MARUTI SUZUKI INDIA LTD.,NEW DELHI vs. ADDL. CIT, NEW DELHI

PER SUCHITRA KAMBLE, JM

This appeal is filed by the assessee for Assessment Year 2009-10 against the order dated 2/1/2014 u/s 143(3) r/w Section 144C of Income tax Act, 1961, passed by Addl. CIT, Range – 06, New Delhi.

1.1. That on the facts and circumstances of the case the impugned assessment having been completed on the basis of directions issued by the Dispute Resolution Panel (“DRP”) u/s 144C(5) of the Act without judiciously and

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independently considering the factual and legal objections to the draft assessment order, is illegal and bad in law.

1.2. That the DRP erred on facts and in law in not interfering with the draft order passed by the Assessing Officer holding that since appeals have been field by the appellant and the Department on various issues, there is no warrant to interfere with the proposed additions/disallowances.

1.3. That the DRP erred on facts and in law in not directing the Assessing Officer to delete various additions/disallowance, which were squarely covered in favour of the appellant by the appellate orders for the earlier years.

2.0. That the Assessing Officer erred on facts of the case and in law in completing the impugned assessment at an income of Rs.2071,38,86,572/- against income of Rs.1262,60,79,909/-.

3.0. That the Assessing Officer erred on facts and in law in not allowing an aggregate claim of deduction of Rs.78,01,08,417/- under section 43B of the Act.

3.1. That the Assessing Officer erred in making disallowance under section 43B of the Act following the assessment orders for the earlier assessment years despite admitting that in the earlier year(s) most of the issues have been decided in favour of the appellant.

3.2. That the Assessing Officer erred on facts and in law in holding that the deduction of liability to pay taxes/duties under section 43B is admissible only after such liability has been incurred under the Act. 3.3. That the Assessing Officer failed to appreciate that the assessee having admittedly paid Rs. 41.61.588 - as Excise Duty on vehicles. Rs.24J0.93" - as R& D cess on vehicles and Rs. 1.10.654/- on account of excise duty on spare parts in the relevant assessment year, the same were allowable deduction u/s 43 B of the Act.

3.4. That the Assessing Officer has, without any basis or material, erroneously concluded that the aforesaid payments have been made in advance for the stocks still to be manufactured, without appreciating that as on 31.03.09 the appellant had finished stock of vehicles amounting to Rs 166 appellant had finished stock of vehicles amounting to Rs 166 crores, which included accrued liability of excise duty and R&D cess amounting to Rs 12.87 crores and consequently, the same were, in any case, allowable deduction u/s 43 B of the Act. 3.5. That the Assessing Officer erred on facts and in law in not allowing

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deduction under section 43B of the Act for a sum of Rs 20,99,92,306/- representing the customs duty paid in respect of inputs imported by the assessee company and, for which the corresponding exports had been made by the year end . 3.6. That the Assessing Officer erred on facts and in law in not allowing deduction under section 43B of the Act for a sum of Rs 10,15,93,048/- representing the amount of excise duty actually paid on purchased inputs included in RG 23A Part II. 3.7. That the Assessing Officer failed to appreciate that the aforesaid balances represented the amount of excise duty actually paid by the appellant to the suppliers of raw materials and other inputs for which liability had already been incurred and thus could not be considered as advance payment of excise duty. 3.8. That theAssessing Officer erred on facts and in law in not allowing deduction under section 43B of the Act for a sum of Rs.21,90,94,216/- representing the custom duty paid and included in valuation of closing stock.

3.9. That the Assessing Officer erred on facts and in law in not allowing deduction under section 43B of the Act for a sum of Rs 13,85,95,901/- representing custom duty (CVD) paid to be adjusted against excise duty payable on finished products.

3.10. That the Assessing Officer erred on facts and in law in not allowing deduction under section 43B of the Act for a sum of Rs 7,13,58,922/- representing custom duty in respect of the goods in transit/under inspection.

3.11. That the Assessing Officer erred on facts and in law in not allowing deduction under section 43B of the Act for a sum of Rs. 2,20,97,979/- being Customs Duty paid under protest.

3.12. That the Assessing Officer erred on facts and in law in not allowing deduction u/s 43B of the Act for a sum of Rs.1,06,72,866/- being Excise Duty paid under protest. 3.13. That the Assessing Officer erred in not following the binding decisions of the High Court and the Tribunal in the appellant's own case for the earlier assessment years, in gross violation of principles of judicial propriety.

4.0. That the Assessing Officer has erred in law, on facts and in the circumstances of the case in not allowing the claim of the assessee for withdrawal of add back of Rs. 69,50,54,572/- in the computation of taxable income, being the amounts disallowed in earlier years under Section 43B of the Act.

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4.1. That the Assessing Officer has erred in law, on facts and in the circumstances of the case in failing to apply the fundamental rules of law of taxation that the same income cannot be taxed twice and that the AO is duty bound to determine the true figure of the assessee’s taxable income in accordance with the provisions of the Act. 4.2 That the Assessing Officer has erred in not appreciating that similar withdrawal of add- back under section 43B was allowed by the AO himself and confirmed by the DRP in AY 2007-08. 5.0. That the Assessing Officer erred on facts and in law in making further disallowance of Rs.8,35,98,603/- under section 14A of the Act. 5.1. That the assessing officer erred on facts and in law in proceeding to make disallowance under section 14A simply on the basis of method/ formula prescribed in Rule 8D of the I.T. Rules, without appreciating that preconditions for applying the said rule as prescribed in sub-sections (2)/ (3) of section 14A of the Act were not satisfied.

5.2. That the Assessing Officer erred on facts and in law in not appreciating that there was no nexus between any expenditure incurred and exempt dividend income. 5.3 That the Assessing Officer erred on facts and in law in holding that suo- motu disallowance of Rs. 1,60,71,719/- made by the appellant in the return of income under section 14A of the Act was incorrect. 5.4. That the assessing officer erred on facts and in law in disregarding the explanation given by the appellant for non-inclusion of interest expenses for the purposes of disallowance under section 14A of the Act.

5.5. That the Assessing Officer erred on facts and in law in not following the binding order of the Tribunal in the assessee’s own case for Assessment Year 1999-2000 and 2000-2001 wherein the Tribunal deleted the disallowance made u/s 14A of the Act.

6.1 That the Assessing Officer erred on facts and in law in holding that the sales tax subsidy received by the appellant was not capital receipt but taxable revenue receipt under section 28(iv) of the Act.

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6.2. That the Assessing Officer failed to appreciate that identical issue was decided in favour of the appellant both by the CIT(A) and the ITAT in appellant’s own case for AY 2005- 06, following the decision of the apex Court in the case of CIT v Ponni Sugars and Chemicals Limited: 306 ITR 392 (SC). 6.3 That the Assessing Officer erred on facts and in law in not appreciating that since the object of subsidy was to promote industrial growth/ development, to generate employment, etc., the subsidy so received was in the nature of capital receipt not liable to tax under the provisions of the Act. 6.4. That the Assessing Officer erred on facts and in law in not appreciating that the fact that appellant is a cash rich company or that the appellant was granted subsidy under prestigious unit category or that the appellant could utilize the subsidy amount without any pre-restricted object, had no bearing on deciding the issue in question.

6.5. That the Assessing Officer erred on facts and in law in not considering the Memorandum dated 18.10.01 issued by the Prohibition, Excise and Taxation Commissioner, Haryana, which was the competent authority and part of High Powered Committee, certifying the aforesaid amount retained as per entitlement certificate as capital subsidy. 7.0. That the Assessing Officer erred on facts and in law in disallowing expenditure of Rs. 679,11.80,556/- incurred on account of royalty, both lumpsum and running, holding the same to be capital expenditure.

7.1 That the Assessing Officer erred, on facts and in law in not appreciating that royalty paid by the appellant to Suzuki Motor Corporation, Japan (hereinafter referred to as “SMC”) is merely for the right and license to manufacture and sell the licensed product for a specified duration in India and was therefore, revenue in nature.

7.2. That the Assessing Officer erred on facts and in law in not appreciating that payment of royalty is directly linked and correlated with the production/sales of cars and spares by the appellant and if there is no production/sale of cars and spares, there will be o royalty payable to SMC.

7.3 That the Assessing Officer erred on facts and in law in not appreciating that royalty payment (including cess) was held to be revenue expenditure in all the preceding assessment years till assessment year 2005-06 and that there being no change in facts during the year under consideration, there was no warrant or justification to take a totally contradictory view in holding the same to be capital expenditure.

7.4. That the Assessing Officer erred on facts and in law in disallowing Rs.

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32,03,13,445/-on account of R&D cess on royalty, holding that cess also partook the character of royalty, without appreciating that royalty was paid to SMC whereas R&D cess on royalty, being a statutory payment, was paid to the Indian Government.

7.5. That the Assessing Officer erred in failing to appreciate that R&D cess, being a statutory payment, is governed by section 43B of the Act, which is a separate code in itself and overrides other provisions of the Act, and hence the payment of R&D cess is an allowable deduction under that section.

7.6. That the Assessing Officer erred on facts and in law in not appreciating that R&D cess on royalty was always accepted to be revenue expenditure in all the previous assessments till assessment year 2005-06, and that there being no change in facts during the year under consideration, there was no warrant or justification to take a totally contradictory view and holding the same to be capital expenditure.

7.7. Without prejudice, the assessing officer erred on facts and in law in not appreciating that the appellant had suo-moto disallowed R&D cess paid on royalty to the extent of Rs. 52,84,893/- under section 43B , thereby resulting in a double disallowance to the extent of Rs. 52,84,893/-. 8.0. That the Assessing Officer has erred in law and on facts in disallowing deduction of Rs.67,00,000/- representing the excise duty paid by the appellant during the relevant previous year.

8.1. That the Assessing Officer failed to appreciate that the said amount of Rs.67,00,000/- constituted and represented excise duty actually paid by the appellant and is, therefore, allowable deduction under section 43 B of the Act. 8.2. That the Assessing Officer erred on facts and in law in leveling false and baseless allegations of the appellant having, inter alia, hidden true nature of payment of excise duty.

9.0 That the Assessing Officer has erred on facts and in law in making disallowance of Rs.36,38,43,197/- being the expenditure provided on estimated basis on account of foreseen price increase (in short “FPI”), disregarding the consistent and accepted method followed by the appellant for last many years since inception. 9.1. That the Assessing Officer completely failed to appreciate that there was a clear contractual agreement/ understanding between appellant and suppliers

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under which the appellant was liable to pay additional amount of price for the supplies of various inputs received during the year and accordingly the said liability accrued during or before the end of that year and estimated amount thereof was accordingly allowable as deduction from assessable income.

9.2. That theAssessing officerfailed to appreciate that mere fact that the exact amount of additional price payable to suppliers was not quantified until the end of relevant accounting year did not at all mean that there was no accrual of liability in that year.

9.3. That the Assessing officercompletely disregarded the evidence and material placed on record which conclusively establishes the existence of agreement/understanding between appellant and suppliers for the payment of additional price to them for supplies made during the accounting year ended on 31st March, 2009.

9.4. That the Assessing Officer erred on facts and in law in not taking cognizance of the fact that the entire amount of liability has either been paid or written back and offered to tax as its income in the succeeding assessment year.

9.5. Without prejudice, the Assessing Officer erred on facts and in law in not allowing the deduction of the amount disallowed in the preceding assessment year(s) but actually paid during the year under consideration.

10.0. That the Assessing Officer has erred in law, on facts and in the circumstances of the case in making ad-hoc disallowance of Rs. 17,29,22,979/- for alleged sharing of resources by the appellant with other group / subsidiary companies.

10.1. That the assessing officer / DRP erred in observing that the appellant had borne expenses incurred for other corporate entities, failing to appreciate that the entire expenses were incurred by the appellant for the purposes of its business and hence no part of the expenditure incurred was required to be disallowed on account of sharing of resources.

10.2. That the assessing officer/ DRP further failed to appreciate that the disallowance of any part of the expenses incurred is ultimately tax neutral in as much as the expenses disallowed in the hands of the appellant would have to be allowed in the hands of the group/ subsidiary companies.

10.3. Without prejudice to the aforesaid, the quantum of disallowance computed by the Assessing Officer is very high as compared to expenses that could, if at all, reasonably attributed towards sharing of expenses.

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11.0 That the Assessing Officer erred on facts and in law in disallowing Rs.7.67.00.000-. being the expenditure incurred on account of discharging corporate social responsibility}. without appreciating that such expenditure was incurred wholly and exclusively for the purposes of business.

11.1. That the assessing officer erred on facts and in law in holding that the expenditure incurred on corporate social responsibility is, even otherwise, capital in nature on the ground that the same resulted in enduring benefit to the appellant. 11.2. Without prejudice, the assessing officer erred on facts and in law in not allowing depreciation under section 32 of the Act, consistent with his finding that the aforesaid expenditure is capital in nature. 12.0. That the assessing officer has erred on facts and in law in disallowing a sum of Rs.6,41,060/-, being expenditure incurred on account of club membership fees, following the assessment orders for the earlier years, alleging that the appellant failed to justify the said expenses.

15.1. Whether on the facts and in the circumstances of the case, the DRP erred in law in upholding, in principle, transfer pricing adjustment made by the assessing officer / TPO in respect of expenditure incurred on advertising, marketing and publicity (“AMP expenses’’)?

15.2. The DRP/TPO erred on facts and in law in not appreciating that the only Transfer Pricing adjustment permitted by Chapter X of the Act was in respect of the difference between the arm's length price (ALP) and the contract or declared

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price but it cannot determine the 'quantum' of the international transaction or extent of business expenditure.

15.3. The DRP erred on facts and in law in not appreciating that the Transfer Pricing adjustment sought to be made by the TPO in the present case was a mere quantitative adjustment, on the footing that the Appellant had incurred an excessive amount of AMP expenditure , and not on the footing that there was a difference between the ALP and the contract or declared price, and that a Transfer Pricing adjustment was not at all permitted or authorized by Chapter X of the Act.

15.4. The DRP erred on facts and in law in not holding that merely because the Indian company has incurred expenditure on product advertisements including the foreign brand and the AMP expenses incurred by the taxpayer which are proportionately higher than those incurred by comparable cases, it does not lead to the inference of “transaction” between the taxpayer and the foreign AE for creating marketing intangibles on behalf of the later. 15.5. The DRP/TPO erred on facts and in law in holding that expenditure incurred by the appellant which incidentally resulted in brand building for the foreign AE, was a transaction of creating and improving marketing intangibles for and on behalf of its foreign AE and further that such a transaction was in the nature of provision of a service by the appellant to the AE.

15.6. That the assessing officer erred on facts and in law in not appreciating that the characterization of the appellant being that of a full fledged manufacturer and the sole beneficiary of the AMP expenditure incurred by it, justifies the conduct of the appellant in incurring and bearing the cost of AMP expenditure. 15.7. The DRP erred on facts and in law in not holding that expenditure on advertisement and brand promotion, unilaterally incurred by the appellant, could not be regarded as a ‘transaction’ in the absence of any proved understanding / arrangement between the appellant and the associated enterprise.

15.8. The DRP/TPO erred on facts and in law in not appreciating that the AMP expenses, etc., unilaterally incurred by the appellant in India could not be characterized as an international transaction as per section 92B,in the absence of any proved understanding / arrangement between the appellant and the associated enterprise, so as to invoke the provisions of section 92 of the Act.

15.9. The DRP/TPO erred on facts and in law in not appreciating that in

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absence of any understanding / arrangement between the appellant and the associated enterprise, the associated enterprise was under no obligation to reimburse AMP expenses incurred by the appellant for sale of its products in India.

15.10. The DRP TPO erred on facts and in law in not appreciating that the advertisement and marketing expenses were incurred by the appellant wholly and exclusively for purposes of its business and not on behalf of or for the benefit of the AE: any benefit to the AE being only incidental.

15.11 That the assessing officer erred on facts and in law in not appreciating that the joint trade mark ‘‘Maruti-Suzuki” is exclusively used by the assessee and AE (SMC) does not have any right to use/sell products under the joint trademark “Maruti-Suzuki”

15.12. That the assessing officer erred on facts and in law in not appreciating that the AMP expenses ,etc, unilaterally incurred by the appellant in India cannot be characterized as an international transaction as per section 92B so as to invoke the provisions of section 92 of the Act.

15.13. That the assessing officer erred on facts and in law in not appreciate the A&M expenses incurred by the Assessee were towards the products manufactured and owned by the Assessee and not towards the brand, per se (Joint Brand);

15.14. Withoutprejudice to the all other grounds, AOfailed to appreciate that full disallowance of excessive A&M expenditure is not appropriate as the excessive expenditure will lead to Brand building of both Maruti and Suzuki. That the assessing officer erred on facts and in law in holding that the appellant incurred extra-ordinary / non routine expenses of promotion and development of Suzuki brand and, therefore, helped in creation of marketing intangible in India.

15.15. That theassessing officer erred on facts and in law in not appreciating that the AMP expensesincurred by the appellant, did not result in creation of any marketing intangibles; much less on account of the AE.

15.16. Without prejudice that the assessing officer erred on facts and in law in ignoring the fact that, since the appellant earns return commensurate with other brand owners, the appellant is adequately compensated for its functions and AMP expenses.

15.17. Without prejudice that the assessing officer erred on facts and in law, in not appreciating that the AMP expenses incurred by the appellant was appropriately established to be at arm’s length applying Transactional Net Margin Method (TNMM).

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15.18. The DRP/TPO erred on facts and in law in applying Bright Line Test (“BLT”) for computing adjustment on account of expenditure on advertisement and brand promotion expenses, without appreciating that in absence of specific provision in the Transfer Pricing statutory provisions in India., adjustment on account of the arm’s length price of the advertisement and brand promotion expenses could not be made.

15.19. The DRPTPO erred on facts and in law in not appreciating that such a Transfer Pricing adjustment cannot at all be made in law without determining the Arm's Length Price ("ALP") by applying one of the methods specified in section 92C of the Act.

15.20. The DRP/TPO erred on facts and in law in not appreciating that merely because the net profit rate of the appellant was better than the corresponding net profit rate of comparable companies, would not lead to the conclusion that incurring of AMP expenses for the AE was at arm’s length.

15.21 That the assessing officer erred on facts and in law in ignoring that “bright line limit” is not a prescribed method under the purview of section 92C of the Act.

15.22. That the assessing officer erred on facts and in law in failing to appreciate that the appellant has long-term rights to use the trademark/ licensed intangibles and reaps all the benefits of the said A&M expenses and is thus the economic owner of any related marketing intangible.

15.23. That the assessing officer erred on facts and in law in failing to appreciate that all the key decisions with respect to advertising, marketing, selling and distribution of the products manufactured by the appellant for sale in designated territories are taken by the appellant and consequently, the appellant is responsible / eligible for the related risks and reward.

15.24. That the assessing officer erred on facts and in law in holding that the appellant should have earned a mark-up in respect of the AMP expenses, alleged to have incurred for and on behalf of the associated enterprise.

15.25. That the assessing officer erred on facts and in law in individually examining the international transactions entered into by the appellant, not appreciating that such transactions being closely linked, ought to have been

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benchmarked on an aggregate basis.

15.26.That the assessing officer erred on facts and in law in considering the Net sales of Hindustan Motors as Rs.59,118.21 Crores instead of Rs.591.1821 Crores while computing the AMP/ Sales ratio of the comparable companies.

15.27. That the assessing officer erred on facts and in law in not appreciating that on considering the correct net sales of Hindustan Motors as Rs 591.1821 the AMP to sales ratio (refer table below) of the comparable companies is more than AMP to sales ration of the appellant and the AMP adjustment stands deleted. Rs. In Crore

Company Net Sales Name Advertisement/Publicity Percentage expenses (%)

Hindustan 591.1821 32.94 5.57% Motors Ltd. Mahindra & 12649.06 96.49 0.76% Mahindra 25660.79 321.29 1.25% Arithmetic Mean (5.57+0.76+1.25/3) 2.53% Maruti 20358.3 258.50 1.27% Suzuki India Ltd.

15.28 That the assessing officer erred on facts and in law in not following the DRP direction to take the correct figures for turnover and AMP expenditure for Hindustan Motors.

16.0. That the assessing officer erred on facts and in law in making transfer pricing adjustment amounting to Rs.311,73,59,562/- in relation to the international transaction of payment of royalty entered into by the appellant.

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16.1. That the assessing officer erred on facts and in law, in not appreciating that the international transaction of payment of royalty entered into by the appellant was appropriately established to be at arm's length applying Transactional Net Margin Method (TNMM). 16.2. That the assessing officer erred on facts and in law in artificially splitting the single and inseverable license agreement entered into by the applicant into two separate agreements for use of technology and for use of brand name failing to appreciate that the License Agreement provided the appellant an exclusive right and license to manufacture and sell the licensed product for a specified duration in India and all others rights vested in the license agreement including technology, technical know how and Trade Mark are linked to the core right to manufacture and sell licensed products and were are linked to the core right to manufacture and sell licensed products and were therefore inseverable. 16.3. That the assessing officer erred on facts and in law in failing to appreciate that the methods used by the Ld. TPO to compute the arm’s length royalty is not a method prescribed in TP regulations under Income tax Act, 1961 Therefore the addition made by TPO is void-ab -initio.

16.4. That the Assessing Officer erred on facts and in law in failing to appreciate that the decision to obtain the licensed trademarks was taken solely/exclusively by the appellant for its business purposes since its inception [as against being imposed on it by SMC Motor Corporation (‘A.E’ or ‘ SMC’)].

16.5. That the Assessing Officer erred on facts and in law in failing to appreciate that the license agreement signed between the Assessee and its AE (i.e. SMC) was signed in 1982 when the appellant was a wholly owned government company and thus the license agreement was entered into between two unrelated enterprises thereby complying with the arm's length standard as per the Comparable Uncontrolled Price (CUP) method.

16.6. Failing to appreciate that by the time when Assessee started using the co- branded trademark “Maruti - Suzuki”, Maruti brand was totally new brand whereas “Suzuki” brand had international presence and therefore there cannot be any question of impairment of the Maruti Brand and reinforcement of Suzuki Brand.

16.7. That the assessing officer erred on facts and in law in failing to appreciate that the License Agreement was entered into by the appellant with the approval of the Secretariat of Industrial Assistance, Ministry of Commerce and Industry/ approval from the Reserve Bank of India.

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16.8. That the assessing officer erred on facts and in law in holding that co- branding of “Maruti-Suzuki” has resulted in the reinforcement of value of “Suzuki” brand and simultaneous impairment of “Maruti” trademark failing to appreciate that such concept of “reinforcement” cannot be considered to be an “international transaction” as defined in section 92B of the Act which consists of purchase, sale or lease of tangible or intangible property; 16.9. That the assessing officer erred on facts and in law in holding, on the basis of conjectures and surmises that, the associated enterprises has charged separate royalty for the use of technology and for use of brand name in the proportion in which it incurs expenditure on R&D and Brand promotion.

16.10. Without prejudice, the assessing officer erred in considering the consolidated financials of the associated enterprise for the purpose of segregating the payment of royalty for the use of technology and for the use of brand name. 16.11 That the assessing officer erred on facts and in law in failing to appreciate stature of the associated enterprise and the brand recognition enjoyed by it globally.

16.12. That the assessing officer erred on facts and in law in ignoring the search for third party independent technology agreements conducted by the appellant.

16.13. Without prejudice, the assessing officer erred in failing to appreciate the permissible limits of RBI for the payment of the brand royalty i.e. 5% on domestic sales and 8% on exports for composite royalty (both brand and technology) and 1 % and 2% if only for brand resulting is a maximum 20-25% of royalty attribution towards brand as against the 46% computed by the TPO.

16.14. Without prejudice, the Assessing Officer erred on facts and in law in not appreciating that if compensation for AMP expenses was to be received by the assessee from it’s AE, it will effectively transfer the economic ownership of the brand of the associated enterprise, and in which case it would be grossly unjustified to disallow the payment of royalty for use of brand name.

17.0. That the Assessing Officer erred on facts and in law in making various statements/ averments merely based on conjecture/surmises and unsound presumptions, which were not in accordance with the facts of the case, thereby making a high pitched assessment disregarding judicial pronouncements undertaking the TP adjustment.

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18.0. That the A.O has erred in law, on facts and in the circumstances of the case in allowing TDS credit of Rs.39,53,78,592/- only against Rs.42,81,91,036/- claimed by the appellant in the revised return of income or before DRP, thereby allowing a short-credit of Rs.3,28,12,444/-.

19.0. That the assessing officer erred on facts and in law in charging interest under sections 234B, 234C and 234D of the Act.

19.1. That the Assessing Officer grossly erred in computing the interest u/s 234B of the Act by first adjusting the interest computed under that section on the basis of the assessed income against the self assessment tax paid by the appellant.

19.2. That the Assessing Officer erred on facts and in law in charging interest u/s 234C on assessed Income instead of returned Income as per the provisions of Act.

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lease and fleet management and pre-owned cars, in addition to operating to over 50 driving schools. The following international transactions had been undertaken by the assessee during the F.Y. 2008-09:

S.No. Description of the transactions Amount (In Rs.) Method 1 Purchase of components, 12,110,450,295 TNMM consumables, spares etc. 2 Purchase of CBUs 24,206,633 TNMM 3 Sale of vehicles, spares and 4,427,693,972 TNMM components 4 Purchase of capital items 3,571,719,761 TNMM 5 Payment of Royalty 6,776,868,613 TNMM 6 Payment of Technical Service Fee 654,248,018 TNMM 7 Other Expenditure 6,248,255 TNMM 8 Payment of Guarantee Fee 120,180,464 TNMM

The assessee filed its return of income on 26/09/2009 declaring total income of Rs. 1319,47,29,675/-. A reference was made to the Transfer Pricing Officer (TPO). The TPO vide order dated 21.01.2013 made following adjustments to the returned income of the assessee:

1 Adjustment on account of payment of royalty for use Rs. 311.74 cr. of brand name 2 Adjustment on account of AMP Rs. 136 cr. Total Adjustment to be made Rs. 447.74 cr.

Draft Assessment Order was passed on 28.03.2013. Revised return was filed on 29/03/2011 at an income of Rs. 1262,60,79,909/-. The case was processed u/s 143(1) on 29/03/2011 at returned income. The assessee filed objections before the Dispute Resolution Panel (DRP). The Dispute Resolution Panel vide

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dated 30.12.2013 rejected all the grounds raised by the assessee and directed the Assessing Officer to allow the TDS credit of Rs.17,21,027/-. The Assessing Officer completed the assessment vide order dated 02.01.2014. The Assessing Officer made various additions amounting of Rs. 2071,04,18,575/-.

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the year under consideration, the duties paid were allowable as deduction under section 43B of the Act. Therefore, the Ld. AR submitted that the aggregate amount of Rs. 78,01,08,417/- was allowable as deduction to the assessee under section 43B of the Act. The Ld. AR relied upon the following decisions:-

• Berger Paints India Ltd. Vs. CIT(2004) 266 ITR 99 (S.C) • CIT v. Shri Ram Honda Power Equipment Corporation : 258 CTR 329 / 352 ITR 481 (SC) • CIT v. Modipon Ltd.: 400 ITR 1 (SC) • CIT v. Paharpur Cooling Towers Ltd.: CA No. 19769 of 2017 (SC) • Lakhanpal National v. ITO : 162 ITR 240 (Guj) • Bharat Petroleum Corporation Ltd: 252 ITR 43 (Bom) • CIT v. NCR Corporation India (P) Ltd.: 240 Taxman 598 (Kar.) • Chemicals and Plastics India Ltd. v. CIT : 260 ITR 193 (Mad) • CIT vs. C.L. Gupta: 259 ITR 513 (All.) • CIT v. Raj and Sans Deep Ltd: 293 ITR 12 (P&H) • Indian Communication Network : 206 ITR 96 (ITAT - SB) • DCIT v Glaxo SmithKline Consumer Healthcare Ltd: 107 ITD 343 (SB) (Chd.) • Hind Lamps Ltd. DCIT: ITA No. 283/D/92 (Agra) • Euro RSCG Advertising (P) Ltd v. ACIT : [2013] 154 TTJ 389 (Mum) The Ld. AR further submitted that the aforesaid issue is, in principle, also covered by the order of the Hon’ble Delhi High Court in assessee’s own case for the Assessment Years 1994-95, 1995-96 and 1996-97, reported in 255 CTR 140 and orders for assessment years 1999-00, 2000-01, 2001-02, 2005-06 and 2006-07.

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irrespective of the previous year in which the liability to pay such sum was incurred by the assessee occurring in Section 43B to mean that whether or not the liability to pay such sum was incurred is immaterial and that if an amount of tax or duty is paid in the first year as advance, then the deduction is to be allowed in that year itself, but one of the primary conditions for the operation of section 43B is that the liability to pay tax or duty must necessarily have been incurred. The Ld. DR submitted that this has also been observed by the Hon'ble Supreme Court in Allied Motors (P) Ltd. v. CIT (1997) 224 ITR 677 (SC), which is reproduced below: "As is evident from the Budget Speech of the Finance Minister for the year 1983-84 and the Memorandum explaining the provisions in the Finance Bill, 1983 that section 43B was clearly aimed at curbing the activities of those taxpayers, who did not discharge their statutory liability of payment of excise duty, employer's contribution to Provident Fund, etc. for long periods of time but claimed deductions in that regard from their income on the ground that the liability to pay these amounts had been incurred by them in the relevant Previous Year. It was to stop this mischief that section 43B was inserted... "

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issue was covered in the assessee's own case for the assessment years 1994- 95, 1995-96, 1996-97, 1999-00, 2000-01, 2002-03, 2004-05, 2005-06, 2006- 07 and 2007-08, the Ld. DR submits that these are continuous issues forming part of the assessment order for AY 2005-06 and 2006-07 also, and are at present pending for adjudication before Hon'ble Delhi High Court. On this issue, for A.Y. 2006-07 a coordinate Bench of this Tribunal, vide 4.13 of its order:

"4.13 Under the 'Inclusive method', the figure of purchase, sale and inventories are required to be taken with the element of tax or duty etc. Since the amount of unutilized balance of excise duty under PLA does not form part of purchase, this amount will be eligible for separate deduction u/s. 43 B. At the same time, the last year's unutilized PLA getting deduction in that year due to the application of section 43B, would be required to be added back to the income of the current year as determined above. We, therefore, set aside the impugned order and direct the A.O. to firstly recast the assessee's profit and loss account on inclusive basis and then make suitable deduction in respect of the amount of unutilized PLA at the end of the current year and also the preceding year. "

While reproducing the above paragraph for AY 2007-08, the Tribunal observed as under:

"8.5 We find that the ITAT under similar set of facts has decided an identical issue after discussing in detail and following the decision cited before it including the decision of special Bench of the ITAT in the case of DCIT vs. Glaxo Smith Klin Consumer Health Care Ltd. (supra) holding that the excess amount of excise duty reflected in the account-current is nothing but actual payment of excise duty even though mentioned as advance payment and hence allowable as deduction under sec. 43B of the Act in the year of payment. The special bench has further clarified that the allowing of deduction on payment basis could not result in double deduction under any

21 ITA No. 467/Del/2014

circumstance. We thus respectfully following the above decision set aside the matter to the file of the Assessing Officer to decide the issue afresh after affording opportunity of being heard to the assessee as per the decision cited above in the case of assessee itself for the assessment year 2006-07 (supra). Ground Nos. 3, 3.0.1 to 3.1.1 are accordingly allowed for statistical purposes."

The Ld. DR submitted that there is no change in the circumstances that are discussed in para No 8.5 of the above order so as to take any contrary view. The Ld. DR submitted plea of the Revenue that these are continuous issues forming part of the assessment order for AY 2005-06 and 2006-07 also, and are at present pending adjudication before Hon'ble Delhi High Court is not a ground for us to deviate from the consistent view taken by this Tribunal in assessee's own case for the earlier years.

“3. Issue involved in grounds No 3 to 3.0.2 relates to the allowability or disallowability of deduction of the statutory duties on payment basis under section 43B of the Income-tax Act, 1961 (‘the Act). According to the Assessment order, the following are such statutory duties claimed by the assessee for deduction, but disallowed by the Assessing Officer:

Item Item Particulars Amount (Rs.) No.

1(a) PLA Balance of Excise Duty on Vehicles 28,21,616 1(b) PLA Balance R&D Cess on Vehicles 23,02,815

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1(c) PLA Balance Excise Duty on Spare parts 90,04,752 2 Customs Duty paid on import of components for 42,961 Exports for purposes for which export had not been made by year end 3 Customs Duty paid on import of components for 12,64,98,615 Exports purposes for which export had been made by year end 4 Excise duty on Inputs balance in RG 23A Part-II 18,47,40,688

5a CVD (Modvat) paid on goods in transit to be 10,73,21,757 adjusted against excise duty payable on finished products components 5b. CVD (Modvat) paid on goods in transit to be 2,78,71,332 adjusted against excise duty payable on finished products Steel Coils 6 Customs Duty on Goods in Transit/under 1,93,27,627 Inspection 7 Customs Duty on Inventory in Closing Stock 18,23,52,893 8 Customs duty paid under protest 92,431 Total 66,23,77,487

3.1. According to the assessee, the assessee, in the return of their income, has claimed deduction of Rs.66,23,77,487 in respect of the above statutory duties paid during the year under consideration under section 43B of the Act and simultaneously offered for tax Rs.l 17,72,92,005 claimed as deduction in earlier years. The duties so paid include excise duty, custom duty on import/ purchase of inputs/components and also amount of duty paid in PLA account. However, the assessing officer, following the assessment order for the earlier years, disallowed Rs.66,23,77,487 on the ground that deduction under section 43B of the Act is allowable only where the amount claimed as deduction on actual payment basis is charged to the P&L Account. It is primarily the case of the assessing officer that the amount paid by the

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assessee is in the nature of advance payment of duty, liability in respect of which has not accrued/ crystallized and consequently, such advance payment is not allowable as deduction. Dispute Resolution Panel (“DRP”), also approved the findings of the assessing officer on the ground that similar issues arising in the preceding years is pending before the ITAT as well as the Honble High Court.

It is the submission of the Ld. AR that the assessing officer/DRP, 3.2. failed to appreciate that as per the mandate of section 43B of the Act any amount of duty paid by the assessee is allowable as deduction on the basis of payment itself irrespective of the method of accounting followed by the assessee and such a duty can only be claimed in the year of payment but not in any other year, and therefore, irrespective of the treatment given by the assesSee to the various amount of duties paid during the year under consideration, the duties paid were allowable as deduction under section 43B of the Act.

3.3. While placing reliance on the decisions reported in Berger Paints India Ltd. v. CIT (2004) 266 ITR 99 (SC), CIT v. Shri Ram Honda Power Equipment Corporation : 258 CTR 329 / 352 ITR 481 (SC), CIT v. Modipon Ltd.:334 ITR 106 (Del), Lakhanpal National Ltd. v. ITO : 162 ITR 240 (Guj), Bharat Petroleum Corporation Ltd.: 252 ITR 43 (Bom), CIT v. NCR Corporation India (P) Ltd. : 240 Taxman 598 (Kar.), Chemicals and Plastics India Ltd. v. CIT : 260 ITR 193 (Mad), CIT v. C.L. Gupta: 259 ITR513 (All.), CIT v. Raj and Sans Deep Ltd: 293 ITR 12 (P&H), Indian Communication Network 206 ITR 96 (ITAT - SB), DCIT v. Glaxo SmithKline Consumer Healthcare Ltd: 107 ITD 343 (SB) (Chd.), Hind Lamps Ltd. DCIT: ITA No. 283/D/92 (Agra), Euro RSCG Advertising (P) Ltd v. ACIT : 154 TTJ 389 (Mum), he submitted that the aggregate amount of Rs.66,23,77,487 was allowable as deduction to the assessee under section 43B of the Act. Ld. AR further submitted that this

24 ITA No. 467/Del/2014

issue is, in principle, also covered by the order of the Delhi High Court in assessee’s own case for the assessment years 1994-95, 1995-96 and 1996- 97, reported in 255 CTR 140.

In the light of these submissions and detailed explanation offered 3.4. by both the parties now we shall proceed to deal with the item wise submissions under Ground No.3.”

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stock. The Ld. AR relied on the decision of Special Bench of the Tribunal in the case of DCIT v. Glaxo Smith Kline Consumer Health Care Ltd reported in 107 ITD 343 (SB) (Chd.), wherein it is held that PLA balance is an allowable deduction. Further, the issue stands covered in favour of the assessee in view of decision of the Hon'ble Supreme Court in the case of CIT v. Modipon Ltd.: CA No.19763, 19767, 19768,19770 of 2017 / 87 taxmann.com 275 (SC). Similar view has been taken by the Delhi Bench of the Tribunal in the assessee’s own case for the assessment years 1994-95, 1995-96, 1996-97, 1999-00, 2000-01, 2004-05, 2005-06,2006-07,2007-08 and 2008-09. The order of the Tribunal has been confirmed by Hon’ble Delhi High Court for the assessment years 1994-95,1995-96 and 1996-97, reported in 255 CTR 140. The orders of the Delhi Tribunal have been affirmed by the Hon’ble Delhi High Court for the assessment years 1999-00 (ITA No.31/2005) and 2000-01 (ITA No.442/2005).

“15. In the present case, the assessee had no option, but to keep the account, in respect of each excisable U' product (evident from the mandate in Rule 173G that it "shall keep an account current"). The latter part of the main rule makes it clear beyond any doubt that the assessee has no choice in the obligation, and cannot remove the goods manufactured by it, unless sufficient amounts are kept in credit:

"...and the assessee shall periodically made credit in such account- current, by cash payment into the treasury, so as to keep the balances, in such account-current sufficient to cover the duly due on the goods intended to be removed at any time, and every such assessee shall pay the duty determined by him for consignment by debit to such account-current before

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removal of the goods"

The revenue's contention that the amounts in credit also relate to goods not manufactured, and therefore not relatable to any "liability incurred" is, in the opinion of this Court, without any basis. The arrangement prescribed by the rule is both a collection mechanism - dictated by convenience, as well as mandatory. It is convenient, for the reason that if the assessee were to be asked to pay the exact amount, through some other method, by deposit, as a precondition for clearance, that would have been cumbersome to it as well as the revenue; it would also have led to problems of storage of goods, and slow down their supply and distribution. The Rule makers pragmatically directed that "sufficient" amounts ought to be maintained in the account, to cover the removals. Therefore, at any given point of time, there had to be an excess in the account, if the assessee were to remove the goods. Each clearance mentions the quantum of goods, and the duty amount, which is apparently reconciled at the end of the period, and shortfalls if any are appropriated from the account. The excess credit is likewise adjusted for the next day's clearances. The point to be underlined is that there is no choice, and the amounts relate to the assessee's duty liability, falling within the description under Section 43-B. The consequence of not allowing the amounts as deductions, are vividly brought out in the decision of the Allahabad High Court in C.L. Gupta & Sons (supra), where it was held that:

"10. In the case in hand, admittedly, the amount of customs duty of Rs. 3,56,451 was paid by the assessee in March, 1987, and, therefore, in terms of Section 43B it is deductible only in the year in which it is actually paid, i.e., for the assessment year 1987-88, irrespective of the year in which the assessee incurred the liability on the basis of the method of accounting regularly adopted by him and, therefore, in view of the clear provisions of law, the deduction cannot be allowed in the assessment year 1988-89. In our view, both the learned Income Tax Appellate Tribunal as

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well as the Commissioner of Income Tax (Appeals) fell in error in holding that since the assessee-firm debited the cost of goods imported including the duty paid on delivery of goods in the trading account in April, 1987, and before the actual delivery of the goods, the value of the goods and customs duty paid thereon was shown in the balance-sheet as document in hands, therefore, the deduction should be allowed in the assessment year 1988-89, is contrary to the prescription of law. Section 43B in clear terms provides that the deduction claimed by the assessee in respect of any sum paid by way of tax, duty, cess or fee, shall be allowed only in computing the income referred to in Section 28 of that previous year in which it was actually paid, irrespective of the previous year in which the liability was incurred for the payment of such sum as per the method of accounting regularly employed by the assessee. For the purpose of claiming benefit of deduction of the sum paid against the liability of tax, duty, cess, fee, etc., the year of payment is relevant and is only to be taken into account. The year in which the assessee incurred the liability to pay such tax. duty, etc., has no relevance and cannot be linked with the matter of giving benefit of deduction under Section 43B of the Act. In this view of the matter, the appeal deserves to be allowed.

As a result of the above discussion, the first question is answered in favour of the assessee, and against the revenue.”

The Hon’ble Delhi High Court has already decided this issue in favour of the assessee for A.Ys. 1999-00 and 2000-01. Therefore, in absence of any

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contrary material brought to our notice by the Ld. DR against the order of the Tribunal, we allow Ground Nos. 3.3 to 3.4.

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Receipt of duty drawback is altogether different from allowability of deduction in respect of which duty paid by the assessee on payment basis under section 43B of the Act. The Ld. AR further submitted that without prejudice to the aforesaid, in case the assessing officer’s contention were to be accepted, then duty drawback income amounting to Rs. 15,93,11,093/- declared by the assessee himself, being the amount of duty drawback received in the instant year but which allegedly accrued in the previous year, as per the principle adopted by the assessing officer is not taxable in the year under consideration. The Ld. AR submitted that there is no justification for adopting two different and inconsistent methods while computing the income of the present year. The aforesaid sum was duly declared as the income of the immediately succeeding year on receipt, a method consistently adopted by the assessee company and accepted by the AO since inception. The Tribunal has decided the aforesaid issue in favour of assessee in the assessment years 1999-00, 2000-01, 2001- 02, 2002-03, 2004-05, 2005-06, AY 2006-07, 2007-08 and 2008-09. The orders of the Delhi Tribunal have been affirmed by the Delhi High Court for assessment years 1999-00 (ITA No.250/2005), 2000-01 (ITA No.976/2005), 2005-06 (ITA Nos. 171 and 172/2012) and 2006-07 (ITA No. 381/2016). Further, the issue stand covered in favour of the assessee in view of the decision of the Hon’ble Punjab and Haryana High Court in the case of CIT v. Sriyansh Knitters P. Ltd. 336 ITR 235 wherein the High Court, while affirming the finding of the Tribunal held that duty drawback accrues in the year in which rate is fixed by the competent authority after verification of claim of the assessee and amount is quantified and not in the year of export. Similar view has been held in the case of CIT v. Manav Tools (India) P. Ltd: 336 ITR 237 (P&H). It has been held similarly by the Delhi High Court in assessee’s own case for assessment years 1994-95, 1995-96, 1996-97, 1997-98, 1998-99, 1999-00, 2001-02 and 2004-05.

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“6. Question (iii) concerns the disallowance of an addition of Rs. 20,60,14,392 representing the customs duty paid on imports claimed as a deduction under Section 43B of the Act. This was directly paid by the Assessee to the customs authorities and paid during the AY in question. Consequently, it was correctly allowed as a deduction by the ITAT. Question (iii) therefore, is answered in the affirmative i.e. in favour of the Assessee and against the Revenue.”

The facts of the present case and the decision of the Delhi High Court is on identical issue. Thus, this issue is covered by the decision of the Hon’ble Delhi High Court in favour of the assessee.

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32 ITA No. 467/Del/2014

directed to allow deduction for amount forming part of RG 23A balance to the extent it has been directly paid to custom authorities.

“32. An analysis of Section 43B of the Act reveals that for the deduction there under to be allowed, the following conditions are required to be satisfied.

(a) there should be an actual payment of excise duty whether “by way of tax, duty, cess or fee, by whatever name”;

(b) such payment has to be “under any law for the time being in force”

(c) the payment of such sum should have been made by the Assessee;

d) irrespective of the method of accounting regularly employed by the Assessee, deduction shall be allowed while computing the income tax for the previous year “in which sum is actually paid” by the Assessee;

e) the expression ‘any such sum payable’ refers to a sum for which the Assessee “incurred liability in the previous year even though such sum might not have been payable within that year under the relevant law.

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57F (4A) of the CE Rules under which credit which was lying unutilised as of 16th March 1995 with the manufacturers stood lapsed in the manner set out therein. The Supreme Court upheld the challenge by the manufacturers to the aforementioned Rule 57F (4A) of the CE Rules on the ground that under the MODVAT scheme as it existed on the date of change, i.e. 16th March 1995, MODVAT credit lying in the balance with the Assessee represented “a vested right accrued or acquired by the Assessee under the existing law”. It was observed as under:

“5………… when on the strength of the Rules available, certain acts have been done by the parties concerned, incidents following thereto must take place in accordance with the Scheme under which the duty had been paid on the manufactured products and if such a situation is sought to be altered, necessarily it follows that the right, which had accrued to a party such as the availability of a scheme, is affected and, in particular, it loses sight of the fact that the provision for facility of credit is as good as tax paid till tax is adjusted on future goods on the basis of the several commitments which would have been made by the Assessee concerned.”

In Dai Ichi Karkaria (supra), the question that arose for consideration 36. was whether the cost of the raw material was the price paid by the manufacturer to its seller, as contended by the Revenue, or is it the price of raw material minus the excise duty thereon which has been paid by the seller and for which the manufacturer is entitled to credit under the MODVAT scheme to be utilized against the payment of excise duty on products manufactured by him, including the intermediate product, as contended by the manufacturer. The Supreme Court analysed the entire MODVAT scheme,

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in particular Rules 57A to 571, and observed as under:

“18. It is clear from these Rules, as we read them, that a manufacturer obtains credit for the excise duty paid on raw material to be used by him in the production of an excisable product immediately it makes the requisite declaration and obtains an acknowledgement thereof. It is entitled to use the credit at any time thereafter when making payment of excise duty on the excisable product. There is no provision in the Rules which provides for a reversal of the credit by the excise authorities except where it has been illegally or irregularly taken, in which event it stands cancelled or, if utilised, has to be paid for. We are here really concerned with credit that has been validly taken, and its benefit is available to the manufacturer without any limitation in time or otherwise unless the manufacturer itself chooses not to use the raw material in its excisable product. The credit is, therefore, indefeasible. It should also be noted that there is no corelation of the raw material and the final product; that is to say, it is not as if credit can be taken only on a final product that is manufactured out of the particular raw material to which the credit is related. The credit may be taken against the excise duty on a final product manufactured on the very day that it becomes available.

“Costs of Purchase

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the taxing authorities), freight inwards and other expenditure directly attributable to the acquisition. Trade discounts, rebates, duty drawbacks and other similar items are deducted in determining the costs of purchase.”

“16. Specified duty paid on inputs may be debited to a separate account, e.g. MODVAT/CENVAT Credit Receivable (inputs) Account. As and when MODVAT/CENVAT credit is actually utilized against payment of excise duty on final products, appropriate accounting entries will be required to adjust the excise duty paid out of MODVAT/CENVAT Credit Receivable (inputs) Account to the account maintained for payment / provision for excise duty on final product. In this case, the purchase cost of the inputs would be net of the specified duty on inputs. Therefore, the inputs consumed and the inventory of inputs would be valued on the basis of purchase cost net of the specified duty on inputs. The debit balance in MODVAT/ CENVAT Credit Receivable (Inputs) should be shown on the assets side under the head ‘advances’, xxx

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side, under the head ‘advances’. According to the accrual concept of accounting (mercantile system), credit is taken even after the documents evidencing payment of specific duty on inputs are received later than the physical receipt of the goods.

The Court now turns to the decision in Oswal Agro Mills (supra). The 41.1. facts, in brief, in the above decision were that the Appellant therein was engaged in the manufacture and trade of products like de-oiled meals, industrial hard oil, edible oils etc. The Assessee entered into agreements with other entities for the purchase of imported palm stearin fatty acid (‘imported material’) from the said importers. In terms of the said agreement, the imported material was to be purchased by the Appellant at landed cost, i.e. CIF price, customs duty, clearing charges, etc. and 3% ofthe total cost. Under Clause 11 of the agreements, any liability arising after the sale of the imported material in respect of customs duty, excise duty, penalty, sales tax, etc. would be paid by the appellant and included in the landed cost of imported material.

At the time of actual import of material, the Customs Department 41.2 demanded 100% of the applicable customs duty as additional customs duty on the CIF value of the imported material. The additional demand was challenged by the importers before the Supreme Court. As an interim measure, the Supreme Court allowed the clearance of imported material on payment of 15% of the disputed additional customs duty. A stay was granted for the balance 85% subject to furnishing of bank guarantees by the importers in favour of the Customs Department. In terms of the agreement between the appellant and the importers, the appellant provided counter guarantees for

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the bank guarantees provided by the importers for the unpaid disputed amount of 85% of the additional customs duty.

As far as the Appellant therein was concerned, the unpaid 41.3. additional customs duty pertaining to the previous year relevant to AY 1987- 88 was Rs. 1,64,87,375. The Appellant therein, following the mercantile system of accounting, claimed deduction on account of the said additional customs duty, in as much as the same was included in the landed cost of the imported material. The AO rejected the claim since the Appellant therein had failed to produce evidence by which it could be ascertained that the liability to pay the additional customs duty was crystallized during the period relevant to the ASSESSMENT YEAR

.41.4. After the CIT (A) also dismissed the appeal of the Appellant holding that the liability would arise only when the Supreme Court gave a verdict in favour of the Customs Department, the Appellant went before the ITAT. Rejecting the Appellant’s appeal, the ITAT held that there was no actual payment and the liability was covered only by the bank guarantee which had not yet been appropriated or encashed and the same is still in the ownership of the Appellant and therefore, the claim for deduction could not be allowed as the bank guarantee cannot fulfill the requirements of expenditure so as to qualify for deduction from the total income. As far as Section 43B was concerned, it was held that even assuming it is a statutory liability, as the liability is eventually fastened upon the Appellant, the provision of bank guarantee in itself cannot be treated as payment as it has not been adjusted towards the customs duty.

This Court concurred with the ITAT and held that as long as the 41.5. writ petitions were pending before the Supreme Court, the Appellant therein would have no obligation to pay any amount as the condition precedent for the Appellant to pay disputed amount would not be satisfied. The liability of the Appellant to pay the additional customs duty was contingent upon the

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importers being called upon to pay the same. Reference was made by this Court to the decision of the Supreme Court in Rotork Controls India P. Ltd. v. CIT [2009] 314 ITR 62 (SC) where three conditions were laid down while considering where a provision made for future claims against warrantees was allowable as a deduction. On the facts of the case, this Court held that subject liability was a contingent liability in respect thereof could not be allowed as a deduction for the AY in question.

Specific to Section 43B, the Court considered whether it was in fact 41.6. an obligation of the Appellant therein to pay additional customs duty and whether such obligation could be considered to be a Court observed:

“Although the Assessee is obliged to pay the additional customs duty as and when the importers are called upon to pay the same, nonetheless, it cannot be considered as a statutory liability because the same is not imposed on the Assessee by virtue of any statute. Customs duty is an incident of import of goods and an importer is obliged to pay the same under the Customs Act. Therefore, the liability to pay the additional customs duty is a statutory liability of the importers. However, in the hands of the Assessee, the liability to pay the quantum of custom duty imposed on the importers, either directly to them or on their behalf, cannot be considered as a statutory liability as this obligation is not imposed by any statute but from the contracts entered into between the Assessee and the importers. The liability in question is thus, clearly a contractual liability insofar as the Assessee is concerned.” (emphasis supplied)

The Court clarified that Section 43B of the Act would apply “only in 41.7. cases of statutory liability” and held that:

“This provision would have no application insofar as the assessee is concerned, as the liability to pay the amount of additional customs duty on behalf of the importers as and when they are called upon to discharge the

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same is, clearly, a contractual liability and not a statutory liability. Therefore, the question whether the said liability should be considered as deductible under Section 43B of the Income Tax Act does not arise.”

It must be noted at this stage that after hearing the arguments on 43. 21st September 2017, an affidavit dated 6th November 2017 has been filed by the Assessee pointing out that out of the total amount of unutilized MODVAT credit of Rs. 69,93,00,428, an amount of Rs. 15,73,38,110 pertains to goods already consumed and which were, therefore, not includable in the closing stock of raw materials and inputs as on 31st March 1999. It is pointed out that this was noted by the CIT (A) in para 9.16 of the appellate order and that this finding was not questioned by the Revenue. It is accordingly submitted that even if the Revenue’s contention on the interpretation of Section 43B was accepted, the Assessee is unquestionably entitled to deduction of the aforementioned amount of Rs. 15,73,38,110. It is further pointed out that out of the aforementioned unutilized MODVAT credit claimed as a deduction by the Assessee for the AY 1999-00, a further amount of Rs. 14,96,79,029 represents additional or countervailing duty which has been paid by the Assessee directly to the Customs Department on the import of raw materials, components and the inputs. This, according to the Assessee, is borne out by the RG-23 (Part-II) Register maintained by the Assessee and verified and audited from time to time by the excise authorities. It is asserted that the said amount “has actually been paid by the Appellant to the customs authorities (and not to the Appellant’s suppliers)” and therefore, this amount should also be allowed under Section 43B of the Act.

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41 ITA No. 467/Del/2014

under Section 37 of the Act then tbs inclusive method of valuation of stock has to be followed. The Assess- I must opt to either treat the same as expenditure or treat it as forming part of current assets. If the plea of deduction under Section 37 is to be allowed then the question of utilising the unutilized MODVAT credit for payment of excise duty would not arise at all.

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In view of the finding of the Hon'ble High Court, this issue is remanded back to the file of the A.O to verify the claim as per the directions of the Hon'ble High Court and if found proper be allowed for deduction for amount forming part of RG 23A balance to the extent it has been directly paid to custom authorities. Needless to say the assessee be given opportunity of hearing by following principles of natural justice.

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excise duties are allowable in the year of payment u/s 43B of the Act, and even if such duties are included in the value of closing stock, they would be separately allowable. The aforesaid issue is covered by the decision of the Supreme Court in the case of Samtel Color Ltd wherein the Court dismissed the SLP in Civil Appeal No 6449/2012 filed by department against the order of Delhi High Court in 184 Taxman 120 and held that advance customs duty paid is allowable deduction u/s 43B of the Act. The Karnataka High Court in the case of CIT v. NCR Corporation India (P) Ltd. 240 Taxman 598, reiterated the principle laid down by the Apex Court in the case of Berger Paints (supra) and held that the entire amount of excise duty and customs duty paid by the assessee in a particular year are allowable as deduction irrespective of the fact that such duties are included in the value of closing stock. It was further held that provisions of Section 43B, while overriding all the other provisions of the Act, also override Section 145A and further that the provisions of section 145A does not in any manner dilute or nullify the effect of provisions of Section 43B of the Act. The Ld. AR further submitted that the issue stands covered in favour of the assessee by the order of the Tribunal in the assessee’s own case for A.Y 1999-00, 2000-01, 2001-02, 2002-03, 2004-05 2005-06, 2006-07, 2007-08 and 2008-09 wherein the Tribunal has held that, since the duty is paid, deduction claimed u/s 43B of the Act has to be allowed. The orders of the Delhi Tribunal have been affirmed by the Delhi High Court for assessment years 1999-00 (ITA No.250/2005), 2000-01 (ITA No. 976/2005), 2001-02 (ITA No. 519/2010), 2005-06 (ITA No. 171/2012) and 2006-07 (ITA No. 381/2016).

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the amount of Rs.69,12,41,610/- represents customs duty included in closing stock and Rs 50,28,051/- represents customs duty on tools imported by the Assessee which were made available by it to its contract manufacturers, also. described as vendors in the question of law framed on the same issue in subsequent AY 2001-02.

Thus, the issue is squarely covered by the decision of the Hon’ble Delhi High Court in Assessee’s own case. Ground No. 3.8 is allowed.

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46 ITA No. 467/Del/2014

07 and 2007-08 wherein it was held that since the duty is paid, deduction claimed u/s 43B of the Act has to be allowed. 3.26 Per Contra, on these Grounds 3.6 and 3.7, Ld. DR submitted that in respect of the amount of Rs.13,51,93,089/- being customs duty (CVD) paid to be adjusted against excise duty payable on finished products, a coordinate Bench of this Tribunal has also accepted that under the ‘Inclusive method’ it will be inclined in purchases, sales, and opening and closing stock of inventories, as a result of which the ultimate impact is revenue neutral and no deduction will be allowable to the assessee under this head. As regards the amount of Rs.1,93,27,627/- being customs duties on goods in transit/under inspection, he contends that it is be noted that the duty paid is not tax deductible as goods in transit are not expenditure of the year and are not routed through the P&L account. Further according to him, the liability to pay customs barrier and since the assessee has claimed deduction on this account, the onus of proving this fact was on the assessee. He points out that it is not on record whether the assessee has discharged this responsibility, as such in view of the decision of Hon’ble Supreme Court in Indian Molasses Co. (P) Ltd. 37 ITR 66, this amount has to be treated as an advance payment, which is not an allowable deduction. Lastly he contended that these are continuous issues forming part of the assessment order for AY 2005-06, 2006-07 and 2007-08 also, and are at present pending adjudication before Hon’ble Delhi High Court. 3.27. Substantially this question had fallen for consideration before a coordinate Bench of this tribunal in assessee’s own case for the AY 2006-07 and 2007-08 and by para Nos. 5.3 and 5.4 of its order for A.Y. 2006-07, a coordinate Bench of this Tribunal resolved the issue in the following manner, “5.3. Next item is customs duty (CVD) paid to be adjusted against excise duty payable on finished products amounting to Rs.15,59,44,258/-, which is the amount of customs duties on goods in transit/under inspection. The assessee claimed deduction for the above amounts u/s 43B of the Act, which the AO denied.

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5.4 We have heard the rival submissions and perused the relevant material on record. The Ld. AR contended that this issue has been decided in earlier years in the assessee’s favour by the Tribunal. He further referred to the judgment of the Hon’ble Delhi High Court in CIT vs. Samtel Colour Ltd. (2009) 184 Taxman 120 (Del) in which it has been held that advance customs duty paid in the year in question is an admissible deduction u/s 43B. In our considered opinion, there can be no dispute on the otherwise availability of deduction of advance customs duty paid by the assessee, which has to be allowed in the year of payment. In this judgment also, the Hon’ble High Court has noticed vide para 3 that the provisions of section 145A were not applicable as the assessment year under consideration was 1995-96. In view of the detailed discussion supra with reference to the applicability of section 145A to the year in question, there can be no escape from valuation of purchase, sale and inventories under the inclusive method. We, therefore, direct the AO to recast Profit and loss account under ‘Inclusive method’ as per the mandate of section 145A, thereby, inter alia, increasing the purchase value with the above customs duty. Then the AO will allow separate deduction for the above referred sums to the extent not getting eventually deducted separately by way of increased purchase price, as has been discussed above. At the same time, we also direct the AO to make sure that such amount separately getting deducted in this year does not get deduction once again in the next year. In the like manner, the last year’s similar deduction separately allowed should be taxed in the computation of income of the current year”, and by following the same for AY 2007-08, vide para 14.1 the matter was set aside to the file of the Assessing Officer to decide the issue afresh as per the above direction of the ITAT in the appeal for the assessment year 2006-07 after affording opportunity of being heard to the assessee. In the absence of any change of circumstances or law, we think it fit to follow the same line of reasoning and set aside to the file of the Assessing Officer to decide the issue

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afresh as per the above direction in the appeal for the assessment year 2006- 07 and 2007-08 after affording opportunity of being heard to the assessee. Ground Nos. 3.6 and 3.7 are, accordingly, allowed for statistical purposes.” Thus, the issue in the present year as well as of the earlier Assessment Years is identical and hence we also deem it fit to follow the same reasoning and set aside the issue to the file of the Assessing Officer to decide the issue afresh as per the earlier assessment years. Needless to say, the assessee be given opportunity of hearing by following principles of natural justice. Ground No. 3.9 to 3.10 are partly allowed for statistical purpose.

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the High Court has held that amount paid by the assessee against excise duty demand raised by excise authorities was allowable deduction as it was statutory liability which was allowable on payment basis under section 43B of the Act. Similarly, the Mumbai Bench of the Tribunal in the case of Euro RSCG Advertising (P) Ltd v. ACIT [2013] 154 TTJ 389 (Mum) held that service tax liability alongwith the interest paid on the basis of the show cause notice issued by the service tax authorities, is allowable deduction under section 43B of the Act in the year in which the payment was made irrespective of the fact that such demand was paid under protest and the matter was subjudice before the authorities. The issue stands covered in favour of the assessee by the order of the Tribunal in the assessee’s own case for A.Y’s 1999-00, 2000-01, 2001- 02, 2002-03 2005-06, 2006-07, 2007-08 and 2008-09.

“3.28. With regard to the disallowance of claim for deduction under section 43B of the Act for a sum of Rs. 92,431 /- being Customs Duty paid under protest, assessee submits that the Custom duty paid under protest represented the duties paid as per the additional demand raised by the statutory authorities, i.e. the Customs Department, and though they have disputed such additional demand and paid the amount under protest, in view of the demand being in the nature of a statutory liability, the same represented accrued/ crystallized liability. According to the assessee, as per the mandate of section 43B of the Act, the aforesaid additional custom duty so actually paid under protest was claimed as deduction on payment basis which has been disallowed by the assessing officer. However, the assessing officer disallowed the aforesaid following assessment order for the assessment year 2005-06. Ld. AR invited our attention to the decision of the Mumbai Bench of the Tribunal in the case of Euro RSCG Advertising (P) Ltd v.

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ACIT : 154 TTJ 389 (Mum) wherein it was held that wherein the service tax liability alongwith the interest was paid on the basis of show cause notice issued by the service tax authorities, the same was allowable under section 43B in the year in which the payment was made irrespective of the fact that such demand was paid under protest and the matter was subjudice before the authorities. He further submitted that in similar circumstances the Honhle Delhi High Court in the case of CIT v. Dharampal Satyapal Sons (P.) Ltd.: 50 DTR 287, held that the amount paid by the assessee against excise duty demand raised by excise authorities was allowable deduction as it was statutory liability which was allowable on payment basis under section 43B of the Act, and also submitted that in assessee’s own case for A.Y’s 1999-00, 2000-01, 2001-02, 2002-03, 2005-06, 2006-07 and 2007-08, coordinate Benches of this Tribunal have held that, since the duty is paid, deduction claimed u/s 43B of the Act has to be allowed.

3.29. This aspect of disallowance of claim for deduction under section 43B of the Act for the amount of Customs Duty paid under protest has been one of the subject of matters in assessee’s own case for the AY 2006-07 and 2007- 08 successively, and for the AY 2006-07 vide para 5.5 of the order dated 24.8.2015, the following finding was returned by the Tribunal,

“5.5. Next item is Customs duty paid under protest amounting to Rs. 1,34,25,787. We have discussed similar issue supra while dealing with 'Excise duty paid under protest' by holding that first the Profit and loss account be recast as per 'Inclusive method' in terms of section 145A and then some adjustments as stated above be separately made. Such directions are fully applicable pro tanto to the customs duty paid under protest. The AO is directed to follow the same.”

3.30. While following the same for AY 2007-08, Tribunal set aside the matter to the file of the Assessing Officer to decide it afresh as decided above by the ITAT after affording opportunity of being heard to the assessee.

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3.31. Ld. DR fairly concedes that the decision of the Tribunal on the issue of ‘Excise duty paid under protest’, in A.Y. 2006-07 and 2007- O8 was acceptable to the Revenue, and accordingly, no further appeal was preferred on this issue. In these circumstances, while following the same, we set aside Ground No. 3.8 to the file of the Assessing Officer to decide it afresh as decided by the ITAT for the Assessment Years 2006-07 and 2007-08 after affording opportunity of being heard to the assessee.” Thus, the issue is squarely covered by the decision of the Tribunal in Assessee’s own case, therefore, we set side this issue to the file of the Assessing Officer to decide it afresh as decided by the Tribunal in earlier Assessment Years. Needless to say, the assessee be given opportunity of hearing. Ground No. 3.11 to 3.12 are partly allowed for statistical purpose.

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add back of the aforesaid amount. Not allowing withdrawal of add back has resulted in the claim not being allowed in any year. To the extent the assessee’s claim under Section 43B of the Act are allowed in the earlier assessment years out of the said amount of Rs.69,50,54,573/-, the same would certainly be liable to be added to the assessable income of the present year. Withdrawal of add back has also been allowed by ITAT in assessee case for AY 2000- 01, 2004-05, AY 2005-06, AY 2006-07 and AY 2008-09. Department Appeal in AY 2004-05 on this issue has not been admitted by Delhi High Court vide order dated 28- 01-2010.

“Grounds No. 4 to 4.2 Not allowing withdrawal of add back u/s 43B: 4. Adverting to Ground No 4 to 4.2, in the AY 2008-09 the assessee company offered an amount of Rs. 117,72,92,005/- in its return of income representing the amounts received back or adjusted in the Profit and Loss Account during FY 2007-08 out of the amounts which have already been claimed as deduction on payment basis u/s 43B of the Act in the preceding assessment years, and this amount was offered to tax by the assessee during AY 2008-09 on the presumption that deduction would be allowed in preceding years on payment basis. It is pleaded that the aforesaid total amount of Rs.117,72,92,005/- has not been allowed to the assessee on payment basis in the preceding assessment years and thus the assessee has prayed that it be allowed to withdraw the add back of the said amount and not allowing withdrawal of add back has resulted in the claim not being allowed in

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any year. Ld. AR brought to our notice that assessee’s claim under Section 43B deduction was allowed in the earlier assessment years, as such, said amount of Rs. 117,72,92,005/- would certainly be liable to be added to the assessable income of the present year. It is submitted on behalf of the assessee that the withdrawal of write-back has been allowed by AO for AY2007-08, which has been confirmed by DRP. He submitted that identical claims have been allowed in the assessee’s own case by ITAT in AY 1999-2000, 2000-01 AY 2005-06 and AY 2006- 07 and by CIT(A) in AY 2001-02 and 2002-03.

4.1. As submitted by the Ld. AR, in the order dt 24.08.2015 for the AY 2006-07, this Tribunal in assessee’s own case, vide paragraph No 6.3 and 6.4 dealt with this issue in the following manner:

“6.3. Ground nos. 4 to 6.1 deal with a sum of Rs. 1,41,59,08,897, which has been stated to be a total of certain amounts claimed by the assessee as deductible in the preceding year u/s 43B as excise duty and customs duty and voluntarily offered for taxation in the current year's income. The ld. AR contended that since such deductions have been denied by the AO, the corresponding offering of the same to tax in the current year, be eliminated. 6.4. We agree with the ld. AR that one amount cannot be taxed twice. It is but natural that if an amount claimed as deduction by the assessee in the earlier year has not been allowed, then on the assessee's suo motu offering of it as an item of income for the current year on the strength of deduction claimed in the earlier year, which finally stands denied, should not be charged to tax. On being called upon to furnish the detail of such amount, it was stated that it, inter alia, includes a sum of Rs.71,63,89,449, which is subject matter of ground no. 3.5, that we have discussed immediately hereinbefore. We note that apart from the sustenance of disallowance of Rs.71.63 crore in the preceding year, there is no other disallowance u/s 43B which has been upheld by the Tribunal. It is overt that all other disallowances made by the AO u/s 43B have been deleted by the tribunal. The ld. AR could not furnish any detail of the remaining amount of Rs.69.96 crore (Rs.141.59 crore minus Rs.71.63 crore), allegedly finally disallowed u/s 43B of the Act by the tribunal in the preceding year. It is simple and plain that if the tribunal has allowed deduction for the amounts disallowed by the AO in the preceding year, then the same are rightly chargeable to tax in the current year. This ground is, therefore, dismissed, subject to our decision on

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ground no. 3.5 in granting deduction of Rs.71,63,89,449, representing last year's unutilized Modvat credit which was claimed by the assessee as deductible u/s 43B but disallowed by the AO and also the tribunal.”

4.2. For the AY 2007-08, though the AO refused to allow the deductions claimed by the assessee under section 43B of the Act, by order dated 20-05-2016 the Tribunal considered the case of the assessee and set aside the matter to the file of AO, and the relief on this aspect is dependent upon the findings of the AO while implementing the said order, as such we deem it just and proper to direct the AO to consider this aspect also in the light of implementing the order of this Tribunal for the AY 2007-08. These grounds are, therefore, allowed for statistical purpose.

Thus, the issue is squarely covered by the decision of the Tribunal in Assessee’s own case, therefore, we set side this issue to the file of the Assessing Officer to decide it afresh as decided by the Tribunal in earlier Assessment Years. Needless to say, the assessee be given opportunity of hearing. Ground No. 4 to 4.2 are partly allowed for statistical purpose.

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Rules, 1962 (the ‘Rules’) and determined the amount disallowable under section 14A of the Act at Rs.9,96,70,322/-, comprising of the following:

S. NO. Particulars Amount in Rs. (in millions) 1 Direct expenditure Nil 2 Interest expenditure incurred during 18.44 million the year (Rs. 148 milions) attributed in the ratio of average value of investments resulting in exempt income to average value of total assets 3 ½ % of average value of investments 81.23 Total 99.67 The assessing officer made a net disallowance of Rs.8,35,98,603/- after giving benefit of the suo moto disallowance of Rs. 16,071,719/- made by the assessee.

a) Re: Assessing officer erred in applying Rule 8D in present case

In terms of the provisions of section 14A of the Act, only expenditure incurred, having relation with earning of exempt income, is not an allowable deduction under the provisions of the Act. The phrase “expenditure incurred” used in the aforesaid section refers to actual expenditure, which has proximate nexus with exempt income, and not some imaginary or notional expenses, for the purposes of disallowance under that Section. In view thereof, the provisions of section 14A are applicable only if the assessing officer at the first place finds that the assessee has actually incurred expenses, which have proximate nexus with earning of exempt dividend income and not otherwise. In other words, the onus is on the assessing officer to find proximate nexus of expenses with earning of

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exempt income, before rejecting the claim of assessee and computing disallowance under section 14A of the Act. The provisions of sub-section (2) and (3) to section 14A, which empowers the assessing officer to compute disallowance as per provisions of Rule 8D of the Rules, w.e.f assessment year 2008-09, also provides that disallowance as per provisions of Rule 8D can be computed, only if the assessing officer, having regard to the accounts of assessee is not satisfied with the correctness of the claim of the assessee. In other words, even from assessment year 2008-09 and onwards, the assessing officer can compute disallowance under section 14A as per the provisions of Rule 8D, only if assessing officer, having regard to accounts of assessee, reaches a finding, that assessee has incurred expenses over and above expenses suo-motu disallowed by him.. In the absence of such finding, the assessing officer does not have power to compute disallowance under section 14A of the Act as per provisions of Rule 8D, even for assessment years 2008-09 and onwards. Reliance in this regard is placed on following decisions:

• CIT vs. Walfort Share & Stock Brokers: 326 ITR 1 (SC) • Godrej & Boyce Mfg. Co. Ltd. v. DCIT : 394 ITR 449 (SC) - affirming Godrej & Boyce Mfg. Co. Ltd. v. CIT: 328 ITR 81 (Bom.) • Maxopp Investment Ltd. vs. CIT: 347 ITR 272 (Del.)

Attention is also invited to the decision of Punjab & Haryana High Court in the case of CIT vs. Hero Cycles: 323 ITR 518, wherein, too, High Court held that disallowance under section 14A of the Act can be made only if assessing officer establishes proximate nexus of expenditure with exempt income. It has similarly been held in the following decisions:

• CIT v. Metalman Auto P. Ltd.: 336 ITR 434 (P&H) CIT v. Reliance Utilities and Power Ltd.: 313 ITR 340 (Bom) • • CIT v. Torrent Power Ltd.: 363 ITR 474 (Guj). In view of the above, it is respectfully submitted that the provisions of sub- section (2) and sub-section (3) of section 14A of the Act, as discussed supra, permits the assessing officer to apply the procedure of computing disallowance

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by applying the formula prescribed in Rule 8D of the Rules, if and only if, the assessing officer records the satisfaction that the expenditure disallowed by the assessee under that section is not correct and/or sufficient. In the present case, the Assessing Officer , it is submitted, primarily held that:

� actual earning/ receipt of dividend income is not essential; � Rule 8D has been brought in the Statute to mitigate the calculation of disallowance; � assessee-company is paying huge interest on loans, which could have been reduced by not making such investments; � fact that assessee, suo motu, made disallowance goes to show that the assessee was conscious of the fact that it had incurred some expenditure for acquiring shares.

b) Re: No disallowance was warranted under section 14A in present case The assessee, it will be appreciated, is an operating company engaged in manufacture of automobiles. The entire expenditure incurred was in relation to the manufacturing operations of the assessee and the assessing officer has failed to bring on record any evidence/ material to demonstrate that any part of such expenditure was relatable to the exempt income.

c) Re: Disallowance out of interest expenditure Insofar as interest expenditure was concerned, interest paid by the assessee was on account of the following:

Particulars Amount (Rs. Millions)

Interest on- (a) advances from dealers 79 (b) Others including interest on export 69 credit/overdraft

Total 148

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On perusal of the aforesaid, it will kindly be noticed that the aforesaid expenditure actually related to the manufacturing operations of the assessee. Borrowed funds available with the assessee, as a matter of fact, were utilized for business operations and not used for making the investments. It is further submitted that interest free own funds available with the assessee far exceeds the investment made in shares/securities on which exempt dividend income was received. The assessee, as on the last date of the relevant assessment year, had investments amounting to Rs.317 crores, which is substantially less than the opening investments of Rs.518 crores (refer page 151 of PB Vol 1). Further, on perusal of the balance sheet for the relevant year (refer page 151 of PB Vol I), it will kindly be noticed that the following interest free funds were available at disposal of the assessee:

a) Share Capital Rs. 145 Crores

b) Opening Reserves and Surplus Rs. 8,270 crores

c) Current year’s cash profits Rs. 10,797 crores Further, net cash from operating activities for the year under consideration amounted to Rs. 1193 crores (refer page 153 of PB Vol I). It will, thus, be appreciated that interest free funds available with the assessee (both opening as well as closing) far exceeds the total investments. In the aforesaid facts, it cannot, it is submitted, be concluded that investments were made from borrowed funds; on the contrary, it is clearly evident that the borrowed funds had also reduced during the relevant assessment year. Further, it is submitted that in case of mixed pool of funds, the correct method to establish source of investment would be to consider the macro fund/ cash flow position during the year and if the assessee had sufficient surplus funds available, presumption should be drawn in favour of the assessee that surplus funds have been utilized for making investments. Reliance in this regard is also placed on the following decisions, wherein it has been held that where assessee had sufficient funds/ deposits for advancing interest free loans or making investment in

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shares, etc., and there is nothing on record to show that borrowed funds have been directly utilized for such purpose, a presumption in favour of the assessee can be drawn with respect to utilization of interest free and borrowed funds:

• East India Pharmaceutical Works Ltd. Vs. CIT : 224 ITR 627 (S.C) • Indian Explosives Ltd. V. CIT: 147 ITR 392 (Cal.) • Woolcombers of India Ltd. v. CIT: 134 ITR 219 (Cal.) - approved by Supreme Court in the case of East India Pharmaceutical Works Ltd. v. CIT: 224 ITR 627 • Alkali & Chemical Corp. of India v. CIT: (1986) 161 ITR 820 (Cal.) • CIT v. Reliance Utilities and Power Ltd.: 313 ITR 340 (Bom.) • CIT vs. M/s. Ashok Commercial Enterprises: ITA No. No.2985 of 2009 (Bom) • Gujarat State Fertilizers and Chemicals Ltd : 358 ITR 323 (Guj) • Hero Honda Finlease Ltd vs. ACIT: ITA No. 3726 & 6102/Del/2012 (Del)

The Gujarat High Court in the case of CIT v. UTI Bank Ltd: 215 Taxman 8 (Mag.) held that where there are sufficient interest free funds to meet tax free investments, they are presumed to be made from interest free funds and not loaned funds and no disallowance can be made under section 14A of the Act. The Supreme Court has dismissed the Revenue’s SLP in Civil Appeal No. 468/2014 against the aforesaid decision. In the case of mixed funds, the option is with the assessee to appropriate fund and expenditure in a manner most favourable to the assessee. While following the ratio emanating from the aforesaid decisions, it has been held in the following cases, 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 Mfg. Co. Ltd. v. DCIT : 394 ITR 449 (SC) • • HDFC Bank Ltd v. DCIT: 366 ITR 505 (Bom) HDFC Bank Ltd v. DCIT: 383 ITR 529 (Bom) • • CIT v. K. Raheja Corporation Pvt. Ltd: ITA No. 1260 of 2009 (Bom.) • Bright enterprises Pvt Ltd. v. CIT: 381 ITR 107 (P&H) • CIT v. Max India Ltd: 388 ITR 81 (P&H)

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• Gurdas Garg v. CIT: ITA No.413 of 2014 (P&H) • CIT v. Microlabs Ltd. : 383 ITR 490 (Kar.) • PCIT v. Sintex Industries Ltd. : TA No.268 of 2017/82 taxmann.com 171 (Guj.) Lubi Submersibles Ltd.: ITA No.868 of 2010 (Guj.) • • CIT v. Gujarat Power Corporation Ltd.: 352 ITR 583 (Guj) Gujarat State Fertilizers and Chemicals Ltd: Tax Appeal No. 82 of 2013 (Guj HC) • CIT v. Torrent Power Ltd.: 363 ITR 474 (Guj) • CIT vs. Suzlon Energy Ltd.: 215 Taxman 272 (Guj) • M/s Gogrej Agrovet Ltd. v. AC1T: ITA No. 1629/Mum/09 (Mum.) • Dy. CIT v. Eimco Elecon (India) Ltd.: 142 ITD 52 (Ahd) • Dy. CIT v. Jammu & Kashmir Bank Ltd.: 142 ITD 553(Asr.) • T and T Motors Ltd. v. Addl. CIT : 154 ITD 306 (Delhi) Hero Honda Finlease Ltd vs. ACIT: ITA No. 3726/Del/2012 (Del) • • ACIT vs. Champion Commercial Co Ltd: 152 TTJ 241 (Kol) • TML Drive Lines Ltd vs. ACIT : ITA No. 6064/Mum/2010 (Mum) • Kulgam Holdings Pvt. Ltd. vs. ACIT : ITA No. 1259/Ahd/2006 (Ahd) The aforesaid decisions are squarely applicable in the facts of the present case inasmuch as total investment made is much lower than interest free funds available with the assessee and hence, there is no basis to hold that any part of interest bearing funds would have been utilized for making investment.

Re: Administrative Expenses

It is submitted that since no portion of the expenditure debited to the profit and loss account had proximate nexus with investments in shares or earning of dividend income therefrom, neither the same has been established by the assessing officer in the assessment order, there is no warrant for making any disallowance under section 14A of the Act, leave alone attribution @ lA% of average value of investments, in accordance with provisions of Rule 8D of the Rules. In fact, the assessee, on a conservative basis suo-motu disallowed an amount of Rs. 1,60,71,719/- on account of salary cost and administrative expenditure following an objective method of computation.

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d) Re: Incorrect computation of disallowance under section 14A Without prejudice, the Ld. AR submitted that, the disallowance computed under section 14A of the Act is incorrect since while computing disallowance as per Rule 8D, entire investments have been considered, without excluding investments not resulting in any exempt income during the year under consideration.

e) Re- Investments not resulting in exempt income to be excluded In the following decisions, it has consistently been held disallowance under section 14A of the Act is only to be made only if there is exempt income and not otherwise: . Cheminvest Ltd. v. CIT : 379 ITR 33 (Del.) • PCIT v. IL & FS Energy Development Company Ltd. : 297 CTR 452 (Del.) CIT v. Holcim India (P) Ltd.: 272 CTR 282 (Del.)"' • CIT v. Corrtech Energy Pvt. Ltd.: 372 ITR 97 (Guj.) • • CIT v. Winsome Textile Industries Ltd.: 319 ITR 204 (P&H) • CIT v. M/s Lakhani Marketing: 272 CTR 265 (P&H) • CIT v. M/s. Shivam Motors (P) Ltd.: 272 CTR 277 (All) • Redington (India) Ltd vs. ACIT: 392 ITR 633 (Mad.) • SInterglobe Enterprises v. DCIT: ITA No.1362 & 1032/Del./2013 (Del. Trib.) - affirmed by Delhi High Court in ITA No.456 of 2016 • DCIT v. Morgan Stanley India Securities Pvt. Ltd. : ITA No. 114/Mum/2013 • (Mum.) VS ACIT v. M. Baskaran: 152 ITD 844 (Chn. Trib.)

Specific reliance in this regard is placed on the decision of the Kolkata Bench of the Tribunal in the case of REI Agro Ltd vs. DCIT: 144 ITD 141. In the said case, in A.Y .2008-09, the assessee had invested Rs.103 crores in shares on which it earned tax-free dividends of Rs.1.3 lakhs. The assessee claimed that though its borrowings had increased by Rs.122 crores, the said investments were funded out of own funds. It further claimed that no expenditure had been incurred to earn the dividends thereby warranting a disallowance u/s 14A of the Act. However, the AO applied Rule 8D and computed the disallowance at

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Rs.4 crore. On appeal by the assessee, the CIT(A) reduced the disallowance to Rs.26 lakh. Appeal filed by the Revenue against the aforesaid decision has been dismissed by the Calcutta High Court as not giving rise to any substantial question of law in appeal No. GA No.3581 of 2013. The Hon’ble Delhi High Court in the case of ACB India Limited v. ACIT: 374 ITR 108, similarly held that only investment which actually resulted in exempt dividend income has to be considered for the purpose of computing the disallowance as per Rule 8D of the Rules. In view of the aforesaid, the Ld. AR submitted that the assessing officer erred in considering the entire investments while computing disallowance u/s 14A read with rule 8D. The disallowance u/s 14A read with rule 8D is to be in relation to the income which does not form part of the total income and this can be done only by taking into consideration the investment which has given rise to this income which does not form part of the total income. The ITAT for AY’s 2001-02, 2002-03 2005-06, 2006-07, 2007-08 and 2008-09 has remanded the matter back to the assessing officer for fresh adjudication. Further, the Assessing Officer has, in the appeal effect order for the Assessment Year 2006-07, deleted the entire disallowance made under section 14A of the Act. The aforesaid issue is squarely covered in favour of the assessee by the decision of the Delhi High Court for assessment years 1999-00 (ITA No. 250/2005) and 2000-01 (ITA No.976/2005), wherein the High Court has held that onus is on the Revenue to establish proximate nexus of expenses with earning of exempt income and that no disallowance of interest was called for under section 14A of the Act. In the aforesaid circumstances, the assessing officer erred in disallowing Rs.8,35,98,603/- in the assessment order and the same, therefore, calls for being deleted. Alternatively, the assessing officer may be directed to re-compute the disallowance under section 14A of the Act.

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that there was no question of disallowance of any amount on account of interest under Section 14A of the Act, but the Tribunal in assessee’s own case for A.Y. 2008-09 held as under:

“Ground No 6.0 to 6.4 disallowance of Rs. 7,43,27,349/- under section 14A of the Act

S. Particulars Amount in Rs. No. (in

millions)

1 Direct Expenditure Nil 2 Interest expenditure incurred during the year 13.73 (Rs.128.46millions) attributed in the ratio of average value of investments resulting in exempt income to average value of total assets.

3 ½ % of average value of investments 60.59 Total 74.32

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6.1. It is contended on behalf of the assessee that the disallowance made on this count in the final assessment order is without judicious appreciation of the facts and correct position of law, and is liable to be deleted. Ld. AR based his arguments on three reasons:

6.2. On the first aspect, basing on the provisions of section 14A it is contended that even for assessment years 2008-09 and onwards, disallowance under section 14A, as per provisions of Rule 8D of the Rules can be made only if the assessing officer, having regard to the ITA No.- 6021/Del/2012 accounts of the assessee, reaches a finding that assessee has incurred actual expenses, which have proximate nexus with earning of exempt income. Ld. AR submitted that the onus is on the assessing officer to find proximate nexus of expenses with earning of exempt income, before rejecting the claim of assessee and computing disallowance under section 14A of the Act, and the provisions of sub-section (2) and (3) to section 14A, which empowers the assessing officer to compute disallowance as per provisions of Rule 8D of the Rules, w.e.f. assessment year 2008-09, also

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provides that disallowance as per provisions of Rule 8D can be computed, only if the assessing officer, having regard to the accounts of assessee is not satisfied with the claim of assessee that no expenditure in relation to exempt income has been incurred by assessee. In other words, even from assessment year 2008-09 and onwards, the assessing officer can compute disallowance under section 14A as per the provisions of Rule 8D, only if assessing officer, having regard to accounts of assessee, reaches a finding, that assessee has incurred expenses, having proximate nexus with earning of exempt dividend income. According to the Ld. AR in the absence of such finding, as is held in CIT vs. Walfort Share & Stock Brokers: 326 ITR 1 (SC), Godrej & Boyce Mfg. Co. Ltd. v. DCIT : 394 ITR 449 (SC) - affirming Godrej & Boyce Mfg. Co. Ltd. v. CIT: 328 ITR 81 (Bom.), Maxopp Investment Ltd. vs. CIT: 347 ITR 272 (Del.), and Punjab & Haryana High Court in the case of CIT vs. Hero Cycles: 323 ITR 518, assessing officer does not have power to compute disallowance under section 14A as per provisions of Rule 8D, even for assessment years 2008-09 and onwards. He submitted that similar view is taken in CIT v. Metalman Auto P. Ltd.: 336 ITR 434 (P&H) , CIT v. Reliance Utilities and Power Ltd.: 313 ITR 340 (Bom) , CIT v. Torrent Power Ltd.: 363 ITR 474 (Guj).

6.3. Reference can also be made to the decisions in Chemical & Mettallurgical Design Co. Ltd : ITA No. 803/2008 (Delhi), CIT Vs Ms. Sushma Kapoor : 319 ITR 299 (Delhi), ACIT v. Eicher Limited: 101 TTJ 369 (Del.) , Maruti Udyog Limited V. DCIT: 92 ITD 119 (Del.), on the aspect of section 14A of the Act, wherein it has been held that without any cogent basis and material on record, no artificial/ ad-hoc disallowance is permissible for expenses incurred by the assessee, and the legal position that emerges from the these decisions is that: (a) there must be some actual expenditure incurred; and (b) such expenditure must be incurred "in relation to" the earning of exempt income, which means that there must be some nexus between the actual expenditure and the exempt income. In this regard he placed reliance on SIL Investment Ltd. vs ACIT: 148 TTJ 213 (Del.) , M/s Multi Commodity Exchange of (India)

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Ltd. Vs. DCIT: ITA No.1050/Mum/2010 (Mum.), M/s. Auchtel Products Ltd. vs ACIT: I.T.A. No. 3183 /Mum/2011 (Mum.), Om Era Engineering (P) Ltd. vs ITO: ITA No. 3913/D/2010 (Del.), Minda Investments Ltd. v. DCIT: 138 TTJ 240 (Del.), Punjab National Bank V. DCIT: 103 TTJ 908 (Del.), Vidyut Investment Ltd: [2006] 10 SOT 284 (Del.) , Impulse (India) Pvt. Ltd.: (2008) 22 SOT 368 (Del.) , D.J. Mehta v. ITO: 290 ITR 238 (Mum.)(AT), Jindal Photo Ltd vs. DCIT: ITA No. 814 (Del) 2011, Dishman Pharmaceuticals & Chemicals Ltd. v. Dy. CIT: 45 SOT 37 (Ahd.), Minda Investments Ltd. Vs. Dy. CIT: 138 TTJ 240 (Del), Bunge Agribusiness (India) (P.) Ltd. v. Dy. CIT: 132 ITD 549 (Mum.) also.

6.4. In the present case of the assessee, the assessing officer has simply applied the procedure prescribed in Rule 8D of the Rules to compute the amount disallowable under section 14A of the Act without appreciating that in the present case, no part of interest and/or administrative expenditure was incurred in relation to exempt income.

6.5. Further the assessing officer, in the assessment order, has not pointed out even a single expenditure being incurred by the appellant during the year, having relation/ proximate nexus with exempt dividend income earned during the year. The assessing officer, it is submitted, invoked the provisions of section 14A read with Rule 8D of the Rules in a mechanical manner, which, it is respectfully submitted is beyond jurisdiction.

6.6. For the principle that disallowance under section 14A of the Act cannot be sustain without any satisfaction being recorded by the assessing officer before applying Rule 8D of the Rules, reliance is placed on the decisions reported in Pr.CIT vs. U.K. Paints (India) (P.) Ltd.: 244 Taxman 309 (Del.), Joint Investments P. Ltd. v. CIT: 275 CTR 471 (Del.), Minda Investments Ltd. vs. DCIT: 138 TTJ 240 ( Del.) , ACIT vs. MMTC Limited: ITA No. 724/Del/2014 (Del. Trib.), REI Agro Ltd vs. DCIT: 144 ITD 141 (Revenue appeal dismissed by Calcutta High Court in appeal No. GA No.3581 of

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2013)., CIT v. Abhishek Industries Ltd - 231 Taxman 85 (P&H), 6.7. Second contention raised on behalf of the assessee is that the assessee is an operating company engaged in manufacture of automobiles and the entire expenditure incurred was in relation to the manufacturing operations of the assessee and the assessing officer has failed to bring on record any evidence/ material to demonstrate that any part of such expenditure was relatable to the exempt income. It is submitted on behalf of the assessee that the entire expenditure incurred by the assessee was actually related to the manufacturing operations, all the borrowed funds available with the appellant were utilized for business operations and not used for making the investments and that the interest free own funds available with the appellant far exceeds the investment made in shares/securities on ITA No.- 6021/Del/2012 which exempt dividend income was received. During the year interest paid by the appellant was on account of the following:

Particulars Amount (Rs. millions) a) Advances from dealers 67 b) Others including interest on cash credit/overdraft 61 Total: 128

6.8. Whereas as is evident from the balance sheet the following interest free funds were available at disposal of the assessee:

(a) Share Capital Rs. 144 crores (b) Reserves and Surplus Rs. 8,271 crores Total Rs. 8,415 crores

6.9. Ld. AR submitted that in case of mixed pool of funds, the correct method to establish source of investment would be to consider the macro fund/ cash flow position during the year and basing on the decisions in East India Pharmaceutical Works Ltd. v. CIT: 224 ITR 627 (SC), Indian Explosives Ltd. V.

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CIT: 147 ITR 392 (Cal.), Woolcombers of India Ltd. v. CIT: 134 ITR 219 (Cal.) - approved by Supreme Court in the case of East India Pharmaceutical Works Ltd. v. CIT: 224 ITR 627, Alkali & Chemical Corp. of India v. CIT: (1986) 161 ITR 820 (Cal.), CIT v. Reliance Utilities and Power Ltd.: 313 ITR 340 (Bom.), CIT vs. M/s. Ashok Commercial Enterprises: ITA No. No.2985 of 2009 (Bom), Gujarat State Fertilizers and Chemicals Ltd : 358 ITR 323 (Guj), Hero Honda Finlease Ltd vs. ACIT: ITA No. 3726 & 6102/Del/2012 (Del) he submitted that if the assessee had sufficient surplus funds available, presumption should be drawn in favour of the assessee that surplus funds have been utilized for making investments. He submitted that the Gujarat High Court in the case of CIT v. UTI Bank Ltd: 215 Taxman 8 (Mag.) held that where there are ITA No.-6021/Del/2012 sufficient interest free funds to meet tax free investments, they are presumed to be made from interest free funds and not loaned funds and no disallowance can be made under section 14A of the Act, and the Hon'ble Apex Court has dismissed the revenue's SLP in Civil Appeal No. 468/2014 against the aforesaid decision.

6.10. He contended that in the case of mixed funds, the option is with the assessee to appropriate fund and expenditure in a manner most favorable to the assessee, and by placing reliance on Godrej & Boyce Mfg. Co. Ltd. v. DCIT : 394 ITR 449 (SC), HDFC Bank Ltd v. DCIT: 366 ITR 505 (Bom), HDFC Bank Ltd v. DCIT: 383 ITR 529 (Bom), CIT v. K. Raheja Corporation Pvt. Ltd: ITA No.1260 of 2009 (Bom.), Bright enterprises Pvt Ltd. v. CIT: 381 ITR 107 (P&H), CIT v. Max India Ltd: 388 ITR 81 (P&H), Gurdas Garg v. CIT: ITA No.413 of 2014 (P&H), CIT v. Microlabs Ltd. : 383 ITR 490 (Kar.), Lubi Submersibles Ltd.: ITA No.868 of 2010 (Guj.), CIT v. Gujarat Power Corporation Ltd.: 352 ITR 583 (Guj), Gujarat State Fertilizers and Chemicals Ltd: Tax Appeal No. 82 of 2013 (Guj HC), CIT v. Torrent Power Ltd.: 363 ITR 474 (Guj), CIT vs. Suzlon Energy Ltd.: 215 Taxman 272 (Guj), M/s Gogrej Agrovet Ltd. v. ACIT: ITA No. 1629/Mum/09 (Mum.), Dy.CIT v. Eimco Elecon (India) Ltd.: 142 ITD 52 (Ahd), Dy.CIT v. Jammu & Kashmir Bank Ltd.: 142

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ITD 553(Asr.), T and T Motors Ltd. v. Addl. CIT : 154 ITD 306 (Delhi), Hero Honda Finlease Ltd vs. ACIT: ITA No. 3726/Del/2012 (Del), ACIT vs. Champion Commercial Co Ltd: 152 TTJ 241 (Kol), TML Drive Lines Ltd vs. ACIT : ITA No. 6064/Mum/2010 (Mum), Kulgam Holdings Pvt. Ltd. vs. ACIT : ITA No. 1259/Ahd/2006 (Ahd), he submitted that 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:

6.11. Lastly it is contended on behalf of the assessee that the disallowance computed under section 14A of the Act is incorrect since while computing disallowance as per Rule 8D, entire investments have been considered, without excluding the following:

(a) strategic long-term business investments, not for the purpose of earning dividend but for furthering the operations/ business of the company; and

(b) investments not resulting in any exempt income during the year under consideration.

6.12. Reliance is placed on the decisions in CIT v. Oriental Structural Engineers Pvt. Ltd.: 216 Taxman 92 (Del.) , Cheminvest Ltd v. CIT : 379 ITR 33 (Del HC), Eicher Goodearth Ltd. v. CIT: 378 ITR 28 (Del.), VA Tech Escher Wyss Flovel (P) Ltd. v. ACIT: [2014] 147 ITD 678 (Del Trib.) , CIT v. Knorr Bremse India(P) Ltd.: ITA No 1676/2002 (Del Trib.), Interglobe Enterprises v. DCIT: ITA No. 1362 & 1032/D/2013 (Del Trib.), Garware Wall Ropes v. ACIT: ITA No. 5408/2012 (Mum.), ACIT vs. M/s Spray Engineering Devices Ltd: ITA No. 646/Chd/2009 (Chd.), J.M. Financial Ltd. v. ACIT: ITA No. 4521/ Mum/2012 (Mum. Trib.), Piem Hotels Limited v. DCIT: I.T.A No. 240/Mum/2012 (Mum Trib.), DCIT v. Morgan Stanley India Securities Pvt. Ltd: ITA No.114/Mum/2013 (Mum.Trib.), in support of the contention that while computing average investments, strategic long-term business

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investments not for earning dividend but for promoting manufacturing operations ought to have been excluded. In view of the above, without prejudice to their contention that no disallowance is warranted under section 14Aof the Act, Ld. AR prayed that, the assessing officer may be directed to re- compute disallowance under that section after reducing the strategic long- term trade investments.

6.13. For the principle that disallowance under section 14A of the Act is only to be made only if there is exempt income and not otherwise, support is derived from the decisions in ACB India Ltd. v. ACIT: 374 ITA No.- 6021/Del/2012 ITR 108 (Del.), Cheminvest Ltd. v. CIT : 379 ITR 33 (Del.), CIT v. Holcim India (P) Ltd.: 272 CTR 282 (Del.), ACIT v. Vireet Investments (P.) Ltd: 165 ITD 27 (Del SB), CIT v. Corrtech Energy Pvt. Ltd.: 372 ITR 97 (Guj.), CIT v. Winsome Textile Industries Ltd.: 319 ITR 204 (P&H), CIT v. M/s Lakhani Marketing: 272 CTR 265 (P&H) , CIT v. M/s. Shivam Motors (P) Ltd.: 272 CTR 277 (All), Interglobe Enterprises v. DCIT: ITA No.1362 & 1032/Del./2013 (Del. Trib.) - affirmed by Delhi High Court in ITA No.456 of 2016, REI Agro Ltd vs. DCIT: 144 ITD 141 (Kol. Trib.) - Department appeal dismissed in CIT v. REI Agro Ltd. : I.T.A.T No.220 of 2013 (Cal. HC), DCIT v. Morgan Stanley India Securities Pvt. Ltd. : ITA No. 114/Mum/2013 (Mum.), ACIT v. M. Baskaran: 152 ITD 844 (Chn. Trib.), and it is submitted that the assessing officer erred in considering the entire investments while computing disallowance u/s 14A read with rule 8D. The disallowance u/s 14A read with rule 8D is to be in relation to the income which does not form part of the total income and this can be done only by taking into consideration the investment which has given rise to this income which does not form part of the total income.

6.14. Basing on the contentions and submissions made for the AY 2006-07 and 2006-07, Ld. DR argued on the aspects whether earning of exempt income is necessary for disallowance u/s 14A, relationship of expenditure

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with exempt income, dominant object or purpose test, what does it mean by expenditure incurred etc by placing extensive reliance on the decisions in Maxopp Investments, Walfort share and Stock Brokers P Ltd., DBDT Circular No 5/2014 etc.

6.15. In this matter, assessee earned dividend income of Rs.166,83,50,967/- , which was claimed as exempt from tax under sections 10(34) and 10(35) of the Act. However, according to the assessee, they did not incur any expenditure in earning this. Making investment, maintaining or continuing with any investment in a ITA No.-6021/Del/2012 particular share/mutual fund etc. and the time when to exit from one investment to another are all the activities requiring well coordinated and well informed management decisions, involving not only inputs from various sources but it also involves acumen of senior management functionaries. There are incidental administrative expenses on collecting the information, research, etc. which helps in arriving at particular investment decisions and these expenses, relating to earning of income are embedded in the indirect expenses without which it would not be possible to carry out this herculean task. It, therefore, cannot be said that no expenditure at all incurred to earn Rs.166,83,50,967/-, when huge amounts to a tune of Rs. 8,415 crores was available with the assessee. By looking into these factors, Ld. AO proceeded to hold that Rule 14A is applicable. In these circumstances, we are of the considered opinion that the AO is justified in taking the view that the plea of the assessee that no expenditure was incurred for earning the exempt income cannot be accepted, and to proceed with the application of the formula prescribed under Rule 8D of the Rules, which is in force from the AY 2008-09.

6.16. Adverting to the arguments of the Ld. AR on the aspects of interest expenses relevant under Rule 8(ii) of the Rules and the reckoning of the investment amount relevant for 8D(iii), on a consideration of the same in the light of the principles of law laid down by the Court, as stated supra, we

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agree with the submissions made on behalf of the assessee that insofar as the interest expense under Rule 8D(ii) is concerned, it has to be determined after examination of the macro fund/ cash flow position during the year and if the assessee had sufficient surplus funds available, presumption should be drawn in favour of the assessee that surplus funds have been utilized for making investments, and while ITA No.-6021/Del/2012 calculating the disallowance under Rule 8D(iii) has to be calculated in relation to the income which does not form part of the total income and this can be done only by taking into consideration the investment which has given rise to this income which does not form part of the total income after reducing the strategic long- term trade investments. We, therefore, deem it just and proper to set aside the impugned order on this score and send the matter to the file of AO for making disallowance u/s 14A, in accordance with the view taken above.”

The disallowance u/s 14A read with rule 8D is to be in relation to the income which does not form part of the total income and this can be done only by taking into consideration the investment which has given rise to this income which does not form part of the total income. This aspect was not properly verified by the Assessing Officer in the present Assessment year as well. Thus, the issue is squarely covered by the decision of the Tribunal in Assessee’s own case, therefore, we set side this issue to the file of the Assessing Officer to decide it afresh as decided by the Tribunal in earlier Assessment Years. Needless to say, the assessee be given opportunity of hearing. Ground No. 5 to 5.5 are partly allowed for statistical purpose.

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included in the gross total income while filing original return of income. In view of the decision of Supreme Court in the case of CIT vs Ponni Sugars and Chemicals Ltd: 306 ITR 392/ 174 Taxman 87 (SC) the assessee revised return on 27.03.2010 and reduced Rs.7,03,81,097/- received on account of subsidy from the total income. It was, thus, claimed that the aforesaid receipt, being in the nature of capital receipt, is not includible in the total income, which has not been accepted by the assessing officer. The assessing officer, in the assessment order, held that sales tax amount retained/ received by the assessee was revenue in nature and consequently, taxable under provisions of the Act.

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production capacity of 70,000 vehicles added as a result of first expansion”. Pursuant thereto, the assessee was issued entitlement certificate dated 01.08.2001 under rule 28C of Haryana General Sales Tax Rules, 1975 to avail sales tax concession to the extent of Rs.564.35 crores during the period 01.08.2001 to 31.07.2015. The Ld. AR submitted that that the incentive/ subsidy was granted to the assessee for undertaking substantial expansion of existing industry in line with the larger public objective of the Policy to promote industrialization and employment generation and not to supplement trading receipts, which is, it is respectfully submitted, clearly in the nature of a capital receipt, not liable to tax. The Ld. AR pointed out that in terms of sub-rule (5)(b) of Rule 28C, the decision to grant tax concession to a prestigious unit (the category in which the assessee falls) is given on the basis of factors like employment generation, impact on overall industrial growth, etc. The underlying objective of conferring the benefit under Rule 28C, clearly proves beyond any doubt the fact that the avowed intent/ purpose of granting the concession is industrial development of the State and employment generation. During the relevant assessment year, the assessee accordingly retained Rs.7,03,81,097/- out of the sales tax collected on sales of finished products from expanded unit and claimed it as capital receipt not liable to tax. The assessing officer, however, did not appreciate the correct position in law and disallowed the entire amount holding it as revenue in nature. In view of the objects of the scheme, the Ld. AR submitted that the sales tax exemption/incentive was given for promoting industrial growth of existing industrial units and creating employment opportunities. The Ld. AR that the incentives received under the scheme by way of exemption from payment of certain taxes was just a mode adopted to disburse the incentive/ subsidy by the State Government. It is settled law that the taxation of subsidy, by whatever name called, is determined by the purpose for which the subsidy is granted and not the form / mode / manner in which the subsidy is received / disbursed. The Supreme Court in the case of V.S. S.V. Meenakshi Achi: 60 ITR 253 held that the character of the subsidy in the hands of the recipient is to be determined having regard to the purpose for which the subsidy has been given. The aforesaid principle has been reiterated by the Supreme Court in the case of

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Sahney Steel and Press Works Ltd. and Others vs. CIT: 228 ITR 253 wherein the Court held that the character of a subsidy in the hands of the recipient, whether revenue or capital, is to be determined having regard to the purpose for which the subsidy is given. The Hon’ble Supreme Court of India in Sahney Steel & Press Works Ltd.’s case (supra) and Ponni Sugars & Chemicals Ltd.’s case (supra). The Ld. AR relied upon the decision of the jurisdictional High Court in the case of CIT vs. Johnson Matthey India Pvt. Ltd. : ITA No. 193/2015 wherein the Hon’ble Delhi High Court, on exactly similar facts decided the aforesaid issue in favour of the assessee by holding that the sales tax subsidy received by the assessee pursuant to Haryana Government’s Scheme given for promoting the local industry was in the nature of a capital receipt, not liable to tax under the provisions of the Act. In that case, the assessee was a manufacturer of catalysts for auto industries and was awarded an entitlement certificate under Rule 28C of the Haryana General Sales Tax Rules, 1975 which entitled the assessee to a 50% sales tax concession for a period of ten years. The sales tax subsidy was granted by Haryana Government under the initiative of Government to promote investment in certain areas of Haryana and was available to such industrial units which duly fulfilled the conditions prescribed under Rule 28C of Haryana General Sales Tax Rules, 1975. Accordingly, the assessee received Rs.2,00,64,000/-as subsidy from the Government for establishing a manufacturing unit in Manesar (Haryana) which was claimed as a capital receipt not liable to tax. The assessing officer disallowed the same treating it as a revenue receipt. On appeal, the CIT(A) confirmed the order of the assessing officer. On further appeal, the Tribunal reversed the order of the CIT(A) after considering the decisions of the Apex Court in the case of Ponni Sugars and Chemicals Ltd. (supra) and decision of the Delhi bench of the Tribunal in the case of Maruti Suzuki India Ltd. for AY 2005-06. The pertinent observations of the Tribunal are as under:

“9. Discussing the issue in detail the Delhi Bench of the Tribunal in the above cited case of Maruti Suzuki India Ltd. has decided the issue in favour of the

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assessee with this finding that the subsidy in question viewed from the angle of provisions of section 25A of the Haryana General Sales Tax Act read with Industrial policy 1999 of the Govt, of Haryana, are part of capital receipt given by the State Govt, for the purpose of meeting the objective of Industrial Policy 1999 to attract investment and to ensure growth of the existing industries so that they can generate employment in industrial and allied sector by 20% It was held that the entire package of incentive and concession should be read as focusing and providing incentive for investment of industrial sector to achieve effective, meaningful and speedy development of the State.

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Supreme Court in the case of Ponni Sugar & Chemicals Ltd has laid down some principles after elaborately discussing its earlier judgment in the case of M/s. Sahney “Steel & Press Works (Supra). In view of those principles the Tribunal in the case of Maruti Suzuki has decided an identical issue in favour of the assessee under almost similar facts of the case. Following the said decision we in the present case decide the issue in favour of the assessee with this direction tot eh A.O to allow the claimed sale tax subsidy receipt amount to Rs.2,00,64,000/- received by the assessee during the year as capital receipt for the assessment. Ground NO. 2 is thus allowed.”

On revenue’s appeal to the High Court, the order of the Tribunal was confirmed by the High Court holding that if the purpose of the subsidy was to promote an industry especially with special interest of development of capital infrastructure, it should be treated as capital receipt. The Hon’ble High Court observed as under: “This Court has considered the submissions and is of the opinion that the ITAT’s impugned order has noted the relevant law. Crucially, Ponni Sugars (supra) is a later decision of the Supreme Court which had gone to deal with various authorities, including Sahney (supra). The Supreme Court has emphasized in each case the purpose for which subsidy or assistance is given by the State government or a public agency. If that is to promote an industry, especially with special interest of development of capital infrastructure, the amounts received are to be treated as capital and not revenue. This Court too had the occasion to deal with the issues in CIT v. Bougainvillea Multiplex Entertainment Centre Pvt. Ltd. (ITA 586/2013, decided on 30.01.2015) where the decision in Ponni Sugars (supra) and previous authorities were discussed and applied in given facts of the case. We are of the opinion that the impugned order of the IT AT does not disclose any infirmity. No substantial question of law arises. It is accordingly dismissed. ” A reference was also made by the Ld. AR regarding CBDT Circular No.142 dated 1st August, 1974 in the context of subsidy received under the Central

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Outright Grant of Subsidy Scheme. The Ld. AR relied upon the decision of the Punjab & Haryana High Court in the case of CIT vs. Sham Lai Bansal in ITA: 472 of 2010, wherein the High Court, following the decision of the Supreme Court in the case of Ponni Sugar (supra), held that the subsidy received by the assessee was capital receipt not liable to tax. The following decisions are also to the same effect:

• CIT v. Chaphalkar Brothers Pune : 400 ITR 279 (SC) • Sunbeam Auto Pvt. Ltd. v. PCIT : 402 ITR 309 (Del.) • Bougainvillea Multiplex Entertainment Centre (P.) Ltd.: 373 ITR 14 (Del) • CIT vs. Siya Ram Garg (HUF): 237 CTR 21 (P&H) • CIT vs. Talbros Engineering Ltd.: 386 ITR 154 (P&H) • CIT vs Rasoi Ltd.: 335 ITR 438 (Cal.) • DCIT vs. Inox Leisure Ltd.: 351 ITR 314 (Guj) • Garden Silk Mills Ltd. v. CIT and Anr. : 394 ITR 192 (Guj.) • CIT vs. Birla VXL Ltd.: 215 Taxman 117 (Guj.) • DCIT vs. Munjal Auto Industries Ltd.: 218 Taxman 135 (Guj.) • CIT vs. Samta Chavigarh: ITA No. 144 of 2007 (Raj)/ 222 Taxman 205 (Mag.) • Shiv Shakti Flour Mills (P) Ltd. v. CIT: ITA No. 6 of 2014 (Gau) • Honda Siel Cars India Ltd in ITA No.5577/ Del/ 2004 (Del.) • ACIT vs. Shree Cement Ltd. : ITA No. 614, 615 and 635/JP/2010 (JP) • DCIT vs. M/s Teesta Agro Industries Ltd. ITA No. 1237, 1053, 1753/Kol/2010 . Associated Cement Co. Ltd. vs. Addl. CIT : ITA No. 6289 & 6320 /Mum/2003 . Everest Industries Ltd vs. ACIT: ITA No.814/Mum/2007 Zenith Fiber Ltd vs. ITO: 2009 TIOL 468 (Mum) • • Sterlite Optical Technologies Ltd. in ITA No.7136/Mum/04 • Indo Rama Industries Limited in ITA No. 2130/ Del/ 2008 • PVR Limited v. ACIT: ITA No. 1897/ Del/ 2010 (Del ITAT) • Ford India (P) Ltd. vs. DCIT: 59 SOT 221 (Chennai ITAT) Shyam Steel Industries Ltd. v. ACIT: 161 ITD 1 (TM) (Kol.) •

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The Ld. AR submitted that the nature of the subsidy - whether capital or revenue, has to be examined by applying the “purpose test” as laid down repeatedly by the Supreme Court in the case of Sahney Steel (supra) and reiterated in Ponni Sugar (supra). There is also no dispute that the form and nomenclature of the subsidy are totally irrelevant in order to determine the nature of the subsidy. It would thus be appreciated that the purpose of grant of subsidy/ incentive is the only relevant and crucial test for determining the nature of the subsidy. If the incentive/ subsidy is given for promoting industrialization and for employment generation, then all other factors like the manner of giving the incentive (whether it be linked to purchase of a capital asset like machinery, etc., or to purchase of a circulating asset like raw material, etc.), the time of giving the incentive (whether prior to start of operations or after that date) and the source of the subsidy (whether received from customers as part of sale price) are totally irrelevant. In view of the aforesaid, it is submitted that the aforesaid incentive/ subsidy was in the nature of capital receipt not chargeable to tax in the hands of the assessee. It may also be pointed out that a prospective amendment by insertion of clause (xviii) to section 2(24) of the Act is made by Finance Act, 2015 applicable w.e.f. 01.04.2016 bringing to tax the subsidy (ies) received by the assessee (except for reimbursement of actual cost). It is submitted that as the amendment is made prospective, the subsidies, considering the purpose test, shall be treated as capital receipts for earlier years including year under consideration. The Ld. AR mentioned that the aforesaid issue was decided in favour of the assessee by the order of the Delhi Bench of the Tribunal in assessee’s own case for the assessment year(s) 2002-03, 2004-05, 2005-06, 2006-07 and 2007-08. Subsequently, the Tribunal had, for the assessment year 2008-09, relying upon the decision of the Delhi High Court in the case of Bhushan Steels and Strips Ltd., decided the aforesaid issue against the assessee. The adverse decision of the Delhi High Court in the case of Bhushan Steels and Strips Ltd. has been stayed by the Hon'ble Supreme Court vide order dated 20.11.2017 in SLP (C) No.30728-30732/2017. Further, the order of the Tribunal for AY 2005-

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06 has recently been affirmed by the Delhi High Court vide order dated 7.12.2017 in ITA No.171/2012, wherein the High Court has, relying upon the decision in the case of Johnson Matthey (supra) held that sales tax exemption received under the Haryana General Sales Tax Rules, 1975 is to be treated as capital receipt. Similarly, order of the Tribunal for assessment year 2006-07 has also been affirmed by the Delhi High Court in ITA No.381/2016. Therefore, the Ld. AR submitted that the assessing officer erred in not excluding the amount of subsidy while computing the taxable income of the assessee. Such action is contrary to the facts of the case and position in law and the same, therefore, calls for being reversed.

“11. Grounds No 11 to 11.5 relate to the Sales Tax Subsidy claimed as capital receipt from the total income. Briefly stated relevant facts on this ground, as apparent from record and the Industrial Policy, 1999 notified on 11.11.1999 by the State Government of Haryana having a bearing on the claim of the assessee, are that the assessee had, for the relevant year under consideration, received sales tax concessions amounting toRs.13,55,68,826/- from the Government of Haryana under Rule 28C of the Haryana General Sales Tax Rules, 1975, and claimed it to be a capital receipt not liable for tax. However, AO denied the same and brought it to tax by treating the same as revenue receipt.

11.1. It is submitted on behalf of the assessee that the incentive/ subsidy was granted to the assessee for undertaking substantial expansion of existing industryin line with the larger public objective of the Policy to promote industrialization and employment generation and

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not to supplement trading receipts, which is, it is respectfully submitted, clearly in the nature of a capital receipt, not liable to tax. Ld. AR submits that the issue regarding taxability of sales tax incentive is squarely covered in favour of the assessee by the decisions reported in CIT vs Ponni Sugars and Chemicals Ltd: 306 ITR 392 (SC), Sahney Steel and Press Works Ltd. v. CIT: 228 ITR 253 (SC), V.S. S.V. Meenakshi Achi: 60 ITR 253 (SC), CIT v. Johnson Matthey India Pvt. Ltd. : ITA No. 193/2015 (Del.), Bougainvillea Multiplex Entertainment Centre (P.) Ltd.: 373 ITR 14 (Del), CIT vs. National Co-operative Consumer Federation Ltd.: 254 ITR 599 (Del), Shree Balaji Alloys vs. CIT: 198 Taxman 122 (J&K) – Revenue’s appeal dismissed by the Supreme Court in Civil Appeal No. 10061 of 2011 [287 CTR 459 (SC)], CIT vs. Ruby Rubber Works Ltd., 178 ITR 181 (Ker. FB) – affirmed by the Supreme Court in Kalpetta Estates Ltd. Vs. CIT : 260 ITR 601, CIT vs. Sham Lal Bansal in ITA: 472 of 2010 (P&H), CIT vs. Siya Ram Garg (HUF): 237 CTR 21 (P&H), CIT vs. Talbros Engineering Ltd. : 386 ITR 154 (P&H), Chaphalkar Brothers: 351 ITR 309 (Bom.), Sadichha Chitra vs. CIT: 189 ITR 774 (Bom.), CIT vs Rasoi Ltd.: 335 ITR 438 (Cal.), CIT vs. Balarampur Chini Mills Ltd.: 238 ITR 445 (Cal.), CIT vs. Madurantakam Co-operative Sugar Mills Ltd.: 263 ITR 388 (Mad), Garden Silk Mills Ltd. v. CIT and Anr. : 394 ITR 192 (Guj.), DCIT vs. Inox Leisure Ltd.: 351 ITR 314 (Guj), CIT vs. Birla VXL Ltd.: 215 Taxman 117 (Guj.), DCIT vs. Munjal Auto Industries Ltd.: 218 Taxman 135 (Guj.), DCIT vs. Reliance Industries Limited: 88 ITD 273 (Mum SB.).

11.2. He drew support from the decision of the jurisdictional High Court in the case of CIT v. Bougainvillea Multiplex Entertainment Centre (P.) Ltd.: 373 ITR 14. Ld. AR further submitted that a coordinate Bench of Delhi Bench of the Tribunal considered all relevant facts and decided

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the issue in favour of the assessee in assessee’s own cases in ITA No.1927/Del/2010 (AY 2005-06), ITA No.5120/Del/2010 (AY 2006-07), ITA No.5720/Del/2011 (AY 2007-08) and the decision in ITA No.1927/Del/2010 for assessment year 2005-06 was followed by the Delhi Bench of the Tribunal in the case of Johnson Matthey India (P) Ltd.v. Addl. CIT in ITA No.952/Del/2011, wherein the Tribunal, in the context of the aforesaid sales tax incentive in the State of Haryana, held the incentive to be capital receipt, not liable to tax, most importantly the Hon’ble Delhi High Court affirmed the said decision in the case titled as CIT vs. Johnson Matthey India Pvt. Ltd. in ITA No. 193/2015.

11.3. Basing on this set of facts and law, Ld. AR submitted that the issue of taxability of Sales Tax Subsidy pursuant to the Haryana Government’s Scheme is squarely covered in favour of the assessee by the aforesaid binding decision of the jurisdictional Delhi High Court in the case of Johnson Matthey (supra).

11.4. Per contra, Ld. DR placed reliance on the decision of the Delhi High Court in the case of CIT vs Bhushan Steel and Stripes Ltd., dt. 13.7.2017, ITA No. 315/03,316/03,317/03,349/03 and 434/05 and submitted that in this decision after considering all the decisions specially Sahney Steel and Ponni Sugars and Chemicals Ltd. of Hon’ble Supreme Court, it was concluded by the Hon’ble Delhi High Court that the Sales Tax subsidy received by the assessee as revenue receipt. The Industrial Policy and Sales Tax subsidy policy have discussed in detail for consideration of such receipts in the hands of the assessee “whereas the State Government is of the opinion that for promoting of certain industries and expansion of diversification or modernization existing units (Page No. 15 of the above said order of the Hon'b!e Delhi

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High Court). Page No. 23 of the above said order also mentions that “the object of providing subsidy by way of permission to not deposit amounts collected (as sales tax liability) - which meant that the customer or servicer user concerned had to pay sales tax, but at the same time, the collector (i.e the assessee) could retain the amount so collected, undoubtedly was to achieve the larger goal of industrialization. This has been the basis of sales tax subsidy received during the year. In principle there has not been any difference in Haryana sales tax subsidy policy and UP sales tax policy. The Ltd. AR of the assessee has been gas lighting the issues of sales tax subsidy simply bifurcating it in the name of the States. The different forms cannot be taken away the substance from the issues of sales tax subsidy. According to him, the jurisprudence keeps involving, and accordingly, the Delhi High Court has decided the issues of sales tax subsidy as revenue receipts in the case of Bhushan Steel and Stripes Ltd. stating very clearly at page No. 26 of its judgment.

11.5. According to the Ld. DR the assessee’s case also encircles the issues of sales tax subsidy in the similar ways, thereby, the sales tax subsidy received in the hands of the assessee needs to be treated as revenue receipts, and the Assessee’s reliance on Bougainvillea multiplex Entertainment Centre Pvt. Ltd. 373 ITR 14(Del) and Johnson Matthey India Pvt. Ltd., ITANo. 192/2015(Del) are misplaced. Ld. DR emphasizes that the Hon’ble Delhi High Court’s decision in the case of M/s Bhushan Steel and Stripes Ltd. dt. 13.7.2017 being the recent decision after consideration of all the case laws, wherein the wisdom of the Delhi High Court has reached, in the processes of advancement of jurisprudence, as to treat the sales tax subsidy as revenue receipt, has to be preferred to other earlier decisions. This is being recent, speaking

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and the well reasoned order needs to be followed by the Hon’ble Bench, ITAT which falls under the jurisdiction of the Hon’ble Delhi High Court.

11.6. On this premise, Ld. DR, therefore, prayed to consider the recent decision of the Hon’ble Delhi High Court reached in the case of Bhushan Steel & Stripes Ltd. for considering the sales tax subsidy as the revenue receipt without considering the decision as per incuriam which is a subject matter of Hon’ble supreme Court.

11.7. In reply, Ld. AR submitted that in the case of the Bhushan Steel & Strips Limited the Hon’ble Delhi High Court considered the case of sales-tax subsidy received under an altogether different industrial policy of the Government of UP, and in that different context of the policy of the Government of UP, the Court held that the sales tax subsidy was in the nature of a revenue receipt and not a capital receipt.

11.8. Ld. AR referred to the paragraph No 25 and 26 of the decision in Bhushan Steel & Strips Limited (supra) in support of his submission that this decision of the Delhi High Court in the case of Bhushan Steel (supra) is confined to the peculiar facts of the Uttar Pradesh Industrial Policy, 1990, as would be evident from the following observations: “25…………Paras 6 (A) and 6(B) of that scheme specifically provided for capital subsidy to set up prestige units; the amounts indicated (Rupees fifteen lakhs) were to be towards capital expenditure. Now, if that was the scheme under which the assessees set-up their units, undoubtedly it contained specific provisions that enabled capital subsidies. Whether the assessees were entitled to it, or not, is not relevant. The assessees are now concerned with the sales tax amounts they were permitted to retain, under the amended scheme (dated 27.07.1991) which allowed the facility of such retention, after the unit (established and which could possibly claim benefit under the first scheme) was already set up. This subsidy scheme had no strings attached. It merely stated that the collection could be retained to the extent of 100% of capital expenditure. Whilst it might be tempting to read the linkage with capital expenditure as not only applying to the limit, but also implying an underlying intention that the capital expenditure would thereby

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be recouped, the absence of any such condition should restrain the court from so concluding”. “26. How a state frames its policy to achieve its objectives and attain larger developmental goals depends upon the experience, vision and genius of its representatives. Therefore, to say that the indication of the limit of subsidy as the capital expended, means that it replenished the capital expenditure and therefore, the subsidy is capital, would not be justified. The specific provision for capital subsidy in the main scheme and the lack of such a subsidy in the supplementary scheme (of 1991) meant that the recipient, i.e. the assessee had the flexibility of using it for any purpose. Unlike in Ponni Sugars (supra), the absence of any condition towards capital utilization meant that the policy makers envisioned greater profitability as an incentive for investors to expand units, for rapid industrialization of the state, ensuring greater employment. Clearly, the subsidy was revenue in nature.”

11.9. Basing on the above observations, he submitted that the Hon’ble Court gave much emphasis to the fact that the UP Industrial Policy specifically provided for capital subsidies, and considering the fact that the in that case assessee was not granted capital subsidy, as specifically contained in the said Policy, the Court concluded that the subsidy received was not in the nature of a capital subsidy but only a revenue subsidy; whereas, according to the Ld. AR, unlike in the UP Industrial Policy, there is no specific provision in the Haryana Industrial Policy for capital subsidy and hence, the decision in the case of Bhushan is not applicable. As regards observations of the Hon’ble Court regarding no strings being attached to the incentives, Ld. AR submitted that such observations have to be read in the aforesaid context/ discussion wherein the Court held that the case of Bhushan was not falling in capital subsidy scheme as contained in the UP Policy.

11.10. Ld. AR pointed out that in fact, in Johnson Matthey (supra) and Bougainvillea Multiplex Entertainment Centre (P) Limited: 373 ITR 14 the Hon’ble Delhi High Court held that despite no strings being attached

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thereto, the subsidy or incentive, as the case may be, was in the nature of capital subsidy. He submitted that in similar view has been taken in Shree Balaj Alloys : 198 Taxman 122 (J&K) – affirmed by SC in 287 CTR 459, CIT v. Chaphalkar Brothers: 351 ITR 309 (Bom) , CIT v. Rasoi Limited : 335 ITR 438 (Cal) , CIT v. Birla VXL Ltd: 215 Taxman 117 (Guj) , DCIT v Inox Leisure Ltd. : 351 ITR 314 (Guj) , CIT v.Samta Chavigarh: 268 CTR 199 (Raj.).

11.11. Ld. AR emphatically submitted that the issue of taxability of sales tax subsidy pursuant to the Haryana Government’s Scheme is squarely covered in favour of the assessee by the binding decision of the jurisdictional Delhi High Court in the case of Johnson Matthey (supra), whereas the decision in the case of Bhushan Steel (supra) rendered in the context of an altogether different industrial policy of the Government of UP, as such, it is not applicable to the facts of the present case.

11.12. According to the Ld. AR there is no conflict between the Judgements of the Hon’ble Jurisdictional High Court in the cases of Johnson Matthey (supra) and Bougainvillea Multiplex Entertainment Centre (P) Limited: 373 ITR 14 on one hand and Bhushan Steel (supra) on the other, inasmuch they dealt with two different industrial policies surrounded by different facts and circumstances. However, according to him, even if it is construed that there is a conflict between two judgements of the Division Bench of the jurisdictional High Court, then it has to be seen that the decision of the jurisdictional High Court in the case of Johnson Matthey (supra) having been rendered in the context of the very same scheme, Haryana Industrial Policy, 1999 in the context of which the case of assessee falls, has to be preferred over the decision

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of the jurisdictional High Court in the case of Bhushan Steels (supra), because it has been rendered in context of an altogether different Industrial Policy.

11.13. Placing reliance on the decisions rendered in Government of Andhra Pradesh and Anr. vs. B. Satya Naraina Rao(dead) by LRs. and Others (2000) : 4 SCC 262(SC), A.R. Antuleyvs. R.S.Naik: AIR 1988 SC 1531 (SC), R. Thiruvirkolam v. Presiding Officer and Another : 1 SCC 9 (SC), State of Assam v. RipaSarma : 3 SCC 63 (SC), Punjab Development and Reclamation Corporation Limited vs. Presiding Officer, Labour Court : 1990 : 3SCC 682 (SC), CIT v. Thana Electricity Supply Ltd.: 206 ITR 727 (Bom.), CIT v. Cascade Holdings (P) Ltd.: 365 ITR 84 (Bom.), Ld. AR submitted that even if there is a conflict between the judgements of jurisdictional High Court, viz., Bougainvillea Multiplex Entertainment Centre (supra) and Johnson Matthey (supra) on the one hand, and Bhushan Steels (supra) on the other, the judgment rendered in case of Johnson Matthey (supra) has to be preferred because the decision in the case of Bhushan Steel (supra) was rendered without considering the earlier decisions rendered by the bench of co-equal strength in case of Johnson Matthey (supra) and Bougainvillea Multiplex Entertainment Centre (P.) Ltd. (supra). Saying so, he submitted that the contention of the Ld. DR that in the processes of advancement of jurisprudence, the Hon’ble High Court has evolved the law to treat the sales tax subsidy as revenue receipt cannot be accepted.

11.14. Lastly, Ld. AR contended that in Sandeep Kumar Bafna v. State of Maharashtra and Anr. : AIR (2014) SC 1745; and Mamaleshwar Prasad v. Kanhaiyalal (Dead) through L.Rs. : AIR (1975) SC 907 it has

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been held that where two judicial precedents of co-equal strength are available on the issue and the later judgment does not consider the earlier one, then, the lower court shall follow the judicial precedent rendered earlier in point of time.

11.15. We have carefully gone through the rival contentions in the light of the decisions of the Hon’ble jurisdictional High Court in CIT v. Bougainvillea Multiplex Entertainment Centre (P.) Ltd.: 373 ITR 14 and CIT vs Bhushan Steel and Stripes Ltd., and the decision of the Delhi Bench of the Tribunal in the case of Johnson Matthey India (P) Ltd.v. Addl. CIT in ITA No.952/Del/2011, and upheld by the Hon’ble Delhi High Court in the case titled as CIT vs. Johnson Matthey India Pvt. Ltd. in ITA No. 193/2015. In all these cases the guidance is taken and strength is derived from the decisions of the Hon’ble Apex Court in Sahney Steel and Press Works Ltd. v. CIT: 228 ITR 253 (SC), and CIT vs Ponni Sugars and Chemicals Ltd: 306 ITR 392 (SC). Purposive test is the key principle that is applied for determination of the nature of the subsidy. Though it is an undisputed fact that a coordinate Bench of this Tribunal considered all relevant facts and decided the issue in favour of the assessee in assessee’s own cases in ITA No.1927/Del/2010 (AY 2005-06), ITA No.5120/Del/2010 (AY 2006-07), ITA No.5720/Del/2011 (AY 2007-08), submission of the DR that the law is kept on evolving by the Hon’ble jurisdictional High Court, inasmuch as the Hon’ble Court in a subsequent and latest judgement in Bhushan Steels case (supra) held that the subsidy given at post project stage without mandating for any specific use of such subsidy fund, is only a revenue receipt, necessitates this Bench to look afresh at the issue in the light of the march of law. For proper appreciation of the

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contentions of the parties, it is but necessary to find out the principles of law laid down in these decisions.

11.16. In Sahney Steel and Press Works Ltd ( supra) facts involve the notification issued by the Andhra Pradesh Government where under certain facilities and incentives were to be given to all the new industrial undertakings which commenced production on or after 1st Jan., 1969 with investment capital (excluding working capital) not exceeding Rs. 5 crores. The incentives were to be allowed for a period of five years from the date of commencement of production. Concession is also available for subsequent expansion of 50 per cent and above of existing capacities provided in each case, the expansion was located in a city or town or panchayat area other than that in which the existing unit is located. The incentives were, refund of sales-tax on raw materials, machinery and finished goods, levied by the State Government subject to a maximum of 10 per cent of the equity capital paid up in the case of public limited companies and the actual capital in the case of others; subsidy on power consumed for production to the extent of 10 per cent in the case of medium and large scale industries etc; exemption from payment of water rate Liability on account of assessment of land revenue or taxes on land used for establishment of any industry, shall be limited to the amount of such taxes payable immediately before the land is so used.

11.17. In Sahney Steel’s case, it was contended on behalf of the assessee that the subsidy given was up to 10 per cent of the capital investment calculated on the basis of the quantum of investment in capital, and, therefore, receipt of such subsidy was on capital account and not on revenue account. It was also urged in that case that subsidy

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granted on the basis of refund of sales tax on raw materials, machinery and finished goods were also of capital nature as the object of granting refund of sales tax was that the assessee could set up new business or expand his existing business. However, Hon’ble Apex Court on examination of the decisions in the case of Seaham Harbour Dock Co. vs. Crook 16 Tax Cases 333 (HL), Lincolnshire Sugar Co. Ltd. vs. Smart 20 Tax Cases 643 and a Canadian case St. John Dry Dock & Ship Building Co. Ltd. vs. Minister of National Revenue 4 DLR 1, and while affirming the principle laid down in Ostime vs. Pontypridd & Rhondda Joint Water Board 28 Tax Cases 262, held that the contention that the subsidies were of capital nature and were given for the purpose of stimulating setting up and expansion of industries in the State cannot be upheld because of the subsidy scheme itself. Hon’ble Court observed that no financial assistance was granted to the assessee for setting up of the industry, and it was only when the assessee had set up its industry and commenced production, various incentives were given for the limited period of five years. The Hon’ble Court further observed that that the endeavour of the State was to provide the newly set up industries a helping hand for 5 years to enable them to be viable and competitive, sales-tax refund and the relief on account of water rate, land revenue as well as electricity charges were all intended to enable the assessee to run the business more profitably, as such the amount paid to the assessee was in the nature of subsidy from public funds to assist it in carrying on its trade or business. Having regard to the scheme of the Notification, it was held that there can be little doubt that the object of various assistances under the subsidy scheme was to enable the assessee to run the business more profitably, since the payments were made only after the industries have been set up.

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Payments are not being made for the purpose of setting up of the industries. But the package of incentives was given to the industries to run more profitably for a period of five years from the date of the commencement of production. In other words, a helping hand was being provided to the industries during the early days to enable them to come to a competitive level with other established industries. In such circumstances, the Hon’ble Court held that the payments were nothing but supplementary trade receipts, though the assessee could not use this money for distribution as dividend to its shareholders, but, the assessee was free to use the money in its business entirely as it liked and was not obliged to spend the money for a particular purpose, as such, by no stretch of imagination can the subsidies whether by way of refund of sales-tax or relief of electricity charges or water charges can be treated as an aid to setting up of the industry of the assessee. If any subsidy is given, the character of the subsidy in the hands of the recipient—whether revenue or capital—will have to be determined by having regard to the purpose for which the subsidy is given. If it is given by way of assistance to the assessee in carrying on of his trade or business, it has to be treated as trading receipt. The sales-tax upon collection forms part of the public funds of the State. In this sense it was held that the source of the fund is quite immaterial. If the purpose is to help the assessee to set up its business or complete a project, the monies must be treated as to have been received for capital purpose. But, if monies are given to the assessee for assisting him in carrying out the business operation and the money is given only after and conditional upon commencement of production, such subsidies must be treated as assistance for the purpose of the trade. In Sahney’s case, subsidies have not been granted for production of or bringing into

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existence any new asset, but were granted year after year only after setting up of the new industry and commencement of production and such a subsidy could only be treated as assistance given for the purpose of carrying on of the business of the assessee. These subsidies are of revenue character and will have to be taxed accordingly. Hon’ble Apex Court also noted many decisions of Indian Courts on this aspect, viz., V.S.S.V. Meenakshi Achi & Anr. vs. CIT (1966) 60 ITR 253 (SC), CIT vs. Ruby Rubber Works Ltd. (1989) 78 CTR (Ker) 75, Sadichha Chitra vs. CIT (1990) 90 CTR (Bom) 135, Kesoram Industries & Cotton Mills Ltd. vs. CIT (1991) 191 ITR 518 (Cal), CIT vs. Dusad Industries (1986) 51 CTR (MP) 217 etc.

11.18. In this context, it is pertinent to note that the Madhya Pradesh High Court in the case of CIT vs. Dusad Industries (1986) 51 CTR (MP) 217 : (1986) 162 ITR 784 (MP) : TC 13R.622, dealt with a case where Government had framed a scheme for granting sales-tax subsidies to industries set up in backward areas took the view that the object of the scheme was not to supplement the profits made by industries. In that view of the matter, the High Court held that the subsidies given under the said scheme by the Government to newly set up industries were capital receipts in the hands of the industries and could not be taxed as revenue receipts. In that case, 75 per cent of the sales-tax paid in a year for a period of five years from the day of starting of production was to be given back by the Government to the industry concerned. The High Court was of the view that obviously the subsidy was given by way of an incentive for capital investment and not by way of addition to the profits of the assessee as was clear from the facts and circumstances of the case. While referring to these facts, Hon’ble Apex Court held that the Madhya Pradesh High Court, however, failed to

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notice the significant fact that under the scheme framed by the Government, no subsidy was given until the time production was actually commenced, mere setting up of the industry did not qualify an industrialist for getting any subsidy, and the subsidy was given as help not for the setting up of the industry which was already there but as an assistance after the industry commenced production. Hon’ble Apex Court, therefore, held that the view taken by the Madhya Pradesh High Court is erroneous.

11.19. Law laid down by the Hon’ble Apex Court in Sahney Steel and Press Works Ltd ( supra) is, therefore, that the character of the subsidy in the hands of the recipient—whether revenue or capital—will have to be determined by having regard to the purpose for which the subsidy is given. If the purpose is to help the assessee to set up its business or complete a project, the monies must be treated as to have been received for capital purpose, and if it is given by way of assistance to the assessee in carrying on of his trade or business, it has to be treated as trading receipt. The source of the fund is quite immaterial. In a case where 75 per cent of the sales-tax paid in a year for a period of five years from the day of starting of production was to be given back by the Government to the industry concerned, the view taken by the Madhya Pradesh High Court that the subsidy was given by way of an incentive for capital investment and not by way of addition to the profits of the assessee was expressly disapproved basing on the significant fact that under the scheme framed by the Government, no subsidy was given until the time production was actually commenced.

11.20. In Ponni Sugars case (supra), four factors exist in the Incentive Schemes, were, (i) benefit of the incentive subsidy was available only to

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new units and to substantially expanded units, not to supplement the trade receipts; (ii) the minimum investment specified was Rs. 4 crores for new units and Rs. 2 crores for expansion units; (iii) increase in the free sale sugar quota depended upon increase in the production capacity. In other words, the extent of the increase of free sale sugar quota depended upon the increase in the production capacity; (iv) the benefit of the Scheme had to be utilized only for repayment of term loans. The important point noted by the Hon’ble Apex Court in this case is that Government of India, financial institutions as well as the sugar industries are parties to the Scheme in the sense that but for the Scheme the financial institutions would not have given term loans to set up new units/expansion of the existing units. Keeping in mind the object behind the payment of the incentive subsidy such payment received by the assessee under the Scheme was not in the course of a trade but was of capital nature, while reiterating the principle of purposive test enunciated in Sahney Steel & Press Works Ltd., Hon’ble Apex Court held, that the receipt of the subsidy by the assessee in that case was capital in nature as the assessee was obliged to utilize the subsidy only for repayment of term loans undertaken by the assessee for setting up new units/expansion of existing business.

11.21. In Bougainville case (supra), facts submitted to the Court are that against the backdrop of steep decline of viewership due to various reasons including onslaught of cable television leading to erosion in entertainment tax collections and with a view to encourage setting up of multiplex cinema halls and malls, in order to promote the viewership in cinema halls, various State Governments, being aware that setting up an operation of such multiplexes involves various problems including huge capital investments, had come up with schemes offering incentives

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to cinema industry and the Government of the State of Uttar Pradesh formulated a promotional scheme to such effect and notified it by Government order issued on 13.07.1999. Hon’ble jurisdictional High Court after noticing the decisions of the Hon’ble Apex Court in Sahney Steel and Press Works Ltd. v. CIT: 228 ITR 253 (SC), and CIT vs Ponni Sugars and Chemicals Ltd: 306 ITR 392 (SC) found vide Para No 32, that the UP Scheme under which the assessee claims exemption to the extent of entertainment tax subsidy, claiming it to be capital receipt, is clearly designed to promote the investors in the cinema industry encouraging establishment of new multiplexes. Since the subsidy of such nature cannot possibly be granted by the Government directly, the Entertainment tax is leviable on the admission tickets to cinema halls only after the facility becomes operational, and since the source of the subsidy is the public at large which is to be attracted as viewers to the cinema halls, the funds to support such an incentive cannot be generated until and unless the cinema halls become functional, by applying the “purpose test”, referred to in Ponni Sugars (supra) held that the assistance in the form of entertainment tax exemption came in the hands of assessee to enable it to set up the new unit which renders it a receipt on capital account. The periodicity (year to year) of the subsidy, its source (collections from the public at large) and the form (deemed deposit) are irrelevant considerations.

11.22. In CIT vs. Johnson Matthey India Pvt. Ltd., while referring to the decisions in Sahney (supra), Ponni Sugars (supra) and Bougainvillea Multiplex Entertainment Centre (supra), Hon’ble jurisdictional High Court observed as under: “This Court has considered the submissions and is of the opinion that the ITAT’s impugned order has noted the relevant law. Crucially, Ponni Sugars (supra) is a

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later decision of the Supreme Court which had gone to deal with various authorities, including Sahney (supra). The Supreme Court has emphasized in each case the purpose for which subsidy or assistance is given by the State government or a public agency. If that is to promote an industry, especially with special interest of development of capital infrastructure, the amounts received are to be treated as capital and not revenue. This Court too had the occasion to deal with the issues in CIT v. Bougainvillea Multiplex Entertainment Centre Pvt. Ltd. (ITA 586/2013, decided on 30.01.2015) where the decision in Ponni Sugars (supra) and previous authorities were discussed and applied in given facts of the case. We are of the opinion that the impugned order of the ITAT does not disclose any infirmity. No substantial question of law arises. It is accordingly dismissed.”

11.23. Recently the Hon’ble Delhi High Court in the case of CIT vs Bhushan Steel and Stripes Ltd., dt. 13.7.2017, ITA No. 315/03,316/03,317/03,349/03 and 434/05 after considering all the decisions specially Sahnev Steel and Ponni Sugars and Chemicals Ltd. of Hon’ble Supreme Court, and Bougainville case (supra) of High Court, reached a conclusion that the Sales Tax subsidy received by the assessee as revenue receipt.

11.24. In this case, the Hon’ble Court observed that the object of providing subsidy by way of permission to not deposit amounts collected (as sales tax liability)- which meant that the customer or servicer user concerned had to pay sales tax, but at the same time, the collector (i.e. the assessee) could retain the amount so collected, undoubtedly was to achieve the larger goal of industrialization, and the achievement of a quantitative limit (of 125% of capital expenditure in the case of small scale units and 100% in the case of other units) meant that the subsidy could no longer be claimed. However, it was further observed that whilst it might be tempting to read the linkage with capital expenditure as not only applying to the limit, but also implying

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an underlying intention that the capital expenditure would thereby be recouped, the absence of any such condition should restrain the court from so concluding. In this matter, it was stated that in Sahney Steel (supra) and Ponni Sugars (supra) the issue decided was - what was the true purpose of the incentive or the subsidy, whereas the end use of the funds was considered as an additional argument to decide the matter either way. Furthermore, basing on the amendment to Section 2(24) of the Act by the Finance Act, 2015, it was contended before the Hon’ble jurisdictional High Court that,

…….. the Finance Act of 2015 which came into force on 01.04.2016 amended Section 2(24) of the Income Tax Act and inserted Clause (xvi). It is stated that assistance in the form of subsidy or grant or cash incentive or duty drawback or waiver by Central or State Governments or any authority in cash or kind to the assessee other than subsidy or grant or reimbursement which is taken into account determining the actual cost of the asset, is deemed to be income. It was submitted that this amendment clarifies the intent of Parliament which is that the assistance received otherwise than towards capital augmentation or creation is deemed to be income. This amendment is prospective which means that the law is to be interpreted in the light of the judgments applicable, notably Ponni Sugars (supra) in the present case.

11.25. After considering the entire case law on this aspect, vide paragraph No 26, the Hon’ble court held,-

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11.26. A reading of all these decisions, therefore, makes the golden principle that runs through them very clear. While framing its policy to achieve its objectives and attain larger developmental goals, depending upon the experience, vision and genius of its representatives, it is always open for the State to provide incentives, which results in capital and revenue receipts in the hands of the receiver, depending upon the purpose for which they are given. If any subsidy is given, the character of the subsidy in the hands of the recipient—whether revenue or capital—will have to be determined by having regard to the purpose for which the subsidy is given. If the purpose is to help the assessee to set up its business or complete a project, the monies must be treated as to have been received for capital purpose. But, if monies are given to the assessee for assisting him in carrying out the business operation and the money is given only after and conditional upon commencement of production, such subsidies must be treated as assistance for the purpose of the However, any stipulation placing the assessee is under obligation to utilize the subsidy only for repayment of term loans undertaken by the assessee for setting up new units/expansion of existing business, or to liquidate the cost incurred in creating the capital asset, makes the receipt a capital receipt and renders the time of providing the subsidy irrelevant. Mere indication of the limit of subsidy as the capital expended does not justify the conclusion that it replenished the capital expenditure and therefore, the subsidy is capital. It is, therefore, neither the lofty ideals/objectives of the policy document nor the presumed end use of the subsidy amount that determines the nature or subsidy in the hands of the recipient, but the purpose envisaged by the policy document that satisfies the ‘purpose test’ formulated under Sahney’s case. Unless the intention of the policy

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makers is express and clear discernible from the policy document to link up the utilization of subsidy amount, irrespective of the time of recipient getting it, with liquidation of the capital cost, as could be gather from the decisions of Sahney steels and Ponni Sugars cases, no inference is permissible to be drawn that the subsidy results in capital receipt in the hands of the recipient. Developmental objectives of the subsidy policy document, ipso facto, do not determine the nature of subsidy. Purpose as could be culled out from the framework of the policy document is the sole determinative factor. Having noted the context of relevancy or otherwise of the source, form and time of subsidy in determining its nature, now we shall proceed to examine the nature of receipt in the hands of the assessee in this matter.

11.27. Main objectives of the Haryana Industrial Policy are to increase the share of industry in the Net/Gross State Domestic Product by attracting new investments and growth of existing industry; to increase the employment in Industrial and Allied sector by 20% in the next five years; to attain sustainable economic development through catalysis of investments in all sectors of the economy; to achieve larger value addition within the State thereby contributing to a higher quality of life etc. According to the assessee, a perusal of the aforesaid indicates that the objectives of the Policy inter-alia, included growth of existing industry and increasing the employment opportunities. For achieving the aforesaid objective, the stated approach, inter alia, was to rationalize the package of incentives making it more effective and meaningful for speedy development of the State. The Policy specifically provided for customised package of incentives and concessions for prestigious projects to be decided by a high power committee.

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11.28 Policy document says,

“SCHEME OF INCENTIVES CUSTOMISED PACKAGE OF INCENTIVES Customised package of incentives and concessions will be provided for prestigious projects having investment of Rs.30 crores and above. A High Powered Committee will be constituted under the chairmanship of the Chief Minister to decide the package in individual cases”

11.29. Accordingly, sales tax concessions were to be provided to new units and also industrial units undergoing expansion/ diversification. Pursuant to the aforesaid Policy, Chapter IV-C was inserted in July, 2000 in the Haryana General Sales Tax Rules’ 1975, containing Rule 28C dealing with “Tax Concessions, Class of Industries, Period and Other Conditions”. The Salient features of the said Rule 28C, to the extent relevant, are as under: (a) Concessions shall be available to an “eligible industrial unit”; (b) The expression “eligible industrial unit” was defined in sub-clause (c) of Rule 28C(3) of Haryana General Sales Tax Rules’1975 to include a new industrial unit or unit undertaking expansion or diversification subject to fulfillment of other conditions. The relevant extract of the said definition is as under: “Rule 28-C ……… (3)(c) “eligible industrial unit” means- (1) a new industrial unit or a unit undertaking expansion or diversification which, on the date of commercial production of new/expanded/diversified unit, fulfills the following conditions……” (emphasis supplied)

(c) The term “expansion” was defined in clause (f) of Rule 28C(3) of Haryana General Sales Tax Rules’1975 as under: “expansion” means an industrial capacity set up or installed during the operative period which creates additional production facilities for manufacture of the same product (s) as of the unit before expansion in which the additional fixed capital investment in plant and machinery made during the operating period in one go, not exceeding the period of one year, exceeds 25% of the fixed capital

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investment (gross block) of the unit before expansion at the same or new location.” (emphasis supplied)

(d) Eligibility of prestigious units defined in clause (m) as unit having fixed capital investment exceeding Rs.30 crores, shall be determined by the High Powered Committee;

(e) Clause 5(b), provides that decision to grant tax concession to prestigious unit shall be taken by the High Powered Committee on the basis of factors like employment generation, likely revenue, growth of ancillaries, impact on overall industrial growth, etc. [Also refer clause 6(e)].;

(f) Clause 8(a) provides for issuance of the entitlement certificate in form ST-72B. 11.30. In terms of sub-rule (5)(b) of Rule 28C, it is provided that the decision to grant tax concession to a prestigious unit is given on the basis of factors like employment generation, impact on overall industrial growth, etc. According to the Ld. AR assessee in this case falls in the category of ‘prestigious unit’. He emphasized that the underlying objective of conferring the benefit under Rule 28C, clearly proves beyond any doubt the fact that the avowed intent/ purpose of granting the concession is industrial development of the State and employment generation.

11.31. In this background, the assessee had undertaken industrial expansion in terms of the Rule 28C of Haryana General Sales Tax Rules, 1975. The High Powered Committee, thereafter, in its meeting held on 14.06.2001 granted sales tax concession to the assessee, whereby the assessee was required to pay 50% of the sales tax collected on sales of finished products from expanded unit and, retain balance 50% of the tax so collected, subject to maximum permissible benefit of Rs.564.35 crores. The letter/ communication received from Director of Industries, Haryana intimating the aforesaid decision, clearly referred to concession being granted “only in respect of vehicles

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rolled out of production capacity of 70,000 vehicles added as a result of first expansion”. Pursuant thereto, the assessee was issued entitlement certificate dated 01.08.2001 under rule 28C of Haryana General Sales Tax Rules, 1975 to avail sales tax concession to the extent of Rs.564.35 crores during the period 01.08.2001 to 31.07.2015.

11.32. Ld. AR submitted that in the case of the Bhushan Steel & Strips Limited the Hon’ble Delhi High Court considered the case of sales-tax subsidy received under an altogether different industrial policy of the Government of UP, and in that different context of the policy of the Government of UP, the Court held that the sales tax subsidy was in the nature of a revenue receipt and not a capital receipt.

11.33. A comparative analysis of the both the policies, namely, Uttar Pradesh Industrial Policy, 1990 (applicable to the facts of Bhushan’s case (supra)) and Haryana Industrial Policy, 1999 (applicable to the case of the appellant), is tabulated by the Ld. AR as follows:

Salient Bhushan’s case Appellant/ Johnson Matthey case Features Policy Uttar Pradesh Industrial Haryana Industrial Policy, 1999 Policy, 1990

Governing Act Section 4A of the UP Rule 28C of the Haryana Sales Tax and section Sales Tax Act, 1948 read Rules. with Rule 25 of the UP Sales Tax Rules. Object of To encourage the capital To promote industrial growth in the subsidy investment and context of overall economic establishment of New development of the State by creating (see Preamble) Industrial Units in the an investor friendly enabling State of Uttar Pradesh environment that facilitates the industry to move strongly to the front ranks of global competition.

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Eligibility "STATE CAPITAL “SCHEME OF INCENTIVES” criteria for a SUBSIDY SCHEME prestigious ………. CUSTOMISED PACKAGE OF unit "6 (A) :Special capital INCENTIVES subsidy for the prestige units:— Customised package of incentives Any district, where and concessions will be provided any industry of fixed for prestigious projects having capital investment of investment of Rs.30 crores and 25 crore is not above. A High Powered Committee already established, will be constituted under the the first industrial chairmanship of the Chief Minister unit to be established to decide the package in individual from the capital cases” investment of Rs.25 crore or more, within the period of 1.4.90 to “Rule 28-C 31.3.95, shall be ……… treated as "Prestige" Unit and the special (3)(c)“eligible industrial unit” state capital means- subsidy worth (1) a new industrial unit or a unit Rs.15 lakh shall be undertaking expansion or granted to this diversification which, on the date of unit. If prestige unit commercial production of incentive to the new/expanded/diversified unit, ancillary units for the fulfills the following conditions……” supply of requirement of more than 30% of ……………. its own purchased (f) “expansion” means an industrial parts and capacity set up or installed during components, then the the operative period which creates further additional additional production facilities for special capital manufacture of the same product (s) subsidy of Rs.15 lakh as of the unit before expansion in shall be available to which the additional fixed capital it. This scheme shall investment in plant and machinery be applied with effect made during the operating period in from 1.4.90 and the one go, not exceeding the period of facility of subsidy one year, exceeds 25% of the fixed shall not be capital investment (gross block) of admissible in the the unit before expansion at the district under the same or new location.” scheme, where any

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unit of the capital ………… investment of Rs.25 (m)”prestigious unit” means an crore has already eligible unit having fixed been established prior capital investment exceeding to 1.4.90. Rs.30 crores. …………..

(5)(b) Decision about the tax concession to prestigious unit shall be taken by the High Powered Committee on the basis of factors like employment generation, likely revenue, growth of ancillaries, impact on overall industrial growth etc. A prestigious unit shall not be, as a matter of right entitled to benefits available to other units.

11.34. Basing on this he submitted that the Uttar Pradesh Industrial Policy, 1990 and the Haryana Industrial Policy,1999, are altogether different Industrial Policies with altogether different eligibility criteria. He submitted that the UP Industrial Policy specifically provided for “Capital Subsidy Scheme”, which is not there in the case of Haryana Policy.

11.35. However, on a careful perusal of the schemes in question, we find that, but for certain changes in the form and expression, there is no material difference between these schemes in substances. They are similar in respect of the time, its source and the form of subsidy in the hands of the assessee. Time of assessee getting subsidy as is adverted to in Sahney’s case or the stipulation of utilization of subsidy as is in Ponni’s case are similar in both the schemes. In the case on hand the fact remains that the concession is granted only in respect of vehicles rolled out of production capacity of 70,000 vehicles added as a result of

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first expansion. Except making some specific provision for capital subsidy in the main scheme and the lack of such a subsidy in the supplementary scheme (of 1991) in respect of the UP Scheme, under both the schemes there is no difference. Under both the schemes no strings attached in respect of the utilization of funds and the assessees have the flexibility of using it for any purpose. There is no stipulation as to how the subsidy money has to be utilized which means that the assessee had the flexibility of using it for any purpose. Specific provision for capital subsidy in the main scheme and the lack of such a subsidy in the supplementary scheme (of 1991) in respect of the UP Scheme only corroborated the conclusion that the recipient of the subsidy, i.e. the assessee had the flexibility of using it for any purpose. Per se, the existence or otherwise of provisions for capital subsidy does make any difference in the nature of subsidy funds in the hands of the assessee insofar as they are allowed only after the completion of the formation of capital asset and the absence of any condition towards capital utilization meant that the policy makers envisioned greater profitability as an incentive for investors to expand units, for rapid industrialization of the state, ensuring greater employment which fact distinguishes the present case from the facts of Ponni Sugar’s case. When the purpose of the subsidy is clearly revenue in nature, end use of the funds by the assessee to liquidate the cost incurred in the expansion activity remains irrelevant having regard to the fact that the subsidy was not expressly for meeting the capital expenses either in the presenti or of past as was the case in Ponni Sugar’s case. Though the case in Bougainville was referred to in the case of Johnson Matthey, the Hon’ble Court noticed the said case in Bougainville while rendering the decision in Bhushan Steels case also. Though the findings of the

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Tribunal in Johnson Matthey’s case were upheld by the Hon’ble Jurisdictional High Court in CIT vs. Johnson Matthey India Pvt. Ltd., we find it difficult to agree with the argument of the Ld. AR that the observations of this Tribunal made in assesee’s case were approved by the Hon’ble High Court, inasmuch as the Hon’ble Court has not specifically considered the same. As has been consistently held in all the decisions from Sahney Steels to Bhushan steels that insofar as the subsidy benefits inure to the benefit of the assessee after the accomplishment of the expansion without any burden of any condition towards capital utilization of the subsidy amount meant that the policy makers envisioned greater profitability as an incentive for investors to expand units, for rapid industrialization of the state, ensuring greater employment. In this context, we find it difficult to agree with the submission of the Ld. AR that the decision in CIT vs. Johnson Matthey India Pvt. Ltd., has to be preferred to the latest decision of the Jurisdictional High Court in CIT vs Bhushan Steel and Stripes Ltd. on the ground that the Haryana State scheme was considered in the later, whereas in the later one UP Scheme was considered. For that matter in both Bougainville’s case and Bhushan Steels’s case, the very same UP scheme was considered, but with different result. No conflict could be seen in the principle applied or laid down, but what we understand is that the change in result is occasioned by the variance of facts.

11.36. For the reasons stated in the preceding paragraphs, we are of the considered opinion that any subsidy given to the assessee post accomplishment of the project or expansion there, without any obligation to utilize the subsidy only for repayment of term loans undertaken by the assessee for setting up new units/expansion of existing business, or to liquidate the cost incurred in creating the capital

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asset or its expansion, is only in the nature of the revenue receipt and is liable to be brought to tax. We, therefore, uphold the addition on this count and accordingly dismiss the grounds 11 to 11.5.”

Thus, the issue is squarely covered by the decision of the Tribunal in Assessee’s own case. Therefore, in absence of any contrary material brought to our notice by the Ld. AR against the order of the Tribunal, we dismiss the grounds. Ground No. 6 to 6.5 are dismissed.

Total Royalty Rs.679.11cr Less: Adjustment by TPO -Rs.311.73cr Balance Rs.367.38cr Depreciation on above@25% -Rs.91.84cr

Disallowance Rs.275.54cr

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In this regard, the Ld AR submitted that the aforesaid action of the Assessing Officer in holding the royalty payments to be capital in nature. The aforesaid right vested with the assessee was not exclusive in as much as in terms of Article 2.01(b)(ii), SMC granted license for non-exclusive use outside India, meaning thereby, that the owner of the trademark reserved with itself, the right to allow the user of the very same trademark to any other nature is not tenable in law due to the reason that the payment was under the agreement and the same is allowable revenue expenditure. Expenditure is regarded as capital in nature, if the same results in, (i) acquisition of capital asset (s); or (ii) benefit of enduring nature in the capital field or adds to the profit earning apparatus of the assessee. Having regard to the aforesaid settled legal principles, the Ld. AR submitted that in the present case since the payment of royalty by the assessee under the aforesaid agreement does not result in acquisition of any new assets or benefit of enduring nature in the capital field, the same cannot be regarded as in the nature of capital expenditure. The Ld. AR submitted that on perusal of the agreement dated 04.01.2005 entered into between the assessee and SMC, it is patently clear that payment of royalty by the assessee does not result in acquisition of any new assets or benefit of enduring nature in the capital field, and therefore, the same cannot be regarded as capital expenditure. To further elaborate, the Ld. AR submitted that there is no ownership rights given to the assessee. The Ld. AR submitted that during the currency of the agreement, the assessee only had a limited right to use the technology provided by SMC. In terms of Articles 2.02, 2.03 and 2.04, the ownership/proprietary rights in the technical know-how, at all times, continued and still continues to vest in SMC and the assessee was not authorized to transfer, assign or convey the licensed/know-how/technical information to any third party and, therefore, the assessee only acquired limited right to use and exploit the know-how, for carrying on manufacturing/ business operations. Further, the conditions in the agreement stipulated in Article 3.10 as to non-partibility, confidentiality and the secrecy of the know- how also indicate that the assessee obtained mere right to use the know-how

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during the currency of the agreement, without anything more. Even improvements to the technical knowledge/ information belong to the owner, i.e. SMC. The Courts, including the Apex Court and the jurisdictional High Court have, in the following cases, consistently held that payment made for obtaining access to information and restricted license to the limited use of know-how, should be treated as revenue expenditure. The Ld. AR relied upon the following decisions:

• CIT v. Ciba India Ltd: 69 ITR 692 (SC) • Alembic Chemical Works Co. Ltd. v. CIT: 177 ITR 377 (SC) CIT v. Shriram Pistons and Rings Limited -CC 12154/2009 (SC) • (dismissing the SLP filed by the revenue against the order of the Delhi High Court in ITA No. 167/2008) • Shriram Refrigeration Industries Ltd. v. CIT: 127 ITR 746(Del) • Triveni Engineering Works Ltd. v. CIT 136: ITR 340 (Del) CIT v. Sharda Motor Industrial Limited: 319 ITR 109 (Del) • • Climate Systems India Limited v. CIT: 319 ITR 113 (Del) Shriram Pistons and Rings Limited v. CIT: 307 ITR 363 (Del) • • CIT v Lumax Industries Limited 173 Taxman 390 (Del) • CIT v. J.K. Synthetics Ltd. 309 ITR 371 (Del) • CIT v. Munjal Showa Ltd.: 329 ITR 449 (Del) • CIT v. Denso India P. Ltd.: 232 Taxman 437 (Del.) • CIT v. Modi Revlon (P) Ltd : 210 Taxman 161(MAG.) (Del.) • CIT v. Prem Heavy Engineering Works P. Limited: 282 ITR 11 (All.) • CIT v. Artos Breweries Ltd : [2013] 215 Taxman 80 (AP) • CIT v. Essel Propack 325 ITR 185 (Bom) CIT v. Eicher Motors Ltd : 293 ITR 464 (M.P.) • • ITO v. Shivani Locks : 118 TTJ 467 (Del ITAT) Goodyear India Ltd. v. ITO : 73 ITD 189 (Del ITAT) • Hero MotoCorp Ltd. v. ACIT : ITA Nos. 5130/Del/2010 for assessment year 2006-07 (Del. ITAT) • Fenner (India) Ltd v. ACIT : [2012] 139 ITD 406 (Chennai) Glaxo SmithKline Consumer Healthcare Ltd. : ITA No. 1324/Chd/2012 (Chd) Glaxo SmithKline Consumer Healthcare Ltd. v DCIT: 175 TTJ 552 (Chd. • Trib.)

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The Ld. AR further pointed out the decision of the Delhi High Court in the case of CIT v. Hero Honda Motors Ltd.: 372 ITR 481, wherein the High Court while following the aforesaid decisions has held that royalty payment made to a foreign company for merely acquiring right to use technical knowhow whereas ownership and intellectual property rights in know how remained with foreign company, was allowable revenue expenditure. In the aforesaid judgments, the Courts/ Tribunal have, on an analysis of the agreement, come to the conclusion that payment made under the agreement was deductible revenue expenditure, since there was no out and out/ absolute transfer of the know- how by the owner-licensor to the licensee and the know-how supplied by the foreign company remained the property of the foreign company for all times to come; the assessee having only a limited right to use the know-how during the currency of the agreement. The no exclusive use of Trademark, the aforesaid right vested with the assessee was not exclusive in as much as in terms of Article 2.01(b)(ii), SMC granted license for non-exclusive use outside India, meaning thereby, that the owner of the trademark reserved with itself, the right to allow the user of the very same trademark to any other person. The Ld. AR submitted that in terms of Article 2.01 (b)(i), the exclusive license granted to the assessee within India by SMC only ensures that SMC would not grant similar license(s) to any other person in the same territory for manufacture of the specified products. Such an exclusive license only eliminates competition thereby securing profitability of the assessee. The same does not result in acquisition of any new asset or any enduring advantage in the capital field. The exclusive license only enables the business of the assessee to be carried on more efficiently and profitably, while leaving the fixed capital untouched. In the following cases, notwithstanding that the licensee in India had access to the know-how of the foreign company under an exclusive license, the payment in the nature of royalty made has been held to be revenue in nature. The Ld. AR relied upon the following decisions:

• CIT v. Ciba India Ltd: 69 ITR 692 (SC)

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• CIT v. IAEC (Pumps) Ltd.: 232 ITR 316 (SC) • Shriram Refrigeration Industries Ltd. v. CIT: 127 ITR 746(Del) • Triveni Engineering Works Ltd. v. CIT: 136 ITR 340 (Del) • CIT v. Bhai Sunder Dass & Sons (P) Ltd: 158 ITR 195 (Del.) CIT v. Hero Honda Motors Ltd.: 372 ITR 481 (Del.) • • Praga Tools Ltd. v. CIT : 123 ITR 773 (AP) Mysore Kirloskar Ltd. V. CIT: 114 ITR 443 (Kar.) • • CIT v. Tata Engineering & Locomotive Co. Pvt. Ltd. 123 ITR 538 (Bom) CIT v. Hindustan Motors Ltd.: 192 ITR 619 (Cal.) • • CIT v. Avery India Ltd.: 207 ITR 813 (Cal.) • Shivani Locks Ltd. (ITA No. 3173 & 3048/D/07) (Del)(ITAT) • Hero Honda (P) Ltd.: ITA No 5130/Del/2010 (Del. ITAT)

The Ld. AR further submitted that there is no enduring benefit in capital field. The assessee only had the right to use the Trademark on non-exclusive basis. In terms of Article 7.04 and 7.05, the assessee is always exposed to the risk of premature termination of the agreement by the licensor. On termination of the agreement, the assessee carries the risk of not getting the upgraded technology from owner, i.e. SMC in the present case. The mere fact that the agreement with the licensor did not specifically debar the assessee from using the knowledge after the termination of the agreement does not, the Ld. AR submitted, mean that the assessee acquired any advantage of capital in nature so as to be treated as capital expenditure, considering the rapid stride in technological advancement and the fast technological obsolescence. The advantage of the continued utilization of the special knowledge and technical know-how along with the specific drawings, business and other information, in light of the quick changing technology does not result in any enduring advantage in the capital field, apart from the submission made earlier that the assessee was a mere licensee, entitled to use the technical knowhow of SMC. The Ld. AR relied upon the following judicial pronouncements wherein it has been held that the assessee’s right to make use of the technical know-how and the knowledge even after the period of the agreement is of no consequence:

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• CIT v. Avery India Ltd : 207 ITR 813 (Cal) • Praga Tools Ltd v. CIT : 123 ITR 773 (FB)(AP) • CIT v. Tata Engineering Ltd: 123 ITR 538 (Bom) • Triveni Engineering Works Ltd. V. CIT: 136 ITR 340 (Del) ACIT v. Shama Engine Valves Ltd.: 138 ITR 216 (Del) • • Shriram Pistons and Rings Ltd.: 219 CTR 228 (Del.) CIT v. J.K. Synthetics Ltd.: 176 Taxman 355 (Del.) • • CIT v. B. N Elias & Co. Ltd.: 168 ITR 190 (Guj) SRP Tools Ltd. v. CIT: 237 ITR 684 (Mad.) • • Mysore Kirloskar Ltd.: 114 ITR 443 (Kar) • CIT v. Power Build Ltd.: 244 ITR 19 (Guj.) • CIT v. Gujarat Carbon Ltd.: 254 ITR 294 (Guj.) • CIT v. Kanpur Cigarettes (P) Ltd.: 287 ITR 485 (All.) The Ld. AR further submitted that the mode of payment is irrelevant. Under the agreement, in consideration of use of know-how for manufacturing the vehicles/parts, the assessee is obliged to make payment by way of (a) lumpsum royalty; and (b) running royalty. The Ld. AR submitted that the aforesaid payment of lump sum royalty is made under the same agreement and is governed by the same terms. The objective of incurrence of both the expenses is the same and is subject to the same terms and obligations. In terms of Article 6.01 and 6.02, royalty is paid in lumpsum in three installments starting from the year of entering into the license agreement while running royalty is paid each year on the basis of quantum of sale of each model. The Ld. AR submitted that the payment of running royalty is directly linked and correlated with the production/ sales of cars and spares by the assessee company. If there is no production/ sale of cars and spares, there will be no royalty payable by the assessee to SMC. The assessee merely gets a license to use the various items of the intellectual property of the licensor for manufacture of the licensed products and parts without acquiring any ownership of such intellectual property. Such license to manufacture has been granted by the licensor to the assessee during the validity of the license agreement. The royalty is paid by the assessee on the number of licensed products already manufactured and there is no future benefit to be derived from such payment. Accordingly, there is no

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enduring benefit of capital nature to the assessee and the expenditure is revenue in nature. It has been laid down by the Hon’ble Supreme Court in case of Alembic Chemical Works Co. Ltd. 177 ITR 377 and also in Empire Jute case 124 ITR 1 (SC) that the tests of “enduring benefit” and “lumpsum payment” or “once for all payments” are immaterial and irrelevant for laying down whether a particular item of expenditure is capital or revenue. The Ld. AR referred the decision of the Delhi High Court in the case of Shriram Refrigeration Industries Ltd. v. CIT: 127 ITR 746. The assessee, in that case, in consideration of the rights granted for use of know-how agreed to pay lump-sum fee and recurring royalty. The revenue allowed deduction for the recurring royalty paid but held payment of lump-sum fee to be capital in nature. The High Court, on an analysis of the agreement, came to the conclusion that the payment of lump- sum fee not being for acquisition of any ownership rights in the know-how was allowable revenue expenditure. The Court further noted that the Revenue having allowed deduction for the recurring royalty paid, the lump-sum fee could not, even otherwise, be treated differently. The Ld. AR also made reference to the decision of the Delhi High Court in case of CIT v. Hero Honda Motors Ltd.: 372 ITR 481 wherein, the High Court held royalty to be in the nature of revenue expenditure even though royalty was paid for exclusive use of technical knowhow/ information, the agreement was for 10 years and extendable and the assessee was permitted to use the technical knowhow and information even after termination of the agreement. To the same effect is the decisions of the Delhi Bench of the Tribunal in the case of Hero Honda Motors Ltd. vs. DCIT: ITA No. 5130/Del/2010 for Assessment Year 2006-07. In view of the above cumulative reasons, where the expenditure incurred by way of royalty merely facilitates carrying on of business more profitably and efficiently, without addition to the capital apparatus, the advantage of enduring nature ensuing there from shall be on revenue account only. The Ld. AR relied upon Circular No. 21 of 1969 issued by CBDT, which clarifies that if in terms of the Agreement, only a license is obtained for user of technical knowledge from a foreign participant for a limited period together with or without the right to use

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the patents and trademarks of the foreign party, the payment would not bring into existence an asset of enduring advantage to the Indian party. Following the aforesaid Circular, similar royalty payment was held to be allowable as revenue deduction by the jurisdictional Delhi High Court in case of CIT v Lumax Industries Limited: 173 Taxman 390. It has similarly been held in the case of CIT V. J.K. Synthetics Limited: 309 ITR 371 (Del). The assessing officer, in the impugned order, has disallowed the royalty as capital expenditure following the assessment orders for the preceding assessment years on the following grounds:

• Car is a fast moving consumer product with a life cycle of 5 years whereas the license agreement is for 10 years, extendable by 5 years, and even thereafter the assessee can produce the said model of car, which provides more than enduing benefit to the assessee.

• The license fee has been paid to obtain exclusive right from the parent company for manufacture and sale of the products in India.

• The license agreement led to the setting up of a new factory based on new technology obtained through the license agreement.

The aforesaid findings/ observations of the assessing officer are erroneous, based on incorrect appreciation of the facts and the settled legal position, as pointed out by the Ld. AR hereinafter. It was contended by the Assessing Officer that the life cycle of a car is much less than the term of the agreement. In this regard, the Ld. AR submitted that even assuming (without admitting) the life cycle of a car to be so, still the conclusion of the assessing officer based on the so-called life cycle of a car vis-a-vis tenure of agreement being 10 years is totally erroneous. The assessing officer, it is respectfully submitted, failed to appreciate that 10 years is merely the tenure of the agreement and if the assessee were to manufacture a particular car for say 5 years only, then, the royalty payment would accordingly be payable for that period. Thus, the tenure

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of agreement being 10 years was totally irrelevant for period. Thus, the tenure of agreement being 10 years was totally irrelevant for holding that the agreement resulted in more than enduring benefit to the assessee. In order to determine the nature of the royalty payment, whether capital or revenue, what is material is the underlying purpose for which payment is made and not the tenure. If the payment is for use of technical knowhow simplicit or, as opposed to acquisition of proprietary rights therein, then, the payment has to be regarded as revenue, irrespective of the tenure for which permission is granted for such use. In the present case, under the license agreement, the assessee was, as stated above, merely granted permission/ access to the technical knowhow for the limited purpose of use in the business of manufacturing cars. The assessee only has the right to use the technology relating to the new models during the currency of the agreement. The proprietary rights on the know-how and the intellectual property rights in relation thereto continue to be owned by SMC. In view of the aforesaid, the mere fact that agreement is for 10 years, extendable by 5 years, is irrelevant for determining the nature of royalty payment. Further, the assessing officer stated that the assessee acquired an enduring advantage as the right to manufacture the products and parts is available even after the expiry of the term of the agreement. In this regard, it is reiterated that the Courts have in the following cases held that in the absence of clause of return of documentation/know-how and the fact that the assessee was entitled to carry on manufacturing activities with use of such know- how/documentation even after the expiry of the agreement, did not alter the nature of transaction or result in any benefit of enduring character to the assessee. The Ld. AR relied upon the following decisions:

Praga Tools Ltd. v. CIT : 123 ITR 773 (AP)(FB) • • CIT v. Tata Engineering & Locomotive Co. Pvt. Ltd. 123 ITR 538 (Bom) • Shriram Refrigeration Industries Ltd. v. CIT: 127 ITR 746 (Del) • Triveni Engineering Works Ltd. V. CIT: 136 ITR 340 (Del) • CIT v. Bhai Sunder Dass & Sons (P) Ltd.: 158 ITR 195 (Del.)

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• CIT v. Hero Honda Motors Ltd.: 372 ITR 481 (Del.) CIT v. B.N. Elias & Co. (P) Ltd.: 168 ITR 190 (Cal.) • CIT v. Avery India Ltd.: 207 ITR 813 (Cal.) • • SRP Tools Ltd. v CIT: 237 ITR 684(Mad) • CIT v. Power Build Ltd.: 244 ITR 19 (Guj.) • CIT v. Gujarat Carbon Ltd.: 254 ITR 294 (Guj.) • CIT v. Kanpur Cigarettes (P) Ltd.: 287 ITR 485 (All.) • Shriram Pistons and Rings Ltd.: 219 CTR 228 (Del.) CIT v. J.K. Synthetics Ltd.: 176 Taxman 355 (Del.) •

Further, the Ld. AR pointed out that it has been held in the following judicial precedents that where the assessee continued to manufacture using the technology obtained even after expiry of the agreement, the same was not conclusive and the expenditure would be allowable revenue expenditure, if on a cumulative reading of the agreement, it appeared that the assessee did not acquire any asset or enduring advantage in the capital field:

• CIT v. Tata Engineering Ltd: 123 ITR 538 (Bom.) (HC) • Praga Tools Ltd. v. CIT: 123 ITR 733 (AP) ACIT v. Shama Engine Valves Ltd.: 138 ITR 216 (Del) • CIT v. J.K Synthetics : 309 ITR 371 (Del) • • CIT v. B. N Elias & Co. Ltd.: 168 ITR 190 (Guj) • CIT v. Avery India Ltd.: 207 ITR 813 (Cal) • SRP Tools Ltd. v. CIT: 237 ITR 684 (Mad) • Mysore Kirloskar Ltd. : 114 ITR 443

The assessing officer further stated that the assessee obtained an exclusive license to manufacture the products and parts in India in as much as the licensor (SMC) agreed not to manufacture similar products in India nor to provide the technology to any other party. In this regard, the Ld. AR submitted that the exclusive license by itself would not, it is respectfully submitted, render the expenditure by way of royalty as capital in nature on the ground

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that same has resulted in enduring benefit. As elaborately discussed earlier, the exclusive license seeks to protect the profitability/market of the assessee from/for manufacturing and selling the vehicles/cars in India, during the currency of the agreement, by eliminating competition from any other manufacturer(s), who may seek to manufacture similar vehicles in India. The exclusive license, thus, merely enables the existing business of manufacture to be carried on more efficiently and profitably, without any addition to the profit earning or capital apparatus. The enduring benefit, if any, is thus, on revenue account. The observation of the assessing officer that the license Agreement led to the assessee setting up a new factory based on new technology is factually incorrect. In this regard, it is pertinent to note that no new plant/ factory was set up by the assessee on the basis of the agreement entered into for use of technical knowledge/ information. The assessing officer failed to appreciate that the assessee is engaged in the business of manufacture of automobiles since 1982. The assessee is not making payment in the initial year of setting up of the factory, which is operative and running at the time of entering into the subject Agreement. Various models of the cars introduced by the assessee from time to time are nothing but part of the existing business of the assessee. Therefore, the mere fact that new models/ variants of cars are introduced by the assessee based on the license agreement does not mean that an altogether new product was manufactured. That apart, even if various variants of car are treated as different/ new products, still, having regard to the fact that the same were part of the very same business of the assessee of manufacturing of cars, no new business was set up so as to regard the payment of royalty as resulting in an enduring benefit to the assessee. The said payment of royalty therefore does not result in acquisition by the assessee of any asset or advantage of enduring benefit which is in the “capital field” as explained by the Hon’ble Supreme Court in the Empire Jute case 124 ITR 1 (SC), which is necessary in order to consider the same as capital expenditure. The payment of the entire royalty, both Lumpsum and running royalty, therefore needs to be allowed revenue deduction. The aforesaid issue has been decided in favour of the

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assessee by the Delhi Bench of the Tribunal in assessee’s own case for the AY 2006-07, AY 2007-08 and AY 2008-09 holding that amount of royalty considered by the assessing officer as capital expenditure should be allowed as revenue expenditure. In view of the aforesaid, the assessing officer should be directed to allow the entire royalty payment as allowable revenue deduction.

“Ground No 9 to 9.3 disallowance of expenditure of Rs. 192.77 Cr out of the total amount of Rs.495.15 Cr incurred on account of royalty.

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crores, made by TPO the assessing officer has computed the disallowance out of royalty payments to a tune of Rs. 192.77 Cr.

9.1. It is the argument of the Ld. AR that the assessing officer failed to appreciate the fact that the nature and purpose for which the royalty has been paid to SMC is only the use of licensed information for the engineering, design and development, manufacture, testing, quality control, sale and after sales service of Products and Parts, and as per clause 7.01 of the agreement the duration of the agreement has been specified as 10 years and vide clause 7.04 of the agreement it was subject to termination at earlier date for breach. He submitted that as evidenced by clause 2.02 of the agreement SMC does not transfer to MSIL any specific patents or copyrights or other secret or protected information or knowhow so as to make MSIL a proprietor of the same or so as to enable MSIL to exercise proprietary rights such as unrestricted rights of transfer to third party, either by way or assignment or license.

9.2. According to him in order to determine the nature of the royalty payment, whether capital or revenue, what is material is the underlying purpose for which payment is made and not the tenure or its extendibility or the life cycle of the product that is manufactured with the help of the technology that is accessed from SMC. If the payment is for use of technical knowhow, simplicitor, then the payment has to be regarded as revenue, irrespective of the tenure for which permission is granted for such use. Since in the present case, under the License Agreement, the assessee was merely granted permission to access the technical knowhow for the limited purpose of using the technology relating to the new models during the currency of the agreement and the proprietary rights for the know-how and the intellectual property

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rights in relation thereto continue to be owned by SMC alone, the payment is undoubtedly revenue in nature.

9.3. While placing reliance on Circular No. 21 of 1969 issued by CBDT, he argued that if in terms of the Agreement, only a license is obtained for user of technical knowledge from a foreign participant for a limited period together with or without the right to use the patents and trademarks of the foreign party, the payment would not bring into existence an asset of enduring advantage to the Indian party. He further submitted that while following the aforesaid Circular, the jurisdictional Delhi High Court in case of CIT v Lumax Industries Limited: 173 Taxman 390 held that similar royalty payment was allowable as revenue deduction.

9.4. He submitted that in a host of decisions, namely, CIT v. Ciba India Ltd: 69 ITR 692 (SC) , Alembic Chemical Works Co. Ltd. v. CIT: 177 ITR 377 (SC), CIT v. Shriram Pistons and Rings Limited -CC 12154/2009 (SC) (dismissing the SLP filed by the revenue against the order of the Delhi High Court in ITA No. 167/2008), Shriram Refrigeration Industries Ltd. v. CIT: 127 ITR 746(Del), Triveni Engineering Works Ltd. v. CIT 136: ITR 340 (Del), CIT v. Sharda Motor Industrial Limited: 319 ITR 109 (Del), Climate Systems India Limited v. CIT: 319 ITR 113 (Del), Shriram Pistons and Rings Limited v. CIT: 307 ITR 363 (Del), CIT v Lumax Industries Limited 173 Taxman 390 (Del), CIT v. J.K. Synthetics Ltd. 309 ITR 371 (Del), CIT v. Munjal Showa Ltd. : 329 ITR 449 (Del), CIT v. Hero Honda Motors Ltd.: 372 ITR 481 (Del.), CIT v. Denso India P. Ltd.: 232 Taxman 437 (Del.) , CITv. Modi Revlon (P) Ltd : 210 Taxman 161(MAG.) (Del.), CIT v. Prem Heavy Engineering Works P. Limited: 282 ITR 11 (All.), CIT v. Artos Breweries Ltd : [2013]

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215 Taxman 80 (AP), CIT v. Essel Propack 325 ITR 185 (Bom), CIT v. Eicher Motors Ltd : 293 ITR 464 (M.P.), ITO v. Shivani Locks : 118 TTJ 467 (Del ITAT), Goodyear India Ltd. v. ITO : 73 ITD 189 (Del ITAT), Hero MotoCorp Limited v. ACIT : ITA Nos. 5130/Del/2010 for assessment year 2006-07 (Del. ITAT), Fenner (India) Ltd v. ACIT : [2012] 139 ITD 406 (Chennai), Glaxo SmithKline Consumer Healthcare Limited : ITA No. 1324/Chd/2012 (Chd), GlaxoSmithKline Consumer Healthcare Ltd. v DCIT : 175 TTJ 552 (Chd. Trib.), the issue of allowability of royalty payments as revenue expenditure is covered in favour of the assessee company.

9.5. He further relied upon the decision of the Hon’ble Jurisdictional High Court in the case of CIT v. J.K Synthetics: 309 ITR 371@ pg 391, wherein while culling out legal principles based on various decisions it was held that the fact that assessee could use the technical knowledge obtained during the tenure of the License for the purposes of its business after the agreement has expired, and in that sense, resulting in an enduring advantage, has been categorically rejected by the Courts, and that this, by itself, cannot be decisive because knowledge by itself may last for a long period even though due to rapid change of technology and huge strides made in the field of science, the knowledge may with passage of time become obsolete. Ld. AR disputed the factual correctness of the observation of the assessing officer that the license Agreement led to the assessee setting up a new factory based on new technology, and submitted that no new plant/ factory was setup by the assessee on the basis of the agreement entered into for use of technical knowledge/ information. According to him the assessing officer failed to appreciate that the assessee is engaged in the business of manufacture of automobiles and various models of the cars introduced

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by the assessee from time to time are nothing but part of the same business of the assessee, as such the mere fact that new models/ variants of car are introduced by the assessee based on the license agreement does not mean that an altogether new product was manufactured. He made a reference to the decisions of the Delhi High Court in case of CIT v. Hero Honda Motors Ltd.: 372 ITR 481 and decision of the Delhi Bench of the Tribunal in the case of Hero Honda Motors Limited v. DCIT: ITA no. 5130/Del/2010 for A.Y. 2006-07, and also to the decision of the Delhi Bench of the Tribunal in the case of Hero Honda Motors Limited v. DCIT in ITA Nos. 716 to 718/Del/2008 for the assessment years 2000-01 to 2002-03 wherein, a coordinate Bench of this Tribunal, after analyzing all the decisions, held royalty to be in the nature of revenue expenditure even though royalty was paid for exclusive use of technical knowhow/ information, the agreement was for 10 years and extendable, the assessee was permitted to continue to manufacture motorcycles even after termination of the agreement. Lastly he submitted that the aforesaid issue has now been decided in favour of the assessee by the Delhi Bench of the Tribunal in assessee’s own case for the AY2006-07 and AY 2007-08holding that amount of royalty considered by AO as capital expenditure should be allowed as revenue expenditure. For these reasons he prayed that the assessing officer may be directed to allow the entire royalty payment as allowable revenue deduction.

9.6. Per contra, Ld. DR vehemently defended the observations of the AO, while submitting that in the scenario of a New Model coming every 2nd or 3rd year and the old Models getting phased out, License Agreement is for 10 years, extendable by 5 years and even thereafter MSIL can produce the said model of Car, is more than enduring.

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Further, there has been technology transfer for manufacturing the product, and the personnel of the company have been technically trained. The transfer of technology is as per the License Agreement but the Skill which has been acquired year after year due to training of the companies personnel has been absorbed in the company and can be used across the other Products. This is again an enduring benefit. Referring to the cases cited by the Ld. AR, it is the argument of the Ld. DR that in all the cases where the Courts have held that the Royalty payment is Revenue and not capital are the ones where the License Agreement was only to approach or access the technology without imparting any trade secrets and above all the time period was much short, say 5 years or less coupled with the fact that , the product was different and the right given was not exclusive. He submitted that the Tribunal’s order in assessee’s own case for AY 2007-08 cannot be relied upon because on this aspect the Tribunal was swayed by the assessee contention that TPO has disallowed the royalty, but as a matter of fact, TPO had determined the value of the ALP of the co- branding done by Suzuki. The value of the same is determined by equating the trade mark royalty Maruti was paying to Suzuki for its brand. The logic is simple if Maruti was paying licensed trade name royalty to Suzuki then Suzuki should also be paying back the trade name royalty to Maruti. Whereas it is a fact that royalty being paid is a composite royalty including the usage of Trademark and technical information. It is Suzuki who has been charging this royalty even if its name was used only on the rear of the vehicle. But now after taking over the management of the company, it has repositioned its name and brand and logo on these vehicles. The question is whether any independent party that had assiduously over the years have built up a

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name and reputation would have allowed so? And that too absolutely free when the other party had been throughout charging it for whatever it was providing it be it machinery, technology, spare parts, technical assistance, corporate guarantee, trade name, trade mark. That does not seem to be a situation in normal and independent circumstances and this was not appreciated by the Tribunal, as a consequence of which the Revenue preferr3d an appeal on this issue also. According to him, the Tribunal had merely relied on its order for earlier years which in turn relied merely on decision of Hon’ble Delhi High Court in Hero Honda Motors Ltd. (2015) 372 ITR 481 (Del) and not discussed the facts that are recorded in the assessment order. It is submitted that on the basis of the facts mentioned in the assessment order, the ratio decidendi of the Delhi High Court decision in Hero Honda Motors Ltd. (supra) would not be applicable in the instant case. Lastly, it is argued by the Ld. DR that these are continuous issues forming part of the assessment order for AY 2005-06, 2006-07 and 2007-08 also, and are at present pending adjudication before Hon’ble Delhi High Court.

9.7. On this issue, a coordinate Bench of This tribunal in assessee’s own case for AY 2007-08, vide para 20.5 and 20.6 on page 91-93 of order, referred to order for AY 2006-07 and held as under: “8.5. The ld. DR has relied on certain decisions, which categorize payment for use of technical know-how etc. as a capital expenditure. Similarly, the ld. AR has also relied on certain decision which mark such payment as a revenue expense. In all these decisions, the dividing line is whether the consideration is for purchase of technical information, know-how information, designs and drawings, etc., or for its use. If it is for use alone, then it is revenue and vice versa. Recently, the Hon'ble jurisdictional High Court in CIT vs. Hero Honda Motors Ltd. (2015) 372 ITR 481 (Del), on consideration of the relevant clauses of the agreement before it, which considerably match with the Agreement under consideration, has held that the payments made for Model fee (which is equivalent of Lumpsum royalty in our case) and Running royalty are revenue expenses. In this judgment, the Hon'ble

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jurisdictional High Court has considered several judgments of the Hon'ble Supreme Court and Hon'ble High Courts and on consideration of their cumulative effect, it has come to the conclusion that both the amounts are revenue in nature. The Hon'ble Delhi High Court in an earlier judgment in Shriram Refrigeration Industries Ltd. vs. CIT (1981) 127 ITR 746 (Del), has held that the lumpsum royalty is a revenue expenditure. After going through the relevant clauses of the Agreement, we have noted that royalty paid by the assessee is for use of licensed information and no part of the same is towards its acquisition as an owner. In the light of the above discussion, it is absolutely clear that the view canvassed by the AO in treating this amount as capital expenditure, is not sustainable. 8.6. Our above finding decides the nature of royalty payment for use of licensed information as revenue expenditure and not its quantum part. We have noticed above that the tribunal in its order for the immediately preceding year has also given some observations, which prima facie indicate that the entire amount of royalty is for the use of licensed information. Since we have held the royalty for use of licensed information as revenue expenditure, the quantification aspect becomes irrelevant. It is so because the TPO has held royalty for use of licensed information at ALP. We, therefore, hold that the amount of royalty considered by the AO as capital expenditure should be allowed as a revenue expenditure. At the same time, depreciation allowed by the AO on this amount should be taken back.”

9.8. Following the above decision for AY 2006-07, which is on an identical issue in the case of assessee itself, this Tribunal for the AY 2007-08 hold that the amount of royalty considered by the Assessing Officer as capital expenditure should be allowed as a revenue expenditure, and at the same time, depreciation allowed by the Assessing Officer on this amount should be taken back. This tribunal specifically held that the terms of the agreement considered by the Hon’ble Jurisdictional High Court in CIT vs. Hero Honda Motors Ltd. (2015) 372 ITR 481 (Del), are considerably matching with the Agreement under consideration. On the face of this observation, without the same being disturbed by the higher forums, we find it difficult to countenance the argument of the Ld. DR that the ratio decidendi of the Delhi High Court decision in Hero Honda Motors Ltd.

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(supra) would not be applicable in the facts of the instant case. We, therefore, respectfully following the same hold that the amount of royalty considered by the Assessing Officer as capital expenditure should be allowed as a revenue expenditure, and at the same time, depreciation allowed by the Assessing Officer on this amount should be taken back. Grounds No 9 to 9.3 are, accordingly, allowed.”

Thus, this issue is squarely covered in favour of the assessee by the decision of the Tribunal for the earlier Assessment year i.e. A.Y. 2008-09. Therefore, in absence of any contrary material brought to our notice by the Ld. DR against the order of the Tribunal, we allow these grounds. Hence Ground No. 7 to 7.3 are allowed.

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the nature of capital expenditure or personal expenses are allowable under the Act. The assessee has given detailed factual and legal arguments in the earlier part of this submission as to why the royalty payment be considered as revenue expenditure. The Ld. AR submitted that the aforesaid issue is dependent and interlinked to the issue of royalty expenditure, since if it is held that royalty payments by assessee is a revenue expenditure, the R&D cess should also be considered as a revenue expenditure. The aforesaid issue has been decided in favour of the assessee by the Delhi Bench of the Tribunal in assessee’s own case for the AY 2006-07, AY 2007-08 and AY 2008-09.

Ground No 10 to 10.2 disallowance of Rs.16,93,68,741/- on account of R&D Cess on Royalty

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Ld. DR submitted that the issue of R&D Cess paid by the assessee is decided in favour of the assessee by the Delhi Bench of the Tribunal in assessee’s own case for the AY 2006-07 and AY 2007-08.

10.1. This issue is based on Ground No. 9 above, i.e. capitalisation of Royalty expenditure. The ITAT has also decided this issue in favour of the assessee on the basis of its decision on Ground No. 9. Since the decision of the ITAT in Ground No. 9 is not acceptable, therefore, its decision on this issue is also not acceptable. It is further averred that these are continuous issues forming part of the assessment order for AY 2006-07 and 2007-08 also, and are at present pending adjudication before Hon’ble Delhi High Court.

10.2. In the Order for the AY 2007-08, a coordinate Bench of this Tribunal found that this issue has been decided in the case of assessee itself in the appeal before the ITAT for the assessment year 2006-07 and in that case it was held that:

“9. The next ground is disallowance of R&D cess paid amounting to Rs.9,68,47,294/-. Relevant discussion has been made by the AO on page 26 of his final order. The assessee treated the amount of royalty and cess on royalty as revenue expenditure. The AO disallowed a sum of Rs.9.68 crore after proportionately allowing deduction to the extent of depreciation allowed by him on royalty. There is no dispute on the nature of cess, which is on royalty and has been treated both by the assessee as well as the AO as part and parcel of royalty and accordingly claimed/disallowed in line with the treatment of royalty. Since we have allowed deduction for the entire amount of royalty paid by the assessee during the year by deleting the TP adjustment and also overturning the action of the AO in treating the remaining half part as capital expenditure, the consequential amount of cess on royalty payment automatically becomes deductible. We, therefore, direct to allow deduction of Rs.9.68 crore. “

10.3. This Tribunal followed the above reasoning for the AY 2007-

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08 also. Since the related facts of the present assessment year are similar to those in the assessment year 2006- 07 and 2007-08 on an identical issue, we, while respectfully following the same direct the Assessing Officer to allow the deduction as directed by the ITAT in the appeal for the assessment year 2006-07 and 2007-08 after affording opportunity of being heard to the assessee. Grounds 10 to 10.2 are allowed accordingly.”

Thus, the issue is squarely covered in favour of the assessee by the decision of the Tribunal in assessee’s own case for A.Y.2008-09. Therefore, in absence of any contrary material brought to our notice by the Ld. DR against the order of the Tribunal, we allow these grounds. Hence Ground No. 74 to 7.7 are allowed.

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hundred suppliers. The issue is also covered in favour of the assessee by the orders of the Tribunal in the assessee’s own case for AYs 2000-01, 2001-02, AY 2002-03, AY 2007-08 and AY 2008- 09. The orders of the Tribunal have been affirmed by Delhi High Court for Assessment Years 2000-01 (Ita No. 976/2005) 2001-02 (ITA No. 519/2010).

Ground Nos 13 to 13.3 disallowance Rs.58,61,136/- on account of Expenditure on Excise duty:

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13.1. Ld. AR submits that the issue is also covered in favour of the assessee by the orders of the Tribunal in the assessee’s own case for AYs 2000-01, 2001-02, AY 2002-03 and AY 2007-08. 13.2. Per contra, it is the argument of the Ld. DR that this issue is related to the disallowance u/s. 43B for the year immediately preceding the previous year, and the ITAT has allowed this expenditure following the same principle laid down earlier to allow relief to the assessee on the issue of excise duty and customs duty. According to the Ld. DR, if this proposition is accepted in the current year, it shall defeat the very purpose of making the disallowance in the previous year and moreover, Revenue has not accepted the proposition of ITAT in allowing relief to the assessee and in that sense is a live issue. Accepting the decision of tribunal on this issue shall give finality to this issue for that particular year only. It is further averred that these are continuous issues forming part of the assessment order for AY 2005-06, 2006-07 and 2007-08 also, and are at present pending adjudication before Hon’ble Delhi High Court.

13.3. On a perusal of the decision, we find that this issue is substantially involved in Ground Nos. 14 to 14.3 in the assessee’s appeal for AY 2007-08, and on this aspect, a coordinate Bench of this Tribunal held as under:

“27.3 We find that in its order dated 16.10.2012 in the case of assessee itself for the assessment year 2002-03, an identical issue has been decided in favour of the assessee by the ITAT following its earlier orders. Relevant para No. 50 thereof is being reproduced hereunder: 50. We have heard both the sides on this issue. This issue is covered in favour of the assessee by the decision of ITAT in assessee’s own case for assessment years 2000-01 and 2001-02. The relevant para of the order for assessment year 2001-02 is reproduced hereunder:

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“22. In regard to Ground No. 9 which is against the action of CIT(A) in deleting the disallowance of the Excise Duty paid by the assessee representing the reversal of the excise MODVAT availed in inputs on clearance of finished goods, it was fairly conceded by both the sides that this issue was squarely covered by the decision of the co-ordinate bench in assessee’s own case for assessment year 2000-01 in ITA No. 678/Del/2004. Respectfully following the decision f the Co-ordinate Bench of this Tribunal in assessee’s own case for assessment year 2000- 01, the findings of the CIT(A) on this issue stands confirmed. 23. It is also noticed that this Excise Duty is paid against the order of the Settlement Commission and is in the nature of reversal of MODVAT availed on the inputs and not in the nature of penalty or fines. In the circumstances, the ground of appeal as raised by the Revenue on this issue stands dismissed.” 27.4 In view of the above finding of the ITAT on the issue and of the Excise Tribunal in the assessment year 2000-01 that shortage of stock of raw-material and the minor discrepancy was the result of accounting error due to use of large quantity of inputs procured from several hundred suppliers, we hold that the assessee was justified in claiming Rs.77 lacs on account of expenditure on excise duty on payment basis under sec. 43B of the Act. The Assessing Officer is accordingly directed to allow the claim. Ground Nos. 14 to 14.3 are thus allowed.”

13.4. When the facts are similar and a particular view is taken by a coordinate Bench of this Tribunal for the earlier years, it is not desirable to deviate from the same in a subsequent year in the absence of any change of circumstances, as such by respectfully following the same, we direct the Assessing Officer to allow the deduction of Rs.58,61,136/- representing the excise duty paid by the appellant during the relevant previous year. Grounds No 13 to 13.3 are allowed accordingly.”

Thus, the issue is squarely covered in favour of the assessee by the Tribunal in assessee’s own case for A.Y. 2008-09. Therefore, in absence of any contrary material brought to our notice by the Ld. DR against the order of the Tribunal, we allow these grounds. Hence Ground No. 8 to 8.2 are allowed

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(a) The liability was booked on account of materials already supplied by suppliers and not on an ad hoc or arbitrary basis.

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b) The amount was determined and computed with a substantial degree of accuracy at the time of determining and booking the amount as per information available till date of finalization of accounts

c) The liability was required to be booked as per accrual system of accounting as the goods were already received.

The Ld. AR submitted that FPI is an existing liability as per the understanding arrived at with the suppliers of the components, who are original manufacturers of the components. It is on the basis of analysis of the claims, price trend, and correspondences/discussions/negotiations with the suppliers during the year and past dealings that the assessee had computed the impact of change in price of components. The change in price of the components takes place to give effect to the increase in the cost of the inputs required for manufacturing of the components. The same is as per the agreement with the suppliers to ensure uninterrupted supply of components, even when their cost has been increased. The Ld. AR also submitted that such practice is quite common in the motor vehicle industry which has also been duly recognized in the departmental clarification issued by the Central Excise Department. Thus, the Ld. AR submitted that it is not a case of provisional liability/contingent liability incurring of which is dependent on happening of an event. The liability, in our respectful submission, is in fact in respect of such purchases already made by the assessee and duly debited in the books of accounts. Thus, the amount of FPI is a liability which accrues simultaneously with each purchase made by assessee and is allowable as deduction in determining the income of the relevant assessment year. The aforesaid is further in accordance with practice prevalent in motor vehicles industry. Reference in this regard is invited to a notification dated 28.7.2003 issued by the Excise Authorities on the subject of charging of interest under section 11AB wherein the excise authorities recognized prevailing commercial practice of supplementary invoices being made in addition to the original invoices. The liability on account

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of FPI was an ascertained liability representing additional purchase price of the goods. Since the liability accrued during the relevant assessment year, even though was finally paid in the following assessment years, the same was allowable deduction. The Ld. AR relied upon the following decisions wherein it has been held that liability which has arisen in the relevant accounting year is an allowable deduction even though its actual quantification and discharge is deferred to a future date:

a) Calcutta Discount Co. Ltd.: 37 ITR 1 (SC) b) Metal Box (P) Limited (1969): 73 ITR 53 (SC) c) United Commercial Bank v. CIT 240 ITR 355 (SC) d) Bharat Earth Movers: 245 ITR 428 (SC) e) Kelvinator of India Ltd. reported in 256 ITR 1 confirmed by SC in 320 ITR 561 f) CIT v Vinitec Corpn. (P) Ltd.: 278 ITR 337 (Delhi) g) National Mineral Development Corporation Ltd. v. JCIT : 98 ITD 278 (Hyd. ITAT)

The Hon’ble Supreme Court in the case of CIT v. Woodward Governor India (P) Ltd. 312 ITR 254 has held that:-

“21. In conclusion, we may state that in order to find out if an g) expenditure is deductible the following have to be taken into account (i) whether the system of accounting followed by the assessee is mercantile system, which brings into debit the expenditure amount for which a legal liability has been incurred before it is actually disbursed and brings into credit what is due, immediately it becomes due and before it is actually received; (ii) whether the same system is followed by the assessee from the very beginning and if there was a change in the system, whether the change was bona fide; (iii) whether the assessee has given the same treatment to losses claimed to have accrued and to the gains that may accrue to it; (iv) whether the assessee has been consistent and definite in

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making entries in the account books in respect of losses and gains; (v) whether the method adopted by the assessee for making entries in the books both in respect of losses and gains is as per nationally accepted accounting standards; (vi) whether the system adopted by the assessee is fair and reasonable or is adopted only with a view to reducing the incidence of taxation. ”

The Ld. AR further relied upon the judgment of the Supreme Court in the case of Rotork Controls India (P) Ltd. vs CIT: 314 ITR 62 wherein it has been held that:-

“17. At this stage, we once again reiterate that a liability is a present obligation arising from past events, the settlement of which is expected to result in an outflow of resources and in respect of which a reliable estimate is possible of the amount of obligation. ”

The Ld. AR submitted that the invoices, raised by the suppliers, were provisional and each invoice was liable to be reviewed/ amended once the quantum is determined and that this quantum of increase would apply to re- compute the prices payable by assessee on all supplies made by the suppliers during the year. The aforesaid method of accounting regularly and consistently followed does not lead to any loss of revenue, whatsoever. The liability estimated in a particular year finally settled in the subsequent year gets reflected in the profit & loss account. The income as well as the charge on settlement in the subsequent year is brought to the income or expenses statement of the assessee company to the extent of variation from the actual FPI liability. It is well settled that mere timing difference should not be used to disturb the method of accounting and books of accounts of a tax payer consistently maintained and accepted year after year. The Ld. AR further submitted that the aforesaid method of accounting has been regularly followed by assessee and claims were accordingly made which has been duly accepted by Revenue in all the preceding years except in assessment year AY 2003-04,

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AY 2007-08 and 2008-09. There has been no change in method of accounting or estimation. The Ld. AR submitted that it is a well settled position of law that while the principle of res judicata does not apply to the income-tax proceedings, the Courts have emphasized there must be consistency in the position that the Revenue takes on an issue in different assessment years. The Ld. AR relied upon the following decisions:

• CIT vs. Excel Industries (P) Limited: 358 ITR 295 (SC) • Radhasoami Satsang v. CIT 193 ITR 321 (SC) DIT (E) v. Apparel Export Promotion Council: 244 ITR 734 (Del) • CIT v. Neo Polypack (P) Ltd: 245 ITR 492 (Del.) • • CIT v. Girish Mohan Ganeriwala: 260 ITR 417 (P&H) • CIT V. Dalmia Promoters Developers (P) Ltd: 200 CTR 426 (Del.) • Escorts Cardiac Diseases Hospital: 300 ITR 75 (Del)

The Ld. AR further submitted that against the total accrued liability claimed during the year amounting to Rs.36.38 crores, the entire amount has either been paid or written-back and offered for tax as part of his chargeable income in assessment year 2010-11. The amount of write-back could, in law, be taxed by the Assessing Officer in assessment year 2010-11 only if the same was an allowable deduction from the assessee’s assessable income in assessment year 2009-10. Further, the payment made in next year against the liability for foreseen price increase of previous year should be allowed as deduction in Assessment Year 2010-11. The issue now stands squarely covered in favour of the assessee by the order of the Tribunal in the assessee’s own case for the assessment years 2007-08 and 2008-09, wherein the Tribunal held that provision for foreseen price increase made by the assessee represented an accrued/crystallized liability, which is an allowable business deduction.

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Ground No 12 to 12.5 Disallowance on account of Provisional Liability relating to Expenditure on account of FPI-OE Components

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suppliers and have knowledge of the claims of suppliers, trend of the cost of inputs, etc. The personnel in the purchase department updates the foreseen price of each component for each supplier and effective date, based on their input and available information in computer system regarding quantity purchased and price paid. The liability in respect of each component was worked out considering the weight of each material, the quantity procured, the old rate and new rate worked by the assessee considering the price changes occurred during the period. It is on the basis of analysis of the claims, price trend, and correspondences/ discussions/negotiations with the suppliers during the year and past dealings that the assessee had computed the impact of change in price of components, and, therefore, it is not a case of provisional liability/contingent liability, incurring of which is dependent on happening of an event, but in fact it is in respect of such purchases already made by the assessee and duly debited in the books of accounts resulting in that the amount of FPI is a liability which accrues simultaneously with each purchase made by assessee and is allowable as deduction in determining the income of the relevant assessment year. The accounting of FPI was justified by the assessee on account of the liability that was determined and computed with a substantial degree of accuracy on account of materials already supplied by suppliers, at the time of determining and booking the amount as per information available till date of finalization of accounts and such a liability was required to be booked as per accrual system of accounting as the goods were already received. According to the Ld. AR this practice of provision for FPI is in accordance with practice prevalent in motor vehicles industry. Reference in this regard is invited to a notification dated 28.7.2003 issued by the Excise Authorities on the

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subject of charging of interest under section 11AB wherein the excise authorities recognized prevailing commercial practice of supplementary invoices being made in addition to the original invoices.

12.1. Placing reliance on the decision in assessee’s own case decided in favour by CIT (A) for AY 2003-04 and by ITAT for AY 2007- 08, and also the decisions reported in Calcutta Discount Co. Ltd.: 37 ITR 1 (SC), Metal Box India (P) Limited (1969): 73 ITR 53 (SC) , United Commercial Bank v. CIT 240 ITR 355 (SC), Bharat Earth Movers: 245 ITR 428 (SC) , CIT v Vinitec Corpn. (P) Ltd.: 278 ITR 337 (Delhi), National Mineral Development Corporation Ltd. v JCIT: 98 ITD 278 (Hyd. ITAT), Ld. AR argued that that liability which has arisen in the relevant accounting year is an allowable deduction even though its actual quantification and discharge is deferred to a future date. In respect of the vendor-wise and item-wise details of total provision of Rs.32,11,63,153 made during the relevant year in the paper book, it is submitted that the said details contain name of the vendor, the amount of additional value in respect of the component, the invoices, raised by the suppliers, were provisional and each invoice was liable to be reviewed/ amended once the quantum is determined and that this quantum of increase would apply to re-compute the prices payable by assessee on all supplies made by the suppliers during the year, and the liability for FPI was provided in the books of accounts on a scientific analysis of increase in price of components due to change in input cost, representing additional purchase price of the goods. It is submitted that since the liability accrued during the relevant assessment year, even though was finally paid in the following assessment years, the same was allowable deduction.

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12.2. Ld. AR placed reliance on the decision of the Hon’ble Supreme Court in the case of CIT vs Woodward Governor India (P) Ltd.: 312 ITR 254 wherein it is held that:- “21. In conclusion, we may state that in order to find out if an expenditure is deductible the following have to be taken into account (i) whether the system of accounting followed by the assessee is mercantile system, which brings into debit the expenditure amount for which a legal liability has been incurred before it is actually disbursed and brings into credit what is due, immediately it becomes due and before it is actually received; (ii) whether the same system is followed by the assessee from the very beginning and if there was a change in the system, whether the change was bona fide; (iii) whether the assessee has given the same treatment to losses claimed to have accrued and to the gains that may accrue to it; (iv) whether the assessee has been consistent and definite in making entries in the account books in respect of losses and gains; (v) whether the method adopted by the assessee for making entries in the books both in respect of losses and gains is as per nationally accepted accounting standards; (vi) whether the system adopted by the assessee is fair and reasonable or is adopted only with a view to reducing the incidence of taxation.“ 12.3. Further reliance is also placed on the judgment of the apex Court in the case of Rotork Controls India (P) Ltd. vs CIT: 314 ITR 62 wherein it has been held that:- “17. At this stage, we once again reiterate that a liability is a present obligation arising from past events, the settlement of which is expected to result in an outflow of resources and in respect of which a reliable estimate is possible of the amount of obligation.”

12.4. Ld. AR submitted that this practice is in consonance with the provisions of the Companies Act and generally accepted accounting principles and practices of Institute of Chartered Accountants of India and has been regularly followed by assessee and claims were accordingly made which has been duly accepted by Revenue in all the preceding years except in assessment year AY 2003-04 and AY 2007- 08. There has been no change in method of accounting or estimation. It is submitted that this method of accounting regularly and consistently

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followed does not lead to any loss of revenue, whatsoever and the liability estimated in a particular year finally settled in the subsequent year gets reflected in the profit & loss account, whereby the income as well as the charge on settlement in the subsequent year is brought to the income or expenses statement of the assessee company to the extent of variation from the actual FPI liability. Ld. AR argued that it is well settled that mere timing difference should not be used to disturb the method of accounting and books of accounts of a tax payer consistently maintained and accepted year after year. In support of his argument that while the principle of res judicata does not apply to the income-tax proceedings, the Courts have emphasized there must be consistency in the position that the Revenue takes on an issue in different assessment years, Ld. AR cited the decisions reported in CIT vs. Excel Industries (P) Limited: 358 ITR 295 (SC), Radhasoami Satsang v. CIT 193 ITR 321(SC), DIT (E) v. Apparel Export Promotion Council: 244 ITR 734 (Del), CIT v. Neo Polypack (P) Ltd: 245 ITR 492 (Del.), CIT v. Girish Mohan Ganeriwala: 260 ITR 417 (P&H), CIT V. Dalmia Promoters Developers (P) Ltd: 200 CTR 426 (Del.), Escorts Cardiac Diseases Hospital: 300 ITR 75 (Del). Since the issue now stands covered in favour of the assessee by the order of the Tribunal in the assessee own case for the assessment year 2007-08, wherein the Tribunal held that provision for foreseen price increase made by the appellant represented an accrued/crystallized liability, which is an allowable business deduction, Ld. AR submits that the addition on this account may be deleted.

12.5. Per contra, Ld. DR submitted that the decision of ITAT for AY 2007-08 is not acceptable because the assessee’s methodology is unique and no case law applies to the modus operandi adopted by the

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assessee. Further according to him Assessee’s reliance on the case of Hon’ble Supreme Court in the case of Radha Saomi Satsang v. CIT reported in 193 ITR 321 and, Berger Paints v. CIT reported in 266 ITR 199, is also misplaced because in these cases Hon’ble Supreme Court was considering the situation where the liability was certain, but what was not certain was the quantum of such liability. In the case of the assessee, the assessee has quantified the liability without being sure of the liability and at the same time not acknowledging the quantified liability to the creditors and not leaving any note in the audit report. He placed reliance on the decisions reported in ITO vs. EMCO Transformers Ltd. (ITAT, Bom) 32 1TD 260, Srinivasa Computers Ltd. vs. ACIT (ITAT, Chennai) 107 1TD 357, and CIT vs. Rotork Controls India Ltd. (Mad) 293 ITR 311. According to him, later on the Hon’ble Supreme Court has laid down General Principle on this issue, wherein it was stated that the value of contingent liability, like warranty expense, if properly ascertained and discounted on accrual basis can be an item of deduction under section 37, the principle of estimation is not the normal rule it would depend on the nature of business, nature of sale, nature of product and scientific method of accounting adopted by the assessee, and it would also depend upon the historical trend and number of articles produced.

12.6. On a perusal of the order of the Tribunal for the AY 2007-08 on this issue, we find that this issue covered by the ground Nos. 13 to 13.5 and by noticing that similar disallowance was deleted by the first appellate authority and revenue did not prefer any appeal thereon, and the Tribunal observed as follows: “26.5 Considering the above submissions, we find that similar disallowance was made in the assessment year 2003-04 and the first appellate order had

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deleted the disallowance while deciding the issue in favour of the assessee against which Revenue did not prefer any appeal before the ITAT. Thereafter, only during the year under consideration, such disallowance has been made. Of course, principles of res-judicata is not application in the income- tax matters but rule of consistency is applicable as per which under the similar facts and circumstances, department ought to follow same approach on an issue in other assessment years. It is an established proposition of law that a method of accounting regularly and consistently followed does not lead to any loss of Revenue, whatsoever. The liability estimated in a particular year finally settled in the subsequent year gets reflected in the profit and loss account. We thus set aside the matter to the file of the Assessing Officer with direction to decide the issue afresh after affording opportunity of being heard to the assessee as per the first appellate order on the issue in the assessment year 2003-04 against which no appeal was preferred by the Revenue before the ITAT.”

12.7. When a similar question was dealt with by the first appellate authority and the Revenue accepted the same without preferring any appeal thereon, it is not open for the Revenue now to contend that Assessee’s reliance on the case of Hon’ble Supreme Court in the case of Radha Saomi Satsang v. CIT reported in 193 ITR 321 and, Berger Paints v. CIT reported in 266 ITR 199, is also misplaced because in these cases Hon’ble Supreme Court was considering the situation where the liability was certain, but what was not certain was the quantum of such liability. There is no dispute that the same method of accounting is regularly and consistently followed by the assessee as such rule of consistency is applicable as per which under the similar facts and circumstances, department ought to follow same approach on an issue in other assessment years. We, therefore, respectfully following the reasoning adopted by the coordinate Bench of this Tribinal for the AY 2007-08, set aside the matter to the file of the Assessing Officer with direction to decide the issue afresh after affording opportunity of being heard to the assessee as per the first appellate order on the issue in the assessment year 2003-04, as followed by this Tribunal for the AY 2007-08 also. Grounds 12 to 12.5

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are disposed of accordingly.”

Thus, the issue is identical in assessee’s own case for A.Y. 2008-09. Therefore, we are remanding back this issue to the file of the Assessing Officer with direction to decide the issue afresh after giving opportunity of hearing to the assessee. Hence Ground No. 9 to 9.5 are partly allowed for statistical purpose.

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providing insurance services to the customers of its vehicles. Providing insurance facility at the dealership’s shop serves, inter alia, the following advantages to the assessee company:

(a) MSIL is able to provide one stop shop for the company’s products, which enables the company to not only promote sales but also face the ever increasing competition from rival automobile companies; b) MSIL is able to ensure mooth and timely delivery of the vehicles; c) MSIL is able to provide smooth after sale services by taking care of post- sales insurance needs of the customers d) Promoting sale of spare parts and accessories e) Promoting service incomes of the company and its dealers

In view of the significant contribution of the Insurance subsidiaries in promoting the company’s products, it is in the best interests of the assessee to ensure the subsistence and smooth running of the Insurance subsidiaries. The simplistic business structure of the Insurance Company required negligible administrative and manpower support for its functioning, which has been provided by the existing set-up of the MSIL. The assessee, it needs to be appreciated, provided the support to the Insurance subsidiaries due to its business exigency rather than supporting the said company. The sharing of facilities/services by MSIL for its own business interests and accordingly, the related cost is an allowable business expenditure for the company. Further, it may kindly be appreciated that the expression “for the purpose of business” as used in section 37(1) of the Act is much wider than “for the purpose of earning income”. What is, therefore, important for the purpose of allowability of deduction under section 37(1) of the Act is that the expenditure must be incurred for the purpose of business. It is not necessary that incurring of expenditure must immediately result in receipt of income and/or there must be substantial quantum of income. Therefore, if expenditure is incurred for the purpose of business, such expenditure is an allowable deduction, even though

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the same does not result in earning of income immediately. The Ld. AR relied upon the decisions of the Supreme Court in the case of CIT vs. Malayalam Plantations Ltd.: 53 ITR 140. The apex Court reiterated the same approach in the following cases:

• CIT vs. Birla Cotton Spinning. & Weaving Mills Ltd.: 82 ITR 166 (SC) • Madhav Prasad Jatia vs. CIT : 118 ITR 200 (SC)

In the present case, sharing of MSIL resources by group/ subsidiary companies providing insurance services was only meant to promote the purpose of MSIL’s business and hence the entire expenditure incurred by the company was allowable as deduction. The Ld. AR further submitted that since the entire expenditure as incurred by the assessee wholly and exclusively for purposes of its business, any incidental/ indirect benefit to the group company(ies), it is settled law, cannot be the basis for disallowing the expenditure in the hands of the assessee. The Ld. AR further relied upon the decisions referred supra, some of which are as follows:

• Sassoon J. David and Co. P. Ltd. vs. CIT : 118 ITR 261 (SC); CIT v Nestle India Ltd. 337 ITR ITR 103 (Del. HC) (affirmed by the Supreme • Court) • CIT vs Adidas India Marketing (P) Ltd: 195 Taxman 256 (Del) • CIT vs Agra Beverages Corporation (P) Ltd: 200 Taxman 43 (Del. Mag.) (HC); • Sony India (P) Ltd vs. Dy. CIT : 315 ITR 150 (Del ITAT) • Star India (P) Ltd.: 103 ITD 73 TM (Mum.)

In view of the aforesaid, the Ld. AR that the assessing officer erred in disallowing Rs. 17,29,22,979/- in the impugned assessment order, which calls for being deleted in toto. Without prejudice to submission above, the Ld. AR submitted that even if the company were to recover the cost of charges provided to the Insurance subsidiaries, it shall be a very small amount compared to what has been considered by the AO in the impugned assessment

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order. The annual cost of services/facilities provided to the different Insurance companies has been estimated at Rs.1.54 Crores as below:

Head Approx. Cost (Rs.) Salaries of Employees 1,12,75,000/- Travelling Cost 10,00,000/- Office Infrastructure Cost 9,46,800 IT System/Application Cost 22,00,000 Total Cost 1,54,21,800/-

That apart, and without prejudice to the above, the Ld. AR further submitted that it is disputed the aforesaid business expenditure, being will have to be allowed as deduction under section 37(1) of the Act, either in the hands of the assessee company or to the group Companies. Therefore, on an overall basis, the entire exercise of seeking to tax the normal business expenditure is, in any case, revenue neutral. Accordingly, even on this ground, deduction in respect of such business expenditure should be allowed under section 37(1) of the Act. The Ld. AR relied upon the following decisions wherein it has been held that Revenue should agitate issues or make adjustment on issues which are revenue neutral and do not affect overall taxes likely to be collected by the Government.

• CIT v. Excel Industries Ltd and Mafatlal Industries (P) Ltd.: 358 ITR 295 (SC) CIT v. Bilahari Investment P. Ltd.: 299 ITR 1 (SC) • • CIT v. Shri Ram Pistons & Rings Ltd.: 220 CTR 404 (Del.) • CIT v. Triveni Engg. & Industries Ltd.: 336 ITR 374 (Del.) • CIT v. Nagri Mills Co. Ltd.: 33 ITR 681 (Bom.) • CIT vs. M/s Vishnu Industrial Gases: ITA No. 229/1988 (Del.)

In view of the aforesaid, the Ld. AR submitted that the assessing officer may be directed to delete the arbitrary disallowance based on an adhoc percentage of the turnover made in the impugned assessment order. The aforesaid issue now

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stands covered in favour of the assessee by the order of the Delhi Bench of the Tribunal in assessee’s own case for AY 2008-09.

“Grounds No 14 to 14.4 Sharing of resources with other Group Companies/ Subsidiary Companies

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14.1. Ld. AR submitted that in view of the stringent provisions of the Motor Vehicles Act, 1988, it is mandatory that every vehicle should have a valid Insurance to drive on the road at the time of taking delivery itself from the dealership and under the governing insurance laws, it is not permissible for the company to obtain insurance agency, necessitating the assessee to promote the group companies. According to him this promotes the assessee to provide one stop shop for the company’s products, which enables the company to not only promote sales but also face the ever increasing competition from rival automobile companies; to ensure smooth and timely delivery of the vehicles; to provide smooth after sale services by taking care of post-sales insurance needs of the customers; sale of spare parts and accessories; and service incomes of the company and its dealers. He further submitted that the simplistic business structure of the Insurance Company required negligible administrative and manpower support for its functioning, which has been provided by the existing set-up of MSIL. Since the assessee provided the support to the Insurance subsidiaries due to its business exigency the related cost is allowable business expenditure for the company, in view of the fact that the expression “for the purpose of business” as used in section 37(1) of the Act is much wider than “for the purpose of earning income”.

14.2. He relied on the decisions of the Supreme Court in the case of CIT vs. Malayalam Plantations Ltd.:53 ITR 140, wherein it was held, that “ the expression " for the purpose of the business " is wider in scope than the expression " for the purpose of earning profits ". Its range is wide : it may take in not only the day to day running of a business but also the rationalization of its administration and modernization of its machinery; it may include measures for the preservation of the business and for the protection of its assets and property

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from expropriation, coercive process or assertion of hostile title ; it may also comprehend payment of statutory dues and taxes imposed as a pre-condition to commence or for carrying on of a business ; it may comprehend many other acts incidental to the carrying on of a business. However wide the meaning of the expression may be, its limits are implicit in it. The purpose shall be for the purpose of the business, that is to say, the expenditure incurred shall be for the carrying on of the business and the assessee shall incur it in his capacity as a person carrying on the business. It cannot include sums spent by the assessee as agent of a third party, whether the origin of the agency is voluntary or statutory; in that event, he pays the amount on behalf of another and for a purpose unconnected with the business” (emphasis supplied)

14.3. He submitted that the said approach is reiterated by the Hon’ble Apex Court in CIT vs. Birla Cotton Spinning. & Weaving Mills Ltd.: 82 ITR 166 (SC) and Madhav Prasad Jatia vs. CIT : 118 ITR 200 (SC) also.

14.4. By placing reliance on the decisions in Sassoon J. David and Co. P. Ltd. vs. CIT : 118 ITR 261 (SC); , CIT v Nestle India Ltd. 337 ITR ITR 103 (Del. HC) (affirmed by the Supreme Court), CIT vs Adidas India Marketing (P) Ltd: 195 Taxman 256 (Del), CIT vs Agra Beverages Corporation (P) Ltd: 200 Taxman 43 (Del. Mag.) (HC); , Sony India (P) Ltd vs. Dy. CIT : 315 ITR 150 (Del ITAT), Star India (P) Ltd.: 103 ITD 73 TM (Mum.) he argued that since the entire expenditure as incurred by the assessee wholly and exclusively for purposes of its business, any incidental/ indirect benefit to the group company(ies), it is settled law, cannot be the basis for disallowing the expenditure in the hands of the assessee.

14.5. As a matter of fact, Ld. AR submitted that even if the company were to recover the cost of charges provided to the Insurance subsidiaries, it shall be a very small amount compared to what has been considered by the AO in the impugned assessment order.

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Assessee estimated the annual cost of services/facilities provided to the different Insurance companies at Rs.1.31 Crores as below: Salaries of Employees 10,250,000 Travelling Cost 918,000 Office Infrastructure Cost 946,800 IT System/ Application cost 985,000 Total Cost 13,099,800

14.6. He further submitted that the said expenditure being the business expenditure, will have to be allowed as deduction under section 37(1) of the Act, either in the hands of the appellant company or to the group companies, in that sense the entire exercise of seeking to tax the normal business expenditure is, in any case, revenue neutral as such in view of the decisions in CIT v. Excel Industries Ltd and Mafatlal Industries (P) Ltd.: 358 ITR 295 (SC), CIT v. Bilahari Investment P. Ltd.: 299 ITR 1 (SC), CIT v. Shri Ram Pistons & Rings Ltd.: 220 CTR 404 (Del.), CIT v. Triveni Engg. & Industries Ltd.: 336 ITR 374 (Del.), CIT v. Nagri Mills Co. Ltd.: 33 ITR 681 (Bom.), and CIT vs. M/s Vishnu Industrial Gases: ITA No. 229/1988 (Del.) Revenue should not agitate issues or make adjustment on issues which are revenue neutral and do not affect overall taxes likely to be collected by the Government. Ld. DR vehemently relied upon the orders of the authorities below.

14.7. On a careful reading of the record in the light of the above arguments of the Ld. Counsel, we find that there is no material that is brought on record to controvert the plea of the assessee that they have provided the support to the Insurance subsidiaries due to its business exigency rather than supporting the said companies and it is it is in the best interests of MSIL to do so for maximizing their profits, as such the

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related cost is allowable business expenditure for the company. It also further goes undisputed that this being the business expenditure will have to be allowed as deduction under section 37(1) of the Act, either in the hands of the appellant company or to the group companies. In these circumstances, while respectfully following the decisions of the Hon’ble Apex Court and the jurisdictional High Court, we find that the addition on this score cannot be sustained. Accordingly, while along ground Nos 14 to 14.4, we direct the Ld. AO to delete the same.”

The issue is identical with the A.Y. 2008-09 decided by the Tribunal. Therefore it will be appropriate to remand back this issue to the file of the Assessing Officer and we direct the Assessing Officer to delete the disallowance based on an adhoc percentage of the turnover made in the assessment order in light of the decision of the Tribunal. Needless to say the assessee be given opportunity of hearing by following principles of natural justice. Hence Ground No. 10 to 10.3 are partly allowed for statistical purpose.

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the grounds of commercial expediency and for long term sustainability and there is no element of any personal benefit being granted. The expenditure was incurred by the company wholly and exclusively for the purpose of promoting its business and, therefore, the expenditure is allowable. On the contrary, the assessing officer disallowed the claim of the assessee on the ground that the same had not been incurred wholly and exclusively for the purpose of the business. In addition, the assessing officer also alleged that the expenditure incurred by the assessing officer resulted in an enduring benefit to the assessee and therefore was capital in nature. In this regard, it is respectfully submitted that the assessee, since 28 years is committed to the principle of “Give” - a principle that has been the bedrock of the company’s approach to sustainable business. The assessee company has formulated a corporate social responsibility policy recognizing its responsibility towards all its stakeholders. The key stakeholders of the assessee company are its employees and their families, customers and their families, shareholders and investors, dealers, suppliers and other business partners, local community and society and environment and regulatory authorities. The assessee company follows a partnership approach with its various stakeholders, and believes that the prosperity and wellbeing of the stakeholders will fuel the growth of the company in the future. During the relevant assessment year, the assessee company had incurred Rs.76.70 millions towards CSR activities in the following areas:

(a) Maintenance of Children's Park near India Gate, New Delhi. This children’s park spread over 10 acres area has been developed to give clean, green and safe playgrounds where children can have fun together even as they learn and grow. The Park prominently displavs the banner of the assessee company at various places within the park including the entrance gates and the ticket counters. Further, the company’s initiative in the taking over and developing the children’s park has hogged limelight through publicity in the print and social media. It is pertinent to note that the assessee company cannot be said

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to be merely carrying out philanthropic objects, rather the contributions are indirectly aimed for promoting business of the assessee company and also for advertising its name.

(b) National Road Safety Mission, as a mark of gratitude to the people of the country, on the occasion of completing 25 years of successful operations, the company launched a National Road Safety Mission to promote a culture of safe and accident free driving on Indian roads. Even during the slow down period year like F.Y. 08-09, the management devoted time and resources to start a national road safety program to promote consciousness for safe driving in the country. It is pertinent to note that the aforesaid is not in principle a range of additional activities that the company adopts; rather it is a way of carrying out the core activity which recognizes the company’s responsibility towards society as part of the business environment. It thus follows, that CSR considerations are integrated into the company’s business strategy and core processes.

(c) Community Development and Employee Volunteering as the company considers local community its important stakeholder. The CSR team along with the NGO partner works with the community identifies their needs and does social projects accordingly. These community initiatives have helped in developing a cohesive relationship between the community and the company. The company has adopted 4 villages around Manesar manufacturing plant for overall development of these villages and for the well-being of people living in these villages. The assessee company has been strengthening its own operations by gaining the co-operation of the local community and its employees. Further, the company endeavours to educate its employees and workers in order to develop an effective two-way communication to educate workers as to what is in their best interests. Sometimes a company's policies are also very one-sided. Workers, usually receive politically motivated communications from outside persons, who have no stake in the future of the company, and who are looking for short-term political gains. The management

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needs to counter this by developing an education process so as to develop a long term sustained growth for its business. Moreover CSR is an efficient instrument of how to bind the workers to the company. This would also include good working conditions which directly have a positive impact on the profit making strategy of the company.

(d) ITI Project for which the government has identified upgradation of ITIs in the country to meet the future requirement of skilled manpower as per industry requirements. In order to support this initiative, the company has adopted 4 ITIs in Haryana in association with two of its suppliers in public private partnership mode to develop them as centre of excellence. Unemployed educated youth are identified from these villages and given vocational trainings at ITI Gurgaon and Maruti driving school, Gurgaon. The company also facilitates their employment. It is also felt by the company that this provides a positive psychological impact on the minds of the functionaries of the company. It will be appreciated that whenever aforesaid CSR activities are undertaken by the company, the same is covered by print and electronic media. The expenditures incurred by the assessee in such identified causes, thus, creates goodwill and brand image for the assessee and helps in promoting business interests in long run. Such expenditure creates a positive all-round brand image, which leaves impact on the mind of everyone and ultimately attracts customers to the products and services offered by the company. Following all laws and caring for the environment makes good business sense, and helps in image building. The assessee company is undertaking the aforesaid CSR activities which would cumulatively maximize the probability of its long-term survival and sustained growth. Considered in the light of the aforesaid background, the Ld. AR submitted, that the CSR expenditure is allowable as a business deduction under the provisions of the Income Tax Act (‘the Act”). In this regard, the Ld. AR pointed out to provisions of section 37(1) of the Act, and submitted that under section 37(1) of the Act the fundamental condition for allowability is that the expenditure must be incurred “for the purpose of

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business”. The said expression is, much wider than “for the purpose of earning income”. For any expenditure to be eligible for deduction, such expenditure must be incurred for the purposes of business, irrespective of fact whether incurring of such expenditure is voluntarily and without any compelling necessity or mandatory. It is, in this regard, also relevant to refer to the legislative history of section 37(1) of the Act, wherein the Income Tax Bill of 1961 initially proposed to lay down that “necessity” of the expenditure would be a condition for claiming deduction under that section. The implication of the aforesaid is that the fact that somebody other than the assessee is also benefitted by the incurring of the expenditure does not come in the way of the expenditure being allowed by way of deduction under section 37(1) of the Act. What is important for the purpose of allowability of deduction under section 37(1) of the Act is that the expenditure must be incurred for the purpose of business. Again, the words, “for the purpose of business” should not be limited to the meaning of “earning profit alone”. It is also important to note that the purpose has to be seen from the point of view of the businessman and should not be seen with reference to narrow objective of earning profits immediately. To elaborate, certain expenditure may not reap profits immediately, but may be advantageous in the long run, by creating goodwill and brand image. The Ld. AR further submitted that CSR expenses are allowable as revenue expenditure, as has been held in the following decisions: i) Sri Venkata Satyanarayana Rice Mill Contractors Co v. CIT: 223 ITR 101 ii) CIT v. Ranbaxy Laboratories Ltd. : ITA No.743 of 2008 iii) CIT v. Madras Refineries Ltd.: 266 ITR 170 (Mad.) iv) CIT v. Rajasthan Spinning and Weaving Mills Ltd.: 281 ITR 408 (Raj.),

The Rajasthan High Court, while relying on its decision in the assessee’s own case reported at 274 ITR 465 decided the issue in favour of the assessee.

v) The Bombay High Court in the case of Krishna Sahakari Sakhar Karkhana Ltd v. CIT: 229 ITR 577 held that contribution to the education fund under the Maharashtra Cooperative Societies Act, 1960 was allowable as

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revenue expenditure. The Chennai High Court in the case of CIT v. Chennai Petroleum Corpn. Ltd: T.C.(A).No.57 of 2006, held that social and welfare community expenses are deductible as business expenditure. The Gujarat High Court in the case of CIT vs Jayendrakumar Hiralal: 327 ITR 147. The Karnataka High Court in the case of Mysore Kirloskar v. CIT: 166 ITR 836, held that the contribution made for common treatment of effluents was allowable business expenditure under section 37(1) observed that the expenditure incurred on account of donations to certain funds, charitable institutions, etc. is allowable even if the donation has no nexus with the business of the assessee and regardless of any business activity or any commercial expediency. The money may be expended on grounds of commercial expediency but not of necessity and still would be allowable as a business deduction. The Karnataka High Court in the case of CIT vs. Karnataka Financial Corporation: 326 ITR 355 held that expenditure incurred in setting up “model villages” at the instance of the government is allowable as deduction. In the case of Infosys Technologies Ltd. v. JCIT: 109 TTJ 631 (Bang.), the assessee incurred installed traffic signals at Bannerghatta Circle where the office of assessee was situated as there used to be traffic jams resulting in delay to employees in reaching the office. The same was handed over to the Government after installation. The Tribunal held that incurrence of such expenditure was prompted solely with a view to benefit its employees. It was observed that the expenditure being incurred in the character as a trader and was prompted by commercial expediency would be allowable as deduction. The Ld. AR also relied upon the decision of Mumbai Bench of the Tribunal in the case of Hindustan Petroleum Corp. Ltd. v. DCIT: 96 ITD 186. In the instant case, the assessee, a company owned by Government of India and working under its control and directions, incurred some expenditure towards implementation of 20- Point Programme at instance of Government and claimed deduction of same under section 37(1) of the Act. The Tribunal observed that it was in business interest of assessee to abide by directions of Government of India which owned assessee and expenditure on 20- Point Programme was incurred in view of specific directions

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of Government of India and allowable under section 37(1) of the Act. Attention is also invited to the decision of the Mumbai Tribunal in the case of Indian Petroleums vs. Department of Income Tax: ITA No. 664 and 665/ Ahd/2008, wherein the Court held that the assessee is entitled to the deduction of expenditure incurred in the nature of donation / contribution towards community development work. The Ld. AR relied upon the decision of the Ahmedabad bench of the Tribunal in the case of Lubrizol Advances Materials India P. Ltd. v. DCIT: 150 ITD 538. The Ld. AR also relied upon the following cases: i) IAC v. Nuchem Plastics Ltd.: 35 TTJ 559 (Del.) ii) DCIT v. Hero Moto Corp. Ltd. : ITA No.l609/Del/2016 (Del. Trib.) iii) CIT v. D.T.T.D.C Ltd.: 350 ITR 1 (Del) iv) Delhi Cloth and General Mills Company Ltd. v. ITO: ITA No. 5289/Del./74-75 v) Ranbaxy Laboratories Ltd.: ITA No.: 3925/D/02 (Del.-ITAT) vi) JCIT v. Deversons Industries Ltd. 290 ITR (AT) 287 (Ahd)

The Ld. AR also pointed out that Explanation 2 has been inserted in section 37 of the Act by the Finance (No.2) Act, 2014 w.e.f. 1.04.2015 to provide that CSR expenses referred in section 135 of the Companies Act, 2013 shall not be deemed to be incurred for the purpose of business. The aforesaid Explanation inserted w.e.f. 1.04.2015, the Ld. AR submitted that the same also fortifies the claim of the assessee that prior to assessment year 2015-16, even CSR expenditure was an allowable business deduction. In view of the above catena of judicial pronouncements, the Ld. AR submitted that, CSR expenses are expenditure incurred wholly and exclusively for the purpose of business and are hence allowable as a revenue deduction.

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provisions of the Income Tax Act (‘the Act”). In this regard, the Ld. AR pointed out to provisions of section 37(1) of the Act, and submitted that under section 37(1) of the Act the fundamental condition for allowability is that the expenditure must be incurred “for the purpose of business”. The said expression is, much wider than “for the purpose of earning income”. For any expenditure to be eligible for deduction, such expenditure must be incurred for the purposes of business, irrespective of fact whether incurring of such expenditure is voluntarily and without any compelling necessity or mandatory. It is, in this regard, also relevant to refer to the legislative history of section 37(1) of the Act, wherein the Income Tax Bill of 1961 initially proposed to lay down that “necessity” of the expenditure would be a condition for claiming deduction under that section. The implication of the aforesaid is that the fact that somebody other than the assessee is also benefitted by the incurring of the expenditure does not come in the way of the expenditure being allowed by way of deduction under section 37(1) of the Act. What is important for the purpose of allowability of deduction under section 37(1) of the Act is that the expenditure must be incurred for the purpose of business. Again, the words, “for the purpose of business” should not be limited to the meaning of “earning profit alone”. It is also important to note that the purpose has to be seen from the point of view of the businessman and should not be seen with reference to narrow objective of earning profits immediately. Certain expenditure may not reap profits immediately, but may be advantageous in the long run, by creating goodwill and brand image. These submissions of the Ld. AR are supported by the Income Tax statute. But at the same time, it can be seen that Explanation 2 has been inserted in section 37 of the Act by the Finance (No.2) Act, 2014 w.e.f. 1.04.2015 to provide that CSR expenses referred in section 135 of the Companies Act, 2013 shall not be deemed to be incurred for the purpose of business. The aforesaid Explanation inserted w.e.f. 1.04.2015. Therefore, in the present assessment year the said explanation will not be applicable. Hence, the expenditure has to be allowed because ultimately the assessee was publicizing its product at the prominent places by maintaining them such as parks and

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this has direct impact on the sales promotions of the assessee company. Therefore, Ground No. 11 to 11.12 are allowed.

• Nestle India Limited: 296 ITR 682 (Del.) • CIT v. Samtel Color Ltd.: 326 ITR 425 (Del.) - SLP filed by the Revenue dismissed in C.A No.6449/2012 • Otis Elevators Co. (India) Ltd v. CIT 195 ITR 682 (Bom) • CIT v. Citibank N.A.: 264 ITR 18 (Bom) • CIT v. Force Motors Ltd.: ITA No. 5296 of 2010 (Bom) • CIT v. Sundaram Industries Ltd 240 ITR 335 (Mad) • Gujarat State Export Corporation Ltd. v. CIT: 209 ITR 649 (Guj.) • CIT v. Infosys Technologies Ltd.: 205 Taxman 59 (Kar)

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• Assam Brook Ltd. v CIT: 267 ITR 121 (Cal) • DCIT v. Max India Ltd (2007) 112 TTJ (Asr.) 726 (Bom); • American Express International Banking Corporation v CIT 258 ITR 601.

The Ld. AR further submitted that the aforesaid issue is also covered in favour of the assessee by the decisions of the Tribunal in the assessee’s own case for the assessment years 2001-02, 2002-03, 2004-O5, 2005-06, 2006-07, 2007-08 and 2008-09.

“8. On the aspect of disallowance of Rs.10,06,470/- expenditure incurred on club membership, case of the assessee is that the assessee company has debited Rs.10,06,470/- to profit & loss account, the expenditure was incurred on subscription to clubs provided to various employees and directors on account of club membership fees and the assessing officer has, in the impugned assessment order disallowed the said expenditure of Rs.10,06,470/- by holding that the same cannot be considered as business expenditure. Ld. AR argued that this expenditure has been incurred for business purposes on the grounds of commercial expediency and there is no element of any personal benefit being granted either to the employee or director and the Tax Auditors have amply clarified this position vide clause 17(b) of the Tax Audit Report. Basing on the decision of the Supreme Court in the case of Samtel Color Ltd. (Civil appeal no. 6449/2012) by way of which the Hon’ble Apex Court dismissed the SLP filed by Revenue against the order of Delhi High Court in CIT v. Samtel Color Ltd.: 326 ITR 425 (Del.) allowing the

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claim for deduction representing expenditure incurred on club membership, he argued that this expenditure is allowable as deduction. He submitted that besides being covered by the decisions in Nestle India Limited: 296 ITR 682 (Del.), CIT v. Samtel Color Ltd.: 326 ITR 425 (Del.), Otis Elevators Co. (India) Ltd. v. CIT 195 ITR 682 (Bom); American Express International Banking Corporation v. CIT 258 ITR 601 (Bom.); CIT v. Citibank N.A.:264 ITR 18 (Bom), CIT v. Force Motors Ltd.:ITA No. 5296 of 2010 (Bom), CIT v. Sundharam Industries Ltd. 240 ITR 649 (Guj.), CIT v. Infosys Technologies Ltd.: 205 Taxman 59 (Kar), Assam Brook Ltd. v. CIT: 267 ITR 121 (Cal), DCIT v Max India Ltd. (2007) 112 TTJ (Asr.)726, this issue is also covered in favour of the assessee by the decisions of the Tribunal in the assessee’s own case for the assessment years 2001-02, 2002-03, 2004-05, 2005-06, 2006-07 and 2007- 08.

8.1 On this aspect, the Ld. DR submitted that in view of the decision of Hon’ble Supreme Court cited above, the decision of the ITAT was accepted and further appeal before the Hon’ble High Court u/s 260A was not preferred on this issue for AY 2006-07 and 2007-08. In view of this submission of Ld. DR this ground is allowed and the Assessing Officer is directed to allow a sum of Rs. 10,06,470/- being expenditure incurred on account of club membership fees.”

Thus, this issue is squarely covered by the decision of the Tribunal in assessee’s own case. Hence Ground No. 12 is allowed.

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(i) The international transaction of payment of royalty does not satisfy the arm’s length principle

(ii) held that the assessee was not justified in paying any royalty to SMC towards use of SMC’s trademark;

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(iii) allocated the royalty paid by the assessee in the ratio of R&D and AMP expenses incurred by the associated enterprise. The TPO accordingly held that 46% of the total royalty paid by the assessee is towards use of trademark.

The TPO accordingly made an adjustment of Rs. 311.73 crores being 48% of the total royalty paid by the assessee. In this regard, the Ld. AR submitted that the Tribunal in assessee’s own case for A.Y. 2005-06 (ITA No. 5237/Del/2011) and for A.Y. 2006-07 (ITA No. 5120/Del/2010) deleted similar adjustment on account of payment of Brand royalty. Following the order for A.Y. 2006-07, the Tribunal directed for the deletion of transfer pricing adjustment on account of payment of royalty in A.Y. 2007-08 (ITA No. 5270/Del/2011). Similarly, the Tribunal for A.Y. 2008-09 (ITA No. 6020/Del/2012) deleted the adjustment on account of royalty made by the TPO. Similarly in the case of Goodyear India Ltd. vs. DCIT (ITA No. 5650/Del/2011) held that payment of royalty cannot be disallowed arbitrarily on the basis that a brand is weak. The Ld. AR submitted that following the findings of the Co-ordinate benches in the preceding year, similar Transfer Pricing adjustment on account of brand royalty, amounting to Rs. 311.73 crores calls for being deleted.

“12. Another contention of the TPO that the Goodyear Brand was weak and therefore does not require payment of royalty, is not brought out from the records. The AR of the assessee has made elaborate submission and placed evidence on record to show that ‘Goodyear’ brand is considered to be one of the top most acclaimed brand across the globe. Therefore, there is no merit in

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the allegation of the TPO that Goodyear brand has no worth and therefore, the payment made by the assessee for use of Goodyear brand is unwarranted.

……..

Thus, the issue is identical with the earlier assessment year and in the present year as well, there is a direct nexus between the revenue of the taxpayer and the payment of royalty. Therefore, the Revenue cannot dispute the benefit derived by the taxpayer from payment of such royalty. Hence Ground No. 16 to 16.14 are allowed.

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principles of the natural justice. Hence, Ground No. 18 is partly allowed for statistical purpose.

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Accepting the contention of the assessee, the Tribunal observed in C.C Chokshi and Co (supra) as under:

“3.6.2 We have heard both parties perused the records and considered the matter carefully. The factual and legal background relating to the issue has already been discussed in the preceding paras. The section 140A provides that in case payment made under the said section falls short of the tax payable including interest under the said section then the tax so paid shall be first attributed towards the interest and the balance amount shall be adjusted against the tax payable. In this case, the tax payable under section 140A also included interest payable under section 234B. The issue is whether the interest payable under section 234B which has to be first adjusted against the payment u/s 140A has to be calculated with respect to total income as declared in the return or total income determined in the regular assessment.

We find that the section 140(1B) provides that interest payable under section 234B, has to be computed on the amount by which the advance paid falls short of assessed tax and the assessed tax for the purpose of this sub-section has been defined in the Explanation to mean the tax on total income as declared in the return as reduced by tax deducted/collected at source etc. Therefore, we agree with the submission made by Id. A.R that the interest payable under section 234 B for the purpose of adjustment against the tax paid under section 140A has to be computed with respect to assessed tax determined on the basis of total income declared in the return. But this is only for the limited purpose of adiustment of payment made u/s. 140A against interest payable under section 234B while making computation of interest payable by the assessee under section 234B which has to be computed with respect to the total income determined in regular assessment as per the definition of assessed tax given in section 234B. The assessee has also followed the same procedure with which we agree. The order of CIT(A)

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confirming the method followed by the AO is therefore set aside and the claim of the assessee is allowed. ”

The aforesaid issue is now covered in favour of the assessee by the Delhi Bench of the Tribunal in assessee’s own case for AY 2007-08 and 2008-09. The Assessing Officer should, therefore, be directed to recompute interest under section 234B of the Act, as aforesaid. As per section 234C of the Act, interest is required to be calculated on the basis of returned income and not on the basis of assessed income. The Assessing Officer erred on facts and in v in charging interest u/s 234C on assessed Income instead of returned Income as per the provisions of Act. The aforesaid issue is now covered in favour of the assessee by the Delhi Bench of the Tribunal in assessee’s own case for AY 2007-08 and 2008-09. The assessing officer should, therefore, be directed to recompute interest under section 234C of the Act, as aforesaid.

“3.6.2 We have heard both parties perused the records and considered the matter carefully. The factual and legal background relating to the issue has already been discussed in the preceding paras. The section 140A provides that in case payment made under the said section falls short of the tax payable including interest under the said section then the tax so paid shall be first attributed towards the interest and the balance amount shall be adjusted against the tax payable. In this case, the tax payable under section 140A also included interest payable under section 234B. The issue is whether the interest payable under section 234B which has to be first adjusted against the payment u/s 140A has to be calculated with respect to

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total income as declared in the return or total income determined in the regular assessment.

We find that the section 140(1B) provides that interest payable under section 234B, has to be computed on the amount by which the advance paid falls short of assessed tax and the assessed tax for the purpose of this sub-section has been defined in the Explanation to mean the tax on total income as declared in the return as reduced by tax deducted/collected at source etc. Therefore, we agree with the submission made by Id. A.R that the interest payable under section 234 B for the purpose of adjustment against the tax paid under section 140A has to be computed with respect to assessed tax determined on the basis of total income declared in the return. But this is only for the limited purpose of adiustment of payment made u/s. 140A against interest payable under section 234B while making computation of interest payable by the assessee under section 234B which has to be computed with respect to the total income determined in regular assessment as per the definition of assessed tax given in section 234B. The assessee has also followed the same procedure with which we agree. The order of CIT(A) confirming the method followed by the AO is therefore set aside and the claim of the assessee is allowed. ”

The aforesaid issue is now covered in favour of the assessee by the Delhi Bench of the Tribunal in assessee’s own case for AY 2007-08 and 2008-09. The Assessing Officer is, therefore, directed to recompute interest under section 234B of the Act, as aforesaid. As per section 234C of the Act, interest is required to be calculated on the basis of returned income and not on the basis of assessed income. The Assessing Officer erred on facts and in v in charging interest u/s 234C on assessed Income instead of returned Income as per the provisions of Act. The aforesaid issue is now covered in favour of the assessee by the Delhi Bench of the Tribunal in assessee’s own case for AY 2007-08 and 2008-09. Therefore, we remand back this issue to the file of the Assessing

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Officer and direct the Assessing Officer to recomputed interest under section 234C of the Act, as aforesaid. Needless to say, the assessee be given opportunity of hearing by following principles of natural justice.

Order pronounced in the Open Court on 17th October, 2018.

Sd/- Sd/- (R. K. PANDA) (SUCHITRA KAMBLE) ACCOUNTANT MEMBER JUDICIAL MEMBER

Dated: 17/10/2018 R. Naheed * Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT(Appeals) 5. DR: ITAT

ASSISTANT REGISTRAR ITAT NEW DELHI

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Date 1. Draft dictated on PS 2. Draft placed before author PS 3. Draft proposed & placed before .2018 JM/AM the second member 4. Draft discussed/approved by JM/AM Second Member. .10.2018 5. Approved Draft comes to the PS/PS Sr.PS/PS 6. Kept for pronouncement on PS .10.2018 7. File sent to the Bench Clerk PS 8. Date on which file goes to the AR 9. Date on which file goes to the Head Clerk. 10. Date of dispatch of Order.