M/S. HERO MOTOCORP LTD.,NEW DELHI vs. ADDL. CIT, NEW DELHI

per the Assessing Officer eligible for deduction under section 80 IA

of the Act. It was further submitted by the Ld. AR that the Ld. CIT

(A), relying on the order passed by the Tribunal in the assessment

year 2006-07, upheld the disallowance made by the assessing

officer.

6.0.1 The Ld. AR for the assessee submitted that the

Tribunal, in the assessee’s own case for the assessment years 2010-

11 and 2011-12, after duly taking into consideration the material

facts/evidences placed on record, decided the issue in favour of the

assessee, holding that for the purpose of determination of ‘market

price’ of power under section 80IA(4) read with 80IA(8) of the Act,

where multiple options of price of a product are available, then the

price which is most favorable to the assessee needs to be adopted.

The Tribunal, while distinguishing the decision of Delhi bench of the

Tribunal in the earlier years, also held that price of power charged

by State Electricity Board is not reflective of market price for

computing deduction under section 80IA(4) of the Act. It was

16 ITA Nos.6282 & 6302 Hero Motorcorp Ltd. vs. ACIT & DCIT submitted that the decision of the Tribunal in assessment year

2006-07 was distinguished by the Tribunal on the basis of

rectification order dated 06.09.2013 passed by the Tribunal in MA

No 1/Del/2013, while deciding the issue in favour the assessee in

assessment years 2010-11 and 2011-12. The Ld. AR pointed out

that following the order for the assessment years 2010-11 and 2011-

12, the Tribunal deleted the disallowance made by the assessing

officer in assessment years 2009-10 and 2004-05.

7.0 The Ld. DR relied on the order of the AO.

8.0.0 We have gone through the records. Though by order

dated 23.11.2012 passed by the Tribunal for assessment year 2006-

07, the Tribunal had decided the issue against the assessee,

subsequently, the said order was rectified by the Tribunal vide order

dated 6.9.2013. In the order for Assessment Years 2010-11 and

2011-12, the Tribunal after considering the aforesaid, held as under:

“124. We find that the expression market value ‘inter-unit transfer has been defined under Explanation to section 80IA of the Act as follows: “Explanation.—For the purposes of this sub-section, ―market value‖, in relation to any goods or services, means— (i) the price that such goods or services would ordinarily fetch in the open

17 ITA Nos.6282 & 6302 Hero Motorcorp Ltd. vs. ACIT & DCIT market; or (ii) the arm‘s length price as defined in clause (ii) of section 92F, where the transfer of such goods or services is a specified domestic transaction referred to in section 92BA.”

The aforesaid definition endorses the meaning of market price‘ explained by the Courts in several decisions, i.e., the price that such goods or services would ordinarily fetch in the open market. In the present case, we note that there are two prices available at which buyers are paying price for procurement of power, i.e., the rate at which power is supplied by HSEB and the rate at which power is supplied by the private entity, i.e., Maruti Udyog Ltd. The issue, thus, arises is what should be the market price of power? The market rate (or "going rate") for goods or services is the usual price charged for them in a free market. If demand goes up, manufacturers and laborers will tend to respond by increasing the price they require, thus setting a higher market rate. Had power been provided by HSEB in abundant quantity to meet the needs of consumers, especially manufacturing entities, there was no occasion for any other player to supply the power at higher rates. In such a situation, the free market conditions would have forced a private player to supply the power at the same rate at which power is supplied by HSEB or at a lower rate. But since the actual facts are reverse inasmuch as HSEB is not able to meet the power requirement of the consumers, private entities are forced to generate power for self-consumption, as in the case of appellant, or supply in the market like Maruti Udyog at a higher price. The consumers in the free market conditions are, therefore, willing to

18 ITA Nos.6282 & 6302 Hero Motorcorp Ltd. vs. ACIT & DCIT pay higher price to meet their power consumption needs. In such a situation, under an arm‘s length condition, if the appellant, too, like Maruti was to supply power to third party located in its vicinity, the appellant could have also charged price higher than that charged by HSEB. The aforesaid discussion leads to the conclusion that the price charged by HSEB, at best under the facts and circumstances of the case and looking to the power situation at Haryana, cannot be said to be ‗market price‘ within the meaning of Explanation to section 80IA(8) of the Act. We find that the Tribunal in appellant‘s own case for assessment year 2006-07 dismissed the aforesaid claim on a mistaken belief that the rate at which power was supplied by Maruti was not a proper benchmark, since Maruti was supplying power to its associated enterprises. The aforesaid mistake was also rectified by the Tribunal pursuant to miscellaneous application filed by the appellant whereby the words ―associated enterprises‖ were replaced with ‗ancillary units‘. Considering that the original decision was taken on a mistaken belief, it was not a correct decision and, thus, cannot be followed. In the given facts, where different rates for supply of power are available, we agree with the decision of Jaipur bench of Tribunal in the case of Sri Cement Ltd. (supra), wherein while applying the decision of Supreme Court in the case of Vegetable Products Ltd.: 88 ITR 192 it was held as under :- “12. On perusal of the above, it could be clearly seen that the statute provides that the assessee must adopt 'market value' as the transfer price. In the open market, where a basket of 'market

19 ITA Nos.6282 & 6302 Hero Motorcorp Ltd. vs. ACIT & DCIT values' [say like, independent third party transactions, grid price (average annual landed cost at which grid has sold power to the assessee), power exchange price for the relevant period etc.] are available, the law does not put any restriction on the assessee as to which 'market value' it has to adopt, it is purely assessee's discretion. So long as the assessee has adopted a 'market value' as the transfer price that is sufficient compliance of law. AO can adopt a different value only where the value adopted by assessee does not correspond to the 'market value'. Even if assessee's cement unit has purchased power also from the grid or that assessee's power unit has also partly sold its power to grid or third parties that by itself, does not compel the assessee or permit the Revenue to adopt only the 'grid price' or the price at which the eligible unit has partly sold its power to grid or third parties, as the 'market value' for captive consumption of power to compute the profits of the eligible unit. Any such attempt is clearly beyond the explicit provisions of s. 80-IA(8) of the Act. Underlying principles forming the basis of our findings given hereinbefore in this order are also supported by the decision of Special Bench of Hon'ble Bangalore Tribunal in Aztec Software & Technology Services Ltd. v. Asstt. CIT [2007] 107 ITD 141/15 SOT 49/162 Taxman 119 (Bang.) (SB) as well as Mumbai Tribunal decision in the case of Asstt. CIT v. Maersk Global Service Center (India)(P.) Ltd. [2011] 133 ITD 543/16 taxmann.com 47 (Mum.) wherein while interpreting the transfer pricing provisions, the Courts have held that it is the assessee who is the best judge to know the transactions undertaken and thus finding out the comparable cases from the vast database available in the public domain. Once the assessee has adopted the same, the AO has to examine whether the same is market price or not. AO has the power to adopt the market price only when the price adopted by the assessee does not correspond to market value. In the present case, we find that the assessee has

20 ITA Nos.6282 & 6302 Hero Motorcorp Ltd. vs. ACIT & DCIT adopted a rate at which actual transactions have been undertaken by unrelated entities. The volumes of transaction as relied upon are also substantial and hence it cannot be said that the assessee has handpicked some transactions, which are beneficial to it. The Departmental Representative submitted that since the assessee has itself drawn power from the grid, the grid rate represents the 'best market value' and hence the same should only be adopted. We are not agreeable to the above contention of the Department. No doubt the grid rate is market value but there is no concept of 'best' market value in law. If by using the said adjective, Revenue seeks to infer that grid rate is the only market value in the present context, such inference is also clearly not tenable Further, in case there are options the option favorable to the assessee is to be adopted. This is a well- settled principle of law laid down by Courts time and again including Supreme Court in the case of Vegetable Products Ltd. (supra) and other High Courts as pointed out by the Authorised Representative. 13. In the light of the aforesaid, we hold that:

(a) the value adopted by the assessee be it value as per independent third party trading transactions or as per power exchange (IEX etc.) or any other independent transaction (for the relevant period and which has taken place in the relevant area where the eligible unit is located) constitute 'market value' in terms of Explanation to s. 80-IA(8);

(b) the value at which State grid has sold power to the cement unit of the assessee (average annual landed cost) also constitute 'market value' in terms of Explanation to s. 80-IA(8) but the value at which State grid or third party has purchased power from the power unit of the assessee, which represents its power which is sold when not required by the cement unit, does not constitute

21 ITA Nos.6282 & 6302 Hero Motorcorp Ltd. vs. ACIT & DCIT 'market value' in terms of Explanation to s. 80-IA(8). It is the 'principle' and not the 'quantum' which is deciding factor;

(c) where a basket of 'market values' are available for the relevant period and relevant geographical area where the eligible unit is situated, the assessee has discretion to adopt any one of them as market value; and

(d) If the value adopted by the assessee is 'market value' as explained above, it is not permissible for Revenue to recompute the profits and gains of the eligible unit by substituting the said value (as adopted by the assessee) by any other 'market value'. 14. Accordingly, we delete the disallowance as made by the AO in order under s. 143(3) on account of deduction under s. 80-IA of the Act and hence the grounds 1 and 2 are accordingly decided in favour of the assessee.”

In the present case also there are three rates,(i) rates at which power is purchased from state electricity board, ( ii) the cost of production of the power by the legible unit of the assessee and mark up thereon ( iii) the rates at which power is supplied by Independent party to its ancillary unit . Therefore there are multiple basket of the market rates. As held in above decision that where multiple options for the price of a product are available, then the option which is most favorable to assesse needs to be adopted for the purposes of determining inter-unit transfer price u/s 80 IA(8) of the Act. Further it is not the case of the revenue that the power cost incurred by the assessee is inflated or incorrect. In that view of the matter, in the present case, considering that three different prices for supply of power are available in the market, the method

22 ITA Nos.6282 & 6302 Hero Motorcorp Ltd. vs. ACIT & DCIT adopted by the appellant to compute inter-unit transfer price by imputing a reasonable mark-up on its cost of production, i.e., Rs.8.75, which was less than the rate of Rs. 9.84 charged by Maruti, was quite a reasonable for the purposes of computing deduction u/s 80IA(4) of the Act. Therefore we reverse the disallowance made by the Ld. assessing officer of deduction of Rs. 8 0 7.76 Lacs under section 80 IA, in relation to the generation of power .Accordingly, the ground No. 26 of appeal stands allowed.”

8.0.1 We find that following the aforesaid order of the

Tribunal, the Tribunal deleted the disallowance made by the

assessing officer in assessment years 2009-10 and 2004-05.

Respectfully following the same, we hold that the disallowance made

by the Assessing Officer (AO) under 80IA of the Act in relation to the

generation of power cannot be sustained. We, accordingly, allow this

ground of appeal raised by the assessee.

9.0.0 Grounds of appeal nos. 3 to 3.1 pertain to disallowance

of the claim of additional depreciation under section 32(1)(iia) of the

Act made by the assessee. It was submitted by the Ld. AR that in

terms of section 32(1)(iia), additional depreciation on new plant and

machinery acquired and installed during the year is available,

23 ITA Nos.6282 & 6302 Hero Motorcorp Ltd. vs. ACIT & DCIT subject to condition of increase in installed capacity of the relevant

industrial undertaking. It was submitted that the assessee claims to

have increased its installed capacity during the year, thereby

entitling it to additional depreciation under the aforesaid section,

whereas the claim of the AO is that the relevant plant and

machinery installed during the year did not enhance the production

of the assessee and, therefore, the same had no nexus/co-relation

with the increase in installed capacity. Ld. AR submitted that during

the relevant previous year, the assessee invested Rs. 105.8 crores

and Rs.79.57 crores in plant and machinery in Gurgaon and

Daruhera units respectively. Due to the said investment, the

installed capacity increased by 75% in Gurgaon plant (from 8,00,000

to 14,00,000 units) and by 43.75% in Dharuhera plant (from

8,00,000 units to 11,50,000 units) from 31.03.2002 to 31.03.2005.

The Ld. AR submitted that in terms of section 32(1)(iia) of the Act,

additional depreciation of Rs. 14.93 crores was claimed by the

assessee in respect of plant and machinery installed in factory

premises in the aforesaid plants but the assessing officer, disallowed

the aforesaid claim of additional depreciation holding that there was

24 ITA Nos.6282 & 6302 Hero Motorcorp Ltd. vs. ACIT & DCIT

no correlation between installed capacity and installation of machine

by observing as under:

“As per assessee there has been increase in installed capacity as compared to last year of 12% and 15% in respect of its two plants. The records of the assessee indicates the claimed increase in installed capacity as under:

Installed capacity plant wise Ay 2005-06 As on GGN DHR Total 31.03.2002 800000 800000 1600000

31.03.2005 1400000 1150000 2550000

Increase 75.00% 43.75% 59.38%

1000000 31.03.2004 1250000 2250000 Last year 12.00% 15.00% 13.33%

8.2 During the course of assessment proceedings various records of the assessee and breakup of production were called for and examined so as to verify the claim of the assessee that it is due to new machinery being added that there has been increased in installed capacity. The analyses of production details submitted by the assessee reveals the following position.

Addition of machinery Upto October After October (in crores) (in crores) GGN 37.57 68.23 DHR 4.3 36.57

8.3 Now this addition to the plant and machinery is mapped on the actual production done by the assessee in the corresponding period to arrive at the conclusion as to whether really there has been increased in installed capacity by virtue of

25 ITA Nos.6282 & 6302 Hero Motorcorp Ltd. vs. ACIT & DCIT addition of plant and machinery or it is only a matter of demand and supply which governs the production of motor cycles with inherent capacity already been there. Actual production (No.) Upto October After October Difference GGN 609354 719502 110148 DHR 625222 670952 45730

8.4 This table would reveal that in Dharuhera plant where the machinery has been added after October 2005 of Rs. 36.57 crores the increase in production is of only 45730 over a period of 151 days whereas in the first half of the year where the addition to machinery is very small almost similar quantity is been produced. This implies that addition of machinery had either no effect or very minimum effect on the production capacity. It appears that more production is linked to the demand and supply position rather than increase in the capacity. This fact gets further reinforced that the peak production in respect of both the plants of 123351 units in Gurgaon and 117000 units in Dharuhera had simultaneously taken place in the month of October 2004. This factor clearly establishes the fact that the machinery acquired by the assessee was more related to the change in the technology for producing a newer engine i.e. core 1 technology rather than addition to the installed capacity. Even in case of Gurgaon plant where an argument could be raised that there has been investment of Rs. 37.57 crores before October and that had resulted due to the increased production. However, that also doesn't appear to be a correct view because in the month of May, 2004 when there has not been large investment the production has been of 103535 units whereas in the month of June and August the production has been of 98273 and 92781 units respectively. Therefore, the correlation between installed capacity and installation of machine is not established and in any case if Dharuhera is an indicator the addition to plant and machinery has been almost neutral so far as installed capacity is concerned. The reason very clearly lies in the fact that the in assessment year 2004-05 i.e. the immediately preceding year there has been a huge

26 ITA Nos.6282 & 6302 Hero Motorcorp Ltd. vs. ACIT & DCIT addition in plant and machinery and even by assessee's admission there has been increased in capacity by almost 45% to 50% over that as on 31/03/2002. Apparently in this case since major increase in capacity took place in the immediately preceding year it appears that there remained a higher capacity of production inherent in the expansion made in the earlier year and the same got reflected due to demand and supply position in the current year. Therefore there has been no real increase in installed capacity due to acquisition in plant and machinery.”

9.0.1 The Ld. AR submitted that the Ld. CIT (A) upheld

the aforesaid action of the assessing officer, with the direction to

the assessee to establish nexus of investment with increase in

installed capacity of the assessee company as a whole by holding

as under:

“The appellant has not demonstrated that investment in plant and machinery during the impugned assessment year has effect of increase in installed capacity and not as a part of expansion programme of installed capacity undertaken for the financial year ending on 31.03.2004. Therefore, I direct the AO to verify as to whether investment in plant and machinery during the impugned assessment year is at stand alone mode which has increased the installed capacity to Gurgaon and Daruhera plant. In case, this fact is proved that due to investment in plant and machinery during this year the capacity has increase irrespective of expansion plant

27 ITA Nos.6282 & 6302 Hero Motorcorp Ltd. vs. ACIT & DCIT undertaken during the immediate preceding year the additional depreciation is allowable.”

9.0.2 The Ld. AR for the assessee invited attention to the

provision of Section 32(1)(iia) of the Act, as amended by Finance

(No.2) Act, 2004, w.e.f. 01.04.2005 and applicable for the year under

consideration, which reads as under:

“32. In respect of depreciation of— ……………………………………. (iia) in the case of any new machinery or plant (other than ships and aircraft), which has been acquired and installed after the 31st day of March, 2002, by an assessee engaged in the business of manufacture or production of any article or thing, a further sum equal to fifteen per cent of the actual cost of such machinery or plant shall be allowed as deduction under clause (ii) : Provided that such further deduction of fifteen per cent shall be allowed to— (A)a new industrial undertaking during any previous year in which such undertaking begins to manufacture or produce any article or thing on or after the 1st day of April, 2002; or (B)any industrial undertaking existing before the 1st day of April, 2002, during any previous year in which it achieves the substantial expansion by way of increase in installed capacity by not less than ten per cent: Provided further that no deduction shall be allowed in respect of—

28 ITA Nos.6282 & 6302 Hero Motorcorp Ltd. vs. ACIT & DCIT a) any machinery or plant which, before its installation by the assessee, was used either within or outside India by any other person; or b) any machinery or plant installed in any office premises or any residential accommodation, including accommodation in the nature of a guest house; or c) any office appliances or road transport vehicles; or d) any machinery or plant, the whole of the actual cost of which is allowed as a deduction (whether by way of depreciation or other-wise) in computing the income chargeable under the head "Pro-fits and gains of business or profession" of any one previous year: Provided also that no deduction shall be allowed under clause (A) or, as the case may be, clause (B), of the first proviso unless the assessee furnishes the details of machinery or plant and increase in the installed capacity of production in such form, as may be prescribed along with the return of income, and the report of an accountant, as defined in the Explanation below sub-section (2) of section 288 certifying that the deduction has been correctly claimed in accordance with the provisions of this clause. Explanation.—For the purposes of this clause,— XXX (2) "installed capacity" means the capacity of production as existing on the 31st day of March, 2002”

9.0.3 It was argued by the Ld. AR that the language of the

aforesaid section is plain and unambiguous and provides that

additional depreciation of 15% shall be available on the cost of

29 ITA Nos.6282 & 6302 Hero Motorcorp Ltd. vs. ACIT & DCIT new plant & machinery acquired and installed after 31.03.2002,

inter alia in case of a undertaking existing before 01.04.2002,

during any previous year in which such undertaking achieves the

substantial expansion by way of increase in installed capacity by

not less than 10%. On the basis of the aforesaid language of the

aforesaid section, it was argued that the same did not contain any

condition of the nexus of plant and machinery with increase in

installed capacity of the relevant industrial undertaking. If there

was increase in installed capacity, additional depreciation was

admissible on cost of new plant and machinery acquired and

installed during the year.

9.0.4 The Ld. AR further invited our attention to section

32(1)(iia) as amended by the Finance Act, 2005, w.e.f.

01.04.2006, whereby the aforesaid condition of increase in

installed capacity was removed and additional depreciation was

available on any new plant and machinery acquired or installed

after 31.03.2005 by an assessee engaged in the business of inter

alia manufacture or production of any article or thing. It was

argued that the intention of the legislature was to give incentive to

30 ITA Nos.6282 & 6302 Hero Motorcorp Ltd. vs. ACIT & DCIT investment in new plant and machinery de hors actual increase in

production from such installation. It was argued that the

intention of the amendment was not to discriminate incentives on

investments made pre and post 31.03.2005, but to simplify and

remove hardship in the provisions, in order to extend the benefit

of additional depreciation on new investments in plant and

machinery without any further condition.

9.0.5 It was further argued that, even otherwise the AO and

the Ld. CIT (A) have erred in denying the aforesaid claim of

deduction, since what they were comparing was the nexus of

increase in production with installation of relevant plant and

machinery, whereas the requirement of law was only increase in

overall installed capacity of the relevant industrial undertaking.

9.0.6 The Ld. AR, thereafter, invited our attention to the

details of the installed capacity at the relevant Gurgaon and

Dharuhera plants, which was undisputed by the lower authorities

to contend that the relevant plants satisfied the condition of

increase in installed capacity of more than 10%, as per the table

below:

31 ITA Nos.6282 & 6302 Hero Motorcorp Ltd. vs. ACIT & DCIT

Gurgaon Plant Daruhera Plant Total Installed capacity as on 8,00,000 8,00,000 16,00,000 31.03.2002 Installed capacity as on 12,50,000 10,00,000 22,50,000 31.03.2004 Installed capacity as on 14,00,000 11,50,000 25,50,000 31.03.2005 %age increase in installed 75.00% 43.75% 59.38% capacity on 31.3.2005 vis-à- vis 31.3.2002 % age increase in installed 12% 15% 13.33% capacity on 31.3.2005 vis-à- vis 31.3.2004 % age increase of differential 18.75% 18.75% 18.75% of installed capacity for year ending 31.3.2005 (i.e. 31.3.2005 – 31.3.2004) vis-à- vis 31.3.2002

9.0.7 The Ld. AR submitted that the claim of the

assessee was further supported by the report of Chartered

Accountant in Form 3AA wherein the Auditors have certified the new

investment made by the assessee in the plant and machinery and

increase in the installed capacity. (Page No 124-198 of PB-

Supplementary). It was submitted that in the notes to accounts

forming part of audited annual accounts for the year ending

31.03.2005, the statutory auditors too have disclosed the details

regarding the licensed, installed and actual production capacity for

the relevant previous year and preceding previous year. (Page No. 25

of PB) as under:

32 ITA Nos.6282 & 6302 Hero Motorcorp Ltd. vs. ACIT & DCIT

9.0.8 It was argued that, since the assessee satisfied the relevant conditions for claim of additional depreciation under section 32(1)(iia), the disallowance made by the AO deserved to be deleted. 9.0.9 Reliance was also placed on the following decisions wherein it has been held that there is no requirement under section 32(1)(iia) of the Act to establish operational connectivity of the eligible plant and machinery with the article and thing manufactured by the assessee:

• CIT v. VTM Ltd: 319 ITR 336 (Mad) • CIT v. Hindustan Newsprint Ltd.: 183 Taxman 257 (Ker) • CIT v. Hi Tech Arai Ltd: 321 ITR 477 (Mad): • CIT v. Texmo Precision castings: 321 ITR 481 (Mad) • CIT vs. Diamines & Chemicals Ltd.: 271 CTR 98 (Guj) • NRB Bearings Ltd. vs. DCIT: 133 ITD 306 (Mum ITAT)

10.0 On the other hand, the Ld. CIT (DR) refuted the contentions of the assessee’s counsel. The Ld. CIT (DR) heavily relied upon the findings contained in the assessment order. It was argued

33 ITA Nos.6282 & 6302 Hero Motorcorp Ltd. vs. ACIT & DCIT that, there was ambiguity in the language of section 32(1)(iia) and

that the presence of the condition of increase in installed capacity

only amplified that the increase in such investment was concomitant

of the eligible plant and machinery. It was further argued that, the

assessee had erred in filing the present ground of appeal, since there

was no grievance to the assessee from the order of CIT (A), in as

much as the CIT (A) had only remitted the matter back to the AO for

verification.

11.0 In the rejoinder the Ld. Counsel for the assessee only

made an additional argument that the ground of appeal filed by the

assessee was valid, since if the provisions of section 32(1)(iia) are to

be understood in the right spirit, then there was no need for the

verification directed to be carried out by the Ld. CIT (A).

12.0.0 We have heard both the parties and find substantial

force in the contentions of the assessee company. We find that the

language of section 32(1)(iia) reproduced supra, is plain and

unambiguous. On a plain and literal reading of the said section, we

find no condition requiring nexus of the relevant plant and

machinery acquired and installed during the year with the increase

34 ITA Nos.6282 & 6302 Hero Motorcorp Ltd. vs. ACIT & DCIT in installed capacity of the relevant industrial undertakings during

the year. As per our reading, the requirement of the section is that

in case of an existing industrial undertaking, additional depreciation

shall be available on new plant and machinery acquired and

installed during the previous year, if such industrial undertaking

achieves substantial expansion by way of increase in installed

capacity by not less than 10%. Accordingly, if there is an increase in

installed capacity of the relevant industrial undertaking, the new

plant and machinery acquired and installed during such year shall

be eligible for additional depreciation at the rate prescribed in that

section. There is no further condition of drawing operational nexus

of such plant and machinery with increase in installed capacity. We

also find that the said condition, has even been removed in section

32(1)(iia) by the Finance Act, 2005, w.e.f. 01.04.2006, although said

amendment is not applicable during the year under consideration,

but re-enforces the intent of the legislature, that the same was not

relevant even in the earlier year, warranting nexus of plant &

machinery with increase in installed capacity. Nevertheless, there is

no condition of the relevant plant and machinery resulting in the

35 ITA Nos.6282 & 6302 Hero Motorcorp Ltd. vs. ACIT & DCIT increase in production of the relevant industrial undertaking. What

the AO and the Ld. CIT (A) have held in the impugned order(s), is

drawing nexus of the installed plant and machinery with increase in

production from such machinery, which is clearly not the

requirement in law. In view of the same, we find that, the AO and

the Ld. CIT (A) have travelled to an extraneous territory, while

examining and disallowing the aforesaid claim of additional

depreciation under section 32(1)(iia) of the Act. We also draw

support for the aforesaid reasoning from the following decisions

referred by the Ld. Counsel for the assessee:

• CIT v. VTM Ltd: 319 ITR 336 (Mad): “5. In the case on hand, the assessee is stated to have set up a wind mill at a cost of Rs. 5,85,60,000. It is true that the assessee is a company engaged in the business of manufacture of textile goods. As far as application of section 32(1)( iia) of the Act, is concerned, what is required to be satisfied in order to claim the additional depreciation is that the setting up of a new machinery or plant should have been acquired and installed after 31-3-2002 by an assessee, who was already engaged in the business of manufacture or production of any article or thing. The said provision does not state that the setting up of a new machinery or plant, which was acquired and installed up to (sic.

36 ITA Nos.6282 & 6302 Hero Motorcorp Ltd. vs. ACIT & DCIT after) 31-3-2002 should have any operational connectivity to the article or thing that was already being manufactured by the assessee. Therefore, the contention that the setting up of a wind mill has nothing to do with the power industry, namely, manufacture of oil seeds etc. is totally not germane to the specific provision contained in section 32(1)( iia) of the Act. 6. In such circumstances, we are not able to appreciate the contention of the learned standing counsel for the appellant on the ground that the order of the Commissioner of Income-tax (Appeals) as confirmed by the Tribunal should be interfered with. It cannot also be said that setting up of a windmill will not fall within the expression setting up of a new machinery or plant. We do not find any error in the conclusion of the Tribunal in confirming the order of the Commissioner of Income-tax (Appeals). We, therefore, do not find any question of law much less substantial question of law to entertain this appeal. The appeal fails and the same is dismissed. No costs.”

• CIT v. Hindustan Newsprint Ltd.: 183 Taxman 257 (Ker): “The above provision was later modified dispensing with the requirement of increase in installed capacity as a condition for eligibility for additional depreciation. In this case the contention of the revenue is that the installed capacity of the final product of the company viz., newsprint remains unaltered even after installation of the de-inking machinery in respect of which additional depreciation was claimed. However the assessee's

37 ITA Nos.6282 & 6302 Hero Motorcorp Ltd. vs. ACIT & DCIT case as is clear from the orders of the authorities below including the Income-tax Tribunal is that there is increase in installed capacity of pulp and pulp though an intermediary product also is marketable and hence assessee is entitled to additional depreciation under the above provision. Standing counsel for the revenue contended that installed capacity of an industry should always be understood with reference to the final product manufactured and sold by it. Even though there cannot be any doubt on this proposition there is nothing to indicate that the respondent-assessee cannot sell pulp as a product. The fact that pulp is an intermediary product and is generally consumed captively in the manufacture of newsprint does not mean that pulp is not a product that cannot be marketed by the respondent as and when they desire. There is no dispute that pulp is a marketable commodity. If there is reduction in the manufacture of final product on account of any reason, necessarily respondent will have to market the excess pulp produced. So much so we agree with the view of the Tribunal that pulp being a marketable commodity produced by the respondent, the increase in the installed capacity of the pulp plant on account of the installation of the de-inking machinery will entitle the respondent for the benefit of additional depreciation. The finding of the Tribunal that there has been increase in the installed capacity of the production of pulp in terms of the requirement of the provision in the statute is not disputed in the appeal filed by the revenue. On the other hand their contention is that the installed

38 ITA Nos.6282 & 6302 Hero Motorcorp Ltd. vs. ACIT & DCIT capacity should have reference to only final product that is newsprint. We are unable to uphold this contention of the revenue and we feel that the intermediary product viz., pulp produced by the company being a marketable commodity the increase in the installed capacity for claiming benefit of additional depreciation under the above provision can be in the production of intermediary viz., pulp. We therefore agree with the finding of the Tribunal and dismiss the department appeal.”

• CIT v. Hi Tech Arai Ltd: 321 ITR 477 (Mad) • CIT v. Texmo Precision castings: 321 ITR 481 (Mad)

12.0.1 The ratio emanating from the aforesaid decisions

squarely supports the aforesaid interpretation of section 32(1)(iia)

of the Act. As regards the condition of increase in installed

capacity, we have seen the facts and there is no dispute by the

AO/Ld. CIT (A) as well on the increase in installed capacity of

assessee. The same is certified by auditors and also reported in

notes to audited accounts reproduced supra. In view of the above,

we delete the disallowance made by the AO and hence the ground

of appeal is allowed.

39 ITA Nos.6282 & 6302 Hero Motorcorp Ltd. vs. ACIT & DCIT 13.0.0 The Ld. AR submitted that Grounds of Appeal Nos. 4 –

4.1 relate to disallowance of portfolio management expenditure of

Rs. 27,68,039/- claimed by the assessee as deduction against

business income. It was submitted that during the relevant previous

year, the assessee had incurred expenditure of Rs.27,68,039/-

towards portfolio management fee and that the assessing officer had

disallowed the same on the ground that the same related to the

investment activity of the assessee and therefore not an allowable

deduction against business income. It was further submitted that on

further appeal, the disallowance was sustained by the Ld. CIT (A) by

holding that the issue is decided against the assessee by the

Tribunal in the assessment year 2008-09. It was submitted by the

Ld. AR that before the Ld. CIT (A), the assessee had raised without

prejudice and an alternate condition, that if the aforesaid

expenditure was to be considered as having nexus with investment

activity, the same may be directed to be allowed as deduction under

section 48 against income from capital gains. It was submitted that

the aforesaid alternate claim was denied by the Ld. CIT (A), holding

40 ITA Nos.6282 & 6302 Hero Motorcorp Ltd. vs. ACIT & DCIT that such fee had nexus with earning exempt income from

investment activity and, therefore, was not allowable.

13.0.1 In support of the grounds of appeal, the Ld. Counsel

repeated the arguments taken before the lower authorities that the

aforesaid expenditure was incurred for proper administration and

management of surplus funds arising in the course of business and,

therefore, the said expenditure satisfies the test of commercial

expediency and purpose of business contained in section 37(1) of the

Act; and therefore the same ought to be allowed as business

deduction.

13.0.2 Without prejudice to the above, it was further argued

that if the said expenditure was not to be treated as “for the purpose

of business”, but having relation with investment activity, then this

expenditure needs to be alternatively allowed against income arising

from investment activity i.e. capital gains. In this connection, the Ld.

AR also invited our attention to the decision of Delhi Bench of

Tribunal in the assessee’s own case for the assessment year 2008-

09, wherein while the Tribunal rejected the first argument of

allowance of the aforesaid expenditure as business deduction, but

41 ITA Nos.6282 & 6302 Hero Motorcorp Ltd. vs. ACIT & DCIT accepted the alternate claim of the said expenditure to be deductible

against income under the head capital gains.

13.0.3 The Ld. Counsel further relied upon the decision of

Pune Bench of Tribunal in the case of DCIT vs. KRA Holding &

Trading (P.) Ltd.: 54 SOT 493 wherein portfolio management fee paid

by the assessee was held to be allowable as deduction under Section

48 while computing capital gains arising from sale of shares. It was

the plea of the Ld. AR that section 48 allows deduction of - (i)

expenditure incurred wholly and exclusively in connection with

transfer of capital asset or (ii) cost of acquisition of asset, which are

reduced from the sale consideration at the time of computing capital

gains under section 45 of the Act. It was argued that if the portfolio

management expenditure is not to be considered as business

expenditure, then the only nexus of such expenditure is either with

purchase or sale of relevant instrument, which is clearly allowable

deduction under either clause (i) or clause (ii) of section 48 of the

Act.

13.0.4 As regards the finding of the Ld. CIT (A), that the said

expenditure is related to earning of exempt income, the Ld. Counsel

42 ITA Nos.6282 & 6302 Hero Motorcorp Ltd. vs. ACIT & DCIT argued that the expenditure was incurred to make investment and

earn capital appreciation there from, but not dividend income and,

therefore, the said expenditure cannot be attributed to earing of

exempt income.

13.0.5 Without prejudice, it was submitted that if at all

disallowance is to be made for nexus with exempt income, then only

proportionate expenditure in the ratio of dividend income to capital

gains should be made.

14.0 The Ld. DR defended the findings in the assessment

order. It was argued that when the assessee is claiming income from

investments under the head capital gains and not business income,

then such expenditure cannot be allowed as deduction against

business income. The Ld. DR relied upon the order of Delhi Bench of

Tribunal in the assessee’s own case for the assessment year 2008-

09 for the aforesaid proposition. As regards the alternate plea of the

assessee regarding allowance of deduction under section 48, the Ld.

DR contended that the aforesaid expenditure is to be considered as

having relation with exempt income and for that reason should not

be allowed as deduction.

43 ITA Nos.6282 & 6302 Hero Motorcorp Ltd. vs. ACIT & DCIT 15.0.0 We have heard the arguments of both the parties. We

find that the aforesaid issue has been decided against the assessee

by the Tribunal in the assessee’s own case for the assessment year

2008-09, wherein it has been held that the portfolio management

expenditure is not allowable as business expenditure. The relevant

observations of the Tribunal for that year are as under:

“197. On careful consideration of above submissions, we hold that on ground no. 51 and 51, the assessee vehemently contended that the gains realized from sale of such various instruments is income under the head of capital gains and the AO wrongly held that eh aforesaid income was taxable under the head of business income. At the same time while arguing for ground no.52, the assessee’s submissions are that the expenditure incurred for the administration and management of funds in the course of business being towards cash management/optimum utilization of business funds should be considered as expenditure for the purpose of business and hence the same may be allowed as business deduction. Alternatively, ld. Counsel of the assessee has also submitted that without prejudice to the above contentions, if the Tribunal holds that the aforesaid PMS expenses and PMS fee are not allowable as business expenditure, then the AO may be directed to allow the same as deduction from income from capital gains.

44 ITA Nos.6282 & 6302 Hero Motorcorp Ltd. vs. ACIT & DCIT 198. Since while adjudicating ground no. 50 of the assessee, we have come to the conclusion that the income from sale of shares/mutual funds/PMS etc. is taxable as capital gains instead of business income, then expenses incurred towards portfolio management fee and entry load PMS fee in respect of investment made in shares/mutual funds are not allowable as business expenditure and the same deserve to be allowed as deduction from income from capital gains as per provisions of the Act. Thus, ground no. 52 of the assessee is allowed by accepting alternate submission of the assesse and AO is directed to allow the impugned expenditure incurred by the assessee towards portfolio management fee and entry load PMS fee from the income under the head of capital gains in accordance with relevant provisions of the Act. Finally, ground no. 52 of the assessee is allowed.”

15.0.1 We respectfully agree with the aforesaid findings of the

co-ordinate Bench of the Tribunal. We also find that if the

expenditure is not allowed as business deduction, then the same

ought to be allowed as deduction under either clause (i) or clause (ii)

of section 48 of the Act while computing income arising from

investments under the head capital gains. The Tribunal in the

aforesaid order has also accepted the aforesaid alternate plea of the

45 ITA Nos.6282 & 6302 Hero Motorcorp Ltd. vs. ACIT & DCIT assessee. We, however, further find that the nexus of the aforesaid

expenditure with earning of exempt dividend cannot be completely

ruled out. Accordingly, we accept the alternate contention of the

assessee and direct the assessing officer to disallow part of the

aforesaid expenditure in the ratio of dividend income to capital gains

under section 14A and the balance expenditure to be allowed as

deduction under section 48 from income declared by the assessee

under the head capital gains. Such expenditure can be further

apportioned by the assessing officer in the ratio of short term or long

term capital gain declared by the assessee.

15.0.2 As a result the aforesaid ground of appeal is partly

allowed.

16.0.0 Grounds of Appeal Nos.5-5.1 are against the

disallowance of professional fee of Rs.14.74 lacs paid to resident of

USA for want of TDS or alternatively as capital expenditure. It was

submitted by the Ld. AR that during the relevant assessment year,

the assessee made a payment of Rs 14.74 lakhs to Shri Tarun

Khanna, professor from Harvard University and a resident of USA,

towards consultancy charges for the service rendered in the scenario

46 ITA Nos.6282 & 6302 Hero Motorcorp Ltd. vs. ACIT & DCIT planning exercise initiated by the assessee company. Scenario

planning exercise was aimed at identifying the key variables

impacting the two-wheeler industry and establishing the early

warning signal. It was submitted that Shri Khanna, after studying

the two wheeler industry, had given advice to the assessee company

relating to future prospects. The aforesaid payment was, however,

remitted without taking any tax at source in India. It was further

submitted that in the assessment order, the AO invoked the

provision of Section 40(a)(i) and made the disallowance on the

ground that the assessee had failed to deduct tax at source from

aforesaid payment, which was taxable in India as “fee for technical

services” under Section 9(1)(vii) of the Act. Alternatively, the

assessing officer held that the aforesaid expenditure resulted in

enduring benefit to the assessee through the study conducted by the

vendor and, therefore, the expenditure was a capital expenditure,

which was not allowable as revenue deduction under Section 37(1)

of the Act. The Ld. AR further submitted that on further appeal

before the Ld. CIT (A), the assessee argued exemption from

deduction of tax at source under Indo-USA DTAA wherein it was

47 ITA Nos.6282 & 6302 Hero Motorcorp Ltd. vs. ACIT & DCIT argued that the payment was not taxable in India, which overrode

the provisions of the Act including Section 9(1)(vii). The Ld. CIT (A),

however, did not agree to contentions of the assessee and upheld the

disallowance. It was submitted that the Ld. CIT (A) did not allow the

benefit of Treaty on the ground that there was no exemption

available in as much as the vendor had “made available” advice to

the assesee, which was not exempt under the relevant provision of

Treaty. It was submitted that the Ld. CIT (A), however, did not give

any finding on the alternate contention of the AO regarding the

expenditure to be capital or revenue in nature.

16.0.1 In support of the grounds of appeal, the Ld. AR

argued that it is now settled by the decision of the Hon’ble Supreme

Court in the case of G.E. India Technology Centre (P) Ltd. vs. CIT:

327 ITR 456, that if the payment is not taxable in India as per the

provisions of Treaty, then the payer-assessee is not liable to deduct

tax at source under section 195 of the Act. It was argued that the

aforesaid payment was not taxable in India as per Article 12 of Indo-

USA DTAA which was applicable to income earned by non-resident

in the nature of “fees for included services”. The Ld. AR submitted

48 ITA Nos.6282 & 6302 Hero Motorcorp Ltd. vs. ACIT & DCIT that, as per the said definition, income is taxable in India only if the recipient “makes available” its technical knowledge, experience, skill, know-how to the resident payer which enables the latter to apply the technology contained therein. If the recipient only enjoy the services, but is unable to apply know-how behind the service, then the income would not satisfy the test of “make available”. Reliance for the aforesaid meaning was placed on the following decisions: • CIT vs. De Beers India Minerals (P) Ltd: 346 ITR 467 (Karnataka) • DIT vs. Guy Carpenter & Co Ltd: 346 ITR 504 (Del-HC) • Raymond Ltd v. DCIT: 86 ITD 791 (Mumbai) • Ernst & Young India: 323 ITR 184 (AAR) • ICICI Bank Ltd. v. DCIT: (2008) 20 SOT 453 (Mum) • Bharti AXA: 326 ITR 477 (AAR) • Worley Parsons Services Pty Ltd (AAR No. 750 of 2007)

16.0.2 It was argued that the assessee had engaged the services of Shri Tarun Khanna merely for providing services in the scenario planning exercise, wherein the latter was required to advise on the key variables of the two wheeler industry. In no case and no circumstances, did Shri Tarun Khanna reveal or provide the details of researches to the assessee, in order to enable the latter to carry

49 ITA Nos.6282 & 6302 Hero Motorcorp Ltd. vs. ACIT & DCIT out and undertake such services in future on its own accord without

availing services from him. It was submitted that the role and

services provided by Shri Tarun Khanna were on principal-to-

principal basis and did not lead to any transfer of specialised

knowledge/know-how. It was submitted that since the consultancy

services provided by Shri Tarun Khanna did not involve making

available of any technology or technical knowledge to the assessee,

the same cannot be characterized as FTS, within the meaning of

Article 12 (4) of the DTAA and, therefore, not chargeable to tax in

India. It was argued that the payment was exempt from tax in India

as per the Article 12 of Treaty and in the absence of any permanent

establishment or place of business of the foreign national in India,

the payment was completely exempt and not taxable in India.

16.0.3 As regards the alternate contention of the assessing

officer, it was argued that the payment made by the assessee

company to Shri Tarun Khanna was capital expenditure resulting in

enduring benefit is also not correct, since the consultancy services

of Shri Khanna did not result in acquisition of any asset/intangible

right in the nature of a capital asset, or enduring benefit increasing

50 ITA Nos.6282 & 6302 Hero Motorcorp Ltd. vs. ACIT & DCIT the profit earning apparatus of the company. The services were

rendered in connection with the existing business of the assessee

company and, therefore, benefit, if any, derived, formed integral part

of the existing business/apparatus and not for addition thereto.

Thus, the fees paid by the assessee to Shri Tarun Khanna cannot be

characterized as capital asset. Reliance was placed on the decision

of the Hon’ble Delhi High Court in assessee’s own case, reported at

372 ITR 481 wherein disallowance of royalty paid to foreign JV

partner on the similar issue was deleted on the ground that payment

of royalty does not result in enduring benefit in the capital field to be

treated as capital expenditure. It was submitted that the

disallowance of fee paid by the assessee to Shri Tarun Khanna on

the alternate ground of being capital expenditure also deserves to be

deleted.

17.0 The Ld. CIT (DR) heavily relied upon by the orders

passed by the AO and the Ld. CIT (A).

18.0.0 We have heard the rival contentions. We agree with

the contentions of the Ld. Counsel of the assessee that the

impugned payment did not “make available” technical know-how/

51 ITA Nos.6282 & 6302 Hero Motorcorp Ltd. vs. ACIT & DCIT knowledge of the foreign national to the assessee in India. The

foreign national had only made available its findings of the scenario

planning exercises conducted by him as a professional, but did not

make available his knowledge, which was used for conducting the

aforesaid exercise.The legal position in this regard is no longer res

integra and is settled by catena of decisions referred to by the Ld.

Counsel of the assessee supra with regard to the meaning of

expression “make available” used in the Treaty. Useful reference

can be made to the decision of the Hon’ble Delhi High Court in the

case of DIT vs Guy Carpenter & Co Ltd: 346 ITR 504 (Del) referred

supra. Accordingly, the impugned payment made was not taxable in

India. Accordingly, the assessee did not commit any error in not

deducting tax at source while making the remittance and, therefore,

the same did not warrant any disallowance under Section 40(a)(i) of

the Act.

18.0.1 We also do not find in force in the alternate contention

of the assessing officer to treat the said payment as capital

expenditure. The assessee is a large sized company already existing

in the business of manufacturing two wheelers since past several

52 ITA Nos.6282 & 6302 Hero Motorcorp Ltd. vs. ACIT & DCIT years. The impugned expenditure constitutes a miniscule part of the

total expenses incurred by the assessee in the course of carrying on

the said business. The aforesaid expenditure did not result in

providing any benefit of enduring nature leave alone the benefit by

way of accretion to the profit earning apertures or in the capital

field. The said expenditure is part and parcel of the existing

business, incurred to gain some insight of the future outlook of the

two-wheeler industry and, therefore, the same formed integral part

of the existing business, which cannot, in our view, be sought to be

capital in nature.

18.0.2 Accordingly, the disallowance made by the AO on both

the aforementioned accounts was wrong in law and is, therefore,

deleted. The grounds of appeal 5-5.1 stand allowed.

19.0.0 As regards Ground No. 6 to 6.5, the same relate to

Transfer Pricing adjustment of Rs.7,05,334/- on account of

international transaction of import of components. During the

accounting year, the assessee, inter alia, entered into the

international transaction of import of components aggregating to Rs.

177.35 crores. In the Transfer Pricing Study, the assessee applied

53 ITA Nos.6282 & 6302 Hero Motorcorp Ltd. vs. ACIT & DCIT TNMM for the purpose of benchmarking. The TPO, however, made a

transfer pricing adjustment of Rs.6,57,195/- applying CUP method

by comparing the prices of import of two components, viz., sprocket

timing and sprocket camp, from the associated enterprises with that

of the prices of components sourced locally from domestic suppliers,

after their indigenization. The Ld. CIT (A) upheld the transfer pricing

adjustment holding that the associated enterprise charged

excessively high price for the two components which cannot be

attributed to geographical variation.

19.0.1 The Ld. AR submitted that the assessee imported

only those components/spare parts from the associated enterprise

where such products were not available in the domestic market

(throughout the relevant previous year) or could not be supplied by

the domestic vendors in desired quantity and quality. The price paid

to the local vendor(s), cannot, in such circumstances, be regarded as

benchmark to determine the arm’s length price for products

imported from the associated enterprise. It was submitted that it

needs to be appreciated that the domestic vendor(s) had limited

capacity to supply products/components, which fell short of the

54 ITA Nos.6282 & 6302 Hero Motorcorp Ltd. vs. ACIT & DCIT assessee’s requirements. The associated enterprise, on the other

hand, was in a position to cater to the assessee’s complete

requirement of such products/components. The price paid to the

local vendor(s) for part supply (for want of domestic vendor(s) not

being able to supply the complete quantity) could not be compared

with the price paid to the associated enterprise for the balance

quantity secured. It was also pointed out by the Ld. AR that the

aforesaid issue is covered in favour of the assessee by the decision of

the Tribunal in the assessment year 2006-07. It was submitted that

the Tribunal had held that if the goods were not available

indigenously, then naturally the rate of indigenous goods cannot be

applied for determining the ALP and had restored back the matter

back to assessing officer to re-adjudicate the issue in the light of the

evidence to be submitted by the assessee that goods were not

indigenously available and the adjustment is liable to be deleted. It

was pointed out that similar directions were given by the Tribunal in

the assessment years 2002-and 2003-04, while setting aside the

matter to the AO/TPO.

55 ITA Nos.6282 & 6302 Hero Motorcorp Ltd. vs. ACIT & DCIT 19.0.2 It was further pointed out that the TPO, while giving

effect to the order of the Tribunal for assessment year 2006-07, had

deleted the transfer pricing adjustment by holding as under:

“5. During the proceedings, it was gathered that the assessee made purchase of only Rs. 81 crores from its AE out of the total purchase of Rs. 5911 crores. The process of indigenization was steadily progressing and the assessee has subsequently stopped purchasing these components when such parts were available indigenously as per the desired quality in sufficient quantity.

19.0.3 The Ld. AR also relied on the order passed by the

Tribunal in assessment year 2004-05, wherein the Tribunal after

taking into consideration the orders for the earlier years and the

approach adopted by the TPO, had deleted similar transfer pricing

adjustment.

20.0 The Ld. CIT – DR supported the orders of the

authorities below.

56 ITA Nos.6282 & 6302 Hero Motorcorp Ltd. vs. ACIT & DCIT 21.0.0 We have gone through the records. Co-ordinate

Bench of the Tribunal in assessment year 2004-05 has held as

under:

“On a careful consideration of the matter, we find that out of the total purchases of Rs.20,46,58,682/- from the domestic market, the assessee imported from associated enterprises the components worth Rs.22,83,666/- which does not constitute any significant portion thereof. We, therefore, having regard to the directions given by the Tribunal for earlier years and the approach adopted by the ld. AO while deleting the addition on this score, hold that the transfer pricing adjustment to the tune of Rs.7,05,334/- made by the TPO cannot be sustained and accordingly while allowing the ground delete the same.

21.0.1 In view of the latest order of the Tribunal wherein this

issue has been dealt with in detail, which we respectfully follow, we

hold this issue in favour of the assessee and hold that the transfer

pricing adjustment to the tune of Rs.7,05,334/- made by the TPO

cannot be sustained and accordingly while allowing the grounds

delete the same.

22.0 In the result, the appeal of the assessee stands

partly allowed.

57 ITA Nos.6282 & 6302 Hero Motorcorp Ltd. vs. ACIT & DCIT 6302/Del/2015 (Departmental appeal):

23.0.0 We now take up the appeal filed by the Revenue.

Ground no. 1 relates to disallowance of net expenditure of Rs.

12507.73 lacs on account of Royalty and Technical Guidance Fee by

holding the same to be capital in nature after allowing depreciation

@ 25%. The Ld. AR submitted that the assessee has been

manufacturing two wheelers in India since 1985 on the basis of

technology provided by M/s Honda Motors Co. Ltd., Japan (“Honda”)

and pursuant to the agreement dated 2.06.2004 paid Royalty and

Technical guidance fee aggregating to Rs. 16676.98 lacs to Honda.

The assessing officer held the same to be capital in nature and made

net disallowance of Royalty and Technical Guidance fee of

Rs.12507.73 lacs after allowing depreciation @ 25%. It was further

submitted that on appeal, the Ld. CIT (A) deleted the same following

the appellate orders for the earlier assessment years.

23.0.1 The Ld Counsel for the assessee brought to our

notice that coordinate bench of this Tribunal decided the issue in

favour of the assessee for the AYs 2000-01 to 2003-04, 2006-07 to

2008-09, 2010-11 and 2011-12 by holding that the annual payment

58 ITA Nos.6282 & 6302 Hero Motorcorp Ltd. vs. ACIT & DCIT of Royalty/technical guidance fee was allowable as revenue

expenditure. Similar approach was adopted by the revenue for the

AYs 2009-10, 2010-11, 2011-12, 2012-13 and 2013-14 also. The

Learned AR submitted that the order of the Tribunal relating to the

AY 2002-03 has been confirmed by the Hon’ble Delhi High Court in

assessee’s own case reported as CIT vs. Hero Honda, 372 ITR 481. It

was further submitted that even subsequently by order dated

31.07.2019, the Tribunal decided the issue in favour of the assessee

for the AY 2004-05.

24.0 The Ld. CIT DR relied on the assessment order.

25.0 We have perused the record. In view of the fact that

the issue has been consistently decided in favour of the assessee for

more than 13 years which also stands upheld by the Hon’ble

jurisdictional High Court, the same approach has to be adopted in

this case also and, therefore, respectfully following the consistent

view taken by the Tribunal and approved by the Hon’ble High Court,

we uphold the findings of the learned CIT (A). Accordingly, we

dismiss the ground of appeal raised by the Revenue.

59 ITA Nos.6282 & 6302 Hero Motorcorp Ltd. vs. ACIT & DCIT 26.0.0 Ground no. 2 relates to disallowance of net

expenditure of Rs.19,85,30,762/- incurred on account of model fee

by holding the same to be capital in nature after allowing

depreciation @ 25%. It was submitted that the assessee has been

manufacturing two wheelers in India since 1985 on the basis of

technology provided by M/s Honda Motors Co. Ltd., Japan (“Honda”)

and pursuant to the agreement dated 2.06.2004 had paid Model fee

of Rs. 26,47,07,683/- to Honda. The assessing officer held the same

to be capital in nature and made a net disallowance of

Rs.19,85,30,762/- after allowing depreciation @ 25%. It was

further submitted that following the appellate orders for the earlier

years, the Ld. CIT (A) had deleted the disallowance made by the

assessing officer.

26.0.1 The Ld. Counsel for the assessee pointed out that in

assessee’s own case for the AY 1996-97, the Tribunal took the view

that the model fee paid by the assessee to Honda is allowable u/s

37(1) of the Act as revenue expenditure on the ground that the

payment was only for right to use the technology/know-how and

there was no ownership of the intellectual property which remained

60 ITA Nos.6282 & 6302 Hero Motorcorp Ltd. vs. ACIT & DCIT to be with Honda. This view of the Tribunal was challenged by the

revenue but the Hon’ble Delhi High Court declined to entertain the

appeal. The decision of the Hon’ble High Court was accepted by the

Department and has become final, as no SLP has been filed there

against. The Ld. Counsel further pointed out that in the assessee’s

own case for A.Y.1996-97, the Tribunal was pleased to allow model

fee paid to Honda under section 37(1) of the Act as revenue

expenditure. The said decision is reported as Hero Honda Motors

Ltd. v. JCIT: 95 TTJ 782 (Del). The Hon’ble Delhi High Court did not

entertain the appeal filed by the department on the said issue. The

decision of the High Court was accepted by the Department and has

become final, as no SLP has been filed there against. It was further

submitted that the Tribunal in the assessment years 1997-98 and

1999-2000 allowed similar expenditure on payment of model fee,

following the decision of the Tribunal for assessment year 1996-97.

The Revenue’s appeal against the said orders has been dismissed by

the High Court. It was also submitted that in assessment year 1999-

2000, appeal filed by the Revenue against the order of the High

Court has been dismissed by the Hon’ble Supreme Court. It was

61 ITA Nos.6282 & 6302 Hero Motorcorp Ltd. vs. ACIT & DCIT further submitted that the Tribunal in assessee’s case for

assessment year 2001-02, vide order dated 27.03.2009 in ITA No.

2067/Del/2006, allowed the payment of model fee following the

same order for assessment year 1996-97 and that the same

treatment has been given by ITAT in respect of AY 2006-07, AY

2007-08, AY 2008-09, 2010-11 and 2011-12. It was further

submitted that the Hon’ble High Court has affirmed the order

passed by the Tribunal in assessment year 2000-01 to 2002-03 in

372 ITR 481. The Ld. AR further submitted that the Tribunal deleted

similar disallowance of payment of model fee in AYs 2012-13, 2013-

14 and that vide recent order dated 31.07.2019, the Tribunal in

assessment year 2004-05, dismissed the appeal of the revenue

holding that the issue has been decided in favor of the assessee

company in the earlier years by the Tribunal which has been upheld

by the Hon’ble High Court and Supreme Court. It was further

submitted that subsequently the same view was upheld by the

Tribunal and the Hon’ble High Court affirmed the same and that the

Hon’ble Supreme Court also declined to interfere with the same. The

Ld. AR also submitted that vide order dated 23.4.2019 for the

62 ITA Nos.6282 & 6302 Hero Motorcorp Ltd. vs. ACIT & DCIT Assessment Year 2009-10, the Tribunal reaffirmed the said view. Ld.

27.0 The Ld. CIT-DR relied on the assessment order.

28.0.0 We have perused the record. It is, clear that for quite a

long time there is consistency in the view taken by the Tribunal as

upheld by the Hon’ble jurisdictional High Court and Hon’ble Apex

court. Therefore, the issue is no longer res integra and is in favour of

the assessee. We uphold the findings of the Ld. CIT (A). Accordingly,

we dismiss the ground of appeal raised by the Revenue.

29.0.0 Ground no. 3 relates to disallowance of export

commission of Rs. 8,69,26,848/- paid to Honda Motor Company

Ltd. (Honda), Japan under Section 40(a)(i) on ground that the same

constituted royalty/fee for technical services on which the assessee

was obliged to deduct tax at source under section 195 of the Act.

Alternatively, the AO disallowed the aforesaid amount on the

following grounds:

(i) The export agreement was for the benefit of Honda and not the assessee company, therefore, the payment of export commission was held to be not allowable under Section 37(1) (ii) The export agreement was in the nature of license acquired by the assessee for the purpose of making export to other countries where Honda had exclusive privilege to operate. The

63 ITA Nos.6282 & 6302 Hero Motorcorp Ltd. vs. ACIT & DCIT license was for a longer period of time and, therefore, it constitutes an intangible asset. Accordingly, the expenditure was held to be a capital expenditure.

29.0.1 On appeal, the Ld. CIT (A) deleted the disallowance

made by the AO by relying on the orders passed by the Tribunal in

assessee’s own case for assessment years 2006-07 to 2008-09.

29.0.2 The Ld. Counsel for the assessee submitted that

issue is squarely covered in favour of the assessee by the order

passed by the Tribunal in assessee’s own case in AY 2006-07

wherein the Tribunal had held that by way of export agreement,

Honda had only permitted the assessee to export the specified goods

to the specified countries and the that assessee did not acquire any

asset/intangible right in the nature of a capital asset. Further, the

Tribunal held that no managerial, technical or consultancy services

had been provided which were taxable in India and, therefore, no

TDS was liable to be deducted. The Ld. AR submitted that the

aforesaid order of the Tribunal has been affirmed by the Hon’ble

High Court vide order dated 08.05.2017, passed in ITA No.

923/2015. The Ld. Counsel also pointed out that the Tribunal

64 ITA Nos.6282 & 6302 Hero Motorcorp Ltd. vs. ACIT & DCIT following the aforesaid order for the assessment year 2006-07,

decided the issue in favor of the assessee in the assessment year

2007-08.

30.0 The Ld. CIT DR relied on the order of the AO.

31.0.0 We have perused the record. We find that the issue is

squarely covered in favour of the assessee by the order passed by

the Tribunal in AY 2006-07 wherein the Tribunal has held as under:

“71. We have carefully considered the arguments of both the sides and perused the material placed before us. While considering the adjustment made by the TPO in respect of export agreement, we have discussed both these agreements. The technical know-how agreement was entered into between the assessee and HMCL in the year 1984 which was renewed in the year 1994 and then in 2004. Under the technical know-how agreement, the assessee was permitted to manufacture, assemble, sell and distribute the products within the territory which was defined as Republic of India. Thus, since 1984 to 2004, the assessee was not allowed to export any product. The export agreement was entered into with HMCL only on 21st June, 2004 by which HMCL gave its consent for export of the goods to the designated countries on the payment of export commission. Therefore, the contention of the Revenue that cumulative effect of the two agreements is to be considered

65 ITA Nos.6282 & 6302 Hero Motorcorp Ltd. vs. ACIT & DCIT cannot be accepted. Both the agreements were entered into in different parts of time, one in the year 1984 and, the other in the year 2004 and both the agreements operate under different fields. By the first agreement, HMCL provided technical know- how for manufacture and sale of two wheelers within the territory of India. By the export agreement, HMCL permitted the assessee to export the designated goods to the designated countries outside India. Therefore, both the agreements are to be interpreted independently. On the perusal of the export agreement, we are unable to agree with the Revenue that the export agreement is in the nature of royalty or fees for technical services. We find that the Authority for Advance Ruling has considered the issue of TDS on the export commission in the case of Spahi Project P.Ltd. (supra). …………………….. ………………………………………………………………………………… 73. Similarly, ‘fee for technical services’ has been defined by way of Explanation-2 after Section 9(1)(vii) of the Income-tax Act. From a plain reading of the above definitions of ‘royalty’ as well as ‘fee for technical services’, it would be evident that the payment of export commission would not fall in any of the above definitions. By way of technical agreement, the assessee received the technical know-how to manufacture, assemble, sell and distribute the two wheelers within the territory of India. The payment made in pursuance to such agreement was royalty and has been treated by the assessee itself as royalty. By way of second agreement i.e. export agreement, HMCL permitted the

66 ITA Nos.6282 & 6302 Hero Motorcorp Ltd. vs. ACIT & DCIT assessee to export the specified two wheelers to the specified countries. Therefore, by export agreement, the assessee has not been transferred or permitted to use any patent, invention, model, design or secret formula. Similarly, HMCL, by way of export agreement, has not rendered any managerial, technical or consultancy services. In view of the above, we hold that export commission was neither royalty nor fee for technical services and, therefore, the assessee was not required to deduct tax at source on the payment of export fee. Once the assessee was not required to deduct the tax at source, it cannot be said that the assessee failed to deduct tax at source so as to apply Section 40(a)(ia). 74. While considering the disallowance made by the TPO by way of transfer pricing adjustment, we have discussed at length and have arrived at the conclusion that the export agreement was for the benefit of the assessee and not detrimental to the assessee. Therefore, the finding of the Assessing Officer that the expenditure incurred by the assessee by way of export agreement was not incurred for the purpose of business of the assessee cannot be upheld. We hold that the export commission paid by the assessee was for the purpose of assessee’s business. 75. The Assessing Officer has alternatively held the payment of export commission to be capital expenditure. After considering the arguments of both the sides and the facts of the case, we are unable to accept this view of the Assessing Officer. By way of

67 ITA Nos.6282 & 6302 Hero Motorcorp Ltd. vs. ACIT & DCIT export agreement, HMCL has only permitted the assessee to export the specified goods to the specified countries, that too, subject to running payment of the export commission. The assessee has not acquired any asset or even the intangible right in the nature of a capital asset. The Assessing Officer has disallowed the royalty payment paid by the assessee by way of technical know-how agreement holding the same to be capital expenditure. From paragraph No.7 to paragraph No.29, we have discussed at length and have come to the conclusion that the payment of running royalty cannot be said to be capital expenditure. While doing so, we have also relied upon several decisions of Hon’ble Jurisdictional High Courts at pages 17 to 24. For the sake of brevity, we are not reproducing the same again but, we reiterate that the ratio of those decisions in the cases of Lumax Industries Ltd. (supra), Shriram Pistons & Rings Ltd. (supra), Sharda Motor Industrial Ltd. (supra), J. K. Synthetics Ltd. (supra), Climate systems India Ltd. (supra) and Munjal Showa Ltd. (supra) would also be applicable so as to arrive at the conclusion that the payment of running export commission paid as a percentage of export amount every year cannot be said to be capital expenditure. In view of the above, we delete the disallowance of export commission made by way of transfer pricing adjustment and also by way of general provisions of the Income-tax Act.”

68 ITA Nos.6282 & 6302 Hero Motorcorp Ltd. vs. ACIT & DCIT 31.0.1 The aforesaid order passed by the Tribunal in AY

2006-07 has further been affirmed by the Hon’ble Delhi High Court

in ITA No. 923/2015. Considering the aforesaid, we find that the

order passed by the Ld. CIT (A) is correct in law. We accordingly

uphold the order of the Ld. CIT (A) and dismiss the ground of appeal

raised by the Revenue.

32.0.0 Ground no. 4 relates to disallowance of

Rs.5,18,00,000/- being provision for warranty made in respect of

sales made during the year. The Ld. AR submitted that during the

year, the assessee had claimed the deduction of Rs.5.18 crores on

account of provision for warranty on motorcycles sold by the

assessee during the year and such deduction had been claimed on

mercantile basis, on the basis weighted average cost of the actual

claims received in the past years. It was further submitted that

based on the order for AY 2004-05, the AO disallowed the aforesaid

provision holding the same to be an unascertained liability. The Ld.

Ar further submitted that on appeal, the Ld. CIT (A), vide the

impugned order, deleted the same holding that the issue is squarely

covered in favour of the assessee by order passed by the Tribunal in

69 ITA Nos.6282 & 6302 Hero Motorcorp Ltd. vs. ACIT & DCIT assessee’s own case for various assessment years and that the

appeal filed by the Revenue has not been admitted by the High

Court.

32.0.1 The Ld. Counsel for the assessee submitted that the

issue is squarely covered in favour of the assessee by the following

orders passed in assessee’s own case:

- The Tribunal in the assessee’s own case for assessment year 2002-03 following the decision of the Hon’ble Supreme Court in the case of Rotork Controls India Ltd. vs. CIT reported in 314 ITR 62, deleted the similar disallowance of provision of warranty made in that year. - Similar disallowance was also made by the assessing officer in assessment year 2003-04. On further appeal, the disallowance was deleted by the Ld. CIT ( A) vide order dated 31.01.2011 and the department did not file an appeal challenging the aforesaid action of the Ld. CIT (A). - The Tribunal, following the orders for the assessment years 1999-2000 (ITA No. 5511/Del/2003), 1996-97 (ITA No. 3093/Del/2000) and 1997-98 (ITA No. 4028/Del/2003), deleted similar disallowance in assessment year 2006-07. No question of law was framed by the Hon’ble Delhi High Court in relation to the appeal preferred by the Revenue against the order of the Hon’ble Tribunal for the assessment year 1996-97.

70 ITA Nos.6282 & 6302 Hero Motorcorp Ltd. vs. ACIT & DCIT

- Further, the disallowance of provision made for warranty was also deleted by the Tribunal in AY 2004-05, 2007-08 and 2008- 09.

33.0 The Ld. CIT -DR relied on the order of the AO. 34.0.0 We have perused the record. We find that the

Tribunal, vide recent order dated 31.07.2019 passed in assessment

year 2004-05, dismissed the appeal of the revenue holding as under:

“36. Even for the Asstt. Year 2002-03, while following the decision of the Hon’ble Apex Court in the case of Rotork Controls India Ltd. vs CIT, 314 ITR 62, the Tribunal deleted the addition and subsequently, similar addition was disallowed in respect of Asstt. Years 1999-2000, 1996-97, 1997-98, 2006-07, 2007-08 to 2009-10 by several orders of the Tribunal, which are to be found place in the paper book. On a reading of these orders, we are of the considered opinion that the issue is fairly settled and there is no need to reopen the same for taking fresh view. Learned CIT (A) deleted the addition by following the appellate orders and, therefore, we do not find any perversity in such finding. We uphold the order of ld. CIT (A).”

34.0.1 In view of the aforesaid, we find that the issue has

been decided in favor of the assessee company by order passed by

71 ITA Nos.6282 & 6302 Hero Motorcorp Ltd. vs. ACIT & DCIT the Tribunal in the earlier years and since appeal filed by the

Revenue has not been admitted by the High Court, the issue has

attained finality. We find that the order passed by the CIT (A) is

correct in law. We accordingly uphold the order of the Ld. CIT (A)

and dismiss the ground of appeal raised by the Revenue.

35.0 In the result, the appeal of the Revenue is dismissed.

36.0 In the final result, the appeal of the assessee is partly

allowed whereas the appeal of the Department is dismissed.

Order pronounced on 13th April, 2021.

Sd/- Sd/- (O.P. KANT) (SUDHANSHU SRIVASTAVA) ACCOUNTANT MEMBER JUDICIAL MEMBER Dated: 13.04.2021 *Dragon Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT(Appeals) 5. DR: ITAT ASSISTANT REGISTRAR ITAT NEW DELHI