Goodyear India Ltd., Haryana V. DCIT, New Delhi

ITA 1004/DEL/2016

• Counselvise Citation: [2018] 126 COUNSELVISE.COM (IT) 4097 (ITAT-DELHI)
• Duration Of Justice: 1 year(s) 10 month(s) 26 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 22-01-2018
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: I1
• Next Hearing Date: 19-07-2017
• Assessment Year: 2011-2012
• Appeal Filed On: 26-02-2016
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: SANJAY I BARA
• Keywords: Depreciation; Transfer pricing; Business expenditure; Opportunity of being heard; International transaction; Rule of consistency; Additional evidence; Question of law; Cost of acquisition; Corroborative evidences; Revenue expenditure; Capital expenditure
• Section: 92C; 43B; 234B; 37; 144; 92

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH I : NEW DELHI) BEFORE SHRI B.P. JAIN, ACCOUNTANT MEMBER AND SHRI KULDIP SINGH, JUDICIAL MEMBER ITA NO.1516/DEL./2015 (ASSESSMENT YEAR : 2010-11) ITA NO.1004/DEL./2016 (ASSESSMENT YEAR : 2011-12) M/S. GOODYEAR INDIA LIMITED, VS. DCIT, CIRCLE 10 ( 1), MATHURA ROAD BALLABGARH, NEW DELHI. DISTRICT FARIDABAD 121 004 (HARYANA) (PAN : AAACG3511H) ITA NO.1706/DEL./2017 (ASSESSMENT YEAR : 2012-13) M/S. GOODYEAR INDIA LIMITED, VS. ADDL.CIT, SPL. RA NGE 4, MATHURA ROAD BALLABGARH, NEW DELHI. DISTRICT FARIDABAD 121 004 (HARYANA) (PAN : AAACG3511H) (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI AJAY VOHRA, SENIOR ADVOCATE SHRI NEERAJ JAIN, ADVOCATE AND SHRI ABHISHEK AGARWAL, CA REVENUE BY : SHRI SANJAY I. BARA, CIT DR DATE OF HEARING : 23.11.2017 DATE OF ORDER : 22.01.2018 O R D E R PER BENCH : ITA NO.1516/DEL/2015 ITA NO.1004/DEL/2016 ITA NO.1706/DEL/2017 2 SINCE COMMON QUESTIONS OF FACTS AND LAW HAVE BEEN R AISED IN THE AFORESAID APPEALS, THE SAME ARE BEING DISPOS ED OFF BY WAY OF CONSOLIDATED ORDER TO AVOID REPETITION OF DISCUSSIO N. 2. THE APPELLANT, M/S. GOODYEAR INDIA LIMITED (HERE INAFTER REFERRED TO AS THE TAXPAYER) BY FILING THE PRESEN T APPEALS SOUGHT TO SET ASIDE THE IMPUGNED ORDER DATED 29.12.2015, NIL & 27.01.2017, PASSED BY THE AO IN CONSONANCE WITH THE ORDERS PASS ED BY THE LD. DRP/TPO UNDER SECTION 143 (3) READ WITH SECTION 144 C OF THE INCOME-TAX ACT, 1961 (FOR SHORT THE ACT) QUA THE ASSESSMENT YEARS 2010-11. 2011-12 & 2012-13 ON THE GROUNDS INT ER ALIA THAT :- ITA NO.1516/DEL./2015 (AY : 2010-11) 1. THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN COMPLETING ASSESSMENT UNDER SECTION 144C/143(3) OF THE INCOME- TAX ACT, 1961 ('THE ACT') AT AN INCOME OF RS. 134,7 6,30,400 AS AGAINST THE INCOME OF RS.112,28,90,705 RETURNED BY THE APPELLANT. 2. THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN MAKING AN ADDITION OF RS.16,65,18,068 ALLEGEDLY ON ACCOUNT OF DIFFERENCE FROM THE ARM'S LENGTH PRICE OF THE INTER NATIONAL TRANSACTIONS ENTERED INTO BY THE APPELLANT WITH ITS ASSOCIATED ENTERPRISE, ON THE BASIS OF ORDER PASSED BY THE TRA NSFER PRICING OFFICER ('TPO') UNDER SECTION 92CA(3) OF THE ACT. 3. THAT THE ASSESSING OFFICER/ TPO ERRED ON FACTS A ND IN LAW IN HOLDING THE ARM'S LENGTH PRICE OF THE INTERNATIO NAL TRANSACTION OF PAYMENT OF TRADEMARK FEE OF RS.7,84,24,000 TO TH E ASSOCIATED ENTERPRISE (AE'), THE GOODYEAR TIRE & RUBBER COMPA NY, USA AS NIL ALLEGEDLY HOLDING THAT NO RECOGNIZABLE BENEF IT HAS BEEN PASSED ON TO THE APPELLANT AND THEREFORE THERE WAS NO RATIONALE FOR PAYING THIS TRADEMARK FEES TO THE AE. 3.1 THAT THE ASSESSING OFFICER/ TPO ERRED ON FACTS AND IN LAW IN NOT APPRECIATING THAT THE INTERNATIONAL TRANSACT ION OF PAYMENT OF TRADEMARK FEES WAS APPROPRIATELY BENCHMARKED APP LYING ITA NO.1516/DEL/2015 ITA NO.1004/DEL/2016 ITA NO.1706/DEL/2017 3 TRANSACTIONAL NET MARGIN METHOD CTNMM') AS THE MOST APPROPRIATE METHOD AND WAS ACCORDINGLY ESTABLISHED TO BE AT ARM'S LENGTH. 3.2 THAT THE ASSESSING OFFICER/ TPO ERRED ON FACTS AND IN LAW IN HOLDING THAT THE ENTIRE ARRANGEMENT OF THE PAYME NT OF TRADEMARK FEE IS DESIGNED TO SHIFT PROFITS OUTSIDE INDIA. 3.3 THAT THE ASSESSING OFFICER/ TPO ERRED ON FACTS AND IN LAW IN NOT APPRECIATING THAT THE TRADEMARK FEES PAID BY THE APPELLANT TO THE AE 1 % OF THE NET DOMESTIC SALES AND 2% OF T HE NET EXPORT SALES IS WITHIN THE LIMITS PRESCRIBED BY THE RBI IN THE EARLIER YEAR AND WAS A BONAFIDE TRANSACTION. 3.4 THAT THE ASSESSING OFFICER/ TPO ERRED ON FACTS AND IN LAW IN COMPARING THE OTHER SUBSIDIARY, NAMELY, GOODYEAR SOUTH ASIA TYRES PRIVATE LIMITED, AURANGABAD, MAHARASHTRA OF G OODYEAR USA WITH THE APPELLANT WITH REFERENCE TO THE PAYMEN T OF TRADEMARK FEE, 4. THAT THE ASSESSING OFFICER/TPO ERRED ON FACTS AN D IN LAW IN MAKING TRANSFER PRICING ADJUSTMENT AMOUNTING TO RS.7,84,24,000 IN RELATION TO THE ADVERTISEMENT, MA RKETING AND SALES PROMOTION EXPENSES (HEREINAFTER REFERRED TO A S 'THE AMP EXPENSES') INCURRED BY THE APPELLANT. 4.1 THAT THE ASSESSING OFFICER/TPO ERRED ON FACTS AND IN LAW IN MAKING THE SAID ADDITION ALLEGEDLY HOLDING THAT THE APPELLANT WAS PROMOTING THE BRAND OF THE ASSOCIATED ENTERPRIS E AND INSTEAD OF PAYMENT OF THE TRADEMARK FEE TO THE AE OF RS.7,8 4,24,000, THE APPELLANT OUGHT TO HAVE RECEIVED EQUIVALENT AMOUNT AS COMPENSATION FOR CREATING AND DEVELOPING MARKETING INTANGIBLES IN INDIA. 4.2 THE ASSESSING OFFICER/TPO ERRED ON FACTS AND I N LAW IN NOT APPRECIATING THAT THE AMP EXPENSES, ETC., UNILA TERALLY INCURRED BY THE APPELLANT IN INDIA COULD NOT BE CHA RACTERIZED AS AN INTERNATIONAL TRANSACTION AS PER SECTION 92B, IN THE ABSENCE OF ANY PROVED UNDERSTANDING / ARRANGEMENT BETWEEN THE APPELLANT AND THE ASSOCIATED ENTERPRISE, SO AS TO INVOKE THE PROVISIONS OF SECTION 92 OF THE ACT. 4.3 THE ASSESSING OFFICER / TPO ERRED ON FACTS AND IN LAW IN NOT APPRECIATING THAT THE ONLY TRANSFER PRICING ADJ USTMENT PERMITTED BY CHAPTER X OF THE ACT WAS IN RESPECT OF THE DIFFERENCE BETWEEN THE ARM'S LENGTH PRICE (ALP) AND THE CONTRA CT OR DECLARED PRICE, BUT THE SAID PROVISION COULD NOT BE INVOKED TO DETERMINE THE 'QUANTUM' / EXTENT OF BUSINESS EXPEND ITURE. ITA NO.1516/DEL/2015 ITA NO.1004/DEL/2016 ITA NO.1706/DEL/2017 4 4.4 THE ASSESSING OFFICER/TPO ERRED ON FACTS AND I N LAW IN HOLDING THAT EXPENDITURE INCURRED BY THE APPELLANT WHICH INCIDENTALLY RESULTED IN BRAND BUILDING FOR THE FOR EIGN AE, WAS A TRANSACTION OF CREATING AND IMPROVING MARKETING INT ANGIBLES FOR AND ON BEHALF OF ITS FOREIGN AE AND FURTHER THAT SU CH A TRANSACTION WAS IN THE NATURE OF PROVISION OF A SER VICE BY THE APPELLANT TO THE AE. 4.5 THAT ASSESSING OFFICER/TPO ERRED ON FACTS AND IN LAW IN NOT APPRECIATING THAT SUCH A TRANSFER PRICING ADJUSTMENT COULD NOT A T ALL BE MADE IN RESPECT OF AMP EXPENSES WHICH WERE FOUND TO CONS TITUTE LEGITIMATE, BONAFIDE AND DEDUCTIBLE BUSINESS EXPEND ITURE AND THE APPELLANT WAS THE ECONOMIC OWNER OF THE BENEFIT OF SUCH EXPENSES. 4.6 THAT THE ASSESSING OFFICER/TPO ERRED ON FACTS AND IN LAW IN NOT APPRECIATING THAT THE CHARACTERIZATION OF TH E APPELLANT BEING THAT OF A FULL FLEDGED MANUFACTURER AND I OR DISTRIBUTOR PERFORMING ALL FUNCTIONS AND BEARING ALL RISKS, IS THE SOLE BENEFICIARY OF THE AMP EXPENDITURE INCURRED BY IT, JUSTIFIED THE CONDUCT OF THE APPELLANT IN INCURRING AND BEARING T HE COST OF AMP EXPENDITURE. 4.7 THE ASSESSING OFFICER/TPO ERRED ON FACTS AND I N LAW IN NOT APPRECIATING THAT SUCH A TRANSFER PRICING ADJUS TMENT CANNOT AT ALL BE MADE IN LAW WITHOUT DETERMINING THE ARM'S LENGTH PRICE ('ALP') BY APPLYING ONE OF THE METHODS SPECIF IED IN SECTION 92C OF THE ACT. 4.8 WITHOUT PREJUDICE THAT THE ASSESSING OFFICER E RRED ON FACTS AND IN LAW IN IGNORING THE FACT THAT, SINCE THE APP ELLANT EARNS RETURN COMMENSURATE WITH OTHER BRAND OWNERS, THE AP PELLANT IS ADEQUATELY COMPENSATED FOR ITS FUNCTIONS AND AMP EX PENSES. 4.9 WITHOUT PREJUDICE THAT THE ASSESSING OFFICER/TP O ERRED ON FACTS AND IN LAW IN NOT APPRECIATING THAT THE AMP E XPENSES INCURRED BY THE APPELLANT WAS APPROPRIATELY ESTABLI SHED TO BE ARMS LENGTH APPLYING TNMM. 4.10 WITHOUT PREJUDICE, THE ASSESSING OFFICER/TPO ERRED ON FACTS AND IN LAW IN NOT PLACING ON RECORD ANY COMPA RABLES FOR DETERMINING ARMS LENGTH AMP EXPENDITURE. 4.11 WITHOUT PREJUDICE THAT THE ASSESSING OFFICER/ TPO ERRED ON FACTS AND IN LAW IN NOT APPRECIATING THAT EVEN APPL YING BRIGHT LINE TEST ('BLT') NO ADJUSTMENT ON ACCOUNT OF AMP EXPENDITURE COULD BE MADE IN AS MUCH AS AMP EXPENDI TURE ITA NO.1516/DEL/2015 ITA NO.1004/DEL/2016 ITA NO.1706/DEL/2017 5 INCURRED BY THE APPELLANT WAS LOWER THAN AMP EXPEND ITURE INCURRED BY COMPARABLE COMPANIES. 5. THAT THE ASSESSING OFFICER I TPO ERRED ON FACTS AND IN LAW IN MAKING AN ADJUSTMENT OF RS.96,70,068 IN THE ARM' S LENGTH PRICE OF THE INTERNATIONAL TRANSACTION OF EXPORT OF FINISHED GOODS ENTERED INTO BY THE APPELLANT WITH ITS ASSOCIATED E NTERPRISE. 5.1 THAT THE ASSESSING OFFICER ITPO ERRED ON FACTS AND IN LAW IN NOT APPRECIATING EXPORT INCENTIVE, BEING A COMPE NSATION FOR THE COST INCURRED FOR SALE OF GOODS, IS REQUIRED TO BE REDUCED FROM THE COST OF GOODS SOLD FOR COMPUTING GROSS PROFIT M ARGIN FOR DETERMINING THE ARM'S LENGTH PRICE. 5.2 THAT THE ASSESSING OFFICER I TPO ERRED ON FACT S AND IN LAW IN HOLDING THAT INCENTIVE RECEIVED IN RESPECT OF EX PORT OF FINISHED GOODS, SHOULD NOT BE TAKEN INTO ACCOUNT FOR DETERMI NING THE PROFIT/COST IN RESPECT OF THE INTERNATIONAL TRANSAC TION OF EXPORT. 5.3 THAT THE ASSESSING OFFICER I TPO HAS ERRED ON FACTS AND IN LAW IN HOLDING THAT 'IF THE APPELLANT'S METHOD OF C ALCULATION OF 'COST OF GOODS SOLD' IS FOLLOWED, IT WOULD TANTAMOU NT TO A CLAIM THAT BENEFIT, WHICH HAS NOT YET ACCRUED AT THE TIME OF SALE OF GOODS, BEING TREATED AS A COMPONENT OF COST OF GOOD S SOLD.' 5.4 THAT THE ASSESSING OFFICER I IPO ERRED ON FACT S AND IN LAW IN IGNORING THAT THE GLOBAL TRANSFER PRICING POLICY OF THE GROUP COMPANY PROVIDES FOR REDUCING THE COST OF MERCHANDI SE BY THE EXPORT INCENTIVES AVAILABLE TO THE EXPORTING ENTITY . 5.5 THAT THE ASSESSING OFFICER / TPO ERRED ON FACT S AND IN LAW IN HOLDING THAT THE EXPORT INCENTIVE DOES NOT FORM PART OF INVOICE PRICE OF GOODS SOLD AND HENCE THE SAME CANNOT BE REDUCED FROM THE COST OF G OODS SOLD. 6. THAT THE ASSESSING OFFER ERRED ON FACTS AND IN L AW IN MAKING DISALLOWANCE OF PROVISION FOR REPLACEMENT LO SS AMOUNTING TO RS.61,53,000 ALLEGEDLY ON THE GROUND T HAT THE APPELLANT DID NOT INCUR EXPENDITURE ON ACCOUNT OF R EPLACEMENT OF GOODS IN THE SUBSEQUENT YEARS. 7. THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN MAKING AN AD HOC DISALLOWANCE OF RS.3,80,12,100 BEING 30% OF THE TOT AL EXPENDITURE OF RS.12,67,07,000 INCURRED BY THE APPE LLANT ON ADVERTISEMENT AND PUBLICITY HOLDING THAT THE EXPEND ITURE WAS INCURRED FOR BRAND BUILDING FOR THE ENTITIES OWNING THE BRAND. ITA NO.1516/DEL/2015 ITA NO.1004/DEL/2016 ITA NO.1706/DEL/2017 6 7.1 THAT THE DRP ERRED ON FACTS AND IN LAW IN AFFI RMING THE ABOVE DISALLOWANCE PROPOSED BY THE ASSESSING OFFICE R ALLEGEDLY FOLLOWING ITS ORDER IN ASSESSMENT YEAR 2009-10 7.2 THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN NOT APPRECIATING THAT THE ADVERTISEMENT AND PUBLICITY E XPENSES WERE INCURRED BY THE APPELLANT IN THE COURSE OF CARRYING ON OF ITS BUSINESS AND WERE ALLOWABLE DEDUCTION AS BUSINESS E XPENDITURE. 7.3 THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN NOT APPRECIATING THAT WHEN THE SAID EXPENDITURE OF ADVE RTISEMENT HAS BEEN SUBJECTED TO BENCHMARKING ANALYSIS BY THE TPO UNDER SECTION 92 OF THE ACT AND APPROPRIATE ARM'S LENGTH PRICE IN THIS REGARD HAS BEEN DETERMINED, THERE CANNOT BE ANY FUR THER DISALLOWANCE FOR THE SAID EXPENDITURE UNDER SECTION 37 OF THE ACT. 8. THAT THE ASSESSING OFFICER/ DRP ERRED ON FACTS A ND IN LAW IN MAKING DISALLOWANCE OF RS.35,84,180 BEING OTHER MISCELLANEOUS CHARGES AND RS.12,74,347 BEING SERVIC E TAX WRITTEN OFF OUT OF MISCELLANEOUS EXPENDITURE OF RS.12,35,1 6,000 ALLEGEDLY HOLDING THAT (I) THE EXPENDITURE WERE NOT SUPPORTED BY VOUCHERS AND THE APPELLANT COULD NOT SUBSTANTIATE T HAT THE EXPENDITURE WERE INCURRED WHOLLY AND EXCLUSIVELY FO R THE PURPOSE OF BUSINESS (II) THE APPELLANT HAS FAILED TO DEDUCT TAXES AT SOURCE ON CERTAIN EXPENDITURE AND (III) SOME OF THE EXPEND ITURE WERE IN THE NATURE OF CAPITAL NATURE. 8.1 WITHOUT PREJUDICE, THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN NOT ALLOWING DEPRECIATION ON THE EXPEN SES HELD TO BE IN THE NATURE OF CAPITAL EXPENDITURE. 9. THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN MAKING DISALLOWANCE OF RS. 13,05,000 BEING PROVISIO N FOR OBSOLETE STOCK OF SHARES ALLEGEDLY ON THE GROUND TH AT THE SAME WAS ONLY A PROVISION AND NOT AN ACTUAL WRITE OFF. 9.1 THAT THE ASSESSING OFFER ERRED ON FACTS AND IN LAW IN DISALLOWING PROVISION FOR OBSOLETE SPARES AND PARTS AMOUNTING TO RS.13,05,000 ALLEGEDLY HOLDING THAT THE APPELLANT H AS FAILED TO PROVIDE THE BASIS AND WORKING OF PROVISION OF OBSOL ETE STORES AND SPARES. 10. THAT THE ASSESSING OFFICER ERRED ON FACTS AND I N LAW IN MAKING AN AD-HOC DISALLOWANCE OF RS.25,00,000 HOLDING 50% OF THE SAL ARY PAID TO ADMINISTRATIVE STAFF OF THE APPELLANT WHICH WAS ALL EGEDLY ATTRIBUTED TO THE CAPITAL WORK IN PROGRESS AND WAS OUGHT TO BE CAPITALIZED ALONG WITH THE CAPITAL WORK IN PROGRESS . ITA NO.1516/DEL/2015 ITA NO.1004/DEL/2016 ITA NO.1706/DEL/2017 7 11. THAT THE ASSESSING OFFICER ERRED ON FACTS AND I N LAW IN MAKING DISALLOWANCE OF STORES AND SPARES WRITTEN OF F AMOUNTING TO RS. 53,93,000 ALLEGEDLY HOLDING THAT SUCH DETAIL S AND SUPPORTING EVIDENCE OF WRITE OFF OF STORES AND PART S WERE NOT FURNISHED AND ALSO SUCH WRITE OFF WAS NOT VERIFIABL E WITH REFERENCE TO PHYSICAL DISPOSAL. 12. THAT THE ASSESSING OFFICER ERRED ON FACTS AND I N LAW IN UNDER SECTION 234B AND SECTION 234C OF THE ACT. ITA NO.1004/DEL./2016 (AY : 2011-12) 1. THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN COMPLETING ASSESSMENT UNDER SECTION 144C/143(3) OF THE INCOME-TAX ACT, 1961 ('THE ACT') AT AN INCOME OF RS.132,46,38,800 AS AGAINST THE INCOME OF RS.109,38 ,32,595 DETERMINED BY THE APPELLANT IN ITS INCOME TAX RETUR N. 2. THAT THE DRP/ASSESSING OFFICER ERRED ON FACTS AN D IN LAW IN MAKING AN ADDITION OF RS.19,08,88,000 ALLEGEDLY ON ACCOUNT OF DIFFERENCE FROM THE ARM'S LENGTH PRICE OF THE IN TERNATIONAL TRANSACTIONS ENTERED INTO BY THE APPELLANT WITH ITS ASSOCIATED ENTERPRISE, ON THE BASIS OF ORDER PASSED BY THE TRA NSFER PRICING OFFICER ('TPO') UNDER SECTION 92CA(3) OF THE ACT. 3. THAT THE ASSESSING OFFICER/ TPO ERRED ON FACTS A ND IN LAW IN HOLDING THE ARM'S LENGTH PRICE OF THE INTERN ATIONAL TRANSACTION OF PAYMENT OF TRADEMARK FEE OF RS.9,54, 44,000 TO THE ASSOCIATED ENTERPRISE (AE'), THE GOODYEAR TIRE & RUBBER COMPANY, USA AT NIL ALLEGEDLY HOLDING THAT N O RECOGNIZABLE BENEFIT HAS BEEN PASSED ON TO THE APPE LLANT AND THEREFORE THERE WAS NO RATIONALE FOR PAYING THIS TR ADEMARK FEES TO THE AE. 3.1 THAT THE DRP/ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN HOLDING THAT THE ENTIRE ARRANGEMENT OF THE PAYME NT OF TRADEMARK FEE IS DESIGNED TO SHIFT PROFITS OUTSIDE INDIA. 3.2 THAT THE DRP ERRED ON FACTS AND IN LAW IN SUSTA INING THE TRANSFER PRICING ADJUSTMENT MADE BY THE TPO HOL DING THE ARMS LENGTH PRICE OF INTERNATIONAL TRANSACTION OF PAYMENT OF ROYALTY AS NIL FOLLOWING ITS ORDERS FOR ASSESSMENT YEARS 2007- 08, 2008-09, 2009-10 AND 2010-11. 3.3 THAT THE ASSESSING OFFICER / TPO ERRED ON FACT S AND IN LAW IN HOLDING THAT THE PAYMENT OF TRADEMARK FEE TO THE AE WAS A SEPARATE INTERNATIONAL TRANSACTION WHICH IS R EQUIRED TO ITA NO.1516/DEL/2015 ITA NO.1004/DEL/2016 ITA NO.1706/DEL/2017 8 BE BENCH MARKED SEPARATELY RATHER THAN AGGREGATING WITH OTHER TRANSACTIONS UNDER TNMM. 3.4 THAT THE DRP/ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN NOT APPRECIATING THAT THE INTERNATIONAL TRANSACT ION OF PAYMENT OF TRADEMARK FEES WAS APPROPRIATELY BENCH M ARKED APPLYING TRANSACTIONAL NET MARGIN METHOD ('TNMM') A S THE MOST APPROPRIATE METHOD AND WAS ACCORDINGLY ESTABLI SHED TO BE AT ARM'S LENGTH. 3.5 THAT THE ASSESSING OFFICER/ TPO ERRED ON FACTS AND IN LAW IN COMPARING THE OTHER SUBSIDIARY, NAMELY, GOOD YEAR SOUTH ASIA TYRES PRIVATE LIMITED, AURANGABAD, MAHAR ASHTRA OF GOODYEAR USA WITH THE APPELLANT WHILE HOLDING TH AT THERE WAS NO JUSTIFICATION FOR PAYMENT OF THE TRADEMARK F EE. 3.6 THAT THE ASSESSING OFFICER/ TPO ERRED ON FACTS AND IN LAW IN NOT APPRECIATING THAT THE TRADEMARK FEES PAI D BY THE APPELLANT TO THE AE 1 % OF THE NET DOMESTIC SALES A ND 2% OF THE NET EXPORT SALES IS WITHIN THE LIMITS PRESCRIBE D BY THE RBI AND WAS A BONAFIDE PAYMENT MADE AS PER THE TRADEMAR K LICENSE AGREEMENT. 3.7 WITHOUT PREJUDICE, THAT THE ASSESSING OFFICER/ TPO ERRED ON FACTS AND IN LAW IN DISREGARDING THE COMPARABLE UNCONTROLLED PRICE OF ROYALTY SUBMITTED DURING THE COURSE OF ASSESSMENT PROCEEDINGS, FOR BENCHMARKING THE TRANSA CTION OF PAYMENT OF ROYALTY APPLYING CUP METHOD . 4. THAT THE DRP/ASSESSING OFFICER ERRED ON FACTS AN D IN LAW IN MAKING TRANSFER PRICING ADJUSTMENT AMOUNTING TO RS.9,54,44,000 IN RELATION TO THE ADVERTISEMENT, MA RKETING AND SALES PROMOTION EXPENSES (HEREINAFTER REFERRED TO A S 'THE AMP EXPENSES') INCURRED BY THE APPELLANT. 4.1 THAT THE DRP/ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN MAKING THE SAID ADDITIONAL ALLEGEDLY HOLDING THA T THE APPELLANT WAS PROMOTING THE BRAND OF THE ASSOCIATED ENTERPRISE AND INSTEAD OF PAYMENT OF THE TRADEMARK FEE TO THE AE OF RS.9,54,44,000, THE APPELLANT OUGHT TO HAVE RECEIVE D EQUIVALENT AMOUNT AS COMPENSATION FOR CREATING AND DEVELOPING MARKETING INTANGIBLES IN INDIA. 4.2 THE DRP/ASSESSING OFFICER ERRED ON FACTS AND I N LAW IN NOT APPRECIATING THAT THE AMP EXPENSES, ETC., UNILA TERALLY INCURRED BY THE APPELLANT IN INDIA COULD NOT BE CHA RACTERIZED AS AN INTERNATIONAL TRANSACTION AS PER SECTION 92B, IN THE ABSENCE OF ANY PROVED UNDERSTANDING / ARRANGEMENT B ETWEEN ITA NO.1516/DEL/2015 ITA NO.1004/DEL/2016 ITA NO.1706/DEL/2017 9 THE APPELLANT AND THE ASSOCIATED ENTERPRISE, SO AS TO INVOKE THE PROVISIONS OF SECTION 92 OF THE ACT. 4.3 THE DRP/TPO ERRED ON FACTS AND IN LAW IN NOT APPRECIATING THAT THE ONLY TRANSFER PRICING ADJUSTM ENT PERMITTED BY CHAPTER X OF THE ACT WAS IN RESPECT OF THE DIFFERENCE BETWEEN THE ARM'S LENGTH PRICE (ALP) AND THE CONTRACT OR DECLARED PRICE, BUT THE SAID PROVISION COULD NOT BE INVOKED TO DETERMINE THE 'QUANTUM' I EXTENT OF BUSI NESS EXPENDITURE. 4.4 THE DRP/ASSESSING OFFICER ERRED ON FACTS AND I N LAW IN HOLDING THAT EXPENDITURE INCURRED BY THE APPELLANT WHICH INCIDENTALLY RESULTED IN BRAND BUILDING FOR THE FOR EIGN AE, WAS A TRANSACTION OF CREATING AND IMPROVING MARKETING I NTANGIBLES FOR AND ON BEHALF OF ITS FOREIGN AE AND FURTHER THA T SUCH A TRANSACTION WAS IN THE NATURE OF PROVISION OF A SER VICE BY THE APPELLANT TO THE AE. 4.5 THE DRP/ASSESSING OFFICER ERRED ON FACTS AND I N LAW IN NOT APPRECIATING THAT SUCH A TRANSFER PRICING ADJUS TMENT CANNOT AT ALL BE MADE IN LAW IN ABSENCE OF AN INTER NATIONAL TRANSACTION IN RELATION TO AMP EXPENSE AND WITHOUT DETERMINING THE ARM'S LENGTH PRICE ('ALP') BY APPLY ING ONE OF THE METHODS SPECIFIED IN SECTION 92C OF THE ACT. 4.6 WITHOUT PREJUDICE THAT THE DRP/TPO ERRED ON FA CTS AND IN LAW, IN NOT APPRECIATING THAT THE AMP EXPENS ES INCURRED BY THE APPELLANT WAS APPROPRIATELY ESTABLI SHED TO BE AT ARM'S LENGTH APPLYING TNMM. 4.7 WITHOUT PREJUDICE THAT THE ASSESSING OFFICER/T PO ERRED ON FACTS AND IN LAW IN NOT APPRECIATING THAT EVEN A PPLYING BRIGHT LINE TEST ('BLT') NO ADJUSTMENT ON ACCOUNT O F AMP EXPENDITURE COULD BE MADE IN AS MUCH AS AMP EXPENDI TURE INCURRED BY THE APPELLANT WAS LOWER THAN AMP EXPEND ITURE INCURRED BY COMPARABLE COMPANIES. 5. THAT THE DRP/ASSESSING OFFER ERRED ON FACTS AND IN LAW IN MAKING DISALLOWANCE OF PROVISION FOR WARRANTY (R EPLACEMENT LOSS) AMOUNTING TO RS.11,83,493 ALLEGEDLY HOLDING T HAT THE SAME WAS CONTINGENT IN NATURE. 5.1 THAT THE DRP ERRED ON FACTS AND IN LAW IN OBSE RVING THAT THE PROVISION FOR WARRANTY IS BASED ON ESTIMAT E AND THE BEHAVIOR PATTERN OF CUSTOMER TO CLAIM WARRANTY OR N OT CANNOT BE PREDICTED. ITA NO.1516/DEL/2015 ITA NO.1004/DEL/2016 ITA NO.1706/DEL/2017 10 6. THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN MAKING AN AD HOC DISALLOWANCE OF RS.3,33,17,400 BEI NG 30% OF THE TOTAL EXPENDITURE OF RS.11,10,58,000 INCURRED B Y THE APPELLANT ON ADVERTISEMENT AND PUBLICITY FOLLOWING THE FINDING IN THE PRECEDING ASSESSMENT YEAR ALLEGEDLY HOLDING THAT THE EXPENDITURE WAS INCURRED FOR THE BENEFIT OF THE ENT ERPRISE WHO OWNS BRAND NAME. 6.1 THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN NOT APPRECIATING THAT THE ADVERTISEMENT AND PUBLICI TY EXPENSES WERE INCURRED BY THE APPELLANT IN THE COURSE OF CAR RYING ON OF ITS BUSINESS AND WERE ALLOWABLE DEDUCTION AS BUSINE SS EXPENDITURE. 6.2 THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN MAKING DISALLOWANCE OF RS.54,17,314 ALLEGEDLY ON A CCOUNT OF SHORT FALL OF INTEREST ON PROVIDENT FUND. 7. THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN UNDER SECTION 234B AND SECTION 234C OF THE ACT. ITA NO.1706/DEL./2017 (AY: 2012-13) 1. THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN COMPLETING ASSESSMENT UNDER SECTION 144C/143(3) OF THE INCOME- TAX ACT, 1961 ('THE ACT') AT AN INCOME OF RS.1,19,5 8,49,260 AS AGAINST THE INCOME OF RS.92,07,70,135 DETERMINED BY THE APPELLANT IN ITS INCOME TAX RETURN. 2. THAT THE DRP/ASSESSING OFFICER ERRED ON FACTS AN D IN LAW IN MAKING AN ADDITION OF RS.22,36,02,000 ALLEGEDLY ON ACCOUNT OF DIFFERENCE FROM THE ARM'S LENGTH PRICE OF THE INTER NATIONAL TRANSACTIONS ENTERED INTO BY THE APPELLANT WITH ITS ASSOCIATED ENTERPRISE, ON THE BASIS OF ORDER PASSED BY THE TRA NSFER PRICING OFFICER ('TPO') UNDER SECTION 92CA(3) OF THE ACT. 3. THAT THE ASSESSING OFFICER/ TPO ERRED ON FACTS A ND IN LAW IN HOLDING THE ARM'S LENGTH PRICE OF THE INTERNATIO NAL TRANSACTION OF PAYMENT OF TRADEMARK FEE OF RS.11,18,01,000 TO T HE ASSOCIATED ENTERPRISE (AE'), THE GOODYEAR TIRE & RUBBER COMPA NY, USA AT NIL ALLEGEDLY HOLDING THAT NO RECOGNIZABLE BENEF IT HAS BEEN PASSED ON TO THE APPELLANT AND THEREFORE THERE WAS NO RATIONALE FOR PAYING THIS TRADEMARK FEES TO THE AE. 3.1 THAT THE DRP/ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN HOLDING THAT THE ENTIRE ARRANGEMENT OF THE PAYME NT OF TRADEMARK FEE IS DESIGNED TO SHIFT PROFITS OUTSIDE INDIA. ITA NO.1516/DEL/2015 ITA NO.1004/DEL/2016 ITA NO.1706/DEL/2017 11 3.2 THAT THE DRP ERRED ON FACTS AND IN LAW IN SUSTA INING THE TRANSFER PRICING ADJUSTMENT MADE BY THE TPO HOLDING THE ARMS LENGTH PRICE OF INTERNATIONAL TRANSACTION OF PAYMEN T OF ROYALTY AS NIL FOLLOWING ITS ORDERS FOR PRECEDING ASSESSMENT Y EARS 2007-08 TO 2011-12. 3.3 THAT THE DRP/ASSESSING OFFICER ERRED ON FACTS A ND IN LAW IN NOT APPRECIATING THAT THE INTERNATIONAL TRANSACT ION OF PAYMENT OF TRADEMARK FEES WAS APPROPRIATELY BENCHMARKED APP LYING COMPARABLE UNCONTROLLED PRICE METHOD (CUP) AS THE M OST APPROPRIATE METHOD AND WAS ACCORDINGLY ESTABLISHED TO BE AT ARMS LENGTH. 3.4 THAT THE ASSESSING OFFICER / TPO ERRED ON FACT S AND IN LAW IN HOLDING THAT THE PAYMENT OF TRADEMARK FEE TO THE AE WAS A SEPARATE INTERNATIONAL TRANSACTION WHICH IS REQUIRE D TO BE BENCHMARKED SEPARATELY NOT APPRECIATING THAT THE SA ID INTERNATIONAL TRANSACTION WAS SEPARATELY BENCHMARKE D APPLYING CUP METHOD IN THE TRANSFER PRICING STUDY. 3.5 THAT THE ASSESSING OFFICER/TPO ERRED ON FACTS AND IN LAW IN DISREGARDING THE COMPARABLE UNCONTROLLED TRANSAC TIONS CONSIDERED FOR BENCHMARKING THE TRANSACTION OF PAYM ENT OF ROYALTY APPLYING CUP METHOD, IN THE TRANSFER PRICIN G STUDY AND AS SUBMITTED DURING THE COURSE OF ASSESSMENT PROCEE DINGS. 3.6 THAT THE ASSESSING OFFICER/ TPO ERRED ON FACTS AND IN LAW IN COMPARING THE OTHER SUBSIDIARY, NAMELY, GOODYEAR SOUTH ASIA TYRES PRIVATE LIMITED, AURANGABAD, MAHARASHTRA OF G OODYEAR USA WITH THE APPELLANT WHILE HOLDING THAT THERE WAS NO JUSTIFICATION FOR PAYMENT OF THE TRADEMARK FEE. 4. THAT THE DRP/ASSESSING OFFICER ERRED ON FACTS AN D IN LAW IN MAKING TRANSFER PRICING ADJUSTMENT AMOUNTING TO RS.11,18,01,000 IN RELATION TO THE ADVERTISEMENT, M ARKETING AND SALES PROMOTION EXPENSES (HEREINAFTER REFERRED TO A S 'THE AMP EXPENSES') INCURRED BY THE APPELLANT. 4.1 THAT THE DRP/ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN MAKING THE SAID ADDITIONAL ALLEGEDLY HOLDING THA T THE APPELLANT WAS PROMOTING THE BRAND OF THE ASSOCIATED ENTERPRIS E AND INSTEAD OF PAYMENT OF THE TRADEMARK FEE TO THE AE OF RS.11, 18,01,000, THE APPELLANT OUGHT TO HAVE RECEIVED EQUIVALENT AMOUNT AS COMPENSATION FOR CREATING AND DEVELOPING MARKETING INTANGIBLES IN INDIA. 4.2 THE DRP/ASSESSING OFFICER ERRED ON FACTS AND I N LAW IN NOT APPRECIATING THAT THE AMP EXPENSES, ETC., UNILA TERALLY INCURRED BY THE APPELLANT IN INDIA COULD NOT BE CHA RACTERIZED AS ITA NO.1516/DEL/2015 ITA NO.1004/DEL/2016 ITA NO.1706/DEL/2017 12 AN INTERNATIONAL TRANSACTION AS PER SECTION 92B, IN THE ABSENCE OF ANY PROVED UNDERSTANDING / ARRANGEMENT BETWEEN THE APPELLANT AND THE ASSOCIATED ENTERPRISE, SO AS TO INVOKE THE PROVISIONS OF SECTION 92 OF THE ACT. 4.3 THE DRP/TPO ERRED ON FACTS AND IN LAW IN NOT APPRECIATING THAT THE ONLY TRANSFER PRICING ADJUSTM ENT PERMITTED BY CHAPTER X OF THE ACT WAS IN RESPECT OF THE DIFFE RENCE BETWEEN THE ARM'S LENGTH PRICE (ALP) AND THE CONTRACT OR DE CLARED PRICE, BUT THE SAID PROVISION COULD NOT BE INVOKED TO DETE RMINE THE 'QUANTUM' / EXTENT OF BUSINESS EXPENDITURE. 4.4 THE DRP/TPO ERRED ON FACTS AND IN LAW IN CHARAC TERIZING THE APPELLANT AS A DISTRIBUTOR AND NOT A RISK BEARI NG MANUFACTURER, NOT APPRECIATING THAT AROUND 77% OF I NCOME EARNED BY THE APPELLANT CONSTITUTES SALE OF MANUFAC TURED GOODS. 4.5 THAT THE DRP/TPO ERRED ON FACTS AND IN LAW IN CONCLUDING THAT THE APPELLANT IS INCURRING AMP EXPE NSES AT THE BEHEST AND UNDER THE CONTROL OF THE AE AND PRIMARIL Y FOR THE BENEFIT OF THE AE, ALLEGEDLY RELYING ON ARTICLE VII I INFRINGEMENT CLAUSE OF THE TRADEMARK LICENSE AGREEM ENT ENTERED BETWEEN THE PARTIES. 4.6 THE DRP/TPO ERRED ON FACTS AND IN LAW IN SUMMA RILY CONCLUDING EXISTENCE OF AN INTERNATIONAL TRANSACTIO N ALLEGEDLY HOLDING THAT THE APPELLANT HAS FAILED TO PROVIDE CO MPLETE INFORMATION REGARDING ITS AMP EXPENDITURE AND THAT IT HAS FAILED TO DISCHARGE ITS ONUS, WITHOUT POINTING OUT SPECIFI C DETAILS WHICH WERE NOT COMPLIED BY THE APPELLANT. 4.7 THE DRP/TPO ERRED ON FACTS AND IN LAW IN HOLDI NG THAT EXPENDITURE INCURRED BY THE APPELLANT WHICH INCIDEN TALLY RESULTED IN BRAND BUILDING FOR THE FOREIGN AE, WAS A TRANSAC TION OF CREATING AND IMPROVING MARKETING INTANGIBLES FOR AN D ON BEHALF OF ITS FOREIGN AE AND FURTHER THAT SUCH A TRANSACTI ON WAS IN THE NATURE OF PROVISION OF A SERVICE BY THE APPELLANT T O THE AE. 4.8 THE DRP/ASSESSING OFFICER ERRED ON FACTS AND I N LAW IN NOT APPRECIATING THAT SUCH A TRANSFER PRICING ADJUS TMENT CANNOT AT ALL BE MADE IN LAW IN ABSENCE OF AN INTERNATIONA L TRANSACTION IN RELATION TO AMP EXPENSES AND WITHOUT DETERMINING THE ARM'S LENGTH PRICE ('ALP') BY APPLYING ONE OF THE METHODS SPECIFIED IN SECTION 92C OF THE ACT. 4.9 WITHOUT PREJUDICE THAT THE DRP/TPO ERRED ON FAC TS AND IN LAW IN NOT APPRECIATING THAT THE AMP EXPENSES IN CURRED BY THE APPELLANT WAS APPROPRIATELY ESTABLISHED TO BE ARMS LENGTH APPLYING TNMM. ITA NO.1516/DEL/2015 ITA NO.1004/DEL/2016 ITA NO.1706/DEL/2017 13 4.10 WITHOUT PREJUDICE, THE ASSESSING OFFICER/TPO ERRED ON FACTS AND IN LAW IN NOT APPRECIATING THAT EVEN APPL YING BRIGHT LINE TEST ('BLT') NO ADJUSTMENT ON ACCOUNT OF AMP EXPENDITURE COULD BE MADE IN AS MUCH AS AMP EXPENDI TURE INCURRED BY THE APPELLANT WAS LOWER THAN AMP EXPEND ITURE INCURRED BY COMPARABLE COMPANIES. 5. THAT THE DRP ERRED ON FACTS AND IN LAW IN MAKING DISALLOWANCE OF PROVISION FOR WARRANTY (REPLACEMENT LOSS) AMOUNTING TO RS.1,49,77,293 ALLEGEDLY HOLDING THAT THE SAME WAS CONTINGENT IN NATURE. 5.1 THAT THE DRP ERRED ON FACTS AND IN LAW IN OBSE RVING THAT THE PROVISION FOR WARRANTY IS BASED ON ESTIMATE AND THE BEHAVIOR PATTERN OF CUSTOMER TO CLAIM WARRANTY OR NOT CANNOT BE PREDICTED. 6. THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN MAKING AN AD HOC DISALLOWANCE OF RS.3,64,99,828 BEI NG 30% OF THE TOTAL EXPENDITURE OF RS.12,16,66,095 INCURRED B Y THE APPELLANT ON ADVERTISEMENT AND PUBLICITY FOLLOWING THE FINDING IN THE PRECEDING ASSESSMENT YEAR ALLEGEDLY HOLDING THA T THE EXPENDITURE WAS INCURRED FOR THE BENEFIT OF THE ENT ERPRISE WHO OWNS BRAND NAME. 6.1 THAT THE ASSESSING OFFICER ERRED ON FACTS AND I N LAW IN RELYING ON THE DECISION OF HONBLE DELHI HIGH COURT IN THE CASE OF MARUTI SUZUKI INDIA LIMITED TO HELD THAT IF THE BRAND NAME IS NOT OWNED BY THE ASSESSEE, SUCH EXPENDITURE IS INCU RRED FOR THE BENEFITS OF THE ENTERPRISE WHO OWN THE BRAND NAME, NOT APPRECIATING THAT THE SAID DECISION WAS MADE REDUND ANT BY THE HONBLE SUPREME COURT. 6.1 THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN NOT APPRECIATING THAT THE ADVERTISEMENT AND PUBLICITY E XPENSES WERE INCURRED BY THE APPELLANT IN THE COURSE OF CARRYING ON OF ITS BUSINESS AND WERE ALLOWABLE DEDUCTION AS BUSINESS E XPENDITURE. 7. THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN UNDER SECTION 234B AND SECTION 234C OF THE ACT. 2. BRIEFLY STATED, FOR THE SAKE OF BREVITY, THE FAC TS OF ITA NO.1516/DEL/2015 FOR AY 2010-11 ARE TAKEN FOR ADJUD ICATION OF THE CONTROVERSY RAKED IN ALL THE AFORESAID APPEALS ARE : THE TAXPAYER IS HELD BY GOODYEAR USA OF 74% AND STARTED ITS OPER ATION IN 1922 ITA NO.1516/DEL/2015 ITA NO.1004/DEL/2016 ITA NO.1706/DEL/2017 14 AND SET UP A MANUFACTURING FACILITY AT BALLABHGARH, HARYANA IN 1961. THE TAXPAYER IS INTO THE BUSINESS OF MANUFAC TURING AND SALE OF PASSENGER CAR, MEDIUM COMMERCIAL TRUCK, LIGHT TR UCK AND FARM TYRES. THE TAXPAYER ALSO TRADES IN RADIAL PASSENGE R, OFF-THE-ROAD BIAS, FARM AND TRUCK TYRES. THE TAXPAYER SUPPLIES TYRES TO MANY LEADING ORIGINAL EQUIPMENT MANUFACTURERS (OEMS) IN INDIA AND CATERS TO REPLACEMENT MARKET AS WELL AS EXPORT MARK ET. THE TAXPAYER IS A PIONEER IN INTRODUCING TUBELESS RADIA L TYRES IN THE PASSENGER CAR SEGMENT. 3. DURING THE YEAR UNDER ASSESSMENT, THE TAXPAYER E NTERED INTO INTERNATIONAL TRANSACTIONS AS UNDER :- S.NO. TYPES OF INTERNATIONAL TRANSACTION METHOD SELECTED TOTAL VALUE OF TRANSACTION 1 IMPORT OF RAW MATERIAL TNMM 120,315,346 2 IMPORT OF SPARES PARTS 807,826 3 IMPORT OF CAPITAL GOODS 210,783,278 4 PAYMENT OF TRADEMARK FEE 78,424,000 5 IMPORT OF FINISHED GOODS 111,258,218 6 COMMISSION RECEIVED 3,925,637 7 EXPORT OF FINISHED GOODS 288,779,320 8 COMMISSION PAID 1,485,974 9 PAYMENT OF REGIONAL SERVICE CHARGES 54,934,540 10 COST ALLOCATION FROM GROUP COMPANIES 1,075,600 11 REIMBURSEMENT OF EXPENSES TO GROUP COMPANIES 198,852 12 REIMBURSEMENT OF EXPENSES FROM GROUP COMPANIES CUP 3,365,016 ITA NO.1516/DEL/2015 ITA NO.1004/DEL/2016 ITA NO.1706/DEL/2017 15 4. THE TAXPAYER IN ITS TP DOCUMENTATION BY USING TR ANSACTIONAL NET MARGIN METHOD (TNMM) FOR CLASS-1 MANUFACTURING AND CLASS-2 TRADING WITH OPERATING PROFIT/SALES CALCULA TED ITS MARGIN AT 10.99% AND 8.41% AS AGAINST ARMS LENGTH MARGIN OF 6.05% AND 1.91% RESPECTIVELY, HENCE FOUND ITS INTERNATIONAL T RANSACTION AT ARMS LENGTH AS PROFIT LEVEL INDICATOR (PLI) OF THE MANUFACTURING AND TRADING SEGMENT ARE MORE THAN THAT OF THE COMPA RABLES. HOWEVER, TPO BY APPLYING THE DOCTRINE OF BENEFIT DETERMINED THE ALP OF TRADEMARK PAYMENTS TO BE NIL AND CONSEQU ENTLY PROPOSED ADJUSTMENT OF RS.7,84,24,000/-. TPO FURTH ER HELD THAT SINCE THE TAXPAYER WAS PROMOTING THE BRAND OF ITS A SSOCIATED ENTERPRISE (AE) FOR WHICH THE TAXPAYER WAS NOT COMP ENSATED DETERMINED THE VALUE OF COMPENSATION ON BRAND BUILD ING FURTHER PROPOSED ADJUSTMENT OF RS.7,84,24,000/- ON THIS SCO RE. TPO ALSO QUESTIONED THE TAXPAYERS APPROACH OF BENCHMARKING BY REDUCING THE EXPORT INCENTIVE FROM THE TOTAL COST AND THEN D ETERMINED THE MARK UP OF 5% ON TOTAL COST TO ARRIVE AT THE VALUE OF EXPORT AND PROCEEDED TO HOLD THAT 5% MARK UP SHOULD HAVE BEEN CHARGED ON THE TOTAL COST AND THEREBY PROPOSED AN ADJUSTMENT O F RS.96,70,068/-. CONSEQUENTLY, TPO PROPOSED THE DET ERMINATION OF ALP RELATING TO EXPORT OF TRADED GOODS AT RS.17,16, 20,264/-, ITA NO.1516/DEL/2015 ITA NO.1004/DEL/2016 ITA NO.1706/DEL/2017 16 RELATING TO PAYMENT OF TRADEMARK FEE/CREATION OF MA RKETING INTANGIBLES AT RS.7,84,24,000/- AND DIRECTED THE AO TO ENHANCE THE INCOME OF THE TAXPAYER BY RS.96,70,068/- BY NOT ALL OWING THE TAXPAYER TO REDUCE THE EXPORT INCENTIVES TO CALCULA TE THE VALUE OF THE GOODS SOLD AND MADE THE TOTAL ENHANCEMENT OF TA XPAYERS INCOME AT RS.16,65,18,068/-. 5. THE TAXPAYER CARRIED THE MATTER BEFORE THE LD. D RP BY FILING OBJECTIONS WHO HAS DISPOSED OF THE OBJECTIONS. FEE LING AGGRIEVED, THE TAXPAYER HAS COME UP BEFORE THE TRIBUNAL BY WAY OF FILING THE PRESENT APPEALS. 6. WE HAVE HEARD THE LD. AUTHORIZED REPRESENTATIVES OF THE PARTIES TO THE APPEAL, GONE THROUGH THE DOCUMENTS R ELIED UPON AND ORDERS PASSED BY THE REVENUE AUTHORITIES BELOW IN T HE LIGHT OF THE FACTS AND CIRCUMSTANCES OF THE CASE. GROUNDS NO.1 & 2 OF ITA NO.1516/DEL./2015 (AY: 2010-11) ITA NO.1004/DEL./2016 (AY: 2011-12) ITA NO.1706/DEL./2017 (AY: 2012-13) 7. GROUNDS NO.1 & 2 OF ITA NOS.1516/DEL/2015, 1004/DEL/2016 & 1706/DEL/2017 ARE GENERAL IN NATURE MORE SPECIFICALLY ELABORATED IN THE SUBSEQUENT GROUNDS, NEED NO ADJUDICATION. ITA NO.1516/DEL/2015 ITA NO.1004/DEL/2016 ITA NO.1706/DEL/2017 17 GROUNDS NO.3, 3.1, 3.2, 3.4 OF ITA NO.1516/DEL./2015 (AY: 2010-11) GROUNDS NO.3, 3.1, 3.2, 3.4, 3.5, 3.6 & 3.7 OF ITA NO.1004/DEL./2016 (AY: 2011-12) GROUNDS NO.3, 3.1, 3.2, 3.4, 3.5 & 3.6OF ITA NO.1706/DEL./2017 (AY: 2012-13) 8. AT THE VERY OUTSET, THE LD. AR FOR THE TAXPAYER CONTENDED THAT THE ISSUE IS AS TO WHETHER DETERMINING OF ALP OF TR ANSACTION OF PAYMENT OF TRADEMARK FEES PAID BY THE TAXPAYER TO I TS AE IS SQUARELY COVERED BY THE ORDER PASSED BY THE COORDIN ATE BENCH OF THE TRIBUNAL IN ASSESSEES OWN CASE DECIDED VIDE ITA NOS. 5650/DEL/2011, 6240/DEL/2012 & 916/DEL/2014 FOR AY S 2007-08, 2008-09 & 2009-10 AND FURTHER BEEN CONFIRMED BY THE HONBLE DELHI HIGH COURT VIDE ORDER DATED 13.02.2017 . THE LD. DR FOR THE REVENUE DREW OUR ATTENTION TOWARDS PARA 5.7 OF THE TP ORDER AND CONTENDED THAT THE TAXPAYER HAS BEEN MANDATORILY US ING GOODYEAR TRADEMARK AND LOGO IN INDIA AND OVER THE YEARS HAS MADE EFFORTS BY WAY OF EXPENDITURE AND HUMAN EFFORTS TO DEVELOP THE BRAND IN INDIA AND THE BRAND HAS THEREBY GROWN IN VALUE AND SIGNIF ICANT ECONOMIC SUBSTANCE HAS BEEN ADDED TO IT AND MARKETING INTANG IBLES HAVE BEEN CREATED BY THE TAXPAYER BENEFITING THE PARENT COMPA NY BUT NO RECOGNIZABLE BENEFIT HAS BEEN PASSED TO THE TAXPAYE R. HOWEVER, ITA NO.1516/DEL/2015 ITA NO.1004/DEL/2016 ITA NO.1706/DEL/2017 18 THE LD. DR HAS NOT CONTROVERTED THE FACT THAT THERE IS NO CHANGE IN THE BUSINESS MODEL OF THE TAXPAYER SINCE AYS 2007-0 8, 2008-09 & 2009-10 WHEN THE ISSUE AS TO PAYMENT OF TRADEMARK F EE HAS BEEN DECIDED. 9. COORDINATE BENCH OF THE TRIBUNAL IN ASSESSEES O WN CASE FOR AYS 2007-08, 2008-09 & 2009-10 DECIDED IDENTICAL IS SUE AS TO DETERMINING THE ALP OF INTERNATIONAL TRANSACTION RE GARDING TRADEMARK FEE TO BE NIL IN FAVOUR OF THE TAXPAYER B Y RETURNING FOLLOWING FINDINGS :- 8. WE HAVE HEARD THE RIVAL CONTENTIONS IN LIGHT OF THE MATERIAL PRODUCED AND THE DECISIONS RELIED UPON. LD . COUNSEL OF THE ASSESSEE HAS EMPHASIZED ON THE BENCHMARKING OF PAYMENT OF TRADEMARK AS CLOSELY LINKED TRANSACTION WITH THE MA NUFACTURING SEGMENT. THE LD. COUNSEL OF THE ASSESSEE HAS SUBMIT TED THAT THE ROYALTY RELATES TO THE ENTIRE TURNOVER/PRODUCTION O F THE APPELLANT AND CONSTITUTES AN ESSENTIAL PART OF THE COST OF SA LES. THE ENTIRE BUSINESS MODEL OF THE APPELLANT IS BASED ON THE LIC ENSES GRANTED BY THE ASSOCIATED ENTERPRISE TO MANUFACTURE THE TYR ES WHICH HAVE BEEN HIGHLY SUCCESSFUL AND RENOWNED THROUGHOUT THE WORLD, AND FOR PROVIDING ALL THE I.P. RIGHTS AND TECHNOLOGY NE CESSARY FOR THE SAME, FOR WHICH THE ROYALTY PAYMENT HAS BEEN MADE. WITHOUT WHICH, THE APPELLANTS BUSINESS WILL CEASE TO EXIST AND ITS ENTIRE OPERATIONS WOULD COME TO A HALT. ACCORDINGLY, SINCE THE ENTIRE OPERATION OF THE APPELLANT IS BASED ON RIGHTS AND L ICENSES TO MANUFACTURE THE AUTOMOBILE TYRES AND TUBES, FOR WHI CH ROYALTY IS BEING PAID, THE ROYALTY PAYMENTS CANNOT BE SEPARATE LY EVALUATED. IN THE CASE OF THE APPELLANT, IT IS NOBODYS CASE T HAT THE COMPANY HAS ENTERED INTO DIVERSE ACTIVITIES. THE INTERNATIO NAL TRANSACTIONS OF THE APPELLANT PRIMARILY RELATE TO ITS BUSINESS O F MANUFACTURING OF TYRES AND SUCH INTERNATIONAL TRANSACTIONS ARE CL OSELY INTERLINKED OR INTER-TWINED. IT WOULD ALSO NOT BE P OSSIBLE TO DETERMINE SEPARATELY PROFIT FROM THE INTERNATIONAL TRANSACTIONS OF PAYMENT OF TRADEMARK FEES. RELIANCE IN THIS REGARD IS PLACED BY THE LD. ASSESSEE COUNSEL ON THE DECISION OF HONBLE COORDINATE BENCH OF TRIBUNAL, IN A SIMILAR CASE OF MARUTI SUZU KI INDIA ITA NO.1516/DEL/2015 ITA NO.1004/DEL/2016 ITA NO.1706/DEL/2017 19 LIMITED VS. ACIT (ITA NO. 5237/DEL/2011), FOR ASSES SMENT YEAR 2005-06, TOO, HELD AS UNDER: 13.1 THUS, WE AGREE WITH THE SUBMISSION OF THE APPELLANTS COUNSEL THAT THE ENTIRE BUSINESS MODEL OF THE APPELLANT IS BASED ON LICENSE FROM SMC, JAPAN FOR W HICH ROYALTY HAS BEEN PAID. WITHOUT SUCH TECHNOLOGY SUPP LY THE APPELLANTS BUSINESS WILL CEASE TO EXIST AND ITS EN TIRE OPERATIONS WOULD COME TO A HALT. THUS, WE AGREE WIT H THE APPELLANTS SUBMISSION TPO HAS ARBITRARILY DIVIDED THE LICENSE AGREEMENT OF THE APPELLANT WITHOUT APPRECIA TING THAT ALL THE LICENSE AGREEMENT IS A SINGLE IN SEVER ABLE AGREEMENT. 9. RELIANCE HAS ALSO BEEN PLACED BY THE ASSESSEE ON TH E DECISION OF DELHI BENCH OF TRIBUNAL IN THE CASE OF LUMAX INDUSTRIES LTD. VS. ACIT (ITA NO. 4456/DEL/2012), W HEREIN, IN THE SIMILAR CASE OF PAYMENT OF ROYALTY, THIS TRIBUN AL CONCLUDED THAT: .............THE PAYMENT OF ROYALTY CANNOT BE EXAM INED DIVORCED FROM THE PRODUCTION AND SALES. ROYALTY IS INEXTRICABLY LINKED WITH THESE ACTIVITIES. IN THE A BSENCE OF PRODUCTION AND SALE OF PRODUCTS, THERE WOULD BE NO QUESTION ARISING REGARDING PAYMENT OF ANY ROYALTY. RULE 10A(D) OF THE ITAT RULES DEFINES TRANSACTION AS A NUMBER OF CLOSELY LINKED TRANSACTIONS. ROYALTY, THE N, IS A TRANSACTION CLOSELY LINKED WITH PRODUCTION AND SALE S. IT CANNOT BE SEGREGATED FROM THESE ACTIVITIES OF AN ENTERPRISE, BEING EMBEDDED THEREIN. THAT BEING SO, ROYALTY CANNOT BE CONSIDERED AND EXAMINED IN ISOLATION ON A STANDALONE BASIS .. ROYALTY IS TO BE CALCULATED ON A SPECIFIED AGREED B ASIS, ON DETERMINING THE NET SALES WHICH, IN THE PRESENT CAS E, ARE REQUIRED TO BE DETERMINED AFTER EXCLUDING THE AMOUN TS OF STANDARD BOUGHT OUT COMPONENTS, ETC., SINCE SUCH NE T SALES DO NOT STAND RECORDED BY THE ASSESSEE IN ITS BOOKS OF ACCOUNT. THEREFORE, IT IS OUR CONSIDERED OPINION TH AT THE ASSESSEE WAS CORRECT IN EMPLOYING AN OVERALL TNMM F OR EXAMINING THE ROYALTY. THE TPO WORKED OUT THE DIFFERENCE IN THE PLI OF THE OUTSIDE PARTY (THE ASS ESSEE) AT 4.09% AND THE COMPARABLES AT 7.05%. THIS HAS NOT BE EN SHOWN TO FALL OUTSIDE THE PERMISSIBLE RANGE. THE H ONBLE TRIBUNAL ACCORDINGLY HELD THAT THE ASSESSEE WAS COR RECT IN APPLYING OVERALL TNMM FOR EXAMINING ROYALTY. 10. THE AFORESAID DECISION OF THIS TRIBUNAL HAS BEEN UP HELD BY THE HONBLE HIGH COURT IN THE CASE OF ACIT VS. L UMAX INDUSTRIES LTD. (ITA NO. 102/2014). ITA NO.1516/DEL/2015 ITA NO.1004/DEL/2016 ITA NO.1706/DEL/2017 20 11. THE ASSESSEE HAS ALSO RIGHTLY MADE REFERENCE TO THE DECISION OF DELHI HIGH COURT IN THE CASE OF SONY ER ICSSON MOBILE COMMUNICATIONS INDIA PVT. LTD VS. CIT (ITA N O 16/2014) REPORTED AT 374 ITR 118, WHEREIN, THE COURT HAS UPH ELD CLUBBING OF CLOSELY LINKED TRANSACTIONS FOR UNDERTAKING BENC HMARKING ANALYSIS APPLYING ENTITY WISE TNMM. IN FACT, IN THE CASE OF CIT VS. REEBOK INDIA CO LTD (ITA NO 213/2014), BEING PA RT OF THE DECISION OF HONBLE HIGH COURT IN THE CASE OF SONY ERICKSON, THE COURT HAS HELD AS UNDER: 185. ROYALTY PAYABLE FOR AVAILING THE RIGHT TO USE WOULD DEPEND UPON CORRESPONDING PRICE, WHICH WOULD HAVE B EEN PAID BY AN INDEPENDENT OR UNRELATED ENTERPRISE. THI S IS JUDGED BY APPLYING COMPARABLES. TPO HAS NOT REJECTE D THE QUANTUM OF ROYALTY ON THE SAID PRINCIPLE. THE REASO NING GIVEN BY THE TPO IS NOT ONLY ERRONEOUS FOR THE REAS ONS STATED ABOVE, BUT IS ALSO CONTRARY TO THE RULES. DE PENDING UPON THE METHOD SELECTED, NET PROFIT OR GROSS PROFI T OF THE ASSESSED HAS TO BE COMPARED WITH PROFIT MARGINS OF RELATED ENTERPRISE. THE FORMULA PRESCRIBED UNDER TH E RULES DOES NOT ACCEPT THE RATIOCINATION ADOPTED AND APPLIED BY THE TPO. 12. ANOTHER CONTENTION OF THE TPO THAT THE GOODYEAR BRA ND WAS WEAK AND THEREFORE DOES NOT REQUIRE PAYMENT OF ROYALTY, IS NOT BROUGHT OUT FROM THE RECORDS. THE AR OF THE ASS ESSEE HAS MADE ELABORATE SUBMISSION AND PLACED EVIDENCE ON RE CORD TO SHOW THAT GOODYEAR BRAND IS CONSIDERED TO BE ONE OF THE TOP MOST ACCLAIMED BRAND ACROSS THE GLOBE. THEREFORE, T HERE IS NO MERIT IN THE ALLEGATION OF THE TPO THAT GOODYEAR BR AND HAS NO WORTH AND THEREFORE, THE PAYMENT MADE BY THE ASSESS EE FOR USE OF GOODYEAR BRAND IS UNWARRANTED. 13. THE DRP HAS FURTHER ADDED THAT SINCE THE SISTER CON CERN OF THE ASSESSEE, GOODYEAR SOUTH ASIA PRIVATE LIMITE D, IS NOT MAKING PAYMENT OF ROYALTY, THEREFORE, THERE SHALL B E NO PAYMENT OF ROYALTY BY THE ASSESSEE EITHER. WE HAVE CONSIDER ED THIS ASPECT AND FOUND THAT THERE IS DIFFERENCE IN BUSINESS DYNA MICS AND COMMERCIAL REALITIES IN BOTH THE COMPANIES IN AS MU CH AS 60% OF THE SALES MADE BY GOODYEAR SOUTH ASIA LIMITED IS MA DE TO ITS RELATED PARTIES ITSELF. NEVERTHELESS, THE AR OF THE ASSESSEE HAS RIGHTLY POINTED OUT THAT IN TERMS OF RULE 10B(1)(A) OF THE RULES, INTERNATIONAL TRANSACTIONS ENTERED INTO BY THE ASSE SSEE WITH ITS AE, GOODYEAR INC. USA CANNOT BE COMPARED WITH THE INTERNATIONAL TRANSACTION ENTERED BETWEEN ANOTHER A E, GOODYEAR SOUTH ASIA PVT. LTD. WITH GOODYEAR INC. USA. ITA NO.1516/DEL/2015 ITA NO.1004/DEL/2016 ITA NO.1706/DEL/2017 21 14. THE AR OF THE ASSESSEE HAS RIGHTLY PALCED RELIANCE ON THE DECISION OF THIRD MEMBER BENCH OF THE MUMBAI TRIBUN AL, IN THE CASE OF TECNIMONT ICB PVT. LTD. VS. ACIT (ITA NO. 4 608 & 5085/MUM/2010), WHEREIN, WHILE EXPLAINING THE IMPOR T OF CLAUSE (I) OF RULE 10B(E) OF THE ACT, HELD THAT THE RULES STRICTLY PROVIDES THAT AN UNCONTROLLED TRANSACTION SHALL BE A TRANSAC TION UNDERTAKEN BETWEEN TWO UNRELATED PARTIES AND CANNOT BE GIVEN A WIDER TERM TO INCLUDE TRANSACTION ENTERED BETWEEN T WO OTHER RELATED PARTIES, AS UNDER: 14. WHAT IS AN UNCONTROLLED TRANSACTION HA S BEEN CLEARLY DEFINED UNDER RULE 10A(A) TO MEAN A TRANSA CTION BETWEEN ENTERPRISES OTHER THAN ASSOCIATED ENTERPRIS ES WHETHER RESIDENT OR NON-RESIDENT. A PLAIN READING OF THE MEANING GIVEN TO THE EXPRESSION UNCONTROLLED TRANSACTION LEAVES NO ROOM FOR ANY DOUBT THAT IT I S A TRANSACTION BETWEEN TWO NON-ASSOCIATED ENTERPRISES. IF HE TRANSACTION IS BETWEEN TWO ASSOCIATED ENTERPRISES, IT GOES OUT OF THE AMBIT OF UNCONTROLLED TRANSACTION UNDE R RULE 10A. WHEN SECTION 92C IS READ ALONG WITH RULE 10B(E ) AND 10A, IT BECOMES ABUNDANTLY CLEAR THAT IN COMPUT ING ALP UNDER THE TRANSACTIONAL NET MARGIN METHOD, A COMPARISON OF THE ASSESSEES NET PROFIT MARGIN FROM INTERNATIONAL TRANSACTIONS WITH ITS AES HAS NECESSA RILY TO BE MADE WITH THAT OF THE NET PROFIT MARGIN REALIZED BY THE SAME ENTERPRISE OR AN UNRELATED ENTERPRISE FROM A COMPARABLE BUT DEFINITELY UNCONTROLLED TRANSACTION, I.E., A TRANSACTION BETWEEN NON-ASSOCIATED ENTERPRISES. THE RE IS NO STATUTORY SANCTION FOR ROPING IN A COMPARABLE CONTROLLED TRANSACTION FOR THE PURPOSES OF BENCHMAR KING. WHEN IT HAS BEEN CLEARLY MANDATED IN ALL THE RELEVA NT METHODS FOR DETERMINING ALP THAT THE COMPARISON HAS TO BE MADE BY THE ENTERPRISES INTERNATIONAL TRANSACTI ON WITH COMPARABLE UNCONTROLLED TRANSACTION, BY NO SHEER LO GIC A COMPARABLE CONTROLLED TRANSACTION CAN BE EMPLOYED F OR THE PURPOSES OF MAKING COMPARISON. THERE IS NO WARR ANT FOR DILUTING THE PRESCRIPTION GIVEN BY THE STATUTE OR RULES WHEN SUCH PRESCRIPTION ITSELF SERVES THE ENDS OF JU STICE PROPERLY AND IS INFALLIBLE. IF THE VIEW OF THE REVE NUE THAT A CONTROLLED TRANSACTION SHOULD NOT BE SHUNTED OUT FO R THE PURPOSES OF BENCHMARKING, IS ACCEPTED, THEN ALL THE RELEVANT PROVISIONS CONTAINED IN CHAPTER X IN THIS REGARD, WILL BECOME OTIOSE. IF SUCH A CONTENTION OF MAKING COMPARISON WITH A COMPARABLE CONTROLLED TRANSACTION IS TAKEN TO ITS LOGICAL CONCLUSION, THEN THERE WILL NE VER ARISE ANY NEED TO TAKE UP ANY CASE FOR TRANSFER PRICING S CRUTINY. THE REASON IS OBVIOUS. ALP IS DETERMINED FOR APPLIC ATION IN RESPECT OF TRANSACTIONS BETWEEN TWO AE SO THAT THE PROFIT LIKELY TO ARISE FROM SUCH TRANSACTIONS IS NO T UNDER- ITA NO.1516/DEL/2015 ITA NO.1004/DEL/2016 ITA NO.1706/DEL/2017 22 REPORTED VIS--VIS FROM SIMILAR TRANSACTIONS WITH T HIRD PARTIES. IF THE COMPARISON IS MADE AGAIN WITH NET P ROFIT MARGIN REALIZED FROM TRANSACTIONS BETWEEN TWO AES, INSTEAD OF THIRD PARTIES, IT MAY DEMONSTRATE THE SA ME COOKED RESULTS IN BOTH THE SITUATIONS, THEREBY LEAV ING NO SCOPE FOR ANY ADJUSTMENT. IN THIS EVENTUALITY, THE VERY OBJECT OF SUCH PROVISIONS WILL BE FRUSTRATED. THUS, IT FOLLOWS THAT THE ALP CAN BE DETERMINED ONLY BY MAKI NG COMPARISON WITH A COMPARABLE UNCONTROLLED TRANSACTI ON AND NOT A COMPARABLE CONTROLLED TRANSACTION. 15. IT IS ALSO NOT ACCEPTABLE THAT AN INTERNATIONAL TRA NSACTION WHICH IS NOT UNDERTAKEN IN THE PRECEDING YEAR, CANN OT BE UNDERTAKEN BETWEEN PARTIES SUBSEQUENTLY. IN PURSUAN CE TO DIRECTION OF THE BENCH, THE APPELLANT HAS SUBMITTED THREE DOCUMENTS AS ADDITIONAL EVIDENCE, I.E. (I) CERTIFIC ATE ISSUED BY THE ASSOCIATED ENTERPRISE, I.E. THE GOODYEAR TIRE & RUB BER COMPANY, USA EXPLAINING THE REASONS FOR NOT CHARGIN G ROYALTY IN THE EARLIER YEARS; (II) COPY OF EXTRACTS OF MINU TES OF BOARD OF DIRECTORS MEETING DATED 31.07.2006 REGARDING APPROV AL FOR EXECUTION OF TRADEMARK LICENSE AGREEMENT AND (III) COPY OF AN EMAIL EXCHANGED BETWEEN THE APPELLANT AND THE ASSOC IATED ENTERPRISE REGARDING PAYMENT OF TRADE MARK FEE IN J ULY 2006. THESE EVIDENCES ARE ADMITTED ON RECORD. THE LD. DR HAS NO OBJECTION TO ADMIT THESE EVIDENCES ON RECORD. IN TH ESE EVIDENCES, THE AE HAS CLARIFIED THAT IT DID NOT CHARGE ROYALTY IN THE EARLIER YEARS IN ORDER TO SUPPORT THE APPELLANT WHO WAS YET TO ACHIEVE HIGHER MARKET SHARE, STABILIZE OPERATIONS, MAINTAIN COMPETITIVE PRICING AND WAS RECOVERING FROM FINANCIAL DIFFICULT IES. SUBSEQUENTLY, WHEN THE FINANCIAL POSITION OF THE AS SESSEE IMPROVED, THE AE STARTED CHARGING ROYALTY IN CONSID ERATION FOR ALLOWING THE ASSESSEE TO USE ITS VALUABLE BRAND NAM E. THE REASONS GIVEN BY THE AR OF THE ASSESSEE, FOR NOT CH ARGING ROYALTY BY THE AE, PRIOR TO THE YEAR UNDER CONSIDERATION IS DULY CORROBORATED FROM THE YEAR TO YEAR PROFITS SHOWN BY THE COMPANY. IT IS VALID REASON THAT THE AE WAS NOT CHARGING ROY ALTY PRIOR TO FINANCIAL YEAR 2006-07 WAS DUE TO THE LOSSES INCURR ED BY THE ASSESSEE AND PRIOR TO YEAR 2000, NO INDIAN COMPANIE S WERE ALLOWED TO PAY TRADEMARK FEES UNDER AUTOMATIC ROUTE . NEVERTHELESS, THE MUMBAI BENCH OF TRIBUNAL HAS, IN THE CASE OF DRESSER- RAND INDIA PVT LTD VS. ACIT (ITA NO. 8753/ MUM/2010 HELD THAT WHETHER THE SERVICES GIVEN BY THE AE TO T HE ASSESSEE, WITHOUT CHARGING CONSIDERATION, ON GRATUITOUS BASIS IN THE PRECEDING YEAR, CANNOT DE BAR THE AE FROM CHARGING FEE FOR THE SAME SERVICES SUBSEQUENTLY. THE OBSERVATIONS ARE: 8WHEN EVALUATING THE ARMSLENGTH PRICE OF A SERVICE, IT IS WHOLLY IRRELEVANT AS TO WHETHER THE ASSESSEE BENEFITS FROM IT OR NOT; THE REAL QUESTION WHICH IS TO BE ITA NO.1516/DEL/2015 ITA NO.1004/DEL/2016 ITA NO.1706/DEL/2017 23 DETERMINED IN SUCH CASES IS WHETHER THE PRICE OF TH IS SERVICE IS WHAT AN INDEPENDENT ENTERPRISE WOULD HAV E PAID FOR THE SAME. SIMILARLY, WHETHER THE AE GAVE THE SA ME SERVICES TO THE ASSESSEE IN THE PRECEDING YEARS WIT HOUT ANY CONSIDERATION OR NOT IS ALSO IRRELEVANT. THE AE MAY HAVE GIVEN THE SAME SERVICE ON GRATUITOUS BASIS IN THE E ARLIER PERIOD, BUT THAT DOES NOT MEAN THAT ARMS LENGTH PR ICE OF THESE SERVICES ISNIL. THE AUTHORITIES BELOW HAVE BEEN SWAYED BY THE CONSIDERATIONS WHICH ARE NOT AT ALL R ELEVANT IN THE CONTEXT OF DETERMINING THE ARMS LENGTH PRIC E OF THE COSTS INCURRED BY THE ASSESSEE IN COST CONTRIBUTION ARRANGEMENT. 16. IN LIGHT OF THE ABOVE, WE CONCLUDE THAT THERE EXIST S A DIRECT NEXUS BETWEEN THE REVENUE EARNED BY THE ASSESSEE AN D THE PAYMENT OF ROYALTY MADE TO THE ASSOCIATED ENTERPRIS E FOR USING BRAND NAME, AND THEREFORE, IT WOULD BE INCORRECT TO ANALYZE THE TRANSACTION OF PAYMENT OF ROYALTY IN ISOLATION. FUR THER, THE LD. DR HAD RAISED A CONTENTION THAT THE ASSESSEE HAS NO T DEMONSTRATED HOW THE PAYMENT FOR ROYALTY BENEFICIAL TO THE TAXPAYER. WE ARE OF THE OPINION THAT, ASCERTAINING WHETHER A SERVICE HAS ACTUALLY BENEFITTED THE ASSESSEE IS NOT WITHIN THE PREROGATIVE OF THE TAX AUTHORITIES.THE HON'BLE DELH I HIGH COURT IN CIT V. CUSHMAN & WAKEFIELD (INDIA) (P.) LTD. (20 14) 367 ITR 730(DEL) HAS HELD THAT THE AUTHORITY OF THE TPO IS LIMITED TO CONDUCTING TRANSFER PRICING ANALYSIS FOR DETERMININ G THE ALP OF AN INTERNATIONAL TRANSACTION AND NOT TO DECIDE IF S UCH SERVICES EXIST OR BENEFITS DID ACCRUE TO THE ASSESSEE. SUCH LATER ASPECTS HAVE BEEN HELD TO BE FALLING IN THE EXCLUSIVE DOMAI N OF THE AO. 17. ACCORDINGLY, IN VIEW OF THE AFORESAID, WE ARE OF TH E OPINION THAT SINCE THE OPERATING MARGIN OF THE ASSE SSEE AT 6.96% IS HIGHER THAN THE COMPARABLES AT 2.77%, THE INTERN ATIONAL TRANSACTION OF PAYMENT OF ROYALTY ENTERED INTO BY T HE ASSESSEE ARE TO BE CONSIDERED BEING AT ARMS LENGTH APPLYING TNM M AS THE MOST APPROPRIATE METHOD. 18. WE THEREFORE DIRECT THE ASSESSING OFFICER TO DELETE THE ADJUSTMENT ON THIS ACCOUNT. 10. SO, FOLLOWING THE DECISION RENDERED BY THE COOR DINATE BENCH OF THE TRIBUNAL IN ASSESSEES OWN CASE (SUPRA), CON FIRMED BY THE HONBLE DELHI HIGH COURT, WE ARE OF THE CONSIDERED VIEW THAT SINCE THERE IS A DIRECT NEXUS BETWEEN THE REVENUE EARNED BY THE TAXPAYER ITA NO.1516/DEL/2015 ITA NO.1004/DEL/2016 ITA NO.1706/DEL/2017 24 AND THE PAYMENT MADE BY THE TAXPAYER ON ACCOUNT OF ROYALTY, THE TRANSACTION OF PAYMENT OF ROYALTY CANNOT BE ANALYZE D IN ISOLATION. FURTHERMORE, THE DOCTRINE OF BENEFIT TEST APPLIED B Y THE TPO CANNOT BE INVOKED AS IT IS PREROGATIVE OF THE BUSINESSMAN TO SEE IF ANY SERVICE IS BENEFICIAL TO THE PROMOTION OF ITS BUSIN ESS OR NOT. SO, CONSEQUENTLY, THE AO IS DIRECTED TO DELETE THE ADJU STMENT MADE ON ACCOUNT OF ALP OF INTERNATIONAL TRANSACTION OF PAYM ENT OF TRADEMARK FEES OF RS.7,84,24,000/-, RS.9,54,44,000/ - & RS.11,18,01,000/- FOR AYS 2010-11, 2011-12 & 2012-1 3 RESPECTIVELY. CONSEQUENTLY, GROUNDS NO.3, 3.1, 3.2, 3.4 OF ITA NO.1516/DEL./ 2015, GROUNDS NO.3, 3.1, 3.2, 3.4, 3. 5, 3.6 & 3.7 OF ITA NO.1004/ DEL./2016 AND GROUNDS NO.3, 3.1, 3.2, 3.4, 3.5 & 3.6 OF ITA NO.1706/DEL./2017 ARE DETERMINED IN FAVOUR O F THE TAXPAYER. GROUNDS NO.4, 4.1, 4.2, 4.3, 4.4, 4.5, 4.6, 4.7, 4.8, 4.9, 4.10 & 4.11 OF ITA NO.1516/DEL./2015 (AY: 2010-11) GROUNDS NO.4, 4.1, 4.2, 4.3, 4.4, 4.5, 4.6 & 4.7 OF ITA NO.1004/DEL./2016 (AY: 2011-12) GROUNDS NO.4, 4.1, 4.2, 4.3, 4.4, 4.5, 4.6, 4.7, 4.8, 4.9 & 4.10 OF ITA NO.1706/DEL./2017 (AY: 2012-13) 11. THE ISSUE AS TO MAKING TRANSFER PRICING ADJUSTM ENT OF ADVERTISEMENT, MARKETING AND SALES PROMOTION (AMP) HAS ALSO ITA NO.1516/DEL/2015 ITA NO.1004/DEL/2016 ITA NO.1706/DEL/2017 25 BEEN DEALT WITH BY THE COORDINATE BENCH OF THE TRIB UNAL IN TAXPAYERS OWN CASE FOR AYS 2007-08, 2008-09 & 2009 -10 (SUPRA) AND DECIDED IN FAVOUR OF THE TAXPAYER. AGAIN, IT I S NOT IN DISPUTE THAT THERE IS NO CHANGE IN THE BUSINESS MODEL OF TH E TAXPAYER SO FAR AS AMP EXPENSES ARE CONCERNED SINCE AYS 2007-08, 20 08-09 & 2009-10. THE COORDINATE BENCH OF THE TRIBUNAL IN T AXPAYERS OWN CASE (SUPRA) PROCEEDED TO HOLD THAT INCURRING OF AM P EXPENSES BY THE TAXPAYER IS NOT AN INTERNATIONAL TRANSACTION OF BRAND BUILDING OF GOODYEAR BRAND UNDERTAKEN BY THE TAXPAYER WITH AE A ND AS SUCH, NO ADJUSTMENT CAN BE MADE BY RETURNING FOLLOWING FI NDINGS :- 37. WE HAVE CONSIDERED THE ARGUMENTS OF THE AR OF THE ASSESSEE AND THE DR. WE AGREE WITH THE SUBMISSION O F THE AR OF THE ASSESSEE THAT THE CONCLUSION DRAWN BY THE LD. D R, BY REFERRING TO THE AFORESAID CLAUSES OF TRANSFER PRICING STUDY AND TRADEMARK LICENSE AGREEMENT, DOES NOT LEAD TO AN INFERENCE OF EXISTENCE OF AN INTERNATIONAL TRANSACTION OF INCURRING AMP EXPEN SE BY THE ASSESSEE. NEVERTHELESS, IT IS EQUALLY IMPORTANT TO REFER TO THE FOLLOWING FINDINGS OF THE DELHI HIGH COURT IN THE C ASE OF HONDA SIEL POWER PRODUCTS VS. DCIT (ITA NO. 346/2015), WH EREIN, THE COURT HAS OBSERVED THAT: 26. THE RELEVANT FACTS ARE THAT UNDER A TECHNICAL COLLABORATION AGREEMENT, THE ASSESSEE IS GRANTED EXCLUSIVE LICENSE TO MANUFACTURE AND SELL THE PRODU CTS OF THE FOREIGN AES AGAINST PAYMENT OF ROYALTY OF 4% ON SALES. ADDITIONALLY, THE ASSESSEE ENTERED INTO AGRE EMENT DATED 19TH MARCH, 2007 FOR OBTAINING LICENSE TO USE THE TRADEMARK HONDA. THE CONSIDERATION FOR USE OF SUCH TRADEMARK IS DETERMINED AT 1 PER CENT OF THE SALES OF LICENSED PRODUCTS. THE MERE EXISTENCE OF SUCH AN AGREEMENT WHEREBY A LICENSE HAS BEEN GRANTED TO THE ASSESSEE TO USE THE BRAND NAME WOULD NOT IPSO FACTO IMPLY ANY FURTHER UNDERSTANDING OR ARRANGEMENT BETW EEN THE ASSESSEE AND ITS FOREIGN AE REGARDING THE AMP EXPENSE FOR PROMOTING THE BRAND OF THE FOREIGN AE. ITA NO.1516/DEL/2015 ITA NO.1004/DEL/2016 ITA NO.1706/DEL/2017 26 27. TURNING TO THE TP REPORT, A REFERENCE HAS BEEN MADE BY THE REVENUE TO PARA 4.8 THEREOF WHICH SHOWS THAT MARKET DEVELOPMENT IS THE FUNCTION OF THE AE AS WEL L AS THE ASSESSEE IN INDIA. PARA 4.9 OF THE TP REPORT HA S BEEN REFERRED FOR THE PURPOSES OF POINTING OUT EXPORT MA RKET RELATED INFORMATION FOR THE PRODUCTS AND THE COMPET ITORS AND OTHER ASSISTANCE IN TAPPING POTENTIAL EXPORT MA RKETS IS PROVIDED BY THE HONDA GROUP. IT IS FURTHER POINT ED OUT THAT PARA 4.47 OF THE TP REPORT RECORDS THAT HSPP I S RESPONSIBLE FOR BRAND BUILDING AND MAINTAINING BRA ND LOYALTY IN DOMESTIC MARKET. REFERENCE IS MADE TO T HE STATEMENT THAT THIS BRAND NAME HAS BEEN DEVELOPED AND POPULARISED BY HSPP IN INDIA. ACCORDING TO THE REVENUE, THEREFORE, THERE IS NO DISPUTE THAT THE AS SESSEE IS ENGAGED IN DEVELOPING AND MAINTENANCE OF BRAND/TRA DE NAME IN INDIA. 28. A REFERENCE IS MADE BY THE REVENUE TO THE EXPOR T AGREEMENT WHEREUNDER THE ASSESSEE HAS BEEN GRANTED RIGHTS TO EXPORT PRODUCTS TO CERTAIN PERMITTED COU NTRIES FOR PAYMENT OF ROYALTY OF 8 PER CENT OF THE EXPORT PRICE, WHICH WAS SUBSEQUENTLY RAISED TO 12.25 PER CENT FRO M 1ST FEBRUARY 2008. HONDA, JAPAN RESERVED THE RIGHT TO CHANGE THE PERMITTED COUNTRIES AT ANY TIME. ACCORDI NG TO THE REVENUE THIS INDICATES THAT THE ASSESSEE HAS NO T BEEN AN INDEPENDENT MANUFACTURER AND IS ONLY FUNCTIONING AS A CONTRACT MANUFACTURER FOR THE AE. IT IS ALSO POIN TED OUT THAT THE LIST OF COUNTRIES TO WHICH EXPORT IS PERMI TTED BY HONDA, JAPAN INCLUDED THE COUNTRIES FALLING IN THE SAME GEOGRAPHICAL LOCATION AS INDIA. IT IS STATED THAT T HE TERMS OF THE AGREEMENT WITH SUCH DISTRIBUTORS IN OTHER CO UNTRIES COULD HAVE WORKED AS A SOUND COMPARABLE BUT THAT THE ASSESSEE HAD NOT CHOSEN TO MAKE ANY SUCH ATTEMPT IN ITS TP DOCUMENTATION. 29. IN RESPONSE, IT IS POINTED OUT ON BEHALF OF THE ASSESSEE THAT THE PAYMENT OF ROYALTY FEE FOR THE HONDA TRADE MARK ARE SEPARATELY BENCHMARKED BY THE ASSESSEE. THAT IS NOT THE SUBJECT MATTER OF THE DISPUTE IN THE PRESENT CA SE. IT IS FURTHER POINTED OUT THAT THE AGREEMENT WHEREUNDER LICENSE HAS BEEN GRANTED TO THE ASSESSEE, DOES NOT CONTAIN ANY STIPULATION CONCERNING THE PROMOTION OF THE BRA ND NAME HONDA OR FOR INCURRING AMP EXPENSES FOR THAT PURPOSE. THERE IS, ACCORDING TO THE ASSESSEE, NO TA NGIBLE MATERIAL TO SHOW THAT ANY ARRANGEMENT OR UNDERSTAND ING, EVEN AN INFORMAL ONE, EXISTS BETWEEN THE ASSESSEE A ND ITS FOREIGN AE IN RELATION TO AMP EXPENSES. ITA NO.1516/DEL/2015 ITA NO.1004/DEL/2016 ITA NO.1706/DEL/2017 27 38. ACCORDINGLY, IN VIEW OF THE AFORESAID, WE ARE OF TH E OPINION THAT THE ADJUSTMENT MADE BY THE TPO IS SQUA RELY COVERED BY THE DECISION OF DELHI HIGH COURT IN THE CASE OF MARUTI (SUPRA) AND HONDA SIEL POWER PRODUCTS (SUPRA) AND THEREFORE , IN THE ABSENCE OF ANY INTERNATIONAL TRANSACTION OF BRAND B UILDING OF GOODYEAR BRAND, UNDERTAKEN BY THE ASSESSEE WITH I TS AE, THERE CANNOT BE ANY ADJUSTMENT UNDER THE TRANSFER PRICING PROVISIONS. FURTHER, AS HELD BY THE HONBLE HIGH COURT, CHAPTER X OF THE ACT DOES NOT AUTHORIZE THE REVENUE TO MAKE QUANTITA TIVE ADJUSTMENT UNDER THE TRANSFER PRICING PROVISIONS, S UCH AS AMP EXPENSE. THE CONTENTION OF THE LD. DR ABOUT ABNORMA L INCREASE IN ADVERTISEMENT EXPENSES IN COMPARISON TO PRECEDIN G YEAR, DOES NOT RENDER ANY HELP TO THE REVENUE, KEEPING IN VIEW THE PROPORTIONATE RISE IN TURNOVER OF ASSESSEE. WE ACCO RDINGLY DIRECT THE ASSESSING OFFICER TO DELETE THE ADJUSTMENT MADE ON THIS ACCOUNT. 39. IN THE RESULT, THE APPEAL IS ALLOWED ON THIS GROUND . 12. SO, FOLLOWING THE AFORESAID DECISION IN ASSESSE ES OWN CASE RENDERED BY THE COORDINATE BENCH OF THE TRIBUNAL AN D CONFIRMED BY THE HONBLE DELHI HIGH COURT, WE ARE OF THE CONSIDE RED VIEW THAT TRANSFER PRICING ADJUSTMENT MADE BY AO/TPO TO THE T UNE OF RS.7,84,24,000/-, RS.9,54,44,000/- & RS.11,18,01,00 0/- FOR AYS 2010-11, 2011-12 & 2012-13 RESPECTIVELY ARE NOT SUS TAINABLE, HENCE ORDERED TO BE DELETED. CONSEQUENTLY, GROUNDS NO.4, 4.1, 4.2, 4.3, 4.4, 4.5, 4.6, 4.7, 4.8, 4.9, 4.10 & 4.11 OF ITA NO.1516/ DEL./2015, GROUNDS NO.4, 4.1, 4.2, 4.3, 4.4, 4.5, 4.6 & 4.7 OF ITA NO.1004/DEL./2016 AND GROUNDS NO.4, 4.1, 4.2, 4.3, 4.4, 4.5, 4.6, 4.7, 4.8, 4.9 & 4.10 OF ITA NO.1706/DEL./2017 ARE D ETERMINED IN FAVOUR OF THE TAXPAYER. ITA NO.1516/DEL/2015 ITA NO.1004/DEL/2016 ITA NO.1706/DEL/2017 28 GROUNDS NO.5, 5.1, 5.2, 5.3, 5.4 & 5.5 OF ITA NO.1516/DEL./2015 (AY 2010-11) 13. THE TAXPAYER DURING THE YEAR UNDER ASSESSMENT M ADE PURCHASES FROM GOODYEAR SOUTH ASIA TYRES PVT. LTD. AND RESOLD TO AES OVERSEAS. THE TAXPAYER CONTENDED THAT EXPORT INCENTIVES ARE A VALID SOURCE OF PROFIT FOR ANY EXPORTERS. HOWEVE R, TPO TAKEN THE VIEW THAT EXPORT INCENTIVES DOES NOT FORM PART OF T HE INVOICE PRICE OF THE GOODS SOLD AND AS SUCH, THE TAXPAYER IS NOT ALLOWED TO REDUCE VALUE OF EXPORT INCENTIVES TO CALCULATE THE COST OF GOODS SOLD AND THEREBY DETERMINED THE ALP REGARDING THIS TRANSACTI ON AS UNDER :- PARTICULARS AMOUNT PURCHASE PRICE OF GOODS 160,989,991 ADD : FREIGHT COST 7,287,579 LESS : REBATE RECEIVED - 4 ,829,700 TOTAL ELECTIVE COST 163,447,870 ADD : 5% MARKUP 8,172,394 ARMS LENGTH PRICE OF EXPORT SALES OF TRADED GOODS 171,620,264 REVENUE SHOWN 161,950,196 DIFFERENCE 9,670,068 14. THE TPO ACCORDINGLY PROPOSED ALP OF INTERNATION AL TRANSACTIONS RELATING TO EXPORT OF TRADING GOODS AT RS.17,16,20,264/- AS AGAINST RS.16,19,50,196/- DETE RMINED BY THE TAXPAYER. 15. THIS ISSUE HAS COME UP BEFORE THE COORDINATE BE NCH OF THE TRIBUNAL IN ASSESSEES OWN CASE FOR AY 2006-07 WHIC H HAS FURTHER BEEN FOLLOWED IN AYS 2007-08, 2008-09 & 2009-10 (SU PRA), WHICH ITA NO.1516/DEL/2015 ITA NO.1004/DEL/2016 ITA NO.1706/DEL/2017 29 HAS BEEN CONFIRMED BY THE HONBLE DELHI HIGH COURT. FOR FACILITY OF REFERENCE, FINDINGS RETURNED BY THE COORDINATE B ENCH OF THE TRIBUNAL IN TAXPAYERS OWN CASE FOR AY 2006-07 ARE REPRODUCED AS UNDER :- 11.5 AS REGARDS ISSUE OF REDUCTION OF EXPORT INCEN TIVE FROM GOODS SOLD IS CONCERNED, WE FIND THAT THE REASONING ADOPTED BY THE TPO HAS CONSIDERABLE COGENCY. THE EXPORT BENEFI TS ARE GIVEN TO THE TAXPAYERS TO PROMOTE AND STIMULATE THE GROWT H OF EXPORTS OF GOODS AND SERVICES IN INDIA. THEY ARE ALSO MEANT TO EARN VALUABLE FOREIGN EXCHANGE FOR THE COUNTRY. THE EXPO RT INCENTIVE WAS AVAILABLE TO THE ASSESSEE ONLY AFTER TRADING EX PORTS MADE BY THE ASSESSEE. GLOBAL TRANSFER PRICING POLICY OF THE GROUP COMPANY MENTIONS COST IN INTER COMPANY TRANSFER BEF ORE THE GOODS AND SERVICES ARE DISPATCHED FROM THE PREMISES OF A COMPANY TO THE OTHER COMPANY. IN THE GLOBAL TRANSFE R PRICING POLICY THE FUTURE VALUE OF BENEFITS WHICH MAY BE AV AILABLE IN A FEW COUNTRIES CANNOT BE INCLUDED AS THIS WILL DISTU RB THE VERY BASIS/PURPOSE OR PROVIDING UNIFORM RETURN TO TEACH AND EVERY ENTERPRISE WHICH IS A MEMBER OF GLOBAL TRANSFER PRI CING POLICY. THE VERY PURPOSE OF GLOBAL TRANSFER PRICING IS TO P ROVIDE A MINIMUM AMOUNT OF RETURN TO THE MEMBERS OF GLOBAL T RANSFER PRICING POLICY. IF INDIA PROVIDE TAX INCENTIVE OR O THER INCENTIVE TO COMPENSATE ITS TAXPAYERS ON THE BASIS OF THE ECONOM IC SITUATION, THEN THIS BENEFIT IS AVAILABLE TO INDIAN TAXPAYERS AND THE SAME CANNOT BE TRANSFERRED OR TRADED TO OTHER ENTITY WHI CH IS NOT LOCATED IN INDIA. THIS KIND OF SHIFTING OF ECONOMIC AND TAX INCENTIVES OFFERED TO LOCAL COMPANY WILL DISTURB TH E FISCAL STRUCTURE OF A COUNTRY AND WILL RESULT IN SHIFTING OF PROFITS FROM ONE TAX JURISDICTION TO OTHER TAX JURISDICTION. THE ECONOMIC AND TAX INCENTIVES OFFERED TO INDIAN ENTITIES ARE NOT M EANT TO SUBSIDIZE THE ENTITY IN FOREIGN JURISDICTION. THE A SSESSEE WHO IS INVOLVED IN CONTROLLED TRANSACTION THIS APPROACH AC TUALLY RESULTS IN TRANSFERRING, BENEFIT FROM GOVERNMENT GRANTED IN CENTIVES TO AE. MOREOVER, THE ENTITIES TRANSFER PRICING POLICY CANNOT OVERRIDE THE BASIC FUNDAMENTAL OF TRANSFER PRICING ANALYSIS. IF ASSESSEES METHOD OF CALCULATION OF COST OF GOODS SOLD IS FOLL OWED, IT WOULD TANTAMOUNT TO A CLAIM OF BENEFIT, WHICH HAS NOT YET ACCRUED AT THE TIME OF SALE OF GOODS, BEING TREATED AS A COMPO NENT OF COST OF GOODS SOLD. 11.6 THE TPOS REFERENCE TO THE OECD GUIDELINES IS ALSO GERMANE. IN THIS REGARD, WE FIND THAT IN THE SAID G UIDELINES GROSS PROFIT ARE DEFINED AS THE GROSS PROFITS FROM A BUS INESS TRANSACTIONS ARE THE AMOUNT COMPUTED BY DEDUCTING F ROM THE ITA NO.1516/DEL/2015 ITA NO.1004/DEL/2016 ITA NO.1706/DEL/2017 30 GROSS RECEIPTS OF THE TRANSACTIONS THE ALLOCABLE PU RCHASED OR PRODUCTION COSTS OF SALES, WITH DUE ADJUSTMENT FOR INCREASES OR DECREASES IN INVENTORY OR STOCK IN TRADED, BUT WITH OUT TAKING ACCOUNT OF OTHER EXPENSES. 11.7 FROM THE ABOVE IT FOLLOWS THAT WHILE DETERMINI NG THE GROSS PROFITS FROM SALE OF GOODS SUCH INCENTIVES CANNOT B E ADJUSTED TO DETERMINE THE COST OF GOODS SOLD. TPO HAS RIGHTLY O BSERVED THAT EXPORT INCENTIVES DOES NOT FORM PART OF THE INVOICE PRICE OF GOODS SOLD. IN SUCH A CASE, IT CANNOT BE REDUCED FROM THE COST OF GOODS SOLD. WE AGREE WITH THE TPO THAT AN EXPENDITURE THA T DOES NOT FORM PART OF THE BOOKS OF ACCOUNTS CANNOT BE TREATE D AS AN EXPENSE FOR THE PURPOSE OF TRANSFER PRICING ACCOUNT ING. 11.8 ASSESSEES RELIANCE OF ACCOUNTING STANDARD (AS )-II- VERIFICATION OF INVENTORIES ISSUED BY INSTITUTE OF CHARTERED ACCOUNTANT OF INDIA (ICAI), FOR THE PURPOSE OF DETE RMINING THE COST OF PURCHASE IS NOT COGENT AS THE REFERENCE TO COST OF PURCHASE IN THIS IS NOT IN THE CONTEXT OF ARMS LENGTH PRICE IN TRANSFER PRICING. 11.9 ASSESSEES RELIANCE ON THE DECISION OF THE ITA T IN SONY INDIA (P) LTD., VS. DCIT (SUPRA) IS NOT APPLICABLE ON THE FACTS OF THE PRESENT CASE. THE PORTION OF THIS DECISION REFE RRED BY THE ASSESSEES COUNSEL WAS IN THE CONTEXT OF MANUFACTUR ING OF EXPORT TO UTILIZE IDLE FACILITIES TO ENABLE THE COMPANY TO IMPROVE RECOVERY OF ITS FIXED ASSEMBLY COST. MOREOVER, IN THE PRESEN T CASE, WE ARE CONCERNED WITH COMPUTATION OF COST PLUS MARKUP WHIC H WAS NOT THE CASE IN THE SONY INDIA DECISION. 11.10 IN THE BACKGROUND OF THE AFORESAID DISCUSSION , WE ARE OF THE OPINION THAT TPO HAS RIGHTLY HELD THAT EXPORT I NCENTIVE AMOUNTING TO ` 7,872,603/- CANNOT BE DEDUCTED FROM COST OF GOODS SOLD. 12. AS REGARDS ISSUE OF DEDUCTION OF REBATE /DISCOU NT RECEIVED AMOUNTING TO ` 33,21,586/-, THE TPO OBSERVED THAT T HE ASSESSEE IN THIS REGARD HAS MADE THE CLAIM FOR THE FIRST TIME. ASSESSING OFFICER FURTHER OBSERVED AS UNDER:- (I) THIS ITEM O F REBATE DOES NOT FIND A PLACE IN THE FINANCIALS ACCOMPANYING THE TP REPORT. (II) IN THE DETAILS FORWARDED BY THE ADDL. C.I.T. ( TRANSFER PRICING) PUNE THERE IS NO REFERENCE TO ANY REBATE BEING ALLO WED BY M/S GSATL. (III) THE REBATE CLAIMED DOES NOT SEEM TO AP PEAR ANYWHERE IN THE AUDITED FINANCIALS OF THE ASSESSEE. (IV) THE ONLY CONCLUSION THAT CAN BE ARRIVED AT IS THAT THE ISSUE / CLAIM OF REBATE HAS BEEN RAISED TO OFFSET THE FREIGHT COST W HICH HAS ENTERED THE COST BASE AT THIS STAGE. FOR THESE REASONS THE CLAIM OF REBATE SHALL NOT BE ALLOWED. ITA NO.1516/DEL/2015 ITA NO.1004/DEL/2016 ITA NO.1706/DEL/2017 31 12.1 IN THIS REGARD, WE FIND THAT AS PER THE AGREEM ENT ASSESSEE IS ENTITLED FOR REBATE OF 3% ON COST OF GOODS PURCHASE D FOR EXPORTS TO AE AS WELL AS TO UNRELATED PARTIES. WE FIND THAT THE ABOVE REASONING ADOPTED BY THE ASSESSING OFFICER IN DISAL LOWING THE DEDUCTION IS NOT COGENT. THAT THE ASSESSEE HAS NOT MADE ANY SUCH CLAIM INITIALLY CANNOT ACT AS ESTOPPEL AGAINST THE PROPER AND VALID CLAIM. WE AGREE WITH THE LD. COUNSEL OF THE ASSESSE E COMPANY THAT THE REBATE RECEIVED IS INEXTRICABLY LINKED WIT H THE COST OF PURCHASE. WE FURTHER NOTE THAT IN SUBSEQUENT ASSESS MENT YEARS FOR ASSESSMENT YEAR 2007-08 AND 2008-09 THE TPO HAS ACCEPTED THE CONTENTION OF THE ASSESSEE THAT THE REBATE RECE IVED UPON PURCHASE OF GOODS IS DEDUCTIBLE FROM THE VALUE OF C OST OF GOODS SOLD. HENCE, IN OUR CONSIDERED OPINION, ASSESSEE IS ENTITLED FOR DEDUCTION OF REBATE RECEIVED UPON PURCHASE OF GOODS FROM THE VALUE OF GOODS SOLD. 12.2 WE FURTHER FIND THAT THE REBATE AMOUNT WAS NET TED OFF AND NET AMOUNT OF PURCHASE COST SHOWN IN THE PROFIT AND LOSS ACCOUNT. IN THIS REGARD, TPO HAS CONTENDED THAT THE SAID AMOUNT WAS NOT REFLECTED IN THE BOOKS AND ACCOUNTS OF THE ASSESSEE. IN OUR CONSIDERED OPINION, THIS FACTUAL ASPECT NEEDS V ERIFICATION. HENCE, WE REMIT THIS ISSUE REGARDING VERIFICATION O F NETTING OFF OF REBATE FROM COST OF PURCHASE TO THE FILE OF ASSESSI NG OFFICER. NEEDLESS TO ADD THAT THE ASSESSEE SHOULD BE GIVEN A DEQUATE OPPORTUNITY OF BEING HEARD. 16. SO, FOLLOWING THE DECISION RENDERED BY THE COOR DINATE BENCH OF THE TRIBUNAL FOR AY 2006-07, THE ORDER PASSED BY THE TPO IS UPHELD TO THE EXTENT OF NETTING OFF OF EXPORT INCEN TIVE FROM THE COST OF GOODS SOLD AND SET ASIDE THE ISSUE OF NETTING OF F OF REBATE/ DISCOUNT FROM THE COST OF GOODS SOLD TO THE FILE OF AO/TPO FOR VERIFICATION OF THE CLAIM IN VIEW OF THE DECISION R ENDERED BY THE TRIBUNAL FOR AY 2006-07 BY PROVIDING AN OPPORTUNITY OF BEING HEARD TO THE TAXPAYER. CONSEQUENTLY, GROUNDS NO.5, 5.1, 5.2, 5.3, 5.4 & 5.5 OF ITA NO.1516/DEL./2015 ARE ALLOWED FOR STATISTICAL PURPOSES. ITA NO.1516/DEL/2015 ITA NO.1004/DEL/2016 ITA NO.1706/DEL/2017 32 GROUND NO.6 OF ITA NO.1516/DEL./2015 (AY: 2010-11) GROUNDS NO.5 & 5.1, OF ITA NO.1004/DEL./2016 (AY: 2011-12) ITA NO.1706/DEL./2017 (AY: 2012-13) 17. THE AO HAS MADE DISALLOWANCE OF PROVISION MADE BY THE TAXPAYER FOR REPLACEMENT LOSS ON THE GROUND THAT TH E TAXPAYER HAS NOT INCURRED EXPENDITURE ON ACCOUNT OF REPLACEMENT OF GOODS IN THE SUBSEQUENT YEARS; THAT THE SAME IS NOT ASCERTAINED AND IS CONTINGENT IN NATURE. THE LD. AR FOR THE TAXPAYER CONTENDED T HAT THIS ISSUE IS AGAIN SQUARELY COVERED IN FAVOUR OF THE TAXPAYER IN ITS OWN CASE IN AYS 2006-07, 2007-08, 2008-09 AND 2009-10 (SUPRA). HOWEVER, ON THE OTHER HAND, LD. DR FOR THE REVENUE RELIED UP ON THE ORDERS PASSED BY THE AO/DRP. 18. THE COORDINATE BENCH OF THE TRIBUNAL IN AYS 200 7-08, 2008-09 AND 2009-10 (SUPRA) BY RELYING UPON THE FIN DINGS RETURNED BY THE COORDINATE BENCH OF THE TRIBUNAL IN AY 2006- 07 IN ASSESSEES OWN CASE DECIDED THE ISSUE IN FAVOUR OF THE TAXPAYER. OPERATIVE PART OF THE ORDER IS REPRODUCED AS UNDER : DURING THE FINANCIAL YEAR ENDED ON 31ST MARCH 2007 THE APPELLANT, HAD INCURRED /MADE PROVISION FOR WARRANT Y CLAIMS TO THE EXTENT OF RS.17,72,000 ON THE BASIS OF PAST TRE ND AND EXPERIENCE OF ACTUAL WARRANTY CLAIMS. THE PROVISION FOR WARRANTY IS MADE ON A SCIENTIFIC AND ACTUAL BASIS AND NOT AN ADHOC PROVISION. ITA NO.1516/DEL/2015 ITA NO.1004/DEL/2016 ITA NO.1706/DEL/2017 33 IT WILL BE APPRECIATED, THAT THE PROVISION FOR WARR ANTY IS NOT A FUTURE OR A CONTINGENT LIABILITY. THE LIABILITY TOW ARDS WARRANTY EXPENSES IS INCURRED AS SOON AS THE SALE IS MADE BY THE APPELLANT AND, THEREFORE, IT IS A LIABILITY IN PRESENTI AND H AS DEFINITELY ARISEN IN THE ACCOUNTING YEAR. DEDUCTION THEREFORE SHOULD BE ALLOWED IN THE YEAR OF SALES, TO WHICH THE LIABILITY IS ATTACH ED, ALTHOUGH THE EXACT LIABILITY MAY BE QUANTIFIED AT A FUTURE DATE. RELIANCE IS PLACED IN THIS REGARD ON THE RECENT DEC ISION OF SUPREME COURT IN THE CASE OF ROTORK CONTROLS INDIA LTD. VS. CIT: 223 CTR 425, WHEREIN, THE SUPREME COURT LAID DOWN T HREE CONDITIONS FOR ALLOWABILITY OF PROVISION FOR WARRA NTY - (A) AN ENTERPRISE HAS A PRESENT OBLIGATION AS A RESULT OF A PAST EVENT; (B) IT IS PROBABLE THAT AN OUTFLOW OF RESOURCES WILL BE REQUIRED TO SETTLE THE OBLIGATION; AND (C) A RELIABLE ESTIMATE CAN BE MADE OF THE AMOUNT OF THE OBLIGATION. RELYING ON THE ABOVE DECISION IN THE CASE OF ROTORK CONTROLS (SUPRA), THE HONBLE DELHI HIGH COURT IN THE CASE O F CIT VS. WHIRLPOOL OF INDIA [242 CTR 245], TOO, DISMISSED TH E GROUNDS OF THE REVENUE FOR DISALLOWING PROVISION FOR WARRANTY. OUR ATTENTION IS ALSO INVITED TO THE ORDER PASSED B Y THE DELHI BENCH OF THE TRIBUNAL IN THE APPELLANTS OWN CASE F OR THE ASSESSMENT YEAR 2006-07, WHEREIN, SIMILAR AD-HOC DI SALLOWANCE OF WARRANTY WERE DELETED, AS UNDER: WE AGREE WITH THE ASSESSEES CONTENTION THAT PROVI SION FOR ESTIMATED EXPENDITURE TO BE INCURRED FOR WARRAN TY OBLIGATION IN RESPECT OF SALES MADE IN THE RELEVANT PREVIOUS YEARS IS TO BE ACCOUNTED AS EXPENDITURE IN THE YEAR OF SALE, IN ORDER TO MATCH THE COST WITH REVEN UE. THE PROVISION FOR WARRANTY IS NECESSARILY REQUIRED TO B E MADE BY THE COMPANIES WHICH ARE REQUIRED TO FOLLOW MERCA NTILE SYSTEM OF ACCOUNTING. IN THIS REGARD, WE FURTHER FI ND THAT COURTS HAVE CONSISTENTLY HELD THE VIEW THAT LIABILI TY FOR PROVISION FOR WARRANTY FOR REPLACEMENT ON ACCOUNT O F MANUFACTURING DEFECTS ARISES AT THE TIME OF SALE AN D IS TO BE ALLOWED AS DEDUCTION IN THAT YEAR ON THE BASIS O F RATIONAL /SCIENTIFIC ESTIMATE, NOTWITHSTANDING THAT THE EXACT AMOUNT OF LIABILITY IS ASCERTAINED AT A LATER DATE. WE FURTHER FIND THAT ACTION OF THE ASSESSEE IN CREATIN G PROVISION FOR WARRANTY IS ALSO IN CONSONANCE WITH T HE DECISION OF THE HONBLE APEX COURT IN THE CASE OF R OTORK CONTROLS INDIA LTD. VS. C.I.T. 314 ITR 62. SIMILARL Y, WE FIND THAT RELYING ON THE ABOVE DECISION IN THE CASE OF ROTORK CONTROLS THE HONBLE HIGH COURT IN THE CASE OF C.I.T. VS. WHIRLPOOL OF INDIA 242 CTR 245 TOO, DISM ISSED THE GROUNDS OF THE REVENUE FOR DISALLOWING PROVISIO N FOR ITA NO.1516/DEL/2015 ITA NO.1004/DEL/2016 ITA NO.1706/DEL/2017 34 WARRANTY. RELIANCE BY THE ASSESSEES COUNSEL IN OTH ER CASE LAWS IN THIS REGARD AS MENTIONED ABOVE ARE ALSO GER MANE AND SUPPORT THE CASE OF THE ASSESSEE. IN THE BACKGR OUND OF THE AFORESAID DISCUSSIONS AND PRECEDENTS, WE HOLD T HAT PROVISION FOR WARRANTY MADE BY THE ASSESSEE IS ALLO WABLE. 19. FOLLOWING THE FINDINGS RETURNED BY THE COORDINA TE BENCH OF THE TRIBUNAL AND THE FACT THAT THE TAXPAYER HAS FIL ED COMPLETE DETAILS ON THE BASIS OF PAST TRENDS AND EXPERIENCE OF ACTUAL GUARANTEE CLAIMS ON A SCIENTIFIC AND ACTUAL BASIS, WHICH IS AVAILABLE AT PAGES 348 TO 372 OF THE PAPER BOOK, WE ARE OF TH E CONSIDERED VIEW THAT PROVISION FOR WARRANTY MADE BY THE TAXPAY ER IS ALLOWABLE ONE. CONSEQUENTLY, GROUND NO.6 OF ITA NO.1516/DEL ./2015 AND GROUNDS NO.5 & 5.1 OF ITA NO.1004/DEL./2016 & ITA NO.1706/ DEL./2017 ARE DETERMINED IN FAVOUR OF THE TAXPAYER. GROUNDS NO.7, 7.1, 7.2, 7.3 OF ITA NO.1516/DEL./2015 (AY 2010-11) GROUNDS NO.6 & 6.1 OF ITA NO.1004/DEL./2016 (AY 2011-12) GROUNDS NO.6, 6.1 & 6.2 OF ITA NO.1706/ DEL./2017 (AY 2012-13) 20. AO HAS MADE AD HOC DISALLOWANCE OF RS.3,80,12,1 00/-, RS.3,33,17,400/- & RS.3,64,99,828/- FOR AYS 2010-11 , 2011-12 & 2012-13 RESPECTIVELY BEING 30% OF THE TOTAL EXPENDI TURE ON THE GROUNDS THAT THE TAXPAYER HAS INCURRED THE SAID ADV ERTISEMENT AND ITA NO.1516/DEL/2015 ITA NO.1004/DEL/2016 ITA NO.1706/DEL/2017 35 PUBLICITY EXPENDITURE FOR BRAND BUILDING FOR THE EN TITIES OWNING THE BRAND. THE LD. AR FOR THE TAXPAYER CONTENDED THAT THIS ISSUE HAS ALSO BEEN DECIDED BY THE COORDINATE BENCH OF THE TR IBUNAL IN FAVOUR OF THE TAXPAYER IN AYS 2007-08, 2008-09 AND 2009-10 (SUPRA). HOWEVER, ON THE OTHER HAND, THE LD. DR FO R THE REVENUE RELIED ON THE ORDERS OF THE AO/DRP. 29. THE COORDINATE BENCH OF THE TRIBUNAL HAS ORDERE D TO DELETE AD HOC DISALLOWANCE MADE BY THE AO ON ACCOUNT OF AD VERTISEMENT EXPENSES U/S 37 OF THE ACT BY MAKING FOLLOWING OBSE RVATIONS :- 64. WE HAVE HEARD THE RIVAL CONTENTIONS IN THE LIGHT OF THE MATERIAL PRODUCED AND PRECEDENT RELIED UPON. WE HAV E ALREADY HELD THAT THE ADVERTISEMENT EXPENDITURE INCURRED BY THE ASSESSEE IS INCURRED WHOLLY FOR THE PURPOSE OF ITS BUSINESS AND PROFESSION AND OUGHT TO BE ALLOWED DEDUCTION IN ENTIRETY. FURT HER, THE ASSESSING OFFICER HAS CLEARLY MADE AN AD-HOC DISALL OWANCE OF ADVERTISEMENT EXPENDITURE INCURRED BY THE ASSESSEE, WHICH IS NOT PERMISSIBLE UNDER THE LAW. WE ARE OF THE CONSIDERED VIEW THAT AO WAS NOT JUSTIFIED IN MAKING SUCH AD-HOC DISALLOWANC ES AND THEREFORE, DIRECT THE ASSESSING OFFICER TO DELETE T HE ADJUSTMENT ON THIS ACCOUNT. 30. FOLLOWING THE ORDER PASSED BY THE COORDINATE BE NCH OF THE TRIBUNAL, WE ARE OF THE CONSIDERED VIEW THAT WHEN T HE BENCH HAS ALREADY HELD THAT THE TAXPAYER HAS INCURRED ADVERTI SEMENT EXPENSES WHOLLY FOR THE PURPOSE OF BUSINESS AND PROFESSION, THE SAME ARE REQUIRED TO BE ALLOWED IN FULL. SO, IN THE GIVEN C IRCUMSTANCES, AD HOC DISALLOWANCE OF ADVERTISEMENT EXPENSES INCURRED BY THE ITA NO.1516/DEL/2015 ITA NO.1004/DEL/2016 ITA NO.1706/DEL/2017 36 TAXPAYER IS NOT PERMISSIBLE UNDER LAW. SO, AO IS D IRECTED TO DELETE THE SAME ACCORDINGLY. CONSEQUENTLY, GROUNDS NO.7, 7.1, 7.2, 7.3 OF ITA N0.1516/DEL./2015, GROUNDS NO.6 & 6.1 OF I TA NO.1004/DEL./2016 AND GROUNDS NO.6, 6.1 & 6.2 OF IT A NO.1706/ DEL./2017 ARE DETERMINED IN FAVOUR OF THE TAXPAYER GROUNDS NO.6.2 OF ITA NO.1004/DEL./2016 (AY 2011-12) 31. AO MADE DISALLOWANCE OF RS.54,17,314/- ON ACCOU NT OF SHORTFALL ON INTEREST OF PROVIDENT FUND ON FAILURE OF THE TAXPAYER TO FILE CLARIFICATION OR SUPPORTING DOCUMENTS. THIS I SSUE WAS SPECIFICALLY RAISED BY THE TAXPAYER BEFORE THE LD. DRP AS IS EVIDENT FROM PAGES 210 & 211. THE TAXPAYER ADDRESSED FACTU AL AND LEGAL SUBMISSIONS BEFORE THE LD. DRP AS UNDER :- 10. FACTUAL AND LEGAL ARGUMENTS AGAINST THE ADDITI ON PROPOSED BY THE ASSESSING OFFICER. DURING THE SUBJECT YEAR, ASSESSEE HAS CLAIMED RS.15,95,33,526 INCURRED BY IT ON ACCOUNT OF MISCEL LANEOUS EXPENSES. DURING THE COURSE OF ASSESSMENT HEARING O N 18 MARCH, 2015, LD. AO REQUESTED THE ASSESSEE TO FURNISH THE DETAILS OF SOME OF THE MAJOR HEADS OF MISCELLANEOUS EXPENSES. IN RESPONSE TO THE SAME, ASSESSEE VIDE ITS REPLY DATED 25 MARCH , 2015 FURNISHED THE SUB-HEAD WISE BREAKUP OF MISCELLANEOU S EXPENSES ALONG WITH SUPPORTING VOUCHERS. DETAILS FURNISHED B Y ASSESSEE, INTER ALIA INCLUDES RS.54,17,314 REPRESENTED AS PF INTEREST SHORTFALL'. LD. AO HAS PROPOSED TO DISALLOW THE 'PF INTEREST SHORTFALL' OF RS.54,17,314 ON THE PREMISE THAT ASSE SSEE HAS NOT PRODUCED ANY SUPPORTINGS TO SUBSTANTIATE THE SAME. ITA NO.1516/DEL/2015 ITA NO.1004/DEL/2016 ITA NO.1706/DEL/2017 37 THE DETAILED BREAK UP OF PF INTEREST SHORTFALL SO UGHT BY THE AO WAS DULY SUBMITTED BY THE ASSESSEE ALONG WIT H COPIES OF NECESSARY SUPPORTINGS ON SAMPLE BASIS VIDE ITS REPL Y DATED 25 MARCH 2015. A COPY OF THE REPLY ALONG WITH THE RELE VANT ANNEXURE IS ENCLOSED AT PAGES _ TO _ OF THE PAPERBO OK. BASIS THE ABOVE, IT IS HUMBLY SUBMITTED THAT THE LD . AO HAS ERRED IN MAKING THE PROPOSED DISALLOWANCE RELYI NG ON THE DECISIONS OF THE HON'BLE SUPREME COURT IN THE CASES OF CALCUTTA AGENCY LTD. (19 ITR 191) AND LASHIMARA TAN COTTON M ILLS CO. (73 ITR 634). THE CASE LAWS RELIED UPON BY THE LD. AO DO NOT APPLY TO THE FACTS OF THE CASE SINCE THE ASSESSEE H AS DULY FILED THE BREAK-UP OF THE EXPENSE ON ACCOUNT OF SHORTFALL, AS DESIRED BY THE LD. AO. IN VIEW OF THE ABOVE DISCUSSION, THE ASSESSEE HUMBL Y APPEALS BEFORE THE BENCH THAT THE SAID ALLOWANCE IS UNSUSTAINABLE IN LAW AND IS LIABLE TO BE DELETED. 32. THE LD. AR FOR THE TAXPAYER FURTHER CONTENDED T HAT THIS IS A PURELY LEGAL ISSUE AND THE HONBLE DELHI HIGH COURT HAS ALREADY DEALT WITH THE SAME IN ITA NO.1208/ OF 2010 & ORS. IN CIT VS. GOVIND NAGAR SUGAR LTD. & ORS. VIDE ORDER DATED 19. 11.2010 BY DECIDING IN FAVOUR OF THE ASSESSEE. 33. UNDISPUTEDLY, THE TAXPAYER HAS ALREADY PAID THE DUES ALONG WITH INTEREST, AS IS EVIDENT FROM THE DETAILS AVAIL ABLE AT PAGES 254 & 255 OF THE PAPER BOOK. THIS AMOUNT HAS BEEN DULY C REDITED IN THE ACCOUNT OF EMPLOYEES. THE AO HAS DISALLOWED THIS A MOUNT U/S 43B OF THE ACT. 34. LD. AR FOR THE TAXPAYER CONTENDED THAT SINCE TH E INTEREST AMOUNT IS NOT IN THE NATURE OF PF, SECTION 43B IS N OT ATTRACTED. ITA NO.1516/DEL/2015 ITA NO.1004/DEL/2016 ITA NO.1706/DEL/2017 38 35. HONBLE DELHI HIGH COURT TO DECIDE THE IDENTICA L ISSUE FRAMED THE SUBSTANTIVE QUESTION OF LAW AS UNDER :- A) WHETHER THE INTEREST PAID ON THE LATE PAYMENT O F THE PROVIDENT FUND CAN PARTAKE THE CHARACTER OR NAT URE OF THE PROVIDENT FUND? B) WHETHER THE PROVISIONS OF SECTION 43B OF THE ACT ARE APPLICABLE ON THE INTEREST PAID BY THE ASSESSEE ON THE LATE PAYMENT OF PROVIDENT FUND? 36. HONBLE HIGH COURT DECIDED THE AFORESAID QUESTI ON IN AFFIRMATIVE AND OPERATIVE PART OF THE JUDGMENT IS A S UNDER :- 11. WE NOW REVERT BACK TO THE MOOT QUESTION, I.E., WHETHER INTEREST ON DELAYED PAYMENT PARTAKES THE CHARACTER OF PF DUES. LEARNED COUNSEL FOR THE REVENUE LAID GREAT EMPHASIS ON THE JUDGMENT IN THE CASE OF MAHALAKSHMI SUGAR MILLS CO. (SUPRA) ITSELF AND ACCORDING TO THEM, THE SUPREME COURT CLEARLY ST ATED IN THAT JUDGMENT THAT THE INTEREST PAYABLE ON ARREARS OF CE SS UNDER SECTION 3(3) IS IN REALITY PART AND PARCEL OF THE LIABILITY TO PAY CESS. IT WAS AN ACCRETION TO THE CESS. THE ARREARS OF CESS CARR IES INTEREST; IF THE CESS IS NOT PAID WITHIN THE PRESCRIBED PERIOD A LARGER SUM WILL BECOME PAYABLE AS CESS. THE EXACT LANGUAGE USED BY THE COURT AND THE CONTEXT IN WHICH IT WAS SAID IS REPRODUCED BELO W: 10. NOW THE INTEREST PAYABLE ON AN ARREAR OF CESS UNDER SECTION 3(3) IS IN REALITY PART AND PARCEL OF THE LIABILITY TO PAY CESS. IT IS AN ACCRETION TO THE CE SS. THE ARREAR OF CESS 'CARRIES' INTEREST; IF THE CESS IS N OT PAID WITHIN THE PRESCRIBED PERIOD A LARGER SUM WILL BECO ME PAYABLE AS CESS. THE ENLARGEMENT OF THE CESS LIABIL ITY IS AUTOMATIC UNDER SECTION 3(3). NO SPECIFIC ORDER IS NECESSARY IN ORDER THAT THE OBLIGATION TO PAY INTER EST SHOULD ACCRUE. THE LIABILITY TO PAY INTEREST IS AS CERTAIN AS THE LIABILITY TO PAY CESS. AS SOON AS THE PRESCRIBED DA TE IS CROSSED WITHOUT PAYMENT OF THE CESS, INTEREST BEGIN S TO ACCRUE. IT IS NOT A PENALTY, FOR WHICH PROVISIONS H AS BEEN SEPARATELY MADE BY SECTION 3(5). NOR IS IT A PENALT Y WITHIN THE MEANING OF SECTION 4, WHICH PROVIDES FOR A CRIM INAL LIABILITY AND A CRIMINAL PROSECUTION. THE PENALTY P AYABLE UNDER SECTION 3(5) LIES IN THE DISCRETION OF THE CO LLECTING OFFICER OR AUTHORITY.............(EMPHASIS SUPPLIED ) ITA NO.1516/DEL/2015 ITA NO.1004/DEL/2016 ITA NO.1706/DEL/2017 39 12. IT IS CLEAR FROM THE READING OF THE AFORESAID J UDGMENT THAT WHEN THE DUES ARE PAID BELATEDLY AND IT ATTRACTS IN TEREST, WHICH IS STATUTORILY PAYABLE, SUCH AN INTEREST BECOMES PART AND PARCEL OF THE CESS DUES. ON THE SAME ANALOGY, WHEN THE PROVID ENT DUES ARE NOT DEPOSITED BY THE EMPLOYER IN TIME, INTEREST PAY ABLE THEREUPON UNDER THE PF ACT (WHICH IS ALSO A STATUTORY LIABILI TY), THE SAID INTEREST WOULD BECOME PART OF THE PROVIDENT FUND DU ES. THUS, EVEN IF THE INTEREST IS NOT PENAL IN NATURE BUT ONLY COM PENSATORY, HAVING REGARD TO THE FACT THAT IT PARTAKES THE CHARACTER O F THE PROVIDENT DUES ITSELF, SECTION 43B OF THE ACT WOULD BE ATTRAC TED AND UNLESS THIS INTEREST IS ACTUALLY PAID THE ASSESSEE WOULD NOT BE ENTITLED TO CLAIM DEDUCTION IN RESPECT THEREOF. 37. THE RATIO OF THE JUDGMENT (SUPRA) RELIED UPON B Y THE TAXPAYER IS THAT WHEN THE PROVIDENT FUND DUES ARE NOT DEPOSI TED BY THE EMPLOYER IN TIME, THE INTEREST PAYABLE THEREON WOUL D BECOME PART OF THE PROVIDENT FUND DUES AND SECTION 43B OF THE A CT WOULD BE ATTRACTED. HOWEVER, WHEN THE TAXPAYER HAS ACTUALLY PAID THE INTEREST, SECTION 43B WOULD NOT BE ATTRACTED AND TH E TAXPAYER IS ENTITLED TO CLAIM DEDUCTION THEREOF. SO, WE ARE OF THE CONSIDERED VIEW THAT AO/DRP HAVE ERRED IN MAKING DISALLOWANCE ALLEGEDLY ON ACCOUNT OF SHORTFALL OF INTEREST OF PROVIDENT FUND. CONSEQUENTLY, THE AO IS DIRECTED TO ALLOW THE SAME AFTER VERIFYIN G THE FACTS AS TO THE PAYMENT OF DUES PAID ALONG WITH INTEREST BY THE TAXPAYER. SO, GROUND NO.6.2 OF ITA NO.1004/DEL./2016 IS DETERMINE D IN FAVOUR OF THE TAXPAYER. ITA NO.1516/DEL/2015 ITA NO.1004/DEL/2016 ITA NO.1706/DEL/2017 40 GROUND NO.8 & 8.1 OF ITA NO.1516/DEL/2015 (AY 2010-11) 38. AO HAS MADE DISALLOWANCE OF RS.35,84,180/- AND RS.12,74,347/- BEING THE MISC. CHARGES AND SERVICE TAX WRITTEN OFF OUT OF MISC. EXPENDITURE OF RS.12,35,16,000/- ON TH E GROUNDS THAT THE EXPENDITURE WERE NOT SUPPORTED BY VOUCHERS AND THE TAXPAYER HAS FAILED TO PROVE THAT THE EXPENDITURE WERE INCUR RED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS; THAT THE T AXPAYER HAS FAILED TO DEDUCT TAX AT SOURCE ON CERTAIN EXPENDITURE AND THAT SOME OF THE EXPENDITURE ARE IN THE NATURE OF CAPITAL EXPENDITUR E. 39. THE LD. AR FOR THE TAXPAYER DREW OUR ATTENTION TOWARDS DETAILS OF MISC. EXPENDITURE TO THE TUNE OF RS.12,3 5,16,000/- DURING THE YEAR UNDER ASSESSMENT, AVAILABLE AT PAGE 387 (S CHEDULE 13) OF THE PAPER BOOK. THE TAXPAYER FURTHER FILED THE DET AILS OF EXPENSES DISALLOWED, AVAILABLE AT PAGE 415 OF THE PAPER BOOK , AND DETAILS OF AMOUNT ADJUSTED ON ACCOUNT OF SERVICE TAX, AVAILABL E AT PAGE 419 OF THE PAPER BOOK, AND GIVEN THE BREAK UP AT PAGE 422 OF THE PAPER BOOK. 40. THE TAXPAYER BROUGHT ON RECORD THE DETAIL OF EX PENDITURE QUA DISALLOWANCE OF RS.35,84,180/-, AVAILABLE AT PAGES 432 TO 437 OF THE PAPER BOOK, AND INVOICES/ VOUCHERS AT PAGES 438 TO 491 OF THE PAPER BOOK. ITA NO.1516/DEL/2015 ITA NO.1004/DEL/2016 ITA NO.1706/DEL/2017 41 41. UNDISPUTEDLY, ACCOUNTS OF THE TAXPAYER ARE AUDI TED BY THE STATUTORY AUDITOR, TAX AUDITORS AS WELL AS COST AUD ITORS WHICH ARE SUBSTANTIATED WITH NECESSARY DOCUMENTS. WHEN THE A CCOUNTS OF THE TAXPAYER ARE DULY AUDITED BY THE STATUTORY AUDITORS AND PROVES TO BE SUPPORTED WITH DOCUMENTS DISCUSSED IN PRECEDING PAR AS, THE INCOME-TAX AUTHORITIES ARE NOT ONLY REQUIRED TO ACC EPT AUDITORS REPORT BUT ALSO TO DRAW THE PROPER INFERENCE FROM T HE SAME. RELIANCE IN THIS REGARD IS PLACED ON THE DECISION R ENDERED BY HONBLE DELHI HIGH COURT IN THE CASE OF JAY ENGINEERING LTD. REPORTED IN 113 ITR 389. 42. WHEN THE TAXPAYER RAISED SPECIFIC OBJECTION BEF ORE THE LD. DRP QUA DISALLOWANCE OF THE AFORESAID EXPENSES, THE LD. DRP HAS ISSUED SPECIFIC DIRECTION TO THE AO TO ALLOW THESE EXPENSES IF THE SAME ARE FOUND TO BE GENUINE ON FILING NECESSARY EV IDENCE IN SUPPORT OF ITS CLAIM BY THE TAXPAYER. WE ARE OF TH E CONSIDERED VIEW THAT WHEN THE ACCOUNTS ARE AUDITED AND DULY SU PPORTED WITH EVIDENCES DISCUSSED IN THE PRECEDING PARAS, THE AO IS TO ALLOW THE SAME AFTER VERIFYING ITS GENUINENESS AND TO PROCEED ACCORDINGLY. CONSEQUENTLY, GROUND NO.8 & 8.1 OF ITA NO.1516/DEL /2015 IS DETERMINED IN FAVOUR OF THE TAXPAYER. ITA NO.1516/DEL/2015 ITA NO.1004/DEL/2016 ITA NO.1706/DEL/2017 42 GROUND NO.9 & 9.1 OF ITA NO.1516/DEL/2015 (AY 2010-11) 43. AO HAS MADE DISALLOWANCE OF RS.13,05,000/- BEIN G THE PROVISION FOR OBSOLETE STOCKS AND SPARES ON THE GRO UND THAT THE SAME WAS ONLY A PROVISION AND NOT AN ACTUAL WRITE O FF AND ON THE GROUND THAT THE TAXPAYER HAS FAILED TO PROVIDE THE BASIS AND WORKING OF THE PROVISION OF THE OBSOLETE STORES AND SPARES. THE LD. AR FOR THE TAXPAYER CONTENDED THAT IT IS CONSISTENT POLICY OF THE TAXPAYER TO WRITE OFF OBSOLETE STOCKS AND SPARES AN D HAS NEVER BEEN DISALLOWED EARLIER AND IN THE LAST YEAR, AMOUNT OF RS.20,36,000/- WAS WRITTEN OFF ON THIS ACCOUNT. 44. THE TAXPAYER HAS BROUGHT ON RECORD THE COMPLETE DETAILS OF OBSOLETE STOCKS AND SPARES, AVAILABLE AT PAGES 429 TO 431 OF THE PAPER BOOK. THE LD. DRP DIRECTED THE AO TO ALLOW T HE PROVISION OF OBSOLETE STOCKS AND SPARES IN CASE THE SAME HAS BEE N SCIENTIFICALLY WORKED OUT. HOWEVER, THE AO PROCEEDED TO DISALLOW THE SAME ON THE GROUND THAT THE TAXPAYER HAS FAILED TO PRODUCE THE DETAILS OF THE STOCKS AND SPARES WRITTEN OFF. WHEN THE TAXPAYER H AS BROUGHT ON RECORD DETAILS OF AMOUNT AND ITEMS OF SLOW MOVING A RTICLE AND THE REVENUE HAS NOT DISPUTED THAT THIS SYSTEM IS BEING FOLLOWED BONAFIDELY BY THE TAXPAYER, THE AO WAS REQUIRED TO FOLLOW THE RULE OF CONSISTENCY. SO, IN VIEW OF THE MATTER, AO IS D IRECTED TO DELETE ITA NO.1516/DEL/2015 ITA NO.1004/DEL/2016 ITA NO.1706/DEL/2017 43 THE DISALLOWANCE ON ACCOUNT OF STORES AND SPARES WR ITTEN OFF AFTER VERIFYING THE DOCUMENTS AVAILABLE AT PAGES 429 TO 4 31 OF THE PAPER BOOK. CONSEQUENTLY, GROUND NO.9 & 9.1 OF ITA NO.1 516/ DEL/2015 IS DETERMINED IN FAVOUR OF THE TAXPAYER GROUND NO.10 OF ITA NO.1516/DEL/2015 (AY 2010-11) 45. AO MADE AD HOC DISALLOWANCE OF RS.25,00,000/- B EING 50% OF THE SALARY OF ADMINISTRATIVE STAFF OF THE TAXPAY ER ON THE GROUND THAT THE SAME WAS ATTRIBUTED TO CAPITAL WORK-IN-PRO GRESS AND WAS REQUIRED TO BE CAPITALIZED ALONG WITH CAPITAL WORK- IN-PROGRESS. THE LD. AR FOR THE TAXPAYER CONTENDED THAT SINCE THE RO LE OF MANUFACTURING DIRECTOR AND PLANT SUPERVISOR IS TO M ONITOR THE OVERALL RUNNING OF THE FACTORY AND PRODUCTION, THE SALARY PAID TO THEM CANNOT BE CAPITALIZED ON THE GROUND THAT THEY WERE ALSO ENGAGED IN SUPERVISING THE CAPITAL WORK-IN-PROGRESS ALONG WITH THEIR REGULAR WORK. THE LD. AR FOR THE TAXPAYER FU RTHER CONTENDED THAT SINCE THE TAXPAYER HAS UNDERTAKEN EXTENSION OF ITS EXISTING BUSINESS AND NOT SETTING UP A NEW FACILITY OR UNIT, THE REVENUE EXPENSES INCURRED FOR THE SAME CANNOT BE CAPITALIZE D. 46. WE ARE OF THE CONSIDERED VIEW THAT WHEN IT IS N OT DISPUTED BY THE REVENUE THAT SO FAR AS WORK-IN-PROGRESS IS CONC ERNED, IT WAS ITA NO.1516/DEL/2015 ITA NO.1004/DEL/2016 ITA NO.1706/DEL/2017 44 QUA THE EXTENSION OF EXISTING BUSINESS UNDER THE CO MMON MANAGEMENT, IT SATISFIES THE TEST OF UNITY OF CONTR OL, INTERLACING OF FUNDS, COMMON MANAGEMENT ETC.. HONBLE DELHI HIGH COURT IN CASE OF CIT VS. RELAXO FOOTWEARS LIMITED CITED AS 293 ITR 2 31 (DEL.) DECIDED THE IDENTICAL ISSUE IN FAVOUR OF THE TAXPAY ER BY RETURNING THE FOLLOWING FINDINGS :- HELD, DISMISSING THE APPEAL, THAT THE NEW UNIT WAS A PART OF THE EXISTING BUSINESS AND THERE WAS NO DISP UTE THAT THERE WAS UNITY OF CONTROL AND INTERLACING OF THE UNITS. THUS THE EXPENSES INCURRED BY THE ASSESSEE FOR THE SETTING UP OF THE NEW UNIT WHICH WAS A PART OF THE EXISTING BUSINESS WERE THEREFORE TO BE ALLOWED AS A REVENUE EXPENDITURE. 47. SIMILARLY, HONBLE DELHI HIGH COURT IN CASE OF JAY ENGINEERING WORKS LTD. VS. CIT CITED AS 311 ITR 405 (DEL.) HELD AS UNDER :- HELD, THAT IT WAS CLEAR THAT THE CONTROL OVER THE TWO UNITS WAS IN THE HANDS OF THE SAME MANAGEMENT AND ADMINISTRATION. THERE WAS NO DOUBT ON THIS SCORE A ND IN FACT, THE ANNUAL REPORT OF THE ASSESSEE MADE A REFERENCE TO THE PROJECT AT HYDERABAD. THE FACTS O N RECORD SHOWED THAT THE NEW VENTURE WAS MANAGED FROM COMMON FUNDS AND THERE WAS THE NECESSARY UNITY OF CONTROL LEADING TO AN INTERCONNECTION, INTERDEPENDE NCE AND INTERLACING OF THE TWO VENTURES SUCH THAT IT WO ULD BE SAID THAT THE FUEL INJECTION EQUIPMENT PROJECT W AS ONLY AN EXTENSION OF THE EXISTING BUSINESS OF THE ASSESSEE AND, THEREFORE, THE EXPENDITURE INCURRED B Y THE ASSESSEE ON THIS PROJECT WAS REVENUE EXPENDITURE. ITA NO.1516/DEL/2015 ITA NO.1004/DEL/2016 ITA NO.1706/DEL/2017 45 48. FOLLOWING THE DECISIONS RENDERED BY THE HONBLE DELHI HIGH COURT AND THE FACT THAT THE TAXPAYER CARRIED OUT TH E EXPANSION OF THE EXISTING BUSINESS FOR WHICH SERVICES OF MANAGING DI RECTOR AND PLANT SUPERVISOR WHO HAVE ALSO MONITORED AND ENSURE D DAY-TO-DAY RUNNING OF THE FACTORY AND PRODUCTION ALONG WITH CA PITAL WORK-IN- PROGRESS FOR EXPANSION OF THE SAME UNIT WERE AVAILE D OF, WHICH SATISFIES THE TEST OF UNITY OF CONTROL, INTERLACING OF FUNDS, COMMON MANAGEMENT ETC. AND AS SUCH, THEIR SALARY TO THE EX TENT OF 50% CAPITALIZED BECAUSE THE SALARY DRAWN BY THEM IS REV ENUE EXPENDITURE. CONSEQUENTLY, WE ORDER TO DELETE THE DISALLOWANCE OF RS.25,00,000/- MADE BY THE AO AND DETERMINE THIS GR OUND IN FAVOUR OF THE TAXPAYER. GROUND NO.11 OF ITA NO.1516/DEL/2015 (AY 2010-11) 49. THE AO MADE DISALLOWANCE OF RS.53,93,000/- ON A CCOUNT OF STORES AND SPARES WRITTEN OFF ON THE GROUND THAT TH E DETAILS AND SUPPORTING EVIDENCES OF THE WRITTEN OFF STORES AND SPARES HAVE NOT BEEN FURNISHED AND THE SAME WAS NOT VERIFIABLE WITH REFERENCE TO PHYSICAL DISPOSAL. THE LD. AR FOR THE TAXPAYER CON TENDED THAT IN COMPLIANCE TO THE DIRECTIONS ISSUED BY THE DRP, THE Y HAVE SUBMITTED ALL DETAILS OF STORES AND SPARES WRITTEN OFF BY REPLY DATED 19.01.2015, AVAILABLE AT PAGES 430 AND 431 OF THE P APER BOOK, AND ITA NO.1516/DEL/2015 ITA NO.1004/DEL/2016 ITA NO.1706/DEL/2017 46 ITS ACCOUNTS ARE AUDITED BY STATUTORY AUDITORS. WH EN WE EXAMINE PROFIT AND LOSS ACCOUNT OF THE TAXPAYER, AVAILABLE AT PAGE 379 OF THE PAPER BOOK, IT SHOWS THAT THE TAXPAYER IS A GROWING COMPANY HAVING GROSS SALE OF RS.1167 CRORES AS ON MARCH 31, 2010 AS AGAINST RS.980 CRORES IN THE EARLIER YEARS WITH GRO SS PROFIT OF RS.734 CRORES AS AGAINST RS.329 CRORES IN THE PREVI OUS YEAR AND IN THE GIVEN CIRCUMSTANCES, TO WRITE OFF USELESS STORE S IS A BUSINESS DECISION OF THE MANAGEMENT WHICH CANNOT BE QUESTION ED PARTICULARLY WHEN THE ACCOUNTS OF THE TAXPAYER ARE AUDITED ONE WITH SUPPORTING EVIDENCE. MOREOVER, THE TAXPAYER HAS BR OUGHT ON RECORD THE COMPLETE DETAILS OF THE WRITTEN OFF STOR ES AND SPARES, AVAILABLE AT PAGES 430 & 431 OF THE PAPER BOOK. SO , IN VIEW OF THE MATTER, WE ARE OF THE CONSIDERED VIEW THAT THE DISA LLOWANCE OF RS.53,93,000/- MADE BY THE AO ON ACCOUNT OF STORES AND SPARES WRITTEN OFF IS NOT SUSTAINABLE, HENCE DISALLOWANCE IS ORDERED TO BE DELETED AND THIS GROUND IS DETERMINED IN FAVOUR OF THE TAXPAYER. GROUND NO.12 OF ITA NO.1516/DEL./2015 (AY: 2010-11) GROUNDS NO.7 OF ITA NO.1004/DEL./2016 (AY: 2011-12) ITA NO.1706/DEL./2017 (AY: 2012-13) 50. GROUND NO.12 OF ITA NO.1516/DEL./2015 AND GROUN DS NO.7 OF ITA NO.1004/DEL./2016 (AY: 2011-12) & ITA ITA NO.1516/DEL/2015 ITA NO.1004/DEL/2016 ITA NO.1706/DEL/2017 47 NO.1706/DEL./2017 (AY: 2012-13) NEED NO ADJUDICATIO N AS THE SAME ARE CONSEQUENTIAL IN NATURE. 51. RESULTANTLY, ALL THE AFORESAID THREE APPEALS BE ING ITA NO.1516/DEL./2015, ITA NO.1004/DEL./2016 AND ITA NO.1706/DEL./2017 ARE ALLOWED FOR STATISTICAL PURPO SES. ORDER PRONOUNCED IN OPEN COURT ON THIS 22 ND DAY OF JANUARY, 2018. SD/- SD/- (B.P. JAIN) (KULDIP SING H) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED THE 22 ND DAY OF JANUARY, 2018 TS COPY FORWARDED TO: 1.APPELLANT 2.RESPONDENT 3.CIT 4.CIT (A) 5.CIT(ITAT), NEW DELHI. AR, ITAT NEW DELHI.