M/s. Honda Siel Power Products Ltd., Gautam Budh Nagar V. DCIT, New Delhi

ITA 551/DEL/2014

• Counselvise Citation: [2016] 132 COUNSELVISE.COM (IT) 8340 (ITAT-DELHI)
• Duration Of Justice: 2 year(s) 2 month(s) 12 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 13-04-2016
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: I1
• Next Hearing Date: 02-11-2015
• Assessment Year: 2009-2010
• Appeal Filed On: 31-01-2014
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: ARMENDRA KUMAR
• Assessee Lawyers: BHAVITA KUMARI
• Keywords: Related party transaction; Capital asset; Business income; Depreciation; Transfer pricing; Business expenditure; Opportunity of being heard; Principle of natural justice; International transaction; Advance ruling; Question of law; Non-deduction of tax; Bad and doubtful debts; Commercial expediency; Revenue expenditure; Capital expenditure
• Section: 92C; 143(3); 92B; 92F; 234B; 37(1); 10B; 92

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, DELHI BENCH I - 1 NEW DELHI BEFORE : SHRI I.C. SUDHIR, JUDICIAL MEMBER & SHRI L.P. SAHU, ACCOUNTANT MEMBER ITA NO.551/DEL./2014 ASSTT. YEAR : 2009 - 10 HONDA SIEL POWER PRODUCT LTD., VS. D.C.I.T., CIRCLE 11(1) PLOT NO. 5, SECTOR 41, KASNA, NEW DELHI. GREATER NOIDA INDL. DEVELOPMENT AREA, GAUTAM BUDH NAGAR, U.P. [PAN: AAACH8464L] ITA NO. 636/DEL./2015 ASSTT. YEAR : 2010 - 11 HONDA SIEL POWER PRODUCT LT D., VS. D.C.I.T., CIRCLE 11(1) PLOT NO. 5, SECTOR 41, KASNA, NEW DELHI. GREATER NOIDA INDL. DEVELOPMENT AREA, GAUTAM BUDH NAGAR, U.P. (APPELLANT) (RESPONDENT) APPELLANT BY : S/SH. NEERAJ JAIN, ADV., ROMIT KATYAL, CA AND MS. BHAVITA KUMARI, ADV. RESPONDENT BY : SH. ARMENDRA KUMAR, CIT/ DR DATE OF HEARING : 16.02.2016 DATE OF PRONOUNCEMENT : 13 .04.2016 ORDER PER L.P. SAHU, ACCOUNTANT MEMBER: THIS APPEAL HAS BEEN FILED BY THE ASSESSEE AGAINST THE ASSESSMENT ORDER S DA TED 11.12.2013 & 21.11.2014 PASSED U/S. 143(3) READ WITH SECTION ITA NO S . 551/DEL./2014 & 636/DEL./2015 2 144C OF THE IT ACT, 1961 (HEREINAFTER REFERRED TO AS THE ACT ) FOR THE ASSESSMENT YEAR 20 09 - 10 AND 20 10 - 11 ON THE FOLLOWING GROUNDS : GROUNDS RAISED IN A.Y. 2009 - 10: GENERAL: 1. THAT THE IMPUGNED ORDER OF ASSESSMENT FRAMED BY THE ASSESSING OFFICER IN PURSUANCE OF THE DIRECTIONS OF THE DISPUTE RESOLUTION PANEL (HEREINAFTER REFERRED TO AS DRP ) UNDER SECTION 143(3) READ WITH SECTION 144C OF THE INCOME - TAX ACT, 1961 ( ACT ), IS BA D IN LAW, VIOLATIVE OF PRINCIPLES OF NATURAL JUSTICE AND VOID AB - INITIO. 1.1. THAT ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN COMPUTING THE INCOME OF THE APPELLANT AT RS 39,11,70,920 AGAINST THE RETURNED TOTAL INCOME OF RS.23,08,71,683. TRANSFER PRICING ISSUES : 2. THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN MAKING ADDITION TO THE INCOME OF THE APPELLANT TO THE EXTENT OF RS.5,25,76,004 ON ACCOUNT OF THE ALLEGED DIFFERENCE IN THE ARM S LENGTH PRICE OF INTERNATIONAL TRANSACTIONS. ADVERTI SEMENT, MARKETING AND SALES PROMOTION EXPENSES: 3. THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN MAKING TRANSFER PRICING ADJUSTMENT IN RELATION TO THE ADVERTISEMENT, MARKETING AND SALES PROMOTION EXPENSES (HEREINAFTER REFERRED TO AS THE AMP EXP ENSES ) INCURRED BY THE APPELLANT. 3.1. THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE DRP ERRED IN LAW IN UPHOLDING, IN PRINCIPLE, TRANSFER PRICING ADJUSTMENT MADE BY THE ASSESSING OFFICER / TPO IN RESPECT OF EXPENDITURE INCURRED ON AMP EXPE NSES. 3.2. THE ASSESSING OFFICER / TPO ERRED ON FACTS AND IN LAW IN NOT APPRECIATING THAT THE ONLY TRANSFER PRICING ADJUSTMENT PERMITTED BY CHAPTER X OF THE ACT WAS IN RESPECT OF THE DIFFERENCE BETWEEN THE ARM S LENGTH PRICE (ALP) AND THE CONTRACT OR DECL ARED PRICE. ITA NO S . 551/DEL./2014 & 636/DEL./2015 3 3.3. THE DRP ERRED ON FACTS AND IN LAW IN NOT APPRECIATING THAT THE TRANSFER PRICING ADJUSTMENT SOUGHT TO BE MADE BY THE TPO IN THE PRESENT CASE WAS A MERE QUANTITATIVE ADJUSTMENT, ON THE FOOTING THAT THE APPELLANT HAD INCURRED AN EXCESSIVE AM OUNT OF AMP EXPENDITURE , AND NOT ON THE FOOTING THAT THERE WAS A DIFFERENCE BETWEEN THE ALP AND THE CONTRACT OR DECLARED PRICE, AND THAT A TRANSFER PRICING ADJUSTMENT WAS NOT AT ALL PERMITTED OR AUTHORIZED BY CHAPTER X OF THE ACT. 3.4 THE DRP ERRED ON FACTS AND IN LAW IN NOT HOLDING THAT MERELY BECAUSE THE INDIAN COMPANY HAS INCURRED EXPENDITURE ON PRODUCT ADVERTISEMENTS INCLUDING THE FOREIGN BRAND AND THE AMP EXPENSES INCURRED BY THE TAXPAYER, WHICH ARE PROPORTIONATELY HIGHER THAN THOSE INCURRED BY COMPARABLE CASES, IT DOES NOT LEAD TO THE INFERENCE OF TRANSACTION BETWEEN THE TAXPAYER AND THE FOREIGN AE FOR CREATING MARKETING INTANGIBLES ON BEHALF OF THE LATER. 3.5. THE DRP/TPO ERRED ON FACTS AND IN LAW IN HOLDING THAT EXPENDITURE INCURRED BY THE APPELLANT WHICH INCIDENTALLY RESULTED IN BRAND BUILDING FOR THE FOREIGN AE, WAS A TRANSACTION OF CREATING AND IMPROVING MARKETING INTANGIBLES FOR AND ON BEHALF OF ITS FOREIGN AE AND FURTHER THAT SUCH A TRANSACTION WAS IN THE NATURE OF PROVISION OF A SE RVICE BY THE APPELLANT TO THE AE. 3.6. THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN NOT APPRECIATING THAT THE CHARACTERIZATION OF THE APPELLANT BEING THAT OF A FULL FLEDGED MANUFACTURER AND THE SOLE BENEFICIARY OF THE AMP EXPENDITURE INCURRED B Y IT, JUSTIFIES THE CONDUCT OF THE APPELLANT IN INCURRING AND BEARING THE COST OF AMP EXPENDITURE. 3.7. THE DRP ERRED ON FACTS AND IN LAW IN NOT HOLDING THAT EXPENDITURE ON ADVERTISEMENT AND BRAND PROMOTION, UNILATERALLY INCURRED BY THE APPELLANT, COULD NOT BE REGARDED AS A TRANSACTION IN THE ABSENCE OF ANY PROVED UNDERSTANDING / ARRANGEMENT BETWEEN THE APPELLANT AND THE ASSOCIATED ENTERPRISE. 3.8. THE ASSESSING OFFICER/TPO ERRED ON FACTS AND IN LAW IN NOT APPRECIATING THAT THE AMP EXPENSES, ETC., UNI LATERALLY INCURRED BY THE APPELLANT IN INDIA COULD NOT BE CHARACTERIZED AS AN ITA NO S . 551/DEL./2014 & 636/DEL./2015 4 INTERNATIONAL TRANSACTION AS PER SECTION 92B, IN THE ABSENCE OF ANY PROVED UNDERSTANDING / ARRANGEMENT BETWEEN THE APPELLANT AND THE ASSOCIATED ENTERPRISE, SO AS TO INVOKE THE PR OVISIONS OF SECTION 92 OF THE ACT. 3.9. THE DRP/TPO ERRED ON FACTS AND IN LAW IN NOT APPRECIATING THAT IN ABSENCE OF ANY UNDERSTANDING / ARRANGEMENT BETWEEN THE APPELLANT AND THE ASSOCIATED ENTERPRISE, THE ASSOCIATED ENTERPRISE WAS UNDER NO OBLIGATION TO REIMBURSE AMP EXPENSES INCURRED BY THE APPELLANT FOR SALE OF ITS PRODUCTS IN INDIA. 3.10. THE DRP/TPO ERRED ON FACTS AND IN LAW IN NOT APPRECIATING THAT THE ADVERTISEMENT AND MARKETING EXPENSES WERE INCURRED BY THE APPELLANT WHOLLY AND EXCLUSIVELY FOR PUR POSES OF ITS BUSINESS AND NOT ON BEHALF OF OR FOR THE BENEFIT OF THE AE; ANY BENEFIT TO THE AE BEING ONLY INCIDENTAL. 3.11 THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN NOT APPRECIATE THE A&M EXPENSES INCURRED BY THE ASSESSEE WERE TOWARDS THE PR ODUCTS MANUFACTURED AND OWNED BY THE ASSESSEE AND NOT TOWARDS THE BRAND, PER SE; 3.12 THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN NOT APPRECIATING THAT THE AMP EXPENSES INCURRED BY THE APPELLANT, DID NOT RESULT IN CREATION OF ANY MARKETING INTANGIBLES; MUCH LESS ON ACCOUNT OF THE AE. 3.13 WITHOUT PREJUDICE THAT THE ASSESSING O FFICER ERRED ON FACTS AND IN LAW IN IGNORING THE FACT THAT, SINCE THE APPELLANT EARNS RETURN COMMENSURATE WITH OTHER BRAND OWNERS, THE APPELLANT IS ADEQUATELY COMPENSATED FOR ITS FUNCTIONS AND AMP EXPENSES. 3.14 WITHOUT PREJUDICE THAT THE ASSESSING OFFIC ER/TPO ERRED ON FACTS AND IN LAW, IN NOT APPRECIATING THAT THE AMP EXPENSES INCURRED BY THE APPELLANT WAS APPROPRIATELY ESTABLISHED TO BE AT ARM S LENGTH APPLYING TRANSACTIONAL NET MARGIN METHOD ( TNMM ). 3.15 THE ASSESSING OFFICER/TPO ERRED ON FACTS AND IN LAW IN APPLYIN G BRIGHT LINE TEST ( BLT ) FOR COMPUTING ADJUSTMENT ON ACCOUNT OF EXPENDITURE ON ADVERTISEMENT AND BRAND PROMOTION EXPENSES, ITA NO S . 551/DEL./2014 & 636/DEL./2015 5 WITHOUT APPRECIATING THAT IN ABSENCE OF SPECIFIC PROVISION IN THE TRANSFER PRICING STATUTORY PROVISIONS IN INDIA. , ADJUSTMENT ON ACCOUNT OF THE ARM S LENGTH PRICE OF THE ADVERTISEMENT AND BRAND PROMOTION EXPENSES COULD NOT BE MADE. 3.16 THE ASSESSING OFFICER/TPO ERRED ON FACTS AND IN LAW IN NOT APPRECIATING THAT SUCH A TRANSFER PRICING ADJUSTMENT CANNOT AT ALL BE M ADE IN LAW WITHOUT DETERMINING THE ARM S LENGTH PRICE ( ALP ) BY APPLYING ONE OF THE METHODS SPECIFIED IN SECTION 92C OF THE ACT. 3.17. THE ASSESSING OFFICER/TPO ERRED ON FACTS AND IN LAW IN NOT APPRECIATING THAT M ERELY BECAUSE THE NET PROFIT RATE OF THE APPELLANT WAS BETTER THAN THE CORRESPONDING NET PROFIT RATE OF COMPARABLE COMPANIES, WOULD NOT LEAD TO THE CONCLUSION THAT INCURRING OF AMP EXPENSES FOR THE AE WAS AT ARM S LENGTH. 3.18 THAT THE ASSESSING OFFICER/TPO ERRED ON FACTS AND IN LAW IN IGNORING THAT BRIGHT LINE LIMIT IS NOT A PRESCRIBED METHOD UNDER THE PURVIEW OF SECTION 92C OF THE ACT. 3.19 WITHOUT PREJUDICE THAT THE ASSESSING OFFICER/TPO ERRED ON FACTS AND IN LAW IN NOT APPRECIATING THAT FOR DETERMINING WHETHER THE AMP EXPENSES INCURRED BY THE APPELLANT COULD BE SAID TO BE EXCESSIVE, ONLY THE APPROPRIATE COMPARABLES HAVING SIMILAR PRODUCT / BRAND PROFILE AS THE APPELLANT COULD BE CONSIDERED IN TERMS OF RULE 10B(2) OF THE INCOME - TAX RULES, 1962 READ WITH SECTION 92C OF THE ACT. 3.20 THAT THE ASSESSING OFFICER/TPO ERRED ON FACTS AND IN LAW IN FAILING TO APPRECIATE THAT THE APPELLANT HAS LONG - TERM RIGHTS TO USE THE TRADEMARK/ LICENSED INTANGIBLES AND REAPS ALL THE BENEFITS OF THE SAID AMP EXPENSES AND IS THUS THE ECONOMIC OWNER OF ANY RELATED MARKETING INTANGIBLE. 3.21 THAT THE ASSESSING OFFICER/TPO ERRED ON FACTS AND IN LAW IN FAILING TO APPRECIATE THAT ALL THE KEY DECISIONS WITH RESPECT TO ADVERTISING, MARKETING, SELLING AND DISTRIBUTION OF THE PRODUCTS MANUFACTURED BY THE APPELLANT FOR SALE IN DESIGNATED TERRITORIES ARE TAKEN BY THE APPELLANT AND CONSEQUENTLY, THE APPELLANT IS RESPONSIBLE / ELIGIBLE FOR THE RELATED RISKS AND REWARD. ITA NO S . 551/DEL./2014 & 636/DEL./2015 6 3.22 THAT THE ASSESSING OFFICER/TPO ERRED ON FACTS AND IN LAW IN HOLDING THAT THE APPELLANT SHOULD HA VE EARNED A MARK - UP IN RESPECT OF THE AMP EXPENSES, ALLEGED TO HAVE INCURRED FOR AND ON BEHALF OF THE ASSOCIATED ENTERPRISE. 3.23 WITHOUT PREJUDICE THAT, THE ASSESSING OFFICER/TPO ERRED ON FACTS AND IN LAW IN HOLDING THE AMP EXPENSES INCURRED BY THE APPEL LANT TO BE EXCESSIVE ON THE BASIS OF A BRIGHT LINE LIMIT ARRIVED AT BY CONSIDERING INAPPROPRIATE COMPARABLES, NOT HAVING SIMILAR PRODUCT/ BRAND PROFILE AS THE APPELLANT. 3.24 WITHOUT PREJUDICE THAT THE ASSESSING OFFICER/TPO ERRED ON FACTS AND IN LAW IN CONSIDERING SELLING AND DISTRIBUTION EXPENSES FOR THE PURPOSE OF CALCULATING ALLEGED AMP EXPENDITURE OF THE APPELLANT. 3.25 WITHOUT PREJUDICE THAT THE ASSESSING OFFICER/TPO ERRED ON FACTS AND IN LAW IN CONSIDERING THE FOLLOWING COMPANIES AS COMPARABLE FOR BENCHMARKING ADVERTISEMENT AND PUBLICITY EXPENSES: COMPANIES ADVERTISEMENT EXPENSES (% OF SALES) 1.JYOTI LTD. 0.02 2.POWERICA LTD. (IN LACS). 0.37 3.SHAKTI PUMPS (INDIA) LTD. 8.16 4.WPIL LTD. 2.53 5.ELGI ELECTRIC &INDS. LTD. 8.90 6.JAKSONS LTD. 0.90 7.POWER BUILD LTD. 2.53 AVERAGE 3.34 3.26 THAT THE ASSESSING OFFICER/TPO ERRED ON FACTS AND IN LAW IN HOLDING THAT INCURRING OF AMP EXPENSES WAS A SEPARATE TRANSACTION AND IS TO BE EVALUATED SEPARATELY. 3.27 THAT THE ASSESSING OFFICER / TPO ERRED ON FACTS AND IN LAW IN HOLDING THAT THE APPELLANT HAS RENDERED SERVICE TO THE AES BY INCURRING THE AMP EXPENSE AND BY HOLDING THAT MARKUP HAS TO BE EARNED BY THE ITA NO S . 551/DEL./2014 & 636/DEL./2015 7 APPELLANT IN RESPECT OF THE AMP EXPENSES, ALLEGED TO HA VE INCURRED FOR AND ON BEHALF OF THE AE. 3.28 WITHOUT PREJUDICE, THE ASSESSING OFFICER/TPO ERRED ON FACTS AND IN LAW IN NOT APPRECIATING THAT MARKUP, IF AT ALL, HAD TO BE RESTRICTED TO THE VALUE ADDED EXPENSES INCURRED BY THE APPELLANT FOR PROVIDING THE A LLEGED SERVICE IN THE NATURE OF BRAND PROMOTION. ROYALTY IN RESPECT OF EXPORTS MADE TO ASSOCIATED ENTERPRISES : 4. THAT THE ASSESSING OFFICER/TPO ERRED ON FACTS AND IN LAW IN HOLDING THAT ARM S LENGTH PRICE OF INTERNATIONAL TRANSACTIONS OF PAYMENT OF ROYALTY ON EXPORTS MADE TO THE ASSOCIATED ENTERPRISES OF RS.45,67,000 WAS NIL. 4.1 . THAT THE ASSESSING OFFICER/TPO ERRED ON FACTS AND IN LAW IN HOLDING THAT THE ASSESSEE WAS ACTING AS A CONTRACT MANUFACTURER AND HENCE ROYALTY PAID AS PERCENTAGE OF SALE T O THE ASSOCIATED ENTERPRISES IS NOT AT ARM S LENGTH AS IT AMOUNTS TO COLLECTING ROYALTY ON THE SALE TO ITSELF. 4.2. THAT THE ASSESSING OFFICER/TPO ERRED ON FACTS AND IN LAW IN HOLDING THAT WHERE THE APPELLANT IS MAKING PART OF ITS SALES TO RELATED PARTIES AND THE BENEFIT OF PURCHASING COMPONENTS IS REAPED BY THE ASSOCIATED ENTERPRISE, THE PAYMENT OF ROYALTY DO NOT CONFIRM TO ARM S LENGTH PRICE. 4.3. THAT THE ASSESSING OFFICER/TPO ERRED IN NOT APPRECIATING THAT THE ROYALTY PAID IN TERMS OF AGREEMENT DULY A PPROVED BY THE CENTRAL GOVERNMENT, CANNOT BE REFERRED AS A NON BONAFIDE PAYMENT NOT SATISFYING THE ARM S LENGTH TEST. 4.4. THAT THE ASSESSING OFFICER/TPO ERRED IN NOT APPRECIATING THAT PAYMENT OF ROYALTY IS A NECESSARY COST INCURRED BY THE APPELLANT FOR M ANUFACTURE OF GOODS. CORPORATE TAX ISSUES: 5. THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN DISALLOWING ROYALTY AMOUNTING TO RS.5,08,52,635 AND TECHNICAL GUIDANCE FEE ITA NO S . 551/DEL./2014 & 636/DEL./2015 8 AMOUNTING TO RS.1,36,21,453 PAID TO HONDA MOTOR COMPANY, JAPAN AS PER THE TECHNICAL COLLABORATION AGREEMENT ( TCA ) AS CAPITAL EXPENDITURE INCURRED FOR ACQUISITION OF INTANGIBLE ASSET AND INSTEAD ALLOWING DEPRECIATION @25%. 5.1 WITHOUT PREJUDICE, THAT THE ASSESSING OFFICER ERRED ON FACTS IN DISALLOWING TECHNICAL GUIDANCE FEE OF RS.1,36,21,453 IN PLACE OF RS.1,00,56,950. 5.2. THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN HOLDING THAT IN TERMS OF THE TECHNICAL COLLABORATION AGREEMENT, INTELLECT UAL PROPERTY RIGHT DEVELOPED BY HONDA, JAPAN HAS BEEN TRANSFERRED TO THE APPELLANT. 5.3. THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN HOLDING THAT IN TERMS OF TCA, PATENT FOR THE NEW DEVELOPED PROJECT HAS BEEN TRANSFERRED TO THE LICENSOR, I.E., APPELLANT. 5.4. THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN HOLDING THE PAYMENT OF ROYALTY AND TECHNICAL GUIDANCE FEE TO BE CAPITAL EXPENDITURE ON THE GROUND THAT (I) IN THE EVENT OF THE EXPIRATION OF THE CONTRACT, THE ASSESSEE MAY CONTINUE TO USE THE KNOW - HOW AND THE INDUSTRIAL PROPERTY RIGHTS FOR THE PURPOSES OF MANUFACTURE, ASSEMBLY, PROCUREMENT, SALE, DELIVERY AND SERVICE OF THE PRODUCTS AND THE PARTS. (II) THE TERMS OF AGREEMENT ARE QUITE COMPREHENSIVE AND THE WHOLE TECHNICAL KNOW - HOW TO SE T UP THE BUSINESS OF THE APPELLANT ARE PROVIDED BY HONDA. (III) THE ASSESSEE HAS PAID THE ROYALTY FOR THE ACQUISITION OF AN INDIVISIBLE, NON - TRANSFERABLE AND EXCLUSIVE LICENSE IN FAVOUR OF THE APPELLANT TO MANUFACTURE AND ASSEMBLE THE PRODUCTS AND THE PARTS IN THE TERRITORY, AND TO SELL AND DISTRIBUTE IN THE TERRITORY THE PRODUCTS AND THE PARTS SO MANUFACTURED OR ASSEMBLED OR PROCURED. (IV) THE ASSESSEE CAN GRANT INDIVISIBLE AND NON - TRANSFERABLE SUBLICENSES TO USE THE KNOW - HOW TO INDIAN PERSONS, COMPANIES OR OTHER ITA NO S . 551/DEL./2014 & 636/DEL./2015 9 L EGAL ENTITIES EXCLUSIVE PRIVILEGE OF MANUFACTURING AND SELLING THE PRODUCTS. (V) IN THE EVENT OF THE EXPIRATION OF THE CONTRACT, THE APPELLANT MAY CONTINUE TO USE THE KNOW - HOW AND THE INDUSTRIAL PROPERTY RIGHTS IS CAPITAL IN NATURE. 6. THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN DISALLOWING EXPORT COMMISSION PAID TO M/S HONDA MOTOR CO. LTD. OF JAPAN OF RS.4,32,49,149 INVOKING SECTION 40 (A) (I) OF THE ACT HOLDING THE SAME TO BE ROYALTY/FEE FOR TECHNICAL SERVICE ON WHICH ALLEGEDLY THE ASSESSEE H AD FAILED TO DEDUCT TAX AT SOURCE AS PER SECTION 195 OF THE ACT. 6.1. THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN LAW IN HOLDING THAT THE PAYMENTS OF EXPORT COMMISSION WAS TOWARDS ROYALTY/FEE FOR TECHNICAL SERVICES AS THE SAME WAS IN CONSIDERA TION FOR (I) RIGHT TO USE TRADEMARK, (II) PERMISSION TO EXPORT AND (III) IN LIEU OF MANAGERIAL AND TECHNICAL SERVICES PROVIDED BY HONDA, AND ACCORDINGLY THE APPELLANT WAS UNDER OBLIGATION TO DEDUCT TAX AT SOURCE THERE FROM AS PER SECTION 195 OF THE ACT. 6 .2. THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN NOT APPRECIATING THAT PAYMENT OF EXPORT COMMISSION TO HONDA DOES NOT RESULT IN AN INCOME ACCRUING OR ARISING IN INDIA IN TERMS OF SECTION 9(1) OF THE ACT AND HENC E IS NOT LIABLE TO TAX IN INDIA. 6.3 THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN NOT APPRECIATING THAT THE PAYMENT OF EXPORT COMMISSION WAS MADE TO HONDA IN CONSIDERATION OF ACCORDING CONSENT FOR CEDING OVERSEAS TERRITORY PERMITTING EXPORT OF MOTORCYCLE AND SPARES BY THE APPEL LANT. 6.4 THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN NOT APPRECIATING THAT SERVICES / ASSISTANCE PROVIDED BY HONDA WERE INCIDENTAL TO THE RIGHT FOR EXPLOITING THE FOREIGN TERRITORY AND WERE NOT IN THE NATURE OF FEE FOR TECHNICAL SERVICES . ITA NO S . 551/DEL./2014 & 636/DEL./2015 10 6.5 THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN NOT APPRECIATING THAT THE PAYMENT OF EXPORT COMMISSION WAS NOT CONSIDERATION FOR USE OF TRADE MARK OR PROVISION OF TECHNICAL ASSISTANCE, FOR WHICH SEPARATE ROYALTY PAYMENT WAS BEING MADE ON WHICH TAX IS DULY DEDUCTED UNDER SECTION 195 OF THE ACT. 6.6. WITHOUT PREJUDICE THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN NOT APPRECIATING THAT PAYMENT OF EXPORT COMMISSION BEING FOR EARNING INCOME FROM SOURCE OUTSIDE INDIA, CANNOT BE CHARA CTERIZED AS ROYALTY OR FEE FOR TECHNICAL SERVICE AS PER SECTION 9(1)(VI)(B) OR SECTION 9(1)(VII)(B) OF THE ACT RESPECTIVELY. 7. THAT THE ASSESSING OFFICER ERRED ON FACTS IN NOT ALLOWING CREDIT FOR TAX DEDUCTED AT SOURCE AMOUNTING TO RS.71,407 FROM THE TAX PAYABLE WITHOUT ASSIGNING ANY REASON THEREOF. 8. THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN LEVYING INTEREST UNDER SECTION 234B OF THE ACT. GROUNDS RAISED IN A.Y. 2010 - 11: GENERAL: 1. THAT THE IMPUGNED ORDER OF ASSESSMENT FRAMED BY THE ASSESSING OFFICER IN PURSUANCE OF THE DIRECTIONS OF THE DISPUTE RESOLUTION PANEL (HEREINAFTER REFERRED TO AS DRP ) UNDER SECTION 143(3) READ WITH SECTION 144C OF THE INCOME - TAX ACT, 1961 ( ACT ), IS BA D IN LAW, VIOLATIVE OF PRINCIPLES OF NATURAL JUSTICE AND VOID AB - INITIO. 1.1 THAT ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN COMPUTING THE INCOME OF THE APPELLANT AT RS 43,72,68,200 AGAINST THE RETURNED TOTAL INCOME OF RS.31,80,76,602. TRANSFER PRICING ISSUES : 2. THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN MAKING ADDITION TO THE INCOME OF THE APPELLANT TO THE EXTENT OF RS.11,36,67,464 ON ACCOUNT OF THE ALLEGED DIFFERENCE IN THE ARM S LENGTH PRICE OF INTERNATIONAL TRANSACTIONS. ITA NO S . 551/DEL./2014 & 636/DEL./2015 11 ADVERTISEMENT, M ARKETING AND SALES PROMOTION EXPENSES: 3. THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN MAKING TRANSFER PRICING ADJUSTMENT AMOUNTING TO RS. 10,98,88,464 IN RELATION TO THE ADVERTISEMENT, MARKETING AND SALES PROMOTION EXPENSES (HEREINAFTER REFERRED T O AS THE AMP EXPENSES ) INCURRED BY THE APPELLANT. 3.1 WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE DRP ERRED IN LAW IN UPHOLDING, IN PRINCIPLE, TRANSFER PRICING ADJUSTMENT MADE BY THE ASSESSING OFFICER / TPO IN RESPECT OF EXPENDITURE INCURRED ON ADVERTISING, MARKETING AND PUBLICITY ( AMP EXPENSES )? 3.2 THE DRP/TPO ERRED ON FACTS AND IN LAW IN NOT APPRECIATING THAT THE ONLY TRANSFER PRICING ADJUSTMENT PERMITTED BY CHAPTER X OF THE ACT WAS IN RESPECT OF THE DIFFERENCE BETWEEN THE ARM S LEN GTH PRICE (ALP) AND THE CONTRACT OR DECLARED PRICE. 3.3 THE DRP ERRED ON FACTS AND IN LAW IN NOT APPRECIATING THAT THE TRANSFER PRICING ADJUSTMENT SOUGHT TO BE MADE BY THE TPO IN THE PRESENT CASE WAS A MERE QUANTITATIVE ADJUSTMENT, ON THE FOOTING THAT THE APP ELLANT HAD INCURRED AN EXCESSIVE AMOUNT OF AMP EXPENDITURE , AND NOT ON THE FOOTING THAT THERE WAS A DIFFERENCE BETWEEN THE ALP AND THE CONTRACT OR DECLARED PRICE, AND THAT A TRANSFER PRICING ADJUSTMENT WAS NOT AT ALL PERMITTED OR AUTHORIZED BY CHAPTER X O F THE ACT. 3.4 THE DRP ERRED ON FACTS AND IN LAW IN NOT HOLDING THAT MERELY BECAUSE THE INDIAN COMPANY HAS INCURRED EXPENDITURE ON PRODUCT ADVERTISEMENTS INCLUDING THE FOREIGN BRAND AND THE AMP EXPENSES INCURRED BY THE TAXPAYER, WHICH ARE PROPORTIONATELY HIG HER THAN THOSE INCURRED BY COMPARABLE CASES, IT DOES NOT LEAD TO THE INFERENCE OF TRANSACTION BETWEEN THE TAXPAYER AND THE FOREIGN AE FOR CREATING MARKETING INTANGIBLES ON BEHALF OF THE LATER. 3.5 THAT THE DRP/TPO ERRED ON FACTS AND IN LAW IN NOT APPRECIA TING THAT SINCE THE APPELLANT WAS PERFORMING THE KEY PEOPLE/CRITICAL DECISION MAKING FUNCTIONS WITH REGARD TO ADVERTISEMENT AND MARKETING ACTIVITY, THE RISK RELATED TO SUCH ACTIVITY OUGHT TO HAVE BEEN BORNE BY THE APPELLANT. 3.6 THAT THE DRP/TPO ERRED ON FACT S AND IN LAW IN NOT APPRECIATING THE FACT THAT SINCE THE APPELLANT WAS BEARING THE RISK RELATED TO THE MARKETING ACTIVITY AND WAS ALSO ENTITLED TO RETAIN THE PROFIT ATTRIBUTABLE TO SUCH ITA NO S . 551/DEL./2014 & 636/DEL./2015 12 ACTIVITY, THE APPELLANT HAD RIGHTLY BORNE THE EXPENDITURE RELATABLE TO SUCH MARKETING FUNCTION. 3.7 THAT THE DRP/TPO ERRED ON FACTS AND IN LAW IN RE - CHARACTERIZING THE APPELLANT, A LICENSED MANUFACTURER, AS A LIMITED RISK SERVICE PROVIDER ENTITLED TO COST PLUS REMUNERATION FOR ITS MARKETING EFFORTS. 3.8 THE DRP/TPO ERRED ON FACTS AND IN LAW IN HOLDING THATEXPENDITURE INCURRED BY THE APPELLANT WHICH INCIDENTALLY RESULTED IN BRAND BUILDING FOR THE FOREIGN AE, WAS A TRANSACTION OF CREATING AND IMPROVING MARKETING INTANGIBLES FOR AND ON BEHALF OF ITS FOREIGN AE AND FURTHER THAT SUCH A TRANSACTION WAS IN THE NATURE OF PROVISION OF A SERVICE BY THE APPELLANT TO THE AE. 3.9 THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN NOT APPRECIATING THAT THE CHARACTERIZATION OF THE APPELLANT BEING THAT OF A FULL FLEDGED MANUFACTURER AND THE SOLE BENEFICIARY OF THE AMP EXPENDITURE INCURRED BY IT, JUSTIFIES THE CONDUCT OF THE APPE LLANT IN INCURRING AND BEARING THE COST OF AMP EXPENDITURE. 3.10 THE DRP ERRED ON FACTS AND IN LAW IN NOT HOLDING THAT EXPENDITURE ON ADVERTISEMENT AND BRAND PROMOTION, UNILATERALLY INCURRED BY THE APPELLANT, COULD NOT BE REGARDED AS A TRANSACTION IN THE AB SENCE OF ANY PROVED UNDERSTANDING / ARRANGEMENT BETWEEN THE APPELLANT AND THE ASSOCIATED ENTERPRISE. 3.11 THE DRP/TPO ERRED ON FACTS AND IN LAW IN NOT APPRECIATING THAT THE AMP EXPENSES, ETC., UNILATERALLY INCURRED BY THE APPELLANT IN INDIA COULD NOT BE CHARAC TERIZED AS AN INTERNATIONAL TRANSACTION AS PER SECTION 92B, IN THE ABSENCE OF ANY PROVED UNDERSTANDING / ARRANGEMENT BETWEEN THE APPELLANT AND THE ASSOCIATED ENTERPRISE, SO AS TO INVOKE THE PROVISIONS OF SECTION 92 OF THE ACT. 3.12 THAT THE DRP/TPO ERRED ON FA CTS AND IN LAW IN NOT APPRECIATING THAT UNILATERALLY INCURRING OF AMP EXPENSES BY THE APPELLANT DOES NOT RESULT IN AN INTERNATIONAL TRANSACTION IN TERMS OF SECTION 92B OF THE ACT, EVEN AFTER ITS AMENDMENT BY THE FINANCE ACT, 2012. 3.13 THE DRP/TPO ERRED ON FAC TS AND IN LAW IN NOT APPRECIATING THAT IN ABSENCE OF ANY UNDERSTANDING / ARRANGEMENT BETWEEN THE APPELLANT AND ITA NO S . 551/DEL./2014 & 636/DEL./2015 13 THE ASSOCIATED ENTERPRISE, THE ASSOCIATED ENTERPRISE WAS UNDER NO OBLIGATION TO REIMBURSE AMP EXPENSES INCURRED BY THE APPELLANT FOR SALE OF ITS PRODUCTS IN INDIA. 3.14 THAT THE DRP/TPO ERRED ON FACTS AND IN LAW BY QUESTIONING THE COMMERCIAL EXPEDIENCY OF AMP EXPENDITURE INCURRED BY THE APPELLANT AND ASSUMING THAT BENEFIT HAS ACCRUED TO AE ON ACCOUNT OF AMP EXPENSES INCURRED BY THE APPELLANT IN INDIA. 3.15 THE DRP/TPO ERRED ON FACTS AND IN LAW IN NOT APPRECIATING THAT THE ADVERTISEMENT AND MARKETING EXPENSES WERE INCURRED BY THE APPELLANT WHOLLY AND EXCLUSIVELY FOR PURPOSES OF ITS BUSINESS AND NOT ON BEHALF OF OR FOR THE BENEFIT OF THE AE; ANY BENEFIT TO TH E AE BEING ONLY INCIDENTAL. 3.16 THAT THE DRP/TPO ERRED ON FACTS AND IN LAW IN NOT APPRECIATING THAT NO ADJUSTMENT ON ACCOUNT OF ALLEGEDLY EXCESS AMP EXPENDITURE IS WARRANTED IN THE CASE OF THE APPELLANT AS SUCH EXPENSE HAVE BEEN FOUND TO CONSTITUTE BONAFIDE AND DEDUCTIBLE BUSINESS EXPENDITURE. 3.17 THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN NOT APPRECIATE THE A&M EXPENSES INCURRED BY THE ASSESSEE WERE TOWARDS THE PRODUCTS MANUFACTURED AND OWNED BY THE ASSESSEE AND NOT TOWARDS THE BRAND, PER SE; 3.18 THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN NOT APPRECIATING THAT THE AMP EXPENSES INCURRED BY THE APPELLANT, DID NOT RESULT IN CREATION OF ANY MARKETING INTANGIBLES; MUCH LESS ON ACCOUNT OF THE AE. 3.19 WITHOUT PREJUDICE THAT THE ASSESSING OFFICER ERR ED ON FACTS AND IN LAW IN IGNORING THE FACT THAT, SINCE THE APPELLANT EARNS RETURN COMMENSURATE WITH OTHER BRAND OWNERS, THE APPELLANT IS ADEQUATELY COMPENSATED FOR ITS FUNCTIONS AND AMP EXPENSES. 3.20 WITHOUT PREJUDICE THAT THE ASSESSING OFFICER ERRED ON FAC TS AND IN LAW, IN NOT APPRECIATING THAT THE AMP EXPENSES INCURRED BY THE APPELLANT WAS APPROPRIATELY ESTABLISHED TO BE AT ARM S LENGTH APPLYING TRANSACTIONAL NET MARGIN METHOD (TNMM). 3.21 THE DRP/TPO ERRED ON FACTS AND IN LAW IN APPLYIN G BRIGHT LINE TEST ( BL T ) FOR COMPUTING ADJUSTMENT ON ACCOUNT OF EXPENDITURE ON ITA NO S . 551/DEL./2014 & 636/DEL./2015 14 ADVERTISEMENT AND BRAND PROMOTION EXPENSES, WITHOUT APPRECIATING THAT IN ABSENCE OF SPECIFIC PROVISION IN THE TRANSFER PRICING STATUTORY PROVISIONS IN INDIA., ADJUSTMENT ON ACCOUNT OF THE ARM S LENG TH PRICE OF THE ADVERTISEMENT AND BRAND PROMOTION EXPENSES COULD NOT BE MADE. 3.22 THE DRP/TPO ERRED ON FACTS AND IN LAW IN NOT APPRECIATING THATSUCH A TRANSFER PRICING ADJUSTMENT CANNOT AT ALL BE MADE IN LAW WITHOUT DETERMINING THE ARM S LENGTH PRICE ( ALP ) BY APPLYING ONE OF THE METHODS SPECIFIED IN SECTION 92C OF THE ACT. 3.23 THE DRP/TPO ERRED ON FACTS AND IN LAW IN NOT APPRECIATING THAT M ERELY BECAUSE THE NET PROFIT RATE OF THE APPELLANT WAS BETTER THAN THE CORRESPONDING NET PROFIT RATE OF COMPARABLE COMPANIES, WOULD NOT LEAD TO THE CONCLUSION THAT INCURRING OF AMP EXPENSES FOR THE AE WAS AT ARM S LENGTH. 3.24 THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN IGNORING THAT BRIGHT LINE LIMIT IS NOT A PRESCRIBED METHOD UNDER THE PURVIEW OF SECTION 92 C OF THE ACT. 3.25 WITHOUT PREJUDICE THAT THE DRP/TPO ERRED ON FACTS AND IN LAW IN NOT APPRECIATING THAT FOR DETERMINING WHETHER THE AMP EXPENSES INCURRED BY THE APPELLANT COULD BE SAID TO BE EXCESSIVE, ONLY THE APPROPRIATE COMPARABLES HAVING SIMILAR PRODUCT / BRAND PROFILE AS THE APPELLANT COULD BE CONSIDERED IN TERMS OF RULE 10B(2) OF THE INCOME - TAX RULES, 1962 READ WITH SECTION 92C OF THE ACT. 3.26 THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN HOLDING THAT THE APPELLANT SHOULD HAVE EARNED A MARK - UP IN RESPECT OF THE AMP EXPENSES, ALLEGED TO HAVE INCURRED FOR AND ON BEHALF OF THE ASSOCIATED ENTERPRISE. 3.27 WITHOUT PREJUDICE THAT, THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN HOLDING THE AMP EXPENSES INCURRED BY THE APPELLANT TO BE EXCESSIVE ON THE B ASIS OF A BRIGHT LINE LIMIT ARRIVED AT BY CONSIDERING INAPPROPRIATE COMPARABLES, NOT HAVING SIMILAR PRODUCT/ BRAND PROFILE AS THE APPELLANT. 3.28 WITHOUT PREJUDICE THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN CONSIDERING SELLING AND DISTRIBUTION EXPENSES AMOUNTING TO RS. 7,13,41,000 FOR THE PURPOSE OF CALCULATING ALLEGED AMP EXPENDITURE OF THE APPELLANT ITA NO S . 551/DEL./2014 & 636/DEL./2015 15 3.29 WITHOUT PREJUDICE THAT THE ASSESSING OFFICER/TPO ERRED ON FACTS AND IN LAW IN CONSIDERING THE FOLLOWING COMPANIES AS COMPARABLE FOR BENCHMARKING ADVERTISEMENT AND PUBLICITY EXPENSES: COMPANIES ADVERTISEMENT EXPENSES (% OF SALES) 1. BIRLA POWER SOLUTIONS LTD. 1.43% 2. GREAVES COTTON LTD 0.32% 3. GUJARAT FORGINGS LTD 1.61% 4. JAKSONS LTD 0.60% 5. KIRLOSKAR BROTHERS LTD 1.25% 6. POWERICA LTD 0.22% 7. SHAKTI PUMPS LTD 2.74% 8. SOUTHERN AGRO ENGINES PVT LTD NA 9. SUDHIRGENSETS LTD 0.28% 10. SUPERNOVA ENGINEERS LTD 0.51% AVERAGE 1.00% 3.30 WITHOUT PREJUDICE , THAT ON FACTS AND CIRCUMSTANCES OF THE CASE THE DRP /TPO OUGHT TO HAVE CONSIDER ED THE FOLLOWING COMPANIES AS COMPARABLE FOR BENCHMARKING THE ADVERTISEMENT AND PUBLICITY EXPENSES: NAME OF THE COMPANY AMP/SALES KIRLOSKAR BROTHERS LTD. 4.70% KIRLOSKAR OIL ENGINES LTD. 4.04% BEST AND CROMPTON ENGG LTD 4.42% AVERAGE 4.39% 3.31 WITHOUT PREJUDICE THAT THE ASSESSING OFFICER/TPO ERRED ON FACTS AND IN LAW, IN NOT APPRECIATING THAT THE AMP EXPENSES INCURRED BY THE APPELLANT WAS APPROPRIATELY ESTABLISHED TO BE AT ARM S LENGTH APPLYING TRANSACTIONAL NET MARGIN METHOD (TNMM).. ITA NO S . 551/DEL./2014 & 636/DEL./2015 16 3.32 THAT THE ASSESSIN G OFFICER/TPO ERRED ON FACTS AND IN LAW IN HOLDING THAT INCURRING OF AMP EXPENSES WAS A SEPARATE TRANSACTION AND IS TO BE EVALUATED SEPARATELY. 3.33 THAT THE ASSESSING OFFICER / TPO ERRED ON FACTS AND IN LAW IN HOLDING THAT THE APPELLANT HAS RENDERED SERVICE TO THE AES BY INCURRING THE AMP EXPENSE AND BY HOLDING THAT MARKUP HAS TO BE EARNED BY THE APPELLANT IN RESPECT OF THE AMP EXPENSES, ALLEGED TO HAVE INCURRED FOR AND ON BEHALF OF THE AE. 3.34 WITHOUT PREJUDICE, THE ASSESSING OFFICER/TPO ERRED ON FACTS AND IN L AW IN NOT APPRECIATING THAT MARKUP, IF AT ALL, HAD TO BE RESTRICTED TO THE VALUE ADDED EXPENSES INCURRED BY THE APPELLANT FOR PROVIDING THE ALLEGED SERVICE IN THE NATURE OF BRAND PROMOTION. ROYALTY IN RESPECT OF EXPORTS MADE TO ASSOCIATED ENTERPRISES: 4. THAT THE ASSESSING OFFICER/TPO ERRED ON FACTS AND IN LAW IN HOLDING THAT ARM S LENGTH PRICE OF INTERNATIONAL TRANSACTIONS OF PAYMENT OF ROYALTY ON EXPORTS MADE TO THE ASSOCIATED ENTERPRISES OF RS.37,79,000 WAS NIL. 4.1 THAT THE ASSESSING OFFICER/TPO ERRED ON FACTS AND IN LAW IN HOLDING THAT THE ASSESSEE WAS ACTING AS A CONTRACT MANUFACTURER AND HENCE ROYALTY PAID AS PERCENTAGE OF SALE TO THE ASSOCIATED ENTERPRISES IS NOT AT ARM S LENGTH AS IT AMOUNTS TO COLLECTING ROYALTY ON THE SALE TO ITSELF. 4.2 THAT THE ASSES SING OFFICER/TPO ERRED ON FACTS AND IN LAW IN NOT APPRECIATING THAT THE TRANSACTION OF SALE OF GOODS BY THE APPELLANT TO ASSOCIATED ENTERPRISES WAS UNDERTAKEN ON A PRINCIPAL TO PRINCIPAL BASIS, WHEREIN THE APPELLANT IS ACTING AS A LICENSED MANUFACTURER 4.3 TH AT THE ASSESSING OFFICER/TPO ERRED ON FACTS AND IN LAW IN ARBITRARILY HOLDING THAT WHERE THE ASSESSEE COMPANY IS MAKING A PART OF ITS SALES TO ITS RELATED PARTIES AND THE BENEFIT OF PRODUCING COMPONENTS IS REAPED BY AE, THE PAYMENT FOR CHARGES FOR ROYALTY DOES NOT CONFIRM TO THE ARM S LENGTH PRINCIPLE . ITA NO S . 551/DEL./2014 & 636/DEL./2015 17 4.4 THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN NOT APPRECIATING THAT THE ROYALTY IS PAID BY THE APPELLANT ON NET SALES AFTER DEDUCTING THE COST OF IMPORTED COMPONENTS, STANDARD BOUGHT OUT COMPONE NTS AND EXPORT COMMISSION. 4.5 THAT THE ASSESSING OFFICER/TPO ERRED IN NOT APPRECIATING THAT THE ROYALTY PAID IN TERMS OF AGREEMENT DULY APPROVED BY THE CENTRAL GOVERNMENT, CANNOT BE REFERRED AS A NON BONAFIDE PAYMENT NOT SATISFYING THE ARM S LENGTH TEST. 4.6 TH AT THE ASSESSING OFFICER/TPO ERRED IN NOT APPRECIATING THAT PAYMENT OF ROYALTY IS A NECESSARY COST INCURRED BY THE APPELLANT FOR MANUFACTURE OF GOODS. CORPORATE ISSUES RE: DISALLOWANCE OF RELOCATION EXPENSES 5. THAT THE ASSESSING OFFICER/ DRP ERRED ON FACTS AND IN LAW IN TREATING EXPENDITURE AMOUNTING TO RS. 51,15,000/ - , INCURRED ON ACCOUNT OF RELOCATION OF APPELLANT S FACTORY AS CAPITAL EXPENDITURE. 5.1 THAT THE ASSESSING OFFICER/ DRP ERRED ON FACTS AND IN LAW IN HOLDING THAT THE AFORESAID PAYMENT WAS TOWA RDS COST OF PLANT AND MACHINERY AND THEREFORE, THE SAME SHOULD BE CAPITALIZED ALONG WITH PLANT AND MACHINERY. 5.2 THAT THE ASSESSING OFFICER/ DRP ERRED ON FACTS AND IN LAW IN HOLDING THAT THE PROFESSIONAL AND CONSULTANCY CHARGES INCURRED TOWARDS SHIFTING OF PL ANT AND MACHINERY ARE AN INTEGRAL PART OF THE BUSINESS OF THE APPELLANT, AND THEREFORE, THE SAME SHOULD BE TREATED AS CAPITAL IN NATURE. 5.3 THAT THE ASSESSING OFFICER/ DRP ERRED ON FACTS AND IN LAW IN HOLDING THAT THE APPELLANT WOULD SECURE AN ADVANTAGE OF EN DURING NATURE ON ACCOUNT OF RELOCATION OF THE APPELLANT S FACTORY. RE: DISALLOWANCE OF PROVISION ON ACCOUNT OF SLOW MOVING INVENTORIES 6. THAT THE ASSESSING OFFICER/ DRP ERRED IN DISALLOWING PROVISION FOR SLOW MOVING INVENTORY DEBITED IN THE PROFIT AND LOSS STATEMENT, AMOUNTING TO RS. 11,76,382, BEING THE AMOUNT OF EXPENSES ESTIMATED BY THE APPELLANT TO BE INCURRED ON ACCOUNT OF OBSOLESCENCE/ SLOW MOVING INVENTORY. 6.1 THAT THE ASSESSING OFFICER/DRP ERRED ON FACTS AND IN LAW IN HOLDING THE PROVISION FOR SLOW MOVI NG INVENTORY, ESTIMATED BY THE APPELLANT IN ACCORDANCE WITH ACCOUNTING STANDARD 2, ISSUED BY THE INSTITUTE OF ITA NO S . 551/DEL./2014 & 636/DEL./2015 18 CHARTERED ACCOUNTANTS OF INDIA, TO BE AN UNASCERTAINED LIABILITY, WHICH WAS NOT AN ALLOWABLE EXPENSE 6.2 WITHOUT PREJUDICE, THAT THE ASSESSING OFFICER /DRP ERRED ON FACTS AND IN LAW IN MAKING THE AFORESAID DISALLOWANCE OF THE AMOUNT OF PROVISION FOR SLOW MOVING INVENTORY AND NOT APPRECIATING THAT THE AFORESAID DISALLOWANCE WAS REVENUE NEUTRAL IN NATURE, BECAUSE AS AND WHEN THE AFORESAID INVENTORY WILL BE SOLD, THE LOSS RELATING TO THE SAME WILL NOT BE DEBITED IN PROFIT & LOSS STATEMENT. 2. SINCE BOTH THESE APPEALS WERE HEARD TOGETHER AND MAJOR ISSUES INVOLVED IN THESE APPEALS ARE COMMON, WE DEEM IT APPROPRIATE TO DECIDE BOTH THESE APPEALS SIMULTANEOUSLY BY THIS CONSOLIDATED ORDER FOR THE SAKE OF CONVENIENCE AND BREVITY. 3. THE BRIEF FACTS LEADING TO THE PRESENT CASES ARE THAT THE APPELLANT COMPANY INCORPORATED UNDER THE COMPANIES ACT, 1956 IS ENGAGED IN THE BUSINESS OF MANUFACTURE AND SALE OF PORTABLE GENSETS, GENERAL PURPOSE ENGINES AND WATER PUMPING SETS, PROCESSING OF PRE SSURE DIE CASTING PARTS. FOR ASSESSMENT YEAR 2009 - 10 , THE ASSESSEE COMPANY FILED ITS RETURN ON 30.09.2009 DECLARING TOTAL INCOME OF RS. 23,08,71,683. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE AO NOTED THAT THE ASSESSEE IS PAYING ROYALTY OF RS. 6,78, 03,514 AND A TECHNICAL GUIDANCE FEE OF RS. 1,81,61,938 TO HONDA MOTOR CO. JAPAN. THE AO CAME TO THE CONCLUSION THAT ROYALTY AND TECHNICAL GUIDANCE FEE WERE TO BE CAPITALISED, AFTER ALLOWING DEPRECIATION OF 25% ON THE SAME. 3.1. ON THE ISSUE OF EXPORT COMMISSION, THE AO FOUND THAT THE EXPORT COMMISSION IS IN THE NATURE OF ROYALTY/ FEES FOR TECHNICAL SERVICES. AS NO TAX WAS DEDUCTED AT SOURCE, THE PAYMENT OF RS. 4,32,49,149 WAS NOT ALLOWED AS ITA NO S . 551/DEL./2014 & 636/DEL./2015 19 DEDUCTION BY INVOKING SECTION 40(A)(I) OF THE ACT. ALTERNATELY, THE AO HELD THAT THE EXPENDITURE IN QUESTION IS PURELY FOR THE USE OF LICENSE ACQUIRED BY THE ASSESSEE, WHICH WAS FOR A LONG PERIOD OF TIME AND THUS WOULD CONSTITUTE A CAPITAL ASSET. ACCORDINGLY, THE PAYMENT OF EXPORT COMMISSION WA S DISALLOWED. 3.2. THE AO ALSO NOTICED THAT THE ASSESSEE HAD ENTERED INTO INTERNATIONAL TRANSACTIONS DURING THE YEAR UNDER CONSIDERATION. THE TPO IN THE ORDER DATED 14.12.2012 MADE AN ADJUSTMENT OF RS. 4,80,08,814 ON ACCOUNT OF THE DIFFERENCE IN ADVERTIS EMENT AND PROMOTION EXPENDITURE OF THE ASSESSEE COMPANY AND THE ARM S LENGTH PRICE OF SUBSIDY RECEIVED FROM THE ASSOCIATED ENTERPRISES. THE AO FURTHER MADE DISALLOWANCE OF ROYALTY PAYMENT OF RS. 45,67,000 ON ACCOUNT OF SALES MADE TO ASSOCIATED ENTERPRISES. 3.4. THE ASSESSEE CARRIED THE MATTER IN APPEAL BEFORE THE DRP. THE DRP - 1, NEW DELHI IN IT S ORDER HAS SUSTAINED THE VARIOUS ADDITIONS/ DISALLOWANCES MADE IN THE ASSESSMENT ORDER. 4. SIMILARLY, FOR ASSESSMENT YEAR 2010 - 11 , THE ASSESSEE COMPANY FILED I TS RETURN FOR THE ASSESSMENT YEAR 2010 - 11 ON 29.09.2010 DECLARING TOTAL INCOME OF RS.31,80,76,602. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE AO NOTED THAT THE ASSESSEE IS PAYING ROYALTY OF RS. 9,19,05,000 AND A TECHNICAL GUIDANCE FEE OF RS. 2,00,87, 000 TO HONDA MOTOR CO. JAPAN. THE AO CAME TO THE CONCLUSION THAT ROYALTY AND TECHNICAL GUIDANCE FEE WERE TO BE CAPITALISED, AFTER ALLOWING DEPRECIATION OF 25% ON THE SAME. 4.1 THE AO FURTHER MADE ADDITION OF RS. 1,11,47,000 TOWARDS RELOCATION EXPENSES T OWARDS SHIFTING OF FACTORY OF THE ASSESSEE COMPANY, ON THE GROUND ITA NO S . 551/DEL./2014 & 636/DEL./2015 20 THAT SUCH EXPENDITURE WAS CAPITAL IN NATURE AND HAD RESULTED IN BENEFIT OF ENDURING NATURE TO THE ASSESSEE COMPANY. THE AO ALSO NOTED THAT THE AMOUNT OF RS. 11,76,382 DEBITED IN THE PROFIT & LOSS ACCOUNT OF THE ASSESSEE COMPANY TOWARDS PROVISION OF SLOW MOVING INVENTORY WAS NOT TO BE ALLOWED SINCE SUCH EXPENDITURE IN THE NATURE OF PROVISION. 4.2 THE AO FURTHER NOTICED THAT THE ASSESSEE HAD ENTERED INTO INTERNATIONAL TRANSACTIONS DURING THE YEAR UNDER CONSIDERATION. THE TPO IN THE ORDER DATED 31.12.2013 MADE AN ADJUSTMENT OF RS. 10,98,88,464 ON ACCOUNT OF THE DIFFERENCE IN ADVERTISEMENT AND PROMOTION EXPENDITURE OF THE ASSESSEE COMPANY AND THE ARM S LENGTH PRICE OF SUBSIDY RECEIVED FROM THE A SSOCIATED ENTERPRISES. THE AO FURTHER MADE DISALLOWANCE OF ROYALTY PAYMENT OF RS. 37,790,00 ON ACCOUNT OF SALES MADE TO ASSOCIATED ENTERPRISES. 4.3. THE ASSESSEE CARRIED THE MATTER IN APPEAL BEFORE THE DRP. THE DRP - I, NEW DELHI IN ITS ORDER DATED 21.11.2 014 DIRECTED THE AO TO DELETE THE DISALLOWANCE OF PAYMENT OF ROYALTY AND TECHNICAL GUIDANCE FEE BY FOLLOWING THE ORDER OF THE HONBLE ITAT, I BENCH. DELHI IN THE ASSESSEE S OWN CASE FOR ASSESSMENT YEAR 2007 - 08 IN ITA NO. 5713/DEL/2011 DATED 25.07.2014. 4.4 HOWEVER, THE DRP SUSTAINED THE ADDITIONS MADE BY THE AO/ TPO ON ALL OTHER ISSUES. 5. AGGRIEVED BY THE FINAL ASSESSMENT ORDERS FOR BOTH THE YEARS, THE ASSESSEE IS IN APPEALS BEFORE THE TRIBUNAL ON THE GROUNDS REPRODUCED HEREINABOVE. ITA NO S . 551/DEL./2014 & 636/DEL./2015 21 6. AS IS SPECIFIED IN THE GROUNDS OF APPEALS ITSELF, THE LD. AR OF THE ASSESSEE SUBMITTED THAT GROUND NOS. 1 & 1.1 RAISED IN A.Y. 2009 - 10 AND GROUNDS NOS. 1 TO 2 RAISED IN A.Y. 2010 - 11 MAY BE TREATED AS GENERAL IN NATURE AND DO NOT REQUIRE ANY SPECIFIC ADJUDICATION . 7. GROUNDS NOS. 2, 3 TO 3.28 RAISED IN A.Y. 2009 - 10 AND GROUNDS NOS. 3 TO 3.34 RAISED IN A.Y. 2010 - 11 ARE IDENTICAL AND RELATE TO THE ISSUE OF TRANSFER PRICING ADDITIONS ON ACCOUNT OF ADVERTISING, MARKETING AND PROMOTION EXPENSES AMOUNTING TO RS. 4,80,0 8,814 AND RS.10,98,88,464 RESPECTIVELY. 8. THE RELEVANT SUBMISSIONS MADE BY THE LD. COUNSEL FOR THE ASSESSEE ON THIS ISSUE ARE COMMON FOR BOTH THE YEARS. THEREFORE, THE SUBMISSIONS MADE BY WAY OF WRITTEN SYNOPSIS FOR THE A.Y. 2010 - 11 ARE REPRODUCED AS UN DER : THE APPELLANT IN THE RELEVANT PREVIOUS YEAR ENTERED INTO THE FOLLOWING INTERNATIONAL TRANSACTIONS WITH THE ASSOCIATED ENTERPRISES: SL. NO. INTERNATIONAL TRANSACTIONS AMOUNT PAYMENT (RS.) METHOD APPLIED 1. IMPORT OF RAW MATERIAL, AND COMPONENTS 328,338,399 TNMM 2. EXPORT OF SPARES 81,60,405 TNMM 3. IMPORT OF FINISHED GOODS 258,942,760 TNMM 4. EXPORT OF FINISHED GOODS 114,376,442 TNMM 5. PAYMENT OF ROYALTY 91,905,263 TNMM 6. PAYMENT OF TECHNICAL ASSISTANCE FEE 20,092,761 TNMM 7. PAYMENT OF EXPORT COMMISSION 47,054,017 TNMM 8. REIMBURSEMENT OF EXPENSES BY AES 1,065,607 COST RECHARGES 9. REIMBURSEMENT OF EXPENSES TO AES 33,447 COST RECHARGES ITA NO S . 551/DEL./2014 & 636/DEL./2015 22 IN THE TRANSFER PRICING STUDY REPORT, THE INTERNATIONAL TRANSACTIONS HAVE BEEN BENCHMARKED USING TRANSACTIONAL NET MARGIN METHOD ( TNMM ) AS THE MOST APPROPRIATE METHOD WITH OPERATING PROFIT/OPERATING REVENUE (OP/OR) RATIO AS PROFIT LEVEL INDICATOR. FOR THE PURPOSE OF SELECTING COMPARABLES THE APPELLANT HAS SELECTED COMPANIES ENGAGED IN MANUFACTURING OF ENGINE AND GENERATORS AND THE FOLLOWING FILTERS WERE USED FOR REJECTING NON - COMPARABLE COMPANIES: A. COMPANIES FOR WHICH SUFFICIENT INFORMATION IS NOT AVAILABLE B. COMPANIES THAT DO NOT HAVE SIGNIFICANT (LESS THAN 25%) FOREIGN EXCHANGE EARNINGS; C. COMPANIES THAT HAVE SUBSTA NTIAL (EXCESS OF 25%) RELATED PARTY TRANSACTIONS; D. COMPANIES INCURRING PERSISTENT LOSSES ACCORDINGLY, THE APPELLANT HAS ANALYSED THE OP/TC RATIO OF THE FOLLOWING 10 COMPARABLE COMPANIES: S. NO. COMPANY NAME OP/OC % ECONOMIC ACTIVITY 1 BIRLA POWER SOLUTIONS - 3.70% GENSETS 2 GREAVES COTTON LTD 10.31% GENSETS AND ENGINES 3 GUJARAT FORGINGS LTD 4.56% DIESEL ENGINES, PUMPSETS 4 JAKSONS LTD 6.51% GENSETS 5 KIRLOSKAR BROS LTD 7.65% INDUSTRIAL AND ENGINEERING PUMPS 6 POWERICA LTD 12.48% DIESEL AND GAS GENSETS 7 SHAKTI PUMPS LTD 12.28% SUBMERSIBLE AND BOOSTER PUMPS 8 SOUTHERN AGRO ENGINES PVT LTD 4.62% ENGINES AND PUMPSETS 9 SUDHIRGENSETS LTD 16.80% GENSETS 10 SUPERNOVA ENGINEERS LTD 4.53% DIESEL AND GAS GENSETS AVERAGE PLI 7.60% APPELLANT 10.67% SINCE THE OPERATING PROFIT MARGIN OF THE COMPARABLES AT 7.60% WAS LESS THAN THE OPERATING PROFIT MARGIN OF THE APPELLANT AT 10.67%, THE INTERNATIONAL TRANSACTIONS WERE STATED TO BE AT ARM S LENGTH APPLYING TNMM AS MOST APPROPRIATE METHOD. ITA NO S . 551/DEL./2014 & 636/DEL./2015 23 THE BENCHMARKING ANALYSIS, AS AFORESAID, UNDERTAKEN BY THE APPELLANT, WAS NOT DISPUTED BY THE TPO AND THE INTERNATIONAL TRANSACTIONS HAVE BEEN CONSIDERED TO BE AT ARM S LENGTH. THE TPO, HOWEVER, HAS PROCEEDED TO UNDERTAKE THE BENCHMARKING ANALYSIS OF ADVER TISEMENT, MARKETING AND SALES PROMOTION (AMP) EXPENSES AGGREGATING TO RS.12,62,35,000 INCURRED BY THE APPELLANT ON THE PRODUCTS HONDA DURING THE RELEVANT PREVIOUS YEAR, AS FOLLOWS: PARTICULARS AMOUNT (RS.) COMMISSION ON SALES 5,02,96,000 ADVERTISEMENT AND PUBLICITY 1,76,58,000 SALES PROMOTION 3,72,36,000 TOTAL 12,62,35,000 THE TRANSFER PRICING OFFICER (TPO) HAD UNDERTAKEN BENCHMARKING ANALYSIS OF AMP EXPENSES INCURRED BY THE APPELLANT ALLEGEDLY APPLYING THE BRIGHT LINE TEST. THE TPO HAS HELD THAT THE AMP EXPENSES TO THAT EXTENT WERE INCURRED FOR CREATING MARKETING INTANGIBLE OF HONDA BRAND WHICH BELONGS TO THE ASSOCIATED ENTERPRISE AND, THEREFORE, REQUIRES COMPENSATION ALONG WITH A MARK - UP FOR THE BRAND PROMOTION SERVICES. FOR APPLY ING BRIGHT LINE TEST, THE TPO COMPARED AMP EXPENDITURE OF 4.13% (AS A PERCENTAGE OF TOTAL TURNOVER) INCURRED BY THE APPELLANT WITH AVERAGE AMP EXPENDITURE OF 1% OF THE FOLLOWING COMPARABLE COMPANIES: NAME OF COMPANY AMP/SALES BIRLA POWER SOLUTIONS 1.43% GREAVES COTTON 0.32% GUJARAT FORGINGS LTD 1.61% JAKSONS LTD 0.60% KIRLOSKAR BROTHER LTD 1.25% POWERICA LTD 0.22% SHAKTI PUMPS LTD 2.74% SUDHIRGENSETS LTD 0.28% SUPERNOVA ENGINEERS LTD 0.51% ITA NO S . 551/DEL./2014 & 636/DEL./2015 24 ARITHMETIC MEAN 1.00% THE TPO ACCORDINGLY, HELD THAT, SINCE THE RATIO OF AMP EXPENSES AS A PERCENTAGE OF SALES IN CASE OF THE APPELLANT AT 4.13% WAS HIGHER THAN AMP EXPENSES OF 1% INCURRED BY THE ABOVE COMPARABLE COMPANIES, THE APPELLANT HAD INCURRED NON - ROUTINE AMP EXPENSES TO THE EXTENT OF THE DIFFERENTIAL, WHICH RESULTED IN CREATION OF MARKETING INTANGIBLES ON ACCOUNT OF PROMOTION AND DEVELOPMENT OF BRAND, VIZ., HONDA OWNED BY THE ASSOCIATED ENTERPRISE. THE TRANSFER PRICING OFFICER, ACCORDINGLY, IN THE ORDER PASSED UNDER S ECTION 92CA(3) OF THE ACT MADE AN ADJUSTMENT OF RS. 10,98,88,464 ON ACCOUNT OF THE ALLEGED DIFFERENCE IN ADVERTISEMENT AND PROMOTION EXPENDITURE INCURRED BY THE APPELLANT AND THE ARM S LENGTH PRICE OF SUBSIDY RECEIVED FROM THE ASSOCIATED ENTERPRISES (AES) AS FOLLOWS: COMPUTATION OF TP ADJUSTMENT AMOUNT (RS. IN LACS) VALUE OF SALES 3,058,005,000 AMP / SALES OF THE COMPARABLES 1% AMOUNT THAT REPRESENTS BRIGHT LINE 30,580,000 EXPENDITURE ON AMP BY ASSESSEE 12,62,35,000 EXPENDITURE IN EXCESS OF BRIGHT LINE 9,56,55,000 MARK - UP @ 14.88% 1,42,33,464 REIMBURSEMENT THAT ASSESSEE SHOULD HAVE RECEIVED. 10,98,88,464 ADJUSTMENT TO ASSESSEE S INCOME 10,98,88,464 A SPECIAL BENCH WAS CONSTITUTED IN THE MATTER OF L.G. ELECTRONICS INDIA PVT. LTD., TO CONSIDER THE ABOVE CONTROVERSY RELATING TO TRANSFER PRICING ADJUSTMENT IN RELATION TO AMP EXPENSES. THE SPECIAL BENCH, VIDE ORDER DATED 23 - 01 - 2013 IN ITA NO. 5140/DEL/20 11, DELIVERED ITS DECISION. MAJORITY OF THE SPECIAL BENCH OF THE TRIBUNAL ARRIVED, INTER ALIA, AT THE FOLLOWING CONCLUSION: (I) WHERE THE INDIAN COMPANY HAS INCURRED EXPENDITURE ON ADVERTISEMENTS OF THE FOREIGN BRAND AND THE AMP EXPENSES INCURRED BY THE TAXPAY ER ARE PROPORTIONATELY HIGHER THAN THOSE INCURRED BY COMPARABLE CASES, THE SAME LEADS TO THE INFERENCE OF TRANSACTION BETWEEN THE TAXPAYER AND THE FOREIGN AE FOR CREATING MARKETING INTANGIBLES ON BEHALF OF THE LATER. ITA NO S . 551/DEL./2014 & 636/DEL./2015 25 (II) THE TRANSACTION OF BRAND BUILDING I S A TRANSACTION OF CREATING AND IMPROVING MARKETING INTANGIBLES BY THE TAXPAYER FOR AND ON BEHALF OF ITS FOREIGN AE; SUCH TRANSACTION IS IN THE NATURE OF PROVISION OF SERVICE. (III) THE BRIGHT LINE TEST IS USED ONLY TO ASCERTAIN THE COST / VALUE OF SERVICE RENDE RED BY THE TAXPAYER TO FOREIGN AE TOWARDS CREATION AND IMPROVEMENT OF MARKETING INTANGIBLES. (IV) THE SPECIAL BENCH ACCORDINGLY HELD THAT AMP EXPENSE MAY RESULT IN TRANSACTION OR INTERNATIONAL TRANSACTION, WHICH MAY BE BENCHMARKED UNDER THE TRANSFER PRICING RE GULATIONS. 1. NO INTERNATIONAL TRANSACTION THE SAID DECISION OF SPECIAL BENCH OF THE TRIBUNAL RECENTLY WAS CONSIDERED BY THE HON BLE DELHI HIGH COURT IN THE CASE OF SONY ERICSSON MOBILE COMMUNICATIONS INDIA PVT. LTD. VS. CIT 374 ITR 118. IN THE SAID DECISION THE HON BLE DELHI HIGH COURT CONSIDERED THE CASE OF LIMITED RISK DISTRIBUTORS, I.E., SONY ERICSSON, CANON AND REEBOK, ETC., WHEREIN, THE EXISTENCE OF INTERNATIONAL TRANSACTION ON ACCOUNT OF AMP EXPENDITURE WAS ADMITTED AND REPORTED. THE DELHI HIGH COURT IN THE SAID DECISION UPHELD TP ADJUSTMENT IN RESPECT OF AMP EXPENSES ONLY IN RESPECT OF LIMITED RISK DISTRIBUTORS AND NOT IN RESPECT OF FULL RISK MANUFACTURERS. THE HIGH COURT FOLLOWED AND APPLIED PARA 6.38 OF THE OECD TRANSFER PRICING GUIDELINES. IT IS OF VITAL IMPORTANCE TO NOTE THAT THE GUIDELI NES APPLY ONLY TO LIMITED RISK DISTRIBUTORS AND NOT TO FULL RISK MANUFACTURERS LIKE THE APPELLANT FURTHER, AT PARA 124 OF THE ORDER, THE HON BLE HIGH COURT HAS DISTINGUISH ED BETWEEN THE FUNCTIONAL PROFILE OF A LIMITED RISK DISTRIBUTOR AND A FULL RISK DISTRIBUTOR . THE HON BLE HIGH COURT IN THE CASE OF SONY ERICSSON MOBILE COMMUNICATIONS INDIA PVT LTD (SUPRA) HAS FURTHER HELD THAT NO TRANSFER PRICING ADJUSTMENT IN RESPECT OF AMP EXPENSE CAN BE MADE WHERE THE ASSESSEE (INDIAN ENTITY) HAS ECONOMIC OWNERSHIP OF THE BRAND/LOGO/TRADEMARK IN QUESTION, IN THE CASE OF LONG TERM RIGHT OF USE OF THE SAME. THIS PRINCIPLE ALSO SQUARELY COVERS THE PRESENT CASE. THE APPELLANT HAS A LONG TER M AGREEMENT FOR THE USE OF THE TRADEMARK HONDA IN INDIA. THIS CLEARLY EVIDENCES THE FACT THAT THE ECONOMIC BENEFIT ARISING OUT OF THE ALLEGED PROMOTION OF THE AE S LOGO IS BEING ENJOYED BY THE APPELLANT. THERE IS A CLEAR OPPORTUNITY AND REASONABLE ANTIC IPATION FOR THE APPELLANT TO BENEFIT FROM THE MARKETING ACTIVITIES UNDERTAKEN BY IT. THIS IS ITA NO S . 551/DEL./2014 & 636/DEL./2015 26 CLEARLY EVIDENCED BY THE SIGNIFICANTLY HIGHER PROFITS MADE BY ASSESSEE COMPARED TO ITS INDUSTRY PEERS AND ALSO THE VERY SIZABLE YEAR ON YEAR INCREASE IN ITS TURNO VER. IN VIEW OF THE AFORESAID, IT IS RESPECTFULLY SUBMITTED THAT THE ECONOMIC OWNERSHIP OF THE TRADEMARK HONDA RESTS WITH THE APPELLANT. THE HON BLE HIGH COURT IN THE CASE OF SONY ERICSSON MOBILE COMMUNICATIONS INDIA PVT LTD VS CIT (ITA NO 16/2014) DISAG REED WITH THE FINDING OF THE SPECIAL BENCH THAT THE CONCEPT OF ECONOMIC OWNERSHIP IS NOT RECOGNIZED UNDER THE ACT. AS HELD BY THE HON BLE DELHI HIGH COURT DECISION IN THE CASE OF SONY ERICSSON MOBILE COMMUNICATIONS (SUPRA), IF THE INDIAN ENTITY IS THE E CONOMIC OWNER OF THE BRAND AND IS INCURRING AMP EXPENSES FOR THE PURPOSE OF PROMOTION OF SUCH BRAND, BENEFIT IS ONLY RECEIVED BY THE INDIAN ENTITY. IT IS RESPECTFULLY SUBMITTED THAT THE ECONOMIC OWNERSHIP OF THE BRAND RESTS WITH THE APPELLANT AND ACCORDING LY, THE APPELLANT CANNOT BE EXPECTED TO SEEK COMPENSATION FOR THE EXPENDITURE INCURRED ON THE ASSET ECONOMICALLY OWNED BY IT. NO TRANSFER PRICING ADJUSTMENT ON ACCOUNT OF AMP EXPENSES WOULD BE WARRANTED. THE AFORESAID TEST IS FULLY SATISFIED IN THE CASE OF THE APPELLANT AND THE TRANSFER PRICING ADJUSTMENT ON ACCOUNT OF AMP EXPENSES MADE BY THE TPO IS LIABLE TO BE DELETED. IT IS SUBMITTED THAT IN CASE OF A DISTRIBUTOR OF THE PRODUCTS OF THE AE, THE OVERSEAS SUPPLIER OF THE GOODS HAS A HIGHER POTENTIAL OF REP ATRIATING PROFITS FROM INDIA BY WAY OF HIGHER PRODUCT PRICING AND SQUEEZING THE RETURN LEFT FOR THE INDIAN DISTRIBUTOR. IT IS PERTINENT TO NOTE THAT ORDINARILY FOR A DISTRIBUTOR, WHO IS FUNCTIONALLY ONLY A RESELLER AND TYPICALLY DOES NOT ADD VALUE, THE COS T OF SALES (COMPRISING ESSENTIALLY OF FINISHED GOOD PURCHASES) TO SALES IS A SIGNIFICANT PERCENTAGE. IN CASE OF MANUFACTURER, ANY EXPENDITURE INCURRED ON ACCOUNT OF ADVERTISEMENT AND MARKETING EXPENSES ARE BORNE BY IT AND THE RELATED BENEFITS ALSO ACCRUE T O THE MANUFACTURER. THE FUNCTIONS PERFORMED BY THE MANUFACTURER IN INDIA ARE SIGNIFICANT AND VALUE ADDING AND ACCORDINGLY THE RETURNS FOR SUCH FUNCTIONS VESTS WITH THE INDIAN MANUFACTURER. WITH RESPECT TO THE MANUFACTURING AND SALES OF ALL THE DIFFERENT V ARIANTS OF THE PRODUCT HONDA (WHICH TRADEMARK IS OWNED BY THE AE), THE FOLLOWING OPERATIONS ARE EXCLUSIVELY DONE/BORNE BY THE APPELLANT WITHOUT ANY INTERVENTION OF THE AE: - STRATEGIC BUSINESS PLANNING - MANUFACTURING AND PACKING OPERATIONS - RAW MATERIAL PROCUREMENT - SPECIFICATIONS OF THE FINAL PRODUCT ITA NO S . 551/DEL./2014 & 636/DEL./2015 27 - QUALITY TESTING - TECHNOLOGY AND LEGAL COMPLIANCE - SELLING AND DISTRIBUTION - MARKETING AND PROMOTIONAL STRATEGY - ANNUAL ADVERTISEMENT SPENDS - CHOICE OF MEDIA - SCOPE OF MARKETING - PRODUCT RECALL - RISK OF PRODUCT EXPIRY/LOSS - CONSUMER COMPLAINTS - FINANCIAL RISKS (WORKING CAPITAL, INVENTORY, CREDIT RISK/BAD DEBT, ETC.) - EMPLOYMENT OF ASSETS (LAND, BUILDING, PLANT & MACHINERY, INFORMATION TECHNOLOGY, FINANCE, OFFICE EQUIPMENTS, ETC.) HENCE IT WOULD BE APPRECIATED T HAT THE APPELLANT, BEING A FULL - FLEDGED MANUFACTURER AND NOT A DISTRIBUTOR, THE ENTIRE AMP EXPENSE IS INCURRED AT ITS OWN DISCRETION AND FOR ITS OWN BENEFIT FOR SALE OF HONDA PRODUCTS IN INDIA. IN SUCH CIRCUMSTANCES, THERE DOES NOT RESULT AN INTERNATIONAL TRANSACTION AND THE APPELLANT CANNOT BE EXPECTED TO SEEK COMPENSATION FOR THE ALLEGEDLY EXCESS AMP EXPENDITURE INCURRED BY IT. THE APPELLANT, BEING A FULL - FLEDGED MANUFACTURER AND NOT A DISTRIBUTOR, ENTIRE AMP EXPENSE IS INCURRED AT ITS OWN DISCRETION AND FOR ITS OWN BENEFIT FOR SALE OF HONDA PRODUCTS IN INDIA. IN THE CASE OF THE APPELLANT, THE ADVERTISEMENTS ARE AIMED AT PROMOTING THE SALES OF THE PRODUCT SOLD UNDER TRADEMARK HONDA MANUFACTURED BY THE APPELLANT AND NOT TOWARDS PROMOTING THE BRAND NAME OF THE AE. IN SUCH CIRCUMSTANCES, THE ALLEGED EXCESS AMP EXPENDITURE DOES NOT RESULT IN AN INTERNATIONAL TRANSACTION AND THE APPELLANT CANNOT BE EXPECTED TO SEEK COMPENSATION FOR SUCH EXPENSES UNILATERALLY INCURRED BY IT FROM THE AE. 2. NATURE OF ADVERTISEMENT S: IT IS SUBMITTED THAT ADVERTISEMENT AND SELLING EXPENSES HAVE BEEN INCURRED BY THE ASSESSEE ONLY ON THE PRODUCTS DEALT IN BY THE APPELLANT IN INDIA. THE APPELLANT IN THE ADVERTISEMENT PROMOTES SALE OF THESE PRODUCTS DEALT IN BY THE ASSESSEE IN INDIA AND NOT THE BRAND NAME OF THE ASSOCIATED ENTERPRISE. THE HON BLE DELHI HIGH COURT IN THE CASE OF SONY ERICSSON MOBILE COMMUNICATIONS (SUPRA) HELD THAT EXPENDITURE INCURRED FOR PROMOTING PRODUCTS CANNOT BE REGARDED AS EXPENDITURE FOR INCURRED FOR DEVELOPMENT O F BRAND. THE HON BLE COURT HELD AS UNDER: ITA NO S . 551/DEL./2014 & 636/DEL./2015 28 IN VIEW OF THE AFORESAID, IT IS RESPECTFULLY SUBMITTED THAT SINCE THE AMP EXPENDITURE INCURRED BY THE APPELLANT IS RESTRICTED TO PROMOTION OF SALE OF ITS PRODUCTS RATHER THAN DEVELOPMENT OF BRAND, THE ADJUSTMENT MADE BY THE TPO ON THE BASIS THAT THE APPELLANT IS DEVELOPING BRAND HONDA ON BEHALF OF ITS ASSOCIATED ENTERPRISE IS FLAWED LIABLE TO BE REJECTED. THE APPELLANT, PURSUANT TO THE LICENSE AGREEMENT, IS AUTHORIZED TO MANUFACTURE THE MODELS/VARIANTS OF GENSE TSETC FOR SALE IN INDIA. ON FACTS OF APPELLANT S CASE, APART FROM ADVERTISING ONLY FOR THE PRODUCTS SOLD IN INDIA, NO BRAND NAME IS SEPARATELY ADVERTISED. IN VIEW OF THE AFORESAID, IT IS SUBMITTED THAT IN CASE OF A FULL RISK DISTRIBUTOR OR A FULL RISK MANUFACTURER, RUNNING AN INDEPENDENT BUSINESS, NO COMPENSATION ON ACCOUNT OF AMP EXPENSES IS WARRANTED. 3. BRIGHT LINE TEST IS NOT THE PRESCRIBED METHOD: THE BRIGHT LINE TEST APPROVED BY THE SPECIAL BENCH IN THE CASE OF LG ELECTRONICS INDIA PVT. LTD. (ITA NO 5140/DEL/2011) IS NOT ONE OF THE FIVE METHODS PROVIDED UNDER THE ACT. IN OTHER WORDS, WHILE EMBARKING ON BENCHMARKING OF AMP EXPENSES, NONE OF THE FIVE PRESCRIBED METHODS ARE APPLIED BY THE REVENUE. THE HON BLE HIGH COURT IN THE CASE OF SONY ERICSSON M OBILE COMMUNICATIONS (SUPRA) UPHELD THE AFORESAID CONTENTION THAT BRIGHT LINE TEST HAS NO MANDATE UNDER THE ACT. IN VIEW OF THE AFORESAID, IT IS RESPECTFULLY SUBMITTED THAT THE BRIGHT LINE TEST HAS NO MANDATE UNDER THE ACT AND ACCORDINGLY THE SAME CANNO T BE RESORTED TO FOR THE PURPOSE OF ASCERTAINING IF THERE EXISTS AN INTERNATIONAL TRANSACTION OF BRAND PROMOTION SERVICES BETWEEN THE APPELLANT AND THE ASSOCIATED ENTERPRISE. THE HON BLE DELHI HIGH COURT IN THE CASE OF SONY ERICSSON MOBILE COMMUNICATIONS INDIA PVT LTD VS CIT (ITA NO 16/2014) HELD THAT IF THE INDIAN ENTITY HAS SATISFIED TRANSACTIONAL NET MARGIN METHOD (TNMM), I.E., AS LONG AS THE OPERATING MARGINS OF THE INDIAN ENTERPRISE ARE HIGHER THAN THE OPERATING MARGINS OF COMPARABLE COMPANIES, NO FU RTHER/SEPARATE COMPENSATION FOR AMP EXPENSES IS WARRANTED. IN THE PRESENT CASE, THE OPERATING PROFIT MARGIN OF THE APPELLANT AT 10.67% IS HIGHER THAN THAT OF THE COMPARABLE COMPANIES AT 7.67% AND TNMM HAS UNDISPUTEDLY BEEN SATISFIED AND ACCEPTED BY THE TPO. SINCE THE OPERATING MARGINS OF THE APPELLANT ARE IN EXCES S OF THE SELECTED COMPARABLE COMPANIES, NO ADJUSTMENT ON ACCOUNT OF AMP EXPENSES IS WARRANTED IN THE CASE OF THE APPELLANT. ITA NO S . 551/DEL./2014 & 636/DEL./2015 29 4. WITHOUT PREJUDICE - SELLING EXPENSES NOT TO BE CONSIDERED WHILE COMPUTING THE ADVERTISEMENT AND MARKETING EXPENSES IT IS RESPECTFULLY SUBMITTED THAT FOR PURPOSE OF APPLYING THE BRIGHT LINE TEST, THE TPO HAS CONSIDERED SELLING AND DISTRIBUTION EXPENSES AMOUNTING TO RS. 7,13,41,000 AS EXPENSES INCURRED FOR PROMOTION OF HONDA BRAND. SUCH SELLING AND DISTRIBUTION EXPENSES ARE EXPENSES INCURRED IN CONNECTION WITH SALE AND DO NOT LEAD TO BRAND PROMOTION AS HELD BY THE HON BLE SPECIAL BENCH: S NO. PARTICULARS AMOUNT (RS) 1 COMMISSION ON SALES 5,02,96,000 2 SALES DISCOUNT 2,10,45,000 TOTAL 7,13,41,000 THE TPO HAS NOT FOLLOWED THE SPECIAL BENCH DECISION BY NOT EXCLUDING SELLING AND DISTRIBUTION EXPENSES DEBITED TO THE PROFIT AND LOSS ACCOUNT. IT IS SUBMITTED THAT THE AFORESAID SELLING AND DISTRIBUTION EXPENSES AGGREGATING TO RS. 7,13,41,000 , INCURRED BY THE APPLICANT, BEING EXPENSES INCURRED IN CONNECTION WITH EFFECTING THE SALE, DO NOT LEAD TO BRAND PROMOTION AS HELD BY THE HON BLE SPECIAL BENCH FURTHER, HON BLE DELHI HIGH COURT, TOO, AT PARA 176, REITERATED THAT MARKETING OR SELLING EXPENSES LIKE TRADE DISCOUNTS, VOLUME DI SCOUNTS, ETC. OFFERED TO SUB - DISTRIBUTORS OR RETAILERS ARE NOT IN THE NATURE AND CHARACTER OF BRAND PROMOTION . ACCORDINGLY, IN TERMS OF THE DIRECTIONS OF THE HON BLE TRIBUNAL AND THE POSITION UPHELD BY THE HON BLE HIGH COURT, THE ADVERTISEMENT EXPENSES OF RS. 5,48,94,000 ONLY CONSTITUTING 1.80% OF THE TURNOVER IS TO BE CONSIDERED AS AMP EXPENSES INCURRED BY THE APP ELLANT EXCLUSIVELY FOR SALES OF ITS OWN PRODUCT BEARING THE AE S BRAND NAME HONDA . DURING THE COURSE OF THE HEARING, IT WAS SUBMITTED BY THE LD. AR THAT THE ASSESSEE WAS A MANUFACTURER AND IN THE FACT OF THE CASE , THERE WAS NO MATERIAL BROUGHT ON RECOR D BY THE REVENUE TO ESTABLISH THAT THE AMP EXPENDITURE WERE INCURRED PURSUANT TO ARRANGEMENT, UNDERSTANDING OR ACTION IN CONCERT SO AS TO ITA NO S . 551/DEL./2014 & 636/DEL./2015 30 CONCLUDE AS A TRANSACTION IN TERMS OF SECTION 92(F)(2) OF THE ACT SO AS TO GIVE RISE TO AN INTERNATIONAL TRANSACTION. IT WAS SUBMITTED THAT DELHI BENCH OF TRIBUNAL IN ASSESSEE S OWN CASE FOR A.Y. 2008 - 09 IN ITA NO. 6023/DEL./2012 VIDE ORDER DATED 12.12.2014 REMITTED THIS ISSUE BACK TO THE FILE OF TPO. THIS ORDER OF ITAT WAS ASSAILED BEFORE THE HON BLE DELHI HIGH COURT WH ERE, THE HON BLE COURT HAS DECIDED THE ISSUE IN FAVOUR OF THE ASSESSEE VIDE ORDER DATED 23.12.2015. 9. THE LEARNED D.R. RELIED UPON THE ORDERS OF THE AUTHORITIES BELOW. THE LD. DR ALSO RELIED ON THE ORDERS OF ITAT IN THE CASE OF CRANES SOFTWARE INTERNATIONAL LTD. VS. DCIT 52 TAXMAN.COM 19 (BANG. TRIBUNAL) AND OF DELHI HIGH COURT IN CIT VS. AMADUES INDIA PVT. LTD. IN ITA NO. 535/2014 AND 729/2014 DATED 15.04.2015 AND ITA NO. 23/2015 & 55/2015 DATED 21.09.15 IN THE CASE OF REBOK INDIA CO. VS. CIT 10. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS IN THE LIGHT OF MATERIAL AVAILABLE ON RECORD AND WE FIND THAT THE DELHI BENCH OF THE TRIBUNAL IN THE ASSESSEE S CASE FOR ASSESSMENT Y EAR 2008 - 09, BEARING ITA NO. 6023/DEL/2012 HAS REMITTED THE SIMILAR ADDITION MADE ON ACCOUNT OF TRANSFER PRICING ADJUSTMENT IN RESPECT OF AMP EXPENSES TO THE TPO FOR DECIDING AS PER THE DECISION OF THE SPECIAL BENCH OF THE TRIBUNAL IN THE CASE OF THE LG EL ECTRONICS. IT WAS ALSO SUBMITTED THAT THE DECISION OF THE SPECIAL BENCH IN THE CASE OF LG ELECTRONICS HAS BEEN CONSIDERED AND OVER - RULED BY THE HON BLE DELHI HIGH COURT IN THE CASE OF SONY ERICKSON. RELEVANT PORTION OF THE SAID ORDER READS AS FOLLOWS: 5. 2 IT IS SEEN THAT THE SPECIAL BENCH IN L.G. ELECTRONICS CASE IN PARA 17.4 HAS GIVEN CERTAIN DIRECTIONS ON THE BASIS OF WHICH THE AMP IS TO BE ITA NO S . 551/DEL./2014 & 636/DEL./2015 31 CALCULATED. PARA 17.6 FURTHER GIVES SPECIFIC DIRECTIONS IN REGARD TO THE COMPARABLES. ON A CONSIDERATION THEREOF, WE ARE OF THE VIEW THAT IN THE PECULIAR FACTS AND CIRCUMSTANCES OF THE CASE AND THE MATERIAL AVAILABLE ON RECORD, IT WOULD BE APPROPRIATE TO RESTORE THE ISSUE BACK TO THE FILE TO THE TPO WITH THE DIRECTION TO PASS A SPEAKING ORDER IN ACCORDANCE WITH LAW TA KING INTO CONSIDERATION THE PRINCIPLES LAID DOWN BY THE SPECIAL BENCH IN L.G. ELECTRONICS CASE AND IN THE EVENTUALITY THEY ARE MODIFIED OR SUBSTITUTED BY THE DECISION OF THE JURISDICTIONAL HIGH COURT IN THE CASE OF CANON INDIA PVT. LTD., THE SAME SHALL ALS O NECESSARILY BE TAKEN INTO CONSIDERATION. IN VIEW OF THE ABOVE, GROUND NO. 3 ALONG WITH VARIOUS SUB - GROUNDS ARE ALLOWED FOR STATISTICAL PURPOSES. 10.1 WE FURTHER NOTE THAT THE HON BLE DELHI HIGH COURT IN THE APPELLANT S APPEAL AGAINST THE ABOVE ORDER FO R A.Y. 2008 - 09 (ITA NO 346/2015) HAS HELD THAT AMP EXPENSES UNILATERALLY INCURRED BY THE APPELLANT CANNOT BE CONSTRUED AS AN INTERNATIONAL TRANSACTION. THE RELEVANT OBSERVATIONS OF HON BLE COURT ARE REPRODUCED AS UNDER FOR READY REFERENCE : 37. ADDITIONA LLY IT WAS HELD BOTH IN MSIL (SUPRA) AS WELL AS WHIRLPOOL OF INDIA LIMITED (SUPRA) THAT IN TERMS OF THE LAW EXPLAINED BY THE SUPREME COURT IN CIT V. B.C. SRINIVAS SETTY (1981) 128 ITR 294 (SC) AND PNB FINANCE LIMITED V. CIT (2008) 307 ITR 75 (SC), IN THE A BSENCE OF ANY MACHINERY PROVISION, BRINGING AN IMAGINED INTERNATIONAL TRANSACTION TO TAX IS FRAUGHT WITH THE DANGER OF INVALIDATION. IN THE PRESENT CASE, IN THE ABSENCE OF THERE BEING AN INTERNATIONAL TRANSACTION INVOLVING AMP SPEND WITH AN ASCERTAINABLE P RICE, EVEN IF SUCH PRICE WERE TO BE NIL, NEITHER THE SUBSTANTIVE NOR THE MACHINERY PROVISION OF CHAPTER X ARE APPLICABLE TO THE TRANSFER PRICING ADJUSTMENT EXERCISE. 38. THE COURT IS SATISFIED THAT IN THE PRESENT CASE, THE ASSESSEE IS CARRYING ON BUSINESS AS AN INDEPENDENT ENTERPRISE AND IS INCURRING AMP EXPENSES FOR ITS OWN BENEFIT AND NOT AT THE BEHEST OF THE AE. THE BENEFIT OF CREATION OF MARKETING INTANGIBLES FOR T HE FOREIGN AE ON ACCOUNT OF AMP EXPENSES CAN AT BEST SAID TO BE INCIDENTAL. THE DECISION IN SONY ERICSSON (SUPRA) ACKNOWLEDGES THAT AN EXPENDITURE ITA NO S . 551/DEL./2014 & 636/DEL./2015 32 CANNOT BE DISALLOWED WHOLLY OR PARTLY BECAUSE IT INCIDENTALLY BENEFITS THE THIRD PARTY. THIS WAS IN CONTEXT O F SECTION 37(1) OF THE ACT. REFERENCE WAS MADE TO THE DECISION IN SASSOON J DAVID & CO PVT. LTD. V. CIT (1979) 118 ITR 26 (SC). THE SUPREME COURT IN THE SAID DECISION EMPHASISED THAT THE EXPRESSION 'WHOLLY AND EXCLUSIVELY' USED IN SECTION 10 (2) (XV) OF TH E ACT (INDIAN INCOME TAX ACT, 1922) DID NOT MEAN 'NECESSARILY1. IT SAID: 'THE FACT THAT SOMEBODY OTHER THAN THE ASSESSEE IS ALSO BENEFITTED BY THE EXPENDITURE SHOULD NOT COME IN THE WAY OF AN EXPENDITURE BEING ALLOWED BY WAY OF A DEDUCTION UNDER SECTION 10 (2) (XV) OF THE ACT (INDIAN INCOME TAX ACT, 1922) IF IT SATISFIES OTHERWISE THE TESTS LAID DOWN BY THE LAW.' 39. THE OECD TRANSFER PRICING GUIDELINES, PARA 7.13 EMPHASISES THAT THERE SHOULD NOT BE ANY AUTOMATIC INFERENCE ABOUT AN AE RECEIVING AN ENTITY G ROUP SERVICE ONLY BECAUSE IT GETS AN INCIDENTAL BENEFIT FOR BEING PART OF A LARGER CONCERN AND NOT TO ANY SPECIFIC ACTIVITY PERFORMED. EVEN PARAS 133 AND 134 OF THE SONY ERICSSON JUDGMENT MAKES IT CLEAR THAT AMP ADJUSTMENT CANNOT BE MADE IN RESPECT OF A FU LL - RISK MANUFACTURER. 40. CERTAIN ADDITIONAL FACTS HAVE BEEN MENTIONED BY THE ASSESSEE IN ITS WRITTEN NOTE OF SUBMISSIONS. IT IS POINTED OUT THAT DURING THE FINANCIAL YEAR 2007 - 2008 RELEVANT TO THE AY IN QUESTION, OF THE TOTAL TURNOVER OF RS. 251.06 CRORE ONLY RS. 9.57 CRORE, CONSTITUTING 3.81 PER CENT, IS TOWARDS DISTRIBUTION ACTIVITY WHEREAS THE BALANCE REVENUE OF RS. 241.48 CRORE WAS FROM THE MANUFACTURING ACTIVITY. FURTHER IT IS POINTED OUT THAT THE CONTENTION OF THE REVENUE THAT MARKET DEVELOPMENT IN INDIA IS THE FUNCTION OF THE AE IS FACTUALLY INCORRECT. IT IS POINTED OUT THAT PARA 4.30 OF THE TP DOCUMENTATION HAS STATED THAT THE ASSESSEE PLANS AND EXECUTES ITS OWN MARKETING STRATEGY AS IT CONSIDERS NECESSARY AND APPROPRIATE. FURTHER AS AN INDEPENDENT MANUFACTURER THE ASSESSEE BEARS ALL THE RISKS ASSOCIATED WITH ITS BUSINESS OF MANUFACTURING AND SALE OF PRODUCTS IN INDIA AND ABROAD. THE CONDITION IN THE LICENSE AGREEMENT THAT THE TECHNOLOGY WILL BE USED FOR SALE OF GOODS IN DESIGNATED JURISDICTIONS OR SPECIFIED TERRITORIES IS NOT AN UNUSUAL ARRANGEMENT. THE QUESTION OF RECHARACTERISING THE ASSESSEE AS A 'CONTRACT MANUFACTURER' WAS UNWARRANTED. THE COURT FINDS THAT THE REVENUE HAS NOT BEEN ABLE TO CONTROVERT ANY OF THE ABOVE SUBMISSIONS. ITA NO S . 551/DEL./2014 & 636/DEL./2015 33 41. IN THAT VIE W OF THE MATTER, THE QUESTION OF A BENCHMARKING ANALYSIS BY EVALUATING THE AMP EXPENSES INCURRED BY THE ASSESSEE IN RELATION TO ITS TOTAL SALES VIS - A - VIS ITS COMPARABLES IS NOT CALLED FOR. THERE IS NOTHING TO INDICATE THAT THE AMP EXPENSES INCURRED BY THE ASSESSEE IS AT THE INSTANCE OF FOREIGN AE AND THAT THE ASSESSEE HAS TO BE COMPENSATED BY THE FOREIGN AE IN THAT BEHALF. 42. QUESTION (II) IS ANSWERED IN FAVOUR OF THE ASSESSEE AND AGAINST THE REVENUE BY HOLDING THAT THE REVENUE HAS NOT BEEN ABLE TO DEMONS TRATE THAT THERE EXISTS AN INTERNATIONAL TRANSACTION INVOLVING THE ASSESSEE AND A FOREIGN AE ON THE QUESTION OF AMP EXPENSES. 10.2 RESPECTFULLY FOLLOWING THE DECISION OF THE HON BLE JURISDICTIONAL HIGH COURT IN THE APPELLANT S OWN CASE (SUPRA), WE DECID E THIS ISSUE IN FAVOUR OF ASSESSEE AND DELETE THE ADJUSTMENT MADE BY THE TPO ON ACCOUNT OF AMP EXPENSES FOR BOTH THE YEARS UNDER APPEAL. IN VIEW OF THIS DECISION RENDERED BY HON BLE JURISDICTIONAL HIGH COURT IN THE CASE OF ASSESSEE ITSELF, THE DECISIONS RE LIED UPON BY THE LD. DR WILL BE OF NO HELP TO THE REVENUE ON THIS POINT. 11. GROUND NOS. 4 TO 4.4 IN A.Y. 2009 - 10 AND GROUNDS NOS. 4 TO 4.6 IN A.Y. 2010 - 11 RELATE TO TRANSFER PRICING ADDITION ON PAYMENT OF ROYALTY OF RS. 45,67,000/ - AND RS. 37,79,000 ON SALES TO ASSOCIATED ENTERPRISES. COMMON SUBMISSIONS HAVE BEEN MADE BY THE LD. AR, THROUGH SYNOPSIS FILED AT THE TIME OF HEARING, WHICH ARE REPRODUCED HEREUNDER FROM THE APPEAL FOR A.Y. 2010 - 11 FOR READY REFERENCE: THE APPELLANT IS ENGAGED IN THE MANUFACTU RE AND DISTRIBUTION/SALE OF POWER PRODUCTS LIKE GENERATOR SETS, ENGINES, TILLERS ETC AND IN INDIA AS WELL AS OUTSIDE INDIA, INCLUDING TO ITS OVERSEAS RELATED PARTIES. IT PERFORMS ALL MANUFACTURING, SELLING & DISTRIBUTION, AND OTHER MANAGEMENT FUNCTIONS IN THIS REGARD AND ASSUMES TYPICAL ENTREPRENEURIAL RISKS ASSOCIATED WITH THE CARRYING ON ITS BUSINESS OF MANUFACTURING OF THE POWER PRODUCTS. ITA NO S . 551/DEL./2014 & 636/DEL./2015 34 THE TPO HOWEVER HELD THAT THE APPELLANT, WHILE MAKING SALES TO ITS ASSOCIATED ENTERPRISES, IS ACTING IN THE CAPACITY OF A CONTRACT MANUFACTURER AND ACCORDINGLY NO ROYALTY SHOULD HAVE BEEN PAID BY THE APPELLANT ON SUCH SALES. IN THIS REGARD IT IS RESPECTFULLY SUBMITTED THAT THE TPO HAS FAILED TO DISTINGUISH BETWEEN THE FUNCTIONAL PROFILE OF A LICENSED MANUFACTURER AND A CONTRACT MANUFACTURER. IN THE CASE OF A LICENSED MANUFACTURER SUCH AS THE APPLICANT, THE SELLER IS ENTITLED TO COMPENSATION WHICH INCLUDES RETURNS ATTRIBUTABLE TO EXPLOITATION OF INTANGIBLES SUCH TECHNICAL KNOW - HOW ETC. I.E. MARKET DETERMINED PRICES. ON THE OTHER HAND, IN THE CASE OF A CONTACT MANUFACTURER, THE MANUFACTURER ACTS IN ACCORDANCE WITH THE INSTRUCTIONS OF THE BUYER AND IS ONLY ENTITLED TO ROUTINE COST PLUS RETURNS. IT IS SUBMITTED THAT THE APPLICANT CONTINUES TO PERFORM VARIOUS CRITICAL FUNC TIONS SUCH AS PRODUCTION PLANNING, VENDOR IDENTIFICATION, PROCUREMENT OF RAW MATERIAL ETC. IRRESPECTIVE OF THE FACT AS TO WHETHER THE SALES ARE MADE TO THIRD PARTY CUSTOMERS OR TO THE ASSOCIATED ENTERPRISES. HOWEVER, THE TPO, DISREGARDING THE FACT THAT EV EN WITH RESPECT TO SALES MADE TO ASSOCIATED ENTERPRISES THE APPLICANT IS PERFORMING ALL THE ENTREPRENEURIAL FUNCTIONS AND IS ASSUMING ASSOCIATED RISKS, ARBITRARILY CHARACTERIZED THE APPLICANT AS A CONTRACT MANUFACTURER. THE DIFFERENCE BETWEEN THE FUNCTION AL PROFILE OF A CONTRACT MANUFACTURER AND AN ENTREPRENEUR SUCH AS THE APPLICANT IS SUMMARIZED AS UNDER: PARTICULARS APPLICANT CONTRACT MANUFACTURER NATURE OF RELATIONSHIP PRINCIPAL TO PRINCIPAL PRINCIPAL AND AGENT TYPE OF PRODUCTS STANDARD CUSTOMIZED TO THE REQUIREMENTS OF PRINCIPAL VOLUME OF PRODUCTION NO SEPARATE PRODUCTION CAPACITY IS EARMARKED FOR THE AES CAPACITY DETERMINED ON THE BASIS OF PRINCIPAL S DEMANDS QUALITY CONTROL AS PER THE STANDARDS OF THE APPLICANT AS PER THE STANDARDS PRESCRIBED BY THE ITA NO S . 551/DEL./2014 & 636/DEL./2015 35 PRINCIPAL INVENTORY MANAGEMENT AND RISK HSPP MANAGES INVENTORY AND BEARS ASSOCIATED RISKS DOES NOT PERFORM INVENTORY MANAGEMENT AND DO NOT BEAR ASSOCIATED RISKS PRICING MARKET DETERMINED PRICES INCLUDES RETURN FOR EXPLOITATION OF INTANGIBLE ROUTINE COST PLUS RETURN RISKS BEARS FULL QUALITY CONTROL AND PRODUCT LIABILITY RISK DOES NOT BEAR QUALITY CONTROL OR PRODUCT LIABILITY RISK IN VIEW OF THE AFORESAID, IT IS RESPECTFULLY SUBMITTED THAT EVEN WITH RESPECT TO SALES MADE TO ASSOCIATED ENTERPRISES, THE APPLICANT IS ACTING IN THE CAPACITY OF AN ENTREPRENEUR/LICENSED MANUFACTURER AND WAS THEREFORE JUSTIFIED IN PAYING ROYALTY ON SUCH SALES. RELIANCE IS PLACED IN THIS REGARD ON THE DECISION OF THE HON BLE DELHI BENC H OF THE TRIBUNAL IN THE CASE OF HERO MOTOCORP LIMITED VSADDL CIT (ITA NO 5130/DEL/2010) WHEREIN THE HON BLE TRIBUNAL HELD AS UNDER: THE FURTHER FINDING OF THE TPO THAT THE POSITION OF THE ASSESSEE COMPANY WITH REGARD TO EXPORT WAS THAT OF A CONTRACT MAN UFACTURER, IN OUR OPINION, IS WITHOUT ANY BASIS AND IN FACT CONTRARY TO THE FACTS ON RECORD. THE RAW MATERIALS HAVE BEEN PURCHASED BY THE ASSESSEE IN ITS OWN RIGHT. IT IS NOT THE CASE OF THE TPO THAT THE RAW MATERIALS HAVE BEEN SUPPLIED BY THE AE. THE ASSE SSEE HAS SOLD THE GOODS TO AE ON PRINCIPAL TO PRINCIPAL BASIS AND HAS RECEIVED THE SALE CONSIDERATION. IN VIEW OF THE ABOVE, IN OUR OPINION, THERE IS NO JUSTIFICATION FOR DISALLOWANCE OF THE ROYALTY ON THE EXPORT. FURTHER, THE HON BLE DELHI BENCH OF THE TRIBUNAL IN THE CASE OF HONDA MOTORCYCLE AND SCOOTERS INDIA PVT LTD VS ACIT (ITA NO 132/DEL/2013) WHILE DELETING A SIMILAR ADJUSTMENT HELD AS UNDER: ITA NO S . 551/DEL./2014 & 636/DEL./2015 36 THE FINDING OF THE TPO THAT THE POSITION OF THE ASSESSEE WITH REGARD TO EXPORT WAS THAT OF A CONTRACT MAN UFACTURER, IS WITHOUT ANY BASIS AND IS CONTRARY TO THE FACTS ON RECORD. IT IS EVIDENT FROM THE FINANCIAL RESULTS OF THE ASSESSEE THAT IT HAS INDEPENDENT SALES BOTH DOMESTIC AS WELL AS EXPORTS. THE ASSESSEE HAS SOLD THE GOODS TO THE AES ON PRINCIPAL TO PRIN CIPAL BASIS AND HAS RECEIVED THE SALES CONSIDERATION. THE ROYALTY IS PAYABLE ON THE BASIS OF MANUFACTURE OF GOODS. BASED ON THE SUBMISSIONS MADE BEFORE US AND ALSO THE CHART SHOWING THE PRICE EARNED BY THE ASSESSEE FROM EXPORTS OF GOODS TO THE AES AS WELL AS NON - AES, THE ASSESSEE HAS EARNED A PREMIUM WHICH WOULD NOT BE IN THE CASE OF A CONTRACT MANUFACTURER. IN CASE OF SISTER CONCERN OF THE ASSESSEE, IDENTICAL PAYMENT OF ROYALTY WAS HELD TO BE ALLOWABLE BY THE TRIBUNAL IN THE CASE OF M/S. HERO MOTOCORP LTD. XXX 13. IN VIEW OF THE ABOVE REASONING, WE ARE OF THE VIEW THAT THERE IS NO JUSTIFICATION FOR DISALLOWANCE OF ROYALTY ON THE EXPORT MADE TO THE AES. ACCORDINGLY, THE ADDITION MADE BY THE AO/TPO BY DETERMINING THE ALP OF ROYALTY ON EXPORTS TO THE AES AT NIL IS DELETED. RELIANCE IN THIS REGARD IS ALSO PLACED ON THE FOLLOWING DECISIONS OF THE TRIBUNAL: - APPLICANT S OWN CASE FOR ASSESSMENT YEAR 2008 - 09 (ITA NO 6023/DEL/2012) - DEPUTY CIT VS. SONAOKEGAWA PRECISION FORGINGS LTD. (ITA NO. 5386/DEL/2010) - SC ENVIRO AGRO INDIA LTD VS DCIT (ITA NOS. 2057 & 2058/MUMBAI/2009) IT IS FURTHER SUBMITTED THAT THE TPO HAS ARBITRARILY RE - CHARACTERIZED THE ASSESSEE AS CONTRACT MANUFACTURER IN RELATION TO THE INTERNATIONAL TRANSACTION OF EXPORT OF GOODS, WITHOUT CHALLENGI NG THE FAR ANALYSIS CONDUCTED BY THE ASSESSEE WHICH CLEARLY ESTABLISHED THAT THE ASSESSEE IS ACTING AS A LICENSED MANUFACTURER/ ENTREPRENEUR IN RESPECT OF ALL ITS TRANSACTIONS. IT IS RESPECTFULLY SUBMITTED THAT THE REVENUE AUTHORITIES HAVE NO JURISDICTION TO RE - WRITE THE TRANSACTIONS ENTERED INTO BY THE ASSESSEE. RELIANCE IN THIS REGARD IS PLACED IN THIS REGARD ON THE DECISION OF HON BLE DELHI BENCH OF THE TRIBUNAL IN THE CASE OF SONY INDIA (P) LTD. VS DCIT (ITA NO 1189/DEL/2005) ITA NO S . 551/DEL./2014 & 636/DEL./2015 37 FURTHER RELIANCE IN THIS REGARD IS PLACED ON THE DECISION OF THE HON BLE DELHI HIGH COURT IN THE CASE OF CIT VS EKL APPLIANCES (ITA NO 1068/2011 & 1070/2011) WHEREIN THE HON BLE HIGH COURT HELD THAT BARRING EXCEPTIONAL CASES, THE REVENUE AUTHORITIES CANNOT RESTRUCTURE/RE - CHARACTERIZE THE LEGITIMATE. IN VIEW OF THE AFORESAID, IT IS RESPECTFULLY SUBMITTED THAT IN THE ABSENCE OF ANY EVIDENCE, THE TPO WAS NOT JUSTIFIED IN ARBITRARILY RE - CHARACTERIZING THE ASSESSEE AS A CONTRACT MANUFACTURER. FURTHER, THE TPO IN THE ORDER HAS STATED THAT THE HON BLE TRIBUNAL IN THE CASE OF ACIT VS SONA OKEGAWA PRECISION FORGING LTD HELD THAT PAYMENT MADE BY CONTRACT MANUFACTURER ON ACCOUNT OF ROYALTY IS NOT AT ARM S LENGTH. HOWEVER, THE HON BLE DELHI BENCH OF THE TRIBUNAL IN THE AFORESAID CASE WHILE DISMISSING THE APPEAL OF THE DEPARTMENT WITH RESPECT TO A SIMILAR ADDITION MADE BY THE TPO, HELD AS UNDER: AS SUCH, THE FEE WAS PAID ON THE SALES MADE TO THE AE ALSO. THERE WAS NO MATERIAL BROUGHT BY THE TPO TO DEMONSTRATE THAT TH E PRICE ON SALES MADE TO THE AE WAS NOT AT AN ARM S LENGTH . THAT BEING SO, IT WAS AT MARKET DETERMINED PRICES THAT THE SALES WERE MADE BY THE ASSESSEE. MOREOVER, IT GOES UNCHALLENGED THAT THE FEES PAID UNDER THE TECHNOLOGY AGREEMENT COMPRISES AN INTEGRAL PART OF THE COST OF PRODUCTION, WHICH WAS RECOVERED FROM THE SALE PRICE. IT WAS THUS, THAT SO FAR AS REGARDS THE SALES MADE TO THE AE, THE AMOUNT OF FEES PAID UNDER THE TECHNOLOGY AGREEMENT WAS RECOVERED BY THE ASSESSEE FROM THE AE AS PART OF SALE PRICE. T HIS BEING SO, SUCH FEE PAID BECAME REVENUE NEUTRAL, THAT IS TO SAY, IN CASE THE ASSESSEE DID NOT PAY THE FEES ON THE SALES MADE TO THE AE, A CORRESPONDING REDUCTION IN THE PRICE CHARGED TO THE AE WOULD HAVE TO BE GIVEN BY THE ASSESSEE, LEST THE COST FOR TH E SALE COME DOWN. SUCH LATTER METHODOLOGY WAS NOT ADVISABLE, FOR IT WOULD CREATE PROBLEMS IN THE ACCOUNTING. ALSO, THE IMPACT ON THE TAXABLE PROFITS WOULD BE NIL. 17. IT WAS ON TAKING INTO CONSIDERATION ALL OF THE ABOVE THAT THE LD. CIT(A) DELETED THE ADD ITION WRONGLY MADE BY THE AO. WE DO NOT FIND ANY REASON TO RECORD ANY VARIANCE WITH THE WELL REASONED ELABORATE FINDINGS OF FACT RECORDED BY THE LD. CIT(A). THE SAME ARE HEREBY UPHELD. ITA NO S . 551/DEL./2014 & 636/DEL./2015 38 IN THE CASE OF THE ASSESSEE TOO, IT IS AN ADMITTED FACT THAT THE SALE S WERE MADE BY THE ASSESSEE TO ITS ASSOCIATED ENTERPRISE AT MARKET DETERMINED PRICES. MOREOVER, THE ROYALTY PAID UNDER THE TECHNOLOGY AGREEMENT COMPRISES AN INTEGRAL PART OF THE COST OF PRODUCTION, WHICH HAS BEEN RECOVERED FROM THE SALE PRICE. ACCORDINGLY, EVEN APPLYING THE CRITERIA LAID DOWN BY THE HON BLE TRIBUNAL, THE ASSESSEE IS OPERATING AS AN INDEPENDENT MANUFACTURER EVEN WITH RESPECT TO SALES MADE TO AES. IN VIEW OF THE AFORESAID, IT IS SUBMITTED THAT THE CONTENTION OF THE TPO THAT THE ASSESSEE, WHIL E MAKING SALES TO ITS ASSOCIATED ENTERPRISES IS ACTING AS A CONTRACT MANUFACTURER IS UNFOUNDED AND THE ADDITION MADE BY THE TPO IS LIABLE TO BE DELETED. WITHOUT PREJUDICE TO THE SUBMISSION THAT WITH REGARD TO EXPORT OF GOODS TO THE AES, THE ASSESSEE WAS A CTING AS AN ENTREPRENEUR, IT IS SUBMITTED THAT EVEN IF THE ASSESSEE HAD BEEN ACTING AS A CONTRACT MANUFACTURER, THEN UNDER SUCH CIRCUMSTANCES THE PAYMENT OF ROYALTY WOULD HAVE BEEN REVENUE NEUTRAL. IN OTHER WORDS, IF NO ROYALTY WAS PAID BY THE ASSESSEE THE N THE PRICE REALIZED BY IT FROM ITS AES WOULD HAVE BEEN LOWER AS COMPARED TO THE PRICE ACTUALLY REALIZED BY THE ASSESSEE (SINCE CONTRACT MANUFACTURERS ARE NORMALLY COMPENSATED ON A COST PLUS BASIS AND THE TPO HAS NOT CHALLENGED THE OPERATING PROFIT MARGIN EARNED BY THE ASSESSEE). THEREFORE, EVEN UNDER SUCH CIRCUMSTANCES, THE PAYMENT OF ROYALTY WOULD HAVE BEEN REVENUE NEUTRAL. RELIANCE IN THIS REGARD IS PLACED ON DECISION OF THE HON BLE DELHI BENCH OF THE TRIBUNAL IN THE CASE OF ACIT VS SONA OKEGAWA PRECISIO N FORGING LTD (ITA NO: 260/DEL/2010) IN VIEW OF THE AFORESAID, IT IS RESPECTFULLY SUBMITTED THAT THE PAYMENT OF ROYALTY BY THE ASSESSEE TO HONDA WAS JUSTIFIED, THE SAME WAS MADE ON ACCOUNT OF COMMERCIAL EXPEDIENCY AND CANNOT BE DISPUTED. THE TPO HAS FURTHER STATED THAT SINCE THE PURCHASE PRICE OF THE COMPONENT BOUGHT FROM THE ASSOCIATED ENTERPRISES INCLUDED THE RETURN FOR TECHNOLOGY AND THEREFORE, NO SEPARATE ROYALTY WAS PAYABLE. IN THIS REGARD, IT IS RESPECTFULLY SUBMITTED THAT THE TPO HAS FAILED TO APPRECIATE THAT FOR THE PURPOSE OF COMPUTING THE ROYALTY, THE VALUE OF IMPORTED COMPONENTS AND EXPORT COMMISSION IS REDUCED FROM THE SALES PRICE. ACCORDINGLY, THE PAYMENT OF ROYALTY IS ONLY ON THE VALUE ADDITION DONE BY THE APPLICANT UTILIZING THE TECHNICA L KNOW PROVIDED BY THE ASSOCIATED ENTERPRISES AND NO ROYALTY IS BEING PAID ON THE COST OF COMPONENTS IMPORTED FROM THE AES. ITA NO S . 551/DEL./2014 & 636/DEL./2015 39 IN VIEW OF THE AFORESAID, IT IS SUBMITTED THAT THE ADDITION MADE BY THE TPO IS BAD IN LAW AND IS LIABLE TO BE DELETED. RE: BENCHMARKING OF INTERNATIONAL TRANSACTIONS OF PAYMENT OF ROYALTY APPLYING TNMM: IT IS SUBMITTED THAT THE APPELLANT HAS APPLIED TRANSACTIONAL NET MARGIN METHOD (TNMM) FOR DETERMINING ARM S LENGTH PRICE OF PAYMENT OF ROYALTY TO HMCL, JAPAN, BEING THE MOST A PPROPRIATE METHOD IN THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE. THE AFORESAID PAYMENTS ARE ESTABLISHED TO BE AT ARM S LENGTH APPLYING SUCH METHOD. UNDER THE TRANSFER PRICING REGULATIONS CONTAINED IN SECTIONS 92 TO 92F OF THE ACT, THE MANDATE OF THE TPO IS TO DETERMINE THE ARM S LENGTH PRICE OF THE INTERNATIONAL TRANSACTION, APPLYING THE MOST APPROPRIATE METHOD, OUT OF THE FIVE METHODS PRESCRIBED. THE LAW DOES NOT EMPOWER THE TRANSFER PRICING OFFICER TO QUESTION THE JUSTIFICATION OF THE PAYMENT BY DIS PUTING THE GENUINENESS OF THE AGREEMENT ITSELF. THE AFORESAID HAS BEEN CLARIFIED BY CBDT VIDE INSTRUCTION NO. 3 OF 2003 DATED 20 - 05 - 2003 AS UNDER: - - - IN ORDER TO MAINTAIN UNIFORMITY OF PROCEDURE AND TO ENSURE THAT WORK IN THIS IMPORTANT AREA PROCEED S SMOOTHLY AND EFFECTIVELY, THE FOLLOWING GUIDELINES ARE HEREBY ISSUED: (I) REFERENCE TO TRANSFER PRICING OFFICER (TPO): THE POWER TO DETERMINE ARM S LENGTH PRICE IN AN INTERNATIONAL TRANSACTION IS CONTAINED IN SUB - SECTION (3) OF SECTION 92C. HOW EVER SECTION 92CA PROVIDES THAT WHERE THE ASSESSING OFFICER CONSIDERS IT NECESSARY OR EXPEDIENT SO TO DO, HE MAY REFER THE COMPUTATION OF ARM S LENGTH PRICE IN RELATION TO AN INTERNATIONAL TRANSACTION TO THE TPO. SUB - SECTION (3) OF SECTION 92CA PROVIDES TH AT THE TPO AFTER TAKING INTO ACCOUNT THE MATERIAL AVAILABLE WITH HIM SHALL, BY AN ORDER IN WRITING, DETERMINE THE ARM S LENGTH PRICE IN ACCORDANCE WITH SUB - SECTION (3) OF SECTION 92C . SUB - SECTION (4) OF SECTION 92CA PROVIDES THAT ON RECEIPT OF THE ORDER OF THE TPO, THE ASSESSING OFFICER SHALL PROCEED TO COMPUTE THE TOTAL INCOME OF THE ASSESSEE HAVING REGARD TO THE ARM S LENGTH PRICE DETERMINED BY THE TPO. THUS, WHEREAS THE DETERMINATION OF THE ARM S LENGTH PRICE, - - - IS REQUIRED TO BE DONE BY THE TPO, - - - THE COMPUTATION OF TOTAL ITA NO S . 551/DEL./2014 & 636/DEL./2015 40 INCOME HAVING REGARD TO THE ARM S LENGTH PRICE SO DETERMINED BY THE TPO IS REQUIRED TO BE DONE BY THE ASSESSING OFFICER UNDER SUB - SECTION (4) OF SECTION 92C READ WITH SUB - SECTION (4) OF SECTION 92CA. (II) ROLE OF TRANS FER PRICING OFFICER: THE ROLE OF THE TPO BEGINS AFTER A REFERENCE IS RECEIVED FROM THE ASSESSING OFFICER. IN TERMS OF SECTION 92CA THIS ROLE IS LIMITED TO THE DETERMINATION OF ARM S LENGTH PRICE IN RELATION TO THE INTERNATIONAL TRANSACTION(S) REFERRED TO H IM BY THE ASSESSING OFFICER - - - - - - THE PRICE HAS TO BE DETERMINED BY ANY ONE OF THE METHODS STIPULATED IN SUB - SECTION (1) OF SECTION 92C AND BY APPLYING THE MOST APPROPRIATE METHOD REFERRED TO IN SUB - SECTION (2) THEREOF. - - - - (EMPHASIS SUPPLIED) RELIANCE IS ALSO PLACED ON THE DECISION OF MUMBAI BENCH OF THE TRIBUNAL IN THE CASE OF CA COMPUTER ASSOCIATES PVT. LTD. VS. DCIT (ITA NOS. 5420 AND 5421/MUM/2006) , WHEREIN, WHILE DELETING THE ADJUSTMENT MADE BY THE TPO BY HOLDING PAYMENT OF ROYALTY TO BE U NJUSTIFIED, THE HON BLE TRIBUNAL HELD AS UNDER: 8. THE MANNER IN WHICH THE A.L.P. IS TO BE DETERMINED BY ANY OF THE METHOD PRESCRIBED IN SEC. 92C IN PROVIDED IN RULE 10B OF THE I.T. RULES, 2961. AFTER EXAMINING THE PARAMETERS PRESCRIBED IN RULE 10 B, IT CAN BE SEEN THAT BAD DEBTS WRITTEN OFF CANNOT BE FACTOR TO DETERMINE THE ARM S LENGTH PRICE OF ANY INTERNATIONAL TRANSACTION. IN OUR OPINION, THE TPO HAS EXCEEDED HIS LIMITATION BY FOLLOWING THE METHOD WHICH IS NOT AUTHORIZED UNDER THE ACT OR RULES. WE, THEREFORE, HOLD THAT THE ARM S LENGTH PRICE DETERMINED BY THE TPO AND ADOPTED BY THE ASSESSING OFFICER TO THE EXTENT OF ROYALTY PAYABLE TO THE CA INC MANAGEMENT, USA IS NOT AS PER THE PROCEDURE PRESCRIBED AND SAME CANNOT BE SUSTAINED. WE, THEREFORE, DI RECT THE ASSESSING OFFICER TO ADOPT THE ARM S LENGTH PRICE OF THE ROYALTY PAYABLE TO CA INC MANAGEMENT, USA AS DECLARED BY THE ASSESSEE IN BOTH THE YEARS. THE AFORESAID DECISION OF THE HON BLE TRIBUNAL HAS BEEN UPHELD BY THE HON BLE BOMBAY HIGH COURT IN CIT VS CA COMPUTER ASSOCIATES INDIA PVT LTD (ITA NO 20/2011). ITA NO S . 551/DEL./2014 & 636/DEL./2015 41 IT IS PERTINENT TO NOTE HERE THAT THE ROYALTY CONSTITUTES AN ESSENTIAL PART OF THE COST OF SALES RELATABLE TO EXPORT OF PRODUCTS. ACCORDINGLY, SINCE THE EXPORTS OF THE APPELLANT TO THE ASSOCIATED ENTERPRISE IS BASED ON THE RIGHTS AND LICENSES PROVIDED BY HONDA, FOR WHICH ROYALTY IS BEING PAID, THE ROYALTY PAYMENTS CANNOT BE SEPARATELY EVALUATED. IN VIEW OF THE AFORESAID, IT WOULD BE APPRECIATED THAT THE TRANSACTION OF PAYMENT OF ROYALTY ON EXPORTS TO AES IS INTRINSICALLY LINKED WITH THE MANUFACTURE OF GOODS EXPORTED TO THE AES AND HAS THEREFORE BEEN APPROPRIATELY BENCHMARKED BY APPLYING TNMM, AT THE ENTITY LEVEL, AS THE MOST APPROPRIATE METHOD. RELIANCE IN THIS REGARD MAY BE PLACED ON THE GUIDANCE NOTE ISSUED BY THE INSTITUTE OF CHARTERED ACCOUNTS OF INDIA WHICH STATES AS UNDER: 5.7 THE FACTORS REFERRED TO ABOVE ARE TO BE APPLIED CUMULATIVELY IN SELECTING THE MOST APPROPRIATE METHOD. THE REFERENCE THEREIN TO THE TERMS BEST SUITED AND MOST RELIABLE MEASURE INDICATES THAT THE MOST APPROPRIATE METHOD WILL HAVE TO BE SELECTED AFTER A METICULOUS APPRAISAL OF THE FACTS AND CIRCUMSTANCES OF THE INTER NATIONAL TRANSACTION OR SPECIFIED DOMESTIC TRANSACTION. FURTHER, THE SELECTION OF THE MOST APPROPRIATE METHOD SHALL BE FOR EACH PARTICULAR INTERNATIONAL TRANSACTION OR SPECIFIED DOMESTIC TRANSACTION. THE TERM TRANSACTION ITSELF IS DEFINED IN RULE 10A(D) TO INCLUDE A NUMBER OF CLOSELY LINKED TRANSACTIONS. THEREFORE, THOUGH THE REFERENCE IS TO APPLY THE MOST APPROPRIATE METHOD TO EACH PARTICULAR TRANSACTION, KEEPING IN VIEW, THE DEFINITION OF THE TERM TRANSACTION , THE MOST APPROPRIATE METHOD MAY BE CHOSEN FOR A GROUP OF CLOSELY LINKED TRANSACTIONS. TWO OR MORE TRANSACTIONS CAN BE SAID TO BE LINKED WHEN THESE TRANSACTIONS EMANATE FROM A COMMON SOURCE BEING AN ORDER OR A CONTRACT OR AN AGREEMENT OR AN ARRANGEMENT AND THE NATURE, CHARACTERISTICS AND TERMS OF THESE TRANSACTIONS ARE SUBSTANTIALLY FLOWING FROM THE SAID COMMON SOURCE. IT IS SUBMITTED THAT THE TPO HAS INCORRECTLY DETERMINED THE ARM S LENGTH PRICE OF ROYALTY PAID ON SALES TO AES AT NIL WITHOUT APPLYING ANY COMPARABLE TRANSACTIONS. THE APPELLANT HA S APPLIED TNMM AND COMPARED ITS OPERATING MARGINS WITH THE MARGINS OF COMPARABLE COMPANIES AND ON THAT BASIS ARRIVED AT THE ARM S LENGTH PRICE OF TRANSACTION OF PAYMENT OF ROYALTY ON SALES TO AES. HOWEVER, THE TPO, WITHOUT FOLLOWING ANY OF THE METHODS PRES CRIBED UNDER THE ACT, ARBITRARILY DETERMINED THE ARM S LENGTH PRICE OF ROYALTY ON SALES TO AES AT NIL. ITA NO S . 551/DEL./2014 & 636/DEL./2015 42 FURTHER, THE HON BLE DELHI HIGH COURT IN THE CASE OF SONY ERICSSON MOBILE COMMUNICATIONS INDIA PVT LTD VS CIT (ITA NO 16/2014) HELD THAT CLUBBING OF CLO SELY LINKED (INCLUDING CONTINUOUS TRANSACTIONS) IS PERMISSIBLE IN APPROPRIATE CASES. THE ASSESSEE, TOO BENCHMARKED THE TRANSACTION OF PAYMENT OF ROYALTY APPLYING TNMM AND AGGREGATING THE SAME WITH CLOSELY LINKED TRANSACTIONS. THE HON BLE COURT FURTHER HELD THAT ONCE THE REVENUE ACCEPTS THE TNMM AS THE MOST APPROPRIATE METHOD, THEN IT WOULD BE INAPPROPRIATE FOR THE REVENUE TO TREAT A PARTICULAR EXPENDITURE AS A SEPARATE INTERNATIONAL TRANSACTION. SUCH AN EXERCISE, THE HON BLE COURT HELD, WOULD LEAD TO UNUSUA L AND ABSURD RESULTS. RELIANCE IS ALSO PLACED IN THIS REGARD ON THE DECISION OF THE HON BLE PUNE BENCH OF THE TRIBUNAL IN THE CASE OF DEMAG CRANES & COMPONENTS (INDIA) PVT. LTD. VS. DCIT . YOUR HONOUR S ATTENTION IS INVITED TO RECENT DECISION OF THE HON BLE PUNE BENCH OF THE TRIBUNAL IN THE CASE OF CUMMINS INDIA LTD VS ADDL CIT (ITA NO 1616/PN/2011), WHEREIN, INTERPRETING RULE 10A(D) OF THE RULES, IT WAS HELD AS UNDER: 26. IN VIEW OF THE RATIO LAID DOWN BY PUNE BENCH OF THE TRIBUNAL IN DEMAG CRANES & COMPONENTS (INDIA) PVT. LTD. VS. DCIT (SUPRA), IT IS HELD THAT WHERE NUMBER OF TRANSACTIONS ARE CLOSELY LINKED TRANSACTIONS, THEN THE SAME CAN BE AGGREGATED AND CONSTRUED AS A SINGLE TRANSACTION FOR THE PURPOSE OF DETERMINING THE ARM'S LENGTH PRICE. IN CA SE, THERE IS CLOSE LINK EXISTS BETWEEN THE DIFFERENT TRANSACTIONS, THE SAME SHOULD BE TREATED AS COMPOSITE TRANSACTION AND APPROPRIATE METHOD SHOULD BE APPLIED TO WORK OUT THE TRANSFER PRICING ANALYSIS. WHERE TWO OR MORE TRANSACTIONS EMANATE FROM COMMON SO URCE BEING AN ORDER OR CONTRACT OR AN AGREEMENT OR AN ARRANGEMENT, THEN SUCH TRANSACTIONS COULD BE SAID TO BE CLOSELY LINKED AS THE NATURE, CHARACTERISTIC AND TERMS OF SUCH TRANSACTION SUBSTANTIALLY FLOW FROM THE SAID COMMON SOURCE . IN VIEW OF THE AFORES AID, IT IS SUBMITTED THAT THE ADJUSTMENT MADE BY THE TPO TO THE ARM S LENGTH PRICE OF INTERNATIONAL TRANSACTION OF PAYMENT OF ROYALTY WITHOUT APPLYING ANY OF THE PRESCRIBED METHODS IS UNLAWFUL AND IS LIABLE TO BE DELETED. ITA NO S . 551/DEL./2014 & 636/DEL./2015 43 12. THE LD. CIT / DR PLACED RELI ANCE ON THE ORDERS OF THE AUTHORITIES BELOW AND HAS NO OBJECTION IF THE ISSUE IS REMITTED TO THE AO IN TERMS OF THE FINDINGS OF THE COORDINATE BENCH IN THE PRECEDING YEAR. 13. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL ON RECORD. IT IS SEEN THAT CO - ORDINATE BENCH IN THE CASE OF THE ASSESSEE FOR ASSESSMENT YEAR 2008 - 09 (ITA NO. 6023/DEL/2012) HAS REMITTED SIMILAR ADDITION MADE ON ACCOUNT OF TRANSFER PRICING ADJUSTMENT IN RESPECT OF ROYALTY TO THE FILE OF THE AO FOR DECIDING AS PER THE TER MS OF CO - ORDINATE BENCH IN THE CASE OF HERO MOTOCORP. THE RELEVANT PORTION OF THE SAID ORDER READS AS FOLLOWS: 8. WE HAVE HEARD THE RIVAL SUBMISSION AND PERUSED THE MATERIAL AVAILABLE ON RECORD. IT IS SEEN THAT CO - ORDINATE BENCH IN THE CASE OF THE SISTE R CONCERN WHEREIN TERMS AND CONDITIONS RECORDED IN THE AGREEMENTS ARE STATED TO BE IDENTICAL HAD DECIDED THE ISSUE IN FOLLOWING MANNER: - 92. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIAL PLACED BEFORE US. WE HAVE ALREADY CONSIDERED SIMILAR ISSUE WHILE CONSIDERING THE DISALLOWANCE OF ROYALTY AND THE EXPORT COMMISSION. WHILE CONSIDERING THE DISALLOWANCE OF THE EXPORT COMMISSION, WE HAVE NOTED THAT THE PAYMENT OF ROYALTY AND THE EXPORT COMMISSION ARE FOR TWO DIFFERENT PURPOSES. THE ASSESSEE IS PAYING ROYALTY AS PER TECHNICAL KNOW - HOW AGREEMENT DATED 02 - 06 - 2004 WITH HMCL. AS PER THIS AGREEMENT, THE ASSESSEE IS ENTITLED TO USE TECHNICAL KNO W - HOW PROVIDED BY HMCL FOR MANUFACTURE AND SALE OF TWO WHEELERS AND PARTS. ROYALTY IS TO BE PAID FOR THE GOODS MANUFACTURED BY THE ASSESSEE, WHETHER SOLD WITHIN INDIA OR OUTSIDE INDIA. IT IS NOT IN DISPUTE THAT THE MOTORCYCLES WHICH WERE EXPORTED BY THE AS SESSEE, WERE MANUFACTURED BY USING THE TECHNICAL KNOW - HOW PROVIDED BY HMCL UNDER THE TECHNICAL KNOW - HOW AGREEMENT DATED 02 - 06 - 2004. THEREFORE, ROYALTY IS PAYABLE ON SUCH MANUFACTURING OF GOODS. THE CONTENTION OF THE LEARNED TPO THAT THE GOODS ARE EXPORTED TO SUBSIDIARIES OF THE ASSOCIATED ENTERPRISE, I.E. AE OF HONDA JAPAN AND THE ASSESSEE ALSO PAID EXPORT COMMISSION, WOULD BE NO GROUND FOR DISALLOWANCE OF THE ROYALTY OR DETERMINING ARM S LENGTH PRICE OF THE ROYALTY AT NIL. THE ASSESSEE IS ITA NO S . 551/DEL./2014 & 636/DEL./2015 44 EXPORTING GOODS T O AE OF HONDA ON PRINCIPAL TO PRINCIPAL BASIS AND THE PRICE AT WHICH EXPORT IS MADE IS HIGHER THAN THE DOMESTIC PRICE. WHILE DISCUSSING THE DISALLOWANCE OF EXPORT COMMISSION, WE HAVE DISCUSSED THIS ISSUE AT LENGTH AND HAVE NOTED THAT EVEN AFTER REDUCING TH E EXPORT COMMISSION, THE ASSESSEE DERIVED THE BENEFIT OF RS. 13.05 CRORES BY EXPORT. AT THE COST OF REPETITION, WE WOULD LIKE TO MENTION THAT THE EXPORT SALE VALUE WAS MORE THAN THE DOMESTIC SALE RATE AND THE ASSESSEE HAS GIVEN A DETAILED WORKING THEREOF, WHICH IS ENCLOSED WITH THIS ORDER IN THE FORM OF ANNEXURE - I. IN THE ABOVE WORKING, THE ASSESSEE HAS REDUCED THE EXPORT COMMISSION. THEREFORE, BY EXPORT TO THE AE OF HONDA JAPAN, THE ASSESSEE HAS BEEN BENEFITED AND WAS NOT AT A LOSS. THE FURTHER FINDING OF THE TPO THAT THE POSITION OF THE ASSESSEE COMPANY WITH REGARD TO EXPORT WAS THAT OF A CONTRACT MANUFACTURER, IN OUR OPINION, IS WITHOUT ANY BASIS AND IN FACT CONTRARY TO THE FACTS ON RECORD. THE RAW MATERIALS HAVE BEEN PURCHASED BY THE ASSESSEE IN ITS OWN RIGHT. IT IS NOT THE CASE OF THE TPO THAT THE RAW MATERIALS HAVE BEEN SUPPLIED BY THE AE. THE ASSESSEE HAS SOLD THE GOODS TO AE ON PRINCIPAL TO PRINCIPAL BASIS AND HAS RECEIVED THE SALE CONSIDERATION. IN VIEW OF THE ABOVE, IN OUR OPINION, THERE IS NO JUST IFICATION FOR DISALLOWANCE OF THE ROYALTY ON THE EXPORT. WE MAY REITERATE THAT THE REVENUE HAS DISALLOWED THE ENTIRE ROYALTY PAID EVEN ON DOMESTIC SALE WHICH HAS BEEN CONSIDERED AT LENGTH BY US IN THE EARLIER PARAGRAPH OF THIS ORDER AND WE HAVE ARRIVED AT THE CONCLUSION THAT THE PAYMENT OF ROYALTY WAS A REVENUE EXPENDITURE, INCURRED FOR THE PURPOSE OF BUSINESS. ACCORDINGLY, THE ADDITION MADE BY THE TPO BY DETERMINING ARM S LENGTH PRICE OF ROYALTY ON EXPORT AT NIL IS DELETED. 8.1 FROM A READING OF THE ABOV E IT IS SEEN THAT WHILE COMING TO THE DECISION BEFORE THE CO - ORDINATE BENCH A DETAILED WORKING IN NUMBERS AND FIGURES IN SUPPORT OF ITS CLAIM WAS PROVIDED BY THE ASSESSEE. THE SAID EXERCISE IS FOUND MISSING IN THE PRESENT CASE DEHORS THE ABOVE FACT TAKING INTO CONSIDERATION THE SUBMISSIONS OF THE REVENUE, WE SET ASIDE THE ORDERS OF THE AUTHORITIES BELOW AND DIRECT THE TPO TO CONSIDER THE CLAIM OF THE ASSESSEE THAT THE AGREEMENT ENTERED INTO BY THE ASSESSEE WITH THE AE IS SIMILAR TO THE AGREEMENT ENTERED INT O BY THE SISTER CONCERN WITH THE AE INASMUCH AS THE TERMS AND CONDITIONS IMPACTING THE ISSUE ARE MATERIALLY SIMILAR AND ACCORDINGLY THEREAFTER CONSIDERING THE DECISION OF THE CO - ORDINATE BENCH IN THE CASE OF SISTER CONCERN, HE SHALL PASS A SPEAKING ORDER I N ACCORDANCE WITH LAW AFTER GIVING THE ASSESSEE A REASONABLE OPPORTUNITY OF BEING HEARD. THE ASSESSEE CONSEQUENTLY WOULD BE AT LIBERTY TO PLACE RELEVANT FACTS IN SUPPORT OF ITS CLAIM BEFORE THE TPO. ITA NO S . 551/DEL./2014 & 636/DEL./2015 45 FOLLOWING THE ORDER OF THE CO - ORDINATE BENCH, THE ADDIT ION S ON ACCOUNT OF TRANSFER PRICING ADJUSTMENT OF RS. 45,67,000 AND RS. 37,79,000 IN A.YRS. 2009 - 10 AND 2010 - 11 ARE , THEREFORE, SET ASIDE TO THE FILE OF THE TPO TO CONSIDER THE CLAIM OF THE ASSESSEE IN THE LIGHT OF THE FINDINGS OF THE CO - ORDINATE BENCH IN A SSESSMENT YEAR 2008 - 09 (SUPRA) . THESE GROUNDS ARE, THEREFORE, ALLOWED FOR STATISTICAL PURPOSES. 14. THE NEXT ISSUE RAISED BY ASSESSEE BY WAY OF GROUNDS NOS. 5 TO 5.4 IN APPEAL FOR A.Y. 2009 - 10 RELATE TO DISALLOWANCE OF PAYMENT OF ROYALTY AND TECHNICAL GUI DANCE FEE HOLDING THE SAME TO CAPITAL EXPENDITURE. THE RELEVANT FACTS ARE THAT THE ASSESSEE PAID ROYALTY OF RS. 6,78,03,514 AND TECHNICAL GUIDANCE FEE OF RS. 1,81,61,938 TO HONDA MOTOR CO., JAPAN. THE AO HELD THE EXPENDITURE TO BE CAPITAL IN NATURE AND DIS ALLOWED THE SAME AFTER ALLOWING DEPRECIATION AT THE RATE OF 25%. 15. THE LD. AR, AT THE OUTSET, STATED THAT THE AFORESAID ISSUE IS SQUARELY COVERED BY THE DECISION OF THE CO - ORDINATE BENCHES OF THE TRIBUNAL IN THE ASSESSEE S OWN CASE FOR ASSESSMENT YEAR 2 007 - 08 AND 2008 - 09 IN ITA NOS. 5713/DEL/2011 AND ITA NO. 6023/DEL/2012, WHEREIN THE CO - ORDINATE BENCHES, AFTER CONSIDERING THE DECISION RENDERED IN THE CASE OF HERO MOTO CORP LTD. V. DCIT IN ITA NO. 716/DEL/2008 AND AFTER MAKING A COMPARISON OF THE VARIOUS CLAUSES OF THE AGREEMENT WAS PLEASED TO DELETE THE ADDITION MADE IN THE ASSESSMENT ORDER ON ACCOUNT OF PAYMENT OF ROYALTY AND TECHNICAL GUIDANCE FEE. IT WAS SUBMITTED THAT THERE IS NO CHANGE IN THE FACTS AND CIRCUMSTANCES OF THE PRESENT CASE . COPY OF THE AFORESAID DECISIONS OF THE CO - ORDINATE BENCHES WAS FILED. IT WAS FURTHER POINTED OUT THAT THE DECISION OF THE ITA NO S . 551/DEL./2014 & 636/DEL./2015 46 CO - ORDINATE BENCH OF THE TRIBUNAL IN THE CASE OF HERO MOTO CORP (SUPRA) HAS BEEN AFFIRMED BY THE JURISDICTIONAL DELHI HIGH COURT IN THE CASE OF CI T V. HERO MOTO CORP IN 372 ITR 481. IT WAS SUBMITTED THAT THE HIGH COURT HAS ALSO HELD THAT PAYMENT OF ROYALTY AND TECHNICAL GUIDANCE FEE IS ALLOWABLE BUSINESS DEDUCTION. IT WAS FURTHER SUBMITTED THAT THE DRP IN THE SUBSEQUENT ASSESSMENT YEAR 2010 - 11 HAS D ELETED IDENTICAL DISALLOWANCE PROPOSED BY THE ASSESSING OFFICER ON THE BASIS OF THE ORDER OF THE CO - ORDINATE BENCH OF THE TRIBUNAL IN THE ASSESSEE S OWN CASE FOR ASSESSMENT YEAR 2008 - 09. 16. PER CONTRA, THE LD. CIT DR PLACED RELIANCE ON THE ASSESSMENT OR DER AND THE ORDER OF DRP. 17. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL AVAILABLE ON RECORD. WE FIND THE AFORESAID ISSUE IS SQUARELY COVERED BY THE ORDER OF THE CO - ORDINATE BENCHES OF THE TRIBUNAL FOR ASSESSMENT YEARS 2007 - 08 AND 2008 - 0 9 WHEREIN THE CO - ORDINATE BENCHES FOLLOWING THE VIEW TAKEN IN HERO MOTO CORP LTD. V. ACT DATED 23.11.2012 IN ITA NO. 5130/DEL/2012, SUBSEQUENTLY AFFIRMED BY THE DELHI HIGH COURT IN 372 ITR 481, CONFIRMED THE RELIED GRANTED BY THE CIT(A) HOLDING THAT THE CO MPARATIVE CLAUSES BASED ON THE AGREEMENT IN THE CASE OF ASSESSEE AND HERO MOTO CORP WERE PARIMATERIA AND CONSEQUENTLY THE PAYMENTS WERE REVENUE IN NATURE. RESPECTFULLY FOLLOWING THE ORDER OF THE CO - ORDINATE BENCHES IN ASSESSMENT YEARS 2007 - 08 AND 2008 - 09 I N THE ASSESSEE S OWN CASE, GROUND NOS 5 TO 5.4 IN APPEAL FOR A.Y. 2009 - 10 ARE , THUS, ALLOWED. ITA NO S . 551/DEL./2014 & 636/DEL./2015 47 18. THE NEXT ISSUE RAISED IN APPEAL FOR A.Y. 2009 - 10 BY WAY OF GROUND NOS. 6 TO 6.6 RELATE TO DISALLOWANCE OF EXPORT COMMISSION AMOUNTING TO RS. 4,32,49,149 PAID TO HONDA MOTOR CO. JAPAN UNDER SECTION 40(A)(I) BY HOLDING SUCH PAYMENTS TO BE IN THE NATURE OF ROYALTY/ TECHNICAL GUIDANCE FEE ON THE GROUND OF FAILURE TO DEDUCT TAX AT SOURCE THEREFROM. 19. THE LD. AR SUBMITTED THAT THE AFORESAID ISSUE IS SQUARELY COVERED IN FAVOUR OF THE ASSESSEE BY THE ORDER OF THE CO - ORDINATE BENCH IN ASSESSEE S OWN CASE FOR ASSESSMENT YEARS 2007 - 08 AND 2008 - 09. 20. THE LD. CIT DR HAS PLACED RELIANCE UPON THE ORDERS OF THE AUTHORITIES BELOW. THE LD. DR ALSO RELIED ON THE ORDER O F AUTHORITY FOR ADVANCE RULINGS IN THE CASE OF GAUNGHOU USHA INTERNATIONAL LTD., CHIA(COPLY PLACED ON RECORD) IN AAR NO. 1508 OF 2013. 21. WE HAVE HEARD THE RIVAL SUBMISSIONS. WE FIND THAT THE AFORESAID ISSUE IS COVERED BY THE ORDERS OF CO - ORDINATE BENCH OF THE TRIBUNAL IN ASSESSMENT YEARS 2007 - 08 AND 2008 - 09 WHEREIN REFERRING TO THE EARLIER DETAILED FINDINGS THAT THE TECHNICAL COLLABORATION AGREEMENT IN THE CASE OF HERO HONDA MOTORS (SUPRA) ARE PARIMATERIA TO THE CASE OF ASSESSEE, THE COORDINATE BENCH WA S PLEASED TO HOLD THAT THE EXPORT COMMISSION WAS NEITHER ROYALTY NOR FEES FOR TECHNICAL SERVICES AND AS SUCH THE ASSESSEE WAS NOT REQUIRED TO DEDUCT TAX AT SOURCE ON PAYMENT OF EXPORT FEE AND THUS, NO DISALLOWANCE UNDER SECTION 40(A)(I) COULD BE SUSTAINED. RESPECTFULLY FOLLOWING THE ORDER OF THE CO - ORDINATE BENCH IN ASSESSEE S OWN CASE WHERE NO CHANGE IN FACTS OR ITA NO S . 551/DEL./2014 & 636/DEL./2015 48 CIRCUMSTANCES HAS BEEN POINTED OUT, THE ADDITIONS MADE BY APPLYING SECTION 40(A)(I) ARE DIRECTED TO BE DELETED. ACCORDINGLY, THESE GROUNDS OF APPE AL STAND ALLOWED. IN VIEW OF THIS DECISION OF CO - ORDINATE BENCH IN THE CASE OF ASSESSEE, THE ADVANCE RULING RELIED ON BY THE LD. DR DOES NOT HELP THE REVENUE, AS THE SAID RULING IS BINDING ON THAT APPLICANT AND NOT UPON THE TRIBUNAL U/S. 245S OF THE IT ACT . 22. BY WAY OF GROUND NO. 7 IN APPEAL FOR A.Y. 2009 - 10, THE ASSESSEE HAS AGITATED THAT CREDIT FOR TDS AMOUNTING TO RS.71,407/ - HAS NOT BEEN GIVEN BY THE AO WITHOUT ANY REASON. THIS ISSUE IS RESTORED TO THE FILE OF AO TO VERIFY THE STAND OF ASSESSEE AND A CCORDINGLY TO GIVE CREDIT THEREOF AS PER PROVISIONS OF LAW. 23. THE ISSUE OF INTEREST U/S. 234B IS CONSEQUENTIAL IN NATURE AND NEEDS NO ADJUDICATION. 2 4 . ACCORDINGLY, THE APPEAL FOR A.Y. 2009 - 10 IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. 2 5 . THE NEXT ISSUE RAISED IN GROUND NOS. 5 TO 5.3 IN APPEAL FOR A.Y. 2010 - 11 RELATE S TO DISALLOWANCE OF RS. 43,47,750 ON ACCOUNT OF RELOCATION EXPENSES ON TRANSFER OF FACTORY OF THE ASSESSEE COMPANY FROM RUDRAPUR TO GREATER NOIDA. IN THIS REGARD, THE LD. AR HAS SUBMITTED AS UNDER: DURING THE RELEVANT YEAR, THE APPELLANT HAD INCURRED CERT AIN EXPENDITURE AMOUNTING TO RS. 1,11,47,000, DEBITED TO THE PROFIT & LOSS ACCOUNT, UNDER THE HEAD EXCEPTIONAL ITEMS IN SCHEDULE 11 TO THE AUDITED FINANCIAL STATEMENTS. THE AFORESAID EXPENSES WERE INCURRED ON ACCOUNT OF SHIFTING/ ITA NO S . 551/DEL./2014 & 636/DEL./2015 49 RELOCATION OF FACTORY PR EMISES FROM RUDRAPUR TO GREATER NOIDA FOR THE PURPOSES OF CONSOLIDATION OF FACTORY PREMISES AND UTILIZATION IN PRODUCTION. THE DETAILS OF SUCH RELOCATION EXPENSES ARE PROVIDED AS UNDER: S. NO. PARTICULARS AMOUNT (IN RS.) 1. FREIGHT ON TRANSFER OF RAW MATERIALS 13,52,000 2. FREIGHT ON TRANSFER OF MACHINES 34,55,000 3. TRAVELLING AND CONVEYANCE 16,12,000 4. PROFESSIONAL CHARGES 10,24,000 5. SALARY COST OF MACHINES 6,38,000 6. SALARY COST FOR GENERAL WORK 3,07,000 7. PUBLICITY 7,66,000 8. STORES, SPARES AND TOOLS 6,36,000 9. REPAIR EXPENSES 4,90,000 10. JOINING EXPENSES 4,94,000 11. MISCELLANEOUS EXPENSES 3,73,000 TOTAL 1,11,47,000 OUT OF THE AFORESAID, THE ASSESSING OFFICER, VIDE IMPUGNED ORDER DATED 16.12.2014 DISALLOWED THE FOLLOWING EXPENDITURE AGGREGATING TO RS. 51,15,000, HOLDING THE SAME TO BE CAPITAL EXPENDITURE ON THE GROUND THAT SUCH EXPENDITURE HAD RESULTED IN BENEFIT OF ENDURING NATURE TO THE APPELLANT: S. NO. PARTICULARS AMOUNT (IN RS.) 1. FREIGHT ON TRANSFER OF MACHINES 34,55,000 2. PROFESSIONAL CHARGES 10,24,000 ITA NO S . 551/DEL./2014 & 636/DEL./2015 50 3. STORES, SPARES AND TOOLS 6,36,000 TOTAL 51,15,000 THE ASSESSING OFFICER, HOWEVER, ALLOWED DEPRECIATION @ 15% ON THE AFORESAID AMOUNT, THEREBY RESTRICTING THE DISALLOWANCE ON ACCOUNT OF SHIFTING EXPENDITURE TO RS. 43,47,750. IN THIS REGARD, IT IS SUBMITTED THAT THE AFORESAID EXPENSES INCURRED BY THE APPE LLANT REPRESENT EXPENSES INCURRED IN DISMANTLING THE EXISTING PLANT, TRANSPORTATION COST OF MACHINES AT NEW SITE AND REINSTALLATION COST OF SUCH MACHINES AT NEW PREMISES, COMPRISING OF CIVIL WORKS COST, COST OF NEW STORES AND SPARE PARTS, AND PROFESSIONAL AND CONSULTANCY CHARGES INCURRED FOR THE PURPOSES OF RELOCATION. THE SHIFTING EXPENSES WERE, THEREFORE, INDIRECT EXPENSES, WHICH WERE INCURRED AT THE TIME OF SHIFTING OF FACTORY FROM RUDRAPUR TO GREATER NOIDA. THE EXPENSES WERE INCURRED FOR THE PURPOSE OF RUNNING THE BUSINESS OF THE APPELLANT COMPANY AS A MORE TECHNICALLY VIABLE, EFFICIENT AND PROFITABLE UNIT. THE SAID EXPENSES WERE INCURRED ONLY FOR SHIFTING OF FACTORY/MACHINES FROM ONE PLACE TO THE OTHER WITHOUT ANY ENHANCEMENT IN THE MANUFACTURING CAP ACITY. SUCH RELOCATION, IT WOULD BE NOTED, DID NOT RESULT IN THE ESTABLISHMENT OF A NEW/ INDEPENDENT SET - UP, WHICH WOULD CONTRIBUTE TOWARDS THE PROFIT MAKING APPARATUS OF THE APPELLANT COMPANY. IT IS RESPECTFULLY SUBMITTED THAT NO ENDURING BENEFIT HAD ACCR UED TO THE APPELLANT AS A RESULT OF SUCH SHIFTING EXPENSES, MUCH LESS IN THE CAPITAL FIELD, AS THE APPELLANT HAD MERELY CONSOLIDATED THE MACHINES/SPARES AT THE RUDRAPUR FACTORY WITH THE EXISTING FACTORY AT GREATER NOIDA. REFERENCE, IN THIS REGARD, MAY BE MADE TO THE FOLLOWING DECISIONS WHEREIN HAS BEEN HELD THAT IF THE OUTGOING OR EXPENDITURE IS RELATED TO THE CARRYING ON, OR CONDUCT OF THE BUSINESS, IT MAY BE REGARDED AS AN INTEGRAL PART OF THE PROFIT MAKING PROCESS AND THEREFORE REVENUE IN NATURE: EMPIR E JUTE CO. LTD. V. CIT: 124 ITR 1 (SC) CIT V. ASSOCIATED CEMENT COMPANIES LTD.: 172 ITR 257 (SC) ALEMBIC CHEMICAL WORKS CO. LTD. V. CIT: 177 ITR 377 (SC) ARVIND MILLS LTD V. CIT: 97 ITR 422 (SC) ITA NO S . 551/DEL./2014 & 636/DEL./2015 51 CHANDULALKESHAVLAL V. CIT: 38 ITR 601(SC) BOMBAY STEAM NAVIGATION CO. (1953) (P.) LTD. V. CIT: 56 ITR 52 (SC) DEVIDASVITHALDAS& CO. V. CIT: 84 ITR 277 (SC) CHELPARK COMPANY LTD. V. CIT: 191 ITR 249 (MAD.) K.T.M.T.M. ABDUL KAYOOM V. CIT: 44 ITR 689 (SC) ASSAM BENGAL CEMENT CO. LTD. V. CIT: 27 ITR 34 (SC) L.H. S UGAR FACTORY & OIL MILLS P. LTD. V. CIT: 125 ITR 293 (SC) DALMIA JAIN & CO. LTD. V. CIT: 81 ITR 754 (SC) M.K. BROS. (P.) LTD. V. CIT: 86 ITR 38 (SC) TRAVANCORE SUGARS & CHEMICALS LTD. V. CIT: 62 ITR 566 (SC) CIT V. B.N. ELIAS & CO. (P.) LTD.: 168 ITR 190 ( CAL.) CIT V. HINDUSTAN GENERAL ELECTRIC CORPN. LTD.: 81 ITR 243 (CAL.) GANNON NORTON METAL DIAMOND DIES LTD. V. CIT: 163 ITR 606 (BOM.) CIT V. MEHTA TRANSPORT CO.: 160 ITR 35 (GUJ.) SARASWATI INDUSTRIAL SYNDICATE LTD. V. CIT: 137 ITR 886 (PUNJ. &HAR.) CIT V. OBLUM ELECTRICAL INDUSTRIES.: 127 ITR 409 (AP) FURTHER, ATTENTION IS INVITED TO FOLLOWING DECISIONS WHEREIN IT HAS BEEN HELD THAT SHIFTING/ RELOCATION EXPENSES INCURRED BY THE ASSESSEE IN THE COURSE OF BUSINESS ARE ALLOWABLE REVENUE EXPENDITURE AND CAN NOT BE TREATED AS CAPITAL IN NATURE: CIT V. KARANPURA DEVELOPMENT CO. LTD.: 144 ITR 538 (CAL.) CIT V. BRAKES INDIA LTD.: 161 TAXMAN 47 (CHENN.) CIT V. LOYAL SUPER FABRICS: 304 ITR 78 (CHENN.) MADURA COATS LTD. V. ITO: 26 ITD 152 (MAD.) HINDUSTAN TIMES LTD . V. ITO: 3 ITD 525 (DEL.) JCIT V. ITC LTD.: 299 ITR(TRIB.) 341 (KOL.)(SB)(AT) THE DECISION IN THE CASE OF BIMETAL BEARINGS(SUPRA), RELIED UPON BY THE ASSESSING OFFICER, HAS BEEN DISTINGUISHED IN THE SUBSEQUENT DECISION OF THE HON BLE MADRAS HIGH COURT IN THE CASE OF CIT V. LOYAL SUPER FABRICS: 304 ITR 78 (MAD.). FURTHER, IT IS RESPECTFULLY SUBMITTED THAT THE DECISION OF BOMBAY HIGH COURT IN THE CASE OF OTIS ELEVATOR (SUPRA), ALSO RELIED UPON BY THE ASSESSING OFFICER, IS PER INCURIAM, SINCE THE SAME HAS BEE N RENDERED WITHOUT CONSIDERING THE DECISION OF THE APEX COURT IN THE CASE OF EMPIRE JUTE CO. V. CIT: 124 ITR 1. THE DECISION OF THE PATNA HIGH COURT IN THE CASE OF JAMSHEDPUR ENGG. (SUPRA) HAS ALSO BEEN DULY CONSIDERED AND ITA NO S . 551/DEL./2014 & 636/DEL./2015 52 DISTINGUISHED BY THE THIRD MEMBER OF THE MADRAS BENCH OF THE TRIBUNAL IN THE CASE OF MADURA COATS LTD. V. ITO: 26 ITD 152. (MAD.) IN THE PRESENT CASE, IT IS RESPECTFULLY SUBMITTED, THE ABOVE EXPENSES WERE INCURRED ON MERELY REALLOCATION OF THE FACTORY FROM RUDRAPUR TO GREATER NOIDA AND NO NEW ASSET HAS COME INTO EXISTENCE. SUCH EXPENSES, THEREFORE, ARE ALLOWABLE REVENUE DEDUCTION AND CANNOT BE CONSIDERED AS CAPITAL IN NATURE FOR THE FOLLOWING CUMULATIVE REASONS: (I) THE EXPENSES WERE INDIRECT IN NATURE MAINLY TO DISMANTLE, SHIFT AND INST ALL MACHINES AT NEW LOCATION; (II) NO NEW ASSET HAS COME INTO BEING AS A RESULT OF SHIFTING EXPENSES; (III) THERE WAS NO ENHANCEMENT IN EXISTING MANUFACTURING CAPACITY AND EXPENSES WERE INCURRED ONLY TO SHIFT EXISTING MACHINES FROM ONCE PLACE TO THE OTHER . 2 6 . ON THE OTHER HAND, THE LD. CIT/ DR RELIED ON THE ORDER OF THE AO/ DRP TO CONTEND THAT THE EXPENDITURE IN CONSIDERATION WAS RELATING TO THE SHIFTING OF PLANT AND MACHINERY, WHICH BEING THE CAPITAL ASSETS OF THE ASSESSEE COMPANY, THESE EXPENSES NEED TO CAPITALIZED AS PER THE PROVISIONS OF LAW. IT WAS FURTHER ARGUED THAT THE ASSESSEE COMPANY HAS ESTABLISHED A NEW SET - UP AT GREATER NOIDA WHICH HAS RESULTED IN ENDURING BENEFIT AND ACCORDINGLY, EXPENDITURE NEEDS TO BE DISALLOWED AS CAPITAL IN NATURE. 2 7 . WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE CHARTS, SYNOPSIS AND PAPER BOOKS PLACED BEFORE US. THE ISSUE RELATES TO DETERMINATION OF EXPENDITURE AS CAPITAL OR REVENUE. WE FIND SUBSTANCE IN THE SUBMISSION OF THE APPELLANT THAT THE EXPENDITURE WAS INCURRED ON SHIFTING OF EXISTING ASSETS OF THE ASSESSEE COMPANY TO GREATER NOIDA FOR CONSOLIDATING THE UNITS TO INCREASE PROFITABILITY AND EFFICIENCY. WE ARE OF THE VIEW THAT THE EXPENSES INCURRED BY THE ASSESSEE COMPANY DID NOT BRING INTO EXISTENCE ANY NEW CAPITAL ASSET. THE ASSESSEE COMPANY HAS RELIED ON THE DECISION OF THE APEX COURT AND VARIOUS ITA NO S . 551/DEL./2014 & 636/DEL./2015 53 OTHER HIGH COURTS TO CONTEND THAT IT NOT EVERY ENDURING BENEFIT WHICH WOULD BE CONSIDERED AS CAPITAL IN NATURE AND SUCH BENEFIT MUST BE IN THE CAPITAL FIELD. IT WOULD BE USEFUL TO REFER TO THE DECISION IN THE CASE OF EMPIRE JUTE CO. LTD. V. CIT: 124 ITR 1 (SC) WHEREIN IT HAS BEEN HELD THAT IF THE EXPENDITURE IS RELATED TO THE CONDUCT OF THE BUSINESS, IT MAY BE REGARDED AS AN INTEGRAL PART OF THE PROFIT MAKING PROCESS AND WOULD BE HELD AS REVENUE IN NATURE. 2 8 . THE DECISIONS RELIED UPON BY THE AO/ DRP ARE DISTINGUISHABLE FROM THE FACTS CANVASSED BY THE ASSESSEE COMPANY AND HAVE BEEN DULY CONSIDERED AND D ISTINGUISHED BY COURTS SUBSEQUENTLY. WE ARE IN AGREEMENT WITH THE DECISIONS RELIED UPON BY THE LD. AR IN THE CASE OF KARANPURA DEVELOPMENT (CAL.), LOYAL SUPER FABRICS (MAD.) AND MADURA COATS (MAD.) WHICH, ACCORDING TO US, ARE SIMILAR TO THE CASE OF THE ASS ESSEE. ACCORDINGLY, WE HOLD THAT THE EXPENSES ON RELOCATION AND SHIFTING ARE REVENUE IN NATURE AND WOULD BE ALLOWED AS BUSINESS DEDUCTION AND THE DISALLOWANCE MADE BY THE AO ON THIS COUNT IS DELETED . 2 9 . THE LAST ISSUE RAISED IN APPEAL FOR A.Y. 2010 - 11 BY WAY OF G ROUND NOS. 6 TO 6.2 RELATE TO DISALLOWANCE OF RS. 11,76,382 ON ACCOUNT OF PROVISION FOR SLOW - MOVING INVENTORY. THE LD. AR HAS SUBMITTED AS UNDER: DURING THE RELEVANT YEAR UNDER CONSIDERATION, THE APPELLANT HAD, IN ITS BOOKS OF ACCOUNTS, DEBITED A SUM OF RS. 11,76,382 ON ACCOUNT OF SLOW AND NON - MOVING INVENTORY UNDER THE HEAD OTHER EXPENSES . THE METHOD OF VALUATION OF INVENTORY WAS DULY REFLECTED AT PARAGRAPH 12(A) OF THE TAX AUDIT REPORT AND REFERENCE TO THE ACCOUNTING POLICY FOR INVENTORIES WAS ALSO MADE IN SCHEDULE 12 IN PARAGRAPH (VII) OF THE AUDITED ACCOUNTS. THE ASSESSING OFFICER/ DRP, VIDE ORDER DATED 16.12.2014, WITHOUT POINTING OUT THE BASIS ON WHICH SUCH EXPENDITURE WAS DISALLOWABLE, STATED THAT SINCE EXPENDITURE IN RESPECT OF THE ABOVE AMOUNT WAS IN THE NATURE OF ITA NO S . 551/DEL./2014 & 636/DEL./2015 54 PROVISION, THE SAID PROVISION OUGHT TO HAVE BEEN ADDED BACK TO THE INCOME OF THE ASSESSEE. IN THIS REGARD, IT IS RESPECTFULLY SUBMITTED, THAT THE PROVISION FOR SLOW/ NON - MOVING ITEMS WAS MADE BY THE ASSESSEE AS PER ITS INTERNAL POLICY BASED ON INDUSTRY NORMS VIZ., @ 100% OF CLOSING STOCK IF INVENTORY IS NOT SOLD FOR PERIOD OF 1 YEAR AND 50% OF CLOSING STOCK IF INVENTORY IS NOT SOLD FOR PERIOD OF 6 MONTHS TO 1 YEAR. SUCH PROVISION WAS ALSO IN ACCORDANCE WITH SCHEDULE XIV OF THE C OMPANIES ACT, 1956. IN FACT, NEITHER THE STATUTORY NOR THE TAX AUDITORS HAVE FOUND THE SAME TO BE NOT ASCERTAINABLE OR A CONTINGENT LIABILITY. IT WILL BE APPRECIATED THAT IN ACCORDANCE WITH THE ACCOUNTING STANDARD 2 ON VALUATION OF INVENTORY, PRESCRIBED B Y INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA, INVENTORIES HAVE TO BE VALUED AT THE COST PRICE OR NET REALIZABLE VALUE, WHICHEVER IS LOWER. REFERENCE, IN THIS REGARD, MAY BE PLACED ON THE FOLLOWING CASES WHEREIN THE AFORESAID METHOD OF VALUING THE CLOSING STOCK AT COST OR NET REALIZABLE VALUE, WHICHEVER IS LOWER, FOR THE PURPOSES OF THE ACT HAS BEEN ACCEPTED AS A RECOGNIZED METHOD OF ACCOUNTING OF INVENTORIES: K. MOHAMMED ADAM SAHIB V. CIT: 56 ITR 360 (MAD.) INDIA MOTOR PARTS AND ACCESSORIES (P) LTD V. CIT: 60 ITR 531 (MAD.) CIT V. DALMIA CEMENT (BHARAT) LTD: 215 ITR 441 (DEL.) CIT V INDO - COMMERCIAL BANK LTD.: 44 ITR 22 (DEL.) CIT VS. BHARAT COMMERCE & INDUSTRIES LIMITED : 240 ITR 256 (DEL HC) IAC V. CONSOLIDATED PNEUMATIC TOOL CO. (INDIA) LTD.: 14 ITD 564 ( BOM.) WIPRO LIMITED VS. DCIT: 96 TTJ 211(BANG.) SAMSUNG ELECTRONICS INDIA LTD. VS. JCIT (ITA NO.3200 & 2344/DEL/2000 & ITA NO.3734/DEL/2002) [DEL ITAT] RELIANCE, IS ALSO PLACED ON THE FOLLOWING DECISIONS, WHEREIN IT HAS BEEN HELD THAT THE PROVISION MADE BY THE ASSESSEE TOWARDS OBSOLETE AND SLOW MOVING ITEMS WAS ALLOWABLE DEDUCTION: CIT V. BRITISH PAINTS INDIA LTD.: 188 ITR 44 (SC) CIT V. HINDUSTAN ZINC LTD.: 291 ITR 391(SC) CHAINRUPSAMPATRAM V. CIT: 24 ITR 481 (SC) HOTLINE TELE TUBE AND COMPONENTS LIMITED: 175 TAXMAN 286 (DEL. HC) CIT V. HUGHES COMMUNICATION INDIA LTD.: 215 TAXMAN 136 (DEL. HC) ITA NO S . 551/DEL./2014 & 636/DEL./2015 55 CIT V BECTON DICKINSON INDIA (P.) LTD.: 214 TAXMAN 636 (DEL. HC) CIT V BHARAT COMMERCE & INDUSTRIES LTD.: 107 TAXMAN 135 (DEL. HC) JETAIRWAYS INDIA (P) LTD. VS CIT (IN 4228/M/2000 FOR ASSESSMENT YEAR 1997 - 98 AND OTHER YEARS) (MUM. ITAT) EMERSONS PROCESS MANAGEMENT INDIA (P) LTD. VS ADDL. CIT: IT APPEAL NO. 8118 (MUM.) OF 2010 (BOM. TRIB.) DIGITAL EQUIPMENT INDIA LTD. VS CIT: ITA NO. 6623 AND 6624(BOM.)/2008 (B OM. TRIB.) CIT V NUWARE INDIA LTD.: 118 ITD 70 (DEL. TRIB.) IN VIEW OF THE ABOVE, IT IS RESPECTFULLY SUBMITTED, THAT THE ACTION OF THE ASSESSING OFFICER IN DISALLOWING THE AFORESAID PROVISION ON ACCOUNT OF SLOW MOVING EXPENSES IS ERRONEOUS AND BASED ON INC ORRECT APPRECIATION OF FACTS AND THE SETTLED LEGAL PRINCIPLES. THAT APART, AND WITHOUT PREJUDICE TO THE AFORESAID, IT IS RESPECTFULLY SUBMITTED THAT EVEN OTHERWISE NO DISALLOWANCE IS WARRANTED UNDER THE PROVISIONS OF THE ACT INASMUCH AS THE PROVISION FOR S LOW MOVING INVENTORY OF RS. 11,76,382, DEBITED TO THE PROFIT AND LOSS ACCOUNT FOR THE YEAR UNDER CONSIDERATION, WOULD BE REDUCED TO NIL WHEN THE INVENTORY IS ACTUALLY WRITTEN OFF IN THE SUBSEQUENT ASSESSMENT YEARS. 30 . ON THE OTHER HAND, THE LD. CIT DR RELIED ON THE ORDERS OF THE LOWER AUTHORITIES. 31 . WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL ON RECORD. WE FIND THAT THE AFORESAID ISSUE IS SQUARELY COVERED BY THE DECISION OF THE JURISDICTIONAL DELHI HIGH COURT IN THE CASE OF HOTLINE T ELE TUBE AND COMPONENTS LTD.: 175 TAXMAN 286, WHERE THE COURT HAS HELD THAT PROVISION FOR DIMINUTION IN VALUE OF STOCK WAS ALLOWABLE AS DEDUCTION. THE RELEVANT FINDINGS OF THE COURT READ AS UNDER: 5. IN THE INSTANT CASE WE FIND THAT THE PRINCIPLE FOR VAL UING STOCK AT COST OR REALIZABLE MARKET PRICE WHICHEVER IS LOWER IS APPLICABLE. THE ASSESSEE HAS DEMONSTRATED THAT THE STOCK BEING OBSOLETE DID NOT MOVE FOR OVER THREE YEARS AND ALSO THE FACT THAT IT COULD ONLY BE SOLD IF AT ALL AS SCRAP. AS A MATTER OF FA CT, THE ASSESSEE ALSO ESTABLISHED THAT IN THE EVENT IT IS SOLD AS ITA NO S . 551/DEL./2014 & 636/DEL./2015 56 SCRAP THE BURDEN OF EXCISE DUTY WOULD BE MUCH MORE THAN WHAT IT COULD REALIZE ON SALE OF THE SAID STOCK AS SCRAP. THE TRIBUNAL HAS RETURNED THIS AS A FINDING OF FACT. IN VIEW OF THESE FINDIN GS, IT IS QUITE CLEAR THAT, ALL THAT, THE ASSESSEE HAS DONE BY MAKING THE PROVISION FOR DIMINUTION IN VALUE OF STOCK IS TO ANTICIPATE THE LOSS IN THE VALUE OF STOCK. 6. IN THE CIRCUMSTANCES, WE ARE OF THE VIEW THAT NO SUBSTANTIAL QUESTION OF LAW ARISES FOR OUR CONSIDERATION. 7. ACCORDINGLY, THE APPEAL IS DISMISSED. 3 2 . IT HAS SIMILARLY BEEN HELD IN THE DECISION OF DELHI HIGH COURT IN THE CASE OF CIT V. HUGHES COMMUNICATION INDIA LTD.: 215 TAXMAN 136. FURTHER, WE FIND MERIT IN THE SUBMISSION OF THE ASSESSEE THAT WHERE THE PROVISION IS MADE ON A SCIENTIFIC AND REASONED BASIS YEAR AFTER YEAR AND SUCH PROVISION WOULD BE REDUCED COMPLETELY WHEN THE OBSOLETE STOCK IS WRITTEN OFF IN SUBSEQUENT YEARS, NO DISALLOWANCE CAN BE MADE ON THE ASSESSEE COMPANY. RES PECTFULLY FOLLOWING THE DECISION OF THE JURISDICTIONAL HIGH COURT, WE HOLD THAT THE PROVISION FOR SLOW MOVING INVENTORY WOULD BE ALLOWED AS REVENUE DEDUCTION AND THEREFORE, THE DISALLOWANCE MADE IN THE ASSESSMENT ORDER FOR A.Y. 2010 - 11 ON THIS ACCOUNT HAS TO BE DELETED. 3 3 . ACCORDINGLY, THE APPEAL OF THE ASSESSEE FOR A.Y. 2010 - 11 ALSO STANDS PARTLY ALLOWED. 3 4 . IN THE RESULT, BOTH THE APPEALS OF THE ASSESSEE - COMPANY ARE PARTLY ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 13.04.20 16. SD/ - SD/ - ( I.C. SUDHIR ) (L.P. SAHU) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED : 13.04.2016 *AKS/ - ITA NO S . 551/DEL./2014 & 636/DEL./2015 57 COPY OF ORDER FORWARDED TO: (1) THE APPELLANT (2) THE RESPONDENT (3) COMMISSIONER (4) CIT(A) (5) DEPARTMENTAL REPRESENTATIVE (6) GUARD FILE BY ORDER ASSISTANT. REGISTRAR INCOME TAX APPELLATE TRIBUNAL DELHI BENCHES, NEW DELHI DATE INITIAL 1. DRAFT DICTATED ON 04 /5/6.04.16 PS 2. DRAFT PLACED BEFORE AUTHOR 07.04.16 PS 3. DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER JM/AM 4. DRAFT DISCUSSED/APPROVED BY SECOND MEMBER. JM/AM 5. APPROVED DRAFT COMES TO THE SR.PS/PS 18.04.2016 PS/PS 6. KEPT FOR PRONOUNCEMENT ON PS 7. FILE SENT TO THE BENCH CLERK 18.04.1016 PS 8. DATE ON WHICH FILE GOES TO THE AR 9. DATE ON WHICH FILE GOES TO THE HEAD CLERK. 10. DATE OF DISPATCH OF ORDER.