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Income Tax Appellate Tribunal - Delhi

Honda Siel Cars India Ltd. vs Asstt. Commr. Of Income-Tax on 21 July, 2006

Equivalent citations: [2007]109ITD1(DELHI), (2007)111TTJ(DELHI)630

ORDER

Joginder Pall, Accountant Member

1. These two appeals have been filed by the assessee against two orders dated 24.08.2005 of CIT(A), Ghaziabad, for the assessment years 2001-2002 & 2002-2003 respectively. Since the issues involved in both the appeals are common, these were heard together and are being disposed of by this consolidated order for the sake of convenience.

2. At the outset, the assessee has raised following common additional ground for both the assessment years:

1. That the CIT(A) erred on facts and in law in enhancing the assessed income of the appellant alleging that the payment made on account of lump sum fee and royalty was neither revenue expenditure (as claimed by the appellant), nor capital expenditure(as treated by the assessing officer), without providing reasonable opportunity of being heard as provided in Section 251(2) of the Act.

The assessee has submitted that it had filed returns of income for both the assessment years declaring therein loss of Rs. 68,14,22,302/- and Rs. 93,03,99,726/- for the assessment years 2001-2002 & 2002-2003 respectively. In the return of income filed for the asstt. year 2001-2002, the assessee had claimed deduction of lump sum fee amounting to Rs.28,67,00,000/- paid to M/s. Honda Motor Company Ltd; Japan (In short 'HMCL') under a technical collaboration agreement (In short 'TMC') and royalty of Rs. 12,38,37,000/- paid to HMCL @ 4% of the sale for the assessment year 2001-2002. Similar deduction amounting to Rs. 29,20,07,000/- towards instalment of lump sum fee and Rs. 15,60,93,000/-being royalty was claimed as deduction for the assessment year 2002-2003. The AO disallowed the claim of the assessee on the ground that the technical know-how received by the assessee related to setting up its plant and, therefore, the impugned expenditure was capital in nature. Similar reasoning was given by the AO for treating the royalty payments also as capital expenditure. When the matter was taken in appeals before the CIT(A), the CIT(A) held that the impugned expenditure was indeed diversion of income to the holding company. The action of the CIT(A) has resulted in enhancement of income. As per provisions of Sub-section (2) of Section 251 of the Act, the CIT(A) was under a statutory duty to issue a show cause notice to the assessee before enhancing the income. Since the Id. CIT(A) failed to issue such notice, the assessee has contended that the action of the CIT(A) for enhancing the income is illegal, invalid and void ab initio. The asscssee has contended that this is purely a legal issue for which relevant facts are already on record. The additional ground raised by the assessee deserves to be admitted. Reliance has been placed on two judgments of Hon'ble Supreme Court in the cases of Jute Corporation of India v. CIT 187 ITR 168 and National Thermal Power Co. Ltd v. CIT 229 ITR 383.

3. The Ld. CIT, DR, Sh. P.C.K. Solomon, vide his letter dated 25.05.2006 has submitted that Revenue has no objection to admittance of the additional ground of appeal for both the assessment years.

4. We have heard both the parties and considered the respective submissions. Considering the fact that the issue raised under additional ground directly arises from the order of the CIT(A) and is legal in nature for which relevant facts are already on record, the additional ground raised by the assessee for both the assessment years is admitted. Two judgments of Hon'ble Supreme Court in the case of Jute Corporation of India v. CIT (supra) and National Thermal Power Co. Ltd. v. CIT (supra) also support this view. Therefore, we order accordingly.

5. As regards the merits of additional ground, the Ld. counsel for the assessee, Sh. Ajay Vohra, drew our attention to the provisions of Sub-section (2) of Section 251 which provides that the Ld. CIT(A) shall not enhance an assessment or reduce the amount of refund unless the assessee has had a reasonable opportunity of showing cause against such enhancement or reduction. Me submitted that this necessarily implies that the CIT(A) must issue a show cause notice to put the assessee to notice for enhancement of income. He submitted that in this case, no such show cause notice was issued by the CIT(A). Therefore, this is jurisdictional defect and the enhancement made by the CIT(A) deserves to be quashed. He relied on the judgment of Delhi High Court in the case of Gedore Tools Pvt. Ltd v. CIT 238 ITR 268, where it has been held that the CIT(A) is required to issue a notice under Section 251(2) before making enhancement of assessment. He also relied on the judgment of Hon'ble Supreme Court in the case of CIT v. Rai Bahadur Hardutroy Motilal Chamaria reported in 66 ITR 443. Thus, he submitted that the impugned orders of the CIT(A) for enhancing the income may be quashed.

6. The Ld. CIT, DR vide his letter dated 25.05.2006 submitted that Sub-section (2) of Section 251 only provides that the Of (A) shall not enhance an assessment unless the appellant had a reasonable opportunity of showing cause against such enhancement. There is no statutory notice prescribed under the Act for issuing a show cause notice for enhancement of income. The law only requires that the assessee must be made aware of the proposed action and his reply must be considered before enhancing the income. He produced before us a copy of the order sheet entries made by the CIT(A) on 26.7.2005 and 10.8.2005, where the assessee was duly informed about the proposed action of the CIT(A). The reply dated 10.8.2005 filed by the assessee has been duly incorporated by the CIT(A) on pages 6 to 19 of the impugned order for the assessment year 2001-2002 and thereafter, the ld. CIT(A) has given his own reasoning for treating the lump sum fee payments and royalty payments as diversion of income to the holding company. Thus, he submitted that the ld. CIT(A) has complied with the statutory requirement of issuing notice before enhancing the income and, therefore, there was no illegality in the action of the ld. CIT(A) as alleged by the assessee.

7. We have heard both the parties and carefully considered the rival contentions with reference to facts, evidence and material on record. The provisions of Sub-section (2) of Section 251 read as under:

(2) The Commissioner (Appeals) shall not enhance an assessment or a penalty or reduce the amount of refund unless the appellant has had a reasonable opportunity of showing cause against such enhancement or reduction.

A bare reading of the above provision shows that the Ld. CIT(A) is under a statutory duty to issue a show cause notice and provide a reasonable opportunity to the assessee before enhancing such income. The order sheet entries made on 26.7.2005 & 10.8.2005 by the CIT(A) are extracted as under

26.7.2005 Sh. K.L. Gupta, Manager Taxation attended. Requested for adjournment. On the next date of hearing further point are to be explained since Honda Siel Car India Ltd. is 99.9% subsidiary to Honda Motors Company of Japan then how the payment in the name of technical know how and lump sum for Royalty is justified when all the technical inputs are provided by the Parent company why the lump sum payment and Royalty payment which are the same thing in other words should be treated as diversion of profit without paying taxes and instead of debating over capital or venue expenditure it should be added 40,65,07,000 in the income of the appellant because taxes have not been paid over it. In other words payment in the name of Royalty and lump sum is paying to oneself for one's knowledge. Why the contract so far as provisions of Article 14 are concerned. Appellant is also required to distinguish the fact of case in respect to the observation made by the Hon'ble Supreme Court in the case of Jones Wood Mead and Son (India) Limited v. CIT.

224 ITR 342 where the test of enduring benefit brought is therefore not a certain on conclusive test and it cannot be applied blindly and mechanically without reference to the particulars facts and circumstances of a given case.

Noted for 10.8.2005 Sd/-

Honda Siel Cars India Limited 2001-02,2002-03 10.8.2005 Shri Rupesh Jain (PCA) & Mr. Surender Agarwal, GM (Finance) Sh. K.L. Gupta, Sr. Manager Taxation - Shri Chitresh Gupta attended filed the written submission on the point asked for. Supported by case laws and paper book. Argued that reasonableness of remittance according to TCA stand justified on the basis of approval given by Govt. of India. Agreed that TCA will be within the ambit of India Contract Act. Lump sum payment magnitude and proceeding of Royalty was decided on the bass of commercial viability of the product even the cost price being higher to sale price, further argued that due to restructure clause the benefit was of non-enduring nature. From the provisions for various expenses were to be made because bill were not raised in time. Regarding dispute custom payment the matter is in Hon'ble ITAT. Further argued that AO should have considered the claim irrespective of payment made. Stated that receivable amount from excise was actually to be disbursed to the customs who are entitled for 8% less excise duty. Since AO did not ask for actual, disbursement therefore it was not submitted. Regarding 3% payment to HMCL on the Ports sale to Thailand it was stated that separate agreement was entered to sell the indigenous made out of the designed territorial boundary.

Sd/- 10.3.2005 In response to the above show cause notice, the assessee filed a detailed reply vide his letter dated 10.08.2005 (copy placed at pages 54 to 63 of the paper book) This has also been extracted by the CIT(A) on pages 6 to 19 of the assessment order for the A.Y. 2001-2002 and also in the order for asstt. year 2002-2003. The implication of the proposed action of the CIT(A) was clearly brought to the notice of the assessee. Therefore, it is not correct to say that the Id. CIT(A) has not issued any show cause notice before making the enhancement of income. Since there is no statutory notice prescribed under the Act and the assessee has been allowed full opportunity before making enhancement of income, we are of the considered opinion that there is no illegality in the action of the CIT(A) before enhancing the income. The law only requires that assessee must be made aware of the proposed action of CIT(A) for enhancement of income and the explanation be obtained and considered. The entry' made in the order sheet amounts to due compliance with the procedure. Thus, we are of the view that Ld. CIT(A) has complied with the procedure as laid down under the Act and the assessee was duly put to notice before making enhancement of income. The ratio of the judgments of Hon'ble Supreme Court in the cases of Gedore Tools Pvt. Ltd v. CIT (supra) and CAT v. Rai Bahadur Hardutroy Motilal Chamaria (supra) is not applicable to the facts of the present case because the assessee was put to notice by the CIT(A) before making enhancement of income. Therefore, the orders of the CIT(A) are upheld on this point and the additional ground of appeal filed by the assessee is rejected for both the assessment years.

8. Now, we take up first ground of appeal common to both the assessment years which read as under:

1. That on the facts and circumstances of the case the CIT(A) erred in upholding disallowance of technical know-how fee and royalty paid to Honda Motor Company lid; Japan (HMCL), on a different ground than that taken by the assessing officer, thereby enhancing the assessment.

1.1 That on the facts and circumstances of the case the CIT(A erred in alleging that payment of technical know-how fee and royalty to HMCL is neither revenue expenditure, as claimed by the appellant, nor capital expenditure as held by the assessing officer, but diversion of profit in favour of HMCL.

1.2. That on the facts and circumstances of the case the CIT(A) erred in alleging that relevant Articles of Technical Collaboration Agreement (TCA) between appellant and HMCL, relating to payment of technical know-how fee and royalty to HMCL are void, in terms of Contract Act and permission granted by Reserve Bank of India.

1.3. That on the facts and circumstances of the case the CIT(A) erred in not appreciating that since appellant by virtue of TCA merely acquired a right to use the technical information and know-how, payment therefore in the nature of lump sum fee and royalty is revenue in nature and deductible business expenditure.

1.4. Without prejudice, that on the facts and circumstances of the case the CIT(A) erred in not directing allowance of depreciation on the amount of lump sum fee and royalty, treating the same as capital expenditure.

The facts of the ease are that in the returns of income filed for both the assessment years, the assessee had claimed deductions of Rs. 28,27,00,000/-and Rs.29,20,07,000/- being lump sum amount of "Technical Guidance Fee" paid to M/s. HMCL, Japan for the assessment years 2001-02 & 2002-03 under a Technical Collaboration Agreement (In short 'the TCA'). In addition, the assessee also claimed deductions of Rs. 12,38,27,000/- and Rs. 15,60,93,000/- being royalty paid to the foreign company under the agreement for the assessment years 2001-02 & 2002-03 respectively. During the course of assessment proceedings, the AO called upon the assessee to justify its claim as revenue expenditure. The assessee submitted that it had entered into TCA with M/s. HMCL, Japan, under which the assessee was granted an indivisible, non-transferable and exclusive right and license to use the know-how and technical information provided by M/s. HMCL. In consideration of right and license granted, the assessee company was required to pay a lump sum fee of US 30.5 million Dollars payable in 5 equal instalments beginning from the 3rd year after commencement of commercial production. The assessee furnished copy of the TCA. Relying on the two judgments of Hon'ble Supreme Court in the case's of CIT v. Ciba India Limited 69 ITR 692 and Alembic Chemical Wroks Co. Ltd. v. CIT 177 ITR 377, the assessee contended that the impugned expenditure was allowable as revenue expenditure. Similarly, the assessee had explained that the assessee was also required to pay Royalty @ 4% of the net sale price of the manufactured products sold in India under TCA for a period 7 years. The assessee claimed that such payments were also in the nature of Revenue expenditure and hence allowable. However, the AO referred to the various clauses of TCA and observed that without such agreement, the assessee could not even start its business, let alone run it. He observed that the agreement was crucial for setting up and starting the business of the assessee and the technical know-how provided for the foreign collaborators included inputs for setting up its plant and manufacturing facilities. The restrictions placed on the use of license, technical know how, trademark etc. were simply by way of abundant precautions and legality as the affairs of the assessee-company were being supervised and monitored by the parent company i.e. HMCL, Japan. Thus, the AO observed that by incurring expenditure in the nature of technical guidance fee, the assessee had obtained an advantage of enduring benefit and, therefore, such expenditure was capital in nature. He also relied on the two judgments of Hon'ble Supreme Court in the cases of CIT v. Ciba of India Ltd and CIT v. Warner Hindustan Limited (1998) 9 SCC 534 and the judgment of Allahabad High Court in the case of Ram Kumar Pharmaceutical Works v. CIT . He further observed that the expenditure incurred on payment of Royalty was also for acquisition of technical know-how, license etc. and, therefore, by incurring such expenditure, the assessee has obtained benefit of enduring nature. In this view of the matter, the AO disallowed both the Royalty payments and lump sum technical guidance fee being capital expenditure for both the assessment years.

9. Aggrieved, the assessee filed appeals against the assessment orders before the CIT(A) and submitted detailed submissions vide letter dated 10.08.2005. The Ld. CIT(A) called for further clarifications on the points noted on page 19 of the impugned order for the assessment year 2002-2003. The asscsscc furnished this information. It was submitted before the CITA) that both the lump-sum technical fee and Royalty were being paid by the assessee to HMCL under the Technical Collaboration Agreement dated 21.5.1996 where the assessee was granted an indivisible, non-transferable and exclusive right and license to use know-how and technical information for manufacture of automobiles etc. In consideration, the assessee was to pay a sum of US$ 30.5 million payable in 5 equal instalments. Similarly, Royalty @ 4% on the net sales (both internal and export sales) was payable by the assessee for the technical information and know-how etc. supplied by HMCL, Japan for a period of 7 years. It was submitted that the business of the assessee was a joint venture between HMCL & Siel Limited, an Indian Company where HMCL was to have 60% of share holding in assessee company and 40% was to be held by Indian partner - Siel Limited. However, share-holding had changed in the various years and in the year 2003, the shareholding by HMCL aggregated to 99.9% and by Siel Limited to 0.1 %. It was also submitted that taking into account the desired level of technological dynamism in Indian Industry, the Govt. of India had encouraged acquisition of foreign technology, import of technology and development of imported know-how as well as upgradation of indigenous technology, RBI accorded approval to all Industries for foreign technology collaboration agreements subject to the lump sum payment not exceeding US$ 2 million. Similar restrictions were placed on Royalty payments. The said policy was liberalized subsequently. The fact that lump-sum technical guidance fees and Royalty were paid to holding companies did not make any difference so far as the claim of the assessee was concerned because considering the commercial expediency of such payments, the same had been recognized by the Indian Government. It was submitted that the Govt. approval has been given under the governing statute e.g. Foreign Exchange Regulation Act or by a Department of Industries by Ministry of Government of India under a policy guideline because the outflow of precious foreign exchange is a matter of greater concern to the Government. Reliance was placed on the judgment of Hon'ble Supreme Court in the case of LIC v. Escorts Ltd , where it was observed that Reserve Bank of India was the authority under Section 29(1) of the Foreign Exchange Regulation Act to grant permission for payments to foreign parties. It was also submitted that the mere fact that holding company i.e. IIMCL held 99.9% shares of the assessee company did not mean that the payment was made to self because both HMCL and Siel India were two distinct and separate legal entities. It was also submitted that if that were so, then the entire profit of the assessee should have been treated as income of the holding company and taxed in its hands in India. It was also argued that at the most, disallowance, if any, out of payments made to related party could be made under Section 40A(2)(b), provided the payments are found as excessive or unreasonable, having regard to fair market value of the goods/services. But in this case, such situation did not arise because the agreement was approved by the Govt. of India. Relying on the judgment of Delhi High Court in the case of CIT v. Shriram Pistons & Rings Ltd 118 ITR 230, it was submitted that in a case where approval of remuneration to a son of a Director of the assessee was approved by the Company Law Board, no disallowance Under Section 40A(2) of the Act could be made. Reliance was also placed on the decision of the ITAT, Pune Bench in the case of Kinetic Honda Motor Ltd. v. CIT 77 ITD 393 where by referring to CBDT's Circular No. 6 P dated 8.7.1968 in the context of Section 40A(2)(b), the Tribunal had held that if payments were approved by one wing of the Government, there was no question of being treated as excessive and unreasonable having regard to the legitimate business needs. In this case also, there was change in the pattern of share-holding of a foreign company which had arisen from 28.56% to 51%. But the agreement was approved by the Govt. of India. It was held that there was no justification in making any disallowance once the agreement was approved by the Ministry of Industries. Reliance was also placed on the decision of ITAT, Bombay Bench in the case of Bombay-Burmah Trading Corporation Ltd v. DCIT in ITA No. 3518/Mum./2000. It was also submitted that the judgment of Supreme Court in the case of Jonas Wood head and Sons Indian Limited v. CIT 224 ITR 342 were distinguished on facts on the ground that in the present case, the lump-sum fee/Royalty paid by the assessee under the TCA was in lieu of use of know-how, designs for the manufacture, assembly testing or inspection of the cars provided by HMCL. Foreign collaborator was not obliged to provide technical assistance for the setting up of manufacturing facilities of the assessee. The assessee had qualified engineers, technicians and other personnel, some of whom were trained by IIMCL for the purpose of setting of its plant. The expenses of such personnel were capitalized by the assessee. It was also submitted that there were restrictions imposed on the assessee about the use of the technical know-how provided by the foreign collaborators within 90 days from the date of expiration or termination of TCA. Thus, the assessee did not enjoy exclusive right for unlimited period about the use of technical know-how provided by the foreign collaborators.

10. The Ld. CIT(A) considered these submissions and referred to the Article 14 of the TCA which provided payment of lump sum fee of US$ 30.5. million to HMCL payable in 5 equal instalments and also royalty payable @ 4% on internal sales and exports subject to taxes. He also referred to letter dated 13.11.1995 of Govt. of India, Ministry of Industry, where proposal for foreign collaboration subject to the terms and conditions mentioned therein was approved. The Ld. CIT(A) noted that while granting the approval, Govt. of India had prescribed equity participation to HMCL to 60% and by the assessee to 40%. However, in the year 1996 the shareholding of HMCL went up to 90% and in the year 2000, the same stood at 99%. The share-holding of the assessee was 1 %. Subsequently in the year 2003, the equity holding of HMCL went up to 99.9% and of the assessee stood at 0.01 %. The Ld. CIT(A) observed that change in the equity ratio was not as per spirit of the permission given by the Govt. of India. Thus, he observed that the assessee became almost a complete subsidiary to HMCL. He also observed that permission for payment of Royalty and lump technical guidance fee was with the condition subject to taxes. While these words were incorporated for payment to royalty, but the same were missing in the clause relating to payment of lump-sum amount of technical fee. This was contrary to the conditions laid down by the Govt. of India while granting the approval. He also referred to Section 16 of the Indian Contract Act, 1872 which deal with the contracts made under undue influence to obtain an unfair advantage over the other. He also observed that HMCL was holding a real or apparent authority as per the spirit of the provisions of Section 16(2)(a) of the Indian Contract Act. Thus, he observed that both the lump-sum payment of technical guidance fees and royalty were indeed for diversion of profit without paying taxes. He also observed that the TCA agreement with 1IMCL, Japan was a voidable contract in terms of Section 23 of the Indian Contract Act, 1872 read with permission granted by the Government. He also observed that diversion of profit was also established as the money transferred by way of royalty payment and technical guidance fee flowed back to the assessee in the form of increased equity shareholding of the HMCL by making aforesaid payment to the HMCL. He further observed that stipulation in the TCA that Lump-sum Technical fee was to commence in 3rd year of commencement of production showed that these payments were to be made out of profits. But the assessee has only increased its losses rather earning profit. Thus, he disallowed the claims of the assessee for payment of lump-sum technical guidance fees and royalty for both the assessment years. He did not decide the ground taken before him that the AO was not justified in disallowing the claims of the assessee for deductions on the ground that the impugned expenditure was capital in nature. In other words, he has not recorded any finding as to whether the expenditure incurred was capital or revenue in nature. The assessee has now brought the appeals before us.

11. The Ld. counsel for the assessee reiterated the submissions made before the authorities below. He drew our attention to pages 1 to 24 of the paper book which is a copy of written submissions filed before the CIT(A). He further referred to pages 96 to 123 of the paper book which is a copy of Technical Collaboration Agreement between the assessee and the HMCL. He referred to page 100 of the paper book where the assessee had entered into a TCA on 21.05.1996 with M/s/HMCL as per which the assessee had agreed to obtain license and technical assistance from M/s. HMCL for the manufacture and sale of certain automobiles. He referred to page 102 of the paper book, which defines the term "know-how" as to mean all secret and technical information, including but not limited to drawings, standards, specifications, material lists, process manuals and directions maps, which directly related to the products or the license parts themselves or was necessary for the manufacture of the products or the licensed parts. Clause (7) of the said agreement defines the term "Technical Information" as to mean the know-how and technical information, such as service materials and Japanese Industrial Standard, which directly related to the products or the licensed parts or was necessary for the manufacture of the products or the licensed parts. Article-2 of the said agreement provided that the assessee was granted to licensee an indivisible, non-transferable and exclusive right and license of manufacture, use and sell the products and the licensed parts within the territory under the Intellectual Property Rights and by using know-how, and the technical information, provided that the licensee may grant sub-licenses with a prior written consent of licensor. As per Article 7.1. of the TCA, the know-how and the other non-public technical or business information of licensor of the M/s. HMCL shall remain the sole and exclusive property of licensor and the same shall be held in trust and confidence for licensor by the assessee. Thus, he submitted that the assessee was merely licensee and not owner of the technical know-how and the business information. He further referred to Article 8 on page 107 of the paper book where the assessee was restricted to use the said technical know-how only for the manufacture of its products and the assessee was precluded from allowing the use of such information by any third party. The assessee was directly prohibited from sharing such information with anybody else. He then referred to Article 14 of the agreement on page 111 of the paper book which provided the consideration in the form of lump-sum fee and royally payable to HMCL. He further referred to Clause 14.3 on page 112 of the paper book which clearly provided that all payments and remittance by licensee will be subject to tax deduction at source/levy of cess. Thus, he submitted that the observations made by the CIT(A) in the impugned orders that there was no clause for payment of tax in respect of lump-sum guidance fee was factually incorrect. He also submitted that the statement too show that the assessee had deducted tax while making payment of royalty and lump-sum fee to HMCL. These have been placed at pages 438 to 440 of the paper book. He submitted that various clauses of the agreement referred to above show that the assessee had limited right to use and access of knowledge and technical information for manufacture of its own products. The assessee was not owner of the such know-how and had limited excess for manufacture of a limited use for manufacture of its own car. He further referred to Article 16 of the TCA which provided use of trade marks of HMCL. As per agreement, the assessee was prohibited from use or permitting any third party, the trade marks licensed hereunder in the servicing, sale or other disposition of any goods other than the products and the parts for repair or replacement. The agreement further pointed out that on termination, the shall discontinue the use of trademarks licensed by licensor. Article 19 on page 115 of the paper book provided that agreement was effective for a period of 10 years from the date of agreement or 7 years from the date of commencement of commercial production and shall thereafter be renewed subject to the prevailing laws. He referred to page 117 of the paper book where the assessee was required to discontinue the manufacture, sale and other disposition of the products and the parts, use of the Intellectual Property Rights, Technical Information licensed or furnished by the licensor under this agreement. The assessee was required to return all relevant documents and information belonging to HMCL. Article 23 of the agreement further prohibited the assessee from assigning any rights, directly or indirectly to any other party without prior written consent of the other parties. Thus, he submitted that expenditure incurred by the assessee by way of payment of lump-sum fee and technical guidance and royalty for the right to use know-how and technical information for manufacture of automobiles was revenue expenditure as the assessee had not acquired ownership right in the technology/information received and had only limited right to use the same. In support of such contention, the Ld. counsel relied upon the following judgments:

(i) CIT v. Ciba of India Ltd 69 ITR 692 (SC)

(ii) CIT v. Indian Oxygen Ltd. 281 ITR 337(SC)

(iii) CIT v. IACE (Pumps) Ltd. 232 ITR 31 (SC)

(iv) CIT v. Wavin (India) Ltd. 236 ITR 314(SC)

(v) Shri Ram Refrigeration v. CIT 127 ITR 746 (Del.)

(vi) CIT v. Tata Engineering Locomotive Co. Ltd. 123 ITR 538 (Bom)

(vii) Triveni Engg. Works Ltd v. CIT 138 ITR 216

(viii) ACTT v. Sharma Engines Values Ltd. 138 ITR 216

(ix) CIT v. Bhai Sunder Dass and Sons (P) Ltd. 158 ITR 195 (Del.)

(x) CIT v. Jyoti Electrical Motors Ltd 255 ITR 345 (Bom)

(xi) Cir v. Kanpur Cigarettes 147 Taxman 428 (All)

(xii) IAC v. Bajaj tempotd 218 ITR (AT) 147 (Pune)(SB)

(xiii) S.R.P. Tools Ltd v. CIT 237 ITR 684 (Mad.) Thus, he submitted that the AO was not correct in disallowing such expenditure as capital in nature.

11.1 As regards the action of the CIT(A), the Ld. counsel submitted that he has not decided the issue whether the impugned expenditure was capital or revenue in nature which was the basis for making such disallowance by the AC However, he has held that the impugned payments represented diversion of profits because the assessee flouted the conditions laid down, by the Government while granting permission to enter TCA with HMCL. He has particularly referred that HMCL has increased its share-holding from 60% to 99.9%, lump-sum technical know fee and royalty was subject to tax and no tax was paid by HMCL in respect of the same and the lump sum technical know-how fee and royalty were payable only out of the profits of the assessee and not immediately on entering the TCA. The Ld. counsel submitted that these allegations of the ld. CIT(A) were without any basis and contrary to the facts on record. He submitted that increase in share-holding by HMCL was approved by the Govt. of India, Ministry of Industries and Reserve Bank of India. He referred to pages 422 to 429 of the paper book where such approval was granted by the Reserve Bank of India. Page 422 is the letter of Govt. of India, Ministry of Industries dated 25/29th June, 1999 where HMCL was allowed to have 95% equity of the assessce-company. Page 423 is the letter dated 20th Oct. 2000 of the Govt. of India, where HMCL was allowed to have equity holding of 99%. Page 424 is the letter of Reserve Bank of India for transferring 32,40,000 equity shares of HSCI in favour of HMCL at the rate of Rs.31/- per share. Similarly page 426 & 427 is a letter dated 25th March, 2000 of Reserve Bank of India for granting permission of transferring 1,44,00,000 equity shares of Rs.10/- each to HSCI in favour of HMCL at a price of Rs.18.05 per share. Pages 428 & 429 is a letter dated 23rd April, 2003 of Govt. of India, Department of Economic Affairs where approval was granted for transfer of Rs.32.4 lakhs equity shares to M/s. HSCI representing 0.9% of the equity capital of the assessee. Thus, he submitted that the observations of the CIT(A) that equity ratio has been changed by flouting the conditions for granting approval to the joint venture was factually wrong and incorrect. He further submitted that lumpsum know-fee and royalty were remitted only to HMCL after deduction of tax at source in terms of the provisions of the Income-tax Act and Double Taxation Avoidance Act (DTAA) between India and Japan. The details regarding tax deducted at source and deposit of such tax etc. are placed at pages 430 to 440 of the paper book. Thus, he submitted that allegation of the CIT(A) that relevant clauses of the TCA were flouted, was again without any basis. He further stated that the TCA provided payment of lump-sum know-how fee in instalments over a period of 5 years starting from 3rd year after the commencement of the commercial production so that the assessee was able to find its feet and establish itself in the market and the payment of lump-sum know-how technical fee did not drain its financial resources during initial phase, which was capital intensive. The stipulation in the agreement had nothing to do with the profit of the assessee as the payment had to be made from the year specified in the TCA, irrespective of whether the assessee had profit or loss. He submitted that the Ld. CIT(A) has also erred in not appreciating that all these payments were made under an agreement approved by the Govt. of India and was again subject to the permission given by the Resave Bank of India and the same could not be brushed aside lightly and have to be given due consideration. The assessee has relied on the following judgments:

(i) LIC v. Escorts Ltd.

(ii) Cir v. Shriram Pistons and Rings Ltd. 181 ITR 230 (Del.)

(iii) Kinetic Honda Motors Ltd v. DCIT 77 ITD 393 (ITAT, Pune)

(iv) Bombay Burma Trading Corporation v. DCIT (ITAT, Bombay) (copy placed at page 455 to 458 of the paper book) Thus, the Ld. counsel submitted that the TCA cannot be said to be void or having been obtained by HMCL by exercising undue influence on the assessee and, therefore, the conclusion drawn by the ld. CIT(A) that the agreement with TCA was void, deserves to be set aside.

11.2. As regards royalty payments, the Ld. counsel submitted that similar deductions had been claimed and allowed in the earlier asstt. years. Following the principle of consistency, the Ld. counsel submitted that no disallowance of the royalty payment was called for by the AO and the Ld. CIT(A) was not justified in upholding the disallowance on the ground that the same represented diversion of income. He relied on the following judgments:

(i) Radhasoami Satsang v. CIT 193 ITR 321 (SC)

(ii) Director of Income-tax (Exemption) and Anr. v. Apparel Export Promotion Council (No. 1) 244 ITR 734(Del.)

(iii) CIT v. Kishan Lal (HUF) 258 ITR 359(Del.)

(iv) CIT v. Neo Polypack (P) Ltd. 245 ITR 492 (Del.)

(v) Sayaji Iron And Engg. Co. v. CIT 253 ITR 749 (Guj.)

(vi) CIT v. Girish Mohan Ganeriwala 260 ITR 417 (P&H)

(vii) Vesta Investment and Trading Co. (P) Ltd v. CIT 70 ITD 200 (Chd.)

(viii) DIT v. Guru Nanak Vidya Bhandar Trust 139 Taxman 308 (Del.)

(ix) Arihant Builders Dev. and Inv. (P) Ltd. v. ITAT 144 Taxman 121 (MP)

(x) CIT v. ARJ Security Printers 264 ITR 276 (Del.)

(xi) DCIT v. Jindal Photofilms Ltd (TM) ITA No. 1920/Del/98 (ITAT, Delhi).

He also made an alternative submission that once the AO had disallowed the impugned expenditure on the ground that the same was capital in nature, he ought to have allowed depreciation thereon.

12. The Ld. CIT(DR) also filed written submissions vide his letter dated 25.05.2006 stating therein that the various letters filed by the assessee indicated that various agreements were approved by the Govt. of India and further R.B.I, had accorded approval for enhancing the equity holding by the HMCL of the assessee company. He submitted that had these documents been available with the CIT(A), he would have not observed in his orders that change in equity ratio was not as per the spirit of the approval granted by the Govt. of India. He further stated that since equity holding with the HMCL at the point of time was of 99.9%, it was rightly held by him that payment made by the assessee in the garb of lump-sum payment of technical fee and royalty were nothing but diversion of profit. He further submitted that a perusal of TCA entered into between the assessee with the HMCL shows that the use of the license, technical know-how and trade mark by the assessee was for a considerable long period of time. i.e. 10 years and this resulted in enduring benefit of the assessee. Thus, the AO had rightly treated the impugned expenditure as capital in nature. He has also added that without TCA, the assessee could not have started its business and, therefore, this agreement was crucial for the inception and starting of the business. He stated that this also supported the case of the Revenue that the impugned expenditure was capital in nature. In support of the same, the Ld. CIT(DR) relied on the judgments referred to and relied upon by the AO in the order. As regards, the ground for allowing claim of deprecation on the capital expenditure, the Ld. CIT(DR) has submitted that the assessee is entitled to the claim of depreciation on the capitalized amount of lump-sum technical fee and royalty.

13. We have heard both the parties at some length and given our thoughtful consideration to the rival contentions, examined the facts, evidence and material placed on record. We have also gone through the orders of the authorities below and also referred to the relevant pages of the paper book to which our attention has been drawn. We have also referred to the various judgments cited by both the parties at bar. From the facts discussed above, it is obvious that the AO had disallowed the lump sum payment of technical fee and royalty on the ground that the impugned payments related to setting up of plant and manufacture of automobile goods and. therefore, the expenditure was capital in nature. The Ld. CIT(A) has not recorded any finding on the issue raised before him as to whether the impugned expenditure was capital in nature. However, he has held that the impugned payments represented diversion of profits to IIMCL. Briefly stated, the conclusions drawn by the CIT(A) are based on the following facts:

(i) M/s. IIMCL has increased a share holding from 60% to 99.9% after entering into the TCA which was against the approval granted by the Govt. of India to the proposal for setting up a joint venture with HMCL where the equity participation ratio of HMCL was supposed to be 60%. This according to the Ld. CIT(A) tantamounted to flouting the conditions laid down by the Govt. for according approval.

(ii) The lump-sum technical know-how fee and royalty were subject to tax and no tax was paid by HMCL in respect of the same.

(iii) The lump-sum technical know-how fee and royalty was payable only out of profits of the assessee and not immediately on entering into the TCA.

(iv) Since the equity holding of the HMCL was 99.9%, the said company exercised undue influence while entering into the TCA and, therefore, such agreement was void under Section 16 read with Section 23 of the Indian Contract Act, 1972.

12.1. The approval letters placed at pages 403 to 429 of the paper book clearly show that increase in share-holding by HMCL in the assessee-company from time to time was approved by the Govt. It is clear from the approval letters issued by the Ministry of Industries and Reserve Bank of India. These letters have already been referred to while discussing the facts of the case and submissions of both the parties. We also do not find any merit in the submissions of the Ld. CIT(DR) that had these approval letters been placed before the CIT(A), the CIT(A) would have not recorded in the impugned order that increase in equity share holding meant flouting the conditions imposed by the Govt. of India while granting approval to the proposal of joint venture. We find that the increase in share-holding has been duly brought to the knowledge of the CIT(A) and the same is also noted on page 22 of the impugned order for the assessment years 2001-2002 and page 24 of the impugned order for the asstt. year 2002-2003.

12.2. While granting the approval, the Ministry of Industries and Reserve Bank of India exercised due check on the in-flow of the foreign funds for the Industrial Development particularly in those segments which required higher level of technical know-how and the same is not available in India. While granting the approval, the Govt. also takes into account that the valuable foreign-exchange does not out-flow from the country in the form of royalty and technical know-how fee. All relevant aspects of the matter are duly considered by the Govt. of India. Thus, the objection raised by the CIT(A) that increase in equity holding by HMCL violated the conditions for granting the approval by the Govt. of India is without any basis and merit.

12.3. The next objection of the CIT(A) is that the technical know-how fee and royalty were subject to tax and no tax was paid by HMCL, has again been found without any merit. The assessee had remitted lump-sum know-how and royalty to HMCL after deduction of tax at source in terms of provisions of the Act and the double taxation avoidance agreement (DTAA) between India and Japan. The details regarding tax deducted at source and deposit of such tax have been placed before us at page 430 to 440 of the paper book which have already been discussed in the preceding paragraphs. Thus, here also, the assessee has not violated any conditions laid down by the Govt. of India while according approval. In case, the tax was not deducted at source or the same was not paid, the Revenue was free to take appropriate action under the relevant sections of the Act. However, there was due compliance on these conditions by the assessee. Therefore, the revenue did not feel any need to take such action against the assessee.

12.4 The other objection of the CIT(A) that the very fact that lump-sum technical know-how fee was to be paid from 3rd year after the commencement of commercial production showed that the intention was to make payments out of profits of the assessee is again devoid of any merit. Obviously, the proposed project not only involved high level of technical know-how and technology, but was also capital intensive. Therefore, the condition for payment for a period of 3 years from the commencement of production was stipulated in the TCA only with a view to enable the joint venture to stablise its position and establish itself in the market. If the payment was to start from the first year of its production, it would have resulted in undue strain on the financial resources of the assessee company. After all, the intention of both the parties to joint venture was to ensure its success more so when it involved huge investment. Moreover, it is for the parties to decide as to when the payment should start keeping in view the commercial consideration and it is not for the revenue to dictate its term as to when the payment should be made. Therefore, we also do not find any merit in such objections raised by the CIT(A) when there is nothing in the TCA that the payments of technical know-how fee and royalty were to be made out of profit of the assessee.

12.5. As regards the observations of the CIT(A) that since HMCL was holding 99.9% of shares of assessee-company, the TCA agreement was made under undue influence and as such was void under Section 16 read with Section 23 of the Indian Contract Act, 1872, we find no merit in the same. As discussed earlier increase in share-holding was duly approved by the Govt. of India and R.B.I. Therefore, it was not unilateral that HMCL had increased the share-holding. Once the approval is required to be obtained from the Govt. of India/Reserve Bank of India, who is expected to scrutinize such proposals minutely keeping in view the over-all interest of the country in the field of economic development, requirement of foreign technology for such development and the out-flow of foreign exchange. It cannot be said that M/s. HMCL could exercise undue influence on the assessee. This is so because the agreement was not only between two parties, but also subject to the approval of the Govt. of India/Reserve Bank of India. In the case of Kinetic Honda Motors Ltd. v. DOT 77 ITD 393 (Pune), the ITAT Pune Bench referred to Board's Circular N0. 6-P, dated 6.7.1968 in the context of Section 40A(2)(b) that when payments were approved by one wing of the Government, there was no question of such payment being treated as excessive arid unreasonable, having regard to the legitimate business needs. In that case also, the assessee company, namely, Kinetic Honda Motors Ltd v. DCIT was established in 1984 as joint venture in collaboration with M/s. Honda Motors Company, Japan, each having 28.56% of the equity capital. Subsequently, in the assessment year 1995-96, equity contribution of foreign company was increased to 51%. Royalty agreement was renewed for a period of 5 years. Taking into account the increase in share-holding of the foreign company, the Revenue disallowed the claim for royalty payment. On appeal before the Tribunal, the disallowance of royalty payment was deleted on the ground that the Revenue cannot sit in judgment over the Ministry of Industries without any concrete evidence to the contrary which was neither fair nor in accordance with the Govt. Policy. Now once the Govt. had accorded approval after due consideration, it is not for the Revenue to sit in judgment over such decisions. Such course of action by the Revenue authorities would only discourage the foreign investments which are badly needed for the overall economic development of the country. Therefore, the approval granted by one wing of the Govt. i.e. Ministry of Industry and R.B.I, cannot be treated lightly. Thus, taking into account these facts, we are of the considered opinion that the Ld. CITA) was not justified in holding that TCA agreement was void because of increased share-holding of HMCL and foreign exchange had exercised any undue influence.

12.6. Thus, in the light of detailed discussions in the preceding paragraphs and the legal position discussed above, we are of the considered opinion that the ld. CIT(A) was not justified in treating the payment of lump-sum technical fee and royalty as diversion of profit to HMCL, Japan. Accordingly, we set aside the orders of the CIT(A) and allow this ground of appeal of the assessee for both the assessment year.

12.7. The next aspect of the case is whether the impugned expenditure was capital or revenue in nature. The assessee has made detailed submissions in this regard. These have been summarised in the earlier paragraphs. However, we find that the Ld. CIT(A) has not recorded any finding on the same because he has taken a view that the impugned payments represented diversion of profits to a foreign company. This view has not been approved by the Bench. We, therefore, consider it fair and appropriate to restore this issue to the file of the CIT(A) for deciding the same afresh as per law and after allowing proper opportunity to both the parties. During the course of hearing of the appeals before the CIT(A), the assessee shall be free to raise alternative issue regarding claim of depreciation, if the expenditure was treated to be capital in nature. We order accordingly. These grounds of appeal are disposed of in these terms.

13. The next ground common to both the assessment years is that the Id. CIT(A) was not justified in sustaining disallowance of research and development expenses amounting to Rs.57,44,102/- and Rs. 1,54,14,278/-for the assessment years 2001-2002 & 2002-2003 respectively on the ground that the same were capital in nature. The facts of the case are that the AO observed that the assessee had debited research and development expenses of Rs.69,37,000/- to profit & loss account and claimed as revenue expenditure for the asstt. year 2001-2002. The AO observed that the expenses incurred were towards research and development prior to the launch of various new models of cars. These also included annual membership fee paid to Automotive Research Association of India amounting to Rs.7,50,000/- and Rs. 4,42,898/-. The same was allowed as Revenue expenditure. However, the remaining expenditure of Rs.57,44,102/was not allowed by the AO on the ground that such expenditure related to research and development and was, therefore, capital in nature.

13.1 As regards the assessment years 2002-2003, the AO noticed that out of research and development expenses amounting to Rs. 2,05,36,000/-, the assessee had claimed expenses of Rs. 1,80,13,000/- as revenue expenditure. When asked to explain, the assessee submitted that in view of the Memorandum of Exchange of Technicians which was part of TCA, the parent company had agreed to provide technical assistance through their technical experts from time to time to the company as and when required, for which payment on the basis of their stay and visit in India to the factory as well as lor service taken by the company. The assessee also furnished complete details of these expenses which included salary, repair and maintenance, traveling, staff welfare which though form part of the respective heads of expenditure yet were shown by the auditors' in accordance with the requirement of AS-8 (Accountant Standard-8). It was also explained that by virtue of the nature of business, the assessee was required to provide after-sales service to its customers and company received a lot of complaints. The same being technical in nature could not be handled by normal automobile engineer. In order to cater to such requirement, Technical & Research Centre (In short "TRC") has been maintained and all expenses related to TRC have been disclosed under the head "Research & Development" to comply with the requirement of Accounting standard. The AO observed that providing of Technical Know-how was the responsibility of the parent-company for which the assessee was paying lump-sum technical fee in view of the agreement made for the purpose. Thus, it was the responsibility of the parent-company to provide technical assistance in removing defects, improving technology to be used by the assessee in its products. He observed that the expenses claimed for Research & Development were the additional burden upon the assessee. However, the AO allowed the expenses related to technical guidance fee, salary of staff, other expenses including expenses in respect of depreciation of building and other research amounting to Rs. 15,76,707/- vehicle maintenance expenses of 1,13,865/-, Courier Services Rs.34,487/-, Telephone Rs.181/-, Staff Welfare Rs.33,616/-, Newspapers Rs.1385/-, Entertainment Rs.5633/-, Repair and Maintenance and Conveyance totalling to Rs.82,365/- and Membership fee to ARRAI Rs.7,50,000/-, all totalling to Rs.25,98,236/-. He disallowed the remaining expenses of Rs. 1,54,14,278/-on the ground that the same were capital in nature.

14. Aggrieved, the assessee impugned the disallowance in appeal before the CIT(A). It was submitted before the CIT(A) that the expenses incurred pertained to day to day expenses of TRC Department of the assessee. Referring to the details of the expenses, the assessee had submitted that the nature of the same showed that these were revenue in nature. However, these expenses were segregated and were shown under the head "Research & Development Expenses" by way of note to the profit & loss account as per ASA. It was submitted that TRC was responsible for analysing the problems that are encountered during the manufacturing as well as failures in the field. It identifies the root cause, suggested suitable counter-measures and also controls counter-measure implementation. TRC provided assistance and handled complaints of technical nature, which could not be solved by normal Automobile Engineers. This was also the part of customer care or after sale service function of the appellant. The assessee also submitted that though HMCL had undertaken to provide technical assistance to the assessee yet it was not possible and practicable to approach HMCL for each and every minor defect in the vehicle. The minor defects which might be dealt with by the technical staff of the assessee and the expenditure incurred in respect of the same was treated as research and development expenditure. It was also submitted that TRC acted as an interface between the assessee and HMCL on technical/engineering issues. It was also explained that TRC was engaged in Homologation of the vehicles according to Indian environment and is continuously in touch with developments taking place around the world in automobile market. It was also required to improve product quality, product appeal and localization of parts. The TRC was also responsible to ensure compliance to various statutory regulations like ARRAI and also takes part in the deliberations of enacting bodies of regulations and kept in constant touch with the development taking place around automobile market. Thus, it was submitted that TRC was performing useful functions which were necessary for carrying on the operation of the business, and, therefore, it was not correct to say that the assessee was not carrying on any research and development activity. The Ld. CIT(A) was not impressed with these submissions and accordingly upheld the disallowance on the ground that the assessee was not carrying out any research and development activities. The assessee is aggrieved with the orders of the CIT(A). Hence, these appeals before us.

15. The Ld. counsel for the assessee, Sh. Ajay Vohra, drew our attention to page 124 of the paper book which are details of Research and Development Expenditure for the assessment year 2002-2003, which include salaries, wages and other related cost for repairs and maintenance, travelling, printing, courier services, training & seminar, vehicle maintenance, misc. expenses, payment made outside bodies for research and development which include rates and taxes, membership fee and technical guidance fee. Besides these expenses included of soft-ware, fabric for testing and other misc. expenses etc. 15.1. As regards assessment year 2001-2002, the AO has observed that the said expenses related to testing and research of car on which part of the expenditure has already been treated as capital in nature. He submitted that TRC provided customer care center and feed back/information to HMCL of design improvement based on local environment position as localization/indigenisation of components etc. Thus, the Id. counsel has submitted that the expenditure is of revenue in nature and does not result in any enduring benefit in the capital field to the assessee. Therefore, the same was wrongly treated as capital in nature. He also made alternative submission that if the expenditure was capital in nature, the Ld. CIT(A) ought to have directed the AO to allow depreciation thereon.

16. The Ld. CIT(DR) has submitted that expenditure incurred on research and development was for the purpose of creation of or invention of some new device/asset which could provide the assessee benefit of enduring nature. He submitted that since the assessee has now furnished details of these expenses, the deduction in respect of expenses which are revenue in nature can be ascertained after verification and may be allowed to the assessee. As regards the claim of the assessee that the CIT(A) ought to have directed the AO to allow depreciation on the same, the Ld. CIT(DR) has submitted that to the extent expenditure is revenue in nature, no such depreciation is to be allowed. But in respect of the remaining amount, the assessee may be allowed the amount of depreciation.

17. We have heard both the parties at some length and given our thoughtful consideration to the rival submissions, gone through the evidence and material placed on record. From the facts discussed above, it is clear that the assessee has explained the purpose of setting up of Technical and Research Center (TRC) and its functioning was also explained by the assessee during the course of proceedings before the authorities below. From the facts discussed above, it is obvious that one of the reasons given by the authorities below for making impugned disallowance was that it was the responsibility of the HMCL to provide technical assistance and guidance as per TCA. However, the assessee has explained the purpose of setting up of TRC for analyzing the problems being encountered during the manufacturing as well as failures in the field. The scope and ambit of its duties was to identify root cause, and suggest suitable counter-measure and controls counter measure implementation. TRC also provided assistance and handled complaints of technical nature. This was also part of customer care or after sale services function of the assessee. This center was also responsible for Homologation of the vehicles according to Indian environment and to co-ordinate for the new model activities. It was no doubt true that HMCL had undertaken to provide technical assistance to assessee, but it was not practicable to approach HMCL for each and every minor defect in the vehicle which was required to be tuned to the Indian environment. It is common knowledge that the automobile Industry in the country is now extremely competitive and in order to survive in the market one is required to continuously monitor and bring improvement in the quality of the products manufactured and to look more attractive and fuel efficient. Therefore, setting of TRC center was absolutely essential for the manufacture and for carrying on business activities of the assessee moreso when the vehicles sold are covered by warranty period. Such center keeps a close watch on the repetitive defects for which complaints are received from the buyers and to bring about improvement with a view to cut down cost on warranty and also to improve quality. Therefore, the objection raised by the authorities below that providing of technical assistance was the responsibility of HMCL is not valid and has to be seen in this context. The details for the research and development expenses incurred by the assessee for the assessment year 2001-2002 are at page 60 of the paper book which show rates, taxes and fees, payment made to automotive research association of India, technical fee, part development/testing expenses, salaries, wages and other related cost, repair and maintenance, traveling and conveyance, freight expenses, training and seminar etc. The assessee had separately shown research and development expenditure on capital account amounting to Rs. 40,46,388/- being cost of 4 cars capitalized for testing and research purposes. Thus, most of these expenses are revenue in nature. Similarly details for the expenses for the assessment year 2002-2003 are given on page 124 of the paper book which have already been dealt with while recording the facts of the case. These expenses are also revenue in nature. In fact, technical guidance fee amounting to Rs.63,58,287/- was also paid to technicians for the TRC Department. These are not the payments made to HMCL. Considering the fact that the nature of expenses incurred by the asscssee is revenue and the TRC looks after customers care for improvement and change with a view to cut the repetitive cost it cannot be said that the assessee has derived any benefit of enduring in nature. It also does not result in creation of new assets or advantage in the capital field. We are, therefore, of the opinion that the Ld. CIT(A) was not justified in treating the impugned expenditure as capital in nature. The factum that assessee has incurred such expenditure for the purpose of assessee's business is not in doubt. Accordingly, we set aside the orders of the CIT(A) and allow the deduction of the impugned expenditure as revenue in nature. Since we have already allowed such expenditure as revenue in nature, the ground relating to the claim of depreciation has become redundant. Therefore, the same is dismissed as such.

18. The next ground of appeal for the assessment year 2001-2002 is that the learned CIT(A) was not justified in sustaining the disallowance of Rs.63,07,099/- being expenditure incurred by the assessee in connection with the launch of new model of car manufactured by the assessee. The facts of the case are that this expenditure was not charged to profit & loss account for the assessment year 2001-2002. However, in the computation of income, the assessee had claimed deduction of the same as revenue expenditure with a Note that impugned expenditure pertained to new model of car in the existing line of business. It was stated that the expenditure was charged to profit & loss account for the A.Y. 2002-2003. But the same was disallowed while computing income for the subsequent year because expenditure related to this asstt. year. The assessee also stated that by incurring such expenditure no new asset in the capital field had been created. The AG examined the details and found that the same was for travelling, training & seminar and sale promotion of the new model of the car. However, the AO disallowed the same on the ground that by incurring such expenditure, the assessee had obtained a benefit of enduring nature by way of establishing a new car model in the automobile market of India. The AO also observed that the judgment of Supreme Court in the case of Empire Jute Co. Limited v. CIT 124 ITR 1 relied upon by the assessee was not applicable to the facts of the case. Accordingly, he disallowed the same.

18.1. Aggrieved, the assessee impugned the disallowance in appeal before the CIT(A). However, he upheld the disallowance on the ground that new model car was going to be an asset and, therefore, the expenditure related to capital asset formation. The assessee has now brought the matter in appeal before this Bench.

18.2. The Ld. counsel for the assessee, Sh. Ajay Vohra, reiterated the submissions which were made before the authorities below. He submitted that the expenses relate to traveling, training & seminar, printing & stationery, sales promotion etc. incurred in connection with the launch of new model. The same is revenue expenditure incurred in the normal course of the business and is allowable deduction. He relied on the decision of the ITAT, Delhi Bench in the case of ACIT v. Medicamen Biotech Limited reported in (2006) 66 TTJ (Del.) 873.

18.3. The Ld. CIT(DR) stated that new model of car was an asset which provided enduring benefit to the assessee for the years to come and, therefore, the expenditure incurred on the same was certainly a capital expenditure.

18.4. We have heard both the parties and carefully considered the rival contentions, examined the facts, evidence and material placed on record. There is no doubt about the fact that the assessee is already engaged in the business of manufacture of cars and the production had commenced about three years before. The new model of the car relates to the same line of business which the assessee has been carrying on. The assessee has not set up a separate and independent unit to manufacture new model of the car. From the details of the expenses given, it is clear that the expenses related to travelling, training & seminar and advertisement, technical guidance fee etc. of the on going business. It is common knowledge and there is a cut through competition in the automobile market and the assessee is required to bring new models in the market in order to retain/capture market. Therefore, the expenditure incurred by the assessee in respect of on going business is a revenue expenditure. The marketability of the new model entirely depended on the sale promotion and holding of training and seminar so that the new model is well received in the market. It is not correct to say that by incurring such expenditure, the assessee had acquired advantage of enduring in nature. Similar issue came up for consideration before the ITAT, Delhi Bench in the case of ACIT v. Medicamen Biotech Limited reported in (2006) 66 TTJ (Del.) 873., where it was held that the expenditure incurred on launching of a new pharmaceutical product docs not result in benefit of enduring nature and, therefore, the expenditure does not fall in the capital field. It was also held that the said expenditure is revenue in nature and the mere fact that the assessee had treated the expenditure as deferred revenue expenditure over a period of time does not make the expenditure capital in nature. It was also held that the term given by the assessee in the books of account or entries made in the books are not decisive or conclusive in establishing the nature of expenditure. While taking such view, the Tribunal has relied on the judgment of Hon'ble Supreme Court in the case of Kedanar Nath Jute Manufacturing Co. Ltd. v. CIT . The very fact that the expenditure was not debited to the profit & loss account of the assessment year under reference would not make any difference so far as the claim of the assessee because undoubtedly the expenditure relate to the asstt. year under reference and was claimed in the statement of income filed alongwith the return. The assessee had itself disallowed the same for computing the income of subsequent asstt. year where the expenditure was charged to tax. Having regard to these facts and circumstances of the case and the legal position discussed above, we are of the considered opinion that the Ld. CIT(A) was not justified in sustaining the disallowance of the impugned expenditure. Accordingly, we set aside the order of the CIT(A) and direct the AO to allow deduction of the same. This ground of appeal is allowed.

19. The next ground of relates to sustaining a disallowance of custom duty amounting to Rs.32,63,032/- on the drawings imported under TCA with HMCL, admitted by the assessee during the accounting year relevant to assessment year under reference. Briefly stated, the facts of the case are that the assessee deposited a sum of Rs. 3,00,00,000/- with the Custom Department in the earlier years is a pan payment towards Custom Duty on import of Drawing under the TCA with HMCL, Japan in response to the show cause notice issued by the Custom Authorities claiming amount of Rs. 28,14,76,000/- being duty and penalty. The payment of Rs. 3,00,00,000/-was an advance. The assessee also filed an application with the Custom & Excise Settlement Commission after making said payment. Out of the payment of Rs. 3 crore, the assessee admitted custom duty of Rs. 1,16,63,000/- and debited the expenses in the year under consideration. But in the revised computation, the assessee added back the Custom Duty of Rs. 84,00,257/- and claimed deduction of Rs.32,63,032/-, the amount which was paid in the assessment year 1999-2000 and adjusted in the assessment year under consideration. The AO observed that the impugned amount was paid on 31.3.1999 under protest and, therefore, did not relate to the asstt. year under consideration. He also observed that the payment was not in revenue account. He also observed that provisional payment does not become an ascertained liability until the same has become final. He also observed that the show cause notice issued by the Custom Authorities was also for imposing the penalty for not making the payment. The assessee had submitted that the amount of Rs. 3,00,00,000/- paid on 31.3.1999 as an advance was shown as loan and advance in the audited accounts in the financial year 31.3.199 and the claim was made before the CIT(A) under Section 43B of the Act for the assessment year 1999-2000 which was not allowed by the CIT(A). This issue was pending before the ITAT. It was submitted that in case it was decided in favour of the assessee, the amount of Rs.32,63,032/- would be required to be added back to the income of the asstt. year 2002-2003. However, the claim was not accepted by the AO on the ground that the same did not relate to the asstt. year under consideration.

19.1. The assessee impugned the disallowance in appeal before the CIT(A).The assessee reiterated the submissions made before the A.O. However, the Ld. CIT (A) observed that since the issue was subject matter of appeal before the ITAT for the assessment year 1999-2000, the disallowance is confirmed for statistical purposes. The AO would give appeal effect after receipt of the order of the ITAT. The assessee has now brought this issue in appeal before this Bench.

19.2. The Ld. counsel for the assessee, Sh. Ajay Vohra, reiterated the submissions which were made before the authorities below. He submitted that the assessee had moved the petition before the Custom and Central Excise Settlement Commission, New Delhi, and the said Commission vide order dated 23.08.2002 has now decided that the assessee is liable to payment of aforesaid Custom duty of Rs. 32,63,032/-. The assessee has admitted the liability in respect of this amount during the accounting year relevant to the assessment year under consideration. Therefore, the Ld. CIT(A) ought to have accepted the claim of the assessee for the asstt. year under consideration because the liability became final in the assessment year under consideration.

19.3. The Ld. CIT(DR), on the other hand, relied on the order of the AO and submitted since the expenditure does not relate to the asstt. year under consideration, the deduction was rightly disallowed by the AO and confirmed by the CIT(A). He also relied on the decision of the ITAT, Delhi Bench in the case of Maruti Udyog Ltd. v. Dy. CIT reported in 92 ITD 119, where it was held that advance payment of taxes or duty without incurring liability to pay such taxes or duty can not be allowed as deduction under Section 43B.

19.4. We have heard both the parties and carefully considered the rival contentions. Not doubt from the facts discussed above, it is obvious that the assessee had made the payment of the amount on 31.3.1999 as an advance and had claimed deduction for the asstt. year 1999-2000.The Revenue did not allow the same on the ground that the amount in question was advance only and had not become final. The assessee's appeal for the A.Y. 1999-2000 is pending with the Tribunal. In case, the matter is decided by the Tribunal in favour of the assessee by taking notice of the subsequent events that the liability had become final, the assessee would not be entitled to claim deduction for the same in the asstt. year under consideration. However, if the disallowance made is upheld by the Tribunal for the reason that the amount paid was only an advance and was not otherwise payable and hence not allowable Under Section 43B, the assessee would be entitled to claim deduction in the asstt. year under reference because the liability had become final in the asstt. year under reference and the advance so paid would be adjusted in the asstt. year under reference. Thus, we set aside the order of the CIT(A) and direct the AO to allow the claim of the assessee only if the said claim is not allowed for the asstt. year 1999-2000. This ground of appeal is treated as allowed for statistical purposes.

20. The next ground of appeal for the assessment year 2002-2003 relates to upholding the action of the AO for disallowing an amount of Rs.86,38,000/- being provision for warranty made by the assessee during the accounting year under reference. The facts of the case are the Cars sold by the assessee are covered under warranty. The assessee made provisions of Rs.86.38,000/- for warranty and claimed deduction of the same on the ground that the company was engaged in the business of manufacture and sale of highly competitive premium segment cars and the assessee was contractually bound to provide after sale services at various intervals and provide one year after-sale warranty for manufacturing defects and thereafter sale service to the customers. It was stated that the liability to provide free after-sale service accrues to the assessee as soon as the car is sold to the customer. It was also submitted that it was a liability in presenti as definitely arises in accounting year, though the exact amount may be quantified in future. However, the AO while relying on the judgment of Hon'ble Supreme Court in the case of Indian Molasses Co. Private Limited v. CIT 37 ITR 66 has held that the same was not ascertained liability of the asstt. year under consideration. Accordingly, he disallowed the claim.

20.1. Being aggrieved, the assessee carried the matter in appeal before the CIT(A) and reiterated the submissions which were made before the AO. However, these submissions did not find favour with the CIT(A), who held that making of total provisions on estimate basis without actually incurring such expenditure especially when there was a probability that the total expenditure may not occur does not make the liability as ascertained and accrued liability of the assessment year under reference. Therefore, he upheld the disallowance. The assessee has now brought this issue in appeal before us.

20.2. The Ld. counsel for the assessee submitted that the assessee as per regular method of accounting followed by it provided for warranty in respect of the car sold. The amount of provision for warranty for car per month is worked out on the basis of appellant's experience regarding warranty claimed and received for the earlier and is spread over the period of warranty commencing on the sale of car. The provision for warranty made on scientific basis and as per regular method of accounting followed by the assessee was allowable revenue expenditure. He relied on the recent decision of the ITAT, Delhi Bench in the case of D.C. Spl. Range-5, New Delhi v. Samtel Colours Ltd. New Delhi in ITA No. , 3966/Del/96 for the A.Y. 1991-92. He further stated that similar expenditure incurred has been allowed in the past. He referred to page 383 of the paper book which shows similar provision for warranty made for the assessment years 1998-99 to 2001-2002. made on the similar basis were allowed. In fact, in the earlier assessment year, the claim of the assessee amounting to Rs. 58.30 lacs as provision for warranty was allowed. He further drew our attention to page 125 of the paper book which are details of the provisions made for the asstt. year under reference which is linked with the number of cars sold. Thus, he submitted that the deduction in respect of the impugned amount may be allowed.

20.3. The Ld. CIT(DR), on the other hand, heavily relied on the orders of the authorities below and submitted that the liability under consideration was only contingent in nature and, therefore, was not allowable.

20.4. We have heard both the parties and carefully considered the rival submissions, examined the facts, evidence and material placed on record. There is no dispute about the fact that the cars sold to the customers are covered by warranty and after-sale services for repair and replacement for a period of one year. The assessee has been following the same method of accounting and has been making provisions for the same on the basis of actual expenses incurred in the past. It is a fact that in the past such expenses have been allowed by the Revenue. Even such claim of the assessee was allowed for the A.Y. 2001-2002. This is not the case of the Revenue that the provisions made far exceeded the actual expenses incurred. In the case of Bharat Harth Movers v. CIT reported in 245 ITR 428, the Hon'ble Supreme Court has considered the general principles regarding allowance of business expenditure and the difference between the accrued and contingent liabilities. It was held as under:

If a business liability has definitely arisen in the accounting year, the deduction should be allowed although the liability may have to be quantified and discharged at a future date. What should be certain is the incurring of the liability. It should also be capable of being estimated with reasonable certainty though the actual quantification may not be possible. If these requirements are satisfied the liability is not a contingent one. The liability is in praesenti though it will be discharged at a future date. It does not make any difference if the future date on which the liability shall have to be discharged is not certain.

The very fact that the assessee had made provision only does not mean that the liability was not ascertained and contingent in nature. In fact, similar issue was considered by the ITAT, Amritsar Bench in the case of Jay Bee Industries v. DOT reported in (1998) 61 TTJ 403, where the assessee was engaged in the same business and the assessee estimated the cost of repairs al 2% on sale value of transformers which were sold with warranty of 12 to 18 months and 6% of sale cost of transformers which were sold with warranty of 60 months. On these facts, it was held that the liability to carry out repairs/replacements accrues on the date when the sale agreement is executed with warranty clause and such in-built liability cannot be ignored. The Tribunal held that such liabilities are to be treated as trading expense and must be allowed. It must be mentioned that while deciding this case, the Tribunal also took into account the fact that the AO had made no efforts to find out whether the amount of provision exceeded the actual on repairs and replacement. But the fact remains that the expenses were allowed for the reason it was not a contingent liability and such liability arose as soon as assessee made the sale. In the case of CIT v. Indian Transformers Ltd. 270 ITR 259 the Kerala High Court by relying on the judgment of Supreme Court in the case of Bharat Earth Movers v. CIT allowed deduction in respect of provision for meeting warranty liability on the ground that the same was not contingent liability. In the case of Wipro GE Medical System Ltd. v. DCIT (2003) 81 TTJ 455 the ITAT, Bangalore Bench considered the claim of the assessee for deduction of warranty claims and observed that warranty expenses claimed as deduction was not abnormally high and the gap between the warranty provision and warranty expenditure incurred had narrowed down over the years and, therefore, such expenditure was allowable as revenue expenditure and was not a contingent liability. While deciding this case, ITAT Bangalore Bench also followed the decision of ITAT, Amritsar Bench in the case of Jay Bee Industries v. DCIT (supra). This issue also came to be considered by the ITAT, Delhi Bench, in the case of JCIT v. Modi Olivetti Ltd. reported in (2003) 81 TTJ 445, where the assessee has made provision for warranty claim @ 1.5% on the cost of sales. The Tribunal by referring to the judgment of Supreme Court in the case of Bharat Earth Movers v. CIT (supra) held that the liability had been incurred on the date when sale was made and was not contingent in nature. Accordingly, the claim of the assessee was allowed.

20.5. Thus, the various judgments cited above support the view that the liability was incurred on the date when sales were made. Therefore, this was ascertained and accrued liability of the assessee and accordingly the same was allowable. We, therefore, set aside the order of the CIT(A) and delete the impugned disallowance. This ground of appeal is allowed.

21. The next ground of appeal for the assessment year 2002-2003 is that the Ld. CIT(A) was not justified in sustaining the disallowance of provision amounting to Rs. 2,96,50,000/- made by the assessee towards the sales promotion expenses, instead directing the assessing officer to allow only 10% of the said provision. The facts of the case are that the AO observed that the assessee had claimed sales promotion expenses amounting to Rs.6,49,36,642/- which also included the provision made in respect of various expenses amounting to Rs. 2,96,50,000/-. The break-up of these provisions were for trade in over allowance for 2001-2002 at Rs.6000000, fleet/Dempo Car at provision at Rs.900000(), Hindustan Times Promotion provision for 2001-2002 at Rs.1500000, sales promotion at Rs.7100000, Compensation for plant of Rs.1000000, Rendezvous viz Magzine at Rs.85,000/-, Finance Schedule provision ICICI Bank at Rs.70,000/-, Misc. provisions at Rs. 9 lacs and S/C & S/Manager incentive provisions Rs.26 lacs. The AO called upon the assessee to explain why these expenses were debited only on provisional basis. The assessee submitted that it was engaged in the business of manufacture and sale of highly competitive premium segment car. The company needed to do lot of advertisement and sales promotion activities on a continuous basis. The provision for sales promotion expenses were not a future and contingent liability. The same had already been incurred during the relevant previous year. But the invoices were not received till the date of finalisation of the accounts. Since this liability was recurring in nature and the accounts were being maintained in accordance with the method of accounting regularly employed by the assessee, it was contended that the deduction of the expenses should be allowed. However, the AO observed that the liability was made only on estimate basis and, therefore, the same was contingent in nature. The AO disallowed the same.

21.1 Aggrieved, the assessee impugned the disallowance in appeal before the CIT(A). The submissions made before the AO were reiterated. It was submitted that the assessee had already incurred the liability which was fully ascertained and accrued liability. However, the same was provided on estimate basis because the bills were not received from the respective parties. These submissions were considered by the CIT(A) but he was not impressed with the same. He observed that there was no proper billing system between the assessee and his clients on regular basis and such a large portion of expenditure on provision basis was not justified. He, therefore, upheld the disallowance of 90% of the provision and allowed the relief to the extent of 10% of Rs. 2,96,50,000/-.The assessee has now brought this issue in appeal before this Bench.

22.2 The Ld. counsel for the assessee reiterated the submissions made before the authorities below and submitted that the assessee had indeed incurred the expenditure and the same was accrued and ascertained liability of the asstt. year under consideration. However, he submitted that the provisions were made on estimate basis because the actual bills were not received from the client-Departments till the end of the accounting year. He submitted that as per regular method of accounting followed by the assessee, it provided the liability in respect of various expenses in its books of account at the end of the year on the estimated basis. Since the bills for all the expenses were not received by the assessee, the accounts were finalized. Any excess provision was reversed in the immediately succeeding year. The Ld. counsel drew our attention to pages 126 to 168 of the paper book which contained details of the actual expenditure of Rs.2,70,23,000/- incurred by the assessee against the provision of Rs. 2,96,50,000/-.Thus, he submitted that the deduction of the impugned expenditure may be allowed.

22.3. The Ld. CIT(DR), on the other hand, relied on the order of the authorities below. He submitted that since the liability was not ascertained, the authorities below were justified in making the impugned disallowance.

22.4. We have heard both the parties and carefully considered the rival contentions with reference to facts, evidence and material placed on record. We have also referred to the relevant pages of the paper books to which our attention has been drawn. There is no dispute about the fact that the assessee is engaged in the business of manufacture and sale of highly competitive premium segment cars. The assessee was required to incur huge amount of expenses on advertisement on continuous basis. The fact that the assessee had not received the bills in the accounting year under reference has not been disputed by the Revenue. In fact, out of the provisions made, the assessee has already incurred expenses of Rs. 2,70,23,000/- for which the details are placed at page 126 of the paper book. Copies of the bills for the same have also been placed at pages 127 to 168 of the paper book. A perusal of those bills shows that the expenses have been incurred for the work done upto 313.2002 which shows that the expenditure related to the assessment year under reference. This also shows that the assessee had indeed incurred such expenditure, but the bills have been received subsequently. Looking into the details of actual expenditure incurred out of provisions in the subsequent asstt. year, it cannot be said that the provisions so made were wide off the mark to reduce the tax liability of the assessee. However, considering the fact that the assessee claimed to have made provisions only in respect of expenses already incurred upto 31.3.12002 and in the immediately succeeding asstt. year, the bills received indicated expenses incurred of Rs. 2,70,23,000/-, we are of the opinion that the assessee is entitled to deduction of ascertained liability to the extent of Rs. 2,70,23,000/-and not Rs. 2,96,50,000/-. Therefore, we set aside the order of the CIT(A) and direct the AO to allow deduction of expenses of Rs. 2,70,23,000/-. This ground of appeal is partly allowed.

23. The next ground of appeal relates to upholding the disallowance of Rs. 10,52,277/- made by the AO being commission paid to HMCL. The facts of the case are that the AO found that in the accounting year under reference, the assessee had made export of wheels, assembly steering, and other items to M/s. Honda Automobile, Thailand, who is the associated enterprises within the definition of Section 92A of the Income-tax Act. The assessee paid commission @ 3% of the export FOB value claimed at Rs. 10,52,277/- and credited to M/s. Honda Motor Company, Japan. The assessee explained that the commission was paid in pursuance of agreement made with HMCL for making export of the parts abroad. However, the AO observed that the assessee had made purchases of parts exported from its sister concern of M/s/HMCL and commission was paid to an associate enterprises and the same was held to be not allowable to the assessee within the meaning of Section 92A.

23.1 Being aggrieved, the assessee impugned the disallowance in appeal before the CIT(A). It was submitted before the CIT(A) that under the TCA, the assessee was not authorized to sell its product in any other territory than India without written consent of M/s. HMCL. The assessee had entered into a separate agreement dated 1.4.1999 under which the HMCL accorded a consent to the assessee to export specific parts to certain countries including Thailand for consideration of the payment of commission @ 3% of the FOB value of such exports. It was submitted that the payment was made by the assessee to HMCL as a consideration for according consent to the appellant to export the parts which were earlier being supplied by HMCL or its affiliates. It was also submitted that by virtue of said payment, the assessee gained access to new market for its products which enable it to enhance its sale. Thus, it was contended that the expenditure incurred was wholly and exclusively for the purposes of its business. It was also stated that HMCL was a separate and legal entity and the transactions between the parties were at arm's length and this fact was not disputed by the AO. The fact that assessee had indeed made payment was also not doubted by the AO. Thus, it was contended that the assessee was entitled to deduction of its claim. However, these submissions did not find favour with the CIT(A), who observed that such payment of commission was because of undue influence of HMCL leading to diversion of profits. Thus, he upheld the disallowance. The assessee has now brought the matter in appeal before us.

23.2. The Ld. counsel for the assessee reiterated the submissions which were made before the authorities below. He also drew our attention to Article 3 of the TCA where the assessee was prohibited from exporting the cars, parts/components manufactured by it in India to any other country. The assessee could do so only with the prior approval of the HMCL. The assessee, therefore, entered into an agreement with HMCL for export of cars, components to Honda Group of Companies in Thailand. The payment of commission was made in lieu of HMCL allowing the assessee to export cars/components to Honda in Thailand. It was not payment for HMCL for procuring any order from its group company for the assessee. Thus, it was submitted that since the expenses have been incurred wholly and exclusively for the purpose of the business, the same were allowable.

23.3. The Ld. DR on the other hand relied on the orders of the authorities below. He submitted that since 99.9% equity holdings of the assessee-company are held by M/s. HMCL, the impugned payment was nothing but diversion of its profit to HMCL. Thus, he submitted that the order of the CTT(A) in sustaining the disallowance does not merit any interference.

23.4. We have heard both the parties and carefully considered the rival contentions, examined the facts, evidence and material placed on record. It is clear from Article 3 of the TCA that the assessee was authorized to manufacture and sell cars in the territory of India. The assessee was not allowed to sell cars/pails components outside India except with the approval of the HMCL. Therefore, the impugned payment was not part of TCA. However, for this purpose, the assessee entered into a separate agreement under which the assessee was allowed to export parts/components abroad and consideration thereof, the assessee was required to pay commission @ 3% of the FOB value of such exports. No finding has been recorded by the authorities below that the commission so paid by the assessee was either excessive or unreasonable. Therefore, commission so paid is for promotion of assessee's business and for making exports of its parts and cars outside the country. Therefore, such expenditure was incurred wholly and exclusively for the purpose of business. While dealing with the first-two grounds of appeal i.e. lump-sum technical fee and royalty payment, we have already rejected the plea of the Revenue that payments made to HMCL represented diversion of profit. The same finding would equally hold good to the present issue.

23.5. In the light of these facts and circumstances of the case, we are of the considered opinion that the impugned expenditure was incurred wholly and exclusively for the purpose of its business for acquiring rights outside the country to export cars/components. Therefore, the ld. CIT(A) was not justified in sustaining the impugned disallowance. The order of the CIT(A) is set set-aside and the AO is directed to allow deduction of the same. This ground of appeal is allowed.

24. The last ground of appeal relates to upholding an addition of Rs.60,34,730/- in respect of Excise Duty refund receivable by the assessee on behalf of purchaser of the goods. The facts relating to this ground are that the AO observed that in the balance-sheet, an amount of Rs.79,63,384 was shown as receivable. When the assessee was asked to explain, it submitted that such amount receivable included excise duty of the car sold to India Motels at Rs.5,96,726/-, excise duty of Rs.3,61,303/- on sale of car to Ambassador Hotel. Rs.1,92,340/- on sale of car to Leela Ventures and amount of Rs.48,76,196/- being excise duty refund of sale of 43 Cars and export rebate of Rs.8165/-. It was explained by the assessee that the amount in question was refunded to the car buyers. However, the AO observed that the assessee failed to furnish any supporting evidence that the amount received was actually refunded to the car owners. He, therefore, made an addition of Rs.60,34,370/-.

24.1. Aggrieved, the assessee filed an appeal before the CIT(A). It was submitted before the CIT(A) that amount of Rs.60,34,370/- represented the claim made by the assessee before the Excise Authorities in respect of the car sold by the assessee to certain class of customers who were exempt from the payment of Excise Duty under certain Schemes e.g. Hotels under EPCG Scheme, Taxi Operators etc. However, such claim was made by the assessee on behalf of the purchaser of the cars and is paid to them when the refund claim is accepted by the Excise authorities. Thus, it was submitted that the refund of excise duty does not represent the income of the assessee. It was also submitted that at the time of sale of the car by the assessee, the excise duty charged also included a special excise duty of 24% in respect of sale of cars to be used by taxi operators. At the time when car is sold, the assessee does not know whether or not the car would be used for the purpose of taxi. It was only when the same was registered as taxi by the purchaser of the car, that the purchaser approached the assessee with the relevant documents and requested the assessee to refund special excise duty paid on such car. It was only based on such documents that the assessee made a claim for refund of such duty before the Excise Authorities till the refund is actually received and disbursed by the Excise Authorities, the assessee treated the amount so receivable in the balance sheet because it has already paid such amount to the purchaser of the car. Thus, it was submitted that such amount does not constitute the income of the assessee. These submissions did not find favour with the CIT(A) who observed that the assessee could not furnish the details and the evidence before the AO on account of excise duty receivable relating to sale of cars to hotels and for taxi purpose. He observed that working and methodology alongwith evidence should have been explained to the AO. Since the assessee has failed to discharge the burden of proving, the Ld. CIT(A) upheld the disallowance. The assessee has now brought this issue in appeal before us.

24.2. The Ld. counsel for the assessee reiterated the submissions which were made before the authorities below. He submitted that at the time when car was sold, the assessee charged full amount of excise duty and paid the same to the Govt. because at that time it was not know whether the car would be used by the buyer as a taxi or not. The excise duty so charged and paid has been treated as income and expenses respectively in the books of the assessee. Once it came to know that car was being run as taxi, it applied for refund of excise duty on behalf of the taxi operator. The amount received from the Excise Department towards the custom duty was recorded as excise duty receivable in the books of the assessee. Once the refund is received from the Excise Department, the same is passed on to the customers. As regards the car sold lo Hotels, the assessee charged excise duty at full rate and accounted for the same as its income. Later on, the assessee applied for refund from the Excise Department. Hotels did not pay the assessee for the excise duty which was refundable and the assessee recovered the same from the Excise Department. Since the assessee was holding this amount in Trust for the customers and the same was passed on to them on receipt from the Excise Authorities, the amount did not constitute income of the assessee.

24.3. The Ld. CIT(DR), on the other hand, heavily on the orders of the authorities below. He submitted that since the assessee failed to furnish relevant details and supporting evidence on account of excise duty receivable and the fact that the same was actually passed on the customers, the Ld. DR contended that the authorities were justified in making the impugned disallowance.

24.4. We have heard both the parties at some length and given our thoughtful consideration to the rival contentions, examined the facts, evidence and material placed on record. From the facts discussed above, it is obvious that the claim of the assessee was that it charged full excise duty at the time of sale of cars to the taxi operators and accounted for the same in its income and expenditure because at that time, the assessee did not know whether the car sold would be used as taxi or not. It is only when the car is registered as taxi, that the taxi operator approached the assessee to claim refund of the same. The assessee has also stated that on receipt of refund of Excise Duty from the Excise Authorities, the same was passed on to car owner. The main objection of the AO was that the assessee failed to furnish complete details alongwith supporting evidence about the excise duty charged, accounted for in the books of account recovered from the Excise Deptt. and disbursed to the car owners. Therefore, such claim was disallowed and upheld in appeal by the CIT(A). Now in case, the assessee has claimed refund of excise duty on behalf of others and on receipt the same has been passed down to the customers, no income accrues to the assessee and the claim of the assessee deserves to be allowed. However, considering the fact that these details were not furnished before the authorities below and the order of the CIT(A) has been set aside in regard to first-two grounds of appeal, we consider it fair and appropriate also to set aside the order of the CIT(A) on this point and restore the same to his file with a direction to redecide the same as per law and after allowing reasonable opportunity to both the parties. We order accordingly. This ground of appeal is treated as allowed for statistical purposes.

25. In the result, both the appeals of the assessee are partly allowed.

26. This decision was pronounced in the open court on 21st JuIy, 2006.