M/s Michelin India Tyres Pvt. Ltd., New Delhi V. DCIT, New Delhi

ITA 414/DEL/2011

• Counselvise Citation: [2019] 118 COUNSELVISE.COM (IT) 6963 (ITAT-DELHI)
• Duration Of Justice: 7 year(s) 11 month(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 08-01-2019
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: I2
• Next Hearing Date: 10-07-2017
• Assessment Year: 2006-2007
• Appeal Filed On: 24-01-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Transfer pricing; Business expenditure; Opportunity of being heard; International transaction; Question of law; Bad and doubtful debts; Revenue expenditure; Capital expenditure
• Section: 92C; 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH : I-2 : NEW DELHI BEFORE SHRI BHAVNESH SAINI, JUDICIAL MEMBER AND SHRI R.K. PANDA, ACCOUNTANT MEMBER ITA NO.414/DEL/2011 ASSESSMENT YEAR: 2006-07 MICHELIN INDIA TYRES PVT. LTD., UNIT 401-404, 4 TH FLOOR, COPIA CORPORATE SUITES, JASOLA DISTRICT CENTRE, NEW DELHI. PAN: AADCM8454G VS. DCIT, CIRCLE-6(1), NEW DELHI. (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI NAGESHWAR RAO, ADVOCATE REVENUE BY : SHRI SARABJEET SINGH, SR.DR DATE OF HEARING : 05.12.2018 DATE OF PRONOUNCEMENT : 08.01.2019 ORDER PER R.K. PANDA, AM: THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST THE ORDER DATED 26 TH OCTOBER, 2010 PASSED BY THE ASSESSING OFFICER U/S 143(3) REA D WITH SECTION 144C OF THE IT ACT RELATING TO ASSESSMENT YEAR 2006-07. 2. GROUNDS OF APPEAL NOS.1,2,3 AND 16 BEING GENERAL IN NATURE ARE DISMISSED. ITA NO.414/DEL/2011 2 3. GROUNDS OF APPEAL NO.4,5,6 AND 12 WHICH RELATE T O DISALLOWANCE OF TECHNICAL FEE PAID READ AS UNDER:- 4. THE HONBLE DRP/AO ERRONEOUSLY ASSUMED THAT THE PAYMENT FOR TECHNICAL SERVICES FAILS TO SATISFY THE COMMENSURATE WITH IN COME TEST. THE HONBLE DRP/AO HAS ERRED IN LAW AND IN FACTS OF THE CASE BY ASSUMI NG THAT SINCE THERE IS NO INCOME ARISING TO THE APPELLANT FROM THE PAYMENT MADE FOR TECHNICAL SERVICES, IT IS NOT COMMENSURATE WITH THE INCOME. 5. WITHOUT PREJUDICE TO THE ABOVE GROUNDS, THE HON BLE DRP/AO HAS ERRED IN LAW AND FACTS OF THE CASE IN HOLDING THE ARMS LENG TH PRICE OF THE TRANSACTION INVOLVING TECHNICAL ASSISTANCE PROVIDED TO THE APPELLANT BY I TS AE AS NIL. THE TPO CAN ONLY DISALLOW THE PROFIT MARGIN CHARGED BY THE AE, BUT T HE COSTS INVOLVED HAVE TO BE ALLOWED. 6. WITHOUT PREJUDICE TO THE ABOVE GROUNDS, THE HON BLE DRP/AO HAS ERRED IN THE USE OF COMPARABLE UNCONTROLLED PRICE (CUP) ME THOD FOR THE BENCHMARKING OF THE TRANSACTION INVOLVING TECHNICAL ASSISTANCE PROV IDED TO THE APPELLANT BY ITS AE, AND THE USE OF SUCH CUP WAS WITHOUT ANY COMPARABLE TRANSACTIONS WHATSOEVER. 12. THE HONBLE DRP/AO HAS ERRED ON FACTS AND CIRCU MSTANCES IN FAILING TO APPRECIATE THAT THE AVAILING OF TECHNICAL ASSISTANC E SERVICES FROM AES SHOULD NOT FALL UNDER THE PURVIEW OF TRANSFER PRICING SINCE THE PRI CE AT WHICH THE IMPUGNED TRANSACTION TOOK PLACE WAS COMMERCIALLY NEGOTIATED WITH THE CONSENT OF THE JOINT- VENTURE PARTNER. 4. FACTS OF THE CASE, IN BRIEF, ARE THAT THE ASSESS EE FILED ITS RETURN OF INCOME ON 30.11.2006 DECLARING LOSS OF RS.24,18,39,870/-. A REFERENCE WAS MADE BY THE ASSESSING OFFICER TO THE TPO FOR DETERMINATION OF T HE ALP OF THE INTERNATIONAL TRANSACTION U/S 92C(3) OF THE IT ACT. IN RESPONSE TO THE NOTICE ISSUED BY THE TPO, THE ASSESSEE FILED VARIOUS DETAILS FROM TIME TO TIME AS REQUIRED BY THE TPO. DURING THE COURSE OF TP PROCEEDINGS, THE TPO OBSERVED THAT THE ASSESSEE HAS UNDERTAKEN THE FOLLOWING INTERNATIONAL TRANSACTIONS:- ITA NO.414/DEL/2011 3 S.NO. TYPE OF INTERNATIONAL TRANSACTION VALUE 1 IMPORT OF FINISHED GOODS FOR RESALE IN INDIA 245, 291,403 2. AVAILING OF TECHNICAL ASSISTANCE FROM AES 78,291 ,144 3. REIMBURSEMENT OF EXPENSES BY AE 2,893,345 4. ADVANCE PAID AGAINST MACHINERY 164,062,049 4.1 HE OBSERVED THAT THE ASSESSEE HAS PAID FEE FOR TECHNICAL SERVICES ON A WHOLE FOR THE MANUFACTURING OPERATIONS OF THE ASSESSEE. HOWEV ER, THERE IS NO MANUFACTURING ACTIVITY UNDERTAKEN DURING THIS YEAR. ON BEING QUE STIONED BY THE TPO, IT WAS ARGUED THAT SINCE THE JV BETWEEN APOLLO TYRES AND THE ASSE SSEE CONSTITUTED 49% STAKE IN FAVOUR OF APOLLO TYRES, IT WAS A KEY PARTICIPANT IN DECIDING THE PRICE FOR THE TECHNICAL SERVICES AVAILED FROM MICHELIN GROUP ENTITIES WORLD WIDE. HENCE THE PRICE NEGOTIATED WITH THE OVERSEAS AES WAS A COMMERCIALLY NEGOTIATED PRICE AND CAN BE CONSIDERED AT ARMS LENGTH. THE TPO OBSERVED THAT THE MAJORITY SH ARES IN THIS CASE WAS WITH THE ASSESSEE AND IT WAS ALSO OPEN FOR IT TO NEGOTIATE T HE TERMS AND PAYMENTS THEREOF. HE FURTHER OBSERVED THAT THE SHELVING OF THE MANUFACTU RING FUNCTIONS HAS BEEN MOSTLY ATTRIBUTED TO THE TERMINATION OF THE JV AGREEMENT W ITH APOLLO TYRES. HE OBSERVED THAT THE JV AGREEMENT WITH APOLLO TYRES WAS ENTERED INTO ON 17 TH SEPTEMBER, 2003 AND IT WAS TERMINATED UNDER AN AGREEMENT DATED 30 TH SEPTEMBER, 2005. HE FURTHER OBSERVED THAT EVEN IN THE PREVIOUS YEAR ENDED 31 ST MARCH, 2005, THE MANUFACTURING OPERATIONS OF THE ASSESSEE WERE HIVED OFF FOLLOWING DISAGREEMENTS BETWEEN APOLLO TYRES AND MICHELIN GROUP. THEREFORE, IT IS AMPLY C LEAR THAT THE ASSESSEE DID NOT HAVE ANY MANUFACTURING OPERATIONS IN THE PRECEDING ASSES SMENT YEAR ALSO. HE FURTHER NOTED THAT EVEN IN THE PREVIOUS ASSESSMENT YEAR, THE ASSE SSEE HAS MADE PAYMENTS FOR ITA NO.414/DEL/2011 4 TECHNICAL ASSISTANCE AND HAD NO MANUFACTURING OPERA TIONS. ACCORDING TO HIM, UNDER UNCONTROLLED CIRCUMSTANCES AND BY APPLICATION OF CU P METHOD, THERE IS NO ARMS LENGTH PRICE FOR ANY PAYMENT WHICH DOES NOT HAVE TH E CORRESPONDING BENEFIT. IN THE INSTANT CASE, THE ASSESSEE IS PERPETUALLY PAYING TE CHNICAL ASSISTANCE FEE FOR WHICH NO CORRESPONDING BENEFIT ARISES TO IT. SINCE THE PAYM ENT OF TECHNICAL SERVICE FEE WAS ARGUED TO BE PAID IN ACCORDANCE WITH AN AGREEMENT E NTERED INTO WITH THE AE, THE ASSESSING OFFICER PROCEEDED TO IDENTIFY WHETHER TRA NSFER OF THE INTANGIBLE HAS ACTUALLY TAKEN PLACE AND THEN ONLY TO ASCERTAIN WHETHER THE INCOME WITH RESPECT TO A TRANSFER IS COMMENSURATE WITH THE INCOME ATTRIBUTABLE TO THE IN TANGIBLE. ACCORDING TO HIM, THE FORMAL AGREEMENT BETWEEN THE ASSESSEE AND THE AE CA NNOT BE A BASIS FOR DETERMINING THE ALP OF THE TRANSACTIONS. ACCORDING TO HIM, IN THE TP PARLANCE, THE AGREEMENTS BETWEEN THE ASSOCIATES MAY BE A TOOL TO DETERMINE T HE QUANTUM AND METHODOLOGY OF PAYMENT, BUT, THE SAME DOES NOT HOLD SACROSANCT ON GROUNDS OF ECONOMIC REALITY. RELYING ON VARIOUS DECISIONS, HE HELD THAT THE PAYM ENT OF TECHNICAL SERVICES CANNOT BE JUSTIFIED SOLELY ON THE BASIS OF AGREEMENT BETWEEN THE ASSESSEE AND THE AE AND THE REAL TEST LIES IN COMMENSURATE ECONOMIC BENEFITS. HE OBSERVED THAT THE PAYMENT OF TECHNICAL KNOW-HOW SERVICE MUST SATISFY COMMENSUR ATE WITH INCOME TEST. ACCORDING TO THE TPO AS PER VARIOUS JUDICIAL PRECED ENTS IN THE COMMENSURATE WITH INCOME THE PROFIT EARNED BY THE ENTERPRISE OVER AN D ABOVE THE INDUSTRY AVERAGE CAN BE CONSIDERED AS INCOME ATTRIBUTABLE TO THE PAYMENT OF TECHNICAL SERVICE FEES. HOWEVER, IN THE INSTANT CASE, THERE IS NO INCOME SINCE THE A SSESSEE HAS ITSELF ADMITTED THAT THIS PAYMENT WAS MADE FOR MANUFACTURING FUNCTION OF THE ASSESSEE WHICH DID NOT TAKE ITA NO.414/DEL/2011 5 PLACE. SINCE THERE WAS NO MANUFACTURING ACTIVITY E VEN IN THE PREVIOUS ASSESSMENT YEAR, THEREFORE, HE HELD THAT THE ALP OF SUCH PAYME NT IS NIL BY APPLICATION OF CUP METHOD. 5. BASED ON THE ORDER OF THE TPO, THE ASSESSING OFF ICER CONFRONTED THE ASSESSEE TO EXPLAIN AS TO WHY THE TECHNICAL FEES PAID BY THE AS SESSEE SHOULD NOT BE AMORTIZED. REJECTING THE VARIOUS EXPLANATION GIVEN BY THE ASSE SSEE, THE ASSESSING OFFICER HELD THAT WHEN THE ASSESSEE WAS PROCURING TYRES FROM ITS PARENT/ASSOCIATED COMPANIES AND WAS SELLING IN INDIA, IT WANTED TO SET UP MANUFACTU RING FACILITY WHICH WAS ALTOGETHER A DIFFERENT VENTURE WHICH THE ASSESSEE WAS SEEKING TO ESTABLISH AS A JV WITH APOLLO GROUP. THE JV WOULD HAVE TAKEN THE SHAPE OF A DIST INCT ENTERPRISES DIFFERENT FROM THE ASSESSEE. SINCE THE VENTURE WAS ADMITTEDLY ABORTED AND SINCE THERE WAS NO SIGN OF ITS REVIVAL AND NO EFFORT FOR THE REVIVAL OF THE JOINT VENTURE OR FOR SETTING UP OF THE FACILITY OF ITS OWN IS APPARENT, THEREFORE, THIS BUSINESS CA N SAFELY BE TREATED AS ABORTED. FURTHER, THE ASSESSEE ITSELF IS DISALLOWING A PART OF THE EXPENSES ON THE SAME PROJECT. THEREFORE, CLAIMING THE OTHER PART IS WITHOUT ANY C OGENT REASONS. HE, THEREFORE, HELD THAT THE CLAIM OF RS.7,82,91,144/- IS NOT AN ALLOWA BLE EXPENDITURE. 6. THE ASSESSEE APPROACHED THE DRP. HOWEVER, THE D RP ALSO REJECTED THE CONTENTION OF THE ASSESSEE. THE ASSESSING OFFICER ACCORDINGLY MADE THE DISALLOWANCE OF RS.7,82,91,144/- IN THE FINAL ORDER. AGGRIEVED WITH SUCH ORDER OF THE ASSESSING OFFICER/TPO, THE ASSESSEE IS IN APPEAL BEFORE THE T RIBUNAL. ITA NO.414/DEL/2011 6 7. THE LD. COUNSEL FOR THE ASSESSEE STRONGLY CHALLE NGED THE ORDER OF THE A.O./TPO/DRP. HE SUBMITTED THAT THE TPO GROSSLY ERR ED IN REJECTING THE BENCHMARKING OF THE TECHNICAL FEES PAID TO OVERSEAS AES BY CONSIDERING THE OVERSEAS AE AS TESTED PARTY AND APPLYING TNMM. THE DRP ALSO ROUTINELY UPHELD THE TPOS DETERMINATION OF ALP FOR TECHNICAL FEES AS NIL ON T HE PRETEXT OF APPLYING CUP AS THE MOST APPROPRIATE METHOD BY PURPORTED APPLICATION OF FANCIFUL AND ILLEGAL COMMENSURATE WITH INCOME TEST AND COMPLETELY FAIL ED TO APPRECIATE THE INVALIDITY OF SUCH APPROACH. HE SUBMITTED THAT ABSENCE OF DIRECT INCOME ATTRIBUTABLE TO SUCH EXPENDITURE WOULD HARDLY BE TEST FOR DETERMINING IT S ALP UNDER CHAPTER-X. HE SUBMITTED THAT IT IS THE SETTLED LAW THAT PROVISION S OF CHAPTER-X CAN ONLY BE USED TO SUBSTITUTE ALP BY APPLYING ONE OF THE PRESCRIBED M ETHODS IN LAW. THE TPO, IN THE INSTANT CASE, PROCEEDED BY COMPLETELY IGNORING THE NATURE OF SERVICE CONTEMPLATED UNDER THE TECHNICAL SERVICES AGREEMENT. THE LOWER AUTHORITIES HAVE DISCARDED THE VARIOUS CASE LAWS CITED BY THE ASSESSEE IN SUPPORT OF THE ASSESSEES CASE. THEIR APPROACH IS NOT ONLY ARBITRARY AND INCONSISTENT WIT H PROVISIONS UNDER CHAPTER-X, BUT IS ALSO CONTRARY TO SETTLED PRINCIPLES OF TAXATION AS EVERY EXPENDITURE NEED NOT NECESSARILY RESULT IN SEPARATE STREAM OF INCOME. HE ACCORDINGL Y, SUBMITTED THAT WITHOUT CONSIDERING THE SUBMISSIONS MADE BY THE ASSESSEE, T HE LOWER AUTHORITIES COULD NOT HAVE DISALLOWED THE EXPENDITURE CLAIMED BY THE ASSE SSEE. 8. THE LD. DR, ON THE OTHER HAND, STRONGLY SUPPORTE D THE ORDER OF THE TPO/A.O. HE SUBMITTED THAT THE EXPENDITURE WAS INCURRED FOR AN ABORTED MANUFACTURING PROCESS ITA NO.414/DEL/2011 7 AND SINCE NO BENEFIT OR FUTURE BENEFIT WAS ACCRUED TO THE ASSESSEE, THEREFORE, SUCH EXPENDITURE IS IN THE NATURE OF PRE-OPERATIVE EXPEN DITURE. HE ACCORDINGLY, SUBMITTED THAT THE ORDER OF THE A.O./TPO/DRP SHOULD BE UPHELD . 9. WE HAVE CONSIDERED THE RIVAL ARGUMENTS MADE BY B OTH THE SIDES AND PERUSED THE ORDERS OF THE AUTHORITIES BELOW. WE FIND THE ASSES SEE IN THE INSTANT CASE HAD INCURRED AN AMOUNT OF RS.11,60,89,064/- IN RESPECT OF AN ABO RTED PROJECT OF SETTING UP OF A MANUFACTURING FACILITY IN INDIA. THE ABOVE AMOUNT CONSISTED OF AN AMOUNT OF RS.7,82,91,144/- TOWARDS TECHNICAL FEES PAID WHICH THE ASSESSEE CLAIMED AS REVENUE EXPENDITURE AGAINST ITS INCOME FROM TRADING OF TYRE S. WE FIND THE ASSESSING OFFICER, APPLYING THE CUP METHOD, DETERMINED THE ARMS LENGT H PRICE AT NIL AND DISALLOWED THE SAME ON THE GROUND THAT THE PAYMENT OF TECHNICAL KN OW-HOW SERVICE DOES NOT SATISFY COMMENSURATE WITH INCOME TEST. THERE IS NO INCOM E SINCE THE ASSESSEE HAS ITSELF COMMENTED THAT THIS PAYMENT WAS MADE FOR MANUFACTUR ING FUNCTION OF THE ASSESSEE WHICH DID NOT TAKE PLACE. THE ASSESSING OFFICER FU RTHER HELD THAT IT IS IN THE NATURE OF CAPITAL EXPENDITURE AND ACCORDINGLY, DISALLOWED THE SAME. 10. WE FIND IDENTICAL ISSUE HAD COME UP IN ASSESSEE S OWN CASE IN THE IMMEDIATELY PRECEDING ASSESSMENT YEAR AND THE TRIBUNAL IN ITA N O. 3355/DEL/2011, ORDER DATED 30.10.2015, HAS DISCUSSED THE ISSUE BY OBSERVING AS UNDER:- 11. A.O. OBSERVED THAT THE TECHNICAL FEE PAID BY THE ASSESSEE TOWARDS RECEIPT OF CERTAIN RIGHTS TO USE TECHNOLOGY BY THE ASSESSEE FO R THE MANUFACTURE OF TYRES WAS EXPENDITURE WHICH WAS CLEARLY IN THE NATURE OF CAPI TAL EXPENDITURE AND RELIED UPON THE JUDGEMENTS CITED AS KCP LTD. VS CIT 242 ITR 659 (S.C.) AND CITS VS REINZ TALBROS PVT. LTD. 252 ITR 637 (DEL.). ITA NO.414/DEL/2011 8 12. LD. CIT(A) WHILE CONFIRMING THE ORDER PASSED BY A.O., OBSERVED IN PARA 5.2 OF THE IMPUGNED ORDER TO THE EFFECT THAT THE APPELLAN T ITSELF HAS SUBMITTED THAT THESE EXPENSES WERE INCURRED WITH A VIEW TO ESTABLISH A M ANUFACTURING FACILITY AS A PART OF ITS ON- GOING BUSINESS STRATEGY AND ACHIEVE BACK WARD INTEGRATION. HOWEVER, THE PLAN FOR WHICH THE FUNDS AMOUNTING TO RS.1,42,04,92 6/- WERE EXPENDED BY THE APPELLANT I.E. AVAILING THE TECHNICAL SERVICES TO A SSESS THE FEASIBILITY, WAS EVENTUALLY HIVED-OFF / DISCONTINUED. THUS, SUCH EXPENDITURE C AN BE APTLY SUMMED UP AS 'INFRUCTUOUS EXPENDITURE' INCURRED FOR A PROJECT WH ICH WAS ULTIMATELY SCRAPPED. JUDICIAL PRECEDENTS ON THIS ISSUE HAVE HELD SUCH EX PENSES AS NOT ALLOWABLE BEING IN THE NATURE OF CAPITAL EXPENDITURE AND RELIED UPON T HE JUDGEMENT CITED AS TRIVENI ENGINEERING WORKS LTD. VS CIT 232 ITR 639 (DEL.), 1 00 TAXMAN 90 (DEL. H.C.). 13. LD. A.R. BY RELYING ON THE JUDGEMENT OF HONBLE JURISDICTIONAL HIGH COURT CITED AS INDO RAMA SYNTHETICS (I) LTD. VS CIT 185 T AXMAN 277 (DEL.) CONTENDED THAT IN THE IDENTICAL CIRCUMSTANCES, HON'BLE JURISD ICTIONAL HIGH COURT HAS DISCUSSED THE CASE OF TRIVENI ENGINEERING WORKS LTD. (SUPRA) AND CIT VS MODI INDUSTRIES LTD. (1993) 200 ITR 341 AND CAME TO THE FOLLOWING C ONCLUSION: IN THE CASE AT HAND THE AMOUNT SPENT ON THE PROJEC T REPORTS WAS NOT FOR THE PURPOSE OF FACILITATING THE ASSESSEE'S EXISTING TRADING OPERATIONS OR ENABLING MANAGEMENT AND CONDUCT OF THE ASSESSEE'S B USINESS TO BE CARRIED ON MORE EFFICIENTLY OR MORE PROFITABLY WHIL E LEAVING THE FIXED CAPITAL UNTOUCHED. IF ONLY THE PROJECT REPORTS HAD BEEN SUCCESSFULLY ACCEPTED AND PUT INTO IMPLEMENTATION, THE ASSESSEE WOULD HAVE GONE INTO MANUFACTURING OF A NEW PRODUCT WHICH WOULD HAV E CERTAINLY REQUIRED INVESTMENT OF FRESH CAPITAL AND COMING INT O EXISTENCE OF ADDITIONAL FIXED ASSETS. 14. NOW. COMING TO THE CASE AT HAND, THE ASSESSEE C LAIMED TO HAVE SPENT AN AMOUNT OF RS.1,42,04,926/- TOWARDS LEGAL FEE UNDER THE HEA D PROFESSIONAL NEW DELHI LEGAL EXPENSES, WHICH HAVE BEEN TREATED AS CAPITAL EXPEN DITURE AND ADDED TO THE INCOME OF THE ASSESSEE BY THE A.O. AS WELL AS LD. CIT(A). 15. LD. CIT(A) BY RELYING UPON THE DECISION OF HON' BLE HIGH COURT IN THE CASE OF TRIVENI ENGINEERING WORKS PVT. LTD. (SUPRA) CONFIRM ED THE ORDER PASSED Y A.O. MAKING ADDITION OF RS.1,42,04,926/- BEING IN THE NA TURE OF CAPITAL EXPENDITURE ON THE SOLE GROUND THAT WHEN THE SAID AMOUNT WAS EXPEN DED BY THE APPELLANT FOR AVAILING THE TECHNICAL SERVICES TO ASSESS THE FEASI BILITY OF THE PROJECT WAS EVENTUALLY HIVED OFF / DISCOUNTED SUCH EXPENDITURE ARE TO BE T REATED AS INFRUCTUOUS EXPENDITURE AND AS SUCH ARE IN THE NATURE OF CAPITAL EXPENDITUR E. 16. HOWEVER, THE HON'BLE JURISDICTIONAL HIGH COURT IN THE CASE OF INDO RAMA SYNTHETICS (I) LTD. (SUPRA) HAS MADE FINE DISTINCTI ON IN THE CAPITAL AND REVENUE EXPENDITURE IN PARA 10 OF THE JUDGEMENT REPRODUCED IN THE PRECEDING PARA OF THIS ORDER BY OBSERVING THAT IF THE EXPENDITURE IS INCUR RED FOR STARTING OF A NEW BUSINESS NOT CARRIED OUT BY THE ASSESSEE EARLIER, THEN SUCH EXPENDITURE IS HELD TO BE OF CAPITAL ITA NO.414/DEL/2011 9 IN NATURE. HOWEVER, IF THE EXPENDITURE INCURRED IS IN RESPECT OF THE SAME BUSINESS WHICH IS ALREADY CARRIED OUT BY THE ASSESSEE EVEN I F FOR THE EXPANSION OF BUSINESS, TO START A NEW UNIT WHICH IS THE SAME AS EARLIER BU SINESS AND THERE IS UNITY OF CONTROL OF CREATING FUNDS THEN SUCH EXPENDITURE IS TO BE TR EATED AS BUSINESS EXPENDITURE. NO DOUBT, HON'BLE JURISDICTIONAL HIGH COURT IN THE CAS E OF TRIVENI ENGINEERING WORKS LTD. (SUPRA) OBSERVED THAT :- AFTER TAKING NOTE OF VARIOUS JUDGMENTS OF THE SUPR EME COURT OBSERVED THAT TEST TO DETERMINE AN EXPENDITURE TO BE CAPITAL OR REVENUE IS NOT STRAIGHT. HOWEVER, THE TEST OF 'ENDURING BENEFIT IS LARGELY ACCEPTED AND APPLIED BY THE COURTS. FURTHER, IF THE EXPENDITURE IS INCURRED WITH A VIEW TO BRINGING AN ASSET OR ADVANTAGE INTO EXISTENCE, I T IS TO BE TREATED AS CAPITAL EXPENDITURE AND WHILE DOING SO, IT IS NOT N ECESSARY THAT SUCH EXPENDITURE SHOULD HAVE THAT RESULT. 17. BUT IN THE INSTANTS CASE, THE EXPENDITURE OF RS .1,42,02,926/- EXPENDED ON LEGAL FEES BY THE ASSESSEE, CANNOT BE TREATED AS CAPITAL EXPENDITURE FOR TWO REASONS ONE: THATS THE EXPENSES WERE INCURRED WITH A VIEW TO ES TABLISH MANUFACTURING FACILITIES AS A PART OF ONGOING BUSINESS STRATEGY AND TO ACHIE VE BACKWARD INTEGRATION, EVEN THOUGH, THE PLANT FOR WHICH THE FUNDS AMOUNTING TO RS.1,432,02,926/- WERE EXPENDED BY THE APPELLANT I.E. FOR AVAILING TECHNIC AL SERVICES TO ASSESS THE FEASIBILITY WAS EVENTUALLY HYPED OFF / DISCONTINUED AND THE SAME ARE TO BE TREATED AS REVENUE EXPENDITURE IN VIEW OF THE LAW LAID DOWN BY HON'BLE JURISDICTIONAL HIGH COURT IN THE CASE CITED AS INDO RAMA SYNTHETICS (I) LTD (SUPRA) AND AS SUCH, THE SAID EXPENDITURE ON ACCOUNT OF TECHNICAL FEE CANNOT BE T REATED AS CAPITAL EXPENDITURE. 11. IN VIEW OF THE DECISION OF THE TRIBUNAL IN ASSE SSEES OWN CASE IN THE IMMEDIATELY PRECEDING ASSESSMENT YEAR, WE ARE OF TH E CONSIDERED OPINION THAT THE A.O./TPO ARE NOT JUSTIFIED IN DENYING THE SAME AS R EVENUE EXPENDITURE IN NATURE. FURTHER, WE FIND MERIT IN THE ARGUMENT OF THE LD. C OUNSEL FOR THE ASSESSEE THAT ABSENCE OF DIRECT INCOME ATTRIBUTABLE TO SUCH EXPENDITURE W OULD HARDLY BE A TEST FOR DETERMINING ITS ALP UNDER CHAPTER-X. IN VIEW OF TH E ABOVE, THE GROUNDS RAISED BY THE ASSESSEE ARE ALLOWED. 12. THE GROUNDS OF APPEAL NOS.7 TO 11 BY THE ASSESS EE READ AS UNDER:- ITA NO.414/DEL/2011 10 7. THE HONBLE DRP/AO HAS ERRED IN REJECTING THE M OST APPROPRIATE METHOD ADOPTED BY THE APPELLANT TO DETERMINE THE AR MS LENGTH PRICE FOR THE TRANSACTION PERTAINING TO IMPORT OF GOODS FOR RESAL E (TRADING ACTIVITIES). 8. THE HONBLE DRP/AO HAS ADOPTED A FLAWED APPROACH BY USING SINGLE YEAR DATA AS AGAINST THE MULTIPLE YEAR DATA USED BY THE APPELLANT, TO COMPUTE THE ALP OF THE INTERNATIONAL TRANSACTION OF THE APPELLA NT USING TNMM METHOD. 9. THE HONBLE DRP/AO ERRED IN LAW BY NOT DIRECTING TPO TO APPLY THE PROVISO TO SECTION 92C OF THE ACT AND TO ALLOW THE APPELLANT THE BENEFIT OF UPWARD VARIATION OF 5 PERCENT IN DETERMINING THE AR MS LENGTH PRICE. 10. WITHOUT PREJUDICE TO GROUND 7, THE DRP/AO HAS E RRED IN THE COMPUTATION OF MARGINS USING THE TRANSACTIONAL NET MARGIN METHOD AND CONFIRMING THE ERRED CALCULATION MADE BY TPO. THE T PO HAS CALCULATED THE MARGINS USING THE CAPITALINE AND PROWESS DATABASES TO ARRIVE AT A MEAN MARGIN OF 8.02%. HOWEVER, THE APPELLANTS CALCULATION BASED O N THE ANNUAL REPORTS OF THE COMPARABLES GIVES A MEAN MARGIN OF 7.12%. 11. WITHOUT PREJUDICE THAT TNMM IS NOT THE MOST APP ROPRIATE METHOD TO BENCHMARK THE TRADING TRANSACTION THE DRP/AO/TPO HA VE ERRED IN NOT UNDERTAKING ADJUSTMENTS FOR DIFFERENCES IN THE COST BASE OF THE ASSESSEE VIS-A-VIS THE COMPARABLE COMPANIES. 13. FACTS OF THE CASE, IN BRIEF, ARE THAT THE ASSES SEE IN THE INSTANT CASE HAS APPLIED RESALE PRICE METHOD (RPM) ON PURCHASE OF GOODS. TH E TPO OBSERVED THAT MOST OF THE COMPARABLE COMPANIES TAKEN BY THE ASSESSEE ARE NOT INTO TRADING. HE OBSERVED FROM THE PROWESS DATABASE THAT THE PERCENTAGE OF TR ADING SALES OF ALL COMPANIES WAS BELOW 10% EXCEPT INDIA TYRE & RUBBER WHOSE TRADING SALES ARE 100%. SINCE THE ASSESSEE HAS SELECTED COMPANIES FROM THE SAME INDUS TRY, THEREFORE, IN ORDER TO BRING IN CLOSER COMPARABILITY, THE TPO APPLIED TNMM. THE DR P UPHELD THE ACTION OF THE ITA NO.414/DEL/2011 11 A.O./TPO IN CONSIDERING THE TNMM AS THE MOST APPROP RIATE METHOD AS AGAINST RPM SELECTED BY THE ASSESSEE. 13.1 THE LD. COUNSEL FOR THE ASSESSEE, REFERRING TO THE ORDER OF THE TRIBUNAL FOR A.Y. 2003-04, SUBMITTED THAT IDENTICAL ISSUE WAS DECIDED BY THE TRIBUNAL IN ASSESSEES OWN CASE AND IT WAS HELD THAT THE CIT(A) WAS FULLY JUST IFIED IN DIRECTING THE A.O/TPO TO ADOPT THE RESALE PRICE METHOD AS THE MOST APPROPRIA TE METHOD INSTEAD OF TNMM APPLIED BY THEM. HE SUBMITTED THAT THERE IS NO CHA NGE IN THE BUSINESS. THEREFORE, IN ABSENCE OF ANY CONTRARY MATERIAL BROUGHT BY THE A.O ./TPO/DRP, THE RPM SHOULD BE ACCEPTED. 14. THE LD. DR, ON THE OTHER HAND, HEAVILY RELIED O N THE ORDER OF THE TPO. HE SUBMITTED THAT THE ASSESSEE IN THE INSTANT CASE HAS DEBITED SUBSTANTIAL EXPENSES IN THE P&L ACCOUNT AND NOT IN THE TRADING ACCOUNT, THEREFO RE, THE ALP OF THE INTERNATIONAL TRANSACTION CANNOT BE DETERMINED AND, THEREFORE, IT IS NOT PROPER TO USE RPM. 14.1 THE LD. COUNSEL FOR THE ASSESSEE, IN HIS REJOI NDER, SUBMITTED THAT THE DRP, WHILE DECIDING THE ISSUE AT PARA 4 OF THE ORDER, HAS NOT GIVEN ANY CLEAR-CUT FINDING. FURTHER, THE TPO IN THE SUBSEQUENT ASSESSMENT YEAR HAS FOLLO WED RPM. HE ACCORDINGLY, SUBMITTED THAT THE ORDER OF THE A.O./TPO ADOPTING T NMM AS THE MOST APPROPRIATE METHOD SHOULD BE SET ASIDE AND THE RPM FOLLOWED BY THE ASSESSEE SHOULD BE ALLOWED. 15. WE HAVE CONSIDERED THE RIVAL ARGUMENTS MADE BY BOTH THE SIDES. WE FIND THE ONLY ISSUE TO BE DECIDED IN THE IMPUGNED GROUNDS IS REGARDING THE MOST APPROPRIATE METHOD I.E., RPM FOLLOWED BY THE ASSESSEE OR TNMM A DOPTED BY THE A.O/TPO/DRP. ITA NO.414/DEL/2011 12 WE FIND IDENTICAL ISSUE HAD COME UP BEFORE THE TRIB UNAL IN ASSESSEES OWN CASE FOR ASSESSMENT YEAR 2003-04. WE FIND THE TRIBUNAL IN I TA NO.1874/DEL/2011, ORDER DATED 10 TH JANUARY, 2018 HAS DECIDED THE ISSUE IN FAVOUR OF T HE ASSESSEE BY OBSERVING AS UNDER:- 8. WE HAVE CONSIDERED THE SUBMISSIONS OF BOTH THE PARTIES AND CAREFULLY GONE THROUGH THE MATERIAL AVAILABLE ON THE RECORD. IN TH E PRESENT CASE, IT IS AN ADMITTED FACT THAT THE TPO HAS ACCEPTED THE RPM AS THE MOST APPROPRIATE METHOD FOR THE ASSESSMENTS 2005-06, 2008-09 AND 2009-10, WHICH IS EVIDENT FROM THE OBSERVATION OF THE LD. CIT(A) IN PARA 4.8 OF THE ORDER DATED 13 .03.2013 FOR THE ASSESSMENT YEAR 2007- 08 WHICH READ AS UNDER: 4.8 IT WAS ALSO BROUGHT TO THE NOTICE THAT THE TPO HAS ACCEPTED RPM AS THE MOST APPROPRIATE METHOD IN THE CASE OF THE APPELLAN T FOR THE AY 2005-06 AND SUBSEQUENTLY IN THE AY 2008-09 AND 2009-10. THE APP ELLANT CONTINUES TO BE A RESELLER OF TYRES AND TUBES IN ALL THESE YEARS. 9. IT IS ALSO NOTICED THAT FOR THE ASSESSMENT YEAR 2007-08, THE LD. CIT(A) DIRECTED THE TPO TO ADOPT THE RPM AS THE MOST APPROPRIATE METHOD AND DELETED THE ADDITIONS MADE BY THE AO UNDER TNMM. IN THE PRESENT CASE, NOT HING IS BROUGHT ON RECORD TO SUBSTANTIATE THAT THE FACTS FOR THE YEAR UNDER CONS IDERATION WERE DIFFERENT FROM THE ASSESSMENT YEARS 2005-06, 2007-08, 2008-09 AND 2009 -10. THEREFORE, ON THE PRINCIPLES OF CONSISTENCY ALSO, THE RPM WAS RIGHTLY DIRECTED BY THE LD. CIT(A) TO BE ADOPTED AS THE MOST APPROPRIATE METHOD FOR THE YEAR UNDER CONSIDERATION. 10. ON A SIMILAR ISSUE, THE HONBLE BOMBAY HIGH COU RT IN THE CASE OF CIT VS LOREAL INDIA (P.) LTD. (SUPRA) HELD AS UNDER: 7. AFTER HAVING PERUSED THE RELEVANT PART OF THE O RDER PASSED BY THE COMMISSIONER AND THE TRIBUNAL ON THIS QUESTION, WE ARE IN AGREEMENT WITH MR. PARDIWALLA THAT THE TRIBUNAL DID NOT COMMIT ANY ERROR OF LAW APPARENT ON THE FACE OF THE RECORD NOR CAN THE FINDINGS CAN BE SAID TO BE PERVERSE. THE TRIBUNAL HAS FOUND THAT THE TPO HAS PASSED AN ORDER EARLIER ACCEPTING THIS METHOD. THE TRIBUNAL HAS NOTED IN PARA 19 OF THE OR DER UNDER CHALLENGE THAT THIS METHOD IS ONE OF THE STANDARD METHOD AND THE O ECD (ORGANIZATION OF ECONOMIC COMMERCIAL DEVELOPMENT) GUIDELINES ALSO ST ATE IN CASE OF DISTRIBUTION OR MARKETING ACTIVITIES WHEN THE GOODS ARE PURCHASED FROM ASSOCIATED ENTITIES AND THERE ARE SALES EFFECTED TO UNRELATED PARTIES WITHOUT ANY FURTHER PROCESSING, THEN, THIS METHOD CAN BE ADOPTE D. THE FINDINGS OF FACT ARE BASED ON THE MATERIALS WHICH HAVE BEEN PRODUCED BEF ORE THE COMMISSIONER AS ALSO THE TRIBUNAL. FURTHER, IT WAS HIGHLIGHTED BEFO RE THE COMMISSIONER AS ALSO THE TRIBUNAL THAT THE RPM HAS BEEN ACCEPTED BY THE TPO IN THE PRECEDING AS WELL AS SUCCEEDING ASSESSMENT YEARS. THAT IS IN RES PECT OF DISTRIBUTION ITA NO.414/DEL/2011 13 SEGMENT ACTIVITY OF THE ASSESSEE. IN SUCH CIRCUMSTA NCES, AND WHEN NO DISTINGUISHING FEATURES WERE NOTED BY THE TRIBUNAL, IT DID NOT COMMIT ANY ERROR IN ALLOWING THE ASSESSEE'S APPEAL. SUCH FINDI NGS DO NOT RAISE ANY SUBSTANTIAL QUESTION OF LAW. THE APPEAL IS DEVOID O F MERITS AND IS, THEREFORE, DISMISSED. THERE WOULD BE NO ORDERS AS TO COSTS. 11. SIMILARLY, THE ITAT DELHI BENCH F, NEW DELHI IN THE CASE OF DCIT VS DELTA POWER SOLUTION INDIA P. LTD. IN ITA NO.3004/DEL/201 3 (SUPRA) HELD AS UNDER: 6.1. IT IS OBSERVED THAT THE PRIMARY OBJECTIVE OF THE ASSESSEE IS OF MANUFACTURING /TRADING/ ASSEMBLING OF TELECOM POWER EQUIPMENT, VISUAL DISPLAY PRODUCTS, INDUSTRIAL AUTOMATION AND MAGNETI C COMPONENTS, ETC. THE ONLY ISSUE IN DISPUTE IS IN REGARDS TO THE MAM FOR DETERMINING ALP IN RESPECT OF THE TRADING SECTION. THE ASSESSEE HAD USED TNMM AS MAM FOR ARRIVING AT THE ALP IN RESPECT OF PURCHASE OF RAW MATERIALS, EX PORT OF FINISHED GOODS AND IN RESPECT OF TRANSACTION RELATING TO IMPORT OF IND USTRIAL AUTOMATION PRODUCTS AND SALES COMMISSION IT HAD USED RPM AS MAM. THE LD . AR SUBMITTED THAT AS THERE IS NO VALUE ADDITION IN RESPECT OF GOODS S OLD BY THE ASSESSEE AND THEREFORE RPM IS THE MAM FOR DETERMINING ALP IN RES PECT OF THESE TWO HEADS BEING IMPORT OF INDUSTRIAL AUTOMATION PRODUCT S AND SALES COMMISSION. 6.2. IT IS OBSERVED THAT THE LD.CIT(A) HAS DEALT WI TH THE ISSUES RELATING TO THE TIMING DIFFERENCE AND SUFFICIENT DATA NOT BEING AVA ILABLE TO RECONCILE THE CHANGE IN THE MARKET, CHANGE IN RATE OF EXCHANGE, C HANGE IN COST ETC. AT LENGTH IN PARAGRAPH 3.1.AT PAGES 3 TO 9. THE LD.CIT(A) HAS REPRODUCED IN PARAGRAPH G, THE RELEVANT EXTRACT OF THE ACCEPTED POSITION FO R A.Y: 2009-10, WHEREIN THE TPO HAS ACCEPTED THE RPM AS THE MOST APPROPRIATE ME THOD FOR CALCULATING THE ALP IN RESPECT OF TRADING SEGMENT. 12. WE, THEREFORE, BY KEEPING IN VIEW THE AFORESAID NARRATED FACTS, THE RATIO LAID DOWN BY THE HONBLE BOMBAY HIGH COURT AND RESPECTFU LLY FOLLOWING THE AFORESAID DECISION DATED 14.03.2016 OF THE ITAT DELHI BENCH F, NEW DELHI IN ITA NO. 3004/DEL/2013 FOR THE ASSESSMENT YEAR 2008-09 IN TH E CASE OF DCIT VS DELTA POWER SOLUTION INDIA P. LTD., ARE OF THE VIEW THAT THE LD. CIT(A) WAS FULLY JUSTIFIED IN DIRECTING THE AO/TPO TO ADOPT RPM AS THE MOST AP PROPRIATE METHOD INSTEAD OF TNMM APPLIED BY THEM. ACCORDINGLY, WE DO NOT SEE AN Y INFIRMITY IN THE IMPUGNED ORDER AND DO NOT SEE ANY MERIT IN THIS APPEAL OF TH E DEPARTMENT. 13. IN THE RESULT, THE APPEAL OF THE DEPARTMENT IS DISMISSED. 16. SINCE THERE IS NO CHANGE IN THE BUSINESS PATTER N OF THE ASSESSEE AND THE SAME BUSINESS IS CONTINUING AND CONSIDERING THE FACT THA T THE TPO HAS ACCEPTED RPM AS THE MOST APPROPRIATE METHOD FOR ASSESSMENT YEAR 2005-06 , 2008-09 AND 2009-10, AND THE ITA NO.414/DEL/2011 14 FINDING GIVEN BY THE TRIBUNAL AT PARA 8 OF THE ORDE R WAS NOT CONTROVERTED BY THE REVENUE, WE DIRECT THE A.O./TPO TO ADOPT RPM AS THE MOST APPROPRIATE METHOD AS CONSIDERED BY THE ASSESSEE. THE GROUNDS RAISED BY THE ASSESSEE ARE ACCORDINGLY, ALLOWED. 17. THE GROUNDS OF APPEAL NO.13 OF THE ASSESSEE REA DS AS UNDER:- 13. THE HON'BLE DRP/A.O. HAS ERRED ON FACTS AND CI RCUMSTANCES OF THE CASE BY NOT ALLOWING 50 PERCENT OF THE TRAVELLING AND 25 PE RCENT OF THE PERSONNEL EXPENSES AMOUNTING TO RS. 37,094,022, INCURRED BY THE APPELL ANT AND DEEMING THE SAME TO BE RELATED TO THE MANUFACTURING ACTIVITY. 18. FACTS OF THE CASE, IN BRIEF, ARE THAT THE ASSES SEE HAD INCURRED AN AMOUNT OF RS.11,60,89,064/- IN RESPECT OF AN ABORTED PROJECT OF SETTING UP OF MANUFACTURING FACILITY IN INDIA WHICH NEVER TOOK OFF. THE ABOVE AMOUNT CONSISTS OF RS.7,82,91,144/- TOWARDS TECHNICAL FEES PAID AND RS.3,77,97,920/- TO WARDS OTHER EXPENSES WHICH WAS ADDED BACK BY THE ASSESSEE ITSELF WITHOUT ASSIGNING ANY REASON. THE ASSESSING OFFICER OBSERVED FROM THE DETAILS OF PROJECT EXPENSES WRITT EN OFF BY THE ASSESSEE THAT ONLY PAYMENTS MADE TO SUB-CONTRACTORS RELATABLE TO PROJE CT WERE INCLUDED IN IT. THE ASSESSEE DID NOT INCLUDE EXPENSES RELATABLE TO PROJ ECT INCURRED ON ACCOUNT OF PERSONAL TRAVEL EXPENSES AND OTHER INCIDENTAL CHARGES. THES E EXPENSES ALSO FORMED PART OF THE EXPENSE RELATABLE TO THE ABORTED PROJECT PART OF WH ICH HAS BEEN DISALLOWED BY THE ASSESSEE ITSELF UNDER PROJECT EXPENDITURE WRITTEN OFF. SINCE NO EXACT BIFURCATION WAS AVAILABLE, THE TPO HELD THAT 50% OF THE TRAVELLING EXPENSES AND 25% OF THE SALARY, WAGES, BONUS, ETC. ON ESTIMATE BASIS AS RELATABLE T O THE ABORTED PROJECT AND, THEREFORE, BE DISALLOWED. SINCE THIS DISALLOWANCE HAS NOT BEE N CAPTURED BY THE TP ADJUSTMENT, ITA NO.414/DEL/2011 15 THE TPO WORKED OUT SUCH DISALLOWANCE AT RS.1,35,24, 365/- BEING 25% OF RS.5,40,97,458/- ON ACCOUNT OF SALARIES, ETC. AND R S.2,35,69,657/- (BEING 50% OF RS.4,71,39,314/-) BOTH TOTALING TO RS.3,70,94,022/- . THE ASSESSEE APPROACHED THE DRP. HOWEVER, THE DRP ALSO DECIDED THE ISSUE AGAIN ST THE ASSESSEE. THE ASSESSING OFFICER ACCORDINGLY, MADE THE DISALLOWANCE. AGGRIE VED WITH SUCH ORDER OF THE A.O./TPO, THE ASSESSEE IS IN APPEAL BEFORE THE TRIB UNAL. 18.1 THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THA T THE ASSESSING OFFICER PROCEEDED ON A FACTUALLY INCORRECT PREMISE THAT MANUFACTURING OF TYRES CANNOT BE TAKEN AS EXTENSION OF EXISTING TRADING BUSINESS OF TYRES AND THAT IT AMOUNTED TO SETTING UP OF ALTOGETHER DIFFERENT VENTURE FOR MANUFACTURING. HE SUBMITTED THAT ONE OF THE OBJECTIVES OF THE ASSESSEE COMPANY RIGHT FROM VERY INCEPTION WAS MANUFACTURING OF TYRES. THEREFORE, THE DISALLOWANCE OF EXPENDITURE ARBITRARILY MADE WITHOUT ANY VALID REASONS SHOULD BE SET ASIDE AND THE CONSEQUENTIAL D ISALLOWANCE MADE ON UNSUPPORTED ALLEGATION OF EXPENDITURE RELATING TO ABORTED PROJE CT SHOULD BE DELETED. 19. THE LD. DR, ON THE OTHER HAND, HEAVILY RELIED O N THE ORDER OF THE A.O./DRP. REFERRING TO PARA 6.1 OF THE ORDER OF THE DRP, HE S UBMITTED THAT THE DRP HAS GIVEN A CATEGORICAL FINDING THAT COMPLETE DETAILS OF THESE EXPENSES WERE NEITHER FILED BEFORE THE ASSESSING OFFICER NOR BEFORE THE DRP TO JUSTIFY THE CLAIM THAT NO SUCH EXPENSES WERE INCURRED IN CONNECTION WITH THE SETTING UP OF THE PROJECT. THEREFORE, THE ORDER OF THE DRP/A.O. SHOULD BE UPHELD. IN HIS ALTERNATE CO NTENTION, HE SUBMITTED THAT THE ITA NO.414/DEL/2011 16 MATTER MAY BE RESTORED TO THE FILE OF A.O./TPO WITH A DIRECTION TO FURNISH ALL THE DETAILS AND SUBSTANTIATE ITS CLAIM. 20. WE HAVE HEARD THE RIVAL ARGUMENTS MADE BY BOTH THE SIDES AND PERUSED THE MATERIAL AVAILABLE ON RECORD. WE FIND THE ASSESSING OFFICER ON AD HOC BASIS MADE THE ADDITION OF RS.3,70,94,022/- BEING 50% OF THE TRAVE LLING EXPENSES AND 25% OF THE SALARY, WAGES, BONUS, ETC., RELATING TO THE ABORTED PROJECT. WE FIND THE DRP REJECTED THE GROUND RAISED BY THE ASSESSEE HOLDING THAT COMP LETE DETAILS OF THESE EXPENSES WERE NEITHER FILED BEFORE THE ASSESSING OFFICER NOR DURI NG THE DRP PROCEEDINGS TO JUSTIFY ITS CLAIM THAT NO SUCH EXPENSES WERE INCURRED IN CONNEC TION WITH THE SETTING UP OF THE PROJECT. IT IS THE SUBMISSION OF THE LD. COUNSEL F OR THE ASSESSEE THAT THE FINDING OF THE TPO IS CONTRARY TO THE FACTS AVAILABLE ON RECORD SI NCE THE ASSESSEE HAS FURNISHED ALL THE DETAILS. CONSIDERING THE TOTALITY OF THE FACTS OF THE CASE AND IN THE INTEREST OF JUSTICE, WE DEEM IT APPROPRIATE TO RESTORE THE ISSUE TO THE FILE OF THE ASSESSING OFFICER WITH A DIRECTION TO VERIFY THE DETAILS FILED BY THE ASSESS EE AND, IN CASE COMPLETE DETAILS WERE FILED, THEN TO ADJUDICATE THE ISSUE AFRESH IN ACCOR DANCE WITH LAW, AFTER GIVING DUE OPPORTUNITY OF BEING HEARD. WE HOLD AND DIRECT ACC ORDINGLY. THIS GROUND OF APPEAL IS ALLOWED FOR STATISTICAL PURPOSES. 21. GROUND NO.14 BY THE ASSESSEE READ AS UNDER:- 14. THE HONBLE DRP/AO HAS ERRED ON FACTS AND IN L AW BY NOT ALLOWING PROVISION FOR IMPAIRMENT OF STOCK VALUE. 22. THE FACTS OF THE CASE, IN BRIEF, ARE THAT DURIN G THE COURSE OF ASSESSMENT ITA NO.414/DEL/2011 17 PROCEEDINGS, THE ASSESSING OFFICER ASKED THE ASSESS EE TO JUSTIFY ITS CLAIM FOR DEBITING PROVISION ON ACCOUNT OF IMPAIRMENT AMOUNTING TO R S.34,09,016/-. THE ASSESSEE IN ITS REPLY SUBMITTED THAT THE AMOUNT OF IMPAIRMENT I S PROVIDED FOR WHERE THE NET REALIZABLE VALUE OF THE INVENTORY/STOCK IS MORE THA N THE COST OF THAT PARTICULAR STOCK OR ITEM OF PRODUCT. IT WAS SUBMITTED THAT THE NET REA LIZABLE VALUE OF THE 1153 QUANTITY OF STOCK BEARING NO.CAI033269 HAS BEEN RECORDED AS RS. 1,06,20,641/- WHICH IS LOWER THAN THE COST PRICE OF THE STOCK RECORDED AT RS.1,4 0,30,257/-. THE DIFFERENCE BETWEEN THE ABOVE AMOUNTING TO RS.34,09,016/- HAS BEEN ACCR UED AS PROVISION FOR IMPAIRMENT OF STOCK VALUE. IT WAS ACCORDINGLY SUBMITTED THAT THE ABOVE IS NOT IN THE NATURE OF AN UNASCERTAINED LIABILITY AND SHOULD NOT BE TREATED A S SUCH AND SHOULD BE ALLOWED AS A DEDUCTION. 23. HOWEVER, THE ASSESSING OFFICER WAS NOT SATISFIE D WITH THE EXPLANATION GIVEN BY THE ASSESSEE. ACCORDING TO HIM, THE LAW DOES NOT A LLOW ANY PROVISION OTHER THAN SPECIFIED ONES LIKE PROVISION FOR BAD DEBTS. NOTHIN G WAS BROUGHT ON RECORD IN THE INSTANT CASE TO PROVE THAT THE PROVISION WAS MADE O N SCIENTIFIC BASIS. REJECTING THE VARIOUS EXPLANATION GIVEN BY THE ASSESSEE AND OBSER VING THAT HOW AND WHY A VALUE LOWER THAN THE COST VALUE WAS ASSIGNED AND IN ABSEN CE OF ANY DEBIT NOTES ISSUED TO THE SUPPLIER ON ACCOUNT OF SUPPLY OF INFERIOR MANUFACTU RED TYRES, THE ASSESSING OFFICER IN THE DRAFT ASSESSMENT ORDER PROPOSED TO DISALLOW THE SAME. THE ASSESSEE APPROACHED THE DRP. HOWEVER, THE DRP ALSO UPHELD THE ACTION O F THE ASSESSING OFFICER. THE ASSESSING OFFICER IN THE FINAL ORDER THEREOF, MADE THE DISALLOWANCE. AGGRIEVED WITH SUCH ORDER OF THE A.O./DRP, THE ASSESSEE IS IN APPE AL BEFORE THE TRIBUNAL. ITA NO.414/DEL/2011 18 24. THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT VALUATION OF CLOSING STOCK ON THE BASIS OF COST OR REALIZABLE VALUE WHICHEVER IS LOWE R IS AN ACCEPTED ACCOUNTING PRINCIPLE BY DECISIONS OF VARIOUS COURTS. SUCH IS ALSO THE A PPROACH PRESCRIBED UNDER ACCOUNTING STANDARD-2 WHICH DEALS WITH VALUATION OF INVENTORY WHICH HAS BEEN PRESCRIBED U/S 145A OF THE IT ACT. HE SUBMITTED THAT THE ASSESSING OFFICER HAS DISALLOWED THE SAME BY PRESUMING IT TO BE A PROVISION FOR IMPAIRMENT O F STOCK AS AN UNASCERTAINED LIABILITY AND ON THE PREMISES THAT THE LAW DOES NOT ALLOW ANY PROVISION OTHER THAN SPECIFIED ONES LIKE PROVISION FOR BAD DEBTS. THE OR DER OF THE DRP IS ALSO VERY CRYPTIC. HE ACCORDINGLY SUBMITTED THAT THE ADDITION MADE BY THE ASSESSING OFFICER SHOULD BE DELETED. 25. THE LD. DR, ON THE OTHER HAND, HEAVILY RELIED O N THE ORDERS OF THE A.O./DRP. 26. WE HAVE CONSIDERED THE RIVAL ARGUMENTS MADE BY BOTH THE SIDES AND PERUSED THE MATERIAL AVAILABLE ON RECORD. WE FIND THE ASSESSIN G OFFICER DISALLOWED AN AMOUNT OF RS.34,09,016/- WHICH WAS DEBITED BY THE ASSESSEE UN DER THE HEAD PROVISION ON ACCOUNT OF IMPAIRMENT ON THE GROUND THAT THE LAW D OES NOT ALLOW ANY PROVISION OTHER THAN SPECIFIED ONES LIKE PROVISION FOR BAD DEBTS. FURTHER, ACCORDING TO HIM, NOTHING WAS BROUGHT ON RECORD TO PROVE THAT THE PROVISION W AS MADE ON SCIENTIFIC BASIS AND THE ASSESSEE HAS NOT RAISED ANY DEBIT NOTE AGAINST THE SUPPLIERS FOR SUPPLY OF INFERIOR QUALITY OF MATERIAL. IT IS THE SUBMISSION OF THE L D. COUNSEL FOR THE ASSESSEE THAT THE VALUATION OF CLOSING STOCK ON THE BASIS OF COST OR REALIZABLE VALUE WHICHEVER IS LOWER IS AN ACCEPTED ACCOUNTING PRINCIPLE AND THE VALUATION OF THE INVENTORY MADE BY THE ITA NO.414/DEL/2011 19 ASSESSEE IS AS PER ACCOUNTING STANDARD-2. WE FIND MERIT IN THE ARGUMENTS ADVANCED BY THE LD. COUNSEL FOR THE ASSESSEE. IT HAS BEEN H ELD BY VARIOUS DECISIONS THAT VALUATION OF CLOSING STOCK SHOULD BE MADE ON THE BASIS OF COS T OR REALIZABLE VALUE WHICHEVER IS LOWER IF THE SAME SYSTEM OF ACCOUNTING IS BEING FOL LOWED BY THE ASSESSEE CONSISTENTLY. SUCH TYPE OF APPROACH HAS ALSO BEEN PRESCRIBED IN A CCOUNTING STANDARD-2 ISSUED BY ICAI WHICH DEALS WITH VALUATION OF INVENTORY. WE F IND THE ASSESSING OFFICER IN THE INSTANT CASE DISALLOWED THE PROVISION PRESUMING THA T IT IS AN UNASCERTAINED LIABILITY. SINCE THE ASSESSEE, INSTEAD OF SHOWING THE LOWER VA LUE ON THE RIGHT HAND SIDE HAS SHOWN THE GROSS VALUE AND DEBITED THE PROVISION, TH EREFORE, THE NET EFFECT WOULD BE NIL. WE, THEREFORE, SET ASIDE THE ORDER OF THE ASSESSING OFFICER AND DIRECT HIM TO ALLOW THE CLAIM OF THE ASSESSEE. THE GROUND RAISED BY THE AS SESSEE IS ACCORDINGLY ALLOWED. 27. GROUND OF APPEAL NO.15 READS AS UNDER:- 15. THE HONBLE DRP/AO HAS ERRED ON FACTS AND IN L AW BY NOT ALLOWING 50 PERCENT OF THE TOTAL ADVERTISEMENT EXPENSES AMOUNTI NG RS.7,124,007/-. 28. THE FACTS OF THE CASE, IN BRIEF, ARE THAT THE A SSESSING OFFICER, DURING THE COURSE OF ASSESSMENT PROCEEDINGS, NOTICED THAT THE ASSESSE E HAD INCURRED HUGE ADVERTISEMENT EXPENSES AMOUNTING TO RS.1,42,48,015/-. WITH A VIE W TO EXAMINE WHETHER THE ABOVE EXPENSES WERE WHOLLY AND EXCLUSIVELY RELATED TO THE BUSINESS OF THE ASSESSEE, ESPECIALLY IN VIEW OF THE FACT THAT THESE EXPENSES WOULD ESSENTIALLY LEAD TO ESTABLISHMENT AND PROMOTION OF MICHELIN BRAND IN INDIA, HE ASKED THE ASSESSEE TO PROVIDE THE REQUISITE DETAILS. FROM THE SUBMISSION S FILED BY THE ASSESSEE, HE OBSERVED ITA NO.414/DEL/2011 20 THAT WHOLE OF SUCH EXPENSES CLAIMED CANNOT BE ACCEP TED AS INCURRED WHOLLY AND EXCLUSIVELY FOR THE BUSINESS OF THE ASSESSEE. RELY ING ON THE OECD GUIDELINES, THE ASSESSING OFFICER HELD THAT THE ASSESSEE IS INCURRI NG SUCH A HUGE AMOUNT ON ADVERTISEMENT AND GENERATING BENEFITS TO ITS AES WH O OWNED THE BRAND WITHOUT BEING ABLE TO COGENTLY SHOW AS TO HOW IT BENEFITTED WHOLL Y FROM SUCH BRAND BUILDING. THEREFORE, IT IS A CONCOCTED ARRANGEMENT TO LOWER I TS PROFIT AND SAVE ON THE EXPENDITURE OF THE AE. RELYING ON THE DECISION OF THE HON'BLE SUPREME COURT IN THE CASE OF MCDOWELL AND CO. LTD. VS. CTO REPORTED IN 154 ITR 1 48 (SC), THE ASSESSING OFFICER DISALLOWED 50% OF SUCH EXPENSES AMOUNTING T O RS.79,24,007/- TOWARDS BRAND BUILDING FOR THE ENTITY SHOWN IN THE BRAND. THE AS SESSEE APPROACHED THE DRP BUT WITHOUT ANY SUCCESS. THE ASSESSING OFFICER, THEREA FTER, MADE THIS DISALLOWANCE. 29. AGGRIEVED, THE ASSESSEE IS IN APPEAL BEFORE TH E TRIBUNAL. 30. THE LD. COUNSEL FOR THE ASSESSEE CHALLENGED THE ORDER OF THE ASSESSING OFFICER IN DISALLOWING 50% OF SUCH ADVERTISEMENT EXPENSES. HE SUBMITTED THAT THE ACTION OF THE ASSESSING OFFICER IS UNJUSTIFIED AND MERELY BASED O N PRESUMPTIONS AND SURMISES. HE SUBMITTED THAT ALTHOUGH DETAILED SUBMISSION WAS MAD E BEFORE THE ASSESSING OFFICER AND DRP IN SUPPORT OF SUCH EXPENDITURE BEING WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF THE ASSESSEES BUSINESS IN INDIA INCLUDING THE D ECISION OF THE TRIBUNAL IN THE CASE OF NESTLE INDIA LTD. (2009) 27 SOT 09 WHICH HAS BEEN UPHELD BY THE HON'BLE DELHI HIGH COURT, THE LOWER AUTHORITIES HAVE DISREGARDED THE S AME AND PROCEEDED TO DISALLOW THE EXPENDITURE. HE ACCORDINGLY SUBMITTED THAT THE ACT ION OF THE ASSESSING OFFICER WHICH ITA NO.414/DEL/2011 21 HAS BEEN UPHELD BY THE DRP SHOULD BE SET ASIDE AND THE DISALLOWANCE BE DELETED. 31. THE LD. DR, ON THE OTHER HAND, HEAVILY RELIED O N THE ORDER OF THE ASSESSING OFFICER AND THE DRP. 32. WE HAVE CONSIDERED THE RIVAL ARGUMENTS MADE BY BOTH THE SIDES AND PERUSED THE MATERIAL AVAILABLE ON RECORD. WE FIND THE ASSESSIN G OFFICER DISALLOWED AN AMOUNT OF RS.71,24,007/- BEING 50% OF THE ADVERTISEMENT EXPEN SES OF RS.1,42,48,015/- DEBITED BY THE ASSESSEE ON THE GROUND THAT THESE EXPENSES W OULD LEAD TO ESTABLISHMENT AND PROMOTION OF MICHELIN BRAND IN INDIA. IN OTHER W ORDS, IT IS HIS ALLEGATION THAT SUCH EXPENSES ARE TOWARDS BRAND BUILDING FOR THE ENTITIE S OWNING THE BRAND AND THE ASSESSEE HAS NOT BENEFITTED WHOLLY AND EXCLUSIVELY FROM SUCH ADVERTISEMENT EXPENSES. WE DO NOT FIND ANY LOGIC BEHIND THE ACTION OF THE ASSESSI NG OFFICER. THERE IS NO DISPUTE REGARDING THE INCURRING OF THE EXPENDITURE. IT IS NOT THE CASE OF THE ASSESSING OFFICER THAT BY INCURRING SUCH EXPENSES THE REVENUE OF THE ASSESSEE HAS NOT GONE UP. IF WHILE INCURRING SUCH EXPENSES IN THE NORMAL COURSE OF BUS INESS ACTIVITIES EITHER THE PARENT COMPANY OR SOME OTHER PARTY IS BENEFITTED, THE SAME CANNOT BE A GROUND TO DISALLOW A PART OF THE EXPENDITURE ON AD HOC BASIS. WE FIND THE DELHI BENCH OF THE TRIBUNAL IN THE CASE OF NESTLE INDIA LTD. VS. DCIT 111 TTJ 498 HAS HELD THAT THE EXPENDITURE INCURRED BY THE ASSESSEE COMPANY ON ADVERTISEMENT/S ALES PROMOTION OF SOME NESTLE PRODUCTS IN INDIA MAY GIVE RISE TO CERTAIN BENEFIT TO NESTLE SA, BUT IT CANNOT BE A GROUND TO DISALLOW THE CLAIM OF THE ASSESSEE ONCE I T IS ESTABLISHED THAT THE EXPENDITURE IN QUESTION HAS BEEN INCURRED BY THE ASSESSEE FOR T HE PURPOSE OF BUSINESS OF THE ITA NO.414/DEL/2011 22 ASSESSEE INASMUCH AS THE EXPENDITURE BY THE ASSESSE E ON ADVERTISEMENT/SALES PROMOTION HAS DIRECT NEXUS BETWEEN THE EARNING OF T HE INCOME BY THE ASSESSEE. THE DECISION OF THE TRIBUNAL HAS BEEN UPHELD BY THE JUR ISDICTIONAL HIGH COURT. THE VARIOUS OTHER DECISIONS RELIED ON BY THE LD. COUNSE L FOR THE ASSESSEE WHICH ARE PLACED ON PAPER BOOK ALSO SUPPORT HIS CASE. SINCE THERE I S NO DISPUTE REGARDING THE INCURRING OF THE EXPENDITURE AND IT IS ALSO NOT THE CASE OF T HE REVENUE THAT BY INCURRING SUCH HUGE EXPENDITURE THERE IS NO INCREASE IN THE TURNOV ER OF THE ASSESSEE, THEREFORE, MERELY BECAUSE THE PARENT COMPANY WILL BE BENEFITTED BECAU SE THE BRAND IS OWNED BY IT, THE SAME CANNOT BE A GROUND TO DISALLOW 50% OF THE EXPE NDITURE ON AD HOC BASIS. WE, THEREFORE, SET ASIDE THE ORDER OF THE CIT(A) AND DI RECT HIM TO DELETE THE DISALLOWANCE. 33. IN THE RESULT, THE APPEAL FILED BY THE AS SESSEE IS ALLOWED, IN THE TERMS INDICATED. THE DECISION WAS PRONOUNCED IN THE OPEN COURT ON 0 8.01.2019. SD/- SD/- (BHAVNESH SAINI) (R.K. PANDA) JUDICIAL MEMBER ACCOUNTANT MEMFBER DATED: 08 TH JANUARY, 2019 DK COPY FORWARDED TO 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR ASSTT. REGISTRAR, ITAT, NEW DELHI