HERO MOTOCORP LIMITED,NEW DELHI vs. JCIT, NEW DELHI

INCOME TAX APPELLATE TRIBUNAL DELHI BENCH ―I-2‖: NEW DELHI BEFORE SH. I. C. SUDHIR, JUDICIAL MEMBER AND SHRI PRASHANT MAHARISHI, ACCOUNTANT MEMBER

ITA No. 1545/Del/2015 (Assessment Year: 2010-11)

Hero MotoCorp Limited, JCIT, 34, Basant Lok, Vasant Range-1, New Delhi Vs. Vihar, New Delhi PAN: AAACH0812J (Appellant) (Respondent)

ITA No. 2424/Del/2015 (Assessment Year: 2010-11)

DCIT, M/s. Hero Moto Corp. Circle-11(1), Ltd., 34, Community Vs. New Delhi Centre, Basant Lok, Vasant Vihar, New Delhi-110057 (Appellant) (Respondent)

ITA No. 1609/Del/2016 (Assessment Year: 2011-12)

DCIT, M/s. Hero Moto Corp. Circle-11(1), Ltd., 34, Community

Page 2 of 484 New Delhi Vs. Centre, Basant Lok, Vasant Vihar, New Delhi-110057 (Appellant) (Respondent)

ITA No. 914/Del/2016 (Assessment Year: 2011-12)

M/s. Hero Moto Corp. DCIT, Ltd., 34, Community Circle-11(1), Vs. Centre, Basant Lok, New Delhi Vasant Vihar, New Delhi-110057 (Appellant) (Respondent)

Assessee by : Sh. Ajay Vohra, Sr. Adv Sh. Gaurav Jain, Adv Ms. Bhavita Kumar, Adv Revenue by: Sh. NC Sawain, CIT DR Date of Hearing 28/07/2016 Date of pronouncement 24/10/2016

O R D E R PER BENCH 1) These are the cross appeals filed by the parties for two assessment years namely assessment year 2010-11 and 2011- 12 against Assessment Orders under section 143 (3) of the

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 3 of 484 Income Tax Act (in short ‗the Act ‗) passed by the Ld. Assessing officer (in short ‗AO‘ ) pursuant to directions of Ld. Dispute Resolution Panel (in short ‗DRP‘) under section 144C (13) of the Income Tax Act on draft assessment order passed by the Ld. Assessing Officer under section 143 (3) of the Income Tax Act incorporating adjustments proposed by the Ld. Transfer Pricing Officer (in short ‗TPO‘) in his order under section 92CA (3) of the Income Tax Act. 2) As common issues are involved in both these appeals, we first deal with those issues in deciding the appeal of the parties for assessment year 2010-11 and subsequently if no change in the facts and circumstances of the issues involved are found, we will accordingly apply our decision in appeal for assessment year 2010 – 11 while disposing of the appeal for assessment year 2011 – 12 of the parties. Therefore, firstly we record facts of the case for assessment year 2010 – 11. 3) The assessee is a joint-venture company between Hero group, India and Honda motor Co, Japan engaged in the business of manufacturing of two wheelers. As stated by appellant company , the assessee is having 59% share of motorcycle market in India. For assessment year 2010 – 11 assessee filed return of income on 30 September 2010 declaring total income of Rs. 16302076983/-. As the assessee was involved in international transactions with its associated enterprises, the learned assessing officer made reference to the learned transfer-pricing officer for examining the determination of arm‘s length price of those international transactions. The Ld. Transfer pricing officer passed an order under section 92CA (3) on 31/12/2013. Subsequently the Ld. assessing officer passed draft assessment order under section 143 (3) of the income tax act 1961 on 31st of March 2014 wherein against the returned income of Rs. 16302076984/-, the total income was determined at Rs. Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 4 of 484 74551967470/-. There were 60 additions / disallowances / adjustments were made to the returned income of the assessee. The above draft assessment order also included adjustment under section 92CA of the income tax act proposed by the Learned transfer pricing officer amounting to Rs. 319897455/-. Against the draft assessment order of the Ld. assessing officer, assessee preferred objection before the Ld. dispute resolution panel. The Ld. Dispute resolution panel who vied its directions under section 144C (5) dated 26/12/2014 disposed of the objections raised by the assessee and gave direction to the learned assessing officer. Therefore after incorporating the directions given by the Learned dispute resolution panel on various objections filed by the assessee the Ld. assessing officer passed order under section 143(3) read with section 144C of the income tax act 1961 on 20/02/2015 wherein against the returned income of the assessee of Rs. 16302076983/- the assessment was made at total income of Rs. 91587547750/-. Against the assessment order, assessee has preferred appeal before us and revenue has filed appeal against the direction of the dispute resolution panel. 4) The assessee has raised the following grounds of appeal for the Assessment Year 2010-11 in ITA No. 1545/Del/2015:- ―1. That the assessing officer erred on facts and in law in completing assessment under section 143(3) read with section 144C of the Income-tax Act, 1961 ('the Act'), vide order, dated 20.02.2015, at an income of Rs. 9158,75,47,743/- as against the income of Rs. 1630,20,76,9847- returned by the appellant. 2. That the assessing officer erred on facts and in law in enhancing the value of closing inventory of raw materials & components and thereby income of the appellant by Rs. 117.43 lacs in respect of freight inward expenses and import clearing charges incurred in relation to procurement of raw-material/components, alleging the same to be attributable to the closing stock of the aforesaid goods.

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 5 of 484 2.1. That on the facts and circumstances of the case, the assessing officer failed to appreciate that in accordance with the consistent, regular and accepted method of valuation of inventory followed by the assessee, the aforesaid costs being incurred in exceptional situations, is not to be considered for the purposes of valuation of closing inventory. 2.2 That the assessing officer erred on facts and in law in not appreciating that the aforesaid addition was revenue neutral inasmuch as the same would warrant enhancement in the value of opening stock in the immediately succeeding year, which does not affect the tax liability to be collected from the appellant as a whole. 3. That the assessing officer erred on facts and in law in enhancing the value of closing inventory of finished goods and thereby income of the appellant by an amount of Rs. 6.40 lacs, in respect of cost of rejection of semi finished goods and obsolete items. 3.1 That on facts and circumstances of the case, the assessing officer failed to appreciate that the aforesaid costs was abnormal in nature and, therefore, in accordance with the consistent, regular and accepted method of accounting was not considered for the purpose of valuation of closing inventory. 3.2 Without prejudice, the assessing officer erred on facts and in law in not appreciating that the aforesaid addition was revenue neutral. 4. That the assessing officer erred on facts and in law in making a disallowance of Rs. 61,59,89,710 in respect of provision made at the end of the year towards net increase in prices of raw material already supplied by the vendors upto 31.03.2010, with retrospective effect, on the ground that basis of creating the said provision was not comprehensible. 4.1 That on the facts and circumstances of the case, the assessing officer erred in observing that as per the terms of purchase order, rates negotiated with the vendors cannot be modified from a prior date, thereby holding that provisions have been incorrectly made by the assessee and are not allowable expenditure. 4.2 That the assessing officer erred in not appreciating that the provision to the extent of Rs. 10.34 crores was made on the basis of actual price revisions approved upto the end of the relevant year and provision to the extent of Rs. 51.25 crores Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 6 of 484 was made on the basis of management's best estimate, on a scientific basis, which is an allowable business expenditure, as per mercantile system of accounting, under section 37(1) of the Act. 5. That the assessing officer erred on facts and in law in making an addition of Rs.3.02 lacs by estimating the value of scrap lying in stock as at the end of the relevant previous year, on hypothetical / notional basis. 6. That the assessing officer erred on facts and in law in making addition of Rs.38,22,168, in respect of liquidated damages recovered from transporters for late delivery of goods to the customers during the relevant year, which were ascertained in the succeeding year, holding the same to be income of the relevant assessment year. 6.1 That the assessing officer erred on facts and in law in not appreciating that the aforesaid income on account of liquidated damages recoverable from customers accrued in the succeeding year and did not constitute income of the relevant assessment year. 6.2 That the assessing officer erred on facts and in law in observing that the appellant failed to substantiate that the said income did not accrue in the relevant year. 7. That the assessing officer erred on facts and in law in disallowing a sum of Rs.19,65,81,820 in respect of provision for advertisement expenses incurred at the head office made at the end of the relevant previous year, which were reversed in the succeeding year, alleging the same to be excessive. 7.1 That the assessing officer erred on facts and in law in alleging that the provision for expenses at the end of relevant previous year was not made on scientific basis and was not a reasonable estimate and, therefore, contingent in nature. 7.2 That the assessing officer erred on facts and in law in observing that the appellant failed to substantiate the method of creating the aforesaid provision. 8. That the assessing officer / the Transfer Pricing Officer (the TPO) erred on facts and in law in making adjustment of Rs.31,98,97,455 to the income of the assessee on account of the following international transactions disregarding the benchmarking analysis applying Transactional Net Margin Method ("TNMM") undertaken by the assessee:

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 7 of 484 s. International Amount of Proposed Difference No. Transactions international Arm's length transaction shown price of the by the assessee international transaction 1. Payment of Export 159,127,093 NIL 159,127,093 Commission 2. Payment of Model 159,044,986 NIL 159,044,986 Fee 4. Royalty paid on 1,725,376 NIL 1,725,376 exports made to the AEs. Total 319,897,455

8.2 That the TPO erred on facts and in law in holding that benchmarking analysis undertaken by the assessee in respect of the international transactions of payment of export commission, model fee and royalty by aggregating with other transactions and applying TNMM was incorrect and each such transaction is required to be analyzed separately. 8.3 That the TPO erred on facts and in law in determining the arm's length price of international transaction of payment of export commission of Rs. 15,91,27,093 at NIL, allegedly applying CUP method holding that no independent party shall pay such commission in similar circumstances since – (a) An independent enterprise would compensate another party for ceding territory to it only when the latter party either withdraws from that territory or some restrictions are placed upon it. Nothing of that sort has happened to the AE. The AE continues its business as usual in those overseas territories. (b) The restriction to export products was imposed by the AE itself. It is not as if after the AE lifted its restriction some loss was caused to it that it needed to claim compensation from the assessee. The assessee is part of the Honda group. If the AE places a restriction by one agreement, lifts with another agreement and then claims compensation, the entire scheme appears to be nothing but a device to shift profits out of India. (c) The assessee's exports to South East Asian countries consists of motorcycles of 100cc, 125cc and 150cc capacity. The AE does not have a manufacturing facility for these classes of motorcycles in these countries. Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 8 of 484 (d) If one looks at the entire arrangement in its entirety, it will be abundantly clear that the AE has simply used the assessee to position these products in the South East Asian markets at competitive prices. Neither has it actually ceded the market nor has it conferred any special benefit upon the assessee. (e) The AE is not making any special effort for the assessee. Hence, if the assessee wishes to operate as an independent enterprise, it would have first assessed as to what is the damage that is being caused to the AE by its entering those territories. (f) If the parent company allows an AE to use an already established marketing network it does not mean that a special benefit is passing to the assessee. The parent company will not allow a third party access to its network. Hence, the access that the assessee has gained to the marketing / dealer network of HMCL is incidental to its being part of the group. As per the OECD guidelines such incidental services do not call for a separate payment. (g) It is evident from para 7.4, 7.5 & 7.6 of OECD guidelines that the key measures in identifying intra group services and in applying arm's length test are whether - • the services have been provided in order to meet specific need of the recipient; • any benefit has accrued to the recipient; • in comparable circumstances an independent enterprise would have been willing to pay an independent thirty party to do so. From the available details, it is more than evident that the assessee has not received any service that an independent entrepreneur would have been willing to pay for. (h) It can clearly be seen that all the responsibility of activities connected to export of goods lies on the shoulders of the assessee. An export agent would not leave it to principal to carry out all these functions. Hence, there is no comparison between the AE and an export agent in this matter. (i) The assessee also enters the South Asian markets with products that the AE, HMCL does not sell there. Yet the assessee has to pay an export commission, while the AE gains an entry into India supported by the assessee and

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 9 of 484 eventually enters the motorcycle segment that the assessee is operating in, albeit after a few years but the assessee receives nothing. (j) It is only the associated enterprise that has only benefited from the export of the product by the assessee as the same is to support its existing subsidiaries or group companies and to promote market for its products in those countries. 8.4 That the TPO erred on facts and in law in determining the arm's length price of international transaction or payment of model fee of Rs. 15,90,44,986 at NIL, allegedly on the following grounds – (a) The assessee is equally responsible for the technology upgradation that is taking place in India; (b) The assessee pays model fee and royalty for the same set of service; 8.5 That the Transfer Pricing Officer erred on facts and in law in holding that the assessee was engaged in undertaking R&D activity for development of new models. 8.6 That the Transfer Pricing Officer erred on facts and in law in holding that arm's length price of international transaction of payment of royalty on exports made to AEs of Rs.17,25,376 was NIL on the ground that – (a) the assessee was acting as a contract manufacturer and hence royalty paid as percentage of sale to the associated enterprises is not at arm's length as it amounts to collecting royalty on the sale to itself. (b) the assessee is making part of its sales to related parties and the benefit of purchasing components is reaped by the associated enterprise, the payment of royalty does not conform to arm's length price. 8.7 That the Transfer Pricing Officer erred on facts and in law in not appreciating that the payment of export commission, model fee and royalty was validly benchmarked applying TNMM method as most appropriate method and that no adverse inference could be drawn on this account.

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 10 of 484 8.8 That the Transfer Pricing Officer erred on facts and in law in computing adjustment on account of international transaction of payment of export commission, model fee and royalty without applying any of the prescribed methods. 9. That the assessing officer erred on facts and in law in disallowing under section 40(a)(ia) expenditure of Rs. 64,08,000 incurred on account of provision towards advertisement and publicity expenses created at the end of year, on the ground that the assessee failed to deduct tax at source therefrom under section 194C of the Act. 9.1 That the assessing officer erred on facts and in law in holding that an assessee is obliged to withhold tax in respect of provisions, even where the (i) exact amount identifiable, at the time of creating the provision. 10. That the assessing officer erred on facts and in law in disallowing amount of Rs. 1,47,34,700 on account of provision made towards commission paid on institutional sales to dealers, on the ground that the assessee failed to deduct tax at source under section 194H from the amount of aforesaid provision invoking provision of section 40(a)(ia) of the Act. 10.1 That the assessing officer erred on facts and in law in not appreciating that since the contract between the dealers and the appellant was on principal to principal basis, the provisions of section 194H were not applicable on the aforesaid amount of commission. 10.2 That the assessing officer erred on facts and in law in observing that the appellant did not dispute applicability of section 194H on the aforesaid amount of provision made towards commission payable to dealers.

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 11 of 484 Without Prejudice 10.3 Without prejudice, that the assessing officer erred on facts and in law in not appreciating that since payees were not identified nor any right to receive commission accrued in the hands of payees, there was no obligation on assessee to deduct tax at source under section 194H of the Act. 10.4 That the assessing officer erred on facts and in law in holding that an assessee is obliged to withhold tax in respect of provisions, even where the (i) exact amount payable to recipient(s), subject to TDS, and/or (ii) the actual recipients are not identifiable, at the time of creating the provision. 10.5 That the assessing officer/DRP erred on facts and in law in holding that even if the payees/recipients have considered the impugned payments as income and paid tax thereon in the year of receipt will not militate against disallowance under section 40(a)(ia) of the Act during the year under consideration. 11. That the assessing officer erred on facts and in law in disallowing purchases to the extent of Rs.72.40 crores made from certain parties related with the assessee, in terms of Accounting Standard 18 issued by the Institute of Chartered Accountants of India, alleging the same to be excessive. 11.2 That on the facts and circumstances of the case, the assessing officer failed to appreciate that the expenditure was actually incurred for the purposes of business and no part of the same was excessive or unreasonable. 11.3 That on the facts and circumstances of the case, the assessing officer erred in not appreciating that the Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 12 of 484 aforesaid parties were not related to the assessee in terms of section 40A(2)(b) of the Act and hence no disallowance of expense on the ground that payment made to such parties was excessive, could be made. 11.4 That the assessing officer erred on facts and in law in alleging that the assessee had maintained its relationship with the parties in a manner that they do not qualify for being related parties as per the provisions of section 40A(2) of the Act. 12. That the assessing officer erred on facts and in law in disallowing expenditure of Rs. 2 cores incurred on account of advisory services availed from Hero Corporate Services Ltd. alleging that the assessee failed to establish nexus of services availed from the aforesaid party with the business of assessee company and, therefore, not being incurred wholly and exclusively for the purpose of business. 12.1 That the assessing officer erred on facts and in law in observing that since Hero Corporate Services Ltd. was related to assessee in terms of AS 18, although not related in terms of section 40A(2)(b) of the Act, the Revenue had powers to determine the reasonableness of the aforesaid payment made by the assessee to the said party. 13. That the assessing officer erred on facts and in law in holding that purchases made from certain vendors aggregating to Rs. 3828.78 crores are disallowable under section 40(a)(ia) on the ground that assessee failed to deduct tax at source (TDS) therefrom under section 194C of the Act. 13.1 That the assessing officer erred on facts and in law in observing that contracts entered with the aforesaid vendors

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 13 of 484 were in the nature of 'work contract' and, therefore, payments made thereunder were subject to TDS under section 194C of the Act. 13.2 That on the facts and circumstances of the case, the assessing officer failed to appreciate that the provisions of section 194C of the Act were not applicable in relation to the aforesaid transactions, as the same were in the nature of contract of sale. 13.3 That the assessing officer erred on facts and in law in treating the aforesaid purchase contract as 'work contracts', simply because, the assessee, while placing the purchase orders to the vendors, in addition to specifications of the products to be purchased from the vendors, also specified to the vendors the name of suppliers and purchase price of raw materials/components to be used in manufacture of products by such vendors. 13.4 That the assessing officer erred on facts and in law in observing that by arranging the transaction in the aforesaid manner, the assessee had adopted colorable device to avoid deduction of tax at source, 13.5 Without prejudice, the assessing officer erred on facts and in law in not appreciating that the assessee had a bonafide belief that tax was not deductible at source on aforesaid transaction of supply of goods. 13.6 Further, without prejudice, that the assessing officer erred on facts and in law in not appreciating that the disallowance under section 40(a)(ia) against the aforesaid expenditure cannot exceed the outstanding liability at the end of the year.

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 14 of 484 13.7 Further without prejudice, that the assessing officer erred on facts and in law in disallowing the aforesaid purchases for alleged failure to deduct tax at source from payments made there against, without appreciating that, since the recipient had considered sales to the appellant as part of the taxable income on which tax was duly paid, the same could not have been disallowed in the hands of appellant under section 40(a)(ia) of the Act. 14, That the assessing officer erred on facts and in law in disallowing aggregate expenditure of Rs. 8,29,765 incurred on account of booking of hotel to convene training courses on the ground that assessee failed to deduct tax at source from such payments under section 1941 of the Act, invoking provisions of section 40(a)(ia) of the Act. 14.1 Without prejudice, that the assessing officer erred on facts and in law in not appreciating that since the assessee harboured a bona fide belief that no tax was required to be deducted there from, no disallowance was warranted under section 40(a)(ia)of the Act 14.2 Without prejudice, the assessing officer erred on facts and in law in not appreciating that no disallowance against the aforesaid expenditure could be made exceeding the outstanding liability as at the end of the year. 14.3 Further, without prejudice, the assessing officer erred on facts and in law in not appreciating that since the payees have also paid tax on the income receivable from the assessee, no disallowance could be made under section 40(a)(ia) of the Act for alleged default in deduction of tax at source by the assessee.

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 15 of 484 15. That the assessing officer erred on facts and in law in disallowing expenditure of Rs. 36,88,02,598 incurred towards quarterly target and turnover discount and trade discount of Rs. 27,74,47,608 given to the dealers/customers on the ground that the assessee failed to deducted tax at source there from under section 194H of the Act, invoking provisions of section 40(a)(ia) of the Act. 15.1 That the assessing officer erred on facts and in law in not appreciating that the aforesaid discounts were offered under contracts entered into with the dealers on a principal to principal to basis, and did not constitute 'commission' as referred to in section 194H of the Act. 16. That the assessing officer erred on facts and in law in disallowing expenditure of Rs. 1,56,12,424 incurred by way of payment to FX Enterprises Solutions Pvt Ltd., towards reimbursement of cost of gifts distributed to customers, on the ground that aforesaid payments were made under a contract for carrying out work, and since tax was not deduced under section 194C of the Act from the said payment, the same was disallowable under section 40(a)(ia) of the Act. 16.1 That on the facts and circumstances of the case, the assessing officer failed to appreciate that there was no contract for carrying out work between the assessee and FX Enterprises Solutions Pvt. Ltd., and the aforesaid payment was not covered within the ambit of provisions of section 194C of the Act. 16.2 That on the facts and circumstances of the case, the assessing officer failed to appreciate that the aforesaid

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 16 of 484 payment was made against purchases and not for any work carried out by FX Enterprises Solutions Pvt. Ltd. 16.3 That the assessing officer erred on facts and in law in not following directions of the DRP and not appreciating that similar issue was allowed by the assessing officer in set aside proceedings for AY 2007-08. 16.4 Without prejudice, that the assessing officer erred on facts and in law in not appreciating that since the assessee harboured a bona fide belief that no tax was required to be deducted there from, no disallowance was warranted under section 40(a)(ia)of the Act. 16.5 Without prejudice, the assessing officer erred on facts and in law in not appreciating that no disallowance against the aforesaid expenditure could be made under section 40(a)(ia)of the Act exceeding the outstanding liability as at the end of the year. 16.6 Further, without prejudice, the assessing officer erred on facts and in law in not appreciating that since the payees have also paid tax on the income receivable from the assessee, no disallowance could be made under section 40(a)(ia) of the Act for alleged default in deduction of tax at source by the assessee. 17. That the assessing officer erred on facts and in law in disallowing under section 40(a)(ia) expenditure of Rs. 222.13 lacs incurred on account of payment to Forum I Aviation Pvt. Ltd., on the ground that the assessee failed to deduct tax at source there from under section 1941 of the Act. 17.1 That the assessing officer erred on facts and in law in observing that the aforesaid payments were subject to TDS Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 17 of 484 under section 1941, instead of section 194C of the Act applied by the assessee. 17.2 Without prejudice, that on the facts and circumstances of the case, the assessing officer failed to appreciate that an expenditure cannot be disallowed under section 40(a)(ia) of the Act if tax has been deducted at source there from under the provisions of the Act, notwithstanding that tax as per the assessing officer was deductible under a different provision than that applied by the assessee. 17.3 Further Without prejudice, that the assessing officer erred on facts and in law in not appreciating that since the assessee harboured a bona fide belief that no tax was required to be deducted there from, no disallowance was warranted under section 40(a)(ia) of the Act 17.4 Without prejudice, the assessing officer erred on facts and in law in not appreciating that the disallowance against the aforesaid expenditure could not be made exceeding the outstanding liability as at the end of the year. 17.5 Further, without prejudice, the assessing officer erred on facts and in law in not appreciating that since the payees have also paid tax on the income receivable from the assessee, no disallowance could be made under section 40(a)(ia) of the Act for alleged default in deduction of tax at source by the assessee. 18. That the assessing officer erred on facts and in law in disallowing additional depreciation of Rs.86.15 lacs claimed under section 32(l)(iia) of the Act, in respect of computers installed at supervisory offices located in the compound of factory at Gurgaon / Dharuhera / Haridwar plant, on the ground, that in terms of proviso to said section

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 18 of 484 additional depreciation is not admissible on any machinery or plant installed in any office premises. 19. That the assessing officer erred on facts and in law in holding that expenditure aggregating to Rs. 4,54,32,77,040 (Rs. 454.32 crores), incurred by the assessee during the relevant previous year on account of royalty, technical guidance fees and model fees paid to Honda Motor Co., Japan, ('Honda') under the 'License and Technical Assistance Agreement' ("LTAA") was capital in nature and not allowable deduction. 19.1 That the assessing officer erred on facts and in law in making net disallowance of Rs. 3,28,68,80,008 (Rs. 328.68 crores), out of total expenditure of Rs. 454.32 crores on account of royalty/technical guidance fee/model fee and cess on model fee, after reducing amount of Rs. 1607.70 lacs disallowed under section 92CA (royalty of Rs. 17.25 lacs and model fee of Rs. 1590.45 lacs) and Rs. 109.56 crores on account of depreciation @ 25% on said expenses. 19.2 That the assessing officer erred on facts and in law in observing that the assessee acquired capital assets in the nature of intellectual property rights and patents from Honda on payment of royalty and technical guidance fees under the LTAA. 19.3 That the assessing officer erred on facts and in law in observing that the assessee received benefit of enduring nature under the LTAA, since - (i) the appellant obtained exclusive right to manufacture and sell the products within the territory of India and, (ii) the license had a degree of perpetuity, as it was being renewed and extended year after year.

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 19 of 484 19.4 That the assessing officer erred on facts and in law in observing that payments under the LTAA covered consideration for setting up of manufacturing facility for the appellant. 19.5 Without prejudice, that the assessing officer erred on facts and in law in treating 100% expenditure incurred on account of royalty, technical guidance fees and model fees as capital expenditure as opposed to 25% of similar expenditure held to be capital expenditure in earlier years. 20. That the assessing officer erred on facts and in law in treating gains arising from sale of investments made during the year as business income, instead of "capital gains" as considered by the assessee. 20.1 That the assessing officer erred on facts and in law in observing that investments were made by the assessee with a view to earn profit from selling the same at a later stage and, therefore, profits were taxable under the head "business income". 20.2 That the assessing officer erred on facts and in law in observing that since the turnover from sale of investments was higher than the turnover from business of selling motor vehicles, therefore, the assessee was primarily engaged in activity of investments, which was to be regarded as business activity and, accordingly, income arising therefore was taxable under the head "business income". 21. That the assessing officer erred on making disallowance of Rs. 2,22,50,0637- on account of PMS fee on protective basis on the ground that same should be disallowed in the event income from PMS scheme is held to be taxable under the head "capital gains", in further appeal.

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 20 of 484 21.1 Without prejudice, the assessing officer erred on facts and in law in not issuing directions that in the event income is held to be taxable under the head "capital gains", the aforesaid expenditure be allowed as deduction while computing income under that head. 22. That the assessing officer erred on facts and in law in making additional disallowance of Rs,145.62 lacs under section 14A of the Act, by applying provisions of Rule 8D of the Rules. 22.1 That the assessing officer erred on facts and in law in applying provisions of Rule 8D of the Rules, without reaching a finding/recording satisfaction as to the incorrectness of the suo moto disallowance of expenses made by the assessee under section 14A of the Act. 22.2 That the assessing officer erred on facts and in law in attributing interest expenditure incurred during the year towards earning of exempt income by applying provisions of Rule 8D of the Rules. 22.3 Without Prejudice, that the assessing officer erred on facts and in law in not following directions of the DRP and compute the disallowance as per method followed in the assessment order read with the directions of ITAT in the assessment year 2007-08. . ; 23. That the assessing officer erred on facts and in law in enhancing the value of closing inventory and thereby income of assessee by Rs.15,65,000 in respect of proportionate amount of depreciation on model fee incurred during the year and debited to the profit and loss account, alleging the same to be directly related to manufacture of

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 21 of 484 finished goods and, therefore, attributable to the closing stock of such goods, 24. That the assessing officer erred on facts and in law in disallowing expenditure of Rs.34,65,552 incurred on advertisement qua death anniversary of Late Shri Raman Munjal, being the Founder of the assessee-company, on the ground that same was not incurred for the purpose of business. 25. That the assessing officer erred on facts and in law in making disallowance of Rs.29,50,00,000/- on account of commission paid to Managing Director, Shri Pawan Munjal under section 36(l)(ii) of the Act on the ground that commission was paid in lieu of distribution of dividend to him, who was also shareholder of the assessee company. 25.1 That the assessing officer erred on facts and in law in holding that the appellant failed to justify the commercial expediency for making the aforesaid payment of commission to the Managing Director. 25.2 That on the facts and circumstances of the case the assessing officer failed to appreciate that the commission was paid to Shri Munjal in lieu of services rendered by him and not in lieu distribution of profits. 25.3 That the assessing officer erred on facts and in law in not appreciating that dividend was separately distributed amongst all the shareholders, including Shri Munjal and thus, payment of commission was not in lieu of distribution of dividend. 26. That the assessing officer erred on facts and in law in disallowing deduction of Rs, 8,07,76,420/- claimed under

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 22 of 484 section 801A of the Act in respect of captive power generating unit situated at Gurgaon. 26.1 That the assessing officer erred on facts and in law in computing income of the power generating unit by considering the rate of Rs. 4.39 per unit, at which power was supplied by State Electricity Board, as the 'market price' of the power, supplied by that unit to the vehicle manufacturing unit of the assessee, as against rate of Rs. 8.75 per unit (cost of generation of power at Rs. 7.61 per unit + markup of 15%) adopted by the assessee. 26.2 That the assessing officer erred on facts and in law in not appreciating that the price at which electricity was supplied by HSEB was not reflective of 'market price' since electricity supply was not adequately available from HSEB at Gurgaon as per its requirement. 27. That the assessing officer erred on facts and in law, in disallowing net loss of Rs.7,14,232, arising on reinstatement of trade receivable in foreign currency with exchange rate prevalent at the end of the relevant previous year, on the ground that such loss is contingent and notional in nature, which is not an allowable business deduction. 27.1 That the assessing officer erred in noting the observations of the DRP that the aforesaid net loss was not allowable, since the same was speculative under section 43(5), without appreciating that the net amount of loss disallowed in the assessment order related to reinstatement of trade receivables and not in respect of any speculative transaction entered during the year.

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 23 of 484 28. That the assessing officer erred on facts and in law in disallowing expenditure of Rs.9,01,80,410 incurred on account of fee paid to M/s G2 RAMS India Pvt Ltd. under section 40(a)(ia) on the ground that the assessee failed to deduct tax at source there from under section 194J of the Act. Without prejudice 28.1 That the assessing officer erred on facts and in law in not appreciating that since tax was deducted at source from the aforesaid payment, albeit under section 194C, the aforesaid expenditure was not disallowable under section 40(a)(ia) of the Act. 28.2 That the assessing officer erred on facts and in law in not appreciating that provisions of section 40(a)(ia) were, even otherwise, not applicable, since the assessee was under bonafide belief that tax was liable to be deducted at source from the aforesaid payment under section 194C of the Act. 28.3 That the assessing officer erred on facts and in law in not appreciating, that since the recipient had, in any case, included the aforesaid receipt as part of taxable income, the aforesaid expenditure could not have been disallowed in the hands of assessee under section 40(a)(ia) of the Act. 28.4 That the assessing officer erred on facts and in law in not appreciating that since there was no liability outstanding as at the end of the relevant year, no part of the aforesaid expenditure was disallowable under section 40(a)(ia) of the Act. 29. That the assessing officer erred on facts and in law in disallowing deduction under section 80IC of the Act, aggregating to Rs.997,25,35,090, on an ad-hoc basis, on Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 24 of 484 the ground that the assessee failed to give sufficient documentary evidence substantiating fulfillment of conditions precedent for claiming deduction under that section, without pointing out any such single condition not being fulfilled by the assessee. 29.1 That the assessing officer erred on facts and in law in not appreciating that all the conditions precedent for claiming deduction under section 80IC were satisfied by the assessee. 30. That the assessing officer erred on facts and in law in disallowing deduction under section 80IC by an amount of Rs.6,25,55,736, being the amount of markup at 12.48% attributed over the value of goods, aggregating to Rs.50,12,47,888, procured from other non-eligible units, by applying the provisions of section 80IA(8) read with section 80IC(7) of the Act, on the ground that deduction under the former section needs to be computed by recording inter-unit transfer at market price. 30.1 That the assessing officer erred on facts and in law in holding that the auditor failed to disclose the factum of inter-unit transfer of goods and services in the audit report filed in Form No.lOCCB. 30.2 Without Prejudice, that the assessing officer erred in making a separate and additional disallowance of the aforementioned amount, without appreciating that the entire deduction claimed by the appellant u/s80IC has already been disallowed in entirety (challenged in ground of appeal no. 29 supra), resulting in double disallowance of the same amount to the total taxable income. -

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 25 of 484 31. That the assessing officer erred on facts and in law in disallowing deduction under section 80IC by an amount of Rs.362,93,25,945, invoking provisions of section 80IA(10) of the Act, on the ground that eligible business at Haridwar earned extraordinary profits as compared to other non- eligible units by way of charging higher amount for basic price per unit of two-wheelers vis-a-vis price charged by other non-eligible units. 31.1 That the assessing officer erred on facts and in law in holding that part of the alleged extraordinary profits earned by the eligible unit should have been attributed to the head office on account of sales/marketing set-up at head-office. 31.2 Without Prejudice, that the assessing officer erred in making a separate and additional disallowance of the aforementioned amount, without appreciating that the entire deduction claimed by the appellant u/s80IC has already been disallowed in entirety (challenged in ground of appeal no. 29 supra), resulting in double disallowance of the same amount to the total taxable income. 32. That the assessing officer erred on facts and in law in disallowing deduction under section 80IC of the Act by an amount of Rs. 497.42 crores, on the ground that part of the manufacturing activity(ies) at Haridwar were outsourced and, therefore, profit attributable to such outsourced activity(ies) shall not be allowable as deduction. 32.1 That the assessing officer erred on facts and in law in drawing adverse inference that part of manufacturing activity(ies) at Haridwar unit were outsourced on the basis of lower consumption of power per unit at Haridwar plant vis-a-vis rate of power consumption at other two plants.

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 26 of 484 32.2 Without Prejudice, that the assessing officer erred in making a separate and additional disallowance of the aforementioned amount, without appreciating that the entire deduction claimed by the appellant u/s80IC has already been disallowed in entirety (challenged in ground of appeal no. 29 supra), resulting in double disallowance of the same amount to the total taxable income. 33. That the assessing officer erred on facts and in law in disallowing deduction under section 80IC of the Act by an amount of Rs.697.40 crores on the ground that part of profits earned by the eligible unit should have been attributed to advertisement and marketing activities carried out at head-office, and such profits were not derived from the business of manufacturing, which were only eligible for deduction under the aforesaid section. 33.1 That the assessing officer erred on facts and in law in holding that part of extraordinary profits earned by eligible unit at Haridwar were attributable to profit earned from marketing of products and brand value. 33.2 That the assessing officer erred on facts and in law in holding that since marketing activities were carried out at Head Office, therefore, the assessee should have transferred goods to Head Office at cost plus reasonable margin and the head-office should have earned higher profit on account of sales and marketing activities. 33.3 That the assessing officer erred on facts and in law in holding that the assets, such as, brand value and marketing network, were not owned by the eligible undertaking at Haridwar. Without Prejudice,

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 27 of 484 33.4 That the assessing officer erred on facts and in law in attributing profits to the manufacturing activities at Haridwar by applying net profit rate of 6.85%, on an arbitrary basis. 33.5 That the assessing officer erred on facts and in law in holding that the net profit rate of the first year of operation of business would be the rate of profit derived solely from manufacturing activities. 33.6 That the assessing officer erred on facts and in law in computing the net profit rate of 6.85% for attributing profits to the manufacturing activity at Haridwar, by computing net profit rate for the first year of operation of the assessee- company on an arbitrary basis. 33.7 Without Prejudice, that the assessing officer erred in making a separate and additional disallowance of the aforementioned amount, without appreciating that the entire deduction claimed by the appellant u/s80IC has already been disallowed in entirety (challenged in ground of appeal no. 29 supra), resulting in double disallowance of the same amount to the total taxable income. 34. That the assessing officer erred on facts and in law in disallowing deduction under section 80IC of the Act by an amount of Rs. 194,72,20,072 in respect of certain incomes earned by the eligible unit, on the ground that such incomes were not derived from the business of manufacture of specified articles or things. 34.1 That the assessing officer erred on facts and in law in holding that the other income aggregating to Rs. 194,72,20,072 is taxable under the head "income from other sources".

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 28 of 484 34.2 Without Prejudice, that the assessing officer erred in making a separate and additional disallowance of the aforementioned amount, without appreciating that the entire deduction claimed by the appellant u/s80IC has already been disallowed in entirety (challenged in ground of appeal no. 29 supra), resulting in double disallowance of the same amount to the total taxable income. 35. That the assessing officer erred on facts and in law in making disallowance of Rs.47,21,618/- incurred on repair, maintenance of various existing assets at Nagpur office premises, holding that said office premise was not put to use for business purposes of the assessee during the relevant assessment year. 36. That the assessing officer erred on facts and in law in treating expenditure incurred towards support of up gradation of softwares aggregating to Rs. 25.05 lakhs incurred by the assessee during the year as capital expenditure and making a net disallowance of Rs. 17.53 lakhs, after allowing depreciation @ 30%. 36.1 That on the facts and circumstances of the case the assessing officer failed to appreciate that the aforesaid expenditure did not result in acquisition of any new asset or benefit of any enduring nature in the capital field, to be regarded as capital in nature. 37. That the assessing officer erred on facts and in law in making disallowance of expenses of Rs, 118.58 crores incurred on repair and maintenance to plant and machinery and stores and tools consumed on the ground that total expenses cannot be accepted to be in the nature of "current

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 29 of 484 repairs" in the absence requisite information being provided by the assessee in the prescribed format. 37.1 That the assessing officer erred in making the above disallowance without examining the nature of such expenditure, simply on the basis of non furnishing of information in prescribed format, without pointing any single expenditure/voucher nor meeting the requirement of law. Without Prejudice 37.2 That on the facts and circumstances of the case, the additional disallowance of Rs. 59.29 crores made with respect to the aforesaid issue in the final assessment order vis-a-vis the amount of disallowance proposed in the draft assessment order is beyond jurisdiction and bad in law. 37.3 That the assessing officer erred on facts and in law in enhancing the original amount of disallowance of Rs. 59.29 crores, being 50% of the total expenditure in dispute, proposed in the draft assessment order to the total amount of expenditure of Rs. 118.58 crores, without any, directions from the DRP to enhance the amount of disallowance, and change in facts or new information coming to the possession of the assessing officer after the passing of the draft assessment order. 37.3 Further without prejudice, the assessing officer erred in not allowing depreciation on the aforesaid expenses. 38. That the assessing officer erred on facts and in law in disallowing depreciation to the extent of Rs.l,14,39,200/- in respect of office building at Nagpur, holding that said asset was not put to use for business purposes of the assessee during the relevant assessment year. Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 30 of 484 39. That the assessing officer erred on facts and in law in disallowing depreciation by an amount of Rs. 15,72,228 in respect of depreciation @ 100% claimed on rain water harvesting system at Daruhera unit on the ground that the aforesaid asset did not specifically fall under any sub clause of clause III(3)(ix) of Appendix to Income Tax Rules, 1962 ('the Rules'), entitling depreciation @100%. 39.1 That the assessing officer erred on facts and in law in not appreciating that aforesaid asset was constructed for the purpose of preventing water pollution which was covered under clause III (3)(ix) of Appendix I to the Rules and was thus, eligible for higher rate of depreciation. 39.2 That the assessing officer erred on facts and in law in not following binding directions of the DRP without appreciating that all details in respect of said claim were filed by the appellant. 40 That the assessing officer erred on facts and in law in disallowing depreciation by an amount of Rs. 1,56,37,228/- in respect of depreciation claimed @ 100% on secured land fill system at Haridwar unit on the ground that the aforesaid asset did not specifically fall under any sub clause of clause III(3)(ix) of Appendix to Income Tax Rules, 1962 ('the Rules'), entitling depreciation @100%.. 40.1 That the assessing officer erred on facts and in law in not following binding directions of the DRP without appreciating that all details in respect of said claim were filed by the appellant. 40.2 Without prejudice, the assessing officer erred in not allowing the expenditure incurred on construction of rain

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 31 of 484 harvesting system and land fill system as revenue expenditure under section 37(1) of the Act. 41. That the assessing officer erred on facts and in law in making ad hoc addition of Rs. 20,10,00,000, being 10% of additions made to plant and machinery and land and building during the year, on the ground that assessee failed to provide requisite information in the prescribed format. 41.1 That the assessing officer erred in making the ad hoc disallowance without examining the nature of such expenditure, simply on the basis of non furnishing of information in prescribed format, 41.2 That the assessing officer erred on facts and in law in not following binding directions of the DRP without appreciating that all details in respect of said claim were filed by the appellant in respect of such genuine expenditure 42. That the assessing officer erred on facts and in law in making an ad hoc disallowance of Rs. 40,12,000, being 50% of expenses incurred through credit card on the ground that assessee failed to provide requisite information in the prescribed format. 42.1 That the assessing officer erred in making the ad hoc disallowance without examining the nature of such expenditure, simply on the basis of non furnishing of information in prescribed format. 42.2 That the assessing officer erred on facts and in law in not following binding directions of the DRP without appreciating that all details in respect of said claim were filed by the appellant in respect of such genuine expenditure. 43. That the assessing officer erred in not giving credit in respect of TDS of Rs. 7,22,03,977. Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 32 of 484 44. That the assessing officer erred on facts and in law in charging interest under section 234D of the Act. 5) The revenue has raised the following grounds of appeal in ITA No. 2424/Del/2015 for assessment year 2010 –11:- ―1. Whether Hon'ble DRP was correct on facts and circumstances of the case and in law in deleting the addition of Rs. 156.51 lacs made by the AO on account of disallowance of write off obsolete stock in the draft order? 2. Whether Hon'ble DRP was correct on facts and circumstances of the case and in law in deleting the addition of Rs. 18,572/- made by the AO on account of disallowance of prepaid expenses in the draft order? 3. Whether Hon'ble DRP was correct on facts and circumstances of the case and in law in deleting the addition of Rs. 698.07 lacs made by the AO on account of disallowance of prior period expenses in the draft order? 4. Whether Hon'ble DRP was correct on facts and circumstances of the case and in law in deleting the addition of Rs, 501.77 lacs made by the AO on account of disallowance of software expenses charged to revenue in the draft order? 5. Whether Hon'ble DRP was correct on facts and circumstances of the case and in law in deleting the addition of Rs. 32.72 lacs made by the AO on account of disallowance of depreciation on wrong classification of assets under the head computers in the draft order? 6. Whether Hon'ble DRP was correct on facts and circumstances of the case and in law in deleting the addition of Rs. 404.84 lacs made by the AO on account of deemed dividend in the draft order? Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 33 of 484 7. Whether Hon'ble DRP was correct on facts and circumstances of the case and in law in deleting the addition of Rs. 9149.48 lacs made by the AO on account of disallowance of reimbursement of free service coupon u/s 40(a) (ia) in the draft order? 8. Whether Hon'ble DRP was correct on facts and circumstances of the case and in law in deleting the addition of Rs. 30,800/- lacs made by the AO on account of disallowance of legal and professional expenses u/s 40(a)(ia) in the draft order? 9. Whether Hon'ble DRP was correct on facts and circumstances of the case and in law in deleting the addition of Rs. 190.86 lacs made by the AO on account of disallowance of foreign traveling expenses in the draft order? 10. Whether Hon'ble DRP was correct on facts and circumstances of the case and in law in deleting the addition of Rs. 48.94 lacs made by the AO on account of disallowance of lease rent of Haridwar in the draft order? 11. Whether Hon'ble DRP was correct on facts and circumstances of the case and in law in deleting the addition of Rs. 44.17 lacs made by the AO on account of disallowance of Community Development Expenses in the draft order? 12. Whether Hon'ble DRP was correct on facts and circumstances of the case and in law in deleting the addition of Rs. 156.51 lacs made by the AO on account of disallowance of write off obsolete stock in the draft order? 13. Whether Hon'ble DRP was correct on facts and circumstances of the case and in law in deleting the Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 34 of 484 addition of Rs. 10.99 lacs made by the AO on account of disallowance of pre-operative expenses in the draft order? 14. Whether Hon'ble DRP was correct on facts and circumstances of the case and in law in deleting the addition of Rs. 182.55 lacs made by the AO on account of disallowance of expenses on account of Current Repairs in the draft order? 15. Whether Hon'ble DRP was correct on facts and circumstances of the case and in law in deleting the addition of Rs. 2.01 lacs made by the AO on account of disallowance of expenses on account of purchase of mobile phones in the draft order?‖ 6) Now we 1st take up the appeal of the assessee and deal with each of the grounds. 7) The first ground of the appeal of the assessee is against the overall assessed income, since no arguments have been advanced before us by the parties and admitted that this ground of appeal is general in nature, we dismiss this ground of appeal. 8) The second ground of appeal is against the action of the ld. Assessing Officer in enhancing the value of the closing inventory of raw material/ components and thereby income of the appellant by Rs. 117.43 lakhs in respect of freight inward expenses and import clearing charges incurred in relation to procurement of raw material and components stating that same to be attributable to the closing stock of those goods. Ld. assessing officer observed that assessee has not considered freight inward and import cleaning charges for inventory valuation which results in undervaluation of closing inventory based on the details submitted by the assessee it was found that the value of such impact of non inclusion of freight inward Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 35 of 484 and cleaning charges is Rs. 117.43 Lacs. On query during the course of assessment proceedings assessee submitted that most of the time it purchases material on CIF basis and therefore the cost of delivery of goods to location of the company are embedded in the purchase price hence , inward charges and important cleaning charges towards purchase of a material are preliminary included in the valuation of the closing stock. It further stated that only in rare cases the material is purchased on the urgent basis where the transportation charges and freight inward charges etc are to be incurred by the company. As those materials are purchased on the urgent basis necessity, they are not forming part of the closing stock and therefore no such cost is required to be added to the value of the closing stock of the assessee. The Ld. assessing officer rejected the contention of the appellant and stated that according to section 145 of the income tax act the value of the purchase and sale of goods and inventory for the purpose of determining the income chargeable under the head profits and gains of business or profession shall be in accordance with the method of accounting regularly employed by the assessee and it should further be adjusted to include the amount of any tax duty cess or fee actually paid or incurred by the assessee to bring the goods to the place of its location and condition as on the date of valuation. Ld. assessing officer further stated that according to accounting standard 2 valuation of inventory is that cost of inventory should comprise of all cost of purchases cost incurred in bringing the inventory to the present location and condition based on the above points, Learned assessing officer computed plant wise impact of non inclusion of freight inward and clearing charges on closing stock by applying the amount of closing stock of inventory with total purchases and total expenses. Therefore it computed the total overall impact Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 36 of 484 value of the closing stock of Rs. 117.43 lakhs which is required to be added to the valuation of the closing stock and consequently to the income of the assessee. On objection, before the learned dispute resolution panel, the opinion of the income tax officer was confirmed. The Learned DRP was also of the view that the addition on account of freight and inward charges., clearing import charges should be included in the valuation of inventory to the extent of Rs. 117.43 lakhs. Though the issue was covered by the decision of the coordinate bench in the favour of the assessee for earlier years in its own case, the Learned dispute resolution panel did not agree with that particular decision as it did not accept with the decision of the coordinate bench wherein on the principle of consistency, that if in the previous years the revenue has accepted the method of valuation of the closing stock by the assessee, this year it cannot be disturbed. The Learned DRP was also the view that principle of consistency does not operate against the law. Therefore, in the final assessment order the addition of Rs. 11743000/- was made to the total income of the assessee on account of increase in the valuation of the closing stock on account of inclusion of freight and clearing import charges. Assessee being aggrieved with the order of the Learned assessing officer has preferred appeal before us. 9) The Ld. authorized representative of the assessee submitted that Freight expenses of Rs 117.43 lacs were incurred on account of purchases under exceptional situation viz. material shortage, for immediate consumption. There is no time lag between the entry of raw-material in the factory premises and consumption thereof in the process of manufacturing. Since the invoice is received after receipt and consumption of material in the manufacturing process, the said expenditure is not, therefore, attributable to closing inventory. That apart, it would Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 37 of 484 further be appreciated that the appellant follows a consistent and regular method of not considering the aforesaid expenditure for purposes of valuing closing stock, which has always been accepted by the Revenue in past. Since the method of valuation of closing stock, without including such cost in the valuation of closing inventory having been consistently followed and accepted by the Revenue, no adjustment is called for in the year under appeal. The contention of the assessing officer that the aforesaid aspect was not examined in the earlier years (prior to AY 2007-08) and the Department had mistakenly accepted the valuation of closing stock exclusive of similar expenses in the past and thus, consistency cannot be a ground for following the same method of valuation of closing stock, without basis cannot be correct , since (i) firstly, the assessments in the past (prior to AY 2007-08) have been made under section 143(3) of the Act and it cannot be said that the issue of valuation of closing stock has not been examined, and (ii) secondly, there is no mistake in the accounting/valuation method followed by the appellant in relation to the aforesaid expenses, since the issue of inclusion of the aforesaid expenses in closing inventory would arise only if the relevant material is forming part of the inventory. It is submitted that the appellant‘s inventory is fast moving and by the time, the invoice for expenses is received, the relevant material is already consumed; in such a case, value of inventory cannot be increased by the amount of freight charges incurred in relation to such material. The contention of the AO/DRP that the revenue aspect will keep on changing from year to year, as there might be chances that in one year the closing inventory will be very high or it may be very low in other years not tenable in law. It would be appreciated that appellant is assessed to same rate of tax in each year and therefore the overall tax outflow would remain the same and revenue neutral. Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 38 of 484 It is respectfully submitted that the aforesaid issue, even otherwise, stands decided in favour of the appellant by the order of the Delhi Bench of the Tribunal in the appellant‘s own case for the assessment year 2007-08 and 2008-09. The Tribunal deleted the aforesaid addition on the ground that the appellant was following consistent system of accounting, which was unnecessarily disturbed by the Revenue, without change in facts. It was further held that tinkering with the accounting method was unjustified when the exercise did not materially alter the profits of the appellant company. 10) Ld DR relied up on the order of the ld. AO and LD DRP and submitted that there cannot be applied the principle of consistency in wrong method of valuation adopted by the assessee. 11) We have carefully considered the rival contentions. The company is a corporate entity therefore it has to value its closing stock according to the accounting standard 2 ‘valuation of inventories‘ issued by the Ministry of corporate affairs and ICAI. According to that accounting standard the closing stock of the finished goods is required to be valued including all cost of purchases, cost of conversion and other cost incurred in bringing the inventory to their present location and conditions. The contention of the appellant is that that it‘s all purchases are accounted for on CIF basis and therefore the suppliers are required to provide the goods at the factory location and therefore in the closing stock of inventory there cannot be any element of freight etc ,this issue has been considered by the coordinate bench in appellant‘s own case for A Y 2007-08 where in it has been held that :- ―7.13. We have considered the submissions and the material filed by both the parties. The issue in question is regarding

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 39 of 484 method of valuation of closing stock. The primary contention of the assessee is that it had to make emergency purchases and that these stocks so purchased were immediately consumed. In such exceptional situations, the assessee has directly accounted the freight and import clearing charges to the profit and loss account. This means that such raw material stocks are not part of closing stock at all. Further, this fact is not rebutted by the DR. 7.14. Though technically it can be argued that the value of closing inventory must include freight/ import clearing charges, the facts explained by the assessee are that the purchases in question are done under exceptional circumstances (which are well known in this type of industry) for immediate consumption. They are in fact consumed immediately i.e. as soon as raw material enters the factory premises which is not disputed by assessing officer, hence the question of such purchases being part of closing stock does not arise at all. In such a situation, when freight/ import charges are directly debited to the P&L A/c along with the value of the purchases, naturally the question of treating them as part of closing inventory does not arise. The assessee has acted and accounted in a proper and acceptable method. Therefore, the relief should be granted on this count alone. 7.15. Alternatively, the undisputed fact remains that the assessee has been consistently following the said method of accounting in the last many years and the Revenue has been accepting these facts and method of accounting without any demur. 7.16. The contention of the DRP that, the principle of res- judicata does not apply in Income tax proceedings and therefore, the Assessing officer is correct to come to Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 40 of 484 independent conclusion and is not bound by past acceptance of a factual legal point by the department is untenable. Technically the principle of res judicata may not apply to the income tax proceedings as each year is an independent year, yet there ought to be uniformity in treatment and consistency as propounded by Hon‘ble Supreme Court in the case of Radhasoami Satsang Vs. CIT 193 ITR 321, when the facts and circumstances are identical. It is a judicially accepted principle that when the facts are same, a uniform view should be adopted for the subsequent years in the income tax proceedings. Unless there is a material change in the facts, which is neither demonstrated by assessing officer nor DRP, the view which is taken earlier, should not be changed, as held by various courts. We now discuss some of the case laws. 7.17. The Hon‘ble Supreme Court in the case of Radhasoami Satsang (supra), on the theory of consistency, has held as under: ― ..Strictly speaking, res judicatta does not apply to the income tax proceedings. Though, each assessment year being a unit, what was decided in one year might not apply in the following, year , where a fundamental aspect permeating through different assessment years has been found as a fact one way or the other and parties have allowed that position to ne sustained by not challenging the order, it would not be at all appropriate to allow the position to be changed in a subsequent year‖. 7.18. This view has been followed by the Hon‘ble Delhi High Court in the case of CIT vs. Neo Ploy Pack (P) Ltd [2000] 245 ITR 492 and the Hon‘ble Bombay High Court in the case of CIT vs. Gopal Purohit [2011] 336 ITR 287. Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 41 of 484 7.19. Further, the Hon‘ble Supreme Court in the case of CIT vs. Realest Builders and Services Limited (2008) 307 ITR 202 held that: ―In cases where the department wants to tax an assessee on the ground of the liability arising in a particular year, it should always ascertain the method of accounting followed by the assessee in the past and whether change in method of accounting was warranted on the ground that profit is being underestimated under the impugned method of accounting. If the Assessing Officer comes to the conclusion that there is underestimation of profits, he must give facts and figures in that regard and demonstrate to the Court that the impugned method of accounting adopted by the assessee results in underestimation of profits and is, therefore, rejected. Otherwise, the presumption would be that the entire exercise is revenue neutral. In the instant case, that exercise had never been undertaken. The Assessing Officer was required to demonstrate both the methods, one adopted by the assessee and the other by the department. In the circumstances, there was no reason to interfere with the conclusion given by the High Court‖

7.20. The Hon‘ble Supreme Court in the case of CIT Vs. Bilahari Investment P. Ltd. 299 ITR 1 (SC) held as follows: ―Every assessee is entitled to arrange its affairs and follow the method of accounting, which the Department has earlier accepted. It is only in those cases where the

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 42 of 484 Department records a finding that the method adopted by the assessee results in distortion of profits that the Department can insist on substitution of the existing method.‖ 7.21. In the case of CIT Vs. Jagatjit Industries Ltd. (2011) 399 ITR 382 (Del.), the Hon‘ble Jurisdictional High Court has held as follows: ―If a particular accounting system has been followed and accepted and there is no acceptable reason to differ with it, the doctrine of consistency would come into play. The method of accounting cannot be rejected. The assessee was following the mercantile system of accounting. According to past business practice, the expenditure spilled over the next year and was debited in the second year and was allowed by the Assessing officer. The Assessing officer for the assessment year in question disallowed Rs. 13,46,299 claimed as expenditure of prior period allowable in the current year. The Commissioner (Appeals) deleted the disallowance and this was upheld by the Tribunal. On appeal to the High Court: Held, dismissing the appeal, that the assessee had claimed prior period expenses on the ground that the vouchers for such expenses from the employees/ branch employees were received after March 31st of the financial year. It had branch offices throughout the country. It debited the expenditure spill over the subsequent years and the Assessing officer had been allowing it in the past. The accounting practice had been consistently followed by it and accepted by the Revenue. Nothing had been brought on record to show that there had

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 43 of 484 been distortion of profits or that the books of account did not reflect the correct picture. In the absence of any reason whatsoever, there was no warrant or justification to depart from the previous accounting system which was accepted by the Department in respect of the previous years.‖

7.22. In the present case, the Revenue has rejected the method of accounting which is consistently followed by the assesseee on the ground that there may be chance where in a particular year, the method adopted by the assessee may result in underestimation of profits. However, the Revenue failed to demonstrate with facts and figures that the impugned method of accounting may result in material underestimation of profits. On the contrary, the assessee has demonstrated that the change in the method of accounting for year under appeal would result in loss to the revenue as the opening stock would also require similar adjustment and the cascading effect will be loss to revenue. We observe that in many of the additions made in this case by the revenue, the consistent method of accounting is unnecessarily disturbed, though it has been accepted in many years. In our view such tinkering with the method is unjustified when the exercise does not materially alter the profits. The facts and figures in many additions demonstrate that the issue raised is revenue neutral in the long run. Such petty additions should be avoided on the ground of materiality, as AS-1 which talks about materiality, consistency, prudence etc. is part of the I.T.Act after it is notified u/s 145(2). 7.23. In view of the foregoing and proposition laid down by the Hon‘ble Supreme Court and the Hon‘ble High Courts, we are of the opinion that adjustment of Rs. 31.38 lacs made Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 44 of 484 to total value of closing stock of Rs. 275 crores and consumption of stock of Rs. 7178 crores is uncalled for. If valuation of closing stock is changed then the value of opening stock should also be changed on the same basis or method. The closing stock of a particular year is the opening stock of the subsequent year. It is not the case of the revenue that the method of valuation of closing stock is materially affecting the accounts and profits disclosed by the assessee. This adjustment sought to be made is revenue neutral and at best may result in preponment or postponement of revenue. The issue is whether such exercise is at all required on the ground of materiality. Materiality is a concept which is well recognized both in accountancy and law. Accounting standards notified by the CBDT u/s 145(2) mandate that the concept of materiality be taken into consideration when finalizing the accounts of an assessee. 7.24. Further, the Hon‘ble Supreme Court in the case of Berger Paints India Ltd. Vs. CIT (2004) 266 ITR 99 at page 103 (SC), has noted with approval, the observations of the Special Bench of the ITAT in the case of Indian Communication Network Pvt. Ltd. Vs. IAC (1994) 206 ITR (AT) 96 (Delhi). At page 114 it observed that: ―Before we part with the ground, we cannot help feeling that the litigation between the parties could have been avoided since it was quite immaterial, whether full deduction was allowed in one year or partly in one year and partly in the next, since the assessee is a company and rate of tax is uniform. The gain to one and the loss to the other is illusory since what is deferred in one year, would have to be discharged in the next. In that sense, nobody has won and nobody has lost.‖

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 45 of 484 7.25. Even on this plea also, the assessee succeeds. We have dealt with this issue elaborately as, in a number of grounds, this issue would become applicable. In view of above discussion, we allow this ground of the assessee.‖ 12) Before us, the Ld. departmental representative could not point out any changes in the facts and circumstances of the case for this year compared to the year in which the tribunal has decided this issue. He also did not point out any contrary decision and therefore, respectfully following the decision of the coordinate bench we allow ground No. 2 of the appeal of the assessee. 13) Ground No. 3 of the appeal of the assessee is against the action of the Ld. AO in enhancing the value of closing inventory of finished goods and thereby the income of the appellant by an amount of Rs. 6.40 Lacs in respect of cost of rejection of semi finished goods and obsolete items. Brief facts of the issue is that assessee has incurred cost of rejection of Rs. 1352.28 Lacs which has not been considered for the purpose of valuation of the closing stock of inventory and the same has been wrongly charged to the profit and loss account according to the assessing officer. He referred to the para No. 13 of the accounting standard (AS – 2) wherein it is mentioned that in determining the cost of inventory in accordance with paragraph 6, it is appropriate to exclude certain cost and recognize them as expenses in the period in which they are incurred. The example of such cost are the abnormal amounts of wastages of material labour or other production cost. Therefore according to him what is to be excluded is only abnormal losses arising out of the materials, labour and other production related costs but not normal wastage and rejection which arise in during the production and they should be taken as part of production cost,

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 46 of 484 and has to be considered for the purpose of the valuation of the semi finished and finished goods inventory at the end of the year. As the rejections are being debited to the profit and loss account year after year therefore according to the Ld. assessing officer, the rejections are part of the normal production process and are not abnormal in nature. On the point that this issue has already been decided in the favour of appellant in its own case for assessment year 2007 – 08 was also rejected by the Ld. assessing officer for the reason that the appeal has been filed by the revenue before the Hon‘ble Delhi High Court. Hence the addition of Rs. 6.14 Lacs was made to the total income of the assessee on account of cost of rejections debited to the profit and loss account. Assessee filed objection before the Ld. dispute resolution panel where it was held that cost of normal and abnormal losses has to be loaded into the value of closing stock and segregation of loss on its nature and loading only normal losses into the value of closing stock is held against the law, accounting principles and the ratio laid down by the Hon‘ble Supreme Court in the case of British paints India Ltd. Therefore the Ld. Dispute resolution panel declined to interfere with the finding of the Ld. assessing officer in this regard. 14) Ld. authorized representative of the assessee submitted before us that AS-2 on ―Valuation of inventory‖ stipulates that abnormal wastages should not be considered for valuation of inventory. Since, the impugned write off on account of rejection of material, was in the nature of abnormal rejections, the appellant, as per consistent, regular and accepted method of accounting, charged the same to profit and loss account, without any allocation to the value of closing inventory. He further submitted that adjustment made by the AO is contrary to the mandatory accounting standard consistently and

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 47 of 484 regularly followed by the appellant and accepted by the Department. Reliance in this regard is placed on: i. UCO Bank v. CIT: 240 ITR 355 (SC) ii. CIT v. Singaribai: 13 ITR 224 (All.)(FB) iii. Juggilal v. CIT: 101 ITR 40 (All.) iv. CIT v. TISCO: 106 IR 363 (Bom.) v. CIT v. Sankarapandia: 130 ITR 541 (Mad.) vi. Balapur Mandali v. CIT: 135 ITR 91 (Guj.)

He further stated that In any case, considering that the appellant is a high tax paying company, subjected to uniform rate of tax, no adjustment is even otherwise called for in view of the following:

a. If the closing stock of the year is to be varied, similar adjustments would need to be made to the opening stock, too. (Refer: K.G. Khosla & Co. Ltd. v. CIT: 99 ITR 574 (Del.) and CIT vs. M/s. The Mahalaxmi Glass Works Pvt. Ltd. : ITA No. 192 of 2009) b. Corresponding adjustment would need to be carried out in the opening stock of the succeeding year. c. The addition, if any, is revenue neutral, if seen in a macro perspective and, therefore, no adjustment is called for. [Refer: CIT v. Excel Industries Ltd.:358 ITR 295 (SC); CIT v. Nagri Mills Company Ltd.: 33 ITR 681 (Bom.); Triveni Engineering Industries Ltd.: 336 ITR 374 (Del.)] d. He further argued that The contention of the assessing officer that the revenue aspect will keep on changing from year to year, as there might be chances when in one year Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 48 of 484 the closing inventory will be very high or it may be very low in other years, is in our respectful submission is also not tenable in law, especially in light of the fact that the appellant is assessed to same rate of tax in each year and therefore the overall tax outflow remains the same and revenue neutral in nature. In the Andes submitted that The aforesaid issue stands decided in favour of the appellant by the order of the Delhi Bench of the Tribunal in the appellant‘s own case for the assessment year 2007- 08 and 2008-09, whereby similar adjustment made in that year was deleted on the same grounds as discussed in Ground No. 2. Therefore according to him the issue is squarely covered in favour of the appellant by the order of the coordinate bench in the assessee‘s own case. 15) Ld. departmental representative submitted that the assessee has not included this loss into the valuation of the closing stock and therefore the Ld. assessing officer and Ld. dispute resolution panel has rightly included the above sum in the cost of valuation of the closing stock of the semi finished and finished goods. He further submitted that the loss arising because of manufacturing process is a normal loss and therefore it cannot be excluded according to the Para No. 6 of the accounting standard. He further submitted that the revenue has challenged the order of the coordinate bench in the appellant‘s own case for assessment year 2007 – 08 before the Hon‘ble Delhi High Court therefore that may not be followed. 16) We have carefully considered the rival contention and has also perused the relevant provisions of the accounting standard – 2 which has been relied by the Ld. assessing officer. We have carefully perused the decision of the coordinate bench in the appellant‘s own case for assessment year 2007 2008 wherein the identical issue is dealt with as under:- Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 49 of 484 ―8.9. The issue in question is whether the cost of abnormal rejections have to be considered for the purpose of valuation of closing stock. The assessee relied on Accounting standard-2 – Valuation of Inventories which is a notified accounting standard by the Companies Act which stipulates that abnormal wastages should not be considered for valuation of inventory. 8.10. It was submitted by the Ld.AR of the assesse that it is in the manufacturing of precision and quality product and in case of unfit material it has been consistently following the method of charging the abnormal rejection of material to its profit and loss account, without any allocation to the value of closing inventory. 8.11. The assessing officer‘s case is that cost of rejections needed to be included in the value of closing stock. Assessing officer worked out an amount of Rs. 9.24 lacs as attributable to closing stock out of total expenditure of Rs. 12.49 crores and closing stock value of Rs. 275 crores. The assessee as a consistent accounting policy has been claiming the cost of abnormal rejections as revenue expenditure for the previous years and this has been regularly accepted by department in past. 8.12. The amount of Rs. 9.24 lacs attributed by the assessing officer, in our view, is materially inconsequential so as to warrant disturbing the regular method of valuation of closing stock being followed by the assessee company. The quantum of the addition of Rs 9.24 lacs is less than 0.74% of the value of abnormal rejections. As a percentage of total stocks / turn over/ profits declared, this figure is miniscule.

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 50 of 484 8.13. Accounting Standard-2 stipulates that abnormal wastages should not be considered for valuation of inventory. It reads as follows: ―16. Examples of costs excluded from the cost of inventories and recognized as expenses in the period in which they are incurred are: a) Abnormal amounts of wasted materials, labour or other production costs; storage costs, unless those costs are necessary in the production process before a further production stage; administrative overheads that do not contribute to bringing inventories to their present location and condition; and selling costs.‖ 8.14. Keeping in view the treatment prescribed under AS- 2 and the fact that the assessee has been regularly following the same method of accounting for valuation of charging such rejection to P&L A/c and its closing inventory, we are of the view the addition in question is uncalled for. The adjustment is not material adjustment. Further, for the reasons stated by us on the issue of consistency, while disposing ground no. 2 to 2.2, we allow this ground of the assessee.‖

Both the parties have admitted that there is no difference in the facts and circumstances of the case of the appellant in the assessment year before us as well as the year for which the order of the coordinate bench pertains to. On reading of the assessment order as well as the direction of the Ld. dispute resolution panel it was not found that how the loss of the assessee was found to be normal when the assessee submitted

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 51 of 484 that it is an abnormal loss incurred by it during the course of manufacturing process. Further the Ld. dispute resolution panel has also stated that both the cost of normal and abnormal losses have to be loaded to the value of the closing stock is devoid of any merit as it is contrary to the accounting standard issued by the Institute of chartered accountants of India which has been mandated by the Ministry of corporate affairs ,which only says that, only normal losses are required to be included and abnormal losses are required to be excluded for the purpose of the valuation of the closing stock of the finished goods and semi finished goods. In view of the above, we respectfully following the decision of the coordinate bench in the appellant‘s own case for the previous year allow ground No. 3 of the appeal of the assessee. 17) The ground No. 4 of the appeal is against disallowance of Rs. 615989710/- in respect of provisions made at the end of the year towards net increase in prices of raw materials already supplied by the vendors upto 31st of March 2010 with retrospective effect on the ground that the basis of creating the said provision was not comprehensible. During the course of the assessment proceedings assessee has provided this sum as an year-end provision in respect of purchases submitting the detailed breakup of these provisions. The Ld. assessing officer has noted that a sum of Rs. 1034.90 lakhs has been provided against the price amendments made, while remaining amount of Rs. 5125 Lacs has been provided against the provisions for price amendment on estimated basis. The Ld. assessing officer noted that the purchase orders issued by the assessee does not have the condition which allow them to amend effective from back dates and this practice has been regularly followed by the assessee. As the price amendments are not in line with the

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 52 of 484 purchase orders placed by the appellant he did not accept that the provisions are business expenditure. Ld. assessing officer further stated that the issue decided by the Hon‘ble tribunal wherein the similar addition has been deleted in appellant‘s own case is not accepted by the revenue as the appeal has been filed before the Hon‘ble Delhi High Court. Therefore he disallowed a sum of Rs. 6159.90 Lacs out of purchases to the total income of the appellant. Appellant preferred objections before the Ld. dispute resolution panel , who held accepting the contention of the appellant that AO is directed to verify the working of the upward revision and downward revision of the purchase price calling all the details has considered necessary from the assessee and if the upward and downward revision in the purchase price is scientifically worked out then the same is to be allowed. Consequently the Ld. assessing officer asked for the relevant details where the assessee has given the basis of the working of the impugned provision and breakup along with the details of purchase vouchers and decrees and increase in the prize amendments. However the Ld. assessing officer was of the view that assessee has not given the basis of working for arriving at the amended prices he made the disallowance of Rs. 6159.90 Lacs to the total income of the assessee. Therefore the appellant is in appeal before us on this ground. 18) Ld. authorized representative submitted before us that that in the general terms and conditions of purchase order, on the basis of which it has been stated that the rates negotiated with the vendors cannot be modified from prior date, although there is no express stipulation that the rates of supply of materials can be modified from prior date, there is no stipulation either that the rate cannot be modified retrospectively. Thus, the assessing officer erred in observing that the prices cannot be amended from prior dates. It is submitted, that considering the Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 53 of 484 volatility in prices of material like steel etc., used as inputs by the vendors and having regard to the continuous supply of such material in heavy volume by the vendors, it is not practically feasible to negotiate the rate with vendors on daily/periodic basis and, therefore, it is a trade/industry practice for serving commercial interests, to negotiate and revise the rates for supply already made with retrospective effect. He further submitted that it is a matter of record that the appellant has, year after year, including in the relevant year, issued purchase orders for modified rates with retrospective effect, for which payments have also been made by the appellant to the vendors. Stated that The payments made for amended prices with retrospective effect have always been accepted as revenue deduction, including payments made during the relevant year. Therefore according to him , during the relevant previous year, the appellant made aggregate provision of Rs. 6159.90 lacs, comprising of Provision for purchase orders issued for price amendment as at 31.3.2012 of Rs. 1034.90 lacs and Provision on estimated basis for price amendments under negotiation as on 31.3.2012 of Rs. 5125 lacs. Further, it is submitted, that the appellant has been making the aforesaid provisions as per industry/trade practice consistently year after year, which has always been accepted and allowed by the Revenue in the past. Without prejudice, it is further submitted that out of the aggregate provision of Rs. 6,159.90 lacs, the amount of Rs. 1,034.90 was made on the basis of actual supplies made upto the end of the year as per price amendments actually issued as on 31.03.2010 lacs, detailed working whereof is enclosed in paper book and therefore, such amount cannot in any case be disallowed on the ground of the same being contingent in nature. He further submitted that similar provision for increase in prices as at the end of the year was accepted and allowed in Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 54 of 484 the assessment order for the assessment year 2007-08. In that year, it was only the provisions which were found to be excessive in the succeeding year, i.e., AY 2008-09, on actual crystallization of price amendments and reversed in that year, were disallowed in the assessment order for AY 2007-08, which, too, was allowed and accepted, on merits by the Tribunal and set-aside for the limited purpose of verification of the provision, which too was deleted in the set-aside order dated 30.10.2014 passed by the assessing officer. Further he submitted that in the assessment order for AY 2008-09, similar disallowance of provision was made by the assessing officer in complete disregard of the findings of the assessing officer in the preceding assessment year, viz. AY 2007-08 as also the consistent method followed by the appellant. In that year, the Delhi bench of the Tribunal, vide order dated 13.06.2014 passed in the appellant‘s own case for assessment year 2008-09 was pleased to delete the disallowance made by the assessing officer keeping in view the principle of materiality and consistency followed by the appellant. Therefore according to him the aforesaid issue is squarely covered in favour of the appellant by the order of the Delhi Bench of the Tribunal in the appellant‘s own case for the assessment year 2008-09 as also the assessment order for AY 2007-08. He submitted that the DRP had set-aside the issue to the file of the assessing officer to verify whether upward/ downward revision is scientific in nature or not. However, the AO, without considering the details submitted by the appellant, including the break-up and details of purchase vouchers, proceeded to disallow the provision on conjectures and surmises. In this regard he submitted page No. 1030 to 1139 and 1140 paper book volume 3 where the complete details are provided for. Hence he submitted that appellant had worked out the provision on a scientific basis, which is clearly borne out Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 55 of 484 from the contemporaneous documents submitted before the AO/ DRP. Further, the appellant has been consistently making the aforesaid provision year after year on the same scientific basis, which as pointed above, has always been accepted and allowed in past, except in assessment year 2008-09, which was also deleted by the Tribunal. Therefore his argument was that that the provision made by the assessee is based on the negotiation with the parties, based on the scientific method for increase in prices, there is not only upward revision but downward revision also and further the issue is squarely covered in favour of the appellant by virtue of the decision of the coordinate bench in appellant‘s own case for earlier years. 19) Ld. departmental representative submitted that the pricee revision has been made by the assessee after the purchase orders having placed before the parties and further the quantification made by appellant was not submitted before the Ld. assessing officer and the working arrived at the amended prices was subject to verification pursuance to the order of the Ld. dispute resolution panel. He further stressed up on the finding of the Ld. assessing officer that that the disallowances entirely attributable to the assessee‘s failure to submit relevant detail for purpose of verification by the assessing officer. He therefore eminently relied upon the order of the Ld. AO. 20) We have carefully considered the rival contentions and also perused order of the coordinate bench in the appellant‘s own case for earlier years. We have also perused the page No. 1130 to 1140 of the paper book volume 3 submitted by the assessee before the Ld. assessing officer in pursuance of direction of the Ld. dispute resolution panel. The parties before us have confirmed that there is no change in the facts and circumstances of the case for this year compared to the year for which the tribunal has decided this issue in favour of the Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 56 of 484 appellant. The coordinate bench in assessee‘s own case for assessment year 2007 – 08 has decided this issue as under:- ―12.11. The addition in question is on account of provision for increase in price of material. When there is an excess provision on account of price revision made during the year, the assessee reversed the same in subsequent year i.e. when the actual figures are known. Similarly, when there is a short provision for increase in price of raw material supplied in immediately preceding year, the balance is recognized as expenditure during the year. A claim is made based on ascertainment of actual liability. The assessing officer disallowed the reversals of provision on the ground that this was a prior period expenditure. 12.12. When provisions are made, what is to be seen is whether the assessee has done a bona fide and genuine exercise to estimate its liability with reasonable certainty. The term reasonable certainty means that the provision in question might be slightly higher or lower than the actual figure. When the provision is higher, it is reversed in subsequent year, when the actual figures are known. Similarly, when the provision is lower, the same is claimed in the latter assessment year. It cannot be said that these are prior period expenditure. The actual liability in question is ascertained only during the year and hence the liability crystallizes during the year. Estimation of an expense has to be considered in contradiction to actual ascertainment of the expenses. Once the actual expense has been ascertained, the liability accrues in that year to the extent not provided in the earlier year and is to be allowed as revenue expenditure in the year of crystallization. Concepts of Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 57 of 484 going concern, accrual and consistency have to be taken into account by the revenue authorities while evaluating such provisions and making such adjustments. The assessee is disputing the figures of disallowance and the DRP is also expressing its inability to correct the figures. In our view the DRP is not helpless and could have directed the assessing officer to verify the figures and correct the mistakes, if any. In view of the above discussion, we allow this ground of assessee for statistical purpose and direct the assessing officer to properly verify the figures and allow the claim of the assessee.‖ Subsequently for the assessment year 2008- 2009 when the similar disallowance was made by the Ld. assessing officer the coordinate bench vide its order dated 13/06/2014 has deleted the disallowance made by the assessing officer keeping in view the principle of materiality and consistency followed by the appellant . On the ground that the mention has been made in the purchase order that there cannot be any revision of the prices subsequently and the prices mentioning the purchase order of final based on which the Ld. assessing officer has relied very heavily we are of the view that that these are the general terms and conditions of the purchase order claimed by the appellant upon its various vendors and there is no prohibition in the said purchase orders that subsequently the prices cannot be revised. Many times the prices are dependent upon the cost of the raw material such as metal etc of the vendors which is highly fluctuating, which may result into subsequent price revision. Further when the actual payments are made to the vendors on the basis of such retrospective increase in price of material supplied, which is accepted and allowed as revenue expenditure, the provision made for such

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 58 of 484 increase in price in relation to materials supplied upto the end of the year, cannot be viewed distinctly and be held as not an allowable business expenditure. It is not the case of the revenue that such price revision has not been made and has not been paid to the vendors as purchase price of the material. Further it is also not the case of the revenue that such price revision which has been made by appellant is not at market rate , no such evidences have been put forth before us. Further it is also not the case of the revenue that the transactions are between the related parties and there is undue consideration paid by the appellant of those vendors. Further also the quantity purchased from those vendors are not in dispute. Merely because there is a price revision subsequent to the placing of the purchase orders cannot lead to conclusion that the expenditure incurred by the assessee in revision of the rises of the material purchased by it during the year based on the purchase order is not a business expenditure. According to us there may be million reasons for revision of such price. It is not the case of the revenue that assessee has only made the upward revision on perusal of the statement it is apparent that the assessee has also made the downward revision by negotiating the prices from the vendors. This itself proves that there is a strong negotiation deployed by the appellant with the vendor perhaps which may be going on throughout during the year and based on which the provisions are made or credit notes are issued at the end of the year on account of such price negotiation. Further, there are strong business/commercial reasons behind such trade practice as explained by appellant, which was always accepted by the Revenue in the past. Furthermore, we also agree that once the Revenue had accepted the similar transaction in the earlier years, the same could not have been disturbed during the year under consideration on the Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 59 of 484 grounds of consistency. For the aforesaid various reasons, we hold that the impugned expenditure incurred by the appellant on account of provisions for retrospective increase in price of materials which was already settled up to the end of the year end had, thus, accrued during the year under consideration, was an allowable business expenditure. The Supreme Court in the case of Rotork Control versus CIT 314 ITR 62 has held that the provision made for liabilities accrued upto the end of the year, is an allowable expenditure in accordance with the Mercantile System of Accounting. In that view of the matter, the action of the assessing officer in disallowing the aforesaid provision on the ground of being not arising from the terms and conditions of the purchase order or on the ground of being contingent in nature is not valid and deserves to be reversed. As regards the finding of the DRP as also the assessing officer qua the method followed for creating the aforesaid provision, we have seen the working of the same at page 1140 of the paper book. The provision has been made on a scientific basis by estimating the actual increase in price of material and the amount of material that was already supplied and consumed in the vehicles manufactured up to the end of the year. Considering that the provision has been made on the basis of scientific estimation, having regard to the principles laid down by the Supreme Court in the case of Rotork Control (supra), the impugned provision made for an accrued liability is an allowable revenue expenditure in accordance with the mercantile system of accounting. That apart, notwithstanding the method followed for creating the provision, the aforesaid is only an issue of the year of allowability, since the actual expenditure is allowable in the subsequent year on finalization of negotiations. We have held in the ground of appeal no. 2 supra that adjustments should not be made on issues which Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 60 of 484 are revenue neutral. Accordingly there is no justification in sustaining the aforesaid disallowance. Accordingly, we reverse the action of the assessing officer and allow the ground no 4 of appeal raised by the appellant. 21) Ground No. 5 of the appeal of the assessee is against an addition of Rs. 3.02 lakhs by estimating the value of the scrap lying in stock as at the end of the relevant previous year on hypothetical and national basis. Ld. assessing officer on perusal of the significant accounting policies mentioned in scheduled 12 of the financial statements for the financial year ended on 31st of March 2010 with respect to scrap where it is been mentioned that it has been accounted on sale bases, it was noted by him that during the last 15 days of the year under consideration in the 1st 15 days of the next year there are no scrap sales has been booked or booked for the lesser amount in comparison to other days. Therefore on the basis of the average sale of scrap in these 30 days the sale of scrap has been calculated by the Ld. assessing officer at Rs. 302400/- after reducing the sales recorded on last day of the year. Further it was noted by the Ld. assessing officer that except the excise records which are maintained at the time of sale the assessee has not maintained any stock register at scrap yard showing receipt and disposal of the scrap, he made an addition of Rs. 302400/- and Rs. 156510002/- the income of the assessee in the draft assessment order. On objection before the Ld. DRP, Ld. dispute resolution panel deleted the addition of Rs. 15651000/- on account of certain obsolete store items on the ground that no sale was credited against such items in the books of accounts and therefore for the remaining amount of Rs. 302400/- the addition was made to the total income of the assessee. This

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 61 of 484 addition has been contested by the assessee by this 5th ground of appeal preferred before us. 22) Ld. authorized representative of the assessee submitted before us that It is an admitted position that the appellant has not maintained register containing item wise details of scrap generated in the course of manufacturing, but has instead furnished item-wise details of scrap sold during the year. The appellant it is submitted cannot be expected to keep quantitative tally of each nut and bolt, which gets scrapped in the course of manufacturing. Such a requirement from the assessing officer is highly impracticable and not in consonance with the business realities; he submitted that The amount of scrap lying at shop floor is miniscule having regard to total turnover of appellant, which is further corroborated by the fact that only an amount of Rs. 3.02 lacs was estimated as value of scrap as on 31.03.2010 in the assessment order. He further submitted that , it was, having regard to the impracticality in taking stock of the scrap generated in the manufacturing process and the concept of materiality for the purposes of accounting, that the items scrapped are not valued at the end of the year for the purposes of accounting in the books of account but brought into books as and when sold. He stated that The aforesaid method of accounting for scrap is, it is respectfully submitted, a universally accepted method, which is followed by almost every appellant engaged in the business of manufacturing. The aforesaid method of accounting has also been consistently and regularly followed by the appellant, since past several years, which has always been accepted by the Revenue. He further relied upon the decision of the Hon‘ble Supreme Court in case of UCO Bank v. CIT: 240 ITR 355 (SC).he alternatively argued that The addition, if any, is revenue neutral, if seen in a macro perspective, since closing stock Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 62 of 484 would become opening stock in next year and, therefore, no adjustment is called for. For this proposition he relied upon decision of Hon‘ble Supreme Court in case of CIT v. Excel Industries Ltd.(358 ITR 295) (SC) and Hon‘ble Bombay high court in Nagri Mills Company Ltd.(33 ITR 681 (Bom.) and Hon‘ble Delhi High Court in case of Triveni Engineering Industries Ltd.: 336 ITR 374 (Del.). He further stated that it should be appreciated that AO made the addition by increasing value of closing inventory without making corresponding adjustment to the value of opening inventory he alternatively submitted without prejudice that in any case, the amount of Rs.3,02,400/- estimated in the assessment order is purely hypothetical and notional, without any evidence to establish that scrap was actually lying in the premises of the appellant at the end of the relevant year. Accordingly, for that reason as well, the addition made in the assessment order calls for being deleted. He further stated that assuming while denying that in the event the aforesaid addition is to be sustained, it is prayed that the AO should be directed to make identical addition to the opening stock of the subsequent year. He further stated in all fairness the aforesaid issue has been decided against the appellant by the Tribunal in appellant‘s own case for the AY 2007-08 and 2008-09. The Tribunal, in the said years, had restored the matter back to the file of the assessing officer to compute the value of closing stock on consistent basis, as per method to be followed by the assessing officer in the set-aide order. Consequently , The AO had, in the set aside proceedings for AY 2007-08, vide order dated 31.10.2014, confirmed such disallowance on an ad-hoc basis by estimating the average of scrap lying in the closing stock as a proportion of scrap sales for the last 15 days for the ended 31.03.20007 and the first 15 days of the subsequent financial year, to the extent of Rs. 4 Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 63 of 484 lacs. He further pointed out that the aforesaid disallowance sustained by the Tribunal was challenged by the assessee in further appeal before the Honourable Court, which has been admitted by the honourable High Court, vide order dated 19.11.2015 in ITA No. 341/2014, as involving substantial question of law. He stated that the assessee is sanguine that the aforesaid issue would be decided in favour of the assessee upon disposal of appeal by the Hon‘ble Court. 23) Ld. departmental representative relied upon the order of the Ld. assessing officer and Ld. dispute resolution panel and submitted that that assessee has not accounted for the scrap realized during the course of the year and specifically in the last 15 days of this year and 1st 15 days of the next year therefore the addition made by the Ld. assessing officer is sustainable he further stated that in the case of the assessee in the previous year‘s identical addition has been sustained. 24) We have carefully considered the rival contentions. Accounting standard 2 notified by the Ministry of corporate affairs it provides that inventory is required to be valued at the end of the year for determining the true and fair profit or loss of the financial period of an enterprise. According to that the inventory is required to be valued according to accounting standard 2 in case it is held for the sale in the ordinary course of the business. In the present case the assessee is not holding scrap as an inventory in the ordinary course of its business. It is also not the dealer in scrap. The inventory that it holds in the ordinary course of its business at the raw materials semi finished goods and they finished goods of the company. Therefore it is incorrect to hold that assessee should have valued the scrap at the end of the year. Furthermore the accounting policy of the company also states that the scraps is accounted for at the time of it disposal. Therefore, according to Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 64 of 484 us it is not mandatory for an assessee to value scrap as at the end of financial period for working out the true and fair profit or losses of the company. More so as in the previous year this accounting policy of the company has been accepted by the revenue without disturbing the profit on this count. Further, While rendering our decision in the preceding ground of appeal, following the decision of honourable High Courts and Supreme Court, we have held that adjustment should not be made in the assessment order on issues, which are revenue-neutral. The impugned addition under consideration is purely revenue- neutral in as much as addition of the estimated value of the scrap to closing stock would be debited as opening stock in the profit and loss account of the immediately succeeding year. Further, the assessing officer will need to carry out the similar exercise in the last year, to estimate stock of scrap which would become opening stock of this year. There is, thus, no escapement of Revenue on the basis of the impugned addition made by the assessing officer in the assessment order. We have already held in multiple grounds supra that no adjustment should be made to returned income on issues, which are revenue neutral. Having held as above, it is difficult to take any different view for the issue under consideration, which is also purely revenue neutral, especially considering that if similar adjustment (which has not been carried out by the assessing officer) is made to the opening stock, no additional tax liability would delve upon the appellant It could also be seen that the addition of Rs.3.02 lacs is miniscule having regard to the size of the company, which has declared turnover of Rs.16,000 crores (approx.) during the year under consideration and net profit of Rs.2232 crores. The aforesaid renders force in the arguments taken by the Ld. Counsel that an assesse engaged in the business of manufacturing, especially that of the size of the Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 65 of 484 appellant, cannot be expected to keep quantitative tally of miniscule items like nuts and bolts lying in the scrap yard. In view of the aforesaid, keeping in mind the principle of materiality, we find that there is no error in the system and regular practice followed by the appellant of not estimating the value of scrap lying in the scrap yard and accounting for sale as and when such scrap is sold and removed from the factory premises. For the aforesaid cumulative reasons we do not find any justification in sustaining the addition of Rs.3.02 lacs made by the assessing officer in the assessment order. As regards the decision of the Tribunal in the earlier two assessment years, we draw support from the various decisions, wherein it has been held that since doctrine of res judicata is not applicable to income tax proceedings, the Tribunal can deviate from earlier orders passed in the assessee‘s own case as in those earlier decisions the provisions of the accounting standard A-S to with respect to valuation of inventories were not considered and whether they apply to the scrap generated in a manufacturing process by the company. Furthermore there is no evidences brought on record by the Ld. assessing officer that the assessee has sold scrap out of the books. Furthermore the amount of addition working out by the Ld. assessing officer was also on the estimate basis without any quantitative details of the scrap. It is also not the case of the assessee that compared to the earlier years the scrap sold by the assessee is lesser during the year. In view of the above, the addition made by the Ld. Assessing officer on account of estimating the value of scrap lying in closing stock amounting to Rs. 3.02 lakhs is deleted and ground No. 5 of appeal raised by the assesse is allowed. 25) Ground No. 6 of the appeal of the assessee was with respect to addition of Rs. 3822168 in respect of liquidated damages recovered from transporters for late delivery of the goods to the Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 66 of 484 customers during the relevant year which were determined in the succeeding year but according to the assessing officer it was the income of the appellant for this year. As the assessee is engaged in the business of manufacturing and selling of 2 wheelers the assessee uses transport facility for delivery of vehicles to the customers/dealers. At the time of appointing the transporters for delivery of the vehicle the assessee agrees in advance the time limit for delivery of such vehicles at the place of the destination. In the event there is a delay in delivery of vehicle beyond the specified agreed limb time-limit the assessee has a policy of charging liquidated damages from the transporters for such delays. Accordingly in the immediately succeeding year the assessee recovered liquidated damages of Rs. 3 8.22 lakhs on account of such damages towards delay in delivery of goods dispatched by the assessee during the relevant year. The Ld. assessing officer was of the view that assessee should have made provision of this sum in the current year and not in the succeeding years and therefore the addition was made in the hands of the assessee of Rs. 3822168/–. On objection before the Ld. dispute resolution panel it was directed to the Ld. assessing officer to carry on verification as directed by the Hon‘ble ITAT in relevant year and to decide the issue accordingly. However Ld. assessing officer in final assessment order made the above addition is according to him the assessee could not provide any scientific basis for proving its version. And therefore assessee is in appeal before us. 26) Ld. authorized representative submitted that As per AS-9 on Revenue Recognition, revenue can be recognized only if the same is measurable and ultimate collection thereof can be estimated with reasonable certainty. It is submitted that income accrues to an assessee only when the same can be finally ascertained as has been held in the following cases: Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 67 of 484 i. J P Shrivastava and Sons (Bhopal) Private Ltd vs. CIT: 57 ITR 624 (SC) ii. ThiagarajaChettiar& Co. vs. CIT, Madras: 51 ITR 393 (Mad.) iii. CIT vs. South Madras Industrial Development Co. (P) Ltd. : 120 ITR 913 (Mad.) iv. CIT vs. Seshasayee Bros. (P.) Ltd.: 239 ITR 471 (Mad.) v. CIT v. R. Lakshmi Narayanan: 202 CTR 125 (Mad.) vi. Sanjib Kumar Agarwal v. CIT: 310 ITR 295 (Cal.) vii. ACIT v. GETIT Infomediary Ltd.: 42 taxmann.com 391 (Del.) viii. DCIT v. SP Real Estate Developers P. Ltd: 47 taxmann.com 281 (Hyd.) 27) He further submitted that Information regarding timely delivery of vehicles dispatched from premises of appellant came to knowledge of appellant only after the end of the relevant previous year, on submission of bills by transporters along with ―delivery report‖ from dealers of vehicles, which determined the levy of penalty/liquidated damages, if any, and quantum thereof. He further stated that In the absence of information, appellant could not have ascertained whether there was any delay or the period of delay, if any and the amount of penalty leviable thereon. Accordingly, income accrued in the succeeding year. Assuming while denying he submitted that it is respectfully submitted that the adjustment being revenue neutral, would not affect tax liability of the appellant. In the past history of similar addition is submitted that aforesaid issue is covered by the decision of ITAT in appellant‘s own case for AY 2008-09wherein it has been held that method of accounting consistently followed by an appellant and accepted by the Revenue in the earlier years should not be disturbed in Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 68 of 484 the absence of any change in facts, more so when the change does not affect the overall tax liability to be collected from the appellant. While holding as above, the Tribunal set aside the matter to the file of the assessing officer to be decided afresh, keeping in mind the fact that such LDs, being due at the end of the relevant year, are not easily ascertainable and the transaction is revenue neutral. He further stated that that the assessing officer, in the set aside order dated 26.02.2015 passed in connection with the assessment year 2008-09, deleted the aforesaid addition on account of liquidated damages recovered by the appellant and accepted the claim of the appellant that in the absence of information qua delay in delivery details by the end of the year, the amount of LD‘s cannot be ascertained and thus, no addition on this account is sustainable. He drew our attention to the page number. 577- 579 of PB Vol. 1 to support his contention. Therefore he submitted that when the assessee has already offered the sum in the subsequent year when the income accrued to the appellant there is no reason that it should be added in the current year and further the issue is squarely covered in the favour of the assessee on account of the assessment carried out by the assessee in earlier years consequent to the direction of the tribunal in assessee‘s own case. 28) Ld. departmental representative relied upon the order of the Ld. assessing officer and submitted that the liquidated damages are pertaining to this year and therefore same should be accounted for in this year only. Merely because the assessee has offered the such income in the subsequent year it cannot be excluded as income of the assessee in the current year. 29) We have heard the rival contentions. We agree with the contentions of the appellant that even under the mercantile system of accounting revenue cannot be recognized as income Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 69 of 484 on estimate basis unless the same can be measured with reasonable certainty. In the present case, as submitted by the appellant, which has not been disputed by the assessing officer that the information qua delay in delivery of vehicles before the end of the previous year is not available with the appellant. The assessing officer has also stated that the assessee should have recognized such income on estimate basis. Unless the information on actual delay in delivery of vehicles is available with the assessee, it is difficult to make any such estimation. Any estimation without any data for actual delay in delivery would be purely hypothetical and notional, which is outside the realm of taxation under the provisions of the Act. Furthermore, as we have repeatedly held in the preceding grounds of appeal, that a consistent and regular method of accounting, which has always been accepted by the Revenue in the past, should not be disturbed, merely for better presentation of accounts, more so when such exercise is revenue-neutral. We have also noted from the set-aside order dated 26.02.2016 passed by the assessing officer for the assessment year 2008-09, wherein the similar addition made in the original assessment order was deleted, while categorically observing that in the absence of information for late delivery of vehicles being available with the appellant before the end of the year, the liquidated damages could not have been estimated for recognition as income. In view of the above, we delete addition made by the Ld. Assessing officer on account of late delivery charges of Rs. 3 822168/- on account of liquidated damages recovered from transporters for late delivery of vehicles . Therefore, ground No. 6 of the appeal of the assessee is allowed. 30) Ground No. 7 of the appeal of the assessee is against the disallowance of Rs. 196581820/– in respect of provision for advertisement expenses incurred at the head office made at the Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 70 of 484 end of the relevant previous years which were subsequently reversed in the succeeding year alleging same to be excessive. Furthermore, the Ld. assessing officer also held that it was not made on scientific basis and therefore it was a contingent expenditure in nature. The Ld. assessing officer was also of the view that the appellant has failed to substantiate the method for creating the aforesaid provisions of the advertisement expenditure. The brief history of those expenditure is that assessee has during the year created certain provisions pertaining to its head office. The Ld. assessing officer asked for the basis of those provisions and also that details as to when this provisions were squared off. Therefore on the basis of the examination of the detailed the Ld. assessing officer was of the view that these provisions crystallizing in the next financial year when amount of expenditure incurred was less than the provisions made and therefore it was stated by him that there is an excess provision of Rs. 196581820/– was booked by the assessee. Therefore, according to the Ld. assessing officer the provisions made is a contingent and no scientific basis of reasonable estimate is proved. He rejected the contention of the appellant that that the liability was not crystallized till to date of finalization of the accounts. Therefore, he proposed an addition of this sum in the draft assessment order, which was objected by the appellant before the Ld. Dispute resolution panel. The Ld. Dispute resolution panel directed the Ld. assessing officer to do verification as per the order of coordinate bench in earlier years. For the purpose of verification by the Ld. assessing officer the assessee submitted a chart giving party wise breakup and details of provisions for advertisement expenses on the basis of the purchase order issued. However the Ld. assessing officer was of the view that as agreement between assessee and the various parties has not been produced the disallowance of Rs. Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 71 of 484 196581820/– was made to the total income of the assessee. Therefore, assessee is in appeal before us at ground No. 7 of the appeal. 31) The Ld. authorized representative submitted that The appellant is a company incorporated under the Companies Act, 1956 and it is mandatory for the appellant to follow mercantile system of accounting, which is being followed consistently year after year. In terms of the mercantile system of accounting, it is incumbent on the appellant to provide for expenses incurred during the year. Accordingly, the appellant on the basis of information provided by various departments regarding services availed during the relevant previous year, for which invoices have not been received and/or the rates are under negotiations, provided on estimate basis, liability for such expenses as at the end of the year. As stated above, provisions are made on the basis of management‘s best estimate in light of undergoing price negotiations with the vendors, which were not finalized until the end of the year. It is undisputed that the liability existed as the end of the relevant year, which was provided on the basis of management‘s best estimate, in as much as the provision made has been upheld to be an allowable deduction and it is only the excess amount of provision, which was reversed in the succeeding year, that has been disallowed on the ground of the same being an unascertained liability. In this regard, it is submitted, that what is required to be seen is whether the methodology followed by the assessee for providing for expenses is rational / scientific or not. If yes, then the method followed by the assessee needs to be accepted (and not disturbed) and the amount provided for is to be allowed. In this regard, it is submitted that the provision for advertisement expenses, in the year under consideration as well, has been made on the basis of actual Purchase orders and agreements and thus, has been Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 72 of 484 made on reasonable and scientific basis. Detail of provisions for advertisement is enclosed in paper book at Pg. 1293 of PB Vol. 3. As submitted above, the amount of provision is created by the appellant, on the basis of reasonable estimate, based on inputs gathered from the various departments. The estimate by its very nature cannot be precise. Further, in the case of the appellant company, having offices / branches at various locations throughout the country and several departments, the aforesaid variation, which is 0.001 % of the total turnover, cannot be said to be unreasonable or excessive. There is no mala fide involved in the process of making provision for expenses. Further, there can be no allegation of suppression of taxable income considering that the appellant is a large tax company with increasing revenues, year after year. Additionally, any short fall or excess in the amount of provision is debited/credited in the books of account in the succeeding year in accordance with the method followed consistently year after year which has been accepted by the Revenue. On an overall basis, there is even otherwise no loss to Revenue. In these circumstances, no disallowance can be made only for the reason that provision made exceeded the actual amount of liability devolving on the assessee and no loss is caused to the revenue. It is a settled law that where liability has accrued during the previous year, the same needs to be provided in the books, provided the same is capable of being estimated with reasonable certainty, even if the liability is quantified and discharged at a future date. He relied on the decision of Hon‘ble Supreme Court in Bharat Earth Movers v. CIT: 245 ITR 428 (SC) and decision of Hon‘ble Madras High Court in CIT v. Armour Consultants (P.) Ltd. 214 Taxman 444 (Mad.) and decision of the coordinate bench; Bayer Bio Science (P) Ltd.: 148 TTJ 73 (Mum.). The said method of accounting being Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 73 of 484 always accepted by the Revenue in the past could not have been disturbed by the Revenue. For the aforesaid cumulative reasons, it is submitted, that no part of the provision made at the end of the year by the assessee on the basis of a reasonable estimate / scientific basis, can be disallowed as excessive or being in the nature of contingent liability. Further, it would be appreciated on perusal of the details filed during the assessment proceedings that out of the total Purchase Orders of Rs. 197.83 crores released in AY 2010-11, invoices to the extent of Rs. 109.48 crores was received during the relevant previous year. Out of the balance PO‘s of value of Rs. 88.35 crores, Rs. 12.97 crores related to activities relating to AY 2011-12 and accordingly, no provision was made in this regard. Thus, provision was only made with respect to POs of Rs. 75.38 crores, out of which work to the extent of Rs. 19.07 crores could not materialize and thus, was reversed in the succeeding year. Accordingly, it would be appreciated that aforesaid provision was made on the basis of actual PO and management‘s best estimates and thus was reasonable and scientific in nature. He further submitted that the aforesaid issue is squarely covered in favour of the appellant by the decision of the Delhi Bench of Tribunal in appellant‘s own case for the assessment year2008- 09, wherein the Tribunal reversed the action of assessing officer in disallowing provision on the ground that the amount reversed there against in the succeeding year exceeded 15% of the amount of provision. The Tribunal held that the said approach followed by the Respondent had no valid basis and was purely ad-hoc. It was held that if a provision is made on rational and scientific basis, the same needs to be allowed as business deduction, notwithstanding the same (without any percentage limit) gets reversed in the succeeding year. The Tribunal also held that the assessing officer was bound to follow Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 74 of 484 the practice and stand taken by the Department on this issue in the earlier years and, accordingly, restored the matter back to the file of the assessing officer to reconsider the issue, having regard to the method of making provisions followed by the appellant and accepted by the Revenue in preceding years. He further stated that the Ld. assessing officer , in the set-aside proceedings, vide order dated 26.02.2015, accepted the claim of the assessee and allowed relief on the aforementioned identical issue by observing that the assessee had computed the provision on the basis of actual Purchase Orders, which was scientific and logical in nature. For this he referred to the page No. 582 – 583 of paper book volume 1. 32) The Ld. departmental representative relied upon the order of the Ld. assessing officer and submitted that in the absence of proper details furnished by the appellant the relevant disallowances been made by the Ld. assessing officer. He vehemently supported the order of the Ld. assessing officer on this disallowance. 33) We have heard the rival contentions. We agree with the submissions of the Ld. Counsel of the appellant, which, in fact, have even been agreed by the DRP and endorsed by Tribunal in the order for AY 2008-09, that a provision made for expenses on a scientific and rational basis is allowable business deduction. The provisions so made cannot be disallowed merely because; part thereof was reversed in the subsequent year at the time of actual quantification of the liabilities. We also find that the appellant had given complete details in respect of the method followed in creating the aforesaid provisions, which were made on the basis of details / information available with the company as at the end of the relevant year. We further reiterate and follow the finding given in the preceding ground of appeal that the Revenue should not make adjustment on the issues which Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 75 of 484 are revenue-neutral, having no impact on the overall tax liability of an assessee. While following the aforesaid principles, we observe that the present disallowance is also revenue- neutral, since the impugned amount of provision, as also admitted by the assessing officer itself, was reversed in the succeeding year and consequential offered to tax in that year. If such provision is disallowed in this year, the corresponding reduction would need to be made in the return of the succeeding year, neutralizing the entire tax liability on the appellant company. For the aforesaid cumulative reasons, we hereby delete the disallowance made by the by the Ld. Assessing officer of Rs. 1 9658 1820/– in respect of provision for advertisement expenses incurred at the head office made at the end of the relevant previous year which were reversed in the succeeding year and allow the ground No. 7 of appeal raised by the assesse. 34) Ground No. 8 of the appeal of the assessee is against the order of the Ld. assessing officer in making an adjustment of Rs. 319897455/– to the income of the assessee on account of the international transactions regarding payment of export commission, payment of modal fees and royalty paid on exports made to the associated enterprise. The Ld. assessing officer has held that benchmarking analysis undertaken by the assessee in respect of the international transactions of payment of a these sums by clubbing with the other transactions by applying the transactional net margin method was incorrect and in such transaction is required to be analyzed separately. The Ld. transfer pricing officer has held that the payment of export commission of Rs. 159127093/– has arm‘s length price of Rs. nil applying the cup method holding that no independent party will pay such commission in similar circumstances as the associated enterprise continues its business as usual in those Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 76 of 484 overseas territories without withdrawing from that particular territory or withdrawing some restrictions placed on it. Further he held that the restriction to export products was imposed by the associated enterprise itself he further hold that assessee has exports to south-east Asian countries consist of motorcycles of various capacities and the associated enterprise does not have a manufacturing facility for these classes of motorcycles in those countries. According to the Ld. transfer pricing officer on reading of the entire arrangement it is clear that the associated enterprise has simply used the assessee to position these products in the South Asian market at competitive prices without ceding the market and nor confirming any special benefit upon the assessee. The Ld. transfer pricing officer has further determined the arm‘s length price of payment of modal fees of Rs. 159044986/– at Rs. nil as according to him the payment of modal fees and the royalties are for the same set of services. He further held that the arm‘s length price of international transaction of payment of royalty on exports made to associated enterprise of Rs. 1725376/– was Nil as assessee was a contract manufacturer and hence royalty paid as a percentage of sales to the associated enterprise is not at arm‘s length as it amounts to collecting royalty on the sale to itself. He further held that that the sale of the assessee is partly to the related parties and the benefit of purchasing components is reaped by the associated enterprises therefore the payment of royalty does not conform to the arm‘s length price. The brief facts of the payment of export commission expenses by the assessee is that it is under a technical knowhow agreement the assessee was entitled to use technical know-how provided by Honda motor Co Ltd Japan for manufacture and sale of 2 wheelers and parts in India and was not authorized to sale its products or parts in any other territory other than in India Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 77 of 484 without prior written consent of Honda motor Co Ltd Japan. The assessee entered into a separate export agreement dated 15/01/2005 under which the Honda motor Co Ltd Japan recorded its consent to the assessee to export specific models of 2 wheelers to certain countries on payment of export commission at the rate of 5% of the free on board value of such exports. In the transfer pricing documentation appellant applied transactional net margin method as the most appropriate method to justify the international transaction of payment of export commission and submitted that it is at arm‘s length. Appellant says that the operating profit ratio of the assessee is 16.42% which is higher than the average of the operating profit ratio of comparable companies the international transactions entered into by the appellant were considered to be at arm‘s length by the appellant. The Ld. transfer pricing officer on a reference being made by the Ld. assessing officer has determine the arm‘s length of export commission payment at Rs. nil applying cup method and providing rational is that the transaction of payment of export commission is required to be benchmarked separately, an independent enterprise would compensate another party for ceding territory to it only when the later party either withdraws from that territory or some restrictions are placed upon it and nothing of that short has happened to the associated enterprise and therefore the associated enterprise continues its business as usual in those overseas territories and it is only the associated enterprise of that has been benefited from the export of the product by the assessee as the same is to support its existing subsidiaries or group companies and to promote market for its products in those countries. On the objection filed by the appellant before the Ld. dispute resolution Panel it was held that the transaction of payment of the commission is a different class of transaction Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 78 of 484 on its own as it is different from other international transactions. It was further held that therefore it should be benchmarked separately it was further held by the Ld. dispute resolution panel that assessee has also paid payment of modal fees and technical guidance fees that cover similar kind of services and therefore no independent party would have made these 3 separate payments for the same set of services and hence they upheld the adjustment proposed by the Ld. transfer pricing officer. Accordingly the arm‘s length price of the export commission payment was held to be Rs. nil. Therefore aggrieved by the order of the Ld. assessing officer/transfer pricing officer/dispute resolution panel the assessee has preferred appeal before us. 35) The 2nd international transaction was with respect to a sum of Rs. 159044986/- paid by the appellant as model fee to its associated enterprise. The model fee has been paid by the appellant in terms of the technical knowhow agreement entered into by the appellant for obtaining technical know-how in respect of new models introduced by the appellant during the relevant previous year. The about transaction was also benchmarked applying the transaction net marginal method as the most appropriate method justify the international transaction of payment of modal fee as being at arm‘s length. Regarding the profit level indicator since the operating profit ratio of the assessee is at 16.42% which was higher than the average of the operating profit ratio of the comparable companies the international transactions with respect to the model fee payment entered into by the appellant was considered to be an arm‘s length by the appellant. On reference to the transfer pricing officer by the Ld. assessing officer he determine the arm‘s length price of the model fee payment at Rs. nil applying the cup method by concluding that that no Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 79 of 484 independent party would pay such a fee in similar circumstances or the reason that in the annual report of the assessee an impression is given that research and development is carried out by the assessee complainant the technology provided by the Honda motorcycle company Ltd Japan and if that be the case the assessee is equally responsible for technology up gradation that is taking place in India. Further since the model fee payment in the royalty payment are for the same set of services there is no justification for further payment of the model fees. Therefore, on these reasons he held that the arm‘s length price of the model fee payment is Rs. nil. On objection filed by the assessee before the Ld. dispute resolution panel it upheld the findings of the Ld. transfer pricing officer on the same reasons which were given for the purpose of upholding the findings of the Ld. transfer pricing officer with respect to the payment of export commission. 36) The 3rd international transaction was with respect to the payment of royalty on sales to the associated enterprise amounting to Rs. 17.25 Lacs. The brief facts regarding the payment of royalty is that the assessee is paying royalty to Honda Japan for export made to subsidiaries and group companies. The Ld. transfer pricing officer has held that the arm‘s length price of the international transaction of payment of royalty related to the export of products to the associated enterprise is Rs. nil for the reason that assessee is paying royalty to the associated enterprise as well as export commission also. He was further of the view that assessee is a contract manufacturer and no contract manufacturer would pay royalty and to an independent party. He further gave a reason that when the assessee is making a part of it sale to as is related parties and the benefit of producing component is also obtained by associated enterprise is therefore the payment Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 80 of 484 charges for royalty do not conform to at arm‘s length prices. Against the order of the Ld. transfer pricing officer and Ld. assessing officer in draft assessment order appellant preferred objections before the dispute resolution panel who upheld the reasoning‘s of Ld. transfer pricing officer and held that arm‘s length price of payment of royalty is correctly determined by him at Rs. nil. 37) Ld. authorized representative has submitted point wise arguments with respect to all 3 services before us. 38) His arguments with respect to the export commission paid by the appellant are as under:- a) The export commission is paid by the appellant for providing access by HMCL to the appellant for procuring export orders using their network and infrastructure in relation to exports. b) In terms of technical knowhow agreement, the appellant was entitled to use technical knowhow provided by HMCL for manufacture and sale of two wheelers and parts in India and the assessee was not authorized to sell its products or parts in any territory other than India without prior written consent of HMCL. The export agreement with HMCL accorded consent to the appellant for export of specific models of two wheelers to certain countries on payment of export commission @ 5% of the FOB value of such exports. c) The payment of export commission was made by the appellant to HMCL as consideration for according consent to the appellant to export two wheelers in the overseas territory(ies), which were earlier being supplied by HMCL or its other affiliates. In other words, the payment of commission was made to HMCL in lieu of HMCL agreeing

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 81 of 484 to cede the overseas market. It is to be appreciated that the appellant by virtue of the aforesaid payment gained access to new market for its products, which enabled it to enhance its sales. d) The export commission is also paid by the appellant to HMCL for procuring export orders using their network and infrastructure in relation to exports. e) The primary purpose of payment of export commission, therefore, it would be appreciated, was ceding of overseas territory by HMCL in favour of the assessee, whereby the assessee is enabled to export its product manufactured in India to earn higher profits. f) The transaction has been appropriately benchmarked on an aggregate basis applying TNMM. The Hon‘ble Delhi High Court in the case of Sony Ericsson Mobile Communications vs CIT 374 ITR 118 held that aggregation of closely linked transactions is desirable and not merely permissible. Reliance in this regard is also placed on the following decisions wherein Courts have upheld the benchmarking of international transactions applying TNMM on an aggregate basis: i. Maruti Suzuki India Ltd vs CIT 381 ITR 117 ii. CIT vs Lumax Industries Ltd (ITA No 102/2014) (Delhi High Court) iii. Daksh Business Process Services Pvt Ltd vs DCIT (ITA No 2666/Del/2014) iv. Toyota Kirloskar Auto Parts Pvt Ltd vs ACIT (ITA No 1356/Bang/2011)

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 82 of 484 v. Avery Dennison India Pvt Ltd vs ACIT (ITA No 4868/Del/2014) vi. Cummins India Ltd vs Addl CIT (ITA No 1616/PN/2011) g) It would be appreciated that the aforesaid issue is squarely covered in favour of the appellant by the decision of the Delhi Bench of Tribunal in appellant‘s own case for the assessment years 2006-07, 2007-08 & 2008- 09, wherein the Tribunal deleted the similar adjustment made by the TPO. 39) Learned authorized representatives‘ arguments with respect to the model fees payment are as under:- a) The payment of model fee has been made in terms of License and Technical Assistance Agreement (approved by the Government) in consideration of license to manufacture ‗Products‘ and using technical knowhow a provided by the associated enterprises during the currency of the agreement .

b) The payment of model fee, therefore, it would be appreciated, is a consideration in terms of agreement with the associated enterprises for availing license to use their proprietary technology. In other words, the payment of model fee is necessary cost incurred for obtaining know- how for manufacture of products by the appellant.

c) It would be appreciated that while implementing the Transfer Pricing regulations, in our respectful submission, it would not be appropriate for the Indian tax administration to deny payment of rightful consideration to a non resident related party (AE) pursuant to a Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 83 of 484 bonafide agreement for use of their proprietary technology by the assessee for manufacture of finished products in India. Therefore, it is respectfully submitted that payment of royalty is made in consideration for right to manufacture products and using the technical knowhow owned by the associated enterprises.

d) The payment of model fee and royalty during the relevant year is for making available technology for manufacture of newer models of motorcycles, i.e., SPL3(KVHA) ―Splendor NXG‖ model and P-EA (KVNA) ―Hunk‖ model of motorcycles. The payment of model fee and royalty was for making available to the assessee new technology with respect to the aforesaid products to be manufactured by the appellant.

e) It will be appreciated that in absence of the technical knowhow provided by HMCL, the appellant would not have been in a position to manufacture newer models of motorcycles to carry on its business. The appellant, solely on the basis of technology provided by Honda, manufactures various models of motorcycles in India. The entire technical knowhow in this regard is provided by Honda and the finished products manufactured by the appellant conforms to the specifications, drawings and designs as provided by Honda. It is stated in the TP report that the appellant does not undertake significant research and development activities, all of which is performed by Honda. . The research and development undertaken by the appellant in India is limited to implementing the technology provided by HMCL and controlling product‘s specification, etc. Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 84 of 484

f) The fact that the appellant has obtained technical knowhow for manufacture of motorcycles in consideration of model fee is borne out from the various evidences, such as agreements, drawings and designs, specifications, etc. provided by Honda, Japan

g) In our respectful submission, the payment of model fee is as per the industrial policy and the agreement approved by RBI.

h) It is a common practice in the industry that, for obtaining technology, consideration is usually paid partly in the form of lump sum technical know-how fee and partly in the form of recurring royalty. The payment of consideration for availing technology, as aforesaid, is consistent with the industrial policy of the Government.

i) It would be appreciated that the aforesaid issue is squarely covered in favour of the appellant by the decision of the Delhi Bench of Tribunal in appellant‘s own case for the assessment years 2006-07, 2007-08 & 2008- 09, wherein the Tribunal deleted the similar adjustment made by the TPO. j) It is submitted that the finding of the Hon‘ble Tribunal in this regard for assessment year 2006-07 has been approved by the Hon‘ble High court in Department‘s appeal No. ITA 923/2015 wherein the Hon‘ble High Court accepting the decision of the Tribunal declined to frame a question of law on allowance of Model Fee.

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 85 of 484 40) The Ld. authorized representative put forth his argument with respect to arm‘s length price of royalty as under:- a) The contention of the assessing officer that the appellant is acting as contract manufacturer with regard to the transaction of export to the AE is erroneous and inconsistent with the facts on record. b) The appellant acts as an independent manufacturer of products, viz., two wheelers and not as a contractor manufacturer as observed by the TPO. The sale of such products are made to the AE on principal to principal basis, at price agreed upon by the parties

c) It would be appreciated that the aforesaid issue is squarely covered in favour of the appellant by the decision of the Delhi Bench of Tribunal in appellant‘s own case for the assessment years 2006-07, 2007-08 & 2008- 09, wherein the Tribunal deleted the similar adjustment made by the TPO.

d) It may be noted that the Revenue has not challenged the aforesaid finding of the Tribunal before the Hon‘ble High Court. Accordingly, the finding of the Hon‘ble Tribunal has attained finality. 41) The Ld. departmental representative relied upon the orders of the Ld. transfer pricing officer and reiterated the reasons given by him in his order which has been upheld by Ld. dispute resolution panel. On those arguments he justified that payment of export commission has rightly been benchmarked at Rs. nil. 42) We have carefully considered the rival contentions and perused the reasons given by the Ld. transfer pricing officer. We have also perused the order of the coordinate bench in case of the

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 86 of 484 assessee for assessment year 2007 – 08 and assessment year 2008- 2009 wherein the identical issue was considered and decided by the coordinate bench. Before us the Ld. DR could not point out that the facts in the present year are anyway different from the facts and issues decided by the coordinate bench in earlier years in appellant‘s own case. The coordinate bench has decided this issue for assessment year 2007 2008 in ITA number 00/Del/2012 as under:- ―59.15. The Tribunal considered these very same T.P. adjustments while disposing of the case of the assessee for A.Y. 2006-07. Paras 65 to 66, paras 88 & 89 and 90 & 91 of the Tribunal‘s cover all the three issues, as reproduced below. ―65. In the details filed before the Assessing Officer, the assessee has given model-wise details to show that the sale consideration of the export of each model was more than the domestic rate and even after considering the export commission, it was more than the domestic rate. The TPO has also held that under the export agreement, the assessee has agreed to various conditions which are detrimental to the assessee and, therefore, the assessee is not required to pay any export commission. The first point mentioned by the Assessing Officer to arrive at this conclusion is that the assessee is not able to export any model which it wants to export but it was required to export certain prescribed models. However, without the export agreement, the assessee was not able to export any of the models. It is only because of the export agreement the assessee is permitted to export the specified models to the specified countries. Therefore, the export agreement has benefited the assessee and not detrimental to the assessee as alleged by the Assessing Officer. The second Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 87 of 484 condition pointed out by the TPO is that the assessee cannot use any other distributor except the group companies and the subsidiaries. We have already pointed out that in fact the assessee is benefited by using the marketing network of the subsidiaries of HMCL because the assessee has not paid any amount to the subsidiaries of AEs. If the assessee utilizes the services of any other person, it would have been required to pay for those services. The TPO has also mentioned that the assessee is expected to bear the warranty cost. However, such warranty cost is to be borne by the assessee even in the case of domestic sale. Even otherwise, the warranty cost is always to be borne by the manufacturer. The TPO has also referred to paragraph 7.7 of the export agreement to point out that the assessee is required to conduct service campaign of its products in those countries. Paragraph 7.7 reads as under:- ―7.7 If reasonably requested by any Distributor, LICENSEE shall at its discretion conduct a service campaign, in respect of the Products and in the relevant Designated Country. Any reasonable costs/expenditure to be incurred or spent in this regard shall be duly decided by the LICENSEE at its sole discretion.‖ 66. From the above, it is evident that first of all it is to be requested by the distributor that a service campaign is required and then the assessee has a discretion to conduct or not to conduct such campaign. In case any such campaign is conducted, then the expenditure in this regard would be borne by the assessee. In our opinion, this clause cannot be said to be a detrimental condition as stated by the TPO in his order. The TPO has disallowed the entire export commission on the ground that the Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 88 of 484 export agreement was not for the benefit of the assessee but detrimental to the interest of the assessee. Therefore, no export commission is required to be paid. After considering the entire facts, we are of the opinion that the export agreement was for the benefit of the assessee and not detrimental to the interests of the assessee. By virtue of the export agreement, the assessee was able to export the specified models of the two wheelers to the specified countries. It is true that by virtue of the export agreement, the assessee was not permitted to export any of the models to any of the countries. However, even by export of specified models to the specified countries, the assessee has benefited and the assessee has given the detailed working of such benefit which is also enclosed as Annexure-1 to this order. As per this working, the assessee derived the benefit of `13.05 crores by the export. The export sale rate was more than the domestic sale rate even after considering the export commission. In view of the above, we are unable to uphold the disallowance of commission by the Assessing Officer by way of transfer pricing adjustment.‖ ―88. In our opinion, the ratio of the above decision would be applicable to the facts of the assessee‘s case because in this case also, there is no dispute about the genuineness of the payment, namely, that the payment was in fact made by the assessee to the recipient foreign company. The assessee has furnished the entire information asked for by the AO/TPO. It is not even the allegation of the Revenue that any information is not furnished by the assessee. The technical assistance received by the assessee by way of development of new model was essential for the purpose of assessee‘s Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 89 of 484 business. It is also not in dispute that the assessee was benefited from the know-how and technical assistance by way of model development by HMCL. The said technical assistance was all pervasive in the operation of the assessee‘s business.

Page 90 of 484 Thereafter, the burden shifted to the Revenue to show that the payment of model development fee was excessive and unreasonable and therefore, arm‘s length price should have been less than what is actually paid by the assessee. We find that the TPO has not specified how the model development fee paid by the assessee was excessive or unreasonable. It is only his subjective assessment that the arm‘s length price of the model development fee should have been 25% of the payment made by the assessee. While taking this view, he has held that there was a joint activity of development of new model by the assessee and HMCL. The contribution of the assessee is much more than the HMCL and therefore, he attributed only 25% of the model development fee as arm‘s length price of the transaction. However, we have already discussed above that there was no such joint activity of the model development. The activity of the assessee of the market research and market study was for ascertaining the specifications of the model/technology required by it. Therefore, it was prior to the actual research and development undertaken by HMCL. The next activity of the assessee started only after the model is developed by HMCL and technology is handed over to the assessee. Then the assessee undertook the research and development activity for absorption of such technology and for indigenization of the spare parts. Thus, the activity of research and development of the model was undertaken by HMCL and not jointly by the assessee and HMCL. No other reason is given by the TPO for determining the arm‘s length price at 25% of the model fee paid by the assessee. He has not applied any method for determining the arm‘s length price prescribed under Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 91 of 484 Section 92C(1) of the Income-tax Act. In view of the above, the decision of Hon‘ble Jurisdictional High Court in the case of Nestle India Ltd. (supra) would support the case of the assessee rather than the Revenue. In view of the totality of above facts, we are unable to uphold the view of the TPO that the arm‘s length price of model development should be to the extent of 25% of the payment towards model fee. The same is set aside and the addition made on this count is accordingly directed to be deleted.

Page 92 of 484

11.2 On analysis of the above facts following points are noticed: 1. The assessee is paying royalty to Honda Japan. 2. The exports are made to the subsidiaries or group companies of Honda Japan. 3. The assessee, in a way is paying royalty to Honda Japan for the exports made to the subsidiaries and group companies of Honda Japan. 4. The assessee is also paying Export Commission to Honda Japan @ 5% for the exports made to the AEs. 5. In a way the price of exports made to AEs have been reduced by the amount of royalty and export commission as compared to the sale in the domestic market. 11.3 The position of the assessee company with regard to manufacturing for the AEs is that of a Contract Manufacturer. The assessee company is purchasing raw material from the AEs. The royalty paid as a percentage of sales to the associated enterprise is not at arm‘s length because it amounts to collecting royalty on the sales to itself. All the AEs are typically within the broad umbrella of the multinational corporation. Even though, it appears that the technical knowhow is commercially exploited in India, in realty the price for these activities are not fixed by market forces. Whether the sales of the assessee are made within India to its AE or to the parent company does not make much difference to the principles of arm‘s length transactions. In this case the capacity and other parameters are tied to the AE capacity and it cannot act like an entrepreneur. Therefore, both the risk and reward are like a contract manufacturer. No contract

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 93 of 484 manufacturer would like to make this kind of transactions with an independent third party.‖

We respectfully follow the decision of coordinate Bench of the Tribunal.‖ 59.16. The submission of the ld. DR that the Tribunal has not considered the agreement while disposing of the mater in the previous year is devoid of merit. Ld. DR has not pointed out as to what are the clauses and as to how he has come to the conclusion that the Tribunal has not considered certain aspects while disposing of the matter in the earlier year. In the absence of any specific submission in this behalf, we are inclined to follow the coordinate Bench order, which has considered the technical knowhow agreement dated 2-6-2004 which is approved by the Central government on 6-9-2004 as well as the supplementary agreement dated 30-1-2004 and 20-9-2005, both of which were approved by the Central government and had come to the conclusion referred to above. In view of the above discussion, we allow this ground of the assessee.‖ 43) For the subsequent year also the coordinate benches followed the similar view with respect to all the payments. Further with respect to the allowance of the model fee the Hon‘ble Delhi High Court in appellant‘s own case for assessment year 2006 – 07 has not admitted the appeal of the revenue on this aspect, and further with respect to the arm‘s length price of payment of royalty on sales to associated enterprise the appellant has submitted that revenue has not challenged the aforesaid finding of the tribunal before the Hon‘ble high court which fact is not controverted by Ld. DRP therefore accordingly the finding of the coordinate bench has attained finality. In view of above, Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 94 of 484 respectfully following the decision of the Coordinate Bench of the Tribunal in appellant‘s own case for AY 2006-07, 2007-08 &2008-09, we hold that the issue is squarely covered in favour of the appellant. Therefore we reverse the finding of the lower authorities in determining the arm‘s length pricing of payment of export commission of Rs. 15.91 crores, model fees payment of Rs. 15904 4986/– and payment of royalty on sales of Rs. 17.25 Lacs at Rs. nil. Therefore, ground no. 8 of the appeal of assessee is allowed. 44) Ground No. 9 of the appeal of the assessee is against the disallowance under section 40 (a) (ia) of Rs. 6408000/- incurred on account of provision towards advertisement and publicity expenses provided at the end of the year on the ground that the assessee has failed to deduct tax at source there from under the provisions of section 194C of the income tax act. According to the Ld. assessing officer the assessee should have withheld tax in respect of provision even when the exact amount payable to recipient subject to tax deduction at source and the actual recipients are not identifiable at the time of providing for the liability. The brief fact of the disallowances is that At the year end, the assessee created provision for expenses under ―Dealer Group Promotion Scheme‖ (DGP), debited under the head of ‗advertisement & publicity‘ expenses, which were pending to be processed as on 31.03.2010 and booked as provision on 31.03.2010. The assessee enters into principal to principal agreement with dealers, whereby the dealers purchases vehicles from the assessee on its own account and further sell the same to the customers. The dealers, in order to promote sales have to incur advertisement expenses, for which re-imbursement of certain portion thereof is subsequently sought from the assessee, pursuant to a sales promotion scheme introduced by the assessee. In such Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 95 of 484 circumstances, since the contract of advertisement is between the dealers and the contractor, the obligation to deduct tax at source, if any, from the payments made under such advertisement contracts is that of the dealer(s). The assessee simply reimburses the actual cost incurred by the dealer, in proportion of its share, as per the terms of arrangement/scheme. Further, since the assessee only reimburses portion of total expense, which did not constitute income of the recipient dealers, the same was not subject to TDS under section 194C of the Act. Under section 194C of the Act, a person is liable to deduct tax at source at specified rate on income comprised in amount payable to a contractor. Thus, liability to deduct tax at source arises only if the payment includes any element of income. The amount of Rs. 64,08,000/- is provision for expenses in respect of all bills, which are pending to be processed as on 31.03.2010 and booked as provision on 31.03.2010. In view of the mercantile system of accounting being mandatory for the assessee company to follow, the assessee company, on the basis of bills received from dealers, which are pending for processing, makes estimate and creates provision for such liability. These invoice/bills of dealers are processed in the subsequent year and credited to the said provision account and any shortfall in the provision is debited in or any excess provision is reversed in such year. It was submitted that the aforesaid provision of liability towards dealers was reasonably estimated on the basis of bills pending to be processed during the year and no income accrued in the hands of such dealers and, therefore, the assessee was not obliged to deduct tax at source there from under any provision of Chapter XVIIB of the Act. However Ld. assessing officer was of the view that assessee is liable to deduct tax at source from the aforesaid amount of Rs. 6 4.08 lakhs under the provisions Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 96 of 484 of section 194C of the act and consequently held that the entire amount is disallowable for non-deduction of tax at source. On objection before the Ld. dispute resolution panel the reasons given by the Ld. assessing officer was upheld rejecting the objection of the assessing. The Ld. assessing officer has observed that the assessee was having an arrangement with the various media agencies for organizing and carrying out advertisement of the company in different print/electronic media at stipulated date and time. In accordance with the above the companies choose purchase orders to the advertiser for the requisite number of advertisement to be executed in the stipulated period of time and subsequently the bills of media agencies were raised on assessee on the basis of submission of proof of carrying out of the advertisement. Therefore the tax should have been deducted on this sum. 45) The Ld. authorized representative vehemently contested the disallowance made by the Ld. assessing officer submitting that:- a) The observations made by the AO/DRP are patently contrary to facts on record. The assessee submitted that the aforesaid payments were made on account of reimbursement of actual expenses incurred by the dealers on advertisements. Since the responsibility to deduct tax at source at the time of making payment to the advertisement contractor was undertaken by the dealer, the assessee was not obliged to deduct tax at source in relation to the aforesaid reimbursement to the dealers on a cost to cost basis, as the same would have resulted in double deduction of tax at source.

b) Further, there was no privity of contract between the advertising agency and the assessee so as to require the Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 97 of 484 assessee to deduct tax at source from the aforesaid amount under section 194C of the Act. The privity of contract was between the dealer and the advertising agency. The assessee did not make payment to the dealer under any contract with the dealer for carrying out advertising work, and hence the provision of section 194C of the Act did not apply. c) Reliance, in this regard, is placed on the following decisions, wherein it has been held that the payer is not obliged to deduct tax at source from re-imbursement of expenses under any provision of Chapter XVII-B of the Act, since the same does not constitute income of the payee:

I. ITO v. Dr. Willmar Schwabe India (P) Ltd.: 95 TTJ 53 (Del.) (Further, appeal dismissed by the Delhi High Court). ii. CIT vs. DLF Commercial Project Corp.: ITA No. 627/2012 (Del.) iii. CIT v. Fortis Healthcare ltd.: 181 Taxman 257 (Del.) iv. CIT vs. Siemens Aktiongesellschaft: 310 ITR 320 (Bom.) v. United Hotels Ltd. v. ITO: 93 TTJ 822 (Del) vi. Karnavati Co-op. Bank Ltd. V. DCIT: 134 ITD 486 (Ahd.) vii. Mahyco Monsanto Biotech (India) Ltd. v. Addl. CIT: ITA NO. 5842/MUM/2012 (Mum.)(ITAT)

d) The aforesaid issue has also been decided in favor of the appellant by the Tribunal in appeal for the AY 2007-08,

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 98 of 484 wherein it has been held that there is no obligation to deduct tax at source from re-imbursement of expenses. [Refer Pages 19 of Vol-1, Para 35.4to 35.6] e) Without prejudice to the above, even otherwise, the appellant was not obliged to deduct tax at source from the aforesaid expenditure, since the same was merely a provision, where neither the exact party who incurred the advertisement expenditure nor the exact amount payable thereto was ascertained. f) Since the amount payable party-wise was not quantified, the appellant was not in a position to deduct tax at source from the provision created for the aforesaid expenses / liability under any provision of Chapter XVII-B of the Act. g) It is submitted that the satisfaction of the following twin conditions is a sine qua for attracting any provision of Chapter XVIIB of the Act:

i. credit to the account of identified payee and ii. the credit results in accrual of income in the hands of recipient.

Identified Payee

a) Reliance, in this regard, is placed on the following decisions, wherein while approving the aforesaid legal position, it has been held that an appellant is not liable to withhold tax under the provisions of Chapter XVII-B from the amount of

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 99 of 484 provision, where, the exact amount receivable by the payee is not known or the payee is not identified: (i) UCO Bank v. UOI: 369 ITR 335 (Del.) (ii) Ericsson Communication Ltd.: TS-523-HC-DEL (iii) Industrial Development Bank of India v. ITO: 104 TTJ 230 (Mum.) (iv) Pfizer Ltd. v. ITO: ITA NO. 1667/Mum./2010 (Mum.) (v) Dishnet Wireless Limited vs. DCIT: [2015] 172 TTJ 394 (Chennai) b) Further, it is submitted that it has not been appreciated that the liability to withhold tax also attaches with itself, the liability to issue a TDS certificate for the tax deducted/withheld by the payer. If the payee is not identifiable then it is impossible for the payer to issue a TDS certificate. Accordingly, the interpretation adopted by the assessing officer would lead to absurdity, which cannot be the intention of the legislature.

Income in the hands of the payee (i) Obligation to deduct tax at source would be triggered only when the sum payable by payer is chargeable to tax as income in the hands of payee.

(ii) In the present case, it would be appreciated that since the provision has been made on an estimate basis, the same cannot be construed as ‗income‘ in the hands of the payee. It is well settled that income accrues only when the recipient is vested with the right to receive income from the

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 100 of 484 payer or there must be a debt owed to the recipient by the payer. [Refer: E.D. Sasoon & Co. Ltd: 26 ITR 27 (SC)].

(iii) Therefore, unless the recipient is vested with a right to receive payment from the payer, no income can be said to have accrued in the hands of such payee. b. ACIT v. Motor Industries Co.: 249 ITR 141 (Kar.) c. Ericsson Communication Ltd.: TS-523-HC-DEL

h) Without prejudice, considering that similar payments were made by the applicant in preceding assessment years, without deduction of tax at source, which was always accepted by the Revenue, the applicant was under the bonafide belief that no tax was required to be deducted there from and accordingly, having regard to the decision of CIT v. Kotak Securities Ltd.: 245 CTR 3, no disallowance was warranted under section 40(a)(ia) of the Act.

i) Further, without prejudice, it is submitted, that since the payees have also paid tax on the income receivable from the assessee, no disallowance could be made under section 40(a)(ia) of the Act for alleged default in deduction of tax at source by the assessee.

j) The aforesaid legal position has also been recently endorsed by the Finance Act, 2012 (passed on 28.5.2012) whereby, section 40(a)(ia) has been amended to provide that the assessee shall be deemed to have deducted and

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 101 of 484 deposited tax, on the amount on which tax was deductible but was, in fact, not deducted, on the date of furnishing of return of income by the resident payee, if the assessee is not treated as an assessee in default under proviso to section 201(1) of the Act considering that the payee has-

(i) taken into account such sum as part of gross revenue credited to the profit and loss account for the relevant financial year;

(ii) furnished return of income under section 139 of the Act for the relevant assessment year taking into account profit disclosed in the profit and loss account for the relevant financial year ; and (iii) paid tax due on the income declared in such return of income; and the payer furnishes a certificate to this effect from an accountant.

k) Memorandum explaining provisions of the Finance Bill, 2012 provides the justification for insertion of second proviso to section 40(a)(ia) of the Act in the following words:- ―In order to rationalize the provisions of disallowance on account of non-deduction of tax from the payments made to a resident payee, it is proposed to amend section 40(a)(ia) to provide that where an assessee makes payment of the nature specified in the said section to a resident payee without deduction of tax and is not deemed to be an assessee in default under section 201(1) on account of payment of taxes by the payee, then, for the purpose of

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 102 of 484 allowing deduction of such sum, it shall be deemed that the assessee has deducted and paid the tax on such sum on the date of furnishing of return of income by the resident payee.‖ (emphasis supplied)

l) On perusal of the above, it may kindly be noted that the wordings ‗In order to rationalize the provisions‘ indicates that the amendment was made with a view to remove the unnecessary hardship caused to assesses by the earlier provision. The non-deduction of tax at source from the amounts genuinely spent by the assessee for business purpose, resulting in disallowance of the same under section 40(a)(ia) of the Act, notwithstanding that tax was paid by the payee treating the amount received from the payer as its taxable income, caused a lot of hardship to the assesses and thus the amendment by the Finance Act, 2012, relaxing the rigour of such provision should be construed as having retrospective operation from assessment year 2005-2006, being the year of insertion of the said section in the Statute.

m) It is reiterated that though the aforesaid amendment, by way of insertion of second proviso in section 40(a)(ia) of the Act has been made applicable from 1 April 2013, i.e., from assessment year 2013-14 onwards, but since the said amendment is remedial in nature, designed to eliminate unintended consequences which may cause undue hardship to the taxpayers, the same should be regarded as clarificatory and retrospective in nature. It is well settled law that when a provision is inserted as a

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 103 of 484 remedy to make the provision workable, it is required to be considered to be applicable retrospectively. [Refer: Allied Motors (P.) Ltd. vs. CIT: 224 ITR 677 (SC); CIT vs. Alom Extrusions Ltd: 319 ITR 306 (SC)]

n) Reference at this juncture may also be made to the amendment to section 40(a)(ia) of the Act vide Finance Act, 2010, w.e.f. 01.04.2010 by way of insertion of the first proviso thereto, which provided relaxation from disallowance under the said section, where the assessee had deducted tax at source on payments made in conformity with Chapter XVII-B and deposited the same on or before due date specified in section 139(1) of the Act.

o) Controversy arose as to whether amendment made by the Finance Act, 2010, by way of insertion of first proviso to section 40(a)(ia) of the Act was prospective or retrospective in nature. On the aforesaid issue the Courts have, in a catena of decisions, consistently held that the amendment brought by Finance Act 2010 being remedial in nature, designed to eliminate unintended consequences which may cause undue hardship to the taxpayers, had to be regarded as clarificatory in nature and having retrospective operation with effect from 1st April, 2005, viz, the date on which section 40(a)(ia) was brought on the statute. Reference can be made to the following decisions: (i) CIT v. Naresh Kumar and Ors.: ITA No. 24/2013 (Del.) (ii) CIT vs. Rajinder Kumar: ITA No. 65/2013 (Del) (iii) CIT vs. Virgin Creations [ITA No. 302 of 2011] (Cal)

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 104 of 484 (iv) M/s Lloyd Insulation (India) Ltd v DCIT: ITA No. 2400/Del/2011 (Delhi) (v) Bansal Parivahan (India) Pvt. Ltd. vs. ITO : (2011) 43 SOT 619 (Mumbai) (vi) Piyush C. Mehta vs ACIT : 2012 52 SOT 27 (Mumbai) (vii) Parth Developers vs ITO : ITA No. 344/Ahd/2010 [ (viii) Dynamic Builders vs. ITO : ITA No. 1625/Ahd./2008 (Ahmedabad) (ix) Aavkar Developers vs. ITO : ITA No. 3165 / Ahd./ 2009 ( Ahmedabad) (x) Golden Stables Life Centre Pvt. Ltd. vs. C.I.T : ITA No. 5145/Mum/2009 (Mumbai) (xi) Matrix Glass and Structures (P) Ltd. vs ITO : ITA No. 658 (Kol) of 2010 (Kol) (xii) ACIT v. M/s Sanjay Automobile Engineering: ITA No. 1370/PN/2011 (Pune) (xiii) Rana Builders vs. ITO : 142 ITD 205 (Rajkot) (xiv) Rajamahendri Shipping & Oil Field Services Limited [ITA No.352/Vizag/2008]

p) In the following decisions, the Courts/Tribunal construing the amendment in section 201 and 40(a)(ia) by Finance Act, 2012 w.e.f. 1.07.2012, applying the ratio decidendi laid down in the judicial precedents referred hereinabove, held the said amendment to be procedural in nature and thus applicable retrospectively.

(i) Ansal Land Mark Township P. Ltd.: 377 ITR 635 (Del.)

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 105 of 484 (ii) Gujarat Pipavav Port Limited vs. DCIT: ITA Nos. 614 & 615/Rjt/2012 (Rajkot) (iii) DCIT v. Ananda Marakala : 48 taxmann.com 42 (Bang.) (iv) Shri G. Shankar v. ACIT: ITA No.1832/2013 (Bang.) (v) Rajeev Kumar Agarwal: 45 taxmann.com 555 (AGR) (vi) Ballabh Das Agarwal vs. ITO (ITAT Kolkata)

q) In view of the above, it is submitted that when amendment in section 201 has been held to have retrospective application, the corresponding amendment in section 40(a)(ia) of the Act should also be construed to have retrospective application.

r) In that view of the matter, without prejudice to the submissions that (i) there was no failure on the part of the appellant to deduct tax at source and (ii) the alleged failure, if any, was on the basis of bonafide belief/difference of opinion, it is respectfully prayed that since the payees have also paid tax on the income received/ receivable from the appellant, no disallowance could have been made in the hands of the appellant under the said section for alleged failure to deduct tax at source, in view of the amendment made to section 40(a)(ia) of the Act, which is clarificatory in nature and, therefore, applicable retrospectively. In the event, it is decided that the assessee was liable to deduct tax at source from the aforesaid provision, the matter may be

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 106 of 484 set-aside to check if the payees had paid the taxes and no part of such provision be disallowed.

s) In all fairness, it is submitted, that the aforesaid issue that the similar issue that assessee is liable to deduct tax at source from provision has been decided against the appellant by the Tribunal in assessment year 2007-08. However, the said decision is distinguishable from the facts of the instant case, in as much as, the Tribunal in that order decided against the appellant on the ground that payees for which provision was made were identifiable, unlike the facts of the instant case. Further, the Tribunal did not consider the alternate plea of the appellant that if the payee had paid the taxes then in view of second proviso to section 40(a)(ia), having retrospective application, no disallowance could be made under the said section.

t) It would be pertinent to point out that the appellant has preferred an appeal before the Hon‘ble Delhi High Court against the order of the Tribunal for AY 07-08 and 08-09 in ITA No 341/2014, wherein the Hon‘ble Court vide order dated 19.11.2015 was pleased to admit question of law on the aforesaid issue and the appellant is sanguine that the issue shall be decided in favour of the appellant on disposal of the appeal.

u) Further, the assessing officer, in the set-aside orders for assessment year 2007-08 and 2008-09 had also accepted the alternate contention on verification of the date of Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 107 of 484 deduction and depositing tax at source and disallowance was made only on the ground that relief ought to be granted in the year of deduction of tax a source, viz., the subsequent assessment year. [Page 570-571 and 585-586 of Vol-2] 46) We have carefully perused the rival contentions and also perused the relevant material placed before us including the order of the coordinate bench in case of appellant for earlier years where in it is held that it is reimbursement of expenditure and on this there is no requirement of tax deductions at sources. Ld DR could not point out any change in the facts and circumstances of the case and therefore we are bound to follow the order of the coordinate bench in case of the appellant for earlier years. Therefore we are bound to follow the order of coordinate bench and allow ground no 9 of the appeal of the assessee and delete the disallowance accordingly. 47) Ground No. 10 of appeal is against the disallowance made by the Ld. assessing officer of Rs. 14734700/-on account of provision made towards commission paid on institutional sales to dealers on the ground that the assessee has failed to deduct tax at source under section 194H from the amount of the aforesaid provision. The assessee is also aggrieved on the observation of the Ld. assessing officer that appellant has not disputed that the applicability of section 194H on the aforesaid amount of provision made towards commission payable to dealers though contract between the dealers in the appellant was on principle to principle basis and according to the appellant the provisions of section 194H were not applicable on the aforesaid amount of commission. The brief facts of the disallowances that as per the arrangement of the appellant with the government institutions like canteen stores Department etc

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 108 of 484 vehicles are sold to such institutions or their representative at an agreed price which is normally less than the prevailing market price. In respect of such sales made by a dealer at a concessional price, the appellant compensates the dealer at a predetermined rate, the dealer remain liable for any defects in the vehicle on principal-to-principal basis. On receipt of the instant intimation from dealers across the country at the end of the financial year, which is voluminous, the regional journal cell office provides information about the number of vehicles sold to institutional customers. The amount of compensation to the dealer is computed by applying specific percentage to the value of vehicles sold in provision is made thereof in the books of accounts accordingly at the end of the year the appellant made provision of Rs. 14734700/– towards commission on institutional sales payable to dealers. The Ld. assessing officer has disallowed the aforesaid amount of provision on the ground that the appellant has failed to deduct tax at source under section 194H from the sale provision under section 40(a) (ia) of the act. Ld. dispute resolution panel agreed with the view of the Ld. assessing officer and therefore the appellant is an appeal before us raising this ground. 48) Before us the Ld. authorized representative submitted that sales made by dealers to institutional customers were on a principal to principal basis and not as agent of the appellant and only the concession in price of vehicles sold by dealers was compensated by the appellant at pre-determined price. He relied upon the decision of the Hon‘ble Delhi High Court in case of Jai Drinks P. LTd.: 336 ITR 383 (Del.). He further submitted that Without prejudice, obligation to deduct tax at source under Chapter XVII-B arises (i) when the payee is identified and (ii) amount is receivable by payee during such year. He submitted that the provision was made on the basis of intimation as to the Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 109 of 484 number of vehicles sold to institutional customers that was received at the fag end of the financial year. However, the appellant was aware about the liability to pay commission, but was not aware about the amount payable to the respective payee/dealer. According to him dealer is vested with right to receive commission only after claim for such commission made by the dealer is verified, acknowledged and passed for payment by the appellant. In the event of rejection of claim, the dealer would not be entitled to receive any commission on sales made to customer. Therefore, commission amount payee wise was not known and there was no right to receive the same in hands of the payee. He further submitted that considering that similar payments were made by the applicant in preceding assessment years, without deduction of tax at source, which was always accepted by the Revenue, the applicant was under the bonafide belief that no tax was required to be deducted there from and accordingly, having regard to the decision of Bombay High Court in the case CIT v. Kotak Securities Ltd.: 245 CTR 3, no disallowance was warranted under section 40(a)(ia) of the Act. He further submitted that since the payees have also paid tax on the income received/ receivable from the applicant, no disallowance could be made under section 40(a)(ia) of the Act for alleged default in deduction of tax at source by the appellant. The assessee relied upon submission supra that amendment by way insertion of second proviso to section 40(a)(i), being clarificatory in nature, has retrospective application and, therefore, were payee have paid taxes no disallowance could even otherwise be made under section 40(a)(ia) of the Act. He submitted that the aforesaid issue is squarely covered in favour of the applicant by the order of the Tribunal in applicant‘s own case for assessment year 2007-08 and 2008-09, wherein it was held by the Tribunal that tax is Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 110 of 484 not required to be deducted under section 194H on payments made to dealers on account of sales by dealers on principal to principal basis. 49) The Ld. departmental representative relied upon the order of the Ld. assessing officer and the Ld. dispute resolution panel and submitted that that assessee has paid discount/commission to its dealers which is subject to tax deduction at source under the provisions of section 194H of the income tax act and therefore the tech should have been deducted on the sum. He vehemently supported the order of the Ld. assessing officer that the disallowance has been properly made. 50) We have carefully considered the rival contentions and perused the relevant material placed before us. It is a matter of fact that this issue is decided by the coordinate bench in the appellant‘s own case for assessment year 2007 – 08 and 2008 – 09 and admittedly, there is no change in the facts and circumstances of the case of the assessee compared to the year for which the tribunal has decided this issue. The coordinate bench in appellant‘s own case has decided this issue for assessment year 2007 – 08 as under:- ―45.11. The facts of this case clearly demonstrate that what is given to the stockists/ dealers are discount on the purchase price and not any commission. The stockists/ dealers purchase spare parts/ vehicles from the assessee. They are not commission agents. Sale consideration is paid by these parties to the assessee. As a matter of incentive for higher sale, the assessee grants discount if the stockits/ dealers achieve a particular volume of transaction. Thus, in our view the discount in question is not in the nature of commission or the brokerage, which attracts sec. 194H. In the case of CIT Vs. Mother Dairy Ltd. (ITA no. 1925/2010(Del) the Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 111 of 484 Hon‘ble Delhi High Court was considering similar case and held as follows: ―3. The assessee explained in writing that it sold the products to the concessionaires on a principal to principal basis, that the concessionaires buy the products at a given price after making full payment for the purchases on delivery, that the milk and other products once sold to the concessionaires became their property and cannot be taken back from them, that any loss on account of damage, pilferage and wastage is to the account of the concessionaires and that in these circumstances the payment made to the concessionaires cannot be treated as ―commission‖ for services rendered and consequently there was no liability on the part of the assessee to deduct tax. 13. It is irrelevant that the concessionaires were operating from the booths owned by the Dairy and were using the equipment and furniture provided by the Dairy. That fact is not determinative of the relationship between the Dairy and the concessionaires with regard to the sale of the milk and other products. They were licensees of the premises and were permitted the use of the equipment and furniture for selling the milk and other products. But so far as the milk and the other products are concerned, these items became their property the moment they took delivery of them. They were selling the milk and the other products in their own right as owners. These are two separate legal relationships. The income tax authorities were not justified or correct in law in mixing up the two distinct relationships or telescoping one into the other to hold that because the concessionaires were selling the milk Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 112 of 484 and the other products from the booths owned by the Diary and were using the equipment and furniture in the course of sale of the milk and other products, they were carrying on the business only as agents of the Diary. 45.12. The Hon‘ble High Court held that in such circumstances S.194H is not attracted. 45.13. In the case of Jai Drinks (P) Ltd. 336 ITR 383 (Del.), the Hon‘ble Delhi High Court has held as follows: ―Held, dismissing the appeal, that a perusal of the agreement showed that the assessee had permitted the distributor to sell its products in a specified area. The distributor was to purchase products at a predetermined price from the assessee for selling them. Both the assessee and the distributor had been collecting and paying their sales tax separately. The CIT(A) and also the Tribunal rightly held that the payments being made by the assessee to the distributor were incentives and discounts and not commission.‖ 45.14. Respectfully following the propositions laid down in the aforementioned cases we allow this ground of the assessee.‖ 51) The vehicles in the present case are being sold by the dealers, which are normally less than the prevailing market price in view of the institutional sales, and therefore the dealers are being compensated for the sales made by them at concessional price and dealers are selling these goods to the institutional customers on principal-to-principal basis. For the less realization of the sale price by the dealer, they are compensated by the assessee at the predetermined rate. The above issue has already been decided by the coordinate bench as stated above and Ld. departmental representative could not point out any contrary decisions on this issue, therefore respectfully following Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 113 of 484 the decision of the coordinate bench we allow ground No. 10 of the appeal reversing the disallowance made by the Ld. assessing officer on commission to dealers on institutional sales amounting to Rs. 1 473 4700/– on account of non-deduction of tax. 52) Ground No. 11 of the appeal of the assessee is against disallowance of purchases to the extent of Rs. 7 2.40 crores made from certain parties related with the assessee in terms of accounting standard 18 issued by the Institute of chartered accountants of India alleging that the same are excessive. It is further the grievance of the assessee that the expenditure was actually incurred by the assessee for the purpose of the business and no part of the same was excessive or unreasonable and further the parties which have been picked up by the Ld. assessing officers were not related to the assessee in terms of the provisions of section 40A (2) (b) of the income tax act hence no disallowance of such expenses could have been made by invoking those provisions. The brief facts of the disallowances that during the course of business of manufacturing of the 2 wheelers the appellant has procured certain material such as critical components like shock absorber carburetors etc which are fitted in the 2 wheeler manufactured by the appellant from a single vendor having the requisite technology to manufacture the same, in accordance with the specifications given by the appellant. The appellant procure this material and components from this single vendor. The purchase price of components which are purchased from various suppliers are based upon the negotiations with such vendor and a different due to various factors like level of automation vendor, amount of investment by the vendor, age of the plant, capacity utilization, volume of the supply, geographical differences and tax effect on the purchase of those Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 114 of 484 goods. During the course of assessment proceedings the Ld. assessing officer after comparing purchase price of certain products, which were purchased from the aforesaid related parties is also from unrelated parties, alleged that the purchase price from the related parties was excessive in order to reduce the taxable income of the appellant. The AO was also of the view that the shareholding in various companies as been organized in such a manner that the parties do not qualify as related party under the provisions of the income tax act but they are related parties according to the provisions of accounting standard 18 issued by the Institute of chartered accountants of India. The Ld. assessing officer was also of the view that he has the power to lift the corporate veil to disallow excessive purchase price paid to the aforesaid parties notwithstanding that the said parties were not related in terms of the provisions of section 40A (2) of the income tax act. He was also of the view that the appellant has failed to establish the reason behind purchase of Roma trail of same quality at higher price from the related party incomes of accounting standards compared to the procurement of similar material at lower prices from unrelated parties. Therefore the Ld. assessing officer computed excessive purchase price at Rs. 11.60 crores in respect of purchases from related parties for which internal comparables of similar products purchased from related parties were available. In case of other parties was no internal comparable was available the Ld. assessing officer worked out an amount of Rs. 6 0.80 crores in the same proportion as that of purchases for into which internal comparables are available and therefore the Ld. assessing officer computed the total disallowance of Rs. 7 2.40 crore out of the purchases. The Ld. assessing officer made such addition in the draft assessment order, which were challenged by the assessee before the Ld. dispute resolution panel who Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 115 of 484 concurred with the views of the Ld. assessing officer rejecting the objection of the appellant, and therefore the assessee is in appeal before us on this ground. 53) Ld. authorized representative submitted that it was on account of various factors / varying business circumstances, enumerated below as a consequence of which prices paid to different vendors, including related parties in terms of AS-18, were different:

i. Level of automation of vendor; ii. Amount of investment by vendor, age of the plant, capacity utilization (impacting fixed cost recovery); iii. Volume of supply by each vendor (At times vendor supplying more is paid less and vendor supplying less is paid more); iv. Geographical differences of each vendor (which could impact cost of freight, labour, power), lead time, indirect tax costs (CST vs. VAT) etc. Further, the assessee company also preferred purchasing material from more than one suppliers, due to business/commercial expediency, viz., derisking the supply chain to reduce dependence, inability of one supplier to meet demand increase, etc., even if the price paid is nominally higher vis-à-vis the price charged by another supplier.

He further submitted that submitted, that it was on account of the aforesaid business considerations that the purchase were made from related parties, at prices nominally higher than those paid to unrelated parties. He also submitted that there

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 116 of 484 are several instances where purchases were made from related parties at a price lower than the price charged by unrelated parties, which clearly demonstrates that prices are negotiated based on various commercial factors and the fact that the vendor is related or unrelated to the appellant is not relevant. According to him purchases are made at higher rate from such parties on account of commercial/business expediency, like, derisking the supply chain to reduce dependence, inability of existing supplier to meet demand increase etc. he further submitted that it was not that in every instance purchases made from related parties were at prices higher than purchase price paid to unrelated parties. There are several instances attached at page Nos. 1537-1561A of the PB Vol. 4, wherein it has been demonstrated that purchases were made from related parties even at a price lower than the prices paid to unrelated parties. According to him, instances of higher purchase price were, therefore, only because of commercial factors/business considerations, the reasonableness of which is to be seen from the point of view of the businessman and cannot be dictated by the Revenue. [Refer: SA Builders Ltd: 288 ITR 1 (SC)]. he further stated that apart from the provisions of section 40A(2), there is no provision under the Act, which clothes the assessing officer with the power to go into the issue of reasonableness of the expenditure incurred by an appellant. Where the party is not related in terms of 40A(2), there is no scope for the assessing officer to examine the reasonableness of the expenditure and to disallow any part thereof. [Refer: Shaw Wallace Distilleries Ltd. vs. ACIT: 85 TTJ 236 (Del.) which has been upheld by the Supreme Court in SLP No. 18121/2007; DCIT vs ICICI Web Trade Ltd.: ITA No. 6559/M/2006 (Mum.)]. Similar view has been held by Delhi Bench of Tribunal in case of Glaxo Smithkline Asia P. Ltd.: 97 TTJ 108 which has been Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 117 of 484 upheld by Supreme Court in SLP No. 18121/2007/ 236 CTR 113. He vehemently submitted that the vendors are independent, distinct legal entities and the appellant exercises no control over such vendors. These entities are carrying on business in their independent right and supplying goods to independent, unrelated third parties as well. Therefore, no question arises of lifting of corporate veil as alleged by the assessing officer. [Refer: Juggilal Kamlapat v. CIT: 73 ITR 702 (SC) and CIT v. Indian Express Newspapers (Madurai) (P) Ltd.: 238 ITR 70 (Mad)]. He argued that Further, as long as the appellant acted in a bonafide manner and it was not a case of fraudulent or sham transaction, the Revenue would not, on account of commercial considerations be empowered to lift the corporate veil even if an incidental tax advantage accrues to the appellant. He further referred to the various decisions where it has been held that legitimate transaction entered into bonafide cannot be branded as a colourable device merely because it results in lower tax outflow and tax saving to the taxpayer and is between related parties. Similarly, the fact that transaction is between two unrelated parties would not also mean that such transaction could not be regarded as a sham transaction. i) Aradhana Beverages & Foods Co. P. Ltd. v. DCIT: 21 taxmann.com 135 (Del.) ii) CIT v. Samsung India Electronics Ltd.: 243 CTR 235 (Del.): SLP filed by the Revenue has been dismissed in CC 21452/2011. iii) CIT v. George Williamson (Assam) Ltd. 265 ITR 626 (Gau) iv) CIT vs Bihariji Construction (India) Ltd. 289 ITR 303 (Gau)

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 118 of 484 v) CIT vs Lazor Syntex Ltd. Income Tax Application No. 11 of 1999 (rendered on 11 Jun 2007) (Bom) vi) CIT v. Rockman Cycle Industries (P) Ltd. (2009) 226 CTR 562 (P&H) vii) Porrits and Spencer (Asia) Ltd. v. CIT (2010) 231 CTR 294 (P&H) viii) DCIT v. ICICI Web Trade Ltd.: ITA No. 6559/M/2006 : Lex Doc ID 391299

On the issue of the inclusion of those parties is related party in accounting standard 18 disclosure in this financial statements he submitted that appellant did not participate in the management of the said vendors and the commercial transactions were entered into with them are at arm‘s length (which is also demonstrated by the fact that several transactions with related parties were at prices lower than the price charged to unrelated parties), and there was no colorable device adopted by the appellant to evade tax, so as to warrant the lifting of the corporate veil. He ultimately submitted that no further disallowance is, in any case, called for in the hands of appellant under section 40A(2) of the Act even if it were to be assumed that purchases made from such unrelated parties are at higher price considering that the said parties are (i) profit making taxpaying companies, (ii) subject to less or same rate of tax as applicable to the appellant, (iii) the excessive income has been subject to tax in their hands and (iv) there is no loss of Revenue. Reference in this regard can also be made to the recent decision of Apex court in case of CIT v. Glaxo Smithkline Asia (P) Ltd: 195 Taxman 35 and Bombay Court in the case of CIT vs. V. S. Dempo & Co. P. Ltd.: 196 Taxman 193/336 ITR 209; and the Mumbai bench of Tribunal in the case of Indo

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 119 of 484 Bearing Traders [TS-780-ITAT-2012(Mum)]. He further challenged the estimate made by the Ld. and assessing officer regarding the computation disallowance of purchases qua vendors where there was no comparable available, is in any case incorrect. For this proposition he submitted that aforesaid issue is squarely covered in favour of the appellant by the decision of the Delhi Bench of Tribunal in the appellant‘s own case for the assessment year 2007-08 and 2008-09, wherein the same disallowance made in that year was deleted on the ground that since in the first place, the parties were not related to the appellant company in terms of section 40A (2), disallowance on ground of excessive purchase price could not have been made under that section. Further, the Tribunal held that the transactions were entered by the appellant on account of commercial expediency and when the recipients had paid tax on payments received from the appellant company, disallowance could not be made by applying provisions of section 40A(2) of the Act. Therefore, according to him, the disallowance made by the Ld. assessing officer is not in accordance with the provisions of the income tax act and it is made on hypothetical basis.

54) The Ld. departmental representative relied upon the order of the lower authorities and submitted that that though the parties are not covered as related parties under the income tax act but there covered as related party in terms of the provisions of the accounting standard issued by the ICAI and when there are payments made to those parties which are beyond the market rate the disallowances rightly been made by the Ld. assessing officer and confirmed by the Ld. dispute resolution panel.

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 120 of 484 55) We have carefully considered the rival contention and perused the relevant records placed before us. It was submitted by the parties that there is no change in the facts and circumstances of the case in the present assessment year compared to the assessment year for which the coordinate bench is decided this issue in the favour of the appellant for assessment year 2007 – 08 and 2008 – 09 wherein this issue has been decided by the coordinate bench as under:- ―13.14. The basic requirement for the applicability of section 40A(2) of the Act is that the payment should be made to a related person i.e. to a person referred to in clause (b), of sub-section (2) of section 40A of the Act. 13.15. In the present case, it is an undisputed fact that the payments are not made to a person mentioned in clause (b) of section 40A (2) of the Act. 13.16. Clause (a ) of sub-section (2) of section 40A of the Act provides that where the assessee incurs any expenditure in respect of which payment has been or is to be made to any person referred to in clause (b) of the sub section and the Assessing Officer is of the opinion that such expenditure is excessive or unreasonable having regard to the fair market value of the goods, services or facilities for which the payment is made or the legitimate needs of the business or profession of the assessee or the benefit derived by or accruing to him there from, so much of the expenditure as it so considered by him to be excessive or unreasonable, shall not be allowed as a deduction. The object of section 40A (2) is to prevent diversion of income. An assessee who has large income and is liable to pay tax at the highest rate prescribed under the Act Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 121 of 484 often seeks to transfer a part of his income to a related person who is not liable to pay tax at all or liable to pay tax at a rate lower than the rate at which the assessee pays the tax. In order to curb such tendency of diversion of income and thereby reducing the tax liability by illegitimate means, section 40-A was added to the Act by an amendment made by the Finance Act, 1968. Clause (b) of section 40A (2) gives the list of related persons. 13.17. In the present case, it is an undisputed fact that none of the parties fall within the persons specified as defined under clause (b) of section 40A (2) of the Act. Related parties are to be considered in terms of provisions of sec. 40A (2) of the Act and not as mentioned in AS-18 issued by the Institute of Chartered Accountant. Thus, we are of the view that the provisions of section 40A (2) do not apply to the present case. Further, there is no provision under the Act which authorizes the Assessing Officer to lift the corporate veil and disallow an expenditure on the ground of reasonableness and commercial expediency unless it is established that the transaction is primarily devised to evade tax. 13.18. In the present case, it was submitted by the learned AR of the assessee that the related parties are profit-making companies and are subject to tax to at some less or the same rate of tax. Thus, there is no loss of Revenue. This submission of the assessee has not been controverted before us by the learned DR. Tax benefit alleged is factually wrong as the other compared assesses are profit making companies/ assesses. There is no loss to the revenue if only the excess payment of Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 122 of 484 price is taken, but this situation is not considered by the Revenue. Except for allegation that excess price is paid to reduce profit, no other evidence is gathered by assessing officer to prove that the assessee had in fact evaded or saved tax by such exercise. The argument of the Revenue fails. The allegation that the assessee has structured his associate concern so as to avoid sec. 40A (2) is also devoid of merit, as the revenue has failed to demonstrate as to how it has come to such a conclusion. The allegation means that profit is transferred to third parties, where the share holding of the assessee is not a major share holding. The allegation means that the assessee is distributing profits to companies with majority holding by unrelated parties for the purpose of reducing taxes. Such wild allegation cannot be endorsed by us. 13.19. The assessee does not dispute the fact that certain purchases are made at a rate higher than the rate paid to certain other parties for the same periods. The assessee at pages 1523 to 1523.18 of the paper book also furnished instances where purchases were made from these parties at price lower than the purchases made from unrelated parties. Further, the disallowance was made on adhoc basis without setting any benchmark for the disallowance. 13.20. Notwithstanding the above view, even assuming for a moment that the provisions of the section 40A (2) would apply to the present case, then the following propositions laid down by various courts have to be considered. 13.21. The Hon‘ble Bombay High Court in the case of CIT v. Indo Saudi Services (Travel) (P.) Ltd. [2009] 310 ITR Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 123 of 484 306 relying on CBDT Circular No. 6-P, dated 6-7-1968 held that no disallowance should be made under section 40A(2) of the Income-tax Act in respect of the payments made to the relatives and sister concerns where there is no attempt to evade tax. 13.22. Having held that the provisions of section 40A (2) of the Act does not apply to the facts of the case. We now proceed to answer whether the action of the Assessing Officer in disallowing the expenditure on the ground of commercial expediency is justified. 13.23. The Hon‘ble Supreme Court in the case of CIT vs Walchand & Co [1967] 65 ITR 381 in the context of deductibility of expenditure under Section 37(1) of the Income-tax Act, 1961 [Corresponding to section 10(2)(xv) of the Indian Income-tax Act, 1922] held as under: ―In applying the test of commercial expediency for determining whether the expenditure was wholly and exclusively laid out for the purpose of the business, reasonableness of the expenditure has to be adjudged from the point of view of the businessman and not of the revenue‖. 13.24. Further, reference is also drawn to the decision of the Hon‘ble Supreme Court in the case of S.A. Builders Ltd. v. CIT (Appeals) [2007] 288 ITR 1 (SC) , where in it was held as under: "....that once it is established that there was nexus between the expenditure and the purpose of the business (which need not necessarily be the business of the assessee itself), the revenue cannot justifiably claim to put itself in the arm-chair of the businessman or in the position of the board of directors and assume the role to Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 124 of 484 decide how much is reasonable expenditure having regard to the circumstances of the case. No businessman can be compelled to maximize his profit. The income-tax authorities must put themselves in the shoes of the assessee and see how a prudent business man would act. The authorities must not look at the matter from their own view point but that of a prudent businessman...." 13.25. It is a well settled principle that Commercial expediency cannot be judged by the Revenue from its point of view. In the present case, we are of the view that the assessing officer has made this disallowance based on surmises and conjectures without properly examining the facts on record and without bringing any evidence that the purchases were made at an excessive price compared to fair market value to evade tax. 13.26. In view of the above discussions, and bearing in mind entirety of the case, we are of the considered view that the impugned disallowance was indeed uncalled for on the facts of this case. Hence, we uphold the grounds of the assessee.‖ In view of the above about decision of the coordinate bench in appellant‘s own case and further failure on part of the revenue to controvert any of the findings in the earlier order of the tribunal or pointing out any contrary decisions on this issue, the respectfully following the order of the coordinate bench to not inclined to uphold the disallowance made by the Ld. assessing officer on account of the purchases of Rs. 7 2.40 crores made from the parties who are related parties in terms of accounting standard 18 issued by the Institute of chartered accountants of India but not in terms of provisions of section Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 125 of 484 40A (2) of the income tax act. In the result ground No. 11 of the appeal of the assessee is allowed.

56) The ground No. 12 of the appeal of the assessee is against disallowance of expenditure of Rs. 2 crores incurred on account of advisory services availed from hero corporate services Ltd when the Ld. assessing officer was of the view that the assessee has failed to establish nexus of services availed from the aforesaid parties with the business of the assessee company and therefore these expenses are not incurred wholly and exclusively for the purposes of the business. Further according to the Ld. assessing officer the recipient of the income was related to the assessee in terms of the provisions of accounting standard 18. The brief facts of the issue is that the appellant has paid return worship fees of Rs. 2 crores to hero corporate services Ltd in connection with the availing advisory services for the purposes of the business which are payable Rs. 50 Lacs every quarter. The Ld. assessing officer has disallowed this sum is according to him the nexus of advisory services rendered by that company with the business of the appellant could not be ascertained and the appellant has also failed to explain as to how it is commercially expedient to avail the aforesaid services from the related party. On objection before the Ld. dispute resolution panel the action of the Ld. assessing officer was confirmed. Therefore the assessee is in appeal before us against the above disallowance. 57) Before us, the Ld. authorized representative submitted that appellant entered into service agreement for availing advisory services rendered by HCSL, a company engaged in business of providing various corporate services like management of treasury and finance functions, human resources development, strategic planning and projects, IT support etc. HCSL during Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 126 of 484 the relevant previous year, provided following services to the appellant company:

i. The employees/experts of HCSL had interaction with the Internal HR Department of the appellant, in order to identify the areas of training to be provided to various categories of employees of the appellant. In accordance with the feedback and discussion with the experts of HCSL, the training programme was implemented by the appellant. HCSL subsequently provided support to the appellant to evaluate the progress and attendance of training conducted for employees.

ii. Updating/evaluation of Information technology support/up gradation required by the appellant. Incidentally, during the relevant previous year, there was no information-technology in charge in the appellant company and therefore, the appellant availed full IT support from HCSL. HCSL during the year also developed supporting software programmes to streamline support functions of the appellant.

He further submitted that appellant is a listed company and various investors/fund wants to have interaction with the top management/senior staff of the appellant in order to disseminate information about the appellant, its growth plan, etc. HCSL acted as a communication channel between the appellant and the aforesaid investors. According to him Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 127 of 484 services were, therefore, provided by the aforesaid company, which was related to the business of the appellant company. He stated that The fee paid by the appellant to HCSL was wholly and exclusively for the purpose of business and the expense was incurred on grounds of commercial expediency. Therefore he argued that expenditure justified by business considerations and incurred out of commercial expediency is allowable deduction and the reasonableness of the expenditure has to be seen from the point of view of businessman and not that of the Revenue, as laid down repeatedly in the following cases: i) CIT vs. Walchand & Co.: 65 ITR 381(SC) ii) J.K. Woollen Manufacturers vs. CIT: 72 ITR 612 (SC) iii) Aluminium Corporation of India Ltd. vs. CIT: 86 ITR 11(SC) iv) CIT vs. Panipat Woollen & General Mills Co. Ltd.: 103 ITR 666 (SC) v) J.J. Enterprises v. CIT: 254 ITR 216 (SC) vi) CIT v. Dalmia Cement (P.) Ltd: 254 ITR 377 (Del) vii) S.A. Builders: 288 ITR 1 (SC)

According to him further, since the aforesaid party was not related to the appellant in terms of section 40A(2)(b) of the Act, there was no scope for the Revenue to examine the reasonableness of the expenditure incurred and to disallow any part thereof for that reason. In any case, no evidence has been brought on record by the Revenue to substantiate that the amount paid was excessive, having regard to the legitimate needs of business. He further submitted that Apart from the provisions of aforesaid section 40A(2), there is no provision under the Act, which gives power to the assessing officer to go Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 128 of 484 into the issue of reasonableness of the expenditure, where the transacting parties are not related under section 40A(2)(b) of the Act. On the relationship of the assessee he submitted that, AS-18 defines wider test of ‗related party‘ only for the purpose of accounting. The same cannot replace the various categories of related persons set out in section 40A(2)(b) of the Act. Thus, if the parties are not related in terms of section 40A(2)(b) of the Act, no disallowance on account of alleged unreasonableness of expense can be made, notwithstanding that such parties are related in terms of AS-18. He further submitted that In the preceding assessment year viz. 2007-08, the assessing officer admitted the factum of services being rendered by HCSL to the appellant. The assessing officer, however, disallowed Rs. 1.50 crores out of the total expenditure on the ground that the appellant failed to justify commercial expediency for incurring the said expenditure. Therefore according to him aforesaid issue is squarely covered by the decision of the Delhi bench of the Tribunal in the appellant‘s own case for the assessment year 2007-08 and 2008-09, wherein the ad-hoc disallowance made out of total expenditure incurred in that year was deleted on the ground that services were rendered by HCSL to the appellant and the assessing officer could not sit in the arm chair of a businessmen to decide reasonableness of an expenditure. 58) Ld. departmental representative submitted that the assessee has paid the sum to the sister concern of the assessee and then excess of such services with the business of the appellant are not ascertained and further the assessee is also not satisfied this Ld. assessing officer as to how the services availed by the assessee how it is commercially expedient to the business of the appellant. According to him the expenditure incurred by the

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 129 of 484 assessee was not wholly annexed was duly for the purposes of the business as it is paid to the related party. 59) We have carefully considered the rival contentions. We have also noted the documents in relation to various services provided by HCSL, the necessity thereof was explained by the appellant in his submissions discussed above. We have also gone through the order of the Tribunal for AY 2007-08, wherein while following the settled legal propositions that an assessing officer cannot sit in the arm chair of the business man and decide the reasonableness of expenditure incurred or commercial expediency thereof, deleted the impugned disallowance made by the assessing officer as under :- ―15.12. The assessing officer in this case made an ad hoc disallowance by allowing an amount of Rs. 20 lacs as expenditure for the services availed by the assessee from HCSL and disallowing the rest. The assessing officer has by observing in his order that various reports have been provided by HCSL admitted the fact that certain services were rendered in this case. His only doubt is how these services were needed in the business of the assessee. We also note that the parties are not related to each other in terms of sec. 40A(2)(b). While it is so, the action of the Revenue in disallowing the certain portion of the expenditure is not justified unless the revenue demonstrates that the transaction is primarily a device to evade tax. 15.13. The Hon‘ble Supreme Court in the case of CIT v. Walchand & Co. (P.) Ltd. [1967] 65 ITR 381 held that the Income-tax authorities have to decide whether the expenditure claimed as an allowance was incurred voluntarily and on grounds of commercial expediency. In

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 130 of 484 applying the test of commercial expediency for determining whether the expenditure was wholly and exclusively laid out for the purpose of the business, the Supreme Court laid down that the reasonableness of the expenditure has to be adjudged from the point of view of the businessman and not of the Revenue. 15.14. The Hon'ble Supreme Court in the case of CIT v. Dharamraj Giriji Riya Narsingiriji 91 ITR 544 held that "it is not open to the Department to prescribe what expenditure an assessee should incur and in what circumstances he should incur that expenditure. Every businessman knows its interest best". 15.15. It is well settled that the assessing officer cannot place himself in the arm chair of businessman and decide the amount of expenditure that is to be incurred for the purpose of running of the business. The expenditure in question cannot be disallowed for the reason that the expenditure was incurred for business and was in the revenue field and was not a personal expenditure. In the result, this ground of the assessee is allowed.‖ Having regards to the facts and circumstances of the case under consideration, and in absence of any contrary decision pointed out by the Ld. departmental representative and any changes in the facts and circumstances of the case in the present assessment year we respectfully following the aforesaid finding given by the coordinate bench in appeal order for AY 2007-08 in case of appellant. Direct the assessing officer to delete the disallowance made of Rs. 2 crores on account of advisory services expenditure incurred on payment to hero

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 131 of 484 corporate services Ltd. Therefore ground nos. 12 of the appeal of the assessee is allowed. 60) Ground No. 13 of the appeal of the assessee is against the disallowance of purchases made from certain Vendors amounting to Rs. 3 828.78 crores by applying the provisions of section 40(a) (ia) as according to the Ld. assessing officer the assessee has failed to deduct tax at source under the provisions of section 194C of the income tax act. According to the Ld. assessing officer the above payment for purchases of goods is in the nature of work‘s contracts and therefore take should have been deducted on these payments. The brief facts of the issue is that as the assessee is a Manufacturing concern of auto Mobile it places certain purchase orders are Vendor for certain customize intermediary products like wheel assembly, seat assembly etc. By placing the aforesaid purchase orders to the vendor the appellant also provide the specification of the products to be purchased as also the name of the suppliers from whom the vendor is required to purchase raw material components to be used in manufacture of customize intermediary products as the price negotiated by the appellant with such suppliers. The Ld. assessing officer was of the view that appellant by specifying the name of the Vendor of raw Materials along with the purchase price thereof was controlling the supply of raw material to the Vendor and he termed it is deemed supply of from a trial by the appellant itself to those Vendor and hence the contract with the vendor is constituted what‘s contract according to him and therefore the provisions of section 194C is applicable on those payments to those Vendor. According to the Ld. and assessing officer the Vendor are not operating as independent business entities but are captive units and working under the direction and control and dictation of

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 132 of 484 the appellant and thereby having no independent decision- making of their own but of the appellant only. The Ld. assessing officer was also of the view that the appellant while arranging the transaction in the aforesaid manner of routing the supply of material through other parties has hoodwinked the revenue in order to evade liability to deduct tax at source. Therefore he held that the aforesaid transaction of purchase from vendor was in the nature of the contract for carrying out the work which is subject to tax deduction at source under the provisions of section 194C of the income tax act and as the assessee has failed to deduct tax at source on those payments the entire purchase consideration amounting to Rs. 3 828.78 crores made from these aforesaid vendors is liable to disallowance under section 40(a) (ia) of the income tax act. 61) Before us the Ld. authorized representative submitted the point wise rebuttal of the observation made by the Ld. assessing officer in the assessment order as well as the observation of the Ld. dispute resolution panel. His main contentions are summarized as under:- a) In the course of business of manufacturing two wheelers, the assessed places purchase orders on vendors of certain customized intermediary products like wheel assembly, seat assembly, sheet metal components etc. b) While placing the aforesaid purchase orders to the vendors, the appellant also provides the specifications of the products to be purchased, as also the names of suppliers, from whom the vendor is required to purchase raw materials/components to be used in manufacture of customized intermediary products at the price negotiated by the assessee with such suppliers.

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 133 of 484 c) The names of the suppliers and the price at which the vendors are required to procure raw materials, etc., from such supplier, is advised by the appellant in order to ensure proper quality and uniform pricing of the finished products to be supplied by such vendors. It is to be appreciated that the prices of raw-materials like, rubber, plastics, aluminum, steel fluctuates quite frequently and could substantially affect the cost of intermediary customized products required to be supplied by the vendors, which in turn can have a substantial bearing on the price of the final product. The appellant in order to hedge itself against the price fluctuation and also to get best rates on account of bulk volumes, negotiated and fixes the rate of above raw materials, which are purchased by the vendors, for making component, etc. supplied by them to the assessee.

d) Further, the components to be fitted in the two-wheelers have to be standardized and must conform to the specifications of the motorcycles to be manufactured by the appellant company. The quality of components used in the assembly of motorcycles, which are sourced from several vendors has not only to be uniform but top grade as well. In order to ensure that the vendors use quality material in fabrication / manufacture of the intermediary products / components supplied to the appellant, the appellant company after extensive research and investigation zeroes in on credible and reputable manufacturers and insists that the vendors source the raw material / components required from such manufacturers only. Further, in view of the sheer

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 134 of 484 magnitude and size of its operations, the appellant is able to negotiate with the manufacturers of raw material / components for best prices. The appellant advices the vendors who supply intermediary products to the appellant, of the prices negotiated by the appellant with the manufacturers of raw material / components, to be sourced by such vendors. Since the price paid by the appellant to the vendors of intermediary products / components is, in turn dependent on prices of inputs paid by the vendors to suppliers of raw material / components, it is in the best interest of the appellant to ensure that the prices of raw material / components sourced by the vendors from independent manufacturers are kept to the minimum. It is in this background that the appellant seeks to leverage its strength, given the magnitude of its business and requirement of intermediary products to extract the best prices from the manufacturers of raw material or components. The benefit of lower prices enjoyed by the vendors is, in turn, passed on to the appellant when the appellant purchases intermediary products / components from the vendors, utilizing raw materials / components sourced from independent manufacturers at best prices negotiated by the appellant.

e) Furthermore, the appellant specifies suppliers, in view of their technical expertise level, references / reputation, financial stability and power and the ability to meet delivery due dates and capacity to align with the growth of the company. Also, the supplier must be in a position to serve the appellant‘s long term needs by adhering to

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 135 of 484 the delivery agreements with higher technical production level. Therefore, selecting the most appropriate suppliers is considered as an important strategic management decision that helps the company to ensure uniform quality, control prices and ensure continuous and uninterrupted supply of material. Excise duty, sales tax, etc. and other applicable taxes are paid by the vendors on manufacture and sale of goods to the applicable, while claiming CENVAT credit in respect of duty paid on raw materials purchased by the vendors (from the suppliers) for manufacture of goods.

f) The raw material is acquired by the vendor from suppliers, specified by the appellant, in their own name and not on account or behalf of the appellant. The appellant at no point of time acquires ownership of raw material, etc., supplied by the suppliers to the vendors. The goods manufactured remain at the risk of the vendors until supplied to the appellant. The appellant acquires ownership only of the finished goods manufactured and supplied by the vendors at that stage and not at any anterior point of time. Thus, the aforesaid contract was in the nature of contract of sale.

g) The provisions of section 194C of the Act are applicable to a contract for carrying out any work and not to a contract for sale of goods.

h) A contract shall be regarded a contract of sale, if the title in goods passes to the purchaser after the manufacture Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 136 of 484 and delivery of goods to the purchaser, whereas if the title to the goods passes to the purchaser at any time anterior to manufacture and delivery of goods to the purchaser, the same shall be regarded as contract for carrying out work/works contract. The fact that goods are manufactured according to specifications of the purchaser is not relevant in determining the nature of contract as a contract of sale or works contract.

i) The aforesaid position is well settled and reference in this regard can be made to the decision of the Supreme Court in the case of CIT vs. Silver Oak Laboratories P. Ltd.: SLP No.18012/2009.

j) Section 194C has also been amended, w.e.f 1-10-2009, to clarify that contract of manufacturing customized goods, without using material procured from the customer would be outside the scope of work contract under section 194C.

k) Raw-materials are purchased by the vendors from the suppliers on their own account, after negotiating other relevant terms of payment and delivery schedule, payments of excise duty and VAT, etc. The raw materials are delivered to the vendors and are at the risk and title of the vendors. The vendors who are independent legal entities with their own manufacturing establishments, employing huge labour, utilize the raw materials purchased for producing customized finished goods for the appellant. The title in the finished goods, goods Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 137 of 484 passes to the appellant only after the goods have come into existence and are supplied by the vendor to the appellant. Excise duty is paid by the vendors in their own right, as an independent manufacture and not as a job worker in respect of goods manufactured and sold to the appellant. Further, the appellant has paid sales tax/VAT, as the case maybe, for the goods purchased from the vendors.

l) In this connection, the appellant has attached the sample purchase orders raised by the vendors and invoices issued by the suppliers for the purchase-sale transaction entered between them at Pg. 1878 to 1882 of PB Vol. 4, which clearly establishes independence of transaction between the aforesaid two parties, without any involvement, much less control, or transfer of ownership in the hands of appellant.

m) Similarly, the salient features of the terms and conditions of the purchase order raised by the appellant upon the vendors are as under: ―7. SUPPLY QUALITY ASSURANCE: The Supplier shall be subject to SUPPLY QUALITY ASSURANCE which entails free access to inspectors detailed by us for purpose of inspecting manufacturing and inspection procedures at your site, and for assisting in delivery schedules and inspection of raw material, machines, tools, fixtures, jigs, or any other items in connection with the manufacture of components for us. Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 138 of 484 8. SAMPLE INSPECTION: The Purchase Order stands valid only on acceptance of samples to be confirmed by us in writing, unless otherwise provided in Purchase Order itself. 9. DELIVERY SCHEDULE: We reserve the right to return the material at supplier‘s cost or cancel the Purchase Order(s) in the event of non-compliance of delivery schedule. 10. SHIPPING DOCUMENTS: Demurrage and penalties etc. becoming leviable on account of delay in delivery of dispatch of Railway Receipts, Goods Receipt or any other shipping documents will be to the vendor‘s account and recoverable from him. 12. REJECTION: Suppliers, whose samples of one particular type of component, if rejected twice by us, are liable to the cancellation of the Purchase Order without assigning any further reasons and without us being liable to any cost, which may have been incurred by the supplier towards the manufacture of item for us. 13. Material, if rejected after inspection at our factory by us, must be lifted from our premises, within 10 days of intimation. We will not be responsible for any rejection, if not removed within the stipulated time. The same would be dispatched to you at your risk and cost. It may be noted that, even while assembling, or processing, if any further defects,

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 139 of 484 not arising from mishandling are noticed, we reserve the right to reject such material as line rejection. Our decision on such rejection shall be final. 14. Rejection must be replaced within the delivery schedule and will be invoiced separately and not as replacements. All charges inclusive of freight and handling on replacement of rejections shall be borne by supplier. For outstation suppliers, where requested, the rejected material will be dispatched at the risk of the supplier. 17. WARRANTY Warranty extended by us on our product has to be honoured by you as per prevailing policy of HHML from time to time. The warranty for product supplied by you will start from the period our final product is SHIPPED OUT. You will warrant that all the new goods supplied by you are free of all defects in the material and workmanship. Its liability under such warrant being limited to taking goods at the factory of HERO HONDA MOTORS LTD., GURGAON/DHARUHERA any part(s) which within 6 calendar months from the date when the product as delivered now to the representative and why by HHML is satisfied on its examination of part(s) to have been defective in material or workmanship. The defective part(s) received by HHML from field under the terms and conditions can be inspected, by supplier if so desire, at HHML premises of Gurgaon/Dharuhera on dates specified by HHML Warranty Officer. In case supplier fails Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 140 of 484 to inspect the part(s) HHML will have the full authority in finalizing the claim. Failed parts after inspection will be scrapped by HHML and it will be their sole discretion to ask the supplier to send the credit note or the part‘s replacement in settlement of the failed parts which must reach HHML premises within one month from the date of receiving intimation from HHML.‖ (emphasis supplied)

n) The aforesaid terms and conditions establish that the contract between the appellant and the vendor was in the nature of contract of sale and not works contract, in view of the following:

(i) The purchase order stood valid only on acceptance of samples of goods, by the appellant; (Clause 8)

(ii) The appellant has the right to return the material at vendor‘s cost or cancel the purchase order, in case the vendor does not supply the goods as per the agreed delivery schedule; (Clause 9)

(iii) Demurrage and penalties leviable on account of delay in delivery of dispatch documents is on vendor‘s account; (Clause 10)

(iv) In case the purchase order is rejected, cost of samples manufactured by the vendor is to the Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 141 of 484 account of vendor and cannot be recovered from the appellant; (Clause 12)

(v) Goods rejected on account of defect found therein, are to the account of vendor; (Clause 13)

(vi) All charges relating to replacement of rejections are on account of the vendor; (Clause 14)

(vii) The vendor shall provide warranty for replacement of defective goods manufactured and supplied by vendor. (Clause 17)

o) From perusal of the aforesaid terms and conditions, it will kindly be appreciated that the vendors supplied finished goods to the appellant, at their risk and cost. Title to the finished goods was transferred to the appellant only once the goods were approved/ accepted by the appellant and not at any anterior stage.

p) It follows, as a necessary corollary that raw materials were purchased by the vendors from the suppliers on their own account; raw materials were not (directly or indirectly) supplied by the appellant; the cost thereof, risk and title in such material always vested in the vendors, until converted into finished components to be supplied to the appellant and accepted by the appellant. Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 142 of 484 Accordingly, the contract between the appellant and vendors was in the nature of contract of sale and not works contract as alleged in the assessment order.

q) The assessing officer it is submitted has merely gone by the fact that the appellant had specified to the vendors the source of supply of raw materials/components and the prices to be paid therefore, for holding the impugned purchase contract as contract for carrying out work which is too farfetched. The assessing officer failed to appreciate the business consideration behind such stipulation.

r) The aforesaid assumptions by the assessing officer are further belied by the fact that the appellant has paid the vendors for supply of goods including the cost of raw materials / components (alleged to be supplied by the appellant to the vendors). The vendors have in their tax assessments being assessed on the full purchase price received from the appellant. If the appellant had supplied the raw material / components required by the vendors for fabrication / manufacture of customized intermediary products, the appellant would have been required to pay only conversion charges to the vendors and not the full purchase price for the customized intermediary products / components.

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 143 of 484

s) The supply of raw material by the supplier to the vendors, even if the price thereof has been negotiated/fixed by the appellant, cannot by any stretch of imagination be considered as purchase of such material by the vendors from the appellant, so as to constitute contract of sale of goods by the vendor to the appellant, as a contract of work under the amended provisions of section 194C of the Act. The fact of the matter and the position in law is that the raw material is purchased by the vendors from the suppliers, and not from the appellant, under a legally valid commercial contract between the vendor and the supplier. There is no privity of contract between the appellant and the suppliers.

t) In these circumstances, even the amended provisions of section 194C of the Act do not cover the case of the appellant.

u) The allegation made by the assessing officer that the appellant had arranged the said purchase transaction in the aforesaid manner simply to hoodwink the Revenue in order to avoid deduction of tax at source is not based on correct appreciation of facts and the position in law pointed above. The disallowance made on the aforesaid basis has, therefore, no legs to stand and needs to be deleted.

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 144 of 484

v) The assessing officer has failed to appreciate the aforesaid distinction between contract of sale and works contract and has merely on surmises and conjectures, without any basis, alleged that the vendors never acquired title in raw materials purchased from supplier specified by the appellant.

w) That apart and without prejudice to the above, the appellant has incurred similar expenditure in the earlier years as well, treating the aforesaid transaction of supply of goods from the vendors as contract of sale of goods, without deducting tax at source. The aforesaid position was never disputed by the Revenue, too, in such years (except AY 2007-08 and 2008-09, which were challenged by the appellant before ITAT and decided in favour of the appellant in 2007-08 and 2008-09). In view of the aforesaid undisputed practice being followed by the appellant, which stands accepted by the Revenue, the appellant, it is submitted, had a bonafide belief that tax was not deductible at source on aforesaid transaction of supply of goods. Under such circumstances, no disallowance can be made under section 40(a)(i) of the Act. [Refer: CIT v. Kotak Securities Ltd.: 245 CTR 3 (Bom.)]

x) Since, the appellant would not be deducting tax at source, in future as well (out of such expense

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 145 of 484 payment), there would, in terms of the proviso be no occasion for the appellant to be entitled to deduction there for in a later year(s). Section 40(a)(ia) of the Act would, in such circumstances, operate to deny deduction for the expense for all times to come. In other words, deduction for the amount of expense would be lost forever, notwithstanding that the deductee / recipient of income out of whose income tax had to be deducted at source, has already paid tax on such income.

y) In our respectful submission, in situations of bona-fide difference of opinion between the tax deductor and the Revenue regarding the liability to deduct tax at source, the provisions of section 40(a)(ia) of the Act are harsh and seek to discriminate against an appellant, who has failed to deduct tax altogether vis-à-vis another appellant who has defaulted in depositing tax deducted at source in time. Although, the latter default is more serious in as much as the tax payer enjoys moneys legitimately belonging to Government, the provisions of section 40(a)(ia) of the Act in such cases only seek to defer deduction for expenditure in the hands of such payer to the year(s) in which tax deducted is ultimately deposited, whereas in the case of a payer who has failed to deduct tax at source, the deduction or expenditure is lost in perpetuity.

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 146 of 484 z) The aforesaid legal position has been set right by the Finance Act, 2012 (passed on 28.5.2012) whereby, section 40(a)(ia) has been amended to provide that the appellant shall be deemed to have deducted and deposited tax, on the amount on which tax was deductible but was, in fact, not deducted, on the date of furnishing of return of income by the resident payee, if the resident payee has included the said amount in its taxable income and has furnished certificate from a Chartered Accountant in the prescribed form, to this effect. aa) Reliance is placed on the submission and decisions referred for the aforesaid proposition supra, which are not repeated for the sake of brevity, wherein it has been upheld that the aforesaid amendment in section 40(ia), will have retrospective application. bb) The appellant has attached certificates from the Chartered Accountant certifying that payments received from the appellant were offered to tax by the vendors in their return of income for the assessment year 2010-11. Accordingly, for that reason as well, the aforesaid disallowance under section 40(a)(ia) deserves to be deleted.

cc) Further without prejudice, only the outstanding liabilities against expenses incurred at the end of the year are liable for disallowance under section 40(a)(ia), in the event of failure on part of appellant to deduct tax at source. (Refer: Vector Shipping Services P. Ltd: 357 ITR 642 (All.) [SLP filed by

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 147 of 484 revenue has been dismissed vide CC No(s). 8068/2014 dated 02.07.2014] and Merilyn Shipping and Transport v. ACIT: 146 TTJ 1 (Vishak.)(SB)] dd) The aforesaid issue is squarely covered by the decision of Delhi bench of Tribunal in the appellant‘s own case for the assessment year 2007-08 and 2008-09, wherein after exhaustive consideration of the facts, it was held that the impugned transactions are in the nature of contract of sale and not contract for carrying out work to be covered within the scope of section 194C of the Act. The Tribunal also found force in the arguments of the appellant that, where recipients have paid tax, no disallowance under section 40(a)(ia) was warranted.‖ 62) At the end of his lengthy arguments he submitted that the Ld. assessing officer relied in applying the provisions of section 194C of the income tax act when the transaction is for the purchase of the goods and not for the purpose of carrying out any work. 63) The Ld. departmental representative relied upon the order of the Ld. assessing officer and submitted that the purchase of the goods is made by the vendors under the instructions and under the control of the appellant, the material is also negotiated with the supplier by the appellant himself therefore it is not the case of purchase of goods but it is the case of carrying out work on behalf of the assessee as the specifications are also provided. He therefore submitted that the Ld. assessing officer has correctly applied the provisions of section 194C of the income tax act for

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 148 of 484 making the disallowance for non-deduction of tax on such payments. 64) We have carefully considered the rival contentions. Payment to the parties involved under this issue are as under :

S Name of Party Purchases on which . TDS not deducted N o . 1 A G INDUSTRIES 3,76,54,81,121 PVT. LTD. 2 AUTOFIT LTD. 10,93,76,09,478 3 MUNJAL AUTO 2,71,83,20,586 INDUSTRIES LTD 4 NAPINO AUTO AND 3,54,81,34,010 ELECTRONICS LTD 5 OMAX AUTOS LTD 3,82,10,12,273 6 RICO AUTO 2,93,61,02,832 INDUSTRIES LIMITED 7 ROCKMAN 5,38,55,90,501 INDUSTRIES LTD 8 SATYAM AUTO 3,70,61,53,570 COMPONENTS LIMITED 9 SUNBEAM AUTO 3,66,64,29,412 PVT LTD Sub-Total 4048,48,33,784 Less: Materials 219,69,48,651 supplied to aforementioned vendors TOTAL 3828,78,85,133 65) We note that the Ld. assessing officer had adopted the findings and reasons given in the assessment order for AY 2007-08, while repeating the disallowance in the assessment year under consideration. The Tribunal in the order for AY 2007-08 in appellant‘s own case has reversed the aforesaid findings of the assessing officer. The coordinate bench has held that impugned transaction is not covered within the scope of section 194C of the Act. The relevant observations of the coordinate bench are as under:

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 149 of 484

―14.58. The issue before us for adjudication is whether on the facts and circumstances of the case, the customized intermediatery products like wheel assembly, seat assembly etc. sourced by the assessee from the vendors is a contract of sale by the vendors or a contract of work.

14.59. The assessing officer issued summons u/s 131 to nine vendors and recorded their statements. This exercise resulted in the assessing officer gathering information from the vendors that they have procured material from the sources specified by the assessee and at rates specified by the assessee. Based on the statements from nine vendors, the assessing officer came to the conclusion that the assessee has termed the ―contract of work‖ as ―contract for sale‖. The reasons in details for arriving at such conclusion by the Assessing officer and as confirmed by the DRP are discussed in the above paragraphs (supra).

14.60. With the above background, we examine the legal position in this regard. ................... 14.73. On perusal of the above mentioned CBDT Circulars, it can be appreciated that the fact that the goods sold are manufactured according to specifications of the buyer is not relevant in determining whether the contract is a contract of sale or works contract. What is relevant to determine the stage of passing of Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 150 of 484 property/title in the goods from the vendor to the buyer. Where title to the goods passes to the buyer at the time goods are manufactured and transported, the contract would be one for sale of goods, notwithstanding that the goods are manufactured according to the specifications of the buyer.

14.74. The principal test to be applied to determine whether the contract is works contract or contract for sale is examined whether title to the goods passes to the purchaser at any time anterior to the manufacture and delivery of goods to the purchaser. If the answer to the aforesaid query is in the negative, then, the contract is one of sale, when the vendor manufactures goods in his own right, as principal, and not as job worker.

14.75. The legal position is well settled that in case title/ownership in goods passes to the buyer on transfer of goods by the vendor, even though goods are manufactured according to the specifications and design supplied by the purchaser, the contract cannot be regarded as contract for carrying out work falling under section 194C of the Act. ................... 14.86. Whether a particular contract constitutes ―contract for sale‖ or ―contract for work‖ is based on facts of each case. The same would depend upon the intention and conduct of the parties as evidenced by the terms of the contract. It is a settled judicial preposition that the

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 151 of 484 substance and not the form of the contract is material in determining the nature of transactions.

14.87. Applying the principals laid by the Courts to the facts of the present case, we now proceed to examine whether the contract in the case on hand is ―contract for sale‖ or ―contract for work‖.

(1) All the nine parties are independent legal establishments engaged in the manufacturing of finished products and are not captive units of the assessee. (2) The vendors have their own manufacturing establishments, employing huge labour; utilize the raw materials purchased by them, for producing customized finished goods for the assessee. (3) The assessee has issued purchase orders for supply of components as per the assessee‘s specification. The assessee has filed copies of the purchase orders/ invoices. The same finds place in the paper book filed by the assessee. (4) The raw materials are delivered to the vendors by the suppliers and are at the risk and title of the vendors. The suppliers collect from the vendors, sales tax, VAT etc. on sale of raw material and the vendor paid the same. (5) Excise duty is paid by the vendors in their own right, as an independent manufacturer and not

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 152 of 484 as a job worker in respect of goods manufactured and sold to the assessee. (6) The assessee has paid sales tax/VAT, as the case maybe, for the goods purchased from the vendors.

14.88. Further on perusal of the sample purchase orders produced before us and the terms and conditions on which the purchase order is placed, we observe that the transaction is on a principal to principal basis. ................. 14.90. Combined reading of all the terms and conditions of the purchase order takes us to the conclusion that the vendors supply finished goods to the assessee at their risk and cost. Title to the finished goods was transferred to the appellant when the supplier/ vendor completed production of the finished goods and dispatched the same to the assessee and only when the assessee approves and accepts the said goods i.e. title passes on acceptance of goods. Until that stage of acceptance on delivery, there is no transfer of title as per the intention of the parties gathered from the purchase order. The transfer of title at the stage of acceptance of deliveries by the purchaser would be, in our opinion, only a sale of goods but not work contract.

14.91. The test laid down by the courts is to examine the intention of the parties as to the point of time when they want to transfer of title in the goods. In this case, the title in the goods vests in the assessee on delivery of the

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 153 of 484 goods. The assessee never acquired any title prior to the point of delivery.

14.92. We are unable to appreciate the conclusion drawn by the assessing officer as approved by the DRP that the assessee has made a deemed purchase of the raw material and in turn made a deemed supply of the same to the vendors. This is nothing but a presumption unsupported by facts. The assessing officer accepts that all the vendors purchase raw material and components from their supplier after paying sales tax, excise duty etc. wherever applicable. The purchases are made on a principal to principal basis. Title in the goods passes to the vendors from the supplier on delivery of the raw material and the assessee does not in any way acquire any title to the goods i.e. raw material. The argument of the Ld. DR that the nature of arrangement of the assessee is that of indirect supply of material to the vendor, which is in the nature of contract for carrying out work is farfetched, devoid of merit and not supported by evidence. It is not the case of revenue that there are any financial transactions between the assessee and the raw material suppliers of the vendors. The test is to see the fact whether the assessee acquired any title to the raw material purchased by the vendors from the suppliers. The answer to this is no. We are unable to understand as to how the assessing officer as well as the DRP has considered this as a deemed purchase by the assessee. The reason enunciated by the assessee w.r.t identifying the suppliers of the material along with the determination of

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 154 of 484 price of the raw material fixing of payment terms etc., clearly constitutes a matter of business expediency for the assessee.

14.93. Further, in the statement recorded from the vendors after summoning them u/s 131 of the Act, the vendors have confirmed that this is a case of sale of goods and not a works contract. Mr. Yogesh Kumar Jindal has explained the purpose for which the assessee specifies the suppliers and the rate.

14.94. We have carefully gone through the decision of the Karnataka High Court in the case of Nova Pharma Ltd. (supra) relied by the Ld. DR and are of the view that the fact of the case is clearly distinguishable and cannot be applied to the facts of the present case. The assessee has rightly distinguished the case. As the same is brought out in the earlier part of the order, for sake of brevity we do not repeat the same.

14.95. In this case, there is no supply of raw material by the assessee to the vendors either directly or indirectly. In laying down the quality specification of the products, the assessee is ensuring the required quality of its purchases which in turn ensures the quality of its two wheelers. Considering the magnitude of the total requirements, the assessee was able to negotiate the price and hence is controlling its input costs. The low price enjoyed by the vendors, in turn would be passed on to the assessee. This is a case where the vendors were Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 155 of 484 purchasing raw material on their own account by payment of excise duty, VAT etc. The goods were manufactured by the vendors to the specification and other terms and conditions spelt out in the purchase orders and in their own right as independent manufactures. On this factual matrix, we have no hesitation in holding that it is a case of contract of sale and not contract of work. Hence, in our view, the provision of Sec. 194C are not applicable and consequently the disallowance made u/s 40(a)(ia) is to be deleted.

14.96. It would be pertinent to point that section 194C was amended by the Finance (2) Act, 2009 w.e.f. 1.10.2009, whereby the definition of ―work‖ was enlarged to include contract for manufacturing or supplying a product according to the requirement or specification of a customer by using material purchased from such customer. The said amendment also provided that contract for carrying out work shall not include contract for manufacturing or supplying of product according to the requirement or specification of a customer by using material purchased from a person other than such customer.

14.97. In case of the assessee, the finished goods are manufactured by the supplier as per the prescribed specifications of the assessee. The raw material and other ingredients required for manufacture are specified by the appellant, in order to ensure proper quality of

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 156 of 484 the finished products. The rates are negotiated to achieve economy of scale and to leverage the position of the assessee, which leads to reduction in cost of production. Such raw-materials are however acquired by the vendor on their own account and not on behalf of the assessee.

14.98. The right of ownership passes to the assessee only after the goods come into existence, on manufacture and are supplied to the assessee as finished goods. Prior thereto, the risk in the goods vests with the vendor/supplier. All the other terms of purchase/sale between the vendor and supplier, like payment terms, period of delivery etc. is for acquisition of ascertained goods – the contract is thus one of sale and not a contract for carrying out work.

14.99.In view of the above finding, we are not adjudicating on the other arguments raised by the assessee on this issue, though we find force in the argument of the assessee that since all the vendors have filed their returns of income and paid taxes on the receipts from the assessee, no disallowance under section 40(a)(ia) is warranted. Hence the additional evidence and additional argument is not adjudicated as it would be an academic exercise. In the result, this ground of the assessee is allowed.‖

66) In absence of any contrary decision pointed out by the Ld. departmental representative and the facts and circumstances of Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 157 of 484 the case remaining the same was the assessment years , We follow the aforesaid findings given in the appeal order for 2007- 08 and therefore, we hold that the transaction entered by the appellant for purchase of material from vendors is outside the scope of section 194C of the Act. Accordingly, for the aforesaid cumulative reasons, we delete the impugned disallowance made by the assessing officer on account of purchases of Rs. 3 828.78 crores disallowed for failure to deduct tax under section 194C of the income tax act. In the result ground No. 13 of the appeal of the assessee is allowed. 67) The ground No. 14 of the appeal of the assessee is against the disallowance made by the Ld. assessing officer of Rs. 8 29765/– incurred on account of booking of hotel to convene training courses on the ground that the assessee has failed to deduct tax at source from such payments under section 194I of the income tax act. The opinion of the Ld. assessing officer was further confirmed by the Ld. dispute resolution panel following the orders of the tribunal for assessment year 2007 – 08 and 2008 – 09 in the appellant‘s own case where the about disallowances have been confirmed. Aggrieved by this, the appellant is in appeal before us. 68) Before us the Ld. authorized representative stated that on this payment is no tax is required to be deducted under the provisions of section 194I of the income tax act in view of the CBDT circular No. 715 dated 8895 wherein it has been clarified that the provisions of section 194I are applicable only when payment is made to hotel for accommodation taken on regular basis and further what is regular basis was further clarified by CBDT wide circular No. 5/2000 to dated 13 to July 2002. According to him the accommodation would be regarded as being taken on regular basis of the appellant has contract with hotel to be provided room in total for specified period on Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 158 of 484 specified date at specified rate and hotel being under legal obligation to provide rooms during the currency of those agreements. He submitted that the appellant is taking Hall on rent for the purpose of folding beating etc and not satisfied the test of room take on hire owned regular basis and therefore no tax is required to be deducted on such payment. He further submitted that in the past assessee is also not deducted the tax at source which is been accepted by the revenue therefore the assessee was under a bonafides believe that no tax was required to be deducted on such payment being made to hotel and therefore under such circumstances no disallowance should have been made by the Ld. assessing officer on non- deduction of tax at source on these payments. For this proposition he relied upon the decision of the Hon‘ble Bombay high court in case of CIT versus Kotak securities Ltd 245 CTR 3 (BOM). However he readily agreed that similar issue has been decided in appellant‘s own case for the earlier years where the coordinate bench has taken a view that the appellant should have deducted tax at source from such payments. He further submitted that against the order of the coordinate bench delay appellant has further preferred appeal before the Hon‘ble Delhi High Court which is been admitted involving this substantial question of law. He therefore submitted that the disallowance made by the Ld. assessing officer is not proper. 69) Ld. departmental representative submitted that the assessee should have deducted tax at sources the payment to the portal false under the provisions of section 194I of the income tax act and as assessee is regularly taking those hotel on rent the disallowance has rightly been made. He further submitted that in the assessee‘s own case the coordinate benches already decided this issue against the appellant therefore there is no reason to deviate from that decision. Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 159 of 484 70) We have carefully considered the rival contentions. We find that the Tribunal in the orders passed for the assessment years 2007-08 and 2008-09 have categorically held that hire charges for taking room in a hotel on hire are covered within the scope of section 194I of the Act. 71) However the alternate plea raised by the appellant deserves consideration that disallowance u/s 40(a)(ia) could not be made if recipient had paid tax thereon, the appellant has not produced any evidence in support of such plea, which is a condition precedent for allowance of relief as per the second proviso to section 40(a)(ia) of the Act. We, however, find force in the arguments of the appellant that disallowance under section 40(a)(ia) cannot be made, if the assessee held a bonafide belief for being outside the purview of TDS. We draw support for the aforesaid conclusion from the following findings in the decision of Honourable Bombay High Court in the case of CIT v. Kotak Securities LTd.: 340 ITR 333: ―32. Accordingly, we hold that the transaction charges paid by the assessee to the stock exchange constitute ‗fees for technical services‘ covered under s. 194J of the Act and, therefore, the assessee was liable to deduct tax at source while crediting the transaction charges to the account of the stock exchange. However, since both the Revenue and the assessee were under the bona fide belief for nearly a decade that tax was not deductible at source on payment of transaction charges, no fault can be found with the assessee in not deducting the tax at source in the assessment year in question and consequently disallowance made by the AO under s. 40(a)(ia) of the Act in respect of the transaction charges cannot be sustained. …………..‖

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 160 of 484 It may be noted that the assessee and revenue both had challenged the aforesaid decision of the Honourable Bombay High Court before the Supreme Court, which has been decided vide order dated 39.3.2016, reported at 383 ITR. In that decision, the apex Court reversed the findings of the Honourable High Court on the main issue that transaction charges paid to stock exchange is subject to TDS under section 194J of the Act. Since, the apex Court reversed the decision of the Honourable Bombay High Court on the main issue, they did not find it necessary to give any decision on the aforesaid alternative finding of the Honourable High Court. In view of the above, considering that the Supreme Court did not reverse the finding of the Bombay High Court in the aforesaid alternative ground of bona fide belief, the said decision continues to hold the field. Having held as above, coming back to the facts of the present case, the CBDT in its Circular has clarified that payments made to hotels would be subject to TDS under section 194-I, if the hotel room is take on hire on regular basis. Accordingly, it implies that where hotel room is not taken on hire on regular basis, payment made in lieu thereof will not be subject to TDS under section 194-I of the Act. The appellant had been acting on the aforesaid bona fide belief while making payments for taking hotel rooms on hire on certain solitary occasion while organizing staff meetings, etc. Although, the Tribunal in the appeal order for the AY 2007-08 has held that even such solitary payment would be subject to TDS under section 194-I, but did not give any finding whether any bona fide belief was formed by the appellant or not. The, latter question is therefore open for consideration. The Ld. departmental representative did not contest that the assessee did not have the bonafide belief. According to us the assessee was under and bonafides believe to for not deduction of tax at Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 161 of 484 source as in the past years no such disallowances been made on this account and further the CBDT itself is clarified these issues which says that there are doubts about the payment made to hotels in such circumstances whether covered under the provisions of section 194I of the income tax act or not. In view of the aforesaid discussion, we feel that bonafide belief of the appellant for not deduction tax at source from aforesaid payment for taking room on hire on certain solitary occasion(s) cannot be doubted. Accordingly, following the decision of Bombay High Court in the case of Kotak Securities Ltd. (supra), we delete the disallowance made by the assessing officer on the aforesaid alternate ground. Therefore, ground No. 14 of the appeal of the assessee is decided accordingly.

72) Ground No. 15 of the appeal of the writ assessee is against the disallowance of Rs. 3 6880 2598/– being expenditure incurred towards quarterly target on turnover discount on trade discount of Rs. 2 7744 7608/– given to the dealers/customers on the ground that the assessee has failed to deduct tax at source on these payments as they are covered under the provisions of section 194H of the income tax act. Assessee being further aggrieved by the rejection of the argument of the assessee by the Ld. assessing officer that the above said payments have been made under the contracts entered into with the dealers on principle to principle basis and therefore did not constitute commission as per the provisions of section 194H of the income tax act. According to the Ld. assessing officer seized the payments made were on the basis of the performance of dealers and targets achieved by those dealers which is not in the nature of discount as the same was not given at the time of taking delivery of goods by the dealers but was given subsequently and therefore it falls into the definition of commission expenditure Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 162 of 484 under section 194H of the income tax act regarding the disallowance of the trade discount given to the dealers on sales invoice at the time of sale , he was of the view that it is based on the achievement of turnover targets. On objection before the Ld. dispute resolution panel the disallowance was sustained despite there being a decision of the coordinate bench in favour of the assessee for previous year as according to the Ld. dispute resolution panel it is not attained finality. Aggrieved by the order of the Ld. and assessing officer on this count appeal is been preferred before us. 73) Ld. authorized representative submitted before us that for the purpose of selling vehicles/spare parts, the appellant company had entered into agreements with stockiest/dealers at various locations in India, on a principal to principal basis. Under such agreements, stockiest/dealers, inter alia, purchase spare parts from the appellant-company at a predetermined price and sell the same on their own account at price negotiated with the customers, subject to MRP. The company, in order to promote sales of spare parts to such stockiest/dealers, offers various schemes, whereby stockiest/dealers are eligible for discounts, which are to be allowed with reference to the progressive amount of purchases made by such stockiest/dealers from the company. Thus, higher the amount of purchase orders placed by the stockiest/dealers, higher is the amount of discounts, to which the dealers are entitled. Cash discount is also offered on timely payments by the dealers/stockiest against aforesaid purchases. The provisions of section 194H are applicable, where payment by way of commission or brokerage is made for any services rendered by a person in the capacity of an agent. In the present case, in the absence of any principal-agent relationship between the company and the stockiest/dealers, the discount received by such stockiest/dealers, was not in the Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 163 of 484 nature of ‗commission‘ or ‗brokerage‘, subject to TDS under section 194H of the Act. Reliance, in this regard, is placed on the following decisions wherein it has been held that the provisions of section 194H are not applicable where the payment is made to a dealer or distributor in a principal to principal contract: i) CIT v. Ahmedabad Stamp Vendors Association: 348 ITR 378 (SC) ii) Chief Treasury Officer v. UOI: 355 ITR 484 (All. HC) iii) Roorkee Stamp Vendor Association v. State of Uttarakhand & Ors: WP No. 422/2013 (Uttkd.) iv) Kerala State Stamp Vendors Associations Vs. Office Of The Accountant-general and Others: 282 ITR 7 (Ker.) v) CIT v. Mother Dairy Ltd. (Del.)(HC): 249 CTR 559 (Del.) vi) CIT v Intervet India (P) Ltd.:268 CTR 429 (Bom.) vii) CIT v. Mother Dairy Ltd.: ITA No. 1925/2010 (Del.)(HC) viii) Jai Drinks (P) Ltd.: 336 ITR 383 (Del.) ix) S.R.L. Ranbaxy v. ACIT: 143 TTJ 265 (Del.) x) Kotak Securities Limited vs. DCIT: 2012 50 SOT 158 (Mum.i) xi) Government Milk Scheme v. ACIT: 98 ITD 306 (Pune) xii) Shree Baidyanath Ayurved Bhavan Ltd. Vs. JCIT: 83 TTJ 40 xiii) Delhi Milk Scheme Vs. ITO (2006) 8 SOT 344 (Del.) xiv) All India Radio Commercial Broadcasting Service/ Prasar Bharati Broadcasting Corpn. of India Vs. ITO (2006) 8 SOT 513 (Del.)

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 164 of 484 xv) Addl. CIT v. Paul Bottling Pvt. Ld: 10 Taxman.com 47 (Del-ITAT) He further submitted that discount was allowed under the schemes, based on quantity purchased / sold during the specified period, which could be calculated only after the said period was over and the relevant data / information / details were available. Even though the amount of dealer‘s entitlement was subsequently quantified, the same was, in effect, reduction in selling price and hence in the nature of ‗discount‘. According to him for the purposes of section 194H of the Act, the nature of the payment is not to be determined with the time of payment thereof, but with reference to the legal relationship between the parties. He stated that as regards trade discount, it was given at the time of sales on the sale invoice in the ordinary course of business and was not paid as reward for effecting the sale of the vehicles and thereby, was not based on achievement of turnover targets, as alleged by the assessing officer and was not in the nature of commission so as to be liable for the deduction of tax under section 194H of the Act. He alternatively submitted that, considering that the appellant was under the bonafide belief that no tax was required to be deducted there from, accordingly, having regard to the decision of Kotak Securities (supra), no disallowance is warranted under section 40(a)(ia) of the Act. Further according to him that since the payees have also paid tax on the income receivable from the appellant, no disallowance could be made under section 40(a)(ia) of the Act for alleged default in deduction of tax at source by the appellant. He reiterated his argument that disallowance under section 40(a)(ia) can be made only qua liabilities which are not paid and are outstanding at the end of the year. (Refer: Vector Shipping Services P. Ltd: 357 ITR 642 (All.) [SLP filed by

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 165 of 484 revenue has been dismissed vide CC No(s). 8068/2014 dated 02.07.2014] and Merilyn Shipping and Transport v. ACIT: 146 TTJ 1 (Vishak.)(SB)]. In the end he submitted that the aforesaid issue is squarely covered in favour of the appellant by the decision of the Tribunal in the appellant‘s own case for the assessment years 2007-08 and 2008-09, wherein it has been held that the agreement between the appellant and dealers was on principal to principal basis and, therefore, incentives payable to dealers was not liable to TDS under section 194H, warranting disallowance under section 40(a)(ia) of the Act. 74) Ld. departmental representative submitted that the Ld. assessing officer has correctly made the disallowance as it is a discount which is in the form of commission covered under the provisions of section 194H of the income tax act and we on which at the time of the payment or at the time of the credit the appellant should have deducted the tax at source which is not been deducted therefore the disallowance is rightly made and confirmed by the Ld. dispute resolution panel. 75) We have heard the rival contentions. As dealership agreement entered between the appellant and dealers is on a principal-to- principal basis and dealers do not act as agents of the appellant while purchasing and further selling the vehicles. Accordingly, the incentives offered at the time of purchase of vehicles do not fall within the meaning of commission u/s 194H of the Act. Further, the issue is squarely covered by the decision of the ITAT in assessee‘s own case in AY 2008-09 wherein following the ITAT decision in assessee‘s own case for the year AY 2007- 08, it was observed as under – ―148. From the bare reading of the decision of the Tribunal in assessee‘s own case for AY 2007-08 (supra), we observe that after dealing with rivals

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 166 of 484 submissions and contentions of both the parties, the tribunal reached to the following finding and conclusion deciding the issue in favour of the assessee. The relevant operative part of the order of the Tribunal for AY 2007-08 in assessee‘s own case (supra) read as under- ―45.11. The facts of this case clearly demonstrate that what is given to the stockiest/ dealers is discount on the purchase price and not any commission. The stockiest/ dealers purchase spare parts/ vehicles from the assessee. They are not commission agents. Sale consideration is paid by these parties to the assessee. As a matter of incentive for higher sale the assessee grants discount if the stockiest/ dealers achieve a particular volume of transaction. Thus, in our view the discount in question is not in the nature of commission or the brokerage which attracts sec. 194H. In the case of CIT Vs. Mother Dairy Ltd. (ITA no. 1925/2010(Del) the Hon‘ble Delhi High Court was considering similar case and held as follows: ―3. The assessee explained in writing that it sold the products to the concessionaires on a principal to principal basis, that the concessionaires buy the products at a given price after making full payment for the purchases on delivery, that the milk and other products once sold to the concessionaires became their property and cannot be taken back from them, that any loss on account of damage, pilferage and wastage is to the account of the concessionaires and Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 167 of 484 that in these circumstances the payment made to the concessionaires cannot be treated as ―commission‖ for services rendered and consequently there was no liability on the part of the assessee to deduct tax. It is irrelevant that the concessionaires were operating from the booths owned by the Dairy and were also using the equipment and furniture provided by the Dairy. That fact is not determinative of the relationship between the Dairy and the concessionaires with regard to the sale of the milk and other products. They were licensees of the premises and were permitted the use of the equipment and furniture for the purpose of selling the milk and other products. But so far as the milk and the other products are concerned, these items became their property the moment they took delivery of them. They were selling the milk and the other products in their own right as owners. These are two separate legal relationships. The income tax authorities were not justified or correct in law in mixing up the two distinct relationships or telescoping one into the other to hold that because the concessionaires were selling the milk and the other products from the booths owned by the Diary and were using the equipment and furniture in the course of sale of the milk and other products, they were carrying on the business only as agents of the Diary.‖ 45.12. The Hon‘ble High Court held that in such circumstances S.194H is not attracted.

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 168 of 484 45.13. In the case of Jai Drinks (P) Ltd. 336 ITR 383 (Del.), the Hon‘ble Delhi High Court has held as follows: ―Held, dismissing the appeal, that a perusal of the agreement showed that the assessee had permitted the distributor to sell its products in a specified area. The distributor was to purchase products at a pre- determined price from the assessee for selling them. Both the assessee and the distributor had been collecting and paying their sales tax separately. The CIT(A) and also the Tribunal rightly held that the payments being made by the assessee to the distributor were incentives and discounts and not commission.‖ 45.14. Respectfully following the propositions laid down in the aforementioned cases we allow this ground of the assessee.‖ 76) In that view of the matter, the Ld. departmental representative could not point out any decision contrary to the above finding of the coordinate bench or change in the facts and circumstances of the case, therefore respectfully following the decision of the coordinate bench in the appellant‘s own case for assessment years 2007-08 and 2008-09 discussed supra, we delete the disallowance made by the Ld. assessing officer on account of expenditure of Rs. 3 6880 2598 towards the quarterly target on turnover discount on trade discount of Rs. 2 7744 7608 given to the dealers. In the result ground No. 15 of the appeal of the assessee is allowed. 77) The ground No. 16 of the appeal of the assessee is against the disallowance of expenditure of Rs. 1 561 2424 on account of payment to FX enterprise solutions private limited toward room reimbursement of cost of gifts distributed to customers on the ground that the aforesaid payments are made under a contract for carrying out any work and the tech should have been Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 169 of 484 deducted on such payment under the provisions of section 194C of the income tax act and hence the disallowance. The brief facts of the disallowances that the appellant had lost passport scheme wherein the customer became members on payment of membership fees and were entitled to certain point for each transactions like services of vehicle, purchase of parts etc which were redeemable against this gifts. Under the aforesaid scheme the responsibility of the distributing gifts to the eligible customer was that of the dealer. The appellant was only bearing the cost of gift given to a customer at the time of the customers became member of this particular scheme or 50% of the cost of gift when gift was given redemption of more than a specified limit by the customer. For this purpose the appellant has appointed the FX enterprise solution two-minute the procurement and distribution of the gift and for this the appellant has made payment of Rs. 1.56 crores to this party on account of purchase of gifts reimbursement of cost of gift sent by the vendors to the dealers. The Ld. and assessing officer was of the view that memorandum of understanding entered into by the appellant with the aforesaid party provides that that party was to procure gifts from the parties identified by the appellant and data rates negotiated and finalized by the appellant and appellant has therefore definite control over the work of the aforesaid vendor therefore it was held that the above payment are in the nature of services rendered by such offender. It was further held by him that the vendor was entitled to 1.5% of the profit margin of more the landed cost price of the product and hence the payment was made to the vendor against the composite product prices as well as the service charges contained therein. According to the Ld. and assessing officer these transaction attract the provisions of section 194C of the income tax act and as the tax is not been deducted on the said Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 170 of 484 sum he disallowed the same. The Ld. dispute resolution panel on objection by the appellant directed the Ld. and assessing officer to follow the decision of the coordinate bench in appellant‘s own case for assessment year 2007 – 08 and set aside the matter to the file of the Ld. assessing officer for verification and carrying out similar exercises. However the Ld. assessing officer has sustained the about disallowance which were in the draft assessment order. Aggrieved by the order of the Ld. and assessing officer the assessee is in appeal before us. 78) It was submitted by Ld. authorized representative before us that appellant had appointed FX Enterprise in order to control the distribution of gifts under the Passport scheme. The liability of purchasing and distributing gifts was not that of the appellant, but was that of dealers. The appellant was only to share partial cost of gifts. The gifts were procured by FX Enterprises on its own account and the appellant never got title to the same. The title of ownership in goods passed to dealers after supply of same by FX Enterprise. The contract was, therefore, was contract of sale and not a works contract, on which appellant was not liable to deduct tax at source. Even if the appellant allowed FX Solution to charge 1.5% over the landed cost of goods purchased from vendors shortlisted by the appellant, the contract was in the nature of contract of sale only and aggregate payment including profit margin of FX was towards purchase price of goods and not in lieu of any work/services carried by said party. Reliance, in this regard, is placed on arguments taken in GOA 13 (supra), wherein applicability of 194C has been dealt with. Without prejudice, since the payee has also paid tax on income receivable from appellant, no disallowance could be made under section 40(a)(ia). The aforesaid legal position has been set right by the Finance Act, 2012 (passed on 28.5.2012) whereby, section 40(a)(ia) has been amended to Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 171 of 484 provide that the appellant shall be deemed to have deducted and deposited tax, on the amount on which tax was deductible but was, in fact, not deducted, on the date of furnishing of return of income by the resident payee, if the resident payee has included the said amount in its taxable income and has furnished certificate from a Chartered Accountant in the prescribed form, to this effect. It is submitted, that considering the legislative intent, the provisions of section 40(a)(ia) of the Act needs to be liberally construed and no disallowance could be made under that section, where tax has been paid by the recipients. Without prejudice, considering that similar payments have been made by the appellant in the past since several years, without deduction of tax at source, which has always been accepted by the Revenue, the appellant was under the bonafide belief that no tax was required to be deducted there from and accordingly, having regard to the decision of Kotak Securities (supra)no disallowance is warranted under section 40(a)(ia) of the Act. Further, without prejudice, disallowance under section 40(a)(ia) can be made only qua liabilities which are not paid and are outstanding at the end of the year. (Refer: Vector Shipping Services P. Ltd: 357 ITR 642 (All.) [SLP filed by revenue has been dismissed vide CC No(s). 8068/2014 dated 02.07.2014] and Merilyn Shipping and Transport v. ACIT: 146 TTJ 1 (Vishak.)(SB)]

79) He further submitted that It would be pertinent to point out that the aforesaid issue was set aside by the Tribunal in assessment years 2007-08 and 2008-09 to the file of the assessing officer wherein the Tribunal directed the assessing officer to verify the claim of the appellant, that the title of ownership in goods passed on the dealers which is then

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 172 of 484 distributed by them, by examining the contract entered into between FX Solutions and appellant. It would be appreciated that in those years, the contract between the parties had not been examined by the lower authorities and the Tribunal had set-aside the matter for examination thereof. Pursuant to aforesaid order passed by ITAT, the assessing officer has, vide order dated 30.10.2014, in assessment year 2007-08(at Pg. 568-570 of PB Vol. 1) and order dated 26.02.2015 for AY 2008- 09 (at Pg. 588-589 of PB Vol. 1) after examining the contract between FX Solution and appellant accepted the contention of the appellant that aforesaid contract was essentially contract of sale and not works contract and thus deleted the addition. He urged that in the year under consideration, the aforesaid contract had already been furnished before the AO/ DRP (Pg. 3145-3149 of PB Vol. 8) and the assessing officer, in complete disregard of the observations of the ITAT/DRP as also the stand of the revenue authorities in set-aside proceedings for the AY 2007-08 and 2008-09, repeated the disallowance on mere surmises and conjectures. 80) We have heard the rival contentions. We have gone though the MOU entered between the appellant and FX Enterprise Solutions India Pvt. Ltd. No doubt the aforesaid party was entitled to profit of 1.5% over the landed cost of product supplied to the customers on redemption of certain points. However, if we see the dominant nature of the transaction, the same is in the nature of purchases or, in other words, contract or sale inasmuch as the appellant never had title in the goods before same were procured by FX and further supplied either to dealers or the appellant. We have held in ground of appeal No.13 (supra) that sale contract, even where the goods are purchased by the vendor as per the specifications of the purchaser, is not in the nature of work contract covered within Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 173 of 484 the scope of section 194C of the Act. Furthermore, we note that when the assessing officer had accepted the aforesaid nature of transaction as ‗contract of sale‘ in the set-aside orders passed for the assessment years 2007-08 an 2008-09, no different view could have been taken in the assessment year under consideration, on the grounds of consistency. For the cumulative reasons, we hereby delete the disallowance made by the ld. Assessing officer of Rs. 1 561 2424 by way of payment to Fx enterprise solutions private limited towards reimbursement of cost of gifts distributed to the customers. In the result ground No. 16 of the appeal of the assessee is allowed. 81) Ground No. 17 of the appeal of the assessee is against the disallowance of Rs. 222.13 lakhs incurred on account of payment to forum Aviation‘s private limited on the ground that the assessee has failed to deduct tax at source under section 194I of the income tax act. The brief facts of the expenditure disallowed is that that the appellant uses facility of transportation through aircraft for purpose of business under a charter agreement entered with the vendor in consideration for payment of variable charges per hour of use of aircraft and share of fixed cost of such aircraft. According to the assessee it is deducted tax from the aforesaid payment under the provisions of section 194C of the income tax act however the Ld. that assessing officer was of the view that the payments are subject to deduction of tax at source under the provisions of section 194I of the income tax act and not under section 194C of the income tax act and therefore disallowed the entire sum for non-deduction of tax. The Ld. dispute resolution panel also agreed with the view of the Ld. assessing officer and therefore assessee is in appeal before us.

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 174 of 484 82) Before us the Ld. authorized representative submitted that payment to Forum I Aviation (P) Ltd., was not towards taking aircraft on hire, simpliciter, but for availing composite transportation services, comprising of services of pilot, fuel cost, repairs and maintenance, etc. The aircraft was always under the possession and control of the carrier, and was also run and operated by the carrier, and, therefore, there was no use of aircraft by the appellant, under any lease or other arrangement. The arrangement was, therefore, not towards use of aircraft but for availing transport services, which are covered under section 194C and not 194I of the Act. The Board vide Circular No.558, dated 28.03.1990 while considering the issue of applicability of section 194C of the Act towards payments made by State Road Transport Corporation to private bus owners, from whom buses are hired held that the provisions of section 194C are applicable and tax will have to be deducted at source from the payment made to the private bus owners. Similarly, drawing analogy from the aforesaid Circular, the contract for availing transport service through air-craft, being similar in nature, would be a transport contract in terms of the aforesaid Circular. Reliance, in this regard, is placed on the following decisions, wherein it has been held that payment under contract of transport coupled with other services, like services of driver, etc. would be subject to TDS under section 194C and not 194I of the Act: i. CIT vs. Swayam Shipping Services Pvt. Ltd.: Tax Appeal No. 1037 of 2009(Guj. HC) ii. Ahmedabad Urban Development Authority vs. ACIT: ITA No.1637/Ahd/2010 (ITAT Ahd) iii. ACIT vs. Accenture Services Pvt. Ltd.: ITA No. 5920- 5922/Mum/2009 (Mum. ITAT) iv. SKIL Infrastructure v. ITO (TDS): ITA No. 3419 and 3420/Mum/2010 (Mum. ITAT) Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 175 of 484 v. ITO v. Indian Oil Corporation: ITA Nos. 1829 to 1834/Del/2011 (Del. ITAT) vi. ACIT v. Sh. Manish Dutt: ITA No. 4017/M/2007 (Mum.)(ITAT)

83) He further submitted that since the appellant had, in any case, under a bonafide belief, deducted tax at source under section 194C, instead of section 194I of the Act, provisions of section 40(a)(ia) cannot be invoked to disallow deduction claimed by the appellant. Reliance, in this regard, is placed on the following decisions: - CIT v. S.K Tekriwal : 361 ITR 432 (Cal.)(HC) - DCIT v. Chandabhoy & Jassobhoy : 49 SOT 448 (Mum.) - Sunbell Alloys Company of India Ltd [TS-642-ITAT- 2012(Mum)] - M/s. Saralee Household & Bodycare India Pvt. Ltd. (Mum.) - UE Trade Corpn. (India) Ltd. v. DCIT: 28 taxmann.com 77 (Del.) - Highlight Pictures India Ltd. v. ACIT: 49 taxmann.com 187 (Mum.) - ITO v. Premier Medical Supplies and Stores: 25 taxmann.com 171 (Kol.)

84) He further urged that in view of the aforesaid undisputed practice being followed by the appellant, which stands accepted by the Revenue, the appellant, it is submitted, had a bonafide belief that tax was not deductible at source on aforesaid transaction. Under such circumstances, no disallowance can be made under section 40(a)(i) of the Act. (Refer:CIT v. Kotak Securities Ltd.: 245 CTR 3 (Bom.). since the recipients would Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 176 of 484 have considered the receipts from the appellant as part of taxable income, no disallowance ought to be made under section 40(a)(ia) of the Act. The aforesaid legal position has been set right by the Finance Act, 2012 (passed on 28.5.2012) whereby, section 40(a)(ia) has been amended to provide that the appellant shall be deemed to have deducted and deposited tax, on the amount on which tax was deductible but was, in fact, not deducted, on the date of furnishing of return of income by the resident payee, if the resident payee has included the said amount in its taxable income and has furnished certificate from a Chartered Accountant in the prescribed form, to this effect. Further, without prejudice, disallowance under section 40(a)(ia) can be made only qua liabilities which are not paid and are outstanding at the end of the year. (Refer: Vector Shipping Services P. Ltd: 357 ITR 642 (All.) [SLP filed by revenue has been dismissed vide CC No(s). 8068/2014 dated 02.07.2014] and Merilyn Shipping and Transport v. ACIT: 146 TTJ 1 (Vishak.)(SB)]. In the end he submitted that The aforesaid issue is squarely covered in favour of the appellant by the decision of Delhi bench of Tribunal in the appellant‘s own case for the assessment year 2007-08 and 2008-09, wherein same disallowance made in that year for alleged short deduction of tax at source were deleted by the Tribunal, by following the decision of Calcutta High Court in the case of S.K Tekriwal (supra). 85) We have heard the rival contentions. We have gone through the charter agreement entered between the appellant and Forum India Aviation Ltd. The appellant did not take air-craft on hire, simply. The aircraft was always in the possession of the vendor. The appellant only got a right to use the facility of aircraft as and when required. Thus, the appellant was availing composite services, which involved facility to board the aircraft, facility of Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 177 of 484 pilot, fuel, repair and maintenance, etc. The provisions of section 194I, in our opinion, are attracted where the assets like vehicles or aircraft are taken on hire. If, apart from using the asset/vehicle, additional services are also obtained from the vendor, then the contract do not remain a contract for hire but a contract for obtaining composite services or, in other word, contract for carrying out work. We have noted that a similar controversy arose before the Hon‘ble Gujarat High Court in the case of Swayam Shipping Services Pvt. Ltd.: 339 ITR 647. In that case, the assessee had taken cranes / trailers on rent from various transport companies and handling agents. The assessee had deducted tax at source from payments made to such vendors‘ u/s 194C, whereas the Revenue had held that tax was required to be deducted at source there from u/s 194I of the Act. Accordingly, the assessing officer had raised demand for differential tax u/s 201 of the Act. The High Court, while noting the facts held that the assessee had not merely taken the vehicles on hire, but had taken the entire facility of freight and transport from the vendors, which fell within the scope of section 194C as ‗work contract‘, instead of section 194I applied by the Revenue. The relevant observations of the Hon‘ble high court in this regard are as under: ―6. The facts are not in dispute. The assessee has carried out freight and transportation works contracts with three transporters who transported the goods belonging to the assessee and its clients to various places through their vehicles. The assessee had not taken the trailers/cranes on hire or rent from the said parties. The assessee has given sub-contracts to the said parties for the transportation of goods and not for renting out of machineries and equipments. Sec. 194-I of the Act makes

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 178 of 484 provision for deduction of tax at source where any person who is responsible for paying to a resident any income by way of rent whereas s. 194C of the Act makes provision for deduction of tax at source where any person is responsible for paying any sum to any resident for carrying out any work including supply of labour for carrying out any work in pursuance of a contract between the contractor and a specified person. In the facts of the present case, there is nothing to indicate that the assessee has taken trailers/cranes on rent so as to attract the provisions of s. 194-I of the Act. The assessee had given sub-contracts for transportation of goods. In the circumstances, the said transactions would fall within the purview of s. 194C of the Act as the assessee was responsible for paying the amount in question for carrying out work in pursuance of contracts between the assessee and the transporters and as such was required to deduct tax at source at the rate prescribed under the said section. The CIT(A) was, therefore, justified in holding that the assessee was not an assessee in default within the meaning of the said expression as contemplated under s. 201 of the Act and consequently, the Tribunal was justified in confirming the order passed by the CIT(A). 7. In view of the above discussion, there being no legal infirmity in the impugned order of the Tribunal the same does not give rise to any question of law, much less, a substantial question of law so as to warrant interference by this Court. The appeal is, accordingly, dismissed.‖ 86) Further The Circular No.558 dated 28.3.90 issued by the Board in connection with payments to be made by State Road Transport Corporation to private bus owners was also to the

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 179 of 484 same effect. To the same effect are the decisions of the various Benches of the Tribunal: i. Ahmedabad Urban Development Authority vs. ACIT: ITA No.1637/Ahd/2010 (ITAT Ahd) ii. ACIT vs. Accenture Services Pvt. Ltd.: ITA No. 5920- 5922/Mum/2009 (Mum. ITAT) iii. SKIL Infrastructure v. ITO (TDS): ITA No. 3419 and 3420/Mum/2010 (Mum. ITAT) iv. ITO v. Indian Oil Corporation: ITA Nos. 1829 to 1834/Del/2011 (Del. ITAT) v. ACIT v. Sh. Manish Dutt: ITA No. 4017/M/2007 (Mum.)(ITAT)

In view of the above, we hold that the appellant had rightly deducted tax at source from the aforesaid payments made to Forum India Aviation Ltd. u/s 194C of the Act. Since the appellant had deducted tax at source under the correct provision, the question of disallowance u/s 40(a)(ia) does not arise. Accordingly, the disallowance made by the assessing officer under that section stands deleted. Since we have given our findings on the primary contentions, we do not feel it necessary to go into the alternate contentions raised by the appellant. In the result the disallowance made by the Ld. assessing officer of Rs. 222.13 lakhs incurred on account of payment to Forum aviation private limited for non-deduction of tax or short deduction of tax is hereby deleted in the result ground No. 17 of the appeal of the assessee is allowed. 87) Ground No. 18 of the appeal of the assessee is against the disallowance made by the Ld. assessing officer on account of additional depreciation of Rs. 86.15 Lacs with respect to the computers installed at the supervisory office located in the Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 180 of 484 factory of the appellant. The Ld. assessing officer was of the view that in terms of the proviso to said section additional depreciation is not admissible on any machinery or plant which is installed in any office surmises. The Ld. DRP was also of the view that no additional depreciation on such plant and machinery which is installed by the assessee is allowable. Therefore the appellant is in appeal before us. 88) Before us the Ld. authorized representative submitted that in the case of the appellant, the activity of manufacturing two wheelers is carried out at factory premises located in Gurgaon, Dharuhera and Haridwar. The aforesaid factory premises, apart from having shop floor where the actual activity of manufacturing two wheelers takes place, also comprises of office premises of various supervisory engineers or other administrative staff providing support functions to the manufacturing activity carried out at factory premises, through the help of various technical machinery and labour at the shop floor. In addition to the manufacturing activity being carried out at the factory premises, the appellant has corporate office located at Vasant Vihar from where the overall administrative functions and marketing activities are controlled. Under section 32(1)(ii) of the Act, additional depreciation is available on actual cost of plant and machinery, other than plant and machinery installed in any office premises, acquired and installed by an appellant engaged in the business of manufacture or production of any article or thing after 31st March, 2005. Accordingly, in terms of provisions of section 32(1)(iia) of the Act, the appellant in the return of income for the relevant assessment year, claimed additional depreciation amounting to Rs. 70,39,799/- on computers installed at supervisory offices located in the compound of factory at Gurgaon / Dharuhera/Haridwar Plant, on the ground that such offices formed integral part of the Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 181 of 484 factory. The said section 32(iia) was introduced with an intent to give boost to the manufacturing sector and accordingly the said benefit has been extended to assets installed in the manufacturing premises and not in the office premises. Supervisory offices located in the compound of factory at Gurgaon / Dharuhera Plant, being dedicated to supervision of manufacturing activity, constituted integral part of factory and cannot be said to be office premises for the purposes of section 32(iia). Reliance in this regard is placed on the decision of the Gujarat High Court in the case of CIT vs Statronics and Enterprises (P) Ltd.: 288 ITR 455. In that case, the issue for consideration before the Court was whether additional depreciation is allowable in respect of computer installed in office premises. The Court held that computers and data processing machines, even though installed in office premises, constitutes plant and machinery and are eligible for additional depreciation as per the provisions of section 32(1)(iia) of the Act. Similarly, the Allahabad High Court in the case of CIT vs Radla Machinery Exports: 155 Taxman 131 had held that computers used for data processing of other companies were eligible for additional depreciation. Reliance, in this regard, is placed on the following decisions wherein it has been held that electrical installations like cables, overhead cables, etc. are part and parcel of plant and machinery itself and are, therefore, entitled to benefit/depreciation/ allowances available to plant and machinery: (i) CIT v Tajmahal Hotel : 82 ITR 44 (SC) (ii) CIT v. Tribeni Tissues Ltd: 206 ITR 92 (Cal) (iii) CIT v. Indian Turpentine Ltd. : 75 ITR 533 (All.) (iv) CIT v. Jagadees Chandran :75 ITR 697 (Mad.) (v) CIT v. Tea Estate: 207 ITR 311 (Cal)

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 182 of 484 He further submitted that The supervisory/administrative offices located in the factory premises are involved in providing support functions to the manufacturing activity carried out at that plant and, therefore, form integral part of such factory. In view of the above, computers installed at supervisory/administrative offices within the factory area would be regarded as being installed at factory only and not in any office premises, and hence entitled for additional depreciation under section 32(iia) of the Act. In case of assets installed within the supervisory/administrative offices located within factory premises, it is submitted, that such assets may not be directly engaged in the production process but by virtue of functions discharged at such offices, which are dedicated to supervision of manufacturing activity carried out at that plant, have nexus with the production process and, therefore, are not to be denied the benefit of section 32(1)(iia) of the Act. In view of the above, the disallowance made by the assessing officer is not based on correct appreciation of the position in law and thus needs to be deleted. In all fairness, he pointed that the aforesaid issue has been decided against the appellant by the Delhi Tribunal in the appellant‘s own case for the assessment year 2007-08 and 2008-09. It would, however, be pertinent to point out that the aforesaid disallowance sustained by the Tribunal was challenged by the appellant in further appeal before the High Court, which has been admitted by the High Court, vide order dated 19.11.2015 in ITA No. 341/2014, as involving substantial question of law. 89) Ld. departmental representative submitted that the Ld. assessing officer has not granted additional depreciation on the computers that they are installed in the office of the factory premises and they are not eligible for the additional

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 183 of 484 depreciation. He further stated that the issue is already been decided against the assessee nearly areas and therefore same needs to be followed. 90) We have heard the rival contentions. We find that there is no dispute to the effect that the computers on which additional depreciations have been claimed during the year under consideration are not installed on the shop floor or such computers directly facilitate in the manufacturing process, but have been installed in the administrative / supervisory offices located in the compound of the factory premises. The plea of the appellant has been that for the purpose of additional depreciation, distinction has to be drawn between the computers installed in the supervisory offices of the manufacturing plant with the computers installed at the head office / corporate office, which is involved in the overall supervision of the business function. It has been argued that in the former case, although the computers are not directly involved in the manufacturing operations, but are indirectly facilitating the manufacturing activity as opposed to the computers installed at head office / corporate office. It was the submission that the exclusion of ―machinery or plant installed in any office premises‖ under clause (b) of the proviso to section 32(1)(iia) of the Act is applicable to office premises like head office / corporate offices where there is no direct or indirect nexus with the manufacturing operations. The plant and machinery installed in the offices supervising the manufacturing operations should be viewed distinctly and are outside the ambit of exclusion provided in the aforesaid section. We have, however, found that the aforesaid plea was not accepted by the Tribunal in the appeal orders for AY 2007-08, which was followed in appeal for AY 2008-09. However during the course of hearing before us, the Ld. authorized Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 184 of 484 representative has placed reliance on the decision of the Hon‘ble Gujarat High Court in the case of CIT versus startronics enterprise is private limited 288 ITR 455, which was not raised before the coordinate bench in the earlier orders of the appellant for earlier assessment year, wherein the Hon‘ble high court has considered the identical issue with respect to the computer installed in the office premises and under:- ―8. Placing reliance upon section 32(1)(iia) of the Act, it is submitted that if the plant or machinery is installed in any office premises or in residential accommodation, then, no deduction shall be allowed under clause (iia) of section 32(1). Section 32(1)(iia), with its proviso, for the purposes of this case, would read as under : 32.(1) In respect of depreciation of buildings, machinery, plant or furniture owned by the assessee and used for the purposes of the business or profession, the following deductions shall, subject to the provisions of section 34, be allowed—. . .

(iia) in the case of any new machinery or plant (other than ships and aircraft) which has been installed after the 31st day of March, 1980, but before the 1st day of April, 1985, a further sum equal to one-half of the amount admissible under clause (ii) (exclusive of extra allowance for double or multiple shift working of the machinery or plant and the extra allowance in respect of machinery or plant installed in any premises used as a hotel) in respect of the previous year in which such machinery or plant is installed or, if the machinery or plant is first put to use in the immediately succeeding previous year, then, in respect of that previous year :

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 185 of 484 Provided that no deduction shall be allowed under this clause in respect of—

(a) any machinery or plant installed in any office premises or any residential accommodation ; . . . " 9. It is submitted that even if the computers and data processing machines are taken to be plant and machinery and are entitled to investment allowance, because of their location in the office, additional depreciation would not be allowable. The thrust of the argument is on the words " office premises" . 10. The submission is that the computers and the data processing machines are always kept in the office and in this case, when the computer and the data processing machines are used in the office, then, the additional depreciation would not be allowable. 11. It is to be noted that the words " office premises" have not been defined in the Income-tax Act. The word " office" would partake its character with the activities carried on in the said premises. In a given case, a doctor's clinic would be his office, but, would also be his clinic and if he installs a computer or some machine for the purposes of pathology, then, his office would be taken to be industrial premises for the purposes of depreciation and investment allowance. In a given case, a computer kept in the office of a manager for his personal use or for some other purpose, then, such computer would not be entitled to investment allowance and/or additional depreciation. In the present case, the words " office premises" though would be covering office but, industrial premises would not come within the office premises if the said premises are used for data processing. In the present case, undisputedly, the office

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 186 of 484 premises are used as industrial premises for production of the data processors. The submission of learned counsel is based on a narrow interpretation of the words " office premises", which we are unable to concede.‖

91) Accordingly, following the aforesaid decision of Hon‘ble Gujarat High Court , we set aside this issue to the file of the Ld. assessing officer to decide the issue afresh in accordance with the ratio laid down by the Hon‘ble Gujarat High Court about the liability of additional depreciation on computers installed at the factory premises, needless to say that the proper opportunity of hearing may be granted to the assessee to substantiate its claim. In the result ground No. 18 of the appeal of the assessee is decided accordingly. 92) Ground No. 19 of the appeal of the assessee is against the disallowance of Rs. 4543277040/– incurred by the assessee during the relevant previous year on account of royalty, technical guidance fees and model fees paid to Honda motor Co Japan under the license and technical assistance agreement holding that these expenditure are capital in nature and not allowable. The assessee was further aggrieved wherein the net disallowance of Rs. 3 286880008/– out of the total expenditure of Rs. 4 543277040/– on account of royalty and technical guidance fee model fee and cess model fee after reducing the amount of Rs. 1 607.70 Lacs was disallowed under section 92CA and Rs. 109.56 crores on account of depreciation at the rate of 25% on the above expenses. The Ld. assessing officer was of the view that the assessee has acquired capital asset in the nature of intellectual property rights and patents from Honda on payment of royalty and technical guidance fee under the license and technical assistance agreement. According to

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 187 of 484 him the assessee has received the benefit of enduring nature as the assessee has obtained exclusive right to my feature and sell the products within the territory of India and licenses a degree perpetual as it was being renewed and extended year after year. Further the assessee was aggrieved on account of disallowance of hundred percent of expenditure incurred on account of royalty technical guidance fees and model fees as capital expenditure as in past earlier years 25% of such similar expenditure were held to be capital expenditure. The brief fact of the expenditure incurred by the assessee and its rational are that appellant is engaged in the business of manufacture and sale of motorcycles using technology licensed by Honda Motor Co. Ltd, Japan (―Honda‖). The appellant makes payment of royalty to Honda for use of know-how and technical guidance fee, as per agreed per diem rates, for technicians visiting the appellant for rendering services as required by the appellant, in accordance with License and Technical Assistance Agreement, (‗LTAA‘) dated 02.06.2004, read with Memorandum for exchange of technicians, applicable during the relevant year. The appellant also pays model fees in lumpsum on launch of any new model. During the relevant previous year, in terms of the aforesaid agreement, the appellant had incurred expenditure aggregating to Rs. 453,32,77,040 (Rs. 454.32 crores) on account of (i) Rs. 437.17 crores (comprising of royalty of Rs. 416.36 crores and cess thereon of Rs. 20.82 crore) as royalty, (ii) Rs. 46.22 lacs as technical guidance fee (including cess) and (iii) Rs. 16.68 crores (comprising of model fees of Rs. 15.90 crores and cess thereon at Rs. 78.55 lacs) as model fees, which were claimed as revenue deduction. The aforesaid payments were made after deducting tax at source @10% being the rate of tax applicable in relation to payment of royalty and fees for technical services under Article 12 of Indo- Japan Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 188 of 484 DTAA. Though the above issue is covered in favour of the appellant by the decision of the coordinate bench in the assessment years 2000 – 01, 2001 – 02, 2002 – 03, 2006 – 07, 2007 – 08 and 2008 – 09 wherein the tribunal has held that the annual payment of royalty technical guidance fee was allowable as revenue expenditure, the Ld. DRP on objection filed by the assessee has confirmed the finding of the Ld. it assessing officer for the reason that the order of the tribunal has not reached the finality. With respect to the model fees the similar expenditure were allowed as deduction by the coordinate bench for earlier years and wherein the appeal of the revenue against the aforesaid order of the coordinate bench has been dismissed by the Hon‘ble high court and appeal filed by the revenue against the order of the Hon‘ble high court has been further dismissed by the Hon‘ble Supreme Court. 93) Ld. authorized representative submitted exhaustive arguments on this ground which are summarized as under:- a) Royalty/Technical Guidance Fees and Model Fees – not capital expenditure (i) The aforesaid right vested with the appellant was not exclusive in as much as, in terms of Article 2 of LTAA, Honda reserved the right to provide technology to manufacture motorcycles to Honda Motorcycles India Ltd.(‗HMSI‘). The appellant during the currency of the agreement only had a limited right to use the technology of Honda. (ii) The ownership/proprietary rights in the technical know-how continued to vest in Honda and the appellant was not authorized to transfer, assign or convey the know-how/technical information to any third party.

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 189 of 484 b) No ownership rights – only limited right to use During the currency of the agreement, the appellant only had a limited right to use the technology of Honda. Ownership/proprietary rights in the technical know- how continued to vest in Honda and the appellant was not authorized to transfer, assign or convey the know- how/technical information to any third party as the appellant only acquired limited right to use and exploit the know-how. c) No exclusive license (i) The aforesaid right vested with the appellant was not exclusive in as much as, in terms of Article 2 of LTAA, Honda reserved the right to provide technology to HMSI to manufacture motorcycles. (ii) That aforesaid limited right were available to the appellant and the fact of such rights being not exclusive can be gathered from the following clauses of the agreement:- ―Article 2 (Grant of License and Exclusivity) Subject to the terms and conditions herein contained, LICENSOR hereby grants to LICENSEE an indivisible, non-transferable and exclusive right and license, without the right to grant sublicenses, to manufacture, assemble, sell and distribute the products and the parts during the term of this Agreement within the Territory under the Intellectual Property Rights and by using the Technical Information. Provided, it is acknowledged by LICENSEE, (i) the exclusivity granted herein is against the third parties but not HMSI, and

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 190 of 484 (ii) the exclusivity against HMSI is only with respect to the exterior of the products. It is agreed between the parties that subject to the terms hereof, the LICENSOR shall make necessary endeavors so that New Model(s) for the LICENSEE are introduced in a phased and timely manner in order to meet the request from the LICENSEE and such introduction would be on reasonable criteria.‖ d) Payment under the agreement – allowable revenue expenditure (i) As per the various clauses of the agreement, it would be appreciated that the royalty payable to Honda is only for the purpose of use of technical assistance in the manufacture and sale of products and the appellant has not acquired any capital asset, much less in the nature of intellectual property rights or patents belonging to Honda, which, in unequivocal terms, as provided in the agreement vested in absolute ownership of Honda at all times (ii) Reliance in this regard is placed on the following decisions wherein it has been held that where payment is made to simply use the technical know- how/knowledge provided by the foreign collaborator as opposed to acquisition of ownership rights therein, the payment made would be regarded as revenue expenditure. i) CIT v. Ciba India Ltd.: 69 ITR 692 (SC) ii) CIT vs. British India Corp. Ltd. [1987] 165 ITR 51 (SC) iii) Alembic Chemical Works Co. Ltd. v. CIT: 177 ITR 377 (SC) Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 191 of 484 iv) Shriram Refrigeration Industries Ltd. v. CIT: 127 ITR 746 (Del HC) v) Triveni Engineering Works Ltd. vs. CIT : 136 ITR 340 (Del) vi) Addl. CIT vs. Shama Engine Valves Ltd. : 138 ITR 217 (Del) vii) CIT vs. Bhai Sunder Dass & Sons P. Ltd. : 158 ITR 195 (Del) viii) CIT vs. Lumax Industries Ltd. : 173 Taxman 390 (Del) ix) Shriram Pistons & Rings Ltd. vs. CIT : 171 Taxman 81 (Del) x) CIT vs. Shri Ram Pistons and Rings Ltd. : 220 CTR 404 (Del) xi) Goodyear India Ltd. vs. ITO : 73 ITD 189 (Del)(TM) xii) ITO vs. Shivani Locks : 118 TTJ 467 (Del) xiii) Climate Systems India Ltd. vs. CIT: 319 ITR 113 (Del- HC) xiv) CIT vs. Sharda Motor Industries Ltd: 319 ITR 109 (Del- HC) xv) CIT vs. Essel Propack 325 ITR 185 (Bom-HC) (iii) Since, no proprietary rights in the know how vested in the appellant, the appellant being a mere licensee with limited rights to use the technical assistance during the currency of the agreement, there is no explicit or implied intention to transfer or create ownership in the technical know-how /technical information in the appellant.

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 192 of 484 (iv) In view of the aforesaid, expenditure by way of royalty, technical guidance fee and model fees incurred by the appellant was allowable revenue deduction since- (v) payment was made for limited license to use the know- how provided by Honda, as the proprietary and ownership rights in the same continued to remain vested with Honda at all times and, therefore, there was no absolute parting of know-how in favour of the appellant resulting in acquisition of any asset, (vi) no benefit of enduring nature in the capital field accrued to the appellant, even if the license to manufacture and sell products in India is assumed to be exclusive, except for grant of license to HMSI, (vii) the subject payment made did not cover consideration paid for setting up of the manufacturing facility in India

e) Model fees accepted as revenue expenditure i) For A.Y. 1996-97, the Tribunal was pleased to allow model fee paid to Honda under section 37(1) of the Act as revenue expenditure on the ground that payment was only for right to use the technical know-how and there was no ownership of any intellectual property, which continued to remain with Honda.[Hero Honda Motors Ltd. v. JCIT: 95 TTJ (Del) 782]. It would be pertinent to point out that the aforesaid order of the Tribunal has attained finality inasmuch as the appeal filed by the Revenue against the said decision of the Tribunal was dismissed by the Delhi High Court. . The decision of the High Court was accepted by the Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 193 of 484 Revenue and has become final, as no SLP was filed there against. ii) It is further respectfully submitted that the Tribunal in the assessment years 1997-98 and 1999-00 allowed similar expenditure on payment of model fee, following the decision of the Tribunal for assessment year 1996- 97. The Revenue‘s appeal against the said orders has been dismissed by the High Court. In the assessment year 1999-00, appeal filed by the Revenue against the order of the High Court has been dismissed by the Hon‘ble Supreme Court. f) Res Judicata/Rule of Consistency i) The appellant has been paying royalty, technical guidance fees and model fees in terms of the agreement of 1984 and, again, under the agreement of 1995 which was always accepted and treated as revenue in nature by the Department. ii) In view of the aforesaid, the doctrine of res judicata does not strictly apply to the income-tax proceedings but in order to maintain consistency, the Revenue cannot be permitted to rake up settled issues: (i) CIT v. Excel Industries: 358 ITR 295 (SC) (ii) Radhasoami Satsang v. CIT: 193 ITR 321 (SC) (iii) CIT v. Rajasthan Breweries: SLP (C) 1379/2014 (SC) (iv) CIT v. Realest Builders and Services: 307 ITR 202 (SC) (v) CIT V. Neo Polypack (P) Ltd: 245 ITR 492 (Del.)

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 194 of 484 (vi) CIT V. Dalmia Promoters Developers (P) Ltd: 281 ITR 346 (Del.) (vii) DIT v. Escorts Cardiac Diseases Hospital: 300 ITR 75 (Del.) (viii) CIT V. A.K.J. Security Printers: 264 ITR 276 (Del) (ix) DIT(E) vs. Apparel Export Promotion Council: 244 ITR 734 (Del.) (x) Vesta Investment and Trading CO. (P) Limited v. CIT: 70 ITD 200 (Chd.) g) The aforesaid issue is covered in favour of the appellant by the decision of Tribunal in the assessment years 2000-01; 2001-02; 2002-03, 2006- 07, 2007-08 and 2008-09 wherein the Tribunal has held that annual payment of royalty/technical guidance fee was allowable revenue expenditure. It would be pertinent to note that he aforesaid orders of the Tribunal relating to assessment years 2000-01 to 2002-03 have been affirmed by the Delhi High Court in the appellant‘s own case reported as CIT v. Hero Honda Motors Ltd.: 372 ITR 481. 94) The Ld. departmental representative vehemently supported the order of the Ld. assessing officer and submitted that the demo payment has resulted into the enduring benefit as the appellant was entitled to use information even after the termination of agreement and there is it is degree of perpetuating India war agreements based on which the payments have been made. He therefore submitted that the disallowance made by the Ld. assessing officer of these payments as capital expenditure is correct. He reiterated the submission that the order of the coordinate bench has not reached the finality therefore the

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 195 of 484 disallowance has been made. In view of this is submitted that the order of the coordinate bench may not be followed. 95) We have heard the rival contentions. We have gone through the orders in the appellant‘s case for the earlier assessment years as was pointed out by the Ld. Counsel. Both the parties admitted before us that there is no change in the facts and circumstances of the case as well as the agreement under which the payments have been made by the assessee. The Ld. departmental representative also could not point out any other judicial precedent on this issue of the higher forum. In this event we are duty bound to follow the order of the coordinate bench passed in the case of the appellant for the beer years. For the sake brevity, we reproduce hereunder the finding in the appeal order for AY 2007-08, which was followed in the order for AY 2008-09 as under: ―57. The issue whether the expenditure in question is in the capital field or the revenue field has been decided in favour of the assessee by the ITAT in assessee‘s own case for earlier assessment years 2000-01, 2001-02, 2002-03 and 2006-07. The ITAT Delhi Bench ‗C‘ in assessee‘s own case for A.Y. 2006-07 in ITA no. 5130/Del/2010 vide order dated 23-11-2012 has held that the annual payment of royalty was a revenue expenditure. In doing so the ITAT has relied on various judicial pronouncements including the decision of Jurisdictional High Court in the case of Climate Systems India Ltd. and Sharda Motors Industrial Ltd. No change in facts and circumstances has been pointed out by the ld. DR. Therefore, respectfully following the same, we allow this ground of the assessee.‖

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 196 of 484 Therefore respectfully following the above decisions of the Tribunal and High Court in the appellant‘s own case, we reverse the order of the Ld. assessing officer in holding the above 3 payments as capital expenditure. In the result ground No. 19 of the appeal of the assessee is allowed.

96) Ground No. 20 of the appeal of the assessee is against the treatment given by the assessing officer to the gains arising from sale of investments made during the year as business income instead of capital gain is considered by the appellant of Rs. 1 94.04 crores. The brief facts of the case is that appellant has invested surplus funds arising in the course of business under various modes of investments like mutual fund, portfolio management services and shares. The gain arising from the sale of such various instruments during the year of Rs. 1 94.04 crores were disclosed by the assessee under the head of the capital gains. However the Ld. assessing officer has held that with respect to the magnitude in volume of the total turnover from sale of such investment the aforesaid income was taxable under the head business income and not as a capital gain. On objection filed before the Ld. dispute resolution panel the opinion of the Ld. assessing officer was confirmed and therefore assessee is in appeal before us. 97) Before us the Ld. authorized representative submitted that a) The appellant is engaged in the business of manufacture and sale of two wheelers. During the relevant previous year, the turnover from sale of vehicles was Rs.16,780 crores (approx.).

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 197 of 484 b) The appellant, it is submitted, realizes funds from sale of vehicles on daily basis. However, the appellant makes payment to various vendors in four tranches/dates during a month. Accordingly, the appellant generates substantial surplus funds in the course of the aforesaid business activities, which remain idle in the bank account. In order to optimally utilize the spare funds, instead of keeping the same idle in the bank account, the appellant invested the same, primarily in various mutual funds/liquid schemes of mutual funds, and also portfolio management schemes.

c) The investments were made by the appellant as part of prudent fund/cash management, in order to optimally utilize spare funds. Investments made in units of mutual funds were switched to realize best yields.

d) The aforesaid investment activity does not constitute business of the company and investments are made, it is reiterated, to only optimize return on idle funds.

e) It is submitted that gain arising from sale of an asset is taxable under the head ―business income‖, where such asset is held as ‗stock-in-trade‘ by an appellant. Where an asset is held as capital asset, within the meaning of section 2(14), gains arising from sale thereof is taxable as ‗capital gains‘ under section 45 of the Act.

f) The nature of asset, whether stock-in-trade or capital asset depends upon the dominant intention with which

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 198 of 484 investment is made. If the intention behind holding an asset is to deal in it, the same qualifies as stock-in-trade and if the asset is held with an intent not to deal therein but to reap benefit from holding the same, by way of capital appreciation, deriving of rental/royalty/dividend income, etc. there from, the same would qualify as capital asset.

g) Simply because investment is made with a view to capital appreciation or earning optimum return on such investment, the same does not automatically become business asset or stock-in-trade, to characterize the income earned there from as business income.

h) The appellant made various investments as part of prudent cash/fund management, with a view to optimally utilize spare funds and, could not, therefore, be said to be engaged in business of sale-purchase of various investments, giving rise to income taxable under the head ―business‖. The appellant could not be said to be a dealer in various kinds of investment.

i) The investment in shares/mutual funds have been regularly shown under the head ‗investments‘ in the balance sheet(s) and valued at cost. The same have, at no point, been converted or treated as stock-in-trade. The classification of shares/mutual funds as ‗investments‘ has been accepted all along by the Revenue and there is no change in facts in the year under consideration, to warrant any deviation/departure from the accepted position.

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 199 of 484 j) Further, the purchase/redemption/transfer of various units of mutual funds/investments made during the year, on almost daily basis, was only with a view to properly manage cash/funds and not with a view to earn profit, as a dealer in such investments.

k) Reliance is placed on the following decisions, wherein inspite of large volume /frequency of transaction of sale/purchase of shares, considering the intention behind such investments, the gains realized there from have been held to be taxable under the head ‗capital gains‘ instead of ‗business income‘:

i. CIT v. Gopal Purohit: 336 ITR 287 (Bom.) (SLP dismissed by SC at 334 ITR 308 (st.)) ii. Jindal Photo Investment Ltd.: 334 ITR 308 (St.) (SC) iii. CIT vs M/s Devasan Investments Pvt. Ltd.[2014]: SLP(C) No. 30606 of 2014 (SC) iv. CIT v. Rohit Anand: 327 ITR 445 (Del.) v. CIT v Consolidated Finvest and Holding Ltd (2011) 337 ITR 264 (Delhi) vi. CIT v. Avinash Jain : 214 Taxman 260 (Del) vii. CIT v. PNB Finance & Industries Ltd: 236 CTR 1 (Del) viii. CIT V. Ess Jay Enterprises (P) Limited: 173 Taxman 1 (Del.) ix. CIT v. Vinay Mittal: 208 Taxman 106 (Del.) (SLP Dismissed) x. CIT v. Suresh R. Shah: ITA No. 1974/2011 (Bom.)(HC)

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 200 of 484 xi. CIT v Naishadh V. Vachharajani ITA No. 1042 of 2011 (Bom.) affirming the decision of Mumbai Tribunal in ITA No. 6429/Mum/2009 xii. Slocum Investment (P) Ltd. vs. DCIT: 106 ITD 1 (Del. Trib.) xiii. Gomti Credits (P) Limited vs. DCIT: 100 TTJ 1132 (Del).

l) Reliance is also placed on the following decisions, wherein it has been consistently held that frequency or volume of transactions does not simpliciter characterize the income from sale of shares as business income: i. Holck Larsen v. CIT: 85 ITR 285 (SC) ii. J. M. Share & Stock Brokers Limited V. JCIT: ITA No. 2801/ Mum/ 00 iii. ACIT V. Motilal Oswal: [2006] 8 SOT 771 (Mum.) iv. Janak S. Rangwalla V. ACIT: [2007] 11 SOT 627 (Mum.) v. Shah-La Investments and Financial Consultants (P) Ltd. v. Dy. CIT: 2 SOT 371 (Hyd. Tri.) vi. ACIT v. Shri Sunder Iyer: ITA No. 295/Mum/2001 (share broker) vii. Sugamchand C. Shah v. ACIT: Lex ID 390372 (Ahd. Tri.) viii. Vinod M. Shah vs Addl. CIT: 2010 38 SOT 503 (Mum Tri.) ix. DCIT V. Ramesh Babu Lal in IT No‘s. 4084/ Mum/ 2009 (Mum. Trib.) x. Nagindas P. Sheth (HUF) vs. ACIT (ITAT Mumbai) xi. DCIT v. M/s. Eterna Steel & Investments Pvt. Ltd.

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 201 of 484 xii. ITO v. Veer Enterprises Ltd. 2011-TIOL-233-ITAT- KOL xiii. ACIT vs. Naishadh v. Vachharajani: I.T.A. No. 6429/Mum/2009 (Mum. Tri.) affirmed by the Bombay High Court in ITA No.1042 of 2011. xiv. Amit Jain v. ACIT: ITA No. 309/D/2010 (Del Tri.) xv. CIT v Consolidated Finvest and Holding Ltd (2011) 337 ITR 264 (Delhi) xvi. CIT v. Suresh R. Shah: ITA No. 1974/2011 (Bom.)(HC)

m) That apart, it would be noted, that out of the total income earned from mutual funds, almost 49.67% of the total income earned from investments made in mutual funds was for a period of more than one year. It is submitted, that an investment held for a period of more than one year cannot be considered as an investment held for trading purposes and income there from cannot be held to be business income. It is to be appreciated that under the Act shares/mutual funds held for more than one year are considered as ‗long term capital asset‘, the sale whereof results in long term capital gains.

n) The Delhi Bench of the Tribunal in the case of Arjun Kapur v. DCIT: 70- ITD 61 held that shares held for a period of one year or more, should be considered as shares acquired and held for a long span of time, and hence giving rise to long term capital gains under the Act.

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 202 of 484 o) That apart, the Calcutta Bench of the Tribunal in the case of ITO vs Neeraj Vanijya (P) Ltd.: LexDoc Id: 407109 held that gains on mutual funds cannot be treated as business income.

p) In so far as the investment in shares is concerned, it is to be appreciated that the same was primarily made either through PMS. Under PMS, the company advances funds to the Portfolio Manager, who in turn makes investment in various shares. In substance the investments under PMS is similar to investment in mutual funds. The appellant, it is reiterated, is only interested in the return on funds invested and does not act as a dealer/trader, so as to be regarded as being engaged in business activity.

q) Attention in this regard is invited to decision of Mumbai Bench of Tribunal in the case of ITO vs. Radha Birju Patel: 5382/Mum./2009, wherein it has been held that investments made in various shares through PMS scheme, with a view to earn optimum return on investment / wealth creation/maximization cannot be treated as income taxable under the head‖ business income‖.

r) Recently, the Delhi High Court in the case of Radials International v. CIT: 367 ITR 1 and the Karnataka High Court in the case of CIT v. Kapur Investments Pvt. Ltd.: 234 Taxman 149 has held likewise.

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 203 of 484 s) To the same effect are the following decisions: i. DCIT v. M/s. Eterna Steel & Investments Pvt. Ltd. : ITA No. 817 /Kol/2010 (Kol.) ii. ITO v. Veer Enterprises Ltd. : ITA No. 1448 of 2009 (Kol.) iii. ARATrading& Investment Pvt. Ltd. vs DCIT (Pune)(ITAT) iv. KRA Holding & Trading Pvt Ltd vs. DCIT (ITAT Pune): ITA Nos. 500 & 1320/PN/2008 & 434/PN/2009 (Pune) v. Devendra Motilal Kothari v. Dy. CIT: 132 ITD 173 (Mum) vi. Homi K. Bhabha v ITO ITA No. 3287/Mum/2009 (Mum) vii. Apoorva Patni v. Addl. CIT: 24 taxmann.com 223 (Pune)

t) The shares acquired by the company were also with the objective of reaping benefit from long term appreciation in value and not with intent to deal in the same. It would be noted that the investment in various derivatives was made with a view to hedge the investment made by the appellant in different equity shares. It is to be reiterated that the appellant did not directly enter into any futures transaction for which it did not hold underlying equity shares.

u) In view of the above, it is respectfully submitted, that the appellant was not involved in the activity of trading in various shares/mutual funds etc. and had merely invested

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 204 of 484 surplus funds with a view to optimally utilize such spare funds and, therefore, income arising from such activities could not be taxed under the head ―business income‖.

v) Further, classification of shares/mutual funds as ‗investments‘ has been accepted all along by the Revenue and there is no change in facts in the year under consideration, to warrant any deviation/departure from the accepted position. [Refer: CIT v. Ess Jay Enterprises (P) Limited: 173 Taxman 1 (Del.)]

w) It is reiterated that the investment in shares/mutual funds have been regularly shown under the head ‗investments‘ in the balance sheet(s) and valued at cost. The same have, at no point, been converted or treated as stock-in-trade. The classification of shares/mutual funds as ‗investments‘ has been accepted all along by the Revenue and there is no change in facts in the year under consideration, to warrant any deviation/departure from the accepted position.

x) Emphatic reliance is also placed on the recent Circular No.6 of 2016 dated 29.02.2016 wherein it has been, inter alia, directed by the CBDT that gain from listed shares/ securities held for more than 12 months shown as capital gains by the assessee be not disputed by the assessing officer.

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 205 of 484 y) Further reliance is placed on the recent decision of the Jaipur Bench of Tribunal in the case of DCIT vs. Mahender Kumar Bader ITA 605/D/2013, wherein it has been held that in view of the aforesaid CBDT Circular No. 6/2016 dated 29.02.2016, if assessee has consistently shown shares as an ―investment‖ and offered gains as capital gains, AO is not entitled to urge that the same constitutes ―stock-in-trade‖ and assess gains as business profits on grounds that there were substantial and frequent transactions and motive was to earn profit and holding period of such shares was very short.

z) The aforesaid issue is squarely covered in favour of the appellant by the decision of the Delhi bench of the tribunal in the appellant‘s own case for the AY 2007-08 and 2008-09, wherein after considering the legal position and intention of the appellant company, the Tribunal came to the conclusion that income from sale of shares/mutual funds/PMS etc. would be taxable as capital gains, instead of business income brought to tax by the assessing officer. 98) Ld. departmental representative reiterated the same argument that the looking at the magnitude of the turnover of the investment activities allegedly shown by the assessee it constitutes business income and therefore the Ld. assessing officer and Ld. dispute resolution panel has rightly held that these income is chargeable to tax under the head business income and not under that capital gains as claimed by the appellant. 99) We have heard the rival contentions. We have gone through the order passed by the Tribunal for the assessment year 2007- Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 206 of 484 08, which was followed in appeal order for AY 2008-09. The Tribunal in that year went through the entire facts, which are similar to the year under consideration, and the legal position before coming to the conclusion that the gains arising from investment of surplus funds in shares/mutual funds/PMS as part of cash management policy cannot lead to the conclusion that the appellant was carrying on business to bring to tax such income under the head ―business‖ as against ‗capital gains‘ offered by the appellant. The Ld. departmental representative could not point out any change in the facts and circumstances of the case of the current assessment year compared to the assessment year for which the tribunal is decided in the appellant‘s own case for earlier years. No other judicial precedent was also cited by which we could deviate from the order of the coordinate bench in the earlier years in the appellant‘s own case. The relevant observations in the appeal order for AY 2007-08 are as under:

―65.20. The issue that emerges for consideration is whether the gains that arose to the assessee from investment in debt mutual funds/PMS/ shares are to be taxed under the head ―business income‖ or under the head ―capital gains‖. .................... 65.28. Now, we proceed to analyze the facts of the present case in the light of the principles laid down by the Courts (Supra) for determining the nature of the transaction vis a vis capital gains vs. business income:

Intention of the assessee at the time of the purchase of shares: Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 207 of 484 65.29. The business of the assessee is not to deal in shares and securities. The investment was made with a view to earn capital appreciation and to use the spare fund optimally instead of keeping it in the banks. For the year under appeal, the assessee earned dividend income of Rs.22.61 crores from investments held in shares and mutual funds.

Treatment in the books of accounts: 65.30. It is an undisputed fact that the assessee had treated the transaction as investment in its books of accounts and not as stock in trade. The assesse has shown the investments in shares both at the beginning and closing of the year as an investment only and not as stock in trade.

65.31. The assessee has valued the investments at cost as per Accounting standard 13- Accounting for Investments and not in accordance with Accounting Standard –2 which deals with valuation of inventories.

65.32. The assessee has been holding the securities/ shares as investments from year to year and consistently following the same method of accounting for the purpose of disclosure and valuation. This treatment by the assessee was accepted by the Revenue for the past years.

65.33. The assessee had earned income from both long term and short term capital gains which means the

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 208 of 484 assessee has also held shares for a period of more than 12 months.

Whether the investments are made out of borrowed funds 65.34. The investments were made from surplus funds of the assessee and there were no borrowings. The investments were made to optimally utilize the spare funds instead of keeping the same idle in the bank accounts. The investments were made in mutual funds (debt and liquid funds) and through portfolio management schemes/ IPOs.

65.35. The co-ordinate bench of the Delhi ITAT in the case of Narendra Gehlaut vs. JCIT [ITA No 1648/ Del/ 2010] held that despite borrowing, gains on shares assessable as Short term capital gains and not business profits. The decision is rendered considering the CBDT Circular No 4/ 2007 and various judicial precedents on the subject.

Frequency of the transactions 65.36. Out of the total sale value of Rs 13,690.84 crores realized from the investments, an amount of Rs 12,330.33 crores relates to sale of short term debt mutual funds and liquid funds in which the transactions are effected on daily basis (i.e. surplus amounts are invested and the withdrawals are made in a short span depending on the business needs of the assessee). These funds were invested mainly into money market instruments, short-term corporate deposits and treasury. Most schemes have a lock-in period of a maximum of three days to protect

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 209 of 484 against procedural (primarily banking) glitches, and offer redemption proceeds within 24 hours.

65.37. The Assessing officer has brought the transaction to tax under the head ―Business income‖ mainly on the ground that the volume of the transaction of such investments was high and the assessee is undertaking the trading of stocks and mutual funds regularly and systematically. However, we observe that there is not much frequency in sale/purchase of investments, from analysis carried out at page 526 of objections in Form 35A. It is not the case that the assessee has indulged in regular trading in shares on day to day basis.

65.38. The Mumbai Bench of the ITAT in the case of Janak S. Rangwala (11 SOT 627) observed that mere volume and magnitude of transaction will not alter the nature of transaction if the intention was to hold the shares as investment and not in stock in trade.

Investments in mutual funds – 65.39. Out of the total income earned from mutual funds, almost 67.34% of the total income earned from investments made in mutual funds was for a period of more than one year.

Investments in shares – 65.40. Investment in shares was primarily made either through PMS or under Initial Public Offer. Under PMS, the Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 210 of 484 company advances funds to the Portfolio Manager, who in turn makes investment in various shares. In substance the investments under PMS are similar to investment in mutual funds. The assessee, reiterated that it is only interested in the return on funds invested and does not act as a dealer/trader, so as to be regarded as being engaged in business activity.

65.41. In view of the above factual matrix it emerges that assessee is: (i) not a trader in stocks (ii) Intention of holding the shares as investment/ stock is manifest. (iii) Sales are effected by delivery. (iv) Department has itself in earlier years taxed such transactions under the head ―Capital Gains‖.

65.42. Considering these facts and applicable judicial precedents on the issue, we are of the considered opinion that the income in question can be taxed only under the head ―Capital Gains‖ and not under the head business income. This ground of the assessee is allowed.‖

100) In addition to the aforesaid observations, the appellant in this year also has benefit of the recent Circular No.6 of 2016 dated 29.2.2016 issued by the CBDT, wherein with an idea to reduce litigation on this issue of classification of the head of income arising from sale of shares / mutual funds, etc., the CBDT has opined that gains arising from sale of such shares/securities Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 211 of 484 held for a period of more than 12 months and shown as capital gains by the assessee should not be disputed by the assessing officer. Having regard to the aforesaid intent of the Circular where a consistent method has been followed by an assessee to treat the investment as on capital account corroborated with disclosure in balance sheet as investment, the same consistent stand should not be disputed by the assessing officer. It is also not disputed by the Ld. assessing officer that the capital gains arising on the various investments are held for less than 12 months and are not long-term capital gain. In view of the aforesaid reasons also, while respectfully following the appeal orders for AY 2007-08 and 2008-09, we reverse the action of the assessing officer in changing the head of income surplus arising from sale of shares/mutual funds, etc. therefore ground No. 20 of the appeal of the assessee is allowed. 101) Ground No. 21 of the appeal of the assessee is that Z assessing officer has disallowed Rs. 22250063/- on account of portfolio management services fees or protective basis of the ground that the same should be disallowed in the event income from PMS team is held to be taxable under the head capital gain in further appeal. The assessee was further aggrieved for the reason that that even if such income is chargeable to tax under the head capital gain the aforesaid expenditure be allowed as deduction while computing the income under that head. 102) Before us, the ld. Authorised Representative submitted that The portfolio management fee, it is submitted, is paid to the portfolio manager for administering the funds of the appellant, by way of investments in various instruments, which may be shares, mutual funds, debentures, fixed deposits or any other mode of investment. Cash management / optimum utilization of surplus funds arising in the course of business is an integral part of the business activity of the appellant and the deployment of surplus Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 212 of 484 funds could be in the form of investment or stock-in-trade. If the investment is held as stock in trade, income there from, is assessable as business income, whereas if the investment is held as capital asset, income there from would be taxable as capital gains. However, expenditure incurred for the administration and management of funds in the course of business being towards cash management/optimum utilization of business funds would be considered as expenditure for the purposes of business and hence allowable business deduction. In view the above, the aforesaid deduction has been rightly claimed by the appellant and no part of the same is to be allocated for the purposes of computation of capital gains. He also submitted that, in the event the Tribunal were to hold the aforesaid PMS expenses to be not an allowable business expenditure, the assessing officer may be directed to allow the same as deduction from income under the head ―capital gains‖, in accordance with law. However he further submitted that In all fairness the Tribunal in appellant‘s own case in for A.Y 2008-09 while holding the income from PMS as ―capital gains‖ held the PMS expenses for administering the funds are not allowable business expenditure. However, the Tribunal, in the said order accepted the alternate contention of the appellant by directing the AO to allow reduction of PMS expenses from income under the head ―capital gains‖. 103) Ld. departmental representative relied upon the orders of the Ld. assessing officer and submitted that the PMS expenses cannot be granted as deduction even if the income of the assessee is computed under the head of the capital gains. 104) We have carefully considered the rival contentions. The revenue could not point out any other decision which can be controverted against the decision of the coordinate bench in the case of the assessee for assessment year 2008- 2009 wherein Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 213 of 484 the PMS expenses from income under the head capital gain is granted as reduction. Following the decision of coordinate bench in appellant‘s own case in AY 2008-09, we hold that expenses incurred towards portfolio management fees in respect of investment in mutual funds/ shares is not allowable as business expenditure and same deserves to be allowed as deduction from income from capital gains as per provisions of the Act. Thus, ground nos. 21 to 21.1 of the appellant is allowed by accepting alternative plea of the appellant and AO is directed to allow the impugned expenditure incurred by the appellant towards portfolio management fees from income under the head capital gains in accordance with relevant provisions of the Act. Hence ground no. 21 of the appeal is allowed. 105) Ground No. 22 of the appeal is against disallowance of Rs. 1 45.62 lakhs under section 14 A of the income tax act by applying the provisions of rule 8D of the income tax rules 1962. The grievance of the assessee is that the Ld. assessing officer has disallowed this sum without finding of recording satisfaction as to the incorrectness of the Suo motto disallowance of expenses made by the assessee under section 14 A of the income tax act. It was further the grievance that the Ld. assessing officer is attributed interest expenditure incurred during the year awards earning of exempt income by applying provisions of rule 8D of the rules and according to the assessee there is no such interest expenditure attributable to the exempt income. During the relevant previous year, the appellant earned exempt dividend income of Rs. 11.79 crores from investments held in shares and mutual funds, which was exempt under section 10(34)/10(35)/10(15)(iv)(h) of the Act. In the return of income, the appellant made suo-moto disallowance of Rs. 16,45,937 under section 14A of the Act, by attributing proportionate amount of salary paid to employees involved in Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 214 of 484 treasury functions as well as the proportionate amount of PMS fee towards earning of exempt income. The working of the disallowance made by appellant was also submitted before the Ld. assessing officer. However the Ld. assessing officer rejected the method of disallowance computed by the appellant under section 14 A of the income tax settlement but the disallowance of his 145.62 lakhs invoking the provisions of rule 8D of the rules after reducing suo motto disallowance of 16.46 Lacs made by the appellant in the return of income. On objection before the Ld. dispute resolution panel would directed the Ld. assessing officer to carry out similar exercise is was directed by the tribunal in earlier years however the Ld. assessing officer disallowed Rs. 1 45.62 lakhs in the final assessment order. Therefore the assessee is in appeal before us. 106) Ld. authorized representative submitted that As per section 14A(2), disallowance under that section as per Rule 8D can be made only if the assessing officer records satisfaction/finding as to the incorrectness in the method of disallowance followed by the appellant. [Refer: Maxopp Investment Ltd: 347 ITR 272 (Del.)]. In the absence of any satisfaction recorded in the assessment order, the disallowance as per Rule 8D needs to be deleted. In the present case, as submitted above, the appellant suo moto identified expenses, having relation with earning of exempt dividend income, viz., salary of employees engaged in treasury functions and proportionate PMS fees which were disallowed in the return of income. The company is engaged in the business of manufacture and sale of motor vehicles. The appellant company instead of keeping idle the liquid funds generated from the aforesaid business, temporarily lying in bank accounts, invests them in various shares/mutual funds/portfolio management schemes. The decision to make such temporary investment, which is part of daily cash Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 215 of 484 management, is not taken by the directors of the company, who are involved in the core business functions carried out by the company. The board of directors had delegated the aforesaid task to the treasury department. It would be appreciated that the Treasury department was responsible for managing the overall fund flow of the Company and different roles had been assigned to different people depending on their caliber and expertise. Accordingly, a team of certain persons (2 employees during the relevant year) in the treasury department, who on the basis of broad investment guidelines/policy of the company, invest idle/liquid funds on daily basis in various schemes, depending upon the funds requirement. Apart from the aforesaid expenses, there is no other expenditure nor has the same been pointed out by the assessing officer. He submitted that the provisions of sub-section (2) and sub-section (3) permits the assessing officer to apply the procedure of computing disallowance 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 section 14A of the Act is not correct and/or sufficient. Reliance in this regard is placed on the decision of the Delhi High Court in the case of Joint Investments P. Ltd. v. CIT: 275 CTR 471, wherein the High Court held that the computation of the assessee or claim that no expenditure was incurred for earning exempt income should be examined with reference to accounts and only if the assessee‘s explanation is unsatisfactory, only then the AO can proceed further. He stated that even otherwise, there is no nexus of expenses, like interest expenditure and other administrative expenses with investments, warranting disallowance under section 14A. Regarding interest expenditure he submitted that appellant is a cash rich company, which does not borrow funds for making Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 216 of 484 investment. The marginal interest expenditure of Rs. 2.10 crores was incurred on other temporary loans/dealers deposit, having nexus with main business function. Further, no direct nexus of interest expenditure with investments or earning of dividend income was established by the assessing officer, for which the initial burden was on the assessing officer. [Refer: CIT vs. Hero Cycles: 323 ITR 518 (P&H) and Godrej & Boyce Mfg. Co. Ltd. v. CIT: 328 ITR 81 (Bom.). He submitted that That apart, the appellant had substantial free reserves of Rs. 3760.81 crores at the beginning of the relevant previous year and had also generated substantial surplus/interest free funds of Rs. 2686.64 crores during the year, which were sufficient to make net investment of Rs. 527.63 crores during the year. In such circumstances, it is to be presumed that only interest free funds have been utilized for making investments during the year. He relied upon the following decisions: i. East India Pharmaceuticals Works Ltd: v. CIT: 224 ITR 627 (SC), ii. Woolcombers of India Ltd. v. CIT: 134 ITR 219 (Cal) iii. CIT vs. Hotel Savera: 239 ITR 795 (Mad) iv. CIT v Radico Khitan Ltd : 274 ITR 354 (All) v. CIT v Dhampur Sugar Mills Ltd : 274 ITR 370 (All) vi. CIT v. United Collieries Ltd. : 49 Taxman 227 (Cal) vii. CIT v. Enamour Investment Ltd.: 72 Taxman 370 (Cal) viii. CIT v. Caroline Investment Ltd.: 87 Taxman 238 (Cal) ix. CIT v. Kanoria Investment (P) Ltd.: 232 ITR 7 (Cal) x. Tata Fertilizers Ltd. v. DCIT: 92 Taxman (Mag) 423 (Mum) xi. Smt. Chanchal Katyal V. CIT: 207 CTR 154 (All.) xii. DCIT V. Samtel Electron Devices Ltd: 100 TTJ 706 (Del.)

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 217 of 484 xiii. Motor General Finance Limited: 267 ITR 381 (SC) followed by Delhi HC in 272 ITR 550. xiv. Kumaragiri Textiles Ltd V. DCIT: 100 ITD 57 (Chennai) (TM) xv. CIT v. Reliance Utilities and Power Ltd.: 313 ITR 240 (Bombay HC)

He further relied upon following decisions, wherein with respect to assessment years 2008-09 and onwards, it has been held that Rule 8D is not mandatory, if satisfaction is not recorded and further, if appellant is able to establish that investments was made out of surplus interest free funds, no disallowance of the interest expenditure is warranted as per provisions of said Rule: i. TML Drive Lines Ltd vs. ACIT: ITA No. 6064/Mum/2010 ii. ACIT vs. Champion Commercial Co. Ltd: 139 ITD 108 iii. Max India Limited vs. DCIT: ITA No. 274/2012 iv. SIL Investment Ltd. vs ACIT: 148 TTJ 213 v. M/s. Auchtel Products Ltd. vs ACIT: I.T.A. No. 3183 /Mum/2011 vi. JK Investors (Bombay) Ltd vs. ACIT: ITA No.7858/Mum/2011 vii. DCIT vs Ashish Jhunjhunwala: I.T.A No. 1809/Kol/2012.

According to him Further, it has been held that disallowance of interest on borrowed funds under section 14A could not be made where the appellant was having mixed pool of funds and also since investments were made in the preceding years and no

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 218 of 484 fresh investment was made during the year under consideration. [Refer: CIT v. HDFC Bank: ITA No. 330/2012; CIT vs. UTI Bank Ltd: 215 Taxman 8 (Guj.) [dismissed the revenue‘s SLP in Civil Appeal No. 468/2014], CIT v. Gujarat Narmada Valley Fertilisers Co. Ltd: 221 Taxman 479 (Guj.); Hero Honda Finlease Ltd vs. ACIT: ITA No. 3726 & 6102/Del/2012 (Del). All the expenses, other than the suo-moto disallowance by the appellant, related to main business function of manufacturing vehicles. In the absence of any proximate nexus having been established by the assessing officer. He further pointed out that the Tribunal in the appellant‘s own case for the assessment year 2007-08 and 2008-09 set-aside the matter to the file of the assessing officer to be decided afresh as per law, having regard to the satisfaction to be recorded qua correctness of the suo-moto disallowance made by the appellant in the return of income and to adjudicate afresh following the decisions of the Delhi High Court in the case of Maxopp Investment Ltd. (supra). He stated that The AO, in the set aside proceedings for assessment year 2007-08, vide order dated 30.10.2014 passed under section 254/143(3) of the Act [at Pg. 553-558 of PB Vol. 1]did not make any disallowance in respect of interest expenses since there was no nexus between the income and such expenditure, The AO however, made disallowance of administrative expenses under section 14A in proportion the total profit before tax bears to tax free income, which has been challenged in appeal before the CIT(A) and is pending disposal.

107) Ld. departmental representative relied upon the order of the lower authorities and submitted that disallowance under section 14 A is mandatory and only the disallowance can be

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 219 of 484 made applying rule 8D. He submitted that the assessee does not have any option to say that particular expenditure is not incurred when the application of rule 8D is been made mandatory w.e.f. assessment year 2008 – 09. 108) We have heard the rival contentions. We find that the appellant year after year is following a consistent method of computing disallowance u/s 14A by attributing expenditure incurred at the Treasury Department towards earning of exempt dividend income. The appellant has also given justification of nexus of such expenditure incurred at Treasury Department with portfolio management activity considering that the portfolio management is not the main business function of the appellant. The appellant is a company whose core business function is that of manufacturing and selling two-wheelers, having a turnover of Rs.16,000 crores approximately. The investments are made by the appellant as part of its cash management policy in order to better utilize the idle / surplus funds. We have also decided on the aforesaid aspect in ground of appeal no. 20 that the investment activity as part of its cash management function does not constitute business. In view of the same, we are of the view that no additional expenditure is required to be incurred more specifically of the management in investing surplus funds as per the cash management policy. The assessing officer has also not, on the basis of any tangible evidence/findings, pointed out incurrence of such expenditure. The legal position qua recording of satisfaction or coming to a finding qua inaccuracy in the method of disallowance followed by an assessee before making resort to the provisions of Rule 8D of the Rules, in terms of sub-section (2) / sub-section (3) of section 14A, has been repeatedly endorsed by the Hon‘ble jurisdictional High Court. Reference in this regard can be made to the decision of Maxopp Investment Ltd. : 347 ITR 471. In Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 220 of 484 view of the aforesaid legal position, we find that no valid satisfaction was recorded by the assessing officer in the assessment order to reject the method followed by the appellant in computing disallowance u/s 14A, before mechanically resorting to and applying the provisions of Rule 8D of the Rules. In view of such findings, the additional disallowance made by the assessing officer u/s 14A stands deleted on the aforesaid ground at the threshold. That apart, we also agree with the submissions of the appellant that, since the appellant is a cash- rich company, which, in fact, is investing surplus/idle funds in various modes of investments, there could be no nexus of interest-bearing borrowed funds with such investments. The appellant is having substantial free reserves of Rs.3760.81 crores at the beginning of the relevant year and has generated surplus interest free funds of Rs.268.64 crores during the year. The assessing officer, too, in the set-aside proceedings for the AY 2007-08 had accepted the aforesaid cash flow position and deleted the disallowance of interest expenditure. In view of this we reverse the finding of the Ld. assessing officer about disallowance of Rs. 145.62 lakhs under section 14 A of the income tax act applying the rule 8D of the income tax rules 1962. He in the result ground No. 22 of the appeal of the assessee is allowed. 109) The ground No. 23 of the appeal of the assessee is against the action of the Ld. assessing officer in enhancing the value of closing inventory and thereby income of the assessee by Rs. 1 565000/– in respect of proportionate amount of depreciation on model fees incurred during the year and debited to the profit and loss account alleging the same to be directly related to the manufacturing of is goods and therefore attributable to the closing stock of the such goods. The appellant manufactures two-wheelers under technical collaboration agreement entered Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 221 of 484 into with Honda Motor Co. Ltd., Japan. In accordance with the above collaboration agreement, the appellant pays model fee to Honda to obtain design / know-how to manufacture a new model of two-wheeler. The said expenditure is incurred prior to commencement of production of the new model. The ld AO held that expenditure incurred by the appellant towards model fee is directly related to manufacture of new models of two-wheelers and, therefore, needs to be attributed to the value of closing stock of finished goods of two-wheelers. Accordingly, the assessing officer on proportionate basis, worked out a sum of Rs.15,65,000/- out of depreciation on model fee debited to the profit and loss account, as attributable to the value of closing stock and made addition of the said amount to the income of appellant. The objection of the assessee is for the Ld. dispute resolution panel was rejected and therefore assessee is in appeal before us on this ground. 110) The Ld. authorized representative submitted that in terms of the AS-2 on ―Valuation of Inventory‖ costs incurred directly or indirectly for bringing the inventories to their present location and condition, are liable to be included to the cost of inventory. Model fee is not incurred during the manufacturing process for converting the raw material into finished goods but is incurred before the commencement of manufacturing process. Accordingly, allocation of the aforesaid cost to the closing inventory at the year-end is not in accordance with the provisions of AS 2. Attention was also invited to the opinion issued by the ICAI in Compendium of Opinions IX Page 41 & 68 wherein it has, with respect to treatment of loading development cost (R&D cost) on the year-end inventory been opined that the R&D costs should not be loaded to the value of closing inventory being not incurred for converting the raw material to the finished goods nor directly related to affecting change in the Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 222 of 484 location and condition of the inventory. Since Model Fee paid to the foreign collaborator is akin to R&D cost and not in the nature of conversion cost, is not to be considered for the purposes of loading to closing inventory. He submitted that in accordance with section 145A of the Act, closing stock should be valued as per method of valuation of stock consistently and regularly followed. It was the main contention that The appellant has been following the same system of accounting and valuation of inventory for the past several years, which has always been accepted by the department. In the absence of any change in the method of accounting and/or the books of accounts maintained by the appellant, during the relevant previous year, as compared to earlier years, the method of accounting/valuation followed by the assessee-company cannot be disturbed as has been held in following cases:

UCO Bank v. CIT: 240 ITR 355 (SC) CIT v. Singaribai: 13 ITR 224 (All.)(FB) Juggilal v. CIT: 101 ITR 40 (All.) CIT v. TISCO: 106 IR 363 (Bom.) CIT v. Sankarapandia: 130 ITR 541 (Mad.) Kone Elevator India (P.) Ltd v ACIT: 355 ITR 139 (Madras) Balapur Mandali v. CIT: 135 ITR 91 (Guj.)

He further submitted that Further considering that the appellant is a high tax paying company, subjected to uniform rate of tax, no adjustment is even otherwise called for in view of the following:

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 223 of 484 (i) If the closing stock of the year is to be varied, similar adjustments would need to be made to the opening stock, too. (Refer: K.G. Khosla & Co. Ltd. v. CIT: 99 ITR 574 (Del.)and CIT vs. M/s. The Mahalaxmi Glass Works Pvt. Ltd. : ITA No. 192 of 2009) (ii) Corresponding adjustment would need to be carried out in the opening stock of the succeeding year. According to him The addition, if any, is revenue neutral, if seen in a macro perspective and, therefore, no adjustment is called for. [Refer: CIT v. Excel Industries : 358 ITR 95; Nagri Mills Company Ltd.: 33 ITR 681 (Bom.); Triveni Engineering Industries Ltd.: 336 ITR 374 (Del.); CIT-1 v Gujarat Alkalies & Chemicals Ltd: 372 ITR 237(Guj HC). In the and submitted that aforesaid issue is squarely covered in favour of the appellant by the decision of the Delhi Bench and he of the Tribunal in appellant‘s own case for assessment year 2008-09, wherein similar disallowance of depreciation on model fee was deleted by the Tribunal on the ground that expenditure was incurred on new model fees prior to commencement of production of new models of two wheelers, and even otherwise this exercise would be revenue neutral in a broader perspective as the same adjustment would be required to be done in the opening stock of finished goods for the year under consideration.

111) The Ld. departmental representative relied upon the order of the Ld. assessing officer. 112) We have carefully considered the rival contentions. In absence of any change in the facts and circumstances of the case or any contrary decision, We have heard the rival contentions. We find that the similar issue was raised in the assessment order for AY 2008-09, which was decided in favour of the appellant by the Tribunal in appeal order for that year by observing as under- Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 224 of 484 ―219. On careful consideration of above submissions of both the parties, we are of the view that if the closing stock of the year under consideration. is to be varied, then similar adjustments would need to be made in the opening stock also and corresponding adjustments would also need to be carried out in the opening stock of the succeeding year and if any addition is made in this regard, would be revenue neutral if seen in a macro perspective. From the orders of the authorities below, we clearly observe that the AO has not disputed the mode of valuation of inventory made by the assessee during preceding years and if any kind of adjustment is held to be attributable to the value of finished closing stock, then the said corresponding amount/adjustment would need to be made in the opening stock of the succeeding year and in a broader sense, such kind of adjustment/addition would be revenue neutral. On specific query from the Bench, the DR submitted that the treatment given by the revenue authorities on the issue in the preceding year is not known to him and in this situation, we hold that the / department has not disputed the claim of the assessee in the preceding years.

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 225 of 484 expenditure was incurred prior to commencement of production of new model and the same was neither incurred during the manufacturing of new model nor model fee expenditure is directly related to manufacture of new models. In this factual aspect and circumstances, we hold that the assessee incurred expenditure on new model fees prior to commencement of production of new models of two wheelers, even otherwise this exercise would be revenue neutral in a broader perspective as the same adjustment would be required to be done in the opening stock of finished goods for the year under consideration. More so, when the assessee has followed a particular mode of accounting for this expenditure which was accepted by the Revenue, then the department cannot take a different stand in the succeeding year to make an addition in this regard. We are unable to see any valid ground to 'accept' a deviated stand of the Revenue on the issue, which in a broader sense, is revenue neutral, then no adjustment is called for in this regard. We hold that findings of the AO are not sustainable and we set aside the same. Hence, we allow ground no.58 to 58.1 of the assessee.‖

Accordingly, respectfully following the aforesaid decision, we decide the issue in favour of the appellant. Accordingly, the ground number 23 of appeal stands allowed. 113) Ground No. 24 of the appeal of the assessee is against the disallowance of expenditure of Rs. 3465552/- incurred on advertisement on the death anniversary of late Sh. Raman Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 226 of 484 Munjal being the founder of the assessee company on the ground that same was not incurred for the purposes of the business. On objection before the Ld. dispute resolution panel the expenditure were held to be personal in nature and therefore not deductible as business expenditure in the hands of the appellant company. Therefore assessee is in appeal before us. 114) The Ld. authorized representative submitted that Late Shri Raman Munjal was the founder of the appellant-company and had served and looked after the business operations of the appellant company in the capacity of managing director during his lifetime. The impugned expenditure was, therefore, incurred to remember an ex-employee of the appellant company. As regards the allowability of the said expenditure, it is submitted that it is well settled that the expression ―for the purpose of business‖ used in section 37(1) is not limited to earning of profit alone and if the expenditure satisfies the test of business / commercial expediency, the same needs to be allowed as business deduction under the said section. In view of the same, the impugned expenditure was incurred to remember and bestow gratitude to the Founder /ex-employee of the appellant company on account of commercial expediency, which would be regarded as being incurred for the purpose of business under section 37(1) of the Act. Reliance, in this regard, is placed on the following decisions, of the Supreme Court, wherein it has been held that the expression " expenditure laid out or expended wholly and exclusively for the purpose of such business‖ used in section 37(1) includes expenditure voluntarily incurred out of commercial expediency, in order to indirectly facilitate the business; the expression "commercial expediency" is an expression of wide import and includes expenditure a prudent man may incur for the purpose of the business; the Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 227 of 484 reasonableness whereof has to be seen from the point of view of businessman and not that of the Revenue: i. Hero Cycles (P) Ltd. v. CIT: 281 CTR 481 ii. S.A. Builder v. CIT: 288 ITR 1 iii. CIT vs. Walchand& Co.: 65 ITR 381 iv. J.K. Woollen Manufacturers vs. CIT: 72 ITR 612 v. Aluminium Corporation of India Ltd. vs. CIT: 86 ITR 11 vi. CIT vs. PanipatWoollen& General Mills Co. Ltd.: 103 ITR 666 vii. J.J. Enterprises v. CIT: 254 ITR 216 viii. CIT vs. Dhanrajgirji Raja Narasingirji : 91 ITR 544

Further, reliance is placed on the following decisions, wherein while following the ratio emanating from the aforesaid decisions, the expenses incurred towards festival celebrations along with employees, etc. have been held to be allowable business deduction:  CIT vs Usha Sales Ltd: 182 ITR 453 (Del.) - Expenditure incurred on celebration of ‗Shri Ram Jayanti‘ allowed  M/s Holtec Consulting Pvt. Ltd. V. DCIT: I.T.A. No. 3878/Del/2010 & 796/DEL/2011 (Del Trib)- Gifts given to directors/employees on birth anniversaries allowable  Vijay Seeds Co. (P.) Ltd. V ACIT: 74 TTJ 120 (PuneTrib.): Expenditure incurred on Ganesh Festival held to boost morale of the employees, thus allowable.

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 228 of 484  Mangalam Cement Ltd. V DCIT: 43ITD292(Jaipur ITAT) - Expenditure incurred on gifts to employess on occasions like birthdays, anniversaries, marriages, etc allowable.  Vindhya Telelink Ltd v JCIT(JabalpurITAT) 119TTJ(Jab)433 - Festival expenses was necessity for having cordial relationship with the staff, hence allowable.  Hindustan Construction Co. Ltd. V. JCIT: Mum ITAT (IT Appeal Nos. 6438 to 6441 (Mum.) of 2008)- Nature of expenses being payment for pooja, donation for local festivals and other benevolent activities held to be for the purpose of business

He therefore submitted that an analogy can also be drawn from the following decisions, wherein the Courts have held that if an expenditure incurred is established to have been incurred for the purpose of business out of commercial expediency, the same shall be an allowable business deduction, notwithstanding that such expenditure was incurred in relation to the promoter/ family of the promoter of the company:  Kostub Investment Ltd v CIT: 365 ITR 436 (Delhi)  CIT v Naidunia News and Networking (P.) Ltd: 210 Taxman 73 (Madhya Pradesh)

Further submitted that the impugned expenditure was not incurred for the first time during the assessment year under consideration and the same has been incurred year after year in earlier assessment years as well. In the earlier assessment years, the aforesaid expenditure was always accepted and allowed as revenue expenditure in the assessment orders

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 229 of 484 passed under section 143(3) of the Act. In view of the above, the aforesaid expenditure having been accepted to be an allowable business deduction in the earlier years, the said expenditure on the grounds of consistency, too, could not have been disallowed in the assessment year under consideration. Reliance, in this regard, is placed on the following decisions:  CIT v. Excel Industries: 358 ITR 295 (SC)  RadhasoamiSatsang v. CIT: 193 ITR 321 (SC)  CIT v. Rajasthan Breweries: SLP (C) 1379/2014 (SC)  CIT v. Realest Builders and Services: 307 ITR 202 (SC)  CIT V. Neo Polypack (P) Ltd: 245 ITR 492 (Del.)  CIT V. Dalmia Promoters Developers (P) Ltd: 281 ITR 346 (Del.)  DITv. Escorts Cardiac Diseases Hospital: 300 ITR 75 (Del.)  CIT V. A.K.J. Security Printers: 264 ITR 276 (Del)  DIT(E) vs. Apparel Export Promotion Council: 244 ITR 734 (Del.)  Vesta Investment and Trading CO. (P) Limited v. CIT: 70 ITD 200 (Chd.)

For the aforesaid cumulative reasons, it is submitted that the aforesaid expenditure was allowable deduction under section 37(1) of the Act. The disallowance made by the assessing officer is not based on correct appreciation of facts and position in law and, therefore, the same calls for being deleted. Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 230 of 484 115) Ld. departmental representative relied upon the order of the lower authorities and submitted that expenditure incurred by the assessee on the advertisement on the death anniversary of founder of the assessee company is a personal expenditure of the family and not the companies expenses and therefore these expenses are not incurred wholly and exclusively for the purpose of the business and therefore disallowable. 116) We have considered rival contentions. Under section 37(1) of the Act, expenditure is allowable as deduction if the same is incurred for the purpose of business out of commercial expediency. An expenditure which is personal in nature, is not an allowable business deduction. In the present case, the assessing officer has disallowed the expenditure incurred for making advertisement in newspapers to commemorate the death anniversary of late Shri Raman Munjal, being the founder and ex-managing director of the appellant, on the ground that he was family member of the promoters family, losing sight of the fact he was also ex-employee of the company who served in the capacity of managing director during his lifetime. He was, thus, simply not a distant family member of the promoters, but had strong nexus with the business of the appellant company. The expression ―for the purpose of business‖ used in section 37(1) is not limited to earning of profit alone and involves incurrence of several expenses out of commercial expediency, which may not directly result in the earning of profit. Celebration of functions with employees in order to keep them motivated and build cordial relations amongst the staff is a universally accepted practice and cannot, in any eventuality, be said to be not an allowable expenditure. The Ld. Counsel of the appellant has also cited several decisions wherein similar expenses incurred to celebrate various festivals, anniversaries, etc. with the employees have been upheld to be allowable Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 231 of 484 business deduction. To the same effect is the expenditure incurred for paying tribute to an ex-employee, who had assumed substantial roles and responsibilities to foster the business of the appellant company. Accordingly, any expenditure incurred by the company to pay him homage satisfies the test of business / commercial expediency and, thus, cannot be said to be not incurred for the purpose of business. More so when in past assessment years the similar expenditure have been incurred by the assessee but have not been disallowed by the Ld. assessing officer and this fact has not been controverted by the Ld. departmental representative even on the principle of consistency also we are not inclined to upheld the disallowance. In that view of the matter, we do not agree with the findings of the assessing officer in disallowing the expenditure of Rs. 3 465552/– incurred for giving advertisements in newspaper to commemorate Mr. Munjal‘s death anniversary. In the result ground No. 24 of the appeal of the assessee is allowed. 117) Ground No. 25 is against the disallowance of Rs. 29500 0000/- on account of commission paid to the managing director Mr. Munjal under section 36 (1) (ii) of the act on the ground that the commission was paid in view of distribution of dividends to him was also shareholder of the assessee company. The assessee was further aggrieved against the observation of the Ld. assessing officer that the appellant failed to justify the commercial expediency for making the aforesaid payment of commission to the managing director and on his failure to appreciate that the commission vote paid to him in view of services rendered by him and not in view of distribution of profits. The brief facts of the expenses incurred by the appellant are that Shri. Pawan Munjal was appointed as Managing Director & CEO of the appellant company in the Annual Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 232 of 484 General Meeting of the shareholders vide Board Resolution and continued to render services in that capacity. The consideration in lieu of services to be rendered by Sh. Pawan Munjal as Managing Director/CEO was payable, inter alia, as basic salary per month along with commission payable with reference to profits subject to the condition that the amount of commission shall not exceed 1% of the net profits of the company in a particular financial year as computed in the manner provided in section 198 of the Companies Act, 1956. Sh. Pawan Munjal also held 0.02% of shares respectively in appellant company. On this account, the appellant incurred expense of Rs.29.50 crores on account of commission paid to Managing Director and CEO, viz., Shri Pawan Munjal which was claimed as revenue deduction while computing the income for the relevant assessment year. The Ld. assessing officer has disallowed the said sum on account of the commission paid to the above employee of the company on the ground that the commission was paid in view of distribution of dividend stream was also shareholder of the appellant company. It was also the reason given by the Ld. assessing officer the dividend paid actually reduce the corpus available for distribution is dividend with the direction of avoiding dividend distribution tax by paying commission to the directors. On objection filed before the Ld. dispute resolution panel the disallowance made by the Ld. assessing officer was upheld also for the reason that assessee has failed to demonstrate that the services rendered by the managing director were necessary for the purpose of the business of the appellant. Therefore in the final assessment order the Ld. assessing officer made the above disallowance. Aggrieved by that the assessee has filed this ground of appeal before us for adjudication.

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 233 of 484 118) Ld. authorized representative submitted that In terms of section 36(1)(iii) of the Act, bonus or commission paid to an employee in lieu of services rendered is an allowable deduction. The aforesaid section, however, carves out an exception that such an expense would not be deductible if the same would have been payable to an employee as share of profits or dividend. It is respectfully submitted that in the case of appellant, commission was paid in lieu of services rendered by the Managing Director and not in lieu of distribution of profits. He further mentioned that the commission was paid to Managing Director, in addition to salary and other benefits, in accordance with the terms of employment, in lieu of services rendered and not in lieu of distribution of dividend entitled to shareholders. It is not in doubt that Mr. Munjal is actively engaged in supervising the business operation of the applicant company, in his capacity of Managing Director, which has not even been doubted by the assessing officer; the other part his remuneration package, viz., salary and other benefits paid to him have been accepted as an allowable revenue expenditure to have been incurred for the purpose of business in lieu of service rendered by him to the applicant company. His main argument was that remuneration to executive directors is recommended by the Remuneration Committee and duly approved by the Board of Directors, comprising of independent directors, after considering various factors, in which promoter directors do not participate. Therefore, he submitted that, when service rendered by Mr. Munjal and other part of the remuneration package by way of salary and other benefits stands accepted to have been incurred for the purpose of business, the other part of the same remuneration package, viz., commission with reference to percentage of profits, could not have been viewed adversely, as not being incurred for the purpose of business or was paid in Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 234 of 484 lieu of distribution of dividend. He further added that, it would be appreciated that the commission paid had no co-relation to the shareholding of 0.02% held by Mr. Munjal, but was solely linked to the services rendered, which substantiates that commission paid was not in lieu of dividend. During the relevant previous year, the applicant company declared dividend at 5500%, which was distributed amongst all the shareholders, including Mr. Munjal, with reference to the shares held by each shareholder in the company. Accordingly, it would be appreciated that dividend was separately distributed amongst all the shareholders and the impugned payment, being made without any reference to number of shares held by Mr. Munjal in the applicant company, was not in lieu of dividend as misconstrued and alleged in the assessment order. According to him merely because Mr. Munjal was also a shareholder of the applicant company, does not ipso facto lead to the conclusion that commission was paid in lieu of distribution of dividend, since – (i) Mt. Munjal was actively engaged in business operations in the capacity of Managing Director, which has not been doubted by the assessing officer; (ii) the part of the remuneration paid to him have been accepted and allowed as business expenditure; (iii) commission paid had no link to the percentage or number of shares held by him in the applicant company; thus, commission was paid in lieu of service rendered by him to the applicant company and not in lieu of distribution of dividend. Reliance, in this regard, is placed on the following decisions, wherein it has been held that commission paid to directors, as part of salary, in lieu of services rendered by them to the applicant and not with reference to their share of profits, is an allowable business deduction and will not fall within the rigors of section 36(1)(ii) of the Act: ShahzadaNand and Sons vs CIT: 108 ITR 358 (SC) - Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 235 of 484 AMD Metplast P. Ltd. v. DCIT: 341 ITR 563 (Del) - - CIT v. Bony Polymers Ltd.: ITA No. 1298/Del/2011 (Del) - DCIT v. Celsius Refrigeration P. Ltd.: ITA No. 4746/Del/2010 (Del) Career Launcher (India) Ltd. v. ACIT: ITA No. - 4924/Del/2009 (Del) [affirmed by Del HC in 358 ITR 179] - DCIT v. CTI Shipbrokers India P. Ltd: ITA No. 84(Del) 2011 CIT v Convertech Equipments (P.) Ltd: 217 - Taxman 115 (Delhi) - Arihant am Infraprojects (P.) Ltd v JCIT: 64 taxmann.com 404 (Pune - Trib.)

With respect to the observation of the assessing officer that the payment of commission reduced the corpus available for distribution as dividend with the intention of avoiding dividend distribution tax by paying commission to the Director, it is submitted is based on surmises and conjectures, without appreciating the facts and financial position of the applicant company. The applicant, it is submitted, during the year under consideration, even after declaration of dividend @5500 %, and payment of commission had sufficient profits. Thus, commission cannot be alleged to have been paid to reduce surplus and reduce distribution of dividend. The applicant, it would be appreciated, is in fact one of the highest dividend paying company in India. The history of payment of dividend is as follows:

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 236 of 484

Financial Year Percentage of Dividend

2005-06 1000%

2006-07 850%

2007-08 950%

2008-09 1000%

2009-10 5500%

2010-11 5250%

2011-12 2250%

2012-13 3000%

2013-14 3250%

Therefore he further submitted that the impugned year is not the first year of payment of commission to the Managing Director. The same was paid in accordance with the terms of employment, with reference to percentage of profits, in earlier years as well which was always accepted as eligible business in those years. The commission is being paid at the same rate of 1% of net profit since the year 1989 and the same has been allowed by the assessing officer. Commission paid in preceding years is as follows- 200 20 2007 2008- Year 5-06 06- -08 09 07

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 237 of 484

Commissi 14.7 13. 14.78 18.61 on (Crs) 8 03

He further press submitting that the doctrine of res judicata though the doctrine of res judicata does not strictly apply to the income-tax proceedings but in order to maintain consistency, the Revenue cannot be permitted to rake up the settled issues. Reference, in this regard, can be made to the following decisions:  CIT Vs Excel Industries Ltd : 358 ITR 295 (SC)  RadhasoamiSatsang 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. Dalmial Promoters Developers (P) Ltd: 281 ITR 346 (Del.)  M/s. Escorts Cardiac Diseases Hospital: 300 ITR 75 (Del.)  Vesta Investment& Trading Co. (P) Ltd: 70 ITD 200 (Chd.)  Udaipur Distillery Co. Ltd V. JCIT: 100 ITD 422 (Jodh.)  CIT v. A.K.J. Security Printers: 264 ITR 276 (Del)  Gopal Purohit v. JCIT (29 SOT 117): Mum Trib  Bio Med (P.) Ltd v ACIT: 69 SOT 250 (Delhi - Trib.)

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 238 of 484 In nutshell his submission was the commission paid to Managing Director is allowable in terms of section 36(1)(ii) of the Act for the following reasons: (i) Commission was paid in accordance with the terms of employment entered in earlier years; (ii) The commission was paid in lieu of services rendered by Shri Munjal in the capacity of Managing director; (iii) Dividend was paid to Shri Munjal in addition to commission, in proportion to his shareholding in the appellant company in line with dividend distributed to the shareholders; (iv) There is no whisper or any evidence being brought on record by the assessing officer in the assessment order, which suggests that profits were distributable to Shri Munjal as a shareholder of 0.02% shares in appellant company in lieu of which commission was paid. (v) The commission paid to Managing Director in earlier years, in accordance with the terms of employment, have been accepted as allowable business deduction in the earlier years. Without there being any change in facts during the impugned year, the commission paid could not have been disallowed on the grounds of consistency as well. (vi) In the end is submitted that issue is squarely covered in favour of appellant by the order of Delhi Bench of the Tribunal in the case of group concern of the appellant company, viz. Hero Honda Finlease Ltd. v. Addl. CIT: ITA No 4329/Del/2010 (Del) relating to assessment year 2005-06. Further, the Delhi High Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 239 of 484 Court, vide order dated 08.04.2015 passed in ITA No. 99/2015 for assessment year 2009-10 has also dismissed the appeal of the Revenue on the aforesaid issue.

119) Ld. departmental representative relied upon the order of the lower authorities and submitted that these the commission has been paid by the assessee to the managing director the same is hit by the provisions of section 36 (1) (ii) of the act on the ground that the commission was paid in lieu of distribution of the profits of dividend to him. Therefore he pressed that the disallowance may be confirmed. 120) We have heard the rival contentions. We notice that the year under consideration was not the first year of payment of such commission to Mr. Pawan Munjal. The same terms and conditions of his employment, comprising salary, perquisites and commissions not exceeding 1% of the net profit was agreed/prevalent in the earlier years, which was approved by the Board of Directors (comprising of independent directors as well) and ratified by the shareholders. The aforesaid total remuneration package, including commission, is in lieu of services rendered by him in the capacity of Managing Director. There is no quarrel or doubt that Mr. Munjal had not been rendering services to the appellant company in the capacity as Managing Director. More so, since the other part of his remuneration package, i.e., basic salary and other benefits given to him have been accepted and allowed as revenue expenditure, there is no valid reason to differently treat the other part of his remuneration package given by way of 1% of net profit. It is not the case of the assessing officer that the total remuneration package comprising of 1% of net profit is

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 240 of 484 unreasonable, having regard to the nature of services provided by Mr. Munjal in his capacity as Managing Director. Having not doubted the same, the assessing officer cannot disallow any part of the total remuneration package agreed between the assessee and an employee/director. Coming back to the provision of section 36(1)(ii), the said section, in fact, enabled deduction of any sum paid to an employee as bonus or commission for services rendered. The exception carved out in the aforesaid section for allowability of bonus or commission is, where such sum was otherwise payable to the employee, as profit or dividend. In other words, the aforesaid section provides for disallowance of expenditure incurred as bonus or commission, which otherwise constituted share of profit or dividend of the recipient. In the present case, as we have observed (supra) and also explained by the appellant, the commission constitutes part of Mr. Munjal‘s remuneration package, the computation whereof is simply based on the percentage of net profit. The computation of remuneration with reference to profit does not, ipso facto, classify the same as payment of profit or dividend, covered within the exception provided in section 36(1)(ii) of the Act. In the case of a company, recipient is entitled to dividend with reference to percentage of his/her shareholding in the company. In the present case, Mr. Munjal held 0.02% of shares in the appellant company, for which separate dividend was received as per the total amount of dividend declared by the company to its all shareholders. The provisions of section 36 provides that ―36. (1) The deductions provided for in the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in section 28—

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 241 of 484

ii) any sum paid to an employee as bonus or commission32 for services rendered, where such sum would not have been payable to him as profits or dividend if it had not been paid as bonus or commission;‘

In the present case the assessee has paid Rs. 29.50 crores to the managing director of the company as commission whereas the managing director is just holding shares of the company of 0.02% therefore it cannot be said that a sum of Rs. 29.50 crores would have been paid to that shareholder holding 0.02% as dividend. Therefore The impugned amount of commission was separate and was not in addition or in lieu of dividend linked to percentage of shares held by Mr. Munjal in the appellant company. We draw support for the aforesaid view from the recent decision of Delhi High Court in the case of Carrier Launchers India Ltd. vs. ACIT: 358 ITR 179, where, too, the High Court held that where the commission is paid in lieu of services provided by the employee and the amount of commission has no link with the dividend that the recipient would be entitled to as a shareholder, such payment is outside the purview of section 36(1)(ii) of the Act. The relevant observations of the High Court are as under: ― 19. The revenue's contention that the Tribunal erred in allowing the bonus payment to the directors cannot be accepted. It has not disputed the facts viz., (a) that the payment was supported by board resolutions and (b) that none of the directors would have received a lesser amount of dividend than the bonus paid to them, having regard to their shareholding. Further, the directors are full-time employees of the company receiving salary. They

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 242 of 484 are all graduates from IIM, Bangalore. Taking all these facts into consideration, it would appear that the bonus was a reward for their work, in addition to the salary paid to them and was in no way related to their shareholding. The bonus payment cannot be characterized as a dividend payment in disguise. The Tribunal has found that having regard to the shareholding of each of the directors, they would have got much higher amounts as dividends than as bonus and there was no tax avoidance motive. The quantum of the bonus payment was linked to the services rendered by the directors. It cannot therefore be said that the bonus would not have been payable to the directors as profits or dividend had it not been paid as bonus/commission. 20. The issue has been considered by this Court in AMD Metplast (P.) Ltd v. Dy. CIT [2012] 341 ITR 563 / 20 taxmann.com 647 (Delhi) in the light of the judgment of the Bombay High Court in Loyal Motor Service Co. Ltd v . CIT [1946] 14 ITR 647 . It was observed that the judgment of the Bombay High Court (supra) does not assist the revenue and that so long as the bonus or commission is paid to the directors for services rendered and as part of their terms of employment it has to be allowed and sec.36(1)(ii) does not apply. 21. Having regard to the above legal position and the factual findings recorded by the Tribunal, we are unable to say that the Tribunal erred in holding that the bonus payment was allowable u/s.36(1)(ii) of the Act. The substantial questions of law are answered in the affirmative, against the revenue and in favour of the assessee for both the years.‖

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 243 of 484

We also agree with the decision taken by the Tribunal in the case of appellant group company, viz., Hero Honda Finlease Ltd. Vs. Addl. CIT : ITA No.4329/Del/2010 relating to AY 2005-06, wherein the similar disallowance was deleted. In view of this we are of the opinion that in making payment of commission to the managing director of the company of 29.50 crore the provisions of section 36 (1) (ii) of the income tax act cannot be applied. Furthermore regarding the commercial expediency of the above sum the such commission was decided by the remuneration committee constituted by the company in terms of the provisions of the listing agreement entered into with various stock exchanges. Even otherwise the commission‘s leading to the percentage of the profit earned by the company has for the companies act and there is an outer limit which is also been fixed in the terms and conditions of employment of the managing director therefore it cannot be said that there is no business expediency in payment of such commission to the managing director of the company. In view of this ground No. 25 of the appeal regarding disallowance of Rs. 29.54 crores paid the managing director as commission disallowed by the Ld. assessing officer is deleted and accordingly the above ground of appeal of the assessee is allowed. 121) Ground No. 26 of the appeal of the assessee is against the disallowance of deduction of Rs. 8 077 6420/– claimed under section 80 IA of the act in respect of captive power generating unit situated at Gurgaon. The Ld. assessing officer was of the view that income of the eligible power generating unit is required to be considered taking the rate of Rs. 4.39 per unit at which power was supplied by state Electricity Board as the market price of the power supplied by the unit to the vehicle Manufacturing rate of the assessee against the rate of Rs. 8.754 Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 244 of 484 unit adopted by the assessee. The assessee has taken the above rate considering the cost of generation of power at Rs. 7.61 per unit plus added markup thereon at the rate of 15% over that resulting into the prize of Rs. 8.75 per unit. According to the assessee the electricity supplied by the Haryana state Electricity Board was not reflective of the market price since electricity supply was not adequately available from Electricity Board at particular area as per the requirement of the assessee and therefore market rate should be taken for working out the eligible profit taking the cost of power generation plus adequate markup thereon. This contention of the assessee was rejected by the Ld. assessing officer. Brief facts of the issue was that due to the power supply constraint in the area of Gurgaon, Haryana the appellant is set up a power plant within the factory premises to meet the requirement of the power of the manufacturing unit of the assessee. On this unit the assessee claimed deduction under section 80 IA of the income tax act on the profit derived by that unit. For the purpose of deriving the profit the appellant adopted the transfer price of power for captive consumption from power generating unit to the manufacturing unit as cost of generation of the power along with a markup of 15%. According to the working of the assessee the cost of generating the power was Rs. 7.61 per unit and after reading markup thereon it was 8.75 per unit. Based on this the assessee derived the profit of Rs. 8 0 7.76 Lacs from that industrial undertaking which is eligible for deduction. However the Ld. assessing officer rejected the market price adopted by the assessee and substituted same by the rate of state Electricity Board taking same at Rs. 4.39 per unit and the fair market price because the assessee was also getting power from state Electricity Board that rate. The Ld. that assessing officer proposed the amount disallowance in the computation of total Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 245 of 484 income while framing the draft assessment order against which the assessee preferred objections before the Ld. dispute resolution panel who in turn confirmed the findings of the assessing officer and therefore the assessee is in appeal before us. 122) Before us the Ld AR of the appellant submitted that :-

a) The terms of provisions of sub-section (8) of section 80-IA of the Act seeks to provide that in computing profits of the eligible business, inter unit transfer of goods and services, should be recorded at the price such goods would ordinarily fetch on sale in the open market. Reliance, in this regard, is placed on the following decisions: Kailash Chandra Mitra v The Secretary of State for India - (1910) 17 CLJ 34 State of U.P v Ram Sarup XII SCN 65 S.C - Administrator General of West Bengal v. Collector, - Varanasi , [1988] 2 SCR 1025 (SC) - Ahura Chemical Products Pvt. Ltd. v. Union of India AIR 1981 SC 1782 - CIT, West Bengal v. Manmatha Nath Mukerjee : (1958) 34 ITR 567 Revenue Divisional Officer v. Mani Bharathi alias K. - Balasubramanian (1968) 2 MLJ 592 (Mad-HC) - Hinchcliff (Inspector of Taxes) v. Crabtree [1971] 81 ITR 677 (Cal)

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 246 of 484 b) Thus, in order to determine the market price of any goods or services, open market conditions must exist, i.e., there is willingness on the part of the buyer to purchase and the seller to sell the goods. In such a situation, the price determined by the market forces of demand and supply is the market price of such goods. c) However, in case of any transaction of purchase and sale taking place on account of certain obligation on the part of the either side, effecting the determination of the price of the goods, such a price cannot be said to be the market price thereof. The expression `open market‘ necessarily refers to free trade market conditions. d) In the aforesaid circumstances, the rate of Rs. 4.39 per unit at which electricity was supplied by HSEB to the Dharuhera plant is not relevant and cannot be regarded as price of power in the open market, since such supply was not available at Gurgaon and the Dharuhera Plant was getting only 9.87% of its requirement from HSEB and balance was generated in house. e) In the present case, Maruti, being an independent party, was supplying power to its ancillary units in the same area where the factory of the appellant was located at Rs. 9.84 per unit. Accordingly, the rate of power at which SEB supplied power cannot be considered as the market rate for adopting inter-unit transfer price thereof and computing deduction under section 80-IA of the Act. f) Attention in this regard is invited to the decision of the Mumbai bench of the Tribunal in the case of Reliance Infrastructure Ltd. v. Addl. CIT: ITA No. 4631/Mum./2009, wherein it has been held that the rate

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 247 of 484 of supply of power by the State Electricity Board will not be determinative of market price where, other benchmarks of actual sale of power were available to an assessee. g) Kind attention is further invited to the decision of the Jaipur bench of the Tribunal in the case of Shree Cement v. Addl. CIT: 160 TTJ 529, wherein the Tribunal while adjudicating the issue regarding allowability of deduction under section 80IA of the Act while computing the profits and gains derived by captive power undertaking, held as under: ―13. In the light of the aforesaid, we hold that:- (a) the value adopted by the assessee be it value as per independent third party trading transactions or as per power exchange (IEX etc.) or any other independent transaction (for the relevant period and which has taken place in the relevant area where the eligible unit is located) constitute 'market value' in terms of Explanation to s. 80-IA(8); (b) the value at which State grid has sold power to the cement unit of the assessee (average annual landed cost) also constitute 'market value' in terms of Explanation to s. 80- IA(8) but the value at which State grid or third party has purchased power from the power unit of the assessee, which represents its power which is sold when not required by the cement unit, does not constitute 'market value' in terms of Explanation to s. 80-IA(8). It is the 'principle' and not the 'quantum' which is deciding factor; (c) where a basket of 'market values' are available for the relevant period and relevant geographical area where the

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 248 of 484 eligible unit is situated, the assessee has discretion to adopt any one of them as market value; and (d) If the value adopted by the assessee is 'market value' as explained above, it is not permissible for Revenue to recompute the profits and gains of the eligible unit by substituting the said value (as adopted by the assessee) by any other 'market value'.‖ h) Reliance is placed on following decisions wherein it has been held that deduction under section 80IA cannot be denied on the ground that the power was captively consumed by the assessee and for that purpose market value of power is to be adopted: i) CIT vs. Orissa Cement Ltd.: 254 ITR 412 (Del) ii) CIT vs. Dalmia Dadri Cement Ltd.: 263 ITR 364 (Del) iii) West Coast Paper Mills Ltd V. JCIT: 100 TTJ 833 (Mum) iv) CIT vs. Standard Motor Products Ltd.: 131 ITR 300 (Mad) v) Ahmedabad Mfg. & Calico Printing Co. Ltd.‘s case: 162 ITR 760 (Guj) vi) CIT vs. Chitram and Co. Pvt. Ltd.: 191 ITR 96 (Mad) vii) DCM Shriram Consolidated Limited: 322 ITR 486 (Del.) viii) Tamilnadu Petro Products Ltd. vs. Asstt. CIT: 238 CTR 454(Mad) ix) Assam Carbon Products Limited V. ACIT: 100 TTJ 224 (Kol) i) In all fairness, the aforesaid issue has been decided against the appellant by the Hon'ble ITAT in the appeal for A.Y. 2006-07 on the mistaken belief that independent supplier of electricity in the area, i.e. Maruti Udyog Ltd.,

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 249 of 484 was supplying power only to related parties and not to independent parties. Accordingly, it was held that the rate of supply of electricity by Maruti was not reflective of market price, which needed to be adopted as the rate of supply of power by SEB. j) In this regard, it is respectfully submitted that there is no evidence on record, nor was it the admission or submission of the appellant, that Maruti was supplying power to associated enterprises/ related parties and not to unrelated parties in general. The only submission of the appellant was that Maruti was supplying power to business associates, who were not related to Maruti, much less in terms of section 40A(2) of the Act, and there was no occasion for Maruti to charge higher price, or for such business associates to pay higher price to Maruti in consideration of supply of power. k) Further, the appellant had filed miscellaneous application against the aforesaid order passed by the Tribunal in the relevant assessment year pointing out that the assumption by the Tribunal that Maruti supplied power to related/ associated enterprises, which have been defined under section 92CA of the Act to mean companies having common control/ directions, etc., had no factual foundation. Further, no opportunity was allowed to the appellant to lead evidence to rebut such erroneous factual assumption which is not borne out from record. l) The Tribunal, while adjudicating upon the aforesaid application of the appellant, vide order dated 06.09.2013, modified its earlier order by substituting the words ―associated enterprises‖ with ―ancillary units‖, but did not reverse the finding given in the original order. Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 250 of 484 m) Following the aforesaid decision, the Tribunal in the appellant‘s own case in the AYs 2002-03, 2007-08 and 2008-09 have also decided the issue against the appellant. The appeal against the aforesaid orders is pending before the High Court. The Delhi High Court has been pleased to admit the substantial question of law on the aforesaid issue of deduction under section 80IA in assessment year 2002-03 in appellant‘s own case in ITA No. 31/2014 vide order dated 15.07.2014. 123) Ld DR relied up on the orders of lower authorities and submitted that the power is purchased from state electricity board at lower rate than charged by the assessee. Therefore rates of state electricity board should be applied for working deduction u/s 80 IA of the act. He vehemently supported the order of the ld AO and Ld DRP. 124) We have carefully. We find that the expression ‗market value‘ for inter-unit transfer has been defined under Explanation to section 80IA of the Act as follows: ―Explanation.—For the purposes of this sub-section, ―market value‖, in relation to any goods or services, means— (i) the price that such goods or services would ordinarily fetch in the open market; or (ii) the arm‘s length price as defined in clause (ii) of section 92F, where the transfer of such goods or services is a specified domestic transaction referred to in section 92BA.‖

The aforesaid definition endorses the meaning of ‗market price‘ explained by the Courts in several decisions, i.e., the price that such goods or services would ordinarily fetch in the open Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 251 of 484 market. In the present case, we note that there are two prices available at which buyers are paying price for procurement of power, i.e., the rate at which power is supplied by HSEB and the rate at which power is supplied by the private entity, i.e., Maruti Udyog Ltd. The issue, thus, arises is what should be the market price of power? The market rate (or "going rate") for goods or services is the usual price charged for them in a free market. If demand goes up, manufacturers and laborers will tend to respond by increasing the price they require, thus setting a higher market rate. Had power been provided by HSEB in abundant quantity to meet the needs of consumers, especially manufacturing entities, there was no occasion for any other player to supply the power at higher rates. In such a situation, the free market conditions would have forced a private player to supply the power at the same rate at which power is supplied by HSEB or at a lower rate. But since the actual facts are reverse inasmuch as HSEB is not able to meet the power requirement of the consumers, private entities are forced to generate power for self-consumption, as in the case of appellant, or supply in the market like Maruti Udyog at a higher price. The consumers in the free market conditions are, therefore, willing to pay higher price to meet their power consumption needs. In such a situation, under an arm‘s length condition, if the appellant, too, like Maruti was to supply power to third party located in its vicinity, the appellant could have also charged price higher than that charged by HSEB. The aforesaid discussion leads to the conclusion that the price charged by HSEB, at best under the facts and circumstances of the case and looking to the power situation at Haryana, cannot be said to be ‗market price‘ within the meaning of Explanation to section 80IA(8) of the Act. We find that the Tribunal in appellant‘s own case for assessment year 2006-07 dismissed Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 252 of 484 the aforesaid claim on a mistaken belief that the rate at which power was supplied by Maruti was not a proper benchmark, since Maruti was supplying power to its associated enterprises. The aforesaid mistake was also rectified by the Tribunal pursuant to miscellaneous application filed by the appellant whereby the words ―associated enterprises‖ were replaced with ‗ancillary units‘. Considering that the original decision was taken on a mistaken belief, it was not a correct decision and, thus, cannot be followed. In the given facts, where different rates for supply of power are available, we agree with the decision of Jaipur bench of Tribunal in the case of Sri Cement Ltd. (supra), wherein while applying the decision of Supreme Court in the case of Vegetable Products Ltd.: 88 ITR 192 it was held as under :- ―12. On perusal of the above, it could be clearly seen that the statute provides that the assessee must adopt 'market value' as the transfer price. In the open market, where a basket of 'market values' [say like, independent third party transactions, grid price (average annual landed cost at which grid has sold power to the assessee), power exchange price for the relevant period etc.] are available, the law does not put any restriction on the assessee as to which 'market value' it has to adopt, it is purely assessee's discretion. So long as the assessee has adopted a 'market value' as the transfer price that is sufficient compliance of law. AO can adopt a different value only where the value adopted by assessee does not correspond to the 'market value'. Even if assessee's cement unit has purchased power also from the grid or that assessee's power unit has also partly sold its power to grid or third parties that by itself, does not compel the assessee or

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 253 of 484 permit the Revenue to adopt only the 'grid price' or the price at which the eligible unit has partly sold its power to grid or third parties, as the 'market value' for captive consumption of power to compute the profits of the eligible unit. Any such attempt is clearly beyond the explicit provisions of s. 80-IA(8) of the Act. Underlying principles forming the basis of our findings given hereinbefore in this order are also supported by the decision of Special Bench of Hon'ble Bangalore Tribunal in Aztec Software & Technology Services Ltd. v. Asstt. CIT [2007] 107 ITD 141/15 SOT 49/162 Taxman 119 (Bang.) (SB) as well as Mumbai Tribunal decision in the case of Asstt. CIT v. Maersk Global Service Center (India)(P.) Ltd. [2011] 133 ITD 543/16 taxmann.com 47 (Mum.) wherein while interpreting the transfer pricing provisions, the Courts have held that it is the assessee who is the best judge to know the transactions undertaken and thus finding out the comparable cases from the vast database available in the public domain. Once the assessee has adopted the same, the AO has to examine whether the same is market price or not. AO has the power to adopt the market price only when the price adopted by the assessee does not correspond to market value. In the present case, we find that the assessee has adopted a rate at which actual transactions have been undertaken by unrelated entities. The volumes of transaction as relied upon are also substantial and hence it cannot be said that the assessee has handpicked some transactions, which are beneficial to it. The Departmental Representative submitted that since the assessee has itself drawn power from the grid, the grid rate represents the 'best market value' and hence the same should only Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 254 of 484 be adopted. We are not agreeable to the above contention of the Department. No doubt the grid rate is market value but there is no concept of 'best' market value in law. If by using the said adjective, Revenue seeks to infer that grid rate is the only market value in the present context, such inference is also clearly not tenable Further, in case there are options the option favorable to the assessee is to be adopted. This is a well- settled principle of law laid down by Courts time and again including Supreme Court in the case of Vegetable Products Ltd. (supra) and other High Courts as pointed out by the Authorised Representative. 13. In the light of the aforesaid, we hold that:

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

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

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 255 of 484

value' in terms of Explanation to s. 80-IA(8). It is the 'principle' and not the 'quantum' which is deciding factor;

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

( If the value adopted by the assessee is 'market d value' as explained above, it is not permissible ) for Revenue to recompute the profits and gains of the eligible unit by substituting the said value (as adopted by the assessee) by any other 'market value'.

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 256 of 484 of the revenue that the power cost incurred by the assessee is inflated or incorrect. In that view of the matter, in the present case, considering that three different prices for supply of power are available in the market, the method adopted by the appellant to compute inter-unit transfer price by imputing a reasonable mark-up on its cost of production, i.e., Rs.8.75, which was less than the rate of Rs. 9.84 charged by Maruti, was quite a reasonable for the purposes of computing deduction u/s 80IA(4) of the Act. Therefore we reverse the disallowance made by the Ld. assessing officer of deduction of Rs. 8 0 7.76 Lacs under section 80 IA, in relation to the generation of power. .Accordingly, the ground No. 26 of appeal stands allowed. 125) Ground No. 27 of the appeal of the assessee is against the disallowance of mark to market loss of Rs. 7.14 Lacs incurred by the assessee in export of 2 wheelers against which the amount receivable and foreign currency was outstanding at the end of the relevant previous year. The appellant is also entered into forward market contract with the bank, in order to hedge its exposure in foreign currency on account of import. On restatement of foreign currency exposure of the appellant with respect to the sundry debtors and other transaction it incurred a loss of Rs. 7 14232. The above losses been claimed by the assessee as deduction under section 37 (1) of the income tax act. However, the Ld. assessing officer disallowed this loss stating that it is a contingent loss in nature and thus in the nature of notional loss hence not allowable. Ld. DRP also conquered with the opinion of the Ld. assessing officer. Therefore, assessee is in appeal before us. 126) Ld. authorized representative submitted that the aforesaid issue is squarely covered in favour of the appellant by the decision of Hon‘ble Supreme Court in case of CIT versus Woodward Gov

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 257 of 484 India private limited 312 ITR 254. The appellant further stated that it is not the term mark to market loss, but it is in fact the adjustment on account reinstatement of trade receivable with extended prevalent at the end of the year which is squarely covered. 127) Ld. departmental representative relied upon the order of the lower authorities and submitted that Ld. assessing officer has correctly made the disallowance as assessee has not incurred any actual loss. But it is a contingent loss arising on restatement of the foreign currency rate as on the end of the assessment year. 128) We have carefully considered the rival contentions. We have heard the rival contentions. The net loss of Rs.7.4 lacs disallowed by the assessing officer relates to loss arising on reinstatement of trade debtors in foreign currency. The aforesaid issue that reinstatement of assets and liabilities on revenue account in foreign currency is allowable business loss under the mercantile system of accounting has been settled by the Supreme Court in the case of CIT vs. Woodward Governor India Pvt. Ltd.: 312 ITR 254. The relevant observations of the Supreme Court with respect to the above are as under: ―13. As stated above, one of the main arguments advanced by the learned Addl. Solicitor General on behalf of the Department before us was that the word "expenditure" in s. 37(1) connotes "what is paid out" and that which has gone irretrievably. In this connection, heavy reliance was placed on the judgment of this Court in the case of Indian Molasses Company (supra). Relying on the said judgment, it was sought to be argued that the increase in liability at any point of time prior to the date of payment cannot be said to have gone irretrievably as it can

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 258 of 484 always come back. According to the learned counsel, in the case of increase in liability due to foreign exchange fluctuations, if there is a revaluation of the rupee vis-a-vis foreign exchange at or prior to the point of payment, then there would be no question of money having gone irretrievably and consequently, the requirement of "expenditure" is not met. Consequently, the additional liability arising on account of fluctuation in the rate of foreign exchange was merely a contingent/notional liability which does not crystallize till payment. In that case, the Supreme Court was considering the meaning of the expression "expenditure incurred" while dealing with the question as to whether there was a distinction between the actual liability in presenti and a liability de futuro. The word "expenditure" is not defined in the 1961 Act. The word "expenditure" is, therefore, required to be understood in the context in which it is used. Sec. 37 enjoins that any expenditure not being expenditure of the nature described in ss. 30 to 36 laid out or expended wholly and exclusively for the purposes of the business should be allowed in computing the income chargeable under the head "Profits and gains of business". In ss. 30 to 36, the expressions "expenses incurred" as well as "allowances and depreciation" has also been used. For example, depreciation and allowances are dealt with in s. 32. Therefore, Parliament has used the expression "any expenditure" in s. 37 to cover both. Therefore, the expression "expenditure" as used in s. 37 may, in the circumstances of a particular case, cover an amount which is really a "loss" even though the said amount has not gone out from the pocket of the assessee.

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 259 of 484 15. For the reasons given hereinabove, we hold that, in the present case, the "loss" suffered by the assessee on account of the exchange difference as on the date of the balance sheet is an item of expenditure under s. 37(1) of the 1961 Act.

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 260 of 484 foreign currency is held by the assessee on revenue account or as a trading asset or as a part of circulating capital embarked in the business. But, if on the other hand, the foreign currency is held as a capital asset or as fixed capital, such profit or loss would be of capital nature." (Emphasis, italicized in print, supplied) 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.‖ In view of the above decision of the Hon‘ble Supreme Court, we direct the Ld. assessing officer to delete the disallowance of Rs. 714232/- on account of the foreign currency loss arising on

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 261 of 484 application of accounting standard 11 issued by the Institute of chartered accountants of India. In the result ground No. 27 of the appeal of the assessee is allowed. 129) Ground No. 28 of the appeal of the assessee is against the disallowance of Rs. 9.01 crores on account of dealer‘s conference for deduction of tax at lower rate or wrongful rate. The brief facts of the case is that appellant has incurred an expenditure on account of dealer‘s conference which was held at Dubai. Necessary arrangements for this event were done by one party, which included the arrangement for transfer to hotel from airport along with arrangement of various to artists . The said company was also responsible for staging green rooms, set and pros for theatres, light and sound for theatre, projection systems etc. Effectively the said company was entrusted with the overall responsibility for organizing the event. The contract entered into with the said company was a composite contract for organizing an event, involving various arrangements for carrying out work of organizing the event. In view of the above, tax was deducted at source under section 194C of the Act before remitting the payment under that section. AO held that by organizing an event, the said party had rendered service in the nature of professional or technical, covered under section 194J of the Act. Accordingly, AO made disallowance of Rs. 901.80 lacs, being the amount attributable to alleged short deduction of tax at source under section 194J as against section 194C applied by appellant, in respect of payments made to the said party by invoking provisions of section 40(a)(ia) of the Act. Therefore, is assessee is in appeal before us.

130) Ld. authorized representative submitted as under:-

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 262 of 484 a) The appellant entered into a composite contract for organizing an event, which involved arrangement for booking of hotel, arranging transfer of guests from the airport to hotel, breakfast-lunch in hotel, engaging various artists, staging green rooms, light and sound for theatre projection system, taking venue on rent, etc.

b) The said activities, it would be appreciated, did not involve any specialized skill / intellect on the part of the vendor, but were predominantly physical involving organizing / arranging of facilities in order to hold an event.

c) The aforesaid activities, therefore, fell within the meaning of ‗contract for carrying out work‘ under section 194C and were not in the nature of service contract, much less professional / technical services covered under section 194J of the Act. [refer Del HC in case of SRF Finance Ltd. v. CBDT: 211 ITR 861] d) Analogy for the aforesaid can also be drawn from Circular No.715, dated 8.8.1995, issued by CBDT wherein for contract entered by an appellant with advertising agencies, it has been opined, that such composite contract falls within the meaning of ‗contract for carrying out work‘ under section 194C of the Act. e) The aforesaid two expressions, viz., ―professional services‖ and ―technical services‖ have been defined in Explanation to the aforesaid section. In terms of the aforesaid Explanation, ‗professional service‘ means service rendered by a person in the course of carrying on legal, medical, Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 263 of 484 engineering, architecture, accountancy, technical consultancy, interior decoration, advertising or such other profession as is notified by the Board for the purpose of section 44AA or section 194J of the Act. f) Contract for organizing an event is not included within the list of professions specified in the aforesaid definition or in the list of professions notified by the Board for the purpose of section 44AA or section 194J of the Act, nor has any such notification been pointed out by the assessing officer. In view of the above, the aforesaid contract does not fall within the meaning of professional service for purposes of section 194J of the Act. g) As regards ―fees for technical service‖ (hereinafter referred as ‗FTS‘), the said expression has been defined in Explanation 2 to clause (vii) of Section 9(1) of the Act, which defines FTS to mean payments of any kind to any person in consideration for services of a managerial, technical or consultancy nature, including the provision of services of technical or other personnel. It would, therefore, be pertinent to understand the meaning of the aforesaid terms, viz.,―consultancy‖, ―technical and managerial‖

Re: Consultancy: h) The term ―consultancy‖ means giving some sort of consultation by the provider to the recipient of service, de-hors the performance or execution of any work in relation thereto. It is only when the consideration is given for rendering some advice or opinion that the consideration would fall within the meaning of

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 264 of 484 consultancy services. [Refer UPS SCS (Asia) Ltd.: 50 SOT 268 (Mum)] i) The vendor has not rendered any advisory services to the appellant and has only executed the various tasks entrusted to the vendor under the composite contract. Therefore, the impugned payment does not fall within the meaning of ―consultancy services‖ under section 194J read with Explanation 2 to section 9(1)(vii) of the Act.

Re: Technical: j) It would be appreciated that the said word encompasses payment made for rendering services, which involve use of specialized knowledge or skill by the service provider, as opposed to rendering of service, which is predominantly physical and does not involve use of knowledge / specialized skill. k) It is only where the service provided involved specialized knowledge or skill, the same would fall within the meaning of ―technical service‖ under section 194J of the Act, as has been held in the following decisions: a) SRF Finance Ltd. v. CBDT: 211 ITR 861 (Del) b) Skycell Communications Ltd. and Anr. v. DCIT: 251 ITR 53 (Mad) c) Yashraj Films v. ITO: 140 ITD 625 (Mum) d) CIT v. Bharti Cellular Ltd.: 319 ITR 139 (Del. HC) e) Dr. Hutarew & Partner (India) P. Ltd. v. ITO: 25 SOT 347 (Del. Trib.) f) Credit Lyonnais v. ADIT: 144 ITD 644 (Mum. Trib.) g) ACIT v. Evolv Clothing Co. (P) Ltd.: 142 ITD 618 (Mad. Trib.) Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 265 of 484 h) Singapore Airlines Ltd. v. ITO: 7 SOT 84 (Mad. Trib.) i) Canara Bank v. ITO: 117 ITD 207 (Ahd. Trib.) l) In view of aforesaid, the vendor has not rendered any service, which involved use of specialized skill or knowledge or applied/industrial science. The service rendered by the vendor was predominantly physical involving organizing of various facets to hold an event/conference and, therefore, do not fall within the meaning of word ‗technical‘.

Re: Managerial: m) As regards the meaning of the word ‗managerial‘, since the said word has been used along with the words ‗consultancy‘ and ‗technical‘, the same would take colour from the words 'managerial' and 'consultancy', between which the same is sandwiched, by applying the principle of noscitur a sociis. n) Since the impugned service, as submitted above, did not involve application of any specialized skill, but was predominantly physical, the same would not fall within the meaning of words ‗managerial‘ either. o) The aforesaid services are thus in the nature of making logistic arrangements, which have been held to be commercial services and not in the nature of managerial, technical or consultancy services.[Refer DIT v. Panalfa Autoelektrik Ltd: ITA No.292/2014 (Del.) and Yash Raj Films (Mum-Tri)] p) Where an activity is covered within the meaning of taxable service for the purpose of levying service tax Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 266 of 484 under the Service Tax Legislation, it does not automatically cover such service under section 194J of the Act. q) That apart, the service needs to satisfy the test of being covered within the meaning of professional or technical service as defined in section 194J so as to fall under that section. r) Since, the impugned service does not fall within the meaning of ―professional service‖ or ―technical service‖ as defined in section 194J, the same is not subject to TDS under that section, notwithstanding that the aforesaid service has been included as part of taxable service under the Service Tax Legislation.

Without Prejudice: s) Without prejudice, since the appellant, has in any case deducted tax at source under a different provision under a bonafide belief, no disallowance could be made under section 40(a)(ia) of the Act:

(i) CIT v. S.K Tekriwal: ITA No. 183 of 2012 (Kol.)(HC) (ii) DCIT v. Chandabhoy & Jassobhoy: ITA No.20/Mum/2010 (Mum.) (iii) Sunbell Alloys Company of India Ltd [TS-642-ITAT- 2012(Mum)] (iv) M/s. Saralee Household & Bodycare India Pvt. Ltd. (Mum.) (v) UE Trade Corpn. (India) Ltd. v. DCIT: 28 taxmann.com 77 (Del.)

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 267 of 484 (vi) Highlight Pictures India Ltd. v. ACIT: 49 taxmann.com 187 (Mum.) (vii) ITO v. Premier Medical Supplies and Stores: 25 taxmann.com 171 (Kol.)

t) The aforesaid issue is also squarely covered in favour of the appellant by the decision of the Delhi bench of the Tribunal in the appellant‘s own case for the assessment year 2007-08 and 2008-09, wherein disallowances made in that year for alleged short deduction of tax at source were deleted by the Tribunal, by following the decision of Calcutta High Court in the case of S.K. Tekriwal (supra). u) Further, without prejudice, the appellant was under the bonafide belief that tax was required to be deducted under section 194C for reasons discussed in detail above, accordingly, having regard to the decision of Naresh Kumar and Ors (supra) and Kotak Securities (supra) v) Without prejudice to the above, it is submitted, that there was no outstanding liability, against the aforesaid expenses at the end of the year and therefore no disallowance could have been made under section 40(a)(ia) of the Act for that reason also. (Refer: Vector Shipping Services P. Ltd: 357 ITR 642 (All.) [SLP filed by revenue has been dismissed vide CC No(s). 8068/2014 dated 02.07.2014] and Merilyn Shipping and Transport v. ACIT: 146 TTJ 1 (Vishak.)(SB)] w) Further, without prejudice, it is submitted, that for the reasons discussed supra, since the payees have also paid tax on the income receivable from the appellant, no disallowance could be made under section 40(a)(ia) of the

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 268 of 484 Act for alleged default in deduction of tax at source by the appellant.

131) Ld. departmental representative relied upon the orders of lower authorities and submitted that the assessee should have detected tax thereon under the provision of section 194J of the income tax act whereas the assessee is deducted tax under section 194C of the income tax act and therefore there is a short deduction of tax and has the disallowance has been rightly made by the Ld. assessing officer. 132) We have carefully considered the rival contentions. The facts are not in dispute that the contract entered by the appellant with G2RAMS India Pvt. Ltd. involved composite services in relation to organizing an event, viz., arrangement of hotels, airport transfers, engagement of various artists, staging of events, etc. The issue that arises is whether such composite services fall within the meaning of contract for carrying out work u/s 194C or within the meaning of technical or professional services u/s 194J of the Act. Firstly, dwelling upon the applicability of section 194J, the words ―professional or technical services‖ used in section 194J have been defined in Explanation thereto. The aforesaid Explanation provides an exhaustive definition of the word ―professional services‖ as services provided in the course of carrying on legal, medical, engineering, architectural, accountancy, technical consultancy, interior decoration, advertising or any other notified profession. The service under consideration is clearly not prescribed in the aforesaid list of certified professions, nor the assessing officer or the ld. DR has pointed out so. Accordingly, the question of the services under consideration falling within the meaning of ―professional services‖ does not arise. As regards ‗fee for

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 269 of 484 technical services‘, which borrows the meaning from Explanation to section 9(1)(vii) of the Act has been explained by Courts in several decisions. The meaning of words ‗managerial, technical and consultancy‘ used in the aforesaid section has been explained by the Hon‘ble Delhi High Court in the case of DIT v. Pan Alfa Auto Elekrik Ltd.: 227 Taxman 351 in the following words: ― 14. The expressions "managerial, technical and consultancy services" have not been defined either under the Act or under the General Clauses Act, 1897. The said terms have to be read together with the word 'services' to understand and appreciate their purport and meaning. We have to examine the general or common usage of these words or expressions, how they are interpreted and understood by the persons engaged in business and by the common man who is aware and understands the said terms. The expression "management services" was elucidated upon by this Court in J.K. (Bombay) Ltd. v. CBDT, [1979] 118 ITR 312/1 Taxman 537 in the following terms:— '6. It may be asked whether management is not a technical service. According to an Article on "Management Sciences", in 14 Encyclopaedia Britannica 747, the management in organisations include at least the following:

"(a) discovering, developing, defining and evaluating the goals of the organization and the alternative policies that will lead toward the goals,

(b) getting the organization to adopt the policies,

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 270 of 484

(c) scrutinizing the effectiveness of the policies that are adopted,

(d) initiating steps to change policies when they are judged to be less effective than they ought to be."

Management thus pervades all organisations. Traditionally administration was distinguished from management, but it is now recognised that management has a role even in civil services. According to the Fontana Dictionary of Modern Thought, page 366, management was traditionally identified with the running of business. Therefore, management as a process is practised throughout every organization from top management through middle management to operational management.' Recently this Court in CIT v. Bharti Cellular Ltd., [ 2009] 319 ITR 139/[2008] 175 Taxman 573 had observed:— 'The word "manager" has been defined, inter alia, as: "a person whose office it is to manage an organization, business establishment, or public institution, or part of one; a person with the primarily executive or supervisory function within an organization, etc., a person controlling the activities of a person or team in sports, entertainment, etc." It is, therefore, clear that a managerial service would be one which pertains to or has the characteristic of a manager. It is obvious that the expression "manager" and consequently "managerial service" has a definite human element attached to it. To put it bluntly, a machine cannot be a manager.'

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 271 of 484 Reference can be also made to the decision of the Authority for Advance Rulings in Intertek Testing Services India (P.) Ltd., In re [2008] 307 ITR 418/175 Taxman 375, wherein it was elucidated:— 'First, about the connotation of the term "managerial". The adjective "managerial" relates to manager or management. Manager is a person who manages an industry or business or who deals with administration or a person who organizes other people's activity [New Shorter Oxford Dictionary]. As pointed out by the Supreme Court in R. Dalmia v. CIT [1977] 106 ITR 895, "management" includes the act of managing by direction, or regulation or superintendence. Thus, managerial service essentially involves controlling, directing or administering the business.‖ ―18. It would be incongruous to hold that the non- resident was providing technical services. To quote from Skycell Communications Ltd. v. Dy CIT [2001] 251 ITR 53/119 Taxman 496 (Mad), the word 'technical' has been interpreted in the following manner:— 'Thus while stating that "technical service" would include managerial and consultancy service, the Legislature has not set out with precision as to what would constitute "technical" service to render it "technical service". The meaning of the word "technical" as given in the New Oxford Dictionary is adjective 1. of or relating to a particular subject, art or craft or its techniques: technical terms (especially of a book or Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 272 of 484 article) requiring special knowledge to be understood: a technical report. 2. of involving, or concerned with applied and industrial sciences: an important technical achievement. 3. resulting from mechanical failure: a technical fault. 4. according to a strict application or interpretation of the law or the rules: the arrest was a technical violation of the treaty. Having regard to the fact that the term is required to be understood in the context in which it is used, "fee for technical services" could only be meant to cover such things technical as are capable of being provided by way of service for a fee. The popular meaning associated with "technical" is "involving or concerning applied and industrial science".' 19. The said term was also interpreted by this Court in case of Bharti Cellular Ltd. (supra) where emphasis was laid on the element of human intervention, but we are not concerned with the said aspect in the present case. The non-resident had not undertaken or performed "technical services", where special skills or knowledge relating to a technical field were required. Technical field would mean applied sciences or craftsmanship involving special skills or knowledge but not fields such as arts or human sciences (see paragraph 24 below).‖ ―24. The OECD Report on e-commerce titled, Tax Treaty Characterisation Issues arising from e-commerce: Report to Working Party No.1 of the OECD Committee on Fiscal Affairs dated 01st February 2001, has elucidated:—

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 273 of 484 'Technical services 39. For the Group, services are of technical nature when special skills or knowledge related to a technical field are required for the provision of such services. Whilst techniques related to applied science or craftsmanship would generally correspond to such special skills or knowledge, the provision of knowledge acquired in fields such as arts or human sciences would not. As an illustration, whilst the provisions of engineering services would be of a technical nature, the services of a psychologist would not. 40. The fact that technology is used in providing a service is not indicative of whether the service is of a technical nature. Similarly, the delivery of a service via technological means does not make the service technical. This is especially important in the e-commerce environment as the technology underlying the internet is often used to provide services that are not, themselves, technical (e.g. offering online gambling services through the internet). 41. In that respect, it is crucial to determine at what point the special skill or knowledge is used. Special skill or knowledge may be used in developing or creating inputs to a service business. The fee for the provision of a service will not be a technical fee, however, unless that special skill or knowledge is required when the service is provided to the customer. For example, special skill or knowledge will be required to develop software and data used in a computer game that would subsequently be used in carrying on the business of allowing consumers to play this game on the internet for a fee. Similarly, special skill Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 274 of 484 or knowledge is used to create a troubleshooting database that customers will pay to access over the Internet. In these examples, however, the relevant special skill or knowledge is not used when providing the service for which the fee is paid, i.e. allowing the consumer to play the computer game or consult the troubleshooting database. 42. Many categories of e-commerce transactions similarly involve the provision of the use of, or access to, data and software (see, for example, categories 7, 8, 9, 11, 13, 15, 16, 20 and 21 in annex 2). The service of making such data and software, or functionality of that data or software, available for a fee is not, however, a service of a technical nature. The fact that the development of the necessary data and software might itself require substantial technical skills is irrelevant as the service provided to the client is not the development of that data and software (which may well be done by someone other than the supplier) but rather the service of making the data and software available to that client. For example, the mere provision of access to a troubleshooting database would not require more than having available such a database and the necessary software to access it. A payment relating to the provision of such access would not, therefore, relate to a service of a technical nature. Managerial services 43. The Group considers that services of a managerial nature are services rendered in performing management functions. The Group did not attempt to give a definition of management for that purpose but noted that this term should receive its normal business meaning. Thus, it Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 275 of 484 would involve functions related to how a business is run as opposed to functions involved in carrying on that business. As an illustration, whilst the functions of hiring and training commercial agents would relate to management, the functions performed by these agents (i.e. selling) would not. 44. The comments in paragraphs 40 to 42 above are also relevant for the purposes of distinguishing managerial services from the service of making data and software (even if related to management), or functionality of that data or software, available for a fee. The fact that this data and software could be used by the customer in performing management functions or that the development of the necessary data and software, and the management of the business of providing it to customers, might itself require substantial management expertise is irrelevant as the service provided to the client is neither managing the client's business, managing the supplier's business nor developing that data and software (which may well be done by someone other than the supplier) but rather making the software and data available to that client. The mere provision of access to such data and software does not require more than having available such a database and the necessary software. A payment relating to the provision of such access would not, therefore, relate to a service of a managerial nature. Consultancy services 45. For the Group, "consultancy services" refer to services constituting in the provision of advice by someone, such as a professional, who has special qualifications allowing him to do so. It was recognized that this type of services Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 276 of 484 overlapped the categories of technical and managerial services to the extent that the latter types of services could well be provided by a consultant.' We broadly agree with the aforesaid observations. However, in the case of selling agents, we add a note of caution that taxability would depend upon the nature of the character of services rendered and in a given factual matrix, the services rendered may possibly fall in the category of consultancy services. Paragraphs 41 and 42 do not emanate for consideration in the present case, and effect thereof can be examined in an appropriate case [However, see CIT v. Estel Communication (P.) Ltd. [2009] 318 ITR 185 (Del) and Skycell Communications Ltd. (supra)].‖ Further Hon‘ble Delhi tribunal has also explained the word ‗consultant ‗in the same decision as under as under:- ―21. The word ―consultant‖ refers to a person, who is consulted and who advises or from whom information is sought. In Black‘s Law Dictionary, Eighth Edition, the word ―consultation‖ has been defined as an act of asking the advice or opinion of someone (such as a lawyer). It may mean a meeting in which parties consult or confer. For consultation service under Explanation 2, there should be a provision of service by the non-resident, who undertakes to perform it, which the acquirer may use. The service must be rendered in the form of an advice or consultation given by the non-resident to the resident Indian payer.‖

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 277 of 484 The word ‗technical services‘ under section 9(1)(vii) read with section 194J has also been recently explained by the apex Court in the case of CIT v. Kotak Securities Ltd.: 383 ITR 1, in the following words: ―"Technical services" like "Managerial and Consultancy service" would denote seeking of services to cater to the special needs of the consumer/user as may be felt necessary and the making of the same available by the service provider. It is the above feature that would distinguish/identify a service provided from a facility offered. While the former is special and exclusive to the seeker of the service, the latter, even if termed as a service, is available to all and would therefore stand out in distinction to the former.‖ On analysis of the aforesaid cases , the aforesaid three words used in section 9(1)(vii) can be understood in the following manner: (i) Managerial - Services essentially involving controlling, directing or administering the business of the service recipient (ii) Consultancy - Advisory services involving rendered by someone who has special skills and expertise in rendering such advisory (iii) Technical – Services provided through human intervention, involving or concerning applied and industrial science In other words, in short, the services provided by the vendors should predominantly involve specialized skills. Having reached the aforesaid conclusion, it would be pertinent to understand the meaning of contract for carrying out work used in section Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 278 of 484 194C of the Act. The decision of Hon‘ble Delhi High Court in the case of SRF Finance Ltd. v. CBDT : 211 ITR 861, wherein the Court explained the meaning of ‗contract for carrying out any work‘ and distinguished the same with a ‗service contract‘. The relevant observations of the Court are as under: "The two words convey different ideas. In the former (i.e., `work') the activity is predominantly physical; it is tangible. In the activity referred as `services', the dominant feature of the activity is intellectual, or at least, mental. Certainly, `work' also involves intellectual exercise to some extent. Even a gardener has to bestow sufficient care in doing his job; so is the case with a mason, carpenter or a builder. But the physical (tangible) aspect is more dominant than the intellectual aspect. In contrast, in the case of rendering any kind of `service', intellectual aspect plays the dominant role. The vocation of a lawyer, doctor, architect or a Chartered Accountant (there are other similar vocations also) involves deep intellectual exercise and physical skill involved in their vocational activities is minimal. A dancer's performance no doubt involves physical movement; but all the movements are projections of the talent which is natural, or acquired by training. A surgery certainly involves physically visible and tangible work; but, inherently, it is the mental skill developed by the intellectual exercise that permeates the operation.

―Word ‗work‘ may have different and wider meanings. But, here, we have to find out the real meaning of the word in the context of its setting in section 194C. The meaning attributable should fit into the clause "for carrying out any work". An architect is not engaged to carry out the work of Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 279 of 484 drawing a sketch. A lawyer is not engaged to carry out the work of arguing a case; he is engaged, to `argue' a case or to `conduct' a case; he is paid `fee' for the services rendered by him and not any `price' for the work done by him..‖(emphasis supplied) In light of the aforesaid decisions, the contract for carrying out any ‗work‘ would refer to contract, where the activity is predominantly physical and not intellectual. If the contract involves mental or intellectual attributes of the vendor, the same may qualify as a service contract. In the present case, the services provided by the vendor, in our opinion, are predominantly physical or, in other words, predominantly not based on mental or intellectual attributes, being that of organizing an event involving booking of hotel, organizing airport transfers, organizing various artistes and professionals to stage the show, etc. The vendor has acted as a ‗one-stop shop‘ for the appellant for coordinating with all the other thirty- party professionals or service providers. In our opinion, the predominant attributes in the service so provided by the vendor is that of contract for carrying out work, which would more appropriately be covered u/s 194C instead of section 194J of the Act. Accordingly, we hold that there was no error on the part of the appellant in deducting tax at source u/s 194C, instead of section 194J of the Act. In view of above, ground No. 28 of the appeal of the assessee is allowed holding that the Ld. assessing officer has wrongly held that take should be deducted on this payment under the provisions of section 194J of the act and according to us, the assessee has rightly rejected the tax under section 194C of the income tax act. Therefore, these expenditures are not Delhi is disallowable under the provisions

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 280 of 484 of section 40(a) (ia) of the income tax act .in the result ground No. 28 of the appeal of the assessee is allowed 133) Ground No. 29 of the appeal of the assessee is against the disallowance under section 80IC of the income tax act of Rs. 9972535090/- on a document is on the ground that assessee has failed to give sufficient documentary evidence to substantiate its claim of fulfilling all the conditions for claiming deduction under that section. The brief facts of the claim of the assessee is that The appellant company had started commercial production at new manufacturing facility at Plot No. 3, Sector 10, Integrated Industrial Estate, Ranipur, SIDCUL, Haridwar (UTTARAKHAND) at Khasra Number 545 Village Salempur Mehdood, Haridwar on 07.04.2008. The said plot was notified by Notification No.177 dated 28.06.2004 as industrial Estate under section 80IC (2)(a)(ii).The appellant for the purpose of establishing a factory/plant, as per the Factory Act, 1948, was required to obtain permission/license from the appropriate authority, in accordance with local State Government Factory Rules, i.e., Uttar Pradesh Factory Rules, 1950, which were applicable in the present case. No separate license was required to carry on the business of manufacture of two wheelers as also to claim deduction for such activity under section 80IC of the Act. The only permission required was the aforesaid license to work as factory, which was submitted along with audit report in Form 10CCB read with Rule 18BBB(4) of the Rules. In view of the aforesaid, the appellant claimed deduction of Rs. 997.25 crore under section 80IC of the Act during the relevant assessment year. However, the Ld. assessing officer disallowed the entire deduction for the reason that appellant failed appellant has failed to comply with the rule 18 BBB of the rules, in as much as the appellant did not obtain any approval

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 281 of 484 for carrying on the business of manufacturing of dwellers in the state of Uttarakhand. Further, according to him the appellant could not also comply with the condition of the employment of natives of that particular state as a precondition of the industrial policy of the government of the state. Further, the assessee could not also comply with the condition of continuous employment of specified number of employees on the given Day as contained in the factory license. The Ld. Dispute resolution panel on objection filed by the assessee agreed with the appellant that not all the above conditions stated by the Ld. assessing officer in the draft assessment order are the requisite conditions on which the deduction under section 80 IC of the act can be denied. However, the Ld. dispute resolution panel 134) Ld. Authorised representative submitted. Regarding satisfaction of Satisfaction of conditions contained in the industrial policy and factory license that in terms of section 80- IC, the conditions precedent to claim deduction under the said section are summarized as under: i) The appellant should be engaged in the business of manufacture or production of specified articles or things [sub-section (2)(a)/(b)] ii) The undertaking should be located in the specified area [sub-section (2)(a)/(b)/(i)/(ii)/(iii)]; iii) Such undertaking should have commenced business of manufacture or production of article or thing or should have undertaken substantial expansion within the specified period [sub-section (2)(a)/(b)/(i)/(ii)/(iii)] iv) The undertaking should not have been formed by splitting up or reconstruction of a business already in existence [sub-section (4) (i)];

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 282 of 484 v) The undertaking should not have been formed by the transfer to a new business of machinery or plant used for any purpose [sub-section (4) (ii)] vi) The claim of deduction must be supported by a certificate issued by a Chartered Accountant in the prescribed form [sub-section (7) Based on the above conditions, he explained the claim of the assessee as under- a) The section does not require as a precedent condition that such eligible business must employ natives of the specified Stat, upto or in excess of a specified percentage, nor does the section mandate that the eligible business must, in order to be entitled to deduction there under, satisfy the conditions stipulated in the State Government order/communication. b) The provisions of section 80IC are self-contained and deduction under that section has to be allowed if the conditions stipulated under that section are satisfied by an assessee. No further conditions, which are extraneous to the said section, can be imposed or satisfaction of such extraneous conditions be considered as a condition precedent for claiming deduction there under. c) In other words, the conditions in the industrial policy cannot be read into the Statute, viz., section 80IC of the Act, when the same have not been incorporated either explicitly or implicitly therein. d) It is submitted that violation of conditions contained in the State industrial policy, if any, can be considered as a default under that policy, which may lead to withdrawal of benefits, if any, granted by the State, but

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 283 of 484 the said violation, not being a pre-requisite condition for claiming tax benefit under section 80IC, would not jeopardize the claim under that section. e) It is reiterated that provisions of section 80IC have to be strictly construed and in the absence of any condition contained therein qua fulfillment of terms of the industrial policy, the latter cannot be read into that section. The conditions prescribed in that section, having been satisfied by the appellant, the appellant must be allowed deduction under section 80IC of the Act, as directed by the DRP which directions have been overlooked by the assessing officer while framing the final order.

135) He further submitted that non-satisfaction of condition prescribed in Rule 18BBB of the Rules regarding obtaining approval to carry on the eligible business a) For the purposes of claiming deduction under section 80IC, as per sub-section (7) thereof, the accounts of the eligible undertaking must be audited by a Chartered Accountant and report of such audit in prescribed Form No.10CCB needs to be submitted along with the return of income.

b) In terms of sub-rule (4) of Rule 18BBB of the Rules the said report in Form No.10CCB has to be accompanied by copy of the agreement, approval or permission, as the case may be, to carry on the activity issued by the Central Government or the State Government or the Local Authority.

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 284 of 484 c) According to the assessing officer, there was mandatory requirement of attaching copy of the approval from Local /State Authority to carry on the eligible business, as condition precedent for claiming deduction under section 80IC of the Act.

d) Copy of factory license issued by Chief Inspector of Factories Utrakhand, which permitted the assessee to establish factory at the specified location, placed by the assessee in compliance of the aforesaid condition, was disregarded by the assessing officer on the ground that there was no mention whatsoever in the factory license granting permission to the assessee to carry on the eligible business, i.e., manufacture or production of specified article or thing, viz., two-wheelers.

e) On that basis, the assessing officer held that the assessee having not satisfied the aforesaid condition, the assessee was not enttled to deduction under section 80IC of the Act.

f) In this regard, it is submitted, that on perusal of the provisons of section 80IC, it would be appreciated that deduction under that section is available to an undertaking engaged in the business of manufacture of article or things (other than articles or things specified in Schedule XIII) and such undertaking is located in the notified area of the specified State.

g) For purpose of claiming deduction, no separate license from the Central/State Government or any other appropriate authority is required to be obtained by an Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 285 of 484 appellant. If the undertaking is located in the specified area and is engaged in manufacture of specified article or things, such undertaking shall be eligible for deduction under section 80IC of the Act.

h) The provisions of Rule 18BBB do not impose any additional condition(s) for claim of deduction under section 80IC, nor could any such condition have been imposed through delegated legislation, viz., Rule 18BBB in derogation of the said section. The said Rule only provides that if an appellant is required to obtain any approval/license to do the eligible business, copy of same must be attached with the audit report. It does not tantamount to imposing any condition precedent to the effect that deduction under section 80IC would be admissible only if such approval is obtained, even if such approval is otherwise not required in law.

i) For establishing a factory, the assessee, as per the Factory Act, 1948, was only required to obtain permission/license to establish the factory in the State of Uttarakhand from the appropriate authority, in accordance with local State Government Factory Rules, i.e., Uttar Pradesh Factory Rules, 1950, which were applicable in the present case.

j) In accordance with the aforesaid applicable law, the assessee obtained factory license from the appropriate State authority, which was attached along with the audit report in Form 10CCB, in compliance of Rule 18BBB(4) of the Rules.

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 286 of 484 k) There being no other approval / permission required from the Central / State Government for setting up factory for manufacture of two-wheelers at Haridwar, in the State of Uttarakhand, no such approval / permission was obtained by the assessee. Consequently, the question of enclosing such approval / permission along with audit report in Form No.10CCB did not arise.

l) It would be pertinent to reiterate the DRP has accepted the aforesaid arguments of the appellant, against which no appeal has been preferred by the Revenue before the Tribunal. While complying with the directions of the DRP, the assessing officer, in our respectful submission, has made baseless allegations that the appellant did not provide entire information/details relating to fulfillment/satisfaction of various conditions to claim or compute amount of deduction under section 80-IC of the Act . The allegations made by the assessing officer in the final assessment order are general in nature, being made on surmises and conjectures, simply to justify the original stand taken in the draft assessment order, while disallowing the entire claim of deduction.

m) At the outset, it may be pertinent to point out that the AO has not indicated the specific approval / permission required which has not been obtained by the appellant and accordingly not enclosed along with Form 10CCB. It is, therefore, submitted that necessary compliance with Rule 18BBB(4) of the Rules was made by the

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 287 of 484 appellant and no default of that rule can be attributed to the appellant.

n) Further, the allegation of the assessing officer that the appellant did not provide complete details/information in support of its claim/computation of deduction under section 80-IC is belied/contradicted by its own action, being challenged in the succeeding grounds of appeal, where after perusing each detail/information, the assessing officer, without prejudice to the present action of denying the entire claim of deduction under the said section, made partial disallowances out of the total claim for one reason or the other. The said action substantiates that the entire detail/information for computing / verifying the amount of deduction was available with the assessing officer, leading to tinkering with the amount of deduction in the later part of the assessment order, challenged by the appellant in the succeeding grounds of appeal .

o) For the aforesaid cumulative reasons, it is respectfully submitted that the present ground of appeal needs to be allowed and the disallowance of the total claim of deduction under section 80IC for the aforesaid reason(s) calls for being deleted.

136) We have heard the rival contentions. The case of the assessing officer was that the appellant is not eligible for claiming deduction u/s 80IC since it did not satisfy the following conditions:

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 288 of 484 a) The appellant failed to comply with Rule 18BBB of the Rules inasmuch as the appellant did not obtain any approval for carrying on the business of manufacturing two-wheelers in the State of Uttaranchal; b) The appellant failed to comply with the condition of employment of natives of State of Uttaranchal at prescribed percentage as contained in the industrial policy issued by the Government for the State of Uttaranchal; [Communication no.429/lnd. Dev. / Employment /2005-06, dated 19.11.2005, issued by the Secretary, Industrial Development to Director, Industries, Uttranchal] c) The appellant failed to meet the condition of continuous employment of specified number of employees on any given day, as contained in the factory license.

As regards the first condition prescribed in Rule 18BBB regarding approval to carry on the eligible business, it was explained by the appellant that for the purposes of carrying on business of manufacturing two-wheelers other than obtaining factory license as per the Factory Act, 1948, no other approval / permission was required from any Central / State government under any law. No such requirement has even been prescribed by the assessing officer. As regards the factory license, the appellant had obtained the said license from the appropriate state authority which was attached along with audit report in Form 10CCB in compliance of Rule 18BBB(4) of the Rules. Considering that no license was required to be obtained to carry

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 289 of 484 on the eligible business under any law, the appellant could not have been said to violate the provisions of said Rule. As regards the other two failures, relating to state industrial policy alleged by the assessing officer, the satisfactions of such conditions have not been stipulated as a condition precedent under any provision of section 80IC of the Act. The provisions of section 80IC are self-contained and if the condition stipulated therein are satisfied, the benefit therein cannot be denied on the ground of non-satisfaction of certain extraneous condition. We, accordingly, hold that there was no failure of satisfaction of conditions precedent to claim deduction u/s 80 IC as was pointed out by the assessing officer in the assessment order. That apart, we additionally note that the DRP had also agreed with the aforesaid view and had directed the assessing officer to not deny the benefit of deduction under section 80IC on the aforesaid ground. The DRP had set aside the matter to the file of the assessing officer to examine whether other conditions precedent for claiming deduction u/s 80IC were satisfied by the appellant or not. The aforesaid findings of the DRP have not been challenged by the assessing officer in appeal before us. Such findings have, thus, become final, which could not have been overridden by the assessing officer in the assessment order. Accordingly, for the aforesaid additional reason also, we hold that deduction u/s 80IC cannot be denied for alleged failure to comply with the aforesaid three conditions specified in the assessment order. As regards compliance of conditions precedent for claiming deduction u/s 80IC, we note that the appellant during the course of set-aside proceedings had point-wise given entire details /information as to how it satisfied each condition precedent for claiming deduction under said section. The claim

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 290 of 484 of deduction of the appellant is also duly supported with the audit report in Form 10CCB issued by the auditors, answering each question in the format and how the appellant satisfied all such conditions. In the final assessment order, the assessing officer has not pointed out violation of any such condition precedent. We agree with the submissions of the Ld. Counsel that the various errors (assuming without admitting) in submission of complete details/information by the appellant to the assessing officer, as noted in the assessment order, related to the computation of deduction, on the basis of which entire claim could not have been denied. Accordingly, in our view, the assessing officer was not justified in denying the benefit of deduction u/s 80IC to the appellant of Rs. 9972535090/–. In view of this ground No. 29 of the appeal of the assessee is allowed. 137) Ground No. 30 of the appeal of the assessee is against disallowing deduction under section 80 IC by an amount of Rs. 6 255 5736/best being an amount of markup at 12.48% attributed over the value of goods, aggregating to Rs. 5 0124 7888/best procured from other non eligible units by applying the provisions of section 80 I A (8) read with section 80 I C (7) of the act on the ground that the deduction under the former section needs to be computed by recording internal unit transfer at market price. Ld. Assessing officer was of the view that the auditor failed to disclose the fact of inter-unit transfer of goods and services in the audit report filed in form No. 10 CCB of the income tax act. The brief facts of the issue is For the aforesaid activity, the appellant purchases various components required to be used in the assembly of two-wheelers, like gear box, fuel tank, etc., from third party vendors. In respect of the alleged inter-unit transfer of goods, what had happened is that

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 291 of 484 the aforesaid components were first purchased by non-eligible units at Gurgaon or Dharuhera from third parties, due to proximity of location of such units with third parties, business relationship, etc. and were thereafter transferred at the same purchase price to the eligible unit at Haridwar. In such a transaction, no value addition in such components was carried out by the non-eligible units.. In the books of accounts of the plant at Haridwar, goods aggregating to Rs.50.12 crores, were shown to have been procured from other units, i.e., Dharuhera and Gurgaon plants. Out of the aforesaid transaction, (i) components having value of Rs.6.34 crores were semi-finished goods for which nominal processing was carried out at other units before transfer to the Haridwar plant, and (ii) balance components having value of Rs. 43.78 crores were procured by the aforesaid non-eligible units from third parties and were transferred to the eligible unit at material cost. Freight charges on transfer of the aforesaid items were always booked at the receiving unit. The Ld. that AO disallowed deduction, to the extent of Rs. 6,25,55,736, by applying the provisions of section 80IA(8) read with section 80IC(7) of the Act and held that for the purpose of computing deduction under the latter section, inter- unit transfer of goods should have been recorded at market price, instead of cost price as carried out by the appellant. Accordingly, markup of 12.48%,being the net profit rate of Gurgaon Unit, was attributed on the entire cost of goods aggregating to Rs.50.12 crores, procured by the eligible unit at Haridwar from other unit(s), which mark-up, amounting to Rs. 6,25,55,736, was reduced from the profit of the eligible unit. 138) Before us, the Ld. authorized representative submitted that:- i) The purchase of components by non-eligible units at Gurgaon or Dharuhera from third parties and

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 292 of 484 thereafter transfer of same at the same purchase price to the eligible unit at Haridwar did not involve any value addition in such components as was carried out by the non-eligible units. ii) The non-eligible units in the aforesaid transaction merely incurred the cost of purchase on behalf of the eligible unit, which was subsequently debited to such unit. Accordingly, the aforesaid transaction was not in the nature of inter-unit purchase and sale of goods, covered within the provisions of section 80IA(8) read with section 80IC(7) of the Act and were, therefore, not reported by the auditors in the audit report. iii) The said transaction cannot be said to be not at market price, since the components procured from third parties by the non-eligible units have been transferred at that very price. The only additional cost incurred on account of purchase of components by the non-eligible units first and then transfer thereof to the eligible units was the element of freight, which has been directly paid and charged at the eligible unit itself. iv) As a result of the aforesaid transaction, goods have not been procured by the eligible unit from the non- eligible units of the assessee, at a lesser price, warranting adjustment under section 80IA(8) read with section 80IC(7) of the Act. v) In the transaction of transfer of semi-finished components, like the transactions discussed above, components were purchased by non-eligible units

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 293 of 484 from third parties/vendors at market price. Marginal processing was carried out at such non-eligible unit(s), before transfer thereof to the eligible unit. vi) The aforesaid processing did not require additional assets or infrastructure, not available with the eligible unit. It was only on account of saving in time that the aforesaid processing, in miniscule cases, was carried out at non-eligible units first and thereafter such semi-finished components were transferred at material cost to the eligible unit. vii) The aforesaid processing, it is submitted, could have been carried out by the eligible unit, too, but as pointed above, it was only on account of saving in time in minuscule cases, that processing was carried out at non-eligible units before transfer of components to the eligible unit. The aforesaid processing, therefore, did not enhance the market price of the aforesaid goods, which remained same as that purchased by non-eligible units from third parties. viii) Section 80IA(8) clearly mandates that the price at which goods are transferred from one business of the appellant to another business should correspond to the market value of such goods for computing the profits of the eligible business. ix) Thus, in order to determine the market price of any goods or services, open market conditions must exist, i.e., there is willingness on the part of the buyer to purchase and the seller to sell the goods. In such a situation, the price determined by the

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 294 of 484 market forces of demand and supply is the market price of such goods. x) In light of the meaning of ‗market price‘ discussed above, there was no enhancement in the price of such semi-finished components, which a willing buyer would have agreed to pay the seller/non- eligible unit, nor the same has been pointed out by the assessing officer. xi) It was only that the non-eligible units, before transfer of components to the eligible unit, carried out certain processing through incurring of labour charges, which the eligible unit could have also done at its plant, which did not result in enhancement of market price of such goods, in as much as, no buyer would have been willing to pay more price than the actual cost for such semi-finished components. xii) Without prejudice to the above, the AO could have only added labour charges incurred by the non- eligible units to the material cost of the aforesaid components (semi-finished), as opposed to mark-up of on the entire purchase cost.

139) Ld. departmental representative submitted that that inter-unit transfer of goods should have been recorded in the market price instead of cost prices carried out by the appellant and therefore, the Ld. assessing officer has correctly attributed the markup of 12.48%. He therefore vehemently supported the order of the assessing officer regarding the adjustment in the deduction claimed by the assessee under section 80 IC (7) of the income tax act.

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 295 of 484 140) We have heard the rival contentions. We have observed that merely because there was inter-unit transfer of certain goods from non-eligible unit to eligible unit, the assessing officer automatically applied the provisions of section 80IA(8) of the Act to hold that such transfer should have been at market price without looking to the nature of transfer and the facts and circumstances of the case. It has been explained by the Appellant that substantive transfers were made on account of some finished components procured by the non-eligible unit from third party vendors, due to proximity of location/relationship, for further transfer to the eligible unit. The freight charges incurred in relation to the procurement and further transfer from non-eligible to eligible unit have been stated to be borne by the eligible unit. We find force in the aforesaid facts stated by the appellant, considering that the unit at Haridwar was a new unit, whereas the other non-eligible units at Gurgaon and Dharuhera were old, established way back in years 1984 and 1997, having up and running operations during the year under consideration. Various ancillary units manufacturing components for such plants were also established near the old plants, which were continuously supplying such components to the non-eligible units. There was thus strong business/commercial reasons for such ancillary units to supply the components to the non-eligible unit first, by virtue of the existing relationship / process for supply of goods in place, which were further transferred at cost to the eligible unit at Haridwar. We do not find any in-genuineness in the aforesaid practice, which is backed by strong commercial reasons as, highlighted above. In the said process, there is no additional cost burden to be borne by the non-eligible unit. The aforesaid transfer only involves additional freight cost, which as stated has been borne by the eligible unit. Further, the Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 296 of 484 provisions of section 80IA(8) as discussed in ground of appeal no. 26 (supra) provides for inter unit transfer at market price. The market price of the components procured by the non- eligible units from third parties/independent vendors do not undergo any change at the time of further transfer by the non- eligible unit to the eligible unit. In other words, the market price of such components at which the same was procured by non- eligible units remains constant. Accordingly, even by applying the provisions of section 80IA(8), in our opinion, there can be no substitution of the price at which goods are debited by the eligible unit in its independent books of account. Similarly, with respect to components having value of Rs.6.34 crores, which were transferred by the non-eligible unit to the eligible unit at Haridwar after nominal processing, too, in our opinion, does not result in enhancement of any market price of such goods; in other words, in a free market condition such goods would have also been sold at the same price at which they have been transferred by the non-eligible unit to the eligible unit. In that view of the matter, we find that the present issue was not decided by the assessing officer in correct perspective and, therefore, erred in disallowing deduction under section 80IC, by enhancing the purchase price by adding certain markup thereon. In view of this we allow ground No. 30 of the appeal of the assessee. 141) Ground No. 31 of the appeal of the assessee was also against the denial of deduction under section 80 IC of the income tax act by Ld. assessing officer on account of inflation of profit by charging higher basic price. The brief facts of the issue are that the appellant is engaged in the business of manufacturing two- wheelers. For the units sold by eligible business unit of appellant situated at Haridwar, the basic sale price charged from customers is higher than the basic sale price charged by Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 297 of 484 the other / non-eligible units. The final price charged by the appellant from dealers/customers with respect to units sold from Haridwar and other units is the same and is not at variance. The difference in basic price is on account of exemption from excise duty available to the unit at Haridwar. There were no extraordinary profits to the eligible unit, vis-à-vis, other / non-eligible units, in as much as, in the latter unit(s), as per CENVAT Rules, the appellant was eligible to take credit of excise duty paid on purchase of excisable goods against the excise duty charged and collected from customers, which reduced the cost of production in such units, whereas in the case of eligible unit, in the absence of exemption from charging excise duty, the excise duty paid on purchase of components was not available for credit and formed part of cost of production, which consequently reduced the profit earned at such unit. The Ld. assessing officer applied provisions of section 80IA(10), which have also been made applicable to section 80IC as per sub-section (7) thereof, and held that the eligible business earned extra ordinary profits on account of higher basic price charged from customers vis-à-vis price charged by non-eligible units, which ought to be disallowed as per the said sections. The AO further held that part of profits earned by eligible business from sale of two-wheelers should have been attributed to head-office in lieu of sales and marketing expenses incurred by the said office resulting in extraordinary profits at Haridwar unit, which ought to be disallowed as per the provisions of section 80IA(10) read with section 80IC(7) of the Act. Therefore the assessing officer made disallowance of Rs.362,93,25,945 on account of the aforesaid alleged extraordinary profits. On objection filed before the Ld. Dispute resolution panel the opinion of the assessing officer was confirmed and therefore assessee is in appeal before us. Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 298 of 484 142) Ld. authorized representative submitted before us that a) This final price charged by the appellant from dealers/customers with respect to units sold from Haridwar and other units is the same. The only variance is in basic sale price on account of exemption from excise duty available to the unit at Haridwar. b) In case of non-eligible unit(s), since excise duty was charged from customers, basic price charged from customers was exclusive of excise duty, whereas in case of eligible units owing to exemption from excise duty, basic price was higher on account of element of excise duty. c) The aforesaid can be understood with the help of the following illustration: Non-eligible unit Eligible unit (Amount in Rs.) (Amount in Rs.)

Basic Price 90 100 Excise Duty 10 Nil Sale Price 100 100

d) The aforesaid higher basic price charged at Haridwar unit vis-à-vis price charged for products sold by the non-eligible unit did not result in earning of any extraordinary profits / higher profits by the eligible unit, vis-à-vis, other / non- eligible units, in as much as, in the latter unit(s), Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 299 of 484 as per CENVAT Rules, the appellant was eligible to take credit of excise duty paid on purchase of excisable goods against the excise duty charged and collected from customers, which reduced the cost of production in such units, whereas in the case of eligible unit, in the absence of exemption from charging excise duty, the excise duty paid on purchase of components was not available for credit and formed part of cost of production, which consequently reduced the profit earned at such unit. e) In case of non-eligible unit, since excise duty was charged from customers on the final product, the appellant, as per CENVAT rules, was eligible to get credit of excise duty paid on purchase of components against payment of excise duty recovered from customers and, therefore, the cost of production of such units was lower vis-à-vis cost of production of goods at the eligible unit. f) In view of the above, allegation of the AO that earning of unreasonable profits at Haridwar unit on the basis of difference in basic price charged at such units vis-à-vis other non-eligible units, without appreciating the reason for such difference arising on account of excise duty and the ultimate impact on profits is not correct. g) That apart, even assuming that the unit at Haridwar earned extra profits by charging higher sale price vis-à-vis price charged by other / non- eligible units, it was submitted that considering that the aforesaid profits were derived from the Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 300 of 484 business of manufacturing two-wheelers at the specified location, the same were, in any case, eligible for deduction under section 80IC of the Act. There is no embargo/prohibition contained in section 80IC stipulating denial of deduction on account of extra profit earned from charging higher sale price. h) That apart, and without prejudice to the above, the action of the assessing officer in applying provisions of section 80IA(10) is not correct as the conditions precedent for applying the aforesaid provision is that – (a) eligible business must have entered into a transaction with a person, who is closely connected with the appellant, and (b) the transaction between them is so arranged, that the same produces extraordinary profits to the eligible business. i) In the present case, even assuming without admitting that higher price has been charged at the Haridwar unit, the aforesaid conditions precedent are not satisfied, in as much as: i) the alleged higher price was charged from customers / dealers, who are independent unrelated parties and are not connected, much less closely connected, to the appellant in any manner, and ii) the business cannot be said to be arranged in collusion with the customers,

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 301 of 484 resulting in earning of alleged extraordinary profits to the eligible business. In fact, it would be totally unrealistic to assume that unrelated customers/dealers will collide with the appellant to pay higher price so as to allow earning of higher profits to the appellant j) The allegation that finished goods should have been transferred from Haridwar unit to Head Office at normal profit and thereafter Head Office should have sold the aforesaid products at higher predetermined sales value is also not correct. k) The business of appellant is to manufacture and sell two-wheelers, which is to be considered as profit earning activity as a whole, which is carried out by the manufacturing plants. The Head Office, it is submitted, is not a separate entity/person and just like the eligible unit, is part of the appellant- company. The head-office was not engaged in any separate business or of rendering services and was, therefore, not a separate profit centre; on the contrary, the Head Office is a separate cost centre l) The role of head office was to facilitate and incur common expenses, for the aforesaid profit earning activity carried out at manufacturing plants. For instance, administrative staff is employed at head office to facilitate smooth running of manufacturing and sale operations carried out at profit centers, viz. manufacturing plants.

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 302 of 484 m) The said expenses could have been incurred directly and separately by each profit Centre/manufacturing plant, but in order to take advantage of economies of scale, the same were incurred through a common cost centre, viz., head office, for an on behalf of such units. n) It is reiterated that by incurring such common expenses, including sales and marketing expenditure, the head office cannot be said to be a separate profit centre, so as to be attributed with part of profits earned from business of manufacture and sale of two-wheelers. o) The actual costs incurred at head office expenses must be allocated to eligible and non-eligible units in an appropriate ratio as held in ACIT v. Asean Brown Baveri Ltd.: 110 TTJ 502 (Mum). p) Reliance, is further placed on the decision of Ahmedabad Bench of the Tribunal in the case of Cadila Healthcare Ltd. v. ACIT: ITA No. 3140/Ahd/2010. In view of the above submission vehemently submitted that the Ld. Ld. assessing officer as well as the Ld. dispute resolution panel has ad in law in restricting the deduction under section 80 IC of the income tax act. 143) Ld. departmental representative relied upon the order of the Ld. assessing officer and submitted that the assessee is earned more than ordinary profits and therefore, the Ld. assessing officer is correctly adjusted the higher profit shown by the assessee.

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 303 of 484 144) We have heard the rival contentions. At the outset, we agree with the submissions of the appellant and reject the contentions of the assessing officer that higher price was charged for vehicles sold from eligible unit vis-a-vis non-eligible unit. The appellant in this connection also produced sales invoices of vehicles of same models removed from eligible unit as also non-eligible unit. The final price charged from the customer, as it would have been ordinarily expected, was same in both the cases. The aforesaid factual position was expected, since there is no reason behind the customer to pay higher price for purchasing same model of vehicle from the eligible unit at Haridwar, vis-a-vis, price to be paid for purchase from non- eligible unit. We agree with the contentions of the appellant that the basic sale price before charging excise duty in case of eligible unit was higher than the basic price of non-eligible unit on account of exemption from excise duty given to the unit located at Haridwar. In view of the same, there was basic fallacy in the entire case made by the assessing officer, while disallowing deduction under section 80IC on the aforesaid ground. That apart, although the appellant had submitted, that no additional profits accrued to the eligible unit on account of exemption from excise duty and charging higher basic price vis- à-vis basic price at non-eligible unit due to non-availment of CENVAT credit of excise duty paid on purchases at the said unit, we hold that even assuming higher profits were earned by the eligible unit, the same cannot be disallowed by applying provisions of section 80IA(10) read with section 80IC(7) of the Act which reads as under: ―(10) Where it appears to the Assessing Officer that, owing to the close connection between the assessee carrying on the eligible business to which this section applies and any other

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 304 of 484 person, or for any other reason, the course of business between them is so arranged that the business transacted between them produces to the assessee more than the ordinary profits which might be expected to arise in such eligible business, the Assessing Officer shall, in computing the profits and gains of such eligible business for the purposes of the deduction under this section, take the amount of profits as may be reasonably deemed to have been derived therefrom‖

145) The aforesaid section is applicable where the eligible unit has entered into transaction with related parties. In the given situation, as taken-up by the assessing officer, the alleged higher sale price being charged by the eligible unit is from the final customer/dealers, which are not covered within the scope of aforesaid section. In that view of the matter, for the aforesaid reason as well, the assessing officer clearly erred in doubting the sale price of goods from eligible unit and consequential earning of higher profits. As regards the other findings of the assessing officer that finished goods should have been transferred from the eligible unit to Head Office at normal profit and Head Office should have further sold the goods at higher sale price or in other words, profits earned by the eligible unit should be attributed to the Head Office for sale and marketing activities carried out by the latter unit, in our opinion, is also not correct. The Head Office is not a separate entity/person or a profit centre. The Head office in a case of multiple manufacturing units plays a central role for undertaking common expenses like administrative, marketing, etc. for all its manufacturing units. The Head Office in such a situation, in our view, is not rendering any separate services to the manufacturing/eligible unit but is a cost centre incurring

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 305 of 484 expenses for and on behalf of all such units. The only rational approach in such a kind of situation is to apportion the common expenses incurred by the head office to various profit making units on a scientific and rational basis. Considering that such expenses are incurred by head office for and on behalf of the profit making units, no profit is liable to be attributed to the head office. We rely in this regard on the decision taken by this Bench in the case of Ranbaxy Laboratories Ltd. v. ACIT: ITA No. 196/Del/2013, wherein on the same controversy it was observed as under: ―87. It is one of the contention of revenue that selling and distribution activity is itself a separate profit center and therefore whatever services have been provided by the selling and distribution arm of the company to the eligible undertaking should have been charged and reduced from the profit of the industrial undertaking after valuing service of selling and distribution arm of the company at market rate. At present assessee has allocated it at cost. Therefore, ld. AO has invoked provisions of section 80 IA (8) of the act. It is not dispute that that products manufactured by these industrial units are sold by selling and distribution arm of the assessee and the cost incurred is allocated to these respective units on the basis of appropriate allocation key of sales. Ld. AR of the appellant relying on the decision of coordinate bench of Cadila Healthcare Ltd vs. ACIT 21 Taxmann.com 483 has submitted that there cannot be any specific demarcation between manufacturing and selling activities of the assessee and profit accrues only at the time of sales of the goods only. Therefore, the contention of the revenue that selling and distribution function of the assessee is a separate profit center is required to be rejected at Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 306 of 484 threshold. We have carefully considered the argument of ld. AR and of the revenue on this point as well as the ld. AO and Ld. DRP. We are of the view that this argument is almost similar to the argument raised by the revenue in the case of Cadila Healthcare Ltd vs. ACIT 21 Taxmann.com 483.

We have carefully perused this decision and note that the controversy in this ground of appeal with respect to applicability of section 80 IA (8) of the act, on marketing and other selling distribution as well as research and development services provided by the undertaking as a whole to the eligible industrial undertaking at the cost or market rate for working out the eligible profit for deduction, has been decided. Ld. DR could not point out any other contrary judgment to the decision cited by the Ld. AR. Therefore, we respectfully following the above decision of coordinate bench hold that provisions of section 80 IA (8) of the act do not apply to the assessee on transfer of services of marketing division of the company to the eligible industrial undertaking whose profits are claimed as deductible.‖

146) In view of the above, we reverse the action of the assessing office in partly disallowing deduction under section 80IC on account of the have profit earned by the assessee in the eligible unit. In the result ground No. 31 of the appeal of the assessee is allowed.

147) Ground No. 32 of the appeal of the assessee was against the disallowance of deduction under section 80 I. C of the income

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 307 of 484 tax on account of the work and outsourcing of the manufacturing activity. As the appellant is engaged in the business of Manufacturing of two wheelers, which involves various processes including assembly of certain components of two wheelers like gearbox , fuel tank, engine etc. It is on the completion of these processes including assembly of the aforesaid each component at the separate and distinct product that is, the two-wheeler vehicle that comes out . The assessee is pointed out that there is no difference between the Manufacturing activity carried on at Haridwar plant and other unit is that in the later unit certain processes like Pressure , heat treatment at surprise carried out at such units whereas these courses are not carried out in the eligible unit, which is situated at Haridwar. Accordingly, the Ld. assessing officer raised equerry regarding lower contention of electricity the appellant is furnished the details of the power consumed at all the 3 units in the respective plants. It was found that the reviewer unit consumes lesser number of units of electricity to manufacture each unit of vehicle. The Ld. assessing officer compared the electricity unit consumed with respect to each vehicle manufactured at all the three units of the assessee. On the basis of the lower consumption of electricity per unit at the eligible unit. He assumed that the part of many featuring activities of the land were outsourced and accordingly disallowed proportion of outsourced Manufacturing activities. He worked out a sum of Rs. 497.42 crores as profit which is attributable to the manufacturing activity at Haridwar plant which are outsourced and therefore this sum was disallowed. The action of the Ld. assessing officer was confirmed by the Ld. Dispute resolution panel on objection raised by the assessee and therefore assessee is in appeal before us.

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 308 of 484 148) Ld. authorized representative submitted before us that there are specific reasons for the lower consumption of electricity at a further unit at the Harbor plant was equipped with the latest efficient technology for carrying out the production process which led to power consumption at lower-level compared to the other plants. He mainly submitted that:- a) It is pointed out that the reason for lower consumption of electricity at Haridwar unit was that Haridwar plant was equipped with latest efficient technology for carrying out the production process, which led to lower consumption of electricity. b) The whole activity of manufacture of two-wheelers, which involved assembly of various components procured from third parties, was carried out by the eligible unit only. The activity of manufacturing the final product, viz., two wheelers was not outsourced by the appellant to any third party. c) It was only that certain intermediate processes, mentioned above, which were carried out at non-eligible plants were not carried on at the Haridwar plant, which led to lower consumption of electricity at Haridwar plant vis-à-vis electricity consumed at non-eligible units. d) The aforesaid intermediate processes were carried out by the vendors of components itself, who supplied a relatively more finished component, in comparison to components supplied by vendors at other non-eligible plants. The lower consumption of electricity, therefore, does not mean that part of manufacturing activity was outsourced. e) That apart and without prejudice to the above, it is submitted that it is well settled that an assesssee need not

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 309 of 484 personally or directly be involved in all stages/ processes of manufacture of goods to be regarded as being engaged in the business of manufacture or production of relevant goods. It has been held that even where the entire manufacturing activities are carried by a third party, but the overall supervision, control, and management of the product manufactured is with the assessee, the assessee would be regarded as being engaged in manufacture or production of relevant goods. Reference, in this regard, can be made to the following decisions: - Addl. CIT vs. A. Mukherjee and Co. (P) Ltd.: 113 ITR 718 (Cal.) Griffon Laboratories Pvt. vs. CIT: 119 ITR 145 - (Cal.) CIT v. Neo Phrama P. Ltd.: 137 ITR 879 (Bom.) - - CIT v. Anglo French Drug Co. (Eastern) Ltd. : 199 ITR 92 (Bom.) India TyreAnd Rubber Co. (India) Pvt. Limited. - vs. CIT: 210 ITR 409 (Bom.) CIT v. Penwalt India Ltd.: 196 ITR 813 (Bom.) - - Oriental Longman Ltd. vs. CIT: 130 ITR 477 (Del.) - CIT v. Acrow India Ltd.: 188 ITR 485 (Bom.) CIT vs. Elgi Ultra Industries Ltd. : 25 - taxmann.com 561 (Mad.) - MkU (Armours) Ltd. v. CIT: 279 CTR 504 (All.) - IT v AAR ESS Exim (P) Ltd: 372 ITR 111 (Del.) Prabhudas Kishoredas Tobacco Products Pvt - Ltd: 282 ITR 568 (Guj.) - Liberty Group Marketing Division v. CIT: 164 Taxman 608 (P&H)

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 310 of 484 Claas India Ltd v ACIT : 21 SOT 580 (Del.) - f) In view of the above, in respect of deduction claimed under section 80-IC on the aforesaid ground, disallowance made in the assessment order is not based on correct appreciation of facts and the position in law and, thus, the disallowance made for being deleted. 149) Ld. departmental representative relied upon the orders of lower authorities and submitted that power contention of the Harbor unit is substantially lower than other units of the appellant and there is no difference between the manufacturing process and therefore the Ld. assessing officer has correctly taken a view and disallowed the proportionate amount of deduction eligible on account of activities outsourced from that particular plant. He vehemently relied on the findings of the Ld. assessing officer. 150) We have heard the rival contentions. On query from the bench, the appellant had furnished the process chart for manufacturing of final products followed in all the three units. On perusal of the same, it was noted that since plant at Haridwar was a new plant and Gurgaon and Dharuhera were old plants, certain initial processes, like press shop, heat treatment, etc., which was carried out at the latter unit were not carried out at the unit at Haridwar. The aforesaid lend support to the argument made by the appellant for justifying the lower consumption of electricity at Haridwar as compared to electricity consumed in other two units. That apart, even assuming that certain intermediary processes were not carried out by the eligible unit at Haridwar and were outsourced to the third parties or non-eligible units, the same cannot lead to the conclusion that the entire profits are not derived from the manufacturing activity for being liable for deduction under section 80IC of the Act. The profit earned by the eligible unit is

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 311 of 484 from manufacturing of two wheelers, which is an eligible activity covered under section 80IC of the Act. Outsourcing of certain intermediary processes or procurement of some finished components for assembly thereof in the vehicle does not, in our view, mean outsourcing of the manufacturing operations. The Courts have in fact repeatedly held that even where the entire manufacturing activities are outsourced or carried out by third party, but the overall supervision, control, and management of the product manufactured is with the assessee, the assessee would be regarded as engaged in manufacture or production of relevant goods. The latest is the decision of Delhi High Court in the case of ITO v AAR ESS Exim (P) Ltd: 372 ITR 111. Thus, disallowance made by the assessing officer on the aforesaid ground was not based on any valid reasons and accordingly the same is deleted and ground 32 of appeal is allowed. 151) Ground No. 33 of the appeal of the assessee is against the disallowance of deduction under section 80 IC of the act on account of profit attributable to advertisement and marketing activities carried out at head office. The Ld. assessing officer was of the view that as the assessee is engaged in the business of manufacturing and selling of the vehicles therefore the goods manufactured at eligible unit and appellant was required to incur substantial marketing expenses at the head office of the appellant. Therefore, there are common expenses including advertisement, brand creation expenses which are incurred at the head office which are required to be allocated to various Manufacturing units of the appellant company including the unit eligible for deduction under section 80 IC. On a rational and scientific basis. In that view of the matter the expenses on such expenditure incurred at the end of his were duly required to be allocated to manufacturing units and have been reduced by the assessee while computing the profits of the unit eligible Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 312 of 484 for the claim of deduction under section 80 IC of the act. However, the Ld. assessing officer held that the appellant company is deriving profit from three centers that is manufacturing of the assets, brand value of the assets and marketing of the assets wherever the deduction under section 80 IC is available only on profits derived from the business of manufacturing of specified. Articles of things. Therefore, he stated that the manufacturing and marketing activities were required to be carried out at the head office and therefore the brand developed was not owned by the eligible unit, which came into existence much later than the existence of the appellant company as a whole. Thus part of the profits are required to be attributable to the advertising and marketing activities carried out by the head office from the profits earned by the eligible unit. Therefore, the Ld. assessing officer computed the rate of net profit for financial year 1984 – 85, being the 1st year of operation of the appellant company at 6.85% and applied the same to arrive at the profits only attributable to the benefit selling activity of the Harbor unit. On the basis of the above, the assessing officer computed the profit attributable to the Manufacturing activity at Rs. 299.85 crores only out of the total claim of the assessee under section 80 IC of the income tax act. The view of the Ld. assessing officer was confirmed by the Ld. dispute resolution panel on objection filed by the assessee. Therefore, assessee is in appeal before us. 152) Ld. authorized representative submitted that:- i) The business of appellant is to manufacture and sell two-wheelers, which is to be considered as profit earning activity as a whole, which is carried out by the manufacturing plants. The Head Office, it is submitted, is not a separate entity/person and

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 313 of 484 just like the eligible unit, is part of the appellant- company. The head-office was not engaged in any separate business or of rendering services and was, therefore, not a separate profit centre; on the contrary, the Head Office is a separate cost centre. ii) The role of head office was to facilitate and incur common expenses, for the aforesaid profit earning activity carried out at manufacturing plants. For instance, administrative staff is employed at head office to facilitate smooth running of manufacturing and sale operations carried out at profit centers, viz. manufacturing plants. iii) Similarly, advertisement expenses are incurred in order to promote sale of goods manufactured at manufacturing plants. The said expenses are in the nature of common expenses incurred for all the plants that may be located at different locations. Accordingly, such expenses are allocated to profit centers/manufacturing plants in an appropriate ratio. iv) The said expenses could have been incurred directly and separately by each profit centre/manufacturing plant, but in order to take advantage of economies of scale, the same were incurred through a common cost centre, viz., head office, for and on behalf of such units. It is reiterated that by incurring such common expenses, including sales and marketing expenditure, the head office cannot be said to be a separate profit centre, so as to be attributed with

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 314 of 484 part of profits earned from business of manufacture and sale of two-wheelers. v) Reliance, in this regard is placed on the decision of Ahmedabad Bench of the Tribunal in the case of Cadila Healthcare Ltd. v. ACIT: ITA No. 3140/Ahd/2010. vi) As regards the marketing and advertisement activities, the same are not a separate profit- earning operation carried out by the appellant. The same forms an integral part of the business of manufacture and selling two-wheelers. The manufacturing activity, it is submitted, could not, on a ‗standalone basis‘, result in earning of any profit to the appellant-company. vii) Profit accrues to an appellant only when the goods manufactured are sold in the market. In order to sell goods, an appellant needs to incur several kind of marketing expenses, which include advertisements and promotion of brand. The marketing activity, thus, forms an integral part of the business of manufacturing and selling two- wheelers and cannot be said to be a separate profit- earning operation. viii) Simply because, the said expenses, instead of being directly incurred by eligible unit, were incurred by head-office, to take advantage of economies of scale, and were subsequently allocated to the eligible unit, would not, in our respectful submission, make any difference. It is reiterated that through the aforesaid arrangement, the head

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 315 of 484 office, which is a cost centre for incurring common corporate expenses pertaining to the overall business, could not be said to be a separate profit centre. ix) The decision of Rolls Royce Plc. DDIT: 113 TTJ 446, as relied upon the AO, subsequently affirmed by the Delhi High Court, reported at 339 ITR 147 (Delhi), has no application to the facts under consideration. In the aforesaid decision, the issue was of attribution of profits earned by the foreign company to operations carried out in India, as per the provisions of section 9(1)(i) read with Article 7 of Indo-UK Treaty, which were taxable in India. In the aforesaid situation, the segregation of profits was on the basis of operations carried out by different companies/persons in different jurisdictions/countries. x) In the present case, the head-office is not a separate entity and the expenses incurred by the head office, as submitted above, formed integral part of the business of manufacture carried out by the manufacturing units. The expenses having been incurred for and on behalf of the manufacturing units were allocated on a scientific basis. The head office not being a separate legal entity, the question of attribution of profits between the head-office and eligible unit does not arise. xi) The AO completely fell in error in holding that only manufacturing profits are eligible for deduction under the said section. The qualification under section 80IC of the Act is qua the unit only, viz., the Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 316 of 484 unit in order to be eligible needs to be engaged in manufacture or production of an article or thing. Profit derived from such unit is eligible for deduction under the said section; there is no further qualification or restriction that only manufacturing profit would be entitled for deduction xii) That apart, it is submitted that the advertisement activity, in any case, forms an integral part of the business of manufacture and sale of two-wheelers, since profit will accrue only when manufactured goods are sold in the market. Thus, the profit, if at all, attributed to such activity, will also be considered as forming integral part of manufacturing operations, which shall be eligible for deduction under section 80-IC of the Act. xiii) The assessing officer did a backward working and arrived at the net profit for the financial year 1984- 85, being the first year of operation of the appellant-company, at 6.85%, by taking average increase of 0.49% each year over a period of 12 years, viz., between financial years 1998-99 to 2009-10. The assessing officer applied the aforesaid ad-hoc rate for purpose of attribution of profit to the manufacturing activity carried out at the eligible unit., on the ground that in the first year, profit was earned by the appellant solely on the basis of manufacturing activity. xiv) Without prejudice to the contention of the assessee that the profits of the assessee cannot be segregated between manufacturing activity and Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 317 of 484 marketing activity, it is submitted, that the aforesaid manner of arriving at the net profit rate of the first year and attributing the same to the manufacturing activity is purely arbitrary and based on conjectures and surmises. The disallowance/attribution made on such arbitrary basis, therefore, needs to be reversed. xv) That apart, during the relevant previous year, the appellant has earned net profit @ 15.99% of turnover. Major part of the aforesaid profit, it is submitted, is attributable to manufacturing activities only, since majority of investments as per balance sheet have been made by the appellant in land, building, plant and machinery, tools, etc., relatable to the manufacturing plant. The appellant has not made any separate investment in purchase of brand and the advertisement expenditure incurred on a year-to-year basis was claimed and allowed revenue deduction against business income, in assessments completed for the earlier year(s). xvi) In view of the same, the correct basis of attribution, without prejudice, should be on the basis of ratio of value of investment in land, building, plant and machinery of the eligible unit over the value of total assets, which, if carried out, would attribute major part of profit to manufacturing activities only. xvii) For the aforesaid cumulative reasons, it is respectfully submitted, that the aforesaid disallowance of deduction under section 80-IC of

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 318 of 484 the Act is not based on correct appreciation of facts and position in law and, thus, needs to be deleted. 153) Ld. departmental representative submitted that in fact the profit earned by the assessee is not only after the manufacturing activity and the profit also involves the activities of the brand assets and marketing assets of the company and therefore the profit is rightly been attributed by the Ld. assessing officer on a plausible percentage will stop. He further submitted that the assessee has wrongly shown the higher profit on the sale of vehicle when the profit earned by these other two activities of the assessee also earns other than manufacturing and hence is required to be reduced from the profit from manufacturing activities shown by the assessee. 154) We have heard the rival contentions. We have already discussed the aforesaid issue at length while disposing the ground of appeal No. 31 to 31.2 supra, wherein we have dealt with that head office is a separate cost centre and expenses incurred thereat needs to be allocated to various profit centers/manufacturing units on a rational and scientific basis, without any element of profit/markup. The issue raised by the assessing officer in the present ground of appeal is categorically similar to that raised in the aforesaid ground. Accordingly following our findings stated above, we reverse the action of the assessing officer and delete the disallowance made under section 80IC. Accordingly, the ground No. 33 of appeal is allowed. 155) Ground No. 34 of the appeal of the assessee is against denial of deduction under section 80 IC of the act on account of other income related to the interest, freight recovery from customer, sundry sales, profit on sale of plant and machinery, miscellaneous income from Vendor of Discounting and

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 319 of 484 exchange fluctuation amounting to Rs. 1947220072/– . During the year the assessee has shown this income as other income and claimed deduction on these income since the said receipts are directed immediate nexus with the business of manufacturing and selling of the vehicles. The Ld. assessing officer held that the aforesaid income not derived from the business of manufacturing of article or thing and were therefore taxable under the head income from other sources and not as business income and therefore they are not eligible. Accordingly, for deduction under section 80 IC of the income tax act. On objection filed before the Ld. dispute resolution panel the opinion of the Ld. assessing officer was confirmed and therefore the assessee is in appeal before us. 156) Ld. authorized representative submitted on each of the items of other income as under:-

Re. Interest on Loan given at subsidized rates to employees a) The appellant had employed various employees at the plant, who were engaged in the activity of manufacture or production of two-wheelers. As a mode of compensation to employees working with the appellant in the business of manufacture or production of two-wheelers, in accordance with the terms of contract of employment the appellant extended facility of loan to employees at subsidized rate, subject to fulfillment of certain conditions. b) It is pertinent to point out that the benefit received by the employees on account of subsidized rate of loan is considered as ‗perquisite‘, which is taxable in the hands of employees under section 17 of the Act read with Rule 3 of the Rules and is, therefore, a form of compensation to

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 320 of 484 employees, in lieu of services provided by them in relation to the activity of manufacture or production of article or thing. c) The remuneration provided to employees as also the benefit / perquisite including loan at subsidized rate of interest is allowable expenditure against income derived from the manufacturing undertaking, for the purpose of computing deduction under section 80IC of the Act. d) Thus, when the remuneration/benefit extended to employees is reduced from income for the purpose of computing deduction under section 80IC, the interest income earned on loan provided to employees, as a result of the employment contract entered with such employees and in order to retain their services, also have first degree/immediate nexus with the manufacturing activity. e) The Delhi High Court in the case of CIT v. Eltek SGS (P) Ltd: 300 ITR 6 held that interest received by the assesse- company on the employees loan and on late payment from customers being linked to the business of the industrial undertaking was includible as business income and eligible for benefit under section 80IA of the Act. f) Reliance, in this regard, is placed on the decision of Delhi bench of Tribunal in the case of Joyco India (P.) Ltd. v. ITO: 122 TTJ 940, wherein it has been held that interest income earned from loan given to employees engaged in the business of manufacturing is derived from such business and, therefore, is eligible for deduction under section 80IA of the Act.

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 321 of 484 Interest on loan provided for working capital support to vendors a) The appellant had engaged vendors to manufacture certain components to be used in the manufacture of two wheelers at the relevant plant. In a case, where the said vendors face financial difficulty in carrying out the manufacture of components, the appellant company provided financial support to such vendors by way of extending working capital support at market rate of interest, so that the supply of components from such vendor and consequently the manufacturing operations of the appellant do not take a hit, owing to such financial difficulty. b) In this connection, copy of correspondences exchanged with vendor on sample basis establishing working capital support raised by the vendors are attached at Pg. 3213- 3216 of paper book Vol. 8 c) The aforesaid loan/working capital support, it is submitted, is, thus, directly related / has first-degree nexus with the activity of manufacture of article or thing, since the vendors were manufacturing components, which were to be used by the appellant in manufacturing two wheelers at eligible unit. d) If the working capital support was not provided by the appellant to such vendors, they would have faced difficulty in providing continuous / uninterrupted supply of components to the appellant, which, in turn, would have interrupted/created pressure on the activity of manufacture of two wheelers carried on by the company, including at eligible unit. e) Accordingly, the aforesaid financial support had direct nexus with the activity of manufacture or production of

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 322 of 484 article or thing and consequently interest income earned there from also had direct nexus with the said activity, which is to be regarded as derived from the said business. f) Attention, in this regard, is invited to the decision of Supreme Court of India in the case of CIT v. Bokaro Steel Ltd.: 236 ITR 315, wherein interest receipts from advances made to contractors to facilitate work was set-off against construction charges and thus, reduced the cost of construction. The Court, in the aforesaid facts, held that such receipts being intrinsically connected with construction of assessee's plant, would be capital receipt and not income of assessee from any independent source. g) The interest income earned from delay in payment received from customers of the relevant undertaking is to be regarded as ‗derived‘ from the eligible business, which is eligible for deduction under section 80IA/80IB/80IC of the Act. h) Reliance, in this regard, is placed on the following decisions, wherein it has been held that interest income earned from delay in payment received from customers of the relevant undertaking is to be regarded as ‗derived‘ from the eligible business, which is eligible for deduction under section 80IA/80IB/80IC of the Act:

(i) CIT v. Advance Detergents: 339 ITR 81 (Del.) (ii) CIT v. Vidyut Corporation: 324 ITR 221 (Bom) (iii) CIT v. Eltek SGS (P) Ltd: 300 ITR 6 (Del.) (iv) CIT v. Poddar Pigments Ltd: 41 DTR 390 (Del.) (v) CIT v. Prallay Oils Ltd: 58 DTR 271 (MP)

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 323 of 484 (vi) Nirma Industries Ltd. v. DCIT: 283 ITR 402 (Guj.) (vii) CIT v. Madras Motors Ltd.: 257 ITR 60 (Mad.) (viii) CIT v. Indo Matsushita Carbon Co. Ltd.: 286 ITR 201 (Mad.) (ix) Phatela Cotgin Industries (P) Ltd. v. CIT: 303 ITR 411 (P&H) (x) CIT v Jindal Polyester And Steel Ltd: 221 Taxman 30 (Allahabad) (xi) ACIT v Sun N Sand Hotels (P.) Ltd: 67 SOT 331 (MumTrib.)(URO)

i) The ratio emanating from the aforesaid decisions, in our respectful submission, is squarely applicable to interest income earned from vendors, inasmuch as, when interest earned from benefit provided to debtors by way of extending extra credit period is held to be eligible for deduction under the relevant sections, the interest income earned from creditors/vendors by way of providing working capital support in order ensure continuous/uninterrupted supply of components is also to be considered as income derived from industrial undertaking, which is eligible for deduction under section 80IC of the Act.

Freight recovery from customers a) The aforesaid receipt was against recovery from customers against freight expenses incurred for delivery of goods to such customer. In order to deliver goods to the customers, the appellant first incurs expenditure on account of freight. Subsequently, such expenses are recovered from the

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 324 of 484 customers and are income as part of gross sales in the profit and loss account. b) The said recovery of freight expenses did not constitute a new source of income for the appellant company, but was only in the nature of recovery/re-imbursement of actual freight expenses incurred in connection with delivery of vehicles sold by the eligible undertaking. c) Considering that freight expenses incurred are allowed as deduction against income derived from the business of manufacturing vehicles, the recovery of such amount from the customers as part of gross sales is to be also considered as derived from the said business for the purposes of claiming deduction under section 80IC of the Act. Reliance, in this regard, is also placed on the recent decision of the Supreme Court in the case of CIT v. Meghalaya Steels Ltd.: 383 ITR 217, wherein it was held that (a) transport subsidy; (b) interest subsidy; (c) power subsidy; and (d) insurance subsidy received by the assessee from Government under the specific State schemes were reimbursements of manufacturing cost incurred by assessee, which were liable to be included under head "profits and gains of business or profession" and not under head "income from other sources" and, therefore, deduction under sections 80-IB and 80-IC ought to be allowed thereon. d) The Delhi High Court in the case of CIT v. Arvind Constructions: 172 Taxman 5 held the transportation charges received as income derived from eligible business entitled for deduction under section 80IA of the Act. Without prejudice to the above, if the aforesaid recovery is not to be treated as derived for the business of manufacturing, the principle of netting needs to be applied Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 325 of 484 and both the freight expenses and recovery thereof needs to be removed from the profit and loss account of the eligible unit and deduction ought to be allowed on the profits arrived after such removal. [Refer: ASG Associated Capsules (P) Ltd. v. CIT: 247 CTR 372 (SC)] e) Thus, considering that freight expenses incurred are more than recovery there against, netting of the aforesaid expenses, will also not have any adverse impact on the profits of the eligible undertaking for the purpose of computing deduction under section 80IB/IC of the Act. Sundry Sales – Rs. 92.41 crore a) The appellant engaged various ancillary units/third parties to carry job-work/processing on the components supplied by the appellant in the activity of manufacture of two wheelers. b) In the aforesaid transaction, the semi-finished components supplied by the appellant company to vendors were credited in the books at cost of such components. The finished components supplied by the vendors were debited in the books at cost plus processing charges. The aforesaid credit in the nature of cost of components supplied to the vendors/ancillaries, was set-off with the cost of finished components supplied back by such vendors/ancillaries, comprising of original cost of components and processing charges c) It would be appreciated that the aforesaid transaction was directly related to and formed integral part of the entire process / activity of manufacturing of two wheelers. Although the aforesaid supplies to vendors/ancillaries was separately credited in the profit and loss account at cost of

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 326 of 484 such components, but the same did not result in earning of any separate / new income to the appellant company.

Miscellaneous Income Vendors – Cash Discounting a) This income has arisen on account of discount received from vendors on early/prompt payment made to them against purchases. The aforesaid benefit being directly related to the cost of purchases, the same was reduced from the cost of such purchases. b) Since, purchase of goods for the purpose of carrying on manufacturing activity is directly related and has immediate nexus with the said activity, therefore, benefit received on account of reduction in such costs is also intrinsically linked to the activity of manufacture. c) That apart, considering that cost of purchases are allowed as deduction against income derived from the business of manufacturing vehicles, the benefit received by way of discount on early payment is to be also considered as derived from the said business for the purposes of claiming deduction under section 80IC of the Act. d) In the case of Munjal Showa v. DCIT: 94 TTJ 227 (Del) it has been held that interest received from suppliers on early payment of raw material cost is derived from the business of manufacturing, which is eligible for deduction under section 80I of the Act.

Exchange fluctuation Gain (net) - Rs. 2,41,67,060/

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 327 of 484 a) The aforesaid net gain of Rs. 2,41,67,060/- arising in respect of fluctuation in foreign currency comprises of the following Foreign exchange fluctuation gain in respect of fixed assets Rs. 34,13,666 Foreign fluctuation gain (net) against imports Rs. 2,07,53,394 b) As regards gain of Rs. 34,13,666, the same was in relation to outstanding liabilities towards purchase of fixed assets, which was to be reduced from the cost of fixed assets for the purposes of computing depreciation thereon, as per the provision section 43A of the Act. c) The aforesaid gain, being liable to be reduced form the cost of assets, was not taxable as income and, therefore, was liable to be reduced from profits derived from the eligible business as also from the income under the normal provisions. d) Although the said income was to be reduced from profits of eligible business, the same was inadvertently added back in the computation of income under the normal provisions of the Act. As a result of the aforesaid mistake, there was a double addition of same non-taxable income to the income of the appellant e) In view of the same, the aforesaid amount was liable to be reduced from the profits derived from the eligible business for the purpose of computing deduction under section 80IC of the Act. f) Accordingly, the appellant had filed an application dated 13.03.2015 under section 154 of the Act before the assessing officer, praying for rectification of mistakes Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 328 of 484 apparent from record, contained in the assessment order, resulting in wrong computation of income-tax demand. In pursuance thereof, the assessing officer, vide order dated 07.05.2015, has rectified the mistakes contained in the assessment order, thereby deleting the double addition made under section 80-IC of the Act. g) Regarding the remaining gain of Rs. 2,07,53,394, the same was earned in respect of outstanding liabilities in foreign currency against import of goods to be used in the business/activity of manufacture of vehicles at the eligible unit. Since the aforesaid gain was directly related to import of material to be used in the activity of manufacture, the same had direct/immediate nexus with the manufacturing activity and, therefore, was to be considered as derived from the said business. h) Reliance, in this regard, is placed on the decision of Bombay High Court in the case of CIT v. Rachna Udhyog: 230 CTR 72, wherein it has been held that gain arising from fluctuation in foreign currency on revenue account earned by eligible units is to be considered as derived from eligible business, which would be eligible for deduction under the relevant section.

157) The Ld. departmental representative relied upon the order of the Ld. assessing officer and submitted that all these incomes are not income derived from the industrial undertaking and therefore are not eligible for deduction under section 80 IC of the income tax act, he vehemently relied upon the order of the Hon‘ble Supreme Court in case of liberty India versus CIT 317 ITR 218 and submitted that these are not be income which have

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 329 of 484 the direct nexus of the 1st degree of the source with the industrial undertaking. 158) We have heard the rival contentions. Our findings on the various issues raised by the assessing officer are given in seriatim hereunder: 1. Interest on loan given at subsidized rates to employees The Supreme Court in the case of Liberty India vs. CIT: 317 ITR 218, has held that source of income beyond the first degree nexus with the manufacturing operation cannot be considered as derived from such business/activity. Following the aforesaid decision, the Courts / Tribunal in certain cases have held that interest income earned from fixed deposits made by the eligible unit is not eligible for deduction under the relevant provisions of the Act. [Refer: Paswara Electronics (P) Ltd. v. ITO: ITA No. 71/D/2011; Reckit Benckiser India Ltd. v. Addl. CIT: 231 Taxman 585 (Cal.)] However, the facts under consideration are slightly different. The question that needs to be answered is whether interest income earned from loan given at subsidized rate to employees has first-degree nexus with the business operations carried on by the eligible unit. The appellant is engaged in the business of manufacturing two-wheelers and is not engaged in the activity of giving loans and advances to earn interest income. It is not the case of appellant or the assessing officer that surplus funds were given to the employees to earn interest income. The loans/advances to employees under consideration was a measure of incentive / perquisites to the employees involved in carrying on the business of manufacturing.

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 330 of 484 The source of such income is, thus, not the activity of giving loan, but benefit extended to employees engaged in the business. The first-degree nexus of such income, in our view, is the eligible business carried on by the appellant. Therefore, such income would be eligible for deduction u/s 80IC of the Act. The action of the assessing officer on this account is thus reversed. 2. Interest on loans provided for making capital support to vendors The present issue is similar to the immediately preceding issue. In our view, loan has been given to vendors to provide uninterrupted supply of goods to the appellant. The first-degree nexus of giving loan is, thus, business of manufacturing. Accordingly following our findings in the preceding issue, the action of the assessing officer on this account is reversed. 3. Freight recovery from customers The assessing officer has completely gone wrong in considering freight charges recovered from customers as an independent source of income. The freight charges recovered by the appellant for supply of vehicle are recoupment of such charges, which were paid by the appellant at the first place to the transporter delivering the vehicle to the customer/dealers. There is no profit element in the aforesaid recovery. In the absence of any income on the aforesaid recovery there was no warrant to deny benefit of deduction under section 80IC on the above. Accordingly, the action of the assessing officer is reversed on this ground. 4. Sundry Sales

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 331 of 484 The present issue is also similar to the immediately preceding issue relating to freight recovery. The sale of some finished components also does not involve any income element inasmuch as semi-finished components are supplied to ancillary units for further processing and finished components procured there from are subsequently debited at cost in the books. There is no profit element in the aforesaid transaction and therefore the benefit of deduction under section 80IC cannot be denied on above. In that view of the matter, the action of the assessing officer is reversed on this ground. 5) Miscellaneous income – cash discounting from vendors The cash discount availed on early/prompt payment to creditors/supplies of material is also not an independent source of income but a discount towards the purchase price. The purchase price of goods is reduced from the profits of the eligible unit to arrive at profit derived from the manufacturing activity. Accordingly, any benefit towards purchase price would have direct nexus with the computation of the aforesaid profits. The aforesaid income is, thus, directly related to business of manufacturing. Accordingly the action of the assessing officer in disallowing deduction under section 80IC on above was not valid and therefore, the action of the assessing officer on aforesaid ground is reversed. 6) Exchange fluctuation gain As regards denial of deduction under section 80IC on fluctuation gain of Rs.34,13,666, the appellant has pointed out that there was some mistake in the aforesaid

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 332 of 484 claim which have been rectified by the assessing officer in the order dated 07.05.2015 passed under section 154 of the Act. Accordingly we do not render any finding on the aforesaid issue. As regards gain arising on reinstatement of liabilities in foreign currency against import of goods in our view is similar to the issue of cash discount on purchases dealt supra. Similar to our findings given on the said issue, considering that fluctuation gain on import of goods is going to directly reduce foreign exchange liability to be discharged against import of goods being debited in the profit and loss account to arrive at the profits of the eligible business, such benefit has direct nexus with the said business, which is eligible for deduction under section 80IC of the Act. We draw support for the aforesaid conclusion from the decision of the Bombay High Court in the case of CIT v. Rachna Udyog : 233 CTR 72. Accordingly the action of the assessing officer on this ground is reversed and we hold that assessee is eligible for deduction under section 80 IC of the income tax act on interest on loans given at subsidized rates to the employees of Rs. 1 62975/–, interest on loans provided for working capital support to vendors Rs. 6626854/–, freight recovery from customer Rs. 935418395/–, sundry sales of Rs. 9 2410 3150/–, cash discount received from the vendor is Rs. 5 673 2831/– and exchange fluctuation of Rs. 2 416 7060/–. In the result ground No. 34 of the appeal of the assessee is partly allowed. 159) Ground No. 35 of the appeal of the assessee is against the disallowance of expenses incurred on repairs and maintenance of assets at Nagpur premises alleging that the premises were not put to use. The appellant has acquired office at Nagpur wide

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 333 of 484 agreement to sell dated 07/03/2008. The possession of the premises was taken during the relevant financial year itself. During the relevant assessment year, the appellant incurred the expenses on repairs and maintenance expenses of existing assets and relatable to the office premises at Nagpur which were claimed as revenue expenditure. The nature of expenditure is, electrical item purchase etc. interior work, wooden floor, fixing, additional civil work done, electrical works, additional electrical works, dismantling of and conditions, Pinewood on board purchase. The total expenditure incurred were Rs. 4 721618/–. The Ld. assessing officer disallowed the aforesaid expenditure on the ground that the office premises at Nagpur were not put to use during the relevant previous year, and thereby the expenditure incurred in respect of such premises are not reliable expenditure. Further, the Ld. assessing officer treated the above expenditure as capital expenditure and did not allow any depreciation thereon too. On objection before the Ld. dispute resolution panel The findings of the Ld. assessing officer were confirmed. Therefore the assessee is in appeal before us. 160) Ld. authorized representative submitted before us that the above property was acquired by agreement to sell dated 07/03/2008. Pursuant to that agreement the appellant received possession of the property and subsequent to the payment made in August 2009, the possession was completed and the PAC appellant acquired the ownership right of the said property. Therefore, assessee undertook repair and maintenance of such premises in order to bring the assets into working condition and incurred various expenditure. The Ld. assessing officer. Merely because the registration of the sale deed took place. Subsequently as alleged that the asset was not put to use. Blooded authorized representative further submitted that the said premises were in possession of the appellant Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 334 of 484 during the relevant further financial year, even though the registered sale deed might have taken place later on as the appellant has been incurring electricity, water and other routine expenditure for upkeep and maintenance of the said premises. He further submitted that the relevant expenditure debited by the assessee in the books of account on account of these officer revenue in nature is no new addition to the respective office has been made. 161) Ld. departmental representative relied upon the order of the lower authorities and submitted that the assessee has not taken the above property as there was registered sale deed later on between the assessee and the seller of the property and therefore the assessee has not put to use the above property. Therefore, the expenses incurred on purchase of various items for that office are correctly disallowed by the Ld. assessing officer. 162) We have heard the rival contentions. The assessing officer in our view has gone wrong in holding that the property was not put to use simply because there was no mention of the date of delivery of effective possession in the registered sale deed. It is a common practice permitted as per the Transfer of the Property Act to enter into an agreement to sell and take possession of the property as per the terms and conditions to be fulfilled as per that agreement and the sale could be registered at a later date. Accordingly, as per the said practice, the appellant in the present case took possession of the property, pursuant to the agreement of sale deed dated 07.03.2008. Further, if the possession was not taken by the appellant the question of incurrence of various repairs and maintenance expenses under consideration would not have arisen. These expenses were incurred since the possession was with the appellant and considering the transaction as per the terms and conditions of Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 335 of 484 agreement to sale was executed, the appellant invested sum of Rs.47.21 lacs on the property. Accordingly, the property was clearly in possession with the appellant. In that view of the matter there was no valid basis to disallow the expenses of repair and maintenance of existing assets in the office premises at Nagpur on the ground that there was no evidence of possession of such property with the appellant and consequently the property was not put to use. In that view of the matter, we delete the disallowance made by the Ld. assessing officer amounting to Rs. 4721618 on account of various expenditure incurred on repair and maintenance of assets at Nagpur office premises and allow this ground No. 35 of appeal of the assessee. 163) Ground No. 36 of the appeal of the assessee is against the disallowance of expenses incurred on purchase of computer software for sending fax through SA. B. And Lotus Notes and purchase of other software for up gradation amounting to Rs. 2 505000/–. The aforesaid expenses were incurred towards support of the up gradation of the software application software that is the software that is used in the accounts and administration department for the appellant and are not related to the manufacturing activity carried by the appellant. The appellant claimed these expenditure as revenue expenditure. However, the Ld. assessing officer treated the aforesaid expenditure as capital in nature. Since the expenses resulted in acquisition of capital asset and also provided enduring benefit to the appellant. On objection before the Ld. dispute resolution panel the opinion of the Ld. assessing officer was confirmed and therefore the assessee is in appeal before us. 164) The Ld. authorized representative submitted that the appellant does not acquired any capital asset in as much as the appellant is simply incurred expenses for the support of up gradation of Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 336 of 484 the software and seized the above expenditure are only for support of application software which does not, and as the production capacity manufacturing activity of the appellant company‘s these expenditure cannot be said to resulting benefit of enduring nature in the capital field. Therefore he submitted that it is not the capital expenditure but the revenue expenditure. He further submitted that the software‘s are becoming very obsolete nowadays. In view of the changing a and needs to be replaced or upgraded by an appellant support its existing system and therefore such expenditure in any case cannot be said to result in any enduring benefit to the appellant to be considered as a capital expenditure. He further relied on the decision of the Hon‘ble Delhi High Court in case of CIT versus Ashai India safety Glass Ltd and Amway India Enterprise to support his contention. He further submitted that the expenditure, which is incurred on obtaining license to use application software, is not a capital expenditure is allowable expenditure in its entirety. He stated that it is so even though the software has been classified as a separate asset under the income tax rules for the purpose of claiming depreciation under section 32 of the income tax act. He relied upon the number of decisions to support its claim and submitted that in view of the above the expenditure incurred by the appellant should be allowed as revenue expenditure. In the and he submitted that coordinate bench in appellant‘s own case in assessment year 2008 – 09, while holding that the expenses incurred on software are allowable revenue deduction held that the expenses incurred for the purchase of servers are capital in nature. He further submitted that there is no purchase of any severed in the present expenditure claimed. 165) The Ld. departmental representative relied upon the order of the lower authorities and submitted that the software has been Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 337 of 484 classified as an capital expenditure in the income tax rules in the schedule of depreciation. Further, he submitted that the depreciation is allowable on that particular asset and thus the expenditure on software cannot be of revenue, nature. He further submitted that there is no difference between the new software purchase and upgrade of the original software purchase as the new software comes into existence on account of up gradation of the existing software and therefore, the Ld. assessing officer is correctly held the same to be capital expenditure and it is not allowable as revenue expenditure. 166) We have heard the rival contentions. In the modern era, technology is changing at a rapid pace, which forces an assessee to upgrade to the latest technology including in the field of software and hardware to be used in relation thereto. It is an admitted fact that computer software is purchased/upgraded by the appellant was related to use of application of software in the accounts and administrative departments, which are not linked to manufacturing activity. The various High Courts including Hon‘ble Delhi High Court in the decisions relied upon by the appellant have held that expenditure incurred on purchase/up gradation of applications software is not capital in nature and is an allowable revenue expenditure. In view of the aforesaid discussion, as stated before us that the above expenditure related to the open tax server for sending fax through SA P and purchase of up gradation package, respectfully following the decision of the coordinate bench in the appellant‘s own case where it is been held that the software are revenue expenditure and whereas the server purchase are capital expenditure. In view of this we direct the Ld. assessing officer to allow the deduction of expenses on account of purchase of the software including their up gradation treating it as revenue expenditure and to allow Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 338 of 484 depreciation on server purchased treating it as capital expenditure. In the result ground No. 36 of the appeal of the assessee is partly allowed. 167) The ground No. 37 of the appeal of the assessee is against disallowance of various expenses incurred on repairs and maintenance to plant and machinery and store said tool consumed on account of non-furnishing of requisite details in the prescribed format amounting to Rs 118.58 crores. During the year appellant has incurred the expenditure under that manufacturing and other expenses which were claimed as revenue deduction such expenses are repairs and maintenance to plant – machinery of Rs. 38 crores and store cess tool consumed of Rs. 80.58 crores totaling in all to Rs. 118.58 crores. These expenses are periodical repairs expenses to the existing plant and machinery of the appellant and further the store sales tools were consumed in relation to the existing plant and machinery without their being in inning any increase in the production capacity. The Ld. assessing officer proposed an end of disallowance at the rate of 50% of the aforesaid total expenditure for the reason that appellant has failed to furnish the requisite information in the prescribed format and that the expenses incurred on repairs and maintenance to plant and machinery were not in the nature of the current repairs buttock immolated repairs. Ld. dispute resolution panel disapproved the finding of the Ld. assessing officer. Regarding the dark disallowances. However, despite this, the Ld. assessing officer made 100 % of the total expenditure incurred by the assessee in the final assessment order which was subsequently rectified wide order dated 07/05/2015 wherein under section 154 of the income tax act no. Assessing officer to Rs. 5 9.29 crores. Therefore aggrieved by the order of the Ld. assessing officer the assessee has filed appeal before us. Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 339 of 484 168) Ld. authorized representative submitted that appellant duly complied with notices issued/queries raised by assessing officer to the best extent possible. It was only in certain cases, that certain column(s) of desired detail(s) in requisite format could not be filled, since the information desired was either unrelated to other items of the row or information to be filled in was not part of the accounts and had to be filled through sifting of each and every supporting voucher /bill / document. However, in such cases, the information was available in other documents/information furnished by the appellant and/or was available with assessing officer though the same may not be in prescribed format and not a single discrepancy has been pointed out by the AO in the details/information furnished by the appellant. Therefore he submitted that, it will be appreciated that information could not be furnished in the prescribed format only on account of genuine difficulty in collating such information in the short span of time. He explained that the aforesaid expenses were incurred on repair and maintenance of existing plant and machinery, which were used for the purpose of business. The aforesaid expenses did not result in acquisition of any new assets or benefit of enduring nature in the capital field or accretion to the profit earning apparatus, to be regarded as capital in nature. The aforesaid expenditure was incurred by the appellant for replacing the old and worn out parts of machinery, which were necessary for keeping the machines in working order. There was no replacement of entire independent plant and machinery and the aforesaid expenses were thus not capital in nature. He stated that since no new asset came into existence by incurring of the said repair expenditure and there was no enhancement in the capacity/ efficiency of the transformers, the expenditure incurred on repairs is allowable as deduction under section Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 340 of 484 31(1) or section 37(1) of the Act as has also been held in following cases: (i) CIT vs Saravana Spinning Mills (P) Ltd.: 293 ITR 201 (SC) (ii) Ramaraju Surgical Cotton Mills: 294 ITR 328 (SC) (iii) CIT v. Sagar Talkies Ltd.: 325 ITR 133 (Kar) (iv) CIT vs Sree Ayyanar Spinning and Weaving Mills Ltd.: 211 Taxmann 534 (SC) (v) CIT vs. Co-operative Sugars Ltd. 235 ITR 343 (Ker.) (vi) CIT vs. Udaipur Distillary Co. Ltd. (No. 3) 268 ITR 451 (Raj.) (vii) B and A Plantations and Industries Ltd. vs. CIT 171 CTR 266 (Gau.) (viii) DCIT v. Modi Rubber: ITA 686/Del/2005 (Del ITAT) (ix) Southern Coalfields Ltd. 85 ITD 608 (Nagpur - ITAT) (x) CIT vs Prabhu Spg. Mills (P) Ltd.: 113 TTJ 372 (ITAT - Chennai) He further submitted that The entire expenses claimed by the appellant were in the nature of ―revenue‖ expenditure and were duly accounted and fully supported by the necessary bills/vouchers. He vehemently stated that there could be no justification to make any ad hoc addition since the books of accounts have been duly audited in accordance with the provisions of the Act and have been accepted as true and correct without any adverse inference being drawn against the appellant. [Refer: Jai Engineering Limited: 113 ITR 389 (Del)].Further he stated that, in the following cases, adhoc disallowance made in absence of any specific mention of any unvouched expenditure liable to be disallowed has been held to be untenable and not called for. (i) Dwarka Prasad Agarwal v. ITO: 52 ITD 239 (Cal)

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 341 of 484 (ii) Mahendra Oil cake Industries Pvt. Ltd. v ACIT: 55 TTJ 711 (Ahd.) (iii) Rattah Mechanical Works Ltd. v ITO: 87 Taxman 288 (Mag)Cd.) (iv) Shriram Pistons and Rings Ltd. v IAC: 39 TTJ 132 (Del.) (v) Roger Enterprises Pvt. Ltd. v. ITA : 52 TTJ 198 (Del.) (vi) Ramji Das Modi v. DCIT: 110 Taxman 107 (JP) (Mag) (vii) ACIT v. Bateli Tea Co. Ltd. [2003] SOT 72 (viii) Continental Seeds & Chemicals Ltd. v. ACIT: (2003) SOT 393 In the end he submitted that the assessing officer has made the disallowance t is submitted that the assessing officer made the disallowance of Rs.59,29,00,000/- by adopting an arbitrary rate of 50% of the total expenditure without bringing on record anything to justify the said basis. Therefore he stated that For the aforesaid cumulative reasons, the disallowance made by the assessing officer is not based on correct appreciation of facts and the position in law discussed above, and therefore calls for being deleted. In the and he further stated that that if the aforesaid expenditure is held to be capital in nature, the assessing officer may be directed to allowed depreciation thereon at appropriate rates. 169) Ld. departmental representative submitted that as the assessee could not furnished the information in the particular format. The Ld. assessing officer could not verify the expenditure and therefore the disallowance has been made. 170) We have heard the rival contentions. It cannot be doubted that repair and maintenance or consumption of stores and tool expenditure needs to be incurred having regard to the size and magnitude of the appellant company. The aforesaid expenses are not being incurred for the first time and are routine

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 342 of 484 expenses incurred regularly in the course of business. It was pointed out by the appellant, which was not disputed by the Ld. DR that the similar expenditure was accepted and allowed in the earlier years as also in the assessment order passed for the succeeding year i.e. assessment year 2011-12 and in the draft order passed for AY 2012-13. The impugned assessment year is a solitary year in which the aforesaid expenditure has been disallowed and that, too, on ad-hoc basis for non-furnishing of details in the prescribed format desired by the assessing officer. It was the case of the appellant that the appellant had furnished all the possible details which could have been gathered and submitted to the best extent possible whereas the case of the assessing officer is that on the basis of details furnished the assessing officer could not ascertain the quantum of expenditure on current repairs and other than current repairs expenditure. We find that there is no necessity to make the aforesaid distinction or the aforesaid distinction will not serve any useful purpose, since even if expenditure is not found to be in nature of current repair under section 31(1) but an ordinary repair, the same would be allowable under section 37(1) of the Act. The reference in this regard could be made to the decision of Supreme Court that in the case of CIT v. Sarvana Spinning Mills Pvt. Ltd: 293 ITR 201 and Ramaraju Surgical Cotton Mills: 294 ITR 328. In that view of the matter unless the case of the assessing officer was that the details/documents to verify the actual nature of expenditure or actual incurrence of an expenditure is not provided by the appellant, disallowance of such magnitude and that, too, on ad- hoc basis cannot be made for non furnishing the details in prescribed format. It is not the case of the assessing officer that the expenses incurred by the appellant were not supported by necessary bills/vouchers nor any unvouched expenditure was Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 343 of 484 pointed out. The appellant is a listed company, whose books of account are subjected to several audits. No adverse remark in maintenance of books of account has even been pointed by the auditors. Further, the Ld. assessing officer also on the verification of the books of accounts. On the other records could not point out any expenditure, which is not supported by the relevant evidences. Therefore, in these circumstances, the action of the Ld. assessing officer in making ad-hoc disallowance was purely unjustified and is thus deleted. In the result ground No. 37 of the appeal of the assessee is allowed. 171) Ground No. 38 of the appeal of the assessee is against the disallowance of the claim of depreciation of Rs. 1.14 crore on account of purchase of office building at Nagpur on the ground that the same is not being put to use. The appellant has acquired and office premises at Nagpur wide agreement to sell dated 07/03/2008 and the sale consideration of those properties were paid till August 2009. The appellants claimed that this property was under the possession of the assessee and therefore it is owned by the assessee, though registered sale deed could not be executed till 14th of June 2010. Based on the above evidence the appellant claimed depreciation on this property which was disallowed by the Ld. assessing officer holding that it was not put to use for the purposes of the business during the relevant previous year and as the assessee has failed to submit details of expenses with respect to electricity, water, etc incurred in respect of the said premises to demonstrate that the said premises were put to use. During the year. 172) The Ld. authorized representative of the assessee submitted that the agreement to sale dated 07/03/2008 was executed and according to that the appellant shall be delivered possession of the property before registration of sale deed. Pursuant to that Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 344 of 484 sale deed the complete payment were made till the August 2009 and the assessee received the possession of the property. Therefore, in that property assessee undertook repairs and maintenance or expenditure in order to bring it into usable state and further incurred expenses of electricity and water etc. Therefore according to him the depreciation sell be allowed to the assessee on the above said property. He submitted that merely the registration has been done later on in favour of the appellant that cannot be the reason for disallowance of depreciation on these assets. His further argument was that when the assessee has incurred unnecessary expenditure in those premises and Ld. assessing officer and Ld. dispute resolution panel themselves have held that these expenditure on capital in nature and therefore now the revenue cannot say that the possession of the property was not available with the assessee during the year. He therefore submitted that the assessee should be entitled to the depreciation as assessee has owned the premises and also used for the purpose of the business during the year and therefore satisfied all the conditions prescribed under section 32 of the income tax act. 173) Ld. departmental representative relied upon the order of the assessing officer and submitted that has no valid registration has been done in favour of the appellant the depreciation is rightly been disallowed by the Ld. assessing officer. 174) We have heard the rival contentions. The issue raised herein has linked to our findings given in ground of appeal No.35 above. We have held that there was no valid basis for the assessing officer to assume that building was not in the possession of the appellant and consequently not put to use until the date of registration of the sale deed. The present issue relating to allowance of depreciation on the said office premises is directly linked to findings given on the aforesaid issue above. Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 345 of 484 Accordingly following our earlier decision, we reverse the action of the assessing officer in disallowing depreciation on Nagpur office building assessee only premises and same were also used by the assessee for the purposes of the business. The ground of appeal No. 38 stands allowed. 175) Ground No. 39 and ground No. 40 of the appeal of the assessee are against the disallowance of claim of depreciation in respect of rainwater harvesting system. For controlling water pollution and to provide safe water to the public who are residing at the industrial area where the appellant‘s factory was located the Central ground water authority (constituted under section 3 (3) of the environment protection act, 1986 through public notice dated 08/10/2009 directed for creation of water harvesting system in their premises. Accordingly assessee incurred expenditure of Rs. 3 4938, 40/– on construction of rainwater harvesting system and also landfill system at Haridwar unit for Rs. 1 737 4697/–. These are the expenditure incurred by the assessee for controlling water pollution and conserving fresh rainwater for the purpose of preventing water pollution and providing pollution free water for consumption within the industrial area. Appellant claimed these expenditure as water pollution control measures and claimed depreciation thereon at the rate of hundred percent. Further, some of these was constructed in later half of the financial year the assessee claimed depreciation on that at 50% of the normal rate of depreciation of the hundred percent amounting to Rs. 1 746920/–. The Ld. assessing officer disallowed the claim of the appellant holding that it does not fall within the rules and therefore allowed depreciation at the rate of 10% only. The Ld. assessing officer also did not except the alternative plea of the appellant that the expenditure incurred on the aforesaid assets were allowable as revenue expenditure as same do not result Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 346 of 484 into acquisition of any new capital asset. Therefore, assessee is in appeal before us. 176) Ld. authorized representative submitted on this issue as under:- a) The requirement for allowance of depreciation under section 32 of the Act are two-fold, namely, (i) the asset must be owned by the appellant; and (ii) the asset must be used for the purpose of the business or profession. b) Under item –III (3) of the table of rates of depreciation in Appendix 1 to the Income-tax Rules, 1962, the depreciation @ 100% is available in respect of equipment falling within the ambit of pollution control. c) The expenditure incurred by the appellant on construction of rainwater harvesting system in Dharuhera Plant was eligible for 100% depreciation since the same fell within the category of water pollution control equipment, contained in clause (ix) of Part III(3) of Appendix-1 to the Rules. The said system included filtration tank and injection well for storage of rainwater, which was developed for the purpose of storage and filtration of water. d) As regards the secured landfill system, the same included collection sump, rainwater collection pond, monitoring bore wells, hide pipeline network, misc. of civil works for extension of Bund level of SFL Facility etc. Same was used for the purpose of handling of industrial waste as a result of manufacturing activities. e) It would be appreciated that purpose behind preventing/controlling water pollution was to provide safe water for the purposes of drinking and use of living beings.

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 347 of 484 Therefore, if the fresh/pollutant free water was made available, through deployment of rainwater harvesting system, the same was nothing but a medium of water pollution control system. f) Without prejudice to the above, in the event depreciation @100% on the aforesaid expenditure incurred on construction of rain water harvesting system and secured land fill system was not allowed in the category of water pollution control equipment, it is submitted that, the same was otherwise allowable revenue expenditure. g) The rainwater harvesting system, it is submitted, did not involve purchase of any scientific equipment, but involved expenditure incurred in digging 300 ft. deep hole/well in the ground and filling the same with stones and installing a pipe of appropriate size going deep into such well. The aforesaid structure was known as re-charge structure, which acted as an aquifer, i.e. such structures could absorb and hold water. The assessee constructed several re-charge structures in the factory premises, which were all connected through pipes. The water stored in such structures was transmitted in the ground water/water body, available to the public at large through the medium of pipes. The water through natural slope / gravitational force got accumulated through the pipes into various tanks from which it was filtered through the overflow process and went further through deep bores into the earth and increased the ground water table. h) Similarly, the secured land fill system, it is submitted, does not involve purchase of any scientific equipment, but involved expenditure incurred in collection pump, rain water collection pond, monitoring bore wells, hide pipe line Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 348 of 484 network, misc. of civil works for extension of Bund level of SFL Facility etc. Same was used for the purpose of handing of industrial waste as a result of manufacturing activities. i) In view of the above, it would be appreciated that the aforesaid rainwater harvesting systems did not involve purchase of any scientific equipment, but involved expenditure on digging of holes in the factory premises and cost of pipe, incurred for the purposes of conservation of water and providing clean/safe drinking water to the public at large. j) Under section 37(1) of the Act, any expenditure, not being capital in nature, incurred wholly and exclusively for the purposes of business, is allowable business deduction. k) The expression ―for the purposes of business‖ used in the aforesaid section is not limited to earning profit alone and if the expenditure incurred satisfies the test of business / commercial expediency, the same is allowable as business deduction under the aforesaid section. l) In the present case, as explained above, the assessee, in order to fulfill its corporate social responsibility and also in view of the public notice issued to provide safe drinking water for the purposes of use by general public/ inhabitants in the area in which the assessee‘s factory is situated, incurred the expenditure on construction of rain water harvesting system, on account of business / commercial expediency. In view of the same, the aforesaid expenditure satisfies the test of having been incurred for the purposes of business.[Refer: Mysore Kirloskar Ltd. vs. CIT: 166 ITR 836 (Kar.); Mahindra and Mahindra vs. CIT

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 349 of 484 261 ITR 501(Bom.); CIT vs. Mahindra & Mahindra: 284 ITR 679; CIT v. India Radiators Ltd.: 236 ITR 719 (Mad.)] In view of the above, it is submitted, that the aforesaid expenditure are in the alternate admissible for deduction as revenue expenditure under section 37(1) of the Act. 177) Ld. departmental representative relied upon the order of the lower authorities and vehemently supported them. 178) We have heard the rival contentions. The purpose behind the construction of rain water harvesting system and secured land fill system is to conserve fresh rain water and provide such water to the community surrounding the factory premises after carrying necessary filtration method and removing impurity there from. The aforesaid expenditure as pointed out by the appellant is also necessitated as per the notice dated 08.10.2009, issued by the Central Ground Water Authority constituted under the Environment Protection Act, 19086. The purpose of aforesaid equipment was thus to control water pollution and provide clear water to the community. In our view the list of items specified in clause (ix) of para III(3) of Appendix I to the Rules falling within the category of water pollution control equipment are not exhaustive. In our view, if any equipment satisfies the test of being a water pollution equipment, the same would be covered within the larger genus of that category to be eligible for depreciation at the prescribed rate there against, notwithstanding specific inclusion of such asset in the specified list. While coming to the aforesaid conclusion, we have also kept in mind the intention of the Legislature behind providing higher rate of depreciation to such equipments viz. to incentivize an assessee to make investment in such equipments and serve the larger public interest. The impugned expenditure was precisely incurred by the appellant

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 350 of 484 to meet the aforesaid objective i.e. to provide clear and safe water to the habitants in the vicinity of the appellant‘s factory in line with the notice issued by the relevant water authority. In view of the above, we hold that the impugned assets were covered within the meaning of Water Pollution Control Equipments prescribed in the Appendix I to the Rules and were therefore, entitled to depreciation at higher rate of 100%. The action of the assessing officer is, therefore, reversed and ground 39 and 40 of appeal are allowed. 179) Ground No. 41 of the appeal of the assessee is against the disallowance of Rs. 20.10 crores on account of depreciation on addition made to plant and machinery and land and building on ground of being details not furnished in the prescribed format as desired by the Ld. assessing officer. During the year the appellant has made an addition to the block of plant and machinery and building on which depreciation at the specified rate was claimed. The appellant has set up plant and machinery of Rs. 1 73.73 crores and land and building of Rs. 2 7.24 crores during the year. The Ld. it assessing officer disallowed 10% of the above addition made to the block of plant and machinery and land and building. According to the Ld. assessing officer there would have been certain preoperative expenses which ought to have been capitalized but not capitalize by the appellant and certain preoperative expenses which would have in claimed as revenue expenditure and not capitalize, there would have been claim of the depreciation at incorrect rates and there is some disallowance on account of excess/incorrect/wrong is inconsistent claim of depreciation with respect to similar items of different units. He further made the dog disallowances under the pretext that there may be claim of depreciation on certain assets, which are not put to use by the appellant during the year. Against this disallowance of Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 351 of 484 depreciation the appellant has preferred this ground of appeal before us. 180) Ld. authorized representative submitted many fold arguments against this disallowance made by the Ld. assessing officer they are as under:- a) In this regard, it is submitted that the appellant duly complied with notices issued/queries raised by assessing officer to the best extent possible. It was only in certain cases, that certain column(s) of desired detail(s) in requisite format could not be filled, since the information desired was either unrelated to other items of the row or information to be filled in was not part of the accounts and had to be filled through sifting of each and every supporting voucher /bill / document. b) However, in such cases, the information was available in other documents/information furnished by the appellant and/or was available with assessing officer though the same may not be in prescribed format and not even a single discrepancy has been pointed out by the AO in the details/information furnished by the appellant. c) In view of the aforesaid, it will be appreciated that information could not be furnished in the prescribed format only on account of genuine difficulty in collating such information in such short span of time, which was not practical, and appellant had no other mala-fide intention. d) That apart, it is reiterated that the information and details of the credit card expenses duly submitted

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 352 of 484 clearly evidenced that the said expenses were incurred wholly and exclusively for the purposes of business of the appellant and were allowable revenue deduction. The expenses incurred through credit card included amounts paid for meeting official telephone bill of the employee, travel expenses, card membership fee etc. e) The assessing officer further failed to appreciate that the accounts of the assessee were duly audited by the chartered accountant and no discrepancy whatsoever were found during the course of such audit. f) In light of above circumstances, bald allegation of AO that expenses might be related to personal purposes of the concerned employee and disallowed 50% of such expenses is erroneous and not sustainable. g) Without prejudice, it is submitted that the assessing officer made the addition of Rs.40,12,968/- by adopting an arbitrary rate of 50% of the total expenses incurred during the year without bringing on record anything to justify the said basis. h) There could be no justification to make any ad hoc addition since the books of accounts have been duly audited in accordance with the provisions of the Act and have been accepted as true and correct without any adverse inference being drawn against the appellant. [Refer: Jai Engineering Limited: 113 ITR 389 (Del)]

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 353 of 484 i) Further, in following cases, adhoc disallowance made in absence of any specific mention of a unvouched expenditure liable to be disallowed have been held to be untenable and not called for. i) Dwarka Prasad Agarwal v. ITO: 52 ITD 239 (Cal) ii) Mahendra Oil cake Industries Pvt. Ltd. v ACIT: 55 TTJ 711 (Ahd.) iii) Rattah Mechanical Works Ltd. v ITO: 87 Taxman 288 (Mag)Cd.) iv) Shriram Pistons and Rings Ltd. v IAC: 39 TTJ 132 (Del.) v) Roger Enterprises Pvt. Ltd. v. ITA : 52 TTJ 198 (Del.) vi) Ramji Das Modi v. DCIT: 110 Taxman 107 (JP) (Mag) vii) ACIT v. Bateli Tea Co. Ltd. [2003] SOT 72 viii) Continental Seeds & Chemicals Ltd. v. ACIT: (2003) SOT 393 For the aforesaid cumulative reasons, the disallowance made by the assessing officer is not based on correct appreciation of facts and the position in law discussed above, and therefore such addition shall be deleted by the Tribunal. 181) The Ld. departmental representative relied upon the order of the lower authorities and submitted that the about disallowance has been properly made by the Ld. assessing officer restricting the depreciation claim of the appellant in view of the several inconsistencies pointed out by the Ld. assessing officer. Therefore this disallowances been correctly made. 182) We have heard the rival contentions. The present issue is similar to the issue raised in ground of appeal No. 37 supra. In our view, the action of the assessing officer for making ad-hoc

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 354 of 484 disallowance on the ground of not providing details in prescribed format, without pointing out any unvouched expenditure or discrepancy in the books of account, which have been audited by the auditors, the expenditure of such magnitude could not have been disallowed on ad-hoc basis. No such disallowance was ever made in the earlier assessment orders nor in the immediately succeeding assessment years i.e. assessment year 2011-12. We were pointed out that no such disallowance was proposed in the draft assessment order for assessment year 2012-13. The disallowance was thus purely made on surmises and conjectures, which is not backed by any strong basis/legal foundation. Accordingly, the disallowance made is deleted and ground No. 41 of appeal is allowed. 183) Ground No. 42 of the appeal of the assessee is against the disallowance of credit card expenses due to non-furnishing of information in prescribed format by the appellant as desired by the Ld. assessing officer. The appellant has incurred expenditure aggregating to Rs. 8 025935 in respect of credit card expenses which was claimed as revenue expenditure. The Ld. assessing officer has disallowed 50% of the total expenses incurred through credit cards since the information was not furnishing the prescribed format and therefore AO was of the view that it could not be ascertained by him whether the expenses were related to the business purpose of the appellant were related to personal purposes of the concerned employee or any other person. According to the version of the appellant. Appellant has submitted the details of such expenses tabulating the employee wise details before the assessing officer. 184) The Ld. authorized representative submitted before us that that the appellant submitted the details according to the format prescribed by the Ld. assessing officer during the course of assessment proceedings, however the certain columns or desire Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 355 of 484 details in requisite format could not be filled as the information was either unrelated or the information was to be obtained through a luminous exercise or such information is available with the assessing officer through other information furnished by the assessee. However it was pointed out by him that despite filing the complete details. The Ld. assessing officer could not point out a single discrepancy in the details furnished by the assessee but the disallowance has been made by the Ld. assessing officer is certain columns only were left blank in view of above facts. He further explained that credit card expenses are duly submitted which shows that the expenses were incurred wholly and expose you for the purpose of the business of the appellant and were rival allowable as revenue reductions these expenses include amounts paid for meeting official telephone bill of the employees, travel expenses, card membership fees, etc and none of the expenses are related to the personal expenses of the employees. He submitted that the appellant company is a public limited company therefore there cannot be any element of the personal expenditure. He further submitted that the in the audit report furnished by the statutory auditor also no personal expenses have been reported. Therefore, it remains just on ad hoc disallowance made by the Ld. assessing officer which is not sustainable and further he stated that the rate adopted by the Ld. assessing officer of 50% of the total expenses is clearly arbitrary and without any basis. He further relied upon the decision of the Hon‘ble Delhi High Court in case of Jaya engineering Ltd, reported at 113 ITR 389 wherein it has been held that there is no justification for making any ad hoc disallowance when the books of accounts of the assessee are audited in accordance with the law and have been accepted as true and correct. He further relied upon the plethora of decision and submitted that disallowance made by Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 356 of 484 the Ld. assessing officer is not based on the correct appreciation of facts and position in law and therefore such addition shall be deleted by the tribunal. 185) Ld. departmental representative relied upon the order of the Ld. assessing officer and submitted that the information supplied by the assessee is in complete with respect to certain columns as desired by the assessing officer. Therefore in absence of such kind of information the disallowances been made at the rate of 50% of the total expenditure and therefore the order of the assessing officer does not deserve any interference. 186) We have heard the rival contentions. The present issue is similar to disallowance made by the assessing officer, which have been dealt in ground of appeal no. 37 and 41 supra. It is an admitted position that expenses of the business are paid through credit card these days. The company reimburses credit card expenses only after establishing nexus of same with the business activities. The books of account of the appellant are audited and no adverse inference in relation to incurrence of such expenses have been pointed out by the auditors. No unvouched expenditure has been pointed out by the assessing officer. This is not the first year of the incurrence of such expenses. No disallowance on the aforesaid account was made in any preceding assessment year or the succeeding assessment years. Accordingly as held by us in the decision taken in ground of appeal no. 37 and 41 supra, the approach followed by the assessing officer to make ad-hoc disallowance on the ground of not furnishing the details in prescribed format, although the entire details to the best extent possible were provided by the appellant, was not correct. Accordingly, we direct the Ld. assessing officer to delete the disallowance of 50% of the total expenses incurred through credit cards of Rs. 8 025935 made on ad hoc basis without indicating any expenditure of personal Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 357 of 484 gesture or non-business purposes in the result ground No. 42 of the appeal of the assessee is allowed. 187) Ground No. 43 of the appeal of the assessee is against not giving credit in respect of tax deduction at source of Rs. 72203977. In ground No. 44 of the appeal of the assessee is against charging of interest under section 234D of the income tax act. Both these grounds of appeal of the assessee were not pressed before us by the Ld. authorized representative. Hence, we dismissed Ground No. 43 and ground No. 44 of the appeal of the assessee. 188) In the result appeal of the assessee in ITA No. 1545/DEL/2015 for assessment year 2010 – 11 is partly allowed. 189) Now we come to the appeal of the revenue in ITA No. 2424/del/2015 wherein 15 grounds of appeal have been raised as under.

190) The 1st ground of the appeal of the revenue is against deletion of disallowance on account of right above certain obsolete store right by the Ld. dispute resolution panel. The brief facts of the issue is that assessee is prefecture of automobile vehicle and during the year certain item of inventory were written off during the year for the reason of changing design of model, phasing out of the model or Component becoming obsolete due to obsolescence and damages, etc. Therefore, consequently, the appellant as return of the store items to the extent of Rs. 1 56.51 Lacs against which assessee has shown the sale of scrap. During the course of assessment proceedings it was submitted that that the spare parts, which are written off during the year, were pertaining to the discontinued models and therefore they had only scrap value in the market and hence they were written off. However, the Ld. assessing officer in draft assessment order disallowed the about deduction for the reason that assessee Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 358 of 484 failed to disclose any corresponding credit against these items is a sale of such store items . Before the Ld. dispute resolution panel on objection filed by the assessee. It upheld the contention of the assessee and directed the AO to delete the aforesaid disallowance made in the draft assessment order on the ground that the items return of would form part of scrap sold during the year in scrap held as closing stock and disallowance therefore would amount to double taxation. Therefore agreed by the direction of the Ld. dispute resolution panel, the revenue is in appeal before us. 191) The Ld. departmental representative submitted that that there cannot be any doubt that there can be in obsolete item in the store items. However, the assessee has not shown the corresponding credit against this items discarded by it is sale of such store item as a scrap. Therefore, the Ld. assessing officer is correct in disallowing the above amount of force return of. He further submitted that without verifying the above correlation between the items return of and the scrap sold during the year, the Ld. dispute resolution panel ad in deleting the about disallowance made by the Ld. assessing officer in draft assessment order. 192) The Ld. authorized representative submitted that it is not in dispute that the aforesaid amount has been written off by the appellant in the books of accounts and pertains to the scrap obsolete items. He submitted that as and when this items are sold a scrap it would form part of scrap sale recorded in the books of the assessee and would be duly offered to tax at that particular time, but not immediately when the store‘s items are written off they can be shown a scale of scrap unless they are sold, they cannot be accounted on the credit side of the profit and loss account and therefore the observation of the Ld. assessing officer that there is no correlation proved by the Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 359 of 484 assessee between the scrap written off in the books of account as obsolete item and scrap sales shown in the profit and loss account. He submitted that that the above issue is squarely covered in favour of the assessee by the decision of the coordinate bench in the appellant‘s own case for the assessment year 2007 – 08 and 2008- 2009 wherein similar ad hoc disallowance on account of obsolete items rejected in the course of manufacturing on the ground that the assessee could not substantiate the actual amount of loss with the scrap register was deleted by the tribunal, holding that keeping in view the size of the company and its operation and reasonableness of the claim and accepted past history deduction claimed on account of write off obsolete items could not be disallowed On ad hoc basis. 193) We have heard the rival contentions. We note that similar issue relating to disallowance of loss of obsolete items was deleted by the Tribunal in the assessee‘s own case for assessment year 2007-08 which was followed in assessment year 2008-09. The relevant observations of the Tribunal for assessment year 2007- 08 are as under: ―10.14.The disallowance in question relates to claim on account of scrap generated. On examination of the order of the assessing officer as well as the DRP, we find that an adverse inference, by the Assessing officer and the DRP, was drawn since the assessee has not maintained a scrap register. The assessee has to substantiate its claim for deduction. At the same time, when the assessee discloses income from sale of this scrap, it is not correct on the part of the assessing officer and DRP to infer on surmises that this sales revenue is not due to sale of scrap but for something else. It has to be appreciated that the assessee produces excisable goods and all the sales are monitored by excise authorities. There is no proof that the Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 360 of 484 assessee has indulged in making unaccounted sales. The scrap is either sold or is on the scrap floor. No other logical inference can be drawn on these undisputed facts without contrary evidence.

10.15. The assessee has realized an amount of Rs. 11.43 crores on sale of scrap as against the aforesaid claim of Rs. 12.53 crores which was on account of scrap. The fact that the assessee could not maintain quantitative details of scrap does not lead to a conclusion that the entire claim should be disallowed. Assessing officer should have, in our opinion, considered the reasonableness of the claim based on the size of the company, its operations or on the basis of similar comparable cases and also by keeping in view the past history of the assessee. When the Assessing officer does not dispute the realization from the sale of scrap, the disallowance of the entire value of scarp is not justified.‖

The Ld. departmental representative could not point out any change in the facts and circumstances of the case of the appellant as compared to the assessment year in which the above issue is decided by the coordinate bench . No other contrary decision was also pointed out therefore, respectfully following the decision of the coordinate bench in the appellant‘s own case for the earlier years. We dismiss ground No. 1 of the appeal of the revenue.

194) The 2nd ground of appeal of the revenue is regarding the prepaid expenses not provided for by the appellant. It was found by the Ld. AO during the assessment proceeding that assessee has

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 361 of 484 claimed certain expenditure which are not pertaining to this year but subsequent year. Therefore he held that the amount of Rs. 1 8752/- pertain to the subsequent year and therefore same are not allowable as expenses. In this year. On objection before the Ld. dispute resolution panel. It directed the Ld. assessing officer to delete the aforesaid disallowance by observing that under the Mercantile system of accounting. An item can be recognized as expense only. The right to incurred such expenses are has accrued to the assessee notwithstanding that such expensive pertain to a transaction of an earlier year. 195) Ld. Departmental representative relied upon the order of the Ld. assessing officer and submitted that the expenses are not pertaining to this year but to subsequent year and therefore there rightly disallowed by the Ld. assessing officer. 196) Ld. authorized representative submitted that assessee is following the Mercantile system of accounting. Therefore, deduction of expenditure is allowable in the year in which the liability thereof accrues notwithstanding the same has not resulted in earning of any income for the particular year. He referred to the plethora of decision on this issue. He submitted that in the present case the liability in relation to various expenses which are of revenue in nature arose during the relevant previous year itself and therefore they are allowable as deduction in this year only. He further submitted that the aforesaid issue is covered by the decision of the tribunal in assessee‘s own case for assessment year 2008 2009 and therefore that decision may be followed. 197) We have heard the rival contentions. We note that similar issue relating to disallowance of pre-paid expenses was deleted by the Tribunal in the assessee‘s own case for assessment year 2008- 09. The relevant observations of the Tribunal for assessment year 2008-09 are as under: Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 362 of 484 ―38. Briefly stated the facts related to this ground are that during the assessment year under consideration, the assessee claimed deduction of expenses in the nature of maintenance charges, renewal of licenses etc. aggregating to Rs.41.63 lacs. The AO disallowed Rs.31.64 lac out of the total expenditure on the ground that the same are related to the succeeding year and no corresponding revenue has been reported by the assessee during the relevant previous year against such claim of expenses. Ld. Counsel of the assessee submitted that the aforesaid expenditure was indirect expenses incurred for the purposes of business and cannot be said to have one to one nexus with the income of the assessee. Ld. counsel of the assessee submitted that the assessee is following consistent method of accounting which was accepted by the revenue in the preceding assessment year, then no adjustment is called for in the present year. The counsel of the assessee also submitted that the aforesaid issue is covered in favour of the assessee by the decision of the Tribunal in assessee's own case in the AY 2007-08 (supra) wherein it has been held that the method of accounting consistently followed by the assessee and accepted by the revenue in the earlier years should not be disturbed in absence of any change in facts, more so when the change does not affect the overall tax liability of the assessee.

Page 363 of 484 the Tribunal in assessee's own case for AY 2007- 08 (supra). 40. Accordingly, in view of above submissions of both the patties, we hold that when the assessee is following a consistent method of accounting which was accepted by the revenue in the earlier years, then the same cannot be disturbed by the revenue by taking a deviated stand without any justified and reasonable cause. Therefore, ground no. 7 to 7.2 of the assessee are allowed by respectfully following the decision of the Tribunal in assessee's own case for A Y 2007-08 (supra) and the AO is directed to delete the addition in the light of observations and findings of the Tribunal in assessee's own case for AY 2007-08.‖

The Ld. departmental representative could not point out any change in the facts and circumstances of the case of the appellant as compared to the assessment year in which the above issue is decided by the coordinate bench. No other contrary decision was also pointed out therefore, respectfully following the decision of the coordinate bench in the appellant‘s own case for the earlier years, We dismiss ground No. 2 of the appeal of the revenue.

198) Ground No. 3 of the appeal of the revenue is against the disallowance of prior period expenses amounting to Rs. 6 980 7983 made by the Ld. assessing officer in the draft assessment order which was directed to be deleted by the Ld. dispute resolution panel based on the observation or assessment year 2007 – 08 and 2008 – 09. The brief fact of the issue is that the assessee being a company of significant amount of volume and Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 364 of 484 locations and therefore expense provided on the basis of estimate, purchase orders etc as the relevant bills vouchers etc of the vendor is are not settled till the close of the assessment year. In many cases the service contacted by the various locations are also not available at the head office. Therefore the assessee provides these expenses on the basis of the fair estimate. The Ld. assessing officer identified such expenditure amounting to Rs. 6 980 7983, which are pertaining to the prior period on the ground that the same pertinent to a year prior to the assessment year and as the time period of 6 months from the end of relevant assessment year was available to the assessee for filing the return of income therefore the assessee could have considered claiming such expenses in the computation of income of the earlier year. When the direction of the Ld. dispute resolution panel revenue has preferred this appeal. 199) The Ld. departmental representative submitted that the expenses pertaining to the current year, or only allowable to the assessee as deduction. Therefore, the expenses accounted for in the books of the assessee in the current year, but which pertain to the earlier year cannot be allowed as they are prior prayed expenses and therefore, the Ld. dispute resolution panel was not correct in directing the Ld. assessing officer to allow those expenses as deduction in the current. 200) Ld. authorized representative submitted that that assessee has incurred advertisement and publicity expenditure for which the bills were received from the vendor subcontractors during the relevant year only and the amount of each such expenses being a material having regard to the nature and size on turnover of the assessee could not be estimated with reasonable certainty for the purpose of making provision thereof in the preceding year. He further submitted that since the amount of all the Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 365 of 484 aforesaid expenses notice retained during the relevant previous year only on receipt of bills from the vendor the liability crystallizing such year and is allowable deduction. During the relevant previous year. He further relied upon the several decisions of various high courts wherein on in identical facts and circumstances such expenditure are allowed as deduction where liability against such expenses cannot be ascertained with reasonable certainty. Further submitted that the aforesaid expenditure which crystallized during the year under consideration, although pertaining to the preceding year would be allowable as business deduction in the current year in which the bills of the vendor , service providers is Approved and admitted by the assessee. He further referred to the similar circumstances pertaining to the sales promotion expenditure, travelling expenditure, annual general meeting expenses, annual maintenance contract under that repairs and maintenance of plant and machinery expenditure, Gen plant expenditure, professional and legal charges, marketing professional charges and sharing debenture handling expenses. In the Andy referred that the issue is squarely covered in the favour of the appellant by the order of the tribunal in appellant‘s own case for earlier years. 201) We have heard the rival contentions. We note that similar issue relating to disallowance of prior-period expenses was deleted by the Tribunal in the assessee‘s own case for assessment year 2008-09. The relevant observations of the Tribunal for assessment year 2008-09 are as under: ―5. On careful consideration of above contention and submissions of both the parties and careful perusal of the record placed before us, inter alia decision in assessee's own case for AY 2007-08 (supra), we

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 366 of 484 observe that the same issue was decided by coordinate bench of this Tribunal in favour of the assessee with following findings and conclusions:- "61.10. The issue herein is year of deductibility. Additional ground of appeal was filed for A. Y. 2006- 07 before the Tribunal and this additional ground was not disposed of Misc. application is pending. The assessee's contention is that the correct amount is Rs. 23.86 lakhs and not Rs. 643.05 lakhs as mentioned by the A.O. Details are given in the paper book we find that the D.R.P. has directed the assessing officer to verify the price. This working given by the assessee is not properly verified by the A.O. The AO should have verified the claim of the assessee. We direct the assessing officer to verify the claim of the assessee. Be it as it may, the genuineness of the expenditure is not in doubt and as it is a question of excess/ short provision of discount in respect of sales effected, we are of the considered opinion that method of accounting followed by the assessee need not to be disturbed as it is being consistently followed over the years and as the revenue has accepted the same. The assessee's claim that the amount of Rs. 23.86 lakhs is not prior period expenses is not seriously disputed by the revenue. As to the balance amount Rs. 90,000 under the festival offer scheme, it was marginal variation that arose due to estimation of liability towards sales discount to be given to dealers. Thus the disallowance cannot be sustained both on the grounds of materiality as well as consistency. Similar issues were dealt by us while

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 367 of 484 disposing of ground nos. 7 and 7.1. Consistent with the view taken therein, we allow this ground of the assessee for statistical purposes.‖ 6. During the argument, both the parties fairly agreed that the assessee claimed deduction for following miscellaneous expenses aggregating to Rs.7,09,31,076 but in the assessment order, the amount of Rs.7,15,91,826 has been incorrectly reported on account of totaling expenses. From page no. 14-16 of DRP order, we observe that the DRP has also pointed out mistake of totaling. At the outset, we observe that the Assessing Officer has nowhere disputed the genuineness of the expenditure claimed by the assessee and if assessee is denied deduction, then it would never get deduction for such expenses. From DRP Order, we also observed that the DRP has followed its decision in respect of immediately preceding year. At the same time, we observe that the mistake of totaling and the working given by the assessee has not been properly verified at the end of Assessing Officer and the same should have been verified by the Assessing Officer. Under above circumstances, we hold that the issue is squarely covered in favour of the assessee by the decision of Hon'ble ITAT 'C' Bench in assessee's own case for AY 2007-08 (supra) and we direct the Assessing Officer to allow the claim of the assessee after proper examination and verification. Accordingly, going consistent with the view taken by this Tribunal in assessee's own case for the immediately preceding year to the year under consideration in this appeal,

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 368 of 484 we hold that ground no. 1 of the revenue being devoid of merits deserves to be dismissed and we dismiss the same.‖

The Ld. departmental representative could not point out any change in the facts and circumstances of the case of the appellant as compared to the assessment year in which the above issue is decided by the coordinate bench. No other contrary decision was also pointed out therefore, respectfully following the decision of the coordinate bench in the appellant‘s own case for the earlier years, We dismiss ground No. 3 of the appeal of the revenue

202) Grounds 4 of the appeal of revenue is that software expenses disallowed as capital expenditure of Rs. 5 0 1.77 lakhs by the Ld. assessing officer have been directed by the Ld. dispute resolution panel for deletion. The brief facts of the case is that during the relevant assessment year the assessee incurred expenditure aggregating to Rs. 8.206 crores on account of software up gradation and maintenance in respect of the various softwares. Further as sum of Rs. 7 426 3619 towards obtaining license right to use application software was also upgraded by the assessee. The Ld. and assessing officer in the draft assessment order has held that since the expenses resulting acquisition of capital asset the same constituted capital expenditure and therefore not allowable as revenue expenditure. On objection by the assessee before the Ld. dispute resolution panel it directed the Ld. assessing officer to delete the disallowance made on the aforesaid ground following the order of coordinate bench for assessment year 2007 – 08 in appellant‘s own case.

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 369 of 484 203) The Ld. departmental representative submitted that the assessee has incurred expenditure on account of software which is a capital expenditure as the assessee is earning and benefit of enduring nature and therefore same cannot be allowed as revenue expenditure. 204) The Ld. authorized representative submitted that the expenses are been made with respect to the license to use application software for day-to-day use in the business of the assessee and assessee has not acquired any capital asset as such. He further submitted that these are the licenses, in which required up gradation periodically therefore, these expenses cannot result into the benefit of enduring nature as it becomes obsolete very fast. He further placed reliance on the plethora of decision of the jurisdictional High Court as well as other high courts. He further submitted that merely because the software has been listed in the depreciation schedule in the income tax rules. The license of a software cannot become a capital expenditure. He further submitted that in the case of the appellant itself. The coordinate bench is allowed as deduction in earlier years holding such expenditure as revenue in nature. 205) We have heard the rival contentions. We note that similar issue relating to disallowance of software expenses was deleted by the Tribunal in the assessee‘s own case for assessment year 2008- 09. The relevant observations of the Tribunal for assessment year 2008-09 are as under: ―59. On careful consideration of above submissions and contentions of both the parties and on careful perusal of the decision of Hon‘ble High Court of Delhi in the case of CIT vs Asahi India Safety Glass Ltd. (supra) and CIT vs Amway India Enterprises (supra), we clearly observe that the expenditure on purchase of software is revenue expenditure which is allowable u/s 37 of the Act.‖ Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 370 of 484 The Ld. departmental representative could not point out any change in the facts and circumstances of the case of the appellant as compared to the assessment year in which the above issue is decided by the coordinate bench. No other contrary decision was also pointed out therefore, respectfully following the decision of the coordinate bench in the appellant‘s own case for the earlier years, We dismiss ground No. 4 of the appeal of the revenue

206) Ground No. 5 of the appeal of the revenue is against the wrong classification of certain assets under the head computers and therefore according to the learned assessing officer the assessee‘s claim of depreciation at the rate of 60% on those assets which is allowable as the normal rate applicable to the plant and machinery. During the year assessee has purchased certain assets which the computer peripherals amounting to RS. 12215308/- . The appellant claimed depreciation on these items at the rate of 60%. However, the Ld. and assessing officer allowed and depreciation on such items at normal rate applicable to plant and machinery and disallowed the excess claim of depreciation amounting to Rs. 3 272835/–. On objection before the Ld. dispute resolution panel, the dispute resolution panel on the basis of the decision of the Hon‘ble jurisdictional High Court in the case of BSES Rajdhani Ltd held that the aforesaid assets on which higher rate of depreciation, has been claimed was essentially and inextricably linked to the computer system and were primarily utilised for enhancing the functionality of the computer system as a whole and therefore they are eligible for deduction at the rate of 60%. 207) The Ld. departmental representative relied upon the order of the Ld. assessing officer.

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 371 of 484 208) The Ld. authorized representative submitted that the issue is now squarely covered in favour of the assessee because of the decision of the restriction High Court on identical issue and which is been followed by the Ld. dispute resolution panel. Further, in his written submission. He submitted that this issue is already been decided by the coordinate bench in the assessee‘s own case for assessment year 2008 2009.

209) We have heard the rival contentions. We note that similar issue relating to disallowance of prior-period expenses was deleted by the Tribunal in the assessee‘s own case for assessment year 2008-09. The relevant observations of the Tribunal for assessment year 2008-09 are as under: ―175. It is a well-accepted legal proposition that the ratio of decisions of Hon‘ble High Court are binding on the lower courts and the Tribunal until and unless they are set aside or modified by the higher forum i.e. Hon'ble Supreme Court of India. The issue of depreciation on computer peripherals is being contested by the department before the Hon'ble apex court and the case is pending. At the same time, we also take cognizance of decision of Hon'ble Jurisdictional High Court of Delhi in the case of Commissioner of Income Tax vs. BSES Rajdhani Powers Ltd. (supra), wherein it has been held that the depreciation on computer peripherals is allowable @60%. In this situation, the contention of the revenue is not acceptable that certain components such as UPS and access ports are capable of use on stand-alone basis, independent of computer. Therefore, these are eligible for depreciation at the rate applicable to plant and machinery. Accordingly, ground no. 46 of the assessee is allowed by respectfully following the decision of Hon'ble Jurisdictional High Court of Delhi in the case of Commissioner of Income Tax vs. BSES Rajdhani Powers Ltd. (supra).‖ Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 372 of 484 210) The Ld. departmental representative could not point out any change in the facts and circumstances of the case of the appellant as compared to the assessment year in which the above issue is decided by the coordinate bench. No other contrary decision was also pointed out therefore, respectfully following the decision of the coordinate bench in the appellant‘s own case for the earlier years; we dismiss ground No. 5 of the appeal of the revenue

211) The ground No. 6 of the appeal of the revenue is against the direction of the Ld. dispute resolution panel holding that they advances to hero Honda finlease Ltd in the nature of business transactions, which would fall within the ambit of sub clause (ii) to subsection 2 (22) (e) of the income tax act and would thus not be taxable as deemed dividend in the hands of the assessee. Hero Honda Finlease Ltd is related company in which the assessee holds 30% of the share capital, which is engaged primarily in the business of the financing of the vehicles. This company access to the dealers of the assessee facility of financing vehicle purchased by such dealer from the assessee company and the dealers on purchase of vehicles from the assessee against the bill of the purchase discounted from this company and remit payment to the assessee. The dealers are required to make payment of the aforesaid discounted bills to that company on maturity thereof. Secondly, when payments by the dealers to that particular company are due the dealers due to convenience of facility of collection Centre‘s of the assessee available all over India make payment into the assessee‘s bank account foreign on behalf of that company which in turn remitted by the assessee to that particular company within to 2- 3 days. The Ld. and assessing officer was of the view that the

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 373 of 484 amount received by the assessee from the dealers as a loan and advances given by that particular company to the assessee and consequently deemed as the dividend income under the provisions of section 2(22) (e) of the act. Aggrieved by the order of the Ld. dispute resolution panel the revenue is in appeal before us wherein the Ld. dispute resolution panel is directed the Ld. assessing officer to not to consider the above amount as deemed dividend as per the income tax act. 212) Ld. departmental representative relied upon the orders of the lower authorities and submitted that the provisions of deemed dividend applicable in the present case. 213) The Ld. authorized representative submitted that the assessee is a large size benefit sharing company having a gross turnover of Rs. 16,000 crores and with the dealer network across the country. He submitted that the financing company is engaged in the financing of the vehicle purchased by the dealers from the assessee does not have such huge infrastructure including the collection Centre at several places across the country like that maintained by the assessee company. In view of the above, the dealers of the assessee were also the customers of that finance company make payment of amounts due to that finance company to the assessee for onward remittance to the finance company. He therefore submitted that the about transaction is carried out only on account of convenience of facility to the dealers. Thus, there was no loan or advance is given by the finance company to the assessee. He further submitted that that assessee also does not enjoy the loan and advances given by the company to be taxed as deemed dividend in the hands of such recipient as a shareholder, because the sum is immediately transferred and the sums are not available or actually utilised by the assessee in its business. He further relied on the several other decisions wherein it has been held Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 374 of 484 that in case of business transaction. The amount cannot be held to be deemed dividend. He further submitted that the in the assessee‘s own case for assessment year 2007-08. The issue has been decided in favour of the appellant. 214) We have heard the rival contentions. We note that similar issue relating to addition of deemed dividend was deleted by the Tribunal in the assessee‘s own case for assessment year 2007- 08 which was followed in assessment year 2008-09. The relevant observations of the Tribunal for assessment year 2007- 08 are as under: 16.27.Section 2(22)(e), is a deeming section and it is well settled that it should be strictly interpreted. In the present case, the intention of the parties did not reflect that it was an advance or loan so as to attract section 2(22)(e). The assessee in this case was holding the money received from dealers as custodian of HHFL. There is no privity of contract between the assessee and HHFL. There is no positive act of granting loan or advance given by HHFL to the assessee. There is neither a stipulation for payment of interest or period of repayment. Further, the assessee has not used the funds for its own purposes, as admittedly the assessee is a cash rich company, not requiring loans. This fact is not disputed by the Revenue. The assessee was used as channel for remittance of money by the dealers to HHFL for the purpose of convenience and from assessee‘s a standpoint this is business expediency. We are unable to appreciate the conclusions drawn by the assessing officer that this is a deemed loan. In our view, by no stretch of imagination it can be said that there was any amount of advance or loan given by HHFL to the assessee.

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 375 of 484

16.28.Even assuming that the transaction is in the nature of loan, we have to agree with the arguments of the Ld. AR of the assessee that the transaction cannot be deemed as dividend in terms of exemption provided in clause (ii) of section 2(22)(e) of the Act, since the loan would be considered as given by HHFL, which is engaged in the business of money lending, in the ordinary course of its business. Therefore, the amount cannot be deemed as dividend in the hands of the assessee. The arguments of the Ld. DR that since no interest was charged/ chargeable thereon from the assessee, the aforesaid loan cannot be said to be given in the ordinary course of business of HHFL is taken to its logical conclusion, supporting our view that this is not a loan or advance.

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

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 376 of 484 215) Ground No. 7 of the appeal of the revenue is against the direction of the Ld. dispute resolution panel to delete the proposed disallowance on the ground that the payment was in the nature of reimbursement of expenses which did not attract provision of the tax deduction at source and hence, no disallowance can be made the above payment relates to the reimbursement of free service coupon to dealers for repair of vehicles. The assessee issues free service coupons to customers for service/repair of vehicles along with the vehicles sold. Free service is carried out by dealers for which reimbursement is made by the assessee to dealers on presentation of free service coupons handed over by the customers to dealers. The ld. AO held that the dealers rendered technical service of repairing the vehicle to assessee and, therefore, the assessee was liable to deduct tax there from under section 194J of the Act. Accordingly, the AO proposed disallowance of Rs. 91.49 crores, under section 40(a)(ia) of the Act. The ld DRP, while accepting the contention of the assessee, directed the AO to delete the proposed disallowance on the ground that the payment was in the nature of reimbursement of expenses, which did not attract provisions of TDS and hence, no disallowance under section 40(a)(ia) is called for. The ld DRP further held that assessee had not received any technical/ professional service to warrant the applicability of section 194J of the Act.

216) Ld. departmental representative relied upon the order of the Ld. assessing officer.

217) Ld. authorized representative submitted that on free service coupons no tax is required to be deducted and is arguments were as under:

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 377 of 484 A) The agreement entered into between the assessee and dealers is on principal-to-principal basis; in other words, the dealers do not act as agent of assessee.

b) The dealers purchase products from the company on principal to principal basis, ownership for which passes on to the dealers and the same is subsequently sold by the dealers at profit in the market.

c) It has been specifically provided that the dealers shall not have any right or authority to, and shall not incur any debt or liabilities or transact any business whatsoever in the name of or for and on behalf of the company nor give any warranty nor make any representation, on behalf of the company and in no way describe or represent themselves as the agent of the company.

d) It is the obligation of the dealer to handle the business of dealership at its own expense as also to efficiently and promptly service the vehicles of the customers.

e) The products sold by the company to the dealers and further sale by the dealers to the customers are with free service coupons, i.e., the sale price of the vehicles embeds therein free service obligation.

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 378 of 484

f) On sale of vehicle by the dealer to the customer, it is the obligation of the dealer to service products sold to the customer, on customer bringing the vehicle to the dealer for free service. The payment in lieu of service provided by the dealers is made by the customers in the form of free service coupons received at the time of purchase of vehicles. The company honors such free service coupons when the same are presented by the dealers to the company, in terms of the reciprocal obligation of the company towards the dealers, incurred by the company at the time of sale of products to the dealers.

g) The liability to deduct tax, if any, in law is on the service recipient viz., the customer and cannot be shifted on to the company merely because payment is made by the customer not in cash but by way of prepaid coupon, the liability where under is discharged by the company.

h) The aforesaid transaction can be equated with transaction entered through a credit card where the physical payment of cash to the vendor is paid by the credit card issuing company to the vendor for and on behalf of the customer/service recipient, who in law may be liable to deduct tax at source from amount payable to the vendor and not the credit card issuing company making the actual payment,

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 379 of 484 which in the present case can be equated with the assessee company.

i) In view of the above, there is no failure on the part of the assessee in not deducting tax at source from the reimbursement of expenses to the dealers on account of free service and therefore no portion of the impugned expenditure can be disallowed under section 40(a)(ia) of the Act.

j) That apart and without prejudice to the above, even otherwise the assessee cannot be said to have defaulted in not deducting tax at source under section 194J, since the repair/maintenance services provided by the dealer to the customers was not in the nature of ―technical service‖, as defined in section 9(1)(vii) read with section 194J of the Act.

k) There was no element of managerial or technical services involved in repair services rendered by the dealers to the customers when such customers bring vehicles to the dealers, as there is no interaction between the persons repairing the vehicle and the assessee/customer, involving any rendering of advice, consultancy, technical knowledge, etc. by the former to the latter, so as to constitute payment made by the assessee to the dealers to fall within the meaning of fees for technical services as defined in section 9(1)(vii) of the Act. Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 380 of 484

l) Reliance, in this regard, is placed on the following decisions: - Kandla Port Trust v. DCIT: ITA No. 771/Rjt./2010 (Rajkot)(ITAT) Addl. DIT v. BHEL-GE-Gas Turbine Servicing - (P)Ltd.: ITA No.976 to 981 /Hyd/2011 (Hyd.)(ITAT)

m) Without Prejudice to the above, as discussed in detail in assessee‘s appeal, The aforesaid legal position has been set right by the Finance Act, 2012 (passed on 28.5.2012) whereby, section 40(a)(ia) has been amended to provide that the assessee shall be deemed to have deducted and deposited tax, on the amount on which tax was deductible but was, in fact, not deducted, on the date of furnishing of return of income by the resident payee, if the resident payee has included the said amount in its taxable income and has furnished certificate from a Chartered Accountant in the prescribed form, to this effect.

n) It is submitted, that considering the legislative intent, the provisions of section 40(a)(ia) of the Act needs to be liberally construed and no disallowance could be made under that section, where tax has been paid by the recipients.

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 381 of 484 o) Without prejudice, as discussed in detail in assessee‘s appeal, the assessee was under the bonafide belief that no tax was required to be deducted there from and accordingly, having regard to the decision of CIT v. Kotak Securities Ltd.(Supra), no disallowance is warranted under section 40(a)(ia) of the Act.

p) Further, without prejudice, it is submitted, that since the payees have also paid tax on the income received/ receivable from the applicant, no disallowance could be made under section 40(a)(ia) of the Act for alleged default in deduction of tax at source by the appellant. The assessee relies upon submissions in assessee‘s appeal that amendment by way insertion of second proviso to section 40(a)(i), being clarificatory in nature, has retrospective application and, therefore, where payees have paid taxes no disallowance could even otherwise be made under section 40(a)(ia) of the Act.

q) Further, without prejudice, disallowance under section 40(a)(ia) can be made only qua liabilities, which are not paid and are outstanding at the end of the year. (Refer: Vector Shipping Services P. Ltd: 357 ITR 642 (All.) [SLP filed by revenue has been dismissed vide CC No(s). 8068/2014 dated 02.07.2014] and Merilyn Shipping and Transport v. ACIT: 146 TTJ 1 (Vishak.)(SB)]

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 382 of 484 r) The aforesaid issue is squarely covered in favour of the assessee by the decision of the Delhi bench of the Tribunal in the assessee‘s own case for the assessment years 2007-08 and 2008-09, wherein the Tribunal deleted the disallowance made under section 40(a)(ia) on the ground that – (i) repair services do not fall within the meaning of professional services defined under section 194J of the Act and (ii) no service was, in any case, availed by the appellant from dealers; service, if any, was availed by customers from the dealers, necessitating obligation on the appellant to deduct tax at source. 218) We have heard the rival contentions. We note that similar issue relating to disallowance u/s 40(a)(ia) for non-deduction of tax from reimbursement of free service coupons, was deleted by the Tribunal in the assessee‘s own case for assessment year 2007- 08 which was followed in assessment year 2008-09. The relevant observations of the Tribunal for assessment year 2007- 08 are as under:

―29.41.In the case on hand, the obligation incurred by the assessee at the time of sale to pay the cost of free services and is not payment made in consideration for the rendering of any managerial, technical or consultancy services as defined for the purpose of S.194J. Routine repairs which includes supply of spares does not attract Sec. 9(1)(vii) of the Act and hence no TDS need be done u/s 194J. As sec. 194J does not apply, disallowance u/s 40(a)(ia) on the ground that no deduction of tax at source is made u/s 194J is bad in law and has to be deleted.

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 383 of 484

29.42.We also find force in the argument of the assessee that the services in this case are availed by the ultimate customer who has paid the consideration by way of sale price to dealer by a separate transaction of purchase of two-wheeler. Service is neither availed by the assessee nor is the payment made by the assessee in consideration of availing a service for itself. As already stated, even f it taken as a service availed by the assessee, sec. 194J is not attracted as this is not a technical service.

29.43.Revenue has placed reliance in Circular No. 8/2009 dated 24-11-2009. In this circular it was clarified that payments made by TPA on behalf of insurance company to Hospitals are liable for deduction of tax at source. The view in this case is that the service is a professional service in the field of medical service. Hence Sec. 194J was made applicable. The same does not apply here. Even otherwise, this proposition as a matter of fact supports of the case of the assessee. In the case of the assessee, the dealer is playing a role similar to that of the TPA in as much it is making payment to the person doing the repair job. This payment made for service rendered is only being made by the dealer. Applying the proposition laid out in the Board Circular, technically it is the dealer who is liable to deduct tax at source on payments made to the service provided for doing the repair jobs but not the assessee. The subsequent reimbursement made by the assessee to the dealer cannot be covered under the provisions of sec. 194J of the Act. Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 384 of 484

29.45. On this factual matrix, and as Sec.194J is not attracted in this case, we uphold the contentions of the assessee and allow this ground of appeal.‖

The Ld. departmental representative could not point out any change in the facts and circumstances of the case of the appellant as compared to the assessment year in which the above issue is decided by the coordinate bench. No other contrary decision was also pointed out therefore, respectfully following the decision of the coordinate bench in the appellant‘s own case for the earlier years, We dismiss ground No.7 of the appeal of the revenue

219) Ground rate of the appeal goes with respect to be proposed disallowance of Rs. 3 0800/– of legal and professional expenses for non-deduction of the tax. During the year the assessee is incurred legal and professional expenses amounting to Rs. 3 0800/– paid to Mr. VK Agrawal. The Ld. and assessing officer disallowed the aforesaid expenditure for the alleged failure of the assessee to deduct tax at source there from under the provisions of section 194J of the income tax act. The contention of the assessee was that it is for the purpose of the reimbursement of expenses and it is not for the purpose of obtaining any legal advice and therefore there was no tax deduction required to be made by the appellant. The Ld. assessing officer accepting the argument of the assessee however, said that tax is required to be deducted under the provisions of section 194J of the income tax act and therefore disallowed the above sum. The Ld. dispute resolution panel the accepted the contention of the assessee and directed the assessing officer to delete the proposed disallowance on the Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 385 of 484 ground that the payment was in the nature of reimbursement of expenses which would not attract the provisions of the tax deduction at source. Revenue aggrieved with the order of the Ld. dispute resolution panel has preferred appeal before us. 220) Ld. departmental representative reiterated same arguments as advanced by the Ld. assessing officer in assessment order and supported the order of the Ld. assessing officer. 221) Ld. authorized representative submitted that that the above sum is representing the actual convince expenses incurred by the above professional on cost-to-cost basis and vouchers and details whereof are already submitted before the Ld. assessing officer and in the paper book. He submitted that the reimbursement of expenses does not constitute income in the hands of the recipient and therefore the assessee was not liable to deduct tax at source there from. He placed reliance upon the plethora of decision including the decision of coordinate bench in appellant‘s own case for the earlier year wherein it has been held that the disallowance of expenditure on account of reimbursement of the out-of-pocket expenses incurred by the professional benders are not hit by the provisions of the non- deduction of tax at source because there in the nature of the reimbursement. 222) We have heard the rival contentions. We note that similar issue relating to disallowance relating to re-imbursement of professional expenses was deleted by the Tribunal in the assessee‘s own case for assessment year 2007-08 which was followed in assessment year 2008-09. The relevant observations of the Tribunal for assessment year 2007-08 are as under:

―35.8. It is the case of the assessee that it had reimbursed the expenses incurred by various

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 386 of 484 consultants and vendors on travelling and out of pocket expenses. It is also claimed that out of an amount of Rs. 10.68 lacs expenses to the extent of Rs. 6.01 lacs were made after verifying the supporting vouchers for claims raised by the vendors. Balance amount of Rs. 4.66 lacs were based on self certification. In our view such reimbursement of expenditure has no element of income embodied in it. Thus, we apply the following decisions wherein it is held that payer is not obliged to deduct tax at source from reimbursement of expenses:

- United Hotels Ltd. Vs. ITO 93 TTJ 822;

- Karnavati Co-op. Bank Ltd. Vs. DCIT 134 TTJ 486 (Ahd.).

35.9. Respectfully following the same, the ground is allowed in favour of the assessee.‖

The Ld. departmental representative could not point out any change in the facts and circumstances of the case of the appellant as compared to the assessment year in which the above issue is decided by the coordinate bench. No other contrary decision was also pointed out therefore, respectfully following the decision of the coordinate bench in the appellant‘s own case for the earlier years, We dismiss ground No.8 of the appeal of the revenue

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 387 of 484

223) Grounds 9 of the appeal of the revenue is against the direction of the Ld. dispute resolution panel to delete the proposed disallowance on the basis of the order of the ITAT passed in the assessee‘s own case for earlier years with respect to the disallowance of expenditure of reimbursement of foreign travelling expenses paid to directors and employees of the company. The brief facts of the expenses is that during course of discharge of official duties, the employees/directors of the company are required to travel abroad and incur incidental expenses in foreign currency like local conveyance, boarding and lodging expenses, telephone expenses etc. it was claimed that The assessee had introduced a policy fixing per diem allowance payable to employees, depending upon the grade/category of the employees and the place/country of travel. The employees are not entitled to any extra allowance in the event actual expenditure incurred by the employee is in excess of such per diem allowance. The aforesaid rates of per diem allowance were not applicable to Managing Director/Directors, considering their status and business exigencies requiring their overseas travel and incurrence of expenses in foreign currency. For payment of per diem allowance, as per policy, the assessee does not require the expenses to be necessarily supported / backed by bills considering the practical difficulties/impossibilities in producing invoices for petty expenses like local conveyance, telephone bills, etc. The employees are only required to submit details of expenditure incurred in specified form, on basis of which travel bill is settled. The Ld. AO disallowed the aforesaid expenditure, aggregating to Rs.190.86 lacs, on the ground that the aforesaid reimbursements were not backed by bills/invoices

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 388 of 484 of actual expenditure incurred by the employees, which is necessary in law before allowing deduction of foreign travel expenditure. On objection before Ld. DRP . It allowed the claim of the assessee and directed the AO to delete the proposed disallowance on the basis of the order of ITAT passed in the assessee‘s own case for AY 2007-08 and 2008-09. Therefore, revenue is aggrieved by the order of the Ld. dispute resolution panel and therefore in appeal before us. 224) The Ld. departmental representative relied upon the orders of the Ld. assessing officer and vehemently supported is order stating that protection to be deducted on the reimbursement of foreign travel expenses paid to the directors, and employees and therefore the disallowance is rightly made by the Ld. assessing officer. 225) Ld. authorized representative submitted that no tax is required on such summons, it is a reimbursement of expenditure and his argument was that Per diem allowance payable by the assessee is reasonable, having regard to the cost of lodging, boarding, etc. in decent hotels in foreign countries, and the assessee has no reason to doubt the incurrence of such amount by the employees in actuality during the course of foreign travel. The assessee does not insist on production of bills against expenses declared by the employees, considering the practical difficulties/impossibilities in submitting invoices/bills for petty expenses like conveyance, telephone, meals, etc. In view of the above, it is submitted, that the practice followed by the assessee to reimburse expenses on the declarations of the employees was in order and the expenditure cannot be disallowed simply on the ground that declarations of the employees were not backed by invoice/bills of expenses incurred. Reliance, in this regard, is placed on the decision of Supreme Court in the case of CIT v. Larsen & Toubro: 313 ITR 1, wherein it was held that Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 389 of 484 declaration submitted by the employees, which may not be backed with supporting evidences, is sufficient for the assessee to make re-imbursement of expenses, like leave travel concession, to employees. The allegation of Ld. Assessing officer that per diem allowance for travel expenses was not in the nature of reimbursement of expense and in terms of section 10(14) of the Act travel allowance is exempt only to extent actually incurred, it is respectfully submitted, that the declaration filed by the employees corroborates that the allowance has been actually incurred for the purpose it was given and the aforesaid decision also fully supports the assessee‘s case. Further The aforesaid issue is squarely covered in favour of the assessee by the decision of Delhi bench of tribunal in the assessee‘s own case for the AY 2007-08 and 2008-09, wherein the Tribunal held that disallowance cannot be made merely on the basis that vouchers were not produced by the employees. 226) We have heard the rival contentions. We note that similar issue relating to disallowance relating to re-imbursement of foreign travelling expenses to directors/employees was deleted by the Tribunal in the assessee‘s own case for assessment year 2007- 08 which was followed in assessment year 2008-09. The relevant observations of the Tribunal for assessment year 2007- 08 are as under: ―51.15.The assessing officer in this case has not doubted the fact that employees/ directors of the company travelled abroad and the fact that they have incurred incidental expenses in foreign currency. The reason for disallowance is that employees have not furnished to the assessee evidence in support of the fact that they have incurred conveyance, boarding and

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 390 of 484 lodging expenses etc. When reasonable amount of daily allowance is fixed as per the rules of the company and when these D.A. rules are followed by the assessee, in our view, the incurring of expenditure by the employees is not to be doubted. Even in cases where officers of the government of India travel abroad, daily allowance is given and vouchers for such expenditure are not insisted because of practical difficulties in submitting bills/ vouchers of petty expenses. In such circumstances, what is to be examined by the assessing officer is the reasonableness of the expenses incurred as compared to the general rates of expenses and allow the same. The assessee submits that the fixed per diem allowance payable to employees depending on the grade is reasonable. When such rates are reasonable the question of disallowance does not arise unless the revenue demonstrates that the rates are excessive. In this case it is not that the expenses are not incurred for the stated purpose nor is it that the rates are unreasonable. The disallowance in question in our view on the sole ground that vouchers are not produced by the employees cannot be sustained. In the result this ground of the assessee is allowed.‖ The Ld. departmental representative could not point out any change in the facts and circumstances of the case of the appellant as compared to the assessment year in which the above issue is decided by the coordinate bench. No other contrary decision was also pointed out therefore, respectfully following the decision of the coordinate bench in the appellant‘s

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 391 of 484 own case for the earlier years, We dismiss ground No. 9 of the appeal of the revenue

227) Ground No. 10 of the appeal of the revenue is against the direction of the Ld. dispute resolution panel deleting the disallowance proposed by the Ld. assessing officer proportionate amount of premium paid for land taken on lease for 99 years by the appellant at its Haridwar unit. The brief fact of the claim of the assessee was that assessee-company was, vide allotment letter dated 8.8.2006 allotted land at Haridwar by State Industrial Development Corporation of Uttaranchal Ltd. (SIDCUL) on lease for a period of 99 years. The aforesaid lease was granted on payment of premium of Rs. 48,45,87,780. In accordance with the aforesaid letter, the land was allotted to the assessee for which lease deed was executed subsequently on 17th February 2014 for remaining lease period of 90 years at that time. As per the lease agreement, in addition to the amount of premium paid, the lessee was required to pay annual rent at Rs.5 per sq.m. In the return of income, the assessee apportioned the amount of premium paid on taking land on lease, over the period of lease, and claimed deduction for the proportionate amount of Rs.48,94,826 as revenue expenditure. The Ld. AO disallowed aforesaid expenditure claimed by assessee on the ground that the aforesaid premium was paid to acquire right and interest in the land, which has resulted in (a) acquisition of capital asset in the form of land or (b) benefit of enduring nature in the capital field since the land was acquired to construct manufacturing plant thereon. The AO also alleged that the aforesaid payment of lease enhanced the profit earning apparatus of the assessee whose benefit was of enduring nature and therefore was capital in nature. On objection before Ld. DRP, the Ld. DRP , after taking the assessee‘s submissions on Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 392 of 484 record and considering the case-laws on the issue, directed the AO to delete the proposed disallowance. 228) Ld. departmental representative submitted that the disallowances made by the Ld. assessing officer based on the reasoning that the aforesaid premium was paid to acquire the right and interest in the land which is resulted into acquisition of capital asset in the form of land and further the benefit of enduring nature in the capital field is obtained by the appellant and therefore the expenditure incurred by the assessee was in capital in nature and therefore rightly disallowed by the Ld. assessing officer further more is recess it is not any intangible asset which is eligible for depreciation according to the income tax act. 229) The Ld. authorized representative submitted that the assessee has not acquired any capital asset and he also raised the alternative ground that this if the sale premium would fall within the meaning of the capital expenditure then the assessee should be eligible for depreciation on this amount and it is a business or commercial right available to the assessee which is eligible for the purpose of depreciation in terms of the provisions of section 32 of the income tax act. His arguments are summarized as under:-

1) No acquisition of capital asset a) On perusal of terms of lease agreement, annexed at Pg. 2948-2994 of PB Vol. 7, it would be appreciated that the assessee did not acquire the capital asset in the form of land from the State Government, but only obtained a limited right to use land on lease over the tenure of lease

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 393 of 484 period. It would be further appreciated that the land was granted on lease for the purpose of construction of factory building thereon and carry on the business of manufacturing two-wheelers. b) It was also stipulated that if the assessee did not erect factory building and did not commence business operations within the stipulated time, the lessor shall be at liberty to terminate the lease and take over the possession of land. c) As per clause 7 of the lease agreement, the assessee was not vested with right to transfer, assign or otherwise part with physical possession of the land, without the written consent of the lessor. d) Further, as per clause 10.2 of the agreement, on expiry of the period of lease, the lease was not automatically renewable and in case the period of lease was not extended by the parties at mutually acceptable terms and conditions, the lessee was liable to deliver back physical possession of the land to the lessor. e) It will thus be appreciated that the said payment did not result in acquisition of proprietary / absolute right in the land and were only for obtaining restricted/limited right to use land for construction of factory building thereon and carry on the business of manufacture and sale of two- wheeler f) In this regard, it is respectfully submitted that the impugned payment of premium in lumpsum at the time of entering into the lease agreement, resulted in payment of annual rent at a depressed and nominal value of Rs.5 per

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 394 of 484 sq. mtr. In view of the same, the premium paid was in lieu of annual payment of fair market value of rent:  CIT v. Madras Auto Service (P.) Ltd.: 233 ITR 0468 (SC)  DCIT v. Sun Pharmaceuticals Ind. Ltd.: 329 ITR 479 (Guj)- Revenue‘s SLP Dismissed in SLP No.33784/09 vide order dated 4.12.2009, reported at 325 ITR (st) 6.  CIT v. H. M.T. Ltd. (No. 2): 203 ITR 820 (Kar)  CIT v. UCAL Fuel Systems Ltd.: 296 ITR 702 (Mad.)  CIT v. Gemini Arts P. Ltd.: 254 ITR 201 (Mad.) (SLP dismissed)  United Phosphorus Ltd. v. ACIT: [2015] 230 Taxman 596 (Gujarat)  M/s. Lupin Limited v. JCIT: ITA No.5088/Mum/2005 (Mum. Trib.)  Emerson Network Power (India) P Ltd v. ACIT: ITA No. 118/Mum/2010 (Mum. Trib.)  GMM Pfaudler Ltd. vs. JCIT: ITA No. 2627/Ahd/2008 (Ahd. Trib.)

g) In view of the aforementioned legal position, it is submitted that the assessing officer has erred in treating the impugned payment on account of premium paid to take land on lease as capital expenditure. h) In all fairness, it is pointed out that a contrary view has been taken by the Delhi High Court in the case of GAIL India Ltd. v. JCIT: [2012] 211 Taxman 587. However, SLP bearing SLP No(s).12614-12615/2013 there against has been admitted by the Supreme Court vide order dated 07/05/2014 and is pending disposal.

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 395 of 484 2) On claim of depreciation on these rights as intangible assets a) premium would fall within the meaning of ‗business or commercial rights‘ covered under section 32(1)(ii) of the Act for the purposes of allowance of depreciation thereon. It would be appreciated, that the assessee is engaged in the business of manufacturing two-wheelers and the subject land was taken, and was permitted under the lease agreement to be used, only for the purposes of constructing factory and carrying on business operations thereon. The new factory to be constructed on the leasehold land was in connection with extension of existing business of manufacturing two wheelers by the assessee and, therefore, the leasehold right obtained on payment of impugned premium was a right obtained in connection with business of the assessee company, which is covered within the meaning of ‗business or commercial right‘ under section 32(1)(ii) of the Act. b) It is further respectfully submitted that leasehold rights, more specifically where lease extends over a long period of time, has been recognized as a separate asset under the provisions of the Act as also the Wealth-tax Act, as could be gathered from the following provisions: Section 27 of the Act, which deems ‗owner‘ for the purposes of charging income under the head house property, under clause (iiib) thereof deems ―a person who acquires any rights (excluding any rights by way of a lease from month to month or for a period not exceeding one year) in or with respect to any building or part thereof, by virtue of any such transaction as is referred to in clause (f) of section 269UA, shall be deemed to be owner of that Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 396 of 484 building or part thereof;‖ [Section 269UA(f) covered transfer of immoveable property by way of lease for a period of more than 12 years for the purpose of purchase of immoveable properties by Central Government under Chapter XX-C of the Act];

c) Similarly, section 4 of the WT Act, which deems certain assets to be included in the net wealth of an assessee, by way of sub-section (8)(b) there of covers similar rights, as contained in section 27 of the Act (referred supra), for the purpose of inclusion in the net wealth of an assessee. [Refer: Jaya Hind Sciaky Ltd v DCIT: 79 ITD 185 (Pune); Tulsidas V. Patel (P.) Ltd v WTO: 65 ITD 287 (Mum); Voltas Ltd v ACWT: 113 ITD 19 (Mum) (SB)]

d) Section 269UA(d) of the Act included any rights in land or building within the meaning of immovable property;

e) Section 54D of the Act, which provides for exemption from capital gain on compulsory acquisition of lands and building also includes exemption for interalia transfer of ―any right in land or building‖;

f) Further, analogy can be drawn from the decision of Bombay High Court in the case of CIT v. Tata Services Ltd.: 122 ITR 594, wherein it was held that the word ―property‖ of any kind used in section 2(14) of the Act is a word of the widest amplitude and would include any right which can be called ―property‖ in the definition of ―capital asset‖. In that case, the right to obtain conveyance of immoveable property was held to be a capital asset. Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 397 of 484

g) The Delhi High Court in the case of Bawa Shiv Charan Singh v. CIT: 149 ITR 29, held that the word ―property‖ used in section 2(14) is a term of the widest import and signifies every possible interest which a person can acquire, hold and enjoy. It was held that tenancy right/right to continue in the possession of a property as a tenant, is a valuable right, which falls within the meaning of the term ―capital asset‖ under section 2(14) of the Act. The aforesaid decision has been noted with approval by Supreme Court in D.P. Sandhu Bros., Chembur P. Ltd.: 273 ITR 1 (SC).To the same effect is the recent decision of the Hon‘ble Madras High Court in the case of Madathul Brothers v. DCIT: 301 ITR 345 (Mad.)

h) In view of the above, it could be argued that, if premium paid for obtaining lease is disallowed as capital expenditure on the ground of vesting substantial leasehold rights with the assessee, then such leasehold rights ought to be considered as a separate asset, which would be covered within the meaning of ―business or commercial rights‘ under section 32(1)(ii) of the Act. i) Reliance is also placed on the following decisions, wherein it has been recognized that land and/or building or any right therein, including leasehold rights are different assets and the provisions applicable on the former, for instance section 50C, cannot be applied on transfer of latter assets:  Atul G. Puranik v. ITO: 141 TTJ 69 (Mum.)  ITO v. Pradeep Steel Rolling Mills P. Ltd.: 155 TTJ 294 (Mum. Trib.)  DCIT v. Tejinder Singh: 147 TTJ 87 (Kol. Trib.) Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 398 of 484  Kancast v. ITO: 68 SOT 110 (Pune Trib.) j) Reliance, in this regard, is placed on the following decisions, wherein it has been held that, by applying the principle of ejusdem generis, the expression "business or commercial rights of similar nature" in section 32(1)(ii) of the Act, need not answer the description of "knowhow, patents, trademarks, licenses or franchises" but must fall in the larger genus of ‗intangible assets‘ related to business, for being eligible for depreciation under that section:  CIT vs. Smifs Securities Ltd.: 348 ITR 302 (SC)  Areva T & D India Ltd. & Ors. vs. DCIT: 345 ITR 421 (Del.)  Triune Energy Services (P) Ltd. vs. DCIT: 237 TAXMAN 0230 (Delhi)  CIT v. MIS Bharti Teletech Ltd.:233 Taxman 238 (Delhi)  CIT v. Hindustan Coca Cola Beverages (P.) Ltd.:[2011] 331 ITR 192 (Del.)  ThyssenKrupp Elevator (India) (P.) Ltd. v. ACIT: 167 TTJ 131 (Delhi - Trib.)  Cosmos Co-op Bank Ltd. v. DCIT: 64 SOT 90 (Pune) k) In view of the above, considering that the Courts have conclusively held that the expression ‗business or commercial rights‘ needs to be widely construed and, therefore, any intangible right connected with business of an assessee would fall within the scope of that expression, which would be eligible for depreciation under section 32(1)(ii) of the Act. l) Out of the aforementioned decisions, in the following cases, various intangible assets/rights acquired by an

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 399 of 484 assessee by way of slump sale or amalgamation, as the case may be, included lease/leasehold rights, which was held to be eligible for depreciation under section 32(1)(ii) of the Act as falling within the scope of ‗business or commercial rights‘:  Areva T & D India Ltd. & Ors. vs. DCIT: 345 ITR 421 (Del.)  ThyssenKrupp Elevator (India) (P.) Ltd. v. ACIT: 167 TTJ 131 (Delhi - Trib.)  Cosmos Co-op Bank Ltd. v. DCIT: 64 SOT 90 (Pune)

m) Reliance, in this regard, is placed on the following decisions, wherein it has been held premium paid for acquisition of leasehold rights would fall within the meaning of ‗business or commercial rights‘ under section 32(1)(ii) of the Act and would accordingly be eligible for depreciation under that section:  East India Minerals Limited V. JCIT: ITA No.224/CTK/2012 (Cuttack)  NMDC Ltd v JCIT: ITA No 714 and 885/Hyd/2012 (Hyd.)  Tirumala Music Centre Pvt Ltd v ACIT: ITA No 37/Hyd/2012 (Hyd.)

Therefore he submitted that for the aforementioned reasons sticking to his main plea that lease premium in the facts and circumstances of the case is an allowable revenue expenditure, in the event, it is held to be capital expenditure, then the assessing officer may be directed to allow depreciation thereon

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 400 of 484 as ‗business or commercial rights‘ under section 32(1)(ii) of the Act. 230) We have heard the rival contentions. We note that the main claim of the assessee of considering the premium paid for taking the land on lease as revenue expenditure in the similar facts and circumstances has been decided against by the Hon‘ble Delhi High Court in the case of GAIL India Ltd. v. JCIT: 211 Taxman 587. The relevant observations of the High Court are as under: ―6. This Court has considered these submissions and the issue which was sought to be urged has been re-visited on a number of occasions by various Courts. There is no doubt that in Madras Auto Services case (supra), the Court had observed that there is no single decisive test to ascertain whether expenditure qualifies as Revenue or that which properly falls in the capital field. Several aspects are to be applied such as nature of gain by the assessee, specially in a case of this kind, whereby constructing a building on a land which belongs to someone else, the saving in expenditure etc., a very important consideration, the Court emphasized that it should be seen from the "Commercial point of view". The other aspect emphasized by the Supreme Court was whatever substituted for revenue expenditure should normally be considered as revenue expenditure. 7. It is no doubt true that the decisions in HMT (Supra), Sun Pharmaceuticals (supra) and Gemini Arts (supra) dealt with fact situations where the assessee had obtained long lease, and where the

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 401 of 484 Court found the down payment as lumpsum premium to be a real advance rental payment which therefore qualify as revenue expenditure. At the same time, this Court is also aware of the fact that in Madras Auto services (supra), the leased land contained a dilapidated structure, and since it could not be used by the assessee, the parties therefore agreed that the assessee could construct upon the land at its own cost but at the same time it would have no right or title in the new construction. All this was taken into consideration by the Court to hold that the amount paid at the commencement of the lease was the advance rent that could be amortized. At the same time, there are other rulings by the Supreme Court in (Assam Bengal Cement Company Limited Vs. CIT (1955) 27 ITR 34, CIT vs. Panbari Tea Company Limited (1965) 57 ITR 422 and DurgaMadiraSangh vs. Commissioner of Income Tax (1969) 72 ITR 769. In all these cases, the Court upheld the Revenue‘s contention and stated that the expenditure towards acquisition of lease amounted to "brining into existence an asset or advantage for enduring benefit of the business" and was properly attributable by way of capital expenditure – of (Assam Bengal Cement Co Limited). In Panbari Tea Company Limited (Supra), the Court underlined the fact where the party consciously chose to assign two different meanings to the expressions "Premium" and "Rent". The Court would not be justified in concluding that the premium paid constituted advance rent. Significantly this Court notices that in Panbari Tea Company Limited, the lease Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 402 of 484 arrangement itself were for a period of 10 years, despite which the Supreme Court held it to constitute a capital asset. In the present case, unlike in Madras Auto Services or other decisions of the Supreme Court cited by the assessee, the lease arrangements are for a substantially long period i.e. 60-95 years. That the arrangements do not confer outright ownership rights to the lessee is beside the point as the enjoyment of the land as a lessee in such cases is substantially that of the owner itself. In other words, barring the right to alienate or outright sale of the property in unqualified manner, all rights of enjoyment in respect of leased properties are with the assessee. Furthermore, even though the stipulation in the deed – one of which (dated 25.07.1995 with MHIDC) was produced during the hearing by the assessee, clause 3(m) enjoins the lessee not to transfer either directly or indirectly, sell or encumber the lease benefits to any other party, the same stipulation enables transfer with "previous consent in writing of the Chief Executive Officer". This Court is also further conscious of the fact that the conditions embodied in such lease deed are part of the general policies consciously adopted by the municipal and statutory authorities who manage and lease out such assets. 8. Having regard to these factors, this Court finds no infirmity with the reasoning of the Tribunal. 8. Having regard to these factors, this Court finds no infirmity with the reasoning of the Tribunal

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 403 of 484 9. In view of the above conclusion, the questions of law are answered against the assessee and in favour of the Revenue. The appeals consequently have to fail and are accordingly dismissed without any order to costs.‖ The ratio emanating from the aforesaid decision in our view is squarely applicable to the facts of the present case, in as much as the lease under consideration is for a long period for 99 years and the appellant enjoys substantial rights as a lessee including the right to transfer/assign or otherwise part with the physical possession of the land, albeit with the prior consent of the lessor. In view of the aforesaid binding decision of the jurisdictional High Court, we agree with the findings of the Ld. Assessing officer that lease premium is not allowable revenue expenditure. However, the Ld. Counsel has raised an alternate legal plea that if the substantial rights arising to the appellant under the lease are held to be on capital account, then premium paid should be considered as resulting in acquisition of an intangible asset, which should be eligible for depreciation as intangible assets under section 32(1(ii) of the Act. We find that the aforesaid is purely a question of law, to be answered based on the facts already on record. Such a plea is permissible to be taken at this stage, which was not objected to by the DR. In order to answer the aforesaid plea, the first issue that arises is whether the appellant has acquired any capital asset on payment of premium by entering into the lease agreement. Once we apply the decision of the Hon‘ble Delhi High Court in the case of GAIL India (supra), the premium paid has been held to be not allowable revenue expenditure, but a capital expenditure on the ground that assessee/lessee acquires substantial rights equitable to an owner under a long term lease entered with the lessor. The aforesaid

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 404 of 484 substantial rights are also capable for transfer/alienation for consideration, subject to prior approval from the lessor. The Hon‘ble Bombay High Court in the case of CIT v. Tata Services Ltd: 122 ITR 594 is an authority for the proposition that any substantial right vesting with an assessee falls within the meaning of ‗capital asset‘ under section 2(14) of the Act. Accordingly, by applying the ratio emanating from the decision of Bombay High Court (supra) read with the decision of Delhi High Court in the case of GAIL India (supra), rights vesting with the appellant in a long term lease; to be compendiously called as leasehold rights, satisfy the test of being classified as ‗capital asset‘ under section 2(14) of the Act. Reliance in this regard is also placed on the decision of the Hon‘ble Delhi High Court in the case of Baba Shiv Charan Singh v. CIT: 149 ITR 29, wherein tenancy right i.e. the right to continue in the possession of the property as a tenant was held to be falling within the meaning of ‗capital asset‘ under section 2(14) of the Act. We also agree with the various provisions in the scheme of the Act highlighted by the Ld. Counsel, which endorses that leasehold rights in a long term lease are recognized as a separate asset. In view of the above, we reach to the conclusion that premium paid, once held to be capital expenditure, can be said to have been paid for acquiring a separate asset, being leasehold rights in the hands of appellant. Having held as above, the next issue that arises is whether such leasehold rights would fall in the category of ―land‖ for which lease has been taken or in the category of intangible assets as specified in section 32(1)(ii) entitling to depreciation thereon. In our view, land and leasehold rights in land are both distinct and separate assets in general law as well as in the Act. In case of the asset in the nature of land, the possessor thereto enjoys exclusive ownership right therein, in perpetuity, whereas in case of

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 405 of 484 leasehold rights, the lessee only enjoys rights provided to him in the lease agreement, during the limited tenure of the lease. In case of lease, the rights of the lessee would come to an end on expiry of the lease period, unless the lease is extended on payment of additional premium/conversion charges and further modification of the lease terms, which may include higher payment of rent, etc. Accordingly, the asset in the nature of lease is clearly distinct and separate from asset in the nature of leasehold rights in the land. We also draw support for the aforesaid reasoning from the various decisions referred by the Ld. Counsel, wherein it has been held that leasehold rights being a distinct asset from land and is outside the scope of deeming fiction stipulated under section 50C, which is applicable on transfer of land or building only. (i) Atul G. Puranik v. ITO: 141 TTJ 69 (Mum.) (ii) ITO v. Pradeep Steel Rolling Mills P. Ltd.: 155 TTJ 294 (Mum. Trib.) (iii) DCIT v. Tejinder Singh: 147 TTJ 87 (Kol. Trib.) (iv) Kancast v. ITO: 68 SOT 110 (Pune Trib.) In view of the above, we hold that leasehold right is an independent asset and does not fall in the category of asset as land. Having held as above, the next issue that arises is whether leasehold rights could be said to fall within the meaning of ―business or commercial rights of similar nature‖ prescribed for depreciation under section 32(1)(ii) of the Act. The Hon‘ble Delhi High Court in the case of Areva T&D India Ltd. v. DCIT: 345 ITR 421, has categorically held that an intangible asset in the nature of ‗business or commercial rights‘ need not answer the description of ―know-how, patents, trademarks, license, or franchises‖ specifically prescribed before the use of such

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 406 of 484 expression under section 32(1)(ii) of the Act. The Hon‘ble High Court held that any asset satisfies the test of larger genus of intangible assets relating to business, the same would be eligible for depreciation under section 32(1)(ii) of the Act. The relevant observations of the High Court in this regard are as under: ―13. In the present case, applying the principle of ejusdem generis, which provides that where there are general words following particular and specific words, the meaning of the latter words shall be confined to things of the same kind, as specified for interpreting the expression "business or commercial rights of similar nature" specified in Section 32(1)(ii) of the Act, it is seen that such rights need not answer the description of "knowhow, patents, trademarks, licenses or franchises" but must be of similar nature as the specified assets. On a perusal of the meaning of the categories of specific intangible assets referred in Section 32(1)(ii) of the Act preceding the term "business or commercial rights of similar nature", it is seen that the aforesaid intangible assets are not of the same kind and are clearly distinct from one another. The fact that after the specified intangible assets the words "business or commercial rights of similar nature" have been additionally used, clearly demonstrates that the Legislature did not intend to provide for depreciation only in respect of specified intangible assets but also to other categories of intangible assets, which were neither feasible nor possible to exhaustively enumerate. In the circumstances, the nature of "business or commercial rights" cannot be restricted to only the aforesaid six categories of assets, viz., knowhow, patents, trademarks, copyrights, licenses or franchises. The nature of "business or commercial rights"

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 407 of 484 can be of the same genus in which all the aforesaid six assets fall. All the above fall in the genus of intangible assets that form part of the tool of trade of an assessee facilitating smooth carrying on of the business. In the circumstances, it is observed that in case of the assessee, intangible assets, viz., business claims; business information; business records; contracts; employees; and knowhow, are all assets, which are invaluable and result in carrying on the transmission and distribution business by the assessee, which was hitherto being carried out by the transferor, without any interruption. The aforesaid intangible assets are, therefore, comparable to a license to carry out the existing transmission and distribution business of the transferor. In the absence of the aforesaid intangible assets, the assessee would have had to commence business from scratch and go through the gestation period whereas by acquiring the aforesaid business rights along with the tangible assets, the assessee got an up and running business. This view is fortified by the ratio of the decision of the Supreme Court in Techno Shares & Stocks Ltd. ( supra) wherein it was held that intangible assets owned by the assessee and used for the business purpose which enables the assessee to access the market and has an economic and money value is a "license" or "akin to a license" which is one of the items falling in Section 32(1)(ii) of the Act. 14. In view of the above discussion, we are of the view that the specified intangible assets acquired under slump sale agreement were in the nature of "business or commercial rights of similar nature" specified in Section 32(1)(ii) of the

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 408 of 484 Act and were accordingly eligible for depreciation under that Section.‖ We may at this stage also refer to the decision of the Hon‘ble Supreme Court in the case of CIT v. Smif Securities Ltd: 348 ITR 302, wherein the apex Court held that goodwill arising on amalgamation of companies is also a separate intangible asset, which is eligible for depreciation under section 32(1)(ii) of the Act, although goodwill has also not been specified in the preceding list of assets. We have also noted that the Court/Tribunal in the following cases have allowed depreciation on various intangible asset which included lease/leasehold rights, by way of slump sale or amalgamation under section 32(1)(ii) of the Act as falling within the scope of business or commercial rights. (i) Areva T & D India Ltd. & Ors. vs. DCIT: 345 ITR 421 (Del.) (ii) Thyssen Krupp Elevator (India) (P.) Ltd. v. ACIT: 167 TTJ 131 (Delhi - Trib.) (iii) Cosmos Co-op Bank Ltd. v. DCIT: 64 SOT 90 (Pune) In view of the aforesaid discussion, we hold that intangible assets including an asset in the nature of leasehold rights would fall within the meaning of ‗business or commercial rights‘ under section 32(1)(ii) for being allowed depreciation thereon, if such intangible asset could be said to be related to or is to be used in relation to business of the assessee. In the present case, the impugned land was taken on lease to construct factory building thereon. In fact, the lease agreement specifically creates an embargo on the assessee/lessee to use the land only for the purpose of constructing factory and not otherwise. In fact, we note that the assessee had subsequent to taking the land on

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 409 of 484 lease had constructed a new state of the art factory thereon engaged in the activity of manufacturing two wheelers on which deduction under section 80IC was also claimed, which was discussed by us in detail in the assessee‘s appeal. Accordingly the intangible asset in the nature of leasehold right vesting with the appellant was clearly related to its business and therefore the same satisfies the test of being classified as business or commercial right within the meaning of section 32(1)(ii) of the Act. The various benches of the Tribunal in the following cases have also upheld the similar view that premium paid for acquisition of leasehold rights fall within the meaning of business or commercial rights under section 32(1)(ii) of the Act. (i) East India Minerals Limited V. JCIT: ITA No.224/CTK/2012 (Cuttack) (ii) NMDC Ltd v JCIT: ITA No 714 and 885/Hyd/2012 (Hyd.) (iii) Tirumala Music Centre Pvt Ltd v ACIT: ITA No 37/Hyd/2012 (Hyd.) In view of the above, we uphold the alternate plea of the assessee and direct the Revenue to allow depreciation on the premium paid by the appellant to acquire the leasehold rights. This ground No. 10 of appeal of revenue is therefore allowed for statistical purposes. 231) Ground No. 11 of the appeal of the revenue is against the direction of the Ld. dispute resolution panel to delete the disallowance of expenses incurred on account of corporate social responsibility amounting to Rs. 4 417308/– which was debited in the head community development expenses in the books of accounts of the appellant. The Ld. AO disallowed the aforesaid expenses on the ground that it was not incurred

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 410 of 484 wholly and exclusively for the purposes of earning business income from the activity of manufacture and sale of two- wheelers and, therefore, such expenditure was not allowable deduction under section 37(1) of the Act. It was also observed that the aforesaid payments were in the nature of application of income, which were not allowable as expenditure under the provisions of the Act and that the assessee failed to establish with necessary documentary evidences, the onus cast upon it as per law. On objection before the Ld. DRP, after taking the assessee‘s submissions on record and considering the case-laws on the issue, directed the AO to delete the proposed disallowance. 232) The Ld. departmental representative relied upon the order of the Ld. assessing officer and submitted that the corporate social responsibility expenditure are not allowable as they are not incurred for the purpose of the business. He vehemently relied upon the order of the Ld. assessing officer on the reasoning given by him. He further referred to the provisions of section 37 (1) of the act wherein the above amount has specifically held to be disallowable. 233) Ld. authorized representative submitted that these expenses incurred under the aforesaid head were mainly incurred for the following purposes: (i) Expenditure incurred by way of sponsorship / construction of camps, etc., organized for social/public welfare like cancer detection camps, meal eye camps, etc. (ii) Traffic Barricade provided to police in the vicinity of factory premises. (iii)Security guard provided at Traffic Park maintained by the assessee. (iv) Horticulture and plantation activities at such traffic park. Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 411 of 484 (v) Renovation/construction expenses incurred at school operating in the vicinity of the factory premises for welfare of the children of employees studying at that school, etc. The aforesaid expenses debited under the head ―corporate social responsibility‖, were incurred for the purposes of assessee‘s business or, in other words, directly or indirectly benefited the business carried on by the assessee-company. He submitted that Sponsorship/ construction of health checkup camp aforesaid activity organized for needy and poor people, apart from promoting the welfare of public, prominently displayed the name of the assessee-company, which in turn enhanced goodwill as also provided publicity to the assessee- company. The increase in goodwill and publicity of the assessee-company, it is submitted, is aimed at promoting increase in sales and overall growth of the business carried on by the company. He submitted that Traffic Barricade, Security guard and Horticulture activities have been incurred by the assessee in order to regulate the flow of traffic and traffic safety as also the cleanliness/decor of the area falling within the vicinity of the factory premises or the area approaching the factory premises of the assessee-company, maintained traffic park near that area, kept security guards at that park, incurred expenses on provision of traffic barricade to the police deputed at that area and other related expenses. The maintenance of such traffic parks helps the assessee-company to promote safe driving habits amongst the general public, which promotes and publicizes the products, viz., two-wheelers manufactured and sold by the assessee. The control of traffic in the area around the factory premises also helps in saving the time of assessee‘s

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 412 of 484 staff, employees and labour in order to reach the factory premises. He submitted that Expenses on construction / renovation of the school was incurred on aforesaid activity for schools located in the vicinity of the assessee-company where children of employees of the assessee company were studying, and the same was incurred to provide good education facility to the children of employees as a measure of staff/employees welfare. Thus, it will be appreciated that the expenses on aforesaid activities incurred for public welfare, in order to promote goodwill/name of the assessee or to impart employees‘ welfare, is an allowable business deduction under section 37(1) of the Act. Further, where expenditure is incurred for public welfare, in order to promote goodwill/name of the assessee or to impart employees‘ welfare, the same is an allowable business deduction under section 37(1) of the Act. He further referred to the following decisions holding that expenditure incurred to promote goodwill/name of assessee or to impart employees‘ welfare is allowable business deduction. Expenditure by way of grant to schools/ education funds for employee‘s welfare: (i) Mysore Kirloskar Ltd. vs. CIT: 166 ITR 836 (Kar.) (ii) Mahindra and Mahindra vs. CIT 261 ITR 501 (Bom) (iii)CIT vs. Mahindra & Mahindra: 284 ITR 679 (Bom) (iv) Krishna SahakariSakharKarkhana Ltd V. CIT: 229 ITR 577 (Bom.) (v) CIT v. India Radiators Ltd.: 236 ITR 719 (Mad.) (vi) Northern Coalfields Ltd v ACIT; 69 SOT 637 (Jabalpur - Trib.)

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 413 of 484

Meeting Social Responsibilities, which have indirect business nexus: i. VenkataSatyanarayana Rice Mill Contractors Co V. CIT: 223 ITR 101 (SC) ii. CIT Vs. Chemicals and Plastics India Ltd. 292 ITR 115 (Mad.) iii. CIT v. Madras Refineries Ltd.: 266 ITR 170 (Mad) iv. CIT v. Chennai Petroleum Corpn. Ltd: T.C.(A).No.57 of 2006 (Mad.) v. CIT vsJayendrakumarHiralal: 327 ITR 147 (Guj.) vi. CIT vs. Karnataka Financial Corporation: 326 ITR 355 (Kar.) vii. Infosys Technologies Ltd. v. JCIT: 109 TTJ 631 (Bang. Trib.) -affirmed by the Karnataka High Court reported at 360 ITR 714 viii. Ranbaxy Laboratories Ltd.: ITA No.: 3925/D/02 (Del.Trib.) ix. CIT v. Deversons Industries Ltd. 290 ITR (AT) 287 (Ahd) x. Hindustan Petroleum Corpn. Ltd. Vs. DCIT 96 ITD 186 (Bom.)

Display of name/Publicity expense (i) CIT v. Delhi Cloth & General Mills Co. Ltd.: 115 ITR659 (Del.) (ii) CIT v. Lake Palace Hotels & Motels (P) Ltd.: 293 ITR 281 (Raj.) (iii) CIT v. Aluminium Industries Ltd.: 214 ITR 541 (Ker.)

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 414 of 484 (iv) Sarda Plywood Industries Ltd. v. CIT: 238 ITR 354 (Cal.)

Relying on the above decisions, he submitted that it is clear that even if there was no statutory obligation on the part of the assessee to incur the expenditure, so long as the expenditure was incurred for generating good-will / promoting business, the same was allowable business expenditure under section 37(1) of the Act. He further submitted that The expression ―for the purposes of business‖ used in the aforesaid section is not limited to earning profit alone and if the expenditure satisfies the test of business / commercial expediency, the same needs to be allowed deduction under the aforesaid section: (i) CIT vs. Malayalam Plantations Ltd.:53 ITR 140 (SC) (ii) CIT vs. Birla Cotton Spinning. & Weaving Mills Ltd.: 82ITR 166 (SC) (iii)Madhav Prasad Jatia vs. CIT: 118 ITR 200 (SC) His further argument was that Even where expenditure is incurred by an assessee on account of commercial / business expediency, the same is allowable as business deduction under section 37(1) of the Act: (i) CIT vs. Walchand& Co.: 65 ITR 381 (SC) (ii) J.K. Woollen Manufacturers vs. CIT: 72 ITR 612(SC) (iii)Aluminium Corporation of India Ltd. vs. CIT: 86 ITR 11 (SC) (iv) CIT vs. PanipatWoollen& General Mills Co. Ltd.: 103 ITR 666 (SC) (v) S.A. Builders: 288 ITR 1(SC) (vi) J.J. Enterprises v. CIT: 254 ITR 216 (SC) Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 415 of 484 (vii) CIT v. Dalmia Cement (P.) Ltd: 254 ITR 377 (Delhi) 234) Therefore he submitted that For the aforesaid cumulative reasons, expenditure incurred under the head ―community development expenses‖ for public welfare, in order to promote goodwill/name of the assessee or to impart employees‘ welfare, having been incurred for the purposes of business and on account of commercial / business expediency, is allowable business deduction under section 37(1) of the Act. 235) We have heard the rival contentions. We have given our findings while disposing ground of appeal no. 24 in the assessee‘s appeal supra that under section 37(1) of the Act, the expression ‗for the purpose of business‘ is wide enough to cover expenses incurred on account of business/commercial expediency and is not restricted to expenses incurred for the purpose of earning profit. The appellant is a large corporate house and is one of the flagship companies in India. In the course of carrying of business, the role of the appellant is not restricted to merely earning profit but also discharging certain community related obligations, with a larger intent of fostering its goodwill/reputation. We have gone through the details of various expenses incurred by the assesse which were debited under the head ―Corporate social responsibility‖ and elaborated in detail in the submissions made by the Ld. Counsel above. The said expenses although were not incurred towards earning profit, but were incurred out of commercial expediency and were directly/indirectly related to its business like earning goodwill/display of name, employee‘s welfare, etc. The said expenses therefore, in our view, satisfy the test of being allowable as business deduction under section 37(1) of the Act. We draw support for the aforesaid conclusion from the following decisions of the various Tribunals/High Courts :

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 416 of 484 (i) In the case of Mysore Kirloskar Ltd. vs. CIT: 166 ITR 836 (Kar.), the assessee started school for education of children of its employees for attracting technocrats and men of managerial skill to its industry. Donations made by the company to the school were claimed as business expenditure under section 37(1) of the Act. The Tribunal sustained disallowance of the deduction claimed on the ground that the expenditure was not incurred wholly and exclusively for the purpose of business of the assessee. The Hon'ble High Court did not approve the approach of the ITAT and allowed the claim of the assessee by observing as under: ―Held,(i) that the words " for the purpose of business " used in section 37(1) should not be limited to the meaning of " earning profit alone ". Business expediency or commercial expediency may require providing facilities like schools, hospitals, etc., for the employees or their children or for the children of the ex-employees. Any expenditure laid out or expended for their benefit, if it satisfies the other requirements, must be allowed as deduction under section 37(1) of the Act. The fact that somebody other than the assessee was also benefited or incidentally took advantage of the provision made, should not come in the way of the expenditure being allowed as a deduction under section 37(1) of the Act. Nevertheless, it is expenditure allowable as deduction under the Act. (ii) That the word ―expenditure‖ primarily denoted the idea of spending or paying out or away. It was something which was gone irretrievably, but should

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 417 of 484 not be in respect of an unascertained liability of the future. It must be an actual liability in praesenti, as opposed to a contingent liability of the future. (iii) The reasons given by the Tribunal for rejecting the claim of the assessee were not sound. Moreover, since the Tribunal had not recorded a finding as to whether the donation made by the assessee to the trust could be considered as ―expenditure‖, the matter had to be remanded to the Tribunal for decision afresh in the light of the observations contained in the judgment.‖ (ii) In the case of Mahindra and Mahindra vs. CIT 261 ITR 501, the Bombay High Court allowed deduction of expenditure incurred by the assessee in making initial contribution to the approved superannuation fund to an educational society, which was running school for children of employees, as business expenditure under section 37(1) of the Act. It was held that the amount should be allowed as business expenditure because it was incurred predominantly for staff welfare. The decision in the case of Mahindra & Mahindra (supra) was further followed by the Bombay High Court in the case of CIT vs. Mahindra & Mahindra: 284 ITR 679. (iii)In the case of CIT v. India Radiators Ltd.: 236 ITR 719 (Mad.), the Madras High Court observed as under: ―The finding of the Tribunal is that by making the contribution to the Panchayat for upgrading the elementary school, the assessee-company was assured by the school management that it would give preference in the matter of admission to the children of the employees in the said school. The Tribunal placed Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 418 of 484 reliance on a letter from the President of the Building Committee and Parents Teacher Association of the school. It is well settled that if a certain sum of money was expended for the education of the children of the employees of the assessee-company, it should be regarded as staff welfare expenditure, particularly in view of the fact that in these days it is very hard to get admission in educational institutions. The employees of the assessee are given the satisfaction by the donation made by the assessee that their employers have taken full care of the education of their ward and such a mental satisfaction on the part of the employees would generate good will and the expenditure can be regarded as staff welfare expenditure and allowable as business expenditure. The contribution made by the assessee to the Panchayat has resulted in the benefit of the assessee‘s business in the sense that the assessee‘s employees are the beneficiaries in getting preferential admission in the school. The fact that the benefit has percolated to the general public would not stand in the way of assessee getting the necessary deduction once the expenditure is held to be business expenditure. Hence, the Tribunal has come to the correct conclusion that the expenditure incurred by the assessee was a revenue expenditure. It should also be noted that the contribution made to the Panchayat was not in contravention of any law, nor was it opposed to public policy. In this view of the matter, the contribution made by the assessee to the Panchayat for the up-gradation of the elementary school should be regarded as an allowable business expenditure under the provisions of s. 37(1).‖ Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 419 of 484 (iv) In the case of CIT Vs. Chemicals and Plastics India Ltd. 292 ITR 115 (Mad.), the assessee claimed deduction in relation to contribution to Madras Chamber of Commerce, of which the assessee was a member, as business expenditure. It was contended that since the maintenance of the trade Chamber was for the furtherance of business interests of the constituents of the Chamber, the contribution made had to be treated as business expenditure. The assessing officer rejected the claim for deduction, which was allowed by the Tribunal. The Hon'ble High Court approved the view taken by the ITAT by holding that since activities of the Chamber of Commerce were closely linked with the welfare of corporate entities who were its members and whose interests were taken care of by the Chamber, the expenditure was deductible, irrespective of whether the expense incurred was compulsory or otherwise. (v) In the case of CIT v. Madras Refineries Ltd.: 266 ITR 170, the Madras High Court observed as under: ―The concept of business is not static. It has evolved over a period of time to include within its fold the concrete expression of care and concern for the society at large and the people of the locality in which the business is located in particular. Being known as a good corporate citizen brings goodwill of the local community, as also with the regulatory agencies and the society at large, thereby creating an atmosphere in which the business can succeed in a greater measure with the aid of such goodwill. Monies spent for bringing drinking water as also for establishing or improving the school meant for the

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 420 of 484 residents of the locality in which the business is situated cannot be regarded as being wholly outside the ambit of the business concerns of the assessee, especially where the undertaking owned by the assessee is one which is to some extent a polluting industry. The Tribunal was right in allowing the deduction of the entire expenditure of Rs. 15,32,000 as business expenditure.‖ (vi) In the case of Hindustan Petroleum Corpn. Ltd. Vs. DCIT 96 ITD 186 (Bom.), the assessee company incurred certain expenditure towards implementation of 20 point programme. The expenditure was incurred to improve the conditions of SC/ST in pursuance of national policies and to help acceleration of all round development of villages by providing assistance to educated unemployed to earn a living. The assessing officer held that since the expenditure was in the nature of donation, the same could not be allowed deduction. The CIT(A) upheld the order of the assessing officer by holding that the expenditure incurred did not have any direct connection with the business of the assessee because the beneficiaries of the expenditure were not employees of the assessee nor had the assessee any statutory obligation to incur such expenditure. On second appeal, by making reference to various authorities including the decision of the Hon'ble Karnataka High Court in the case of Mysore Kirloskar Ltd. Vs. CIT (supra), the ITAT upheld the claim of the assessee. The relevant observations of the Tribunal are as under:

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 421 of 484 ―It has been held by the Karnataka High Court in the case of Mysore Kirloskar Ltd. Vs. CIT (1987] 166 ITR 836/30 Taxman 467 that while the basic requirements for invoking sections 37(1) and 80G are quite different, but nonetheless the two sections are not mutually exclusive. Thus, there are overlapping areas between the· donations given· by· the assessee and the business. In other words, there can be certain amounts, though in the nature of donations, and nonetheless, these amounts may be deductible under section 37(1) as well. Therefore, merely because the expenditure in question was in the nature of donation, or, as per the words of the Commissioner (Appeals), 'prompted by altruistic motives', it did not cease to be an expenditure deductible under section 37(1). In the case of Mysore Kirloskar Ltd. (supra), the High Court observed that even if the contribution by the assessee is in the form of donations, but if it could be termed as expenditure of the category falling in section 37(1), then the right of the assessee to claim the whole of it as a deduction under section 37(1) cannot be declined. What is material in this context is whether the expenditure in question was in question was necessitated by business considerations or not. Once it is found that the expenditure was dictated by commercial expediencies, the deduction under section 37(1) cannot be declined.

In the instant case, the expenditure on 20-Point Programme was incurred in view of specific directions of

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 422 of 484 the Government of India. It could not but be the business interest of the assessee to abide by the directions of the Government of India which also owned the assessee. Further, the expenditure incurred for the implementation of 20-Point programme was solely for the welfare of the oppressed classes of society, for which even the Constitution of India sanctions positive discrimination and for contribution to all around development of villages, which has always been the central theme of Government's development initiatives. An expenditure of such a nature cannot but be, 'a concrete expression of care and concern for the Society at large and an expenditure to discharge the responsibilities of a 'good corporate citizen which brings goodwill of with the regulatory agencies and society at large, thereby creating an atmosphere in which the business can succeed in a greater measure with the aid of such goodwill' . Just because the expenditure was voluntary in nature and was not forced on the assessee by a statutory obligation, it could not cease to be a business expenditure. 236) Further, the insertion of explanation 2 to section 37(1) has been inserted w.e.f. 01/04/2015 and shall be applicable for the assessment year 2015 – 16 onwards and therefore same does not apply to the assessment year in question before us in this appeal. In view of the above we agree with the findings of the ld DRP and dismiss the ground no 11 of appeal raised by the department.

237) No. 12 of the appeal of the revenue is against the disallowance of Rs. 1 56.51 Lacs written off by the assessee is obsolete stock which the Ld. dispute resolution panel has given direction to Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 423 of 484 the Ld. assessing officer to delete it. The parties before us submitted that this issue has been dealt with in ground No. 1 of the appeal of the revenue and therefore it is a duplicate ground. In view of this we dismiss ground No. 12 of the appeal of the revenue. 238) Ground No. 13 of the appeal of the revenue was against the direction of the Ld. dispute resolution panel to delete the disallowance of expenses incurred on account of being preoperative expenses of the new planted. The brief facts of the issue is that assessee is engaged in the business of manufacturing of vehicles Manufacturing facilities located at 3 different locations since last several years. During the relevant previous year the company in order to expand the Manufacturing facilities was in the process of establishing new Manufacturing Plant at the manner. During the previous year the assessee paid certain services is aggregating to Rs. 10.99 Lacs to Rajasthan state industrial development and industrial Corporation for setting up the plant on land already acquired by the assessee which was debited to the profit and loss account and claimed as revenue deduction. The Ld. assessing officer proposed disallowed this expenditure on the ground that the expenditure incurred in relation to the Nevada plant which was to be set up by the assessee during the year is in the nature of preoperative expenses and thus capital expenditure. The assessing officer was also that the aforesaid expenses were not reliable in terms of specific provisions of the income tax act contained in section 35D, wherein the assessee was eligible to claim amortization of this expenses on commencement of production from new plant. On objection before the Ld. dispute resolution panel, the above proposed disallowances were directed to be deleted. Therefore, the Ld. assessing officer is aggrieved and hence in appeal before us. Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 424 of 484 239) The Ld. departmental representative submitted that expenses incurred by the assessee on account of setting of the plant were in the nature of preoperative expenses and thus capital expenditure in nature as it is not come into production during the year. It was further submitted that that as the commencement of production has not happened at Neemrana the plant the assessee is not entitled for the claim of deduction under the provisions of section 35D of the income tax act. He vehemently supported the order of the Ld. assessing officer. 240) Ld. departmental representative submitted that:- a) The new manufacturing plant at Neemarana was only an expansion in the same line of business, in which the assessee was already engaged under the control and supervision of the existing management of the company. b) The aforesaid expenditure was not capital in nature as the same was not directly or indirectly related to acquisition of any fixed assets at Neemrana Plant or setting up of that plant. c) The various expenses incurred towards acquisition of assets and those of revenue nature incurred in relation to the new facility, were met out of funds generated from the existing business of manufacture of motorcycles at Gurgaon and Dharuhera. There was thus complete interlacing of funds. d) The overall policy decisions relating to manufacturing operations/selling functions at the new plant are all looked after by a centralized team, which oversees the working of the existing plants at Gurgaon, Dharuhera and Haridwar. There was thus common management, common administration, interlacing of funds and unity of control.

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 425 of 484 e) The test for determining whether different ventures constitutes same business, as has been enunciated by the Supreme Court in following decisions, is whether there is any interconnection, interlacing, interdependence or unity embracing different ventures. The aforesaid interdependence/interlacing of different ventures can be established by existence of common management, common business organization/administration and common fund. What is relevant is unity of control and not the nature of products dealt with by the two businesses. (i) Produce Exchange Corporation Ltd. vs. CIT: 77 ITR 739 (SC) (ii) Setabganj Sugar Mills Ltd. vs. CIT : 41 ITR 272 (SC) (iii) CIT vs. Prithvi Insurance Co. Ltd.: 63 ITR 632 (SC) (iv) Hoogly Trust (P) Ltd. v CIT 73 ITR 685 (SC) (v) L.M. Chhabda& Sons vs. CIT : 65 ITR 638 (SC) (vi) Standard Refinery & Distillery Ltd. v. CIT: 79 ITR 589 (SC) (vii) B.R. Ltd. v. V.P. Gupta: 113 ITR 647 (SC)

f) It has been held that expenditure incurred in connection with expansion of business, involving setting up of new unit, which satisfies the test of unity of control, interlacing of funds, common management, etc. would be allowable revenue deduction. (i) CIT v. RelaxoFootwears Ltd: 293 ITR 231 (Del.) (ii) Indo Rama Synthetics (I) Ltd. v. CIT: 228 CTR 278 (Del. HC) (iii) Enpro India Ltd. vs. DCIT: 113 Taxman 132 (Del.) (iv) Jay Engineering Works Ltd. v. CIT: 311 ITR 405 (Del.) Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 426 of 484 (v) CIT v. Tata Chemicals Ltd: 256 ITR 395 (Bom.) (vi) Addl. CIT v. Aniline Dye Stuffs & Pharmaceuticals Pvt. Ltd.: 138 ITR 843(Bom) (vii) Kesoram Industries and Cotton Mills Ltd vs CIT: 196 ITR 845 (Cal .) (viii) Hindustan Aluminim Corporation Ltd. v. CIT: 159 ITR 673 (Cal.) (ix) CIT v. Rane (Madras) Ltd.: 215 CTR 250 (Chenn.) (x) Prem Spinning and Weaving Mills Co. Ltd. v. CIT : 98 ITR 20 (All.) (xi) CIT v. Shah Theatres P. Ltd. : 169 ITR 499 (Raj.) (xii) CIT v. MalwaVanaspati& Chemicals Co. Ltd., 149 CTR 283 (MP) (xiii) CIT v. Kerala State Industrial Development Corporation Ltd.: 182 ITR 62 (Ker.) (xiv) CCIT v. Senapathy Whitely Ltd. : 101 CTR 31 (Kar.) (xv) CIT v. Hindustan Machine Tools Ltd.: 175 ITR 212 (Kar). g) Since the new facility was only an extension of the existing business and, thus, constituted part of such business, the aforesaid expenditure, being revenue in nature, was allowable revenue expenditure. h) With regard to the reference of the assessing officer to provisions of clause (d) of section 35D(2), it is submitted, that aforesaid clause can only be invoked in respect of such expenditure which are capital in nature or otherwise not allowable under any other provision of the Act which is not the present case since the expenses incurred by the assessee were clearly allowable under section 37(1) of the Act, being an expenditure incurred wholly and exclusively for the

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 427 of 484 purposes of business, not being personal or capital expenditure. i) On perusal of CBDT Circular No. 56 dated 19.3.1971, it will be noticed that the provisions of section 35D were not intended to supersede/override any existing provisions of law. Further, it cannot be said that section 35D is a specific provision and section 37(1) is a general provision and, therefore, section 35D will override section 37(1) of the Act. [Also refer: Goodyear India Ltd. v. ITO : 73 ITD 189 (Del)(TM). j) The aforesaid issue is squarely covered in favour of the assessee by the decision of Delhi Bench of the Tribunal in assessee‘s own case for the assessment year 2007-08 and 2008-09 where similar disallowance made in that year on account of expenses incurred in connection with expansion of business at Haridwar was deleted, while following the decisions of Delhi High Court in case of RelaxoFootwears and Jay Engineering referred supra. 241) We have heard the rival contentions. We note that similar issue relating to revenue expenses incurred in connection with extension of the existing business at a new location was held to be allowable revenue expenditure under section 37(1) of the Act by the Tribunal in the assessee‘s own case for assessment year 2007-08 which was followed in assessment year 2008-09. The relevant observations of the Tribunal for assessment year 2007- 08 are as under: ―Facts: 26.2. During the year, the assessee was in the process of setting-up new plant at Haridwar; Direct expenses in relation to acquisition of assets, were capitalized and indirect

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 428 of 484 expenses, aggregating to Rs. 1.87 crores, were claimed as revenue expenditure. 26.3. The Assessing officer disallowed the aforesaid expenditure on the ground that since the same were incurred in relation to setting-up new plant, the same are capital expenditure. ……….. Our findings &conclusion: 26.19.The case laws on this issue are discussed while disposing off ground no. 20. The issue is covered by the judgments of the jurisdictional High Court in the case of JAY Engineering Works (supra) and Relaxo Footwear Ltd. (supra) relied by the assessee and is in favour of the assessee. Thus, we respectfully follow the same and allow this ground of the assessee.‖ 242) Both the parties admitted that there is no change in the facts and circumstances of the case compared to the assessment year for which the tribunal is decided except that in that particular year, it was the Haridwar plant and in this year‘s it is Neemrana Plant. The Ld. departmental representative also could not point out any other judicial precedent. In view of this respectfully following the above decision, we uphold the findings of the DRP and thus dismissed the ground No. 13 of appeal raised by the department. 243) Ground 14 of the appeal of the revenue is against disallowance of expenses incurred on repairs and maintenance of various assets incurred by the assessee which according to the Ld. assessing officer were capital expenditure and whereas the Ld. dispute resolution panel after taking into consideration the order of the coordinate bench in assessee‘s own case for

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 429 of 484 assessment year 2008 2009. The brief facts of the issue is that assessee has incurred an expenditure of Rs. 1 976617 2/- provision of its various offices, as repair and maintenance expenses. These expenses are been claimed by the appellant as revenue expenditure. The Ld. assessing officer was of the view that all of the expenses are not in the nature of current repairs but is capital in nature and thus he determined depreciation at the rate of 10% of the expenditure and held them to be not allowable as deduction in terms of section 30 (a) (ii) of the income tax act. Therefore he allowed 10% depreciation on the sum of Rs. 1 976 6172, and thereby made a disallowance of Rs. 1 825 5930. Ld. DRP directed the Ld. assessing officer to delete the above addition. In addition, therefore, revenue is in appeal before us against the order of the Ld. dispute resolution panel. 244) Ld. departmental representative submitted that the assessee has incurred these expenditure which are stated to be routine expenditure on repairs and maintenance expenses of various existing assets, but they are not in the nature of current repairs which are allowable as deduction. Therefore, the Ld. assessing officer has treated this expenditure as capital expenditure and granted 10% depreciation thereon.. He vehemently supported the order of the Ld. assessing officer on this ground. 245) Ld. authorized representative submitted that that the boy expenditure incurred by the assessee is in the nature of the current repairs as need for them arises in the ordinary course of the use of those assessed to normal wear and tear. He further stated that the current repairs are required to be carried out and the following factors determine the nature of such expenditure such as periodical repairs, test of commercial expediency and petty repairs. For each of the proposition he relied upon the several decisions of the various courts. He further submitted the details of the above expenses incurred are Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 430 of 484 miscellaneous in nature like building maintenance, whitewash and paintwork, plastering, other renovation work etc. he submitted that none of these expenses results into a capital expenditure is no new asset has come into existence. He submitted that these expenses were incurred by the assessee mainly to preserve the existing assets and only to carry on the business more profitably and did not result in acquisition of any new asset. He further submitted that the above issue has been decided in the earlier years in case of the appellant by the coordinate benches set aside the issue to the file of the assessing officer for verification whether the expenditure was incurred on existing assets or not. He further submitted that in pursuance of that order, the Ld. assessing officer has passed order dated 26th of February 2015 after examining the nature of expenses incurred by the assessee has held that these expenses are revenue in nature and allowable to the assessee as deduction. 246) We have heard the rival contentions. We have seen the details of expenses incurred by the assessee. The same are routine expenses, which are quite reasonable having regard to the size and magnitude of the company. Such expenses are incurred year after year, which are always allowed deduction. We also note that similar issue was allowed in the assessee‘s own case for assessment year 2008-09. The relevant observations of the Tribunal for assessment year 2008-09 are as under: 247) ―51. We have considered the submissions and arguments of both the parties on the issue. Ld. Counsel of the assessee submitted that the claim of expenses was pertaining to the expenses which were incurred from time to time on miscellaneous repair/maintenance like building maintenance, whitewash, paint work, plastering, enamel and premium work, replacement of roof cladding sheet/ Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 431 of 484 kharanja on the various existing assets which did not result in any manner in increase of production capacity and the expenses were incurred to facilitate a smooth running of existing business operations. Ld. Counsel of the assessee also submitted that the expenses incurred on routine repair and maintenance were in relation to various existing assets of the assessee company used for the purpose of business only. Ld. Counsel of the assessee further submitted that the expenditure of Rs.3,60,409/- was incurred in respect of existing asset i.e. DGH House by way of renovation which include replacement of roof, brick work, flooring and plastering etc. Ld. Counsel of the assessee further submitted that the said expenditure are revenue in nature and has been accepted by the AO in the earlier years. 52. Ld. DR replied that when the assessee failed to file any vouchers to establish or substantiate the claim of expenditure on repair and maintenance, then the AO has no option but to disallow the same. The DR further submitted that when the assessee is beneficiary of the benefit of enduring nature, then the AO is justified to treat the same expenses as capital in nature. The DR supported the orders of the authorities below and alternatively submitted that the issue requires detailed examination and verification at the end of AO, then if it is found to be appropriate, the issue may be set aside to the file of AO for fresh adjudication. 53. On careful perusal of record placed before us, we observe that the AO made an addition on the following observations and findings:- Before coming to any conclusion, it is necessary to bring on record the findings of the Special Auditor on the issue. Same is as under: -

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 432 of 484 During the course of special audit, we have observed that in the following cases the expenses have been charged off as revenue expenses whereas the supporting vouchers suggest that the same should have been capitalized. The copy of the vouchers is marked as page no. 3A57 to 3A63(forming part of volume III). The details of the same are given below:-

Sl.No. Account Date of Location Text Narration Total H E A 1 Building 19.01.2008 HHHD Construction of 3,60,409 e x m M Air 2 Maintenance- 31.03.2008 HHHD Provision for 14,39,892 a p o a Intake H capita d e u Total 18,00,301 i Room o l work n n n DG rt s t t Set From the above facts it is seen that in respect of building ic e e maintenance expenditure of Rs.360409/- is in fact related u n to construction of Air Intake Room DG set. Expenditure is lt a clearly capital in nature. As regard balance of the payment u n at Rs.1439892, where the assessee claims them to be in r c the nature of repairs, the Auditor has reported that e e vouchers are not available. Only detail submitted by the assessee is a list the provision of capital nature work as on 31.03.08. Though the inner items appear to be in the nature of repairs but no vouchers were available to the Special Auditor during the course of audit or submitted to the AO in response to the reply of final show cause. Therefore, AO is inclined to go by the nature of these expenses as given by the assessee itself i.e. provision for capital nature work'. Entire amount of Rs.1800301/- is therefore inadmissible being capital in nature. Therefore, after allowing depreciation @10% amounting to Rs.90015,

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 433 of 484 for the period of 6 months, amount of Rs. 17,10,286/- is added to the income of the assessee. The DRP vide its order dated 28.03.2013 has decided this issue in favour of Revenue. Accordingly, in conformity with the order of DRP, an addition of Rs.17,10,286 is made to the total income of the assessee. " 54. In view of above conclusion of the AO, we clearly observe that the AO has observed that "though inner items appear to be in the nature of repairs but no vouchers were available to the Special Auditor during the course of audit or submitted to the AO in response to the reply of final show cause." Hence, we are of the opinion that it is a well- settled legal proposition that the repairs and maintenance expenses which does not bring any benefit of enduring nature or create any new asset for the assessee the then the same expenses should be allowed. At the same time, we also observe that the onus is on the assessee to establish that the expenses were incurred on the existing assets of the assessee which did not bring any benefit of enduring nature or create any new asset for the assessee and the assets were used for the purpose of business only. In the present case, the assessee made a claim of Rs. 1800301/- which consist of provision of Rs. 1439892/- for repair expenses and second part of Rs.360409/- said to be incurred in respect of building maintenance. In a peculiar situation when the assessee failed to file any vouchers of expenditure to substantiate its claim, then the AO has no option but to disallow the same. We find it appropriate to restore the issue to the file of AO for a fresh adjudication with a direction that the issue of claim of assessee pertaining to repair and maintenance expenses shall be decided after affording due opportunity of hearing for the Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 434 of 484 assessee. The AO is also directed to examine and verify the fact that whether the claim of expenditure was actually incurred on the existing assets of the assessee and whether the assessee got any benefit of enduring nature in return of said expenditure. With above directions to the AO, ground no. 10 to 10.1 of the assessee are disposed of and deemed to be treated as allowed for statistical purposes.‖ 248) Parties before us have admitted that there is no difference in the facts and circumstances of the present case and also the nature of expenditure involved in the present issue compared to the nature of expenses and issued decided by the coordinate bench in above order. Even before us, the revenue could not point out that any of the expenditure incurred by the assessee on account of repairs is not on the existing assets, but new assets have been purchased out of these expenses. In view of above facts we delete the disallowance made by the Ld. and assessing officer respectfully following the decision of the coordinate bench in assessee‘s own case for earlier years and consequent order of the Ld. and assessing officer after examining the complete details in the result, we direct the Ld. and assessing officer to delete the disallowance made of Rs. 1 825 5930/-by holding that expenditure incurred of Rs. 1 976 6172 is allowable repairs and maintenance expenditure on the existing assets of the company and is revenue in nature. In the result ground No. 14 of the appeal of the revenue is dismissed. 249) Ground No. 15 of the appeal of the revenue is against direction of the Ld. dispute resolution panel to delete the disallowance of Rs. 2 18850 on account of expenditure incurred on purchase of the mobile phones held by the Ld. and assessing officer as capital expenditure in nature. The brief facts of the issue is that assessee has purchased certain mobile phones during the year for use by its employees, which were claimed as revenue Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 435 of 484 deduction. However, the Ld. assessing officer was of the view that this is the capital expenditure and he allowed depreciation on this amount and disallowed the balance amount as capital expenditure. The Ld. dispute resolution panel on objection filed by the assessing officer allowed the above claim and directed the Ld. assessing officer to delete the proposed disallowance. The Ld. Assessing officer being aggrieved by the order of the Ld. dispute resolution panel is in appeal before us on this issue.

250) The Ld. departmental representative relied upon the order of the Ld. assessing officer. Ld. authorized representative submitted that the assessee has purchased this mobile phones which were actually used by the employees and did not form part of any profit earning apparatus of the assessee and these are not capital expenditure. He further submitted that the mobile technology is becoming very obsolete due to the fast technological changes in the expenditure was incurred by the appellant as a replacement of already existing mobile phones which were used by the employees but had become obsolete and unworkable. Therefore he submitted that, expenditure is revenue expenditure in nature. 251) We have heard the rival contentions. The issue in the present ground is similar to the ground of appeal no. 36 taken in assessee‘s appeal. While disposing the said ground we have held that in the modern era of fast changing technology, expenses incurred on replacement/up gradation of existing assets is allowable revenue expenditure. It is a common knowledge that there is a huge revolution in the mobile telephony industry, which forces person, especially in case of corporate to constantly upgrade to newer model of mobile phones. It cannot also be disputed that mobile phone in the facts and circumstances of the assessee‘s case does not Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 436 of 484 constitute profit earning apparatus or as an essential tool of trade to carry on such business. Mobile phones only facilitate smooth carrying of business by the executives of the appellant company. In that view of the matter while following the decision taken while disposing of the ground of appeal no. 36 for assessee‘s appeal we hold that expenditure incurred towards mobile phone in the facts of the appellant‘s case is an allowable revenue expenditure. Accordingly, the order of the DRP is sustained and the ground of appeal raised by the department is dismissed. 252) In the result appeal No. 2424/Del/ 2015 filed by the revenue in assessment year 2010-11 is partly allowed.

A Y 2011-12 253) Now we come to the appeals of the parties for the assessment year 2011 – 12. The brief facts of the assessment proceeding is that that assessee has filed his return of income declaring total income of Rs. 1388, 79, 52, 025/– on 30/11/2011. As in the return of the assessee there were international transactions. Hence, the Ld. assessing officer made a reference under section 92CA(1) to the Ld. transfer pricing officer. The Ld. transfer pricing officer in his order under section 90 2CA of the income tax act, 1961 dated 29th of January 2015 determine the arm‘s length price of the international transaction of payment of export commission of Rs. 1 6124 0908/–, payment of model fees of Rs. 8 8428 7976/– and payment of royalty for export of Rs. 6 31680/– totalling to Rs. 1 04, 61, 60, 566/– at rupees nil. Consequently, the enhancement to the total income of the assessee was proposed by him. Incorporating the above adjustment to the arm‘s length price of the international transactions, Ld. assessing officer passed draft assessment Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 437 of 484 order wherein he further proposed 38 adjustments in the form of disallowances, additions to the total income of the assessee. Against this order. The assessee preferred objection to the dispute resolution panel under the provisions of section 144C of the income tax act. The Ld. dispute resolution panel passed direction wide their order dated 28th of December 2015 wherein they have accepted certain arguments of the assessee and directed the Ld. assessing officer to delete the addition or disallowances. Against some of those direction of the assessee, revenue is in appeal before us. Further, some of the findings of the Ld. assessing officer in draft assessment order were approved by the Ld. dispute resolution panel and incorporated in the final order. Consequently, the Ld. assessing officer passed final assessment order under section 143 (3) of the income tax act, 1961 is Pursuant to the directions of Ld. dispute resolution panel under section 144C of the income tax act, 1961, wherein the income of the assessee was computed at Rs. 7 411, 97, 02, 803/– against the returned income of Rs. 1 388, 79, 52, 0 25/–. Therefore the assessee aggrieved by the order of the Ld. assessing officer has preferred an appeal before us. Therefore, for assessment year 2011 – 12, there are cross appeals filed by the assessee as well as the revenue before us. ( revenue‘s Appeal ) ITA No 1609/Del/2016 254) Revenue has raised the following grounds of appeal in ITA No. 1609/Del/2016:- ―1. Whether Ld. DRP was correct on facts and circumstances of the case and in law in deleting the addition of Rs. 180.11 lacs made by the AO on account of disallowance of write off obsolete stock in the draft order?

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 438 of 484 2. Whether Ld. DRP was correct on facts and circumstances of the case and in law in deleting the addition of Rs. 1080.95 lacs made by the AO on account of disallowance of prior period expense in the draft order? 3. Whether Ld. DRP was correct on facts and circumstances of the case and in law in deleting the addition of Rs.130.44 lacs made by the AO on account of disallowance of software expenses charge to revenue in the draft order? 4. Whether Ld. DRP was correct on facts and circumstances of the case and in law in deleting the addition of Rs. 98.66 lacs made by the AO on account of disallowance of depreciation on wrong classification of assets under the head computer in the draft order? 5. Whether Ld. DRP was correct on facts and circumstances of the case and in law in deleting ‗the addition of Rs. 513.98 lacs made by the AO on account of deemed dividend in the draft order? 6. Whether Ld. DRP was correct on facts and circumstances of the case and in law in deleting the addition of Rs.206.73 lacs made by the on account of disallowance of foreign travelling expenses in the draft order? 7. Whether Ld. DRP was correct on facts and circumstances of the case and in Saw in deleting the addition of Rs. 48.84 lacs made by the AO on account of disallowance of lease rent of Haridwar in the draft order? 8. Whether Ld. DRP was correct on facts and circumstances of the case and in law in deleting the addition of Rs. 42.20 lacs made by the AO on account of disallowance of community development expenses in the draft order?

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 439 of 484 9. Whether Ld. DRP was correct on facts and circumstances of the case and in law in deleting the addition of Rs. 265.33 lacs made by the AO on account of disallowance the expenses on account of current repair in the draft order? 10. Whether Ld. DRP was correct on facts and circumstances of the case and in law in deleting the addition of Rs. 3.19 lacs made by the AO on account of disallowance of expense on account of purchase of mobile phones in the draft order?‖

255) The 1st ground of appeal of the revenue is against the direction of the Ld. dispute resolution panel that the stock of Rs. 1 801 1035 has been written off by the assessee in the books of accounts with respect to the store items. Assessee submitted before the Ld. assessing officer that that the above amount has been written of due to the changing the design of model, phase out of the model part in the comparable becoming unuseful due to obsolescence damage etc. The Ld. dispute resolution panel directed the Ld. assessing officer to not to make the above addition following the direction of the panel in earlier years. The parties before us as submitted that this is the ground identical to the ground No. 1 of the departmental appeal for assessment year 2010 – 11, and there is no change in the facts and circumstances of the case. We have carefully perused the relevant material placed before us and also the arguments of the assessee as well as revenue on this point. We have already decided ground No. 1 of the appeal of the revenue for assessment year 2010 – 11 wherein we confirm the finding of the Ld. dispute resolution panel and dismiss the ground No. 1 of the appeal of the revenue. Therefore, following our decision in appellant‘s own case for assessment year 2010-11, we also dismiss ground No. 1 of the appeal of the revenue. Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 440 of 484 256) Ground No. 2 of the appeal of the revenue was against the disallowance of Rs. 1080.95 Lacs as prior period expenses. Parties before us submitted that the decision identical to the ground No. 3 of the appeal of the revenue for assessment year 2010 – 11, and there is no change in the facts in the circumstances of the case and therefore the parties submitted that their arguments remains the same. We‘ve carefully considered the rival contentions and also perused the relevant facts of ground No. 3 of the revenue‘s appeal for assessment year 10 – 11 and we are convinced that they are identical except the amount involved in the ground. Therefore, following our decision in ground No. 3 of the revenue is appeal in these order for assessment year 2010 – 11 wherein we have dismissed. The ground of the revenue finding no infirmity in the order of the Ld. dispute resolution panel, we also dismiss ground No. 2 of the appeal of the revenue for this year too . 257) Ground No. 3 of the appeal of the revenue is against the disallowance of software expenses of Rs. 1 30.44 Lacs on account of software purchases made by the assessing officer which was directed by the Ld. dispute resolution panel for deletion. The parties before us submitted that this issue is identical to ground No. 4 of the revenue is appeal for assessment year 2010 – 11, and their arguments also remains the same. They further submitted that there is no change in the facts and circumstances of the case. We have carefully considered the rival contentions and also perused the relevant ground of appeal of the revenue for earlier year in the case of the assessee and the reasons given by the Ld. assessing officer for proposing the disallowance and the reasons given by the Ld. dispute resolution panel directing the Ld. assessing officer to delete the addition. On the basis of the submission of the parties. It is apparent that ground No. 4 of the appeal of the Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 441 of 484 revenue for assessment year 2010 – 11, squarely covers the issue involved in the present appeal. While deciding the ground No. 4 of the appeal of the revenue for assessment year 2010 2011, we hold that software expenses incurred by the assessee are revenue expenditure in nature and not capital expenditure and thereby we dismissed that ground of appeal. Similarly, therefore, we also dismiss ground No. 3 of the appeal of the revenue wherein the software expenses of Rs. 130.44 lacs were proposed to be disallowed by the Ld. assessing officer holding them to be capital expenditure in nature. In the result ground No. 3 of the appeal of the revenue is dismissed. 258) Ground No. 4 of the appeal of the revenue was against the wrong classification of certain assets of the had computers amounting to Rs. 98.66 Lacs and therefore there was an excess claim of depreciation by the assessee. The parties before us submitted that this issue is identical to ground No. 5 of the revenue is appeal for assessment year 2010 – 11, and there is no change in the facts and circumstances of the case and therefore their arguments also remains the same. We have carefully considered the rival contentions and also perused the orders of the Ld. assessing officer as well as the direction issued by the Ld. dispute resolution panel. While deciding the appeal of the assessee for assessment year 2010 – 11 wherein the revenue raised ground No. 5 which is identical to this ground of appeal of the assessee. We have dismissed ground No. 5 of the appeal of the revenue for assessment year 2010 – 11 and therefore also on the same ground and for the same reasons contained therein, We also dismiss ground No. 4 of the appeal of the assessee. 259) Ground No. 5 of the appeal of the revenue is against the direction of Ld. dispute resolution panel directing the Ld. assessing officer to delete the addition of Rs. 5 13.98 lakhs Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 442 of 484 made by him as deemed dividend in the hands of the assessee on account of payment received by appellant on behalf of Hero Honda Finlease limited. The parties before us submitted that this issue is identical to the ground No. 6 of the appeal of the revenue for assessment year 2010 – 11, and there is no change in the facts and circumstances of the case and therefore their arguments remains the same. We have carefully considered the rival contentions as well as the order of the Ld. assessing officer and the directions of the Ld. dispute resolution panel on this issue. As the issue involved in this ground of appeal is similar to the ground No. 6 of the revenue is appeal for assessment year 2010 – 11 and we have dismissed that ground of appeal for the reasons contained therein and therefore for the same reasons we also dismiss ground No. 5 of the appeal of the revenue for this year. 260) Ground No. 6 of the appeal of the revenue is against the disallowance of reimbursement of foreign travelling expenses to the directors, and employees amounting to Rs. 206.73 lakhs which is directed to be deleted by the Ld. dispute resolution panel. The parties before us submitted that the issue involved in this appeal is identical to the ground of appeal no. 9 of the revenue‘s appeal for assessment year 2010 – 11 and there is no change in the facts and circumstances of the case and their arguments for and against of this ground also remains the same. We have carefully perused the ground No. 9 of the appeal of the revenue for assessment year 2010 – 11, and also perused the facts of this ground of appeal and we also found that they are identical except the amount involved therein. While deciding the appeal of the revenue for the assessment year 2010 – 11. We have dismissed that ground of appeal vide ground No. 9 of that appeal and therefore for the same reasons we also dismiss ground number 6 of the appeal of the revenue. Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 443 of 484 261) Ground No. 7 of the appeal of the revenue was against the disallowance of proportionate amount of premium paid for line taken only is for 99 years at Haridwar. The parties before us submitted that the issue involved in this appeal is identical to the ground of appeal no. 10 of the revenue‘s appeal for assessment year 2010 – 11 and there is no change in the facts and circumstances of the case and their arguments for and against of this ground also remains the same. We have carefully perused the ground No. 10 of the appeal of the revenue for assessment year 2010 – 11, and also perused the facts of this ground of appeal and we also found that they are identical except the amount involved therein. While deciding the appeal of the revenue for the assessment year 2010 – 11. We have dismissed that ground of appeal vide ground No. 10 of that appeal and therefore for the same reasons we also dismiss ground number 7 of the appeal of the revenue. 262) Ground No. 8 of the appeal of the revenue was against the disallowance of expenses incurred on account of corporate social responsibility of Rs. 42.20 Lacs incurred by the assessee, which were directed by the Ld. dispute resolution panel for deletion. Therefore, revenue is in appeal before us. The parties before us submitted that the issue involved in this appeal is identical to the ground of appeal no. 11 of the revenue‘s appeal for assessment year 2010 – 11 and there is no change in the facts and circumstances of the case and their arguments for and against of this ground also remains the same. We have carefully perused the ground No. 11 of the appeal of the revenue for assessment year 2010 – 11, and also perused the facts of this ground of appeal and we also found that they are identical except the amount involved therein. While deciding the appeal of the revenue for the assessment year 2010 – 11. We have dismissed that ground of appeal vide ground No. 11 of Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 444 of 484 that appeal and therefore for the same reasons we also dismiss ground number 8 of the appeal of the revenue. 263) Ground No. 9 of the appeal of the revenue is appeal is against the direction of the Ld. Dispute resolution panel to delete the disallowance on account of repairs expenditure amounting to Rs. 2 65.33 lakhs. The parties before us submitted that the issue involved in this appeal is identical to the ground of appeal no. 14 of the revenue‘s appeal for assessment year 2010 – 11 and there is no change in the facts and circumstances of the case and their arguments for and against of this ground also remains the same. We have carefully perused the ground No. 14 of the appeal of the revenue for assessment year 2010 – 11, and also perused the facts of this ground of appeal and we also found that they are identical except the amount involved therein. While deciding the appeal of the revenue for the assessment year 2010 – 11. We have dismissed that ground of appeal vide ground No. 14 of that appeal and therefore for the same reasons we also dismiss ground number 9 of the appeal of the revenue. 264) Ground No. 10 of the appeal of the revenue was against the direction of the Ld. dispute resolution panel against the proposed addition of Rs. 3.19 Lacs made by the Ld. assessing officer on account of the purchase of mobile phones holding the same as capital expenditure. The parties before us submitted that the issue involved in this appeal is identical to the ground of appeal no. 15 of the revenue‘s appeal for assessment year 2010 – 11 and there is no change in the facts and circumstances of the case and their arguments for and against of this ground also remains the same. We have carefully perused the ground No. 15 of the appeal of the revenue for assessment year 2010 – 11, and also perused the facts of this ground of appeal and we also found that they are identical Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 445 of 484 except the amount involved therein. While deciding the appeal of the revenue for the assessment year 2010 – 11. We have dismissed that ground of appeal vide ground No. 15 of that appeal and therefore for the same reasons we also dismiss ground number 10 of the appeal of the revenue. 265) In the result ITA number 1629/del/2016 filed by revenue for assessment year 2011 – 12 is dismissed. A Y 2011-12 ( Assessee‘s Appeal ) . 266) Now we come to the appeal of the assessee wherein assessee has raised the following grounds of appeal for the AY 2011-12 in ITA No. 914/Del/2016:- GROUNDS OF APPEAL 1. That the assessing officer erred on facts and in law in completing assessment under section 143(3) read with section 144C of the Income-tax Act, 1961 ('the Act1), vide order, dated 27.01.2016, at an income of Rs. 7411,97,02,8007- as against the income of Rs. 1388,79,52,025/- returned by the appellant under the normal provisions. 2. That the assessing officer / the Transfer Pricing Officer (the TPO) erred on facts and in law in making adjustment of Rs.104,61,60,566 to the income of the assessee on account of the following international transactions disregarding the benchmarking analysis applying Transactional Net Margin Method ("TNMM") undertaken by the assessee: International s Amount of Proposed Arm's Difference Transactions . international length price of N transaction the o shown by the international . assessee transaction

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 446 of 484 Payent of Export 1 16.12.40.908 NIL 16,12.40,908 Commission . Payment 2 of 88.42,87,976 NIL 88,42,87,976 Model Fee . Royalty paid on 4 6,31,680 NIL 6,31,680 exports made to . the AEs. Total 104,61,60,566

2.1 That the assessing officer/TPO erred on facts and in law in holding that benchmarking analysis undertaken by the assessee in respect of the international transactions of payment of export commission, model fee and royalty by aggregating with other transactions and applying TNMM was incorrect and each such transaction is required to be analyzed separately. 3. That the assessing officer/TPO erred on facts and in law in determining the arm's length price of international transaction of payment of export commission of Rs. 16,12,40,908 at NIL, allegedly applying CUP method holding that no independent party shall pay such commission in similar circumstances since – (a) An independent enterprise would compensate another party for ceding territory to it only when the latter party either withdraws from that territory or some restrictions are placed upon it. Nothing of that sort has happened to the AE. The AE continues its business as usual in those overseas territories. (b) The restriction to export products was imposed by the AE itself. It is not as if after the AE lifted its restriction some loss was caused to it that it needed to claim compensation from the assessee. The assessee is part of the Honda group. If the AE places a restriction by one agreement, lifts with another Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 447 of 484 agreement and then claims compensation, the entire scheme appears to be nothing but a device to shift profits out of India. (c) The assessee's exports to South East Asian countries consists of motorcycles of lOOcc, 125cc and 150cc capacity. The AE does not have a manufacturing facility for these classes of motorcycles in these countries. (d) If one looks at the entire arrangement in its entirety, it will be abundantly clear that the AE has simply used the assessee to position these products in the South East Asian markets at competitive prices. Neither has it actually ceded the market nor has it conferred any special benefit upon the assessee. (e) The AE is not making any special effort for the assessee. Hence, if the assessee wishes to operate as an independent enterprise, it would have first assessed as to what is the damage that is being caused to the AE by its entering those territories. (f) If the parent company allows an AE to use an already established marketing network it does not mean that a special benefit is passing to the assessee. The parent company will not allow a third party access to its network. Hence, the access that the assessee has gained to the marketing / dealer network of HMCL is incidental to its being part of the group. As per the OECD guidelines such incidental services do not call for a separate payment. 3.1 That the assessing officer/TPO erred on facts and in law in not appreciating that the appellant could not have exported two wheelers without payment of export commission to the associated enterprise

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 448 of 484 3.2 That the assessing officer/TPO erred on facts and in law in determining the arm's length price of international transaction or payment of model fee of Rs. 88,42,87,976 at NIL, allegedly on the following grounds - (a) The assessee is equally responsible for the technology up gradation that is taking place in India; (b) The assessee pays model fee and royalty for the same set of service; 3.3 That the assessing officer/TPO erred on facts and in law in holding that the assessee was engaged in undertaking R&D activity for development of new models. 3.4 That the assessing officer TPO erred on facts and in law in not appreciating that in the absence of technology provided by the associated enterprise, the appellant could not have manufactured specified models of motorcycles 3.5 That the assessing officer/TPO erred on facts and in law in disregarding that the payment of model fees has been approved by the RBI. 4. That the assessing officer/TPO erred on facts and in law in holding that arm's length price of international transaction of payment of royalty on exports made to AEs of Rs. 6,31,680 was NIL on the ground that – (a) the assessee was acting as a contract manufacturer and hence royalty paid as percentage of sale to the associated enterprises is not at arm's length as it amounts to collecting royalty on the sale to itself. (b) the assessee is making part of its sales to related parties and the benefit of purchasing components is reaped by the

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 449 of 484 associated enterprise, the payment of royalty does not conform to arm's length price. 4.1 That the assessing officer/TPO erred on facts and in law in re-characterizing the appellant as a contract manufacturer not appreciating that even with respect to exports to associated enterprises, the appellant is operating in the capacity of full risk bearing entrepreneur. 4.2 That the assessing officer/TPO officer erred on facts and in law in not appreciating that the royalty is paid by the appellant on net sales after deducting the cost of imported components, standard bought out components and export commission. 5. That the assessing officer/TPO erred on facts and in law in not appreciating that the payment of export commission, model fee and royalty was validly benchmarked applying TNMM method as most appropriate method and that no adverse inference could be drawn on this account. 6. That the assessing officer TPO erred on facts and in law in computing adjustment on account of international transaction of payment of export commission, model fee and royalty without applying any of the prescribed methods. 7. That the assessing officer erred on facts and in law in enhancing the value of closing inventory of raw materials/components and thereby income of the appellant by Rs.59.83 lacs in respect of freight inward expenses and import clearing charges incurred in relation to procurement of raw- material/components and attributable to the closing stock of the aforesaid goods on the ground that the aforesaid cost needs to be added to the value of closing stock in accordance with accounting standard read with section 145 A of the Act.

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 450 of 484 8. That the assessing officer erred on facts and in law in enhancing the value of closing inventory of finished goods and thereby income of the appellant by an amount of Rs. 59,000, in respect of cost of rejection of semi finished goods and obsolete items, on the ground that the aforesaid cost needs to be added to the value of closing stock in accordance with accounting standards read with section 145A of the Act. 8.1. That the assessing officer erred on facts and in law in observing that the appellant did not state that the expenditure on account of rejection of various goods debited in the profit and loss account did not comprise of abnormal rejections. 9. That the assessing officer erred on facts and in law in making a disallowance of Rs. 134,58,08,269 in respect of provision made at the end of the year towards net increase in prices of raw material already supplied by the vendors upto 31.03.2011, with retrospective effect, on the ground that - (i) the said provisions were made for contingent liability and (ii) there was no condition of revision of prices in the purchase order placed by the appellant on such vendors. 9.1 That on the facts and circumstances of the case, the assessing officer erred in observing that as per the terms of purchase order, rates negotiated with the vendors / cannot be modified from a prior date, thereby holding that provisions have been incorrectly made by the appellant and are not allowable expenditure. 9.2 That the assessing officer erred in not appreciating that out of the total provision of Rs 13,458 Lakhs, provision to the extent of Rs. 8,169.57 lakhs was made on the basis of actual price revisions approved upto the end of the relevant year and balance provision to the extent of Rs. 5288.51 lakhs was made

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 451 of 484 on the basis of management's best estimate, on a scientific basis, which is an allowable business expenditure, as per mercantile system of accounting, under section 37(1) of the Act. 10. That the assessing officer erred on facts and in law in making an addition of Rs.2.51 lacs by estimating the value of scrap lying in stock as at the end of the relevant previous year, on hypothetical / notional basis. 11. That the assessing officer erred on facts and in law in disallowing a sum of Rs. 28,76,95,776 in respect of provision for advertisement expenses (incurred at the head office) made at the end of the relevant previous year, which were reversed in the succeeding year, alleging the same to be excessive. 11.1 That the assessing officer erred on facts and in law in alleging that the provision for expenses at the end of relevant previous year was not made on scientific basis and was not a reasonable estimate and, therefore, contingent in nature. 11.2 That the assessing officer erred on facts and in law in observing that the appellant failed to substantiate the method of creating the aforesaid provision. 12. That the assessing officer erred on facts and in law in disallowing purchases to the extent of Rs.57,13,76,000 made from certain parties related with the appellant, in terms of Accounting Standard 18 issued by the Institute of Chartered Accountants of India, alleging the same to be excessive. 12.1 That on the facts and circumstances of the case, the assessing officer erred in not appreciating that the aforesaid parties were not related to the appellant in terms of section 40A(2)(b) of the Act and hence no disallowance of expense on the ground that payment made to such parties was excessive, could be made. Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 452 of 484 12.2 That the assessing officer erred on facts and in law in alleging that the appellant had maintained its relationship with the parties in a manner that they do not qualify for being related parties as per the provisions of section 40A(2) of the Act. 12.3 Without Prejudice, that the assessing officer erred on facts and in law in disallowing purchases, to the extent of Rs. 35,36,56,000, with respect to purchases from aforesaid related parties (in terms of AS-18) for which no comparable instance supporting the allegation of excessive payment, was available, on pure estimate basis. 13. That the assessing officer erred on facts and in law in disallowing expenditure of Rs. 2 cores incurred on account of advisory services availed from Hero Corporate Services Ltd. ("HCSL") alleging that the appellant failed to establish the business expediency of the said expenditure or nexus of services availed from the aforesaid party with the business of appellant company and, therefore, such expenditure was not incurred wholly and exclusively for the purpose of business. 13.1 That the assessing officer erred on facts and in law in observing that the Revenue had powers to determine the reasonableness of the aforesaid payment made by the appellant to HCSL on the ground that the said party was related to appellant in terms of AS 18, although not related in terms of section 40A(2)(b) of the Act. 14. That the assessing officer erred on facts and in law in disallowing amount of Rs. 1,15,82,750 on account of provision made towards commission paid on institutional sales to dealers, on the ground that the appellant failed to deduct tax at source under section 194H from the amount of aforesaid provision invoking provision of section 40(a)(ia) of the Act.

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 453 of 484 14.1 That the assessing officer erred on facts and in law in not appreciating that since the contract between the dealers and the appellant was on principal to principal basis, the provisions of section 194H were not applicable on the aforesaid amount of commission. 14.2 That the assessing officer erred on facts and in law in observing that the appellant did not dispute applicability of section 194H on the aforesaid amount of provision made towards commission payable to dealers. Without Prejudice 14.3 Without prejudice, that the assessing officer erred on facts and in law in not appreciating that since payees were not identified nor any right to receive commission accrued in the hands of payees, there was no obligation on appellant to deduct tax at source under section 194H of the Act. 14.4 That the assessing officer erred on facts and in law in observing that liability to deduct tax at source under section 194H in the present case got attracted since amounts payable were clearly ascertainable and payees were identifiable. 14.5 That the assessing officer erred on facts and in law in not deleting the aforesaid disallowance made under section 40(a)(ia) on the ground that the payees/recipients had considered the impugned payments as income and paid tax thereon in the year of receipt and, therefore, ousting the applicability of the said section. 14.6 Without prejudice, that the assessing officer erred on facts and in law in not appreciating that the appellant had a bonafide belief that tax was not deductible at source on the aforesaid amount of provision for commission payable to dealers.

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 454 of 484 15. That the assessing officer erred on facts and in law in holding that purchases made from certain vendors aggregating to Rs. 4095.55 crores are disallowable under section 40(a)(ia) on the ground that the appellant failed to deduct tax at source (TDS) there from under section 194C of the Act. 15.1 That the assessing officer erred on facts and in law in observing that contracts entered with the aforesaid vendors were in the nature of 'work contract' and, therefore, payments made there under were subject to TDS under section 194C of the Act. 15.2 That on the facts and circumstances of the case, the assessing officer failed to appreciate that the provisions of section 194C of the Act were not applicable in relation to the aforesaid transactions, as the same were in the nature of contract of sale. 15.3 That the assessing officer erred on facts and in law in treating the aforesaid purchase contract as 'work contracts', merely on the basis that the appellant, while placing the purchase orders to the vendors, in addition to specifications of the products to be purchased from the vendors, also specified to the vendors the name of suppliers and purchase price of raw materials/components to be used in manufacture of products by such vendors. 15.4 That the assessing officer erred on facts and in law in observing that by arranging the transaction in the aforesaid manner, the appellant had adopted colorable device to avoid deduction of tax at source. 15.5 Without prejudice, the assessing officer erred on facts and in law in not appreciating that the appellant had a bonafide

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 455 of 484 belief that tax was not deductible at source on aforesaid transaction of supply of goods. 15.6 Further, without prejudice, that the assessing officer erred on facts and in law in not appreciating that the disallowance under section 40(a)(ia) against the aforesaid expenditure cannot exceed the outstanding liability at the end of the year. 15.7 Further without prejudice, that the assessing officer erred on facts and in law in disallowing the aforesaid purchases for alleged failure to deduct tax at source from payments made there against, without appreciating that, since the recipient had considered sales to the appellant as part of the taxable income on which tax was duly paid, the same could not have been disallowed in the hands of appellant under section 40(a)(ia)of the Act. 16. That the assessing officer erred on facts and in law in disallowing aggregate expenditure of Rs. 4,00,945 incurred on account of booking of hotel to convene training courses on the ground that appellant failed to deduct tax at source there from under section 1941 of the Act. invoking provisions of section 40(a)(ia) of the Act. 16.1 Without prejudice, that the assessing officer erred on facts and in law in not appreciating that since the appellant was under a bona fide belief that no tax was required to be deducted there from, no disallowance was warranted under section 40(a)(ia)of the Act. 16.2 Without prejudice, the assessing officer erred on facts and in law in not appreciating that no disallowance against the aforesaid expenditure could be made exceeding the outstanding liability as at the end of the year.

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 456 of 484 16.3 Further, without prejudice, the assessing officer erred on facts and in law in not appreciating that since the payees have also paid tax on the income receivable from the appellant, no disallowance could be made under section 40(a)(ia) of the Act for alleged default in deduction of tax at source by the appellant. 17. That the assessing officer erred on facts and in law in disallowing expenditure of Rs.40,71,44,058/- incurred towards quarterly target and turnover discount and trade discount of Rs. 35,05,00,0427- given to the dealers7customers on the ground that the appellant failed to deduct tax at source there from under section 194H of the Act, invoking provisions of section 40(a)(ia) of the Act. 17.1 That the assessing officer erred on facts and in law in observing that since the impugned payments were not in the nature of 'discount' to dealers, but incentives for meeting targets, the same was in the nature of 'commission', being subject to IDS under section 194H of the Act. 17.2 That the assessing officer erred on facts and in law in not appreciating that the aforesaid discounts were offered under contracts entered into with the dealers on a principal to principal to basis, and did not constitute 'commission' as referred to in section 194H of the Act. 17.3 Without prejudice, that the assessing officer erred on facts and in law in not appreciating that since the appellant was under a bona fide belief that no tax was required to be deducted there from, no disallowance was warranted under section 40(a)(ia) of the Act. 17.4 Without prejudice, the assessing officer erred on facts and in law in not appreciating that no disallowance against the

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 457 of 484 aforesaid expenditure could be made exceeding the outstanding liability as at the end of the year. 17.5 Further, without prejudice, the assessing officer erred on facts and in law in not appreciating that since the payees have also paid tax on the income receivable from the appellant, no disallowance could be made under section 40(a)(ia) of the Act for alleged default in deduction of tax at source by the appellant. 18. That the assessing officer erred on facts and in law in disallowing legal and professional expenses of Rs.41,47,4607- , on the ground that the appellant failed to deduct tax at source there from under section 194J of the Act invoking provisions of section 40(a)(ia) of the Act. 18.1 That the assessing officer erred on fact and in law in not accepting the invoices raised by the vendors for reimbursement of expenses on the ground that the said claim were raised on the basis of self serving vouchers. 18.2 Without prejudice, that the assessing officer erred on facts and in law in not appreciating that since the appellant was under a bona fide belief that no tax was required to be deducted there from, no disallowance was warranted under section 40(a)(ia)of the Act 18.3 Without prejudice, the assessing officer erred on facts and in law in not appreciating that no disallowance against the aforesaid expenditure could be made exceeding the outstanding liability as at the end of the year. 18.4 Further, without prejudice, the assessing officer erred on facts and in law in not appreciating that since the payees have also paid tax on the income receivable from the appellant, no disallowance could be made under section 40(a)(ia) of the Act for alleged default in deduction of tax at source by the appellant. Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 458 of 484 19. That the assessing officer erred on facts and in law in disallowing expenditure of Rs.27,46,60,632 incurred on account of fee paid to M/s G2 RAMS India Pvt. Ltd. under section 40(a)(ia) on the ground that the appellant failed to deduct tax at source there from under section 194J of the Act. 19.1 That the assessing officer erred on facts and in law in observing that services provided by G2 RAMS India Pvt. Ltd. were in the nature of fee for technical or professional services within the meaning of section 9(l)(vii) read with section 194J and did not satisfy the test of‘ work contract' covered within the scope of section 194C of the Act. 267) Without prejudice

19.2 That the assessing officer erred on facts and in law in not appreciating that since tax was deducted at source from the aforesaid payment, albeit under section 194C, the aforesaid expenditure was not disallowable under section 40(a)(ia) of the Act. 19.3 That the assessing officer erred on facts and in law in not appreciating that provisions of section 40(a)(ia) were, even otherwise, not applicable, since the appellant was under bonafide belief that tax was liable to be deducted at source from the aforesaid payment under section 194C of the Act. 19.4 That the assessing officer erred on facts and in law in not appreciating, that since the recipient had, in any case, included the aforesaid receipt as part of taxable income, the aforesaid expenditure could not have been disallowed in the hands of appellant under section 40(a)(ia) of the Act. 19.5 That the assessing officer erred on facts and in law in not appreciating that since there was no liability outstanding as Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 459 of 484 at the end of the relevant year, no part of the aforesaid expenditure was disallowable under section 40(a)(ia) of the Act. 20. That the assessing officer erred on facts and in law in disallowing additional depreciation of Rs.46.88 lacs claimed under section 32(l)(iia) of the Act, in respect of computers installed at supervisory offices located in the compound of factory at Gurgaon / Dharuhera / Haridwar plant, on the ground, that in terms of proviso to said section additional depreciation is not admissible on any machinery or plant installed in any office premises. 20.1 That the assessing officer erred on facts and in law on holding that since computers at supervisory offices located within the factory premises were not directly involved in manufacturing activity, were not eligible for additional depreciation under section 32(l)(iia) of the Act. 20.2 That the assessing officer erred on facts and in law in observing that since the appellant was claiming depreciation on computers @60%, the same cannot be said to be plant and machinery for the purposes of the claim of additional depreciation under section 32(l)(iia) of the Act. 21. That the assessing officer erred on facts and in law in holding that expenditure aggregating to Rs. 3,87,55,10,269 and Rs. 92,79,73,203, incurred by the appellant during the relevant previous year on account of royalty/ technical guidance fees and model fees, respectively, paid to Honda Motor Co., Japan ("Honda") under the 'License and Technical Assistance Agreement' ("LTAA") was capital in nature and not allowable deduction. 21.1 That the assessing officer erred on facts and in law in holding that net amount of Rs. 360,26,12,604 out of total

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 460 of 484 expenditure of Rs. 3,87,55,10,269 incurred on account of royalty/technical guidance fee and of Rs. 92,79,73,203 incurred on account of model fee and cess on model fee, is disallowable on the ground of being capital expenditure after reducing depreciation thereon @ 25%, aggregating to Rs. 96,88,77,567.25 on royalty/ technical guidance fee and of Rs. 23,19,93,300.75 on model fees, before reducing amounts of Rs. 6.31.680 on account of royalty/TGF and Rs. 88,42,87,978 on account of model fee disallowed under section 92CA and challenged in ground of appeal no. 2 - 3(supra). 21.2 That the assessing officer erred on facts and in law in observing that the appellant acquired capital assets in the nature of intellectual property rights and patents from Honda on payment of royalty and technical guidance fees under the LTAA. 21.3 That the assessing officer erred on facts and in law in observing that the appellant received benefit of enduring nature under the LTAA, since - (i)the appellant obtained exclusive right to manufacture and sell the products within the territory of India and, (ii) the license had a degree of perpetuity, as it was being renewed and extended year after year. 21.4 That the assessing officer erred on facts and in law in observing that payments under the LTAA covered consideration for setting up of manufacturing facility for the appellant. 21.5 Without prejudice, that the assessing officer erred on facts and in law in treating 100% expenditure incurred on account of royalty, technical guidance fees and model fees as capital expenditure as opposed to 25% of similar expenditure held to be capital expenditure in earlier years. 22. That the assessing officer erred on facts and in law in treating gains arising from sale of investments made during the

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 461 of 484 year as business income, instead of "capital gains" as considered by the appellant and consequently making an addition of Rs. 203,64,00,000 under the head business income, as opposed to income of Rs. 76,21,70,079 disclosed under the head 'capital gains'. 22.1 That the assessing officer erred on facts and in law in observing that investments were made by the appellant with a view to earn profit from selling the same at a later stage and, therefore, profits were taxable under the head "business income". 22.2 That the assessing officer erred on facts and in law in observing that since the turnover from sale of investments was higher than the turnover from business of selling motor vehicles, therefore, the appellant was primarily engaged in activity of investments, which was to be regarded as business activity and, accordingly, income arising therefore was taxable under the head "business income". 23. That the assessing officer erred on facts and in law in making additional disallowance of Rs.6.131acs under section 14A of the Act, by applying provisions of Rule 8D of the Rules. 23.1 That the assessing officer erred on facts and in law in applying provisions of Rule 8D of the Rules, without reaching a finding/recording satisfaction as to the incorrectness of the suo moto disallowance of expenses made by the appellant under section 14A of the Act. 23.2 That the assessing officer erred on facts and in law in attributing interest expenditure incurred during the year towards earning of exempt income by applying provisions of Rule 8D of the Rules.

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 462 of 484 24. That the assessing officer erred on facts and in law in enhancing the value of closing inventory and thereby income of appellant by Rs.24,62,000 in respect of proportionate amount of depreciation on model fee incurred during the year and debited to the profit and loss account, alleging the same to be directly related to manufacture of finished goods and, therefore, attributable to the closing stock of such goods. 25. That the assessing officer erred on facts and in law in disallowing expenditure of Rs.36,01,3027- incurred on advertisement for remembering death anniversary of Late Shri Raman Munjal, being the Founder of the appellant-company, on the ground that same was an expenditure of personal nature, not being incurred for the purpose of appellant's business. 26. That the assessing officer erred on facts and in law in making disallowance of Rs.25,10,98,0007- on account of commission paid to Managing Director, Shri Pawan Munjal under section 36(l)(ii) read with section 37(1) of the Act on the ground that commission was paid in lieu of distribution of dividend to him, who was also shareholder of the appellant company. 26.1 That the assessing officer erred on facts and in law in holding that the appellant failed to justify the commercial expediency for making the aforesaid payment of commission to the Managing Director. 26.2 That on the facts and circumstances of the case the assessing officer failed to appreciate that the commission was paid to Shri Munjal in lieu of services rendered by him and not in lieu distribution of profits. 26.3 That the assessing officer erred on facts and in law in not appreciating that dividend was separately distributed

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 463 of 484 amongst all the shareholders, including Shri Munjal and thus, payment of commission was not in lieu of distribution of dividend. 27. That the assessing officer erred on facts and in law in disallowing deduction of Rs. 9,36,20,9837- claimed under section 80IA of the Act in respect of captive power generating unit situated at Gurgaon. 27.1 That the assessing officer erred on facts and in law in computing income of the power generating unit by considering the rate of Rs. 5.13 per unit, at which power was supplied by State Electricity Board, as the 'market price' of the power, supplied by that unit to the vehicle manufacturing unit of the appellant, as against rate of Rs. 9.78 per unit (cost of generation of power at Rs. 8.50 per unit + mark-up of 15%) adopted by the appellant. 27.2 That the assessing officer erred on facts and in law in not appreciating that the price at which electricity was supplied by HSEB was not reflective of'market price1 since electricity supply was not adequately available from HSEB at Gurgaon as per its requirement. 27.3 That the assessing officer erred on facts and in law in observing that head office expenses were not considered while computing deduction under section 80IA of the Act for the power generating unit. 28. That the assessing officer erred on facts and in law in disallowing deduction under section 80IC of the Act by an amount of 95.85 crores, being the proportionate amount of purchases from vendors after processing of semi-finished goods supplied by the appellant, amounting to Rs. 577.15 crores, computed on ad-hoc basis, on the ground that manufacturing

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 464 of 484 activity to the aforesaid extent of purchases was outsourced and, therefore, proportionate amount of profit derived from such purchases was not eligible for deduction under section 80IC of the Act. 28.1 That the assessing officer erred on facts and in law in observing that purchase of finished components from the vendors for further consumption in assembly/manufacture of two wheelers constituted outsourcing of manufacturing activity. 29. That the assessing officer erred on facts and in law in disallowing deduction under section 80IC of the Act by an amount of Rs. 521.27 crores, on the ground that part of the manufacturing activity(ies) at Haridwar were outsourced and, therefore, profit attributable to such outsourced manufacturing activity(ies) shall not be eligible for deduction. 29.1 That the assessing officer erred on facts and in law in drawing adverse inference that part of manufacturing activity(ies) at Haridwar unit were outsourced on the basis of lower consumption of power per unit at Haridwar plant vis-a-vis rate of power consumption at other two plants. 30. That the assessing officer erred on facts and in law in disallowing deduction under section 80IC by an amount of Rs. 6,17,00,000, with respect to goods/items, aggregating to Rs. 62.23 crores procured from other non-eligible units, by applying the provisions of section 80IA(8) read with section 80IC(7) of the Act. 30.1 That the assessing officer erred on facts and in law in disallowing deduction under section 80IC to the extent of Rs. 1.53 cores, being the proportionate amount of purchases from non-eligible unit(s) after processing of semi-finished goods, aggregating to Rs. 9.23 crores, computed on ad-hoc basis, on the

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 465 of 484 ground that manufacturing activity to the aforesaid extent of purchases was outsourced and. therefore, proportionate amount of profit derived from such purchases was not eligible for deduction under section 80IC of the Act. 30.2 That the assessing officer erred on facts and in law in disallowing deduction under section 80IC to the extent of Rs. 4.64 cores, being the amount of markup (adopted @8.76%, being the NP for Gurgaon unit) attributed over the value of unprocessed goods, aggregating to Rs. 53 crores procured from other non-eligible units, by applying the provisions of section 80IA(8) read with section 80IC(7) of the Act, on the ground that deduction under the former section needs to be computed by recording inter-unit transfer at market price. 31. That the assessing officer erred on facts and in law in disallowing deduction under section 80IC by an amount of Rs.636,85,69,061 (restricted to Rs. 414,82,93,617, being the balance deduction claimed under section 80IC) invoking provisions of section 80IA(10) of the Act, on the ground that eligible business at Haridwar earned extraordinary profits as compared to other non-eligible units by way of charging higher amount for basic price per unit of two-wheelers vis-a-vis price charged by other non-eligible units. 31.1 That the assessing officer erred on facts and in law in holding that part of the alleged extraordinary profits earned by the eligible unit should have been attributed to the head office on account of sales/marketing set-up at head-office. 32. That the assessing officer erred on facts and in law in disallowing deduction under section 80IC of the Act by an amount of Rs. 609.39 crores (restricted to Rs. NIL, being the balance deduction claimed under section 80IC) on the ground

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 466 of 484 that part of profits earned by the eligible unit should have been attributed to advertisement and marketing activities carried out at head-office, and such profits were not derived from the business of manufacturing, which were only eligible for deduction under the aforesaid section. 32.1 That the assessing officer erred on facts and in law in holding that part of the profits earned by eligible unit at Haridwar were attributable to profit earned from marketing of products and brand value. 32.2 That the assessing officer erred on facts and in law in holding that since marketing activities were carried out at Head Office, therefore, the appellant should have transferred goods to Head Office at cost plus reasonable margin and accordingly the head-office would have earned higher profit on account of sales and marketing activities. 32.3 That the assessing officer erred on facts and in law in holding that the assets, such as, brand value and marketing network, were not owned by the eligible undertaking at Haridwar. Without Prej udice 32.4 That the assessing officer erred on facts and in law in attributing profits to the manufacturing activities at Haridwar by applying net profit rate of 6.85%, on an arbitrary basis. 32.5 That the assessing officer erred on facts and in law in holding that the net profit rate of the first year of operation of business would be the rate of profit derived solely from manufacturing activities. 32.6 That the assessing officer erred on facts and in law in computing the net profit rate of 6.85% for attributing profits to the manufacturing activity at Haridwar, by computing net profit Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 467 of 484 rate for the first year of operation of the appellant-company on an arbitrary basis. 33. That the assessing officer erred on facts and in law in disallowing deduction under section 80IC of the Act by an amount of Rs. 137,06,12,682 (restricted to Rs. NIL, being the balance deduction claimed under section 80IC) in respect of certain incomes earned by the eligible unit, (being interest income earned from vendors for early payment - Rs. 13,25,832, interest on employee loans- Rs. 1,96,881, interest on security deposits- Rs. 3,78,000, freight recovery- Rs. 128,01,65,563, cash discounting income-Rs. 7,29,74,243, exchange fluctuation from export sales- Rs. 1,55,72,162 on the ground that such incomes were not derived from the business of manufacture of specified articles or things, without appreciating that all the aforesaid incomes had first degree nexus with manufacturing activity. 33.1 That the assessing officer erred on facts and in law in holding that the other income aggregating to Rs. 137,06,12,682 is taxable under the head "income from other sources". 34. That the assessing officer erred on facts and in law in disallowing deduction under section 80IC of the Act, aggregating to Rs.1038,11,93,617 (restricted to Rs. NIL, being the balance deduction claimed under section 80IC), on an ad-hoc basis, on the ground that the appellant failed to give sufficient documentary evidence substantiating fulfillment of conditions precedent for claiming deduction under that section, without pointing out any such single condition not being fulfilled by the appellant.

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 468 of 484 34.1 That the assessing officer erred on facts and in law in not appreciating that all the conditions precedent for claiming deduction under section 80IC were satisfied by the appellant. 34.2 That the assessing officer erred on facts and in law in disallowing deduction under section 80IC of the Act, aggregating to Rs.1038,11,93,617/-, on the ground that the appellant did not satisfy the following conditions alleged as pre-requisites for claim of deduction under the said section: (i) the appellant did not comply with provisions of Rule 18BBB(4) of the Rules, by not attaching the approval obtained from an appropriate authority for carrying on the eligible business; (ii) the appellant did not comply with the conditions specified in the Industrial Policy and consequent Notification issued by Uttaranchal Government; and (iii) the appellant violated the terms of factory license regarding continuous employment of specified number of employees on any given day. 34.3 That the assessing officer erred on facts and in law in observing that the appellant failed to satisfy the conditions precedent of obtaining approval from an appropriate authority to carry on the eligible business for the purpose of claiming deduction under section 80IC of the Act. 34.4 That the assessing officer erred on facts and in law in not appreciating that no separate approval was required by the appellant to carry on the eligible business of manufacturing two- wheelers at a specified location, under section 80IC of the Act. 34.5 That the assessing officer erred on facts and in law in observing that failure to comply with conditions contained in industrial policy for the relevant State would disentitle the appellant to claim of deduction under section 8QIC of the Act.

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 469 of 484 34.6 That the assessing officer failed to appreciate that section 80IC is an independent and self-contained provision and did not stipulate any pre-requisite conditions, as contained in the industrial policy, for claiming deduction under that section.‖

268) Ground No. 1 of the appeal of the assessee is general in nature and no arguments are been advanced by the appellant. Therefore we dismiss ground No. 1 of the appeal. 269) Ground No. 2, 3, 4, 5 and 6 were against the action of the Ld. transfer pricing officer wherein arm‘s length price of the payment of export commission of Rs. 16.12 crores, payment of model fees of Rs. 88.42 crores and payment of royalty of Rs. 6.31 Lacs have been determined at nil. The parties before us submitted that the issue involved in this appeal is identical to the ground of appeal no. 8 of the assesse‘s appeal for assessment year 2010 – 11 and there is no change in the facts and circumstances of the case and their arguments for and against of this grounds also remains the same. We have carefully perused the ground No. 8 of the appeal of the assessee for assessment year 2010 – 11, and also perused the facts of these grounds of appeal and we also found that they are identical except the amount involved therein. While deciding the appeal of the assessee for the assessment year 2010 – 11, We have allowed ground No. 8 of that appeal and therefore for the same reasons we also allow ground number 2,3,4,5 and 6 of the appeal of the assessee. 270) Ground No. 7 of the appeal of the assessee was against the addition of freight in and import clearing expenses amounting to Rs. 59.83 lakhs to the cost of closings inventory. The parties before us submitted that the issue involved in this appeal is identical to the ground of appeal no. 2 of the assessee‘s appeal

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 470 of 484 for assessment year 2010 – 11 and there is no change in the facts and circumstances of the case and their arguments for and against of this ground also remains the same. We have carefully perused the ground No. 2 of the appeal of the assessee for assessment year 2010 – 11, and also perused the facts of this ground of appeal and we also found that they are identical except the amount involved therein. While deciding the appeal of the assessee for the assessment year 2010 – 11, We have allowed ground No. 2 of that appeal and therefore for the same reasons we also allow ground number 7 of the appeal of the assessee. 271) Ground No. 8 of the appeal of the assessee is against the addition on account of cost of rejection of semifinished goods and obsolete items to the value of the closing stock amounting to Rs. 0.59 Lacs. The parties before us submitted that the issue involved in this appeal is identical to the ground of appeal no. 3 of the assessee‘s appeal for assessment year 2010 – 11 and there is no change in the facts and circumstances of the case and their arguments for and against of this ground also remains the same. We have carefully perused the ground No. 3 of the appeal of the assessee for assessment year 2010 – 11, and also perused the facts of this ground of appeal and we also found that they are identical except the amount involved therein. While deciding the appeal of the assessee for the assessment year 2010 – 11, We have allowed ground No. 3 of that appeal and therefore for the same reasons we also allow ground number 8 and 8.1 of the appeal of the assessee. 272) Ground No. 9 of the appeal of the assessee was against the disallowance of provision for increasing the price of material amounting to Rs. 1 34.58 crores. The parties before us submitted that the issue involved in this appeal is identical to the ground of appeal no. 4 of the assessee‘s appeal for Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 471 of 484 assessment year 2010 – 11 and there is no change in the facts and circumstances of the case and their arguments for and against of this ground also remains the same. We have carefully perused the ground No. 4 of the appeal of the assessee for assessment year 2010 – 11, and also perused the facts of this ground of appeal and we also found that they are identical except the amount involved therein. While deciding the appeal of the assessee for the assessment year 2010 – 11, We have allowed ground No. 4 of that appeal and therefore for the same reasons we also allow ground number 9 to 9.2 of the appeal of the assessee. 273) Ground No. 10 of the appeal of the assessee is against the disallowance of cost of capital of Rs. 2.51 Lacs. The parties before us submitted that the issue involved in this appeal is identical to the ground of appeal no. 5 of the assessee‘s appeal for assessment year 2010 – 11 and there is no change in the facts and circumstances of the case and their arguments for and against of this ground also remains the same. We have carefully perused the ground No. 5 of the appeal of the assessee for assessment year 2010 – 11, and also perused the facts of this ground of appeal and we also found that they are identical except the amount involved therein. While deciding the appeal of the assessee for the assessment year 2010 – 11, We have allowed ground No. 5 of that appeal and therefore for the same reasons we also allow ground number 10 of the appeal of the assessee. 274) Ground No. 11 of the appeal of the assessee is against the disallowance of provision of head office expenses amounting to Rs. 28.77 crores which were reversed in the succeeding year. The parties before us submitted that the issue involved in this appeal is identical to the ground of appeal no. 7 of the assessee‘s appeal for assessment year 2010 – 11 and there is no Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 472 of 484 change in the facts and circumstances of the case and their arguments for and against of this ground also remains the same. We have carefully perused the ground No. 7 of the appeal of the assessee for assessment year 2010 – 11, and also perused the facts of this ground of appeal and we also found that they are identical except the amount involved therein. While deciding the appeal of the assessee for the assessment year 2010 – 11, We have allowed ground No.7 of that appeal and therefore for the same reasons we also allow ground number 11 of the appeal of the assessee. 275) Ground No. 12 of the appeal of the assessee would is against the disallowance of Rs. 57.14 crores on account of purchase from related parties a per accounting standard 18 on the allegation that assessee has paid excessive purchase price. The parties before us submitted that the issue involved in this appeal is identical to the ground of appeal no. 11 of the assessee‘s appeal for assessment year 2010 – 11 and there is no change in the facts and circumstances of the case and their arguments for and against of this ground also remains the same. We have carefully perused the ground No. 11 of the appeal of the assessee for assessment year 2010 – 11, and also perused the facts of this ground of appeal and we also found that they are identical except the amount involved therein. While deciding the appeal of the assessee for the assessment year 2010 – 11, We have allowed ground No. 11 of that appeal and therefore for the same reasons we also allow ground number 12 of the appeal of the assessee. 276) Ground No. 13 of the appeal of the assessee was against the disallowance of payments amounting to Rs. 2 crores made for advisory services availed from hero corporate services private limited. The parties before us submitted that the issue involved in this appeal is identical to the ground of appeal no. 12 of the Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 473 of 484 assessee‘s appeal for assessment year 2010 – 11 and there is no change in the facts and circumstances of the case and their arguments for and against of this ground also remains the same. We have carefully perused the ground No. 12 of the appeal of the assessee for assessment year 2010 – 11, and also perused the facts of this ground of appeal and we also found that they are identical including the amount involved therein. While deciding the appeal of the assessee for the assessment year 2010 – 11, We have allowed ground No. 12 of that appeal and therefore for the same reasons we also allow ground 13 of the appeal of the assessee. 277) Ground No. 14 of the appeal of the assessee is against the disallowance of commission paid to dealers on institutional sales amounting to Rs. 1.16 crores disallowed by the Ld. assessing officer‘s for failure to deduct tax at source under section 194H of the income tax act. The parties before us submitted that the issue involved in this appeal is identical to the ground of appeal no. 10 of the assessee‘s appeal for assessment year 2010 – 11 and there is no change in the facts and circumstances of the case and their arguments for and against of this ground also remains the same. We have carefully perused the ground No. 10 of the appeal of the assessee for assessment year 2010 – 11, and also perused the facts of this ground of appeal and we also found that they are identical except the amount involved therein. While deciding the appeal of the assessee for the assessment year 2010 – 11, We have allowed ground No. 10 of that appeal and therefore for the same reasons we also allow ground number 14 of the appeal of the assessee. 278) Ground No. 15 of the appeal of the assessee is against the disallowance of Rs. 4 095.55 crores on account of non- deduction of tax under section 194C of the income tax act for Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 474 of 484 purchases. The parties before us submitted that the issue involved in this appeal is identical to the ground of appeal no. 13 of the assessee‘s appeal for assessment year 2010 – 11 and there is no change in the facts and circumstances of the case and their arguments for and against of this ground also remains the same. We have carefully perused the ground No. 13 of the appeal of the assessee for assessment year 2010 – 11, and also perused the facts of this ground of appeal and we also found that they are identical except the amount involved therein. While deciding the appeal of the assessee for the assessment year 2010 – 11, We have allowed ground No. 13 of that appeal and therefore for the same reasons we also allow ground 15 of the appeal of the assessee. 279) Ground No. 16 of the appeal of the assessee is against the disallowance of Rs. 4 0, 0945/– paid by the Ld. assessing officer for non-deduction of tax on use of halls taken on hire in hotels for conducting staff training. The parties before us submitted that the issue involved in this appeal is identical to the ground of appeal no. 14 of the assessee‘s appeal for assessment year 2010 – 11 and there is no change in the facts and circumstances of the case and their arguments for and against of this ground also remains the same. We have carefully perused the ground No. 14 of the appeal of the assessee for assessment year 2010 – 11, and also perused the facts of this ground of appeal and we also found that they are identical except the amount involved therein. While deciding the appeal of the assessee for the assessment year 2010 – 11, We have allowed ground No. 14 of that appeal and therefore for the same reasons we also allow ground number 16 of the appeal of the assessee. 280) Ground No. 17 of the appeal of the assessee is against the disallowance of Rs. 75.76 crores made by the Ld. assessing Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 475 of 484 officer on account of non-deduction of tax on incentive and discount given to the dealers by the assessing officer. The parties before us submitted that the issue involved in this appeal is identical to the ground of appeal no. 15 of the assessee‘s appeal for assessment year 2010 – 11 and there is no change in the facts and circumstances of the case and their arguments for and against of this ground also remains the same. We have carefully perused the ground No. 15 of the appeal of the assessee for assessment year 2010 – 11, and also perused the facts of this ground of appeal and we also found that they are identical except the amount involved therein. While deciding the appeal of the assessee for the assessment year 2010 – 11, We have allowed ground No. 15 of that appeal and therefore for the same reasons we also allow ground number 17 of the appeal of the assessee. 281) Ground No. 18 of the appeal of the assessee is against the disallowance of these 41.47 Lacs on account of failure to deduct tax at source on legal and professional charges paid to the various consultant. The parties before us submitted that the issue involved in this appeal is identical to the ground of appeal no. 8 of the assessee‘s appeal for assessment year 2010 – 11 and there is no change in the facts and circumstances of the case and their arguments for and against of this ground also remains the same. We have carefully perused the ground No. 8 of the appeal of the assessee for assessment year 2010 – 11, and also perused the facts of this ground of appeal and we also found that they are identical except the amount involved therein. While deciding the appeal of the assessee for the assessment year 2010 – 11, We have allowed ground No. 8 of that appeal and therefore for the same reasons we also allow ground number 18 of the appeal of the assessee.

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 476 of 484 282) Ground No. 19 of the appeal of the assessee is against the disallowance of Rs. 27.47 crores on payment made to event organisations for failure to deduct tax at source. The parties before us submitted that the issue involved in this appeal is identical to the ground of appeal no. 28 of the assessee‘s appeal for assessment year 2010 – 11 and there is no change in the facts and circumstances of the case and their arguments for and against of this ground also remains the same. We have carefully perused the ground No. 28 of the appeal of the assessee for assessment year 2010 – 11, and also perused the facts of this ground of appeal and we also found that they are identical except the amount involved therein. While deciding the appeal of the assessee for the assessment year 2010 – 11, We have allowed ground No. 28 of that appeal and therefore for the same reasons we also allow ground number 19 of the appeal of the assessee. 283) Ground No. 20 of the appeal of the assessee is against the disallowance of depreciation of computers installed at the supervisory office amounting to Rs. 46.88 lakhs. The parties before us submitted that the issue involved in this appeal is identical to the ground of appeal no. 18 of the assessee‘s appeal for assessment year 2010 – 11 and there is no change in the facts and circumstances of the case and their arguments for and against of this ground also remains the same. We have carefully perused the ground No. 18 of the appeal of the assessee for assessment year 2010 – 11, and also perused the facts of this ground of appeal and we also found that they are identical except the amount involved therein. While deciding the appeal of the assessee for the assessment year 2010 – 11, We have set aside ground No. 18 of that appeal to the file of the assessing officer with certain directions and therefore for the same reasons we also set aside this ground of appeal to the file Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 477 of 484 of the assessing officer with the same directions. Accordingly ground No. 20 of the appeal is disposed of . 284) Ground No. 21 of the appeal of the assessee is against the disallowance of Rs 290. 62 crores of royalty expenditure and model fees expenditure on the ground that they are capital expenditure in nature. The parties before us submitted that the issue involved in this appeal is identical to the ground of appeal no. 19 of the assessee‘s appeal for assessment year 2010 – 11 and there is no change in the facts and circumstances of the case and their arguments for and against of this ground also remains the same. We have carefully perused the ground No. 19 of the appeal of the assessee for assessment year 2010 – 11, and also perused the facts of this ground of appeal and we also found that they are identical except the amount involved therein. While deciding the appeal of the assessee for the assessment year 2010 – 11, We have allowed ground No. 19 of that appeal and therefore for the same reasons we also allow ground number 21 of the appeal of the assessee. 285) Ground No. 22 of the appeal of the assessee is against the treatment given by the Ld. assessing officer to the gains derived from sale of investment as business income, whereas the assessee has treated them as capital gains.. The parties before us submitted that the issue involved in this appeal is identical to the ground of appeal no.20 of the assessee‘s appeal for assessment year 2010 – 11 and there is no change in the facts and circumstances of the case and their arguments for and against of this ground also remains the same. We have carefully perused the ground No. 20 of the appeal of the assessee for assessment year 2010 – 11, and also perused the facts of this ground of appeal and we also found that they are identical except the amount involved therein. While deciding the appeal of the assessee for the assessment year 2010 – 11, We have Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 478 of 484 allowed ground No. 20 of that appeal and therefore for the same reasons we also allow ground number 22 of the appeal of the assessee. 286) Ground No. 23 of the appeal of the assessee is against the disallowance of Rs. 6.13 lakhs made by the Ld. assessing officer under section 14 A applying the provisions of rule 8D of the income tax rules, 1962. The parties before us submitted that the issue involved in this appeal is identical to the ground of appeal no. 22 of the assessee‘s appeal for assessment year 2010 – 11 and there is no change in the facts and circumstances of the case and their arguments for and against of this ground also remains the same. We have carefully perused the ground No. 22 of the appeal of the assessee for assessment year 2010 – 11, and also perused the facts of this ground of appeal and we also found that they are identical except the amount involved therein. While deciding the appeal of the assessee for the assessment year 2010 – 11, We have allowed ground No. 22 of that appeal and therefore for the same reasons we also allow ground number 23 of the appeal of the assessee. 287) Ground No. 24 of the appeal of the assessee is against the depreciation on model fee of Rs. 24.62 lakhs thereby included the same in the valuation of the closing inventory. The parties before us submitted that the issue involved in this appeal is identical to the ground of appeal no. 23 of the assessee‘s appeal for assessment year 2010 – 11 and there is no change in the facts and circumstances of the case and their arguments for and against of this ground also remains the same. We have carefully perused the ground No. 23 of the appeal of the assessee for assessment year 2010 – 11, and also perused the facts of this ground of appeal and we also found that they are identical except the amount involved therein. While deciding the appeal of the assessee for the assessment Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 479 of 484 year 2010 – 11, We have allowed ground No. 23 of that appeal and therefore for the same reasons we also allow ground number 24 of the appeal of the assessee. 288) Ground No. 25 of the appeal of the assessee is against the disallowance of expenditure on advertisement incurred by the assessee on death anniversary of late S here Raman Munjal amounting to Rs. 36.01 lakhs. The parties before us submitted that the issue involved in this appeal is identical to the ground of appeal no. 24 of the assessee‘s appeal for assessment year 2010 – 11 and there is no change in the facts and circumstances of the case and their arguments for and against of this ground also remains the same. We have carefully perused the ground No. 24 of the appeal of the assessee for assessment year 2010 – 11, and also perused the facts of this ground of appeal and we also found that they are identical except the amount involved therein. While deciding the appeal of the assessee for the assessment year 2010 – 11, We have allowed ground No. 24 of that appeal and therefore for the same reasons we also allow ground number 25 of the appeal of the assessee. 289) Ground No. 26 of the appeal of the assessee is against the disallowance of commission paid to the managing director of the company when the AO has invoked the provisions of section 36 (1)(ii) of the act. The parties before us submitted that the issue involved in this appeal is identical to the ground of appeal no. 25 of the assessee‘s appeal for assessment year 2010 – 11 and there is no change in the facts and circumstances of the case and their arguments for and against of this ground also remains the same. We have carefully perused the ground No.25 of the appeal of the assessee for assessment year 2010 – 11, and also perused the facts of this ground of appeal and we also found that they are identical except the amount involved Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 480 of 484 therein. While deciding the appeal of the assessee for the assessment year 2010 – 11, We have allowed ground No. 25 of that appeal and therefore for the same reasons we also allow ground number 26 of the appeal of the assessee. 290) Ground No. 27 of the appeal of the assessee is against the disallowance of deduction under section 80 IA of the income tax act with respect to the power generation unit of the assessee amounting to Rs. 9.36 crore on account of market price of the goods. The parties before us submitted that the issue involved in this appeal is identical to the ground of appeal no. 26 of the assessee‘s appeal for assessment year 2010 – 11 and there is no change in the facts and circumstances of the case and their arguments for and against of this ground also remains the same. We have carefully perused the ground No. 26 of the appeal of the assessee for assessment year 2010 – 11, and also perused the facts of this ground of appeal and we also found that they are identical except the amount involved therein. While deciding the appeal of the assessee for the assessment year 2010 – 11, We have allowed ground No. 26 of that appeal and therefore for the same reasons we also allow ground number 27 of the appeal of the assessee. 291) Ground No. 28 and 29 Of the appeal of the assessee is against the disallowance under IC of the income tax act on account of cost of sales to vendors on account of outsourcing benefited activity. The amount disallowed by the Ld. assessing officer was Rs. 95.85 crores. Further, the Ld. and assessing officer disallowed deduction under section 80 IC of the act on account of job work outsourcing of Manufacturing activity and the amount of such disallowance was Rs. 521.27 crores. The parties before us submitted that the issue involved in this appeal is identical to the ground of appeal no. 32 of the assessee‘s appeal for assessment year 2010 – 11 and there is no Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 481 of 484 change in the facts and circumstances of the case and their arguments for and against of this ground also remains the same. We have carefully perused the ground No. 32 of the appeal of the assessee for assessment year 2010 – 11, and also perused the facts of this ground of appeal and we also found that they are identical except the amount involved therein. While deciding the appeal of the assessee for the assessment year 2010 – 11, We have allowed ground No. 32 of that appeal and therefore for the same reasons we also allow ground number 28 and 29 of the appeal of the assessee. 292) Ground No. 30 of the appeal of the assessee was against the disallowance of deduction under section 80 I. C of the income tax act on account of inter-unit transfer of goods. The parties before us submitted that the issue involved in this appeal is identical to the ground of appeal no. 30 of the assessee‘s appeal for assessment year 2010 – 11 and there is no change in the facts and circumstances of the case and their arguments for and against of this ground also remains the same. We have carefully perused the ground No. 30 of the appeal of the assessee for assessment year 2010 – 11, and also perused the facts of this ground of appeal and we also found that they are identical except the amount involved therein. While deciding the appeal of the assessee for the assessment year 2010 – 11, We have allowed ground No. 30 of that appeal and therefore for the same reasons we also allow ground number 30 of the appeal of the assessee. 293) Ground No. 31 of the appeal of the assessee is against the disallowance of deduction under section 80IC of the act on account of inflation of profit by charging higher basic price amounting to Rs. 4 14.83 crores. The parties before us submitted that the issue involved in this appeal is identical to the ground of appeal no. 31 of the assessee‘s appeal for Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 482 of 484 assessment year 2010 – 11 and there is no change in the facts and circumstances of the case and their arguments for and against of this ground also remains the same. We have carefully perused the ground No. 31 of the appeal of the assessee for assessment year 2010 – 11, and also perused the facts of this ground of appeal and we also found that they are identical except the amount involved therein. While deciding the appeal of the assessee for the assessment year 2010 – 11, We have allowed ground No. 31 of that appeal and therefore for the same reasons we also allow ground number 31 of the appeal of the assessee. 294) Ground No. 32 of the appeal of the assessee is against the disallowance of Rs. 609.39 crores under section 80 I. C of the income tax act on account of profit attributable to advertisement and marketing activities carried out by the head office. The parties before us submitted that the issue involved in this appeal is identical to the ground of appeal no. 33 of the assessee‘s appeal for assessment year 2010 – 11 and there is no change in the facts and circumstances of the case and their arguments for and against of this ground also remains the same. We have carefully perused the ground No. 33 of the appeal of the assessee for assessment year 2010 – 11, and also perused the facts of this ground of appeal and we also found that they are identical except the amount involved therein. While deciding the appeal of the assessee for the assessment year 2010 – 11, We have allowed ground No. 33 of that appeal and therefore for the same reasons we also allow ground number 32 of the appeal of the assessee. 295) Ground No. 33 of the appeal of the assessee is against the disallowance of deduction of Rs. 137.06 crore under section 80 I. C of the income tax act on account of other income. The parties before us submitted that the issue involved in this Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 483 of 484 appeal is identical to the ground of appeal no. 34of the assessee‘s appeal for assessment year 2010 – 11 and there is no change in the facts and circumstances of the case and their arguments for and against of this ground also remains the same. We have carefully perused the ground No. 34 of the appeal of the assessee for assessment year 2010 – 11, and also perused the facts of this ground of appeal and we also found that they are identical except the amount involved therein. While deciding the appeal of the assessee for the assessment year 2010 – 11, We have decided ground No. 34 of that appeal and therefore for the same reasons we also partly allow ground number 33 of the appeal of the assessee. 296) Ground No. 34 of the appeal of the assessee is against the disallowance of deduction of Rs. 1 0 38.12 crores under section 80 I. C for alleged on satisfaction of prerequisite condition for claim of deduction under the section. The parties before us submitted that the issue involved in this appeal is identical to the ground of appeal no. 29 of the assessee‘s appeal for assessment year 2010 – 11 and there is no change in the facts and circumstances of the case and their arguments for and against of this ground also remains the same. We have carefully perused the ground No. 29 of the appeal of the assessee for assessment year 2010 – 11, and also perused the facts of this ground of appeal and we also found that they are identical except the amount involved therein. While deciding the appeal of the assessee for the assessment year 2010 – 11, We have allowed ground No. 29 of that appeal and therefore for the same reasons we also allow ground number 34 of the appeal of the assessee. 297) In the result appeal of the assessee in ITA No. 914/del/2015 for assessment year 2011 – 12 is partly allowed. Order pronounced in the open court on 24/10/2016. Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)

Page 484 of 484 -Sd/- -Sd/- (PRASHANT MAHARISHI) (I.C.SUDHIR) ACCOUNTANT MEMBER JUDICIAL MEMBER

Dated: 24/10/2016 A K Keot Copy forwarded to 1. Applicant 2. Respondent 3. CIT 4. CIT (A) 5. DR:ITAT ASSISTANT REGISTRAR ITAT, New Delhi

Hero MotoCorp Limited Vs. JCIT & DCIT Vs. Hero MotoCorp Ltd. ITA Nos. 1545/Del/2015 and 2424/Del/2015 (AY 2010-11) ITA No. 1609/Del/2016 and 914/Del/2016 (AY 2011-12)