VOLKSWAGEN INDIA PRIVATE LTD.,,PUNE vs. ASSISTANT COMMISSIONER OF INCOME-TAX,,

आयकर अपीलीय अिधकरण “ए” �यायपीठ पुणे म� । IN THE INCOME TAX APPELLATE TRIBUNAL “A” BENCH, PUNE �ी डी. क�णाकरा राव, लेखा सद�य एवं �ी िवकास अव�थी, �याियक सद�य के सम� BEFORE SHRI D. KARUNAKARA RAO, AM AND SHRI VIKAS AWASTHY, JM आयकर अपील सं./ ITA No.1883/PUN/2013 िनधा�रण वष� / Assessment Year : 2008-09 Volkswagen India Private Limited. E-1, MIDC Industrial Area, Phase-III, Village Nigoje Mhalunge, Kharabwadi, Chakan, Taluka- Khed, Pune-410 501. PAN : AACCV4229P .......अपीलाथ� / Appellant बनाम / V/s. The Assistant Commissioner of Income Tax, Circle-7, Pune. ……��यथ� / Respondent Appellant by : Shri Danesh Bafna Respondent by : Shri S.B. Prasad सुनवाई क� तारीख / घोषणा क� तारीख / Date of Hearing : 24.07.2019 Date of Pronouncement : 05.09.2019 आदेश / ORDER PER D. KARUNAKARA RAO, AM This appeal filed by the assessee is directed against the order of the Ld. CIT(Appeals)-III, Pune dated 30.11.2012 for the assessment year 2008-09.

2 ITA No.1883/PUN/2013 A.Y.2008-09 2. The assessee has raised revised grounds of appeal along with additional grounds which reads as under: “Revised Grounds of appeal : 1. On the facts and in the circumstances of the case and in law, the Learned Commissioner of Income Tax Appeals-III, Pune [CIT(A)] and Learned Assessing Officer (AO) erred in concluding that the Appellant’s business was not set up during FY 2007-08 and consequently disallowed amount of Rs.22,92,60,081/- as expenditure incurred prior to setting up of business. The Appellant humbly prays that the business of the company be accepted to be set up during FY 2007-08 and thereby expenditure of Rs.22,92,60,081/- be allowed as a deductable expenditure. 2. On the facts and in the circumstances of the case and in law, the Learned CIT(A) and AO erred in not treating the activity of rendering of quality/technical services as one of the main business activities of income of the company and thereby assessing the Rs.2,60,09,557/- under the head “Income from Other sources” as opposed to “Busines income”. The appellant humbly prays that the rendering of quality/technical services activity be treated as one of the main business activities of the company and income of Rs.2,60,09,557/- be taxed as “ Business income”. From the above revised grounds, it is evident that the issue raised in appeal is with regard to the set up and commencement of the business of the assessee. Additional grounds of appeal : 3. Without prejudice to the Grounds 1 and 2, the Learned Commissioner of Income Tax (Appeals) -III, Pune ['CIT (A)] erred in concluding that the interest income of Rs.47,01,88,559 on bank deposits earned by the Appellant during the pre- commencement period is chargeable to tax separately under the head "Income from other sources" and would not go to reduce the incidental expenditure pending capitalisation. Your appellant prays that interest income of Rs.47,01,88,559/- period prior to earned by the Appellant in the commencement of business was in nature of capital receipt and hence, was required to be set off against the incidental expenses pending capitalisation, and could not be taxable as income from other sources as a separate source of income.”

3 ITA No.1883/PUN/2013 A.Y.2008-09 The appellant craves leave to add, alter, amend or withdraw all or any of the Grounds of Appeal and to submit such statements, documents and papers as may be considered necessary either at or before the appeal hearing.” 4. Without prejudice to Ground No.1 and 2, on the facts and in the circumstances of the case and in law, Learned Commissioner of Income Tax (Appeals) ["CIT(A)"] and Learned Assessing Officer ("AO") erred in ignoring the fact that if the business of the Appellant is not set up then no expenditure or income can be brought to tax as per section 4 read with first proviso to section 3 of the Act. Your Appellant prays that if it is eventually held that the business is not set-up, then no income and expenditure should be brought to tax. 5. Without prejudice to the Ground No.4, on the facts and in the circumstances of the case and in law, CIT(A) and AO erred in not reducing the interest income of Rs.47,01,88,559 on bank deposits earned by the Appellant during the pre-commencement period from the cost of the asset. Your Appellant prays that, interest income of Rs.47,01,88,559 earned by the Appellant in the period prior to commencement of business was in nature of capital receipt and hence, was required to be reduced from the cost of the asset.” 3. During the proceedings before us, the Ld. Counsel submitted that the additional ground No.3 is not pressed. Therefore, without going into the merits of the issue raised in it, the said additional ground No.3 is dismissed as “not pressed”. FACTS 4. Briefly stated relevant facts include that the assessee is a company incorporated on February 6, 2007 under the Companies Act, 1956, pursuant to Memorandum of Understanding (MOU) dated November 29, 2006 signed between the Government of Maharashtra (GOM) and Volkswagen AG (the parent company) to setup a manufacturing operation for VW's vehicles and components in Chakan Industrial Area, Dist. Pune.

4 ITA No.1883/PUN/2013 A.Y.2008-09 A. The main objects as per the Memorandum of Association ('MOA') (Page 421 to 428 of Paper book) to be pursued by VW on its incorporation was manufacturing of vehicle. They are other objects too. Relevant objects are extracted from the MoA and reproduced herein under: "i) engage in the business of designing, developing, manufacturing, producing, assembling, selling, distributing, exporting, importing and/or marketing automotive vehicles and related parts, components and accessories; ii)………….. iii)…………. iv) engage in any and all other conducts, activities or businesses such as, but not limited to, engineering, purchasing and procurement of automotive parts, components and accessories, as well as provision of engineering, technical assistance and training services." B. During the year under consideration, the construction work of the Unit for manufacturing of Vehicles, was yet to commence on the plot of land allotted on lease by the Maharashtra Industrial Development Corporation ('MIDC') in Chakan Industrial Area, Dist. Pune vide the agreement to lease land on 14 January 2008. Therefore, there is no dispute on the fact of non-start of manufacture of vehicles. Nevertheless, the assessee reported earning of (i) interest income and (ii) receipts for rendering of Technical Assistance Services. With respect to the claim of earning of receipts at item (ii) above for rendering of technical assistance/ services to the group companies abroad, assessee relies and mentioned that VW India entered into a service agreement with Volkswagen AG dated 20.11.2007 w.e.f 01.07.2007 (Page 530 to 533 of Paper book). Under the mandate of the object no.(iv) above of the MOA (supra), the assessee claims the rendering of services under the said agreement and earned Rs.2,60,09,557/- during the year is authorized.

5 ITA No.1883/PUN/2013 A.Y.2008-09 Further, relating to earning of interest income at item (i) above, the assessee received funds from the parent company in the year under consideration for meeting the project cost and the same were temporarily parked in the banks as the Short Term Deposits for interest. These deposits gave rise to the interest income for the assessee. Rs.46,23,26,930/- is the said interest earned on fixed deposits. Assessee filed its original return of income for FY 2007-08 on September 30, 2008 declaring total income of Rs.45,51,49,550/- (Page 50 to 65 of Paper book). As per the return of income, Rs.71,77,381/- is the business loss i.e. being excess of expenditure over income. With respect to provision of technical services provided by VW to Volkswagen AG, in the original ROI, VW inadvertently omitted to claim deduction of certain direct business expenditure incurred during the year. Accordingly, the company filed a revised return of income on November 05, 2009, claiming such revenue expenses to the tune of Rs.22,92,60,081/-. Consequently, VW declared total income of Rs.23,30,66,849/- after setting off the business loss of Rs.22,92,60,081/- with the ‘income from other sources’ of Rs.46,23,26,930/-. (Page 167 to 183 of Paper book). The assessee's case was selected for scrutiny and notices u/s.143(2) and 142(1) of the Act were issued as per law. Further, considering the international transactions with AEs, the case was referred to Transfer Pricing Officer (TPO) and TPO passed an order dated October 30, 2011 (Page 674 to 675 of Paper book). However, TPO did not propose any adjustments on account of International Transactions carried out by the assessee and they are at ALP. In fact, the TPO’s decision of no adjustment was being referred to by the ld. AR to make out the case that the transactions are genuine and the same constitutes the business income of

6 ITA No.1883/PUN/2013 A.Y.2008-09 the assessee and not the ‘income from other sources’. The details are discussed in later parts of this order. In the Assessment: The Assessing Officer vide his assessment 5. order dated December 30, 2011, disallowed the expenditure of Rs.22,92,60,081/- claimed by the assessee in its revised return of income by concluding that the Company's business had not been “set up” during the year under consideration and also held that the said amount of Rs.22,92,60,081/- should be capitalized. Further, the Assessing Officer scrutinized the claim of taxability of Rs.2,60,09,557/- received by the assessee towards rendering technical services to Volkswagen AG, and held that the same is taxable as ‘income from other sources’ only. AO held that the business of the assessee had not yet been setup during the year. Further, on the interest income earned on short term deposits with Banks, Assessing Officer held the same is taxable as ‘income from other sources’. Thus, the aforesaid interest income as well as the Technical Services Fee were taxed as ‘income from other sources’ and the expenditure spent in the year was allowed for capitalization. 6. Before CIT(A): The CIT(A) vide his appellate order dated November 30, 2012, dismissed the appeal of the appellant and upheld the action of Assessing Officer in toto. Before the ITAT 7. Aggrieved with the above said decision of the Assessing Officer/CIT(A), the assessee is in appeal before this Tribunal with the afore-extracted the grounds/additional grounds. We shall now take up all these issues for adjudication. A. Issue of set up of Business in the year under consideration – Reg.

7 ITA No.1883/PUN/2013 A.Y.2008-09 8. Basic facts relating to the issue and the objects of the company are already discussed in the paragraphs above. Specific to the issue relating to “set up & commencement of the business” of the assessee, the Ld. Counsel filed sequence of events and the same are extracted as under: Date Event 29.11.2006 MoU between Government of Maharashtra and VW AG whereby GoM invited VW AG and VW AG agreed to establish a manufacturing operation for VW vehicles and components in Chakan, Pune ( Attached as Annexure-1) 31.01.2007 Memorandum of Association, establishing main objects to pursued by VW India ( refer page No. 421 of PB) 06.02.2007 Grant of certificate of incorporation of VW India (incorporated as a wholly owned subsidiary of VW International Finance NV, Netherland. Ultimate parent company is VW AG, Germany). ( refer page No.408 of PB) 01.06.2007 Grant of Certificate of registration under the Maharashtra Value Added Tax Act, 2002 ( VAT registration) 01.06.2007 Grant of certificate of registration under the Central Sales Tax ( Registration & Turnover) Rules, 1957 ( CST registration) 01.07.2007 In connection with the manufacturing and service business, Appellant set up a Quality Services Department with the appointment of employees and infrastructure to identify the potential Indian Suppliers for the cars and for providing services pursuant to the Service Agreement between VW India and VW AG. Details of employees forming part of this department given at page No.522 of PB. 13.07.2007 Letter issued by Office of the Commissioner of Central Excise, Pune granting Permission for Centralized Service Tax Registration [ Certificate of registration under section 69 of the Finance Act, 1994] ( Service tax registration) ( subsequently revised) Service Agreement entered w.e.f. 01.07.2007 between VW 20.11.2007 India and VW AG for rendering technical services ( refer page No. 530 to 533 of PB) 03.12.2007 Invoice No.VWIPL/2007-08/001 of Euro 340,000 raised towards provision of service (refer page No.534 of PB) Agreement to lease land entered 14.01.2008 between the Maharashtra Industrial Development Corporation and VW India. Assessment of Quality Capability for the supplier Dakshin 22.01.2008

8 ITA No.1883/PUN/2013 A.Y.2008-09 Speaker Manufacturing Pvt. Ltd.( refer page No.527 of PB) Assessment of Quality Capability for the supplier Mahindra 12.02.2008 Ugine Steel Co. Ltd. ( refer page No.528 of PB) Assessment of Quality Capability for the supplier Fairfield 19.02.2008 Pressings Pvt. Ltd. ( refer Page No. 529 of PB) 31.03.2008 Ledger Account of Technical Services for the period of 01 April 2007 to 31 March 2008 ( refer page No. 536 of PB) 24.04.2008 Invoice No. VWIPL/2008-09/001 of Euro 150,000 raised towards provision of services for the period 01 January 2008 to 31 March 2008 (refer page No.534 of PB) 24.09.2008 Transfer Pricing Study Report-Bench marking of international transactions of provision of technical services. ( refer page no.537 to 673 of PB) 30.09.2008 VW India filed Accountant’s report in Form 3CEB for AY 2008-09 and reported international transaction of provision of services under Quality Service Agreement ( refer page no.126 of PB 30.09.2008 VW India filed its Original ROI for AY 2008-09 ( refer page No.133 and 167 to 183 of PB) 05.11.2009 VW India filed its revised ROI for AY 2008-09 (refer page No. 133 and 167 to 183 of PB) 30.10.2011 TPO order for AY 2008-09 accepting VW India’s international transaction of provision of technical services to be at arm’s length price ( refer page no.674 to 675 of PB ARGUMENT OF THE LD. COUNSEL 9. Referring to the above facts and events relating to set up and commencement of the business of assessee, the Ld. Counsel submitted that this is a case where vehicle/components manufacturing infrastructure and its activities of the assessee are neither set up nor commenced in the year under consideration. First vehicle was produced only in December, 2009 relevant to the assessment year 2010-11. Otherwise, as per the assessee, the business of the assessee was set up right from 01.07.2007 onwards by virtue of post dated Agreement between the assessee and the parent company. Referring MoA qua the objects of the company, the Ld. Counsel submitted that rendering of technical services to its parent or group

9 ITA No.1883/PUN/2013 A.Y.2008-09 companies as one of the core business objects of the assessee and the same falls within the ambit of the objects (No.IV) of the MoA already extracted in the preceding paragraphs of this order. Further, the Ld. Counsel in support of set up and commencement of business of assessee in the year under consideration, submitted that Technical Assistance Fee Transaction constitutes an international transaction with AEs and the transaction was referred to the Transfer Pricing Officer (TPO) for benchmarking of international transaction with the Associate Enterprises (AEs). Further, the Ld. Counsel submitted the said international transactions are held to be at arm’s length price (ALP) and therefore, the claim of rendering of technical services by the assessee to the VWAG constitutes not only a genuine but also confirms the claim of set up of the business in the assessment year 2008-09. Further, referring to the various decisions, the Ld. Counsel submitted that incidental income earned by the assessee can constitute set up of the business of the assessee in the year under consideration. Referring to the earning of Technical Assistance receipt of Rs.2.60 Crores from parent company abroad, the Ld. Counsel submitted that the assessee rendered technical services by way of supply of the ‘Suppliers list’ and relied heavily on the Assessment of Quality Capability for the suppliers i.e. Dakshin Speaker Manufacturing Pvt. Ltd. and Mahindra Ugine Steel Co. Ltd. It is the case of the assessee that by furnishing such Assessment Reports in respect of these two parties, the assessee became entitled for earning €3.40 (Euro) on 03.12.2007 vide Invoice No.VWIPL/2007-08/001 and earned another sum of 1.50 Euro by virtue of Invoice No.VWIPL/2008-09/001. 9.1 Referring to the findings of the Assessing Officer and CIT(Appeal) on this issue of date/year of set up of the business of the assessee, ld. AR submitted that Revenue Authorities erroneously came to the conclusion that

10 ITA No.1883/PUN/2013 A.Y.2008-09 the rendering of the said technical services constitutes merely a part of feasibility report which is an act of preparedness before set up of any business. The Ld. Counsel submitted that, on similar facts, the relief was granted to the various taxpayers and the business was considered ‘set up’ in those cases. Thus, it is the case of the assessee that the assessee rendered services of identified the list of the suppliers to the parent company abroad as per the Service Agreement in the previous year under consideration and therefore, assessee’s business stands set up in the previous year i.e. 2008- 09. Assessee relies heavily on the MOA, Service Agreement with VWAG, invoices, quality reports etc in support of the claim. DR’s Argument on Business setup: On the other hand, on the issue 10. of the claim of set of business in assessment year 2008-09, the Ld. DR for the Revenue relied heavily on the orders of the income-tax authorities below. The ld. DR filed written submission too and stated that the contents of Para 6, 7, 12 and 13 of his note are relevant. As per the Revenue, the identification of suppliers list is merely constitutes a feasibility report and there is no set up of the assessee involved in this exercise. Thus, the case of the Revenue is that the assessee does not have to have any business set up for submission of the quality report. As such, the said MOA, being post- dated one, does not exist at the relevant point of time. Therefore, the object clause IV of the MOA is also postdated and non-existent one at the relevant point of time. Ld. DR is extremely critical of the said object clause IV and submitted that the rendering of Technical Assistance to VWAG is not borne out of the said object clause IV of the MOA. Referring to the said invoices raised by the assessee, ld. DR submitted, the same constitutes self-serving documents. Absence of details of date of actual receipt of the said Rs.2.60 crores also goes against the assessee.

11 ITA No.1883/PUN/2013 A.Y.2008-09 10.1 Decision of the ITAT – Business set up or not: Further, on the expenditure incurred by the assessee in this period, the revenue holds that the same constitute capital work in progress and not allowable as deduction or not allowed to be set off against the interest income related to the deposits in the bank. 11. We have heard both the sides on the issue of set up and commencement of business and perused the orders of Revenue Authorities. A. The Assessing Officer dealt with this issue by observing as under (at page 40 of the assessment order): - “In view of the above discussion, I hereby conclude that although there are certain services which are offered by VW India to VW AG, Germany, these services are necessary only for commencement of business and can be termed as preparatory services but by no stretch of imagination it can be termed as independent quality and technical service.” B. On this issue, the CIT(Appeal) has held as follows: “5.3.6 Thus, the facts narrated above do not indicate that the appellant rendered quality services of the nature claimed to Volkswagen AG during the year and it is difficult to accept the proposition of the appellant that the amount was received for providing quality services to the parent company in the very first year of its inception. Even presuming for a while that the amount of Rs.2.60 crores was received from Volkswagen AG for rendering services, going by the trend in the subsequent years as discussed hereinabove, this activity cannot be regarded as independent business activity or as one of the main business activities of the company. Such receipts are in the nature of miscellaneous income earned during pre-operative period and the same are liable to be assessed under the head ‘income from other sources’ along with interest income. The decision of Hon’ble Bombay High Court in the case of Commissioner of Income Tax Vs. Piem Hotels Pvt. Ltd. (209 ITR 616) referred above supports the view that just because some miscellaneous income is earned during the pre operative period, it does not follow that the business as such is set up. The fact that interest income on deposits was admitted as income from other sources in the original as well as revised return also supports the stand of the revenue that the business of the appellant was not set up as on 31.03.2008.”

12 ITA No.1883/PUN/2013 A.Y.2008-09 12. Thus, the stand of Revenue is very clear that the reports submitted by the assessee to VWAG constitute merely the feasibility reports. Further, these activities are only of miscellaneous nature and not an independent business activity. Further, the very conduct of the assessee in offering the interest income as ‘income from other sources’ also confirms the revenue’s claim. We shall now deal with some of the main arguments of the ld. AR/DR in the following paragraphs of the order. Summary of AR’s/DR’s Arguments 13. In this regard, ld. Counsel for the assessee brought our attention to the copies of invoices dated 03.12.2007 and 24.04.2008 (VWIPL/2007- 08/001 and VWIPL2008-09/001). He also brought our attention to the copies of the related services agreement (page 530 of the Paper Book) with reference to the said invoices and submitted that the assessee rendered services to Volkswagen AG and object of the service agreement includes (i) suppliers auditing and qualification; (ii) laboratory support coordination; (iii) technical product evaluation; and, (iv) driving test services. The said agreement operates retrospectively as on 01.07.2007 with locking period of 3 years for termination, if any. As per clause III of service agreement, payment is due on 25 day of the quarter following the provision of services. The first invoice payment raised on 03.12.2007 for the period of 01.07.2007 to 31.12.2007 for the amount of Rs.340,00 Euros. The second invoice payment raised on 24.04.2008 for the period of 01.01.2008 to 31.03.2008 for the amount of Rs.150,000 Euros. The total of this amount works out to Rs.2.60 crores. 14. Referring to the said service agreement, it is a case of the Revenue that it is a case of an afterthought. The service agreement signed in the month of

13 ITA No.1883/PUN/2013 A.Y.2008-09 November, 2007 covers the assessee’s operation of the second quarter of the financial year. Referring to the invoices, service agreement, reports etc, it is the case of the Revenue that the amount raised is not specific to the services received to the parental company. Referring to the invoice dated 24.04.2008, it is the case of the Revenue that the assessee follows a mercantile accounting and the said invoices cannot be pertained as income of the assessee to the outside from the financial year under consideration. 15. We heard both the sides on the issue of said set up of the business, where the manufacturing activity of the assessee is undisputedly neither set up nor commenced. Therefore, the disputed fact is that if the some services, against which the assessee received payment of Rs.2.60 crores, constitutes business receipts or not. In this regard, the case of the Revenue is that signing of the service agreement, clubbed with the raising of invoices for two quarters linking to report of assessment of quality and capability of couple of suppliers [i.e. (i) Dakshin Speaker Manufacturing Pvt. Ltd. dated 22.01.2008 (page 527 of the Paper Book); (ii) Mahindra Ugine Steel Co. Ltd. dated 12.02.2008 (page 528 of the Paper Book); and, (iii) Fairfield Pressings Private Limited dated 19.02.2008 (page 529 of the Paper Book)] is an afterthought. Per contra, rely on the said service agreement and claims that the said amount of Rs.2.60 crores constitutes a business receipt. 16. Further, commending on the contents of the said invoices of said assessment of quality and capability, the revenue holds they are aimed at (reasons for audited) to assess the process capability of export of (i) Loudspeakers to Audi AG, (ii) as a potential future supplier of Press Parts Incl. Inner/Outer Skin Panels and Welded Assemblies for the Indian EM-VW. The said audit is done not at the request of the VW-AG and some other

14 ITA No.1883/PUN/2013 A.Y.2008-09 parties. These invoices being related to the period of July to December, 2008, and therefore, the Invoice No.VWIPL/2007-08/001 dated 03.12.2007 may relate to Invoice No.VWIPL/2008-09/001 dated 24.04.2008. Further, the case of the Revenue is that the supplier list furnished by the assessee to the VW-AG kept at page 350 onwards of the Paper Book, does not mention the addresses of the clients useful for the Revenue to reach them for verifying the veracity if the said companies are identified as potential supplier. Referring to the MOA, the case of the Revenue is that none of the expression used in Object No.IV covers the kind of activities i.e. identification of suppliers, assessment quality and capability falls in the scope of the said object of the MOA. Thus, it is the case of the Revenue that whatever is furnished by the assessee during the year to the company abroad constitutes only some miscellaneous paper reports and they are not good enough to demonstrate the business is set up and commenced during the year under consideration. Further, it is the case of the Revenue that such furnishing of suppliers list or assessment of quality and capability reports are not done in the subsequent years as well for earning the income from the companies in Germany in the later years. Further, it is the case of Revenue that the Audit Report made by the auditors in Form No.3CEB, where the auditors commented on non-commencement of business in the year under consideration. Thus, as per the revenue, providing quality and technical services is not the business of the assessee as per the said Form No.3CEB, the Revenue relied on the various judicial pronouncements in this regard. 17. Now, we may take up each of the above arguments for adjudication. a. Comments on the Object No.IV of the MOA

15 ITA No.1883/PUN/2013 A.Y.2008-09 18. We have already extracted the said Object No.IV of the MOA. In this order, the text of the said object no.IV of MOA was already extracted in the preceding paragraphs of the order. In this regard, the argument of the assessee revolves around the fact that the assessee earned a sum of Rs.2,60,09,557/- towards rendering of Technical Services of furnishing of assessment of quality and capability for the supplier. The said object no.IV mentions that the assessee is authorized to ‘engage in any other and all other conducts, activities are businesses such as engineering, purchasing and procurement of automotive parts, components & accessories as well as provision of engineering technical assistance and training services’. From the above, assessee’s counsel argued that the identification of suppliers from India for the group companies abroad is covered by the above clause of the object of the assessee. Per contra, the case of the Revenue is that the object clause no.IV of the MOA constitutes a residential one, general one, miscellaneous one etc and the same does not constitute an independent business activity. Hence, the services rendered by the assessee being merely supplying the list of the suppliers, amounts to a miscellaneous activity, such earning is taxable as ‘income from other sources’ only. In any case, such lists of suppliers, are anyway available in the public domain/online. This is merely a case of preparatory services and never a case of rendering of crystallized and independent business services entitled to receive any sum for such proprietary work for taxing under the head ‘business income’. Ongoing through the arguments and papers placed before us, we find that the said object is of general in nature. We find the main object of MOA of the assessee, with core object of manufacturing of passenger vehicles & consonants in India is the core activity. As discussed in the open Court that there is failure on the part of the assessee to demonstrate how the reporting

16 ITA No.1883/PUN/2013 A.Y.2008-09 of list of supplier one of Quality Assessments fall in the scope of the said Object No.IV of the MOA. Thus, the conducting of assessment of quality and capability of (i) Dakshin Speaker Manufacturing Pvt.; (ii) Mahindra Ugine Steel Co. Ltd.; and, (iii) Fairfield Pressings Private Limited fall outside the business scope of the MOA. Further, there is failure on the part of the assessee to furnish the details of the address for communication to the Assessing Officer for facilitating of conducting of requisite enquiries, if any, u/s 133(6) of the Act by the Assessing Officer. In any case, mere furnishing of list of suppliers which is anyway available in the public domain does not amount to any concrete exercise of rendering services by the assessee. Such data i.e. the list of supplier is available online in public domain. In any rendering of such services is not a perennial feature of the company. It is a year specific claim of the assessee. Therefore, considering the generally worded expression in the said object no.IV, we are of the considered opinion, the arguments of the ld. Counsel of the assessee that the said services rendered under the mandate of the said Object No.IV is not entertained. Accordingly, the relevant parts of the arguments are dismissed. b. Comments on the Service Agreement with VW-AG dated 20.11.2007 19. The assessee relied heavily on the ‘service agreement’ with VW-AG and submitted that although the said service agreement signed on 20.11.2007, it has retrospective effect right from 01.07.2007 (Page 532 to 533 of the Paper Book) i.e. the date mentioned in the said agreement. The objects of the agreement are specified in para 1.1 of the said agreement. Out of the 4 objects of the agreement which are already narrated above, the object (b) to (d) are obviously not applicable since they are linked to the (i) laboratory support and coordination; (ii) technical support evaluation; and, (iii) driving

17 ITA No.1883/PUN/2013 A.Y.2008-09 test services etc. The only object i.e. suppliers auditing and qualification etc are bit close to the activities relied upon by the assessee for calling the business set up/commencement. In any case, the reported activity of identification of suppliers is not proved as the suppliers details were not furnished to the Assessing Officer for cross examination u/s 133(6) of the Act. Coming to the supplier auditing and qualification, the only three of the “assessment of quality and capability” were relied upon by the assessee are not free from the dispute qua the timing of raise of the invoices. The gist of these assessments/audited reports indicated that they are relatable to the invoices raised subsequent to the entire of the relevant financial year under consideration. On this technical ground, the said invoices and the services are held not relatable to the assessment year under consideration. Therefore, the arguments raised by the assessee on this issue are not allowed. Accordingly, the relevant grounds are dismissed. c. Invoices assessment of quality and capability of (i) Dakshin Speaker Manufacturing Pvt. Ltd.; (ii) Mahindra Ugine Steel Co. Ltd.; and, (iii) Fairfield Pressings Private Limited. 20. The assessee submitted that the Invoice No.VWIPL/2007-08/001 dated 03.12.2007 for Rs.340,000 Euros and Invoice No.VWIPL/2008-09/001 dated 24.04.2008 for Rs.150,000 Euros. While the Invoice No.VWIPL/2007- 08/001 is raised for the quarter of 01.07.2007 to 31.12.2007, the invoice date was 03.12.2007. The said invoice merely makes a reference to the post- dated service agreement which is signed on November, 2007. In this quarter of the financial year, no report by way of assessment of quality and capability was done to the VW-AG, Germany. We have already mentioned of dates of the said suppliers i.e. (i) Dakshin Speaker Manufacturing Pvt. Ltd. dated 22.01.2008 (page 527 of the Paper Book); (ii) Mahindra Ugine Steel Co. Ltd.

18 ITA No.1883/PUN/2013 A.Y.2008-09 dated 12.02.2008 (page 528 of the Paper Book); and, (iii) Fairfield Pressings Private Limited dated 19.02.2008 (page 529 of the Paper Book). These invoices do not specify the services are aimed at to the benefit of VW-AG, Germany and the use of the products for the said company, who is the party to the service agreement. Therefore, there is lacuna in the inflow of the communication and filing of details by the assessee, required to demonstrate the assessments made by the assessee is in accordance with the service agreement only. From this point of view, we are of the opinion, the services rendered are relatable to the invoices unconnected to the previous financial year under consideration. Thus, it is a case of the Invoice No.VWIPL/2007- 08/001 dated 03.12.2007 is unconnected to the claim services and Invoice No.VWIPL/2008-09/001 dated 24.04.2008 outside the definition of the previous year under consideration. Accordingly, this part of the arguments of the assessee is dismissed. d. Report of the Auditors in Form No.3CEB and Report of the Transfer Pricing Officer Auditor’s Report: The auditors furnished the certificate in Form 21. No.3CEB relating to the international transactions and specified domestic transactions. The same are filed under the provisions of the Act. In the said Form, there is column relating to “nature of business or activities of the assessee” where the rendering of technical services were never mentioned as in column no.4. Therefore, relying on the said entry, the Revenue argues that the rendering of so called technical services is never a business activity of the assessee under the Object of the MOA. In this regard, there are no specific arguments raised by the ld. Counsel for the assessee before us. Therefore, we are of the opinion that no specific adjudication on this issue is needed. Accordingly, the arguments of ld. DR are approved.

19 ITA No.1883/PUN/2013 A.Y.2008-09

Report of Transfer Pricing Officer: The ld. Counsel for the assessee 22. submitted that the said international transaction worth Rs.2.60 crores was benchmarked by the TPO and found that the transactions are at arm’s length. No adjustments were recommended by the TPO to the Assessing Officer while benchmarking the transactions. Based the said decision of the TPO, assessee argues that the business is set up as the transactions of earning of technical services are accepted by the TPO. Assessee argues that the TPO accepted the genuineness of the services rendered by the assessee and the consideration received by the assessee from the parental company and the same is possible only when the business is set up. In this regard, per contra, the Revenue submits that the scope of the TP study is restricted to the benchmarking exercise of the international transactions only and the commencement or set up of business qua the object of the assessee and the details rendering of services are entirely in the jurisdiction of the Assessing Officer and not the TPO. 23. Considering the same, we are of the opinion, the TPO’s decision to not to make the adjustment to the international transaction is unconnected to the dispute on the date of set up and commencement of the business of the assessee in the year under consideration. Considering the above, we are of the opinion, the Object No.IV relied upon by the ld. Counsel for the assessee is of no use considering its generality. Thus, the TPO’s report cannot be the benchmark for establishing the date/year of commencement/set up of the business of the assessee. The jurisdiction of the TPO has to be understood in the restrictive source. Accordingly, the relevant arguments raised by the assessee on this issue are dismissed.

20 ITA No.1883/PUN/2013 A.Y.2008-09 24. Therefore, finally, we are of the considered opinion that the amount of Rs.2.60 crores received by the assessee rightly taxed by the Assessing Officer as “income from other sources” and not business income of the assessee.

B. Allowability of Expenditure of Rs.22,92,60,081/- 25. On the allowability of the claim of expenditure of Rs.22,92,60,081/-, relevant facts are already discussed in the preceding paragraphs of the order. On considering the same and also the decisions cited before us, we find the same does not constitute the allowable expenditure in the year under consideration. Otherwise, the assessee claimed this expenditure in the revised return of income as deductible expenditure which were not permitted by the Assessing Officer and the CIT(A). In our view, the decision of the Assessing Officer is correct and proper. Accordingly, grounds no.1 and 2 of the assessee are dismissed. 26. Additional ground no.4 relates to an alternative claim to the grounds no.1 and 2 on the treatment to the income and expenditure earned or incurred in the financial year 2007-08 in the light of the provisions of section 4 of the Act. The case of the assessee is that in case the business is held not set up during the financial year 2007-08, the “previous year” has not yet commenced in view of the language used in proviso to section 3 of the Act. When the previous year is not commenced logically, no income is to be brought to tax u/s 4 of the Act as done by the Assessing Officer in this case u/s 56 of the Act. In other words, it is the case of the assessee that no income should be taxed in the assessment year under consideration when the business is not set up or commenced as the previous year is not commenced. This argument is raised in the context of Revenue decision to

21 ITA No.1883/PUN/2013 A.Y.2008-09 proceed to tax a sum of Rs.2,60,09,557/- u/s 56 of the Act under the head ‘income from other sources’. The ld. Counsel for the assessee relied heavily on certain decisions in this regard which discussed in para 16 to 18 of the written submission. 27. On the other hand, the ld. DR for the Revenue heavily relied on the various judgments of the Hon’ble Supreme Court which are authorized taxation of certain income under the head ‘income from other sources’ also in case where business is not commenced. C. Taxation of Interest Income – Reg. 28. Considering the same and relying on the said binding ratios, we are of the opinion, the additional ground no.4 has to be dismissed. 29. Additional ground no.5 relates to the treatment to be given to the “interest income” of Rs.47,01,88,559/- earned on bank deposits in the prior period to the commencement of business. The assessee treated the same as capital receipt. It is the claim of the assessee that the said earning of interest income on the fixed deposits is inextricably linked to the business of the assessee. Therefore, such set up of the business is permissible. The ld. Counsel for the assessee relied various decisions in this regard. 30. On the other hand, ld. DR for the Revenue submitted that such interest income should not constitute a capital receipt. According to the ld. DR, such income is taxable as revenue receipt. In this regard, ld. DR relied heavily on the Jurisdictional High Court judgment in the case of Shree Maheshwar Hydel Power Corporation Ltd. vs. CIT, 96 taxmann.com 167 (Bom.).

22 ITA No.1883/PUN/2013 A.Y.2008-09 31. During the rebuttal time on this issue, disregarding the above Jurisdictional High Court judgment in the case of Shree Maheshwar Hydel Power Corporation Ltd. (supra), ld. Counsel for the assessee filed a list of differences distinguishing the facts of the issue of both the assessee on one side and that of the Shree Maheshwar Hydel Power Corporation Ltd. (supra) on the other. The contents of relevant portion at page 19 and 20 of the written note of the assessee are relevant in this regard and the same are extracted hereunder :- “1. On the basis of submissions made, VW clearly submits that its business has been set-up and commenced during the FY 2007-08. If at all the submissions of the appellant are not accepted, VW states that the interest income of Rs. 47,01,88,559 earned on bank deposits in the period prior to the commencement of business was in nature of capital receipt and hence was required to be set off against the incidental expenses pending capitalization and could not be taxable as income from other sources. 2. VW stated its position in notes to computation of income while filing its original as well as revised return of income, that the interest income earned on short term bank deposits are offered to tax under ‘Income from other sources’ on a conservative basis in view of decision of Tuticorin Alkali Chemicals and Fertilisers Ltd vs Commissioner of Income tax [1997] 227ITR172 (SC) (Page 59- 60 & 178-179 of Paperbook). VW stated that it reserved it right to claim such interest income as not taxable under the Act, inter alia, based on any subsequent judicial pronouncement. It is submitted that subsequently, Hon’ble SC in the case of CIT vs. Bokaro Steel Ltd. (1999) 236 ITR 315 (SC) and CIT vs. Karnal Co-operative Sugar Mills (2000) 243 ITR 2 (SC) distinguished the Tuticorin Alkali (supra) decision and held that incidental income earned during the pre-commencement period need not be treated as revenue income if the same is inextricably linked to setting-up of the business and such revenue can be adjusted against the cost of the asset. 3. The Appellant submits that the entire shareholders fund along with the borrowed funds have been utilised by the Appellant for setting up manufacturing plant in Pune. A one on one linkage of the available funds to the construction of the project is highlighted below for ready reference : Particulars FY 2006- FY 2007- FY 2008- FY 2009- Total 07 08 09 10 Inflow: a. Receipts 26.85 1040.15 371.00 - 1,438.68 from Share Capital b. Receipts - - 105.00 2,127.22 2,232.22 from Borrowed Capital ( Net) Total 26.85 1040.15 476 2,127.22 3670.90 Inflow: Outflow

23 ITA No.1883/PUN/2013 A.Y.2008-09 a. Capital 12.45 195.88 997.00 (455.51) 749.82 work in progress b. - 84.00 208.00 1,729.24 2,021.24 Purchase of Fixed Assets (Incd transfer from WIP) Total 12.45 279.88 1205.00 1273.72 2,771.06 Outflow The data stated above clearly shows that the entire funds received by the Appellant, be it from the shareholders or the outside lenders are towards set up of the manufacturing plant and thus any income generated or any amount expended should be added or reduced from the cost of the project. Thus, it is submitted that whether the business is set-up or not and if the business of the Appellant is not commenced, the interest income earned on short term bank deposits which are inextricably linked to the setting-up of the business of the Appellant, shall be capitalized and go on to reduce the cost of the asset or be adjusted against the incidental expenses pending capitalization and will not be taxable under the Act for the year under consideration. 4. In support of appellant’s submission, reliance is placed on various judicial pronouncements wherein it has been held that if the interest earned by the Appellant was inextricable linked with setting up of the plant of the Appellant, it constituted a capital receipt in the hands of the assessee and shall not be taxable as Income from other sources.”

24 ITA No.1883/PUN/2013 A.Y.2008-09 remand the issue to the file of the Assessing Officer for want of finding of facts on inextricably linked with the interest income to the business of the assessee. The Assessing Officer is directed to examine the issue in the light of the above-said Jurisdictional High Court judgment in the case of Shree Maheshwar Hydel Power Corporation Ltd. (supra) and decided the issue afresh. The Assessing Officer shall grant a reasonable opportunity of being heard to the assessee in accordance with set principles of natural justice. Accordingly, the additional ground no.5 raised by the assessee is allowed for statistical purposes. 34. In the result, the appeal of the assessee is partly allowed for statistical purposes. Order pronounced on 05th day of September, 2019. Sd/- Sd/- (िवकास अव�थी /VIKAS AWASTHY) (डी. क�णाकरा राव/D. KARUNAKARA RAO) �याियक सद�य/JUDICIAL MEMBER लेखा सद�य /ACCOUNTANT MEMBER पुणे / Pune; �दनांक / Dated : 05th September, 2019. SB/Sujeet आदेश क� �ितिलिप अ�ेिषत / Copy of the Order forwarded to : अपीलाथ� / The Appellant. 1. ��यथ� / The Respondent. 2. 3. The CIT(Appeals)-III, Pune. 4. The CIT-IV, Pune. िवभागीय �ितिनिध, आयकर अपीलीय अिधकरण, “ए” ब�च, 5. पुणे / DR, ITAT, “A” Bench, Pune. गाड� फ़ाइल / Guard File. 6. आदेशानुसार / BY ORDER, //True Copy// िनजी सिचव /Private Secretary आयकर अपीलीय अिधकरण, पुणे / ITAT, Pune.