9911796707
TMI Blog2013 (8) TMI 57X X X X Extracts X X X X X X X X Extracts X X X X ..... ,43,972. The return of income was revised on 05.03.2009, wherein increased amount of TDS was claimed. The return was processed u/s 143(1) of the Income-tax Act, 1961 ('the Act') on 24.03.2010. The case was selected for scrutiny and notice u/s 143(2) was issued. During assessment proceedings the assessing officer referred the case to the Transfer Pricing Officer ('TPO'), as there were certain international transactions with its associate concerns (AEs). The TPO passed an order dated 27.9.2010. 3. Though the accounts were duly audited, the assessing officer was of the view that that there were complexities in the accounts as maintained by the assessee, which involved substantial revenue implications, therefore, a show cause notice u/s 142(2A) of the Act was issued and served upon the assessee on 08.06.2010, proposing special audit u/s 142(2A) of the Act. 3.1. The assessee vide letter dated 23.07.2010, opposed the Special Audit, citing the correctness, completeness and reliability of its account. However, for the detailed reasons given at para 2 of the assessment order, the assessing officer referred the matter for Special Audit. Special Auditor was appointed on 20-12-2010 with set ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 09, be directed to be allowed as deduction during the relevant year. 2. That on the facts and circumstances of the case, expenditure of Rs. 7,23,161 claimed as deduction in immediately succeeding assessment year i.e. 2008-09 on account of reversal of GENVAT credit/ excise duty paid in relation to obsolete/ dead stock written off in books of accounts of the relevant year, which has been disallowed in the draft assessment order passed under section 144C of the Act for the assessment year 2008-09, be directed to be allowed as deduction during the relevant year." 5.1. Ld. Counsel for the assessee filed a detailed petition and explained the facts necessitating the filing of the above additional grounds. Apropos additional ground no. 1 i.e. misc. expenses it is submitted that in the draft assessment order dated 13-6-2012 passed u/s 144C of the Act for the assessment year 2008-09, the assessing officer has disallowed the aforesaid expenses on the ground that the same pertained to prior period i.e. the relevant year and are not allowable revenue expenditure against income of the assessment year 2008-09. 5.2. Apropos additional ground no. 2 i.e. reversal of cenvat credit, it is submitted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt to ground of appeal nos. 9 to 9.7. It consists of copy of certificate issued by the Chartered Accountant certifying that the parties mentioned therein have duly accounted for sales made by them to the assessee during F.Y. 2006-07 in the books of account and that such sales are credited in the books of account and further that tax which was due is paid on the income declared in the return paid on the basis of such P&L A/c and returns of income prepared on the basis of these books of account. 5.8. The assessee is in the business of manufacturing of reputed brand two-wheelers, popularly known as Hero Honda Motor Cycles. During the course thereof it places purchase orders on various vendors providing specifications of the products to be purchased. It also specifies the name of parties, from whom the vendor is required to purchase, raw materials/ components etc., which are to be used in manufacture of customized intermediary products. As a consistent policy, the prices are also negotiated by the assessee with such suppliers. 5.9. Assessee claimed these transactins to be of purchase/ sale on principal to principal basis. According to assessing officer, these supplies constituted wor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... justifies the application on the plea that specific objections on this legal issue were already taken before the DRP. 5.14. After hearing rival submissions we are of the considered view that the additional evidence in question have to be admitted, as in our opinion, these documents are crucial for the adjudication of the grounds raised by the assessee on disallowance made u/s 40(a)(ia) of the Act, specifically in view of amendment made by the Finance Act 2012, which was passed on 28-5- 2012. Thus evidence becomes relevant to a legal issue, which was raised before DRP also. The assessment order in this case was passed on 4-4-2012 and hence, in our view, the assessee is justified in claiming that he was prevented by sufficient cause in filing these evidences before the assessing officer. We allow this application of the assessee. 6. There are numerous grounds raised by the assessee. We have heard Mr. Ajay Vohra Advocate on behalf of the assessee and Mr. Piyush Jain ld. CIT DR on behalf of the Revenue at length on the various issues that have been raised in this appeal. We have also perused all the papers on record, orders of the authorities below as well as case laws cited. 6.1. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d to the purchase price, but are separately debited to profit and loss account, since invoices of transporters are received after consumption of material. The freight amount is not included in the valuation of closing stock, as per the method of accounting for valautaion of stock consistently followed by the assesse and accepted by the Revenue in the past. Assessee's Submissions: 7.4. It was submitted by the Ld.AR of the assessee that Freight expenses of Rs. 31.38 lacs were incurred on account of purchases under exceptional situation, for immediate consumption. There is no time lag between the entry of raw-material in the factory premises and consumption thereof in the process of manufacturing. Since the invoice is received after receipt and consumption of material in the manufacturing process, the said expenditure is not, therefore, attributable to closing inventory. The fact that aforesaid cost was incurred in exceptional circumstances is clear having regard to the pettiness of the said amount, when compared to the total quantum of freight expenditure. 7.5. That apart, the assessee follows a consistent and regular method of not considering the aforesaid expenditure for purpose ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ect method results in deferment in payment of tax, which results in loss of interest to the revenue. c. Further, reliance is placed on the assessment order and order passed by DRP. AR's Rejoinder: 7.11. The Ld. DR's contention that the aforesaid accounting treatment would result in loss of revenue to tax department on account of interest, it is submitted, that the assessee had followed the similar accounting treatment in the earlier year(s) as well and, therefore, no such amount was included in the value of opening stock of the year under consideration. If the said amount (which as submitted in the submissions before assessing officer and DRP amounts to Rs. 36 lacs) is considered, there would be no loss to revenue; on the contrary, the tax liability determined upon the assessee would be excessive. 7.12. In view of the aforesaid, taking into account the facts of the case, the adjustment made by the AO calls for being reversed. The Ld. DR's contentions, it was submitted, are untenable, incorrect and accordingly, not required to be considered for adjudicating the present issue. Our findings and conclusion: 7.13. We have considered the submissions and the material filed by both t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... there is a material change in the facts, which is neither demonstrated by assessing officer nor DRP, the view which is taken earlier, should not be changed, as held by various courts. We now discuss some of the case laws. 7.17. The Hon'ble Supreme Court in the case of Radhasoami Satsang (supra), on the theory of consistency, has held as under: " ..Strictly speaking, res judicatta does not apply to the income tax proceedings. Though, each assessment year being a unit, what was decided in one year might not apply in the following, year , where a fundamental aspect permeating through different assessment years has been found as afact one way or the other and parties have allowed that position to ne sustained by not challenging the order, it would not be at all appropriate to allow the position to be changed in a subsequent year". 7.18. This view has been followed by the Hon'ble Delhi High Court in the case of CIT vs. Neo Ploy Pack (P) Ltd [2000] 245 ITR 492 and the Hon'ble Bombay High Court in the case of CIT vs. Gopal Purohit [2011] 336 ITR 287. 7.19. Further, the Hon'ble Supreme Court in the case of CIT vs. Realest Builders and Services Limited (2008) 307 ITR 202 held that: "I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expenses on the ground that the vouchers for such expenses from the employees/ branch employees were received after March 31st of the financial year. It had branch offices throughout the country. It debited the expenditure spill over the subsequent years and the Assessing officer had been allowing it in the past. The accounting practice had been consistently followed by it and accepted by the Revenue. Nothing had been brought on record to show that there had been distortion of profits or that the books of account did not reflect the correct picture. In the absence of any reason whatsoever, there was no warrant or justification to depart from the previous accounting system which was accepted by the Department in respect of the previous years." 7.22. In the present case, the Revenue has rejected the method of accounting which is consistently followed by the assesseee on the ground that there may be chance where in a particular year, the method adopted by the assessee may result in underestimation of profits. However, the Revenue failed to demonstrate with facts and figures that the impugned method of accounting may result in material underestimation of profits. On the contrary, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te immaterial, whether full deduction was allowed in one year or partly in one year and partly in the next, since the assessee is a company and rate of tax is uniform. The gain to one and the loss to the other is illusory since what is deferred in one year, would have to be discharged in the next. In that sense, nobody has won and nobody has lost." 7.25. Even on this plea also, the assessee succeeds. We have dealt with this issue elaborately as, in a number of grounds, this issue would become applicable. In view of above discussion, we allow this ground of the assessee. 8.1. Ground no. 3 to 3.2: (Addition on account of cost of rejection of semi finished goods and obsolete items): DRP Directions: 8.2. The DRP in its order under reference has decided the issue with following directions; "The assessee has objected the enhancement of the value of closing inventory by Rs. 9.24 lacs on account of cost of rejection. The arguments of the assessee are similar to the one taken at objection No. 1 i.e. the method of accounting has been consistently followed by the assessee in the past and accepted by the department and secondly, that the adjustment would be revenue neutral in the long run ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... laced on Nagri Mills Company Ltd.: 33 ITR 681 (Bom.); Triveni Engineering Industries Ltd.: 336 ITR 374 (Del). DR's submissions: 8.8. DR relied on the order of the assessing officer as well as on the DRP and repeated the arguments taken in grounds of appeal no. 2-2.2 Our findings and conclusion: 8.9. The issue in question is whether the cost of abnormal rejections have to be considered for the purpose of valuation of closing stock. The assessee relied on Accounting standard-2 - Valuation of Inventories which is a notified accounting standard by the Companies Act which stipulates that abnormal wastages should not be considered for valuation of inventory. 8.10. It was submitted by the Ld.AR of the assesse that it is in the manufacturing of precision and quality product and in case of unfit material it has been consistently following the method of charging the abnormal rejection of material to its profit and loss account, without any allocation to the value of closing inventory. 8.11. The assessing officer's case is that cost of rejections needed to be included in the value of closing stock. Assessing officer worked out an amount of Rs. 9.24 lacs as attributable to closing stock ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... years which has been accepted by the department. (b) The aforesaid system of accounting is revenue neutral in the long run. (c) The method of accounting is followed regularly and the same cannot be rejected as improper. Lastly without prejudice the assessee has held that the addition should be restricted to Rs. 3 lacs if at all which could be attributed/allocated to the value of closing inventory". The objections of the assessee have been examined. It seen that as regards inclusion of the raw materials cost, in valuing of closing inventory, the explanation at (a), (b) & (c) above are similar in nature to the two objections (1) and (2) above. The DRP has already given a finding that it was the duty of the AO to determine the true income of the year and therefore, the objections are not sustainable. On merits also it is seen that it is difficult to accept that the whole of the raw materials purchase during the year has been consumed. Therefore, some amount has to be attributed to the value of closing inventory. Therefore, the amount of Rs. 4.84 crores representing the proportionate amount in respect of closing inventory lying at the end of the year considering all the above stated p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ws in relation thereto, discussed under Ground of Appeal No. 2. 9.10. Since, the assessee has been following consistent, regular and accepted method of not considering the aforesaid provision for valuation of closing stock, the same could not have been disturbed by the assessing officer; 9.11. 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: If the closing stock of the year is to be varied, similar adjustments would need to be made to the opening stock, too. ( K.G. Khosla & Co. Ltd. v. CIT: 99 ITR 574 (Del.). Futher, corresponding adjustment would need to be carried out in the opening stock of the succeeding year. b. The addition, if any, is revenue neutral, if seen in a macro perspective and, therefore, no adjustment is called for. Reliance placed on Nagri Mills Company Ltd.: 33 ITR 681 (Bom.); Triveni Engineering Industries Ltd.: 336 ITR 374 (Del.). 9.12. Further, without prejudice, the assessing officer has erred in apportioning the entire amount of provision for price increase towards closing stock, without appreciating that substantial part of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld by weight. (c) It has pointed out that Rs. 11.43 crores has been realized against the aforesaid loss of Rs. 12.53 crores which is not disproportionate. The objections of the assessee have been considered. It is seen that the special auditor at page no. 72 of Annexure (iii) of the audit report has mentioned that the assessee has not maintained any stock register at scrap yard showing how much scrap has been received and its subsequent disposal. It is also noted that in the scrap stock register the extent of generation of scraps in sales cannot be verified. Also the assessee has not maintained any third party evidence that those items are actually obsolete and rejected and also no such evidence was provided during the course of assessment proceedings. The DRP finds that the assessee's contention that loss of Rs. 12.53 crores is compensated with revenue of Rs. 11.43 crores not to be correct as the scrap is not generated from one single activity and also includes rejection during inspection and rejection of obsolete items as well. In view of the above, the objections of the assessee are not sustained." Therefore, in conformity with the directions issued by the DRP, addition of Rs. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f such scrap and while allowing deduction claimed on account of rejections debited to profit and loss account, made addition only of the estimated value of scrap, that may be lying in the stores on the last day of the previous year, on an estimate basis. 10.12. In that view of the matter, it is not in doubt that scrap is generated in the course of manufacturing by the assessee. In the absence of any evidence in the possession of the assessing officer, despite special audit, that the amount debited by the assessee in the books was not genuine, the impugned disallowance needs to be deleted. DR's submission: 10.13. Reliance is placed on the assessment order and order passed by DRP. Our Findings & conclusion: 10.14. The disallowance in question relates to claim on account of scrap generated. On examination of the order of the assessing officer as well as the DRP, we find that an adverse inference, by the Assessing officer and the DRP, was drawn since the assessee has not maintained a scrap register. The assessee has to substantiate its claim for deduction. At the same time, when the assessee discloses income from sale of this scrap, it is not correct on the part of the assessing o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sis is followed regularly by the assessee. The assessee has stated actual amount of disallowance should be Rs. 301.11 lacs at all". The objection of the assessee are not found to be consistent with the accounting method described under the Income tax Act wherein only such expenses are allowed which have actually crystallized during the year. In the instant case, the provisions have been made in the accounts which may be as per the requirements of the Companies Act, but the AO is required to determine the true income of the assessee under the Income tax Act alone. Based on the above principle, all provisions whether subsequently reversed or not are disallowable. Therefore, the action of the AO is upheld The assessee has without prejudiced contended that the figure of Rs. 345.71 lacs adopted in the assessment order may if at all be substituted by the correct amount of Rs. 301.11 lacs. The DRP has considered but it is seen that as per the provision of section 144C(8) of the Income Tax Act, the DRP cannot issue any direction for further enquiry before passing of the assessment order and therefore, this objection for statistical purpose is treated as rejected." Therefore in conformity ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is not disputed by the assessee. The supplementary invoices belong to the next year. Hence it is not correct to say that the liability for which provision is made has crystallized during the year. The assessee has not demonstrated the same. The company in this case makes a provision for increase in material cost on estimate basis, based on price fixation with the vendors. These provisions have been made in the consistent manner year after year. It is not denied by the Revenue that the price revision in question is on the material already supplied by the vendor to the assessee company, which is either consumed or lying in closing stock. Thus, the expenditure in question has to be definitely allowed. The only issue is the year of allowability. Only excess provision written back is added by the assessing officer. Out of total provision for price revision for material of Rs. 31.31 crores, excess provision of Rs. 3.01 crores was reversed in the next year, which was added by the assessing officer. When the provision itself is doubted as not belonging to this particular year by the assessing officer, we do not understand as to how only the excess provision is sought to be reversed. 11.12 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ection of the assessee on this account is not sustained. The assessee has contended that the amounts of Rs. 498.76 lacs and Rs. 978.76 lacs adopted in the assessment year may be substituted with the correct amount of Rs. 326.70 lacs and Rs. 739.98 lacs respectively. The DRP has considered this, but it is seen that as per the provision of section 144C(8) of the Income Tax Act, the DRP cannot issue any direction for further enquiry before passing of the assessment order and therefore, this objection suggestion for statistical purposes is treated as rejected." Therefore in conformity with the order of the DRP prior period expenses amounting to Rs. 498.09 lacs and amount of Rs. 978.76 lacs, on account of booking of short income/ excess raw material consumption during the year are disallowed & added towards assessee's income. (Addition of Rs. 1476.85 Lac ( Rs. 498.09 lacs+ Rs. 978.76 lacs) Facts: 12.3. During the relevant year, the assessee claimed deduction of Rs. 3.26 crores (incorrectly adopted in the assessment order at Rs. 4.98 crores) on account of short provision for increase in price of raw material supplied in the immediately preceding year. Similar to provision for increas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ated 28.5.2012. The aforesaid additional ground, however, inadvertently remained to be adjudicated by the Hon'ble Tribunal in the final order, for which the assessee is in the process of filing a Miscellaneous Application. In view thereof, your Honour may decide the aforesaid issue, subject to the amount being allowed in either of the two years, depending upon the outcome of adjudication of additional ground of appeal in that year. DR's arguments: 12.10. Reliance is placed on the assessment order and order passed by DRP. Our Findings and conclusion: 12.11. The addition in question is on account of provision for increase in price of material. When there is an excess provision on account of price revision made during the year, the assessee reversed the same in subsequent year i.e. when the actual figures are known. Similarly, when there is a short provision for increase in price of raw material supplied in immediately preceding year, the balance is recognized as expenditure during the year. A claim is made based on ascertainment of actual liability. The assessing officer disallowed the reversals of provision on the ground that this was a prior period expenditure. 12.12. When pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the amount of investment, the edge of the plant and the prestige utilization of the vendor; the volume of supply of each vendor; the geographical differences of each vendor which impacts the cost of freight labour etc.; the lead time and the indirect tax cost etc. as well as the assessee preference for purchasing material from more than one suppliers due to business commercial expediency namely, De risking supply chain to reduce dependence on one vendor. It was also contended on behalf of the assessee that these related parties related only as per the accounting standard 18 and are not related parties in terms of provisions of section 40A(2) of the Income Tax Act". The objection of the assessee cannot be accepted. Even if the contention of the assessee that the parties are not strictly related parties in terms of section 40A(2b) of the Income Tax Act, the fact remains that these parties are close associates of the assessee and the assessee has paid higher price for the goods purchased for these parties than the goods available in the market, which fact is proved by the availability of certain internal comparables i.e. other parties from which the assessee has actually required the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wer than the prices paid to unrelated parties. 13.9. The instances of higher purchase price were, therefore, only on account of commercial factors/business considerations, the reasonableness of which is to be seen from the point of view of the businessman and cannot be dictated by the Revenue. Reliance placed on SA Builders Ltd: 288 ITR 1 (SC). 13.10. Apart from the provisions of section 40A (2), there is no provision under the Act, which clothes the assessing officer with the power to go into the issue of reasonableness of the expenditure incurred by an assessee. Where the party is not related in terms of 40A(2), there is no scope for the assessing officer to examine the reasonableness of the expenditure and to disallow any part thereof. Reliance is place on Shaw Wallace Distilleries Ltd. vs. ACIT: 85 TTJ 236 (Del.); DCIT vs ICICI Web Trade Ltd.: ITA No. 6559/M/2006 (Mum.) Pgs. 27-37 & 1197-1202 of Case Laws PB. 13.11. Further without prejudice, the exercise of comparison of price of related party with unrelated party is also not correct as in certain instances, the assessing officer has made comparison of transaction of a related party with the transaction entered with another ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... order to curb such tendency of diversion of income and thereby reducing the tax liability by illegitimate means, section 40-A was added to the Act by an amendment made by the Finance Act, 1968. Clause (b) of section 40A (2) gives the list of related persons. 13.17. In the present case, it is an undisputed fact that none of the parties fall within the persons specified as defined under clause (b) of section 40A (2) of the Act. Related parties are to be considered in terms of provisions of sec. 40A (2) of the Act and not as mentioned in AS-18 issued by the Institute of Chartered Accountant. Thus, we are of the view that the provisions of section 40A (2) do not apply to the present case. Further, there is no provision under the Act which authorizes the Assessing Officer to lift the corporate viel and disallow an expenditure on the ground of reasonableness and commercial expendiency unless it is established that the transaction is primarily deviced to evade tax. 13.18. In the present case, it was submitted by the learned AR of the assessee that the related parties are profit making companies and are subject to tax to at some less or the same rate of tax. Thus there is no loss of Rev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncy is justified. 13.23. The Hon'ble Supreme Court in the case of CIT vs Walchad & Co [1967] 65 ITR 381 in the context of deductibility of expenditure under Section 37(1) of the Income-tax Act, 1961 [Corresponding to section 10(2)(xv) of the Indian Income-tax Act, 1922] held as under: "In applying the test of commercial expediency for determining whether the expenditure was wholly and exclusively laid out for the purpose of the business, reasonableness of the expenditure has to be adjudged from the point of view of the businessman and not of the revenue". 13.24. Further, reference is also drawn to the decision of the Hon'ble Supreme Court in the case of S.A. Builders Ltd. v. CIT (Appeals) [2007] 288 ITR 1 (SC) , where in it was held as under: "....that once it is established that there was nexus between the expenditure and the purpose of the business (which need not necessarily be the business of the assessee itself), the revenue cannot justifiably claim to put itself in the arm-chair of the businessman or in the position of the board of directors and assume the role to decide how much is reasonable expenditure having regard to the circumstances of the case. No businessman can ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f selection of the raw material, determining the price at which the raw material is to be supplied to the vendors, the assessee has tried to circumvent the provision of section 194C of the Income Tax Act by showing the contract to be contract for purchase of goods whereas the contract actually is a works contract. It is a fact that the assessee provides the specification of the product to be supplied, the specification of the raw material to be used and also settles these prices at the raw material is to be supplied to the vendors. All these facts looked at from the totality of the circumstances clearly shows that the assessee has placed a works contract with the vendors. The assessee is indirectly supplying the material to the vendors by passing on the purchase price of the raw material to the suppliers of the raw material through the channel of the vendors, who are for the major part of their business dependent upon the assessee and are thus agreeable to the terms dictated by the assessee. The objection of the assessee is therefore rejected." Therefore, in conformity with the order of DRP, amount of Rs. 2487.64 crores is added to the income of the assessee.(Amount disallowed - R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ured from the customer would be outside the scope of work contract under section 194C. 14.9. Raw-materials are purchased by the vendors from the suppliers on their own account, 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 manufacture and not as a job worker in respect of goods manufactured and sold to the assessee. Further, the vendor has charged and assessee has paid sales tax/VAT, as the case maybe, for the goods purchased from the vendors; all these parameters clearly demonstrate that the transactions are in the nature of purchase and sale only. 14.10. In this connection, the assessee has referred ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nder a legally valid commercial contract between the vendor and the supplier. There is no privity of contract between the assessee and the suppliers. 14.14. It is also pleaded that the special auditor has in the audit report under section 142(2A) of the Act for the succeeding year has held such transaction to be in the nature of contract of sale of goods. 14.15. In these circumstances, even the amended provisions of section 194C of the Act do not cover the case of the assessee. In any case, the said provision operates prospectively and cannot have retrospective operation, as held by the Supreme Court in the case of Silver Oak Laboratories P. Ltd. (supra). 14.16. The allegation made by the assessing officer that the assessee had arranged the said purchase transaction in the aforesaid manner simply to hoodwink the Revenue in order to avoid deduction of tax at source isbereft of any basis and based on incorrect appreciation of facts and the position in law as pointed above. The disallowance made on the aforesaid basis has, therefore, no legs to stand and needs to be deleted. 14.17. The assessing officer has also failed to appreciate the basic distinction between contract of sale a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... njoys moneys legitimately belonging to Government, the provisions of section 40(a)(ia) of the Act in such cases only seek to defer deduction for expenditure in the hands of such payer to the year(s) in which tax deducted is ultimately deposited, whereas in the case of a payer who has failed to deduct tax at source, the deduction or expenditure is lost in perpetuity. Thus the revenue interpretation lends to incongruous results. 14.21. The aforesaid legal position has been set right by the Finance Act, 2012 (passed on 28.5.2012) whereby, section 40(a)(ia) has been amended to provide that the assessee shall be deemed to have deducted and deposited tax, on the amount on which tax was deductible but was, in fact, not deducted, on the date of furnishing of return of income by the resident payee, if the resident payee has included the said amount in its taxable income and has furnished certificate from a Chartered Accountant in the prescribed form, to this effect. 14.22. It is submitted, that considering the legislative intent, the provisions of section 40(a)(ia) of the Act needs to be liberally construed and no disallowance could be made under that section, where tax has been paid by t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ure of contract for carrying out work, which was subject to TDS under section 194C of the Act.Reliance, in this regard, is placed on the decision of Karnataka High Court in the case of CIT and ITO vs Nova Nordisk Pharma India Ltd.: 341 ITR 451. In that case, the assessee was an indirect subsidiary of a Denmark based company and was engaged in selling pharma products, like insulin. The Denmark Company was supplying raw material, know-how and trade mark to certain Indian manufacturers and such manufacturers were obliged to sell their manufactured products to the assessee. The payment for purchase of such manufactured products was made by assessee, without deduction of any tax at source. 14.30. The assessing officer held that the contracts between the assessee and the Indian manufacturing companies and that between the Indian manufacturing companies and Denmark were interlinked and ultimately the assessee was supplying the raw material, know-how etc. to the Indian manufacturing companies for manufacturing the specified products. In view thereof, the assessing officer held that the assessee was liable to deduct tax at source under section 194C of the Act from the aforesaid payment. On ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e the situation of such nature and of course proceeded between the contract between the assessee and the manufacturer company." 14.32. It is submitted, that the ratio emanating from the aforesaid decision is squarely applicable to the case of the assessee in as much as the nature of arrangement of the assessee was also that of indirect supply of material to the vendor, which is in the nature of contract for carrying out work and, therefore, the payment made by the assessee to the vendors was subject to TDS under section 194C of the Act. 14.33. Since, the assessee has failed to deduct tax at source under the aforesaid section, the expenditure incurred calls for being disallowed under section 40(a)(ia) of the Act. Accordingly the assessment order on this issue needs to be upheld and the ground of appeal raised by the assessee calls for being dismissed. It is further pleaded that the ITAT Special Bench judgment in the case of Marilyn Shipping & Transport (supra) has not been approved by Karnataka High Court. Assessee's Rejoinder: 14.34. The Ld. DR's contention that the assessee was indirectly supplying material to the vendors and, therefore, the impugned arrangement was to be rega ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to negotiate with the manufacturers of raw material / components for best prices. The assessee advices the vendors who supply intermediary products to the assessee, of the prices negotiated by the assessee with the manufacturers of raw material / components, to be sourced by such vendors. Since the price paid by the assessee to the vendors of intermediary products / components is, in turn dependent on prices of inputs paid by the vendors to suppliers of raw material / components, it is in the best interest of the assessee to ensure that the prices of raw material / components sourced by the vendors from independent manufacturers are kept to the minimum. It is in this background that the assessee seeks to leverage its strength, given the magnitude of its business and requirement of intermediary products to extract the best prices from the manufacturers of raw material or components. The benefit of lower prices enjoyed by the vendors is, in turn, passed on to the assessee when the assessee purchases intermediary products / components from the vendors, utilizing raw materials / components sourced from independent manufacturers at best prices negotiated by the assessee. 14.38. In case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d that in absence of any evidence being brought on record by the Ld. DR/assessing officer in support of the aforesaid allegation, the same needs to be ignored. 14.43. As regards the contention of the Ld. DR that vendors were practically captive units of the assessee in as much as 98%-100% of the sales were made by them to the assessee, it is submitted that the same is also based on surmises, conjectures and contrary to record. 14.44. In this regard, the assessee is adducing herewith relevant extract of audited financial statements of following vendors, which are listed companies and are available on the internet, in public domain: Rico Auto Industries Limited Omax Autos Limited 14.45. Further, a chart showing comparison of total sales made by aforesaid vendors and sales made to assessee is enclosed as under:- Name of the vendor Total sales during AY 2007-08 (Rs. In crores) Sales made to assessee during AY 2007-08 (Rs. In crores) Total sales during AY 2008-09 (Rs. In crores) Sales made to assessee during AY 2008-09 (Rs. In crores) Rico Auto Industries 770.40 286.54 708.71 286.05 Omax Autos Li8mited 689.54 206.40 714.35 289.16 14.46. The aforesaid comparative cha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... supply of material by an independent third party at a price agreed on an arm's length basis. In the case of assessee, it cannot, therefore, be said that the material procured by the vendors from independent suppliers was supplied by the assessee. It was only on account of business exigencies discussed above that the name of raw material suppliers and purchase price thereof was stipulated by the assessee by the vendors supplying the finished products. It is to be further appreciated that, unlike facts of the case before the Karnataka High Court, the assessee is not supplier of any know-how to the vendors who manufacture goods supplied to the assessee using their own know-how, manufacturing establishment / labour, etc. 14.51. Further, in the facts of the aforesaid case, it was only a single vendor / manufacturer engaged by the assessee to whom raw material was supplied by the foreign company, unlike the case of assessee where the assessee had entered into several contracts for purchase of similar kinds of finished products / components from different vendors, as also specified various raw material suppliers to the vendors. 14.52. For the aforesaid cumulative reasons, it is submitt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee and at rates specified by the assessee. Based on the statements from nine vendors, the assessing officer came to the conclusion that the assessee has termed the "contract of work" as "contract for sale". The reasons in details for arriving at such conclusion by the Assessing officer and as confirmed by the DRP are discussed in the above paragraphs (supra). 14.60. With the above background, we examine the legal position in this regard. 14.61. Section 194-C was brought to the statute book by Finance Act 1972 w.e.f. 1-4-1972. Provisions of Section 194 C of the Act 14.62.Section 194 C of the Act requires any person responsible for paying any sum to any resident for carrying out any work (including supply of labour for carrying out any work) in pursuance of a contract, has to deduct tax at source at the rates prescribed. 14.63.Explanation to section 194C of the Act defines the expression "work" to include contracts for (a)advertsing, (b)broadcastings and telecasting; (c) carriage of goods and passengers by any mode of transportation other than railways and (d) catering. 14.64.Finance Act 2009 w.e.f 1.10.2009 had inserted clause (e) to the definition of "work" which reads as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... no income tax will be deducted. 14.68. With effect from 1-7-1995 new Explanation 2 has been inserted to Section 194 C of the Act to include carriage of goods and passengers by any mode other than railways within the meaning of working. 14.69. The CBDT vide Circular No. 681 dated 8-3-1994 withdrew its earlier Circulars Nos 86 dated 29-5-1972, Circular No.83 dated 26-9-1972 and Circular No. 108 dated March 20, 1973 and provided that Section 194C would apply to all types of contracts for carrying out any work including transport contracts, service contracts, advertisement contracts, broadcasting contracts, telecasting contracts, labour contracts, material contracts and works contracts. Further, the circular continues to assert that "the provisions of this section will not cover contracts for sale of goods". The Circular further reiterated that where the contractor undertakes to supply any article or thing fabricated according to the specifications given by 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 delivered, the contract will be a contract for sale and as such outsid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , in reply to question no.15 in Circular no.715, dated 8.8.1995 on the subject of applicability of section 194C, in respect of contract for supply printed material as per prescribed specifications, it has been said that such contracts would also be covered under section 194C. It has been represented that the views expressed in these two circulars, to the extent as pointed out above, are in contradiction to each other. 2. The matter has been examined by the Board and it is considered that exclusive reliance on question/Answer no.15 of Circular no.715, without taking into account the principles laid down in Circular no.681 is not justified. Before taking a decision on the applicability of TDS under section 194C on a contract, it would have to be examined whether the contract in question is a contract for work or a contract for sale and TDS shall be applicable only where it is contract of work. 3. It is, therefore, clarified that the provisions of section 194C would apply in respect of a contract for supply of any article or thing as per prescribed specifications only if it is contract for work and not a contract for sale as per the principles in this regard laid down in para 7(vi) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... person other than the customer, it would constitute a sale. What is significant is that in using the words which clause (e) uses in the Explanation, Parliament has taken note of the position that was reflected in the circulars issued by the Central Board of Direct Taxes since May 29, 1972. The Revenue always understood section 194C to mean that where a product or thing is manufactured to the specifications of a customer, the agreement would constitute a contract for sale, if (i) the property in the article or thing passes to the customer upon delivery ; and (ii) the material that was required was not sourced from the customer/purchaser, but was independently obtained by the manufacturer from a person other than the customer. The Legislature which intends to bring clarity to a legislative provision or to remove an ambiguity is inferred to do so at the inception. 14.77.The expression "contract of work" and "contract of sale" has been subject matter of interpretation by the Hon'ble Supreme Court under the Sales Tax Act for considering the applicability of sales tax Act in the following cases: 14.78. In Govt. of Andhra Pradesh v. Guntur Tobaccos Ltd., AIR 1965 SC 1396;16 STC 240, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... otels of India Ltd. 29 STC 474 made the following relevant observations in this regard: "....................... The difficulty which the Courts have often to meet with in construing a contract of work and labour, on the one hand, and a contract for sale, on the other, arises because the distinction between the two is very often a fine one. This is particularly so when the contract is a composite one involving both a contract of work and labour and a contract of sale. Nevertheless, the distinction between the two rests on a clear principle. A contract of sale is one whose main object is the transfer of property in, and the delivery of the possession of, a chattel as a chattel to the buyer. Where the principal object of work undertaken by the payee of the price is not the transfer of a chattel qua chattel, the contract is one 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 materials, nor the value of the skill and labour as compared with the value of the materials, is conclusive, although such matters may be taken into consideration in determining, in the circumstance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ining the terms and conditions and also on examination of the invoices, purchase orders as well as the challans indicating payment of excise duty, we are of the view that there is no material on record to indicate that the transaction in question is a 'contract for carrying out works'. Hence, Section 194C of the Income Tax Act, 1961, ('Act' for short) is not attracted. Our attention, in fact, is invited to the amendment in section 194C of the Act vide Finance (no.2) Act, 2009, with effect from 1st October, 2009, which defines "work" to include manufacturing or supplying a product according to the requirement or specification of a customer by using material purchased from such customer. In fact, it is clarified that the definition of the work "work" will not include manufacturing or supplying a product according to the requirement or specification of a customer by using material purchased from a person other than such customer. However, this amendment came into force only with effect from 1st Ocotber,2009, which will not apply to the period in question in the present case(s)." 14.85.Reliance is also placed on the following decisions: - Wadilal Dairy International Ltd vs. Asst. CIT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eparately to Hero Honda Motors Ltd. Accounts Section. Copies of bills which are normally submitted to bankers should also be sent in advance in duplicate along with the challans indicating these bills have been/would be presented to the bankers for payment. 4. All drawings samples or technical data supplied to you by us shall be kept as secret and will not be sold or disclosed and these shall be returned to us as and when demanded. Failure to comply with this shall make you liable for breach of trust and other actions as may be deemed fit by us. 5. Items manufactured by you for us from the data provided by us must not be sold in open market or to other manufacturers/ distributor unless permitted by us in writing. In case the supplier commits the breach of this condition in addition to rights of the purchaser the suppliers shall also be liable to pay all the purchaser liquidated damages and not as penalty for each product or part thereof sold to or through any one else. 7. Supply Quality Assurance: The Supplier shall be subject to SUPPLY QUALITY ASSURANCE which entails free access to inspectors detailed by us for purpose of inspecting manufacturing and inspection procedures of y ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... terial will be dispatched at the risk of the supplier. 17. Warranty extended by us on our product has to be honoured by you as per prevailing policy of HHML from time to time. The warranty for product supplied by you will start from the period our final product is SHIPPED OUT. You will warrant that all the new goods supplied by you are free of all defects in materials and workmanshsip. Its liability under such warranty being limited to taking goods at the factory of HERO HONDA MOTORS LTD. GURGAON/ DHARUHERA any part(s) which within 6 calendar months from the date when the product was delivered now to the representative and which by HHML is satisfied on its examination of part(s) to have been defective in material of workmanship. The defective part(s) received by HHML from field under the terms of warranty can be inspected by supplier if so desired at HHML premises of Gurgaon/ Dharuhera on dates specified by HHML. Warranty Officer in case supplier fails to inspect the part(s) HHML will have full authority in finalizing the claim. Failed parts after inspection will be wrapped by HHML and it will be their sole discretion to ask the supplier to send the credit note or the parts replac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... delivery of the raw material and the assessee does not in any way acquire any title to the goods i.e. raw material. The argument of the Ld. DR that the nature of arrangement of the assessee is that of indirect supply of material to the vendor, which is in the nature of contract for carrying out work is far fetched, devoid of merit and not supported by evidence. It is not the case of revenue that there are any financial transactions between the assessee and the raw material suppliers of the vendors. The test is to see the fact whether the assessee acquired any title to the raw material purchased by the vendors from the suppliers. The answer to this is no. We are unable to understand as to how the assessing officer a well as the DRP has considered this as a deemed purchase by the assessee. The reason enunciated by the assessee w.r.t identifying the suppliers of the material along with the determination of price of the raw material fixing of payment terms etc., clearly constitutes a matter of business expediency for the assessee. 14.93. Further, in the statement recorded from the vendors after summoning them u/s 131 of the Act, the vendors have confirmed that this is a case of sale ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d other ingredients required for manufacture are specified by the appellant, in order to ensure proper quality of the finished products. The rates are negotiated to achieve economy of scale and to leverage the position of the assessee, which leads to reduction in cost of production. Such raw materials are however acquired by the vendor on their own account and not on behalf of the assessee. 14.98. The right of ownership passes to the assessee only after the goods come into existence, on manufacture and are supplied to the assessee as finished goods. Prior thereto, the risk in the goods vests with the vendor/supplier. All the other terms of purchase/sale between the vendor and supplier, like payment terms, period of delivery etc. is for acquisition of ascertained goods - the contract is thus one of sale and not a contract for carrying out work. 14.99. In view of the above finding, we are not adjudicating on the other arguments raised by the assessee on this issue, though we find force in the argument of the assessee that since all the vendors have filed their returns of income and paid taxes on the receipts from the assessee, no disallowance under section 40(a)(ia) is warranted. H ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... poses of business. 15.4. The AO disallowed Rs 1.50 cr. Out of the total amount paid on the ground that (i) nexus of advisory services rendered by HCSL with the business of the assessee could not be ascertained; and (ii) the assessee failed to explain as to how it was commercially expedient to avail the aforesaid services from HCSL. Assessee's Submissions: 15.5. The assessee entered into service agreement with HCSL for availing advisory services in relation to various corporate services like human resource, I.T., etc., and availing supervisory services for evaluating data processing work carried out by M/s Results Mcann Pvt. Ltd. under passport scheme launched by the assessee company. 15.6. HCSL during the relevant previous year, provided following services to the assessee company: Advise on training programs to be conducted for employees and evaluating performance of employees thereafter; Updation/evaluation of Information technology support/upgradation required by the assessee; HCSL during the year also developed supporting software programmes to streamline support functions of the assessee. HCSL acted as a communication channel between the assessee and various investors, w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n grounds of commercial expediency. In applying the test of commercial expediency for determining whether the expenditure was wholly and exclusively laid out for the purpose of the business, the Supreme Court laid down that the reasonableness of the expenditure has to be adjudged from the point of view of the businessman and not of the Revenue. 15.14. The Hon'ble Supreme Court in the case of CIT v. Dharamraj Giriji Riya Narsingiriji 91 ITR 544 held that "it is not open to the Department to prescribe what expenditure an assessee should incur and in what circumstances he should incur that expenditure. Every businessman knows its interest best". 15.15. It is well settled that the assessing officer cannot place himself in the arm chair of businessman and decide the amount of expenditure that is to be incurred for the purpose of running of the business. The expenditure in question cannot be disallowed for the reason that the expenditure was incurred for business and was in the revenue field and was not a personal expenditure. In the result, this ground of the assessee is allowed. 16. Ground nos. 11 to 11.2:- (Payment received on behalf of Hero Honda Fin lease Ltd. (HHFL) deemed as di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent by M/s Hero to the assessee is not a transaction in the business of money lending, but is loan provided to the assessee in a scheme devise to circumvent the provisions of section 2(22)(e) of the I. T. Act. Moreover, it is not the assessee's case that it has paid an interest in the regular course of borrowing money on interest. The objection of the assessee is rejected." Therefore, in conformity with the order of DRP, amount of Rs. 6,445 lacs is added to the income of the assessee. (Addition - Rs. 6,445 lacs) Facts: 16.3. Hero Honda Finlease Limited (HHFL) is a related company in which the assessee holds 30% (approximately) of the share capital, which is engaged primarily in the business of financing of vehicles. 16.4. In pursuance of the said business, HHFL extends to the dealers of the assessee company, 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. Subsequently, when payments by de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iness. 16.11.That apart, the assessee is, otherwise a cash rich company, and as discussed in detail infra, infact invests surplus funds in short term investments, in order to properly utilize the funds. It cannot, thus, be said that assessee avails short form advances from HHFL in the aforesaid manner, as assessee does not require such advances. 16.12. Without prejudice to the above, even assuming that the aforesaid amount was given by way of advance to the assessee, the same cannot be deemed as dividend in terms of exemption provided in clause (ii) of section 2(22)(e) of the Act, since the same would be considered as being given by HHFL, which is engaged in the business of money lending, in the ordinary course of its business and therefore, cannot be deemed as dividend in the hands of the assessee. 16.13.Reliance, in this regard, is placed on the following decisions: CIT v. F. Praveen: 220 CTR 639 (Mad.), CIT v. Ambassador Travels (P) Limited: 220 CTR 475 (Del.), Pradeep K. Malhotra v. CIT: 338 ITR 538 (Cal.) Nagindas M. Kapadia v. CIT: 177 ITR 393 (Bom.) CIT v. Parle Plastics Ltd.: 332 ITR 63 (Bom.) 16.14. The aforesaid payment was made by dealers on behalf of the HHFL a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itted, that it is undisputed that HHFL is in the money lending business. Merely because, no interest was charged by HHFL to the assessee would not lead to the inference that the amount allegedly advanced by HHFL was not in the ordinary course of its business, since charging interest is not sine qua non of carrying on money lending business, for purposes of applying exclusion contained in clause (ii) of section 2(22)(e) of the Act. 16.21. An assessee is free to give interest free loans and advances on account of commercial expediency. Reference, in this regard, can be made to the decision of Supreme Court in the case of S.A. Builders Ltd.: 288 ITR 1, wherein the transaction of interest free loan to a company on account of commercial expediency has been upheld to be business transaction. 16.22. For the aforesaid cumulative reasons, the arguments of the Ld. DR needs to be rejected and the ground of appeal raised by the assessee calls for being allowed. Our findings & conclusion: 16.23. On a careful consideration of the factual matrix we find that the assessee has received money from its dealers for on ward remittance to HHFL. It is an undisputed fact that the money was remiited to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and, in its widest meaning the term "advance" may or may not include lending. The word "advance" if not found in the company of or in conjunction with a word " loan" may or may not include the obligation of repayment. If it does, then it would be a loan. Thus, arises the conundrum as to what meaning one would attribute to the term " advance" . The rule of construction to our minds which answers this conundrum is noscitur a sociis. The said rule has been explained both by the Privy Council in the case of Angus Robertson v. George Day [1879] 5 AC 63 by observing " it is a legitimate rule of con- struction to construe words in an Act of Parliament with reference to words found in immediate connection with them" and our Supreme Court in the case of Rohit Pulp and Paper Mills Ltd. v. CCE, AIR 1991 SC 754 and State of Bombay v. Hospital Mazdoor Sabha, AIR 1960 SC 610. It is important to note that Rohit Pulp, AIR 1991 SC 754 was the case dealing with taxation. In brief in the said case the assessee was seeking to take benefit of an exemption notification. The Department denied the benefit of the " notification" on the ground that the paper manufactured by the assessee was " coated paper" ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... High Court in the case of Nagindas M. Kapadia [1989] 177 ITR 393 would show that the court excluded from the ambit of "dividend", monies which the assessee had received towards purchases. In our view, both the Commissioner of Income-tax (Appeals) and the Tribunal have correctly appreciated this aspect of the matter in the said judgment of the Bombay High Court. The relevant portion of the judgment of the Bombay High Court which sets out this aspect of the matter is already extracted by us in the narrative given by us hereinabove. We are also in agreement with the view of the Tribunal that the judgment of the Supreme Court in the case of P. Sarada [1998] 229 ITR 444 and Smt. Tarulata Shyam [1977] 108 ITR 345 has no applicability to the present case. Both the judgments establish the principle that once the payment made to a shareholder is deemed as dividend then the mere fact that it is repaid would not take it out of the ambit of the tax net. In the instant case, however, a discussion with respect to which has been made hereinabove, the issue is whether the payment received by the shareholder would at all fall within the four corners of the provisions of section 2(22)(e) of the Act. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ate the conclusions drawn by the assessing officer that this is a deemed loan. In our view, by no stretch of imagination it can be said that there was any amount of advance or loan given by HHFL to the assessee. 16.28. Even assuming that the transaction is in the nature of loan, we have to agree with the arguments of the Ld. AR of the assessee that the transaction cannot be deemed as dividend in terms of exemption provided in clause (ii) of section 2(22)(e) of the Act, since the loan would be considered as given by HHFL, which is engaged in the business of money lending, in the ordinary course of its business. Therefore, the amount cannot be deemed as dividend in the hands of the assessee. The arguments of the Ld. DR 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 is taken to its logical conclusion, supporting our view that this is not a loan or advance. 16.29. Considering the decision of the Hon'ble Delhi High Court and the intent of the Legislature in introduction of Section 2(22)(e) of the Act, we are of the view that the transaction in question would not fall wit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ost certified in the cost audit report. Charging of any mark up by the assessee on the cost of generation from itself in order to create an income which is exempt from taxes i.e. on which a deduction is allowable u/s 80IA of the Income Tax Act and in turn reducing it's taxable income from the manufacturing unit, cannot be justified on any ground. The objection of the assessee is rejected." Therefore, in conformity with the order of DRP, amount of Rs. 426.38 lacs is not allowed as deduction. No addition to the income is warranted since the computation to income as per this order begins before giving effect to the claim of assessee for deduction under section 80IA. 105 Facts: 17.3. In view of the power supply constraints in the area of Gurgaon, Haryana, the assessee had set-up a power plant within the factory premises, in order to meet the captive consumption requirements of power, which is eligible for deduction under section 80IA of the Act. No power is drawn from the Electricity Board. 17.4. 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 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nbefore specified presents exceptional difficulties, the Assessing Officer may compute such profits and gains on such reasonable basis as he may deem fit. [Explanation. - For the purposes of this sub-section, "market value", in relation to any goods or services, means the price that such goods or services would ordinarily fetch in the open market.]." 40. From the above, it is evident that where the goods or services held for the purposes of eligible business are transferred to another business, carried on by the assessee, then for the purpose of deduction under this Section, the profits and gains of such eligible business shall be computed as if transfer had been made at the market value of such goods or services as on date. In the case under appeal before us, it is not in dispute that in the eligible business, the assessee is generating the power which is being consumed by the assessee company's manufacturing facility. Therefore, the profit of the eligible business is to be computed at the market rate of supply of power. It is the assessee's contention that Maruti Udyog Limited is supplying the power to its AE at the rate of Rs. 8.50 per unit while the assessee has computed the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d that the relevant ledger accounts of both the input division and output division show that the excise duty is deemed to have been paid through PLA i.e. the ledger account or through available CENVAT credits. It is seen from pages 57 to 58 of the draft assessment order that the assessee has been claiming before the Assessing Officer that the excise duty has been actually paid. However, the assessee has changed its stand before this panel and the counsel has now stated that the excise duty is deemed to have been paid through PLA i.e. the ledger account or through available through CENVAT credits. The contentions of the counsel have to be verified before the same can be accepted. The best proof or verification regarding the payment of the excise duty can be through a confirmation from the relevant excise authorities that the excise duty of Rs 1.88 crores in question has been deemed to have been paid through the PLA or the available CENVAT credits before the relevant dates permitted by section 43B income of the Act. The assessee shall produce such confirmation/certificate from the relevant excise authorities, before the AO. Who will allow /disallow the claim on the basis of the confi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rejected and the ground of appeal raised by the assessee calls for being allowed Our findings & conclusion: 18.10. The DRP in this case directed the assessing officer to verify the claim of the assessee with regard to payment made through PLA. The Hon'ble Delhi High court in the case of CIT Vs. Maruti Suzuki Ltd. (supra) held that payment through PLA constitutes effective payment of excise duty. The assessing officer is bound by this decision. The assessee had already placed all necessary evidences before the assessing officer. On the factual matrix, in the interest of justice, we set aside the matter to the file of assessing officer for fresh adjudication in accordance with law. The assessing officer is directed to consider payment through PLA as effective payment of excise duty and decide the issue accordingly. In the result, this ground of the assessee is allowed for statistical purposes. 19. Ground no. 14 to 14.3: (Addition to value of closing stock on the basis of value reported in cost audit report):- DRP Directions: 19.2. The DRP has issued following directions to the Assessing Officer; "In the draft assessment order, the AO has enhanced the value of closing inventory ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s been accepted by the Revenue in the past. The same cannot be substituted during the relevant year, for the aforesaid reason. 19.8. Further 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: 19.9. If the closing stock of the year is to be varied, similar adjustments would need to be made to the opening stock, too. (Refer: K.G. Khosla & Co. Ltd. v. CIT: 99 ITR 574 (Del.)) 19.10. Corresponding adjustment would need to be carried out in the opening stock of the succeeding year. 19.11. The addition, if any, is revenue neutral, if seen in a macro perspective and, therefore, no adjustment is called for. [Refer: Nagri Mills Company Ltd.: 33 ITR 681 (Bom.); Triveni Engineering Industries Ltd.: 336 ITR 374 (Del.)] DR's submissions: 19.12. Reliance is placed on the assessment order and order passed by DRP. Our findings & conclusion: 19.13. The addition of Rs. 19 lacs has been made on account of particular method of valuation of closing stock followed by the cost auditors. Admittedly the method of valuation followed by the cost auditors was statutory requirement. There is n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he same is rejected. Secondly, the counsel has submitted that the disallowance on account of interest and the disallowance of half percent of average value of investment have been made without linking this expenditure to the activity of earning the exempt income. This objection of the assessee deserves to be rejected. The disallowance made by the AO is purely on the basis of formula provided in rule 8D of the Income Tax rules and therefore cannot be faulted with. The objection of the assessee is rejected. Thirdly, the counsel has objected that once the half percent of the average value of investment has been disallowed for the reason of administrative effort for earning the exempt income the AO was not justified in separately making the disallowance of Rs. 86.74 lakhs out of the salary of the two directors. This objection of the assessee is justified. Once the AO has made a disallowance of half percent of the average value of investment during the year for the administrative effort for making investment for earning exempt income he was not justified in making a further disallowance out of the salary of two directors. The AO is directed not to make the separate disallowance of 86. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erated substantial surplus/interest free funds of Rs. 625.05 crores during the year, which were sufficient to make investments of Rs. 273 crores during the year. In such circumstances, it is to be presumed that only interest free funds have been utilized for making investments during the year. Reliance is placed on East India Pharmaceuticals Works Ltd: v. CIT: 224 ITR 627 (SC). Administrative expenses 20.10. All the expenses, other than, the suo-moto disallowance by the assessee, related to main business function of manufacturing vehicles. In the absence of any proximate nexus having been established by the assessing officer and considering that provisions of Rule 8D of the Rules are not applicable to the assessment year, the disallowance of administrative expenses made by the assessing officer, needs to be deleted. DR submissions: 20.11. Reliance is placed on the assessment order and order passed by DRP. Our Findings & conclusion: 20.12. The dispute is regarding disallowance of expenses relating to exempt income under section 14A of the Act read with Rule 8D. Under the said provisions, the disallowance of expenses relating to exempt income is required to be computed as per S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ection 14A(1) [as it now stands] as also in its initial avatar as section 14A. It is only the prescription with regard to the method of determining such expenditure which is new and which will operate prospectively. In other words, section 14A, even prior to the introduction of sub-sections (2) & (3) would require the assessing officer to first reject the claim of the assessee with regard to the extent of such expenditure and such rejection must be for disclosed cogent reasons. It is then that the question of determination of such expenditure by the assessing officer would arise. The requirement of adopting a specific method of determining such expenditure has been introduced by virtue of sub-section (2) of section 14A. Prior to that, the assessing was free to adopt any reasonable and acceptable method. 42. Thus, the fact that we have held that sub-sections (2) & (3) of section 14A and Rule 8D would operate prospectively (and, not retrospectively) does not mean that the assessing officer is not to satisfy himself with the correctness of the claim of the assessee with regard to such expenditure. If he is satisfied that the assessee has correctly reflected the amount of such expendi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n as laid down by the Hon'ble Delhi High Court in the case of Maxopp Investment Ltd. (supra), we restore the determination of the disallowable amount of expenses under Section 14A to the file of the Assessing Officer to be done in accordance with provisions of section 14A read with the decision of the Jurisdictional High Court, keeping in mind all the reasonableness of suo motu disallowance offered by assessee in the return. 20.16. Further, we direct the Assessing Officer to determine the amount of expenditure only if the Assessing officer, having regard to the accounts of the assessee, is not satisfied with the correctness of the claim made by the assessee in respect of such expenditure incurred in realtion to dividend income. The assessing officer shall consider all the contentions raised by the assessee as well as the proposition laid down by various courts and decide the issue de novo. Ground is allowed for statistical purposes. 21. Ground no. 16- 16.1: It comprises of two additions: (i) 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 A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 under the order of the High Court, the deposit of the money with the bank does not amount to payment of excise duty. Similar are the findings of the Ahmedabad Tribunal in the case of Mugat Dying and Printing Mills Ltd. 87 ITD 215 (Ahd.), The objection of the assessee is therefore, rejected." Therefore, in conformity with the order of DRP, amount of Rs. 496 lacs is added to the income of the assessee. {Addition Rs. 496 lacs ( Rs. 288 lacs + Rs. 208 lacs) } Fa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eted, on the ground that same has been held to be unconstitutional:- CIT v. Hindustan Latex Ltd.: ITA No. 64 of 2012 (Ker.) Universal Cables Ltd. vs. DCIT:ITA No.954/K/2010 (Kol.) (ITAT) 21.9. Furthermore, section 43B(b) of the Act provides that deduction otherwise allowable under this Act on account of, interalia, sum payable by the assessee as an employer by way of contribution to, inter alia, any other fund for the welfare of employees, shall be allowable deduction in the year in which such sum is actually paid. 21.10. The fund created with LIC to make payments for employee benefit, viz., leave encashment, would be covered within the aforesaid clause as 'any other fund for the welfare of employee' and contribution made thereto have been specifically covered as allowable deduction in the year of payment. 21.11. As regards the amount of Rs. 2.08 crores, the assessee had specifically filed evidences of the aforesaid aggregate payment during the course of assessment proceedings, vide letter dated 21.4.2001, which have been ignored by the assessing officer and are again attached at page no. 2076- 2089 of the paper book. DR submissions: 21.12. Reliance is placed on the assessme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce, we do not find merit in the arguments of the Revenue that the assessee has claimed deduction under 43B; therefore, it cannot claim deduction under section 37 of the Act. 21.18. Clause (f) of section 43B was introduced by Finance Act 2001.w.e.f from 1.4.2002 to nullify the decision of the Hon'ble Supreme Court in the case Bharat Earth Movers vs CIT 245 ITR 428 wherein the Hon'ble Supreme Court held that provision for leave encashment is an accrued liability and not a contingent liability. 21.19. In view of the above decision, provision for leave encashment which is otherwise allowable under section 37 of the Act is allowed under section 43B of the Act only on actual payment. 21.20. In the present case, the company has created a fund under a separate trust which has entered into a master policy with LIC for payment of leave encashment to the employees. The company makes annual contribution to the trust/ LIC to keep the policy in force. The assessee pays annual 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. Hence, we agree with the arguments of the Ld.AR of the assessee that, as there i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ry offices located in the factory compound are entitled to additional depreciation u/s 32(iia) of the Act as these supervisory offices formed integral part of the factory. The objection of the assessee is not acceptable. The computers even though installed at the factory premises cannot be treated as plant as these are not involved in the manufacturing process. In the cases of M/s Kirloskar Cummins ITA No. 1287/90 order dated 29th January, 1987 and in the case of Sunny Gold Winery ITA No. 1288/93, have held that computers and Xerox machines are not entitled to investment allowance. Objection of the assessee is rejected." Therefore, in conformity with the order of DRP, amount of Rs. 38.61 lacs is added to the income of the assessee. (Addition - Rs. 38.61 lacs) Facts: 22.3. Under section 32(1)(ii) additional depreciation is available on actual cost of plant and machinery, other than plant and machinery installed in any office premises, acquired and installed by an assessee engaged in the business of manufacture or production of any article or thing after 31st March, 2005. 22.4. During the relevant previous year, the assessee claimed additional depreciation of Rs.38.61 lacs, on co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and human resources, as pointed out by the Special auditor is not disputed. We do not find merit in the arguments of the assesse that 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). The case laws relied by the assesse are clearly distinguishable on facts. 22.12. In view of the above discussions, this ground of assessee is dismissed. 23.1. Ground no. 18: (Disallowance of deduction u/s 35(1)(iv) in respect of R&D assets): 23.2. The DRP has issued following directions to the Assessing Officer; "During the relevant previous year, the assessee claimed deduction of Rs. 97,86,496/- under section 35(10)(iv) of the Act in respect of assets acquired and used for the purpose of scientific research and development. In the draft assessment order, out of the aforesaid total deduction, the assessing officer has disallowed deduction of Rs. 71.54 lakhs on the ground that relevant assets were used for testing of raw material received and finished products sold and were not used for R&D pu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... igenizing various components, which are otherwise imported from outside India, on the basis of drawings and designs of such parts supplied by the foreign collaborator. The assessee gets certain components indigenously developed on sample basis, which are to be approved by the collaborator for indigenous production. For this process, the assessee purchased certain R&D assets to analyze and check, various materials/components procured from vendors (engaged in production of indigenous components as per design and specification provided by the assessee), to confirm, whether the same meet the specification given by the assessee, before giving the go ahead for mass production of such indigenously developed components. 23.8. As stated earlier, the R&D assets were used for the purposes of testing various materials/components supplied by the vendors, for which specification was provided after research was carried out by the assessee and before such material/components could have been used in the main line manufacturing activities carried out by the assessee company. Such testing helps the assessee to find deficiencies and improve the quality of inputs, by taking appropriate measures. Accor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ets were used for testing of raw material and finished products. 23.17. The testing undertaken by aforesaid equipments helps the assessee to find deficiencies and improve the quality of inputs, by taking appropriate measures. Accordingly, the testing carried out through use of such assets, was in the course of research and development activity carried out by the assessee and, therefore, the cost of such assets was allowable deduction under section 35(1)(iv) of the Act. 23.18. Even in terms of section 43(4)(i) of the Act, the term "scientific research" means any activity undertaken by an assessee for extension of knowledge in the field of science and includes all expense incurred for prosecution of such research. 23.19. Therefore, the aforesaid assets used in execution of scientific research, would fall in the meaning of "scientific research" as defined in section 43(4) of the Act. 23.20. 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, therefore, the ground of appeal raised by the assessee in this regard needs to be allowed. Our Findings & conclusioin: 23.21. Section 35( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... irections to the Assessing Officer; "During the relevant previous yea, the appellant incurred expenditure of Rs. 11.90 lakhs on account of first insurance premium paid at the time of purchase of vehicles used for purpose of business. In the return of income, the aforesaid expenditure was claimed as revenue deduction. The counsel argued that the expenditure involved in revenue as even the first insurance premium operates only for 12 months and has to be renewed every year. The objection of the assessee is not acceptable. It is to be observed that it is a settled position that all the expenditure incurred in relation to bringing on asset to use is to be treated as capital expenditure. For example, the expenditure on license fee to establish a factory has been held to be of capital nature by the High Court in 227 ITR 878 and 139 CTR 245. Assessee's objection is rejected." Therefore, in conformity with the order of DRP, amount of Rs. 10.27 lacs is added to the income of the assessee. (Addition - Rs. 10.27 lacs) Facts: 24.2. During the relevant previous year, the assessee incurred expenditure of Rs.11.90 lacs on account of first insurance premium paid at the time of purchase of veh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iture): Assessing officer's order:- DRP Directions: The DRP has issued following directions to the Assessing Officer; "Disallowance of retail and maintenance of assets by treating the same as capital expenditure. This disallowance is discussed by the AO from page 77 to 79 of the draft assessment order. In all there are five items were disallowed and these are discussed as follows: 1. Payment made towards ground water study, consent fee paid to pollution control board for water and air, and associated travel expenses in relation to existing land Rs. 10,46,052/- It is seen that the AO in this regard as observed that no supporting evidences have been provided to substantiate as to which a plot of land i.e. whether Gurgaon/Daruhera, Haridwar or Shamalka, this expenditure relates. In view of this the AO was correct in not allowing these expense as genuine expenditure as the assessee has not substantiated the purpose for which the expenses were incurred. From the nature of the payment given above as submitted by the assessee on page 43 of the synopsis of the objection, the expenditure in connection a feasibility study for setting up certain plant. Any expenditure on feasibility stu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... apital asset has been brought into existence. The AO is directed not to make the disallowance of Rs. 41,69,196. Since the AO has allowed depreciation on this expenditure, he is directed to withdraw the same. 4. Repair, replacement and maintenance expenses of various existing assets. Rs. 33,54,670/-. The AO has held this expenditure to be of capital in nature on page 78 of the draft assessment order further reason that the expenditure is on replacement of pipes and for bringing in new transformers against the old one which has increased the life of the asset or the production capacity of the asset. The AO however is not justified in holding this expenditure to be of capital nature. Replacement of existing pipes and replacement of old transformers does not lead to increase in the production capacity of the assessee. The replacement of the pipes and the transformers which are no more service-able, is regular maintenance expenditure in a production facility and is an allowable revenue expenditure. The AO is accordingly directed not to make the disallowance of Rs. 33,54,670/- on this account. Since the Assessing officer has allowed depreciation by capitalizing this expenditure, he is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ature ; (b) maintenance expenses of existing agricultural land at Samalka, on the ground that the same was not allowable business expenditure, considering that agricultural income is exempt from tax Assessee's Submissions: 25.4. The expenditure on account of ground water study was incurred in connection with feasibility study for putting up plant on existing land at Neemrana. No new plant came into existence as a result of the aforesaid expenditure, as the idea to put up the plant was shelved at that time. The Delhi High Court in the case of Indo Rama Synthetics Ltd.: 333 ITR 18 has held that expenditure incurred on feasibility studies in connection with setting up of a new unit in existing line of business would constitute revenue expenditure, if the project is abandoned, since no asset comes into being. 25.5. Without Prejudice to the above, in any case, since the new plant to be set-up was to be engaged in the existing business of manufacture of vehicles, under the control and supervision of existing management as also by deployment of funds generated from the existing business, the same was for extension of existing business. Further, since no new asset/profit earning apparat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he expenditure is revenue or capital and each case must, of course, be dealt with on the broad principles that have been accepted by the courts as are mentioned above. 16. Applying these principles to the present case, it is quite clear to us that the control over the two units is in the hands of the same management and administration. There is no doubt on this score and in fact, the annual report of the assessee, which has been shown to us by learned counsel, makes a reference to the project at Hyderabad. There can be no dispute from the facts that have been placed before us on record that the new venture was managed from common funds and there is the necessary unity of control leading to an interconnection, interdependence and interlacing of the two ventures such that it can be said that the fuel injection equipment project is only an extension of the existing business of the assessee and, therefore, the expenditure incurred by the assessee on this project is a revenue expenditure." 25.11. In the case of CIT Vs. Relaxo Footwears Ltd. (2007) 293 ITR 231 (Del), the Jurisdictional High Court was considering a case wherein the assessee had claimed pre-operative expenses of Rs. 41,2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ative expenses, which were not relatable, either directly or indirectly, in connection with the acquisition of any fixed assets or setting up of the plant at Haridwar, aggregating to Rs. 1.87 crores, were debited to the profit and loss account and claimed as revenue deduction. The counsels have argued that the new plant being set up at Haridwar was only an extension of the existing business and thus constituted part of the existing business as such allowable as revenue expenditure. The assessee's objection is not accepted. Perusal of the details of the expenditure on page 1614 and 1615 from vo. 7 of the paper book shows that an expenditure 9210549/0 is incurred on foundation stone laying ceremony at Haridwar plant. In its judgement reported in 118 ITR 772 (Bom.), the Bombay High Court has held that the opening ceremony expenses for launching of the ship is the part of the expenditure on ship building and is therefore capital in nature. The further expenses include expenses on topographical survey of land for plant. Expenditure on consultation for the plant, expenditure for providing services to the plant, expenditure on developing strategies for the plant, professional fee for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Engineering Works Ltd. v. CIT: 311 ITR 405 (Del.) CIT v. Havells India Ltd.: 253 CTR 271 (Del.) DR's submissions: 26.10. The assessee, during the relevant previous year, was in the process of setting up a new plant at Hardwar and indirect expenses incurred in relation thereto were claimed as revenue expenditure. 26.11. In this regard, as held by the assessing officer, the aforesaid indirect expenses, being incurred in relation to setting up of new plant were capital expenditure. 26.12. Further, the said expenses include expenditure incurred in relation to puja ceremony organized at the time of laying of foundation stone at Hardwar 26.13. Reference in this regard is made to the decision of the Bombay High Court in the case of CIT vs Great Eastern Shipping Co. Ltd.: 118 ITR 772, wherein the Court had held that all direct and indirect expenses, including ceremonial expenses, incurred in relation to capital assets, are capital in nature. 26.14. In view of the aforesaid, the appeal of the assessee in relation to aforesaid issue needs to be rejected. Assessee's Rejoinder: 26.15. The decision of the Bombay High Court in the case of CIT vs Great Eastern Shipping Co. Ltd.: 118 ITR ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... section 40(a)(ia) can be made in the hands of assessee. Further, without prejudice, disallowance to be restricted to outstanding liability only. Reliance is placed on arguments taken in GOA 9 (supra). 27.2. On these general arguments, we hold that the issue of bona fide belief is an issue of fact and cannot be generally applied. Coming to the argument that the recipient have paid the tax, it is for the assessee to lead evidence. Wherein no evidence led, the argument of the assessee fails. 28. Ground no. 22.1 (payment of passenger tax to Government on behalf of transporters): DRP Directions: 28.1. The DRP has issued following directions to the Assessing Officer; "The assessee avails transport facilities from various vendors for transportation of employees to the factories/office premises to specific pick up/drop points. The transporters were liable for payment of passenger tax to the Government. During the relevant previous year, the assessee paid passenger tax of Rs 36,02,885/- to the Government directly on behalf of the transporters, pursuant to Notification issued by the Government specifying that such passenger tax should be paid by the customers on behalf of transporters d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctly on behalf of the transporters. 28.3. The AO held that the assessee failed to deduct tax at source under section 194C from passenger tax, in relation to a transport contract and consequently made disallowance under section 40(a)(ia) of the Act. Assessee'e Submissions: 28.4. Under section 194C of the Act a person is liable to deduct tax at source at specified rate on income comprised in amount payable to a contractor. Thus liability to deduct tax at source arises only if the payment includes any element of income. 28.5. The passenger tax levied by Government on the transporters, which is deposited directly with the Government, is not income of the contractor/transporter and considering that, in the present case, the aforesaid payment of tax was made directly to Government on behalf of the transporter, the same was not liable to TDS under the provisions of section 194C of the Act. 28.6. Reference can be made to Circular No.4 of 2008 dated 28.04.2008 issued by CBDT, stating that a lessee is not obliged to deduct tax at source from the amount 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 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... foresaid vehicle is carried out by dealers for which reimbursement of expenses incurred by dealer is made by the assessee on presentation of free service coupons handed over by the customers to the dealer. In the draft assessment order, the assessing officer has made disallowance of such expenditure, aggregating to Rs. 68.27 crores under section 40(a)(ia) for alleged failure to deduct tax at source under section 194J. The main thrust of the argument of the counsel in this regard was that the assessee was only reimbursing the expenditure incurred by the dealers for the free services provided by them to assessee's customers and further that the dealers was not rendering in technical services and the provisions of section 194J are not applicable to the facts. The objection of the assessee is not acceptable. In the scheme of the assessee's business model the assessee provided a certain model to the customer and for this purpose, the responsibility of rendering the free services is entrusted to it's dealers all over the country. The customer 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see and dealers is on a principal to principal basis, in other words, the dealers do not act as agent of assessee. 29.6. The dealers purchase products from the company on principal to principal basis, ownership for which passes on to the dealers and the same is subsequently sold by the dealers at profit in the market. 29.7. It has been specifically provided that the dealers shall not have any right or authority to, and shall not incur any debt or liabilities or transact any business whatsoever in the name of or for and on behalf of the company nor give any warranty nor make any representation, on behalf of the company and in no way describe or represent themselves as the agent of the company. 29.8. It is the obligation of the dealer to handle the business of dealership at its own expense as also to efficiently and promptly service the vehicles of the customers. 29.9 The products sold by the company to the dealers and further sale by the dealers to the customers are with free service coupons i.e. the sale price of the vehicles 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 prod ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under section 40(a)(ia) could not have exceeded the said amount; DR's Submissions 29.16. The assessee issues free service coupons to customers for service/ repair of vehicles along with the vehicles sold. Free service is carried out by dealers, for which payment is made by the assessee to dealers. Accordingly, the assessee had made payment for technical service of repairing vehicle of customers, obtained from dealers, which is subject to TDS under section 194J of the Act. Since, the aforesaid payment received by the dealer from the assessee involved income, in the form of labour charges, the same was subject to deduction of tax at source by the assessee. The payer as well as payee are both identified. Reliance is placed on DRP directions and AO's order. 29.17. In view of the assessee's failure to deduct tax at source therefrom under section 194J, the assessing officer had rightly disallowed the impugned expenditure under section 40(a)(ia) of the Act, which needs to be upheld and the ground of appeal raised by 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aid expenditure can be disallowed under section 40(a)(ia) of the Act. 29.26. As regards the contention of the Ld. DR, that the impugned payment cannot be deemed to be pure re-imbursement as the same involved an element of income to the dealers on account of labour charges, it is submitted, that there is no quarrel to the proposition that impugned payment on account of re-imbursement of free service coupon may constitute income of the dealers. It is not the argument of the assessee that since the impugned payment is pure re-imbursement of expenses of the dealers, the same does not constitute income of the dealers and, therefore, the assessee is not liable to deduct tax at source. The Ld. DR has not appreciated the contention of the assessee properly. 29.27. It is thus pleaded that the person responsible for making the payment by coupon or cash if it is not presented towards service of vehicles to the dealers is the service recipient i.e. customer and not the assessee; it merely honors the payment to 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mer. On this factual matrix, it would be wrong to hold that the dealer has rendered technical services as contemplated u/s 194J to the assessee for which the assessee paid a particular amount to the dealer and non-deduction of tax at source on such payments attracts disallowance u/s 40(a)(ia). 29.34. The assessing officer relied on Section 194J which reads as follows: [Fees for professional or technical services 194J(1) Any person, not being an individual or a Hindu undivided family, who is responsible for paying to a resident any sum by way of- (a) fees for professional services, or (b) fees for technical services, or (ba) any remuneration or fees or commission by whatever name called, other than those on which tax is deductible under section 192 to a director of a company, or (c) royalty, or (d) any sum referred to in clause (va) of section 28. Shall, at the time of credit of such sum to the account of the payee or at the time of payment thereof in cash or by issue of a cheque 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 Ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts by the assessee were clearly business receipts in the hands of Technik (para 30) Clarification given in question no.29 of the CBDT Circular no.715, dated 8.8.1995 deals not only with section 194C, but also section 194J. Section 194J clearly includes within its ambit the fees for technical services as defined in Explanation 2 to section 9(1)(vii(b). The said circular excludes routine maintenance repairs from the scope of section 194J which deals with TDS on 'fees for technical services'. Section 9(1)(vii) and section 194J, rely on the definition given in Explanation 2 to section 9(1)(vii). Therefore, the clarification issued by the Board in the context of section 194J with respect to normal maintenance repairs would be relevant for understanding the import of the said Explanation in the context of section 9(1)(vii)(b). (Para 35)." 29.40. In the case of Kandla Port Trust vs.Dy.CIT(2011) 16 Taxman.com 273 (Rajkot-Trib.)the ITAT Rajkot Bench held as under: "From the meaning 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) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... defined in Explanation 2 to section 9(1)(vii). The assessee succeeds on this ground." Regarding the decision of the Hyderabad in the case of Mannesmann Demag Lauchhammer (supra) which involves deputing of technicians to India for supervision of repairs to be carried out at the plant and machinery purchased by the NMDC, we find that the said decision is distinguishable on facts. Such deputation, whether deputation or supervision, is absent in both instant cases as well as the case before it, as observed by the Delhi Bench of the Tribunal in the cited case. The relevant para of the order of the Tribunal in that case reads as follows:- "We find that in Demag's case, the foreign company rendered 'technical consultancy' by way deputing a technician to India for supervising repairs to be carred out on the plant and machinery purchased by National Mineral Development Corporation. It is not the repair work per se which has been held to be technical services but it is 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 wo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be deleted. 29.42. We also find force in the argument of the assessee that the services in this case are availed by the ultimate customer who has paid the consideration by way of sale price to dealer by a separate transaction of purchase of two wheeler. Service is neither availed by the assessee nor is the payment made by the assessee in consideration of availing a service for itself. As already stated, even f it taken as a service availed by the assessee, sec. 194J is not attracted as this is not a technical service. 29.43. Revenue has placed reliance in Circular No. 8/2009 dated 24-11-2009. In this circular it was clarified that payments made by TPA on behalf of insurance company to Hospitals are liable for deduction of tax at source. The view in this case is that the service is a professional service in the field of medical service. Hence Sec. 194J was made applicable. The same does not apply here. Even otherwise, this proposition as a matter of fact supports 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 lacs 30.3. The Asssessing Officer held that assessee was liable to deduct tax therefrom under section 194I, as car falls within the meaning of 'plant', as defined in section 43(3), and, therefore, disallowed the aforesaid expenditure under section 40(a)(ia) of the Act. Assessee's Submissions: 30.4. Under section 194I of the Act, a person making payment of rent, under any lease arrangement, for use of, inter alia, machinery or plant or equipment, is required to deduct tax at source at the applicable rate. 30.5. The 'car' does not fall within the category of assets viz., machinery, plant or equipment prescribed in the aforesaid section. The aforesaid three assets, have not been defined under 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ps, vehicles, books, scientific apparatus and surgical equipments used for the purposes of the business or profession but does not include tea bushes or livestock or building or furniture and fittings." U/s 194-I, "rent" means any payment, by whatever name called, under any lese, sub-lease, tenancy or any other agreement or arrangement for the use of, among other things, machinery or plant or equipment". 30.13. In our view, car does fall within the category of machinery, plant or equipment and payment made for the use of the same would fall within the definition of "Rent" under sec. 194 of the Act. Accordingly, non-deduction of tax at source, in our view, attracts the provisions of sec. 40(a)(ia). 30.14. The judgment of the Hon'ble Andhra Pradesh High Court in the case of Hyderabad Deccan Cigarettes Factory v. CIT 236 ITR 615 is not applicable to the facts of the case as what was considered in that case was sec. 32A wherein the section 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 def ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the dealers. It is also a fact that the assessee is the prime owner of the brand "Hero Honda" and it is to promote the name and the product manufactured by the assessee that the advertisements are placed. No individual dealer stands to make any particular gain in his business by placing the advertisement. The advertisements are placed on behalf of and as required by the assessee. It is only through a complex arrangement that the payments are routed through the dealers, primarily to circumvent the provisions of TDS and to avoid deduction of TDS. Since the payments are made for advertisement, the provisions of section 194C of the income tax act are clearly applicable. The objection of the assessee is overruled." Therefore, in conformity with the order of DRP, amount of Rs. 186.10 lacs is added to the income of the assessee.( Addition - Rs. 186.10 lacs) Facts: 31.2. During the relevant previous year, the assessee, incurred 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 sect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed by auditors. (Sample copy submitted during assessment proceedings, enclosed at page no. 1622 to 1776 of the paper book). In view of the same, the question of any disallowance under section 40(a)(ia) of the Act in respect of expenditure to the extent of Rs.5,07,615 does not arise. DR's Submissions 31.10. Reliance is placed on the assessment order and order passed by DRP. Our findings & conclusion: 31.11. The assessee's case is that only cost of advertisement is reimbursed to the dealers and hence no tax to deduct at source. In other words the claim is that it is mere reimbursement of expenditure. 31.12. U/s 194C, tax is to be deducted at source for any work which in turn includes advertising. The reimbursement to the dealer in this case, in our view, is for the purpose of advertising and argument of the assessee that the expenditure in question is not incurred for the purpose of advertisement is devoid 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 han ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y way of advertisement on the game show and the expenditure is incurred by way of handing over motorcycles to the game show organizer. The game show organizer are earning income by organizing these game shows including the receipt of gifts from the sponsors by not taking money from the sponsors, the organizer of the game shows received payment for advertising the products of the assessee on the TV show in kind in the shape of motorcycles. The further distributions of these motorcycles to the winners of the game show is a kind of expenditure of the game show organizer deductible from the income of the organizer from the activity of the organizing of the TV show. Any payment for advertising the products of the assessee and its brand name will attract the provisions of assessment 194B of the I. T. act. In the case of Kanchenjanga Sea Food Ltd., 265 ITR 644 (AP) the Andhra Pradesh High Court has held that 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in specified games and not on payment towards advertisement/sponsorship. 32.8. Reliance on the decision of Andhra Pradesh High Court in the case of Kanchenjanga Sea Food Ltd. v. CIT: 265 ITR 644 (AP), subsequently approved by the Supreme Court in 325 ITR 540, wherein it was held that an assessee is liable to deduct tax at source from eligible payments, even if the same are not paid by way of cash/cheque, but by any other mode, is misplaced. 32.9. There is no quarrel to the proposition that an assessee is liable to deduct tax at source from eligible payments, notwithstanding that the same are paid by a mode, other than cash/cheque. If the provisions of section 194B are not applicable, the question of withholding tax from distribution in kind, also does not arise. DR's Submissions: 32.10. During the relevant previous year, the assessee incurred expenditure on account of distribution of motor 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 afo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on any income by way of winning from any lottery or crossword puzzle or card game and other game of any sort in an amount exceeding ten thousand rupees shall, at the time of payment thereof, deduct income-tax thereon at the rates in force." 32.18. In our view a reading of the above leads to the conclusion that the assessee was liable u/s 194B to deduct tax at source and having not done so attracts disallowance u/s 40(a)(ia). This ground of the assessee is dismissed. 33. Ground no. 22.6: (TDS on use of catering services provided by hotels and room rent to hotels): DRP Directions: 33.1. The DRP has issued following directions to the Assessing Officer; "During the relevant previous year, the assessee incurred expenditure of Rs. 6.72 lakhs towards booking of banquet halls/space in hotel to convene various meetings. The aforesaid amount included charges for snacks/refreshments 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... overed within the meaning of section 194C of the Act. DR's Submisisons: 33.6. Reliance is placed on the assessment order and order passed by DRP. Our findings & conclusion: 33.7. The distinction put forth by the assessee that the predominant purpose was to conduct a meeting and not to avail catering services does not appeal to us. Explanation III to Section 194 C interalia defines the expression "work" to include catering contracts. 33.8. In the present case, since the assessee has availed catering services from the hotel and also paid hire charges for use of banquet halls, in our view, the assessee ought to have deducted as TDS u/s 194C for the catering services availed and u/s 194I for banquet halls taken on hire. Violation of the same would result disallowance u/s 40(a)(ia). This ground of the assessee is dismissed. 34. Ground nos. 22.7 & 22.7.1 (Reimbursement 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 Om ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e's Submissions: 34.4. Since, the contractors were engaged by Omax, the liability to deduct tax at source from payment to them was that of Omax. The assessee only re- imbursed portion of total expense, which did not constitute income of Omax, nor was subject to TDS. The TDS on whole payment was otherwise deducted by Omax, for which details were available with the assessee before making reimbursement. DR's Submission: 34.5. Reliance is placed on the assessment order and order passed by DRP. Our findings & conclusion:- 34.6. Section 194Cof the Act is applicable to payments for carrying out any work in pursuance of a contract. 34.7. In the case on hand, we observe that there is no contract for carrying out work between the assessee and Omax. It is the case of pure reimbursement of expenses incurred by Omax on behalf of the assessee. It is a 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 expens ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sible. To provide invoices in support of evidence and therefore, the reimbursement was made on the basis of declarations. As already stated above, the AO cannot give the benefit without making verification of the facts which is not possible, if the assessee does not furnish evidence in that regard. This part of the assessee's objection is also rejected." Assessee has submitted evidence with regard to payment of Rs. 45,000/-. Accordingly addition by this amount is reduced from the total addition made as per the draft order. This will result into addition of Rs. 10.68 lacs. (Addition - Rs. 10.68 lacs) Facts: 35.2. The assessee made payments, amounting to Rs.10.68 lacs, to various consultants/vendors towards out of pocket / traveling expenses, incurred by them in the course of carrying out assignment and included in the invoice. 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, warrant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to MTNO and BSNL. In the draft assessment order, the AO has disallowed the aforesaid expenditure on the ground that the aforesaid payment made towards rental of lease line from MTNL/BSNL falls within the meaning of 'rent' under section 194I and since the assessee failed to deduct the tax at source under the aforesaid section, the entire expenditure was disallowed under section 40(a)(ia) of the Act. The ld counsel have submitted that payment for taking lines from MTNL/BSNL on lease does not amount to payment of rent and as such the provision of deduction of tax were not applicable in assessee's case. It is however to be observed that MTNL/BSNL has provided leased line facility i.e. network infrastructure to the assessee for which it is charging per month rentals. A lease line is a service contract between a provider 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 affecti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... leased lines is covered in favour of the assessee by following decisions:- Asia Satelite Vs. CIT 332 ITR 340 (Del) Skycell Communication Ltd. Vs. DCIT 251 ITR 53 (Mad), 36.10.These ratios being squarely applicable to present case, respectfully following the same we allow this ground of the assessee. 37. Ground no. 22.10 (TDS on hire charges of generator used at the corporate office) DRP Directions: 37.1. The DRP has issued following directions to the Assessing Officer; "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. In the draft assessment order, the AO disallowed the aforesaid expenditure incurred towards hire charges of generator used at the corporate office on the ground 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee was exempt from deducting tax at source from the payment of rent even up to 18/5/06. A copy of the certificate is enclosed that page 1815 of vol. 7 of the paper book furnished before us. We have careful perused the said certificate which is issued on 18/5/06. The certificate is saying that the assessee is authorized for payment of rent without TDS at the time of payment for credit thereof. This certificate is not made applicable on retrospective basis. Since it has been issued only on 18/5/06, it will be only applicable for the period after this date. Any document to be applicable retrospectively has to clearly specify the same. The objection of the assessee is rejected." Therefore, in conformity with the order of DRP, amount of Rs. 4.32 lacs is added to 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 Subm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cordingly, there was no contract for carrying out work, necessitating deduction of tax at source. DR's Submissions 39.3. Reliance is placed on the assessment order and order passed by DRP Our findings & conclusion: 39.4. The description in the invoice that the vendor raised the bill for flower arrangement is not disputed. Service rendered in the form of flower arrangement or flower decoration is different from mere sale of flowers. Therefore, we do not find much force in the contention of the assessee that the payment in question is for the purchase of flowers and not for carrying out any work. In our considered view, the payment towards flower arrangement does warrant deduction of tax at source u/s 194C. Since, the assessee failed to deduct at 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, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ontract of purchase and contract for job work has been explained in detail. 40.7. Where the vendor supplies the product according to the requirements, specification of a customer, without using material purchased from such customer, the same does not fall within the meaning of 'work contract' specified in section 194C of the Act. Accordingly, in the present case the aforesaid contract cannot be regarded as works contract for the purpose of section 194C of the Act DR's comments 40.8. Reliance is placed on the assessment order and order passed by DRP. Findings of the Tribunal: 40.9. It is an undisputed fact that the payment in question was made seperatly towards purchase of cloth and for stitching charges. If the arguments of the 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 sc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee. Copy of the relevant pages of the PMS agreement are attached at page 1828A to 1830L of the paper book, wherein the amount payable against column of management fees has been stated to be NIL. DR's Submissions: 41.4. Reliance is placed on the assessment order and order passed by DRP. Our findings & conclusion: 41.5. Nature of payment in this case is placed on record by way of agreement at paper book pages 1828A to 1830L. The same is not reproduced for the sake of brevity. 41.6. We have perused the PMS agreement which is at page 1828A to 1830L of the paper book. Perusal of the above clearly demonstrates that the assessing officer wrongly construed the aforesaid payment as one that was made towards management 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rly start claiming deduction only on provision given by postponing the receipt of the actual bill to the latter years because in that scenario, on receipt of the bills and on making actual payment or giving credit to the parties assessee will not bother about deduction of tax as the expenditure in question would have been already allowed to the assessee on provisioning basis. The objection of the assessee accordingly is rejected. An alternate contention has been raised by the counsel that the TDS on aforesaid provisioning to the extent of Rs. 1344 lakhs has been actually deposited by the assessee before the due date of filing of the return of income and as such this amount cannot be disallowed by applying section 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 pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al labour under section 192 of the Act. Section 40(a)(ia) did not cover failure of non- deduction under section 192 and, therefore, the aforesaid amount of provision was not disallowable under the former section. 42.4. As regards, the balance provision of Rs.1344 lacs, the same were created on the basis of reasonable estimate of the liability accrued at the end of the year, wherein the (i) exact amount payable to the vendor was not known and; (ii) in certain situations, the exact vendor was also not known. 42.5. In case of amounts payable to various dealers/stockists under different sales promotion schemes, it may be noted that the relevant dealers entitled to receive the aforesaid incentives (quantified 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and, therefore, for the aforesaid reason as well, the said amount cannot be disallowed under section 40(a)(ia). DR's Submissions 42.10. Reliance is placed on the assessment order and order passed by DRP. Findings of the Tribunal: 42.11. The provision in question was made towards various expenses. An amount of Rs. 42.50 lacs was a provision made for likely payments to casual labour. It is not a provision for contract labour. Hence, we agree with the submission of the assessee that it is not liable to deduct TDS u/s 194C of the Act. The balance payment was estimated liability of amount payable to vendors. We have dealt this issue on payments to vendors while disposing of ground nos. 9 to 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 tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eivable, inter alia, from the assessee. In the said certificate, it was nowhere stipulated that the assessee was to apply the rate as per such certificate only in respect of payment upto a certain limit. On the contrary, the said certificate unequivocally permitted the assessee to withhold tax at the rates prescribed therein on payments to be made to the payee. Accordingly, the allegation that the assessee has failed in not deducting tax at source from the payments made to the recipients in excess of amount stipulated in the certificate is not correct and therefore disallowance on that ground under section 40(a)(ia) of the Act is not called for. The copy of the relevant certificate 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of non-deduction of tax. It is a case where the assessee deduced tax at a rate prescribed in the certificate issued u/s 197. The finding of the revenue is that the payment in question was in excess of the amount specified in the certificate issued u/s 197 for deduction of lower rate of tax. The Hon'ble Calcutta High Court in the case of CIT Vs. S.K. Tekriwal (ITA no. 183 of 2012 has held as follows: "We are of the view that the provisions of section 40(a)(ia) of the Act has two limbs one is where, inter alia, assessee has to deduct tax and the second where after deducting tax, inter alia, the assessee has to pay into Government Account. There is nothing in the said 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , the AO worked out the proportionate amount of Rs. 55.74 lakhs and disallowed the same under section 40(a)(ia) of the Act. The counsels have submitted that the parties to whom the payments were made were non corporate assessee, the assessee deducted tax at source that the correct rate applicable to non corporate assessees. It was further submitted that the payment made to m/s Results services (P) ltd. in respect of the passport scheme of the assessee was not in a lieu of any profession or technical services obtained but was in lieu of contract for carrying out work which falls within the ambit of section 194C of the Act and the AO has wrongly applied 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2,354/- made to a party, viz., Results Services Ltd. in lieu of services obtained for managing the data of customers under passport scheme, where assessee had deducted tax under section 194C, on the ground that the assessee was liable to deduct tax therefrom under section 194J, since the services obtained were technical services. Assessee's Submissions: 44.4. As regards party mentioned at serial No.1 viz., Fort Point Automotive Pvt. Ltd, the said party was a partnership firm in customer master of the assessee, which was subsequently updated in the said master as a private limited company and on account of said bonafide mistake, tax was deduced 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 laun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... loys Company of India Ltd [TS-642-ITAT- 2012(Mum)] - M/s. Saralee Household & Bodycare India Pvt. Ltd. (Mum.) - UE Trade Corpn. (India) Ltd. v. DCIT: 28 taxmann.com 77 (Del.) DR's Submission 44.13. Reliance is placed on the assessment order and order passed by DRP. Finding of the Tribunal: 44.14. This is also a case of deduction of tax at a lower rate, as the assessee was under a bona fide belief that TDS has to be made at a rate applicable to non-corporate assessees. Applying the proposition laid down by Hon'ble Calcutta High Court in the case of CIT Vs. S.K. Tekriwal (ITA no. 183 of 2012), supra, and consistent with 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. Du ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the progressive amount of purchases made by such stockists/dealers from the company. Thus, higher the amount of purchase orders placed by the stockists/dealers, higher is the amount of discounts, to which the dealers are entitled. Cash discount is also offered on timely payments by the dealers/stockists against aforesaid purchases. 45.6. The provisions of section 194H are applicable, where payment by way of commission or brokerage is made for any services rendered by a person in the capacity of an agent. 45.7. In the present case, in the absence of any principal-agent relationship between the company and 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 (K ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in their own right as owners. These are two separate legal relationships. The income tax authorities were not justified or correct in law in mixing up the two distinct relationships or telescoping one into the other to hold that because the concessionaires were selling the milk and the other products from the booths owned by the Diary and were using the equipment and furniture in the coruse of sale of the milk and other products, they were carrying on the business only as agents of the Diary. 45.12. The Hon'ble High Court held that in such circumstances S.194H is not attracted. 45.13. In the 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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g Liner Country Invoice issued by Charge Type Treaty Details with respect to Profits from Shipping business- Clause 8 of relevant DTAA NYK Lines NYK Lines Japan NYK Line(India) Ltd., Mumbai, Ist Floor, Navel House, JN Heridia Marg, Ballard Estate, Mumbai-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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (2) of the Act to the ITO (TDS) and obtain his permission for deducting tax at lesser amount. In the case of GE Technology Centre Pvt. Ltd. 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 i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n terms of the relevant provisions of the DTAA, profits from business of the shipping companies was exempt from tax in India under 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 res ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e gift items to dealers for further distribution to customers. In this connection, the Memorandum of Understanding entered 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... previous year, the assessee made payment of Rs.2.13 crores to FX Enterprise Solutions India Pvt. Ltd. on account 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. Rel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng the depreciation for taxation in A.Y 09-10 appears to circumvent the legal consequences of making 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 am ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the oil companies were required to pay to the assessee, royalty with reference to certain 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 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... consistent, regular and accepted method of accounting, accounted income on 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... becoming member. Further, as submitted earlier, the responsibility 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 estima ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... imbursement o aforesaid expenses is made by the 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 deduc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g, boarding, etc. in decent hotels in 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 exp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re, Rs. 54.61 crores was 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 ..... 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 and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. World Sports Nimbu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 mark or logo save for the Gl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 of the Services of WSN's event manage ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 boards (indicative size:20 feet x 3 feet or 6 meters ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 television production team for the purpose of providing shade to tel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce 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 Global Partner shall not distort, add to, delete from or interfere with any s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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 access such still images relating to the Events and/or to ICC events or matches which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 which includes a bundle of commercial rights that document the imparting of the technical and co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 document the imparting of the technical and commercial knowledge concerning the commercial exploitation o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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 cinematograph films, any patent, trade mark, design or model, plan, secret, formula or process or for information concerning industrial, commercial or scientific experience. 53.6. It is to be appreciated that events like the ICC Wor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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, proceedings under section 201(1) were not pursued by the Department and no order under that section was passed. Thus, after due examination it was accepted by the Department that the payment made to GCC is not in the nature of royalty and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 consideration was recognized for each of the above sets of deliverables. 53.25. In terms of the aforesaid clause of the GP Agreement, the assessee made payment of Rs.220.85 lacs to Nimbus towards cost of pitch logo, signages delivery and implementation, per ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eraton 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 assessee was permitted remittance of the fee earned in India without deduction of tax at source. In the year 1999 ITC hotels was treated as a representative assessee u/s.163 of the Act and notice was issued u/s.142 of the act. As the assessee did not comply with the not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... les 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 amount received by the assessee from the Indian hotels/clients for the services rendered under the relevant agreements was not in the nature of ` royalties` within the meaning given in section 9(1)(vi) read with Explanation 2 thereto of the Income-tax Act, 1961, or as given in ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 carry the Sahara name and/or logo. The AO held that the payment made by the assessee to IMG Canada for the said rights of title sponsorship amounted to a royalty payment under article 13(3) of the said appeal, the Tribunal, however, held that the payment made by the assessee to IMG Ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 the dominant object emerges to be the advertisement in foreign territories. The advertisement revenue has no attribution to India and in the absence of any PE, this revenue cannot be taxed in India. Luthansa Cargo India (P) Ltd. Vs. DyCIT (2005) 92 TTJ (Del) 837, Set Satellite (Singapore)Pt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 the disallowance of provision for advertisement expenses u/s 40(a)(a) is also rejected." Therefore, in conformity with the order of DRP, amount of Rs. 5,893 lacs is added to the income of the assessee.(Addition - Rs. 5,893 lacs) Facts: 54.2. At the year end, the assessee created provision of R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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 is credited. It is also submitted that TDS amount has been paid before the due date of filing of return of income of the relevant year. 54.15. Under these circumstances we set aside the issue to the file of the A.O. for verification as to whether tax has been deducted and paid before due date of filing of the re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 not been able to provide necessary verification is respect of payment to PMC Officers Mess Airforce Station Chandigarh on the lines as directed by the DRP. No relief is hence being given on this point. Therefore after giving effect of Rs. 8,95,243, net addition is now confined to Rs.31 lacs. (Addition - Rs. 31 lacs) Facts ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ness, 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 assessee would be justified in taking a view that no T.D.S. need to be made. The matter requires further investigation into the facts, keeping in view our observations. Thus in the interest of justice, we set aside this issue to the file of the A.O. for fresh adjudication. This ground is allowed for statistical purposes. 56. Ground no. 31.3 (D ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. Ground nos. 34 to 35.6.4: (Disallowance of royalty/ technical guidance fee on the following grounds: a. capital expenditure; (b) applying section 40(a)(ia) for failure to deduct tax at source at rate applicable to business profits.): DRP Directions: 57.1. DRP has adjudicated the issue as under: "DRP has carefully perused the detailed submissions of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... censor 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 LICENSOR's facilities to instruct and as to the application of the Technical Information and or/otherwise, in the manner advice them mentioned in this Article 4.1." Regarding Quality compliance "20.2 .....(1) LICENSOR may from time to time inspect the Products and the Domestic Parts. For such inspection, LICENSEE shall, at the request of LICENSOR, submit to LIC ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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, the assessee paid Rs. 26,709.21 lacs (including cess thereon of Rs. 1271.87 lacs) as royalty, Rs. 138.37 lacs (including cess thereon of Rs. 6.59 lacs) as technical guidance fee, and Rs. 4712.96 lacs as model fee to Honda, which were claimed revenue deduction. The aforesaid payments were made after deducting tax at source @10% being the rate of tax applicable in relation to pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ry 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 services of technicians of Honda was availed for providing technical guidance/assistance, trouble shooting etc., in relation to manufacture of various models of two wheelers at the already existing plant/manufacturing facility. 57.14. The manufacturing activity carried out by the assessee involves assembly of motorcycles. In case, technicians of the foreign enterprise supervise the man ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 production of engines, another technician comes at some other point of time for 80 days to address difficulties being faced in the gear shop and yet another technician comes at a different point of time for 40 days to supervise/ advise on assembly of final product, the time spent by various technicians for various jobs, as aforesaid, are not to be aggregated to determine the period of stay, to apply ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 that services/assistance provided by Honda were incidental to the right for ceding overseas territory and were incidental to exploring foreign territory and were not in the nature of 'fee for technical services' while the AO has held 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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. In light of discussion above, the objection of the applicant on these grounds is thus rejected." [Addition Rs. NIL - To be considered separately in the para hereunder where TPO's disallowances have been discussed]" Facts ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 of those decisions in the cases of Lumax Industries Ltd. (supra), Shriram Pistons & Rings Ltd. (supra), Sharda Motor Industrial Ltd. (supra), J.K.Synthetics Ltd. (supra), Climate systems India Ltd. (supra) and Munjal Showa Ltd. (supra) would also be applicable so as to arrive at the conclusion that the payment of running export commission paid as a percentage of export amount every year cannot be said to be capital expenditure. In view ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 by the DRP to verify the details and agreements .A copy of TPO's report dated 21.02.2012 was given to assessee. The Export agreement was verified during the hearing ,there is no mention about ceding of territories . Further Technical know-how agreement was renewed 2nd June, 2004 and within 19 days export agreement was operationalised. (Agreement dated15.1.2005 is retrospectively effective from 21.6.2004) It is obviously a contrived agreement. A plain reading of relevant articles from the agreement, as extracted below and assessee's submission before DRP will make this apparent. " ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... issions, 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 export commission are the only factors that create pricing differentials between a domestic sale and an export sale. This is incorrect as there are many other factors like differences in freight and transportation charges etc. that will be factored into the cost of exports that will lead to higher realizations. It is due to these reasons that the Tribunals have held that a comparison between an export sale and a domestic sale is not a good comparison for the purpose of benchmarking. The assessee has also pointed out that the products sold by the assessee are different from the products sold by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f 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, which implies that such payments are as per industry norms and are comparable to payment of royalty and technical know-how fee by other industries in the segment. It is respectfully submitted that the central government is expected to grant approval for payment of royalty after taking into consideration the reasonability of such payments and the benefit expected to be derived by the licensee as well as by the industry at large. The aforesaid criteria for evaluation a license agreement would by itself ensure compliance with the arm's length standard. " DRP has noted that the Assessee has relied ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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, therefore, liable to be disallowed, therefore, consisted with finding of the TPO in the preceding year, in the relevant precious year, too. The adjustment in respect of the model fee may kindly be restricted to the extent of 75% as against 100% of the model fee paid. " Model fee is the third transactions benchmarked by the TPO. SIA has approved lump sum payment being model fee for 2 new models of Japanese Yen 900 million in 3 instalments subject to tax. But whether as discussed above, this is at arm's length has to be seen by the TPO. Model fee is being paid but without regard to R&D being out by the assessee. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ember 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, pursuant to which the AE accorded consent to the appellant to export specific models of two wheelers to certain countries on payment of export commission @ 5% of the FOB value of such exports. 59.5. The appellant during the relevant previous year earned additional contribution of Rs.15.61 crores to profit after taking into account the export commission and payment of royalty from exports (refer page 2194-95 of the paper book No. 10). 59.6. The Tribunal, in the appellate order passed for assessment year 2006- 07, deleted similar addition on account of international transactions of payment of export commission (at pages 59 to 61 and paragraphs 65 to 66), holding that export agreement was for the benefit of the appellant and was not detrimental to the interest of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts 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 Tribunal considered these very same T.P. adjustments while disposing of the case of the assessee for A.Y. 2006-07. Paras 65 to 66, paras 88& 89 and 90 & 91 of the Tribunal's cover all the three issues, as reproduced below. 65. In the details filed before the Assessing Officer, the assessee has given model-wise details to show that the sale consideration of the export of each model was more than the domestic rate and even after considering the export commission, it was more than the domestic rate. The TPO has also held that under the export agreement, the assessee has agreed to various conditions which are detrimental to the assessee and, therefore, the assessee is not required to pay any export commission. The first point mentioned by the Assessing Officer to arrive at this conclusion is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing 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 to any of the countries. However, even by export of specified models to the specified countries, the assessee has benefited and the assessee has given the detailed working of such benefit which is also enclosed as Annexure-1 to this order. As per this working, the assessee derived the benefit of Rs. 13.05 crores by the export. The export sale rate was more than the domestic sale rate even after considering the export commission. In view of the above, we are unable to uphold the disallowance of commission by the Assessing Officer by way of transfer pricing adjustment. 88. In our opinion, the ratio of the above decision would be applicable to the facts of the assessee's case because in this case also, there is no dispute about the genuineness of the payment, namely, that the payment wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... de 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 model development. The activity of the assessee of the market research and market study was for ascertaining the specifications of the model/technology required by it. Therefore, it was prior to the actual research and development undertaken by HMCL. The next activity of the assessee started only after the model is developed by HMCL and technology is handed over to the assessee. Then the assessee undertook the research and development activity for absorption of such technology and for indigenization of the spare parts. Thus, the activity of research and development of the model was undertaken by HMCL and not jointly by the assessee and HMCL. No other reason is given by the TPO for determining the arm's length price at 25% of the model fee paid by the assessee. He has not applied any method fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AEs is that of a Contract Manufacturer. The assessee company is purchasing raw material from the AEs. The royalty paid as a percentage of sales to the associated enterprise is not at arm's length because it amounts to collecting royalty on the sales to itself. All the AEs are typically within the broad umbrella of the multinational corporation. Even though, it appears that the technical knowhow is commercially exploited in India, in realty the price for these activities are not fixed by market forces. Whether the sales of the assessee are made within India to its AE or to the parent company does not make much difference to the principles of arm's length transactions. In this case the capacity and other parameters are tied to the AE capacity and it cannot act like an entrepreneur. Therefore, both the risk and rewardare like a contract manufacturer. No contract manufacturer would like to make this kind of transactions with an independent third party." We respectfully follow the decision of coordinate Bench of the Tribunal. 59.16. The submission of the ld. DR that the Tribunal has not considered the agreement while disposing of the mater in the previous year is devoid of merit. Ld. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the assessee during the current previous year only. It was further submitted that the balance amount of 90000 was on account of claim recorded against provisions of Rs. 3.38 crores under the festival offer scheme which arose on account marginal variance qua the amount of liability towards sales discount to be given to the dealer estimated by the assessee at the end of the last year. It was submitted that the excess amount recorded in the succeeding year is because of the difficulty in estimating exact liability in previous year. Considering the fact that the excess expenditure has been provided on finalization of the accounts and on account of addition of scheme of discount which got finalized this year. No disallowance on this account is required to be made as the expenditure has crystallized this year. The AO, however may verify the submission of the assessee regarding incorrect figure of Rs. 643.05 lakhs adopted by the assessee." From the directions of DRP as reproduced above it is seen that only amount of Rs.26.86 lacs has adequately been explained by the assessee company. DRP has accordingly directed the AO not to make this addition. However assessee has contested the figu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as estimated by the assessee as at the end of the last year. It is submitted that the difficulty in estimation of the exact liability cannot qualify the excess amount recorded in the succeeding year as prior period expenditure. 61.7. Without prejudice, since the aforesaid adjustment is revenue neutral, if seen in a macro perspective, no adjustment is called for. 61.8. Further without prejudice, it may be pointed out that the assessee had filed additional ground of appeal for allowance of said expenditure in appeal for AY 2006-07, which has been admitted by the Hon'ble Tribunal. No decision was rendered thereon in the final order, for which M.A. has been filed, which is pending disposal. DR's Submissions 61.9. Reliance is placed on the assessment order and order passed by DRP. Our findings & conclusion 61.10. The issue herein is year of deductibility. Additional ground of appeal was filed for A.Y. 2006-07 before the Tribunal and this additional ground was not disposed of. Misc. application is pending. The assessee's contention is that the correct amount is Rs.23.86 lakhs and not Rs.643.05 lakhs as mentioned by the A.O. Details are given in the paper book we find that the D.R. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt regarding fulfilment of the conditions/ targets by dealers/ stockist under the sales promotion scheme, in respect of purchases made until the year ending 31.03.2007. It has been further stated that the variance between the actual expense and the provision was not material and hence the provision made cannot be said to be unreasonable or excessive, far removed from reality. 43.3 Reliance in this regard, has been placed by the assessee on the judgment of Hon'ble Supreme Court in the case of Bharat Earthmovers v. CIT (245 ITR 248), wherein it was held that difficulty in estimation of an accrued liability cannot convert such ascertained liability into a contingent one. 43.4 The assessee has further submitted that any short/ excess provision is recognized as income/ expense in the books of accounts of the succeeding year and that the method of provisioning for expenses under the sales promotion schemes is as per the consistent/ regular method of accounting followed by the assessee, which has been accepted by the revenue in the earlier years. 43.5 In the above context, attention is drawn to the fact that the assessee is in practice of finalising the accounts and preparation of Bala ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee that such accounting treatment has been accepted by the Revenue since past many years and the same cannot be rejected subsequently if the same has been accepted in the past in view of various case laws cited by the assessee. By stating that the assessee tries to justify the mistake committed by the assessee in earlier years. There is no two opinion on the facts that the value of closing inventory must include the freight and import clearing charges. The Assessee has accepted the same but has justified it as it was not earlier pointed out by the Department. Hon'ble Supreme Court in its decision in the case of 41 ITR 191 Court has clearly stated that mere production of evidences before the Income-tax officer was not enough, that there may be omission or failure to make a true and full disclosure, if some material for the assessment lay embedded in the evidence which the revenue could have uncovered but did not, then it is the duty of the assessee to bring it to the notice of the assessing authority. It is the duty of the assessee to point out all the relevant material and facts which might be hidden and embedded in the books of accounts. It has also been pointed out that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ious year. 62.7. Merely because the estimated liability was more than the amount actually incurred, would not mean that the differential amount is an unascertained liability. 62.8. That apart, the aforesaid exercise being revenue neutral inasmuch as the excess provision has already been offered to tax in the succeeding year, the disallowance was not warranted. 62.9. Further without prejudice, the DRP had erroneously issued two directions qua the impugned issue, one in favour of assessee and the other against the assessee. The AO should have followed the directions favorable to assessee DR's Submissions: 62.10. Reliance is placed on the assessment order and order passed by DRP. Our findings & conclusion: 62.11. This is also an issue relating to provision. Year of allowability is to be determined. Thre are timing issues. The assessee estimated an amount of discount/ incentive payable to the dealers and made a provision at the end of the year. Out of the aggregate provision of Rs. 18.59 crores the actual payment came to Rs. 16.19 crores resulting in variation of Rs. 2.39 crores. The assessee wrote back the amount in the subsequent assessment year. The assessee as a going concer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsport services and the physical possession of the aircraft always remain with the carrier and was flown by the carrier itself and they assessee was only utilized in the transport serviced provided by the carrier. The objection of the assessee is not acceptable. It is seen that the assessee has already deducted tax u/s 194C of the I. T. Act. As such even the assessee was aware that TDS was to be deducted but it has deducted under the wrong provisions which amounts to not deducting the TDS under the applicable provisions. As per the agreement of charter the assessee was entitled to use the aircraft for transport in consideration for payment of fixed cost of aircraft incurred by the assessee and the agreed rate per hour for the use of number of hours of the aircraft. Under a normal agreement of taking the aircraft for further matter for any vehicle on a casual higher the person using the vehicle or aircraft will not be sharing the cost of the aircraft. Since is assessee sharing the fixed cost of the aircraft, the stand of the AO is that the aircraft is taken on rent has to be upheld. Aircraft like any other vehicle will fall in the definition of machinery, plant or equipment. As such ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... I of the Act, provisions of section 40(a)(ia) cannot be invoked to disallow deduction claimed by the assessee. DR comments 63.9. Reliance is placed on the assessment order and order passed by DRP. Our findings & conclusion: 63.10. This is again an issue of disallowance u/s 40(a)(ia) for the reason that the assessee has short deducted tax at source. While disposing of ground no. 34 to 35.6.4 we have followed the judgment of Hon'ble Calcutta High Court in the case of CIT Vs. S.K. Tekriwal (ITA no. 183 of 2012) holding that no disallowance can be made u/s 40(a)(ia) under such circumstances. This is not a case of non deduction of tax at source. It is a case of deduction of tax at source at a different rate. Consistent with the view taken therein we allow this ground of the assessee. 64. Ground no. 41: (Addition on account of outstanding liability DRP Directions 64.1. The DRP has issued following directions to the Assessing Officer: "Till early 1990s, the assessee used to receive advance of Rs. 500 per motorcycle from prospective customers against booking of motorcycle to be sold in future depending upon availability, since demand outstripped supply. The aforesaid amount along wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... if there is any claim of interest made by the assessee in respect of the booking amount of Rs. 13.30 crores shown as liability in the assessee's account." Assessee has not submitted any further evidence with regard to accounting of interest on liabilities which as per the draft order have been treated to have ceased. No further interference can therefore be made. Therefore, in conformity with the order of DRP, amount of Rs. 1,330.30 lacs is added to the income of the assessee. (Addition - Rs. 1,330.30 lacs) Facts: 64.2. 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. 64.3. 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. 64.4. The Assessing Officer made addition of aforesaid amount to income of the assessee under section 28(iv) of the Act. Assessee's Submissi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment order needs to be upheld and the ground of appeal raised by the assessee calls for being dismissed. Rejoinder to DR comments 64.14. As regards the contention of the DR that the assessee has not produced any evidence to establish that the liability in respect of amount outstanding in books of accounts from past 15-20 years is still alive, our attention is invited to the summary of the movement in the aforesaid outstanding liability in the past three years, which was submitted before the assessing officer. The same shows that the assessee had in the recent past made payments against the claims raised by the assessee company and establishes that the aforesaid liability is still outstanding. The assessee acknowledges its liability and is under obligation to refund the amounts as and when the claims are raised by the customers. The liability has not been written back in the books of account. There is thus no remission or cessation of the liability. 64.15. In that view of the matter, the contention raised by the Ld. DR needs to be rejected and the ground of appeal of the assessee calls for being allowed Our findings & conclusion:- 64.16. Addition in this case is made under sec. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mbay High Court has interpreted this very clause in the case of Mahindra and Mahidnra Ltd. Vs. CIT(2003) 261 ITR 501 in the following manner(page 509): "The income which can be taxed under section 28(iv) must not only be referable to a benefit or perquisite, but it must be arising from business. Secondly, section 28(iv) does not apply to benefits in cash or money (see 1981(130 ITR 168(Guj.). 64.17. By applying the above binding propositions laid down by the Jurisdictional High Court, we do not find any merit in the action of the assessing officer in considering the deposit amount as income of the assessee u/s 28(iv) of the Act. Hence the same is deleted. This ground of appeal is allowed. 65. Ground no. 42: (Gains from sale of investments income treated as business income): DRP Directions 65.1. The DRP has issued following directions to the Assessing Officer; "In the course of business, the assessee had invested surplus funds generated from business under various schemes of mutual funds, Portfolio Management Scheme (PMS), shares, derivates, etc. During the relevant previous year, the assessee realized net gains of Rs. 139.80 crores from sale of such various investments which w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ection 45 of the Act. 65.5. The nature of asset, whether stock-in-trade or capital asset depends upon the dominant intention with which investment is made. If the intention behind holding an asset is to deal in it, the same qualifies as stock-in-trade and if the asset is held with an intent not to deal therein but to reap benefit from holding the same, by way of capital appreciation, deriving of rental/royalty/dividend income, etc. therefrom, the same would qualify as capital asset. 65.6. Simply because investment is made with a view to capital appreciation or earning optimum return on such investment, the same does not automatically become business asset or stock-in-trade, to characterize the income earned therefrom as business income. 65.7. The assessee made various investments as part of prudent cash/fund management, with a view to optimally utilize spare funds and, could not, therefore, be said to be engaged in business of sale-purchase of various investments, giving rise to income taxable under the head "business". The assessee could not be said to be a dealer in various kinds of investment. 65.8. The investment in shares/mutual funds have been regularly shown under the he ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and hence giving rise to long term capital gains under the Act. 65.13. That apart, the Calcutta Bench of the Tribunal in the case of ITO vs Neeraj Vanijya (P) Ltd.: LexDoc Id: 407109 held that gains on mutual funds cannot be treated as business income. 65.14. In so far as the investment in shares is concerned, it is to be appreciated that the same 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 is similar to investment in mutual funds. The assessee, it is reiterated, 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. 65.15. Attention in this regard is invited to recent decision of Mumbai Bench of Tribunal in the case of ITO vs. Radha Birju Patel: 5382/Mum./2009, wherein it has been held that investments made in various shares through PMS scheme, with a view to earn optimum return on investment / wealth creation/maximization cannot be treated as income taxable under the head" business income". 65.16. To the same ef ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... subsequently. (c) The third test, which is frequently applied, is as to how the assessee dealt with the subject-matter of transaction during the time the asset was with the assessee. Has it been treated as stock-in-trade, or has it been shown in the books of account and balance sheet as an investment. This inquiry, though relevant, is not conclusive. (d) The fourth test is as to how the assessee himself has returned the income from such activities and how the Department has dealt with the same in the course of preceding and succeeding assessments. This factor, though not conclusive, can afford good and cogent evidence to judge the nature of transaction and would be a relevant circumstance to be considered in the absence of any satisfactory explanation. (e) The fifth test, normally applied in cases of partnership firms and companies, is whether the deed of partnership or the memorandum of association, as the case may be, authorises such an activity. (f) The last but not the least, rather the most important test, is as to the volume, frequency, continuity and regularity of transactions of purchase and sale of the goods concerned. In a case where there is repetition and continuity ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that particular item? If purchase and sale are frequent, or there are substantial transactions in that item, it would indicate trade. Habitual dealing in that particular item is indicative of intention of trade. Similarly, ratio between the purchase and sale and the holdings may show whether the assessee is trading or investing (high transaction and low holdings indicate trade whereas low transaction and high holdings indicate investment). 4. Whether purchase and sale is for realizing profit or purchases are made for retention and appreciation in its value? Former will indicate intention of trade and later, an investment. In the case of shares whether intention was to enjoy dividend and not merely earn profit on sale and purchase of shares. A commercial motive is an essential ingredient of trade. 5. How the value of the items has been taken in the balance sheet? If the items in question are valued at cost, it would indicate that they are investments or where they are valued at cost or market value or net realizable value (Whichever is less), it will indicate that items in question are treated as stock-in-trade. 6. How the company (assessee) is authorized in memorandum of associa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gh Court in the case of CIT vs. Consolidated Finvest and Holding Ltd. [2011] 337 ITR 264 held that where the assesse had acquired the shares in public issue and had in fact, shown them in the books of accounts as investment and were booked under the head "non-trade" and not trading investment . The intention to acquire those shares as investment could be reflected from the fact that it was holding most of the shares of other companies since long period of time and was not entering into frequent business of sale and purcahses of shares. From the facts, the Commissioner (Appeals) and the Tribunal arrived at a finding of fact that the acquisition of such shares in public issue with the intent of holding them for a long period of time to achieve long-term appreciation and the mere fact that the shares were sold in a short span of time of its acquisition due to steep and unanticipated rise in stock market did not mean that the intention of the assessee at the time of purchase of shares was not to hold them for a long period of time or to deal in them.. The profit arisen from sale of shares during the relevant previous year was to be treated under the head 'Capital gains' and not 'profit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ut of borrowed funds 65.34. The investments were made from surplus funds of the assessee and there were no borrowings. The investments were made to optimally utilize the spare funds instead of keeping the same idle in the bank accounts. The investments were made in mutual funds (debt and liquid funds) and through portfolio management schemes/ IPOs. 65.35 The co-ordinate bench of the Delhi ITAT in the case of Narendra Gehlaut vs. JCIT [ITA No 1648/ Del/ 2010] held that despite borrowing, gains on shares assessable as Short term capital gains and not business profits. The decision is rendered considering the CBDT Circular No 4/ 2007 and various judicial precedents on the subject. Frequency of the transactions 65.36. Out of the total sale value of Rs 13,690.84 crores realized from the investments, an amount of Rs 12,330.33 crores relates to sale of short term debt mutual funds and liquid funds in which the transactions are effected on daily basis (i.e. surplus amounts are invested and the withdrawals are made in a short span depending on the business needs of the assessee). These funds were invested mainly into money market instruments, short-term corporate deposits and treasury. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed following directions to the Assessing Officer; "The assessee has a policy of providing reimbursement of medical expenses and leave travel allowance to the employees. The employees have an option to either avail of the aforesaid benefit or encash it during the relevant year or to carry forward the leave for claim in the succeeding year. The assessee was earlier claiming the aforesaid expenditure in the year of actual claim by the assessee. During the current previous year however, the assessee changed its method of accounting from cash to mercantile basis for accounting the medical expenses/leave travel allowance and pursuant to this change in the method of accounting made a provision of Rs. 4.21 crores in the books of accounts and claimed the same as deduction. The AO has disallowed the assessee's claim by holding that the provision made for aforesaid liability is not an ascertained/crystallized liability during the year. The counsel argued that the claim of the assessee has been made for the liability towards accumulated medical reimbursement /leave travel allowance claims which have accrued up to the end of the previous year and is not an unascertained liability. The object ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ursuant to AS-15 becoming mandatory, w.e.f. 1-4-2006. 66.7. Reliance in this regard is placed on the following decisions, wherein it has been held that bonafide change in the method of accounting which is consistently followed thereafter, calls for being accepted: - Indo Commercial Bank Ltd vs. ITO: 44 ITR 22 (Mad.) - Forest Industries Travancore Ltd. vs. CIT: 51 ITR 329 (Ker.) - CIT vs. Corborandum Universal Ltd: 149 ITR 759(Mad.) - CIT vs. Dolaguri Tea Co (P) Ltd: 76 Taxman 257(Cal.) - CIT vs. Kesoram Industries and Cotton Mills Limited: 204 ITR 154 (Cal.) 66.8. In view of the above, provision for such liability is clearly allowable deduction, since the same pertained to liability(ies) accrued until the end of the relevant year and was provided on account of compliance of mandatory Accounting Standard. 66.9. Reliance, in this regard, is further placed on the following decisions, wherein it has been held that where there is a bonafide change in the method of accounting, claim on the basis of the changed method would be allowable deduction in the year of change, more so since the liability in regard thereto has not been claimed as deduction in the earlier years. - CIT v. W ..... X X X X Extracts X X X X X X X X Extracts X X X X
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