TMI Blog2023 (8) TMI 1179X X X X Extracts X X X X X X X X Extracts X X X X ..... or benchmarking the transactions. The Revenue authorities cannot sit into the shoes of businessman to decide which agreement should be made or which should not be. Hence, in effect, authorities below have opined that payment has no commercial expediency. This, in our considered opinion, is not as per the provisions of the Act. Hence, we accept the submissions of assessee and direct that the expenditure should be duly allowed. Disallowance of signage expenses as capital in nature - nature of expenses - HELD THAT:- As decided in assessee own case 2016-17 [ 2021 (11) TMI 570 - ITAT DELHI] signage expenditure is revenue in nature. Disallowance of sales tools expenses - These sales tools/fixtures are placed at dealer's outlets and are manufactured by third party in accordance with the specifications provided by the assessee - HELD THAT:- As In assessee s own case for assessment year 2015 16 [ 2021 (5) TMI 949 - ITAT DELHI] we hold that sales tool expenditure are revenue expenditure in nature and therefore the disallowance made AO is directed to be deleted. Capitalization of royalty expenses paid to HMJ - HELD THAT:- As decided in assessee s own case for AY 2016-1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rtment shall genuinely provide reliefs/remedies available to assessee in cases wherein the assessee has missed to claim any relief available to during the assessment and therefore the claim of deduction shall be allowed by the AO - HELD THAT:- As decided in own case 2016-17 [ 2021 (11) TMI 570 - ITAT DELHI] 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 is not acceptable as there is no estoppel in law; especially where the issue has been decided by the Jurisdictional High Court on similar facts - we direct the Assessing Officer to allow assessee s claim of deduction in respect of technical know-how payment. Payment of gratuity - assessee submitted that the said disallowance is made without providing any opportunity to assessee and the draft assessment order passed by the NFAC is non- speaking on this ground - HELD THAT:- We find that the issue should be remitted to the AO in the interest of justice. AO shall factually verify the averments of the assessee and decide as per law, by giving the assessee proper opportunity of being heard. Levy of education cess - ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lying the principles of commercial expediency , which approach had been rejected judicially and is not mandated under the provisions of section 92CA of the Act. Re : Payment of Export Commission -INR 20,92,73,824/- 8. 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 INR 20,92,73,824/. 8.1 The TPO/DRP completely erred III 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. 8.2 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. 8.3 That the TPO/DRP have completely contradicted themselves vis-a-vis this transaction because at one place they hold that it is the Appellant is providing services for building the brands of the AE in terms of its export activities ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment). 9.2 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 Model Fee 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. 9.3 That the TPO/DRP also failed to appreciate that under the Technical Collaboration Agreement the technical know-how was provided for manufacture and modification and upgradation of products. 9.4 That the TPO/DRP grossly erred in re-determining the arm's length price of the international transaction involving 'payment of model fees' paid for 'Color stripchange' as 'Nil', arbitrarily alleging that the same does not require any specialized technical insights and without reasonably applying any prescribed methods, thereby, violating the basic principles of Indian TP regulations. B. Corporate tax grounds Re: Expenditure o[Signage 's -INR 54,57,713/- 10. That the AO/DRP erred in treating an Amount of INR 54,57,7l3/- incurred on Signage's as being capital in nature. 10.1 That AO/DRP erred in no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which was distinguishable on facts and related to the acquisition of know-how for the setting up of the manufacturing facility. 12.2 That the AO/DRP also completely failed to appreciate that the payment of running royalty by the Appellant was in respect of up gradation of technology and was revenue in nature. 12.3 That the AO/DRP completely failed to appreciate that the running royalty is intrinsically linked to the trading activity i.e. manufacture and sales of products. 12.4 That the AO/DRP also failed to appreciate that arbitrary allocation of 25% of the running royalty was contrary to any settled position of law and could not be sustained. 12.5 That the AO/DRP also completely failed to appreciate that the Appellant did not acquire any proprietary rights in the know-how and was merely granted the right to use the technology for the purposes of manufacturing two-wheelers. Re: Claim or Deduction or expenses of INR 265, 78,13,0701- in respect or Technical Know how 13. That the AO/DRP have erred in not allowing deduction of expenses of INR 265,78,13,070/- in respect of Technical know-how duly claimed before the AO and DRP. 13.1 That the AO/DRP have erred in not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... umstances of the case and in law, the AO has erred in making addition in relation to excess allowance claimed by the Assessee under section 43B of the Act without appreciating that the differential amount has already been disallowed by the Assessee in the ITR form, thus leading to double disallowance of same amount in the hands of the Assessee which is totally against the provisions of law. 16.4 That the AO erred in not following the direction issued by the DRP in Para 5.9.1 of the Directions issued wherein the AO was directed to consider the facts and pass a speaking order. Re: Education Cess 17. That the AO/DRP erred in disallowing the claim of Education Cess amounting to INR 20,95,70,801/- as additional claim raised during assessment. 17.1 That the DRP erred in not appreciating that 'cess' will not partake the character of 'tax' as it a form of 'fee' being charged for a particular purpose as held by the constitutional bench of the Hon'ble Supreme Court in the case of Hinger Rampur Coal Co. Ltd. Ors. v . State of Orissa Ors. [(1961) 2 SCR 537]. 17.2 That the amendment brought in by the legislature cannot be applied retrospectively an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9;s network of HMJ in these countries. Ld. Counsel further submitted that the TPO observed that no special benefit was received by the assessee by the said expense and as such, no service was provided by the AE and therefore, held the arm's length price ('ALP') of export commission paid to be Nil. He submitted that the ITAT had remanded this adjustment in assessee s own case for AY 2008-09 to 2011-12. He submitted that the TPO has not followed the directions of the ITAT and has determined the Arm's Length of the transaction to be at NIL. Thus, the department has consistently disregarded the directions of this Tribunal as well as the decisions of the Hon'ble High Court. He further submitted that be that as it may, after considering the outcome of the remand proceedings, coordinate bench of this Tribunal has decided the issue in favour of the assessee for appeals pertaining to AY 2013-14 and 2014-15. He also submitted that this issue is covered by the decision of ITAT dated 09.11.2021 in assessee s own case for AY 2016-17 bearing ITA No. 477/Del/2021 and order dated 19.05.2021 in assessee s own case for AY 2015-16 bearing ITA No. 9073/DEL/2019. 5. We have heard ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e deciding the case of the assessee has not considered the decision of the Hon'ble Supreme Court in case of Honda Seil Cars Ltd. 319 ITR 713 but coordinate bench has mainly relied upon the Article 2, 13 and 11 of the technology know how agreement. He extensively relied on paragraph 23 to 25 of the orders of the Hon'ble Supreme Court. He further relied on Article 15 and Article 17 of the above agreement. Therefore, he submitted that the above argument might be considered where the royalty is considered as capital expenditure. 10. We have carefully considered the rival contentions and perused the orders of the lower authorities. Ground number 2 - 5 and challenging the rejection of the transfer pricing methodology adopted by the assessee for benchmarking international transaction as well as the application of the principles of commercial expediency and need test applied by the learned transfer pricing officer and confirmed by the learned dispute resolution panel. The ground number 6 along with its sub- 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... profit ratio of the assessee @ 4.60% was higher than average of operating margin of -2.24% earned by the comparables companies. Considering that the operating profit margin of the selected comparable companies was lower than the OPM of the assessee, such international transactions were considered as being at arms length TNMM. 7.2 The TPO held that the assessee has not received any services that an independent entrepreneur would be willing to pay for and accordingly considered the arms length price of the said transaction of payment of export commission of nil. 7.3 While treating the ALP as nil the TPO held that the assessee is a contract manufacturer and further held that by its export activities the assessee is developing the brand of the AE and actually has carried out service to the AE. 7.4 It was also pointed out that the assessee has made export to AE's related parties in Chile, Peru and Mexico and such exports are apparently for the benefit of the AE's of parent company. 7.5 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n'ble jurisdiction High Court of Delhi in the case of Cushman and Wakefield (367 ITR 730). It would not be out of place to mention here that in earlier assessment years, this quarrel was restored to the files of the TPO to decide the issue afresh in the light principle laid down by the Hon'ble High Court in the case of Cushman and Wakefield (supra). 7.16. We have been told that in the set aside assessment proceedings the TPO has once again made the addition following the earlier findings that the assessee had failed to provide evidence. 7.17 Considering the facts of the case as mentioned elsewhere we are of the considered view that the assessee has successfully demonstrated not only the benefits but has also shown that the profitability is higher (as per the charts exhibited elsewhere). Considering the totality of the facts we have no hesitation in directing the AO/TPO to delete the impugned addition on account of export commission. 7.18 This ground is accordingly 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctive meanings as defined below: 1. The term. Products shall mean the Honda two-wheelers and three-wheelers, the specific models and types of which are listed in Exhibit I attached hereto, and such additional models and types of two-wheelers and three-wheelers as may from time to time be decided as agreed upon by the parties hereto, in writing after execution of this Agreement and shall include new models or types of two-wheelers and three-wheelers changed pursuant to the Model change (as defined hereinbelow). Such additional models and types of two-wheelers and three-wheelers and such new models or types of two-wheelers and three wheelers pursuant to Model change shall be specified in a Model Agreement (hereinafter referred to as the Model Agreement ) to be entered into between the parties hereto in each instance, according to which Exhibit I hereto shall be revised; Article 11 - CONSIDERATION 11.1 In consideration of the right and license granted to the LICENSEE under Article 2 hereof and upon furnishing of the Technical Information. under Article 3.2 hereof, the LICENSEE shall pay to the LICENSOR the following: a) the amount of lump-sum fee in respect of the i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... per the provisions of the Act. Hence, we accept the submissions of the ld. Counsel of the assessee and direct that the expenditure should be duly allowed. 10. Apropos disallowance of Rs. 54,57,713 of signage expenses as capital in nature : On this issue, ld. Counsel of the assessee submitted that the assessee had purchased glow sign board/ signals, which were displayed at the location of the dealers of the assessee. The sole purpose of incurring these expenses is to increase the sales at the stores etc. and thus is solely for the purpose of business and allowable as revenue in nature. At the same time, these are not giving any enduring benefit to the assessee, given the dynamic and competitive nature of the business. The Assessing Officer disallowed the claim of the assessee in a cryptic manner. He observed that the explanation given by the assessee is not satisfactory and following the DRP directions held the expense to be capital in nature and allowed depreciation @15%. The expenditure on Sign boards is revenue in nature and ld. Counsel of the assessee placed reliance on the following decisions :- (i) CIT v. Pepsico India Holdings Pvt. Ltd. [(2007) 207 Taxman 5 (Del)], ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l Power Products Ltd.(supra). Thus, we are of the view that the expenditure to the extent claimed by the assessee is to be allowed in the hands of the assessee and not/the entire expenditure. Ground of appeal No. 6 is thus partly allowed. 3.1 Respectfully following the decision of the coordinate bench, we hold accordingly. 14. Therefore, respectfully following the decision of the coordinate bench in assessee's own case ground No. 8 of the appeal of the assessee is allowed holding that signage expenditure of Rs. 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 Rs. 7,545,398/ is deleted and ground number 7 of the appeal of the assessee is allowed. Following the aforesaid order of the coordinate Bench, we delete the disallowance and allow this ground of the assessee. 12. Apropos disallowance of sales tools expenses : These sales tools/fixtures are placed at dealer's outlets and are manufactured by third party in accordance with the specifications provided by the assessee. The sales t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt of Honda Siel Cars of Royalty India Ltd. Vs. CIT (82 Taxmann.com 212). Ld. Counsel of the assessee submitted that the facts are distinguishable from the facts of the case of the assessee. He submitted that the Hon'ble Supreme Court has categorically held that the decision applies only to the payment of royalty made during the formative years and the year under consideration is the 15th year, thus payment cannot be said to be made for setting up of the business. He submitted that the issue is also covered in favour of the assessee in assessee s own case for AY 2012-13 to 2016-17. He referred to the decision of ITAT in assessee s own case for AY 2016-17 (supra). 16. Upon careful consideration and hearing both the sides, we find that this issue is squarely covered by the decisions of ITAT in assessee s own case and the same was decided vide paras 16 to 18. For the sake of reference, we reproduced para 18 as under :- 18. The fact also shows 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 respectfully following the decision of the coordin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ine the same whether the payments satisfy the claim of donation u/s 80G of the Act. We find that the case law is fully applicable to the facts of the case. There is no restriction in the Act that expenditure when disallowed for CSR cannot be considered u/s 80G of the Act. Hence, we remit the issue to the file of AO to verify whether these payments were qualified as donations u/s 80G of the Act or not, if they qualify as donation u/s 80G of the Act then the requisite amount deserves to be allowed. 19. Apropos issue of disallowance u/s 80JJAA of the Act : The assessee has claimed deduction u/s 80JJAA of the Act amounting to Rs. 6,85,27,062/- in relation to employees/ workmen employed by the assessee during the year. The assessee claimed 1051 employees as are additional employees employed during the previous year as per the amended section from AY 2017-18. AO held that applying the amended section, out of 1051 employees, employees without PF number and employees having monthly salary above Rs. 25,000 are held to be not eligible for deduction u/s 80JJAA of the Act. Ld. Counsel of the assessee placed reliance on the decision of CIT vs. Texas Instruments India (P.) Ltd. [2021] 127 tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... careful consideration, we find that this issue is squarely covered by the decisions of the ITAT in assessee s own case in AYs 2013-14 to 2016-17. For the sake of reference, we are reproducing the relevant paras from the order of ITAT in AY 2016-17 as under :- 4. Ground No.10, reads as under: 10. That the A.O/LEARNED DRP have erred in not allowing deduction of expenses of INR 250,17,14,636/- in respect of Technical know-how duly claimed before the A.O and DRP. 10.1 That the A.O/Learned DRP have erred in not allowing deduction of expenses of 250,17,14,636/- in respect of Technical know-how in utter disregard to circular no.14(XL-35) dated 11.04.1955. 5. Briefly, the facts relating to this issue are the assessee is a resident corporate entity and is a subsidiary of Honda Motorcycle Co. 3 ITA No.477/Del./2021 Ltd., Japan. Basically, assessee is engaged in the business of manufacturing and distribution of motorcycles, scooters etc. in India. 6. In the year under consideration, the assessee had paid Rs. 250,17,14,636 towards fee for technical know-how. However, in the return of income, the assessee did not claim it as deduction. 7. In course of assessment proceedings, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tional claim of deduction of expenses in respect of technical knowhow- A similar issue has been decided in A.Y. 2012-13. The relevant findings read as under :- 47. 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 lump sum 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 CIT v. 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 amount expended is in relation to the running royalty and not for the purpose of setting up of plant. Further, reference is also made to the decision of the Delhi Tribunal in the case of Honda Cards India Ltd vs DCIT : ITA No.4491/Del/2014 dated 18.08.2017 (pages 414- 457 of the CLPB) and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee and the draft assessment order passed by the NFAC is non- speaking on this ground. He submitted that the case of the assessee is that the AO erred in rejecting the revised income filed by the assessee and sustaining the addition made in the intimation issued by CPC without issuing show-cause notice prior to making/ sustaining additions based on the adjustments made to the returned income in the intimation issued under section 143(1) of the Act which is against the principles of natural justice. He further submitted that the AO has completely erred in making addition in relation to excess under section 43B of the Act without appreciating that the differential amount has already been disallowed by the assessee in the ITR form, thus leading to double disallowance of same amount in the hands of the assessee. Ld. Counsel for the assessee submitted that the DRP directed the AO to pass speaking order on the same. However, the AO has not dealt with the issue in the final assessment order. Against this, the assessee has filed an appeal before the AO to rectify the same, which is still pending. 24. Upon careful consideration, we find that the issue should be remitted to the AO in ..... X X X X Extracts X X X X X X X X Extracts X X X X
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