TMI Blog2013 (8) TMI 57X X X X Extracts X X X X X X X X Extracts X X X X ..... cost audit report - Disallowance u/s 14A as per Rule 8D - Disallowance of Rs. 4.26 crores on account of payment to LIC to cover leave encashment on the ground that same is allowable on actual payment of leave encashment under section 43B(f) of the Act; - Disallowance of Rs. 2.08 crores being the actual amount of leave encashment to employees during the year, on account of no evidence establishing such payment. - Disallowance of expenditure incurred in connection with expansion of business at Hardwar - payment of passenger tax to Government on behalf of transporters - Reimbursement of free service coupons to dealer for repair of vehicle - Payment to dealers on account of reimbursement of advertisement expenses - Reimbursement of repair and maintenance cost of Omax Auto Ltd. - TDS on reimbursement of out of pocket/ traveling expenses to consultant/ vendors - TDS on rental of leased lines from MTNL/BSNL - TDS on rent paid towards property taken on lease (matter remanded back) - TDS on management fee under a portfolio management scheme - TDS on payments exceeding exemption limit specified under 197 certificate - TDS at lower rate or wrong provision - TDS on incentive/ discount to deal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... motorbikes gifted to various winners of contestants at TV shows - TDS on use of catering services provided by hotels and room rent to hotels - TDS on hire charges of generator used at the corporate office - TDS on purchase of flowers - TDS on stitching charges of uniform for employees - TDS on provisions of various miscellaneous expenses made at the end of relevant year - Disallowance of incorrect deduction on account of additional depreciation reversed in succeeding year. - ITA No. 1980 /Del/ 2012 - - - Dated:- 11-6-2013 - Shri R. P. Tolani And Shri J. S. Reddy,JJ. For the Appellant : Shri Ajay Vohra Adv., Shri Gaurav Jain FCA, Shri Upvan Gupta ACA, Shri Neeraj Jain Adv. For the Respondent : Shri Peeyush Jain CIT (DR) TP ORDER Per Bench : The Assessee is a company engaged in the manufacturing and selling of two-wheelers. The assessee maintains regular books of accounts, which are duly audited u/s 44AB. The accounting policies, method of accounting, excepting one instance, are the same as in earlier years. Assessee is assessed to tax since past so many years. There was a joint venture between Hero Group, India and Honda Motor Company, Japan. During the Financia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... made detailed submissions on various dates raising objections on special auditors recommendation and supporting its own accounts, policies and method of accounts. The assessing officer after considering the same, passed draft assessment order u/s 144C of the Act computing the income at Rs. 4485,91,57,334/-. 3.4. The assessee filed objections before the DRP-I, New Delhi. The DRP vide order dated 29-2-2012 disposed of these objections and issued certain directions to the assessing officer. Thereafter, the assessing officer passed an order u/s 143(3) red with se. 144C on 4-4-2012. Aggrieved, the assessee filed this appeal before us on various grounds, which we would be considering in seriatum. 4. Shri Ajay Vohra, Sr. Advocate, appeared on behalf of the assessee and Mr. Piyush Jain CIT (DR) appeared on behalf of the Revenue. 5. The assessee moved an application under Rule 11 of the ITAT Rules 1963 for the admission of following additional grounds of appeal:- "1. That on the facts and circumstances of the case, miscellaneous expenses, aggregating to Rs. 7,15,91,826/- incurred in respect of services availed from vendors during the relevant year, but were claimed as deduction in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... additional ground no. 2 i.e. reversal of CENVAT on the ground that it is not clear as to which year VAT in question prtains. It is pleaded that this issue may require verification of some facts. 5.5. On a query from the Bench he submitted that admission of these additional grounds of appeal is being opposed by him on technical grounds as the assessee has not made the claim while filing its return of income. 5.6. After hearing rival contentions, we are of the considered opinion that the additional grounds of appeal have to be admitted as all the facts are on record. No fresh investigation into the facts is required. The assessing officer while passing the assessment order for assessment year 2008-09 came to a conclusion that the expenditure in question pertains to assessment year 2007-08, which gives rise to a consequential issue. Thus additional grounds of appeal have been raised pursuant to the finding in the draft assessment order dated 13-6-2012 for assessment year 2008-09. Thus the assessee was prevented by sufficient cause from raising this ground earlier.As these are legal grounds on the issue of year of allowbility of the said expenditure and as all the facts are alread ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r examining the accounts of the assessee and the books and return of income of the vendors, has certified that the vendors have duly paid the tax due on the income declared in the return of income after accounting for the sale made to the assessee during the F.Y. 2006-07 along with copy of the return of income of the vendor. This is to support its contention that it would fall within the ken of the aforesaid Finance Act 2012. It was pleaded that the aforesaid evidences are crucial for adjudication of the grounds of appeal and that they go to the root of the matter. Reliance is placed on the decision of Hon'ble Jurisdictional Delhi High court in the case of CIT Vs. Text Hundred Industries Ltd. 239 CTR 263, wherein the Hon'ble Court has held that additional evidences which are necessary to render substantial justice have to be admitted by the ITAT. It was submitted that for the reasons already stated, these evidence could not be filed before the lower authorities and hence the application was rightly made for admission of the additional evidence deserves to be accepted. 5.12. Ld. CIT (DR) strongly opposed the admission of additional evidence and urged that the ld. AR has not taken ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to 2.2: (Addition of freight inward/ import clearing expenses to cost of closing inventory): DRP Directions: 7.2. The DRP in its order has sustained the additions so made by the assessing officer. Findings of the DRP are given as under; "Directions:The objections of the assessee have been considered. There cannot two opinions on the fact that the value of closing inventory must include freight and import clearing charges. The assessee has tried to justify its position by stating that the department had accepted this method of valuation in the past. As is well known, the principle of res-judicata does not apply in Income tax proceedings and therefore, the AO is correct to come to independent conclusion and is not bound by past acceptance of a factual legal point by the department. The other contention of the assessee is that the transaction would be revenue neutral in the long run. While in some years, there may be no impact of such adjustment but in some years the impact will be very high. As it is the duty of the AO to determine the true income of the year, the action of the AO is upheld." In conformity with the directions of the DRP addition of Rs. 31.38 lacs is made to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng adjustment would need to be carried out in the opening stock of the succeeding year. The addition, if any, is revenue neutral, if seen in a macro perspective and, therefore, no adjustment is called for. Reliance was placed on the following decisions Nagri Mills Company Ltd.: 33 ITR 681 (Bom.); Triveni Engineering Industries Ltd.: 336 ITR 374 (Del). DR's submissions: 7.9. The method of accounting followed by the assessee do not consider expenditure incurred on account of freight/ import clearing charges and hence this is not in accordance with the accepted principles of accountancy and is, therefore, not a correct approach. Accordingly, the adjustment made by the assessing officer was justified. 7.10. As regards the contention of the assessee that the method of valuation of closing stock cannot be disturbed by the Revenue considering- (i) such method has been consistently followed, which has always been accepted by the Revenue in the past, and (ii) since closing stock of one year becomes opening stock of next year, there is no loss to revenue warranting impugned adjustment, it is submitted, that the same is not acceptable for the following reasons: An incorrect method of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as soon as raw material enters the factory premises which is not disputed by assessing officer, hence the question of such purchases being part of closing stock does not arise at all. In such a situation, when freight/ import charges are directly debited to the P L A/c along with the value of the purchases, naturally the question of treating them as part of closing inventory does not arise. The assessee has acted and accounted in a proper and acceptable method. Therefore, the relief should be granted on this count alone. 7.15. Alternatively, the undisputed fact remains that the assessee has been consistently following the said method of accounting in the last many years and the Revenue has been accepting these facts and method of accounting without any demur. 7.16. The contention of the DRP that, the principle of res-judicata does not apply in Income tax proceedings and therefore, the Assessing officer is correct to come to independent conclusion and is not bound by past acceptance of a factual legal point by the department is untenable. Technically the principle of res judicata may not apply to the income tax proceedings as each year is is an independent year, yet there ought ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h the methods, one adopted by the assessee and the other by the department. In the circumstances, there was no reason to interfere with the conclusion given by the High Court" 7.20. The Hon'ble Supreme Court in the case of CIT Vs. Bilahari Investment P. Ltd. 299 ITR 1 (SC) held as follows: "Every assessee is entitled to arrange its affairs and follow the method of accounting, which the Department has earlier accepted. It is only in those cases where the Department records a finding that the method adopted by the assessee results in distortion of profits that the Department can insist on substitution of the existing method." 7.21. In the case of CIT Vs. Jagatjit Industries Ltd. (2011) 399 ITR 382 (Del.), the Hon'ble Jurisdictional High Court has held as follows: "If a particular accounting system has been followed and accepted and there is no acceptable reason to differ with it, the doctrine of consistency would come into play. The method of accounting cannot be rejected. The assessee was following the mercantile system of accounting. According to past business practice, the expenditure spilled over the next year and was debited in the second year and was allowed by the As ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7.23. In view of the foregoings and proposition laid down by the Hon'ble Supreme Court and the Hon'ble High Courts, we are of the opinion that adjustment of Rs. 31.38 lacs made to total value of closing stock of Rs. 275 crores and consumption of stock of Rs. 7178 crores is uncalled for. If valuation of closing stock is changed then the value of opening stock should also be changed on the same basis or method. The closing stock of a particular year is the opening stock of the subsequent year. It is not the case of the revenue that the method of valuation of closing stock is materially affecting the accounts and profits disclosed by the assessee. This adjustment sought to be made is revenue neutral and at best may result in preponment or postponement of revenue. The issue is whether such exercise is at all required on the ground of materiality. Materiality is a concept which is well recognized both in accountancy and law. Accounting standards notified by the CBDT u/s 145(2) mandate that the concept of materiality be taken into consideration when finalizing the accounts of an assessee. 7.24. Further, the Hon'ble Supreme Court in the case of Berger Paints India Ltd. Vs. CIT (2004) 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... said expenditure comprised of abnormal wastages, it was not practically feasible to segregate normal and abnormal wastages and, therefore, the assessee as per the consistent method of accounting did not consider the aforesaid costs for purposes of allocation to closing inventory. Assesse's Submissions: 8.5. AS-2 on valuation of inventory stipulates that abnormal wastages should not be considered for valuation of inventory. Since, the impugned write off on account of rejection of material, in the nature of abnormal rejections, the assessee, as per consistent, regular and accepted method of accounting, charged the same to profit and loss account, without any allocation to the value of closing inventory. 8.6. The adjustment made by the Assessing officer is therefore contrary to the mandatory accounting standard consistently and regularly followed by the assessee and accepted by the Department. 8.7. In any case, considering that the assessee is a high tax paying company, subjected to uniform rate of tax, no adjustment is even otherwise called for in view of the following: a. If the closing stock of the year is to be varied, similar adjustments would need to be made to the ope ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of inventory. It reads as follows: "16. Examples of costs excluded from the cost of inventories and recognised as expenses in the period in which they are incurred are: a) Abnormal amounts of wasted materials, labour or other production costs; storage costs, unless those costs are necessary in the production process before a further production stage; administrative overheads that do not contribute to bringing inventories to their present location and condition; and selling costs." 8.14. Keeping in view the treatment prescribed under AS-2 and the fact that the assessee has been regularly following the same method of accounting for valuation of charging such rejection to P L A/c and its closing inventory, we are of the view the addition in question is uncalled for. The adjustment is not material adjustment. Further, for the reasons stated by us on the issue of consistency, while disposing ground no. 2 to 2.2, we allow this ground of the assessee. 9.1. Ground nos. 4 to 4.3: (Addition of provision for increase in price of material to the value of closing inventory)- DRP Directions:- 9.2. The DRP has issued following directions to the Assessing Officer on this issue: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vendors keep on supplying the material provisionally at the agreed rates, which is recorded in the books of accounts by the assessee. 9.5. At the year end, the company estimates the additional liability on account of price revision under negotiation and makes upward/downward provision, as the case may be, in relation to material supplied until the end of the relevant year. 9.6. During the year under appeal, the company had debited the profit and loss account with adjustment on account of upward revision in price at Rs. 31.31 crores. (wrongly taken in the assessment order at Rs. 31.69 crores.) Assessee's Submissions: 9.7. The aforesaid provision for increase in price of raw material related to material already supplied by the vendors, which stood consumed in the course of manufacturing. The fact that raw material supplied during the year was almost fully consumed by the assessee at the end of the year is evident from the fact that the closing inventory of the company was only 4% of the total consumption during the year. Any goods / material lying in the closing inventory, in relation to which provision for increase in revision of price was made by the assessee, if at all, w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... finding of the assessing officer or the DRP. The addition is made based on surmise that it is not possible to consume all the purchases. When the assessee states that the stocks so purchased are consumed, the explanation cannot be rejected without further verification and bringing on record contrary evidence. The 'Just in time' system of inventory adopted by the assessee is not disputed by the Revenue. The assessee worked out and pointed out that the actual apportionment is about Rs. 3 lacs and submitted the calculation before the DRP. However, this claim has not been verified by the Revenue. Therefore, on the ground of consistency and materiality for the reasons given while disposing off ground nos. 2 to 2.2 and also for the reason that the revenue failed to contradict the claim of the assessee with evidence, we all this ground of appeal. 10.1. Ground nos. 5 to 5.1 (Disallowance of cost of scrap material): DRP Directions: 10.2. The directions of the DRP on this issue are reproduced as under; "The assessee has objected to the disallowance of Rs. 12.53 crores claimed in respect of cost of material/obsolete items rejected in the course of manufacturing which was debited to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bolt, which gets scrapped in the course of manufacturing. Such a requirement from the assessing officer is highly impracticable and not in consonance with the business realities. 10.6. There is no finding that the aforesaid loss claimed by the assessee is unreasonable, having regard to the size/operations or past history of the assessee nor the aforesaid cost has disturbed the gross profit earned by the assessee during the relevant year vis- -vis earlier years. 10.7. The assessing officer has itself noted in the assessment order, the earlier years' history of expenditure on account of wastage/scrap vis- -vis the total turnover, which has not been found to be excessive in this year. 10.8. There is an accepted history of trading results. For the relevant year as well, the books of account have not been rejected and the trading results has been accepted on the basis of books of accounts, which are accepted to be true and complete. Under such circumstances, the assessing officer erred in disallowing the loss arising on account of wastage. 10.9. The assessee has also realized an amount of Rs.11.43 crores as against the aforesaid loss of Rs.12.53 crores which again is not disprop ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessing officer should have, in our opinion, considered the reasonableness of the claim based on the size of the company, its operations or on the basis of similar comparable cases and also by keeping in view the past history of the assessee. When the Assessing officer does not dispute the realization from the sale of scrap, the disallowance of the entire value of scarp is not justified. At best an estimated value of scrap items, lying in the floor of stores on the last day of the previous year can be made as was done by the assessing officer in the subsequent year. 10.16. In view of the above, as an estimate has to be made of the stock of scrap at the shop floor and the same be taken into account, we set aside the issue to the file of the assessing officer for fresh adjudication by keeping in view our discussion on the above issue. In the result this ground is allowed for statistical purposes. 11.1. Ground no. 6 to 6.3: (Disallowance of provision for price increase reversed in the next year): DRP Directions: 11.2. The DRP vide above order has issued following directions to the Assessing Officer; "The assessee has objected to the disallowance of Rs. 345.71 lacs in respect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... best estimate, in as much as the provision made has been upheld to be an allowable deduction and it only the excess amount of provision, which was reversed in the succeeding year, that has been disallowed on the ground of the same being an unascertained liability. 11.6. It is a settled law that where liability has accrued during the previous year, the same needs to be provided in the books provided the same is capable of being estimated with reasonable certainty, even if the liability is quantified and discharged at a future date. Reliance placed on Bharat Earth Movers v. CIT: 245 ITR 428 (SC); Bayer Bio Science (P) Ltd.: 148 TTJ 73 (Mum). 11.7. The assessee had been consistently and regularly following the accounting practice of creating provision and reversing any excess or shortfall therein in the succeeding year and offering the same to tax in that year accordingly. 11.8. The said method of accounting having been always accepted by the Revenue in the past could not have been disturbed by it without justified and sufficient reason to overcome the theory of consistency. 11.9. Without prejudice, the aforesaid adjustment was not warranted, since the same is a revenue neutr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r; "The assessee has objected to the disallowance of Rs. 498.09 lacs on account of short provision for increase in prices of materials created in the immediately preceding year on the ground that the same is prior expenditure. The assessee has also objected to the disallowance of Rs. 978.76 lacs on account of short provision for decrease in prices of materials to income on the ground that the same has been resulted in excess booking of expenditure on account of consumption of raw materials during the relevant previous year. Lastly without prejudice the assessee has contended that the figures adopted by the AO are not correct". The objection of the assessee has been considered. It is seen that the AO after due consideration of the assessee's reply has held that the actual quantification though possible was not considered by the assessee. The assessee has also not been able to provide any evidence to substantiate its submissions that the special auditor has erred in making various additions with regard to the amount of provisions and prior period expenses. In any case, expenses which do not pertain to the year under consideration cannot be allowed to the assessee. Therefore, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l liability accounted for and claimed during the relevant previous year becomes a prior period expense. The additional liability crystallized /accrued in the year under appeal on finalization of price negotiations. Reliance is placed on Saurashtra Cement and Chemical Ltd. v. CIT: 213 ITR 523 (Guj.). 12.6. As per consistent, regular and accepted method of accounting followed by the assessee, any excess or shortfall in such provision is reversed in the succeeding year and offered for tax accordingly. The aforesaid method of accounting of accounting has been consistently and regularly followed by the assessee, which has been accepted by the Revenue as such in all the years. 12.7. It needs to be appreciated that when such a method is consistently and regularly followed, any aberration would even out over the years, and, therefore, no tinkering with such method is required, more so when the assessee is subjected to uniform rate of tax. Reliance is place on Nagri Mills Company Ltd.: 33 ITR 681 (Bom.); Triveni Engineering Industries Ltd.: 336 ITR 374 (Del.). 12.8. Without prejudice, the amount of Rs. 4.98 crores and Rs. 9.78 crores adopted in the assessment order are incorrect, whic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ertainment of the expenses. Once the actual expense has been ascertained, the liability accures in that year to the extent not provided in the earlier year and is to be allowed as revenue expenditure in the year of crystallization. Concepts of going concern, accrual and consistency have to be taken into account by the revenue authorities while evaluating such provisions and making such adjustments. The assessee is disputing the figures of disallowance and the DRP is also expressing its inability to correct the figures. In our view the DRP is not helpless and could have directed the assessing officer to verify the figures and correct the mistakes, if any. In view of the above discussion, we allow this ground of assessee for statistical purpose and direct the assessing officer to properly verify the figures and allow the claim of the assessee. 13. Ground nos. 8 to 8.2: (Disallowance of alleged excessive purchases price paid to related parties as per AS-18): DRP Directions: 13.2. The DRP has issued following directions to the Assessing Officer; "Assessee has objected to proposed addition of Rs. 16.60 crores in respect of purchases from related parties on account of excessive p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with definition given in AS-18 issued by the Institute of Chartered Accountants of India (ICAI) and as disclosed in the notes to accounts of the audited accounts of the relevant previous year, but admittedly not related in terms of definition provided in section 40A (2) of the Act, amounted to Rs.2108.40 crores. 13.4. The Assessing Officer after comparing purchase price of certain products, which were purchased from the aforesaid related parties as also from unrelated parties, alleged that the purchases price from related parties was excessive in order to reduce the taxable income. 13.5. Accordingly, it was observed that the assessing officer had the power to lift the corporate veil, to disallow excessive purchase price paid to the aforesaid parties, notwithstanding that the said parties were not related, in terms of provisions of section 40A(2) of the Act. 13.6. Accordingly, the AO computed excessive purchase price for which internal comparable was available at Rs. 16.16 crores and estimated the balance excessive price at Rs. 33.95 cr. and made total disallowance of Rs. 50.11 cr, out of purchases. Assesee's Submissions: 13.7. The purchases are made at higher rate from s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... empo Co. P. Ltd.: 196 Taxman 193/336 ITR 209; and the Mumbai bench of Tribunal in the case of Indo Bearing Traders [TS-780-ITAT-2012(Mum)]. DR's Submissions: 13.13. Reliance is placed on the assessment order and order passed by DRP Our findings and conclusion: 13.14. The basic requirement for the applicability of section 40A(2) of the Act is that the payment should be made to a related person i.e. to a person referred to in clause (b), of sub-section (2) of section 40A of the Act. 13.15. In the present case, it is an undisputed fact that the payments are not made to a person mentioned in clause (b) of section 40A (2) of the Act. 13.16. Clause (a ) of sub-section (2) of section 40A of the Act provides that where the assessee incurs any expenditure in respect of which payment has been or is to be made to any person referred to in clause (b) of the sub- section and the Assessing Officer is of the opinion that such expenditure is excessive or unreasonable having regard to the fair market value of the goods, services or facilities for which the payment is made or the legitimate needs of the business or profession of the assessee or the benefit derived by or accruing to him ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s failed to demonstrate as to how it ha come to such a conclusion. The allegation means that profit is transferred to third parties, where the share holding of the assessee is not a major share holding. The allegation means that the assessee is distributing profits to companies with majority holding by unrelated parties for the purpose of reducing taxes. Such wild allegation cannot be endorsed by us. 13.19. The assessee does not dispute the fact that certain purchases are made at a rate higher than the rate paid to certain other parties for the same periods. The assessee at pages 1523 to 1523.18 of the paper book also furnished instances where purchases were made from these parties at price lower than the purchases made from unrelated parties. Further, the disallowance was made on adhoc basis without setting any bench mark for the disallowance. 13.20. Not withstanding the above view, even assuming for a moment that the provisions of the section 40A (2) would apply to the present case, then the following propositions laid down by various courts have to be considered. 13.21. The Hon'ble Bombay High Court in the case of CIT v. Indo Saudi Services (Travel) (P.) Ltd. [2009] 310 IT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 13.26. In view of the above discussions, and bearing in mind entirety of the case, we are of the considered view that the impugned disallowance was indeed uncalled for on the facts of this case. Hence, we uphold the grounds of the assessee. 14. Ground nos. 9 to 9.7: (Disallowance of purchase under section 40(a)(ia) for alleged failure to deduct TDS u/s 194C): DRP Directions: 14.2. The DRP has issued following directions to the Assessing Officer; "Assessee has objected to disallowance of Rs. 2487.46 crores made by the AO by applying provisions of section 40(a)(ia) for failure to deduct TDS. In the course of business of manufacturing two wheelers, the assessee places purchase orders on vendors of certain customized intermediary products like wheel assembly, seat assembly, etc. While placing the aforesaid purchase orders to the vendors, the assessee also provides the specifications of the products to be purchased, as also the names of suppliers, from whom the vendor is required to purchase raw materials/components to be used in manufacture of customized intermediary products at the price negotiated by the assessee with such suppliers. The counsel for the assessee contende ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g with purchase price thereof, was controlling the supply of raw material to the vendors, which was to be deemed as supply of raw-material by the assessee itself, and hence the contract with vendors constituted 'work contract' under section 194C, as amended by Finance (No. 2) Act, 2009. In view of the assessee's failure to deduct tax at source under section 194C, the Assessing officer disallowed purchases, aggregating to Rs.2487.46 crores, under section 40(a)(ia) of the Act. Assessee's Submissions 14.5. The provisions of section 194C of the Act are applicable to a contract for carrying out any work and not to a contract for sale of goods. 14.6. A contract shall be regarded a contract of sale, if the title in goods passes to the purchaser after the manufacture and delivery of goods to the purchaser, whereas if the title to the goods passes to the purchaser at any time anterior to manufacture and delivery of goods to the purchaser, the same shall be regarded as contract for carrying out work/works contract. The directions that goods are manufactured according to specifications of the purchaser is neither decisive for ascertaining the time of pasing of title in the goods nor in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... act simpliciter as contract for carrying out works. The assumption is too far fetched and unsubstantiated as the assessing officer failed to appreciate the business realties and consideration behind such stipulation in high precision markets of two wheelers. 14.12. The aforesaid assumptions by the assessing officer are further belied by the fact that the assessee has paid the vendors the price and taxes for sale of such goods including the cost of raw materials / components (alleged to be supplied by the assessee to the vendors), which establish them to be transactions of purchase and sale. The vendors have in their tax assessments being assessed have offered them as sales on the full purchase price received from the assessee. If the assessee had supplied the raw material / components required by the vendors for fabrication / manufacture of customized intermediary products, the assessee would have been required to pay only conversion charges to the vendors and not the full purchase price for the customized intermediary products / components. Similarly VAT would not have been charged thereon. 14.13. The supply of raw material by the supplier to the vendors, even if the price the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wed by the assessee, which stands accepted by the Revenue in every case, the assessee had a bonafide belief that tax was not deductible at source on aforesaid transaction of supply of goods. Under such circumstances also, no disallowance can be made under section 40(a)(i) of the Act. Reliance is placed on CIT v. Kotak Securities Ltd. 245 CTR 3. 14.19. Since these are transactions of purchase and sale simpliciter, the assessee would not be deducting tax at source, in future as well (out of such expense payment), as there is no legal liability, consequently in terms of the proviso as held by department, would mean that the assessee will never ever be entitled to deduction of purchase price in all later years. Section 40(a)(ia) of the Act would, in such circumstances operate as a perpetual bar to deny deduction for the expense for all times to come. In other words, deduction for the amount of expense would be lost forever, notwithstanding that the deductee / recipient of income out of whose income tax had to be deducted at source, has already paid tax on such income. This supposition on the part of department defeats every logic of accountancy and legal interpretation. 14.20. It i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nce the outstanding liability against the aforesaid expenditure at the end of year amounted to Rs. 127.43 crores only, the disallowance under section 40(a)(ia) could not have exceeded the said amount. Reliance is placed on Marilyn Shipping and Transport v. ACIT: 146 TTJ 1 (Vishak.)(SB). DR's submissions: 14.25. Reliance is placed on the assessment order and order passed by DRP. 14.26. In addition to above, it was submitted that it needs to be emphasized that, although the assessee did not supply the material to the vendors directly, but the impugned arrangement is in the nature of indirect supply of material to the vendors, which is covered within the provisions of section 194C of the Act. 14.27. In the impugned arrangement of purchase of material, the assessee, apart from giving name of the supplier, from whom the vendor is required to purchase the raw material/ components to be used in manufacturing such customized intermediary products and fixing the purchase price, also fixes the other terms of payments by the vendor to the supplier. 14.28. The payment terms are deliberately arranged in a manner, that, the assessee first pays the amount for purchase of material to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the supplier/manufacturer of the assessee company, we find this is not simply a situation of a product manufactured to the specifications of the assessee, being sold to the assessee at the price fixed by the supplier but this is a situation where a product manufactured out of raw materials supplied by a foreign company who had direct interest in the assessee company so manufactured to the specification of the assessee company utilising the technical know-how supplied by it also labelling the product with the brand name of the assessee and supplying the entire product only to the assessee company and not to anyone else and it is throughout to be held as a specific contract for manufacturing of a particular product notwithstanding the fact that the supplier had paid the price for the raw-material directly to the foreign company which supplied the raw material to the manufacturer, but had interest in the assessee company in India while bearing the trade mark of the foreign supplier, but having a definite communication and in such a situation one has to really look into the real nature of the transaction that emerges on the conjoint reading of the three agreements and the assessing of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng out work/works contract. The fact that goods are manufactured according to specifications of the purchaser is not relevant in determining the nature of contract as a contract of sale or works contract. 14.35. The aforesaid position is well settled and reference in this regard can be made to the decision of the Supreme Court in the case of CIT vs. Silver Oak Laboratories P. Ltd.: SLP No.18012/2009. 14.36. In the present case, the assessee was merely providing necessary specifications to the vendors for manufacturing requisite products. Although, the assessee also specified the rate for purchase of raw material and particular parties from whom such raw material was to be purchased, the said specifications had no bearing on the transaction for purchase of finished products by the assessee from vendors. 14.37. The assessee company is engaged in manufacture of reputed two- wheelers, a product requiring high precision engineering. The components to be fitted in the two-wheelers have to be standardized and must conform to the specifications of the motorcycles to be manufactured by the assessee company. Furthermore, the quality of components used in the assembly of Motorcycles, wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rice to be paid by the vendor to such supplier were specified by the assessee company. 14.40. That apart, the vendors were purchasing raw material and other ingredients for manufacturing finished products on their own account and not on behalf of the assessee company, after negotiating other relevant terms of payment and delivery schedule, payments of excise duty and VAT, etc. The raw materials are delivered to the vendors and are at the risk and title of the vendors. The vendors, who are independent legal entities with their own manufacturing establishments, employing huge labour, utilize the raw materials purchased for producing customized finished goods for the assessee. The title in the finished goods passes to the assessee only after the goods have come into existence and are supplied by the vendor to the assessee. Excise duty is paid by the vendors in their own right, as an independent manufacturer and not as a job worker in respect of goods manufactured and sold to the assessee. Further, the vendor has legally charged and assessee has paid sales tax/VAT due thereon, as the case maybe, for the goods purchased from the vendors. 14.41. The contention of the Ld. DR/assessing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... laced by the Ld. DR on the decision of the Karnataka High Court in the case of CIT and ITO vs Nova Nordisk Pharma India Ltd.: 341 ITR 451, it is submitted that the same is distinguishable and not applicable to the facts of the present case for the following reasons: 14.49. In that case, the assessee was an indirect subsidiary of a Denmark- based foreign company, which was supplying raw material to the vendor of the assessee company and, thus, had a direct interest in the assessee company. The vendor was to supply the entire products manufactured through the use of raw material procured from the Denmark-based foreign company to the assessee company only, as also fixing the brand name of the assessee company. It is important to note that the technical know-how for the manufacture of products by the vendor, using the raw material supplied by the foreign company was also supplied by the foreign company free of cost. The price arrangement between the assessee and the vendor was such that the assessee company was to only pay 19% of the landed cost of the raw material supplied by the foreign company and consumed in the production of the product. It was in the background of the aforesaid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a product according to the specification of a customer by using material purchased from such customer. 14.54. The definition of work was amended to include the aforesaid activity as well, only prospectively w.e.f. 1-10-2009. The Supreme Court in the case of Silver Oak (supra) has held that the aforesaid amended definition of 'work' under section 194C is only applicable prospectively and does not have retrospective application. 14.55. Even assuming without admitting that, the aforesaid amendment has retrospective application, as argued by the Ld. DR, in view of the submissions above, that the contract between the vendors and the suppliers was independent, it cannot even under the amended definition be said that the material was indirectly supplied by the assessee to the vendors to be covered within the amended provisions of section 194C of the Act. 14.56. For the aforesaid cumulative reasons, it is submitted that, the contentions of DR are incorrect, unsustainable and not applicable to the facts of the present case. 14.57. The assessee relies on submissions made in chart of issues already submitted before the Hon'ble bench, which are not repeated for the sake of brevity, and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by using material purchased from the customer only. 14.66. Initially Circular no. 86 dated 29-5-1972 was issued which provided as under: "The deduction of income-tax will be made from sums paid for carrying out any work or for supplying labour for carrying out any work. In other words, the new provision will apply only in relation to 'works contracts' and 'labour contracts' and will not cover contracts for sale of goods. Since contracts for the construction of buildings or dams or laying of roads and air-fields or railway lines or erection or installation of plant and machinery are in the nature of contracts for work and labour, income-tax will have to be deducted from payments made in respect of such contracts. Similarly, contracts granted for processing of goods supplied by Government or any other specified person, where the ownership of such goods remains at all times with the Government or such person, will also fall within the purview of the new section. The same position will obtain in respect of contracts for fabrication of sea and river crafts where materials are supplied by the Government or any other specified person and the fabrication work is done by a contractor. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of these judgements, the Board have decided to withdraw their above mentioned Circulars nos. 86 and 93 and para 11 of Circular no.108 and issue the following guidelines in regard to the applicability of the provisions of section 194C:- (i) The provisions of section 194C shall apply to all types of contracts for carrying out any work including transport contracts, service contracts, advertisement contracts, broadcasting contracts, telecasting contracts, labour contracts, materials contracts and works contracts. .................................... (vi) The provisions of this section will not cover contracts for sale of goods. (b) Where, however, the contractor undertakes to supply any article or thing fabricated according to the specifications given by the Government or any other specified person and the property in such article or thing passes to the Government or such person only after such article or thing is devliered, the contract will be a contract for sale and as such outside the purview of this section. 14.72. In subsequent Circular no.13/2006, dated 13.12.2006, the CBDT has further clarified as follows: "1. Representations have been received in the Board seeki ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted, the contract would be one for sale of goods, notwithstanding that the goods are manufactured according to the specifications of the buyer. 14.74.The principal test to be applied to determine whether the contract is works contract or contract for sale is examined whether title to the goods passes to the purchaser at any time anterior to the manufacture and delivery of goods to the purchaser. If the answer to the aforesaid query is in the negative, then, the contract is one of sale, when the vendor manufactures goods in his own right, as principal, and not as job worker. 14.75.The legal position is well settled that in case title/ownership in goods passes to the buyer on transfer of goods by the vendor, even though goods are manufactured according to the specifications and design supplied by the purchaser, the contract cannot be regarded as contract for carrying out work falling under section 194C of the Act. 14.76. The Bombay High Court in the case of CIT vs. Gelnmark Pharmaceuticals Ltd [2010] 324 ITR 199 held that Clause (e) was introduced "to bring clarity on this issue" or, in other words, to remove the ambiguity on the question. Clause (e) as introduced contains a po ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ontract may be for work to be done for remuneration and for supply of materials used in the execution of the works for a price : it may be a contract for work in which the use of materials is accessory or incidental to the execution of the work : or it may be a contract for work and use or supply of materials though not accessory to the execution of the contract is voluntary or gratuitous. In the last class there is no sale because though property passes it does not pass for a price. Whether a contract is of the first or the second class must depend upon the circumstances : if it is of the first : it is a composite contract for work and sale of goods : where it is of the second category, it is a contract for execution of work not involving sale of goods." 14.79.In State of Himachal Pradesh v. Associated Hostels of India Ltd. [1972] 29 STC 474, the Supreme Court observed that where the principal objective of work undertaken by the payee of the price is not the transfer of a chattel qua chattel, contract is of work and labour. The test is whether or not the work and labour bestowed end in anything that can properly become the subject of sale; neither the ownership of the materials ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 27, the court stated (page 14 of [1989] 73 STC 1 and page 972 of AIR 1989 SC): "In our opinion, in each case the nature of the contract and the transaction must be found out. And this is possible only when the intention of the parties is found out. The fact that in the execution of a contract for work some materials are used and the property in the goods so used, passes to the other party, the contractor undertaking to do the work will not necessarily be deemed, on that account, to sell the materials. Whether or not and which part of the job-work relates to that depends, as mentioned hereinbefore, on the nature of the transaction. A contract for work in the execution of which goods are used may take any one of the three forms as mentioned by this court in Government of Andhra Pradesh v. Guntur Tobaccos Ltd., AIR 1965 SC 1396." 14.82. The above case laws though rendered in the context of Sales Tax Act, has been referred to by various Judicial Authorities while adjudicating the matters under the Income tax Act 1961 only with a view to emphasise the distinction between contract for work and a contract for sale. 14.83.The Bombay High Court in the case of BDA Ltd vs. ITO [2006] 28 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the nature of transcations. 14.87.Applying the principals laid by the Courts to the facts of the present case, we now proceed to examine whether the contract in the case on hand is "contract for sale" or "contract for work". Facts (1) All the nine parties are independent legal establishments engaged in the manufacturing of finished products and are not captive units of the assessee. (2) The vendors have their own manufacturing establishments, employing huge labour; utilize the raw materials purchased by them, for producing customized finished goods for the assessee. (3) The assessee has issued purchase orders for supply of components as per the assessee's specification. The assessee has filed copies of the purchase orders/ invoices. The same finds place in the paper book filed by the assessee. (4) The raw materials are delivered to the vendors by the suppliers and are at the risk and title of the vendors. The suppliers collect from the vendors, sales tax, VAT etc. on sale of raw material and the vendor paid the same. (5) Excise duty is paid by the vendors in their own right, as an independent manufacturer and not as a job worker in respect of goods manufactured and so ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se order(s) in the event of non-compliance of delivery schedule. 10. SHIPPING DOCUMENTS: Demurrage and penalties etc. becoming leviable on account of delay in delivery of dispatch of Railway Receipts. Goods Receipt or any other shipping documents will be to the vendor's account and recoverable from him. 11. PAYMENT: Subject to the proper settlement of the transaction involved, Vendors bill will be paid by the company within 30-45 days of the receipt of material in our plant. Unless alternative terms of payment are agreed and stated on the order. In case of Company's agreement to accept documents through Bank, the bank charges will be borne by the vendor. Failure by vendor to advise his/ their Bankers to recover all the bank charges from vendor will result in non-retirement of bills by us. 12. REJECTION: Suppliers, whose samples of one particular type of component, if rejected twice by us, are liable to the cancellation of our purchase order without assigning any further reasons and without us being liable to any cost, that may have been incurred by the supplier towards the manufacture of the item for us. 13. Material, if rejected after inspection at our factory by us, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rages and penalties due to delay in delivery is leviable on the vendor. (d) In case of rejection of goods, the cost of sample is on account of vendor only. (e) All charges relating to replacement/ rejection are on account of vendor. (f) Vendor shall provide warranty for replacement of defective goods. 14.90. Combined reading of all the terms and conditions of the purchase order takes us to the conclusion that the vendors supply finished goods to the assessee at their risk and cost. Title to the finished goods was transferred to the appellant when the supplier/ vendor completed production of the finished goods and dispatched the same to the assessee and only when the assessee approves and accepts the said goods i.e. title passes on acceptance of goods. Until that stage of acceptane on delivery, there is no transfer of title as per the intention of the parties gathered from the purchase order. The transfer of title at the stage of acceptance of deliveries by the purchaser would be, in our opinion, only a sale of goods but not work contract. 14.91. The test laid down by the courts is to examine the intention of the parties as to the point of time when they want to transfer o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inguished the case. As the same is brought out in the earlier part of the order, for sake of brevity we do not repeat the same. 14.95. In this case, there is no supply of raw material by the assessee to the vendors either directly or indirectly. In laying down the quality specification of the products, the assessee is ensuring the required quality of its purchases which in turn ensures the quality of its two wheelers. Considering the magnitude of the total requirements, the assessee was able to negotiate the price and hence is controlling its input costs. The low price enjoyed by the vendors, in turn would be passed on to the assessee. This is a case where the vendors were purchasing raw material on their own account by payment of excise duty, VAT etc. The goods were manufactured by the vendors to the specification and other terms and conditions spelt out in the purchase orders and in their own right as independent manufactures. On this factual matrix, we have no hesitation in holding that it is a case of contract of sale and not contract of work. Hence, in our view, the provision of Sec. 194C are not applicable and consequently the disallowance made u/s 40a(ia) is to be deleted. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sed by the AO in respect of assessee's claim regarding expenditure for advisory/supervisory services from M/s Hero Corporate Services Ltd. (HCSL). The Counsel have contended that HCSL is a company engaged in the business of providing various corporate services like management of treasury and finance functions, human resources development and strategic planning and projects, IP support etc. The assessee has agreed to pay a retainer-ship fee of Rs. 2 crores per annum for availing advisory services in relation to corporate service like human resources, IP and Rs. 10 lakhs per month in relation to supervisory service for evaluating data processing work carried out by a third party M/s Results Mecann (P) Ltd. under passport schemes launched by the assessee company. The objection of the assessee is not acceptable. Since the assessee has been launching passport schemes in the past also, it must have been managing these areas itself or by certain payments to some parties other than HCSL. In order to justify the payment to HCSL, the assessee was required to show that the expenditure incurred on these activities before entering into the agreement with HCSL are not being incurred after ente ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from HCSL inasmuch as the expenditure of Rs.20 lacs out of the total payment of Rs.1.70 crores has been allowed as deduction. 15.9. Only part of the total expenditure has been disallowed on the ground of the same being excessive, having regard to the services availed. It is a settled position that reasonableness of the expenditure has to be seen from the point of view of businessman and not that of the Revenue. [Refer S.A. Builders: 288 ITR 1 (SC)]. 15.10. Further, since the aforesaid party was not related to the assessee in terms of section 40A (2)(b) of the Act, there was no scope for the Revenue to examine the reasonableness of the expenditure incurred and to disallow any part thereof for that reason. In any case, no evidence has been brought on record by the Revenue to substantiate that the amount paid was excessive, having regard to the legitimate needs of business. DR's Submissions 15.11. Reliance is placed on the assessment order and order passed by DRP. Our findings conclusion: 15.12. The assessing officer in this case made an ad hoc disallowance by allowing an amount of Rs. 20 lacs as expenditure for the services availed by the assessee from HCSL and disallo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h assessee is a shareholder. The facts regarding this addition stated by the assessee are as follows: Hero Honda Finlease Limited (HHFL) is a related company in which assessee holds 30% (approximately) of the share capital, which is engaged primarily in the business of financing of vehicles. In pursuance of the said business, HHFL extends to the dealers of the assessee company, a facility of financing vehicles purchased by the dealers from the assessee company. The dealers on purchase of vehicles from the assessee, get the bill of purchase raised by the assessee, discounted from HHFL and remit payment to the assessee. The dealers are required to make payment of aforesaid discounted bills to HHFL on maturity thereof. The interesting fact however is that the dealers who have discounted the bills with M/s Hero Honda Finlease Ltd., instead of returning the amounts to M/s Hero Honda Finlease Ltd actually to make the payments to the assessee and the assessee in turn, after enjoying the funds for certain days later on passes on these funds to M/s Hero Honda Finlease Ltd. There is no logic for the dealers who have discounted the bills with M/s Hero Honda Finlease Ltd. give the billed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and consequently deemed the same as dividend income under section 2(22)(e) of the Act. Assessee's Submissions:- Payment is sent by customers of HHFL to the assessee, for and on behalf of HHFL, solely on account of convenience of facility of numerous collection centres of the assessee. There is no instruction, express or implied, either by the assessee or HHFL to the dealers/customers, directing the customers to make payment against liability of HHFL to the assessee company. The assessee receives aforesaid payment from the customers/dealers as trustee/custodian/agent of HHFL and remits the same to the latter company, immediately, in a short span of 2-3 days, which was the processing time taken inter alia, for identifying/segregating from out of the payments received, those which relate to HHFL, issuing instructions to the bank to transfer the funds to account of HHFL and the time taken by the bank in carrying out such instructions, in transmitting funds to the bank account of HHFL. There was, thus, no loan or advance given by HHFL to the assessee. Section 2(22)(e) of the Act warrants a positive act of granting loan or advance by a company to its shareholders to fall within ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ming without admitting that the aforesaid payment made by dealers was in the nature of loan/advance by HHFL to the assessee, since HHFL was engaged in the money lending business, the aforesaid loan/advance could be said to be given in the ordinary course of that business, which is ousted from the application of the provisions of section 2(22)(e) of the Act, it is submitted, that since no interest was charged/ chargeable thereon from the assessee, the aforesaid loan cannot be said to be given in the ordinary course of business of HHFL. It is not the business of the assessee to give loan free of cost. 16.17. Accordingly, the action of the assessing officer in deeming the aforesaid receipt as dividend under section 2(22)(e) of the Act needs to be upheld and the ground of appeal raised by the assessee, calls for being dismissed. Assesse's Rejoinder : 16.18. It would be pertinent to point out that the assessee receives money from the customers/dealers and not from HHFL. Further, the assessee remits the aforesaid payment received in the assessee's bank accounts, on account of HHFL, immediately to HHFL, without any time lag. The short delay of 2- 3 days is on account of processing t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... HFL by the assessee as loan. 16.24. Further, there is no assertive conclusion either by the Assessing Officer or by the DRP as to whether the transaction is in the nature of loan or an advance. While the Assessing officer has concluded that amount given to the assessee by HHFL is in the nature of loan/ advance, the DRP has held it to be in the nature of loan. Thus, there is disconnect in the conclusion arrived by both the Authorities. In our view, the transaction cannot take the color of either a loan and advance. 16.25. The Hon'ble Delhi High Court in the case of CIT vs. Rajkumar [2009] 318 ITR 462 at page 473 held as under: "A bare reading of the recommendations of the Commission and the speech of the then Finance Minister would show that the purpose of the insertion of sub-clause (e) to section 2(6A) in the 1922 Act was to bring within the tax net monies paid by closely held companies to their principal shareholders in the guise of loans and advances to avoid payment of tax. Therefore, if the said background is kept in mind, it is clear that sub- clause (e) of section 2(22) of the Act, which is in parimateria with sub- clause (e) of section 2(6A) of the 1922 Act, plainly ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment of the Supreme Court with regard to the applicability of the said rule of con-struction are briefly as follows : (i) does the term in issue have more than one meaning attributed to it, i.e., based on the setting or the context one could apply the narrower or wider meaning ; (ii) are words or terms used found in a group totally "dissimilar" or is there a " common thread" running through them ; (iii) the purpose behind the insertion of the term. Let us examine as to whether based on the aforesaid tests the said rule of construction noscitur a sociis ought to be applied in the instant case. (i) the term ' advance' has undoubtedly more than one meaning depending on the context in which it is used ; (ii) both the terms, that is, advance or loan are related to the " accu- mulated profits" of the company ; (iii) and last but not the least the purpose behind the insertion of the term " advance" was to bring within the tax net payments made in the guise of loan to shareholders by companies in which they have a substantial interest so as to avoid payment of tax by the shareholders ; Keeping the aforesaid rule in mind we are of the opinion that the word "advance" which ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g P. Ltd [2009] 318 ITR 476. 16.26. The Hon'bel Calcutta High Court in the case of Pradeep K.Malhotra vs. CIT [2011] 338 ITR 538 held that the phrase "by way of advance or loan" appearing in sub-clause (e) of section 2(22) of the Income- tax Act, 1961, must be construed to mean those advances or loans which a shareholder enjoys simply on account of being a person who is the beneficial owner of shares (not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profits) holding not less than ten per cent. of the voting power ; but if such loan or advance is given to such shareholder as a consequence of any further consideration which is beneficial to the company received from such a share-holder, in such case, such advance or loan cannot be said to be deemed dividend within the meaning of the Act. Thus, gratuitous loan or advance given by a company to those classes of shareholders would come within the purview of section 2(22) but not cases where the loan or advance is given in return to an advantage conferred upon the company by such shareholder. 16.27. Section 2(22)(e), is a deeming section and it is well settled that it should be st ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion u/s 80IA of the Income Tax Act. The brief facts in this regard stated by the assessee are as follows:- In view of the power supply constraints in the area of Gurgaon, Haryana, where the assessee had set-up its manufacturing facility, the assessee had also set up a power plant in order to meet the captive consumption requirements of power. The assessee claimed deduction under section 80IA of the Act at Rs. 426.38 lakhs in respect of power generated at the aforesaid unit and captively consumed by the assessee. The deduction claimed was duly supported by Chartered Accountant's Report. For the purposes of computing deduction under section 80IA, the assessee adopted the transfer price of power, captively consumed, at the cost of generation power per unit with mark- up of 15%. The cost of generation of power was adopted at Rs. 5.92, which was based on cost certified in the cost audit report. Accordingly, the assessee adopted the rate of transfer of power @ Rs. 6.81 per unit (Rs. 5.92 + 15% of Rs. 5.92). The AO held that the inter unit transfer of power from the power plant should have been at a price at which Haryana State Electricity Board, a Government Company is supplying a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essment order. Assessee's Submissions: 17.6. Ld. Counsel contends that the aforesaid issue has been decided against the assessee by the Hon'ble ITAT in the appeal for A.Y. 2006-07 on the mistaken belief that independent supplier of electricity in the area, i.e. Maruti Udyog Ltd., was supplying power only to related parties and not to independent parties. Accordingly, it was held that the rate of supply of electricity by Maruti was not reflective of market price, which needed to be adopted as the rate of supply of power by SEB. 17.7. The assessee has filed Miscellaneous Application to rectify the aforesaid mistake, which is pending disposal. DR's arguments: 17.8. Reliance is placed on the assessment order and order passed by DRP as well as the findings of the ITAT in the assessee's own case for the earlier year. Our findings conclusion:- 17.9. Admittedly the Tribunal in its order for A.Y. 2006-07 in ITA no. 5130/Del/2010 dated 23-11-2012 on the very same issue held as follows: 39. We have carefully considered the submissions of both the sides and perused the material placed before us. Sub-section (8) of Section 80IA reads as under:- "(8) Where any goods [or servi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wer to the assessee and other industrial units in the area at the rate of ₹ 3.90 per unit. Now, the question is, what is the market rate at which power is being supplied. In our opinion, the rate at which power is being supplied by the Haryana State Electricity Board, to each and every industrial unit situated in the area, in which assessee's manufacturing unit is situated, is the market rate at which power is available. The rate at which Maruti Udyog Limited is claimed to supply the power to its AE cannot be said to be the market rate of the power in that area because as per assessee's own claim, Maruti Udyog Limited is supplying the power to its AE and not to unrelated parties in general. In view of the above, we hold that the Assessing Officer was fully justified in arriving at the conclusion that there was a loss in the power generation undertaking of the assessee and therefore, there was no eligible profit for allowing deduction under Section 80IA. Accordingly, we dismiss ground Nos.8 8.1 of the assessee's appeal. 17.10. The filing of a miscellaneous application u/s 254(2) by assessee of this ITAT order does not deter the fact that as on today the issue stands deci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al findings as per the draft assessment order. Addition of Rs. 188 lacs is accordingly made to the income of the assessee. (Addition - Rs. 188 lacs) Facts: 18.3. Assessee claims to be liable to pay excise duty, arising on manufacture of intermediate goods, transferred inter unit in the course of manufacturing vehicles 18.4. The Assessing Officer made addition of Rs. 1.88 crores, with respect to excise duty payable on inter unit transfer of goods on the ground that the assessee failed to establish that the excise duty had been paid by the assessee. The DRP directed the AO to verify the evidence and allow the claim. The AO maintained the disallowance, even after direction of the DRP, despite the assessee furnishing confirmatory evidence. Assessee's Submissions: 18.5. The assessee has attached evidence of payment of excise duty through PLA at pages 2495-2512 (Vol-13) in paper book. Reliance is placed on CIT v. Maruti Suzuki Ltd.: ITA No. 903/20011 (Del.) (HC), wherein it has been held that payment though PLA constitutes effective payment of excise duty. 18.6. The AO has erred in not appreciating the evidence, placed on record. DR's arguments: 18.7. The assessee is li ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stent method of accounting followed by the assessee since past several years which has been accepted by the revenue. Objection o the assessee cannot be accepted. There can be no better value of the closing stock than the value reported in the cost audit report, in a case where the assessee is valuing the closing on the basis of cost or market value whichever is lower. Assessee has not disputed the correctness of the value in the cost audit report. In the name of consistency, a wrong method followed by he assessee cannot be allowed to perpetuate. Objection of the assessee is rejected." Therefore, in conformity with the order of DRP, amount of Rs. 19 lacs is added to the income of the assessee. (Addition - Rs. 19 lacs) Facts: 19.3. The AO enhanced the value of closing inventory by an amount of Rs.19 lacs on account of higher value thereof reported in the cost audit report vis-a-vis that disclosed in the books of accounts and made consequential addition to the income of the assessee. Assessee's Submissions 19.4. The value of closing stock reported in the cost audit report, which was higher by Rs.19 lacs vis- -vis the value disclosed in the audited statement, was on the b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... disclose true profits of the assessee's business. It is not the case of the assessing officer that the assessee should change his method of valuation of closing stock so that in all future years the stock value decided by the cost auditor is to be adopted by the assessee. The addition has been made just because the cost auditor has arrived at a particular valuation of closing stock. It is well settled that valuation is an opinion based on certain methods. Minor variations do occur. Hence for the reasons stated while disposing Ground No 2 (Supra), we allow this ground of appeal. 20. Ground no. 15-15.1: (Disallowance u/s 14A as per Rule 8D): DRP Directions: 20.2. The DRP has issued following directions to the Assessing Officer; "During the relevant previous year, the assessee earned dividend income of rs. 22.61 crores from investments held in shares and mutual funds. In the return of income, the assessee made suo-moto disallowance of Rs. 12.58 lakhs, in respect of proportionate amount of salary paid to employees involved in treasury functions, under section 14A of the Act. The AO has proposed a disallowance of Rs. 86.74 lakhs being out of the salary paid to two directors n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Facts: 20.3. During the relevant previous year, the assessee earned exempt dividend income of Rs.22.61 crores from investments held in shares and mutual funds. In the return of income, the assessee made suo-moto disallowance of Rs.12.58 lacs under section 14A of the Act, in respect of proportionate amount of salary paid to employees involved in treasury functions. 20.4. The AO made further disallowance of Rs. 112.19 lacs by applying provisions of Rule 8D of the Rules. Assessee's Submissions: 20.5. At the outset, the assessing officer has erred in enhancing the amount of disallowance under section 14A by applying provisions of Rule 8D of the Rules, which are applicable only with effect from assessment year 2008-09 and onwards. Reliance is placed on Godrej Boyce Mfg. Co. Ltd: 328 ITR 81 (Bom) and Maxopp Investment : 347 ITR 272 (Del.). 20.6. Without prejudice, as per section 14A(2), disallowance under that section as per Rule 8D can be made only if the assessing officer records satisfaction/finding as to the incorrectness in the method of disallowance followed by the assessee. Reliance is placed on Maxopp Investment Ltd: 347 ITR 272 (Del.). In the absence of any satisfactio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... igh Court in the case of Maxopp Investment Ltd. (supra) has held that the disallowance u/s 14A is required to be made as per Rule 8D in relation to the assessment year 2008-09 and subsequent years. For the earlier years, the direction is to compute the disallowance on 'reasonable basis'. The operative part of the order is reproduced below: On the restospectivity of Rule 8D "We are of the view that Rule 8D would operate prospectively. We agree with the submissions made by Dr Rakesh Gupta that if the said Rule were to have retrospective effect, nothing prevented the Central Board of Direct Taxes from saying so, particularly, in view of the fact that it had the power to make a rule retrospective by virtue of Section 295(4) of the said Act. Instead of making Rule 8D retrospective, clause 1(2) of the Income-tax (Fifth Amendment) Rules, 2008 made it clear that the rules would come into force from the date of their publication in the Official Gazette. It is, therefore, clear that Rule 8D, which was introduced by virtue of the Notification No.45/2008 dated 24.03.2008, was prospective in operation and cannot be regarded as being retrospective. We may also point out that we have had the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enditure on the basis of a reasonable and acceptable method of apportionment. It would be appropriate to recall the words of the Supreme Court in Walfort Share Stock Brokers (P.) Ltd. (supra) to the following effect:- "The theory of apportionment of expenditure between taxable and non-taxable has, in principle, been now widened under section 14 A." So, even for the pre-Rule8D period, whenever the issue of section 14A arises before an Assessing Officer, he has, first of all, to ascertain the correctness of the claim of the assessee in respect of the expenditure incurred in relation to income which does not form part of the total income under the said Act. Even where the assessee claims that no expenditure has been incuured in relation to income which does not form part of total income, the assessing officer will have to verify the correcteness of such claim. In case, the assessing officer is satisfied with the claim of the assessee with regard to the expenditure or no expenditure, as the case may be, the assessing officer is to accept the claim of the assessee insofar as the quantum of disallowance under section 14A is concerned. In such eventuality, the assessing officer cann ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Assessing Officer; "A disallowance of Rs. 4.26 crores of the payment to LIC covers leave encashment by application of section 43B of the I. T. Act. During the relevant previous year, the assessee incurred aggregate expenditure of Rs. 6.33 crores on account of leave encashment paid/payable to employees, which comprised of Rs. 4.26 crores on account of payment to LIC towards master policy taken to cover leave encashment payment to employees; and Rs. 2.08 crores incurred on account of actual payment of leave encashment to employees during the year. The counsel argued that payment of premium to LIC towards master cover policy amounts to actual payment of leave encashment. The objection of the assessee is not acceptable. In the case of Udaipur distillery company Limited 268 ITR 305 (Raj.) has held that the bank guarantee does not amount to actual payment. The High Court further clarified the actual payment requires money to flow from the assessee to the exchequer. In the case of Rajasthan Patrika 258 ITR 300 (Raj.), the Rajasthan High Court held that in a case, where excise duty is selected by the assessee but it is disputed and the amount of the excise duty is deposited with the bank ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ards master policy taken to cover leave encashment payment to employees; and Rs. 2.08 crores incurred on account of actual payment of leave encashment to employees during the year. 21.4. The Assessing Officer disallowed Rs. 4.26 crores, incurred on account of payment to LIC towards master policy taken to cover leave encashment payment to employees on the ground that such payment was covered by the provisions of section 43B(f) of the Act and, accordingly, was allowable deduction in the year of actual payment of leave encashment to employees and not on the date of contribution to trust or otherwise. The amount of Rs 2.08 crores was disallowed on the ground that the assessee has not filed necessary evidences establishing the aforesaid payment to employees. Assessee's Submissions 21.5. The assessee had taken master policy with LIC to fund payment of leave salary to employees as and when the same becomes due. In such circumstances, the assessee pays premium to LIC and leave salary is paid by LIC directly to the employees and no deduction is claimed by the assessee at that point of time. Since, there is no direct payment of leave encashment by the assessee, the same is not covered ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act in respect of (a)............... (b) any sum payable by the assessee as an employer by way of contribution to any provident fund or superannuation fund or gratuity fund or any other fund for the welfare of employees; (c)...................... (d)..........................; (e).........................; (f) any sum payable by the assessee as an employer in lieu of any leave at the credit of his employee. Shall be allowed (irrespective of the previous year in which the liability to pay such sum was incurred by the assessee according to the method of accounting regularly employed by him) only in computing the income referred to in section 28 of that previous year in which such sum is actually paid by him." 21.14. A plain reading of the section makes it clear that the above provision starts with the non-obstante clause. However, at the same time the above provision is not for allowance of any claim, and rather only puts certain restrictions on allowability of an expenditure which is "otherwise allowable under the Act". That means an expenditure which is otherwise allowable under any provisions of the Act, would not be allowed if such expenditure has not been actually ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vs. M/s. Taxtol Co. Ltd in C.A.No 447 of 2003 dated 09.09.2009 while interpreting the provisions relating to contribution to LIC towards gratuity fund held that once payment was made to LIC the assesse did not have control over the funds and therefore the expenditure was deductible under section 28/ 37 of the Income Tax Act 1961. 21.22. Even though ld. CIT(DR) contended that the payment is not covered by section 43B (b), we do not think the contention is tenable because admittedly the leave encashemnt fund is maintained for the benefit of the employees and the payment of premium was to the fund operated by the LIC. Therefore, section 43B(b) is squarely attracted to the payment involved.Thus, an amount of Rs. 4.26 crores cannot be disallowed as the amount is actually paid during the year. 21.23. In view of the above discussions, we are of the view that the payment is allowable under section 37(1) and no disallowance under section 43B is warranted since the assesse has paid the premium to the LIC and the question of any payment in future to the employees towards leave encashment does not arise. Accordingly, we allow this ground of the assesse. 21.24. In respect of the amount of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d the aforesaid claim of additional depreciation on the ground that supervisory offices located in the compound of factory, where computers, being plant and machinery, were installed, constituted office premises, which were not eligible for additional depreciation under section 32(1)(ii) of the Act. Assessee's Submissions: 22.6. Section 32(iia) of the Act was introduced with an intent to give boost to the manufacturing sector and accordingly the said benefit has been extended to assets installed in the manufacturing premises and not in the office premises. 22.7. Supervisory offices located in the compound of factory at Gurgaon / Dharuhera Plant, being dedicated to supervision of manufacturing activity, constituted integral part of factory and cannot be said to be office premises for the purposes of section 32(iia). 22.8. Reliance, in this regard, is placed on the following decisions wherein it has been held that electrical installations like cables, overhead cables, etc. are part and parcel of plant and machinery itself and are, therefore, entitled to benefit/depreciation/ allowances available to plant and machinery:- CIT v Tajmahal Hotel : 82 ITR 44 (SC) CIT v. Tribeni ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ial was as per the specification given in the order placed on the vendor for supply of the material, before such material could be used in the manufacturing activity carried on by the assessee company. It has been also contended on behalf of the assessee before the AO that even though the testing equipment was installed at the manufacturing shop floor and not in the R D facility, it was nevertheless entitled of less deduction u/s 135(1)(4) of the I. T. Act. The position thus emerges that the testing equipment purchased by the assess in this assessment year is installed at the manufacturing shop floor and not in research and development facility and is used only for testing the specification given to the vendors for supply of the material to verify that the material supplied is as per the ordered specification. The equipment is not utilized for carrying out any research. Thus, the equipment in question is not entitled for deduction u/s 135(1)(iv) allowed in respect of capital expenditure on research development. " Therefore, in conformity with the order of DRP, amount of Rs. 71.54 lacs is added to the income of the assessee. (Addition - Rs. 71.54 lacs) Facts: 23.3. During ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Reference, in this regard, can also be made to the relevant portion of the Director's Report for the relevant year, where the Director's have highlighted the areas of Research and Development carried out by the assessee company and benefits derived therefrom (@Pg. 360, Volume 2). 23.10. The entire process of absorption of foreign collaborator's technology and production of two wheeler, without assistance of foreign collaborator/Honda, results in extension and improvement of knowledge in technology of manufacturing different models of two-wheelers, which falls within the meaning of 'scientific research', defined in section 43(4)(i) of the Act, which includes activity undertaken by an assessee for extension of knowledge in the field of science and includes all expense incurred for prosecution of such research. 23.11. Further, deduction on similar assets purchased in the earlier year(s) has always been accepted and allowed in the completed assessments for such years. DR's argument: 23.12. The assessee has claimed deduction under section 35(1)(iv) of the Act in respect of assets acquired and used for purposes of scientific research and development. 23.13. It is submitted that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... respect of any expenditure of a capital nature on scientific research related to the business carried on by the assessee, such deduction as may be admissible under the provisions of sub-section (2)." 23.22. The requirement of the section is that the expenditure should be of a capital nature on scientific research related to the business carried on by the assessee. There is factual dispute between the parties. 23.23. Assessing officer was of the view that the assets in question were used for testing of raw material received and finished products sold. There is a finding that these machineries are located in the shop floor and not in any separate R D area. The presumption is that these are testing equipments. It is for the assessee to lead evidence that these machineries are used for research. No such evidence is given. 23.24. The Ld. DR submits that these are quality control equipments and not the equipments used for the purpose of scientific research and development. 23.25. The assessee relies on the definition of scientific research given in sec. 43(4)(i), which is extracted here for ready reference: "scientific research" means any activities for the extension of knowled ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re on the ground that the same is capital in nature, having been incurred for putting the vehicle to use as per provision of Motor Vehicles Act. The Assessing officer made net disallowance of Rs.10.27 lacs, after allowing depreciation. Assessee'sSubmissions 24.4. Insurance premium is paid is to cover loss on happening of specified events, for the specified period after the date of purchase, and is to be renewed annually. The same is not in relation to acquisition of car. Thus, premium paid either before/at the time of purchase of car cannot be capitalized as part of the cost of car and is allowable revenue expenditure. DR's submissions: 24.5. Reliance is placed on the assessment order and order passed by DRP. Our Findings conclusion: 24.6. Under the Act, depreciation has to be computed on the actual cost of the assesse. 24.7. The expression "actual cost" has been defined under section 43(1) of the Act to mean the actual cost of the assets to the assesse, reduced by that portion of the cost thereof, if any, as has been met directly or indirectly by any other person or authority. 24.8. In the case of Challapalli Sugars Ltd vs. CIT [1975] 98 ITR 167, the expression " ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the Ahmedabad ITAT in the case of Gujarat Alkali Ltd. 82 ITD 135 (Ahd.) and to the judgements of the Gujarat High court 159 ITR 253 (Guj.) and 236 ITR 929 (Guj.) and 196 ITR 237 (Guj.). The expenditure of Rs. 10,46,052/- is there of capital nature and has been rightly disallowed by the AO. The objection of the assessee is therefore rejected. It is seen that the AO has allowed depreciation on this expenditure. This is an error on the part of the AO. Since in the present year, the expenditure has been merely incurred on a feasibility study and no depreciable assets have been created and brought into use, the assessee is not entitled any depreciation in respect of this expenditure. The AO is accordingly directed to withdraw the depreciation allowed in respect of this expenditure of Rs. 10,46,052/-. 2. Payments made towards maintenance expenses of existing land at Samalka agricultural land Rs. 59,74,781/-. The objection of the assessee in this regard is not acceptable. Any expenditure on maintenance of agricultural land by the assessee cannot be allowed as a business expenditure as the income from agricultural land is not chargeable to tax. This part of assessee's objection is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expenses, which was already reversed subsequently during the year and, accordingly, not claimed as deduction. Rs. 8,45,183/-. The counsel had submitted that this expenditure has been returned back subsequently during the assessment year itself and the expenditure has not been actually claimed. The necessary evidence showing reversal of this expenditure has been enclosed at paper book page no. 1612 in vol. 6 of the paper book. The AO is directed by the panel to verify the reversal entry and if this expenditure has been already reversed and not claimed as submitted by counsel, the AO shall not make the disallowance of Rs. 8,45,183/-. The assessee will render necessary evidence to the AO in the matter of verification of the reversal of this expenditure. Since the AO has already allowed deprecation in respect of this expenditure. If the AO comes to a conclusion as above, that the expenditure has been already reversed and not claimed by the assessee, the depreciation which is already allowed to the assessee in respect of this expenditure shall be withdrawn." Therefore, as per the findings of the DRP, on paragraphs 21.1 to 21.4, relief to the assessee is given hereunder. Further, as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of existing business. Further, since no new asset/profit earning apparatus, came into being, to regard the same as capital expenditure, the expenditure was allowable revenue deduction. 25.6. As regards, the agricultural land at Samalka, the assessee was not carrying on agricultural operation at that land. The said land was purchased in order to construct factory plant thereon as soon as permission to construct factory on such land was accorded to the assessee. The said land being acquired for the purpose of business, maintenance expenditure incurred thereon is allowable business deduction. DR's arguments 25.7. Reliance is placed on the assessment order and order passed by DRP. Our findings conclusion: 25.8. The expenditure in question is two fold- one incurred in connection with the feasibility study for putting up plant on existing land at Neemrana and the other is the expenditure on agricultural land which was purchased for construction of a factory plant at some future date. 25.9. We shall consider the case laws relied upon by both the parties. 25.10. In the case of Jay Engineering Works Vs. CIT 311 ITR 405, the Hon'ble Jurisdictional High Court was consideri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... considering a case wherein the assessee had claimed pre-operative expenses of Rs. 41,24,481/-, being the expenses incurred on a new factory . In para 6, the Hon'ble High Court applying the test of unity of control and interlacing of the un its, upheld the order of the Tribunal, holding that expenses incurred by the assessee for the setting up of a new unit, was a part of the existing business, allowable as a revenue expenditure. 25.12. Ld. DR relied upon the decision of Hon'ble Bombay High Court in the case of CIT Vs. Great Eastern Shipping Co. Ltd. (1979) 118 ITR 772 (Bom.). The Hon'ble Court in that case was considering the issue as to what was actual cost for the purpose of computing depreciation allowable. The proposition laid down is that all expenditure incurred directly or indirectly or intimately on the capital assets acquired by the assessee can be included in the term "capital cost" of the asset. It held that term "actual cost" does not mean only the cost paid to the vendors for the asset. 25.13. In the case on hand, disallowance of claim was made as the assessee had failed to give any evidence to the assessing officer as to which land was this expenditure incurred. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ces to the plant, expenditure on developing strategies for the plant, professional fee for the plant etc. This expenditure is on acquiring a new capital asset in the shape of manufacturing plant at Haridwar. Moreover, this expenditure is of the nature of preoperative expenses which was necessary before the capital asset in the shape of plant at Haridwar could be brought into use. The assessee's objection is accordingly rejected." Therefore, in conformity with the order of DRP, amount of Rs. 187.72 lacs is added to the income of the assessee.(Addition - Rs. 187.72 lacs) Facts: 26.2. During the year, the assessee was in the process of setting-up new plant at Haridwar; Direct expenses in relation to acquisition of assets, were capitalized and indirect expenses, aggregating to Rs. 1.87 crores, were claimed as revenue expenditure. 26.3. The Assessing officer disallowed the aforesaid expenditure on the ground that, since the same were incurred in relation to setting-up new plant, the same are capital expenditure Assessee's Submissions: 26.4. The aforesaid aggregate expenditure of Rs.1.87 crores was in the nature of administrative and general overhead expenses like conveyanc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inder: 26.15. The decision of the Bombay High Court in the case of CIT vs Great Eastern Shipping Co. Ltd.: 118 ITR 772, relied upon by the Ld. DR is not applicable to the facts of the assessee's case and has been wrongly relied upon. 26.16. In the said case, the assessee had incurred expenditure, including ceremonial expenses, on purchase and installation of new assets. In that case, the issue for consideration in Revenue's appeal before the High Court was whether such expenses could be capitalized as part of cost of assets for the purposes of allowing depreciation to the assessee under section 32 of the Act or not. The Court, while following the decision of the Supreme Court in the case of Challapalli Sugars Ltd. 77 ITR 392, decided the issue in favour of assessee and held that expenditure incurred in connection with installation of assets was to be capitalized as part of cost of the assets. The issue, whether the aforesaid expenses were indirect in nature and were incurred in connection with the extension of existing business of the assessee, was not for consideration before the Court and was not even raised by the assessee. 26.17. In that view of the matter, the aforesaid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ification issued by the Government specifying that such passenger tax should be paid by the customers on behalf of transporters directly to the Government. The aforesaid payments were made by the assessee directly to the government on behalf of the transporters without any deduction of tax at source. In the draft assessment order, the AO has made disallowance under section 40(a)(ia) for alleged failure to deduct tax at source under section 194C, the disallowance deserves to be deleted for the following reasons: The counsel submitted that u/s 194C a person is liable to deduct tax at source on income price in the amount payable to contractors and therefore, the element of passenger tax payable to government by the transporter did not constitute the income of the transporters and as such the assessee was not liable to deduct TDs from the same. The objection of the assessee is not acceptable. What the assessee is required to pay to the transporters for the services rendered by the transporters is the lump-sum transport charges. It is the responsibility of the transporters to discharge his duty of incurring various expenditure like expenditure on petrol, expenditure on salary of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt of service tax paid to the landlord, as the same does not constitute income of the landlord. DR's Arguments 28.7. Reliance is placed on the assessment order and order passed by DRP. Our findings conclusion: 28.8. The assessee in this case has paid passenger tax to the government on behalf of the transporters who provide facility for pick-up/drop of the employees to factories/ office premises. This is done in pursuance to government notification. Prior to such notification, the assessee was deducting tax on bran amount inclusive of the cost of tax and the transporter was paying the tax in question. Now as stated, the assessee under the amended State law is required to pay the tax directly to the government on behalf of the transporters. The assessing officer disallowed the same on the ground that no tax has been deducted at source on this amount. The undisputed fact is that there is no element of income in this particular transaction. The passenger tax is levied by the government on the transporters, which is to be paid directly by the assessee. Under these circumstances, in our considered opinion, no tax is to be deductable at source by applying the judgment of the Hon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mer can chose to go to any of these dealers for getting these free services. The assessee is providing training to the technical persons appointed by the authorized dealers on how to carry out the services. Thus, it is clear that a responsibility is cast on the assessee to provide these free services to the customers at its own cost. For this purpose the assessee has in turn entered into agreement to its authorize dealers to carry out the actual services and for which the assessee makes payment to the dealers. The payment made by the assessee to its dealer is an contractual payment for obtaining technical services from the dealers for servicing the two wheelers. The service of the two wheelers is a technical service. It involves the persons what are doing the service of the vehicles have to be technical expert in the field of auto industry that is the working with the two wheeler. It is also a fact that assessee is proving technical training to the technicians of the dealer who actually carry out the services. Thus it cannot be denied that the services rendered by the dealer are technical services. There is no contract for rendering free services between the dealer and the customer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hicles has embedded therein free service obligation. 29.10. On sale of vehicle by the dealer to the customer, it is the obligation of the dealer to service products sold to the customer, on customer bringing the vehicle to the dealer for free service. The payment in lieu of service provided by the dealers is made by the customers in the form of free service coupons received at the time of purchase of vehicles. The company honours such free service coupons when the same are presented by the dealers to the company, in terms of the reciprocal obligation of the company towards the dealers, incurred by the company at the time of sale of products to the dealers. 29.11. The liability to deduct tax, if any, in law is on the service recipient viz., the customer and cannot be shifted on to the company merely because payment is made by the customer not in cash but by way of prepaid coupon, the liability whereunder is discharged by the company. 29.12. The aforesaid transaction can be equated with transaction entered through a credit card where the physical payment of cash to the vendor is paid by the credit card issuing company to the vendor for and on behalf of the customer/service reci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee calls for being dismissed. Assessee's Rejoinder: 29.18. The assessee issues free service coupons to customers for service/repair of two wheelers at the time of sale. Free service is carried out by dealers for which reimbursement is made by assessee to dealers on presentation of free service coupons handed over by the customers to dealers. 29.19. The contention of the DR that assessee was liable for deduction of TDS under section 194J on reimbursement made by the assessee is not correct and unsustainable for the following reasons: 29.20. The agreement entered into between the assessee and dealers is on a principal to principal basis; in other words, the dealers do not act as agent of assessee. 29.21. It is the obligation of the dealer to handle the business of dealership at its own expense. The products sold by the company to the dealers and further sale by the dealers to the customers has condition of free service coupons, i.e., the sale price of the vehicles has embedded therein the free service obligation 29.22. The liability to deduct tax, if any, in law is technically on the recipient of services i.e. the customer and cannot be shifted on to the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be made by the customer through re-imbursement of valid free service coupon. No service has been obtained by the assessee which obligates it to withhold tax under the provisions of the Act. 29.28. That apart and without prejudice to the above, even otherwise the assessee cannot be said to have defaulted in not deducting tax at source under section 194J, since the repair/maintenance services provided by the dealer to the customers was not in the nature of "technical service", as defined in section 9(1)(vii) read with section 194J of the Act. 29.30. Reliance is placed on the decision of the Delhi bench of the Tribunal in the case of Lufthansa Cargo India Pvt. Ltd. DCIT: 91 ITD 133, wherein it has been held that payment made towards maintenance/repair services do not fall within the meaning of 'fees for technical services' as defined in Explanation 2 to section 9(1)(vii) of the Act. 29.31.This view is further supported by the following decisions: Kandla Port Trust v. DCIT: ITA No. 771/Rjt./2010 (Rajkot)(ITAT) Addl. DIT v. BHEL-GE-Gas Turbine Servicing (P)Ltd.: ITA No.976 to 981 /Hyd/2011 (Hyd.)(ITAT) 29.32. The assessee relies on submissions made in chart of issues alr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... que or draft or by any other mode, whichever is earlier, deduct an amount equal to ten percent of such sum as income tax on income comprised therein." 29.35. Clause (ba) was inserted by the Finance Act, 2012 w.e.f. 1-7-2012. Prior to such insertion what is covered in this clause is fees for professional service or fees for technical services or royalty or any sum referred to in clause (va) of section 28. 29.36. In our view, the payment in question does not fall in any of the above conditions. The term "professional service" is defined in Explanation (a) to mean services rendered by a person in the course of carrying on legal, medical, engineering or architectural profession or the profession of accountancy or technical consultancy or interior decoration or advertising or such other profession as is notified by the Board. The term "Technical Services" is defined in Explanation (b). 29.37. In Explanation (b), "fees for technical services" has been defined as having the same meaning as in Explanation 2 to clause (vii) of sub-section (1) of Section9, which reads as follows:- "Explanation 2 - For the purposes of this clause, "fees for technical services" means any consideration ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g of 'fees for technical services', as provided in Explanation (2) of section 9(1)(vii), it is apparent that fee for technical services includes payment of consideration for rendering of following services: (a) Managerial (b) Technical (c) Provision of services of technical or other personnel (Para 15) 'Fee for technical services' does not include following consideration: (i) Construction (ii) Assembly (iii) Mining or like project. From a perusal of annual maintenance contract it is noticed that the AM contractor shall carry out all repairs as per detailed description in the agreements. From those agreements, it was found that those contracts were not in respect of managerial or technical or consultancy services. Thus, it is clear that those agreements were related to annual maintenance of machineries and not for technical services. The revenue in view of the fact that the contractors have utilized services of technical persons presumed that the assessee made payments for technical services which cannot be agreed. It may be technical services for contractor but not for the assessee. The case of the assessee is simply a case of annual maintenance of machineries for whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the provision of the consultant technician deputed to India for supervising the repairs which has been treated as consultancy services. The foreign technician stayed on in India for 44 days to advise and supervise repair work which was obviously carried out by the engineers and workers of the Indian company. Thus, the nature of services rendered by the foreign company was consultancy of technical nature through the provision of its technician deputed to India. Our conclusion is supported by the decision of Andhra Pradesh High Court in the same case reported in 238 ITR 861, wherein Hon'ble High Court affirming the aforesaid decision of the Tribunal held that the Explanation 2 has expanded the scope of section 9(1)(vii)(b) by providing that the services of technical or other personnel would be taxable. It has been repeatedly stated by the assessee that no foreign technician was ever deputed of India. The lower authorities and the DR have not pointed out any instance of a technician having been assigned of India. This decision therefore is of no assistance to the Revenue." Thus, the above decisions of the Tribunal are relevant for the proposition that the routine repairs do not cons ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pports of the case of the assessee. In the case of the assessee, the dealer is playing a role similar to that of the TPA in as much it is making payment to the person doing the repair job. This payment made for service rendered is only being made by the dealer. Applying the proposition laid out in the Board Circular, technically it is the dealer who is liable to deduct tax at source on payments made to the service provided for doing the repair jobs but not the assessee. The subsequent reimbursement made by the assessee to the dealer cannot be covered under the provisions of sec. 194J of the Act. 29.45. On this factual matrix, and as Sec.194J is not attracted in this case, we uphold the contentions of the assessee and allow this ground of appeal. 30. Ground no. 22.3 (Disallowance of car rental charges): DRP Directions: 30.1. The DRP has issued following directions to the Assessing Officer; "During the relevant previous year, the assessee took car on lease from Hero Honda Finlease Ltd., which was used by employees in the course of discharging administrative functions for the purpose of business, against which the assessee paid rental charges of Rs. 107.39 lakhs. In the draf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... section 194I of the Act, nor does the said section make any reference to any other provision for meaning thereof. Accordingly, the ordinary meaning and the context in which these assets have been included in the said section, would have to be adopted. 30.6. It is submitted that the ordinary meaning of the words 'machinery' or 'equipment' implies that the same are in the nature of assets, which are used as tool in the physical operations of the business. Accordingly, the word 'plant', has to be read in context, and in a sense cognate to the words with which it finds company, viz., 'machinery' and 'equipment', applying the well recognized principles of interpretation of statutes, viz. 'ejusdem generis' and 'Noscitur a Sociis'. 30.7. In view of the above, the word 'plant', as used in section 194I means such assets, which are used as tool in the course of physical business operations of an assessee. 30.8. In the present case, since car on which impugned lease rental has been paid has been used by employees in the course of discharging administrative functions as part of regular business activities, such car is not used as a tool in the course of main business function of manufact ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction referred the term ship, aircraft, machinery or plant specified in sub-section (2). Under sub-section (2) plant and machinery does not include vehicle. 30.15. In the case on hand, we are not considering investment allowance u/s 32A. Hence, the definition given u/s 43(3), in our view, applies in this case. Thus, the issue is decided against the assessee. 30.16. Nevertheless the assessee has raised an alternate contention that M/s Hero Honda Finlease Ltd. has paid all the taxes and filed its return of income and thus it is not assessee in default in terms of proviso to sec. 201 inserted by the Finance Act, 2012 w.e.f. 1-7-2012 and consequently disallowance u/s 40(a)(ia) is not warranted in as much as corresponding amendment was made to this section as well. This plea deserves to be considered. Since this issue is not examined by the lower authorities we set aside the matter to the file of assessing officer for fresh adjudication. This ground of the assessee is allowed in part for statistical purposes. 31. Ground no. 22.4 to 22.4.3: (Payment to dealers on account of reimbursement of advertisement expenses):- DRP Directions: 31.1. The DRP has issued following directions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d expenditure of Rs.186.10 lacs in respect of reimbursement of advertisement expenses, like, putting up the hoardings, participation in various fairs and events, etc. incurred by dealers. 31.3. The Assessing officer disallowed the aforesaid expenditure under section 40(a)(ia), on the ground that the assessee failed to deduct tax at source from the re-imbursement of advertisement expenses to dealers under section 194C of the Act. Assessee's Submissions: 31.4. The assessee enters into principal to principal agreement with dealers, whereby the dealers purchases vehicles from the assessee on its own account and further sell the same to the customers. The dealers, in order to promote sales have to incur advertisement expenses, for which re-imbursement of certain portion thereof is subsequently sought from the assessee, pursuant to a sales promotion scheme introduced by the assessee. 31.5. In such circumstances, since the contract of advertisement is between the dealers and the contractor, the obligation to deduct tax at source, if any, from the payments made under such advertisement contracts is that of the dealer(s). The assessee simply reimburses the actual cost incurred by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of merit. 31.13. The argument that only cost is reimbursed and this has no element of income has no force, as it is not supported by evidence. The general argument of the assessee that proviso inserted to Sec. 201 by Finance Act 2012 w.e.f. 1-7-2012 applies to the case on hand, has to be examined by the assessing officer. 31.14. The second argument of the assessee is that they were purchasing gift items from the vendors to be used for the purpose of publicity and as this is amount for the purchase of goods, it is not a payment against work contract and the same cannot be subjected to TDS also has force in view of the decision of the Hon'ble Delhi High Court in the case of Eastern Medikit Ltd. 146 TTJ 551. This aspect also requires examination of facts. Thus, we set aside the mater to the file of assessing officer for fresh adjudication in accordance with law considering the material filed by the assessee. This ground of appeal is treated as allowed for statistical purposes. 32. Ground no. 22.5 to 22.5.1 (TDS on motorbikes gifted to various winners of contestants at TV shows): DRP Directions: 32.1. The DRP has issued following directions to the Assessing Officer; "During ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the payment contemplated u/s 194I includes not only the cash payments or payment by cheque or draft but also payment by any other mode and therefore, the payment of higher charges made by the assessee by giving 85% of the catch of fish will attract provisions of TDs u/s 195 of the I. T. Act. The objection of the assessee is accordingly rejected." Therefore, in conformity with the order of DRP, amount of Rs. 7.49 lacs is added to the income of the assessee.(Addition - Rs. 7.49 lacs) Facts: 32.2. During the relevant previous year, the assessee incurred expenditure of Rs.7.49 lacs on account of distribution of motor vehicles to winners of game shows organized by TV channels. 32.3. The Assessing Officer disallowed the aforesaid expenditure under section 40(a)(ia) on the ground that the assessee failed to deduct tax at source therefrom under section 194B of the Act. Assessee's Submissions: 32.4. Under section 194B an assessee is liable to deduct tax at source from payment to any person of income by way of winnings from, inter alia, any game. The liability to deduct tax at source under the aforesaid section arises where an assessee has a contract with the participants in a ga ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... otor vehicles to winners of game shows organized by TV channels. 32.11. It is submitted that, although the aforesaid game show was organized by TV channels, since, the distribution of gift to winners of such game show, viz., motor vehicle, was provided by the assessee, it can be said that the aforesaid game show was organized on behalf of the assessee only. In that view of the matter, it is submitted that the assessee was responsible for deduction of TDS on gift of motor vehicle to winners of game show under section 194B of the Act. 32.12. In view of the aforesaid, the ground of appeal raised by the assessee needs to be dismissed Assessee's Rejoinder: 32.13. As regards the contention of the Ld. DR, that it should be deemed that show was organized by the assessee, it is submitted, that the said plea is contrary to record and has been raised for the first time. 32.14. In this connection, pursuant to the query raised by the Hon'ble Bench, the assessee had adduced agreement entered between the organizer of the show, viz., MTV ASIA LDC and the assessee company, on sample basis. On perusal of the same, it is patently clear that the game show was organized by the organizer and t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts served during the course of meetings. The assessee has incurred expenditure of Rs. 1,01,582/- towards hire charges of banquet hall on certain days for carrying out training activities of staff. The assessee also incurred expenditure of Rs. 15.99 lakhs in respect of room taken on hire in a hotel, for providing temporary lodging facility to foreign professionals/experts engaged by the assessee. In the draft assessment order, the assessing officer has disallowed the aforesaid payments, aggregating to Rs 22.71 lakhs and Rs. and Rs. 1.02 lakhs under section 40(a)(ia) on the ground that the assessee failed to deduct tax at source under section 194C of the Act, since the said payments were made for availing catering services provided by the hotels and therefore, fall within the meaning of work contract as defined under that section. The counsels submitted that the TDs are not deductible on payment to hotel for booking of banquet hall including provisions of snacks, refreshments etc. and also on payments for booking rooms in a hotel. The objection of the assessee is not acceptable, a reference in this regard can be made to an article published on page 238 of the magazine section of 98 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ursement of repair and maintenance cost of Omax Auto Ltd.):- DRP Directions 34.1. The DRP has issued following directions to the Assessing Officer; "The assessee has a manufacturing plant located at Dharuhera, which is adjacent to the manufacturing plant of another company, viz, Omax Auto Ltd. ('Omax'). The assessee and Omax share a common road leading to their respective plants. As the said road was in a poor state/damaged, both the companies decided to rebuild the road and carry out incidental work in order to facilitate smooth and efficient transportation of material, personnel and there by reduce costs. However, it was decided that the aforesaid work shall be carried out by Omax. Accordingly, during the relevant previous year, the appellant made a payment of Rs. 8.22 lakhs on account of reimbursement of its share of cost borne by Omax. In the draft assessment order, the assessing officer has disallowed the aforesaid deduction claimed by the assessee on the ground that the assessee failed to prove that the payment was made on cost to cost basis. The AO also observed that the assessee had failed to provide reconciliation regarding tax deducted at source from payment made by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... settled position in law that withholding tax provisions do not apply to payments in the nature of reimbursements of cost for the reason that there is no element of income for the recipient of the money from this payment. Therefore, we are of the view that provisions of Sec. 194C of the Act are not applicable to reimbursements of actual expenses and the assesse company was not liable to deduct tax at source on payments made to Omax. Consequently disallowance u/s 40(a)(ia) is bad in law. Therefore, we allow the grounds of appeal of the assesse. 35. Ground no. 22.8 (TDS on reimbursement of out of pocket/ traveling expenses to consultant/ vendors): DRP Directions: 35.1. The DRP has issued following directions to the Assessing Officer; "In the course of business, the assessee avails services from various vendors. The invoices raised by such vendors include claims towards reimbursement of out of pocket/travelling expenses. During the relevant previous year, the assessee made payments, aggregating to Rs. 11.13 lakhs, to various consultants/vendors towards out of pocket/travelling expenses in the draft assessment order. The AO has disallowed the aforesaid expenditure under section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 35.3. The Assessing officer held that assessee was also liable to deduct tax from such expenses under the relevant provision of Chapter XVII-B under which tax was deducted from fees paid to the vendor. AR's Submissions: 35.4. Re-imbursement of out of pocket/travelling expenses at actuals does not constitute income of the recipient professionals, warranting deduction of tax at source, which is obligatory only qua income element in the payment made. 35.5. Reliance, in this regard, is placed on the following decisions, wherein it has been held that the payer is not obliged to deduct tax at source from re- imbursement of expenses under any provision of Chapter XVII-B of the Act, since the same does not constitute income of the payee: - ITO v. Dr. Willmar Schwabe India (P) Ltd.: 95 TTJ 53 (Del.) (Further, appeal dismissed by the Delhi High Court). - United Hotels Ltd. v. ITO: 93 TTJ 822 (Del) - Karnavati Co-op. Bank Ltd. V. DCIT: 134 ITD 486 (Ahd.) - Mahyco Monsanto Biotech (India) Ltd. v. Addl. CIT: ITA NO. 5842/MUM/2012 (Mum.) (ITAT) 35.6. Out of total expenditure, reimbursement of expenses to the extent of Rs. 6.01 lacs were made after verifying the supporting vouchers ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ider and a customer, whereby the provider agrees to deliver a symmetric telecommunications line connecting two or more locations in exchange for a monthly rent. Lease lines are used by business to connect geographically distant offices. Unlike dial-up connections, a leased line is always active. The fee for the connection is a fixed monthly rate. The primary factors affecting the monthly fee are distance between end points and the speed of the circuit. Because the connection doesn't carry anybody else's communications, the carried can assure a given level of quality. Since, the infrastructure is dedicatedly provided for the user therefore it is chargeable to TDS. The objection of the assessee is accordingly, rejected." Therefore, in conformity with the order of DRP, amount of Rs. 13.21 lacs is added to the income of the assessee. (Addition - Rs. 13.21 lacs) Facts: 36.2. The assessee made payments of Rs.13,20,750 on account of rentals towards leased line obtained from MTNL/BSNL. 36.3. The Assessing officer held that assessee was liable to deduct tax from aforesaid rental payment under section 194I. Assesee's Submissions: 36.4. Under the impugned arrangement, the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ound that the assessee failed to deduct tax at source there from under section 1941 of the Act. The ld counsel has submitted that the generator in this case was utilized by the assessee company at the corporate office and that the generate utilized at the corporate office cannot be regarded as machinery plant or equipment as such, the provision of section 194(I) for deduction of tax at source are not attracted. The SC in 248 ITR 175 (SC), while deciding the issue of eligibility of investment allowance has held that the generators installed by an industrial company is entitled to investment allowance as plant and machinery. The objection of the assessee is therefore rejected." Therefore, in conformity with the order of DRP, amount of Rs. 2.03 lacs is added to the income of the assessee. (Addition - Rs. 2.03 lacs) Facts: 37.2. During the relevant previous year, the assessee incurred total expenditure of Rs.2,02,500 towards hire charges of generator used at the corporate office 37.3. The Assessing Officer held that the assessee was liable to deduct tax at source therefrom under section 194I, as use of generator fell in the category of use of plant and machinery. Assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the income of the assessee. (Amount disallowed - Rs. 4.32 lacs) Assessee's Submissions: 38.2. Though the certificate was dated 18.5.2006, however, the same was effective for the full year. The assessee was, therefore, exempted from TDS and there was no failure on the part of the assessee in deducting tax at source from the impugned rental payment. Certificate is attached at page No. 1815 of the paper book. DR's Submissions:- 38.3. Reliance is placed on the assessment order and order passed by DRP. Our findings conclusion: 38.4. After due considera tion, we do not find much force in the argument of the assesse that the though the certificate u/s197 was issued on 18.05.2006 it was effective for the full assessment year. Thus, on this ground we hold the issue against the assessee. 38.5. Nevertheless, the amendments made to the provisions of S.201 and S.40(a)(ia) by the Finance Act 2012 .we.f. 1-7-2012 and its impact on the present payment have not been considered by the assessing officer. Therefore, we set aside the issue to the file of assessing officer for fresh adjudication in accordance with law. 39. Ground nos. 22.12 22.12.1( TDS on purchase of flowers): D ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t source, the expenditure claimed has to be disallowed u/s 40(a)(ia) of the Act. This ground of the assessee is dismissed. 40. Ground no. 22.13 (TDS on stitching charges of uniform for employees) DRP Directions: 40.1. The DRP has issued following directions to the Assessing Officer; "The AO in this regard has held that since the invoice has raised by the vendors separately for supply of material/clothes and separately for stitching, the contact with the vendor in the nature of work contract which was subject to TDs u/s 194C of the Act. The AO has made a disallowance of 54000/- in view of the assessee's failure to deduct tax at source. The AO disallowed the expenditure of Rs. 54000 u/s 40(a)(ia) of the act. It was submitted by the ld counsel that the contract with the vendor was a composite contract for purchase of uniform for which vendor was to use his own clothes for stitching the uniform of staffs in accordance with size and specification of each employee/staff. The relevant bill and the voucher in this regard are placed at page 1827 and 1828 of vol. 7 of the paper book. The narration on the voucher at page 1827 clearly shows that the payment is for suits and stitching c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee it is to be accepted that it was purchase of goods and not contract for work, we do not see a reason as to why the vendor has to raise a separate bill for sitching charges. Though the assessee submitted that this is a composite contract, no evidence is led in this direction. Thus, we uphold the findings of the assessing officer and dismiss this ground of the assessee. 41. Ground no. 22.14: (TDS on management fee under a portfolio management scheme): DRP Directions: 41.1. The DRP has issued following directions to the Assessing Officer; "The AO has disallowed expenditure of Rs. 3.75 lakhs allegedly incurred on account of Management fee paid in connection with subscription to Reliance Capital PMS. The counsel of the assessee merely submitted that the amount of Rs. 3.75 lakhs paid was the entry loan @.75% of the capital introduced in the scheme and it was not management fees. The ld counsel however could not establish as to how entry loan of Rs. 3,75000 was not in the nature of management fee. The relevant document in this regard are placed at pag3 1828A to 1830L. On page 1828A, it is clearly mentioned that the payment of Rs. 3,75000 is entry charges. This page doe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... agement fees. What was actually paid, was entry load fees at the time of subscription of portfolio management scheme ("PMS"). Thus, there is no such liability on part of the assessee to deduct tax at source u/s 194J of the Act. In the result, this ground of the assessee is allowed. 42. Ground no. 22.15 to 22.15.3 (TDS on provisions of various miscellaneous expenses made at the end of relevant year): DRP Directions: 42.1 The DRP has issued following directions to the Assessing Officer: "As at the end of the relevant previous year, the assessee, inter alia, created provision, aggregating to Rs. 1663 lakhs, in respect of various expenses incurred during the year for which bills were not received from the vendors before the finalization of the books of account for the year ending 31st march, 2007. Accordingly, the assessee on the basis of best estimate of the amount payable for various services rendered during the relevant previous year provided for liability towards such expenses in the provision account. The aforesaid aggregate provision, inter alia, comprised of Rs. 42.49 lakhs towards wages/bonus payable to casual labour and Rs. 1344 lakhs in respect of various expenses lik ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction 40(a)(ia) of the act. This contention of the assessee has already dealt with by the AO in the draft assessment order wherein it has been held that the concession from disallowance u/s 40(i)(ia) is available to the assessee only when the TDS has already been deducted within the due time though paid before the before the due date for filing of the return. This is stand of the AO is supported by clear wording of the first proviso below section 40A of the I. T. Act. The provision clearly says that where the TDS is deducted in any subsequent year or after deducting in the relevant previous year, has been paid after the due date for filing of the return, the deduction shall be allowed in the assessment year relevant to the previous year in which the TDS has been deducted. This clearly means that where the TDS has been deducted after the relevant previous year the deduction shall be allowed only in the relevant previous year when it has been paid after deduction. This means that in those cases, where the TDS has been deduced after the relevant previous year but has been paid within the due time for filing of return u/s 139(1) of I. T. act for the assessment year relevant to the pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ified on the basis of reasonable estimate) were not even identified, in view of exact details of sales made by each dealer not being available with the assessee company. The aforesaid provision on account of incentives payable to dealers was created on the basis of overall/macro details of sales made by the dealers in a region / zone, as provided by regional / zonal offices of the assessee company located at various places, which was not supported by the information / details of exact number of vehicles sold by each dealer. 42.6. Since the payee was not identified and the amount payable party-wise was not quantified, the assessee was not obliged to deduct tax at source from the provision created for the aforesaid expenses / liability under any provision of Chapter XVII-B of the Act. The liability to deduct tax at source arises only when following two conditions are satisfied: i) credit to the account of identified payee, and ii) the credit results in accrual of income in the hands of the recipient. 42.7. Reliance, in this regard, is placed on the following decisions, wherein while approving the aforesaid legal position, it has been held that an assessee is not liable to wit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9.7. Consistent with the view taken therein, we hold that no deduction of tax at source is warranted on the balance provision of Rs. 1344 lacs created towards estimated payment to vendors. 42.12. The next provision is towards amount payable to various dealers/ stockists under different sales promotion schemes. The claim of the assessee is that receivers of the incentives are not identified. It is also stated that the provision created was on overall basis. Be that as it may, the fact remains that the payment in question is towards sales promotion. As estimates made on reasonable basis, tax should have been deducted at source based on party- wise liability. Decision in the case of Industrial Development Bank of India v. ITO 104 TTJ 230 (Mum.) does not apply to the facts of the case in as much the facts in that case were that the assessee failed to deduct tax at source in respect of interest provision made on certain bonds that can be transferred simply by endorsement and delivery. As such, the payees could not be identified till the registration date that is subsequent to closure of books of account. In the present case, the identity of the dealers is not in doubt. It is only the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is placed at page 1878 and 1879 of vol. 8 of assessee's paper book. Page 1879 is the part of the application on the basis of which the certificate placed at 1879 is issued by the AO for deduction of TDS at lower rates. Perusal of the annexure-a of the application at page 1879, shows that the TDS certificate at lower rates of TDS is granted upto certain amounts mentioned in the Annexure-A. The certificate issued to M/s Chetak Logistic Ltd. is in respect of some of Rs. 593 intimated by M/s Chetak Logistic that was expected to be credited/paid during the F.Y 06-07. Thus it is clear that any payment by the assessee to M/s Chetak Logistic beyond the sum mentioned in Annexure-A of the application of M/s Chetak is not covered by the certificate issued by the AO for lower rate of tax to be deducted at source. Thus the objection of the assessee is rejected." Therefore, in conformity with the order of DRP, amount of Rs. 348.13 lacs is added to the income of the assessee. (Addition - Rs. 348.13 lacs) Facts: 43.2. The assessee made payment of certain expenses, after deducting TDS at discounted/NIL rate on the basis of exemption certificate under section 197 provided by the vendors. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... section to treat, inter alia, the assessee as defaulter where there is a short fall in deduction. With regard to the short fall, it cannot be assumed that there is a default as the deduction is not as required by or under the Act, but the facts is that this expression, 'on which tax is deductible at source under Chapter XVII-B and such tax has not been deducted or, after deduction has not been paid on or before the due date specified in sub section(1) of section 139. This section 40(a)(ia) of the Act refers only to the duty to deduct tax and pay to government account. If there is any shortfall due to any difference of opinion as to the taxability of any item or the nature of payments falling under various TDS provisions, the assessee can be declared to be an assessee in default u/s 201 of the Act and no disallowance can be made by invoking the provisions of section 40(a)(ia) of the Act. Accordingly, we confirm the order of CIT(A) allowing the claim of assessee and this issue of revenue's appeal is dismissed." We find no substantial question of law is involved in this case and therefore, we refuse to admit the appeal. Accordingly, the appeal is dismissed." 43.10. The assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the TDS provision of section 194J of the Act. The objection of the assessee is considered carefully. M/s Fort Point Automotive Pvt. Ltd. is clearly a corporate party and assessee's objection with regard to this party is rejected. Whether or not these parties are Corporates or not is a matter of fact which can be verified by the AO. The assessee will render necessary assistance in this regard and produce all the relevant evidence. After verification of the fact, the AO will decide whether the remaining parties are corporate or not. If it is found that the remaining parties are not corporate parties, the AO shall not make the disallowance in respect of these parties. The contention of the ld counsel that the services rendered by m/s Results Services Pvt. Ltd. was not professional or technical services but the payment to these parties has been made under a work contract is not acceptable. Under a work contra tithe payment is always made on the basis of the quantity of the job carried out. In the present case, M/s results service are entitled to fixed retainer-ship fees per month. In addition to Rs. 7.15, per passport supervised by this party per month, no job work execution is invo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... duced at wrong rate. 44.5. In so far as parties mentioned at serial No.2 to 5 are concerned, the invoice raised by the said parties disclosed the status of such recipients as non-corporate in as much as the words 'private limited' or 'limited' was not affixed to their name. In view thereof, the assessee deducted tax at source at the correct rate applicable thereto and there was no default on the part of assessee in deducting tax at source at the rate applicable to non-corporate assesses. Re: Results Service (P) Ltd. 44.6. The assessee had launched scheme called "Passport Scheme", whereby the customers of assessee using two wheelers were eligible to enroll for such scheme on payment of membership fees and the customers were entitled to certain points for each transaction undertaken with the assessee/dealers like service of vehicles, purchase of spares parts, tools, purchase of new vehicle, etc. The customers were entitled to redeem the points so earned, in lieu of certain discounts or gifts or cash compensation, as the case may be, depending upon the scheme. 44.7. Since, the assessee has a large data base of customers enrolling for the aforesaid Scheme, to the tune of 34.23 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ith the view taken by us while disposing of ground no. 26.16.1 we allow this ground of the assessee. 45. Ground no. 22.17 to 22.10 (TDS on incentive/ discount to dealers): DRP Directions 45.1. The DRP has issued following directions to the Assessing Officer; "The brief facts as stated by the assessee on this issue are as follows: In the course of business of selling two wheelers, the assessee appoints various dealers and provides various incentives/discounts from time to time under various schemes in order to increase sales to dealers and ultimate customers. During the relevant previous year, the assessee has incurred expenditure of Rs. 2211 lakhs on account of various incentives/discounts given to dealers. The aforesaid expenditure, aggregating to Rs. 2211 lakhs, relates to amount of discounts offered by the company to various stockists/dealers on purchase of space parts made by the latter from the assessee company, in accordance with sales incentive/discount scheme prevalent during the relevant previous year. The counsels of the assessee have in this regard repeated their submission made before the AO that the payments made are in the nature of discount and not commis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the stockists/dealers, the discount received by such stockists/dealers, was not in the nature of 'commission' or 'brokerage', subject to TDS under section 194H of the Act. 45.8. Reliance, in this regard, is placed on the following decisions wherein it has been held that the provisions of section 194H are not applicable where the payment is made to a dealer or distributor in a principal to principal contract: CIT v. Ahemedabad Stamp Vendors Association: C.A. No. 10270/2003 (SC) Kerala State Stamp Vendors Associations Vs. Office Of The Accountant-general and Others: 282 ITR 7 (Ker.) CIT v. Mother Dairy Ltd.: ITA No. 1925/2010 (Del.)(HC) Jai Drinks (P) Ltd.: 336 ITR 383 (Del.) S.R.L. Ranbaxy v. ACIT: 143 TTJ 265 (Del.) 45.9. In view of the above, the disallowance made by the AO calls for being deleted. DR's Submissions: 45.10. Reliance is placed on the assessment order and order passed by DRP. Our finding conclusion: 45.11. The facts of this case clearly demonstrate that what is given to the stockists/ dealers is discount on the purchase price and not any commission. The stockists/ dealers purchase spare parts/ vehicles from the assessee. They are not commission ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case of Jai Drinks (P) Ltd. 336 ITR 383 (Del.), the Hon'ble Delhi High Court has held as follows:- Held, dismissing the appeal, that a perusal of the agreement showed that the assessee had permitted the distributor to sell its products in a specified area. The distributor was to purchase products at a pre- determined price from the assessee for selling them. Both the assessee and the distributor had been collecting and paying their sales tax separately. The CIT(A) and also the Tribunal rightly held that the payments being made by the assessee to the distributor were incentives and discounts and not commission." 45.14. Respectfully following the propositions laid down in the aforementioned cases we allow this ground of the assessee. 46. Ground nos. 23 -23.3 (TDS on clearing charges paid towards import consignments): DRP Directions 46.1. The DRP has issued following directions to the Assessing Officer; "The AO has disallowed expenditure of Rs.78.48 lacs incurred on account of clearing charges paid towards import consignments, on the ground that the assessee failed to deduct tax at source therefrom, invoking provisions of section 40(a)(i)of the Act. The Applicant has objec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ai-400 038, Service Tax Regn. No. AAACT3273NST002 LCL/SCHIMP Documentation fees-IMP Edu Cess on S. Tax- THC/IHC Service Tax, Edu Cess on S. Tax-Doc. Fees, Service Tax-THC-IHC Source based taxation for 10 years of convention; thereafter residence based taxation APL APL Singapore APL (India) Pvt. Ltd., Akruti Trade Centre, 402, 4th Floor, Road No. 7, M.I.D.C. Andheri(East), Mumbai 400 093. Service Tax No. Residence based taxation Mitsui OSK Lines Mitsui Line Japan Mitsui OSK Lines(India) Pvt. Ltd., Source based taxation for 10 years of convention; thereafter residence based taxation CM A CG M Glob al(In dia) CM A CG M France CMA CGM Global (India) Pvt. Ltd., Hamilton House, 8 J.N. Herdia Marg, Ballaard Estate, Mumbai 400 038 Equipment import demurrage charge exchange rate difference Source based taxation for 10 years of convention; thereafter residence based taxation 46.3. Perusal of the table compiled above will show the following factual inaccuracies in the applicant's submissions 1. The payments have not been made to non-resident ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vs. CIT 327 ITR 456 Apex Court has laid down the rationale that section 195(1) imposes a statutory duty on any person responsible for paying to non- resident "any sum chargeable under the provisions of the Act" to deduct tax at the rates in force, and that section 195(2) and 195 (3) are safeguards. It has also explained that- "The payer is also an assessee under the ordinary provisions of the Income-tax Act. When the Payer remits an amount to a non-resident out of India he claims deduction or allowances under the Income-tax Act for said sum as an 'expenditure'. Under section 40(a)(i), inserted vide Finance Act, 1988 w. e. f. 1.4.89, payment in respect of royalty, fees for technical services or other sums chargeable under the Income-tax Act would not get the benefit of deduction if the assessee fails to deduct TAX in respect of payments outside India which are chargeable under the I.T. Act. This provision ensures effective compliance of Section 195 of the Income-tax Act relating to tax deduction at source in respect of payments outside India in respect of royalties, fees or other sums chargeable under the Income-tax Act, 1961. In a given case where the payer is an assessee he will ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the relevant Article of the DTAA and, therefore, the assessee was not liable to deduct tax at source from remittance of clearing charges to agents. 46.7. Reliance, in this regard, is also placed on the decision of Kolkata bench of Tribunal in the case of Taj Leather Works v. CIT: 23 Taxmann.com 58, wherein it has been held that where assessee-exporter made payments to Indian agents of foreign airlines on account of air-freight, assessee did not have TDS obligations either under section 194C or section 195 of the Act. 46.8. In view of the above, the assessing officer has made disallowance on mis-appreciation of facts and position in law and, therefore, the disallowance made needs to be deleted. DR's submission: 46.9. Reliance is placed on the assessment order and order passed by DRP. Our findings conclusion: 46.10. The assessee claims that the payment in question was made to non- resident shipping companies through its agents. The assessing officer is of the view that the payments were made to the agents of non-resident company and not to the resident shipping company per se and as such held that assessee was liable to deduct tax at source. These facts cannot be addres ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d into between the assessee and the vendor is attached at page no. 1937-1940 of the paper book. Under the MOU, the vendor was to procure specified gift items and supply the same on a principal to principal basis to dealers for further distribution to the customers under the passport scheme. The AO in the draft assessment order has held that the payments made to the vendor could not be said to be for the purchase of gifts, but was against services rendered by such vendor and that the 1.55 profit margin over the landed cost price of the product was in the nature of service charges by such vendor. The AO has held that the total payments made to these vendors ware against a composite product price including service charges which was subject to TDS u/s 194C of the I. T. Act. Since the assessee has not deducted tax at source, the AO has proposed a disallowance of Rs. 213 lakhs by invoking the provision of section 40(a)(ia) of the Act. The counsel of the assessee have submitted that it was only for the purpose of facilitation and control of the passport scheme that the assessee appointed the vendor as sourcing and distributing agent of the gift items and that the assessee was not liable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of purchase of gifts or re-imbursement of cost of gifts sent by the vendor to the dealers. 47.4. The AO held that the arrangement with FX Enterprise was in the nature of work contract, which was liable for TDS under section 194C of the Act. Assessee's Submissions: 47.5. The assessee had appointed FX Enterprise in order to control the distribution of gifts under the Passport scheme. The liability of purchasing and distributing gifts was not that of the assessee, but was that of dealers. The assessee was only to share partial cost of gifts. The gifts were procured by FX Enterprises on its own account and the assessee never got title to the same. The title of ownership in goods passed to dealers after supply of same by FX Enterprise. The contract was, therefore, was contract of sale and not a works contract, on which assessee was not liable to deduct tax at source. 47.6. Reliance, in this regard, is placed on arguments taken in GOA 9 (supra) 47.7. In view of the above, the disallowance made in the assessment order calls for being deleted. DR's submissions: 47.8. Reliance is placed on the assessment order and order passed by DRP. 238 Our findings conclusion: Terms o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a wrong claim in A.Y 07-08. In this background, the disallowance the wrong claim of depreciation and corresponding addition to assessee's income for A.Y 07-08 has to be upheld for A.Y 07-08. The objection of the assessee is rejected. The assessee has the option of getting his assessment for A.Y 09-10 rectifying under law on the ground that the amount of Rs. 82.17 lakhs on account of additional depreciation has been taxed for A.Y 07-08." Therefore, in conformity with the order of DRP, amount of Rs. 82.07 lacs is added to the income of the assessee. (Amount disallowed - Rs. 82.07 lacs) Facts 48.2. In the books of account of the relevant previous year, the assessee claimed additional depreciation of Rs.82.07 lacs in accordance with accounting norms, which was not admissible deduction from taxable income under the provisions of the Act. 48.3. The aforesaid amount, however, inadvertently remained to be added back in the computation/return of income of the relevant assessment year. 48.4. The aforesaid mistake came to the notice of the assessee subsequently and, therefore, the said amount was reversed in the books of account for the financial year 2008-09, relevant to assessment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rtain percentage of sale price of products sold with brand name of the assessee. As at the end of the relevant previous year, the assessee company on the basis of past experience estimated the amount of royalty income receivable from such companies with reference to products that would have been sold by oil companies before the end of the relevant previous year, and booked income receivable of Rs. 69 lakhs. Against the aforesaid provision of income of Rs. 69 lakhs, the assessee actually received royalty income of Rs. 97.29 lakhs in the immediately succeeding previous year. The differential amount of Rs. 28.29 lakhs was offered to tax in the year of receipt. In the assessment order, the AO has brought to tax additional royalty income, amounting to Rs. 28.29 lakhs, which was received in the immediately succeeding year on the ground that such income pertains to sales made by oil/lubricant companies during the relevant previous year. The counsels of the assessee have submitted that it takes time for the lubricants and oil companies selling products using brand name of the assessee to collate details of products sold at various outlets across the country. Therefore, there is a differe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the basis of estimate and any excess or short provision thereto is recognized in the succeeding year. Since, such method was always accepted in the past, no adjustment was warranted in the year under appeal. 49.8. Without prejudice, the addition, if any, is revenue neutral, if seen in a macro perspective and, therefore, no adjustment is called for. DR's Submissions: 49.9. Reliance is placed on the assessment order and order passed by DRP. Our findings conclusion: 49.10. This is a case of estimation of income based on the information available with the assessee at the time of closing of accounts. Though the income in question pertains to this particular assessment year the assessee due to some practical difficulties in receiving data and information from oil companies, accounted for the income on estimate basis as a matter of consistent policy since past. The excess / short provision of income has been taken care of in the subsequent assessment year. The issue is revenue neutral. This method of accounting of income has been consistently followed and revenue has also accepted the same over the number of years. Under these circumstances, consistent with the view taken by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ility of distributing gifts/birthday cards to the customers is that of dealers. Under the scheme, the assessee makes payment of the cost of birthday cards at the first instance and, thereafter, seeks reimbursement of the same from the dealers. 50.3. The aforesaid amounts receivable by the assessee for a particular month comes to the knowledge of the assessee on receipt of intimation/information from the administrator of the scheme, viz., Results Services (P) Ltd., who takes time in processing the date of transactions and sending intimation thereof to the assessee. 50.4. Accordingly, the assessee realized income of Rs. 230.51 lacs on account of above two items for the month of March, 2007 in the immediately succeeding assessment year, on receipt of information from the vendor and offered the same to tax in that year. 50.5. The AO made addition of the aforesaid income in the year under consideration, on the ground that same pertained to the relevant assessment year. Assessee's Submissions: 50.6. Subscription fees from various customers enrolling under the passport scheme for the month of March, 2007 could not be estimated, in the absence of information available about the n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee on the basis of details of expenditure submitted by the employees in specified form, which may not be necessarily supported/backed by bills considering the practical difficulties/impossibilities in producing invoices for petty expenses like local conveyance, telephone bills, etc. In the draft assessment order, the AO has disallowed the aforesaid expendi9ture aggregating to Rs. 155.52 lakhs incurred on account of reimbursement of foreign travel expenses to employees/directors on the ground that the aforesaid reimbursement are not backed by bills/invoices of actual expenditure incurred by the employees, which is necessary in law before allowing deduction of foreign travel expenditure. The counsels have submitted that the amount of Rs. 155.52 lakhs is eligible for deduction in view of Supreme Court's judgment in the case of Larsen and Toubro 313 ITR 1 (SC). The objection of the assessee is not acceptable. 'The judgment of the Hon'ble Supreme Court in the case of Larsen and Toubro (SUPRA) is applicable only with regard to leave travel concession and conveyance allowance. The assessee in the present case has not claimed any deduction on account of transport allowance given ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n foreign countries, and the assessee has no reason to doubt the incurrence of such amount by the employees in actuality during the course of foreign travel. 51.9. The assessee does not insist on production of bills against expenses declared by the employees, considering the practical difficulties/impossibilities in submitting invoices/bills for petty expenses like conveyance, telephone, meals, etc. 51.10. In respect of foreign travel expenses of the directors, too, it will be appreciated that the average foreign currency utilized per day is only USD 923, which having regard to their status and functions, cannot be said to be unreasonable and excessive. (Refer Page 1945) 51.11. The reasonableness of the expenses incurred by the various employees and the policy of the assessee has not even been doubted by the assessing officer in the assessment order. 51.12. In view of the above, it is submitted, that the practice followed by the assessee to reimburse expenses on the declarations of the employees was in order and the expenditure cannot be disallowed simply on the ground that declarations of the employees were not backed by invoice/bills of expenses incurred. 51.13. Relianc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... incurred towards sponsorship of events, alleged to be non-product specific expenditure, resulting in brand building of the assessee company and Rs. 26.92 crores towards advertising of launch of new models of two wheelers during the year. In the draft assessment order, the AO treated the aforesaid latter two expenses, to the extent of Rs. 54.61 crores allegedly towards brand building and Rs. 26.92 crores towards launch of new models off vehicles as capital expenditure. The counsels have submitted that the objective behind incurring advertisement expenses at time of launch of new models of two wheelers is to increase the sale of vehicle and consequential increase in a turnover/profits of the assessee company, and the purpose is to constantly remaining the buying public about the name of the company so that it remains in public memory and is readily recall by the prospective customers whenever he considers buying a motorcycle. The objection of the assessee is not acceptable. It remains a fact that non product specific advertisement expenses go a long way in building the brand name. Brand name being an intellectual property is a capital asset. Any expenditure on building a capital ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eld has to be decided on the facts of the case. This is a case where the assessee has incurred an amount of Rs. 26.92 crores towards advertising, launch of new models of two wheelers. In our view, launch expenses cannot be held to be in the capital field. It does not result in assessee having enduring benefit in the form of the capital asset. Similarly, expenditure of Rs. 54.61 crores incurred towards sponsorship of events cannot be considered as incurred in the capital field. In coming to such conclusion we rely on the following decisions of the Jurisdictional High Court: - CIT Vs. Salora International Ltd. (2009) 308 ITR 199 (Del.); - CIT v. Pepsico India Holdings (P) Ltd. (ITA no. 319 of 2010 others) (Del.); "For the Assessment Year 2001-02, the assessee had incurred advertising expenditure of about Rs.3.08 crores for launching of its products and the Assessing Officer held that the expenditure was of an enduring nature and treated one-third of it as capital expenditure. The Tribunal, confirming the findings of the CIT(A) that the expenditure was revenue expenditure, held that there was a direct nexus between the advertising expenditure and the business of the assessee a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee's name and products, and not for use of any proprietary trademark/logo of ICC, the same did not constitute "royalty" or "fees for technical services" under the Act and it has thus not deducted tax on the said remittances. DRP has perused the Global Partnership Agreement dt. 14th June, 2004 (GPA) of the applicant with GCC and World Sport Nimbus PTE Ltd dt 14 June 2004. Perusal of this reveals the following facts relevant to determination of the character of the payments: 1. IDI is the company formed by member countries of ICC to own and control the commercial rights. IDI as the owner of commercial rights granted by way of contract dt 20 th July 2000 as subsequently novated/ amended/ or supplemented certain of such rights to GCC for exploitation including the right to appoint third party sponsors, suppliers, broadcasters and other licensees. (Clause Introduction A at Page 1 of the Global Partnership Agreement dt. 14th June, 2004). 2. Global Cricket Corporation (GCC) Pte. Ltd, a company incorporated in Singapore has the exclusive right to grant the global partnership rights to the Global Partner for use solely within the Brand sector in the licensed territory. 3. Worl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ial Rights. GCC hereby informs the Global Partner that IDI is the owner of the Proprietary interests and that GCC is the appropriate party to authorize use of the Event Marks, the ICC Marks and the Official Status in connection with the Commercial Rights. The Global Partner shall seek permission to use any of the Event Marks and the Official Status only from GCC. The Global Partner further acknowledges and agrees that IDI/GCC are in the process of reviewing and developing the ICC Marks and the Event Marks and the Global Partner agrees to use such new ICC Marks and Event Marks as are notified to it by GCC and shall use no other marks or logos (save for the Global Partner Marks) in relation to the Global Partnership Rights. 6.4 The Global Partner shall not use or apply the ICC Marks, the Event Marks or the Official Status in any way save as expressly permitted in this Agreement and/or approved in writing by GCC and the Global Partner shall not use the ICC Marks and the Event Marks otherwise than in conjunction with the Official Status. 6.5 The Global Partner shall not use any of the ICC Marks, the Official/Status or the Event Marks in combination or conjunction with any other m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is or which GCC reasonably deems to be necessary in connection therewith. NB Emphasis supplied Perusal of the above extract from Global Partnership Agreement (GPA henceforth) dt. 14th June, 2004 will show that the use of the Event Marks and the Official Status is both granted and protected by this Agreement. Event Marks are thus notified to Global Partner by GCC and it shall use no other marks or logos (save for the Global Partner Marks) in relation to the Global Partnership Rights, execute such further documentation as may be specified by GCC which may, in the reasonable opinion of GCC, be required in order to record the terms of this Agreement on any trade mark or other register or which may, in the reasonable opinion of GCC, be necessary in order to protect the validity and/or ownership of the ICC Marks, the Event Marks, the Official Status, or the Proprietary interests. While the intellectual property of the ICC marks, event marks, and official status marks continues to vest with the ICC/GCC the right to use and protect the intellectual property is conferred by the GPA agreement a characteristic typical of Royalty payments. Regarding Characterisation of payment for "Use o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d para 4.9, it is apparent that the Global Partner shall be permitted to withhold from the designated account the relevant payment or part thereof to which the applicable rule or order relates in accordance with the terms of such rule or order. Regarding Global Partnership Rights Extract from Schedule 4 Global Partnership Rights 1 Right to use official status 1.1 The Global Partner has the right to use the Official Status conjunction only with the Global Partner Marks and in accordance with the provisions of this Agreement being the following designations: (a) Official Global Partner of ICC: (b) Official Global Partner of the ( E;ent Title ) 2. Advertising and promotional right before and at each event. 2.1 Subject always to paragraph 6 below and the provisions of this Agreement, the Global Partner shall have the right, subject to applicable laws, regulations and codes of practice, to display the Global Partner Marks on certain Advertising Sites, and elsewhere, immediately before, during and after each March at the venue as described below: (a) The right to 12.5% of all ground level perimeter advertising comprising no less than eight (8) ground level perimeter b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t and shall contain a hyperlink to the internet website of the Global Partner; (i) The Global Partner Marks shall be displayed, together with the logo of each of the other Global Partners and Official Sponsors (Worldwide), on a "Welcome Board" located prominently by the main entrance of each Stadium, on a media backdrop at all press conference and on the winner's podium; (j) The Global Partner Marks shall be displayed on at least one flag in any designated "flag court" at each venue (where available), together with flags bearing the logo of each of the other official sponsors, exact details of which shall be mutually determined in good faith by the parties and provided that each Global Partner (including the Global Partner) shall be entitled to the same number of flags; (k) Subject to prevailing local rules, regulations, restrictions and/or legislation, the Global Partner Marks shall be displayed, together with the logo of each of the other Global Partners and Official Sponsors (Worldwide) on such Venue and host city dressings as are agreed between the parties. (l) The Global Partner Marks shall be exclusively displayed on any sun umbrellas that may be utilized by the telev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eproduce and publish or to authorize its sub-contractors to use, reproduce and publish the Event Marks and the ICC Marks throughout the Licensed Territory in or on Advertising Materials and Premiums in accordance with the provisions of this Agreement. For the avoidance of doubt, the Global Partner irrevocably acknowledge and agrees that IDI/ICC may, at any time during the Term, grant to any Competitor the right and/or license to use and/or reproduce the ICC/Marks provided always that such right and/or license does not in any way relate to, and/or arise in connection with, any of the Events. 4 Rights regarding Footage, Photographs and Player Attributes 4.1 The Global Partner shall have the non-exclusively right to access such footage relating to the Events and/or to ICC events or matches which IDI and/or GCC owns or controls, strictly for advertising and promotional purposes only (which may include television commercials for the Global Partner's products) and only for use during the Term and in accordance with the terms of this Agreement, provided that; (a) The Global Partner shall not acquire any rights in any such footage other than the limited license hereunder; (b) The G ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation to the access of any footage referred to herein shall be for the account of the Global Partner. 4.2 The Global Partner shall be entitled, during the Term, to incorporate still images of the Events in or on Advertising Materials and Premiums for use in accordance with this Agreement provided that the Global Partner shall acquire from any necessary source all copyright consents and/or approvals in relation to the use of such still images and further PROVIDED THAT, without prejudice to paragraph 4.2(e) below, if the still images are used or to be used by the Global Partner in a manner which suggests and endorsement of the Global Partner and/or its products or services by any third party or any other association with the Global Partner by the same, then the Global Partner shall be solely and conditionally responsible for acquiring from any necessary source (including, without limitation, Teams and members of Teams) all consents and/or approvals required for the use of such still images in such manner prior to publication 0r other distribution or exploitation thereof. For the avoidance of doubt and further to the above, the Global Partner shall have the non- exclusive right to a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e parties, and is effective, at least 6 months prior to the Event to which the advertising and promotional materials relate. For the purpose of this paragraph 4.3, the Event shall be deemed to commence on the date of the first competitive Match of the applicable Event, not including any warm-up Match. The Global Partner will accept that a contract is pre-existing for the purpose hereof where the Global Partner is or has been notified in writing by GCC that IDI has provided to GCC written confirmation that a player is party to a pre-existing contract in accordance with this provision. Perusal of the above Schedule will show that Global Partnership Rights conferred by the GPA 2004 is a bundle of Commercial Rights at the essence of which is the exploitation of the "ICC mark", "Event mark", and "Official Status". GCC has exclusive right to exploit the ICC mark and all the commercial rights flow from the exclusive ownership/right to exploit the said mark and the imparting of the technical and commercial knowledge of exploiting these events and marks. Applicant having signed the GPA is liable to pay the "Global Partnership Fee" for Global Partnership Rights as laid out in Schedule 4 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reement 2004 it is clear that the Global Partner having signed the GPA 2004, shall use the services of WSNs event management and implementation team in relation to the delivery of the Global Partnership Rights. Thus it was observed supra that the agreement is one but the payment is split and the Global Partner has no choice but to use the services of Nimbus as a part of the overall Global Partnership Rights conferred under the said tripartite GPA. It is merely a means of billing the variable component of what is effectively a part of the overall Global Partnership Fee Package and intended to enable the full use of the commercial knowledge transferred under the GPA 2004. It is thus an artificial segregation flowing as it does from rights conferred by one tripartite agreement in consequence of the 'Global Partnership Rights', the segregation of payment for deliverables does not alter the character of the payment which will have to be seen wholistically wrt commercial clauses of governing GPA. 3. Applicant having signed the GPA is liable to pay the "Global Partnership Fee" for Global Partnership Rights as laid out in Schedule 4 which includes a bundle of commercial rights that docum ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1. GCC Pte Ltd., Singapore ('GCC') - ICC Trophy, 2006 India Rs. 979.50 - ICC World Cup, 2007 West Indies Rs. 2720.39 1. Nimbus Sport Intnl', Singapore ('Nimbus') - ICC Trophy, 2006 India Rs. 32.79 - ICC World Cup, 2007 West Indies Rs. 188.05 Total Rs. 3920.74 Assessee's submissions: Regarding payments to GCC 53.3. The assessee was appointed as one of the 'Global Partner' of the cricketing events organized by ICC, wherein the assessee was entitled for certain sponsorship rights, like, getting the right to advertise on billboards at the venue, color advertisement space in official brochure/website of ICC, etc. 53.4. The agreement for sponsorship was purely for advertisement and publicity of the brand name of the assessee and for promotion of its products during the cricketing events of ICC. 53.5. The term 'royalties' as used in paragraph (3) of Article 12 of the DTAA means payments of any kind received as consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work including cin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... liable to withhold tax therefrom. 53.12. For the aforesaid reason itself, without prejudice to the submissions infra that payment to Nimbus was for different purposes and did not constitute royalty, even assuming without admitting that payments to Nimbus were in essence for sponsorship of event, as held by the assessing officer, the assessee was not liable to deduct tax at source therefrom, since such sponsorship payment, for reasons discussed above, is not taxable in India. 53.13. The Delhi Bench of Tribunal in the case of Nimbus Sport International PTE Ltd. v. DCIT: 145 TTJ 186, held that advertisement revenue collected by the assessee company form an Indian company in relation to matches played abroad cannot be taxed in India. 53.14. It may be pertinent to point that the aforesaid issue was raised by the International Taxation Division of the Income tax Department in the year 2003, and the assessee was asked to show cause as to why the assessee should not be considered as an assessee in default under section 201(1) of the Act for not deducting tax from payment of sponsorship consideration to GCC. After considering the detailed reply of the assessee on the aforesaid lines, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the former, if the payment to GCC could be brought to tax in India in the hands of GCC, the aforesaid exemption would be of no consequence, and there would be little point in issuing the above Notification. 53.20. It is settled position that no provision of the Act is to be read in a manner so as to render it otiose. The aforesaid exemption cannot be rendered nugatory or inapplicable on such a hyper-technical interpretation and flimsy argument advanced by the assessing officer. Income of IDIL, being not chargeable to tax in India, no deduction of tax under Section 195 of the Act was called for. 53.21. In view of the above, for the aforesaid reason as well, the assessee was not liable to deduct tax from the aforesaid payment to GCC. Re: Nimbus 53.22. The GP Agreement contemplated two sets of deliverables. The first set of deliverables was the grant of "Global Partnership Rights" (being advertising rights) (explained supra) by GCC. The other set of deliverables, being event management services for delivery and implementation of Global Partnership Rights, were to be provided by Nimbus. 53.24. In terms of Article 4.3 read with Schedule 4 to the GP Agreement, separate cons ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... djudicated is whether the payment in question constitutes royalty within the terms of Article 12 of Indo- Singapore DTAA or u/s. 9(1)(vi) of the act. The assessee has relied on two judgments of the jurisdictional High Court on this issue. 53.32. In the case of Sheraton International Inc. the factual matrix considered was that a non resident was engaged in providing services to hotels in various parts of the country. It entered into one such agreement with ITC for providing services to 3 of its hotels. The scope of the services envisaged in the agreement was publicity, advertisements and sales including reservation services. The tenure was a period of 10 years. ITC was to pay a fee @ 3% of the room sales, for services rendered by the assessee. Similar agreements were entered into by the assessee with Adayar Hotels as well as Hotel Windsor Manore, Bangalore due to reorganization of the rights and liabilities of ITC hotels. The assessee`s case was that the payment in question was business income and as the assessee has no P/E in India, the income is not taxable in India. This view was accepted by the Revenue and `No Objection Certificate` was given on 28th October,1991 and the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me of " Welcomenet" which was used for reservations within the country; (iii) the entire transaction entered into between the assessee and its clients-hotels was an " integrated business arrangement" under which the main purpose was to carry out advertisement, publicity and sales promotion for mutual benefit, in this context all other services, i.e., use of trade mark, trade name, computer reservations were incidental to the main purpose as stated above ; (iv) it found as a matter of fact that the payments received by the assessee were neither in the nature of royalty under section 9(1)(vi) read with Explanation 2 or article 12(3) of the DTAA nor fee for technical services or fee for included services under section 9(1)(vii) read with Explanation 2 or article 12(4) of the DTAA. See observations in paragraph 85 of the impugned judgment. The relevant portion of the finding is extracted below : "As such, considering all the facts of the case, the relevant provisions of the Income-tax Act, 1961, as well as that of the DTAA between India and the USA and keeping in view the legal position emanating from various judicial pronouncements discussed above, we are of the opinion that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ular, that the payments received were for use of trade mark, brand name and stylized mark "S". We agree with reasoning adopted by the Tribunal." 53.36. In the case of CIT Vs Sahara India Financial Corporation the Hon`ble Delhi High Court held as follows: "The assessee had entered into an agreement with IMG Canada, as per which IMG was to provide to the assessee the tile sponsorship benefits in connection with the cricket tournaments set out in the schedule. The Schedule to the said agreement specified the details of the Title Sponsor package, which included the right that all the matches and the tournaments would be referred to as Sahara Cup. It also provided for incorporation of the Sahara name and logo as the official tournament logo. The Sahara name and logo were to be prominently displayed at either end of the cricket ground on the out field as also on the stumps and the score boards. The players clothing was also required to display the Sahara logo. Apart from those rights, certain other rights, such as provision for certain number of VVIP tickets, VIP tickets and season tickets were also part of the Title Sponsor Package. The official awards and trophies also required to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as follows. "87. Coming to the issue about the advertisement revenue received by the assessee in Singapore for matches played abroad, it has not been disputed that the matches in question for which advertisements were given by the Indian company, were all played in foreign countries. The assessee does not have a PE in India. In this eventuality, the revenue collected by it for the matches played overseas and telecast at overseas will not attract the theory of force of attraction for taxing them in India. The force of attraction can not apply on an assumption that some percentage of the viewers may be Indian and the advertisement made have some incremental value in India for the advertising companies. The clincher to the issue is that the assessee does not have a PE in India, the matches were not played in India, the telecast of the matches was not in India and the indirect benefit which might have been derived by some of the Indian viewers cannot be held to be incremental for Indian companies on assumption. The dominant object of the payment by the Indian companies to assessee's Singapore office was to advertise their products in foreign territory in foreign cricket matches and t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... C, only for onward payment to IDIL. In our view the overall objective of the notification and the mechanism employed by IDIL for sale of media and sponsorship rights have to be taken into consideration for deciding the matter. When so considered, it is clear that the payments made to GCC are tax exempt, having no element of income and hence there is no requirement of withholding tax u/s.195 of the Act. 53.40. In view of the above discussion, we come to a conclusion that the payments in question made to GCC and PTE Ltd. and Nimbus Sports International are not taxable in India and thus no tax need be deducted at source u/s.195. Consequently no disallowance can be made u/s.40(a)(ia) of the Act. The ground of appeal of the assessee is allowed. 54. Ground nos. 31 to 31.1( Disallowance of provisions for advertisement expenses under section 40(a)(ia): DRP Directions: 54.1. The DRP has issued following directions to the Assessing Officer; "This issue is similar in facts and legal submission by the assessee to the issue with regard to objection no 23.17. Assessee's objection regarding objection no 23.17 have already been rejected above, for the same reasons assessee's objection to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... year, no disallowance could have been made under section 40(a)(ia) DR arguments 54.12. Reliance is placed on the assessment order and order passed by DRP.AO. Our findings conclusion: 54.13. We agree with the finding of the Assessing Officer that tax is deductible at source on the facts and circumstances of the case. Non deduction attracts S.40(a)(ia) in this case. The disallowance has been made on two grounds (i) that the expenditure is neither ascertained expenditure nor crystallized income; ii) alternatively, if it is held that the expenditure is either ascertained or crystallized then the provisions of S.40(a)(ia) gets attracted as no TDS was made. We have already held that TDS has to be deducted on these payments. As regards provision for the reasons given in ground nos. 38.2 to 38.3 and 39.1 to 39.3 of this order, we uphold the contention of the assessee. This is ascertained expenditure and provison has been made on a bona fide estimate. The assessee has been consistently following this method of provisioning. 54.14. In the case on hand the assessee claims that tax has been deducted at source, in the immediately succeeding year when the account of the media agency ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ows that the certificate is not applicable to payments made for sponsorship to ISB. Since the payment made by the assessee to ISB is for sponsorship the disallowance proposed by the AO on this account is to be upheld. Assessee's objection is rejected." As per the order of the DRP addition of Rs. 40,000- and Rs. 43,000/- being the reimbursement to M/s Jagdish Motors and M/s Bikes Auto have been deleted. Similarly expenditure of Rs. 4 lacs being payments to French Embassy has also been deleted. These amounts will therefore be excluded from the income. As regards PMC Officers Mess Airforce Station Chandigarh where the payment of Rs.1 lac was made, it has been directed that AO should verify whether this institution is exempt as per circular no.4/2002 dated 16.07.2002 issued by CBDT. Similar is the direction in respect of payments of Rs.4,12,243/- made to IIT, Delhi ,which is claimed to be exempt u/s 10(23C) vide same circular. Case of the assessee with regard to IIT, Delhi stands covered as per section 10 (23C) (iiiab) read with clause (ix) of circular No. 4/2002 dated 16.07.2002 issued by CBDT. This amount will also be excluded from the income of the assessee. However assessee has n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der passed by DRP. Our findings conclusion: 55.9. The payment made to PMC Officers Mess, Air Force Station at Chandigarh is payment to government and the question of deduction of tax at source, in our opinion, does not arise. Thus, the disallowance of Rs. 1 lac is hereby deleted. 55.10. Coming to payment made to India School of Business, Hyderabad, undisputed fact is that certificate u/s 197 was provided by ISB. The Assessing officer's case is that payment in question is not covered under this particular certificate. The assessee's case is that payment towards sponsorship of events is towards professional services and hence exempt from TDS as per certificate issued u/s 197 of the Act. In our considered view, once certificate u/s 197 is issued by the department, either for non- deduction of tax or for deduction of tax at a lower rate, the assessee can claim that based on this certificate it has a bona fide belief that tax need not be deducted at source. Further, the claim of the assessee that payments receivable by ISB have to be verified from the correspondence with ISB. If ISB's income is exempt under the Act either u/s 10(23) or S.11 to 13, then also, in our view the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... order passed by DRP/AO. Our findings conclusion: 56.4. Admittedly the issue is decided in favour of the assessee by the ITAT in the assessee's own case for A.Y. 2006-07. The issue is disputed on the method of computing the warranty, liability by the assessee. The A.O. disallowed the whole claim on the ground that the provision is excessive. The A.O. finds fault with the assessee taking weighted average of two years expense but does not give an alternative computation of liability. The assessing officer is wrong in coming to the conclusion that the Hon'ble Supreme Court in the case of Rotork Controls India Ltd. (supra) has laid down that the only basis of making a provision is last years average and that all other methods are not rational. Just because some excess provision is made, the method cannot be termed as irrational. Last year excess provision is reversed in this year and so on. As long as the basis is logical and consistent, it cannot be rejected. Just because the estimate is excessive in the view of the A.O. the entire claim cannot be disallowed. Respectfully following the order of the coordinate Bench on the same issue, we allow this ground of the assessee. 57. Gr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... treatment during stay and other measures for health and safety of the engineers at the licensee's premises or facilities as under:- "Whereas according to Article 4 of the Agreement the Parties agreed to enter into a MEMORANDUM ON EXCHANGE OF TECHNICIANS ("Memorandum" or "this Memorandum") to formalize the arrangements(s) for exchange of Technicians whereby Licensor will impart technical guidance and training to Licensee's engineer(s) (either at Licensor's facilities or at Licensee's facilities) and instruct and advise Licensee's engineer(s) as to the application to the Technical Information." As per Technical Collaborations and Technical Assistance agreement, brief extracts from which are reproduced below to show the supervision and quality control exercised by Honda through its technicians:- Regarding Technical Information and Technical experts. " 4.1 During the term of this Agreement, LICENSOR shall furnish LICENSEE with all the Technical Information deemed necessary by LICENSOR for the manufacture of the Products and the parts, by disclosing it in documentary form and/or by dispatching LICENSOR's technical experts(s) to LICENSEE and/or accepting LICENSEE's engineer(s) at ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in favour of the assessee however the Department is in appeal before High Court as per Addl CITs report in this regard. Since the matter apropos the capital nature of this payment is sub-judice, and has not attained finality, the DRP declines to interfere in this matter. The objection of the applicant on these grounds is thus rejected." Therefore, in conformity with the order of DRP, amount of Rs. 26824.59 lacs is added to the income of the assessee.[Addition of Rs. 26824.59 lacs] Facts:- 57.2. The assessee is engaged in the business of manufacture and sale of motorcycles using technology licensed by Honda Motor Co. Ltd, Japan ("Honda"). The assessee makes payment of royalty to Honda for use of know-how and technical guidance fee, as per agreed per diem rates, for technicians visiting the assessee for rendering services as required by the assessee, in accordance with License and Technical Assistance Agreement, ('LTAA') dated 02.06.2004, read with Memorandum for exchange of technicians, applicable during the relevant year. The assessee also pays model fees in lump sum on launch of any new model. 57.3. During the relevant previous year, in terms of the aforesaid agreement, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly submitted, that even otherwise, on facts and in law, Honda did not have PE in India in terms of Article 5(4) of the Treaty between India and Japan for the following reasons: A. No assembly project 57.11. In terms of Article 5 of the Indo-Japan Treaty, foreign enterprise is deemed to have constituted PE in the other contracting State if the foreign enterprise carries on supervisory activities in relation to construction, installation or assembly project for a period of more than six months in the other contracting State (in India). 57.12. The words "assembly project", referred to in Article 5(4) of the Treaty means "setting up of assembly project", which would be clear from the fact that the words "assembly project" have been used along with construction, installation project, which denotes an activity of long duration requiring substantial presence of the foreign enterprise executing or supervising the project. 57.13. In the present case, the supervisory activities availed from Honda were not in relation to any assembly project in India. The assessee already had an existing plant/manufacturing facility and no new facility was set-up during the relevant previous year. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... royalty/FTS cannot be said to be "effectively connected" to any pre-existing PE and hence the provisions of paragraph 5 of Article 12 had no application. Consequently, subject payments were taxable @10% only, in terms of Article 12(2) of the Treaty. C. The period of stay was less than 180 days/six months 57.20. That apart and without prejudice to the above, the supervisory services rendered by technicians of Honda did not exceed the stipulated period of six months. The assessee had requisitioned services of technicians of Honda in relation to different activities, viz., assistance, trouble shooting of different problems arising from time to time in connection with manufacturing various models of motorcycles. 57.21. Each requisition of foreign technician for which separate purchase order/request was placed had no relation/coherence with the other purchase order issued by the assessee and, therefore, the period of stay of foreign technicians under different and separate purchase orders could not be aggregated to determine the period of stay for purposes of Article 5(4) of the DTAA. 57.22. For example, if a technician comes for few days to provide consultancy in relation to p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... efore, respectfuly following the same, we allow this ground of the assessee. 57.28. Now coming to the disallowance u/s 40(a)(i) the allegation against the assessee is that there was short deduction of tax i.e,. TDS was deducted @ 10% instead of 40%. It is not a case of non-deduction of tax at source. It is a case of short deduction of tax of source due to application of lower rate. While disposing of similar issue above we have followed the decision of the Hon'ble Calcutta High Court in the case of CIT Vs. S.K. Tekriwal (ITA no 183 of 2012) and decided the issue in favour of the assessee. Consistent with the view taken therein, we decide this issue also in favour of the assessee, on the sole ground that, disallowance u/s 40(a)(i) cannot be made in the case of short deduction of tax at source. The other arguments pressed by the parties are not adjudicated upon as they are of academic nature only. 58. Ground no. 36 to 36.10 (Disallowance of export commission for alleged failure to deduct tax at source): 58.1. DRP's Observations For the purpose of convenience the objections are clubbed and the gist of these is that the applicant holds that the AO erred in not appreciating ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... DS @ 10% on this remittance under the LTAA. Now that under the same LTAA, a payment is being made for the same commercial rights to be exercised albeit in a different territory, the characterization of the payment cannot change. On these facts the DRP concludes that the action of the AO in characterization of payment termed as 'export commission' is correct and his finding that applicant was bound to take a certificate from the AO under section 195(2) of the Act in view of the decision of the Supreme Court in the case of Transmission Corporation of India Ltd. Vs. CIT 239 ITR 587, before remitting export commission to Honda and that in absence thereof required to withhold tax on export commission paid to Honda is correct as per Law. The disallowance u/s 40(i)a is also thus correct and reinforced by the decision of the Hon'ble Apex Court at 327 ITR 456 (SC). The objection of the applicant on these grounds is thus rejected. On the alternative argument of treating payment made as export commission as capital expenditure disallowable u/s 37(1) of the Income-tax Act, 1961, DRP refuses to interfere as discussed in Objection no 35 since on this issue the Department is in appeal before ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r decision of the Tribunal in assessee's own case for A.Y. 2006-07. The Tribunal therein has held as follows:- "75. The Assessing Officer has alternatively held the payment of export commission to be capital expenditure. After considering the arguments of both the sides and the facts of the case, we are unable to accept this view of the Assessing Officer. By way of export agreement, HMCL has only permitted the assessee to export the specified goods to the specified countries, that too, subject to running payment of the export commission. The assessee has not acquired any asset or even the intangible right in the nature of a capital asset. The Assessing Officer has disallowed the royalty payment paid by the assessee by way of technical know-how agreement holding the same to be capital expenditure. From paragraph No.7 to paragraph No.29, we have discussed at length and have come to the conclusion that the payment of running royalty cannot be said to be capital expenditure. While doing so, we have also relied upon several decisions of Hon'ble Jurisdictional High Courts at pages 17 to 24. For the sake of brevity, we are not reproducing the same again but, we reiterate that the ratio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nalysed the additional income from exports over domestic sales .Assessee has relied upon various case laws including ITAT Mumbai decision in Dresser Rand India regarding business decisions as well as DRP decision in Honda Seil Power Products regarding export commission. The panel has considered all arguments and submissions, including those dated 22nd 24th Feb. 2012, of the assessee. Panel is of the view that the TPO has passed a detailed speaking order. Yet DRP has considered all the details on record to arrive at its conclusions. It is needless to say that Transfer Pricing is highly fact intensive and transactions need to be considered with reference to the business circumstances of the assessee. Since facts of Honda Seil power product are different, that decision cannot be applied to assessee's case. It would suffice to say in Honda Seil power products, based on facts, export commission was allowed and royalty was disallowed. Further, Transfer Pricing by nature is about comparability and comparability would include analysis of economic circumstances and business choices made leading up to the rationale for a particular decision. The Transfer Pricing Officer was also asked ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... omestic sale price of motorcycles, which clearly establishes the arm's length nature of the international transaction of payment of export commission. " Further according to assessee, "From the above table, it is clear that the assessee has realized additional profit of Rs. 15,61,64,909/- from export of goods as compared to profits which could have been realized form the sale in domestic markets. In consideration for payment of export commission the assessee is also able to procure export orders using the distribution network and infrastructure of HMCL. " After considering all the submissions, the DRP is of the view that the assessee has attempted to make out a case that it has gained a higher income from the export of certain models of motorcycles as compared to the domestic sale of these motorcycles. The assessee must appreciate that the income/profit realised from exports cannot be compared to domestic transactions. This has been decided by the case of Indo American Jewellery Ltd. (2010-TII-24-ITAT-Mum-TP) and also in the case of Vedaris Technology (ITAT Delhi). The comparison that the assessee has made is also faulty as it seems to give the impression that royalty and expor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ribunal relying upon the approval granted by the Central Government, considered the transaction of payment of royalty to be arm's length. The Hon'ble Tribunal held as under: "The assessee has placed on record a copy of the letter dated 30.040.1993 written by the Reserve Bank of India, Exchange Control Department, to Sona Steering Systems Ltd., in which payment of royalty @ 3% on domestic sales was allowed to be paid for a period of five years. There are similar other correspondences which have been placed on record. The assessee has also placed on record a press note issued by the Government of India, Ministry of Commerce and Industries, Department of Industrial Policy Promotion, issued in 2003, under which royalty payment @ 8% on export on export sales and 5% n domestic sales have been referred t be reasonable for the purpose of processing approval of payments. On the other hand, the AO failed to bring any material on record that payment of royalty @ 3% was not at arm's length. Therefore, the payment stands justified under the CUP method. It is submitted that royalty and technical know-how fee is paid by the assessee on the basis of the approval granted by Central Government ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CUP . In Perot Systems TSI (India) Ltd. (2010-TIOL-15-Del), M/s CABOT INDIA LTD (2011-TII-58-ITAT-MUM-TP), Coca Cola Pvt. Ltd. [309 ITR 194 (P H)] it has generally been held that approvals given by government authorities were not a test to decide the arm's length nature of international transactions. Further, RBI approval is for purpose of remittance of foreign exchange under Foreign Exchange Control Manual of RBI is not a determinant of Arm's Length Price. In view of the above discussion, the DRP finds no infirmity in the action of TPO and no interference is called for by the DRP. i. Model Fee Payment Before the DRP ,the assessee has claimed, " with regard to the Transfer Pricing adjustment in respect of the entire amount of model fee paid to the associated enterprise, viz Honda Motor Company, Japan of Rs. 47,12,95,747/- without prejudice to our contention that the said adjustment is unlawful and is not sustainable and is liable to dropped for the reasons elaborately submitted in the objections filed before your Honour, it is respectfully submitted that the TPO in the preceding previous year has held that only 75% of payment towards model fee to be excessive and, therefo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Total 59,88,25,615 The assessing officer accordingly enhanced income of the appellant by a sum of Rs.59,88,25,615 allegedly on account of difference in the arm's length price international transactions. Re: Payment of export commission: 59.3. Under Technical Know How Agreement June 2, 2004 the appellant was entitled to use technical know-how provided by Honda Motor Co. Ltd, Japan (HMCL) for manufacture and sale of two wheelers and parts in India and was not authorized to sell its products or parts in any other territory than in India without the prior written consent of HMCL. The agreement was approved by the Secretariat for Industrial Assistance, Ministry of Industrial Policy and Promotion through approval dated September 6, 2004. It is submitted that such terms conditions are normally prevalent in technology agreements between uncontrolled entities wherein the licensor of the technology, in order to protect its market share/territory incorporates such conditions in the technology agreements. 59.4. Considering the constraint in the technical know-how agreement, appellant entered into a separate Export agreement dated 21.06.2004, pu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -how agreements have been entered into by the appellant with its associated enterprises: 1. Technical know-how agreement dated 2.6.2004. The agreement has been approved by the Central Government vide approval dated 6.9.2004. 2. First supplementary agreement dated 30.11.2004. The agreement has been approved by the Central Government vide approval dated 6.6.2005. The agreement and the approval have been considered by the Hon'ble Tribunal at pages 82-83 of the order for assessment year 2006-07. 3. Second supplementary agreement dated 20.9.2005. The agreement has been approved by the Central Government vide approval dated 26.7.2006. The terms of the approval are similar to the approval relating to first supplementary agreement and specifically allows payment of royalty on exports 59.14. Since the facts of the case for assessment year 2007-08 are pari- materia with the facts of assessment year 2006-07, wherein the Hon'ble Tribunal deleted the adjustment made by the TPO on account of payment of royalty on exports, it is respectfully submitted that the adjustment proposed by the TPO for assessment year 2007-08 is liable to be deleted Our findings conclusion 59.15. The Tribun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... /expenditure to be incurred or spent in this regard shall be duly decided by the LICENSEE at its sole discretion." 66. From the above, it is evident that first of all it is to be requested by the distributor that a service campaign is required and then the assessee has a discretion to conduct or not to conduct such campaign. In case any such campaign is conducted, then the expenditure in this regard would be borne by the assessee. In our opinion, this clause cannot be said to be a detrimental condition as stated by the TPO in his order. The TPO has disallowed the entire export commission on the ground that the export agreement was not for the benefit of the assessee but detrimental to the interest of the assessee. Therefore, no export commission is required to be paid. After considering the entire facts, we are of the opinion that the export agreement was for thebenefit of the assessee and not detrimental to the interests of the assessee. By virtue of the export agreement, the assessee was able to export the specified models of the two wheelers to the specified countries. It is true that by virtue of the export agreement, the assessee was not permitted to export any of the models ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , in the earlier two years i.e. 1996-97 1999-2000, the expenditure by way of model development fee was treated as capital expenditure but the appellate authorities have held it to be revenue expenditure. 90. From the above, in our opinion, the assessee has duly discharged the initial onus which lay upon the assessee. Thereafter, the burden shifted to the Revenue to show that the payment of model development fee was excessive and unreasonable and therefore, arm's length price should have been less than what is actually paid by the assessee. We find that the TPO has not specified how the model development fee paid by the assessee was excessive or unreasonable. It is only his subjective assessment that the arm's length price of the model development fee should have been 25% of the payment made by the assessee. While taking this view, he has held that there was a joint activity of development of new model by the assessee and HMCL. The contribution of the assessee is much more than the HMCL and therefore, he attributed only 25% of the model development fee as arm's length price of the transaction. However, we have already discussed above that there was no such joint activity of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CD DAWN DLX 2721 741 2016261 Glamour 1878 940 1765320 Karizma 53 1324 70172 Passion Plus 14968 1042 15492456 Pleasure 15 1109 16635 Splendor Plus 19339 300 5801700 Super Splendor 2039 842 1716838 4,08,32,068 11.2 On analysis of the above facts following points are noticed: 1. The assessee is paying royalty to Honda Japan. 2. The exports are made to the subsidiaries or group companies of Honda Japan. 3. The assessee, in a way is paying royalty to Honda Japan for the exports made to the subsidiaries and group companies of Honda Japan. 4. The assessee is also paying Export Commission to Honda Japan @ 5% for the exports made to the AEs. 5. In a way the price of exports made to AEs have been reduced by the amount of royalty and export commission as compared to the sale in the domestic market. 11.3 The position of the assessee company with regard to manufacturing for the AEs is that of a Contract Manufacturer. The assessee company is purchasing ra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... period expenditure):- DRP Directions: 61. The DRP has issued following directions to the Assessing Officer; "The assessee had introduced certain schemes in the immediately preceding financial year, viz., 2005-06. At the year end, the assessee made provision for discount to be given to dealers on such schemes in respect of sales made to dealers in that year, which were to be finalized and passed in the immediately succeeding year. To the extent, the aforesaid provisions was sought, the deduction for excess claim was taken during the relevant previous year. The AO has proposed to disallow Rs. 643.05 lakhs. The counsels have submitted that the AO was wrongly computed the account of excess claim at Rs. 643.05 lakhs whereas the correct amount was only Rs. 26.86 lakhs and the detail working of the same is set up at page 482 to 486 of the objection in form no. 35A. the counsel further submitted that the correct amount of 23.86 laksh was not prior period expenditure and it was allowable in the current assessment year because Rs. 22.96 lakhs related to additional scheme of discount which got finalized and accepted by the assessee during the current previous year only. It was furth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons: 61.4. At the outset, the computation of Rs.643.05 lacs made in the assessment order is incorrect. The correct amount of excess claim vis- -vis short provision made in the last year works out to Rs.26.86 lacs only, for which detailed explanation qua working is set out at pages 482 to 486 of the Objections in Form 35A before the DRP, which are not repeated for the sake of brevity. 61.5. The aforesaid correct amount of Rs.23.86 lacs was not prior period expenditure and was allowable deduction during the relevant previous year for the following reasons: Out of aforesaid total amount, expenditure to the extent of Rs.22.96 lacs under cash discount scheme accrued during the relevant previous year only, since the same related to additional scheme of discount, which got finalized and accepted by the assessee during the relevant year only. 61.6. As regards the balance amount of Rs.90,000, the same was on account of claim recorded against provision of Rs.3.38 crores under the festival offer scheme, which arose on account of marginal variance qua the amount of liability towards sales discount to be given to the dealer, as estimated by the assessee as at the end of the last year. It ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cess provision for discounts/ incentives payable to dealers at the end of the relevant year, which was recovered in next year on receipt of actual bills from the dealers). Assessing officer's order: 43 Point No. 50: This issue pertains to addition made on account of excess provision. The issue has been discussed by the Assessing Officer in the draft assessment order as under; "43.1 The assessee during the year has made certain provisions with regards to expenses, since the provisions are not crystalised during the year the assessee was thus asked that "Para 25.4 of Annexure - III to the Special Audit Report states that excess provision pertaining to various expenses such as Sales promotion, Early payment benefit scheme, Gwaliar Mela Scheme have been made during financial year 2006-07, which are not crystallized during the subsequent year. In this regard, you are requested to show cause as to why the amount of Rs. 239.15 lacs should not be disallowed." 43.2 In response to the above point, the assessee vide its letter dated 21.04.2011 has submitted that the aforesaid provision was based on the best estimate of the management regarding fulfilment of the conditions/ targets by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... year, there is a difference of 12.86% between the amount booked as provision and the amount actually expended, i.e., Rs. 2.39 crores and Rs. 18.59 crores (2.39/ 18.59 = 12.86%). The best estimate should not call for such a high amount of difference in estimation. 43.8 As regards contention of the assessee that method of accounting is on the basis of estimate and reversing the excess provision or recognizing income by virtue of short provision in the succeeding assessment year since past many years, which has been accepted by the Revenue in the past, it is to be noted that the method of accounting of the assessee has not been challenged, however, the question arises regarding the degree of estimation. 43.9 In this regard it is to be noted that the above contention of the assessee that it is consistently following such method of accounting from past many years and accordingly the same should not be disallowed is not tenable since the method of accounting followed by the assessee is not appropriate and past mistakes cannot be carried on throughout, especially when the same has been identified. 43.10 As regards further contention of the assessee that such accounting treatment ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ers, in respect of various sales promotion schemes prevalent during the year. 62.3. Out of the aforesaid total provision, aggregating to Rs.18.59 crores made at the end of the year, the actual claim paid to the dealers amounted to Rs.16.19 crores only in the succeeding year and, therefore, the excess amount of provision of Rs.2.39 crores was reversed and offered for tax in the immediately succeeding financial year. AO 62.4. The AO disallowed the aforesaid excess provision on the ground that same was an unascertained liability. Assessee's Submissions 62.5. The reason for excess provision qua each scheme has been explained in detail at pages 499 to 500 of the objection/form 35A which are not repeated for the sake of brevity. Primarily, the provision was made on the basis of estimated/projected sales to dealers under the scheme, which fell short of actual claim lodged by the dealers in the subsequent year. 62.6. However, the aforesaid provision being made on the basis of reasonable/best estimate of the management, as per consistent, regular and accepted method of accounting is allowable deduction in its entirety during the relevant previous year. 62.7. Merely because the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ies were entitled to use the aircraft transportation services provided by the carrier, in consideration of payment of variable charges at an agreed rate per hour for the number of hours of use of aircraft by the charter company and also share fixed cost of such aircraft incurred by the carrier, which was allocated to each company under the charter agreement. During the relevant previous year, the assessee incurred expenditure of Rs. 332.28 lakhs on account of fixed and variable charges paid to the carrier for use of aircraft by the assessee for the purposes of business. It would be pertinent to point out that the assessee deducted tax at source under the provisions of section 194C of the Act before remitting payment comprising of fixed and variable charges towards use of aircraft by the assessee. In the draft assessment order, the AO disallowed the aforesaid deduction claimed by the assessee on the ground that the aforesaid payments were eligible for deduction of tax at source under section 194I (as rent) instead of 194C applied by the assessee. The counsels have submitted that the arrangement was not towards use of the aircraft by us but for availing transport services and the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... carrier, and, therefore, there was no use of aircraft by the assessee, under any lease or other arrangement. 63.6. The arrangement was, therefore, not towards use of aircraft but for availing transport services, which are covered under section 194C and not 194I of the Act 63.7. Reliance, in this regard, is placed on the following decisions, wherein it has been held that payment under contract of transport coupled with other services, like services of driver, etc. would be subject to TDS under section 194C and not 194I of the Act: CIT vs. Shayam Shipping Services Pvt. Ltd.: Tax Appeal No. 1037 of 2009(Guj. HC) Ahmedabad Urban Development Authority vs. ACIT: ITA No.1637/Ahd/2010 (ITAT Ahd) ACIT vs. Accenture Services Pvt. Ltd.: ITA No. 5920- 5922/Mum/2009 (Mum. ITAT) SKIL Infrastructure v. ITO (TDS): ITA No. 3419 and 3420/Mum/2010 (Mum. ITAT) ITO v. Indian Oil Corporation: ITA Nos. 1829 to 1834/Del/2011 (Del. ITAT) ACIT v. Sh. Manish Dutt: ITA No. 4017/M/2007 (Mum.)(ITAT) 63.8. Without prejudice, in view of submissions made supra, since the assessee had, in any case, under a bonafide belief, deducted tax at source under section 194C, instead of section 194I of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... limitation prescribed under the limitation act does not automatically extinguish the liability in the hands of the payers. The objection of the assessee is not acceptable. It is a fact that the deposit amount for booking of the scooters have been lying with the assessee for long time even after the expiry of limitation period. Under the booking contract, this deposit amount was to be adjusted against the price of the scooter on the maturity of the booking. Period of more than a decade has passed since the receipt of the booking amount practically there is no requirement on the assessee to discharge any liability on this account the addition to the income on this account proposed by the AO is therefore justified . The objection of the assessee is rejected. It is seen that the AO has not considered issue of interest claimed by the assessee in respect of these booking amounts being an outstanding liability in the books of accounts. Since as already discussed above, there is practically no liability to pay this amount on the assessee, there will also be no liability towards any accrued interest which might have been claimed. The AO is directed to consider this issue also and disallow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s not covered under section 28(iv). [Refer: Mahindra Mahindra Ltd. v. CIT: 261 ITR 501 (Bom.); Jindal Equipment Consultancy Services Ltd.: 325 ITR 87 (Del.)] DR submissions 64.10. The assessee had, in the earlier years (till 1990), received Rs.500 from customers against booking of vehicles. The said amount alongwith interest accrued thereon was to be adjusted against sale price of vehicle at the time of delivery. The assessee stopped accruing interest after 1996 and issued press notice that customers may claim money back. 64.11. On account of the above, as on 31.3.2007, amount of Rs.13,30,29,968 including interest accrued thereon, amounting to Rs.3,27,87,468, was outstanding as payable in the books. 64.12. It is submitted that, in respect of aforesaid outstanding amount, the assessee has not produced any evidence to establish that the liability in respect of said amount is still alive; neither any confirmation has been produced from customers. Further, as the said amount pertains to relatively very old period, i.e. 15-20 years back, the same was practically waived off by the customers, which needs to be brought to tax in the hands of assessee. 64.13. In view of the af ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ught on record any such material to indicate that the alleged remission of liability towards the deposit amount occurred during the impugned assessment year. Even otherwise, when an amount is received in cash, sec.28(iv) does not apply as held by the Hon'ble Bombay High Court in the case of Mahindra Mahindra, 261 ITR 501. The Jurisdictional High Court in the case of Jindal Equipment Leasing and Consultancy Services Ltd. (Del) 325 ITR 87 at page 91 held as follows:- CIT vs. Jindal Equipments Leasing and Consultancy Services Ltd. "With this, we proceed to examine this aspect on its merits, viz., whether the provisions of section 28(iv) of the Act are attracted in the given case. Thus, what is to be seen is as to whether the amount written off of Rs.1,46,53,065/- in its books of account by JSPL amounts to the value of any benefit or perquisite whether convertible into money or not and can be treated as 'profits and gains from business'. The pre-requisites for attracting the said provisions are: (i) Benefit or perquisite arising in the course of business is of the nature, other than cash or money. It is for this reason expression "whether convertible into money or not" is menti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd when the higher profits are available. The fact that assessee's turnover in purchase of sale of investment is more than even the business of manufacture and sale of scooters further strengthens the finding that the assessee is engaged in the business of making investment of sale of the same. Assessee's objection is accordingly rejected." Therefore, in conformity with the order of DRP, amount of Rs. 13979.57 lacs is treated as business income against capital gain claimed by the assessee. Facts: 65.2. The assessee invests surplus funds arising in the course of business under various modes of investment like mutual funds/PMS, shares, etc., The gains realized from sale of such various instruments were disclosed under the head 'capital gains'. 65.3. The Assessing officer held that, having regard to the magnitude/volume of such investments, the aforesaid income was taxable under the head 'business'. Assessee's Submissions: 65.4. Gain arising from sale of an asset is taxable under the head "business income", where such asset is held as 'stock-in-trade' by an assessee. Where an asset is held as capital asset, within the meaning of section 2(14), gains arising from sale the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Tribunal in ITA No. 6429/Mum/2009 65.10. That apart and without prejudice to the above, there is, even otherwise, not much frequency in sale/purchase of investments, as could be gathered from analysis carried out at page 526 of objections in Form 35A. 65.11. On perusal of the same, it would be noted, that out of the total income earned from mutual funds, almost 67.34% of the total income earned from investments made in mutual funds was for a period of more than one year. In fact, out of the gross receipt of Rs.178.61 crores, the major amount of Rs.128.59 crores relates to investment in mutual funds and shares, held for more than one year. It is submitted, that an investment held for a period of more than one year cannot be considered as an investment held for trading purposes and income therefrom cannot be held to be business income. It is to be appreciated that under the Act shares/mutual funds held for more than one year are considered as 'long term capital asset', the sale whereof results in long term capital gains. 65.12. The Delhi Bench of the Tribunal in the case of Arjun Kapur v. DCIT: 70- ITD 61 held that shares held for a period of one year or more, should be conside ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from such activities could not be taxed under the head "business income". DR's Submissions: 65.19. Reliance is placed on the assessment order and order passed by DRP.AO. Our findings conclusion: 65.20. The issue that emerges for consideration is whether the gains that arose to the assessee from investment in debt mutual funds/PMS/ shares are to be taxed under the head "business income" or under the head "capital gains". 65.21. The Hon'ble Gujarat High Court in the case CIT vs Rewashanker A. Kothari [2006] 283 ITR 338 after examing earlier judgements on the question had laid down the following parameters /tests to determine when income from transactions in shares/ securities should be treated as "income from business" or the gain has to be taxed under the " Capital gains" (a) The first test is whether the initial acquisition of the subject-matter of transaction was with the intention of dealing in the item, or with a view to finding an investment. If the transaction, since the inception, appears to be impressed with the character of a commercial transaction entered into with a view to earn profit, it would furnish a valuable guideline. (b) The second test that is oft ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd common sense approach has to be adopted always keeping in mind commercial considerations. The tests have been laid down in Instruction No.4/2007 dated 15.6.2007 CIT vs. Rewashanker A. Kothari 283 ITR 338 (Guj). 65.24. The Lucknow Bech of the Tribunal in the case of Sarnath Infrastructure (P) Ltd vs. ACIT (Lucknow) [2009] (120 TTJ 216) considering almost all the important judicial decisions laying down legal principlas to determine the nature of the transaction and the CBDT Circular No 4 of 2007, the Tribunal culled out the following principles at para 13 of the order which can be applied to the facts of a case to find out whethertranscations(s) in question are in the nature of trade or merely for investment purposes: 1. What is the intention of the assessee at the time of purchase of the shares (or any other item). This can be found out from the treatment it gives to such purchase in its books of account. Whether shown in opening/closing stock or shown separately as investment or non- trading asset. 2. Whether assessee has borrowed money to purchase and paid interest thereon? Normally, money is borrowed to purchase goods for the purposes of trade and not for investing in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the assessee that it is violating those legal requirements, if it is claimed that it is dealing as a trader in that item? Whether it had such an intention (to carry on illegal business in that item) since beginning or when purchases were made? 10. It is permissible as per CBDT's Circular No. 4 of 2007 of 15th June, 2007 that an assessee can have both portfolios, one for trading and other for investment provided it is maintaining separate account for each type, there are distinctive features for both and there is no intermingling of holdings in the two portfolios. 11. Not one or two factors out of above alone will be sufficient to come to a definite conclusion but the cumulative effect of several factors has to be seen. 65.25. The Pune Bench of the ITAT in the case of Apporva Patni vs. Addl.CIT [2012] (54 SOT 9) held that investments through PMS scheme for appreciation and maximization of the wealth and not merely encashing of profits as trader, gain from such activity was liable to be considered as derived from activity of investments and not trading. (Similair view was taken by the Tribunals in ITO vs, Radha Biriju Patel [2011] (46 SOT 23),(Mum ITAT), ARA Trading Inves ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s and securities. The investment was made with a view to earn capital appreciation and to use the spare fund optimally instead of keeping it in the banks. For the year under appeal, the assessee earned dividend income of Rs.22.61 crores from investments held in shares and mutual funds. Treatment in the books of accounts: 65.30. It is an undisputed fact that the assessee had treated the transaction as investment in its books of accounts and not as stock in trade. The assesse has shown the investments in shares both at the beginning and closing of the year as an investment only and not as stock in trade. 65.31. The assessee has valued the investments at cost as per Accounting standard 13- Accounting for Investments and not in accordance with Accounting Standard -2 which deals with valuation of inventories. 65.32. The assessee has been holding the securities/ shares as investments from year to year and consistently following the same method of accounting for the purpose of disclosure and valuation. This teartment by the assessee was accepted by the Revenue for the past years. 65.33. The assesse had earned income from both long term and short term capital gains which means th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... earned from investments made in mutual funds was for a period of more than one year. Investments in shares - 65.40. Investment in shares was primarily made either through PMS or under Initial Public Offer. Under PMS, the company advances funds to the Portfolio Manager, who in turn makes investment in various shares. In substance the investments under PMS are similar to investment in mutual funds. The assessee, reiterated that it is only interested in the return on funds invested and does not act as a dealer/trader, so as to be regarded as being engaged in business activity. 65.41. In view of the above factual matrix it emerges that assessee is: (i) not a trader in stocks (ii) Intention of holding the shaes as investment/ stock is manifest. (iii) Sales are effected by delivery. (iv) Department has itself in earlier years taxed such transactions under thehead "Capital Gains". 65.42. Considering these facts and applicable judicial precedents on the issue, we are of the considered opinion that the income in question can be taxed only under the head "Capital Gains" and not under the head business income. This ground of the assessee is allowed. 66. Ground no. 43 43.1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al reimbursements and leave travel allowance payable to employees as on 31.3.2007, on the basis of actuarial valuation, amounting to Rs. 4.12 crores. 66.3. The Assessing officer held that the aforesaid provision was not for an ascertained/crystallized liability, which liability would accrue only on receipt of claim from the employees and, therefore, disallowed the aforesaid amount of provision. Assessee's Submissions: 66.4. The aforesaid provision was made for liability towards accumulated medical reimbursements/leave travel allowance claims, which had accrued to the employees, upto the end of the relevant previous year and was, therefore, not an unascertained liability. 66.5. It is settled law that under the mercantile system of accounting, deduction of expenditure is allowable in the year in which liability has accrued, notwithstanding that the same has to be discharged at a later date. Reference in this regard can be made to the following decisions: - Metal Box Company of India Ltd. v. Their Workmen: 73 ITR 53 - Bharat Earthmovers v. CIT: 245 ITR 428 - Rotork Controls India Ltd. vs. CIT: 314 ITR 62 (SC) 66.6. The aforesaid provision was necessitated on account of ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
