TMI Blog2015 (9) TMI 20X X X X Extracts X X X X X X X X Extracts X X X X ..... after a debit to the Profit and loss account, the amount appears in balance sheet, in one form or the other, the deduction cannot be said to have been actually allowed on payment, till it is exhausted and gets removed from the balance sheet also. In such circumstances, the amount of unexhausted (not necessarily only unutilized) Modvat credit – i.e. which appears in balance sheet either in the form of increased value of closing stock (Rs.2 in our example) and increased value of raw material representing unutilized Modvat credit (Re.1 in our example) - calls for separate deduction in terms of section 43B. We, therefore, set aside the impugned order and direct the AO to first recast the assessee's Profit and loss account on inclusive basis, then allow deduction for the equivalent amount of Modvat credit as represented by ₹ 3 in our example. The AO should also make sure that the equivalent of ₹ 3 allowed as deduction on payment basis u/s 43B in this year should not get deducted in the next year and further, the corresponding amount of deduction allowed u/s 43B in the preceding year, should also be separately added to the income of the current year. Disallowance u/s 43B ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eduction separately allowed should be taxed in the computation of income of the current year. Customs duty paid under protest - Held that:- As discussed similar issue supra while dealing with 'Excise duty paid under protest' by holding that first the Profit and loss account be recast as per 'Inclusive method' in terms of section 145A and then some adjustments as stated above be separately made. Such directions are fully applicable pro tanto to the customs duty paid under protest. The AO is directed to follow the same. Disallowance u/s 43B is customs duty included in closing stock - Held that:- As elaborately discussed this aspect supra in the context of excise duty included in the value of closing stock. In principle, we hold that the amount of customs duty of ₹ 22.52 crore is allowable in the year in question, but, the AO is directed to first verify the argument of following the 'Inclusive method' and then allow deduction u/s 43B in the manner discussed above, if the same did not get eventually allowed. The AO should further make it is sure that no double deduction is allowed on this score, either in the current year with the last year's amount getting separately deduc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ional transactions, then the entire exercise of determining ALP fails. Instantly, we are confronted with such a peculiar situation. There is no separate value of the international transaction of royalty for use of licensed trademark and the tribunal has held in the earlier year that it is a payment of inseparable royalty for use of both the licensed information and the licensed trademarks. In such circumstances and respectfully following the order of the tribunal for the immediately preceding year, we order for the deletion of the addition of ₹ 127.195 crore on account of transfer pricing adjustment of royalty for use of licensed trademark. Royalty for Licensed information whether capital expenditure? - Held that:- Our finding decides the nature of royalty payment for use of licensed information as revenue expenditure and not its quantum part. We have noticed above that the tribunal in its order for the immediately preceding year has also given some observations, which prima facie indicate that the entire amount of royalty is for the use of licensed information. Since we have held the royalty for use of licensed information as revenue expenditure, the quantification aspect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ould be given only in respect of vehicles rolled out of production capacity of 70000 vehicles added as a result of first expansion and not to the production augmented by capacity addition of 30000 vehicles as a result of second expansion.' When we consider section 25A along with Rule 28C of Haryana General Sales-tax Act/Rules, it becomes evident that the object of subsidy is in line with the Industrial Policy of Haryana Government, being 'attracting new investments and growth of existing industry.' In our considered opinion, such subsidy cannot be characterized as anything other than a capital receipt. It has been brought to our notice that the Tribunal, for the immediately preceding assessment year, has also treated similar subsidy as capital receipt. T.P. Adjustment of AMP Expenses - Held that:- Presently, we have the benefit of the judgment of the Hon'ble Delhi High Court in Sony Ericsson (2015 (3) TMI 580 - DELHI HIGH COURT ), which has also dealt with the treatment to be given in the context of a manufacturer.No reasons, except the pendency of the matter in the Hon'ble High Court in assessee's own case, have been given by the ld. AR to claim departure from the view taken ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t is observed that similar issue came up for consideration before the Tribunal in its order for the AY 2004-05. After making a thorough discussion on the issue, the Tribunal has held that Rule 2BA is relevant only for the purpose of availing exemption u/s 10 by employees and not for the purpose of allowing deduction to the employer u/s 35DDA of the Act. Resultantly, the disallowance made by the AO came to be knocked down by the tribunal. In the absence of any distinguishing factor having been pointed out by the ld. DR, respectfully following the precedent, we direct to allow deduction u/s 35DDA Disallowance of club membership fee - Held that:- In our considered opinion, this issue is no more res integra in view of the judgment of the Hon'ble Supreme Court in CIT vs. United Glass Manufacturing Company Ltd. [2012 (9) TMI 914 - SUPREME COURT] in which it has been held that no disallowance can be made for club membership in respect of the employees of the company. Similar view has been taken by the Tribunal in the assessee's own case for the earlier assessment years including the immediately preceding year. Respectfully, following the above precedents, we order for the deletion of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deals with disallowances made u/s 43B in respect of certain items of excise duty and customs duty. I. Excise duty 4.1. Firstly, we shall deal with all the items of excise duty disallowances. The first amount of disallowance of excise duty is ₹ 30,75,821/-, being, the amount of excise duty paid on vehicles and spare parts under PLA (Personal Ledger Account). The assessee paid certain sum under PLA which is nothing, but, excise duty paid inaccount as advance, to be adjusted against actual excise duty required to be paid at the time of removal of goods from bonded warehouse. At the end of the year, there were three balances in PLA, consisting of ₹ 2,32,113/- towards excise duty on vehicles, ₹ 7,29,595/- towards R D cess on vehicles and ₹ 21,14,113/- towards excise duty on spare parts. The assessee claimed deduction for these amounts u/s 43B on the ground that these stood paid before the close of the financial year relevant to the assessment year under consideration. The AO, following his view taken in earlier years, refused to allow this deduction. The assessee is aggrieved against such disallowance. It has been admitted on behalf of the Revenue that simi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , duty, cess or fee, by whatever name called, under any law for the time being in force, or (b) to (f) .. shall be allowed (irrespective of the previous year in which the liability to pay such sum was incurred by the assessee according to the method of accounting regularly employed by him) only in computing the income referred to in section 28 of that previous year in which such sum is actually paid by him : ...'. 4.5. A perusal of the relevant parts of the above provision transpires that it has the following essential elements in so far as the deduction on account of excise duty is concerned : - i. Deduction is permissible in respect any sum payable under any law for the time being in force by the assessee by way of tax, duty, cess or fee, etc. ii. Deduction of tax or duty etc. is to be allowed only in computing the business income of that previous year in which such sum is actually paid by the assessee. iii. Deduction is permissible in the year of payment irrespective of the incurring of liability in any previous year as per the method of accounting regularly employed by the assessee. iv. Deduction is allowable 'only' once and that too in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iability without payment. Thus, it is clear that if excise duty is paid in the year of incurring liability itself, then deduction is allowed in such year. If, some part of the excise duty for which liability has been incurred is not paid for one reason or the other before the close of the year etc., then the paid part gets deduction in the year of incurring of the liability but the unpaid part becomes eligible for deduction in the later coinciding with the actual payment. Whereas, in the first instance, full deduction is allowable in year one itself, in the second instance, part of the amount not allowed in the first year becomes eligible for deduction in the second year at the time of payment. There can be a converse situation as well in which excise duty is paid in advance, though a specific liability is incurred later. A manufacturer is sometimes obliged to deposit excise duty in advance without availing its actual utilization. In such circumstances, the obligation to pay such amount under the respective excise rules will bring the case within the otherwise deductibility provision and the event of actual payment will grant deduction in the year of payment notwithstanding the fac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erstood with the help of an illustration. Suppose an assessee pays a sum of ₹ 10/- in PLA out of which a sum of ₹ 9/- is adjusted during the year against the excise duty payable on the removal of goods from bonded warehouse. Further suppose that goods corresponding to the excise duty of ₹ 7 are sold during the year and goods corresponding to the excise duty of ₹ 2 are still in stock. In such a situation, when the assessee originally pays ₹ 10/-, he will debit PLA and credit bank account with ₹ 10/-. During the course of the year when excise duty of ₹ 9/- is adjusted against the advance paid under PLA, Excise duty account will be debited and PLA credited with a sum of ₹ 9/-. Amount of excise duty of ₹ 9 debited in the books of account will ultimately find its place in the Profit and Loss account and become eligible for deduction, on which there is no dispute. The assessee on sale of goods with corresponding excise duty of ₹ 7, out of total utilized to the tune of ₹ 9, will show income of ₹ 7 as part of sales. In this way, the assessee gets deduction for ₹ 9 and shows income of ₹ 7 towards excise duty ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion of this aspect of the matter, if needed. 4.9. It is further noticed that a Special Bench of the Tribunal in the case of DCIT vs. Glaxo Smithkline Consumer Healthcare Ltd., (2007) 107 ITD 343 (SB) (Chd.), has held that the excess amount of excise duty reflected in the account-current is nothing but actual payment of excise duty even though mentioned as advance payment and, hence, allowable as deduction u/s 43B of the Act in the year of payment. The Special bench further clarified that the allowing of deduction on payment basis should not result in double deduction under any circumstance. The tribunal in assessee's own case has also allowed deduction in the earlier years on account of unutilized PLA at the end of the year. In view of the above discussion, while we hold that the above referred sum of unutilized amount in PLA at the end of the year u/s 43B under 'Exclusive method' qualifies for deduction, we also hold that this amount cannot be allowed deduction once again in the immediately succeeding year and also the similar amount allowed as deduction in the preceding year u/s 43B requires to be included in the computation of income of the current year. 4.10. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... duty etc. As the assessment year under consideration is governed by section 145A, the assessee was under statutory obligation to cast its Profit and loss account on 'Inclusive method', which it has not done. Under such circumstances, we cannot approve the 'Exclusive method' followed by the assessee. It goes without saying that there can be no estoppel against the statute. We, therefore, direct the AO to recast Profit and loss account on the basis of 'Inclusive method'. This would require adopting the figures of purchase, sale and opening as well closing inventories as inclusive of tax or duty etc. 4.12. We have noted above that section 145A starts with a nonobstante clause qua section 145 of the Act and section 43B starts with a non-obstante clause qua 'any other provision of this Act'. The effect of the non-obstante clause in section 145A is that even if the exclusive method of valuing purchase, sale, opening and closing stocks may be generally available, but the assessee will have to compute its 'Business income' by casting its Profit and loss account as per the 'inclusive method', meaning thereby, that the value of purchase, sal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ise law, a manufacturer is entitled to claim Modvat credit of the amount of excise duty paid by him on raw materials and inputs purchased for consumption in the manufacture of excisable goods. The amount of duty paid to the supplier of raw material is considered as the amount of central excise duty actually paid by the assessee. Thus, a manufacturer of final product under Modvat/Cenvat Scheme is allowed to get adjustment of excise duty paid by him on any inputs received in the factory to be used in the manufacture of final product. In the year under consideration, the assessee purchased excise duty paid raw material and other inputs and as per the excise rules became entitled to Modvat credit of the excise duty paid on raw material eligible for set off against liability of excise duty on the finished goods at the time of removal of goods from bonded warehouse. 4.15. We have noticed above that the assessee is also following 'Exclusive method'. Under the 'Exclusive method', the total amount of excise duty paid by the assessee on purchase of inputs does not get added to their purchase price, but appears as an asset with the nomenclature of Modvat credit. When goods ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is court also notices that the Supreme Court has upheld the view which allows assesses to claim credits, such as Modvat, etc, falling within the description of liability paid, to escape the mischief of Section 43-B.' In view of this later development of law, the earlier contrary view taken by the Special Bench in Glaxo (supra) on the question of unutilized Modvat credit now needs to be properly aligned with the ratio decidendi of the judgment in Shri Ram Honda (supra). 4.17. Armed with the above legal position, now the remaining amount of Re.1 in our above example under the 'Exclusive method', which is unutilized Modvat credit in the balance sheet at the end of the year, needs to be treated at 'excise duty paid'. Since this amount is considered as excise duty paid, the same has to be allowed as deduction during the year of payment as per section 43B. Caveat remains that deduction for a sum of Re.1 in the current year, being the Modvat credit unutilized at the end of the year under the exclusive method, also requires enhancement of income of the succeeding year to this extent. In the like manner, the corresponding amount allowed as deduction u/s 43B in the pre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mes imperative to give effect to the provisions of section 145A of the Act, which are applicable to the year under consideration and are binding without any exception. 4.20. Now we come to giving effect to sections 145A and 43B under the 'Inclusive method'. In line with our discussion made above while dealing with PLA component of excise duty, we direct the AO to first recast Profit and loss account of the assessee by taking the figures of purchase, sale and opening and closing stocks at the value inclusive of tax or duty etc., so as to give effect to the mandate of section 145A. Once this is done, then it will be the turn of giving effect to the mandate of section 43B, which requires the granting of deduction of tax or duty etc. on payment basis. This can be done by allowing deduction for that part of the Modvat credit separately u/s 43B of the Act, which has not been finally deducted. 4.21. We have understood Modvat credit in three parts in the example given above while discussing it under the exclusive method, viz., ₹ 7 which is utilized Modvat and finished goods sold; ₹ 2 which is utilized Modvat but finished goods in stock at the end of the year; and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Deduction for Modvat credit by means of its inclusion in Purchase value of raw materials can be treated as allowed by way of debit to the Profit and loss account only when it also gets exhausted. If, even after a debit to the Profit and loss account, the amount appears in balance sheet, in one form or the other, the deduction cannot be said to have been actually allowed on payment, till it is exhausted and gets removed from the balance sheet also. In such circumstances, the amount of unexhausted (not necessarily only unutilized) Modvat credit i.e. which appears in balance sheet either in the form of increased value of closing stock (Rs.2 in our example) and increased value of raw material representing unutilized Modvat credit (Re.1 in our example) - calls for separate deduction in terms of section 43B. We, therefore, set aside the impugned order and direct the AO to first recast the assessee's Profit and loss account on inclusive basis, then allow deduction for the equivalent amount of Modvat credit as represented by ₹ 3 in our example. The AO should also make sure that the equivalent of ₹ 3 allowed as deduction on payment basis u/s 43B in this year should not g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er consideration and accordingly, income is required to be determined by switching over to the 'Inclusive method' and then allowing deduction u/s 43B on payment basis. We, therefore, set aside the impugned order and direct the AO to first recast the assessee's Profit and loss account on inclusive basis, inter alia, by including the amount of excise duty paid under protest to the purchase value of goods. If such goods have been consumed during the year and corresponding finished goods manufactured and sold, the matter will end there as it will amount to grant of deduction. If however, the finished goods so manufactured with the use of such protested excise duty paid raw material are in closing stock or in the shape of raw material only, then apart from enhancing the value of purchase and finished goods or raw materials, as the case may be, the assessee will be entitled to separate deduction of this amount u/s 43B. This will be done again with the same rider that in the year of settlement of dispute, this amount of separate deduction allowed in the current year, should be separately offered for taxation and further the corresponding amount of duty paid under protest in ea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ished products amounting to ₹ 15,59,44,832/-. Simultaneous with this, there is another item of ₹ 5,40,40,258/-, which is the amount of customs duties on goods in transit/under inspection. The assessee claimed deduction for the above amounts u/s 43B of the Act, which the AO denied. 5.4. We have heard the rival submissions and perused the relevant material on record. The ld. AR contended that this issue has been decided in earlier years in the assessee's favour by the Tribunal. He further referred to the judgment of the Hon'ble Delhi High Court in CIT vs. Samtel Colour Ltd. (2009) 184 Taxman 120 (Del) in which it has been held that advance customs duty paid in the year in question is an admissible deduction u/s 43B. In our considered opinion, there can be no dispute on the otherwise availability of deduction of advance customs duty paid by the assessee, which has to be allowed in the year of payment. In this judgment also, the Hon'ble High Court has noticed vide para 3 that the provisions of section 145A were not applicable as the assessment year under consideration was 1995-96. In view of the detailed discussion supra with reference to the applicability of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e AO is directed to first verify the argument of following the 'Inclusive method' and then allow deduction u/s 43B in the manner discussed above, if the same did not get eventually allowed. The AO should further make it is sure that no double deduction is allowed on this score, either in the current year with the last year's amount getting separately deducted u/s 43B or in the next year with the current year's amount getting separate deduction. III. Adjustments on account of last year's disallowances u/s 43B. 6.1. Now we take up ground no. 3.5 along with ground nos. 4 to 6.1. The amount in dispute as per ground no. 3.5 is ₹ 71,63,89,449 representing the amount of last year's unutilized Modvat credit which was claimed by the assessee as deductible u/s 43B, but disallowed by the AO and such disallowance came to be affirmed by the tribunal. While allowing deduction for the current year's unutilized Modvat credit at the end of the year amounting to ₹ 48,53,55,419, we have noticed that the position of law has undergone change and now this amount is deductible for the year in question. The assessee contends that a sum of ₹ 71,63,89,449 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7; 69.96 crore (Rs.141.59 crore minus ₹ 71.63 crore), allegedly finally disallowed u/s 43B of the Act by the tribunal in the preceding year. It is simple and plain that if the tribunal has allowed deduction for the amounts disallowed by the AO in the preceding year, then the same are rightly chargeable to tax in the current year. This ground is, therefore, dismissed, subject to our decision on ground no. 3.5 in granting deduction of ₹ 71,63,89,449, representing last year's unutilized Modvat credit which was claimed by the assessee as deductible u/s 43B but disallowed by the AO and also the tribunal. B. ROYALTY I. Transfer pricing adjustment of Royalty for licensed trademark 7.1. The assessee has challenged the addition of ₹ 1,27,19,59,816/- made by the AO on account of transfer pricing adjustment. 7.2. Briefly stated, the facts of this ground are that the assessee chose Suzuki Motor Corporation, Japan (SMC) as its partner in 1982 with SMC acquiring 26% equity stake in the company Maruti Udyog Ltd. (MUL). In 1992, SMC increased its share to 50%. SMC held 54.2% in the company in the previous year relevant to the assessment year under consideration. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which is an indivisible contract and the same does not specifically spell out consideration for the use of technical knowhow and consideration for the use of trademark of SMC. The TPO considered licence agreement dated 9.1.2001 between the assessee and SMC. After reproducing relevant clauses from this Agreement, he held that the assessee paid royalty to SMC towards licence for manufacture, sale and after-sales services. He further noticed that clauses 3.02 and 3.03 of the Agreement stipulate that improvement and modification of the Products and Parts by the assessee shall be treated as licensed information whose legal ownership will get transferred to the SMC and the assessee will be compensated for such improvements and modifications. He noticed that no such compensation was given despite the assessee incurring huge R D expenses. The TPO came to hold that 'Suzuki' trademark of the AE was piggybacked on 'Maruti', the trademark of the assessee, without any compensation to the assessee. After going through all the relevant clauses of the Agreement, the TPO held that the total royalty of ₹ 254.39 crore paid by the assessee to SMC was for use of both the 'Lice ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d on page No.1301 onwards of paper book no. 4), it was pointed out that royalty is a one merged payment for use of the licensed information and licensed trademarks and the TPO was not right in artificially splitting the same into two parts. Relying on the order dated 2.8.2013 passed by the Tribunal in the assessee's own case for the AY 2005-06 (ITA No.5237/Del/2011), the ld. AR contended that in the preceding year also the TPO bifurcated total royalty payment into two parts, namely, 50.58% for use of technology and remaining 49.42% for use of brand name, which view has been turned down by the tribunal by holding that the entire payment of royalty under the licence agreement was a consideration for use of both. 7.4. Au contraire, the ld. DR vehemently justified the action of the TPO in drawing a conclusion that 50% of total royalty payment was for use of licensed information and the remaining 50% for use of licensed trademark. He also took us through the same Agreement dated 9.1.2001 and submitted that clause 1.06 provides that the 'Licensed Trademark' shall mean the trademarks owned by Suzuki listed in Exhibit-B and other Indian trademarks which Suzuki may, hereafter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... till further pointed out that apart from paying such lumpsum royalty and technical fees, the assessee also incurred huge R D expenditure which, in the instant year alone, stands at ₹ 67.1 crore, which has gone into development/upgradation of the licensed information whose intellectual property rights also vests with SMC. He summed up his position by stating that the three sums, namely, lumpsum royalty, R D expenses incurred by the assessee and the payment of ₹ 20.00 crore towards 'technical/other services' pertain exclusively to the use of 'Licensed information' and Running royalty exclusively pertains to the use of 'Licensed trademark'. He thus argued that the TPO was more than reasonable in apportioning royalty of ₹ 127.195 crore to the use of brand as against the actual running royalty of ₹ 250.81 crore paid by the assessee for use of licensed trademark. In the alternative, he argued that if the tribunal was not satisfied with 50:50 division of royalty by the TPO, then the matter may be sent back for apportioning royalty for use of licensed trademark on some rational basis. The ld. DR contended that since the assessee's own tra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to go with the finding about the royalty attributable to the use of both the licensed information and the licensed trademarks. It is so for the reason that the Agreement also provides like that, which has been discussed elsewhere in this order. The tribunal further noticed in para 9.2 of its order that the co-branded trade mark, 'Maruti-Suzuki' is being used since inception of the company. In para 14, the tribunal agreed with the assessee's submissions : 'that Suzuki brand is an international renowned global brand. This can be substantiated by the Report of top 500 brands available on internet.' That is how in para 17, the Tribunal deleted the disallowance made by the AO on the basis of the TPO's conclusion that the payment of royalty towards use of licensed trademark was not warranted. 7.6. Thus it is manifest that the tribunal in the immediately preceding year has held two things. First that the payment of royalty under the Agreement is both for the use of licensed information and licensed trademark and there can be no division of royalty payment; and second that brand Suzuki is valuable and not worthless as was held by the TPO. In so far as the first a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... buted by the TPO to the use of licensed information, which was accepted at ALP. However, the AO treated this amount as an expenditure of capital nature. After allowing suitable depreciation, the AO made disallowance of ₹ 95.98 crore. The assessee is aggrieved against this addition. 8.2. We have heard the rival submissions and perused the relevant material on record. It is noticed that in all the earlier years before assessment year 2005-06, the AO has consistently considered running royalty as deductible in full and capitalized the lumpsum royalty subject to depreciation. The assessee also initially claimed deduction for the running royalty and capitalized the lumpsum royalty of ₹ 3.57 crore. However, during the course of assessment proceedings, it was claimed that the entire amount of royalty paid, inclusive of lumpsum royalty, was of the revenue nature and, hence, deductible in full. The AO also deviated from his earlier consistent stand and treated the entire portion of the royalty for use of licensed information as capital expenditure. Now, the question before us is whether the amount of royalty on licensed information, consisting of running and lumpsum royalty, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... usive basis and further Maruti has no authority to sub-licence the same except for getting the parts manufactured by other entities for supply to Maruti alone for the manufacture of Products in accordance with this Agreement. Clause 2.02 of the Agreement states that : 'Maruti recognizes and acknowledges Suzuki's ownership and validity of the Licensed Information ....'. Article 3 of the Agreement provides that Suzuki agrees to make available to Maruti such licensed information which is to be utilized for manufacture of products. Clause 3.02 of the Agreement deals with 'Improvements by Maruti'. It states that if at any time during the term of this Agreement, Maruti discovers or acquires any improvement with respect to Products or Parts, it shall give to Suzuki full information, instructions, knowhow and assign ownership of the same to Suzuki and the same shall be considered as 'Licensed Information'. This clause of the Agreement not only stipulates that Suzuki will supply the licensed information only for use by Maruti, but, also that any improvements to such licensed information made by Maruti, will also vest with Suzuki. Clause 3.04 of the Agreement make ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the 'Licensed Information'. In fact, such licensed information is required to be returned to Suzuki upon termination of the Agreement. The 'right to use' the licensed information, has certain restrictions put on by Suzuki, which the assessee cannot violate. The assessee is under obligation to maintain confidentiality of the Licensed Information. A bird's eye view of all the above clauses makes it vivid that the royalty payment is 'for use of' the Licensed Information and not 'for acquisition as its owner'. In this view of the matter, there can be no scope for treating the royalty paid for the 'licensed information' as a capital expenditure. 8.5. The ld. DR has relied on certain decisions, which categorize payment for use of technical know-how etc. as a capital expenditure. Similarly, the ld. AR has also relied on certain decision which mark such payment as a revenue expense. In all these decisions, the dividing line is whether the consideration is for purchase of technical information, know-how information, designs and drawings, etc., or for its use. If it is for use alone, then it is revenue and vice versa. Recently, the Hon'bl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ciation allowed by him on royalty. There is no dispute on the nature of cess, which is on royalty and has been treated both by the assessee as well as the AO as part and parcel of royalty and accordingly claimed/disallowed in line with the treatment of royalty. Since we have allowed deduction for the entire amount of royalty paid by the assessee during the year by deleting the TP adjustment and also overturning the action of the AO in treating the remaining half part as capital expenditure, the consequential amount of cess on royalty payment automatically becomes deductible. We, therefore, direct to allow deduction of ₹ 9.68 crore. IV. Royalty paid to non-AE 10.1. The next issue raised through Ground No.18.14 is against the transfer pricing adjustment in respect of royalty paid, inter alia, to M/s Auto Chassis International purely for technology/know-how. The ld. AR contended that total royalty paid by the assessee amounting to ₹ 254.39 crore included a sum of ₹ 1,09,45,172/- towards licence fees paid to Auto Chassis International, which is a non-associated enterprise. It was argued that such payment to non- AE cannot be benchmarked u/s 92 of the Act. 10. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee relied on the judgment of the Hon'ble Supreme Court in CIT vs. Ponni Sugars Chemicals Ltd. Ors. (2008) 306 ITR 392 (SC). The AO treated this amount as revenue in nature and hence taxable. The assessee is aggrieved against the treatment of sales-tax subsidy as revenue receipt. 12.2. We have heard the rival submissions and perused the relevant material on record. Primary question for deciding the nature of any subsidy, as a capital or revenue receipt, is to ascertain the object for which it was given. The mode of its quantification or manner of its disbursement, are irrelevant considerations. When the object of subsidy is to encourage an assessee to set up or expand industry, it assumes the character of a capital receipt. Such subsidy may be given in any form, may be by financing investment in capital asset or giving the amount in cash or by means of a waiver of sales-tax, etc. for a particular period. But, when the object is not to encourage industrialisation but to facilitate the carrying on an existing business more efficiently post its set-up, then it becomes a revenue receipt, irrespective of the form of disbursement. The Hon'ble Supreme Court in Ponni Sugars ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... would be given only in respect of vehicles rolled out of production capacity of 70000 vehicles added as a result of first expansion and not to the production augmented by capacity addition of 30000 vehicles as a result of second expansion.' When we consider section 25A along with Rule 28C of Haryana General Sales-tax Act/Rules, it becomes evident that the object of subsidy is in line with the Industrial Policy of Haryana Government, being 'attracting new investments and growth of existing industry.' In our considered opinion, such subsidy cannot be characterized as anything other than a capital receipt. It has been brought to our notice that the Tribunal, for the immediately preceding assessment year, has also treated similar subsidy as capital receipt. This ground is, therefore, allowed. D. T.P. ADJUSTMENT OF AMP EXPENSES 13.1. The next ground is against the addition on account of transfer pricing adjustment towards advertisement, marketing and promotion (AMP) expenses. 13.2. Briefly stated, the facts of this ground are that the TPO bifurcated AMP expenses into routine advertisement expenses and nonroutine advertisement expenses. Applying the bright line test, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n conformity with the final view to be taken by the Hon'ble High Court for the preceding year. It was also submitted that the judgment of the Hon'ble Delhi High Court in Sony Ericson Mobile Communications India Pvt. Ltd. vs. CIT dated 16.3.2015 cannot be applied as the facts of the cases considered in that batch of appeals are different from the assessee. In the opposition, the ld. DR strongly recommended to follow the judgment of the Hon'ble Delhi High Court in Sony Ericson Mobile Communications Ltd., in which there is discussion about the TP adjustment to be made in the case of manufacturers. He further relied on the order passed by the Tribunal in the case of Perfetti Van Melle India Pvt. Ltd. vs. DCIT (ITA No.407/Del/2015) in which the Bench has discussed about the TP adjustment of AMP expenses in the case of a manufacturer, as is the case under consideration. 13.4. We have heard the rival submissions and perused the relevant material on record. It is an admitted position that the assessee before us is a 'Manufacturer' and not a 'Distributor'. The Special Bench of the Tribunal in the case of LG Electronics India Pvt. Ltd. Vs. ACIT (supra), by its ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee as a distributor, who either simply acts an agent of manufacturer or purchases goods from the manufacturer for resale at his own account. The Hon'ble High Court held that where the TNMM has been applied as the most appropriate method by a Distributor, which method has not been disturbed by the TPO, then, the international transaction of AMP and distribution activities should be clubbed. It further held that for determining the ALP of such transactions under a combined approach, only such comparables should be chosen which conform to the AMP functions and other distribution functions conducted by the assessee. If there is some difference in the functions under these international transactions, including that of AMP, between the assessee and the comparables, then, suitable adjustment should be made to bring both the transactions at par. If probable comparables are not performing similar functions as done by the assessee and no adjustment is possible for bringing the international transactions of the assessee in an aggregate manner at par with those undertaken by the comparables, then, segregation should be done and the international transaction of AMP spend should be s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f AMP expenses, the TPO is free to choose any other suitable method including Cost plus method [Para 194(xiii)]; - In so making a TP adjustment on account of AMP expenses, a proper set off/purchase price adjustment should be allowed from the other transaction of distribution of the products [Para 93]; - Selling expenses cannot be considered as part of AMP expenses [Paras 175 176 of the judgment]. 13.7. The bright line test, disapproved by the Hon'ble High Court, primarily concentrates on the quantitative aspects of the AMP expenses alone. It overlooks the examination of the AMP functions carried out by the assessee on one hand and the comparables on the other. The Hon'ble High Court in Sony Ericson Mobile (supra), has held that AMP expense is a separate international transaction and also bright line test is not applicable for determining the ALP of AMP expenses. The manner for the determination of the ALP of the distribution activity and AMP activity has also been set out by the Hon'ble High Court to be conducted, firstly, in a bundled manner by considering the distribution and AMP functions performed by the assessee as well as the probable comparables, and i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t by the assessee as well as comparables, this will amount to snatching away the tag of international transaction from AMP expenses, which has been assigned by the Hon'ble High Court. What Their Lordships have held in the judgment is that the distribution activity and AMP expenses are two separate but related international transactions. It is only for the purposes of determining their ALP that these two should be aggregated. The process of such aggregation does not take away the separate character of the AMP transaction, albeit related. An analysis and examination of the distribution and AMP functions carried out by an assessee must be necessarily done in the first instance, which should be then compared with similar functions performed by some probable comparables. If the distribution and AMP functions performed by an assessee turn out to be different from those performed by probable comparables, then, a suitable adjustment should be made to the profits of the comparable so as to counterbalance the effect of such differences. If however differences exist in such functions, but no adjustment can be made, then, such probable comparable should be dropped from the list of comparab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unction, which is apparent from the extraction from para 165 of the judgment : 'On behalf of the assessee, it was initially argued that the TPO cannot account for or treat AMP as a function. This argument on behalf of the assessee is flawed and fallacious for several reasons. There are inherent flaws in the said argument'. It held vide para 165 of the judgment that : 'An external comparable should perform similar AMP functions.' Thus it is manifest that comparison of AMP functions is vital which cannot be dispensed with. Let us we go a step further with the alternative prescription of the judgment that if ALP of both the transactions of Distribution and AMP cannot be determined in a combined manner, then the ALP of AMP function should be separately done. The submission advanced by the assessee of considering the profit on an entity level without making comparison of AMP functions done by the assessee as well as the comparable, will render this alternative approach incapable of compliance. Canvassing such a view as argued on behalf of the assessee amounts to treating AMP spend as a non-international transaction, which is patently incapable of acceptance. The fact rem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed with the net profit margin realized by the assessee as per the mandate of sub-clause (iv) of Rule 10B(1)(e). 13.10. Sub-rule (2) of Rule 10B provides that 'for the purposes of sub-rule (1)', the comparability of an international transaction with an uncontrolled transaction shall be judged with reference to the following, namely - (a) the specific characteristics of the property transferred or services provided in either transaction; (b) the functions performed, taking into account assets employed or to be employed and the risks assumed, by the respective parties to the transactions; (c) the contractual terms (whether or not such terms are formal or in writing) of the transactions which lay down explicitly or implicitly how the responsibilities, risks and benefits are to be divided between the respective parties to the transactions; (d) conditions prevailing in the markets in which the respective parties to the transactions operate, including the geographical location and size of the markets, the laws and Government orders in force, costs of labour and capital in the markets, overall economic development and level of competition and whether the markets are wholesale or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rily deals with a case of Distributor, though the initial discussion about the character of AMP spend as an international transaction and the jurisdiction of the TPO etc. are common to a distributor and also a manufacturer. Similarly there are some other observations in this judgment, which are common to both. Though this judgment lays down at length some broader principles for the determination of ALP of AMP expenses in the case of a 'Distributor', still certain principles dealing exclusively with the determination of the ALP of AMP expenses in the case of a 'Manufacturer', have also been laid down. Such discussion has been made in para 92 of the judgment, the relevant part of which is reproduced here as under : - '92. The majority judgment refers to an example where the Indian AE may have earned actual profit of ₹ 140/-, but returned reduced net profit of ₹ 120/- as the Indian AE had incurred brand building expenses to the tune of ₹ 20/- for the foreign AE, whereas the net profit on sales declared by comparable uncontrolled transactions was ₹ 100/- only. Thus, it was observed that the costs including AMP expenses are independent of c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act as per any suitable method (other than TNMM) including Cost plus method, but by excluding the selling expenses from the overall base of AMP expenses. 13.15. Turning to the facts of the case, we find that the TPO/AO have computed disallowance of AMP expenses on the basis of bright line test. There is no discussion about the AMP functions carried out by the assessee or comparables. Now since the Special bench order has been partly modified by the Hon'ble Delhi High Court, including the nonapplicability of the bright line test, and no material has been placed on record by the ld. AR to, firstly, demonstrate the AMP functions carried out by the assessee and then, to compare such functions with those done by comparables, this issue cannot be decided at our end. Under such circumstances, we set aside the impugned order and remit the matter to the file of the AO/TPO for deciding it afresh as per law. In this fresh exercise, the TPO will follow the parts of the judgment in Sony Ericson (supra) as are common to both Manufacturers and Distributors; apply the parts of the judgment as are applicable to a 'Manufacturer'; and ignore the parts of the judgment which pertain excl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of excess consumption of raw material and components. The facts apropos these grounds are that the assessee is following 'Just-in-time' system for management and reorder of inventory, in which inventories are ordered just in time when their requirement arises. The material so required is delivered straight to the shop floor in the relevant department. As a result of this, though the purchases are recorded as per actual bills upon the arrival of goods in the premises, the inventories are procured by considering the standard consumption of various raw materials for manufacture of vehicles. Due to this difference in the making of entry in the books of account and actual receipt of goods directly in the relevant department, which, in turn, is based on standard quantity of material required for manufacture of vehicles, sometimes there arises difference between the physical inventory taken and the inventory as per books of account at the end of the year. Some items of stock may be eventually under-consumed while others over-consumed. The net effect of under/over consumption is nothing, but, the deviation from the standard consumption. During the year in question, the variation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CIT (2012) 347 ITR 272 (Del) has held that disallowance u/s 14A can be made as per Rule 8D only from assessment year 2008-09 as rule 8D is prospective. It has been further held by Their Lordships that for earlier years, the disallowance should be made as per 'reasonable and acceptable method of apportionment.' In view of the above discussion, it becomes clear that the AO's decision in applying Rule 8D for making disallowance u/s 14A of the Act, cannot be countenanced. It is noted that similar disallowance was made for the immediately preceding year. When the matter came up for consideration before the tribunal, the Bench held that the disallowance u/s 14A cannot be made as per Rule 8D and the question of computation of disallowance u/s 14A has been remitted to the AO for doing it afresh as per law. Respectfully following the precedent, we also set aside the impugned order on this score and send the matter to the file of AO for making disallowance u/s 14A, in accordance with the view taken by the Tribunal in its order for the assessment year 2005-06. III. Disallowance u/s 35DDA 16.1. The next ground is against the disallowance of ₹ 38,63,64,348/- made u/s 35 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... - on written down value of software expenses capitalized by the AO in preceding years. The factual matrix of this ground is that the assessee claimed deduction for software expenses incurred in earlier years, which was refused by the AO, who held it to be a capital expenditure. The view taken by the AO was finally upheld by the Tribunal. In the final computation of income, the AO refused to allowed depreciation on the capitalized value of software expenses. 18.2. It is obvious that once the AO has refused to grant deduction of software expenses claimed by the assessee and capitalized the same by treating it as capital asset, then depreciation on the written down value of such software expenses is required to be granted as per law. Since no such detail is available about the written down value of software expenses capitalized in earlier years, we set aside the impugned order and remit the matter to the file of AO for allowing deduction in respect of the written down value of the software expenses capitalized in earlier years. VI. Charging of statutory interest 19. Next ground is against the charging of interest u/ss 234B, 234C and 234D of the Act. This ground is consequenti ..... X X X X Extracts X X X X X X X X Extracts X X X X
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