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Honda Motorcycle and Scooter India [P] Ltd Versus The Addl. CIT, Gurgaon Range and Vica-Versa

2016 (10) TMI 634 - ITAT DELHI

Depreciation on plastic mould - higher rate of depreciation on moulds in case of two wheeler manufacturer - use of moulds at vendor's premises - Held that:- We are inclined to hold that the conclusion arrived by the ld. CIT(A) in para 5.2 of the impugned order is quite correct and justified and we are unable to see any valid reason to interfere with the impugned order on this issue as admittedly and undisputedly the assessee is owner of the plastic mould which were used in the premises of variou .....

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t case and thus it is entitled to claim depreciation @ 30% which was rightly allowed by the ld. CIT(A) - Decided against revenue. - Payment in the nature of reimbursement of expenses - AO made disallowance on the allegation that the assessee has not made tax deduction at source on the payments made to non resident outside India whereas the CIT(A) granted part relief to the assessee by observing that since payments have been made outside India in the form of reimbursement of expenses, thus th .....

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CIT(A) followed the order of DRP for earlier A.Y 2006-07 wherein claim of the assessee regarding payment in the nature of reimbursement of expenses was allowed. We are unable to see any valid reason to interfere with the conclusion of the CIT(A) especially when the AO could not establish that the impugned payments made by the assessee to non residents outside India were chargeable to tax in India and in this situation, TDS provisions are not applicable to the payments made by the assessee and he .....

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tee as per excise laws and the same has to be held for the purpose of business of the assessee, because excise duty or additional excise duty was paid as per mandatory taxation legislation which cannot be avoided. In the present case, payment of sales tools expenses was not under legal obligation or liability and same has been incurred without any agreement. At the risk of repetition, we may point out that as per clause 11.2 of agreement between the assessee and the dealer, all expenses have to .....

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ssee has neither set up a new plant nor purchased any capital asset. Accordingly, in view of the above decision of the Hon'ble Supreme Courtin the case of Empire Jute Company Limited [1980 (5) TMI 1 - SUPREME Court ]we find no merit in the order of the AO nor in the impugned order of the CIT(A) holding the above expenses to be capital in nature - ITA No. 3073/Del/2011, ITA No. 3074/Del/2011, ITA No. 3075/Del/2011, ITA Nos. 3237/Del /2011, ITA Nos. 3460/Del /2013 - Dated:- 31-8-2016 - SHRI S.V. M .....

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the case of the assessee and 26.3.2013 in Revenue s appeal. Since the issues involved in all these appeals are similar and the appeals were heard together, so these are being disposed off by this consolidated order for the sake of convenience. We shall dispose them of one by one. First we take up Revenue s appeal for A.Y 2007-08 ITA No. 3460/Del/2013 [A.Y 2007-08] 2. The fol lowing grounds have been raised by the Revenue in this appeal: 1. The ld. CIT(A) erred in treating the assessee company el .....

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clusively for the purpose of business, and which the assessee was under no obligation to incur, as per its agreement with vendors. 3. The ld. counsel of the Revenue supporting the action of the A.O contended that the assessee company is not entitled to claim depreciation @ 30% as it is not manufacturer of rubber and plastic goods. The ld. counsel of the Revenue contended that CIT(A) erred in treating the assessee company eligible for claiming depreciation at a higher rate on moulds, higher rate .....

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be used in the assessee s factory. Therefore, the claim of deprecation @ 30% is not allowable. However, the ld. counsel of the Revenue fairly contended that the A.O allowed deprecation @ 15% whereas the assessee claimed depreciation @ 30% as per entry vii of the schedule of depreciation. The ld. counsel of the Revenue finally submitted that the impugned order of ld. CIT(A) was without any basis and the same may be set aside by the restoring that of the A.O. 4. Per contra, the ld. counsel of the .....

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be owned and used by the assessee. The ld. AR further submitted that in the present case the moulds were owned by the assessee and these were given to vendors for the purpose of manufacturing of various parts of two wheelers as specified by the assessee and the only question which remains to be considered is whether such moulds were used in plastic factories for the purpose of business of the assessee. To support this contention, the ld. AR also placed reliance on the decision of the Hon'ble .....

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s. First of all we may point out that the A.O has not made any addition or disallowance in any of the earlier or subsequent A.Ys. Secondly, we observe that the A.O has allowed depreciation @ 15% whereas the assessee is claiming deprecation @ 30% by alleging that the assessee has made arrangement with vendors who, in turn, are engaged in manufacturing rubber and plastic goods as per specifications given by the assessee. The main contention of the A.O is that the assessee is not a manufacturer of .....

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he same were given to vendors for use in their respective manufacturing units/factories. At this juncture, we find it appropriate to consider the proposition laid down by the Ahmadabad Bench of the Tribunal in the case of Symphony Comfort Systems Ltd [supra] wherein it was held as below: 4.3. I have considered carefully the observation of the AO and the submission of the counsel alongwith the appellate order passed for asst. yr. 1991-92. The CIT(A)-XIV while deciding the issue for asst. yr. 1991 .....

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iew taken by the Karnataka High Court has also been followed in the decision of the Tribunal Delhi Bench, wherein, though the end product, viz. vacuum glass was not a plastic product, it was held that the plastic moulds used for manufacturing plastic covers of the vacuum glasses in exactly the same manner as manufacturing is carried out by any other plastic factory, were entitled to depreciation at the higher rate under Appendix-I of the IT Rules. In view of the conclusion arrived at by the CIT( .....

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s issue as admittedly and undisputedly the assessee is owner of the plastic mould which were used in the premises of various vendors for manufacturing of plastic and rubber goods for use of assessee. In our considered opinion, it is immaterial whether the plastic /rubber moulds were used in the factory premises of the assessee or vendors. Prime requirement is that moulds should be owned by the assessee, the same should be part of block assets shown by the assessee and these were put to use for t .....

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l ied upon by the ld. DR. 8. The ld. DR took us through para 6.2 at page 14 of the impugned first appellate order and contended that since the payments were made by the assessee outside India in the form of reimbursement of expenses which attracts TDS provisions and the assessee has not deducted any TDS at the time of payments and the impugned payments made by the assessee are squarely covered under the provisions of section 40(a)(ia) of the Income-tax Act, 1961 [hereinafter referred to as ' .....

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tax in India, therefore the CIT(A) was right in granting relief to the assessee by following the order of the DRP for A.Y 2006-07. The ld. AR also drew our attention towards the relevant operative para 6.2 at pages 14 and 15 of the impugned order and submitted that the CIT(A) has granted part relief to the assessee and the disallowance on the issue of payment to American Embassy School towards school fees of daughter, reimbursement on account of travel expenses of Mr. Takeshi Miyashita and paym .....

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ct, income should be chargeable to tax in India, then only TDS provisions can be held as applicable. 11. On careful consideration of the above rival submissions, at the very outset, we may point out that the AO made disallowance on the allegation that the assessee has not made tax deduction at source on the payments made to non resident outside India whereas the CIT(A) granted part relief to the assessee by observing that since payments have been made outside India in the form of reimbursement o .....

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case, the CIT(A) followed the order of DRP for earlier A.Y 2006-07 wherein claim of the assessee regarding payment in the nature of reimbursement of expenses was allowed. We are unable to see any valid reason to interfere with the conclusion of the CIT(A) especially when the AO could not establish that the impugned payments made by the assessee to non residents outside India were chargeable to tax in India and in this situation, TDS provisions are not applicable to the payments made by the asses .....

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s on account of auto spare parts traded amounting to ₹ 77,85,401/-. The ld. DR further pointed out that AO noticed that there was an agreement between the assessee company and its dealers under the head General Obligations of the Company at para 11.2 under the sub-head Advertising Support. The ld. DR submitted that as per clause 11.2, the assessee has to provide necessary information, materials and such other assistance from time to time, at the dealer s cost and expenses, therefore, there .....

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t the dealers and impugned sales tools expenses represents 50% subsidy given to dealers on account of basic cost of standard sales tools, tools/features for standardization of Honda Exclusive Dealer Outlets. Therefore, the AO was incorrect in holding that the appellant was under no obligation to incur these expenses. The ld. AR submitted that the acid test of section 37 of the Act is that the expenses should have been incurred for the purpose of business of the assessee and as per dealership agr .....

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paper book and submitted that as per the decision of Hon'ble Jurisdictional High Court of Delhi in the case of Tupperware India [P] Ltd Vs. CIT reported at [2015] 60 Taxmann.com 350 [Delhi] where contract manufacturers were carrying out manufacturing activities for the assessee and it was in assessee s business necessity that all the taxliabilities of manufacturers were duly satisfied by the assessee then the payments in this regard has to be considered as business expenses of the assessee .....

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tion of business of contract manufacturers in as much as without them, the assessee could not run its business of trading in India. Therefore, law of additional excise duty levied upon the contract manufacturers was discharged by the assessee and in this situation it was held that it was for the purpose of business of the assessee. The ld. DR pointed out that the facts and circumstances of the present case are quite similar and distinct. Therefore, the ratio of the decision of Hon'ble Delhi .....

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ment but there was no separate contract on this issue and the assessee was not under obligation to bear this liability to incur expenses on sales tools expenses. Therefore, it was rightly disallowed by the AO. The ld. DR also contended that as per contract, liability to bear the expenses was on the dealer and the assessee and the assessee has not discharged its onus to support the claim as required u/s 37 of the Act. 15. On careful perusal of the above rival submissions, first of all we may poin .....

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the production in accordance with the provisions of policy, guidelines and operational standards with regards to advertising issue by the company from time to time. 16. In view of the above, the assessee company was under obligation to provide necessary information, material and such other assistance from time to time at the dealers cost and the expenses and there was no obligation on the assessee company to subsidize 50% of the sales tools expenses or 50% in the form of subsidy to the dealers o .....

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incurred by the assessee by amending the agreement and as per clause (c) of clause 3 at page 386 of the assessee s paper book, the assessee company was under obligation to compensate the dealers suitably in consideration for cooperation/services/assistance as and when rendered by dealers in respect of sales. The ld. AR also submitted that such compensation was to be decided as per pol icy of the company in such matters. First of all, we may point out that the said clause (c) of clause (3) of the .....

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essee to incur 50% subsidy on sales tools expenses to the dealers and in the absence of any such amendment or document, we decl ine to accept the contention of the assessee when it was under no obligation of agreement between dealers and thus the impugned claim of expenses could not be held as allowable to the assessee. At this juncture, we may point out that ratio of the decision in the case of Tupperware India Ltd [supra] is not available to the appellant in the present case as it was a case p .....

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e by the contractee as per excise laws and the same has to be held for the purpose of business of the assessee, because excise duty or additional excise duty was paid as per mandatory taxation legislation which cannot be avoided. In the present case, payment of sales tools expenses was not under legal obligation or liability and same has been incurred without any agreement. At the risk of repetition, we may point out that as per clause 11.2 of agreement between the assessee and the dealer, all e .....

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o. 3075/Del /2011[A.Y 2005-06] 18. Both the parties concurred that Ground No 1 in A.Y 2004-05 and 2005-06 are similar to the facts of A.Y 2007-08. Since by the earl ier part of this order we have dismissed ground No. 2 of the Revenue wherein the assessee got relief from the first appellate order on the issue of payments to non residents and our said conclusion would apply mutatis mutandis to Ground No. 1 in A.Y 2004-05 and 2005-06. Consequently, Ground No 1 of the assessee in both the years are .....

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xisting business were allowable a revenue deduction. The ld. AR drew our attention towards para 7 at page 3 of the assessment order and contended that the AO by passing a cryptic order made disallowance without looking into the facts of the case. The ld. AR further contended that the CIT(A) in para 8.3 dismissed the ground of the assessee by incorrectly observing that the generalledger detai ls reveals that the expenses have been booked as trial run cost and trial parts purchased etc. Therefore, .....

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enses neither related to setting up of a new plant and were not incurred on purchase of any capital asset, such expenses were not incurred in capital and were allowable revenue expenses as per the test laid down by the Hon'ble Supreme Court in the case of Empire Jute Company Limited VS. CIT reported at 124 ITR 1. 20. The ld. AR lastly contended that the assessee incurred trial run expenses on the activity of indigenisation of software and consequently this activity boosted Indian economy. Th .....

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justified and correct in disallowing the same. 22. After careful consideration of the above rival submissions and perusing the relevant material on record as well as the cited decisions, we find that it is an admitted fact that the assessee incurred trial run expenses for introducing the new models of motorcycle as part of the existing business which the assessee claimed allowable as revenue deduction whereas the CIT(A) and the AO came to the conclusion that these expenses were capital expenditu .....

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nefit, may, none-the-less, be on revenue account and the test one during benefit may break down. It is not every advantage of enduring nature acquired by an assessee that brings the case within the principle laid down in this test. What is material to consider is the nature of the advantage in a commercial sense that it is only where the advantage is in the capital field that the expenditure would be disallowable on an application of this test. If the advantage consists merely in facilitating th .....

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