Income Tax Appellate Tribunal - Delhi
Hero Honda Motors Ltd., New Delhi vs Department Of Income Tax
INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH "C": NEW DELHI
BEFORE SHRI B.C. MEENA, ACCOUNTANT MEMBER
AND
SHRI A. T. VARKEY, JUDICIAL MEMBER
ITA No. 2048/Del/2011
(Assessment Year: 2003-04)
ACIT Hero Honda Motors Ltd.
Circle-12(1) 34, Community Center,
New Delhi Vs. Basant Lok, Vasant Vihar,
New Delhi
PAN: AAACH0812J
(Appellant) (Respondent)
ITA No. 2045/Del/2011
(Assessment Year: 2003-04)
Hero Honda Motors Ltd. Vs. ACIT
34, Community Center, Circle-12(1)
Basant Lok, Vasant Vihar, New Delhi
New Delhi
PAN: AAACH0812J
(Appellant) (Respondent)
Appellant by : Ajay Vohra, Adv
Respondent by : R. S. Gill, Sr. DR
ORDER
PER A. T. VARKEY, JUDICIAL MEMBER
Both these appeals have been preferred against the order of the ld CIT(A)-XX, New Delhi dated 31.01.2011 for the Assessment Year 2003-04.
2. The grounds of appeal raised by revenue in ITA No. 2048/Del/2011are as follows:-
"1. On the facts and circumstances of the case and in law the ld CIT(A) has erred in deleting the addition of Rs. 17,22,60,688/- made by the Assessing Officer on account of royalty expenses.
2. On the facts and circumstances of the case and in law, the ld CIT(A) has erred in deleting the addition of Rs. 2,65,37,236/- made by the Assessing Officer on account of model fee for obtaining use of technical know how.
3. On the facts and circumstances of the case and in law, the ld Page No. 2 CIT(A) has erred in deleting the addition of Rs. 73,98,784/- made by the Assessing Officer on account of Expenditure on software claimed u/s 37(1).
4. On the facts and circumstances of the case and in law, the ld CIT(A) has erred in deleting addition of Rs. 80,40,300/- made by the Assessing Officer on account of Transfer Pricing Adjustment (difference in arm‟s length price in international transactions of purchase of spare parts)
5. The appellant craves to leave, to add, alter or amend any ground of appeal raised above at the time of the hearing."
3. The grounds of appeal preferred by the assessee ITA No. 2045/Del/2011are as follows:-
"1. That the CIT(Appeals) erred on facts and in law in upholding the action of the Assessing Officer in deleting the benefit of deduction under section 80HHC of the Act on the custom duty benefit under DEPB Scheme, amounting to Rs. 16,31,41,138/-.
1.1 That the CIT(Appeals) erred in facts and in law in reducing the entire amount of DEPB benefit from the profits of the business, without appreciating that only profit on transfer of DEPB licenses ought to be excluded in terms of proviso to sub-section (3) of section 80HHC read with section 28(iiid) of the Act.
1.2 That the CIT(Appeals) erred on facts and in law in treating interest income of Rs. 2,40,81,432/- as "income from other sources" and consequentially excluding the same from "profits of the business"
for the purposes of computing deduction under section 80HHC of the Act.
1.3 Without prejudice, that the CIT(Appeals) erred on facts and in law in not allowing netting of interest expenditure amounting to Rs. 1,73,23,592/-, incurred during the year, against interest income of Rs. 2,40,81,432/- earned during the year, while computing deduction under section 80HHC of the Act.
1.4 Without prejudice, that the CIT(Appeals) erred on facts and in law in not directing for computation of deduction under section 80HHC by taking amount of profits of business finally assessed in the assessment order.
2. That the CIT(Appeals) erred on facts and in law in upholding the action of the Assessing Officer in disallowing deduction under section 80IA of the Act, amounting to Rs. 2,28,86,196/-, claimed by the appellant in respect of the captive power generating unit at Gurgaon.
2.1 That the CIT(Appeals) erred on facts and in law in upholding the action of the Assessing Officer in computing profits of the power generating unit by adopting the rate of supply of power at Rs. 4.05 per unit, at which power was supplied by State Electricity Board, as the „market price‟ of the power, as against rate of Rs. 5.92 per unit (cost of generation of power at Rs. 5.15 per unit + mark-up of 15% adopted by the appellant for the purposes of computing Page No. 3 deduction under section 80IA of the Act for captive power generating unit.
3. That the CIT(Appeals) erred on facts and in law in upholding the levy of interest under section 234D of the Act."
4. First of all we will decide the Revenue‟s Appeal. Ground No. 1. Apropos, deletion of addition of Rs. 17,22,60,688/- made by the Assessing Officer on account of Royalty Expenses by CIT(A).
5. Brief Facts of the case is that the assessee is engaged in the business of manufacture and sale of motorcycles. The assessee pursuant to Technical Collaboration Agreement (TCA), has been paying royalty to its joint Venture Partner M/s. Honda Motor Company, Japan (Honda). During the relevant previous years, the assessee has paid royalty of Rs. 68,90,42,672/- on different models at ex-factory sale price of the product in pursuance of Article 25.1(2) of the Technical Assistance Agreement (Agreement) dated 2nd June, 1995, read with Third Supplementary Amendment to the said agreement entered into with Honda.
6. In the assessment order, the Assessing Officer while relying upon the decision of the Apex Court in the case of southern Switchgear Ltd. Vs. CIT: 232 ITR 359 held that 25% of royalty constituted capital expenditure.
7. On appeal, the ld CIT(A) deleted the disallowance treating the expenditure incurred on account of royalty as revenue expenditure while following its earlier order passed in the assessment year 2002-03.
8. Aggrieved by the said order of the ld CIT(A) the revenue is before us. Ld DR contended that a perusal of the „License and Technical Agreement‟ comprising of 41clauses, it is very clear that the Intellectual Property Rights developed by Honda has been transferred to the assessee. The agreement states that Honda has acquired and possesses certain Intellectual Property Rights, manufacturing information and know-how, quality standards and marketing methods relating to such 2/3 wheelers. Thus, as asset of enduring benefit which was the exclusive property of Honda has been transferred for use by the assessee company.
9. The ld DR contended that the patent over the new developed project has also been transferred to licensee and the licensor has transferred its intellectual property rights to licensee, the assessee company. The licensor has developed model nos. CD-100 STD, CD100OX, CD-100 Splendor, C-100 to cite Page No. 4 some examples after sustained research and development at their end. The model developed by licensor has been admittedly patented.
10. The ld DR contended that over and above, the transfer of the right of Intellectual Property Right and patent, the licensor has also agreed to set up manufacturing facilities for the licensee, the assessee company and other rights exclusively handed over to the licensor inter alia are:-
(a) know-how and technical information and any other non-public technical or business information being the sole and exclusive property of licensor to be held in trust and confidence by licensee.
(b) use of trademark
(c) the know-how is not limited to drawings, specifications, process
manuals etc.
11. According to the ld DR the technical assessment agreement is renewable, the initial term being for ten year, since extended to another ten years, as on date. Therefore, according to the ld DR it is crystal clear that a capital asset in terms of intellectual property rights and patented have been transferred for whole by the licensor to the assessee company. The licensor has parted with its assets in pursuance to the Agreement. For acquiring this capital for which payment made, would also have to fall within the four walls of capital expenditure. Therefore according to the ld DR the Assessing Officer was right in holding that royalty formed an integral element of capital expenditure.
Therefore the Assessing Officer was right in holding that Rs. 17,22,60,688/- capital in nature, therefore the said order may be restored. On the other hand, the ld counsel for the assessee Shri Ajay Vohra pointed out that in the assessee‟s own case for the Assessment Year 2000-01 to 2002-03 and for Assessment Year 2006-07 and 2007-08 the Tribunal allowed royalty and technical guidance fee both to Honda under section 37(1) of the Act as revenue expenditure and does not want us to disturb the order of the ld CIT(A).
12. We find that the co-ordinate Bench of ITAT held in the case of Hero Motocorp Limited Vs. ACIT in ITA NO. 5130/Del/2010 for the Assessment Year 2006-07 as under:-
26. In the light of these facts, let us examine the various decisions discussed above so as to arrive at the finding which of the decisions is applicable in the case of the assessee.
27. In our opinion, the facts of the assessee's case are identical to the facts in the case of Climate Systems India Ltd. (supra). In the case of Page No. 5 Climate Systems India Ltd. (supra), the assessee company made the lump sum payment and also the running royalty. The running royalty was calculated as a percentage of sales. The lump sum payment was treated as capital expenditure by the assessee company and the running royalty was treated as revenue expenditure. The Assessing Officer disallowed the running royalty holding it to be capital expenditure which was confirmed by the learned CIT(A) as well as the ITAT. The Hon'ble Jurisdictional High Court allowed the appeal. The facts of the assessee's case are identical because the assessee also in the year 1984 entered into an agreement by which the assessee was provided with technical assistance for setting up of the plant and also for manufacture, assembly and service of the motorcycles. The assessee made lump sum payment of $5,00,000 for the technical assistance for construction of plant and paid a running royalty as a percentage of sales in respect of technical assistance for manufacture, assembly and service of the motorcycles. The running royalty which was paid annually was claimed as revenue expenditure and was disallowed by the Assessing Officer treating the same as capital expenditure. Thus, the facts of the assessee's case are identical to the 34 ITA-5130/Del/2010 facts before the Hon'ble Jurisdictional High Court in the case of Climate Systems India Ltd. (supra).
28. Similar were the facts before the Hon'ble Jurisdictional High Court in the case of Sharda Motor Industrial Ltd. (supra). In that case also, SMIL made a lump sum payment and also running royalty at a specified percentage based upon the production. The lump sum payment was treated as capital expenditure and running royalty was claimed as revenue expenditure. The Assessing Officer treated the royalty as capital expenditure and the Hon'ble Jurisdictional High Court affirmed the views of the Tribunal that the payment of running royalty was revenue expenditure. In this case, the Hon'ble Jurisdictional High Court has considered the decision of Hon'ble Apex Court in the case of Southern Switchgears Ltd. (supra) relied upon by the Revenue.
29. In the case of Lumax Industries Ltd. (supra), the assessee was paying license fee on year to year basis for acquisition of technical knowledge.
The LIL claimed the said payment as revenue expenditure which was disallowed by the Assessing Officer holding that by virtue of the agreement, the LIL had derived an asset of enduring nature. On appeal, the CIT(A) allowed the assessee's claim and the Tribunal upheld the order of the CIT(A). On further appeal, the Hon'ble Jurisdictional High court upheld the order of the ITAT and has also observed that even if the assessee had obtained the long term advantage of enduring benefit, that by itself would not convert any expenditure incurred by the assessee into capital expenditure. This decision of Hon'ble Jurisdictional High Court is after considering the decision of Hon'ble Apex Court in the case of Jonas Woodhead and Sons (India) Ltd. (supra) relied upon by the Revenue. The decisions of Hon'ble Apex Court in the case of Southern Switch Gear Ltd. (supra) and Jonas Woodhead And Sons (India) Ltd. (supra) have slightly 35 ITA-5130/Del/2010 different facts because in both the cases, there was a collaboration agreement by which technical assistance was provided for setting up of the factory and also manufacture and sale of product. The payment of royalty was lump sum payment and, therefore, the Hon'ble Apex Court upheld the view of the Revenue that 25% of the payment is capital in nature. In the case of the assessee also, the collaboration agreement was for grant of technical assistance for setting up of the factory and also for the manufacture and sale of the product. But the assessee made separate payment for the technical assistance for Page No. 6 setting up of the factory which was $5,00,000. This sum was treated as capital expenditure by the assessee itself. The annual payment for the royalty was based upon the percentage of sale of the motorcycles. Thus, the facts in the case of the assessee are distinguishable than the facts before the Hon'ble Apex Court. On the other hand, the facts of the assessee's case are identical to the facts before the Hon'ble Jurisdictional High Court in the case of Climate Systems India Ltd. (supra) and Sharda Motor Industrial Ltd. (supra) and also the decision of ITAT in assessee's own case cited supra. We, therefore, respectfully following the above decisions of Hon'ble Jurisdictional High Court, hold that the annual payment of royalty was a revenue expenditure. Accordingly, ground No.6 of the assessee's appeal is allowed."
13. Similar facts were before the Assessing Officer for the relevant Assessment Year 2003-04; the issue regarding royalty technical guidance fee was dealt by ITAT in assessee‟s favor in Assessment Year 2001-02, 2002-03 and 2007-08, and since there is no change of facts or law in the present case before us and as afore-stated similar issue was allowed in favour of the assessee in respect to the royalty, we respectfully follow the orders of the co-ordinate Bench, and we confirm the order of the ld CIT(A) and dismiss the appeal of the revenue on this ground.
14. Apropos deletion of addition of Rs. 2,65,37,236/- made by the Assessing Officer on account of model fee for obtaining use of technical know-how.
15. Brief facts of the case is that assessee during the relevant previous year had paid total amount of Rs. 10,61,48,944/- towards know-how fee for new models to M/s Honda Motor Co. Ltd. Japan (Honda) under the third supplementary agreement dated 25.09.2001 to the Technical collaboration agreement dated 02.06.1995. Since, said fee was paid for use of know-how of new model and not for acquisition thereof, the same was claimed allowable deduction u/s 37(1) of the Act. The Assessing Officer disallowed 25% of the total model fees alleging that the said expenditure provided long term benefit to the assessee and in essence is a capital expenditure. On appeal, the ld CIT(A) while observing that characterization of payment of royalty under the same technical collaboration agreement cannot be different from payment of model fee, held that expenditure on model fee was allowable revenue expenditure. Aggrieved by the said order of the ld CIT(A), the Revenue is before us. At the outset itself the ld counsel for the assessee pointed out that the issue before us, stands squarely covered in favour of the assessee by the order of the Tribunal in the assessee‟s own case for Assessment Year 1996-97, Page No. 7 wherein the Tribunal was pleased to allow model fee paid to Honda u/s 37(1) of the Act as revenue expenditure on the ground that payment was only for right to use the technical know-how and there was no ownership of any intellectual property, which continued to remain with Honda. The said decision is reported as Hero Honda Motors Ltd. Vs. JCIT: 95 TTJ (Del) 782. The ld counsel brought to our notice that the Hon‟ble Delhi High Court has not entertained the appeal filed by the department on the said issue. The decision of the High Court was accepted by the Department and has become final, as no SLP has been filed there against. It was further submitted that the Tribunal in the assessment years 1997-98 and 1999-2000 allowed similar expenditure on payment of model fee, following the decision of the Tribunal for assessment year 1996-97. The Tribunal in Assessment Year 2001-02, allowed royalty and technical guidance fee paid to Honda u/s 37(1) of the Act as revenue expenditure on the ground that payment was only for right to use the technical know-how and did not result in transfer of ownership in any intellectual property, which continued to remain with Honda. Similar view has been held by the Tribunal in the Assessment Year 2006-07, 2007-08 and 2002-03.
16. In assessee‟s own case for Assessment Year 2001-02 in ITA No. 716/Del/2008, ITA No. 1312/Del/2008, ITA No. 718/Del/2008, ITA No. 1648/Del/2007 and ITA No. 1623 & 1624/Del/2008 the co-ordinate Bench has held as under:-
"Here we may also add that assessee‟s plea about consistency on the basis of Hon‟ble Supreme Court judgment in the case of Radhasoami Satsang (supra) is also relevant in as much as the Department has allowed the assessee expenditure in this behalf as revenue expenditure for a long period of 15 years. Hon‟ble Supreme Court judgment in the case of SS and Jonas were pronounced in 1997 and with these judgments being on the case law books Department still allowed the assessee‟s expenditure in respect of TGF as revenue expenditure. In our view, the assessee‟s expenditure towards TGF/model fee is fully eligible to be treated as revenue expenditure and even if it is assumed that there is any shred of doubt, the rule of consistency does help assessee‟s case and it will not be desirable that assessee be subjected to a new regime of opinion without analysis of peculiar facts. The model fee expenditure has already been settled by ITAT and Hon‟ble Delhi High court as revenue expenditure in assessee‟s own case. In view of all these facts, assessee succeeds on merits on the issue about Model Fee and TGF expenditure being fully allowable revenue expenditure."Page No. 8
17. Respectfully following the aforesaid decision in assessee‟s own case, we confirm the order of the ld CIT(A) and dismisses the appeal of the Revenue on this ground.
18. Apropos addition of Rs. 73,98,784/- made by Assessing Officer on account of expenditure on software claimed u/s 37(1) of the Act.
19. The assessee, during the year incurred expenditure amounting to Rs. 73,98,784/- towards user charges/ license fee for use of the software. The expenditure related to purchase of application software e.g., lotus notes, Catia ADD + ASS, Tivoli TSM client etc. for Research and Development department and some other department. The assessee claimed the same as revenue expenditure allowable u/s 37(1) of the Act on the ground that license to use the software does not result in creation of an asset or providing enduring benefit to the company. According to the assessee the application software enables the assessee to carry out its business operation efficiently and smoothly. The Assessing Officer, however, held the said expenditure as capital in nature alleging that the assessee has acquired the asset for long term use. On appeal the ld CIT(A) following the earlier Assessment Year deleted the aforesaid addition by holding that the expenditure was incurred for facilitating day to day operations and conduct of business and satisfy the test laid down by the Special Bench of the Tribunal in the case of Amway Indian Enterprises Vs. DCIT:
111 ITD 112. Aggrieved by the said order of the ld CIT(A) the Revenue is before us. According to the ld DR the said expenditure was incurred by the assessee to gain enduring benefit in the capital field. According to the ld DR, software is an asset acquired for use in business and assessee‟s claim that it involves rapid obsolescence by itself does not undermine the real character of the asset. Thus according to the ld DR, the ld CIT(A) erred in deleting the said addition and so he pleads that the order of the ld CIT(A) may be reversed and the order of the Assessing Officer restored. On the other hand the ld counsel Shri Ajay Vohra contended that the said expenditure does not constitute profit earning apparatus and merely enable the assessee to efficiently conduct is business.
Further, according to the ld counsel, it need to be appreciated that none of the software was in relation to the production function of the assessee, to be considered as resulting in an enduring benefit in the capital field or accretion to the profit earning apparatus. The ld counsel submitted that the aforesaid Page No. 9 software merely facilitated the accounting/ research and development functions, etc. carried on by the assessee to streamline the existing business operations and carry them efficiently and profitably. The ld counsel AR, Ajay Vohra contended that no enduring benefit or any ownership rights had accrued to the assessee. The ownership title for the software remained with the vendor and the assessee had only license to use the software with a termination clause. The assessee has only license to use software, documentation and information etc. The assessee is not permitted to sub- license or rent the software and otherwise transfer any of its rights or obligations under this agreement. According to the ld counsel, it may be appreciated that since the assessee only had the license to use the aforesaid software and the proprietary, intellectual rights therein continued to vest with the vendor(s), the licensor of the software. It will be appreciated that there was no outright sale of the aforesaid software to the assessee and the aforesaid expenditure did not result in acquisition/ creation for an asset in the capital feild as the assessee did not acquire any ownership rights in the aforesaid software. The ld counsel stressed that the assessee‟s rights were confined to the use of software alone and the assessee was prohibited from making copies of the aforesaid software for commercial exploitation. The ld counsel submitted that in the event of termination of the agreement, the assessee was prohibited from using the software and was to return the same to the licensor or destroy all copies of such software and delete/ remove the same from all its computer hardware and storage media. Ld counsel wanted us to distinguish between outright sale and license to use. And in the case of outright sale of software, there are absolutely no restrictions on the purchase of software as to its user and disposal. According to the ld counsel, the purchaser of the software can exploit the same in whatever manner it likes, including the right to make copies of the software for commercial exploitation, modifying/ altering the same without the consent of the seller, sub-license, sell, transfer the software, etc., for an indefinite period. However here the assessee cannot venture to do so and it is limited to only use of the software during the subsistence of the agreement between the licensor.
20. The aforesaid expenditure, according to the ld counsel is allowable revenue deduction, as the same is meant for better conduct and improvement Page No. 10 of the existing business and does not result in any enduring benefit in the capital field or creation of a capital asset. The expenditure merely resulted in facilitating the assessee‟s trading operations or enabling him to manage and conduct his business more efficiently or more profitably, while leaving the fixed capital untouched. The ld counsel relied on the following decisions:
Empire Jute Co. Ltd. Vs. CIT: 124 ITR 1 (SC) CIT Vs. Associates Cement Companies Ltd.: 172 ITR 257 (SC) Alembic Chemical Works Co. Ltd. Vs. CIT: 177 ITR 377 (SC)
21. According to the ld counsel, in view of the aforesaid facts and circumstances of the case and in the light of various tests as laid down by Special Bench in Amway India Enterprises (Supra) , the expenditure incurred by the assessee in relation to the application of software for carrying routine day to day operations of the business is allowable revenue expenditure. The ld counsel pointed out that the co-ordinate Bench of this Tribunal vide its order dated 31.07.2013, in assessee‟s own case for the Assessment Year 2002-03 has decided the aforesaid issue in favour of the assessee while observing that assessee had only obtained license to use the software while the intellectual rights contained in the software continued to vest with the licensor of the software; thereby holding that the expenses incurred towards license fee for usage of software were allowable u/s 37(1) of the Act. Therefore the ld counsel does not want us to disturb the order of the ld CIT(A). We have heard both the parties and gone through the records and perused the case laws cited by both sides. We find that for the Assessment Year 2002-03, the same issue was decided in ITA No. 1052/Del/2011 & ITA No. 902/Del/2011 dated 31.07.2013 "33. We have duly considered the rival contentions and gone through the record carefully. From perusal of the details, exhibiting the nature of software available on page 18 of the ld CIT(A)‟s order as well as page 77 of the paper book-I, it reveals that these are application software, which were used in day to day operation and conduct of assessee‟s business. Basically, they do not provide any enduring benefit to the assessee. The assessee only had the license to use the software and the proprietary, intellectual rights contained in the software continued to vest with the vendor I.e. licensor of the software. Therefore, in our opinion, ld First Appellate Authority has rightly appreciated the facts and circumstances and no interference is called for in her finding. This ground of appeal is rejected."
Page No. 1122. Since there is no change in the facts and laws, we respectfully following the decision rendered in assessee‟s own case in this respect and we confirm the order of the ld CIT(A) and dismiss the appeal of the Revenue on this ground.
23. Apropos deletion of addition of Rs. 80,40,300/- made by the Assessing Officer on account of Transfer Pricing adjustment (difference in arm‟s length price in international transactions of purchase of spare parts)
24. The assessee in the TP documentation applied TNMM to determine the arm‟s length prices of international transaction of import of components, spare parts, etc. It was also stated in the TP documentation that in absence of comparable uncontrolled price such transactions cannot be applied to bench marking the CUP method. The TPO, however, in his order applied CUP method by comparing the international transaction of import of components with prices of purchase of similar components after they are indigenizing from the domestic vendor. According to the assessee the CUP method evaluates whether the amount charged in a controlled transaction is at arm‟s length with reference to the amount charged in a comparable uncontrolled transaction to provide a direct estimate of the price of parties would have agreed to, had they resorted directly to an open market alternative to the controlled transaction. And it was the contention of the assessee that minor differences in contractual terms or economic conditions could materially affect the amount charged in an uncontrolled transaction. And the method becomes less reliable substitute for arm‟s length dealings if not all significant characteristics of the uncontrolled transactions are comparable. And the prices of international transactions of import of components and spare parts would not be compared with the prices of such components sourced from local manufacturers in the domestic market after their indigenization. Therefore the consistent stand of the assessee was that in the absence of comparable uncontrolled transactions has rightly applied Transactional Net Margin Method (TNMM) as the most appropriate method for determining the arm‟s length price of such international transactions and the TPO in the Transfer Pricing assessment for Assessment Year 2007-08 has accepted the aforesaid contention of the assessee and did not make any adjustment on account of import of components.
Page No. 1225. The ld counsel pointed out that Tribunal while disposing the appeal of the assessee for Assessment Year 2006-07 (ITA No. 5130/Del/2010) and 2002-03 (902/De/2011) remanded the matter back to the TPO with the direction to verify if raw material was available to the assessee from domestic sources.
"99. We have carefully considered the arguments of both the sides and perused the material placed before us. After considering the facts of the case and the arguments of both sides, we agree with the Revenue that for determining the ALP of purchase of the spare parts/ components, CUP method would be most appropriate method. Therefore, we uphold the selection of CUP method by the TPO. However, while applying the CUP method, it is to be ascertained whether similar goods were available indigenously. If the goods were not available indigenously, then naturally the rate of indigenous goods cannot be applied for determining the ALP. It is the contention of the assessee that when the goods were not available indigenously then only the same were purchased from AE. However, no evidence in this regard is produced by the assessee. At the same time, we find that no specific opportunity was allowed to produce such evidence. In view of above, in our opinion, it would meet the ends of justice if the orders of authorities below on this point are set aside and the matter is restored too the file of the Assessing Officer. We order accordingly and direct the Assessing Officer to allow adequate opportunity to the assessee to produce evidence in support of its contention that the spare parts were purchased from the AE only when the same were not available indigenously. The Assessing Officer will re-adjudicate the issue in accordance with law after considering the submissions of the assessee and also after taking into account the order of the TPO for subsequent year, if the facts are similar."
41. We find that in this year, assessee has made purchase of spare parts from its AE at Rs. 20,43,68,023/-. The assessee has adopted TNMM method as the most appropriate method in its transfer pricing documentation. The transaction was referred to the learned TPO by the Assessing Officer who did not accept the TMNN method adopted by the assessee. He determined the arms length price of the international transaction of import of components by applying CUP method and recommend the adjustment at Rs. 10,27,90,237/-. Leaned CIT(Appeals) on an analysis of the details has observed that learned TPO ought to have not rejected the TNMM method. According to her, application of CUP method is not appropriate. Therefore, she deleted the adjustment recommended by the learned TPO in the value of international transaction entered with the associate enterprises by the assessee.
42. We find that the similar issue has been considered by the ITAT in the findings extracted supra and since there is no change in facts or law, we respectfully follow the order of the co-ordinate Bench and we set aside the order of the ld CIT(A) and restore these issues to the file of the Page No. 13 Assessing Officer for re-adjudication. The Assessing Officer shall follow the directions given in Assessment Year 2006-07, extracted supra."
26. We find that the similar issue has been considered by the ITAT in the findings extracted supra and since there is no change in facts or law, we respectfully follow the order of the co-ordinate Bench and we set aside the order of the ld CIT(A) and restore these issues to the file of the Assessing Officer for re-adjudication. The Assessing Officer shall follow the directions given in Assessment Year 2006-07, extracted supra.
27. In the result, the appeal of the Revenue is partly allowed for statistical purpose.
28. Coming to the appeal preferred by the assessee in ITA No. 2045/Del/2011, the ground No. 1 and 1.1 of assessee is denial of benefit of deduction u/s 80HHC of the Income-tax Act, 1961, 1961(herein after „the Act‟) on the custom duty benefit under DEPB Scheme, amounting to Rs. 16,31,41,138/- and other claims of the assessee while computing deduction under section 80HHC.
29. Brief facts of the case is as follows. The assessee is engaged in the business of manufacture and sale of motorcycles.
30. The assessee in the return of income claimed deduction u/s 80HHC of the Act of Rs. 4,08,99,897/-. The deduction claimed was duly supported by Chartered Accountant‟s Report in Form 10CAC.
31. The assessee in the return of income claimed deduction u/s 80HHC of the Act of Rs. 7,08,99,897/-. The deduction claimed was duly supported by Chartered Accountant‟s Report in Form 10CCAC. The Assessing Officer, however, while completing assessment allowed deduction u/s 80HHC of the Act at Rs. 5,80,86,196/- by inter-alia:
(a) not regarding custom duty benefit under DEPB scheme amounting to Rs. 16,31,41,138/- as benefit under section 28(iiib) of the Act instead holding it to be covered under clause 28(iv) of the Act and, therefore, excluding 90% of amount received under DEPB scheme from profits of business Page No. 14 by treating the same as „other receipts‟ in terms of clause (baa) of Explanation to section 80HHC of the Act.
(b) not reducing excise duty and sale tax from total turnover without appreciating the excise duty and sales tax being not leviable on exports, the same do not form part of the export turnover and therefore, on parity of reasoning, same ought to have been excluded from total turnover.
(c) treating interest income of Rs. 2,75,10,284/- as "income from other sources" as against business income returned by the appellant.
(d) without prejudice, not netting off the interest expenditure of Rs. 1,73,23,592/- against interest income for computing deduction under section 80HHC of the Act.
32. The CIT(A) accepted the claim of the appellant in excluding sales tax and excise duty from the total turnover for the purposes of computing deduction under section 80HHC of the Act. However, the ld CIT(A) upheld the action of the Assessing Officer in reducing the amount of deduction under section 80HHC by not treating custom duty benefit under DEPB scheme as taxable under section 28(iiib) and by treating interest income as income from other sources.
33. Aggrieved by the said order of the ld CIT(A), the assessee is before us.
34. According to the ld counsel, Shri Ajay Vohra, the benefit is provided by way of credit to the pass book on exports of specified goods at prescribed rates. Such credit is recognized in the books of accounts as income on export sale by debiting "DEPB receivable account" and crediting "DEPB income account" which is grouped under the heading "other income". The ld counsel reiterated that assessee utilizes the said credit subsequently against import of components. The ld counsel further stated that pursuant to the order passed by the Assessing Officer, section 28(iii) and section 80HHC was amended by the Taxation Laws (Amendment) Act, 2005, w.e.f. 01.04.1998, whereby "profit arising from transfer of DEPB befit‟ was brought to tax under clause (iiid) of section 28 of the Act. The amendment was also made in section 80HHC by way of Page No. 15 inserting proviso to sub-section (3) thereof to allow deduction under that section to profit on transfer of DEPB benefit contained in section 28(iiid), subject to satisfaction of certain conditions. According to him, the Bombay High Court in the case of CIT Vs. Kalpataru Colours and Chemicals Ltd., 328 ITR 451, had held that section (iiid) covers full amount of DEPB benefit including amount of credit utilized by an assessee, which is not eligible for deduction under section 80HHC, if conditions stipulated in proviso to that section are not satisfied.
35. According to him, the ld CIT(A), while following the amendments to section 28(iii) read with second proviso to section 80HHC(3) of the Act, inserted by the Taxation Laws (Amendment) Act, 2005, w.e.f. 01.04.1998 and the decision of Bombay High Court in the case of CIT Vs. Kalpataru Colours and Chemicals Ltd. (supra) confirmed the disallowance of DEPBV benefit.
36. The ld counsel for the assessee Shri Ajay Vohra pointed out that assessee‟s own case for the Assessment Year 2002-03 is set aside and this issue has been remanded back to the file of the Assessing Officer for verification in the light of the Hon‟ble Supreme Court‟s order in the case of Topman Exports Vs. CIT reported in 342 ITR 49, and decision of Hon‟ble Delhi High Court in the case of CIT Vs. K.R.B.L. Ltd reported in 82 DTR 241 and the decision of Hon‟ble Gujarat High Court in the case of Avni Export reported in 348 ITR 391. The co- ordinate bench in ITA Nos. 1052/Del/2011 & ITA No. 902/Del2011held as under:
"9. Ld. Counsel for the assessee at the very outset submitted that Hon‟ble Supreme Court has transferred a large number of writ petitions filed in various High Court‟s, challenging the amendment carried out in the 3rd and 4th provision to section 80HHC, vide amendment of taxation law (2nd amendment) Act, 2005. The Hon‟ble Gujarat High Court has decided this issue in the case of Avani Exports and others Vs. CIT Rajkot reported in 348 ITR 391. He pointed out that Hon‟ble Court has upheld the constitutional validity of the Act but held that it cannot be applied with retrospective effect. He further submitted that assessing officer in the assessment order has held that benefit under DEPB scheme was covered u/s 28 (IV) and was not to be regarded as export incentives u/s 28(III)
(a) /(b) or (c) of the Act. Thus, the assessing officer has reduced 90% of DEPB benefit from profits while computing the deduction admissible u/s 80HHC. He pointed out that this issue was considered by the special bench of the ITAT in the case of Topman Export. Wherein it was held that only the profit on sale of DEPB credit would fall within the ambit of (IIId) of Section 28. This decision of the tribunal was reversed by the Hon‟ble Bombay High Court in the case of Kalpataru Colours and Chemicals Vs. additional CIT reported in 31/ ITR page 87, however, the Hon‟ble Supreme Court has upheld the view of the tribunal in the case of Topman Export Vs. CIT reported in 342 ITR page 49. He also pointed out that after the decision of Hon‟ble Supreme Court, Hon‟ble Delhi High Court has also held that where the assessee itself had utilized the DEPB credit for its Page No. 16 business and had not transferred the same to any 3rd party, then the provisions of section 28(IIId) would not be attracted, and therefore, the 2nd 3rd , 4th proviso of section 80 HHC (3) will also not be applicable on the assessee. On the other hand, Ld. DR relied upon the order of the assessing officer.
10. On due consideration of the facts and circumstances, we find that decision of Hon‟ble Gujarat High Court in the case of Avni export has come on 2nd of July, 2012. Similarly, the decision of Hon‟ble Supreme Court in the case of Topman Exports was pronounced on 8th of February, 2012. The benefit of both these decisions was not available to the Ld. Revenue authorities because CIT(A) has decided the appeal of assessee on 29.11.2010, therefore, we set aside this issue to the file of assessing officer for verification and readjudication. The Ld. Assessing officer shall keep in mind, the decision of Hon‟ble Supreme Court in the case of Topman Exports Vs. CIT reported in 342 ITR 49, decision of Hon‟ble Delhi High Court in the case of CIT Vs. K.R.B.L. Ltd. reported in 82 DTR page 241 and the decision of Hon‟ble Gujarat High Court in the case of Avni Export reported in 348 ITR 391, while deciding, whether any amount from DEPB receipt deserves to be reduced from the eligible profit for computing deduction u/s 80HHC?"
37. Since there is no change in the facts and law on this issue we respectfully following the decision in assessee‟s own case for Assessment Year 2002-03 above and we set aside the impugned order and direct the Assessing Officer to verify the claim in the light of the decision of the Hon‟ble Supreme Court in the case of Topman Exports (supra), K.R.B.L. Ltd (supra) and Avni Exports (supra).
38. Next issue is ground no. 1.2 and 1.3 that of the treatment given for interest income of Rs. 2,40,81,432/- as "income from other sources" and consequentially excluding the same from profits of the business for the purposes of computing deduction u/s 80HHC of the Act.
39. At the outset the ld counsel Shir Ajay Vohra submitted that the Tribunal vide its order dated 31.07.2013, passed in assessee‟s own case for the Assessment Year 2002-03 held that net income has to be excluded under Clause (baa) of the explanation to Section 80HHC and directed the Assessing Officer to verify the claim of the assessee and to re-compute the deduction admissible u/s 80HHC in the light of the Delhi High Court decision in the case of Shri Ram Honda Power Equipment 289 ITR 475 (Del). After citing the case of Shriram Honda (supra)co-ordinate Bench of this Tribunal has held that Clause (baa) of the explanation to Section 80HHC envisages two step process in computing profit derived from export. In the first step assessing officer is required to apply section 28 to 44 in order to compute the profits and gains of business or profession. In doing so, the Assessing Officer may find that certain Page No. 17 incomes, which have no nexus to the export business of the assessee, are not allowable and therefore ought to be treated as income from other source. Once, Assessing Officer computed what is business income, then, he should proceed to the next step of deducting 90% of the receipts referred in clause (baa) of the explanation to section 80HHC, in order to arrive at the profits derived from the exports. The co-ordinate bench of this tribunal after quoting the said decision of jurisdictional High Court held in para 33 of its order which is reproduced as follow:-
"13. This decision has been approved by the Hon‟ble Supreme Court in the case of AC associate Capsules Pvt. Ltd. Vs. CIT reported in 343 ITR page 89.The Hon‟ble High Court has held that interest income earned on fixed deposit for the purpose of availing credit facilities from the bank the does not have immediate nexuses with the export business and, therefore, has to necessarily be treated as income from other source and not a business income. The Hon‟ble High Court has further held that net interest income is to be considered which will not fall within the ambit of eligible profit for the purpose of computation of deduction u/s 80HHC, 90% of the net interest income is to be excluded under clause (baa) of the explanation. Respectfully following this decision, we direct the assessing officer to verify the claim of assessee and then re-compute the deduction admissible u/s 80HHC in the light of Hon‟ble Delhi High Court‟s decision. The next component under these grounds is exclusion of 90% of miscellaneous income. The assessee has a miscellaneous income of Rs. 3,11,00,000/-. The Ld. Counsel for the assessee has submitted this miscellaneous income is under 11 heads, which include royalty, rent mutual fund, bill discounting, etc. He pointed out that assessee itself has excluded 90% of the receipts representing miscellaneous interest income royalty, rent and miscellaneous income from commission. The other receipts have arisen during the course of business and is an operational income and cannot be considered as of the nature of „any other receipts‟ in terms of clause (baa) of explanation to section 80HHC of the Act. He made detail written submission in his note and made reference to a large number of decisions. The Ld. DR on the other hand, pointed out that no discussion is discernable in the order of Ld. CIT(A) on this issue, therefore, this issue may be remitted back to the file of Ld.CIT(A).
14. On due consideration of the facts and circumstances, we find that neither in the assessment order nor in the order of Ld. CIT(A), a discussion is available about the nature of receipts and how 90% of these miscellaneous receipts are excluded. In the absence of complete factual details in the impugned orders, it is difficult to cross verify the details submitted by the Ld. Counsel in his written note, therefore, we set aside this issue also to the file of assessing officer for verification and the adjudication."
40. In view of the above order of the co-ordinate bench of this Tribunal on the issue before us and since there is no change of facts or law, we respectfully follow it and set aside the impugned order on this issue and remand the issue back to the file of the Assessing Officer to verify and adjudicate afresh this issue as stated above.
Page No. 1841. Apropos disallowing deduction u/s 80IA of the Act, amounting to Rs. 2,28,86,196/-, claimed by the appellant in respect of the captive power generating unit at Gurgaon and that the ld CIT(A) erred on upholding the action of the Assessing Officer in computing profits of the power generating unit by adopting the rate of supply of power at Rs. 4.05 per unit, at which power was supplied by State Electricity Board, as the „market price‟ of the power, as against rate of Rs. 5.92 per unit (cost of generation of power at Rs. 5.15 per unit + mark-up of 15%) adopted by the appellant for the purposes of computing deduction u/s 80IA of the Act for captive power generating unit. In view of the power supply constraints in the area of Gurgaon, Haryana, where the assessee had set-up its manufacturing facility, the appellant had set-up power plant in order to meet the captive consumption requirement of power. The appellant claimed deduction u/s 80IA of the Act at Rs. 2,28,86,196/- in respect of power generated at the aforesaid unit and captively consumed by the appellant. The deduction claimed was duly supported by Chartered Accountant‟s Report. For the purpose of computing deduction u/s 80IA, the appellant adopted the transfer price of power, captively consumed, at the cost of generation of power per unit with mark-up of 15%. The cost of generation of power was adopted at Rs. 5.15, which was based on cost certified in the cost audit report. Accordingly, the appellant adopted the rate of transfer of power @ Rs. 5.92 per unit (Rs. 5.15 + 15% of Rs. 5.15). The Assessing Officer, in the assessment order, has held that the inter-unit transfer of power from the Power Plant should have been at the price at which HSEB (government body) is supplying to appellant‟s Dharuhera/ Gurgaon Plant, i.e. Rs. 3.90 per unit. Since the cost of generation was more than the market value taken by the Assessing Officer, no deduction u/s 80IA of the Act has been allowed in the assessment order by the Assessing Officer following the earlier year assessment order which stand has been upheld by the ld CIT(A). Aggrieved by the said order of the ld CIT(A) the assessee is before us.
42. The ld counsel, Shri Ajay Vohra submitted that the rate of transfer price of power power, adopted by the appellant for the purpose of computing deduction u/s 80IA of the Act is correct and no disallowance of deduction claimed under the said section is called for. According to him, in terms of sub- section(8) of Section 80-IA of the Act, profits of the eligible business are required Page No. 19 to be computed on the basis of inter unit transfer of goods and services at the price such goods would ordinarily fetch on sale in the open market. The ld counsel contended that the market price of the goods is to be determined at the price at which there is willingness on part of the buyer to purchase and on part of the seller to sell the goods. For the aforesaid proposition, reference was made to the following decisions:-
P. Ramnath Aiyar‟s Law Lexicon (2002 Edition) on the meaning of expression „market price‟ Inland Revenue Commissioner Vs. Clay and Buchanan (1914) 3KB 466,471 Kailash Chandra Mitra Vs. The Secretary of State for India (1910)17CLJ State of UP Vs. Ram Sarup XII SCN 65 S.C. In view of the aforesaid decisions, the ld counsel argued that the rate at which electricity was supplied by HSEB cannot be said to be expression of market price since for the following reasons:-
HSEB was not in a position to provide assured, committed and continuous supply of electricity, as per the appellant‟s requirement, or even of other manufacturing companies operating in that areas;
as a result, till recently, Maruti Udyog Ltd, an independent supplier of electricity, generating electricity using the same technology as adopted by the appellant, was charging rate of supply of power @ Rs. 7.50 per unit, from its associated factories located in vicinity and the companies were purchasing at that price since no electricity supply was available from HSEB.
43. The ld Counsel therefore submitted that the price charged by HSEB in Darahera Plant can, by no stretch of imagination, be treated or considered as the price of power in the open market. According to the ld counsel Shri Ajay Vohra the rate charged by HSEB at Dhruhera plant is not, therefore, the rate which the power could be said to be available in the open market in Gurgaon area. When the fact remains that HSEB could not assure providing uninterrupted power and the assessee was forced to procure the same power which was available from an alternate source at much higher cost. The ld counsel stressed that the inter-division transfer of power from the captive power Page No. 20 plants, had been made and recorded at the price lower than the market price, which has been considered as fair price by the Auditors. According to the ld counsel, the said price being the fair market value of power was in conformity with the provisions of sub-section (8) of Section 80-IA of the Act. The ld counsel contended that the re-computation of the allowable deduction made by the Assessing Officer by substitution the said price with Rs. 3.90, at which electricity was not available in the open market is contrary to the mandate of sub-section (8) of Section 80-IA of the Act. The ld counsel relied on the decision of Mumbai Bench of the Tribunal in the case of Reliance Infrastructure Ltd. Vs. Addl. CIT: ITA No. 4631/Mum/2009, wherein price paid for purchase of power form third party, other than government body, was accepted to be constituting market price for the purpose of computing deduction u/s 80IA(4) of the Act. It was submitted by the ld counsel that the rate as adopted by the appellant, as the market price of power be taken to compute the profits of the Power Plant for computing deduction u/s 80IA of the Act. Therefore the ld counsel pleads that the impugned order may be set aside. On the other hand the ld DR supported the decision of the ld CIT(A) and pointed out that the aforesaid issue has been decided against the assessee by co-ordinate Bench of this Tribunal in the assessee‟s own case for the Assessment Year 2006-07, 2007-08 and 2002-03.
44. We find that for the Assessment Year 2006-07, the co-ordinate Bench of this Tribunal has held in assessee‟s own case in ITA No. 5130/Del/2010 dated 23.11.2012 on this issue as under:-
"39. We have carefully considered the submissions of both the sides and perused the material placed before us. Sub-section (8) of Section 80IA reads as under:-
"(8) Where any goods (or services) held for the purposes of the eligible business are transferred to any other business carried on by the assessee, or where any goods (or services) held for the purposes of any other business carried on by the assessee are transferred to the eligible business and, in either case, the consideration, if any, for such transfer as recorded in the accounts of the eligible business does not correspond to the market value of such goods (or services) as on the date of the transfer, then, for the purposes of the deduction under this section, the profits and gains of such eligible business shall be computed as if the transfer in either case, had been made at the market value of such goods (or services) as on that date:
Provided that where, in the opinion of the Assessing Officer, the computing of the profits and gains of the eligible business, in the manner hereinbefore specified presents exceptional difficulties, in Page No. 21 the Assessing Officer may compute such profits and gains on such reasonable basis as he may deem fit.
(Explanation- for the purpose of this sub-section, "market value", in relation to any goods or services, means the price that such goods or services would ordinarily fetch in the open market._"
40. From the above, it is evident that where the goods or services held for the purposes of eligible business are transferred to another business, carried on by the assessee, then for the purpose of deduction under this section, the profits and gains of such eligible business shall be computed as it transfer had been made at the market value of such goods or services as on date. IN the case under appeal before us, it is not in dispute that in the eligible business, the assessee is generating the power which is being consumed by the assessee company‟s manufacturing facility. Therefore, the profit of the eligible business is to be computed at the market rate of supply of power. It is the assessee‟s contention that Maruti Udyog Limited is supplying the power to its AE at the rate of Rs. 8.50 per unit while the assessee had computed the profit of the eligible business by taking the rate of power at Rs. 7.08 per unit. The assessee has computed the rate of power by the cost of generation per unit with mark of 15%. However, the Assessing Officer has pointed out that the government undertaking i.e. Haryana State Electricity Board has supplied the power to the assessee and other industrial units in the area at the rate of Rs. 3.90 per unit. Now, the question is, what is the market rate at which power is being supplied. In our opinion, the rate at which power is being supply by the Haryana State Electricity Board, to each and every industrial unit situated in the area, in which the assessee‟s manufacturing unit is situated, is the market rate at which power is available. The rate at which Maruti Udyog Limited is claimed to supply the power to its AE cannot be said to be the market rate of the power in that area because as per assessee‟s own claim, Maruti Udyog Limited is supplying the power to its AE and not to unrelated parties in general. In view of the above, we hold that the Assessing Officer was fully justified in arriving at the conclusion that there was a loss, in the power generation undertaking of the assessee and therefore, there was no eligible profit for allowing deduction under section 80IA. Accordingly, we dismiss ground Nos. 8 & 8.1 of the assessee‟s appeal."
45. Since, there is no change in facts and law, respectfully following the decision rendered by the co-ordinate Bench, we dismiss this ground of the assessee and confirm the order of the ld CIT(A).
46 Apropos levy of interest u/s 234D of the Act.
47. Ld counsel for the assessee Shri Ajay Vohra submitted that the provision of section 234D of the Act were inserted from 01.06.2003 and in the following cases, it was held that the same was prospective in operation and would apply Page No. 22 from Assessment Year 2004-05 and onwards. Ld counsel relied heavily on the on the following decisions:-
DIT Vs. Jacabs Civil Incorporated: 330 ITR 578 (del) (HC) ITO Vs. Ekta Promoters Private Limited: 113 ITD 719 (Del)(SB)
48. Ld DR pointed out that section 234D has been amended by the Finance Act, 2012 w.e.f. 01.06.2003, whereby Explanation 2 has been inserted in the section to provide that provisions of said section will be applicable to assessment years prior to 01.06.2003 also, provided assessment for such years is completed after said date. And according to the ld DR, in the present case, the assessment being completed on 28.02.2006, in view of the aforesaid amendment, the said ground need to be decided against the assessee.
49. We have heard both the sides and has gone though the case laws cited by both the parties and has carefully perused the records. Let us see Section 234D of the Act:-
"234D. (1) Subject to the other provisions of this Act, where any refund is granted to the assessee under sub-section (1) of section 143, and--
(a) no refund is due on regular assessment; or
(b) the amount refunded under sub-section (1) of section 143 exceeds the amount refundable on regular assessment, the assessee shall be liable to pay simple interest at the rate of [one-half] per cent on the whole or the excess amount so refunded, for every month or part of a month comprised in the period from the date of grant of refund to the date of such regular assessment.
(2) Where, as a result of an order under section 154 or section 155 or section 250 or section 254 or section 260 or section 262 or section 263 or section 264 or an order of the Settlement Commission under sub-section (4) of section 245D, the amount of refund granted under sub-section (1) of section 143 is held to be correctly allowed, either in whole or in part, as the case may be, then, the interest chargeable, if any, under sub-section (1) shall be reduced accordingly.
Explanation (1)-Where, in relation to an assessment year, an assessment is made for the first time under section 147 or section 153A, the assessment so made shall be regarded as a regular assessment for the purposes of this section."
Explanation (2)-For the removal of doubts, it is hereby declared that the provisions of this section shall also apply to an assessment year commencing before the 1st day of June, 2003 if the proceedings in respect of such assessment year is completed after the said date."
Page No. 2350. In view of the explanation (2) it has been clearly stated that the provision of this section shall also apply to an assessment years before 1st June 2003 if the assessment for such year commences before 1st June 2003, and if the proceedings in respect of such assessment year is completed after the said date. Admittedly in this case assessment was completed only on 28.02.2006. We find force in the argument of the ld DR that the provision of section 234D would apply for the assessee in this case. Therefore we uphold and confirm the order of the ld CIT(A) and dismiss the appeal of the assessee on this ground.
51. In the result the assessee‟s appeal ITA No. ITA No. 2045/Del/2011is partly allowed.
Order pronounced in the open court on 15.05.2014.
-Sd/- -Sd/-
(B.C. MEENA) (A. T. VARKEY)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Dated:15 /05 /2014
A K Keot
Copy forwarded to
1. Applicant
2. Respondent
3. CIT
4. CIT (A)
5. DR:ITAT
ASSISTANT REGISTRAR
ITAT, New Delhi