TMI Blog2021 (11) TMI 570X X X X Extracts X X X X X X X X Extracts X X X X ..... are revenue expenditure in nature and therefore the disallowance made by the learned assessing officer is directed to be deleted. Accordingly, ground number 8 of the appeal is allowed Sales tool expenditure are revenue expenditure in nature and therefore the disallowance is directed to be deleted. Accordingly, ground number 8 of the appeal is allowed. Capitalization of the royalty expenses - HELD THAT:- Assessee was already engaged in the manufacturing of motorcycle and Scooter and payment of royalty expenses was not with respect to setting up of manufacturing facility. Therefore we also allow ground of the appeal of the assessee and direct the learned AO to delete the addition on account of capitalisation of royalty expenses holding it to be revenue in nature. Deduction/expenditure in respect of primary educational cess and higher and secondary education cess paid - HELD THAT:- All the arguments has allowed the claim of the assessee - we direct the ld AO to allow assessee the deduction of cess u/s 37 (1) of the act. Accordingly, additional ground of appeal is allowed. - STAY APP. No. 68/Del/2021. [in ITA. No. 477/Del/2021] And ITA. No. 477/Del/2021 - - - Dated:- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , Commission - INR 49,53,48.444/- 5. That the TPO/DRP erred in recomputing the arm s length price of the International transaction relating to payment of export commission whereby making an adjustment of lNR 49,53,48,444/-. 5.1 The TPO/DRP erred in rejecting the combined transaction approach adopted by the Assessee for benchmarking its operating profitability using the TNMM method. 5.2 T'he 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. 5.3 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. 5.4 That the TPO/DRP also erred in coming to the conclusion that there was a service which was being rendered by the Appellant to the AE in terms of developing the brand of the AE in the territories. 5.5 That the TPO/DRP have completely contradicted themselves vis-a-vis this t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ely 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 Royally on sales lo its AE - 1NR 9,15,98,320/- 6. That the TPO/DRP erred on facts and in law making adjustment of INR 9,15,98,320/ being royalty paid by the Appellant to Honda Motors Japan (HMJ) for exports to AEs. 6.1 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, 6.2 The TPO/DRP erred in rejecting the combined transaction approach adopted by the Assessee for benchmarking its operating profitability using the TNMM method. 6.3 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 royalty on exports to AEs was intrinsically linked with the main activity of manufact ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rs in respect of advertising material as per the dealer agreement. 8.3 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. 8.4 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 and hence the expenditure was wholly and exclusively for the purposes of the Appellant s business. 8.5 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 159,17,81,250/- 9. That the AO/DRP grossly erred in coming to the conclusion that 25% of the running royalty of INR 848,95,00,000/- was to be treated as capital in nature as it resulted in enduring benefit to the assessee, 9.1 That the AO/DRP erred in relying on the judgment of the Supreme Court in the Appellant s sister company s case, which was distinguishable o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... its associated enterprise and therefore reference was made to the transfer pricing officer to determine the arm s-length price in respect of international transaction undertaken by the assessee. The learned transfer pricing officer (1) (3), New Delhi passed an order u/s 92CA wherein he has proposed the addition of ₹ 586,946,764/ on account of adjustment u/s 92CA with respect to the payment of export commission and royalty for export to associated enterprise. The assessee made payment of export commission of ₹ 495,348, 444/ and payment of royalty for export to associated enterprise of ₹ 91,598,320/ which was determined as arm s-length price at Rs Nil by the learned transfer pricing officer. Further assessee claimed deduction of ₹ 8,876,939 on account of signage as allowable revenue expenditure which was held to be the capital expenditure by the learned AO and allowed depreciation thereon at the rate of 15% amounting to ₹ 1,331,541/ and accordingly a sum of ₹ 7,545,398/ was added back to the returned income of the assessee. Assessee incurred an expenditure of ₹ 1 92,90,061/ on account of sales tool expenditure incurred for providing it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r compared to the facts and circumstances in the case of the assessee for assessment year 2015 16. 7. Ground number 1 of the appeal of the assessee is general in nature, no specific arguments were advanced, therefore same is dismissed. 8. Ground number 2 is with respect to the transfer pricing adjustment on account of payment of export commission of ₹ 495,348,444/ and ₹ 91,598,320/ on payment of royalty on export to associated enterprises. The learned transfer pricing officer has rejected the transfer pricing methodology adopted by the assessee for benchmarking its international transaction. The learned TPO also rejected principles of commercial expediency argued by the assessee stating that it is not mandated as per the provisions of Section 92CA of the act. The determined ALP of these transactions at Rs Nil. The coordinate bench in assessee s own case for assessment year 2015 16 has considered this issue as Under:- 7. Ground No. 2 is with respect to adjustment on account of export commission and royalty paid to associated enterprises. This is challenged by the assessee from Ground No. 2 to Ground No. 7 of the above appeal. 8. The ld. AR submitted th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 access to various global markets where the AE exists as network. The identical issue arose in the case of the for Assessment Year 2013-14 and 2014-15 wherein, coordinate bench deleted adjustment relying on the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 manufacturer with respect to export of good. 7.11 In our understanding of the facts of the case in hand, we are of the considered view that the TPO/DRP have grossly failed in distinguishing between the fun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... our 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. 9. Therefore, respectfully following the decision of the coordinate bench in assessee s own case for assessment year 2015 16, we allow ground number 5 of the appeal and thereby direct the learned transfer pricing officer/learned assessing officer to delete the adjustment on account of the arm s-length price of the export commission payment of ₹ 495,348, 444/ . 10. Coming to ground number 6 of the appeal with respect to adjustment of ₹ 91,598,320/ being made on account of royalty payment to Honda motors Japan for export to associated enterprises where the arm s-length price was determined by the learned assessing officer at Rs nil, The coordinate bench in assessee s own case for assessment year 2015 16 also dealt with the above issue in paragraphs extracted above. Therefore, ground number 6 of the appeal of the assessee is also allowed. 11. Ground number 2 4 of the appeal are supporting the arguments advanced by the assessee for groun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1,65,62,386/- is revenue in nature. 13. Therefore respectfully following the decision of the coordinate bench in assessee s own case, we also hold that signage expenditure is revenue in nature. Accordingly the disallowance of ₹ 7,545,398/ is deleted and ground number 7 of the appeal of the assessee is allowed. 14. Ground number 8 is with respect to the disallowance of the sales tool expenses incurred by the assessee. The coordinate bench has also decided this issue in favour of the assessee by the order dated 21/05 /2021 in assessee s own case for assessment year 2015 16 as Under:- 6. An identical issue is decided by the coordinate bench in assessee's own case in ITA No. 7463 and 7464/Del/2018 for Assessment Year 2013-14 and 2014-15 holding that the above sales tools expenses is allowable to the assessee u/s. 37(1) of the Act. This decision of the coordinate bench followed the earlier decision of the tribunal in assessee's own case reported in 2021] 124 taxmann.com 81 (Delhi - Trib.)/[2021] 187 ITD 264 Dated 31 August 2024 assessment year 2012 - 13 wherein the issue of disallowance of sales tools expenses is discussed as Under:- 27. Now coming to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h arises is whether the assessee is incurring expenditure to maintain standard format of displaying its products all over India in order to induce prospective customers to clearly identify the exclusive dealers of assessee's products in India and expenditure incurred was wholly and exclusively for the purpose of his business. 32. The Ld. DR for the Revenue placed reliance on the orders of the authorities below. 33. We have heard the rival contentions and perused the record. We have perused the Agreement between the assessee and its dealer and Article 11.2 of the Dealership Agreement reads as under:- 11.2 The company shall provide the necessary information, materials and such other assistance from time to time at the dealer's cost and expense, wherever applicable, which support the dealer's advertising and sales promotion efforts for the products, in accordance with the provisions of the policy, guidelines, and operations standards with regard to advertising issued by the Company from time to time. The company may at discretion, provide subsidy on the advertising material. 34. Clause 7.2 of the Dealership Agreement states as follows:- 7.2 The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erefore the disallowance made by the learned assessing officer of ₹ 1 92,90,061/- is directed to be deleted. Accordingly, ground number 8 of the appeal is allowed. 16. Ground number 9 is with respect to the capitalization of the royalty expenses paid to him the amount of Japan wherein the assessee has paid a royalty expenditure of ₹ 8,488,135,369/ in lieu of granting license Under the royalty and technical knowhow agreement and INR ₹ 2,331,540,470/ in lieu of granting technical guidance Under the technical knowhow agreement. The assessee has claimed that it did not acquire any new asset or any new enduring benefit from the payment made Under the agreement. We find that this issue is squarely covered in favour of the assessee by the decision of the coordinate bench in assessee s own case for assessment year 2015 16 in ITA number 9073 del 2019 dated 21/05/2021 as Under:- 18. Ground No. 10 is with respect capitalization of the royalty being 25% of ₹ 2,05,82,70,086/- i.e. ₹ 1,543,702,565 being treated as a capital in nature as it resulted in an enduring benefit to the assessee. 19. The learned authorised representative that this issue has bee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nate 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 honourable Supreme Court in relying on the decision of the honourable Delhi High Court allowed the claim of the assessee as Under:- 7. Now coming to the next issue raised which is by way of additional ground of appeal. Since it is legal issue, it is admitted for adjudication. The assessee fairly pointed out that the lumpsum Royalty was capitalized in its books of accounts and also not claimed as an expenditure in the return of income. However, because of the settled position by way of the decision of the Jurisdictional High Court in Hero Honda Motors Ltd. (supra), the same is being claimed as business expenditure. The relevant findings are as under:- The Hon'ble ITAT in the appellant's own case for Assessment Year 2011-12 reiterated that the facts in the case of the appellant differ from the facts of Honda Siel Cars Ltd. (supra) because the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he present case, payments are made pursuant to the agreement dated 01/04/2005. At the time of the agreement was executed, the assessee was in existence in operation for more than 10 years. Thus, it cannot be said that the technical knowhow given under the agreement was for setting up of the business of the assessee. It was also brought to our attention that a coordinate Bench of this tribunal in assessee s own case for assessment year 2008-09 2009-10 has held that the said expenditure of payment of royalty and lump sum model fee to be in the nature of revenue expenditure. The said order for assessment year 2008-09 has also been confirmed by the Hon ble Jurisdictional Delhi High Court in ITA No. 34 of 2016 dated 18.01.2016. 34. Hon ble Supreme Court while deciding the case of royalty/technical knowhow expenditure in the nature of capital held that the expenditure was for the purpose of setting up of manufacturing facility of the assessee and hence the payment was treated as capital in nature. The Hon ble Supreme Court distinguished the judgment of the Delhi High Court in the case of Hero Honda Motors (supra) and observed as under: 25) Coming to the judgment of the Delhi Hig ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d. Admittedly, there was no existing business and, thus, question of improvising the existing technical know-how by borrowing the technical know-how of the HMCL, Japan did not arise. The assessee was not in existence at all and it was the result of joint venture of HMCL, Japan and M/s. HSCIL, India. The very purpose of Agreement between the two companies was to set up a joint venture company with aim and objective to establish a unit for manufacture of automobiles and part thereof. As a result of this agreement, assessee company was incorporated which entered into TCA in question for technical collaboration. This technical collaboration included not only transfer of technical information, but, complete assistance, actual, factual and on the spot, for establishment of plant, machinery etc. so as to bring in existence manufacturing unit for the products. Thus, a new business was set up with the technical know-how provided by HMCL, Japan and lump sum royalty, though in five Installments, was paid therefor. 37. In view of above discussion, we are of the view that the judgement of the Hon ble Supreme Court in assessee s own case for assessment year 1999- 2000 to 2005-06 would not be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n careful consideration of the issue raised in the additional ground and the decision of the honourable Supreme Court, absence of any fresh investigation of facts, the additional ground filed by the assessee is accepted. 23. The learned authorised representative submitted that this issue is squarely covered in favour of the assessee by the decision of the honourable Rajasthan High Court and honourable Bombay High Court. He specifically referred to the decision of the honourable Bombay High Court in case of sesa Goa Ltd versus joint Commissioner of income tax (2020) 423 ITR 426 and also the honourable Rajasthan High Court s decision in case of Chambal fertilisers and chemicals Ltd versus joint Commissioner of income tax (2019) 107 taxman.com 484. The learned AR referred to the CBDT circular dated 18th/5/1967. He also referred to the recommendation of the select committee and several judicial precedents. Therefore he submitted that the above deduction of education cess is allowable in the hands of the assessee. 24. The learned departmental representative referred to the decision of the honourable Supreme Court in case of CIT versus K Srinivasan (1972) 83 ITR 346 and submitted t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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