Income Tax Appellate Tribunal - Delhi
Maruti Suzuki India Ltd., New Delhi vs Assessee on 24 August, 2015
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCHES : I-1 : NEW DELHI
BEFORE SHRI R.S. SYAL, AM AND SHRI A.T. VARKEY, JM
ITA No.5120/Del/2010
Assessment Year : 2006-07
ITA No.2441/Del/2012
Assessment Year : 2006-07
Maruti Suzuki India Ltd., Vs. Addl. CIT,
Plot No.1, Nelson Mandela Range-6,
Road, CR Building,
Vasant Kunj, New Delhi.
New Delhi.
PAN: AAACM0829Q
(Appellant) (Respondent)
Assessee By : Shri Ajay Vohra, Sr. Advocate;
Shri Neeraj Jain & Shri Rohit Jain,
Advocates; & Ms Tejasvi Jain, Shri
Ramit Katyal, Shri Puneet Chugh,
CAs.
Department By : Shri Amrinder Kumar, CIT, DR.
Date of Hearing : 20.08.2015
Date of Pronouncement : 24.08.2015
ITA No.5120/Del/2010
ITA No.2441/Del/2012
ORDER
PER R.S. SYAL, AM:
The assessee has filed two appeals for the assessment year 2006-
07. First is the main appeal directed against the final order passed by the Assessing Officer (AO) on 20.10.2010 under section 143(3) read with section 144C of the Income-tax Act, 1961 (hereinafter also called 'the Act'). Second appeal, having only one issue, is against the order of the AO passed u/s 154 read with sections 92CA(5)/143(3) of the Act on 12.4.2012, pursuant to the suo motu rectification proceedings taken up by the Transfer Pricing Officer (TPO).
2. Ground nos. 1 and 2 are general, which do not require any specific adjudication.
A. DISALLOWANCES U/S 43B
3. Ground no. 3 deals with disallowances made u/s 43B in respect of certain items of excise duty and customs duty.
2 ITA No.5120/Del/2010 ITA No.2441/Del/2012 I. Excise duty 4.1. Firstly, we shall deal with all the items of excise duty disallowances. The first amount of disallowance of excise duty is Rs.30,75,821/-, being, the amount of excise duty paid on vehicles and spare parts under PLA (Personal Ledger Account). The assessee paid certain sum under PLA which is nothing, but, excise duty paid in- account as advance, to be adjusted against actual excise duty required to be paid at the time of removal of goods from bonded warehouse. At the end of the year, there were three balances in PLA, consisting of Rs.2,32,113/- towards excise duty on vehicles, Rs.7,29,595/- towards R&D cess on vehicles and Rs.21,14,113/- towards excise duty on spare parts. The assessee claimed deduction for these amounts u/s 43B on the ground that these stood paid before the close of the financial year relevant to the assessment year under consideration. The AO, following his view taken in earlier years, refused to allow this deduction. The assessee is aggrieved against such disallowance. It has been admitted on 3 ITA No.5120/Del/2010 ITA No.2441/Del/2012 behalf of the Revenue that similar issue has been decided by the tribunal in earlier years in favour of the assessee.
4.2. The next amount of disallowance of excise duty is the balance of Rs.48,53,55,419/- at the end of the year in RG 23A Part II account. This amount represents excise duty paid on raw material and inputs purchased by the assessee for use in the manufacture of automobiles. Under the central excise law, a manufacturer is entitled to claim Modvat credit in respect of the amount of central excise duty paid on raw material and inputs purchased for manufacture of excisable goods. The amount in dispute is Modvat credit unutilized at the end of the year. The assessee treated it as payment of tax and claimed deduction u/s 43B of the Act. The AO refused to allow this deduction. It has been admitted by both the sides that the tribunal in earlier years, following the dictum of Special bench in Glaxo Smithkline Consumer Healthcare Ltd., (2007) 107 ITD 343 (SB) (Chd.), has decided this issue in favour of the Revenue. The assessee is aggrieved against the addition. 4 ITA No.5120/Del/2010 ITA No.2441/Del/2012 4.3. The last amount of disallowance of excise duty is Rs.45,00,000, which was paid by the assessee under protest pursuant to additional demand raised by the competent authority. Though the assessee disputed such additional demand, but ended up paying the same under protest and claimed a deduction for the same. The AO disallowed it on the ground that the same was being contested and there was no finality regarding the liability and further, such amount was not debited to the Manufacturing, Trading, Profit and loss account (hereinafter called `Profit and loss account' for convenience). The assessee is aggrieved against such disallowance. It has been admitted by the Revenue that similar issue has been decided by the tribunal in earlier years in favour of the assessee.
4.4. We have heard the rival submissions and perused the relevant material on record qua the above items of disallowances of excise duty. The assessee claimed deduction for these sums u/s 43B, which the AO refused to allow. In order to evaluate the rival submissions, it would be apposite to note the relevant parts of section 43B, as under : - 5 ITA No.5120/Del/2010 ITA No.2441/Del/2012
`43B. Notwithstanding anything contained in any other provision of this Act, a deduction otherwise allowable under this Act in respect of--
(a) any sum payable by the assessee by way of tax, duty, cess or fee, by whatever name called, under any law for the time being in force, or
(b) to (f) ..............
shall be allowed (irrespective of the previous year in which the liability to pay such sum was incurred by the assessee according to the method of accounting regularly employed by him) only in computing the income referred to in section 28 of that previous year in which such sum is actually paid by him :
......'.
4.5. A perusal of the relevant parts of the above provision transpires that it has the following essential elements in so far as the deduction on account of excise duty is concerned : -
i. Deduction is permissible in respect any sum payable under any law for the time being in force by the assessee by way of tax, duty, cess or fee, etc. ii. Deduction of tax or duty etc. is to be allowed only in computing the business income of that previous year in which such sum is actually paid by the assessee.
6 ITA No.5120/Del/2010 ITA No.2441/Del/2012 iii. Deduction is permissible in the year of payment irrespective of the incurring of liability in any previous year as per the method of accounting regularly employed by the assessee. iv. Deduction is allowable `only' once and that too in the year of payment. It cannot be allowed twice, that is, firstly in the year of incurring liability as per the method of accounting followed and if the date of payment is different from the year of incurring liability, then again in the year of payment. The use of the words 'irrespective of the previous year in which the liability to pay such sum was incurred by the assessee according to the method of accounting regularly employed by him' before the word 'only', leaves nothing to doubt that the deduction is permissible in the computation of income of the previous year in which such sum is actually paid by the assessee. If an amount of tax or duty is paid in the first year as advance for which specific liability is incurred in the second year, then deduction is to be allowed only in the first year. 7 ITA No.5120/Del/2010 ITA No.2441/Del/2012 Deduction, if any, getting claimed at the time of incurring of liability in the second year as per the method of accounting followed by the assessee, would require reversal. v. Deduction of tax or duty etc. in the year of payment is permissible only if the same is otherwise allowable under the Act. In other words, if deduction for tax or duty etc. is otherwise not permissible, then section 43B cannot intervene to allow deduction at the time of payment of such otherwise non-deductible amount.
vi. Section 43B contains a non-obstante provision qua any other provision of the Act. It means it has an overriding effect over all other provisions of the Act. Further, the non-obstante clause used in the beginning of the provision is qua the year of deductibility and not the otherwise eligibility for deduction. 4.6. When a manufacturer pays excise duty on the goods manufactured by it, the same forms a part of the cost of goods. When the goods are sold, the manufacturer, charges excise duty separately in the invoice 8 ITA No.5120/Del/2010 ITA No.2441/Del/2012 apart from the sale price of goods etc. To put it simply, excise duty at the time of payment is otherwise deductible and its charging at the time of sale, is liable to tax. Without interference of section 43B of the Act, an assessee following mercantile system of accounting could claim deduction for excise duty etc. at the time of incurring of its liability, even without making actual payment. Now with the insertion of section 43B, an assessee can get deduction of excise duty only in the year of payment and not with the mere incurring of liability without payment.
Thus, it is clear that if excise duty is paid in the year of incurring liability itself, then deduction is allowed in such year. If, some part of the excise duty for which liability has been incurred is not paid for one reason or the other before the close of the year etc., then the paid part gets deduction in the year of incurring of the liability but the unpaid part becomes eligible for deduction in the later coinciding with the actual payment. Whereas, in the first instance, full deduction is allowable in year one itself, in the second instance, part of the amount not allowed in the first year becomes eligible for deduction in the second year at the 9 ITA No.5120/Del/2010 ITA No.2441/Del/2012 time of payment. There can be a converse situation as well in which excise duty is paid in advance, though a specific liability is incurred later. A manufacturer is sometimes obliged to deposit excise duty in advance without availing its actual utilization. In such circumstances, the obligation to pay such amount under the respective excise rules will bring the case within the otherwise deductibility provision and the event of actual payment will grant deduction in the year of payment notwithstanding the fact that the goods have not yet been lifted from the bonded warehouse at the end of the year. In such a case, section 43B requires granting of deduction at the time of payment matching with the incurring of general liability. However, the granting of deduction in the year of payment in respect of goods not lifted till the end of the year, simultaneously requires preventing the grant of deduction once again at the time of removal of goods in the subsequent year on incurring of specific liability. In such a situation, there arises a need to accordingly increase the income of the subsequent year with the amount of deduction 10 ITA No.5120/Del/2010 ITA No.2441/Del/2012 allowed in the preceding year, which once again gets claimed as deduction on the event of incurring the specific liability. 4.7. The ld. AR candidly admitted that the assessee has followed `Inclusive method' of accounting for goods sold in domestic market and `Exclusive method' for the goods exported. Whereas, under the `Exclusive method', Purchases, Sales and Inventories (both opening and closing) are taken without the effect of tax or duty etc., Purchases, Sales and Inventories (both opening and closing) are taken inclusive of tax or duty etc. under the `Inclusive method'. As the assessee has also followed `Exclusive method', we shall firstly proceed to evaluate the points under consideration as per the `Exclusive method'. Under this method, the amount of tax or duty etc. paid does not does not get included in the figures of purchase, sale and inventories, as these are recorded without considering their effect. We have noticed above that section 43B mandates that deduction of tax or duty etc. is to be allowed in the year of payment.
11 ITA No.5120/Del/2010 ITA No.2441/Del/2012 4.8. We espouse the first item, being the amount deposited by the assessee in PLA. This is the amount paid in-account by the assessee in PLA which remained unutilized at the end of the year. It is in the nature of advance payment of excise duty to be adjusted against the removal of goods from bonded warehouse at a later point of time in subsequent year. Normally, at the time of payment of excise duty, the amount goes to the PLA, which is an item of asset appearing in the balance sheet. When goods are removed from bonded warehouse, a corresponding sum of excise duty is taken away from PLA and is carried to Profit and Loss account as Excise duty. This can be understood with the help of an illustration. Suppose an assessee pays a sum of Rs.10/- in PLA out of which a sum of Rs.9/- is adjusted during the year against the excise duty payable on the removal of goods from bonded warehouse. Further suppose that goods corresponding to the excise duty of Rs. 7 are sold during the year and goods corresponding to the excise duty of Rs.2 are still in stock. In such a situation, when the assessee originally pays Rs.10/-, he will debit PLA and credit bank account with Rs.10/-. During 12 ITA No.5120/Del/2010 ITA No.2441/Del/2012 the course of the year when excise duty of Rs.9/- is adjusted against the advance paid under PLA, Excise duty account will be debited and PLA credited with a sum of Rs.9/-. Amount of excise duty of Rs.9 debited in the books of account will ultimately find its place in the Profit and Loss account and become eligible for deduction, on which there is no dispute. The assessee on sale of goods with corresponding excise duty of Rs.7, out of total utilized to the tune of Rs.9, will show income of Rs.7 as part of sales. In this way, the assessee gets deduction for Rs. 9 and shows income of Rs.7 towards excise duty. Thus it is seen that out of total Rs.10 paid by the assessee in PLA, he has claimed deduction of Rs.9. The controversy before us is w.r.t. to the unutilized amount in PLA at the end of the year, being equivalent of Re.1/- in our example, which was actually paid but could not be debited to the Excise duty account and hence not going to the debit side of the Profit and loss account. The assessee wants deduction for this amount as well. In our considered opinion, the character of this amount in terms of section 43B is no different from Rs.2 in our example, being the amount of excise duty on 13 ITA No.5120/Del/2010 ITA No.2441/Del/2012 goods in stock. As section 43B requires deduction of tax and duty etc. at the time of payment, naturally, this sum of Re.1 will also require deduction as it has been paid during the year in question. In our considered opinion, there can be no hindrance in allowing deduction of Re.1 as per the mandate of section 43B. Concurrently, it is significant to note that this unutilized amount of Re.1 appearing in balance sheet at the end of the year would be actually utilized in the next year on the removal of goods from the bonded warehouse. At that time, the assessee will debit Excise duty and credit PLA account with Re.1. Such debit of Re.1 in the excise duty account in the next year will eventually go to the Profit and loss account and get deducted.. We have noticed above that deduction for tax and duty etc. is allowable only once and not twice. Since deduction of Re.1 got granted in the year of making payment u/s 43B, this would require add back in the computation of income of later year on its utilization and getting debited to Profit and loss account through Excise duty account. Similar will be position for the last year's balance in PLA claimed as deduction u/s 43B, but adjusted against the 14 ITA No.5120/Del/2010 ITA No.2441/Del/2012 goods manufactured in the current year. Such amount of deduction allowed u/s 43B in the preceding year on account of unutilized PAL at the end of the year, requires to be separately offered for taxation in the current year. When this legal consequence of allowing deduction u/s 43B at the time of payment was confronted to the ld. AR, he stated that the assessee has voluntarily added back the suitable amounts in the computation of income of the current/subsequent years. He was fair enough to accept that a suitable direction may be given by the Bench to the AO for verification of this aspect of the matter, if needed. 4.9. It is further noticed that a Special Bench of the Tribunal in the case of DCIT vs. Glaxo Smithkline Consumer Healthcare Ltd., (2007) 107 ITD 343 (SB) (Chd.), has held that the excess amount of excise duty reflected in the account-current is nothing but actual payment of excise duty even though mentioned as advance payment and, hence, allowable as deduction u/s 43B of the Act in the year of payment. The Special bench further clarified that the allowing of deduction on payment basis should not result in double deduction under any circumstance. The 15 ITA No.5120/Del/2010 ITA No.2441/Del/2012 tribunal in assessee's own case has also allowed deduction in the earlier years on account of unutilized PLA at the end of the year. In view of the above discussion, while we hold that the above referred sum of unutilized amount in PLA at the end of the year u/s 43B under `Exclusive method' qualifies for deduction, we also hold that this amount cannot be allowed deduction once again in the immediately succeeding year and also the similar amount allowed as deduction in the preceding year u/s 43B requires to be included in the computation of income of the current year.
4.10. Having discussed the above position under the `Exclusive method', which the assessee is following in respect of goods meant for exports, let us see, if the adoption of `Exclusive method' is in accordance with law? In this regard, it is noticed that the legislature inserted section 145A by the Finance (No.2) Act, 1998 w.e.f. 1.4.199, the relevant part of which reads as under : -
"145A. Notwithstanding anything to the contrary contained in section 145, the valuation of purchase and sale of goods and inventory for the purposes of determining the income chargeable under the head "Profits and gains of business or profession" shall be--16
ITA No.5120/Del/2010 ITA No.2441/Del/2012
(a) in accordance with the method of accounting regularly employed by the assessee; and
(b) further adjusted to include the amount of any tax, duty, cess or fee (by whatever name called) actually paid or incurred by the assessee to bring the goods to the place of its location and condition as on the date of valuation.
Explanation.--For the purposes of this section, any tax, duty, cess or fee (by whatever name called) under any law for the time being in force, shall include all such payment notwithstanding any right arising as a consequence to such payment;"
4.11. The above provision provides that notwithstanding anything to the contrary contained in section 145, valuation of purchase and sale of goods and inventory for the purposes of determining the income chargeable under the head "Profits and gains of business or profession"
shall be in accordance with the method of accounting regularly employed by the assessee and further adjusted to include the amount of any tax or duty etc. actually paid or incurred by the assessee to bring the goods to the place of its location and condition as on the date of valuation. Thus it is manifest that the command of section 145A is to value purchase, sale and inventories with the element of tax or duty etc, which is called `Inclusive method'. With the insertion of section 145A w.e.f. assessment year 1999-2000, the hitherto optionally permissible 17 ITA No.5120/Del/2010 ITA No.2441/Del/2012 `Exclusive method' is no more available to the assessee. Now, all the assessees earning business income are required to follow only the `Inclusive method' and under this method, purchase, sale of goods and inventories (both opening and closing) are required to be adjusted to include the amount of tax or duty etc. As the assessment year under consideration is governed by section 145A, the assessee was under
statutory obligation to cast its Profit and loss account on `Inclusive method', which it has not done. Under such circumstances, we cannot approve the `Exclusive method' followed by the assessee. It goes without saying that there can be no estoppel against the statute. We, therefore, direct the AO to recast Profit and loss account on the basis of `Inclusive method'. This would require adopting the figures of purchase, sale and opening as well closing inventories as inclusive of tax or duty etc. 4.12. We have noted above that section 145A starts with a non-
obstante clause qua section 145 of the Act and section 43B starts with a non-obstante clause qua `any other provision of this Act'. The effect of 18 ITA No.5120/Del/2010 ITA No.2441/Del/2012 the non-obstante clause in section 145A is that even if the exclusive method of valuing purchase, sale, opening and closing stocks may be generally available, but the assessee will have to compute its `Business income' by casting its Profit and loss account as per the `inclusive method', meaning thereby, that the value of purchase, sale and inventories must be accounted in the annual accounts as inclusive of tax or duty etc. The effect of non-obstante clause in section 43B is that even if deduction of tax or duty etc. may be admissible under the Act on the incurring of liability, but such deduction will be subject to payment alone. A harmonious reading of sections 145A and 43B of the Act brings out that the `Business income' is firstly required to be mandatorily computed by following the `Inclusive method', by loading the amount of tax or duty etc. on purchase, sale and inventories and thereafter, if some part of tax or duty is unpaid, that should be added back in the computation of income. If in a converse situation, some amount of tax or duty is paid as advance in current account, which has not been included in the amount of purchase etc. and is lying unadjusted in the 19 ITA No.5120/Del/2010 ITA No.2441/Del/2012 balance sheet, then the same should be separately deducted in terms of section 43B. However, having allowed deduction on payment basis as per section 43B, the computation of income of the succeeding year determined under inclusive method as per section 145A, would require enhancement with such amount of tax or duty etc. allowed as deduction in the earlier year. In our considered opinion, it is the crux of reading of section 145A in juxtaposition to section 43B of the Act. 4.13. Under the `Inclusive method', the figures of purchase, sale and inventories are required to be taken with the element of tax or duty etc. Since the amount of unutilized balance of excise duty under PLA does not form part of purchase, this amount will be eligible for separate deduction u/s 43B. At the same time, the last year's unutilized PLA getting deduction in that year due to the application of section 43B, would be required to be added back to the income of the current year as determined above. We, therefore, set aside the impugned order and direct the AO to firstly recast the assessee's Profit and loss account on inclusive basis and then make suitable deduction in respect of the 20 ITA No.5120/Del/2010 ITA No.2441/Del/2012 amount of unutilized PLA at the end of the current year and also the preceding year.
4.14. Now, we come to the next item of disallowance, being a sum of Rs. 48.53 crore towards Excise duty on inputs balance in RG 23A. This amount is unutilized Modvat credit available to the assessee at the end of the year. Under the Central Excise law, a manufacturer is entitled to claim Modvat credit of the amount of excise duty paid by him on raw materials and inputs purchased for consumption in the manufacture of excisable goods. The amount of duty paid to the supplier of raw material is considered as the amount of central excise duty actually paid by the assessee. Thus, a manufacturer of final product under Modvat/Cenvat Scheme is allowed to get adjustment of excise duty paid by him on any inputs received in the factory to be used in the manufacture of final product. In the year under consideration, the assessee purchased excise duty paid raw material and other inputs and as per the excise rules became entitled to Modvat credit of the excise duty paid on raw material eligible for set off against liability of excise duty on 21 ITA No.5120/Del/2010 ITA No.2441/Del/2012 the finished goods at the time of removal of goods from bonded warehouse.
4.15. We have noticed above that the assessee is also following `Exclusive method'. Under the `Exclusive method', the total amount of excise duty paid by the assessee on purchase of inputs does not get added to their purchase price, but appears as an asset with the nomenclature of Modvat credit. When goods using the excise duty paid raw material are manufactured, the manufacturer becomes entitled to use Modvat credit against his liability of excise duty on finished products. This utilized part of the Modvat credit goes to the Excise duty account in the same manner as utilized PLA discussed above. Suppose, an assessee has Modvat credit of Rs. 10 and has utilized duty paid raw material in its production during the year for corresponding sum of Rs.9, out of which finished goods corresponding to Modvat utilized of Rs.7 are sold and the finished goods corresponding to Modvat utilized of Rs.2 are in stock. The assessee will get deduction for Rs.9 under the exclusive method. Simultaneously the assessee will offer income of Rs.7 embedded in the 22 ITA No.5120/Del/2010 ITA No.2441/Del/2012 sale price. It is the remaining amount of Re.1 which is unutilized Modvat credit appearing as an asset in the balance sheet at the end of the year, for which the assesse is now seeking deduction. 4.16. At the outset, we want to mention that the Special Bench of the Tribunal in Glaxo Smithkline Consumer Healthcare (supra) has held that unexpired Modvat credit before it is set off, cannot be treated as tax paid. Accordingly the Special Bench held that the Modvat credit available to the assessee as on the last date of the previous year does not amount to payment of excise duty and is, hence, not allowable u/s 43B. In earlier years, the Tribunal has followed the dictum of this Special Bench verdict and upheld the disallowance. The ld. AR submitted that there has been further articulation of law on this point. Referring to the judgment of the Hon'ble Supreme Court in the case of CIT Vs. Shri Ram Honda Power Equipment Ltd. (2013) 352 ITR 481 (SC), the ld. AR submitted that the amount lying credited in the Modvat account at the end of the accounting year has now become deductible u/s 43B as per its ratio. We find that the Hon'ble Apex Court in Shriram Honda Power 23 ITA No.5120/Del/2010 ITA No.2441/Del/2012 Equipment Ltd. (supra) has held that : `The Authorities below are right in coming to the conclusion that MODVAT Credit is excise duty paid'. The Hon'ble jurisdictional High Court in the assessee's own case in CIT vs. Maruti Suzuki India Ltd. (2013) 255 CTR 140 (Del), after taking note of the judgment of the Hon'ble Supreme Court in the case of Shri Ram Honda Power Equipment Corporation (supra) has held that : `This court also notices that the Supreme Court has upheld the view which allows assesses to claim credits, such as Modvat, etc, falling within the description of liability paid, to escape the mischief of Section 43-B.' In view of this later development of law, the earlier contrary view taken by the Special Bench in Glaxo (supra) on the question of unutilized Modvat credit now needs to be properly aligned with the ratio decidendi of the judgment in Shri Ram Honda (supra).
4.17. Armed with the above legal position, now the remaining amount of Re.1 in our above example under the `Exclusive method', which is unutilized Modvat credit in the balance sheet at the end of the year, needs to be treated at `excise duty paid'. Since this amount is considered 24 ITA No.5120/Del/2010 ITA No.2441/Del/2012 as excise duty paid, the same has to be allowed as deduction during the year of payment as per section 43B. Caveat remains that deduction for a sum of Re.1 in the current year, being the Modvat credit unutilized at the end of the year under the exclusive method, also requires enhancement of income of the succeeding year to this extent. In the like manner, the corresponding amount allowed as deduction u/s 43B in the preceding year, if any, also requires separate add back to the income of the current year. It is so because deduction for payment of tax or duty etc. can be allowed only once, and that too, at the time of payment. We, therefore, hold that the amount of unutilized Modvat credit is deductible in the computation of income for the current year under the exclusive method. But such amount also requires add back in the computation of income of the immediately next year and also the corresponding amount of unutilized Modvat credit of the preceding year, if allowed as deduction in such earlier year, requires a separate addition to the income of the current year. It is the treatment of Modvat credit under the `Exclusive method'.
25 ITA No.5120/Del/2010 ITA No.2441/Del/2012 4.18. We have noticed supra that the use of `Exclusive method' is no more permissible in the year under consideration. As such, there is a need to give effect to section 145A read with section 43B under the `Inclusive method'.
4.19. Before taking up this aspect, we would like to deal with the judgment of the Hon'ble Supreme Court in Shri Ram Honda (supra), relied by the ld. AR for supporting the claim of per se deduction without any further adjustments as per section 145A. It is relevant to note that the Hon'ble Supreme Court in Shri Ram Honda (supra) was dealing with A.Y. 1995-96. While granting deduction for Modvat credit, the Hon'ble Summit Court followed the judgment of the Hon'ble Bombay High Court in CIT vs. Indo Nippon Chemical Co. Ltd., (2000) 245 ITR 384 (Bom), as affirmed by the Hon'ble Apex Court in (2003) 261 ITR 275, in holding that the same was squarely applicable and hence the amount was deductible. The assessment year involved in the case of Indo Nippon (supra) was 1989-90, which is again before the insertion of section 145A. It is interesting to note that during the course of arguments 26 ITA No.5120/Del/2010 ITA No.2441/Del/2012 before the Hon'ble Bombay High Court, the ld. counsel for the Department brought to the notice of Their Lordships that section 145A stood inserted and, hence, the exclusive (net) method followed by the assessee was impermissible. The Hon'ble High Court considered this aspect in the last para of its judgment and observed that the insertion of section 145A w.e.f. the AY 1999-2000 had no bearing as the assessment year under their consideration was 1989-90. In the light of this position, it becomes imperative to give effect to the provisions of section 145A of the Act, which are applicable to the year under consideration and are binding without any exception.
4.20. Now we come to giving effect to sections 145A and 43B under the `Inclusive method'. In line with our discussion made above while dealing with PLA component of excise duty, we direct the AO to first recast Profit and loss account of the assessee by taking the figures of purchase, sale and opening and closing stocks at the value inclusive of tax or duty etc., so as to give effect to the mandate of section 145A. Once this is done, then it will be the turn of giving effect to the mandate 27 ITA No.5120/Del/2010 ITA No.2441/Del/2012 of section 43B, which requires the granting of deduction of tax or duty etc. on payment basis. This can be done by allowing deduction for that part of the Modvat credit separately u/s 43B of the Act, which has not been finally deducted.
4.21. We have understood Modvat credit in three parts in the example given above while discussing it under the exclusive method, viz., Rs.7 which is utilized Modvat and finished goods sold; Rs. 2 which is utilized Modvat but finished goods in stock at the end of the year; and Re.1 which is unutilized Modvat at the end of the year. Now under the `Inclusive method', the price of duty paid input/raw material will be taken at full price inclusive of Rs.10. In that view of the matter, the assessee can be said to have initially claimed deduction for Rs.10. Out of total Modvat credit of Rs.10 received during the year, a sum of Rs.3 has two components, viz., Rs. 2 as a part of purchases of raw materials and also simultaneously a part of the corresponding finished goods in closing stock; and Re. 1 as a part of purchases of raw materials and also simultaneously a part of the corresponding raw materials in closing 28 ITA No.5120/Del/2010 ITA No.2441/Del/2012 stock. Though apparently it appears that the assessee gets deduction of Rs.3 also by way of higher value of purchase of raw material, but the reality is different. When the figures of closing stock of finished goods and raw material also include Rs.3, then in fact, there is no deduction of Rs.3, because debit to the Profit and loss account through increased purchase value gets neutralized with the credit to the Profit and loss account with increased value of closing stock. This enhanced value of closing stock inclusive of Rs.3 will become opening stock of the succeeding year, thereby obliterating the effect of deduction of Rs.3. When such goods are sold or utilized and sold in the next year, the sale price will be realized which will be inclusive of Rs.3 excise duty component also. So in fact, there is no actual deduction of Rs.3 during the year under consideration because of the increased purchase price getting counterbalanced with the equal amount of loading in the value of closing stock. After having increased the value of purchase and closing stock in terms of section 145A with the amount of Modvat credit, now there is a separate requirement of giving effect to the mandate of section 29 ITA No.5120/Del/2010 ITA No.2441/Del/2012 43B, which requires the granting of deduction of Rs.10 in the year of payment. A sum of Rs.7 included in purchase value as a part of Rs.10, gets eventual deduction because it is exhausted as the same is not taken as an asset to the balance sheet, either directly as Unutilized Modvat, or indirectly as part of closing stock. But in so far as the amount of Rs.3 is concerned, it does not get final deduction because of the same being a part of assets in balance sheet. Deduction for Modvat credit by means of its inclusion in Purchase value of raw materials can be treated as allowed by way of debit to the Profit and loss account only when it also gets exhausted. If, even after a debit to the Profit and loss account, the amount appears in balance sheet, in one form or the other, the deduction cannot be said to have been actually allowed on payment, till it is exhausted and gets removed from the balance sheet also. In such circumstances, the amount of unexhausted (not necessarily only unutilized) Modvat credit - i.e. which appears in balance sheet either in the form of increased value of closing stock (Rs.2 in our example) and increased value of raw material representing unutilized Modvat credit 30 ITA No.5120/Del/2010 ITA No.2441/Del/2012 (Re.1 in our example) - calls for separate deduction in terms of section 43B. We, therefore, set aside the impugned order and direct the AO to first recast the assessee's Profit and loss account on inclusive basis, then allow deduction for the equivalent amount of Modvat credit as represented by Rs.3 in our example. The AO should also make sure that the equivalent of Rs.3 allowed as deduction on payment basis u/s 43B in this year should not get deducted in the next year and further, the corresponding amount of deduction allowed u/s 43B in the preceding year, should also be separately added to the income of the current year. 4.22. The next item of disallowance u/s 43B in dispute is the amount of excise duty paid under protest to the tune of Rs.45 lac. The facts apropos this issue are that certain demand was created against the assessee by the Excise Department. The assessee paid the same albeit under protest by challenging the levy of demand. Deduction claimed for such demand under exclusive method was disallowed by the AO on the ground that the assessee was contesting this liability and there was no finality regarding this liability.
31 ITA No.5120/Del/2010 ITA No.2441/Del/2012 4.23. After considering the rival submissions and perusing the relevant material on record, we find that the Tribunal, in the assessee's own case for earlier years, has decided this issue in the assessee's favour which position has been admitted by the Revenue vide the AO's letter dated 24.7.2015. We note that the Hon'ble Supreme Court in CIT vs. Bharat Carbon and Ribbon Manufacturing Company Pvt. Ltd., (1999) 239 ITR 505 (SC), has held that a statutory liability accrues on issuance of demand notice. It has further been held that raising of further dispute by the assessee is not relevant. In view of this judgment, it becomes clear that the issuance of notice of demand by the competent Excise authority makes the amount otherwise deductible by means of incurring the liability. This satisfies the condition of section 43B which provides for deduction on actual payment in respect of an otherwise deductible amount. Since the amount in question has been paid during the year, it qualifies for deduction in terms of section 43B under the exclusive method. Thus on one hand deduction for excise duty paid under protest is available in the year of payment under the exclusive method, the same 32 ITA No.5120/Del/2010 ITA No.2441/Del/2012 amount cannot be allowed to get deducted once again on the finalization of the dispute with the Excise department on its transfer to Excise duty account. Simultaneously, the amount of excise duty paid under protest in earlier years getting deduction u/s 43B calls for inclusion in the total income of the current year on the removal of the amount from Excise duty paid under protest account.
4.24. We have noticed above that section 145A is applicable to the year under consideration and accordingly, income is required to be determined by switching over to the `Inclusive method' and then allowing deduction u/s 43B on payment basis. We, therefore, set aside the impugned order and direct the AO to first recast the assessee's Profit and loss account on inclusive basis, inter alia, by including the amount of excise duty paid under protest to the purchase value of goods. If such goods have been consumed during the year and corresponding finished goods manufactured and sold, the matter will end there as it will amount to grant of deduction. If however, the finished goods so manufactured with the use of such protested excise duty paid raw material are in 33 ITA No.5120/Del/2010 ITA No.2441/Del/2012 closing stock or in the shape of raw material only, then apart from enhancing the value of purchase and finished goods or raw materials, as the case may be, the assessee will be entitled to separate deduction of this amount u/s 43B. This will be done again with the same rider that in the year of settlement of dispute, this amount of separate deduction allowed in the current year, should be separately offered for taxation and further the corresponding amount of duty paid under protest in earlier years should be separately offered for taxation in the computation of income for the current year, if such earlier disputes on which excise duty was paid under protest, get resolved.
II. Customs duty 5.1. Now, we take up the disallowances u/s 43B on items of customs duty. First is customs duty of Rs.8,65,07,635/- paid on import of components for which exports had been made by the year end and Rs.1,47,142/- for which exports had not been made by the year end. These amounts claimed by the assessee as allowable u/s 43B of the Act, were disallowed by the AO. It is common submission that the tribunal 34 ITA No.5120/Del/2010 ITA No.2441/Del/2012 has allowed deduction in respect of these amounts in the preceding years.
5.2. Here again it is noticed that the assessee has also followed `Exclusive method'. In such circumstances, this method needs to be substituted with `Inclusive method' as mandatorily required u/s 145A. We, therefore, direct the AO to recast Profit and loss account as per `Inclusive method' as discussed above and then allow deduction in respect of the customs duty paid in accordance with section 43B, if not getting deducted in such recast. Customs duty paid on import of components for which exports had/had not been made by the year end under the inclusive method would now stand included in the value of imports and accordingly get deducted. Customs duty of Rs.8,65,07,635/- paid on import of components for which exports had been made by the year end would not require any separate deduction as the same will be debited to the Profit and loss account and also get exhausted. As regards the other amount of customs duty for which exports had not been made by the year end would represent the amount though debited to the Profit 35 ITA No.5120/Del/2010 ITA No.2441/Del/2012 and loss account by means of increased input cost but not getting exhausted as the same also appearing in the balance sheet through the enhanced value of closing stock. Separate deduction is required to this extent u/s 43B of the Act. At the same time, we also direct the AO to make sure that such amount separately getting deducted in this year does not get deduction once again in the next year. In the like manner, the last year's similar deduction separately allowed should be taxed in the computation of income of the current year.
5.3. Next item is customs duty (CVD) paid to be adjusted against excise duty payable on finished products amounting to Rs.15,59,44,832/-. Simultaneous with this, there is another item of Rs.5,40,40,258/-, which is the amount of customs duties on goods in transit/under inspection. The assessee claimed deduction for the above amounts u/s 43B of the Act, which the AO denied.
5.4. We have heard the rival submissions and perused the relevant material on record. The ld. AR contended that this issue has been decided in earlier years in the assessee's favour by the Tribunal. He 36 ITA No.5120/Del/2010 ITA No.2441/Del/2012 further referred to the judgment of the Hon'ble Delhi High Court in CIT vs. Samtel Colour Ltd. (2009) 184 Taxman 120 (Del) in which it has been held that advance customs duty paid in the year in question is an admissible deduction u/s 43B. In our considered opinion, there can be no dispute on the otherwise availability of deduction of advance customs duty paid by the assessee, which has to be allowed in the year of payment. In this judgment also, the Hon'ble High Court has noticed vide para 3 that the provisions of section 145A were not applicable as the assessment year under consideration was 1995-96. In view of the detailed discussion supra with reference to the applicability of section 145A to the year in question, there can be no escape from valuation of purchase, sale and inventories under the inclusive method. We, therefore, direct the AO to recast Profit and loss account under `Inclusive method' as per the mandate of section 145A, thereby, inter alia, increasing the purchase value with the above customs duty. Then the AO will allow separate deduction for the above referred sums to the extent not getting eventually deducted separately by way of increased 37 ITA No.5120/Del/2010 ITA No.2441/Del/2012 purchase price, as has been discussed above. At the same time, we also direct the AO to make sure that such amount separately getting deducted in this year does not get deduction once again in the next year. In the like manner, the last year's similar deduction separately allowed should be taxed in the computation of income of the current year. 5.5. Next item is Customs duty paid under protest amounting to Rs.1,34,25,787. We have discussed similar issue supra while dealing with `Excise duty paid under protest' by holding that first the Profit and loss account be recast as per `Inclusive method' in terms of section 145A and then some adjustments as stated above be separately made. Such directions are fully applicable pro tanto to the customs duty paid under protest. The AO is directed to follow the same.
5.6. The last aspect of disallowance u/s 43B is customs duty included in closing stock amounting to Rs. 22,52,46,693/-. The assessee claimed deduction for this sum, which was denied by the AO. The ld. AR stated that the assessee followed `Inclusive method' of accounting on this issue. The claim of the assessee is that the amount of Rs.22.52 crore, 38 ITA No.5120/Del/2010 ITA No.2441/Del/2012 being the amount of customs duty paid on the import of raw material/inputs, was included in the cost of material and also as a part of closing stock, thereby levelling both the debit and the credit sides of the Profit & Loss Account. The ld. AR contended that such amount of customs duty is separately deductible in terms of section 43B of the Act. He also submitted that this issue is settled in the assessee's favour in earlier years.
5.7. We have elaborately discussed this aspect supra in the context of excise duty included in the value of closing stock. In principle, we hold that the amount of customs duty of Rs.22.52 crore is allowable in the year in question, but, the AO is directed to first verify the argument of following the `Inclusive method' and then allow deduction u/s 43B in the manner discussed above, if the same did not get eventually allowed. The AO should further make it is sure that no double deduction is allowed on this score, either in the current year with the last year's amount getting separately deducted u/s 43B or in the next year with the current year's amount getting separate deduction.
39 ITA No.5120/Del/2010 ITA No.2441/Del/2012 III. Adjustments on account of last year's disallowances u/s 43B. 6.1. Now we take up ground no. 3.5 along with ground nos. 4 to 6.1. The amount in dispute as per ground no. 3.5 is Rs.71,63,89,449 representing the amount of last year's unutilized Modvat credit which was claimed by the assessee as deductible u/s 43B, but disallowed by the AO and such disallowance came to be affirmed by the tribunal. While allowing deduction for the current year's unutilized Modvat credit at the end of the year amounting to Rs.48,53,55,419, we have noticed that the position of law has undergone change and now this amount is deductible for the year in question. The assessee contends that a sum of Rs.71,63,89,449 is the amount of deduction claimed by it u/s 43B in the preceding year and simultaneously offered for taxation in the current year voluntarily. However, in view of the sustenance of disallowance of this sum by the tribunal in the preceding year, the assessee claims that the same amount offered for taxation in the current year, be correspondingly reduced from its total income.
40 ITA No.5120/Del/2010 ITA No.2441/Del/2012 6.2. We agree with the argument that since the amount of unutilized Modvat credit stood disallowed in the preceding year by the tribunal on the premise that the same before its set off cannot be treated as tax paid, then the same should be excluded from the total income of the current year, if voluntarily offered by the assessee for taxation. The AO is directed to verify this aspect and allow deduction for this sum, if the same was eventually disallowed in the preceding year and the assessee once again offered it for taxation in the computation of total income for the current year.
6.3. Ground nos. 4 to 6.1 deal with a sum of Rs. 1,41,59,08,897, which has been stated to be a total of certain amounts claimed by the assessee as deductible in the preceding year u/s 43B as excise duty and customs duty and voluntarily offered for taxation in the current year's income. The ld. AR contended that since such deductions have been denied by the AO, the corresponding offering of the same to tax in the current year, be eliminated.
41 ITA No.5120/Del/2010 ITA No.2441/Del/2012 6.4. We agree with the ld. AR that one amount cannot be taxed twice. It is but natural that if an amount claimed as deduction by the assessee in the earlier year has not been allowed, then on the assessee's suo motu offering of it as an item of income for the current year on the strength of deduction claimed in the earlier year, which finally stands denied, should not be charged to tax. On being called upon to furnish the detail of such amount, it was stated that it, inter alia, includes a sum of Rs.71,63,89,449, which is subject matter of ground no. 3.5, that we have discussed immediately hereinbefore. We note that apart from the sustenance of disallowance of Rs.71.63 crore in the preceding year, there is no other disallowance u/s 43B which has been upheld by the Tribunal. It is overt that all other disallowances made by the AO u/s 43B have been deleted by the tribunal. The ld. AR could not furnish any detail of the remaining amount of Rs.69.96 crore (Rs.141.59 crore minus Rs.71.63 crore), allegedly finally disallowed u/s 43B of the Act by the tribunal in the preceding year. It is simple and plain that if the tribunal has allowed deduction for the amounts disallowed by the AO in the 42 ITA No.5120/Del/2010 ITA No.2441/Del/2012 preceding year, then the same are rightly chargeable to tax in the current year. This ground is, therefore, dismissed, subject to our decision on ground no. 3.5 in granting deduction of Rs.71,63,89,449, representing last year's unutilized Modvat credit which was claimed by the assessee as deductible u/s 43B but disallowed by the AO and also the tribunal. B. ROYALTY I. Transfer pricing adjustment of Royalty for licensed trademark 7.1. The assessee has challenged the addition of Rs.1,27,19,59,816/- made by the AO on account of transfer pricing adjustment. 7.2. Briefly stated, the facts of this ground are that the assessee chose Suzuki Motor Corporation, Japan (SMC) as its partner in 1982 with SMC acquiring 26% equity stake in the company Maruti Udyog Ltd. (MUL). In 1992, SMC increased its share to 50%. SMC held 54.2% in the company in the previous year relevant to the assessment year under consideration. The assessee, MUL, is 43 ITA No.5120/Del/2010 ITA No.2441/Del/2012 engaged in manufacturing of passenger cars primarily for sale in Indian market. It also exports vehicles to other countries. The assessee reported certain international transactions which have been enumerated on page 18 of the order of the Transfer Pricing Officer (TPO). The assessee selected the Transactional Net Margin Method (TNMM) as the most appropriate method with the Profit Level Indicator (PLI) of Operating Profit/Sales (OP/S). The assessee computed its OP/S at 11.19%, as against (-) 4.43% of certain comparables chosen by it. The assessee is a licensed manufacturer of cars in India. For use of the licence given by SMC, the assessee paid a total royalty of Rs.254,39,19,633/- divided into two parts, namely, Running royalty of Rs.250.84 and Lumpsum royalty of Rs.3.57 crore. Apart from that, the assessee also paid Rs.20.00 crore to its AE towards Technical/other services. The assessee treated running royalty as revenue expenditure in its return of income. Lumpsum royalty was initially treated as capital expenditure, but 44 ITA No.5120/Del/2010 ITA No.2441/Del/2012 during the course of assessment proceedings, the same was also claimed as revenue expenditure. On a reference made by the AO for determination of the arm's length price (ALP) of the international transactions, the TPO observed that the assessee had undertaken tremendous efforts and incurred huge expenditure on market development and promotion of 'Maruti' and 'Suzuki' brands in India over a period of time, but, had not received any compensation from its AE for meeting huge expenditure incurred on the brand development as well as market development. He further observed that Suzuki trade mark (S) was registered in India several decades ago, but, was not used and, hence, did not have any brand value. He also noticed on page 27 of his order that the assessee carried out huge R&D for development of its products in India and during the year in question alone, a sum of Rs.67.10 crore was spent on it. Since the assessee is only a licensed manufacturer, the TPO observed that R&D activity should have been carried out by the 45 ITA No.5120/Del/2010 ITA No.2441/Del/2012 licensor and not the assessee-licensee. On being called upon to explain as to why the royalty expenses be not disallowed for the reasons given in his order for the AY 2005-06, the assessee submitted that the payment of royalty was made as per the licence agreement which is an indivisible contract and the same does not specifically spell out consideration for the use of technical know- how and consideration for the use of trademark of SMC. The TPO considered licence agreement dated 9.1.2001 between the assessee and SMC. After reproducing relevant clauses from this Agreement, he held that the assessee paid royalty to SMC towards licence for manufacture, sale and after-sales services. He further noticed that clauses 3.02 and 3.03 of the Agreement stipulate that improvement and modification of the Products and Parts by the assessee shall be treated as licensed information whose legal ownership will get transferred to the SMC and the assessee will be compensated for such improvements and modifications. He noticed that no such 46 ITA No.5120/Del/2010 ITA No.2441/Del/2012 compensation was given despite the assessee incurring huge R&D expenses. The TPO came to hold that 'Suzuki' trademark of the AE was piggybacked on `Maruti', the trademark of the assessee, without any compensation to the assessee. After going through all the relevant clauses of the Agreement, the TPO held that the total royalty of Rs.254.39 crore paid by the assessee to SMC was for use of both the `Licensed Information' as well as `Licensed trademarks'. Since no bifurcation of royalty payment was given, he segregated it into two equal parts, viz., Rs.127.195 crore towards manufacturing licence, that is for the use of `Licensed information' and Rs.127.195 crore towards sale and after sale service licence, that is for use of `Licensed trademark'. This 50:50 segregation was done on the ground that both manufacturing and sale functions were equally important for running a business. He took up the determination of the ALP of the royalty paid for use of `Licensed trademark'. It was noticed that the assessee used co-branded trade mark i.e., 'Maruti- 47 ITA No.5120/Del/2010 ITA No.2441/Del/2012 Suzuki.' Considering the fact that the assessee's trademark of 'Maruti' has acquired status of a super brand, whereas 'Suzuki' is relatively weak brand in the Indian market, the TPO held that the ALP of royalty paid to the AE was Nil. In his opinion, the assessee ought to have been compensated by SMC for use of its trade mark 'Maruti' in a co-branded trademark, as against the AE charging royalty of Rs.127.195 crore from the assessee for use of its 'Suzuki' brand in a co-branded trademark. That is how, the TPO proposed transfer pricing adjustment of Rs.127.195 crore on account of royalty payment for use of `Licensed trademark'. The Dispute Resolution Panel (DRP) affirmed the view taken by the AO in the draft order on this issue, which was based on the order of the TPO. This led to the addition of Rs.127.195 crore, which has been assailed before us. At this stage, it is relevant to mention that the TPO did not dispute the ALP of royalty paid for `Licensed Information', whose transacted value was computed by him at 48 ITA No.5120/Del/2010 ITA No.2441/Del/2012 Rs.127.195 crore. Instantly, we are taking up the ALP of the royalty payment for use of `Licensed trademark', for which transfer pricing adjustment has been made.
7.3. The ld. counsel for the assessee contended that there is a composite agreement between the assessee and SMC for use of the licensed information and licensed trademark and royalty is also one consolidated amount for use of both, which has been split in two parts, namely, lumpsum royalty and running royalty. Taking us through the Agreement between the assessee and SMC dated 9.1.2001 (a copy of which has been placed on page No.1301 onwards of paper book no. 4), it was pointed out that royalty is a one merged payment for use of the licensed information and licensed trademarks and the TPO was not right in artificially splitting the same into two parts. Relying on the order dated 2.8.2013 passed by the Tribunal in the assessee's own case for the AY 2005-06 (ITA No.5237/Del/2011), the ld. AR contended that in 49 ITA No.5120/Del/2010 ITA No.2441/Del/2012 the preceding year also the TPO bifurcated total royalty payment into two parts, namely, 50.58% for use of technology and remaining 49.42% for use of brand name, which view has been turned down by the tribunal by holding that the entire payment of royalty under the licence agreement was a consideration for use of both. 7.4. Au contraire, the ld. DR vehemently justified the action of the TPO in drawing a conclusion that 50% of total royalty payment was for use of licensed information and the remaining 50% for use of licensed trademark. He also took us through the same Agreement dated 9.1.2001 and submitted that clause 1.06 provides that the 'Licensed Trademark' shall mean the trademarks owned by Suzuki listed in Exhibit-B and other Indian trademarks which Suzuki may, hereafter, obtain relating to the Products and Parts. It was contended that clause 2.03 of the Agreement provides for use of 'Licensed Trademarks' and co-branded trademark of 'Maruti- Suzuki.' It was, therefore, put forth that it is not only co-branded 50 ITA No.5120/Del/2010 ITA No.2441/Del/2012 trade mark of `Maruti-Suzuki' which has been under the Agreement, but also the 'Licensed Trademarks', which exclusively belong to Suzuki. Once the trademark of SMC has been allowed to be used to the assessee on its products, either separately or as a part of co- brand, and further a part of the royalty has been admittedly also paid for the use of licensed trademark, he argued that it could not be said that there was no separate consideration for use of licensed trademark embedded in total royalty payment. It was stated that if some part of royalty is relatable to the use of licensed trademark, then that cannot be lost sight of. He insisted that the Agreement impliedly provides for separate royalty for use of the licensed trademark. This was corroborated by stating that the Agreement itself divides payment of royalty as per Article 6 into two parts, the first being lumpsum and the second being running royalty. He emphasized that the 'Lumpsum royalty' is a consideration exclusively for the use of licensed information which, as per this 51 ITA No.5120/Del/2010 ITA No.2441/Del/2012 Agreement, is 20 crore yen, payable in three instalments, namely, the first instalment of 6.50 crore yen within 30 days of the effective date; 6.5 crore yen to be paid not later than nine months after the effective date or the day on which Suzuki transfers to Maruti a substantial part of the documentation relating to such model of products, whichever is later; and the remaining part of 7 crore yen to be paid not later than 18 months after the effective date or 'the date of start of production of such model of products by Maruti, whichever is later.' In the light of this clause, which is uniform in all other Agreements entered into between the assessee and SMC, the ld. DR contended that the 'Lumpsum royalty' is exclusively towards the use of licensed information, which is payable only on the occasion of receipt of licensed information. He further stated that apart from paying such lumpsum royalty for use of licensed information, the assessee also paid a sum of Rs.20,00,29,488/- to SMC towards 'Technical/other services'. He still further pointed out 52 ITA No.5120/Del/2010 ITA No.2441/Del/2012 that apart from paying such lumpsum royalty and technical fees, the assessee also incurred huge R&D expenditure which, in the instant year alone, stands at Rs.67.1 crore, which has gone into development/upgradation of the licensed information whose intellectual property rights also vests with SMC. He summed up his position by stating that the three sums, namely, lumpsum royalty, R&D expenses incurred by the assessee and the payment of Rs.20.00 crore towards 'technical/other services' pertain exclusively to the use of `Licensed information' and Running royalty exclusively pertains to the use of `Licensed trademark'. He thus argued that the TPO was more than reasonable in apportioning royalty of Rs.127.195 crore to the use of brand as against the actual running royalty of Rs.250.81 crore paid by the assessee for use of licensed trademark. In the alternative, he argued that if the tribunal was not satisfied with 50:50 division of royalty by the TPO, then the matter may be sent back for apportioning royalty for use of licensed 53 ITA No.5120/Del/2010 ITA No.2441/Del/2012 trademark on some rational basis. The ld. DR contended that since the assessee's own trade mark, namely, 'Maruti' has much higher brand value than the trade mark 'Suzuki' of SMC, which is relatively weak in India, the entire amount of royalty paid by the assessee to its AE towards the use of 'licensed trade marks' was rightly disallowed by the AO as having Nil ALP.
7.5. We have considered the rival submissions and perused the relevant material on record. It can be observed that the TPO has attributed a sum of Rs.127.195 crore towards royalty for use of licensed trademarks, whose ALP has been determined at Rs. Nil. In doing so, he relied on his order passed for the immediately preceding year. In such earlier year, the TPO bifurcated total royalty into two parts, namely, 50.58% for use of licensed information and 49.42% for use of licensed trade mark. It is not disputed that all the Agreements under which the assessee paid royalty to its AE during the year are identically worded. Clause 6 of 54 ITA No.5120/Del/2010 ITA No.2441/Del/2012 the Agreement dated 25.3.2006 deals with the consideration to be paid, which is in two parts, namely, Lumpsum royalty and Running royalty. The bifurcation between lumpsum and running royalty is not based on use of licensed information and licensed trademark. It is a quid pro quo for use of both in a cumulative manner. The finding of the tribunal in para 11 of its order for the immediately preceding year is : `that royalty thus paid by the assessee to SMC constitute a single/inseverable/indivisible contract/package which provided the assessee the exclusive right and licence to manufacture and to sell the licensed product for a specified limited duration'. In para 13, the Tribunal observed that: 'the TPO has rewritten the agreement/transaction undertaken by the assessee by artificially segregating the single transaction of payment of royalty into two transactions of payment of royalty for use of brand name and for use of technology.' In a nutshell, these paras indicate that the tribunal has treated total royalty payment as a common consideration for use 55 ITA No.5120/Del/2010 ITA No.2441/Del/2012 of both, namely, licensed information and licensed trademarks, which is incapable of bifurcation. At the same time, it is also equally true that some observations in the tribunal order give impression that the Bench attributed the entire royalty payment to the use of `Licensed information'. Given the face off between such observations, we are more inclined to go with the finding about the royalty attributable to the use of both the licensed information and the licensed trademarks. It is so for the reason that the Agreement also provides like that, which has been discussed elsewhere in this order. The tribunal further noticed in para 9.2 of its order that the co-branded trade mark, 'Maruti-Suzuki' is being used since inception of the company. In para 14, the tribunal agreed with the assessee's submissions : `that Suzuki brand is an international renowned global brand. This can be substantiated by the Report of top 500 brands available on internet.' That is how in para 17, the Tribunal deleted the disallowance made by the AO on the basis of 56 ITA No.5120/Del/2010 ITA No.2441/Del/2012 the TPO's conclusion that the payment of royalty towards use of licensed trademark was not warranted.
7.6. Thus it is manifest that the tribunal in the immediately preceding year has held two things. First that the payment of royalty under the Agreement is both for the use of licensed information and licensed trademark and there can be no division of royalty payment; and second that brand Suzuki is valuable and not worthless as was held by the TPO. In so far as the first aspect of bifurcation of royalty payment into two parts is concerned, although we find that the arguments put forth by the ld. DR are not absolutely without foundation, yet, the principle of consistency, laid down by the Hon'ble Supreme Court and Hon'ble High Courts in several judgments, persuades us to go with the view taken by the tribunal in its order for the A.Y. 2005-06, more specifically because the TPO has also relied on his finding given for the AY 2005-06 in arriving at the decision taken against the assessee in the extant year. As 57 ITA No.5120/Del/2010 ITA No.2441/Del/2012 regards the second aspect, the ld. DR has not brought on record any further material to demolish the finding given by the tribunal in the earlier year about the brand `Suzuki' having substantial value and the royalty payment at ALP.
7.7. Addition on account of transfer pricing adjustment can be made by making a comparison between the transacted value of an international transaction and its ALP. Thus it is clear that the availability of the transacted value of an international transaction is sine qua non. If such transacted value is either not separately available or cannot be precisely determined from a combined value of a number of international transactions, then the entire exercise of determining ALP fails. Instantly, we are confronted with such a peculiar situation. There is no separate value of the international transaction of royalty for use of licensed trademark and the tribunal has held in the earlier year that it is a payment of inseparable royalty for use of both the licensed information and the licensed trademarks. 58 ITA No.5120/Del/2010 ITA No.2441/Del/2012 In such circumstances and respectfully following the order of the tribunal for the immediately preceding year, we order for the deletion of the addition of Rs.127.195 crore on account of transfer pricing adjustment of royalty for use of licensed trademark. II. Royalty for Licensed information whether capital expenditure?
8.1. The next issue is against the disallowance amounting to Rs.95,98,09,735/- made by the AO on account of royalty paid. We have noticed above that out of total royalty of Rs.254.39 crore paid by the assessee during the year, the TPO attributed Rs.127.195 crore to the use of licensed trade marks, for which he made transfer pricing adjustment. This issue has been discussed hereinabove. The remaining amount of Rs.127.195 crore was attributed by the TPO to the use of licensed information, which was accepted at ALP. However, the AO treated this amount as an expenditure of capital nature. After allowing suitable depreciation, the AO made 59 ITA No.5120/Del/2010 ITA No.2441/Del/2012 disallowance of Rs.95.98 crore. The assessee is aggrieved against this addition.
8.2. We have heard the rival submissions and perused the relevant material on record. It is noticed that in all the earlier years before assessment year 2005-06, the AO has consistently considered running royalty as deductible in full and capitalized the lumpsum royalty subject to depreciation. The assessee also initially claimed deduction for the running royalty and capitalized the lumpsum royalty of Rs.3.57 crore. However, during the course of assessment proceedings, it was claimed that the entire amount of royalty paid, inclusive of lumpsum royalty, was of the revenue nature and, hence, deductible in full. The AO also deviated from his earlier consistent stand and treated the entire portion of the royalty for use of licensed information as capital expenditure. Now, the question before us is whether the amount of royalty on licensed information, consisting of running and lumpsum royalty, is revenue or capital expenditure? 60 ITA No.5120/Del/2010 ITA No.2441/Del/2012 8.3. Before reaching any conclusion in this regard, it is paramount to note the relevant clauses of the Agreement entered into by the assessee, under which payment of royalty for licensed information has been made during the year in question. Since all these Agreements are, mutatis mutandis, identically worded, we take up Agreement made by the assessee on 25.3.2006 with SMC, a copy of which has been placed at pages 1405 onwards of the paper book. First page of the Agreement provides that Suzuki has granted to Maruti 'licenses for manufacture and sale of certain models of Suzuki four wheel motor vehicle, and whereas, Maruti has requested Suzuki to grant a license for an additional Suzuki model called ` YL6', and Suzuki has agreed to do so pursuant to the terms and conditions hereinafter set forth in this Agreement.' This indicates that the Agreement is for grant of licence and not for outright sale. Clause 1.04 defines 'Licensed Information' to : `mean any and all technical information, whether patented or not, including know- 61 ITA No.5120/Del/2010 ITA No.2441/Del/2012 how, trade secrets and other data (including all drawings, prints, machines and material specifications, engineering data and other information, knowledge and advice) which Suzuki now has..... relating to the engineering, design and development, manufacture, quality control, of Products and Parts and which may be supplied by Suzuki to Maruti ...'. This clause indicates that the Licensed Information is for manufacturing of Product and Parts by the assessee and not for setting up of factory by the assessee. Article 2 of the Agreement gives `Scope of license'. As per this clause, Suzuki has agreed to provide technical assistance and licence necessary for engineering, design, development and manufacture, etc., of Products and Parts. It is further relevant to note that the use of the Licensed Information to the assessee is a 'non-exclusive right.' This Article further provides that Maruti shall have the right to sub-license the rights granted as per this Agreement to other entities, who will manufacture parts for supplying them only to 62 ITA No.5120/Del/2010 ITA No.2441/Del/2012 Maruti for the manufacture of Products of Maruti, and, that too, with the prior written consent of Suzuki. This Article, therefore, makes it clear that the licence given by Suzuki for use of licensed information is on non-exclusive basis and further Maruti has no authority to sub-licence the same except for getting the parts manufactured by other entities for supply to Maruti alone for the manufacture of Products in accordance with this Agreement. Clause 2.02 of the Agreement states that : `Maruti recognizes and acknowledges Suzuki's ownership and validity of the Licensed Information ....'. Article 3 of the Agreement provides that Suzuki agrees to make available to Maruti such licensed information which is to be utilized for manufacture of products. Clause 3.02 of the Agreement deals with `Improvements by Maruti'. It states that if at any time during the term of this Agreement, Maruti discovers or acquires any improvement with respect to Products or Parts, it shall give to Suzuki full information, instructions, knowhow and assign 63 ITA No.5120/Del/2010 ITA No.2441/Del/2012 ownership of the same to Suzuki and the same shall be considered as `Licensed Information'. This clause of the Agreement not only stipulates that Suzuki will supply the licensed information only for use by Maruti, but, also that any improvements to such licensed information made by Maruti, will also vest with Suzuki. Clause 3.04 of the Agreement makes it clear that Maruti shall not use the licensed information made available to it by Suzuki pursuant to this Agreement directly or indirectly in connection with the manufacture of any products other than the Products and Parts agreed under this Agreement. Article 3.10 of the Agreement is a Confidentiality clause which provides that all licensed information supplied to and acquired by Maruti under this Agreement shall be kept by Maruti in confidence and shall not disclose the same to any other party at any time during the life of this Agreement. Clause 5.04 provides that Maruti is not authorized to use nor shall Maruti use the word 'Suzuki' or any word similar thereto except as specifically 64 ITA No.5120/Del/2010 ITA No.2441/Del/2012 authorized under this agreement. Article 7 contains term of the Agreement, which has been fixed at ten years and, further extendable by a period of five years. Clause 7.05 of the Agreement has been captioned as 'Effect of termination.' It provides that upon any expiration, termination or cancellation of this Agreement, Maruti shall immediately return to Suzuki the licensed information or shall destroy the same at Suzuki's instructions.
8.4. An overview of the above clauses of the Agreement makes it patent that the Licensed Information is for manufacture of Products and Parts and not for setting up of the assessee's factory. The use of Licensed information has been allowed by Suzuki, which is non- exclusive to the assessee and, further, the assessee cannot sub- licence the same to a third party except for getting parts manufactured to be used by it in manufacture of the Products. The assessee has been simply given a licence to use the Licensed Information for a period of ten years and the assessee recognizes 65 ITA No.5120/Del/2010 ITA No.2441/Del/2012 Suzuki's ownership of the Licensed Information. The assessee is not entitled to use the Licensed Information for any products other than those stipulated in the Agreement and, further, there is a Confidentiality Clause which prevents the assessee from disclosing the Licensed Information to a third party. Upon termination, the assessee is not entitled to the use of Licensed Information and is obliged to return the same to Suzuki. All the above features of the Agreement make it unequivocal that what the assessee has acquired under this Agreement is a right to use the `Licensed Information'. There is no outright purchase by the assessee of the `Licensed Information'. In fact, such licensed information is required to be returned to Suzuki upon termination of the Agreement. The `right to use' the licensed information, has certain restrictions put on by Suzuki, which the assessee cannot violate. The assessee is under obligation to maintain confidentiality of the Licensed Information. A bird's eye view of all the above clauses makes it vivid that the 66 ITA No.5120/Del/2010 ITA No.2441/Del/2012 royalty payment is `for use of' the Licensed Information and not `for acquisition as its owner'. In this view of the matter, there can be no scope for treating the royalty paid for the `licensed information' as a capital expenditure.
8.5. The ld. DR has relied on certain decisions, which categorize payment for use of technical know-how etc. as a capital expenditure. Similarly, the ld. AR has also relied on certain decision which mark such payment as a revenue expense. In all these decisions, the dividing line is whether the consideration is for purchase of technical information, know-how information, designs and drawings, etc., or for its use. If it is for use alone, then it is revenue and vice versa. Recently, the Hon'ble jurisdictional High Court in CIT vs. Hero Honda Motors Ltd. (2015) 372 ITR 481 (Del), on consideration of the relevant clauses of the agreement before it, which considerably match with the Agreement under consideration, has held that the payments made for Model fee (which is equivalent 67 ITA No.5120/Del/2010 ITA No.2441/Del/2012 of Lumpsum royalty in our case) and Running royalty are revenue expenses. In this judgment, the Hon'ble jurisdictional High Court has considered several judgments of the Hon'ble Supreme Court and Hon'ble High Courts and on consideration of their cumulative effect, it has come to the conclusion that both the amounts are revenue in nature. The Hon'ble Delhi High Court in an earlier judgment in Shriram Refrigeration Industries Ltd. vs. CIT (1981) 127 ITR 746 (Del), has held that the lumpsum royalty is a revenue expenditure. After going through the relevant clauses of the Agreement, we have noted that royalty paid by the assessee is for use of licensed information and no part of the same is towards its acquisition as an owner. In the light of the above discussion, it is absolutely clear that the view canvassed by the AO in treating this amount as capital expenditure, is not sustainable.
8.6. Our above finding decides the nature of royalty payment for use of licensed information as revenue expenditure and not its 68 ITA No.5120/Del/2010 ITA No.2441/Del/2012 quantum part. We have noticed above that the tribunal in its order for the immediately preceding year has also given some observations, which prima facie indicate that the entire amount of royalty is for the use of licensed information. Since we have held the royalty for use of licensed information as revenue expenditure, the quantification aspect becomes irrelevant. It is so because the TPO has held royalty for use of licensed information at ALP. We, therefore, hold that the amount of royalty considered by the AO as capital expenditure should be allowed as a revenue expenditure. At the same time, depreciation allowed by the AO on this amount should be taken back.
III. R&D cess on royalty paid
9. The next ground is disallowance of R&D cess paid amounting to Rs.9,68,47,294/-. Relevant discussion has been made by the AO on page 26 of his final order. The assessee treated the amount of royalty and cess on royalty as revenue expenditure. The AO 69 ITA No.5120/Del/2010 ITA No.2441/Del/2012 disallowed a sum of Rs.9.68 crore after proportionately allowing deduction to the extent of depreciation allowed by him on royalty. There is no dispute on the nature of cess, which is on royalty and has been treated both by the assessee as well as the AO as part and parcel of royalty and accordingly claimed/disallowed in line with the treatment of royalty. Since we have allowed deduction for the entire amount of royalty paid by the assessee during the year by deleting the TP adjustment and also overturning the action of the AO in treating the remaining half part as capital expenditure, the consequential amount of cess on royalty payment automatically becomes deductible. We, therefore, direct to allow deduction of Rs.9.68 crore.
IV. Royalty paid to non-AE 10.1. The next issue raised through Ground No.18.14 is against the transfer pricing adjustment in respect of royalty paid, inter alia, to M/s Auto Chassis International purely for technology/know-how. 70 ITA No.5120/Del/2010 ITA No.2441/Del/2012 The ld. AR contended that total royalty paid by the assessee amounting to Rs.254.39 crore included a sum of Rs.1,09,45,172/- towards licence fees paid to Auto Chassis International, which is a non-associated enterprise. It was argued that such payment to non- AE cannot be benchmarked u/s 92 of the Act.
10.2. After considering the rival submissions and perusing the relevant material on record, we agree in principle that the ALP u/s 92 can be determined only of international transactions, which form the basis for making addition towards transfer pricing adjustment. Ordinarily, an international transaction is a transaction between two or more AEs. If there is a transaction with non-AE that automatically goes out of reckoning for the purposes of processing it u/s 92 of the Act. Further, we do not consider it necessary to consider this issue on merits because in earlier paras we have deleted entire royalty addition made by the AO, comprising of transfer pricing adjustment on account of international transaction of 71 ITA No.5120/Del/2010 ITA No.2441/Del/2012 payment for use of `Licensed trademark'; and payment for use of `Licensed information' treated by him as capital expenditure. The net effect of this deletion is that even if the amount under consideration is paid to AE, still it is deductible. Be that as it may, we find that this ground is otherwise also not sustainable. The reason being that the TPO made transfer pricing adjustment in respect of royalty paid for use of licensed trademark. On the contrary, this amount paid to M/s Auto Chassis International is admittedly for use of know-how and not their trademark. V. Error of the AO in computing disallowable amount of royalty
11. Ground no. 10.5 of the assessee's appeal is against the computation error made by the AO in determining the amount of disallowance at Rs.95.98 crore towards royalty paid for the use of licensed information. In view of our allowing deduction of royalty 72 ITA No.5120/Del/2010 ITA No.2441/Del/2012 in full, this ground challenging the computation error made by the AO in making disallowance, becomes infructuous.
C. SUBSIDY 12.1. The next issue raised in this appeal is against treating subsidy of Rs.32,25,70,213/- as revenue receipt as against the assessee's claim of capital receipt. The assessee received sales-tax subsidy in the form of 50% exemption of sales-tax. Though the amount was initially treated as revenue receipt in the return of income, but the assessee claimed it as capital receipt during the course of assessment proceedings. The assessee submitted that it was a capital subsidy allowed by the Haryana Government for helping it in expansion of industry. In support of its claim of such subsidy as capital receipt, the assessee relied on the judgment of the Hon'ble Supreme Court in CIT vs. Ponni Sugars & Chemicals Ltd. & Ors. (2008) 306 ITR 392 (SC). The AO treated this amount as 73 ITA No.5120/Del/2010 ITA No.2441/Del/2012 revenue in nature and hence taxable. The assessee is aggrieved against the treatment of sales-tax subsidy as revenue receipt. 12.2. We have heard the rival submissions and perused the relevant material on record. Primary question for deciding the nature of any subsidy, as a capital or revenue receipt, is to ascertain the object for which it was given. The mode of its quantification or manner of its disbursement, are irrelevant considerations. When the object of subsidy is to encourage an assessee to set up or expand industry, it assumes the character of a capital receipt. Such subsidy may be given in any form, may be by financing investment in capital asset or giving the amount in cash or by means of a waiver of sales-tax, etc. for a particular period. But, when the object is not to encourage industrialisation but to facilitate the carrying on an existing business more efficiently post its set-up, then it becomes a revenue receipt, irrespective of the form of disbursement. The Hon'ble Supreme Court in Ponni Sugars (supra) has held that : `if the object of the 74 ITA No.5120/Del/2010 ITA No.2441/Del/2012 assistance under the subsidy scheme was to enable the assessee to set up a new unit or to expand the existing unit then the receipt of the subsidy was on capital account'.
12.3. At this juncture, it is imperative to note that the Finance Act, 2015, w.e.f. 1-4-2016 has further enlarged the definition of income given u/s 2(24) by inserting sub-clause (xviii), which reads as under:-
`(xviii) assistance in the form of a subsidy or grant or cash incentive or duty drawback or waiver or concession or reimbursement (by whatever name called) by the Central Government or a State Government or any authority or body or agency in cash or kind to the assessee other than the subsidy or grant or reimbursement which is taken into account for determination of the actual cost of the asset in accordance with the provisions of Explanation 10 to clause (1) of section 43;' 12.4. A reading of the above provision makes it explicit that now subsidy given by the Central Government or a State Government or any authority etc. for any purpose, except where it is taken into account for determination of the actual cost of the asset under Explanation 10 75 ITA No.5120/Del/2010 ITA No.2441/Del/2012 section 43(1), has become chargeable to tax. Even if a subsidy is given to attract industrial investment or expansion, which is a otherwise a capital receipt under the pre-amendment regime, shall be income chargeable to tax, except where it has been taken into account for determination of actual cost of asset in terms of Explanation 10 to section 43(1). As this amendment is prospective, it cannot take effect retrospectively to include the assessment year under consideration.
12.5. Adverting to the facts of the instant case, we find that the assessee was allowed subsidy under Industrial Policy 1999 of the Government of Haryana, a copy of which is available at page 777 of the paper book. The objective of the Industrial Policy has been set out at page 779 which talks of increasing the share of industry by 'attracting new investments and growth of existing industry.' Pursuant to this Industrial Policy, the assessee was given Entitlement certificate under Rule 28C of Haryana Central Sales-tax Rules 1975, a copy of which has been placed at page 871 of the paper book. Para 7 of the Certificate puts condition for entitlement 76 ITA No.5120/Del/2010 ITA No.2441/Del/2012 of subsidy by providing that: 'incentive would be given only in respect of vehicles rolled out of production capacity of 70000 vehicles added as a result of first expansion and not to the production augmented by capacity addition of 30000 vehicles as a result of second expansion.' When we consider section 25A along with Rule 28C of Haryana General Sales-tax Act/Rules, it becomes evident that the object of subsidy is in line with the Industrial Policy of Haryana Government, being 'attracting new investments and growth of existing industry.' In our considered opinion, such subsidy cannot be characterized as anything other than a capital receipt. It has been brought to our notice that the Tribunal, for the immediately preceding assessment year, has also treated similar subsidy as capital receipt. This ground is, therefore, allowed. 77 ITA No.5120/Del/2010 ITA No.2441/Del/2012 D. T.P. ADJUSTMENT OF AMP EXPENSES 13.1. The next ground is against the addition on account of transfer pricing adjustment towards advertisement, marketing and promotion (AMP) expenses.
13.2. Briefly stated, the facts of this ground are that the TPO bifurcated AMP expenses into routine advertisement expenses and non- routine advertisement expenses. Applying the bright line test, the TPO considered three comparables, namely, Hindustan Motors Ltd. (Nil AMP expenses), Mahindra and Mahindra (Rs.54.86 crore advertisement expenses) and Tata Motors Ltd. (Rs.187.25 crore advertisement expenses). He calculated percentage of AMP expenses to gross sales of Hindustan Motors at '0', of Mahindra and Mahindra at 0.61%, and of Tata Motors Ltd. at 0.77%. Average of the percentage of AMP expenses to gross sales of Mahindra and Mahindra and Tata Motors Ltd. was determined at 0.69%. Since the assessee's percentage of AMP expenses to gross sales stood at 1.53%, the TPO proposed TP adjustment of Rs.124.24 crore. Thereafter, he passed an order u/s 154 on the ground 78 ITA No.5120/Del/2010 ITA No.2441/Del/2012 that the average percentage of comparables was inaccurately worked out by omitting 0% of Hindustan Motors Ltd. That is how, he passed order u/s 154 by taking arithmetic mean of three comparables at 0.456% and, recommending the TP adjustment of Rs.158.64 crore. The AO, giving effect to the TPO's order and after going through the directions of the DRP, finally made the said addition. The assessee is aggrieved against the addition so made by the AO, which also covers the sole issue in the appeal filed against the order passed u/s 154 due to enhanced TP adjustment of AMP expenses.
13.3. We have heard the rival submissions and perused the relevant material on record. At the very outset, it was contended by the ld. AR that the Tribunal, for the immediately preceding assessment year, namely, AY 2005-06, has followed the Special Bench decision in the case of LG Electronics India Pvt. Ltd. vs. DCIT (2013) 152 TTJ (Del) 273 (SB) and upheld the legal issues, namely, AMP expenses being an international transaction, jurisdiction of the TPO in making TP adjustment of AMP expenses and limitation, etc. against the assessee 79 ITA No.5120/Del/2010 ITA No.2441/Del/2012 and thereafter sent the matter to the TPO for recomputation of transfer pricing adjustment on account of AMP expenses to be done in conformity with the Special Bench decision in LG Electronics India Pvt. Ltd. (supra). The ld. AR submitted that the said decision of the Tribunal for the immediately preceding assessment year has been challenged by the assessee before the Hon'ble High Court and the hearing is under way. It was, therefore, prayed that the matter of the TP adjustment of AMP expenses for the instant year be sent back to the TPO/AO for deciding it in conformity with the final view to be taken by the Hon'ble High Court for the preceding year. It was also submitted that the judgment of the Hon'ble Delhi High Court in Sony Ericson Mobile Communications India Pvt. Ltd. vs. CIT dated 16.3.2015 cannot be applied as the facts of the cases considered in that batch of appeals are different from the assessee. In the opposition, the ld. DR strongly recommended to follow the judgment of the Hon'ble Delhi High Court in Sony Ericson Mobile Communications Ltd., in which there is discussion about the TP adjustment to be made in the case of 80 ITA No.5120/Del/2010 ITA No.2441/Del/2012 manufacturers. He further relied on the order passed by the Tribunal in the case of Perfetti Van Melle India Pvt. Ltd. vs. DCIT (ITA No.407/Del/2015) in which the Bench has discussed about the TP adjustment of AMP expenses in the case of a manufacturer, as is the case under consideration.
13.4. We have heard the rival submissions and perused the relevant material on record. It is an admitted position that the assessee before us is a `Manufacturer' and not a `Distributor'. The Special Bench of the Tribunal in the case of LG Electronics India Pvt. Ltd. Vs. ACIT (supra), by its majority decision, without drawing any distinction between manufacturers and distributors, has held, inter alia, that AMP is a transaction and also an international transaction within the meaning of section 92B of the Act and that the TPO has jurisdiction to compute the ALP of this international transaction despite the same not having been specifically referred to by the AO. On the question of determination of the ALP of this international transaction, the Special bench approved the application of bright line test for working out the amount of non-routine 81 ITA No.5120/Del/2010 ITA No.2441/Del/2012 AMP expenses and held that the ALP of AMP expenses should be determined on Cost plus method by treating AMP transaction as a separate and distinct from other international transactions. It further held that the selling expenses directly incurred in connection with the sales do not lead to brand promotion and hence should not be brought within the overall ambit of AMP expenses. The Special bench laid down certain parameters to be taken into consideration for determining the ALP of AMP expenses. In the ultimate analysis, the matter was sent back to the TPO/AO for undertaking the exercise afresh in the light of its directions. 13.5. Following the said special bench order, various benches of the Tribunal decided several cases involving AMP expenses, restoring the matter to the file of AO/TPO for deciding this issue in conformity with the directions given by the Special Bench in LG Electronics (supra). Several assessees as well as the Revenue preferred their respective appeals before the Hon'ble High Courts against the tribunal orders following the Special bench order. A batch of appeals in relation to `Distributors' (not Manufacturers) led by Sony Ericson Mobile 82 ITA No.5120/Del/2010 ITA No.2441/Del/2012 Communications India Pvt. Ltd. Vs. CIT has been disposed of by Their Lordships of the Hon'ble Delhi High Court, delivering judgment on 16th March, 2015, upholding the majority view of Special Bench in LG Electronics (supra) treating AMP as an international transaction and also conferring jurisdiction in the TPO to determine the ALP of the international transaction of AMP expenses. Dealing with the computation of ALP of such transactions by a Distributor, the Hon'ble High Court has held, inter alia, that the international transaction of AMP expenses should be bundled/aggregated with other international transaction carried out by the assessee as a distributor, who either simply acts an agent of manufacturer or purchases goods from the manufacturer for resale at his own account. The Hon'ble High Court held that where the TNMM has been applied as the most appropriate method by a Distributor, which method has not been disturbed by the TPO, then, the international transaction of AMP and distribution activities should be clubbed. It further held that for determining the ALP of such transactions under a combined approach, only such comparables should 83 ITA No.5120/Del/2010 ITA No.2441/Del/2012 be chosen which conform to the AMP functions and other distribution functions conducted by the assessee. If there is some difference in the functions under these international transactions, including that of AMP, between the assessee and the comparables, then, suitable adjustment should be made to bring both the transactions at par. If probable comparables are not performing similar functions as done by the assessee and no adjustment is possible for bringing the international transactions of the assessee in an aggregate manner at par with those undertaken by the comparables, then, segregation should be done and the international transaction of AMP spend should be separately processed under the transfer pricing provisions for the purposes of determining its ALP separately. In such a determination of ALP of AMP expenses in a segregated manner, proper set off on account of excess purchase price adjustment should be allowed. The view taken by the Special bench of the Tribunal in segregating routine and non-routine expenses on the basis of bright line test has been set aside by the Hon'ble High Court. Further, the decision taken by the Special Bench to 84 ITA No.5120/Del/2010 ITA No.2441/Del/2012 the effect that the expenses concerned with the sales, such as, rebates and discounts etc., should be excluded from the ambit of AMP expenses, has been upheld.
13.6. We can summarize the relevant position emanating from the judgment of the Hon'ble High Court, as under : -
AMP expense is an international transaction [Paras 52 & 53 of the judgment] ;
The TPO has jurisdiction to determine the ALP of the international transaction of AMP expenses [Para 50 of the judgment];
Inter-connected international transactions can be aggregated and section 92(3) does not prohibit the set-off [Paras 80 & 81]; AMP is a separate function. An external comparable should perform similar AMP functions. [Paras 165 &166] ; Bright line test cannot be applied to work out non-routine AMP expenses for benchmarking [Para 194(x)];
85 ITA No.5120/Del/2010 ITA No.2441/Del/2012 ALP of AMP expenses should be determined preferably in a bundled manner with the distribution activity [Paras 91, 121 & others] ;
For determining the ALP of these transactions in a bundled manner, suitable comparables having undertaken similar activities of distribution of the products and also incurring of AMP expenses, should be chosen [Paras 194(i), (ii), (viii) & others]; The choice of comparables cannot be restricted only to domestic companies using any foreign brand [Para 120] ;
If no comparables having performed both the functions in a similar manner are available, then, suitable adjustment should be made to bring international transactions and comparable transactions at par [Para 194 (iii)] ;
If adjustment is not possible or comparable is not available, then, the TNMM on entity level should not be applied [Paras 100, 121, 194(iii) & (vi)] ;
86 ITA No.5120/Del/2010 ITA No.2441/Del/2012 In the above eventuality, international transaction of AMP should be viewed in a de-bundled manner or separately [Paras 121& 194(xi)] ;
In separately determining the ALP of AMP expenses, the TPO is free to choose any other suitable method including Cost plus method [Para 194(xiii)];
In so making a TP adjustment on account of AMP expenses, a proper set off/purchase price adjustment should be allowed from the other transaction of distribution of the products [Para 93] ; Selling expenses cannot be considered as part of AMP expenses [Paras 175 & 176 of the judgment].
13.7. The bright line test, disapproved by the Hon'ble High Court, primarily concentrates on the quantitative aspects of the AMP expenses alone. It overlooks the examination of the AMP functions carried out by the assessee on one hand and the comparables on the other. The Hon'ble High Court in Sony Ericson Mobile (supra), has held that AMP expense is a separate international transaction and also bright line test is 87 ITA No.5120/Del/2010 ITA No.2441/Del/2012 not applicable for determining the ALP of AMP expenses. The manner for the determination of the ALP of the distribution activity and AMP activity has also been set out by the Hon'ble High Court to be conducted, firstly, in a bundled manner by considering the distribution and AMP functions performed by the assessee as well as the probable comparables, and if probable comparables having performed both the functions are not available, then to determine the ALP of AMP expenses in a segregated manner. As such, it becomes immensely important to separately examine the Distribution activity and AMP functions undertaken by the assessee as well as probable comparables. It is vital to highlight the difference between the AMP expenses and AMP functions.
Whereas the AMP functions are the means by which the AMP activity is performed, the AMP expenses are the amount spent on the performance of such means (functions). To put it simply, an examination of AMP functions carried out by the assessee and the probable comparables is sine qua non in the process of determination of the ALP of the international transaction of AMP spend, either in a segregate or an 88 ITA No.5120/Del/2010 ITA No.2441/Del/2012 aggregate manner. What Their Lordships have held is to bundle the distribution activity with the AMP activity, being two separate but connected international transactions, for the purposes of determination of the ALP of both these international transactions in a combined manner.
13.8. The ld. AR argued that the assessee applied TNMM and since the profit margin declared by the assessee from its international transactions favourably compares with the average margin of the comparables, which fact has not been disputed by the TPO, then no adjustment should be made on account of AMP expenses because such expenses stand subsumed in the overall operating profit. The argument of the ld. AR, if taken to a logical conclusion, will make the AMP spend a non-international transaction, which, in our considered opinion, is contrary to the verdict of the Hon'ble Delhi High Court in Sony Ericsson (supra). Once AMP expense has been held to be an international transaction, it is, but, natural that the functions performed by the assessee under such a transaction need to be compared with similar 89 ITA No.5120/Del/2010 ITA No.2441/Del/2012 functions performed by a comparable case. If AMP functions performed by the assessee turn out to be different from those performed by a probable comparable company, then, an adjustment is required to be made so as to bring the AMP functions performed by the assessee as well as the comparable, at the same pedestal. If we concur with the contention of the ld. AR that the addition on account transfer pricing adjustment of AMP expenses be deleted without any examination of the AMP functions carried out by the assessee as well as comparables, this will amount to snatching away the tag of international transaction from AMP expenses, which has been assigned by the Hon'ble High Court. What Their Lordships have held in the judgment is that the distribution activity and AMP expenses are two separate but related international transactions. It is only for the purposes of determining their ALP that these two should be aggregated. The process of such aggregation does not take away the separate character of the AMP transaction, albeit related. An analysis and examination of the distribution and AMP functions carried out by an assessee must be necessarily done in the first 90 ITA No.5120/Del/2010 ITA No.2441/Del/2012 instance, which should be then compared with similar functions performed by some probable comparables. If the distribution and AMP functions performed by an assessee turn out to be different from those performed by probable comparables, then, a suitable adjustment should be made to the profits of the comparable so as to counterbalance the effect of such differences. If however differences exist in such functions, but no adjustment can be made, then, such probable comparable should be dropped from the list of comparables. If, in doing this exercise, there remains no company doing comparable distribution and AMP functions, then, both the international transactions are required to be segregated and then examined on individual basis by finding out probable comparables doing such separate functions similarly. For the international transaction of AMP spend, this can be done by, firstly, seeing the AMP functions actually performed by the assessee and then comparing it with the AMP functions performed by a probable comparable. If both are found out to be similar, then the matter ends and a comparable is found and one can go ahead with determining the ALP 91 ITA No.5120/Del/2010 ITA No.2441/Del/2012 of such a transaction. If the AMP functions performed by the two entities are found to be different, then adjustment is required to be made in the case of a probable comparable, so as to make it uniform with the assessee. A particular assessee may have possibly done, say, four different AMP functions as against the probable comparable having done, say, only three. In such a scenario, again the adjustment will be warranted. In another situation, the AMP functions performed by the assessee and probable comparable may be similar but with varying standards, which will also call for an adjustment. Crux of the matter is that the AMP functions performed by the assessee must be similar to those done by the comparable, in the same manner as such functions are compared in any other international transaction. However, in computing ALP of AMP spend, the adjustment or set off, if any, available from the distribution function, should be allowed. The essence of the judgment in the case of Sony Ericson Mobile (supra) is that the two international transactions of Distribution and AMP should be examined on the touchstone of transfer pricing provisions, but on an aggregate basis. 92 ITA No.5120/Del/2010 ITA No.2441/Del/2012 Determining the ALP of two transactions in an aggregate manner postulates making a comparison of both the functions of distribution and AMP carried out by the assessee with the comparables, so that surplus from the distribution activity could be adjusted against the deficit in the AMP activity. The Hon'ble High Court has no where laid down that the AMP functions performed by the assessee should not be compared with those performed by the comparable parties. On the contrary, it turned down the contention raised by the ld. AR urging for not treating AMP as a separate function, which is apparent from the extraction from para 165 of the judgment : `On behalf of the assessee, it was initially argued that the TPO cannot account for or treat AMP as a function. This argument on behalf of the assessee is flawed and fallacious for several reasons. There are inherent flaws in the said argument'. It held vide para 165 of the judgment that : `An external comparable should perform similar AMP functions.' Thus it is manifest that comparison of AMP functions is vital which cannot be dispensed with. Let us we go a step further with the alternative prescription of the judgment that if ALP of both the 93 ITA No.5120/Del/2010 ITA No.2441/Del/2012 transactions of Distribution and AMP cannot be determined in a combined manner, then the ALP of AMP function should be separately done. The submission advanced by the assessee of considering the profit on an entity level without making comparison of AMP functions done by the assessee as well as the comparable, will render this alternative approach incapable of compliance. Canvassing such a view as argued on behalf of the assessee amounts to treating AMP spend as a non-international transaction, which is patently incapable of acceptance. The fact remains that as per the verdict of the Hon'ble High Court, the AMP spend is an international transaction, which is required to be processed under Chapter X of the Act by taking into account the AMP functions performed by an assessee and then comparing such functions with those performed by comparable entities. This can be done only by mandatorily making a comparison of the AMP functions performed by the assessee and comparables and then making an adjustment, if any, due to differences between the two, so that the AMP functions performed by the assessee and comparable are brought to a similar 94 ITA No.5120/Del/2010 ITA No.2441/Del/2012 platform. In fact, this is also the prescription of Rule 10B(1)(e), which provides as under :-
` (e) transactional net margin method, by which,--
(i) the net profit margin realised by the enterprise from an international transaction entered into with an associated enterprise is computed in relation to costs incurred or sales effected or assets employed or to be employed by the enterprise or having regard to any other relevant base ;
(ii) the net profit margin realised by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction or a number of such transactions is computed having regard to the same base ;
(iii) the net profit margin referred to in sub-clause (ii) arising in comparable uncontrolled transactions is adjusted to take into account the differences, if any, between the international transaction and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect the amount of net profit margin in the open market ;
(iv) the net profit margin realised by the enterprise and referred to in sub-clause (i) is established to be the same as the net profit margin referred to in sub-clause (iii) ;
(v) the net profit margin thus established is then taken into account to arrive at an arm's length price in relation to the international transaction.' 13.9. A perusal of the sub-clause (iii) of this Rule divulges that net profit margin under a comparable uncontrolled transaction as determined 95 ITA No.5120/Del/2010 ITA No.2441/Del/2012 under sub-clause (ii) should be: "adjusted to take into account the differences, if any, between the international transaction and the comparable uncontrolled transactions." It is only such adjusted net profit margin in sub-clause (iii) of Rule 10B(1)(e) which is compared with the net profit margin realized by the assessee as per the mandate of sub-clause (iv) of Rule 10B(1)(e).
13.10. Sub-rule (2) of Rule 10B provides that 'for the purposes of sub-rule (1)', the comparability of an international transaction with an uncontrolled transaction shall be judged with reference to the following, namely -- (a) the specific characteristics of the property transferred or services provided in either transaction ; (b) the functions performed, taking into account assets employed or to be employed and the risks assumed, by the respective parties to the transactions ; (c) the contractual terms (whether or not such terms are formal or in writing) of the transactions which lay down explicitly or implicitly how the responsibilities, risks and benefits are to be divided between the respective parties to the transactions ; (d) conditions prevailing in the 96 ITA No.5120/Del/2010 ITA No.2441/Del/2012 markets in which the respective parties to the transactions operate, including the geographical location and size of the markets, the laws and Government orders in force, costs of labour and capital in the markets, overall economic development and level of competition and whether the markets are wholesale or retail. Sub-rule (3) of Rule 10B stipulates that an uncontrolled transaction shall be comparable to an international transaction if (i) none of the differences, if any, between the transactions being compared, or between the enterprises entering into such transactions are likely to materially affect the price or cost charged or paid in, or the profit arising from, such transactions in the open market ; or (ii) reasonably accurate adjustments can be made to eliminate the material effects of such differences. 13.11. A comparative study of sub-rules (1), (2) and (3) of Rule 10B makes it palpable that the international transaction and the uncontrolled transaction with which comparison is sought to be made for determining the ALP, in the first instance, must have overall similar characteristics. It is vivid that if the goods/services are different, then no effective 97 ITA No.5120/Del/2010 ITA No.2441/Del/2012 comparison can be made. Once the goods/services under both the transactions are broadly similar but there is a difference in them because of certain specific characteristics; and/or the products/services in both the transactions are identical, but still there are certain differences due to the contractual terms or the geographical location etc., then, a reasonably accurate adjustment should be made for eliminating the material effects of such differences so as to bring the international transaction and the comparable uncontrolled transaction on the same podium. If due to one reason or the other, no reasonable accurate adjustment can be made due to such differences, then, such uncontrolled transaction should not be considered as a comparable transaction. 13.12. It is discernible that the prescription of Rule 10B is in complete harmony with the ratio of the judgment in the case of Sony Ericson Mobile (supra), to the effect that the AMP functions carried out by the assessee are required to be necessarily compared with the AMP functions carried out by a comparable entity in determining the AMP of ALP expenses. Difference between the functions, if capable of 98 ITA No.5120/Del/2010 ITA No.2441/Del/2012 adjustment, should be given effect to in the profit rate of the comparable and if such difference cannot be given adjusted, then, the probable comparable should be eliminated.
13.13. We have noticed above that the assessee is a `Manufacturer' and not a `Distributor'. The judgment in the case of Sony Ericson Mobile (supra) primarily deals with a case of Distributor, though the initial discussion about the character of AMP spend as an international transaction and the jurisdiction of the TPO etc. are common to a distributor and also a manufacturer. Similarly there are some other observations in this judgment, which are common to both. Though this judgment lays down at length some broader principles for the determination of ALP of AMP expenses in the case of a `Distributor', still certain principles dealing exclusively with the determination of the ALP of AMP expenses in the case of a `Manufacturer', have also been laid down. Such discussion has been made in para 92 of the judgment, the relevant part of which is reproduced here as under : - 99 ITA No.5120/Del/2010 ITA No.2441/Del/2012
`92. The majority judgment refers to an example where the Indian AE may have earned actual profit of Rs.140/-, but returned reduced net profit of Rs.120/- as the Indian AE had incurred brand building expenses to the tune of Rs.20/- for the foreign AE, whereas the net profit on sales declared by comparable uncontrolled transactions was Rs.100/- only. Thus, it was observed that the costs including AMP expenses are independent of cost of imported raw material/finished products having some correlation with overall profit. The example highlights the weakness of the TNM Method. The reasoning would be equally valid, where no AMP or ‗brand building' expenses are incurred. (See paragraph 21.8 to 22.10 of the majority decision). The net profit margins can be affected by variation of operating expenses. Thus, the requirement to select appropriate comparable and adjustment. It would be inappropriate and unsound to accept comparables, with or without adjustment and apply TNM Method, and yet conjecturise and mistrust the arm's length price. TNM Method would not be the most appropriate method when there are considerable value additions by the subsidiary AEs. In paragraph 22.9, the majority decision has observed that all costs including the AMP expenses are independent of cost of material. This indicates that the observations have been made with reference to manufacturing activities. It would not be appropriate and proper to apply the TNM Method in case the Indian assessed is engaged in manufacturing activities and distribution and marketing of imported and manufactured products, as interconnected transactions. Import of raw material for manufacture would possibly be an independent international transaction viz. marketing and distribution activities or functions. We have earlier used the term `plain vanilla distributor'. When we use the words `plain vanilla distributor' we do not mean plain vanilla situations, but value additions and each party making valuable unique contribution.' 100 ITA No.5120/Del/2010 ITA No.2441/Del/2012 13.14. It is discernible from the italicized part of the above para that the application of TNM Method is not appropriate and proper in case the assessee is engaged in manufacturing activities. In such circumstances, the import of raw material for manufacture would be an independent international transaction viz. marketing and distribution activities or functions. The core of the above para is that in the case of a `Manufacturer', the international transactions concerned with the manufacturing activity cannot be aggregated with the AMP activities as both are separate and distinct. Once both are held to be separate and TNMM is not to be applied, the only thing which remains is that the AMP transaction should be separately and independently processed under the Chapter X of the Act as per any suitable method (other than TNMM) including Cost plus method, but by excluding the selling expenses from the overall base of AMP expenses.
13.15. Turning to the facts of the case, we find that the TPO/AO have computed disallowance of AMP expenses on the basis of bright line test. There is no discussion about the AMP functions carried out by the 101 ITA No.5120/Del/2010 ITA No.2441/Del/2012 assessee or comparables. Now since the Special bench order has been partly modified by the Hon'ble Delhi High Court, including the non- applicability of the bright line test, and no material has been placed on record by the ld. AR to, firstly, demonstrate the AMP functions carried out by the assessee and then, to compare such functions with those done by comparables, this issue cannot be decided at our end. Under such circumstances, we set aside the impugned order and remit the matter to the file of the AO/TPO for deciding it afresh as per law. In this fresh exercise, the TPO will follow the parts of the judgment in Sony Ericson (supra) as are common to both Manufacturers and Distributors; apply the parts of the judgment as are applicable to a `Manufacturer'; and ignore the parts of the judgment which pertain exclusively to a `Distributor'. Needless to say, the assessee will be allowed a reasonable opportunity of hearing in such fresh proceedings.
13.16. Now we espouse the contention of the ld. AR to send the matter back to the TPO/AO for deciding this issue in conformity with the decision yet to be rendered by the Hon'ble High Court in its own 102 ITA No.5120/Del/2010 ITA No.2441/Del/2012 case, for which hearing is still going on. This contention, in our considered opinion, is devoid of any merit. It is axiomatic that there can be no direction to follow a forthcoming judgment which is not in existence at the time of giving direction. A direction can be given by a higher authority to the lower authority to follow only such a decision which is available for consideration at the time of giving direction by the higher authority. There can be no direction to follow a decision, which itself has not yet seen the light of the day at that point of time. Presently, we have the benefit of the judgment of the Hon'ble Delhi High Court in Sony Ericsson (supra), which has also dealt with the treatment to be given in the context of a manufacturer. The Delhi bench of the tribunal in some decisions including Perfetti Van Melle India (supra) has dealt with the manner of computation of the ALP of the AMP expenses incurred by manufacturers in the light of the judgment in the case of Sony Ericsson (supra). No reasons, except the pendency of the matter in the Hon'ble High Court in assessee's own case, have been given by the ld. AR to claim departure from the view taken by the tribunal in earlier 103 ITA No.5120/Del/2010 ITA No.2441/Del/2012 cases. We, therefore, turn down the request of the ld. AR in this regard. With these observations, we send the matter back to the file of TPO/AO for a fresh determination of the ALP of the AMP expenses in accordance with our above observations. In view of our decision in restoring the issue of calculation of ALP of AMP expenses to the TPO/AO, the assessee's appeal against the order passed by the AO/TPO u/s 154, enhancing the amount of TP adjustment, would automatically be taken care of in such fresh proceedings. We want to clarify that in such fresh proceedings, the assessee will be at liberty to lead any fresh evidence in support of its case.
E. MISCELLANEOUS GROUNDS I. Excess consumption of raw materials 14.1. Ground nos. 7 to 7.4 are against the addition of Rs.4.48 crore made by the AO on account of excess consumption of raw material and components. The facts apropos these grounds are that the assessee is following 'Just-in-time' system for management and reorder of inventory, in which inventories are ordered just in time when their 104 ITA No.5120/Del/2010 ITA No.2441/Del/2012 requirement arises. The material so required is delivered straight to the shop floor in the relevant department. As a result of this, though the purchases are recorded as per actual bills upon the arrival of goods in the premises, the inventories are procured by considering the standard consumption of various raw materials for manufacture of vehicles. Due to this difference in the making of entry in the books of account and actual receipt of goods directly in the relevant department, which, in turn, is based on standard quantity of material required for manufacture of vehicles, sometimes there arises difference between the physical inventory taken and the inventory as per books of account at the end of the year. Some items of stock may be eventually under-consumed while others over-consumed. The net effect of under/over consumption is nothing, but, the deviation from the standard consumption. During the year in question, the variation between physical stock and stock register was Rs.4.48 crore negative, which means items where stock as per stock register was more than physical stock and Rs.2.86 crore positive i.e., items where stock as per stock register was less than the physical stock, 105 ITA No.5120/Del/2010 ITA No.2441/Del/2012 leaving the net difference of Rs.1.62 crore. The AO disallowed Rs.4.48 crore ignoring the excess amount of Rs.2.86 crore. The assessee is aggrieved against this addition.
14.2. It is manifest that the net difference of Rs.1.62 crore is nothing, but, excess consumption over the standard consumption. Such shortage of Rs.1.62 crore is only 0.018% of total consumption of material debited to the Profit & Loss Account. In view of the fact that this amount has actually been consumed in the manufacturing of goods, it cannot call for any disallowance. There may be production efficiencies or inefficiencies leading to under or over consumption of inputs vis-a-vis standard consumption. Such under or over consumption becomes a part of the cost of production. In our considered opinion, there can be no logic in disallowing such amount, which is nothing but excess consumption of inputs. Similar view has been taken by the Tribunal in the assessee's own case for earlier assessment years including the immediately preceding assessment year. This ground is allowed.
106 ITA No.5120/Del/2010 ITA No.2441/Del/2012 II. Disallowance u/s 14A 15.1. The next ground is disallowance u/s 14A of the Act amounting to Rs.10,44,83,860/-. The assessee received dividend income of Rs.72.00 crore which was claimed as exempt u/ss 10(34) and 10(35) of the Act. The AO invoked the provisions of section 14A. Applying the mandate of Rule 8D, he worked out the amount disallowable at Rs.10,44,83,860/. This disallowance consists of three amounts. First is Rs.1.3 crore towards interest. Second is Rs.4.6 crore, being ½% of the average value of investments towards administrative expenses. By mistake, once again, the AO included a sum of Rs.4.6 crore towards ½% of administrative expenses, thereby making total of disallowance at Rs.10.44 crore. The assessee has assailed this disallowance. 15.2. We have heard the rival submissions and perused the relevant material on record. It is observed that the year under consideration is AY 2006-07. The Hon'ble jurisdictional High Court in the case of Maxopp Investments Ltd. vs. CIT (2012) 347 ITR 272 (Del) has held that disallowance u/s 14A can be made as per Rule 8D only from assessment 107 ITA No.5120/Del/2010 ITA No.2441/Del/2012 year 2008-09 as rule 8D is prospective. It has been further held by Their Lordships that for earlier years, the disallowance should be made as per 'reasonable and acceptable method of apportionment.' In view of the above discussion, it becomes clear that the AO's decision in applying Rule 8D for making disallowance u/s 14A of the Act, cannot be countenanced. It is noted that similar disallowance was made for the immediately preceding year. When the matter came up for consideration before the tribunal, the Bench held that the disallowance u/s 14A cannot be made as per Rule 8D and the question of computation of disallowance u/s 14A has been remitted to the AO for doing it afresh as per law. Respectfully following the precedent, we also set aside the impugned order on this score and send the matter to the file of AO for making disallowance u/s 14A, in accordance with the view taken by the Tribunal in its order for the assessment year 2005-06. III. Disallowance u/s 35DDA 16.1. The next ground is against the disallowance of Rs.38,63,64,348/- made u/s 35DDA of the Act.
108 ITA No.5120/Del/2010 ITA No.2441/Del/2012 16.2. Succinctly, the facts of this ground are that the assessee claimed deduction for a sum of Rs.38.63 crore u/s 35DDA being the aggregate of 1/5th of payments made to its employees under VR Scheme during the previous year relevant to the assessment year 2002-03 and 1/5th of the payments made to employees under VR Scheme during the period relevant to the assessment year 2004-05. The AO made disallowance on the ground that the VR Scheme was not in accordance with Rule 2BA of the Income-tax Rules, 1962. The disallowance has been challenged through this ground.
16.3. After considering the rival submissions and perusing the relevant material on record, it is observed that similar issue came up for consideration before the Tribunal in its order for the AY 2004-05. After making a thorough discussion on the issue, the Tribunal has held that Rule 2BA is relevant only for the purpose of availing exemption u/s 10 by employees and not for the purpose of allowing deduction to the employer u/s 35DDA of the Act. Resultantly, the disallowance made by the AO came to be knocked down by the tribunal. In the absence of any 109 ITA No.5120/Del/2010 ITA No.2441/Del/2012 distinguishing factor having been pointed out by the ld. DR, respectfully following the precedent, we direct to allow deduction u/s 35DDA for a sum of Rs.38.63 crore.
IV. Disallowance of club membership fee 17.1. The next ground is against the disallowance of Rs.1,79,509/- on account of expenditure incurred on club membership. Shorn of unnecessary details, it is observed that the assessee paid the said amount on account of club membership, which the AO disallowed. The assessee is in appeal before us.
17.2. In our considered opinion, this issue is no more res integra in view of the judgment of the Hon'ble Supreme Court in CIT vs. United Glass Manufacturing Company Ltd. (SC) 2012-TIOL-102-SC-IT in which it has been held that no disallowance can be made for club membership in respect of the employees of the company. Similar view has been taken by the Tribunal in the assessee's own case for the earlier assessment years including the immediately preceding year. 110 ITA No.5120/Del/2010 ITA No.2441/Del/2012 Respectfully, following the above precedents, we order for the deletion of this addition.
V. Depreciation on software expenses capitalized in earlier years 18.1. Ground no. 14 is against not allowing depreciation amounting to Rs.9,26,418/- on written down value of software expenses capitalized by the AO in preceding years. The factual matrix of this ground is that the assessee claimed deduction for software expenses incurred in earlier years, which was refused by the AO, who held it to be a capital expenditure. The view taken by the AO was finally upheld by the Tribunal. In the final computation of income, the AO refused to allowed depreciation on the capitalized value of software expenses. 18.2. It is obvious that once the AO has refused to grant deduction of software expenses claimed by the assessee and capitalized the same by treating it as capital asset, then depreciation on the written down value of such software expenses is required to be granted as per law. Since no such detail is available about the written down value of software expenses capitalized in earlier years, we set aside the impugned order 111 ITA No.5120/Del/2010 ITA No.2441/Del/2012 and remit the matter to the file of AO for allowing deduction in respect of the written down value of the software expenses capitalized in earlier years.
VI. Charging of statutory interest
19. Next ground is against the charging of interest u/ss 234B, 234C and 234D of the Act. This ground is consequential and is, accordingly, allowed except the charging of interest u/s 234C. The ld. AR argued that the AO computed interest u/s 234C on the basis of income finally determined as against the income-tax due on returned income. We find force in the arguments put forth on behalf of the assessee that computation of interest u/s 234C for deferment of advance tax is required to be made on the basis of 'tax due on the returned income' as has been enshrined in the provision itself. We, therefore, direct the AO to verify this aspect of the matter and compute interest u/s 234C as per law.
20. Ground no. 27, against the initiation of penalty u/s 271(1)(c), is premature and, hence, dismissed.
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21. In the result, the main appeal of the assessee is partly allowed and the appeal against the order u/s 154 is allowed for statistical purposes.
The order pronounced in the open court on 24.08.2015.
Sd/- Sd/-
[A.T. VARKEY] [R.S. SYAL]
JUDICIAL MEMBER ACCOUNTANT MEMBER
Dated, 24th August, 2015.
dk
Copy forwarded to:
1. Appellant
2. Respondent
3. CIT
4. CIT (A)
5. DR, ITAT
AR, ITAT, NEW DELHI.
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