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Honda Cars India Ltd. Versus DCIT (LTU) , New Delhi and Vica-Versa

Disallowance made u/s 40(a)(i) - payments to non-resident companies without deducting tax at source u/s 195 - Held that:- there is no dispute of the fact that out of 18 non-resident associate companies to whom payments have been made, it was held that 16 associated enterprises do not have a P.E. in India. The D.R.P. in the case of Asia Honda Thailand for the A.Y. 2009-10 has held that the Non-resident company had no P.E. in India. Revenue has not filed an appeal on this finding of the D.R.P. Hen .....

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nda Motor Company Ltd issue decided in favour of the Assessee and against the Revenue by holding that Section 40 (a) (i) of the Act is discriminatory and therefore, not applicable in terms of Article 26 (3) of the Indo-US DTAA. - ITA No.2056/Del/2014, ITA No.3229/Del/2014 - Dated:- 29-6-2016 - SHRI I.C. SUDHIR, JUDICIAL MEMBER AND SHRI J. SUDHAKAR REDDY, ACCOUNTANT MEMBER For The Assessee : Shri Deepak Chopra, Shri Amit Srivastava and Ms Manasvini Bajpai, Advocates For The Department : Shri Anuj .....

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the licencee. For the relevant assessment year, the assessee company filed a e-return declaring nil income on 26.9.2009. The AO passed an order u/s 143(3) read with section 144C of the Act determining the total income of the assessee at ₹ 1665,09,05,642/-, inter alia, making the following additions:- S.No. Particulars Amount (Rs.) Amount (Rs.) A. Total Profit as per Profit & Loss Account (-) 328,11,76,662 B. Additions i. Royalty & Lumpsum fee 156,32,14,000 ii. Airfare Fare under Te .....

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i Anuj Arora, the ld.CIT, DR on behalf of the revenue. Paper books and written submissions were filed by both the sides. On a careful consideration of these submissions and after perusal of the paper books filed, the orders of the authorities below and the case laws cited, we hold as follows. 5. We first take up the assessee s appeal in ITA No.2056/Del/2014. The grounds of appeal read as follows:- 1 That the order passed by the Commissioner of Income Tax (appeals) [CIT(A)] to the extent prejudic .....

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e Act were applicable on such payments. 4 That the AO/CIT(A) erred in law in concluding that there existed a Permanent Establishment (PE)/business connection of Honda Motors, Japan and Asian Honda Thailand, being non-resident companies from whom the Appellant had purchased raw materials, components etc. 5 That the AO/CIT(A) grossly erred in law in relying on statements of expatriate employees recorded during the course of survey proceedings on the Appellant, such statements having been selective .....

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had been determined at arm's length basis and in view of the Article 9 of the Double Tax Treaties no further income could be attributed to the non-resident in Indian, irrespective of the existence of a PE. 8 That the CIT(A) grossly erred in law in confirming the applicability of the provisions of section 40(a)(i) of the Act on reimbursements which did not have any element of income embedded in the same. 9 That without prejudice the provisions of section 40(a)(i) of the Act could have been a .....

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pellant reserves the right to add, alter, amend and or vary the grounds of appeal at the time or before the hearing of the appeal. 6. Though a number of grounds have been taken, the sole issue is the disallowance made u/s 40(a)(i) of the Act. The facts leading to this issue are as follows. During the course of assessment proceedings, the AO noticed that the assessee company had made certain payments to non-resident companies without deducting tax at source u/s 195 of the Act. The list is given a .....

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n Honda, USA Purchase of raw materials 54,63,684 7. Honda Auto Parts, Malaysia Purchase of raw materials 30,335 8. Honda Trading, Thailand Purchase of raw materials 28,18,79,799 9. Honda Access, Thailand Purchase of raw materials 8,46,73,965 10. PT Honda Precision Indonesia Purchase of raw materials 3,06,545 11. Honda Parts Manufacturing Corp., Philippines Purchase of raw materials 17,51,219 12. Honda Malaysia SDN BHD, Malaysia Purchase of raw materials 2,85,353 13. PT Honda Prospect Motor, Indo .....

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Honda Motor, Japan Purchase of cars 1,61,74,28,776 22. Honda Trading, Thailand Purchase of capital goods 1,23,87,02,622 23. Honda Trading, Japan Purchase of capital goods 2,51,45,05,486 24. Honda Motor, Japan Purchase of capital goods 96,30,987 25. Honda Automobile Thailand Purchase of capital goods 95,27,823 26. Honda Trading Europe Purchase of capital goods 2,90,131 27. Honda Trading South China Purchase of capital goods 2,89,780 28. Honda Motor Japan Payment of Royalty 1,01,45,19,188 29. Hond .....

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ing Japan Reimbursement of miscellaneous expenses 10,98,326 37. Honda R&D Japan Reimbursement of miscellaneous expenses 26,05,415 38. Honda Auto Parts Manf. SDN Reimbursement of miscellaneous expenses 1,09,128 39. Honda Mfg. of Albama LLC Reimbursement of miscellaneous expenses 9,62,737 7. The assessee was required to furnish an explanation as to why disallowance u/s 40(a)(i) of the Income-tax Act should not be made. The AO was of the opinion that the non-resident companies and the parent co .....

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order. On appeal, the first appellate authority held that: a) Out of 17 associated enterprises (AEs), permanent establishment is not established in respect of 16 AEs of the assessee company; b) Merely because these companies were also subsidiaries of HMCJ, it does not imply that, even in the absence of relevant facts required for proving existence of PE, it can be held that these companies have PE in India. c) There is no business connection between the assessee and these companies, which exists .....

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aid to these two companies for supply of raw materials, spare parts and purchase of capital goods were in the nature of sum chargeable to tax on which TDS was deductible u/s 195 of the Act. e) Similarly, payments embedded in the reimbursements amounting to ₹ 17,34,83,255/- were also held as not in the nature of sums chargeable to tax on which TDS was to be deducted. f) On non-discrimination clause, he referred to Article 24(3) of the Indo-Japan Double Taxation Avoidance Agreement and held .....

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f the decision of the Pune Bench of the ITAT in the case of Automated Securities Clearance Inc. vs. Income Tax Officer (2008) 118 TTJ 619 (Pune) and other Tribunal decisions come to the conclusion that the non-discrimination clause does not apply in the case on hand. 8. Aggrieved, the assessee as well as the Revenue are in appeal. The ld. Counsel for the assessee submitted that: a) Honda Motors Company, Japan and Asian Honda, Thailand, do not have a PE in India; b) All other associated non-resid .....

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arts, was liable for taxation in India and hence, the provisions of section 195(2) read with section 40(a)(i) would not apply; d) In the case of Honda Motors, Japan, the ld.CIT(A) had held that it has a PE in India, while disposing of the assessee s case and whereas no such finding was till date given by the Revenue authorities in the case of non-resident company, Honda Motors, Japan; e) That a notice issued u/s 148 dated 17.3.2016 to Honda Motors, Japan, has not culminated into an order till da .....

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High court in the case of CIT vs. Herbalife International India Pvt. Ltd. in ITA 7/2007, Order dated 13.5.2016; h) The provisions of Indo-Japan DTAA were also considered by the court in the caseof Herbalife (supra) since Mitsubishi Corporation had been an intervenor in the said matter. The Hon ble court had considered the provisions of section 40(a)(i) as it stood originally as well as after the amendment w.e.f. 1.4.2005; i) That the transactions between the assessee and its associated enterpris .....

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ecision of the Automated Securities Clearance Inc. (supra) relied upon by the ld.CIT was reversed by a larger Bench of the ITAT in the case of Rajeev Sureshbhai Gajwani vs. ACIT (2011) 129 ITD 0145. 9. The ld. counsel for the assessee submitted that without prejudice to a contention that Honda Motors Japan and all other associated enterprises do not have a PE in India as non-discrimination clause applies, the disallowance made u/s 40(a)(i) read with section 195 of the Act is bad in law and, henc .....

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sue whether the non-resident associated companies, other than Honda Motor, Japan, having PE in India or not, the claim by the assessee that the Revenue had adjudicated that these 16 entities do not have PE in India and the Revenue has not filed an appeal against such finding was forwarded to the AO/Addl. CIT and their reply, which does not controvert this claim of the assessee, is filed before the Bench. (d) On the assessee s reliance on Article 24(3) of DTAA i.e. the nondiscrimination clause, h .....

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) That in para 30, the High Court considered the submissions that Article 9 contemplates an AE and once the status is that of an AE, the entire Article 26(3) is ruled out and whereas in the case on hand Article 9(1) clearly applies; (iv) The contention of the assessee that TPO has found all the transactions to be at arm s length and hence the conditions laid down in Article 9(1) are not satisfied, the ld. DR submits that: (a) The TPO s order has been constrained by the disclosures made before hi .....

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y year with the same with AEs, which would not be a rational interpretation; (e) Without prejudice to the above, the forty elements captured by the AO go far beyond the FAR analysis of the assessee and hence the matter should be set aside to the AO or TPO with appropriate directions. The TPO will have the benefit of FAR analysis of Honda Motors, Japan for the same year, which is before the TPO. (f) That the disallowance should not be deleted on the ground of inadequate enquiry or defects or non- .....

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Bojoria vs. State of West Bengal, AIR 1953 (SC) 404, 406; and 2) State of West Bengal vs. Anwar All Sarkar, AIR 1952 (SC) 75. (h) To establish discrimination, the tax payer has to demonstrate that the treatment is unreasonable, arbitrary or irrelevant. (i) The payment to non-resident does not offend the principle of non-discrimination and that section 40(a)(i) is a deterrent provision which prompts compliance on the part of the resident tax payers. Section 40(a)(i) creates a distinction between .....

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ll under the phrase other disbursements of either Article 24(3) is not correct or justified. Reliance is placed on OECD MC commentary. (l) Benefit of DTAA is available to a non-resident and as the assessee is a resident company, it cannot claim the benefit of DTAA. (m) The DTAA benefit can be availed only where the specific provision overrides the modes provided in the Act. As no corresponding provision exists in the DTAA, section 40(a)(i) needed to be given full effect to. (n) Section 40 of the .....

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ngth by both parties. 12. In reply, the ld. counsel for the assessee drew the attention of the Bench to the orders of the Agra bench of the Tribunal in the case DCIT vs. Gupta Overseas 160 TTJ 257. On a query from the Bench, he submitted that a Miscellaneous Application was filed in the case of Gupta Overseas (supra) on one legal issue relating to section 9(1)(vii), post the amendment, on the ground that the same had not been adjudicated upon by the ITAT. He submitted that vide order dated 28.2. .....

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yments made to non-resident companies is correct in law. 13.1. There is no dispute of the fact that out of 18 non-resident associate companies to whom payments have been made, it was held that 16 associated enterprises do not have a P.E. in India. The D.R.P. in the case of Asia Honda Thailand for the A.Y. 2009-10 has held that the Non-resident company had no P.E. in India. Revenue has not filed an appeal on this finding of the D.R.P. Hence we have to reverse the finding of the Ld.CIT(A) that Asi .....

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he issue whether Honda Motor Company Ltd. has a PE in India or not should be preferably adjudicated by the AO in the assessment of that company. It is not advisable to determine this issue in collateral proceedings, as is in the case of the assessee. Thus, we adjudicate the issue by considering the arguments of the assessee without prejudice, invoking the non-discrimination clause in terms of Article 24(3) of the DTAA, between India and Japan. The AO in this case has denied the benefit of the no .....

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and hence the benefit of DTAA cannot be given. 16. We find that this issue is no more res integra. The jurisdictional High Court in the case of CIT vs. Herbalife International India Pvt. Ltd., judgment dated 13th May, 2016, has, after considering the argument of the intervener, Mitsubishi Corporation, and the provisions of the Indo-Japanese DTAA has on the issue of other disbursements in para 38 to 42, held as follows:- 38. The question that next arises is whether the payment by the Assessee to .....

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haracter like royalties and interest. 40. The Court is unable to agree with the above submissions of the Revenue. In the context of which the expression other disbursement' occurs in Article 26 (3), it connotes something other than interest and royalties'. If the intention was that other disbursements' should also be in the nature of interest and royalties then the word 'other' should have been followed by such' or such like'. There is no warrant, therefore, to procee .....

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ed under Article 12 (4) of the DTAA. The ITAT did not address this issue. It addressed the question whether, even assuming it was FIS, Section 40 (a) (i) of the Act cannot be applied and consequently, no disallowance can be made. Before this Court no question has been framed at the instance of the Assessee that the payment is covered by Article 12 (4) of the DTAA. Consequently, this question is not examined by the Court. 17. Thus, the findings of the ld.CIT(A) on this issue have to be necessaril .....

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ans that the expenditure which is allowable under Sections 30 to 38 of the Act in computing business income would be subject to deductibility condition in Section 40 of the Act. The payment of FTS to HIAI would be allowable in terms of Section 37 (1) of the Act but before such payment can be allowed the condition imposed in Section 40 (a) (i) of the Act regarding deduction of TDS has to be complied with. In other words if no TDS is deducted from the payment of FTS made to HIAI by the Assessee, t .....

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ion 40 (a) (i) of the Act, as it was during the AY in question i.e. 2001-02, did not provide for deduction in the TDS where the payment was made in India. The requirement of deduction of TDS on payments made in India to residents was inserted, for the first time by way of Section 40 (a) (ia) of the Act with effect from 1st April 2005. Then again as pointed out by Mr. M.S. Syali, learned Senior Advocate for the Intervener, Section 40 (a) (ia) refers only to payments of ―interest, commission .....

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t a document titled ‗Application and Interpretation of Article 24(Non- Discrimination), Public discussion Draft, May 2007 did envisage deduction of tax while making payments to non-residents. It is viewed only as additional compliance of verification requirement which would not attract the nondiscrimination rule. The OECD Expert Group noted that ―the non-discrimination obligation under tax conventions is restricted in scope when compared with equal treatment or nondiscrimination clau .....

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d on passive income, such as dividends, interest, rents, and royalties. Because the recipient may have no connection with the country of source other than the investment generating the income, withholding at the time of payment is likely to be the only realistic opportunity for the source country to collect its tax. Withholding is often not required on payments to residents. However, the application of withholding tax systems is appropriate. Residents have substantial economic connections with t .....

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r as payment to a non-resident is concerned, Section 40 (a) (i) of the Act as it stood at the relevant time mandated that if no TDS is deducted at the time of making such payment, it will not be allowed as deduction while computing the taxable profits of the payer. No such consequence was envisaged in terms of Section 40 (a) (i) of the Act as it stood as far as payment to a resident was concerned. This, therefore, attracts the non-discrimination rule under Article 26 (3) of the DTAA. 51. The arg .....

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xpression used in Article 26 (3) is ‗same conditions . Learned counsel for the Revenue sought to justify the difference in the treatment of payments made to non-residents by referring to Article 14 of the Constitution of India and contended that the line of enquiry envisaged examining whether (a) the classification was based on an intelligible differentia and (b) whether the classification had a rational nexus with the object of the statute. 52. Section 40 (a) (i), in providing for disallo .....

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n that in those ‗same conditions whether the consequences are different for the failure to deduct TDS. 53. It is argued by the Revenue that since in the present case no condition of deduction of TDS was attracted, in terms of Section 40 (a) (i) of the Act as it then stood, to payments made to a resident, but only to payments made to non-residents, the two payments could not be said to be under the ‗same condition . The further submission is that if they are not made under the same co .....

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oncessions from the other, the final agreement will often represent a number of compromises, and it may be uncertain as to whether a full and sufficient quid pro quo is obtained by both sides.‖ The Court acknowledged that developing countries allow 'treaty shopping to encourage capital and technology inflows which developed countries are keen to provide to them. It was further noted that the corresponding loss of tax revenues could be insignificant compared to the other non-tax benefit .....

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f Article 14 of the Constitution of India, but whether the classification brought about by Section 40 (a) (i) of the Act defeats the object of the DTAA. 56. The argument of the Revenue also overlooks the fact that the condition under which deductibility is disallowed in respect of payments to non-residents, is plainly different from that when made to a resident. Under Section 40 (a) (i), as it then stood, the allowability of the deduction of the payment to a non-resident mandatorily required ded .....

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ent as deduction is what brings about the discrimination. The tested party is another resident Indian who transacts with a resident making payment and does not deduct TDS and therefore in whose case there would be no disallowance of the payment as deduction because TDS was not deducted. Therefore, the consequence of non-deduction of TDS when the payment is to a nonresident has an adverse consequence to the payer. Since it is mandatory in ITA No. 7/2007 Page 31 of 35 terms of Section 40 (a) (i) f .....

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the Act. 57. A plain reading of Section 90 (2) of the Act, makes it clear that the provisions of the DTAA would prevail over the Act unless the Act is more beneficial to the Assessee. Therefore, except to the extent a provision of the Act is more beneficial to the Assessee, the DTAA will override the Act. This is irrespective of whether the Act contains a provision that corresponds to the treaty provision. In Union of India v. Azadi Bachao Andolan (supra) the Supreme Court took note of the Circ .....

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that will govern the taxation of income." 58. Further in Union of India v. Azadi Bachao Andolan (supra), after taking note of the decisions of various high courts on the purpose of Double Taxation Avoidance Conventions qua Section 90 of the Act, the Supreme court observed as under: "A survey of the aforesaid cases makes it clear that the judicial consensus in India has been that Section 90 is specifically intended to enable and empower the Central Government to issue a notification fo .....

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of total income under Section 5 of the Act, then there was no purpose in making those sections ‗subject to the provisions‖ of the Act. The very object of grafting the said two sections with the said clause is to enable the Central Government to issue a notification under Section 90 towards implementation of the terms of the DTAs which would automatically override the provisions of the Income tax Act in the matter of ascertainment of chargeability to income tax and ascertainment of to .....

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(2)(i) of the Act on the ground that it was violative of Article 14 of the Constitution as well as Article 25 of the DTAA between India and South Korea. Section 245R (2) of the Act barred a non-resident applicant from approaching the Authority for Advance Ruling (AAR) where the matter was pending before any income tax authority. The matter, therefore, only pertained to the procedure of filing a petition before the AAR and not as regards any substantive right. The decision of the Pune Bench of th .....

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icable in terms of Article 26 (3) of the Indo-US DTAA. 62. Accordingly, question (a) is answered in the affirmative, i.e., in favour of the Assessee and against the Revenue by holding that the ITAT was correct in allowing a deduction of ₹ 5.83 crores being the administrative fee paid by the Assessee to HIAI. These findings are binding on us. Thus, we have to uphold the arguments of the ld. counsel for the assessee and reverse the findings of the AO as confirmed by the ld.CIT(A). 18. Coming .....

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ld. DR made strenuous and elaborate submissions bringing out certain issues raised by the AO, to persuade us that TPO was wrong in coming to the conclusion that the transactions between the AEs and the assessee are at arm s length. We find that the TPO has passed the order after the surveys were conducted on the assessee. If the AO had certain additional material facts, he could have brought it to the notice of the TPO and asked for a fresh report. In our view, this argument of the Ld.D.R. is er .....

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at is the difference between the arm s length price and the price at which the transactions have taken place between the assessee and the AE and without quantifying the excess/shortage in the price, seeks to invoke Article 9(1). In our view, such an argument is devoid of merit and hence we dismiss the same. 19. The ld. DR relies on the judgment of the jurisdictional Delhi High Court in the case of Jansampark Advertising & Marketing (P) Ltd. (supra) and pleads that the Tribunal should set asi .....

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er and only general submissions are made before us in this regard. Hence, this contention is also dismissed as devoid of merits. On the submissions made by the Ld.D.R. on Article 14, 15 and 16 of the Constitution, technical expression in the UN Model Convention, etc., we find that the Jurisdictional High Court has considered all these issues in the case of Herbalife International India (supra). Respectfully following the same, these arguments are rejected. 20. In view of the above discussion, we .....

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9/2014. The grounds of appeal read as follows:- 1. On the facts and circumstances of the case and in law Ld. CIT(A) has erred in deleting the addition of ₹ 1,56,32,14,000/- made by AO treating the amount of royalty and lump sum fee paid by assessee as capital instead of revenue claimed by assessee. 2. On the facts and circumstances of the case and in law Ld. CIT(A) has erred in deleting the addition of ₹ 4,61,29,639/- made by AO treating the amount of expenditure on airfare booked un .....

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stead of revenue. 5. On the facts and circumstances of the case and in law the Ld. CIT(A) has erred in granting relief of ₹ 6,55,17,18,887/- by reducing the addition from ₹ 18,31,14,22,555/- to ₹ 11,75,97,03,668/- made by AO u/s 40(a)(i) of the IT Act. 5 (a) On the facts and circumstances of the case and in law the CIT(A) has erred in reducing the addition from ₹ 209,53,84,934/- to ₹ 5,57,70,260/- made by AO u/s 40(a)(i) of the IT Act, thereby allowing ground No.8(i .....

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nd in law the Ld. CIT(A) has erred in reducing the addition from ₹ 16,23,90,27,016/- to ₹ 11,53,51,80,104/- made by AO u/s 40(a)(i) of the IT Act, thereby allowing ground NO.6&7 of assesee's appeal, ignoring the facts narrated in assessment order and remand report dated 14.02.2014. 5 (c)(i) On the facts and circumstances of the case and in law the Ld. CIT(A) has erred in reducing the addition from ₹ 16,23,90,27,016/- to ₹ 11,53,51,80,104/- made by AO u/s 40(a)(i) .....

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os.1 to 4 are that the assessee is engaged in manufacturing of cars and sales thereof. Return was filed at nil income. The AO assessed the income of the assessee at ₹ 8,37,36,95,940/- after making the following additions:- (i) Royalty and lump sum fee Rs.1,56,32,14,000/- (ii) Airfare of Technicians booked under technical guidance ₹ 4,61,29,639/- (iii) Entry tax ₹ 6,04,047/- (iv) Software expenses ₹ 10,71,206/- 24. Dissatisfied with the orders of AO, the assessee carried t .....

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2007, wherein the identical issue was involved and deleted the addition holding as under:- I have carefully considered the submissions of the appellant and perused the order of the AO and have also considered the facts and the evidences placed on record which show that an identical issue was involved in assessment year 2003-04 wherein Hon ble Tribunal, vide their order dated 16.05.2008 in ITA No.3173/del/2007, have decided this issue in favour of the appellant. Since the issue involved in the ye .....

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We find no infirmity in this order of the Ld.CIT(A). The finding of the Co- Ordinate Bench of the Tribunal are binding on him. Hence we uphold his order on this issue and dismiss this ground of Revenue. b) Disallowance of airfare of technicians:- The AO made the addition on this account holding that, airfare borne by assessee related to Purchase & Works Department and in any case was an expenditure, the benefit of which is of ending nature. The Ld. CIT(A) held as under :- I have considered .....

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ar, on identical facts, it is held that the expenditure of ₹ 4,61,29,639 claimed by the appellant on account of air fare and travel expenses is in nature of revenue expenditure and, therefore, the addition made by the AO on this ground is deleted. Accordingly, Ground No.3 is allowed in favour of the appellant. We uphold this finding of the Ld.CIT(A) as he applied the decision of the ITAT and dismissed this ground of Revenue. c) Entry tax u/s 43B of Income Tax Act The AO made this addition .....

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f this, respectfully the same. It is held that the appellant is entitled to deduct this amount in computing its total income. Accordingly, this ground is decided in favour of the appellant. We find no infirmity in this order of the Ld.CIT(A). Hence we dismiss this ground of Revenue. d) Software Expenses With regard to the last addition of software expenses, the Ld. AR submitted before Ld. CIT(A) that, website tracking and website online statistic tools was used, for the purpose of tracking or pr .....

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essee. Reliance was also placed on the judgement of Hon'ble Delhi High Court in the case of CIT vs Asahi India Safety Glass Ltd. 245 CTR 529 wherein it was held that expenditure incurred on application software was allowable revenue deduction. The Ld. CIT(A) on the basis of above submissions held as under :- I have carefully considered the submissions of the appellant and perused the order of the AO in the light of the evidences placed on record, which show that this issue was involved in th .....

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