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

ITA 5720/DEL/2011

• Counselvise Citation: [2016] 132 COUNSELVISE.COM (IT) 7803 (ITAT-DELHI)
• Duration Of Justice: 4 year(s) 4 month(s) 30 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 20-05-2016
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: I1
• Next Hearing Date: 05-11-2015
• Assessment Year: 2007-2008
• Appeal Filed On: 21-12-2011
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: TEJASVI JAIN CAS
• Keywords: Related party transaction; Capital asset; Depreciation; Transfer pricing; Business expenditure; Rectification of order; Opportunity of being heard; International transaction; Rule of consistency; Earning of tax free income; Proportionate interest; Competent authority; Royalty expenses; Tax effect; Capital receipt; Commercial expediency; Revised return; Revenue expenditure; Capital expenditure
• Section: 92C; 43B; 143(3); 92B; 234B; 14A; 260A; 92

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH I - 1 NEW DELHI) BEFORE SHRI I.C. SUDHIR AND SHRI L.P. SAHU ITA NO. 5720/DEL/2011 ASSESSMENT YEAR: 2007 - 08 ITA NO.2564/DEL/2014 ASSESSMENT YEAR: 2007 - 08 MARUTI SUZUKI IN DIA LTD., VS. ADDITIONAL CIT, PLOT NO.1, NELSON MANDELA ROAD, RANGE - 6, VASANT ROAD, NEW DELHI. NEW DELHI. (PAN: AAACM0829Q) (APPELLANT) (RESPONDENT) ASSESSEE BY: S/SHRI AJAY VOHRA, SR. ADV. NE ERAJ JAIN, ROHIT JAIN, ADV. ROMIT KATYAL & MS. TEJASVI JAIN, CAS DEPARTMENT BY:SHRI AMRENDRA KUMAR, CIT(DR) C O R R I G E N D U M IT HAS COME TO OUR NOTICE THAT THERE ARE FEW TYPOGRAPHICAL MISTAKES IN T HE ORDER DATED 20.5.2016 OF THE ITAT, WHICH NEEDS RECTIFICATIONS BEING APPARENT FROM THE RECORD IN THE SAID ORDER. THESE MISTAKES ARE IN THE SHAPE OF (I) NON - REPRODUCTION OF RELEVANT PARAGRAPH NO S . 4.14 TO 4.21 OF THE ORDER OF THE ITAT FOR ASSESSMENT YEAR 2 006 - 07 ON CERTAIN ISSUES FOLLOWED IN THE PRESENT ORDER OF THE ITAT IN PARA NO. 12.3 (PAGE NO. 44 OF THE ORDER); (II) NON - REPRODUCTION OF PARA NO.9 OF THE ORDER OF THE ITAT FOR THE ASSESSMENT YEAR 2006 - 07 IN PARA NO. 21.1, PAGE 91 OF THE PRESENT ORDER; (II I) THE REFERENCE OF RELEVANT PARA NOS. OF THE ORDER OF THE ITAT FOR THE ASSESSMENT YEAR 2006 - 07 REMAINED TO BE TYPED AT THE END OF FIRST PARAGRAPH OF THE PAGE NO.98 OF THE ORDER OF THE ITAT AND ALSO REMAINED THE PUTTING OF THE SIGN OF INVERTED COM M AS IN T HE STARTING OF THE QUOTED PARAGRAPH I.E. 12.1 AT PAGE NO. 98 OF THE ORDER OF THE ITAT AND AT PAGE NO. 101 OF THE ORDER OF THE ITAT WHILE ENDING UP THE QUOTED PORTION . ON THE SAME PAGE NO. 101 OF THE 2 ORDER ALSO REMAINED THE TYPING OF CONCLUSION ON THE ISSUE RAISED IN GROUND NOS. 11 TO 11.6; (I V ) NON - PRODUCTION OF PARAGRAPH 19 OF ITAT ORDER IN THE ASSESSMENT YEAR 2006 - 07 IN PARA NO. 32.2, PAGE NO. 161 OF THE PRESENT ORDER OF THE ITAT; ( V) AT PAGE NO. 70 IN PARA NO. 18 OF THE PRESENT ORDER OF THE ITAT IN THE THIRD LINE FROM TOP , TH E STARTING WORD ASSESSING OFFICER IS MISSING IN THE STARTING OF THE SENTENCE AND IN THE 5 TH LINE IN THE SENTENCE STARTING AS I N SUPPORT OF IN PLACE OF CAPITAL T IN THE WORD THE AFTER THE WORD THAT THE CORRECT WORD WILL B E THE; (VI) IN PARA NO. 18 AT PAGE NO. 69 OF THE ORDER IN THE LAST LINE DURING THE YEAR, . I N PLACE OF HAS AFTER THE WORDS THE ASSESSEE THE WORD HAD WILL COME; (VII) IN THE THIRD LINE OF P A RA NO. 25 AT PA GE NO. 102 OF THE PRESENT ORDER, IN THE SECOND SENTENCE BEFORE A.Y. 1999 - 2000 IN PLACE OF IN. THE CORRECT WORD IN WOULD COME; (VI II ) AT PAGE NO. 103 OF THE PRESENT ORDER OF THE ITAT IN THE FIRST LINE OF PARA NO.25.4, IN PLACE OF THE CORRECT ASSESSMENT YEAR 2006 - 07, IT HAS BEEN WRONGLY TYPED AS 2006 - 06; (IX ) AT PAGE NO. 111 IN PARA NO. 26.5 OF THE ORDER, IT HAS BEEN WRONGLY TYPED THAT NO APPEAL HAD BEEN FILED BY THE REVENUE ON THE ISSUE AGAINST THE FIRST APPELLATE ORDER FOR THE ASSESSMENT YEAR 2003 - 04 AND THE CONSEQUENTIAL FINDING IN THE CO NCLUSION OF THE ITAT IN THE SAID PARAGRAPH AT PAGE NO. 112 OF THE ORDER; (X) NON - PUTTING OF THE INVERTED COMMA AT THE STARTING OF QUOTED PARA NO. 50 AT PAGE NO. 114 OF THE PRESENT ORDER OF THE ITAT; (X I ) AT PAGE NO. 115 AND 116 IN PARA NOS. 28 AND 28.1, T HE SUBMISSION OF THE ASSESSEE THAT ORDER OF THE ITAT FOR THE ASSESSMENT YEAR 2006 - 07 ON THE ISSUE OF TP ADJUSTMENT ON ACCOUNT OF EXCESSIVE AMP EXPENSES HAS BEEN REVERSED BY THE HONBLE HIGH COURT OF DELHI , HAS BEEN REMAINED TO BE MENTIONED AND ACCORDINGLY EFFECT THEREOF HAS BEEN REMAINED TO BE GIVEN IN PARA NOS. 28.3 AND 28.4 OF THE ORDER OF THE ITAT , BESIDES IN PARA NO. 28.3 IN THE 4 TH LINE FROM THE BOTTOM AT PAGE NO. 116 OF THE ORDER OF 3 THE ITAT IN PLACE OF CORRECT ASSESSMENT YEAR 200 5 - 0 6 AND 2006 - 07 , I T HAS BEEN WRONGLY TYPED AS 2005 - 06 FURTHER THAT AT PAGE NOS. 117 TO 141 OF THE PRESENT ORDER, EXTRACTS OF ORDER OF THE ITAT IN A.Y. 2006 - 07, NOW REVERSED BY HON'BLE HIGH COURT, HAVE BEEN WRONGLY REPRODUCED IN PLACE OF THE RELEVANT PARAGRAPH NOS. 7.1 AND 7.9 OF THE DECISION OF HON'BLE HIGH COURT; (XIII) AT PAGE NOS. 143 , THE PRESENT ORDER NON - PUTTING OF INVERTED COMMAS IN THE STARTING OF THE QUOTED PORTION BEFORE B. ROYALTY AND AT THE ENDING OF THE QUOTED PORTION AT PAGE 152; AND AT PAGE NO. 153 HAS RE MAINED TO BE TYPED THE FINDING AS GROUND NO. 15.32 PARA NOS. 28.9 TO 28.10 AT PAGE NOS. 153 TO 155 HAVE BEEN WRONGLY TYPED AND ACCORDINGLY CORRECTION OF PRESENT PARA NOS. 28.11, 28.12, 28.13 AND 28.14 ARE REQUIRED TO BE MADE AS 28.9, 28.10, 28.11 AND 28.1 2; (XI I I ) AT PAGE NO.156 IN PARA NO. 29 IN THE SECOND LINE FROM THE END OF THE PARAGRAPH IN PLACE OF THE WORD THE BETWEEN EMPOWERED AND DIRECT THE CORRECT WORD TO WILL COME; (XI V ) AT PAGE NO. 157 IN PARA NO. 29.2 OF THE PRESENT ORDER OF THE ITAT I N THE SECOND LINE OF THE FIRST SENTENCE BETWEEN THE WORDS CLAIM AND CREDIT THE WORD TDS IS MISSING; AND LASTLY (X V ) AT THE LAST PAGE NO.164 IN THE MOVEMENT TABLE AGAINST THE COLUMN DRAFT DICTATED DIRECTLY ON COMPUTER AND AGAIN DRAFT PLACED BEFORE THE AUTHOR AGAINST THE CORRECT DATE 0 2 .5.2016 TO 13.05.2016 AGAINST THE FIRST COLUMN AND THE DATE 16 . 5 .2016 AGAINST THE SECOND COLUMN HA VE BEEN WRONGLY TYPED THE DATE AS 20.6.2016 . 2. WE FIND THAT CARRYING OUT RECTIFICATIONS IN THE ABOVE APPARENT MISTAKES, INVOKING THE PROVISIONS OF SEC . 254(2) OF THE I.T. ACT ARE HAVING NO EFFECT OF ENHANCING AN ASSESSMENT OR REDUCING A REFUND OR OTHERWISE INCREASING THE LIABILITY OF THE ASSESSEE. THESE ARE THUS ALLOWED BY WAY OF 4 ISSUING CORRIGENDUM. AFTER RECTI FICATION, THE ORDER DATED 20.05.2016 OF THE ITAT WILL BE READ AND UNDERSTOOD AS REPRODUCED IN ANNEXURE - A ATTACHED HERETO. SD/ - SD/ - ( L.P. SAHU ) ( I.C. SUDHIR ) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED: 12 /07/2016 *MOHAN LAL* 5 ANNEXURE:A IN THE INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH I - 1 NEW DELHI) BEFORE SHRI I.C. SUDHIR AND SHRI L.P. SAHU ITA NO. 57 20 /DEL/201 1 ASSESSMENT YEAR: 200 7 - 0 8 ITA NO.2564/DEL/2014 ASSESSMENT YEAR: 2007 - 08 MARUT I SUZUKI INDIA LTD., VS. ADDITIONAL CIT, PLOT NO.1, NELSON MANDELA ROAD, RANGE - 6, VASANT ROAD, NEW DELHI. NEW DELHI. (PAN: AAAC M0829Q ) (APPELLANT) (RESPONDENT) ASSESSEE BY: S/ SHRI AJAY VOHRA, S R. ADV. NEERAJ JAIN, ROHIT JAIN, ADV. ROMIT KATYAL & MS. TEJASVI JAIN, CAS DEPARTM ENT BY: SHRI AMRENDRA KUMAR, CIT(DR) DATE OF HEARING : 0 3 . 0 3 .201 6 DATE OF PRONOUN CEMENT: 20 : 0 5 .201 6 ORDER PER I.C. SUDHIR : JUDICIAL MEMBER ITA NO. 5720/DEL/2011: (A.Y. 2007 - 08 ) THE ASSESSEE HAS QUESTIONED THE ORDER OF THE AUTHORITIES BELOW ON THE FOLLOWING GROUNDS: 1. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CAS E THE IMPUGNED ASSESSMENT COMPLETED VIDE ORDER DATED 2 9 .1 1 .201 1 UNDER SECTION 143(3) READ WITH SECTION 144C OF THE INCOME - TAX ACT, 1961 (THE ACT), IS ILLEGAL AND BAD IN LAW. 1.1 THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE IMPUGNED ASSESSMENT HAVING BEEN COMPLETED ON THE BASIS OF DIRECTIONS 6 ISSUED BY THE DISPUTE RESOLUTION PANEL (DRP) UNDER SECTION 144C(5) OF THE ACT WITHOUT JUDICIOUSLY AND INDEPENDENTLY CONSIDERING THE FACTUAL AND LEGAL OBJECTIONS TO THE DRAFT ASSESSMENT ORDER, IS ILLEGAL AND BAD I N LAW. 1.2 THAT THE DRP ERRED ON FACTS AND IN LAW IN NOT INTERFERING WITH THE DRAFT ORDER PASSED BY THE ASSESSING OFFICER HOLDING THAT SINCE APPEALS HAVE BEEN FILED BY THE APPELLANT AND THE DEPARTMENT ON VARIOUS ISSUES, THERE IS NO WARRANT TO INTERFERE WITH THE PROPOSED ADDITIONS/ DISALLOWANCES. 1.3 THAT THE DRP ERRED ON FACTS AND IN LAW IN NOT DIRECTING THE ASSESSING OFFICER TO DELETE VARIOUS ADDITIONS/ DISALLOWANCE, WHICH WERE SQUARELY COVERED IN FAVOUR OF THE APPELLANT BY THE APPELLATE ORDERS FOR THE EARLIER YEARS. 2.0 THAT THE ASSESSING OFFICER ERRED ON FACTS OF THE CASE AND IN LAW IN COMPLETING THE IMPUGNED ASSESSMENT AT AN INCOME OF RS. 25,76,67,35,640 / - AGAINST INCOME OF RS. 18,87,09,02,130 / - DECLARED BY THE APPELLANT. 3.0 THAT THE ASSESSING OFFICER ERRED ON F ACTS AND IN LAW IN NOT ALLOWING AN AGGREGATE CLAIM OF DEDUCTION OF RS. 118,83,44,986/ - U/S 43B OF THE ACT. 3.0.1 THAT THE ASSESSING OFFICER ERRED IN MAKING DISALLOWANCE UNDER SECTION 43B OF THE ACT FOLLOWING THE ASSESSMENT ORDERS FOR THE EARLIER ASSESSMENT YEAR S DESPITE ADMITTING THAT IN THE EARLIER YEAR(S) MOST OF THE ISSUES HAVE BEEN DECIDED IN FAVOUR OF THE APPELLANT. 7 3.0.2 THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN HOLDING THAT THE DEDUCTION OF LIABILITY TO PAY TAXES/DUTIES U/S 43B IS ADMISSIBLE ON LY AFTER SUCH LIABILITY HAS BEEN INCURRED UNDER THE ACT. 3.1 THAT THE ASSESSING OFFICER FAILED TO APPRECIATE THAT THE ASSESSEE HAVING ADMITTEDLY PAID RS 69,55,197/ - AS EXCISE DUTY ON VEHICLES, RS .12,97,721/ - AS R & D CESS ON VEHICLES AND RS. 78,98,967 / - ON ACCOUNT OF EXCISE DUTY ON SPARE PARTS IN THE RELEVANT ASSESSMENT YEAR, THE SAME WERE ALLOWABLE DEDUCTION U/S 43B OF THE ACT . 3.1.1 THAT THE ASSESSING OFFICER HAS, WITHOUT ANY BASIS OR MATERIAL, ERRONEOUSLY CONCLUDED THAT THE AFORESAID PAYMENTS HAVE BEEN MADE IN ADVANCE FOR THE STOCKS STILL TO BE MANUFACTURED WITHOUT APPRECIATING THAT AS ON 31.03.0 7 THE APPELLANT HAD FINISHED STOCK OF VEHICLES AMOUNTING TO RS 540.8 CRORES, WHICH INCLUDED ACCRUED LIABILITY OF EXCISE DUTY AND R&D CESS AMOUNTING TO RS 97.81 CRORES AND CONSEQUENTLY, THE SAME WERE, IN ANY CASE, ALLOWABLE DEDUCTION U/S 43B OF THE ACT. 3.2 THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN NOT ALLOWING DEDUCTION UNDER SECTION 43B OF THE ACT FOR A SUM OF RS 34,200 / - REPRESENTING THE CUSTOMS DUTY PAID IN RESPECT OF INPUTS IMPORTED BY THE ASSESSEE COMPANY FOR WHICH THE CORRESPONDING EXPORTS HAD NOT BEEN MADE BY THE YEAR END . 3.3 THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN NOT ALLOWING DEDUCTION UNDER SECTION 43B OF THE ACT FOR A SUM OF RS 12,8 0,54,223/ - REPRESENTING THE CUSTOMS DUTY PAID IN RESPECT OF INPUTS IMPORTED BY THE ASSESSEE COMPANY AND, FOR WHICH THE CORRESPONDING EXPORTS HAD BEEN MADE BY THE YEAR END . 8 3.4 THAT THE LEARNED ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN NOT ALLOWING DEDUC TION UNDER SECTION 43B OF THE ACT FOR A SUM OF RS 46,90,80,304/ - REPRESENTING THE AMOUNT OF EXCISE DUTY ACTUALLY PAID ON PURCHASED INPUTS INCLUDED IN RG 23A PART II. 3.4.1 THAT THE ASSESSING OFFICER FAILED TO APPRECIATE THAT THE AFORESAID BALANCES REPRESENTED T HE AMOUNT OF EXCISE DUTY ACTUALLY PAID BY THE APPELLANT TO THE SUPPLIERS OF RAW MATERIALS AND OTHER INPUTS FOR WHICH LIABILITY HAD ALREADY BEEN INCURRED AND THUS COULD NOT BE CONSIDERED AS ADVANCE PAYMENT OF EXCISE DUTY. 3.4.2 THE ASSESSING OFFICER ERRE D ON FACTS AND IN LAW IN NOT ALLOWING DEDUCTION ON THE GROUND THAT THE CLAIM OF DEDUCTION OF UNUTILIZED BALANCE IN RG23A WAS REVENUE NEUTRAL BY VIRTUE OF THE PROVISIONS OF SECTION 145A OF THE ACT. 3.5 THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN N OT ALLOWING DEDUCTION UNDER SECTION 43B OF THE ACT FOR A SUM OF RS . 17,76,35,117/ - REPRESENTING THE CUSTOM DUTY PAID AND INCLUDED IN VALUATION OF CLOSING STOCK. 3.6 THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN NOT ALLOWING DEDUCTION UNDER SECTION 43 B OF THE ACT FOR A SUM OF RS 28,48,36,339/ - REPRESENTING CUSTOM DUTY ( CVD ) PAID TO BE ADJUSTED AGAINST EXCISE DUTY PAYABLE ON FINISHED PRODUCTS. . 3.7 THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN NOT ALLOWING DEDUCTION UNDER SECTION 43B OF THE ACT FOR A SUM OF RS 10,83,22,551/ - REPRESENTING CUSTOM DUTY IN RESPECT OF THE GOODS IN TRANSIT/UNDER INSPECTION. 9 3.8 THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN NOT ALLOWING DEDUCTION UNDER SECTION 43B OF THE ACT FOR A SUM OF RS. 42,30,367 - BEING C USTOMS DUTY PAID UNDER PROTEST. 3.9 THAT THE ASSESSING OFFICER FAILED TO APPRECIATE THAT SECTION 145A DID NOT PURPORT TO NULLIFY AN ALLOWABLE DEDUCTION AVAILABLE TO AN ASSESSEE AND CANNOT BE READ AS PREVAILING OVER OR SUPERSEDING THE STATUTORY MANDATE OF SEC TION 43B OF THE ACT. 4.0 THAT THE ASSESSING OFFICER ERRED IN NOT FOLLOWING THE BINDING DECISIONS OF THE ITAT AND THE CIT(A) IN THE APPELLANTS OWN CASE FOR THE EARLIER ASSESSMENT YEARS, IN GROSS VIOLATION OF PRINCIPLES OF JUDICIAL PROPRIETY. 5.0 THAT THE ASSE SSING OFFICER ERRED ON FACTS AND IN LAW IN MAKING AN ADDITION OF RS. 0.27 CRORES IN RESPECT OF PURPORTED ALLEGED EXCESS CONSUMPTION OF RAW MATERIAL AND COMPONENTS FOLLOWING THE ASSESSMENT ORDERS FOR THE EARLIER YEARS. 5.1 THAT THE ASSESSING OFFICER FAILED TO APPRECIATE THAT THE EXCISE PROCEEDINGS WERE IN RESPECT OF THE CLAIM MADE FOR CREDIT OF CENVAT FOR WHICH THE CENTRAL EXCISE AUTHORITIES HAD ISSUED SHOW CAUSE NOTICE ALLEGING THAT THE SAME COULD NOT BE AVAILED BY THE ASSESSEE, WHICH WAS NOT AT ALL RELEVANT FOR MAKING THE IMPUGNED ADDITION OF RS. 0.27 CRORES. 5.2 THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN MAKING THE ADDITION MERELY ON THE BASIS OF EXCISE SHOW CAUSE NOTICE, WITHOUT APPRECIATING THE FACT THAT SIMILAR NOTICES HAVE BEEN REVERSED IN EAR LIER YEARS BY CESTAT IN ALL CASES. 10 5.3 THAT THE ASSESSING OFFICER FAILED TO APPRECIATE THAT ONCE THE FIGURES OF OPENING STOCK, PURCHASES AND CLOSING STOCK, AS APPEARING IN THE PROFIT & LOSS ACCOUNT WERE ACCEPTED AND THERE BEING NO ALLEGATION OF SALE OF ANY STOCK OUTSIDE THE REGULAR BOOKS OF ACCOUNTS, NO ADDITION COULD, IN ANY CASE BE MADE FOR EXCESS CONSUMPTION OF INPUT MATERIALS. 5.4 THAT THE ASSESSING OFFICER FAILED TO APPRECIATE THAT THE HONBLE ITAT HAS DELETED ADDITION ON THIS GROUND IN THE APPELLANT COMPA NYS OWN CASE FOR AYS 1999 - 2000, 2000 - 01, 2001 - 02 AND 2005 - 06 . 6.0 THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN MAKING DISALLOWANCE OF RS. 4,85,68,020 / - UNDER SECTION 14A OF THE ACT. 6.1 THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN PROCEEDI NG TO MAKE DISALLOWANCE UNDER SECTION 14A OF THE ACT SIMPLY ON THE BASIS OF METHOD/ FORMULA PRESCRIBED IN RULE 8D OF THE I.T. RULES WITHOUT APPRECIATING THAT: (A) THE SAID RULE WAS NOT AT ALL APPLICABLE TO THE YEAR UNDER CONSIDERATION; (B) THERE IS NOTHING ON REC ORD TO DISPUTE THE CONTENTION OF THE APPELLANT THAT NO EXPENDITURE WAS ACTUALLY INCURRED IN RELATION TO EXEMPT INCOME; (C) DISALLOWANCE UNDER THAT SECTION CANNOT BE MADE SIMPLY ON THE BASIS OF ASSUMPTION OF SOME EXPENDITURE HAVING BEEN INCURRED IN RELATION TO EXEMPT INCOME; 11 (D) PRECONDITIONS FOR APPLYING RULE 8D AS PRESCRIBED IN SUB - SECTIONS (2)/ (3) OF SECTION 14A OF THE ACT WERE NOT SATISFIED. 6.2 THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN NOT APPRECIATING THAT THERE WAS NO DIRECT NEXUS BETWEEN EXPENDI TURE INCURRED AND EXEMPT DIVIDEND INCOME. 6.3 THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN NOT FOLLOWING THE BINDING ORDERS OF THE JURISDICTIONAL TRIBUNAL IN THE APPELLANTS OWN CASE FOR AYS 1999 - 2000 AND AY 2000 - 2001 WHEREIN THE TRIBUNAL DELETED THE DISALLOWANCE MADE U/S 14A OF THE ACT. 6.4 WITHOUT PREJUDICE TO ABOVE, THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN COMPUTING THE DISALLOWANCE OF EXPENDITURE UNDER SECTION 14A OF THE ACT READ WITH RULE 8D OF THE I.T. RULES. 6.5 THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN DISALLOWING PART OF THE AMOUNT OF INTEREST PAID ON ADVANCES FROM DEALERS AND OTHER INTEREST U/S 14A OF THE ACT. 6.6 THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN FOLLOWING THE JUDGEMENT IN THE CASE OF M/S DAGA C APITAL MANAGEMENT PVT LTD. (312 ITR (AT) 01 (2009) DELHI (SB) WHICH HAS BEEN OVERRULED BY MUMBAI HIGH COURT IN THE CASE OF GODREJ & BOYCE MFG. CO. LTD. MUMBAI VS. DY. COMMISSIONER OF INCOME TAX ( 328 ITR 81 ) , FOR MAKING DISALLOWANCE U/S 14A . 7.0 THAT THE A SSESSING OFFICER ERRED ON FACTS AND IN LAW IN NOT ALLOWING DEDUCTION UNDER SECTION 35DDA OF RS . 23,91,54,586 / - (BEING 1/5 TH OF 12 THE TOTAL EXPENDITURE OF RS. 119.58 CRORES INCURRED BY THE APPELLANT COMPANY, IN RESPECT OF PAYMENT MADE TO ITS EMPLOYEES UNDER THE VOLUNTARY RETIREMENT SCHEME DURING THE F.Y. 200 3 - 0 4) SIMPLY FOLLOWING THE ASSESSMENT ORDER FOR AY 2004 - 05. 7.1 THAT THE ASSESSING OFFICER ERRED IN TAKING A DIAGRAMMATICALLY OPPOSITE VIEW OF DEDUCTIBILITY OF THE VERY SAME AMOUNT, WHICH STOOD ALLOWED TO THE APPELLANT IN THE INITIAL ASSESSMENT YEAR. 7.2 THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN ALLEGING THAT THE VOLUNTARY RETIREMENT SCHEME/VOLUNTARY SEPARATION SCHEME OF THE COMPANY WAS NOT IN ACCORDANCE WITH THE RULE 2BA OF THE I.T. RULES. 7.3 THAT T HE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN NOT FOLLOWING THE BINDING ORDERS OF THE CIT(A)/ ITAT IN THE APPELLANTS OWN CASE FOR AY 2004 - 05 AND AY2005 - 06. 8.0 THAT THE ASSESSING OFFICER HAS ERRED ON FACTS AND IN LAW IN DISALLOWING A SUM OF RS. 39,50,780 / - BEING EXPENDITURE INCURRED ON ACCOUNT OF CLUB MEMBERSHIP FEES, FOLLOWING THE ASSESSMENT ORDERS FOR THE EARLIER YEARS, ALLEGING THAT THE APPELLANT FAILED TO JUSTIFY THE SAID EXPENSES. 9.0 THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN MAKING DISAL LOWANCE OF EXPENDITURE OF RS.142.61 CR INCURRED ON ACCOUNT OF ROYALTY HOLDING THE SAME TO BE A CAPITAL EXPENDITURE. 10.1 THAT THE ASSESSING OFFICER ERRED, ON FACTS AND IN LAW IN NOT APPRECIATING THAT ROYALTY PAID BY MSIL TO SUZUKI MOTOR CORPORATION (HEREINAFTE R REFERRED TO AS SMC) IS FOR THE EXCLUSIVE RIGHT AND 13 LICENSE TO MANUFACTURE AND SELL THE LICENSED PRODUCT FOR A SPECIFIED LIMITED DURATION IN INDIA. ALL OTHERS RIGHTS VESTED IN THE LICENSE AGREEMENT INCLUDING TECHNOLOGY, TECHNICAL KNOW HOW AND TRADE MARK ARE LINKED TO THE CORE RIGHT TO MANUFACTURE AND SELL LICENSED PRODUCT S AND WAS THEREFORE, REVENUE IN NATURE. 10.2 THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN NOT APPRECIATING THAT PAYMENT OF ROYALTY IS DIRECTLY LINKED AND CORRELATED WITH THE PRODU CTION/ SALES OF CARS AND SPARES BY THE ASSESSEE COMPANY AND IF THERE IS NO PRODUCTION/ SALE OF CARS AND SPARES, THERE WILL BE NO ROYALTY PAYABLE BY MSIL TO SMC. 10.3 THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN NOT APPRECIATING THAT ROYALTY PAYMENT (INCLUDING CESS) WAS HELD TO BE REVENUE EXPENDITURE IN ALL THE PRECEDING ASSESSMENT YEARS AND THAT THERE BEING NO CHANGE IN FACTS DURING THE YEAR UNDER CONSIDERATION, THERE WAS NO WARRANT OR JUSTIFICATION TO TAKE A TOTALLY CONTRADICTORY VIEW IN HOLDING THE SAME TO BE CAPITAL EXPENDITURE. 10.4 THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN NOT ALLOWING THE CLAIM OF THE ASSESSEE THAT LUMPSUM ROYALTY PAID SHOULD ALSO BE CONSIDERED AS REVENUE EXPENDITURE. 10.5 WITHOUT PREJUDICE TO THE ABOVE GROUNDS, THE ASSESS ING OFFICER ERRED ON FACTS AND IN LAW IN MAKING A COMPUTATIONAL ERROR WHILE DETERMINING THE AMOUNT OF DISALLOWANCE OF RS. 142,61,00,000/ - . 10.6 THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN HOLDING THAT CESS ON ROYALTY ALSO PARTOOK THE CHARACTER OF ROYALTY, WITHOUT APPRECIATING THAT ROYALTY WAS PAID TO SMC WHEREAS R&D CESS ON 14 ROYALTY, BEING A STATUTORY PAYMENT, WAS PAID TO THE INDIAN GOVERNMENT. 10.7 THAT THE ASSESSING OFFICER ERRED IN FAILING TO APPRECIATE THAT THE R&D CESS, BEING A STATUTORY PAYMENT, I S GOVERNED BY SECTION 43B OF THE ACT, WHICH IS A SEPARATE CODE IN ITSELF AND OVERRIDES OTHER PROVISIONS OF THE ACT, AND HENCE THE PAYMENT OF R&D CESS IS AN ALLOWABLE DEDUCTION U/S 43B OF THE ACT. 10.8 THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN NOT APPRECIATING THAT R&D CESS PAID ON ROYALTY WAS ACCEPTED TO BE REVENUE EXPENDITURE IN ALL THE PREVIOUS ASSESSMENTS, AND THAT THERE BEING NO CHANGE IN FACTS DURING THE YEAR UNDER CONSIDERATION, THERE WAS NO WARRANT OR JUSTIFICATION TO TAKE A TOTALLY CONTRAD ICTORY VIEW AND HOLDING THE SAME TO BE CAPITAL EXPENDITURE. 10.9 THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN NOT ADJUDICATING THE CLAIM OF THE ASSESSEE THAT R&D CESS PAID ON LUMPSUM ROYALTY SHOULD ALSO BE CONSIDERED AS REVENUE EXPENDITURE. 11.0 THAT TH E LEARNED ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN NOT ACCEPTING THE CLAIM OF THE APPELLANT THAT SALES TAX SUBSIDY RECEIVED OF RS. 31,92,30,033 / - REPRESENTING CAPITAL RECEIPT NOT LIABLE TO TAX. 11.1 THAT THE ASSESSING OFFICER FAILED TO APPRECIATE THAT T HE PURPOSE OF ASSESSMENT IS TO DETERMINE THE TRUE AND CORRECT ASSESSABLE INCOME OF THE ASSESSEE AND THEREFORE, IT WAS INCUMBENT UPON THE ASSESSING OFFICER TO INDEPENDENTLY CONSIDER THE TAXABILITY OF THE SALES TAX SUBSIDY, IRRESPECTIVE OF TREATMENT GIVEN BY THE APPELLANT IN THE RETURN OF INCOME. 15 11.2 THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN HOLDING THAT THE SALES TAX SUBSIDY RECEIVED BY THE ASSESSEE COMPANY WAS NOT CAPITAL RECEIPT BUT TAXABLE REVENUE RECEIPT UNDER SECTION 28(IV) OF THE INCOME TAX ACT. 11.3 THAT THE ASSESSING OFFICER FAILED TO APPRECIATE THAT IDENTICAL ISSUE WAS DECIDED IN FAVOUR OF THE APPELLANT BY CIT(A)/ ITAT IN APPELLANTS OWN CASE FOR AY 2005 - 06 FOLLOWING THE DEC ISIONS OF THE APEX COURT IN THE CASE OF CIT V PONNI SUGARS AND CHEMIC ALS LIMITED: 306 ITR 392 (SC). 11.4 THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN NOT APPRECIATING THAT SINCE THE OBJ ECT OF SUBSIDY WAS TO PROMOTE INDUSTRIAL GROWTH/ DEVELOPMENT, TO GENERATE EMPLOYMENT, ETC., THE SUBSIDY RECEIVED WAS IN THE NATURE OF CAPITAL RECEIPT NOT LIABLE TO TAX UNDER THE PROVISIONS OF THE ACT. 11.5 THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN NOT APPRECIATING THAT THE FACT THAT ASSESSEE IS A CASH RICH COMPANY OR THAT IT WAS GRANTED SUBSIDY UNDER PRESTIGIOUS UNIT CATEGORY OR THAT THE ASSESSEE COULD UTILIZE THE SUBSIDY AMOUNT WITHOUT ANY PRE - RESTRICTED OBJECT, HAD NO BEARING ON DECIDING THE ISSUE IN QUESTION. 11.6 THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN NOT CONSIDERING THE MEMORANDUM DATED 18.10.01 ISSUED BY THE PROHIBITION, EXCISE AND TAXATION COMMISSIONER, HARYANA, WHICH WAS THE COMPETENT AUTHORITY AND PART OF HIGH POWERED COMMITTEE, CERTIFYING THE AFORESAID AMOUNT RETAINED AS PER ENTITLEMENT CERTIFICATE AS CAPITAL SUBSIDY. 16 12 THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN NOT ALLOWING THE DEPRECIATION ON WRITTEN DOWN VALUE OF SOFTWARE EXPENDITURES CAPITALIZED IN EARLIER YEARS. THAT THE ASSESSING OFFICER FURTHER ERRED ON FACTS AND IN LAW IN NOT EVEN ADJUDICATING THE SAID CLAIM MADE BY APPELLANT DURING T HE COURSE OF ASSESSMENT PROCEEDINGS. 13 THE AO HAS ERRED IN LAW, ON FACTS AND IN CIRCUMSTANCES OF THE CASE IN MAKING DISALLOWANCE OF RS. 34,83,64,435/ - BEING THE EXPENDITURE PROVIDED ON ESTIMATED BASIS ON ACCOUNT OF FORESEEN PRICE INCREASE. 13.1 THE AO COM PLETELY FAILED TO APPRECIATE THAT THERE WAS A CLEAR CONTRACTUAL AGREEMENT/UNDERSTANDING BETWEEN APPELLANT AND SUPPLIERS UNDER WHICH THE APPELLANT WAS LIABLE TO PAY ADDITIONAL AMOUNT OF PRICE FOR THE SUPPLIES OF VARIOUS INPUTS RECEIVED DURING THE YEAR ENDED ON 31ST MARCH 2007 AND ACCORDINGLY THE SAID LIABILITY ACCRUED DURING OR BEFORE THE END OF THAT YEAR AND ESTIMATED AMOUNT THEREOF WAS ACCORDINGLY ALLOWABLE AS DEDUCTION FROM ASSESSABLE INCOME. 13.2 THE AO FAILED TO APPRECIATE THAT MERE FACT THAT THE EXACT AMOU NT OF ADDITIONAL PRICE PAYABLE TO SUPPLIERS WAS NOT QUANTIFIED UNTIL THE END OF RELEVANT ACCOUNTING YEAR DID NOT AT ALL MEAN THAT THERE WAS NO ACCRUAL OF LIABILITY IN THAT YEAR. 13.3 THE AO COMPLETELY DISREGARDED THE EVIDENCE AND MATERIAL PLACED ON RECORD WH ICH CONCLUSIVELY ESTABLISHES THE EXISTENCE OF AGREEMENT/UNDERSTANDING BETWEEN APPELLANT AND SUPPLIERS FOR THE PAYMENT OF ADDITIONAL PRICE TO THEM FOR SUPPLIES MADE DURING THE ACCOUNTING YEAR ENDED ON 31ST MARCH 2007. 17 13.4 THE AO HAS ERRED IN LAW, ON FACTS AND IN CIRCUMSTANCES OF THE CASE IN NOT APPRECIATING THE FACT THAT THE ASSESSEE IS REGULARLY FOLLOWING A PERMITTED METHOD OF ACCOUNTING SINCE INCEPTION OF THE COMPANY AND ACCEPTED BY REVENUE YEAR BY YEAR. 13.5 THE AO HAS GROSSLY ERRED IN LAW IN NOT APPRECIATING THE CLARIFICATION ISSUED BY THE EXCISE DEPARTMENT RECOGNIZING THE PRACTICE FOLLOWED BY THE AUTOMOBILE INDUSTRY TO WHICH THE ASSESSEE BELONGS. 14.0 THAT THE AO HAS ERRED IN LAW AND ON FACTS IN DISALLOWING THE DEDUCTION OF RS.77,00,000/ - REPRESENTING THE EXCISE DUTY PAID BY THE ASSESSEE COMPANY DURING THE RELEVANT PREVIOUS YEAR. 14.1 THAT THE AO HAS WHILE DISALLOWING THE SAME FAILED TO APPRECIATE THAT THE EXCISE DUTY PAID BY THE ASSESSEE COMPANY OF RS. 77,00,000 / - REPRESENTED THE REVERSAL OF EXCESS MODVAT AVAIL ED ON INPUTS ON CLEARANCE OF FINISHED GOODS AND AS SUCH THE SAME REPRESENTED AN ELIGIBLE BUSINESS EXPENDITURE WHICH WAS ALLOWABLE AS SUCH. 14.2 THAT THE AO HAS FAILED TO APPRECIATE THAT THE SAID AMOUNT OF RS. 77,00,000/ - CONSTITUTED AND REPRESENTED EXCIS E DUTY ACTUALLY PAID BY THE APPELLANT AND, THEREFORE, THE SAID AMOUNT WAS SQUARELY COVERED BY SECTION 43B AND THE APPELLANT WAS ACCORDINGLY ENTITLED TO STATUTORY DEDUCTION IN RESPECT TO THAT AMOUNT. 14.3 THE AO HAS FAILED TO APPRECIATE THAT FOR DETERMINI NG WHETHER THE APPELLANT WAS ENTITLED TO CLAIM THE SAID DEDUCTION OF RS. 77,00,000 / - UNDER SECTION 43B, THE ONLY TWO QUESTIONS, WHICH HAD 18 TO BE ASKED WERE; (A) WHETHER THE AMOUNT HAD ACTUALLY BEEN PAID BY THE ASSESSEE; AND (B) WHETHER THAT PAYMENT HAD BEEN MADE DURING THE RELEVANT PREVIOUS YEAR. THE AO HAS FAILED TO APPRECIATE THAT, AS IN THE PRESENT CASE, THE ANSWER TO BOTH THESE QUESTIONS WERE IN THE AFFIRMATIVE, THE DEDUCTION OF RS 77,00,000 / - UNDER SECTION 43B NECESSARILY HAD TO BE ALLOWED BY THE AO. 15 THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN MAKING ADDITION TO THE INCOME OF THE APPELLANT TO THE EXTENT OF RS. 463.12 ON ACCOUNT OF THE ALLEGED DIFFERENCE IN THE ARMS LENGTH PRICE OF INTERNATIONAL TRANSACTIONS. 15.1 THAT THE ASSESSI NG OFFICER ERRED ON FACTS AND IN LAW IN ADOPTING A COMPLETELY CONTRADICTORY POSITION OF ACCEPTING TRANSACTIONAL NET MARGIN METHOD (TNMM) AS THE MOST APPROPRIATE METHOD ON THE ONE HAND, AND YET SEEKING TO QUESTION APPROPRIATENESS OF INDIVIDUAL ELEMENTS OF OPERATING COST ON THE OTHER, THEREBY FAILING TO APPRECIATE FUNDAMENTAL TP PRINCIPLES; 15.2 THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN MAKING TRANSFER PRICING ADJUSTMENT AMOUNTING TO RS. 286,00,00,000/ - IN RELATION TO THE ADVERTISEMENT, MARKETING AND SALES PROMOTION EXPENSES (HEREINAFTER REFERRED TO AS THE AMP EXPENSES) INCURRED BY THE APPELLANT. 15.3 THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN NOT APPRECIATING THAT SINCE THE APPELLANT IS THE SOLE BENEFICIARY OF THE AMP EXPENDITURE INCURR ED BY IT, ITS CONDUCT IN INCURRING AND BEARING THE COST OF SUCH EXPENDITURE WAS CONSISTENT WITH THE ARMS LENGTH PRINCIPLE. 19 15.4 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 JUSTIFIES THE CONDUCT OF THE APPELLANT IN INCURRING AND BEARING THE COST OF AMP EXPENDITURE. 15.5 THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN NOT APPRECIATING THAT EXPENDITURE ON ADVERTISEMENT AND BRAND PROMOTION, UNIL ATERALLY INCURRED BY THE APPELLANT, COULD NOT BE REGARDED AS A TRANSACTION IN THE ABSENCE OF ANY UNDERSTANDING / ARRANGEMENT BETWEEN THE APPELLANT AND THE ASSOCIATED ENTERPRISE. 15.6 THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN NOT APPRECIATING TH AT THE AMP EXPENSES, ETC., INCURRED BY THE APPELLANT IN INDIA CANNOT BE CHARACTERIZED AS AN INTERNATIONAL TRANSACTION AS PER SECTION 92B, SO AS TO INVOKE THE PROVISIONS OF SECTION 92 OF THE ACT. 15.7 THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN NOT APPRECIATING THAT IN THE ABSENCE OF ANY UNDERSTANDING / ARRANGEMENT BETWEEN THE APPELLANT AND THE ASSOCIATED ENTERPRISE, THE ASSOCIATED ENTERPRISE WAS UNDER NO OBLIGATION TO REIMBURSE THE AMP EXPENSES INCURRED BY THE APPELLANT FOR SALE OF ITS PRODUCTS TO T HE DEALERS. 15.8 THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN NOT APPRECIATING THAT ADVERTISEMENT AND MARKETING EXPENSES INCURRED BY THE APPELLANT IS NOT ON BEHALF OF OR FOR THE BENEFIT OF THE AE, ANY BENEFIT TO THE AE BEING ONLY INCIDENTAL. 20 15.9 THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN NOT APPRECIATE THAT AE (SMC) DOES NOT HAVE ANY RIGHT TO USE/SELL PRODUCTS UNDER THE JOINT TRADEMARK MARUTI - SUZUKI 15.10 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; 15.11 WITHOUT PREJUDICE TO THE ALL OTHER GROUNDS, AO FAILED TO APPRECIATE THAT FULL DISALLOWANCE OF EXCESSIVE A&M EXPENDITURE IS NOT APP ROPRIATE AS THE EXCESSIVE EXPENDITURE WILL LEAD TO BRAND BUILDING OF BOTH MARUTI AND SUZUKI. THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN HOLDING THAT THE APPELLANT INCURRED EXTRA - ORDINARY / NON ROUTINE EXPENSES OF PROMOTION AND DEVELOPMENT OF S UZUKI BRAND AND, THEREFORE, HELPED IN CREATION OF MARKETING INTANGIBLE IN INDIA. 15.12 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 INTANGIB LES; MUCH LESS ON ACCOUNT OF THE AE. 15.13 THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN NOT APPRECIATING THAT THE POWER OF THE TPO IS RESTRICTED TO THE DETERMINATION OF ARMS LENGTH PRICE OF INTERNATIONAL TRANSACTIONS BY APPLYING ANY OF THE PRESCRIBE D METHOD AND NOT TO MAKE DISALLOWANCE OF BUSINESS EXPENSES INCURRED BY THE APPELLANT. 15.14 THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN APPLYING BRIGHT LINE TEST (BLT) FOR COMPUTING ADJUSTMENT ON ACCOUNT OF 21 EXPENDITURE ON ADVERTISEMENT AND BRAND P ROMOTION EXPENSES WITHOUT APPRECIATING THAT IN ABSENCE OF SPECIFIC PROVISION UNDER THE TRANSFER PRICING REGULATIONS IN INDIA., ADJUSTMENT ON ACCOUNT OF THE ARMS LENGTH PRICE OF THE ADVERTISEMENT AND BRAND PROMOTION EXPENSES COULD NOT BE MADE. 15.15 THAT THE AS SESSING OFFICER 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. 15.16 WITHOUT PREJUDICE THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN NOT APPRECIATING THAT EVEN APP LYING DEVELOPER ASSISTER RULE AS CONTAINED IN US TRANSFER PRICING REGULATIONS, VIZ., REG.1.482 - 4, THE APPELLANT WOULD BE CHARACTERIZED AS DEVELOPER OF THE MARKETING INTANGIBLES AND HENCE IT WOULD NOT BE REQUIRED TO SEEK REIMBURSEMENT / COMPENSATION FOR SUC H EXPENDITURE FROM THE ASSOCIATED ENTERPRISE. 15.17 THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN APPLYING PARAS 6.36, 6.37 AND 6.38 OF THE OECD GUIDELINES WHICH ARE APPLICABLE ONLY TO DISTRIBUTORS AND NOT TO MANUFACTURERS SUCH AS THE APPELLANT. 15.18 THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN FAILING TO APPRECIATE THAT THE COMPARABLE COMPANIES AS IDENTIFIED IN THE TRANSFER PRICING STUDY ARE NOT RIGHT COMPARABLES FOR APPLYING THE BRIGHT LINE TEST (BLT) DUE TO DIFFERENCE IN PRODUCT PROFILE, PRO DUCT RANGE AND TARGET MARKETS OF THESE COMPANIES. 15.19 THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN CONSIDERING THE AMP EXPENDITURE OF HINDUSTAN MOTORS AS NIL AND NOT 22 APPRECIATING THAT THE COMPANY WITH THE NO AMP EXPENDITURE CANNOT BE USED AS A COMP ARABLE TO THE APPELLANT FOR THE PURPOSE OF APPLYING THE BLT. 15.20 THAT THE ASSESSING OFFICER 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 A&M EXPENSES AND IS THUS THE ECONOMIC OWNER OF ANY RELATED MARKETING INTANGIBLE. 15.21 THAT THE ASSESSING OFFICER 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. 15.22 THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW I N 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. 15.23 THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN ADOPTING AN INCONSISTENT APPROACH FO R COMPUTING THE AMP EXPENSES INCURRED BY THE APPELLANT AND BY THE COMPARABLE COMPANIES. 15.24 WITHOUT PREJUDICE, THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW BY CONSIDERING SALES PROMOTION EXPENSES OF APPELLANT AS CONTRIBUTORY TO THE ALLEGED BRAND BUILDING E XERCISE. 15.25 WITHOUT PREJUDICE THAT, THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN HOLDING THE AMP EXPENSES INCURRED BY THE APPELLANT TO BE 23 EXCESSIVE ON THE BASIS OF A BRIGHT LINE LIMIT ARRIVED AT BY CONSIDERING INAPPROPRIATE COMPARABLES, NOT HAVING SIMILAR PRODUCT/ BRAND PROFILE AS THE APPELLANT. 15.26 WITHOUT PREJUDICE THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN NOT CONSIDERING THE FOLLOWING ALTERNATE SET OF COMPARABLE COMPANIES IN PASSENGER AUTOMOBILE INDUSTRY IDENTIFIED BY THE APPELLANT FO R BENCHMARKING OF ADVERTISEME NT AND BRAND PROMOTION EXPENSES (AMOUNTS IN RS. CRORES) NAME OF THE COMPANY N N ET SALES A A &M EXPENDITURE A&M/ SALES FORD 2 2 191.79 1 25.92 5.75% HONDA 3 3 870.6 3 3.68 0.87% GM 1 1 844.1 1 38.1 7.49% HYUNDAI 8 8 762.49 305.96 3. 49% MEAN 4.40% MARUTI SUZUKI 1 1 4592.2 338.9 2.32% 15.27 WITHOUT PREJUDICE THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN NOT APPRECIATING THAT, FOR THE PURPOSE OF UNDERTAKING BENCHMARKING ANALYSIS OF AMP EXPENDITURE OF THE AFORESAID COMPA NY IN PASSENGER AUTOMOBILE SEGMENT AND THE SAME COULD NOT BE DISREGARDED ON THE GROUND OF RELATED PARTY TRANSACTION. 15.28 THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN INDIVIDUALLY EXAMINING THE INTERNATIONAL TRANSACTIONS ENTERED INTO BY THE 24 APPELLAN T, NOT APPRECIATING THAT SUCH TRANSACTIONS BEING CLOSELY LINKED, OUGHT TO HAVE BEEN BENCHMARKED ON AN AGGREGATE BASIS. 15.29 WITHOUT PREJUDICE THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN IGNORING THE FACT THAT, SINCE THE APPELLANT EARNS RETURN COMME NSURATE WITH OTHER BRAND OWNERS, THE APPELLANT IS ADEQUATELY COMPENSATED FOR ITS FUNCTIONS AND AMP EXPENSES. 15.30 WITHOUT PREJUDICE THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW, IN NOT APPRECIATING THAT THE AMP EXPENSES INCURRED BY THE APPELLANT WAS AP PROPRIATELY ESTABLISHED TO BE AT ARMS LENGTH APPLYING TRANSACTIONAL NET MARGIN METHOD (TNMM). 15.31 THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN MAKING TRANSFER PRIC ING ADJUSTMENT AMOUNTING TO RS. 177,11,75,274/ - IN RELATION TO THE INTERNATIONAL TRAN SACTION OF PAYMENT OF ROYALTY ENTERED INTO BY THE APPELLANT. 15.32 THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW, IN NOT APPRECIATING THAT THE INTERNATIONAL TRANSACTION OF PAYMENT OF ROYALTY ENTERED INTO BY THE APPELLANT WAS APPROPRIATELY ESTABLISHED TO BE AT ARMS LENGTH APPLYING TRANSACTIONAL NET MARGIN METHOD (TNMM). SINGLE/IN SEVERABLE AGREEMENT AND LICENSE TO MANUFACTURE & SELL. 15.33 THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN ARTIFICIALLY SPLITTING THE SINGLE AND INSEVERABLE LICENSE AGREEMEN T ENTERED INTO BY THE APPLICANT INTO TWO SEPARATE AGREEMENTS FOR USE OF TECHNO LOGY AND FOR USE OF BRAND NAME FAILING TO APPRECIATE THAT THE LICENSE AGREEMENT CONSTITUTED A SINGLE/ IN SEVERABLE/ INDIVISIBLE CONTRACT/ PACKAGE, WHICH PROVIDED APPELLANT THE EX CLUSIVE RIGHT 25 AND LICENSE TO MANUFACTURE AND SELL LICENSED PRODUCT IN INDIA USING SMC TECHNOLOGY, ALL OTHERS RIGHTS VESTED IN THE LICENSE AGREEMENT ARE LINKED TO THE CORE RIGHT TO MANUFACTURE AND SELL LICENSED PRODUCTS. 15.34 THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN FAILED TO APPRECIATE THAT THE METHODS USED BY THE LD. TPO TO COMPUTE THE ARMS LENGTH ROYALTY IS NOT A METHOD PRESCRIBED IN TP REGULATIONS UNDER INCOME TAX ACT,1961,THEREFORE THE ADDITION MADE BY TPO IS VOID - AB INITIO. 15.35 THAT THE ASSES SING OFFICER ERRED ON FACTS AND IN LAW IN FAILING TO APPRECIATE THAT THE DECISION TO OBTAIN THE LICENSED TRADEMARKS WAS TAKEN SOLELY/ EXCLUSIVELY BY THE APPELLANT FOR ITS BUSINESS PURPOSES SINCE ITS INCEPTION [AS AGAINST BEING IMPOSED ON IT BY SMC MOTOR CO RPORATION (AE OR SMC)]. 15.36 THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN FAILING TO APPRECIATE THAT THE LICENSE AGREEMENT SIGNED BETWEEN THE ASSESSEE AND ITS AE (I.E. SMC) WAS SIGNED IN 1982 WHEN THE ASSESSEE WAS A WHOLLY OWNED GOVERNMENT COMPA NY AND THUS THE LICENSE AGREEMENT WAS ENTERED INTO BETWEEN TWO UNRELATED ENTERPRISES THEREBY COMPLYING WITH THE ARMS LENGTH STANDARD AS PER THE COMPARABLE UNCONTROLLED PRICE (CUP) METHOD. 15.37 FAILING TO APPRECIATE THAT BY THE TIME WHEN ASSESSEE STARTED USIN G THE CO - BRANDED TRADEMARK MARUTI - SUZUKI, MARUTI BRAND WAS TOTALLY NEW BRAND WHEREAS SUZUKI BRAND HAD INTERNATIONAL PRESENCE AND THEREFORE THERE CANNOT BE ANY QUESTION OF IMPAIRMENT OF THE MARUTI BRAND AND REINFORCEMENT OF SUZUKI BRAND. 26 15.38 THAT THE A SSESSING OFFICER ERRED ON FACTS AND IN LAW IN FAILING TO APPRECIATE THAT THE LICENSE AGREEMENT WAS ENTERED INTO BY THE APPELLANT WITH THE APPROVAL OF THE SECRETARIAT OF INDUSTRIAL ASSISTANCE, MINISTRY OF COMMERCE AND INDUSTRY, ALONG WITH THE APPROVAL FROM THE RESERVE BANK OF INDIA. 15.39 THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN HOLDING THAT CO - BRANDING OF MARUTI - SUZUKI HAS RESULTED IN THE REINFORCEMENT OF VALUE OF SUZUKI BRAND AND SIMULTANEOUS IMPAIRMENT OF MARUTI TRADEMARK FAILING TO APPREC IATE THAT SUCH CONCEPT OF REINFORCEMENT CANNOT BE CONSIDERED TO BE AN INTERNATIONAL TRANSACTION AS DEFINED IN SECTION 92B OF THE ACT WHICH CONSISTS OF PURCHASE, SALE OR LEASE OF TANGIBLE OR INTANGIBLE PROPERTY; 15.40 THAT THE ASSESSING OFFICER ERRED ON FA CTS AND IN LAW IN HOLDING, ON THE BASIS OF CONJECTURES AND SURMISES THAT, THE ASSOCIATED ENTERPRISES HAS CHARGED SEPARATE ROYALTY FOR THE USE OF TECHNOLOGY AND FOR USE OF BRAND NAME IN THE PROPORTION IN WHICH IT INCURS EXPENDITURE ON R & D AND BRAND PROMOT ION. 15.41 WITHOUT PREJUDICE, THE ASSESSING OFFICER ERRED IN CONSIDERING THE CONSOLIDATED FINANCIALS OF THE ASSOCIATED ENTERPRISE FOR THE PURPOSE OF SEGREGATING THE PAYMENT OF ROYALTY FOR THE USE OF TECHNOLOGY AND FOR THE USE OF BRAND NAME. 15.42 THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN FAILING TO APPRECIATE STATURE OF THE ASSOCIATED ENTERPRISE AND THE BRAND RECOGNITION ENJOYED BY IT GLOBALLY. 27 15.43 THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN IGNORING THE SEARCH FOR THIRD PARTY INDEPENDENT TECHN OLOGY AGREEMENTS CONDUCTED BY THE APPELLANT. 15.44 FAILING TO APPRECIATE THE PERMISSIBLE LIMITS OF RBI FOR THE PAYMENT OF THE BRAND ROYALTY I.E. 5% ON DOMESTIC SALES AND 8% ON EXPORTS FOR COMPOSITE ROYALTY (BOTH BRAND AND TECHNOLOGY ) AND 1% AND 2% IF ONLY FOR BRAND RESULTING IS A MAXIMUM 20 - 25% OF ROYALTY ATTRIBUTION TOWARDS BRAND AS AGAINST THE 48.33% COMPUTED BY THE TPO. 15.45 WITHOUT PREJUDICE, THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN NOT APPRECIATING THAT IF COMPENSATION FOR AMP EXPENSES WAS TO BE RECEIVED BY THE ASSESSEE FROM ITS AE, IT WILL EFFECTIVELY TRANSFER THE ECONOMIC OWNERSHIP OF THE BRAND TO THE ASSOCIATED ENTERPRISE, AND IN WHICH CASE IT WOULD BE GROSSLY UNJUSTIFIED TO DISALLOW THE PAYMENT OF ROYALTY FOR USE OF BRAND NAME. 15.46 COMPUTATION ER ROR 15.46.1 THE LD. AO/TPO ERRED IN CONSIDERING THE INCORRECT FIGURES OF RUNNING ROYALTY AND LUMP SUM ROYALTY WHILE CALCULATING THE DISALLOWANCE IN TP PROVISIONS 15.46.2 THE LD. AO/TPO ERRED IN DISREGARDING THE OBSERVATION OF THE DRP THAT ON ADJUSTMENT ON ACCOUNT OF LUMP SUM ROYALTY TO BE RESTRICTED TO THE DEPRECIATION CHARGED TO P/L ACCOUNT. 15.47 THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN MAKING VARIOUS STATEMENTS/ AVERMENTS MERELY BASED ON CONJECTURES/ SURMISES AND UNSOUND PRESUMPTIONS, WHICH WERE NOT IN ACCORDA NCE WITH THE FACTS OF THE CASE, THEREBY MAKING A HIGH 28 PITCHED ASSESSMEN T DISREGARDING JUDICIAL PRONOUNCEMENTS UNDERTAKING THE TP ADJUSTMENT; 16 THE LD AO HAS GROSSLY ERRED IN INITIATING PENALTY UNDER SECTION 271(1)(C) OF THE ACT MECHANICALLY AND WITHOUT RE CORDING ANY SATISFACTION FOR ITS INITIATION. 17 THAT THE AO HAS ERRED IN LAW, ON FACTS AND IN THE CIRCUMSTANCES OF THE CASE IN NOT ALLOWING THE CREDIT OF TDS CERTIFICATES CLAIMED THROUGH THE REVISED RETURN OF RS 3,55,99,213/ - AND DURING THE COURSE OF ASSESSM ENT PROCEEDINGS AMOUNTING TO RS. 6,73,540 / - . 18 THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN CHARGING INTEREST UNDER SECTIONS 234B, 234C AND 234D OF THE ACT. 19 THAT THE LD AO GROSSLY ERRED IN COMPUTING THE INTEREST U/S 234B OF THE INCOME TAX ACT,196 1 (THE ACT) IN FIRST ADJUSTING THE INTEREST COMPUTED U/S 234B OF THE ACT ON THE ASSESSED INCOME AGAINST THE SELF ASSESSMENT TAX PAID BY THE ASSESSEE. 19.1 THAT THE ASSESSING OFFICER GROSSLY ERRED IN LAW IN INTERPRETING THAT THE MANDATE OF EXPLANATION APPENDE D TO SUB - SECTION (1) OF SECTION 140A (REQUIRING THAT SELF ASSESSMENT TAX PAID BY THE ASSESSEE SHALL BE FIRST ADJUSTED AGAINST THE INTEREST PAYABLE ON THE RETURNED INCOME), MUST BE IMPORTED TO SECTION 234B OF THE ACT TO ADJUST INTEREST UNDER THAT SECTION ON THE ASSESSED INCOME AGAINST THE SELF ASSESSMENT TAX PAID BY THE ASSESSEE. 29 20. THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN CHARGING INTEREST U/S 234C ON ASSESSED INCOME INSTEAD OF RETURNED INCOME AS PER THE PROVISIONS OF ACT. THE APPELLA NT PRAYS LEAVE TO ADD, AMEND, ALTER, DELETE OR FOREGO ANY OF THE GROUNDS EITHER BEFORE OR DURING THE COURSE OF HEARING . 2. AT THE OUTSET OF HEARING, LEARNED SENIOR COUNSEL SHRI AJAY VOHRA POINTED OUT THAT ISSUES RAISED IN THE ABOVE GROUNDS ARE COVERED B Y THE ORDERS OF THE ITAT IN THE CASE OF ASSESSEE ITSELF AND BY THE DECISIONS OF HONBLE COURTS. 3. HEARD AND CONSIDERED THE ARGUMENTS ADVANCED BY THE PARTIES IN VIEW OF ORDERS OF THE AUTHORITIES BELOW, MATERIAL AVAILABLE ON RECORD AND THE DECISIONS RELIE D UPON. 4. GROUND NOS. 1 AND 2 ARE GENERAL IN NATURE, HENCE, DO NOT NEED INDEPENDENT ADJUDICATION. 5. GROUND NOS. 3, 3.01 TO 3.9 : IN THESE GROUNDS VALIDITY OF DISALLOWANCE UNDER SECTION 43B OF THE ACT OF THE CLAIMED DEDUCTIONS HAS BEEN QUESTIONED. 30 6. THE RELEVANT FACTS ARE THAT THE ASSESSEE IN ITS RETURN OF INCOME HAD CLAIMED RS.1,18,83,44,986 IN RESPECT OF VARIOUS STATUTORY DUTIES PAID DURING THE YEAR UNDER CONSIDERATION UNDER SEC. 43B OF THE ACT AND SIMULTANEOUSLY OFFERED FOR TAX OF RS.1,10,53,05,94 0 CLAIMED AS DEDUCTION IN EARLIER YEARS (S). THE DUTIES SO PAID INCLUDED EXCISE DUTY, CUSTOMS DUTY ON IMPORT/PURCHASE OF INPUTS/COMPONENTS AND ALSO AN AMOUNT OF DUTY PAID IN PLA ACCOUNT . THE ASSESSING OFFICER FOLLOWING THE ASSESSMENT ORDERS OF EARLIER YEAR S PROPOSED DISALLOWANCE OF RS.1,18,83,44,986 ON THE GROUND THAT DEDUCTION UNDER SEC. 43B OF THE ACT IS ALLOWABLE ONLY WHERE THE AMOUNT CLAIMED AS DEDUCTION ON ACTUAL PAYMENT BASIS IS CHARGED TO THE PROFIT AND LOSS ACCOUNT. HE WAS OF THE VIEW THAT AMOUNT PA ID BY THE ASSESSEE IS IN THE NATURE OF ADVANCE PAYMENT OF DUTY, LIABILITY IN RESPECT OF WHICH HAS NOT ACCRUED/CRYSTALLIZED AND SUBSEQUENTLY, SUCH ADVANCE PAYMENTS IS NOT ALLOWABLE AS DEDUCTION. THE ASSESSING OFFICER ACCORDINGLY MADE DISALLOWANCE OF RS.8,30 ,39,046 (NET OF AMOUNT OFFERED DURING THE YEAR BY THE ASSESSEE I.E. RS.1,18,83,44,986 RS. 1,10,53,05,940 IN THE FINAL ASSESSMENT ORDER. THE SAME HAS BEEN UPHELD BY THE FIRST APPELLATE ORDER WHICH HAS BEEN QUESTIONED BY THE ASSESSEE BEFORE THE ITAT. 7. I N SUPPORT OF THE GROUNDS, THE LEARNED AR CONTENDED THAT AS PER THE MANDATE, SECTION 43 OF THE ACT, ANY AMOUNT OF DUTY PAID BY THE ASSESSEE IS 31 ALLOWABLE AS DEDUCTION ON PAYMENT BASIS IRRESPECTIVE OF THE METHOD OF ACCOUNTING FOLLOWED BY THE ASSESSEE. SUCH DU TY CAN ONLY BE CLAIMED IN THE YEAR OF PAYMENT AND NOT IN ANY OTHER YEAR(S). ACCORDINGLY, IRRESPECTIVE OF THE TREATMENT GIVEN BY THE ASSESSEE TO THE VARIOUS AMOUNTS OF DUTY PAID DURING THE YEAR UNDER CONSIDERATION, THE DUTIES PAID WERE ALLOWABLE AS DEDUCTIO N UNDER SEC. 43B OF THE ACT. THUS, THE AGGREGATE AMOUNT OF RS.1,18,83,44,986 WAS ALLOWABLE AS DEDUCTION TO THE ASSESSEE UNDER SEC. 43B OF THE ACT. HE PLACED RELIANCE ON THE FOLLOWING DECISIONS: BERGER PAINTS INDIA LTD. V. CIT : (2004) 266 ITR 99 (SC) LAKH ANPAL NATIONAL LTD. V. ITO : 162 ITR 240 (GUJ) BHARAT PETROLEUM CORPORATION LTD. : 252 ITR 43 (BOM) CHEMICALS AND PLASTICS INDIA LTD. V. CIT : 260 ITR 193 (MAD) INDIAN COMMUNICATION NETWORK (P) LTD. V. INSPECTING ACIT : 206 ITR S - 96 / 49 ITD 56 (ITAT S B) CIT V. C.L. GUPTA : 259 ITR513 (ALL.) CIT V. RAJ AND SANS DEEP LTD: 293 ITR 12 (P&H) DCIT V . GLAXO SMITHKLINE CONSUMER HEALTHCARE LTD: 107 ITD 343 (SB) (CHD.) 8. THE ITEM - WISE SUBMISSION ON EACH OF THE ABOVE GROUNDS HAVE BEEN EXPLAINED BY THE LEARNED AR HEREUNDER: 8.1 REGARDING EXCISE DUTY PAID I.E. BALANCE IN PLA, HE SUBMITTED THAT THE ISSUE IS COVERED IN FAVOUR OF THE ASSESSEE BY THE FOLLOWING DECISIONS: 32 (I) DELHI HC FOR AY 1994 - 95, 1995 - 96, 1996 - 97 REPORTED IN 255 CTR 140 (PARA 15 - 16) . (II) ITAT F OR AY 1999 - 00 (PARA 28) (III) ITAT FOR AY 200 0 - 0 1 (PARA 4 - 5) (IV) ITAT FOR AY 2001 - 02 (PARA 4.3) (V) ITAT FOR AY 2002 - 03 (PARA 13, PAGE 15 - 17 OF ORDER) (VI) ITAT FOR AY 2004 - 05 (PARA 3 - 5, PAGE 3 - 7 OF ORDER) (VII) ITAT FOR AY 2005 - 06 (PARA 14 - 1 6, PAGE 7 - 8 OF ORDER) (VIII) ITAT FOR AY 2006 - 07 (PARA 4 .4 - 4.13, PAGE 5 - 21 OF ORDER) 8.2 AS PER LEARNED AR, T HE AFORESAID AMOUNT WAS PAID BY THE ASSESSEE UNDER RULE 4 OF THE EXCISE RULES, 2002 IN ORDER TO COVER THE DUTY REQUIRED TO BE PAID ON THE GOODS TO BE REMOVED FROM BONDED WAREHOUSE. AT THE TIME OF REMOVAL OF THE GOODS, EXCISE DUTY/R&D CESS PAYABLE ON THE GOODS IS DEBITED TO THE PLA. AS PER THE MANDATE OF SECTION 43B OF THE ACT, THE AFORESAID AMOUNT WAS CLAIMED AS DEDUCTION IN THE RETURN OF INCOME. THE A SSESSING OFFICER HAS, HOWEVER, DISALLOWED THE SAME FOLLOWING THE ASSESSMENT ORDER FOR THE ASSESSMENT YEAR 2005 - 06. IN THE ASSESSEES OWN CASE FOR THE ASSESSMENT YEAR 1999 - 2000, THE ITAT ALLOWED THE CLAIM SUBJECT TO INCURRING OF LIABILITY ON MANUFACTURED G OODS. 33 THE LIABILITY INCURRED BY THE ASSESSEE AS ON 31.3.07 WAS RS. 42.98 CRORES CRORES, WHICH WAS MUCH MORE THAN THE AMOUNT DEPOSITED IN PLA. CONSEQUENTLY, THE BALANCE IN PLA WAS ALLOWABLE DEDUCTION UNDER SECTION 43B OF THE ACT. FURTHER RELIANCE IS PLAC ED ON THE DECISION OF SPECIAL BENCH OF THE TRIBUNAL IN THE CASE OF DCIT V GLAXO SMITH KLINE CONSUMER HEALTH CARE LTD REPORTED IN 107 ITD 343 (SB) (CHD.), WHEREIN IT HAS BEEN HELD THAT PLA BALANCE IS AN ALLOWABLE DEDUCTION. FURTHER, THE ISSUE STAND COVERED IN FAVOUR OF THE ASSESSEE, IN VIEW OF HON'BLE DELHI HIGH COURT DECISION IN THE CASE OF CIT VS MODIPON LTD. (NO. 2) (334 ITR 106). 8.3 THE LEARNED CIT(DR) ON THE OTHER HAND TRIED TO JUSTIFY THE ORDERS OF THE AUTHORITIES BELOW AND PLACED RELIANCE UPON THEM . 8.4 HAVING GONE THROUGH THE DECISIONS RELIED UPON, WE FIND THAT UNDER THE SIMILAR SET OF FACTS IN THE CASE OF ASSESSEE ITSELF FOR THE ASSESSMENT YEARS 1994 - 95, 1995 - 96, 1996 - 97, 1999 - 00, 2000 - 01, 2002 - 03, 2004 - 05, 2005 - 06 AND 2006 - 07 AN IDENTICAL ISSUE HAS BEEN DECIDED BY THE ITAT IN FAVOUR OF THE ASSESSEE. THE HON'BLE HIGH COURT OF DELHI IN THE APPEALS PREFERRED FOR THE ASSESSMENT YEARS 1994 - 95, 1995 - 96 AND 1996 - 97 HAS UPHELD THE DECISION OF THE ITAT IN THESE ASSESSMENT YEARS WHICH HAS BEEN REPORTED I N 255 CTR (DEL.) 140. THE DECISION OF HON'BLE DELHI HIGH COURT IN THE CASE OF CIT VS. 34 MODIPON LTD. 334 ITR 106 (DEL.) ALSO SUPPORTS THE CASE OF THE ASSESSEE. IN ITS RETURN OF INCOME DURING THE YEAR, THE ASSESSEE HAD CLAIMED DEDUCTION OF DUTY PAID AMOUNTI NG TO RS.1,61,51,885 BEING BALANCE IN THE PLA, UNDER SECTION 43B OF THE ACT. THE SAID AMOUNT WAS PAID BY THE ASSESSEE UNDER RULE 4 OF THE EXCISE RULES, 2002 IN ORDER TO COVER THE DUTY REQUIRED TO BE PAID ON THE GOODS TO BE REMOVED FROM BOUNDED WAREHOUSE. A T THE TIME OF REMOVAL OF THE GOODS, EXCISE DUTY/R&D CESS PAYABLE ON THE GOODS WAS DEBITED TO THE PLA. THE AFORESAID AMOUNT WAS CLAIMED AS DEDUCTION AS PER SEC. 43B OF THE ACT IN ITS RETURN OF INCOME. THE ASSESSING OFFICER HOWEVER DISALLOWED THE SAME FOLLOW ING THE ASSESSMENT ORDER FOR THE ASSESSMENT YEAR 2005 - 06. IN THE ASSESSEES OWN CASE FOR THE ASSESSMENT YEAR 1999 - 00, THE ITAT ALLOWED THE CLAIM SUBJECT TO INCURRING OF LIABILITY ON MANUFACTURED GOODS. THE CONTENTION OF THE LEARNED AR REMAINED THAT LIABILI TY INCURRED BY THE ASSESSEE AS ON 31.3.2007 WAS RS.42.98 CRORES WHICH WAS MUCH MORE THAN THE AMOUNT DEPOSITED IN PLA. CONSEQUENTLY, THE BALANCE IN PLA WAS ALLOWABLE DEDUCTION UNDER SEC. 43B OF THE ACT. WE FIND THAT THE SPECIAL BENCH OF THE ITAT IN THE CASE OF DCIT VS. GLAXO SMITH KLINE CONSUMER HEALTH CARE LTD. (SUPRA) HAS HELD THAT PLA BALANCE IS AN ALLOWABLE DEDUCTION. IN THE CASE OF ASSESSEE ITSELF FOR THE ASSESSMENT YEAR 1999 - 00, THE ITAT HAS ALLOWED THE CLAIM SUBJECT TO INCURRING OF LIABILITY ON MANUFA CTURED 35 GOODS. IN ITS RECENT DECISION IN THE APPEAL FOR THE ASSESSMENT YEAR 2006 - 07, THE DELHI BENCH OF THE ITAT IN THE CASE OF ASSESSEE ITSELF IN ITA NOS. 5120/DEL/2010 AND 2441/DEL/2012 HAS DECIDED AN IDENTICAL ISSUE DEALING IN PARA NOS. 4.4 TO 4.13 OF TH E ORDER. PARA NO. 4.13 OF THE SAID ORDER IS THE CONCLUDING PARAGRAPH ON THE ISSUE, REPRODUCED HEREUNDER: 4.13 UNDER THE INCLUSIVE METHOD, THE FIGURE OF PURCHASE, SALE AND INVENTORIES ARE REQUIRED TO BE TAKEN WITH THE ELEMENT OF TAX OR DUTY ETC. SINCE TH E AMOUNT OF UNUTILIZED BALANCE OF EXCISE DUTY UNDER PLA DOES NOT FORM PART OF PURCHASE, THIS AMOUNT WILL BE ELIGIBLE FOR SEPARATE DEDUCTION U/S. 43B. AT THE SAME TIME, THE LAST YEARS UNUTILIZED PLA GETTING DEDUCTION IN THAT YEAR DUE TO THE APPLICATION OF SECTION 43B, WOULD BE REQUIRED TO BE ADDED BACK TO THE INCOME OF THE CURRENT YEAR AS DETERMINED ABOVE. WE, THEREFORE, SET ASIDE THE IMPUGNED ORDER AND DIRECT THE A.O. TO FIRSTLY RECAST THE ASSESSEES PROFIT AND LOSS ACCOUNT ON INCLUSIVE BASIS AND THEN MAKE SUITABLE DEDUCTION IN RESPECT OF THE AMOUNT OF UNUTILIZED PLA AT THE END OF THE CURRENT YEAR AND ALSO THE PRECEDING YEAR. 8.5 WE FIND THAT THE ITAT UNDER SIMILAR SET OF FACTS HAS DECIDED AN IDENTICAL ISSUE AFTER DISCUSSING IN DETAIL AND FOLLOWING THE DE CISION CITED BEFORE IT INCLUDING THE DECISION OF SPECIAL BENCH OF THE ITAT IN THE CASE OF DCIT VS. GLAXO SMITH KLIN CONSUMER HEALTH CARE LTD. (SUPRA) HOLDING THAT THE EXCESS AMOUNT OF EXCISE DUTY REFLECTED IN THE ACCOUNT - CURRENT IS NOTHING 36 BUT ACTUAL PAYME NT OF EXCISE DUTY EVEN THOUGH MENTIONED AS ADVANCE PAYMENT AND HENCE ALLOWABLE AS DEDUCTION UNDER SEC. 43B OF THE ACT IN THE YEAR OF PAYMENT. THE SPECIAL BENCH HAS FURTHER CLARIFIED THAT THE ALLOWING OF DEDUCTION ON PAYMENT BASIS COULD NOT RESULT IN DOUBLE DEDUCTION UNDER ANY CIRCUMSTANCE. WE THUS RESPECTFULLY FOLLOWING THE ABOVE DECISION SET ASIDE THE MATTER TO THE FILE OF THE ASSESSING OFFICER TO DECIDE THE ISSUE AFRESH AFTER AFFORDING OPPORTUNITY OF BEING HEARD TO THE ASSESSEE AS PER THE DECISION CITED A BOVE IN THE CASE OF ASSESSEE ITSELF FOR THE ASSESSMENT YEAR 2006 - 07 (SUPRA). GROUND NOS. 3, 3.0.1 TO 3. 1 . 1 ARE ACCORDINGLY ALLOWED FOR STATISTICAL PURPOSES. 9. GROUND NOS. 3.2 : IT IS REGARDING CUSTOMS DUTY PAID ON IMPORT OF COMPONENTS FOR EXPORT PURPOSE S FOR WHICH EXPORTS HAD NOT BEEN MADE. THE ASSESSEE DID NOT INCLUDE DUTY PAID ON PURCHASES IN THE COST OF PURCHASES AND THE VALUE OF CLOSING STOCK IN THE PROFIT AND LOSS ACCOUNT. THE ASSESSEE HAD BEEN FOLLOWING EXCLUSIVE METHOD OF ACCOUNTING IN RESPECT OF CUSTOMS DUTY PAID ON IMPORT OF COMPONENTS FOR THE EXPORT PURPOSES. THE ASSESSEE PLEASED THAT ADDITION OF DUTY, BOTH IN THE PURCHASES AS WELL AS CLOSING STOCK AS PER THE REQUIREMENT OF SEC. 145A, IS TAX NEUTRAL IN AS MUCH AS THE SAME AMOUNT IS BOTH DEBITED AS WELL AS CREDITED TO THE PROFIT AND LOSS ACCOUNT. HOWEVER, TO 37 GIVE EFFECT TO THE PROVIS I ONS OF SEC. 43B OF THE ACT, WHICH MANDATES THAT DUTY PAID BY THE ASSESSEE ARE ALLOWABLE ONLY ON PAYMENT BASIS, CUSTOMS DUTY PAID BY THE ASSESSEE ON IMPORT OF COMPONEN TS FOR EXPORT PURPOSES, WHETHER OR NOT EXPORT AGAINST THE SAME HAD ACTUALLY TAKEN PLACE DURING THE RELEVANT YEAR, IS CLAIMED AS DEDUCTION IN THE RETURN OF INCOME . THE ASSESSING OFFICER DISALLOWED THE SAME FOLLOWING THE ASSESSMENT FOR THE ASSESSMENT YEAR 20 05 - 06. 9.1 IN SUPPORT OF THE GROUND, THE LEARNED AR SUBMITTED THAT IN THE CASE OF ASSESSEE ITSELF FOR THE ASSESSMENT YEAR 1999 - 00, 2000 - 01, 2005 - 06 AND 2006 - 07, THE ITAT HAS HELD THAT SINCE THE DUTY IS PAID DEDUCTION CLAIMED UNDER SEC. 43B OF THE ACT H AS TO BE ALLOWED. HE ALSO POINTED OUT THAT APPEAL FOR THE ASSESSMENT YEAR 2005 - 06 HAS ALSO BEEN DISPOSED OFF BY THE ITAT IN THE CASE OF THE ASSESSEE VIDE ITA NO. 5120/DEL/2010 AND HAS DECIDED AN IDENTICAL ISSUE IN FAVOUR OF THE ASSESSEE. HE ALSO MADE FOLLO WING SUBMISSIONS: IT IS FURTHER SUBMITTED THAT THE INTRODUCTION OF THE PROVISIONS OF SECTION 145A DOES NOT IN ANY WAY AFFECT THE CLAIMS OF THE APPELLANT UNDER SECTION 43B AS THERE IS NO CONFLICT BETWEEN THE PROVISIONS OF SECTION 145A AND SECTION 43B OF THE ACT. WHILE THE PROVISIONS OF SECTION 145A MANDATE THE APPELLANT TO INCLUDE THE VALUE OF TAX, DUTY, CESS OR FEE IN THE VALUE OF ITS CLOSING STOCK, THE PROVISIONS NOWHERE REQUIRES THE APPELLANT TO GO A STEP FURTHER AND CURTAIL THE OPERATION OF SECTION 43B B Y NOT CLAIMING THE DEDUCTION OF SUCH DUTIES, ETC. IN THE YEAR OF PAYMENT BUT IN THE YEAR IN WHICH SUCH STOCKS ARE CONSUMED BY THE APPELLANT. 38 . EVEN IF THE AFORESAID AMOUNT HAS TO BE ADDED TO PURCHASES AND CLOSING STOCK BY VIRTUE OF SECTION 145A, THEREBY BE ING INCOME NEUTRAL IN SO FAR AS THE P&L ACCOUNT IS CONCERNED, EVEN THEREAFTER, THE SAID AMOUNT WILL BE SEPARATELY DEDUCTIBLE WHILE COMPUTING THE TAXABLE INCOME U/S 43B. IT IS SUBMITTED THAT THE HONBLE SUPREME COURT, IN THE CASE OF BERGER PAINTS LTD. V. CIT: 266 ITR 99(SC) HELD THAT CUSTOMS AND EXCISE DUTIES ARE ALLOWABLE IN THE YEAR OF PAYMENT U/S 43B, AND EVEN IF SUCH DUTIES ARE INCLUDED IN THE VALUE OF CLOSING STOCK, THEY WOULD BE SEPARATELY ALLOWABLE. IN THAT CASE, THE QUESTION BEFORE THE HONBLE CAL CUTTA HIGH COURT FOR THE AY 1984 - 85 WAS AS FOLLOWS: WHETHER, ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE TRIBUNAL WAS RIGHT IN LAW IN REJECTING THE APPELLANTS CLAIM FOR DEDUCTION OF THE EXCISE AND CUSTOMS DUTIES OF RS.98,25,833/ - PAID IN THE YEAR OF ACCOUNT AND DEBITED IN THE PROFIT & LOSS ACCOUNT, ON THE GROUND THAT THE CREDITING OF THE PROFIT & LOSS ACCOUNT BY THE VALUE OF THE CLOSING STOCK WHICH INCLUDED THE AFORESAID DUTIES, DID NOT HAVE THE EFFECT OF WIPING OUT THE DEBIT TO THE PROFIT & LOSS ACCOUNT? THE HONBLE SUPREME COURT DECIDED THE QUESTION IN FAVOUR OF THE APPELLANT AND HELD THAT BY MERELY DEBITING THE DUTIES TO THE P&L ACCOUNT AND CREDITING THEM TO THE P&L ACCOUNT AS PART OF THE VALUE OF THE CLOSING STOCK, THEY COULD NOT BE SAID TO HAVE BEEN ALLOWED AS DEDUCTION AND WOULD BE SEPARATELY ALLOWABLE U/S 43B. IT IS THUS SUBMITTED THAT IN VIEW OF THE AFORESAID JUDGMENT OF THE HONBLE SUPREME COURT, THE MATTER HAS BEEN LAID TO REST AND IT CAN NO LONGER BE DISPUTED, THE APPELLANT OUGHT TO BE ALLOWED DEDUCTION OF DUTIES AND TAXES IN THE YEAR OF PAYMENT AND IN CASE SUCH DUTIES AND TAXES HAVE BEEN CREDITED TO THE P&L ACCOUNT AS PART OF THE VALUE OF THE CLOSING STOCK, THEY OUGHT TO BE SEPARATELY ALLOWED AS DEDUCTION IN SUCH YEAR WHILE DETERM INING THE TAXABLE INCOME OF THE APPELLANT UNDER THE ACT. 39 IT IS FURTHER SUBMITTED THAT THE PROVISIONS OF SECTION 43B, WHILE OVERRIDING ALL THE OTHER PROVISIONS OF THE ACT, ALSO OVERRIDE SECTION 145A. SECTION 145A DOES NOT IN ANY MANNER PREVAIL OVER OR IN ANY WAY LIMIT THE OPERATION OF SECTION 43B OF THE ACT. IT IS FURTHER SUBMITTED THAT IN THE BERGER PAINTS CASE, THE CLOSING STOCK VALUATION OF THE APPELLANT INCLUDED THE AMOUNT OF DUTIES. IN OTHER WORDS THE POSITION WAS AS IF THE PROVISIONS OF SECTION 14 5A HAD BEEN GIVEN EFFECT TO AND IMPLEMENTED. THEREFORE PROVISIONS OF SECTION 145A DO NOT ADVERSELY AFFECT THE JUDGMENT IN THE CASE OF BERGER PAINTS. FURTHER IN THE CASE OF SONA STEERING SYSTEMS LTD. V. DCIT : 78 TTJ 213 , THE DELHI BENCH OF HONBLE TRIBUN AL ALLOWED THE CLAIM OF THE APPELLANT UNDER SECTION 43B OF THE AMOUNT OF CUSTOMS DUTY PAID BY THE APPELLANT WHICH WAS INCLUDED IN THE CLOSING STOCK AND CREDITED TO THE P&L ACCOUNT. THE PERTINENT FINDINGS ARE REPRODUCED AS UNDER: ACCORDING TO THE ACCOUNTI NG PRINCIPLES WHENEVER THE RAW MATERIAL PURCHASED IS SHOWN IN THE CLOSING STOCK AND CARRIED FORWARD TO THE NEXT YEAR IN THE FORM OF OPENING STOCK, IT CANNOT BE SAID THAT THE COST OF PURCHASE HAS BEEN ALLOWED. FOR THE SIMILAR REASON THE CUSTOM DUTY PAID BY THE APPELLANT HAS BEEN ADDED TO THE COST OF RAW MATERIAL AND THE SAME HAS BEEN SHOWN IN THE CLOSING STOCK AND CARRIED FORWARD TO THE NEXT YEAR IN THE FORM OF OPENING STOCK. THEREFORE IT CANNOT BE SAID THAT THE EXPENDITURE ON ACCOUNT OF CUSTOMS DUTY STANDS ALLOWED TO THE APPELLANT IN THE YEAR UNDER CONSIDERATION. THEREFORE FOLLOWING THE DECISION OF THE SPECIAL BENCH, THE APPELLANT IS ENTITLED TO DEDUCTION OF THE AFORESAID AMOUNT U/S 43B IN THE YEAR UNDER CONSIDERATION. THE DELHI BENCH OF THE TRIBUNAL IN THE CASE OF PUROLATOR INDIA LTD. V. DCIT: ITA NO. 1441/DEL/2003 DECIDED SIMILAR ISSUE IN FAVOUR OF APPELLANT BY ACCEPTING THE VALUATION OF CLOSING STOCK ON NET OF MODVAT BASIS. THE TRIBUNAL RELIED UPON THE DECISION OF THE SUPREME COURT IN THE CASE OF CIT V . INDO NIPPON CHEMICALS LTD.: 261 ITR 275 (SC) WHEREIN THE NON INCLUSIVE METHOD OF ACCOUNTING FOR MODVAT FOLLOWED BY THE APPELLANT WAS APPROVED BY THE APEX COURT. THE RELEVANT FINDINGS ARE REPRODUCED HEREUNDER: AS AGREED BY THE LEARNED REPRESENTATIVE S OF BOTH SIDES THIS ISSUE IS SQUARELY COVERED IN FAVOUR OF THE APPELLANT BY THE DECISION OF THE HONBLE SUPREME COURT 40 IN THE CASE OF CIT V. INDO NIPPON CHEMICALS CO. LTD.: 261 ITR 275 (SC) WHEREIN THE NON INCLUSIVE METHOD OF ACCOUNTING FOR MODVAT FOLLOWED BY THE APPELLANT WAS APPROVED BY THE HONBLE APEX COURT. FURTHER AS HELD BY THE DELHI BENCH OF ITAT IN THE CASE OF DCIT V. HCL INFO SYSTEM LTD. (ITA NO. 1314(D)/2003) THE INSERTION OF SECTION 145A IN THE STATUTE BY THE FINANCE ACT 1998 W.E.F 01.04.1999 H AS ALSO NOT MADE ANY DIFFERENCE TO THIS PROPOSITION LAID DOWN BY THE HONBLE SUPREME COURT. AS SUCH RESPECTFULLY FOLLOWING THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF INDO NIPPON CHEMICALS CO. LTD. (SUPRA) WE DECIDE THIS ISSUE IN FAVOUR OF THE APP ELLANT AND ALLOW GROUND NO. 2. THE AFORESAID DECISION OF THE TRIBUNAL HAS BEEN AFFIRMED BY THE DELHI HIGH COURT IN ITA NO. 999/2007 WHEREIN THE HIGH COURT, TAKING INTO ACCOUNT THE PROVISIONS OF SECTION 145A OF THE ACT, HAS OBSERVED THAT THE AFORESAID ISS UE WILL NOT AFFECT THE INCOME OF THE APPELLANT AND MATTER WAS TAX NEUTRAL IN AS MUCH AS WHETHER THE APPELLANT FOLLOWS INCLUSIVE OR EXCLUSIVE METHOD OF ACCOUNTING THE SAME WOULD NOT MAKE ANY IMPACT ON THE PROFIT AND LOSS. 9.2 THE LEARNED CIT(DR) ON THE OTH ER HAND PLACED RELIANCE ON THE ORDERS OF THE AUTHORITIES BELOW. 9.3 WE FIND THAT DURING THE YEAR, THE ASSESSING OFFICER HAS DISALLOWED THE CLAIMED DEDUCTION FOLLOWING ITS ORDERS ON AN IDENTICAL ISSUE FOR THE ASSESSMENT YEAR 2005 - 06. THE ITAT IN THAT ASSES SMENT YEAR HAS DECIDED THE ISSUE IN FAVOUR OF THE ASSESSEE. AGAIN IN ITS RECENT DECISION IN THE APPEAL FOR THE ASSESSMENT YEAR 2006 - 07, THE ITAT HAS DECIDED THE ISSUE IN FAVOUR OF THE ASSESSEE VIDE PARA NOS.5.1 AND 5.2 OF ITS ORDER DATED 24.8.2015 (SUPRA). THE 41 SAID PARAGRAPH OF THE ORDER ARE BEING REPRODUCED HEREUNDER FOR A READY REFERENCE: 5.1. NOW, WE TAKE UP THE DISALLOWANCES U/S 43B ON ITEMS OF CUSTOMS DUTY. FIRST IS CUSTOMS DUTY OF RS.8,65,07,635/ - PAID ON IMPORT OF COMPONENTS FOR WHICH EXPORTS HAD BE EN MADE BY THE YEAR END AND RS.1,47,142/ - FOR WHICH EXPORTS HAD NOT BEEN MADE BY THE YEAR END. THESE AMOUNTS CLAIMED BY THE ASSESSEE AS ALLOWABLE U/S 43B OF THE ACT, WERE DISALLOWED BY THE AO. IT IS COMMON SUBMISSION THAT THE TRIBUNAL HAS ALLOWED DEDUCTION IN RESPECT OF THESE AMOUNTS IN THE PRECEDING YEARS. 5.2. HERE AGAIN IT IS NOTICED THAT THE ASSESSEE HAS ALSO FOLLOWED `EXCLUSIVE METHOD. IN SUCH CIRCUMSTANCES, THIS METHOD NEEDS TO BE SUBSTITUTED WITH `INCLUSIVE METHOD AS MANDATORILY REQUIRED U/S 14 5A. WE, THEREFORE, DIRECT THE AO TO RECAST PROFIT AND LOSS ACCOUNT AS PER `INCLUSIVE METHOD AS DISCUSSED ABOVE AND THEN ALLOW DEDUCTION IN RESPECT OF THE CUSTOMS DUTY PAID IN ACCORDANCE WITH SECTION 43B, IF NOT GETTING DEDUCTED IN SUCH RECAST. CUSTOMS DU TY PAID ON IMPORT OF COMPONENTS FOR WHICH EXPORTS HAD/HAD NOT BEEN MADE BY THE YEAR END UNDER THE INCLUSIVE METHOD WOULD NOW STAND INCLUDED IN THE VALUE OF IMPORTS AND ACCORDINGLY GET DEDUCTED. C USTOMS DUTY OF RS.8,65,07,635/ - PAID ON IMPORT 42 OF COMPONENTS FOR WHICH EXPORTS HAD BEEN MADE BY THE YEAR END WOULD NOT REQUIRE ANY SEPARATE DEDUCTION AS THE SAME WILL BE DEBITED TO THE PROFIT AND LOSS ACCOUNT AND ALSO GET EXHAUSTED. AS REGARDS THE OTHER AMOUNT OF CUSTOMS DUTY FOR WHICH EXPORTS HAD NOT BEEN MADE BY THE YEAR END WOULD REPRESENT THE AMOUNT THOUGH DEBITED TO THE PROFIT AND LOSS ACCOUNT BY MEANS OF INCREASED INPUT COST BUT NOT GETTING EXHAUSTED AS THE SAME ALSO APPEARING IN THE BALANCE SHEET THROUGH THE ENHANCED VALUE OF CLOSING STOCK. S EPARATE DEDUCTION IS REQUIRED TO TH IS EXTENT U/S 43B OF THE ACT. AT THE SAME TIME, WE ALSO DIRECT THE AO TO MAKE SURE THAT SUCH AMOUNT SEPARATELY GETTING DEDUCTED IN THIS YEAR DOES NOT GET DEDUCTION ONCE AGAIN IN THE NEXT YEAR. IN THE LIKE MANNER, THE LAST YEARS SIMILAR DEDUCTION SEPARATELY ALLOWED SHOULD BE TAXED IN THE COMPUTATION OF INCOME OF THE CURRENT YEAR . 9.4 RESPECTFULLY FOLLOWING THE ABOVE DECISION ON AN IDENTICAL ISSUE IN THE APPEAL FOR THE ASSESSMENT YEAR 2006 - 07, WE SET ASIDE THE MATTER TO THE FILE OF THE ASSESSING OFFICER TO DECIDE THE ISSUE AFRESH AS PER THE ABOVE DECISION OF THE ITAT AFTER AFFORDING OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. GROUND NO. 3.2 IS THUS ALLOWED FOR STATISTICAL PURPOSES. 43 10. GROUND NO.3.3 : IT IS REGARDING CUSTOMS DUTY PAID ON IMPORT OF COMPONENTS FOR EXPORT PURPOSES FOR WHICH EXPORTS HAD BEEN MADE. THE ASSESSING OFFICER HELD THAT IN SO FAR AS CUSTOMS DUTY PAID ON IMPORT OF COMPONENTS IN RESPECT OF WHICH EXPORTS WERE MADE DURING THE YEAR UNDER CONSIDERATION IS CONCERNED, SINC E THE ASSESSEE IS ENTITLED FOR DUTY DRAW BACK, WHICH BECOMES IMMEDIATELY DUE ON THE DATE OF EXPORT, THE AMOUNT OF CUSTOMS DUTY ON IMPORT AS REVENUE NEUTRAL, CONSEQUENTLY, NO DEDUCTION IS ALLOWABLE TO THE ASSESSEE IN RESPECT OF THE SAME. 10.1 THE LEARNED AR MADE FOLLOWING SUBMISSIONS: THE ASSESSING OFFICER, HOWEVER, FAILED TO APPRECIATE THAT: A) DUTY DRAWBACK DOES NOT ACCRUE AUTOMATICALLY ON EXPORT OF GOODS SINCE THE EXPORTER IS REQUIRED TO FULFILL VARIOUS ADDITION/REQUIREMENTS IN ORDER TO CLAIM THE SAME. DU TY DRAWBACK ACCRUES ONLY WHEN THE CLAIM OF THE EXPORTER - ASSESSEE IS SANCTIONED BY THE CUSTOM AUTHORITIES; B) DUTY DRAWBACK RECEIVABLE IS SEPARATELY CHARGEABLE TO TAX AS INCOME OF THE ASSESSEE UNDER SECTION 28 OF THE ACT. RECEIPT OF DUTY DRAWBACK IS ALTOGETHER DIFFERENT FROM ALLOWABILITY OF DEDUCTION IN RESPECT OF WHICH DUTY PAID BY THE ASSESSEE ON PAYMENT BASIS UNDER SECTION 43B OF THE ACT. WITHOUT PREJUDICE TO THE AFORESAID, IN CASE THE ASSESSING OFFICERS CONTENTION WERE TO BE ACCEPTED, THEN DUTY DRAWBACK I NCOME AMOUNTING TO RS. 18,14,95,775 DECLARED BY THE APPELLANT FOR THE YEAR UNDER CONSIDERATION SHOULD BE DIRECTED TO BE EXCLUDED. THE HONBLE TRIBUNAL HAS DECIDED THE AFORESAID ISSUE IN FAVOUR OF APPELLANT FOR AY S 1999 - 00 TO 2 00 2 - 0 3 , AY 2004 - 05, 2005 - 06 AND 2006 - 07 . FURTHER, THE ISSUE STAND S COVERED IN FAVOUR OF THE ASSESSEE, IN VIEW OF PUNJAB AND HARYANA HIGH COURT IN THE CASE OF CIT V. SRIYANSH KNITTERS P. LTD. 336 ITR 235 WHEREIN THE HIGH COURT WHILE AFFIRMING THE FINDING OF THE TRIBUNAL HELD THAT DU TY 44 DRAWBACK ACCRUES IN THE YEAR IN WHICH RATE IS FIXED BY THE COMPETENT AUTHORITY AFTER VERIFICATION OF CLAIM OF THE ASSESSEE AND AMOUNT IS QUANTIFIED AND NOT IN THE YEAR OF EXPORT. SIMILAR VIEW HAS BEEN HELD IN THE CASE OF CIT V. MANAV TOOLS (INDIA) P. LTD: 336 ITR 237 (P&H). 10.2 THE LEARNED CIT(DR) ON THE OTHER HAND PLACED RELIANCE ON THE ORDERS OF THE AUTHORITIES BELOW. 10.3 WE FIND THAT THE ITAT HAS DECIDED AN IDENTICAL ISSUE IN FAVOUR OF THE ASSESSEE IN ITS APPEAL FOR THE ASSESSMENT YEAR 2006 - 07 (SUPRA) DEALING WITH THE SAME IN PARA NO. 5.1 AND 5.2, REPRODUCED HEREUNDER: 5.1. NOW, WE TAKE UP THE DISALLOWANCES U/S 43B ON ITEMS OF CUSTOMS DUTY. FIRST IS CUSTOMS DUTY OF RS.8,65,07,635/ - PAID ON IMPORT OF COMPONENTS FOR WHICH EXPORTS HAD BEEN MADE B Y THE YEAR END AND RS.1,47,142/ - FOR WHICH EXPORTS HAD NOT BEEN MADE BY THE YEAR END. THESE AMOUNTS CLAIMED BY THE ASSESSEE AS ALLOWABLE U/S 43B OF THE ACT, WERE DISALLOWED BY THE AO. IT IS COMMON SUBMISSION THAT THE TRIBUNAL HAS ALLOWED DEDUCTION IN RESPE CT OF THESE AMOUNTS IN THE PRECEDING YEARS. 5.2. HERE AGAIN IT IS NOTICED THAT THE ASSESSEE HAS ALSO FOLLOWED `EXCLUSIVE METHOD. IN SUCH CIRCUMSTANCES, THIS METHOD NEEDS TO BE SUBSTITUTED WITH `INCLUSIVE METHOD AS MANDATORILY REQUIRED U/S 145A. WE, T HEREFORE, DIRECT THE AO 45 TO RECAST PROFIT AND LOSS ACCOUNT AS PER `INCLUSIVE METHOD AS DISCUSSED ABOVE AND THEN ALLOW DEDUCTION IN RESPECT OF THE CUSTOMS DUTY PAID IN ACCORDANCE WITH SECTION 43B, IF NOT GETTING DEDUCTED IN SUCH RECAST. CUSTOMS DUTY PAID O N IMPORT OF COMPONENTS FOR WHICH EXPORTS HAD/HAD NOT BEEN MADE BY THE YEAR END UNDER THE INCLUSIVE METHOD WOULD NOW STAND INCLUDED IN THE VALUE OF IMPORTS AND ACCORDINGLY GET DEDUCTED. C USTOMS DUTY OF RS.8,65,07,635/ - PAID ON IMPORT OF COMPONENTS FOR WHICH EXPORTS HAD BEEN MADE BY THE YEAR END WOULD NOT REQUIRE ANY SEPARATE DEDUCTION AS THE SAME WILL BE DEBITED TO THE PROFIT AND LOSS ACCOUNT AND ALSO GET EXHAUSTED. AS REGARDS THE OTHER AMOUNT OF CUSTOMS DUTY FOR WHICH EXPORTS HAD NOT BEEN MADE BY THE YEAR END WOULD REPRESENT THE AMOUNT THOUGH DEBITED TO THE PROFIT AND LOSS ACCOUNT BY MEANS OF INCREASED INPUT COST BUT NOT GETTING EXHAUSTED AS THE SAME ALSO APPEARING IN THE BALANCE SHEET THROUGH THE ENHANCED VALUE OF CLOSING STOCK. S EPARATE DEDUCTION IS REQUI RED TO TH IS EXTENT U/S 43B OF THE ACT. AT THE SAME TIME, WE ALSO DIRECT THE AO TO MAKE SURE THAT SUCH AMOUNT SEPARATELY GETTING DEDUCTED IN THIS YEAR DOES NOT GET DEDUCTION ONCE AGAIN IN THE NEXT YEAR. IN THE LIKE MANNER, THE LAST YEARS SIMILAR DEDUCTIO N SEPARATELY ALLOWED SHOULD BE TAXED IN THE COMPUTATION OF INCOME OF THE CURRENT YEAR . 46 10.4 RESPECTFULLY FOLLOWING THE ABOVE DECISION THAT DUTY DRAW BACK ACCRUES IN THE YEAR IN WHICH RATE IS FIXED BY THE COMPETENT AUTHORITY AFTER VERIFICATION OF CLAIM O F THE ASSESSEE AND AMOUNT IS QUANTIFIED AND NOT IN THE YEAR OF EXPORT , WE DIRECT THE ASSESSING OFFICER TO DECIDE THE ISSUE AFRESH IN VIEW OF THE ABOVE DECISION ON THE ISSUE AFTER AFFORDING OPPORTUNITY OF BEING TO THE ASSESSEE. THE GROUND IS ACCORDINGLY ALL OWED FOR STATISTICAL PURPOSES. 11. GROUND NOS. 3.4 TO 3.4.2 : IT IS RELATING TO DISALLOWANCE OF RS.46,90,80,304 REGARDING BALANCE IN RG 23A PART - II. THE RELEVANT FACTS ARE THAT THE ASSESSEE HAD CLAIMED DEDUCTION UNDER SEC. 43B OF THE ACT AMOUNTING TO RS.4 6,90,80,304 REPRESENTING BALANCE IN RG 23A AS ON 31.3.2007. THE AMOUNT REPRESENTED EXCISE DUTY PAID ON RAW - MATERIAL AND INPUTS PURCHASE BY THE ASSESSEE FOR USE IN THE MANUFACTURE OF AUTOMOBILES. THE ASSESSEE CLAIMED THAT UNDER CENTRAL EXCISE LAW, IT IS ENT ITLED TO CLAIM MODVAT CREDIT IN RESPECT OF THE AMOUNT OF CENTRAL EXCISE DUTY SO PAID ON RAW - MATERIAL AND INPUTS PURCHASE FOR MANUFACTURE OF EXCISABLE GOODS. THE SAID AMOUNT OF DUTY PAID TO THE SUPPLIER OF THE RAW - MATERIAL AND INPUTS WAS REGARDED AS AMOUNT OF CENTRAL EXCISE DUTY ACTUALLY PAID BY THE ASSESSEE UNDER THE EXCISE LAW, CLAIMED THE ASSESSEE. THE ASSESSING OFFICER, HOWEVER, DISALLOWED THE 47 AFORESAID AMOUNT FOLLOWING THE ASSESSMENT ORDER FOR THE ASSESSMENT YEAR 2005 - 06. 12. BEFORE THE ITAT, THE LEARN ED AR SUBMITTED THAT THE ISSUE RAISED IS FULLY COVERED BY THE FOLLOWING DECISIONS: I) SHRI RAM HONDA POWER EQUIPMENT LTD. (SLP NO. 23461/2012); II) MARUTI SUZUKI INDIA LTD. 225 CTR 140 (DEL.); III) MARUTI SUZUKI INDIA LTD. VS. ACIT ITA NO. 5120/D EL/2010 & ORS. (A.Y. 2006 - 07) ORDER DATED 24.8.2015; 12.1 THE LEARNED AR ALSO FURNISHED FOLLOWING SUBMISSIONS: THE SPECIAL BENCH OF THE TRIBUNAL IN THE CASE OF DCIT V GLAXO SMITHKLINE CONSUMER HEALTHCARE LTD: 107 ITD 343/ 299 ITR (AT) 1 (CHD.) (SB), HAS HELD THAT, UNUTILIZED MODAT CREDIT IS NOT AN ALLOWABLE DEDUCTION, SINCE SUCH CREDIT DOES NOT AMOUNT TO PAYMENT OF DUTY (PARAS 53 TO 57 OF THE ORDER). FOLLOWING THE ORDER OF THE SPECIAL BENCH IN GLAXO (SUPRA), THE ITAT IN APPELLANTS OWN CASE HA D DEC IDED THE ISSUE AGAINST THE APPELLANT TILL AY 2005 - 06 . HOWEVER, SUPREME COURT HAS ALLOWED THE DEDUCTION U/S 43B FOR THE AMOUNT LYING CREDITED IN THE MODVAT ACCOUNT AT THE END OF THE ACCOUNTING YEAR THEREBY DISMISSING THE SLP (NO. 23461/2012) FILED BY THE D EPARTMENT AGAINST THE ORDER OF HC IN THE CASE OF SHRI RAM HONDA POWER EQUIPMENT LTD .: 352 ITR 481 (SC) . FOLLOWING THE AFORESAID DECISION, T HE HON'BLE DELHI HIGH COURT IN APPELLANTS OWN CASE FOR THE ASSESSMENT YEAR 1994 - 95 TO 1996 - 97, REPORTED IN 255 CT R 140 HELD THAT AMOUNT DEPOSITED BY ASSESSEE, IN EXCISE PERSONAL LEDGER ACCOUNT IN TERMS OF RULE 173G OF CENTRAL EXCISE RULES, 1944, IN ORDER TO CLEAR GOODS, COULD NOT BE DISALLOWED UNDER SECTION 43B OF THE ACT . RECENTLY THE TRIBUNAL DECIDED THIS ISSUE IN FAVOUR OF THE APPELLANT FOR AY 2006 - 07. (PARA 4.14 TO 4.21) 48 12.2 THE LEARNED CIT(DR) ON THE OTHER HAND PLACED RELIANCE ON THE ORDERS OF THE AUTHORITIES BELOW. 12.3 HAVING GONE THROUGH THE ABOVE CITED DECISIONS, WE FIND THAT IN THE LAST ASSESSMENT YEAR UN DER SIMILAR SET OF FACTS, THE ITAT HAS DECIDED AN IDENTICAL ISSUE IN FAVOUR OF THE ASSESSEE ( THE RELEVANT PARA NOS. 4.14 TO 4.21 ) OF THE ORDER DATED 24.8.2015 (SUPRA) ARE BEING REPRODUCED HEREUNDER. 4.14. NOW, WE COME TO THE NEXT ITEM OF DISALLOWANCE, BEING A SUM OF RS. 48.53 CRORE TOWARDS EXCISE DUTY ON INPUTS BALANCE IN RG 23A. THIS AMOUNT IS UNUTILIZED MODVAT CREDIT AVAILABLE TO THE ASSESSEE AT THE END OF THE YEAR. UNDER THE CENTRAL EXCISE LAW, A MANUFACTURER IS ENTITLED TO CLAIM MODVAT CREDIT OF THE AMOUNT OF EXCISE DUTY PAID BY HIM ON RAW MATERIALS AND INPUTS PURCHASED FOR CONSUMPTION IN THE MANUFACTURE OF EXCISABLE GOODS. THE AMOUNT OF DUTY PAID TO THE SUPPLIER OF RAW MATERIAL IS CONSIDERED AS THE AMOUNT OF CENTRAL EXCISE DUTY ACTUALLY PAID BY THE ASSESSEE. THUS, A MANUFACTURER OF FINAL PRODUCT UNDER MODVAT/CENVAT SCHEME IS ALLOWED TO GET ADJUSTMENT OF EXCISE DUTY PAID BY HIM ON ANY INPUTS RECEIVED IN THE FACTORY TO BE USED IN THE MANUFACTURE OF FINAL PRODUCT. IN THE YEAR UNDER CONSIDERATION, THE AS SESSEE PURCHASED EXCISE DUTY PAID RAW MATERIAL AND OTHER INPUTS AND AS PER THE EXCISE RULES BECAME ENTITLED TO MODVAT CREDIT OF THE EXCISE DUTY PAID ON RAW MATERIAL ELIGIBLE FOR SET OFF AGAINST LIABILITY OF EXCISE DUTY ON THE FINISHED GOODS AT THE TIME OF R EMOVAL OF GOODS FROM BONDED WAREHOUSE. 4.15. WE HAVE NOTICED ABOVE THAT THE ASSESSEE IS ALSO FOLLOWING `EXCLUSIVE METHOD. UNDER THE `EXCLUSIVE METHOD, THE TOTAL AMOUNT OF EXCISE DUTY PAID BY THE ASSESSEE ON PURCHASE OF INPUTS DOES NOT GET ADDED TO THEIR PURCHASE PRICE, BUT APPEARS AS AN ASSET WITH THE NOMENCLATURE OF MODVAT CREDIT. WHEN GOODS USING THE EXCISE DUTY PAID RAW MATERIAL ARE MANUFACTURED, THE MANUFACTURER BECOMES ENTITLED TO USE MODVAT CREDIT AGAINST HIS LIABILITY OF EXCISE DUTY ON FINISHED PR ODUCTS. THIS UTILIZED PART OF THE MODVAT CREDIT GOES TO THE EXCISE DUTY ACCOUNT IN THE SAME MANNER AS UTILIZED PLA DISCUSSED ABOVE. SUPPOSE, AN ASSESSEE HAS MODVAT CREDIT OF RS.10 AND HAS UTILIZED DUTY PAID RAW MATERIAL IN ITS PRODUCTION DURING THE YEAR FO R CORRESPONDING SUM OF RS.9, OUT OF WHICH FINISHED GOODS CORRESPONDING TO MODVAT UTILIZED OF RS.7 ARE SOLD AND THE 49 FINISHED GOODS CORRESPONDING TO MODVAT UTILIZED OF RS.2 ARE IN STOCK. THE ASSESSEE WILL GET DEDUCTION FOR RS.9 UNDER THE EXCLUSIVE METHOD. SI MULTANEOUSLY THE ASSESSEE WILL OFFER INCOME OF RS.7 EMBEDDED IN THE SALE PRICE. IT IS THE REMAINING AMOUNT OF RE. 1 WHICH IS UNUTILIZED MODVAT CREDIT APPEARING AS AN ASSET IN THE BALANCE SHEET AT THE END OF THE YEAR, FOR WHICH THE ASSESSE IS NOW SEEKING DED UCTION. 4.16. AT THE OUTSET, WE WANT TO MENTION THAT THE SPECIAL BENCH OF THE TRIBUNAL IN GLAXO SMITHKLINE CONSUMER HEALTHCARE (SUPRA) HAS HELD THAT UNEXPIRED MODVAT CREDIT BEFORE IT IS SET OFF, CANNOT BE TREATED AS TAX PAID. ACCORDINGLY THE SPECIAL BENCH HELD THAT THE MODVAT CREDIT AVAILABLE TO THE ASSES SEE AS ON THE LAST DATE OF THE PREVIOUS YEAR DOES NOT AMOUNT TO PAYMENT OF EXCISE DUTY AND IS, HENCE, NOT ALLOWABLE U/S 43B. IN EARLIER YEARS, THE TRIBUNAL HAS FOLLOWED THE DICTUM OF THIS SPECIAL BENCH VE RDICT AND UPHELD THE DISALLOWANCE. THE LD. AR SUBMITTED THAT THERE HAS BEEN FURTHER ARTICULATION OF LAW ON THIS POINT. REFERRING TO THE JUDGMENT OF THE HONBLE SUPREME COURT IN THE CASE OF CIT VS. SHRI RAM HONDA POWER EQUIPMENT LTD. (2013) 352 ITR 481 (SC) , THE LD. AR SUBMITTED THAT THE AMOUNT LYING CREDITED IN THE MODVAT ACCOUNT AT THE END OF THE ACCOUNTING YEAR HAS NOW BECOME DEDUCTIBLE U/S 43B AS PER ITS RATIO. WE FIND THAT THE HONBLE APEX COURT IN SHRIRAM HONDA POWER EQUIPMENT LTD. (SUPRA) HAS HELD THAT : ` THE AUTHORITIES BELOW ARE RIGHT IN COMING TO THE CONCLUSION THAT MOD VA T CREDIT IS EXCISE DUTY PAID. THE HONBLE JURISDICTIONAL HIGH COURT IN THE ASSESSEES OWN CASE IN CIT VS. MARUTI SUZUKI INDIA LTD. (2013) 255 CTR 140 (DEL), AFTER TAKING NOTE OF T HE JUDGMENT OF THE HONBLE SUPREME COURT IN THE CASE OF SHRI RAM HONDA POWER EQUIPMENT CORPORATION (SUPRA) HAS HELD THAT : `THIS COURT ALSO NOTICES THAT THE SUPREME COURT HAS UPHELD THE VIEW WHICH ALLOWS ASSESSES TO CLAIM CREDITS, SUCH AS MODVAT, ETC, FALL ING WITHIN THE DESCRIPTION OF LIABILITY PAID, TO ESCAPE THE MISCHIEF OF SECTION 43 - B. IN VIEW OF THIS LATER DEVELOPMENT OF LAW, THE EARLIER CONTRARY VIEW TAKEN BY THE SPECIAL BENCH IN GLAXO (SUPRA) ON THE QUESTION OF UNUTILIZED MODVAT CREDIT NOW NEEDS TO BE PROPERLY ALIGNED WITH THE RATIO DECIDENDI OF THE JUDGMENT IN SHRI RAM HONDA (SUPRA). 4.17. ARMED WITH THE ABOVE LEGAL POSITION, NOW THE REMAINING AMOUNT OF RE. 1 IN OUR ABOVE EXAMPLE UNDER THE `EXCLUSIVE METHOD, WHICH IS UNUTILIZED MODVAT CREDIT IN THE BALANCE SHEET AT THE END OF THE YEAR, NEEDS TO BE TREATED AT ` EXCISE DUTY PAID. SINCE THIS AMOUNT IS CONSIDERED AS EXCISE DUTY PAID, THE SAME HAS TO BE ALLOWED AS DEDUCTION 50 DURING THE YEAR OF PAYMENT AS PER SECTION 43B. CAVEAT REMAINS THAT DEDUCTION FOR A SUM OF RE. 1 IN THE CURRENT YEAR, BEING THE MODVAT CREDIT UNUTILIZED AT THE END OF THE YEAR UNDER THE EXCLUSIVE METHOD, ALSO REQUIRES ENHANCEMENT OF INCOME OF THE SUCCEEDING YEAR TO THIS EXTENT. IN THE LIKE MANNER, THE CORRESPONDING AMOUNT ALLOWED AS DEDUC TION U/S 43B IN THE PRECEDING YEAR, IF ANY, ALSO REQUIRES SEPARATE ADD BACK TO THE INCOME OF THE CURRENT YEAR. IT IS SO BECAUSE DEDUCTION FOR PAYMENT OF TAX OR DUTY ETC. CAN BE ALLOWED ONLY ONCE, AND THAT TOO, AT THE TIME OF PAYMENT. WE, THEREFORE, HOLD TH AT THE AMOUNT OF UNUTILIZED MODVAT CREDIT IS DEDUCTIBLE IN THE COMPUTATION OF INCOME FOR THE CURRENT YEAR UNDER THE EXCLUSIVE METHOD. BUT SUCH AMOUNT ALSO REQUIRES ADD BACK IN THE COMPUTATION OF INCOME OF THE IMMEDIATELY NEXT YEAR AND ALSO THE CORRESPONDIN G AMOUNT OF UNUTILIZED MODVAT CREDIT OF THE PRECEDING YEAR, IF ALLOWED AS DEDUCTION IN SUCH EARLIER YEAR, REQUIRES A SEPARATE ADDITION TO THE INCOME OF THE CURRENT YEAR. IT IS THE TREATMENT OF MODVAT CREDIT UNDER THE `EXCLUSIVE METHOD. 4.18. WE HAVE NOTIC ED SUPRA THAT THE USE OF `EXCLUSIVE METHOD IS NO MORE PERMISSIBLE IN THE YEAR UNDER CONSIDERATION. AS SUCH, THERE IS A NEED TO GIVE EFFECT TO SECTION 145A READ WITH SECTION 43B UNDER THE `INCLUSIVE METHOD. 4.19. BEFORE TAKING UP THIS ASPECT, WE WOULD LI KE TO DEAL WITH THE JUDGMENT OF THE HONBLE SUPREME COURT IN SHRI RAM HONDA (SUPRA), RELIED BY THE LD. AR FOR SUPPORTING THE CLAIM OF PER SE DEDUCTION WITHOUT ANY FURTHER ADJUSTMENTS AS PER SECTION 145A. IT IS RELEVANT TO NOTE THAT THE HONBLE SUPREME COUR T IN SHRI RAM HONDA (SUPRA) WAS DEALING WITH A.Y. 1995 - 96. WHILE GRANTING DEDUCTION FOR MODVAT CREDIT, THE HONBLE SUMMIT COURT FOLLOWED THE JUDGMENT OF THE HONBLE BOMBAY HIGH COURT IN CIT VS. INDO NIPPON CHEMICAL CO. LTD., (2000) 245 ITR 384 (BOM), AS AF FIRMED BY THE HONBLE APEX COURT IN (2003) 261 ITR 275, IN HOLDING THAT THE SAME WAS SQUARELY APPLICABLE AND HENCE THE AMOUNT WAS DEDUCTIBLE. THE ASSESSMENT YEAR INVOLVED IN THE CASE OF INDO NIPPON (SUPRA) WAS 1989 - 90, WHICH IS AGAIN BEFORE THE INSERTION O F SECTION 145A. IT IS INTERESTING TO NOTE THAT DURING THE COURSE OF ARGUMENTS BEFORE THE HONBLE BOMBAY HIGH COURT, THE LD. COUNSEL FOR THE DEPARTMENT BROUGHT TO THE NOTICE OF THEIR LORDSHIPS THAT SECTION 145A STOOD INSERTED AND, HENCE, THE EXCLUSIVE (NET) METHOD FOLLOWED BY THE ASSESSEE WAS IMPERMISSIBLE. THE HONBLE HIGH COURT CONSIDERED THIS ASPECT IN THE LAST PARA OF ITS JUDGMENT AND OBSERVED THAT THE INSERTION OF 51 SECTION 145A W.E.F. THE AY 1999 - 2000 HAD NO BEARING AS THE ASSESSMENT YEAR UNDER THEIR CON SIDERATION WAS 1989 - 90. IN THE LIGHT OF THIS POSITION, IT BECOMES IMPERATIVE TO GIVE EFFECT TO THE PROVISIONS OF SECTION 145A OF THE ACT, WHICH ARE APPLICABLE TO THE YEAR UNDER CONSIDERATION AND ARE BINDING WITHOUT ANY EXCEPTION. 4.20. NOW WE COME TO GIVI NG EFFECT TO SECTIONS 145A AND 43B UNDER THE `INCLUSIVE METHOD. IN LINE WITH OUR DISCUSSION MADE ABOVE WHILE DEALING WITH PLA COMPONENT OF EXCISE DUTY, WE DIRECT THE AO TO FIRST RECAST PROFIT AND LOSS ACCOUNT OF THE ASSESSEE BY TAKING THE FIGURES OF PURCH ASE, SALE AND OPENING AND CLOSING STOCKS AT THE VALUE INCLUSIVE OF TAX OR DUTY ETC., SO AS TO GIVE EFFECT TO THE MANDATE OF SECTION 145A. ONCE THIS IS DONE, THEN IT WILL BE THE TURN OF GIVING EFFECT TO THE MANDATE OF SECTION 43B, WHICH REQUIRES THE GRANTING OF DEDUCTION OF TAX OR DUTY ETC. ON PAYMENT BASIS. THIS CAN BE DONE BY ALLOWING DEDUCTION FOR THAT PART OF THE MODVAT CREDIT SEPARATELY U/S 43B OF THE ACT, WHICH HAS NOT BEEN FINALLY DEDUCTED. 4.21. WE HAVE UNDERSTOOD MODVAT CREDIT IN THREE PARTS IN THE EXAMPLE GIVEN ABOVE WHILE DISCUSSING IT UNDER THE EXCLUSIVE METHOD, VIZ., RS.7 WHICH IS UTILIZED MODVAT AND FINISHED GOODS SOLD; RS. 2 WHICH IS UTILIZED MODVAT BUT FINISHED GOODS IN STOCK AT THE END OF THE YEAR; AND RE. 1 WHICH IS UNUTILIZED MODVAT AT THE END OF THE YEAR. NOW UNDER THE `INCLUSIVE METHOD, THE PRICE OF DUTY PAID INPUT/RAW MATERIAL WILL BE TAKEN AT FULL PRICE INCLUSIVE OF RS. 10. IN THAT VIEW OF THE MATTER, THE ASSESSEE CAN BE SAID TO HAVE INITIALLY CLAIMED DEDUCTION FOR RS. 10. OUT OF TOTAL MODVAT CREDIT OF RS.10 RECEIVED DURING THE YEAR, A SUM OF RS.3 HAS TWO COMPONENTS, VIZ., RS. 2 AS A PART OF PURCHASES OF RAW MATERIALS AND ALSO SIMULTANEOUSLY A PART OF THE CORRESPONDING FINISHED GOODS IN CLOSING STOCK; AND RE. 1 AS A PART OF PURCHASES OF RAW MATERIALS AND ALSO SIMULTANEOUSLY A PART OF THE CORRESPONDING RAW MATERIALS IN CLOSING STOCK. THOUGH APPARENTLY IT APPEARS THAT THE ASSESSEE GETS DEDUCTION OF RS.3 ALSO BY WAY OF HIGHER VALUE OF PURCHASE OF RAW MATERIAL, BUT THE REALITY IS DIFFERENT. W HEN THE FIGURES OF CLOSING STOCK OF FINISHED GOODS AND RAW MATERIAL ALSO INCLUDE RS.3, THEN IN FACT, THERE IS NO DEDUCTION OF RS.3, BECAUSE DEBIT TO THE PROFIT AND LOSS ACCOUNT THROUGH INCREASED PURCHASE VALUE GETS NEUTRALIZED WITH THE CREDIT TO THE PROFIT AND LOSS ACCOUNT WITH INCREASED VALUE OF CLOSING STOCK. THIS ENHANCED VALUE OF CLOSING STOCK INCLUSIVE OF RS.3 WILL BECOME OPENING STOCK OF THE 52 SUCCEEDING YEAR, THEREBY OBLITERATING THE EFFECT OF DEDUCTION OF RS.3. WHEN SUCH GOODS ARE SOLD OR UTILIZED AND SOLD IN THE NEXT YEAR, THE SALE PRICE WILL BE REALIZED WHICH WILL BE INCLUSIVE OF RS.3 EXCISE DUTY COMPONENT ALSO. SO IN FACT, THERE IS NO ACTUAL DEDUCTION OF RS.3 DURING THE YEAR UNDER CONSIDERATION BECAUSE OF THE INCREASED PURCHASE PRICE GETTING COUNTER BALANCED WITH THE EQUAL AMOUNT OF LOADING IN THE VALUE OF CLOSING STOCK. AFTER HAVING INCREASED THE VALUE OF PURCHASE AND CLOSING STOCK IN TERMS OF SECTION 145A WITH THE AMOUNT OF MODVAT CREDIT, NOW THERE IS A SEPARATE REQUIREMENT OF GIVING EFFECT TO THE M ANDATE OF SECTION43B, WHICH REQUIRES THE GRANTING OF DEDUCTION OF RS. 10 IN THE YEAR OF PAYMENT. A SUM OF RS.7 INCLUDED IN PURCHASE VALUE AS A PART OF RS.10, GETS EVENTUAL DEDUCTION BECAUSE IT IS EXHAUSTED AS THE SAME IS NOT TAKEN AS AN ASSET TO THE BALANC E SHEET, EITHER DIRECTLY AS UNUTILIZED MODVAT, OR INDIRECTLY AS PART OF CLOSING STOCK. BUT IN SO FAR AS THE AMOUNT OF RS.3 IS CONCERNED, IT DOES NOT GET FINAL DEDUCTION BECAUSE OF THE SAME BEING A PART OF ASSETS IN BALANCE SHEET. DEDUCTION FOR MODVAT CREDI T BY MEANS OF ITS INCLUSION IN PURCHASE VALUE OF RAW MATERIALS CAN BE TREATED AS ALLOWED BY WAY OF DEBIT TO THE PROFIT AND LOSS ACCOUNT ONLY WHEN IT ALSO GETS EXHAUSTED. IF, EVEN AFTER A DEBIT TO THE PROFIT AND LOSS ACCOUNT, THE AMOUNT APPEARS IN BALANCE S HEET, IN ONE FORM OR THE OTHER, THE DEDUCTION CANNOT BE SAID TO HAVE BEEN ACTUALLY ALLOWED ON PAYMENT, TILL IT IS EXHAUSTED AND GETS REMOVED FROM THE BALANCE SHEET ALSO. IN SUCH CIRCUMSTANCES, THE AMOUNT OF UNEXHAUSTED (NOT NECESSARILY ONLY UNUTILIZED) MOD VAT CREDIT I.E. WHICH APPEARS IN BALANCE SHEET EITHER IN THE FORM OF INCREASED VALUE OF CLOSING STOCK (RS.2 IN OUR EXAMPLE) AND INCREASED VALUE OF RAW MATERIAL REPRESENTING UNUTILIZED MODVAT CREDIT (RE. 1 IN OUR EXAMPLE) - CALLS FOR SEPARATE DEDUCTION IN TERMS OF SECTION 43B. WE, THEREFORE, SET ASIDE THE IMPUGNED ORDER AND DIRECT THE AO TO FIRST RECAST THE ASSESSEE S PROFIT AND LOSS ACCOUNT ON INCLUSIVE BASIS, THEN ALLOW DEDUCTION FOR THE EQUIVALENT AMOUNT OF MODVAT CREDIT AS REPRESENTED BY RS.3 IN OUR EX AMPLE. THE AO SHOULD ALSO MAKE SURE THAT THE EQUIVALENT OF RS.3 ALLOWED AS DEDUCTION ON PAYMENT BASIS U/S 43B IN THIS YEAR SHOULD NOT GET DEDUCTED IN THE NEXT YEAR AND FURTHER, THE CORRESPONDING AMOUNT OF DEDUCTION ALLOWED U/S 43B IN THE PRECEDING YEAR, SH OULD ALSO BE SEPARATELY ADDED TO THE INCOME OF THE CURRENT YEAR . 12.4 FOLLOWING THE ABOVE DECISIONS ON THE ISSUE, WE SET ASIDE THE MATTER TO THE FILE OF THE ASSESSING OFFICER TO DECIDE THE ISSUE AFRESH IN VIEW OF THE 53 ABOVE DECISION OF THE ITAT IN THE CA SE OF ASSESSEE ITSELF IN THE APPEAL FOR THE ASSESSMENT YEAR 2006 - 07 AFTER AFFORDING OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. THE GROUNDS ARE THUS ALLOWED FOR STATISTICAL PURPOSES. 13. GROUND NO. 3.5 : THE ASSESSING OFFICER DISALLOWED RS.17,76,35,117 HOL DING THE SAME AS MERELY ADVANCE PAYMENT, LIABILITY IN RESPECT OF WHICH HAS NOT CRYSTALLIZED AND, THEREFORE, NOT ALLOWABLE AS DEDUCTION UNDER SEC. 43B OF THE ACT. 1 3.1 THE LEARNED AR POINTED OUT THAT THE ISSUE IS SQUARELY COVERED IN FAVOUR OF THE ASSESSEE IN THE DECISIONS OF THE ITAT IN THE CASE OF ASSESSEE ITSELF FOR THE ASSESSMENT YEARS 1999 - 00, 2000 - 01, 2001 - 02, 2002 - 03, 2004 - 05, 2005 - 06 AND 2006 - 07 (SUPRA). 1 3.2 THE LEARNED AR ALSO MADE FOLLOWING SUBMISSIONS IN SUPPORT: IN RESPECT OF CUSTOM DUTY PAID ON IMPORT OF RAW MATERIAL/INPUTS, THE ASSESSEE FOLLOWED INCLUSIVE METHOD OF ACCOUNTING. ACCORDINGLY, THE AMOUNT OF CUSTOM DUTY PAID ON IMPORTED INPUTS/ RAW MATERIAL IS INCLUDED IN THE PURCHASE PRICE, WHICH IS DEBITED TO THE PROFIT & LOSS ACCOUNT. THE SAID DUTY IS ALSO INCLUDED AND CONSIDERED AS PART OF THE VALUE OF CLOSING STOCK, WHICH IS SHOWN IN THE CREDIT SIDE OF THE PROFIT & LOSS ACCOUNT. CUSTOM DUTY OF RS.17,76,35,117 REPRESENTS CUSTOM DUTY ON IMPORT OF RAW MATERIAL/INPUTS, WHICH IS INCLUDED IN THE VAL UE OF CLOSING STOCK AS PER THE AFORESAID INCLUSIVE METHOD OF ACCOUNTING FOLLOWED BY THE ASSESSEE. THE SAID METHOD IS ALSO IN LINE WITH THE PROVISIONS OF SECTION 145A OF THE ACT. INCLUSION OF CUSTOM DUTY, BOTH IN THE VALUE OF PURCHASE AS WELL AS IN THE VALU E OF CLOSING STOCK, IS TAX NEUTRAL INASMUCH AS THE VERY SAME AMOUNT IS BOTH DEBITED AND CREDITED TO THE PROFIT & LOSS ACCOUNT. HOWEVER, AS PER THE MANDATE UNDER SECTION 43B OF THE ACT, THE CUSTOM DUTY SO ACTUALLY PAID BY THE ASSESSEE IS SEPARATELY CLAIMED AS DEDUCTION ON PAYMENT BASIS IN THE RETURN OF INCOME. 54 IN THE EARLIER YEARS, THE ASSESSING OFFICER, HOWEVER, DISALLOWED THE AFORESAID AMOUNT HOLDING THE SAME TO MERELY ADVANCE PAYMENT, LIABILITY IN RESPECT OF WHICH HAS NOT CRYSTALLIZED AND THEREFORE, NOT A LLOWABLE AS DEDUCTION UNDER SECTION 43B OF THE ACT. THE ISSUE STANDS COVERED IN FAVOUR OF THE APPELLANT BY THE ORDER OF THE TRIBUNAL IN THE APPELLANTS OWN CASE FOR A.YS 1999 - 00 TO 2002 - 03, 2004 - 05 2005 - 06 AND 2006 - 07 WHEREIN THE TRIBUNAL HAS HELD THAT, SINCE THE DUTY IS PAID, DEDUCTION CLAIMED U/S 43B OF THE ACT HAS TO BE ALLOWED. THE AFORESAID ISSUE IS COVERED BY THE DECISION OF THE SUPREME COURT IN THE CASE OF SAMTEL COLOR LTD WHEREIN THE COURT DISMISSED THE SLP IN CIVIL APPEAL NO 6449/2012 FILED BY DE PARTMENT AGAINST THE ORDER OF DELHI HIGH COURT REPORTED IN 184 TAXMAN 120 HOLDING THAT CUSTOM DUTY PAID IS ALLOWABLE DEDUCTION U/S 43B OF THE ACT. THE AFORESAID ISSUE IS ALSO COVERED IN FAVOUR OF THE APPELLANT BY THE DECISION OF THE SUPREME COURT IN CASE OF BERGER PAINTS INDIA LTD V. CIT: (2004) 266 ITR 99 (SC). 13.3 THE LEARNED CIT(DR) ON THE OTHER HAND PLACED RELIANCE ON THE ORDERS OF THE AUTHORITIES BELOW. 13.4 CONSIDERING THE ABOVE SUBMISSIONS, WE FIND THAT AN IDENTICAL ISSUE UNDER SIMILAR SET OF F ACTS HAS BEEN DECIDED BY THE ITAT IN THE APPEAL FOR THE ASSESSMENT YEAR 2006 - 07 (SUPRA). RELEVANT PARA NOS. 5.6 AND 5.7 OF THE ABOVE ORDER DATED 24.8.2015 ARE BEING REPRODUCED HEREUNDER: 5.6. THE LAST ASPECT OF DISALLOWANCE U/S 43B IS CUSTOMS DUTY INCLUDE D IN CLOSING STOCK AMOUNTING TO RS. 22,52,46,693/ - . THE ASSESSEE CLAIMED DEDUCTION FOR THIS SUM, WHICH WAS DENIED BY THE AO. THE LD. AR STATED THAT THE ASSESSEE FOLLOWED `INCLUSIVE METHOD OF ACCOUNTING ON THIS ISSUE. THE CLAIM OF THE ASSESSEE IS THAT THE AMOUNT OF RS.22.52 CRORE, BEING THE AMOUNT OF CUSTOMS DUTY PAID ON THE IMPORT OF RAW MATERIAL/INPUTS, WAS INCLUDED IN THE COST OF MATERIAL AND ALSO 55 AS A PART OF CLOSING STOCK, THEREBY LEVEL L ING BOTH THE DEBIT AND THE CREDIT SIDES OF THE PROFIT & LOSS ACC OUNT. THE LD. AR CONTENDED THAT SUCH AMOUNT OF CUSTOMS DUTY IS SEPARATELY DEDUCTIBLE IN TERMS OF SECTION 43B OF THE ACT. HE ALSO SUBMITTED THAT THIS ISSUE IS SETTLED IN THE ASSESSEES FAVOUR IN EARLIER YEARS. 5.7. WE HAVE ELABORATELY DISCUSSED THIS ASPEC T SUPRA IN THE CONTEXT OF EXCISE DUTY INCLUDED IN THE VALUE OF CLOSING STOCK. IN PRINCIPLE, WE HOLD THAT THE AMOUNT OF CUSTOMS DUTY OF RS.22.52 CRORE IS ALLOWABLE IN THE YEAR IN QUESTION, BUT, THE AO IS DIRECTED TO FIRST VERIFY THE ARGUMENT OF FOLLOWING T HE `INCLUSIVE METHOD AND THEN ALLOW DEDUCTION U/S 43B IN THE MANNER DISCUSSED ABOVE, IF THE SAME DID NOT GET EVENTUALLY ALLOWED. THE AO SHOULD FURTHER MAKE IT IS SURE THAT NO DOUBLE DEDUCTION IS ALLOWED ON THIS SCORE, EITHER IN THE CURRENT YEAR WITH THE LAST YEARS AMOUNT GETTING SEPARATELY DEDUCTED U/S 43B OR IN THE NEXT YEAR WITH THE CURRENT YEARS AMOUNT GETTING SEPARATE DEDUCTION . 13.5 RESPECTFULLY FOLLOWING THE ABOVE DECISIONS ON THE ISSUE, WE SET ASIDE THE MATTER TO THE FILE OF THE ASSESSING OFFI CER TO DECIDE THE ISSUE AFRESH AS DIRECTED HEREINABOVE BY THE ITAT AFTER AFFORDING OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. THE GROUND NO. 3.5 IS ACCORDINGLY ALLOWED FOR STATISTICAL PURPOSES. 14. GROUND NOS. 3.6 & 3.7 : THE ASSESSING OFFICER DISALLOWED THE AMOUNT REPRESENTED CUSTOMS DUTY/CVD PAID BY THE ASSESSEE DURING THE YEAR UNDER CONSIDERATION ON IMPORT OF COMPONENTS/RAW - MATERIAL, WHICH WERE IN TRANSIT AS ON THE LAST DATE OF FINANCIAL YEAR. THE ASSESSEE HAD CLAIMED DEDUCTION OF THE AMOUNT UNDER SEC. 43B OF THE ACT ON THE BASIS THAT THE AMOUNT REPRESENTED ACTUAL CUSTOMS DUTY/CVD PAID BY THE ASSESSEE. FOLLOWING ITS ORDER ON THE ISSUE FOR THE ASSESSMENT YEAR 2005 - 06, THE ASSESSING OFFICER DISALLOWED THE CLAIM. THE ITAT HAS DECIDED AN IDENTICAL ISSUE IN ITS RECENT DECISION DATED 24.8.2015. THE RELEVANT PARA NOS. 5.3 AND 5.4 THEREOF ARE BEING REPRODUCED HEREUNDER: 5.3. NEXT ITEM IS CUSTOMS DUTY (CVD) PAID TO BE ADJUSTED AGAINST EXCISE DUTY PAYABLE ON FINISHED PRODUCTS AMOUNTING TO RS.15,59,44,832/ - . SIMULTANEOUS WITH THIS, THERE IS 56 ANOTHER ITEM OF RS.5,40,40,258/ - , WHICH IS THE AMOUNT OF CUSTOMS DUTIES ON GOODS IN TRANSIT/UNDER INSPECTION. THE ASSESSEE CLAIMED DEDUCTION FOR THE ABOVE AMOUNTS U/S 43B OF THE ACT, WHICH THE AO DENIED. 5.4. WE HAVE HEA RD THE RIVAL SUBMISSIONS AND PERUSED THE RELEVANT MATERIAL ON RECORD. THE LD. AR CONTENDED THAT THIS ISSUE HAS BEEN DECIDED IN EARLIER YEARS IN THE ASSESSEES FAVOUR BY THE TRIBUNAL. HE FURTHER REFERRED TO THE JUDGMENT OF THE HONBLE DELHI HIGH COURT IN CIT VS. SAMTEL COLOUR LTD. (2009) 184 TAXMAN 120 (DEL) IN WHICH IT HAS BEEN HELD THAT ADVANCE CUSTOMS DUTY PAID IN THE YEAR IN QUESTION IS AN ADMISSIBLE DEDUCTION U/S 43B. IN OUR CONSIDERED OPINION, THERE CAN BE NO DISPUTE ON THE OTHERWISE AVAILABILITY OF DEDUCTION OF ADVANCE CUSTOMS DUTY PAID BY THE ASSESSEE, WHICH HAS TO BE ALLOWED IN THE YEAR OF PAYMENT. IN THIS JUDGMENT ALSO, THE HONBLE HIGH COURT HAS NOTICED VIDE PARA 3 THAT THE PROVISIONS OF SECTION 145A WERE NOT APPLICABLE AS THE ASSESSMENT YEAR U NDER CONSIDERATION WAS 1995 - 96. IN VIEW OF THE DETAILED DISCUSSION SUPRA WITH REFERENCE TO THE APPLICABILITY OF SECTION 145A TO THE YEAR IN QUESTION, THERE CAN BE NO ESCAPE FROM VALUATION OF PURCHASE, SALE AND INVENTORIES UNDER THE INCLUSIVE METHOD. WE, THEREFORE, DIRECT THE AO TO RECAST PROFIT AND LOSS ACCOUNT UNDER `INCLUSIVE METHOD AS PER THE MANDATE OF SECTION 145A , THEREBY, INTER ALIA , INCREASING THE PURCHASE VALUE WITH THE ABOVE CUSTOMS DUTY . THE N THE AO WILL ALLOW SEPARATE DEDUCTION FOR THE ABOVE REFERRED SUMS TO THE EXTENT NOT GETTING EVENTUALLY DEDUCTED SEPARATELY BY WAY OF INCREASED PURCHASE PRICE , AS HAS BEEN DISCUSSED ABOVE . AT THE SAME TIME, WE ALSO DIRECT THE AO TO MAKE SURE THAT SUCH AMOUNT SEPARATELY GETTING DEDUCTED IN THIS YEAR DOES NOT GET DEDUCTION ONCE AGAIN IN THE NEXT YEAR. IN THE LIKE MANNER, THE LAST YEARS SIMILAR DEDUCTION SEPARATELY ALLOWED SHOULD BE TAXED IN THE COMPUTATION OF INCOME O F THE CURRENT YEAR . 57 14.1 RESPECTFULLY FOLLOWING THE ABOVE DECISION ON THE ISSUE, WE SET AS IDE THE MATTER TO THE FILE OF THE ASSESSING OFFICER TO DECIDE THE ISSUE AFRESH AS PER THE ABOVE DIRECTION OF THE ITAT IN THE APPEAL FOR THE ASSESSMENT YEAR 2006 - 07 AFTER AFFORDING OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. THE GROUND NOS. 3.6 & 3.7 ARE TH US ALLOWED FOR STATISTICAL PURPOSES. 15. GROUND NO. 3.8 : IT IS REGARDING THE DISALLOWANCE OF THE CLAIM OF THE ASSESSEE REGARDING CUSTOMS DUTY PAID UNDER PROTEST REPRESENTING THE DUTIES PAID AS PER THE ADDITIONAL DEMAND RAISED BY THE STATUTORY AUTHORITIES I.E. THE CUSTOMS DEPARTMENT. THE CA SE OF THE ASSESSEE REMAINED THAT AS PER SECTION 53B OF THE ACT, THE SAID ADDITIONAL CUSTOMS DUTY SO ACTUALLY PAID UNDER PROTEST WAS CLAIMED AS DEDUCTION ON PAYMENT BASIS . 15.1 IN SUPPORT OF THE GROUND, THE LEARNED AR MAD E FOLLOWING SUBMISSIONS: CUSTOM DUTY PAID UNDER PROTEST REPRESENTED THE DUTIES PAID AS PER THE ADDITIONAL DEMAND RAISED BY THE STATUTORY AUTHORITIES, I.E. THE CUSTOMS DEPARTMENT. THOUGH THE ASSESSEE HAS DISPUTED SUCH ADDITIONAL DEMAND AND PAID THE AMOUNT UNDER PROTEST, IN VIEW OF THE DEMAND BEING IN THE NATURE OF A STATUTORY LIABILITY, THE SAME REPRESENTED ACCRUED/ CRYSTALLIZED LIABILITY. AS PER THE MANDATE OF SECTION 43B OF THE ACT, THE AFORESAID ADDITIONAL CUSTOM DUTY SO ACTUALLY PAID UNDER PROTEST WAS CLAIMED AS DEDUCTION ON PAYMENT BASIS WHICH HAS BEEN DISALLOWED BY THE ASSESSING OFFICER. THE ASSESSING OFFICER DISALLOWED THE SAID CLAIM ON THE GROUND THAT SINCE THE APPELLANT WAS CONTESTING THESE LIABILITIES AND THERE WAS NO FINALITY REGARDING THE LIAB ILITIES AND THAT THE SAME WERE NOT DEBITED TO THE P&L A/C. THE TRIBUNAL HAS HELD THAT, SINCE THE DUTY IS PAID, DEDUCTION CLAIMED U/S 43B OF THE ACT HAS TO BE ALLOWED. YOUR HONOURS KIND ATTENTION IS INVITED TO THE DECISION OF DELHI HIGH COURT IN THE CASE OF CIT V. DHARAMPAL SATYAPAL SONS (P.) LTD.: 50 DTR 287 , WHEREIN THE HIGH COURT HAS HELD THAT AMOUNT PAID BY THE ASSESSEE AGAINST EXCISE DUTY DEMAND RAISED BY EXCISE AUTHORITIES WAS ALLOWABLE DEDUCTION AS IT WAS STATUTORY LIABILITY WHICH WAS ALLOWABLE ON PAYMENT BASIS UNDER SECTION 43B OF THE ACT. 58 SIMILARLY, THE MUMBAI BENCH OF THE TRIBUNAL IN THE CASE OF EURO RSCG ADVERTISING (P) LTD V. ACIT : [2013] 154 TTJ 389 (MUM) HELD THAT WHEREIN THE SERVICE TAX LIABILITY ALONG WITH THE INTEREST WAS PAID ON THE BAS IS OF SHOW CAUSE NOTICE ISSUED BY THE SERVICE TAX AUTHORITIES, THE SAME WAS ALLOWABLE UNDER SECTION 43B IN THE YEAR IN WHICH THE PAYMENT WAS MADE IRRESPECTIVE OF THE FACT THAT SUCH DEMAND WAS PAID UNDER PROTEST AND THE MATTER WAS SUBJUDICE BEFORE THE AUTHO RITIES. THE ISSUE STANDS COVERED IN FAVOUR OF THE APPELLANT BY THE ORDER OF THE TRIBUNAL IN THE APPELLANTS OWN CASE FOR A.Y S 1999 - 00, 2000 - 01, 2001 - 02, 2002 - 03 , 2005 - 06 AND 2006 - 07 . 15.2 WE FIND THAT AN IDENTICAL ISSUE HAS BEEN DECIDED BY THE ITAT IN ITS RECENT DECISION IN THE APPEAL FOR THE ASSESSMENT YEAR 2006 - 07 (SUPRA), RELEVANT PARA NO. 5.5 THEREOF IS BEING REPRODUCED HEREUNDER: 5.5. NEXT ITEM IS CUSTOMS DUTY PAID UNDER PROTEST AMOUNTING TO RS.1 , 34 , 25 , 787. WE HAVE DISCUSSED SIMILAR ISSUE SUPRA WHILE DEALING WITH `EXCISE DUTY PAID UNDER PROTEST BY HOLDING THAT FIRST THE PROFIT AND LOSS ACCOUNT BE RECAST AS PER ` I NCLUSIVE METHOD IN TERMS OF SECTION 145A AND THEN SOME ADJUSTMENTS AS STATED ABOVE BE SEPARATELY MADE . SUCH DIRECTIONS ARE FULLY APPL ICABLE PRO TANTO TO THE CUSTOMS DUTY PAID UNDER PROTEST. THE AO IS DIRECTED TO FOLLOW THE SAME . 15.3 RESPECTFULLY FOLLOWING THE ABOVE DECISION ON THE ISSUE, WE SET ASIDE THE MATTER TO THE FILE OF THE ASSESSING OFFICER TO DECIDE IT AFRESH AS DECIDED ABOVE BY THE ITAT AFTER AFFORDING OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. THE GROUND NO. 3.8 IS ACCORDINGLY ALLOWED FOR STATISTICAL PURPOSES. 16. GROUND NOS. 5 TO 5.4 : THE ASSESSING OFFICER MADE DISALLOWANCE OF RS.27 LACS ON ACCOUNT OF EXCESS CONSUMPTION OF RAW - MATERIAL AND COMPONENT. 16.1 THE LEARNED AR POINTED OUT THAT THE ISSUE IS FULLY COVERED BY THE DECISIONS OF THE ITAT IN THE CASE OF ASSESSEE ITSELF FOR THE ASSESSMENT YEARS 59 2000 - 01, 2001 - 02, 2002 - 03, 2005 - 06 AND 2006 - 07 (SUPRA). HE ALSO MADE FOLLO WING SUBMISSIONS: THE FACTS LEADING TO THE AFORESAID ARE AS UNDER: THE ASSESSEE IS A WELL KNOWN LEADING MANUFACTURER OF AUTOMOBILE. IN THE MANUFACTURING PROCESS, THE ASSESSEE PROCURES AND UTILIZES MORE THAN 12000 ITEMS OF RAW MATERIAL AND COMPONENTS FOR MA NUFACTURING THE RANGE OF AUTOMOBILES. DURING THE PREVIOUS YEAR RELEVANT TO THE ASSESSMENT YEAR 2007 - 08, THE YEAR UNDER CONSIDERATION, THE TURNOVER OF THE ASSESSEE (EXCLUDING EXCISE DUTY) AMOUNTED TO RS.14,592 CRORES. IN ORDER TO EXPLAIN THE BASIS OF ADDI TION OF RS. 27,00,000/ - MADE BY THE ASSESSING OFFICER, IT WOULD BE APPROPRIATE TO FIRST BRIEFLY DESCRIBE THE SYSTEM OF ACCOUNTING FOLLOWED BY THE ASSESSEE FOR ACCOUNTING OF STOCK OF RAW MATERIAL AND COMPONENTS AS UNDER: - THE ASSESSEE FOLLOWED THE ELABORAT E SYSTEM OF BOOK KEEPING FOR RECEIPT AND ISSUE OF RAW MATERIAL AND COMPONENT AS ALSO MANUFACTURE OF FINISHED GOODS. THE ASSESSEE FOLLOWED JUST IN TIME SYSTEM FOR MANAGEMENT AND REORDER OF INVENTORY, WHEREBY THE INVENTORIES ARE ORDERED JUST IN TIME WHEN T HE REQUIREMENT FOR SAID INVENTORY ARISES IN RESPECT OF PRODUCTION SHOPS. THE MATERIAL SO REQUIRED IS DELIVERED STRAIGHT TO THE SHOP FLOOR IN THE RELEVANT DEPARTMENT AND AT A TIME THERE REMAIN ONLY A FEW HOUR INVENTORIES EXCEPT FOR CERTAIN ITEMS. - IN VIEW O F THE AFORESAID SYSTEM, THE ENTIRE PURCHASES ARE RECORDED ON THE BASIS OF STORE RECEIPT VOUCHER UPON THE ARRIVAL OF GOODS IN THE PREMISES OF THE ASSESSEE, I.E. ON ACTUAL RECEIPT BASIS. SINCE THE INPUTS/RAW MATERIAL RECEIVED DIRECTLY ON THE SHOP FLOOR, NO E NTRY IS MADE FOR ISSUE OF RAW MATERIAL TO THE MANUFACTURING PROCESS. - ON DAILY BASIS, A CONSOLIDATED ENTRY IS PASSED FOR CONSUMPTION OF VARIOUS MATERIALS ON THE BASIS OF BILL OF MATERIAL (`BOM), WHICH BASICALLY CONTAINS THE STANDARD QUANTITY OF MATERIAL REQUIRED FOR MANUFACTURE OF A VEHICLE. ACCORDINGLY, ON THE BASIS OF THE NUMBER OF VEHICLES MANUFACTURED AND THE MATERIAL REQUIRED TO MANUFACTURE EACH VEHICLE AS PER BOM, THE CONSUMPTION IS BOOKED IN THE BOOKS OF THE ASSESSEE. - HOWEVER, IN CASE OF CERTAIN MATERIAL, SUCH AS PAINT, CONSUMPTION IS RECORDED ON ACTUAL BASIS AS AGAINST CONSUMPTION OF OTHER MATERIAL BEING RECORDED ON THE BASIS OF STANDARD BILLS OF MATERIAL. - AT THE YEAR END, ACTUAL PHYSICAL VERIFICATION OF THE INVENTORIES IS CARRIED OUT BY THE ASSE SSEE. THEREAFTER, STOCK RECONCILIATION IS PREPARED FOR THE VARIATION BETWEEN PHYSICAL STOCK AND THE STOCK AS PER COMPUTERIZED BOOKS OF ACCOUNT. 60 FOR THE PURPOSES OF FINANCIAL ACCOUNTING, THE ASSESSEE DEBITS TO THE PROFIT AND LOSS ACCOUNT FIGURE OF CONSUMPTI ON AT THE YEAR END, WHICH IS DERIVED ON THE BASIS OF THE FOLLOWING FORMULA: OPENING STOCK (AS PER PHYSICAL INVENTORY) + PURCHASES CLOSING STOCK (AS PER PHYSICAL INVENTORY) FOR THE YEAR UNDER CONSIDERATION, AS PER STOCK RECONCILIATION, VARIATION BETWEEN P HYSICAL STOCK AND STOCK REGISTER WAS RS. 3.53 CRORES/ - NEGATIVE (I.E. ITEMS WHERE STOCK AS PER STOCK REGISTER WAS MORE THAN PHYSICAL STOCK) AND RS.3.26 CRORES POSITIVE (I.E. ITEMS WHERE STOCK AS PER STOCK REGISTER IS LESS THAN THE PHYSICAL STOCK). THERE WA S NET VARIANCE OF RS 0.27 CRORES, WHICH MERELY WORKED OUT AS 0.0027% OF TOTAL CONSUMPTION OF RS.10137 CRORES DEBITED TO THE PROFIT & LOSS ACCOUNT. THE EXCISE AUTHORITIES, ON THE BASIS OF THE INFORMATION, SUO MOTO, SUPPLIED BY THE ASSESSEE, ISSUED NOTICE D IRECTING THE ASSESSEE TO SHOW - CAUSE WHY CENVAT CREDIT SHOULD BE PERMITTED IN RESPECT OF NEGATIVE DIFFERENCE BETWEEN THE PHYSICAL INVENTORY AND STOCK AS PER THE STOCK REGISTER. (PLACED AT PAPER BOOK - IV). THE PROCEEDINGS INITIATED BY THE EXCISE AUTHORITIES ARE PRESENTLY SUB - JUDICE BEFORE CESTAT. IT MAY, HOWEVER, BE PERTINENT TO MENTION HERE THAT SIMILAR ISSUE RAISED BY THE EXCISE AUTHORITIES IN THE EARLIER YEAR(S) HAS BEEN DECIDED IN FAVOUR OF THE ASSESSEE BY THE CESAT IN FINANCIAL YEARS 2000 - 01, 2001 - 02 AND 2002 - 03. DESPITE THE AFORESAID, IN THE BASIS THE SHOW CAUSE NOTICE ISSUED BY THE EXCISE AUTHORITIES FOR THE CURRENT YEAR, THE ASSESSING OFFICER HAS PROPOSED AN ADDITION FOR ALLEGED EXCESS CONSUMPTION OF 27,00,000/ - WITHOUT APPRECIATING THAT THE SAME IS ON ACCOUNT OF WASTAGE, SHORTAGES, ETC., WHICH ARE NORMAL IN A BUSINESS OF SIZE AND MAGNITUDE OF THE ASSESSEE. THE ASSESSING OFFICER HAS FAILED TO APPRECIATE THE FOLLOWING ASPECTS WHILE PROPOSING TO MAKE ADDITION OF 27,00,000/ - ON ACCOUNT OF ALLEGED EXCESS CO NSUMPTION: (A) THERE IS NO DISPUTE AS REGARDS THE FIGURE OF OPENING STOCK, PURCHASES, CLOSING STOCK AND ALSO THE SALES. IN THESE CIRCUMSTANCES, THE AMOUNT OF CONSUMPTION DEBITED TO THE PROFIT & LOSS ACCOUNT CANNOT BE DISPUTED, WHICH WAS MERELY A DERIVED FIGUR E, ARRIVED AT BY ADDING TO THE OPENING STOCK THE PURCHASES MADE AND REDUCING THEREFROM THE CLOSING STOCK AS PER THE PHYSICAL INVENTORY. (B) THE ALLEGED WASTAGE IS ONLY 0.0027% OF THE CONSUMPTION OF RS.10137 CRORES DEBITED TO PROFIT AND LOSS ACCOUNT, WHICH IS BELOW THE NORM OF 1% FIXED BY THE GOVERNMENT OF INDIA AS A TOLERANCE LEVEL OF PRODUCTION LOSSES FOR ALLOWING IMPORT AGAINST ADVANCE LICENSES, HAVING REGARD TO NATURE AND SKILL OF THE OPERATION. (C) FIGURES OF CONSUMPTION ARE FULLY VERIFIED BY THE COST AUDITOR WHILE CONDUCTING COST AUDIT UNDER SECTION 233B OF THE COMPANIES ACT, 1956 AND ALSO THE STATUTORY 61 AUDITOR AS WELL AS THE TAX AUDITOR PURSUANT TO TAX AUDIT UNDER SECTION 44AB OF THE ACT. (D) THE DIFFERENCE BETWEEN THE STOCK AS PER THE STOCK REGISTER AND PHYSIC AL INVENTORY MAY BE ON ACCOUNT OF SEVERAL REASONS, SUCH AS POSTING ERRORS, ESTIMATION OF CONSUMPTION BASED ON STANDARD BOM, ETC. (E) THE EXCISE SHOW CAUSE NOTICE ISSUED BY THE EXCISE AUTHORITY WAS MERELY FOR THE PURPOSE OF VERIFYING THE CLAIM OF CENVAT CREDIT , WHICH WAS NOT AT ALL RELEVANT FOR THE PURPOSE OF ALLOWABILITY OF CONSUMPTION OF RAW MATERIAL/INPUTS FOR COMPUTING TAXABLE INCOME OF THE ASSESSEE. (F) THE CONSUMPTION ACTUALLY DEBITED TO THE PROFIT & LOSS ACCOUNT REPRESENTED THE ENTIRE ACTUAL CONSUMPTION OF THE ASSESSEE, WHICH IS CLEARLY ALLOWABLE AS DEDUCTION WHILE COMPUTING THE BUSINESS PROFITS UNDER THE PROVISIONS OF THE ACT. THE DIFFERENCE BETWEEN THE STOCK AS PER BOOK RECORD AND THE INVENTORY AS PER PHYSICAL VERIFICATION MERELY REPRESENTED THE DIFFERENCE BETWEEN ACTUAL CONSUMPTION AS AGAINST STANDARD CONSUMPTION BOOKED ON THE BASIS OF BOM. THE DIFFERENCE BETWEEN THE STANDARD CONSUMPTION AND THE ACTUAL CONSUMPTION WAS, EVEN OTHERWISE, VERY MARGINAL/ MINISCULE HAVING REGARD TO THE SIZE AND OPERATIONS OF THE ASSESSEE. (G) EXCESS CONSUMPTION, IF ANY, WITHOUT ANYTHING MORE CANNOT LEAD TO ADDITION TO INCOME. THERE IS NO ALLEGATION BY THE ASSESSING OFFICER THAT THE ALLEGED EXCESS CONSUMPTION OF RAW MATERIAL OR COMPONENTS WAS CLANDESTINELY REMOVED FROM THE FACTORY OR HAD BEEN USED FOR PRODUCTION AND SALE OF FINISHED GOODS OUTSIDE THE BOOKS OF ACCOUNTS. IT IS NOT THE CASE OF THE ASSESSING OFFICER THAT THERE IS ANY SUPPRESSION OF SALES. IN THAT VIEW OF THE MATTER, THE ADDITION MADE IS TOTALLY MISCONCEIVED AND UNTENABLE. RELIANCE, IN THIS REGARD, IS PLACED ON THE FOLLOWING DECISIONS: SETIA PLASTIC INDUSTRIES: 206 CTR 484 (DEL.) R.B. BANSILAL ABHIRCHAND SPNG & WVNG MILLS V. CIT: 75 ITR 260 (BOM.) SURAT DISTRICT CO - OPERATIVE MILK PRODUCERS UNION LTD: 99 TTJ 390 (AHD.) GEET ANJALI WOOLLENS PVT.LTD.V. ACIT: (1991) 121 CTR (TRIB) (AHD.) ITO VS. HIMALAYA DRUG COMPANY : 17 TTJ 9 (DEL.) IN THE ASSESSMENT ORDER, THE ASSESSING OFFICER HAS ACCEPTED THE SYSTEM OF ACCOUNTING BEING FOLLOWED BY THE ASSESSEE. HOWEVER, THE ASSESSING OFFICE R HELD THAT THE ERROR IN THE ACCOUNTING ENTRY CANNOT BE ACCEPTED EVEN IF THERE IS INSIGNIFICANT VARIATION. THE ASSESSING OFFICER, AS STATED ABOVE, FAILED TO APPRECIATE THAT THE CONSUMPTION CLAIMED REPRESENTED ACTUAL CONSUMPTION OF RAW MATERIAL AND INPUTS, WHICH IS ALLOWABLE AS BUSINESS DEDUCTION UNDER THE PROVISIONS OF THE ACT. 62 THE ISSUE IS SQUARELY COVERED IN FAVOUR OF APPELLANT BY ITAT ORDERS FOR AY S 2000 - 01, 2001 - 02, 2002 - 03, 2005 - 06 AND 2006 - 07 AND BY THE CIT(A) ORDER FOR AY 2002 - 03. 16.2 THE LEARNED CIT(DR) ON THE CONTRARY PLACED RELIANCE ON THE ORDERS OF THE AUTHORITIES BELOW. 16.3 WE FIND THAT AN IDENTICAL ISSUE UNDER SIMILAR SET OF FACTS HAS BEEN DECIDED IN FAVOUR OF THE ASSESSEE BY THE ITAT IN THE APPEAL FOR THE ASSESSMENT YEAR 2006 - 07 (SUPRA) IN THE CASE OF ASSESSEE ITSELF , HOLDING THAT THERE CAN BE NO LOGIC IN DISALLOWING SUCH AMOUNT WHICH IS NOTHING BUT EXCESS CONSUMPTION OF INPUTS. THE RELEVANT PARA NOS. 14.1 AND 14.2 OF THE SAID ORDER OF THE ITAT FOR THE ASSESSMENT YEAR 2006 - 07 ARE BEING REPR ODUCED HEREUNDER: 14.1. GROUND NOS. 7 TO 7.4 ARE AGAINST THE ADDITION OF RS.4.48 C RORE MADE BY THE AO ON ACCOUNT OF EXCESS CONSUMPTION OF RAW MATERIAL AND COMPONENTS. THE FACTS APROPOS THESE GROUNDS ARE THAT THE ASSESSEE IS FOLLOWING JUST - IN - TIME SYS TEM FOR MANAGEMENT AND REORDER OF INVENTORY, IN WHICH INVENTORIES ARE ORDERED JUST IN TIME WHEN THEIR REQUIREMENT ARISES. THE MATERIAL SO REQUIRED IS DELIVERED STRAIGHT TO THE SHOP FLOOR IN THE RELEVANT DEPARTMENT. AS A RESULT OF THIS, THOUGH THE PURCHAS ES ARE RECORDED AS PER ACTUAL BILLS UPON THE ARRIVAL OF GOODS IN THE PREMISES, THE INVENTORIES ARE PROCURED BY CONSIDERING THE STANDARD CONSUMPTION OF VARIOUS RAW MATERIALS FOR MANUFACTURE OF VEHICLE S . DUE TO THIS DIFFERENCE IN THE MAKING OF ENTRY IN THE BOOKS OF ACCOUNT AND ACTUAL RECEIPT OF GOODS DIRECTLY IN THE RELEVANT DEPARTMENT, WHICH, IN TURN, IS BASED ON STANDARD QUANTITY OF MATERIAL REQUIRED FOR MANUFACTURE OF VEHICLE S, SOME TIMES THERE ARISES DIFFERENCE 63 BETWEEN THE PHYSICAL INVENTORY TAKEN AND THE INVENTORY AS PER BOOKS OF ACCOUNT AT THE END OF THE YEAR. SOME ITEMS OF STOCK MAY BE EVENTUALLY UNDER - CONSUMED WHILE OTHERS OVER - CONSUMED. THE NET EFFECT OF UNDER/OVER CONSUMPTION IS NOTHING, BUT, THE DEVIATION FROM THE STANDARD CONSUMPTION. DURING THE YEAR IN QUESTION, THE VARIATION BETWEEN PHYSICAL STOCK AND STOCK REGISTER WAS RS.4.48 CRORE NEGATIVE, WHICH MEANS ITEMS WHERE STOCK AS PER STOCK REGISTER WAS MORE THAN PHYSICAL STOCK AND RS.2.86 CRORE POSITIVE I.E., ITEMS WHERE STOCK AS PER STOCK REGISTER WAS LESS THAN THE PHYSICAL STOCK, LEAVING THE NET DIFFERENCE OF RS.1.62 CRORE. THE AO DISALLOWED RS.4.48 CRORE IGNORING THE EXCESS AMOUNT OF RS.2.86 CRORE. THE ASSESSEE IS AGGRIEVED AGAINST THIS ADDITION. 14.2. IT IS MANIFEST THAT THE NET DIFFERENCE OF RS.1.62 CRORE IS NOTHING, BUT, EXCESS CONSUMPTION OVER THE STANDARD CONSUMPTION. SUCH SHORTAGE OF RS.1.62 CRORE IS ONLY 0.018% OF TOTAL CONSUMPTION OF MATERIAL DEBITED TO THE PROFIT & LOSS ACCOUNT. IN VIEW OF THE FACT THAT THIS AMOUNT HAS ACTUALLY BEE N CONSUMED IN THE MANUFACTURING OF GOODS, IT CANNOT CALL FOR ANY DISALLOWANCE. THERE MAY BE PRODUCTION EFFICIENCIES OR INEFFICIENCIES LEADING TO UNDER OR OVER CONSUMPTION OF INPUTS VIS - A - VIS STANDARD CONSUMPTION . SUCH UNDER OR OVER CONSUMPTION BECOMES A P ART OF THE COST OF PRODUCTION. IN OUR CONSIDERED OPINION, THERE CAN BE NO LOGIC IN DISALLOWING SUCH AMOUNT, WHICH IS NOTHING BUT EXCESS CONSUMPTION OF INPUTS. SIMILAR VIEW HAS BEEN TAKEN BY THE TRIBUNAL IN THE ASSESSEES OWN CASE FOR EARLIER ASSESSMENT YE ARS INCLUDING THE IMMEDIATELY PRECEDING ASSESSMENT YEAR. THIS GROUND IS ALLOWED . 16.4 FOLLOWING THE ABOVE DECISION, THE ASSESSING OFFICER IS DIRECTED TO DELETE THE DISALLOWANCE OF RS.27 LACS MADE IN THIS REGARD. THE GROUNDS ARE ACCORDINGLY ALLOWED. 64 17. GROUND NOS. 6 TO 6.6 : IT IS REGARDING DISALLOWANCE MADE UNDER SEC. 14A OF THE ACT AT RS.4,85,68,020. THE ASSESSING OFFICER OBSERVED THAT THE ASSESSEE HAS RECEIVED DIVIDEND INCOME OF RS.1,52,74,13,328 DURING THE YEAR, WHICH WAS CLAIMED BY THE ASSESSEE AS E XEMPT FROM TAX UNDER SEC. 10(34) AND 10(35) OF THE ACT. THE ASSESSING OFFICER HELD THAT PROVISIONS OF SECTION 14A OF THE ACT ARE APPLICABLE IN THE CASE OF THE ASSESSEE AND HENCE EXPENDITURE INCURRED IN RELATION TO EXEMPT INCOME IS REQUIRED TO BE DISALLOWED . HE PLACED RELIANCE ON THE DECISION OF SPECIAL BENCH OF THE ITAT IN THE CASE OF DAGA CAPITAL MANAGEMENT PVT. LTD. 312 ITR (AT) 0 1 (MUMBAI) . THE ASSESSING OFFICER APPLIED THE METHOD PRESCRIBED IN RULE 8D OF THE INCOME - TAX RULES, 1962 (THE RULES) AND DE TERMINED THE AMOUNT DISALLOWABLE UNDER SECTION 14A OF THE ACT AT RS. 4,85,68,020/ - , COMPRISING OF THE FOLLOWING: RS. MILLIONS (I) PROPORTIONATE INTEREST AS PER RULE 8D (II) 8.18 (II) % OF AVERAGE INVESTMENT AS PER RULE 8D(III) 40.39 TO TAL: 48.57 THE ASSESSING OFFICER, HOWEVER, HAS FAILED TO APPRECIATE THAT IN TERMS OF SECTION 14A OF THE ACT ONLY EXPENDITURE INCURRED IN RELATION TO EXEMPT INCOME CAN BE DISALLOWED UNDER THAT SECTION. 17.1 THE LEARNED AR POINTED OUT THAT T HE PROVI SIONS OF SECTION 14A OF THE ACT CLEARLY POSTULATES DISALLOWANCE OF EXPENDITURE ONLY IN A CASE WHERE IT IS PROVED THAT THE EXPENSES INCURRED HAVE A REAL RELATIONSHIP WITH THE INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME. OUR ATTENTION WAS DRAWN ON T HE DECISION OF SUPREME COURT IN THE CASE OF CIT VS. WALFORT SHARE & STOCK BROKERS 326 ITR 1 WHEREIN IT HAS BEEN HELD THAT BY THE APEX COURT THAT THERE 65 MUST BE A PROXIMATE RELATIONSHIP OF EXPENDITURE WITH EXEMPT INCOME, FOR THE PURPOSES OF MAKING DISALLOWAN CE OF SAME UNDER SECTION 14A OF THE ACT. 17.2 IN THE CASE OF GODREJ & BOYCE MFG. CO. LTD. V. DCIT: 328 ITR 81 THE BOMBAY HIGH COURT, WHILE DECIDING THE ISSUE OF DISALLOWANCE UNDER SECTION 14A OF THE ACT, FOLLOWING THE AFORESAID SUPREME COURT DECISION IN WALFORT SHARES & STOCK BROKERS (SUPRA), OBSERVED THAT DISALLOWANCE UNDER SECTION 14A CAN BE EFFECTED ONLY WHEN A PROXIMATE CAUSE FOR DISALLOWANCE IS ESTABLISHED, STATING THE RELATIONSHIP OF THE EXPENDITURE WITH INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME. THE RELEVANT OBSERVATIONS OF THE COURT ARE REPRODUCED AS UNDER: .. IN ORDER TO DETERMINE THE QUANTUM OF THE DISALLOWANCE, THERE MUST BE A PROXIMATE RELATIONSHIP BETWEEN THE EXPENDITURE AND THE INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME. ONCE SUCH A PROXIMATE RELATIONSHIP EXISTS, THE DISALLOWANCE HAS TO BE EFFECTED. ALL EXPENDITURE INCURRED IN THE EARNING OF INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME HAS TO BE DISALLOWED SUBJECT TO COMPLIANCE WITH THE TEST ADOPTED BY THE SUPREME C OURT IN WALFORT AND IT WOULD NOT BE PERMISSIBLE TO RESTRICT THE PROVISIONS OF SECTION 14A BY AN ARTIFICIAL METHOD OF INTERPRETATION. HENCE, THE INTENTION OF SECTION 14A IS CLEARLY TO DISALLOW ALL EXPENSES RELATING TO THE NONTAXABLE INCOME, AND TO CURB THE PRACTICE OF CLAIMING ALLOWANCES FOR EXPENDITURES ON EXEMPT INCOME. ALL THAT IS REQUIRED IS TO SHOW THAT THERE IS A PROXIMATE CAUSE BETWEEN THE EXPENDITURE INCURRED AND THE EXEMPT INCOME. A PROXIMATE CAUSE CONNOTES A RELATIONSHIP BETWEEN THE EXPENSE AND THE EXEMPT INCOME (WALFORT). (EMPHASIS SUPPLIED) 17.3 FURTHER RELIANCE IS ALSO PLACED ON THE FOLLOWING DECISIONS, WHEREIN IT HAS BEEN HELD THAT WHERE NO EXPENDITURE WAS ACTUALLY INCURRED TO EARN DIVIDEND INCOME, DISALLOWANCE UNDER SECTION 14A CANNOT BE MADE ON THE BASIS OF MERE PRESUMPTION: CIT V. HERO CYCLES: : (2009): 323 ITR 518 (P&H) CIT V . METALMAN AUTO P. LTD.: 336 ITR 434 (P&H) M/S MAXPAK INVESTMENT LTD (ITA NO.2632/DEL/2003) (DEL. TRI.) 66 WIMCO SEEDLINGS LIMITED V. DCIT: 107 ITD 267 (DEL. TRI. )(TM) ACIT V. EICHER LIMITED: 101 TTJ 369 (DEL.) 17.4 FURTHERMORE, IN THE FOLLOWING CASES IT HAS BEEN HELD THAT FOR MAKING A DISALLOWANCE UNDER SECTION 14A OF THE ACT, THE ASSESSING OFFICER HAS TO PROVE NEXUS BETWEEN THE EXEMPT INCOME AND THE EXPENDITURE INCURRED: ACIT V. JINDAL SAW PIPES LTD. : 118 TTJ 228 (DEL . ) PUNJAB NATIONAL BANK V. DCIT: 103 TTJ 908 (DEL.) SHREE SYNTHETICS LIMITED V. CIT: 205 CTR 386 (MP) VIDYUT INVESTMENT LTD: [2006] 10 SOT 284 (DEL.) D.J. MEHTA V. ITO: 290 ITR 238 (MUM.)(AT) 17. 5 ON PERUSAL OF THE AFORESAID IT WILL, THUS, KINDLY BE APPRECIATED THAT DISALLOWANCE UNDER SECTION 14A CANNOT BE MADE UNLESS THERE IS PROXIMATE CONNECTION BETWEEN THE EXEMPT INCOME AND THE ACTUAL EXPENDITURE INCURRED. IN ORDER TO JUSTIFY DISALLOWANCE OF ANY PART OF THE EXPENDITURE UNDER THE SAID SECTION, THE ONUS IS ON THE REVENUE TO BRING ON RECORD NEXUS BETWEEN THE EXPENDITURE AND THE EXEMPT INCOME. 17.6 FURTHERMORE, RULE 8D OF THE RULES INSERTED W.E.F. 24.5.2008, HAS BEEN HELD TO BE APPLICABLE PROSPECTIV ELY FROM ASSESSMENT YEAR 2008 - 09 BY THE BOMBAY HIGH COURT IN THE CASE OF GODREJ BOYCE (SUPRA). 17.7 IT IS ALSO PERTINENT TO MENTION HERE THAT IN THE AFORESAID DECISION IN THE CASE OF GODREJ BOYCE (SUPRA), THEIR LORDSHIPS OF THE BOMBAY HIGH COURT HAVE REV ERSED THE DECISION OF THE SPECIAL BENCH OF THE TRIBUNAL IN THE CASE 67 OF DAGA CAPITAL MANAGEMENT (SUPRA) WHEREIN RULE 8D OF THE RULES WAS HELD TO BE APPLICABLE RETROSPECTIVELY TO ALL PENDING ASSESSMENTS. I N THIS REGARD, IT IS FURTHER PLEADED TO THE DECISION OF THE DIVISION BENCH OF THE DELHI HIGH COURT IN THE CASE OF MAXOPP INVESTMENT LTD. : 347 ITR 272, WHEREIN THE HIGH COURT WHILE REFERRING TO THE DECISION OF BOMBAY HIGH COURT IN THE CASE OF GODREJ & BOYCE MFG. CO. LTD. V. DCIT (SUPRA), HELD THAT THE PROVI SIONS OF RULE 8D WOULD APPLY PROSPECTIVELY, I.E., FROM THE DATE OF INTRODUCTION OF THE RULE. 17.8 IN THE PRESENT CASE OF THE ASSESSEE, THE ASSESSING OFFICER HAS SIMPLY APPLIED THE PROCEDURE PRESCRIBED IN RULE 8D OF THE RULES TO COMPUTE THE AMOUNT DISALLOW ABLE UNDER SECTION 14A OF THE ACT WITHOUT APPRECIATING THAT: IN ORDER TO APPLY THE PROVISION OF SECTION 14A OF THE ACT, THE FIRST AND FOREMOST CONDITION IS ACTUAL INCURRING OF EXPENDITURE HAVING APPROXIMATE RELATIONSHIP WITH THE EXEMPT INCOME; RULE 8D O F THE RULES IS NOT APPLICABLE TO THE YEAR UNDER CONSIDERATION. IN THE PRESENT CASE, NO PART OF INTEREST AND/OR ADMINISTRATIVE EXPENDITURE WAS INCURRED IN RELATION TO EXEMPT INCOME. RE: NO DISALLOWANCE WAS WARRANTED UNDER SECTION 14A IN PRESENT CASE 17. 9 THE ASSESSEE IS AN OPERATING COMPANY ENGAGED IN MANUFACTURE OF AUTOMOBILES. THE ENTIRE EXPENDITURE INCURRED WAS IN RELATION TO THE MANUFACTURING OPERATIONS OF THE ASSESSEE AND THE ASSESSING OFFICER HAS FAILED 68 TO BRING ON RECORD ANY EVIDENCE/ MATERIAL TO DE MONSTRATE THAT ANY PART OF SUCH EXPENDITURE WAS RELATABLE TO THE EXEMPT INCOME. RE: DISALLOWANCE OUT OF INTEREST EXPENDITURE INSOFAR AS INTEREST EXPENDITURE WAS CONCERNED, INTEREST PAID BY THE ASSESSEE WAS ON ACCOUNT OF THE FOLLOWING: MI LLION (A) INTEREST ADVANCES FROM DEALERS 52 (B) OTHERS INCLUDING INTEREST ON OVERDRAFT, INTEREST ON ADVANCES FROM DEALERS, ETC. 39 TOTAL: 91 17.10 ON PERUSAL OF THE AFORESAID, IT WILL KINDLY BE NOTICED THAT THE AFORESAID EXPENDITURE ACTUALLY R ELATED TO THE MANUFACTURING OPERATIONS OF THE ASSESSEE. BORROWED FUNDS AVAILABLE WITH THE ASSESSEE, AS A MATTER OF FACT, WERE UTILIZED FOR BUSINESS OPERATIONS AND NOT USED FOR MAKING THE INVESTMENTS. IT IS FURTHER SUBMITTED THAT INTEREST FREE OWN FUND AVAI LABLE WITH THE ASSESSEE FAR EXCEEDS THE INVESTMENT MADE IN SHARES/SECURITIES ON WHICH EXEMPT DIVIDEND INCOME WAS RECEIVED. 17.11 IN THE CASE OF MIXED FUNDS, THE OPTION IS WITH THE ASSESSEE TO APPROPRIATE FUND AND EXPENDITURE IN A MANNER MOST FAVOURABLE TO THE ASSESSEE. REFERENCE IN THIS REGARD CAN BE MADE IN THE FOLLOWING DECISIONS WHEREIN IT HAS BEEN HELD IN THE CASE OF MIXED POOL OF FUNDS, A PRESUMPTION 69 OF UTILIZATION OF BORROWED FUNDS OR INTEREST FREE FUNDS CAN BE MADE IN FAVOUR OF THE ASSESSEE: EAST I NDIA PHARMACEUTICAL WORKS LTD. V. CIT: 224 ITR 627 (SC) INDIAN EXPLOSIVES LTD. V. CIT: 147 ITR 392 (CAL.), WOOLCOMBERS OF INDIA LTD. V. CIT: 134 ITR 219 (CAL.) APPROVED BY SUPREME COURT IN THE CASE OF EAST INDIA PHARMACEUTICAL WORKS LTD. V. CIT: 224 ITR 62 7 CIT V. RELIANCE UTILITIES AND POWER LTD.: 313 ITR 340 (BOM.) CIT V. M/S ASHOK COMMERCIAL ENTERPRISES: ITA NO. 2985 OF 2009 (BOM) ALKALI & CHEMICAL CORP. OF INDIA V. CIT (1986) 161 ITR 820 (CAL.) CIT V. SUZLON ENERGY LTD.: 215 TAXMAN 272 (GUJ.) 17.12 THE GUJARAT HIGH COURT IN THE CASE OF CIT V. UTI BANK LTD: 215 TAXMAN 8 HELD THAT WHERE THERE ARE SUFFICIENT INTEREST FREE FUNDS TO MEET TAX FREE INVESTMENTS, THEY ARE PRESUMED TO BE MADE FROM INTEREST FREE FUNDS AND NOT LOANED FUNDS AND NO DISALLOWANCE CAN BE MADE UNDER SECTION 14A OF THE ACT. 17.13 THE SUPREME COURT HAS DISMISSED THE REVENUES SLP VIDE ORDER DATED 07.02.2014 IN CIVIL APPEAL NO. 468/2014 AGAINST THE AFORESAID DECISION. WHILE FOLLOWING THE RATIO EMANATING FROM THE AFORESAID DECISIONS, IT HAS BEEN HELD IN THE FOLLOWING CASES, THAT INTEREST EXPENDITURE CANNOT BE DISALLOWED UNDER SECTION 14A OF THE ACT, WHERE THE ASSESSEE HAD SUFFICIENT SURPLUS FUNDS AND THERE WAS NO FINDING BY THE ASSESSING OFFICER OF ANY DIRECT NEXUS OF BORROWED FUNDS WITH INVESTMENTS: 70 GUJARAT STATE FERTILIZERS AND CHEMICALS LTD : TAX APPEAL NO. 82 OF 2013 (GUJ HC) LUBI SUBMERSIBLES LTD.: ITA NO.868 OF 2010 (GUJ.) CIT V. GUJARAT POWER CORPORATION LTD. : 352 ITR 583 (GUJ) CIT V. TORRENT POWER LTD.: 363 ITR 474 (GUJ) CIT VS. SUZLON ENERGY LTD.: 215 TAXMAN 272 (GUJ) CIT V. K. RAHEJA CORPORATION PVT. LTD : ITA NO.1260 OF 2009 (BOM.) HERO HONDA FINL EASE LTD V. ACIT: ITA NO. 3726/DEL/2012 (DEL) DCIT V. MAHARASHTRA SEAMLESS LTD.: 48 SOT 160 (DEL)(URO) EIMCO ELECON (INDIA) LTD. V. ADDL. CIT: 142 ITD 52 (AHD.) M/S. GODREJ AGROVET LTD. V. ACIT: ITA NO. 1629/MUM/09 (MUM) TML DRIVE LINES LTD V. ACIT : ITA NO. 6064/MUM/2010 (MUM) ACIT VS. CHAMPION COMMERCIAL CO LTD: 152 TTJ 241 (KOL) KULGAM HOLDINGS PVT. LTD. V. ACIT : ITA NO. 1259/AHD/2006 (AHD) MAX INDIA LIMITED V. DCIT: ITA NO. 103/2006 (AMR) DY. CIT V. JAMMU & KASHMIR BANK LTD.: 142 ITD 553(ASR.) 17.14 FURTHERMORE, IN THE ASSESSEES OWN CASE FOR THE ASSESSMENT YEAR 1999 - 2000 REPORTED IN 92 ITD 119, THE TRIBUNAL WAS PLEASED TO DELETE THE DISALLOWANCE MADE UNDER SECTION 14A OF THE ACT. THE ITAT FOR AY 2001 - 02 HAS RESTORED THE ISSUE TO FILE OF A.O. FOR RE - ADJUDICATION IN LINE WITH DECISION OF THE SPECIAL BENCH OF THE TRIBUNAL IN THE CASE OF ITO V DAGA CAPITAL MANAGEMENT PVT. LTD. REPORTED IN 312 ITR (AT). THE APPELLANT HAS NOT ACCEPTED THE DECISION OF THE ITAT AND HAS FILED AN APPEAL TO THE HONBLE DELHI HI GH COURT U/S 260A OF THE INCOME TAX ACT. 17.15 THE ITAT FOR AY 2005 - 06 AND AY 2002 - 03 HAS ALSO RESTORED THE ISSUE TO THE FILE OF A.O TO RE - ADJUDICATE THE MATTER IN LINE WITH THE DECISION OF 71 THE JURISDICTIONAL HIGH COURT PENDING ON THIS ISSUE WHICH MATTE R HAS ALREADY BEEN HEARD. 17.16 THE ITAT FOR AY 2006 - 07 HAS RESTORED THE ISSUE TO THE FILE OF AO TO RE - ADJUDICATE THE MATTER FOLLOWING THE JUDGMENT OF ITAT IN APPELLANTS OWN CASE FOR AY 2005 - 06. REFERENCE, IN THIS REGARD, MAY ALSO BE MADE TO THE FOLLOWI NG DECISIONS WHEREIN SIMILAR DISALLOWANCE MADE BY THE ASSESSING OFFICER AS PER RULE 8D BASED ON THE DECISION OF SPECIAL BENCH OF THE TRIBUNAL IN THE CASE OF DAGA CAPITAL (WHICH NOW STANDS REVERSED BY THE BOMBAY HIGH COURT) WAS DIRECTED TO BE DELETED IN THE ABSENCE OF ANY POSITIVE FINDING BY THE ASSESSING OFFICER OF INCURRING OF ANY EXPENSE BY THE APPELLANT: MINDA INVESTMENTS LTD: 138 TTJ 240 (DEL.) OM ERA ENGINEERING (P) LIMITED: ITA NO. 3913/ DEL/ 2010 17.17 THE BOMBAY HIGH COURT IN THE CASE OF CIT V. K. RAHEJA CORPORATION LTD.: ITA NO. 1260/2009 HELD THAT IN THE ABSENCE OF ANY MATERIAL OR BASIS TO HOLD THAT THE INTEREST EXPENDITURE DIRECTLY OR INDIRECTLY WAS ATTRIBUTABLE FOR EARNING THE DIVIDEND INCOME , THE DISALLOWANCE OF INTEREST ON BORROWED FUNDS U/ S 14A CANNOT BE MADE. IN THE AFORESAID CIRCUMSTANCES, THE ASSESSING 72 OFFICER ERRED IN DI SALLOWING RS.4,85,68,020/ - IN THE PROPOSED ASSESSMENT ORDER AND THE SAME, THEREFORE, CALLS FOR BEING DELETED. 17.18 ON THE OTHER HAND, LEARNED CIT(DR) SUPPORTED T HE ORDERS OF THE AUTHORITIES BELOW. 17.19 CONSIDERING THE ABOVE SUBMISSIONS, THERE IS NO DOUBT THAT RULE 8D WAS NOT APPLICABLE DURING THE YEAR UNDER CONSIDERATION, HOWEVER, THE APPLICATION OF THE PROVISIONS LAID DOWN UNDER SEC. 14A OF THE ACT IS JUSTIFI ABLE WHEN THE ASSESSING OFFICER IS NOT SATISFIED THAT THERE IS PROXIMATE CAUSE FOR DISALLOWANCE, STATING THE RELATIONSHIP OF EXPENDITURE WITH INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME. IN THE PRESENT CASE, THE ASSESSING OFFICER HAS SIMPLY APPLIED PROCEDURE LAID DOWN IN RULE 8D TO COMPUTE THE AMOUNT DISALLOWABLE UNDER SEC. 14A OF THE ACT . THE CONTENTION OF THE ASSESSEE IN THE PRESENT CASE REMAINED THAT IT IS AN OPERATING COMPANY ENGAGED IN MANUFACTURE OF AUTOMOBILE. THE ENTIRE EXPENDITURE INCURRED WAS IN RELATION TO THE MANUFACTURING OPERATION OF THE ASSESSEE AND THE ASSESSING OFFICER FAILED TO BRING ON RECORD ANY EVIDENCE/MATERIAL TO DEMONSTRATE THAT ANY PART OF SUCH EXPENDITURE WAS RELATABLE TO THE EXEMPT INCOME. IT WAS FURTHER CONTENDED THAT BOR ROWED FUNDS AVAILABLE WITH THE ASSESSEE AS A 73 MATTER OF FACT WERE UTILIZED FOR BUSINESS OPERATION AND NOT USED FOR MAKING THE INVESTMENTS. IT WAS FURTHER CONTENDED THAT INTEREST FREE OWN FUND AVAILABLE WITH THE ASSESSEE FOR EXCEEDED THE INVESTMENT MADE IN S HARES/SECURITIES ON WHICH EXEMPT DIVIDEND INCOME WAS RECEIVED. THE HON'BLE JURISDICTIONAL HIGH COURT OF DELHI IN THE CASE OF MAXOPP INVESTMENT LTD. 347 ITR 272 (SUPRA) RELIED UPON BY THE LEARNED AR HAS BEEN PLEASED TO HOLD THAT BEFORE MAKING DISALLOWANCE UNDER SEC. 14A OF THE ACT, IT IS MANDATORY ON THE PART OF THE ASSESSING OFFICER TO RECORD HIS SATISFACTION THAT EXPLANATION MADE BY THE ASSESSEE ON THE APPLICABILITY OF THE PROVISIONS UNDER SEC. 14A OF THE ACT. WE THUS IN THE INTEREST OF JUSTICE SET ASID E THE MATTER TO THE FILE OF THE ASSESSING OFFICER TO DECIDE THE ISSUE AFRESH FOLLOWING THE RATIOS LAID DOWN BY THE HON'BLE JURISDICTIONAL HIGH COURT IN THE CASE OF MAXOPP INVESTMENT LTD. (SUPRA) AFTER AFFORDING OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. T HE GROUND IS ACCORDINGLY ALLOWED FOR STATISTICAL PURPOSES. 18. GROUND NOS. 7 TO 7.2 : VALIDITY OF DISALLOWANCE OF DEDUCTION CLAIMED UNDER SEC. 35DDA OF THE ACT AT RS.23,91,54,586 HA D BEEN QUESTIONED. DURING THE YEAR, THE ASSESSEE HA D CLAIMED DEDUCTIO N OF RS.23,91,54,836 UNDER SEC.35DDA OF THE ACT BEING 1/5 TH OF THE PAYMENT OF RS.119.58 CRORES MADE BY THE ASSESSEE COMPANY DURING ASSESSMENT YEAR 2004 - 05 TO ITS 74 EMPLOYEES UNDER VRS SCHEME. ASSESSING OFFICER DISALLOWED THE CLAIM ON THE BASIS THAT VRS SCHEM E WAS NOT IN ACCORDANCE WITH RULE 2BA OF THE IT RULES, 1962. IN SUPPORT OF THE GROUNDS, THE LEARNED AR SUBMITTED TH AT T HE AFORESAID ISSUE OF CLAIM U/S 35DDA IS COVERED IN FAVOUR OF ASSESSEE BY THE ORDER OF THE ITAT FOR AY 2004 - 05 , AY 2005 - 06 AND AY 2006 - 07 . 18.1 FURTHER RELIANCE IS PLACED ON THE FOLLOWING DECISIONS WHERE IT HAS BEEN HELD THAT COMPLIANCE WITH THE CONDITIONS OF RULE 2BA IS MANDATORY ONLY TO AVAIL THE EXEMPTION UNDER SECTION 10(10C) BY EMPLOYEES AND NOT FOR THE PURPOSES OF DEDUCTION UNDER SEC TION 35DDA: CIT V. SONY INDIA (P.) LTD. : 210 TAXMAN 149 (DEL)(HC)(MAG.) STATE BANK OF MYSORE V. CIT: 356 ITR 468 (KAR.)(HC ) 18.2 THE LEARNED CIT(DR) ON THE OTHER HAND PLACED RELIANCE ON THE ORDERS OF THE AUTHORITIES BELOW. 18.3 WE FIND THAT AN IDENTICA L ISSUE HAS BEEN DECIDED BY THE ITAT IN THE EARLIER ASSESSMENT YEARS IN THE CASE OF ASSESSEE ITSELF AND LASTLY IN THE APPEAL FOR THE ASSESSMENT YEAR 2006 - 07 (SUPRA), THE ITAT HAS GIVEN FOLLOWING FINDING: 75 16.2. SUCCINCTLY, THE FACTS OF THIS GROUND ARE THAT THE ASSESSEE CLAIMED DEDUCTION FOR A SUM OF RS.38.63 CRORE U/S 35DDA BEING THE AGGREGATE OF 1/5 TH OF PAYMENTS MADE TO ITS EMPLOYEES UNDER VR SCHEME DURING THE PREVIOUS YEAR RELEVANT TO THE ASSESSMENT YEAR 2002 - 03 AND 1/5 TH OF THE PAYMENTS MADE TO EMPLOYEE S UNDER VR SCHEME DURING THE PERIOD RELEVANT TO THE ASSESSMENT YEAR 2004 - 05. THE AO MADE DISALLOWANCE ON THE GROUND THAT THE VR SCHEME WAS NOT IN ACCORDANCE WITH RULE 2BA OF THE INCOME - TAX RULES, 1962. THE DISALLOWANCE HAS BEEN CHALLENGED THROUGH THIS GRO UND. 16.3. AFTER CONSIDERING THE RIVAL SUBMISSIONS AND PERUSING THE RELEVANT MATERIAL ON RECORD, IT IS OBSERVED THAT SIMILAR ISSUE CAME UP FOR CONSIDERATION BEFORE THE TRIBUNAL IN ITS ORDER FOR THE AY 2004 - 05. AFTER MAKING A THOROUGH DISCUSSION ON THE ISSUE, THE TRIBUNAL HAS HELD THAT RULE 2BA IS RELEVANT ONLY FOR THE PURPOSE OF AVAILING EXEMPTION U/S 10 BY EMPLOYEES AND NOT FOR THE PURPOSE OF ALLOWING DEDUCTION TO THE EMPLOYER U/S 35DDA OF THE ACT. RESULTANTLY, THE DISALLOWANCE MADE BY THE AO CAME TO BE KNOCKED DOWN BY THE TRIBUNAL. IN THE ABSENCE OF ANY DISTINGUISHING FACTOR HAVING BEEN POINTED OUT BY THE LD. DR, RESPECTFULLY FOLLOWING THE PRECEDENT, WE DIRECT TO ALLOW DEDUCTION U/S 35DDA FOR A SUM OF RS.38.63 CRORE. 18.4 RESPECTFULLY FOLLOWING THE ABOVE ADDITION ON AN IDENTICAL ISSUE UNDER SIMILAR SET OF FACTS, WE DIRECT THE ASSESSING OFFICER TO ALLOW THE CLAIMED DEDUCTION UNDER SEC. 35DDA OF THE ACT AT RS.23,91,54,586. THE GROUND NOS. 7 TO 7.2 ARE ACCORDINGLY ALLOWED. 76 19. GROUND NO. 8 : THE VALIDI TY OF DISALLOWANCE OF EXPENDITURE OF RS.39,50,780 INCURRED ON CLUB MEMBERSHIP HAS BEEN QUESTIONED IN THIS GROUND. THE ASSESSEE HAS DEBITED RS.39,50,780 ON ACCOUNT OF CLUB MEMBERSHIP FEES TO PROFIT AND LOSS ACCOUNT. THE SAID EXPENDITURE WAS INCURRED ON SUBS CRIPTION TO CLUB PROVIDED TO VARIOUS EMPLOYEES AND DIRECTORS. THE ASSESSING OFFICER DISALLOWED THE SAID EXPENDITURE WITH THIS FINDING THAT THE SAME CANNOT BE CONSIDERED AS BUSINESS EXPENDITURE. 19.1 IN SUPPORT OF THE ABOVE GROUND, THE LEARNED AR FURNISHED FOLLOWING SUBMISSIONS: AT THE OUTSET, THE APPELLANT COMPANY WISHES TO CLARIFY THAT THE AFORESAID EXPENDITURE HAS BEEN INCURRED FOR BUSINESS PURPOSES ON THE GROUNDS OF COMMERCIAL EXPEDIENCY AND THERE IS NO ELEMENT OF ANY PERSONAL BENEFIT BEING GRANTED EIT HER TO THE EMPLOYEE OR DIRECTOR. THE TAX AUDITORS HAVE AMPLY CLARIFIED THIS POSITION VIDE CLAUSE 17(B) OF THE TAX AUDIT REPORT (PAGE 274 OF PAPER BOOK - I). THE AFORESAID EXPENDITURE IT, THUS, ALLOWABLE AS DEDUCTION. THE AFORESAID ISSUE IS COVERED BY THE R ECENT DECISION OF THE SUPREME COURT IN THE CASE OF SAMTEL COLOR LTD (CIVIL APPEAL NO 6449/2012) WHEREIN THE COURT DISMISSED THE SLP FILED BY REVENUE AGAINST THE ORDER OF DELHI HIGH COURT (REFERRED INFRA) ALLOWING THE CLAIM FOR DEDUCTION REPRESENTING EXPEND ITURE INCURRED ON CLUB MEMBERSHIP. RELIANCE IS PLACED ON THE FOLLOWING JUDICIAL PRONOUNCEMENTS: 77 NESTLE INDIA LIMITED: 296 ITR 682 (DEL.) CIT V. SAMTEL COLOR LTD.: 326 ITR 425 (DEL.) OTIS ELEVATORS CO. (INDIA) LTD V CIT 195 ITR 682 (BOM); AMERICAN EXPRE SS INTERNATIONAL BANKING CORPORATION V CIT 258 ITR 601 (BOM); CIT VS CITIBANK N.A.: 264 ITR 18 (BOM) CIT VS FORCE MOTORS LTD.: ITA NO. 5296 OF 2010 (BOM) CIT V SUNDHARAM INDUSTRIES LTD 240 ITR 335 (MAD); GUJARAT STATE EXPORT CORPORATION LTD. VS. CIT: 209 ITR 649 (GUJ.) CIT VS INFOSYS TECHNOLOGIES LTD.: 205 TAXMAN 59 (KAR) ASSAM BROOK LTD. VS CIT: 267 ITR 121 (CAL) DCIT V MAX INDIA LTD (2007) 112 TTJ (ASR.) 726 THE AFORESAID ISSUE IS ALSO COVERED IN FAVOUR OF THE ASSESSEE BY THE DECISIONS OF THE TRIBUNAL I N THE APPELLANTS OWN CASE FOR THE AYS 2001 - 02, 2002 - 03, 2004 - 05, 2005 - 06 AND 2006 - 07. 19.1 THE LEARNED CIT(DR) ON THE OTHER HAND TRIED TO JUSTIFY THE ORDERS OF THE AUTHORITIES BELOW ON THE ISSUE. 19.2. WE FIND THAT AN IDENTICAL ISSUE HAS BEEN DECIDE D BY THE ITAT IN THE CASE OF ASSESSEE ITSELF RECENTLY IN THE APPEAL FOR THE ASSESSMENT YEARS 2006 - 07, THE RELEVANT PARAS NOS. 17.1 AND 17.2 THEREOF ARE BEING REPRODUCED HEREUNDER: 17.1. THE NEXT GROUND IS AGAINST THE DISALLOWANCE OF RS.1,79,509/ - ON ACCOU NT OF EXPENDITURE INCURRED ON CLUB MEMBERSHIP. SHORN OF UNNECESSARY DETAILS, IT IS OBSERVED THAT THE ASSESSEE PAID THE SAID AMOUNT ON ACCOUNT OF CLUB 78 MEMBERSHIP, WHICH THE AO DISALLOWED. THE ASSESSEE IS IN APPEAL BEFORE US. 17.2. IN OUR CONSIDERED OPINI ON, THIS ISSUE IS NO MORE RES INTEGRA IN VIEW OF THE JUDGMENT OF THE HONBLE SUPREME COURT IN CIT VS. UNITED GLASS MANUFACTURING COMPANY LTD. (SC) 2012 - TIOL - 102 - SC - IT IN WHICH IT HAS BEEN HELD THAT NO DISALLOWANCE CAN BE MADE FOR CLUB MEMBERSHIP IN RESPECT OF THE EMPLOYEES OF THE COMPANY. SIMILAR VIEW HAS BEEN TAKEN BY THE TRIBUNAL IN THE ASSESSEES OWN CASE FOR THE EARLIER ASSESSMENT YEARS INCLUDING THE IMMEDIATELY PRECEDING YEAR. RESPECTFULLY, FOLLOWING THE ABOVE PRECEDENTS, WE ORDER FOR THE DELETION OF THIS ADDITION . 19.2 RESPECTFULLY FOLLOWING THE ABOVE DECISION, THE ASSESSING OFFICER IS DIRECTED TO DELETE THE DISALLOWANCE IN QUESTION. THE GROUND NO.8 IS ACCORDINGLY ALLOWED. 20. GROUND NOS. 9 TO 10.5 : VALIDITY OF DISALLOWANCE OF ROYALTY PAID HAS BEEN QUE STIONED IN THESE GROUNDS. 2 0. 1 THE FACTS IN BRIEF ARE THAT DURING THE YEAR, THE ASSESSEE PAID ROYALTY TO SUZUKI MOTOR CORPORATION, JAPAN ( SMC ) FOR USE OF LICENSE INFORMATION FOR 79 THE ENGINEERING, DESIGN AND DEVELOPMENT, MANUFACTURE, TESTING, QUALITY CON TROL, SALE AND AFTER SALES SERVICE OF PRODUCTS AND PARTS. THE DETAILS OF ROYALTY PAID AGGREGATING TO RS.3,67,25,97,400 COMPRISED OF THE FOLLOWING AMOUNTS : * ROYALTY AND SERVICE TAX CLAIMED AS R EVENUE EXPENDITURE: RS.361,92,40,438/ - *ROYALTY CLAIMED AS CAPIT AL EXPENDITURE (LUMP SUM ROYALTY): RS.5,33,56,962 20.2 THE ASSESSING OFFICER IN THE PROPOSED ASSESSMENT ORDER HELD THAT THE ROYALTY PAID BY THE ASSESSEE WAS CAPITAL IN NATURE AND CONSEQUENTLY ENTIRE ROYALTY WAS DISALLOWABLE. SINCE THE LEARNED TPO HAD PROP OSED ADJUSTMENT OF RS.249.73 CRORES, THE ASSESSING OFFICER COMPUTED THE DISALLOWANCE OUT OF ROYALTY PAYMENTS AS UNDER: TOTAL ROYALTY RS.367.25 CR. LESS: ADJUSTMENT PROPOSED BY TPO R S.177.12 CR. BALANCE RS.190.14 CR DEPRECIATION ON ABOVE RS. 47.54 CR PROPOSED DISALLOWANCE R S. 142.61 CR. 20.3 IN SUPPORT OF THE GROUNDS, THE LEARNED AR MADE FOLLOWING SUBMISSIONS: THE ASSESSING OFFICER HAS, HOWEVER, FAILED TO APPRECIATE THAT ON PERUSAL OF THE AGREEMENTS ( REFER PAPER BOOK V ), IT IS PATENTLY CLEAR THAT: THE NATURE AND PURPOSE FOR WHICH THE ROYALTY HAS BEEN PAID TO SMC IS ONLY THE USE OF LICENSED INFORMATION FOR THE ENGINEERING, DESIGN AND DEVELOPMENT, 80 MANUFACTURE, TESTING, QUALITY CONTROL, SALE AND AFTER SALES SERVICE OF PRODUCTS AND PARTS. THE DURATION OF THE AGREEMENT HAS BEEN SPECIFIED AS 10 YEARS (KINDLY REFER CLAUSE 7.01 OF THE AGREEMENT) AND WAS SUBJECT TO TERMINATION AT EARLIER DATE FOR BREACH (REFER CLAUSE 7.04 OF THE AGREEMENT). THE LICENSE AGREEMENTS BETWEEN THE ASSESSEE COMPANY (MSIL) AND SUZUKI MOTOR CORPORATION, JAPAN (SMC) DOES NOT TRANSFER TO MSIL ANY SPECIFIC PATENTS OR COPYRIGHTS OR OTHER SECRET OR PROTECTED INFORMATION OR KNOWHOW SO AS TO MAKE MSIL A PROPRIETOR OF THE SAME OR SO AS TO ENABLE MSIL TO EXERCISE PROPRIETARY RIGHTS SUCH AS UNRESTRICTED RIGHTS OF TRANSFER TO THIRD PARTY, EITHER BY WAY OR ASSIGNMENT OR LICENSE (REFER CLAUSE 2.02 OF THE AGREEMENT). RELIANCE, IN THIS REGARD, IS PLACED ON CIRCULAR NO. 21 OF 1969 ISSUED BY CBDT, WHICH CLARIFIES THAT IF IN TERMS OF THE AGREEMENT, ONLY A LICENSE IS OBTAI NED FOR USER OF TECHNICAL KNOWLEDGE FROM A FOREIGN PARTICIPANT FOR A LIMITED PERIOD TOGETHER WITH OR WITHOUT THE RIGHT TO USE THE PATENTS AND TRADEMARKS OF THE FOREIGN PARTY, THE PAYMENT WOULD NOT BRING INTO EXISTENCE AN ASSET OF ENDURING ADVANTAGE TO THE INDIAN PARTY. FOLLOWING THE AFORESAID CIRCULAR, SIMILAR ROYALTY PAYMENT WAS HELD TO BE ALLOWABLE AS REVENUE DEDUCTION BY THE JURISDICTIONAL DELHI HIGH COURT IN CASE OF CIT V LUMAX INDUSTRIES LIMITED: 173 TAXMAN 390. IT IS FURTHER RESPECTFULLY SUBMITTED TH AT THE ISSUE THAT THE ALLOWABILITY OF ROYALTY PAYMENTS AS REVENUE EXPENDITURE IS COVERED IN FAVOUR OF THE ASSESSEE COMPANY BY THE FOLLOWING JUDGMENTS: - CIT V. CIBA INDIA LTD: 69 ITR 692 (SC) ALEMBIC CHEMICAL WORKS CO. LTD. VS. COMMISSIONER OF INCOME TAX, [1989] 177 ITR 377 (SC) CIT V SHRIRAM PISTONS AND RINGS LIMITED - CC 12154/2009 (SUPREME COURT) SHRIRAM PISTONS AND RINGS LIMITED V. CIT: 219 CTR 228 (DEL) SHRIRAM PISTONS AND RINGS LIMITED V. CIT 307 ITR 363 (DEL) SHRIRAM REFRIGERATION INDUSTRIES LTD. V. C IT: 127 ITR 746(DEL) TRIVENI ENGINEERING WORKS LTD. V. CIT 136 ITR 340 (DEL) CIT VS. PREM HEAVY ENGINEERING WORKS P. LIMITED (2006) 282 ITR 11 (ALL.) CIT V SHARDA MOTOR INDUSTRIAL LIMITED: 319 ITR 109 (DEL) CLIMATE SYSTEMS INDIA LIMITED V . CIT : 319 ITR 11 3 (DEL.) SHRIRAM PISTONS AND RINGS LIMITED V CIT 307 ITR 363 (DEL) CIT V LUMAX INDUSTRIES LIMITED 173 TAXMAN 390 (DEL) CIT V J.K.SYNTHETICS LTD. 309 ITR 371 (DEL) , SLP DISMISSED VIDE ORDER DATED 16.11.2009 IN S.L.P.(C) NO.17346 OF 2009 CIT V . MUNJAL SHOWA LTD. : 329 ITR 449 (DEL)(HC) 81 CIT V. DENSO INDIA P. LTD.: ITA 16/2008 (DEL.) (HC) CIT V. EKL APPLIANCES LTD : ITA NO 1069/2011 (DEL) CIT V. HERO HONDA MOTORS LTD: 372 ITR 481(DEL) CIT V. MODI REVLON (P) LTD : 210 TAXMAN 161(MAG.) (DEL HC) CIT V. ARTOS BREW ERIES LTD : [2013] 215 TAXMAN 80 (AP HC) CIT V. ESSEL PROPACK 325 ITR 185 (BOM - HC) CIT V . EICHER MOTORS LTD : 293 ITR 464 (M.P.) HONDA SIEL CARS V. ACIT : 111 TTJ 630 (ITAT) ITO V. SHIVANI LOCKS : 118 TTJ 467 (DEL ITAT) GOODYEAR INDIA LTD. V. ITO : 73 ITD 189 (DEL ITAT) HERO MOTOCORP LTD V. ACIT : ITA NO. 5130/DEL/2010 (DEL) HERO HONDA MOTORS LIMITED V. DCIT : ITA NOS. 716 TO 718/DEL/2008 FOR THE ASSESSMENT YEARS 2000 - 01 TO 2002 - 03 FENNER (INDIA) LTD V. ACIT : [2012] 139 ITD 406 (CHENNAI) THE ASSESSING OF FICER, IN THE PROPOSED ORDER, HAS DISALLOWED THE ROYALTY AS CAPITAL EXPENDITURE ON THE FOLLOWING GROUNDS: CAR IS A FAST MOVING CONSUMER PRODUCT WITH A LIFE CYCLE OF 5 YEARS WHEREAS THE LICENCE AGREEMENT IS FOR 10 YEARS, WHICH IS MORE THAN ENDURING BENEFI T TO THE ASSESSEE; THE LICENSE AGREEMENT IS FOR 10 YEARS, EXTENDABLE BY 5 YEARS AND EVEN THEREAFTER THE ASSESSEE CAN PRODUCE THE SAID MODEL OF CAR, WHEREAS INT THE AFORESAID DECISIONS, AGREEMENT WAS FOR 5 YEARS; THE LICENCE AGREEMENT LED TO THE ASSESSEE S ETTING UP A NEW FACTORY BASED ON NEW TECHNOLOGY THE AFORESAID FINDINGS/ OBSERVATIONS OF THE ASSESSING OFFICER ARE ERRONEOUS, BASED ON INCORRECT APPRECIATION OF THE FACTS AND THE SETTLED LEGAL POSITION, AS DISCUSSED HEREUNDER: RE (1) : FIRSTLY, THE OBSE RVATION OF THE ASSESSING OFFICER ABOUT LIFE CYCLE OF A CAR IS NOTHING BUT CONJECTURES AND SURMISES. THAT APART, IT IS FURTHER SUBMITTED THAT EVEN ASSUMING (WITHOUT ADMITTING) THE LIFE CYCLE OF A CAR TO BE SO, STILL THE CONCLUSION OF THE ASSESSING OFFICER BASED ON THE SO - CALLED LIFE CYCLE OF A CAR VIS - - VIS TENURE OF AGREEMENT BEING 10 YEARS IS TOTALLY ERRONEOUS. THE ASSESSING OFFICER, IT IS RESPECTFULLY SUBMITTED, FAILED TO APPRECIATE THAT 10 YEARS IS MERELY THE TENURE OF THE AGREEMENT AND IF THE ASSESSEE WERE TO MANUFACTURE A PARTICULAR CAR FOR SAY 5 YEARS ONLY, THEN, THE ROYALTY PAYMENT WOULD BE FOR THOSE MANY YEARS ONLY. THUS, THE TENURE OF AGREEMENT BEING 10 YEARS WAS TOTALLY IRRELEVANT FOR HOLDING THAT THE AGREEMENT RESULTED IN MORE THAN ENDURING BEN EFIT TO THE ASSESSEE. 82 RE (2): IN ORDER TO DETERMINE THE NATURE OF THE ROYALTY PAYMENT, WHETHER CAPITAL OR REVENUE, WHAT IS MATERIAL IS THE UNDERLYING PURPOSE FOR WHICH PAYMENT IS MADE AND NOT THE TENURE. IF THE PAYMENT IS FOR USE OF TECHNICAL KNOWHOW, SIM PLICITOR, THEN THE PAYMENT HAS TO BE REGARDED AS REVENUE, IRRESPECTIVE OF THE TENURE FOR WHICH PERMISSION IS GRANTED FOR SUCH USE. IN THE PRESENT CASE, UNDER THE LICENSE AGREEMENT, THE ASSESSEE WAS, AS STATED ABOVE, MERELY GRANTED PERMISSION/ ACCESS TO T HE TECHNICAL KNOWHOW FOR THE LIMITED PURPOSE OF USE IN THE BUSINESS OF MANUFACTURING CARS. THE ASSESSEE ONLY HAS THE RIGHT TO USE THE TECHNOLOGY RELATING TO THE NEW MODELS DURING THE CURRENCY OF THE AGREEMENT. THE PROPRIETARY RIGHTS FOR THE KNOW - HOW AND TH E INTELLECTUAL PROPERTY RIGHTS IN RELATION THERETO CONTINUE TO BE OWNED BY SMC. IN VIEW OF THE AFORESAID, THE MERE FACT THAT A GREEMENT IS FOR 10 YEARS, EXTENDABLE BY 5 YEARS, IS IRRELEVANT FOR DETERMINING THE NATURE OF ROYALTY PAYMENT. FURTHER, THE COURT S HAVE CONSISTENTLY HELD THAT THE ABSENCE OF CLAUSE OF RETURN OF DOCUMENTATION/KNOW - HOW AND THE FACT THAT THE ASSESSEE WAS ENTITLED TO CARRY ON MANUFACTURING ACTIVITIES WITH USE OF SUCH KNOW - HOW/DOCUMENTATION EVEN AFTER THE EXPIRY OF THE AGREEMENT, DID NOT ALTER THE NATURE OF TRANSACTION OR RESULT IN ANY BENEFIT OF ENDURING CHARACTER TO THE ASSESSEE. REFERENCE, IN THIS REGARD, MAY BE MADE TO THE FOLLOWING DECISIONS OF THE JURISDICTIONAL DELHI HIGH COURT: ACIT V. SHAMA ENGINE VALVES LTD. : 138 ITR 216 @ 223 (DEL) TRIVENI ENGINEERING WORKS LTD. V. CIT 136 ITR 340 (DEL) SHRIRAM PISTONS AND RINGS LIMITED V CIT: 219 CTR 228 (DELHI) SHRIRAM PISTONS AND RINGS LIMITED V CIT 307 ITR 363 (DELHI) THE DELHI HIGH COURT IN THE CASE OF CIT V. J.K SYNTHETICS: 309 ITR 371 @ PG 391, WHILE CULLING OUT LEGAL PRINCIPLES BASED ON VARIOUS DECISIONS OBSERVED AS UNDER: XXXX (VI) THE FACT THAT ASSESSEE COULD USE THE TECHNICAL KNOWLEDGE OBTAINED DURING THE TENURE OF THE LICENSE FOR THE PURPOSES OF ITS BUSINE SS AFTER THE AGREEMENT HAS EXPIRED, AND IN THAT SENSE, RESULTING IN AN ENDURING ADVANTAGE, HAS BEEN CATEGORICALLY REJECTED BY THE COURTS. THE COURTS HAVE HELD THAT THIS, BY ITSELF, CANNOT BE DECISIVE BECAUSE KNOWLEDGE BY ITSELF MAY LAST FOR A LONG PERIOD EVEN THOUGH DUE TO RAPID CHANGE OF TECHNOLODY AND HUGE STRIDES MADE IN THE FIELD OF SCIENCE, THE KNOWLEDGE MAY WITH PASSAGE OF TIME BECOME OBSOLETE; 83 THE SLP FILED BY THE REVENUE AGAINST THE AFORESAID DECISION HAS BEEN DISMISSED BY THE SUPREME COURT VIDE ORDER DATED 16.11.2009 IN S.L.P.(C) NO.17346 OF 2009 RE (3): THE OBSERVATION OF THE ASSESSING OFFICER THAT THE LICENCE AGREEMENT LED TO THE ASSESSEE SETTING UP A NEW FACTORY BASED ON NEW TECHNOLOGY IS FACTUALLY INCORRECT. NO NEW PLANT/ FACTORY WAS SETUP BY THE ASSESSEE ON THE BASIS OF THE AGREEMENT ENTERED INTO FOR USE OF TECHNICAL KNOWLEDGE/ INFORMATION. THE ASSESSING OFFICER FAILED TO APPRECIATE THAT THE ASSESSEE IS ENGAGED IN THE BUSINESS OF MANUFACTURE OF AUTOMOBILES. VARIOUS MODELS OF THE CARS INTR ODUCED BY THE ASSESSEE FROM TIME TO TIME ARE NOTHING BUT PART OF THE SAME BUSINESS OF THE ASSESSEE. THEREFORE, THE MERE FACT THAT NEW MODELS/ VARIANTS OF CAR ARE INTRODUCED BY THE ASSESSEE BASED ON THE LICENCE AGREEMENT DOES NOT MEAN THAT AN ALTOGETHER NEW PRODUCT WAS MANUFACTURED. THAT APART, EVEN IF VARIOUS VARIANTS OF CAR ARE TREATED AS DIFFERENT/ NEW PRODUCTS, STILL, HAVING REGARD TO THE FACT THAT THE SAME WERE PART OF THE VERY SAME BUSINESS OF THE ASSESSEE OF MANUFACTURING OF CARS, NO NEW BUSINESS WA S SET UP SO AS TO REGARD PAYMENT OF ROYALTY AS RESULTING IN ENDURING BENEFIT IN THE CAPITAL FIELD. REFERENCE MAY ALSO BE MADE TO THE DECISION OF THE DELHI BENCH OF THE TRIBUNAL IN THE CASE OF HERO HONDA MOTORS LIMITED V. DCIT IN ITA NOS. 716 TO 718/DEL/20 08 FOR THE ASSESSMENT YEARS 2000 - 01 TO 2002 - 03 WHEREIN , THE TRIBUNAL, AFTER ANALYZING ALL THE DECISIONS, HELD ROYALTY TO BE IN THE NATURE OF REVENUE EXPENDITURE EVEN THOUGH ROYALTY WAS PAID FOR EXCLUSIVE USE OF TECHNICAL KNOWHOW/ INFORMATION, THE AGREEMEN T WAS FOR 10 YEARS AND EXTENDABLE, THE ASSESSEE WAS PERMITTED TO CONTINUE TO MANUFACTURE MOTORCYCLES EVEN AFTER TERMINATION OF THE AGREEMENT. RECENTLY ITAT, IN APPELLANTS OWN CASE, FOR AY 2006 - 07 HAS DECIDED THIS ISSUE IN FAVOUR OF THE APPELLANT AND HE LD THAT AMOUNT OF ROYALTY CONSIDERED BY ASSESSING OFFICER AS CAPITAL EXPENDITURE SHOULD BE ALLOWED AS REVENUE EXPENDITURE. WITHOUT PREJUDICE TO THE AFORESAID, THE AO ALSO ERRED IN MAKING A COMPUTATIONAL ERROR WHILE DETERMINING THE AMOUNT OF DISALLOWANCE . AS PER THE ASSESSEE, THE AMOUNT OF DISALLOWANCE, IF AT ALL REQUIRED TO BE MADE THOUGH WITHOUT CONCEDING THAT SUCH DISALLOWANCE WAS JUSTIFIED, SHOULD BE RS. 638,064,737/ - AS PER ANNEXURE A TO THESE PROPOSITIONS. 84 20. 4 ON THE OTHER HAND, LEARNED CIT(DR) PL ACED RELIANCE ON THE ORDERS OF THE AUTHORITIES BELOW. HE SUBMITTED THAT ROYALTY PAID BY THE ASSESSEE WAS CAPITAL IN NATURE AND CONSEQUENTLY THE ASSESSING OFFICER WAS JUSTIFIED IN DISALLOWING THE ENTIRE ROYALTY. 20.5 WE FIND THAT UNDER SIMILAR SET OF FACT S, AN IDENTICAL ISSUE HAS BEEN DECIDED BY THE ITAT RECENTLY IN THE APPEAL FOR THE ASSESSMENT YEAR 2006 - 07 IN THE CASE OF ASSESSEE ITSELF, RELEVANT PARA NUMBERS 8.1 TO 8.6 ARE BEING REPRODUCED HEREUNDER FOR A READY REFERENCE: 8.1. THE NEXT ISSUE IS AGAINST THE DISALLOWANCE AMOUNTING TO RS.95,98,09,735/ - MADE BY THE AO ON ACCOUNT OF ROYALTY PAID. WE HAVE NOTICED ABOVE THAT OUT OF TOTAL ROYALTY OF RS.254.39 CRORE PAID BY THE ASSESSEE DURING THE YEAR, THE TPO ATTRIBUTED RS.127.195 CRORE TO THE USE OF LICENSED TRADE MARKS, FOR WHICH HE MADE TRANSFER PRICING ADJUSTMENT. THIS ISSUE HAS BEEN DISCUSSED HEREINABOVE. THE REMAINING AMOUNT OF RS.127.195 CRORE WAS ATTRIBUTED BY THE TPO TO THE USE OF LICENSED INFORMATION, WHICH WAS ACCEPTED AT ALP. HOWEVER, THE AO TREATE D THIS AMOUNT AS AN EXPENDITURE OF CAPITAL 85 NATURE. AFTER ALLOWING SUITABLE DEPRECIATION, THE AO MADE DISALLOWANCE OF RS.95.98 CRORE. THE ASSESSEE IS AGGRIEVED AGAINST THIS ADDITION. 8.2. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RELEVANT MATERI AL ON RECORD. IT IS NOTICED THAT IN ALL THE EARLIER YEARS BEFORE ASSESSMENT YEAR 2005 - 06, THE AO HAS CONSISTENTLY CONSIDERED RUNNING ROYALTY AS DEDUCTIBLE IN FULL AND CAPITALIZED THE LUMPSUM ROYALTY SUBJECT TO DEPRECIATION. THE ASSESSEE ALSO INITIALLY CL AIMED DEDUCTION FOR THE RUNNING ROYALTY AND CAPITALIZED THE LUMPSUM ROYALTY OF RS.3.57 CRORE. HOWEVER, DURING THE COURSE OF ASSESSMENT PROCEEDINGS, IT WAS CLAIMED THAT THE ENTIRE AMOUNT OF ROYALTY PAID, INCLUSIVE OF LUMPSUM ROYALTY, WAS OF THE REVENUE NAT URE AND, HENCE, DEDUCTIBLE IN FULL. THE AO ALSO DEVIATED FROM HIS EARLIER CONSISTENT STAND AND TREATED THE ENTIRE PORTION OF THE ROYALTY FOR USE OF LICENSED INFORMATION AS CAPITAL EXPENDITURE. NOW, THE QUESTION BEFORE US IS WHETHER THE AMOUNT OF ROYALTY ON LICENSED INFORMATION, CONSISTING OF RUNNING AND LUMPSUM ROYALTY, IS REVENUE OR CAPITAL EXPENDITURE? 86 8.3. BEFORE REACHING ANY CONCLUSION IN THIS REGARD, IT IS PARAMOUNT TO NOTE THE RELEVANT CLAUSES OF THE AGREEMENT ENTERED INTO BY THE ASSESSEE, UNDER WHICH PAYMENT OF ROYALTY FOR LICENSED INFORMATION HAS BEEN MADE DURING THE YEAR IN QUESTION. SINCE ALL THESE AGREEMENTS ARE, MUTATIS MUTANDIS , IDENTICALLY WORDED, WE TAKE UP AGREEMENT MADE BY THE ASSESSEE ON 25.3.2006 WITH SMC, A COPY OF WHICH HAS BEEN PL ACED AT PAGES 1405 ONWARDS OF THE PAPER BOOK. FIRST PAGE OF THE AGREEMENT PROVIDES THAT SUZUKI HAS GRANTED TO MARUTI LICENSES FOR MANUFACTURE AND SALE OF CERTAIN MODELS OF SUZUKI FOUR WHEEL MOTOR VEHICLE, AND WHEREAS, MARUTI HAS REQUESTED SUZUKI TO GRANT A LICENSE FOR AN ADDITIONAL SUZUKI MODEL CALLED ` YL6, AND SUZUKI HAS AGREED TO DO SO PURSUANT TO THE TERMS AND CONDITIONS HEREINAFTER SET FORTH IN THIS AGREEMENT. THIS INDICATES THAT THE AGREEMENT IS FOR GRANT OF LICENCE AND NOT FOR OUTRIGHT SALE. CLA USE 1.04 DEFINES LICENSED INFORMATION TO : `MEAN ANY AND ALL TECHNICAL INFORMATION, WHETHER PATENTED OR NOT, INCLUDING KNOW - HOW, TRADE SECRETS AND OTHER DATA (INCLUDING ALL DRAWINGS, PRINTS, MACHINES AND MATERIAL SPECIFICATIONS, ENGINEERING DATA AND OTHE R INFORMATION, KNOWLEDGE AND 87 ADVICE) WHICH SUZUKI NOW HAS..... RELATING TO THE ENGINEERING, DESIGN AND DEVELOPMENT, MANUFACTURE, QUALITY CONTROL, OF PRODUCTS AND PARTS AND WHICH MAY BE SUPPLIED BY SUZUKI TO MARUTI .... THIS CLAUSE INDICATES THAT THE LIC ENSED INFORMATION IS FOR MANUFACTURING OF PRODUCT AND PARTS BY THE ASSESSEE AND NOT FOR SETTING UP OF FACTORY BY THE ASSESSEE. ARTICLE 2 OF THE AGREEMENT GIVES `SCOPE OF LICENSE. AS PER THIS CLAUSE, SUZUKI HAS AGREED TO PROVIDE TECHNICAL ASSISTANCE AND LICENCE NECESSARY FOR ENGINEERING, DESIGN, DEVELOPMENT AND MANUFACTURE, ETC., OF PRODUCTS AND PARTS. IT IS FURTHER RELEVANT TO NOTE THAT THE USE OF THE LICENSED INFORMATION TO THE ASSESSEE IS A NON - EXCLUSIVE RIGHT. THIS ARTICLE FURTHER PROVIDES THAT MARU TI SHALL HAVE THE RIGHT TO SUB - LICENSE THE RIGHTS GRANTED AS PER THIS AGREEMENT TO OTHER ENTITIES, WHO WILL MANUFACTURE PARTS FOR SUPPLYING THEM ONLY TO MARUTI FOR THE MANUFACTURE OF PRODUCTS OF MARUTI, AND, THAT TOO, WITH THE PRIOR WRITTEN CONSENT OF SUZU KI. THIS ARTICLE, THEREFORE, MAKES IT CLEAR THAT THE LICENCE GIVEN BY SUZUKI FOR USE OF LICENSED INFORMATION IS ON NON - EXCLUSIVE BASIS AND FURTHER MARUTI HAS NO AUTHORITY TO SUB - LICENCE THE SAME EXCEPT FOR GETTING THE PARTS MANUFACTURED BY OTHER ENTITIES FOR 88 SUPPLY TO MARUTI ALONE FOR THE MANUFACTURE OF PRODUCTS IN ACCORDANCE WITH THIS AGREEMENT. CLAUSE 2.02 OF THE AGREEMENT STATES THAT : `MARUTI RECOGNIZES AND ACKNOWLEDGES SUZUKIS OWNERSHIP AND VALIDITY OF THE LICENSED INFORMATION ..... ARTICLE 3 OF TH E AGREEMENT PROVIDES THAT SUZUKI AGREES TO MAKE AVAILABLE TO MARUTI SUCH LICENSED INFORMATION WHICH IS TO BE UTILIZED FOR MANUFACTURE OF PRODUCTS. CLAUSE 3.02 OF THE AGREEMENT DEALS WITH `IMPROVEMENTS BY MARUTI. IT STATES THAT IF AT ANY TIME DURING THE T ERM OF THIS AGREEMENT, MARUTI DISCOVERS OR ACQUIRES ANY IMPROVEMENT WITH RESPECT TO PRODUCTS OR PARTS, IT SHALL GIVE TO SUZUKI FULL INFORMATION, INSTRUCTIONS, KNOWHOW AND ASSIGN OWNERSHIP OF THE SAME TO SUZUKI AND THE SAME SHALL BE CONSIDERED AS `LICENSED INFORMATION. THIS CLAUSE OF THE AGREEMENT NOT ONLY STIPULATES THAT SUZUKI WILL SUPPLY THE LICENSED INFORMATION ONLY FOR USE BY MARUTI, BUT, ALSO THAT ANY IMPROVEMENTS TO SUCH LICENSED INFORMATION MADE BY MARUTI, WILL ALSO VEST WITH SUZUKI. CLAUSE 3.04 OF THE AGREEMENT MAKES IT CLEAR THAT MARUTI SHALL NOT USE THE LICENSED INFORMATION MADE AVAILABLE TO IT BY SUZUKI PURSUANT TO THIS AGREEMENT DIRECTLY OR INDIRECTLY IN CONNECTION WITH THE MANUFACTURE 89 OF ANY PRODUCTS OTHER THAN THE PRODUCTS AND PARTS AGREED UNDER THIS AGREEMENT. ARTICLE 3.10 OF THE AGREEMENT IS A CONFIDENTIALITY CLAUSE WHICH PROVIDES THAT ALL LICENSED INFORMATION SUPPLIED TO AND ACQUIRED BY MARUTI UNDER THIS AGREEMENT SHALL BE KEPT BY MARUTI IN CONFIDENCE AND SHALL NOT DISCLOSE THE SAME TO AN Y OTHER PARTY AT ANY TIME DURING THE LIFE OF THIS AGREEMENT. CLAUSE 5.04 PROVIDES THAT MARUTI IS NOT AUTHORIZED TO USE NOR SHALL MARUTI USE THE WORD SUZUKI OR ANY WORD SIMILAR THERETO EXCEPT AS SPECIFICALLY AUTHORIZED UNDER THIS AGREEMENT. ARTICLE 7 C ONTAINS TERM OF THE AGREEMENT, WHICH HAS BEEN FIXED AT TEN YEARS AND, FURTHER EXTENDABLE BY A PERIOD OF FIVE YEARS. CLAUSE 7.05 OF THE AGREEMENT HAS BEEN CAPTIONED AS EFFECT OF TERMINATION. IT PROVIDES THAT UPON ANY EXPIRATION, TERMINATION OR CANCELLATI ON OF THIS AGREEMENT, MARUTI SHALL IMMEDIATELY RETURN TO SUZUKI THE LICENSED INFORMATION OR SHALL DESTROY THE SAME AT SUZUKIS INSTRUCTIONS. 8.4. AN OVERVIEW OF THE ABOVE CLAUSES OF THE AGREEMENT MAKES IT PATENT THAT THE LICENSED INFORMATION IS FOR MANUFA CTURE OF PRODUCTS AND PARTS AND NOT FOR SETTING UP 90 OF THE ASSESSEES FACTORY. THE USE OF LICENSED INFORMATION HAS BEEN ALLOWED BY SUZUKI, WHICH IS NON - EXCLUSIVE TO THE ASSESSEE AND, FURTHER, THE ASSESSEE CANNOT SUB - LICENCE THE SAME TO A THIRD PARTY EXCEP T FOR GETTING PARTS MANUFACTURED TO BE USED BY IT IN MANUFACTURE OF THE PRODUCTS. THE ASSESSEE HAS BEEN SIMPLY GIVEN A LICENCE TO USE THE LICENSED INFORMATION FOR A PERIOD OF TEN YEARS AND THE ASSESSEE RECOGNIZES SUZUKIS OWNERSHIP OF THE LICENSED INFORMA TION. THE ASSESSEE IS NOT ENTITLED TO USE THE LICENSED INFORMATION FOR ANY PRODUCTS OTHER THAN THOSE STIPULATED IN THE AGREEMENT AND, FURTHER, THERE IS A CONFIDENTIALITY CLAUSE WHICH PREVENTS THE ASSESSEE FROM DISCLOSING THE LICENSED INFORMATION TO A THIR D PARTY. UPON TERMINATION, THE ASSESSEE IS NOT ENTITLED TO THE USE OF LICENSED INFORMATION AND IS OBLIGED TO RETURN THE SAME TO SUZUKI. ALL THE ABOVE FEATURES OF THE AGREEMENT MAKE IT UNEQUIVOCAL THAT WHAT THE ASSESSEE HAS ACQUIRED UNDER THIS AGREEMENT IS A RIGHT TO USE THE `LICENSED INFORMATION. THERE IS NO OUTRIGHT PURCHASE BY THE ASSESSEE OF THE `LICENSED INFORMATION. IN FACT, SUCH LICENSED INFORMATION IS REQUIRED TO BE RETURNED TO SUZUKI UPON TERMINATION OF THE AGREEMENT. THE `RIGHT TO USE THE 91 LICENS ED INFORMATION, HAS CERTAIN RESTRICTIONS PUT ON BY SUZUKI, WHICH THE ASSESSEE CANNOT VIOLATE. THE ASSESSEE IS UNDER OBLIGATION TO MAINTAIN CONFIDENTIALITY OF THE LICENSED INFORMATION. A BIRDS EYE VIEW OF ALL THE ABOVE CLAUSES MAKES IT VIVID THAT THE ROYA LTY PAYMENT IS `FOR USE OF THE LICENSED INFORMATION AND NOT `FOR ACQUISITION AS ITS OWNER. IN THIS VIEW OF THE MATTER, THERE CAN BE NO SCOPE FOR TREATING THE ROYALTY PAID FOR THE `LICENSED INFORMATION AS A CAPITAL EXPENDITURE. 8.5. THE LD. DR HAS RELIED ON CERTAIN DECISIONS, WHICH CATEGORIZE PAYMENT FOR USE OF TECHNICAL KNOW - HOW ETC. AS A CAPITAL EXPENDITURE. SIMILARLY, THE LD. AR HAS ALSO RELIED ON CERTAIN DECISION WHICH MARK SUCH PAYMENT AS A REVENUE EXPENSE. IN ALL THESE DECISIONS, THE DIVIDIN G LINE IS WHETHER THE CONSIDERATION IS FOR PURCHASE OF TECHNICAL INFORMATION, KNOW - HOW INFORMATION, DESIGNS AND DRAWINGS, ETC., OR FOR ITS USE. IF IT IS FOR USE ALONE, THEN IT IS REVENUE AND VICE VERSA . RECENTLY, THE HONBLE JURISDICTIONAL HIGH COURT IN CI T VS. HERO HONDA MOTORS LTD. (2015) 372 ITR 481 (DEL), ON CONSIDERATION OF THE RELEVANT CLAUSES OF THE AGREEMENT BEFORE IT, WHICH 92 CONSIDERABLY MATCH WITH THE AGREEMENT UNDER CONSIDERATION, HAS HELD THAT THE PAYMENTS MADE FOR MODEL FEE (WHICH IS EQUIVALENT OF LUMPSUM ROYALTY IN OUR CASE) AND RUNNING ROYALTY ARE REVENUE EXPENSES. IN THIS JUDGMENT, THE HONBLE JURISDICTIONAL HIGH COURT HAS CONSIDERED SEVERAL JUDGMENTS OF THE HONBLE SUPREME COURT AND HONBLE HIGH COURTS AND ON CONSIDERATION OF THEIR CUMULATIV E EFFECT, IT HAS COME TO THE CONCLUSION THAT BOTH THE AMOUNTS ARE REVENUE IN NATURE. THE HONBLE DELHI HIGH COURT IN AN EARLIER JUDGMENT IN SHRIRAM REFRIGERATION INDUSTRIES LTD. VS. CIT (1981) 127 ITR 746 (DEL) , HAS HELD THAT THE LUMPSUM ROYALTY IS A REVE NUE EXPENDITURE. AFTER GOING THROUGH THE RELEVANT CLAUSES OF THE AGREEMENT, WE HAVE NOTED THAT ROYALTY PAID BY THE ASSESSEE IS FOR USE OF LICENSED INFORMATION AND NO PART OF THE SAME IS TOWARDS ITS ACQUISITION AS AN OWNER. IN THE LIGHT OF THE ABOVE DISCUSS ION, IT IS ABSOLUTELY CLEAR THAT THE VIEW CANVASSED BY THE AO IN TREATING THIS AMOUNT AS CAPITAL EXPENDITURE, IS NOT SUSTAINABLE. 8.6. OUR ABOVE FINDING DECIDES THE NATURE OF ROYALTY PAYMENT FOR USE OF LICENSED INFORMATION AS REVENUE EXPENDITURE AND NOT ITS QUANTUM PART. WE HAVE NOTICED 93 ABOVE THAT THE TRIBUNAL IN ITS ORDER FOR THE IMMEDIATELY PRECEDING YEAR HAS ALSO GIVEN SOME OBSERVATIONS, WHICH PRIMA FACIE INDICATE THAT THE ENTIRE AMOUNT OF ROYALTY IS FOR THE USE OF LICENSED INFORMATION. SINCE WE HAVE HELD THE ROYALTY FOR USE OF LICENSED INFORMATION AS REVENUE EXPENDITURE, THE QUANTIFICATION ASPECT BECOMES IRRELEVANT. IT IS SO BECAUSE THE TPO HAS HELD ROYALTY FOR USE OF LICENSED INFORMATION AT ALP. WE, THEREFORE, HOLD THAT THE AMOUNT OF ROYALTY CONSIDE RED BY THE AO AS CAPITAL EXPENDITURE SHOULD BE ALLOWED AS A REVENUE EXPENDITURE. AT THE SAME TIME, DEPRECIATION ALLOWED BY THE AO ON THIS AMOUNT SHOULD BE TAKEN BACK. 20.6 RESPECTFULLY FOLLOWING THE ABOVE DECISION ON AN IDENTICAL ISSUE IN THE CASE OF AS SESSEE ITSELF FOR THE ASSESSMENT YEAR 2006 - 07, WE HOLD THAT THE AMOUNT OF ROYALTY CONSIDERED BY THE ASSESSING OFFICER AS CAPITAL EXPENDITURE SHOULD BE ALLOWED AS A REVENUE EXPENDITURE. AT THE SAME TIME, DEPRECIATION ALLOWED BY THE ASSESSING OFFICER ON THIS AMOUNT SHOULD BE TAKEN BACK. THE ASSESSING OFFICER IS DIRECTED ACCORDINGLY. GROUND NOS. 9 TO 10.5 ARE THUS ALLOWED. 94 21. GROUND NOS. 10.6 TO 10.8 : IT IS REGARDING DISALLOWANCE OF R & D CESS PAID. THE LEARNED AR SUBMITTED THAT THE ISSUE IS FULLY COVERED BY THE RECENT DECISION OF THE ITAT IN THE APPEAL FOR THE ASSESSMENT YEAR 2006 - 07 . HE SUBMITTED THAT AS PER PROVISIONS OF RESEARCH & DEVELOPMEN T CESS ACT , 1986, R&D CESS IS IMPOSED ON IMPORT OF TECHNOLOGY BY THE GOVERNMENT OF INDIA, WHICH IS DEFINITELY NOT A RELATED PARTY OF THE APPELLANT COMPANY. THE APPELLANT HAS BEEN INSTRUCTED BY THE GOVERNMENT OF INDIAS APPROVAL FOR REMITTANCE OF ROYALTY TO PAY R&D CESS ON THE PAYMENT OF ROYALTY. SUCH, R&D CESS, BEING A STATUTORY PAYMENT, IS GOVERNED BY SECTION 43B, WH ICH IS A SEPARATE CODE IN ITSELF AND OVERRIDES OTHER PROVISIONS OF THE ACT. IT IS NOT IN DISPUTE THAT THE SAID R&D CESS HAS NOT ACTUALLY BEEN PAID TO THE GOVERNMENT WITHIN THE TIME LIMITS PRESCRIBED BY SECTION 43B. THE CONTENTION OF THE APPELLANT HOWEVER, IS THAT DISALLOWANCE OF ROYALTY UNDER TP LAW CANNOT LEAD TO A DISALLOWANCE OF R&D CESS WHICH IS A PAYMENT COVERED UNDER SECTION 43B OF THE ACT. THE AFORESAID ISSUE IS DEPENDENT AND INTERLINKED TO THE ISSUE OF ROYALTY EXPENDITURE, SINCE IF IT IS HELD THAT R OYALTY PAYMENTS BY ASSESSEE IS A REVENUE EXPENDITURE, THE R&D CESS SHOULD ALSO BE CONSIDERED AS A REVENUE EXPENDITURE. 95 21.1 WE FIND THAT AN IDENTICAL ISSUE HAS BEEN DECIDED IN THE CASE OF ASSESSEE ITSELF IN THE APPEAL BEFORE THE ITAT FOR THE ASSESSMENT YE AR 2006 - 07 (SUPRA), RELEVANT FINDING THEREOF IN PARA NO. 9 IS REPRODUCED: 9. THE NEXT GROUND IS DISALLOWANCE OF R&D CESS PAID AMOUNTING TO RS.9,68,47,294/ - . RELEVANT DISCUSSION HAS BEEN MADE BY THE AO ON PAGE 26 OF HIS FINAL ORDER. THE ASSESSEE TREATED T HE AMOUNT OF ROYALTY AND CESS ON ROYALTY AS REVENUE EXPENDITURE. THE ASSESSING OFFICER DISALLOWED A SUM OF RS.9.68 CRORE AFTER PROPORTIONATELY ALLOWING DEDUCTION TO THE EXTENT OF DEPRECIATION ALLOWED BY HIM ON ROYALTY. THERE IS NO DISPUTE ON THE NATURE OF CESS, WHICH IS ON ROYALTY AND HAS BEEN TREATED BOTH BY THE ASSESSEE AS WELL AS THE AO AS PART AND PARCEL OF ROYALTY AND ACCORDINGLY CLAIMED/DISALLOWED IN LINE WITH THE TREATMENT OF ROYALTY. SINCE WE HAVE ALLOWED DEDUCTION FOR THE ENTIRE AMOUNT OF ROYALTY P AID BY THE ASSESSEE DURING THE YEAR BY DELETING THE TP ADJUSTMENT AND ALSO OVERTURNING THE ACTION OF THE AO IN TREATING THE REMAINING HALF PART AS CAPITAL EXPENDITURE, THE CONSEQUENTIAL AMOUNT OF CESS ON ROYALTY PAYMENT AUTOMATICALLY BECOMES DEDUCTIBLE. WE , THEREFORE, DIRECT TO ALLOW DEDUCTION OF RS.9.68 CRORE . SINCE THE RELATED FACTS OF THE PRESENT ASSESSMENT YEAR ARE SIMILAR TO THOSE IN THE ASSESSMENT YEAR 2006 - 07 ON AN IDENTICAL ISSUE, WE RESPECTFULLY FOLLOWING THE SAME DIRECT THE ASSESSING OFFICER TO ALLOW THE DEDUCTION AS DIRECTED BY THE ITAT IN THE APPEAL FOR THE ASSESSMENT YEAR 2006 - 07 AFTER AFFORDING OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. THE GROUND NOS. 10.6 TO 10.8 ARE ACCORDINGLY ALLOWED. 96 22. GROUND NOS. 11 TO 11.6 : IT IS REGARDING DISALL OWANCE OF SALES - TAX SUBSIDY OF RS.31,92,30,033 CLAIMED AS CAPITAL RECEIPTS FROM THE TOTAL INCOME. 23. THE RELEVANT FACTS ARE THAT DURING THE YEAR, SALES TAX CONCESSION AMOUNTING TO RS.31,92,30,033 WAS RECEIVED BY THE ASSESSEE AND THE SAME WAS SHOWN IN THE PROFIT AND LOSS ACCOUNT. IT WAS SUBMITTED BEFORE THE ASSESSING OFFICER THAT THE AFORESAID RECEIPT BEING IN THE NATURE OF CAPITAL RECEIPT, MAY BE REDUCED FROM THE TOTAL INCOME. THE ASSESSING OFFICER DID NOT AGREE AND MADE THE DISALLOWANCE. 24. IN SUPPORT OF THE GROUNDS, THE LEARNED AR FURNISHED FOLLOWING SUBMISSIONS: SECTION 25A OF THE HARYANA GENERAL SALES TAX ACT, 1973 EMPOWERS THE STATE GOVERNMENT TO GRANT SALES TAX CONCESSION AND, ALSO CONVERT SALES TAX CONCESSION INTO CAPITAL SUBSIDY. IN PURSUANCE TO THE ABOVE, RULE 28C OF HARYANA GENERAL SALES TAX RULES 1975 (PAGE 660 OF PAPER BOOK I II) PROVIDED FOR CONCESSION OF TAX PAYABLE UNDER THE ACT TO AN ELIGIBLE INDUSTRIAL UNIT. THE ELIGIBLE UNIT HAS BEEN DEFINED IN CLAUSE (C) OF RULE 28C(3) OF HARYANA GE NERAL SALES TAX RULES1975 TO INCLUDE A NEW INDUSTRIAL UNIT OR UNIT UNDERTAKING EXPANSION OR DIVERSIFICATION SUBJECT TO FULFILLMENT OF OTHER CONDITIONS. EXPANSION TOO HAS BEEN DEFINED IN CLAUSE (F) OF RULE 28C(3) OF HARYANA GENERAL SALES TAX RULES1975 AS UNDER: EXPANSION MEANS AN INDUSTRIAL CAPACITY SET UP OR INSTALLED DURING THE OPERATIVE PERIOD WHICH CREATES ADDITIONAL PRODUCTION FACILITIES FOR MANUFACTURE OF THE SAME PRODUCT (S) AS OF THE UNIT BEFORE EXPANSION IN WHICH THE ADDITIONAL FIXED CAPITA L INVESTMENT IN PLANT AND MACHINERY MADE DURING THE OPERATING PERIOD IN ONE GO, NOT EXCEEDING THE PERIOD OF ONE YEAR, EXCEEDS 25% OF THE FIXED CAPITAL INVESTMENT (GROSS BLOCK) OF THE UNIT BEFORE EXPANSION AT THE SAME OR NEW LOCATION. 97 24.1 SINCE THE ASSES SEE COMPANY HAD UNDERTAKEN EXPANSION IN TERMS OF THE ABOVE RULE 28C, THE HIG H POWERED COMMITTEE, IN ITS MEETING HELD ON 14.06.2001, GRANTED SALES TAX CONCESSION TO THE ASSESSEE COMPANY, WHEREBY THE ASSESSEE COMPANY WAS TO PAY 50% OF THE SALES TAX COLLECTED ON SALE OF FINISHED PRODUCTS FROM EXPANDED UNIT AND, RETAIN 50% BUT MAXIMUM BENEFIT PERMISSIBLE WAS RS. 564.35 CRORES (PAGES 336 OF PAPER BOOK - II). 24.2 FOR THE INSTANT ASSESSMENT YEAR, ASSESSEE COMPANY ACCORDINGLY RETAINED RS. 319,230,033/ - OUT OF THE SALES TAX COLLECTED ON SALE OF FINISHED PRODUCTS FROM EXPANDED UNIT AND, DECLARED THE SAME ERRONEOUSLY AS INCOME UNDER THE HEAD SALES TAX BENEFIT, AS WOULD BE EVIDENT FROM SCHEDULE 16 (OTHER INCOME) TO THE PROFIT AND, LOSS ACCOUNT PREPARED FOR THE FINAN CIAL YEAR 2006 - 07 RELEVANT TO THE INSTANT ASSESSMENT YEAR. 24.3 CONSIDERING THE AVOWED OBJECT BEHIND GRANT OF THE AFORESAID SALES TAX SUBSIDY/ BENEFIT, THE S AME WAS IN THE NATURE OF CAPITAL RECEIPT NOT LIABLE TO TAX UNDER THE PROVISIONS OF THE ACT FOR THE REASONS BRIEFLY DISCUSSED HEREUNDER: LEGAL POSITION: IT IS SETTLED LAW THAT THE TAXATION OF SUBSIDY, BY WHATEVER NAME CALLED, IS DETERMINED BY THE PURPOSE FOR WHICH THE SUBSIDY IS GRANTED AND NOT THE FORM / MODE / MANNER IN WHICH THE SUBSIDY IS RECEIVED / DISBURSED. THE SUPREME COURT IN THE CASE OF V.S. S.V. MEENAKSHI ACHI: 60 ITR 253 HELD THAT THE CHARACTER OF THE SUBSIDY IN THE HANDS OF THE RECIPIENT IS TO BE DETERMINED HAVING REGARD TO THE PURPOSE FOR WHICH THE SUBSIDY HAS BEEN GIVEN. 98 24.4 THE AFORESAI D PRINCIPLE HAS BEEN REITERATED BY THE SUPREME COURT IN THE CASE OF SAHNEY STEEL AND PRESS WORKS LTD. AND OTHERS VS. CIT: 228 ITR 253 WHEREIN THE COURT HELD THAT THE CHARACTER OF A SUBSIDY IN THE HANDS OF THE RECIPIENT, WHETHER REVENUE OR CAPITAL, IS TO BE DETERMINED HAVING REGARD TO THE PURPOSE FOR WHICH THE SUBSIDY IS GIVEN. IT WAS FURTHER HELD THAT IF THE PURPOSE OF THE SUBSIDY IS TO HELP THE ASSESSEE TO SET UP ITS BUSINESS OR COMPLETE A PROJECT, THE SUBSIDY IS TO BE TREATED AS HAVING BEEN RECEIVED FOR C APITAL PURPOSES, WHEREAS, IF THE SUBSIDY IS GIVEN TO THE ASSESSEE FOR ASSISTING HIM IN CARRYING OUT THE BUSINESS OPERATIONS AND IS GIVEN ONLY AFTER AND CONDITIONAL UPON COMMENCEMENT OF PRODUCTION, SUCH SUBSIDY IS TO BE TREATED AS ASSISTANCE FOR THE PURPOSE OF THE TRADE AND WOULD CONSTITUTE REVENUE RECEIPT. 24.5 THE AFORESAID PRINCIPLE HAS BEEN REITERATED BY THE SUPREME COURT IN THE CASE OF PONNI SUGARS (SUPRA) WHEREIN THEIR LORDSHIP HELD THAT THE PURPOSE FOR WHICH SUBSIDY IS GIVEN IS ONLY RELEVANT FOR DETE RMINING ITS NATURE. 24.6 IT IS, THEREFORE, OF THE UTMOST IMPORTANCE TO NOTE THAT THE OBJECT OF GRANT OF THE SUBSIDY BY WAY OF SALES - TAX CONCESSION UNDER RULE 28C OF THE 99 HARYANA SALES TAX RULES IS TO GIVE ASSISTANCE TO THE ASSESSEE FOR ESTABLISHMENT OF A N EW INDUSTRIAL UNIT OR FOR SUBSTANTIAL EXPANSION OF AN EXISTING INDUSTRIAL UNIT. 24.7 THIS IS ABSOLUTELY CLEAR, FIRSTLY FROM THE FACT THAT ONLY NEW INDUSTRIAL UNITS/ SUBSTANTIALLY EXPANDED UNITS ARE ENTITLED TO THE BENEFIT OF THE SAID SALES - TAX CONCESSION AND SECONDLY, BECAUSE THE QUANTUM OF THE BENEFIT CONFERRED ALSO DEPENDS ON THE AMOUNT OF FIXED CAPITAL INVESTMENT IN SETTING UP THE NEW INDUSTRIAL UNIT OR IN THE SUBSTANTIAL EXPANSION OF THE EXISTING INDUSTRIAL UNIT. 24.8 IT IS ALSO OF UTMOST IMPORTANCE TO NOTE THAT IN TERMS OF SUB - RULE (5)(B) OF RULE 28C, THE DECISION TO GRANT TAX CONCESSION TO A PRESTIGIOUS UNIT (THE CATEGORY IN WHICH THE ASSESSEE FALLS) IS GIVEN ON THE BASIS OF FACTORS LIKE EMPLOYMENT GENERATION, IMPACT ON OVERALL INDUSTRIAL GROWTH, ET C. THESE FACTORS, WHICH ARE NOTHING BUT THE UNDERLYING OBJECTIVE OF CONFERRING THE BENEFIT UNDER RULE 28C, CLEARLY PROVES BEYOND ANY DOUBT THE FACT THAT THE AVOWED INTENT/ PURPOSE OF GRANTING THE CONCESSION IS INDUSTRIAL DEVELOPMENT OF THE STATE AND EMPLOY MENT GENERATION. 100 24.9 CONSEQUENTLY, APPLYING THE RATIO OF THE JUDGMENT OF THE SUPREME COURT IN THE SAHNEY STEEL (SUPRA) AND PONNI SUGAR (SUPRA), IT IS CLEAR THAT THE AMOUNT OF THE SUBSIDY RECEIVED BY AN ASSESSEE UNDER RULE 28C IS A CAPITAL RECEIPT, WHICH CANNOT BE SUBJECTED TO TAX UNDER THE PROVISIONS OF THE ACT. 24.10 THE ISSUE IS ALSO COVERED IN FAVOUR OF ASSESSEE BY THE FOLLOWING ORDERS : - (A) CIT V. NATIONAL CO - OPERATIVE CONSUMER FEDERATION LTD.: 254 ITR 599 (DEL) (B) DCIT V . RELIANCE INDUSTRIES LTD: (2004) 88 ITD 273 ( MUM ) (SB) AFFIRMED BY THE BOMBAY HIGH COURT IN 339 ITR 632 (C) CIT V. CHAPHALKAR BROTHERS: 351 ITR 309 ( MUM. ) (D) CIT V. KIRLOSKAR OIL ENGINES LTD: 364 ITR 88 ( MUM ) (E) CIT VS. SHAM LAL BANSAL IN ITA: 472 OF 2010 (P&H) (F) CIT V. BIRLA VXL LTD.: 215 TAXMAN 11 7 (GUJ.) (G) DCIT V. MUNJAL AUTO INDUSTRIES LTD.: 218 TAXMAN 135 ( GUJ. ) (H) DCIT V. INOX LEISURE LTD.: 351 ITR 314 (GUJ.) (I) CIT V. SAMTA CHAVIGARH: ITA NO. 144 OF 2007 (RAJ)/ 222 TAXMAN 205 (MAG.) (J) CIT V . UDUPI BUILDERS P. LTD.319 ITR 440 (KAR) (K) CIT V. RASOI LTD : 3 35 ITR 438 (CAL.) (L) PVR LIMITED V. ACIT: ITA NO. 1897/ DEL/ 2010 (DEL ITAT) (M) HONDA SIEL CARS INDIA LTD : ITA NO.5577/ D/ 2004 (DEL . ITAT ) (N) BHUSHAN STEEL & STRIPS LTD V DCIT : 91 TTJ 108 (DEL . ITAT ) (O) DCIT V. INDO RAMA TEXTILES LTD : 53 SOT 515 (DEL . ITAT ) (P) PVR LIM ITED V. ACIT: ITA NO.1897/ DEL/ 2010 (DEL . ITAT ) (Q) ZENITH FIBRES LTD V ITO : ITA NOS. 3325 & 3326/M/07 (MUM . ITAT ) (R) ASSOCIATED CEMENT CO. LTD. VS. ADDL. CIT: ITA NO. 6289 & 6320 /MUM/2003 (MUM. ITAT) (S) EVEREST INDUSTRIES LTD VS. ACIT: ITA NO.814/MUM/2007 (MUM. ITAT) (T) DCIT V. M/S TEESTA AGRO INDUSTRIES LTD. ITA NO. 1237, 1053, 1753/KOL/2010 (KOL. ITAT) (U) ACIT V. SHREE CEMENT LTD. : ITA NO. 614, 615 AND 635/JP/2010 (JPR . ITAT ) (V) FORD INDIA (P) LTD. V. DCIT: 59 SOT 221 (CHENNAI ITAT) (W) ITO V. SHREE BALAJI ALLOYS: ITA NO. 143(ASR)/2012 (ASR. ITAT) 101 24.11 KIND ATTENTION IS INVITED TO THE DECISION OF THE JAMMU AND KASHMIR HIGH COURT IN THE CASE OF M/S SHREE BALAJI ALLOYS V. CIT: 239 CTR 70 WHEREIN THE HIGH COURT HAS DECIDED THE SIMILAR ISSUE IN FAVOUR OF THE ASSESSEE BY HOLD ING THE SUBSIDY GIVEN FOR SETTING UP UNIT IN THE STATE OF JAMMU FOR EMPLOYMENT GENERATION WAS IN THE NATURE OF A CAPITAL RECEIPT, NOT LIABLE TO TAX UNDER THE PROVISIONS OF THE ACT. 24.12 RELIANCE IN FURTHER PLACED ON THE DECISION OF THE PUNJAB AND HARYANA HIGH COURT IN THE CASE OF CIT V. SIYA RAM GARG (HUF) : 237 CTR 321 WHEREIN THE HIGH COURT WHILE FOLLOWING DECISION OF THE SUPREME COURT IN THE CASE OF PONNI SUGARS (SUPRA) HELD THAT THE SUBSIDY RECEIVED BY THE ASSESSEE FOR SETTING UP INDUSTRIAL UNIT IN BAC KWARD AREA WHICH WAS DETERMINED WITH REFERENCE TO CAPITAL INVESTMENT, WAS A CAPITAL RECEIPT. 24.13 IT MAY ALSO BE POINTED OUT THAT FINANCE ACT, 2015, HAS W.E.F 01.04.2016 AMENDED THE DEFINITION OF INCOME DEFINED UNDER SECTION 2(24) OF THE ACT TO INCLUDE WITHIN ITS AMBIT, SUBSIDY GRANTED TO THE ASSESSEE FOR ANY PURPOSE BY THE CENTRAL/STATE GOVERNMENT, EXCEPT WHERE IT IS TAKEN INTO ACCOUNT FOR DETERMINATION OF ACTUAL COST OF THE ASSET UNDER EXPLANATION 10 TO SECTION 43(1) OF THE ACT. HOWEVER, IT IS SUBMITT ED THAT THE AMENDMENT IS 102 APPLICABLE PROSPECTIVELY AND IS NOT APPLICABLE TO THE ASSESSMENT YEAR UNDER CONSIDERATION. 24.14 THE ISSUE STANDS COVERED IN FAVOUR OF THE APPELLANT BY THE ORDER OF THE TRIBUNAL IN THE APPELLANTS OWN CASE FOR THE ASSESSMENT YEAR 2005 - 06 AND AY 2006 - 07. 24.1 5 HE ALSO PLACED RELIANCE ON THE DECISIONS OF HON'BLE SUPREME COURT IN THE CASE OF CIT VS. PONNI SUGAR & CHEMICALS LTD. 306 ITR 329 (SC) AND IN VIEW OF THIS DECISION THE ASSESSEE HAS REVISED RETURN ON 26.3.2009 AND REDUCED RS.31,92,30,033 RECEIVED ON ACCOUNT OF SUBSIDY FROM THE TOTAL INCOME. THE RELEVANT PARAS OF THE ORDER OF THE ITAT ON THE ISSUE FOR THE ASSESSMENT YEAR 2006 - 07 ARE BEING REPRODUCED HEREUNDER: 12.1. THE NEXT ISSUE RAISED IN THIS APPEAL IS AGAINST TREAT ING SUBSIDY OF RS.32,25,70,213/ - AS REVENUE RECEIPT AS AGAINST THE ASSESSEES CLAIM OF CAPITAL RECEIPT. THE ASSESSEE RECEIVED SALES - TAX SUBSIDY IN THE FORM OF 50% EXEMPTION OF SALES - TAX. THOUGH THE AMOUNT WAS INITIALLY TREATED AS REVENUE RECEIPT IN THE R ETURN OF INCOME, BUT THE ASSESSEE CLAIMED IT AS CAPITAL RECEIPT DURING THE COURSE OF ASSESSMENT PROCEEDINGS. THE ASSESSEE SUBMITTED THAT IT WAS A CAPITAL SUBSIDY ALLOWED BY THE HARYANA GOVERNMENT FOR HELPING IT IN EXPANSION OF INDUSTRY. IN SUPPORT OF ITS C LAIM OF SUCH SUBSIDY AS CAPITAL RECEIPT, THE 103 ASSESSEE RELIED ON THE JUDGMENT OF THE HONBLE SUPREME COURT IN CIT VS. PONNI SUGARS & CHEMICALS LTD. & ORS. (2008) 306 ITR 392 (SC). THE AO TREATED THIS AMOUNT AS REVENUE IN NATURE AND HENCE TAXABLE. THE ASSES SEE IS AGGRIEVED AGAINST THE TREATMENT OF SALES - TAX SUBSIDY AS REVENUE RECEIPT. 12.2. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RELEVANT MATERIAL ON RECORD. PRIMARY QUESTION FOR DECIDING THE NATURE OF ANY SUBSIDY, AS A CAPITAL OR REVENUE RECE IPT, IS TO ASCERTAIN THE OBJECT FOR WHICH IT WAS GIVEN. THE MODE OF ITS QUANTIFICATION OR MANNER OF ITS DISBURSEMENT, ARE IRRELEVANT CONSIDERATIONS. WHEN THE OBJECT OF SUBSIDY IS TO ENCOURAGE AN ASSESSEE TO SET UP OR EXPAND INDUSTRY, IT ASSUMES THE CHARAC TER OF A CAPITAL RECEIPT. SUCH SUBSIDY MAY BE GIVEN IN ANY FORM, MAY BE BY FINANCING INVESTMENT IN CAPITAL ASSET OR GIVING THE AMOUNT IN CASH OR BY MEANS OF A WAIVER OF SALES - TAX, ETC. FOR A PARTICULAR PERIOD. BUT, WHEN THE OBJECT IS NOT TO ENCOURAGE INDU STRIALIZATION BUT TO FACILITATE THE CARRYING ON AN EXISTING BUSINESS MORE EFFICIENTLY POST ITS SET - UP, THEN IT BECOMES A REVENUE RECEIPT, IRRESPECTIVE OF THE FORM OF DISBURSEMENT. THE HONBLE SUPREME COURT IN PONNI SUGARS (SUPRA) HAS HELD THAT : `IF THE OB JECT OF THE ASSISTANCE UNDER THE SUBSIDY SCHEME WAS TO ENABLE THE ASSESSEE TO SET UP A NEW UNIT OR TO EXPAND THE EXISTING UNIT THEN THE RECEIPT OF THE SUBSIDY WAS ON CAPITAL ACCOUNT. 12.3. AT THIS JUNCTURE, IT IS IMPERATIVE TO NOTE THAT THE FINANCE ACT, 2015, W.E.F. 1 - 4 - 2016 HAS FURTHER ENLARGED THE DEFINITION OF INCOME GIVEN U/S 2(24) BY INSERTING SUB - CLAUSE (XVIII), WHICH READS AS UNDER: - 104 `(XVIII) ASSISTANCE IN THE FORM OF A SUBSIDY OR GRANT OR CASH INCENTIVE OR DUTY DRAWBACK OR WAIVER OR CONCES SION OR REIMBURSEMENT (BY WHATEVER NAME CALLED) BY THE CENTRAL GOVERNMENT OR A STATE GOVERNMENT OR ANY AUTHORITY OR BODY OR AGENCY IN CASH OR KIND TO THE ASSESSEE OTHER THAN THE SUBSIDY OR GRANT OR REIMBURSEMENT WHICH IS TAKEN INTO ACCOUNT FOR DETERMINATIO N OF THE ACTUAL COST OF THE ASSET IN ACCORDANCE WITH THE PROVISIONS OF EXPLANATION 10 TO CLAUSE (1) OF SECTION 43 ; 12.4. A READING OF THE ABOVE PROVISION MAKES IT EXPLICIT THAT NOW SUBSIDY GIVEN BY THE CENTRAL GOVERNMENT OR A STATE GOVERNMENT OR ANY AUTHORITY ETC. FOR ANY PURPOSE, EXCEPT WHERE IT IS TAKEN INTO ACCOUNT FOR DETERMINATION OF THE ACTUAL COST OF THE ASSET UNDER EXPLANATION 10 SECTION 43(1), HAS BECOM E CHARGEABLE TO TAX. EVEN IF A SUBSIDY IS GIVEN TO ATTRACT INDUSTRIAL INVESTMENT OR EXPANSION, WHICH IS A OTHERWISE A CAPITAL RECEIPT UNDER THE PRE - AMENDMENT REGIME, SHALL BE INCOME CHARGEABLE TO TAX, EXCEPT WHERE IT HAS BEEN TAKEN INTO ACCOUNT FOR DETER MINATION OF ACTUAL COST OF ASSET IN TERMS OF EXPLANATION 10 TO SECTION 43(1). AS THIS AMENDMENT IS PROSPECTIVE, IT CANNOT TAKE EFFECT RETROSPECTIVELY TO INCLUDE THE ASSESSMENT YEAR UNDER CONSIDERATION. 12.5. ADVERTING TO THE FACTS OF THE INSTANT CASE, WE FIND THAT THE ASSESSEE WAS ALLOWED SUBSIDY UNDER INDUSTRIAL POLICY 1999 OF THE GOVERNMENT OF HARYANA, A COPY OF WHICH IS AVAILABLE AT PAGE 777 OF THE PAPER BOOK. THE OBJECTIVE OF THE INDUSTRIAL POLICY HAS BEEN SET OUT AT PAGE 779 WHICH TALKS OF INCREASIN G THE SHARE OF INDUSTRY BY 105 ATTRACTING NEW INVESTMENTS AND GROWTH OF EXISTING INDUSTRY. PURSUANT TO THIS INDUSTRIAL POLICY, THE ASSESSEE WAS GIVEN ENTITLEMENT CERTIFICATE UNDER RULE 28C OF HARYANA CENTRAL SALES - TAX RULES 1975, A COPY OF WHICH HAS BEEN PLA CED AT PAGE 871 OF THE PAPER BOOK. PARA 7 OF THE CERTIFICATE PUTS CONDITION FOR ENTITLEMENT OF SUBSIDY BY PROVIDING THAT: INCENTIVE WOULD BE GIVEN ONLY IN RESPECT OF VEHICLES ROLLED OUT OF PRODUCTION CAPACITY OF 70000 VEHICLES ADDED AS A RESULT OF FIRST EXPANSION AND NOT TO THE PRODUCTION AUGMENTED BY CAPACITY ADDITION OF 30000 VEHICLES AS A RESULT OF SECOND EXPANSION. WHEN WE CONSIDER SECTION 25A ALONG WITH RULE 28C OF HARYANA GENERAL SALES - TAX ACT/RULES, IT BECOMES EVIDENT THAT THE OBJECT OF SUBSIDY IS IN LINE WITH THE INDUSTRIAL POLICY OF HARYANA GOVERNMENT, BEING ATTRACTING NEW INVESTMENTS AND GROWTH OF EXISTING INDUSTRY. IN OUR CONSIDERED OPINION, SUCH SUBSIDY CANNOT BE CHARACTERIZED AS ANYTHING OTHER THAN A CAPITAL RECEIPT. IT HAS BEEN BROUGHT TO OUR NOTICE THAT THE TRIBUNAL, FOR THE IMMEDIATELY PRECEDING ASSESSMENT YEAR, HAS ALSO TREATED SIMILAR SUBSIDY AS CAPITAL RECEIPT. THIS GROUND IS, THEREFORE, ALLOWED . 24.15A RESPECTFULLY FOLLOWING THE ABOVE DECISION OF THE ITAT FOR ASSESSMENT YEAR 2006 - 07 (SUPRA), WE HOLD THAT THE SALES TAX SUBSIDY CLAIMED AS CAPITAL RECEIPT FROM THE TOTAL INCOME CANNOT BE CHARACTERIZED AS ANYTHING OTHER THAN A CAPITAL RECEIPT. IT IS ORDERED ACCORDINGLY TO ALLOW THE CLAIM AS CAPITAL RECEIPT. GROUND NOS. 11 TO 11.6 ARE T HUS ALLOWED. 106 25. GROUND NO.12 : IT IS REGARDING NON - ALLOWANCE OF DEPRECIATION ON WRITTEN DOWN VALUE OF SOFTWARE EXPENSE CAPITALIZED BY THE ASSESSING OFFICER IN THE PRECEDING YEARS. THE RELEVANT FACTS ARE THAT I N AY 1999 - 2000 TO AY 2002 - 03, THE ASSESSING OFFICERS HAD MADE THE FOLLOWING ADDITIONS TO THE INCOME OF THE ASSESSEE COMPANY BY TREATING THE EXPENDITURE ON PURCHASE AND DEVELOPMENT OF SOFTWARE AS A CAPITAL EXPENDITURE. AY 1999 - 2000 : RS.48,54,526/ - AY 2000 - 01 : RS.1,82,71,588/ - AY 2001 - 02 : RS.3,54 ,28,689/ - AY 2002 - 03 : RS.95,22,835/ - 25.1 THE ASSESSEE CLAIMED THAT T HE WRITTEN DOWN VALUE OF THE SOFTWARE EXPENSES SO CAPITALIZED AS ON 31.03.2007 IS RS. 6,17,614/ - ON WHICH DEPRECIATION ALLOWABLE @ 60% FOR AY 2006 - 07 WORKS OUT TO RS. 3,70,568/ - WHICH SHOULD BE ALLOWED. 25.2 THE LEARNED AR POINTED OUT THAT S IMILAR CLAIM OF DEPRECIATION HAS BEEN ALLOWED BY THE ITAT IN THE APPELLANTS OWN CASE FOR AY 2006 - 07. 25.3 THE LEARNED CIT(DR) ON THE OTHER HAND PLACED RELIANCE ON THE ORDERS OF THE AUTHORITIES B ELOW. 107 25.4. WE FIND THAT IN THE CASE OF ASSESSEE FOR THE ASSESSMENT YEAR 2006 - 0 7 (SUPRA), THE ITAT HAS DECIDED AN IDENTICAL ISSUE IN FAVOUR OF THE ASSESSEE UNDER SIMILAR FACTS. THE RELEVANT PARA NOS. 18.1 AND 18.2 OF THE SAID ORDER OF THE ITAT ARE BEING R EPRODUCED HEREUNDER: 18.1. GROUND NO. 14 IS AGAINST NOT ALLOWING DEPRECIATION AMOUNTING TO RS.9,26,418/ - ON WRITTEN DOWN VALUE OF SOFTWARE EXPENSES CAPITALIZED BY THE AO IN PRECEDING YEARS. THE FACTUAL MATRIX OF THIS GROUND IS THAT THE ASSESSEE CLAIMED DEDUCTION FOR SOFTWARE EXPENSES INCURRED IN EARLIER YEARS, WHICH WAS REFUSED BY THE AO, WHO HELD IT TO BE A CAPITAL EXPENDITURE. THE VIEW TAKEN BY THE AO WAS FINALLY UPHELD BY THE TRIBUNAL. IN THE FINAL COMPUTATION OF INCOME, T HE AO REFUSED TO ALLOWED DE PRECIATION ON THE CAPITALIZED VALUE OF SOFTWARE EXPENSES. 18.2. IT IS OBVIOUS THAT ONCE THE AO HAS REFUSED TO GRANT DEDUCTION OF SOFTWARE EXPENSES CLAIMED BY THE ASSESSEE AND CAPITALIZED THE SAME BY TREATING IT AS CAPITAL ASSET, THEN DEPRECIATION ON THE WRITTEN DOWN VALUE OF SUCH SOFTWARE EXPENSES IS REQUIRED TO BE GRANTED AS PER LAW. SINCE NO SUCH DETAIL IS AVAILABLE ABOUT THE WRITTEN DOWN VALUE OF SOFTWARE EXPENSES CAPITALIZED IN EARLIER YEARS, WE SET ASIDE THE 108 IMPUGNED ORDER AND REMIT THE MATTER TO TH E FILE OF AO FOR ALLOWING DEDUCTION IN RESPECT OF THE WRITTEN DOWN VALUE OF THE SOFTWARE EXPENSES CAPITALIZED IN EARLIER YEARS . 25.5 RESPECTFULLY FOLLOWING THE ABOVE DECISION, WE SET ASIDE THE MATTER TO THE FILE OF THE ASSESSING OFFICER FOR ALLOWING DEDU CTION IN RESPECT OF THE WRITTEN DOWN VALUE OF THE SOFTWARE EXPENSES CAPITALIZED IN EARLIER YEARS AFTER AFFORDING OPPORTUNITY OF BEING HEARD TO THE ASSESSEE IN THIS REGARD. THE GROUND NO. 12 IS ACCORDINGLY ALLOWED. 26. GROUND NO S . 13 TO 13.5 : THESE GROUND S RELATE TO DISALLOWANCE ON ACCOUNT OF PROVISIONAL LIABILITY EXPENDITURE ON ACCOUNT OF FPI - OE COMPONENTS (CURRENT A/C CODE 05D0509). 26.1 THE RELEVANT FACTS OF THE CASE ARE THAT THE ASSESSEE HAD ACCOUNTED FOR LIABILITY ON ACCOUNT OF FORESEEN PRICE INCRE ASE (FPI) ON AN ESTIMATE BASIS. FPI OF RS. 34,83,64,435 WAS DEBITED TO CONSUMPTION OF RAW MATERIAL AND COMPONENTS IN THE PROFIT AND LOSS ACCOUNT IN ACCORDANCE WITH MERCANTILE SYSTEM OF ACCOUNTING. THE SAME WAS CLAIMED AS BUSINESS DEDUCTION IN THE COMPUTATI ON OF INCOME. 109 26. 2 THE ASSESSING OFFICER HOWEVER, DISALLOWED THE AFORESAID CLAIM OF THE ASSESSEE ON THE GROUND THAT ASSESSEE HAS QUANTIFIED THE LIABILITY WITHOUT ACKNOWLEDGING THE QUANTIFIED LIABILITY TO THE CREDITORS. 26. 3 IN SUPPORT OF THE ABOVE GROUND S, LEARNED AR SUBMITTED THAT T HE AFORESAID PRACTICE WAS IN CONSONANCE WITH THE PROVISIONS OF THE COMPANIES ACT AND GENERALLY ACCEPTED ACCOUNTING PRINCIPLES AND PRACTICES OF INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA. 26. 3.1 HE SUBMITTED THAT LIABILITY F OR FPI WAS PROVIDED IN THE BOOKS OF ACCOUNTS ON A SCIENTIFIC ANALYSIS OF INCREASE IN PRICE OF COMPONENTS DUE TO CHANGE IN INPUT COST. 26. 3.2 THE LIABILITY OF FPI WAS ESTIMATED BY THE PURCHASE DEPARTMENT WITH SUBSTANTIAL DEGREE OF ACCURACY AS THEY ARE IN CONSTANT TOUCH WITH SUPPLIERS AND HAVE KNOWLEDGE OF THE CLAIMS OF SUPPLIERS, TREND OF THE COST OF INPUTS, ETC. THE PERSONNEL IN THE PURCHASE DEPARTMENT UPDATES THE FORESEEN PRICE OF EACH COMPONENT FOR EACH SUPPLIER AND EFFECTIVE DATE, BASED ON THEIR INPUT AND AVAILABLE INFORMATION IN COMPUTER SYSTEM REGARDING QUANTITY PURCHASED AND PRICE PAID. THE LIABILITY IN RESPECT OF EACH COMPONENT WAS WORKED OUT 110 CONSIDERING THE WEIGHT OF EACH MATERIAL, THE QUANTITY PROCURED, THE OLD RATE AND NEW RATE WORKED BY THE AS SESSEE CONSIDERING THE PRICE CHANGES OCCURRED DURING THE PERIOD. 26. 3.3 THE ACCOUNTING OF FPI WAS JUSTIFIED ON ACCOUNT OF FOLLOWING REASONS: A) THE LIABILITY WAS BOOKED ON ACCOUNT OF MATERIALS ALREADY SUPPLIED BY SUPPLIERS AND NOT ON AN AD HOC OR ARBITRARY BASIS. B) THE AMOUNT WAS DETERMINED AND COMPUTED WITH A SUBSTANTIAL DEGREE OF ACCURACY AT THE TIME OF DETERMINING AND BOOKING THE AMOUNT AS PER INFORMATION AVAILABLE TILL DATE OF FINALIZATION OF ACCOUNTS. C) THE LIABILITY WAS REQUIRED TO BE BOOKED AS PER ACCRUA L SYSTEM OF ACCOUNTING AS THE GOODS WERE ALREADY RECEIVED. 26. 3.4 THE LEARNED AR SUBMITTED FURTHER THAT FPI IS AN EXISTING LIABILITY AS PER THE UNDERSTANDING ARRIVED AT WITH THE SUPPLIERS OF THE COMPONENTS, WHO ARE ORIGINAL MANUFACTURERS OF THE COMPONEN TS. IT IS ON THE BASIS OF ANALYSIS OF THE CLAIMS, PRICE TREND, AND CORRESPONDENCES/DISCUSSIONS/NEGOTIATIONS WITH THE SUPPLIERS DURING THE YEAR AND PAST DEALINGS THAT THE ASSESSEE HAD COMPUTED THE IMPACT OF CHANGE IN PRICE OF COMPONENTS. THE CHANGE IN PRICE OF THE COMPONENTS TAKES PLACE TO GIVE EFFECT TO THE INCREASE IN THE COST OF THE 111 INPUTS REQUIRED FOR MANUFACTURING OF THE COMPONENTS. THE SAME IS AS PER THE AGREEMENT WITH THE SUPPLIERS TO ENSURE UNINTERRUPTED SUPPLY OF COMPONENTS, EVEN WHEN THEIR COST HAS BEEN INCREASED. 26. 3.5 IT IS ALSO SUBMITTED THAT SUCH PRACTICE IS QUITE COMMON IN THE MOTOR VEHICLE INDUSTRY WHICH HAS ALSO BEEN DULY RECOGNIZED IN THE DEPARTMENTAL CLARIFICATION ISSUED BY THE CENTRAL EXCISE DEPARTMENT. 26. 3.6 IT IS THUS RESPECTFULL Y SUBMITTED THAT IT IS NOT A CASE OF PROVISIONAL LIABILITY/CONTINGENT LIABILITY INCURRING OF WHICH IS DEPENDENT ON HAPPENING OF AN EVENT. THE LIABILITY, IN OUR RESPECTFUL SUBMISSION, IS IN FACT IN RESPECT OF SUCH PURCHASES ALREADY MADE BY THE ASSESSEE AND DULY DEBITED IN THE BOOKS OF ACCOUNTS. THUS, THE AMOUNT OF FPI IS A LIABILITY WHICH ACCRUES SIMULTANEOUSLY WITH EACH PURCHASE MADE BY ASSESSEE AND IS ALLOWABLE AS DEDUCTION IN DETERMINING THE INCOME OF THE RELEVANT ASSESSMENT YEAR. THE AFORESAID IS FURTHER IN ACCORDANCE WITH PRACTICE PREVALENT IN MOTOR VEHICLES INDUSTRY. 26. 3.7 THE LIABILITY ON ACCOUNT OF FPI WAS AN ASCERTAINED LIABILITY REPRESENTING ADDITIONAL PURCHASE PRICE OF THE GOODS. SINCE THE LIABILITY 112 ACCRUED DURING THE RELEVANT ASSESSMENT YEAR, E VEN THOUGH WAS FINALLY PAID IN THE FOLLOWING ASSESSMENT YEARS, THE SAME WAS ALLOWABLE DEDUCTION. 26. 3.8 RELIANCE IN THIS REGARD HAS BEEN PLACED ON THE FOLLOWING DECISIONS WHEREIN IT HAS BEEN HELD THAT LIABILITY WHICH HAS ARISEN IN THE RELEVANT ACCOUNTING YEAR IS AN ALLOWABLE DEDUCTION EVEN THOUGH ITS ACTUAL QUANTIFICATION AND DISCHARGE IS DEFERRED TO A FUTURE DATE: A) ASSESSEES OWN CASE DECIDED IN FAVOUR BY CIT (A) FOR AY 2003 - 04 B) CALCUTTA DISCOUNT CO. LTD. 37 ITR 1 (SC) C) METAL BOX (1969) 73 ITR 53 (SC) D) U NI TED COMMERCIAL BANK V . CIT 240 ITR 355 (SC) E) BHARAT EARTH MOVERS 245 ITR 428 (SC). F) KELVINATOR OF INDIA LTD. REPORTED IN 256 ITR 1 CONFIRMED BY SC IN 320 ITR 561 G) CIT V . VINITEC CORPN. (P) LTD. : 278 ITR 337 (DEL . ) H) NATIONAL MINERAL DEVELOPMENT CORPORATION L TD. V . JCIT : 98 ITD 278 (HYD. ITAT) 2 6. 3.9 THE HONBLE SUPREME COURT IN THE CASE OF CIT VS WOODWARD GOVERNOR INDIA (P) LTD. 312 ITR 254 HAS HELD THAT: - 21. IN CONCLUSION, WE MAY ST ATE THAT IN ORDER TO FIND OUT IF AN EXPENDITURE IS DEDUCTIBLE THE FOLLOWING HAVE TO BE TAKEN INTO ACCOUNT (I) WHETHER THE SYSTEM OF ACCOUNTING FOLLOWED BY THE ASSESSEE IS MERCANTILE SYSTEM, WHICH BRINGS INTO DEBIT THE EXPENDITURE AMOUNT FOR WHICH A LEGAL L IABILITY HAS BEEN INCURRED BEFORE IT IS ACTUALLY DISBURSED AND BRINGS INTO CREDIT WHAT IS DUE, IMMEDIATELY IT BECOMES DUE AND BEFORE IT IS ACTUALLY RECEIVED; (II) WHETHER THE SAME SYSTEM IS FOLLOWED BY THE ASSESSEE FROM THE VERY 113 BEGINNING AND IF THERE WAS A CHANGE IN THE SYSTEM, WHETHER THE CHANGE WAS BONA FIDE; (III) WHETHER THE ASSESSEE HAS GIVEN THE SAME TREATMENT TO LOSSES CLAIMED TO HAVE ACCRUED AND TO THE GAINS THAT MAY ACCRUE TO IT; (IV) WHETHER THE ASSESSEE HAS BEEN CONSISTENT AND DEFINITE IN MAKING ENTRIES IN THE ACCOUNT BOOKS IN RESPECT OF LOSSES AND GAINS; (V) WHETHER THE METHOD ADOPTED BY THE ASSESSEE FOR MAKING ENTRIES IN THE BOOKS BOTH IN RESPECT OF LOSSES AND GAINS IS AS PER NATIONALLY ACCEPTED ACCOUNTING STANDARDS; (VI) WHETHER THE SYSTEM ADO PTED BY THE ASSESSEE IS FAIR AND REASONABLE OR IS ADOPTED ONLY WITH A VIEW TO REDUCING THE INCIDENCE OF TAXATION. 26.3 .10 RELIANCE IS ALSO PLACED ON THE JUDGMENT OF THE APEX COURT IN THE CASE OF ROTORK CONTROLS INDIA (P) LTD. VS CIT: 314 ITR 62 WHEREIN IT HAS BEEN HELD THAT: - 17. AT THIS STAGE, WE ONCE AGAIN REITERATE THAT A LIABILITY IS A PRESENT OBLIGATION ARISING FROM PAST EVENTS, THE SETTLEMENT OF WHICH IS EXPECTED TO RESULT IN AN OUTFLOW OF RESOURCES AND IN RESPECT OF WHICH A RELIABLE ESTIMATE IS POS SIBLE OF THE AMOUNT OF OBLIGATION. 26. 3. 1 1 THE LEARNED AR SUBMITTED THAT THE INVOICES, RAISED BY THE SUPPLIERS, WERE PROVISIONAL AND EACH INVOICE WAS LIABLE TO BE REVIEWED/ AMENDED ONCE THE QUANTUM IS DETERMINED AND THAT THIS QUANTUM OF INCREASE WOULD AP PLY TO RE - COMPUTE THE PRICES PAYABLE BY ASSESSEE ON ALL SUPPLIES MADE BY THE SUPPLIERS DURING THE YEAR. 114 26. 3. 1 2 THE AFORESAID METHOD OF ACCOUNTING REGULARLY AND CONSISTENTLY FOLLOWED DOES NOT LEAD TO ANY LOSS OF REVENUE, WHATSOEVER. THE LIABILITY ESTIMATED IN A PARTICULAR YEAR FINALLY SETTLED IN THE SUBSEQUENT YEAR GETS REFLECTED IN THE PROFIT & LOSS ACCOUNT. THE INCOME AS WELL AS THE CHARGE ON SETTLEMENT IN THE SUBSEQUENT YEAR IS BROUGHT TO THE INCOME OR EXPENSES STATEMENT OF THE ASSESSEE COMPANY TO THE EX TENT OF VARIATION FROM THE ACTUAL FPI LIABILITY. IT IS WELL SETTLED THAT MERE TIMING DIFFERENCE SHOULD NOT BE USED TO DISTURB THE METHOD OF ACCOUNTING AND BOOKS OF ACCOUNTS OF A TAX PAYER CONSISTENTLY MAINTAINED AND ACCEPTED YEAR AFTER YEAR. 26. 3. 1 3 IT WA S FURTHER SUBMITTED THAT THE AFORESAID METHOD OF ACCOUNTING HAS BEEN REGULARLY FOLLOWED BY ASSESSEE AND CLAIMS WERE ACCORDINGLY MADE WHICH HAS BEEN DULY ACCEPTED BY REVENUE IN ALL PRECEDING EXCEPT IN ASSESSMENT YEAR AY 2003 - 04. THERE HAS BEEN NO CHANGE IN METHOD OF ACCOUNTING OR ESTIMATION. 26. 3. 1 4 IT WAS SUBMITTED THAT, AS DISCUSSED SUPRA, IT IS A WELL SETTLED POSITION OF LAW THAT WHILE THE PRINCIPLE OF RES JUDICATA DOES NOT APPLY TO THE INCOME - TAX PROCEEDINGS, THE COURTS HAVE EMPHASIZED THERE MUST BE 115 CON SISTENCY IN THE POSITION THAT THE REVENUE TAKES ON AN ISSUE IN DIFFERENT ASSESSMENT YEARS. 26.3.15 IT WAS ALSO P OINTED OUT THAT FOR THE ASSESSMENT YEARS 2004 - 05 AND 2005 - 06, THE ISSUE OF DEDUCTIBILITY OF THIS AMOUNT HAS BEEN EXAMINED BY THE ASSESSING OFF ICER AND THE CLAIM HAS BEEN ACCEPTED IN FULL AND NO DISALLOWANCE WHATSOEVER HAS EVER BEEN MADE BY THE ASSESSING OFFICER IN RESPECT THEREOF. DURING THE COURSE OF ASSESSMENT PROCEEDINGS FOR BOTH THESE YEARS, THE ASSESSING OFFICER HAD MADE SPECIFIC QUERIES ON THE AFORESAID ISSUE AND EXAMINED THE ALLOWABILITY OF THE EXPENSE IN DETAIL. AFTER THE DETAILED EXAMINATION, THE ASSESSING OFFICER FORMED A CONSIDERED VIEW NOT TO DISALLOW THE AFORESAID EXPENSE INCURRED BY THE ASSESSEE. [REFER CIT V. EXCEL INDUSTRIES LTD: 358 ITR 295 ]. 26.4 THE LD. CIT(DR), ON THE OTHER HAND, TRIED TO JUSTIFY THE ORDER PASSED BY THE ASSESSING OFFICER DISALLOWING THE PROVISION TOWARDS THE FORESEEN PRICE INCREASE. REFERRING TO THE ASSESSMENT ORDER, IT WAS SUBMITTED THAT THE ASSESS E E HAS FOLL OWED A UNIQUE METHOD OF MAKING PROVISION FOR THE ADDITIONAL PRICE TO BE CHARGED BY THE SUPPLIER OF THE MATERIAL AND THAT THE PROVISION HAD BEEN MADE FOR SUCH LIABILITY MERELY TO REDUCE PROFIT FOR THE 116 YEAR UNDER CONSIDERATION. IT WAS SUBMITTED THAT MERELY B ECAUSE SIMILAR PROVISION HAD BEEN ALLOWED IN THE EARLIER YEARS CANNOT BE A VALID GROUND TO CLAIM DEDUCTION SINCE IT IS SETTLED LAW THAT PRINCIPLE OF RES JUDICATA DOES NOT APPLY TO THE INCOME TAX PROCEEDINGS. IT WAS FURTHER SUBMITTED THAT AGAINST THE ORDER OF THE LD. CIT(A) FOR ASSESSMENT YEAR 2003 - 04, THE REVENUE IS IN APPEAL BEFORE THE TRIBUNAL. THE LD. CIT(DR) THUS VEHEMENTLY SUPPORTED THE ORDER PASSED BY THE LOWER AUTHORITY MAKING THE AFORESAID DISALLOWANCE OF FORESEEN PRICE INCREASE. 26.5 WE HAVE CONS IDERED THE ARGUMENTS ADVANCED BY THE PARTIES AND PERUSED THE RELEVANT RECORDS. THE ISSUE RAISED FOR OUR CONSIDERATION IS WHETHER THE APPELLANT IS ENTITLED TO CLAIM DEDUCTION OF PROVISION FOR ADDITIONAL LIABILITY TOWARDS INCREASE IN PRICE OF MATERIALS/ COMP ONENTS PROCURED FROM ORIGINAL EQUIPMENT MANUFACTURERS. IT IS NOTICED THAT BEFORE THE ASSESSING OFFICER, THE APPELLANT HAD VIDE LETTERS DATED 13.2.2010 AND 24.12.2010 CATEGORICALLY STATED THAT PROVISION FOR FORESEEN PRICE INCREASE WAS IN RESPECT OF PURCHAS ES ALREADY MADE BY THE COMPANY AT PROVISIONAL PRICES AND ON WHICH FINAL PRICE IS YET TO BE SETTLED WITH THE SUPPLIER. IT WAS FURTHER SUBMITTED BEFORE ASSESSING OFFICER THAT PROVISION WAS MADE ON A SCIENTIFIC BASIS IN RESPECT OF THE LIABILITY WHICH HAD ALR EADY ARISEN DURING THE 117 RELEVANT YEAR. THE SAID FACTUAL CONTENTIONS, IT IS NOTICED, HAVE NOT AT ALL BEEN REBUTTED/DISPUTED BY THE ASSESSING OFFICER IN THE ASSESSMENT ORDER. IT IS THE CASE OF THE ASSESSING OFFICER THAT THE ASSESSEE HAS QUANTIFIED THE LIABILI TY WITHOUT THERE BEING ANY LIABILITY AND THEREFORE, THE CASE OF THE ASSESSING OFFICER APPEARS TO BE THAT THE PROVISION HAD BEEN MADE IN RESPECT OF A CONTINGENT LIABILITY. 26.5.1 ON PERUSAL OF SAMPLE COPIES OF THE INVOICES PLACED AT PAGES 1876 TO 1880 OF T HE APPELLANTS PAPER BOOK, IT IS ALSO NOTICED THAT THE BILLS CLEARLY CONTAIN THE ENDORSEMENT THE AMOUNT INDICATED IS PROVISIONAL AS ADDITIONAL CONSIDERATION WILL BE RECEIVED FROM BUYER ON ACCOUNT OF PRICE ESCALATION. THERE IS THUS, CLEAR COMMERCIAL UNDER STANDING BETWEEN THE APPELLANT AND THE VENDORS THAT PRICE MENTIONED IN THE INVOICES IS MERELY PROVISIONAL IN NATURE AND IS SUBJECT TO FURTHER INCREASE ON ACCOUNT OF PRICE ESCALATION. AT THIS STAGE, WE MAY REFER TO THE FACT THAT A NOTIFICATION DATED 28.7.2 003 HAD BEEN ISSUED BY THE EXCISE AUTHORITIES ON THE SUBJECT OF CHARGING OF INTEREST UNDER SECTION 11AB WHEREIN THE EXCISE AUTHORITIES RECOGNIZED PREVAILING COMMERCIAL PRACTICE OF SUPPLEMENTARY INVOICES BEING MADE IN ADDITION TO THE ORIGINAL INVOICES. IN T HE SAID NOTIFICATION IT IS NOTED THAT AVAILABLE INTELLIGENCE INDICATE THAT THERE IS A PRACTICE IN MANY INDUSTRIES SPECIALLY IN MOTOR VEHICLES AND PARTS THEREOF AND THEIR VENDORS, THAT MANY A TIME THEY ARE RAISING SUPPLEMENTARY INVOICES IN ADDITION TO THE ORIGINAL INVOICES . THE SAID NOTIFICATION WAS ISSUED IN THE CONTEXT OF CLARIFICATION REGARDING CHARGING OF INTEREST FOR DELAYING PAYMENT OF EXCISE DUTY ON ACCOUNT OF SUPPLEMENTARY INVOICES BEING ISSUED. WHAT IS HOWEVER IMPORTANT IN THE PRESENT CONTEXT IS RECOGNITION OF COMMERCIAL PRACTICE PREVAILING IN THE MOTOR 118 VEHICLE INDUSTRY REGARDING PROVISIONAL BILLS BEING INITIALLY ISSUED, SUBJECT TO PRICE ESCALATION. 26.5.2 CONSIDERING THE AFORESAID, ONCE IT IS NOT DISPUTED THAT PROVISION HAD BEEN MADE BY THE AP PELLANT IN RESPECT OF MATERIAL AND COMPONENTS PROCURED DURING THE RELEVANT YEAR, THEN, IN OUR VIEW IT CANNOT BE DISPUTED THAT THERE WAS ACCRUAL OF ADDITIONAL LIABILITY TOWARDS PURCHASE PRICE OF THE RAW MATERIAL AND COMPONENTS AND THE SAME CANNOT, IN OUR VI EW, BE REGARDED AS A CONTINGENT LIABILITY. 26.5.3 COMING TO THE QUANTIFICATION OF SUCH LIABILITY, IT IS NOTICED THAT THE CONTENTION OF THE APPELLANT THAT PROVISION FOR THE FORESEEN PRICE INCREASE HAD BEEN MADE BY THE PURCHASE DEPARTMENT TAKING INTO CONSI DERATION VARIOUS FACTORS LIKE WEIGHT OF MATERIAL, QUANTITY PROCURED AND ALSO PROVISIONAL/OLD RATES AT WHICH INVOICE IS INITIALLY RAISED BY THE SUPPLIER AND ALSO MARKET PRICE OF THE COMPONENT AS PER THE INFORMATION AVAILABLE TILL THE DATE OF FINALIZATION OF ACCOUNTS, HAS NOT BEEN REBUTTED/CONTROVERTED BY THE ASSESSING OFFICER IN THE ASSESSMENT ORDER, NOR WAS CONTROVERTED BEFORE US BY THE LD. CIT(DR). MOREOVER, IT IS ALSO NOTICED THAT VENDOR - WISE AND ITEM - WISE DETAILS OF TOTAL PROVISION OF RS.34,18,60,435 MAD E DURING THE RELEVANT YEAR HAS BEEN PLACED AT PAGES 1881 TO 1938 OF THE ASSESSEES PAPER BOOK. THE SAID DETAILS CONTAIN NAME OF THE VENDOR, ITEM CODE OF THE COMPONENT SUPPLIED BY THE VENDOR TO THE APPELLANT AND ALSO THE AMOUNT OF ADDITIONAL VALUE IN RESPEC T OF THE COMPONENT. THUS, COMPLETE ITEM WISE AND VENDOR WISE OF THE ADDITIONAL PRICE TO BE PAID BY THE APPELLANT IS AVAILABLE ON THE BASIS OF WHICH PROVISION HAD BEEN MADE. 26.5.4 IT IS THUS CLEAR THAT ADDITIONAL PROVISION FOR FORESEEN PRICE INCREASE/ E SCALATION HAD BEEN MADE BY THE APPELLANT IN RESPECT OF COMPONENTS ACTUALLY SUPPLIED BY THE ORIGINAL EQUIPMENT MANUFACTURER/ VENDOR DURING THE RELEVANT 119 YEAR AND SUCH PROVISION WAS MADE/ QUANTIFIED ITEM - WISE AS WELL AS VENDOR - WISE, AS PER DETAILS PLACED ON R ECORD. THUS, THE PROVISION SO MADE, IN OUR VIEW, NOT ONLY REPRESENTS PROVISION TOWARDS AN ACCRUED/CRYSTALLIZED LIABILITY FOR THE MATERIAL ACTUALLY PURCHASED, WHICH CANNOT BE REGARDED AS CONTINENT LIABILITY INASMUCH AS THERE IS NO CONTINGENCY WITH REGARD TO SUCH LIABILITY OF THE APPELLANT TOWARDS THE VENDOR, BUT SUCH PROVISION ALSO REPRESENTS AMOUNT QUANTIFIED ON A REASONABLE/ SCIENTIFIC BASIS. THE LAW WITH REGARD TO THE ACCRUAL OF LIABILITY IS NOW FAIRLY WELL SETTLED. THE HONBLE SUPREME COURT IN THE CASE OF BHARAT EARTHMOVERS VS. CIT: (2000) 245 ITR 428 (SC) HELD THAT THE LAW IS SETTLED THAT IF A BUSINESS LIABILITY HAS DEFINITELY ARISEN IN THE ACCOUNTING YEAR, THE DEDUCTION SHOULD BE ALLOWED ALTHOUGH THE LIABILITY MAY HAVE TO BE QUANTIFIED AND DISCHARGED AT A FUTURE DATE. THE HONBLE COURT HELD THAT WHAT SHOULD BE CERTAIN IS THE INCURRING OF THE LIABILITY AND IT SHOULD ALSO BE CAPABLE OF BEING ESTIMATED WITH REASONABLE CERTAINTY THOUGH ACTUAL QUANTIFICATION MAY NOT BE POSSIBLE. IF THESE REQUIREMENTS ARE S ATISFIED THE LIABILITY IS IN PRAESENTI THOUGH IT WILL BE DISCHARGED AT A FUTURE DATE. THE HONBLE COURT WHILE REFERRING TO THE EARLIER DECISION OF THE SUPREME COURT IN THE CASE METAL BOX OF INDIA LTD VS. THEIR WORKMEN(1969) 73 ITR 53(SC) HELD THAT THE FOL LOWING PRINCIPLES WERE LAID DOWN BY THE HONBLE SUPREME COURT IN THE SAID DECISION: (I) FOR AN ASSESSEE MAINTAINING HIS ACCOUNTS ON MERCANTILE SYSTEM, A LIABILITY ALREADY ACCRUED, THOUGH TO BE DISCHARGED AT A FUTURE DATE, WOULD BE A PROPER DEDUCTION WHIL E WORKING OUT THE PROFITS AND GAINS OF HIS BUSINESS, REGARD BEING HAD TO THE ACCEPTED PRINCIPLES OF COMMERCIAL PRACTICE AND ACCOUNTANCY. IT IS NOT AS IF SUCH DEDUCTION IS PERMISSIBLE ONLY IN CASE OF AMOUNTS ACTUALLY EXPENDED OR PAID; 120 (II) JUST AS RECEIPTS, THOUGH NOT ACTUAL RECEIPTS BUT ACCRUED DUE ARE BROUGHT IN FOR THE INCOME - TAX ASSESSMENT, SO ALSO LIABILITIES ACCRUED DUE WOULD BE TAKEN INTO ACCOUNT WHILE WORKING OUT THE PROFITS AND GAINS OF THE BUSINESS; (III) A CONDITION SUBSEQUENT, THE FULFILMENT OF WHICH MAY RESULT IN THE REDUCTION OR EVEN EXTINCTION OF THE LIABILITY, WOULD NOT HAVE THE EFFECT OF CONVERTING THAT LIABILITY INTO A CONTINGENT LIABILITY; AND (IV) A TRADER COMPUTING HIS TAXABLE PROFITS FOR A PARTICULAR YEAR MAY PROPERLY DEDUCT NOT ONLY T HE PAYMENTS ACTUALLY MADE TO HIS EMPLOYEES BUT ALSO THE PRESENT VALUE OF ANY PAYMENTS IN RESPECT OF THEIR SERVICES IN THAT YEAR TO BE MADE IN A SUBSEQUENT YEAR IF IT CAN BE SATISFACTORILY ESTIMATED. . 26.5.5 APPLYING THE AFORESAID PRINCIPLE, THE H ONBLE SUPREME COURT IN THE CASE OF BHARAT EARTH MOVERS HELD THAT THE PROVISION MADE BY THE ASSESSE COMPANY FOR MEETING LIABILITY INCURRED BY IT UNDER THE LEAVE ENCASHMENT SCHEME PROPORTIONATE WITH THE ENTITLEMENT EARNED BY EMPLOYEE IS FOR THE LIABILITY, W HICH IS NOT A CONTINGENT LIABILITY. FOLLOWING THE AFORESAID DECISION, THE HONBLE SUPREME COURT IN THE CASE OF ROTORK INDIA PRIVATE LIMITED VS. CIT: (2009) 314 ITR 62(SC) HELD THAT THE PROVISION MADE FOR WARRANTY IN RESPECT OF PRODUCT SOLD ON A SCIENTIFIC BASIS ON THE BASIS OF THE HISTORICAL TREND WAS ALLOWABLE BUSINESS DEDUCTION. WHILE DILATING ON THE CONCEPT OF PROVISIONAND LIABILITY, THE HONBLE SUPREME COURT OBSERVED AS UNDER: 10. WHAT IS A PROVISION? THIS IS THE QUESTION WHICH NEEDS TO BE ANSWERED . A PROVISION IS A LIABILITY WHICH CAN BE MEASURED ONLY BY USING A SUBSTANTIAL DEGREE OF ESTIMATION. A PROVISION IS RECOGNIZED WHEN: (A) AN ENTERPRISE HAS A PRESENT OBLIGATION AS A RESULT OF A PAST EVENT; (B) IT IS PROBABLE THAT AN OUTFLOW OF RESOURCES WIL L BE REQUIRED TO SETTLE THE OBLIGATION; AND (C) A RELIABLE ESTIMATE CAN BE MADE OF THE AMOUNT OF THE OBLIGATION. IF THESE CONDITIONS ARE NOT MET, NO PROVISION CAN BE RECOGNIZED. 121 11. LIABILITY IS DEFINED AS A PRESENT OBLIGATION ARISING FROM PAST EVENTS, THE SETTLEMENT OF WHICH IS EXPECTED TO RESULT IN AN OUTFLOW FROM THE ENTERPRISE OF RESOURCES EMBODYING ECONOMIC BENEFITS. 12. A PAST EVENT THAT LEADS TO A PRESENT OBLIGATION IS CALLED AS AN OBLIGATING EVENT. THE OBLIGATING EVENT IS AN EVENT THAT CREATES AN OB LIGATION WHICH RESULTS IN AN OUTFLOW OF RESOURCES. IT IS ONLY THOSE OBLIGATIONS ARISING FROM PAST EVENTS EXISTING INDEPENDENTLY OF THE FUTURE CONDUCT OF THE BUSINESS OF THE ENTERPRISE THAT IS RECOGNIZED AS PROVISION. FOR A LIABILITY TO QUALIFY FOR RECOGNIT ION THERE MUST BE NOT ONLY PRESENT OBLIGATION BUT ALSO THE PROBABILITY OF AN OUTFLOW OF RESOURCES TO SETTLE THAT OBLIGATION. WHERE THERE ARE A NUMBER OF OBLIGATIONS (E.G., PRODUCT WARRANTIES OR SIMILAR CONTRACTS) THE PROBABILITY THAT AN OUTFLOW WILL BE REQ UIRED IN SETTLEMENT, IS DETERMINED BY CONSIDERING THE SAID OBLIGATIONS AS A WHOLE. IN THIS CONNECTION, IT MAY BE NOTED THAT IN THE CASE OF A MANUFACTURE AND SALE OF ONE SINGLE ITEM THE PROVISION FOR WARRANTY COULD CONSTITUTE A CONTINGENT LIABILITY NOT ENTI TLED TO DEDUCTION UNDER SECTION 37 OF THE SAID ACT. HOWEVER, WHEN THERE IS MANUFACTURE AND SALE OF AN ARMY OF ITEMS RUNNING INTO THOUSANDS OF UNITS OF SOPHISTICATED GOODS, THE PAST EVENT OF DEFECTS BEING DETECTED IN SOME OF SUCH ITEMS LEADS TO A PRESENT OB LIGATION WHICH RESULTS IN AN ENTERPRISE HAVING NO ALTERNATIVE TO SETTLING THAT OBLIGATION. IN THE PRESENT CASE, THE APPELLANT HAS BEEN MANUFACTURING AND SELLING VALVE ACTUATORS. THEY ARE IN THE BUSINESS FROM ASSESSMENT YEARS 1983 - 84 ONWARDS. VALVE ACTUATOR S ARE SOPHISTICATED GOODS. OVER THE YEARS APPELLANT HAS BEEN MANUFACTURING VALVE ACTUATORS IN LARGE NUMBERS. THE STATISTICAL DATA INDICATES THAT EVERY YEAR SOME OF THESE MANUFACTURED ACTUATORS ARE FOUND TO BE DEFECTIVE. THE STATISTICAL DATA OVER THE YEARS ALSO INDICATES THAT BEING SOPHISTICATED ITEM NO CUSTOMER IS PREPARED TO BUY VALVE ACTUATOR WITHOUT A WARRANTY. THEREFORE, WARRANTY BECAME INTEGRAL PART OF THE SALE PRICE OF THE VALVE ACTUATOR(S). IN OTHER WORDS, WARRANTY STOOD ATTACHED TO THE SALE PRICE OF THE PRODUCT. THESE ASPECTS ARE IMPORTANT. AS STATED ABOVE, OBLIGATIONS ARISING FROM PAST EVENTS HAVE TO BE RECOGNIZED AS PROVISIONS. THESE PAST EVENTS ARE KNOWN AS OBLIGATING EVENTS. IN THE PRESENT CASE, THEREFORE, WARRANTY PROVISION NEEDS TO BE RECOGNIZE D BECAUSE THE APPELLANT IS AN ENTERPRISE HAVING A PRESENT OBLIGATION AS A RESULT OF PAST EVENTS RESULTING IN AN OUTFLOW OF RESOURCES. LASTLY, A RELIABLE ESTIMATE CAN BE MADE OF THE AMOUNT OF THE OBLIGATION. IN SHORT, ALL THREE CONDITIONS FOR RECOGNITION OF A PROVISION ARE SATISFIED IN THIS CASE. 1 22 .. 26.5.6 APPLYING THE AFORESAID SETTLED PRINCIPLES TO THE FACTS OF THE APPELLANTS CASE, THE PROVISION MADE BY THE APPELLANT FOR FORESEEN PRICE INCREASE HAS BEEN CALCULATED BY TAKING INTO ACCOUNT COMPONENTS AC TUALLY SUPPLIED BY THE VENDOR AND THE AVAILABLE PRICE TREND, WHICH, IN OUR CONSIDERED VIEW, CLEARLY REPRESENTS PROVISION FOR ACCRUED LIABILITY AND IS ALLOWABLE AS BUSINESS DEDUCTION. THE OBLIGATING EVENT, AS OBSERVED BY THE HONBLE SUPREME COURT IN THE CAS E OF ROTORK CONTROL, IN THE PRESENT CASE IS THE SUPPLY OF COMPONENTS BY THE VENDOR TO THE APPELLANT. AS NOTICED BY US EARLIER, INVOICES INITIALLY RAISED CLEARLY STATE THAT THE PRICE STATED IN THE INVOICE IS PROVISIONAL AND IS SUBJECT TO PRICE ESCALATION. T HERE IS THUS A CLEAR COMMERCIAL UNDERSTANDING BETWEEN THE APPELLANT AND THE VENDOR THAT THE PRICE STATED IN THE INVOICE IS SUBJECT TO FURTHER ESCALATION ON THE BASIS OF THE PRICE PREVAILING THE MARKET. THE PROVISION TOWARDS FORESEEN PRICE INCREASE HAS BEEN , AS NOTICED ABOVE, MADE BY THE APPELLANT ON THE BASIS OF PRECISE VENDOR - WISE AND ITEM - WISE CALCULATION, WHICH IS PLACED IN THE APPELLANTS PAPER BOOK. THE PROVISION HAS THUS BEEN, IN OUR VIEW, NOT ONLY BEEN MADE IN RESPECT OF THE PRESENT OBLIGATION OR AN ACCRUED LIABILITY BUT SUCH PROVISION HAS ALSO BEEN MADE WITH SUBSTANTIAL DEGREE OF ACCURACY AND IS UNDOUBTEDLY SCIENTIFIC IN NATURE AND THEREFORE, WE DO NOT FIND ANY MERIT IN THE DISALLOWANCE MADE BY THE ASSESSING OFFICER. 26.5.7 MOREOVER, IT IS ALSO IMPOR TANT TO NOTE THAT SIMILAR CLAIMS MADE IN THE EARLIER YEARS HAD ALWAYS BEEN ALLOWED BY THE REVENUE, EXCEPT FOR THE DEVIATION IN THE ASSESSMENT YEAR 2003 - 04 WHEN SUCH PROVISION WAS DISALLOWED FOR THE FIRST TIME BY THE ASSESSING OFFICER. THE SAID DISALLOWANCE WAS DELETED BY THE CIT(A), AGAINST WHICH THE REVENUE IS IN APPEAL BEFORE THE TRIBUNAL, WHICH IS PRESENTLY PENDING ADJUDICATION. PERTINENTLY IN THE 123 ASSESSMENT YEARS 2004 - 05 AND 2005 - 06, THE CLAIM WAS AGAIN ALLOWED BY THE ASSESSING OFFICER IN THE REGULAR AS SESSMENT ORDER. SIMILAR CLAIM WAS ALSO ALLOWED IN ASSESSMENT YEAR 2006 - 07, I.E., IMMEDIATELY PRECEDING ASSESSMENT YEAR. THUS EVEN ON THE GROUND OF CONSISTENCY, TOO, THERE WAS NO WARRANT FOR THE ASSESSING OFFICER TO HAVE DISALLOWED THE AFORESAID PROVISION F OR THE FORESEEN PRICE INCREASE IN THE YEAR UNDER CONSIDERATION, HAVING ALLOWED SIMILAR CLAIM IN ASSESSMENT YEARS 2004 - 05 TO 2006 - 07 AND ALSO IN ASSESSMENT YEARS PRIOR TO ASSESSMENT YEAR 2003 - 04. WE MAY IN THIS CONTEXT REFER TO THE FOLLOWING OBSERVATIONS OF THE HONBLE SUPREME COURT IN THE CASE OF CIT VS. EXCEL INDUSTRIES (P) LIMITED: 358 ITR 295: 31. IT APPEARS FROM THE RECORD THAT IN SEVERAL ASSESSMENT YEARS, THE REVENUE ACCEPTED THE ORDER OF THE TRIBUNAL IN FAVOUR OF THE ASSESSEE AND DID NOT PURSUE THE M ATTER ANY FURTHER BUT IN RESPECT OF SOME ASSESSMENT YEARS THE MATTER WAS TAKEN UP IN APPEAL BEFORE THE BOMBAY HIGH COURT BUT WITHOUT ANY SUCCESS. THAT BEING SO, THE REVENUE CANNOT BE ALLOWED TO FLIP - FLOP ON THE ISSUE AND IT OUGHT LET THE MATTER REST RATHER THAN SPEND THE TAX PAYERS' MONEY IN PURSUING LITIGATION FOR THE SAKE OF IT. 32. THIRDLY, THE REAL QUESTION CONCERNING US IS THE YEAR IN WHICH THE ASSESSEE IS REQUIRED TO PAY TAX. THERE IS NO DISPUTE THAT IN THE SUBSEQUENT ACCOUNTING YEAR, THE ASSESSEE DID MAKE IMPORTS AND DID DERIVE BENEFITS UNDER THE ADVANCE LICENCE AND THE DUTY ENTITLEMENT PASS BOOK AND PAID TAX THEREON. THEREFORE, IT IS NOT AS IF THE REVENUE HAS BEEN DEPRIVED OF ANY TAX. WE ARE TOLD THAT THE RATE OF TAX REMAINED THE SAME IN THE PRESENT ASSESSMENT YEAR AS WELL AS IN THE SUBSEQUENT ASSESSMENT YEAR. THEREFORE, THE DISPUTE RAISED BY THE REVENUE IS ENTIRELY ACADEMIC OR AT BEST MAY HAVE A MINOR TAX EFFECT. THERE WAS, THEREFORE, NO NEED FOR THE REVENUE TO CONTINUE WITH THIS LITIGATION WHEN IT W AS QUITE CLEAR THAT NOT ONLY WAS IT FRUITLESS (ON MERITS) BUT ALSO THAT IT MAY NOT HAVE ADDED ANYTHING MUCH TO THE PUBLIC COFFERS. .. 26.5.8 THE AFORESAID OBSERVATION FULLY APPLY IN THE PRESENT CASE INASMUCH IN THE PRESENT CASE TOO, IT IS TH E CASE OF APPELLANT THAT CONSISTENT METHOD OF 124 MAKING PROVISION FOR AFORESAID PRICE INCREASE IS BEING FOLLOWED FOR LAST MANY ASSESSMENT YEARS. AS NOTICED, THE CLAIM HAS ALWAYS BEEN ALLOWED BY THE REVENUE, EXCEPT IN ASSESSMENT YEAR 2003 - 04. IT WAS THEREFORE NOT APPROPRIATE ON THE PART OF THE ASSESSING OFFICER TO HAVE DISALLOWED CLAIM FOR PROVISION FOR THE FORESEEN PRICE INCREASE IN THE YEAR UNDER CONSIDERATION, DESPITE SIMILAR CLAIM BEING ALLOWED IN EARLIER ASSESSMENT YEARS. TAKING INTO CONSIDERATION THE ENT IRETY OF THE CIRCUMSTANCES, WE ARE OF THE CONSIDERED VIEW THAT PROVISION FOR FORESEEN PRICE INCREASE MADE BY THE APPELLANT DURING THE RELEVANT YEAR IN RESPECT OF COMPONENT/MATERIAL SUPPLIED BY THE VENDORS FOR THE ESCALATION IN PRICE, WHICH IS CLEARLY SUPPO RTED BY DETAILED ITEM - WISE WORKING PLACED IN THE PAPER BOOK, CLEARLY REPRESENT AN ACCRUED/CRYSTALLIZED LIABILITY ALLOWABLE AS BUSINESS DEDUCTION. BEING SO, DISALLOWANCE MADE BY THE ASSESSING OFFICER IS DIRECTED TO BE DELETED. THE GROUND NOS. 13 TO 13.5 ARE THUS ALLOWED. 27. GROUND NOS. 14 TO 14.3 : IT IS REGARDING VALIDITY OF DISALLOWANCE OF RS.77 LACS MADE ON ACCOUNT OF EXPENDITURE ON EXCISE DUTY. DURING THE YEAR, THE ASSESSEE HAD PAID EXCISE DUTY OF RS.77 LACS BEING PROVISIONS FOR MODVAT ON QUANTITY DIFF ERENCE ON INPUTS DISALLOWED IN EARLIER YEARS AND CLAIMED DURING THE YEAR ON PAYMENT BASIS UNDER SEC. 43B OF THE ACT. THE ASSESSING OFFICER DISALLOWED THE CLAIM ON THE BASIS THAT ASSESSEE WOULD NOT HAVE BEEN LIABLE TO MAKE THE AFORESAID PAYMENTS OF RS.77 LA CS TO THE EXCISE DEPARTMENT IF IT HAD BEEN ABLE TO ESTABLISH THAT ALL CONSUMPTIONS CLAIMED BY IT WERE FOR THE PURPOSES OF MANUFACTURING. 125 27.1 IN SUPPORT OF THE GROUNDS, THE LEARNED AR SUBMITTED THAT PAYMENTS MADE BY THE ASSESSEE WAS CLEARLY IN THE NAT URE OF EXCISE DUTY, WHICH IS ADMISSIBLE AS DEDUCTION ON PAYMENT BASIS UNDER SECTION 43B OF THE ACT. HE POINTED OUT THAT IN THE CONTEXT OF SIMILAR DUTY PAYMENT FOR ASSESSMENT YEAR 2000 - 01, THE EXCISE TRIBUNAL (CESTAT) HAS HELD THAT THERE WAS NO SHORTAGE OF STOCK OF RAW - MATERIAL AND THE MINOR DISCREPANCY IS THE RESULT OF ACCOUNTING ERROR DUE TO USE OF LARGE QUANTITY OF INPUTS PROCURED FROM SEVERAL HUNDRED SUPPLIERS. THE LEARNED AR SUBMITTED FURTHER THAT THE ISSUE IS SQUARELY COVERED IN FAVOUR OF THE ASSESSEE BY THE ORDERS OF THE ITAT IN THE ASSESSEES OWN CASE FOR THE ASSESSMENT YEARS 2000 - 01, 2001 - 02 AND 2002 - 03 (SUPRA). 27.2 THE LEARNED CIT(DR) ON THE CONTRARY PLACED RELIANCE ON THE ORDERS OF THE AUTHORITIES BELOW. 27.3 WE FIND THAT IN ITS ORDER DATED 16.1 0.2012 IN THE CASE OF ASSESSEE ITSELF FOR THE ASSESSMENT YEAR 2002 - 03, AN IDENTICAL ISSUE HAS BEEN DECIDED IN FAVOUR OF THE ASSESSEE BY THE ITAT FOLLOWING ITS EARLIER ORDERS. RELEVANT PARA NO. 50 THEREOF IS BEING REPRODUCED HEREUNDER: 50. WE HAVE HEARD BO TH THE SIDES ON THIS ISSUE. THIS ISSUE IS COVERED IN FAVOUR OF THE ASSESSEE BY THE DECISION OF ITAT IN ASSESSEES OWN 126 CASE FOR ASSESSMENT YEARS 2000 - 01 AND 2001 - 02. THE RELEVANT PARA OF THE ORDER FOR ASSESSMENT YEAR 2001 - 02 IS REPRODUCED HEREUNDER: 22. IN REGARD TO GROUND NO. 9 WHICH IS AGAINST THE ACTION OF CIT(A) IN DELETING THE DISALLOWANCE OF THE EXCISE DUTY PAID BY THE ASSESSEE REPRESENTING THE REVERSAL OF THE EXCISE MODVAT AVAILED IN INPUTS ON CLEARANCE OF FINISHED GOODS, IT WAS FAIRLY CONCEDED BY BO TH THE SIDES THAT THIS ISSUE WAS SQUARELY COVERED BY THE DECISION OF THE CO - ORDINATE BENCH IN ASSESSEES OWN CASE FOR ASSESSMENT YEAR 2000 - 01 IN ITA NO. 678/DEL/2004. RESPECTFULLY FOLLOWING THE DECISION F THE CO - ORDINATE BENCH OF THIS TRIBUNAL IN ASSESSEE S OWN CASE FOR ASSESSMENT YEAR 2000 - 01, THE FINDINGS OF THE CIT(A) ON THIS ISSUE STANDS CONFIRMED. 23. IT IS ALSO NOTICED THAT THIS EXCISE DUTY IS PAID AGAINST THE ORDER OF THE SETTLEMENT COMMISSION AND IS IN THE NATURE OF REVERSAL OF MODVAT AVAILED ON THE INPUTS AND NOT IN THE NATURE OF PENALTY OR FINES. IN THE CIRCUMSTANCES, THE GROUND OF APPEAL AS RAISED BY THE REVENUE ON THIS ISSUE STANDS DISMISSED. 27.4 IN VIEW OF THE ABOVE FINDING OF THE ITAT ON THE ISSUE AND OF THE EXCISE TRIBUNAL IN THE ASSESSMENT YEAR 2000 - 01 THAT SHORTAGE OF STOCK OF RAW - MATERIAL AND THE MINOR DISCREPANCY WAS THE RESULT OF ACCOUNTING ERROR DUE TO USE OF LARGE QUANTITY OF INPUTS PROCURED FROM SEVERAL HUNDRED SUPPLIERS, WE HOLD THAT THE ASSESSEE WAS JUSTIFIED IN CLAIMING RS.77 LACS ON ACCOUNT OF EXPENDITURE ON EXCISE DUTY ON PAYMENT BASIS UNDER SEC. 43B OF 127 THE ACT. THE ASSESSING OFFICER IS ACCORDINGLY DIRECTED TO ALLOW THE CLAIM. GROUND NOS. 14 TO 14.3 ARE THUS ALLOWED. 28. GROUND NOS. 15 & 16 : THESE GROUNDS ARE RELATING TO ADJU STMENT ON ACCOUNT OF ALLEGED AMP EXPENSES, AND RELATING TO TRANSFER PRICING (ROYALTY, ROYALTY PAID TO NON - AE AND ERROR IN COMPUTING ROYALTY) . 28.1 IN GROUND NOS. 15 TO 15.31, ISSUE OF TP ADJUSTMENT ON ACCOUNT OF ALLEGEDLY EXCESSIVE AMP EXPENSES HAS BEEN RAISED. THE LEARNED AR POINTED OUT THAT THE ORDER OF THE ITAT ON THE ISSUE FOR THE ASSESSMENT YEAR 2006 - 07 HAS BEEN REVERSED BY THE HON'BLE DELHI HIGH COURT VIDE ITS ORDER DATED 11.12.2015 IN ITA 110/2014 AND 710/2015 , A COPY WHEREOF HAS BEEN MADE AVAILABL E. 28.2 THE LEARNED CIT(DR) ON THE OTHER HAND PLACED RELIANCE ON THE ORDERS OF THE AUTHORITIES BELOW. 28.3 THE ASSESSEE RAISED OBJECTIONS AGAINST THE ADJUSTMENT MADE BY THE TPO ON TWO GROUNDS, FIRSTLY, ON ACCOUNT OF ROYALTY TO THE EXTENT OF RS.249,73,6 6,232 AND SECONDLY, ON ACCOUNT OF AMP TO THE EXTENT OF 128 RS.307,88,00,000. THE LEARNED DRP JUSTIFIED THE ACTION OF THE TPO IN BENCHMARKING THE INTERNATIONAL TRANSACTION RELATION TO PAYMENT OF ROYALTY AND AMP SEPARATELY. AN IDENTICAL ISSUE ON TP ADJUSTMENT ON ACCOUNT OF AMP EXPENSES WAS ALSO RAISED IN THE ASSESSMENT YEAR S 2005 - 06 AND 200 6 - 0 7 BEFORE THE ITAT AND THE ITAT FOLLOWING THE DECISION OF THE SPECIAL BENCH IN THE CASE OF LG ELECTRONICS INDIA PVT. LTD. VS. DCIT (2013) 152 TTJ (DEL.) 273 (SB) UPHELD THE LEGAL ISSUES, NAMELY, AMP EXPENSES BEING AN INTERNATIONAL TRANSACTION, JURISDICTION OF THE TPO IN MAKING TP ADJUSTMENT OF AMP EXPENSES AND LIMITATION ETC. AGAINST THE ASSESSEE AND THEREAFTER SENT THE MATTER TO THE TPO FOR RE - COMPUTATION OF TRANSFER PRICIN G ADJUSTMENT ON ACCOUNT OF AMP EXPENSES TO BE DONE IN CONFORMITY WITH THE SPECIAL BENCH DECISION IN LG ELECTRONICS INDIA PVT. LTD. (SUPRA). THE SAID DECISION OF THE ITAT WAS QUESTIONED BY THE ASSESSEE BEFORE THE HON'BLE HIGH COURT OF DELHI AND AS INFORMED BY THE LEARNED AR THE HON'BLE HIGH COURT HAS BEEN PLEASED TO REVERSE THE ORDER OF THE ITAT ON THE ISSUE. THE RELEVANT PARA NOS. 71 & 72 THEREOF ARE BEING REPRODUCED HEREUNDER: 71. SINCE A QUANTITATIVE ADJUSTMENT IS NOT PERMISSIBLE FOR THE PURPOSE OF A TP ADJUSTMENT UNDER CHAPTER X, EQUALLY IT CANNOT BE PERMITTED IN RESPECT OF AMP EXPENSES EITHER. A ALREADY NOTICED HEREINBEFORE, WHAT THE REVENUE HAS SOUGHT TO DO IN THE PRESENT CASE IS TO RESORT TO A QUANTITATIVE ADJUSTMENT BY FIRST DETERMINING WHETHER THE AMP SPEND 129 OF THE ASSESSEE ON APPLICATION OF THE BLP, IS EXCESSIVE, THEREBY EVIDENCING THE EXISTENCE OF AN INTERNATIONAL TRANSACTION INVOLVING THE A.E. THE QUANTITATIVE DETERMINATION FORMS THE VERY BASIS FOR THE ENTIRE TP EXERCISE IN THE PRESENT CASE. 72. AS RIGHTLY POINTED OUT BY THE ASSESSEE, WHILE SUCH QUANTITATIVE ADJUSTMENT INVOLVED IN RESPECT OF AMP EXPENSES MAY BE CONTEMPLATED IN THE TAXING STATUTES OF CERTAIN FOREIGN COUNTRIES LIKE U.S.A., AUSTRALIA AND NEW ZEALAND, NO PROVISION IN CHAPTER X OF THE ACT CONTEMPLATES SUCH AN ADJUSTMENT. AN AMP TP ADJUSTMENT TO WHICH NONE OF THE SUBSTANTIVE OR PROCEDURAL PROVIS I ONS OF CHAPTER X OF THE ACT APPLY, CANNOT BE HELD TO BE PERMITTED BY CHAPTER X. IN OTHER WORDS, WITH NEITHER THE SUBSTANTIVE NOR THE MACHINERY PROVISIONS OF CHAPTER X OF THE ACT BEING APPLICABLE TO AN AMP TP ADJUSTMENT, THE INEVITABLE CONCLUSION IS THAT CHAPTER X AS A WHOLE, DOES NOT PERMIT SUCH AN ADJUSTMENT. 28.4 WE THUS FIND THAT THE HON'BLE HIGH COURT HAS BEEN PLEASED TO HOLD THAT THE AMP EXPENSES UNILATERALLY INCURRED BY THE APPELLANT DOES NOT RESULT IN AN INTERNATIONAL TRANSACTION SO AS TO INVO KE THE PROVIS I ONS OF CHAPTER X OF THE ACT. WE THUS SET ASIDE THE MATTER TO THE FILE OF THE ASSESSING OFFICER TO DECIDE THE ISSUE AS PER ABOVE FINDI NG OF THE HON'BLE HIGH COURT AFTER AFFORDING OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. THE GROUND NOS. 15 TO 15.31 ARE THUS ALLOWED. 130 28.5 GROUND NOS. 15.32 TO 15.46 : IT IS REGARDING THE VALIDITY OF ADJUSTMENT MADE BY THE TPO ON ACCOUNT OF ROYALTY, WHIC H HAS BEEN UPHELD BY THE LEARNED DRP. THE ASSESSING OFFICER/TPO PROPOSED TO ENHANCE THE INCOME OF THE ASSESSEE BY RS.249,73,66,232 BY HOLDING THAT THE ASSESSEES INTERNATIONAL TRANSACTION IN THE NATURE OF PAYMENT OF ROYALTY DOES NOT SATISFY THE ARMS LENGT H PRINCIPLES AS ENVISAGED UNDER THE ACT. THE CONTENTION OF THE ASSESSEE REMAINED THAT WHILE DOING ABOVE, THE AUTHORITIES BELOW HAVE ERRED IN NOT APPRECIATING THAT THE LICENSE AGREEMENT SIGNED BETWEEN THE ASSESSEE AND ITS AE (I.E. SMC) IN 1982 WHEN THE ASSE SSEE WAS A WHOLLY OWNED GOVERNMENT COMPANY AND THUS THE LICENSE AGREEMENT WAS ENTERED INTO BETWEEN TWO UNRELATED ENTERPRISES THEREBY COMPLYING WITH THE ARMS LENGTH STANDARD AS PER THE COMPARABLE UNCONTROLLED PRICE (CUP METHOD). THE LEARNED DRP DID NOT AGR EE WITH THE ASSESSEE AND UPHELD THE ACTION OF THE TPO. THE LEARNED DRP WAS OF THE VIEW THAT THE ORIGINAL AGREEMENT MAY HAVE BEEN BETWEEN THE UNRELATED PARTIES BUT IN THE YEAR UNDER CONSIDERATION DUE TO CHANGE IN EQUITY HOLDING PATTERN BOTH THE ENTITIES HAV E BECOME A.E. THUS, THE TRANSACTIONS BETWEEN THE TWO ARE SUBJECT TO THE PROVISIONS OF SECTION 92C OF THE ACT. REITERATING ITS SUBMISSIONS ON THE ISSUE MADE BEFORE THE AUTHORITIES BELOW, THE LEARNED AR POINTED OUT THAT UNDER SIMILAR FACTS OF THE CASE AN ID ENTICAL ISSUE HAS BEEN DECIDED BY THE ITAT IN THE APPEAL FOR 131 THE ASSESSMENT YEAR 2006 - 07 (SUPRA) AND REFERRED PARA NOS. 7.1 TO 7.7 OF THE ORDER AS PAGE NOS. 43 TO 59. 28.6 THE LEARNED CIT(DR) ON THE OTHER HAND PLACED RELIANCE ON THE ORDERS OF THE AUTHORI TIES BELOW WITH THIS CONTENTION THAT BIFURCATION OF USE OF TECHNOLOGIES AND TRADE MARK IS IMPORTANT TO ADJUDICATE UPON THE ISSUE. 28.7 WE FIND THAT IN ITS CONCLUDING PARA NO. 4.19.2, THE LEARNED DRP HAS OPINED THAT THE ROYALTY WHICH IS ATTRIBUTABLE TO TH E USE OF BRAND NAME HAS BEEN DETERMINED AT RS.1,77,11,75,274. THE ARMS LENGTH PRICE OF THE ROYALTY ATTRIBUTABLE TO USE OF BRAND NAME SHALL BE NIL. ACCORDINGLY, THE PAYMENT OF ROYALTY OF RS.177,11,75,274 TO SMC JAPAN FOR USE OF SUZUKI BRAND IS NOT FOUND TO BE AT ARMS LENGTH. THE ARMS LENGTH PRICE OF PAYMENT OF ROYALTY FOR USE OF BRAND WAS HELD TO BE NIL BY APPLYING THE CUP METHOD. ON AN IDENTICAL ISSUE, THE ITAT IN THE APPEAL FOR THE ASSESSMENT YEAR 2006 - 07 (SUPRA) HAS GIVEN FOLLOWING FINDING: B. R OYALTY I. TRANSFER PRICING ADJUSTMENT OF ROYALTY FOR LICENSED TRADEMARK 7.1. THE ASSESSEE HAS CHALLENGED THE ADDITION OF RS.1,27,19,59,816/ - MADE BY THE AO ON ACCOUNT OF TRANSFER PRICING ADJUSTMENT. 132 7.2. BRIEFLY STATED, THE FACTS OF THIS GROUND ARE THAT TH E ASSESSEE CHOSE SUZUKI MOTOR CORPORATION, JAPAN (SMC) AS ITS PARTNER IN 1982 WITH SMC ACQUIRING 26% EQUITY STAKE IN THE COMPANY MARUTI UDYOG LTD. (MUL). IN 1992, SMC INCREASED ITS SHARE TO 50%. SMC HELD 54.2% IN THE COMPANY IN THE PREVIOUS YEAR RELEVANT TO THE ASSESSMENT YEAR UNDER CONSIDERATION. THE ASSESSEE, MUL, IS ENGAGED IN MANUFACTURING OF PASSENGER CARS PRIMARILY FOR SALE IN INDIAN MARKET. IT ALSO EXPORTS VEHICLES TO OTHER COUNTRIES. THE ASSESSEE REPORTED CERTAIN INTERNATIONAL TRANSACTIONS WHICH HAVE BEEN ENUMERATED ON PAGE 18 OF THE ORDER OF THE TRANSFER PRICING OFFICER (TPO). THE ASSESSEE SELECTED THE TRANSACTIONAL NET MARGIN METHOD (TNMM) AS THE MOST APPROPRIATE METHOD WITH THE PROFIT LEVEL INDICATOR (PLI) OF OPERATING PROFIT/SALES (OP/S). T HE ASSESSEE COMPUTED ITS OP/S AT 11.19%, AS AGAINST ( - ) 4.43% OF CERTAIN COMPARABLES CHOSEN BY IT. THE ASSESSEE IS A LICENSED MANUFACTURER OF CARS IN INDIA. FOR USE OF THE LICENCE GIVEN BY SMC, THE ASSESSEE PAID A TOTAL ROYALTY OF RS.254,39,19,633/ - DIVI DED INTO TWO PARTS, NAMELY, RUNNING ROYALTY OF RS.250.84 AND LUMP SUM ROYALTY OF RS.3.57 CRORE. APART FROM THAT, THE ASSESSEE ALSO PAID RS.20.00 CRORE TO ITS AE TOWARDS TECHNICAL/OTHER SERVICES. THE ASSESSEE TREATED RUNNING ROYALTY AS REVENUE EXPEN DITURE IN ITS RETURN OF INCOME. LUMP SUM ROYALTY WAS INITIALLY TREATED AS CAPITAL EXPENDITURE, BUT DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE SAME WAS ALSO CLAIMED AS REVENUE EXPENDITURE. ON A REFERENCE MADE BY THE AO FOR DETERMINATION OF THE ARMS LENGTH PRICE (ALP) OF THE INTERNATIONAL TRANSACTIONS, THE TPO OBSERVED THAT THE ASSESSEE HAD UNDERTAKEN TREMENDOUS EFFORTS AND INCURRED HUGE EXPENDITURE ON MARKET DEVELOPMENT AND PROMOTION OF 133 MARUTI AND SUZUKI BRANDS IN INDIA OVER A PERIOD OF TIME, BUT, HAD N OT RECEIVED ANY COMPENSATION FROM ITS AE FOR MEETING HUGE EXPENDITURE INCURRED ON THE BRAND DEVELOPMENT AS WELL AS MARKET DEVELOPMENT. HE FURTHER OBSERVED THAT SUZUKI TRADE MARK (S) WAS REGISTERED IN INDIA SEVERAL DECADES AGO, BUT, WAS NOT USED AND, HENCE , DID NOT HAVE ANY BRAND VALUE. HE ALSO NOTICED ON PAGE 27 OF HIS ORDER THAT THE ASSESSEE CARRIED OUT HUGE R&D FOR DEVELOPMENT OF ITS PRODUCTS IN INDIA AND DURING THE YEAR IN QUESTION ALONE, A SUM OF RS.67.10 CRORE WAS SPENT ON IT. SINCE THE ASSESSEE IS ONLY A LICENSED MANUFACTURER, THE TPO OBSERVED THAT R&D ACTIVITY SHOULD HAVE BEEN CARRIED OUT BY THE LICENSOR AND NOT THE ASSESSEE - LICENSEE. ON BEING CALLED UPON TO EXPLAIN AS TO WHY THE ROYALTY EXPENSES BE NOT DISALLOWED FOR THE REASONS GIVEN IN HIS ORDE R FOR THE AY 2005 - 06, THE ASSESSEE SUBMITTED THAT THE PAYMENT OF ROYALTY WAS MADE AS PER THE LICENSE AGREEMENT WHICH IS AN INDIVISIBLE CONTRACT AND THE SAME DOES NOT SPECIFICALLY SPELL OUT CONSIDERATION FOR THE USE OF TECHNICAL KNOW - HOW AND CONSIDERATION F OR THE USE OF TRADEMARK OF SMC. THE TPO CONSIDERED LICENSE AGREEMENT DATED 9.1.2001 BETWEEN THE ASSESSEE AND SMC. AFTER REPRODUCING RELEVANT CLAUSES FROM THIS AGREEMENT, HE HELD THAT THE ASSESSEE PAID ROYALTY TO SMC TOWARDS LICENSE FOR MANUFACTURE, SALE AND AFTER - SALES SERVICES. HE FURTHER NOTICED THAT CLAUSES 3.02 AND 3.03 OF THE AGREEMENT STIPULATE THAT IMPROVEMENT AND MODIFICATION OF THE PRODUCTS AND PARTS BY THE ASSESSEE SHALL BE TREATED AS LICENSED INFORMATION WHOSE LEGAL OWNERSHIP WILL GET TRANSFER RED TO THE SMC AND THE ASSESSEE WILL BE COMPENSATED FOR SUCH IMPROVEMENTS AND MODIFICATIONS. HE NOTICED THAT NO SUCH COMPENSATION WAS GIVEN DESPITE THE ASSESSEE INCURRING HUGE R&D 134 EXPENSES. THE TPO CAME TO HOLD THAT SUZUKI TRADEMARK OF THE AE WAS PIGGY BACKED ON `MARUTI, THE TRADEMARK OF THE ASSESSEE, WITHOUT ANY COMPENSATION TO THE ASSESSEE. AFTER GOING THROUGH ALL THE RELEVANT CLAUSES OF THE AGREEMENT, THE TPO HELD THAT THE TOTAL ROYALTY OF RS.254.39 CRORE PAID BY THE ASSESSEE TO SMC WAS FOR USE OF B OTH THE `LICENSED INFORMATION AS WELL AS `LICENSED TRADEMARKS. SINCE NO BIFURCATION OF ROYALTY PAYMENT WAS GIVEN, HE SEGREGATED IT INTO TWO EQUAL PARTS, VIZ., RS.127.195 CRORE TOWARDS MANUFACTURING LICENCE, THAT IS FOR THE USE OF `LICENSED INFORMATION AND RS.127.195 CRORE TOWARDS SALE AND AFTER SALE SERVICE LICENCE, THAT IS FOR USE OF `LICENSED TRADEMARK. THIS 50:50 SEGREGATION WAS DONE ON THE GROUND THAT BOTH MANUFACTURING AND SALE FUNCTIONS WERE EQUALLY IMPORTANT FOR RUNNING A BUSINESS. HE TOOK UP T HE DETERMINATION OF THE ALP OF THE ROYALTY PAID FOR USE OF `LICENSED TRADEMARK. IT WAS NOTICED THAT THE ASSESSEE USED CO - BRANDED TRADE MARK I.E., MARUTI - SUZUKI. CONSIDERING THE FACT THAT THE ASSESSEES TRADEMARK OF MARUTI HAS ACQUIRED STATUS OF A SUP ER BRAND, WHEREAS SUZUKI IS RELATIVELY WEAK BRAND IN THE INDIAN MARKET, THE TPO HELD THAT THE ALP OF ROYALTY PAID TO THE AE WAS NIL. IN HIS OPINION, THE ASSESSEE OUGHT TO HAVE BEEN COMPENSATED BY SMC FOR USE OF ITS TRADE MARK MARUTI IN A CO - BRANDED T RADEMARK, AS AGAINST THE AE CHARGING ROYALTY OF RS.127.195 CRORE FROM THE ASSESSEE FOR USE OF ITS SUZUKI BRAND IN A CO - BRANDED TRADEMARK. THAT IS HOW, THE TPO PROPOSED TRANSFER PRICING ADJUSTMENT OF RS.127.195 CRORE ON ACCOUNT OF ROYALTY PAYMENT FOR USE OF `LICENSED TRADEMARK. THE DISPUTE RESOLUTION PANEL (DRP) AFFIRMED THE VIEW TAKEN BY THE AO IN THE DRAFT ORDER ON THIS ISSUE, WHICH WAS BASED ON THE ORDER OF THE TPO. THIS LED TO THE ADDITION OF RS.127.195 CRORE, WHICH HAS BEEN ASSAILED 135 BEFORE US. AT THI S STAGE, IT IS RELEVANT TO MENTION THAT THE TPO DID NOT DISPUTE THE ALP OF ROYALTY PAID FOR `LICENSED INFORMATION, WHOSE TRANSACTED VALUE WAS COMPUTED BY HIM AT RS.127.195 CRORE. INSTANTLY, WE ARE TAKING UP THE ALP OF THE ROYALTY PAYMENT FOR USE OF `LICEN SED TRADEMARK, FOR WHICH TRANSFER PRICING ADJUSTMENT HAS BEEN MADE. 7.3. THE LD. COUNSEL FOR THE ASSESSEE CONTENDED THAT THERE IS A COMPOSITE AGREEMENT BETWEEN THE ASSESSEE AND SMC FOR USE OF THE LICENSED INFORMATION AND LICENSED TRADEMARK AND ROYALTY IS ALSO ONE CONSOLIDATED AMOUNT FOR USE OF BOTH, WHICH HAS BEEN SPLIT IN TWO PARTS, NAMELY, LUMPSUM ROYALTY AND RUNNING ROYALTY. TAKING US THROUGH THE AGREEMENT BETWEEN THE ASSESSEE AND SMC DATED 9.1.2001 (A COPY OF WHICH HAS BEEN PLACED ON PAGE NO.1301 O NWARDS OF PAPER BOOK NO. 4), IT WAS POINTED OUT THAT ROYALTY IS A ONE MERGED PAYMENT FOR USE OF THE LICENSED INFORMATION AND LICENSED TRADEMARKS AND THE TPO WAS NOT RIGHT IN ARTIFICIALLY SPLITTING THE SAME INTO TWO PARTS. RELYING ON THE ORDER DATED 2.8.201 3 PASSED BY THE TRIBUNAL IN THE ASSESSEES OWN CASE FOR THE AY 2005 - 06 (ITA NO.5237/DEL/2011), THE LD. AR CONTENDED THAT IN THE PRECEDING YEAR ALSO THE TPO BIFURCATED TOTAL ROYALTY PAYMENT INTO TWO PARTS, NAMELY, 50.58% FOR USE OF TECHNOLOGY AND REMAINING 49.42% FOR USE OF BRAND NAME, WHICH VIEW HAS BEEN TURNED DOWN BY THE TRIBUNAL BY HOLDING THAT THE ENTIRE PAYMENT OF ROYALTY UNDER THE LICENCE AGREEMENT WAS A CONSIDERATION FOR USE OF BOTH. 7.4. AU CONTRAIRE, THE LD. DR VEHEMENTLY JUSTIFIED THE ACTION OF THE TPO IN DRAWING A CONCLUSION THAT 50% OF TOTAL ROYALTY PAYMENT WAS FOR USE OF LICENSED INFORMATION AND THE REMAINING 50% FOR USE OF LICENSED TRADEMARK. HE ALSO TOOK US THROUGH THE SAME AGREEMENT 136 DATED 9.1.2001 AND SUBMITTED THAT CLAUSE 1.06 PROVIDE S THAT THE LICENSED TRADEMARK SHALL MEAN THE TRADEMARKS OWNED BY SUZUKI LISTED IN EXHIBIT - B AND OTHER INDIAN TRADEMARKS WHICH SUZUKI MAY, HEREAFTER, OBTAIN RELATING TO THE PRODUCTS AND PARTS. IT WAS CONTENDED THAT CLAUSE 2.03 OF THE AGREEMENT PROVIDES F OR USE OF LICENSED TRADEMARKS AND CO - BRANDED TRADEMARK OF MARUTI - SUZUKI. IT WAS, THEREFORE, PUT FORTH THAT IT IS NOT ONLY CO - BRANDED TRADE MARK OF `MARUTI - SUZUKI WHICH HAS BEEN UNDER THE AGREEMENT, BUT ALSO THE LICENSED TRADEMARKS, WHICH EXCLUSIVEL Y BELONG TO SUZUKI. ONCE THE TRADEMARK OF SMC HAS BEEN ALLOWED TO BE USED TO THE ASSESSEE ON ITS PRODUCTS, EITHER SEPARATELY OR AS A PART OF CO - BRAND, AND FURTHER A PART OF THE ROYALTY HAS BEEN ADMITTEDLY ALSO PAID FOR THE USE OF LICENSED TRADEMARK, HE AR GUED THAT IT COULD NOT BE SAID THAT THERE WAS NO SEPARATE CONSIDERATION FOR USE OF LICENSED TRADEMARK EMBEDDED IN TOTAL ROYALTY PAYMENT. IT WAS STATED THAT IF SOME PART OF ROYALTY IS RELATABLE TO THE USE OF LICENSED TRADEMARK, THEN THAT CANNOT BE LOST SIGH T OF. HE INSISTED THAT THE AGREEMENT IMPLIEDLY PROVIDES FOR SEPARATE ROYALTY FOR USE OF THE LICENSED TRADEMARK. THIS WAS CORROBORATED BY STATING THAT THE AGREEMENT ITSELF DIVIDES PAYMENT OF ROYALTY AS PER ARTICLE 6 INTO TWO PARTS, THE FIRST BEING LUMPSUM A ND THE SECOND BEING RUNNING ROYALTY. HE EMPHASIZED THAT THE LUMPSUM ROYALTY IS A CONSIDERATION EXCLUSIVELY FOR THE USE OF LICENSED INFORMATION WHICH, AS PER THIS AGREEMENT, IS 20 CRORE YEN, PAYABLE IN THREE INSTALMENTS, NAMELY, THE FIRST INSTALMENT OF 6 .50 CRORE YEN WITHIN 30 DAYS OF THE EFFECTIVE DATE; 6.5 CRORE YEN TO BE PAID NOT LATER THAN NINE MONTHS AFTER THE EFFECTIVE DATE OR THE DAY ON WHICH SUZUKI TRANSFERS TO MARUTI A SUBSTANTIAL PART OF THE DOCUMENTATION RELATING TO 137 SUCH MODEL OF PRODUCTS, WHI CHEVER IS LATER; AND THE REMAINING PART OF 7 CRORE YEN TO BE PAID NOT LATER THAN 18 MONTHS AFTER THE EFFECTIVE DATE OR THE DATE OF START OF PRODUCTION OF SUCH MODEL OF PRODUCTS BY MARUTI, WHICHEVER IS LATER. IN THE LIGHT OF THIS CLAUSE, WHICH IS UNIFORM IN ALL OTHER AGREEMENTS ENTERED INTO BETWEEN THE ASSESSEE AND SMC, THE LD. DR CONTENDED THAT THE LUMPSUM ROYALTY IS EXCLUSIVELY TOWARDS THE USE OF LICENSED INFORMATION, WHICH IS PAYABLE ONLY ON THE OCCASION OF RECEIPT OF LICENSED INFORMATION. HE FURTHER STATED THAT APART FROM PAYING SUCH LUMPSUM ROYALTY FOR USE OF LICENSED INFORMATION, THE ASSESSEE ALSO PAID A SUM OF RS.20,00,29,488/ - TO SMC TOWARDS TECHNICAL/OTHER SERVICES. HE STILL FURTHER POINTED OUT THAT APART FROM PAYING SUCH LUMPSUM ROYALTY AND TE CHNICAL FEES, THE ASSESSEE ALSO INCURRED HUGE R&D EXPENDITURE WHICH, IN THE INSTANT YEAR ALONE, STANDS AT RS.67.1 CRORE, WHICH HAS GONE INTO DEVELOPMENT/UPGRADATION OF THE LICENSED INFORMATION WHOSE INTELLECTUAL PROPERTY RIGHTS ALSO VESTS WITH SMC. HE SUMM ED UP HIS POSITION BY STATING THAT THE THREE SUMS, NAMELY, LUMPSUM ROYALTY, R&D EXPENSES INCURRED BY THE ASSESSEE AND THE PAYMENT OF RS.20.00 CRORE TOWARDS TECHNICAL/OTHER SERVICES PERTAIN EXCLUSIVELY TO THE USE OF `LICENSED INFORMATION AND RUNNING ROYA LTY EXCLUSIVELY PERTAINS TO THE USE OF `LICENSED TRADEMARK. HE THUS ARGUED THAT THE TPO WAS MORE THAN REASONABLE IN APPORTIONING ROYALTY OF RS.127.195 CRORE TO THE USE OF BRAND AS AGAINST THE ACTUAL RUNNING ROYALTY OF RS.250.81 CRORE PAID BY THE ASSESSEE FOR USE OF LICENSED TRADEMARK. IN THE ALTERNATIVE, HE ARGUED THAT IF THE TRIBUNAL WAS NOT SATISFIED WITH 50:50 DIVISION OF ROYALTY BY THE TPO, THEN THE MATTER MAY BE SENT BACK FOR APPORTIONING ROYALTY FOR USE OF LICENSED TRADEMARK ON SOME RATIONAL 138 BASIS. T HE LD. DR CONTENDED THAT SINCE THE ASSESSEES OWN TRADE MARK, NAMELY, MARUTI HAS MUCH HIGHER BRAND VALUE THAN THE TRADE MARK SUZUKI OF SMC, WHICH IS RELATIVELY WEAK IN INDIA, THE ENTIRE AMOUNT OF ROYALTY PAID BY THE ASSESSEE TO ITS AE TOWARDS THE USE O F LICENSED TRADE MARKS WAS RIGHTLY DISALLOWED BY THE AO AS HAVING NIL ALP. 7.5. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND PERUSED THE RELEVANT MATERIAL ON RECORD. IT CAN BE OBSERVED THAT THE TPO HAS ATTRIBUTED A SUM OF RS.127.195 CRORE TOWARDS ROYALTY FOR USE OF LICENSED TRADEMARKS, WHOSE ALP HAS BEEN DETERMINED AT RS. NIL. IN DOING SO, HE RELIED ON HIS ORDER PASSED FOR THE IMMEDIATELY PRECEDING YEAR. IN SUCH EARLIER YEAR, THE TPO BIFURCATED TOTAL ROYALTY INTO TWO PARTS, NAMELY, 50.58% FOR USE OF LICENSED INFORMATION AND 49.42% FOR USE OF LICENSED TRADE MARK. IT IS NOT DISPUTED THAT ALL THE AGREEMENTS UNDER WHICH THE ASSESSEE PAID ROYALTY TO ITS AE DURING THE YEAR ARE IDENTICALLY WORDED. CLAUSE 6 OF THE AGREEMENT DATED 25.3.2006 DEALS WITH THE CONSIDERATION TO BE PAID, WHICH IS IN TWO PARTS, NAMELY, LUMPSUM ROYALTY AND RUNNING ROYALTY. THE BIFURCATION BETWEEN LUMPSUM AND RUNNING ROYALTY IS NOT BASED ON USE OF LICENSED INFORMATION AND LICENSED TRADEMARK. IT IS A QUID PRO QUO FOR USE OF BOTH IN A CUMULATIVE MANNER. THE FINDING OF THE TRIBUNAL IN PARA 11 OF ITS ORDER FOR THE IMMEDIATELY PRECEDING YEAR IS : `THAT ROYALTY THUS PAID BY THE ASSESSEE TO SMC CONSTITUTE A SINGLE/INSEVERABLE/INDIVISIBLE CONTRACT/PACKAGE WHICH PROVIDED THE ASSESSEE THE E XCLUSIVE RIGHT AND LICENCE TO MANUFACTURE AND TO SELL THE LICENSED PRODUCT FOR A SPECIFIED LIMITED DURATION. IN PARA 13, THE TRIBUNAL OBSERVED THAT: THE TPO HAS REWRITTEN THE AGREEMENT/TRANSACTION UNDERTAKEN BY THE ASSESSEE BY ARTIFICIALLY SEGREGATING T HE SINGLE TRANSACTION OF PAYMENT OF ROYALTY 139 INTO TWO TRANSACTIONS OF PAYMENT OF ROYALTY FOR USE OF BRAND NAME AND FOR USE OF TECHNOLOGY. IN A NUTSHELL, THESE PARAS INDICATE THAT THE TRIBUNAL HAS TREATED TOTAL ROYALTY PAYMENT AS A COMMON CONSIDERATION FOR USE OF BOTH, NAMELY, LICENSED INFORMATION AND LICENSED TRADEMARKS, WHICH IS INCAPABLE OF BIFURCATION. AT THE SAME TIME, IT IS ALSO EQUALLY TRUE THAT SOME OBSERVATIONS IN THE TRIBUNAL ORDER GIVE IMPRESSION THAT THE BENCH ATTRIBUTED THE ENTIRE ROYALTY PAYMEN T TO THE USE OF `LICENSED INFORMATION. GIVEN THE FACE OFF BETWEEN SUCH OBSERVATIONS, WE ARE MORE INCLINED TO GO WITH THE FINDING ABOUT THE ROYALTY ATTRIBUTABLE TO THE USE OF BOTH THE LICENSED INFORMATION AND THE LICENSED TRADEMARKS. IT IS SO FOR THE REASO N THAT THE AGREEMENT ALSO PROVIDES LIKE THAT, WHICH HAS BEEN DISCUSSED ELSEWHERE IN THIS ORDER. THE TRIBUNAL FURTHER NOTICED IN PARA 9.2 OF ITS ORDER THAT THE CO - BRANDED TRADE MARK, MARUTI - SUZUKI IS BEING USED SINCE INCEPTION OF THE COMPANY. IN PARA 14, THE TRIBUNAL AGREED WITH THE ASSESSEES SUBMISSIONS : `THAT SUZUKI BRAND IS AN INTERNATIONAL RENOWNED GLOBAL BRAND. THIS CAN BE SUBSTANTIATED BY THE REPORT OF TOP 500 BRANDS AVAILABLE ON INTERNET. THAT IS HOW IN PARA 17, THE TRIBUNAL DELETED THE DISALLOW ANCE MADE BY THE AO ON THE BASIS OF THE TPOS CONCLUSION THAT THE PAYMENT OF ROYALTY TOWARDS USE OF LICENSED TRADEMARK WAS NOT WARRANTED. 7.6. THUS IT IS MANIFEST THAT THE TRIBUNAL IN THE IMMEDIATELY PRECEDING YEAR HAS HELD TWO THINGS. FIRST THAT THE P AYMENT OF ROYALTY UNDER THE AGREEMENT IS BOTH FOR THE USE OF LICENSED INFORMATION AND LICENSED TRADEMARK AND THERE CAN BE NO DIVISION OF ROYALTY PAYMENT; AND SECOND THAT BRAND SUZUKI IS VALUABLE AND NOT WORTHLESS AS WAS HELD BY THE TPO. IN SO FAR AS THE FI RST ASPECT OF BIFURCATION OF ROYALTY PAYMENT INTO TWO PARTS IS CONCERNED, ALTHOUGH WE FIND THAT THE ARGUMENTS PUT 140 FORTH BY THE LD. DR ARE NOT ABSOLUTELY WITHOUT FOUNDATION, YET, THE PRINCIPLE OF CONSISTENCY, LAID DOWN BY THE HONBLE SUPREME COURT AND HONB LE HIGH COURTS IN SEVERAL JUDGMENTS, PERSUADES US TO GO WITH THE VIEW TAKEN BY THE TRIBUNAL IN ITS ORDER FOR THE A.Y. 2005 - 06, MORE SPECIFICALLY BECAUSE THE TPO HAS ALSO RELIED ON HIS FINDING GIVEN FOR THE AY 2005 - 06 IN ARRIVING AT THE DECISION TAKEN AGA INST THE ASSESSEE IN THE EXTANT YEAR. AS REGARDS THE SECOND ASPECT, THE LD. DR HAS NOT BROUGHT ON RECORD ANY FURTHER MATERIAL TO DEMOLISH THE FINDING GIVEN BY THE TRIBUNAL IN THE EARLIER YEAR ABOUT THE BRAND `SUZUKI HAVING SUBSTANTIAL VALUE AND THE ROYAL TY PAYMENT AT ALP. 7.7. ADDITION ON ACCOUNT OF TRANSFER PRICING ADJUSTMENT CAN BE MADE BY MAKING A COMPARISON BETWEEN THE TRANSACTED VALUE OF AN INTERNATIONAL TRANSACTION AND ITS ALP. THUS IT IS CLEAR THAT THE AVAILABILITY OF THE TRANSACTED VALUE OF AN INTERNATIONAL TRANSACTION IS SINE QUA NON . IF SUCH TRANSACTED VALUE IS EITHER NOT SEPARATELY AVAILABLE OR CANNOT BE PRECISELY DETERMINED FROM A COMBINED VALUE OF A NUMBER OF INTERNATIONAL TRANSACTIONS, THEN THE ENTIRE EXERCISE OF DETERMINING ALP FAILS. I NSTANTLY, WE ARE CONFRONTED WITH SUCH A PECULIAR SITUATION. THERE IS NO SEPARATE VALUE OF THE INTERNATIONAL TRANSACTION OF ROYALTY FOR USE OF LICENSED TRADEMARK AND THE TRIBUNAL HAS HELD IN THE EARLIER YEAR THAT IT IS A PAYMENT OF INSEPARABLE ROYALTY FOR U SE OF BOTH THE LICENSED INFORMATION AND THE LICENSED TRADEMARKS. IN SUCH CIRCUMSTANCES AND RESPECTFULLY FOLLOWING THE ORDER OF THE TRIBUNAL FOR THE IMMEDIATELY PRECEDING YEAR, WE ORDER FOR THE DELETION OF THE ADDITION OF RS.127.195 CRORE ON ACCOUNT OF TRAN SFER PRICING ADJUSTMENT OF ROYALTY FOR USE OF LICENSED TRADEMARK . 141 28.8 RESPECTFULLY FOLLOWING THE ABOVE ORDER ON THE ISSUE UNDER SIMILAR SET OF FACTS AS DURING THE YEAR, WE SET ASIDE THE MATTER TO THE FILE OF THE TPO/A.O. TO DECIDE THE ISSUE AFRESH IN V IEW OF THE ABOVE DECISION AFTER AFFORDING OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. GROUND NOS. 15.32 TO 15.46 ARE ALLOWED FOR STATISTICAL PURPOSES. 28. 9 GROUND NO. 15.47 : IT IS REGARDING ERROR OF THE ASSESSING OFFICER IN COMPUTING DISALLOWABLE AMOUNT O F ROYALTY. THE LEARNED AR SUBMITTED THAT THIS ISSUE IS ALSO COVERED BY THE DECISION OF THE ITAT IN THE APPEAL FOR THE ASSESSMENT YEAR 2006 - 07 (SUPRA). THE LEARNED CIT(DR) ON THE OTHER HAND PLACED RELIANCE ON THE ORDERS OF THE AUTHORITIES BELOW. 28.10 WE FIND THAT AN IDENTICAL ISSUE HAS BEEN DEALT WITH BY THE ITAT IN THE APPEAL FOR THE ASSESSMENT YEAR 2006 - 07 (SUPRA) IN PARA NOS. 11 THEREOF AT PAGE NOS. 72 AND 73 OF THE ORDER, REPRODUCED HEREUNDER: 11. GROUND NO. 10.5 OF THE ASSESSEES APPEAL IS AGAINS T THE COMPUTATION ERROR MADE BY THE AO IN DETERMINING THE AMOUNT OF DISALLOWANCE AT RS.95.98 CRORE TOWARDS ROYALTY PAID FOR THE USE OF LICENSED INFORMATION. IN VIEW OF OUR ALLOWING DEDUCTION OF ROYALTY IN FULL, THIS GROUND CHALLENGING THE COMPUTATION ERRO R MADE BY THE AO IN MAKING DISALLOWANCE, BECOMES INFRUCTUOUS . 142 28.1 1 RESPECTFULLY FOLLOWING THE ABOVE DECISION ON AN IDENTICAL ISSUE UNDER SIMILAR SET OF FACTS AS OF THE YEAR UNDER CONSIDERATION, W E HOLD THAT IN VIEW OF OUR ORDER FOR ALLOWING DEDUCTION O F ROYALTY IN FULL, THE GROUND UNDER CONSIDERATION QUESTIONING THE COMPUTATION ERROR MADE BY THE ASSESSING OFFICER IN MAKING DISALLOWANCE DOES NOT SURVIVE AS HAVING BECOME INFRUCTUOUS. THE GROUND IS ACCORDINGLY REJECTED. 28.1 2 THE GROUND NOS. 15.48 AND 16 ARE GENERAL IN NATURE, HENCE, DO NOT NEED INDEPENDENT ADJUDICATION. 29. GROUND NO. 17 : IT IS REGARDING DISALLOWANCE OF CREDIT OF TDS CERTIFICATE CLAIMED THROUGH REVISED RETURN . IN SUPPORT OF THIS GROUND, THE LEARNED AR SUBMITTED THAT THE CLAIM WAS VALI D AND JUSTIFIED AND HENCE THE ASSESSING OFFICER MAY BE DIRECTED TO ALLOW THE CREDIT OF TDS CERTIFICATE CLAIMED THROUGH THE REVISED RETURN OF RS.3,55,99,213 AND DURING THE COURSE OF ASSESSMENT PROCEEDINGS AMOUNTING TO RS.6,73,540. HE SUBMITTED THAT APPELLAT E AUTHORITY IS EMPOWERED T O DIRECT THE ASSESSING OFFICER TO ENTERTAIN THE REVISED GROUND FOR THE CONSIDERATION OF JUST CLAIM. 29.1 THE LEARNED CIT(DR) ON THE OTHER HAND OPPOSED THE GROUND. 143 29.2 IN THE INTEREST OF JUSTICE, THE MATTER IS SET ASIDE TO THE FILE OF THE ASSESSING OFFICER TO CONSIDER THE CLAIMED TDS CREDIT ON THE BASIS OF REVISED RETURN AFTER AFFORDING OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. GROUND NO.17 IS ACCORDINGLY ALLOWED FOR STATISTICAL PURPOSE. 30. GROUND NO. 18 : IT IS REGARDING C HARGING OF INTEREST UNDER SEC. 234B, 234C AND 234D OF THE INCOME - TAX ACT, 1961 WHICH IS GENERAL IN NATURE AS SPECIFIC ISSUE HAS BEEN RAISED IN GROUND NOS. 19 AND 19.1, HENCE, IT DOES NOT NEED INDEPENDENT ADJUDICATION. 31. GROUND NO. 19 AND 19.1 : THE GRIE VANCE OF THE ASSESSEE IS THAT THERE IS ERROR IN COMPUTATION OF INTEREST UNDER SEC. 234B OF THE ACT. THE LEARNED AR SUBMITTED THAT ASSESSING OFFICER HAS COMPUTED INTEREST UNDER SECTION 234B OF THE ACT AS UNDER: INTEREST UNDER SECTION 234B OF THE ACT IS FIRSTLY COMPUTED UP TO THE DATE OF PAYMENT OF FIRST SELF ASSESSMENT TAX PRIOR TO FILING THE ORIGINAL RETURN; AFTER COMPUTING INTEREST AS AFORESAID, SELF ASSESSMENT TAX PAID BY THE APPELLANT IS FIRST ADJUSTED AGAINST THE INTEREST CALCULATED AS AFORESAID. 144 AS AGAINST THE AFORESAID, ACCORDING TO THE APPELLANT, THE ASSESSING OFFICER ERRED IN ADJUSTING SELF ASSESSMENT TAX AGAINST THE INTEREST LEVIABLE UNDER SECTION 234B OF THE ACT CALCULATED UP TO THE DATE OF PAYMENT OF SUCH TAX. THE METHOD OF COMPUTATION U SED BY THE ASSESSING OFFICER IS AGAINST THE METHOD PRESCRIBED IN CBDT CIRCULAR NO.549 DATED 31.10.1989, REPORTED IN 182 ITR(ST.) 1, WHICH IS BINDING ON THE INCOME TAX DEPARTMENT. RELIANCE IN THIS REGARD WA S PLACED ON THE DECISION OF THE AHMEDABAD BENCH O F THE TRIBUNAL IN THE CASE OF PATSON TRANSFORMERS LTD. V. DCIT: 103 TTJ 735 WHEREIN THE TRIBUNAL WAS CONSIDERING THE SIMILAR ISSUE REGARDING THE CALCULATION OF INTEREST UNDER SECTION 234B IN THE LIGHT OF THE EXPLANATION TO SECTION 140A OF THE ACT AND DECID ED THE ISSUE IN FAVOUR OF ASSESSEE. RELIANCE IS FURTHER PLACED ON THE DECISION OF THE MUMBAI BENCH OF THE TRIBUNAL IN THE CASE OF ACIT V. C.C CHOKSHI AND CO.: ITA NO. 7791/MUM/2004 (LEX DOC: 390032) WHEREIN THE TRIBUNAL WAS ADJUDICATING SIMILAR ISSUE. IN THAT CASE, THE ASSESSING OFFICER SIMILARLY ADJUSTED THE SELF ASSESSMENT TAX FIRSTLY AGAINST THE INTEREST LEVIABLE UNDER SECTION 234B OF THE ACT ON THE BASIS OF THE ASSESSED INCOME. ON THE OTHER HAND, THE ASSESSEE CONTENDED THAT THE SAME NEEDS TO BE COMPUTE D WITH REFERENCE TO THE RETURNED INCOME AND NOT THE ASSESSED INCOME. 145 31.2 ACCEPTING THE CONTENTION OF THE ASSESSEE, THE TRIBUNAL OBSERVED AS UNDER: 3.6.2 WE HAVE HEARD BOTH PARTIES PERUSED THE RECORDS AND CONSIDERED THE MATTER CAREFULLY. THE FACTUAL AND LEGAL BACKGROUND RELATING TO THE ISSUE HAS ALREADY BEEN DISCUSSED IN THE PRECEDING PARAS. THE SECTION 140A PROVIDES THAT IN CASE PAYMENT MADE UNDER THE SAID SECTION FALLS SHORT OF THE TAX PAYABLE INCLUDING INTEREST UNDER THE SAID SECTION THEN THE TAX SO P AID SHALL BE FIRST ATTRIBUTED TOWARDS THE INTEREST AND THE BALANCE AMOUNT SHALL BE ADJUSTED AGAINST THE TAX PAYABLE. IN THIS CASE, THE TAX PAYABLE UNDER SECTION 140A ALSO INCLUDED INTEREST PAYABLE UNDER SECTION 234B. THE ISSUE IS WHETHER THE INTEREST PAYA BLE UNDER SECTION 234B WHICH HAS TO BE FIRST ADJUSTED AGAINST THE PAYMENT MADE UNDER SECTION 140A HAS TO BE CALCULATED WITH RESPECT TO TOTAL INCOME AS DECLARED IN THE RETURN OR TOTAL INCOME DETERMINED IN THE REGULAR ASSESSMENT. WE FIND THAT THE SECTION 140 (1B) PROVIDES THAT INTEREST PAYABLE UNDER SECTION 234B, HAS TO BE COMPUTED ON THE AMOUNT BY WHICH THE ADVANCE PAID FALLS SHORT OF ASSESSED TAX AND THE ASSESSED TAX FOR THE PURPOSE OF THIS SUB - SECTION HAS BEEN DEFINED IN THE EXPLANATION TO MEAN THE TAX ON TOTAL INCOME AS DECLARED IN THE RETURN AS REDUCED BY TAX DEDUCTED/COLLECTED AT SOURCE ETC. THEREFORE, WE AGREE WITH THE SUBMISSION MADE BY LD. A.R THAT THE INTEREST PAYABLE UNDER SECTION 234 B FOR THE PURPOSE OF ADJUSTMENT AGAINST THE TAX PAID UNDER SEC TION 140A HAS TO BE COMPUTED WITH RESPECT TO ASSESSED TAX DETERMINED ON THE BASIS OF TOTAL INCOME DECLARED IN THE RETURN. BUT THIS IS ONLY FOR THE LIMITED PURPOSE OF ADJUSTMENT OF PAYMENT MADE U/S. 140A AGAINST INTEREST PAYABLE UNDER SECTION 234B WHILE MA KING 146 COMPUTATION OF INTEREST PAYABLE BY THE ASSESSEE UNDER SECTION 234B WHICH HAS TO BE COMPUTED WITH RESPECT TO THE TOTAL INCOME DETERMINED IN REGULAR ASSESSMENT AS PER THE DEFINITION OF ASSESSED TAX GIVEN IN SECTION 234B. THE ASSESSEE HAS ALSO FOLLOWED THE SAME PROCEDURE WITH WHICH WE AGREE. THE ORDER OF CIT(A) CONFIRMING THE METHOD FOLLOWED BY THE AO IS THEREFORE SET ASIDE AND THE CLAIM OF THE ASSESSEE IS ALLOWED. 31.3 THE LEARNED CIT(DR) ON THE OTHER HAND PLACED RELIANCE ON THE ORDERS OF THE AUTHORIT IES BELOW. 31.4 RESPECTFULLY FOLLOWING THE DECISION OF MUMBAI BENCH OF THE ITAT IN THE CASE OF ACIT VS. C.C. CHOKSHI & CO. (SUPRA) ON THE ISSUE, WE HOLD THAT THE INTEREST PAYABLE UNDER SEC. 234B FOR THE PURPOSE OF ADJUSTMENT AGAINST THE TAX PAID UNDER SE C. 140A OF THE ACT HAS TO BE COMPUTED WITH RESPECT TO ASSESS TAX DETERMINED ON THE BASIS OF TOTAL INCOME DECLARED IN THE RETURN. THIS IS ONLY FOR THE LIMITED PURPOSE OF ADJUSTMENT OF PAYMENT MADE UNDER SEC. 140A OF THE ACT AGAINST INTEREST PAYABLE UNDER SE C. 234B OF THE ACT WHILE MAKING COMPUTATION OF INTEREST PAYABLE BY THE ASSESSEE UNDER SEC. 234B WHICH HAS TO BE COMPUTED WITH RESPECT TO TOTAL INCOME DETERMINED IN REGULAR ASSESSMENT AS PER THE DEFINITION OF ASSESSED TAX GIVEN IN SEC. 234B OF THE ACT. WE T HUS SET ASIDE THE MATTER TO THE FILE OF THE ASSESSING OFFICER TO DECIDE THE ISSUE AFRESH IN VIEW OF THE ABOVE FINDING IN THE CASE OF C.C. 147 CHOKSHI & CO. (SUPRA) AFTER HEARING THE ASSESSEE. GROUND NOS.19 AND 19.1 ARE THUS ALLOWED FOR STATISTICAL PURPOSES. 32. GROUND NO. 20 : THE GRIEVANCE OF THE ASSESSEE IS THAT THE ASSESSING OFFICER HAS ERRED IN CHARGING INTEREST UNDER SEC. 234C OF THE ACT ON ASSESSED INCOME INSTEAD OF RETURNED INCOME AS PER THE PROVISIONS OF THE ACT. THE LEARNED AR SUBMITTED THAT AN IDENTI CAL ISSUE HAS BEEN DECIDED IN FAVOUR OF THE ASSESSEE BY THE ITAT IN ITS CASE FOR THE ASSESSMENT YEAR 2006 - 07 (SUPRA). 32.1 THE LEARNED CIT(DR) ON THE OTHER HAND PLACED RELIANCE ON THE ORDERS OF THE AUTHORITIES BELOW. 32.2 CONSIDERING THE ABOVE SUBMISSIO NS, WE AGREE THAT AS PER SECTION 234C OF THE ACT, INTEREST IS REQUIRED TO BE CALCULATED ON THE BASIS OF RETURNED INCOME AND NOT ON THE BASIS OF ASSESSED INCOME. AN IDENTICAL ISSUE HAS BEEN ADJUDICATED UPON BY THE ITAT IN THE CASE OF ASSESSEE ITSELF FOR THE ASSESSMENT YEAR 2006 - 07. WE DIRECT THE ASSESSING OFFICER TO DECIDE THE ISSUE AFRESH IN VIEW OF THE FINDING OF THE ITAT ON THE ISSUE IN THE APPEAL FOR THE ASSESSMENT YEAR 2006 - 07 (SUPRA) IN PARA NO. 19 THEREOF IS REPRODUCED BELOW : 148 19. NEXT GROUND IS AGAI NST THE CHARGING OF INTEREST UNDER SECTIONS 234B, 234C AND 234D OF THE INCOME - TAX ACT, 1961. THIS GROUND IS CONSEQUENTIAL AND IS, ACCORDINGLY, ALLOWED EXCEPT THE CHARGING OF INTEREST UNDER SEC. 234C. THE LEARNED AR ARGUED THAT THE ASSESSING OFFICER COMPUTE D INTEREST UNDER SEC. 234C ON THE BASIS OF INCOME FINALLY DETERMINED AS AGAINST THE INCOME - TAX DUE ON RETURNED INCOME. WE FIND FORCE IN THE ARGUMENTS PUT FORTH ON BEHALF OF THE ASSESSEE THAT COMPUTATION OF INTEREST UNDER SEC. 234C FOR DEFERMENT OF ADVANCE TAX IS REQUIRED TO BE MADE ON THE BASIS OF TAX DUE ON THE RETURNED INCOME AS HAS BEEN ENSHRINED IN THE PROVISION ITSELF. WE, THEREFORE, DIRECT THE ASSESSING OFFICER TO VERIFY THIS ASPECT OF THE MATTER AND COMPUTE INTEREST UNDER SEC. 234C AS PER LAW. 3 2.3 GROUND NO. 20 IS ACCORDINGLY ALLOWED FOR STATISTICAL PURPOSES. 33. IN RESULT, THE APPEAL IS PARTLY ALLOWED. 34. ITA NO.2564/DEL/2014 : THE HAS QUESTIONED RECTIFICATION ORDER DATED 24.2.2014 ON THE FOLLOWING GROUNDS: 1. THAT ON THE FACTS AND IN THE CIR CUMSTANCES OF THE CASE AND IN LAW, THE IMPUGNED RECTIFICATION ORDER DATED 24.02.2014 PASSED UNDER SECTIONS 154/143(3) OF THE INCOME - TAX ACT, 1961 (THE ACT) IS WITHOUT JURISDICTION, ILLEGAL AND BAD IN LAW. 2. THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN ENHANCING THE DISALLOWANCE OF CESS ON ROYALTY TO RS.5,84,20,133 AGAINST 149 DISALLOWANCE OF RS.3,61,80,458 MADE IN THE ASSESSMENT ORDER DATED 29.11.2011, THEREBY RESULTING IN FURTHER ADDITION OF RS,2,22,39,675. 3. THAT THE ASSESSING OFFICER ERRED ON FACT S AND IN LAW IN ENHANCING THE AFORESAID DISALLOWANCE, WITHOUT APPRECIATING THAT SINCE DISALLOWANCE OF CESS ON ROYALTY MADE IN THE ORIGINAL ORDER DATED 29.11.2011 IS ERRONEOUS, THE ENHANCEMENT MADE IN THE IMPUGNED RECTIFICATION ORDER IS ALSO LEGALLY UNSUSTA INABLE. 35. THE CONTENTION OF THE LEARNED AR REMAINED THAT DISALLOWANCE OF CESS ON ROYALTY MADE IN THE ORIGINAL ASSESSMENT ORDER DATED 29.11.2011 ITSELF WAS WRONG, HENCE, ENHANCEMENT MADE IN THE IMPUGNED RECTIFICATION ORDER IS UNSUSTAINABLE. 36. THE LE ARNED CIT(DR) ON THE OTHER HAND TRIED TO JUSTIFY THE ORDER IMPUGNED AND REITERATED SUBMISSIONS MADE BY HIM IN OPPOSING GROUND NOS. 9 TO 10.5 OF THE ABOVE APPEAL OF THE ASSESSEE. 37. IN THE ABOVE APPEAL I.E. ITA NO.5720/DEL/2011, WE HOLD THAT DISALLOWANCE OF ROYALTY AND SERVICE TAX CLAIMED AS REVENUE EXPENDITURE AT RS.3,61,92,40,438 AND ROYALTY CLAIMED AS CAPITAL EXPENDITURE AT RS.5,33,56,962 WAS NOT JUSTIFIED IN VIEW OF THE DECISION OF THE ITAT ON AN IDENTICAL ISSUE IN THE CASE OF ASSESSEE ITSELF IN THE AP PEAL FOR THE ASSESSMENT YEAR 2006 - 07 HOLDING THAT AMOUNT OF ROYALTY CONSIDERED BY THE ASSESSING 150 OFFICER AS CAPITAL EXPENDITURE SHOULD BE ALLOWED AS REVENUE EXPENDITURE. IN VIEW OF THIS FINDING, THE ISSUE IN THE PRESENT APPEAL BEFORE US ENHANCING THE DISALL OWANCE OF CESS ON ROYALTY HAS BECOME INFRUCTUOUS. THE GROUNDS ARE ACCORDINGLY ALLOWED. 38. IN RESULT, APPEAL IS ALLOWED. 39. IN SUMMARY, ITA NO. 5720/DEL/2011 IS PARTLY ALLOWED AND ITA NO.2564/DEL/2014 IS ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 2 0 . 0 5 . 201 6 SD/ - SD/ - ( L .P . SAHU ) ( I.C. S UDHIR ) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED: 20 / 0 5 /201 6 MOHAN LAL COPY FORWARDED TO: 1) APPELLANT 2) RESPONDENT 3) CIT 4) CIT(APP EALS) 5) DR:ITAT ASSISTANT REGISTRAR 151 SD/ - SD/ - ( L.P. SAHU ) ( I.C. SUDHIR ) ACCOUNTANT MEMBER JUDICIAL MEMBER DATE DRAFT DICTATED DIRECTLY ON COMPUTER 0 2 . 0 5 .201 6 TO 13.05.2016 DRAFT PLACED BEFORE AUTHOR 16 . 0 5 .2016 DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER DRAFT DISCUSSED/AP PROVED BY SECOND MEMBER. 20 .05 .2016 APPROVED DRAFT COMES TO THE SR.PS/PS 20 . 0 5 .2016 KEPT FOR PRONOUNCEMENT ON 20 .0 5 .2016 FILE SENT TO THE BENCH CLERK 20 . 0 5 .2016 DATE ON WHICH FILE GOES TO THE AR DATE ON WHICH FILE GOES TO THE HEAD CLERK. DATE OF DISPATCH OF ORDER.