DEPUTY COMMISSIONER OF INCOME-TAX vs. MERCEDES BENZ INDIA PVT. LTD.,, PUNE

This bunch of cross appeals filed by assessee and Revenue and also Cross Objection filed by assessee on similar issues were heard together and are being disposed of by this consolidated order for the sake of convenience. However, in order to adjudicate the issues, reference is being made to the facts and issues in ITA Nos.514/PUN/2014 and 566/PUN/2014, relating to assessment year 2009-10.

The learned Authorized Representative for the assessee pointed out that major issues raised in the present bunch of appeals stand covered by the orders of Tribunal in assessee’s own case starting from assessment year 2005- 06 followed in assessment years 2006-07 to 2008-09.

First, we take up appeal of assessee in ITA No.514/PUN/2014, relating to assessment year 2009-10 wherein the assessee has raised the following grounds of appeal:- 1. The learned Assessing Officer erred in making addition to the total income of the Appellant of Rs.22,18,12,968 on account of transfer pricing adjustments by not considering the transfer pricing analysis documented in transfer pricing report for AY 2009-10.

Further, the assessee has also raised additional grounds of appeal, which read as under:- 10. The transfer pricing adjustments/additions/variations made by the Assessing Officer is bad in law, illegal and unsustainable on the basis of the following grounds, taken singly or cumulatively, and, therefore, its upholding by the Hon'ble Dispute Resolution Panel ought to be decided. 10.1 Without prejudice to the above, the Additional Commissioner of Income Tax who has passed the relevant Transfer Pricing Order could not have any legal authority to act as a Transfer Pricing Officer ("TPO") in view of the clear provisions of section 92CA and consequently the order passed by him is bad in law and illegal. Accordingly the adjustment made by the AO in the Assessment Order in relation to the transfer pricing adjustments/additions/variations is also bad in law and illegal. 10.2 On the facts and the circumstances of the case and in law, learned AO erred in making the reference to the TPO without proper application of mind to the facts on records, without recording his reasons for any necessity or expediency and without legal and valid approval of CIT and hence the same is not in accordance with the provisions of Section 92CA(1) of the Act. The Appellant prays that the proceedings initiated by the TPO under Section 92CA of the Act on the basis of the said reference be held as void ab initio and thus the order passed by the TPO under Section 92CA(3) of the Act be cancelled. 10.3 a) The conditions stipulated in section 92C(3) of the Act are mandatory and the Assessing Officer is expected to record his satisfaction in that respect before making the reference to the TPO.

The Revenue in ITA 566/PUN/2014, relating to assessment year 2009- 10 has raised the following grounds of appeal:- I) Comparable selection . Dispute Resolution Panel erred in selection and rejection of comparables as - a. Comparables have been identified following vigorous search process Following the same parity of reasoning, the provisions of Rule 10A(a), Rule 10B(2), Rule 10B(3) and Rule 10B(1) comparing functions, assets and risks, from the search undertaken by the assessee company; wherein Hindustan Motors was not a comparable and it did not fit in the category of uncontrolled transaction, when Hon'ble DRP in AY 2007-08 and AY 2008-09 had already upheld the rejection on the same ground, wherein Tata Motor's RPT was 26% which was within the range suggested as limit for classification of the associate concerns, as per Actis Advisors judgment of the ITAT New Delhi in ITA No. 5277/Del/2011 and ITA No.958/Del/2012 delivered on 12.12.2012; and wherein M/s.Chongquing Dima Industries Co. Ltd. was one of the company identified by the assessee company which was taken as comparable based on data provided by the assessee company in TP Audit. II) Foreign Exchange Fluctuations Dispute Resolution Panel erred when it directed that -

However, during the course of hearing, the learned Authorized Representative for the assessee pointed out that in case the issue raised in grounds of appeal No.1 to 6 is decided, which admittedly stands covered by earlier order of Tribunal, then there is no need to adjudicate the additional grounds of appeal. So, first we address the issue raised vide grounds of appeal No.1 to 6, 9 and additional ground of appeal No.10.

The issue raised vide above said grounds of appeal is against adjustment made by comparison of margins of Completely Built Units (CBUs) to the margins of spares. The assessee was engaged in the manufacture and sale of Mercedes Benz cars, automobile parts, components and consumables. The assessee in addition to manufacturing Mercedes Benz cars had also imported Completely Built Units (CBUs) from the parent company. The sale of cars was normally done through dealers. In addition to import of CBUs, the assessee had also imported spare parts or purchased them locally, which were sold to the dealers for their after sales activity. In addition, the assessee had also paid royalty to associated enterprise and that payment of royalty was also aggregated. The assessee had applied an aggregation approach and

The Tribunal in earlier years have held that there is no merit in the approach adopted by TPO, wherein the margins of CBUs were compared with margins of spares imported from associated enterprises. The said issue was first decided by the Tribunal in assessee’s own case in assessment year 2005- 06 and thereafter, in assessment years 2006-07 to 2008-09 vide consolidated order. The relevant findings of Tribunal are in paras 13 to 17 of order dated 30.04.2019 with lead order in ITA No.1468/PUN/2010, relating to assessment year 2006-07. The Tribunal in turn, relying on its earlier order had held that all the transactions have to be aggregated under the umbrella of manufacturing activity and after applying TNMM method, margins shown by assessee needed to be compared with mean margins of finally selected concerns.

The issue arising in the present appeal is squarely covered by the order of Tribunal and following the same parity of reasoning, we hold that in the present year also the transactions undertaken by assessee are to be benchmarked under the umbrella of manufacturing activity on aggregate basis and TNMM method has to be applied and margins shown by assessee have to be compared with mean margins of finally selected concerns. The royalty

The ground of appeal No.1 raised by assessee is general in nature and hence, does not need any adjudication.

The grounds of appeal No.2 and 3 raised by assessee are thus allowed as per our directions in the paras above. The grounds of appeal No.4 and 5 as admitted by assessee would become academic, once the grounds of appeal No.2 and 3 are allowed and similarly, ground of appeal No.9 and additional ground of appeal No.10 would become academic.

Now, coming to ground of appeal No.6, which is against allowability of +/- 5% range which stands allowed in the case of assessee.

The Revenue is also in appeal for the year under consideration vis-à-vis selection of comparables. Since we are remitting this issue back to the file of

Similarly, in the Cross Objections the assessee has raised various grounds of objections vis-à-vis selection of comparables which now would be decided by Assessing Officer and those grounds are also held to be academic in nature.

Now, coming to next issue raised in the present appeal i.e. against treatment of balance royalty and whether the same is to be allowed as revenue expenditure.

We find that similar issue arose before the Tribunal in assessee’s own case in the hands of assessee, wherein the balance royalty was disallowed as capital expenditure. The said issue has been dealt with by Tribunal starting from assessment year 2002-03 onwards and following the same parity of reasoning, we hold that balance royalty payment is to be allowed as revenue expenditure in the hands of assessee. Consequently, the ground of appeal No.7 raised by assessee stands allowed.

That leaves us ground of appeal No.8, which is against disallowance of homologation expenditure of ₹ 1,24,78,000/-.

Brief facts relating to the issue are that the assessee has pointed out that the assessee was engaged in the business of manufacturing of passenger vehicles. The assessee pointed out that under the Central Motor Vehicles Act and Central Motor Vehicles Rules, it was mandatory for the assessee to seek

The learned Authorized Representative for the assessee in this regard pointed out that in earlier years i.e. assessment years 2002-03 to 2004-05, the issue was allowed by the Tribunal, where an adhoc disallowance was made out of homologation expenses. In assessment year 2005-06 to 2008-09, no disallowance was made by Assessing Officer himself and thereafter, in the

The learned Departmental Representative for the Revenue referring to the details of expenses at page 619 of Paper Book, pointed out that the authority certified all new products since the said activity had an enduring benefit as the passenger cars were sold over a period of time, then the same needs to be disallowed. In respect of decision in Honda Siel Cars India Limited Vs. ACIT (supra), it was pointed out that expenditure was R&D expenditure, which was allowed in the hands of assessee.

The learned Authorized Representative for the assessee in this regard placed reliance on the decision of Hon’ble Apex Court in Taparia Tools Ltd. Vs. JCIT (2015) 276 CTR 1 (SC) that there is no concept of enduring benefit and the disallowance of expenses.

We have heard the rival contentions and perused the record. In the line of business of assessee i.e. manufacture and sale of passenger cars, the automobiles which were manufactured were governed by Central Motor Vehicles Act (CMV Act) and Central Motor Vehicle Rules (CMV Rules). Under the said regulations, it is mandatory to seek approval from the agency of the Government before making any technical changes in the existing model and also before introducing new vehicle / any upgraded version of existing vehicle before its commercial use. The ARAI makes the certification in this regard. Rules 91 to 126A of CMV Rules regulate the construction, equipment and

The Hon'ble Supreme Court in Empire Jute Co. Ltd. Vs. CIT (1980) 124 ITR 1 (SC) had laid down that test of enduring benefit cannot be applied blindly and mechanically, without regard to particular facts and circumstances. Merely because the aforesaid expenditure results in an enduring benefit would not make such expenditure as capital in nature, as while allowing any expenditure in the hands of assessee, the intent and purpose of expenditure is to be kept in mind and whether the same is incurred for smooth running of business, then, such expenditure is revenue in nature. Accordingly, we direct the Assessing Officer to allow homologation expenses of ₹ 1.25 crores (approx.). The ground of appeal No.8 raised by assessee is thus, allowed.

Now, coming to Revenue’s appeal in assessment year 2009-10, wherein we have already decided the first issue along with transfer pricing issue raised in the appeal of assessee and have remitted the issue of selection of comparables back to the file of Assessing Officer / TPO.

The second issue raised is adjustment on account of abnormal foreign exchange movement. The TPO while computing PLI of assessee had treated the foreign exchange loss as operating in nature. The DRP in turn, relying on the Safe Harbour principles had treated the foreign exchange fluctuation loss as non operating and directed the Assessing Officer to consider loss suffered

The Revenue is in appeal against the order of DRP.

The case of assessee before us is that the year under consideration witnessed around 14.10% increase in Euro / INR rates vis-à-vis previous year and hence, was an exceptional year, wherein profitability of assessee was impacted by adverse fluctuation in foreign exchange currency. The learned Authorized Representative for the assessee pointed out that similar issue arose before Pune Bench of Tribunal in Demag Cranes & Components (India) Pvt. Ltd. Vs. DCIT in ITA No.328/PN/2014, relating to assessment year 2009-10, order dated 19.10.2016 and it was held that where Euro rates had fallen, then it was an unique event for this year and such foreign exchange loss was to be excluded while computing PLI of assessee. We find merit in the claim of assessee in treating foreign exchange loss as non-operating in nature. There was fluctuation in the rate of Euro / INR rates when compared to the previous year and the market witnessed around 14.10% increase in Euro / INR rates. In such facts and circumstances, where the phenomenon was unique, then the same is to be excluded while computing PLI of assessee.

We find that same ratio has been laid down by the Tribunal in Demag Cranes & Components (India) Pvt. Ltd. Vs. DCIT (supra). The year under appeal in the case of Demag Cranes & Components (India) Pvt. Ltd. Vs. DCIT (supra) and the assessee is same. Following the same parity of reasoning, we direct the exclusion of foreign exchange loss while computing PLI of assessee company. Upholding the order of DRP, we dismiss the ground of appeal No.2 raised by Revenue.

Now, coming to the last issue raised by Revenue i.e. ground of appeal No.3, which is against order of DRP that the expenditure of royalty and homologation which were disallowed by the Assessing Officer should not be included in the computation of PLI.

The learned Authorized Representative for the assessee pointed out that this ground of appeal raised by Revenue would become academic if grounds of appeal No.7 and 8 raised by assessee in its appeal are allowed.

We have already adjudicated grounds of appeal No.7 and 8 raised in assessee’s appeal in favour of assessee, hence ground of appeal No.3 raised by Revenue becomes academic and the same is dismissed.

Now, we take up the appeal of assessee in assessment year 2010-11, wherein the issues raised by various grounds of appeal are similar to the issue raised in assessment year 2009-10. The ground of appeal No.2 raised in respect of TP adjustment is general in nature and hence, does not need our adjudication. The ground of appeal No.1 raised by assessee is pleaded to be academic once the grounds of appeal No.3 and 5 are allowed in the hands of assessee. The issue raised in ground of appeal No.3 is against rejection of combined TNMM method i.e. adoption of aggregation approach. In ground of appeal No.5, the assessee has raised the issue against order of authorities below in comparing the gross margins of CBUs with margins of spares and applying RPM method as most appropriate method. In ground of appeal No.4, the issue raised is against rejection of comparable companies.

We have already adjudicated similar issue in earlier years and also in assessment year 2009-10 in the paras above. Following the same parity of

The issue raised in ground of appeal No.11 is against treatment of royalty payment as capital expenditure instead of revenue expenditure. This issue has been decided in the hands of assessee since assessment year 2002- 03 onwards and following the same parity of reasoning, the royalty has been allowed as revenue expenditure in the hands of assessee. Accordingly, we direct the Assessing Officer to apply the same proposition and allow the claim of assessee in entirety.

Now, coming to appeal filed by Revenue in assessment year 2010-11, wherein the grounds of appeal No.1 to 6 have been raised against order of DRP in allowing homologation expenses as revenue expenditure. The Revenue is aggrieved by the order of DRP as in earlier year the Assessing Officer had held it to be capital expenditure.

We have already adjudicated this issue in the case of assessee in assessment year 2009-10 and following the same parity of reasoning, we allow this claim of assessee. The grounds of appeal raised by Revenue are thus, dismissed.

Now, coming to appeal of assessee in assessment year 2011-12. The grounds of appeal raised in respect of transfer pricing adjustment under category A are identical to the grounds of appeal raised in assessment year 2010-11 and our directions would apply mutatis mutandis to assessment year 2011-12. In this regard, ground of appeal No.1 would become academic. The ground of appeal No.2 is general in nature and does not need any adjudication. The grounds of appeal No.3 to 5 are in respect of transfer pricing adjustment i.e. adoption of aggregation approach and not comparing gross margins of CBUs with spare parts and applying RPM method vis-à-vis selection of comparables. The issue stands decided in paras above and Assessing Officer has to apply the directions of Tribunal in earlier year. The grounds of appeal No.6 to 8 would become academic and the same are dismissed. The ground of appeal No.9 is against orders of authorities below in treating the royalty as capital expenditure instead of revenue expenditure. We have already adjudicated this issue in earlier year and following the same parity of reasoning, this ground of appeal is allowed.

Now, coming to appeal of Revenue in assessment year 2011-12, which is only against order of DRP in holding homologation expenses as revenue in nature, as against order of Assessing Officer in holding it to be capital expenditure. We find no merit in the aforesaid issue since the same has already been adjudicated by us in assessment years 2009-10 and 2010-11 and following the same parity of reasoning, we allow the claim of assessee. The grounds of appeal of raised by Revenue are thus, dismissed.

In the result, all the appeals of assessee are allowed as indicated above and all appeals of Revenue and Cross Objection of assessee are dismissed.