HERO MOTOCROP LTD.,NEW DELHI vs. ACIT, CIRCLE- 11(1), NEW DELHI

per regularly and consistently followed method of valuation of stock

which has been accepted by the Revenue in the past. The Ld. AR

submitted that the AO/Ld. DRP held that the assessee’s contention

that as the method is regularly followed year after year its impact

will be revenue neutral, cannot determine the income of the assessee

correctly for the year under consideration. The AO/Ld. DRP further

28 ITA No.9187/Del/2019 Hero Motocorp Ltd. vs. ACIT held that the revenue aspect keeps on changing on year to year

basis. It was submitted that the Assessing Officer further held that

impact on non-inclusion of freight inward and clearing charges at

Rs. 321.25 lacs has to be added to the income of the assessee.

7.0.1 The Ld. AR submitted that this issue is decided in

favour of the assessee by the recent consolidated order dated

24.10.2016 passed by the Delhi bench of the Tribunal in assessee's

own case for assessment years 2010-11 and 2011- 12, wherein the

Tribunal, following the order of the coordinate benches of the

Tribunal passed in assessee's own case for the assessment years

2007-08 and 2008-09, deleted the aforesaid addition on the ground

that in those years it has been held that the assessee was following

consistent system of accounting, which was unnecessarily disturbed

by the Revenue, without change in facts. It was further held that

tinkering with the accounting method was unjustified when the

exercise did not materially alter the profits of the assessee company.

It was further pointed out by the Ld. AR that following the order of

the Tribunal for AY 2010-11 and 2011-12, the Tribunal has also

29 ITA No.9187/Del/2019 Hero Motocorp Ltd. vs. ACIT decided the issue in favour of the assessee in appellate orders

passed for AYs 2009-10, 2012-13 and 2013-14.

8.0 The Ld. CIT-DR relied upon the Assessment Order

and Order of the TPO, but could not distinguish the decision of the

Tribunal.

9.0.0 We have heard both the parties and perused the

material available on record. The Tribunal in assessee’s own case for

A.Ys. 2010-11 & 2011-12 held as under:

“11) We have carefully considered the rival contentions. The company is a corporate entity therefore it has to value its closing stock according to the accounting standard 2 ‘valuation of inventories’ issued by the Ministry of corporate affairs and ICAI. According to that accounting standard the closing stock of the finished goods is required to be valued including all cost of the finished goods is required to be valued including all cost of purchases, cost of conversion and other cost incurred in bringing the inventory to their present location and conditions. The contentions of the appellant is that that it’s all purchases are accounted for on CIF basis and therefore the suppliers are required to provide the goods at the factory location and therefore in the closing stock of inventory there cannot be any element of freight etc., this issue has been considered by the

30 ITA No.9187/Del/2019 Hero Motocorp Ltd. vs. ACIT coordinate bench in appellant’s own case for A Y 2007-08 where in it has been held that :-

“7.13. We have considered the submissions and the material filed by both the parties. The issue in question is regarding method of valuation of closing stock. The primary contention of the assessee is that it had to make emergency purchases and that these stocks so purchased were immediately consumed. In such exceptional situations, the assessee has directly accounted the freight and import clearing charges to the profit and loss account. This means that such raw material stocks are not part of closing stock at all. Further, this fact is not rebutted by the DR. 7.14 Though technically it can be argued that the value of closing inventory must include freight/ import clearing charges, the facts explained by the assessee are that the purchases in question are done under exceptional circumstances (which are well known in this type of industry) for immediate consumption. They are in fact consumed immediately i.e. as soon as raw material enters the factory premises which is not disputed by assessing officer, hence the question of such purchases being part of closing stock does not arise at all. In such a situation, when freight/ import charges are directly debited to the P& L A/c along with the value of the purchases, naturally the question of treating them as part of closing inventory does not arise. The assessee has acted and accounted in a proper and acceptable method. Therefore, the relief should be granted on this count alone.

31 ITA No.9187/Del/2019 Hero Motocorp Ltd. vs. ACIT 7.15 Alternatively, the undisputed fact remains that the assessee has consistently following the said method of accounting in the last many years and the Revenue has been accepting these facts and method of accounting without any demur. 7.16 The contention of the DRP that, the principle of res- judicata does not apply in Income tax proceedings and therefore, the Assessing officer is correct to come to independent conclusion and is not bound by past acceptance of a factual legal point by the department is untenable. Technically the principle of res judicata may not apply to the income tax proceedings as each year is an independent year, yet there ought to be uniformity in treatment and consistency as propounded by Hon’ble Supreme Court in the case of Radhasoami Satsang vs. CIT 193 ITR 321, when the facts and circumstances are identical. It is a judicially accepted principle that when the facts are same, a uniform view should be adopted for the subsequent years in the income tax proceedings. Unless there is a material change in the facts, which is neither demonstrated by assessing officer nor DRP, the view which is taken earlier, should not be changed, as held by various courts. We now discuss some of the case laws. 7.17 The Hon’ble Supreme Court in the case of Radhasoami Satsang (supra), on the theory of consistency, has held as under: “Strictly speaking, res judicata does not apply to the income tax proceedings. Though, each assessment year being a unit, what was decided in one year might not apply in the following year, where a fundamental aspect permeating through different assessment years has been found as a fact one way

32 ITA No.9187/Del/2019 Hero Motocorp Ltd. vs. ACIT or the other and parties have allowed that position to be sustained by not challenging the order, it would not be at all appropriate to allow the position to be changed in a subsequent year.” 7.18 This view has been followed by the Hon’ble Delhi High Court in the case of CIT vs. Neo Ploy Pack (P) Ltd. [2000] 245 ITR 492 and the Hon’ble Bombay High Court in the case of CIT vs. Gopal Purohit [2011] 336 ITR 287. 7.19 Further, the Hon’ble Supreme Court in the case of CIT vs. Realest Builders and Services Limited (2008) 307 ITR 202 held as: “In case where the department wants to tax an assessee on the ground of the liability arising in a particular year, it should always ascertain the method of accounting followed by the assessee in the past and whether change in method of accounting was warranted on the ground that profit is being underestimated under the impugned method of accounting. If the Assessing Officer comes to the conclusion that there is underestimation of profits, he must give facts and figures in that regard and demonstrate to the Court that the impugned method of accounting adopted by the assessee results in underestimation of profits and is, therefore, rejected. Otherwise, the presumption would be that the entire exercise is revenue neutral. In the instant case, that exercise had never been undertaken. The Assessing Officer was required to demonstrate both the methods, one adopted by the assessee and the other by the department. In the circumstances, there was no reason to interfere with the conclusion given by the High Court.”

33 ITA No.9187/Del/2019 Hero Motocorp Ltd. vs. ACIT

7.20 The Hon’ble Supreme Court in the case of CIT vs. Bilahari Investment P. Ltd. 299 ITR 1 (SC) held as follows: “Every assessee is entitled to arrange its affairs and follow the method of accounting, which the Department has earlier accepted. It is only in those cases where the Department records a finding that the method adopted by the assessee results in distortion of profits that the Department can insist on substitution of the existing method.” 7.21 In the case of CIT vs. Jagatjit Industries Ltd. (2011) 399 ITR 382 (Del.), the Hon’ble Jurisdictional High Court has held as follows: “If a particular accounting system has been followed and accepted and there is no acceptable reason to differ with it, the doctrine of consistency would come into play. The method of accounting cannot be rejected. The assessee was following the mercantile system of accounting. According to past business practice, the expenditure spilled over the next year and was debited in the second year and was allowed by the Assessing Officer. The Assessing Officer for the assessment year in question disallowed Rs.13,46,299 claimed as expenditure of prior period allowable in the current year. The Commissioner (Appeals) deleted the disallowance and this was upheld by the Tribunal. On appeal to the High Court: Held, dismissing the appeal, that the assessee had claimed prior period expenses on the ground that the vouchers for such expenses from the employees/ branch employees were received after March 31st of

34 ITA No.9187/Del/2019 Hero Motocorp Ltd. vs. ACIT the financial year. It had branch offices throughout the country. It debited the expenditure spill over the subsequent years and the Assessing officer had been allowing it in the past. The accounting practice had been consistently followed by it and accepted by the Revenue. Nothing had been brought on record to show that there had been distortion of profits or that the books of account did not reflect the correct picture. In the absence of any reason whatsoever, there was no warrant or justification to depart from the previous accounting system which was accepted by the Department in respect of the previous years.” 7.22 In the present case, the Revenue has rejected the method of accounting which is consistently followed by the assessee on the ground that there may be chance where in a particular year, the method adopted by the assessee may result in underestimation of profits. However, the Revenue failed to demonstrate with facts and figures that the impugned method of accounting may result in material underestimation of profits. On the contrary, the assessee has demonstrated that the change in the method of accounting for year under appeal would result in loss to the revenue as the opening stock would also require similar adjustment and the cascading effect will be loss to revenue. We observe that in many of the additions made in this case by the revenue, the consistent method of accounting is unnecessarily disturbed, though it has been accepted in many years. In our view such tinkering with the method is unjustified when the exercise does not materially alter the profits. The facts and figures in many additions demonstrate that the issue raised is revenue neutral in the long run. Such petty additions should be avoided on the ground of materiality, as AS-1 which talks

35 ITA No.9187/Del/2019 Hero Motocorp Ltd. vs. ACIT about materiality, consistency, prudence etc. is part of the I.T. Act after it is notified u/s 145(2). 7.23 In view of the foregoing and proposition laid down by the Hon’ble Supreme Court and the Hon’ble High Courts, we are of the opinion that adjustment of Rs. 31.18 lacs made to total value of closing stock of Rs. 275 crores and consumption of stocks of Rs. 7178 crores is uncalled for. If valuation of closing stock is changed then the value of opening stock should also be changed on the same basis or method. The closing stock of a particular year is the opening stock of the subsequent year. It is not the case of the revenue that the method of valuation of closing stock is materially affecting the accounts and profits disclosed by the assessee. This adjustment sought to be made is revenue neutral and at best may result in preponment or postponement of revenue. The issue is whether such exercise is at all required on the ground of materiality. Materiality is a concept which is well recognized both in accountancy and law. Accounting standards notified by the CBDT u/s 145(2) mandate that the concept of materiality be taken into consideration when finalizing the accounts of an assessee. 7.24 Further, the Hon’ble Supreme Court in the case of Berger Paints India Ltd. vs. CIT (2004) 266 ITR 99 at page 103(SC), has noted with approval, the observations of the Special Bench of the ITAT in the case of Indian Communication Network Pvt. Ltd. vs. IAC (1994) 206 ITR (AT) 96 (Delhi). At page 114 it observed that: “Before we part with the ground, we cannot help feeling that the litigation between the parties could have been avoided since it was quite immaterial, whether full deduction was allowed in one year or

36 ITA No.9187/Del/2019 Hero Motocorp Ltd. vs. ACIT partly in one year and partly in the next, since the assessee is a company and rate of tax is uniform. The gain to one and the loss to the other is illusory since what is deferred in one year, would have to be discharged in the next. In that sense, nobody has won and nobody has lost.” 7.25 Even on this plea also, the assessee succeeds. We have dealt with this issue elaborately as, in a number of grounds, this issue would become applicable. In view of above discussion, we allow this ground of the assessee.”

9.0.1 Thus, the issue stands squarely covered in favour of

the assessee by order dated 24.10.2016 passed by Tribunal in the

immediately preceding assessment years, i.e. AY 2010-11 and AY

2011-12 wherein identical addition made by the assessing officer

has been deleted. Before us, the Ld. Departmental representative

could not point out any changes in the facts and circumstances of

the case for this year compared to the year in which the Tribunal

has decided this issue. We also find that the Tribunal has in the

appeals for the assessment years 2009-10, 2012-13 and 2013-14,

decided the issue in favor of the assessee company following the

aforesaid order passed for assessment years 2010-11 and 2011-12.

37 ITA No.9187/Del/2019 Hero Motocorp Ltd. vs. ACIT 9.0.2 Therefore, Ground Nos. 3 to 3.1 are allowed in favour

of the assessee.

10.0.0 With respect to Ground Nos. 4 to 4.1 relating to

addition on account of cost of rejection of semi-finished goods and

obsolete items to the value of closing stock amounting to Rs. 3.95

lacs (net of addition of Rs.13.83 lacs after adjusting opening stock),

it was submitted that the aforesaid rejections comprised of abnormal

rejections arising in the course of manufacturing, like rejections on

account of obsolescence, etc. The Ld. AR submitted that according

to principles of accounting (AS-2), as also the consistent, regular

and accepted method of accounting, the assessee only considers

normal wastages arising in the course of manufacturing for the

purposes of allocation to closing inventory. Since, the aforesaid

expenditure comprised of abnormal wastages, it was not practically

feasible to segregate normal and abnormal wastages and, therefore,

the assessee, as per the consistent method of accounting, did not

consider aforesaid costs for purposes of allocation to closing

inventory. It was submitted that it is not practically possible for the

assessee to segregate normal and abnormal wastages embedded in

38 ITA No.9187/Del/2019 Hero Motocorp Ltd. vs. ACIT the aforesaid costs and, therefore, the assessee, as per consistent

and regular method of accounting, which has been accepted by the

Revenue as such in the earlier years, did not consider the aforesaid

expenditure for the purposes of valuation of closing inventory of

finished goods. It was submitted that the Assessing Officer

disallowed this expenditure and added the same to the income of the

assessee.

10.0.1 The Ld. AR submitted that the aforesaid issue stood

decided in favour of the assessee by the order of the Delhi Bench of

the Tribunal in the assessee's own case for the assessment years

2007-08 and 2008-09 wherein similar adjustment made in that year

was deleted on the same ground. The Ld. AR pointed out that the

aforesaid issue has been decided in favour of the assessee by the

order of the Tribunal in assessment year 2010-11 and 2011-12

wherein the Tribunal had held that only normal loss is to be

loaded/added to the cost of closing inventory which was in

consonance with the Accounting Standards issued by the Institute

of Chartered Accountants of India (ICAI). It was further pointed out

by the Ld. AR that following the order of the Tribunal for AY 2010-11

39 ITA No.9187/Del/2019 Hero Motocorp Ltd. vs. ACIT and 2011-12, the Tribunal has also decided the issue in favour of

the assessee in appellate orders passed for AYs 2009-10, 2012-13

and 2013-14.

11.0 The Ld. CIT-DR relied on the Assessment Order and

Order of the TPO, but could not distinguish the decision of the

Tribunal.

12.0.0 We have heard both the parties and perused the

material available on record. The Tribunal for A.Ys. 2010-11 and

2011-12 has held as under:

“16. We have carefully considered the rival contention and has also perused the relevant provisions of the accounting standard – 2 which has been relied by the Ld. assessing officer. We have carefully perused the decision of the coordinate bench in the appellant’s own case for assessment year 2007-08 wherein the identical issue is dealt with as under:-

“8.9 The issue in question is whether the cost of abnormal rejections have to be considered for the purpose of valuation of closing stock. The assessee relied on Accounting standard -2- Valuation of Inventories which is a notified accounting standard by the Companies Act which stipulates that abnormal wastages should not be considered for valuation of inventory.

40 ITA No.9187/Del/2019 Hero Motocorp Ltd. vs. ACIT 8.10 It was submitted by the Ld. AR of the assessee that it is in the manufacturing of precision and quality product and in case of unfit material it has been consistently following the method of changing the abnormal rejection of material to its profit and loss account, without any allocation to the value of closing inventory. 8.11 The assessing officer’s case is that cost of rejections needed to be included in the value of closing stock. Assessing officer worked out an amount of Rs. 9.24 lacs as attributable to closing stock out of total expenditure of Rs. 12.49 crores and closing stock value of Rs. 275 crores. The assessee as a consistent accounting policy has been claiming the cost of abnormal rejections as revenue expenditure for the previous years and this has been regularly accepted by department in past. 8.12 The amount of Rs. 9.24 lacs attributed by the assessing officer, in our view, is materially inconsequential so as to warrant disturbing the regular method of valuation of closing stock being followed by the assessee company. The quantum of the addition of Rs. 9.24 lacs is less than 0.74% of the value of abnormal rejections. As a percentage of total stocks / turn over / profits declared, this figure is miniscule. 8.13 Accounting Standard-2 stipulates that abnormal wastages should not be considered for valuation of inventory. It reads as follows: “16. Examples of costs excluded from the cost of inventories and recognized as expenses in the period in which they are incurred are: a)Abnormal amounts of wasted materials, labour or other production costs; storage costs, unless those

41 ITA No.9187/Del/2019 Hero Motocorp Ltd. vs. ACIT costs are necessary in the production process before a further production stage; administrative overheads that do not contribute to bringing inventories to their present location and condition; and selling costs.” 8.14 Keeping in view the treatment prescribed under AS-2 and the fact that the assessee has been regularly following the same method of accounting for valuation of charging such rejection to P&L A/c and its closing inventory, we are of the view the addition in question is uncalled for. The adjustment is not material adjustment. Further, for the reasons staged by us on the issue of consistency, while disposing around no. 2 to 2.2, we allow this ground of the assessee.” Both the parties have admitted that there is no difference in the facts and circumstances of the case of the appellant in the assessment year before us as well as the year for which the order of the coordinate bench pertains to. On reading of the assessment order as well as the direction of the Ld. Dispute resolution panel it was not found that how the loss of the assessee was found to be normal when the assessee submitted that it is an abnormal loss incurred by it during the course of manufacturing process. Further the Ld. dispute resolution panel has also stated that both the cost of normal and abnormal losses have to be loaded to the value of the closing stock is devoid of any merit as it is contrary to the accounting standard issued by the Institute of chartered accountants of India which has been mandated by the Ministry of corporate affairs, which only says that, only normal losses are required to be included and

42 ITA No.9187/Del/2019 Hero Motocorp Ltd. vs. ACIT abnormal losses are required to excluded for the purpose of the valuation of the closing stock of the finished goods and semi finished goods. In view of the above, we respectfully following the decision of the coordinate bench in the appellant’s own case for the previous year allow ground no. 3 of the appeal of the assessee.”

12.0.1 Thus, this issue is squarely covered in assessee’s

favour by the order of earlier assessment years. We also find that the

Tribunal has in the appeal for the assessment years 2009-10, 2012-

13 and 2013-14, decided the issue in favor of the assessee company

following the aforesaid order passed for assessment years 2010-11

and 2011-12.

12.0.2 Therefore, Ground Nos. 4 - 4.1 are allowed in favour

of the assessee.

13.0.0 With respect to Ground Nos. 5 to 5.4, relating to

disallowance of provision for increase in price of material amounting

to Rs.72.64 crores, the Ld. AR submitted that it can be seen that the

assessee had appointed various vendors for supply of material to be

used in the process of manufacturing of vehicles. It was submitted

that the assessee, at the time of issuing of purchase order,

negotiates the price at which the particular component/ components

43 ITA No.9187/Del/2019 Hero Motocorp Ltd. vs. ACIT shall be supplied by the vendor. Subsequently, vendors are provided

supply of component schedule annually. It was submitted by the Ld.

AR that in the business of manufacturing vehicles, the assessee

purchases raw material from vendors with the express

understanding that the rates would be revised, if there is substantial

increase/decrease in cost of materials, at the agreed interval. It was

submitted that in the assessment order, the assessing officer held

that the aforesaid provision of 72.64 crores is not allowable business

expenditure. The assessing officer held that provisions emanating

from retrospective price amendments are contingent in nature and

thus, not an allowable business expenditure. It was further

submitted that the assessing officer also added back the aforesaid

total provision while computing ‘book profit’ under section 115JB,

holding the same to be an unascertained liability.

13.0.1 The Ld. AR submitted that the provision for the

material is worked out as under:-

(1) Provision for purchase orders issued for price amendment as at 31.3.2015: Rs. 24.79 crores: The aforesaid provision was made on the basis of actual supplies made up to the end of the year as per price amendments actually issued as on 31.03.2015.

44 ITA No.9187/Del/2019 Hero Motocorp Ltd. vs. ACIT Therefore, the assessee has made provision of Rs. 24.79 crores on the basis of actual POs issued to vendors for the change in prices during the year and it involved no estimation. (2) Provision made on best estimate basis of Rs.47.85 crores of which price amendments were not finalized by the end of the year: The provision for price increase of Rs.47.85 crores was made on the basis of per vehicle increase / decrease in metal cost during 3rd/ 4th Quarter multiplied by actual dispatch during the corresponding period.

13.0.2 The Ld. AR submitted that in assessment year 2008-

09, the Tribunal deleted the disallowance holding that similar

disallowance of provision was made by the assessing officer in

complete disregard of the findings of the assessing officer in the

preceding assessment year, viz. Assessment Year 2007-08 as also

the consistent method followed by the assessee. In that year, the

Delhi Bench of the Tribunal, vide order dated 13.06.2014 passed in

the assessee’s own case for assessment year 2008-09 was pleased to

delete the disallowance made by the assessing officer keeping in

view the principle of materiality and consistency followed by the

assessee. Further, the Ld. AR submitted that the Delhi Bench of the

Tribunal, vide consolidated order dated 24.10.2016, passed in

45 ITA No.9187/Del/2019 Hero Motocorp Ltd. vs. ACIT assessee’s own case for assessment year 2010-11 and 2011-12, has

decided the aforesaid issue in favour of the assessee holding that the

provision was made on scientific basis and the transaction is

revenue neutral. It was further pointed out by the Ld. AR that

following the order of the Tribunal for AYs 2010-11 and 2011-12,

the Tribunal has also decided the issue in favour of the assessee in

appellate orders passed for AYs 2009-10, 2012-13 and 2013-14.

Further, in the order passed for assessment year 2009-10, the

Tribunal has also held that the since the provision for increase in

price of material was an ascertained liability made on an actual and

scientific basis, assessing officer erred in making adjustment to

book profit in accordance with the adjustments provided in the

Explanation to section 115JB of the Act.

14.0 The Ld. CIT - DR relied upon the Assessment Order

and Order of the TPO, but could not distinguish the decision of the

Tribunal.

15.0.0 We have heard both the parties and perused the

material available on record. This Tribunal, for A.Ys. 2010-11 &

2011-12, has held as under:

46 ITA No.9187/Del/2019 Hero Motocorp Ltd. vs. ACIT “20) We have carefully considered the rival contentions and also perused order of the coordinate bench in the appellant’s own case for earlier years. We have also perused the page no. 1130 to 1140 of the paper book volume 3 submitted by the assessee before the Ld. assessing officer in pursuance of direction of the Ld. dispute resolution panel. The parties before us have confirmed that there is no change in the facts and circumstances of the case for this year compared to the year for which the tribunal has decided this issue in favour of the appellant. The coordinate bench in assessee’s own case for assessment year 2007-08 has decided this issue as under:-

“12.11 The addition in question is on account of provision for increase in price of material. When there is an excess provision on account of price revision made during the year, the assessee reversed the same in subsequent year i.e. when the actual figures are known. Similarly, when there is a short provision for increase in price of raw material supplied in immediately preceding year, the balance is recognized as expenditure during the year. A claim is made based on ascertainment of actual liability. The assessing officer disallowed the reversals of provision on ground that this was a prior period expenditure. 12.12 When provisions are made, what is to be seen is whether the assessee has done a bona fide and genuine exercise to estimate its liability with reasonable certainty. The term reasonable certainty means that the provision in question might be slightly higher or lower than the actual figure. When the provision is higher, it is reversed in subsequent year, when the actual figures are known.

47 ITA No.9187/Del/2019 Hero Motocorp Ltd. vs. ACIT Similarly, when the provision is lower, the same is claimed in the latter assessment year. It cannot be said that these are prior period expenditure. The actual liability in question is ascertained only during the year and hence the liability crystallizes during the year. Estimation of an expense has to be considered in contradiction to actual ascertainment of the expenses. Once the actual expense has been ascertained, the liability accrues in that year to the extent not provided in the earlier year and is to be allowed as revenue expenditure in the year of crystallization. Concepts of going concern, accrual and consistency have to be taken into account by the revenue authorities while evaluating such provisions and making such adjustments. The assessee is disputing the figures of disallowance and the DRP is also expressing its inability to correct the figures. In our view the DRP is not helpless and could have directed the assessing officer to verify the figures and correct the mistakes, if any. In view of the above discussion, we allow this ground of assessee for statistical purpose and direct the assessing officer to properly verify the figures and allow the claim of the assessee.” Subsequently for the assessment year 2008-09 when the similar disallowance was made by the Ld. assessing officer the coordinate bench vide its order dated 13.04.2014 has held deleted the disallowance made by the assessing officer keeping in view the principle of materiality and consistency followed by the appellant. On the ground that the mention has been made in the purchase order that there cannot be any revision of the prices subsequently and the prices mentioning the purchase order of final based on which the Ld. assessing officer has relied

48 ITA No.9187/Del/2019 Hero Motocorp Ltd. vs. ACIT very heavily we are of the view that that these are the general terms and conditions of the purchase order claimed by the appellant upon its various vendors and there is no prohibition in the said purchase orders that subsequently the prices cannot be revised. Many times the prices are dependent upon the cost of the raw material such as metal etc of the vendors which is highly fluctuating, which may result into subsequent price revision. Further when the actual payments are made to the vendors on the basis of such retrospective increase in price of material supplied, which is accepted and allowed as revenue expenditure, the provision made for such are revenue neutral. Accordingly there is no justification in sustaining the aforesaid disallowance. Accordingly, we reverse the action of the assessing officer and allow the ground no. 4 of appeal raised by the appellant.”

15.0.1 Following the aforesaid order, the Tribunal in AY 2013-14

decided the issue in favour of the assessee while holding as under:

“It is observed that it is common trade practice to contract with vendors on such express terms for payment of arrears in the event of substantial increase/ decrease in cost, in order to maintain continuous supply of raw materials without being affected by market fluctuations, especially in light of the volume of purchases made by the assessee. In the absence of such understanding/ contract with the vendors, the assessee would not be able to operate and continue manufacturing operations

49 ITA No.9187/Del/2019 Hero Motocorp Ltd. vs. ACIT without disruption. This same process is followed when there is reduction in cost elements of component prices, company informs the vendors for reduction in price of components. Accordingly, while price revisions are pending or negotiations are on, the vendors keep on supplying the material provisionally at the agreed rates, with the understanding that pursuant to negotiations being finalized, the arrears of the amount due to them would be paid to them retrospectively. Such price revisions, being an accrued liability at the time of purchase of raw materials, are recorded in the books of accounts by the assessee. At the year end, the company estimates the additional liability on account of price revision under negotiation and makes upward/downward provision, as the case may be, in relation to material supplied until the end of the relevant year. Thus, the Assessing Officer was incorrect in disallowing this claim.” 15.0.2 We also find that the Tribunal has in the appeal for the

assessment years 2009-10 deleted the adjustment by the AO under

section 115JB of the Income Tax Act, 1961 by holding as under:

“From the records it can be seen that the provision for the material is worked out in respect of price amendments which were already issued on 31.03.2009 which was made on the basis of actual supplied made upto the end of the year as per price amendments actually issued on 31.03.2009. The provision was made on the basis of actual PO issued to the vendors for

50 ITA No.9187/Del/2019 Hero Motocorp Ltd. vs. ACIT change in the prices during the year and thus, does not involved any estimation. Therefore, the Assessing Officer was not right in making adjustments which are not consistent with the explanation to Section 115JB of the Income Tax Act, 1961. In the present Assessment Year also the facts are similar and are squarely covered with the decision of the Tribunal for A.Ys. 2010-11, 2011-12, 2012-13 and 2013-14. Hence Ground Nos. 15 to 14.3 are allowed.”

15.0.3 In the present Assessment Year also the facts are similar

and are squarely covered with the decision of the Tribunal for A.Ys.

2009-10 to 2013-14.

15.0.4 Therefore, Ground Nos. 5 to 5.4 are allowed in favour of

the assessee.

16.0.0 The Ld. AR submitted that Ground No. 6 is relating to

disallowance of cost of scrap material amounting to Rs.3.78 lacs. It

was submitted that in the course of the business of manufacturing,

the process generates some scrap on account of rejection of

components, obsolescence of components, etc. In the course of

manufacturing process, scrap is generated mainly on account of

grinding scrap in machining process of various components. Such

51 ITA No.9187/Del/2019 Hero Motocorp Ltd. vs. ACIT scrap generated in the course of manufacturing is not separately

debited to the profit and loss account but is claimed as the part of

cost of material consumed in the course of manufacturing. The Ld.

AR submitted that the wastage generated in the manufacturing

process is negligible compared to the overall consumption of

material during the year. Further, such wastage is normal and

inherent in the manufacturing process and in any case, within

tolerable limits. Scrap generated in the aforesaid manner is

transferred to scrap yard with proper approval of respective ‘Shop

head' and 'Process Planning & Control department' in the

manufacturing unit and is sold after necessary processing (e.g.

crushing of components), if any. The Ld. AR further submitted that

the sale proceeds from sale of scrap is directly credited to the profit

and loss account and is shown as income. It was submitted that

having regard to the nature of scrap/wastage generated during the

course of business i.e. empty oil drums, corrugated wooden boxes,

plastic bags, etc., it is not possible to maintain scrap register at the

shop floor containing item wise details of scrap generated. However,

the assessee maintains record/register of each item of scrap sold

52 ITA No.9187/Del/2019 Hero Motocorp Ltd. vs. ACIT during the year. The sale proceeds from sale of scrap is directly

credited to the assessee’s Profit & Loss A/c and is shown as income.

The Ld. AR submitted that the assessee realized Rs. 22.92 crores

from sale of scrap generated in the course of manufacturing, which

was credited to the profit and loss account and shown as income. It

was submitted that in the assessment order, the assessing officer

has observed that the assessee has erred in not estimating the value

of scrap lying in the factory premises as on the last date of the

previous year viz. 31.3.2015 which should have been credited to

profit and loss account as part of the closing stock. The assessing

officer estimated the value of such scrap at an amount of

Rs.3,78,400/- (computed on the basis of average scrap sales in the

last 15 days of the relevant year and first 15 days of next year, vis-a-

vis, after reducing the scrap sale as on the last days of the relevant

year) and made addition of the same to the closing stock and

consequently to the income of the assessee.

16.0.1 The Ld. AR submitted that the aforesaid issue has

been decided in favour of the assessee in order passed by the

Tribunal in assessee’s own case for the assessment years 2010-11

53 ITA No.9187/Del/2019 Hero Motocorp Ltd. vs. ACIT and 2011-12, wherein the Tribunal accepted the method as followed

by the assessee of accounting income on sale of scrap on a

consistent basis and deleted the impugned addition on the ground

that the assessee was not dealing in scrap and/or holding the scrap

as inventory, and, thus, was not required to value the closing stock

after taking into account the value of scrap. The Ld. AR submitted

that the Tribunal, in coming to the aforesaid conclusion, laid

emphasis on the fact that such transaction was revenue-neutral and

held that considering the size of the assessee company, it could not

be expected to keep quantitative tally of miniscule items. The Ld. AR

pointed out that the Tribunal in assessee’s own case for the AYs

2007-08 and 2008-09 had restored the matter back to the file of the

assessing officer to compute the value of closing stock on consistent

basis, as per method to be followed by the assessing officer in the

set-aside order. The Ld. AR submitted that the assessee had filed an

appeal against the aforesaid order of the Tribunal, which was

admitted by the High Court vide order dated 19.1.2015 as involving

substantial question of law. It was further submitted that the AO in

the set aside proceedings for AY 2007-08, vide order dated

54 ITA No.9187/Del/2019 Hero Motocorp Ltd. vs. ACIT 31.10.2014, confirmed such disallowance on an ad- hoc basis by

estimating the average of scrap lying in the closing stock as a

proportion of scrap sales for the last 15 days for the ended

31.03.20007 and the first 15 days of the subsequent year and the

Ld. CIT (A), vide order dated 01.02.2018, deleted the disallowance

made by the AO in the set aside order. However, the Ld. AR pointed

out that the aforesaid disallowance sustained by the Tribunal in

assessment years 2007-08 and 2008-09 has been categorically

distinguished by the ITAT in the AY 2010-11 (referred supra),

wherein the Tribunal held that the earlier orders were passed

without due consideration of AS-2 and application thereof to scrap

generated during manufacturing process has not been examined. It

was further pointed out by the Ld. AR that following the order of the

Tribunal for AY 2010-11 and 2011-12, the Tribunal has also decided

the issue in favour of the assessee in appellate orders passed for AYs

2012-13 and 2013-14.

17.0 The Ld. CIT DR relied upon the Assessment Order and

Order of the TPO as well as on the Tribunal’s decision for A.Y. 2007-

08 and 2008-09.

55 ITA No.9187/Del/2019 Hero Motocorp Ltd. vs. ACIT 18.0.0 We have heard both the parties and perused the

material available on record. On the issue under consideration, a co-

ordinate Bench of the Tribunal, for A.Y.s 2010-11 and 2011-12, has

held as under:

“24. We have carefully considered the rival contentions. Accounting standard 2 notified by the Ministry of corporate affairs it provides that inventory is required to be valued at the end of the year for determining the true and fair profit or loss of the financial period of an enterprise. According to that the inventory is required to be valued according to accounting standard 2 in case it is held for the sale in the ordinary course of the business. In the present case the assessee is not holding scrap as an inventory in the ordinary course of its business. It is also not the dealer in scrap. The inventory that it holds in the ordinary course of its business at the raw materials semi finished goods and they finished goods of the company. Therefore, it is incorrect to hold that assessee should have valued the scrap at the end of the year. Furthermore the accounting policy of the company also states that the scrap is accounted for at the time of its disposal. Therefore, according to us it is not mandatory for an assessee to value scrap as at the end of financial period for working out the true and fair profit or losses of the company. More so as in the previous year this accounting policy of the company has been accepted by the

56 ITA No.9187/Del/2019 Hero Motocorp Ltd. vs. ACIT revenue without disturbing the profit on this count. Further, while rendering our decision in the preceding ground of appeal, following the decision of honourable High Courts and Supreme Court, we have held that adjustment should not be made in the assessment order on issues, which are revenue-neutral. The impugned addition under consideration is purely revenue-neutral in as much as addition of the estimated value of the scrap to closing stock would be debited as opening stock in the profit and loss account of immediately succeeding year. Further, the assessing officer will need to carry out the similar exercise in the last year, to estimate stock of scrap which would become opening stock of this year. There is, thus, no escapement of Revenue on the basis of the impugned addition made by the assessing officer in the assessment order. We have already held in multiple grounds supra that no adjustment should be made to returned income on issues, which are revenue neutral. Having held as above, it is difficult to take any different view for the issue under consideration, which is also purely revenue neutral, especially considering that if similar adjustment (which has not been carried out by the assessing officer) is made to the opening stock, no additional tax liability would delve upon the appellant It could also be seen that the addition of Rs.3.02 lacs is miniscule having regard to the size of the company, which has declared turnover of Rs.16,000 crores (approx.) during the year under consideration and net profit of Rs.2232 crores. The aforesaid renders force in the arguments taken by the Ld.

57 ITA No.9187/Del/2019 Hero Motocorp Ltd. vs. ACIT Counsel that an assessee engaged in the business of manufacturing, especially that of the size of the appellant, cannot be expected to keep quantitative tally of miniscule items like nuts and bolts lying in the scrap yard. In view of the aforesaid, keeping in mind the principle of materiality, we find that there is no error in the system and regular practice followed by the appellant of not estimating the value of scrap lying in the scrap yard and accounting for sale as and when such scrap is sold and removed from the factory premises. For the aforesaid cumulative reasons we do not find any justification in sustaining the addition of Rs.3.02 lacs made by the assessing officer in the assessment order. As regards the decision of the Tribunal in the earlier two assessment years, we draw support from the various decisions, wherein it has been held that since doctrine of res judicata is not applicable to income tax proceedings, the Tribunal can deviate from earlier orders passed in the assessee’s own case as in those earlier decisions the provisions of the accounting standard A-S to with respect to valuation of inventories were not considered and whether they apply to the scrap generated in a manufacturing process by the company. Furthermore there is no evidences brought on record by the Ld. assessing officer that the assessee has sold scrap out of the books. Furthermore the amount of addition working out by the Ld. assessing officer was also on the estimate basis without any quantitative details of the scrap. It is also not the case of the assessee that compared to the earlier years the scrap sold by

58 ITA No.9187/Del/2019 Hero Motocorp Ltd. vs. ACIT the assessee is lesser during the year. In view of the above, the addition made by the Ld. Assessing officer on account of estimating the value of scrap lying in closing stock amounting to Rs. 3.02 lakhs is deleted and ground No. 5 of appeal raised by the assessee is allowed.”

18.0.1 In the present Assessment Year also the assessee is not

dealing in scrap, and/or holding the scrap as inventory, and, thus,

was not required to value the closing stock after taking into account

the value of scrap. This Tribunal, for A.Y.s 2010-11 and 2011-12,

while coming to the aforesaid conclusion, laid emphasis on the fact

that such transaction was revenue-neutral and held that

considering the size of the assessee company, it could not be

expected to keep quantitative tally of miniscule items. We also find

that the Tribunal has in the appeal for the assessment years 2012-

13 and 2013-14, decided the issue in favor of the assessee company

following the aforesaid order passed for assessment years 2010-11

and 2011-12. The facts are identical in the present year as well.

18.0.2 Therefore, Ground No. 6 is allowed in favour of the

assessee.

59 ITA No.9187/Del/2019 Hero Motocorp Ltd. vs. ACIT 19.0.0 With respect to Ground Nos. 7 to 7.2, relating to

disallowance of prior period expenses amounting to Rs. 7.64 crores,

it was the contention of the Ld. AR that the assessee is a large size

manufacturing company which receives services from several

vendors, running into hundreds. The Ld. AR submitted that the

assessee had made reasonable attempt to quantify the liability

incurred towards expenses during the relevant previous years and

provided for it. It was submitted that it is not humanly possible to

consider and provide for all expenses, in absence of relevant

details/material/information for various reasons like, non-receipt of

bills/invoices from the vendors, the contract terms with vendors not

being settled, disputes in relation to bills received, services

contracted by zonal/regional/branch officers not intimated to the

head office, etc. Accordingly, the assessee claimed deduction for

miscellaneous expenses aggregating to 7.64 crores pertaining to

prior period. The Ld. AR submitted that in the assessment order, the

assessing officer has disallowed the aforesaid expenses, on the

ground that same pertained to prior period and are not allowable

revenue expenditure against income of the relevant year.

60 ITA No.9187/Del/2019 Hero Motocorp Ltd. vs. ACIT 19.0.1 The Ld. AR submitted that the aforesaid issue is

covered by the order passed by the Tribunal in the assessee's own

case for Assessment Year 2008- 09, wherein, the Tribunal had taken

into consideration the finding of the Ld. DRP deciding the issue in

favor of the assessee and remanded the matter to the file of the

Assessing Officer for correcting calculation errors. It was further

submitted that the aforesaid issue has been decided in favour of the

assessee by the order of the Tribunal for assessment years2009 to

2013-14.

20.0 The Ld. CIT-DR relied on the Assessment Order and

Order of the TPO, but could not distinguish the decision of the

Tribunal.

21.0.0 We have heard both the parties and perused the

material available on record. This Tribunal, in A.Y. 2010-11 and

2011-12, has held as under:

“201. We have heard the rival contentions. We note that similar issue relating to disallowance of prior-period expenses was deleted by the Tribunal in the assessee’s own case for assessment year 2008-09. The relevant observations of the Tribunal for assessment year 2008-09 are as under:

61 ITA No.9187/Del/2019 Hero Motocorp Ltd. vs. ACIT

“5. On careful consideration of above contention and submissions of both the parties and careful perusal of the record placed before us, inter alia decision in assessee's own case for AY 2007-08 (supra), we observe that the same issue was decided by coordinate bench of this Tribunal in favour of the assessee with following findings and conclusions:- "61.10. The issue herein is year of deductibility. Additional ground of appeal was filed for A. Y. 2006- 07 before the Tribunal and this additional ground was not disposed of Misc. application is pending. The assessee's contention is that the correct amount is Rs. 23.86 lakhs and not Rs. 643.05 lakhs as mentioned by the A.O. Details are given in the paper book we find that the D.R.P. has directed the assessing officer to verify the price. This working given by the assessee is not properly verified by the A.O. The AO should have verified the claim of the assessee. We direct the assessing officer to verify the claim of the assessee. Be it as it may, the genuineness of the expenditure is not in doubt and as it is a question of excess/ short provision of discount in respect of sales effected, we are of the considered opinion that method of accounting followed by the assessee need not to be disturbed as it is being consistently followed over the years and as the revenue has accepted the same. The assessee's claim that the amount of Rs. 23.86 lakhs is not prior period expenses is not seriously disputed by the revenue. As to the balance amount Rs. 90,000 under the festival offer scheme, it was marginal variation that arose due to estimation of liability towards sales discount to be given to dealers. Thus the disallowance cannot be sustained both on the grounds of materiality as well as consistency. Similar issues were dealt by us while disposing of ground

62 ITA No.9187/Del/2019 Hero Motocorp Ltd. vs. ACIT nos. 7 and 7.1. Consistent with the view taken therein, we allow this ground of the assessee for statistical purposes.” 6. During the argument, both the parties fairly agreed that the assessee claimed deduction for following miscellaneous expenses aggregating to Rs.7,09,31,076 but in the assessment order, the amount of Rs.7,15,91,826 has been incorrectly reported on account of totaling expenses. From page no. 14-16 of DRP order, we observe that the DRP has also pointed out mistake of totaling. At the outset, we observe that the Assessing Officer has nowhere disputed the genuineness of the expenditure claimed by the assessee and if assessee is denied deduction, then it would never get deduction for such expenses. From DRP Order, we also observed that the DRP has followed its decision in respect of immediately preceding year. At the same time, we observe that the mistake of totaling and the working given by the assessee has not been properly verified at the end of Assessing Officer and the same should have been verified by the Assessing Officer. Under above circumstances, we hold that the issue is squarely covered in favour of the assessee by the decision of Hon'ble ITAT 'C' Bench in assessee's own case for AY 2007-08 (supra) and we direct the Assessing Officer to allow the claim of the assessee after proper examination and verification. Accordingly, going consistent with the view taken by this Tribunal in assessee's own case for the immediately preceding year to the year under consideration in this appeal, we hold that ground no. 1 of the revenue being devoid of merits deserves to be dismissed and we dismiss the same.”

63 ITA No.9187/Del/2019 Hero Motocorp Ltd. vs. ACIT The Ld. departmental representative could not point out any change in the facts and circumstances of the case of the appellant as compared to the assessment year in which the above issue is decided by the coordinate bench. No other contrary decision was also pointed out therefore, respectfully following the decision of the coordinate bench in the appellant’s own case for the earlier years. We dismiss ground No. 3 of the appeal of the revenue.”

21.0.1 It can be seen that the facts are identical in the

previous Assessment Years 2009-10 to 2013-14 and squarely

covered in favour of the assessee. Therefore, Ground Nos. 7 to 7.2

are allowed in favour of the assessee.

22.0.0 With respect to Ground No. 8 to 8.3 relating to

provision of Head office expense reversed in succeeding year

amounting to Rs.11.80 crores, the Ld. AR submitted that at the end

of year, the assessee had made provision for various expenses

incurred during the year on the basis of reasonable estimate, since

in the absence of receipt of bills/invoices from the vendors, which

are received in the succeeding year, the exact amount payable there

against was not ascertainable. In the succeeding year, on receipt of

bills from vendors, exact amount payable to vendors was

64 ITA No.9187/Del/2019 Hero Motocorp Ltd. vs. ACIT ascertained. The amount of provision in excess of actual amount

payable was reversed in the books of account. In case of shortfall,

the profit and loss account was debited with the amount of shortfall.

The Ld. AR submitted that the aggregate provision for advertisement

expenses incurred at the head office made at the end of the relevant

previous year, which was reversed in succeeding year amounted to

Rs. 11.80 crores. In the assessment order, the Assessing Officer

disallowed the provisions made at the end of the year of Rs. 11.80

crores which were reversed in the succeeding year on receipt of bills

from the vendors on conclusion of negotiations with the vendors, on

the ground that the provisions to that extent were excessive and

represented contingent liability, which was not allowable deduction.

That apart, the assessing officer also added back the aforesaid total

provision while computing ‘book profit’ under section 115JB,

holding the same to be an unascertained liability.

22.0.1 The Ld. AR submitted that the provision for

advertisement expenses, in the year under consideration as well,

has been made on the basis of actual Purchase orders and

agreements and, thus, has been made on reasonable and scientific

65 ITA No.9187/Del/2019 Hero Motocorp Ltd. vs. ACIT basis. Detail of provisions for advertisement was submitted before

the authorities. The Ld. AR submitted that the Tribunal, in the

immediately preceding assessment years, viz. AYs 2010-11 and

2011-12, has decided the issue in favour of the assessee by following

the order for assessment year 2008-09 holding that the provision

was made on a rational and scientific basis, and, thus, the same

was to be allowed as business deduction, notwithstanding that part

thereof was reversed in the succeeding year. It was submitted that

the Tribunal, in coming to the aforesaid conclusion, also held that

the disallowance cannot be made on issues which are revenue

neutral. It was further submitted that this issue is also covered in

favour of the assessee by the decision of the Tribunal in assessee’s

own case for the assessment year 2008-09, wherein the Tribunal

reversed the action of assessing officer in disallowing provision on

the ground that the amount reversed there against in the succeeding

year exceeded 15% of the amount of provision. The Tribunal held

that the said approach followed by the AO had no valid basis and

was purely ad-hoc. The Tribunal also held that the Assessing Officer

was bound to follow the practice and stand taken by the Department

66 ITA No.9187/Del/2019 Hero Motocorp Ltd. vs. ACIT on this issue in the earlier years and, accordingly, restored the

matter back to the file of the Assessing Officer to reconsider the

issue, having regard to the method of making provisions followed by

the assessee and accepted by the Revenue in preceding years. The

Ld. AR further submitted that the Assessing Officer, in the set-aside

proceedings, vide order dated 26.02.2015, accepted the claim of the

assessee and allowed relief on the aforementioned identical issue by

observing that the assessee had computed the provision on the basis

of actual Purchase Orders, which was scientific and logical in

nature.

22.0.2 It was further pointed out by the Ld. AR that following

the order of the Tribunal for AYs 2010-11 and 2011-12, the Tribunal

has also decided the issue in favour of the assessee in appellate

orders passed for AYs 2009-10, 2012-13 and 2013-14. Further, in

the order passed for assessment year 2009-10, the Tribunal also

held that the provision for advertisement expenses was also

allowable while computing book profit under section 115JB of the

Act.

67 ITA No.9187/Del/2019 Hero Motocorp Ltd. vs. ACIT 23.0 The Ld. CIT-DR relied upon the Assessment Order and

Order of the TPO, but could not distinguish the decision of the

Tribunal.

24.0.0 We have heard both the parties and perused the

material available on record. On the issue under consideration, this

Tribunal, in its orders for A.Ys. 2010-11 and 2011-12, has held as

under:

68 ITA No.9187/Del/2019 Hero Motocorp Ltd. vs. ACIT observe that the present disallowance is also revenue-neutral, since the impugned amount of provision, as also admitted by the assessing officer itself, was reversed in the succeeding year and consequential offered to tax in that year. If such provision is disallowed in this year, the corresponding reduction would need to be made in the return of the succeeding year, neutralizing the entire tax liability on the appellant company. For the aforesaid cumulative reasons, we hereby delete the disallowance made by the by the Ld. Assessing officer of Rs. 1 9658 1820/– in respect of provision for advertisement expenses incurred at the head office made at the end of the relevant previous year which were reversed in the succeeding year and allow the ground No. 7 of appeal raised by the assessee.”

24.0.1 In the present Assessment Year, detail of provisions for

advertisement was submitted before the lower authorities. Further,

the Assessing Officer, in the set-aside proceedings for A.Y. 2008-09,

vide order dated 26.02.2015, accepted the claim of the assessee and

allowed relief on the aforementioned identical issue by observing

that the assessee had computed the provision on the basis of actual

Purchase Orders, which was scientific and logical in nature. Thus,

the Assessing Officer was not right in disallowing the said expenses

and also adding back the same while computing book profit, holding

69 ITA No.9187/Del/2019 Hero Motocorp Ltd. vs. ACIT the same to be unascertained liability. Thus, the issue is squarely

covered by the orders the Tribunal in A.Ys. 2008-09 to 2013-14.

24.0.2 Therefore, Ground Nos. 8 to 8.3 are allowed in

favour of the assessee.

25.0.0 The Ld. AR submitted that Ground Nos. 9 to 9.4

relate to disallowance of alleged excessive purchases from related

parties as per AS-18 amounting to Rs. 29.14 crores. It was

submitted that in the course of business of manufacturing two

wheelers, the assessee, inter alia, procures certain critical

components like shock absorbers, carburetors, etc., which are fitted

in the two- wheelers manufactured by the assessee, from a single

vendor, having the requisite technology to manufacture the same, in

accordance with the specifications given by the assessee. The

assessee, does not procure such components from any other vendor.

The Ld. AR submitted that the purchase price of components which

are purchased from various suppliers are based upon negotiations

with such vendors and are different due to various factors, like level

of automation of vendor, amount of investment by vendor, age of the

plant, capacity utilization (impacting fixed cost recovery), volume of

70 ITA No.9187/Del/2019 Hero Motocorp Ltd. vs. ACIT supply, geographical differences (which could impact cost of freight,

labour, power), lead time, indirect tax Costs (CST Vs VAT) etc.

Further, the assessee also prefers purchasing material from certain

suppliers, due to business/commercial expediency, viz., de-risking

the supply chain to reduce dependence, inability of existing supplier

to meet demand increase, etc. The Ld. AR submitted that the said

parties are not related to assessee in terms of the provisions of

section 40A (2)(b) of the Act. In addition to above, the assessee, in

the course of manufacturing two wheelers, places purchase orders

on vendors of certain customized intermediary products like wheel

assembly, seat assembly, etc. The assessee, while placing aforesaid

purchase orders to the vendors, also specifies the specifications of

the raw materials/components to be used in manufacture of

customized intermediary products as also the name of suppliers

from whom the former vendor would purchase such

materials/components at prices predetermined by the assessee. It

was submitted that the AO after comparing purchase price of certain

products, which were purchased from the aforesaid related parties

as also from unrelated parties, held that the purchase price from

71 ITA No.9187/Del/2019 Hero Motocorp Ltd. vs. ACIT related parties was excessive in order to reduce the taxable income.

The AO also held that the assessee had conducted itself in such a

manner that the parties do not qualify as ‘related party' under

section 40A (2) of the Act, even though said parties were related to

assessee in terms of AS- 18. Accordingly, the AO computed excessive

purchase price at Rs.9.73 crores in respect of purchases from

related parties for which internal comparable of similar products

purchased from related parties were available. In respect of other

category of purchases from related parties for which no internal

comparable was available, the AO worked out an amount of Rs.

19.41 crores in the same proportion as that of purchases for which

internal comparable were available alleging the same to be excessive.

Thus, the AO made total disallowance of Rs.29.14 crores out of

purchases.

25.0.1 The Ld. AR submitted that the aforesaid issue is

squarely covered in favour of the assessee by the decision of the

Delhi Bench of Tribunal in the assessee’s own case for Assessment

Years 2007-08 and 2008-09, wherein identical disallowance made in

that year was deleted on the ground that since in the first place, the

72 ITA No.9187/Del/2019 Hero Motocorp Ltd. vs. ACIT parties were not related to the assessee company in terms of section

40A (2), disallowance on ground of excessive purchase price could

not have been made under that section. Further, the Tribunal held

that the transactions were entered by the assessee on account of

commercial expediency and when the recipients had paid tax on

payments received from the assessee company, disallowance could

not be made by applying provisions of section 40A (2) of the Act. The

Ld. AR pointed out that similar disallowance made in the

immediately preceding two Assessment Years, viz. AY 2010-11 and

2011-12 was also reversed by the Tribunal, following the

aforementioned order of the Tribunal for assessment years 2007-08

and 2008-09. It was further pointed out by the Ld. AR that following

the order of the Tribunal for AYs 2010-11 and 2011-12, the Tribunal

has also decided the issue in favour of the assessee in appellate

orders passed for AYs 2009-10, 2012-13 and 2013-14.

26.0.0 The Ld. CIT-DR relied upon the Assessment Order

and Order of the TPO, but could not distinguish the decision of the

Tribunal.

73 ITA No.9187/Del/2019 Hero Motocorp Ltd. vs. ACIT 27.0.0 We have heard both the parties and perused the

material available on record. On identical issue, this Tribunal in its

order for A.Ys. 2010-11 and 2011-12 has held as under:

“55. We have carefully considered the rival contention and perused the relevant records placed before us. It was submitted by the parties that there is no change in the facts and circumstances of the case in the present assessment year compared to the assessment year for which the coordinate bench is decided this issue in the favour of the appellant for assessment year 2007 – 08 and 2008 – 09 wherein this issue has been decided by the coordinate bench as under:-

“13.14. The basic requirement for the applicability of section 40A(2) of the Act is that the payment should be made to a related person i.e. to a person referred to in clause (b), of sub-section (2) of section 40A of the Act. 13.15. In the present case, it is an undisputed fact that the payments are not made to a person mentioned in clause (b) of section 40A (2) of the Act. 13.16. Clause (a ) of sub-section (2) of section 40A of the Act provides that where the assessee incurs any expenditure in respect of which payment has been or is to be made to any person referred to in clause (b) of the sub section and the Assessing Officer is of the opinion that such expenditure is excessive or unreasonable having regard to the fair market value of the goods, services or facilities for which the payment is made or the legitimate needs of the business or profession of the assessee or the benefit

74 ITA No.9187/Del/2019 Hero Motocorp Ltd. vs. ACIT derived by or accruing to him there from, so much of the expenditure as it so considered by him to be excessive or unreasonable, shall not be allowed as a deduction. The object of section 40A (2) is to prevent diversion of income. An assessee who has large income and is liable to pay tax at the highest rate prescribed under the Act often seeks to transfer a part of his income to a related person who is not liable to pay tax at all or liable to pay tax at a rate lower than the rate at which the assessee pays the tax. In order to curb such tendency of diversion of income and thereby reducing the tax liability by illegitimate means, section 40- A was added to the Act by an amendment made by the Finance Act, 1968. Clause (b) of section 40A (2) gives the list of related persons. 13.17. In the present case, it is an undisputed fact that none of the parties fall within the persons specified as defined under clause (b) of section 40A (2) of the Act. Related parties are to be considered in terms of provisions of sec. 40A (2) of the Act and not as mentioned in AS-18 issued by the Institute of Chartered Accountant. Thus, we are of the view that the provisions of section 40A (2) do not apply to the present case. Further, there is no provision under the Act which authorizes the Assessing Officer to lift the corporate veil and disallow an expenditure on the ground of reasonableness and commercial expediency unless it is established that the transaction is primarily devised to evade tax. 13.18. In the present case, it was submitted by the learned AR of the assessee that the related parties are profit- making companies and are subject to tax to at some less or the same rate of tax. Thus, there is no loss of Revenue. This submission of the assessee has not been controverted

75 ITA No.9187/Del/2019 Hero Motocorp Ltd. vs. ACIT before us by the learned DR. Tax benefit alleged is factually wrong as the other compared assesses are profit making companies/assessees. There is no loss to the revenue if only the excess payment of price is taken, but this situation is not considered by the Revenue. Except for allegation that excess price is paid to reduce profit, no other evidence is gathered by assessing officer to prove that the assessee had in fact evaded or saved tax by such exercise. The argument of the Revenue fails. The allegation that the assessee has structured his associate concern so as to avoid sec. 40A (2) is also devoid of merit, as the revenue has failed to demonstrate as to how it has come to such a conclusion. The allegation means that profit is transferred to third parties, where the share holding of the assessee is not a major share holding. The allegation means that the assessee is distributing profits to companies with majority holding by unrelated parties for the purpose of reducing taxes. Such wild allegation cannot be endorsed by us. 13.19. The assessee does not dispute the fact that certain purchases are made at a rate higher than the rate paid to certain other parties for the same periods. The assessee at pages 1523 to 1523.18 of the paper book also furnished instances where purchases were made from these parties at price lower than the purchases made from unrelated parties. Further, the disallowance was made on adhoc basis without setting any benchmark for the disallowance. 13.20. Notwithstanding the above view, even assuming for a moment that the provisions of the section 40A (2) would apply to the present case, then the following propositions laid down by various courts have to be considered.

76 ITA No.9187/Del/2019 Hero Motocorp Ltd. vs. ACIT 13.21. The Hon’ble Bombay High Court in the case of CIT v. Indo Saudi Services (Travel) (P.) Ltd. [2009] 310 ITR 306 relying on CBDT Circular No. 6-P, dated 6-7-1968 held that no disallowance should be made under section 40A(2) of the Income-tax Act in respect of the payments made to the relatives and sister concerns where there is no attempt to evade tax. 13.22. Having held that the provisions of section 40A (2) of the Act does not apply to the facts of the case. We now proceed to answer whether the action of the Assessing Officer in disallowing the expenditure on the ground of commercial expediency is justified. 13.23. The Hon’ble Supreme Court in the case of CIT vs Walchand & Co [1967] 65 ITR 381 in the context of deductibility of expenditure under Section 37(1) of the Income-tax Act, 1961 [Corresponding to section 10(2)(xv) of the Indian Income-tax Act, 1922] held as under: “In applying the test of commercial expediency for determining whether the expenditure was wholly and exclusively laid out for the purpose of the business, reasonableness of the expenditure has to be adjudged from the point of view of the businessman and not of the revenue”. 13.24. Further, reference is also drawn to the decision of the Hon’ble Supreme Court in the case of S.A. Builders Ltd. v. CIT (Appeals) [2007] 288 ITR 1 (SC) , where in it was held as under: "....that once it is established that there was nexus between the expenditure and the purpose of the business (which need not necessarily be the business of the assessee itself), the revenue cannot justifiably claim to put itself in the arm-chair of the businessman

77 ITA No.9187/Del/2019 Hero Motocorp Ltd. vs. ACIT or in the position of the board of directors and assume the role to decide how much is reasonable expenditure having regard to the circumstances of the case. No businessman can be compelled to maximize his profit. The income-tax authorities must put themselves in the shoes of the assessee and see how a prudent business man would act. The authorities must not look at the matter from their own view point but that of a prudent businessman...." 13.25. It is a well settled principle that Commercial expediency cannot be judged by the Revenue from its point of view. In the present case, we are of the view that the assessing officer has made this disallowance based on surmises and conjectures without properly examining the facts on record and without bringing any evidence that the purchases were made at an excessive price compared to fair market value to evade tax. 13.26. In view of the above discussions, and bearing in mind entirety of the case, we are of the considered view that the impugned disallowance was indeed uncalled for on the facts of this case. Hence, we uphold the grounds of the assessee.” In view of the above about decision of the coordinate bench in appellant’s own case and further failure on part of the revenue to controvert any of the findings in the earlier order of the tribunal or pointing out any contrary decisions on this issue, the respectfully following the order of the coordinate bench to not inclined to uphold the disallowance made by the Ld. Assessing officer on account of the purchases of Rs. 7 2.40 crores made from the parties who are related parties in terms of accounting standard 18 issued by the Institute of chartered accountants of

78 ITA No.9187/Del/2019 Hero Motocorp Ltd. vs. ACIT India but not in terms of provisions of section 40A (2) of the income tax act. In the result ground No. 11 of the appeal of the assessee is allowed.”

27.0.1 Admittedly, the issue is squarely covered by the order

of the Tribunal for A.Ys. 2010-11 and 2011-12. We also find that the

Tribunal has in the appeals for the assessment years 2009-10,

2012-13 and 2013-14, decided the issue in favor of the assessee

company following the aforesaid order passed for assessment years

2010-11 and 2011-12.

27.0.2 Therefore, Ground Nos. 9 to 9.4 are allowed in favour

of the assessee.

28.0.0 As regards Ground Nos. 10 to 10.3 relating to payment

received on behalf of Hero Honda Fin Corp. Ltd. (HFCL) deemed as

dividend under Section 2(22)(e) amounting to Rs.22.26 crores, the

Ld. AR submitted that Hero Fin Corp. Ltd. (HFCL) is a related

company which is engaged primarily in the business of financing of

vehicles. It was submitted that in pursuance of the said business

HFCL extends to the dealers of the assessee company, facility of

financing vehicles purchased by the dealers from the assessee

company. The dealers on purchase of vehicles from the assessee, get

79 ITA No.9187/Del/2019 Hero Motocorp Ltd. vs. ACIT the bill of purchase raised by the assessee, discounted from HFCL

and remit payment to the assessee. The dealers are required to

make payment of aforesaid discounted bills to HFCL on maturity

thereof. Subsequently, when payments by dealers to HFCL are due

to the dealers, due to convenience of facility of collection centers of

the assessee available all over India, make payment into the

assessee's bank account, for and on behalf of HFCL, which is in turn

remitted by the assessee to HFCL in 2-3 days. It was submitted that

the Assessing Officer held that the aforesaid amount received by the

assessee from dealers was loan/advance given by HFCL to assessee

and consequently deemed the same as dividend under section

2(22)(e) of the Act. It was further observed that the aforesaid

advances were not given by HFCL to the assessee in the ordinary

course of business since the aforesaid payments were given by

customers of HFCL and not by HFCL directly.

28.0.1 The Ld. AR submitted that in AY 2007-08, the

Tribunal decided the issue in favour of the assessee by holding that

assessee’s intention did not reflect that the amount was received as

loan or advance so as to attract the provisions of section 2(22)(e) of

80 ITA No.9187/Del/2019 Hero Motocorp Ltd. vs. ACIT the Act. The Tribunal further held that the assessee was holding the

money as a custodian and the amount would be exempted in terms

of clause (ii) section 2(22)(e) since the amount was given in the

ordinary course of business. It was also submitted that in

assessment years 2008-09 to 2013-14, the Tribunal followed the

order for Assessment Year 2007-08 and deleted the disallowance.

29.0 The Ld. CIT-DR relied upon the Assessment Order and

Order of the TPO, but could not distinguish the decision of the

Tribunal.

30.0.0 We have heard both the parties and perused the

material available on record. The Tribunal in A.Ys. 2010-11 and

2011-12 held as under:

“214) We have heard the rival contentions. We note that similar issue relating to addition of deemed dividend was deleted by the Tribunal in the assessee’s own case for assessment year 2007- 08 which was followed in assessment year 2008-09. The relevant observations of the Tribunal for assessment year 2007- 08 are as under:

“16.27. Section 2(22)(e), is a deeming section and it is well settled that it should be strictly interpreted. In the present case, the intention of the parties did not reflect that it was an advance or loan so as to attract section 2(22)(e). The

81 ITA No.9187/Del/2019 Hero Motocorp Ltd. vs. ACIT assessee in this case was holding the money received from dealers as custodian of HHFL. There is no privity of contract between the assessee and HHFL. There is no positive act of granting loan or advance given by HHFL to the assessee. There is neither a stipulation for payment of interest or period of repayment. Further, the assessee has not used the funds for its own purposes, as admittedly the assessee is a cash rich company, not requiring loans. This fact is not disputed by the Revenue. The assessee was used as channel for remittance of money by the dealers to HHFL for the purpose of convenience and from assessee’s a standpoint this is business expediency. We are unable to appreciate the conclusions drawn by the assessing officer that this is a deemed loan. In our view, by no stretch of imagination it can be said that there was any amount of advance or loan given by HHFL to the assessee. 16.28. Even assuming that the transaction is in the nature of loan, we have to agree with the arguments of the Ld. AR of the assessee that the transaction cannot be deemed as dividend in terms of exemption provided in clause (ii) of section 2(22)(e) of the Act, since the loan would be considered as given by HHFL, which is engaged in the business of money lending, in the ordinary course of its business. Therefore, the amount cannot be deemed as dividend in the hands of the assessee. The arguments of the Ld. DR that since no interest was charged/ chargeable thereon from the assessee, the aforesaid loan cannot be said to be given in the ordinary course of business of HHFL is taken to its logical conclusion, supporting our view that this is not a loan or advance.

82 ITA No.9187/Del/2019 Hero Motocorp Ltd. vs. ACIT 16.29. Considering the decision of the Hon’ble Delhi High Court and the intent of the Legislature in introduction of Section 2(22)(e) of the Act, we are of the view that the transaction in question would not fall within the provisions of section 2(22)(e) of the Act. Accordingly, this ground of the assessee is allowed.” The Ld. departmental representative could not point out any change in the facts and circumstances of the case of the appellant as compared to the assessment year in which the above issue is decided by the coordinate bench. No other contrary decision was also pointed out therefore, respectfully following the decision of the coordinate bench in the appellant’s own case for the earlier years. We dismiss ground No.6 of the appeal of the revenue.”

30.0.1 This issue is also squarely covered by the order of the

Tribunal for A.Ys. 2010-11 and 2011-12. We also find that the

Tribunal has in the appeals for the assessment years 2009-10,

2012-13 and 2013-14, decided the issue in favor of the assessee

company following the aforesaid order passed for assessment years

2010-11 and 2011-12.

30.0.2 Therefore, Ground Nos. 10 to 10.3 are allowed in

favour of the assessee.

83 ITA No.9187/Del/2019 Hero Motocorp Ltd. vs. ACIT 31.0.0 As regards Ground Nos. 11 to 11.4 relating to TDS

on quarterly targets and turnover discount and Sales Discount

amounting to Rs. 46.31 crores, it was the contention of the Ld. AR

that during the relevant year, the assessee incurred expenditure of

Rs.154,35,32,553/- on account of various incentives/discounts

offered to dealers under various schemes on purchase of spare

parts/vehicles from the assessee. Out of the aforesaid expenditure,

Rs.100,84,49,593/-relates to amount of discounts offered by the

company in various stockists/dealers, on purchase of spare parts

made by the latter in accordance with sales incentive/discount

scheme prevalent during the relevant previous year. The assessee

has further given trade discount amounting to Rs.53,50,82,960/- to

the dealers on the sales invoice at the time of sales. It was submitted

that the Assessing Officer held that the assessee was liable to deduct

tax from aforesaid discounts/incentives under section 194H of the

Act since the payments made were on the basis of performance of

dealers and targets achieved by dealers which was not in the nature

of "discount” as the same was not given at the time of taking delivery

of goods by the dealers but was given subsequently. The Assessing

84 ITA No.9187/Del/2019 Hero Motocorp Ltd. vs. ACIT Officer held that incentive paid by the assessee to dealers was not in

the nature of discount, but fell within the meaning of the term

‘commission’ as defined in section 194H of the Act and, thus, the

assessing officer disallowed 30% of the entire expenditure of Rs.

1,00,84,49,593/- under section 40(a)(ia) of the Act.. Further, the AO

also disallowed 30% of total trade discount of Rs.53,50,82,960/-

crores given to dealers on sales invoice at the time of sale while

alleging that the same was based on achievement of turnover targets

which represented commission on which TDS under section 194H

was liable to be deducted.

31.0.1 The Ld. AR submitted that the Tribunal in Assessment

Year 2007-08 decided the issue in favour of the assessee relying on

the decision of Hon’ble Delhi High Court in the case of CIT vs.

Mother Dairy Ltd. (ITA No. 1925/2010) and Jai Drinks Pvt. Ltd. (336

ITR 383), holding that the discount in question is not in the nature

of commission but an incentive for higher sale targets. The Ld. AR

further submitted that the aforesaid finding was followed by the

Tribunal in the AYs 2008-09 to 2013-14 wherein similar

disallowance made by the Assessing Officer was deleted.

85 ITA No.9187/Del/2019 Hero Motocorp Ltd. vs. ACIT 32.0 The Ld. CIT-DR relied upon the Assessment Order and

Order of the TPO, but could not distinguish the decision of the

Tribunal and the Hon’ble High Court.

33.0.0 We have heard both the parties and perused the

material available on record. The Tribunal for A.Ys. 2010-11 and

2011-12 held as under:

“75) We have heard the rival contentions. As dealership agreement entered between the appellant and dealers is on a principal-to-principal basis and dealers do not act as agents of the appellant while purchasing and further selling the vehicles. Accordingly, the incentives offered at the time of purchase of vehicles do not fall within the meaning of commission u/s 194H of the Act. Further, the issue is squarely covered by the decision of the ITAT in assessee’s own case in AY 2008-09 wherein following the ITAT decision in assessee’s own case for the year AY 2007-08, it was observed as under –

“148. From the bare reading of the decision of the Tribunal in assessee’s own case for AY 2007-08 (supra), we observe that after dealing with rivals submissions and contentions of both the parties, the tribunal reached to the following finding and conclusion deciding the issue in favour of the assessee. The relevant operative part of the order of the Tribunal for AY 2007-08 in assessee’s own case (supra) read as under-

86 ITA No.9187/Del/2019 Hero Motocorp Ltd. vs. ACIT “45.11. The facts of this case clearly demonstrate that what is given to the stockiest/ dealers is discount on the purchase price and not any commission. The stockiest/ dealers purchase spare parts/ vehicles from the assessee. They are not commission agents. Sale consideration is paid by these parties to the assessee. As a matter of incentive for higher sale the assessee grants discount if the stockiest/ dealers achieve a particular volume of transaction. Thus, in our view the discount in question is not in the nature of commission or the brokerage which attracts sec. 194H. In the case of CIT Vs. Mother Dairy Ltd. (ITA no. 1925/2010(Del) the Hon’ble Delhi High Court was considering similar case and held as follows: “3. The assessee explained in writing that it sold the products to the concessionaires on a principal to principal basis, that the concessionaires buy the products at a given price after making full payment for the purchases on delivery, that the milk and other products once sold to the concessionaires became their property and cannot be taken back from them, that any loss on account of damage, pilferage and wastage is to the account of the concessionaires and that in these circumstances the payment made to the concessionaires cannot be treated as “commission” for services rendered and consequently there was no liability on the part of the assessee to deduct tax. It is irrelevant that the concessionaires were operating from the booths owned by the Dairy and were also using the equipment and furniture provided by the Dairy. That fact is not determinative of the relationship between the Dairy and the concessionaires with regard to the sale of the

87 ITA No.9187/Del/2019 Hero Motocorp Ltd. vs. ACIT milk and other products. They were licensees of the premises and were permitted the use of the equipment and furniture for the purpose of selling the milk and other products. But so far as the milk and the other products are concerned, these items became their property the moment they took delivery of them. They were selling the milk and the other products in their own right as owners. These are two separate legal relationships. The income tax authorities were not justified or correct in law in mixing up the two distinct relationships or telescoping one into the other to hold that because the concessionaires were selling the milk and the other products from the booths owned by the Diary and were using the equipment and furniture in the course of sale of the milk and other products, they were carrying on the business only as agents of the Diary.” 45.12. The Hon’ble High Court held that in such circumstances S.194H is not attracted. 45.13. In the case of Jai Drinks (P) Ltd. 336 ITR 383 (Del.), the Hon’ble Delhi High Court has held as follows: “Held, dismissing the appeal, that a perusal of the agreement showed that the assessee had permitted the distributor to sell its products in a specified area. The distributor was to purchase products at a pre- determined price from the assessee for selling them. Both the assessee and the distributor had been collecting and paying their sales tax separately. The CIT(A)

88 ITA No.9187/Del/2019 Hero Motocorp Ltd. vs. ACIT and also the Tribunal rightly held that the payments being made by the assessee to the distributor were incentives and discounts and not commission.” 45.14. Respectfully following the propositions laid down in the aforementioned cases we allow this ground of the assessee.” 76) In that view of the matter, the Ld. departmental representative could not point out any decision contrary to the above finding of the coordinate bench or change in the facts and circumstances of the case, therefore respectfully following the decision of the coordinate bench in the appellant’s own case for assessment years 2007-08 and 2008-09 discussed supra, we delete the disallowance made by the Ld. assessing officer on account of expenditure of Rs. 3 6880 2598 towards the quarterly target on turnover discount on trade discount of Rs. 2 7744 7608 given to the dealers. In the result ground No. 15 of the appeal of the assessee is allowed.”

33.0.1 Thus, this issue is also covered in favour of the

Assessee by the Tribunal order for A.Ys. 2010-11 and 2011-12 as

well as the decision of the Hon’ble High Court in case of Mother

Dairy Ltd. (supra). We also find that the Tribunal has, in the appeals

for the assessment years 2009-10, 2012-13 and 2013-14, decided

89 ITA No.9187/Del/2019 Hero Motocorp Ltd. vs. ACIT the issue in favor of the assessee company following the aforesaid

order passed for assessment years 2010-11 and 2011-12.

33.0.2 Therefore, Ground Nos. 11 to 11.4 are allowed in

favour of the assessee.

34.0.0 The Ld. AR submitted that Ground Nos. 12 to 12.3

relate to the issue of TDS of on legal and professional charges

amounting to Rs.1.94 lacs. It was submitted that during the relevant

year, the assessee had incurred legal and professional expenses,

amounting to Rs.6,46,644/- on account of reimbursement of actual

expenses towards conveyance, air fare, out of pocket expenses, taxi

charges, lodging etc. incurred and claimed by various persons on

cost to cost basis. The details of said expenses were submitted

before the authorities. The Assessing Officer disallowed 30 % of the

aforesaid expenses amounting to Rs.1.94 lacs, invoking section

40(a)(ia), for the failure of the assessee to deduct tax at source there

from under section 194J of the Act.

34.0.1 The Ld. AR submitted that the aforesaid issue is

squarely covered in favour of the assessee by the decision of Delhi

Bench of Tribunal in the assessee’s own case for the Assessment

90 ITA No.9187/Del/2019 Hero Motocorp Ltd. vs. ACIT Years 2007-08 and 2008-09, wherein disallowance of expenditure on

account of re-imbursement of out-of-pocket expenses incurred by

professionals/vendors under section 40(a)(ia) was deleted on the

ground that same did not have any element of income in the hands

of the recipient. It would also submitted that similar disallowance

made in the draft assessment order, but subsequently deleted by the

Ld. DRP, was challenged in Revenue’s appeal for AY 2010-11 and

2011-12. However, the Tribunal upheld the order of the Ld. DRP and

confirmed the deletion of disallowance on account of non-deduction

of tax on reimbursement of expenses following the order for

assessment years 2007-08 and 2008-09. It was further pointed out

by the Ld. AR that following the order of the Tribunal for AYs 2010-

11 and 2011-12, the Tribunal has also decided the issue in favour of

the assessee in appellate orders passed for AYs 2009-10, 2012-13

and 2013-14.

35.0 The Ld. CIT - DR relied upon the Assessment Order

and Order of the TPO, but could not distinguish the decision of the

Tribunal.

91 ITA No.9187/Del/2019 Hero Motocorp Ltd. vs. ACIT 36.0.0 We have heard both the parties and perused the

material available on record. The Tribunal held in A.Ys. 2010-11 and

2011-12 as under:

“222) We have heard the rival contentions. We note that similar issue relating to disallowance relating to re-imbursement of professional expenses was deleted by the Tribunal in the assessee’s own case for assessment year 2007-08 which was followed in assessment year 2008-09. The relevant observations of the Tribunal for assessment year 2007-08 are as under:

“35.8. It is the case of the assessee that it had reimbursed the expenses incurred by various consultants and vendors on travelling and out of pocket expenses. It is also claimed that out of an amount of Rs. 10.68 lacs expenses to the extent of Rs. 6.01 lacs were made after verifying the supporting vouchers for claims raised by the vendors. Balance amount of Rs. 4.66 lacs were based on self certification. In our view such reimbursement of expenditure has no element of income embodied in it. Thus, we apply the following decisions wherein it is held that payer is not obliged to deduct tax at source from reimbursement of expenses: - United Hotels Ltd. Vs. ITO 93 TTJ 822; - Karnavati Co-op. Bank Ltd. Vs. DCIT 134 TTJ 486 (Ahd.). 35.9. Respectfully following the same, the ground is allowed in favour of the assessee.”

92 ITA No.9187/Del/2019 Hero Motocorp Ltd. vs. ACIT The Ld. departmental representative could not point out any change in the facts and circumstances of the case of the appellant as compared to the assessment year in which the above issue is decided by the coordinate bench. No other contrary decision was also pointed out therefore, respectfully following the decision of the coordinate bench in the appellant’s own case for the earlier years, We dismiss ground No.8 of the appeal of the revenue.”

36.0.1 In the present Assessment Year, the Assessing Officer

disallowed the aforesaid expenses, invoking section 40(a)(ia), for the

failure of the assessee to deduct tax at source there from under

section 194J of the Act. But, it is pertinent to note here that the

Assessing Officer did not doubt that the payment was made by

assessee towards reimbursement of expenses. It was still held that

assessee was liable to deduct tax at source under section 194J of

the Act. Thus, the issue is squarely covered by the order of the

Tribunal for A.Ys. 2010-11 and 2011-12. We also find that the

Tribunal has, in the appeals for the assessment years 2009-10,

2012-13 and 2013-14, decided the issue in favor of the assessee

company following the aforesaid order passed for assessment years

2010-11 and 2011-12.

93 ITA No.9187/Del/2019 Hero Motocorp Ltd. vs. ACIT 36.0.2 Therefore, Ground Nos. 12 to 12.3 are allowed in

favour of the assessee.

37.0.0 With respect to Ground Nos. 13 to 13.2 relating to

gains from sale of investments income treated as business income

amounting to Rs.319.87 crores, it was the submission of the Ld. AR

that the assessee invests surplus funds arising in the course of

business under various modes of investment like mutual

funds/PMS, shares, etc. The gains realized from sale of such various

instruments, amounting to Rs. 319.87 crores during the relevant

previous year, were disclosed under the head ‘capital gains.’ The

Assessing Officer held that, having regard to the magnitude/volume

of total turnover from sale of investments, the aforesaid income was

taxable under the head 'business income’.

37.0.1 The Ld. AR submitted that the aforesaid issue is

squarely covered in favour of the assessee by the decision of the

Delhi Bench of the Tribunal in the assessee’s own case for the AYs

2007-08 and 2008-09, wherein after considering the legal position

and intention of the assessee company, the Tribunal came to the

conclusion that income from sale of shares/mutual funds/PMS etc.

94 ITA No.9187/Del/2019 Hero Motocorp Ltd. vs. ACIT would be taxable as capital gains, instead of business income

brought to tax by the assessing officer on the basis that the assessee

(a) was not a trader in stock; (b) had no intention of holding the

shares as stock; (c) sales were effected by delivery (d) that the

department had itself in earlier years taxed such transactions under

the head capital gains. The Ld. AR pointed out that the Tribunal,

vide order dated 24/10/2006, passed in the assessee’s own case for

AY 2010-11 and 2011-12, reversed the action of AO in changing the

head of income and held that in cases where an assessee treats

investments made in shares as capital assets, in view of Circular

6/2016 of the Board, gains/profits on sale of such investments shall

be treated as capital gains and not income from

business/profession. It was further pointed out by the Ld. AR that

following the order of the Tribunal for AYs 2010-11 and 2011-12,

the Tribunal has also decided the issue in favour of the assessee in

appellate orders passed for AYs 2009-10, 2012-13 and 2013-14.

38.0 The Ld. CIT- DR relied upon the Assessment Order and

Order of the TPO, but could not distinguish the decision of the

Tribunal.

95 ITA No.9187/Del/2019 Hero Motocorp Ltd. vs. ACIT 39.0.0 We have heard both the parties and perused the

material available on record. The Tribunal for A.Ys. 2010-11 and

2011-12 held as under:

“99) We have heard the rival contentions. We have gone through the order passed by the Tribunal for the assessment year 2007- 08, which was followed in appeal order for AY 2008-09. The Tribunal in that year went through the entire facts, which are similar to the year under consideration, and the legal position before coming to the conclusion that the gains arising from investment of surplus funds in shares/mutual funds/PMS as part of cash management policy cannot lead to the conclusion that the appellant was carrying on business to bring to tax such income under the head “business” as against ‘capital gains’ offered by the appellant. The Ld. Departmental representative could not point out any change in the facts and circumstances of the case of the current assessment year compared to the assessment year for which the tribunal is decided in the appellant’s own case for earlier years. No other judicial precedent was also cited by which we could deviate from the order of the coordinate bench in the earlier years in the appellant’s own case. The relevant observations in the appeal order for AY 2007-08 are as under:

96 ITA No.9187/Del/2019 Hero Motocorp Ltd. vs. ACIT “65.20. The issue that emerges for consideration is whether the gains that arose to the assessee from investment in debt mutual funds/PMS/ shares are to be taxed under the head “business income” or under the head “capital gains”. .................... 65.28. Now, we proceed to analyze the facts of the present case in the light of the principles laid down by the Courts (Supra) for determining the nature of the transaction vis a vis capital gains vs. business income: Intention of the assessee at the time of the purchase of shares: 65.29. The business of the assessee is not to deal in shares and securities. The investment was made with a view to earn capital appreciation and to use the spare fund optimally instead of keeping it in the banks. For the year under appeal, the assessee earned dividend income of Rs.22.61 crores from investments held in shares and mutual funds. Treatment in the books of accounts: 65.30. It is an undisputed fact that the assessee had treated the transaction as investment in its books of accounts and not as stock in trade. The assesse has shown the investments in shares both at the beginning and closing of the year as an investment only and not as stock in trade. 65.31. The assessee has valued the investments at cost as per Accounting standard 13- Accounting for Investments and not in accordance with Accounting Standard –2 which deals with valuation of inventories.

97 ITA No.9187/Del/2019 Hero Motocorp Ltd. vs. ACIT

65.32. The assessee has been holding the securities/ shares as investments from year to year and consistently following the same method of accounting for the purpose of disclosure and valuation. This treatment by the assessee was accepted by the Revenue for the past years. 65.33. The assessee had earned income from both long term and short term capital gains which means the assessee has also held shares for a period of more than 12 months. Whether the investments are made out of borrowed funds 65.34. The investments were made from surplus funds of the assessee and there were no borrowings. The investments were made to optimally utilize the spare funds instead of keeping the same idle in the bank accounts. The investments were made in mutual funds (debt and liquid funds) and through portfolio management schemes/ IPOs. 65.35. The co-ordinate bench of the Delhi ITAT in the case of Narendra Gehlaut vs. JCIT [ITA No 1648/ Del/ 2010] held that despite borrowing, gains on shares assessable as Short term capital gains and not business profits. The decision is rendered considering the CBDT Circular No 4/2007 and various judicial precedents on the subject. Frequency of the transactions 65.36. Out of the total sale value of Rs 13,690.84 crores realized from the investments, an amount of Rs 12,330.33 crores relates to sale of short term debt mutual funds and liquid funds in which the transactions are effected on daily basis (i.e. surplus amounts are invested and the withdrawals are made in a short span depending on the

98 ITA No.9187/Del/2019 Hero Motocorp Ltd. vs. ACIT business needs of the assessee). These funds were invested mainly into money market instruments, short-term corporate deposits and treasury. Most schemes have a lock-in period of a maximum of three days to protect against procedural (primarily banking) glitches, and offer redemption proceeds within 24 hours. 65.37. The Assessing officer has brought the transaction to tax under the head “Business income” mainly on the ground that the volume of the transaction of such investments was high and the assessee is undertaking the trading of stocks and mutual funds regularly and systematically. However, we observe that there is not much frequency in sale/purchase of investments, from analysis carried out at page 526 of objections in Form 35A. It is not the case that the assessee has indulged in regular trading in shares on day to day basis. 65.38. The Mumbai Bench of the ITAT in the case of Janak S. Rangwala (11 SOT 627) observed that mere volume and magnitude of transaction will not alter the nature of transaction if the intention was to hold the shares as investment and not in stock in trade. Investments in mutual funds – 65.39. Out of the total income earned from mutual funds, almost 67.34% of the total income earned from investments made in mutual funds was for a period of more than one year. Investments in shares – 65.40. Investment in shares was primarily made either through PMS or under Initial Public Offer. Under PMS, the company advances funds to the Portfolio Manager, who in

99 ITA No.9187/Del/2019 Hero Motocorp Ltd. vs. ACIT turn makes investment in various shares. In substance the investments under PMS are similar to investment in mutual funds. The assessee, reiterated that it is only interested in the return on funds invested and does not act as a dealer/trader, so as to be regarded as being engaged in business activity. 65.41. In view of the above factual matrix it emerges that assessee is: (i) not a trader in stocks (ii) Intention of holding the shares as investment/ stock is manifest. (iii) Sales are effected by delivery. (iv) Department has itself in earlier years taxed such transactions under the head “Capital Gains”. 65.42. Considering these facts and applicable judicial precedents on the issue, we are of the considered opinion that the income in question can be taxed only under the head “Capital Gains” and not under the head business income. This ground of the assessee is allowed.” 100) In addition to the aforesaid observations, the appellant in this year also has benefit of the recent Circular No.6 of 2016 dated 29.2.2016 issued by the CBDT, wherein with an idea to reduce litigation on this issue of classification of the head of income arising from sale of shares / mutual funds, etc., the CBDT has opined that gains arising from sale of such shares/securities held for a period of more than 12 months and shown as capital gains by the assessee should not be disputed

100 ITA No.9187/Del/2019 Hero Motocorp Ltd. vs. ACIT by the assessing officer. Having regard to the aforesaid intent of the Circular where a consistent method has been followed by an assessee to treat the investment as on capital account corroborated with disclosure in balance sheet as investment, the same consistent stand should not be disputed by the assessing officer. It is also not disputed by the Ld. assessing officer that the capital gains arising on the various investments are held for less than 12 months and are not longterm capital gain. In view of the aforesaid reasons also, while respectfully following the appeal orders for AY 2007-08 and 2008-09, we reverse the action of the assessing officer in changing the head of income surplus arising from sale of shares/mutual funds, etc. therefore ground No. 20 of the appeal of the assessee is allowed.”

39.0.1 In the year under consideration, the issue is identical to

the AYs 2010- 11 and 2011-12 wherein the Tribunal allowed this

issue in favour of the assessee. We also find that the Tribunal has in

the appeals for the assessment years 2009-10, 2012-13 and 2013-

14, decided the issue in favor of the assessee company following the

aforesaid order passed for assessment years 2010-11 and 2011-12.

39.0.2 Therefore, Ground No. 13 to 13.2 are allowed in favour

of the assessee.

101 ITA No.9187/Del/2019 Hero Motocorp Ltd. vs. ACIT 40.0.0 The Ld. AR submitted that Ground Nos. 14 to

14.7 are relating to disallowance under Section 14A as per Rule 8D

amounting to 1.65 crores. It was submitted that during the relevant

previous year, the assessee company had earned dividend/interest

income of Rs. 14.49 crores from investments in shares, bonds, and

mutual funds, which was exempt under section

10(34)/10(35)/10(15)(iv)(h) of the Act. In view of the provisions of

section 14A of the Act, the assessee had suo moto disallowed

Rs.66.88 lacs in the return of income, being salary of two employees

of the company who were involved in treasury function along with

portfolio management fee. It was submitted that in the assessment

order, the Assessing Officer, did not accept the method of

disallowance computed by the assessee under section 14A and made

further disallowance of Rs. 1.65 crores invoking provisions of Rule

8D of the Rules after reducing the suo moto disallowance made by

the assessee in the return of income. It was submitted that in the

assessment order, the assessing officer, while computing `book

profit’, made an adjustment of Rs.1.65 crores computed under

102 ITA No.9187/Del/2019 Hero Motocorp Ltd. vs. ACIT section 14A read with Rule 8D of the Rules, without assigning any reason. 40.0.1 The Ld. AR submitted that as per section 14A(2), disallowance under that section as per Rule 8D can be made only if the Assessing Officer records satisfaction/finding as to the incorrectness in the method of disallowance followed by the assessee. In the absence of any satisfaction recorded in the assessment order, the disallowance as per Rule 8D needs to be deleted. Reliance in this regard was placed on the following decisions: - CIT vs. Walfort Share & Stock Brokers 326 ITR 1(SC) - Godrej & Boyce Manufacturing Company Ltd. VS. DCIT: 394 ITR 449(SC) - Maxopp Investment Ltd: 347 ITR 272 (Del.)- Affirmed by the Hon’ble Supreme Court in 402 ITR 640 - CIT v. Essar Teleholdings Ltd.: 401 ITR 445 (SC) - PCIT v. Vedanta Ltd.: [2019] 261 Taxman 179 (Delhi) - H.T. Media Limited v. PCIT: 399 ITR 576 (Del) - Eicher Motors Ltd. vs. CIT: 398 ITR 51 (Del) - PCIT vs. U.K. Paints (India) (P.) Ltd.: 392 ITR 552 (Del.) - CIT v. Abhishek Industries Ltd.: 380 ITR 652 (P&H) - CIT vs. I.P. Support Services India (P) Ltd: 378 ITR 240 (Del)

103 ITA No.9187/Del/2019 Hero Motocorp Ltd. vs. ACIT - Joint Investments (P.) Ltd. v. CIT: 372 ITR 694 (Del) - CIT v. Taikisha Engg. India Ltd.: 370 ITR 338 (Del.)

40.0.2 It was further submitted by the Ld. AR that even

otherwise, there is no nexus of expenses, like interest expenditure

and other administrative expenses with investments, warranting

disallowance u/s 14A.

40.0.3 On the issue of interest expenditure, the Ld. AR

submitted that the assessee is a cash rich company, which does not

borrow funds for making investment. The marginal interest

expenditure of Rs. 2.10 crores was incurred on other temporary

loans/dealers deposit, having nexus with main business function. It

was further argued that no direct nexus of interest expenditure with

investments or earning of dividend income was established by the

assessing officer, for which the initial burden was on the assessing

officer. The Ld. AR submitted that the assessee had substantial free

reserves of Rs 2,946.30 crores at the beginning of the relevant

previous year and had also generated substantial surplus/interest

free funds of Rs. 814.51 crores during the year, which were

sufficient to make net investment of Rs. 669.19 crores during the

104 ITA No.9187/Del/2019 Hero Motocorp Ltd. vs. ACIT year. In such circumstances, it is to be presumed that only interest free funds have been utilized for making investments during the year. Reference, in this regard, was made to the following decisions: - East India Pharmaceutical Works Ltd. v. CIT: 224 ITR 627 (SC) - CIT v. Reliance Industries Ltd.: 410 ITR 466 (SC) - CIT v. UTI Bank Ltd.: 215 Taxman 8 - The Supreme Court dismissed the revenue’s SLP in Civil Appeal No. 468/2014 - Woolcombers of India Ltd. v. CIT: 134 ITR 219 (Cal.) - PCIT v. Basti Sugar Mills Co. Ltd.: ITA No. 205 of 2018 (Del HC) - PCIT v. Reebok India Company: [2018] 259 Taxman 100 (Delhi) - Indian Explosives Ltd. V. CIT: 147 ITR 392 (Cal.) - Alkali & Chemicals Corp of India Ltd. v CIT: 161 ITR 820 (Cal) - CIT v Radico Khaitan Ltd : 274 ITR 354 (All) - CIT v Dhampur Sugar Mills Ltd : 274 ITR 370 (All) - CIT v. United Collieries Ltd. : 49 Taxman 227 (Cal) - CIT v. Enamour Investment Ltd.: 72 Taxman 370 (Cal) - CIT v. Caroline Investment Ltd.: 87 Taxman 238 (Cal) - CIT v. Kanoria Investment (P) Ltd.: 232 ITR 7 (Cal) - CIT vs. Hotel Savera: 239 ITR 795 (Mad) - Smt. Chanchal Katyal v. CIT: 298 ITR 182 (All.) - CIT v. Reliance Utilities and Power Ltd.: 313 ITR 340 (Bom) - CIT v. HDFC Bank Ltd.: 284 CTR 414 (Bom.) - Hero Honda Finlease Ltd vs. ACIT: ITA No. 3726 & 6102/Del/2012 (Del)

105 ITA No.9187/Del/2019 Hero Motocorp Ltd. vs. ACIT 40.0.4 Reliance was also placed on the following cases, wherein, the Courts have repeatedly held that interest expenditure cannot be disallowed under section 14A of the Act, where the assessee had sufficient surplus funds and there was no finding by the assessing officer of any direct nexus of borrowed funds with investments: - Godrej & Boyce Manufacturing Company Ltd. VS. DCIT: 394 ITR 449(SC) - Pr. CIT vs. GMM Pfaulder Ltd.: ITA No. 506 of 2017 dated 31.07.2017 (Guj) - CIT v. Max India Ltd.: 388 ITR 81 (P&H) - CIT vs. Suzlon Energy Ltd.:[2013] 215 Taxman 272 (Gujarat) - CIT vs. M/s. Ashok Commercial Enterprises: ITA No. No.2985 of 2009 (Bom) - Lubi Submeribles Ltd.: ITA No.868 of 2010 (Guj) - CIT vs. K. Raheja Corporation Pvt Ltd: ITA No.1260 of 2009 - Gujarat State Fertilizers and Chemicals Ltd : Tax Appeal No. 82 of 2013 (Guj HC) - Hero Honda Finlease Ltd vs. ACIT: ITA No. 3726/Del/2012 (Del) - Eimco Elecon (India) Ltd. v. Addl. CIT: 142 ITD 52 (Ahd.)

40.0.5 As regards Administrative expenses, the Ld. AR submitted that all the expenses, other than the suo-moto

106 ITA No.9187/Del/2019 Hero Motocorp Ltd. vs. ACIT disallowance by the assessee, related to main business function of

manufacturing of vehicles. The Ld. AR pointed out that the Tribunal

in the assessee's own case for the assessment years 2007-08 and

2008-09 had set aside the matter to the file of the Assessing Officer

to be decided afresh as per law, having regard to the satisfaction to

be recorded qua correctness of the suo-moto disallowance made by

the assessee in the return of income. It was submitted that the AO,

in the set aside proceedings for assessment year 2007-08, vide order

dated 30.10.2014 passed under section 254/143(3) of the Act did

not make any disallowance in respect of interest expenses since

there was no nexus between the income and such expenditure. The

AO, however, made disallowance of such administrative expenses

under section 14A in the proportion the total profit before tax bears

to tax free income, which was upheld by the Ld. CIT (A) vide order

dated 01.02.2018. The Ld. AR further submitted that the Tribunal,

vide consolidated order dated 24/10/2016 passed in ITA Nos.

1545/Del/2015 and 914/Del/2016, in assessee's own case for the

immediately preceding assessment years AY 2010-11 and 2011-12,

decided the issue in favor of the assessee on the ground that there

107 ITA No.9187/Del/2019 Hero Motocorp Ltd. vs. ACIT was no reason/satisfaction recorded by the Assessing Officer under

section 14A(2)/(3) of the Act while proceeding with disallowance

made under section 14A of the Act. The Tribunal also held that there

was nothing to demonstrate that any additional expenditure had

been incurred by the assessee for earning exempt income and that

the assessee had surplus funds/idle funds for making investment.

40.0.6 It was further pointed out by the Ld. AR that the

Tribunal, vide recent order dated 31.05.2018, while dismissing the

appeal of the Revenue for assessment year 2006-07, held that the

assessing officer is bound to record satisfaction qua the

incorrectness of the suo moto disallowance made by the assessee. It

was submitted that in the relevant assessment year also, the

assessing officer failed to record the mandatory satisfaction qua the

incorrectness of the suo moto disallowance made by the assessee in

the return of income.

40.0.7 Further, in all fairness, the Ld. Counsel pointed out

that the Tribunal, while deciding the issue in the assessment years

2009-10, 2012-13 and 2013-14 restored the matter to the file of the

assessing officer to decide the issue afresh after taking into

108 ITA No.9187/Del/2019 Hero Motocorp Ltd. vs. ACIT consideration the decision of the Hon’ble Supreme Court in the case

of Maxopp Investment Ltd. vs. CIT: 402 ITR 640.

40.0.8 The Ld. AR further submitted that insofar as

disallowance of Rs. 1.67 cores made under section 14A read with

Rule 8D of the Rules was concerned, it cannot be added while

computing book profits under section 115JB of the Act. It was

submitted that section 14A contained in Chapter IV of the Act

begins with the phrase – “For the purposes of computing the total

income under this Chapter…….”. Being so, section 14A has

application only for the purposes of Chapter-IV. Income under the

normal provisions of the Act is computed under the five heads

specified in section 14 of the Act. Provisions relating to computation

of income under different heads are contained in sections 14 to 59

forming part of Chapter IV of the Act. In other words, Chapter IV

provides for computation of income of an assessee under the normal

provisions of the Act. It was submitted that as a necessary corollary,

provisions of section 14A cannot be extended to any Chapter, other

than Chapter IV of the Act, i.e., while computing income under the

normal provisions. It was further submitted that Section 115JB

109 ITA No.9187/Del/2019 Hero Motocorp Ltd. vs. ACIT finds place under Chapter XII-B of the Act. Being so, provisions of

section 14A contained in Chapter IV cannot be imported and

incorporated under section 115JB, more so when clause (f) to

Explanation 1 to the said section contains no reference to section

14A of the Act. Reliance in this regard was placed on the decision of

the Hon’ble Delhi High Court in the case of PCIT v. Bhushan Steel

Ltd.: ITA No. 593/2015, dated 29.09.2015, wherein, the Hon’ble

Court upheld the decision of the Tribunal that disallowance under

section 14A read with Rule 8D could not be added while computing

book profits as per section 115JB and declined to frame question of

law. Further, reliance was also placed on the decision of the Special

Bench of the Delhi Tribunal in the case of ACIT vs. Vireet

Investments (P.) Ltd: 165 ITD 27 (Del Trib.), wherein the Tribunal

inter alia, placing reliance on the judgment of Hon’ble Delhi High

Court in the case of Bhushan Steel Ltd. (supra), likewise, held that

computation under clause (f) of Explanation 1 to section 115JB (2) of

the Act is to be made without resorting to computation as

contemplated under section 14A read with rule 8D of the Rules. The

Ld. AR also relied upon the following decisions:

110 ITA No.9187/Del/2019 Hero Motocorp Ltd. vs. ACIT - Quippo Telecom Infrastructure Ltd v. ACIT: ITA No.4931/Del/2010 (Del ITAT) - Beach Minerals Company (P.) Ltd. v. ACIT: ITA No. 2110/Mds/2014 (Chennai ITAT) - Shriram Capital Ltd v. DCIT (ITA. Nos.512 &513 /Mds/2015) (Chennai ITAT) - Scope Private Ltd. v. ACIT : ITA No. 8934/Mum./2010 - Reliance Industrial Infrastructure Ltd. v. ACIT: ITA Nos. 69 & 70/Mum/2009 - JCIT v. Reliance Capital Ltd.: ITA No. 3037/Mum/2008 - Bengal Finance and Investment (P) Ltd. v. CIT: ITA No. 5620/Mum/2010 - Essar Teleholdings Ltd v. DCIT : ITA 3850/Mum/2010 - Nahar Capital And Financial v. ACIT: ITA No. 1120/Chd/2011 - ACIT vs. Spray Engineering Devices Ltd: (2012) 53 SOT 70 (Chd.) (URO.) - GMM Pfaudler Ltd. v. JCIT : ITA Nos. 2627 & 2923/Ahd/2008 & 3280/Ahd/2010 - Cadila Healthcare Ltd. v. ACIT: 21 Taxmann.com 483 (Ahd.) - Reliance Petroproducts (P) Ltd. v. ACIT : ITA No. 2324/Ahd/2009 - Jindal Steel and Alloy Ltd. v. ACIT : ITA Nos. 961 & 962/Mum/2009

111 ITA No.9187/Del/2019 Hero Motocorp Ltd. vs. ACIT 40.0.9 In view of the above, the Ld. AR submitted that

applicability of provisions of section 14A is confined to computation

of tax liability under the five heads of income enumerated in section

4 under normal provisions contained in Chapter-IV of the Act. The

said section 14A cannot be extended and read into section 115JB

falling under Chapter XII-B of the Act.

41.0 The Ld. CIT - DR relied upon the Assessment Order and

Order of the TPO.

42.0.0 We have heard both the parties and perused the material

available on record. This Tribunal, in A.Ys. 2010-11 and 2011-12,

had deleted the disallowance under section 14A of the Act on the

ground of valid satisfaction not having been recorded by the

Assessing Officer. Similarly, in assessment year 2006-07 the

disallowance was deleted. However, we note that the aforesaid

decision was not followed by the Tribunal in the recent decision for

the assessment year 2013-14, wherein the issue was restored back

to the file of the AO to record satisfaction. The relevant observations

are as under:

“It is observed in the present case that the assessee has suo moto disallowed expenses under Section 14A of the Act. The

112 ITA No.9187/Del/2019 Hero Motocorp Ltd. vs. ACIT Hon’ble Apex Court in case of Maxopp Investment Ltd. vs. CIT (2018) 402 ITR 640 (SC) held that:

“40) We note from the facts in the State Bank of Patiala cases that the AO, while passing the assessment order, had already restricted the disallowance to the amount which was claimed as exempt income by applying the formula contained in Rule 8D of the Rules and holding that section 14A of the Act would be applicable. In spite of this exercise of apportionment of expenditure carried out by the AO, CIT (A) disallowed the entire deduction of expenditure. That view of the CIT (A) was clearly untenable and rightly set aside by the ITAT. Therefore, on facts, the Punjab and Haryana High Court has arrived at a correct conclusion by affirming the view of the ITAT, though we are not subscribing to the theory of dominant intention applied by the High Court. It is to be kept in mind that in those cases where shares are held as ‘stock-in-trade’, it becomes a business activity of the assessee to deal in those shares as a business proposition. Whether dividend is earned or not becomes immaterial. In fact, it would be a quirk of fate that when the investee company declared dividend, those shares are held by the assessee, though the assessee has to ultimately trade those shares by selling them to earn profits. The situation here is, therefore, different from the case like Maxopp Investment Ltd. where the assessee would continue to hold those shares as it wants to retain control over the investee company. In that case, whenever dividend is declared by the investee company that would necessarily be earned by the assessee and the assessee alone. Therefore, even at the time of investing into those shares, the assessee knows that it may generate dividend income as well and as and when such dividend income is

113 ITA No.9187/Del/2019 Hero Motocorp Ltd. vs. ACIT generated that would be earned by the assessee. In contrast, where the shares are held as stock-in-trade, this may not be necessarily a situation. The main purpose is to liquidate those shares whenever the share price goes up in order to earn profits. In the result, the appeals filed by the Revenue challenging the judgment of the Punjab and Haryana High Court in State Bank of Patiala also fail, though law in this respect has been clarified hereinabove. 41) Having regard to the language of Section 14A(2) of the Act, read with Rule 8D of the Rules, we also make it clear that before applying the theory of apportionment, the AO needs to record satisfaction that having regard to the kind of the assessee, suo moto disallowance under Section 14A was not correct. It will be in those cases where the assessee in his return has himself apportioned but the AO was not accepting the said apportionment. In that eventuality, it will have to record its satisfaction to this effect. Further, while recording such a satisfaction, nature of loan taken by the assessee for purchasing the shares/making the investment in shares is to be examined by the AO.” Though the Assessing Officer did not accept the method of disallowance computed by the assessee under section 14A and made further disallowance of Rs. 66,35,000/- invoking provisions of Rule 8D of the Income Tax Rules, 1962 after reducing the suo moto disallowance of Rs. 65.23 lakhs made by the assessee in the return of income. But the Assessing Officer has not given the proper calculation to that effect. Therefore, the matter is restored back to the file of the Assessing Officer. We direct the Assessing Officer that after taking cognizance of the

114 ITA No.9187/Del/2019 Hero Motocorp Ltd. vs. ACIT the Apex Court decision, pass the appropriate order. Needless to say, the assessee be given opportunity of hearing by following principles of natural justice. Therefore, Ground No. 16 to 16.7 are partly allowed for statistical purpose.”

42.0.2 Similarly, in assessment years 2009-10 and 2012-13

the matter was set aside. We have given a thoughtful consideration

to the issue. As noted above, this Tribunal had restored the issue of

computation of disallowance u/s 14A to the file of the Assessing

Officer in Assessment Years 2006-07, 2009-2010, 2012-13 as well

as in assessment year 2013-14 on identical facts. Therefore, it is our

considered opinion that ends of justice would be met if in this year

also, the issue is re-examined by the Assessing Officer in light of

judgment of the Hon’ble Apex Court in the case of Maxopp

Investment Ltd. vs. CIT (supra). Accordingly, the matter is restored

to the file of the Assessing Officer. We direct the Assessing Officer to

pass appropriate orders in accordance with law after duly

considering the judgment of the Hon’ble Apex Court in the case of

Maxopp Investment Ltd. vs. CIT (supra) after giving proper

opportunity to the assessee to present its case.

115 ITA No.9187/Del/2019 Hero Motocorp Ltd. vs. ACIT 42.0.3 As regard the addition of disallowance of Rs. 1.67

cores made under section 14A read with Rule 8D of the Rules while

computing book profits under section 115JB of the Act, we find that

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

order of the Hon’ble Delhi High Court in the case of PCIT v. Bhushan

Steel Ltd.: ITA No. 593/2015 and by the order of the Special Bench

of the Tribunal in the case of ACIT vs Vireet Investments (P.) Ltd:

165 ITD 27 (Del Trib.), accordingly the addition made in this regard

is deleted.

42.0.4 Therefore, Ground Nos. 14 to 14.7 are allowed

for statistical purposes.

43.0.0 It was submitted by the Ld. AR that Ground

No. 15 relates to depreciation on Model Fee amounting to Rs. 39.5

lacs. It was submitted that the assessee manufactures two-wheelers

under technical collaboration agreement entered into with Honda

Motor Co. Ltd., Japan (‘Honda’). In accordance with the above

collaboration agreement, the assessee pays model fee to Honda to

obtain design/know-how to manufacture a new model of two-

wheeler. The said expenditure is incurred prior to commencement of

116 ITA No.9187/Del/2019 Hero Motocorp Ltd. vs. ACIT production of the new model. It was submitted that the assessing

officer held that the expenditure incurred by the assessee towards

model fee is directly related to manufacture of new models of two-

wheelers and. therefore, needs to be attributed to the value of

closing stock of finished goods of two-wheelers. Accordingly, the

assessing officer, on proportionate basis, worked out a sum of

Rs.39,50,000/- out of depreciation on model fee debited to the profit

and loss account, as attributable to the value of closing stock and

made addition of the said amount to the income of assessee.

43.0.1 The Ld. AR submitted that the aforesaid issue is

squarely covered in favour of the assessee by the decision of the

Delhi Bench of the Tribunal in assessee’s own case for assessment

years 2010-11 and 2011-12 wherein following the order for

assessment year 2008-09, similar disallowance of depreciation on

model fee was deleted by the Tribunal on the ground that

expenditure was incurred on new model fees prior to commencement

of production of new models of two wheelers, and even otherwise

this exercise would be revenue neutral in a broader perspective as

the same adjustment would be required to be made to the opening

117 ITA No.9187/Del/2019 Hero Motocorp Ltd. vs. ACIT stock of finished goods for the year under consideration. It was

further pointed out by the Ld. AR that following the order of the

Tribunal for AYs 2010-11 and 2011-12, the Tribunal has also

decided the issue in favour of the assessee in appellate orders

passed for AYs 2009-10, 2012-13 and 2013-14.

44.0 The Ld. CIT-DR relied upon the Assessment

Order and Order of the TPO, but could not distinguish the decision

of the Tribunal.

45.0.0 We have heard both the parties and perused

the material available on record. This Tribunal had held in A.Ys.

2010-11 and 2011-12 as under:

“112) We have carefully considered the rival contentions. In absence of any change in the facts and circumstances of the case or any contrary decision, We have heard the rival contentions. We find that the similar issue was raised in the assessment order for AY 2008-09, which was decided in favour of the appellant by the Tribunal in appeal order for that year by observing as under-

“219. On careful consideration of above submissions of both the parties, we are of the view that if the closing stock of the year under consideration is to be varied, then similar adjustments would need to be made in the opening stock also and corresponding adjustments would also need to be

118 ITA No.9187/Del/2019 Hero Motocorp Ltd. vs. ACIT carried out in the opening stock of the succeeding year and if any addition is made in this regard, would be revenue neutral if seen in a macro perspective. From the orders of the authorities below, we clearly observe that the AO has not disputed the mode of valuation of inventory made by the assessee during preceding years and if any kind of adjustment is held to be attributable to the value of finished closing stock, then the said corresponding amount/adjustment would need to be made in the opening stock of the succeeding year and in a broader sense, such kind of adjustment/addition would be revenue neutral. On specific query from the Bench, the DR submitted that the treatment given by the revenue authorities on the issue in the preceding year is not known to him and in this situation, we hold that the / department has not disputed the claim of the assessee in the preceding years. 220. It is well accepted legal proposition that when the department has taken a particular stand on a particular issue, then the department cannot take a deviated stand on the issue in the succeeding year without any sound, justifiable and cogent reason. The department has not disputed the fact that impugned expenditure was incurred prior to commencement of production of new model and the same was neither incurred during the manufacturing of new model nor model fee expenditure is directly related to manufacture of new models. In this factual aspect and circumstances, we hold that the assessee incurred expenditure on new model fees prior to commencement of production of new models of two wheelers, even otherwise this exercise would be revenue neutral in a broader perspective as the same adjustment would be required to be done in the opening stock of finished goods for the year under consideration. More so, when the assessee has

119 ITA No.9187/Del/2019 Hero Motocorp Ltd. vs. ACIT followed a particular mode of accounting for this expenditure which was accepted by the Revenue, then the department cannot take a different stand in the succeeding year to make an addition in this regard. We are unable to see any valid ground to 'accept' a deviated stand of the Revenue on the issue, which in a broader sense, is revenue neutral, then no adjustment is called for in this regard. We hold that findings of the AO are not sustainable and we set aside the same. Hence, we allow ground no.58 to 58.1 of the assessee.” Accordingly, respectfully following the aforesaid decision, we decide the issue in favour of the appellant. Accordingly, the ground number 23 of appeal stands allowed.”

45.0.1 The facts of the present Assessment Year and the

earlier Assessment Year are not different. In the present year also ,

the expenditure was incurred on new model fees prior to

commencement of production of new models of two wheelers, thus,

this action is revenue neutral in a broader perspective as the same

adjustment would be required to be made to the opening stock of

finished goods for the year under consideration. Thus, this issue is

covered in favour of the assessee by the decision of the Tribunal for

A.Ys. 2010-11 and 2011-12. We also find that the Tribunal has in

the appeal for the assessment years 2009-10, 2012-13 and 2013-14,

decided the issue in favor of the assessee company following the

120 ITA No.9187/Del/2019 Hero Motocorp Ltd. vs. ACIT aforesaid order passed for assessment years 2010-11 and 2011-12.

45.0.2 Therefore, Ground No. 15 is allowed in favour of the

assessee.

46.0.0 Regarding Ground No. 16 relating to disallowance of

reimbursement of foreign travelling expenses to directors/employees

amounting to 7.38 crores, the Ld. AR submitted that the

disallowance was made on the ground of non-submission of

evidence/proof of actual expenses incurred by employees. It was

submitted that in the course of discharge of official duties, the

employees of the company are required to travel abroad and incur

incidental expenses in foreign currency like local conveyance,

boarding and lodging expenses, telephone expenses etc. The

assessee had introduced a policy fixing per diem allowance payable

to employees, depending upon the grade/category of the employees

and the place/country of travel. The employees are not entitled to

any extra allowance in the event the actual expenditure incurred by

the employee is in excess of such per diem allowance. It was

submitted that for payment of per diem allowance, as per policy, the

assessee does not require the expenses to be necessarily supported

121 ITA No.9187/Del/2019 Hero Motocorp Ltd. vs. ACIT /backed by bills considering the practical difficulties/impossibilities

in producing invoices for petty expenses like local conveyance,

telephone bills, etc. The employees are only required to submit

details of expenditure incurred in specified form, on basis of which

travel bill is settled. It was submitted that in the assessment order,

the AO made disallowance of Rs.7,38,27,378/- (comprising of Rs.

2,28,58,951/- in respect of Dharuhera, Gurgaon, Haridwar and

Neemrana plants and Rs. 5,09,68,426/- in respect of head office

expenses) out of expenditure incurred towards re-imbursement of

foreign travel expenses incurred by employees, on the ground that

declaration furnished by the employees was not a sufficient evidence

to establish the incurrence of actual expenses, which were required

to be supported with bills/invoices of factual expenditure incurred

by the employees.

46.0.1 The Ld. AR submitted that the aforesaid issue is

squarely covered in favour of the assessee by the decision of Delhi

Bench of the Tribunal in the assessee's own case for the AYs 2007-

08 and 2008-09, wherein the Tribunal held that disallowance

cannot be made merely on the basis that vouchers were not

122 ITA No.9187/Del/2019 Hero Motocorp Ltd. vs. ACIT produced by the employees, which has been reaffirmed by the

Tribunal in the order dated 24.10.2016 passed for the assessment

years 2010-11 and 2011-12. It was further pointed out by the Ld.

AR that following the order of the Tribunal for AYs 2010-11 and

2011-12, the Tribunal has also decided the issue in favour of the

assessee in appellate orders passed for AY 2009-10, 2012-13 and

2013-14.

47.0 The Ld. CIT-DR relied upon the Assessment Order

and Order of the TPO, but could not distinguish the decision of the

Tribunal.

48.0.0 We have heard both the parties and have perused

the material available on record. The Tribunal, in assessee’s own

case, has held in A.Ys. 2010-11 and 2011-12 as under:-

“226) We have heard the rival contentions. We note that similar issue relating to disallowance relating to re-imbursement of foreign travelling expenses to directors/employees was deleted by the Tribunal in the assessee’s own case for assessment year 2007-08 which was followed in assessment year 2008-09. The relevant observations of the Tribunal for assessment year 2007- 08 are as under:

123 ITA No.9187/Del/2019 Hero Motocorp Ltd. vs. ACIT “51.15.The assessing officer in this case has not doubted the fact that employees/ directors of the company travelled abroad and the fact that they have incurred incidental expenses in foreign currency. The reason for disallowance is that employees have not furnished to the assessee evidence in support of the fact that they have incurred conveyance, boarding and lodging expenses etc. When reasonable amount of daily allowance is fixed as per the rules of the company and when these D.A. rules are followed by the assessee, in our view, the incurring of expenditure by the employees is not to be doubted. Even in cases where officers of the government of India travel abroad, daily allowance is given and vouchers for such expenditure are not insisted because of practical difficulties in submitting bills/ vouchers of petty expenses. In such circumstances, what is to be examined by the assessing officer is the reasonableness of the expenses incurred as compared to the general rates of expenses and allow the same. The assessee submits that the fixed per diem allowance payable to employees depending on the grade is reasonable. When such rates are reasonable the question of disallowance does not arise unless the revenue demonstrates that the rates are excessive. In this case it is not that the expenses are not incurred for the stated purpose nor is it that the rates are unreasonable. The disallowance in question in our view on the sole ground that vouchers are not produced by the employees cannot be sustained. In the result this ground of the assessee is allowed.” The Ld. departmental representative could not point out any change in the facts and circumstances of the case of the appellant as compared to the assessment year in which the

124 ITA No.9187/Del/2019 Hero Motocorp Ltd. vs. ACIT above issue is decided by the coordinate bench. No other contrary decision was also pointed out therefore, respectfully following the decision of the coordinate bench in the appellant’s own case for the earlier years, we dismiss ground No. 9 of the appeal of the revenue.”

48.0.1 Thus, this Tribunal in A.Ys. 2010-11 and 2011-12

and earlier years has held that disallowance cannot be made merely

on the basis that vouchers were not produced by the employees. We

also find that the Tribunal has in the appeal for the assessment

years 2009-10, 2012-13 and 2013-14, decided the issue in favor of

the assessee company following the aforesaid order passed for

assessment years 2010-11 and 2011-12. As, the facts have not

changed in this year as well, therefore, the issue is squarely covered

by the decision of the Tribunal for earlier Assessment Years.

48.0.2 Therefore, Ground No. 16 is allowed in favour

of the assessee.

49.0.0 The Ld. AR submitted that Ground Nos. 17 to

17.2 relate to disallowance of Royalty Expenditure amounting to

Rs.95.61 crores on the ground of being capital in nature. It was

submitted that the assessee company has been manufacturing two

125 ITA No.9187/Del/2019 Hero Motocorp Ltd. vs. ACIT wheelers in India since 1985 on the basis of technology provided by

M/s. Honda Motors Co. Ltd., Japan ("HM") and has so far launched

various models of motorcycles by obtaining the technology provided

by that company. However, during AY 2011-12, on account of

commercial considerations, HM decided to exit the joint venture.

Consequently, a Memorandum of Understanding (‘MOU’) dated

16.12.2010 was entered into between the assessee and HM and the

license agreement was mutually terminated. It was further

submitted that in terms of the MOU, two new license agreements

dated 06.07.2011 and 08.01.2011, License 'A' agreement and

License ‘B’ agreement, were entered into between the assessee and

HM. It was submitted that in terms of the license agreement for

License ‘A’ Products, the assessee received the following rights: (i) Rights to use the technology, design and drawings for manufacture of 18 specific models of motor cycles till perpetuity (ii) Right to make modifications to the technology, design and drawings (iii) Unrestricted right to export such products in the overseas markets.

126 ITA No.9187/Del/2019 Hero Motocorp Ltd. vs. ACIT 49.0.1 It was further submitted by the Ld. AR that the

assessee, subsequently had entered into a new License Agreement

(for License B products) dated 22.01.2011 for the purpose of

providing the assessee with transitional support and under the said

agreement the assessee was provided right to manufacture 4 new

models (namely (a) Passion XPRO, (b) Ignitor, (c) Maestro and d)

Impulse) using the technology provided by HM on payment of lump

sum model fee and royalty. Since the right to manufacture the

aforesaid 4 models of motorcycles was not included in the License A

agreement, therefore, in order to be able to manufacture the said

models of motorcycles the assessee had to enter into separate

agreement for manufacture of License ‘B’ products. The Ld. AR

submitted that the assessee, after separation from Honda Motors

Corporation, Japan, was not in a position to independently develop

and launch new models of motorcycles immediately. Therefore, in

order to survive in a highly competitive market, the assessee

requested the associated enterprise to provide right and technology

for manufacture of four new models of motor cycles. Accordingly, the

assessee and the associated enterprise entered into license B

127 ITA No.9187/Del/2019 Hero Motocorp Ltd. vs. ACIT agreement allowing the assessee the right to manufacture a) Passion XPRO, (b) Ignitor, (c) Maestro and d) Impulse models of motorcycles. 49.0.2 It was further submitted by the Ld. AR that during the relevant previous year, in terms of the aforesaid license B agreement, the assessee booked Rs. 127.48 crores as royalty, to Honda, which was claimed revenue deduction. The aforesaid payments were made after deducting tax at source @10% being the rate of tax applicable in relation to payment of royalty and fees for technical services under Article 12 of Indo-Japan DTAA. It was further submitted that the AO treated the aforesaid expenditure incurred by way of royalty paid to Honda as capital expenditure, by following the orders for the earlier year(s) on the ground that: • The assessee had received benefit of enduring nature inasmuch as exclusive right was available with the assessee to manufacture and sell the products within the territory of India; • The assessee was entitled to continued use of information supplied by Honda even after termination of agreement; • The benefit under the agreement had a degree of perpetuity since the agreement was renewed and was extended year after year and did not, therefore, remain a short term agreement. • The assessee had acquired asset in the nature of intellectual property rights and patents from Honda.

128 ITA No.9187/Del/2019 Hero Motocorp Ltd. vs. ACIT 49.0.3 The Ld. AR submitted that the assessing officer

treated the aforesaid expenditure incurred by way of royalty paid to

Honda as capital expenditure on the ground that the assessee had

received benefit of enduring nature and had accordingly, disallowed

Rs. 95.61 crores out of total expenditure of Rs. 127.48 crores on

account of royalty after allowing depreciation @ 25% thereof,

amounting to Rs. 31.87 crores.

49.0.4 The Ld. AR submitted that Royalty was not capital

expenditure. There are no ownership rights but only limited right to

use in License B Products Agreement. It was submitted that during

the currency of the agreement, the assessee only had a limited right

to use the technology of Honda. Ownership/proprietary rights in the

technical know-how continued to vest in Honda and the assessee

was not authorized to transfer, assign or convey the know-

how/technical information to any third party as the assessee only

acquired limited right to use and exploit the know-how. As regards

to Non-exclusive license, the Ld. AR submitted that the said right

vested with the assessee was not exclusive in as much as, in terms

of Article 2 and article 9 of License B agreement, Honda reserved the

129 ITA No.9187/Del/2019 Hero Motocorp Ltd. vs. ACIT right to provide technology to its affiliates to manufacture

motorcycles. The Ld. AR further submitted that aforesaid limited

rights were available to the assessee and the fact of such rights

being not exclusive can be gathered from the following clauses of the

agreement:-

i) ARTCLE 2 - Grant of License and Exclusivity ii) ARTICLE 3-No sublicense iii) ARTICLE 9 - Use and Disclosure of Technical Information iv) ARTICLE 13 - Terms of agreement (upto 30.06.2007) v) ARTICLE 21/22 Termination/Effect of Expiry and Termination vi) ARTICLE 25/26 Certain Prohibitions/Maintenance of Secrecy 49.0.5 The Ld. AR further submitted that payment under the

agreement is allowable revenue expenditure. It was submitted that

as per the various clauses of the agreement, it would be appreciated

that the royalty payable to Honda is only for the purpose of use of

technical assistance in the manufacture and sale of products and

the assessee has not acquired any capital asset, much less in the

nature of intellectual property rights or patents belonging to Honda,

which, in unequivocal terms, as provided in the agreement vested in

130 ITA No.9187/Del/2019 Hero Motocorp Ltd. vs. ACIT absolute ownership of Honda at all times. Further, on perusal of

Article 22 of the License B product agreement, it would be

appreciated that on termination/expiration of the agreement, the

assessee was required to return all the documents and materials to

Honda and promptly discontinue the use of trademarks licensed by

Honda and the assessee did not have any right to continue using

such know-how. It was submitted that, thus, it is clear that there is

no explicit or implied intention to transfer or create ownership in the

technical knowhow/ technical information to the assessee. On the

contrary, it is unequivocally agreed to between the parties that the

know-how should at all times remain the property of Honda. It was

further submitted that the conditions in the agreement as to non-

assignability, confidentiality and the secrecy of the know-how also

indicate that the assessee had merely obtained the right to use the

know-how during the currency of the agreement. Reliance in this

regard was placed on the following decisions wherein it has been

held that where payment is made to simply use the technical know-

how/knowledge provided by the foreign collaborator as opposed to

131 ITA No.9187/Del/2019 Hero Motocorp Ltd. vs. ACIT acquisition of ownership rights therein, the payment made would be regarded as revenue expenditure: • CIT v. Ciba India Ltd.: 69 ITR 692 (SC) • CIT vs. British India Corp. Ltd. [1987] 165 ITR 51 (SC) • Alembic Chemical Works Co. Ltd. v. CIT: 177 ITR 377 (SC) • Shriram Refrigeration Industries Ltd. v. CIT: 127 ITR 746 (Del HC) • Triveni Engineering Works Ltd. vs. CIT : 136 ITR 340 (Del) • Addl. CIT vs. Shama Engine Valves Ltd. : 138 ITR 217 (Del) • CIT vs. Bhai Sunder Dass & Sons P. Ltd. : 158 ITR 195 (Del) • CIT vs. Lumax Industries Ltd. : 173 Taxman 390 (Del) • Shriram Pistons & Rings Ltd. vs. CIT : 171 Taxman 81 (Del) • CIT vs. Shri Ram Pistons and Rings Ltd. : 220 CTR 404 (Del) • Goodyear India Ltd. vs. ITO : 73 ITD 189 (Del)(TM) • ITO vs. Shivani Locks : 118 TTJ 467 (Del) • Climate Systems India Ltd. vs. CIT: 319 ITR 113 (Del-HC) • CIT vs. Sharda Motor Industries Ltd: 319 ITR 109 (Del-HC) • CIT vs. Essel Propack 325 ITR 185 (Bom) • CIT v. Modi Revlon (P) Ltd: (2012) 9 TMI 48 (Del.) • Mafatlal Denim Ltd. V. DCIT: 2011 (12) TMI 351 (Mum.) • Climate Systems India Ltd. vs. CIT: 319 ITR 113 (Del-HC) • Goodyear India Ltd. vs. ITO : 73 ITD 189 (Del)(TM) • CIT v. Avery India Ltd. 207 ITR 813 (Cal) • CIT v. Bhai Sunder Dass & Sons P. Ltd.:158 ITR 195 (Del)

132 ITA No.9187/Del/2019 Hero Motocorp Ltd. vs. ACIT • CIT v. DCM Ltd.: ITA No. 87-89/1992 (Del.)(HC) • CIT v. Denso India P. Ltd.: ITA 16/2008 (Del.) (HC) • CIT v. Eicher Motors Ltd.: 293 ITR 464 (MP)(Indore Bench)

49.0.6 The Ld. AR submitted that since no proprietary rights in the know-how vested in the assessee and the assessee being a mere licensee with limited rights to use the technical assistance during the currency of the agreement, there is no explicit or implied intention to transfer or create ownership in the technical know-how /technical information in the assessee. It was argued that the expenditure by way of royalty incurred by the assessee was allowable revenue deduction since-

• payment was made for limited license to use the know-how provided by Honda, as the proprietary and ownership rights in the same continued to remain vested with Honda at all times and, therefore, there was no absolute parting of know-how in favour of the assessee resulting in acquisition of any asset, • no benefit of enduring nature in the capital field accrued to the assessee, even if the license to manufacture and sell products in India is assumed to be exclusive, except for grant of license to HMSI,

133 ITA No.9187/Del/2019 Hero Motocorp Ltd. vs. ACIT • the subject payment made did not cover consideration paid for setting up of the manufacturing facility in India, • On termination of the agreement, the assessee was required to return all the documents and materials to Honda and promptly discontinue the use of trademarks licensed by Honda and the assessee did not have any right to continue using such know- how.

49.0.7 The Ld. AR further pointed out that the aforesaid

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

Tribunal in assessment years 2000-01, 2001-02, 2002-03, 2006-07,

2007-08, 2008-09, 2009-10 and 2010-11 wherein the Tribunal has

held that annual payment of royalty was allowable revenue

expenditure. It was submitted that the aforesaid orders of the

Tribunal relating to assessment years 2000-01 to 2002-03 have

been affirmed by the Hon’ble Delhi High Court in the assessee’s own

case reported as CIT v. Hero Honda Motors Ltd.: 372 ITR 481.48. It

was also submitted that in orders passed by the Tribunal for

assessment years 2011-12 to 2013-14, the royalty paid in terms of

license B agreement has been held to be an allowable revenue

deduction.

134 ITA No.9187/Del/2019 Hero Motocorp Ltd. vs. ACIT 50.0 The Ld. CIT - DR relied upon the Assessment Order

and Order of the TPO but could not distinguish the order of the

Tribunal for A.Ys. 2010-11 and 2011-12.

51.0.0 We have heard both the parties and perused the

material available on record. This Tribunal, on identical issue, has

for A.Y.s 2010-11 and 2011-12 held as under:

“95) We have heard the rival contentions. We have gone through the orders in the assessee’s case for the earlier assessment years as was pointed out by the Ld. Counsel. Both the parties admitted before us that there is no change in the facts and circumstances of the case as well as the agreement under which the payments have been made by the assessee. The Ld. departmental representative also could not point out any other judicial precedent on this issue of the higher forum. In this event we are duty bound to follow the order of the coordinate bench passed in the case of the assessee for the beer years. For the sake brevity, we reproduce hereunder the finding in the appeal order for AY 2007-08, which was followed in the order for AY 2008-09 as under:

“57. The issue whether the expenditure in question is in the capital field or the revenue field has been decided in favour of the assessee by the ITAT in assessee’s own case for earlier assessment years 2000-01, 2001-02, 2002-03 and 2006-07. The ITAT Delhi Bench ‘C’ in assessee’s own case

135 ITA No.9187/Del/2019 Hero Motocorp Ltd. vs. ACIT for A.Y. 2006-07 in ITA no. 5130/Del/2010 vide order dated 23- 11-2012 has held that the annual payment of royalty was a revenue expenditure. In doing so the ITAT has relied on various judicial pronouncements including the decision of Jurisdictional High Court in the case of Climate Systems India Ltd. and Sharda Motors Industrial Ltd. No change in facts and circumstances has been pointed out by the ld. DR. Therefore, respectfully following the same, we allow this ground of the assessee.” Therefore respectfully following the above decisions of the Tribunal and High Court in the assessee’s own case, we reverse the order of the Ld. Assessing officer in holding the above 3 payments as capital expenditure. In the result ground No. 19 of the appeal of the assessee is allowed.”

51.0.1 We also find that the Tribunal has in the appeal for

the assessment years 2009-10, 2012-13 and 2013-14, decided the

issue in favor of the assessee company by following the aforesaid

order passed for assessment years 2010-11 and 2011-12. The

Tribunal, in its order passed for AY 2012-13, after examining the

terms of license B agreement, held the royalty paid to be an

allowable revenue deduction. The relevant observations of the co-

ordinate Bench of the Tribunal are as under:

“It is pertinent to note that no proprietary rights in the know how vested in the assessee, the assessee being a mere licensee with

136 ITA No.9187/Del/2019 Hero Motocorp Ltd. vs. ACIT limited rights to use the technical assistance during the currency of the agreement, there is no explicit or implied intention to transfer or create ownership in the technical know-how /technical information in the assessee. In view of the aforesaid, expenditure by way of royalty, technical guidance fee and model fees incurred by the assessee was allowable revenue deduction as held in the decision given by the Tribunal for A.Ys. 2010-11 and 2011-12. The issue is squarely covered by the said decision. Therefore, Ground No. 32 to 32.6 are allowed.”

51.0.2 Respectfully following the orders passed by the

Tribunal in earlier years, in assessment years 2011-12 to 2013-14,

the royalty paid in terms of license B agreement is held to be an

allowable revenue deduction.

51.0.3 Therefore, Ground Nos. 17 to 17.2 is allowed in

favour of the assessee.

52.0.0 Ground Nos. 18 to 18.6 are relating to disallowance

u/s 80IC on account of profit attributable to the brand value and

marketing network amounting to Rs. 173.41 crores. It was

submitted by the Ld. AR that in the business of manufacturing and

selling two-wheelers, including goods manufactured at eligible unit,

the assessee was required to incur marketing expenses. The said

137 ITA No.9187/Del/2019 Hero Motocorp Ltd. vs. ACIT expenses were incurred by the Head Office at Delhi. The common

expenses, including advertisement/brand creation expenses, etc.

incurred at Head Office were allocated to various manufacturing

units of the assessee-company, including the unit eligible for

deduction under section 80IC, on a rational and scientific basis. The

expenses on brand /advertisement, etc. incurred at Head Office were

duly allocated to manufacturing units and have been deducted,

while computing profits of the unit eligible for claim of deduction

under section 80IC of the Act. It was further submitted that the

price realized on sale of the products, i.e., two wheelers, is credited

to the profit and loss account and direct and indirect expenses,

including advertisement expenses, incurred in relation to sale of the

products are reduced there from for purpose of computing profits of

the eligible unit and corresponding claim of deduction under section

80IC of the Act. It was submitted that the AO held that profits are

derived by the assessee-company on account of three assets, viz., (1)

manufacturing assets, (2) brand assets and (3) marketing assets

whereas deduction under section 80IC is available only on profits

derived from business of manufacturing of specified articles or

138 ITA No.9187/Del/2019 Hero Motocorp Ltd. vs. ACIT things. It was further observed by the AO that the manufacturing

and marketing activities were carried out at Head Office and,

therefore, the brand developed was not owned by the eligible unit,

which came into existence much later than the existence of the

assessee-company as a whole. Thus, as per the AO, part of the

profits earned by eligible unit should have been attributed to

advertisement/marketing activities carried out by head office. In

order to attribute profits to marketing/advertisement activities, the

AO computed rate of net profit for the financial year 1984-85, being

the first year of operations of the assessee company, at 6.85% on an

arbitrary basis and applied the same to arrive at the profit solely

attributable to the manufacturing activity of Haridwar unit. It was

submitted that on the basis of above, the assessing officer computed

profit attributable to the manufacturing activity at Rs. 213.15

crores. Accordingly, deduction under section 80IC qua remaining

profit of Rs. 173.41 crores, allegedly attributable to marketing and

advertisement activity was disallowed.

52.0.1 The Ld. AR submitted that the issue is squarely

covered in favor of the assessee by order dated 24.10.2016 passed

139 ITA No.9187/Del/2019 Hero Motocorp Ltd. vs. ACIT by the Tribunal for assessment years, i.e. AY 2010-11 and AY 2011 -

12, wherein identical disallowance made by the AO has been

deleted. It was submitted that the Tribunal, in coming to the

aforesaid discussion, reiterated that the head office is not a separate

profit centre and, therefore, no profit is to be separately attributed to

such activity. It further observed that, for the purpose of working

out eligible deduction under section 80-IC of the Act, actual

expenses incurred at the head office are to be allocated between

various profit centers on a rational and scientific basis. It was

further pointed out by the Ld. AR that following the order of the

Tribunal for AYs 2010-11 and 2011-12, the Tribunal has also

decided the issue in favour of the assessee in appellate orders

passed for AYs 2009-10, 2012-13 and 2013-14.

53.0 The Ld. CIT - DR relied upon the Assessment Order and

Order of the TPO, but could not distinguish the decision of the

Tribunal.

54.0.0 We have heard both the parties and perused the

material available on record. The Tribunal in A.Ys. 2010-11 and

2011-12 has held as under:

140 ITA No.9187/Del/2019 Hero Motocorp Ltd. vs. ACIT “154) We have heard the rival contentions. We have already discussed the aforesaid issue at length while disposing the ground of appeal No. 31 to 31.2 supra, wherein we have dealt with that head office is a separate cost centre and expenses incurred thereat needs to be allocated to various profit centers/manufacturing units on a rational and scientific basis, without any element of profit/markup. The issue raised by the assessing officer in the present ground of appeal is categorically similar to that raised in the aforesaid ground. Accordingly following our findings stated above, we reverse the action of the assessing officer and delete the disallowance made under section 80IC. Accordingly, the ground No. 33 of appeal is allowed.”

54.0.1 Thus, the issue is squarely covered in favor of the

assessee by the order dated 24.10.2016 passed by the Tribunal for

immediately preceding assessment years, i.e. AY 2010-11 and AY

2011 -12, wherein identical disallowance made by the AO has been

deleted. The Tribunal, in coming to the aforesaid discussion,

reiterated that the head office is not a separate profit centre and,

therefore, no profit is to be separately attributed to such activity. It

further observed that, for the purpose of working out eligible

deduction under section 80-IC of the Act, actual expenses incurred

141 ITA No.9187/Del/2019 Hero Motocorp Ltd. vs. ACIT at the head office are to be allocated between various profit centers

on a rational and scientific basis. We also find that the Tribunal

has, in the appeal for the assessment years 2009-10, 2012-13 and

2013-14, decided the issue in favor of the assessee company

following the aforesaid order passed for assessment years 2010-11

and 2011-12.

54.0.2 Therefore, Ground Nos. 18 to 18.6 are allowed in

favour of the assessee.

55.0.0 Ground Nos. 19 to 19.1 are relating to disallowance

u/s 80IC on account of other income amounting to 1.17 crores on

the ground that such incomes were not derived from the business of

manufacture of specified articles or things. During the relevant

previous year, the eligible unit at Haridwar earned the following

other incomes, which were credited in the Profit and Loss Account of

that unit:

142 ITA No.9187/Del/2019 Hero Motocorp Ltd. vs. ACIT S.No Name /Type of Other Amount Income (in Rs.) 1 Interest on loan given at subsidized rates to the 16,06,615 employees 2 Interest on loan provided for working capital support to 1,01,15,207 vendors TOTAL 1,17,21,822

55.0.1 The Ld. AR submitted that in the return of

income, the assessee claimed deduction under section 80IC on the

aforesaid ‘other incomes’ since the said receipts had direct and

immediate nexus with the business of manufacturing and selling of

specific articles or things. The assessing officer, without considering

the nature of each of the aforesaid receipts, held that the aforesaid

incomes were not derived from the business of manufacturing of

articles or things and were, therefore, taxable under the head

“income from other sources”. Accordingly, the assessing officer

disallowed deduction under section 80IC by an amount of Rs

1,17,21,822/-.

143 ITA No.9187/Del/2019 Hero Motocorp Ltd. vs. ACIT 55.0.2 The Ld. AR submitted that similar disallowance

made by the assessing officer in preceding assessment years, i.e. AY

2010-11 and AY 2011-12 has been deleted by the Tribunal vide

consolidated order dated 24.10.2016. The Tribunal, after examining

the nature of the aforesaid incomes, held that other incomes in the

nature of Interest on loan to employees, interest on loan to vendors

for working capital support, freight recovery, sundry sales, cash

discounting from vendors and exchange fluctuation gain, etc. earned

by a unit eligible for deduction under Section 80IC of the Act shall

be considered as incidental to the activity of carrying out

manufacturing and were, thus, eligible for deduction under that

section. It was accordingly submitted that the aforesaid issue stands

squarely covered in favour of the assessee. It was further pointed

out by the Ld. AR that following the order of the Tribunal for AYs

2010-11 and 2011-12, the Tribunal has also decided the issue in

favour of the assessee in appellate orders passed for AYs 2009-10,

2012-13 and 2013-14.

144 ITA No.9187/Del/2019 Hero Motocorp Ltd. vs. ACIT 55.0.3 The Ld. CIT - DR relied upon the Assessment Order

and Order of the TPO, but could not distinguish the decision of the

Tribunal.

56.0.0 We have heard both the parties and perused the

material available on record. The Tribunal in A.Ys. 2010-11 and

2011-12 has held as under:

“158) We have heard the rival contentions. Our findings on the various issues raised by the assessing officer are given in seriatim hereunder:

145 ITA No.9187/Del/2019 Hero Motocorp Ltd. vs. ACIT operations carried on by the eligible unit. The appellant is engaged in the business of manufacturing two-wheelers and is not engaged in the activity of giving loans and advances to earn interest income. It is not the case of appellant or the assessing officer that surplus funds were given to the employees to earn interest income. The loans/advances to employees under consideration was a measure of incentive / perquisites to the employees involved in carrying on the business of manufacturing. The source of such income is, thus, not the activity of giving loan, but benefit extended to employees engaged in the business. The first-degree nexus of such income, in our view, is the eligible business carried on by the appellant. Therefore, such income would be eligible for deduction u/s 80IC of the Act. The action of the assessing officer on this account is thus reversed.

……………………………………………………………………….

Accordingly the action of the assessing officer on this ground is reversed and we hold that assessee is eligible for deduction

146 ITA No.9187/Del/2019 Hero Motocorp Ltd. vs. ACIT under section 80 IC of the income tax act on interest on loans given at subsidized rates to the employees of Rs. 162975/–, interest on loans provided for working capital support to vendors Rs. 6626854/–, freight recovery from customer Rs. 935418395/–, sundry sales of Rs. 924103150/–, cash discount received from the vendor is Rs.56732831/– and exchange fluctuation of Rs. 24167060/–. In the result ground No. 34 of the appeal of the assessee is partly allowed.”

56.0.1 Similar disallowance made by the assessing officer

in assessment years 2010-11 and 2011-12 has been deleted by the

Tribunal vide consolidated order dated 24.10.2016. The Tribunal,

after examining the nature of the aforesaid incomes, held that other

incomes in the nature of interest on loan to employees, interest on

loan to vendors for working capital support earned by a unit eligible

for deduction under Section 80IC of the Act shall be considered as

incidental to the activity of carrying out manufacturing and, thus,

eligible for deduction under that section. Accordingly, the aforesaid

issue stands squarely covered in favour of the assessee. We also

find that the Tribunal has in the appeal for the assessment years

2009-10, 2012-13 and 2013-14, decided the issue in favor of the

147 ITA No.9187/Del/2019 Hero Motocorp Ltd. vs. ACIT assessee company following the aforesaid order passed for

assessment years 2010-11 and 2011-12.

56.0.2 Therefore, Ground Nos. 19 to 19.1 are allowed in

favour of the assessee.

57.0.0 Ground Nos. 20 to 20.3 relate to allowability of

weighted deduction of Rs.74,31,13,902/- under section 35(2AB) of

the Act with respect to scientific research and development expenses

incurred during the year. The Ld. AR submitted that the aforesaid

claim of weighted deduction has been disallowed in the assessment

order on the ground that the said claim was not raised by the

assessee in the return of income filed for the relevant year, which is

being disputed by the assessee. The Ld. AR submitted that the facts

relating to the aforesaid claim are as under: 1. That the assessee had set up a dedicated in-house research

and development (“R&D”) centre at 69 K.M., Stone, Delhi Jaipur

Highway, Dharuhera, Rewari, Haryana which was established in the

year 1987, purely for the purposes of research activities. Having

regard to substantial increase in R&D expenses, the assessee

applied for recognition of the said R&D centre before the Department

148 ITA No.9187/Del/2019 Hero Motocorp Ltd. vs. ACIT of Scientific and Industrial Research (‘DSIR’) vide application dated

29.12.2014. The DSIR, after considering the application and

verifying the R&D activities carried on by the assessee in the past

and those proposed in future, granted recognition and registration

vide letter dated 18.03.2015 for the period from 26.02.2015 to

31.03.2017. 2. That subsequently, post receipt of the aforesaid

recognition/registration, the assessee vide application dated

30.03.2015 applied for obtaining approval from DSIR under section

35(2AB) in Form 3CK, which was granted to the assessee vide Form

3CM dated 17.07.2015 stating the period of approval as 26.02.2015

to 31.03.2017. 3. That on the basis of the aforesaid approval in Form 3CM, the

assessee claimed weighted deduction of Rs. 11,69,47,165/- under

section 35(2AB) with respect to R&D expenses (revenue and capital)

incurred at the centre after 26.02.2015 in the return form filed for

the relevant assessment year. 4. That it is the contention of the assessee that, while in the

return form only the undisputed claim of Rs.11,69,47,165/- was

149 ITA No.9187/Del/2019 Hero Motocorp Ltd. vs. ACIT made, the additional claim for weighted deduction of Rs.

74,31,13,902/- with respect to R&D expenditure (both revenue and

capital) incurred at the centre during the period 01.04.2014 to

25.02.2015, was raised through note appended to the computation

of income, which should be deemed to have been filed alongwith the

return form for the relevant year. The copy of acknowledgement of

return of income alongwith computation of income for assessment

year 2015-16 was enclosed at page nos. 1-4 of PB. 5. That the note given in the computation of income appended

with the return of income, as reproduced in the assessment order

reads as under:

“During the relevant previous year, the assessee company’s in- house R&D facility at Dharuhera, in the state of Haryana, was approved by Department of Scientific & Industrial Research (‘DSIR’) for the purposes of section 35(2AB) of the Act vide Form 3CM dated 17.07.2015. Although there is no requirement in section 35(2AB) read with prescribed Form 3CM to state the period of approval, the DSIR, however, stated the period of approval as 26.02.2015 to 31.03.2017.

During the relevant year, the assessee company incurred following expenses (both capital and revenue, other than land and building,) at the aforesaid in-house R&D centre:

150 ITA No.9187/Del/2019 Hero Motocorp Ltd. vs. ACIT

01.04.14 to 26.02.15 to Particulars 25.02.15 31.03.15 Total 2014-2015

A. Revenue Expenditure

Electricity 3,01,89,809 31,01,068 3,32,90,877

Cutting tools 53,64,864 2,45,096 56,09,960

Indirect tools 12,79,201 26,39,080 39,18,281

Salary - of technical employees 56,99,90,817 6,58, 63,200 63,58,54,017

Any other expenditure directly related to R & D 3,55,59,632 1, 77,42,465 5,33,02,097

TOTAL – A 64,23,84,323 8,95,90,908 73,19,75,231

B. Capital Expenditure

Data Processing Equipment 2,11,680 20,58,000 22,69,680

Equipments 6,73,65,693 1,65,57,341 8,39,23,033

Office Equipments 8,65,904 - 8,65,904

Softwares 2,32, 17,580 83,04,475 3,15,22,055

Vehicles 90,68,722 4,36,441 95,05,163

TOTAL – B 10,07,29,579 2,73,56,257 12,80,85,836

GRAND TOTAL – A+B 74,31,13,902, 11,69,47,165 86,00,61,067

In view of the approval in Form 3CM granted from 26.02.2015 to 31.03.2017, the assessee has claimed weighted deduction under section 35{2AB) for revenue and capital expenditure incurred at in-house R&D centre after 26.02.2015 amounting to Rs.11,69,47,165. The assessee was, however, legally advised that, notwithstanding the period of approval stated in Form

151 ITA No.9187/Del/2019 Hero Motocorp Ltd. vs. ACIT 3CM, the company is eligible for weighted deduction of entire expenses incurred at the approved R&D centre of Rs. 86,00,61,067, including the expenditure incurred during the period from 01.04.2014 to 25.02.2015, as detailed above.

In view of the above, although in the return of income the assessee has claimed weighted deduction @ 200% of Rs.11,69,47,165 under section 35(2AB), the company, however, through this note to the return of income/computation of income is preferring the enlarged claim for weighted deduction @ 200% of Rs.86,00,61,067 under section 35(2AB) with regard to entire revenue and capital expenses incurred at the approved in-house R&D centre during the year under consideration.” 6. That during the course of assessment proceedings, the

assessee vide reply dated 18.12.2018 justified the aforesaid

additional claim of deduction of Rs.74,31,13,902 incurred at

approved R&D facility prior to 26.02.2015, which was supported

with the following decisions, wherein it was held that weighted

deduction under section 35(2AB) is available to the centre approved

by DSIR dehors the date of recognition accorded in the approval: • CIT v. Claris Lifesciences Ltd.: 326 ITR 251(Guj) - Special Leave Petition (‘SLP’) filed by the Revenue against the aforesaid decision of the Gujarat High Court was dismissed by the

152 ITA No.9187/Del/2019 Hero Motocorp Ltd. vs. ACIT Supreme Court vide order 4.8.2009, bearing CC No.10181/2009 • CIT vs Sandan Vikas India Ltd.: 335 ITR 117 (Del) – SLP dismissed by the Supreme Court vide order 09.01.2012, bearing CC No.21706/2011 • Maruti Suzuki India Ltd v. Union of India & Anr (397 ITR 728) - The Special Leave Petition of the Revenue was dismissed by the Hon’ble Supreme Court vide order dated 11.05.2018 in SLP No. 32458/2017. • CIT vs. Wheels India Ltd.: 336 ITR 513 (Mad) • Banco Products (India) Ltd. vs. DCIT (ITA No. 1057/2017)(Guj.) • DCIT vs. International Tractors Ltd.: ITA No. 5817/ 6071 of 2010 (Del); • ACIT vs Meco Instruments (P) Ltd.: ITA No. 4246/Mum/2009 (Mum.) • DCIT vs. Famy Care Ltd: 67 SOT 85 (Mum) • ACIT vs. Wockhardt Limited: ITA No.71/Mum/2007

153 ITA No.9187/Del/2019 Hero Motocorp Ltd. vs. ACIT “22.3 The reply of the assessee has been considered and is being discussed as under:-

On going through the claim of the assessee alongwith various judicial precedence we have found force in assessee argument that notwithstanding the period of approval stated in Form 3CM, the company is eligible for weighted deduction of entire expenses incurred at the approved R&D centre of Rs. 86,00,61,067, including the expenditure incurred during the period from 01.04.2014 to 25.02.2015. However, since assessee has not claimed deduction in its return of income, therefore same cannot be allowed in assessment.”

assessing officer accepted the claim in principle, but denied the

same on the ground that the same was not made in the return form.

The aforesaid finding was also approved by the DRP, observing as

under:

“22.5 DRP Directions:

Having considered the submission of the assessee and the AO's draft order (para

22), it is noted that the AO after considering the assessee's submission noted that the assessee's argument for additional weighted deduction of Rs. 86,00,61,067/- on

154 ITA No.9187/Del/2019 Hero Motocorp Ltd. vs. ACIT account of expenditure of Rs. 74,31,13,902/- could not be allow as the same has been claimed in the return of income, notwithstanding the period of approval stated in Form 3CM. It has also been noted by the AO that the R&D facility at Dharuhera was approved by DSIR for the purposes of Section 35(2AB) in Form 3CM dated 17-07- 2015 for the period 26-02-2015 to 31-03-2017. The assessee claimed to have incurred expenditure of Rs. 74.31 crores from 01-04-2014 to 25-02-2015 and another Rs. 11.69 crores from 26.02-2015 to 31-03-2015. The assessee claimed weighted deduction @200% of the entire amount of Rs. 86.00 crores.

Having considered the submission of the -asses see, and considering the fact that no deduction u/s 35(2AB) was claimed in the return of income or by way of revised valid return of income, AO has rightly rejected the claim. Assessee's objection is rejected."

assessee vide ground of appeal no. 20 to 20.3, contending that the

claim through note in the computation of income, should be

considered as raised in the return form.

57.0.1 It was argued by the Ld. AR that notes to computation

of income form an integral part of return of income and, therefore,

155 ITA No.9187/Del/2019 Hero Motocorp Ltd. vs. ACIT any claim made in such notes is deemed to have been made in the

return of income itself. In the present case, the applicant, it is

submitted, claimed deduction of research and development expenses

to the extent of Rs.74,31,13,902/- by way of notes to the

computation of income, which formed integral part of the return of

income and therefore, was allowable under section 35(2AB) of the

Act. Reliance for the aforesaid was placed on the decision of the

Hon’ble Delhi High Court in the case of CIT vs. Nav Sansar Agro

Products: 392 ITR 399 and Hon’ble Punjab and Haryana High Court

in the case of Amritsar Transport Co. (P.) Ltd. vs. CIT: 272 ITR 403

wherein it was held that notes to the computation of income

attached with the return of income formed integral part of the return

form.

57.0.2 Analogy for the aforesaid proposition was also drawn

from the following cases wherein it has been held that notes to

accounts formed integral part of the accompanying financial

statements:

156 ITA No.9187/Del/2019 Hero Motocorp Ltd. vs. ACIT • CIT vs. Sain Processing & Wvg. Mills (P) Ltd.: (2010) 325 ITR 565 (Del) • CIT vs. Khaitan Chemicals & Fertilizers Ltd: 307 ITR 150 (Del) • Kanoi Paper Industries Ltd. vs. CIT: ITA No. 298 of 2004 (Cal) • K.K. Nag Ltd. vs. ACIT: 52 SOT 381(Pune) • Hindustan Shipyard Ltd. vs. DCIT: 130 TTJ 213(Vishakhapatnam) • Shivalik Venture (P.) Ltd. v DCIT: 173 TTJ 238 (Mum) • B & B Infotech Ltd. v ITO: 155 ITD 1040 (Bang) • J.K. Lakshmi Cement Ltd. vs. ACIT: ITA No. 1275/Kol/2010 (Kol)

57.0.3 The Ld. AR also our drew attention to Rule 12(2)

of the Rules which provides that return of income filed electronically

should not be accompanied by a statement showing the

computation of the tax payable or proof of tax

claimed/deducted/collected at source or advance tax. Thus,

computation of income was not required to be filed with the return

of income and, therefore, the same was to be furnished during the

course of assessment proceedings. Accordingly, under the scheme of

e-filing of return of income, all the accompanying documents

157 ITA No.9187/Del/2019 Hero Motocorp Ltd. vs. ACIT including computation are deemed to be filed at the time of filing of

return of income itself. The Ld. AR pointed that, section 139(9)

provides that if the return of income is not accompanied by

computation of income, Tax Audit Report, etc., the same would be

considered as a defective return. Accordingly, it was argued that, in

the e-filing scheme, by virtue of the specific embargo to not file these

documents, they are to be deemed as filed along with the return of

income, if the same are furnished subsequently. It was submitted

that in the present case, since these documents were filed after

receiving the notice, computation of income is to be deemed to be

filed along with return of income and notes therein are to be read as

integral part of the return of income. It was submitted that the

assessee was to be considered as having made the impugned claim

of weighted deduction under section 35(2AB) of the Act in the return

of income itself and non-grant of claim by the assessing officer was

completely erroneous in law, which deserves to be reversed and

claim ought to be allowed.

57.0.4 Without prejudice to the above, the Ld. AR also made

additional submissions, that if notes to computation of income were

158 ITA No.9187/Del/2019 Hero Motocorp Ltd. vs. ACIT not to be considered as forming part of the Return, even then since

all the facts relating to the aforesaid claim were before the AO, which

were accepted at Para 22.3 of the assessment order, the impugned

claim was not a completely new claim, but revision/modification of

the existing claim already taken in the return form, for which the AO

was under a bounden duty to allow while passing the assessment

order as per mandate contained in Article 265 of the Constitution.

Reliance in this regard was placed on the following decisions:

Chokshi Metal Refinery vs. CIT: 107 ITR 63 (Guj) CIT vs. Geo Industries and Insecticides (I) Pvt Ltd: 234 ITR 541 (Mad) Subhash Chandra Sarvesh Kumar v. CIT: 132 ITR 619 (All.) CIT v Simon Carves Ltd.: 105 ITR 212 (SC) Anchor Pressings (P) Ltd. vs. CIT and Ors.: 161 ITR 159 (SC) CIT v Bharat General Reinsurance: 81 ITR 303 (Del) CIT vs. Hiranand: 136 Taxman 66 (Raj) CIT v. Ahmedabad Keiser-e-Hind Mills Co. Ltd.: 128 ITR 486 (Guj.) CIT v Archana R. Dhanwatay: 136 ITR 355 (Bom.) Sneh Lata Jain vs. CIT: 140 Taxman 156 (J&K) PCIT v. Oracle (OFSS) BPO Services Ltd.:[2019] 102 taxmann.com 396 (Del.) CIT v. Bharat Aluminium Co Ltd: 303 ITR 256 (Del) CIT v. Ramco International : 332 ITR 306 (P&H)

159 ITA No.9187/Del/2019 Hero Motocorp Ltd. vs. ACIT Raghavan Nair vs. ACIT: 304 CTR 96 (Ker) JCIT v. Hero Honda Finlease Ltd.: 115 TTJ 752 (Third Member). SNC-Lavalin Acres Inc.: 110 TTJ 13 (Del ITAT) ACIT v. Pushpons International in ITA No. 814/Del/1998 (Del ITAT) Mit Mohan Singh Kahlon v. DCIT: 61 SOT 93 (URO)/ ITA No. 57/Chd/2012. (Chd. ITAT) Emerson Net Work Power India (P) Ltd. v. ACIT 2009122 TTJ 67 (Mum ITAT) Aishwarya Rai: ITA No. 1159/Mum/04 (ITAT Mum) Ogilvy and Mather (P) Ltd. v. Addl. CIT: ITA No. 925/Mum/2009 (ITAT Mum) DCIT v. Tata Asset Management Ltd.: ITA No. 4665/Mum/2010 (ITAT Mum)

57.0.5 In view of the above, the Ld. AR argued that the action

of the AO in not allowing the claim needs to be reversed and the AO

needs to be directed to allow the said claim.

57.0.6 Without prejudice to the above, the assessee has also

raised additional ground of appeal vide Ground No.21, to contend

that if the action of the AO is held to be correct, then the Tribunal is

empowered to admit and allow the same as an additional ground of

appeal, in view of plenary power vested in the Tribunal, as per the

decision of the Hon’ble Supreme Court in the case of National

160 ITA No.9187/Del/2019 Hero Motocorp Ltd. vs. ACIT Thermal Power Company: 229 ITR 383 (SC). The Ld. AR also made

submissions in support of the aforesaid ground of appeal.

58.0 The Ld. CIT - DR refuted the aforesaid submissions

made by the assessee and supported the assessment order. It was

argued that the claim made by way of note in the computation of

income cannot be considered as a claim made in the return of

income, since the tax liability is computed and discharged as per the

claim made in the return form and not on the basis of notes in the

computation of income. The Ld. CIT - DR also relied upon the

decision of the Hon’ble Supreme Court in the case of Goetze (India)

Ltd. v. CIT: 284 ITR 323, wherein it was held that the AO is not

bound to entertain a claim made by the assessee otherwise than

through return of income filed under section 139(1) or revised return

of income under section 139(5) of the Act. The Ld. CIT (DR) also

referred to the provisions of section 80A (5) of the Act which barred

the assessee to raise additional claim otherwise than through that

taken in the return of income. As regards the additional ground of

appeal, the Ld. CIT (DR) argued that when the AO was not

161 ITA No.9187/Del/2019 Hero Motocorp Ltd. vs. ACIT empowered to allow the claim, the Tribunal cannot indirectly allow

the claim through additional ground of appeal.

59.0 In the rejoinder, the Ld. AR pointed out that the

decision of the Hon’ble Supreme Court in the case of Goetze (India)

Ltd. (supra) relied upon by the Ld. CIT - DR was not applicable to

the facts of the present case since the same was applicable to a

situation where a claim was not made in the return of income at all

and was raised for the first time during the course of assessment

proceedings, whereas the plea of the assessee herein is that, the

impugned claim was raised in the return of income, albeit through

notes in the computation of income, which constituted integral part

of return of income. It was argued that even otherwise the aforesaid

decision only bars completely new/fresh claim and not modification

/enlargement of an existing claim already made in the return form.

Thus, on both the aforesaid accounts, it was argued that the

decision of the Hon’ble Supreme Court in the case of Goetze India

supra was not applicable to facts of assessee’s case. As regards

section 80A (5) referred by the Ld. CIT - DR, it was argued that the

same shall not applicable to the claim of deduction under section 35

162 ITA No.9187/Del/2019 Hero Motocorp Ltd. vs. ACIT (2AB) and had restricted scope of specific sections mentioned

therein. As regards the power of the Tribunal to entertain the

additional ground of appeal, the Ld. Counsel argued that the

decision of the Hon’ble Supreme Court in the case of Goetze India

(supra) only prohibited power of the AO to entertain a new claim and

there was a specific finding in that decision, that the said embargo

does not impinge upon the power of the Tribunal to entertain an

additional ground as laid down by the Hon’ble Supreme Court in the

case of NTPC (supra). For the aforesaid proposition the Ld. Counsel

also relied upon the decision of the Hon’ble Delhi High Court in the

case of CIT vs. Jai Parabolic Springs Ltd: 306 ITR 42 and the

decision of the Special Bench of Tribunal in the case of Allcargo

Global Logistics Ltd vs. DCIT: 137 ITD 26.

60.0.0 We have heard both the parties and have perused

the material available on record. We find that the entire facts

relating to the aforesaid claim were before the AO and after

examining the same, the AO did not dispute the allowability of claim

on merits. The sole issue raised by both the AO and the Ld. DRP is

that the said claim is not allowable, since the same was not raised in

163 ITA No.9187/Del/2019 Hero Motocorp Ltd. vs. ACIT the return form whereas the contention of the assessee is that a

claim through note in the computation of income forms integral part

of return form and, therefore, the same should have been

entertained and allowed by the AO. We find that the return of

income in the present case was filed through electronic/digital

mode. Prior to the shifting of practice of filing the return of income to

the electronic mode, it was an accepted practice that the return form

be accompanied by various supporting documents like accounts,

challans, tax audit report etc. including computation of income. In

that regime, it was an accepted position that notes given in the

computation of income was to be read as forming integral part of the

return of income. The support for the aforesaid accepted position

can be drawn from the following decisions brought to our notice by

the assessee:

(1) In the case of CIT vs. Nav Sansar Agro Products: 392 ITR 399 (Delhi), the Hon’ble Delhi High Court held that notes in the computation of income formed part of the return of income. The relevant observations of the Court are as under: “This Court has considered the submissions. The note appended to the computation of income file along with the return by the assessee in this case clearly stated that interest and legal

164 ITA No.9187/Del/2019 Hero Motocorp Ltd. vs. ACIT charges were excluded on the basis of the Income Tax Department's stand in other group cases that they could be included in the case of land and were done by way of "abundant caution" as a disallowance.”

(2) Similarly, the Hon’ble Punjab and Haryana High Court in the

case of Amritsar Transport Co. (P.) Ltd. vs. CIT: 272 ITR 403, while

dealing with the issue of jurisdiction of assessing officer under

section 154 of the Act, held that notes forming part of computation

of income formed integral of the return of income and any oversight

thereof while framing assessment is rectifiable under section 154 of

the Act. The relevant observations of the Court are as under:

“5. After hearing the counsel for the parties and having perused the orders of the authorities below, we are satisfied that it is a clear case of mistake apparent from the record which could have been rectified under section 154 of the Act. The assessee itself in the computation of income had given the note requesting the Assessing Officer to consider the payment of interest under section 244(1A) of the Act which appears to have escaped the notice of the Assessing Officer when he framed the original assessment. In view of this matter, there is possibly no question of this issue being termed as debatable.”

165 ITA No.9187/Del/2019 Hero Motocorp Ltd. vs. ACIT 60.0.1 On shifting of the regime of filing the return form from

physical mode to electronic mode, Rule 12(2) specifically bars an

assessee to file any document along with the return of income. Such

documents are to be filed after receiving the notice under section

143(2)/142(1) selecting the return for scrutiny. The corollary of the

aforesaid procedure is that the accompanying documents are

deemed to have been filed along with the electronic return of income.

If that was not to be the case, then the return of income would have

been treated as a defective return under section 139(9) of the Act.

Accordingly, when the assessee receives notice for assessment and

is asked to file the documents in support of the return of income

including computation of income, such documents and computation

of income are deemed to have been filed at the time of filing the

original return of income, rendering the original return to be a valid

return and not a defective return under section 139(9) of the Act. In

view of the same, computation of income is deemed to be filed along

with return of income and notes of such computation of income as

per the undisputed practice and ratio laid down by the aforesaid

decisions are to be deemed as forming integral part of the return of

166 ITA No.9187/Del/2019 Hero Motocorp Ltd. vs. ACIT income, which are required to be considered by the assessing officer,

while completing the assessment of an assessee.

60.0.2 In view of the aforesaid legal position, on the facts of

the present case, especially considering that the AO after examining

the facts and legal position with respect to the impugned weighted

claim of deduction under section 35(2AB), did not dispute the same

on merits, erred in not granting the benefit to the assessee merely

on the ground that the same was made through note to computation

of income and not in the return form. Accordingly, we reverse the

action of the AO and direct him to allow the weighted deduction to

the assessee. Considering that, we have allowed the claim on the

principal contention raised by the assessee, alternate contentions as

well as the additional ground of appeal are rendered academic in

nature.

60.0.3 We, therefore, allow ground of appeal No. 20 to 20.3

and dismiss ground of appeal No.21 as being academic in nature.

61.0.0 The assessee has also raised the following by way of

additional ground of appeal:

“1. That on the facts and circumstances of the case, depreciation @ 25% on leasehold rights acquired in lands at

167 ITA No.9187/Del/2019 Hero Motocorp Ltd. vs. ACIT Haridwar (Rs.9,79,51,067) and Neemrana (Rs.3,27,49,678), aggregating to Rs.12,42,62,467/- be allowed under section 32(1)(ii) of the Act in accordance with the orders passed by the Hon’ble Tribunal for earlier assessment years viz., AYs 2009-10 to 2011-12 and 2013-14.”

61.0.1 In relation to the aforesaid additional ground, the Ld.

AR submitted that the assessee had taken certain lands on lease for

the purposes of constructing factory (ies) and carrying on business

operations thereon. The land at Haridwar was purchased in the

earlier year on payment of premium. From the assessment year

2009-10 i.e., the year in which commercial production begun on

factory constructed on said land, the assesse claimed deduction for

the proportionate amount of premium paid for acquiring lease as

amortised revenue expenditure. It was further submitted that in

assessment years 2010-11 and 2011-12 the assessing officer

disallowed the aforesaid claim holding the premium paid to be

capital expenditure. On further appeal, the Tribunal (ITAT) upheld

the aforesaid action of the AO, but accepted alternate plea of the

assessee that the aforesaid premium paid resulted in acquisition of

an intangible asset in nature of a ‘business or commercial rights’,

168 ITA No.9187/Del/2019 Hero Motocorp Ltd. vs. ACIT which is eligible for depreciation under section 32(1)(ii) of the Act. It

was further submitted that following the aforesaid order of the

Tribunal, the consequential claim of depreciation was allowed by the

Ld. DRP/ITAT in the assessment year 2009-10 and 2013-14.

61.0.2 The Ld. AR submitted that in the impugned

assessment order, the assessee inadvertently forgot to raise the

claim in the return of income or in the course of assessment

proceedings and has, therefore, raised the consequential claim by

way of additional ground of appeal. Apart from the claim of

depreciation on the premium paid on land at Haridwar in the earlier

year, it is stated that during the relevant year the assessee had paid

additional premium for land taken on lease at Neemrana for a period

of ninety nine years from RICCO.

61.0.3 The Ld. AR drew our attention to the facts relating

to the aforesaid land at Neemrana, as stated in the application for

additional ground of appeal. They are reproduced hereunder:

“The assessee was, vide allotment letter dated 06.07.2005 allotted land at Neemrana by Rajasthan State Industrial Development and Investment Corporation Ltd.

169 ITA No.9187/Del/2019 Hero Motocorp Ltd. vs. ACIT (RICCO) on lease for a period of 99 years. The aforesaid lease was granted on payment of premium cum development charges of Rs. 12,34,50,000/-. The total amount capitalized in the books of accounts was Rs. 13,09,98,710/- which included premium cum development charges, security deposit, registration and stamp duty and other miscellaneous charges. In addition, the assessee was also required to pay annual rent of Rs.19,735 (Rs. 237 per acre per annum). The industrial unit at Neemrana began commercial production on 25.06.14. The assessee submits that akin to the legal position of leasehold rights in respect of land at Haridwar, the leasehold right in the land at Neemrana acquired on payment of premium cum development charges is covered within the meaning of ‘business or commercial right’ eligible for depreciation under section 32(1)(ii) of the Act. In the return of income filed for the relevant assessment year, the assessee, however, inadvertently, did not claim depreciation of Rs.3,27,49,678 on the aforesaid amount of premium/development charges paid for acquiring leasehold rights in the said land.”

61.0.4 In support of the aforesaid ground of appeal, the Ld. AR

explained the facts and relied upon the finding of the Tribunal, in

the order for AY 2010-11 and 2011-12.

170 ITA No.9187/Del/2019 Hero Motocorp Ltd. vs. ACIT 62.0 The Ld. CIT (DR) pointed that the Department has not

accepted the aforesaid order has challenged the same in further

appeal before the High Court.

63.0.0 We have heard both the parties and have perused the

material available on record. Though this claim was not made before

the lower authorities, we find that the additional ground raised by

the assessee raises a pure question of law, facts for the same are on

record. We accordingly admit the additional ground of appeal raised

by the assessee following the decision of the Hon’ble Supreme Court

in the case of National Thermal Power Co Ltd vs CIT: 229 ITR 383

(SC).

63.0.1 We also find that the issue on merits is squarely

covered in favour of the assessee by the order dated 24.10.2016

passed by Tribunal in the preceding assessment years, i.e. AY 2010-

11 and AY 2011-12 wherein the Tribunal held that lease premium

charges were not allowable revenue deduction. However, the

Tribunal allowed the alternate plea raised by the assessee company

and held the premium paid for acquisition of leasehold rights to be

171 ITA No.9187/Del/2019 Hero Motocorp Ltd. vs. ACIT an intangible asset, independent from the land itself, eligible for

depreciation under Section 32(1)(ii) of the Act.

63.0.2 Accordingly, we hold that the assessee is eligible for

depreciation at 25% on lease hold rights acquired in Haridwar and

Neemrana. As regards the land at Haridwar, the AO is directed to

allow the claim of depreciation as per opening WDV carry forward

from the earlier years. In so far as the depreciation of land at

Neemrana is concerned the same shall be allowed after verification

of the relevant payments claimed to have been made by the

assessee.

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

allowed.

Order pronounced on 13/04/2021

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

172 ITA No.9187/Del/2019 Hero Motocorp Ltd. vs. ACIT 4. CIT(Appeals) 5. DR: ITAT ASSISTANT REGISTRAR ITAT NEW DELHI