of brevity. Primarily, the provision was made on the basis of estimated/projected sales to dealers under the scheme, which fell short of actual claim lodged by the dealers in the subsequent year.
62.6. However, the aforesaid provision being made on the basis of reasonable/best estimate of the management, as per consistent, regular and accepted method of accounting is allowable deduction in its entirety during the relevant previous year.
62.7. Merely because the estimated liability was more than the amount actually incurred, would not mean that the differential amount is an unascertained liability.
62.8. That apart, the aforesaid exercise being revenue neutral inasmuch as the excess provision has already been offered to tax in the succeeding year, the disallowance was not warranted.
62.9. Further without prejudice, the DRP had erroneously issued two directions qua the impugned issue, one in favour of assessee and the other against the assessee. The AO should have followed the directions favorable to assessee DR's Submissions:
33762.10. Reliance is placed on the assessment order and order passed by DRP.
Our findings & conclusion:
62.11. This is also an issue relating to provision. Year of allowability is to be determined. Thre are timing issues. The assessee estimated an amount of discount/ incentive payable to the dealers and made a provision at the end of the year. Out of the aggregate provision of Rs. 18.59 crores the actual payment came to Rs. 16.19 crores resulting in variation of Rs. 2.39 crores.
The assessee wrote back the amount in the subsequent assessment year. The assessee as a going concern, at the end of each financial year is required to make a bona fide exercise and estimate the likely expenditure and likely income, when exact data is not available and in the process there is every likelihood of there being a variation between the actual and the provision made. When the exercise is a bona fide and when the variation is not totally unrealistic and excessive, then the method followed by the assessee being consistent has to be approved and not disturbed. Besides, the fact remains that it is revenue neutral. Thus, consistent with the view taken while disposing of ground no. 38.2 to 38.3.3 we allow this claim of the assessee.
63. Ground nos. 40 to 40.2: (Disallowance of payment made towards use of aircraft for alleged failure to deduct tax at source under section 194-I):
DRP Directions:
63.1. The DRP has issued following directions to the Assessing Officer;
"During the relevant previous year, the assessee used facility of transportation for the purpose of business through aircraft, provided 338 by Forum I Aviation Pvt. Ltd. ('carrier') with which there existed a charter agreement along with five other companies for use of such aircraft. Under the aforesaid charter agreement, the charter companies were entitled to use the aircraft transportation services provided by the carrier, in consideration of payment of variable charges at an agreed rate per hour for the number of hours of use of aircraft by the charter company and also share fixed cost of such aircraft incurred by the carrier, which was allocated to each company under the charter agreement. During the relevant previous year, the assessee incurred expenditure of Rs. 332.28 lakhs on account of fixed and variable charges paid to the carrier for use of aircraft by the assessee for the purposes of business. It would be pertinent to point out that the assessee deducted tax at source under the provisions of section 194C of the Act before remitting payment comprising of fixed and variable charges towards use of aircraft by the assessee. In the draft assessment order, the AO disallowed the aforesaid deduction claimed by the assessee on the ground that the aforesaid payments were eligible for deduction of tax at source under section 194I (as rent) instead of 194C applied by the assessee.
The counsels have submitted that the arrangement was not towards use of the aircraft by us but for availing transport services and the physical possession of the aircraft always remain with the carrier and was flown by the carrier itself and they assessee was only utilized in the transport serviced provided by the carrier. The objection of the assessee is not acceptable. It is seen that the assessee has already deducted tax u/s 194C of the I. T. Act. As such even the assessee was aware that TDS was to be deducted but it has deducted under the wrong provisions which amounts to not deducting the TDS under the applicable provisions. As per the agreement of charter the assessee was entitled to use the aircraft for transport in consideration for payment of fixed cost of aircraft incurred by the assessee and the agreed rate per hour for the use of number of hours of the aircraft. Under a normal agreement of taking the aircraft for further matter for any vehicle on a casual higher the person using the vehicle or aircraft will not be sharing the cost of the aircraft. Since is assessee sharing the fixed cost of the aircraft, the stand of the AO is that the aircraft is taken on rent has to be upheld. Aircraft like any other vehicle will fall in the definition of machinery, plant or equipment. As such, provisions 339 of deduction of tax at source u/s 194C of the I. T. Act are applicable. The objection of the assessee is rejected."
Therefore, in conformity with the order of DRP, amount of Rs. 332.28 lacs is added to the income of the assessee.(Amount disallowed - Rs. 332.28 lacs) Facts:
63.2. The assessee uses facility of transportation through aircraft for purposes of business under a charter agreement entered with vendor, in consideration of payment of variable charges per hour of use of aircraft and share of fixed cost of such aircraft. The assessee deducted tax from the aforesaid payments under section 194C.
63.3. The Assessing Officer held that said payments were eligible for deduction of tax under section 194I as rent, instead of section 194C and, therefore, disallowed the entire expenditure under section 40(a)(ia) of the Act.
Assessee's Submissions:
63.4. The payment to Forum I Aviation (P) Ltd., was not towards taking aircraft on hire simpliciter, but for availing composite transportation services, comprising of services of pilot, fuel cost, repairs and maintenance, etc..
63.5. The aircraft was always under the possession and control of the carrier, and was also run and operated by the carrier, and, therefore, there was no use of aircraft by the assessee, under any lease or other arrangement.340
63.6. The arrangement was, therefore, not towards use of aircraft but for availing transport services, which are covered under section 194C and not 194I of the Act 63.7. Reliance, in this regard, is placed on the following decisions, wherein it has been held that payment under contract of transport coupled with other services, like services of driver, etc. would be subject to TDS under section 194C and not 194I of the Act:
CIT vs. Shayam Shipping Services Pvt. Ltd.: Tax Appeal No. 1037 of 2009(Guj. HC) Ahmedabad Urban Development Authority vs. ACIT: ITA No.1637/Ahd/2010 (ITAT Ahd) ACIT vs. Accenture Services Pvt. Ltd.: ITA No. 5920- 5922/Mum/2009 (Mum. ITAT) SKIL Infrastructure v. ITO (TDS): ITA No. 3419 and 3420/Mum/2010 (Mum. ITAT) ITO v. Indian Oil Corporation: ITA Nos. 1829 to 1834/Del/2011 (Del. ITAT) ACIT v. Sh. Manish Dutt: ITA No. 4017/M/2007 (Mum.)(ITAT) 63.8. Without prejudice, in view of submissions made supra, since the assessee had, in any case, under a bonafide belief, deducted tax at source under section 194C, instead of section 194I of the Act, provisions of section 40(a)(ia) cannot be invoked to disallow deduction claimed by the assessee.341
DR comments 63.9. Reliance is placed on the assessment order and order passed by DRP.
Our findings & conclusion:
63.10. This is again an issue of disallowance u/s 40(a)(ia) for the reason that the assessee has short deducted tax at source. While disposing of ground no. 34 to 35.6.4 we have followed the judgment of Hon'ble Calcutta High Court in the case of CIT Vs. S.K. Tekriwal (ITA no. 183 of 2012) holding that no disallowance can be made u/s 40(a)(ia) under such circumstances. This is not a case of non deduction of tax at source. It is a case of deduction of tax at source at a different rate. Consistent with the view taken therein we allow this ground of the assessee.
64. Ground no. 41: (Addition on account of outstanding liability DRP Directions 64.1. The DRP has issued following directions to the Assessing Officer:
"Till early 1990s, the assessee used to receive advance of Rs. 500 per motorcycle from prospective customers against booking of motorcycle to be sold in future depending upon availability, since demand outstripped supply. The aforesaid amount along with interest thereon was to be adjusted against the sale price of the motorcycle at the time of its delivery. However, there was large number of such customers who did not take delivery of vehicle after making the aforesaid initial payment of Rs. 500 towards booking of the vehicle. The assessee accrued interest on the aforesaid booking amount/advance until 1996. The assessee in 1996 issued a press notice that the customers may reclaim the aforesaid booking amount along with interest accrued till March, 1996. As on 31/3/2007, booking amount of Rs. 13,30,29,968/- including Rs. 3,27,87,468/- on account of interest accrued on the booking amount till 31st March 1996, was payable by the assessee. in the draft assessment order, the AO has made the addition of Rs. 1330 lakhs to 342 income of the assessee under section 28(iv) of the Act, on the ground that the aforesaid liability being outstanding since long and remained to be unclaimed by the customers ceased to exist in the hands of the assessee.
The counsels have submitted that the assessee was under obligation to return the aforesaid booking amount received from customer on receipt of claim. It was further argued that the expiry of period of limitation prescribed under the limitation act does not automatically extinguish the liability in the hands of the payers. The objection of the assessee is not acceptable. It is a fact that the deposit amount for booking of the scooters have been lying with the assessee for long time even after the expiry of limitation period. Under the booking contract, this deposit amount was to be adjusted against the price of the scooter on the maturity of the booking. Period of more than a decade has passed since the receipt of the booking amount practically there is no requirement on the assessee to discharge any liability on this account the addition to the income on this account proposed by the AO is therefore justified . The objection of the assessee is rejected. It is seen that the AO has not considered issue of interest claimed by the assessee in respect of these booking amounts being an outstanding liability in the books of accounts. Since as already discussed above, there is practically no liability to pay this amount on the assessee, there will also be no liability towards any accrued interest which might have been claimed. The AO is directed to consider this issue also and disallow if there is any claim of interest made by the assessee in respect of the booking amount of Rs. 13.30 crores shown as liability in the assessee's account."
Assessee has not submitted any further evidence with regard to accounting of interest on liabilities which as per the draft order have been treated to have ceased. No further interference can therefore be made. Therefore, in conformity with the order of DRP, amount of Rs. 1,330.30 lacs is added to the income of the assessee. (Addition - Rs. 1,330.30 lacs) Facts:
64.2. The assessee had in the earlier years (till 1990) received Rs. 500 from customers against booking of vehicles. The said amount alongwith interest 343 accrued thereon was to be adjusted against sale price of vehicle at the time of delivery. The assessee stopped accruing interest after 1996 and issued press notice that customers may claim money back.
64.3. On account of the above, as on 31.3.2007, amount of Rs.13,30,29,968 including interest accrued thereon, amounting to Rs.3,27,87,468, was outstanding as payable in the books.
64.4. The Assessing Officer made addition of aforesaid amount to income of the assessee under section 28(iv) of the Act.
Assessee's Submissions:
64.5. There was no cessation of liability in respect of advances from customers. The assessee was under the obligation to return the aforesaid booking amount/advances received from customers, on receipt of claims from customers.
64.6. The assessee is still continuing to make the payments as and when the claims are raised by the customers.
64.7. The liability ceases to exist only on the basis of some positive act on the part of debtor/creditor indicating cessation/remission of liability, which is missing in the present case. In the absence of any cessation of liability, no income under section 28(iv) arose in the hands of the assessee.
64.8. Reliance, in this regard, is placed on the following decisions, wherein it has been held that liability ceases to exist only on the basis of some positive act on the part of debtor/credit indicating cessation/remission of liability:344
- CIT v. Sagauli Sugar Works Pvt. Ltd: 236 ITR 518 (SC)
- CIT v. Southern Roadways Ltd. : 282 ITR 379 (Mad.)
- CIT v. Hotline Electronics Ltd ( 2012) 205 Taxman 245 (Del.)
- CIT v. Shri Vardhman Overseas Ltd. (2012) 343 ITR 408 (Del.) 64.9. Without prejudice to the above, benefit in cash is not covered under section 28(iv). [Refer: Mahindra & Mahindra Ltd. v. CIT: 261 ITR 501 (Bom.); Jindal Equipment & Consultancy Services Ltd.: 325 ITR 87 (Del.)] DR submissions 64.10. The assessee had, in the earlier years (till 1990), received Rs.500 from customers against booking of vehicles. The said amount alongwith interest accrued thereon was to be adjusted against sale price of vehicle at the time of delivery. The assessee stopped accruing interest after 1996 and issued press notice that customers may claim money back.
64.11. On account of the above, as on 31.3.2007, amount of Rs.13,30,29,968 including interest accrued thereon, amounting to Rs.3,27,87,468, was outstanding as payable in the books.
64.12. It is submitted that, in respect of aforesaid outstanding amount, the assessee has not produced any evidence to establish that the liability in respect of said amount is still alive; neither any confirmation has been produced from customers. Further, as the said amount pertains to relatively very old period, i.e. 15-20 years back, the same was practically waived off by the customers, which needs to be brought to tax in the hands of assessee.345
64.13. In view of the aforesaid, the assessment order needs to be upheld and the ground of appeal raised by the assessee calls for being dismissed.
Rejoinder to DR comments 64.14. As regards the contention of the DR that the assessee has not produced any evidence to establish that the liability in respect of amount outstanding in books of accounts from past 15-20 years is still alive, our attention is invited to the summary of the movement in the aforesaid outstanding liability in the past three years, which was submitted before the assessing officer. The same shows that the assessee had in the recent past made payments against the claims raised by the assessee company and establishes that the aforesaid liability is still outstanding. The assessee acknowledges its liability and is under obligation to refund the amounts as and when the claims are raised by the customers. The liability has not been written back in the books of account. There is thus no remission or cessation of the liability.
64.15. In that view of the matter, the contention raised by the Ld. DR needs to be rejected and the ground of appeal of the assessee calls for being allowed Our findings & conclusion:
64.16. Addition in this case is made under sec.28(iv) of the Act. The issue in question is whether the assessee can be said have received any benefit or perquisite arising from the exercise of business or profession and if so whether the said benefit or perquisite can be said to have accrued to the assessee during the impugned assessment year. From the material facts on 346 record, it is found that there are some claims coming forth from the customers who have deposited the amounts and the assessee honored the claims. It is altogether a different matter that the number of claims is very less due to efflux of time. When the assessee intends to honour the claim and therefore carried the liability in its books of account, it is not correct to say that there is remission of liability. The fact that the assessee continued to disclose the impugned amount as a liability in the balance sheet itself amounts to acknowledgemnt of the debt and as such there is no remission of liability. Even otherwise, the deposit amounts were received during 1990 and we do not find any special circumstances to consider the above mentioned deposit amount as income of the assessee for the impugned assessment year. The revenue has not brought on record any such material to indicate that the alleged remission of liability towards the deposit amount occurred during the impugned assessment year. Even otherwise, when an amount is received in cash, sec.28(iv) does not apply as held by the Hon'ble Bombay High Court in the case of Mahindra & Mahindra, 261 ITR 501.
The Jurisdictional High Court in the case of Jindal Equipment Leasing and Consultancy Services Ltd. (Del) 325 ITR 87 at page 91 held as follows:-
CIT vs. Jindal Equipments Leasing and Consultancy Services Ltd.
"With this, we proceed to examine this aspect on its merits, viz., whether the provisions of section 28(iv) of the Act are attracted in the given case. Thus, what is to be seen is as to whether the amount written off of Rs.1,46,53,065/- in its books of account by JSPL amounts to the value of any benefit or perquisite whether convertible into money or not and can be treated as 'profits and gains from business'. The pre-requisites for attracting the said provisions are:
(i) Benefit or perquisite arising in the course of business is of the nature, other than cash or money. It is for this reason expression "whether convertible into money or not" is mentioned in clause 347
(iv). The Bombay High Court has interpreted this very clause in the case of Mahindra and Mahidnra Ltd. Vs. CIT(2003) 261 ITR 501 in the following manner(page 509):
"The income which can be taxed under section 28(iv) must not only be referable to a benefit or perquisite, but it must be arising from business. Secondly, section 28(iv) does not apply to benefits in cash or money (see 1981(130 ITR 168(Guj.).
64.17. By applying the above binding propositions laid down by the Jurisdictional High Court, we do not find any merit in the action of the assessing officer in considering the deposit amount as income of the assessee u/s 28(iv) of the Act. Hence the same is deleted. This ground of appeal is allowed.
65. Ground no. 42: (Gains from sale of investments income treated as business income):
DRP Directions
65.1. The DRP has issued following directions to the Assessing Officer;
"In the course of business, the assessee had invested surplus funds generated from business under various schemes of mutual funds, Portfolio Management Scheme (PMS), shares, derivates, etc. During the relevant previous year, the assessee realized net gains of Rs. 139.80 crores from sale of such various investments which were disclosed under the head 'capital gains'. In the draft assessment order, the AO has brought to tax the aforesaid income under the head "business income" mainly on the ground that the volume magnitude of such investments was high, aggregating to Rs. 13,690 crores.
The counsels have submitted that the gain arising from sale of an asset is taxable under the head business income' where such assets is held that stock in trade by the assessee and simply because investment is made with the view of capital appreciation or earning optimum 348 return on such investment, the same does not automatically become business income.
The objection of the assessee is not acceptable. The nomenclature given to a transaction is of no relevance in deciding the actual nature of the transaction. The dominant intent of the assessee is to be seen. Looking at the volume of the transaction to the tune of Rs. 13690 crores, and the frequency of the transaction and the short duration of sometimes of even few days for which the investments are held by the assessee indicates that the assessee was in the business of making investments and earning profits on sale of the shares as and when the higher profits are available. The fact that assessee's turnover in purchase of sale of investment is more than even the business of manufacture and sale of scooters further strengthens the finding that the assessee is engaged in the business of making investment of sale of the same.
Assessee's objection is accordingly rejected."
Therefore, in conformity with the order of DRP, amount of Rs. 13979.57 lacs is treated as business income against capital gain claimed by the assessee.
Facts:
65.2. The assessee invests surplus funds arising in the course of business under various modes of investment like mutual funds/PMS, shares, etc., The gains realized from sale of such various instruments were disclosed under the head 'capital gains'.
65.3. The Assessing officer held that, having regard to the magnitude/volume of such investments, the aforesaid income was taxable under the head 'business'.
Assessee's Submissions:
34965.4. Gain arising from sale of an asset is taxable under the head "business income", where such asset is held as 'stock-in-trade' by an assessee. Where an asset is held as capital asset, within the meaning of section 2(14), gains arising from sale thereof is taxable as 'capital gains' under section 45 of the Act.
65.5. The nature of asset, whether stock-in-trade or capital asset depends upon the dominant intention with which investment is made. If the intention behind holding an asset is to deal in it, the same qualifies as stock-in-trade and if the asset is held with an intent not to deal therein but to reap benefit from holding the same, by way of capital appreciation, deriving of rental/royalty/dividend income, etc. therefrom, the same would qualify as capital asset.
65.6. Simply because investment is made with a view to capital appreciation or earning optimum return on such investment, the same does not automatically become business asset or stock-in-trade, to characterize the income earned therefrom as business income.
65.7. The assessee made various investments as part of prudent cash/fund management, with a view to optimally utilize spare funds and, could not, therefore, be said to be engaged in business of sale-purchase of various investments, giving rise to income taxable under the head "business". The assessee could not be said to be a dealer in various kinds of investment.
65.8. The investment in shares/mutual funds have been regularly shown under the head 'investments' in the balance sheet(s) and valued at cost. The same have, at no point, been converted or treated as stock-in-trade. The classification of shares/mutual funds as 'investments' has been accepted all 350 along by the Revenue and there is no change in facts in the year under consideration, to warrant any deviation/departure from the accepted position.
65.9. Reliance is placed on the following decisions, wherein inspite of large volume /frequency of transaction of sale/purchase of shares, considering the intention behind such investments, the gains realized therefrom have been held to be taxable under the head 'capital gains' instead of 'business income':
- CIT v. Gopal Purohit: 336 ITR 287 (Bom.) (SLP dimissed by SC at 334 ITR 308 (st.))
- Jindal Photo Investment Ltd.: 334 ITR 308 (St.) (SC)
- CIT v. Rohit Anand: 327 ITR 445 (Del.)
- CIT v Consolidated Finvest and Holding Ltd (2011) 337 ITR 264 (Delhi)
- CIT v. Vinay Mittal: ITA No. 1172/2011 (Del.) (SLP Dismissed)
- CIT v. Suresh R. Shah: ITA No. 1974/2011 (Bom.)(HC)
- CIT v Naishadh V. Vachharajani ITA No. 1042 of 2011 (Bom.) affirming the decision of Mumbai Tribunal in ITA No. 6429/Mum/2009 65.10. That apart and without prejudice to the above, there is, even otherwise, not much frequency in sale/purchase of investments, as could be gathered from analysis carried out at page 526 of objections in Form 35A.351
65.11. On perusal of the same, it would be noted, that out of the total income earned from mutual funds, almost 67.34% of the total income earned from investments made in mutual funds was for a period of more than one year. In fact, out of the gross receipt of Rs.178.61 crores, the major amount of Rs.128.59 crores relates to investment in mutual funds and shares, held for more than one year. It is submitted, that an investment held for a period of more than one year cannot be considered as an investment held for trading purposes and income therefrom cannot be held to be business income. It is to be appreciated that under the Act shares/mutual funds held for more than one year are considered as 'long term capital asset', the sale whereof results in long term capital gains.
65.12. The Delhi Bench of the Tribunal in the case of Arjun Kapur v. DCIT:
70- ITD 61 held that shares held for a period of one year or more, should be considered as shares acquired and held for a long span of time, and hence giving rise to long term capital gains under the Act.
65.13. That apart, the Calcutta Bench of the Tribunal in the case of ITO vs Neeraj Vanijya (P) Ltd.: LexDoc Id: 407109 held that gains on mutual funds cannot be treated as business income.
65.14. In so far as the investment in shares is concerned, it is to be appreciated that the same was primarily made either through PMS or under Initial Public Offer. Under PMS, the company advances funds to the Portfolio Manager, who in turn makes investment in various shares. In substance the investments under PMS is similar to investment in mutual funds. The assessee, it is reiterated, is only interested in the return on funds 352 invested and does not act as a dealer/trader, so as to be regarded as being engaged in business activity.
65.15. Attention in this regard is invited to recent decision of Mumbai Bench of Tribunal in the case of ITO vs. Radha Birju Patel: 5382/Mum./2009, wherein it has been held that investments made in various shares through PMS scheme, with a view to earn optimum return on investment / wealth creation/maximization cannot be treated as income taxable under the head"
business income".
65.16. To the same effect are the following decisions:
- ARA Trading & Investment Pvt. Ltd. vs DCIT (Pune)(ITAT)
- KRA Holding & Trading Pvt Ltd vs. DCIT (ITAT Pune): ITA Nos. 500 & 1320/PN/2008 & 434/PN/2009 (Pune)
- Devendra Motilal Kothari v. Dy. CIT: 132 ITD 173 (Mum)
- Homi K. Bhabha v ITO ITA No. 3287/Mum/2009 (Mum)
- Apoorva Patni v. Addl. CIT: 24 taxmann.com 223 (Pune) 65.17. The shares acquired by the company through public offer were also with the objective of reaping benefit from long term appreciation in value and not with intent to deal in the same. It would be noted that the investment in various derivatives was made with a view to hedge the investment made by the assessee in different equity shares. It is to be reiterated that the assessee did not directly enter into any futures transaction for which it did not hold underlying equity shares.
65.18. In view of the above, it is respectfully submitted, that the assessee was not involved in the activity of trading in various shares/mutual funds etc. and 353 had merely invested surplus funds with a view to optimally utilize such spare funds and, therefore, income arising from such activities could not be taxed under the head "business income".
DR's Submissions:
65.19. Reliance is placed on the assessment order and order passed by DRP.AO.
Our findings & conclusion:
65.20. The issue that emerges for consideration is whether the gains that arose to the assessee from investment in debt mutual funds/PMS/ shares are to be taxed under the head "business income" or under the head "capital gains".
65.21. The Hon'ble Gujarat High Court in the case CIT vs Rewashanker A. Kothari [2006] 283 ITR 338 after examing earlier judgements on the question had laid down the following parameters /tests to determine when income from transactions in shares/ securities should be treated as "income from business" or the gain has to be taxed under the " Capital gains"
(a) The first test is whether the initial acquisition of the subject-matter of transaction was with the intention of dealing in the item, or with a view to finding an investment. If the transaction, since the inception, appears to be impressed with the character of a commercial transaction entered into with a view to earn profit, it would furnish a valuable guideline.354
(b) The second test that is often applied is as to why and how and for what purpose the sale was effected subsequently.
(c) The third test, which is frequently applied, is as to how the assessee dealt with the subject-matter of transaction during the time the asset was with the assessee. Has it been treated as stock-in-trade, or has it been shown in the books of account and balance sheet as an investment. This inquiry, though relevant, is not conclusive.
(d) The fourth test is as to how the assessee himself has returned the income from such activities and how the Department has dealt with the same in the course of preceding and succeeding assessments. This factor, though not conclusive, can afford good and cogent evidence to judge the nature of transaction and would be a relevant circumstance to be considered in the absence of any satisfactory explanation.
(e) The fifth test, normally applied in cases of partnership firms and companies, is whether the deed of partnership or the memorandum of association, as the case may be, authorises such an activity.
(f) The last but not the least, rather the most important test, is as to the volume, frequency, continuity and regularity of transactions of purchase and sale of the goods concerned. In a case where there is repetition and continuity, coupled with the magnitude of the transaction, bearing reasonable proportion to the strength of holding, then an inference can readily be drawn that the activity is in the nature of business.355
65.22. The Hon'ble Delhi High Court in the case of CIT vs Sahara India Housing Corporation Ltd [2012] (ITA Nos. 740/ 200, 762/2009 & 847/201) held that where there was a dispute whether in the earlier years, the gains were offered as business profits or as capital gains and the Tribunal had not given a clear finding, the Tribunal ought to examine the issue wholistically keeping in mind the parameters/tests laid down in CIT vs. Rewashanker A. Kothari 283 ITR 338 (Guj) and CBDT's Circular No.4/2007 dated 15th June 2007 on when income from transactions in securities should be treated as "business profits" and when as "capital gains":
65.23. Similar view was also taken by the Jurisdictional High Court in the case of CIT vs Vinay Mittal [2012] (ITA No .1172 /2011)(SLP dismissed by the Hon'ble SC) where in it was held that to determine whether an assessee is an investor in shares or a dealer in shares, a pragmatic and common sense approach has to be adopted always keeping in mind commercial considerations. The tests have been laid down in Instruction No.4/2007 dated 15.6.2007 & CIT vs. Rewashanker A. Kothari 283 ITR 338 (Guj).
65.24. The Lucknow Bech of the Tribunal in the case of Sarnath Infrastructure (P) Ltd vs. ACIT (Lucknow) [2009] (120 TTJ 216) considering almost all the important judicial decisions laying down legal principlas to determine the nature of the transaction and the CBDT Circular No 4 of 2007, the Tribunal culled out the following principles at para 13 of the order which can be applied to the facts of a case to find out whethertranscations(s) in question are in the nature of trade or merely for investment purposes:
3561. What is the intention of the assessee at the time of purchase of the shares (or any other item). This can be found out from the treatment it gives to such purchase in its books of account. Whether shown in opening/closing stock or shown separately as investment or non-
trading asset.
2. Whether assessee has borrowed money to purchase and paid interest thereon? Normally, money is borrowed to purchase goods for the purposes of trade and not for investing in an asset for retaining.
3. What is the frequency of such purchase and disposal in that particular item? If purchase and sale are frequent, or there are substantial transactions in that item, it would indicate trade. Habitual dealing in that particular item is indicative of intention of trade. Similarly, ratio between the purchase and sale and the holdings may show whether the assessee is trading or investing (high transaction and low holdings indicate trade whereas low transaction and high holdings indicate investment).
4. Whether purchase and sale is for realizing profit or purchases are made for retention and appreciation in its value? Former will indicate intention of trade and later, an investment. In the case of shares whether intention was to enjoy dividend and not merely earn profit on sale and purchase of shares. A commercial motive is an essential ingredient of trade.
5. How the value of the items has been taken in the balance sheet? If the items in question are valued at cost, it would indicate that they are investments or where they are valued at cost or market value or net 357 realizable value (Whichever is less), it will indicate that items in question are treated as stock-in-trade.
6. How the company (assessee) is authorized in memorandum of association/articles of association? Whether for trade or for investment? If authorized only for trade, then whether there are separate resolutions of the board of directors to carry out investments in that commodity and vice versa?
7. It is for the assessee to adduce evidence to show that his holdings is for investment or for trading and what distinction he has kept in the records or otherwise, between two types of holdings. If the assessee is able to discharge the primary onus and could prima facie show that particular item is held as investment (or say, stock-in-trade) then onus would shift to Revenue to prove that apparent is not real.
8. The mere fact of credit of sale proceeds of shares (or for that matter any other item in question) in a particular account or not so much frequency of sale and purchase will alone not be sufficient to say that assessee was holding the shares (or the items in question) for investment.
9. One has to find out what are the legal requisites for dealing as a trader in the items in question and whether the assessee is complying with them. Whether it is the argument of the assessee that it is violating those legal requirements, if it is claimed that it is dealing as a trader in that item? Whether it had such an intention (to carry on illegal business in that item) since beginning or when purchases were made?
35810. It is permissible as per CBDT's Circular No. 4 of 2007 of 15th June, 2007 that an assessee can have both portfolios, one for trading and other for investment provided it is maintaining separate account for each type, there are distinctive features for both and there is no intermingling of holdings in the two portfolios.
11. Not one or two factors out of above alone will be sufficient to come to a definite conclusion but the cumulative effect of several factors has to be seen.
65.25. The Pune Bench of the ITAT in the case of Apporva Patni vs. Addl.CIT [2012] (54 SOT 9) held that investments through PMS scheme for appreciation and maximization of the wealth and not merely encashing of profits as trader, gain from such activity was liable to be considered as derived from activity of investments and not trading. (Similair view was taken by the Tribunals in ITO vs, Radha Biriju Patel [2011] (46 SOT
23),(Mum ITAT), ARA Trading & Investment (P) Ltd vs. DY CIT [2011]( 47 SOT 172, Pune ITAT) 65.26. The Hon'ble jurisdictional High Court in the case of CIT vs. Consolidated Finvest and Holding Ltd. [2011] 337 ITR 264 held that where the assesse had acquired the shares in public issue and had in fact, shown them in the books of accounts as investment and were booked under the head "non-trade" and not trading investment . The intention to acquire those shares as investment could be reflected from the fact that it was holding most of the shares of other companies since long period of time and was not entering into frequent business of sale and purcahses of shares. From the facts, the Commissioner (Appeals) and the Tribunal arrived at a 359 finding of fact that the acquisition of such shares in public issue with the intent of holding them for a long period of time to achieve long-term appreciation and the mere fact that the shares were sold in a short span of time of its acquisition due to steep and unanticipated rise in stock market did not mean that the intention of the assessee at the time of purchase of shares was not to hold them for a long period of time or to deal in them.. The profit arisen from sale of shares during the relevant previous year was to be treated under the head 'Capital gains' and not 'profit or gain from business or profession'.
65.27. The Hon'ble Delhi High Court in the case of CIT vs. Rohit Anand [2010] (327 ITR 445 held that where the Tribunal had found that the assessee was not a trader in stock but only an investor and that the assessee had demonstrated that his intention was never to trade in shares because the investment was out of his own funds, the investment was not rotated frequently, the total number of transactions was few, the treatment of the shares as investment in earlier years had been accepted by the Assessing Officer, the assessee had taken delivery and made full payment for such investment and that therefore the transactions were to be treated as giving rise to capital gains and not profits and gains of business 65.28. Now, we proceed to analyze the facts of the present case in the light of the principles laid down by the Courts (Supra) for determinng the nature of the transaction vis a vis capital gains vs business income:
Intention of the assessee at the time of the purchase of shares:
65.29. The business of the assessee is not to deal in shares and securities. The investment was made with a view to earn capital appreciation and to use the 360 spare fund optimally instead of keeping it in the banks. For the year under appeal, the assessee earned dividend income of Rs.22.61 crores from investments held in shares and mutual funds.
Treatment in the books of accounts:
65.30. It is an undisputed fact that the assessee had treated the transaction as investment in its books of accounts and not as stock in trade. The assesse has shown the investments in shares both at the beginning and closing of the year as an investment only and not as stock in trade.
65.31. The assessee has valued the investments at cost as per Accounting standard 13- Accounting for Investments and not in accordance with Accounting Standard -2 which deals with valuation of inventories.
65.32. The assessee has been holding the securities/ shares as investments from year to year and consistently following the same method of accounting for the purpose of disclosure and valuation. This teartment by the assessee was accepted by the Revenue for the past years.
65.33. The assesse had earned income from both long term and short term capital gains which means the assessee has also held shares for a period of more than 12 months.
Whether the investments are made out of borrowed funds 65.34. The investments were made from surplus funds of the assessee and there were no borrowings. The investments were made to optimally utilize the spare funds instead of keeping the same idle in the bank accounts. The 361 investments were made in mutual funds (debt and liquid funds) and through portfolio management schemes/ IPOs.
65.35 The co-ordinate bench of the Delhi ITAT in the case of Narendra Gehlaut vs. JCIT [ITA No 1648/ Del/ 2010] held that despite borrowing, gains on shares assessable as Short term capital gains and not business profits. The decision is rendered considering the CBDT Circular No 4/ 2007 and various judicial precedents on the subject.
Frequency of the transactions 65.36. Out of the total sale value of Rs 13,690.84 crores realized from the investments, an amount of Rs 12,330.33 crores relates to sale of short term debt mutual funds and liquid funds in which the transactions are effected on daily basis (i.e. surplus amounts are invested and the withdrawals are made in a short span depending on the business needs of the assessee). These funds were invested mainly into money market instruments, short-term corporate deposits and treasury. Most schemes have a lock-in period of a maximum of three days to protect against procedural (primarily banking) glitches, and offer redemption proceeds within 24 hours.
65.37. The Assessing officer has brought the transaction to tax under the head "Business income" mainly on the ground that the volume of the transaction of such investments was high and the assessee is undertaking the trading of stocks and mutual funds regularly and systematically. However, we observe that there is not much frequency in sale/purchase of investments, from analysis carried out at page 526 of objections in Form 35A. It is not the case that the assessee has indulged in regular trading in shares on day to day basis.
36265.38. The Mumbai Bench of the ITAT in the case of Janak S. Rangwala (11 SOT 627) observed that mere volume and magnitude of transcation will not alter the nature of transcation if the intention was to hold the shares as investment and not in stock in trade.
Investments in mutual funds -
65.39. Out of the total income earned from mutual funds, almost 67.34% of the total income earned from investments made in mutual funds was for a period of more than one year.
Investments in shares -
65.40. Investment in shares was primarily made either through PMS or under Initial Public Offer. Under PMS, the company advances funds to the Portfolio Manager, who in turn makes investment in various shares. In substance the investments under PMS are similar to investment in mutual funds. The assessee, reiterated that it is only interested in the return on funds invested and does not act as a dealer/trader, so as to be regarded as being engaged in business activity.
65.41. In view of the above factual matrix it emerges that assessee is:
(i) not a trader in stocks
(ii) Intention of holding the shaes as investment/ stock is manifest.
(iii) Sales are effected by delivery.
(iv) Department has itself in earlier years taxed such transactions under thehead "Capital Gains".
36365.42. Considering these facts and applicable judicial precedents on the issue, we are of the considered opinion that the income in question can be taxed only under the head "Capital Gains" and not under the head business income. This ground of the assessee is allowed.
66. Ground no. 43 & 43.1 (Disallowance of provision towards medical reimbursement/ leave travel allowance): DRP Directions:
66.1. The DRP has issued following directions to the Assessing Officer;
"The assessee has a policy of providing reimbursement of medical expenses and leave travel allowance to the employees. The employees have an option to either avail of the aforesaid benefit or encash it during the relevant year or to carry forward the leave for claim in the succeeding year. The assessee was earlier claiming the aforesaid expenditure in the year of actual claim by the assessee. During the current previous year however, the assessee changed its method of accounting from cash to mercantile basis for accounting the medical expenses/leave travel allowance and pursuant to this change in the method of accounting made a provision of Rs. 4.21 crores in the books of accounts and claimed the same as deduction. The AO has disallowed the assessee's claim by holding that the provision made for aforesaid liability is not an ascertained/crystallized liability during the year.
The counsel argued that the claim of the assessee has been made for the liability towards accumulated medical reimbursement /leave travel allowance claims which have accrued up to the end of the previous year and is not an unascertained liability.
The objection of the assessee is not acceptable It remains a fact that the claims for the medical reimbursement and leave travel allowance for which the provision has been made, have not been made by the employees this year. Nor any payment on this account has been made by the assessee. The assessee has also not provided any cogent and justifiable reasons for changing its method 364 of account in this regard. The objection of the assessee is therefore rejected."
Therefore, in conformity with the order of DRP, amount of Rs. 412.03 lacs is added to the income of the assessee. (Addition Rs. 412.03 lacs) Facts:
66.2. The assessee has a policy of providing reimbursement of medical expenses and leave travel allowance to employees. In the earlier years, the assessee claimed deduction of aforesaid expenditure in the year of actual payment to employees. During the relevant year, pursuant to revision of AS-
15, relating to accounting of employee benefits, the assessee changed its method of accounting and made provision for estimated liability on account of accumulated medical reimbursements and leave travel allowance payable to employees as on 31.3.2007, on the basis of actuarial valuation, amounting to Rs. 4.12 crores.
66.3. The Assessing officer held that the aforesaid provision was not for an ascertained/crystallized liability, which liability would accrue only on receipt of claim from the employees and, therefore, disallowed the aforesaid amount of provision.
Assessee's Submissions:
66.4. The aforesaid provision was made for liability towards accumulated medical reimbursements/leave travel allowance claims, which had accrued to the employees, upto the end of the relevant previous year and was, therefore, not an unascertained liability.365
66.5. It is settled law that under the mercantile system of accounting, deduction of expenditure is allowable in the year in which liability has accrued, notwithstanding that the same has to be discharged at a later date.
Reference in this regard can be made to the following decisions:
- Metal Box Company of India Ltd. v. Their Workmen: 73 ITR 53
- Bharat Earthmovers v. CIT: 245 ITR 428
- Rotork Controls India Ltd. vs. CIT: 314 ITR 62 (SC) 66.6. The aforesaid provision was necessitated on account of a bonafide change in the method of accounting for medical reimbursement / leave travel allowance benefit, from cash to mercantile basis pursuant to AS-15 becoming mandatory, w.e.f. 1-4-2006.
66.7. Reliance in this regard is placed on the following decisions, wherein it has been held that bonafide change in the method of accounting which is consistently followed thereafter, calls for being accepted:
- Indo Commercial Bank Ltd vs. ITO: 44 ITR 22 (Mad.)
- Forest Industries Travancore Ltd. vs. CIT: 51 ITR 329 (Ker.)
- CIT vs. Corborandum Universal Ltd: 149 ITR 759(Mad.)
- CIT vs. Dolaguri Tea Co (P) Ltd: 76 Taxman 257(Cal.)
- CIT vs. Kesoram Industries and Cotton Mills Limited: 204 ITR 154 (Cal.) 66.8. In view of the above, provision for such liability is clearly allowable deduction, since the same pertained to liability(ies) accrued until the end of 366 the relevant year and was provided on account of compliance of mandatory Accounting Standard.
66.9. Reliance, in this regard, is further placed on the following decisions, wherein it has been held that where there is a bonafide change in the method of accounting, claim on the basis of the changed method would be allowable deduction in the year of change, more so since the liability in regard thereto has not been claimed as deduction in the earlier years.
- CIT v. West Coast Paper Mills Ltd.: 193 ITR 349 (Bom.)
- CIT v. Standard Radiators (P) Ltd.: 286 ITR 207 (Guj.)
- CIT v. Whirpool of India Ltd.: ITA No. 1154 of 2009 (Del.)(HC) 66.10. In view of the above, it is respectfully submitted that the deduction on account of provision towards medical reimbursement / leave travel allowance aggregating to Rs.4.12 crores in respect of subsisting liability has been correctly claimed by the assessee and no portion of the same was disallowable.
DR's Submissions 66.11. Reliance is placed on the assessment order and order passed by DRP.
367Our findings & conclusion:-
66.12. The undisputed fact is that the change in the method of accounting was done by the assessee to follow the mandatory requirement of AS-15 issued by the Institute of Chartered Accountants of India. The accounting standard required the assessee to make the provision for estimated liability on account of accumulated medical reimbursement and leave traveling allowance. Assessing officer disallowed the claim on the ground that the liability will accrue/ crystalize only on receipt of claim by the employee.
66.13. Firstly, the change in method of accunting was required on account of revision of Accounting Standard by the Institute of Chartered Accountants of India and therefore we do not find any reason to doubt the intention of the assessee in changing the method of accouting accordingly. This is a bona fide change in the method of accounting.
66.15. Secondly, we find that the disallowance is against the ratio laid down by the Hon'ble Supreme Court in the case of Bharat Earthmovers vs. CIT 245 ITR 428 (SC).
66.16. Thus, as the change in the accounting is bona fide and in consonance with ICAI guidelines, we allow this ground of the assessee.368
67. Coming to the additional grounds admitted by us, we remit the same to the file of assessing officer for fresh adjudication in accordance with law.
68. In the result, assessee's appeal is partly allowed for statistical purposes as concluded in the body of the order.
Order pronounced in open court on 11th June, 2013.
Sd/- Sd/-
(R.P.TOLANI) (J.S. REDDY )
JUDICIAL MEMBER ACCOUNTANT MEMBER
Dated: 11th June, 2013.
*MP*
Copy to:
1. Assessee
2. Assessing officer
3. CIT(A)
4. CIT
5. DR, ITAT.