Income Tax Appellate Tribunal - Delhi
Honda Siel Power Products Ltd., New ... vs Dcit, New Delhi on 17 April, 2018
1 ITA No. 1579/Del/2017
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH: 'I-1' NEW DELHI
BEFORE SHRI R. K. PANDA, ACCOUNTANT MEMBER
AND
MS SUCHITRA KAMBLE, JUDICIAL MEMBER
I.T.A .No. 1579/DEL/2017 (A.Y 2012-13) &
S. A No. 217/Del/2017 in ITA No. 1579/Del/2017
Honda Siel Power Products Ltd.409, Vs DCIT
DLF Tower B, Circle-11(1)
Jasola Commercial Complex New Delhi
New Delhi
AAACH8464L
(APPELLANT)
(RESPONDENT)
Appellant by Sh. Ajay Vohra, Adv
Respondent by Sh. Yogesh Verma, CIT DR
Date of Hearing 13.02.2018
Date of Pronouncement 17.04.2018
ORDER
PER SUCHITRA KAMBLE, JM
This appeal has been filed by the assessee against the Assessment Order dated 31.01.2017 passed by DCIT, Circle 11(1), New Delhi u/s 143(3) r/w Section 144C of Income tax Act, 1961 in Assessment Year 2012-13.
2. The grounds of appeal are as under:-
Transfer Pricing Issues:
1. That the assessing officer ('AO') erred on facts and in law in making addition to the income of the appellant to the extent of Rs. 11,34,76,600 on account of the alleged difference in the arm's length price of international transactions.
Advertisement, marketing and sales promotion expenses:
2 ITA No. 1579/Del/20172. That the AO/Dispute Resolution Panel ('DRP') erred on facts and in law in making transfer pricing adjustment amounting to Rs 10,54,80,600 in relation to the advertisement, marketing and sales promotion expenses (hereinafter referred to as 'the AMP expenses') incurred by the appellant. 2.1 That on the facts and in the circumstances of the case, the DRP erred in law in making transfer pricing adjustment in respect of expenditure incurred on advertising, marketing and publicity ("AMP expenses"). 2.2 That on the facts and in the circumstances of the case and in law, the DRP erred in directing the assessing officer to determine the Transfer Pricing adjustment in respect of AMP expenses unilaterally incurred by the appellant when the same was duly examined / considered by the TPO in the course of Transfer Pricing assessment proceedings.
2.3 That on the facts and in the circumstances of the case and in law, the DRP erred in imputing the Transfer Pricing adjustment without confronting to the assessee the material sought to be relied to construe an international transaction in respect of AMP expenses and erred in not providing opportunity in terms of section 92C(3) of the Income-tax Act ('the Act'). 2.4 2.4. The Transfer Pricing adjustment, made by the DRP, in respect of AMP expenses without providing an opportunity as per the requirement of section 92C(3) of the Act is unlawful, bad in law and is liable to be deleted. 2.5 The DRP erred on facts and in law in holding that the AMP expenses incurred by the appellant constituted an international transaction. 2.6 The DRP erred on facts and in law in not appreciating that AMP expenses unilaterally incurred by the appellant in India could not be characterized as an international transaction as per section 92B of the Act, in the absence of any proved understanding / arrangement between the appellant and the associated enterprise (hereinafter referred to as 'AE'), so as to invoke the provisions of section 92 of the Act.
2.7 The DRP/TPO erred on facts and in law in not appreciating that the only Transfer Pricing adjustment permitted by Chapter X of the Act was in respect of the difference between the arm's length price (ALP) and the contract or declared price, but the said provision could not be invoked to determine the 'quantum' / extent of business expenditure.
2.8 That the DRP erred on facts and in law in not appreciating that the voluminous evidences / documents (as were required in the course of the hearing) were submitted in support of the claim of the appellant that the advertisement expenditure was independently incurred by the appellant without any understanding/ arrangement or any other influence from the associated enterprise.
2.9That the DRP/TPO erred on facts and in law in not appreciating that since 3 ITA No. 1579/Del/2017 the appellant was operating as a full-fledged manufacturer and full risk distributor, no adjustment on account of AMP expenses was warranted. 2.10. That the DRP/TPO erred on facts and in law in not appreciating that the AMP expenses were incurred by the appellant for it's own benefit and the benefit to the AE, if any, being incidental cannot be a basis to construe an international transaction between the appellant and the associated enterprises.
2.11The DRP/TPO erred on facts and in law in holding that expenditure incurred by the appellant which resulted in benefit by way of brand building and increases sales for the foreign AE, and therefore resulting in a transaction of creating and improving marketing intangibles for and on behalf of its foreign associated enterprise.
2.12 Without prejudice that the DRP/TPO erred on facts and in law in not appreciating that no adjustment on account of allegedly excessive AMP expenses is warranted in the case of the appellant even if AMP expenses incurred by the appellant are separately benchmarked applying the guidelines prescribed by the Hon'ble Delhi High Court in the case of Sony Ericsson Mobile Communications India Pvt Ltd 374 ITR 118. 2.13 The DRP/TPO erred on facts and in law in not appreciating that such a Transfer Pricing adjustment cannot at all be made in law without determining the Arm's Length Price ("ALP") by applying one of the methods specified in section 92C of the Act.
2.14 Without prejudice that the DRP/TPO erred on facts and in law, in not appreciating that the AMP expenses incurred by the appellant were appropriately established to be at arm's length applying Transactional Net Margin Method ('TNMM').
2.15 Without prejudice, that the DRP erred on facts and in law in rejecting benchmarking of AMP expense by applying TNMM, allegedly holding that the assessee has failed to show that the transactions are 'closely linked' in terms of Rule 10A(d) and that it has not been able to discharge its burden of proof and substantiate its claim that only entity level margin can be seen in such circumstances.
2.16 Without prejudice, the DRP/TPO erred on facts and in law in applying a markup of 28.33% on the alleged excess AMP expenditure incurred by the appellant, while computing the value of compensation to be received by the appellant on account of promotion of 'Honda' brand.
2.17 Without prejudice, the DRP/TPO erred on facts and in law in not appreciating that markup, if at all, had to be restricted to the value added expenses incurred by the appellant for providing the alleged service in the 4 ITA No. 1579/Del/2017 nature of brand promotion.
2.18 The DRP erred on facts and in law in directing the TPO/AO to alternatively compute the adjustment on account of AMP expenses applying the bright line test ('BLT') not appreciating that the BLT has been rejected by the Hon'ble Delhi High Court for the purpose of undertaking benchmarking analysis in the case of Sony Ericsson Mobile Communications 374 ITR 118 . 2.19 The DRP erred on facts and in law in directing the TPO/AO to compute the adjustment on account of AMP expenses using AMP intensity adjustment without appreciating that the use of such an adjustment is not mandated under the Indian transfer pricing regulations. Royalty in respect of exports made to associated enterprises;
3. That the assessing officer/TPO erred on facts and in law in holding that arm's length price of international transactions of payment of royalty on exports made to the associated enterprises of Rs. 79,96,000/-was nil, on the basis of the order passed by the TPO under section 92CA(3) of the Act.
3.1 That the assessing officer/TPO erred on facts and in law in holding that the assessee was acting as a contract manufacturer and hence royalty paid as percentage of sale to the associated enterprises is not at arm's length as it amounts to collecting royalty on the sale to itself.
3.2 That the assessing officer/TPO erred on facts and in law in not appreciating that the transaction of sale of goods by the appellant to associated enterprises was undertaken on a principal to principal basis, wherein the appellant is acting as a licensed manufacturer. 3.3 3.3. That the assessing officer/TPO erred on facts and in law in arbitrarily holding that "where the assessee company is making a part of its sales to its related parties and the benefit of producing components is reaped by AE, the payment for charges for royalty does not confirm to the arm's length principle".
3.4 That the assessing officer erred on facts and in law in not appreciating that the royalty is paid by the appellant on net sales after deducting the cost of imported components, standard bought out components and export commission and is a necessary cost incurred by appellant for manufacture of goods.
3.5 That the assessing officer/TPO erred in not appreciating that payment of royalty is a necessary cost incurred by the appellant for manufacture of goods.
Corporate tax Issues:
Disallowance of Royalty and Technical guidance fees:
4. That the assessing officer/ DRP erred on facts and in law in disallowing royalty amounting to Rs. 18,31,67,000 and technical guidance fee amounting 5 ITA No. 1579/Del/2017 to Rs. 10,20,44,000 paid to Honda Motor Company, Japan as per the 'Technical Collaboration Agreement' ("TCA") as capital expenditure incurred for acquisition of intangible asset and instead allowing depreciation @25%. 4.1. That the assessing officer/ DRP erred on facts and in law in holding that in terms of the Technical Collaboration Agreement, intellectual property right developed by Honda, Japan has been transferred to the appellant. 4.2 That the assessing officer/ DRP erred on facts and in law in holding that in terms of TCA, patent for the new developed project has been transferred to the licensor, i.e., appellant.
4.3. That the assessing officer/ DRP erred on facts and in law in observing that in terms of LTAA, the appellant had paid royalty and technical guidance fee for the acquisition of intellectual property rights and patents. 4.4. That the assessing officer/ DRP erred on facts and in law in holding the payment of royalty and technical guidance fee to be capital expenditure on the ground that-
(i) In the event of the expiration of the contract, the assessee may continue to use the know-how and the Industrial Property Rights for the purposes of manufacture, assembly, procurement, sale, delivery and service of the products and the parts.
(ii) The terms of agreement are quite comprehensive and the whole technical know-how to set up the business of the appellant are provided by Honda.
(iii) The assessee has paid the royalty for the acquisition of an indivisible, non-transferable and exclusive license in favour of the appellant to manufacture and assemble the products and the parts in the territory, and to sell and distribute in the territory the products and the parts so manufactured or assembled or procured.
(iv) The assessee can grant indivisible and non-transferable sublicenses to use the know-how to Indian persons, companies or other legal entities exclusive privilege of manufacturing and selling the products.
4.5Without prejudice, that the assessing officer/ DRP erred on facts and in law in alternately disallowing the amount of royalty of Rs. 79,96,000, in respect of sale of goods to the associated enterprise allegedly holding the same to be not wholly and exclusively for the purpose of business and hence disallowable under section 37(1) of the Act.
Disallowance of provision of service coupons:
5. That the assessing officer/ DRP erred on facts and in law in disallowing provision for service coupons amounting to Rs. 67,31,000, (erroneously mentioned as Rs.l,03,15,000 in the final assessment order), allegedly holding that estimate of provision for service coupons by the appellant was not based on any scientific method and, therefore, not allowable under section 37 of the 6 ITA No. 1579/Del/2017 Act.
5.1That the assessing officer/ DRP erred on facts and in law in not appreciating that the provision for service coupons was made by the appellant as per consistent method followed year after year and was revenue neutral in nature.
5.2 Without prejudice, that the assessing officer/ DRP erred on facts and in law in not allowing expenses amounting to Rs 20.83 lakhs, being expenses other than provision of service coupons debited under the head 'service expenses'.
5.3 That the assessing officer/ DRP erred on facts and in law in not allowing the claim of the assesse amounting to Rs 45.82 lakhs, being the amount of last year's closing provision expended during the current year, which was disallowed in that year, resulting in double taxation. Disallowance of provision for warranty:
6. That the assessing officer/ DRP erred on facts and in law in disallowing provision for warranty debited in the Profit and Loss statement, amounting to Rs. 11,13,000, being the amount of expenses estimated by the assessee to be incurred on account of after sales warranty of power products sold during the relevant previous year, on the ground that same is an unascertained liability. 6.1 That the assessing officer/ DRP erred on facts and in law in allegedly holding that estimate of provision for warranty by the assessee was not based on any scientific method and excessive and therefore, not allowable under section 37 of the Act.
6.2 Without prejudice, that the assessing officer/ DRP erred on facts and in law in making the aforesaid disallowance of the amount of provision for warranty and not appreciating that the aforesaid disallowance was revenue neutral in nature, since provision in excess of the actual expenditure is written back and offered to tax as income of the subsequent assessment year. Other issues:
7. That the assessing officer erred on facts and in law in allowing short credit of advance tax to the extent of Rs. 227,300 without assigning any specific reason.
8. That the assessing officer erred on facts and in law in allowing short credit of tax deducted at source to the extent of Rs. 16,889 without assigning any specific reason.
9. That the assessing officer erred on facts and in law in levying interest under section 234B of the Act.
The appellant craves leave to add, alter, amend or vary from the aforesaid grounds of appeal before or at the time of hearing.
7 ITA No. 1579/Del/20173. The assessee company is engaged in business of manufacturing of portable generating sets, I.C. Engines, Water Pumping sets and manufacture and processing of pressure Die-Casting parts. The assessee company filed return of income declaring total income of Rs.66,45,79,270/- on 29.11.2012. The case was selected for scrutiny and notice under Section 143(2) was issued on 14.08.2013. Again notice u/s 143(2) along with questionnaire u/s 142(1) was issued on 06.10.2015. In response to the notices, the Authorized Representatives appeared from time to time and furnished details which were examined by the Assessing Officer. A reference u/s 92CA(1) was made to the TPO. The TPO vide order dated 28.01.2016 held that the ALP of the transaction related to payment of royalty for exports to AE of Rs.79,96,000/- to be "NIL" using CUP method . The Draft Assessment Order u/s 143(3) r.w.s. 144C(1) of the Income Tax Act, 1961 was passed on 14.03.2016 at income of Rs. 89,79,11,520/- as against the returned income of Rs. 66,45,79,270/-. The assessee filed objections before the DRP who vide order u/s 144C(5) of the Income Tax Act, 1961 passed on 27.12.2006 issued certain directions. The Final Assessment Order was passed on 31.01.2017 by making addition of Rs. 79,96,000/- on account of transfer pricing adjustment of royalty. The Assessing Officer further made additions of Rs.19,54,80,6000/- on account of Transfer Pricing Adjustment, Rs. 18,31,67,000/- on account of capitalization of Royalty which is not allowable u/s 37(1) being not wholly and exclusively for the purpose of assessee's business. Further the Assessing Officer made addition of Rs.10,20,44,0000/- on account of capitalization of Technical Guidance Fees and disallowance of Rs.103,15,000/- in respect of provision of service coupon as well as Rs. 11,13,000/- in respect of provision of warranty.
4. Being aggrieved by the Assessment Order passed u/s 143(3) r.w.s. 144C(13) of the Income Tax Act, 1961, the assessee filed present appeal before us.
5. The Ld. AR submitted that as relates to Ground No.1, the same is general 8 ITA No. 1579/Del/2017 in nature. The Ld. AR submitted that Ground Nos. 2 to 2.19 relates to Transfer Pricing Adjustment Rs.10,54,80,600/-. For the relevant assessment year, no adjustment on account of AMP expenses was made by the Transfer Pricing Officer ('TPO') while passing order under section 92CA(3) of the Act. However, the DRP directed the TPO to make the adjustment on account of AMP expenses applying Cost Plus Method following the order for AY 2011-12. This issue is covered in favour of the assessee by the order of the Hon'ble Delhi High Court for AY 2008-09. Following the decision of the Hon'ble Delhi High Court, the Delhi Bench of the Tribunal too deleted the similar adjustments on account of AMP expenses made by the TPO for AY 2009-10, 2010-11 and 2011-12 in assessee's own case. The appeal of the Revenue for AYs 2009-10 and 2010-11 was dismissed by the Hon'ble Delhi High Court. The Ld. AR further submitted that in A.Y. 2011-12 also, the adjustment was made by the TPO/DRP applying the cost plus method. However, the adjustment made by the TPO/DRP was deleted by the Tribunal following the order of the Hon'ble Delhi High Court holding that there is no international transaction between the assessee and the associated enterprise in relation to incurring of AMP expenses for development of brand owned by the associated enterprises.
6. The Ld. DR submitted that as related to Ground No. 2 to 2.19, the AMP Expenses issue is pending before the Hon'ble Supreme Court. The Ld. DR also relied upon the orders of the TPO and Assessing Officer as well as directions of the DRP.
7. We have heard both the parties and perused the material available on record. As per the decision of the Hon'ble High Court in the assessee's own case for Assessment Year 2008-09 ITA No. 346/2015 order dated 23/12/2015 the Hon'ble High Court held as under:-
"38. The Court is satisfied that in the present case, the Assessee is carrying on business as an independent enterprise and is incurring AMP expenses for its own benefit and not at the behest of the AE. The benefit 9 ITA No. 1579/Del/2017 of creation of marketing intangibles for the foreign AE on account of AMP expenses can at best said to be incidental. The decision in Sony Ericsson (supra) acknowledges that an expenditure cannot be disallowed wholly or partly because it incidentally benefits the third party. This was in context of Section 37 (1) of the Act. Reference was made to the decision in Sassoon J David & Co Pvt. Ltd. v. CIT (1979) 118 ITR 26 (SC). The Supreme Court in the said decision emphasised that the expression 'wholly and exclusively' used in Section 10 (2) (xv) of the Act-(.Indian Income Tax Act, 1922) did not mean 'necessarily'. It said: "The fact that somebody other than the Assessee is also benefitfed by the expenditure should not come in the way of an expenditure being allowed by way of a deduction under Section 10 (2) (xv) of the Act (Indian Income Tax Act, 1922) if it satisfies otherwise the tests laid down by the law."
39. The OECD Transfer Pricing Guidelines, para 7.13 emphasises that there should not be any automatic inference about an AE receiving an entity group service only because it gets an incidental benefit for being part of a larger concern and not to any specific activity performed. Even paras 133 and 134 of the Sony Ericsson judgment makes it clear that AMP adjustment cannot be made in respect of a full-risk manufacturer.
40. Certain additional facts have been mentioned by the Assessee in its written note of submissions. It is pointed out that during the financial year 2007-2008 relevant to the AY in question, of the total turnover of Rs. 251.06 crore only Rs. 9.57 crore, constituting 3.81 per cent, is towards distribution activity whereas the balance revenue of Rs. 241.48 crore was from the manufacturing activity. Further it is pointed out that the contention of the Revenue that market development in India is the function of the AE is factually incorrect. It is pointed out that para 4.30 of the TP documentation has stated that the assessee plans and executes its own marketing strategy as it considers necessary and aproprirte. Further as 10 ITA No. 1579/Del/2017 an independent manufacturer the assessee bears all the risks associated with its business of manufacturing and sale of products in India and abroad. The condition in the license agreement that the technology will be used for sael of goods in designated jurisdictions or specified territories is not an unusual arrangement. The question of re-characterizing the assessee as a ' contract manufacturer' was unwarranted. The court finds that the Revenue has not been able to controvert any of the above submissions.
41. In that view of the matter, the question of a benchmarking analysis by evaluating the AMP expenses incurred by the Assessee in relation to its total sales vis-a-vis its comparables is not called for. There is nothing to indicate that the AMP expenses incurred by the Assessee is at the instance of foreign AE and that the Assessee has to be compensated by the foreign AE in that behalf.
42. Question (ii) is answered in favour of the Assessee and against the Revenue by holding that the Revenue has not been able to demonstrate that there exists an international transaction involving the Assessee and a foreign AE on the question of AMP expenses."
Thus, the issue is covered in favour of the assessee as per the Hon'ble Delhi High Court decision in the assessee's own case by the Jurisdictional High Court decision. Therefore, Ground Nos. 2 to 2.19 are allowed.
8. As relates to Ground Nos. 3 to 3.5 regarding transfer pricing adjustment of Rs.79,96,000/- on account of royalty paid on sales to associated enterprises, the Ld. AR submitted that this issue is covered in favour of the assessee by the order of the Tribunal for AY 2007-08 to AY 2011-12. The said finding of the Tribunal has not been challenged by the Revenue before the Hon'ble High Court. Therefore, the order of the Tribunal has attained finality with regard to the issue of payment of royalty on sales made to associated enterprise. The Hon'ble Delhi High Court in the appellant's case for assessment year 2008-09 11 ITA No. 1579/Del/2017 held that 'the question of re-characterizing the assessee as a contract manufacturer was unwarranted". In view of the aforesaid, the Ld. AR submitted that submitted that the adjustment made by the TPO holding the appellant .a be a contract manufacturer is bad in law and is liable to be deleted.
9. As related to Ground Nos. 3 to 3.5, the Ld. DR relied upon the Assessment Order and order of the TPO as well as directions of the DRP.
10. We have heard both the parties and perused the material available on record. The submission of the Ld. AR that this issue is also covered in favour of the assessee, is justified by the order passed in ITA No. 5713/Del/2011, 6023/Del/2012, orders dated 25/07/2014 & 12/12/2014 respectively as well as the Hon'ble High Court decision in assessee's own case for Assessment Year 2008-09 being ITA No. 538/2015 order dated 14/1/2016. The finding given by the Tribunal which was sustained by the Hon'ble High Court for Assessment Year 2008-09 is as follows:-
"9. The next issue agitated by the assessee vide Ground No. 5 to 5.4 is found discussed in the draft assessment order at Pages 3 to 13 and in the DRP's order at Page 7 para 5.1. The relevant facts are that the assessee paid royalty of Rs. 8,77,14,255/- and technical grounded fee of Rs. 1,74,64,000/- to M/s Honda r Company, Japan. The AO held the expenditure to be capital expenditure disallowed the same. The assessee before the DEP placed reliance upon so- treatment given by the AO in 2007- 08 assessment year where he had disallowed 25% of the expenditure on similar facts and circumstances. The expenditure was claimed to be revenue in nature and no portion of which it was submitted could be capitalized. The case law relied upon by the AO was distinguished. However in view of the fact that the dispute was coming from the earlier years the DRP declined to interfere.
10. The Ld. AR relied upon the decision of the Co-ordinate Bench in assessee's own case rendered by the Co-ordinate Bench in 2007-08 12 ITA No. 1579/Del/2017 assessment year in ITA No.-5713/Del/2011 wherein the Co-ordinate Bench after considering the decision rendered in the case of the sister concern i.e Hero Honda Motors Ltd. Vs DCIT in ITA No.-716/Del/2008 and after making a comparison with the various clauses of the Agreement was pleased to delete the addition made. In the facts of the present case it was submitted that there is no change in facts and circumstances and the ground of the assessee deserves to be allowed. 'Copy of. the decision of the Co-ordinate Bench dated'25:07.2014 was filed in the Court and specific attention was invited to para 7.4 which-addresses the issue and the stand of the assessee that the terms and conditions being pari materia to the facts and circumstances to the terms and conditions in the case of_ the sister concern in ITA No.-5130/Del/2010 decisions rendered for 2006- 07 assessment year. The detailed comparison it was stated has been discussed in para 7.5 by the Co-ordinate Bench. The departmental stand that there was no similarity on facts and circumstances with the sister concern it was submitted has also been considered in para 7.6. Considering which it was submitted the Co-ordinate Bench has held that the issue is covered in favour of the assessee. Accordingly heavy reliance was placed on the order in its own case for the ^ immediately preceding assessment year.
11. The Ld. CIT DR placed reliance upon the assessment order and the order of the DRP.
12. We have heard the rival submissions and perused the material available on record. The record would show that the DRP refused to interfere on the reasoning that the issue was still alive as a result thereof the relief granted in appeal in 2007-08 assessment year by the First Appellate Authority was not followed. The Ld. AR has placed copy of the order in assessee's own case for 2007-08 assessment year wherein ITA No.-5713/Del/2011 the Co-ordinate Bench following the view taken in M/s 13 ITA No. 1579/Del/2017 Hero Motor Corp Ltd. Vs ACIT order dated 23.11.2012 in ITA No.- 5130/Del/2010 rendered by the Delhi "C" Bench of the Tribunal by detailed finding in paras 7.4 to 7.7 pages 22 to 40 confirmed the relief granted by the CIT(A) holding that the comparative clauses based on the agreement in the case of the assessee and its' sister concern_were pari materia and-consequently the payments were revenue in nature. Respectfully following the order of the Co-ordinate Bench in the immediately preceding assessment year, Ground Nos.-5 to 5.4 are allowed.
13. The next issue agitated by the assessee in the present appeal is addressed by Ground-Nos.-6 to 6.8. "A perusal ofnhe record shows that the payment of Rs. 5,19,96,673/- paid to-M/s Honda Motors Company, -Japan was di sal lowed, by the AO who held it to be in the nature of royalty and as such a disallowance of the above amount was made as TDS thereon was not deducted. The issue challenged before the DRP was confirmed on the reasoning that it has not been finally' settled as such it was considered not appropriate to interfere. The Ld. AR relies upon the order of the Co- ordinate Bench in assessee's own case in the immediately preceding assessment year cited supra. The Ld. CIT DR has placed reliance upon the orders of the authorities below however no contrary fact or judgement was relied upon so as to canvass- that the view of the Coordinate Bench in assessee's own case in the immediately preceding assessment year be not followed."
Therefore, Ground Nos. 3 to 3.5 are allowed.
11. As relates to Ground Nos. Ground 4 to 4.5 regarding Royalty of Rs.13,73,75,250/- and Technical Guidance Fees of Rs.7,65,33,000/-, the Ld. AR submitted that the expenditure on technical know-how fee/ royalty incurred by the assessee under the agreement in question, has been allowed as revenue deduction since A.Y. 1998-99 till A.Y. 2004-05 (assessment reopened for disallowing in AY 1999-2000) and has been disallowed by the Revenue from 14 ITA No. 1579/Del/2017 the A.Y. 2005-06. There has been no change in facts and in law during the relevant previous year so as to warrant taking a different view of the matter. The Ld. AR made reference to order dated 25.07.2014 passed by the Tribunal in the assessee's own case for assessment year 2007-08 reported at 165 TTJ 363 and the order dated 12.12.2014 passed by the Tribunal in assessee's own case for assessment year 2008-09 bearing ITA No. 6023/Del/2012. In these cases, the Tribunal, on identical facts and upon examining the Technical Collaboration Agreement under consideration in the present case, was pleased to hold that the payment of royalty to Honda Motor Company, Japan, in accordance with the Technical Collaboration Agreement dated 18.10.1985 and subsequent amendments made thereto was revenue in nature and accordingly deleted the disallowance made by the assessing officer. In assessment year 2009-10, the Tribunal likewise deleted the addition following Tribunal orders for the preceding assessment years. The Tribunal, in the aforesaid cases, placed reliance on the decision of Delhi Bench of the Tribunal in the case of Hero MotoCorp Ltd. v. ACIT: ITA No. 5130/Del/2010 for assessment year 2006-07 and held that the royalty agreements entered into between the parties in both the cases was identical. In the aforesaid cases, the Tribunal has, on an analysis of the respective agreements, come to the conclusion that payment made under the agreements was deductible revenue expenditure. The Ld. AR pointed out that the Hon'ble jurisdictional High Court in the case of CIT v. Hero Honda Motors Ltd. 372 ITR 481 was concerned with similar agreement qua payment of royalty to Honda Motor Co., Japan. On examining the terms of the agreement under consideration, the Court was pleased to dismiss the appeal of the Revenue authorities and conclusively hold that expenditure incurred for payment of royalty shall be revenue in nature. Referring to the aforesaid decision, in assessee's own case for assessment years 2007-08 and 2008-09, this issue has been confirmed by the Hon'ble Delhi High Court in ITA No. 312/2015 & 538/2015 vide order dated 14.01.2016, wherein the Court has not admitted the question on issue whether payment of royalty and technical guidance fees is revenue in nature or not. Similarly, in assessment year 2009- 15 ITA No. 1579/Del/2017 10, the Hon'ble Delhi High Court in ITA No. 118/2017 vide order dated 01.03.2017 has not admitted the question on issue whether payment of royalty and technical guidance fees is revenue in nature or not. Similarly, In assessment year 2010-11, the DRP, vide order dated 21.11.2014, had deleted the addition proposed by the assessing officer, following which no disallowance was made in the final assessment order. Relevant extracts of the directions is reproduced below:
"Respectfully following the aforesaid decision of the Hon'ble ITAT 'I' Bench Delhi in the appellant own case for the assessment year 2007-08 in ITA No. 5713/Del/2011 dated 25.07.2014, we hereby direct the Assessing Officer to delete the addition of Rs. 6,89,28,750/- on account of payment of royalty and addition on account of payment of technical guidance fee of Rs. 50,21,750/-. However, it is noted that in the draft assessment order, the AO has erroneously added Rs. 50,21,750/- instead ofRs. 1,50,65,250/-. In principle, we hold the entire expenses as revenue expenses and accordingly the addition on this score gets deleted. Accordingly, we order so.
The grounds of objection Nos. I and 2 are disposed off accordingly. "
In assessment year 2011-12, the Ld. AR, however, pointed that the disallowance of royalty and technical fees was confirmed by the DRP, alternatively under provisions of section 37(1) of the Act. As against disallowance of royalty and technical guidance fee, alternatively made under section 37(1) of the Act, the Ld. AR pointed out the findings of the Tribunal made in order passed for Assessment Year 2011-12, wherein the impugned disallowance has been deleted even on this alternative ground raised by the Revenue. Therefore, the Ld. AR submitted that no part of the royalty and technical guidance fee paid to Honda can be considered as capital expenditure and the same may kindly be directed to be allowable in full being an expenditure in revenue nature, allowable under section 37(1) of the Act.
12. As related to Ground No. 4 to 4.5, the Ld. DR relied upon the Assessment Order and order of the TPO as well as directions of the DRP.
16 ITA No. 1579/Del/201713. We have heard both the parties and perused all the records. the Ld. AR pointed out the findings of the Tribunal made in order passed or Assessment Year 2011-12, reproduced below, wherein the impugned disallowance has been deleted even on this alternative ground raised by the Revenue:
"16. Ground No. 4 is against disallowance of amount of royalty paid of Rs.76,00,000/- and technical guidance fees of Rs.6,11,000/- held to under section 37(1) of the Act.
17. On this issue, Ld. AR submitted that it is conclusively covered in favour of the assessee that payment of royalty and technical guidance fees is revenue in nature in view of the decision of the Hon'ble High Court dated 14/01/2016 in case of the assessee wherein for assessment year 2008- 2009, Hon'ble high court did not admit similar question. He further submitted that for assessment year 2010- 2011 the assessing officer himself has accepted the claim of the assessee and did not make any disallowance on the aforesaid issue. He further submitted that issue is also squarely covered in favour of the appellant in assessee's own case for assessment year 2009 - 10 and 2010 - 11 by order of tribunal.
18. Ld. departmental representative relied upon the orders of the lower authorities, however, did not controvert that Hon'ble high court has not admitted this issue in case of the assessee for assessment year 2008 - 09 and therefore the issue is now conclusively decided in favour of the appellant.
19. We have carefully considered the rival contentions and also perused relevant materials on record. On identical issue, Hon'ble Delhi High Court in assessee's own case in ITA No. 538/2015 dated 14-1-2016 has not admitted the question on issue whether the payment of royalty and technical guidance fees is revenue in nature or not. Hon'ble high court has held that that this issue has been answered in favour of the assessee in assessee's own case in CIT VS Hero Honda Motors (2015) (372 ITR
481) (Del) and therefore the court accordingly declined to frame a question of law on this issue. Respectfully following the decision of the Hon'ble high court in assessee's own case the disallowance under section 37 (1) on account of royalty of Rs. 76 lacs and technical guidance fees of Rs.
6.11 lakhs cannot be upheld. Therefore ground No. 4 of the appeal of the assessee is allowed accordingly."
Thus, this issue is also covered in favour of the assessee. Ground Nos. 4 to 4.5 are allowed.
17 ITA No. 1579/Del/201714. The Ld. AR has taken alternate plea and further submitted that as relates to Double disallowance of Royalty, the payment to the extent of Rs.76,96,000 made by the assessee on account of royalty has already been disallowed by the TPO. The TPO determined the arm's length price of the payment of royalty of Rs. 18,31,67,000/- at Nil. Thus, the Ld. AR submitted that, since the payment of royalty, to the extent of Rs.76,96,000 has already been disallowed in the transfer pricing order, further disallowance to that extent has resulted in double disallowance of the same amount, which is impermissible under the provisions of the Act.
15. The Ld. DR relied upon the order of Assessing Officer and DRP Directions and submitted that there is no double taxation.
16. We have heard both the parties and perused the material available on record. As per the submissions of the Ld. AR, since the payment of royalty, to the extent of Rs.76,96,000 has already been disallowed in the transfer pricing order, further disallowance to that extent has resulted in double disallowance of the same amount, which is impermissible under the provisions of the Act. Since the Royalty issue is already decided in Ground Nos. 3 to 3.5 and 4 to 4.5, this contention of the assessee is accepted.
17. As relates to Ground Nos. 5 to 5.3 regarding disallowance of provision for service coupons of Rs.67,31,000/- (erroneously mentioned as R.1,03,15,000/- in the final assessment order), the Ld. AR submitted that this issue is squarely covered by the order of the Tribunal, in assessee's own case, for the assessment year 2011-12.
18. As related to Ground Nos. 5 to 5.3, the Ld. DR relied upon the order of Assessing Officer, TPO and DRP Directions.
18 ITA No. 1579/Del/201719. We have heard both the parties and perused the material available on record. As per the submissions of the Ld. AR, this issue is also covered by the decision of the Tribunal in the assessee's own case for Assessment Year 2011- 12 being ITA No. 1573/Del/2016 order dated 26/8/2016. The Tribunal held as under:
"25. Therefore in view of the above decision of the Hon'ble Supreme Court in Rotork Controls India (P) Limited vs. CIT (supra) wherein the warranty provisions, which are similar to the after sales service provisions, are held to be allowable expenditure as such provisions are not contingent but definite and are based on the past history of the claims arising, therefore allowable as deductions under section 37(1) of the income tax act. We do not find any difference in the claim of after sales service and warranty expenditure as both are arising out of the obligating event of sales made by the assessee. In the case of the appellant the provision of after sales services has also been made based on the past business history of the appellant and therefore, it cannot be said that it is made on arbitrary basis. Further the contention of the Id. AO is not correct stating that assessee claims excess expenditure in one year because in the year of sales itself assessee claims the expenditure related to sales and when the liability ceases on completion of time, same is reversed in the profit and loss account and offered as income. Therefore , we are of the view that claim of the assessee for deduction of after sales service expenditure is in accordance with Accounting standard 29 issued by the Ministry of corporate affairs which is mandatorily to be followed by the assessee, further quantification of such expenditure has been made on the basis of the past history. Hence, In view of above facts and decision of the Hon'ble Supreme Court, ld. assessing officer is not correct in disallowing an expenditure of Rs.45.82 lakhs on account of after sales services expenditure. In the result, ground No. 5 of the appeal of the assessee is allowed."
20. As relates to Ground Nos. 6 to 6.2 regarding disallowance of provision or warranty of Rs.11,13,000/-, the Ld. AR submitted that provision for warranty is being made year on year on historical and scientific basis in accordance with the terms of the contract since the incorporation of the company which was always accepted as eligible business deduction in those years. Disallowance of provision for warranty was made for the first time in the assessment year 1996-97, which was subsequently deleted by the Tribunal vide order dated 31.07.2006 bearing ITA No. 1842/Del/2000. In the aforesaid case, the 19 ITA No. 1579/Del/2017 Tribunal, on identical facts, has treated the provision for warranty expenses as eligible business deduction. Disallowance of warranty provision made in subsequent assessment years 1997-98, 1998-99 and 2001-02 was also deleted by the Tribunal following the aforementioned order for AY 1996-97. The Ld. AR further pointed out that no disallowance of provision for warranty was made in any of the preceding assessment years and the said provision has been consistently allowed as revenue deduction in all preceding years, apart from the above mentioned years which have also been conclusively decided in favor of the assessee company. Thus, the Ld. AR submitted that the disallowance of provision of warranty is based on incorrect appreciation of facts and position in law. Accordingly, the provision for warranty made by the assessee, in accordance with the consistent method and practice, is neither an unascertained liability nor excessive.
21. As relates to Ground Nos. 6 to 6.2, the Ld. DR relied upon the assessment order and DRP directions.
22. We have heard both the parties and perused the material available on record. The warranty provisons were disallowed in subsequent years for 1997- 98, 1998-99 & 2001-02 which was deleted by the Tribunal vide order dated 31/7/2006 since no disallowance of provisions for warranty was made in any of the preceding year and the said provision was consistently allowed by the Revenue due to the decision of the Tribunal. This issue is also covered in favour of the assessee. Ground Nos. 6 to 6.2 is allowed.
23. As relates to Ground No. 7 regarding short credit of advance tax of Rs.2,27,300/-, the Ld. AR submitted that the direction may be issued to the Assessing Officer to allow the claim after verification.
24. As relates to Ground No. 7, the Ld. DR relied upon the assessment order. It can be seen that short credit of advance tax was not at all verified by the Assessing Officer. Therefore, it will be appropriate to remand this issue to the 20 ITA No. 1579/Del/2017 file of the Assessing Officer for further verification. Needless to say, the assessee be given full opportunity of hearing by following principals of natural justice. Ground No. 7 is partly allowed for statistical purpose.
25. As relates to Ground No. 8 regarding short credit of TDS of Rs.16,889/- the Ld. AR submitted that the direction may be issued to the assessing officer to allow the claim after verification.
26. As related to Ground No. 8, the Ld. DR relied upon the Assessing Officer.
27. We have heard both the parties and perused the material available on record. It is pertinent to note that the Assessing Officer has not verified this short credit of TDS. Therefore, this issue also needs to be verified at the level of Assessing Officer. Needless to say, the assessee be given full opportunity of hearing by following principals of natural justice. Ground No. 8 is partly allowed for statistical purpose.
28. As relates to Ground No. 9 regarding levy of interest u/s 234B of the Act, the Ld. AR submitted that the same is consequential.
29. Ground No. 9 is consequential. Hence, not adjudicated at this juncture.
30. In result, the appeal of the assessee is partly allowed for statistical purpose.
Order pronounced in the Open Court on 17th April, 2018.
Sd/- Sd/-
(R. K. PANDA) (SUCHITRA KAMBLE)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Dated: 17/04/2018
R. Naheed *
21 ITA No. 1579/Del/2017
Copy forwarded to:
1. Appellant
2. Respondent
3. CIT
4. CIT(Appeals)
5. DR: ITAT
ASSISTANT REGISTRAR
ITAT NEW DELHI
Date
1. Draft dictated on 1/11/2017 PS
2. Draft placed before author 2/11/2017 PS
3. Draft proposed & placed before .2018 JM/AM
the second member
4. Draft discussed/approved by JM/AM
Second Member.
5. Approved Draft comes to the PS/PS
Sr.PS/PS 17.04.2018
6. Kept for pronouncement on PS
7. File sent to the Bench Clerk 17.04.2018 PS
8. Date on which file goes to the AR
9. Date on which file goes to the
Head Clerk.
10. Date of dispatch of Order.