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Honda Siel Power Product Ltd. Versus D.C.I.T., Circle 11 (1) , New Delhi.

2016 (5) TMI 869 - ITAT DELHI

Adjustment made by the TPO on account of AMP expenses deleted

Disallowance u/s 40(a)(i) - Held that:- The export commission was neither royalty nor fees for technical services and as such the assessee was not required to deduct tax at source on payment of export fee and thus, no disallowance under section 40(a)(i) could be sustained. Respectfully following the order of the Coordinate bench in assessee’s own case where no change in facts or circumstances has been pointed out, the addi .....

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ned basis year after year and such provision would be reduced completely when the obsolete stock is written off in subsequent years, no disallowance can be made on the assessee company. provision for slow moving inventory would be allowed as revenue deduction and therefore, the disallowance made in the assessment order for A.Y. 2010- 11 on this account has to be deleted. - ITA No.551/Del./2014, ITA No. 636/Del./2015 - Dated:- 13-4-2016 - SHRI I.C. SUDHIR, JUDICIAL MEMBER AND SHRI L.P. SAHU, ACCO .....

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10: General: 1. That the impugned order of assessment framed by the assessing officer in pursuance of the directions of the Dispute Resolution Panel (hereinafter referred to as DRP ) under Section 143(3) read with Section 144C of the Income-tax Act, 1961 ( Act ), is bad in law, violative of principles of natural justice and void ab-initio. 1.1. That assessing officer erred on facts and in law in computing the income of the appellant at ₹ 39,11,70,920 against the returned total income of &# .....

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ses (hereinafter referred to as the AMP expenses ) incurred by the appellant. 3.1. That on the facts and in the circumstances of the case, the DRP erred in law in upholding, in principle, transfer pricing adjustment made by the assessing officer / TPO in respect of expenditure incurred on AMP expenses. 3.2. The Assessing Officer / TPO erred on facts and in law in not appreciating that the only Transfer Pricing adjustment permitted by Chapter X of the Act was in respect of the difference between .....

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or authorized by Chapter X of the Act. 3.4 The DRP erred on facts and in law in not holding that merely because the Indian company has incurred expenditure on product advertisements including the foreign brand and the AMP expenses incurred by the taxpayer, which are proportionately higher than those incurred by comparable cases, it does not lead to the inference of transaction between the taxpayer and the foreign AE for creating marketing intangibles on behalf of the later. 3.5. The DRP/TPO err .....

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ed manufacturer and the sole beneficiary of the AMP expenditure incurred by it, justifies the conduct of the appellant in incurring and bearing the cost of AMP expenditure. 3.7. The DRP erred on facts and in law in not holding that expenditure on advertisement and brand promotion, unilaterally incurred by the appellant, could not be regarded as a transaction in the absence of any proved understanding / arrangement between the appellant and the associated enterprise. 3.8. The Assessing Officer/TP .....

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ellant and the associated enterprise, the associated enterprise was under no obligation to reimburse AMP expenses incurred by the appellant for sale of its products in India. 3.10. The DRP/TPO erred on facts and in law in not appreciating that the advertisement and marketing expenses were incurred by the appellant wholly and exclusively for purposes of its business and not on behalf of or for the benefit of the AE; any benefit to the AE being only incidental. 3.11 That the assessing officer erre .....

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hat, since the appellant earns return commensurate with other brand owners, the appellant is adequately compensated for its functions and AMP expenses. 3.14 Without prejudice that the assessing officer/TPO erred on facts and in law, in not appreciating that the AMP expenses incurred by the appellant was appropriately established to be at arm s length applying Transactional Net Margin Method ( TNMM ). 3.15 The Assessing Officer/TPO erred on facts and in law in applying Bright Line Test ( BLT ) fo .....

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m s Length Price ( ALP ) by applying one of the methods specified in section 92C of the Act. 3.17. The assessing officer/TPO erred on facts and in law in not appreciating that merely because the net profit rate of the appellant was better than the corresponding net profit rate of comparable companies, would not lead to the conclusion that incurring of AMP expenses for the AE was at arm s length. 3.18 That the assessing officer/TPO erred on facts and in law in ignoring that bright line limit is n .....

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TPO erred on facts and in law in failing to appreciate that the appellant has long-term rights to use the trademark/ licensed intangibles and reaps all the benefits of the said AMP expenses and is thus the economic owner of any related marketing intangible. 3.21 That the assessing officer/TPO erred on facts and in law in failing to appreciate that all the key decisions with respect to advertising, marketing, selling and distribution of the products manufactured by the appellant for sale in desig .....

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be excessive on the basis of a bright line limit arrived at by considering inappropriate comparables, not having similar product/ brand profile as the appellant. 3.24 Without prejudice that the assessing officer/TPO erred on facts and in law in considering selling and distribution expenses for the purpose of calculating alleged AMP expenditure of the appellant. 3.25 Without prejudice that the assessing officer/TPO erred on facts and in law in considering the following companies as comparable fo .....

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ed on facts and in law in holding that the appellant has rendered service to the AEs by incurring the AMP expense and by holding that markup has to be earned by the appellant in respect of the AMP expenses, alleged to have incurred for and on behalf of the AE. 3.28 Without prejudice, the assessing officer/TPO erred on facts and in law in not appreciating that markup, if at all, had to be restricted to the value added expenses incurred by the appellant for providing the alleged service in the nat .....

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ed enterprises is not at arm s length as it amounts to collecting royalty on the sale to itself. 4.2. That the assessing officer/TPO erred on facts and in law in holding that where the appellant is making part of its sales to related parties and the benefit of purchasing components is reaped by the associated enterprise, the payment of royalty do not confirm to arm s length price. 4.3. That the assessing officer/TPO erred in not appreciating that the royalty paid in terms of agreement duly appro .....

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as per the Technical Collaboration Agreement ( TCA ) as capital expenditure incurred for acquisition of intangible asset and instead allowing depreciation @25%. 5.1 Without prejudice, that the assessing officer erred on facts in disallowing technical guidance fee of ₹ 1,36,21,453 in place of ₹ 1,00,56,950. 5.2. That the assessing officer erred on facts and in law in holding that in terms of the Technical Collaboration Agreement, intellectual property right developed by Honda, Japan .....

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ial Property Rights for the purposes of manufacture, assembly, procurement, sale, delivery and service of the products and the parts. (ii) The terms of agreement are quite comprehensive and the whole technical know-how to set up the business of the appellant are provided by Honda. (iii) The assessee has paid the royalty for the acquisition of an indivisible, non-transferable and exclusive license in favour of the appellant to manufacture and assemble the products and the parts in the territory, .....

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officer erred on facts and in law in disallowing export commission paid to M/s Honda Motor Co. Ltd. of Japan of ₹ 4,32,49,149 invoking section 40 (a) (i) of the Act holding the same to be royalty/fee for technical service on which allegedly the assessee had failed to deduct tax at source as per section 195 of the Act. 6.1. That the assessing officer erred on facts and in law in law in holding that the payments of export commission was towards royalty/fee for technical services as the same .....

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t liable to tax in India. 6.3 That the assessing officer erred on facts and in law in not appreciating that the payment of export commission was made to Honda in consideration of according consent for ceding overseas territory permitting export of motorcycle and spares by the appellant. 6.4 That the assessing officer erred on facts and in law in not appreciating that services / assistance provided by Honda were incidental to the right for exploiting the foreign territory and were not in the natu .....

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m source outside India, cannot be characterized as royalty or fee for technical service as per section 9(1)(vi)(b) or section 9(1)(vii)(b) of the Act respectively. 7. That the assessing officer erred on facts in not allowing credit for tax deducted at source amounting to ₹ 71,407 from the tax payable without assigning any reason thereof. 8. That the assessing officer erred on facts and in law in levying interest under section 234B of the Act. Grounds raised in A.Y. 2010-11: General: 1. Tha .....

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Transfer Pricing Issues: 2. That the assessing officer erred on facts and in law in making addition to the income of the appellant to the extent of ₹ 11,36,67,464 on account of the alleged difference in the arm s length price of international transactions. Advertisement, marketing and sales promotion expenses: 3. That the assessing officer erred on facts and in law in making transfer pricing adjustment amounting to ₹ 10,98,88,464 in relation to the advertisement, marketing and sales .....

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was in respect of the difference between the arm s length price (ALP) and the contract or declared price. 3.3 The DRP erred on facts and in law in not appreciating that the Transfer Pricing adjustment sought to be made by the TPO in the present case was a mere quantitative adjustment, on the footing that the Appellant had incurred an excessive amount of AMP expenditure , and not on the footing that there was a difference between the ALP and the contract or declared price, and that a Transfer Pri .....

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ehalf of the later. 3.5 That the DRP/TPO erred on facts and in law in not appreciating that since the appellant was performing the key people/critical decision making functions with regard to advertisement and marketing activity, the risk related to such activity ought to have been borne by the appellant. 3.6 That the DRP/TPO erred on facts and in law in not appreciating the fact that since the appellant was bearing the risk related to the marketing activity and was also entitled to retain the p .....

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action of creating and improving marketing intangibles for and on behalf of its foreign AE and further that such a transaction was in the nature of provision of a service by the appellant to the AE. 3.9 That the assessing officer erred on facts and in law in not appreciating that the characterization of the appellant being that of a full fledged manufacturer and the sole beneficiary of the AMP expenditure incurred by it, justifies the conduct of the appellant in incurring and bearing the cost of .....

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al transaction as per section 92B, in the absence of any proved understanding / arrangement between the appellant and the associated enterprise, so as to invoke the provisions of section 92 of the Act. 3.12 That the DRP/TPO erred on facts and in law in not appreciating that unilaterally incurring of AMP expenses by the appellant does not result in an international transaction in terms of section 92B of the Act, even after its amendment by the Finance Act, 2012. 3.13 The DRP/TPO erred on facts an .....

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in India. 3.15 The DRP/TPO erred on facts and in law in not appreciating that the advertisement and marketing expenses were incurred by the appellant wholly and exclusively for purposes of its business and not on behalf of or for the benefit of the AE; any benefit to the AE being only incidental. 3.16 That the DRP/TPO erred on facts and in law in not appreciating that no adjustment on account of allegedly excess AMP expenditure is warranted in the case of the appellant as such expense have been .....

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AE. 3.19 Without prejudice that the assessing officer erred on facts and in law in ignoring the fact that, since the appellant earns return commensurate with other brand owners, the appellant is adequately compensated for its functions and AMP expenses. 3.20 Without prejudice that the assessing officer erred on facts and in law, in not appreciating that the AMP expenses incurred by the appellant was appropriately established to be at arm s length applying Transactional Net Margin Method (TNMM). .....

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g adjustment cannot at all be made in law without determining the Arm s Length Price ( ALP ) by applying one of the methods specified in section 92C of the Act. 3.23 The DRP/TPO erred on facts and in law in not appreciating that merely because the net profit rate of the appellant was better than the corresponding net profit rate of comparable companies, would not lead to the conclusion that incurring of AMP expenses for the AE was at arm s length. 3.24 That the assessing officer erred on facts a .....

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t. 3.26 That the assessing officer erred on facts and in law in holding that the appellant should have earned a mark-up in respect of the AMP expenses, alleged to have incurred for and on behalf of the associated enterprise. 3.27 Without prejudice that, the assessing officer erred on facts and in law in holding the AMP expenses incurred by the appellant to be excessive on the basis of a bright line limit arrived at by considering inappropriate comparables, not having similar product/ brand profi .....

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Solutions Ltd. 1.43% 2. Greaves Cotton Ltd 0. 32% 3. Gujarat Forgings Ltd 1.61% 4. Jaksons Ltd 0.60% 5. Kirloskar Brothers Ltd 1.25% 6. Powerica Ltd 0.22% 7. Shakti Pumps Ltd 2.74% 8. Southern Agro Engines Pvt Ltd NA 9. SudhirGensets Ltd 0.28% 10. Supernova Engineers Ltd 0.51% Average 1.00% 3.30 Without prejudice, that on facts and circumstances of the case the DRP/TPO ought to have considered the following companies as comparable for benchmarking the advertisement and publicity expenses: Name o .....

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ate transaction and is to be evaluated separately. 3.33 That the assessing officer / TPO erred on facts and in law in holding that the appellant has rendered service to the AEs by incurring the AMP expense and by holding that markup has to be earned by the appellant in respect of the AMP expenses, alleged to have incurred for and on behalf of the AE. 3.34 Without prejudice, the assessing officer/TPO erred on facts and in law in not appreciating that markup, if at all, had to be restricted to the .....

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g as a contract manufacturer and hence royalty paid as percentage of sale to the associated enterprises is not at arm s length as it amounts to collecting royalty on the sale to itself. 4.2 That the assessing officer/TPO erred on facts and in law in not appreciating that the transaction of sale of goods by the appellant to associated enterprises was undertaken on a principal to principal basis, wherein the appellant is acting as a licensed manufacturer 4.3 That the assessing officer/TPO erred on .....

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n. 4.5 That the assessing officer/TPO erred in not appreciating that the royalty paid in terms of agreement duly approved by the Central Government, cannot be referred as a non bonafide payment not satisfying the arm s length test. 4.6 That the assessing officer/TPO erred in not appreciating that payment of royalty is a necessary cost incurred by the appellant for manufacture of goods. Corporate Issues Re: Disallowance of relocation expenses 5. That the assessing officer/ DRP erred on facts and .....

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shifting of plant and machinery are an integral part of the business of the appellant, and therefore, the same should be treated as Capital in nature. 5.3 That the assessing officer/ DRP erred on facts and in law in holding that the appellant would secure an advantage of enduring nature on account of relocation of the appellant s factory. Re: Disallowance of provision on account of slow moving inventories 6. That the assessing officer/ DRP erred in disallowing provision for slow moving inventory .....

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xpense 6.2 Without prejudice, that the assessing officer/DRP erred on facts and in law in making the aforesaid disallowance of the amount of provision for slow moving inventory and not appreciating that the aforesaid disallowance was revenue neutral in nature, because as and when the aforesaid inventory will be sold, the loss relating to the same will not be debited in Profit & Loss statement. 2. Since both these appeals were heard together and major issues involved in these appeals are comm .....

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009 declaring total income of ₹ 23,08,71,683. During the course of assessment proceedings, the AO noted that the assessee is paying royalty of ₹ 6,78,03,514 and a technical guidance fee of ₹ 1,81,61,938 to Honda Motor Co. Japan. The AO came to the conclusion that royalty and technical guidance fee were to be capitalised, after allowing depreciation of 25% on the same. 3.1. On the issue of export commission, the AO found that the export commission is in the nature of royalty/ fe .....

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ansactions during the year under consideration. The TPO in the order dated 14.12.2012 made an adjustment of ₹ 4,80,08,814 on account of the difference in advertisement and promotion expenditure of the assessee company and the arm s length price of subsidy received from the associated enterprises. The AO further made disallowance of royalty payment of ₹ 45,67,000 on account of sales made to associated enterprises. 3.4. The assessee carried the matter in appeal before the DRP. The DRP- .....

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clusion that royalty and technical guidance fee were to be capitalised, after allowing depreciation of 25% on the same. 4.1 The AO further made addition of ₹ 1,11,47,000 towards relocation expenses towards shifting of factory of the assessee company, on the ground that such expenditure was capital in nature and had resulted in benefit of enduring nature to the assessee company. The AO also noted that the amount of ₹ 11,76,382 debited in the profit & loss account of the assessee c .....

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ises. The AO further made disallowance of royalty payment of ₹ 37,790,00 on account of sales made to associated enterprises. 4.3. The assessee carried the matter in appeal before the DRP. The DRP-I, New Delhi in its order dated 21.11.2014 directed the AO to delete the disallowance of payment of royalty and technical guidance fee by following the order of the Honble ITAT, I Bench. Delhi in the assessee s own case for assessment year 2007-08 in ITA No. 5713/Del/2011 dated 25.07.2014. 4.4 How .....

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7. Grounds Nos. 2, 3 to 3.28 raised in A.Y. 2009-10 and grounds Nos. 3 to 3.34 raised in A.Y. 2010-11 are identical and relate to the issue of transfer pricing additions on account of advertising, marketing and promotion expenses amounting to ₹ 4,80,08,814 and ₹ 10,98,88,464 respectively. 8. The relevant submissions made by the ld. Counsel for the assessee on this issue are common for both the years. Therefore, the submissions made by way of written synopsis for the A.Y. 2010-11 are .....

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7. Payment of Export Commission 47,054,017 TNMM 8. Reimbursement of Expenses by AEs 1,065,607 Cost Recharges 9. Reimbursement of Expenses to AEs 33,447 Cost Recharges In the Transfer Pricing study report, the international transactions have been benchmarked using Transactional Net Margin Method ( TNMM ) as the most appropriate method with Operating Profit/Operating Revenue (OP/OR) ratio as profit level indicator. For the purpose of selecting comparables the appellant has selected companies enga .....

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ny Name OP/OC % Economic Activity 1 Birla Power Solutions -3.70% Gensets 2 Greaves Cotton Ltd 10.31% Gensets and Engines 3 Gujarat Forgings Ltd 4.56% Diesel Engines, Pumpsets 4 Jaksons Ltd 6.51% Gensets 5 Kirloskar Bros Ltd 7.65% Industrial and Engineering Pumps 6 Powerica Ltd 12.48% Diesel and gas gensets 7 Shakti Pumps Ltd 12.28% Submersible and booster pumps 8 Southern Agro Engines Pvt Ltd 4.62% Engines and pumpsets 9 SudhirGensets Ltd 16.80% Gensets 10 Supernova Engineers Ltd 4.53% Diesel an .....

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undertake the benchmarking analysis of advertisement, marketing and sales promotion (AMP) expenses aggregating to ₹ 12,62,35,000 incurred by the appellant on the products Honda during the relevant previous year, as follows: Particulars Amount (Rs.) Commission on sales 5,02,96,000 Advertisement and publicity 1,76,58,000 Sales Promotion 3,72,36,000 Total 12,62,35,000 The Transfer Pricing Officer (TPO) had undertaken benchmarking analysis of AMP expenses incurred by the appellant allegedly ap .....

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ompany AMP/sales Birla power solutions 1.43% Greaves Cotton 0.32% Gujarat Forgings Ltd 1.61% Jaksons Ltd 0.60% Kirloskar Brother Ltd 1.25% Powerica Ltd 0.22% Shakti Pumps Ltd 2.74% SudhirGensets Ltd 0.28% Supernova Engineers Ltd 0.51% Arithmetic Mean 1.00% The TPO accordingly, held that, since the ratio of AMP expenses as a percentage of sales in case of the appellant at 4.13% was higher than AMP expenses of 1% incurred by the above comparable companies, the appellant had incurred non-routine AM .....

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ociated enterprises (AEs) as follows: Computation of TP adjustment Amount (Rs. In lacs) Value of sales 3,058,005,000 AMP / Sales of the comparables 1% Amount that represents bright line 30,580,000 Expenditure on AMP by assessee 12,62,35,000 Expenditure in excess of bright line 9,56,55,000 Mark-up @ 14.88% 1,42,33,464 Reimbursement that assessee should have received. 10,98,88,464 Adjustment to assessee s income 10,98,88,464 A Special Bench was constituted in the matter of L.G. Electronics India P .....

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rable cases, the same leads to the inference of transaction between the taxpayer and the foreign AE for creating marketing intangibles on behalf of the later. (ii) The transaction of brand building is a transaction of creating and improving marketing intangibles by the taxpayer for and on behalf of its foreign AE; such transaction is in the nature of provision of service. (iii) The bright line test is used only to ascertain the cost / value of service rendered by the taxpayer to foreign AE towar .....

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gh Court considered the case of limited risk distributors, i.e., Sony Ericsson, Canon and Reebok, etc., wherein, the existence of international transaction on account of AMP expenditure was admitted and reported. The Delhi High Court in the said decision upheld TP adjustment in respect of AMP expenses only in respect of limited risk distributors and not in respect of full risk manufacturers. The High Court followed and applied para 6.38 of the OECD Transfer Pricing Guidelines. It is of vital imp .....

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e (Indian entity) has economic ownership of the brand/logo/trademark in question, in the case of long term right of use of the same. This principle also squarely covers the present case. The appellant has a long term agreement for the use of the trademark Honda in India. This clearly evidences the fact that the economic benefit arising out of the alleged promotion of the AE s logo is being enjoyed by the appellant. There is a clear opportunity and reasonable anticipation for the appellant to ben .....

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f the Special Bench that the concept of economic ownership is not recognized under the Act. As held by the Hon ble Delhi High Court decision in the case of Sony Ericsson Mobile Communications (supra), if the Indian entity is the economic owner of the brand and is incurring AMP expenses for the purpose of promotion of such brand, benefit is only received by the Indian entity. It is respectfully submitted that the economic ownership of the brand rests with the appellant and accordingly, the appell .....

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riating profits from India by way of higher product pricing and squeezing the return left for the Indian distributor. It is pertinent to note that ordinarily for a distributor, who is functionally only a reseller and typically does not add value, the cost of sales (comprising essentially of finished good purchases) to sales is a significant percentage. In case of manufacturer, any expenditure incurred on account of advertisement and marketing expenses are borne by it and the related benefits als .....

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tions - Raw material procurement - Specifications of the final product - Quality Testing - Technology and legal compliance - Selling and Distribution - Marketing and promotional strategy - Annual advertisement spends - Choice of media - Scope of marketing - Product recall - Risk of product expiry/loss - Consumer complaints - Financial Risks (Working capital, Inventory, Credit risk/bad debt, etc.) - Employment of assets (land, building, plant & machinery, Information technology, Finance, Offi .....

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butor, entire AMP expense is incurred at its own discretion and for its own benefit for sale of Honda products in India. In the case of the appellant, the advertisements are aimed at promoting the sales of the product sold under trademark Honda manufactured by the appellant and not towards promoting the brand name of the AE. In such circumstances, the alleged excess AMP expenditure does not result in an international transaction and the appellant cannot be expected to seek compensation for such .....

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for promoting products cannot be regarded as expenditure for incurred for development of brand. The Hon ble Court held as under: …… In view of the aforesaid, it is respectfully submitted that since the AMP expenditure incurred by the appellant is restricted to promotion of sale of its products rather than development of brand, the adjustment made by the TPO on the basis that the appellant is developing brand Honda on behalf of its associated enterprise is flawed liable to be reject .....

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escribed method: The Bright Line Test approved by the Special Bench in the case of LG Electronics India Pvt. Ltd. (ITA No 5140/Del/2011) is not one of the five methods provided under the Act. In other words, while embarking on benchmarking of AMP expenses, none of the five prescribed methods are applied by the Revenue. The Hon ble High Court in the case of Sony Ericsson Mobile Communications (supra) upheld the aforesaid contention that Bright Line Test has no mandate under the Act. In view of th .....

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MM), i.e., as long as the operating margins of the Indian enterprise are higher than the operating margins of comparable companies, no further/separate compensation for AMP expenses is warranted. In the present case, the operating profit margin of the appellant at 10.67% is higher than that of the comparable companies at 7.67% and TNMM has undisputedly been satisfied and accepted by the TPO. Since the operating margins of the appellant are in excess of the selected comparable companies, no adjus .....

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and do not lead to brand promotion as held by the Hon ble Special Bench: S No. Particulars Amount (Rs) 1 Commission on sales 5,02,96,000 2 Sales Discount 2,10,45,000 Total 7,13,41,000 The TPO has not followed the Special Bench decision by not excluding selling and distribution expenses debited to the profit and loss account. It is submitted that the aforesaid selling and distribution expenses aggregating to ₹ 7,13,41,000, incurred by the applicant, being expenses incurred in connection wit .....

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constituting 1.80% of the turnover is to be considered as AMP expenses incurred by the appellant exclusively for sales of its own product bearing the AE s brand name Honda . During the course of the hearing, it was submitted by the Ld. AR that the assessee was a manufacturer and in the fact of the case, there was no material brought on record by the Revenue to establish that the AMP expenditure were incurred pursuant to arrangement, understanding or action in concert so as to conclude as a tran .....

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the authorities below. The ld. DR also relied on the orders of ITAT in the case of Cranes Software International Ltd. vs. DCIT 52 Taxman.com 19 (Bang. Tribunal) and of Delhi High Court in CIT vs. Amadues India Pvt. Ltd. in ITA No. 535/2014 and 729/2014 dated 15.04.2015 and ITA No. 23/2015 & 55/2015 dated 21.09.15 in the case of Rebok India Co. vs. CIT 10. We have considered the rival submissions in the light of material available on record and we find that the Delhi bench of the Tribunal in .....

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portion of the said order reads as follows: 5.2 It is seen that the Special Bench in L.G. Electronics case in para 17.4 has given certain directions on the basis of which the AMP is to be calculated. Para 17.6 further gives specific directions in regard to the comparables. On a consideration thereof, we are of the view that in the peculiar facts and circumstances of the case and the material available on record, it would be appropriate to restore the issue back to the file to the TPO with the d .....

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elhi High Court in the appellant s appeal against the above order for A.Y. 2008-09 (ITA No 346/2015) has held that AMP expenses unilaterally incurred by the appellant cannot be construed as an international transaction. The relevant observations of Hon ble Court are reproduced as under for ready reference : 37. Additionally it was held both in MSIL (supra) as well as Whirlpool of India Limited (supra) that in terms of the law explained by the Supreme Court in CIT v. B.C. Srinivas Setty (1981) 12 .....

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38. The Court is satisfied that in the present case, the Assessee is carrying on business as an independent enterprise and is incurring AMP expenses for its own benefit and not at the behest of the AE. The benefit of creation of marketing intangibles for the foreign AE on account of AMP expenses can at best said to be incidental. The decision in Sony Ericsson (supra) acknowledges that an expenditure cannot be disallowed wholly or partly because it incidentally benefits the third party. This was .....

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llowed by way of a deduction under Section 10 (2) (xv) of the Act (Indian Income Tax Act, 1922) if it satisfies otherwise the tests laid down by the law." 39. The OECD Transfer Pricing Guidelines, para 7.13 emphasises that there should not be any automatic inference about an AE receiving an entity group service only because it gets an incidental benefit for being part of a larger concern and not to any specific activity performed. Even paras 133 and 134 of the Sony Ericsson judgment makes i .....

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her it is pointed out that the contention of the Revenue that market development in India is the function of the AE is factually incorrect. It is pointed out that para 4.30 of the TP documentation has stated that the Assessee plans and executes its own marketing strategy as it considers necessary and appropriate. Further as an independent manufacturer the Assessee bears all the risks associated with its business of manufacturing and sale of products in India and abroad. The condition in the lice .....

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es vis-a-vis its comparables is not called for. There is nothing to indicate that the AMP expenses incurred by the Assessee is at the instance of foreign AE and that the Assessee has to be compensated by the foreign AE in that behalf. 42. Question (ii) is answered in favour of the Assessee and against the Revenue by holding that the Revenue has not been able to demonstrate that there exists an international transaction involving the Assessee and a foreign AE on the question of AMP expenses. 10.2 .....

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unds Nos. 4 to 4.6 in A.Y. 2010-11 relate to transfer pricing addition on payment of royalty of ₹ 45,67,000/- and ₹ 37,79,000 on sales to associated enterprises. Common submissions have been made by the Ld. AR, through synopsis filed at the time of hearing, which are reproduced hereunder from the appeal for A.Y. 2010-11 for ready reference: The appellant is engaged in the manufacture and distribution/sale of power products like generator sets, engines, tillers etc and in India as wel .....

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lant on such sales. In this regard it is respectfully submitted that the TPO has failed to distinguish between the functional profile of a licensed manufacturer and a contract manufacturer. In the case of a licensed manufacturer such as the applicant, the seller is entitled to compensation which includes returns attributable to exploitation of intangibles such technical know- how etc. i.e. market determined prices. On the other hand, in the case of a contact manufacturer, the manufacturer acts i .....

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is performing all the entrepreneurial functions and is assuming associated risks, arbitrarily characterized the applicant as a contract manufacturer. The difference between the functional profile of a contract manufacturer and an entrepreneur such as the applicant is summarized as under: Particulars Applicant Contract Manufacturer Nature of relationship Principal to Principal Principal and agent Type of products Standard Customized to the requirements of principal Volume of production No separa .....

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d product liability risk Does not bear quality control or product liability risk In view of the aforesaid, it is respectfully submitted that even with respect to sales made to associated enterprises, the applicant is acting in the capacity of an entrepreneur/licensed manufacturer and was therefore justified in paying royalty on such sales. Reliance is placed in this regard on the decision of the Hon ble Delhi Bench of the Tribunal in the case of Hero Motocorp Limited vsAddl CIT (ITA No 5130/Del/ .....

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eived the sale consideration. In view of the above, in our opinion, there is no justification for disallowance of the royalty on the export. Further, the Hon ble Delhi Bench of the Tribunal in the case of Honda Motorcycle and Scooters India Pvt Ltd vs ACIT (ITA No 132/Del/2013) while deleting a similar adjustment held as under: The finding of the TPO that the position of the assessee with regard to export was that of a contract manufacturer, is without any basis and is contrary to the facts on r .....

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ould not be in the case of a contract manufacturer. In case of sister concern of the assessee, identical payment of royalty was held to be allowable by the Tribunal in the case of M/s. Hero MotoCorp Ltd. XXX 13. In view of the above reasoning, we are of the view that there is no justification for disallowance of royalty on the export made to the AEs. Accordingly, the addition made by the AO/TPO by determining the ALP of royalty on exports to the AEs at nil is deleted. Reliance in this regard is .....

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by the assessee which clearly established that the assessee is acting as a licensed manufacturer/ entrepreneur in respect of all its transactions. It is respectfully submitted that the revenue authorities have no jurisdiction to re-write the transactions entered into by the assessee. Reliance in this regard is placed in this regard on the decision of Hon ble Delhi Bench of the Tribunal in the case of Sony India (P) Ltd. vs DCIT (ITA No 1189/Del/2005) Further reliance in this regard is placed on .....

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e Hon ble Tribunal in the case of ACIT vs Sona Okegawa Precision Forging Ltd held that payment made by contract manufacturer on account of royalty is not at arm s length. However, the Hon ble Delhi Bench of the Tribunal in the aforesaid case while dismissing the appeal of the department with respect to a similar addition made by the TPO, held as under: As such, the fee was paid on the sales made to the AE also. There was no material brought by the TPO to demonstrate that the price on sales made .....

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so, such fee paid became revenue neutral, that is to say, in case the assessee did not pay the fees on the sales made to the AE, a corresponding reduction in the price charged to the AE would have to be given by the assessee, lest the cost for the sale come down. Such latter methodology was not advisable, for it would create problems in the accounting. Also, the impact on the taxable profits would be nil. 17. It was on taking into consideration all of the above that the ld. CIT(A) deleted the ad .....

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ccordingly, even applying the criteria laid down by the Hon ble Tribunal, the assessee is operating as an independent manufacturer even with respect to sales made to AEs. In view of the aforesaid, it is submitted that the contention of the TPO that the assessee, while making sales to its associated enterprises is acting as a contract manufacturer is unfounded and the addition made by the TPO is liable to be deleted. Without prejudice to the submission that with regard to export of goods to the A .....

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enged the operating profit margin earned by the assessee). Therefore, even under such circumstances, the payment of royalty would have been revenue neutral. Reliance in this regard is placed on decision of the Hon ble Delhi Bench of the Tribunal in the case of ACIT vs Sona Okegawa Precision Forging Ltd (ITA No: 260/Del/2010) In view of the aforesaid, it is respectfully submitted that the payment of royalty by the assessee to Honda was justified, the same was made on account of commercial expedie .....

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ddition done by the applicant utilizing the technical know provided by the associated enterprises and no royalty is being paid on the cost of components imported from the AEs. In view of the aforesaid, it is submitted that the addition made by the TPO is bad in law and is liable to be deleted. Re: Benchmarking of international transactions of payment of royalty applying TNMM: It is submitted that the appellant has applied Transactional Net Margin Method (TNMM) for determining arm s length price .....

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cing Officer to question the justification of the payment by disputing the genuineness of the agreement itself. The aforesaid has been clarified by CBDT vide Instruction No. 3 of 2003 dated 20-05-2003 as under: - In order to maintain uniformity of procedure and to ensure that work in this important area proceeds smoothly and effectively, the following guidelines are hereby issued: (i) Reference to Transfer Pricing Officer (TPO): The power to determine arm s length price in an international trans .....

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-section (4) of section 92CA provides that on receipt of the order of the TPO, the Assessing Officer shall proceed to compute the total income of the assessee having regard to the arm s length price determined by the TPO. Thus, whereas the determination of the arm s length price, - is required to be done by the TPO, - the computation of total income having regard to the arm s length price so determined by the TPO is required to be done by the Assessing Officer under subsection (4) of section 92C .....

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d to in sub-section (2) thereof.- (emphasis supplied) Reliance is also placed on the decision of Mumbai Bench of the Tribunal in the case of CA Computer Associates Pvt. Ltd. vs. DCIT (ITA Nos. 5420 and 5421/Mum/2006), wherein, while deleting the adjustment made by the TPO by holding payment of royalty to be unjustified, the Hon ble Tribunal held as under: 8. The manner in which the A.L.P. is to be determined by any of the method prescribed in Sec. 92C in provided in Rule 10B of the I.T. Rules, 2 .....

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procedure prescribed and same cannot be sustained. We, therefore, direct the Assessing Officer to adopt the Arm s Length Price of the royalty payable to CA Inc Management, USA as declared by the assessee in both the years. The aforesaid decision of the Hon ble Tribunal has been upheld by the Hon ble Bombay High Court in CIT vs CA Computer Associates India Pvt Ltd (ITA no 20/2011). It is pertinent to note here that the royalty constitutes an essential part of the cost of sales relatable to expor .....

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evel, as the most appropriate method. Reliance in this regard may be placed on the guidance note issued by the Institute of Chartered Accounts of India which states as under: 5.7 The factors referred to above are to be applied cumulatively in selecting the most appropriate method. The reference therein to the terms best suited and most reliable measure indicates that the most appropriate method will have to be selected after a meticulous appraisal of the facts and circumstances of the internatio .....

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osen for a group of closely linked transactions. Two or more transactions can be said to be linked when these transactions emanate from a common source being an order or a contract or an agreement or an arrangement and the nature, characteristics and terms of these transactions are substantially flowing from the said common source. It is submitted that the TPO has incorrectly determined the arm s length price of royalty paid on sales to AEs at Nil without applying any comparable transactions. Th .....

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held that clubbing of closely linked (including continuous transactions) is permissible in appropriate cases. The assessee, too benchmarked the transaction of payment of royalty applying TNMM and aggregating the same with closely linked transactions. The Hon ble Court further held that once the Revenue accepts the TNMM as the most appropriate method, then it would be inappropriate for the Revenue to treat a particular expenditure as a separate international transaction. Such an exercise, the Hon .....

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Pune Bench of the Tribunal in Demag Cranes & Components (India) Pvt. Ltd. Vs. DCIT (supra), it is held that where number of transactions are closely linked transactions, then the same can be aggregated and construed as a single transaction for the purpose of determining the arm's length price. In case, there is close link exists between the different transactions, the same should be treated as composite transaction and appropriate method should be applied to work out the transfer pricin .....

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is unlawful and is liable to be deleted. 12. The Ld. CIT / DR placed reliance on the orders of the authorities below and has no objection if the issue is remitted to the AO in terms of the findings of the coordinate bench in the preceding year. 13. We have heard the rival submissions and perused the material on record. It is seen that Co-ordinate bench in the case of the assessee for assessment year 2008-09 (ITA No. 6023/Del/2012) has remitted similar addition made on account of Transfer Pricing .....

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parties and perused the material placed before us. We have already considered similar issue while considering the disallowance of royalty and the export commission. While considering the disallowance of the export commission, we have noted that the payment of royalty and the export commission are for two different purposes. The assessee is paying royalty as per technical know-how agreement dated 02- 06-2004 with HMCL. As per this agreement, the assessee is entitled to use technical know-how prov .....

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d to subsidiaries of the Associated Enterprise, i.e. AE of Honda Japan and the assessee also paid export commission, would be no ground for disallowance of the royalty or determining arm s length price of the royalty at nil. The assessee is exporting goods to AE of Honda on principal to principal basis and the price at which export is made is higher than the domestic price. While discussing the disallowance of export commission, we have discussed this issue at length and have noted that even aft .....

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loss. The further finding of the TPO that the position of the assessee company with regard to export was that of a contract manufacturer, in our opinion, is without any basis and in fact contrary to the facts on record. The raw materials have been purchased by the assessee in its own right. It is not the case of the TPO that the raw materials have been supplied by the AE. The assessee has sold the goods to AE on principal to principal basis and has received the sale consideration. In view of th .....

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t at nil is deleted. 8.1 From a reading of the above it is seen that while coming to the decision before the Co-ordinate Bench a detailed working in numbers and figures in support of its claim was provided by the assessee. The said exercise is found missing in the present case dehors the above fact taking into consideration the submissions of the Revenue, we set aside the orders of the authorities below and direct the TPO to consider the claim of the assessee that the Agreement entered into by t .....

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before the TPO. Following the order of the Co-ordinate bench, the additions on account of Transfer Pricing adjustment of ₹ 45,67,000 and ₹ 37,79,000 in A.Yrs. 2009- 10 and 2010-11 are, therefore, set aside to the file of the TPO to consider the claim of the assessee in the light of the findings of the co-ordinate bench in assessment year 2008-09 (supra). These grounds are, therefore, allowed for statistical purposes. 14. The next issue raised by assessee by way of grounds Nos. 5 to .....

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ered by the decision of the Co-ordinate benches of the Tribunal in the assessee s own case for assessment year 2007-08 and 2008-09 in ITA Nos. 5713/Del/2011 and ITA No. 6023/Del/2012, wherein the Co-ordinate benches, after considering the decision rendered in the case of Hero Moto Corp Ltd. v. DCIT in ITA No. 716/Del/2008 and after making a comparison of the various clauses of the agreement was pleased to delete the addition made in the assessment order on account of payment of royalty and techn .....

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cal guidance fee is allowable business deduction. It was further submitted that the DRP in the subsequent assessment year 2010-11 has deleted identical disallowance proposed by the assessing officer on the basis of the order of the Co-ordinate bench of the Tribunal in the assessee s own case for assessment year 2008-09. 16. Per contra, the Ld. CIT DR placed reliance on the assessment order and the order of DRP. 17. We have heard the rival submissions and perused the material available on record. .....

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a and consequently the payments were revenue in nature. Respectfully following the order of the Co-ordinate Benches in assessment years 2007-08 and 2008-09 in the assessee s own case, Ground Nos 5 to 5.4 in appeal for A.Y. 2009-10 are, thus, allowed. 18. The next issue raised in appeal for A.Y. 2009-10 by way of ground Nos. 6 to 6.6 relate to disallowance of export commission amounting to ₹ 4,32,49,149 paid to Honda Motor Co. Japan under section 40(a)(i) by holding such payments to be in t .....

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., Chia(coply placed on record) in AAR No. 1508 of 2013. 21. We have heard the rival submissions. We find that the aforesaid issue is covered by the orders of Co-ordinate bench of the Tribunal in assessment years 2007-08 and 2008-09 wherein referring to the earlier detailed findings that the technical collaboration agreement in the case of Hero Honda Motors (supra) are parimateria to the case of assessee, the Coordinate bench was pleased to hold that the export commission was neither royalty nor .....

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Bench in the case of assessee, the advance ruling relied on by the ld. DR does not help the revenue, as the said ruling is binding on that applicant and not upon the Tribunal u/s. 245S of the IT Act. 22. By way of ground No. 7 in appeal for A.Y. 2009-10, the assessee has agitated that credit for TDS amounting to ₹ 71,407/- has not been given by the AO without any reason. This issue is restored to the file of AO to verify the stand of assessee and accordingly to give credit thereof as per .....

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ant year, the appellant had incurred certain expenditure amounting to ₹ 1,11,47,000, debited to the Profit & Loss account, under the head Exceptional Items in Schedule 11 to the audited financial statements. The aforesaid expenses were incurred on account of shifting/ relocation of factory premises from Rudrapur to Greater Noida for the purposes of consolidation of factory premises and utilization in production. The details of such relocation expenses are provided as under: S. No. Part .....

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rder dated 16.12.2014 disallowed the following expenditure aggregating to ₹ 51,15,000, holding the same to be capital expenditure on the ground that such expenditure had resulted in benefit of enduring nature to the appellant: S. No. Particulars Amount (in Rs.) 1. Freight on transfer of machines 34,55,000 2. Professional Charges 10,24,000 3. Stores, spares and tools 6,36,000 Total 51,15,000 The assessing officer, however, allowed depreciation @ 15% on the aforesaid amount, thereby restrict .....

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were, therefore, indirect expenses, which were incurred at the time of shifting of factory from Rudrapur to Greater Noida. The expenses were incurred for the purpose of running the business of the appellant company as a more technically viable, efficient and profitable unit. The said expenses were incurred only for shifting of factory/machines from one place to the other without any enhancement in the manufacturing capacity. Such relocation, it would be noted, did not result in the establishmen .....

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outgoing or expenditure is related to the carrying on, or conduct of the business, it may be regarded as an integral part of the profit making process and therefore revenue in nature: Empire Jute Co. Ltd. v. CIT: 124 ITR 1 (SC) CIT v. Associated Cement Companies Ltd.: 172 ITR 257 (SC) Alembic Chemical Works Co. Ltd. v. CIT: 177 ITR 377 (SC) Arvind Mills Ltd v. CIT: 97 ITR 422 (SC) ChandulalKeshavlal v. CIT: 38 ITR 601(SC) Bombay Steam Navigation Co. (1953) (P.) Ltd. v. CIT: 56 ITR 52 (SC) Devida .....

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l Electric Corpn. Ltd.: 81 ITR 243 (Cal.) Gannon Norton Metal Diamond Dies Ltd. v. CIT: 163 ITR 606 (Bom.) CIT v. Mehta Transport Co.: 160 ITR 35 (Guj.) Saraswati Industrial Syndicate Ltd. v. CIT: 137 ITR 886 (Punj. &Har.) CIT v. Oblum Electrical Industries.: 127 ITR 409 (AP) Further, attention is invited to following decisions wherein it has been held that shifting/ relocation expenses incurred by the assessee in the course of business are allowable revenue expenditure and cannot be treated .....

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case of CIT v. Loyal Super Fabrics: 304 ITR 78 (Mad.). Further, it is respectfully submitted that the decision of Bombay High Court in the case of Otis Elevator (supra), also relied upon by the assessing officer, is per incuriam, since the same has been rendered without considering the decision of the apex Court in the case of Empire Jute Co. v. CIT: 124 ITR 1. The decision of the Patna High Court in the case of Jamshedpur Engg. (supra) has also been duly considered and distinguished by the Thi .....

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tle, shift and install machines at new location; (ii) no new asset has come into being as a result of shifting expenses; (iii) there was no enhancement in existing manufacturing capacity and expenses were incurred only to shift existing machines from once place to the other. 26. On the other hand, the Ld. CIT/ DR relied on the order of the AO/ DRP to contend that the expenditure in consideration was relating to the shifting of plant and machinery, which being the capital assets of the assessee c .....

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he appellant that the expenditure was incurred on shifting of existing assets of the assessee company to Greater Noida for consolidating the units to increase profitability and efficiency. We are of the view that the expenses incurred by the assessee company did not bring into existence any new capital asset. The assessee company has relied on the decision of the Apex Court and various other High Courts to contend that it not every enduring benefit which would be considered as capital in nature .....

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stinguished by Courts subsequently. We are in agreement with the decisions relied upon by the Ld. AR in the case of Karanpura Development (Cal.), Loyal Super Fabrics (Mad.) and Madura Coats (Mad.) which, according to us, are similar to the case of the assessee. Accordingly, we hold that the expenses on relocation and shifting are revenue in nature and would be allowed as business deduction and the disallowance made by the AO on this count is deleted. 29. The last issue raised in appeal for A.Y. .....

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policy for inventories was also made in Schedule 12 in paragraph (vii) of the audited accounts. The assessing officer/ DRP, vide order dated 16.12.2014, without pointing out the basis on which such expenditure was disallowable, stated that since expenditure in respect of the above amount was in the nature of provision, the said provision ought to have been added back to the income of the assessee. In this regard, it is respectfully submitted, that the provision for slow/ non-moving items was ma .....

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tandard 2 on Valuation of Inventory, prescribed by Institute of Chartered Accountants of India, inventories have to be valued at the cost price or net realizable value, whichever is lower. Reference, in this regard, may be placed on the following cases wherein the aforesaid method of valuing the closing stock at cost or net realizable value, whichever is lower, for the purposes of the Act has been accepted as a recognized method of accounting of inventories: K. Mohammed Adam Sahib v. CIT: 56 ITR .....

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laced on the following decisions, wherein it has been held that the provision made by the assessee towards obsolete and slow moving items was allowable deduction: CIT v. British Paints India Ltd.: 188 ITR 44 (SC) CIT v. Hindustan Zinc Ltd.: 291 ITR 391(SC) ChainrupSampatram v. CIT: 24 ITR 481 (SC) Hotline Tele Tube and Components Limited: 175 Taxman 286 (Del. HC) CIT v. Hughes Communication India Ltd.: 215 Taxman 136 (Del. HC) CIT v Becton Dickinson India (P.) Ltd.: 214 Taxman 636 (Del. HC) CIT .....

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in disallowing the aforesaid provision on account of slow moving expenses is erroneous and based on incorrect appreciation of facts and the settled legal principles. That apart, and without prejudice to the aforesaid, it is respectfully submitted that even otherwise no disallowance is warranted under the provisions of the Act inasmuch as the provision for slow moving inventory of ₹ 11,76,382, debited to the profit and loss account for the year under consideration, would be reduced to Nil .....

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