TMI Blog2018 (7) TMI 208X X X X Extracts X X X X X X X X Extracts X X X X ..... changed on the same basis or method. The closing stock of a particular year is the opening stock of the subsequent year. It is not the case of the revenue that the method of valuation of closing stock is materially affecting the accounts and profits disclosed by the assessee. This adjustment sought to be made is revenue neutral and at best may result in preponment or postponement of revenue. The issue is whether such exercise is at all required on the ground of materiality. Materiality is a concept which is well recognized both in accountancy and law. Accounting standards notified by the CBDT u/s 145(2) mandate that the concept of materiality be taken into consideration when finalizing the accounts of an assessee. Addition on account of cost of rejection of semi-finished goods and obsolete items to the value of closing stock - Held that:- It is pertinent to note that it is not practically possible for the assessee to segregate normal and abnormal wastages embedded in the aforesaid costs and therefore, the assessee, as per consistent and regular method of accounting, accepted by the Revenue as such in the earlier years, did not consider the aforesaid expenditure for the purposes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... laimed deduction for miscellaneous expenses aggregating to ₹ 18,01,39,937 pertaining to prior period. Advertisement provisions of Head Office - assessee made provision for various expenses incurred during the year on the basis of reasonable estimate - Held that:- The provision for advertisement expenses, has been made on the basis of actual Purchase orders and agreements and thus, has been made on reasonable and scientific basis. Detail of provisions for advertisement was submitted before the lower authorities. Further, The Assessing Officer, in the set-aside proceedings for A.Y. 2008-09, vide order dated 26.02.2015, accepted the claim of the assessee and allowed relief on the aforementioned identical issue by observing that the assessee had computed the provision on the basis of actual Purchase Orders, which was scientific and logical in nature. Disallowance of alleged excessive purchases from related parties as per AS-18 - Held that:- The purchase prices of components which are purchased from various suppliers are based upon negotiations with such vendors and are different due to various factors. The assessee also prefers purchasing material from certain suppliers, d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are unable to understand as to how the assessing officer as well as the DRP has considered this as a deemed purchase by the assessee. The reason enunciated by the assessee w.r.t identifying the suppliers of the material along with the determination of price of the raw material fixing of payment terms etc., clearly constitutes a matter of business expediency for the assessee - it is a case of contract of sale and not contract of work. Hence, in our view, the provision of Sec. 194C are not applicable and consequently the disallowance made u/s 40(a)(ia) is to be deleted. Disallowance of legal and professional expenses u/s 40(a)(ia) - failure of the assessee to deduct tax at source there from under section 194J - Held that:- In the present Assessment Year, the Assessing Officer disallowed the aforesaid expenses, invoking section 40(a)(ia), for the failure of the assessee to deduct tax at source there from under section 194J of the Act. But it is pertinent to note here that the Assessing Officer did not doubt that the payment was made by assessee towards reimbursement of expenses, it was still held that assessee was liable to deduct tax at source under section 194J of the Act. Thus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... given the proper calculation to that effect. Therefore, the matter is restored back to the file of the Assessing Officer. Disallowance of Royalty expenditure on the ground of being capital in nature and disallowance on account of cess on model fee - Held that:- No proprietary rights in the know how vested in the assessee, the assessee being a mere licensee with limited rights to use the technical assistance during the currency of the agreement, there is no explicit or implied intention to transfer or create ownership in the technical know-how /technical information in the assessee. In view of the aforesaid, expenditure by way of royalty, technical guidance fee and model fees incurred by the assessee was allowable revenue deduction as held in the decision given by the Tribunal for A.Ys. 2010-11 and 2011-12 Depreciation on Model Fee - Held that:- Expenditure was incurred on new model fees prior to commencement of production of new models of two wheelers, thus, this action is revenue neutral in a broader perspective as the same adjustment would be required to be made to the opening stock of finished goods for the year under consideration. Disallowance of reimbursement of fore ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urcing of certain intermediary processes or procurement of finished components in the process of manufacture does not tantamount to outsourcing of manufacturing activities and thus would not hamper the claim of deduction of the assessee company under Section 80 IC of the Act. Disallowance of deduction u/s 80IC - lower consumption of electricity - part of the manufacturing activity(ies) at Haridwar were outsourced on the basis of lower consumption of power per unit at Haridwar plant vis-à-vis rate of power consumption at other two plants - Held that:- Identical ground in the immediately preceding assessment years, i.e. AY 2010-11 and AY 2011-12 has been deleted by the Tribunal wherein the Tribunal noted that difference in consumption of electricity was on account of the fact that the plant at Haridwar was more energy-efficient and hence certain processes were carried out in said plant. The Tribunal further held that outsourcing of certain intermediary processes or procurement of finished components in the process of manufacture does not tantamount to outsourcing of manufacturing activities and thus would not hamper the claim of deduction of the assessee company under Section 80 I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ied in Industrial Policy of ₹ 1129 crores (restricted to NIL) - Held that:- Deduction u/s 80IC cannot be denied for alleged failure to comply with the three conditions specified in the assessment order. As regards compliance of conditions precedent for claiming deduction u/s 80IC, we note that the appellant during the course of set-aside proceedings had point-wise given entire details /information as to how it satisfied each condition precedent for claiming deduction under said section. The claim of deduction of the appellant is also duly supported with the audit report in Form 10CCB issued by the auditors, answering each question in the format and how the appellant satisfied all such conditions. In the final assessment order, the assessing officer has not pointed out violation of any such condition precedent. Disallowance expenses incurred on repair and maintenance of various assets alleging to be capital expenditure - Held that:- Expenditure incurred is allowable repairs and maintenance expenditure on the existing assets of the company and is revenue in nature. Expenditure incurred on mobile phones - Nature of expenses - revenue or capital - Held that:- As decided in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ibunal in assessee's own case for assessment year 2010-11 2011-12 [ITA No. 1545/DEL/2015 (Hero Moto Corp. Ltd. vs. JCIT A.Y. 2010- 11), 2424/DEL/2015 (DCIT vs. Hero Moto Corp. Ltd. A.Y. 2010-11), 1609/DEL/2015 (DCIT vs. Hero Moto Corp. Ltd. A.Y. 2011-12)and ITA No. 914/DEL/2016 (Hero Moto Corp. Ltd. vs. DCIT A.Y. 2011-12) order dated 24.10.2016 wherein the Tribunal, following the order of the coordinate benches in assessee's own case for the Assessment Years 2006-07, 2007-08 and 2008- 09 deleted the aforesaid addition. Further, the Hon'ble High Court upheld the order of the Tribunal for AY 2006-07 (ITA No. ITA 923/2015 order dated 08.05.2017) deleting the adjustment on account of payment of model fee. The Ld. AR also submitted that during the relevant previous year, the assessee has not sold any products to the associated enterprises on which royalty was payable and the entire amount of royalty was paid by the assessee on sales made to independent enterprises. 4. The Ld. DR relied upon the Assessment Order and Order of the TPO, but could not distinguish the decision of the Tribunal and the Hon ble High Court. 5. We have heard both the parties and perused the mat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icing of model fees and payment of royalty. This issue is squarely covered by the earlier Assessment Years in assessee s favour. Therefore, Ground No. 1 to 15 are allowed in favour of the assessee. 6. As relates to Ground No. 16, is relating to addition of freight inward/import clearing expenses to cost of closing inventory for ₹ 170.01 lacs. The Assessee purchases raw material on CIF basis and included the freight cost for delivery of goods in purchase price and are factored in the value of closing inventory. In exceptional circumstances viz. material shortage, wherein assessee has to immediately lift material, transport charges are paid, which are not included to the purchase price, but are separately debited to profit and loss account, because the invoices of transporters are received after consumption of material. Such freight amount is not included in the valuation of closing stock, as per regularly and consistently followed method of valuation of stock accepted by the Revenue in the past. The AO/DRP held that proportionate amount of ₹ 170.01 lacs out of the total amount of freight charges of ₹ 6.162.22 lacs incurred as attributable to the value of closi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Y 2007-08 where in it has been held that :- 7.13. We have considered the submissions and the material filed by both the parties. The issue in question is regarding method of valuation of closing stock. The primary contention of the assessee is that it had to make emergency purchases and that these stocks so purchased were immediately consumed. In such exceptional situations, the assessee has directly accounted the freight and import clearing charges to the profit and loss account. This means that such raw material stocks are not part of closing stock at all. Further, this fact is not rebutted by the DR. 7.14 Though technically it can be argued that the value of closing inventory must include freight/ import clearing charges, the facts explained by the assessee are that the purchases in question are done under exceptional circumstances (which are well known in this type of industry) for immediate consumption. They are in fact consumed immediately i.e. as soon as raw material enters the factory premises which is not disputed by assessing officer, hence the question of such purchases being part of closing stock does not arise at all. In such a situation, when freight/ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TR 287. 7.19 Further, the Hon ble Supreme Court in the case of CIT vs. Realest Builders and Services Limited (2008) 307 ITR 202 held as : In case where the department wants to tax an assessee on the ground of the liability arising in a particular year, it should always ascertain the method of accounting followed by the assessee in the past and whether change in method of accounting was warranted on the ground that profit is being underestimated under the impugned method of accounting. If the Assessing Officer comes to the conclusion that there is underestimation of profits, he must give facts and figures in that regard and demonstrate to the Court that the impugned method of accounting adopted by the assessee results in underestimation of profits and is, therefore, rejected. Otherwise, the presumption would be that the entire exercise is revenue neutral. In the instant case, that exercise had never been undertaken. The Assessing Officer was required to demonstrate both the methods, one adopted by the assessee and the other by the department. In the circumstances, there was no reason to interfere with the conclusion given by the High Court. 7.20 The Hon ble Sup ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of profits. However, the Revenue failed to demonstrate with facts and figures that the impugned method of accounting may result in material underestimation of profits. On the contrary, the assessee has demonstrated that the change in the method of accounting for year under appeal would result in loss to the revenue as the opening stock would also require similar adjustment and the cascading effect will be loss to revenue. We observe that in many of the additions made in this case by the revenue, the consistent method of accounting is unnecessarily disturbed, though it has been accepted in many years. In our view such tinkering with the method is unjustified when the exercise does not materially alter the profits. The facts and figures in many additions demonstrate that the issue raised is revenue neutral in the long run. Such petty additions should be avoided on the ground of materiality, as AS-1 which talks about materiality, consistency, prudence etc. is part of the I.T. Act after it is notified u/s 145(2). 7.23 In view of the foregoing and proposition laid down by the Hon ble Supreme Court and the Hon ble High Courts, we are of the opinion that adjustment of ₹ 31 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the present Assessment Year, the AO/DRP held that proportionate amount of ₹ 170.01 lacs out of the total amount of freight charges of ₹ 6.162.22 lacs incurred as attributable to the value of closing stock on account of above expenses. However, since the Assessing Officer had made similar addition of ₹ 177.26 lacs on account of above in the closing stock of the last year, which constituted opening stock of the year under consideration, the Assessing Officer allowed deduction for the said amount, resulting in net reduction of ₹ 7.25 lacs (i.e. ₹ 170.01-177.26 lacs). In the earlier years this addition was deleted by the Tribunal for A.Y. 2010-11 and 2011-12, therefore, this issue is squarely covered in favour of the assessee. Therefore, Ground No. 16 is allowed in favour of the assessee. 10. As relates to Ground No. 17-17.1, regarding Addition on account of cost of rejection of semi-finished goods and obsolete items to the value of closing stock, the assessee had debited to the profit and loss account for ₹ 1469.93 lacs representing the cost of material / semi-finished goods rejected in the course of manufacturing or obsolete items. The aforesai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent year 2007-08 wherein the identical issue is dealt with as under:- 8.9 The issue in question is whether the cost of abnormal rejections have to be considered for the purpose of valuation of closing stock. The assessee relied on Accounting standard -2- Valuation of Inventories which is a notified accounting standard by the Companies Act which stipulates that abnormal wastages should not be considered for valuation of inventory. 8.10 It was submitted by the Ld. AR of the assessee that it is in the manufacturing of precision and quality product and in case of unfit material it has been consistently following the method of changing the abnormal rejection of material to its profit and loss account, without any allocation to the value of closing inventory. 8.11 The assessing officer s case is that cost of rejections needed to be included in the value of closing stock. Assessing officer worked out an amount of ₹ 9.24 lacs as attributable to closing stock out of total expenditure of ₹ 12.49 crores and closing stock value of ₹ 275 crores. The assessee as a consistent accounting policy has been claiming the cost of abnormal rejections as revenue expe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f India which has been mandated by the Ministry of corporate affairs, which only says that, only normal losses are required to be included and abnormal losses are required to excluded for the purpose of the valuation of the closing stock of the finished goods and semi finished goods. In view of the above, we respectfully following the decision of the coordinate bench in the appellant s own case for the previous year allow ground no. 3 of the appeal of the assessee. It is pertinent to note that it is not practically possible for the assessee to segregate normal and abnormal wastages embedded in the aforesaid costs and therefore, the assessee, as per consistent and regular method of accounting, accepted by the Revenue as such in the earlier years, did not consider the aforesaid expenditure for the purposes of valuation of closing inventory of finished goods. The AO/DRP was not correct in making this addition. The issue is squarely covered in assessee s favour by the order of earlier assessment years. Therefore, Ground No. 17-17.1 are allowed in favour of the assessee. 14. As relates to Ground No. 18-18.2 regarding disallowance of provision for increase in price of material ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of materiality and consistency followed by the assessee. Further, the Ld. AR submitted that the Delhi bench of the Tribunal, vide consolidated order dated 24.10.2016 passed in assessee s own case for assessment year 2010-11 and 2011-12, has decided the aforesaid issue in favour of the assessee, holding that the provisions was made on scientific basis and the transaction is revenue neutral. 16. The Ld. DR relied upon the Assessment Order and Order of the TPO, but could not distinguish the decision of the Tribunal. 17. We have heard both the parties and perused the material available on record. The Tribunal for A.Ys. 2010-11 2011-12 held as under: 20) We have carefully considered the rival contentions and also perused order of the coordinate bench in the appellant s own case for earlier years. We have also perused the page no. 1130 to 1140 of the paper book volume 3 submitted by the assessee before the Ld. assessing officer in pursuance of direction of the Ld. dispute resolution panel. The parties before us have confirmed that there is no change in the facts and circumstances of the case for this year compared to the year for which the tribunal has decided this issu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssment year 2008-09 when the similar disallowance was made by the Ld. assessing officer the coordinate bench vide its order dated 13.04.2014 has held deleted the disallowance made by the assessing officer keeping in view the principle of materiality and consistency followed by the appellant. On the ground that the mention has been made in the purchase order that there cannot be any revision of the prices subsequently and the prices mentioning the purchase order of final based on which the Ld. assessing officer has relied very heavily we are of the view that that these are the general terms and conditions of the purchase order claimed by the appellant upon its various vendors and there is no prohibition in the said purchase orders that subsequently the prices cannot be revised. Many times the prices are dependent upon the cost of the raw material such as metal etc of the vendors which is highly fluctuating, which may result into subsequent price revision. Further when the actual payments are made to the vendors on the basis of such retrospective increase in price of material supplied, which is accepted and allowed as revenue expenditure, the provision made for such are revenue neutr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of material during the year. Further, such wastage is normal and inherent in the manufacturing process and. in any case, within tolerable limits. Scrap generated in the aforesaid manner is transferred to scrap yard with proper approval of respective Shop head' and 'Process. Planning Control department' in the manufacturing unit and sold after necessary processing (e.g. crushing of components), if any. The sale proceeds from sale of scrap is directly credited to the profit and loss account and shown as income. Having regard to the nature of scrap/wastage generated during the course of business i.e. empty oil drums, corrugated wooden boxes, plastic bags, etc., it is not possible to maintain scrap register at the shop floor containing item wise details of scrap generated. However, the assessee maintains record/register of each item of scrap sold during the year. The sale proceeds from sale of scrap is directly credited to the assessee s P L A/c and shown as income. The assessee realized ₹ 7.96 crores from sale of scrap generated in the course of: manufacturing, which was credited to the profit and loss account i and shown as income. In the assessment order, the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... allowance sustained by the Tribunal in assessment years 2007-08 and 2008-09 has been categorically distinguished by the ITAT in the AY 2010-11 (referred supra), wherein the Tribunal held that the earlier orders were passed without due consideration of AS-2 and application thereof to scrap generated during manufacturing process has not been examined. 20. The Ld. DR relied upon the Assessment Order and Order of the TPO as well as the Tribunal decision for A.Y. 2007-08 and 2008-09. 21. We have heard both the parties and perused the material available on record. The Tribunal for A.Y. 2010-11 and 2011-12 held as under: 24. We have carefully considered the rival contentions. Accounting standard 2 notified by the Ministry of corporate affairs it provides that inventory is required to be valued at the end of the year for determining the true and fair profit or loss of the financial period of an enterprise. According to that the inventory is required to be valued according to accounting standard 2 in case it is held for the sale in the ordinary course of the business. In the present case the assessee is not holding scrap as an inventory in the ordinary course of its business. I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the size of the appellant, cannot be expected to keep quantitative tally of miniscule items like nuts and bolts lying in the scrap yard. In view of the aforesaid, keeping in mind the principle of materiality, we find that there is no error in the system and regular practice followed by the appellant of not estimating the value of scrap lying in the scrap yard and accounting for sale as and when such scrap is sold and removed from the factory premises. For the aforesaid cumulative reasons we do not find any justification in sustaining the addition of ₹ 3.02 lacs made by the assessing officer in the assessment order. As regards the decision of the Tribunal in the earlier two assessment years, we draw support from the various decisions, wherein it has been held that since doctrine of res judicata is not applicable to income tax proceedings, the Tribunal can deviate from earlier orders passed in the assessee s own case as in those earlier decisions the provisions of the accounting standard A-S to with respect to valuation of inventories were not considered and whether they apply to the scrap generated in a manufacturing process by the company. Furthermore there is no evidences b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... further made following observations: The practice/method of accounting of expenses in the succeeding year at the time of receipt of bills/claims is not a correct method of accounting. Since the time period of six months from end of the relevant year, was available to the assessee for filing the return, the assessee could have considered claiming such expenses in the computation of income. 23. The Ld. AR submitted that the aforesaid issue is covered by the order passed by the Tribunal in the assessee's own case for Assessment Year 2008- 09, wherein, the Tribunal had taken into consideration the finding of the DRP deciding the issue in favor of the assessee and remanded the matter to the file of the Assessing Officer for correcting calculation errors. Further, the aforesaid issue has been decided in favour of the assessee by the order of the Tribunal for assessment year 2010-11 and 2011-12. 24. The Ld. DR relied upon the Assessment Order and Order of the TPO, but could not distinguish the decision of the Tribunal. 25. We have heard both the parties and perused the material available on record. The Tribunal in A.Y. 2010-11 and 2011-12 held as under: 201. We h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aggregating to ₹ 7,09,31,076 but in the assessment order, the amount of ₹ 7,15,91,826 has been incorrectly reported on account of totaling expenses. From page no. 14-16 of DRP order, we observe that the DRP has also pointed out mistake of totaling. At the outset, we observe that the Assessing Officer has nowhere disputed the genuineness of the expenditure claimed by the assessee and if assessee is denied deduction, then it would never get deduction for such expenses. From DRP Order, we also observed that the DRP has followed its decision in respect of immediately preceding year. At the same time, we observe that the mistake of totaling and the working given by the assessee has not been properly verified at the end of Assessing Officer and the same should have been verified by the Assessing Officer. Under above circumstances, we hold that the issue is squarely covered in favour of the assessee by the decision of Hon'ble ITAT 'C' Bench in assessee's own case for AY 2007-08 (supra) and we direct the Assessing Officer to allow the claim of the assessee after proper examination and verification. Accordingly, going consistent with the view taken by this Tribun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . In case of shortfall, the profit and loss account was debited with the amount of shortfall. The aggregate provision for advertisement expenses incurred at the head office made at the end of the relevant previous year, which was reversed in succeeding year amounted to ₹ 22,84.11.653. In the assessment order, the Assessing Officer disallowed the provisions made at the end of the year, to the extent of ₹ 22,84.11,653/- which were reversed in the succeeding year on receipt of bills from the vendors on conclusion of negotiations with the vendors, on the ground that the provisions to that extent were excessive and represented contingent liability, which was not allowable deduction. 27. The Ld. AR submitted that the provision for advertisement expenses, in the year under consideration as well, has been made on the basis of actual Purchase orders and agreements and thus, has been made on reasonable and scientific basis. Detail of provisions for advertisement was submitted before the authorities. It would be pertinent to point out that the Tribunal, in the immediately preceding assessment years, viz. AY 2010-11 and 2011-12, has decided the issue in favour of the assessee by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hod followed in creating the aforesaid provisions, which were made on the basis of details / information available with the company as at the end of the relevant year. We further reiterate and follow the finding given in the preceding ground of appeal that the Revenue should not make adjustment on the issues which are revenueneutral, having no impact on the overall tax liability of an assessee. While following the aforesaid principles, we observe that the present disallowance is also revenue-neutral, since the impugned amount of provision, as also admitted by the assessing officer itself, was reversed in the succeeding year and consequential offered to tax in that year. If such provision is disallowed in this year, the corresponding reduction would need to be made in the return of the succeeding year, neutralizing the entire tax liability on the appellant company. For the aforesaid cumulative reasons, we hereby delete the disallowance made by the by the Ld. Assessing officer of ₹ 1 9658 1820/ in respect of provision for advertisement expenses incurred at the head office made at the end of the relevant previous year which were reversed in the succeeding year and allow the gro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... roducts like wheel assembly, seat assembly, etc. The assessee, while placing aforesaid purchase orders to the vendors, also specifies the specifications of the raw materials/components to be used in manufacture of customized intermediary products as also the name of suppliers from whom the former vendor would purchase such materials/components at prices predetermined by the assessee. During the relevant previous year, the assessee made total purchases of various raw materials, etc. aggregating to ₹ 17,791.60 crores. Out of the aforesaid total purchases, purchases from related parties, i.e., parties related to the assessee, in accordance with definition given in AS-18 issued by the Institute of Chartered Accountants of India (ICAI) and as disclosed in the notes to accounts of the audited accounts of the relevant previous year, but admittedly not related in terms of definition provided in section 40A (2) of the Act, amounted to ₹ 1886.15 crores. The AO after comparing purchase price of certain products, which were purchased from the aforesaid related parties as also from unrelated parties, held that the purchase price from related parties was excessive in order to reduce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessment year for which the coordinate bench is decided this issue in the favour of the appellant for assessment year 2007 08 and 2008 09 wherein this issue has been decided by the coordinate bench as under:- 13.14. The basic requirement for the applicability of section 40A(2) of the Act is that the payment should be made to a related person i.e. to a person referred to in clause (b), of sub-section (2) of section 40A of the Act. 13.15. In the present case, it is an undisputed fact that the payments are not made to a person mentioned in clause (b) of section 40A (2) of the Act. 13.16. Clause (a ) of sub-section (2) of section 40A of the Act provides that where the assessee incurs any expenditure in respect of which payment has been or is to be made to any person referred to in clause (b) of the sub section and the Assessing Officer is of the opinion that such expenditure is excessive or unreasonable having regard to the fair market value of the goods, services or facilities for which the payment is made or the legitimate needs of the business or profession of the assessee or the benefit derived by or accruing to him there from, so much of the expenditure as it so ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t has come to such a conclusion. The allegation means that profit is transferred to third parties, where the share holding of the assessee is not a major share holding. The allegation means that the assessee is distributing profits to companies with majority holding by unrelated parties for the purpose of reducing taxes. Such wild allegation cannot be endorsed by us. 13.19. The assessee does not dispute the fact that certain purchases are made at a rate higher than the rate paid to certain other parties for the same periods. The assessee at pages 1523 to 1523.18 of the paper book also furnished instances where purchases were made from these parties at price lower than the purchases made from unrelated parties. Further, the disallowance was made on adhoc basis without setting any benchmark for the disallowance. 13.20. Notwithstanding the above view, even assuming for a moment that the provisions of the section 40A (2) would apply to the present case, then the following propositions laid down by various courts have to be considered. 13.21. The Hon ble Bombay High Court in the case of CIT v. Indo Saudi Services (Travel) (P.) Ltd. [2009] 310 ITR 306 relying on CBDT Ci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... In view of the above discussions, and bearing in mind entirety of the case, we are of the considered view that the impugned disallowance was indeed uncalled for on the facts of this case. Hence, we uphold the grounds of the assessee. In view of the above about decision of the coordinate bench in appellant s own case and further failure on part of the revenue to controvert any of the findings in the earlier order of the tribunal or pointing out any contrary decisions on this issue, the respectfully following the order of the coordinate bench to not inclined to uphold the disallowance made by the Ld. assessing officer on account of the purchases of ₹ 7 2.40 crores made from the parties who are related parties in terms of accounting standard 18 issued by the Institute of chartered accountants of India but not in terms of provisions of section 40A (2) of the income tax act. In the result ground No. 11 of the appeal of the assessee is allowed. The purchase prices of components which are purchased from various suppliers are based upon negotiations with such vendors and are different due to various factors. The assessee also prefers purchasing material from certain supp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by HFCL directly. 35. The Ld. AR submitted that in AY 2007-08, the Tribunal decided the issue in favour of the assessee by holding that assessee s intention did not reflect that the amount was received as loan or advance so as to attract the provisions of section 2(22)(e) of the Act. The Tribunal further held that the assessee was holding the money as a custodian and the amount would be exempted in terms of clause (ii) section 2(22)(e) since the amount was given in the ordinary course of business. In assessment year 2008-09, 2010-11 and 2011-12, the Tribunal followed the order for Assessment Year 2007-08 which dealt with the disallowance. 36. The Ld. DR relied upon the Assessment Order and Order of the TPO, but could not distinguish the decision of the Tribunal. 37. We have heard both the parties and perused the material available on record. The Tribunal in A.Ys. 2010-11 and 2011-12 held as under: 214) We have heard the rival contentions. We note that similar issue relating to addition of deemed dividend was deleted by the Tribunal in the assessee s own case for assessment year 2007-08 which was followed in assessment year 2008-09. The relevant observations of the T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es of the case of the appellant as compared to the assessment year in which the above issue is decided by the coordinate bench. No other contrary decision was also pointed out therefore, respectfully following the decision of the coordinate bench in the appellant s own case for the earlier years. We dismiss ground No.6 of the appeal of the revenue. It is pertinent to note that when payments by dealers to HFCL are due to the dealers, due to convenience of facility of collection centers of the assessee available all over India, make payment into the assessee's bank account, for and on behalf of HFCL, which is in turn remitted by the assessee to HFCL in 2- 3 days. Thus, the assessee is mere custodian of the said amount. Thus, Section 2(22)(e) will not be applicable in the present case. The issue is squarely covered by the order of the Tribunal for A.Ys. 2010-11 and 2011-12. Therefore, Ground Nos. 23 to 23.3 are allowed in favour of the assessee. 38. As relates to Ground No. 24- 24.1 regarding disallowance of payments made for advisory services availed form Hero Corporate Services Ltd. (HCSL) amounting to ₹ 2 Crores, it can be seen that during the relevant previous y ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in this case. His only doubt is how these services were needed in the business of the assessee. We also note that the parties are not related to each other in terms of sec. 40A(2)(b). While it is so, the action of the Revenue in disallowing the certain portion of the expenditure is not justified unless the revenue demonstrates that the transaction is primarily a device to evade tax. 15.13. The Hon ble Supreme Court in the case of CIT v. Walchand Co. (P.) Ltd. [1967] 65 ITR 381 held that the Income-tax authorities have to decide whether the expenditure claimed as an allowance was incurred voluntarily and on grounds of commercial expediency. In applying the test of commercial expediency for determining whether the expenditure was wholly and exclusively laid out for the purpose of the business, the Supreme Court laid down that the reasonableness of the expenditure has to be adjudged from the point of view of the businessman and not of the Revenue. 15.14. The Hon'ble Supreme Court in the case of CIT v. Dharamraj Giriji Riya Narsingiriji 91 ITR 544 held that it is not open to the Department to prescribe what expenditure an assessee should incur and in what circumstanc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... used in manufacture of customized intermediary products at the price negotiated by the assessee with such suppliers. The Assessing Officer held that the assessee by specifying the name of vendors of raw material along with purchase price thereof, was controlling the supply of raw material to the vendors, which was to be deemed as supply of raw-material by the assessee itself, and hence the contract with vendors constituted work contract' under section 194C, as amended by Finance (No. 2) Act. 2009. The Assessing Officer further observed that the vendors are not operating as independent business entities but as captive units and working under the directions and dictation of the assessee, thereby having no independent decision making. In assessment order, the Assessing Officer further observed that the assessee, while arranging the transactions in the aforesaid manner, viz., routing the supply of material through parties, has hoodwinked the Revenue in order to evade liability to deduct tax at source. For the aforesaid cumulative reasons, the Assessing Officer held that the aforesaid transaction of purchase from vendors was in the nature of contract for carrying out work, which wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sment order for AY 2007-08, while repeating the disallowance in the assessment year under consideration. The Tribunal in the order for AY 2007-08 in appellant s own case has reversed the aforesaid findings of the assessing officer. The coordinate bench has held that impugned transaction is not covered within the scope of section 194C of the Act. The relevant observations of the coordinate bench are as under: 14.58. The issue before us for adjudication is whether on the facts and circumstances of the case, the customized intermediatery products like wheel assembly, seat assembly etc. sourced by the assessee from the vendors is a contract of sale by the vendors or a contract of work. 14.59. The assessing officer issued summons u/s 131 to nine vendors and recorded their statements. This exercise resulted in the assessing officer gathering information from the vendors that they have procured material from the sources specified by the assessee and at rates specified by the assessee. Based on the statements from nine vendors, the assessing officer came to the conclusion that the assessee has termed the contract of work as contract for sale . The reasons in details for a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... units of the assessee. ( 2) The vendors have their own manufacturing establishments, employing huge labour; utilize the raw materials purchased by them, for producing customized finished goods for the assessee. ( 3) The assessee has issued purchase orders for supply of components as per the assessee s specification. The assessee has filed copies of the purchase orders/ invoices. The same finds place in the paper book filed by the assessee. ( 4) The raw materials are delivered to the vendors by the suppliers and are at the risk and title of the vendors. The suppliers collect from the vendors, sales tax, VAT etc. on sale of raw material and the vendor paid the same. ( 5) Excise duty is paid by the vendors in their own right, as an independent manufacturer and not as a job worker in respect of goods manufactured and sold to the assessee. ( 6) The assessee has paid sales tax/VAT, as the case maybe, for the goods purchased from the vendors. 14.88. Further on perusal of the sample purchase orders produced before us and the terms and conditions on which the purchase order is placed, we observe that the transaction is on a principal to principal bas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... officer as well as the DRP has considered this as a deemed purchase by the assessee. The reason enunciated by the assessee w.r.t identifying the suppliers of the material along with the determination of price of the raw material fixing of payment terms etc., clearly constitutes a matter of business expediency for the assessee. 14.93. Further, in the statement recorded from the vendors after summoning them u/s 131 of the Act, the vendors have confirmed that this is a case of sale of goods and not a works contract. Mr. Yogesh Kumar Jindal has explained the purpose for which the assessee specifies the suppliers and the rate. 14.94. We have carefully gone through the decision of the Karnataka High Court in the case of Nova Pharma Ltd. (supra) relied by the Ld. DR and are of the view that the fact of the case is clearly distinguishable and cannot be applied to the facts of the present case. The assessee has rightly distinguished the case. As the same is brought out in the earlier part of the order, for sake of brevity we do not repeat the same. 14.95. In this case, there is no supply of raw material by the assessee to the vendors either directly or indirectly. In layin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd supplier, like payment terms, period of delivery etc. is for acquisition of ascertained goods the contract is thus one of sale and not a contract for carrying out work. 14.99. In view of the above finding, we are not adjudicating on the other arguments raised by the assessee on this issue, though we find force in the argument of the assessee that since all the vendors have filed their returns of income and paid taxes on the receipts from the assessee, no disallowance under section 40(a)(ia) is warranted. Hence the additional evidence and additional argument is not adjudicated as it would be an academic exercise. In the result, this ground of the assessee is allowed. 66) In absence of any contrary decision pointed out by the Ld. departmental representative and the facts and circumstances of the case remaining the same was the assessment years , We follow the aforesaid findings given in the appeal order for 2007-08 and therefore, we hold that the transaction entered by the appellant for purchase of material from vendors is outside the scope of section 194C of the Act. Accordingly, for the aforesaid cumulative reasons, we delete the impugned disallowance made by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... chievement of turnover targets which represented commission on which TDS under section 194H was liable to be deducted. 47. The Ld. AR submitted that the Tribunal in Assessment Year 2007-08 decided the issue in favour of the assessee relying on the decision of Hon ble Delhi High Court in the case of CIT vs. Mother Dairy Ltd. (ITA No. 1925/2010) and Jai Drinks Pvt. Ltd. (336 ITR 383), holding that the discount in question is not in the nature of commission but an incentive for higher sale targets. The Ld. AR further submitted that the aforesaid finding was followed by the Tribunal in the AY 2010-11 and 2011-12 wherein similar disallowance made by the Assessing Officer was deleted. 48. The Ld. DR relied upon the Assessment Order and Order of the TPO, but could not distinguish the decision of the Tribunal and the Hon ble High Court. 49. We have heard both the parties and perused the material available on record. The Tribunal for A.Ys. 2010-11 and 2011-12 held as under: 75) We have heard the rival contentions. As dealership agreement entered between the appellant and dealers is on a principal-to-principal basis and dealers do not act as agents of the appellant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d by the Dairy. That fact is not determinative of the relationship between the Dairy and the concessionaires with regard to the sale of the milk and other products. They were licensees of the premises and were permitted the use of the equipment and furniture for the purpose of selling the milk and other products. But so far as the milk and the other products are concerned, these items became their property the moment they took delivery of them. They were selling the milk and the other products in their own right as owners. These are two separate legal relationships. The income tax authorities were not justified or correct in law in mixing up the two distinct relationships or telescoping one into the other to hold that because the concessionaires were selling the milk and the other products from the booths owned by the Diary and were using the equipment and furniture in the course of sale of the milk and other products, they were carrying on the business only as agents of the Diary. 45.12. The Hon ble High Court held that in such circumstances S.194H is not attracted. 45.13. In the case of Jai Drinks (P) Ltd. 336 ITR 383 (Del.), the Hon ble Delhi High Court has held as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pocket expenses incurred by professionals/vendors under section 40(a)(ia) was deleted on the ground that same did not have any element of income in the hands of the recipient. It would also be pertinent to point out that similar disallowance made in the draft AO order, but subsequently deleted by the DRP, was challenged in Revenue s appeal for AY 2010-11 and 2011-12. However, the Tribunal upheld the order of the DRP and confirmed the deletion of disallowance on account of nondeduction of tax on reimbursement of expenses following the order for assessment years 2007-08 and 2008-09. 52. The Ld. DR relied upon the Assessment Order and Order of the TPO, but could not distinguish the decision of the Tribunal. 53. We have heard both the parties and perused the material available on record. The Tribunal held in A.Ys. 2010-11 and 2011-12 as under: 222) We have heard the rival contentions. We note that similar issue relating to disallowance relating to re-imbursement of professional expenses was deleted by the Tribunal in the assessee s own case for assessment year 2007-08 which was followed in assessment year 2008-09. The relevant observations of the Tribunal for assessment ye ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uded arrangement for transfer to hotels from airport, refreshments, F B etc along with arrangement of various artists, sound light, decoration, ambulance, live band, etc. The said company was also responsible for staging green rooms, set and pros for theatres, light and sound for theatre, projection systems etc. The said company was entrusted with the overall responsibility for organizing the event. The contract entered into with the said company was a composite contract for organizing an event, involving various arrangements for carrying out work of organizing the event. In view of the above, tax was deducted at source u/s 194C of the Act before remitting the payment under that Section. The Assessing Officer held that by organizing an event, M/s G2 RAMS India Pvt. Ltd. had rendered to the assessee service in the nature of professional or technical, which was covered within the provisions of section 194J of the Act. Accordingly, the Assessing Officer held that since the assessee failed to deduct tax at source under the aforesaid section, the total expenditure of ₹ 44.85.21.644, incurred on payments made to G2 RAMS India Pvt. Ltd. was disallowable under section 40(a)(ia) of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rd professional services as services provided in the course of carrying on legal, medical, engineering, architectural, accountancy, technical consultancy, interior decoration, advertising or any other notified profession. The service under consideration is clearly not prescribed in the aforesaid list of certified professions, nor the assessing officer or the ld. DR has pointed out so. Accordingly, the question of the services under consideration falling within the meaning of professional services does not arise. As regards fee for technical services , which borrows the meaning from Explanation to section 9(1)(vii) of the Act has been explained by Courts in several decisions. The meaning of words managerial, technical and consultancy used in the aforesaid section has been explained by the Hon ble Delhi High Court in the case of DIT v. Pan Alfa Auto Elekrik Ltd.: 227 Taxman 351 in the following words: 14. The expressions managerial, technical and consultancy services have not been defined either under the Act or under the General Clauses Act, 1897. The said terms have to be read together with the word 'services' to understand and appreciate their purport an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dia (P.) Ltd., In re [2008] 307 ITR 418/175 Taxman 375, wherein it was elucidated:- 'First, about the connotation of the term managerial . The adjective managerial relates to manager or management. Manager is a person who manages an industry or business or who deals with administration or a person who organizes other people's activity [New Shorter Oxford Dictionary]. As pointed out by the Supreme Court in R. Dalmia v. CIT [1977] 106 ITR 895, management includes the act of managing by direction, or regulation or superintendence. Thus, managerial service essentially involves controlling, directing or administering the business. 18. It would be incongruous to hold that the non-resident was providing technical services. To quote from Skycell Communications Ltd. v. Dy CIT [2001] 251 ITR 53/119 Taxman 496 (Mad), the word 'technical' has been interpreted in the following manner:- 'Thus while stating that technical service would include managerial and consultancy service, the Legislature has not set out with precision as to what would constitute technical service to render it technical service . The meaning of the word technical as give ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ological means does not make the service technical. This is especially important in the e-commerce environment as the technology underlying the internet is often used to provide services that are not, themselves, technical (e.g. offering online gambling services through the internet). 41. In that respect, it is crucial to determine at what point the special skill or knowledge is used. Special skill or knowledge may be used in developing or creating inputs to a service business. The fee for the provision of a service will not be a technical fee, however, unless that special skill or knowledge is required when the service is provided to the customer. For example, special skill or knowledge will be required to develop software and data used in a computer game that would subsequently be used in carrying on the business of allowing consumers to play this game on the internet for a fee. Similarly, special skill or knowledge is used to create a troubleshooting database that customers will pay to access over the Internet. In these examples, however, the relevant special skill or knowledge is not used when providing the service for which the fee is paid, i.e. allowing the consumer to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ware (which may well be done by someone other than the supplier) but rather making the software and data available to that client. The mere provision of access to such data and software does not require more than having available such a database and the necessary software. A payment relating to the provision of such access would not, therefore, relate to a service of a managerial nature. Consultancy services 45. For the Group, consultancy services refer to services constituting in the provision of advice by someone, such as a professional, who has special qualifications allowing him to do so. It was recognized that this type of services overlapped the categories of technical and managerial services to the extent that the latter types of services could well be provided by a consultant.' We broadly agree with the aforesaid observations. However, in the case of selling agents, we add a note of caution that taxability would depend upon the nature of the character of services rendered and in a given factual matrix, the services rendered may possibly fall in the category of consultancy services. Paragraphs 41 and 42 do not emanate for consideration in the present ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to understand the meaning of contract for carrying out work used in section 194C of the Act. The decision of Hon ble Delhi High Court in the case of SRF Finance Ltd. v. CBDT : 211 ITR 861, wherein the Court explained the meaning of contract for carrying out any work and distinguished the same with a service contract . The relevant observations of the Court are as under: The two words convey different ideas. In the former (i.e., work') the activity is predominantly physical; it is tangible. In the activity referred as services', the dominant feature of the activity is intellectual, or at least, mental. Certainly, work' also involves intellectual exercise to some extent. Even a gardener has to bestow sufficient care in doing his job; so is the case with a mason, carpenter or a builder. But the physical (tangible) aspect is more dominant than the intellectual aspect. In contrast, in the case of rendering any kind of service', intellectual aspect plays the dominant role. The vocation of a lawyer, doctor, architect or a Chartered Accountant (there are other similar vocations also) involves deep intellectual exercise and physical skill involved in their vo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... come tax act. Therefore, these expenditures are not Delhi is disallowable under the provisions of section 40(a) (ia) of the income tax act .In the result ground No. 28 of the appeal of the assessee is allowed. It is pertinent to note that the assessee had incurred expenditure on account of display of hoardings for advertisements and arrangement of various events for publicity. All arrangements for this event were done by M/s G2 RAMS India Pvt. Ltd. The said company was entrusted with the overall responsibility for organizing the event. The contract entered into with the said company was a composite contract for organizing an event, involving various arrangements for carrying out work of organizing the event. In view of the above, tax was deducted at source u/s 194C of the Act before remitting the payment under that Section. Thus, the facts are identical to that of the A.Ys. 2010-11 and 2011-12 and therefore, the order of the Tribunal is applicable in the present case. Therefore, Ground Nos. 28 to 28.5 are allowed in favour of the assessee. 58. Ground No. 29- 29.2 is regarding disallowance of additional depreciation of computers installed at Supervisory Officer of ₹ 7 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ontentions. We find that there is no dispute to the effect that the computers on which additional depreciations have been claimed during the year under consideration are not installed on the shop floor or such computers directly facilitate in the manufacturing process, but have been installed in the administrative / supervisory offices located in the compound of the factory premises. The plea of the appellant has been that for the purpose of additional depreciation, distinction has to be drawn between the computers installed in the supervisory offices of the manufacturing plant with the computers installed at the head office / corporate office, which is involved in the overall supervision of the business function. It has been argued that in the former case, although the computers are not directly involved in the manufacturing operations, but are indirectly facilitating the manufacturing activity as opposed to the computers installed at head office / corporate office. It was the submission that the exclusion of machinery or plant installed in any office premises under clause (b) of the proviso to section 32(1)(iia) of the Act is applicable to office premises like head office / cor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9. It is submitted that even if the computers and data processing machines are taken to be plant and machinery and are entitled to investment allowance, because of their location in the office, additional depreciation would not be allowable. The thrust of the argument is on the words office premises . 10. The submission is that the computers and the data processing machines are always kept in the office and in this case, when the computer and the data processing machines are used in the office, then, the additional depreciation would not be allowable. 11. It is to be noted that the words office premises have not been defined in the Income-tax Act. The word office would partake its character with the activities carried on in the said premises. In a given case, a doctor's clinic would be his office, but, would also be his clinic and if he installs a computer or some machine for the purposes of pathology, then, his office would be taken to be industrial premises for the purposes of depreciation and investment allowance. In a given case, a computer kept in the office of a manager for his personal use or for some other purpose, then, such computer would not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... after considering the legal position and intention of the assessee company, the Tribunal came to the conclusion that income from sale of shares/mutual funds/PMS etc. would be taxable as capital gains, instead of business income brought to tax by the assessing officer on the basis that the assessee (a) was not a trader in stock; (b) had no intention of holding the shares as stock; (c) sales were effected by delivery (d) that the department had itself in earlier years taxed such transactions under the head capital gains. The Ld. AR pointed out that the Tribunal, vide order dated 24/10/2006 passed in the assessee s own case for AY 2010-11 and 2011-12, reversed the action of AO in changing the head of income and held that in cases where an assessee treats investments made in shares as capital assets, in view of Circular 6/2016 of the Board, gains/profits on sale of such investments shall be treated as capital gains and not income from business/profession. 64. The Ld. DR relied upon the Assessment Order and Order of the TPO, but could not distinguish the decision of the Tribunal. 65. We have heard both the parties and perused the material available on record. The Tribunal for A.Y ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... k in trade. 65.31. The assessee has valued the investments at cost as per Accounting standard 13- Accounting for Investments and not in accordance with Accounting Standard 2 which deals with valuation of inventories. 65.32. The assessee has been holding the securities/ shares as investments from year to year and consistently following the same method of accounting for the purpose of disclosure and valuation. This treatment by the assessee was accepted by the Revenue for the past years. 65.33. The assessee had earned income from both long term and short term capital gains which means the assessee has also held shares for a period of more than 12 months. Whether the investments are made out of borrowed funds 65.34. The investments were made from surplus funds of the assessee and there were no borrowings. The investments were made to optimally utilize the spare funds instead of keeping the same idle in the bank accounts. The investments were made in mutual funds (debt and liquid funds) and through portfolio management schemes/ IPOs. 65.35. The co-ordinate bench of the Delhi ITAT in the case of Narendra Gehlaut vs. JCIT [ITA No 1648/ Del/ 2010] held ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arded as being engaged in business activity. 65.41. In view of the above factual matrix it emerges that assessee is: ( i) not a trader in stocks ( ii) Intention of holding the shares as investment/ stock is manifest. ( iii) Sales are effected by delivery. ( iv) Department has itself in earlier years taxed such transactions under the head Capital Gains . 65.42. Considering these facts and applicable judicial precedents on the issue, we are of the considered opinion that the income in question can be taxed only under the head Capital Gains and not under the head business income. This ground of the assessee is allowed. 100) In addition to the aforesaid observations, the appellant in this year also has benefit of the recent Circular No.6 of 2016 dated 29.2.2016 issued by the CBDT, wherein with an idea to reduce litigation on this issue of classification of the head of income arising from sale of shares / mutual funds, etc., the CBDT has opined that gains arising from sale of such shares/securities held for a period of more than 12 months and shown as capital gains by the assessee should not be disputed by the assessing officer. Having r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ), disallowance under that section as per Rule 8D can be made only if the Assessing Officer records satisfaction/finding as to the incorrectness in the method of disallowance followed by the assessee. In the absence of any satisfaction recorded in the assessment order, the disallowance as per Rule 8D needs to be deleted. Reliance in this regard is placed on the following decisions: - Godrej Boyce Manufacturing Company Ltd. VS. DCIT: 394 ITR 449(SC) - Maxopp Investment Ltd: 347 ITR 272 (Del.) - H.T. Media Limited v. PC1T: ITA No.548/2015 (Del.) dated 23.8.2017 - Eicher Motors Ltd. vs. CIT: ITA No. 136/2017 dated 15.09.2017 Even otherwise, there is no nexus of expenses, like interest expenditure and other administrative expenses with investments, warranting disallowance u/s 14A. 68. On interest expenditure, the Ld. AR submitted that the assessee is a cash rich company, which does not borrow funds for making investment. The marginal interest expenditure of ₹ 2.10 crores was incurred on other temporary loans/dealers deposit, having nexus with main business function. Further, no direct nexus of interest expenditure with investments or earning of dividend income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ddl. CIT: 142 ITD 52 (Ahd.) 69. As regards to Administrative expenses, the Ld. AR submitted that all the expenses, other than the suo-moto disallowance by the assessee, related to main business function of manufacturing of vehicles. In the absence of any proximate nexus having been established by the Assessing Officer, the Ld. AR pointed out that the Tribunal in the assessee's own case for the assessment year 2007-08 and 2008-09 set aside the matter to the file of the Assessing Officer to be decided afresh as per law, having regard to the satisfaction to be recorded qua correctness of the suo-moto disallowance made by the assessee in the return of income. The AO, in the set aside proceedings for assessment year 2007-08, vide order dated 30.10.2014 passed under section 254/143(3) of the Act did not make any disallowance in respect of interest expenses since there was no nexus between the income and such expenditure. The AO, however, made disallowance of such administrative expenses under section 14A in the proportion the total profit before tax bears to tax free income, which is upheld by the C1T(A) vide order dated 01.02.2018. The Tribunal, vide consolidated order dated 24/1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly endorsed by the Hon ble jurisdictional High Court. Reference in this regard can be made to the decision of Maxopp Investment Ltd. : 347 ITR 471. In view of the aforesaid legal position, we find that no valid satisfaction was recorded by the assessing officer in the assessment order to reject the method followed by the appellant in computing disallowance u/s 14A, before mechanically resorting to and applying the provisions of Rule 8D of the Rules. In view of such findings, the additional disallowance made by the assessing officer u/s 14A stands deleted on the aforesaid ground at the threshold. That apart, we also agree with the submissions of the appellant that, since the appellant is a cash-rich company, which, in fact, is investing surplus/idle funds in various modes of investments, there could be no nexus of interest-bearing borrowed funds with such investments. The appellant is having substantial free reserves of ₹ 3760.81 crores at the beginning of the relevant year and has generated surplus interest free funds of ₹ 268.64 crores during the year. The assessing officer, too, in the set-aside proceedings for the AY 2007-08 had accepted the aforesaid cash flow posit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essarily a situation. The main purpose is to liquidate those shares whenever the share price goes up in order to earn profits. In the result, the appeals filed by the Revenue challenging the judgment of the Punjab and Haryana High Court in State Bank of Patiala also fail, though law in this respect has been clarified hereinabove. 41) Having regard to the language of Section 14A(2) of the Act, read with Rule 8D of the Rules, we also make it clear that before applying the theory of apportionment, the AO needs to record satisfaction that having regard to the kind of the assessee, suo moto disallowance under Section 14A was not correct. It will be in those cases where the assessee in his return has himself apportioned but the AO was not accepting the said apportionment. In that eventuality, it will have to record its satisfaction to this effect. Further, while recording such a satisfaction, nature of loan taken by the assessee for purchasing the shares/making the investment in shares is to be examined by the AO. Though the Assessing Officer did not accept the method of disallowance computed by the assessee under section 14A and made further disallowance of ₹ 62.30 lak ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee was provided right to manufacture 4 new models (namely (a) Passion XPRO, (b) Ignitor, (c) Maestro and d) Impulse) using the technology provided by HM on payment of lump sum model fee and royalty. The assessee after separation from Honda Motors Corporation, Japan, was not in a position to independently develop and launch new models of motorcycles immediately. Therefore, in order to survive in a highly competitive market the assessee requested HM to provide right and technology for manufacture of four new models of motor cycles, for which the assessee had limited rights. During the relevant previous year, in terms of the aforesaid License B agreement, the assessee incurred expenditure of Rs. j 3.70 crores (Rs. 3.53 cr + ₹ 0.17 cr towards cess) towards royalty and ₹ 6.58 crores towards technical guidance fees, which was claimed as revenue deduction. The assessee further made the following payments by way of model fees for certain License A products and all License B products in terms of Model fee agreement(s) dated 07.06.2011, entered separately for both set of products towards limited license to use the know-how provided by Honda for manufacture of various mod ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee is to be allowed depreciation @ 25% on the expenditure treated as capital expenditure, but failed to allow depreciation while computing the amount of disallowance. 73. The Ld. AR submitted that Royalty/Technical Guidance Fees and Model Fees are not capital expenditure. There are no ownership rights but only limited right to use in License B Products Agreement. During the currency of the agreement, the assessee only had a limited right to use the technology of Honda. Ownership/proprietary rights in the technical know-how continued to vest in Honda and the assessee was not authorized to transfer, assign or convey the know-how/technical information to any third party as the assessee only acquired limited right to use and exploit the know-how. As regards to Non-exclusive license, the Ld. AR submitted that the said right vested with the assessee was not exclusive in as much as, in terms of Article 2 and article 9 of License B agreement. Honda reserved the right to provide technology to its affiliates to manufacture motorcycles. The Ld. AR further submitted that aforesaid limited right were available to the assessee and the fact of such rights being not exclusive can be gath ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erein it has been held that where payment is made to simply use the technical know-how/knowledge provided by the foreign collaborator as opposed to acquisition of ownership rights therein, the payment made would be regarded as revenue expenditure. CIT v. Ciba India Ltd.: 69 ITR 692 (SC) CIT vs. British India Corp. Ltd. [1987] 165 ITR 51 (SC) Alembic Chemical Works Co. Ltd. v. CIT: 177 ITR 377 (SC) Shriram Refrigeration Industries Ltd. v. CIT: 127 ITR 746 (Del HC) Triveni Engineering Works Ltd. vs. CIT : 136 ITR 340 (Del) Addl. CIT vs. Shama Engine Valves Ltd. : 138 ITR 217 (Del) CIT vs. Bhai Sunder Dass Sons P. Ltd. : 158 ITR 195 (Del) CIT vs. Lumax Industries Ltd. : 1'73 Taxman 390 (Del) Shriram Pistons Rings Ltd. vs. CIT : 171 Taxman 81 (Del)- CIT vs. Shri Ram Pistons and Rings Ltd. : 220 CTR 404 (Del) Goodyear India Ltd. vs. ITO : 73 ITD 189 (Del)(TM) ITO vs. Shivani Locks : 118 TTJ 467 (Del) Since no proprietary rights in the know how is vested in the assessee, the assessee being a mere licensee with limited rights to use the technical assistance during the currency of the agreement, there is no explicit or implied intention to trans ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... id orders has been dismissed by the High Court. In the assessment year 1999-00, appeal filed by the Revenue against the order of the High Court has been dismissed by the Hon'ble Supreme Court. The Delhi Bench of the Tribunal in assessee's own case for assessment year 2001-02. vide order dated 27.03.2009 in ITA No. 2067/Del/2006 allowed the payment of model fee following the same order for assessment year 1996-97. The same treatment has been given by ITAT in respect of AY 2006-07, AY 2007-08, AY 2008-09, AY 2010- 11 and AY 2011-12. The High Court has affirmed the order passed by the Tribunal in assessment year 2000-01 to 2002-03 in 372 ITR 481. The Ld. AR submitted, that when model fees, payment for which is made through the same agreement is accepted as revenue expenditure, the nature of royalty cannot be given any different treatment and therefore, no portion thereof needs to be disallowed as being capital in nature. Thus, the Ld. AR submitted that for the aforesaid cumulative reasons, no portion of the royalty expenditure or Technical Guidance fees incurred by the assessee calls for being disallowed. 75. The Ld. DR relied upon the Assessment Order and Order of the TPO ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... /technical information in the assessee. In view of the aforesaid, expenditure by way of royalty, technical guidance fee and model fees incurred by the assessee was allowable revenue deduction as held in the decision given by the Tribunal for A.Ys. 2010-11 and 2011-12. The issue is squarely covered by the said decision. Therefore, Ground No. 32 to 32.6 are allowed. 77. Ground No. 33, is regarding depreciation on Model Fee of ₹ 66.84 lacs. The assessee manufactures two-wheelers under technical collaboration agreement entered into with Honda Motor Co. Ltd., Japan ( Honda ). In accordance with the above collaboration agreement, the assessee pays model fee to Honda to obtain design / know-how to manufacture a new model of twowheeler. The said expenditure is incurred prior to commencement of production of the new model. The assessing officer held that expenditure incurred by the assessee towards model fee is directly related to manufacture of new models of two-wheelers and. therefore, needs to be attributed to the value of closing stock of finished goods of two-wheelers. Accordingly, the assessing officer on proportionate basis, worked out a sum of ₹ 66,84,000/- out of dep ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment/addition would be revenue neutral. On specific query from the Bench, the DR submitted that the treatment given by the revenue authorities on the issue in the preceding year is not known to him and in this situation, we hold that the / department has not disputed the claim of the assessee in the preceding years. 220. It is well accepted legal proposition that when the department has taken a particular stand on a particular issue, then the department cannot take a deviated stand on the issue in the succeeding year without ant sound, justifiable and cogent reason. The department has not disputed the fact that impugned expenditure was incurred prior to commencement of production of new model and the same was neither incurred during the manufacturing of new model nor model fee expenditure is directly related to manufacture of new models. In this factual aspect and circumstances, we hold that the assessee incurred expenditure on new model fees prior to commencement of production of new models of two wheelers, even otherwise this exercise would be revenue neutral in a broader perspective as the same adjustment would be required to be done in the opening stock of finished goods ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ills, etc. The employees are only required to submit details of expenditure incurred in specified form, on basis of which travel bill is settled. In the draft assessment order, the AO made disallowance of ₹ 2,07.97,233/- (comprising of ₹ 1,08,29,708- in respect of Dharuhera. Gurgaon and Haridwar plants and ₹ 99,67,525/- in respect of head office expenses) out of expenditure incurred towards re-imbursement of foreign travel expenses incurred by employees, on the ground that declaration furnished by the employees was not a sufficient evidence to establish incurrence of actual expenses, which were required to be supported with bills/invoices of factual expenditure incurred by the employees. 82. The Ld. AR submitted that the aforesaid issue is squarely covered in favour of the assessee by the decision of Delhi bench of tribunal in the assessee's own case for the AY 2007-08 and 2008-09, wherein the Tribunal held that disallowance cannot be made merely on the basis that vouchers were not produced by the employees, which has been reaffirmed by the Tribunal in the order dated 24.10.2016 passed for the assessment years 2010-11 and 2011-12. 83. The Ld. DR relied u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hich the above issue is decided by the coordinate bench. No other contrary decision was also pointed out therefore, respectfully following the decision of the coordinate bench in the appellant s own case for the earlier years, We dismiss ground No. 9 of the appeal of the revenue. It is pertinent to note that for payment of per diem allowance, as per policy, the assessee does not require the expenses to be necessarily supported / backed by bills considering the practical difficulties/impossibilities in producing invoices for petty expenses like local conveyance, telephone bills, etc. The employees are only required to submit details of expenditure incurred in specified form, on basis of which travel bill is settled. The Tribunal in A.Ys. 2010-11 and 2011-12 and earlier years held that disallowance cannot be made merely on the basis that vouchers were not produced by the employees, Thus, the facts have not changed in this year as well, therefore, the issue is squarely covered by the decision of the Tribunal for earlier Assessment Years. Therefore, Ground No. 34 is allowed in favour of the assessee. 85. As relates to Ground No. 35, regarding Expenses incurred on advertisement ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l expediency, which may not directly result in the earning of profit. Celebration of functions with employees in order to keep them motivated and build cordial relations amongst the staff is a universally accepted practice and cannot, in any eventuality, be said to be not an allowable expenditure. The Ld. Counsel of the appellant has also cited several decisions wherein similar expenses incurred to celebrate various festivals, anniversaries, etc. with the employees have been upheld to be allowable business deduction. To the same effect is the expenditure incurred for paying tribute to an ex-employee, who had assumed substantial roles and responsibilities to foster the business of the appellant company. Accordingly, any expenditure incurred by the company to pay him homage satisfies the test of business / commercial expediency and, thus, cannot be said to be not incurred for the purpose of business. More so when in past assessment years the similar expenditure have been incurred by the assessee but have not been disallowed by the Ld. assessing officer and this fact has not been controverted by the Ld. departmental representative even on the principle of consistency also we are not i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f dividend to him. who was also shareholder of the assessee company. The assessing officer further contended that dividend paid actually reduced the corpus available for distribution as dividend with the intention of avoiding dividend distribution tax by paying commission to the Director. 90. The Ld. AR submitted that the aforesaid disallowance made by the assessing officer in the preceding years, viz. AY 2010-11 and AY 2011-12 has been deleted by the Tribunal vide recent consolidated order dated 24.10.2016. In the said order, the Tribunal held that the commission paid to directors with reference to percentage of profits of the company for the services rendered as per the terms of appointment, constitutes part of the remuneration package, and in the absence of any disallowance on other components of remuneration paid to such director, the commission cannot, ipso facto be classified as payment of profit/dividend covered within the exception provided under Section 36(1)(ii) of the Act. It is also pertinent to mention that no appeal has been filed by the department before the High Court. The issue is also squarely covered in favour of assessee by the order of Delhi Bench of the Tri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... section provides for disallowance of expenditure incurred as bonus or commission, which otherwise constituted share of profit or dividend of the recipient. In the present case, as we have observed (supra) and also explained by the appellant, the commission constitutes part of Mr. Munjal s remuneration package, the computation whereof is simply based on the percentage of net profit. The computation of remuneration with reference to profit does not, ipso facto, classify the same as payment of profit or dividend, covered within the exception provided in section 36(1)(ii) of the Act. In the case of a company, recipient is entitled to dividend with reference to percentage of his/her shareholding in the company. In the present case, Mr. Munjal held 0.02% of shares in the appellant company, for which separate dividend was received as per the total amount of dividend declared by the company to its all shareholders. The provisions of section 36 provides that 36. (1) The deductions provided for in the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in section 28- ii) any sum paid to an employee as bonus or commissio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onsidered by this Court in AMD Metplast (P.) Ltd v. Dy. CIT [2012] 341 ITR 563 / 20 taxmann.com 647 (Delhi) in the light of the judgment of the Bombay High Court in Loyal Motor Service Co. Ltd vs. CIT [1946] 14 ITR 647. It was observed that the judgment of the Bombay High Court (supra) does not assist the revenue and that so long as the bonus or commission is paid to the directors for services rendered and as part of their terms of employment it has to be allowed and sec.36(1)(ii) does not apply. 21. Having regard to the above legal position and the factual findings recorded by the Tribunal, we are unable to say that the Tribunal erred in holding that the bonus payment was allowable u/s.36(1)(ii) of the Act. The substantial questions of law are answered in the affirmative, against the revenue and in favour of the assessee for both the years. We also agree with the decision taken by the Tribunal in the case of appellant group company, viz., Hero Honda Finlease Ltd. Vs. Addl. CIT : ITA No.4329/Del/2010 relating to AY 2005-06, wherein the similar disallowance was deleted. In view of this we are of the opinion that in making payment of commission to the managing director o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sale of twowheelers and, therefore, such expenditure was not allowable deduction under section 37(1) of the Act. The Assessing Officer observed that the aforesaid payments were in the nature of application of income, which were not allowable as expenditure under the provisions of the Act and that the assessee failed to establish with necessary documentary evidences, the onus cast upon it as per law. 94. The Ld. AR submitted that the disallowance of expenses incurred on account of CSR made by the assessing officer in the preceding years, viz. AY 2010-11 and AY 2011-12 has been deleted by the Tribunal vide recent consolidated order dated 24.10.2016, wherein the Tribunal held that the expenditure incurred by the assessee company on Corporate Social Responsibility, prior to insertion of explanation 2 to Section 37(1) of the Income Tax Act, was an allowable business deduction under the said provision. The Tribunal, in the said order, further elaborated that the role of the assessee was not restricted to merely earning profit, but also discharging certain community related expenses, which would be considered to have been incurred on account of commercial/ business expediency. It is pe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... serving as under: Held,(i) that the words for the purpose of business used in section 37(1) should not be limited to the meaning of earning profit alone . Business expediency or commercial expediency may require providing facilities like schools, hospitals, etc., for the employees or their children or for the children of the ex-employees. Any expenditure laid out or expended for their benefit, if it satisfies the other requirements, must be allowed as deduction under section 37(1) of the Act. The fact that somebody other than the assessee was also benefited or incidentally took advantage of the provision made, should not come in the way of the expenditure being allowed as a deduction under section 37(1) of the Act. Nevertheless, it is expenditure allowable as deduction under the Act. ( ii) That the word expenditure primarily denoted the idea of spending or paying out or away. It was something which was gone irretrievably, but should not be in respect of an unascertained liability of the future. It must be an actual liability in praesenti, as opposed to a contingent liability of the future. ( iii) The reasons given by the Tribunal for rejecting the cl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the benefit has percolated to the general public would not stand in the way of assessee getting the necessary deduction once the expenditure is held to be business expenditure. Hence, the Tribunal has come to the correct conclusion that the expenditure incurred by the assessee was a revenue expenditure. It should also be noted that the contribution made to the Panchayat was not in contravention of any law, nor was it opposed to public policy. In this view of the matter, the contribution made by the assessee to the Panchayat for the up-gradation of the elementary school should be regarded as an allowable business expenditure under the provisions of s. 37(1). ( iv) In the case of CIT Vs. Chemicals and Plastics India Ltd. 292 ITR 115 (Mad.), the assessee claimed deduction in relation to contribution to Madras Chamber of Commerce, of which the assessee was a member, as business expenditure. It was contended that since the maintenance of the trade Chamber was for the furtherance of business interests of the constituents of the Chamber, the contribution made had to be treated as business expenditure. The assessing officer rejected the claim for deduction, which was allowed by t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... horities including the decision of the Hon'ble Karnataka High Court in the case of Mysore Kirloskar Ltd. Vs. CIT (supra), the ITAT upheld the claim of the assessee. The relevant observations of the Tribunal are as under: It has been held by the Karnataka High Court in the case of Mysore Kirloskar Ltd. Vs. CIT (1987] 166 ITR 836/30 Taxman 467 that while the basic requirements for invoking sections 37(1) and 80G are quite different, but nonetheless the two sections are not mutually exclusive. Thus, there are overlapping areas between theT donations givenT byT the assessee and the business. In other words, there can be certain amounts, though in the nature of donations, and nonetheless, these amounts may be deductible under section 37(1) as well. Therefore, merely because the expenditure in question was in the nature of donation, or, as per the words of the Commissioner (Appeals), 'prompted by altruistic motives', it did not cease to be an expenditure deductible under section 37(1). In the case of Mysore Kirloskar Ltd. (supra), the High Court observed that even if the contribution by the assessee is in the form of donations, but if it could be termed as expenditur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Act, was an allowable business deduction under the said provision. The Tribunal, in the said order, further elaborated that the role of the assessee was not restricted to merely earning profit, but also discharging certain community related expenses, which would be considered to have been incurred on account of commercial/ business expediency. It is pertinent to point out that no appeal has been filed by the Department in assessment year 2011-12. Thus, the decision of the Tribunal attains finality. Therefore, Ground No. 37 to 37.1 are allowed in favour of the assessee. 97. Ground No. 38 to 38.1 is regarding disallowance of deduction u/s 80IC amounting to ₹ 26.91 crores. The proportionate amount of sales to vendors for processing of semi-finished goods supplied by the assessee, compute on adhoc basis, on the ground that manufacturing activity to the aforesaid extent of sales was outsourced. The amount was of ₹ 26.91 Crores. During the year, the assessee claimed a deduction of ₹ 1129.63 crores under section 801C of the Act with respect to profits from manufacturing activity carried out at Haridwar. The assessee had engaged various ancillary units/third par ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... like press shop, heat treatment, etc., which was carried out at the latter unit were not carried out at the unit at Haridwar. The aforesaid lend support to the argument made by the appellant for justifying the lower consumption of electricity at Haridwar as compared to electricity consumed in other two units. That apart, even assuming that certain intermediary processes were not carried out by the eligible unit at Haridwar and were outsourced to the third parties or non-eligible units, the same cannot lead to the conclusion that the entire profits are not derived from the manufacturing activity for being liable for deduction under section 80IC of the Act. The profit earned by the eligible unit is from manufacturing of two wheelers, which is an eligible activity covered under section 80IC of the Act. Outsourcing of certain intermediary processes or procurement of some finished components for assembly thereof in the vehicle does not, in our view, mean outsourcing of the manufacturing operations. The Courts have in fact repeatedly held that even where the entire manufacturing activities are outsourced or carried out by third party, but the overall supervision, control, and management ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... treatment, etc., is carried out at such units, whereas these processes are not carried out in eligible unit at Haridwar. Accordingly, on query by the assessing officer regarding lower consumption of electricity, the asessee furnished details of power consumed at all the three manufacturing plants in the following format: Units Electricity Consumed ( in Units) Production Figures (in quantity) Haridwar 3,25,50,345 22,53,200 Gurgaon 6,22,44,192 19,55,856 Dharuhera 5,79,71,177 20,56,691 The AO on the basis of lower consumption of electricity per unit at Haridwar vis-a-vis average rate of consumption of electricity per unit at Gurgaon and Dharuhera plants, assumed that part of manufacturing activities at Haridwar plant were outsourced and accordingly, disallowed proportion of outsourced manufacturing activities in the following manner: Particulars Haridwar Dharuhera Gurgaon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ppellant had furnished the process chart for manufacturing of final products followed in all the three units. On perusal of the same, it was noted that since plant at Haridwar was a new plant and Gurgaon and Dharuhera were old plants, certain initial processes, like press shop, heat treatment, etc., which was carried out at the latter unit were not carried out at the unit at Haridwar. The aforesaid lend support to the argument made by the appellant for justifying the lower consumption of electricity at Haridwar as compared to electricity consumed in other two units. That apart, even assuming that certain intermediary processes were not carried out by the eligible unit at Haridwar and were outsourced to the third parties or non-eligible units, the same cannot lead to the conclusion that the entire profits are not derived from the manufacturing activity for being liable for deduction under section 80IC of the Act. The profit earned by the eligible unit is from manufacturing of two wheelers, which is an eligible activity covered under section 80IC of the Act. Outsourcing of certain intermediary processes or procurement of some finished components for assembly thereof in the vehicle do ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ird party vendors. In the present transaction, the aforesaid components were first purchased by non-eligible units at Gurgaon or Dharuhera from third parties, due to proximity of location of such units with third parties, business relationship, etc. and were thereafter transferred at the same purchase price to the eligible unit at Haridwar. In such a transaction, no value addition in such components was carried out by the non-eligible units. In the books of accounts of the plant at Haridwar which is eligible for deduction under section 80IC of the Act. goods aggregating to ₹ 58.56crores. were shown to have been procured from other units, i.e.. Dharuhera and Gurgaon plants. Out of the aggregate transactions of ₹ 58.56 crores. (i) components having value of ₹ 3.11 crores were semi-finished goods for which nominal processing was carried out at other units before transfer to the Haridwar plant, and ( i i ) balance components having value of ₹ 55.45 crores were procured by the aforesaid non-eligible units from third parties and were transferred to the eligible unit at material cost. Freight charges on transfer of the aforesaid items were always booked at the rece ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transaction was a genuine business transaction borne out of commercial expediency. 107. The Ld. DR relied upon the Assessment Order and Order of the TPO, but could not distinguish the decision of the Tribunal. 108. We have heard both the parties and perused the material available on record. The Tribunal in A.Ys. 2010-11 and 2011-12 held as under: 140) We have heard the rival contentions. We have observed that merely because there was inter-unit transfer of certain goods from non-eligible unit to eligible unit, the assessing officer automatically applied the provisions of section 80IA(8) of the Act to hold that such transfer should have been at market price without looking to the nature of transfer and the facts and circumstances of the case. It has been explained by the Appellant that substantive transfers were made on account of some finished components procured by the non-eligible unit from third party vendors, due to proximity of location/relationship, for further transfer to the eligible unit. The freight charges incurred in relation to the procurement and further transfer from noneligible to eligible unit have been stated to be borne by the eligible unit. We find ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... duction under section 80IC, by enhancing the purchase price by adding certain markup thereon. In view of this we allow ground No. 30 of the appeal of the assessee. The aforesaid issue stands squarely covered in favour of the assessee, by the order dated 24.10.2016 passed by Tribunal in the immediately preceding assessment years, i.e. AY 2010-11 and AY 2011-12 wherein identical disallowance made by the assessing officer has been deleted. The Tribunal, while allowing the claim of the assessee under section 80-IC of the Act, held that for the purpose of computing market price of inter-unit transfer of goods, when the non-eligible units procured goods at market price from third party vendors and supplied the same to the eligible uni t at the same purchase price as increased by the applicable freight cost, no further substitution of such price is warranted in terms of section 80IA(8) of the Act and the transaction was a genuine business transaction borne out of commercial expediency. Therefore, Ground No. 40 to 40.2 are allowed in favour of the assessee. 109. Ground No. 41 is regarding disallowance of deduction u/s 80IC of the Act on account of inflation of profit by charging h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 129,63,47,649 as per Grounds of appeal 38 to 40 under section 801C on various grounds , therefore balance deduction under section 80IC of ₹ 556,75,47,649/- has been proposed to be disallowed on the aforesaid account in the assessment order. 110. The Ld. AR submitted that the aforesaid issue stands squarely covered in favour of the assessee, in as much as similar disallowance made by the assessing officer in the immediately preceding assessment years, i.e. AY 2010- 11 and AY 2011-12 has been deleted by the Tribunal vide consolidated order dated 24.10.2016. In the said order, the Tribunal, while allowing the claim of assessee under section 80-IC of the Act, held that there was basic fallacy in the case made by the AO since the higher basic price was on account of excise duty exemption given to the eligible unit. The Tribunal further observed that the final price charged to the end customer was the same irrespective of the unit of manufacture. The Tribunal also rejected the reliance placed by the AO on the provisions of section 80IA (10) by holding that the said provision was applicable to transactions entered with related parties whereas the alleged higher price charged by t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gible unit, the same cannot be disallowed by applying provisions of section 80IA(10) read with section 80IC(7) of the Act which reads as under: ( 10) Where it appears to the Assessing Officer that, owing to the close connection between the assessee carrying on the eligible business to which this section applies and any other person, or for any other reason, the course of business between them is so arranged that the business transacted between them produces to the assessee more than the ordinary profits which might be expected to arise in such eligible business, the Assessing Officer shall, in computing the profits and gains of such eligible business for the purposes of the deduction under this section, take the amount of profits as may be reasonably deemed to have been derived therefrom 145) The aforesaid section is applicable where the eligible unit has entered into transaction with related parties. In the given situation, as takenup by the assessing officer, the alleged higher sale price being charged by the eligible unit is from the final customer/dealers, which are not covered within the scope of aforesaid section. In that view of the matter, for the aforesaid r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ision of coordinate bench of Cadila Healthcare Ltd vs. ACIT 21 Taxmann.com 483 has submitted that there cannot be any specific demarcation between manufacturing and selling activities of the assessee and profit accrues only at the time of sales of the goods only. Therefore, the contention of the revenue that selling and distribution function of the assessee is a separate profit center is required to be rejected at threshold. We have carefully considered the argument of ld. AR and of the revenue on this point as well as the ld. AO and Ld. DRP. We are of the view that this argument is almost similar to the argument raised by the revenue in the case of Cadila Healthcare Ltd vs. ACIT 21 Taxmann.com 483. We have carefully perused this decision and note that the controversy in this ground of appeal with respect to applicability of section 80 IA (8) of the act, on marketing and other selling distribution as well as research and development services provided by the undertaking as a whole to the eligible industrial undertaking at the cost or market rate for working out the eligible profit for deduction, has been decided. Ld. DR could not point out any other contrary judgment to the de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssets, viz., (1) manufacturing assets, (2) brand assets and (3) marketing assets whereas deduction under section 80IC is available only on profits derived from business of manufacturing of specified articles or things. It was further observed that the manufacturing and marketing activities were carried out at Head Office and. therefore, the brand developed was not owned by the eligible unit, which came into existence much later than the existence of the assessee- company as a whole. Thus, part of the profits earned by eligible unit should have been attributed to advertisement/marketing activities carried out by head office. In order to attribute profits to marketing/advertisement activities, AO computed rate of net profit for the financial year 1984-85. being the first year of operations of the assessee company, at 6.85% on an arbitrary basis and applied the same to arrive at the profit solely attributable to the manufacturing activity of Haridwar unit. On the basis of above, the assessing officer computed profit attributable to the manufacturing activity at ₹ 565.50 crores. Accordingly, deduction under section 80IC qua remaining profit of ₹ 564.13 crores, allegedly att ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... parate profit centre and, therefore, no profit is to be separately attributed to such activity. It further observed that, for the purpose of working out eligible deduction under section 80-IC of the Act, actual expenses incurred at the head office are to be allocated between various profit centers on a rational and scientific basis. Therefore, Ground No. 42 to 42.6 are allowed in favour of the assessee. 117. Ground No. 43 to 43.1 is regarding disallowance of ₹ 198.23 crores in respect of certain income earned by the eligible unit. Such incomes were not derived from the business of manufacture of specified articles or things for ₹ 198. 23 crores (restricted to NIL). During the relevant previous year, the eligible unit at Haridwar earned following other incomes, which were credited in the Profit and Loss Account of that unit: S. No. Name/Type of Other Income Amount 1 Interest on loan given at subsidized rates to the employees 372,665 2 Interest on oan provided for working capital support to vendors 8, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the Tribunal. 120. We have heard both the parties and perused the material available on record. The Tribunal in A.Ys. 2010-11 and 2011-12 held as under: 158) We have heard the rival contentions. Our findings on the various issues raised by the assessing officer are given in seriatim hereunder: 1. Interest on loan given at subsidized rates to employees The Supreme Court in the case of Liberty India vs. CIT: 317 ITR 218, has held that source of income beyond the first degree nexus with the manufacturing operation cannot be considered as derived from such business/activity. Following the aforesaid decision, the Courts / Tribunal in certain cases have held that interest income earned from fixed deposits made by the eligible unit is not eligible for deduction under the relevant provisions of the Act. [Refer: Paswara Electronics (P) Ltd. v. ITO: ITA No. 71/D/2011; Reckit Benckiser India Ltd. v. Addl. CIT: 231 Taxman 585 (Cal.)] However, the facts under consideration are slightly different. The question that needs to be answered is whether interest income earned from loan given at subsidized rate to employees has first-degree nexus with the business operations c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent in the aforesaid transaction and therefore the benefit of deduction under section 80IC cannot be denied on above. In that view of the matter, the action of the assessing officer is reversed on this ground. 5) Miscellaneous income cash discounting from vendors The cash discount availed on early/prompt payment to creditors/supplies of material is also not an independent source of income but a discount towards the purchase price. The purchase price of goods is reduced from the profits of the eligible unit to arrive at profit derived from the manufacturing activity. Accordingly, any benefit towards purchase price would have direct nexus with the computation of the aforesaid profits. The aforesaid income is, thus, directly related to business of manufacturing. Accordingly the action of the assessing officer in disallowing deduction under section 80IC on above was not valid and therefore, the action of the assessing officer on aforesaid ground is reversed. 6) Exchange fluctuation gain As regards denial of deduction under section 80IC on fluctuation gain of ₹ 34,13,666, the appellant has pointed out that there was some mistake in the aforesaid claim whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ound No. 44 to 44.6 is regarding disallowance of deduction u/s 80IC amounting to ₹ 1129.63 crors for non compliance of Rule 18BBB and nonadherence to condition specified in Industrial Policy of ₹ 1129 crores (restricted to NIL). The assessee company had during the financial year 2008-09 on 07.04.2008 started commercial production at new manufacturing facility at Plot No. 3, Sector 10, Integrated Industrial Estate, Ranipur. S1DCUL, Haridwar (UTTARAKHAND) at Khasra Number 545 Village Salempur Mehdood, Haridwar on 07.04.2008. The said plot was notified by Notification No. 177 dated 28.06.2004 as industrial Estate under section 80IC(2)(a)(ii). In this connection, following documents were enclosed by the assessee. - License and registration certificate - Direct tax Notification No. 177 dated 28.06.2004 (relevant extracts) - Khasra no. Certificate - Central Excise Registration Certificate Commercial Tax Registration Certificate - First Sales Invoice - Consent to establish motorcycle unit from Uttaranchal Environment Protection and Pollution Control Board The assessee for the purpose of establishing a factory/plant, as per the Factory Act, 1948, was requir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... no appeal has been field by the Department before the High Court. 123. The Ld. DR relied upon the Assessment Order and Order of the TPO, but could not distinguish the decision of the Tribunal. 124. We have heard both the parties and perused the material available on record. The Tribunal in A.Ys. 2010-11 and 2011-12 held as under: 136) We have heard the rival contentions. The case of the assessing officer was that the appellant is not eligible for claiming deduction u/s 80IC since it did not satisfy the following conditions: a) The appellant failed to comply with Rule 18BBB of the Rules inasmuch as the appellant did not obtain any approval for carrying on the business of manufacturing two-wheelers in the State of Uttaranchal; b) The appellant failed to comply with the condition of employment of natives of State of Uttaranchal at prescribed percentage as contained in the industrial policy issued by the Government for the State of Uttaranchal; [Communication no.429/lnd. Dev. / Employment /2005-06, dated 19.11.2005, issued by the Secretary, Industrial Development to Director, Industries, Uttranchal] c) The appellant failed to meet the condition of continu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cified in the assessment order. As regards compliance of conditions precedent for claiming deduction u/s 80IC, we note that the appellant during the course of set-aside proceedings had point-wise given entire details /information as to how it satisfied each condition precedent for claiming deduction under said section. The claim of deduction of the appellant is also duly supported with the audit report in Form 10CCB issued by the auditors, answering each question in the format and how the appellant satisfied all such conditions. In the final assessment order, the assessing officer has not pointed out violation of any such condition precedent. We agree with the submissions of the Ld. Counsel that the various errors (assuming without admitting) in submission of complete details/information by the appellant to the assessing officer, as noted in the assessment order, related to the computation of deduction, on the basis of which entire claim could not have been denied. Accordingly, in our view, the assessing officer was not justified in denying the benefit of deduction u/s 80IC to the appellant of ₹ 9972535090/ . In view of this ground No. 29 of the appeal of the assessee i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion that no appeal has been filed the department before the High Court. 127. The Ld. DR relied upon the Assessment Order and Order of the TPO, but could not distinguish the decision of the Tribunal. 128. We have heard both the parties and perused the material available on record. The Tribunal in A.Ys. 2010-11 and 2011-12 held as under: 246) We have heard the rival contentions. We have seen the details of expenses incurred by the assessee. The same are routine expenses, which are quite reasonable having regard to the size and magnitude of the company. Such expenses are incurred year after year, which are always allowed deduction. We also note that similar issue was allowed in the assessee s own case for assessment year 2008-09. The relevant observations of the Tribunal for assessment year 2008-09 are as under: 247) 51. We have considered the submissions and arguments of both the parties on the issue. Ld. Counsel of the assessee submitted that the claim of expenses was pertaining to the expenses which were incurred from time to time on miscellaneous repair/maintenance like building maintenance, whitewash, paint work, plastering, enamel and premium work, replacement of r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... HHHD Construction of Air Intake Room DG Set 3,60,409 2 Maintenance- Horticulture 31.03.2008 HHHD Provision for capital work 14,39,892 Total 18,00,301 From the above facts it is seen that in respect of building maintenance expenditure of ₹ 360409/- is in fact related to construction of Air Intake Room DG set. Expenditure is clearly capital in nature. As regard balance of the payment at ₹ 1439892, where the assessee claims them to be in the nature of repairs, the Auditor has reported that vouchers are not available. Only detail submitted by the assessee is a list the provision of capital nature work as on 31.03.08. Though the inner items appear to be in the nature of repairs but no vouchers were available to the Special Auditor during the course of audit or submitted to the AO in response to the reply of final show cause. Therefore, AO is inclined to go by the nature of these expenses as given by the assessee itself i.e. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r statistical purposes. 248) Parties before us have admitted that there is no difference in the facts and circumstances of the present case and also the nature of expenditure involved in the present issue compared to the nature of expenses and issued decided by the coordinate bench in above order. Even before us, the revenue could not point out that any of the expenditure incurred by the assessee on account of repairs is not on the existing assets, but new assets have been purchased out of these expenses. In view of above facts we delete the disallowance made by the Ld. and assessing officer respectfully following the decision of the coordinate bench in assessee s own case for earlier years and consequent order of the Ld. and assessing officer after examining the complete details in the result, we direct the Ld. and assessing officer to delete the disallowance made of ₹ 1 825 5930/-by holding that expenditure incurred of ₹ 1 976 6172 is allowable repairs and maintenance expenditure on the existing assets of the company and is revenue in nature. In the result ground No. 14 of the appeal of the revenue is dismissed. This fact is identical with the earlier Ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... terial available on record. The Tribunal in A.Ys. 2010-11 and 2011-12 held as under: 251) We have heard the rival contentions. The issue in the present ground is similar to the ground of appeal no. 36 taken in assessee s appeal. While disposing the said ground we have held that in the modern era of fast changing technology, expenses incurred on replacement/up gradation of existing assets is allowable revenue expenditure. It is a common knowledge that there is a huge revolution in the mobile telephony industry, which forces person, especially in case of corporate to constantly upgrade to newer model of mobile phones. It cannot also be disputed that mobile phone in the facts and circumstances of the assessee s case does not constitute profit earning apparatus or as an essential tool of trade to carry on such business. Mobile phones only facilitate smooth carrying of business by the executives of the appellant company. In that view of the matter while following the decision taken while disposing of the ground of appeal no. 36 for assessee s appeal we hold that expenditure incurred towards mobile phone in the facts of the appellant s case is an allowable revenue expenditure. Acc ..... X X X X Extracts X X X X X X X X Extracts X X X X
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