Dy. CIT, Circle-9, Pune V. Mercedes Benz I Pvt. Ltd. (formerly known as Daimler Chrysler I Pvt. Ltd), Pune

ITA 1107/PUN/2013

• Counselvise Citation: [2016] 132 COUNSELVISE.COM (IT) 1740 (ITAT-PUNE)
• Duration Of Justice: 3 year(s) 16 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 06-06-2016
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 27-06-2016
• Assessment Year: 2002-2003
• Appeal Filed On: 20-05-2013
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: S K RASTOGI
• Keywords: Capital asset; Gift; Depreciation; Transfer pricing; Business expenditure; Rectification of order; International transaction; Rule of consistency; Retrospective amendment; Additional evidence; Question of law; Corroborative evidences; Right to appeal; Revised return; Revenue expenditure; Capital expenditure
• Section: 80IB; 10B; 154

Judgement Text

] IQ.KS ] IQ.KS ] IQ.KS ] IQ.KS IQ.KS IQ.KSIQ.KS IQ.KS IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH A, PUNE . . , , ! ' BEFORE SHRI R.K. PANDA, AM AND SHRI VIKAS AWASTHY, JM . / ITA NO.1080/PN/2013 !$ $ / ASSESSMENT YEAR : 2002-03 MERCEDES BEN Z INDIA PVT. LTD., (FORMERLY KNOWN AS DAIMLER CHRYSLER INDIA PVT. LTD.) E-3, MIDC, CHAKAN, PHASE-III, CHAKAN INDUSTRIAL AREA, KURULI & NIGHOJE, TAL. KHED, PUNE 410501 PAN NO.AABCM1789L . / APPELLANT V/S ACIT, CIRCLE - 8, PUNE . / RESPONDENT . / ITA NO.1107/PN/2013 !$ $ / ASSESSMENT YEAR : 2002-03 DY.CIT, CIRCLE - 9, PUNE . / APPELLANT V/S MERCEDES BEN Z INDIA PVT. LTD., (FORMERLY KNOWN AS DAIMLER CHRYSLER INDIA PVT. LTD.) SECTOR 15A, CHIKHLI, PUNE - 411018 PAN NO.AABCM1789L . / RESPONDENT CO. NO.57/PN/2014 (ARISING OUT OF ITA NO.1107/PN/2013) !$ $ / ASSESSMENT YEAR : 2002-03 MERCEDES BEN Z INDIA PVT. LTD., (FORMERLY KNOWN AS DAIMLER CHRYSLER INDIA PVT. LTD.) E-3, MIDC, CHAKAN, PHASE-III, CHAKAN INDUSTRIAL AREA, KURULI & NIGHOJE, TAL. KHED, PUNE 410501 PAN NO.AABCM1789L CROSS OBJECTOR 2 ITA NOS.1107, 1080/PN/2013 AND CO NO.57/PN/2014 V/S DY.C IT, CIRCLE - 9, PUNE APPELLANT IN THE APPEAL ASSESSEE BY : SHRI RAJAN R. VOHRA, SHRI RAJENDRA AGIWAL & SHRI NIKHIL MUTHA REVENUE BY : SHRI S.K. RASTOGI, CIT / ORDER PER R.K. PANDA, AM : ITA NO.1080/PN/2013 FILED BY ASSESSEE AND ITA NO.1107/PN/2013 FILED BY THE REVENUE ARE CROSS APPEALS A ND ARE DIRECTED AGAINST THE ORDER DATED 12-03-2013 OF THE CIT (A)-IT/TP, PUNE RELATING TO ASSESSMENT YEAR 2002-03. THE ASSESSE E HAS ALSO FILED CROSS OBJECTION NO.57/PN/2014 AGAINST THE APPEAL FILED BY THE REVENUE. ALL THESE WERE HEARD TOGETHER AND ARE BEING D ISPOSED OF BY THIS COMMON ORDER. ITA NO.1080/PN/2013 (BY ASSESSEE) : 2. GROUND OF APPEAL NO.1 BY THE ASSESSEE READS AS UNDER : 1. THE LD.CIT(A) HAS ERRED IN CONFIRMING THE DISALLO WANCE OF THE EXPENDITURE INCURRED BY THE APPELLANT ON HOMOLOGATI ON AMOUNTING TO RS.37,99,831/- BASED ON THE POSSIBILITY THAT THE SAME CO ULD BE NON- BUSINESS EXPENDITURE/INFLATED EXPENDITURE. THE APPELLANT PRAYS THAT THE ABOVE ADDITION MADE TO THE TOTAL INCOME OF THE APPELLANT BE DELETED AND THE SAME BE ALLOWED AS D EDUCTIBLE EXPENDITURE UNDER SECTION 37(1). 3. FACTS OF THE CASE, IN BRIEF, ARE THAT THE AO DURING TH E COURSE OF ASSESSMENT PROCEEDINGS NOTED THAT THE ASSESSEE COMPA NY HAS DEBITED HOMOLOGATION CHARGES AT RS.77.74 LAKHS. FROM THE DETAILS OF / DATE OF HEARING :07.03.2016 / DATE OF PRONOUNCEMENT:06.06.2016 3 ITA NOS.1107, 1080/PN/2013 AND CO NO.57/PN/2014 HOMOLOGATION CHARGES SUBMITTED BY THE ASSESSEE THE AO NOTED THAT THE SAME INCLUDES RS.54,94,700/- AS EXPENSES PERTAINING TO HOMOLOGATION TRANSFER ACCOUNT. ON BEING ASKED BY THE AO TO SUBMIT THE COMPLETE DETAILS OF HOMOLOGATION TRANSFER ACCOUN T OF RS.54.24 LAKHS THE ASSESSEE EXPLAINED THAT THE SAME PERT AINS TO THE MATERIALS SUPPLIED TO ARAI. THE AO ASKED THE ASSESSEE T O FURNISH THE COMPLETE DETAILS OF THE ACCOUNTS OF MATERIAL SUPPLIED T O ARAI ALONG WITH DELIVERY CHALLANS. HOWEVER, THE ASSESSEE SUBMITT ED THAT COMPLETE RECONCILIATION OF MATERIALS SUPPLIED TO ARAI CANNOT BE SUBMITTED. SUBSEQUENTLY, THE ASSESSEE FURNISHED ONLY 1 3 CHALLANS IN SUPPORT OF THE TRANSFER OF MATERIALS TO ARAI. THE TOTAL OF THESE 13 CHALLANS COMES TO RS.33,51,269/-. THE AO NOTED THAT OUT O F THE ABOVE AMOUNT, ENGINES SUPPLIED FOR A TOTAL AMOUNT OF RS.16, 76,200/- HAVE BEEN WRITTEN OFF. FURTHER, THE ASSESSEE COMPANY C OULD ESTABLISH THE MATERIAL SUPPLIED TO ARAI AT RS.16,75,060/-. SINCE THE ASSESSEE COULD NOT PROVE THE EXPENSES DEBITED PROPERL Y, THE AO RELYING ON THE DECISION REPORTED IN 227 ITR 846 (GUWAHA TI) AND THE DECISION REPORTED IN 256 ITR 701 (AP) DISALLOWED AN AMOUNT OF RS.37,98,831/-. 4. IN APPEAL THE LD.CIT(A) UPHELD THE ACTION OF THE AO BY OBSERVING AS UNDER : FINDINGS : 2 . 2 . 5 I HAVE CONSIDERED THE ARGUMENTS OF THE LEARNED AO AS WELL AS OF THE APPELLANT . THE LEARNED AO HAS CORRECTLY OBSERVED THAT THE ONUS IS ON THE APPELLANT TO ESTABLISH THAT ITS CLAIM OF DEDUCTION OF EXPENDITURE IS IN ACCORDANCE WITH THE JAW. ACCORDING TO THE AO, THE A PPELLANT HAS FAILED TO PROVE THAT THE EXPENDITURE OF RS 35,99,831 WAS INCUR RED . 2.2.6 ALTHOUGH THE APPELLANT HAD STATED THAT THE LEA RNED AO DID NOT ASK FOR ANY FURTHER INFORMATION AFTER 28.03.2005, IT IS WELL AWARE THAT THE ASSESSMENT WAS GETTING TIME BARRED BY 31.3 . 2005 AND ONUS WAS ON IT TO 4 ITA NOS.1107, 1080/PN/2013 AND CO NO.57/PN/2014 ESTABLISH THAT ITS CLAIM OF EXPENDITURE WAS IN ACCORDAN CE WITH THE PROVISIONS OF THE LAW. NOT ONLY THAT THE APPELLANT HA S NOT FILED THE DETAILS AS ADDITIONAL EVIDENCE BEFORE ME, WHICH WERE NOT FILED BEFORE THE LEARNED AO, DESPITE THE FACT THAT THE DISALLOWANCE WA S MADE ON THE GROUND OF NON - SUBMISSION OF DETAILS. 2 . 2 . 7 ACCORDINGLY, IN VIEW OF THE ABOVE DISCUSSION, I HOLD THAT THE EXPENDITURE DEBITED FOR NON-BUSINESS PURPOSES OR INFLATI ON OF EXPENSES CANNOT BE RULED OUT . ACCORDINGLY , I CONFIRM THE DISALLOWANCE OF RS 37,99,831 MADE BY THE LEARNED AO . 5. AGGRIEVED WITH SUCH ORDER OF THE CIT(A) THE ASSESSEE IS IN APPEAL BEFORE US. 6. THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT FULL DE TAILS ARE AVAILABLE AND NOBODY HAS GONE THROUGH THE DETAILS. HE SU BMITTED THAT AFTER 28-03-2005 THE AO DID NOT CALL FOR FURTHER DE TAILS AND COMPLETED THE ASSESSMENT. HE SUBMITTED THAT IN THE INTE REST OF JUSTICE THE ASSESSEE MAY BE GIVEN AN OPPORTUNITY TO SU BSTANTIATE THE EXPENSES TO THE SATISFACTION OF THE AO SINCE THE ASSESSE E IS HAVING ALL THE DETAILS TO THE SATISFACTION OF THE AO. 7. THE LD. DEPARTMENTAL REPRESENTATIVE ON THE OTHER HA ND WHILE SUPPORTING THE ORDER OF THE CIT(A) SUBMITTED THAT HE HAS NO OBJECTION IF THE MATTER IS SET ASIDE TO THE FILE OF THE AO WITH A DIREC TION TO THE ASSESSEE TO FURNISH THE FULL DETAILS. 8. AFTER HEARING BOTH THE SIDES WE FIND THE AO DISALLOWED A N AMOUNT OF RS.37,99,831/- ON ACCOUNT OF HOMOLOGATION CHARGE S ON THE GROUND THAT THE ASSESSEE COULD NOT SUBSTANTIATE W ITH EVIDENCE TO HIS SATISFACTION REGARDING THE COMPLETE DETAILS OF MATERIALS S UPPLIED TO ARAI AND THEIR DELIVERY CHALLAN. WE FIND THE CIT(A) UPHE LD THE ACTION OF THE AO WHICH HAS ALREADY BEEN REPRODUCED IN T HE PRECEDING PARAGRAPHS. IT IS THE SUBMISSION OF THE LD. COUNSEL FOR TH E ASSESSEE THAT GIVEN AN OPPORTUNITY THE ASSESSEE IS IN A POSITION TO FURNISH THE 5 ITA NOS.1107, 1080/PN/2013 AND CO NO.57/PN/2014 FULL DETAILS OF HOMOLOGATION CHARGES BEFORE THE AO. CONSIDER ING THE TOTALITY OF THE FACTS OF THE CASE AND IN THE INTEREST OF JU STICE WE DEEM IT PROPER TO RESTORE THIS ISSUE TO THE FILE OF THE AO WITH A DIRECTION TO GIVE ONE MORE OPPORTUNITY TO THE ASSESSEE TO SUBSTANT IATE WITH EVIDENCE TO HIS SATISFACTION REGARDING THE HOMOLOGATION CHA RGES. GROUND RAISED BY THE ASSESSEE ON THIS ISSUE IS ACCORDING LY ALLOWED FOR STATISTICAL PURPOSES. 9. GROUND OF APPEAL NO.2 BY THE ASSESSEE READS AS UNDER : 2. THE LD.CIT(A) HAS ERRED IN UPHOLDING AD HOC DISA LLOWANCE TO THE EXTENT OF RS.2,50,000/- OUT OF MISCELLANEOUS EXPENSES, ST AFF WELFARE EXPENSES, ADVERTISEMENT AND SALES PROMOTION EXPENSES BASED ON THE POSSIBILITY THAT THE SAME COULD HAVE BEEN BOOKED FOR N ON-BUSINESS PURPOSES AND THEREBY UPHOLDING THE ADDITION MADE BY T HE LD. AO TO THE EXTENT OF RS.2,50,000/-. THE APPELLANT PRAYS THAT THE ABOVE ADDITION MADE TO THE TOTAL INCOME OF THE APPELLANT BE DELETED AND THE SAME BE ALLOWED AS D EDUCTIBLE EXPENDITURE UNDER SECTION 37(1). 10. FACTS OF THE CASE, IN BRIEF, ARE THAT THE ASSESSEE CO MPANY HAS DEBITED A SUM OF RS.3,84,67,000/- ON ACCOUNT OF TRAVELLING AND CONVEYANCE EXPENSES. ON BEING QUESTIONED BY THE AO IT WAS SUBMITTED THAT EMPLOYEES OF DAIMLER CHRYSLER INDIA PVT. LTD ARE REQUIRED TO TRAVEL WITHIN AND OUTSIDE INDIA FOR VARIOUS RE ASONS LIKE, SALES, AFTER SALES SERVICE, TECHNICAL TRAINING, COMMERCIAL MEET INGS, VENDOR DEVELOPMENT, CONFERENCES, OTHER MEETINGS ETC. FRO M THE PERUSAL OF THE DETAILS, THE AO NOTED THAT MOST OF THESE EXPENSES ARE SELF MADE VOUCHERS WHICH HAVE BEEN PREPARED IN-HOUSE FOR WHICH IT WAS CONCLUSIVELY NOT PROVED AS TO WHETHER THE SAME HA S BEEN INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINES S. THE AO, THEREFORE, DISALLOWED AN AMOUNT OF RS.38,46,700/- BEING 10% OF THE EXPENSES ON ADHOC BASIS. FURTHER, OUT OF TELEPHONE EXP ENSES OF 6 ITA NOS.1107, 1080/PN/2013 AND CO NO.57/PN/2014 RS.64,32,984/- THE AO DISALLOWED RS.6,43,298/- BEING 10% OF S UCH EXPENSES ON ACCOUNT OF PROBABLE PERSONAL USE OF THE DIR ECTORS. SIMILARLY, OUT OF MISCELLANEOUS EXPENSES, STAFF WELFARE EXPENSES , ADVERTISEMENT AND SALES PROMOTION EXPENSES ETC. OF RS.13,06,80,000/- THE AO DISALLOWED AN AMOUNT OF RS.25 LAKHS ON ADHOC BASIS ON THE GROUND THAT PERSONAL AND NON BUSINE SS NATURE CANNOT BE RULED OUT. THE ABOVE DISALLOWANCE IS APPROXIMA TELY 2% OF THE TOTAL EXPENDITURE BEING NON BUSINESS EXPENDITURE. 11. BEFORE CIT(A) IT WAS SUBMITTED THAT ALL THE ABOVE MEN TIONED EXPENSES ARE ROUTINE BUSINESS EXPENSES INCURRED ENTIREL Y FOR THE PURPOSE OF BUSINESS. THE AUDITORS IN THE TAX AUDIT REPORT HAVE CERTIFIED THAT NO PERSONAL EXPENSES WERE DEBITED TO THE PROFIT AND LOSS ACCOUNT. THE ASSESSEE SUBMITTED THAT THE DETAILS OF NAT URE OF THESE EXPENSES WERE SUBMITTED DURING THE ASSESSMENT PROCEED INGS FOR VERIFICATION. HOWEVER, THE AO WITHOUT ASKING FOR ANY FURTHER DETAILS OR EXPLANATIONS MADE ADHOC DISALLOWANCE OF EXPENDITURE WITH OUT ANY BASIS OR PROVIDING ANY REASONS FOR THE SAME. IT WAS SUB MITTED THAT ALL REIMBURSEMENT EXPENSES VOUCHERS ARE ADEQUATELY ACC OMPANIED BY NECESSARY SUPPORTING EVIDENCES. RELYING ON VARIOUS D ECISIONS AS MENTIONED AT PAGE 40 OF ORDER OF LD.CIT(A) IT WAS SUBMITTE D THAT THE DISALLOWANCE MADE BY THE AO SHOULD BE DELETED. 12. HOWEVER, THE CIT(A) WAS NOT FULLY SATISFIED WITH THE EXP LANATION GIVEN BY THE ASSESSEE. HE AGREED WITH THE ASSESSEE THA T THERE CANNOT BE ANY DISALLOWANCE IN THE HANDS OF THE COMPANY AS THERE CANNOT BE ANY ELEMENT OF PERSONAL USE BY IT. COMPANY CANNOT SPEND ITS MONEY FOR PERSONAL USE BECAUSE COMPANY IS AN ARTIFICIAL JURIDICAL ENTITY. HOWEVER, THE LD.CIT(A) SUSTAINED AN AMOUNT OF RS.2,50,000/- OUT OF 7 ITA NOS.1107, 1080/PN/2013 AND CO NO.57/PN/2014 MISCELLANEOUS EXPENSES AND DELETED THE BALANCE AMOUNT BY OBSERVING AS UNDER : FINDINGS : 2.9.7 I HAVE GONE THROUGH THE ASSESSMENT ORDER AND AR GUMENTS OF THE APPELLANT. I AGREE WITH THE APPELLANT THAT THERE CANNOT BE DISALLOWANCE IN THE HANDS OF THE COMPANY AS THERE CANN OT BE ANY ELEMENT OF PERSONAL USE BY IT. COMPANY CANNOT SPEND MONEY FOR ITS PERSONAL USE BECAUSE COMPANY IS AN ARTIFICIAL JURIDICAL ENTITY. TAXABILITY OF SUCH EXPENSES MAY BE CONSIDERED IN THE HANDS OF THE E MPLOYEES, IF AT ALL ANY TAXABILITY OF SUCH EXPENDITURE IS REQUIRED TO BE CONSIDERED. MOREOVER, THE DISALLOWANCES WERE MADE ON AD-HOC BASIS W ITHOUT ANY SUBSTANTIATING EVIDENCE AGAINST THE APPELLANT . IN THESE CIRCUMSTANCES, I DELETE THE AD-HOC DISALLOWANCES OF RS.38 , 47,700 ON ACCOUNT OF TRAVELLING AND CONVEYANCE EXPENDITURE AND OF RS.6 , 43,298 MADE ON ACCOUNT OF TELEPHONE EXPENDITURE. 2.9.8 AS FAR AS AD-HOC DISALLOWANCE OUT OF MISCELLANE OUS EXPENSES AND OTHER EXPENSES ARE CONCERNED, I AGREE WITH THE LEARNE D AO THAT CONSIDERING THE NATURE OF THE EXPENSES AND CONSIDERING SIGNIFICANT PART OF SUCH PETTY EXPENDITURE BEING INCURRED IN CASH AND HENCE NOT VERIFIABLE, POSSIBILITY OF BOOKING OF EXPENDITURE FO R NON-BUSINESS PURPOSES CANNOT BE RULED OUT . AT THE SAME TIME , I AM OF THE VIEW THAT DISALLOWANCE OF RS.25,00,000 WITHOUT SUBSTANTIAL EVIDEN CE IS EXCESSIVE AND HENCE , UNJUSTIFIED . IN MY VIEW, AD-HOC DISALLOWANCE OF RS.2,50,000 WOULD MEET THE ENDS OF JUSTICE. ACCORDINGLY, I RESTRIC T THE DISALLOWANCE TO RS. 2 , 50,000 OUT OF M I SCELLANEOUS EXPENSES . 13. AGGRIEVED WITH SUCH PART RELIEF, THE ASSESSEE IS IN APP EAL BEFORE US. 14. WE HAVE CONSIDERED THE RIVAL ARGUMENTS MADE BY BOT H THE SIDES, PERUSED THE ORDERS OF THE AO AND THE CIT(A) AND T HE PAPER BOOK FILED ON BEHALF OF THE ASSESSEE. WE FIND THE LD.CIT(A) H AS ALREADY DELETED THE DISALLOWANCE OUT OF TRAVELLING AND TELEPH ONE EXPENDITURE. HE HAS ONLY SUSTAINED AN AMOUNT OF RS.2,50,0 00/- OUT OF THE MISCELLANEOUS EXPENSES AND OTHER EXPENSES. WE DO NOT FIND ANY INFIRMITY IN THE ORDER OF THE CIT(A). ADMITTEDLY, SUBSTAN TIAL PART OF PETTY EXPENSES HAVE BEEN INCURRED IN CASH AND ARE NOT VERIFIABLE IN NATURE, THEREFORE, THE POSSIBILITY OF BOOKING OF EXPENDITU RE FOR NON BUSINESS PURPOSES CANNOT BE RULED OUT. SINCE THE DISALLOW ANCE 8 ITA NOS.1107, 1080/PN/2013 AND CO NO.57/PN/2014 SUSTAINED BY THE CIT(A) IS VERY NOMINAL CONSIDERING THE HUG E AMOUNT OF MISCELLANEOUS EXPENSES, STAFF WELFARE EXPENSES ETC. AMOUNT ING TO RS.13.07 CRORES, THEREFORE, WE FIND NO INFIRMITY IN THE ORDER O F THE CIT(A) SUSTAINING SUCH DISALLOWANCE. THE SUBMISSION OF THE L D. COUNSEL FOR THE ASSESSEE THAT NO DISALLOWANCE HAS BEEN M ADE IN EARLIER YEAR AND SUBSEQUENT YEAR ON THIS ISSUE IS NOT M ATERIAL. IT IS SETTLED LAW THAT EVERY YEAR IS SEPARATE AND DISTINCT AND THE PRINCIPLE OF RESJUDICATA DO NOT APPLY TO INCOME-TAX PROCEEDINGS. IN THIS VIEW OF THE MATTER WE UPHOLD THE ORDER OF THE CIT(A) AND THE G ROUND RAISED BY THE ASSESSEE IS DISMISSED. 15. GROUND OF APPEAL NO.3 AND 4 BY THE ASSESSEE READS AS UNDER : 3. THE LD.CIT(A) ERRED IN CONSIDERING THE CAR REPAI R CHARGES OF RS.69,876/- AS A PRIOR PERIOD EXPENDITURE CRYSTALLISED IN A.Y. 2001-02 AND THEREBY UPHOLDING THE ADDITION MADE BY THE LD. AO. THE APPELLANT PRAYS THAT THE ABOVE ADDITION MADE TO THE TOTAL INCOME OF THE APPELLANT BE DELETED AND THE SAME BE ALLOWED AS D EDUCTIBLE EXPENDITURE UNDER SECTION 37(1). 4. WITHOUT PREJUDICE TO THE ABOVE GROUND, THE LD.CI T(A) ERRED IN NOT DIRECTING THE LD. AO TO ALLOW THE EXPENDITURE OF RS. 69,876/- AS A DEDUCTIBLE EXPENDITURE IN A.Y. 2001-02. THE APPELLANT PRAYS THAT THE LD. AO BE ALTERNATIVELY DIRECTED TO ALLOW RS.69,876/- AS DEDUCTIBLE EXPENDITURE IN A.Y. 2001-02 . 16. FACTS OF THE CASE, IN BRIEF, ARE THAT THE AO DURING T HE COURSE OF ASSESSMENT PROCEEDINGS NOTED THAT THE CAR REPAIR EXPE NSES OF RS.20,85,880/- INCLUDES THE FOLLOWING PRIOR PERIOD EXPENSES : AMOUNT DATE RS.17,140 28 - 03 - 01 RS.19,636/ - 02 - 02 - 01 RS.33,100 28 - 02 - 01 RS.69,876/ - 9 ITA NOS.1107, 1080/PN/2013 AND CO NO.57/PN/2014 17. HE OBSERVED THAT EVEN THOUGH THESE EXPENSES ARE PAID DURING THE YEAR UNDER CONSIDERATION BUT IT WAS INCURRED IN EA RLIER YEARS AND DO NOT PERTAIN TO THE YEAR UNDER CONSIDERATION. SINCE T HE ASSESSEE COMPANY IS FOLLOWING MERCANTILE SYSTEM OF ACCOUNTING, THEREFOR E, THE LIABILITY OF THE EXPENSES CRYSTALLIZED DURING THE EARLIER YEA R BUT PAID IN SUBSEQUENT YEAR IS NOT DEDUCTIBLE. RELYING ON THE DEC ISION OF HONBLE SUPREME COURT IN THE CASE OF HAJI MOHD. BRICK WOR KS VS. CIT REPORTED IN 224 ITR 591 THE AO DISALLOWED AN AMOUNT OF RS.69,876/- AND ADDED THE SAME TO THE TOTAL INCOME OF THE ASSESSEE. 18. IN APPEAL THE LD.CIT(A) UPHELD THE ACTION OF THE AO BY OBSERVING AS UNDER : FIND I NGS 2 . 10 . 4 I HAVE CONSIDERED THE FACTS AND THE ARGUMENTS OF T HE APPELLANT . I AGREE WITH THE LEARNED AO THAT UNDER INCOME TAX ACT , EXPENDITURE IS ALLOWABLE, WHICH WAS INCURRED IN THE 'PREVIOUS YEAR' . THE DATE OF CAR EXPENDITURE INVOICES ARE OF FEBRUARY AND MARCH 2001 . HENCE , LIABILITY FOR THIS EXPENDITURE WAS NOT CRYSTALLISED IN AY 2002 - 03 BUT WAS CRYSTALLISED IN A Y 2001-02 . AS FAR AS EXPENDITURE NOT CLAIMED PERTAINING TO THE PREVIOUS YEAR, THE APPELLANT HAS 'MISSED THE BUS' . ACCORDINGLY, THE EXPENDITURE PERTAINED TO THE EARLIER YEAR CANNOT BE ALLOWED IN THE CURRENT YEAR. 2.10 . 5 I HAVE ALSO GONE THROUGH THE CASE LAWS RELIED UP O N BY THE APPELLANT . THE COURTS IN KEDARNATH JUTE AND IN L.J. PATEL AND CO HAVE HELD THAT EXPENDITURE IS DEDUCTIBLE IF ITS LIABILITY WAS CR YSTALLISED DURING THE YEAR . IT IS STATED ABOVE THAT SUCH IS NOT THE CASE HERE. THE D ECISION IN GLAXO SMITHKLINE IS NOT APPLICABLE TO THE FACTS OF THE CASE. ON THE OTH ER HAND, CASE RELIED UP ON BY THE LEARNED AO IS DIRECTLY ON TH E FACTS INVOLVED IN THIS ISSUE . 2.10.6 . WITH REGARD TO THE APPELLANT'S ALTERNATIVE ARGUMENT , IT MAY BE MENTIONED THAT THE DIRECTION TO ALLOW THESE EXPENSE S IN THE EARLIER YEAR CANNOT BE ISSUED AS IT WOULD NOT BE IN ACCORDA NCE WITH THE LAW BESIDES THE APPEAL FOR THE AY 2001-02 IS A SEPARATE PROCEEDINGS AND IS NOT BEFORE ME AT THE MOMENT . 2 . 10.7 . IN VIEW OF THE ABOVE DISCUSSION, I CONFIRM THE DECI SION OF THE LEARNED AO TO DISALLOW CAR REPAIR CHARGES OF RS 69 , 876/-. 10 ITA NOS.1107, 1080/PN/2013 AND CO NO.57/PN/2014 19. AGGRIEVED WITH SUCH ORDER OF THE CIT(A) THE ASSESSEE IS IN APPEAL BEFORE US. 20. THE LD. COUNSEL FOR THE ASSESSEE REFERRING TO THE DEC ISION OF HONBLE SUPREME COURT IN THE CASE OF CIT VS. GLAXOSMITHKLIN E REPORTED IN 195 TAXMANN 35 SUBMITTED THAT ALLOWANCE OF T HESE EXPENSES IN THE CURRENT YEAR IN RESPECT OF THE EARLIER Y EAR IS A REVENUE NEUTRAL EXERCISE AND THEREFORE THE AO SHOULD ALLO W DEDUCTION OF THESE EXPENSES IN A.Y. 2002-03. HE ALSO RELIED ON THE FOLLOWING DECISIONS : 1. CIT VS. EXCEL INDUSTRIES LTD. REPORTED IN 358 ITR 2 95 (SC) 2. CIT VS. NAGRI MILLS CO. LTD. REPORTED IN 33 ITR 68 1 (BOM.) 3. CIT VS. VISHNU INDUSTRIAL GASES PVT. LTD. ITR NO.22 9/1988 ORDER DATED 06-05-2008 (DELHI HIGH COURT) 4. DCIT VS. M/S. SICOM LTD. ITA NO.8040/MUM/2010 ORDER DATED 15-01-2014 (MUMBAI ITAT) 21. THE LD. DEPARTMENTAL REPRESENTATIVE ON THE OTHER HAND HEAV ILY RELIED ON THE ORDER OF THE CIT(A). HE SUBMITTED THAT AN EXPENDITURE IS DEDUCTIBLE IF ITS LIABILITY WAS CRYSTALLIZED DURING THE YEAR. SINC E THE ASSESSEE COMPANY IN THE INSTANT CASE IS FOLLOWING MERCAN TILE SYSTEM OF ACCOUNTING AND HAS DEBITED THE EXPENDITURE OF AN EARLIE R YEAR DURING THE CURRENT YEAR, THEREFORE, THE SAME CANNOT BE ALLOWED AS DEDUCTION FROM THE INCOME OF THE CURRENT YEAR. HE ACCOR DINGLY SUBMITTED THAT THE ORDER OF THE CIT(A) BE UPHELD. 22. WE HAVE CONSIDERED THE RIVAL ARGUMENTS MADE BY BOTH THE SIDES, PERUSED THE ORDERS OF THE AO AND CIT(A) AND THE P APER BOOK FILED ON BEHALF OF THE ASSESSEE. WE HAVE ALSO CONSIDERED TH E VARIOUS DECISIONS CITED BEFORE US. WE FIND THE MOTOR CAR REPAIR EX PENSES OF THE COMPANY AMOUNTING TO RS.20,85,880/- INCLUDES AN AMOUN T OF RS.69,876/- RELEVANT TO THE PRECEDING ASSESSMENT FOR WHIC H THE AO 11 ITA NOS.1107, 1080/PN/2013 AND CO NO.57/PN/2014 DISALLOWED THE SAME WHICH HAS BEEN UPHELD BY THE CIT(A). I T IS AN ADMITTED FACT THAT THE ASSESSEE IS A CORPORATE ENTITY A ND IS FOLLOWING MERCANTILE SYSTEM OF ACCOUNTING. THE HONBLE SUPREME COU RT IN THE CASE OF HAJI MOHD BRICK WORKS (SUPRA) RELYING ON VARIOUS D ECISIONS OF THE HONBLE SUPREME COURT HAS HELD THAT WHEN THE AS SESSEE IS FOLLOWING MERCANTILE SYSTEM OF ACCOUNTING, IN THE CASE OF SALE S TAX PAYABLE BY THE ASSESSEE, THE LIABILITY TO PAY SALES TAX WOU LD ACCRUE THE MOMENT DEALER MADE SALES WHICH ARE SUBJECT TO SALES TAX AND AT THAT STAGE THE OBLIGATION TO PAY THE SALES TAX ARISES A ND THE RAISING OF THE DISPUTE IN THIS CONNECTION BEFORE THE HIGHER AUTHOR ITIES WOULD BE IRRELEVANT. IT WAS ACCORDINGLY HELD THAT THE SALES TA X PAID IN A LATER YEAR IS NOT DEDUCTIBLE IN ASSESSMENT FOR LATER YEAR. SINCE THE ASSESSEE IN THE INSTANT CASE IS FOLLOWING MERCANTILE SYSTEM OF ACCOUNTING AND SINCE THE LIABILITY HAS CRYSTALLIZED IN THE PRE CEDING ASSESSMENT YEAR, THEREFORE, THE SAME CANNOT BE ALLOWED A S A DEDUCTION IN THE CURRENT YEAR. THE VARIOUS DECISIONS RELIED ON BY T HE LD. COUNSEL FOR THE ASSESSEE ARE DISTINGUISHABLE AND NOT A PPLICABLE TO THE FACTS OF THE PRESENT CASE. ACCORDINGLY, GROUND OF APPEAL NO.3 IS DISMISSED. 23. SO FAR AS ALTERNATE GROUND BY THE ASSESSEE THAT A DIRECTION MAY BE GIVEN TO THE AO TO ALLOW THE EXPENDITURE IN A.Y. 20 01-02 IS CONCERNED, WE ARE OF THE CONSIDERED OPINION THAT THE AS SESSEE MAY EXPLORE ALTERNATE REMEDY BEFORE THE AO SINCE PROCEEDINGS FOR A.Y. 2001-02 ARE NOT BEFORE THE TRIBUNAL. WE HOLD ACCORDINGL Y. THE GROUNDS RAISED BY THE ASSESSEE ARE ACCORDINGLY DISMISSED. 12 ITA NOS.1107, 1080/PN/2013 AND CO NO.57/PN/2014 24. GROUND OF APPEAL NO.5 BY THE ASSESSEE READS AS UNDER : 5. THE LD.CIT(A) ERRED IN WITHDRAWING THE DEDUCTIO N U/S.80IB OF THE ACT WHICH WAS ALLOWED BY THE LD. AO IN THE RECTIFICA TION ORDER U/S.154 OF THE ACT FOR A.Y. 2002-03. THE APPELLANT PRAYS THAT THE DEDUCTION U/S.80IB OF TH E ACT BE ALLOWED FOR A.Y. 2002-03. 25. FACTS OF THE CASE, IN BRIEF, ARE THAT THE AO DURING THE COURSE OF ASSESSMENT PROCEEDINGS NOTED THAT THE ASSESSEE COMPA NY DURING THE COURSE OF ASSESSMENT PROCEEDINGS CLAIMED THAT DEDUCTION U/S.80IB MAY BE CONSIDERED. DURING THE COURSE OF ASSESSMENT PRO CEEDINGS IT WAS SUBMITTED THAT SINCE THERE WAS NO TAXABLE INCOME DU RING THE PREVIOUS YEAR ENDED 31-03-2002 THE DEDUCTION U/S.80IB WAS NIL. HOWEVER, IF DURING THE ASSESSMENT PROCEEDINGS POSITIVE INCO ME IS DETERMINED, THEN THE ASSESSEE SUBMITS ITS CLAIM FOR DEDUC TION U/S.80IB. IT WAS ACCORDINGLY SUBMITTED THAT DEDUCTION U /S.80IB SHOULD BE ALLOWED TO THE ASSESSEE ON ACCOUNT OF THE POS ITIVE INCOME, IF ASSESSED. 26. HOWEVER, THE AO HELD THAT ASSESSEE COMPANY HAS NOT FILED AUDIT REPORT IN FORM 10CCA DULY SIGNED AND CERTIFIED BY T HE AUDITORS. HE THEREFORE REJECTED THE CLAIM. THE ASSESSEE IN APPEAL FILED BEFORE THE CIT(A) HAD CHALLENGED SUCH DENIAL. SUBSEQUENTLY, THE AO IN AN ORDER PASSED U/S.154 ALLOWED THE CLAIM OF DEDUCTIO N U/S.80IB. 27. BEFORE CIT(A) THE ASSESSEE SUBMITTED THAT SINCE THE D EDUCTION WAS INITIALLY DENIED FOR NON FILING OF AUDIT REPORT IN FORM 10C CB ALONG WITH RETURN OF INCOME AND NOW THAT THE AO IN THE ORDER PASSED U/S.154 HAS ALLOWED SUCH CLAIM, THEREFORE, THE ASSESSEE DOE S NOT PRESS THIS GROUND. HOWEVER, THE CIT(A) NOTED THAT THE A O HAD 13 ITA NOS.1107, 1080/PN/2013 AND CO NO.57/PN/2014 ERRONEOUSLY GRANTED DEDUCTION U/S.154 WHICH SHOULD BE W ITHDRAWN. HE THEREFORE ASKED THE ASSESSEE TO EXPLAIN AS TO WHY THE DEDUCTION GRANTED U/S.80IB SHOULD NOT BE WITHDRAWN AND WHY THE IN COME SHOULD NOT BE ENHANCED. IT WAS SUBMITTED THAT SECTION 80IB (13) R.W.S. 80IA(7) REQUIRES AN ASSESSEE TO FILE AN ACCOUNTANTS REPORT W.E.F. 01-04-2003. THEREFORE, THE BENEFIT GRANTED U/S.80IB CANNOT BE WITHDRAWN. 28. HOWEVER, THE CIT(A) WAS NOT SATISFIED WITH THE EXPLANATI ON GIVEN BY THE ASSESSEE AND HELD THAT THE AO WAS NOT JU STIFIED IN ALLOWING DEDUCTION U/S.80IB IN THE RECTIFICATION ORDER. HE TH EREFORE WITHDREW THE DEDUCTION GRANTED TO THE ASSESSEE U/S.80I B BY OBSERVING AS UNDER : FINDINGS : 2.7.6 I HAVE CONSIDERED THE FACTS INVOLVED IN THE I SSUE AND ARGUMENTS OF THE APPELLANT. I THINK THE ENTIRE DISCU SSION ON FILING OF FORM 10CCB IS MISPLACED. THIS IS NOT THE CASE IN WHICH DEDUCTION WAS CLAIMED BY THE ASSESSEE AND THE AO DENIED IT. IN THIS CASE, DEDUCTION WAS NOT GRANTED BECAUSE IT WAS NOT CLAIMED BY THE APPELLA NT . SINCE THE DEDUCTION WAS NOT CLAIMED EITHER ALONG WITH THE RETU RN OF INCOME OR DURING THE ASSESSMENT PROCEEDINGS, THE LEARNED AO HAS NOT DISCUSSED THE CLAIM IN THE ASSESSMENT ORDER . THEREFORE, TO STATE THAT THE LEARNED AO DENIED THE DEDUCTION ON THE GROUND THAT THE APPE LLANT DID NOT FILE ACCOUNTANT'S REPORT IN FORM 10CCB ALONG WITH THE RET URN OF INCOME IS INCORRECT FACTUAL NARRATION. 2.7.7 THE APPELLANT HAS FILED RETURN OF INCOME DECL AR I NG LOSS. THEREFORE, THE APPELLANT COULD NOT HAVE CLAIMED THE DEDUCTION UNDER THE SECTION 8018 IN THE RETURN OF INCOME. THE APPELLANT'S LOSS BE CAME POSITIVE INTO INCOME BECAUSE OF THE ADDI T IONS AND DISALLOWANCES MADE BY THE LEARNED AO DURING THE ASSESSMENT PROCEEDINGS . THE APPELLANT BECAUSE OF THE POSITIVE INCOME ASSESSED BY THE LEARNED AO , BECAME ELIGIBLE TO CLAIM THE DEDUCTION AFTER THE ASSESSMENT ORDER WAS PASSED . THE APPELLANT HAS CONTENDED THAT IT WAS 'IMPOSSIBLE' FOR IT TO FORESEE TH E ADDITIONS, WHICH WOULD BE MADE DURING THE ASSESSMENT AND CLAIM THE DED U CTION UNDER SECTION 80-IB IN ITS RETURN OF INCOME . LAW DOES NOT EXPECT A PERSON TO DO AN IMPOSSIBLE ACT . THE APPELLANT HAS STATED THA T , AT THE SAME TIME, THE DED U CTION FOR WHICH IT IS ELIGIBLE SHOULD NOT BE DENIED E VEN IF THE LAW HAS NOT PROVIDED FOR SUCH AN EVENTUALITY. 14 ITA NOS.1107, 1080/PN/2013 AND CO NO.57/PN/2014 2 . 7.8 I AGREE WITH THE APPELLANT THAT IT COULD NOT HA VE CLAIMED DEDUCTION IN ITS RETURN OF INCOME BECAUSE OF LOSS. I ALSO AGREE TH AT LAW DOES NOT REQUIRE A PERSON TO DO IMPOSSIBLE ACT . HOWEVER , I DO NOT AGREE WITH THE APPEL L ANT THAT THE DEDUCTION CAN BE GRANTED TO IT AFTER T HE ASSESSMENT IS OVER . THE REASONS FOR MY DECISION ARE AS UNDER: 2.7.9 FIRSTLY, THERE IS NO LEGAL PROVISION , WHICH PRO V IDES FOR GRANTING A DEDUCTION AFTER THE ASSESSMENT IS COMPLETED . THEREFORE, WHAT I NOT EXPRESSIVELY PROVIDED IN THE LAW CANNOT BE DONE ON TH E GROUND OF JUSTICE OR EQUITY. IT IS HELD IN KRISHI UTPADAN MANDI SAMIT BULANDSHAHAR V UNION OF INDIA (2004) 267 ITR 467 (ALL) THAT 'IT IS A WELL-SETTLED PRINCIPLE OF INTERPRETATION OF TAXING STATUTES THAT THERE IS NO EQUITY IN TAX, AND HENCE CONSIDERATIONS OF HARDSHIP ARE IRRELEVANT' THIS IS TRUE ESPECIALLY FOR THE EXEMPTIONS AND DEDUCTIONS PROVISIONS. THE SUPREME COURT IN LIBERTY OIL MILLS (P) LTD V COLLECTOR OF EXCISE(1995) 1 SCC 451 HAS HELD THAT THE PROVISIONS GRANTING EXEMPTION SHOULD BE CONSTRUED STRICT LY. 2.7.10 SECONDLY, GRANTING OF DEDUCTION U/S 80 IB IS SU BJECT TO THE SATISFACTION OF CERTAIN MANDATORY CONDITIONS ON PART O F THE ASSESSE. THESE MANDATORY CONDITIONS ARE PROVIDED IN THE SECTIO N 801B. THEREFORE, GRANTING OF THE DEDUCTION IS NOT AUTOMATI C. IT FOLLOWS THAT AFTER COMPLETION OF ASSESSMENT, SATISFACTION OF THESE COND ITIONS CANNOT BE EXAMINED BY AN AUTHORITY AS THE LAW DOES NOT PROVI DE FOR EXAMINING SUCH CLAIM AFTER THE ASSESSMENT IS COMPLETED. THEREFORE, LEARNED AO'S ACTION OF GRANTING DEDUCTION U/S 154 AMOUNTED TO ARR IVING AT SATISFACTION OF THESE MANDATORY CONDITIONS, WHICH CANNOT BE DONE D URING THE RECTIFICATION PROCEEDINGS. 2.7.11 THIRDLY, FILING OF AN ACCOUNTANT'S REPORT BEFORE COMPLETION OF THE ASSESSMENT IN FORM 10CCS IS HELD TO BE DIRECTORY CONDITION BY T HE COURTS' IN DIFFERENT DECISIONS. KERALA HIGH COURT IN T HE CASE OF CIT V P D ABRAHAM (2012) 80 CCH 127 KERALA HC HAS HELD THAT IT IS A MANDATORY CONDITION AND ACCOUNTANT'S REPORT HAS TO BE FILED ALO NG WITH THE RETURN OF INCOME. HOWEVER, FILLING OF THE ACCOUNTANT'S REPORT AFTER THE ASSESSMENT IS MEANINGLESS AS THE PURPOSE FOR WHICH ENACTMENT HAS PR OVIDED REQUIREMENT OF THE ACCOUNTANT'S REPORT IS NOT MET IF IT IS FILED AFTER THE ASSESSMENT IS COMPLETED. 2.7.12 FOURTHLY, THE HONOURABLE SUPREME COURT IN TH E CASE OF GOETZE (INDIA) LIMITED (2006) 284 ITR 323 (SC) HAS LAID DOWN THAT THE CLAIM OF DEDUCTION CAN ONLY BE MADE BY FILING REVISED RETURN. IT IS TRUE THAT PURELY LEGAL CLAIM CAN BE MADE WITHOUT FILING OF REVISED R ETURN OF INCOME EVEN BEFORE THE APPELLATE AUTHORITY AS HELD BY THE VARIOU S COURTS. HOWEVER THE CLAIM, THE ADMISSIBILITY OF WHICH DEPENDS ON VERIF ICATION OF FACTS SHOULD ONLY BE MADE BY FILING REVISED RETURN AS HELD B Y THE SUPREME COURT IN THE CASE OF GOETZE (INDIA) LIMITED. 2.7.13 IN VIEW OF THE ABOVE, I HOLD THAT DEDUCTION UNDER SECTION 80-IB ALLOWED BY THE LEARNED AO BY PASSING THE RECTIFICATIO N. ORDER WAS NOT PERMISSIBLE BY THE LAW. I HOLD THAT THE APPELLANT CA NNOT CLAIM DEDUCTION U/S.80-IB AFTER THE ASSESSMENT IS COMPLETED IN ABSENCE OF THE LEGAL PROVISION PERMITTING ENTERTAINMENT OF SUCH CLAIM AND ACCORDINGLY WITHDRAW THE DEDUCTION U/S.80IB GRANTED TO THE APPEL LANT. 15 ITA NOS.1107, 1080/PN/2013 AND CO NO.57/PN/2014 29. AGGRIEVED WITH SUCH ORDER OF THE CIT(A) THE ASSESSEE IS IN APPEAL BEFORE US. 30. THE LD. COUNSEL FOR THE ASSESSEE REFERRING TO PAGE 8 2 OF THE PAPER BOOK DREW THE ATTENTION OF THE BENCH TO THE NOT ES ATTACHED TO THE AUDIT REPORT ACCORDING TO WHICH THE DEDUCTION U/S.80 IB IS NIL AS THERE WAS NO TAXABLE PROFITS DURING THE PREVIOUS YEAR E NDED 31-03- 2002. HOWEVER, AS A RESULT OF ASSESSMENT PROCEEDINGS, IF TH ERE IS A TAXABLE INCOME, THEN THE COMPANY RESERVES ITS CLAIM FOR DE DUCTION U/S.80IB. HE SUBMITTED THAT IN VIEW OF THE ABOVE NOTING IN THE AUDITED ACCOUNTS FILED ALONG WITH THE RETURN OF INCOME THE SAME IS TO BE TREATED AS PART OF THE RETURN OF INCOME. FOR THE A BOVE PROPOSITION, HE RELIED ON THE DECISION OF THE MUMBAI BENCH OF THE TRIBU NAL IN THE CASE OF STATE BANK OF INDIA VS. DCIT VIDE ITA NOS. 6817 , 6818, 6823 AND 6824/MUM ORDER DATED 31-08-2015 FOR A.YRS. 2001-02 TO 2002- 03. REFERRING TO THE FOLLOWING DECISIONS HE SUBMITTED THAT IN CASE THE LD.CIT(A) IS OF THE VIEW THAT DEDUCTION U/S.80IB WAS NOT CLA IMED DURING ASSESSMENT PROCEEDINGS HE SHOULD HAVE ADMITTED S UCH CLAIM MADE BY THE ASSESSEE DURING APPELLATE PROCEEDINGS : 1. JUTE CORPORATION OF INDIA VS. CIT REPORTED IN 187 ITR 688 (SC) 2. NATIONAL THERMAL POWER CO. LTD. VS. CIT REPORTED IN 229 ITR 383 (SC) 34. AHMEDABAD ELECTRICITY CO. LTD. VS. CIT REPORTED IN 199 ITR 351 (BOM.) 31. HE SUBMITTED THAT THE LD.CIT(A) CANNOT ENHANCE THE TAX LIABILITY OF THE ASSESSEE WHEN THE AO HAS ALREADY APPLIED HIS MIND AND ACCEPTED THE SUBMISSION OF THE ASSESSEE AS THE SAM E WOULD AMOUNT TO REVISION OF THE ASSESSMENT ORDER WHICH IS BEYO ND THE POWERS OF THE CIT(A). FOR THE ABOVE PROPOSITION, HE RELIED ON THE FOLLOWING DECISIONS : 16 ITA NOS.1107, 1080/PN/2013 AND CO NO.57/PN/2014 1. HINDUSTAN UNILEVER LTD. VS. DCIT REPORTED IN 325 I TR 10 (BOM.) 2. TITANOR COMPONENT VS. CIT REPORTED IN 343 ITR 18 3 (BOM.) 3. IVY COMPTECH PVT. LTD. VS. DCIT ITA NO.667/HYD/ 2008 ORDER DATED 24-10-2013 (HYDERABAD ITAT) 32. RELYING ON VARIOUS OTHER DECISIONS HE SUBMITTED THAT DEDUCTION U/S.80IB SHOULD BE ALLOWED ON CERTAIN ITEMS OF OTHER INCOME . HE ACCORDINGLY SUBMITTED THAT A DIRECTION MAY BE GIVEN TO T HE AO THAT HE SHOULD ALLOW DEDUCTION U/S.80IB IF THE INCOME OF THE ASSE SSEE IS POSITIVE. 33. THE LD. DEPARTMENTAL REPRESENTATIVE ON THE OTHER HA ND WHILE SUPPORTING THE ORDER OF THE CIT(A) FAIRLY CONCEDED THAT T HE ASSESSEE IN PRINCIPLE IS ELIGIBLE FOR DEDUCTION U/S.80IB. REFERRING TO THE PROVISIONS OF SECTION 80A(5) HE SUBMITTED THAT AS PER THE PROVISIONS OF THE SAID SECTION WHERE THE ASSESSEE FAILS TO MAKE A CLA IM IN HIS RETURN OF INCOME FOR ANY DEDUCTION U/S.10A OR SECTION 10 AA OR SECTION 10B OR SECTION 10BA OR UNDER ANY OTHER PROVIS IONS OF THIS CHAPTER UNDER THE HEADING C-DEDUCTIONS IN RESPECT OF C ERTAIN INCOME NO DEDUCTION SHALL BE ALLOWED TO HIM THERE UNDER. SINCE THE LD.CIT(A) HAS PASSED A SPEAKING ORDER, THEREFORE, THE SAM E SHOULD BE UPHELD AND THE GROUND RAISED BY THE ASSESSEE ON TH IS ISSUE SHOULD BE DISMISSED. 34. WE HAVE CONSIDERED THE RIVAL ARGUMENTS MADE BY BOTH THE SIDES, PERUSED THE ORDERS OF THE AO AND THE CIT(A) AND T HE PAPER BOOK FILED ON BEHALF OF THE ASSESSEE. WE HAVE ALSO CONSI DERED THE VARIOUS DECISIONS CITED BEFORE US. ADMITTEDLY, THE ASSESS EE HAS NOT FILED THE TAX AUDIT REPORT IN THE PRESCRIBED FORM DULY SIGN ED BY THE AUDITORS FOR CLAIMING DEDUCTION U/S.80IB BECAUSE THERE WAS NO 17 ITA NOS.1107, 1080/PN/2013 AND CO NO.57/PN/2014 POSITIVE INCOME. HOWEVER, THE ASSESSEE IN THE NOTES TO ACCOUNTS HAS RESERVED ITS CLAIM IF THE ASSESSED INCOME IS POSITIVE. WE FIND THE AO INITIALLY IN THE ASSESSMENT ORDER DENIED THE CLAIM OF DEDU CTION U/S.80IB SINCE THE ASSESSEE HAS NOT FURNISHED THE AUDIT REPORT ALONG WITH THE RETURN OF INCOME. HOWEVER, IN THE ORDER PASSED U/S.154 DATED 29-06-2005 THE AO ALLOWED THE CLAIM OF DEDUCTION U/ S.80IB. WE FIND IN APPEAL THE LD.CIT(A) DIRECTED THE AO TO WITHDRAW THE SAME ON THE GROUND THAT THERE IS NO LEGAL PROVISION WHICH PROVIDES FOR GRANTING OF DEDUCTION AFTER THE ASSESSMENT IS COMPLET ED. FURTHER GRANTING OF DEDUCTION U/S.80IB IS SUBJECT TO SATISFACTION O F CERTAIN MANDATORY CONDITIONS ON THE PART OF THE ASSESSEE. ACC ORDING TO HIM FILING OF THE AUDIT REPORT AFTER THE COMPLETION OF THE ASSESS MENT IS MEANINGLESS. FURTHER, ACCORDING TO HIM THE CLAIM OF DEDUCTIO N CAN ONLY BE MADE BY FILING A REVISED RETURN. ALTHOUGH ACCORDIN G TO HIM PURELY A LEGAL CLAIM CAN BE MADE WITHOUT FILING OF REVISED RET URN OF INCOME EVEN BEFORE THE APPELLATE AUTHORITY, HOWEVER, THE ADMISSIBILITY OF SUCH CLAIM DEPENDS ON VERIFICATION OF FACTS. IT IS THE SUBMISSION OF THE LD. COUNSEL FOR THE ASSESSEE THAT THE C LAIM WAS ALREADY THERE IN THE RETURN OF INCOME WHEN SEPARATE NOT E WAS GIVEN AND THEREFORE IT SHOULD BE TREATED AS PART OF RETURN O F INCOME. FURTHER, THIS GROUND BEING PURELY A LEGAL ONE THE CIT(A) C OULD HAVE ADMITTED SUCH CLAIM FILED BY THE ASSESSEE DURING APPEAL PROCEEDINGS. SINCE THE AO IN THE 154 ORDER HAS GRANTED THE DEDUCTIO N U/S.80IB, THEREFORE, THE CIT(A) SHOULD NOT HAVE WITHDRAWN THE SAME . WE FIND MERIT IN THE ABOVE SUBMISSION OF THE LD. COUNSEL FOR THE AS SESSEE ON THIS ISSUE. SINCE THERE WAS NO POSITIVE INCOME WHILE FILING T HE RETURN OF INCOME, THE ASSESSEE HAS NOT ENCLOSED THE PRESCRIBED AUDIT REPORT DULY SIGNED AND VERIFIED BY THE AUDITORS. HOWEVER, THE AS SESSEE HAD 18 ITA NOS.1107, 1080/PN/2013 AND CO NO.57/PN/2014 RESERVED ITS RIGHT TO CLAIM DEDUCTION U/S.80IB IF THE ASS ESSED INCOME BECOMES POSITIVE. FURTHER, THE SAME IS PURELY A LEGAL ONE , THEREFORE, EVEN IF THE ASSESSEE HAS NOT CLAIMED THE SAME IN ASSESSM ENT PROCEEDINGS, HE CAN VERY WELL CLAIM THE SAME BEFORE THE AP PELLATE AUTHORITIES AND THE APPELLATE AUTHORITIES ARE SUPPOSED TO ENTERTAIN SUCH LEGAL CLAIM. 35. THE HONBLE SUPREME COURT IN THE CASE OF NTPC LTD.(S UPRA) HAS HELD THAT THE TRIBUNAL HAS JURISDICTION TO EXAMINE TH E QUESTION OF LAW WHICH ARISE FROM THE FACTS AS FOUND BY THE INCOME-T AX AUTHORITIES AND HAVING A BEARING ON THE TAX LIABILITY OF THE ASSESSEE. THE HONBLE SUPREME COURT HAS HELD AS UNDER (AT PAGE 386) : UNDER SECTION 254 OF THE INCOME TAX ACT, THE APPELL ATE TRIBUNAL MAY, AFTER GIVING BOTH THE PARTIES TO THE APPEAL AN OPPOR TUNITY OF BEING HEARD, PASS SUCH ORDERS THEREON AS IT THINKS FIT. THE POWER OF T HE TRIBUNAL IN DEALING WITH APPEALS IS THUS EXPRESSED IN THE WIDEST POSSI BLE TERMS. THE PURPOSE OF THE ASSESSMENT PROCEEDINGS BEFORE THE TAXING AUTHORITIES IS TO ASSESS CORRECTLY THE TAX LIABILITY OF AN ASSESSEE IN AC CORDANCE WITH LAW. IF, FOR EXAMPLE, AS A RESULT OF A JUDICIAL DECISION GI VEN WHILE THE APPEAL IS PENDING BEFORE THE TRIBUNAL, IT IS FOUND THAT A NON TAXABLE ITEM IS TAXED OR A PERMISSIBLE DEDUCTION IS DENIED, WE DO NOT SEE AN Y REASON WHY THE ASSESSEE SHOULD BE PREVENTED FROM RAISING THAT QUESTION BE FORE THE TRIBUNAL FOR THE FIRST TIME, SO LONG AS THE RELEVANT F ACTS ARE ON RECORD IN RESPECT OF THAT ITEM. WE DO NOT SEE ANY REASON TO RESTR ICT THE POWER OF THE TRIBUNAL UNDER SECTION 254 ONLY TO DECIDE THE GR OUNDS WHICH ARISE FROM THE ORDER OF THE COMMISSIONER OF INCOME TAX (APP EALS). BOTH THE ASSESSEE AS WELL AS THE DEPARTMENT HAVE A RIGHT TO FILE AN APPEAL/CROSSOBJECTIONS BEFORE THE TRIBUNAL. WE FAIL T O SEE WHY THE TRIBUNAL SHOULD BE PREVENTED FROM CONSIDERING QUESTION S OF LAW ARISING IN ASSESSMENT PROCEEDINGS ALTHOUGH NOT RAISED EARLIER. IN THE CASE OF JUTE CORPORATION OF INDIA LTD. V. CIT [1991] 187 ITR 688, THIS COURT, WHILE DEALING WITH THE POWERS OF THE APPELLATE ASSISTANT COMMISSIONER OBSERVED THAT AN APPELLATE AUTHORITY HAS A LL THE POWERS WHICH THE ORIGINAL AUTHORITY MAY HAVE IN DECIDING T HE QUESTION BEFORE IT SUBJECT TO THE RESTRICTIONS OR LIMITATIONS, IF ANY, PRE SCRIBED BY THE STATUTORY PROVISIONS. IN THE ABSENCE OF ANY STATUTORY PR OVISION, THE APPELLATE AUTHORITY IS VESTED WITH ALL THE PLENARY PO WERS WHICH THE SUBORDINATE AUTHORITY MAY HAVE IN THE MATTER. THERE IS NO GOOD REASON TO JUSTIFY CURTAILMENT OF THE POWER OF THE APPELLATE ASSISTANT COMMISSIONER IN ENTERTAINING AN ADDITIONAL GROUND RAI SED BY THE ASSESSEE IN SEEKING MODIFICATION OF THE ORDER OF ASSESSMENT PASSED BY THE INCOME TAX OFFICER. THIS COURT FURTHER OBSERVED THAT THERE MAY BE 19 ITA NOS.1107, 1080/PN/2013 AND CO NO.57/PN/2014 SEVERAL FACTORS JUSTIFYING THE RAISING OF A NEW PLEA IN AN APPEAL AND EACH CASE HAS TO BE CONSIDERED ON ITS OWN FACTS. THE APPELLAT E ASSISTANT COMMISSIONER MUST BE SATISFIED THAT THE GROUND RAISED WAS BONA FIDE AND THAT THE SAME COULD NOT HAVE BEEN RAISED EARLIER FOR GOOD REASONS. THE APPELLATE ASSISTANT COMMISSIONER SHOULD EXERCISE HIS DISCRETION IN PERMITTING OR NOT PERMITTING THE ASSESSEE TO RAISE AN AD DITIONAL GROUND IN ACCORDANCE WITH LAW AND REASON. THE SAME OBSERVATIO NS WOULD APPLY TO APPEALS BEFORE THE TRIBUNAL ALSO. THE VIEW THAT THE TRIBUNAL IS CONFINED ONLY TO ISSUES A RISING OUT OF THE APPEAL BEFORE THE COMMISSIONER OF INCOME TAX (APP EALS) TAKES TOO NARROW A VIEW OF THE POWERS OF THE APPELLATE TRIBUNA L (VIDE, E.G., CIT V. ANAND PRASAD [1981] 128 ITR 388 (DELHI), CIT V. KARA MCHAND PREMCHAND P. LTD. [1969] 74 ITR 254 (GUJ) AND CIT V . CELLULOSE PRODUCTS OF INDIA LTD. [1985] 151 ITR 499 (GUJ) [FB]). UNDOU BTEDLY, THE TRIBUNAL WILL HAVE THE DISCRETION TO ALLOW OR NOT ALLOW A NEW GROUND TO BE RAISED. BUT WHERE THE TRIBUNAL IS ONLY REQUIRED TO CONSIDER A QUESTION OF LAW ARISING FROM THE FACTS WHICH ARE ON RECORD IN THE ASSESSM ENT PROCEEDINGS WE FAIL TO SEE WHY SUCH A QUESTION SHOULD NOT BE ALLOW ED TO BE RAISED WHEN IT IS NECESSARY TO CONSIDER THAT QUESTION IN ORDER TO CORRECTLY ASSESS THE TAX LIABILITY OF AN ASSESSEE. THE REFRAMED QUESTION, THEREFORE, IS ANSWERED IN THE A FFIRMATIVE, I.E., THE TRIBUNAL HAS JURISDICTION TO EXAMINE A QUEST ION OF LAW WHICH ARISES FROM THE FACTS AS FOUND BY THE AUTHORITIES BELOW AND HAVING A BEARING ON THE TAX LIABILITY OF THE ASSESSEE. WE REMAND THE PROCEEDINGS TO THE TRIBUNAL FOR CONSIDERATION OF THE NEW GROUNDS RAISED BY THE ASSESSEE ON THE MERITS. 36. SINCE IN THE INSTANT CASE THE ASSESSEE IS OTHERWISE ENTITLED TO DEDUCTION U/S.80IB AS GRANTED EARLIER BY THE AO IN THE 1 54 PROCEEDINGS AND SINCE IT IS ALSO THE SETTLED LAW THAT PRO CEEDINGS BEFORE THE APPELLATE TRIBUNAL ARE CONTINUATION OF THE ASSES SMENT PROCEEDINGS, THEREFORE, RESPECTFULLY FOLLOWING THE DECISION O F THE HONBLE SUPREME COURT CITED (SUPRA) WE SET ASIDE THE ORD ER OF THE CIT(A) AND DIRECT THE AO TO ALLOW THE CLAIM OF DEDUCTION U/S .80IB. GROUND RAISED BY THE ASSESSEE ON THIS ISSUE IS ACCORDINGLY ALLOWED. 37. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS PARTLY ALLOWED. 20 ITA NOS.1107, 1080/PN/2013 AND CO NO.57/PN/2014 ITA NO.1107/PN/2013 (BY REVENUE) : 38. GROUND OF APPEAL NO.1 BY THE REVENUE READS AS UNDER : 1. WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF T HE CASE AND IN LAW, THE LD.CIT(A) WAS JUSTIFIED IN DIRECTING THE AO TO ALLOW PROJECT ASSISTANT TECHNICAL CHARGES AS DEDUCTIBLE EXPENDITURE U/ S.37(1) OF THE ACT, WHEN THE ASSESSEE HAS NOT BEEN ABLE TO PROVE THE BA SIS OF SUCH PAYMENT, THE NATURE OF SERVICE RENDERED BY THE EXPAT RIATES AND ALSO WHEN THE PAYMENT WERE NOT MADE IN ACCORDANCE WITH T HE PROJECT ASSISTANT AGREEMENT DATED 11-12-1994. 39. FACTS OF THE CASE, IN BRIEF, ARE THAT THE AO DURING TH E COURSE OF ASSESSMENT PROCEEDINGS EXAMINED THE PROJECT ASSISTANCE AGREEMENT (PA AGREEMENT) BETWEEN THE ASSESSEE COMPANY AND ITS PA RENT COMPANY DAIMLER BENZ PROJECT CONSULAT GMBH, GERMANY (DCP C IN SHORT). HE EXAMINED THE DETAILS OF PAYMENTS MADE TO DCP C ON ACCOUNT OF SERVICES RENDERED BY EXPATRIATES. FROM THE VARIOUS DETAILS FURNISHED BY THE ASSESSEE HE NOTED THAT THE EXP ATRIATES IN CATEGORY D NAMED AS MR. LINO, SPECIALIST, AFTER SALES SERVICE AND MR. TONGER, SENIOR MANAGER, PRE-OWNED CARS WERE PAID RS .33.79 LAKHS EACH. HE NOTED THAT THE PROJECT ASSISTANCE AGRE EMENT DATED 11-12-1994 DOES NOT MENTION CATEGORY D EXPATRIATES. T HEREFORE, ACCORDING TO THE AO, THESE PAYMENTS HAVE BEEN MADE IN VIOLATION OF THE AGREEMENT. ON BEING ASKED BY THE AO, IT WAS SUBMITTE D BY THE ASSESSEE THAT THE AGREEMENT WAS NOT AMENDED SO FAR A ND EXPRESSED ITS INABILITY TO FURNISH THE DETAILS OF THE WORKING OF THE PAY MENTS MADE TO THE EXPATRIATES STATING THAT THE DETAILS OF WORK ING IS AVAILABLE WITH DCPC. REJECTING THE VARIOUS EXPLANATIONS GIVE N BY THE ASSESSEE THE AO DISALLOWED TOTAL AMOUNT OF RS.67,59,428 /- PAID TO BOTH THE EXPATRIATES U/S.37(1) FOR NOT BEING IN COMPLIANC E WITH THE PROVISIONS OF THE PROJECT ASSISTANT AGREEMENT DATED 11-12-1 994. 21 ITA NOS.1107, 1080/PN/2013 AND CO NO.57/PN/2014 40. SO FAR AS PAYMENTS MADE TO THE B CATEGORY EXPATRIA TES IS CONCERNED, THE AO NOTED THAT IN THE AGREEMENT ONLY ON E EXPATRIATE IS SPECIFIED WHEREAS THE PAYMENT HAS BEEN MADE TO 3 EXPAT RIATES WHICH ACCORDING TO HIM WAS IN VIOLATION OF THE AGREEMENT. ACCORDING TO THE AO, THE ASSESSEE DID NOT ESTABLISH THAT THE SERV ICES WERE RENDERED BY THE EXPATRIATES. HE ACCORDINGLY DISALLOWED RS.40,32,454/- AS NON BUSINESS EXPENDITURE U/S.37(1) OF THE ACT. SIMILARLY, IN RESPECT OF EXPATRIATES IN THE CATEGORIES OF A A ND B, THE AO DISALLOWED AN AMOUNT OF RS.88,39,516/- BEING EXCESS PA YMENT MADE WHICH ARE NOT IN ACCORDANCE WITH AGREEMENT. THUS, THE AO DISALLOWED AN AMOUNT OF RS.1,96,31,398/- BEING IN VIOLATION OF TH E PROJECT ASSISTANT AGREEMENT BETWEEN THE ASSESSEE AND THE PARENT COMPANY. 41. BEFORE THE CIT(A) IT WAS SUBMITTED THAT THE ASSESSEE EXECUTED REVISED AGREEMENT IN MAY 2005 WITH RETROSPECTIVE EFFECT FROM 01-01- 2002. THE TECHNICAL SERVICE CHARGES AS PER THE REVISED AGREEMENT HAVE BEEN WHOLLY AND EXCLUSIVELY EXPENDED U/S.37(1) FOR T HE PURPOSE OF THE ASSESSEE. IT WAS FURTHER SUBMITTED THAT THE ISSU E OF NATURE OF THIS EXPENDITURE WHETHER REVENUE OR CAPITAL IS SETTLED IN FAVOUR OF TH E ASSESSEE BY THE DIRECTION OF THE DRP IN ASSESSEES OWN CASE FOR A.Y. 2007-08. IT WAS ALSO SUBMITTED THAT THE TPO HAS ACCE PTED THESE PAYMENTS AT THE ARMS LENGTH AS HE HAS NOT MADE ANY ADJUSTMENT TO IT. IT WAS ARGUED THAT THE AO HAS NO POWER TO DISALLOW THE SAME UNDER ANY OTHER PROVISIONS OF THE ACT ONCE THE PAYMEN T IS ACCEPTED AT THE ARMS LENGTH. FOR THE ABOVE PROPOSITION, THE AS SESSEE RELIED ON THE FOLLOWING DECISIONS : 1. CUSHMAN WAKEFIELD INDIA PVT. LTD. VS. ACIT REPORTE D IN 2011-TII-121-ITAT-DEL-TP 22 ITA NOS.1107, 1080/PN/2013 AND CO NO.57/PN/2014 2. ACIT VS. AMERICAN EXPRESS SERVICES INDIA LTD. ITA NO.4106/MUM/2007 3. CIT VS. ORACLE INDIA PVT. LTD. ITAT NO.383/2009 4. CIT VS. SAMSUNG INDIA ELECTRONIC LTD. ITA NO.39/ 2010 5. CIT VS. NESTLE INDIA LTD. ITA NO.662/2005 42. IT WAS ACCORDINGLY ARGUED THAT THE AO BE DIRECTED TO ALLOW PROJECT ASSISTANT TECHNICAL CHARGES AS DEDUCTIBLE EXPENDITURE. 43. BASED ON THE ARGUMENTS ADVANCED BY THE ASSESSEE THE LD.CIT(A) DELETED THE ADDITION. WHILE DOING SO, HE OBSERVED TH AT THE PAYMENTS MADE TO EXPATRIATES ARE NEITHER CAPITAL EXPEND ITURE NOR ARE OF PERSONAL IN NATURE. FURTHER, THERE IS NO CASE FOR CONSIDERING IT TO HAVE BEEN MADE FOR NON BUSINESS PURPOSES. THE AO ALSO HAS NOT QUESTIONED THE GENUINENESS OF THESE PAYMENTS MADE BY T HE ASSESSEE. THEREFORE, ACCORDING TO HIM, THE PAYMENTS MAD E TO EXPATRIATES WERE OBVIOUSLY MADE FOR THE PURPOSE OF BUSIN ESS OF THE ASSESSEE. THEREFORE, THERE CANNOT BE ANY GROUND FOR M AKING THE DISALLOWANCE U/S.37(1) OF THE I.T. ACT. 44. AGGRIEVED WITH SUCH ORDER OF THE CIT(A) THE REVENUE IS IN APPEAL BEFORE US. 45. THE LD. DEPARTMENTAL REPRESENTATIVE HEAVILY RELIED ON THE ORDER OF THE AO. HE SUBMITTED THAT THE PAYMENTS MADE TO THE VARIOUS EXPATRIATES CATEGORIZED AS B AND D ARE IN VIOLATIO N OF THE TERMS AND CONDITIONS OF THE PROJECT ASSISTANT AGREEMEN T. SIMILARLY IN RESPECT OF A AND B CATEGORY, THE PAYMENTS MADE ARE IN EXCESS OF THE PAYMENTS PRESCRIBED IN THE AGREEMENT. THEREFORE, TH E CIT(A) WAS NOT JUSTIFIED IN DELETING THE ADDITION MADE BY THE AO. 23 ITA NOS.1107, 1080/PN/2013 AND CO NO.57/PN/2014 46. THE LD. COUNSEL FOR THE ASSESSEE ON THE OTHER HAND WHILE SUPPORTING THE ORDER OF THE CIT(A) SUBMITTED THAT THE EX PENSES INCURRED UNDER PROJECT ASSISTANCE TECHNICAL AGREEMENT A RE PURELY FOR THE PURPOSE OF BUSINESS OF THE ASSESSEE. HE SUBMITTE D THAT WHEN THE TPO HAS ACCEPTED THAT A CERTAIN PAYMENT IS AT ARM S LENGTH PRICE, THEN THE AO HAS NO POWER TO DISALLOW THE SAME DU RING THE ASSESSMENT PROCEEDINGS. HE SUBMITTED THAT IN THE TP AS SESSMENT AND CORPORATE TAX ASSESSMENT PROCEEDINGS, IN THE SUBSE QUENT YEARS, THE TAX AUTHORITIES HAVE ACCEPTED THIS REVISED AGREEMEN T ENTERED INTO IN MAY 2005 WITH RETROSPECTIVE EFFECT FROM 01-01-2002 WHIC H INCLUDED EVEN THE D CATEGORY AS WELL AS THE REVISED CHAR GES AS PER THE AGREEMENT FOR THE RESPECTIVE YEARS. 47. REFERRING TO PAGE 431 OF THE PAPER BOOK, THE LD. COUN SEL FOR THE ASSESSEE SUBMITTED THAT BEFORE THE CIT(A) THE ASSE SSEE HAS CHALLENGED THE ORDER OF THE AO IN A.YRS. 2003-04 TO 2004 -05 WHERE SUCH PROJECT ASSISTANCE AND TECHNICAL FEES WAS CONSIDERE D BY THE AO AS CAPITAL EXPENDITURE AS AGAINST TREATING THE SAME A S REVENUE IN NATURE. IN THE ORDER FOR A.YRS. 2003-04 TO 2005-06, T HE AO DID NOT OBJECT TO THE AMENDMENT OF AGREEMENT WITH RETROSP ECTIVE EFFECT. THEREFORE, THE TAX AUTHORITIES CANNOT BLOW HOT AND COLD A T THE SAME TIME. REFERRING TO CLAUSE 3.1(C) OF THE ORIGINAL AGREEMENT ,WH ICH REFERS TO APPENDIX (1) AS WELL AS CLAUSE 3.1 OF THE REVISED AGREEMENT, THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT NUMBER OF EXPATRIATES CAN BE VARIED AS PER THE REQUIREMENTS OF MB INDIA. THEREFORE, THE ALLEGATION OF THE AO THAT ONE CATEGORY OF B EXPATRIATE WAS NOT DEPUTED AS PER THE TERMS OF THE AGREEMENT IS INCORRECT. HE SUBMITTED THAT THE ISSUE REGARDING REVENUE VS. CAPITAL N ATURE OF THE 24 ITA NOS.1107, 1080/PN/2013 AND CO NO.57/PN/2014 CHARGES HAS ALSO BEEN SETTLED IN FAVOUR OF MB INDIA BY TH E ORDER OF THE DRP IN A.Y. 2007-08. THE ORDER OF THE DRP IS BINDING O N THE AO AND THE MATTER IS CONCLUDED IN FAVOUR OF MB INDIA. THEREFO RE, THE SAME CONCLUSION NEEDS TO BE FOLLOWED IN A.Y. 2002-03. 48. RELYING ON THE DECISIONS CITED BEFORE CIT(A) HE SUBMITTE D THAT THE ORDER OF THE CIT(A) ON THIS ISSUE IS IN CONSONANCE WITH THE SETTLED LAW. THEREFORE, THE SAME SHOULD BE UPHELD AND THE GROUND RAISED BY THE REVENUE SHOULD BE DISMISSED. 49. WE HAVE CONSIDERED THE RIVAL ARGUMENTS MADE BY BOTH THE SIDES, PERUSED THE ORDERS OF THE AO AND CIT(A) AND THE P APER BOOK FILED ON BEHALF OF THE ASSESSEE. WE HAVE ALSO CONSIDERED TH E VARIOUS DECISIONS CITED BEFORE US. WE FIND THE AO DISALLOWED PART OF THE PROJECT ASSISTANCE TECHNICAL FEES OF RS.1,96,31,398/- ON THE GROUND THAT SAME IS NON BUSINESS EXPENDITURE DUE TO NOT BEING IN CONSONANCE WITH THE ORIGINAL AGREEMENT. WE FIND THE LD.CIT (A) DELETED THE DISALLOWANCE ON THE GROUND THAT THESE PAYME NTS ARE NEITHER CAPITAL EXPENDITURE NOR PERSONAL IN NATURE AND TH ERE IS NO CASE FOR CONSIDERING IT TO HAVE BEEN MADE FOR NON BUSINES S PURPOSE. FURTHER, HE HELD THAT THE AO HAS NOT QUESTIONED REGARD ING THE GENUINENESS OF PAYMENTS MADE BY THE ASSESSEE. WE FIND N O INFIRMITY IN THE ORDER OF THE CIT(A) DELETING THE ADDITION. TH E SUBMISSION OF THE ASSESSEE THAT THE DRP IN ASSESSEES O WN CASE FOR A.Y. 2007-08 HAS ALLOWED SUCH PROJECT ASSISTANCE TECHNICA L FEES AS DEDUCTIBLE BUSINESS EXPENDITURE COULD NOT BE CONTROVERTE D BY THE LD. DEPARTMENTAL REPRESENTATIVE. WE ALSO FIND MERIT IN THE SUBMISSION OF THE LD. COUNSEL FOR THE ASSESSEE THAT WHEN THE TPO HAS ACCEPTED THAT CERTAIN PAYMENT IS AT ALP, THEN THE AO HAS NO 25 ITA NOS.1107, 1080/PN/2013 AND CO NO.57/PN/2014 POWER TO DISALLOW THE SAME DURING THE ASSESSMENT PROCEEDINGS. 50. THE DELHI BENCH OF THE TRIBUNAL IN THE CASE OF CUSHMAN AND WAKEFIELD INDIA PVT. LTD. VS. ACIT REPORTED IN 135 ITD 242 H AS HELD THAT ONCE AN INTERNATIONAL TRANSACTION HAS BEEN MADE SU BJECT TO DETERMINATION OF ALP BY THE TPO AND HE HAS FOUND THAT T HE TRANSACTION IS AT ALP, THEN IT IS NOT PERMISSIBLE FOR THE AO TO RE- EXAMINE THAT TRANSACTION AND MAKE DISALLOWANCE UNDER THE NORMAL PROVISIONS OF THE ACT. 51. WE FURTHER FIND FROM THE SUBMISSION OF THE LD. COUNSEL FOR THE ASSESSEE THAT IN THE TP ASSESSMENT AND CORPORATE TAX ASSESSMENT PROCEEDINGS OF THE SUBSEQUENT YEARS, THE TAX AUTHORITIES HAVE ACCEPTED THE REVISED AGREEMENT ENTERED INTO IN MAY 200 5 WITH RETROSPECTIVE EFFECT FROM 01-01-2002 WHICH INCLUDED EVEN CATEGOR Y D EMPLOYEES AS WELL AS THE REVISED CHARGES AS PER THE AGR EEMENT FOR THE RESPECTIVE YEARS. UNDER THESE CIRCUMSTANCES WHEN THE DRP IN ASSESSMENT ORDER FOR A.Y. 2007-08 HAS DIRECTED TO ALLOW T HE PROJECT ASSISTANCE TECHNICAL FEES AS DEDUCTIBLE BUSINESS EXPENDITU RE AND THE REVENUE HAS ACCEPTED THE SAME AND WHEN IN SUBSEQUENT YEARS THE TAX AUTHORITIES HAVE ACCEPTED THE REVISED AGREEMENT EN TERED INTO IN MAY 2005 WITH RETROSPECTIVE EFFECT FROM 01-01-2002 AND S INCE THE GENUINENESS OF THE PAYMENTS HAS NOT BEEN DOUBTED BY T HE AO IN THE BODY OF THE ASSESSMENT ORDER, THEREFORE, WE FIND NO REASO N AS TO WHY PART OF SUCH PROJECT ASSISTANCE TECHNICAL FEE SHOULD BE D ISALLOWED. IN VIEW OF THE ABOVE DISCUSSION AND IN VIEW OF THE REASON ING GIVEN BY CIT(A) WE UPHOLD THE ORDER OF THE CIT(A) ON THIS ISSUE. TH E GROUND RAISED BY THE REVENUE IS ACCORDINGLY DISMISSED. 26 ITA NOS.1107, 1080/PN/2013 AND CO NO.57/PN/2014 52. GROUNDS OF APPEAL NO.2 AND 3 BY THE REVENUE READ AS UNDER : 2. WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF T HE CASE AND IN LAW, THE LD.CIT(A) WAS CORRECT IN LAW. (I) WHEN HE IMPLICITLY REJECTED THE DIRECT METHOD O F COMPARABLE UNCONTROLLED PRICE UNDER RULE 10B(1)(A) FOR THE EVA LUATION OF THE INTERNATIONAL TRANSACTION OF THE PAYMENT OF ROYALTY & SEEMS TO HAVE PREFERRED AGGREGATED TRANSACTION NET M ARGIN METHOD UNDER RULE 10B(1)(E), A INDIRECT METHOD WHIL E EVALUATING THE ARMS LENGTH PRICE, WHICH WAS REJECTED BY HIM FOR A.Y. 2005-06 (AND IN A.Y. 2008-09 AS PART OF THE DISP UTE RESOLUTION PANEL); (II) BY REJECTING THE CUP, A DIRECT METHOD FOR WORK ING OUT THE ARMS LENGTH OF THE INTERNATIONAL TRANSACTION AND UNCONTRO LLED TRANSACTION; WHICH PROVIDES FOR INSTANT COMPARISON OF THE PRICES OF THE PRODUCTS/SERVICES; (III) WHEN THE OECD GUIDELINES IN PARA 1.70 CLEARLY SUGGESTS THAT AN ATTEMPT SHOULD BE MADE TO REACH A REASONABLE ACCOMMOD ATION KEEPING IN MIND THE IMPRECISION OF THE VARIOUS METHODS AND THE PREFERENCE FOR HIGHER DEGREES OF COMPARABILITY AND A MORE DIRECT AN D CLOSE RELATIONSHIP OF THE TRANSACTION? 3. WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF TH E CASE AND IN LAW, THE LD.CIT(A) WAS CORRECT IN LAW. I. WHEN THE ASSESSEE COMPANY ITSELF HAS PROVIDED SEPARATE BENCHMARKING AND DETAILED INFORMATION REGARDING THE ROYALTY PAYMENT IN THE LATER YEARS. II. WHEN EACH YEAR SHOULD BE TREATED SEPARATELY BASED ON THE FACTS AND DOCUMENTATION SUBMITTED : (AS PER THE RATIO LAID DOWN IN THE CASE OF M/S. ONWARD TECHNOLOGIES VS. DCIT DATED 30-04-2013 (AP PEAL NO.ITA NO.7985/MUM/2010 OF ITAT MUMBAI). 53. FACTS OF THE CASE, IN BRIEF ARE THAT THE ASSESSEE COM PUTED THE ALP OF THE INTERNATIONAL TRANSACTION CARRIED OUT BY IT B Y APPLYING TRANSACTIONAL NET MARGIN METHOD(TNMM). THE ASSESSEE JUST IFIED THE ROYALTY PAYMENT AS HAVING BEEN PAID AT THE ARM'S LENGTH BY USING TNMM. THE TPO NOTED THAT THE ASSESSEE WAS PAYING ROYA LTY TO THE PARENT COMPANY DAIMLER CHRYSLER AG @ 2.75% FOR USING TEC HNICAL KNOW-HOW VIDE AGREEMENT DATED 12-12-1994. THIS AGREEME NT WAS 27 ITA NOS.1107, 1080/PN/2013 AND CO NO.57/PN/2014 REVISED AND NEW AGREEMENT WAS ENTERED INTO ON 21-12-1 999, WHICH REVISED THE RATE OF ROYALTY PAYMENT TO 5%. 54. THE TPO DID NOT ACCEPT THE APPLICATION OF TNMM FOR BENCHMARKING ROYALTY PAYMENT TRANSACTION. ACCORDING TO HIM, CUP METHOD IS THE MOST APPROPRIATE METHOD IN THE FA CTS OF THE CASE. FURTHER, IN HIS DETAILED ORDER HE DID NOT FIN D ANY JUSTIFICATION FOR THE INCREASE IN ROYALTY PAYMENT T O 5% FROM 2.75%. THE CONCLUSION OF THE TPO, WHICH HAS BEEN SU MMARIZED BY THE LD.CIT(A) AT PARA 2.3.2 OF HIS ORDER IS AS U NDER : (A) AS MENTIONED IN THE INTERNAL DOCUMENTS OF THE COMPANY SUBMITTED DURING THE HEARING OF THE CASE, THE DC AG HAD PROPOSED A ROYALTY RATE OF 3%. (B) MARUTI UDYOG LIMITED, IS PAYING ROYALTY @3%. (C) THE NET PROFIT MARGIN EARNED BY THE COMPANY IS LESS THAN THE AVERAGE OF THE NET PROFIT MARGINS EARNED BY THE COM PARABLE COMPANIES. (D) THE SUBMISSION OF THE COMPANY THAT, THE REVISED ROYALTY RATE @5%, AS AGAINST 2.75%, AS PER THE EARLIER AGREEMENT RESULTED INTO SAVINGS IS NOT ACCEPTABLE FOR THE REASONS GIVEN IN THIS ORDER. (E) THE COMPANY DID NOT SUBMIT THE ROYALTY RATES CH ARGED BY DCAG FROM OTHER ASSOCIATED ENTITIES/INDEPENDENT ENT ERPRISE. IT ALSO DID NOT SUBMIT THE TRANSFER PRICES TO OTHER ENTITIE S, IN RESPECT OF IMPORTED COMPONENTS. IN ABSENCE OF THESE DETAILS FI LED BY THE COMPANY IT IS NOT POSSIBLE TO VERIFY, WHETHER DOUBL E DEDUCTION IS BEING ALLOWED BY DC INDIA FOR THE PROVISION OF TECH NOLOGY BY DC AG. THE COMPANY IS IMPORTING ITS MAJOR PORTION OF RAW M ATERIAL/ COMPONENT FROM ASSOCIATED ENTITIES ONLY. 55. ACCORDINGLY, THE TPO MADE DOWNWARD ADJUSTMENT OF RS.1,84,42,539/- TO THE VALUE OF THE ROYALTY PAYMENT. 56. BEFORE CIT(A) IT WAS ARGUED THAT THE TPO HAS INAPPROPRIATELY USED CUP METHOD. IT WAS STATED THAT THE TPO HAS COM PARED ROYALTY PAID BY THE ASSESSEE WITH THE ROYALTY PAYME NT MADE BY 28 ITA NOS.1107, 1080/PN/2013 AND CO NO.57/PN/2014 MARUTI UDYOG LIMITED (MUL) TO SUZUKI, JAPAN. IT WAS ARGUED THAT SUZUKI IS AN ASSOCIATED ENTERPRISE OF MARUTI UDYOG LIMITED AND THEREFORE, THE TRANSACTION BETWEEN MUL AND SUZUKI I S A CONTROLLED TRANSACTION. THE ASSESSEE ANALYSING RULE 10B(2),(3),(4) AND THE OECD TRANSFER PRICING GUIDELINES SUBMITTED THAT THE CONTROLLED TRANSACTION CANNOT BE COMPARED WITH ANOT HER CONTROLLED TRANSACTION. FOR THE ABOVE PROPOSITION THE ASSESSEE RELIED ON THE FOLLOWING DECISIONS : 1. TECHNIMOT ICB PRIVATE LIMITED (ITA NOS.4608 & 5085/ MUM / 10 & CO. NO.78 / MUM / 11) 2. PHILIPS SOFTWARE CENTRE PVT LIMITED VS. ACIT [2008]11 9TTJ 721 (BANG) 3. SONY INDIA PRIVATE LIMITED [(2008)315ITR (A. T) 150 (DEL)] 4. STARENT NETWORKS (INDIA) PRIVATE LIMITED (ITA NO 135 01PN/2010) 5. M/S GLOBAL LOGIC INDIA PRIVATE LIMITED VS . DCIT (ITA ' NO 6082/DEL/20 10) 6. SKODA AUTO INDIA PRIVATE LIMITED VS. ACIT (122 TTJ 699) 7. ACIT VS . MSS INDIA PRIVATE LIMITED (123 TTJ 657) 8. BECHTEL INDIA PRIVATE LTD VS . DCIT (2010-TII-23-ITAT-DEL-TP) 57. THE ASSESSEE FURTHER SUBMITTED THAT IT HAD OBTA INED APPROVAL FROM THE FOREIGN INVESTMENT PROMOTION BOAR D (FIPB). THE REVISED AGREEMENT BETWEEN THE ASSESSEE AND THE PARENT COMPANY WAS ALSO APPROVED BY THE FIPB. THE DECISIO N OF KINETIC HONDA MOTOR LIMITED VS JCIT 771TD 393 PUNE ITAT WAS RELIED UPON WHEREIN IT HAS BEEN HELD THAT THE GOVERNMENT APPROVALS CANNOT BE LIGHTLY BRUSHED ASIDE. IT WAS SUBMITTED THAT ASSESS EE HAD OBTAINED SPECIFIC APPROVAL FROM THE GOVERNMENT OF I NDIA FOR THE PAYMENT OF ROYALTY AS ROYALTY PAYMENT MADE BY THE A SSESSEE IS NOT COVERED UNDER THE AUTOMATIC ROUTE. 58. THE ASSESSEE CONTENDED THAT THE PAYMENT HAS RESU LTED INTO SUBSTANTIAL SAVING OF ABOUT RS.25 CRORE BECAUSE OF THE RE VISED 29 ITA NOS.1107, 1080/PN/2013 AND CO NO.57/PN/2014 AGREEMENT EVEN THOUGH THE RATE OF ROYALTY WAS INCREAS ED. THEREFORE, TRANSFER PRICING ADJUSTMENT IS NOT REQUIRED . IT WAS STATED THAT NO CUP IS AVAILABLE TO BENCHMARK THE INTERNATIONAL TRANSACTIO N OF THE PAYMENT OF ROYALTY. IT WAS SUBMITTED BY APPLYING THE RAT IO IN THE CASE OF B. C. SRINIVAS SHETTY REPORTED IN 128 ITR 294 SC THAT THE ARM'S LENGTH PRICE OF THE INTERNATIONAL TRANSACTIONS RELATING TO PAYMENT OF ROYALTY CANNOT BE COMPUTED BECAUSE OF THE FAILURE OF MACH INERY PROVISIONS OF THE ACT FOR THE COMPUTATION OF THE ARM'S LENGTH PRICE. 59. THE ASSESSEE ALSO SUBMITTED THAT THE TPO HAS APPLIE D THE RATE AT WHICH MUL HAS PAID ROYALTY TO SUZUKI BASED ON THE INFO RMATION AVAILABLE ON THE OFFICIAL WEBSITE OF THE DEPARTMENT OF I NDUSTRIAL POLICY AND PROMOTION(DIPP) . HOWEVER , IN THE ABSENCE OF THE AGREEMENT FOR THE PAYMENT OF ROYALTY BY MUL, IT CANNOT BE DECIDED AS T O WHETHER ROYALTY WAS PAID FOR THE SIMILAR TRANSFER OF TECHNICAL KNOW-H OW AND WHETHER THE TERMS AND CONDITIONS BASED ON WHICH ROYALTY IS PAID ARE SIMILAR AND OTHER RELEVANT INFORMATION. 60. THE ASSESSEE ALSO CONTENDED THAT THE ROYALTY PAID BY MUL AS A PERCENTAGE OF NET SALES, AND ACCORDINGLY THE ASSESSE E'S EFFECTIVE RATE OF ROYALTY PAYMENT IS LOWER THAN THE EFFECTIVE RATE O F THE MUL FOR THE YEARS UNDER CONSIDERATION. IN THIS CONNECTION, THE AS SESSEE FURNISHED THE COMPARISON BETWEEN THE WORKING FOR MUL AND THE ASSESSEE AS UNDER: PARTICULARS AS PER PROF I T & LOSS ACCOUNT DIRECTORS REPORT AY 2002-03 AY 2003-04 AY 2004-05 ( RS. IN MILLION) MUL APPELLANT MUL APPELLANT MUL APPEL L AN T ROYALTY ** 1 , 210 46 1,129 36 1,134 45 EXPENDITURE INCURRED ON R&D 30 ITA NOS.1107, 1080/PN/2013 AND CO NO.57/PN/2014 CAPITAL EXPENDITURE 168 - 63 - 114 RECURRING EXPENDITURE 299 - 220 - 280 TOTAL (A) 1,677 46 1 , 412 36 1,528 45 GROSS SALES 90,809 3,537 90,636 3,322 112,840 4,894 LESS : EXCISE DUTY (19,487) (780) (18,342) (638) (19,384) (864) NET SALES (B) 71,322 2,757 72,294 2,684 93,456 4,03 0 ROYALTY AND R&D E X PENDITURE AS A % OF NET SALES (C=A/B %) 2 .: 35% 1.67% 1.95% 1.34% 1 . 63% 1 . 11 % * * FOR AY 2002-03, INCLUDES LUMPSUM ROYALTY OF RS.50 M ILLION 61. LASTLY, IT WAS SUBMITTED THAT THE ROYALTY WAS HELD TO BE AT THE ARM'S LENGTH FOR THE AY 2007-08 AND IN THE AY 2008-09.IN THE ASSESSEE'S OWN CASE. THE TPO, BASED ON THE DETAILED SUB MISSIONS MADE BY THE ASSESSEE, HAS CONCLUDED THAT THE ASSESSEE 'S ROYALTY PAYMENTS WERE AT THE ARM'S LENGTH. IT WAS ACCORDINGLY ARGUED THAT THE ARM'S LENGTH PAYMENT OF THE ROYALTY PAID BY THE ASS ESSEE SHOULD BE CALCULATED AT 5% OF THE NET VALUE ADDITION AS CALCULATED BY THE ASSESSEE AND THE ADJUSTMENT MADE BY THE LEARNED TPO SHOULD BE SET ASIDE. 62. BASED ON THE ARGUMENTS ADVANCED BY THE ASSESSEE THE LD.CIT(A) DELETED THE ADJUSTMENT MADE BY THE AO BY OBSE RVING AS UNDER : 2.3.11 I HAVE CONSIDERED THE GROUNDS ON WHICH THE A DJUSTMENT IS MADE BY THE LEARNED TPO AND THE ARGUMENTS OF THE APP ELLANT AGAINST IT. I FIND MYSELF IN THE AGREEMENT WITH THE APPELLANT BECA USE IN MY VIEW, THERE ARE TWO MAJOR FUNDAMENTAL FLAWS WITH RESPECT TO THE ADJUSTMENT MADE BY THE LEARNED TPO. 31 ITA NOS.1107, 1080/PN/2013 AND CO NO.57/PN/2014 2.3.12 FIRSTLY, THE LEARNED TPO HAS USED THE RATE OF ROYALTY PAID BY THE MUL TO SUZUKI JAPAN @ 3% AS A BENCHMARK RATE. AS POINTED OUT BY THE APPELLANT, THIS IS A CONTROLLED TRANSACTION. IT IS FUNDAMENTAL PRINCIPLE OF TRANSFER PRICING, WHICH FINDS EXPRESSION I N THE INCOME TAX RULES THAT, CONTROLLED TRANSACTION IS TO BE COMPARED W ITH THE UNCONTROLLED TRANSACTION FOR BENCHMARKING. THE TRANSF ER PRICE DETERMINED BY BENCHMARKING CONTROLLED TRANSACTION WI TH ANOTHER CONTROLLED TRANSACTION CANNOT BE CONSIDERED THE ARM'S LENGTH PRICE, BECAUSE THE ARM'S LENGTH PRICE SIGNIFIES TRANSFER PRICE WITHOUT POSSIBILITY OF IT BEING INFLUENCED BY THE AE. THIS POSITION IS ELA BORATELY EXPLAINED IN THE DECISION OF HONOURABLE TRIBUNAL IN THE CASE OF TE CHNIMONT ICB PRIVATE LIMITED. 2.3.13 SECONDLY, I FIND THAT THE LEARNED TPO IS NO T CONSISTENT IN HIS APPROACH ON THIS ISSUE. IN AY 2007-08 & 2008-09, RO YALTY PAYMENT IS HELD TO BE AT THE ARM'S LENGTH. NORMALLY, ROYALTY P AYMENT IS MADE AT A CERTAIN FIXED RATE OVER A PERIOD OF 5 TO 10 YEARS. C OMPARABLE COMPANIES ALSO WOULD BE PAYING ROYALTY AT THE FIXED RATE FOR 5 TO 10 YEARS, IN SUCH A SITUATION, THERE IS UNLIKELY TO BE DRASTIC VARIATION SO MUCH SO THAT IN SOME OF THE YEARS, THE ARM'S LENGTH OF THE RATE OF ROY ALTY PAYMENT WOULD VARY BY 2% REQUIRING AN ADJUSTMENT. IT IS EVIDENT THA T SUCH VARIATION IN RATE OF ROYALTY PAYMENT WAS NOT FOUND IN THE LATER Y EARS, IN WHICH PAYMENT WAS HELD TO BE AT THE ARM'S LENGTH PRICE. 2.3.14 IN VIEW OF THE ABOVE DISCUSSION, I AM OF THE VIEW T HAT THE ADJUSTMENT MADE BY THE LEARNED TPO TOWARDS ROYALTY PAYMENT CANNOT BE SUSTAINED. THEREFORE, THE DOWNWARD ADJUST MENT MADE ON ACCOUNT OF THE ROYALTY PAYMENT IS SET ASIDE. 63. AGGRIEVED WITH SUCH ORDER OF THE CIT(A) THE REVENUE IS IN APPEAL BEFORE US. 64. THE LD. DEPARTMENTAL REPRESENTATION HEAVILY RELIED ON THE ORDER OF THE TPO/AO. HE SUBMITTED THAT THE TPO HAD R IGHTLY REJECTED THE TNMM METHOD FOLLOWED BY THE ASSESSEE FOR BENCHMARKING PAYMENT OF ROYALTY TRANSACTION AND CONSIDER ED CUP AS THE MOST APPROPRIATE METHOD TO BENCHMARK THE TRAN SACTION BY COMPARING ROYALTY PAYMENT MADE BY THE ASSESSEE @5% WIT H ROYALTY PAYMENT MADE BY MUL TO SUZUKI, JAPAN @3%. HE SUBMITTED THAT THE LETTER RECEIVED FROM DCAG SUBMITTED DURING ASSESSMEN T PROCEEDINGS REFERRED TO THE ROYALTY RATE AT 3% AND NO T AT 5%. 32 ITA NOS.1107, 1080/PN/2013 AND CO NO.57/PN/2014 FURTHER, THE NET PROFIT MARGIN EARNED BY THE COMPANY IS LESS THAN THE AVERAGE NET PROFIT MARGIN EARNED BY COMPARABLE COMP ANIES. ROYALTY RATES CHARGED FROM ASSOCIATED ENTERPRISES BY DC AG WAS NOT SUBMITTED DESPITE BEING ASKED. HE SUBMITTED THAT THE VA RIOUS COMPARABLES SELECTED BY THE ASSESSEE HAVE HARDLY PAID ANY ROYALTY. SO FAR AS THE RELIANCE OF CONSISTENCY IS CONCERNED HE SUB MITTED THAT THE SAME TO BE SEEN IN SUBSEQUENT YEARS BUT NOT IN PR ECEDING YEARS. HE ALSO RELIED ON THE DECISION OF THE DELHI BENCH OF THE TRI BUNAL IN THE CASE OF LG ELECTRONICS INDIA PVT. LTD. REPORTED IN 153 ITD 591. HE SUBMITTED THAT THE ORDER OF THE CIT(A) BE REVERSED A ND THAT OF THE AO/TPO BE RESTORED. 65. THE LD. COUNSEL FOR THE ASSESSEE ON THE OTHER HAND HEAVILY RELIED ON THE ORDER OF THE CIT(A). HE SUBMITTED THAT THE ASSESSEE HAS PAID LUMPSUM PAYMENT OF RS.2.73 CRORES AS ROYALTY OUT OF W HICH 2 INSTALMENTS ARE STILL PENDING. REFERRING TO PAGES 375 TO 48 1 OF THE PAPER BOOK THE LD. COUNSEL FOR THE ASSESSEE DREW THE A TTENTION OF THE BENCH TO THE DETAILED SUBMISSIONS MADE BEFORE THE LD .CIT(A) ON ACCOUNT OF THIS ROYALTY PAYMENT. REFERRING TO PAGES 497 TO 556 OF THE PAPER BOOK THE LD. COUNSEL FOR THE ASSESSEE DREW T HE ATTENTION OF THE BENCH TO THE COPY OF THE ORIGINAL TECHNICAL KNOWHOW AGREEMENT ACCORDING TO WHICH THE TECHNICAL KNOWHOW FEES ARE MENTIONED IN ARTICLE 17. REFERRING TO PAGES 557 TO 586 O F THE PAPER BOOK THE LD. COUNSEL FOR THE ASSESSEE DREW THE ATTENTIO N OF THE BENCH TO THE COPY OF THE AMENDED TECHNICAL KNOWHOW AGR EEMENT DATED 21-12-1999 WHEREIN THE TECHNICAL KNOWHOW FEES ARE MENTIONED IN ARTICLE 13. HE SUBMITTED THAT THE ROYALTY T O BE PAID BY MB INDIA IS CLOSELY LINKED TO THE MANUFACTURING ACTIVITY O F MB INDIA. 33 ITA NOS.1107, 1080/PN/2013 AND CO NO.57/PN/2014 IN CONSIDERATION OF USE OF TECHNOLOGY AND TECHNICAL INFORMA TION RECEIVED FROM DCAG FOR MANUFACTURING ACTIVITY, MB INDIA HAS T O PAY RUNNING ROYALTY @5% OF THE NET VALUE ADDED FOR EACH CONT RACTUAL VEHICLE. THE ROYALTY IS COMPUTED BY CONSIDERING THE NET S ALES PRICE OF THE LICENSED VEHICLES, WHICH IS EXCLUSIVELY OF EXCISE DUTY A ND COST OF STANDARD BOUGHT OUT COMPONENTS AND THE LANDED COST OF THE IMPORTED MATERIALS USED IN THE MANUFACTURING PROCESS. HE SUBMITTED THAT ROYALTY IS INEXTRICABLY LINKED WITH PRODUCTIO N AND SALES ACTIVITY. IN THE ABSENCE OF PRODUCTION AND SALE THE REOF, THERE WOULD BE NO QUESTION ARISING REGARDING PAYMENT OF ROYALT Y. SINCE ROYALTY PAYMENT IS NOT INDEPENDENT OF SALES AND THEREFORE CANNOT BE EXAMINED ON STAND ALONE BASIS. HENCE COMBINED TRANSACTIO N APPROACH HAS BEEN ADOPTED BY MB INDIA USING TNMM AS THE MOST APPROPRIATE METHOD TO BENCHMARK ITS INTERNATIONAL TRANS ACTION INCLUDING PAYMENT OF ROYALTY. FOR THE ABOVE PROPOSITION, HE RELIED ON THE TRANSFER PRICING RULES AND OECD GUIDELINES. 66. REFERRING TO THE DECISION OF THE DELHI BENCH OF THE TRIBU NAL IN THE CASE OF LUMAX INDUSTRIES LTD. VS. ACIT HE SUBMITTED THAT THE TRIBUNAL IN THE SAID DECISION HAS HELD THAT RULE 10A(D) OF TH E ITAT RULES 1962 DEFINES TRANSACTION AS A NUMBER OF CLOSELY LIN KED TRANSACTIONS. ROYALTY, THEN IS A TRANSACTION CLOSELY LINKED WITH PRODUCTION AND SALES. IT CANNOT BE SEGREGATED THROUG H THESE ACTIVITIES OF AN ENTERPRISE BEING EMBEDDED THEREIN. THAT B EING SO, ROYALTY CANNOT BE CONSIDERED AND EXAMINED IN ISOLATION ON A STANDALONE BASIS. ACCORDINGLY, IT WAS HELD THAT THE ASSES SEE WAS CORRECT IN EMPLOYING OVERALL TNMM FOR EXAMINING THE ROYALTY. HE ALSO RELIED ON THE DECISION OF THE MUMBAI BENCH OF THE TRIBU NAL IN 34 ITA NOS.1107, 1080/PN/2013 AND CO NO.57/PN/2014 THE CASE OF M/S.CADBURY INDIA LTD. VS. ACIT VIDE ITA NOS . 7408/MUM/2010 AND ITA NO.7641/MUM/2010 AND AIR LIQUIDE ENGINEERING PVT. LTD. VS. DCIT VIDE ITA NOS. 1040, 1159/HYD /2011 AND ITA NO.1408/PN/2010. 67. REFERRING TO THE DECISION OF HONBLE DELHI HIGH COURT IN THE CASE OF SONY ERICSSON MOBILE COMMUNICATIONS INDIA PVT. LTD . VS. CIT VIDE ITA NO.16/2014 HE SUBMITTED THAT THE HONBLE H IGH COURT IN THE SAID DECISION HAS HELD THAT THE EXPRESSION CLASS OF TRANSACTION FUNCTIONS PERFORMED BY THE PARTIES IN SECTIO N 92C(1) OF THE ACT ILLUSTRATES THAT THE MEANING OR DEFINITION OF THE EX PRESSION TRANSACTION DOES NOT PROHIBIT CLUBBING OF CLOSELY CONNEC TED OR CONTINUOUS TRANSACTIONS. IN CASE THE TAX PAYER IS ENGA GED IN SINGLE LINE OF BUSINESS, THERE IS NO BAR OR PROHIBITION FROM APPLYING THE TNMM ON ENTITY LEVEL BASIS. ONCE THE COMPARABLES PASS TH E FUNCTIONAL ANALYSIS TEST AND PROFIT MARGINS MATCHES WITH TH E COMPARABLES, IT LEADS TO AN AFFIRMATION OF THE TRANSFER PRICE AS THE ARMS LENGTH PRICE. AFTER THIS IT IS NOT PERMISSIBLE TO MAK E A COMPARISON OF A PARTICULAR ITEM OF COSTS WITHOUT SEGREGATIO N OF PROFITS. HE ACCORDINGLY SUBMITTED THAT SINCE PAYMENT O F ROYALTY IS DEPENDING UPON THE MANUFACTURING AND SALES ACTIVITY, SAME SHOULD BE CONSIDERED AS CONTINUOUS TRANSACTIONS AND THEREFORE USE OF COMBINED TRANSACTION APPROACH IS APPROPRIATE. THE TPO S HOULD NOT HAVE SEGREGATED THE COST (PAYMENT OF ROYALTY) WITHOUT SE GREGATION OF PROFITS. HE SUBMITTED THAT THE TPO SHOULD NOT HAVE REJ ECTED THE TNMM METHOD AND APPLIED CUP AS THE MOST APPROPRIATE ME THOD FOR BENCHMARKING THE PAYMENT OF ROYALTY TRANSACTIONS SINCE FO R APPLICATION OF CUP, IT IS NECESSARY THAT THE TRANSACTION BE ING 35 ITA NOS.1107, 1080/PN/2013 AND CO NO.57/PN/2014 COMPARED SHOULD BE UNCONTROLLED. HE SUBMITTED THAT THE TPO HAS COMPARED THE ROYALTY PAID BY MUL TO SUZUKI, VIS--VIS, ROY ALTY PAID BY THE ASSESSEE TO DCAG. HOWEVER, MUL AND SUZUKI ARE ASSOCIATED ENTERPRISES AND CONTROLLED TRANSACTION CANNOT BE USED FO R BENCHMARKING TRANSFER PRICING. FOR THE ABOVE PROPOSITION HE RELIED ON THE FOLLOWING DECISIONS : 1. BOBST INDIA PVT. LTD. VS. DCIT ITA NO.1380/PN/20 10 ORDER DATED 09-10-2014 2. AKZO NOBEL CHEMICALS (INDIA) LT. VS. DCIT ITA NO.1169/PN/2011, 688 & 2181/PN/2012 & 83/PN/2014 OR DER DATED 25-07-2014. 3. SKODA AUTO INDIA PVT. LTD. VS. ACIT ITA NO.202 /PN/2007 ORDER DATED 12-03-2009 4. M/S. TECHNIMONT ICB PVT. LTD. ITA NOS. 4608/5085 /MUM/2010 ORDER DATED 17-07-2012 5. DCIT VS. MUMBAI VS. TECH MAHINDRA LTD. ITA NO.1176/MUM/2010 ORDER DATED 30-06-2011 6. HINDUJA VENTURES LTD. VS. ACIT ITA NO.4089/MUN/2 011 ORDER DATED 31-01-2012 7. WIPRO LTD. VS. DCIT ITA NO.972/BANG/2011 ORDER DAT ED 15-06- 2012 68. HE ACCORDINGLY SUBMITTED THAT AFTER ANALYZING RULE 10 B(2)(3) AND (4), OECD GUIDELINES AND US TRANSFER REGULATIONS CONTROLLE D TRANSACTION CANNOT BE COMPARED WITH ANOTHER CONTROLLED TRANSA CTION. 69. REFERRING TO THE DECISION OF THE MUMBAI BENCH OF THE TR IBUNAL IN THE CASE OF M/S. TECHNIMONT ICB PVT. LTD. VIDE ITA NOS .4608 AND 5085/MUM/2010 AND CO NO.78/MUM/2011 (THIRD MEMBER) ORD ER DATED 17-07-2012, COPY OF WHICH IS PLACED IN THE PAPER BO OK, HE SUBMITTED THAT THE TRIBUNAL IN THE SAID DECISION HAS HELD T HAT CONTROLLED TRANSACTION EVEN AT ARMS LENGTH PRICE CANNO T BE USED FOR BENCHMARKING ANOTHER CONTROLLED TRANSACTION. HE ACCORD INGLY 36 ITA NOS.1107, 1080/PN/2013 AND CO NO.57/PN/2014 SUBMITTED THAT TNMM METHOD APPLIED BY THE ASSESSEE SHO ULD BE CONSIDERED AS APPROPRIATE METHOD AND THE CUP METHOD A PPLIED BY THE TPO SHOULD BE REJECTED SINCE THE CONTROLLED TRANSAC TION HAS BEEN USED TO BENCHMARK THE PAYMENT OF ROYALTY. 70. THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT TH E ASSESSEE MERCEDES BENZ HAS OBTAINED APPROVAL FROM THE FOREIGN IN VESTMENT PROMOTION BOARD (FIPB) FOR THE ORIGINAL AS WELL AS REVISED A GREEMENT. IT HAS ALSO OBTAINED SPECIFIC APPROVAL FROM DEPARTMENT OF I NDUSTRIAL POLICY AND PROMOTION (DIPP) FOR THE PAYMENT OF ROYALTY AS R OYALTY PAYMENT MADE BY THE ASSESSEE IS NOT COVERED UNDER TH E AUTOMATIC ROUTE. REFERRING TO THE FOLLOWING DECISION HE SUBMITTED THAT FIPB APPROVAL, GOVERNMENT OF INDIA, RBI APPROVAL ETC. FOR THE ROYALTY RATES ITSELF IMPLIES THAT THE PAYMENTS ARE AT ARMS LENGTH : 1. KINETIC HONDA MOTOR LTD. VS. JCIT ITA NO.31/PN/199 9 ORDER DATED 23-03-2000 2. M/S. CADBURY INDIA LTD. VS. ADDL.CIT ITA NO.7408/MU M/2010 & 7641/MUM/2010 ORDER DATED 13-11-2013 3. THYSSENKRUPP INDUSTRIES INDIA PVT. LTD. VS. ADDL.CIT I TA NO.6460/MUM/2012 ORDER DATED 27-02-2013 4. SONE OKEGAWA PRECISION FORGINGS LTD. VS. DY.CIT ITA NO.5386/DEL.2010 ORDER DATED 16-12-2011 5. M/S. HERO MOTOCORP. LTD. VS. ADDL.CIT ITA NO.5130/D EL/2010 ORDER DATED 23-11-2012 71. THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE TPO HAS APPLIED THE RATE AT WHICH MUL HAS PAID ROYALTY TO SUZUK I BASED ON THE INFORMATION AVAILABLE ON THE OFFICIAL WEBSITE OF THE DEPARTM ENT OF INDUSTRIAL POLICY AND PROMOTION (DIPP), HOWEVER, IN THE ABSEN CE OF THE AGREEMENT FOR THE PAYMENT OF ROYALTY BY MUL, IT CANN OT BE DECIDED AS TO WHETHER THE TERMS AND CONDITIONS BASED O N WHICH ROYALTY IS PAID ARE SIMILAR AND OTHER RELEVANT INFORMATION. R EFERRING TO THE CHART FILED AT PAGE 905 OF THE PAPER BOOK THE LD . COUNSEL FOR 37 ITA NOS.1107, 1080/PN/2013 AND CO NO.57/PN/2014 THE ASSESSEE SUBMITTED THAT ROYALTY AND EXPENDITURE IN CURRED ON R&D BY MUL AS THE PERCENTAGE OF NET SALES FOR A.Y. 2002- 03 COMES TO 2.35% WHEREAS THE SAME IS 1.67% IN CASE OF THE ASSES SEE. SIMILARLY, FOR A.Y. 2003-04 THE ROYALTY AND EXPENDITURE INCUR RED ON R&D IS 1.95% IN CASE OF MUL WHEREAS THE SAME IS 1.34% IN C ASE OF THE ASSESSEE. FOR A.Y. 2004-05 THE SAME IS 1.63% IN CASE OF MUL WHEREAS THE SAME IS 1.11% IN CASE OF THE ASSESSEE. THER EFORE, IT CAN BE SEEN THAT EVEN IF ROYALTY PAID BY MUL IS COMPARED, TH E EFFECTIVE RATE OF ROYALTY PAYMENT OF MB INDIA IS LOWER THAN THE RAT E OF MUL FOR THE IMPUGNED ASSESSMENT YEAR. HE SUBMITTED THAT FOR AP PLICATION OF CUP THE PRODUCTS SHOULD BE COMPARABLE WHICH IS NOT IN TH E PRESENT CASE. THEREFORE, WITHOUT PREJUDICE TO THE OTHER ARGUMEN TS HE SUBMITTED THAT EVEN IF ROYALTY PAID BY MUL IS COMPARED TH E EFFECTIVE RATE OF ROYALTY PAYMENT OF MB INDIA IS LOWER THAN THE RAT E OF MUL FOR THE IMPUGNED ASSESSMENT YEAR AND THEREFORE THE ADJUST MENT MADE BY THE TPO SHOULD BE DELETED. 72. HE SUBMITTED THAT IN SUBSEQUENT YEARS, I.E. FROM A.Y. 20 07-08 TO 2010-11 ROYALTY PAYMENT HAS BEEN BENCHMARKED CONS IDERING COMBINED TRANSACTION APPROACH UNDER TNMM METHOD. NO SE PARATE BENCHMARKING WAS UNDERTAKEN TO DETERMINE THE ALP. THE RATE OF ROYALTY OF 5% IS SAME FOR THE A.Y. 2007-08 TO 2011-12 ONW ARDS. THEREFORE, IN VIEW OF THE FOLLOWING DECISIONS ROYALTY PAYMENT PAID BY THE ASSESSEE SHOULD HAVE BEEN ACCEPTED AND NO ADJUST MENT SHOULD BE MADE : 1. BRINTONS CARPETS ASIA PVT. LTD. ITA NO.1296/PN/2010 (PUNE ITAT) 2. MINDARIKA PVT. LTD. ITA NO.5810/DEL/2011 (DELHI I TAT) 3. BIRLASOFT (INDIA) PVT. LTD. VS. DCIT ITA NO.3839/DE L/2010 (DELHI ITAT) 38 ITA NOS.1107, 1080/PN/2013 AND CO NO.57/PN/2014 73. WE HAVE CONSIDERED THE RIVAL ARGUMENTS MADE BY BOTH THE SIDES, PERUSED THE ORDERS OF THE AO AND CIT(A) AND THE P APER BOOK FILED ON BEHALF OF THE ASSESSEE. WE HAVE ALSO CONSIDERED TH E VARIOUS DECISIONS CITED BEFORE US. WE FIND THE ASSESSEE IN THE INS TANT CASE HAD ENTERED INTO AN AGREEMENT DATED 12-12-1994 WITH D CAG TO PAY ROYALTY FOR TECHNICAL KNOWHOW RECEIVED FROM DCAG IN THE F OLLOWING MANNER : (A) LUMPSUM PAYMENT OF DM 56.6 MILLION, NET OF TAXE S PAYABLE IN 4 INSTALMENTS PERIODICALLY FROM 1995 TO 1998. (B) RUNNING ROYALTY @2.75% ON VALUE ADDITION IN IND IA. 74. WE FIND THE ASSESSEE AND DCAG AMENDED THE ORIGINAL AGREEMENT TO PAY ROYALTY FOR TECHNICAL KNOWHOW RECEIVED FROM DCAG. THE COPY OF THE REVISED AGREEMENT DATED 21-12-1 999 IS ENCLOSED AT PAPER BOOK PAGE 557 TO 586 ACCORDING TO W HICH RUNNING ROYALTY @5% ON VALUE ADDITION IN INDIA TO BE PAID AND WAIVI NG OF THE REMAINING 2 INSTALMENTS OF LUMPSUM ROYALTY PAYMENT AS PER THE FIRST AGREEMENT AMOUNTING TO DM 19 MILLION. FOR THE IMPUGNED ASSESSMENT YEAR THE ASSESSEE HAS PAID ROYALTY @5% TO DCAG AMOUNTING TO RS.4,61,06,328/- FOR THE TECHNICAL KNOWHOW REC EIVED. THE ASSESSEE ADOPTED COMBINED APPROACH AND SELECTED T NMM AS THE MOST APPROPRIATE METHOD TO BENCHMARK ITS INTERNATIONAL T RANSACTION INCLUDING THE PAYMENT OF ROYALTY IN ITS TP STUDY REPORT. FOR THE APPLICATION OF TNMM, THE ASSESSEE HAD CONDUCTED SEARCH FO R COMPARABLE COMPANIES ON WIDELY RECOGNIZED COMMERCIAL INFORM ATION DATABASE FOR OBTAINING PUBLICLY AVAILABLE FINANCIAL INFORMATION . FOR THE PURPOSE OF MARGIN OF COMPUTATION, IN ADDITION TO FINANCIA L DATA FOR THE RELEVANT FINANCIAL YEAR, THE ASSESSEE ALSO USED DAT A FOR 2 39 ITA NOS.1107, 1080/PN/2013 AND CO NO.57/PN/2014 PREVIOUS FINANCIAL YEARS AS PER THE TP STUDY CONDUCTED ON THE SEA RCH OF COMPARABLE. THE WEIGHTED AVERAGE MARGIN OF COMPARABLE COMPANIES WAS 2.48% WHEREAS THE MARGIN OF THE ASSESSEE COMPANY WAS 4.30%. SINCE THE NET PROFIT MARGIN EARNED BY THE ASS ESSEE WAS HIGHER THAN THE WEIGHTED AVERAGE MARGINS OF COMPARABLE C OMPANIES, THE ASSESSEE CONCLUDED THAT THE TRANSACTIONS INCLUDING P AYMENT OF ROYALTY ARE AT ARMS LENGTH. WE FIND THE TPO DID NOT AC CEPT THE APPLICATION OF TNM METHOD FOR BENCHMARKING THE PAYMENT OF ROYALTY TRANSACTION AND CONSIDERED CUP AS THE MOST APPROPRIATE METHOD TO BENCHMARK THE TRANSACTION BY COMPARING ROYALTY PAYMENT MADE BY THE ASSESSEE @5% WITH THE ROYALTY PAYMENT MADE BY MAR UTI UDYOG LTD. TO SUZUKI, JAPAN @3%. ACCORDING TO THE TPO THE LETTE R RECEIVED FROM DCAG SUBMITTED DURING THE ASSESSMENT PROCEEDINGS REFERRED T O ROYALTY RATE OF 3% AND ANOTHER 5%. FURTHER MARUTI UDYO G LTD. IS PAYING ROYALTY @3%. THE NET PROFIT MARGIN EARNED BY THE ASSESSEE COMPANY IS LESS THAN THE AVERAGE NET PROFIT MARGIN EARNE D BY THE COMPARABLE COMPANIES. THE AO/TPO FURTHER HELD THAT THE ROYALTY RATES CHARGED FROM OTHER ASSOCIATED ENTERPRISES BY DCA G WAS NOT SUBMITTED. ACCORDINGLY, THE TPO MADE DOWNWARD ADJUSTM ENT OF RS.1,84,42,531/- FOR THE YEAR UNDER CONSIDERATION. 75. WE FIND THE LD.CIT(A) DELETED THE ABOVE ADJUSTMENT M ADE BY THE TPO ON THE GROUND THAT THE TPO HAS COMPARED THE ROYALTY PAID BY MARUTI UDYOG LTD. WHICH IS A CONTROLLED TRANSACTION. AC CORDING TO HIM, THE TRANSFER PRICE DETERMINED BY BENCHMARKING CONTR OLLED TRANSACTION WITH ANOTHER CONTROLLED TRANSACTION CANNOT B E CONSIDERED THE ARMS LENGTH PRICE BECAUSE THE ARMS LEN GTH SIGNIFIES TRANSFER PRICE WITHOUT THE POSSIBILITY OF IT BEING INFLUENCED B Y THE 40 ITA NOS.1107, 1080/PN/2013 AND CO NO.57/PN/2014 ASSOCIATED ENTERPRISE. FURTHER, HE NOTED THAT THE TPO IS INCONSISTENT IN HIS APPROACH ON THIS ISSUE. HE OBSERVED T HAT DURING ASSESSMENT YEAR 2007-08 AND 2008-09 ROYALTY PAYMENT @5% WAS HELD TO BE AT ARMS LENGTH WHICH IS PAID AT THE SAME RA TE AS THAT FOR THE YEARS UNDER CONSIDERATION. 76. WE DO NOT FIND ANY INFIRMITY IN THE ABOVE FINDING OF THE LD.CIT(A). FROM THE VARIOUS DETAILS FURNISHED BY THE ASSESS EE IN THE PAPER BOOK WE FIND IN CONSIDERATION OF THE USE OF TECHNOLO GY AND TECHNICAL INFORMATION RECEIVED FROM DCAG FOR MANUFACTURING AC TIVITY THE ASSESSEE HAS TO PAY RUNNING ROYALTY @5% OF THE NET VALUE ADDED FOR EACH CONTRACTUAL VALUE. THE ROYALTY IS COMPUTED BY CONSIDERING THE NET SALES PRICE OF THE LICENCED VEHICLES, WHICH IS EXCLUS IVE OF EXCISE DUTY AND COST OF STANDARD BROUGHT OUT COMPONEN TS AND LANDED COST OF THE IMPORTED MATERIALS USED FOR THE MANUF ACTURING PROCESS. THE ROYALTY IN THE INSTANT CASE IS INEXTRICABLY LINKED WITH PRODUCTION AND SALES ACTIVITY. IN ABSENCE OF PRODUCTION AN D SALES AND SALE OF PRODUCTS THERE WOULD BE NO QUESTION ARISING R EGARDING PAYMENT OF ROYALTY. WE FIND FORCE IN THE SUBMISSION OF THE LD. COUNSEL FOR THE ASSESSEE THAT SINCE THE ROYALTY PAYMENT IS NOT INDEPENDENT OF SALES AND THEREFORE CANNOT BE EXAMINED O N STANDALONE BASIS. THEREFORE, THE ASSESSEE HAS ADOPTED C OMBINED TRANSACTION APPROACH USING TNM METHOD AS THE MOST APP ROPRIATE METHOD TO BENCHMARK ITS INTERNATIONAL TRANSACTION INCLUDING PAYMENT OF ROYALTY. 77. WE FIND THE DELHI BENCH OF THE TRIBUNAL IN THE CASE OF L UMAX INDUSTRIES LTD. VS. ACIT VIDE ITA NO.5252/DEL/2011 HAS O BSERVED AS UNDER : 41 ITA NOS.1107, 1080/PN/2013 AND CO NO.57/PN/2014 33. THE TPO HAS MADE THE DISALLOWANCE IN QUESTION MAINLY ON THE BASIS OF THE BENEFIT TEST. IN THIS REGARD, IT I S SEEN THAT THE PAYMENT OF ROYALTY CANNOT BE EXAMINED DIVORCED FROM THE PRODUCTION AND SALES. ROYALTY IS INEXTRICABLY LINKE D WITH THESE ACTIVITIES . IN THE ABSENCE OF PRODUCTION AND SALE OF PRODUCTS, THERE WOULD BE NO QUESTION ARISING REGARDING PAYMEN T OF ANY ROYALTY. RULE 10A(D) OF THE IT RULES DEFINES 'TRANSA CTION' 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 ENTE R PRISE, BEING EMBEDDED THEREIN. THAT BEING SO, ROYALTY CANNOT BE CONSIDERED AND EXAMINED IN ISOLATION ON A STANDALONE BASIS. ROY ALTY IS TO BE CALCULATED ON A SPECIFIED AGREED BASIS, ON DETERMIN ING THE NET SALES WHICH, IN THE PRESENT CASE, ARE REQUIRED TO B E DETERMINED AFTER EXCLUDING THE AMOUNTS OF STANDARD BOUGHT OUT COMPONENTS, ETC . , SI N CE SUCH NET SALES DO NOT STAND RECORDED BY THE ASSESSEE I N ITS BOOKS OF ACCOUNT. THEREFORE, IT I S OUR CONSIDERED OPINION THAT THE ASSESSEE WAS CORRECT IN EMPLOYING AN OVERALL TNMM FOR EXAMINING THE ROYALTY. THE TPO WORKED OU T T HE DIFFERENCE IN THE PLI OF THE OUTSIDE PARTY (THE ASSESSEE) AT 4.09% AND THE COMPARABLES AT 7.05%. TH I S HA S NOT BEEN SHOWN TO FALL OUTSIDE THE PERMISSIBLE RANGE. 78. WE FIND THE HONBLE DELHI HIGH COURT IN THE CASE OF SON I ERICSSON MOBILE COMMUNICATIONS PVT. LTD. (SUPRA) WHILE DECIDING ON THE ISSUE OF BUNDLING OF TRANSACTIONS AND USE OF TNM METH OD HAS OBSERVED THAT TH E EXPRESSION CLASS OF TRANSACTION, FUNCTIONS PERFORMED BY THE PARTIES IN SECTION 92C(1) OF THE ACT ILLUST RATES THAT THE MEANING OR DEFINITION OF THE EXPRESSION TRANSACTION DOES NOT PROHIBIT CLUBBING OF CLOSELY CONNECTED OR CONTINUOUS TRANS ACTIONS. THE HONBLE HIGH COURT HAS HELD THAT IN CASE THE TAX PA YER IS ENGAGED IN SINGLE LINE OF BUSINESS, THERE IS NO BAR OR PROH IBITION FROM APPLYING THE TNMM ON ENTITY LEVEL BASIS. IT HAS FURTHER B EEN HELD THAT ONCE THE COMPARABLES PASS THE FUNCTIONAL ANALYSIS TEST AND PROFIT MARGINS MATCHES WITH THE COMPARABLES, IT LEADS TO AN AFFIRMATION OF THE TRANSFER PRICE AS THE ARMS LENGTH PRICE. AFTER THIS IT IS NOT PERMISSIBLE TO MAKE A COMPARISON OF A PARTICULAR ITEM OF COSTS WITHOUT SEGREGATION OF PROFITS. 42 ITA NOS.1107, 1080/PN/2013 AND CO NO.57/PN/2014 79. WE FURTHER FIND FORCE IN THE SUBMISSION OF THE LD. COUNSE L FOR THE ASSESSEE THAT FOR APPLICATION OF CUP IT IS NECESSARY T HAT TRANSACTIONS BEING COMPARED SHOULD BE CONTROLLED. IN THE INSTANT CASE THE TPO HAS COMPARED THE ROYALTY PAID BY MARUTI U DYOG LTD. TO SUZUKI, VIS-A-VIS, ROYALTY PAID BY THE ASSESSEE TO DCAG. HOWEVER, MARUTI UDYOG LTD. AND SUZUKI ARE ASSOCIATED ENTERPRISES AND A CONTROLLED TRANSACTION CANNOT BE USED FOR BENCHMARKING A RMS LENGTH PRICE. 80. WE FIND THE PUNE BENCH OF THE TRIBUNAL IN THE CASE OF M /S. BOBST INDIA PVT. LTD. VS. DCIT VIDE ITA NO.1380/PN/2010 ORDER DATED 09-10-2014 HAS OBSERVED AS UNDER : 7.9 ..... WITHOUT PREJUDICE TO ABOVE WE FIND THAT ACCORDING TO TPO / AO HAS NOT GIVEN COGENT REASONING FOR REJECTING TNMM IDE NTIFIED-BY THE APPELLANT AS THE MOST APPROPRIATE METHOD FOR BENCHMAR KING ITS INTERNATIONAL TRANSACTIONS PERTAINING TO DOMESTIC OPER ATIONS. THE APPROACH ADOPTED BY THE TPO I.E. USING CONTROLLED TR ANSACTION OF THE APPELLANT ITSELF (RECEIPT OF COMMISSION ON MARKETING, OF SPARES) FOR BENCHMARKING THE INTERNATIONAL TRANSACTION PERTAININ G TO RECEIPT OF COMMISSION FOR MARKETING OF MACHINES IS NOT APPROPRIATE AS PER THE INDIAN TP REGULATIONS. ACCORDINGLY INTERNATIONAL TRA NSACTION OF THE APPELLANT PERTAINING TO RECEIPT OF COMMISSION FOR MAR KETING OF MACHINES BENCHMARKED BY ASSESSEE BY AGGREGATING THE SAME WITH OT HER INTERNATIONAL TRANSACTIONS PERTAINING TO DOMESTIC OPER ATIONS USING TNMM SHOULD NOT BE-REJECTED.' 81. THE VARIOUS OTHER DECISIONS RELIED ON BY THE ASSESSEE ON THIS ISSUE ALSO SUPPORT ITS CASE TO THE PROPOSITION THAT TNM METHOD APPLIED BY THE ASSESSEE IS THE APPROPRIATE METHOD AND T HE CUP METHOD APPLIED BY THE TPO IS NOT CORRECT WHERE HE HAS USED A CONTROLLED TRANSACTION TO BENCHMARK THE PAYMENT OF ROYA LTY. WE FURTHER FIND THE ASSESSEE HAS OBTAINED APPROVAL FROM THE FOREIGN INVESTMENT PROMOTION BOARD FOR THE ORIGINAL AS WELL AS RE VISED AGREEMENT. IT HAS ALSO OBTAINED SPECIFIC APPROVAL FROM DEP ARTMENT 43 ITA NOS.1107, 1080/PN/2013 AND CO NO.57/PN/2014 OF INDUSTRIAL POLICY AND PROMOTION (DIPP) FOR THE PAYMENT OF ROYALTY AS ROYALTY PAYMENT MADE BY MB INDIA IS NOT COVERED UN DER THE AUTOMATIC ROUTE. IT HAS BEEN HELD IN VARIOUS DECISIONS TH AT FIPB APPROVAL, GOVERNMENT OF INDIA, RBI APPROVAL ETC FOR THE R OYALTY RATES ITSELF IMPLIES THAT THE PAYMENTS ARE AT ARMS LENGTH. 82. THE MUMBAI BENCH OF THE TRIBUNAL IN THE CASE OF M/S. THYSSENKRUPP INDUSTRIES PVT. LTD. VS. ACIT VIDE ITA NO.6460/MUM/2012 ORDER DATED 27-02-2013 FOR A.Y. 2008-0 9 HAS HELD THAT WHEN A PAYMENT IS MADE AFTER OBTAINING DUE APP ROVAL FROM RBI, THEN SUCH PAYMENT HAS TO BE CONSIDERED AT ALP. T HE RELEVANT OBSERVATION OF THE TRIBUNAL AT PARA 14.3 OF THE ORDER READS AS UNDER : 14.3. AFTER CONSIDERING THE RIVAL SUBMISSIONS AND PERUSI NG THE RELEVANT MATERIAL ON RECORD, WE FIND THAT THE ASSESSEE ENTERED I NTO COLLABORATION AGREEMENT WITH ITS AE FOR PAYMENT OF 2% OF CONTRACT VALUE FOR MANUFACTURING, DRAWING AND ENGINEERING SERVICES AND 5 % OF THE SELLING PRICE AS ROYALTY. THE ASSESSEE APPLIED TO THE RBI SEEKING APPROVAL IN RESPECT OF PAYMENT OF ROYALTY AND TECHNICAL FEE THRO UGH CENTRAL BANK OF INDIA. A COPY OF LETTER ADDRESSED BY THE CENTRAL BANK OF INDIA TO THE RBI DATED 26.03.2008 IS AVAILABLE ON PAGE 240 OF THE PAP ER BOOK. THROUGH THIS LETTER, THE CENTRAL BANK OF INDIA FORWARDED REL EVANT DOCUMENTS ALONG WITH A COPY OF THE AGREEMENT. THE RBI VIDE IT S LETTER DATED 21.04.2008 REQUESTED CENTRAL BANK OF INDIA TO CONSIDE R THE ASSESSEES CASE IN ACCORDANCE WITH ITS AP(DIR SERIES) NO.76 DATED 24.02.2007. IT IS IN PURSUANCE TO THE DEEMED APPROVAL BY RBI UNDER THE AUTOMATIC APPROVAL SCHEME THAT THE ASSESSEE MADE PAYMENT OF ROYAL TY AND TECHNICAL FEE TO ITS AE. IT IS RELEVANT TO NOTE THAT SUCH PAYMENT HAS BEEN APPROVED OR DEEMED TO HAVE BEEN APPROVED BY THE RBI . WHEN A PAYMENT IS MADE AFTER OBTAINING DUE APPROVAL FROM TH E RBI, HOW ITS ALP CAN BE COMPUTED AT `NIL, IS ANYBODYS GUESS. THE FACT O F APPROVAL OF THE PAYMENT BY THE RBI HAS BEEN SUCCINCTLY RECORDED BY TH E TPO IN HIS ORDER AS WELL. HE STILL CHOSE TO PROPOSE ADJUSTMENT IN R ESPECT OF FULL PAYMENT. IN OUR CONSIDERED OPINION, WHEN THE RATE OF ROYALTY PAYMENT AND FEE FOR DRAWINGS ETC. HAS BEEN APPROVED OR DEEMED TO HAVE BEEN APPROVED BY THE RBI, THEN SUCH PAYMENT HAS TO BE CONSI DERED AT ALP. WE, THEREFORE, DIRECT TO DELETE ADDITION OF RS.4.29 CRORE MADE BY THE A.O. IN THIS REGARD. 44 ITA NOS.1107, 1080/PN/2013 AND CO NO.57/PN/2014 83. WE FURTHER FIND IN SUBSEQUENT YEARS ALSO THE ROYALTY P AYMENT HAS BEEN BENCHMARKED CONSIDERING COMBINED TRANSACTION A PPROACH IN TNM METHOD. NO SEPARATE BENCHMARKING WAS UNDERTAKE N TO DETERMINE THE ALP OF ROYALTY. IN A.Y. 2007-08 TILL A.Y. 2011- 12 THE PAYMENT OF ROYALTY WAS HELD TO BE AT ALP. WE THEREFORE FIND MERIT IN THE SUBMISSION OF THE LD. COUNSEL FOR THE ASSESSEE THAT IN VIEW OF THE RULE OF CONSISTENCY THE CIT(A) WAS JUSTIFIED IN REJECTING THE CUP METHOD ADOPTED BY THE AO AND ACCEPTING THE TNM METH OD FOLLOWED BY THE ASSESSEE. 84. IN VIEW OF THE ABOVE DISCUSSION AND IN VIEW OF THE DETA ILED REASONING GIVEN BY THE CIT(A) WE FIND NO INFIRMITY IN HIS ORDE R. ACCORDINGLY, THE SAME IS UPHELD AND THE GROUNDS RAISED B Y THE REVENUE ON THIS ISSUE ARE DISMISSED. 85. GROUND OF APPEAL NO.4 BY THE REVENUE READS AS UNDER : WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE CIT(A) WAS JUSTIFIED IN TREATING THE ROYALTY PAYMENT OF RS.2,84,63,797/- AS REVENUE EXPENDITURE WHEN THE ASSESSEE HAS ACQUIRED END URING BENEFIT AS IT WAS CONFERRED MANUFACTURING RIGHTS AS WEL L AS COPYRIGHTS FOR TECHNICAL PRODUCT DOCUMENTATION ETC. AND FURTHER W HEN THE HONBLE DRP WHILE DECIDING THE CASE FOR A.Y. 2007-08 HAS ALSO UPHE LD THIS TREATMENT GIVEN TO ROYALTY PAYMENT, I.E. HAS HELD THAT ROYALT Y PAYMENT IS OF CAPITAL NATURE. 86. FACTS OF THE CASE, IN BRIEF, ARE THAT OUT OF THE ROYALTY PAID BY THE ASSESSEE COMPANY AT RS.4,69,06,328/- THE AO DISALLOWED AN AMOUNT OF RS.1,84,42,531/- RESTRICTING THE ROYALTY AT 3% AS AGAINST 5% PAID BY THE ASSESSEE. ULTIMATELY, ACCORDING TO HIM, THE ROYALTY AMOUNT REMAINS TO BE CONSIDERED IS RS.2,84,63,797/-. SINC E THE TPO HAS RESTRICTED THE AMOUNT OF ROYALTY FROM 5% TO 3% THE AO HELD THAT THE QUANTUM OF ROYALTY HAS BEEN DECIDED BY TH E TPO. 45 ITA NOS.1107, 1080/PN/2013 AND CO NO.57/PN/2014 HOWEVER, THE NATURE OF THE ROYALTY STILL REMAIN THE SAME AS IT HAS BEEN CARRYING IN THE PREVIOUS YEAR. THE AO ON THE BASI S OF HIS ANALYSIS WAS OF THE OPINION THAT IN VIEW OF ARTICLE 8 AND AR TICLE 3 OF THE AGREEMENT BETWEEN THE ASSESSEE AND ITS AE ON ROY ALTY, THE ASSESSEE HAS ACQUIRED ENDURING BENEFIT AS IT WAS CONFERRE D MANUFACTURING RIGHTS AS WELL AS COPYRIGHTS FOR TECHNICAL PR ODUCT DOCUMENTATION ETC. RELYING ON THE DECISION OF HONBLE BOMBAY HIGH COURT IN THE CASE OF KIRLOSKAR OIL ENGINES LTD. VS. CIT REPO RTED IN 226 ITR 15 HE WAS OF THE OPINION THAT THE ACQUISITION OF MANUFACTURING RIGHT, SPECIFICATIONS AND EXPORT RIGHT AND TH E SAME SHOULD BE TREATED AS CAPITAL EXPENDITURE. 87. THE AO OBSERVED THAT THE ASSESSEE COMPANY IS PAYIN G ROYALTY ONLY ON EACH LICENSED VEHICLE SOLD AND REST OF THE MONEY IS PAID FOR ACQUIRING TECHNICAL KNOW-HOW AND NOT ROYALTY. FURTHER, NA TURE OF THE TECHNICAL FEES PAID BY IT COULD NOT BE PROVED BECAUSE THE ARTICLE 7.2 OF THE AGREEMENT STATES THAT THE ASSESSEE IS ENTITLE D TO DISCLOSE SUCH INFORMATION AND DATA TO ITS CONSULTANTS TO GET THE AGREEMENT APPROVED BY THE INDIAN GOVERNMENT OR THE ASSESSEE MA Y DISCLOSE INFORMATION WHEN IT IS OTHERWISE COMPELLED BY LAW. FURTHER, ARTICLE 17.3 STATES THAT IN THE EVENT OF ANY CONFIDENTIAL INFORMATIO N BEING DISCLOSED TO ANY UNAUTHORIZED THIRD PARTY, IT WILL CONSTITUTE GROSS BREACH OF THE CONTRACT UNLESS THE ASSESSEE PROVE THA T IT HAS BEEN IN ANY WAY RESPONSIBLE THEREOF. THEREFORE, THE AO HELD THAT THESE STIPULATIONS CLEARLY INDICATE THAT THE ASSESSEE HAS ACQUIR ED ABSOLUTE RIGHT OVER THE TECHNICAL KNOW-HOW FOR ASSEMBLY OR MANU FACTURING OF CAR OR CAR PARTS. REJECTING THE VARIOUS EXPLANATIONS G IVEN BY THE ASSESSEE AND FOLLOWING HIS ORDER FOR A.YRS. 2000-01 AND 20 01-02 46 ITA NOS.1107, 1080/PN/2013 AND CO NO.57/PN/2014 WHERE SUCH ROYALTY HAS BEEN DISALLOWED BY HIS PREDECESSO R, THE AO DISALLOWED THE BALANCE ROYALTY OF RS.2,84,63,797/-. 88. BEFORE THE CIT(A) THE ASSESSEE MADE ELABORATE SUBMISS IONS WHICH HAS BEEN SUMMARIZED BY THE LD.CIT(A) WHICH READ AS UNDER : 2.4.4. THE APPELLANTS SUBMISSION MADE AGAINST THE ACTI ON OF THE LEARNED AO IS REPRODUCED AS UNDER: I. MB INDIA HAS NOT ACQUIRED KNOW-HOW FROM DAIMLER AG ON AN OUTRIGHT BASIS. MB INDIA HAS ONLY ACQUIRED A LICENSE /RIGHT TO USE KNOW-HOW OF DAIMLER AG IN RESPECT OF THE LICENSED PRO DUCTS. II. THE AGREEMENT CLEARLY PROVIDES THAT DAIMLER AG WILL REMAIN THE SALE AND EXCLUSIVE OWNER OF THE TECHNICAL KNOW-HOW, TECHNICAL INFORMATION, TRADE MARK ETC AND THAT MB I NDIA IS DEBARRED FROM CLAIMING ANY TITLE TO THE SAID RIGHTS. SUCH LICENSE RIGHT CANNOT BE EQUATED WITH OWNERSHIP RIGHTS. III. NO COPYRIGHT HAS BEEN TRANSFERRED TO MB INDIA . IN FACT THE AGREEMENT STATES THAT COPYRIGHT OF THE TECHNICAL PROD UCT DOCUMENTATION, INCLUDING ANY MODIFICATIONS AS WELL AS THE KNOW- HOW AND ANY PATENTS CONTAINED THEREIN WOULD REMAIN T HE PROPERTY OF DAIMLER AG. IV. THE EXPENDITURE OF TECHNICAL SERVICE CHARGES IS NOT FOR ANY INITIAL OUTLAY OR EXTENSION OF BUSINESS, BUT IS IN CONNE CTION FOR RUNNING THE BUSINESS AND IN THE COURSE OF ITS DAY TO DAY PROFIT MAKING BUSINESS ACTIVITIES. THE AMOUNT PAID IS FOR THE U SE OF KNOW- HOW FOR MANUFACTURING LICENSED VEHICLES WHICH IS AN IN TEGRAL PART OF THE PROFIT MAKING PROCESS. THE ROYALTY EXPENDITURE IS AN ANNUAL RECURRING EXPENDITURE WHICH IS DIRECTLY LINKED TO TH E NUMBER OF VEHICLES SOLD IN A FINANCIAL YEAR - IF NO CAR IS SOLD, NO ROYALTY IS PAYABLE FOR THAT FINANCIAL YEAR. V. THE FIXED CAPITAL OF MB INDIA DOES NOT GET INCREA SED OR ALTERED DUE TO INCURRENCE OF THIS EXPENDITURE AND NE ITHER ANY ASSET WAS BROUGHT INTO EXISTENCE NOR AN ENDURING ADVANTAGE RECEIVED BY MB INDIA ON ACCOUNT OF THIS ROYALTY PAYMENT. VI. THE EXCLUSIVE RIGHT OF MB INDIA TO MANUFACTUR E AND SELL LICENSED PRODUCTS IN INDIA DOES NOT RESTRICT THE RIGHTS OF DAIMLER AG TO SELL THE LICENSED PRODUCTS IN INDIA. VII. THERE ARE RESTRICTIONS PLACED ON MB INDIA FRO M DIVULGING CONFIDENTIAL INFORMATION OBTAINED UNDER THE AGREEME NT TO ANY THIRD PARTY. VIII. UPON THE TERMINATION OF THE AGREEMENT, MB INDIA IS REQUIRED TO IMMEDIATELY DISCONTINUE ALL ASSEMBLING/ MANUFACTURING AND SALES OPERATIONS OF THE LICENSED PROD UCTS. FURTHER; IT HAS ALSO BEEN PROVIDED THAT IF DAIMLER A G, THE PARENT 47 ITA NOS.1107, 1080/PN/2013 AND CO NO.57/PN/2014 COMPANY OF MB INDIA, REDUCES ITS STAKE TO LESS THAN 51% OF THE CAPITAL DIRECTLY OR INDIRECTLY IN MB INDIA THEN ALSO THE AGREEMENT WILL CEASE TO EXIST. IX. THE LUMP SUM TECHNICAL KNOW-HOW FEES PAYABLE UNDER THE AGREEMENT HAVE ALREADY BEEN PAID IN THE INITIAL YEA RS AS REQUIRED UNDER THE AGREEMENT. THE SAME HAS ALSO BEEN APPROPRIAT ELY CONSIDERED FOR TAX PURPOSES IN THE RELEVANT YEARS. MB I NDIA HAS SOUGHT APPROVAL OF ALL ROYALTY AGREEMENTS FROM THE CE NTRAL GOVERNMENT. THERE WAS NO FINDING OF THE CENTRAL GOVE RNMENT AUTHORITIES APPROVING THIS ARRANGEMENT THAT THE LUMP SUM CONSIDERATION WAS INADEQUATE. X. THE ROYALTY IS REGARDED BY MB INDIA AS ROY ALTIES FOR TAX WITHHOLDING PURPOSES. XI. THE ROYALTY IS DEBITED BY MB INDIA TO ITS PRO FIT & LOSS ACCOUNT UNDER THE HEAD 'ROYALTY' IN THE MANUFACTURI NG EXPENSES SCHEDULE. THE TECHNICAL SERVICE CHARGES ARE NOT CONSID ERED AS EXPENSES OF CAPITAL NATURE BY THE AUDITORS IN THE AUDI TED FINANCIAL STATEMENTS AND THE TAX AUDIT REPORT FILED BY MB INDI A ALONG WITH ITS RETURN OF INCOME. XII. MB INDIA IS ALSO PAYING SERVICE TAX ON THE R OYALTY UNDER THE CATEGORY 'INTELLECTUAL PROPERTY' UNDER THE REVE RSE CHARGE MECHANISM SINCE MARCH 2003. 2.4.5 IT WAS SUBMITTED THAT IN VIEW OF THE ABOVE EXP LANATION ON THE TERMS AND CONDITIONS OF THE AGREEMENT, IT IS CLEAR THA T THE APPELLANT HAS NEITHER ACQUIRED ANY ASSETS ON OUTRIGHT BASIS NOR HAS SECU RED ANY ENDURING ADVANTAGE. WHAT THE APPELLANT HAS ESSENTIALLY ACQUIRED IS THE LICENSE TO USE THE TECHNICAL KNOW-HOW DURING THE PERI OD OF AGREEMENT. THEREFORE, ROYALTY PAYMENT IS IN THE NATURE OF REVEN UE EXPENDITURE. FURTHER, ROYALTY EXPENDITURE IS AN ANNUAL RECURRING EXPENDITURE DIRECTLY LINKED WITH THE NUMBER OF VEHICLES SOLD IN THE FINANC IAL YEAR AND THEREFORE IT IS AN ALLOWABLE DEDUCTION. 89. VARIOUS DECISIONS WERE ALSO CITED BEFORE HIM AND THE DE CISION RELIED ON BY THE AO WERE DISTINGUISHED. IT WAS SUBMITTED THAT THE ASSESSEE HAS ENTERED INTO TIME BOUND AGREEMENT THAT G AVE IT RIGHT TO USE TECHNICAL KNOW-HOW ONLY DURING THE SPECIFIC TIME FRAME. THE AGREEMENT DOES NOT GIVE IT ANY OWNERSHIP RIGHTS OVERALL T ECHNICAL KNOW-HOW COVERED UNDER THE AGREEMENT. THE LUMPSUM AN D RUNNING ROYALTY PAYMENTS ARE BOTH REVENUE EXPENDITURE. IT WA S REITERATED THAT IT HAS NOT ACQUIRED ANY MANUFACTURING RIGHT OR COPY RIGHT FOR TECHNICAL PRODUCT DOCUMENTATION ETC. BUT HAS ACQUIRED ME RE RIGHT TO 48 ITA NOS.1107, 1080/PN/2013 AND CO NO.57/PN/2014 USE THE TECHNICAL KNOW-HOW DURING THE PERIOD OF THE AGRE EMENT. ROYALTY EXPENDITURE INDICATES THAT THE ASSESSEE HAS ACT UAL EXPENDITURE AND NOT ONCE FOR ALL EXPENDITURE. THE ASSES SEE HAS NOT ACQUIRED ANY ENDURING ADVANTAGE BY MAKING ROYALTY PAYME NT. ACCORDINGLY, IT WAS ARGUED THAT THE EXPENDITURE SHOULD B E ALLOWED AS REVENUE EXPENDITURE. 90. BASED ON THE ARGUMENTS ADVANCED BY THE ASSESSEE THE LD.CIT(A) HELD THE EXPENDITURE TO BE REVENUE IN NATURE B Y OBSERVING AS UNDER : FINDINGS : 2.4.10 I HAVE CAREFULLY CONSIDERED ARGUMENTS OF TH E LEARNED AO AND THE APPELLANT. I HAVE GONE THROUGH THE REVISED TECH NICAL KNOW-HOW AGREEMENT DATED 21.12.1999. PERUSAL OF THE AGREEMEN T SHOWS THAT IT WAS EFFECTIVE FOR THE PERIOD OF TEN YEARS (ARTICLE 22). FURTHER, ACCORDING TO THE TERMS OF AGREEMENT, THE APPELLANT HAS ACQUIRED EXCLUSIVE LICENSE TO MANUFACTURE LICENSED VEHICLES IN THE SPECIFIC TERRITORY (ARTICLE 2). THE APPELLANT HAS ACQUIRED T ECHNICAL PRODUCT DOCUMENTATION FROM THE PARENT COMPANY (ARTICLE 3). THE APPELLANT ALSO WOULD GET CONTINUOUS SUPPLEMENT OF DOCUMENTS O N TECHNICAL MODIFICATIONS (ARTICLE 4). FURTHER, THE APPELLANT'S PERSONNEL WILL BE TRAINED AT THE FACILITIES OF THE PARENT COMPANY (AR TICLE 11). MOREOVER, IT HAS ACQUIRED RIGHT TO USE THE TRADEMARKS OF THE PARENT COMPANY (ARTICLE 9). 2.4.11 THUS, THE APPELLANT IS PAYING ROYALTY @ 5% GROSS OF TAXES ON SALE OF EACH LICENSED VEHICLE. (ARTICLE13.1). ARTIC LE 13.2 CLARIFIES THAT LICENSED FEES AS PER ARTICLE 13.1 COVER ONLY THE LICENSE RIGHTS AND SERVICES MENTIONED IN ARTICLE 2 TO 4 OF THIS AGREEMENT. THE RIGHT TO USE THE DCAG TRADEMARKS, AND TRAINING SERVICES AS PER ARTICLE 11 2.4.12 IT CAN BE SEEN FROM THE ABOVE THAT THE APPEL LANT HAS NOT ACQUIRED OWNERSHIP OF ANY ASSET NOR IT HAS ACQUIRED ANY RIGHTS FOR SUBSTANTIALLY LONG PERIOD. THE APPELLANT HAS ACQUIR ED RIGHT TO MANUFACTURE AND RIGHT TO USE TECHNICAL KNOW-HOW FOR THE PERIOD OF 10 YEARS. THIS PERIOD IS IN ACCORDANCE WITH THE NOR MAL INDUSTRY PRACTICE ACCORDING TO WHICH, LICENSE TO USE INTELLE CTUAL PROPERTIES IS CONFERRED FOR THE PERIOD BETWEEN 5 TO 10 YEARS. THEREFORE, THE PERIOD OF 10 YEARS CANNOT BE CONSIDERED AS LONG PER IOD FOR CONSIDERING IT TO BE BENEFIT OF ENDURING IN NATURE. FURTHER, TECHNICAL KNOW-HOW IN THE PRESENT TIME BECOME OBSOLETE IN SHO RT TIME DUE TO 49 ITA NOS.1107, 1080/PN/2013 AND CO NO.57/PN/2014 FAST CHANGING TECHNOLOGY. THEREFORE, NORMALLY EVEN IN THE CASES OF TRANSFER OF TECHNOLOGY, ACQUIRER DOES NOT GET BENEF IT OF ENDURING IN NATURE. THIS IS NOT EVEN THE CASE OF TRANSFER OF TE CHNOLOGY. 2.4.13 IN THE ABSENCE OF ANY OWNERSHIP OF ASSETS, ACQUISITION OF RIGHT FOR VERY LONG PERIOD, THE PAYMENT MADE BY THE APPEL LANT HAS A CHARACTER OF ROYALTY. IF THE ROYALTY IS TREATED AS A PAYMENT GIVING ENDURING BENEFIT, THEN THE TERM 'ROYALTY' WOULD LOS E ITS MEANING. IN MY VIEW, APPELLANT'S ROYALTY PAYMENT HAS NOT GIVEN ANY ENDURING BENEFIT TO THE APPELLANT. ACCORDING TO ME, ANNUAL P AYMENT OF THE ROYALTY MADE BY THE APPELLANT IS REVENUE EXPENDITUR E. ACCORDINGLY, I ALLOW THE EXPENDITURE OF RS 2,84,63,797. 91. AGGRIEVED WITH SUCH ORDER OF THE CIT(A) THE REVENUE IS IN APPEAL BEFORE US. 92. THE LD. DEPARTMENTAL REPRESENTATIVE HEAVILY RELIED ON THE ORDER OF THE AO. 93. THE LD. COUNSEL FOR THE ASSESSEE ON THE OTHER HAND WHILE RELYING ON THE ORDER OF THE CIT(A) SUBMITTED THAT MB INDIA HAS NOT ACQUIRED KNOW-HOW FROM DAIM L ER AG ON AN OUTRIGHT BASIS . MB INDIA HAS ONLY ACQUIRED A LICENSE/RIGHT TO USE KNOW-HOW OF DAIM LER AG IN RESPECT OF THE LICENSED PRODUCTS. 94. THE AGREEMENT CLEARLY PROVIDES THAT DAIM L ER AG WILL REMAIN THE SOLE AND EXCLUSIVE OWNER OF THE TECHNICAL KNOW-HOW, TE CHNICA L INFORMATION, TRADE MARK ETC AND THAT MB INDIA IS DEBARRED FROM CLAIMING ANY TITLE TO THE SAID RIGHTS. SUCH LICENSE RIGHT CANN OT BE EQUATED WITH OWNERSHIP RIGHTS . HE SUBMITTED THAT NO COPYRIGHT HAS BEEN TRANSFERRED TO MB INDIA . THE AGREEMENT CLEARLY STATES THAT COPYRIGHT OF THE TECHNICAL PRODUCT DOCUMENTATION , INCLUDING ANY MODIFICATIONS AS WELL AS THE KNOW-HOW AND ANY PATENTS CON TAINED THEREIN WOULD REMAIN THE PROPERTY OF DAIMLER AG. HE SUBM ITTED THAT THE EXPENDITURE OF TECHNICAL SERVICE CHARGES I S NOT FOR ANY INITIAL 50 ITA NOS.1107, 1080/PN/2013 AND CO NO.57/PN/2014 OUTLAY OR EXTENSION OF BUSINESS , BUT IS IN CONNECTION FOR RUNNING THE BUSINESS AND IN THE COURSE OF ITS DAY TO DAY PROFIT MAKING BUSINESS ACTIVITIES. THE AMOUNT PAID IS FOR THE USE OF KNOW-HOW FOR MANUFACTURING L ICENSED VEHICLES WHICH IS AN INTEGRAL PART OF THE PROFIT MAKING PROCESS . THE ROYALTY EXPEND I TURE IS AN ANNUAL RECURRING EXPEND I TURE WHICH IS D I RECTLY LINKED TO THE NUMBER OF VEHICLES SO L D IN A FINANCIAL YEAR - IF NO CAR IS SOLD , NO ROYALTY IS PAYABLE FOR THAT F I NANCIAL YEAR . THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE FIXED CAPITAL OF MB INDIA DOES NOT GET INCREASED OR ALTERED DUE TO INCURRENCE OF TH I S EXPENDITURE AND NEITHER ANY ASSET WAS BROUGHT INTO EXISTENCE NOR AN ENDURING ADVANTAGE R ECEIVED BY MB INDIA ON ACCOUNT OF THIS ROYALTY PAYMENT . THE EXCLUSIVE RIGHT OF MB INDIA TO MANUFACTURE AND SELL LICENSED PRODUCTS IN INDIA DOES NOT RESTRICT THE RIGHTS OF DAIMLER AG TO SELL THE LICENSED PRO DUCTS IN INDIA. HE SUBMITTED THAT T HERE ARE RESTRICTIONS PLACED ON MB INDIA FROM DIVULGING CONFIDENTIAL INFORMATION OBTAINED UNDER THE AGREEMENT TO ANY THIRD PARTY . UPON THE TERM I NATION OF THE AGREEMENT , MB INDIA IS REQUIRED TO IMMEDIATELY DISCONTINUE ALL ASSEMBLING/ MANUFACTURING AND SALES OPERATIONS OF THE LICENS ED PRODUCTS . FURTHER , IT HAS ALSO BEEN PROVIDED THAT IF DAIMLER AG , THE PARENT COMPANY OF MB INDIA , REDUCES ITS STAKE T O LESS THAN 51 % OF T HE CAP I TAL D I RECTLY OR IN D I RECTLY I N MB INDIA , THEN ALSO THE AGREEMENT WILL CEASE TO EX I ST . 95. THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE LUMPSUM TECHNICAL KNOW-HOW FEES PAYABLE UNDER THE AGREEMENT HAV E ALREADY BEEN PAID IN THE INITIAL YEARS AS REQUIRED UNDER THE AGREE MENT . THE SAME HAS ALSO BEEN APPROPRIATELY CONSIDERED FOR TAX PUR POSES IN THE 51 ITA NOS.1107, 1080/PN/2013 AND CO NO.57/PN/2014 RELEVANT YEARS. MB INDIA HAS SOUGHT APPROVAL OF ALL ROYALT Y AGREEMENTS FROM THE CENTRAL GOVERNMENT . THERE WAS NO FINDING OF THE CENTRAL GOVERNMENT AUTHORITIES APPROVING THIS ARRANG EMENT THAT THE LUMP SUM CONSIDERATION WAS INADEQUATE . FURTHER, THE ROYALTY IS REGARDED BY MB INDIA AS ROYALTIES FOR TAX WITHHOLDING PURP OSES . HE SUBMITTED THAT THE ROYALTY IS DEBITED BY MB INDIA TO ITS PROFIT & LOSS ACCOUNT UNDER THE HEAD ROYALTY' IN THE MANUFACTURING EX PENSES SCHEDULE . THE TECHNICAL SERVICE CHARGES ARE NOT CONSIDERED AS EXPENSES OF CAPITAL NATURE BY THE AUDITORS IN THE AUDITED FINANCIAL STATEMENTS AND THE TAX AUDIT REPORT FILED BY MB INDIA ALO NG WITH ITS RETURN OF INCOME . M B INDIA IS ALSO PAYING SERVICE TAX ON THE ROYALTY UNDER THE CATEGORY 'INTELLECTUAL PROPERTY ' UNDER THE REVERSE CHARGE MECHANISM SINCE MARCH 2003 WHICH WOULD NOT HAVE BEEN PA YABLE IF THE EXPENDITURE RESULTED INTO ACQUISITION OF CAPITAL ASSET . 96. REFERRING TO THE FOLLOWING DECISIONS HE SUBMITTED THAT TH E PAYMENT OF ROYALTY TO BE ALLOWED AS REVENUE EXPENDITURE AND THE ORDER OF THE CIT(A) BE UPHELD ON THIS ISSUE. 1, EMPIRE JUTE COMPANY LTD. VS. CIT REPORTED IN 124 ITR 1 (SC) 2. CIT VS. INDIAN OXYGEN LTD. REPORTED IN 218 ITR 33 7 (SC) 3. CIT VS. CIBA OF INDIA LTD. REPORTED IN 69 ITR 692 (SC) 4. CIT VS. I.A. E.C. (PUMPS) LTD. REPORTED IN 232 ITR 316 (SC) 5. ALEMBIC CHEMICAL WORKS CO. LTD. VS. CIT REPORTED I N 177 ITR 377 (SC) 6. MEWAR SUGAR MILLS LTD. VS. CIT REPORTED IN 87 ITR 400 (SC) 7. KIRLOSKAR PNEUMATIC CO. LTD. VS. CIT REPORTED IN 1 36 ITR 746 (BOM HC) 8. GANNON NORTON METAL DIAMOND DIES LTD. VS. CIT REPO RTED IN 163 ITR 606 (BOM.) 9. CIT VS. ESSEL PROPACK LTD. REPORTED IN 325 ITR 185 (BOM HC) 10. ATLAS COPCO AB OF SWEDEN, BOMBAY V. CIT REPORTED IN 249 CTR 450 (BOM. HC 11. ANTIFRICTION VEARING CORPORATION REPORTED IN 11 4 ITR 335 (BOM HC) 12. NEW STANDARD ENGINEERING CO. REPORTED IN 208 IT R 710 (BOM HC) 13. CIT VS. G4S SECURITIES SYSTEMS (INDIA) P. LTD. REPO RTED IN 338 ITR 46 (DEL HC) 14. JK SYNMETICS REPORTED IN 305 ITR 371 (DEL HC) 52 ITA NOS.1107, 1080/PN/2013 AND CO NO.57/PN/2014 97. WE HAVE CONSIDERED THE RIVAL ARGUMENTS MADE BY BOTH THE SIDES, PERUSED THE ORDERS OF THE AO AND CIT(A) AND THE P APER BOOK FILED ON BEHALF OF THE ASSESSEE. WE HAVE ALSO CONSIDERED TH E VARIOUS DECISIONS CITED BEFORE US. WE FIND THE ASSESSEE IN THE IN STANT CASE HAS PAID ROYALTY OF RS.4,69,06,328/- TO THE PARENT COMPANY DCAG @5%. THE AO RESTRICTED SUCH PAYMENT TO 3% BECAUSE O F THE TRANSFER PRICING ADJUSTMENT. THE AO, THEREAFTER, TREATED THE BALA NCE AMOUNT OF RS.2,84,63,797/- AS CAPITAL EXPENDITURE. HE WAS OF THE OP INION THAT THE ASSESSEE HAS ACQUIRED ABSOLUTE RIGHT OVER THE TECHNICAL KNOWHOW FOR THE ASSEMBLY OR MANUFACTURING OF CARS AND P ARTS THROUGH WHICH THE ASSESSEE HAS RECEIVED ENDURING BENEFIT S. HENCE, THE AO HELD THAT SUCH ROYALTY EXPENDITURE AS CAPITAL IN N ATURE. WE FIND IN APPEAL THE LD.CIT(A) DELETED SUCH ADDITION MADE BY T HE AO ON THE GROUND THAT ASSESSEE HAS NOT ACQUIRED ANY OWNERSHIP OF ASS ET OR RIGHTS FOR SUBSTANTIALLY LONG PERIOD AND IN ABSENCE OF T HE SAME PAYMENTS MADE BY THE ASSESSEE HAVE THE CHARACTER OF ROYALTY. SINCE THERE IS NO ENDURING BENEFIT RECEIVED FROM IT THE CIT(A) TRE ATED ROYALTY EXPENDITURE AS REVENUE AND ACCORDINGLY DELETED THE ADDITION MADE BY THE AO. 98. WE FIND NO INFIRMITY IN THE ABOVE DECISION OF THE LD.CIT(A). FROM THE VARIOUS TERMS AND CONDITIONS OF THE AGREEMENT, WE FIND THE ASSESSEE HAS NEITHER ACQUIRED ANY ASSET ON AN OUTRIGHT BASIS NOR SECURED ANY ENDURING ADVANTAGE. WE FIND FORCE IN THE A RGUMENT OF LD. COUNSEL FOR THE ASSESSEE THAT THE BENEFIT SECURED BY THE ASSESSEE IS ESSENTIALLY A LICENSED RIGHT TO USE KNOWHOW FOR THE PER IOD OF THE AGREEMENT. THEREFORE, THE ROYALTY EXPENDITURE IN THIS REG ARD, IN OUR 53 ITA NOS.1107, 1080/PN/2013 AND CO NO.57/PN/2014 OPINION, IS REVENUE IN NATURE. FURTHER ROYALTY BEING AN A NNUAL RECURRING EXPENDITURE, DIRECTLY LINKED TO NUMBER OF VEHICLES SOLD IN A FINANCIAL YEAR, IN OUR OPINION, IS REVENUE EXPENDITURE FULLY DEDUCTIBLE IN COMPUTING THE TAXABLE INCOME OF THE ASSESSEE. 99. WE FIND THE HONBLE SUPREME COURT IN THE CASE OF CI T VS. IAEC PUMPS LTD. REPORTED IN 232 ITR 316 HAS HELD THAT AMOUNT PAID BY THE ASSESSEE TO THE COLLABORATOR FOR USING ITS PATENT S AND DESIGN UNDER AN AGREEMENT WAS ONLY A LICENSE FEE AND CONSTITUT ED REVENUE EXPENDITURE. THE HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. ESSEL PROPACK LTD. REPORTED IN 325 ITR 185 HAS HELD TH AT THE ASSESSEE DID NOT ACQUIRE AN ASSET OF A CAPITAL NATURE BY OBTAINING A NON-EXCLUSIVE LICENCE FOR FIVE YEARS RESTRICTED TO THE TERR ITORY OF INDIA TO MANUFACTURE AND USE TUBE MAKING MACHINES AS THE PRO PRIETARY RIGHTS IN THE PATENTS CONTINUED TO VEST IN THE LICENSOR A ND THEREFORE THE TECHNICAL KNOWHOW FEES PAID BY THE ASSESSEE UNDER T HE TERMS OF THE AGREEMENT IS ALLOWABLE AS REVENUE EXPENDITURE. 100. WE FIND THE HONBLE DELHI HIGH COURT IN THE CASE OF CI T VS. G4S SECURITIES SYSTEM INDIA LTD. HAS HELD AS UNDER (HEAD NOTES) : BUSINESS EXPENDITURE CAPITAL OR REVENUE EXPENDITURE PAYMENT OF ROYALTY FOR USE OF TRADE MARK, TECHNICAL KNOW-HOW ET C. ASSESSEE COMPANY HAS PAID ROYALTY IN LIEU OF TECHNICAL KNOW-H OW AND TRADE MARK FOR EXCLUSIVE USE FOR FIVE YEARS, WHICH WAS EXTENDABLE BY FIVE YEARS ALL RIGHTS AND KNOW-HOW, CONTINUED TO VEST IN PROVIDER CO MPANY AND IT WAS ONLY THE RIGHT TO USE KNOWHOW THAT WAS MADE AVAILABLE TO THE ASSESSEE AND THAT TOO BASED ON ITS NET SALES AT NO POINT OF TI ME THE ASSESSEE WAS ENTITLED TO BECOME THE EXCLUSIVE OWNER OF THE TECHNI CAL KNOW-HOW AND THE TRADEMARK EXPENDITURE WAS THEREFORE DEDUCTIBLE AS REVENUE EXPENDITURE. 54 ITA NOS.1107, 1080/PN/2013 AND CO NO.57/PN/2014 101. WE FIND THE HONBLE BOMBAY HIGH COURT IN THE CASE OF ANTIFRICTION BEARINGS CORPORATION LTD. VS. CIT REPORTED IN 1 14 ITR 335 HAS HELD THAT ROYALTY PAID TO A FOREIGN COLLABORATOR FOR PROVISION OF TECHNICAL KNOW-HOW IN A RESTRICTED MANNER FOR A RESTRIC TED USE DURING THE AGREEMENT PERIOD, NOT RESULTING IN ABSOLUTE TR ANSFER OF ANYTHING OR ACQUISITION OF ANY ASSET OF ENDURING CHARACTE R IS A REVENUE EXPENDITURE. 102. IN VIEW OF THE ABOVE DECISIONS AND IN VIEW OF THE DETA ILED REASONING GIVEN BY THE CIT(A) WE FIND NO INFIRMITY IN HIS ORDER . ACCORDINGLY, THE SAME IS UPHELD AND THE GROUND RAISED BY THE REVENUE ON THIS ISSUE IS DISMISSED. 103. GROUND OF APPEAL NO.5 BY THE REVENUE READS AS UNDER : WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE CIT(A) WAS JUSTIFIED IN DIRECTING THE AO TO VERIFY TH E EVIDENCES FURNISHED BEFORE HIM AND DECIDE THE ADMISSIBILITY OF T HE CLAIM OF EXPENDITURE OF CAPITALIZED CARS, WHEN THE ASSESSEE WAS G IVEN SUFFICIENT OPPORTUNITY TO FURNISH SUCH DETAILS DURING THE COURSE O F ASSESSMENT PROCEEDINGS, AND THE ASSESSEE COULD FURNISH DETAILS OF ONL Y 12 CARS MEANT FOR EXECUTIVES. 104. FACTS OF THE CASE, IN BRIEF, ARE THAT THE AO DURING T HE COURSE OF ASSESSMENT PROCEEDINGS NOTED THAT THE ASSESSEE COMPANY EVERY YEAR HAS BEEN CAPITALIZING NEAR ABOUT 30 CARS MANUFACTURED BY IT. OUT OF THE STOCK OF THE CAPITALIZED CARS, THE COMPA NY SELLS CERTAIN NUMBER OF CARS EVERY YEAR AT A PRICE LOWER THAN THE MARKET PRICE. THE AO ASKED THE ASSESSEE TO PRODUCE LOG BOOK OF AL L THE CAPITALIZED CARS. THE ASSESSEE SUBMITTED THAT THE L OG BOOKS ARE NOT MAINTAINED. THE AO ASKED THE ASSESSEE TO SUBMIT THE LIST OF THE NAMES AND DESIGNATIONS OF THE PERSONS USING SUC H CAPITALIZED 55 ITA NOS.1107, 1080/PN/2013 AND CO NO.57/PN/2014 CARS. ACCORDING TO THE LIST FILED BY THE ASSESSEE, 12 CARS WERE SHOWN AS SPECIFICALLY ALLOTTED TO THE EXECUTIVES OF THE COMPANY AND OTHER 14 CARS HAVE BEEN SHOWN AS INTO CAR POOL. HOWEVER THE ASSESSEE FAILED TO PRODUCE DOCUMENTS AND DETAILS IN SUPPORT OF ITS CONTENTION THAT THE CARS FROM THE CAR POOL WERE BEING USED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS. THE AO, THEREFORE, WAS OF THE VIEW THAT PART OF THE EXPENDI TURE INCURRED ON MAINTAINING THESE CARS, THEIR REPAIRS AND MAINTE NANCE AND DEPRECIATION HAS TO BE CONSIDERED DISALLOWABLE U/S 37(1). THE AO ACCORDINGLY DISALLOWED 50% OF REPAIRS, FUEL AND DEPRECIATION TOTALLING TO RS 1,46,48,921 BEING FOR NON-BUSINESS EXPENDITURE. 105. FURTHER, THE AO ALSO NOTED THAT TOTAL AMOUNT OF EXPENDITURE CAPITALIZED ON THIS ACCOUNT AS PER THE TAX AUDIT REPORT HAS BEEN SHOWN AS RS. 2,39,79,149. HOWEVER, THE ASSESSEE REDUCED ONLY RS 1,90,59,973 ON CAPITALIZED CARS. THE DIFFERENCE OF RS.49,19,176/- WAS EXPLAINED AS PERTAINING TO RTO TAXES AN D OTHER EXPENSES, BUT THE SAME WAS NOT BEEN SUBSTANTIATED WITH EVIDENCES. IN VIEW OF THIS, THE AO CAPITALIZED THE DIFFERENCE OF RS.49,19,176/-. 106. BEFORE CIT(A) IT WAS STATED THAT THE CARS WERE USED BY THE TOP MANAGEMENT EMPLOYEES OF THE ASSESSEE WHEREAS IN THE CA RS IN THE CAR POOL BY THE OTHER EMPLOYEES, PERQUISITE VALUE OF THE C ARS WAS TAXED IN THE HANDS OF RESPECTIVE TOP MANAGEMENT EMPLOYE ES IN ACCORDANCE WITH THE PROVISIONS OF THE ACT. FURTHER, THE A SSESSEE IS REQUIRED TO KEEP THE CARS FOR THE PURPOSE OF DISPLAY IN V ARIOUS EVENTS, PHOTO SHOOTS, ROAD SHOWS, TOURNAMENTS AND ADVE RTISEMENT CAMPAIGNS. IT WAS ARGUED THAT SUCH CARS WERE USED ON LY FOR THE 56 ITA NOS.1107, 1080/PN/2013 AND CO NO.57/PN/2014 PURPOSE OF BUSINESS. FURTHER, THERE CANNOT BE AN ELEMEN T OF PERSONAL USE IN THE HANDS OF THE COMPANY AND ELEMENT OF PERSONAL USE IN THE HANDS OF RESPECTIVE EMPLOYEES IS ALREADY TAXED IN TERMS OF PERQUISITES. IT WAS ACCORDINGLY SUBMITTED THAT THE ADDIT ION MADE BY THE AO BE DELETED. 107. BASED ON THE ARGUMENTS ADVANCED BY THE ASSESSEE THE LD.CIT(A) HELD THAT THE EXPENSES PERTAINING TO THE CARS ALLOTTED TO T HE TOP EXECUTIVES OF THE COMPANY ARE TAX DEDUCTIBLE SINCE T HE SAME WERE TAXED IN THE HANDS OF THE EMPLOYEES. IN RESPECT OF THE EXPENSES INCURRED IN RESPECT OF BALANCE CARS USED IN CAR POOL AND FOR VARIOUS EVENTS OF THE COMPANY HE DIRECTED THE AO TO DECIDE ON THE ADMISSIBILITY OF EXPENSES BASED ON VERIFICATION OF EVIDENCE. HE DID NOT COMMENT UPON THE ALLOWABILITY OF DIFFERENCE BETWEEN THE CAR COST CAPITALIZED AS PER TAX AUDIT REPORT AND EXPENSES REDUCE D FROM THE PROFIT AND LOSS ACCOUNT. THE RELEVANT OBSERVATION OF THE CIT(A) AT PARA 2.6.6 TO 2.6.7 READ AS UNDER : FINDINGS : 2.6.6 THE APPELLANT HAS SUBMITTED THAT THERE IS NO CA SE FOR THE DISALLOWANCE IN CASE OF CARS, WHICH WERE USED BY THE TO P MANAGEMENT EXECUTIVES. THE COMPANY HAS TAXED THIS BENEFIT IN THE HANDS OF RESPECTIVE EMPLOYEES. CONSIDERING THE EXPLANATION OFF ERED, I AGREE WITH THE APPELLANT THAT THERE IS NO CASE FOR THE DISALLOWAN CE IN THE HANDS OF THE COMPANY AS FAR AS CARS USED TOP MANAGEMENT EXECUTIV ES ARE CONCERNED. THIS IS BECAUSE IN THE HANDS OF COMPANY, TH E EXPENDITURE ON CAPITALIZED CAR HAS BEEN INCURRED FOR THE EMPLOYEES A ND IS UNCURED FOR THE PURPOSE OF ITS BUSINESS AND HENCE DEDUCTIBLE. 2.6.7 WITH RESPECT EXPENDITURE INCURRED ON BALANCE C ARS, IT IS SUBMITTED THAT SUCH CARS WERE EITHER USED IN THE CAR PO OL FOR ALL THE EMPLOYEES OR WERE USED FOR THE PURPOSE OF BUSINESS IN EVE NTS SUCH AS EXHIBITION ETC. THE LEARNED AO HAS STATED THAT THE A PPELLANT HAS NOT FURNISHED ANY DOCUMENTARY EVIDENCE TO SUBSTANTIATE THA T THE CARS WERE USED WHOLLY AND EXCLUSIVELY USED FOR THE PURPOSE OF BUSI NESS. THE APPELLANT HAS STATED BEFORE ME THAT IT HAS ALL NECESSA RY EVIDENCE IN SUPPORT ITS CLAIM. IN VIEW OF THIS ASSERTION, I DIRECT THE LEARNED AO TO 57 ITA NOS.1107, 1080/PN/2013 AND CO NO.57/PN/2014 VERIFY THE EVIDENCE AND DECIDE ADMISSIBILITY OF THE C LAIM ON THE BASIS OF EVIDENCE FURNISHED BEFORE HIM. I CONSIDER FIT TO REM IT THE MATTER TO THE LEARNED AO RATHER THAN ADMITTING THE SAME AS ADDITION AL EVIDENCE BEFORE ME AND SENDING THE SAME TO THE AO FOR VERIFICA TION UNDER THE I.T. RULES 46A. 108. AGGRIEVED WITH SUCH ORDER OF THE CIT(A) THE REVENUE IS IN APPEAL BEFORE US. 109. THE LD. DEPARTMENTAL REPRESENTATIVE SUBMITTED THAT THE MATTER MAY BE SET ASIDE TO THE AO SINCE ORDER OF THE C IT(A) IS VERY CRYPTIC AND DOES NOT TOUCH UPON THE ENTIRE ISSUE 110. THE LD. COUNSEL FOR THE ASSESSEE ON THE OTHER HAN D WHILE HEAVILY RELYING ON THE ORDER OF THE CIT(A) SUBMITTED THA T THE BREAK- UP OF CARS AVAILABLE WITH MB INDIA FOR OWN USE DURING 2002- 03 IS AS FOLLOWS : PARTICULARS QUANTITY (NOS.) OPENING BALANCE OF CAPITALISED CARS 31 CAPITALISED DURING THE YEAR 13 SALE OF CAPITALISED CARS DURING THE YEAR 18 CLOSING BALANCE OF CAPITALISED CARS AT THE YEAR END 26 111. HE SUBMITTED THAT DURING ASSESSMENT PROCEEDINGS TH E ASSESSEE WAS REQUIRED TO PRODUCE DETAILS IN RESPECT OF THE CAPITALIZED CARS. THE ASSESSEE SUBMITTED THE DETAILS IN RESPECT OF 26 CARS OUT OF WHICH 12 CARS WERE ALLOTTED TO THE TOP EXECUTIVES OF TH E COMPANY AND THE BALANCE 14 CARS WERE USED IN THE CAR POOL OF TH E COMPANY HE DREW THE ATTENTION OF THE BENCH TO THE FOLLOWING CHART : SR.NO. PARTICULARS AMOUNT (RS.) A EXPENSES DISALLOWED BY T HE AO 1,95,68,097 B AMOUNT ATTRIBUTABLE TO MANAGEMENT CARS BY THE MANAGEMENT EXECUTIVES SUBSEQUENTLY ALLOWED BY THE CIT(A) 67,61,040 C DISALLOWANCE CURRENTLY SUSTAINING POST CIT(A) ORDER CONSISTING OF ITEMS GIVEN IN SR.D. BELOW 1,28,07,057 58 ITA NOS.1107, 1080/PN/2013 AND CO NO.57/PN/2014 D(I) DIFFER ENCE BETWEEN AMOUNT OF CAPITALISED CARS AS PER TAX AUDIT REPORT (RS.2,39,79,149) AND EXPENSES ON CAPITALISED CARS TRANSFERRED FROM P&L A/C TO FIXED ASSETS IN THE FINANCIAL STATEMENTS (RS.1,90,59,973 49,19,176 D(II) 50% OF THE REPAIRS, FUEL AND DEPRECIATIO N [C - D(I)] 78,87,881 112. REFERRING TO THE ABOVE HE DREW THE ATTENTION OF THE BENCH TO THE EXPENSES INCURRED ON BALANCE CARS OF RS.78,87,881/- W HICH WAS RESTORED BACK TO THE FILE OF THE AO FOR VERIFICATION. HE SU BMITTED THAT THE AO WAS NOT JUSTIFIED IN MAKING ADHOC DISALLOWANCE OUT OF THE GENUINE BUSINESS EXPENDITURE OF THE ASSESSEE. SINCE IT WAS CATEGORICALLY SUBMITTED THAT IN CASE OF COMPANY WHICH IS IN ANIMATE PERSON THERE CAN BE NO JUSTIFICATION FOR ADHOC DISALLOWANCE FOR PERSONAL OR NON BUSINESS COMPONENT. 113. AS REGARDS THE QUERY RAISED BY THE AO TO SUBMIT T HE LOG BOOK ANALYSIS TO CAPITALIZED CARS, HE SUBMITTED THAT IT WAS CAT EGORICALLY STATED BEFORE THE AO THAT LOG BOOK IS NOT MAINTAINED AND HENCE COULD NOT BE SUBMITTED, THEREFORE, THE AO DISALLOWED 50% O F THE ABOVE EXPENSES. HE SUBMITTED THAT MERE NON MAINTENANC E OF LOG BOOK CANNOT BE A GROUND TO DISALLOW GENUINE BUSINESS EXPENDITURE. 114. REFERRING TO THE DECISION OF THE HONBLE GUJARAT HIGH COURT IN THE CASE OF SAYAJI IRON AND ENGINEERING COMPANY VS. CIT REPORTED IN 253 ITR 749 HE SUBMITTED THAT NO DISALLOWANCE OUT OF MOT OR CAR EXPENSES CAN BE MADE IN THE HANDS OF COMPANY FOR PERSO NAL USE BY THE DIRECTORS. 115. SO FAR AS THE AMOUNT OF RS.49,19,176/- ON ACCOUNT OF DIFFERENCE BETWEEN AMOUNTS OF CAPITALIZED CARS AS PER TAX AUDIT REPORT AND EXPENSES ON CAPITALIZED CARS TRANSFERRED FROM PROFIT AND LOSS ACCOUNT TO FIXED ASSETS IN THE FINANCIAL STATEMENTS IS CONCERNED 59 ITA NOS.1107, 1080/PN/2013 AND CO NO.57/PN/2014 HE SUBMITTED THAT ALL THESE DETAILS WERE PROVIDED TO THE AO DURING ASSESSMENT PROCEEDINGS. THE DIFFERENCE OF RS.49,19,176/- R ELATES TO THE BALANCE SHEET ITEMS AND NOT PROFIT AND LOSS ITEMS S UCH AS PAYMENT OF RTO TAX, CBU CARS AND PREOWNED CARS. THERE FORE, NO DISALLOWANCE IS CALLED FOR. HE ALSO RELIED ON THE FOLLOWING DECISIONS : 1. ADOR TECHNOLOGIES LTD. VS. DCIT REPORTED IN 112 TT J 24 ORDER DATED 28-02-2007 2. BAJAJ AUTO FINANCE LTD. VS. DCIT REPORTED IN 112 TTJ 437 ORDER DATED 29-12-2006 3. BAJAJ FINANCE LTD. VS. DCIT ITA NO.1175 AND 127 3/PN/2012 ORDER DATED 30-06-2014 116. WE HAVE CONSIDERED THE RIVAL ARGUMENTS MADE BY BOT H THE SIDES, PERUSED THE ORDERS OF THE AO AND CIT(A) AND THE P APER BOOK FILED ON BEHALF OF THE ASSESSEE. WE HAVE ALSO CONSIDERED TH E VARIOUS DECISIONS CITED BEFORE US. WE FIND THE AO IN THE INSTANT C ASE HAS ASKED THE ASSESSEE TO PRODUCE DETAILS IN RESPECT OF THE CAPITALIZED CARS SINCE ACCORDING TO THE AO THE ASSESSEE WAS NOT A BLE TO PRODUCE ALL THE DETAILS OF THE USE AND UTILITY OF ALL THE CAPITALIZED C ARS FOR THE PURPOSE OF ITS BUSINESS ACTIVITIES. HE MADE ADHOC DISALLOWAN CE OF 50% OUT OF REPAIRS, FUEL AND DEPRECIATION AMOUNTING TO RS.1,46,48,921/-. FURTHER, THE AO HAD ALSO MADE DISALLOWANCE OF RS.49,19,176/- BEING THE DIFFERENCE BETWEEN CAR COST CAPITA LIZED AS PER TAX AUDIT REPORT AND EXPENSES REDUCED FROM THE PR OFIT AND LOSS ACCOUNT FOR CAPITALIZATION IN THE BOOKS. THUS, THE AO MADE TOTAL DISALLOWANCE OF RS.1,95,68,097/-. WE FIND IN APPEAL THE LD.CIT(A) HELD THAT THE EXPENSES PERTAINING TO THE CARS ALLOTTED T O TOP EXECUTIVES OF THE COMPANY ARE TAX DEDUCTIBLE SINCE THE S AME WERE TAXED IN THE HANDS OF THE EMPLOYEES IN RESPECT OF THE EX PENSES INCURRED. IN RELATION TO BALANCE CARS USED IN CAR POOL AND FOR VARIOUS 60 ITA NOS.1107, 1080/PN/2013 AND CO NO.57/PN/2014 EVENTS OF THE COMPANY, HE DIRECTED THE AO TO DECIDE THE ADMISSIBILITY OF THE EXPENSES BASED ON VERIFICATION OF EVIDENCES. HE H OWEVER DID NOT COMMENT UPON THE ALLOWABILITY OF THE DIFFERENCE BETWEEN CAR COST CAPITALIZED AS PER TAX AUDIT REPORT AND EXPENSES REDUCE D FROM THE PROFIT AND LOSS ACCOUNT. 117. SO FAR AS EXPENSES PERTAINING TO THE CARS ALLOTTED T O THE TOP EXECUTIVES ARE CONCERNED, WE DO NOT FIND ANY INFIRMITY IN TH E ORDER OF THE CIT(A). IT HAS BEEN HELD BY THE HONBLE GUJARAT HIGH COURT IN THE CASE OF SAYAJI AND IRON ENGINEERING COMPANY (SUPRA) T HAT ONCE THE DIRECTORS OF THE ASSESSEE COMPANY WERE ENTITLED TO USE THE VEHICLES OF THE COMPANY FOR THEIR PERSONAL USE AS PER THE TERMS AND CONDITIONS OF THE AGREEMENT, IT CANNOT BE SAID THAT THE A SSESSEE COMPANY INCURRED EXPENDITURE FOR THE PERSONAL USE OF CAR S BY THE DIRECTORS AND THEREFORE DISALLOWANCE OF PART OF THE EXPEN DITURE INCURRED BY THE COMPANY FOR THE MAINTENANCE OF THE VEHICLES WAS NOT JUSTIFIED. THE PUNE BENCH OF THE TRIBUNAL IN THE CASE OF AD OR TECHNOLOGIES LTD. (SUPRA) HAS HELD THAT ASSESSEE BEING CO MPANY, THERE CAN BE NO JUSTIFICATION FOR ADHOC DISALLOWANCE ON THE GROUND THAT PERSONAL OR NON BUSINESS COMPONENT IN THE EXPENSE S CLAIMED SUCH AS SUNDRY EXPENSES, HOTEL EXPENSES GIFT ARTICLES, EMP LOYEE WELFARE EXPENSES ETC. SIMILARLY, THE PUNE BENCH OF THE TRIB UNAL IN THE CASE OF BAJAJ AUTO FINANCE LTD. (SUPRA) HAS HELD THAT IN CASE OF A COMPANY WHICH IS AN INANIMATE PERSON, NO ADHOC DISALLOWANCE TOWARDS CAR AND TELEPHONE EXPENSES FOR PERSONAL USE CA N BE MADE. SIMILAR VIEW HAS BEEN TAKEN BY THE COORDINATE BENCHES OF THE TRIBUNAL IN DIFFERENT OTHER CASES. WE THEREFORE DO NOT FIND ANY INFIRMITY IN THE ORDER OF THE CIT(A) HOLDING THAT THE EXPENSE S 61 ITA NOS.1107, 1080/PN/2013 AND CO NO.57/PN/2014 PERTAINING TO THE CARS ALLOTTED TO TOP EXECUTIVES OF THE COMPANY ARE TAX DEDUCTIBLE SINCE THE SAME WERE TAXED IN THE HANDS O F THE EMPLOYEES. 118. SO FAR AS THE AMOUNT OF RS.49,19,176/- ON ACCOUNT OF DIFFERENCE BETWEEN AMOUNT OF CAPITALIZED CARS AS PER TAX A UDIT REPORT AND EXPENSES ON CAPITALIZED CARS TRANSFERRED FROM PROFIT A ND LOSS ACCOUNT TO FIXED ASSETS IN THE FINANCIAL STATEMENTS IS CON CERNED, WE FIND MERIT IN THE SUBMISSION OF THE LD. COUNSEL FOR THE ASSES SEE THAT THE DIFFERENCE RELATES TO BALANCE SHEET ITEMS AND NOT PRO FIT AND LOSS ITEMS SUCH AS RTO TAX, CBU CARS AND PREOWNED CARS. HOW EVER, THE ORDER OF THE CIT(A) IS SILENT ON THIS ISSUE. WE THEREFORE R ESTORE THIS ISSUE TO THE FILE OF THE AO WITH A DIRECTION TO VERIFY THE S AME. IN CASE THE SAME IS ONLY DUE TO DIFFERENCE IN THE BALANCE SHEET IT EMS, THEN NO DISALLOWANCE IS CALLED FOR. THE AO SHALL VERIFY THE RECORD S AND DECIDE THE ISSUE AS PER FACT AND LAW. GROUND OF APPEAL N O.5 BY THE REVENUE IS ACCORDINGLY ALLOWED FOR STATISTICAL PURPOSES. CO NO.57/PN/2014 : 119. THE ONLY EFFECTIVE GROUND RAISED BY THE ASSESSEE IN THE CROSS OBJECTION READS AS UNDER : WITHOUT PREJUDICE TO OUR CONTENTION THAT PAYMENT M ADE FOR ROYALTY BE TREATED AS REVENUE EXPENDITURE, IN CASE THE TAX DEPAR TMENTS GROUND THAT THE SAME IS A CAPITAL EXPENDITURE SUCCEEDS, THEN D EPRECIATION UNDER SECTION 32 OF THE ACT SHOULD BE ALLOWED ON CAPITALIZE D ROYALTY. 120. HOWEVER, THE LD. COUNSEL FOR THE ASSESSEE DID NOT PR ESS THE ABOVE GROUND FOR WHICH THE LD. DEPARTMENTAL REPRESENTAT IVE HAS NO OBJECTION. ACCORDINGLY, THE GROUND OF CROSS OBJECTION RA ISED BY THE ASSESSEE IN THE CO IS DISMISSED. 62 ITA NOS.1107, 1080/PN/2013 AND CO NO.57/PN/2014 121. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS PA RTLY ALLOWED, THE APPEAL FILED BY THE REVENUE IS PARTLY ALLOWED FOR STATIS TICAL PURPOSES AND THE CO FILED BY THE ASSESSEE IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 06-06-2016. SD/- SD/- ( VIKAS AWASTHY ) ( R.K. PANDA ) JUDICIAL MEMBER ACCOUNTANT MEMBER IQ.KS PUNE ; DATED : 06 TH JUNE, 2016. LRH'K ' (!* + / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT 2. / THE RESPONDENT 3. # ( ) - THE CIT(A)-IT/TP, PUNE 4. # S / THE CIT-IT/TP, PUNE 5. & ))* , * , IQ.KS / DR, ITAT, A PUNE; 6. . / GUARD FILE. / BY ORDER , // TRUE COPY // // & ) //TRUE COPY// 01 ) * / SR. PRIVATE SECRETARY *, IQ.KS / ITAT, PUNE