TMI Blog2021 (5) TMI 949X X X X Extracts X X X X X X X X Extracts X X X X ..... ure to the extent claimed by the assessee is to be allowed in the hands of the assessee and not/the entire expenditure. Addition of sales tools expenses u/s 37 - HELD THAT:- We find that though the tribunal has considered the material facts for allowance of sales tool expenses however as we could understand referred to the signage expenses. However, in respect of the above apparent error, we find that the logic given by the coordinate bench equally applies to the sales tool expenses also. The above decision was also followed by the coordinate bench in subsequent year. The learned departmental representative also could not show that why the above logic does not apply to the sales tool expenses incurred by the assessee. Therefore, respectfully following the order of the coordinate bench in assessee's own case we hold that since tool expenses incurred by the assessee is a revenue expenditure allowable to the assessee as deduction. Capitalization of the royalty being 25% being treated as a capital in nature as it resulted in an enduring benefit to the assessee - HELD THAT:- On careful perusal of the order, we find that the coordinate bench on identical facts and circumsta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ial expediency , which approach had been rejected judicially and is not mandated under the provisions of section 92CA of the Act. 5. That the order of the TPO is void ab initio being undated and passed beyond the period of limitation as mandated under section 92CA(3A) read with section 153 of the Act. Re : Payment of Export Commission - INR 48,48,62,986/- 6. That the TPO/DRP erred in determining the arm's length price of the international transaction relating to payment of export commission and hence making an adjustment of INR 48,48,62,986/-. 6.1 The TPO/DRP erred in rejecting the 'combined transaction approach' adopted by the Assessee for benchmarking its operating profitability using the TNMM method. 6.2 The TPO/DRP completely erred in not appreciating the functional profile of the Assessee and also completely erred in not appreciating that the transaction of payment of export commission was intrinsically linked with the main activity of manufacture and sale of products and as such could not be alienated to be bench marked separately. 6.3 That the entire approach adopted by TPO/DRP lacks any sound principle and is contrary to the provisi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thod on the basis of lack of similar comparable/s and stressing on the need of product similarity in applying CUP on one hand and on the other hand applied CUP in a manner which is fundamentally flawed. 6.13 That without prejudice, the TPO/DRP erred in applying the CUP method and the benefit test for determining the ALP in respect of Export Commission at NIL. 6.14 That the TPO/DRP completely failed to appreciate that the provisions of section 92CA do not mandate application of the benefit test and as such the application of CUP and the determination of transaction value at NIL was required to be rejected. Re: Payment of Royalty on sales to its AE - INR 12,00,22,040 7. That the TPO/DRP erred on facts and in law making any adjustment of INR 12,0,22,040/- being royalty paid by the Appellant to Honda Motors Japan (HMJ) for exports to AEs. 7.1 That the TPO/DRP completely failed to appreciate that the payment of Royalty was on account of the utilization of know-how for manufacturing goods and whether the manufactured goods were sold to AE or non-AE's was not relevant and had no bearing on the determination of the ALP of such transaction. 7.2 The TPO/DR ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eing sales tools expenses under section 37 of the Act. 9.1 That the AO/DRP grossly erred in introducing a new condition under section 37 of the Act that for allowance of expenditure under that provision there must exist a contractual liability. 9.2 That without prejudice to the above ground, the AO/DRP grossly erred in not appreciating the fact that the Assessee was entitled to make payments to the dealers in respect of advertising material as per the dealer agreement. 9.3 That the AO/DRP also erred in law in not appreciating that even if the expenditure resulted in benefit to the dealers (third parties), the same was still an allowable expenditure being incurred wholly and exclusively for the purpose of business of the Appellant. 9.4 The AO/DRP also erred in not appreciating that the sales tool expenses were incurred in respect of standardisation of the dealer's showrooms who were selling the product's manufactured by the assessee. 9.5 That the AO/DRP erred in making the above disallowance when there was no dispute regarding the genuineness of such expenditure. Re: Capitalization of Royalty - INR 154,37,02,565/- 10. That the AO/DRP grossl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Assessee. 15. That the AO has erred in levying interest of INR 44,23,468/- under section 234D of the Act on the Assessee. 15.1 Without prejudice to the above, the AO has erred in levying excess interest of 14,07,467 under section 234C. 3. The brief facts of the case show that the assessee is a subsidiary of Honda Motor Co Japan and is engaged in business manufacturing and sale of motorcycles and scooters. It has a substantial expertise, technologies know-how, brand equity, a worldwide marketing network in the above filed. 4. Assessee filed its return of income declaring total income of ₹ 1334,94,04,900/- on 28/11/2015. The case of the assessee was selected for scrutiny. It was found that the assessee has entered into international transaction and substantial Specified domestic transactions. The transactions are as enlisted in para No. 3 of the learned Transfer Pricing Officer - 1 (3) New Delhi (the learned TPO) order u/s. 92CA (3) of the act. Out of the above transaction, only 2 transactions are disputed between the parties. Those are payment of royalty and technology know-how fee of ₹ 10,41,44,62,249/- and payment of export commission of ₹ 48 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expenditure whereas the ld. AO was of the view that it is capital expenditure. He noted after reading of the agreement that the payment because of royalty expenditure is with respect of having of enduring nature and therefore, is a capital expenditure. He held that it could not be allowed as revenue expenditure to the assessee. Thus, out of total royalty expenditure of ₹ 8,23,30,80,343/- he held that 25% of the royalty expenditure is of nature of capital expenditure. Thus, ₹ 2,05,82,70,086/- was considered as capital expenditure, allowed depreciation thereon @25% made and made net disallowance of ₹ 1,54,37,02,565/- consequently. In the draft assessment order the total assessment was made at ₹ 1553,32,00,056/-. 5. Against this order, the assessee preferred objection before the ld. DRP-I, New Delhi who passed a direction on 18/09/2019. According to direction all the objection on the merit were dismissed. Therefore, final assessment order was also passed on 30.10.2019 at an income of ₹ 1553,32,00,056/-. The assessee is in appeal. 6. Ground No. 1 of the appeal is general in nature and therefore, it is dismissed. 7. Ground No. 2 is with respect to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ub- grounds (14 in number) is in substance challenging the determination of the arm's-length price of international transaction of export commission of ₹ 484,862,986 at Rs. nil. The ground number seven is with respect to the payment of royalty to its associated enterprise of ₹ 120,022,040/- to Honda Motors Japan for export, which is also determined by the learned transfer pricing officer at Rs. nil holding that there is a failure of benefit test. The claim of the assessee before us that both these issues are covered in favour of the assessee by the decision of the coordinate benches in assessee's own case in earlier years. We have also considered the decision of the coordinate bench in assessee's own case for AY 2013-14 and 2014-15 where, it is claimed that the issue is squarely covered in favour of the assessee. 11. With respect to the TP adjustment to the export commission, which is claimed by the assessee that it is intrinsically, looked that the main activity of manufacturing and sale of products and as such could not be identified separately for benchmarking. It is also claimed by the assessee export commission is paid to its parent entity to get acc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5 The TPO/DRP/DR were of the strong belief that the services rendered by the AE for facilitating exports were unclear. 7.6 At the very outset we have to state that the observations of the TPO/DRP that the assessee was only a contract manufacturer has been out rightly rejected by the Tribunal in assessee's own case in earlier assessment years. 7.7 The primary issue which needs to be examined is whether the assessee was benefited by making such export sales. The following chart would throw light on this issue:- 7.8 From the above chart it can be seen that the average price in respect of exports to AE's was higher than the price of the same product sold in the domestic market to non AE. 7.9 Further we find from the comparative profitability statement, the profitability derived by the assessee from export of goods at 8.91 % is significantly higher than the profitability derived by the assessee from sale of goods in the domestic market @ 5.50%. The comparative profitability statement is as under:- 7.10 For the sake of repetition, the entire edifice of the TPO/DRP's finding is based upon the assumption that the assessee is operating as a contract manu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rdingly allowed. 12. Thus, we find that the both the issues of transfer pricing adjustment with respect to determination of ALP of Rs. Nil on export commission and payment of royalty are decided in favour of the assessee. The ld. DR could not show as well as the ld. AR vehemently submitted that there is no change in the facts and circumstances of the case. In view of this Ground Nos. 2 to seven of the appeal are allowed. 13. Ground No. 8 of the appeal is with respect to the expenses of signage, which was considered by the ld. AO as capital expenditure whereas the assessee claimed it to be revenue expenditure. On carefully consideration of rival contentions, we find that this issue is squarely considered the coordinate bench in ITA No. 7463 and 7064/Del/2018 at para No. 3 of the order. In that para the coordinate bench held that the order of ITAT in assessee's own case for Assessment Year 2012-13 in ITA No. 7714/Del/2017 wherein, as per para No. 26 the coordinate bench held that the expenditure on the signage is allowable to the assessee as revenue expenditure signage are fixed at dealers premises and it dies bit satisfy the test of ownership with the assessee. Thus it w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... zed dealers maintain uniformity in advertising assessee's brand effectively across India and maintaining the high prescribed standards. The Assessing Officer was of the view that the there was no obligation to incur the said expenses; hence, the same were disallowed in the hands of the assessee. 29. The Ld. AR for the assessee pointed out that the expenditure were incurred in order to make the showrooms of the dealer look alike and the assessee incurred 50% of the expenses. The assessee during the course of hearing was asked to file copy of Agreement entered into with the dealer/s and also the No. of dealer appointed by it. The Ld. AR for the assessee duly filed the same and pointed out that the turnover of the assessee had increased from ₹ 64 crores in the preceding year to ₹ 8,539 crores during the year. 30. We have heard the rival contentions and perused the record. The expenditure incurred by the assessee on sales tools/fixtures which are placed at dealer's outlets are specifically manufactured by third party manufacturers in accordance with the specifications provided by the assessee. As per the terms of the agreement between the assessee and the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d on dealer's sales/service capacity will be issued by the Company to the dealer from time to time alongwith guidelines and procedures for procuring the same. This may include recommended purchase prices for such equipments, machinery and tools based on arrangement for bulk purchases/quantity discounts etc. with the suppliers and on training, after sales service infrastructure/support etc. provided by the Supplier. 35. In view of the aforesaid, we are of the view that the expenditure incurred on Signages expenses was in the nature of advertisement expenditure, which are recurring in nature, incurred for the purpose of business and in the absence of any capital asset being acquired/owned by the assessee, the same was allowable as business deduction under section 37(1) of the Act. 17. On careful consideration of the above decision, we find that though the tribunal has considered the material facts for allowance of sales tool expenses however in para number 35 inadvertently, as we could understand referred to the signage expenses. However, in respect of the above apparent error, we find that the logic given by the coordinate bench equally applies to the sales tool expens ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fit of enduring nature. He further referred to article 17 of the agreement, which is in effect of expiry on termination of the agreement to support his case. In view of this, he submitted that the issue is not covered in favour of the assessee but is covered in favour of the revenue by the decision of the honourable Supreme Court in case of Honda sale cars India Ltd. (supra). 21. We have carefully considered the rival contention and perused the orders of the lower authorities as well as the orders of the coordinate bench in case of the assessee deciding the issue in favour of the assessee. On careful perusal of the order, we find that the coordinate bench on identical facts and circumstances has held that the royalty paid by the assessee to the associated enterprises concern is fully revenue in nature and not the capital expenditure. Thus, the coordinate bench deleted the disallowances erred by the ld. AO that 25% of the royalty paid by the assessee is capital in nature. In that case, the coordinate bench in 2021] 124 taxmann.com 81 (Delhi -Trib.)/[2021] 187 ITD 264... ASSESSMENT YEAR 2012-13 DATED AUGUST 31, 2020 in assessee's own case considered the decision of the honoura ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h Court on similar facts. Accordingly, we allow the additional ground of appeal raised by the assessee. There is no change in the facts and circumstances of the case therefore, respectfully following the orders of the assessee's own case for Assessment Year 2012-13 s ground No. 10 of the appeal is allowed. 22. Ground No. 11 is with respect to the deduction of ₹ 231,80,00,000/- of technical know-how claimed by the assessee however, it was not allowed. 23. The ld. AR submitted that identical issue arose before the coordinate bench in Assessment Year 2012-13, 2013-14 and 2014-15 in ITA number 7463 - 7464/del/2019 dated 30 September 2020. He further referred to paragraph number six on page number 18 onwards of that decision to show that the issue squarely covered in favour of the assessee. 24. The taught departmental representative women to supported the order of the lower authorities and stated that this issue has not claimed before the learned assessing officer in the return of income and therefore should not be considered. 25. We have carefully considered the rival contention and perused the orders of the lower authorities. The identical claim with respect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the assessee was entitled to claim the aforesaid expenditure as revenue expenditure in the hands of the assessee. 49. Coming to the stand of the Revenue that where the assessee itself had not claimed as deductible in its hands, then the same cannot be allowed by the additional ground of appeal. We find no merit in the stand of the Ld. DR for the Revenue as there is no estoppel in law; especially where the issue has been decided by the Jurisdictional High Court on similar facts. Accordingly, we allow the additional ground of appeal raised by the assessee. 6.1 Respectfully following the findings of the coordinate bench we decide accordingly. In view of this issue being squarely covered in favour of the assessee by the order of the coordinate bench in assessee's own case for the earlier years, we respectfully following the same allow ground number 11 of the appeal of the assessee. 26. Ground number 12, 13, 14 and 15 were all with respect to either initiation of penalty proceedings u/s. 271 (1) (C) of the act or of charging of interest u/s. 234A, B, C and D of the act. We find that all these grounds are consequential in both the parties did not argue anything on ..... X X X X Extracts X X X X X X X X Extracts X X X X
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