NISSAN MOTOR INDIA PRIVATE LIMITED,KANCHEEPURAM vs. DCIT CORPORATE CIRCLE 4(2), CHENNAI

आदेश / O R D E R PER ABY T. VARKEY, JM: This is an appeal preferred by the assessee against the order of the Assessing Office passed under Section 143(3)/144C(13) of the Income Tax Act, 1961 (hereinafter in short ‘the Act’) dated 21.01.2019 for Assessment Year 2013-14 (hereinafter in short ‘AY’) pursuant to the DRP directions dated 10.01.2019.

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Grounds of appeal raised by the assessee are as under: appeal raised by the assessee are as under: appeal raised by the assessee are as under: 2.

The grounds of appeal listed below are independent and without prejudice to The grounds of appeal listed below are independent and without prejudice to The grounds of appeal listed below are independent and without prejudice to each other.

1.1. The lower authorities had, in the facts and circumstances of the case, 1.1. The lower authorities had, in the facts and circumstances of the case, 1.1. The lower authorities had, in the facts and circumstances of the case, erred in passing orders with u erred in passing orders with unwarranted adjustments to the reported income nwarranted adjustments to the reported income of the Appellant by misapplying the provisions of the Act, by adopting faulty of the Appellant by misapplying the provisions of the Act, by adopting faulty of the Appellant by misapplying the provisions of the Act, by adopting faulty assessment procedure to finalize the adjustment, such as, but not limited to, assessment procedure to finalize the adjustment, such as, but not limited to, assessment procedure to finalize the adjustment, such as, but not limited to, rejection of transfer pricing study, analysis of the f rejection of transfer pricing study, analysis of the functions carried out by the unctions carried out by the Appellant and those of the comparable companies, selection of inappropriate Appellant and those of the comparable companies, selection of inappropriate Appellant and those of the comparable companies, selection of inappropriate comparables, erroneous accounting treatment of certain items, erroneous comparables, erroneous accounting treatment of certain items, erroneous comparables, erroneous accounting treatment of certain items, erroneous computation of profit margins of the comparable companies and not granting computation of profit margins of the comparable companies and not granting computation of profit margins of the comparable companies and not granting appropriate economic adjustments. priate economic adjustments.

2.2 Segmentation between Export and Domestic Segment 2.2 Segmentation between Export and Domestic Segment

2.2.1. The lower authorities had erred in the facts and circumstances of the 2.2.1. The lower authorities had erred in the facts and circumstances of the 2.2.1. The lower authorities had erred in the facts and circumstances of the case and in law, by not appreciating the fact that net margins of t case and in law, by not appreciating the fact that net margins of the Appellant he Appellant in the exports segment is higher than the net margins of the comparables in the exports segment is higher than the net margins of the comparables in the exports segment is higher than the net margins of the comparables selected by the lower authorities and hence at arm's length. selected by the lower authorities and hence at arm's length.

2.2.2. The lower authorities had erred in the facts and circumstances of the 2.2.2. The lower authorities had erred in the facts and circumstances of the 2.2.2. The lower authorities had erred in the facts and circumstances of the case and in law, by erroneously case and in law, by erroneously rejecting the independent certification rejecting the independent certification submitted in relation to the segmentation between the export and domestic submitted in relation to the segmentation between the export and domestic submitted in relation to the segmentation between the export and domestic profitability of the Appellant profitability of the Appellant

2.3. Comparables adopted by the lower authorities 3. Comparables adopted by the lower authorities

2.3.1. The lower authorities had erred in the facts and circu 2.3.1. The lower authorities had erred in the facts and circumstances of the mstances of the case and in law, in considering companies engaged in the manufacture of case and in law, in considering companies engaged in the manufacture of case and in law, in considering companies engaged in the manufacture of commercial vehicles and two wheelers for benchmarking the Appellant's commercial vehicles and two wheelers for benchmarking the Appellant's commercial vehicles and two wheelers for benchmarking the Appellant's international transactions, which were in fact rejected by the Transfer Pricing international transactions, which were in fact rejected by the Transfer Pricing international transactions, which were in fact rejected by the Transfer Pricing Officer (TPO) himself to be non elf to be non-comparable in the subsequent year.

2.3.2. The lower authorities had erred in the facts and circumstances of the 2.3.2. The lower authorities had erred in the facts and circumstances of the 2.3.2. The lower authorities had erred in the facts and circumstances of the case and in law, in undertaking a fresh search process using irrelevant case and in law, in undertaking a fresh search process using irrelevant case and in law, in undertaking a fresh search process using irrelevant parameters for determination of ALP of the Appellant's int parameters for determination of ALP of the Appellant's international ernational transactions, and not providing the details of the search conducted and filters transactions, and not providing the details of the search conducted and filters transactions, and not providing the details of the search conducted and filters adopted in identifying comparable companies, which amounts to cherry picking adopted in identifying comparable companies, which amounts to cherry picking adopted in identifying comparable companies, which amounts to cherry picking of companies

2.4 Computation of net margins of the Appellant 2.4 Computation of net margins of the Appellant

2.4.1. The lower authoritie 2.4.1. The lower authorities had erred in the facts and circumstances of the s had erred in the facts and circumstances of the case and in law, in treating the Investment Promotion Subsidy ('IPS') incentive case and in law, in treating the Investment Promotion Subsidy ('IPS') incentive case and in law, in treating the Investment Promotion Subsidy ('IPS') incentive as a non-operating item and excluding the same in computing the net operating item and excluding the same in computing the net operating item and excluding the same in computing the net

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operating margins of the Appellant without appreciating th operating margins of the Appellant without appreciating the nature of IPS e nature of IPS incentive.

2.4.2. Without prejudice to other grounds, the lower authorities had erred in 2.4.2. Without prejudice to other grounds, the lower authorities had erred in 2.4.2. Without prejudice to other grounds, the lower authorities had erred in the facts and circumstances of the case and in law by considering IPS incentive the facts and circumstances of the case and in law by considering IPS incentive the facts and circumstances of the case and in law by considering IPS incentive as non-operating in nature for computation of the net margin of the App operating in nature for computation of the net margin of the App operating in nature for computation of the net margin of the Appellant, and not excluding it from the computation of taxable income. and not excluding it from the computation of taxable income.

2.4.3. The lower authorities had erred in the facts and circumstances of the 2.4.3. The lower authorities had erred in the facts and circumstances of the 2.4.3. The lower authorities had erred in the facts and circumstances of the case and in law, in treating export incentives as a non case and in law, in treating export incentives as a non-operating item and operating item and excluding the same in computing the excluding the same in computing the net operating margins of the Appellant net operating margins of the Appellant without appreciating the nature of the incentive without appreciating the nature of the incentive

2.4.4. The lower authorities had erred in the facts and circumstances of the 2.4.4. The lower authorities had erred in the facts and circumstances of the 2.4.4. The lower authorities had erred in the facts and circumstances of the case and in law, in treating the write case and in law, in treating the write-back of provisions no longer required as back of provisions no longer required as non-operating in nature, in computing its operating margins, without ing in nature, in computing its operating margins, without ing in nature, in computing its operating margins, without understanding the real nature of the said items. understanding the real nature of the said items.

2.5 Rejection of benchmarking analysis and computation of Arm's 2.5 Rejection of benchmarking analysis and computation of Arm's 2.5 Rejection of benchmarking analysis and computation of Arm's length price (ALP)

2.5.1. Without prejudice to the above grounds, the lower authorit 2.5.1. Without prejudice to the above grounds, the lower authorities had erred ies had erred in the facts and circumstances of the case and in law, in rejecting the 'one in the facts and circumstances of the case and in law, in rejecting the 'one in the facts and circumstances of the case and in law, in rejecting the 'one economic unit approach adopted by the Appellant for determining the ALP of economic unit approach adopted by the Appellant for determining the ALP of economic unit approach adopted by the Appellant for determining the ALP of its international transactions, without appreciating its business model and its international transactions, without appreciating its business model and its international transactions, without appreciating its business model and other economic aspects of its business. aspects of its business.

2.5.2 Without prejudice to the above grounds, the lower authorities had erred 2.5.2 Without prejudice to the above grounds, the lower authorities had erred 2.5.2 Without prejudice to the above grounds, the lower authorities had erred in the facts and circumstances of the case and in law, in rejecting the overseas in the facts and circumstances of the case and in law, in rejecting the overseas in the facts and circumstances of the case and in law, in rejecting the overseas tested party approach used to benchmark the import as well as export re tested party approach used to benchmark the import as well as export re tested party approach used to benchmark the import as well as export related international transactions in the Transfer Pricing study maintained by the international transactions in the Transfer Pricing study maintained by the international transactions in the Transfer Pricing study maintained by the Appellant, despite accepting the entrepreneurial functions and risk of the Appellant, despite accepting the entrepreneurial functions and risk of the Appellant, despite accepting the entrepreneurial functions and risk of the appellant, and not appreciating that a similar approach for benchmarking the appellant, and not appreciating that a similar approach for benchmarking the appellant, and not appreciating that a similar approach for benchmarking the imports was accepted in imports was accepted in a previous year by TPO.

2.6 Economic Adjustment 2.6 Economic Adjustment

2.6.1. The lower authorities had erred in the facts and circumstances of the 2.6.1. The lower authorities had erred in the facts and circumstances of the 2.6.1. The lower authorities had erred in the facts and circumstances of the case and in law, in not granting appropriate adjustments for customs duty and case and in law, in not granting appropriate adjustments for customs duty and case and in law, in not granting appropriate adjustments for customs duty and working capital as envisaged under Rule 100 of the I working capital as envisaged under Rule 100 of the Income Tax Rules, 1962 ncome Tax Rules, 1962 (IT Rules) in determination of ALP of the Appellant's international transactions (IT Rules) in determination of ALP of the Appellant's international transactions (IT Rules) in determination of ALP of the Appellant's international transactions

2.7 Corresponding relief 2.7 Corresponding relief

2.7.1. The lower authorities had erred in the facts and circumstances of the 2.7.1. The lower authorities had erred in the facts and circumstances of the 2.7.1. The lower authorities had erred in the facts and circumstances of the case and in law, in not understanding the business case and in law, in not understanding the business model of the Appellant, by model of the Appellant, by imputing an adjustment in the case of the Appellant's domestic related party imputing an adjustment in the case of the Appellant's domestic related party imputing an adjustment in the case of the Appellant's domestic related party (Renault Nissan Automotive India Private Limited), and not providing a (Renault Nissan Automotive India Private Limited), and not providing a (Renault Nissan Automotive India Private Limited), and not providing a corresponding relief in relation to its transactions with the Appellant, which corresponding relief in relation to its transactions with the Appellant, which corresponding relief in relation to its transactions with the Appellant, which was in fact provided by the TPO himself in the subsequent year. s in fact provided by the TPO himself in the subsequent year.

2.8 Other grounds

2.8.1. The lower authorities erred in the facts and circumstances of the case 2.8.1. The lower authorities erred in the facts and circumstances of the case 2.8.1. The lower authorities erred in the facts and circumstances of the case and in law, by rejecting the Indian benchmarking analysis (using Indian and in law, by rejecting the Indian benchmarking analysis (using Indian and in law, by rejecting the Indian benchmarking analysis (using Indian comparable companies) subm comparable companies) submitted by the Appellant as part of the transfer itted by the Appellant as part of the transfer pricing assessment proceedings. pricing assessment proceedings.

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3.1 The lower authorities erred in the facts and circumstances of the case and 3.1 The lower authorities erred in the facts and circumstances of the case and 3.1 The lower authorities erred in the facts and circumstances of the case and in law, in not allowing in law, in not allowing deduction in respect of the provision for warranty deduction in respect of the provision for warranty accounted by the Appellant, stating that the same is not consistent on a year accounted by the Appellant, stating that the same is not consistent on a year accounted by the Appellant, stating that the same is not consistent on a year on year basis.

3.2 The lower authorities erred in the facts and circumstances of the case and 3.2 The lower authorities erred in the facts and circumstances of the case and 3.2 The lower authorities erred in the facts and circumstances of the case and in law, in not appreciating the in law, in not appreciating the scientific and consistent basis followed by the scientific and consistent basis followed by the Appellant in relation to creation of provision for warranty and erred in Appellant in relation to creation of provision for warranty and erred in Appellant in relation to creation of provision for warranty and erred in concluding that the quantum of provision is in excess, without demonstrating concluding that the quantum of provision is in excess, without demonstrating concluding that the quantum of provision is in excess, without demonstrating any reasons as to why the same is found to be excessive. any reasons as to why the same is found to be excessive.

3.3 The lower authorities also erred in the facts and circumstances of the case .3 The lower authorities also erred in the facts and circumstances of the case .3 The lower authorities also erred in the facts and circumstances of the case and in law, in distinguishing the judicial precedents relied upon by the and in law, in distinguishing the judicial precedents relied upon by the and in law, in distinguishing the judicial precedents relied upon by the Appellant by stating that the same may not apply since the Appellant has Appellant by stating that the same may not apply since the Appellant has Appellant by stating that the same may not apply since the Appellant has engaged some other concern for engaged some other concern for the manufacturing of the goods without the manufacturing of the goods without appreciating that contractually, the Appellant is liable for any claim that arises appreciating that contractually, the Appellant is liable for any claim that arises appreciating that contractually, the Appellant is liable for any claim that arises on account of product warranty on account of product warranty

3.4. The lower authorities erred in the facts and circumstances of the case and 3.4. The lower authorities erred in the facts and circumstances of the case and 3.4. The lower authorities erred in the facts and circumstances of the case and in law, in disregarding the computation adopted by the Appellant for arriving at the computation adopted by the Appellant for arriving at the computation adopted by the Appellant for arriving at the amount of provision and instead determining the quantum of provision as the amount of provision and instead determining the quantum of provision as the amount of provision and instead determining the quantum of provision as an average of the provision for 5 years on an adhoc basis an average of the provision for 5 years on an adhoc basis

4.1. The lower authorities erred in the facts and circumstances of the case and 4.1. The lower authorities erred in the facts and circumstances of the case and 4.1. The lower authorities erred in the facts and circumstances of the case and in law, in treating the payments made for software charges by the Appellant to in law, in treating the payments made for software charges by the Appellant to in law, in treating the payments made for software charges by the Appellant to tax resident of Japan to be in the nature of 'Royalty and thus, subject to tax resident of Japan to be in the nature of 'Royalty and thus, subject to tax resident of Japan to be in the nature of 'Royalty and thus, subject to withholding taxes under the provisions of the Income taxes under the provisions of the Income-tax Act, 1961.

4.2 The lower authorities erred in the facts and circumstances of the case and 4.2 The lower authorities erred in the facts and circumstances of the case and 4.2 The lower authorities erred in the facts and circumstances of the case and in law, in failing to appreciate that the Appellant has the option of availing of in law, in failing to appreciate that the Appellant has the option of availing of in law, in failing to appreciate that the Appellant has the option of availing of the provisions of the relevant tax trea the provisions of the relevant tax treaty where the same are more beneficial ty where the same are more beneficial than the provisions of the income than the provisions of the income-tax Act, 1961.

4.3. The lower authorities erred in the facts and circumstances of the case and 4.3. The lower authorities erred in the facts and circumstances of the case and 4.3. The lower authorities erred in the facts and circumstances of the case and in law, in failing to appreciate that the payment made by the Appellant in law, in failing to appreciate that the payment made by the Appellant in law, in failing to appreciate that the payment made by the Appellant towards software charges does not envisage the transfer of any right in the charges does not envisage the transfer of any right in the charges does not envisage the transfer of any right in the nature of copyright or similar nature in relation to the software. Consequently, nature of copyright or similar nature in relation to the software. Consequently, nature of copyright or similar nature in relation to the software. Consequently, the same would not be covered as 'Royalty' under the India the same would not be covered as 'Royalty' under the India-Japan tax treaty. Japan tax treaty.

4.4 The lower authorities erred in the 4.4 The lower authorities erred in the facts and circumstances of the case and facts and circumstances of the case and in law, in failing to appreciate that the payment by the Appellant is merely in law, in failing to appreciate that the payment by the Appellant is merely in law, in failing to appreciate that the payment by the Appellant is merely acquiring a copy of the computer programme and cannot be treated as a acquiring a copy of the computer programme and cannot be treated as a acquiring a copy of the computer programme and cannot be treated as a payment for the "right to use the copyright in computer programme. payment for the "right to use the copyright in computer programme.

4.5. Further, the lower authorities failed to appreciate that the payment made 5. Further, the lower authorities failed to appreciate that the payment made 5. Further, the lower authorities failed to appreciate that the payment made by the Appellant to the non by the Appellant to the non-resident for purchase of software is in the nature resident for purchase of software is in the nature of business income which would be liable to tax in India only on the of business income which would be liable to tax in India only on the of business income which would be liable to tax in India only on the constitution of a PE of the non constitution of a PE of the non-resident. Therefore, in the absence of PE of the resident. Therefore, in the absence of PE of the non-resident in India, the subject payment is not liable to withholding tax in resident in India, the subject payment is not liable to withholding tax in resident in India, the subject payment is not liable to withholding tax in India

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4.6. Further, the lower authorities failed to appreciate the applicability of the 4.6. Further, the lower authorities failed to appreciate the applicability of the 4.6. Further, the lower authorities failed to appreciate the applicability of the principles upheld by jurisdictional cou principles upheld by jurisdictional courts in the precedents relied on by the rts in the precedents relied on by the Appellant.

4.7 Also, the lower authorities erred in not taking cognizance of Hon'ble 4.7 Also, the lower authorities erred in not taking cognizance of Hon'ble 4.7 Also, the lower authorities erred in not taking cognizance of Hon'ble Chennai ITAT ruling in the Appellant's own case for AY 2014 Chennai ITAT ruling in the Appellant's own case for AY 2014-15, rendered in 15, rendered in the context of applicability of withholding on the subje the context of applicability of withholding on the subject payment.

5.1. The Appellant wishes to submit that certain provisions were reversed to 5.1. The Appellant wishes to submit that certain provisions were reversed to 5.1. The Appellant wishes to submit that certain provisions were reversed to the Profit and Loss Account and reported as income in the books of accounts the Profit and Loss Account and reported as income in the books of accounts the Profit and Loss Account and reported as income in the books of accounts during the subject Financia during the subject Financial Year 2012-13 and offered to tax in the return of 13 and offered to tax in the return of income. These reversals relate to provisions created in the prior financial years income. These reversals relate to provisions created in the prior financial years income. These reversals relate to provisions created in the prior financial years where such provisions were disallowed in computing the income of the where such provisions were disallowed in computing the income of the where such provisions were disallowed in computing the income of the Appellant for income-tax purposes. The Appellant prays tax purposes. The Appellant prays that relief be granted that relief be granted in respect of these provision reversals since the same has inadvertently not in respect of these provision reversals since the same has inadvertently not in respect of these provision reversals since the same has inadvertently not been claimed by the Appellant in the return of income or during the been claimed by the Appellant in the return of income or during the been claimed by the Appellant in the return of income or during the assessment proceedings and has led to income tax being charged on the same assessment proceedings and has led to income tax being charged on the same assessment proceedings and has led to income tax being charged on the same income twice

The Appellant prays that directions be given to grant all such relief arising from The Appellant prays that directions be given to grant all such relief arising from The Appellant prays that directions be given to grant all such relief arising from the grounds of appeal mentioned supra and all consequential relief thereto. the grounds of appeal mentioned supra and all consequential relief thereto. the grounds of appeal mentioned supra and all consequential relief thereto.

The Appellant craves leave to add to and/or to alter, amend, rescind, modify The Appellant craves leave to add to and/or to alter, amend, rescind, modify The Appellant craves leave to add to and/or to alter, amend, rescind, modify the grounds herein above or produce further documents before or at the time above or produce further documents before or at the time above or produce further documents before or at the time of hearing of this Appeal. of hearing of this Appeal.

written submissions. Having heard the rival submissions and upon perusal written submissions. Having heard the rival submissions and upon perusal written submissions. Having heard the rival submissions and upon perusal

of the case records, the appeal is disposed off as under. of the case records, the appeal is disposed off as under.

Ground No.2 relates to the action of the lower author relates to the action of the lower author relates to the action of the lower authorities confirming 4.

the transfer pricing adjustment to the extent of Rs.338.52 crores. The the transfer pricing adjustment to the extent of Rs.338.52 crores. The the transfer pricing adjustment to the extent of Rs.338.52 crores. The

facts as noted are that, the assessee is an Indian subsidiary of the Nissan facts as noted are that, the assessee is an Indian subsidiary of the Nissan facts as noted are that, the assessee is an Indian subsidiary of the Nissan

Group. The assessee is noted to be engaged in the distribution of Nissan Group. The assessee is noted to be engaged in the distribution of Nissan Group. The assessee is noted to be engaged in the distribution of Nissan

branded cars in India, apart from exporting the same to its Associated ia, apart from exporting the same to its Associated ia, apart from exporting the same to its Associated

Enterprises (hereinafter in short ‘AE’), for resale in other international Enterprises (hereinafter in short ‘AE’), for resale in other international Enterprises (hereinafter in short ‘AE’), for resale in other international

markets. The modus operandi of the assessee’s business is that it markets. The modus operandi of the assessee’s business is that it markets. The modus operandi of the assessee’s business is that it

domestically sources the automobile parts and components, which domestically sources the automobile parts and components, which domestically sources the automobile parts and components, which is

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exported to its AEs as well. The assessee is noted to have benchmarked exported to its AEs as well. The assessee is noted to have benchmarked exported to its AEs as well. The assessee is noted to have benchmarked

the transactions with the AEs by applying internal TNMM Method. The the transactions with the AEs by applying internal TNMM Method. The the transactions with the AEs by applying internal TNMM Method. The

Transfer Pricing Officer( Transfer Pricing Officer(TPO) is noted to have rejected the segmental data is noted to have rejected the segmental data

provided by the assessee and instead c provided by the assessee and instead computed the operating margin at omputed the operating margin at

the entity level and compared the same with the operating margins of the entity level and compared the same with the operating margins of the entity level and compared the same with the operating margins of

comparable entities identified by him. The TPO is noted to have computed comparable entities identified by him. The TPO is noted to have computed comparable entities identified by him. The TPO is noted to have computed

the PLI of the assessee the PLI of the assessee viz., OP/OC at 6.23%. Against this, the Against this, the

comparables chosen by the TPO and their margins as computed, are n by the TPO and their margins as computed, are n by the TPO and their margins as computed, are

noted to be as follows:

TPO and also rejected the objections raised by the assessee to the TPO and also rejected the objections raised by the assessee to the TPO and also rejected the objections raised by the assessee to the

computation of its PLI. Aggrieved by the said computation of its PLI. Aggrieved by the said order, the assessee is now order, the assessee is now

in appeal before us.

The Ld. AR of the assessee had set out two different lines of The Ld. AR of the assessee had set out two different lines of The Ld. AR of the assessee had set out two different lines of 6.

arguments agitating the impugned transfer pricing adjustment. The first arguments agitating the impugned transfer pricing adjustment. The first arguments agitating the impugned transfer pricing adjustment. The first

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line of argument of the Ld. AR was in support of the line of argument of the Ld. AR was in support of the Transfer Pricing Transfer Pricing

Study conducted by the assessee and the segmental workings as well as Study conducted by the assessee and the segmental workings as well as Study conducted by the assessee and the segmental workings as well as

the application of internal TNMM. In the second alternative approach, the the application of internal TNMM. In the second alternative approach, the the application of internal TNMM. In the second alternative approach, the

Ld. AR submitted that, some of the comparables identified by the TPO Ld. AR submitted that, some of the comparables identified by the TPO Ld. AR submitted that, some of the comparables identified by the TPO

were functionally dissimilar and that if t were functionally dissimilar and that if the said comparables are excluded he said comparables are excluded

and at the same time, the apparent infirmities made by th and at the same time, the apparent infirmities made by th and at the same time, the apparent infirmities made by the TPO in the

computation of the assessee’s PLI is considered, then the operating computation of the assessee’s PLI is considered, then the operating computation of the assessee’s PLI is considered, then the operating

margins of the assessee would be higher than the operating margins of margins of the assessee would be higher than the operating margins of margins of the assessee would be higher than the operating margins of

the comparables identified by the identified by the TPO and thus would satisfy the arm’s TPO and thus would satisfy the arm’s

length test. Per contra, the Ld. CIT, DR supported the orders of the lower length test. Per contra, the Ld. CIT, DR supported the orders of the lower length test. Per contra, the Ld. CIT, DR supported the orders of the lower

authorities.

placed before us, we first deem it fit to take up the second line of placed before us, we first deem it fit to take up the second line of placed before us, we first deem it fit to take up the second line of

argument of the assessee for adjudication. The Ld. AR of the assessee argument of the assessee for adjudication. The Ld. AR of the assessee argument of the assessee for adjudication. The Ld. AR of the assessee

had pointed out that, out of the above five (5) compa had pointed out that, out of the above five (5) comparables identified by rables identified by

the TPO, three (3) comparables viz., M/s Ashok Leyland Limited, M/s the TPO, three (3) comparables viz., M/s Ashok Leyland Limited, M/s the TPO, three (3) comparables viz., M/s Ashok Leyland Limited, M/s

Eicher Motors Ltd. and M/s VE Commercials Ltd., had been rejected by Eicher Motors Ltd. and M/s VE Commercials Ltd., had been rejected by Eicher Motors Ltd. and M/s VE Commercials Ltd., had been rejected by

the TPO himself, holding it to be functionally dissimilar in the subsequent the TPO himself, holding it to be functionally dissimilar in the subsequent the TPO himself, holding it to be functionally dissimilar in the subsequent

years. It is noted that, the TPO had conducted a broad base search during t, the TPO had conducted a broad base search during t, the TPO had conducted a broad base search during

the year and had included companies engaged in manufacture of the year and had included companies engaged in manufacture of the year and had included companies engaged in manufacture of

commercial vehicles viz., heavy trucks, heavy duty vehicles etc. According commercial vehicles viz., heavy trucks, heavy duty vehicles etc. According commercial vehicles viz., heavy trucks, heavy duty vehicles etc. According

to us, the assessee has rightly pointed out that, these three compa to us, the assessee has rightly pointed out that, these three compa to us, the assessee has rightly pointed out that, these three companies,

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which were engaged in manufacture of commercial vehicles were which were engaged in manufacture of commercial vehicles were which were engaged in manufacture of commercial vehicles were

functionally dissimilar to the assessee’s operations/activities in consumer functionally dissimilar to the assessee’s operations/activities in consumer functionally dissimilar to the assessee’s operations/activities in consumer

automobiles as they operate in different economic markets and thus automobiles as they operate in different economic markets and thus automobiles as they operate in different economic markets and thus

making them incomparable. We also note that t making them incomparable. We also note that these three (3) hese three (3)

comparables had been categorically rejected by the TPO himself in his comparables had been categorically rejected by the TPO himself in his comparables had been categorically rejected by the TPO himself in his

orders passed u/s 92CA(3) of the Act for AYs 2014 orders passed u/s 92CA(3) of the Act for AYs 2014-15 & 2015 15 & 2015-16, copies

of which have been placed before us at Page Nos. 624, 664 and 665 of of which have been placed before us at Page Nos. 624, 664 and 665 of of which have been placed before us at Page Nos. 624, 664 and 665 of

the Paper-book. Having taken no book. Having taken note of the same, we are in agreement with te of the same, we are in agreement with

the assessee that, when the Revenue itself has held these three the assessee that, when the Revenue itself has held these three the assessee that, when the Revenue itself has held these three

companies to be functionally dissimilar in the subsequent years, then it companies to be functionally dissimilar in the subsequent years, then it companies to be functionally dissimilar in the subsequent years, then it

would be unjustified to retain them as comparables in the relevant year. would be unjustified to retain them as comparables in the relevant year. would be unjustified to retain them as comparables in the relevant year.

Accordingly, the TPO/AO is directed to exclude these three (3) dingly, the TPO/AO is directed to exclude these three (3) dingly, the TPO/AO is directed to exclude these three (3)

comparables while computing the comparable PLI. comparables while computing the comparable PLI.

its PLI by the TPO. According to the assessee, the TPO had erred in its PLI by the TPO. According to the assessee, the TPO had erred in its PLI by the TPO. According to the assessee, the TPO had erred in

treating the export incentives and the provisions written back as non export incentives and the provisions written back as non export incentives and the provisions written back as non-

operating in nature. We first take up the item of export incentives and operating in nature. We first take up the item of export incentives and operating in nature. We first take up the item of export incentives and

subsidies received under the IPS Scheme. The assessee has pointed out subsidies received under the IPS Scheme. The assessee has pointed out subsidies received under the IPS Scheme. The assessee has pointed out

that, these incentives/subsidies were received in the co subsidies were received in the course and for the urse and for the

purposes of business, and were also assessed to tax as business income and were also assessed to tax as business income and were also assessed to tax as business income

being intrinsically related with the business operations of the assessee. It being intrinsically related with the business operations of the assessee. It being intrinsically related with the business operations of the assessee. It

is observed that this Tribunal at Bangalore in the case of is observed that this Tribunal at Bangalore in the case of is observed that this Tribunal at Bangalore in the case of Reitzel India

IT (TP) A No.29/Chny/201 /Chny/2019 (AY 2013-14) M/s. Nissan Motor India Pvt. Ltd. M/s. Nissan Motor India Pvt. Ltd. :: 9 ::

IT(TP) No.2341/Bang/2019) has also held that, has also held that, Pvt Ltd vs. DCIT (IT(TP) No.2341/Bang/2019

the export incentives and subsidies ought to be treated as operating the export incentives and subsidies ought to be treated as operating the export incentives and subsidies ought to be treated as operating

income, for the purposes of computation of PLI. The relevant findings income, for the purposes of computation of PLI. The relevant findings income, for the purposes of computation of PLI. The relevant findings

taken note of is as follows: taken note of is as follows:

“11. The issue relating to export incenti 11. The issue relating to export incentives, i.e., whether they are part ves, i.e., whether they are part of operating income or not has since been settled by Hon'ble Bombay of operating income or not has since been settled by Hon'ble Bombay of operating income or not has since been settled by Hon'ble Bombay High Court in the case of Welspun Zucchi Textiles Ltd (supra). High Court in the case of Welspun Zucchi Textiles Ltd (supra). High Court in the case of Welspun Zucchi Textiles Ltd (supra). Accordingly, we direct the AO/TPO to consider export incentives as part Accordingly, we direct the AO/TPO to consider export incentives as part Accordingly, we direct the AO/TPO to consider export incentives as part of operating income. of operating income. If scraps are generated during the course of If scraps are generated during the course of processing of gherkins, we do not find any reason not to consider it as processing of gherkins, we do not find any reason not to consider it as processing of gherkins, we do not find any reason not to consider it as part of operating profit. Accordingly, we direct the AO/TPO to take scrap part of operating profit. Accordingly, we direct the AO/TPO to take scrap part of operating profit. Accordingly, we direct the AO/TPO to take scrap sales as part of operating income, if the scrap is generated dur sales as part of operating income, if the scrap is generated dur sales as part of operating income, if the scrap is generated during out of its business activities. its business activities. “

incentives and subsidies to be an operating item of income, for the incentives and subsidies to be an operating item of income, for the incentives and subsidies to be an operating item of income, for the

purposes of computing the operating margins of the assessee as well as purposes of computing the operating margins of the assessee as well as purposes of computing the operating margins of the assessee as well as

the comparables, in the subsequent AYs 2014 s, in the subsequent AYs 2014-15 and 2015 15 and 2015-16. Having

regard to the above decision (supra) and the fact that the TPO in regard to the above decision (supra) and the fact that the TPO in regard to the above decision (supra) and the fact that the TPO in

assessee’s own case has also treated the export incentives and subsidies assessee’s own case has also treated the export incentives and subsidies assessee’s own case has also treated the export incentives and subsidies

to be an operating item of income in the later years, the AO to be an operating item of income in the later years, the AO to be an operating item of income in the later years, the AO/TPO is

directed to rework the PLI of the assessee as well as the comparables, directed to rework the PLI of the assessee as well as the comparables, directed to rework the PLI of the assessee as well as the comparables,

after considering the export incentive and IPS subsidies to be as an after considering the export incentive and IPS subsidies to be as an after considering the export incentive and IPS subsidies to be as an

operating item of income. operating item of income.

the P&L Account. It is observed that, for computing the operating t. It is observed that, for computing the operating t. It is observed that, for computing the operating

margins, on the given facts of the case, the assessee had treated the margins, on the given facts of the case, the assessee had treated the margins, on the given facts of the case, the assessee had treated the

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provisions written back as a part of operating income and the TPO also provisions written back as a part of operating income and the TPO also provisions written back as a part of operating income and the TPO also had accepted the same. The Ld. DRP however is noted to have suo-moto had accepted the same. The Ld. DRP however is noted to have had accepted the same. The Ld. DRP however is noted to have

enhanced the assessment by treating the provisions written enhanced the assessment by treating the provisions written enhanced the assessment by treating the provisions written-back as a

non-operating item of income. Before us, the Ld. AR for the assessee operating item of income. Before us, the Ld. AR for the assessee operating item of income. Before us, the Ld. AR for the assessee

showed us that the provisions were created in relation to the operating showed us that the provisions were created in relation to the operating showed us that the provisions were created in relation to the operating

expenses/activities of the company. It w activities of the company. It was brought to our notice that, as brought to our notice that,

when these provisions were created in the earlier years, they were when these provisions were created in the earlier years, they were when these provisions were created in the earlier years, they were

treated as an item of operating expense and the same was accepted by treated as an item of operating expense and the same was accepted by treated as an item of operating expense and the same was accepted by

the Revenue as well. He thus contended that, when the same provisions the Revenue as well. He thus contended that, when the same provisions the Revenue as well. He thus contended that, when the same provisions

have now been written back, it ought to be treated as an item of en back, it ought to be treated as an item of en back, it ought to be treated as an item of

operating income, as a matter of parity. He further showed us that, operating income, as a matter of parity. He further showed us that, operating income, as a matter of parity. He further showed us that,

though the Ld. DRP excluded the provisions written back as an item of though the Ld. DRP excluded the provisions written back as an item of though the Ld. DRP excluded the provisions written back as an item of

operating income while computing the PLI of the assessee, but the operating income while computing the PLI of the assessee, but the operating income while computing the PLI of the assessee, but the

provisions written back, in the case of comparables, was considered as an ions written back, in the case of comparables, was considered as an ions written back, in the case of comparables, was considered as an

operating income by the Ld. DRP. This, according to the assesse operating income by the Ld. DRP. This, according to the assesse operating income by the Ld. DRP. This, according to the assessee, showed

the inconsistent stand taken by the Ld. DRP in as much as the Ld. DRP the inconsistent stand taken by the Ld. DRP in as much as the Ld. DRP the inconsistent stand taken by the Ld. DRP in as much as the Ld. DRP

had arbitrarily disturbed the settled consistent position which was disturbed the settled consistent position which was disturbed the settled consistent position which was

permeating through the years. Having regard to these peculiar facts of permeating through the years. Having regard to these peculiar facts of permeating through the years. Having regard to these peculiar facts of

the case, and the fact that these provisions related to the operating the case, and the fact that these provisions related to the operating the case, and the fact that these provisions related to the operating

expenses of the assessee, we direct the AO to rework the PLI o expenses of the assessee, we direct the AO to rework the PLI o expenses of the assessee, we direct the AO to rework the PLI of the

assessee as well as the comparables, after considering the provisions assessee as well as the comparables, after considering the provisions assessee as well as the comparables, after considering the provisions

written back as an operating item of income, for the computation of PLI. written back as an operating item of income, for the computation of PLI. written back as an operating item of income, for the computation of PLI.

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In light of the above directions, we thus allow the alternate plea of In light of the above directions, we thus allow the alternate plea of In light of the above directions, we thus allow the alternate plea of 11.

the assessee for statistical purp the assessee for statistical purposes. Accordingly, the primary contention oses. Accordingly, the primary contention

raised by the assessee supporting its transfer pricing study in relation to raised by the assessee supporting its transfer pricing study in relation to raised by the assessee supporting its transfer pricing study in relation to

application of internal TNMM based on their segmental results, has application of internal TNMM based on their segmental results, has application of internal TNMM based on their segmental results, has

become academic in nature, and is therefore not being separately become academic in nature, and is therefore not being separately become academic in nature, and is therefore not being separately

adjudicated upon. This ground is therefore allowed for statistical cated upon. This ground is therefore allowed for statistical cated upon. This ground is therefore allowed for statistical

purposes.

provisions for warranty to the extent of Rs.45.77 crores. The facts as provisions for warranty to the extent of Rs.45.77 crores. The facts as provisions for warranty to the extent of Rs.45.77 crores. The facts as

noted are that, the assessee had made a provision noted are that, the assessee had made a provision of Rs.145.73 crores on of Rs.145.73 crores on

account of provision for warranties in relation to its domestic and export account of provision for warranties in relation to its domestic and export account of provision for warranties in relation to its domestic and export

sales. In the course of assessment, the assessee is noted to have sales. In the course of assessment, the assessee is noted to have sales. In the course of assessment, the assessee is noted to have

submitted the basis of arriving at the provision for warranty along with submitted the basis of arriving at the provision for warranty along with submitted the basis of arriving at the provision for warranty along with

the granular level break break-up, copy of which is found placed at Pages 536 to up, copy of which is found placed at Pages 536 to 547 of the Paper Book. It was inter alia explained therein that, ordinarily 547 of the Paper Book. It was explained therein that, ordinarily

the regular contractual warranty for the year worked out to Rs.46.56 the regular contractual warranty for the year worked out to Rs.46.56 the regular contractual warranty for the year worked out to Rs.46.56

crores, but a further additional warranty of Rs.99.17 but a further additional warranty of Rs.99.17 crores was provided crores was provided

due to the global recall campaign of their Nissan Micra and Sunny Model due to the global recall campaign of their Nissan Micra and Sunny Model due to the global recall campaign of their Nissan Micra and Sunny Model

cars due to the brake and oil pump fault found across their sales. For this, cars due to the brake and oil pump fault found across their sales. For this, cars due to the brake and oil pump fault found across their sales. For this,

the assessee is also noted to have placed the news article covering this the assessee is also noted to have placed the news article covering this the assessee is also noted to have placed the news article covering this

extraordinary event of their global recall campaign, which is found placed event of their global recall campaign, which is found placed event of their global recall campaign, which is found placed

at Pages 545 to 546 of the Paper Book. The AO however is noted to have at Pages 545 to 546 of the Paper Book. The AO however is noted to have at Pages 545 to 546 of the Paper Book. The AO however is noted to have

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questioned the increased quantum of provision for warranty created questioned the increased quantum of provision for warranty created questioned the increased quantum of provision for warranty created

during the year. The AO is found to have analyzed the per during the year. The AO is found to have analyzed the per during the year. The AO is found to have analyzed the percentage of

warranty created and utilized for the period 2011 warranty created and utilized for the period 2011-12 to 2015 12 to 2015-16 and

observed that the provision created during the year was excessive. Taking observed that the provision created during the year was excessive. Taking observed that the provision created during the year was excessive. Taking

the average of the provision made for the past five (5) financial years, the the average of the provision made for the past five (5) financial years, the the average of the provision made for the past five (5) financial years, the

AO observed that the reaso AO observed that the reasonable provision for warranty ought to be nable provision for warranty ought to be

Rs.99.96 crores and therefore disallowed the impugned sum of Rs.45.77 Rs.99.96 crores and therefore disallowed the impugned sum of Rs.45.77 Rs.99.96 crores and therefore disallowed the impugned sum of Rs.45.77 crores [Rs.145.73 minus minus Rs.99.66] by way of excess provision made Rs.99.66] by way of excess provision made

during the year. On appeal, the Ld. DRP supported the order of the AO. during the year. On appeal, the Ld. DRP supported the order of the AO. during the year. On appeal, the Ld. DRP supported the order of the AO.

Aggrieved by the order of the lower authorities, the assessee is now in d by the order of the lower authorities, the assessee is now in d by the order of the lower authorities, the assessee is now in

appeal before us.

Heard both the parties. Before adverting to the facts of this issue, Heard both the parties. Before adverting to the facts of this issue, Heard both the parties. Before adverting to the facts of this issue, 13.

we first take note of the settled legal position. It is observed that the we first take note of the settled legal position. It is observed that the we first take note of the settled legal position. It is observed that the

Hon’ble Apex Court in the Hon’ble Apex Court in the case of Rotorks Control (I) Ltd. vs. CIT Rotorks Control (I) Ltd. vs. CIT

(180 taxman 422) has held that the provision for warranty is an has held that the provision for warranty is an has held that the provision for warranty is an

allowable item, only if the liability is measured using a substantial degree allowable item, only if the liability is measured using a substantial degree allowable item, only if the liability is measured using a substantial degree

of estimation. According to the Hon’ble Supreme Court, the provision for of estimation. According to the Hon’ble Supreme Court, the provision for of estimation. According to the Hon’ble Supreme Court, the provision for

warranty is to be allowed if the assessee is able to satisfy three (3) arranty is to be allowed if the assessee is able to satisfy three (3) arranty is to be allowed if the assessee is able to satisfy three (3)

conditions, viz. (a) an enterprise has a present obligation as a result of a (a) an enterprise has a present obligation as a result of a (a) an enterprise has a present obligation as a result of a

past event; (b) it is probable that an outflow of resources will be required past event; (b) it is probable that an outflow of resources will be required past event; (b) it is probable that an outflow of resources will be required

to settle the obligation; and (c o settle the obligation; and (c) a reliable estimate can be made of the ) a reliable estimate can be made of the

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amount of the obligation amount of the obligation. According to the Hon’ble Apex Court, if these . According to the Hon’ble Apex Court, if these

conditions are not met, then the provision cannot be allowed. conditions are not met, then the provision cannot be allowed. conditions are not met, then the provision cannot be allowed.

that, the assessee has been consistently providing warranty provision in e assessee has been consistently providing warranty provision in e assessee has been consistently providing warranty provision in

relation to the cars sold by them. Upon enquiry from the Bench, it was relation to the cars sold by them. Upon enquiry from the Bench, it was relation to the cars sold by them. Upon enquiry from the Bench, it was

gathered that the basis of the provision for warranty and the amount gathered that the basis of the provision for warranty and the amount gathered that the basis of the provision for warranty and the amount

provided in all the past as well as the subsequent provided in all the past as well as the subsequent years, has been years, has been

accepted by the Revenue and that no disallowance has been made on this accepted by the Revenue and that no disallowance has been made on this accepted by the Revenue and that no disallowance has been made on this

issue in the assessments framed u/s 143(3) for the past as well as issue in the assessments framed u/s 143(3) for the past as well as issue in the assessments framed u/s 143(3) for the past as well as

subsequent years. The case of the Revenue however for the relevant year subsequent years. The case of the Revenue however for the relevant year subsequent years. The case of the Revenue however for the relevant year

is that, the assessee had made is that, the assessee had made excessive provision in comparison to excessive provision in comparison to

preceding and subsequent years. According to the Revenue, provision of preceding and subsequent years. According to the Revenue, provision of preceding and subsequent years. According to the Revenue, provision of

Rs.145.78 crores was made, out of which, upon examination of the past Rs.145.78 crores was made, out of which, upon examination of the past Rs.145.78 crores was made, out of which, upon examination of the past

and subsequent trend of provisions created in the books they had allowed and subsequent trend of provisions created in the books they had allowed and subsequent trend of provisions created in the books they had allowed

provision of Rs.99.66 crores and the balance impugned sum of Rs.45.77 ision of Rs.99.66 crores and the balance impugned sum of Rs.45.77 ision of Rs.99.66 crores and the balance impugned sum of Rs.45.77

crores was held to be excessive and thus disallowed. We however note crores was held to be excessive and thus disallowed. We however note crores was held to be excessive and thus disallowed. We however note

that, the assessee has provided the detailed break that, the assessee has provided the detailed break-up of the manner of up of the manner of

making the provision of Rs.145.78 crores during th making the provision of Rs.145.78 crores during the year and the detailed e year and the detailed

granular bifurcation were were also provided before the lower authorities, in also provided before the lower authorities, in

which no specific defect or infirmity has been pointed out by them. It is which no specific defect or infirmity has been pointed out by them. It is which no specific defect or infirmity has been pointed out by them. It is

observed that what the Revenue has done is that, they have aggregated observed that what the Revenue has done is that, they have aggregated observed that what the Revenue has done is that, they have aggregated

the provisions made across the years, averaged the same, and thereafter made across the years, averaged the same, and thereafter made across the years, averaged the same, and thereafter

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arrived at a figure, which in their view was a reasonable sum which ought arrived at a figure, which in their view was a reasonable sum which ought arrived at a figure, which in their view was a reasonable sum which ought

to have been provided by the assessee. According to us, this analogy of to have been provided by the assessee. According to us, this analogy of to have been provided by the assessee. According to us, this analogy of

the lower authorities was arbitrary the lower authorities was arbitrary, whimsical and unjustified, particularly justified, particularly

in light of the scientific basis provided by the assessee giving the detailed in light of the scientific basis provided by the assessee giving the detailed in light of the scientific basis provided by the assessee giving the detailed

computation of the provision created during the year, which has been computation of the provision created during the year, which has been computation of the provision created during the year, which has been

placed at Pages 536 to 544 of the Paper placed at Pages 536 to 544 of the Paper-Book. The assessee is also noted Book. The assessee is also noted

to have justifiably explained the reason for the comparatively higher ifiably explained the reason for the comparatively higher ifiably explained the reason for the comparatively higher

provision made during the year. It is observed that, a large batch of two provision made during the year. It is observed that, a large batch of two provision made during the year. It is observed that, a large batch of two

specific consumer automobiles sold by the assessee in India as well as specific consumer automobiles sold by the assessee in India as well as specific consumer automobiles sold by the assessee in India as well as

outside was found to be defective and a global recall outside was found to be defective and a global recall campaign was

conducted during the year. This fact is noted to have been well conducted during the year. This fact is noted to have been well conducted during the year. This fact is noted to have been well

documented in the public domain as well, copies of which, as noted documented in the public domain as well, copies of which, as noted documented in the public domain as well, copies of which, as noted

above, has been placed at Pages 545 to 546 of the Paper Book. The above, has been placed at Pages 545 to 546 of the Paper Book. The above, has been placed at Pages 545 to 546 of the Paper Book. The

break-up of the manner of the computation of up of the manner of the computation of provision for warranty is provision for warranty is noted to inter alia comprise of the liability to be incurred due to this comprise of the liability to be incurred due to this comprise of the liability to be incurred due to this

extraordinary event of the global recall of the cars sold by the assessee. extraordinary event of the global recall of the cars sold by the assessee. extraordinary event of the global recall of the cars sold by the assessee.

The assessee also showed us, from Page 547 of the Paper Book, that the The assessee also showed us, from Page 547 of the Paper Book, that the The assessee also showed us, from Page 547 of the Paper Book, that the

provision for warranty made during the year, in this regard, had been or warranty made during the year, in this regard, had been or warranty made during the year, in this regard, had been

utilized to the extent of 85% in the immediately succeeding year itself utilized to the extent of 85% in the immediately succeeding year itself utilized to the extent of 85% in the immediately succeeding year itself

and that the remaining sum was also utilized in the subsequent years and that the remaining sum was also utilized in the subsequent years and that the remaining sum was also utilized in the subsequent years

thereafter. Accordingly, we find that, it was not a case thereafter. Accordingly, we find that, it was not a case that the higher that the higher

provision made during the year remained unutilized in the subsequent provision made during the year remained unutilized in the subsequent provision made during the year remained unutilized in the subsequent

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years, which would have raised would have raised doubt on the basis of making such basis of making such

provision for warranty. On these specific facts therefore, we find that the provision for warranty. On these specific facts therefore, we find that the provision for warranty. On these specific facts therefore, we find that the

assessee had reasonably met t assessee had reasonably met the conditions laid down by the Hon’ble he conditions laid down by the Hon’ble

Apex Court in the case of in the case of Rotorks Control (I) Ltd. (supra) and had (supra) and had

demonstrated that, it had a present obligation as a result of this demonstrated that, it had a present obligation as a result of this demonstrated that, it had a present obligation as a result of this

extraordinary event and that there was a probable outflow of resources extraordinary event and that there was a probable outflow of resources extraordinary event and that there was a probable outflow of resources

which was required to settle the said obligation and that the same was which was required to settle the said obligation and that the same was which was required to settle the said obligation and that the same was

utilized and settled as well a utilized and settled as well and that the assessee has placed before us, a nd that the assessee has placed before us, a

reliable basis for making such an estimate. We therefore find that the reliable basis for making such an estimate. We therefore find that the reliable basis for making such an estimate. We therefore find that the

lower authorities were unjustified in disallowing the provision for warranty lower authorities were unjustified in disallowing the provision for warranty lower authorities were unjustified in disallowing the provision for warranty

to the extent of Rs.45.77 crores and the same is directed to be to the extent of Rs.45.77 crores and the same is directed to be to the extent of Rs.45.77 crores and the same is directed to be deleted.

This ground is therefore allowed. This ground is therefore allowed.

Ground No. 4 relates to the disallowance of payment made for Ground No. 4 relates to the disallowance of payment made for Ground No. 4 relates to the disallowance of payment made for 15.

purchase of software due to non purchase of software due to non-deduction of TDS u/s 40(a)(ia) of the deduction of TDS u/s 40(a)(ia) of the

Act. The facts as noted are that, the assessee had made payments for Act. The facts as noted are that, the assessee had made payments for Act. The facts as noted are that, the assessee had made payments for

acquiring ‘Consult III Plus Software DVD’ from their AE in Japan which ng ‘Consult III Plus Software DVD’ from their AE in Japan which ng ‘Consult III Plus Software DVD’ from their AE in Japan which

was a system diagnostic tool, to be used for diagnosis and maintenance of was a system diagnostic tool, to be used for diagnosis and maintenance of was a system diagnostic tool, to be used for diagnosis and maintenance of

electronic control system installed in Nissan vehicles. The AO is noted to electronic control system installed in Nissan vehicles. The AO is noted to electronic control system installed in Nissan vehicles. The AO is noted to

have held that the impugned payment fell wi have held that the impugned payment fell within the ambit of royalty and thin the ambit of royalty and

therefore, was liable to be taxed u/s 195 of the Act. Since, the assessee therefore, was liable to be taxed u/s 195 of the Act. Since, the assessee therefore, was liable to be taxed u/s 195 of the Act. Since, the assessee

had remitted the payment without deducting tax, the AO disallowed the had remitted the payment without deducting tax, the AO disallowed the had remitted the payment without deducting tax, the AO disallowed the

impugned sum by invoking Section 40(a)(ia) of the Act. The said impugned sum by invoking Section 40(a)(ia) of the Act. The said impugned sum by invoking Section 40(a)(ia) of the Act. The said

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disallowance was confirmed by the Ld. DRP as well. Now, the assessee is onfirmed by the Ld. DRP as well. Now, the assessee is onfirmed by the Ld. DRP as well. Now, the assessee is

in appeal before us.

pointed out that the impugned issue was squarely covered in their favour pointed out that the impugned issue was squarely covered in their favour pointed out that the impugned issue was squarely covered in their favour

by the decisions rendered by this Tri by the decisions rendered by this Tribunal in their own case in ITA No. bunal in their own case in ITA No.

1854/Chny/2017 for AY 2014 1854/Chny/2017 for AY 2014-15 wherein identical disallowance of 15 wherein identical disallowance of

software payments made by the AO u/s 40(a)(ia) was deleted, by software payments made by the AO u/s 40(a)(ia) was deleted, by software payments made by the AO u/s 40(a)(ia) was deleted, by

observing as under:

“5.5 We have heard the rival submissions and carefully perused the 5.5 We have heard the rival submissions and carefully perused the 5.5 We have heard the rival submissions and carefully perused the materials on record. From the facts of the case it is apparent that the als on record. From the facts of the case it is apparent that the als on record. From the facts of the case it is apparent that the assessee has obtained license only for the usage of the software for a assessee has obtained license only for the usage of the software for a assessee has obtained license only for the usage of the software for a limited period and does not have the right to change or modify the limited period and does not have the right to change or modify the limited period and does not have the right to change or modify the software. This issue is squarely covered by the deci software. This issue is squarely covered by the decision of the Chennai sion of the Chennai Bench of the Tribunal in the case DCIT Vs. Atmel R&D India (P) Ltd., Bench of the Tribunal in the case DCIT Vs. Atmel R&D India (P) Ltd., Bench of the Tribunal in the case DCIT Vs. Atmel R&D India (P) Ltd., cited by the Ld.AR wherein the Bench after relying on various decisions cited by the Ld.AR wherein the Bench after relying on various decisions cited by the Ld.AR wherein the Bench after relying on various decisions of the higher judiciary observed as follows: of the higher judiciary observed as follows:

"41. There is a clear distinction between royalty "41. There is a clear distinction between royalty paid on transfer of paid on transfer of copyright rights and consideration for transfer of copyrighted articles. copyright rights and consideration for transfer of copyrighted articles. copyright rights and consideration for transfer of copyrighted articles. Right to use a copyrighted article or product with the owner retaining Right to use a copyrighted article or product with the owner retaining Right to use a copyrighted article or product with the owner retaining his copyright, is not the same thing as transferring or assigning rights his copyright, is not the same thing as transferring or assigning rights his copyright, is not the same thing as transferring or assigning rights in relation to the in relation to the copyright. The enjoyment of some or all the rights copyright. The enjoyment of some or all the rights which the copyright owner has, is necessary to invoke the royalty which the copyright owner has, is necessary to invoke the royalty which the copyright owner has, is necessary to invoke the royalty definition. Viewed from this angle, a non definition. Viewed from this angle, a non- exclusive and non exclusive and non- transferable licence enabling the use of a copyrighted product cannot transferable licence enabling the use of a copyrighted product cannot transferable licence enabling the use of a copyrighted product cannot be construed as an authority to enjoy any or all of the enumerated trued as an authority to enjoy any or all of the enumerated trued as an authority to enjoy any or all of the enumerated rights ingrained in Article 12 of DTAA. Where the purpose of the rights ingrained in Article 12 of DTAA. Where the purpose of the rights ingrained in Article 12 of DTAA. Where the purpose of the licence or the transaction is only to restrict use of the copyrighted licence or the transaction is only to restrict use of the copyrighted licence or the transaction is only to restrict use of the copyrighted product for internal business purpose, it would not be legall product for internal business purpose, it would not be legall product for internal business purpose, it would not be legally correct to state that the copyright itself or right to use copyright has been to state that the copyright itself or right to use copyright has been to state that the copyright itself or right to use copyright has been transferred to any extent. The parting of intellectual property rights transferred to any extent. The parting of intellectual property rights transferred to any extent. The parting of intellectual property rights inherent in and attached to the software product in favour of the inherent in and attached to the software product in favour of the inherent in and attached to the software product in favour of the licensee/customer is what is contemplat licensee/customer is what is contemplated by the Treaty. Merely ed by the Treaty. Merely authorizing or enabling a customer to have the benefit of data or authorizing or enabling a customer to have the benefit of data or authorizing or enabling a customer to have the benefit of data or instructions contained therein without any further right to deal with instructions contained therein without any further right to deal with instructions contained therein without any further right to deal with them independently does not, amount to transfer of rights in relation them independently does not, amount to transfer of rights in relation them independently does not, amount to transfer of rights in relation

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to copyright or confermen to copyright or conferment of the right of using the copyright. The t of the right of using the copyright. The transfer of rights in or over copyright or the conferment of the right transfer of rights in or over copyright or the conferment of the right transfer of rights in or over copyright or the conferment of the right of use of copyright implies that the transferee/licensee should acquire of use of copyright implies that the transferee/licensee should acquire of use of copyright implies that the transferee/licensee should acquire rights rights either either in in entirety entirety or or partially partially co co-extensive extensive with with the the owner/transferor who divests himself of the rights he possesses in his nsferor who divests himself of the rights he possesses in his nsferor who divests himself of the rights he possesses in his favour.

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software including supporting information and licence authorization software including supporting information and licence authorization software including supporting information and licence authorization device to lntra Asia Trading (P) Ltd.. device to lntra Asia Trading (P) Ltd..

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In view of the above, we are inclined to allow the ground taken by In view of the above, we are inclined to allow the ground taken by In view of the above, we are inclined to allow the ground taken by the assessee. This ground is allowed." the assessee. This ground is allowed."

Since the issue is squarely covered by the decision of the Chennai Bench Since the issue is squarely covered by the decision of the Chennai Bench Since the issue is squarely covered by the decision of the Chennai Bench of the Tribunal, following the same, we hereby hold that in the c of the Tribunal, following the same, we hereby hold that in the c of the Tribunal, following the same, we hereby hold that in the case of the assessee, the payment made for obtaining license to use the the assessee, the payment made for obtaining license to use the the assessee, the payment made for obtaining license to use the software cannot be held as royalties coming into the ambit of the DTAA software cannot be held as royalties coming into the ambit of the DTAA software cannot be held as royalties coming into the ambit of the DTAA or fees for technical services under Section 9(1)(vii) of the Act and or fees for technical services under Section 9(1)(vii) of the Act and or fees for technical services under Section 9(1)(vii) of the Act and accordingly tax need not be deducted at sour accordingly tax need not be deducted at source U/s.195 of the Act. ce U/s.195 of the Act.

The Ld. CIT, DR, on the other hand, supported the action of the The Ld. CIT, DR, on the other hand, supported the action of the The Ld. CIT, DR, on the other hand, supported the action of the 17.

lower authorities. Since, no change in facts or law could be pointed out, Since, no change in facts or law could be pointed out, Since, no change in facts or law could be pointed out,

respectfully following the above decision (supra) in assessees’ own case, espectfully following the above decision (supra) in assessees’ own case, espectfully following the above decision (supra) in assessees’ own case,

we direct the AO to delete the impugned disallowance made u/s 40(a)(ia) to delete the impugned disallowance made u/s 40(a)(ia) to delete the impugned disallowance made u/s 40(a)(ia)

of the Act. This ground is therefore allowed. of the Act. This ground is therefore allowed.

the time of hearing, which are as under: the time of hearing, which are as under:-

“6.1 The appellant respectfully submits t The appellant respectfully submits that it had inadvertently hat it had inadvertently made suo-moto disallowance under section 40(a) of the Act towards moto disallowance under section 40(a) of the Act towards moto disallowance under section 40(a) of the Act towards certain expenses on the premise that the same were not subject to tax certain expenses on the premise that the same were not subject to tax certain expenses on the premise that the same were not subject to tax deduction at source (‘TDS’) under the provisions of the Act, while in deduction at source (‘TDS’) under the provisions of the Act, while in deduction at source (‘TDS’) under the provisions of the Act, while in-fact the same were duly s the same were duly subjected to TDS/ TDS is not applicable on such ubjected to TDS/ TDS is not applicable on such items. The appellant submits that the disallowances were unintentional, items. The appellant submits that the disallowances were unintentional, items. The appellant submits that the disallowances were unintentional, inadvertent errors which have resulted in assessment of a higher inadvertent errors which have resulted in assessment of a higher inadvertent errors which have resulted in assessment of a higher amount of income and prays for relief. amount of income and prays for relief.

6.2 The Appellant respectfully s The Appellant respectfully submits that it had inadvertently ubmits that it had inadvertently missed to claim deduction under section 40(a) of the Act towards certain missed to claim deduction under section 40(a) of the Act towards certain missed to claim deduction under section 40(a) of the Act towards certain expenses which were disallowed in earlier years on non expenses which were disallowed in earlier years on non- -deduction of TDS, however, TDS on the same is deducted and paid in the subject AY. TDS, however, TDS on the same is deducted and paid in the subject AY. TDS, however, TDS on the same is deducted and paid in the subject AY.

6.3 The App The Appellant respectfully submits that it had inadvertently ellant respectfully submits that it had inadvertently missed claiming as a deduction while computing income under the head missed claiming as a deduction while computing income under the head missed claiming as a deduction while computing income under the head ‘profits and gains from business or profession’ certain credits to the ‘profits and gains from business or profession’ certain credits to the ‘profits and gains from business or profession’ certain credits to the profit and loss account that are not taxable under the Act or profit and loss account that are not taxable under the Act or profit and loss account that are not taxable under the Act or were already offered to tax in other assessment years resulting in excess already offered to tax in other assessment years resulting in excess already offered to tax in other assessment years resulting in excess income being subjected to tax. The Appellant prays for relief in respect income being subjected to tax. The Appellant prays for relief in respect income being subjected to tax. The Appellant prays for relief in respect

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of the said amounts which have the resulted in the said sums being of the said amounts which have the resulted in the said sums being of the said amounts which have the resulted in the said sums being taxed twice.”

Relying upon the decisio ying upon the decisions of the Hon’ble Supreme Court in the on’ble Supreme Court in the 19.

cases of NTPC Ltd (229 ITR 383) NTPC Ltd (229 ITR 383)&Jute Corporation of India Ltd Jute Corporation of India Ltd

(187 ITR 688),the assessee pleaded that these additional claims be he assessee pleaded that these additional claims be he assessee pleaded that these additional claims be

admitted for adjudication. Per contra, the Ld. CIT, DR opposed the admitted for adjudication. Per contra, the Ld. CIT, DR opposed the admitted for adjudication. Per contra, the Ld. CIT, DR opposed the

admission of these grounds on the premise that, these grounds were ounds on the premise that, these grounds were ounds on the premise that, these grounds were not

legal in nature but required factual verification as the details now being legal in nature but required factual verification as the details now being legal in nature but required factual verification as the details now being

furnished by the assessee were never placed before the lower authorities. furnished by the assessee were never placed before the lower authorities. furnished by the assessee were never placed before the lower authorities.

According to him therefore, such additional grounds now b According to him therefore, such additional grounds now b According to him therefore, such additional grounds now being raised

deserves to be rejected. deserves to be rejected.

additional grounds, we observe that the Hon'ble Gujrat High Court in the e observe that the Hon'ble Gujrat High Court in the e observe that the Hon'ble Gujrat High Court in the

case of CIT v. Mitesh Impex Mitesh Impex (367 ITR 85) after considering the considering the

decisions decisions decisions rendered rendered rendered by by by the the the Hon'ble Hon'ble Hon'ble Apex Apex Apex Court Court Court in in in the the the case case case

of NTPC v. CIT (229 ITR 383 (229 ITR 383) and Goetze (India) Ltd Goetze (India) Ltd. v. CIT (284

ITR 323)has held that that, if a claim which is available in law is not has held that that, if a claim which is available in law is not has held that that, if a claim which is available in law is not

raised either inadvertently or an account of erroneous raised either inadvertently or an account of erroneous understanding understanding of

legal position, such a relief cannot be shut up for all the times to come legal position, such a relief cannot be shut up for all the times to come legal position, such a relief cannot be shut up for all the times to come

merely because it is raised for the first time merely because it is raised for the first time in appellate proceedings in in appellate proceedings in

absence of a revised return filed before the Assessing Officer. absence of a revised return filed before the Assessing Officer. absence of a revised return filed before the Assessing Officer. Indeed, the

factual details now being filed before us, were not available at the time of factual details now being filed before us, were not available at the time of factual details now being filed before us, were not available at the time of

assessment. However, for that reason, this Tribunal cannot be prevented assessment. However, for that reason, this Tribunal cannot be prevented assessment. However, for that reason, this Tribunal cannot be prevented

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from admitting an additional claim raised by the assessee, which it om admitting an additional claim raised by the assessee, which it om admitting an additional claim raised by the assessee, which it

inadvertently omitted to raise in the return of income. For these reasons, inadvertently omitted to raise in the return of income. For these reasons, inadvertently omitted to raise in the return of income. For these reasons,

we do not find any merit in the contention of the Ld. CIT, DR and we do not find any merit in the contention of the Ld. CIT, DR and we do not find any merit in the contention of the Ld. CIT, DR and

therefore reject the same. At the same time, we n therefore reject the same. At the same time, we note that, the impugned ote that, the impugned

claims (supra) raised by the assessee requires factual verification and claims (supra) raised by the assessee requires factual verification and claims (supra) raised by the assessee requires factual verification and

were not raised before any of the lower authorities. Accordingly, in the were not raised before any of the lower authorities. Accordingly, in the were not raised before any of the lower authorities. Accordingly, in the

fitness of the matters, we admit these grounds and set aside the same to fitness of the matters, we admit these grounds and set aside the same to fitness of the matters, we admit these grounds and set aside the same to the AO for de novo consideration. Needless to say, the AO shall allow consideration. Needless to say, the AO shall allow consideration. Needless to say, the AO shall allow

sufficient opportunity of hearing to the assessee in this regard. These sufficient opportunity of hearing to the assessee in this regard. These sufficient opportunity of hearing to the assessee in this regard. These

grounds are therefore allowed for statistical purposes. grounds are therefore allowed for statistical purposes.

purposes. Order pronounced on the 23rd day of April, 2025, in Chennai. Order pronounced on the , in Chennai.

Sd/- Sd/ Sd/- (अिमताभशु�ा) (एबीटी. . वक�) (AMITABH SHUKLA AMITABH SHUKLA) (ABY T. VARKEY ABY T. VARKEY) लेखासद�य/ACCOUNTANT MEMBER �याियकसद�य/JUDICIAL MEMBER /ACCOUNTANT MEMBER /JUDICIAL MEMBER चे�ई/Chennai, �दनांक/Dated: 23rd April, 20 , 2025. TLN, Sr.PS आदेशक��ितिलिपअ�ेिषत/Copy to Copy to: