Maruti Suzuki India Ltd., New Delhi V. Addl. CIT, New Delhi

ITA 2441/DEL/2012

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 97030 (ITAT-DELHI)
• Duration Of Justice: 3 year(s) 3 month(s) 3 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 24-08-2015
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: I1
• Next Hearing Date: 20-08-2015
• Assessment Year: 2006-2007
• Appeal Filed On: 21-05-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: AMRINDER KUMAR
• Assessee Lawyers: ROHIT JAIN S; AJAY VOHRA SR SHRI NEERAJ JAIN
• Keywords: Capital asset; Business income; Depreciation; Transfer pricing; International transaction; Rule of consistency; Competent authority; Royalty expenses; Capital receipt; Revenue expenditure; Capital expenditure
• Section: 43B; 143(3); 92B; 14A; 10B; 145; 28; 154; 92

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCHES : I-1 : NEW DELHI BEFORE SHRI R.S. SYAL, AM AND SHRI A.T. VARKEY, JM ITA NO.5120/DEL/2010 ASSESSMENT YEAR : 2006-07 ITA NO.2441/DEL/2012 ASSESSMENT YEAR : 2006-07 MARUTI SUZUKI INDIA LTD., PLOT NO.1, NELSON MANDELA ROAD, VASANT KUNJ, NEW DELHI. PAN: AAACM0829Q VS. ADDL. CIT, RANGE-6, CR BUILDING, NEW DELHI. (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI AJAY VOHRA, SR. ADVOCATE; SHRI NEERAJ JAIN & SHRI ROHIT JAIN, ADVOCATES; & MS TEJASVI JAIN, SHRI RAMIT KATYAL, SHRI PUNEET CHUGH, CAS. DEPARTMENT BY : SHRI AMRINDER KUMAR, CIT, DR. DATE OF HEARING : 20.08.2015 DATE OF PRONOUNCEMENT : 24.08.2015 ITA NO.5120/DEL/2010 ITA NO.2441/DEL/2012 2 ORDER PER R.S. SYAL, AM: THE ASSESSEE HAS FILED TWO APPEALS FOR THE ASSESSM ENT YEAR 2006- 07. FIRST IS THE MAIN APPEAL DIRECTED AGAINST THE F INAL ORDER PASSED BY THE ASSESSING OFFICER (AO) ON 20.10.2010 UNDER SECTION 143(3) READ WITH SECTION 144C OF THE INCOME-TAX ACT, 1961 (HEREINAFT ER ALSO CALLED THE ACT). SECOND APPEAL, HAVING ONLY ONE ISSUE, IS AGA INST THE ORDER OF THE AO PASSED U/S 154 READ WITH SECTIONS 92CA(5)/143(3) OF THE ACT ON 12.4.2012, PURSUANT TO THE SUO MOTU RECTIFICATION PROCEEDINGS TAKEN UP BY THE TRANSFER PRICING OFFICER (TPO). 2. GROUND NOS. 1 AND 2 ARE GENERAL, WHICH DO NOT RE QUIRE ANY SPECIFIC ADJUDICATION. A. DISALLOWANCES U/S 43B 3. GROUND NO. 3 DEALS WITH DISALLOWANCES MADE U/S 4 3B IN RESPECT OF CERTAIN ITEMS OF EXCISE DUTY AND CUSTOMS DUTY. ITA NO.5120/DEL/2010 ITA NO.2441/DEL/2012 3 I. EXCISE DUTY 4.1. FIRSTLY, WE SHALL DEAL WITH ALL THE ITEMS OF EXCISE DUTY DISALLOWANCES. THE FIRST AMOUNT OF DISALLOWANCE OF EXCISE DUTY IS RS.30,75,821/-, BEING, THE AMOUNT OF EXCISE DUTY P AID ON VEHICLES AND SPARE PARTS UNDER PLA (PERSONAL LEDGER ACCOUNT). TH E ASSESSEE PAID CERTAIN SUM UNDER PLA WHICH IS NOTHING, BUT, EXCISE DUTY PAID IN- ACCOUNT AS ADVANCE, TO BE ADJUSTED AGAINST ACTUAL E XCISE DUTY REQUIRED TO BE PAID AT THE TIME OF REMOVAL OF GOODS FROM BONDED WAREHOUSE. AT THE END OF THE YEAR, THERE WERE THREE BALANCES IN PLA, CONSISTING OF RS.2,32,113/- TOWARDS EXCISE DUTY ON VEHICLES, RS.7 ,29,595/- TOWARDS R&D CESS ON VEHICLES AND RS.21,14,113/- TOWARDS EXC ISE DUTY ON SPARE PARTS. THE ASSESSEE CLAIMED DEDUCTION FOR THESE AM OUNTS U/S 43B ON THE GROUND THAT THESE STOOD PAID BEFORE THE CLOSE OF TH E FINANCIAL YEAR RELEVANT TO THE ASSESSMENT YEAR UNDER CONSIDERATION . THE AO, FOLLOWING HIS VIEW TAKEN IN EARLIER YEARS, REFUSED TO ALLOW T HIS DEDUCTION. THE ASSESSEE IS AGGRIEVED AGAINST SUCH DISALLOWANCE. I T HAS BEEN ADMITTED ON ITA NO.5120/DEL/2010 ITA NO.2441/DEL/2012 4 BEHALF OF THE REVENUE THAT SIMILAR ISSUE HAS BEEN D ECIDED BY THE TRIBUNAL IN EARLIER YEARS IN FAVOUR OF THE ASSESSEE. 4.2. THE NEXT AMOUNT OF DISALLOWANCE OF EXCISE DUTY IS THE BALANCE OF RS.48,53,55,419/- AT THE END OF THE YEAR IN RG 23A PART II ACCOUNT. THIS AMOUNT REPRESENTS EXCISE DUTY PAID ON RAW MATERIAL AND INPUTS PURCHASED BY THE ASSESSEE FOR USE IN THE MANUFACTUR E OF AUTOMOBILES. UNDER THE CENTRAL EXCISE LAW, A MANUFACTURER IS ENT ITLED TO CLAIM MODVAT CREDIT IN RESPECT OF THE AMOUNT OF CENTRAL EXCISE D UTY PAID ON RAW MATERIAL AND INPUTS PURCHASED FOR MANUFACTURE OF EX CISABLE GOODS. THE AMOUNT IN DISPUTE IS MODVAT CREDIT UNUTILIZED AT TH E END OF THE YEAR. THE ASSESSEE TREATED IT AS PAYMENT OF TAX AND CLAIMED D EDUCTION U/S 43B OF THE ACT. THE AO REFUSED TO ALLOW THIS DEDUCTION. I T HAS BEEN ADMITTED BY BOTH THE SIDES THAT THE TRIBUNAL IN EARLIER YEAR S, FOLLOWING THE DICTUM OF SPECIAL BENCH IN GLAXO SMITHKLINE CONSUMER HEALTHCARE LTD., (2007) 107 ITD 343 (SB) (CHD.) , HAS DECIDED THIS ISSUE IN FAVOUR OF THE REVENUE. THE ASSESSEE IS AGGRIEVED AGAINST THE ADDI TION. ITA NO.5120/DEL/2010 ITA NO.2441/DEL/2012 5 4.3. THE LAST AMOUNT OF DISALLOWANCE OF EXCISE DUT Y IS RS.45,00,000, WHICH WAS PAID BY THE ASSESSEE UNDER PROTEST PURSUA NT TO ADDITIONAL DEMAND RAISED BY THE COMPETENT AUTHORITY. THOUGH TH E ASSESSEE DISPUTED SUCH ADDITIONAL DEMAND, BUT ENDED UP PAYING THE SAM E UNDER PROTEST AND CLAIMED A DEDUCTION FOR THE SAME. THE AO DISALLOWED IT ON THE GROUND THAT THE SAME WAS BEING CONTESTED AND THERE WAS NO FINALITY REGARDING THE LIABILITY AND FURTHER, SUCH AMOUNT WAS NOT DEBI TED TO THE MANUFACTURING, TRADING, PROFIT AND LOSS ACCOUNT (HE REINAFTER CALLED `PROFIT AND LOSS ACCOUNT FOR CONVENIENCE). THE ASS ESSEE IS AGGRIEVED AGAINST SUCH DISALLOWANCE. IT HAS BEEN ADMITTED BY THE REVENUE THAT SIMILAR ISSUE HAS BEEN DECIDED BY THE TRIBUNAL IN E ARLIER YEARS IN FAVOUR OF THE ASSESSEE. 4.4. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUS ED THE RELEVANT MATERIAL ON RECORD QUA THE ABOVE ITEMS OF DISALLOWANCES OF EXCISE DUTY. THE ASSESSEE CLAIMED DEDUCTION FOR THESE SUMS U/S 4 3B, WHICH THE AO REFUSED TO ALLOW. IN ORDER TO EVALUATE THE RIVAL SU BMISSIONS, IT WOULD BE APPOSITE TO NOTE THE RELEVANT PARTS OF SECTION 43B, AS UNDER : - ITA NO.5120/DEL/2010 ITA NO.2441/DEL/2012 6 `43B. NOTWITHSTANDING ANYTHING CONTAINED IN ANY OTHER PR OVISION OF THIS ACT, A DEDUCTION OTHERWISE ALLOWABLE UNDER THIS ACT IN RES PECT OF ( A ) ANY SUM PAYABLE BY THE ASSESSEE BY WAY OF TAX, DU TY, CESS OR FEE, BY WHATEVER NAME CALLED, UNDER ANY LAW FOR THE TIME BE ING IN FORCE, OR ( B ) TO ( F ) .. SHALL BE ALLOWED (IRRESPECTIVE OF THE PREVIOUS YEAR IN WHICH THE LIABILITY TO PAY SUCH SUM WAS INCURRED BY THE ASSESSEE ACCORDING TO THE METHOD OF ACCOUNTING REGULARLY EMPLOYED BY HIM) ONLY IN COMPUTING THE IN COME REFERRED TO IN SECTION 28 OF THAT PREVIOUS YEAR IN WHICH SUCH SUM IS ACTUALL Y PAID BY HIM : .... 4.5. A PERUSAL OF THE RELEVANT PARTS OF THE ABOVE PROVISION TRANSPIRES THAT IT HAS THE FOLLOWING ESSENTIAL ELEMENTS IN SO FAR AS THE DEDUCTION ON ACCOUNT OF EXCISE DUTY IS CONCERNED : - I. DEDUCTION IS PERMISSIBLE IN RESPECT ANY SUM PAYABLE UNDER ANY LAW FOR THE TIME BEING IN FORCE BY THE ASSESSEE BY WAY OF TAX, DUTY, CESS OR FEE, ETC. II. DEDUCTION OF TAX OR DUTY ETC. IS TO BE ALLOWED ONLY IN COMPUTING THE BUSINESS INCOME OF THAT PREVIOUS YEAR IN WHICH SUCH SUM IS ACTUALLY PAID BY THE ASSESSEE. ITA NO.5120/DEL/2010 ITA NO.2441/DEL/2012 7 III. DEDUCTION IS PERMISSIBLE IN THE YEAR OF PAYMENT IRR ESPECTIVE OF THE INCURRING OF LIABILITY IN ANY PREVIOUS YEAR AS PER THE METHOD OF ACCOUNTING REGULARLY EMPLOYED BY THE ASSE SSEE. IV. DEDUCTION IS ALLOWABLE `ONLY ONCE AND THAT TOO IN THE YEAR OF PAYMENT. IT CANNOT BE ALLOWED TWICE, THAT IS, FIRST LY IN THE YEAR OF INCURRING LIABILITY AS PER THE METHOD OF ACCOUNT ING FOLLOWED AND IF THE DATE OF PAYMENT IS DIFFERENT FROM THE YE AR OF INCURRING LIABILITY, THEN AGAIN IN THE YEAR OF PAYM ENT. THE USE OF THE WORDS IRRESPECTIVE OF THE PREVIOUS YEAR IN WHICH THE LIABILITY TO PAY SUCH SUM WAS INCURRED BY THE ASSES SEE ACCORDING TO THE METHOD OF ACCOUNTING REGULARLY EMP LOYED BY HIM BEFORE THE WORD ONLY, LEAVES NOTHING TO DOUB T THAT THE DEDUCTION IS PERMISSIBLE IN THE COMPUTATION OF INCO ME OF THE PREVIOUS YEAR IN WHICH SUCH SUM IS ACTUALLY PAID BY THE ASSESSEE. IF AN AMOUNT OF TAX OR DUTY IS PAID IN T HE FIRST YEAR AS ADVANCE FOR WHICH SPECIFIC LIABILITY IS INCURRED IN THE SECOND YEAR, THEN DEDUCTION IS TO BE ALLOWED ONLY IN THE F IRST YEAR. ITA NO.5120/DEL/2010 ITA NO.2441/DEL/2012 8 DEDUCTION, IF ANY, GETTING CLAIMED AT THE TIME OF I NCURRING OF LIABILITY IN THE SECOND YEAR AS PER THE METHOD OF A CCOUNTING FOLLOWED BY THE ASSESSEE, WOULD REQUIRE REVERSAL. V. DEDUCTION OF TAX OR DUTY ETC. IN THE YEAR OF PAYMEN T IS PERMISSIBLE ONLY IF THE SAME IS OTHERWISE ALLOWABLE UNDER THE ACT. IN OTHER WORDS, IF DEDUCTION FOR TAX OR DUTY E TC. IS OTHERWISE NOT PERMISSIBLE, THEN SECTION 43B CANNOT INTERVENE TO ALLOW DEDUCTION AT THE TIME OF PAYMENT OF SUCH O THERWISE NON-DEDUCTIBLE AMOUNT. VI. SECTION 43B CONTAINS A NON-OBSTANTE PROVISION QUA ANY OTHER PROVISION OF THE ACT. IT MEANS IT HAS AN OVERRIDING EFFECT OVER ALL OTHER PROVISIONS OF THE ACT. FURTHER, THE NON-O BSTANTE CLAUSE USED IN THE BEGINNING OF THE PROVISION IS QUA THE YEAR OF DEDUCTIBILITY AND NOT THE OTHERWISE ELIGIBILITY FOR DEDUCTION. 4.6. WHEN A MANUFACTURER PAYS EXCISE DUTY ON THE GOODS MANUFACTURED BY IT, THE SAME FORMS A PART OF THE COST OF GOODS. WHEN THE GOODS ARE SOLD, THE MANUFACTURER, CHARGES EXCISE DUTY SEPARAT ELY IN THE INVOICE ITA NO.5120/DEL/2010 ITA NO.2441/DEL/2012 9 APART FROM THE SALE PRICE OF GOODS ETC. TO PUT IT S IMPLY, EXCISE DUTY AT THE TIME OF PAYMENT IS OTHERWISE DEDUCTIBLE AND ITS CHA RGING AT THE TIME OF SALE, IS LIABLE TO TAX. WITHOUT INTERFERENCE OF SEC TION 43B OF THE ACT, AN ASSESSEE FOLLOWING MERCANTILE SYSTEM OF ACCOUNTING COULD CLAIM DEDUCTION FOR EXCISE DUTY ETC. AT THE TIME OF INCUR RING OF ITS LIABILITY, EVEN WITHOUT MAKING ACTUAL PAYMENT. NOW WITH THE IN SERTION OF SECTION 43B, AN ASSESSEE CAN GET DEDUCTION OF EXCISE DUTY O NLY IN THE YEAR OF PAYMENT AND NOT WITH THE MERE INCURRING OF LIABILIT Y WITHOUT PAYMENT. THUS, IT IS CLEAR THAT IF EXCISE DUTY IS PAID IN TH E YEAR OF INCURRING LIABILITY ITSELF, THEN DEDUCTION IS ALLOWED IN SUCH YEAR. IF, SOME PART OF THE EXCISE DUTY FOR WHICH LIABILITY HAS BEEN INCURR ED IS NOT PAID FOR ONE REASON OR THE OTHER BEFORE THE CLOSE OF THE YEAR ET C., THEN THE PAID PART GETS DEDUCTION IN THE YEAR OF INCURRING OF THE LIAB ILITY BUT THE UNPAID PART BECOMES ELIGIBLE FOR DEDUCTION IN THE LATER COINCID ING WITH THE ACTUAL PAYMENT. WHEREAS, IN THE FIRST INSTANCE, FULL DEDUC TION IS ALLOWABLE IN YEAR ONE ITSELF, IN THE SECOND INSTANCE, PART OF TH E AMOUNT NOT ALLOWED IN THE FIRST YEAR BECOMES ELIGIBLE FOR DEDUCTION IN TH E SECOND YEAR AT THE ITA NO.5120/DEL/2010 ITA NO.2441/DEL/2012 10 TIME OF PAYMENT. THERE CAN BE A CONVERSE SITUATION AS WELL IN WHICH EXCISE DUTY IS PAID IN ADVANCE, THOUGH A SPECIFIC L IABILITY IS INCURRED LATER. A MANUFACTURER IS SOMETIMES OBLIGED TO DEPO SIT EXCISE DUTY IN ADVANCE WITHOUT AVAILING ITS ACTUAL UTILIZATION. IN SUCH CIRCUMSTANCES, THE OBLIGATION TO PAY SUCH AMOUNT UNDER THE RESPECTIVE EXCISE RULES WILL BRING THE CASE WITHIN THE OTHERWISE DEDUCTIBILITY P ROVISION AND THE EVENT OF ACTUAL PAYMENT WILL GRANT DEDUCTION IN THE YEAR OF PAYMENT NOTWITHSTANDING THE FACT THAT THE GOODS HAVE NOT YE T BEEN LIFTED FROM THE BONDED WAREHOUSE AT THE END OF THE YEAR. IN SUCH A CASE, SECTION 43B REQUIRES GRANTING OF DEDUCTION AT THE TIME OF PAYME NT MATCHING WITH THE INCURRING OF GENERAL LIABILITY. HOWEVER, THE GRANTI NG OF DEDUCTION IN THE YEAR OF PAYMENT IN RESPECT OF GOODS NOT LIFTED TILL THE END OF THE YEAR, SIMULTANEOUSLY REQUIRES PREVENTING THE GRANT OF DED UCTION ONCE AGAIN AT THE TIME OF REMOVAL OF GOODS IN THE SUBSEQUENT YEAR ON INCURRING OF SPECIFIC LIABILITY. IN SUCH A SITUATION, THERE ARIS ES A NEED TO ACCORDINGLY INCREASE THE INCOME OF THE SUBSEQUENT YEAR WITH THE AMOUNT OF DEDUCTION ITA NO.5120/DEL/2010 ITA NO.2441/DEL/2012 11 ALLOWED IN THE PRECEDING YEAR, WHICH ONCE AGAIN GET S CLAIMED AS DEDUCTION ON THE EVENT OF INCURRING THE SPECIFIC LI ABILITY. 4.7. THE LD. AR CANDIDLY ADMITTED THAT THE ASSESS EE HAS FOLLOWED `INCLUSIVE METHOD OF ACCOUNTING FOR GOODS SOLD IN DOMESTIC MARKET AND `EXCLUSIVE METHOD FOR THE GOODS EXPORTED. WHEREAS, UNDER THE `EXCLUSIVE METHOD, PURCHASES, SALES AND INVENTORI ES (BOTH OPENING AND CLOSING) ARE TAKEN WITHOUT THE EFFECT OF TAX OR DUT Y ETC., PURCHASES, SALES AND INVENTORIES (BOTH OPENING AND CLOSING) ARE TAKE N INCLUSIVE OF TAX OR DUTY ETC. UNDER THE `INCLUSIVE METHOD. AS THE ASSE SSEE HAS ALSO FOLLOWED `EXCLUSIVE METHOD, WE SHALL FIRSTLY PROCEED TO EVA LUATE THE POINTS UNDER CONSIDERATION AS PER THE `EXCLUSIVE METHOD. UNDER THIS METHOD, THE AMOUNT OF TAX OR DUTY ETC. PAID DOES NOT DOES NOT G ET INCLUDED IN THE FIGURES OF PURCHASE, SALE AND INVENTORIES, AS THES E ARE RECORDED WITHOUT CONSIDERING THEIR EFFECT. WE HAVE NOTICED ABOVE THA T SECTION 43B MANDATES THAT DEDUCTION OF TAX OR DUTY ETC. IS TO B E ALLOWED IN THE YEAR OF PAYMENT. ITA NO.5120/DEL/2010 ITA NO.2441/DEL/2012 12 4.8. WE ESPOUSE THE FIRST ITEM, BEING THE AMOUNT DEPOSITED BY THE ASSESSEE IN PLA. THIS IS THE AMOUNT PAID IN-ACCOUNT BY THE ASSESSEE IN PLA WHICH REMAINED UNUTILIZED AT THE END OF THE YEA R. IT IS IN THE NATURE OF ADVANCE PAYMENT OF EXCISE DUTY TO BE ADJUSTED AG AINST THE REMOVAL OF GOODS FROM BONDED WAREHOUSE AT A LATER POINT OF TIM E IN SUBSEQUENT YEAR. NORMALLY, AT THE TIME OF PAYMENT OF EXCISE D UTY, THE AMOUNT GOES TO THE PLA, WHICH IS AN ITEM OF ASSET APPEARING IN THE BALANCE SHEET. WHEN GOODS ARE REMOVED FROM BONDED WAREHOUSE, A COR RESPONDING SUM OF EXCISE DUTY IS TAKEN AWAY FROM PLA AND IS CARRIE D TO PROFIT AND LOSS ACCOUNT AS EXCISE DUTY. THIS CAN BE UNDERSTOOD WITH THE HELP OF AN ILLUSTRATION. SUPPOSE AN ASSESSEE PAYS A SUM OF RS. 10/- IN PLA OUT OF WHICH A SUM OF RS.9/- IS ADJUSTED DURING THE YEAR A GAINST THE EXCISE DUTY PAYABLE ON THE REMOVAL OF GOODS FROM BONDED WAREHOU SE. FURTHER SUPPOSE THAT GOODS CORRESPONDING TO THE EXCISE DUTY OF RS. 7 ARE SOLD DURING THE YEAR AND GOODS CORRESPONDING TO THE EXCI SE DUTY OF RS.2 ARE STILL IN STOCK. IN SUCH A SITUATION, WHEN THE ASSES SEE ORIGINALLY PAYS RS.10/-, HE WILL DEBIT PLA AND CREDIT BANK ACCOUNT WITH RS.10/-. DURING ITA NO.5120/DEL/2010 ITA NO.2441/DEL/2012 13 THE COURSE OF THE YEAR WHEN EXCISE DUTY OF RS.9/- I S ADJUSTED AGAINST THE ADVANCE PAID UNDER PLA, EXCISE DUTY ACCOUNT WILL BE DEBITED AND PLA CREDITED WITH A SUM OF RS.9/-. AMOUNT OF EXCISE DU TY OF RS.9 DEBITED IN THE BOOKS OF ACCOUNT WILL ULTIMATELY FIND ITS PLACE IN THE PROFIT AND LOSS ACCOUNT AND BECOME ELIGIBLE FOR DEDUCTION, ON WHICH THERE IS NO DISPUTE. THE ASSESSEE ON SALE OF GOODS WITH CORRESPONDING EX CISE DUTY OF RS.7, OUT OF TOTAL UTILIZED TO THE TUNE OF RS.9, WILL SHO W INCOME OF RS.7 AS PART OF SALES. IN THIS WAY, THE ASSESSEE GETS DEDUCTION FOR RS. 9 AND SHOWS INCOME OF RS.7 TOWARDS EXCISE DUTY. THUS IT IS SE EN THAT OUT OF TOTAL RS.10 PAID BY THE ASSESSEE IN PLA, HE HAS CLAIMED D EDUCTION OF RS.9. THE CONTROVERSY BEFORE US IS W.R.T. TO THE UNUTILIZ ED AMOUNT IN PLA AT THE END OF THE YEAR, BEING EQUIVALENT OF RE.1/- IN OUR EXAMPLE, WHICH WAS ACTUALLY PAID BUT COULD NOT BE DEBITED TO THE EXCISE DUTY ACCOUNT AND HENCE NOT GOING TO THE DEBIT SIDE OF THE PROFIT AND LOSS ACCOUNT. THE ASSESSEE WANTS DEDUCTION FOR THIS AMOUNT AS WELL. I N OUR CONSIDERED OPINION, THE CHARACTER OF THIS AMOUNT IN TERMS OF S ECTION 43B IS NO DIFFERENT FROM RS.2 IN OUR EXAMPLE, BEING THE AMOUN T OF EXCISE DUTY ON ITA NO.5120/DEL/2010 ITA NO.2441/DEL/2012 14 GOODS IN STOCK. AS SECTION 43B REQUIRES DEDUCTION O F TAX AND DUTY ETC. AT THE TIME OF PAYMENT, NATURALLY, THIS SUM OF RE.1 WI LL ALSO REQUIRE DEDUCTION AS IT HAS BEEN PAID DURING THE YEAR IN QU ESTION. IN OUR CONSIDERED OPINION, THERE CAN BE NO HINDRANCE IN AL LOWING DEDUCTION OF RE.1 AS PER THE MANDATE OF SECTION 43B. CONCURRENTL Y, IT IS SIGNIFICANT TO NOTE THAT THIS UNUTILIZED AMOUNT OF RE.1 APPEARING IN BALANCE SHEET AT THE END OF THE YEAR WOULD BE ACTUALLY UTILIZED IN THE N EXT YEAR ON THE REMOVAL OF GOODS FROM THE BONDED WAREHOUSE. AT THA T TIME, THE ASSESSEE WILL DEBIT EXCISE DUTY AND CREDIT PLA ACCOUNT WITH RE.1. SUCH DEBIT OF RE.1 IN THE EXCISE DUTY ACCOUNT IN THE NEXT YEAR WI LL EVENTUALLY GO TO THE PROFIT AND LOSS ACCOUNT AND GET DEDUCTED.. WE HAVE NOTICED ABOVE THAT DEDUCTION FOR TAX AND DUTY ETC. IS ALLOWABLE ONLY O NCE AND NOT TWICE. SINCE DEDUCTION OF RE.1 GOT GRANTED IN THE YEAR OF MAKING PAYMENT U/S 43B, THIS WOULD REQUIRE ADD BACK IN THE COMPUTATION OF INCOME OF LATER YEAR ON ITS UTILIZATION AND GETTING DEBITED TO PROF IT AND LOSS ACCOUNT THROUGH EXCISE DUTY ACCOUNT. SIMILAR WILL BE POSIT ION FOR THE LAST YEARS BALANCE IN PLA CLAIMED AS DEDUCTION U/S 43B, BUT AD JUSTED AGAINST THE ITA NO.5120/DEL/2010 ITA NO.2441/DEL/2012 15 GOODS MANUFACTURED IN THE CURRENT YEAR. SUCH AMOUNT OF DEDUCTION ALLOWED U/S 43B IN THE PRECEDING YEAR ON ACCOUNT OF UNUTILIZED PAL AT THE END OF THE YEAR, REQUIRES TO BE SEPARATELY OFFE RED FOR TAXATION IN THE CURRENT YEAR. WHEN THIS LEGAL CONSEQUENCE OF ALLOWI NG DEDUCTION U/S 43B AT THE TIME OF PAYMENT WAS CONFRONTED TO THE LD . AR, HE STATED THAT THE ASSESSEE HAS VOLUNTARILY ADDED BACK THE SUITABL E AMOUNTS IN THE COMPUTATION OF INCOME OF THE CURRENT/SUBSEQUENT YEA RS. HE WAS FAIR ENOUGH TO ACCEPT THAT A SUITABLE DIRECTION MAY BE G IVEN BY THE BENCH TO THE AO FOR VERIFICATION OF THIS ASPECT OF THE MATTE R, IF NEEDED. 4.9. IT IS FURTHER NOTICED THAT A SPECIAL BENCH O F THE TRIBUNAL IN THE CASE OF DCIT VS. GLAXO SMITHKLINE CONSUMER HEALTHCARE LTD., (2007) 107 ITD 343 (SB) (CHD.) , HAS HELD THAT THE EXCESS AMOUNT OF EXCISE DUTY REFLECTED IN THE ACCOUNT-CURRENT IS NOTHING BUT ACT UAL PAYMENT OF EXCISE DUTY EVEN THOUGH MENTIONED AS ADVANCE PAYMENT AND, HENCE, ALLOWABLE AS DEDUCTION U/S 43B OF THE ACT IN THE YEAR OF PAYM ENT. THE SPECIAL BENCH FURTHER CLARIFIED THAT THE ALLOWING OF DEDUCT ION ON PAYMENT BASIS SHOULD NOT RESULT IN DOUBLE DEDUCTION UNDER ANY CIR CUMSTANCE. THE ITA NO.5120/DEL/2010 ITA NO.2441/DEL/2012 16 TRIBUNAL IN ASSESSEES OWN CASE HAS ALSO ALLOWED DE DUCTION IN THE EARLIER YEARS ON ACCOUNT OF UNUTILIZED PLA AT THE END OF TH E YEAR. IN VIEW OF THE ABOVE DISCUSSION, WHILE WE HOLD THAT THE ABOVE REFE RRED SUM OF UNUTILIZED AMOUNT IN PLA AT THE END OF THE YEAR U/S 43B UNDER `EXCLUSIVE METHOD QUALIFIES FOR DEDUCTION, WE ALSO HOLD THAT THIS AMOUNT CANNOT BE ALLOWED DEDUCTION ONCE AGAIN IN TH E IMMEDIATELY SUCCEEDING YEAR AND ALSO THE SIMILAR AMOUNT ALLOWED AS DEDUCTION IN THE PRECEDING YEAR U/S 43B REQUIRES TO BE INCLUDED IN T HE COMPUTATION OF INCOME OF THE CURRENT YEAR. 4.10. HAVING DISCUSSED THE ABOVE POSITION UNDER T HE `EXCLUSIVE METHOD, WHICH THE ASSESSEE IS FOLLOWING IN RESPECT OF GOODS MEANT FOR EXPORTS, LET US SEE, IF THE ADOPTION OF `EXCLUSIVE METHOD IS IN ACCORDANCE WITH LAW? IN THIS REGARD, IT IS NOTICED THAT THE LEGISLATURE INSERTED SECTION 145A BY THE FINANCE (NO.2) ACT, 19 98 W.E.F. 1.4.199, THE RELEVANT PART OF WHICH READS AS UNDER : - 145A. NOTWITHSTANDING ANYTHING TO THE CONTRARY CON TAINED IN SECTION 145, THE VALUATION OF PURCHASE AND SALE OF GOODS AN D INVENTORY FOR THE PURPOSES OF DETERMINING THE INCOME CHARGEABLE UNDER THE HEAD 'PROFITS AND GAINS OF BUSINESS OR PROFESSION' SHALL BE ITA NO.5120/DEL/2010 ITA NO.2441/DEL/2012 17 (A) IN ACCORDANCE WITH THE METHOD OF ACCOUNTING REGULARLY EMPLOYED BY THE ASSESSEE; AND (B) FURTHER ADJUSTED TO INCLUDE THE AMOUNT OF ANY TAX, DUTY, CESS OR FEE (BY WHATEVER NAME CALLED) ACTUALLY PAID OR INCURRED BY THE ASSESSEE TO BRING THE GOODS TO THE PLACE OF ITS LOC ATION AND CONDITION AS ON THE DATE OF VALUATION. EXPLANATION.FOR THE PURPOSES OF THIS SECTION, ANY TAX, DUTY, CESS OR FEE (BY WHATEVER NAME CALLED) UNDER ANY LAW FOR THE TIME BEING IN FORCE, SHALL INCLUDE ALL SUCH PAYMENT NOTWITHSTANDI NG ANY RIGHT ARISING AS A CONSEQUENCE TO SUCH PAYMENT; 4.11. THE ABOVE PROVISION PROVIDES THAT NOTWITHS TANDING ANYTHING TO THE CONTRARY CONTAINED IN SECTION 145, VALUATION O F PURCHASE AND SALE OF GOODS AND INVENTORY FOR THE PURPOSES OF DETERMINING THE INCOME CHARGEABLE UNDER THE HEAD 'PROFITS AND GAINS OF BUS INESS OR PROFESSION' SHALL BE IN ACCORDANCE WITH THE METHOD OF ACCOUNTI NG REGULARLY EMPLOYED BY THE ASSESSEE AND FURTHER ADJUSTED TO INCLUDE THE AMOUNT OF ANY TAX OR DUTY ETC. ACTUALLY PAID OR INCURRED BY THE ASSESSEE TO BRING THE GOODS TO THE PLACE OF ITS LOCATION AND CONDITION AS ON THE DATE OF VALUATION. THUS IT IS MANIFEST THAT THE COMMAND OF SECTION 145A IS TO VALUE PURCHASE, SALE AND INVENTORIES WITH THE ELEME NT OF TAX OR DUTY ETC, WHICH IS CALLED `INCLUSIVE METHOD. WITH THE INSER TION OF SECTION 145A W.E.F. ASSESSMENT YEAR 1999-2000, THE HITHERTO OPTI ONALLY PERMISSIBLE ITA NO.5120/DEL/2010 ITA NO.2441/DEL/2012 18 `EXCLUSIVE METHOD IS NO MORE AVAILABLE TO THE ASSE SSEE. NOW, ALL THE ASSESSEES EARNING BUSINESS INCOME ARE REQUIRED TO F OLLOW ONLY THE `INCLUSIVE METHOD AND UNDER THIS METHOD, PURCHASE, SALE OF GOODS AND INVENTORIES (BOTH OPENING AND CLOSING) ARE REQUIRE D TO BE ADJUSTED TO INCLUDE THE AMOUNT OF TAX OR DUTY ETC. AS THE ASSES SMENT YEAR UNDER CONSIDERATION IS GOVERNED BY SECTION 145A, THE ASSE SSEE WAS UNDER STATUTORY OBLIGATION TO CAST ITS PROFIT AND LOSS AC COUNT ON `INCLUSIVE METHOD, WHICH IT HAS NOT DONE. UNDER SUCH CIRCUMS TANCES, WE CANNOT APPROVE THE `EXCLUSIVE METHOD FOLLOWED BY THE ASSE SSEE. IT GOES WITHOUT SAYING THAT THERE CAN BE NO ESTOPPEL AGAINS T THE STATUTE. WE, THEREFORE, DIRECT THE AO TO RECAST PROFIT AND LOSS ACCOUNT ON THE BASIS OF `INCLUSIVE METHOD. THIS WOULD REQUIRE ADOPTING THE FIGURES OF PURCHASE, SALE AND OPENING AS WELL CLOSING INVENTORIES AS INC LUSIVE OF TAX OR DUTY ETC. 4.12. WE HAVE NOTED ABOVE THAT SECTION 145A STAR TS WITH A NON- OBSTANTE CLAUSE QUA SECTION 145 OF THE ACT AND SECTION 43B STARTS WITH A NON-OBSTANTE CLAUSE QUA `ANY OTHER PROVISION OF THIS ACT. THE EFFECT OF ITA NO.5120/DEL/2010 ITA NO.2441/DEL/2012 19 THE NON-OBSTANTE CLAUSE IN SECTION 145A IS THAT EVE N IF THE EXCLUSIVE METHOD OF VALUING PURCHASE, SALE, OPENING AND CLOSI NG STOCKS MAY BE GENERALLY AVAILABLE, BUT THE ASSESSEE WILL HAVE TO COMPUTE ITS `BUSINESS INCOME BY CASTING ITS PROFIT AND LOSS ACCOUNT AS P ER THE `INCLUSIVE METHOD, MEANING THEREBY, THAT THE VALUE OF PURCHAS E, SALE AND INVENTORIES MUST BE ACCOUNTED IN THE ANNUAL ACCOUNT S AS INCLUSIVE OF TAX OR DUTY ETC. THE EFFECT OF NON-OBSTANTE CLAUSE IN SECTION 43B IS THAT EVEN IF DEDUCTION OF TAX OR DUTY ETC. MAY BE ADMISSIBLE UNDER THE ACT ON THE INCURRING OF LIABILITY, BUT SUCH DEDUCTION WILL BE SUBJECT TO PAYMENT ALONE. A HARMONIOUS READING OF SECTIONS 145A AND 43 B OF THE ACT BRINGS OUT THAT THE `BUSINESS INCOME IS FIRSTLY REQUIRED TO BE MANDATORILY COMPUTED BY FOLLOWING THE `INCLUSIVE METHOD, BY LOADING THE AMOUNT OF TAX OR DUTY ETC. ON PURCHASE, SALE AND INVENTORI ES AND THEREAFTER, IF SOME PART OF TAX OR DUTY IS UNPAID, THAT SHOULD BE ADDED BACK IN THE COMPUTATION OF INCOME. IF IN A CONVERSE SITUATION, SOME AMOUNT OF TAX OR DUTY IS PAID AS ADVANCE IN CURRENT ACCOUNT, WHIC H HAS NOT BEEN INCLUDED IN THE AMOUNT OF PURCHASE ETC. AND IS LYIN G UNADJUSTED IN THE ITA NO.5120/DEL/2010 ITA NO.2441/DEL/2012 20 BALANCE SHEET, THEN THE SAME SHOULD BE SEPARATELY D EDUCTED IN TERMS OF SECTION 43B. HOWEVER, HAVING ALLOWED DEDUCTION ON P AYMENT BASIS AS PER SECTION 43B, THE COMPUTATION OF INCOME OF THE S UCCEEDING YEAR DETERMINED UNDER INCLUSIVE METHOD AS PER SECTION 14 5A, WOULD REQUIRE ENHANCEMENT WITH SUCH AMOUNT OF TAX OR DUTY ETC. AL LOWED AS DEDUCTION IN THE EARLIER YEAR. IN OUR CONSIDERED OPINION, IT IS THE CRUX OF READING OF SECTION 145A IN JUXTAPOSITION TO SECTION 43B OF THE ACT. 4.13. UNDER THE `INCLUSIVE METHOD, THE FIGURES OF PURCHASE, SALE AND INVENTORIES ARE REQUIRED TO BE TAKEN WITH THE ELEME NT OF TAX OR DUTY ETC. SINCE THE AMOUNT OF UNUTILIZED BALANCE OF EXCISE DU TY UNDER PLA DOES NOT FORM PART OF PURCHASE, THIS AMOUNT WILL BE ELIG IBLE FOR SEPARATE DEDUCTION U/S 43B. AT THE SAME TIME, THE LAST YEAR S UNUTILIZED PLA GETTING DEDUCTION IN THAT YEAR DUE TO THE APPLICATI ON OF SECTION 43B, WOULD BE REQUIRED TO BE ADDED BACK TO THE INCOME OF THE CURRENT YEAR AS DETERMINED ABOVE. WE, THEREFORE, SET ASIDE THE IMP UGNED ORDER AND DIRECT THE AO TO FIRSTLY RECAST THE ASSESSEES PROF IT AND LOSS ACCOUNT ON INCLUSIVE BASIS AND THEN MAKE SUITABLE DEDUCTION IN RESPECT OF THE ITA NO.5120/DEL/2010 ITA NO.2441/DEL/2012 21 AMOUNT OF UNUTILIZED PLA AT THE END OF THE CURRENT YEAR AND ALSO THE PRECEDING YEAR. 4.14. NOW, WE COME TO THE NEXT ITEM OF DISALLOWANC E, BEING A SUM OF RS. 48.53 CRORE TOWARDS EXCISE DUTY ON INPUTS BA LANCE IN RG 23A. THIS AMOUNT IS UNUTILIZED MODVAT CREDIT AVAILABLE T O THE ASSESSEE AT THE END OF THE YEAR. UNDER THE CENTRAL EXCISE LAW, A M ANUFACTURER IS ENTITLED TO CLAIM MODVAT CREDIT OF THE AMOUNT OF EXCISE DUTY PAID BY HIM ON RAW MATERIALS AND INPUTS PURCHASED FOR CONSUMPTION IN T HE MANUFACTURE OF EXCISABLE GOODS. THE AMOUNT OF DUTY PAID TO THE SU PPLIER OF RAW MATERIAL IS CONSIDERED AS THE AMOUNT OF CENTRAL EXC ISE DUTY ACTUALLY PAID BY THE ASSESSEE. THUS, A MANUFACTURER OF FINAL PROD UCT UNDER MODVAT/CENVAT SCHEME IS ALLOWED TO GET ADJUSTMENT O F EXCISE DUTY PAID BY HIM ON ANY INPUTS RECEIVED IN THE FACTORY TO BE USED IN THE MANUFACTURE OF FINAL PRODUCT. IN THE YEAR UNDER CON SIDERATION, THE ASSESSEE PURCHASED EXCISE DUTY PAID RAW MATERIAL AN D OTHER INPUTS AND AS PER THE EXCISE RULES BECAME ENTITLED TO MODVAT CRED IT OF THE EXCISE DUTY PAID ON RAW MATERIAL ELIGIBLE FOR SET OFF AGAINST L IABILITY OF EXCISE DUTY ON ITA NO.5120/DEL/2010 ITA NO.2441/DEL/2012 22 THE FINISHED GOODS AT THE TIME OF REMOVAL OF GOODS FROM BONDED WAREHOUSE. 4.15. WE HAVE NOTICED ABOVE THAT THE ASSESSEE IS ALSO FOLLOWING `EXCLUSIVE METHOD. UNDER THE `EXCLUSIVE METHOD, THE TOTAL AMOUNT OF EXCISE DUTY PAID BY THE ASSESSEE ON PURCHASE OF INP UTS DOES NOT GET ADDED TO THEIR PURCHASE PRICE, BUT APPEARS AS AN AS SET WITH THE NOMENCLATURE OF MODVAT CREDIT. WHEN GOODS USING T HE EXCISE DUTY PAID RAW MATERIAL ARE MANUFACTURED, THE MANUFACTURER BEC OMES ENTITLED TO USE MODVAT CREDIT AGAINST HIS LIABILITY OF EXCISE DUTY ON FINISHED PRODUCTS. THIS UTILIZED PART OF THE MODVAT CREDIT GOES TO THE EXCISE DUTY ACCOUNT IN THE SAME MANNER AS UTILIZED PLA DISCUSSED ABOVE. SU PPOSE, AN ASSESSEE HAS MODVAT CREDIT OF RS. 10 AND HAS UTILIZED DUTY P AID RAW MATERIAL IN ITS PRODUCTION DURING THE YEAR FOR CORRESPONDING SUM OF RS.9, OUT OF WHICH FINISHED GOODS CORRESPONDING TO MODVAT UTILIZED OF RS.7 ARE SOLD AND THE FINISHED GOODS CORRESPONDING TO MODVAT UTILIZED OF RS.2 ARE IN STOCK. THE ASSESSEE WILL GET DEDUCTION FOR RS.9 UNDER THE EXCLUSIVE METHOD. SIMULTANEOUSLY THE ASSESSEE WILL OFFER INCOME OF RS .7 EMBEDDED IN THE ITA NO.5120/DEL/2010 ITA NO.2441/DEL/2012 23 SALE PRICE. IT IS THE REMAINING AMOUNT OF RE.1 WHI CH IS UNUTILIZED MODVAT CREDIT APPEARING AS AN ASSET IN THE BALANCE SHEET AT THE END OF THE YEAR, FOR WHICH THE ASSESSE IS NOW SEEKING DEDUCTIO N. 4.16. AT THE OUTSET, WE WANT TO MENTION THAT THE SPECIAL BENCH OF THE TRIBUNAL IN GLAXO SMITHKLINE CONSUMER HEALTHCARE (SUPRA) HAS HELD THAT UNEXPIRED MODVAT CREDIT BEFORE IT IS SET OFF, CANNO T BE TREATED AS TAX PAID. ACCORDINGLY THE SPECIAL BENCH HELD THAT THE M ODVAT CREDIT AVAILABLE TO THE ASSESSEE AS ON THE LAST DATE OF TH E PREVIOUS YEAR DOES NOT AMOUNT TO PAYMENT OF EXCISE DUTY AND IS, HENCE, NOT ALLOWABLE U/S 43B. IN EARLIER YEARS, THE TRIBUNAL HAS FOLLOWED THE DIC TUM OF THIS SPECIAL BENCH VERDICT AND UPHELD THE DISALLOWANCE. THE LD. AR SUBMITTED THAT THERE HAS BEEN FURTHER ARTICULATION OF LAW ON THIS POINT. REFERRING TO THE JUDGMENT OF THE HONBLE SUPREME COURT IN THE CASE O F CIT VS. SHRI RAM HONDA POWER EQUIPMENT LTD. (2013) 352 ITR 481 (SC), THE LD. AR SUBMITTED THAT THE AMOUNT LYING CREDITED IN THE MOD VAT ACCOUNT AT THE END OF THE ACCOUNTING YEAR HAS NOW BECOME DEDUCTIBL E U/S 43B AS PER ITS RATIO . WE FIND THAT THE HONBLE APEX COURT IN SHRIRAM HONDA POWER ITA NO.5120/DEL/2010 ITA NO.2441/DEL/2012 24 EQUIPMENT LTD. (SUPRA) HAS HELD THAT : ` THE AUTHORITIES BELOW ARE RIGHT IN COMING TO THE CONCLUSION THAT MODVAT CREDIT IS E XCISE DUTY PAID . THE HONBLE JURISDICTIONAL HIGH COURT IN THE ASSESS EES OWN CASE IN CIT VS. MARUTI SUZUKI INDIA LTD. (2013) 255 CTR 140 (DE L), AFTER TAKING NOTE OF THE JUDGMENT OF THE HONBLE SUPREME COURT I N THE CASE OF SHRI RAM HONDA POWER EQUIPMENT CORPORATION (SUPRA) HAS HELD THAT : `THIS COURT ALSO NOTICES THAT THE SUPREME COURT HAS UPHEL D THE VIEW WHICH ALLOWS ASSESSES TO CLAIM CREDITS, SUCH AS MODVAT, ETC, FALLING WITHIN THE DESCRIPTION OF LIABILITY PAID, TO ESCAPE THE MISCHIEF OF SECTION 43-B. IN VIEW OF THIS LATER DEVELOPMENT OF LAW, THE EARLIER CONTRARY VIEW TAKEN BY THE SPECIAL BENCH IN GLAXO (SUPRA) ON THE QUESTION OF UNUTILIZED MODVAT CREDIT NOW NEEDS TO BE PROPERLY ALIGNED WITH THE RATIO DECIDENDI OF THE JUDGMENT IN SHRI RAM HONDA (SUPRA). 4.17. ARMED WITH THE ABOVE LEGAL POSITION, NOW TH E REMAINING AMOUNT OF RE.1 IN OUR ABOVE EXAMPLE UNDER THE `EXCLUSIVE M ETHOD, WHICH IS UNUTILIZED MODVAT CREDIT IN THE BALANCE SHEET AT TH E END OF THE YEAR, NEEDS TO BE TREATED AT ` EXCISE DUTY PAID . SINCE THIS AMOUNT IS CONSIDERED ITA NO.5120/DEL/2010 ITA NO.2441/DEL/2012 25 AS EXCISE DUTY PAID, THE SAME HAS TO BE ALLOWED AS DEDUCTION DURING THE YEAR OF PAYMENT AS PER SECTION 43B. CAVEAT REMAINS THAT DEDUCTION FOR A SUM OF RE.1 IN THE CURRENT YEAR, BEING THE MODVAT C REDIT UNUTILIZED AT THE END OF THE YEAR UNDER THE EXCLUSIVE METHOD, ALSO RE QUIRES ENHANCEMENT OF INCOME OF THE SUCCEEDING YEAR TO THIS EXTENT. I N THE LIKE MANNER, THE CORRESPONDING AMOUNT ALLOWED AS DEDUCTION U/S 43B I N THE PRECEDING YEAR, IF ANY, ALSO REQUIRES SEPARATE ADD BACK TO TH E INCOME OF THE CURRENT YEAR. IT IS SO BECAUSE DEDUCTION FOR PAYMENT OF TAX OR DUTY ETC. CAN BE ALLOWED ONLY ONCE, AND THAT TOO, AT THE TIME OF PAY MENT. WE, THEREFORE, HOLD THAT THE AMOUNT OF UNUTILIZED MODVAT CREDIT I S DEDUCTIBLE IN THE COMPUTATION OF INCOME FOR THE CURRENT YEAR UNDER TH E EXCLUSIVE METHOD. BUT SUCH AMOUNT ALSO REQUIRES ADD BACK IN THE COMPU TATION OF INCOME OF THE IMMEDIATELY NEXT YEAR AND ALSO THE CORRESPONDIN G AMOUNT OF UNUTILIZED MODVAT CREDIT OF THE PRECEDING YEAR, IF ALLOWED AS DEDUCTION IN SUCH EARLIER YEAR, REQUIRES A SEPARATE ADDITION TO THE INCOME OF THE CURRENT YEAR. IT IS THE TREATMENT OF MODVAT CREDIT UNDER THE `EXCLUSIVE METHOD. ITA NO.5120/DEL/2010 ITA NO.2441/DEL/2012 26 4.18. WE HAVE NOTICED SUPRA THAT THE USE OF `EXCLUSIVE METHOD IS NO MORE PERMISSIBLE IN THE YEAR UNDER CONSIDERATION. AS SUCH, THERE IS A NEED TO GIVE EFFECT TO SECTION 145A READ WITH SECTI ON 43B UNDER THE `INCLUSIVE METHOD. 4.19. BEFORE TAKING UP THIS ASPECT, WE WOULD LIK E TO DEAL WITH THE JUDGMENT OF THE HONBLE SUPREME COURT IN SHRI RAM HONDA (SUPRA), RELIED BY THE LD. AR FOR SUPPORTING THE CLAIM OF PER SE DEDUCTION WITHOUT ANY FURTHER ADJUSTMENTS AS PER SECTION 145A. IT I S RELEVANT TO NOTE THAT THE HONBLE SUPREME COURT IN SHRI RAM HONDA (SUPRA) WAS DEALING WITH A.Y. 1995-96. WHILE GRANTING DEDUCTION FOR MOD VAT CREDIT, THE HONBLE SUMMIT COURT FOLLOWED THE JUDGMENT OF THE H ONBLE BOMBAY HIGH COURT IN CIT VS. INDO NIPPON CHEMICAL CO. LTD., (2000) 245 I TR 384 (BOM), AS AFFIRMED BY THE HONBLE APEX COURT IN (2003) 261 ITR 275, IN HOLDING THAT THE SAME WAS SQUARELY APPLICABLE AN D HENCE THE AMOUNT WAS DEDUCTIBLE. THE ASSESSMENT YEAR INVOLVED IN THE CASE OF INDO NIPPON (SUPRA) WAS 1989-90, WHICH IS AGAIN BEFORE THE INSERTION OF SECTION 145A. IT IS INTERESTING TO NOTE THAT DURING THE COURSE OF ARGUMENTS ITA NO.5120/DEL/2010 ITA NO.2441/DEL/2012 27 BEFORE THE HONBLE BOMBAY HIGH COURT, THE LD. COUNS EL FOR THE DEPARTMENT BROUGHT TO THE NOTICE OF THEIR LORDSHIPS THAT SECTION 145A STOOD INSERTED AND, HENCE, THE EXCLUSIVE (NET) METH OD FOLLOWED BY THE ASSESSEE WAS IMPERMISSIBLE. THE HONBLE HIGH COURT CONSIDERED THIS ASPECT IN THE LAST PARA OF ITS JUDGMENT AND OBSERVE D THAT THE INSERTION OF SECTION 145A W.E.F. THE AY 1999-2000 HAD NO BEARING AS THE ASSESSMENT YEAR UNDER THEIR CONSIDERATION WAS 1989-90. IN THE LIGHT OF THIS POSITION, IT BECOMES IMPERATIVE TO GIVE EFFECT TO THE PROVISI ONS OF SECTION 145A OF THE ACT, WHICH ARE APPLICABLE TO THE YEAR UNDER CON SIDERATION AND ARE BINDING WITHOUT ANY EXCEPTION. 4.20. NOW WE COME TO GIVING EFFECT TO SECTIONS 1 45A AND 43B UNDER THE `INCLUSIVE METHOD. IN LINE WITH OUR DISCUSSION MADE ABOVE WHILE DEALING WITH PLA COMPONENT OF EXCISE DUTY, WE DIREC T THE AO TO FIRST RECAST PROFIT AND LOSS ACCOUNT OF THE ASSESSEE BY T AKING THE FIGURES OF PURCHASE, SALE AND OPENING AND CLOSING STOCKS AT T HE VALUE INCLUSIVE OF TAX OR DUTY ETC., SO AS TO GIVE EFFECT TO THE MANDA TE OF SECTION 145A. ONCE THIS IS DONE, THEN IT WILL BE THE TURN OF GIVI NG EFFECT TO THE MANDATE ITA NO.5120/DEL/2010 ITA NO.2441/DEL/2012 28 OF SECTION 43B, WHICH REQUIRES THE GRANTING OF DEDU CTION OF TAX OR DUTY ETC. ON PAYMENT BASIS. THIS CAN BE DONE BY ALLOWIN G DEDUCTION FOR THAT PART OF THE MODVAT CREDIT SEPARATELY U/S 43B OF THE ACT, WHICH HAS NOT BEEN FINALLY DEDUCTED. 4.21. WE HAVE UNDERSTOOD MODVAT CREDIT IN THREE PARTS IN THE EXAMPLE GIVEN ABOVE WHILE DISCUSSING IT UNDER THE EXCLUSIVE METHOD, VIZ., RS.7 WHICH IS UTILIZED MODVAT AND FINISHED GOODS SOLD; R S. 2 WHICH IS UTILIZED MODVAT BUT FINISHED GOODS IN STOCK AT THE END OF TH E YEAR; AND RE.1 WHICH IS UNUTILIZED MODVAT AT THE END OF THE YEAR. NOW UNDER THE `INCLUSIVE METHOD, THE PRICE OF DUTY PAID INPUT/RA W MATERIAL WILL BE TAKEN AT FULL PRICE INCLUSIVE OF RS.10. IN THAT VIE W OF THE MATTER, THE ASSESSEE CAN BE SAID TO HAVE INITIALLY CLAIMED DEDU CTION FOR RS.10. OUT OF TOTAL MODVAT CREDIT OF RS.10 RECEIVED DURING THE YEAR, A SUM OF RS.3 HAS TWO COMPONENTS, VIZ., RS. 2 AS A PART OF PURCHA SES OF RAW MATERIALS AND ALSO SIMULTANEOUSLY A PART OF THE CORRESPONDING FINISHED GOODS IN CLOSING STOCK; AND RE. 1 AS A PART OF PURCHASES O F RAW MATERIALS AND ALSO SIMULTANEOUSLY A PART OF THE CORRESPONDING RAW MATE RIALS IN CLOSING ITA NO.5120/DEL/2010 ITA NO.2441/DEL/2012 29 STOCK. THOUGH APPARENTLY IT APPEARS THAT THE ASSES SEE GETS DEDUCTION OF RS.3 ALSO BY WAY OF HIGHER VALUE OF PURCHASE OF RAW MATERIAL, BUT THE REALITY IS DIFFERENT. WHEN THE FIGURES OF CLOSING S TOCK OF FINISHED GOODS AND RAW MATERIAL ALSO INCLUDE RS.3, THEN IN FACT, T HERE IS NO DEDUCTION OF RS.3, BECAUSE DEBIT TO THE PROFIT AND LOSS ACCOUNT THROUGH INCREASED PURCHASE VALUE GETS NEUTRALIZED WITH THE CREDIT TO THE PROFIT AND LOSS ACCOUNT WITH INCREASED VALUE OF CLOSING STOCK. THIS ENHANCED VALUE OF CLOSING STOCK INCLUSIVE OF RS.3 WILL BECOME OPENING STOCK OF THE SUCCEEDING YEAR, THEREBY OBLITERATING THE EFFECT OF DEDUCTION OF RS.3. WHEN SUCH GOODS ARE SOLD OR UTILIZED AND SOLD IN TH E NEXT YEAR, THE SALE PRICE WILL BE REALIZED WHICH WILL BE INCLUSIVE OF R S.3 EXCISE DUTY COMPONENT ALSO. SO IN FACT, THERE IS NO ACTUAL DEDU CTION OF RS.3 DURING THE YEAR UNDER CONSIDERATION BECAUSE OF THE INCREAS ED PURCHASE PRICE GETTING COUNTERBALANCED WITH THE EQUAL AMOUNT OF LO ADING IN THE VALUE OF CLOSING STOCK. AFTER HAVING INCREASED THE VALUE OF PURCHASE AND CLOSING STOCK IN TERMS OF SECTION 145A WITH THE AMOUNT OF M ODVAT CREDIT, NOW THERE IS A SEPARATE REQUIREMENT OF GIVING EFFECT TO THE MANDATE OF SECTION ITA NO.5120/DEL/2010 ITA NO.2441/DEL/2012 30 43B, WHICH REQUIRES THE GRANTING OF DEDUCTION OF RS .10 IN THE YEAR OF PAYMENT. A SUM OF RS.7 INCLUDED IN PURCHASE VALUE AS A PART OF RS.10, GETS EVENTUAL DEDUCTION BECAUSE IT IS EXHAUSTED AS THE SAME IS NOT TAKEN AS AN ASSET TO THE BALANCE SHEET, EITHER DIRECTLY A S UNUTILIZED MODVAT, OR INDIRECTLY AS PART OF CLOSING STOCK. BUT IN SO FAR AS THE AMOUNT OF RS.3 IS CONCERNED, IT DOES NOT GET FINAL DEDUCTION BECAUSE OF THE SAME BEING A PART OF ASSETS IN BALANCE SHEET. DEDUCTION FOR MODV AT CREDIT BY MEANS OF ITS INCLUSION IN PURCHASE VALUE OF RAW MATERIALS CA N BE TREATED AS ALLOWED BY WAY OF DEBIT TO THE PROFIT AND LOSS ACCOUNT ONLY WHEN IT ALSO GETS EXHAUSTED. IF, EVEN AFTER A DEBIT TO THE PROFIT AN D LOSS ACCOUNT, THE AMOUNT APPEARS IN BALANCE SHEET, IN ONE FORM OR THE OTHER, THE DEDUCTION CANNOT BE SAID TO HAVE BEEN ACTUALLY ALLOWED ON PAY MENT, TILL IT IS EXHAUSTED AND GETS REMOVED FROM THE BALANCE SHEET A LSO. IN SUCH CIRCUMSTANCES, THE AMOUNT OF UNEXHAUSTED (NOT NECES SARILY ONLY UNUTILIZED) MODVAT CREDIT I.E. WHICH APPEARS IN BALANCE SHEET EITHER IN THE FORM OF INCREASED VALUE OF CLOSING STOCK (RS.2 IN OUR EXAMPLE) AND INCREASED VALUE OF RAW MATERIAL REPRESENTING UNUTIL IZED MODVAT CREDIT ITA NO.5120/DEL/2010 ITA NO.2441/DEL/2012 31 (RE.1 IN OUR EXAMPLE) - CALLS FOR SEPARATE DEDUCTIO N IN TERMS OF SECTION 43B. WE, THEREFORE, SET ASIDE THE IMPUGNED ORDER AN D DIRECT THE AO TO FIRST RECAST THE ASSESSEES PROFIT AND LOSS ACCOUNT ON INCLUSIVE BASIS, THEN ALLOW DEDUCTION FOR THE EQUIVALENT AMOUNT OF MODVAT CREDIT AS REPRESENTED BY RS.3 IN OUR EXAMPLE. THE AO SHOULD A LSO MAKE SURE THAT THE EQUIVALENT OF RS.3 ALLOWED AS DEDUCTION ON PAYM ENT BASIS U/S 43B IN THIS YEAR SHOULD NOT GET DEDUCTED IN THE NEXT YEAR AND FURTHER, THE CORRESPONDING AMOUNT OF DEDUCTION ALLOWED U/S 43B I N THE PRECEDING YEAR, SHOULD ALSO BE SEPARATELY ADDED TO THE INCOME OF THE CURRENT YEAR. 4.22. THE NEXT ITEM OF DISALLOWANCE U/S 43B IN DI SPUTE IS THE AMOUNT OF EXCISE DUTY PAID UNDER PROTEST TO THE TUN E OF RS.45 LAC. THE FACTS APROPOS THIS ISSUE ARE THAT CERTAIN DEMAND WA S CREATED AGAINST THE ASSESSEE BY THE EXCISE DEPARTMENT. THE ASSESSEE PA ID THE SAME ALBEIT UNDER PROTEST BY CHALLENGING THE LEVY OF DEMAND. D EDUCTION CLAIMED FOR SUCH DEMAND UNDER EXCLUSIVE METHOD WAS DISALLOWED B Y THE AO ON THE GROUND THAT THE ASSESSEE WAS CONTESTING THIS LIABIL ITY AND THERE WAS NO FINALITY REGARDING THIS LIABILITY. ITA NO.5120/DEL/2010 ITA NO.2441/DEL/2012 32 4.23. AFTER CONSIDERING THE RIVAL SUBMISSIONS AND PERUSING THE RELEVANT MATERIAL ON RECORD, WE FIND THAT THE TRIBUNAL, IN T HE ASSESSEES OWN CASE FOR EARLIER YEARS, HAS DECIDED THIS ISSUE IN THE AS SESSEES FAVOUR WHICH POSITION HAS BEEN ADMITTED BY THE REVENUE VIDE THE AOS LETTER DATED 24.7.2015. WE NOTE THAT THE HONBLE SUPREME COURT IN CIT VS. BHARAT CARBON AND RIBBON MANUFACTURING COMPANY PVT. LTD., (1999) 239 ITR 505 (SC ), HAS HELD THAT A STATUTORY LIABILITY ACCRUES ON I SSUANCE OF DEMAND NOTICE. IT HAS FURTHER BEEN HELD THAT RAISI NG OF FURTHER DISPUTE BY THE ASSESSEE IS NOT RELEVANT. IN VIEW OF THIS JUDG MENT, IT BECOMES CLEAR THAT THE ISSUANCE OF NOTICE OF DEMAND BY THE COMPET ENT EXCISE AUTHORITY MAKES THE AMOUNT OTHERWISE DEDUCTIBLE BY MEANS OF I NCURRING THE LIABILITY. THIS SATISFIES THE CONDITION OF SECTION 43B WHICH PROVIDES FOR DEDUCTION ON ACTUAL PAYMENT IN RESPECT OF AN OTHERW ISE DEDUCTIBLE AMOUNT. SINCE THE AMOUNT IN QUESTION HAS BEEN PAID DURING THE YEAR, IT QUALIFIES FOR DEDUCTION IN TERMS OF SECTION 43B UND ER THE EXCLUSIVE METHOD. THUS ON ONE HAND DEDUCTION FOR EXCISE DUTY PAID UNDER PROTEST IS AVAILABLE IN THE YEAR OF PAYMENT UNDER THE EXCLU SIVE METHOD, THE SAME ITA NO.5120/DEL/2010 ITA NO.2441/DEL/2012 33 AMOUNT CANNOT BE ALLOWED TO GET DEDUCTED ONCE AGAIN ON THE FINALIZATION OF THE DISPUTE WITH THE EXCISE DEPARTMENT ON ITS TR ANSFER TO EXCISE DUTY ACCOUNT. SIMULTANEOUSLY, THE AMOUNT OF EXCISE DUTY PAID UNDER PROTEST IN EARLIER YEARS GETTING DEDUCTION U/S 43B CALLS FOR I NCLUSION IN THE TOTAL INCOME OF THE CURRENT YEAR ON THE REMOVAL OF THE AM OUNT FROM EXCISE DUTY PAID UNDER PROTEST ACCOUNT. 4.24. WE HAVE NOTICED ABOVE THAT SECTION 145A IS APPLICABLE TO THE YEAR UNDER CONSIDERATION AND ACCORDINGLY, INCOME IS REQU IRED TO BE DETERMINED BY SWITCHING OVER TO THE `INCLUSIVE METH OD AND THEN ALLOWING DEDUCTION U/S 43B ON PAYMENT BASIS. WE, T HEREFORE, SET ASIDE THE IMPUGNED ORDER AND DIRECT THE AO TO FIRST RECAS T THE ASSESSEES PROFIT AND LOSS ACCOUNT ON INCLUSIVE BASIS, INTER ALIA, BY INCLUDING THE AMOUNT OF EXCISE DUTY PAID UNDER PROTEST TO THE PURCHASE V ALUE OF GOODS. IF SUCH GOODS HAVE BEEN CONSUMED DURING THE YEAR AND CORRES PONDING FINISHED GOODS MANUFACTURED AND SOLD, THE MATTER WILL END TH ERE AS IT WILL AMOUNT TO GRANT OF DEDUCTION. IF HOWEVER, THE FINISHED GO ODS SO MANUFACTURED WITH THE USE OF SUCH PROTESTED EXCISE DUTY PAID RAW MATERIAL ARE IN ITA NO.5120/DEL/2010 ITA NO.2441/DEL/2012 34 CLOSING STOCK OR IN THE SHAPE OF RAW MATERIAL ONLY, THEN APART FROM ENHANCING THE VALUE OF PURCHASE AND FINISHED GOODS OR RAW MATERIALS, AS THE CASE MAY BE, THE ASSESSEE WILL BE ENTITLED TO S EPARATE DEDUCTION OF THIS AMOUNT U/S 43B. THIS WILL BE DONE AGAIN WITH T HE SAME RIDER THAT IN THE YEAR OF SETTLEMENT OF DISPUTE, THIS AMOUNT OF S EPARATE DEDUCTION ALLOWED IN THE CURRENT YEAR, SHOULD BE SEPARATELY O FFERED FOR TAXATION AND FURTHER THE CORRESPONDING AMOUNT OF DUTY PAID UNDER PROTEST IN EARLIER YEARS SHOULD BE SEPARATELY OFFERED FOR TAXATION IN THE COMPUTATION OF INCOME FOR THE CURRENT YEAR, IF SUCH EARLIER DISPUT ES ON WHICH EXCISE DUTY WAS PAID UNDER PROTEST, GET RESOLVED. II. CUSTOMS DUTY 5.1. NOW, WE TAKE UP THE DISALLOWANCES U/S 43B ON I TEMS OF CUSTOMS DUTY. FIRST IS CUSTOMS DUTY OF RS.8,65,07,635/- PAI D ON IMPORT OF COMPONENTS FOR WHICH EXPORTS HAD BEEN MADE BY THE Y EAR END AND RS.1,47,142/- FOR WHICH EXPORTS HAD NOT BEEN MADE B Y THE YEAR END. THESE AMOUNTS CLAIMED BY THE ASSESSEE AS ALLOWABLE U/S 43B OF THE ACT, WERE DISALLOWED BY THE AO. IT IS COMMON SUBMISSION THAT THE TRIBUNAL ITA NO.5120/DEL/2010 ITA NO.2441/DEL/2012 35 HAS ALLOWED DEDUCTION IN RESPECT OF THESE AMOUNTS I N THE PRECEDING YEARS. 5.2. HERE AGAIN IT IS NOTICED THAT THE ASSESSEE H AS ALSO FOLLOWED `EXCLUSIVE METHOD. IN SUCH CIRCUMSTANCES, THIS ME THOD NEEDS TO BE SUBSTITUTED WITH `INCLUSIVE METHOD AS MANDATORILY REQUIRED U/S 145A. WE, THEREFORE, DIRECT THE AO TO RECAST PROFIT AND L OSS ACCOUNT AS PER `INCLUSIVE METHOD AS DISCUSSED ABOVE AND THEN ALLO W DEDUCTION IN RESPECT OF THE CUSTOMS DUTY PAID IN ACCORDANCE WITH SECTION 43B, IF NOT GETTING DEDUCTED IN SUCH RECAST. CUSTOMS DUTY PAID ON IMPORT OF COMPONENTS FOR WHICH EXPORTS HAD/HAD NOT BEEN MADE BY THE YEAR END UNDER THE INCLUSIVE METHOD WOULD NOW STAND INCLUDED IN THE VALUE OF IMPORTS AND ACCORDINGLY GET DEDUCTED. CUSTOMS DUTY OF RS.8,65,07,635/- PAID ON IMPORT OF COMPONENTS FOR WHICH EXPORTS HAD BEEN MADE BY THE YEAR END WOULD NOT REQUIRE ANY SEPARATE DEDUCTION AS THE SAME WILL BE DEBITED TO THE PROFIT AND LOSS ACCOUNT AND ALSO GET EXHAUSTED. AS REGARDS THE OTHER AMOUNT OF CUSTOMS DUTY FOR WHICH EXPORTS HAD NOT BEEN MADE BY THE YEAR END WOULD REPRESENT THE AMOUNT THOUGH D EBITED TO THE PROFIT ITA NO.5120/DEL/2010 ITA NO.2441/DEL/2012 36 AND LOSS ACCOUNT BY MEANS OF INCREASED INPUT COST B UT NOT GETTING EXHAUSTED AS THE SAME ALSO APPEARING IN THE BALANCE SHEET THROUGH THE ENHANCED VALUE OF CLOSING STOCK. SEPARATE DEDUCTION IS REQUIRED TO THIS EXTENT U/S 43B OF THE ACT. AT THE SAME TIME, WE AL SO DIRECT THE AO TO MAKE SURE THAT SUCH AMOUNT SEPARATELY GETTING DEDUC TED IN THIS YEAR DOES NOT GET DEDUCTION ONCE AGAIN IN THE NEXT YEAR. IN T HE LIKE MANNER, THE LAST YEARS SIMILAR DEDUCTION SEPARATELY ALLOWED SH OULD BE TAXED IN THE COMPUTATION OF INCOME OF THE CURRENT YEAR. 5.3. NEXT ITEM IS CUSTOMS DUTY (CVD) PAID TO B E ADJUSTED AGAINST EXCISE DUTY PAYABLE ON FINISHED PRODUCTS AMOUNTING TO RS.15,59,44,832/-. SIMULTANEOUS WITH THIS, THERE I S ANOTHER ITEM OF RS.5,40,40,258/-, WHICH IS THE AMOUNT OF CUSTOMS DU TIES ON GOODS IN TRANSIT/UNDER INSPECTION. THE ASSESSEE CLAIMED DEDU CTION FOR THE ABOVE AMOUNTS U/S 43B OF THE ACT, WHICH THE AO DENIED. 5.4. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSE D THE RELEVANT MATERIAL ON RECORD. THE LD. AR CONTENDED THAT THIS ISSUE HAS BEEN DECIDED IN EARLIER YEARS IN THE ASSESSEES FAVOUR B Y THE TRIBUNAL. HE ITA NO.5120/DEL/2010 ITA NO.2441/DEL/2012 37 FURTHER REFERRED TO THE JUDGMENT OF THE HONBLE DEL HI HIGH COURT IN CIT VS. SAMTEL COLOUR LTD. (2009) 184 TAXMAN 120 (DEL) IN WHICH IT HAS BEEN HELD THAT ADVANCE CUSTOMS DUTY PAID IN THE YEA R IN QUESTION IS AN ADMISSIBLE DEDUCTION U/S 43B. IN OUR CONSIDERED OP INION, THERE CAN BE NO DISPUTE ON THE OTHERWISE AVAILABILITY OF DEDUCTI ON OF ADVANCE CUSTOMS DUTY PAID BY THE ASSESSEE, WHICH HAS TO BE ALLOWED IN THE YEAR OF PAYMENT. IN THIS JUDGMENT ALSO, THE HONBLE HIGH C OURT HAS NOTICED VIDE PARA 3 THAT THE PROVISIONS OF SECTION 145A WER E NOT APPLICABLE AS THE ASSESSMENT YEAR UNDER CONSIDERATION WAS 1995-96 . IN VIEW OF THE DETAILED DISCUSSION SUPRA WITH REFERENCE TO THE APPLICABILITY OF SECTION 145A TO THE YEAR IN QUESTION, THERE CAN BE NO ESCAP E FROM VALUATION OF PURCHASE, SALE AND INVENTORIES UNDER THE INCLUSIVE METHOD. WE, THEREFORE, DIRECT THE AO TO RECAST PROFIT AND LOSS ACCOUNT UNDER `INCLUSIVE METHOD AS PER THE MANDATE OF SECTION 14 5A, THEREBY, INTER ALIA, INCREASING THE PURCHASE VALUE WITH THE ABOVE CUSTOM S DUTY. THEN THE AO WILL ALLOW SEPARATE DEDUCTION FOR THE ABOVE REFERRED SUMS TO THE EXTENT NOT GETTING EVENTUALLY DEDUCTED SEPARATELY B Y WAY OF INCREASED ITA NO.5120/DEL/2010 ITA NO.2441/DEL/2012 38 PURCHASE PRICE, AS HAS BEEN DISCUSSED ABOVE. AT THE SAME TIME, WE ALSO DIRECT THE AO TO MAKE SURE THAT SUCH AMOUNT SEPARAT ELY GETTING DEDUCTED IN THIS YEAR DOES NOT GET DEDUCTION ONCE AGAIN IN T HE NEXT YEAR. IN THE LIKE MANNER, THE LAST YEARS SIMILAR DEDUCTION SEP ARATELY ALLOWED SHOULD BE TAXED IN THE COMPUTATION OF INCOME OF THE CURREN T YEAR. 5.5. NEXT ITEM IS CUSTOMS DUTY PAID UNDER PROTEST AMOUNTING TO RS.1,34,25,787. WE HAVE DISCUSSED SIMILAR ISSUE SUPRA WHILE DEALING WITH `EXCISE DUTY PAID UNDER PROTEST BY HOLDING TH AT FIRST THE PROFIT AND LOSS ACCOUNT BE RECAST AS PER `INCLUSIVE METHOD IN TERMS OF SECTION 145A AND THEN SOME ADJUSTMENTS AS STATED ABOVE BE S EPARATELY MADE. SUCH DIRECTIONS ARE FULLY APPLICABLE PRO TANTO TO THE CUSTOMS DUTY PAID UNDER PROTEST. THE AO IS DIRECTED TO FOLLOW THE SAM E. 5.6. THE LAST ASPECT OF DISALLOWANCE U/S 43B IS CUS TOMS DUTY INCLUDED IN CLOSING STOCK AMOUNTING TO RS. 22,52,46,693/-. THE ASSESSEE CLAIMED DEDUCTION FOR THIS SUM, WHICH WAS DENIED BY THE AO. THE LD. AR STATED THAT THE ASSESSEE FOLLOWED `INCLUSIVE METHOD OF AC COUNTING ON THIS ISSUE. THE CLAIM OF THE ASSESSEE IS THAT THE AMOUNT OF RS.22.52 CRORE, ITA NO.5120/DEL/2010 ITA NO.2441/DEL/2012 39 BEING THE AMOUNT OF CUSTOMS DUTY PAID ON THE IMPORT OF RAW MATERIAL/INPUTS, WAS INCLUDED IN THE COST OF MATERI AL AND ALSO AS A PART OF CLOSING STOCK, THEREBY LEVELLING BOTH THE DEBIT AND THE CREDIT SIDES OF THE PROFIT & LOSS ACCOUNT. THE LD. AR CONTENDED THAT S UCH AMOUNT OF CUSTOMS DUTY IS SEPARATELY DEDUCTIBLE IN TERMS OF S ECTION 43B OF THE ACT. HE ALSO SUBMITTED THAT THIS ISSUE IS SETTLED IN THE ASSESSEES FAVOUR IN EARLIER YEARS. 5.7. WE HAVE ELABORATELY DISCUSSED THIS ASPECT SUPRA IN THE CONTEXT OF EXCISE DUTY INCLUDED IN THE VALUE OF CLOSING STOCK. IN PRINCIPLE, WE HOLD THAT THE AMOUNT OF CUSTOMS DUTY OF RS.22.52 CRORE I S ALLOWABLE IN THE YEAR IN QUESTION, BUT, THE AO IS DIRECTED TO FIRST VERIFY THE ARGUMENT OF FOLLOWING THE `INCLUSIVE METHOD AND THEN ALLOW DED UCTION U/S 43B IN THE MANNER DISCUSSED ABOVE, IF THE SAME DID NOT GET EVENTUALLY ALLOWED. THE AO SHOULD FURTHER MAKE IT IS SURE THAT NO DOUB LE DEDUCTION IS ALLOWED ON THIS SCORE, EITHER IN THE CURRENT YEAR W ITH THE LAST YEARS AMOUNT GETTING SEPARATELY DEDUCTED U/S 43B OR IN TH E NEXT YEAR WITH THE CURRENT YEARS AMOUNT GETTING SEPARATE DEDUCTION. ITA NO.5120/DEL/2010 ITA NO.2441/DEL/2012 40 III. ADJUSTMENTS ON ACCOUNT OF LAST YEARS DISALLOW ANCES U/S 43B. 6.1. NOW WE TAKE UP GROUND NO. 3.5 ALONG WITH G ROUND NOS. 4 TO 6.1. THE AMOUNT IN DISPUTE AS PER GROUND NO. 3.5 IS RS.7 1,63,89,449 REPRESENTING THE AMOUNT OF LAST YEARS UNUTILIZED M ODVAT CREDIT WHICH WAS CLAIMED BY THE ASSESSEE AS DEDUCTIBLE U/S 43B, BUT DISALLOWED BY THE AO AND SUCH DISALLOWANCE CAME TO BE AFFIRMED BY THE TRIBUNAL. WHILE ALLOWING DEDUCTION FOR THE CURRENT YEARS UNUTILIZE D MODVAT CREDIT AT THE END OF THE YEAR AMOUNTING TO RS.48,53,55,419, WE HA VE NOTICED THAT THE POSITION OF LAW HAS UNDERGONE CHANGE AND NOW THIS A MOUNT IS DEDUCTIBLE FOR THE YEAR IN QUESTION. THE ASSESSEE CONTENDS THA T A SUM OF RS.71,63,89,449 IS THE AMOUNT OF DEDUCTION CLAIM ED BY IT U/S 43B IN THE PRECEDING YEAR AND SIMULTANEOUSLY OFFERED FOR T AXATION IN THE CURRENT YEAR VOLUNTARILY. HOWEVER, IN VIEW OF THE SUSTENAN CE OF DISALLOWANCE OF THIS SUM BY THE TRIBUNAL IN THE PRECEDING YEAR, THE ASSESSEE CLAIMS THAT THE SAME AMOUNT OFFERED FOR TAXATION IN THE CURRENT YEAR, BE CORRESPONDINGLY REDUCED FROM ITS TOTAL INCOME. ITA NO.5120/DEL/2010 ITA NO.2441/DEL/2012 41 6.2. WE AGREE WITH THE ARGUMENT THAT SINCE THE A MOUNT OF UNUTILIZED MODVAT CREDIT STOOD DISALLOWED IN THE PRECEDING YEA R BY THE TRIBUNAL ON THE PREMISE THAT THE SAME BEFORE ITS SET OFF CANNOT BE TREATED AS TAX PAID, THEN THE SAME SHOULD BE EXCLUDED FROM THE TOTAL INC OME OF THE CURRENT YEAR, IF VOLUNTARILY OFFERED BY THE ASSESSEE FOR TA XATION. THE AO IS DIRECTED TO VERIFY THIS ASPECT AND ALLOW DEDUCTION FOR THIS SUM, IF THE SAME WAS EVENTUALLY DISALLOWED IN THE PRECEDING YE AR AND THE ASSESSEE ONCE AGAIN OFFERED IT FOR TAXATION IN THE COMPUTAT ION OF TOTAL INCOME FOR THE CURRENT YEAR. 6.3. GROUND NOS. 4 TO 6.1 DEAL WITH A SUM OF RS. 1,41,59,08,897, WHICH HAS BEEN STATED TO BE A TOTAL OF CERTAIN AMOUNTS CL AIMED BY THE ASSESSEE AS DEDUCTIBLE IN THE PRECEDING YEAR U/S 43B AS EXCI SE DUTY AND CUSTOMS DUTY AND VOLUNTARILY OFFERED FOR TAXATION IN THE CU RRENT YEARS INCOME. THE LD. AR CONTENDED THAT SINCE SUCH DEDUCTIONS HAV E BEEN DENIED BY THE AO, THE CORRESPONDING OFFERING OF THE SAME TO T AX IN THE CURRENT YEAR, BE ELIMINATED. ITA NO.5120/DEL/2010 ITA NO.2441/DEL/2012 42 6.4. WE AGREE WITH THE LD. AR THAT ONE AMOUNT CA NNOT BE TAXED TWICE. IT IS BUT NATURAL THAT IF AN AMOUNT CLAIMED AS DEDU CTION BY THE ASSESSEE IN THE EARLIER YEAR HAS NOT BEEN ALLOWED, THEN ON THE ASSESSEES SUO MOTU OFFERING OF IT AS AN ITEM OF INCOME FOR THE CURRENT YEAR ON THE STRENGTH OF DEDUCTION CLAIMED IN THE EARLIER YEAR, WHICH FINALL Y STANDS DENIED, SHOULD NOT BE CHARGED TO TAX. ON BEING CALLED UPON TO FURNISH THE DETAIL OF SUCH AMOUNT, IT WAS STATED THAT IT, INTER ALIA, INCLUDES A SUM OF RS.71,63,89,449, WHICH IS SUBJECT MATTER OF GROUND NO. 3.5, THAT WE HAVE DISCUSSED IMMEDIATELY HEREINBEFORE. WE NOTE THAT A PART FROM THE SUSTENANCE OF DISALLOWANCE OF RS.71.63 CRORE IN THE PRECEDING YEAR, THERE IS NO OTHER DISALLOWANCE U/S 43B WHICH HAS BEEN UPH ELD BY THE TRIBUNAL. IT IS OVERT THAT ALL OTHER DISALLOWANCES MADE BY TH E AO U/S 43B HAVE BEEN DELETED BY THE TRIBUNAL. THE LD. AR COULD NOT FURNISH ANY DETAIL OF THE REMAINING AMOUNT OF RS.69.96 CRORE (RS.141.59 C RORE MINUS RS.71.63 CRORE), ALLEGEDLY FINALLY DISALLOWED U/S 4 3B OF THE ACT BY THE TRIBUNAL IN THE PRECEDING YEAR. IT IS SIMPLE AND P LAIN THAT IF THE TRIBUNAL HAS ALLOWED DEDUCTION FOR THE AMOUNTS DISALLOWED BY THE AO IN THE ITA NO.5120/DEL/2010 ITA NO.2441/DEL/2012 43 PRECEDING YEAR, THEN THE SAME ARE RIGHTLY CHARGEABL E TO TAX IN THE CURRENT YEAR. THIS GROUND IS, THEREFORE, DISMISSED, SUBJECT TO OUR DECISION ON GROUND NO. 3.5 IN GRANTING DEDUCTION OF RS.71,63,89 ,449, REPRESENTING LAST YEARS UNUTILIZED MODVAT CREDIT WHICH WAS CLAI MED BY THE ASSESSEE AS DEDUCTIBLE U/S 43B BUT DISALLOWED BY THE AO AND ALSO THE TRIBUNAL. B. ROYALTY I. TRANSFER PRICING ADJUSTMENT OF ROYALTY FOR LICENSED TRADEMARK 7.1. THE ASSESSEE HAS CHALLENGED THE ADDITION OF RS. 1,27,19,59,816/- MADE BY THE AO ON ACCOUNT OF TRANSFER PRICING ADJUSTM ENT. 7.2. BRIEFLY STATED, THE FACTS OF THIS GROUND ARE THAT THE ASSESSEE CHOSE SUZUKI MOTOR CORPORATION, JAPAN (SMC) AS ITS PARTNE R IN 1982 WITH SMC ACQUIRING 26% EQUITY STAKE IN THE COMP ANY MARUTI UDYOG LTD. (MUL). IN 1992, SMC INCREASED ITS SHARE TO 50%. SMC HELD 54.2% IN THE COMPANY IN THE PREVIOUS YEAR R ELEVANT TO THE ASSESSMENT YEAR UNDER CONSIDERATION. THE ASSESSEE, M UL, IS ITA NO.5120/DEL/2010 ITA NO.2441/DEL/2012 44 ENGAGED IN MANUFACTURING OF PASSENGER CARS PRIMARILY F OR SALE IN INDIAN MARKET. IT ALSO EXPORTS VEHICLES TO OTHER COUNT RIES. THE ASSESSEE REPORTED CERTAIN INTERNATIONAL TRANSACTIONS W HICH HAVE BEEN ENUMERATED ON PAGE 18 OF THE ORDER OF THE TRANSFER PRICIN G OFFICER (TPO). THE ASSESSEE SELECTED THE TRANSACTIONAL NET MARGIN METHOD (TNMM) AS THE MOST APPROPRIATE METHOD WITH THE PROFIT LE VEL INDICATOR (PLI) OF OPERATING PROFIT/SALES (OP/S). THE ASSESSEE COMPUTED ITS OP/S AT 11.19%, AS AGAINST (-) 4.43% OF CERTAIN COMPARABLES CHOSEN BY IT. THE ASSESSEE IS A LICENSE D MANUFACTURER OF CARS IN INDIA. FOR USE OF THE LICENCE GIVEN BY SMC , THE ASSESSEE PAID A TOTAL ROYALTY OF RS.254,39,19,633/- DIVIDED IN TO TWO PARTS, NAMELY, RUNNING ROYALTY OF RS.250.84 AND LUMPSUM ROYA LTY OF RS.3.57 CRORE. APART FROM THAT, THE ASSESSEE ALSO PAID RS.20.00 CRORE TO ITS AE TOWARDS TECHNICAL/OTHER SERVICES. THE ASSE SSEE TREATED RUNNING ROYALTY AS REVENUE EXPENDITURE IN ITS RETURN OF I NCOME. LUMPSUM ROYALTY WAS INITIALLY TREATED AS CAPITAL EXPE NDITURE, BUT ITA NO.5120/DEL/2010 ITA NO.2441/DEL/2012 45 DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE SAME WAS ALSO CLAIMED AS REVENUE EXPENDITURE. ON A REFERENCE MADE BY THE AO FOR DETERMINATION OF THE ARMS LENGTH PRICE (ALP) OF THE IN TERNATIONAL TRANSACTIONS, THE TPO OBSERVED THAT THE ASSESSEE HAD UNDERTAKEN TREMENDOUS EFFORTS AND INCURRED HUGE EXPENDITURE ON MARK ET DEVELOPMENT AND PROMOTION OF MARUTI AND SUZUKI BRAND S IN INDIA OVER A PERIOD OF TIME, BUT, HAD NOT RECEIVED ANY COMPENSATION FROM ITS AE FOR MEETING HUGE EXPENDITURE INCURRED ON THE BRAND DEVELOPMENT AS WELL AS MARKET DEVELOPMENT. HE FURT HER OBSERVED THAT SUZUKI TRADE MARK (S) WAS REGISTERED IN INDIA SEVE RAL DECADES AGO, BUT, WAS NOT USED AND, HENCE, DID NOT HAVE ANY BRAND VALUE. HE ALSO NOTICED ON PAGE 27 OF HIS ORDER THAT THE ASSESSE E CARRIED OUT HUGE R&D FOR DEVELOPMENT OF ITS PRODUCTS IN INDIA AND DURING THE YEAR IN QUESTION ALONE, A SUM OF RS.67.10 CRORE WAS SP ENT ON IT. SINCE THE ASSESSEE IS ONLY A LICENSED MANUFACTURER, T HE TPO OBSERVED THAT R&D ACTIVITY SHOULD HAVE BEEN CARRIED OU T BY THE ITA NO.5120/DEL/2010 ITA NO.2441/DEL/2012 46 LICENSOR AND NOT THE ASSESSEE-LICENSEE. ON BEING CA LLED UPON TO EXPLAIN AS TO WHY THE ROYALTY EXPENSES BE NOT DISAL LOWED FOR THE REASONS GIVEN IN HIS ORDER FOR THE AY 2005-06, THE A SSESSEE SUBMITTED THAT THE PAYMENT OF ROYALTY WAS MADE AS PE R THE LICENCE AGREEMENT WHICH IS AN INDIVISIBLE CONTRACT AND THE SA ME DOES NOT SPECIFICALLY SPELL OUT CONSIDERATION FOR THE USE OF TECHNICAL KNOW- HOW AND CONSIDERATION FOR THE USE OF TRADEMARK OF SMC. THE TPO CONSIDERED LICENCE AGREEMENT DATED 9.1.2001 BETWEEN THE ASSESSEE AND SMC. AFTER REPRODUCING RELEVANT CLAUSES FROM THI S AGREEMENT, HE HELD THAT THE ASSESSEE PAID ROYALTY TO SMC TOWARD S LICENCE FOR MANUFACTURE, SALE AND AFTER-SALES SERVICES. HE FURTHE R NOTICED THAT CLAUSES 3.02 AND 3.03 OF THE AGREEMENT STIPULATE TH AT IMPROVEMENT AND MODIFICATION OF THE PRODUCTS AND PARTS BY THE AS SESSEE SHALL BE TREATED AS LICENSED INFORMATION WHOSE LEGAL OWNERSHIP WILL GET TRANSFERRED TO THE SMC AND THE ASSESSEE WILL BE COMPE NSATED FOR SUCH IMPROVEMENTS AND MODIFICATIONS. HE NOTICED THA T NO SUCH ITA NO.5120/DEL/2010 ITA NO.2441/DEL/2012 47 COMPENSATION WAS GIVEN DESPITE THE ASSESSEE INCURRI NG HUGE R&D EXPENSES. THE TPO CAME TO HOLD THAT SUZUKI TRADEMARK OF THE AE WAS PIGGYBACKED ON `MARUTI, THE TRADEMARK OF THE ASSE SSEE, WITHOUT ANY COMPENSATION TO THE ASSESSEE. AFTER GOING THROUG H ALL THE RELEVANT CLAUSES OF THE AGREEMENT, THE TPO HELD THAT THE TOTAL ROYALTY OF RS.254.39 CRORE PAID BY THE ASSESSEE TO SM C WAS FOR USE OF BOTH THE `LICENSED INFORMATION AS WELL AS `LICENSED TRADEMARKS. SINCE NO BIFURCATION OF ROYALTY PAYMENT WAS GIVEN, H E SEGREGATED IT INTO TWO EQUAL PARTS, VIZ., RS.127.195 CRORE TOWARDS MANUFACTURING LICENCE, THAT IS FOR THE USE OF `LICENSED INFORMATION AND RS.127.195 CRORE TOWARDS SALE AND AFTER SALE SERVICE LICENCE, THA T IS FOR USE OF `LICENSED TRADEMARK. THIS 50:50 SEGREGATION WAS DONE ON THE GROUND THAT BOTH MANUFACTURING AND SALE FUNCTIONS WERE EQUALLY IMPORTANT FOR RUNNING A BUSINESS. HE TOOK UP THE DETE RMINATION OF THE ALP OF THE ROYALTY PAID FOR USE OF `LICENSED TRADE MARK. IT WAS NOTICED THAT THE ASSESSEE USED CO-BRANDED TRADE MARK I.E., MARUTI- ITA NO.5120/DEL/2010 ITA NO.2441/DEL/2012 48 SUZUKI. CONSIDERING THE FACT THAT THE ASSESSEES TRA DEMARK OF MARUTI HAS ACQUIRED STATUS OF A SUPER BRAND, WHEREAS S UZUKI IS RELATIVELY WEAK BRAND IN THE INDIAN MARKET, THE TPO HE LD THAT THE ALP OF ROYALTY PAID TO THE AE WAS NIL. IN HIS OPIN ION, THE ASSESSEE OUGHT TO HAVE BEEN COMPENSATED BY SMC FOR USE OF IT S TRADE MARK MARUTI IN A CO-BRANDED TRADEMARK, AS AGAINST THE AE CH ARGING ROYALTY OF RS.127.195 CRORE FROM THE ASSESSEE FOR USE OF ITS SUZUKI BRAND IN A CO-BRANDED TRADEMARK. THAT IS HOW, THE TPO PROPOSED TRANSFER PRICING ADJUSTMENT OF RS.127.195 CRORE ON ACC OUNT OF ROYALTY PAYMENT FOR USE OF `LICENSED TRADEMARK. THE DI SPUTE RESOLUTION PANEL (DRP) AFFIRMED THE VIEW TAKEN BY THE AO IN THE DRAFT ORDER ON THIS ISSUE, WHICH WAS BASED ON THE ORDE R OF THE TPO. THIS LED TO THE ADDITION OF RS.127.195 CRORE, WHICH H AS BEEN ASSAILED BEFORE US. AT THIS STAGE, IT IS RELEVANT TO MENTION THAT THE TPO DID NOT DISPUTE THE ALP OF ROYALTY PAID FOR `LIC ENSED INFORMATION, WHOSE TRANSACTED VALUE WAS COMPUTED BY H IM AT ITA NO.5120/DEL/2010 ITA NO.2441/DEL/2012 49 RS.127.195 CRORE. INSTANTLY, WE ARE TAKING UP THE ALP OF THE ROYALTY PAYMENT FOR USE OF `LICENSED TRADEMARK, FOR WHICH TRANS FER PRICING ADJUSTMENT HAS BEEN MADE. 7.3. THE LD. COUNSEL FOR THE ASSESSEE CONTENDED T HAT THERE IS A COMPOSITE AGREEMENT BETWEEN THE ASSESSEE AND SMC FO R USE OF THE LICENSED INFORMATION AND LICENSED TRADEMARK AND ROYALT Y IS ALSO ONE CONSOLIDATED AMOUNT FOR USE OF BOTH, WHICH HAS BEEN SPLIT IN TWO PARTS, NAMELY, LUMPSUM ROYALTY AND RUNNING ROYALTY. T AKING US THROUGH THE AGREEMENT BETWEEN THE ASSESSEE AND SMC D ATED 9.1.2001 (A COPY OF WHICH HAS BEEN PLACED ON PAGE N O.1301 ONWARDS OF PAPER BOOK NO. 4), IT WAS POINTED OUT THAT ROYALTY IS A ONE MERGED PAYMENT FOR USE OF THE LICENSED INFORMATION AND LICENSED TRADEMARKS AND THE TPO WAS NOT RIGHT IN ARTIF ICIALLY SPLITTING THE SAME INTO TWO PARTS. RELYING ON THE O RDER DATED 2.8.2013 PASSED BY THE TRIBUNAL IN THE ASSESSEES OWN CASE FOR THE AY 2005-06 (ITA NO.5237/DEL/2011), THE LD. AR CONTENDE D THAT IN ITA NO.5120/DEL/2010 ITA NO.2441/DEL/2012 50 THE PRECEDING YEAR ALSO THE TPO BIFURCATED TOTAL ROYA LTY PAYMENT INTO TWO PARTS, NAMELY, 50.58% FOR USE OF TECHNOLOGY AND REMAINING 49.42% FOR USE OF BRAND NAME, WHICH VIEW HAS BEEN TURN ED DOWN BY THE TRIBUNAL BY HOLDING THAT THE ENTIRE PAYMENT OF ROY ALTY UNDER THE LICENCE AGREEMENT WAS A CONSIDERATION FOR USE OF BOT H. 7.4. AU CONTRAIRE, THE LD. DR VEHEMENTLY JUSTIFIED THE ACTION OF THE TPO IN DRAWING A CONCLUSION THAT 50% OF TOTAL RO YALTY PAYMENT WAS FOR USE OF LICENSED INFORMATION AND THE REMAINING 50% FOR USE OF LICENSED TRADEMARK. HE ALSO TOOK US THROUGH THE SAM E AGREEMENT DATED 9.1.2001 AND SUBMITTED THAT CLAUSE 1.06 PROVI DES THAT THE LICENSED TRADEMARK SHALL MEAN THE TRADEMARKS OWNED BY SUZUKI LISTED IN EXHIBIT-B AND OTHER INDIAN TRADEMARKS WHIC H SUZUKI MAY, HEREAFTER, OBTAIN RELATING TO THE PRODUCTS AND PARTS. IT WAS CONTENDED THAT CLAUSE 2.03 OF THE AGREEMENT PROVIDES FOR USE OF LICENSED TRADEMARKS AND CO-BRANDED TRADEMARK OF MARUTI - SUZUKI. IT WAS, THEREFORE, PUT FORTH THAT IT IS NOT ONLY CO-BRANDED ITA NO.5120/DEL/2010 ITA NO.2441/DEL/2012 51 TRADE MARK OF `MARUTI-SUZUKI WHICH HAS BEEN UNDER THE A GREEMENT, BUT ALSO THE LICENSED TRADEMARKS, WHICH EXCLUSIVELY BELONG TO SUZUKI. ONCE THE TRADEMARK OF SMC HAS BEEN ALLOWED T O BE USED TO THE ASSESSEE ON ITS PRODUCTS, EITHER SEPARATELY OR AS A PART OF CO- BRAND, AND FURTHER A PART OF THE ROYALTY HAS BEEN ADM ITTEDLY ALSO PAID FOR THE USE OF LICENSED TRADEMARK, HE ARGUED THAT IT COULD NOT BE SAID THAT THERE WAS NO SEPARATE CONSIDERATION FOR USE OF LI CENSED TRADEMARK EMBEDDED IN TOTAL ROYALTY PAYMENT. IT WAS ST ATED THAT IF SOME PART OF ROYALTY IS RELATABLE TO THE USE OF LICEN SED TRADEMARK, THEN THAT CANNOT BE LOST SIGHT OF. HE INSISTED THAT THE AGREEMENT IMPLIEDLY PROVIDES FOR SEPARATE ROYALTY FOR USE OF THE LICENSED TRADEMARK. THIS WAS CORROBORATED BY STATING THAT THE AG REEMENT ITSELF DIVIDES PAYMENT OF ROYALTY AS PER ARTICLE 6 INT O TWO PARTS, THE FIRST BEING LUMPSUM AND THE SECOND BEING RUNNING ROYAL TY. HE EMPHASIZED THAT THE LUMPSUM ROYALTY IS A CONSIDERATI ON EXCLUSIVELY FOR THE USE OF LICENSED INFORMATION WHICH , AS PER THIS ITA NO.5120/DEL/2010 ITA NO.2441/DEL/2012 52 AGREEMENT, IS 20 CRORE YEN, PAYABLE IN THREE INSTALMEN TS, NAMELY, THE FIRST INSTALMENT OF 6.50 CRORE YEN WITHIN 30 DAYS OF THE EFFECTIVE DATE; 6.5 CRORE YEN TO BE PAID NOT LATER THAN NINE M ONTHS AFTER THE EFFECTIVE DATE OR THE DAY ON WHICH SUZUKI TRANSFERS TO MARUTI A SUBSTANTIAL PART OF THE DOCUMENTATION RELATING TO SUC H MODEL OF PRODUCTS, WHICHEVER IS LATER; AND THE REMAINING PART O F 7 CRORE YEN TO BE PAID NOT LATER THAN 18 MONTHS AFTER THE EFFECTIVE D ATE OR THE DATE OF START OF PRODUCTION OF SUCH MODEL OF PRODUCTS BY M ARUTI, WHICHEVER IS LATER. IN THE LIGHT OF THIS CLAUSE, WHIC H IS UNIFORM IN ALL OTHER AGREEMENTS ENTERED INTO BETWEEN THE ASSESSEE AN D SMC, THE LD. DR CONTENDED THAT THE LUMPSUM ROYALTY IS EXCLUS IVELY TOWARDS THE USE OF LICENSED INFORMATION, WHICH IS PAYABLE O NLY ON THE OCCASION OF RECEIPT OF LICENSED INFORMATION. HE FUR THER STATED THAT APART FROM PAYING SUCH LUMPSUM ROYALTY FOR USE OF LICE NSED INFORMATION, THE ASSESSEE ALSO PAID A SUM OF RS.20, 00,29,488/- TO SMC TOWARDS TECHNICAL/OTHER SERVICES. HE STILL FURTH ER POINTED OUT ITA NO.5120/DEL/2010 ITA NO.2441/DEL/2012 53 THAT APART FROM PAYING SUCH LUMPSUM ROYALTY AND TECHNI CAL FEES, THE ASSESSEE ALSO INCURRED HUGE R&D EXPENDITURE WHICH, IN THE INSTANT YEAR ALONE, STANDS AT RS.67.1 CRORE, WHICH HAS GONE IN TO DEVELOPMENT/UPGRADATION OF THE LICENSED INFORMATION W HOSE INTELLECTUAL PROPERTY RIGHTS ALSO VESTS WITH SMC. HE SUMMED UP HIS POSITION BY STATING THAT THE THREE SUMS, NAMELY, LUM PSUM ROYALTY, R&D EXPENSES INCURRED BY THE ASSESSEE AND THE PAYMEN T OF RS.20.00 CRORE TOWARDS TECHNICAL/OTHER SERVICES PERTAIN EXCLUSIVELY TO THE USE OF `LICENSED INFORMATION AND RUNNING ROY ALTY EXCLUSIVELY PERTAINS TO THE USE OF `LICENSED TRADEMARK . HE THUS ARGUED THAT THE TPO WAS MORE THAN REASONABLE IN APPORTI ONING ROYALTY OF RS.127.195 CRORE TO THE USE OF BRAND AS AGA INST THE ACTUAL RUNNING ROYALTY OF RS.250.81 CRORE PAID BY THE ASSESSE E FOR USE OF LICENSED TRADEMARK. IN THE ALTERNATIVE, HE ARGUED THAT IF THE TRIBUNAL WAS NOT SATISFIED WITH 50:50 DIVISION OF ROYALTY BY THE TPO, THEN THE MATTER MAY BE SENT BACK FOR APPORTIONING ROYALTY FOR U SE OF LICENSED ITA NO.5120/DEL/2010 ITA NO.2441/DEL/2012 54 TRADEMARK ON SOME RATIONAL BASIS. THE LD. DR CONTENDED THAT SINCE THE ASSESSEES OWN TRADE MARK, NAMELY, MARUTI HAS MUCH HIGHER BRAND VALUE THAN THE TRADE MARK SUZUKI OF SMC, WHICH IS RELATIVELY WEAK IN INDIA, THE ENTIRE AMOUNT OF ROYALTY PAID BY THE ASSESSEE TO ITS AE TOWARDS THE USE OF LICENSED TRADE MARKS WAS RIGHTLY DISALLOWED BY THE AO AS HAVING NIL ALP. 7.5. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND PERUSED THE RELEVANT MATERIAL ON RECORD. IT CAN BE OBSERVED THAT T HE TPO HAS ATTRIBUTED A SUM OF RS.127.195 CRORE TOWARDS ROYALTY FOR USE OF LICENSED TRADEMARKS, WHOSE ALP HAS BEEN DETERMINED A T RS. NIL. IN DOING SO, HE RELIED ON HIS ORDER PASSED FOR THE IMMEDIA TELY PRECEDING YEAR. IN SUCH EARLIER YEAR, THE TPO BIFURCATED TOTAL ROYALTY INTO TWO PARTS, NAMELY, 50.58% FOR USE OF LICEN SED INFORMATION AND 49.42% FOR USE OF LICENSED TRADE MARK. IT IS NOT DISPUTED THAT ALL THE AGREEMENTS UNDER WHICH THE ASSE SSEE PAID ROYALTY TO ITS AE DURING THE YEAR ARE IDENTICALLY WORD ED. CLAUSE 6 OF ITA NO.5120/DEL/2010 ITA NO.2441/DEL/2012 55 THE AGREEMENT DATED 25.3.2006 DEALS WITH THE CONSIDE RATION TO BE PAID, WHICH IS IN TWO PARTS, NAMELY, LUMPSUM ROYALTY AND RUNNING ROYALTY. THE BIFURCATION BETWEEN LUMPSUM AND RUNNING R OYALTY IS NOT BASED ON USE OF LICENSED INFORMATION AND LICENSE D TRADEMARK. IT IS A QUID PRO QUO FOR USE OF BOTH IN A CUMULATIVE MANNER. THE FINDING OF THE TRIBUNAL IN PARA 11 OF ITS ORDER FOR THE IMMEDIATELY PRECEDING YEAR IS : `THAT ROYALTY THUS PAID BY THE AS SESSEE TO SMC CONSTITUTE A SINGLE/INSEVERABLE/INDIVISIBLE CONTRACT /PACKAGE WHICH PROVIDED THE ASSESSEE THE EXCLUSIVE RIGHT AND LICENCE TO MANUFACTURE AND TO SELL THE LICENSED PRODUCT FOR A SPECIFIED LIMI TED DURATION. IN PARA 13, THE TRIBUNAL OBSERVED THAT: THE TPO HAS REWRITT EN THE AGREEMENT/TRANSACTION UNDERTAKEN BY THE ASSESSEE BY ART IFICIALLY SEGREGATING THE SINGLE TRANSACTION OF PAYMENT OF ROYAL TY INTO TWO TRANSACTIONS OF PAYMENT OF ROYALTY FOR USE OF BRAND NA ME AND FOR USE OF TECHNOLOGY. IN A NUTSHELL, THESE PARAS INDICATE THAT THE TRIBUNAL HAS TREATED TOTAL ROYALTY PAYMENT AS A COMMON CONSID ERATION FOR USE ITA NO.5120/DEL/2010 ITA NO.2441/DEL/2012 56 OF BOTH, NAMELY, LICENSED INFORMATION AND LICENSED TRADEMARKS, WHICH IS INCAPABLE OF BIFURCATION. AT THE SAME TIME, IT IS ALSO EQUALLY TRUE THAT SOME OBSERVATIONS IN THE TRIBUNAL ORDER GIVE IMPRESSION THAT THE BENCH ATTRIBUTED THE ENTIRE ROYALTY PAYMENT TO THE USE OF `LICENSED INFORMATION. GIVEN THE FACE OFF BETWEEN SUCH OBSERVATIONS, WE ARE MORE INCLINED TO GO WITH THE FIN DING ABOUT THE ROYALTY ATTRIBUTABLE TO THE USE OF BOTH THE LICENSED INFORMATION AND THE LICENSED TRADEMARKS. IT IS SO FOR THE REASON THAT TH E AGREEMENT ALSO PROVIDES LIKE THAT, WHICH HAS BEEN DISCUSSED E LSEWHERE IN THIS ORDER. THE TRIBUNAL FURTHER NOTICED IN PARA 9.2 OF ITS O RDER THAT THE CO-BRANDED TRADE MARK, MARUTI-SUZUKI IS BEING USED SINC E INCEPTION OF THE COMPANY. IN PARA 14, THE TRIBUNAL AGR EED WITH THE ASSESSEES SUBMISSIONS : `THAT SUZUKI BRAND IS AN IN TERNATIONAL RENOWNED GLOBAL BRAND. THIS CAN BE SUBSTANTIATED BY T HE REPORT OF TOP 500 BRANDS AVAILABLE ON INTERNET. THAT IS HOW I N PARA 17, THE TRIBUNAL DELETED THE DISALLOWANCE MADE BY THE AO ON THE BASIS OF ITA NO.5120/DEL/2010 ITA NO.2441/DEL/2012 57 THE TPOS CONCLUSION THAT THE PAYMENT OF ROYALTY TO WARDS USE OF LICENSED TRADEMARK WAS NOT WARRANTED. 7.6. THUS IT IS MANIFEST THAT THE TRIBUNAL IN THE IMMEDIATELY PRECEDING YEAR HAS HELD TWO THINGS. FIRST THAT THE PAY MENT OF ROYALTY UNDER THE AGREEMENT IS BOTH FOR THE USE OF LICENSED I NFORMATION AND LICENSED TRADEMARK AND THERE CAN BE NO DIVISION OF R OYALTY PAYMENT; AND SECOND THAT BRAND SUZUKI IS VALUABLE AND NOT WO RTHLESS AS WAS HELD BY THE TPO. IN SO FAR AS THE FIRST ASPECT OF BIFU RCATION OF ROYALTY PAYMENT INTO TWO PARTS IS CONCERNED, ALTHOUGH WE FIND THAT THE ARGUMENTS PUT FORTH BY THE LD. DR ARE NOT ABSOLUTELY WI THOUT FOUNDATION, YET, THE PRINCIPLE OF CONSISTENCY, LAID D OWN BY THE HONBLE SUPREME COURT AND HONBLE HIGH COURTS IN SEVERAL JUDGMENTS, PERSUADES US TO GO WITH THE VIEW TAKEN B Y THE TRIBUNAL IN ITS ORDER FOR THE A.Y. 2005-06, MORE SPECIFICALLY BECA USE THE TPO HAS ALSO RELIED ON HIS FINDING GIVEN FOR THE AY 2005-0 6 IN ARRIVING AT THE DECISION TAKEN AGAINST THE ASSESSEE IN THE E XTANT YEAR. AS ITA NO.5120/DEL/2010 ITA NO.2441/DEL/2012 58 REGARDS THE SECOND ASPECT, THE LD. DR HAS NOT BROUGHT ON RECORD ANY FURTHER MATERIAL TO DEMOLISH THE FINDING GIVEN BY THE TRIBUNAL IN THE EARLIER YEAR ABOUT THE BRAND `SUZUKI HAVING SUBSTANTI AL VALUE AND THE ROYALTY PAYMENT AT ALP. 7.7. ADDITION ON ACCOUNT OF TRANSFER PRICING ADJUST MENT CAN BE MADE BY MAKING A COMPARISON BETWEEN THE TRANSACTED VA LUE OF AN INTERNATIONAL TRANSACTION AND ITS ALP. THUS IT IS CLE AR THAT THE AVAILABILITY OF THE TRANSACTED VALUE OF AN INTERNATIO NAL TRANSACTION IS SINE QUA NON . IF SUCH TRANSACTED VALUE IS EITHER NOT SEPARATELY AVAILABLE OR CANNOT BE PRECISELY DETERMINED FROM A COM BINED VALUE OF A NUMBER OF INTERNATIONAL TRANSACTIONS, THEN THE E NTIRE EXERCISE OF DETERMINING ALP FAILS. INSTANTLY, WE ARE CONFRONTED WI TH SUCH A PECULIAR SITUATION. THERE IS NO SEPARATE VALUE OF TH E INTERNATIONAL TRANSACTION OF ROYALTY FOR USE OF LICENSED TRADEMARK AN D THE TRIBUNAL HAS HELD IN THE EARLIER YEAR THAT IT IS A PAYMENT OF INSEPARABLE ROYALTY FOR USE OF BOTH THE LICENSED INFORMATION AND THE LI CENSED TRADEMARKS. ITA NO.5120/DEL/2010 ITA NO.2441/DEL/2012 59 IN SUCH CIRCUMSTANCES AND RESPECTFULLY FOLLOWING THE O RDER OF THE TRIBUNAL FOR THE IMMEDIATELY PRECEDING YEAR, WE ORDER F OR THE DELETION OF THE ADDITION OF RS.127.195 CRORE ON ACCO UNT OF TRANSFER PRICING ADJUSTMENT OF ROYALTY FOR USE OF LICENSED TRADE MARK. II. ROYALTY FOR LICENSED INFORMATION WHETHER CAPITAL EXPENDITURE? 8.1. THE NEXT ISSUE IS AGAINST THE DISALLOWANCE AMO UNTING TO RS.95,98,09,735/- MADE BY THE AO ON ACCOUNT OF ROYAL TY PAID. WE HAVE NOTICED ABOVE THAT OUT OF TOTAL ROYALTY OF RS.2 54.39 CRORE PAID BY THE ASSESSEE DURING THE YEAR, THE TPO ATTRIBUTED RS.127.195 CRORE TO THE USE OF LICENSED TRADE MARKS, FOR WHICH HE MADE TRANSFER PRICING ADJUSTMENT. THIS ISSUE HAS BEEN DISCUSSED HE REINABOVE. THE REMAINING AMOUNT OF RS.127.195 CRORE WAS ATTRIBUTED BY T HE TPO TO THE USE OF LICENSED INFORMATION, WHICH WAS ACCEPTED AT ALP. HOWEVER, THE AO TREATED THIS AMOUNT AS AN EXPENDITURE OF CAPITAL NATURE. AFTER ALLOWING SUITABLE DEPRECIATION, THE AO MADE ITA NO.5120/DEL/2010 ITA NO.2441/DEL/2012 60 DISALLOWANCE OF RS.95.98 CRORE. THE ASSESSEE IS AGG RIEVED AGAINST THIS ADDITION. 8.2. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RELEVANT MATERIAL ON RECORD. IT IS NOTICED THAT IN ALL THE EAR LIER YEARS BEFORE ASSESSMENT YEAR 2005-06, THE AO HAS CONSISTENTLY CON SIDERED RUNNING ROYALTY AS DEDUCTIBLE IN FULL AND CAPITALIZED THE LUMPSUM ROYALTY SUBJECT TO DEPRECIATION. THE ASSESSEE ALSO I NITIALLY CLAIMED DEDUCTION FOR THE RUNNING ROYALTY AND CAPITALIZED TH E LUMPSUM ROYALTY OF RS.3.57 CRORE. HOWEVER, DURING THE COURSE OF ASSESSMENT PROCEEDINGS, IT WAS CLAIMED THAT THE ENTIRE AMOUNT OF ROYALTY PAID, INCLUSIVE OF LUMPSUM ROYALTY, WAS OF THE REVENUE NAT URE AND, HENCE, DEDUCTIBLE IN FULL. THE AO ALSO DEVIATED FROM HIS EARLIER CONSISTENT STAND AND TREATED THE ENTIRE PORTION OF THE ROYALTY FOR USE OF LICENSED INFORMATION AS CAPITAL EXPENDITURE. NOW, THE QUESTI ON BEFORE US IS WHETHER THE AMOUNT OF ROYALTY ON LICENSED INFORMATION , CONSISTING OF RUNNING AND LUMPSUM ROYALTY, IS REVENUE OR CAPITAL EXP ENDITURE? ITA NO.5120/DEL/2010 ITA NO.2441/DEL/2012 61 8.3. BEFORE REACHING ANY CONCLUSION IN THIS REGARD, IT IS PARAMOUNT TO NOTE THE RELEVANT CLAUSES OF THE AGREEMENT ENTERE D INTO BY THE ASSESSEE, UNDER WHICH PAYMENT OF ROYALTY FOR LICENS ED INFORMATION HAS BEEN MADE DURING THE YEAR IN QUESTION. SINCE ALL THESE AGREEMENTS ARE, MUTATIS MUTANDIS , IDENTICALLY WORDED, WE TAKE UP AGREEMENT MADE BY THE ASSESSEE ON 25.3.2006 WITH SMC , A COPY OF WHICH HAS BEEN PLACED AT PAGES 1405 ONWARDS OF THE P APER BOOK. FIRST PAGE OF THE AGREEMENT PROVIDES THAT SUZUKI HAS G RANTED TO MARUTI LICENSES FOR MANUFACTURE AND SALE OF CERTAIN M ODELS OF SUZUKI FOUR WHEEL MOTOR VEHICLE, AND WHEREAS, MARUTI HAS REQUESTED SUZUKI TO GRANT A LICENSE FOR AN ADDITIONAL SUZUKI MODEL CALLED ` YL6, AND SUZUKI HAS AGREED TO DO SO PURSUANT TO THE T ERMS AND CONDITIONS HEREINAFTER SET FORTH IN THIS AGREEMENT. T HIS INDICATES THAT THE AGREEMENT IS FOR GRANT OF LICENCE AND NOT FO R OUTRIGHT SALE. CLAUSE 1.04 DEFINES LICENSED INFORMATION TO : `MEAN ANY AND ALL TECHNICAL INFORMATION, WHETHER PATENTED OR NOT, INCL UDING KNOW- ITA NO.5120/DEL/2010 ITA NO.2441/DEL/2012 62 HOW, TRADE SECRETS AND OTHER DATA (INCLUDING ALL DRAWIN GS, PRINTS, MACHINES AND MATERIAL SPECIFICATIONS, ENGINEERING DAT A AND OTHER INFORMATION, KNOWLEDGE AND ADVICE) WHICH SUZUKI NOW HAS..... RELATING TO THE ENGINEERING, DESIGN AND DEVELOPMENT, MANUFACTURE, QUALITY CONTROL, OF PRODUCTS AND PARTS AND WHICH MAY BE SUPPLIED BY SUZUKI TO MARUTI .... THIS CLAUSE INDICATES THAT THE LICENSED INFORMATION IS FOR MANUFACTURING OF PRODUCT AND PARTS BY THE ASSESSEE AND NOT FOR SETTING UP OF FACTORY BY THE ASSE SSEE. ARTICLE 2 OF THE AGREEMENT GIVES `SCOPE OF LICENSE. AS PER THIS CLAUSE, SUZUKI HAS AGREED TO PROVIDE TECHNICAL ASSISTANCE AND LICENCE NECESSARY FOR ENGINEERING, DESIGN, DEVELOPMENT AND M ANUFACTURE, ETC., OF PRODUCTS AND PARTS. IT IS FURTHER RELEVANT TO NO TE THAT THE USE OF THE LICENSED INFORMATION TO THE ASSESSEE IS A NO N-EXCLUSIVE RIGHT. THIS ARTICLE FURTHER PROVIDES THAT MARUTI SHALL HA VE THE RIGHT TO SUB-LICENSE THE RIGHTS GRANTED AS PER THIS AGREEME NT TO OTHER ENTITIES, WHO WILL MANUFACTURE PARTS FOR SUPPLYING THE M ONLY TO ITA NO.5120/DEL/2010 ITA NO.2441/DEL/2012 63 MARUTI FOR THE MANUFACTURE OF PRODUCTS OF MARUTI, AND, THAT TOO, WITH THE PRIOR WRITTEN CONSENT OF SUZUKI. THIS ARTICLE, TH EREFORE, MAKES IT CLEAR THAT THE LICENCE GIVEN BY SUZUKI FOR USE OF LIC ENSED INFORMATION IS ON NON-EXCLUSIVE BASIS AND FURTHER MA RUTI HAS NO AUTHORITY TO SUB-LICENCE THE SAME EXCEPT FOR GETTING THE PARTS MANUFACTURED BY OTHER ENTITIES FOR SUPPLY TO MARUTI ALO NE FOR THE MANUFACTURE OF PRODUCTS IN ACCORDANCE WITH THIS AGREEME NT. CLAUSE 2.02 OF THE AGREEMENT STATES THAT : `MARUTI RECOGNIZ ES AND ACKNOWLEDGES SUZUKIS OWNERSHIP AND VALIDITY OF THE L ICENSED INFORMATION ..... ARTICLE 3 OF THE AGREEMENT PROVIDES T HAT SUZUKI AGREES TO MAKE AVAILABLE TO MARUTI SUCH LICENSED INFO RMATION WHICH IS TO BE UTILIZED FOR MANUFACTURE OF PRODUCTS. CLAUS E 3.02 OF THE AGREEMENT DEALS WITH `IMPROVEMENTS BY MARUTI. IT STATES THAT IF AT ANY TIME DURING THE TERM OF THIS AGREEMENT, MARUTI DI SCOVERS OR ACQUIRES ANY IMPROVEMENT WITH RESPECT TO PRODUCTS OR P ARTS, IT SHALL GIVE TO SUZUKI FULL INFORMATION, INSTRUCTIONS, KNOWH OW AND ASSIGN ITA NO.5120/DEL/2010 ITA NO.2441/DEL/2012 64 OWNERSHIP OF THE SAME TO SUZUKI AND THE SAME SHALL B E CONSIDERED AS `LICENSED INFORMATION. THIS CLAUSE OF THE AGREEMEN T NOT ONLY STIPULATES THAT SUZUKI WILL SUPPLY THE LICENSED INF ORMATION ONLY FOR USE BY MARUTI, BUT, ALSO THAT ANY IMPROVEMENTS TO SUC H LICENSED INFORMATION MADE BY MARUTI, WILL ALSO VEST WITH SU ZUKI. CLAUSE 3.04 OF THE AGREEMENT MAKES IT CLEAR THAT MARUTI SHALL NOT USE THE LICENSED INFORMATION MADE AVAILABLE TO IT BY SUZUKI PURSUANT TO THIS AGREEMENT DIRECTLY OR INDIRECTLY IN CONNECTION WITH TH E MANUFACTURE OF ANY PRODUCTS OTHER THAN THE PRODUCTS AND PARTS AGREED UNDER THIS AGREEMENT. ARTICLE 3.10 OF THE AGREEMENT IS A CONFIDEN TIALITY CLAUSE WHICH PROVIDES THAT ALL LICENSED INFORMATION SUPPLIED TO AND ACQUIRED BY MARUTI UNDER THIS AGREEMENT SHALL BE KEPT B Y MARUTI IN CONFIDENCE AND SHALL NOT DISCLOSE THE SAME TO ANY O THER PARTY AT ANY TIME DURING THE LIFE OF THIS AGREEMENT. CLAUSE 5.04 PROVIDES THAT MARUTI IS NOT AUTHORIZED TO USE NOR SHALL MARUTI USE TH E WORD SUZUKI OR ANY WORD SIMILAR THERETO EXCEPT AS SPECIFICA LLY ITA NO.5120/DEL/2010 ITA NO.2441/DEL/2012 65 AUTHORIZED UNDER THIS AGREEMENT. ARTICLE 7 CONTAINS TERM OF THE AGREEMENT, WHICH HAS BEEN FIXED AT TEN YEARS AND, FURT HER EXTENDABLE BY A PERIOD OF FIVE YEARS. CLAUSE 7.05 OF T HE AGREEMENT HAS BEEN CAPTIONED AS EFFECT OF TERMINATION. IT PROV IDES THAT UPON ANY EXPIRATION, TERMINATION OR CANCELLATION OF THIS AGREEMENT, MARUTI SHALL IMMEDIATELY RETURN TO SUZUKI THE LICENSED INFORMATION OR SHALL DESTROY THE SAME AT SUZUKIS INSTRUCTIONS. 8.4. AN OVERVIEW OF THE ABOVE CLAUSES OF THE AGREEM ENT MAKES IT PATENT THAT THE LICENSED INFORMATION IS FOR MANUFACTU RE OF PRODUCTS AND PARTS AND NOT FOR SETTING UP OF THE ASSESSEES FAC TORY. THE USE OF LICENSED INFORMATION HAS BEEN ALLOWED BY SUZUKI, WHICH IS NON- EXCLUSIVE TO THE ASSESSEE AND, FURTHER, THE ASSESSEE C ANNOT SUB- LICENCE THE SAME TO A THIRD PARTY EXCEPT FOR GETTING PARTS MANUFACTURED TO BE USED BY IT IN MANUFACTURE OF THE PRODUCTS. THE ASSESSEE HAS BEEN SIMPLY GIVEN A LICENCE TO USE THE LICENSED INFORMATION FOR A PERIOD OF TEN YEARS AND THE ASSESSEE RECOGNIZES ITA NO.5120/DEL/2010 ITA NO.2441/DEL/2012 66 SUZUKIS OWNERSHIP OF THE LICENSED INFORMATION. THE ASSESSEE IS NOT ENTITLED TO USE THE LICENSED INFORMATION FOR ANY P RODUCTS OTHER THAN THOSE STIPULATED IN THE AGREEMENT AND, FURTHER, T HERE IS A CONFIDENTIALITY CLAUSE WHICH PREVENTS THE ASSESSEE F ROM DISCLOSING THE LICENSED INFORMATION TO A THIRD PARTY. UPON TERMINAT ION, THE ASSESSEE IS NOT ENTITLED TO THE USE OF LICENSED INFORM ATION AND IS OBLIGED TO RETURN THE SAME TO SUZUKI. ALL THE ABOVE F EATURES OF THE AGREEMENT MAKE IT UNEQUIVOCAL THAT WHAT THE ASSESSEE HAS ACQUIRED UNDER THIS AGREEMENT IS A RIGHT TO USE THE `LICENSED INFORMATION. THERE IS NO OUTRIGHT PURCHASE BY THE ASSESSEE OF THE `LICENSED INFORMATION. IN FACT, SUCH LICENSED INFORMATION IS REQ UIRED TO BE RETURNED TO SUZUKI UPON TERMINATION OF THE AGREEMENT. THE `RIGHT TO USE THE LICENSED INFORMATION, HAS CERTAIN RESTRICTION S PUT ON BY SUZUKI, WHICH THE ASSESSEE CANNOT VIOLATE. THE ASSE SSEE IS UNDER OBLIGATION TO MAINTAIN CONFIDENTIALITY OF THE LICENS ED INFORMATION. A BIRDS EYE VIEW OF ALL THE ABOVE CLAUSES MAKES IT V IVID THAT THE ITA NO.5120/DEL/2010 ITA NO.2441/DEL/2012 67 ROYALTY PAYMENT IS `FOR USE OF THE LICENSED INFORMATION AND NOT `FOR ACQUISITION AS ITS OWNER. IN THIS VIEW OF THE MATTE R, THERE CAN BE NO SCOPE FOR TREATING THE ROYALTY PAID FOR THE `LICENSED INFORMATION AS A CAPITAL EXPENDITURE. 8.5. THE LD. DR HAS RELIED ON CERTAIN DECISIONS, W HICH CATEGORIZE PAYMENT FOR USE OF TECHNICAL KNOW-HOW ETC. AS A CAPI TAL EXPENDITURE. SIMILARLY, THE LD. AR HAS ALSO RELIED ON CERTAIN DECI SION WHICH MARK SUCH PAYMENT AS A REVENUE EXPENSE. IN ALL THESE DECIS IONS, THE DIVIDING LINE IS WHETHER THE CONSIDERATION IS FOR PURCH ASE OF TECHNICAL INFORMATION, KNOW-HOW INFORMATION, DESIGNS AND DRAWINGS, ETC., OR FOR ITS USE. IF IT IS FOR USE ALONE, THEN IT IS REVENUE AND VICE VERSA . RECENTLY, THE HONBLE JURISDICTIONAL HIGH COURT IN CIT VS. HERO HONDA MOTORS LTD. (2015) 372 ITR 481 (DE L), ON CONSIDERATION OF THE RELEVANT CLAUSES OF THE AGREEMEN T BEFORE IT, WHICH CONSIDERABLY MATCH WITH THE AGREEMENT UNDER CO NSIDERATION, HAS HELD THAT THE PAYMENTS MADE FOR MODEL FEE (WHICH I S EQUIVALENT ITA NO.5120/DEL/2010 ITA NO.2441/DEL/2012 68 OF LUMPSUM ROYALTY IN OUR CASE) AND RUNNING ROYALTY ARE REVENUE EXPENSES. IN THIS JUDGMENT, THE HONBLE JURISDICTION AL HIGH COURT HAS CONSIDERED SEVERAL JUDGMENTS OF THE HONBLE SUPRE ME COURT AND HONBLE HIGH COURTS AND ON CONSIDERATION OF THEIR CUMUL ATIVE EFFECT, IT HAS COME TO THE CONCLUSION THAT BOTH THE AMOUNTS ARE REVENUE IN NATURE. THE HONBLE DELHI HIGH COURT IN AN EARLIER JUDGMENT IN SHRIRAM REFRIGERATION INDUSTRIES LTD. VS. CIT (1981) 127 ITR 746 (DEL) , HAS HELD THAT THE LUMPSUM ROYALTY IS A REVENUE EXPENDITURE. AFTER GOING THROUGH THE RELEVANT CLAUSES OF THE AGREEMENT, WE HAVE NOTED THAT ROYALTY PAID BY THE AS SESSEE IS FOR USE OF LICENSED INFORMATION AND NO PART OF THE SAME IS TOWARDS ITS ACQUISITION AS AN OWNER. IN THE LIGHT OF THE ABOVE D ISCUSSION, IT IS ABSOLUTELY CLEAR THAT THE VIEW CANVASSED BY THE AO I N TREATING THIS AMOUNT AS CAPITAL EXPENDITURE, IS NOT SUSTAINABLE. 8.6. OUR ABOVE FINDING DECIDES THE NATURE OF ROYALTY PAYMENT FOR USE OF LICENSED INFORMATION AS REVENUE EXPENDITURE AN D NOT ITS ITA NO.5120/DEL/2010 ITA NO.2441/DEL/2012 69 QUANTUM PART. WE HAVE NOTICED ABOVE THAT THE TRIBUNA L IN ITS ORDER FOR THE IMMEDIATELY PRECEDING YEAR HAS ALSO GIVEN SOME OBSERVATIONS, WHICH PRIMA FACIE INDICATE THAT THE ENTIRE AMOUNT OF ROYALTY IS FOR THE USE OF LICENSED INFORMATION. SINCE WE HAVE HELD THE ROYALTY FOR USE OF LICENSED INFORMATION AS REVENUE EXPEN DITURE, THE QUANTIFICATION ASPECT BECOMES IRRELEVANT. IT IS SO BEC AUSE THE TPO HAS HELD ROYALTY FOR USE OF LICENSED INFORMATION AT AL P. WE, THEREFORE, HOLD THAT THE AMOUNT OF ROYALTY CONSIDERED BY THE AO AS CAPITAL EXPENDITURE SHOULD BE ALLOWED AS A REVENUE EX PENDITURE. AT THE SAME TIME, DEPRECIATION ALLOWED BY THE AO ON THI S AMOUNT SHOULD BE TAKEN BACK. III. R&D CESS ON ROYALTY PAID 9. THE NEXT GROUND IS DISALLOWANCE OF R&D CESS PAID AMOUNTING TO RS.9,68,47,294/-. RELEVANT DISCUSSION HAS BEEN M ADE BY THE AO ON PAGE 26 OF HIS FINAL ORDER. THE ASSESSEE TREATED THE AMOUNT OF ROYALTY AND CESS ON ROYALTY AS REVENUE EXPENDITURE. THE AO ITA NO.5120/DEL/2010 ITA NO.2441/DEL/2012 70 DISALLOWED A SUM OF RS.9.68 CRORE AFTER PROPORTIONATEL Y ALLOWING DEDUCTION TO THE EXTENT OF DEPRECIATION ALLOWED BY H IM ON ROYALTY. THERE IS NO DISPUTE ON THE NATURE OF CESS, WHICH IS O N ROYALTY AND HAS BEEN TREATED BOTH BY THE ASSESSEE AS WELL AS THE AO AS PART AND PARCEL OF ROYALTY AND ACCORDINGLY CLAIMED/DISALLOWED I N LINE WITH THE TREATMENT OF ROYALTY. SINCE WE HAVE ALLOWED DEDU CTION FOR THE ENTIRE AMOUNT OF ROYALTY PAID BY THE ASSESSEE DURING T HE YEAR BY DELETING THE TP ADJUSTMENT AND ALSO OVERTURNING THE A CTION OF THE AO IN TREATING THE REMAINING HALF PART AS CAPITAL EXP ENDITURE, THE CONSEQUENTIAL AMOUNT OF CESS ON ROYALTY PAYMENT AUTOM ATICALLY BECOMES DEDUCTIBLE. WE, THEREFORE, DIRECT TO ALLOW DE DUCTION OF RS.9.68 CRORE. IV. ROYALTY PAID TO NON-AE 10.1. THE NEXT ISSUE RAISED THROUGH GROUND NO.18.1 4 IS AGAINST THE TRANSFER PRICING ADJUSTMENT IN RESPECT OF ROYALTY PAID, INTER ALIA, TO M/S AUTO CHASSIS INTERNATIONAL PURELY FOR TECHNOLOGY/K NOW-HOW. ITA NO.5120/DEL/2010 ITA NO.2441/DEL/2012 71 THE LD. AR CONTENDED THAT TOTAL ROYALTY PAID BY THE ASSESSEE AMOUNTING TO RS.254.39 CRORE INCLUDED A SUM OF RS.1,0 9,45,172/- TOWARDS LICENCE FEES PAID TO AUTO CHASSIS INTERNATI ONAL, WHICH IS A NON-ASSOCIATED ENTERPRISE. IT WAS ARGUED THAT SUCH PAYM ENT TO NON- AE CANNOT BE BENCHMARKED U/S 92 OF THE ACT. 10.2. AFTER CONSIDERING THE RIVAL SUBMISSIONS AND PERU SING THE RELEVANT MATERIAL ON RECORD, WE AGREE IN PRINCIPLE THAT THE ALP U/S 92 CAN BE DETERMINED ONLY OF INTERNATIONAL TRANSACTION S, WHICH FORM THE BASIS FOR MAKING ADDITION TOWARDS TRANSFER PRICI NG ADJUSTMENT. ORDINARILY, AN INTERNATIONAL TRANSACTION IS A TRANSACTI ON BETWEEN TWO OR MORE AES. IF THERE IS A TRANSACTION WITH NON-AE THAT AUTOMATICALLY GOES OUT OF RECKONING FOR THE PURPOSES OF PROCESSING IT U/S 92 OF THE ACT. FURTHER, WE DO NOT CONSIDER IT N ECESSARY TO CONSIDER THIS ISSUE ON MERITS BECAUSE IN EARLIER PARAS WE HAVE DELETED ENTIRE ROYALTY ADDITION MADE BY THE AO, COMPR ISING OF TRANSFER PRICING ADJUSTMENT ON ACCOUNT OF INTERNATIONA L TRANSACTION OF ITA NO.5120/DEL/2010 ITA NO.2441/DEL/2012 72 PAYMENT FOR USE OF `LICENSED TRADEMARK; AND PAYMENT F OR USE OF `LICENSED INFORMATION TREATED BY HIM AS CAPITAL EXPEND ITURE. THE NET EFFECT OF THIS DELETION IS THAT EVEN IF THE AMOU NT UNDER CONSIDERATION IS PAID TO AE, STILL IT IS DEDUCTIBLE. BE THAT AS IT MAY, WE FIND THAT THIS GROUND IS OTHERWISE ALSO NOT SUST AINABLE. THE REASON BEING THAT THE TPO MADE TRANSFER PRICING ADJUST MENT IN RESPECT OF ROYALTY PAID FOR USE OF LICENSED TRADEMARK. ON THE CONTRARY, THIS AMOUNT PAID TO M/S AUTO CHASSIS INTERNA TIONAL IS ADMITTEDLY FOR USE OF KNOW-HOW AND NOT THEIR TRADEMARK. V. ERROR OF THE AO IN COMPUTING DISALLOWABLE AMOUNT OF ROYALTY 11. GROUND NO. 10.5 OF THE ASSESSEES APPEAL IS AGA INST THE COMPUTATION ERROR MADE BY THE AO IN DETERMINING THE AMOUNT OF DISALLOWANCE AT RS.95.98 CRORE TOWARDS ROYALTY PAID FOR THE USE OF LICENSED INFORMATION. IN VIEW OF OUR ALLOWING DEDUCT ION OF ROYALTY ITA NO.5120/DEL/2010 ITA NO.2441/DEL/2012 73 IN FULL, THIS GROUND CHALLENGING THE COMPUTATION ERRO R MADE BY THE AO IN MAKING DISALLOWANCE, BECOMES INFRUCTUOUS. C. SUBSIDY 12.1. THE NEXT ISSUE RAISED IN THIS APPEAL IS AGA INST TREATING SUBSIDY OF RS.32,25,70,213/- AS REVENUE RECEIPT AS AG AINST THE ASSESSEES CLAIM OF CAPITAL RECEIPT. THE ASSESSEE REC EIVED SALES-TAX SUBSIDY IN THE FORM OF 50% EXEMPTION OF SALES-TAX. T HOUGH THE AMOUNT WAS INITIALLY TREATED AS REVENUE RECEIPT IN THE RETURN OF INCOME, BUT THE ASSESSEE CLAIMED IT AS CAPITAL RECEI PT DURING THE COURSE OF ASSESSMENT PROCEEDINGS. THE ASSESSEE SUBMI TTED THAT IT WAS A CAPITAL SUBSIDY ALLOWED BY THE HARYANA GOVERNME NT FOR HELPING IT IN EXPANSION OF INDUSTRY. IN SUPPORT OF IT S CLAIM OF SUCH SUBSIDY AS CAPITAL RECEIPT, THE ASSESSEE RELIED ON TH E JUDGMENT OF THE HONBLE SUPREME COURT IN CIT VS. PONNI SUGARS & CHEMICALS LTD. & ORS. (2008) 306 ITR 392 (SC). THE AO TREATED THIS AMOUNT AS ITA NO.5120/DEL/2010 ITA NO.2441/DEL/2012 74 REVENUE IN NATURE AND HENCE TAXABLE. THE ASSESSEE IS AGGRIEVED AGAINST THE TREATMENT OF SALES-TAX SUBSIDY AS REVENUE RECEIPT. 12.2. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSE D THE RELEVANT MATERIAL ON RECORD. PRIMARY QUESTION FOR DECIDING T HE NATURE OF ANY SUBSIDY, AS A CAPITAL OR REVENUE RECEIPT, IS TO ASCERT AIN THE OBJECT FOR WHICH IT WAS GIVEN. THE MODE OF ITS QUANTIFICATION OR MANNER OF ITS DISBURSEMENT, ARE IRRELEVANT CONSIDERATIONS. WHEN THE OBJECT OF SUBSIDY IS TO ENCOURAGE AN ASSESSEE TO SET UP OR EXP AND INDUSTRY, IT ASSUMES THE CHARACTER OF A CAPITAL RECEIPT. SUCH SUBS IDY MAY BE GIVEN IN ANY FORM, MAY BE BY FINANCING INVESTMENT IN CAPITAL ASSET OR GIVING THE AMOUNT IN CASH OR BY MEANS OF A WAIVER O F SALES-TAX, ETC. FOR A PARTICULAR PERIOD. BUT, WHEN THE OBJECT IS NOT TO ENCOURAGE INDUSTRIALISATION BUT TO FACILITATE THE CARRYING ON AN EXISTING BUSINESS MORE EFFICIENTLY POST ITS SET-UP, THEN IT BECOMES A RE VENUE RECEIPT, IRRESPECTIVE OF THE FORM OF DISBURSEMENT. THE HONBLE S UPREME COURT IN PONNI SUGARS (SUPRA) HAS HELD THAT : `IF THE OBJECT OF THE ITA NO.5120/DEL/2010 ITA NO.2441/DEL/2012 75 ASSISTANCE UNDER THE SUBSIDY SCHEME WAS TO ENABLE TH E ASSESSEE TO SET UP A NEW UNIT OR TO EXPAND THE EXISTING UNIT THE N THE RECEIPT OF THE SUBSIDY WAS ON CAPITAL ACCOUNT. 12.3. AT THIS JUNCTURE, IT IS IMPERATIVE TO NOTE T HAT THE FINANCE ACT, 2015, W.E.F. 1-4-2016 HAS FURTHER ENLARGED THE DEFINI TION OF INCOME GIVEN U/S 2(24) BY INSERTING SUB-CLAUSE (XVIII), WHICH RE ADS AS UNDER:- `(XVIII) ASSISTANCE IN THE FORM OF A SUBSIDY OR GRANT OR CASH INCENTIVE OR DUTY DRAWBACK OR WAIVER OR CONCESSION OR REIMBURSEMENT (BY WHATEVER NAME CALLED) BY THE CENTRAL GOVERNMENT OR A STATE GOVERNMENT OR ANY AUTHORITY O R BODY OR AGENCY IN CASH OR KIND TO THE ASSESSEE OTHER THAN THE SUBSIDY OR GRANT OR REIMBURSEMENT WHICH IS TAKEN INTO ACCOUNT FOR DETERMINATION OF THE ACTUAL COST OF THE ASSET IN ACCORDANCE WITH THE PROVISIONS OF EXPLANATION 10 TO CLAUSE (1) OF SECTION 43; 12.4. A READING OF THE ABOVE PROVISION MAKES IT EXPLICIT THAT NOW SUBSIDY GIVEN BY THE CENTRAL GOVERNMENT OR A STATE GOVERNMENT OR ANY AUTHORITY ETC. FOR ANY PURPOSE, EXCEPT WHERE IT IS TAKEN INTO ACCOUNT FOR DETERMINATION OF THE ACTUAL COST OF THE ASSET UNDER EXPLANATION 10 ITA NO.5120/DEL/2010 ITA NO.2441/DEL/2012 76 SECTION 43(1), HAS BECOME CHARGEABLE TO TAX. EVEN I F A SUBSIDY IS GIVEN TO ATTRACT INDUSTRIAL INVESTMENT OR EXPANSION, WH ICH IS A OTHERWISE A CAPITAL RECEIPT UNDER THE PRE-AMENDMENT REGIME, SHA LL BE INCOME CHARGEABLE TO TAX, EXCEPT WHERE IT HAS BEEN TAKEN I NTO ACCOUNT FOR DETERMINATION OF ACTUAL COST OF ASSET IN TERMS OF E XPLANATION 10 TO SECTION 43(1). AS THIS AMENDMENT IS PROSPECTIVE, IT CANNOT TAKE EFFECT RETROSPECTIVELY TO INCLUDE THE ASSESSMENT YEAR UNDE R CONSIDERATION. 12.5. ADVERTING TO THE FACTS OF THE INSTANT CASE, WE FIND THAT THE ASSESSEE WAS ALLOWED SUBSIDY UNDER INDUSTRIAL POLICY 1999 OF THE GOVERNMENT OF HARYANA, A COPY OF WHICH IS AVAILABLE A T PAGE 777 OF THE PAPER BOOK. THE OBJECTIVE OF THE INDUSTRIAL POLIC Y HAS BEEN SET OUT AT PAGE 779 WHICH TALKS OF INCREASING THE SHARE O F INDUSTRY BY ATTRACTING NEW INVESTMENTS AND GROWTH OF EXISTING IND USTRY. PURSUANT TO THIS INDUSTRIAL POLICY, THE ASSESSEE WAS GIVEN ENTITLEMENT CERTIFICATE UNDER RULE 28C OF HARYANA CEN TRAL SALES-TAX RULES 1975, A COPY OF WHICH HAS BEEN PLACED AT PAGE 871 OF THE PAPER BOOK. PARA 7 OF THE CERTIFICATE PUTS CONDITION F OR ENTITLEMENT ITA NO.5120/DEL/2010 ITA NO.2441/DEL/2012 77 OF SUBSIDY BY PROVIDING THAT: INCENTIVE WOULD BE GI VEN ONLY IN RESPECT OF VEHICLES ROLLED OUT OF PRODUCTION CAPACITY OF 70000 VEHICLES ADDED AS A RESULT OF FIRST EXPANSION AND NOT TO THE PRODUCTION AUGMENTED BY CAPACITY ADDITION OF 30000 V EHICLES AS A RESULT OF SECOND EXPANSION. WHEN WE CONSIDER SECTION 25A ALONG WITH RULE 28C OF HARYANA GENERAL SALES-TAX ACT/RULES, IT BECOMES EVIDENT THAT THE OBJECT OF SUBSIDY IS IN LINE WITH THE INDUSTRIAL POLICY OF HARYANA GOVERNMENT, BEING ATTRACTING NEW INVESTM ENTS AND GROWTH OF EXISTING INDUSTRY. IN OUR CONSIDERED OPINION, SUCH SUBSIDY CANNOT BE CHARACTERIZED AS ANYTHING OTHER THA N A CAPITAL RECEIPT. IT HAS BEEN BROUGHT TO OUR NOTICE THAT THE T RIBUNAL, FOR THE IMMEDIATELY PRECEDING ASSESSMENT YEAR, HAS ALSO TREAT ED SIMILAR SUBSIDY AS CAPITAL RECEIPT. THIS GROUND IS, THEREFORE, ALLOWED. ITA NO.5120/DEL/2010 ITA NO.2441/DEL/2012 78 D. T.P. ADJUSTMENT OF AMP EXPENSES 13.1. THE NEXT GROUND IS AGAINST THE ADDITION ON ACCOUNT OF TRANSFER PRICING ADJUSTMENT TOWARDS ADVERTISEMENT, MARKETING AND PROMOTION (AMP) EXPENSES. 13.2. BRIEFLY STATED, THE FACTS OF THIS GROUND ARE THAT THE TPO BIFURCATED AMP EXPENSES INTO ROUTINE ADVERTISEMENT EXPENSES AND NON- ROUTINE ADVERTISEMENT EXPENSES. APPLYING THE BRIGH T LINE TEST, THE TPO CONSIDERED THREE COMPARABLES, NAMELY, HINDUSTAN MOT ORS LTD. (NIL AMP EXPENSES), MAHINDRA AND MAHINDRA (RS.54.86 CRORE AD VERTISEMENT EXPENSES) AND TATA MOTORS LTD. (RS.187.25 CRORE ADV ERTISEMENT EXPENSES). HE CALCULATED PERCENTAGE OF AMP EXPENSE S TO GROSS SALES OF HINDUSTAN MOTORS AT 0, OF MAHINDRA AND MAHINDRA AT 0.61%, AND OF TATA MOTORS LTD. AT 0.77%. AVERAGE OF THE PERCENT AGE OF AMP EXPENSES TO GROSS SALES OF MAHINDRA AND MAHINDRA AN D TATA MOTORS LTD. WAS DETERMINED AT 0.69%. SINCE THE ASSESSEES PERCE NTAGE OF AMP EXPENSES TO GROSS SALES STOOD AT 1.53%, THE TPO PRO POSED TP ADJUSTMENT OF RS.124.24 CRORE. THEREAFTER, HE PASSED AN ORDER U/S 154 ON THE GROUND ITA NO.5120/DEL/2010 ITA NO.2441/DEL/2012 79 THAT THE AVERAGE PERCENTAGE OF COMPARABLES WAS INAC CURATELY WORKED OUT BY OMITTING 0% OF HINDUSTAN MOTORS LTD. THAT IS HO W, HE PASSED ORDER U/S 154 BY TAKING ARITHMETIC MEAN OF THREE COMPARAB LES AT 0.456% AND, RECOMMENDING THE TP ADJUSTMENT OF RS.158.64 CRORE. THE AO, GIVING EFFECT TO THE TPOS ORDER AND AFTER GOING THROUGH T HE DIRECTIONS OF THE DRP, FINALLY MADE THE SAID ADDITION. THE ASSESSEE IS AGGRIEVED AGAINST THE ADDITION SO MADE BY THE AO, WHICH ALSO COVERS T HE SOLE ISSUE IN THE APPEAL FILED AGAINST THE ORDER PASSED U/S 154 DUE T O ENHANCED TP ADJUSTMENT OF AMP EXPENSES. 13.3. WE HAVE HEARD THE RIVAL SUBMISSIONS AND P ERUSED THE RELEVANT MATERIAL ON RECORD. AT THE VERY OUTSET, IT WAS CONT ENDED BY THE LD. AR THAT THE TRIBUNAL, FOR THE IMMEDIATELY PRECEDING AS SESSMENT YEAR, NAMELY, AY 2005-06, HAS FOLLOWED THE SPECIAL BENCH DECISION IN THE CASE OF LG ELECTRONICS INDIA PVT. LTD. VS. DCIT (2013) 152 TTJ (DEL) 273 (SB) AND UPHELD THE LEGAL ISSUES, NAMELY, AMP EXPENSES BEING AN INTERNATIONAL TRANSACTION, JURISDICTION OF THE TPO IN MAKING TP ADJUSTMENT OF AMP EXPENSES AND LIMITATION, ETC. AGA INST THE ASSESSEE ITA NO.5120/DEL/2010 ITA NO.2441/DEL/2012 80 AND THEREAFTER SENT THE MATTER TO THE TPO FOR RECOM PUTATION OF TRANSFER PRICING ADJUSTMENT ON ACCOUNT OF AMP EXPENSES TO BE DONE IN CONFORMITY WITH THE SPECIAL BENCH DECISION IN LG ELECTRONICS INDIA PVT. LTD. (SUPRA). THE LD. AR SUBMITTED THAT THE SAID DECISION OF THE TRIBUNAL FOR THE IMMEDIATELY PRECEDING ASSESSMENT YEAR HAS B EEN CHALLENGED BY THE ASSESSEE BEFORE THE HONBLE HIGH COURT AND THE HEARING IS UNDER WAY. IT WAS, THEREFORE, PRAYED THAT THE MATTER OF THE TP ADJUSTMENT OF AMP EXPENSES FOR THE INSTANT YEAR BE SENT BACK TO T HE TPO/AO FOR DECIDING IT IN CONFORMITY WITH THE FINAL VIEW TO BE TAKEN BY THE HONBLE HIGH COURT FOR THE PRECEDING YEAR. IT WAS ALSO SUB MITTED THAT THE JUDGMENT OF THE HONBLE DELHI HIGH COURT IN SONY ERICSON MOBILE COMMUNICATIONS INDIA PVT. LTD. VS. CIT DATED 16.3.2015 CANNOT BE APPLIED AS THE FACTS OF THE CASES CONSIDERED IN THA T BATCH OF APPEALS ARE DIFFERENT FROM THE ASSESSEE. IN THE OPPOSITION, TH E LD. DR STRONGLY RECOMMENDED TO FOLLOW THE JUDGMENT OF THE HONBLE D ELHI HIGH COURT IN SONY ERICSON MOBILE COMMUNICATIONS LTD. , IN WHICH THERE IS DISCUSSION ABOUT THE TP ADJUSTMENT TO BE MADE IN TH E CASE OF ITA NO.5120/DEL/2010 ITA NO.2441/DEL/2012 81 MANUFACTURERS. HE FURTHER RELIED ON THE ORDER PASSE D BY THE TRIBUNAL IN THE CASE OF PERFETTI VAN MELLE INDIA PVT. LTD. VS. DCIT (ITA NO.407/DEL/2015) IN WHICH THE BENCH HAS DISCUSSED ABOUT THE TP ADJUSTMENT OF AMP EXPENSES IN THE CASE OF A MANUFAC TURER, AS IS THE CASE UNDER CONSIDERATION. 13.4. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERU SED THE RELEVANT MATERIAL ON RECORD. IT IS AN ADMITTED POSITION THA T THE ASSESSEE BEFORE US IS A `MANUFACTURER AND NOT A `DISTRIBUTOR. THE SP ECIAL BENCH OF THE TRIBUNAL IN THE CASE OF LG ELECTRONICS INDIA PVT. LTD. VS. ACIT (SUPRA), BY ITS MAJORITY DECISION, WITHOUT DRAWING ANY DISTI NCTION BETWEEN MANUFACTURERS AND DISTRIBUTORS, HAS HELD, INTER ALIA , THAT AMP IS A TRANSACTION AND ALSO AN INTERNATIONAL TRANSACTION W ITHIN THE MEANING OF SECTION 92B OF THE ACT AND THAT THE TPO HAS JURISDI CTION TO COMPUTE THE ALP OF THIS INTERNATIONAL TRANSACTION DESPITE THE S AME NOT HAVING BEEN SPECIFICALLY REFERRED TO BY THE AO. ON THE QUESTIO N OF DETERMINATION OF THE ALP OF THIS INTERNATIONAL TRANSACTION, THE SPEC IAL BENCH APPROVED THE APPLICATION OF BRIGHT LINE TEST FOR WORKING OUT THE AMOUNT OF NON-ROUTINE ITA NO.5120/DEL/2010 ITA NO.2441/DEL/2012 82 AMP EXPENSES AND HELD THAT THE ALP OF AMP EXPENSES SHOULD BE DETERMINED ON COST PLUS METHOD BY TREATING AMP TRAN SACTION AS A SEPARATE AND DISTINCT FROM OTHER INTERNATIONAL TRAN SACTIONS. IT FURTHER HELD THAT THE SELLING EXPENSES DIRECTLY INCURRED IN CONN ECTION WITH THE SALES DO NOT LEAD TO BRAND PROMOTION AND HENCE SHOULD NOT BE BROUGHT WITHIN THE OVERALL AMBIT OF AMP EXPENSES. THE SPECIAL BENCH LA ID DOWN CERTAIN PARAMETERS TO BE TAKEN INTO CONSIDERATION FOR DETER MINING THE ALP OF AMP EXPENSES. IN THE ULTIMATE ANALYSIS, THE MATTER WAS SENT BACK TO THE TPO/AO FOR UNDERTAKING THE EXERCISE AFRESH IN THE L IGHT OF ITS DIRECTIONS. 13.5. FOLLOWING THE SAID SPECIAL BENCH ORDER, VARI OUS BENCHES OF THE TRIBUNAL DECIDED SEVERAL CASES INVOLVING AMP EX PENSES, RESTORING THE MATTER TO THE FILE OF AO/TPO FOR DECIDING THIS ISSUE IN CONFORMITY WITH THE DIRECTIONS GIVEN BY THE SPECIAL BENCH IN LG ELECTRONICS (SUPRA) . SEVERAL ASSESSEES AS WELL AS THE REVENUE PREFERR ED THEIR RESPECTIVE APPEALS BEFORE THE HONBLE HIGH COURTS A GAINST THE TRIBUNAL ORDERS FOLLOWING THE SPECIAL BENCH ORDER. A BATCH OF APPEALS IN RELATION TO `DISTRIBUTORS (NOT MANUFACTURERS) LED BY SONY ERICSON MOBILE ITA NO.5120/DEL/2010 ITA NO.2441/DEL/2012 83 COMMUNICATIONS INDIA PVT. LTD. VS. CIT HAS BEEN DISPOSED OF BY THEIR LORDSHIPS OF THE HONBLE DELHI HIGH COURT, DELIVERI NG JUDGMENT ON 16 TH MARCH, 2015, UPHOLDING THE MAJORITY VIEW OF SPECIAL BENCH IN LG ELECTRONICS (SUPRA) TREATING AMP AS AN INTERNATIONAL TRANSACTION AND A LSO CONFERRING JURISDICTION IN THE TPO TO DETERMINE THE ALP OF THE INTERNATIONAL TRANSACTION OF AMP EXPENSES. DEALING WITH THE COMPUTATION OF ALP OF SUCH TRANSACTIONS BY A DISTRI BUTOR, THE HONBLE HIGH COURT HAS HELD, INTER ALIA , THAT THE INTERNATIONAL TRANSACTION OF AMP EXPENSES SHOULD BE BUNDLED/AGGREGATED WITH OTHER IN TERNATIONAL TRANSACTION CARRIED OUT BY THE ASSESSEE AS A DISTRI BUTOR, WHO EITHER SIMPLY ACTS AN AGENT OF MANUFACTURER OR PURCHASES GOODS FR OM THE MANUFACTURER FOR RESALE AT HIS OWN ACCOUNT. THE HONBLE HIGH CO URT HELD THAT WHERE THE TNMM HAS BEEN APPLIED AS THE MOST APPROPRIATE M ETHOD BY A DISTRIBUTOR, WHICH METHOD HAS NOT BEEN DISTURBED BY THE TPO, THEN, THE INTERNATIONAL TRANSACTION OF AMP AND DISTRIBUTION A CTIVITIES SHOULD BE CLUBBED. IT FURTHER HELD THAT FOR DETERMINING THE A LP OF SUCH TRANSACTIONS UNDER A COMBINED APPROACH, ONLY SUCH C OMPARABLES SHOULD ITA NO.5120/DEL/2010 ITA NO.2441/DEL/2012 84 BE CHOSEN WHICH CONFORM TO THE AMP FUNCTIONS AND OT HER DISTRIBUTION FUNCTIONS CONDUCTED BY THE ASSESSEE. IF THERE IS S OME DIFFERENCE IN THE FUNCTIONS UNDER THESE INTERNATIONAL TRANSACTIONS, I NCLUDING THAT OF AMP, BETWEEN THE ASSESSEE AND THE COMPARABLES, THEN, SUI TABLE ADJUSTMENT SHOULD BE MADE TO BRING BOTH THE TRANSACTIONS AT PA R. IF PROBABLE COMPARABLES ARE NOT PERFORMING SIMILAR FUNCTIONS AS DONE BY THE ASSESSEE AND NO ADJUSTMENT IS POSSIBLE FOR BRINGING THE INTERNATIONAL TRANSACTIONS OF THE ASSESSEE IN AN AGGREGATE MANNER AT PAR WITH THOSE UNDERTAKEN BY THE COMPARABLES, THEN, SEGREGATION SH OULD BE DONE AND THE INTERNATIONAL TRANSACTION OF AMP SPEND SHOULD B E SEPARATELY PROCESSED UNDER THE TRANSFER PRICING PROVISIONS FOR THE PURPOSES OF DETERMINING ITS ALP SEPARATELY. IN SUCH A DETERMIN ATION OF ALP OF AMP EXPENSES IN A SEGREGATED MANNER, PROPER SET OFF ON ACCOUNT OF EXCESS PURCHASE PRICE ADJUSTMENT SHOULD BE ALLOWED. THE VIEW TAKEN BY THE SPECIAL BENCH OF THE TRIBUNAL IN SEGREGATING RO UTINE AND NON-ROUTINE EXPENSES ON THE BASIS OF BRIGHT LINE TEST HAS BEEN SET ASIDE BY THE HONBLE HIGH COURT. FURTHER, THE DECISION TAKEN BY THE SPECIAL BENCH TO ITA NO.5120/DEL/2010 ITA NO.2441/DEL/2012 85 THE EFFECT THAT THE EXPENSES CONCERNED WITH THE SAL ES, SUCH AS, REBATES AND DISCOUNTS ETC., SHOULD BE EXCLUDED FROM THE AMB IT OF AMP EXPENSES, HAS BEEN UPHELD. 13.6. WE CAN SUMMARIZE THE RELEVANT POSITION EMANA TING FROM THE JUDGMENT OF THE HONBLE HIGH COURT, AS UNDER : - AMP EXPENSE IS AN INTERNATIONAL TRANSACTION [PARAS 52 & 53 OF THE JUDGMENT] ; THE TPO HAS JURISDICTION TO DETERMINE THE ALP OF TH E INTERNATIONAL TRANSACTION OF AMP EXPENSES [PARA 50 OF THE JUDGMENT]; INTER-CONNECTED INTERNATIONAL TRANSACTIONS CAN BE A GGREGATED AND SECTION 92(3) DOES NOT PROHIBIT THE SET-OFF [PARAS 80 & 81]; AMP IS A SEPARATE FUNCTION. AN EXTERNAL COMPARABLE SHOULD PERFORM SIMILAR AMP FUNCTIONS. [PARAS 165 &166] ; BRIGHT LINE TEST CANNOT BE APPLIED TO WORK OUT NON- ROUTINE AMP EXPENSES FOR BENCHMARKING [PARA 194(X)]; ITA NO.5120/DEL/2010 ITA NO.2441/DEL/2012 86 ALP OF AMP EXPENSES SHOULD BE DETERMINED PREFERABLY IN A BUNDLED MANNER WITH THE DISTRIBUTION ACTIVITY [PARA S 91, 121 & OTHERS] ; FOR DETERMINING THE ALP OF THESE TRANSACTIONS IN A BUNDLED MANNER, SUITABLE COMPARABLES HAVING UNDERTAKEN SIMI LAR ACTIVITIES OF DISTRIBUTION OF THE PRODUCTS AND ALSO INCURRING OF AMP EXPENSES, SHOULD BE CHOSEN [PARAS 194(I), (II), (VI II) & OTHERS]; THE CHOICE OF COMPARABLES CANNOT BE RESTRICTED ONLY TO DOMESTIC COMPANIES USING ANY FOREIGN BRAND [PARA 120] ; IF NO COMPARABLES HAVING PERFORMED BOTH THE FUNCTI ONS IN A SIMILAR MANNER ARE AVAILABLE, THEN, SUITABLE ADJU STMENT SHOULD BE MADE TO BRING INTERNATIONAL TRANSACTIONS AND COMPAR ABLE TRANSACTIONS AT PAR [PARA 194 (III)] ; IF ADJUSTMENT IS NOT POSSIBLE OR COMPARABLE IS NOT AVAILABLE, THEN, THE TNMM ON ENTITY LEVEL SHOULD NOT BE APPLIED [P ARAS 100, 121, 194(III) & (VI)] ; ITA NO.5120/DEL/2010 ITA NO.2441/DEL/2012 87 IN THE ABOVE EVENTUALITY, INTERNATIONAL TRANSACTION OF AMP SHOULD BE VIEWED IN A DE-BUNDLED MANNER OR SEPARATELY [PAR AS 121& 194(XI)] ; IN SEPARATELY DETERMINING THE ALP OF AMP EXPENSES, THE TPO IS FREE TO CHOOSE ANY OTHER SUITABLE METHOD INCLUDING COST PLUS METHOD [PARA 194(XIII)]; IN SO MAKING A TP ADJUSTMENT ON ACCOUNT OF AMP EXPE NSES, A PROPER SET OFF/PURCHASE PRICE ADJUSTMENT SHOULD BE ALLOWED FROM THE OTHER TRANSACTION OF DISTRIBUTION OF THE PRODUC TS [PARA 93] ; SELLING EXPENSES CANNOT BE CONSIDERED AS PART OF AM P EXPENSES [PARAS 175 & 176 OF THE JUDGMENT]. 13.7. THE BRIGHT LINE TEST, DISAPPROVED BY THE HON BLE HIGH COURT, PRIMARILY CONCENTRATES ON THE QUANTITATIVE ASPECTS OF THE AMP EXPENSES ALONE. IT OVERLOOKS THE EXAMINATION OF THE AMP FUNCTIONS CARRIED OUT BY THE ASSESSEE ON ONE HAND AND THE COMPARABLES ON THE OTHER. THE HONBLE HIGH COURT IN SONY ERICSON MOBILE (SUPRA), HAS HELD THAT AMP EXPENSE IS A SEPARATE INTERNATIONAL TRANSACTION AND ALSO BRIGHT LINE TEST IS ITA NO.5120/DEL/2010 ITA NO.2441/DEL/2012 88 NOT APPLICABLE FOR DETERMINING THE ALP OF AMP EXPEN SES. THE MANNER FOR THE DETERMINATION OF THE ALP OF THE DISTRIBUTIO N ACTIVITY AND AMP ACTIVITY HAS ALSO BEEN SET OUT BY THE HONBLE HIGH COURT TO BE CONDUCTED, FIRSTLY, IN A BUNDLED MANNER BY CONSIDER ING THE DISTRIBUTION AND AMP FUNCTIONS PERFORMED BY THE ASSESSEE AS WELL AS THE PROBABLE COMPARABLES, AND IF PROBABLE COMPARABLES HAVING PER FORMED BOTH THE FUNCTIONS ARE NOT AVAILABLE, THEN TO DETERMINE THE ALP OF AMP EXPENSES IN A SEGREGATED MANNER. AS SUCH, IT BECOMES IMMENSE LY IMPORTANT TO SEPARATELY EXAMINE THE DISTRIBUTION ACTIVITY AND AM P FUNCTIONS UNDERTAKEN BY THE ASSESSEE AS WELL AS PROBABLE COMP ARABLES. IT IS VITAL TO HIGHLIGHT THE DIFFERENCE BETWEEN THE AMP EXPENSES A ND AMP FUNCTIONS. WHEREAS THE AMP FUNCTIONS ARE THE MEANS BY WHICH TH E AMP ACTIVITY IS PERFORMED, THE AMP EXPENSES ARE THE AMOUNT SPENT ON THE PERFORMANCE OF SUCH MEANS (FUNCTIONS). TO PUT IT SIMPLY, AN EXA MINATION OF AMP FUNCTIONS CARRIED OUT BY THE ASSESSEE AND THE PROBABLE COMPA RABLES IS SINE QUA NON IN THE PROCESS OF DETERMINATION OF THE ALP OF THE INTERNATIONAL TRANSACTION OF AMP SPEND, EITHER IN A SEGREGATE OR AN ITA NO.5120/DEL/2010 ITA NO.2441/DEL/2012 89 AGGREGATE MANNER. WHAT THEIR LORDSHIPS HAVE HELD IS TO BUNDLE THE DISTRIBUTION ACTIVITY WITH THE AMP ACTIVITY, BEING TWO SEPARATE BUT CONNECTED INTERNATIONAL TRANSACTIONS, FOR THE PURPO SES OF DETERMINATION OF THE ALP OF BOTH THESE INTERNATIONAL TRANSACTIONS IN A COMBINED MANNER. 13.8. THE LD. AR ARGUED THAT THE ASSESSEE APPLIED TNMM AND SINCE THE PROFIT MARGIN DECLARED BY THE ASSESSEE FR OM ITS INTERNATIONAL TRANSACTIONS FAVOURABLY COMPARES WITH THE AVERAGE M ARGIN OF THE COMPARABLES, WHICH FACT HAS NOT BEEN DISPUTED BY TH E TPO, THEN NO ADJUSTMENT SHOULD BE MADE ON ACCOUNT OF AMP EXPENSE S BECAUSE SUCH EXPENSES STAND SUBSUMED IN THE OVERALL OPERATING PR OFIT. THE ARGUMENT OF THE LD. AR, IF TAKEN TO A LOGICAL CONCLUSION, WI LL MAKE THE AMP SPEND A NON-INTERNATIONAL TRANSACTION, WHICH, IN OUR CONS IDERED OPINION, IS CONTRARY TO THE VERDICT OF THE HONBLE DELHI HIGH C OURT IN SONY ERICSSON (SUPRA). ONCE AMP EXPENSE HAS BEEN HELD TO BE AN INTERNATION AL TRANSACTION, IT IS, BUT, NATURAL THAT THE FUNCTIONS PERFORMED BY THE ASSESSEE UNDER SUCH A TRANSACTION NEED TO BE COMPAR ED WITH SIMILAR ITA NO.5120/DEL/2010 ITA NO.2441/DEL/2012 90 FUNCTIONS PERFORMED BY A COMPARABLE CASE. IF AMP F UNCTIONS PERFORMED BY THE ASSESSEE TURN OUT TO BE DIFFERENT FROM THOSE PERFORMED BY A PROBABLE COMPARABLE COMPANY, THEN, AN ADJUSTMENT IS REQUIRED TO BE MADE SO AS TO BRING THE AMP FUNCTIONS PERFORMED BY THE ASSESSEE AS WELL AS THE COMPARABLE, AT THE SAME PEDESTAL. IF W E CONCUR WITH THE CONTENTION OF THE LD. AR THAT THE ADDITION ON ACCOU NT TRANSFER PRICING ADJUSTMENT OF AMP EXPENSES BE DELETED WITHOUT ANY E XAMINATION OF THE AMP FUNCTIONS CARRIED OUT BY THE ASSESSEE AS WELL A S COMPARABLES, THIS WILL AMOUNT TO SNATCHING AWAY THE TAG OF INTERNATIO NAL TRANSACTION FROM AMP EXPENSES, WHICH HAS BEEN ASSIGNED BY THE HONBL E HIGH COURT. WHAT THEIR LORDSHIPS HAVE HELD IN THE JUDGMENT IS T HAT THE DISTRIBUTION ACTIVITY AND AMP EXPENSES ARE TWO SEPARATE BUT RELA TED INTERNATIONAL TRANSACTIONS. IT IS ONLY FOR THE PURPOSES OF DETER MINING THEIR ALP THAT THESE TWO SHOULD BE AGGREGATED. THE PROCESS OF SUCH AGGREGATION DOES NOT TAKE AWAY THE SEPARATE CHARACTER OF THE AMP TRA NSACTION, ALBEIT RELATED. AN ANALYSIS AND EXAMINATION OF THE DISTRI BUTION AND AMP FUNCTIONS CARRIED OUT BY AN ASSESSEE MUST BE NECESS ARILY DONE IN THE FIRST ITA NO.5120/DEL/2010 ITA NO.2441/DEL/2012 91 INSTANCE, WHICH SHOULD BE THEN COMPARED WITH SIMILA R FUNCTIONS PERFORMED BY SOME PROBABLE COMPARABLES. IF THE DIS TRIBUTION AND AMP FUNCTIONS PERFORMED BY AN ASSESSEE TURN OUT TO BE D IFFERENT FROM THOSE PERFORMED BY PROBABLE COMPARABLES, THEN, A SUITABLE ADJUSTMENT SHOULD BE MADE TO THE PROFITS OF THE COMPARABLE SO AS TO C OUNTERBALANCE THE EFFECT OF SUCH DIFFERENCES. IF HOWEVER DIFFERENCES EXIST IN SUCH FUNCTIONS, BUT NO ADJUSTMENT CAN BE MADE, THEN, SUC H PROBABLE COMPARABLE SHOULD BE DROPPED FROM THE LIST OF COMPA RABLES. IF, IN DOING THIS EXERCISE, THERE REMAINS NO COMPANY DOING COMPA RABLE DISTRIBUTION AND AMP FUNCTIONS, THEN, BOTH THE INTERNATIONAL TRA NSACTIONS ARE REQUIRED TO BE SEGREGATED AND THEN EXAMINED ON INDIVIDUAL BA SIS BY FINDING OUT PROBABLE COMPARABLES DOING SUCH SEPARATE FUNCTIONS SIMILARLY. FOR THE INTERNATIONAL TRANSACTION OF AMP SPEND, THIS CAN BE DONE BY, FIRSTLY, SEEING THE AMP FUNCTIONS ACTUALLY PERFORMED BY THE ASSESSEE AND THEN COMPARING IT WITH THE AMP FUNCTIONS PERFORMED BY A PROBABLE COMPARABLE. IF BOTH ARE FOUND OUT TO BE SIMILAR, TH EN THE MATTER ENDS AND A COMPARABLE IS FOUND AND ONE CAN GO AHEAD WITH DET ERMINING THE ALP ITA NO.5120/DEL/2010 ITA NO.2441/DEL/2012 92 OF SUCH A TRANSACTION. IF THE AMP FUNCTIONS PERFORM ED BY THE TWO ENTITIES ARE FOUND TO BE DIFFERENT, THEN ADJUSTMENT IS REQUIRED TO BE MADE IN THE CASE OF A PROBABLE COMPARABLE, SO AS TO MAKE IT UNIFORM WITH THE ASSESSEE. A PARTICULAR ASSESSEE MAY HAVE POSSIBLY D ONE, SAY, FOUR DIFFERENT AMP FUNCTIONS AS AGAINST THE PROBABLE COM PARABLE HAVING DONE, SAY, ONLY THREE. IN SUCH A SCENARIO, AGAIN TH E ADJUSTMENT WILL BE WARRANTED. IN ANOTHER SITUATION, THE AMP FUNCTIONS PERFORMED BY THE ASSESSEE AND PROBABLE COMPARABLE MAY BE SIMILAR BUT WITH VARYING STANDARDS, WHICH WILL ALSO CALL FOR AN ADJUSTMENT. CRUX OF THE MATTER IS THAT THE AMP FUNCTIONS PERFORMED BY THE ASSESSEE MU ST BE SIMILAR TO THOSE DONE BY THE COMPARABLE, IN THE SAME MANNER AS SUCH FUNCTIONS ARE COMPARED IN ANY OTHER INTERNATIONAL TRANSACTION. HO WEVER, IN COMPUTING ALP OF AMP SPEND, THE ADJUSTMENT OR SET OFF, IF ANY , AVAILABLE FROM THE DISTRIBUTION FUNCTION, SHOULD BE ALLOWED. THE ESSENCE OF THE JUDGMENT IN THE CASE OF SONY ERICSON MOBILE (SUPRA) IS THAT THE TWO INTERNATIONAL TRANSACTIONS OF DISTRIBUTION AND AMP SHOULD BE EXAM INED ON THE TOUCHSTONE OF TRANSFER PRICING PROVISIONS, BUT ON A N AGGREGATE BASIS. ITA NO.5120/DEL/2010 ITA NO.2441/DEL/2012 93 DETERMINING THE ALP OF TWO TRANSACTIONS IN AN AGGRE GATE MANNER POSTULATES MAKING A COMPARISON OF BOTH THE FUNCTION S OF DISTRIBUTION AND AMP CARRIED OUT BY THE ASSESSEE WITH THE COMPARABLE S, SO THAT SURPLUS FROM THE DISTRIBUTION ACTIVITY COULD BE ADJUSTED AG AINST THE DEFICIT IN THE AMP ACTIVITY. THE HONBLE HIGH COURT HAS NO WHERE L AID DOWN THAT THE AMP FUNCTIONS PERFORMED BY THE ASSESSEE SHOULD NOT BE COMPARED WITH THOSE PERFORMED BY THE COMPARABLE PARTIES. ON THE CONTRARY, IT TURNED DOWN THE CONTENTION RAISED BY THE LD. AR URGING FOR NOT TREATING AMP AS A SEPARATE FUNCTION, WHICH IS APPARENT FROM THE EXT RACTION FROM PARA 165 OF THE JUDGMENT : `ON BEHALF OF THE ASSESSEE, IT WA S INITIALLY ARGUED THAT THE TPO CANNOT ACCOUNT FOR OR TREAT AMP AS A FUNCTI ON. THIS ARGUMENT ON BEHALF OF THE ASSESSEE IS FLAWED AND FALLACIOUS FOR SEVERAL REASONS. THERE ARE INHERENT FLAWS IN THE SAID ARGUMENT. IT HELD VIDE PARA 165 OF THE JUDGMENT THAT : ` AN EXTERNAL COMPARABLE SHOULD PERFORM SIMILAR AMP FUNCTIONS. THUS IT IS MANIFEST THAT COMPARISON OF AMP FUNCTI ONS IS VITAL WHICH CANNOT BE DISPENSED WITH. LET US WE GO A STEP FURTHER WITH THE ALTERNATIVE PRESCRIPTION OF THE JUDGMENT THAT I F ALP OF BOTH THE ITA NO.5120/DEL/2010 ITA NO.2441/DEL/2012 94 TRANSACTIONS OF DISTRIBUTION AND AMP CANNOT BE DET ERMINED IN A COMBINED MANNER, THEN THE ALP OF AMP FUNCTION SHOUL D BE SEPARATELY DONE. THE SUBMISSION ADVANCED BY THE ASSESSEE OF C ONSIDERING THE PROFIT ON AN ENTITY LEVEL WITHOUT MAKING COMPARISON OF AMP FUNCTIONS DONE BY THE ASSESSEE AS WELL AS THE COMPARABLE, WIL L RENDER THIS ALTERNATIVE APPROACH INCAPABLE OF COMPLIANCE. CANV ASSING SUCH A VIEW AS ARGUED ON BEHALF OF THE ASSESSEE AMOUNTS TO TREA TING AMP SPEND AS A NON-INTERNATIONAL TRANSACTION, WHICH IS PATENTLY IN CAPABLE OF ACCEPTANCE. THE FACT REMAINS THAT AS PER THE VERDICT OF THE HON BLE HIGH COURT, THE AMP SPEND IS AN INTERNATIONAL TRANSACTION, WHICH IS REQUIRED TO BE PROCESSED UNDER CHAPTER X OF THE ACT BY TAKING INTO ACCOUNT THE AMP FUNCTIONS PERFORMED BY AN ASSESSEE AND THEN COMPARI NG SUCH FUNCTIONS WITH THOSE PERFORMED BY COMPARABLE ENTITIES. THIS CAN BE DONE ONLY BY MANDATORILY MAKING A COMPARISON OF THE AMP FUNCTI ONS PERFORMED BY THE ASSESSEE AND COMPARABLES AND THEN MAKING AN ADJ USTMENT, IF ANY, DUE TO DIFFERENCES BETWEEN THE TWO, SO THAT THE AMP FUNCTIONS PERFORMED BY THE ASSESSEE AND COMPARABLE ARE BROUGH T TO A SIMILAR ITA NO.5120/DEL/2010 ITA NO.2441/DEL/2012 95 PLATFORM. IN FACT, THIS IS ALSO THE PRESCRIPTION O F RULE 10B(1)(E), WHICH PROVIDES AS UNDER :- ` (E) TRANSACTIONAL NET MARGIN METHOD, BY WHICH, (I) THE NET PROFIT MARGIN REALISED BY THE ENTERPRIS E FROM AN INTERNATIONAL TRANSACTION ENTERED INTO WITH AN ASSO CIATED ENTERPRISE IS COMPUTED IN RELATION TO COSTS INCURRED OR SALES EFFECTED OR ASSETS EMPLOYED OR TO BE EMPLOYED BY THE ENTERPRISE OR HAV ING REGARD TO ANY OTHER RELEVANT BASE ; (II) THE NET PROFIT MARGIN REALISED BY THE ENTERPRI SE OR BY AN UNRELATED ENTERPRISE FROM A COMPARABLE UNCONTROLLED TRANSACTION OR A NUMBER OF SUCH TRANSACTIONS IS COMPUTED HAVING RE GARD TO THE SAME BASE ; (III) THE NET PROFIT MARGIN REFERRED TO IN SUB-CLAU SE (II) ARISING IN COMPARABLE UNCONTROLLED TRANSACTIONS IS ADJUSTED TO TAKE INTO ACCOUNT THE DIFFERENCES, IF ANY, BETWEEN THE INTERN ATIONAL TRANSACTION AND THE COMPARABLE UNCONTROLLED TRANSAC TIONS , OR BETWEEN THE ENTERPRISES ENTERING INTO SUCH TRANSACT IONS, WHICH COULD MATERIALLY AFFECT THE AMOUNT OF NET PROFIT MA RGIN IN THE OPEN MARKET ; (IV) THE NET PROFIT MARGIN REALISED BY THE ENTERPRI SE AND REFERRED TO IN SUB-CLAUSE (I) IS ESTABLISHED TO BE THE SAME AS THE NET PROFIT MARGIN REFERRED TO IN SUB-CLAUSE (III) ; (V) THE NET PROFIT MARGIN THUS ESTABLISHED IS THEN TAKEN INTO ACCOUNT TO ARRIVE AT AN ARMS LENGTH PRICE IN RELAT ION TO THE INTERNATIONAL TRANSACTION. 13.9. A PERUSAL OF THE SUB-CLAUSE (III) OF THIS R ULE DIVULGES THAT NET PROFIT MARGIN UNDER A COMPARABLE UNCONTROLLED TRANS ACTION AS DETERMINED ITA NO.5120/DEL/2010 ITA NO.2441/DEL/2012 96 UNDER SUB-CLAUSE (II) SHOULD BE: ADJUSTED TO TAKE INTO ACCOUNT THE DIFFERENCES, IF ANY, BETWEEN THE INTERNATIONAL TRAN SACTION AND THE COMPARABLE UNCONTROLLED TRANSACTIONS. IT IS ONLY SUCH ADJUSTED NET PROFIT MARGIN IN SUB-CLAUSE (III) OF RULE 10B(1)(E) WHICH IS COMPARED WITH THE NET PROFIT MARGIN REALIZED BY THE ASSESSEE AS PER THE MANDATE OF SUB-CLAUSE (IV) OF RULE 10B(1)(E). 13.10. SUB-RULE (2) OF RULE 10B PROVIDES THAT FOR THE PURPOSES OF SUB-RULE (1), THE COMPARABILITY OF AN INTERNATIONA L TRANSACTION WITH AN UNCONTROLLED TRANSACTION SHALL BE JUDGED WITH REFER ENCE TO THE FOLLOWING, NAMELY (A) THE SPECIFIC CHARACTERISTICS OF THE PR OPERTY TRANSFERRED OR SERVICES PROVIDED IN EITHER TRANSACTION ; (B) THE F UNCTIONS PERFORMED, TAKING INTO ACCOUNT ASSETS EMPLOYED OR TO BE EMPLOY ED AND THE RISKS ASSUMED, BY THE RESPECTIVE PARTIES TO THE TRANSACTI ONS ; (C) THE CONTRACTUAL TERMS (WHETHER OR NOT SUCH TERMS ARE FO RMAL OR IN WRITING) OF THE TRANSACTIONS WHICH LAY DOWN EXPLICITLY OR IMPLI CITLY HOW THE RESPONSIBILITIES, RISKS AND BENEFITS ARE TO BE DIVI DED BETWEEN THE RESPECTIVE PARTIES TO THE TRANSACTIONS ; (D) CONDIT IONS PREVAILING IN THE ITA NO.5120/DEL/2010 ITA NO.2441/DEL/2012 97 MARKETS IN WHICH THE RESPECTIVE PARTIES TO THE TRAN SACTIONS OPERATE, INCLUDING THE GEOGRAPHICAL LOCATION AND SIZE OF THE MARKETS, THE LAWS AND GOVERNMENT ORDERS IN FORCE, COSTS OF LABOUR AND CAP ITAL IN THE MARKETS, OVERALL ECONOMIC DEVELOPMENT AND LEVEL OF COMPETITI ON AND WHETHER THE MARKETS ARE WHOLESALE OR RETAIL. SUB-RULE (3) OF R ULE 10B STIPULATES THAT AN UNCONTROLLED TRANSACTION SHALL BE COMPARABLE TO AN INTERNATIONAL TRANSACTION IF (I) NONE OF THE DIFFERENCES, IF ANY , BETWEEN THE TRANSACTIONS BEING COMPARED, OR BETWEEN THE ENTERPR ISES ENTERING INTO SUCH TRANSACTIONS ARE LIKELY TO MATERIALLY AFFECT T HE PRICE OR COST CHARGED OR PAID IN, OR THE PROFIT ARISING FROM, SUCH TRANSA CTIONS IN THE OPEN MARKET ; OR (II) REASONABLY ACCURATE ADJUSTMENTS CA N BE MADE TO ELIMINATE THE MATERIAL EFFECTS OF SUCH DIFFERENCES. 13.11. A COMPARATIVE STUDY OF SUB-RULES (1), (2) AN D (3) OF RULE 10B MAKES IT PALPABLE THAT THE INTERNATIONAL TRANSACTIO N AND THE UNCONTROLLED TRANSACTION WITH WHICH COMPARISON IS SOUGHT TO BE M ADE FOR DETERMINING THE ALP, IN THE FIRST INSTANCE, MUST HAVE OVERALL SIMILAR CHARACTERISTICS. IT IS VIVID THAT IF THE GOODS/SERVICES ARE DIFFEREN T, THEN NO EFFECTIVE ITA NO.5120/DEL/2010 ITA NO.2441/DEL/2012 98 COMPARISON CAN BE MADE. ONCE THE GOODS/SERVICES UND ER BOTH THE TRANSACTIONS ARE BROADLY SIMILAR BUT THERE IS A DIF FERENCE IN THEM BECAUSE OF CERTAIN SPECIFIC CHARACTERISTICS; AND/OR THE PR ODUCTS/SERVICES IN BOTH THE TRANSACTIONS ARE IDENTICAL, BUT STILL THERE ARE CERTAIN DIFFERENCES DUE TO THE CONTRACTUAL TERMS OR THE GEOGRAPHICAL LOCATION ETC., THEN, A REASONABLY ACCURATE ADJUSTMENT SHOULD BE MADE FOR E LIMINATING THE MATERIAL EFFECTS OF SUCH DIFFERENCES SO AS TO BRING THE INTERNATIONAL TRANSACTION AND THE COMPARABLE UNCONTROLLED TRANSAC TION ON THE SAME PODIUM. IF DUE TO ONE REASON OR THE OTHER, NO REASO NABLE ACCURATE ADJUSTMENT CAN BE MADE DUE TO SUCH DIFFERENCES, THE N, SUCH UNCONTROLLED TRANSACTION SHOULD NOT BE CONSIDERED AS A COMPARABL E TRANSACTION. 13.12. IT IS DISCERNIBLE THAT THE PRESCRIPTION OF R ULE 10B IS IN COMPLETE HARMONY WITH THE RATIO OF THE JUDGMENT IN THE CASE OF SONY ERICSON MOBILE (SUPRA) , TO THE EFFECT THAT THE AMP FUNCTIONS CARRIED OUT BY THE ASSESSEE ARE REQUIRED TO BE NECESSARILY COMPARED WITH THE AMP FUNCTIONS CARRIED OUT BY A COMPARABLE ENTITY IN DETERMINING THE AMP OF ALP EXPENSES. DIFFERENCE BETWEEN THE FUNCTIO NS, IF CAPABLE OF ITA NO.5120/DEL/2010 ITA NO.2441/DEL/2012 99 ADJUSTMENT, SHOULD BE GIVEN EFFECT TO IN THE PROFIT RATE OF THE COMPARABLE AND IF SUCH DIFFERENCE CANNOT BE GIVEN ADJUSTED, TH EN, THE PROBABLE COMPARABLE SHOULD BE ELIMINATED. 13.13. WE HAVE NOTICED ABOVE THAT THE ASSESSEE IS A `MANUFACTURER AND NOT A `DISTRIBUTOR. THE JUDGMENT IN THE CASE OF SONY ERICSON MOBILE (SUPRA) PRIMARILY DEALS WITH A CASE OF DISTRIBUTOR, THOUGH THE INITIAL DISCUSSION ABOUT THE CHARACTER OF AMP SPEND AS AN INTERNATIONAL TRANSACTION AND THE JURISDICTION OF THE TPO ETC. AR E COMMON TO A DISTRIBUTOR AND ALSO A MANUFACTURER. SIMILARLY THE RE ARE SOME OTHER OBSERVATIONS IN THIS JUDGMENT, WHICH ARE COMMON TO BOTH. THOUGH THIS JUDGMENT LAYS DOWN AT LENGTH SOME BROADER PRINCIPLE S FOR THE DETERMINATION OF ALP OF AMP EXPENSES IN THE CASE OF A `DISTRIBUTOR, STILL CERTAIN PRINCIPLES DEALING EXCLUSIVELY WITH T HE DETERMINATION OF THE ALP OF AMP EXPENSES IN THE CASE OF A `MANUFACTURER , HAVE ALSO BEEN LAID DOWN. SUCH DISCUSSION HAS BEEN MADE IN PARA 92 OF THE JUDGMENT, THE RELEVANT PART OF WHICH IS REPRODUCED HERE AS UN DER : - ITA NO.5120/DEL/2010 ITA NO.2441/DEL/2012 100 `92. THE MAJORITY JUDGMENT REFERS TO AN EXAMPLE WHE RE THE INDIAN AE MAY HAVE EARNED ACTUAL PROFIT OF RS.140/-, BUT R ETURNED REDUCED NET PROFIT OF RS.120/- AS THE INDIAN AE HAD INCURRE D BRAND BUILDING EXPENSES TO THE TUNE OF RS.20/- FOR THE FOREIGN AE, WHEREAS THE NET PROFIT ON SALES DECLARED BY COMPARABLE UNCONTROLLED TRANSACTIONS WAS RS.100/- ONLY. THUS, IT WAS OBSERVED THAT THE C OSTS INCLUDING AMP EXPENSES ARE INDEPENDENT OF COST OF IMPORTED RA W MATERIAL/FINISHED PRODUCTS HAVING SOME CORRELATION WITH OVERALL PROFIT. THE EXAMPLE HIGHLIGHTS THE WEAKNESS OF THE TNM METHOD. THE REASONING WOULD BE EQUALLY VALID, WHERE NO AMP OR BRAND BUILDING' EXPENSES ARE INCURRED. (SEE PARAGRAPH 21. 8 TO 22.10 OF THE MAJORITY DECISION). THE NET PROFIT MARGINS CAN BE A FFECTED BY VARIATION OF OPERATING EXPENSES. THUS, THE REQUIREM ENT TO SELECT APPROPRIATE COMPARABLE AND ADJUSTMENT. IT WOULD BE INAPPROPRIATE AND UNSOUND TO ACCEPT COMPARABLES, WITH OR WITHOUT ADJUSTMENT AND APPLY TNM METHOD, AND YET CONJECTURISE AND MISTRUST THE ARM'S LENGTH PRICE. TNM METHOD WOULD NOT BE THE MOST APP ROPRIATE METHOD WHEN THERE ARE CONSIDERABLE VALUE ADDITIONS BY THE SUBSIDIARY AES. IN PARAGRAPH 22.9, THE MAJORITY DEC ISION HAS OBSERVED THAT ALL COSTS INCLUDING THE AMP EXPENSES ARE INDEPENDENT OF COST OF MATERIAL. THIS INDICATES THAT THE OBSERV ATIONS HAVE BEEN MADE WITH REFERENCE TO MANUFACTURING ACTIVITIES. IT WOULD NOT BE APPROPRIATE AND PROPER TO APPLY THE TNM METHOD IN C ASE THE INDIAN ASSESSED IS ENGAGED IN MANUFACTURING ACTIVIT IES AND DISTRIBUTION AND MARKETING OF IMPORTED AND MANUFACT URED PRODUCTS, AS INTERCONNECTED TRANSACTIONS. IMPORT OF RAW MATER IAL FOR MANUFACTURE WOULD POSSIBLY BE AN INDEPENDENT INTERN ATIONAL TRANSACTION VIZ. MARKETING AND DISTRIBUTION ACTIVIT IES OR FUNCTIONS. WE HAVE EARLIER USED THE TERM `PLAIN VANILLA DISTRI BUTOR'. WHEN WE USE THE WORDS `PLAIN VANILLA DISTRIBUTOR' WE DO NOT MEAN PLAIN VANILLA SITUATIONS, BUT VALUE ADDITIONS AND EACH PA RTY MAKING VALUABLE UNIQUE CONTRIBUTION. ITA NO.5120/DEL/2010 ITA NO.2441/DEL/2012 101 13.14. IT IS DISCERNIBLE FROM THE ITALICIZED PAR T OF THE ABOVE PARA THAT THE APPLICATION OF TNM METHOD IS NOT APPROPRIATE AND PROPER IN CASE THE ASSESSEE IS ENGAGED IN MANUFACTURING ACTIVITIES. IN SUCH CIRCUMSTANCES, THE IMPORT OF RAW MATERIAL FOR MANUFACTURE WOULD BE AN INDEPENDENT INTERNATIONAL TRANSACTION VIZ. MARKETIN G AND DISTRIBUTION ACTIVITIES OR FUNCTIONS. THE CORE OF THE ABOVE PARA IS THAT IN THE CASE OF A `MANUFACTURER, THE INTERNATIONAL TRANSACTIONS CONC ERNED WITH THE MANUFACTURING ACTIVITY CANNOT BE AGGREGATED WITH TH E AMP ACTIVITIES AS BOTH ARE SEPARATE AND DISTINCT. ONCE BOTH ARE HELD TO BE SEPARATE AND TNMM IS NOT TO BE APPLIED, THE ONLY THING WHICH REM AINS IS THAT THE AMP TRANSACTION SHOULD BE SEPARATELY AND INDEPENDEN TLY PROCESSED UNDER THE CHAPTER X OF THE ACT AS PER ANY SUITABLE METHOD (OTHER THAN TNMM) INCLUDING COST PLUS METHOD, BUT BY EXCLUDING THE SELLING EXPENSES FROM THE OVERALL BASE OF AMP EXPENSES. 13.15. TURNING TO THE FACTS OF THE CASE, WE FIND THAT THE TPO/AO HAVE COMPUTED DISALLOWANCE OF AMP EXPENSES ON THE BASIS OF BRIGHT LINE TEST. THERE IS NO DISCUSSION ABOUT THE AMP FUNCTIONS CARR IED OUT BY THE ITA NO.5120/DEL/2010 ITA NO.2441/DEL/2012 102 ASSESSEE OR COMPARABLES. NOW SINCE THE SPECIAL BENC H ORDER HAS BEEN PARTLY MODIFIED BY THE HONBLE DELHI HIGH COURT, IN CLUDING THE NON- APPLICABILITY OF THE BRIGHT LINE TEST, AND NO MATER IAL HAS BEEN PLACED ON RECORD BY THE LD. AR TO, FIRSTLY, DEMONSTRATE THE A MP FUNCTIONS CARRIED OUT BY THE ASSESSEE AND THEN, TO COMPARE SUCH FUNCT IONS WITH THOSE DONE BY COMPARABLES, THIS ISSUE CANNOT BE DECIDED AT OUR END. UNDER SUCH CIRCUMSTANCES, WE SET ASIDE THE IMPUGNED ORDER AND REMIT THE MATTER TO THE FILE OF THE AO/TPO FOR DECIDING IT AFRESH AS PE R LAW. IN THIS FRESH EXERCISE, THE TPO WILL FOLLOW THE PARTS OF THE JUDG MENT IN SONY ERICSON (SUPRA) AS ARE COMMON TO BOTH MANUFACTURERS AND DISTRIBUTOR S; APPLY THE PARTS OF THE JUDGMENT AS ARE APPLICABLE TO A ` MANUFACTURER; AND IGNORE THE PARTS OF THE JUDGMENT WHICH PERTAIN EXCL USIVELY TO A `DISTRIBUTOR. NEEDLESS TO SAY, THE ASSESSEE WILL BE ALLOWED A REASONABLE OPPORTUNITY OF HEARING IN SUCH FRESH PROCEEDINGS. 13.16. NOW WE ESPOUSE THE CONTENTION OF THE LD. AR TO SEND THE MATTER BACK TO THE TPO/AO FOR DECIDING THIS ISSUE I N CONFORMITY WITH THE DECISION YET TO BE RENDERED BY THE HONBLE HIGH COURT IN ITS OWN ITA NO.5120/DEL/2010 ITA NO.2441/DEL/2012 103 CASE, FOR WHICH HEARING IS STILL GOING ON. THIS CON TENTION, IN OUR CONSIDERED OPINION, IS DEVOID OF ANY MERIT. IT IS AXIOMATIC THAT THERE CAN BE NO DIRECTION TO FOLLOW A FORTHCOMING JUDGMENT WH ICH IS NOT IN EXISTENCE AT THE TIME OF GIVING DIRECTION. A DIREC TION CAN BE GIVEN BY A HIGHER AUTHORITY TO THE LOWER AUTHORITY TO FOLLOW O NLY SUCH A DECISION WHICH IS AVAILABLE FOR CONSIDERATION AT THE TIME OF GIVING DIRECTION BY THE HIGHER AUTHORITY. THERE CAN BE NO DIRECTION TO FOLL OW A DECISION, WHICH ITSELF HAS NOT YET SEEN THE LIGHT OF THE DAY AT THA T POINT OF TIME. PRESENTLY, WE HAVE THE BENEFIT OF THE JUDGMENT OF THE HONBLE DELHI HIGH COURT IN SONY ERICSSON (SUPRA), WHICH HAS ALSO DEALT WITH THE TREATMENT TO BE GIVEN IN THE CONTEXT OF A MANUFACTURER. THE DELHI B ENCH OF THE TRIBUNAL IN SOME DECISIONS INCLUDING PERFETTI VAN MELLE INDIA (SUPRA) HAS DEALT WITH THE MANNER OF COMPUTATION OF THE ALP OF THE AM P EXPENSES INCURRED BY MANUFACTURERS IN THE LIGHT OF THE JUDGM ENT IN THE CASE OF SONY ERICSSON (SUPRA). NO REASONS, EXCEPT THE PENDENCY OF THE MATTER IN THE HONBLE HIGH COURT IN ASSESSEES OWN CASE, HAVE BEEN GIVEN BY THE LD. AR TO CLAIM DEPARTURE FROM THE VIEW TAKEN BY T HE TRIBUNAL IN EARLIER ITA NO.5120/DEL/2010 ITA NO.2441/DEL/2012 104 CASES. WE, THEREFORE, TURN DOWN THE REQUEST OF THE LD. AR IN THIS REGARD. WITH THESE OBSERVATIONS, WE SEND THE MATTER BACK TO THE FILE OF TPO/AO FOR A FRESH DETERMINATION OF THE ALP OF THE AMP EXP ENSES IN ACCORDANCE WITH OUR ABOVE OBSERVATIONS. IN VIEW OF OUR DECISIO N IN RESTORING THE ISSUE OF CALCULATION OF ALP OF AMP EXPENSES TO THE TPO/AO, THE ASSESSEES APPEAL AGAINST THE ORDER PASSED BY THE A O/TPO U/S 154, ENHANCING THE AMOUNT OF TP ADJUSTMENT, WOULD AUTOMA TICALLY BE TAKEN CARE OF IN SUCH FRESH PROCEEDINGS. WE WANT TO CLARI FY THAT IN SUCH FRESH PROCEEDINGS, THE ASSESSEE WILL BE AT LIBERTY TO LEA D ANY FRESH EVIDENCE IN SUPPORT OF ITS CASE. E. MISCELLANEOUS GROUNDS I. EXCESS CONSUMPTION OF RAW MATERIALS 14.1. GROUND NOS. 7 TO 7.4 ARE AGAINST THE ADDITIO N OF RS.4.48 CRORE MADE BY THE AO ON ACCOUNT OF EXCESS CONSUMPTION OF RAW MATERIAL AND COMPONENTS. THE FACTS APROPOS THESE GROUNDS ARE TH AT THE ASSESSEE IS FOLLOWING JUST-IN-TIME SYSTEM FOR MANAGEMENT AND REORDER OF INVENTORY, IN WHICH INVENTORIES ARE ORDERED JUST IN TIME WHEN THEIR ITA NO.5120/DEL/2010 ITA NO.2441/DEL/2012 105 REQUIREMENT ARISES. THE MATERIAL SO REQUIRED IS DE LIVERED STRAIGHT TO THE SHOP FLOOR IN THE RELEVANT DEPARTMENT. AS A RESULT OF THIS, THOUGH THE PURCHASES ARE RECORDED AS PER ACTUAL BILLS UPON THE ARRIVAL OF GOODS IN THE PREMISES, THE INVENTORIES ARE PROCURED BY CONSIDERI NG THE STANDARD CONSUMPTION OF VARIOUS RAW MATERIALS FOR MANUFACTUR E OF VEHICLES. DUE TO THIS DIFFERENCE IN THE MAKING OF ENTRY IN THE BO OKS OF ACCOUNT AND ACTUAL RECEIPT OF GOODS DIRECTLY IN THE RELEVANT DE PARTMENT, WHICH, IN TURN, IS BASED ON STANDARD QUANTITY OF MATERIAL REQ UIRED FOR MANUFACTURE OF VEHICLES, SOMETIMES THERE ARISES DIFFERENCE BETW EEN THE PHYSICAL INVENTORY TAKEN AND THE INVENTORY AS PER BOOKS OF A CCOUNT AT THE END OF THE YEAR. SOME ITEMS OF STOCK MAY BE EVENTUALLY UN DER-CONSUMED WHILE OTHERS OVER-CONSUMED. THE NET EFFECT OF UNDER/OVER CONSUMPTION IS NOTHING, BUT, THE DEVIATION FROM THE STANDARD CONSU MPTION. DURING THE YEAR IN QUESTION, THE VARIATION BETWEEN PHYSICAL ST OCK AND STOCK REGISTER WAS RS.4.48 CRORE NEGATIVE, WHICH MEANS ITEMS WHERE STOCK AS PER STOCK REGISTER WAS MORE THAN PHYSICAL STOCK AND RS.2.86 C RORE POSITIVE I.E., ITEMS WHERE STOCK AS PER STOCK REGISTER WAS LESS TH AN THE PHYSICAL STOCK, ITA NO.5120/DEL/2010 ITA NO.2441/DEL/2012 106 LEAVING THE NET DIFFERENCE OF RS.1.62 CRORE. THE A O DISALLOWED RS.4.48 CRORE IGNORING THE EXCESS AMOUNT OF RS.2.86 CRORE. THE ASSESSEE IS AGGRIEVED AGAINST THIS ADDITION. 14.2. IT IS MANIFEST THAT THE NET DIFFERENCE OF RS.1.62 CRORE IS NOTHING, BUT, EXCESS CONSUMPTION OVER THE STANDARD CONSUMPTI ON. SUCH SHORTAGE OF RS.1.62 CRORE IS ONLY 0.018% OF TOTAL CONSUMPTIO N OF MATERIAL DEBITED TO THE PROFIT & LOSS ACCOUNT. IN VIEW OF THE FACT THAT THIS AMOUNT HAS ACTUALLY BEEN CONSUMED IN THE MANUFACTURING OF GOOD S, IT CANNOT CALL FOR ANY DISALLOWANCE. THERE MAY BE PRODUCTION EFFICIENC IES OR INEFFICIENCIES LEADING TO UNDER OR OVER CONSUMPTION OF INPUTS VIS-A-VIS STANDARD CONSUMPTION. SUCH UNDER OR OVER CONSUMPTION BECOME S A PART OF THE COST OF PRODUCTION. IN OUR CONSIDERED OPINION, THE RE CAN BE NO LOGIC IN DISALLOWING SUCH AMOUNT, WHICH IS NOTHING BUT EXCES S CONSUMPTION OF INPUTS. SIMILAR VIEW HAS BEEN TAKEN BY THE TRIBUNAL IN THE ASSESSEES OWN CASE FOR EARLIER ASSESSMENT YEARS INCLUDING THE IMMEDIATELY PRECEDING ASSESSMENT YEAR. THIS GROUND IS ALLOWED. ITA NO.5120/DEL/2010 ITA NO.2441/DEL/2012 107 II. DISALLOWANCE U/S 14A 15.1. THE NEXT GROUND IS DISALLOWANCE U/S 14A OF THE ACT AMOUNTING TO RS.10,44,83,860/-. THE ASSESSEE RECEIVED DIVIDEND INCOME OF RS.72.00 CRORE WHICH WAS CLAIMED AS EXEMPT U/SS 10(34) AND 1 0(35) OF THE ACT. THE AO INVOKED THE PROVISIONS OF SECTION 14A. APPL YING THE MANDATE OF RULE 8D, HE WORKED OUT THE AMOUNT DISALLOWABLE A T RS.10,44,83,860/. THIS DISALLOWANCE CONSISTS OF THREE AMOUNTS. FIRST IS RS.1.3 CRORE TOWARDS INTEREST. SECOND IS RS.4.6 CRORE, BEING % OF THE AVERAGE VALUE OF INVESTMENTS TOWARDS ADMINISTRATIVE EXPENSES. BY MISTAKE, ONCE AGAIN, THE AO INCLUDED A SUM OF RS.4.6 CRORE TOWARD S % OF ADMINISTRATIVE EXPENSES, THEREBY MAKING TOTAL OF DI SALLOWANCE AT RS.10.44 CRORE. THE ASSESSEE HAS ASSAILED THIS DISA LLOWANCE. 15.2. WE HAVE HEARD THE RIVAL SUBMISSIONS AND P ERUSED THE RELEVANT MATERIAL ON RECORD. IT IS OBSERVED THAT THE YEAR U NDER CONSIDERATION IS AY 2006-07. THE HONBLE JURISDICTIONAL HIGH COURT IN THE CASE OF MAXOPP INVESTMENTS LTD. VS. CIT (2012) 347 ITR 272 (DEL) HAS HELD THAT DISALLOWANCE U/S 14A CAN BE MADE AS PER RULE 8D ONL Y FROM ASSESSMENT ITA NO.5120/DEL/2010 ITA NO.2441/DEL/2012 108 YEAR 2008-09 AS RULE 8D IS PROSPECTIVE. IT HAS BEE N FURTHER HELD BY THEIR LORDSHIPS THAT FOR EARLIER YEARS, THE DISALLOWANCE SHOULD BE MADE AS PER REASONABLE AND ACCEPTABLE METHOD OF APPORTIONMENT. IN VIEW OF THE ABOVE DISCUSSION, IT BECOMES CLEAR THAT THE AOS DE CISION IN APPLYING RULE 8D FOR MAKING DISALLOWANCE U/S 14A OF THE ACT, CANNOT BE COUNTENANCED. IT IS NOTED THAT SIMILAR DISALLOWANCE WAS MADE FOR THE IMMEDIATELY PRECEDING YEAR. WHEN THE MATTER CAME UP FOR CONSIDERATION BEFORE THE TRIBUNAL, THE BENCH HELD THAT THE DISALL OWANCE U/S 14A CANNOT BE MADE AS PER RULE 8D AND THE QUESTION OF COMPUTA TION OF DISALLOWANCE U/S 14A HAS BEEN REMITTED TO THE AO FO R DOING IT AFRESH AS PER LAW. RESPECTFULLY FOLLOWING THE PRECEDENT, WE ALSO SET ASIDE THE IMPUGNED ORDER ON THIS SCORE AND SEND THE MATTER TO THE FILE OF AO FOR MAKING DISALLOWANCE U/S 14A, IN ACCORDANCE WITH THE VIEW TAKEN BY THE TRIBUNAL IN ITS ORDER FOR THE ASSESSMENT YEAR 2005- 06. III. DISALLOWANCE U/S 35DDA 16.1. THE NEXT GROUND IS AGAINST THE DISALLOWANC E OF RS.38,63,64,348/- MADE U/S 35DDA OF THE ACT. ITA NO.5120/DEL/2010 ITA NO.2441/DEL/2012 109 16.2. SUCCINCTLY, THE FACTS OF THIS GROUND ARE TH AT THE ASSESSEE CLAIMED DEDUCTION FOR A SUM OF RS.38.63 CRORE U/S 35DDA BEI NG THE AGGREGATE OF 1/5 TH OF PAYMENTS MADE TO ITS EMPLOYEES UNDER VR SCHEME D URING THE PREVIOUS YEAR RELEVANT TO THE ASSESSMENT YEAR 2002- 03 AND 1/5 TH OF THE PAYMENTS MADE TO EMPLOYEES UNDER VR SCHEME DURING T HE PERIOD RELEVANT TO THE ASSESSMENT YEAR 2004-05. THE AO MA DE DISALLOWANCE ON THE GROUND THAT THE VR SCHEME WAS NOT IN ACCORDANCE WITH RULE 2BA OF THE INCOME-TAX RULES, 1962. THE DISALLOWANCE HAS BE EN CHALLENGED THROUGH THIS GROUND. 16.3. AFTER CONSIDERING THE RIVAL SUBMISSIONS AND PERUSING THE RELEVANT MATERIAL ON RECORD, IT IS OBSERVED THAT SI MILAR ISSUE CAME UP FOR CONSIDERATION BEFORE THE TRIBUNAL IN ITS ORDER FOR THE AY 2004-05. AFTER MAKING A THOROUGH DISCUSSION ON THE ISSUE, THE TRIB UNAL HAS HELD THAT RULE 2BA IS RELEVANT ONLY FOR THE PURPOSE OF AVAILI NG EXEMPTION U/S 10 BY EMPLOYEES AND NOT FOR THE PURPOSE OF ALLOWING DE DUCTION TO THE EMPLOYER U/S 35DDA OF THE ACT. RESULTANTLY, THE DI SALLOWANCE MADE BY THE AO CAME TO BE KNOCKED DOWN BY THE TRIBUNAL. IN THE ABSENCE OF ANY ITA NO.5120/DEL/2010 ITA NO.2441/DEL/2012 110 DISTINGUISHING FACTOR HAVING BEEN POINTED OUT BY TH E LD. DR, RESPECTFULLY FOLLOWING THE PRECEDENT, WE DIRECT TO ALLOW DEDUCTI ON U/S 35DDA FOR A SUM OF RS.38.63 CRORE. IV. DISALLOWANCE OF CLUB MEMBERSHIP FEE 17.1. THE NEXT GROUND IS AGAINST THE DISALLOWANCE OF RS.1,79,509/- ON ACCOUNT OF EXPENDITURE INCURRED ON CLUB MEMBERSHIP. SHORN OF UNNECESSARY DETAILS, IT IS OBSERVED THAT THE ASSESS EE PAID THE SAID AMOUNT ON ACCOUNT OF CLUB MEMBERSHIP, WHICH THE AO DISALLO WED. THE ASSESSEE IS IN APPEAL BEFORE US. 17.2. IN OUR CONSIDERED OPINION, THIS ISSUE IS N O MORE RES INTEGRA IN VIEW OF THE JUDGMENT OF THE HONBLE SUPREME COURT I N CIT VS. UNITED GLASS MANUFACTURING COMPANY LTD. (SC) 2012-TIOL-102 -SC-IT IN WHICH IT HAS BEEN HELD THAT NO DISALLOWANCE CAN BE MADE FOR CLUB MEMBERSHIP IN RESPECT OF THE EMPLOYEES OF THE COMPA NY. SIMILAR VIEW HAS BEEN TAKEN BY THE TRIBUNAL IN THE ASSESSEES OW N CASE FOR THE EARLIER ASSESSMENT YEARS INCLUDING THE IMMEDIATELY PRECEDIN G YEAR. ITA NO.5120/DEL/2010 ITA NO.2441/DEL/2012 111 RESPECTFULLY, FOLLOWING THE ABOVE PRECEDENTS, WE OR DER FOR THE DELETION OF THIS ADDITION. V. DEPRECIATION ON SOFTWARE EXPENSES CAPITALIZED IN EARLIER YEARS 18.1. GROUND NO. 14 IS AGAINST NOT ALLOWING DEPRE CIATION AMOUNTING TO RS.9,26,418/- ON WRITTEN DOWN VALUE OF SOFTWARE EXP ENSES CAPITALIZED BY THE AO IN PRECEDING YEARS. THE FACTUAL MATRIX OF T HIS GROUND IS THAT THE ASSESSEE CLAIMED DEDUCTION FOR SOFTWARE EXPENSES IN CURRED IN EARLIER YEARS, WHICH WAS REFUSED BY THE AO, WHO HELD IT TO BE A CAPITAL EXPENDITURE. THE VIEW TAKEN BY THE AO WAS FINALLY U PHELD BY THE TRIBUNAL. IN THE FINAL COMPUTATION OF INCOME, THE AO REFUSED TO ALLOWED DEPRECIATION ON THE CAPITALIZED VALUE OF SOFTWARE E XPENSES. 18.2. IT IS OBVIOUS THAT ONCE THE AO HAS REFUSED TO GRANT DEDUCTION OF SOFTWARE EXPENSES CLAIMED BY THE ASSESSEE AND CAPIT ALIZED THE SAME BY TREATING IT AS CAPITAL ASSET, THEN DEPRECIATION ON THE WRITTEN DOWN VALUE OF SUCH SOFTWARE EXPENSES IS REQUIRED TO BE GRANTED AS PER LAW. SINCE NO SUCH DETAIL IS AVAILABLE ABOUT THE WRITTEN DOWN VAL UE OF SOFTWARE EXPENSES CAPITALIZED IN EARLIER YEARS, WE SET ASIDE THE IMPUGNED ORDER ITA NO.5120/DEL/2010 ITA NO.2441/DEL/2012 112 AND REMIT THE MATTER TO THE FILE OF AO FOR ALLOWING DEDUCTION IN RESPECT OF THE WRITTEN DOWN VALUE OF THE SOFTWARE EXPENSES CAPITALIZED IN EARLIER YEARS. VI. CHARGING OF STATUTORY INTEREST 19. NEXT GROUND IS AGAINST THE CHARGING OF INTERES T U/SS 234B, 234C AND 234D OF THE ACT. THIS GROUND IS CONSEQUENTIAL AND IS, ACCORDINGLY, ALLOWED EXCEPT THE CHARGING OF INTEREST U/S 234C. THE LD. AR ARGUED THAT THE AO COMPUTED INTEREST U/S 234C ON THE BASIS OF INCOME FINALLY DETERMINED AS AGAINST THE INCOME-TAX DUE ON RETURNE D INCOME. WE FIND FORCE IN THE ARGUMENTS PUT FORTH ON BEHALF OF THE A SSESSEE THAT COMPUTATION OF INTEREST U/S 234C FOR DEFERMENT OF A DVANCE TAX IS REQUIRED TO BE MADE ON THE BASIS OF TAX DUE ON THE RETURNED INCOME AS HAS BEEN ENSHRINED IN THE PROVISION ITSELF. WE, TH EREFORE, DIRECT THE AO TO VERIFY THIS ASPECT OF THE MATTER AND COMPUTE INT EREST U/S 234C AS PER LAW. 20. GROUND NO. 27, AGAINST THE INITIATION OF PENALT Y U/S 271(1)(C), IS PREMATURE AND, HENCE, DISMISSED. ITA NO.5120/DEL/2010 ITA NO.2441/DEL/2012 113 21. IN THE RESULT, THE MAIN APPEAL OF THE ASSESSEE IS PARTLY ALLOWED AND THE APPEAL AGAINST THE ORDER U/S 154 IS ALLOWED FOR STATISTICAL PURPOSES. THE ORDER PRONOUNCED IN THE OPEN COURT ON 24.08.201 5. SD/- SD/- [A.T. VARKEY] [R.S. SYAL] JUDICIAL MEMBER ACCOUNTANT MEMBER DATED, 24 TH AUGUST, 2015. DK COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT (A) 5. DR, ITAT AR, ITAT, NEW DELHI.