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2015 (9) TMI 962 - ITAT CHENNAI

2015 (9) TMI 962 - ITAT CHENNAI - TMI - Transfer Pricing adjustment - Upward adjustment due to brand promotion expense attributable to the assessee’s holding company - Held that:- Considering the facts of the case which is identical to the case decided by the Special Bench of the Tribunal in the case of LG Electronics India Pvt Ltd. [2013 (6) TMI 217 - ITAT DELHI ] and in the case Ford India Pvt. Ltd [2013 (6) TMI 458 - ITAT CHENNAI] we hereby direct the Ld. Assessing Officer to delete the adhoc .....

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Ld. D.R. Therefore, we hereby restrain ourselves from remitting back the matter for the computation of bright line test. - Decided in favour of the assessee.

Addition on account of advertisement and sales promotion expenses which ought to have been receivable from the assessee’s holding company U/s.92B - Held that:- we hereby accept the concept of Bright Line Test (BLT) as held by our predecessors with respect to the concept of Bright Line Test for distinguishing between the routine a .....

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elong to the owner of the brand. However, in this case even after computing the ALP by following the Bright Line Test the Ld.TPO has deleted the addition ₹ 76.63 crores. - Decided against assessee.

Disallowance being royalty paid by the assessee to its Holding Company M/s.HMC Korea - Held that:- TPO has herself accepted the high-tech technology passed on to the assessee company by its Holding Company and also after details study of 35 licenses arrived at a conclusion that the ro .....

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as subsidy from SIPCOT has been utilized by the company in order to address merits of the case. Therefore, we hereby remit the issue back to the file of Ld. DRP in order to examine the complete facts of the issue in the light of the various decisions cited by the Ld. A.R and pass appropriate order as per merits and law.- Decided in favour of the assessee for statistical purposes.

Disallowance U/s.14A - Held that:- In the present case before us, the details of investment made were not .....

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claimed that the assessee had not received any dividend during the year, which has not been rebutted by the Ld. D.R. Therefore, we hereby hold that disallowance of Section 14A of the Act for ₹ 5,29,910/- is not warranted and accordingly, we direct the Ld. Assessing Officer to delete the same - Decided in favour of the assessee.

Disallowance of expenditure towards 100 cars given to Police Department - Held that:- The expenditure incurred by the assessee was not incidental to carr .....

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celerating growth in exports. The incentive on target plus scheme is also nothing but an entitlement for a duty credit based on incremental exports which should be substantially higher than the general annual export target that is fixed. The incentive on focus market scheme is to offset high freight cost and other externalities to select international market with a view to enhance India’s export competiveness in these countries. It is pertinent to note that the assessee will be entitled to such .....

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ar, however the same shall be taxed in the previous year in which the assessee has received the licenses and derived such income. Thus, this issue is also decided in favour of the assessee.

Disallowance of additional depreciation in respect of assets used in regional offices - Held that:- The assessee is entitled to additional depreciation if it has satisfied the condition that it is engaged in the business of manufacture or production of any article or thing. There is no condition st .....

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ce of credit for the tax deducted at source - Held that:- A.R. has also not furnished the details of the TDS claimed by the assessee and the amount disallowed by the Revenue. Therefore, in the interest of justice we remit this matter back to the file of the Ld. Assessing Officer for examining the relevant documents furnished by the assessee and pass appropriate speaking order as per merits and law after giving opportunity to the assessee of being heard. - Decided in favour of the assessee for st .....

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aised twelve elaborate grounds in its appeal however the crux of the issues are that: Transfer Pricing Issues:- (i) The assessee has challenged the show cause notice issued in respect to brand promotion activity undertaken by the assessee and advertisement expenses, which was treated as international transaction. (However, at the time of hearing the Ld. A.R. did not press this ground and therefore, it is dismissed as such.) (ii) The Ld. Assessing Officer /DRP erred in confirming the order of the .....

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other comparable companies in an international transactions and thereby added the excess expenditure to the income of the assessee under provisions of section 92B of the Act. (iv) Ld. A.O/DRP has erred in determining the ALP for royalty payable by the assessee to its AE at ₹ 265.50 crores as against the actual amount paid ₹ 369.77 crores, which was confirmed by the TPO and thereby addition to the extent of ₹ 104,27,36,417/- was made. Corporate Tax Issues:- (v) The DRP has erre .....

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er in disallowing expenditure of ₹ 5,20,97,000/- on providing 100 cars to the Tamilnadu Police Department. (viii) The DRP has erred in confirming the order of the Ld. Assessing Officer in treating the export incentives on account of target plus scheme and focus market scheme amounting to ₹ 5,52,26,335/- and ₹ 3/- crores respectively as the income of the assessee for the assessment year 2007-08, though the same has not accrued to the assessee during the relevant assessment year. .....

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iness of manufacturing, selling and servicing of passenger vehicles and related spare parts/CKD parts in the domestic market as well as overseas. The assessee had field its e-return for the assessment year 2007-08 on 31.10.2007 declaring its total income as ₹ 815,75,84,340/-. Initially the return was processed U/s.143(1) of the Act and subsequently the case was taken for scrutiny and the assessment was completed U/s.143(3) read with section 92CA & 144C of the Act wherein the Ld. Assess .....

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s population that has enough surplus income to buy such movable and immovable assets such as House, cars etc. Further banks have liberally sanctioned auto loans on equated monthly instatement basis to the buyers. It is also relevant to note that India has got a big percentage of population which is not only young but also earns handsome money especially soft ware boom in India. This section of the society is influenced by the brand name. In India in expanding auto market the share of Hyundai is .....

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by way of royalty on know how supplied by it to the assessee company. It is not an old technology about which it may be said that it does not have bright future and hence the sales will decrease and therefore brand development will not be advantageous to the holding company. It would like to stay ahead of its competitors in the Indian market by ensuring the quality of product as well as by spreading the brand awareness. The Holding company has given to the assessee the exclusive rights of produc .....

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by the Holding Company the assessee has agreed to use brand name and logo of the holding company on its products. It has not developed its own brand name and logo. The assessee could have developed its own brand name and the logo could have generated huge income by use of intangible asset owned by the assessee legally and economically. There is no piggy backing kind of strategy adopted by the assessee for development of its own Brand name and logo. Instead its entire efforts are devoted towards .....

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to the assessee for providing the services of brand development services to the Holding company. Therefore, it would be reasonable to hold that the Holding Company must compensate the assessee company by paying an amount @ 1% of the sales made during the relevant previous years. The assessee company has made sales for ₹ 87,62,49,09,000/- during the relevant previous year and therefore, @ 1% of the sales, amount receivable is calculated at ₹ 87,62,49,09,000/-. Therefore, Arms Length .....

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eby upheld the upward revision to ₹ 82,12,54,41,380/-. 4.2 The Ld. A.R. submitted before us that:- (i) The assessee company did not undertake any brand promotion for its parent company M/s.HMC Korea. (ii) The adhoc rate of 1% on sales adopted by the Revenue is not an accepted method in transfer pricing matters. (iii) The benefit of using the brand name Hyundai has resulted in increase of turnover of the appellant. Consequently the profits have also increased which have been offered to tax. .....

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e company for promoting the brand of its Holding Company. (vii) The agreement between the assessee company and its Holding Company only indicates that the appellant company has the right to use the brand name Hyundai . (viii) There is no finding by the Ld.TPO that excess AMP expenses incurred by the assessee, which would suggest that the assessee has incurred brand promotion expenses benefitting the Holding Company. (ix) The appellant also relied in the case of LG Electronics India Pvt Ltd Vs. A .....

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nt company being the user of the Holding Company s brand name and logo indirectly benefits the Holding Company. The appellant company instead of promoting its own brand has been promoting the brand logo of the Holding company. Thereby the Holding Company is benefited because of the increase in sales of the appellant company. It was only due to the efforts put in by the assessee company and the relevant expenditure incurred for promoting its products the brand value of the Holding Company has pro .....

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Tax Act in order to determine the ALP for brand fees which ought to have been received by the assessee company for the usage of the Holding company s brand Hyundai . The 1% on sales adopted by the Revenue in determining the ALP is purely adhoc and without any basis. It is pertinent to mention here as pointed out by the Ld. A.R. that the Delhi Special Bench of the Tribunal in the case of LG Electronics India Pvt Ltd., mentioned supra has held that Bright-Line- Test (BLT) is the only method to be .....

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use technical information, designs, drawings and industrial property rights for the manufacture, marketing, sale and services of agreed products, for which it agreed to pay royalty @ 1 per cent. The AE allowed the assessee to use its brand name and trademarks to products manufactured in India without any restriction . • The Transfer Pricing Officer ( TPO ) concluded that the assessee was promoting LG brand as it had incurred expenses on AMP to the tune of 3.85% of sales vis-à-vis 1.3 .....

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l efforts. Issues: • Whether transfer pricing adjustment can be made in relation to advertisement, marketing and sales promotion expenses incurred by the assessee? • Whether the assessee ought to have been compensated by the AE in respect of such AMP expenses alleged to have been incurred for and on behalf of the AE? Observations & Ruling The Tribunal has held as follows: • Confirmed validity of jurisdiction of the TPO by observing that the assessee s case is covered u/s. 92CA .....

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here is a transaction of creating and improving marketing intangibles by the assessee for and on behalf of its AE; (ii) the AE is non-resident; and (iii) such transaction is in the nature of provision of service. • Accepted Bright Line Test to determine the cost/ value of the international transaction, in view of the fact that the assessee failed to discharge the onus by not segregating the AMP expense incurred on its own behalf vis-à-vis that incurred on behalf of the AE. • The .....

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by the Supreme Court recognises the fact of brand building for the foreign AE, which is an international transaction and the TPO has the jurisdiction to determine the ALP of the transaction. • The expenses incurred in connection with sales are only sales specific. However, the expenses for promotion of sales leads to brand building of the foreign AE, for which the Indian entity needs to be compensated on an arm s length basis by applying the Bright Line Test. • With regard to the DRP s .....

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d India Pvt. Ltd (2013-TII-118-ITAT-MADTP) cited by the Ld. A.R. supra, the Chennai Bench of the Tribunal followed the Special Bench ruling in the case of LG Electronics India Pvt. Ltd(supra) in applying Bright line Test (BLT) to arrive at the adjustment towards excess AMP expenditure. The Tribunal also ruled that the expenditure directly in connection with sales had to be excluded in computing the AMP adjustment. Thereafter, the Tribunal deleted the hypothetical brand development fee adjustment .....

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d. Assessing Officer to delete the adhoc addition of 1% on sales which is treated as brand development fee by following the decision of the Tribunal cited supra. The aforesaid decisions of the Tribunal has also held that Bright Line Test would be the best method for determining developer of the intangible property, which the Ld. A.R. claimed that such test was made on the assessee by the Ld. DRP; however no additions were made because on the computation of the same it was found not warranted. Th .....

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behalf of the parent company and therefore, considered the same as international transaction invoking the section 92B of the Act, in the same footing as the brand development expenses discussed supra. Accordingly, the Ld.TPO made comparison of the advertisement expenses incurred by the other five comparable companies in the same line of business and worked out the ratio of advertisement expenses to the total sales and determined the average ratio of the comparable at 2.566% as against 3.44% wor .....

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hile arriving at the addition of ₹ 76.63 crores. In support of the argument the assessee relied on the Jurisdictional of Madras High Court in the case of CIT Vs. India Pistons Ltd. in 250 ITR 279 & in the case CIT Vs. Tuticorin Alkali Chemicals and Fertilizers ltd in 261 ITR 80. The Members of the DRP after considering the issue, held in agreement with the claim made by the assessee by observing as under:- 104.3 The contention of the assessee is carefully considered. The trade and volu .....

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expenses that could be attributed to brand promotion and promotion of business of the parent holding company. Viewed in that context, the volume discount and trade discount can at best be attributed to the increase in business of the assessee and not to that of the parent holding company. 104.5 In view of the above, the Assessing Officer/TPO is directed to exclude volume discount and Trade discount from advertisement expenses, while working out the ratio of advertisement expenses to sales. The .....

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(page 43 of TPO s order). The break-up of advertisement expenses considered by TP (as in page 43 of TPO s order) is as under: Expenses in the nature of advertisement cost ₹ 155,59,99,015 Special Trade Discount ₹ 142,81,11,086 Volume Discount ₹ 3,25,81,721 ₹ 3,01,62,71,820 3.1. The DRP directed the TPO to recomputed the ratio of advertisement expenses to sales after excluding the volume discount and trade discount. The revised ratio is (Rs.155,59,99,013/Rs.87,62,49,09,000) .....

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embers of the DRP though agreed with the concept of such addition, directed the Ld.TPO to exclude volume discount and trade discount from advertisement expenditure while working out the ratio of the advertisement expenses to sales. The Ld.TPO subsequently giving effect to the order of the DRP had deleted the addition of ₹ 76.63 crores because the same was not warranted when the volume discount and trade discount were excluded from the advertisement expenses. Ld. AR further admitted that si .....

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incurred on advertisement and brand promotion wherein advertisement and marketing promotion expenses to the extent incurred by uncontrolled comparable distributors is to be regarded within the Bright Line Limit of the routine expenses and the advertisement and market promotion expenses incurred by the distributors beyond such Bright Line Unit constituted non-routine expenditure resulting in creation of economic ownership in the form of marketing intangibles which belong to the owner of the brand .....

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ement, the appellant company paid royalty of 5% on its domestic sales and 8% on its export sales. The assessee company made an analysis under transfer pricing, since the payment of royalty was directly linked with its manufacturing activity and arrived at the method to be followed as Transaction Net Margin Method (TNMM). The assessee further justified the percentage of royalty paid to its Holding Company as it was approved by Reserve Bank of India (RBI). However, the Ld.TPO not accepting the jus .....

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Thus arriving at the difference of 1.86%, the Ld.TPO recommended the disallowance of ₹ 165 crores as excess royalty paid to the Holding Company while deciding the ALP of royalty payment. When the matter reached the DRP, the Ld. Members of the DRP accepted the contention of the Ld.TPO that, separate bench marking analysis is necessary for determining ALP of royalty payment, by not accepting the argument of the assessee that the percentage of royalty payment made to the assessee s Holding Co .....

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ed before us by stating as follows:- (i) The Ld.TPO /DRP were not justified in holding that the royalty payment should be bench marked separately. It was contended that the appellants whole entity approach of bench marking royalty payments along with all other transactions by adopting TNM method at the entity level is justifiable. (ii) Since the operating margin of the appellant company was 7.61% which is higher than the comparable companies selected in the TP study being 2.90%, there was no nec .....

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. (v). The learned TPO in her TP study for adhoc adjustment on account of brand at the rate of 1% had herself observed that in automobile sector the average rate of royalty is 4.7%, which is higher than the appellant s average rate of royalty being 4.22%. Therefore, royalty paid by the appellant should be accepted as arm s length price. (vi). The comparable companies selected by TPO which is further confirmed by the Ld. Members of the DRP viz; Honda Seil Cars India Limited and Maruthi Suzuki Ind .....

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pport of the same. 6.4. We have heard both the parties and carefully perused the materials available on record and decisions cited by the assessee viz. i) ITA Nos.1040 & 1159/Hyd./2011 and 1408/Hyd./2010 (Paper book pg. 370 to 371), ii) Lumax Industrues Ltd. Vs. ACIT in ITA No.4456/Del./2012 (paper book page No.394) and iii) Thyssen Krupp Industries India Pvt Ltd. Vs. Additional CIT, in ITA No.6460/Mum/2012 (paper Book page 433). Further the assessee has relied on the Rule 10B(2)(d) of the I .....

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s, overall economic development and level of competition and whether the markets are wholesale or retail. 6.5 Further perusing the order of the Ld.TPO in page 40 in para Nos.25 & 26 the Ld.TPO herself observed that in respect of royalty payment in automotive sector from the study of 35 licenses, the average works out to 4.7% and the median works out to 4% which is higher than the appellant s average rate of royalty payment of 4.22%. Further the Ld.TPO has observed that the assessee company h .....

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0%. 27. In the case of the assessee what will be the right percentage of royalty that would compensate the assessee suitably. In this connection it is relevant to discuss certain relevant facts. As discussed earlier, India is a vast market for auto makers. India has a huge percentage of middle and upper middle, class population that has enough surplus income to buy such movable and immovable assets such as House, cars etc. Further banks have liberally sanctioned auto loans on equated monthly ins .....

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to brand value development on account of efforts made by the assessee company. So far as the Hyundai technology is concerned it is the latest technology and it cannot be said that old technology has been dumped in Indian market. It has promising future that will earn the holding company in coming years huge income by way of royalty on know how supplied by it to the assessee company. It is not an old technology about which it may be said that it does not have bright future and hence the sales wi .....

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self accepted the high-tech technology passed on to the assessee company by its Holding Company and also after details study of 35 licenses arrived at a conclusion that the royalty payment of 4.7% is prevalent in the automotive sector. Therefore from these circumstances, we do not find it appropriate on the part of the Revenue to make addition on account of ALP of royalty payment. Therefore, we hereby delete the addition of ₹ 104,27,36,417/-made by the Ld.TPO following the directions of Ld .....

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ed. Therefore, the explanation offered by the assessee was not accepted by the Ld. Assessing Officer in the relevant previous year and also for the earlier previous years. Accordingly, the Ld. Assessing Officer reduced the capital subsidy granted by SIPCOT from the cost of the assets installed in the plant and allowed depreciation only on the reduced WDV for all the earlier years. Similarly for the relevant assessment year also, the Ld. Assessing Officer disallowed the depreciation amounting to .....

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vant assessment year also the matter may be remitted back to the file of Ld. DRP with similar direction. Ld. D.R strongly opposed to the submissions of the Ld. A.R. and relied on the orders of the Ld. Members of the Ld. DRP and the Ld. Assessing Officer. 7.3. After hearing both sides, we are of the opinion that the matter requires a categorical finding as to how the cash received as subsidy from SIPCOT has been utilized by the company in order to address merits of the case. Therefore, we hereby .....

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the assessee before the Revenue was that the assessee had made investment out of its revenue reserves of 1709.22 crores and therefore disallowance was not called for. It was further contended that the Rule-8D would not be applicable as it had come into force only w.e.f assessment year 2008-09 and not retrospectively. However, the Ld. DRP found the view of the Ld. Assessing Officer to be fortified by the decision in the case of ITO Vs. Daga Capital Management Pvt Ltd reported in 117 ITD 169 (SB) .....

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se before us, the details of investment made were not brought before us. But as pointed out by the assessee Rule 8D was introduced by the Income Tax Fifth Amendment Rules, 2008 with effect from 24.03.2008. Therefore, it would not be applicable to the case of the assessee for the assessment year 2007-08. Moreover under such circumstances, various judicial authorities have held that 2% to 5% of the dividend earned may be disallowed in order to justify the provisions of Section.14A of the Act. Howe .....

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ore the Revenue for disallowance of expenditure of ₹ 5,20,97,000/- being the cost of 100 cars gifted by the assessee to the Tamil Nadu Police Department. The assessee had justified the action as fulfillment of obligation towards Corporate Social Responsibility . It was further claimed that the use of these vehicles by the Police Department would help the assessee to assess the reliability of the vehicles and also help the public at large. It will also help the assessee as an advertisement .....

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tion which is a body promoting and grooming pace bowlers in India were disallowed, since the same could not be treated as expenditure for business activity. However we do not agree with this view of the Ld. Members of the DRP in the present case before us. In the case relied upon by the Ld. DRP the issue was with respect to expenditure incurred by M/s.MRF Ltd, a tyre manufacturing company, towards promotion of Cricket Spot which is not a related activity with the business of the assessee. In the .....

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o test the performance of the cars manufactured by it. (ii) The extensive usage of the vehicles manufactured by the assessee company will be noticed by the public at large and it will build up the image of the assessee and also Act as advertisement for its products. (iii) The Police Department being over burdened by the large traffic movement in and around the assessee s factory will be at ease for being provided with fast moving vehicles by the assessee company and that will also enhance their .....

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ed. What is to be seen is not whether it was compulsory for the assessee to make the payment or not but the correct test is that of commercial expediency. As long the payment which is made is for the purposes of the business, and the payment made is not by way of penalty for infraction of any law, the same would be allowable as a deduction. The contribution which was made by the assessee could under no circumstances be regarded as illegal payments or payments which were opposed to public policy. .....

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d for public benefit could not be regarded as being opposed to public policy. Requiring payment to be made for a just cause which would entitle a businessman to obtain a license or permit cannot be regarded as being against the public policy. Any contribution made by an assessee to a public welfare fund which is directly, connected or related with the carrying on of the assessee s business or which results in the benefit to the assessee s business has to be regarded as an allowable deduction U/s .....

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e making of such a donation. The mere fact that making of a donation for charitable or public cause or in the public interest results in the Government giving patronage or benefit can be no ground to deny the assessee a deduction of that amount U/s. 37(1) when such payment had been made for the purpose of assessee s business. Therefore, the payment made by the assessee in the instant case was allowable as deduction. 9.3 In these circumstances, we are of the opinion that such gestures of the corp .....

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cer to allow the expenditure of ₹ 5,20,97,000/- incurred by the assessee for providing 100 cars to the Tamil Nadu Police Department. 10.1 Ground No.(viii) Addition on account of export incentives accrued to the assessee on target plus scheme ₹ 5,52,26,335/- and focus market scheme ₹ 3 crores. On examining the P&L a/c for the relevant to assessment year it was observed by the Ld. Assessing Officer that the assessee had shown income by way of export incentives towards target .....

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the general annual export target fixed. HMIL has accrued for ₹ 26 crores as on 31.03.2006 pertaining to exports benefits under the target plus scheme for the financial year 2005-06 exports. This amount was revised during the current financial year i.e. in 2006-07 to ₹ 31.52 crores and accordingly, a further accrual of ₹ 5.52 crores pursuant to filing the application with the authorities for the same. Therefore, an amount of ₹ 31.52 crores was shown as export benefits und .....

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ciple fo commercial prudence, since the target plus license was received in the financial year 2007-08 and license for the focus market scheme was received in the financial year 2008-09, we have correctly excluded the above amount from the computation of total income for the financial year 2006-06. The Ld. Assessing Officer after examining the reply of the assessee rejected the same because of the following reasons:- (i) It is observed from the details of exports incentives like Duty Draw Back a .....

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from the concerned authorities cannot be accepted. (ii) It is noticed that the assessee has been claiming the expenditure on warranty on provision basis by relying on the decision of Hon ble Supreme Court in the case of M/s.Rotark Control India Private Ltd. Vs. CIT whereas, in the issue of export incentive scheme, even though the same has been accrued, the same has not been offered to the tax even though the same was received completely in the subsequent year. (iii) Reliance is also placed on th .....

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supplies and the penalty deduction related to the accounting year 1989-90 relevant to assessment year 1990-91. The fact would show that the Kerala State Electricity Board had deducted a sum of ₹ 4,24,851/- from supply bills for delay in supply during the year 1989-90. Subsequently, the Board refunded a sum of ₹ 2,18,529/- to the assessee during the accounting period 1990-91. The liability for the penalty accrued during the accounting period 1989-90 relevant to the assessment year 19 .....

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Mere protest or opposition by a subject to the levy of tax or other duties payable to the Government cannot carry with it the implication that there is no proper levy legally recoverable till such protest or opposition ceases or is silenced. So long as the assessee is following the mercantile system of accounting, in our view, the assessee should have claimed deduction in the year 1989-90 accounting year. Therefore, the Tribunal was not justified in interfering with the order passed by the appel .....

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eating the same as the income accrued to the assessee during the relevant to assessment year. 10.2 The Ld. A.R. cited the decision of the Hon ble Supreme Court in the case of Excel Industries Ltd., reported in 358 ITR 295(SC) and argued stating that the export incentives received has to be tax in the year when the license was received and not in the year the export was made. Ld. D.R. relied on the orders of the Revenue and argued in support of the same. 10.3 We have heard both the parties and ca .....

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g Officer treated the same as the income of the assessee while framing the assessment. When the matter came up before the Apex Court, the issued was decided in favour of the assessee. The relevant para of the order is reproduced herein below for reference:- 19. This Court further held, and in our opinion more importantly, that income accrues when there arises a corresponding liability of the other party from whom the income becomes due to pay that amount. 20. It follows from these decisions that .....

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ability on the customs authorities to pass on the benefit of duty free imports to the assessee until the goods are actually imported and made available for clearance. The benefits represent, at best, a hypothetical income which may or may not materialize and its money value is therefore not the income of the assessee. 22. In Godhra Electricity Co. Ltd v. Ld. CIT [1997] 225 ITR 746 (SC) this court reiterated the view taken in Shoorji Vallabhdas & Co.(supra) and Morvi Industries Ltd.(supra) 23 .....

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rate from the consumers. 24. The Court did not accept the view taken up by the High Court on facts. Reference was made in this context to Ld. CIT v. Birla Gwalior (P) Ltd. [1973] 89 ITR 266 (SC) wherein it was held, after referring to Morvi Industries that real accrual of income and not a hypothetical accrual of income ought to be taken into consideration. For a similar conclusion, reference was made to Poona Electric Supply Co. Ltd V. Ld. CIT [1965] 57 ITR 521 (SC) wherein it was held that inco .....

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ered from the point of view of real income taking the probability or improbability of realization in a realistic manner and dovetailing of these factors together but once the accrual takes place, on the conduct of the parties subsequent to the year of closing an income which has accrued cannot be made no income . 26. This Court then considered the facts of the case and come to the conclusion (in Godhra Electricity) that no real income had accrued to the assessee in respect of the enhanced charge .....

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ability or improbability of realization has to be considered in a realistic manner and it was held that there was no real accrual of income to the assessee in respect of the disputed enhanced charges for supply of electricity. The decision of the High Court was, accordingly, set aside. 27. applying the three test laid down by various decisions of this Court, namely, whether the income accrued to the assessee is real or hypothetical; whether there is a corresponding liability of the other party t .....

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sessing Officer is required to be pragmatic and not pedantic. 28. Secondly, as noted by the Tribunal, a considered view has been taken in favour of the assessee on the questions raised, starting with the assessment year 1992-93, that the benefits under the advance licenses or under the duty entitlement pass book do not represent the real income of the assessee. Consequently, there is no reason for us to take a different view unless there are very convincing reasons, none of which have been point .....

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as well as in the subsequent assessment year. Therefore, the dispute raised by the Revenue is entirely academic or at best may have a minor tax effect. There was, therefore, no need for the Revenue to continue with this litigation when it was quite clear that not only was it fruitless (on merits) but also that it may not have added anything much to the public coffers. 10.4. In the case of the assessee, the export incentive towards target plus scheme is bestowed as a reward in order to encourage .....

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o such benefit only after verification of the claim of the assessee by the relevant Govt. authorities and issuance of the license by such Government authorities. Therefore, the facts of the assessee s case are similar to the facts of the case decided by the Hon ble apex Court cited supra. Therefore, respectively following the decision of the Hon ble apex Court we hereby hold that the notional income computed by the assessee cannot be treated as taxable income of the assessee during the relevant .....

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42,64,535/- which was procured during the relevant assessment year for the purpose of the assessee s regional offices. The Ld. Assessing Officer opined that as per provisions of section 32(1)(iia) of the Act the additional depreciation is allowable only on the asset which has been utilized by the assessee for its manufacturing activity. The Ld. Members of the DRP also accepted the view of the Ld. Assessing Officer. Accordingly, the Ld. Assessing Officer in his final assessment order disallowed t .....

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addition made in this regard may be deleted. Ld. D.R on the other hand relied on the orders of the Revenue and argued in support of the same. 11.3 We have heard both the parties and carefully perused the materials available on record. Section 32(1)(iia) of the Act stipulates as under:- Section 32(1)(iia): in the case of any new machinery or plant (other than ships and aircraft), which has been acquired and installed after the 31st day of March, 2005, by an assessee engaged in the business of ma .....

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condition stipulated in the Act that additional depreciation shall be allowed only if the asset is deployed in the factory of the assessee and not the office of the assessee. Therefore, we accept the argument of the Ld. A.R. and reject the observations of the Revenue on this regard and accordingly direct the Ld. Assessing Officer to allow the claim of additional depreciation of ₹ 8,52,500/- if the other conditions of the Act remains satisfied. 12.1. Ground No.(x) The Ld. Assessing Officer .....

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.R. After hearing both sides and perusing the orders of the Revenue, we do not find any mention about the disallowance of the TDS. Moreover, the Ld. A.R. has also not furnished the details of the TDS claimed by the assessee and the amount disallowed by the Revenue. Therefore, in the interest of justice we remit this matter back to the file of the Ld. Assessing Officer for examining the relevant documents furnished by the assessee and pass appropriate speaking order as per merits and law after gi .....

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open court on February,2015. PER V. DURGA RAO, JUDICIAL MEMBER : 15. I have carefully gone through the order of ld. Accountant Member. Despite discussion and deep study of the order, though, I am fully agreed with the observations and conclusions drawn by the ld. Accountant Member with regard to ground Nos. (i) to (vi) & (viii) to (xi), I am unable to persuade myself and agree with his views & conclusions drawn with respect to the only Ground No. (vii) Disallowance of expenditure of (_. .....

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_.5,20,97,000/- to the Tamil Nadu Police Department as an advertisement and sales promotion expenditure. The Assessing Officer has asked the assessee to explain as to why the same should not be disallowed as per the provisions of section 37 of the Income Tax Act, 1961 [hereinafter called as Act ]. In response to the above, the assessee has explained before the Assessing Officer that in India, Police Department does not use car for patrolling and surveillance purposes and the usage of cars for ro .....

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wholly and exclusively for the purpose of the business of HMIL to find out the new segments of car market. It was also submitted that the expenditure incurred by the assessee was wholly and exclusively for the purpose of business and it is allowable under section 37 of the Act. Further, the assessee has stated that it was also incurred for commercial expediency and relied on the decisions in the case of Sree Meenakshi Mills Ltd. v. CIT 49 ITR 156 (Mad), CIT v. Birla Cotton Spinning & Weavin .....

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e usage, effectiveness and improvement of the said vehicles donated. The assessee has not provided any information to the Assessing Officer, whether the assessee has obtained the information from the Police Department with regard to the usage of the cars. The Assessing Officer has further observed that the donated cars to the Police Department are not being used with any advertisement features of the assessee company. Further, it was nothing different from other vehicles [vehicles like Bolero &a .....

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vement of the cars manufactured by the assessee. The Assessing Officer has denied that 100 cars donated by the assessee to the Police Department was not real as to ascertain and evaluate the usage, effectiveness and improvement of the cars manufactured by the assessee. According, the claim made by the assessee under section 37 of the Act was denied by the Assessing Officer. 18. On appeal, before the ld. DRP, the assessee has submitted that the expenditure incurred by the assessee was towards Cor .....

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diture incurred by the assessee is for the purpose of advertisement and also corporate social obligation, which is fully allowable under section 37 of the Act. 21. On the other hand, the ld. DR has submitted that the Police Department is being using cars of other companies such as Bolero & Scorpio of Mahindra & Qualis of Toyota. There was nothing special in using the Hyundai Accent cars. Therefore, it cannot be said that the expenditure incurred is for the purpose of advertisement. 22. B .....

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rdingly, it has delivered the cars to the Police Department. It is a facility provided by the assessee to the servants of the Government i.e., Police Department. It is also not correct to say that the Police Department was not using any vehicles. It is the duty of the State Government to decide what facilities are to be provided to their servants and to discharge their duties effectively. Corporate bodies like the assessees are not allowed for stepping into the duties of the State Government, to .....

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as an advertisement to the assessee company. In so far as to ascertain and evaluate usage and effectiveness of cars manufactured by the assessee is concerned, after donating the cars to the Police Department, it appears that the assessee has not made any enquiry with the Police Department as to how efficiently the cars are working. The assessee has failed to file such report either before the Assessing Officer or before the ld. DRP or before the Tribunal. Therefore, it cannot be said that cars .....

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in unsuccessful attempts to get released yarns of the assessee seized by the Textile Commissioner for evaluation of Cotton Cloth and Yarn (Control) order 1945 are not allowable business expenditure. 24. The case law relied on by the assessee in the case of CIT v. Birla Cotton Spinning & Weaving Mills Ltd./Birla Bros (P) Ltd. (supra), the Hon ble Supreme Court has considered the allowability of expenditure under section 37(1) of the Act and held as under: The expression for the purpose of the .....

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allowable expenditure under section 37 of the Act. 25. In the case of CIT v. Malayalam Plantations Ltd. [1964] 53 ITR 140 (SC), the Hon ble Supreme Court has held as under: The expression for the purpose of business in section 10(2)(xv) of the 1922 Act [corresponding to section 37(1) of the 1961 Act] is wider in scope than the expression for the purpose of earning profits . Its range is wide; it may take in not only the day-to-day running of a business but also the rationalisation of its adminis .....

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hall be for the purpose of the business, that is to say, the expenditure incurred shall be for the carrying on of the business and the assessee shall incur it in his capacity as a person carrying on the business. It cannot include sums spent by the assessee as agent of a third party, whether the origin of the agency is voluntary or statutory; in that event, he pays the amount on behalf of another, and for a purpose unconnected with the business. In the present case, the assessee has voluntarily .....

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Ltd. (supra) squarely applies to the facts of the present case. Therefore, it cannot be said that the cars donated by the assessee is for the purpose of business. 26. Further, the assessee has failed to prove that the cars donated by the assessee to the Police Department is wholly and exclusively for the purpose of the business. It has also failed to prove that there is nexus between the expenditure and business of the assessee. 27. In view of the above, keeping in view of the facts and circums .....

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to the Police Department of Tamil Nadu is an eligible expenditure under section 37 of the Income Tax Act or not? ORDER Per D. Manmohan, V.P. On account of difference of opinion between the Hon ble Accountant Member and Hon ble Judicial Member, the following question was formulated and referred to the Hon ble President for nomination of Third Member under section 255(4) of the Income Tax Act, 1961:- Whether the expenditure incurred by the assessee by giving 100 cars to the Police department of T .....

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uring the previous year relevant to the assessment year under consideration the assessee donated 100 cars of Hyundai Accent model to the police department of Tamil Nadu State Government. The total worth of 100 cars was of ₹ 5,20,97,000/- which was shown under the head advertisement and sales promotion (including retail discounts); at page 15 of the paper book (notings below the schedule forming part of accounts), it is stated that the cars were given free of cost to the police department a .....

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e department does not use cars for patrolling and surveillance purposes. The usage of cars for road safety, removal of traffic bottlenecks, reaching the accident spot in time, surveillance, chasing and catching of culprits need to be addressed and tested. The assessee-company therefore offered 100 Hyundai Accent model cars to police department to test the car market. It was also stated that these cars were fitted with latest electronic equipments which are useful in controlling crimes and protec .....

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ness is wider than the expression for the purpose of earning profits and it can be any expenditure incurred, incidental to carrying on of the business. 4. Since the assessee had to support the claim with evidence, the Assessing Officer called upon the assessee to furnish agreement with the police department and other details. At this stage, the assessee-company admitted that there is no formal agreement with the police department. However, a copy of letter, stated to have been addressed to Home .....

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afety related activities. In India, Police Department does not use cars for patrolling and surveillance purposes. The usage of cars for road safety, removal of traffic bottleneck, reaching the accident spot in time, surveillance, chasing and catching of culprits needs to be addressed and tested. These Patrol Cars fitted with the latest electronic equipments would be very useful in controlling crimes and protecting valuable life of citizens. In this direction, we propose to test the market by off .....

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improvements made in the cars, the assessee provided 100 cars to the police department. 5. It is not the case of the assessee that any Board Meeting of the assesseecompany had taken place. In fact the counsel of the assessee was called upon to furnish evidence, if any, to show that the management had collectively taken a decision by recording the same in writing in the form of minutes of meeting etc. But it was stated that no such information is on record. However, it was stated that the assess .....

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nt. Despite several opportunities, no evidence could be furnished by the assessee in this regard. Therefore, the Assessing Officer was of the view that expenditure was not incurred for the purpose of business and the same is not an allowable expenditure, as per provisions of section 37 of the Act. He further observed that donated vehicles are not used with any advertisement features of the assessee-company and it is nothing different from other vehicles namely Bolero, Scorpio and Qualis etc. whi .....

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se and object of donating 100 cars is not real as stated by the assessee and the so called object is remote or illusionary. In this regard, the Assessing Officer referred to the decision of Hon ble Andhra Pradesh High Court in the case of CIT Vs. Vazir Sultan Tobacco Co. Ltd. (169 ITR 139) wherein the Court observed that even though an expenditure is incurred by an assessee voluntarily, but not obligatory, it can be allowed if it is ultimately designed to further the objects and purposes of the .....

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gifting cars to the Tamil Nadu police department. It was further claimed that usage of the vehicles by the police department would help the assessee to assess the reliability of the vehicles and help the public at large apart from helping the assessee as advertisement to promote sales. The assessee placed reliance on the decision of the Hon ble Supreme Court in the case of Sri Venkata Satyanarayana Rice Mill Contractors Co. Vs. CIT (223 ITR 101), wherein the Court observed that in order to cons .....

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rice, if they propose to export rice from Andhra Pradesh. In order to export rice, the members of the Rice Millers Association deposited the stipulated amount in District Welfare Fund and accordingly collected permits. The Hon ble Court observed that expenditure was wholly and exclusively incurred for the purpose of business as the payment is not opposed to public policy. 8. Summary of the arguments of the assessee are: - (a) Gift of cars will help the assessee-company to test the performance of .....

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orporate social responsibility . 9. The learned Accountant Member accepted the plea of the assessee by observing that such gestures of the corporate houses have to be appreciated and encouraged which will benefit public at large. The learned Accountant Member further observed that this expenditure directly or indirectly benefits the assesseecompany, for its image building and its promotion/sales of products and hence the expenditure is allowable as deduction under section 37(1) of the Act becaus .....

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catching culprits equally needs to be addressed and tested and hence the cars were provided to Tamil Nadu police department to test the car market. The learned Judicial Member also recorded the plea of the assessee that these patrolling cars are fitted with latest electronic equipments which are very useful in controlling crimes and protecting the valuable life of citizens. 11. However, the learned Judicial Member opined that donation of cars has no nexus with the business of the assessee. So f .....

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ing used by the Tamil Nadu police department for its patrolling purposes. He also noted the fact that assessee incurred huge expenditure for the purpose of research and development facility every year in order to evaluate usage, effectiveness and improvement of cars and therefore the cars donated to the Tamil Nadu police department though meant to be for deciding its effectiveness, the reason was not real. 12. As regards the plea that expenditure was incurred towards corporate social responsibil .....

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lity which otherwise could have been provided by the Government but not provided; in this case cars were provided by the state government wherever required and hence corporate social responsibility has no role here. The Government has already taken a decision to provide vehicles as per the requirement. Therefore, the principle of corporate social responsibility does not come into play. On the contrary, supply of cars would be against the public policy and hence cannot be allowed as business expe .....

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rein the Court observed that the expression for the purpose of business is wider in its ambit and may not be limited to expenditure incurred for the purpose of earning profits but such expenditure should be incidental to carrying on of the business. Since, in the instant case, the cars given to the police department is not incidental activity for the purpose of business of the assessee, learned Judicial Member concluded that the expenditure is not allowable as deduction under section 37 of the A .....

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assessee shall incur it in its capacity as a person carrying on the business and cannot include the sums spent as an agent of a third party. The learned Judicial Member also observed that the assessee failed to prove that cars donated by the assessee to police department were wholly and exclusively for the purpose of its business since there was no nexus between the expenditure and business of the assessee. 15. On account of difference of opinion, as already stated hereinabove, the point of dif .....

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tion expenditure . The counsel adverted my attention to page 218 of the paper book to submit that assessee-company addressed a letter to the Home Secretary, Government of Tamil Nadu mooting the proposal that they would intend to test the market by offering vehicles to Tamil Nadu police and hence they would like to offer 100 suitably modified Hyundai Accent cars to police department. Learned counsel, therefore, submitted that the main purpose was to test the market i.e., Market Research since it .....

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lso be termed as corporate social responsibility of the assessee-company; presenting the cars to police department who are ill equipped in the matter of surveillance, chasing and catching of culprits because police department does not use cars. It was mainly submitted that the term business expenditure has to be tested from the businessman s point of view and it is not for the Revenue to analyse the concept by sitting in an armed chair. In other words, the main test is whether the expenditure wa .....

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e Hon ble Madras High Court in the case of CIT Vs. Madras Refineries Ltd. (266 ITR 170) to submit that expenditure on social welfare of local residents is a goodwill gesture and monies spent by the assessee for establishing water facilities cannot be regarded as wholly outside the ambit of the business concerns of the assessee. He also relied upon the following decisions in support of his contention that expression wholly and exclusively does not include the expression necessarily and thus even .....

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R 714) (Karn) v) CIT Vs. Kamal & Co. (203 ITR 1038) (Raj) vi) CIT Vs.RajasthanSpg&Wvg. Mills Ltd. (281 ITR 408) (Raj) vii) CIT Vs. T.V.SundaramIyengar& Sons P,.Ltd. (186 ITR 276) (SC) viii) ACIT Vs. Kuber Singh Bhagwandas (118 ITR 379) (MP Full Bench) 18. Learned counsel for the assessee submitted that it was also a corporate social responsibility - on the part of the assessee - to help the needy, be it Government organization or private personnel, and so long as it is incidental to .....

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adras High Court in the case of CIT Vs. Amalgamations Ltd. (214 ITR 399) (pages 431 & 432) wherein the Court observed that though the judgement in the case of Malayalam Plantations Ltd. (supra), at a first glance, appears to support the Revenue, but the Hon ble Supreme Court, in the aforesaid case, proceeded on assumption that the assessee paid estate duty to the State as an agent which could not be recovered from the legal representative of the deceased and in that context the expression fo .....

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n to decide what gives him benefit and merely because there may be a benefit to the third party, so long as there is no such evidence, the same cannot be disallowed. He thus, strongly relied upon the order passed by the learned Accountant Member. 19. On the other hand, learned Departmental Representative submitted that police department in Tamil Nadu have no dearth of vehicles and the Government, in its wisdom, has decided to provide vehicles only to those officers who are in need of vehicles i. .....

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lity refers to an obligation on the part of the Government but not fulfilled i.e., in the event of inability on their part to render proper services, corporates can step in and share government s responsibility as part of their corporate social responsibility. Whereas, in the instant case, how many cars are to be provided to the officers is left to the wisdom of the police department and the assessee cannot assume that police department is unable to provide cars and hence, in the garb of corpora .....

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that they have made reasonable efforts with the police department to obtain feedback whereas no such paper could be filed at any stage of the proceedings. It is also not in dispute that cars did not carry any kind of advertisement features on the cars donated to the police department. In addition to this the assessee has a robust research and development wing, wherein substantial amounts have been spent on yearly basis and thus the purpose, in the instant case, cannot be said to be real and eff .....

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ACIT (123 ITD 67) wherein the Bench observed that the essential condition of allowance is that the expenditure should have been laid out or expended wholly and exclusively for the purpose of such business i.e. to enable a person to carry on and earn profit in that business. It is not enough that disbursements are made in the course of or arise out of or are concerned with or made out of profits of the business, but that must also be for the purpose of running of business, though actual profits .....

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on this issue before analysing the facts of the present case. Learned Departmental Representative also relied upon the decision of the Hon ble High Court of Orissa in the case of CIT Vs. Industrial Development Corporation of Orissa Ltd. (249 ITR 401), wherein the Court observed that if a State owned corporation donates an amount of rupees one lack to Chief Minister s Relief Fund it cannot be treated as expenditure incurred wholly and exclusively for the purpose of business. In this regard, the C .....

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section 37(1) of the Act. The High Court had taken note of the decision of Supreme Court in the case of Sri Venkata Satyanarayana Rice Mill Contractors Co. Vs. CIT(supra) to clarify that in the aforecited decision the assessee association obtained permits from the District Collector after paying contribution, pursuant to the scheme framed by Rice Millers Association, and there is a direct link with the business carried on by the assessee, whereas, in the instant case, there is nothing on record .....

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idence as to whether there is any letter in writing from the police department or Home Secretary mentioning about shortage of cars or need for more cars, learned counsel submitted that there is no such material on record. He merely stated that letter dated 14th August, 2006 addressed to Home Secretary, Government of Tamil Nadu, Chennai proves that assessee sought permission before providing suitably modified Hyundai Accent cars. But the assessee-company did not either obtain a letter in writing .....

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lso admitted that the plea of corporate social responsibility was taken only at a later stage, since the claim was not made on that count before the Assessing Officer, but quickly submitted that allowability of deduction can be justified on any other ground and in the instant case the assessee pleads it is a corporate social responsibility, apart from gaining goodwill image which would help the assessee in carrying on its business in Tamil Nadu smoothly and thus it can be considered as an expend .....

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also admitted that assessee has not even made any effort till date to draw attention of public by mentioning in their advertisements that cars manufactured by them are best cars designed to protect the interest of public at large and used by police personnel . With regard to additional fittings for the specific use of the police personnel, no material was placed on record; the counsel merely contended that every car will have its logo Hyundai and that itself will have advertisement value. 23. I .....

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d down by several courts have to be considered in the backdrop of the facts of this case. 24. In the case of Sassoon J. David & Co. P. Ltd. (118 ITR 261) (SC) the Apex Court observed that the expression wholly and exclusively does not mean necessarily and even a voluntary payment can be considered for claim of deduction so long as it is incurred for the purpose of business. There need not be a direct link between earning of profit and the expenditure incurred. But, at the same time, the expr .....

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that it was incurred wholly and exclusively for the purpose of business. In the instant case the assessee-company initially claimed that it has donated 100 cars to the Police Department to test the efficacy of their vehicles and to obtain feedback, as could be seen from the letter addressed to the Home Secretary (letter dated 14th August, 2006). In the schedule forming part of the accounts it was treated as advertisement and sales promotion expenditure . There is nothing on record to suggest tha .....

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nd the improvement, if any, required. Thus the plea of the assessee that the cars were given for market research fails. In fact the assessee never made even a faint attempt to obtain the feedback in writing. When the cars worth more than ₹ 5 crores are given, a decision has to be taken at a major level and such a decision can be taken in a Board meeting followed by minutes of the meeting. No such evidence was furnished at any stage. 26. This apart the company has a robust market research w .....

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ng the cars free of cost to the Police Department of Government of Tamil Nadu, more particularly when the proposal was not accepted in writing and neither the assessee called for their feedback nor did the Police Department deem it fit to give any feedback. 27. Since the assessee reported the expenditure under the head advertisement and sales promotion it may be seen whether the expenditure has helped in advertisement of their cars - if the cars were given free of cost to the Police Department. .....

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does not attract the attention of common man or the potential buyers. It is also not the case of the assessee that they have given any advertisement on any subsequent occasion that the cars donated to the Police Department were specially fitted with certain features for speed and efficiency. 28. Though an expenditure voluntarily incurred can be classified as business expenditure, it is subject to fulfilling the essential condition that it is wholly and exclusively incurred for the purpose of bus .....

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. 29. At a later stage the assessee-company raised a new plea that it fulfills the corporate social responsibility. In my humble opinion, the expression corporate social responsibility should be given a rational meaning bearing in mind the idea of the Legislature while bringing out this concept. Wherever there is responsibility on the part of the Government and it was not able to extend its arm in fulfilling its social responsibility and if a corporate can fill that gap, it can be considered as .....

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For example, a Police Inspector, under law, is provided a motorcycle which can be used effectively to cruise through the busy roads in India whereas the assessee might feel that even a Police Constable should enjoy the luxury of a car and in the garb of allowing them to have more number of cars for patrolling it may gift cars which cannot be equated to corporate social responsibility. In short, it is for the assessee to prove that the cars were provided genuinely under the impression that it is .....

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xpenditure under section 37(1) of the Income Tax Act, 1961. 30. Though the company claimed that the cars were provided to get feedback about the efficiency of the cars, the letter furnished before the Tribunal clearly indicates that they have already sold the cars to Police Departments and other security agencies which are discharging similar functions and there was no need for them to give further cars to do market research only in Tamil Nadu when the Government has not shown any interest in gi .....

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