TMI Blog2015 (8) TMI 1506X X X X Extracts X X X X X X X X Extracts X X X X ..... method for determining developer of the intangible property, which the Ld. A.R. claimed that such test was made on the assessee by DRP; however no additions were made because on the computation of the same it was found not warranted. The same was also not controverted by the Ld. D.R. Therefore, we hereby restrain ourselves from remitting back the matter for the computation of bright line test. Thus, this issue is decided in favour of the assessee. Addition on account of advertisement and sales promotion expenses which ought to have been receivable from the assessee's holding company u/s. 92B - TPO had held that the assessee had incurred advertisement expenses on behalf of the parent company and therefore, considered the same as international transaction invoking the section 92B - HELD THAT:- We hereby accept the concept of Bright Line Test (BUT) as held by our predecessors with respect to the concept of Bright Line Test for distinguishing between the routine and non-routine expenditure incurred on advertisement and brand promotion wherein advertisement and marketing promotion expenses to the extent incurred by uncontrolled comparable distributors is to be regarded within ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Police Department - Whether assessee had justified the action as fulfilment of obligation towards Corporate Social Responsibility ? - difference of opinion between the Hon'ble the Accountant Member and the Judicial Member - HELD THAT:- The Hon'ble Vice President, sitting as the Third Member has agreed with the Hon'ble Judicial Member and has held that the expenditure incurred by the assessee was not incidental to carrying on the business and there is no commercial expediency in incurring this expenditure and therefore, the view of the learned Judicial Member is upheld. Therefore by the majority view, this ground raised by the assessee is dismissed. Addition on account of export incentives accrued to the assessee on target plus scheme and focus market scheme - HELD THAT:- The export incentive towards target plus scheme is bestowed as a reward in order to encourage the accelerating growth in exports. The incentive on target plus scheme is also nothing but an entitlement for a duty credit based on incremental exports which should be substantially higher than the general annual export target that is fixed. The incentive on focus market scheme is to offset high freig ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or Appellant: R. Vijayaraghavan and S.P. Chidambaram, Advocate For Respondents: N. Rengaraj and Pathlavath Peerya, JCIT, DR ORDER A. Mohan Alankamony, 1. This appeal is filed by the assessee, aggrieved by the order of the ld. Assessing Officer dated 31/10/2011 pursuant to the order of the T.P.O. in accordance with the directions of the Learned Members of the D.R.P. The Assessee has raised twelve elaborate grounds in its appeal however the crux of the issues are that: Transfer Pricing Issues:-- (i) The assessee has challenged the show cause notice issued in respect to brand promotion activity undertaken by the assessee and advertisement expenses, which was treated as international transaction. (However, at the time of hearing the Ld. A.R. did not press this ground and therefore, it is dismissed as such.) (ii) The Ld. Assessing Officer/DRP erred in confirming the order of the Ld. TPO who had held that the appellant ought to have received fees for brand promotion activity undertaken by the assessee to the extent of ₹ 82,12,54,41,380/- from its parent company viz, HMC Korea and the same was added to the income of the assessee under provisions of Sect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee had field its e-return for the assessment year 2007-08 on 31.10.2007 declaring its total income as ₹ 815,75,84,340/-. Initially the return was processed U/s. 143(1) of the Act and subsequently the case was taken for scrutiny and the assessment was completed U/s. 143(3) read with sections 92CA 144C of the Act wherein the Ld. Assessing Officer made the additions following the direction of the Ld. Members of the DRP. Transfer Pricing issues:-- 3.1. Ground No. 2 - Upward adjustment due to brand promotion expense attributable to the assessee's holding company being ₹ 82,12,54,41,380/-:-- The Ld. TPO analysed the issue of brand development services extended by the assessee company to its holding company by observing as under:-- India is a vast market for auto makers. India has a huge percentage of middle and upper middle class population that has enough surplus income to buy such movable and immovable assets such as House, cars etc. Further banks have liberally sanctioned auto loans on equated monthly instatement basis to the buyers. It is also relevant to note that India has got a big percentage of population which is not only young but also e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at belongs to the Holding company. Since the sale of the vehicle produced by the assessee company is ever increasing looking to the expanding market share of Hyundai produced in this territory even low rate of royalty on the net sales of cars would be a reasonable compensation to the assessee for providing the services of brand development services to the Holding company. Therefore, it would be reasonable to hold that the Holding Company must compensate the assessee company by paying an amount @ 1% of the sales made during the relevant previous years. The assessee company has made sales for ₹ 87,62,49,09,000/- during the relevant previous year and therefore, @ 1% of the sales, amount receivable is calculated at ₹ 87,62,49,09,000/-. Therefore, Arms Length Price of the International transaction is determined at ₹ 87,62,49,09,000/-. As nothing has been paid on this account by the Holding Company to the assessee, addition of ₹ 87,62,49,09,000/- in total income of the assessee is called for in A.Y. 2007-08. Thereafter the Learned Members of the DRP confirmed the contentions of the Ld. TPO, however, directed the TPO to exclude the revenue receipts of CKD/Sp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enefited because of the increase in sales of the appellant company. It was only due to the efforts put in by the assessee company and the relevant expenditure incurred for promoting its products the brand value of the Holding Company has proportionately increased. Therefore, the Revenue opined that one percent (1%) of sales excluding the sale of CKD/spare should be attributed for determining the Arm's Length Price (ALP) in this international taxation issue and thereby made an upward adjustment towards brand promotion expense for ₹ 82,12,54,41,380/-. At this juncture we must say that as pointed out by the Ld. A.R, the Ld. TPO and the Ld. Members of the DRP has not adopted any of the five methods prescribed U/s. 92C of the Income-tax Act in order to determine the ALP for brand fees which ought to have been received by the assessee company for the usage of the Holding company's brand Hyundai . The 1% on sales adopted by the Revenue in determining the ALP is purely ad hoc and without any basis. It is pertinent to mention here as pointed out by the Ld. A.R. that the Delhi Special Bench of the Tribunal in the case of LG Electronics India (P.) Ltd. (supra), mentioned supra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oreign AE and hence is a transaction. The said transaction can be characterised as an international transaction within the ambit of Section 92B(1) of the Act, since (i) there is a transaction of creating and improving marketing intangibles by the assessee for and on behalf of its AE; (it) the AE is non-resident; and (Hi) such transaction is in the nature of provision of service. Accepted Bright Line Test to determine the cost/value of the international transaction, in view of the fact that the assessee failed to discharge the onus by not segregating the AMP expense incurred on its own behalf vis-o?=-vis that incurred on behalf of the AE. The transfer pricing provisions being special provisions, override the general provisions such as section 37(1)/40A(2) of the Act. For determining the cost/value of international transaction, selection of domestic comparable companies not using any foreign brand was relevant in addition to other factors. The Supreme Court of India in Maruti Suzuki's case examined the issue of AMP expenses where it directed the TPO for a de novo determination of ALP of the transaction. The direction by the Supreme Court recognises the fact of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... utation of the same it was found not warranted. The same was also not controverted by the Ld. D.R. Therefore, we hereby restrain ourselves from remitting back the matter for the computation of bright line test. Thus, this issue is decided in favour of the assessee. 4.1 Ground No. 3 Addition on account of advertisement and sales promotion expenses which ought to have been receivable from the assessee's holding company amounting to ₹ 76.63 crores U/s. 92B of the Act. The Ld. TPO had held that the assessee had incurred advertisement expenses on behalf of the parent company and therefore, considered the same as international transaction invoking the section 92B of the Act, in the same footing as the brand development expenses discussed supra. Accordingly, the Ld. TPO made comparison of the advertisement expenses incurred by the other five comparable companies in the same line of business and worked out the ratio of advertisement expenses to the total sales and determined the average ratio of the comparable at 2.566% as against 3.44% worked out by the assessee. Thus, the excess advertisement expenses incurred over and above the average of the comparables was determined a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3.44% (page 43 of TPO's order). The break-up of advertisement expenses considered by TP (as in page 43 of TPO's order) is as under: Expenses in the nature of advertisement cost ₹ 155,59,99,015 Special Trade Discount ₹ 142,81,11,086 Volume Discount ₹ 3,25,81,721 ₹ 3,01,62,71,820 3.1. The DRP directed the TPO to recomputed the ratio of advertisement expenses to sales after excluding the volume discount and trade discount. The revised ratio is (₹ 155,59,99,013/₹ 87,62,49,09,000) = 1.776%. In view of the ratio being lower than that of the comparables considered by TPO at 2.566% (see page 50 of TPO's order), no adjustment arises under this head. 4.4. Before us the Ld. AR submitted that the Ld. TPO had adopted the Bright Line Test and thereby made addition of ₹ 76.63 crores towards excess advertisement and market promotion expenditure being expenses attributable towards Assessee's Holding Company for the tangible benefit derived. Ld. A.R. further submitted that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oyalty paid to its Holding Company as it was approved by Reserve Bank of India (RBI). However, the Ld. TPO not accepting the justification of the percentage of royalty paid to the assessee's Holding Company, held that, separate benchmarking analysis should be made and arrived at the following analysis:-- Comparables Royalty expenses (Rs. Crore ) Net Sales ( Rs. Crore) Royalty/ Net sales General Motors India Pvt Ltd. 31.37 1844.10 1.70% Ford India Pvt Ltd 36.63 2,191.79 1.67% Honda Siel Cars India Ltd 136.99 3,873.23 3.54% Maruti Suzuki India Ltd 367.30 14,592.20 2.53% Average 2.36% HMIL 369.77 8,763 4.22% Difference ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ould be accepted as arm's length price. (vi) The comparable companies selected by TPO which is further confirmed by the Ld. Members of the DRP viz. Honda Seil Cars India Limited and Maruti Suzuki India Limited has controlled transactions therefore the benchmarking analysis made by the Ld. TPO is unreliable and requires to be rejected. (vii) The Ld. TPO has taken into account of the royalty payment made by the assessee company which is inclusive of fee for technical know-how and use of brand whereas for comparable companies the Ld. TPO had selected was the royalty payment was only for use of technology. 5.3 The Ld. DR on the other hand relied on the orders of the Ld. TPO/DRP and argued in support of the same. 5.4 We have heard both the parties and carefully perused the materials available on record and decisions cited by the assessee viz (i) Dy- CIT v. AIR Liquide Engineering India (P.) Ltd. [2015] 152 ITD 257 (Hyd.), (ii) Lumax Industries Ltd. v. ACIT [TT Appeal No. 4456 (Delhi) of 2012 (paper book page No. 394) and (iii) Thyssen Krupp Industries India (P.) Ltd. v. Addl. CIT in ITA No.6460/Mum/2012 (Mum.) (paper Book page 433). Further the assessee has relied on th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... year. This has been discussed in Company Profile and Industrial overview given above. In this market, Hyundai brand and Logo has become quite popular. It is due to brand value development on account of efforts made by the assessee company. So far as the Hyundai technology is concerned it is the latest technology and it cannot be said that old technology has been dumped in Indian market. It has promising future that will earn the holding company in coming years huge income by way of royalty on know how supplied by it to the assessee company. It is not an old technology about which it may be said that it does not have bright future and hence the sales will decrease and therefore brand development will not be advantageous to the holding company. It would like to stay ahead of its competitors in the Indian market by ensuring the quality of product as well as by spreading the brand awareness. The Holding Company has given to the assessee the exclusive rights of producing the cars in this territory. Each car produced by the assessee becomes the carrier of holding company's brand name and logo.... **** Facts being so, it is apparent that the Ld. TPO has herself accepted the hig ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been utilized by the company in order to address merits of the case. Therefore, we hereby remit the issue back to the file of Ld. DRP in order to examine the complete facts of the issue in the light of the various decisions cited by the Ld. A.R and pass appropriate order as per merits and law. 7.1 Ground No. (vi) Disallowance U/s. 14A of the Act for ₹ 5,29,910/-. The assessee had contested before the Members of the Ld. DRP against the disallowance of ₹ 5,29,910/- U/s. 14A of the Act by applying the provisions of Rule 8D of the Income-tax Rules, 1962. The argument put up by the assessee before the Revenue was that the assessee had made investment out of its revenue reserves of 1709.22 crores and therefore disallowance was not called for. It was further contended that the Rule 8D would not be applicable as it had come into force only w.e.f. assessment year 2008-09 and not retrospectively. However, the Ld. DRP found the view of the Ld. Assessing Officer to be fortified by the decision in the case of ITO v. Daga Capital Management (P.) Ltd. [2009] 117 ITD 169/26 SOT 603 (Mum.) (SB) wherein it was held that the sub-section (1) of Section 14A is only a clarificatory and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... crores for the promotion of MRF Phase Foundation which is a body promoting and grooming pace bowlers in India were disallowed, since the same could not be treated as expenditure for business activity. However we do not agree with this view of the Ld. Members of the DRP in the present case before us. In the case relied upon by the Ld. DRP the issue was with respect to expenditure incurred by M/s. MRF Ltd. a tyre manufacturing company, towards promotion of Cricket Spot which is not a related activity with the business of the assessee. In the case of the present assessee before us, the assessee has provided with 100 cars to the Police Department by which the public at large would be benefited. In fact, the taxes earned from the Revenue of the assessee company by various government authorities are only spent for the benefit of the public at large. Moreover by extending such gestures by the assessee company would directly or indirectly obtain the following benefits as pointed out by the Ld. A.R. (i) It will help the assessee company to test the performance of the cars manufactured by it. (ii) The extensive usage of the vehicles manufactured by the assessee company will be noticed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nation whether voluntary or at the instance of the authorities concerned, when made to a Chief Minister's Drought Relief Fund or a District Welfare Fund established by the District Collector or any other Fund for the benefit of the public and with a view to secure benefit to the assessee's business, cannot be regarded as payment opposed to public policy. It is not as if the payment in the present case had been made as an illegal gratification. There is no law which prohibits the making of such a donation. The mere fact that making of a donation for charitable or public cause or in the public interest results in the Government giving patronage or benefit can be no ground to deny the assessee a deduction of that amount U/s. 37(1) when such payment had been made for the purpose of assessee's business. Therefore, the payment made by the assessee in the instant case was allowable as deduction. 8.3 In these circumstances, we are of the opinion that such gestures of the corporate houses have to be appreciated and encouraged which will benefit the public at large. Further, since these expenditures have directly or indirectly benefited the assessee company for its image buil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ancial year 2007-08 and license for the focus market scheme was received in the financial year 2008-09, we have correctly excluded the above amount from the computation of total income for the financial year 2006-07. The Ld. Assessing Officer after examining the reply of the assessee rejected the same because of the following reasons:-- (i) It is observed from the details of exports incentives like Duty Draw Back and DFCE Benefits, Target Plus Scheme, Focus Market Benefits, which have been accrued to the assessee at the time of exports and its subsequent realization that the assessee has received entire exports incentives accrued without any adjustment/reduction by the Central Excise and Customs Department. (The detail of the same is enclosed as per annexure-1) Therefore, the contention of the assessee that, the abovesaid export incentives cannot be considered as income unless relevant licenses received from the concerned authorities cannot be accepted. (ii) It is noticed that the assessee has been claiming the expenditure on warranty on provision basis by relying on the decision of Hon'ble Supreme Court in the case of M/s. Rotork Control India Private Ltd. v. CIT whe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng Officer opined that the export incentives received towards target plus scheme and focus market scheme has to be treated as income accrued to the assessee for relevant to assessment year. The Ld. Members of the DRP confirmed the view of the Ld. Assessing Officer and thereafter, the Ld. Assessing Officer finalized the draft assessment order treating the same as the income accrued to the assessee during the relevant assessment year. 9.2 The Ld. A.R. cited the decision of the Hon'ble Supreme Court in the case of CIT v. Excel Industries Ltd. [2013] 358 ITR 295 and argued stating that the export incentives received has to be tax in the year when the license was received and not in the year the export was made. Ld. D.R. relied on the orders of the Revenue and argued in support of the same. 9.3 We have heard both the parties and carefully perused the materials available on record. In the case cited by the Ld. A.R supra, the advance license benefit receivable by the assessee being the entitlement of Duty Free import of raw materials under the import and export policy were excluded from the total income by the assessee in its statement for computation of income since it was opin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orvi Industries that real accrual of income and not a hypothetical accrual of income ought to be taken into consideration. For a similar conclusion, reference was made to Poona Electric Supply Co. Ltd. v. Ld. CIT [1965] 57 ITR 521 (SC) wherein it was held that income tax is a tax on real income. 25. Finally a reference was made to State Bank of Travancore v. Ld. CIT [1986] 158 ITR 102(SC) wherein the majority view was that accrual of income must be real, taking into account the actuality of the situation; whether the accrual had taken place or not must, in appropriate cases, be judged on the principles of real income theory. The majority opinion went on to say: What has really accrued to the assessee has to be found out and what has accrued must be considered from the point of view of real income taking the probability or improbability of realization in a realistic manner and dovetailing of these factors together but once the accrual takes place, on the conduct of the parties subsequent to the year of closing an income which has accrued cannot be made 'no income'. 26. This Court then considered the facts of the case and come to the conclusion (in Godhra Electrici ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... license and the duty entitlement pass book and paid tax thereon. Therefore, it is not as if the Revenue has been deprived of any tax. We are told that the rate of tax remained the same in the present assessment year as well as in the subsequent assessment year. Therefore, the dispute raised by the Revenue is entirely academic or at best may have a minor tax effect. There was, therefore, no need for the Revenue to continue with this litigation when it was quite clear that not only was it fruitless (on merits) but also that it may not have added anything much to the public coffers. 9.4 In the case of the assessee, the export incentive towards target plus scheme is bestowed as a reward in order to encourage the accelerating growth in exports. The incentive on target plus scheme is also nothing but an entitlement for a duty credit based on incremental exports which should be substantially higher than the general annual export target that is fixed. The incentive on focus market scheme is to offset high freight cost and other externalities to select international market with a view to enhance India's export competitiveness in these countries. It is pertinent to note that the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or plant (other than ships and aircraft), which has been acquired and installed after the 31st day of March, 2005, by an assessee engaged in the business of manufacture or production of any article or thing [or in the business of generation or generation and distribution of power] a further sum equal to twenty percent of the actual cost of such machinery or plant shall be allowed as deduction under clause (n): Provided **** Provided **** From the above it is evident that the assessee is entitled to additional depreciation if it has satisfied the condition that it is engaged in the business of manufacture or production of any article or thing. There is no condition stipulated in the Act that additional depreciation shall be allowed only if the asset is deployed in the factory of the assessee and not the office of the assessee. Therefore, we accept the argument of the Ld. A.R. and reject the observations of the Revenue on this regard and accordingly direct the Ld. Assessing Officer to allow the claim of additional depreciation of ₹ 8,52,500/- if the other conditions of the Act remains satisfied. 11.1 Ground No. (x) The Ld. Assessing Officer erred in not granting th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... given 100 cars worth of ₹ 5,20,97,000/- to the Tamil Nadu Police Department as an advertisement and sales promotion expenditure. The Assessing Officer has asked the assessee to explain as to why the same should not be disallowed as per the provisions of section 37 of the Income-tax Act, 1961 [hereinafter called as Act ]. In response to the above, the assessee has explained before the Assessing Officer that in India, Police Department does not use car for patrolling and surveillance purposes and the usage of cars for road safety, removal of traffic bottleneck, reaching the accident spot in time, surveillance, chasing and catching of culprits needs to be addressed and tested. The Hyundai Motor India Ltd. [HMIL in short] has offered 100 Hyundai Accent cars to Tamil Nadu Police Department to test the car market. These patrol cars fitted with the latest electronic equipments would be very useful in controlling crimes and protecting the valuable life of citizens. This expenditure on test marketing has been incurred wholly and exclusively for the purpose of the business of HMIL to find out the new segments of car market. It was also submitted that the expenditure incurred by the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of improving road safety and facilitating surveillance by the Tamil Nadu Police Department and the expenditure incurred by the assessee was fully allowable under section 37 of the Act. However, the ld. DRP has confirmed the order passed by the Assessing Officer. 18. On being aggrieved, the assessee carried the matter in appeal before the Tribunal. 19. The ld. Counsel for the assessee has submitted that the expenditure incurred by the assessee is for the purpose of advertisement and also corporate social obligation, which is fully allowable under section 37 of the Act. 20. On the other hand, the ld. DR has submitted that the Police Department is being using cars of other companies such as Bolero Scorpio of Mahindra Qualis of Toyota. There was nothing special in using the Hyundai Accent cars. Therefore, it cannot be said that the expenditure incurred is for the purpose of advertisement. 21. Both parties have been heard, perused the materials on record and gone through the orders of authorities below. In this case, the assessee has donated 100 cars to Police Department of Tamil Nadu State Government. It is not a case of the assessee that the Tamil Nadu Police Departme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llowable business expenditure. 23. The case law relied on by the assessee in the case of Birla Cotton Spinning Weaving Mills Ltd. (supra), the Hon'ble Supreme Court has considered the allowability of expenditure under section 37(1) of the Act and held as under: The expression for the purpose of the business is essentially wider than the expression for the purpose of earning profits. It covers not only the running of the business or its administration but also measures for the preservation of the business and protection of its assets and property. It may legitimately comprehend many other acts incidental to the carrying on of the business. In the present case, the cars given by the assessee to the Police Department is not an incidental to the business of the assessee. Therefore, it is not allowable expenditure under section 37 of the Act. 24. In the case of CIT v. Malayalam Plantations Ltd. [1964] 53 ITR 140, the Hon'ble Supreme Court has held as under: The expression 'for the purpose of business' in section 10(2)(xv) of the 1922 Act [corresponding to section 37(1) of the 1961 Act] is wider in scope than the expression 'for the purpose of earn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ACT, 1961 As there is difference of opinion between the Members constituting the Bench with regard to one issue, following question is formulated and referred to the Hon'ble President for nominating Third Member 1. Whether, the expenditure incurred by the assessee by giving 100 cars to the Police Department of Tamil Nadu is an eligible expenditure under section 37 of the Income -tax Act or not? D. Manmohan, Vice-President 27. On account of difference of opinion between the Hon'ble Accountant Member and Hon'ble Judicial Member, the following question was formulated and referred to the Hon'ble President for nomination of Third Member under section 255(4) of the Income-tax Act, 1961:-- Whether the expenditure incurred by the assessee by giving 100 cars to the Police department of Tamil Nadu is an eligible expenditure under section 37 of the Income Tax Act or not The Hon'ble President, IT AT was pleased to nominate me as Third Member in the instant case which was listed for hearing on 19th June, 2015. 28. Before adverting to the arguments of both the parties, the facts necessary for disposal of the issue may be stated in brief. As could be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ficer called upon the assessee to furnish agreement with the police department and other details. At this stage, the assessee-company admitted that there is no formal agreement with the police department. However, a copy of letter, stated to have been addressed to Home Secretary, Government of Tamil Nadu, was furnished (page 218 of the paper book) which reads as under- The Home Secretary, Government of Tamil Nadu, Fort St. George, Chennai-600 009. Dear Sir, Ref: Patrol Cars - Market Research. Hyundai Motor India sells cars in many countries across the world and the Group is seventh largest automobile manufacturer in the world. The cars sold by us used by the Police and other security agencies for the purpose of patrolling, surveillance, security and safety related activities. In India, Police Department does not use cars for patrolling and surveillance purposes. The usage of cars for road safety, removal of traffic botdeneck, reaching the accident spot in time, surveillance, chasing and catching of culprits needs to be addressed and tested. These Patrol Cars fitted with the latest electronic equipments would be very useful in controlling crimes and protecti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uate the usage, effectiveness and improvement of the cars manufactured by the assessee and therefore, it is not understandable as to what kind of inputs the police department could have given. In other words, the purpose and object of donating 100 cars is not real as stated by the assessee and the so called object is remote or illusionary. In this regard, the Assessing Officer referred to the decision of Hon'ble Andhra Pradesh High Court in the case of CIT v. Vazir Sultan Tobacco Co. Ltd. [1988] 169 ITR 139 wherein the Court observed that even though an expenditure is incurred by an assessee voluntarily, but not obligatory, it can be allowed if it is ultimately designed to further the objects and purposes of the assessee and the object should be real and not remote or illusionary. Reliance was also placed upon the decision of Chennai Bench of the Tribunal in the case of Tamil Nadu Minerals Ltd. v. Jt. CIT [2005] 95 ITD 294. Thus, the claim of the assessee under section 37(1) of the Act was rejected by the Assessing Officer. 33. When the matter was placed before the Division Bench of the Tribunal, it was contended on behalf of the assessee that it was fulfilling its corporat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee-company, for its image building and its promotion/sales of products and hence the expenditure is allowable as deduction under section 37(1) of the Act because of existence of commercial expediency. 36. Learned Judicial Member was, however, unable to agree with the view taken by the learned Accountant Member and hence passed a separate order on this aspect, wherein he observed that the assessee initially claimed it as advertisement and sales promotion expenditure by stating that police department does not use cars for patrolling and surveillance etc. and the usage of cars for road safety, removal of traffic bottleneck, reaching accident spot in time, catching culprits equally needs to be addressed and tested and hence the cars were provided to Tamil Nadu police department to test the car market. The learned Judicial Member also recorded the plea of the assessee that these 'patrolling cars' are fitted with latest electronic equipments which are very useful in controlling crimes and protecting the valuable life of citizens. 37. However, the learned Judicial Member opined that donation of cars has no nexus with the business of the assessee. So far as the test market ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Court in the case of Birla Cotton Spinning Weaving Milk Ltd. (supra) wherein the Court observed that the expression for the purpose of business is wider in its ambit and may not be limited to expenditure incurred for the purpose of earning profits but such expenditure should be incidental to carrying on of the business. Since, in the instant case, the cars given to the police department is not incidental activity for the purpose of business of the assessee, learned Judicial Member concluded that the expenditure is not allowable as deduction under section 37 of the Act. 40. Learned Judicial Member has also taken into consideration the ratio of the judgment of Hon'ble Supreme Court in the case of Malayalam Plantations Ltd. (supra) wherein the Court observed that though the words for the purpose of business are wider enough to comprehend many other acts incidental to the carrying on of the business, its limits are implicit in it, i.e. for the purpose of business, i.e. to say, expenditure incurred shall be for carrying on of business and the assessee shall incur it in its capacity as a person carrying on the business and cannot include the sums spent as an agent of a thi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expenditure was wholly and exclusively incurred for the purpose of business though it is voluntary in nature and it may not enable the assessee to immediately gain profit, commensurate to the expenditure. He further submitted that it can also be treated as goodwill gesture between the assessee-company and the police department which will go a long way since the assessee can be insulated from unnecessary litigation if they maintain goodwill with the police department. He placed reliance upon the decision of the Hon'ble Madras High Court in the case of CIT v. Madras Refineries Ltd. [2004] 266 ITR 170 to submit that expenditure on social welfare of local residents is a goodwill gesture and monies spent by the assessee for establishing water facilities cannot be regarded as wholly outside the ambit of the business concerns of the assessee. He also relied upon the following decisions in support of his contention that expression wholly and exclusively does not include the expression necessarily and thus even the expenditure incurred voluntarily, in the interest of business, can be considered as expenditure incurred for the purpose of business; even though it may not yield benefit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o decide what gives him benefit and merely because there may be a benefit to the third party, so long as there is no such evidence, the same cannot be disallowed. He thus, strongly relied upon the order passed by the learned Accountant Member. 45. On the other hand, learned Departmental Representative submitted that police department in Tamil Nadu have no dearth of vehicles and the Government, in its wisdom, has decided to provide vehicles only to those officers who are in need of vehicles i.e., it identified the persons and provided vehicles to them so as to effectively deal with the law order problems and accordingly provided number of vehicles such as Bolero, Scorpio and Qualis etc. and hence it is not correct to state that police department does not have vehicles. The corporate social responsibility is a new concept which has emerged recently whereas in the assessment year under consideration this concept has not gained momentum. Even otherwise, corporate social responsibility refers to an obligation on the part of the Government but not fulfilled i.e., in the event of inability on their part to render proper services, corporates can step in and share government's resp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case, certain expenditure was incurred by the assessee as per direction of the Central Government, in the interest of public, but the Bench observed that mere direction given by the Central Government does not fulfil the criteria as laid down in section 37 so as to consider it as an allowable expenditure. In the aforementioned case, the Tribunal has taken note of several rulings of the Supreme Court as well as the High Courts on this issue before analysing the facts of the present case. Learned Departmental Representative also relied upon the decision of the Hon'ble High Court of Orissa in the case of CIT v. Industrial Development Corpn. Of Orissa Ltd. [2001] 249 ITR 401, wherein the Court observed that if a State owned corporation donates an amount of rupees one lakh to Chief Minister's Relief Fund it cannot be treated as expenditure incurred wholly and exclusively for the purpose of business. In this regard, the Court observed that initial onus is upon the party, who claims deduction, to prove that the expenditure was incurred wholly and exclusively for the purpose of business i.e. payment was made with a view to secure benefits for its business. Since there is nothing on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng Officer, but quickly submitted that allowability of deduction can be justified on any other ground and in the instant case the assessee pleads it is a corporate social responsibility, apart from gaining goodwill image which would help the assessee in carrying on its business in Tamil Nadu smoothly and thus it can be considered as an expenditure wholly and exclusively incurred for the purpose of business or at least incidental to carrying on of the business. 48. When called upon to explain as to whether the management has taken any specific decision in the form of making it as one of the issues in the Board meeting or whether there is any communication between the top management and middle level management, learned counsel submitted that there is no such record available and in fact was not produced before the tax authorities. He also admitted that assessee has not even made any effort till date to draw attention of public by mentioning in their advertisements that cars manufactured by them are best cars designed to protect the interest of public at large and used by police personnel . With regard to additional fittings for the specific use of the police personnel, no materia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndicate that there was shortage of cars for performance of their duty effectively. In other words, the proposal was never accepted by the Government of Tamil Nadu which is reinforced by the fact that they never choose to give the report with regard to the effectiveness of the vehicles and the improvement, if any, required. Thus the plea of the assessee that the cars were given for market research fails. In fact the assessee never made even a faint attempt to obtain the feedback in writing. When the cars worth more than 5 crores are given, a decision has to be taken at a major level and such a decision can be taken in a Board meeting followed by minutes of the meeting. No such evidence was furnished at any stage. 52. This apart the company has a robust market research wing and it claims that the cars sold by them were used by the Police and other security agencies elsewhere in which event there was no need to give the cars free of cost to the Police Department in Tamil Nadu. In this background it can be seen that the assessee having claimed to have sold the cars to the Police and other security agencies in other countries/places, the feedback, if any, could have already been obta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... herever there is responsibility on the part of the Government and it was not able to extend its arm in fulfilling its social responsibility and if a corporate can fill that gap, it can be considered as corporate social responsibility. In the instant case this concept has no application. It is for the Tamil Nadu Government to decide as to which officers are entitled to cars for patrolling purposes. It is not the case of the assessee that an officer, who is entitled to a car for patrolling purpose, was not provided with such facility. In such an event of the matter it is not appropriate on the part of the corporate to grab the opportunity to provide luxuries to officials even when not required. For example, a Police Inspector, under law, is provided a motorcycle which can be used effectively to cruise through the busy roads in India whereas the assessee might feel that even a Police Constable should enjoy the luxury of a car and in the garb of allowing them to have more number of cars for patrolling it may gift cars which cannot be equated to corporate social responsibility. In short, it is for the assessee to prove that the cars were provided genuinely under the impression that it i ..... 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