HONDA MOTORCYCLE AND SCOOTER INDIA PVT. LTD. ,GURGAON vs. ACIT, CIRCLE-1(1), GURUGRAM

6. Before us, it is a common point between the parties that the issue is covered by the decision of coordinate Bench in assessee’s own cases in past assessment years.

“5. We have heard both the parties and perused the records. We find that this issue is squarely covered in favour of the assessee by the decisions of ITAT in its own case for AYs. 2015-16 & 2016-17 (supra). The relevant portion of ITAT order for AY 2016-17 is reproduced hereunder :- “8. Ground number 2 is with respect to the transfer pricing adjustment on account of payment of export commission of ₹ 495,348,444/– and ₹ 91,598,320/– on payment of royalty on export to associated enterprises. The learned transfer pricing officer has rejected the transfer pricing methodology adopted by the assessee for benchmarking its international transaction. The learned TPO also rejected principles of commercial expediency argued by the assessee stating that it is not mandated as per the provisions of Section 92CA of the act. The determined ALP of these transactions at Rs Nil. The coordinate bench in assessee’s own case for assessment year 2015 – 16 has considered this issue as under:- “7. Ground No. 2 is with respect to adjustment on account of export commission and royalty paid to associated enterprises. This is challenged by the assessee from Ground No. 2 to Ground No. 7 of the above appeal.

7463 and 7464/Del/2019 for Assessment Year 2013-14 and 2014-15 dated 30.09.2020. He submitted that there is no change in the facts and circumstances of the case with respect to TPO adjustment of export of commission. With respect to the transfer, pricing adjustment related to royalty paid on sales he also submitted that the coordinate bench in assessee's own case for Assessment Year 2008-09 to 2014-15 allowed this ground in favour of the assessee holding that the assessee has sold the good on principle-to-principle basis and has received the sale consideration. He further relied upon the decision of the coordinate bench in assessee's own case in and 7964/Del/2019 for Assessment Year 2013-14 and 2014-15. Thus, he submitted that this issue is fully covered in favour of the assessee by the order of the coordinate bench in assessee's own case and therefore this ground should be allowed.

9. The ld. DR vehemently supported the orders of the lower authorities. He submitted that the coordinate bench while deciding the case of the assessee has not considered the decision of the Hon'ble Supreme Court in case of Honda Seil Cars Ltd. 319 ITR 713 but coordinate bench has mainly relied upon the Article 2, 13 and 11 of the technology know how agreement. He extensively relied on paragraph 23 to 25 of the orders of the Hon'ble Supreme Court. He further relied on Article 15 and Article 17 of the above agreement. Therefore, he submitted that the above argument might be considered where the royalty is considered as capital expenditure.

transfer pricing officer at Rs. nil holding that there is a failure of benefit test. The claim of the assessee before us that both these issues are covered in favour of the assessee by the decision of the coordinate benches in assessee's own case in earlier years. We have also considered the decision of the coordinate bench in assessee's own case for AY 2013-14 and 2014-15 where, it is claimed that the issue is squarely covered in favour of the assessee.

"7. Now, we will address to the grievance relating to addition on account of payment of export commission - Under technical know-how agreement dated 13.07.2000 the assessee was entitled to use technical know-how provided by Honda Motor Company Limited Japan for manufacture and sale of two wheelers and parts in India and was not authorized to sell its products or part in any other territory than in India without prior written consent of HMJ. The assessee entered into a separate export agreement dated 13.07.2000 under which HMJ accorded consent to the assessee to export specific models of two wheelers to certain countries on payment of export commission @ 5% of the FOB value of such exports.

7.1 Under TNMM analysis the operating profit ratio of the assessee @ 4.60% was higher than average of operating margin of -2.24% earned by the comparables companies. Considering that the operating profit margin of the selected comparable companies was lower than the OPM of the assessee, such international transactions were considered as being at arms length TNMM.

7.2 The TPO held that the assessee has not received any services that an independent entrepreneur would be willing to pay for and accordingly considered the arms length price of the said transaction of payment of export commission of nil.

7.3 While treating the ALP as nil the TPO held that the assessee is a contract manufacturer and further held that by its export activities the assessee is developing the brand of the AE and actually has carried out service to the AE.

7.4 It was also pointed out that the assessee has made export to AE's related parties in Chile, Peru and Mexico and such exports are apparently for the benefit of the AE's of parent company.

7.5 The TPO/DRP/DR were of the strong belief that the services rendered by the AE for facilitating exports were unclear.

7.6 At the very outset we have to state that the observations of the TPO/DRP that the assessee was only a contract manufacturer has been out rightly rejected by the Tribunal in assessee's own case in earlier assessment years.

7.7 The primary issue which needs to be examined is whether the assessee was benefited by making such export sales. The following chart would throw light on this issue:-

7.8 From the above chart it can be seen that the average price in respect of exports to AE's was higher than the price of the same product sold in the domestic market to non AE.

7.9 Further we find from the comparative profitability statement, the profitability derived by the assessee from export of goods at 8.91 % is significantly higher than the profitability derived by the assessee from sale of goods in the domestic market @ 5.50%. The comparative profitability statement is as under:-

7.10 For the sake of repetition, the entire edifice of the TPO/DRP's finding is based upon the assumption that the assessee is operating as a contract manufacturer with respect to export of good.

7.11 In our understanding of the facts of the case in hand, we are of the considered view that the TPO/DRP have grossly failed in distinguishing between the function of the license manufacturers and contract manufacturers.

7.12 A perusal of the business profile of the assessee viz-a-viz agreement with the parent, we find that the assessee is a licensed manufacturer such as the assessee, the seller is entitled to compensation which includes returns attributable to exploitation of intangibles such technical know-how etc i.e. market determined prices. On the other hand, in the case of a contact manufacturer, the manufacturer acts in accordance with the instructions of the buyer and is only entitled to routine cost plus returns. It would be pertinent to refer to the decision of the Tribunal in assessee's own case in held as under:-

7.13 A similar decision was taken by the Tribunal in the case of Hero Motocorp Limited in wherein the Tribunal has held as under:-

7.14. In the light of the above the first limb of finding of the TPO/DRP is removed.

7.15. We find that while making the disallowance the TPO has held that assessee failed to demonstrate the benefits derive by it. This proposition of the TPO/DRP also do not hold any water in the light of the principle laid down by the Hon'ble jurisdiction High Court of Delhi in the case of Cushman and Wakefield (367 ITR 730). It would not be out of place to mention here that in earlier assessment years, this quarrel was restored to the files of the TPO to decide the issue afresh in the light principle laid down by the Hon'ble High Court in the case of Cushman and Wakefield (supra).

7.16. We have been told that in the set aside assessment proceedings the TPO has once again made the addition following the earlier findings that the assessee had failed to provide evidence.

7.17 Considering the facts of the case as mentioned elsewhere we are of the considered view that the assessee has successfully demonstrated not only the benefits but has also shown that the profitability is higher (as per the charts exhibited elsewhere). Considering the totality of the facts we have no hesitation in directing the AO/TPO to delete the impugned addition on account of export commission. 7.18 This ground is accordingly allowed."

the coordinate Bench and decide the issue in favour of the assessee.

The addition is deleted.

9. In ground No. 9, the assessee has challenged the addition made on account of transfer pricing adjustment of payment of royalty.

10. Briefly, the facts are, the assessee has entered into a technical know-how agreement with the AE on 13.07.2000. In terms of which, the assessee pays royalty based on percentage of sales including exports to AE. The assessee benchmarked the transaction by adopting aggregate approach under TNMM. However, the TPO did not accept the benchmarking of the assessee and proceeded to benchmark the payment of royalty separately by applying CUP method. While doing so, he held that sale made to AE is equivalent to sale made to self.

Hence, there was no requirement to pay royalty. Thus, he determined ALP of royalty payment at nil, thereby proposing the entire amount of Rs.13,84,61,947/- as transfer pricing adjustment. While deciding assessee’s objections on the issue, learned DRP relied upon their earlier directions and upheld the adjustment.

11. Before us, it is a common point between the parties that the issue is squarely covered by various decisions of the Tribunal in assessee’s own cases in past assessment years.

12. Having considered rival submissions, we find, while deciding assessee’s appeal for assessment year 2016-17 in dated 15.03.2023, the coordinate Bench followed its earlier decision in assessment year 2015-16 and decided as under :

“12. We have considered rival submissions and perused the material available on record. 13. On going through the material available on record, we find, the issue, whether, technical know-how fee paid is in the nature of capital or revenue expenditure is a legacy issue and is continuing from preceding assessment years. While, deciding the issue in the immediately preceding assessment year i.e. assessment year 2015- 16, the Tribunal, in the order referred to above, followed its earlier decision and allowed assessee’s claim. The relevant observations of the Tribunal in this regard are as under:

“25. We have carefully considered the rival contention and perused the orders of the lower authorities. The identical claim with respect to the deduction of expenses in respect of technical knowhow arose before the coordinate bench in case of the assessee in ITA number 7463 and 7464/del/2018 for assessment years 2013 – 14 and 2014 – 15 wherein at para number six the coordinate bench dealt with this issue. The coordinate bench considered the decision of the coordinate bench in assessee’s own case for assessment year 1213 as under :

“6. Additional claim of deduction of expenses in respect of technical know- how- A similar issue has been decided in A.Y. 2012-13. The relevant findings read as under :-

"The Hon'ble ITAT in the appellant's own case for assessment Year 2011- 12 reiterated that the facts in the case of the appellant differ from, the facts of Honda Siel Cars Ltd. (supra) because the amount expended is in relation to the running royalty and not for the purpose of setting up of plant.

Further, reference is also made to the decision of the Delhi Tribunal in the case of Honda Cards India Ltd vs DCIT : dated 18.08.2017 (pages 414- 457 of the CLPB) and also confirmed by Hon'ble Delhi High Court in ITA No.45/2019 vide order dated 13.05.2019 (refer pages 457A-457F of the CLPB), wherein the Tribunal after referring to the decision of the Supreme Court in the case of Honda Siel Cars (supra) observed that the Supreme Court has carved out the distinction between the payments at the time of setting up of the manufacturing facility and the payments made once the manufacturing process has already began. In the former case, royalty expenditure for setting up the manufacturing facility is capital in nature while in the latter case, the royalty expense is revenue in nature. "

. We find no merit in the stand of the Ld. DR for the Revenue as there is no estoppel in law; especially where the issue has been decided by the Jurisdictional High Court on similar facts. Accordingly, we allow the additional ground of appeal raised by the assessee. 6.1 Respectfully following the findings of the coordinate bench we decide accordingly. In view of this issue being squarely covered in favour of the assessee by the order of the coordinate bench in assessee’s own case for the earlier years, we respectfully following the same allow ground number 11 of the appeal of the assessee.”

14. Factual position being identical in the impugned assessment year, respectfully following the consistent view of the Tribunal in assessee’s own case, as discussed above, we direct the Assessing Officer to allow assessee’s claim of deduction in respect of technical know-how payment. Ground is allowed.”

13. There being no difference in factual position in the impugned assessment year, respectfully following the decision of the coordinate Bench, we allow assessee’s claim, thereby deleting the addition.

14. In ground No. 10, the assessee has challenged disallowance of signage expenses amounting to Rs.51,87,028/-.

15. Briefly, the facts are, the assessee has incurred expenditure in purchasing glow signboards/signage, which were displayed at location of the dealers. So basically, these are in the nature of business promotion expenses. Accordingly, the assessee, treating them as revenue expenditure, claimed as deduction. The Assessing Officer, however, disallowed the claim stating that they provide enduring benefit, hence, are capital in nature. When the issue came before learned DRP, following their earlier directions, they directed the Assessing Officer to verify whether Tribunal’s decision in favour of the assessee has been accepted by the department or else to follow the earlier directions of DRP.

“10. Apropos disallowance of Rs.54,57,713 of signage expenses as capital in nature : On this issue, ld. Counsel of the assessee submitted that the assessee had purchased glow sign board/ signals, which were displayed at the location of the dealers of the assessee. The sole purpose of incurring these expenses is to increase the sales at the stores etc. and thus is solely for the purpose of business and allowable as revenue in nature. At the same time, these are not giving any enduring benefit to the assessee, given the dynamic and competitive nature of the business. The Assessing Officer disallowed the claim of the assessee in a cryptic manner. He observed that the explanation given by the assessee is not satisfactory and following the DRP directions held the expense to be capital in nature and allowed depreciation @15%. The expenditure on Sign boards is revenue in nature and ld. Counsel of the assessee placed reliance on the following decisions :- (i) CIT v. Pepsico India Holdings Pvt. Ltd. [(2007) 207 Taxman 5 (Del)], (ii) CIT v. Orient Ceramics & Inds Ltd. [(2013) 358 ITR 49(Del), (iii) CIT vs Rakhra Technologies P. Ltd. [(2012) 347 ITR 484 (P&H)] Ld. Counsel further submitted that this issue is covered in favour of the assessee in assessee's own case for AY 2012-13 to 2016- 17. In this regard, he referred to the decision of ITAT in assessee’s own case for AY 2016-17 & 2015-16.

11. Upon careful consideration and hearing both the parties, we find that this issue is squarely covered in favour of the assessee in assessee’s own case for AY 2015-16 & 2016-17. For the sake of reference, relevant portion of the order of AY 2016-17 is given below :- “12. Coming to ground number 7 of the appeal with respect to the disallowance of expenditure of signage is of Rs.7,545,398/– we find that this issue is also been dealt with by the coordinate bench in assessee’s own case for assessment year 2015 – 16 as under:-

“13. Ground No. 8 of the appeal is with respect to the expenses of signage, which was considered by the ld. AO as capital expenditure whereas the assessee claimed it to be revenue expenditure. On carefully consideration of rival contentions, we find that this issue is squarely considered the coordinate bench in and 7064/Del/2018 at para No. 3 of the order. In that para the coordinate bench held that the order of ITAT in assessee's own case for Assessment Year 2012-13 in ITA No. 7714/Del/2017 wherein, as per para No. 26 the coordinate bench held that the expenditure on the signage is allowable to the assessee as revenue expenditure signage are fixed at dealers premises and it dies bit satisfy the test of ownership with the assessee. Thus it was held that same is revenue expenditure as under:- "3. Disallowance of expenditure on signages - A similar issue was considered and decided by the Tribunal in A.Y. 2012-13 in ITA No. 7714/Del/2017. The relevant findings read as under:- "26. We have heard the rival contentions and perused the record. The expenditure was incurred on signage for display of the name of the assessee at the dealer's premises. However, once the same is fixed at dealers site then the Courts have held that it does not satisfy the test of ownership with the assessee and the expenditure is to be allowed as revenue expenditure, We find support from the ratio laid down by the Hon'ble Delhi High Court in CIT vs Honda Siel Power Products Ltd.(supra). Thus, we are of the view that the expenditure to the extent claimed by the assessee is to be allowed in the hands of the assessee and not/the entire expenditure. Ground of appeal

No. 6 is thus partly allowed." 3.1 Respectfully following the decision of the coordinate bench, we hold accordingly."

14. Therefore, respectfully following the decision of the coordinate bench in assessee's own case ground No. 8 of the appeal of the assessee is allowed holding that signage expenditure of Rs.1,65,62,386/- is revenue in nature.”

13. Therefore respectfully following the decision of the coordinate bench in assessee’s own case, we also hold that signage expenditure is revenue in nature. Accordingly the disallowance of Rs.7,545,398/– is deleted and ground number 7 of the appeal of the assessee is allowed.” Following the aforesaid order of the coordinate Bench, we delete the disallowance and allow this ground of the assessee.”

Relying upon the past assessment history, the Assessing Officer disallowed assessee’s claim by treating the expenses to be capital in nature. Further, he also observed that such expenses are not supported by agreement. While deciding the issue, learned DRP directed the Assessing Officer to verify whether the decision of the Tribunal in favour of the assessee on identical issue has been accepted by the department and in case it is not so, then to follow the directions of the Penal in assessment year 2015-16 and disallow it.

25. Having considered rival submissions, we find that both the Assessing Officer and learned DRP have disallowed assessee’s claim relying upon their respective decisions in past assessment years. It is further evident, though, learned DRP was conscious of the fact that the issue has been decided in favour of the assessee by the Tribunal, however, for keeping the issue alive, it has directed the Assessing Officer to follow the directions of the DRP in case department has not accepted the orders of the Tribunal. Thus, the aforesaid facts clearly reveal that the departmental authorities have not found any factual difference between the impugned assessment year and past assessment years qua the disputed issue. However, learned Departmental Representative has made an attempt to provide a different dimension to the issue by making certain factual submissions, which were neither dealt with by the Assessing Officer nor ld. DRP.

Nor they are the reasons for disallowance of assessee’s claim. It is observed, while deciding identical issue in assessee’s own case in assessment year 2017-18 (supra), the coordinate Bench followed its earlier decision in assessment year 2016-17 and deleted the disallowance. The relevant observations of the coordinate Bench in this regard are as under :

The assessee contested the aforesaid disallowance before learned DRP. While disposing of the objections of the assessee, learned DRP directed the Assessing Officer to verify whether orders passed by the Tribunal in favour of the assessee on identical issue has been accepted by the Revenue and if not so, then to follow the directions of the panel in assessment year 2015-16.

16. Upon careful consideration and hearing both the sides, we find that this issue is squarely covered by the decisions of ITAT in assessee’s own case and the same was decided vide paras 16 to 18. For the sake of reference, we reproduced para 18 as under :- “18. The fact also shows that assessee was already engaged in the manufacturing of motorcycle and Scooter and payment of royalty expenses was not with respect to setting up of manufacturing facility. Therefore respectfully following the decision of the coordinate bench, we also allow ground number 9 of the appeal of the assessee and direct the learned AO to delete the addition of Rs.1,591,781,250/– on account of capitalisation of royalty expenses holding it to be revenue in nature. Accordingly, following the aforesaid decision of the coordinate Bench of the Tribunal, we delete the addition made by the AO. 30. In our considered opinion, there is no factual difference obtaining in the impugned assessment year compared to earlier assessment years. In fact, learned DRP has very categorically observed that the factual position on the issue remains identical to past assessment years. However, we must observe, before us, learned Departmental Representative attempted to make out a new case for Department by submitting that in the year 2016, the assessee has set-up a new plant in Gujarat for production of two wheelers. Thus, he submitted that the royalty payment made during the year must have included payment for obtaining technical knowhow for setting up a new start up of the plant, which is certainly in the nature of capital outlay resulting in enduring benefit to the assessee. Therefore, the disallowance of 25% out of the royalty expenses is justified.

Having gone through the facts and material available on record, we do not find any good reason to deviate from the consistent view taken by the Tribunal on the issue in earlier assessment years. Hence, respectfully following the decision of the Co-ordinate Bench in Assessment Years 2012-13 to 2017-18 (Supra), we direct the Assessing Officer to allow assessee’s claim.

Moreover, an amendment has been brought to section 40(a)(ii) by Finance Act, 2022 with retrospective effect from 01.04.2005 by inserting Explanation-3, which explains that the term “tax” shall include and shall be deemed to have always included any surcharge or cess, by whatever name called, on such tax. Thus, in view of said amendment in the Act, assessee’s claim is unsustainable. Accordingly we uphold the decision of the departmental authorities on this issue.

Ground raised is dismissed.

284 ITR 323 (SC).

Since the issue has not been factually examined by the departmental authorities, as they rejected assessee’s claim summarily, we are inclined to restore the issue to the Assessing Officer for de novo adjudication after giving due and reasonable opportunity of being heard to the assessee. Ground is allowed for statistical purposes.

Order pronounced in the open court on 05/02/2024.