M/S.APOLLO TYRES LTD,COCHIN vs. THE PRINCIPAL COMMISSIONER OF INCOMETAX, COCHIN

IN THE INCOME TAX APPELLATE TRIBUNAL COCHIN BENCH BEFORE SHRI INTURI RAMA RAO, AM AND SHRI RAHUL CHAUDHARY, JM ITA No. 609/Coch/2017 Assessment Year: 2013-14 Apollo Tyres Ltd. .......... Appellant 3rd Floor, Areekal Mansion, Panampilly Nagar, Kochi 682036 [PAN: AAACA6990Q] vs. DCIT, Corporate Circle-1(1), Kochi ......... Respondent Assessee by: Shri Abraham Joseph Markos, Adv. Revenue by: Shri Sanjit Kumar Das, CIT-DR Date of Hearing: 20.08.2025 Date of Pronouncement: 01.09.2025

O R D E R Per: Inturi Rama Rao, AM This appeal filed by the assessee is directed against the final assessment order dated 27.10.2017 passed u/s. 143(3) r.w.s. 144C of Income Tax Act, 1961 (hereinafter "the Act") for Assessment Year (AY) 2013-14.

2 ITA No. 609/Coch/2017 Apollo Tyres Ltd. 29.11.2013 declaring income of Rs. 216,63,52,237/- and also reported book profit u/s. 115JB of Rs. 475,51,57,670/-. The return of income was revised on 31.03.2015 declaring income of Rs. 223,80,75,265/- and book profit u/s. 115JB of Rs. 410,09,91,004/-. The assessee company also reported the following international transactions in Form 3CEB: -

S.No. Description of Transaction Amount 1 Sale of tyres 4,89,75,09,019 2 Sale of semi finished goods 26,73,908 3 Sale of raw material 1,78,745 4 Purchase of tyres 36,79,783 5 Purchase of raw material 24,69,878 6 Purchase of semi finished goods 13,35,810 7 Purchase of second hand moulds 18,26,398 (purchase of capital goods) 8 Receipt of royalty 4,36,55,867 9 Payment of royalty 1,49,06,399 10 Receipt of research and testing services 12,81,14,109 11 Receipt of corporate marketing services 391,40,800 12 Provision of corporate purchase 23,08,219 services 13 Provision of corporate information 2,32,10,5456 technology services 14 Investment in equity 50,02,98,250 15 Reimbursement of expenses 1,07,78,001 16 Recovery of expenses 3,69,14,146

3 ITA No. 609/Coch/2017 Apollo Tyres Ltd. passed u/s. 92CA(3) of the Act suggested upward TP adjustments in respect of corporate guarantee commission provided to Apollo Vredestein BV (AVBV) of Rs. 3,04,17,859/-. The TPO also suggested upward TP adjustments in respect of software development segment of Rs. 9,59,364/-. The TPO also suggested upward TP adjustment in respect of recovery of expenses from AE or Rs. 35,21,609/-. Thus, the TPO suggested total upward adjustment of Rs. 3,48,96,832/- vide order dated 28.10.2016 passed u/s. 92CA of the Act. On receipt of the TPO’s order the AO passed draft assessment order u/s. 143(3) r.w.s. 144C(1) of the Act on 30.12.2016 proposing to make the following additions: -

i. TP adjustment – Rs. 3,48,96,832/- ii. Disallowance of additional depreciation u/s. 32(1)(iia) of the Act on the ground that the plant and machinery was acquired and put to use during the previous year relevant to AY 2012- 13. Since the assets were put to use for less than 180 days, additional depreciation was allowed only at 10% as per second proviso to section 32 of the Act. Balance additional depreciation cannot be allowed in subsequent AY, i.e. the year under consideration – Rs. 36,21,58,356/- iii. Disallowance of pre-operative expenditure details of which were extracted by the AO vide para 9 of the draft assessment order. These pre-operative expenditure was incurred for the purpose of setting up of new plant at Chennai. In the books of account, the appellant company had capitalised the pre- operative expenditure. However, in the return of income it is claimed as revenue expenditure placing reliance on the following decisions: -

4 ITA No. 609/Coch/2017 Apollo Tyres Ltd. - Bell Ceramics Ltd. v. DCIT 2016 – TIOL-1688-HC-AHM- IT (Gujarat) - Jay Engineering Works Ltd. v. CIT 311 ITR 405 (Del) - CIT VS. Modi Industries Ltd. (No. 3) : 200 ITR 341 (Del) - CIT v. Triveni Engineering and Industries Ltd. 181 Taxman 5 (Del) - Prem Spinning and Weaving Mills Co. Ltd. v. CIT 98 ITR 20 - Kashiram Ramgopal v. CIT 36 Taxman 305 However, the AO was of the opinion that that this pre- operative expenditure should go to form part of cost of plant and machinery and buildings as envisaged u/s. 43(1) of the Act. Accordingly, disallowed the claim for allowance as revenue expenditure of pre-operative expenditure ofRs.13,28,53,754/-. iv. Disallowance of excess claim of deduction u/s. 35(2AB) – The appellant company made claim for deduction of Rs. 80,28,91.589/- u/s. 35(2AB) of the Act as against the expenditure certified by DSIR of Rs. 24,53,93,000/- in Form 3CL. The AO was of the opinion that the details of expenditure incurred during the previous year relevant to the assessment year under consideration is as under: - Particulars Amount in Rs. R&D as allowed by the DSIR in Form 3CL 245,393,000 R&D expense incurred by Apollo 128,114,109 Vredestein BV, Netherlands; Vredestein GmbH, Germany and Apollo Tyres Global R&D BV, Netherlands R&D expense incurred for testing of tyres 12,510,307 outside India Other R&D expense incurred at Limda 20,868,464 (Vadodra) Total 406,885,880

5 ITA No. 609/Coch/2017 Apollo Tyres Ltd.

The AO was of the opinion that the R&D expenditure incurred in-house is alone is eligible for deduction. Accordingly, allowed deduction u/s. 35(2AB) of Rs. 31,21,05,589/-. v. The AO made disallowance of Rs. 15,60,53,000/- being expenditure incurred by the assessee on R&D outside India. vi. The AO made addition of Rs. 14,06,31,409/- u/s. 40(a)(i) of the Act on the ground that the appellant company had failed to deduct tax at source on the expenditure incurred by the appellant on R&D outside India, the details of which are extracted by the AO at page 11 of the assessment order. Rejecting the contention of the appellant that there is no obligation to deduct tax at source on reimbursement of expenditure as the same fall under the category of ‘fees for technical services’ and also placing reliance on the decision of the Hon'ble Supreme Court in the case of GE India Technology Centre Pvt. Ltd. v. CIT 327 ITR 456 and also in the case of Transmission Corporation of AP Ltd. v. CIT 239 ITR 587. vii. The AO disallowed the claim made in the return of income on account of loss of unrealised foreign exchange rate fluctuation on capital assets. It is stated that during the previous year relevant to AY 2012-13, the loss on unrealised foreign exchange rate fluctuation on capital items of Rs. 2,18,26,172/- was added back to the taxable income. However, during the previous year relevant to the assessment year under consideration, the foreign exchange contract had been realized. Since the resultant loss was adjusted in the cost of the assets in terms of provisions of section 43A of the Act, it is claimed that the amount of loss debited to Profit & Loss A/c. for the assessment year 2012-13 is reversed by crediting to Profit & Loss A/c. for the assessment year under consideration. This amount was claimed as deduction while computing taxable income. The AO, placing reliance on the decision of the Tribunal in assessee’s own case for AY 2009-

6 ITA No. 609/Coch/2017 Apollo Tyres Ltd. 10 in ITA No. 2/Coch/2014 dated 21.11.2015 disallowed the claim. viii. The AO also made addition of Rs. 9,28,097/- on account of discrepancies in TDS reconciliation statement. ix. The AO disallowed the year end provisions of Rs. 2,86,39,000/- on the ground that the provision of expenditure is an unascertained liability. x. The AO also made addition of Rs. 29,99,048/- u/s. 40(a)(ia) of the Act for non deduction of TDS on year end provisions. xi. The AO disallowed the claim of expenditure incurred on Gas Turbine Overhauling Charges of Rs. 6,57,99,270/- as revenue expenditure by holding that the expenditure had resulted in enduring benefit and held it to be capital expenditure. xii. The AO denied the claim for allowance of depreciation at 80% of the existing asset. xiii. The AO also made several additions on book profit determined u/s. 115JB of the Act. 4. On receipt of the draft assessment order, the appellant company filed objections before the Dispute Resolution Panel (DRP) contesting all the above additions. The DRP issued directions on 04.09.2017 confirming the TP adjustments. However, the DRP had directed the AO to allow balance of additional depreciation following the Tribunal’s decision in assessee’s own case for earlier assessment year. The DRP also confirmed the disallowance of pre- operative expenditure, disallowance of excessive claim u/s. 35(2AB), also disallowance u/s. 40(a)(ia) of Rs. 151,122,545/- and R&D expenditure incurred outside India, the year end provisions for expenditure of Rs 2,86,39,000/-, addition of Rs. 29,99,048/- u/s.

7 ITA No. 609/Coch/2017 Apollo Tyres Ltd. 40(a)(ia) of the Act and Gas Turbine expenditure claimed for deduction of cost of gas turbine overhauling charges of Rs. 5,59,29,379/-. However, the DRP had set aside the ground to disallowance of Rs. 15,60,53,000/- to the AO. The DRP had upheld the addition made to the book profit for the purpose of determining the tax liability u/s. 115JB of the Act.

Adjustment recommended by TPO 3,48,96,832 Disallowance of pre-operative expenditure 13,28,53,754 Disallowance of Excess claim of deduction u/s. 31,21,05,589 35(2AB) Disallowance u/s. 40(a)(i) 14,06,31,409 Unrealised foreign exchange loss o capital assets 2,18,26,172 Difference out of TDS reconciliation 9,28,097 Disallowance of year end provisions 2,86,39,000 Disallowance u/s. 49(a)(ia) 29,99,048 Disallowance of Gas turbine overhauling charges 5,59,29,379 Provision for advances written back 8,00,00,000 Disallowance of Gifts 1,18,54,561

8 ITA No. 609/Coch/2017 Apollo Tyres Ltd. the Assessing Officer (AO') pursuant to the directions of the Dispute Resolution Panel (DRP) and the additions/disallowances made by the AO are illegal, bad in law and without jurisdiction. 2. The additions/disallowances made are unsustainable, unjust, highly excessive and are not based on any material on record. The total income of the Appellant has been incorrectly and un-lawfully assessed under normal provision of the Act by the AO at Rs. 3,06,07,39,110/- as against declared income at Rs. 2,23,80,75,265/-. The AO also incorrectly and un-lawfully assessed Book Profit at Rs. 4,78,47,24,767/- as against declared income at Rs. 4,10,09,91,004/-. 3. That the Ld. AO has erred in facts and in law by disallowing revenue expenditure of Rs. 13,28,53,754/- (pre-operative expenses), incurred by appellant on assets put to use during the year for the expansion of its existing business of manufacturing tyres at Chennai Unit on an incorrect ground that the said expenses relate to erection and construction of plant and machinery and thus should be capitalized as part of cost of plant and machinery and building. 3.1 Without prejudice to the above, the Ld. AO has erred in facts and in law by not allowing depreciation including additional depreciation on the grounds that the same shall be allowed when the asset shall be put to use by the company. Even und though the assets have been put to use during the previous year relevant to the current assessment year, no depreciation has been allowed. 4. The learned AO has erred in disallowing the weighted deduction of Rs 31,21,05,589/- as claimed by the appellant u/s 35(2AB) of the Act in respect of expenditure incurred by it on its in-house R&D facility. 4.1 The Ld. AO has erred in not appreciating the correct facts while holding that the appellant is not engaged in

9 ITA No. 609/Coch/2017 Apollo Tyres Ltd. in-house R&D and has done these activities of test runs of tyres outside of the in-house facility. 4.2 Without prejudice to above, the Ld. AO has erred in making disallowance u/s 35(2AB) amounting to Rs 31,21,05,589/-. The AO has considered 200% of the amount for disallowance i.e. Rs 31,21,05,589/- (Rs 80,28,91,589 49,07,86,000/-) overlooking the fact that assessee should be allowed at least 100% of the amount incurred i.e. Rs 15,60,52,795/- (1/2 of 31,21,05,589/-) u/s 37 of the Income Tax Act, in any case. The addition made by the AO leads to addition to the taxable income of the appellant of the entire amount. 5. The learned AO has erred in disallowing the claim of Rs 14,06,31,409/- u/s 40(a)(i) for non-deduction of TDS 5.1 The Ld. AO has erred in considering reimbursement of Rs 12,68,42,880/- towards Salary and other R&D expenses within the scope of "Fee for technical Services under explanation 2 of section 9(1)(vii)of Income Tax Act and liable for TDS. 5.2 The Ld AO erred in not appreciating that the assessee company has made payment of Rs 1,07,08,950/- for clinical trials majorly to Apollo Tyres Middle East FZE on cost to cost basis; hence TDS not deducted. 5.3 The Ld. AO has erred in appreciating that the payment made of Rs 30,79,579/-for testing and certification charges to ECE (Economic Commission of Europe) have been incurred outside India and not liable to TDS as per the provisions contained in section 40 (a)(i) with Section 195 of the Act being the payment in question does not give rise to or constitute income, which is chargeable to tax in India either on account of provisions of the Act or provisions contained in DTAA. 6. On the facts and circumstances of the case and in law, the learned AO erred in disallowing the claim of Foreign

10 ITA No. 609/Coch/2017 Apollo Tyres Ltd. Exchange Fluctuation Rs. 2,18,26,172/-on account of unrealized foreign exchange fluctuation loss on capital account, as business income without appreciating the fact that the same has been suo-moto added in the previous year in taxable income i.e. AY 2013-14. 7. The AO erred in disallowing the year end provision and making an addition of Rs. 2,86,39,000/- to the total income as per normal provision of the Act. 7.1 The AO also erred in disallowing the year end provision and making an addition of Rs. 2,86,39,000/- to the book profits of the Appellant. 7.2 The AO erred in not appreciating that the Product Publicity Expenses and Business Development Initiative for sales promotion has been made on a reasonable and scientific basis and hence is an allowable expense as per the provisions of the Act. Since individual parties were not identifiable at the time of creation of provision therefore TDS was not deducted. 7.3 The AO erred in net appreciating that the provision, created at the year-end is reversed in subsequent year and TDS was duly deducted at the time of actual credit payment to individual parties 8. The AO grossly erred in making a disallowance of Rs.5,59,29,379/-towards Gas Turbine Overhauling charges u/s 31(i) of the Act. 8.1 The ld. Assessing Officer has erred in not considering the fact that repairs are done to preserve and maintain the asset and not to bring in a new asset 8.2 Further, Ld. AO has failed to consider that when an integral part of machine is replaced, it would come within the connotation of "current repairs". Also, the repair of existing asset does not mean that the new asset has been bought.

11 ITA No. 609/Coch/2017 Apollo Tyres Ltd. 8.3 Without prejudice, Gas turbine is Energy Saving Device and as such eligible for 80% Depreciation which the learned Assessing Officer did not allowed without considering the facts of the case. 9. The AO has erred in making addition of provision for advances written back of Rs 8,00,00,000/- 9.1 The AO erred in not appreciating that assessee suo-moto added actual receipt of Rs 8,06,55,980/- into taxable income and duly paid taxes as per the provision of the Act. 9.2 The AO failed to appreciate that disallowance of Rs 8,00,00,000/- would lead to double taxability of the same receipt, since the income is already included in financial statement and the appellant has shown in computation of income as taxable income. 10. The AO grossly erred in making a disallowance of Rs.5,59,29,379/- towards Gas Turbine Overhauling charges u/s 31 of the Act. 10.1 The Ld. Assessing officer has erred in not considering the fact that repairs are done to preserve and maintain the asset and not to bring in a new asset. 10.2 Further. Ld. AO has failed to consider that when an integral part of machine is replaced, it would come within the connotation of "current repairs". Also, the repair of existing asset does not mean that the new asset has been bought. 10.3 Without prejudice, Gas turbine is Energy Saving Device and as such eligible for 80% Depreciation which the learned Assessing Officer did not allow without considering the facts of the case. 11. The AO has erred in disallowing the deduction claimed u/s. 37 of Rs. 1,18,54,561/- being expenditure on gifts incurred wholly and exclusively for the purpose of business of assessee company.

12 ITA No. 609/Coch/2017 Apollo Tyres Ltd. 11.1 The AO has also erred in considering expenditure on gifts is of personal and not allowed u/s 37(1) of the Income Tax Act 1961. 12. On the facts and in the circumstances of the case and in law, the L4 AO LA Transfer Pricing Officer ("TPO") grossly erred in making transfer pricing addition of Rs. 3,48,96,832/- (as detailed in bellows paras) by re- determining the arm's length price of the transaction by not appreciating that the arm length price is duly computed by independent Chartered Accountant in TP Memorandum. 12.1 On the facts and in the circumstances of the case and in law, the Ld. AO /ld. TPO grossly erred in making transfer pricing addition of Rs 3,04,17,859/-in respect of corporate guarantee provided by the Assessee on behalf of its associated enterprises (AEs) and while doing so ignoring the overall economic scenario and commercial considerations.

12.2 On the facts and in the circumstances of the case and in law, the Ld. AO/Ld. TPΟ grossly erred by making a transfer pricing addition of Rs. 9,57,364/- to the income of the Assessee and holding that the international transactions pertaining to provision of corporate IT services do not satisfy the arm's length principle envisaged under the Act. 12.3 On the facts and in the circumstances of the case and in law, the Ld. AO/Ld. ΤΡΟ grossly erred in not appreciating that the reimbursement of salary expenses of Rs. 35,21,609/- to its associated enterprises ('AEs') is purely on cost to cost basis. Hence no mark-up was warranted. The above grounds are without prejudice to each other. The Appellant company reserves the right to add, alter, amend or

13 ITA No. 609/Coch/2017 Apollo Tyres Ltd. modify any of the grounds appealed against during the course of hearing.” 7. The ground of appeal Nos. 1 & 2 are general in nature, require no adjudication. Ground Nos. 8 and 10 are not pressed by the learned counsel for the assessee, hence dismissed as not pressed.

14 ITA No. 609/Coch/2017 Apollo Tyres Ltd. 594 and decision of the Hon'ble Supreme Court in the case of DCIT v. Core Health Care Ltd. [2008] 298 ITR 194 wherein, it was held as under: -

“6. The substantial questions deal with the amount expended by the assessee towards preoperative expenses for establishing a plant, whether would constitute capital expenditure or revenue expenditure in the facts and circumstances of the case. Section 37 of the Act enables deduction of any expenditure which is laid out or expended wholly and exclusively for the purpose of the business or profession, as the case may be, and which is not in the nature of capital expenditure. In the infinite variety of situations and diversities in which the concept of what constitutes capital expenditure or revenue expenditure, it is not possible to formulate a general rule having universal application. However, a few broad and general tests have been suggested from time to time to ascertain on which side of the line the outlay in any particular case might reasonably falls. These tests are generally efficacious and serve as useful servants; but as masters, they tend to be over-exacting. The question in each case would necessarily be whether the tests relevant and significant in one set of circumstances are relevant and significant in the case on hand also, [see Alembic Chemical Works Co. Ltd. v. Commissioner of Income Tax, Gujarat']. We would not repeat the decisions considered by the Tribunal while recording a conclusion on the question under consideration. For brevity and also to complete the narrative on how this aspect of the matter is examined by the Courts, we refer to the following decisions: Core Health Care Ltd: Section 36(1)(iii) of the Income-tax Act, 1961, has to be read on its own terms: it is a code by itself. It makes no distinction between money borrowed to acquire a capital asset or a revenue asset. All that the section requires is that the assessee must borrow capital and the purpose of the borrowing must be

15 ITA No. 609/Coch/2017 Apollo Tyres Ltd. for business which is carried on by the assessee in the year of account. Unlike Section 37 which expressly excludes an expense of a capital nature, section 36(1)(iii) emphasises the user of the capital and not the user of the asset which comes into existence as a result of the borrowed capital. The Legislature has, therefore, made no distinction in section 36(1)(iii) between "capital borrowed for a revenue purpose" and "capital borrowed for a capital purpose". An assessee is entitled to claim interest paid on borrowed capital provided that the capital is used for business purpose irrespective of what may be the result of using the capital which the assessee has borrowed." Actual cost of an asset has no relevancy in relation to Section 36(1)(iii). The proviso inserted in section 36(1)(iii) by the Finance Act, 2003, with effect from April 1,2004, will operate prospectively. Held accordingly, that the assessee was entitled to deduction under section 36(1)(iii) prior to its amendment by the Finance Act, 2003, in relation to money borrowed for purchase of machinery even though the assessee had not used the machinery in the year of borrowing. Decision of the Gujarat High Court in Deputy CIT v Core Health Care Ltd. [2001]251 ITR 61 affirmed on this point. Held also, remanding the matters to the High Court, that the questions: (a) whether advertisement expenses incurred by the assessee to create a brand image with enduring benefit are allowable as revenue expenditure (b) whether the Tribunal had erred in granting deduction under Section 35D regarding short-term loan, in view of the Explanation to Section 35D(3) which refers only to long-term borrowings, and (c) whether the Tribunal had erred in directing deduction under Section 80HH and 80-1 on the miscellaneous income of Rs.26,64,113 being income on sale of empty containers, were substantial questions of law and

16 ITA No. 609/Coch/2017 Apollo Tyres Ltd. the High Court erred in dismissing the application of the Department on those questions and the High Court had to decide them." Relaxo Footwears Ltd: This order was challenged by the Revenue as well as the assessee. The Tribunal allowed the appeal filed by the assessee and dismissed the appeal of the Revenue. On further appeal by the Revenue contending that (i) the expenses incurred in a new unit earlier to the commencement of the manufacturing process had to be capitalised and the new business of the assessee could not be said to be an extension of the existing business, (ii) the expenditure incurred in connection with the purchase and installation of plant and machinery was capital in nature and thus disallowable, and (iii) the pre-operative expenses could not be written off at one go but had to be capitalised and admissible depreciation allowed thereon: Held, dismissing the appeal, that the new unit was a part of the existing business and there was no dispute that there was unity of control and inter lacing of the units. Thus the expenses incurred by the assessee for the setting up of the new unit which was a part of the existing business were therefore to be allowed as a revenue expenditure." (emphasis supplied) 6.1 The Revenue does not contend on the tenability or genuineness of the expenditure incurred by the assessee as preoperative expenditure for establishing a radial car tyre manufacturing unit in Chennai. The objection raised by the Assessing Officer is that the capitalization of expenditure since has been adopted by the assessee in its books of account, the outflow cannot be booked and claimed as expenditure under Section 37(1) of the Act. Now, therefore, the question raised is whether the expenditure incurred by the assessee for establishing a unit in Chennai is to be treated as revenue expenditure or should be capitalized in the asset of unit at Chennai. As noted by the Supreme Court in Alembic Chemical

17 ITA No. 609/Coch/2017 Apollo Tyres Ltd. Works Co. Ltd. case, though the tests are available for determining what constitutes revenue expenditure and capital expenditure, the final analysis depends on case to case basis. The reported cases in Sakthi Sugars and Priya Village Road shows Ltd cases, the following tests or requirements for identifying the expenditure, whether as capital or revenue, are juxtaposed for our consideration as well: “34. From the above decisions the test for identifying an expenditure as to whether it is a revenue expenditure or capital expenditure can be stated as under (1) If the amount spent was for the purpose of bringing into existence a new asset or obtaining a new advantage, it would be a capital expenditure. (2) If on the other hand, it is not made for the purpose of bringing into existence any such asset or advantage but for running the business or working it with a view to produce the profits, it is a revenue expenditure. (3) For instance if the interest paid was in respect of the asset, which was acquired on an outright basis than it was intimately linked with the value of the asset. That determines the character of the expenditure and it was capital in nature. Keeping the about tests in mind, when we examine the case on hand, the various kinds of expenditures relating to the sum of 6,84,78,570/-, the details of which have been mentioned in paragraphs 19 and 20, disclose that all those expenditures were incurred in the relevant years for the purpose of manufacture of sugar in the respective factories with a view to earn profits and therefore they are nothing but revenue expenditure only. In other words, all expenses which were incurred by way of salaries, wages, bonus, provident fund contribution, workmen welfare expenses, power, fuel and water, manufacturing expenses, rent for office building etc., were all expenses which were incurred for the purpose of running of the business and it cannot be held to be by way of investment. In fact there was no dispute that whatever

18 ITA No. 609/Coch/2017 Apollo Tyres Ltd. investments made for Baramba unit and Dhenkanal unit were capitalised and were never claimed by way of revenue expenditure."

19 ITA No. 609/Coch/2017 Apollo Tyres Ltd. treated and held as revenue expenditure by the Tribunal. The question, again, is not whether the assessee should be called upon to capitalise and claim depreciation; the question is whether the claim of the assessee conforms the deduction permissible under Section 37(1) of the Act. In the facts and circumstances of this case, we are of the view that the preoperative expenses amounting to Rs.26,97,79,538/- incurred by the assessee are revenue expenses, and are correctly so held by the Tribunal. The above view is fortified by a catena of decisions in favour of the assessee. We do not, as a matter of fact, see any reason distinguishable in the case on hand to accept the contest of the Revenue. For the above reasons and discussion, substantial question Nos.1, 1.1 and 1.2 are answered in favour of the assessee and against the Revenue.” Respectfully following the decision of the Hon'ble Kerala High Court in assessee’s own case, we hold that pre-operative expenditure is in the nature of revenue expenditure. Accordingly, we direct the AO to allow the pre-operative expenditure of Rs. 13,28,53,754/- as Revenue expenditure. In the result, the ground No. 3 stands allowed.

20 ITA No. 609/Coch/2017 Apollo Tyres Ltd. Industrial Research ("DSIR") up to 31-03-2014 and are eligible for deduction u/s 35. Further, Company's in-house R&D facility at Limda (Vadodra) has been approved under section 35(2AB) by DSIR along with Order of approval (in Form No. 3CM) dated July 6, 2012. The said approval is valid for a period of three years, ie, from April 1, 2012 to March 31, 2014. The approval entitles the Company to claim weighted average deduction at the rate of 200% of the expenditure (capital as well as revenue) incurred by it on R&D activities. During the year under consideration, the Assessee had incurred revenue expenditure on R&D activities amounting to Rs.38,47,20,950/-and capital expenditure amounting to Rs.2,21,64,930/-. Out of this the AO disallowed the following as tabulated below: -

Particulars Amount R&D expense incurred by reimbursement of salary 12,81,14,109 and other expenses of Apollo Vrerdestein B.V., Netherlands; Vrerdestein GmbH, Germany and Apollo Tyres Global R&D B.V., Netherlands R&D expense incurred for testing of tyres outside 1,25,10,307 India Other R& D expenses incurred at Limda (Vadodra) 2,08,68,464 Total 15,60,52,275

21 ITA No. 609/Coch/2017 Apollo Tyres Ltd. order dated 10.01.2017. The decision of the Tribunal was confirmed by the Hon'ble Kerala High Court in ITA No. 40 of 2017 dated 31.08.2021. The relevant findings of the Hon'ble High Court are extracted below: -

“7. The Revenue filed appeal before the Income Tax Appellate Tribunal in ITA No.257/Coch/2015 and the Tribunal considered the question as follows: "In the present appeal we are concerned with the amount of Rs.3.89 crores. The assessee submitted during the course of assessment proceedings that the said amount represents reimbursement of salary and other costs as incurred towards employees. It was further submitted that one of the employee, Mr.Peter Becker is employed on the rolls of Apollo Tyres, Germany, a subsidiary of Apollo Tyre Limited but he is overall incharge of the R & D activities of the company in India and devotes substantial time to the R & D activities carried out by the company at is R & D Unit at Limda, Baroda. It was argued that the salary paid to Mr.Peter Becker in respect of the services rendered by him in respect of company's R & D Unit at Limda, Baroda, is reimbursed by Apollo Tyres Ltd. To its subsidiary Apollo Gmbh, Germany and debited in the books of the assessee company and as such is an allowable expenditure u/s 35(2AB) of the Income Tax Act. The A.O. Was of the view that deduction under section 35(2AB) is limited to the expenditure on scientific research on in house research and development facility and therefore the amount paid to the employee in Germany would not attract the benefit of the extra weighted deducted of 50% claimed under that provision. The DRP, however, deleted the addition and held that the salary paid to Sh.Peter Becker was entitled for deduction under Section 35(2AB) of the Act. The Ld.DR has relied upon the draft assessment order to canvas his submissions that the deletion of disallowance was

22 ITA No. 609/Coch/2017 Apollo Tyres Ltd. not in accordance with law. The Ld.AR on the other hand has reiterated the submissions made by the assessee before the DRP. We have heard the rival submissions. We are not in agreement with the view of the department. Admittedly, in the present case the nature of the expenditure for R & D is not disputed by the department. The Department has further not disputed the fact that the said employee of the assessee company is overall in-charge of the R & D activities at Baroda. The mere fact that the said employee was paid by Apollo Tyres, Germany and thereafter reimbursed by the assessee company would not ipso facto lead to a conclusion that the expense on R & D is made outside India. The deduction is therefore within the parameters of Section 35(2AB) of the Act. In view thereof, Ground No.3 raised by the department is dismissed." 8. The said finding is assailed by the revenue. The question refers to salary paid at an outdoor R&D facility and the payment is without qualification of the DSIR. The case law cited is not followed both by the DRP and the Tribunal while accepting the weighted deduction under Section 35(2AB) of 50% on the salary paid toMr.Peter Becker. The question does not refer to the circumstances considered and accepted by the DRP while appreciating the claim of expenditure to accept the salary paid by the assessee company to Mr. Peter Becker, an employee of subsidiary of the assessee as an allowable expenditure. The assessee demonstrated the utilisation of services and once the salary paid to Mr.Peter Becker is accepted as expenditure, the reason to disallow weighted deduction is completely wanting. The department could not before the Tribunal demonstrate that the expenditure accepted in respect of Mr.Peter Becker is untenable in fact. The services are stated to have been taken and remuneration paid to the employee in the field, section accords weighted deduction as additional deduction. 9. The findings of fact recorded by the DRP and the Tribunal are available in the circumstances of the case, we are convinced that the question framed is without merit. Hence

23 ITA No. 609/Coch/2017 Apollo Tyres Ltd. question is answered in favour of assessee and against the revenue.” Respectfully following the decision, we direct the AO to allow the R&D expenditure incurred towards reimbursement of salary and other expenses to Apollo Verdestein B.V., Netherlands of Rs. 128,114,109/- under the provisions of section 35(2AB) of the Act. As regards to the R&D expenditure incurred for testing of tyres outside India of Rs. 12,510,307/-, the issue was decided against the assessee by the decision of the Hon'ble Kerala High Court in assessee’s own case for AY 2010-11 in ITA No. 44 of 2017 dated 22.09.2021vide para 10.6 of the order, which reads as under: -

“10.6 In our considered view, the Tribunal fell in a substantial error of law by not taking note of the qualifying words such as expenditure on scientific research on in-house research and development facility as approved by the prescribed authority. As rightly contended by Mr.Christopher Abraham, there is no need for liberal interpretation of a tax provision when the language is unambiguous and grant an incentive not provided by the Parliament to a set of cases. The incentive is admissible only when the expenditure is incurred on scientific research on in-house research and development facility. The object of incentive is to encourage indigenisation of technology and show up the know-how of the assessee/entrepreneurs. The Tribunal's conclusion is accepted the same opens a new eligibility facility without reference to approval by the prescribed authority for claiming incentive of weighted deduction. The circumstances considered and the principle laid in Cadila Healthcare are completely distinguishable. He takes note of the circumstances that the claim of the assessee now encompasses revenue expenses said to have been incurred at assessee's subsidiary at Germany. The said expenditure

24 ITA No. 609/Coch/2017 Apollo Tyres Ltd. allowed as weighted deduction then the words which have substantial meaning in Section 35(2AB) of the Act viz. that in- house research and development facility as approved by the prescribed authority would become otiose. The preference to liberal interpretation for literal construction is the correct principle. The meaning of words ought not to be stressed and strained while constructing the application of a provision in a statute. We are convinced that the Tribunal fell in a serious error by accepting the claim of assessee for weighted deduction amounting to Rs.94,98,220/-. The assessee fails to establish essential requirements for claiming weighted deduction. Therefore, the conclusion recorded by the Tribunal warrants interference under Section 260A of the Act and the question is answered in favour of the revenue and against the assessee.” Respectfully following the decision of the Hon'ble Kerala High Court we confirm the disallowances made by the AO in respect of R&D expenditure incurred outside India of Rs. 12,510,307/- and in respect of R&D expenditure incurred at Limda (Vadodara) of Rs. 20,868,464/-. We find merit in the submission of the appellant that the same qualifies for weighted deduction u/s. 35(2AB) of the Act as it was approved by DSIR. Accordingly, we direct the AO to allow the same. Thus, grounds of appeal Nos. 4 to 4.2 stand partly allowed.

25 ITA No. 609/Coch/2017 Apollo Tyres Ltd. contention of the appellant that reimbursements are not taxable in India under the DTAA or under the provisions of Income Tax Act and the assessee placed reliance on the following decisions: -

i. CIT v. Dunlop Rubber Co. Ltd. [1983] 142 ITR 493 (Delhi) ii. Siemens Aktiongesellschaft 177 Taxman 82 (Bom HC) iii. CIT vs. Industrial Engineering Projects (P.) Ltd. [1993] 202 IATR 1014 (Delhi) iv. DLF Commercial Project Corporation 379 ITR 538 (Delhi) v. Tejaji Farasram Kharawalla Ltd. [1968] 67 ITR 95 (SC) vi. DECTA 237 ITR 190 AAR vii. ABB Ltd. 189 Taxmann 422 viii. Ernst and Young Ltd. 49 taxmann.com 386 (Kolkata ITAT) 13. We carefully considered the submissions made by the appellant. On mere perusal of the assessment order, it would reveal that the disallowance u/s. 40(a)(i) was made by the AO solely for the reason of non-deduction of tax at source on payments made to foreign AE. The AO was of the opinion that if a particular payment does not represent income, it is open to the assessee to apply to the AO of the payer for determination of the appropriate portion of income or to apply for issuance of certificate authorising the payer not to deduct tax at source or deduct tax at lower rate. The AO also placed reliance on the decisions of the Hon'ble Supreme Court in the case of Transmission Corporation of A.P. Ltd v. CIT [1999] 239 ITR 587 and also GE India Technology Centre P. Ltd. v. CIT [2010] 327 ITR 456. The issue whether the payment is merely in the nature

26 ITA No. 609/Coch/2017 Apollo Tyres Ltd. of reimbursement of expenditure or otherwise is a question of fact which required to be examined based on the material on record. On a mere perusal of the assessment order, it would show that the AO neither examined this factual aspect nor the assessee company laid the factual foundation to prove that it is mere reimbursement of expenditure. Even otherwise, the decisions relied upon by ld. Senior counsel were rendered in the context of the provisions of section 195 of the Act. Hence, the ratio of those decisions cannot be applied in the context of provisions of section 40(a)(i) of the Act. Once there is a failure on the part of the assessee to deduct tax at source, the provisions of section 40(a)(i) are triggered. Recently the coordinate bench of this Tribunal in the case involving identical facts and issues in the case of Muthoot Fincorp Ltd. in ITA No. 464, 465 & 496/Coch/2024 dated22.08.2025 (both AM & JM are parties) held as under: - “10. We have heard the rival contentions and perused the material available on record. The solitary issue that arises for our consideration is whether the CIT(A) was correct in law in upholding the disallowance of charges paid to MPCMS towards professional charges made by the appellant for non deduction of tax at source on such payments invoking provisions of section 40(a)(ia) of the Act. 11. Brief facts of the case are that the appellant had engaged services of an organization called MPCMS for rendering professional services in terms of agreement entered into by it on 01.04.2004, which is valid for a period of 5 years. This entity is a sister concern of the appellant company. During the previous year relevant to the assessment year under

27 ITA No. 609/Coch/2017 Apollo Tyres Ltd. consideration, the appellant paid total sum of Rs. 7,33,77, 497/-. Out of the said sum of Rs. 7,33,77,497/- the appellant had deducted TDS only on a sum of Rs. 1,32,42,920/- and on the balance amount no tax was deducted at source treating it as mere reimbursement of expenditure to MPCMS. The said payee, i.e. MPCMS also raised different bills. The AO was of the opinion that the money paid towards management consultancy charges under composite contract and the contract did not envisage any bifurcation of the amounts. The appellant was liable to deduct tax at source on entire amount paid to the MPCMS. As the appellant had failed to deduct tax at source on the entire amount, the AO invoking provisions of section 40(a)(ia) made addition of a sum of Rs. 6.63 crores. Even on appeal before the CIT(A) the same was confirmed by the CIT(A). There is no dispute about the applicability of provisions of section 194C of the Act on such payments. The Hon'ble Apex Court in the case of Transmission Corporation of A.P. Ltd v. CIT [1999] 239 ITR 587 observed that provisions of section 194C of the Act reveals the intention of the legislature to enforce tax even in respect of gross sums even though the whole of such sum does not represent the income chargeable under the Act. Non deduction of tax at source definitely attracts deduction u/s. 40(a)(ia) of the Act. The Hon'ble Apex Court in the context of provisions of section 195 held as under: - “The purpose of sub-section (1) of section 195 is to see that the sum which is chargeable under section 4 of the Act for levy and collection of income-tax, the payee should deduct income-tax thereon at the rates in force, if the amount is to be paid to a non-resident. The said provision is for tentative deduction of income-tax thereon subject to regular assessment and by the deduction of income-tax, rights of the parties are not, in any manner, adversely affected. Further, the rights of payee or recipient are fully safeguarded under sections 195(2), 195(3) and 197. Only thing which is required to be done by them is to file an application for determination by the Assessing Officer that such sum would not be chargeable to tax in the case of

28 ITA No. 609/Coch/2017 Apollo Tyres Ltd. recipient, or for determination of appropriate proportion of such sum so chargeable, or for grant of certificate authorising recipient to receive the amount without deduction of tax, or deduction of income-tax at any lower rates or no deduction. On such determination, tax at appropriate rate would be deducted at the source. If no such application is filed, income-tax on such sum is to be deducted and it is the statutory obligation of the person responsible for paying such 'sum' to deduct tax thereon before making payment. He has to discharge the obligation of tax deduction at source.” 12. Similar provisions are incorporated in the context of provisions of section 194C. The safeguards in the context of section 194C are provided u/s. 197 & 197A of the Act. If the payee was of the opinion that the entire income is not chargeable to tax the rights of the payee are safeguarded u/s. 197 & 197A but the only requirement is to file an application for determination of income to the AO that such sum would not be chargeable to tax in the case of the recipient or for determination of appropriate portion of such sum chargeable or for grant of certificate authorising the recipient to receive the amount without deduction of tax or deduction of income tax at lower rate or no deduction. It is not the case of the appellant that the recipient had obtained any such certificate from the AO. Further, we find that the appellant had not discharged the onus of proving that it is a mere reimbursement of expenditure made by the appellant. The provisions of section 194C does not permit the recipient to bifurcate the gross sum in terms of the contract into two different heads. When the law mandates a particular thing to be done in a particular manner, then it has to be done in the manner. In this connection, attention is drawn to the decision of the Privy Council in Nazir Ahmad v. King Emperor, AIR 1936 PC 253 which dictum has been followed by the honourable Supreme Court in UPSC v. S. Papaiah [1997] 7 SCC 614 and many other cases, Tamil Nadu Medical Officers Association v. Union of India [2020] SCC Online SC 699 and State of Jharkhand v. Ambay Cements

29 ITA No. 609/Coch/2017 Apollo Tyres Ltd. [2005] 1 SCC 368. Provisions of section 40(a)(ia) are automatically attracts on failure of the assessee to deduct tax on the sum paid by him. In the light of the legal positions discussed supra, we are of the considered opinion that the AO had rightly made the addition u/s. 40(a)(i) following the Hon'ble Supreme Court rulings cited supra. Thus, we do not find any merit in the ground of appeal filed by the assessee. Accordingly, this ground of appeal is dismissed.

30 ITA No. 609/Coch/2017 Apollo Tyres Ltd. transaction had no impact on the determination of taxable income. Therefore, the AO had clearly fell in error in brining the same to tax in the year of reversal of the loss especially in view of the fact that in the earlier years the loss debited to Profit & Loss A/c. was not allowed as a deduction. Accordingly, we direct the AO to delete the addition of Rs. 2,18,26,271/-. In the result, this ground of appeal stands allowed.

i. Dishnet Wireless Ltd. v. DCIT [2015] 60 taxmann.com 329 (Chennai-Trib.) ii. Industrial Development Bank of India v. ITO [2007] 293 ITR (AT) 267 (Mumbai) iii. PCIT v. Sanghi Infrastructure Ltd. [2018] 96 taxmann.com 370 (Gujarat iv. DCIT v. Ercisson Communications Ltd. ITA No. 106/2002

It is submitted that in assessee’s own case, the Delhi Tribunal for AY 2010-11 in the context of provisions of section 201 proceedings

31 ITA No. 609/Coch/2017 Apollo Tyres Ltd. held that there was no obligation to deduct tax at source following the decisions of the Hon'ble Supreme Court in the case of Bharat Earth Movers v. CIT [2000] 245 ITR 428 (SC) and Rotork Controls India P. Ltd. v. CIT [2009] 314 ITR 62 (SC).

32 ITA No. 609/Coch/2017 Apollo Tyres Ltd. the context of provisions of section 201 of the Act. Further, we find that the AO had not made addition for non-deduction of tax at source invoking provisions of section 40(a)(ia) of the Act perhaps for the reason that he liability had not crystallized during the year though not stated so specifically. Therefore, we remand this issue back to the file of the AO to decide the admissibility of this provision keeping in view the ratio of the above decisions. Accordingly, this ground of appeal partly allowed for statistical purposes.

 Subject loss of Rs. 17.34,34,860/- was incurred during year ended 31.03.2006 on account of fire at MSWC  Accounting treatment given by Assessee is not relevant, even though loss shown as recoverable in books during the previous year ended 31.03.2006 but not debited to Profit and Loss account in AY 2006-07.  In AY 2008-09 Rs. 4,24,96,060/- was received as part payment of claim from MSWC and was offered to tax also and hence has been allowed as a loss in AY 2006-07 by Hon'ble ITAT and for the balance amount of Rs. 13.10 crores, Assessee made a provision of Rs. 7 Crores and Rs. 6,09,38,800/- during AY 2008- 09 and AY 2010-11 respectively. These provisions were allowed by the AO.  Now in AY 2013-14, the Assessee received a further amount of Rs. 8.06 crores from MSWC against its fire loss claim. The Assessee thus reversed the amount of Rs. 8.06 crores against the

33 ITA No. 609/Coch/2017 Apollo Tyres Ltd. provision of Rs. 13.10 crores made in AY 2008-09 and AY 2010-11 and same is credited in the books for AY 2013-14.  Relevant Note No. 8 for this purpose was given in the computation of income for this AY.  The AO only looked into the Return for AY 2006-07 and did not take into consideration all the relevant facts. The AO erred in not appreciating that this was taken as a claim first time during the course of assessment proceedings in AY 2006-07 and hence finds no mention in the ROI.  Further, the Assessee had stated that if the loss is allowed, any subsequent amounts received from MSWC would be offered to tax. It is in this background that the Assessee thus reversed the amount of Rs. 8.06 crores against the provision of Rs. 13.10 crores made in AY 2008-09 and AY 2010-11 and same is credited in the books for AY 2013-14. Kindly refer Items 7 and 8 of Compilation No.2 Paper Book which is the Computation of Income for AY 2013-14 with supporting extract from P&1. Account where tvv he Appellant itself has offered this for tax under Other income. There is no question of a further addition when Assessee himself has offered this to tax in this AY. The present addition is a duplication. Thus, the sum and substance of the submissions of the learned counsel for the assessee is that the addition of Rs. 8,00,00,000/- amounts to double addition. The submission made by the learned counsel for the assessee are based on factual aspects which requires verification. Therefore, we are of the considered opinion that the matter requires remand to the file of AO for verification of the submissions made by the learned counsel for the assessee. If the submissions are found to be correct on due verification, the addition should be deleted. Thus, the ground No. 9 stands partly allowed.

34 ITA No. 609/Coch/2017 Apollo Tyres Ltd. 18. Ground No. 11 challenges disallowance of gift of Rs. 1,18,54,561/-. It is stated that the expenditure incurred on distribution of gifts on special occasions are allowed as deduction placing reliance on the following decisions: -

i. DCIT v. Haryana Oxygen Ltd. 76 ITD 32 (Del) ii. Sayaji Iron and Engg. Co. v. CIT 253 ITR 749 (Guj) iii. Dinesh Mills Ld. v. CIT 173 CTR 478 (Guj) iv. Punjab Power Packs Ltd. v. DCIT [1999] 71 ITD 163 (Chandigarh) 19. The Chandigarh Bench of this Tribunal in the case of Punjab Power Pack Ltd. (supra) held as under: - 10. One of the main grounds which weighed with the tax authorities in deciding against the assessee was that the identity of the persons to whom the "costly gifts" have been given was not disclosed. In our opinion such disclosures would neither be here nor there since the distribution of Diwali gifts is entrusted to some of the middle or lower level functionaries of the company whether it be the assessee or any body else and it is not possible for the senior management to keep track or verify whether a gift sent to a particular person has reached its destination. Then again disclosure of names may cause embarrassment to some of the recipients and in a given case the names given may not be correct which may lead to harassment in individual cases, but that does not preclude the claim for deduction to be considered under section 37(1) of the Income-tax Act, 1961. Giving of costly gifts may not be desirable but nonetheless it is business expenditure so far as the assessee is concerned. We have already mentioned earlier about the change in corporate thinking vis-a-vis gifts at the time of Diwali. We must at this stage clarify that we are not laying down a general proposition that an assessee should

35 ITA No. 609/Coch/2017 Apollo Tyres Ltd. claim an item of expenditure without satisfying due requirements laid down by law or the rules but the present ground of appeal is being decided strictly keeping in view the facts of the present case and it can not be made applicable on a universal basis. The ld. counsel pointed out during the course of hearing that in the preceding assessment year Diwali expenses of similar type were allowed the quantum being Rs. 1.28 lakhs and the assessee's turnover was Rs. 405.48 lakhs whereas during the year under appeal the expenditure was Rs. 2.16 lakhs and the turnover had gone uptoRs. 578,29 lakhs. This factual statement is not disputed by the Id. DR and we do find on perusal of 'Annexure D' of the Paper Book that the ratio of the expenditure to the turnover in both the years, appears to be quite favourable. Then again there is no basis on the part of the CIT(A) to hold that the expenditure of Rs. 1,83,460 is "personal expenditure" and if so then whose as this is the case of a Public Sector Undertaking of the Punjab Government. The other term he has used is that the expenditure is of a "social nature" but in our opinion this is quite akin to "customary nature" in the context of the festival of Diwali as it is a social practice to give and take such gifts. A list of the expenditure set out of Para 6.3 of the appellate order further shows that there are 214 wall clocks amounting to Rs. 27,826 which have been given as gifts and we do feel that this expenditure can not be treated as lavish or personal and thereby liable to be excluded from the definition of customary expenditure vis-a-vis the festival of Diwali. The same can be said about certain other items which we have noticed namely tea sets, dinner sets, suit lengths, emergency lights etc. In the final analysis we accept the arguments advanced by the ld. counsel on behalf of the appellant and allow the claim in full keeping in mind the decisions cited at the Bar by both the parties.”

36 ITA No. 609/Coch/2017 Apollo Tyres Ltd. Respectfully following the above decision, we hold that the expenditure incurred on gifts should be allowed as deduction. Ground No. 11 stands allowed.

37 ITA No. 609/Coch/2017 Apollo Tyres Ltd. 22. In the result, the appeal filed by the assessee stands partly allowed for statistical purposes.

Order pronounced in the open court on 1st September, 2025.

Sd/- Sd/- (RAHUL CHAUDHARY) (INTURI RAMA RAO) JUDICIAL MEMBER ACCOUNTANT MEMBER Cochin, Dated: 1st September, 2025 n.p. Copy to: 1. The Appellant 2. The Respondent 3. The Pr. CIT concerned 4. The Sr. DR, ITAT, Cochin 5. Guard File Assistant Registrar ITAT, Cochin