IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH: ‘I-1’ NEW DELHI
(Through Video Conferencing)
BEFORE SHRI SUDHANSHU SRIVASTAVA, JUDICIAL MEMBER
&
SHRI O.P. KANT, ACCOUNTANT MEMBER
ITA No. 9187/Del/2019
Assessment Year: 2015-16
Hero Motocorp Ltd. Vs. ACIT
Circle-11(1)
34, Community Centre, New Delhi.
Basant Lok, Vasant Vihar,
New Delhi.
PAN - AAACH0812J
Assessee by Shri Ajay Vohra, Sr. Adv.
Revenue by Shri Gaurav Jain, Adv.
Ms. Monisha Sharma, Adv.
Shri Surenderpal, CIT DR
Date of Hearing 15.01.2021
Date of Pronouncement 13.04.2021
ORDER
PER SUDHANSHU SRIVASTAVA, JUDICIAL MEMBER:
This appeal is filed against the assessment order passed
under section 143(3) read with section 144C of the Income Tax Act,
1961 (‘the Act’) passed by ACIT, Circle-11, New Delhi vide order
dated 30/10/2019.
2 ITA No.9187/Del/2019
Hero Motocorp Ltd. vs. ACIT
2.0 The assessee has raised the following 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 Act'), vide
order dated 30.10.2019, at an income of Rs.
3146,87,81,016/- under the normal provisions and at
book profit of Rs. 3557,57,46,134 under section 115JB of
the Act.
2. That the assessing officer/ Transfer Pricing Officer (‘TPO’)
erred on facts and in law in partly disallowing claim of
deduction under section 80IC to the extent of
Rs.1,87,74,679 by reducing profits of the eligible
undertaking by making transfer pricing adjustment on
inter-unit transfer price of goods procured by the eligible
unit from non-eligible unit during the relevant previous
year.
2.1 That the assessing officer/ TPO erred on facts and in law
in holding that the inter-unit transactions undertaken
between the eligible unit and the non-eligible units of the
assessee during the relevant previous year, were not
undertaken at arm’s length price.
3 ITA No.9187/Del/2019
Hero Motocorp Ltd. vs. ACIT
2.2 That the assessing officer/TPO erred on facts and in law
in determining transfer pricing adjustment of
Rs.1,87,74,679, by applying a markup of 7.69% and
7.03%, being the NP of Gurgaon and Dharuhera units
respectively, to the purchases of Rs.17.72 crores and
Rs.7.32 crores made by eligible unit from the respective
non-eligible units by applying the provisions of section
80IA(8) read with section 80IC(7) of the Act.
2.3 Without prejudice that the TPO erred on facts and in law in
computing the adjustment to total income on an adhoc
basis, without following any acceptable method for
determining arm’s length price prescribed under section
92C of the Act.
3. That the assessing officer erred on facts and in law in
enhancing the value of closing inventory of raw
materials/components by Rs. 321.25 lacs (net addition of
Rs. 156.65 lacs after adjusting opening stock) 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-2 read with section
145A of the Act.
4 ITA No.9187/Del/2019
Hero Motocorp Ltd. vs. ACIT
3.1 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 appellant, the
aforesaid costs being incurred in exceptional situations,
are not to be considered for the purposes of valuation of
closing inventory.
4. That the assessing officer erred on facts and in law in
enhancing the value of closing inventory of finished goods
by an amount of Rs. 13.83 lacs (net disallowance of
Rs.3.95 lacs (13.83 – 9.87 lacs)), 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
standard-2 read with section 145A of the Act.
4.1 That on facts and circumstances of the case, the assessing
officer failed to appreciate that the aforesaid costs were
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.
5. That the assessing officer erred on facts and in law in
making a disallowance of Rs.72,64,48,360, being the
provision made at the end of the year towards
increase/decrease in prices of raw material already
supplied by the vendors upto 31.03.2015.
5 ITA No.9187/Del/2019
Hero Motocorp Ltd. vs. ACIT
5.1 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.
5.2 That on the facts and circumstances of the case, the
assessing officer failed to appreciate that the provisions
were made in accordance with the consistent, regular and
accepted trade practice followed by the assesse which has
always been accepted and allowed by Revenue in the
past.
5.3 That the assessing officer erred in not appreciating that
out of the total provision of Rs 72,64,48,360, provision to
the extent of Rs. 24,79,00,780 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.
47,85,47,580 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.
5.4 That the assessing officer erred on facts and in law in
adding the total provision, aggregating to Rs.
72,64,48,360, made at the end of the year towards
increase/decrease in prices of raw material while
6 ITA No.9187/Del/2019
Hero Motocorp Ltd. vs. ACIT
computing ‘book profit’ under section 115JB, holding the
same to be an unascertained liability.
6. That the assessing officer erred on facts and in law in
making an addition of Rs.3,78,400 by estimating the value
of scrap lying in stock as at the end of the relevant
previous year, on hypothetical / notional basis.
7. That the assessing officer erred on facts and in law in
disallowing various expenses to the extent of Rs.
7,64,31,539 which pertained to services availed from
vendors in the immediately preceding year, and were
claimed as deduction during the year under consideration,
since bills for such expenses were received or liabilities
were recognized during the year, alleging the same to be
prior period expenditure and not business expenditure of
the relevant previous year.
7.1 That the assessing officer erred on facts and in law in
failing to appreciate that the liability in respect of
aforesaid expenses aggregating to Rs. 7,64,31,539
pertaining to services rendered by various
vendors/creditors in the earlier years, crystallized during
the relevant year only on receipt of bills and acceptance of
same by the appellant and, therefore, the same did not
constitute prior period expenditure.
7 ITA No.9187/Del/2019
Hero Motocorp Ltd. vs. ACIT
7.2 Without Prejudice, the assessing officer erred on facts and
in law in not allowing or directing to allow the aforesaid
expenses in the relevant preceding year(s).
8. That the assessing officer erred on facts and in law in
disallowing a sum of Rs.11,79,88,183 in respect of
provision for advertisement expenses incurred at the head
office at end of the relevant previous year, which were
reversed in the succeeding year, alleging the same to be
excessive.
8.1 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.
8.2 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.
8.3 That the assessing officer erred on facts and in law in
adding back the provision for advertisement expenses
incurred at head office, aggregating to Rs. 11,79,88,183,
while computing ‘book profit’ under section 115JB, holding
the same to be an unascertained liability.
9. That the assessing officer erred on facts and in law in
disallowing purchases to the extent of Rs. 29.14 crores
(Rs. 9.73 crores from multiple source purchases and
Rs.19.40 with respect to single source purchases) made
8 ITA No.9187/Del/2019
Hero Motocorp Ltd. vs. ACIT
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, without appreciating the commercial expediency
behind such purchases.
9.1 That on the facts and circumstances of the case, the
assessing officer failed to appreciate that the expenditure
was incurred for the purposes of business and no part of
the same was excessive or unreasonable.
9.2 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.
9.3 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.
9.4 Without Prejudice, that the assessing officer erred on facts
and in law in disallowing purchases to the extent of Rs.
19.40 crores, 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.
9 ITA No.9187/Del/2019
Hero Motocorp Ltd. vs. ACIT
10. That the assessing officer erred on facts and in law in
making addition of Rs.22,26,00,000 to the income of the
appellant under section 2(22)(e) of the Act on account of
payments given by the customers of Hero FinCorp Ltd.
(“HFCL”) to the appellant.
10.1 That on the facts and circumstances of the case, the
assessing officer failed to appreciate that the payment
given by the customers of HFCL to the appellant was not
in the nature of loan or advance given by HFCL to
appellant so as to constitute deemed dividend under
section 2(22)(e) of the Act.
10.2 Without prejudice, that on the facts and circumstances of
the case, the assessing officer failed to appreciate that the
provisions of section 2(22)(e) of the Act were not applicable
to the aforesaid transaction, since the loan or advance
allegedly given by HFCL to the appellant was in the
ordinary course of business of HFCL.
10.3 That the assessing officer erred on facts and in law in
observing that the loan was not advanced by HFCL in the
ordinary course of business of money lending.
11. That the assessing officer erred on facts and in law in
disallowing expenditure of Rs.30,25,34,878 (being 30% of
total amount of Rs.1,00,84,49,593) incurred towards
quarterly target/turnover discount and trade discount of
10 ITA No.9187/Del/2019
Hero Motocorp Ltd. vs. ACIT
Rs. 16,05,24,888 (being 30% of total amount of
Rs.53,50,82,960) given to the dealers/customers under
section 40(a)(ia) on the ground that the appellant failed to
deducted tax at source therefrom under section 194H of
the Act.
11.1 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’, which was subject to TDS under section
194H of the Act.
11.2 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.
11.3 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 therefrom, no disallowance was warranted
under section 40(a)(ia) of the Act.
11.4 Without prejudice, the assessing officer erred on facts and
in law in not appreciating that since the payees had paid
tax on the income receivable from the appellant, no
disallowance could be made under section 40(a)(ia) of the
11 ITA No.9187/Del/2019
Hero Motocorp Ltd. vs. ACIT
Act for alleged default in deduction of tax at source by the
appellant.
12. That the assessing officer erred on facts and in law in
disallowing reimbursement of expenses aggregating to Rs.
1,93,993 (being 30% of the entire expenditure of
Rs.6,46,644) under section 40(a)(ia), on the ground that
the appellant failed to deduct tax at source therefrom
under section 194J of the Act.
12.1 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
claims were raised on the basis of self-serving vouchers.
12.2 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 therefrom, no disallowance was warranted
under section 40(a)(ia) of the Act.
12.3 Without prejudice, the assessing officer erred on facts and
in law in not appreciating that since the payees had 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.
13. 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
12 ITA No.9187/Del/2019
Hero Motocorp Ltd. vs. ACIT
gains” as considered by the appellant and consequently
making an addition of Rs.319,87,41,973 under the head
business income, as opposed to income of
Rs.199,09,31,407 disclosed under the head ‘capital
gains’.
13.1 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”.
13.2 That the assessing officer erred on facts and in law in
observing that the appellant had earned substantial
turnover from sale of investments and was engaged in day
to day monitoring of investments, therefore, the appellant
was primarily engaged in activity of investments, which
was to be regarded as business activity and, accordingly,
income arising therefor was taxable under the head
“business income”.
14. That the assessing officer erred on facts and in law in
making additional disallowance of Rs. 1,65,07,000 under
section 14A of the Act, by applying provisions of Rule 8D of
the Rules.
14.1 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
13 ITA No.9187/Del/2019
Hero Motocorp Ltd. vs. ACIT
incorrectness of the suo moto disallowance of expenses
made by the appellant under section 14A of the Act.
14.2 That the assessing officer erred on facts and in law in
attributing entire interest expenditure incurred during the
year towards earning of exempt income by mechanically
applying provisions of Rule 8D of the Rules.
14.3 That the assessing officer erred on facts and in law in
alternatively holding that interest expenses to the extent of
Rs. 41.06 lacs and half percent of average investment to
the extent of Rs.124.01 lacs disallowed under section 14A
and challenged in ground of ground of appeal no. 14 to
14.2 supra, are even otherwise not allowable business
deductions under section 36(1)(iii) and section 37(1) of the
Act, respectively.
14.4 That the assessing officer erred on facts and in law in not
appreciating that expenses incurred during the year,
including interest expenditure, was for the purpose of
regular business activities and had no nexus with
investments, and were, therefore, allowable business
deduction under section 36(1)(iii) and 37(1) of the Act.
14.5 Without prejudice, that the assessing officer erred on facts
and in law in holding that interest expenditure, if any,
attributable to investments was not allowable under
section 48 of the Act, without appreciating that such
finding was extraneous and beyond jurisdiction to the
assessment year under consideration inasmuch as the
14 ITA No.9187/Del/2019
Hero Motocorp Ltd. vs. ACIT
said issue could be raised only in the year of sale of
investment(s).
14.6 That the assessing officer erred on facts and in law in
making upward adjustment of disallowance computed
under section 14A, read with Rule 8D, while computing
‘book profit’ under section 115JB of the Act without giving
any reasoning.
14.7 That the assessing officer erred on facts and in law in not
appreciating that the disallowance computed under section
14A of the Act read with Rule 8D of the Rules does not
represent actual expenditure incurred for earning exempt
income and the same, therefore, cannot be added back
while computing ‘book profit’ under section 115JB of the
Act.
15. That the assessing officer erred on facts and in law in
enhancing the value of closing inventory and thereby
income of appellant by Rs. 39,50,000 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.
16. That the assessing officer erred on facts and in law in
making disallowance of Rs.7,38,27,378 (comprising of Rs.
2,28,58,951 in respect of Dharuhera, Gurgaon, Haridwar
and Neemrana plants and Rs. 5,09,68,426 in respect of
15 ITA No.9187/Del/2019
Hero Motocorp Ltd. vs. ACIT
head office expenses) out of expenditure incurred towards
re-imbursement of foreign travel expenses incurred by
employees, on the ground that the same were not
supported with evidences/ bills of expenditure incurred
abroad.
17. That the assessing officer erred on facts and in law in
holding that expenditure aggregating to Rs. 127,48,17,707
(net disallowance of Rs. 95,61,13,280 after allowing
depreciation @ 25%), incurred by the appellant during the
relevant previous year on account of royalty paid to Honda
Motor Co., Japan, (‘Honda’) under the ‘License and
Technical Assistance Agreement’ (“LTAA”) was capital in
nature and not allowable deduction.
17.1 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 License B Agreement.
17.2 That the assessing officer erred on facts and in law in
observing that the assessee received benefit of enduring
nature under the License B Agreement, 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.
16 ITA No.9187/Del/2019
Hero Motocorp Ltd. vs. ACIT
18. That the assessing officer erred on facts and in law in
disallowing deduction under section 80IC of the Act by an
amount of Rs.173.41 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.
18.1 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.
18.2 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 the head-office should have earned higher
profit on account of sales and marketing activities.
18.3 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.
18.4 Without prejudice, 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.
17 ITA No.9187/Del/2019
Hero Motocorp Ltd. vs. ACIT
18.5 Without prejudice, 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.
18.6 Without prejudice, 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 appellant company on an arbitrary basis.
19. That the assessing officer erred on facts and in law in
disallowing deduction under section 80IC of the Act by an
amount of Rs. 1,17,21,822 in respect of certain incomes
earned by the eligible unit, on the ground that such
incomes were not derived from the business of
manufacturing.
19.1 That the assessing officer erred on facts and in law in
holding that the other income aggregating to Rs.
1,17,21,822 is taxable under the head “income from other
sources”.
20. That the assessing officer erred on facts and in law in not
allowing weighted deduction of Rs. 74,31,13,902 claimed
under section 35(2AB) of the Act with respect to scientific
research and development expenses incurred during the
year on the ground that such expenses were not claimed
18 ITA No.9187/Del/2019
Hero Motocorp Ltd. vs. ACIT
in the original return of income or revised return of income
permitted under section 139(5) of the Act.
20.1 That the assessing officer erred on facts and in law in not
appreciating that since the aforesaid claim was raised
through notes appended to computation of income, which
formed an integral part of the original return of income and,
therefore, the said claim was raised in the original return of
income itself.
20.2 Without prejudice, that the assessing officer erred on facts
and in law in not appreciating that since the aforesaid
claim was, in any case, preferred during the course of
assessment proceedings, the same ought to have been
entertained and allowed by the assessing officer and could
not have been denied merely because the same was not
claimed in the return of income.
20.3 Without prejudice, that the assessing officer erred on facts
and in law in not appreciating that the aforesaid claim was
a modification/ variation of an existing claim made in the
return of income and not a fresh claim, which could have
otherwise been raised during the course of assessment
proceedings, without revision of return within prescribed
time limits.
21. Without prejudice, on the facts and the circumstances of the
case and in law the aforesaid claim of Rs.74,31,13,902
under section 35(2AB) of the Act can even otherwise be
allowed as additional ground by the Hon’ble Tribunal.
19 ITA No.9187/Del/2019
Hero Motocorp Ltd. vs. ACIT
3.0.0 The Ld. Authorised Representative (AR) submitted
that Ground No. 1 is general in nature and does not require any
adjudication.
4.0.0 With respect to Ground Nos. 2 to 2.3, the Ld. AR
submitted that they related to transfer pricing adjustment on the
ground that the assessee company has shifted profits from non-
eligible unit to the eligible unit in order to claim higher deduction
under section 80IC of the Act. It was submitted that the assessee
was engaged in the business of manufacturing two-wheelers and
had four manufacturing plants at Gurgaon, Dharuhera, Haridwar
and Neemrana. It was further submitted that the assessee was
entitled for deduction under section 80IC of the Act in respect of
profit derived from the undertaking located at Haridwar. The Ld. AR
submitted that for the aforesaid activity, the assessee purchases
various components required to be used in the assembly of two-
wheelers, like gear box, fuel tank, etc., from third party vendors. In
the present transaction, 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,
20 ITA No.9187/Del/2019
Hero Motocorp Ltd. vs. ACIT
business relationship, etc. and were, thereafter, transferred at the
same purchase price to the eligible unit at Haridwar. The Ld. AR
submitted that in such a transaction, no value addition in such
components was carried out by the non-eligible units.
4.0.1 It was further submitted by the Ld. AR that in the
books of accounts of the plant at Haridwar, which is eligible for
deduction under section 80IC of the Act, goods aggregating to Rs.
25.04 crores, were shown to have been procured from other units,
i.e., Dharuhera and Gurgaon plants. Out of the aggregate
transactions of Rs. 25.04 crores: (i) components having value of Rs.
0.73 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. 24.31 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.
4.0.2 The Ld. AR further submitted that in the transfer
pricing study report, the assessee company benchmarked the
21 ITA No.9187/Del/2019
Hero Motocorp Ltd. vs. ACIT
aforesaid inter-unit transaction(s) between eligible and non-eligible
units applying Comparable uncontrolled price (‘CUP’) method, being
the most appropriate and preferred method in the facts of the
present case. Alternatively, the assessee also applied Transactional
Net Margin Method (‘TNMM’) considering itself to be the tested party.
It was submitted that since the operating profit margin of the
comparable companies at 9.31% was within +/- 3% of the operating
profit margin of the assessee (11.18%), the transaction of inter-unit
transfer was considered to be at arm’s length price.
4.0.3 The Ld. AR submitted that the AO/TPO ignored
the CUP method, being one of the methods prescribed under section
92C of the Act, and held the impugned inter-unit purchases to be
not at arm’s length price on the ground that the profit margin of the
non-eligible units, viz., Gurgaon and Dharuhera unit at 7.69% and
7.03% respectively ought to have been charged on such transfer of
components/semi-finished goods. Accordingly, the TPO/AO came to
the conclusion that the assessee has shifted profits from non-eligible
units to the eligible unit in order to claim higher deduction under
section 80IC of the Act without benchmarking inter-unit transfer
22 ITA No.9187/Del/2019
Hero Motocorp Ltd. vs. ACIT
price with any contemporaneous evidence or acceptable method for
determining arm’s length price. It was submitted that the TPO/AO
worked out an adjustment of Rs. 1,87,74,679 in the following
manner:
S. Particulars of Value of Margin Value of mark
No. goods
such of non- up or margin
goods (in eligible should have
Rs.) units earned while
transferring to
eligible units (in
Rs.)
1 Transfer of goods 17,72,17, 7.69% 1,36,28,037
from Gurgaon to 650
Haridwar
2 Transfer of goods 7,32,09,7 7.03% 51,46,642
from Dharuhera to 04
Haridwar
Total 1,87,74,679
4.0.4 The Ld. AR submitted that the aforesaid issue stands
squarely covered in favour of the assessee, by the order dated
24.10.2016 passed by Tribunal in the immediately preceding
assessment years, i.e. AY 2010-11 and AY 2011-12 wherein identical
disallowance made by the assessing officer has been deleted. The
Tribunal, in allowing the claim of the assessee under section 80-IC
of the Act, held that for the purpose of computing market price of
23 ITA No.9187/Del/2019
Hero Motocorp Ltd. vs. ACIT
inter-unit transfer of goods, when the non-eligible units procured
goods at market price from third party vendors and supplied the
same to the eligible unit at the same purchase price as increased by
the applicable freight cost, no further substitution of such price is
warranted in terms of section 80IA(10) of the Act and the transaction
was a genuine business transaction borne out of commercial
expediency. It was further pointed out by the Ld. AR that following
the order of the Tribunal for AY 2010-11 and 2011-12, the Tribunal
has also decided the issue in favour of the assessee in appellate
orders passed for AY 2009-10, 2012-13 and 2013-14.
5.0 The Ld. CIT-DR relied upon the Assessment Order
and Order of the TPO, but could not distinguish the decision of the
Tribunal.
6.0.0 We have heard both the parties and perused the
material available on record. This Tribunal, in order passed for A.Ys.
2010-11 and 2011-12, held as under:
“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
24 ITA No.9187/Del/2019
Hero Motocorp Ltd. vs. ACIT
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
noneligible 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,
25 ITA No.9187/Del/2019
Hero Motocorp Ltd. vs. ACIT
which as stated has been borne by the eligible unit. Further, the
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 noneligible 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.”
26 ITA No.9187/Del/2019
Hero Motocorp Ltd. vs. ACIT
6.0.1 Therefore, the issue stands squarely covered in favour
of the assessee by order dated 24.10.2016 passed by Tribunal in the
immediately preceding assessment years, i.e. AY 2010-11 and AY
2011-12 wherein identical disallowance made by the assessing
officer has been deleted. The Tribunal, while allowing the claim of
the assessee under section 80-IC of the Act, held that for the
purpose of computing market price of inter-unit transfer of goods,
when the non-eligible units procured goods at market price from
third party vendors and supplied the same to the eligible unit at the
same purchase price as increased by the applicable freight cost, no
further substitution of such price is warranted in terms of section
80IA(8) of the Act and the transaction was a genuine business
transaction borne out of commercial expediency. We also find that
the Tribunal has, in the appeal for the assessment years 2009-10,
2012-13 and 2013-14, decided the issue in favor of the assessee
company following the aforesaid order passed for assessment years
2010-11 and 2011-12.
6.0.2 Therefore, Ground Nos. 2 to 2.3 are allowed in favour
of the assessee.
27 ITA No.9187/Del/2019
Hero Motocorp Ltd. vs. ACIT
7.0.0 The Ld. AR submitted that with regard to Ground Nos.
3 to 3.1 relating to addition of freight inward/import clearing
expenses to cost of closing inventory amounting to Rs. 321.25 lacs
(net of addition of Rs.156.65 lacs after adjusting opening stock) it
can be seen that the Assessee purchases raw material on CIF basis
and has included the freight cost for delivery of goods in purchase
price and the same are factored in the value of closing inventory. In
exceptional circumstances viz. material shortage, wherein assessee
has to immediately lift material, transport charges are paid, which
are not included to the purchase price, but are separately debited to
profit and loss account, because the invoices of transporters are
received after consumption of material. It was submitted that such
freight amount is not included in the valuation of closing stock, as
per regularly and consistently followed method of valuation of stock
which has been accepted by the Revenue in the past. The Ld. AR
submitted that the AO/Ld. DRP held that the assessee’s contention
that as the method is regularly followed year after year its impact
will be revenue neutral, cannot determine the income of the assessee
correctly for the year under consideration. The AO/Ld. DRP further
28 ITA No.9187/Del/2019
Hero Motocorp Ltd. vs. ACIT
held that the revenue aspect keeps on changing on year to year
basis. It was submitted that the Assessing Officer further held that
impact on non-inclusion of freight inward and clearing charges at
Rs. 321.25 lacs has to be added to the income of the assessee.
7.0.1 The Ld. AR submitted that this issue is decided in
favour of the assessee by the recent consolidated order dated
24.10.2016 passed by the Delhi bench of the Tribunal in assessee's
own case for assessment years 2010-11 and 2011- 12, wherein the
Tribunal, following the order of the coordinate benches of the
Tribunal passed in assessee's own case for the assessment years
2007-08 and 2008-09, deleted the aforesaid addition on the ground
that in those years it has been held that the assessee was following
consistent system of accounting, which was unnecessarily disturbed
by the Revenue, without change in facts. It was further held that
tinkering with the accounting method was unjustified when the
exercise did not materially alter the profits of the assessee company.
It was further pointed out by the Ld. AR that following the order of
the Tribunal for AY 2010-11 and 2011-12, the Tribunal has also
29 ITA No.9187/Del/2019
Hero Motocorp Ltd. vs. ACIT
decided the issue in favour of the assessee in appellate orders
passed for AYs 2009-10, 2012-13 and 2013-14.
8.0 The Ld. CIT-DR relied upon the Assessment Order
and Order of the TPO, but could not distinguish the decision of the
Tribunal.
9.0.0 We have heard both the parties and perused the
material available on record. The Tribunal in assessee’s own case for
A.Ys. 2010-11 & 2011-12 held as under:
“11) We have carefully considered the rival contentions. The
company is a corporate entity therefore it has to value its closing
stock according to the accounting standard 2 ‘valuation of
inventories’ issued by the Ministry of corporate affairs and ICAI.
According to that accounting standard the closing stock of the
finished goods is required to be valued including all cost of the
finished goods is required to be valued including all cost of
purchases, cost of conversion and other cost incurred in bringing
the inventory to their present location and conditions. The
contentions of the appellant is that that it’s all purchases are
accounted for on CIF basis and therefore the suppliers are
required to provide the goods at the factory location and
therefore in the closing stock of inventory there cannot be any
element of freight etc., this issue has been considered by the
30 ITA No.9187/Del/2019
Hero Motocorp Ltd. vs. ACIT
coordinate bench in appellant’s own case for A Y 2007-08 where
in it has been held that :-
“7.13. We have considered the submissions and the
material filed by both the parties. The issue in question is
regarding method of valuation of closing stock. The primary
contention of the assessee is that it had to make
emergency purchases and that these stocks so purchased
were immediately consumed. In such exceptional
situations, the assessee has directly accounted the freight
and import clearing charges to the profit and loss account.
This means that such raw material stocks are not part of
closing stock at all. Further, this fact is not rebutted by the
DR.
7.14 Though technically it can be argued that the value of
closing inventory must include freight/ import clearing
charges, the facts explained by the assessee are that the
purchases in question are done under exceptional
circumstances (which are well known in this type of
industry) for immediate consumption. They are in fact
consumed immediately i.e. as soon as raw material enters
the factory premises which is not disputed by assessing
officer, hence the question of such purchases being part of
closing stock does not arise at all. In such a situation,
when freight/ import charges are directly debited to the P&
L A/c along with the value of the purchases, naturally the
question of treating them as part of closing inventory does
not arise. The assessee has acted and accounted in a
proper and acceptable method. Therefore, the relief should
be granted on this count alone.
31 ITA No.9187/Del/2019
Hero Motocorp Ltd. vs. ACIT
7.15 Alternatively, the undisputed fact remains that the
assessee has consistently following the said method of
accounting in the last many years and the Revenue has
been accepting these facts and method of accounting
without any demur.
7.16 The contention of the DRP that, the principle of res-
judicata does not apply in Income tax proceedings and
therefore, the Assessing officer is correct to come to
independent conclusion and is not bound by past
acceptance of a factual legal point by the department is
untenable. Technically the principle of res judicata may not
apply to the income tax proceedings as each year is an
independent year, yet there ought to be uniformity in
treatment and consistency as propounded by Hon’ble
Supreme Court in the case of Radhasoami Satsang vs. CIT
193 ITR 321, when the facts and circumstances are
identical. It is a judicially accepted principle that when the
facts are same, a uniform view should be adopted for the
subsequent years in the income tax proceedings. Unless
there is a material change in the facts, which is neither
demonstrated by assessing officer nor DRP, the view which
is taken earlier, should not be changed, as held by various
courts. We now discuss some of the case laws.
7.17 The Hon’ble Supreme Court in the case of
Radhasoami Satsang (supra), on the theory of consistency,
has held as under:
“Strictly speaking, res judicata does not apply to the
income tax proceedings. Though, each assessment
year being a unit, what was decided in one year
might not apply in the following year, where a
fundamental aspect permeating through different
assessment years has been found as a fact one way
32 ITA No.9187/Del/2019
Hero Motocorp Ltd. vs. ACIT
or the other and parties have allowed that position to
be sustained by not challenging the order, it would
not be at all appropriate to allow the position to be
changed in a subsequent year.”
7.18 This view has been followed by the Hon’ble Delhi
High Court in the case of CIT vs. Neo Ploy Pack (P) Ltd.
[2000] 245 ITR 492 and the Hon’ble Bombay High Court in
the case of CIT vs. Gopal Purohit [2011] 336 ITR 287.
7.19 Further, the Hon’ble Supreme Court in the case of CIT
vs. Realest Builders and Services Limited (2008) 307 ITR
202 held as:
“In case where the department wants to tax an
assessee on the ground of the liability arising in a
particular year, it should always ascertain the
method of accounting followed by the assessee in the
past and whether change in method of accounting
was warranted on the ground that profit is being
underestimated under the impugned method of
accounting. If the Assessing Officer comes to the
conclusion that there is underestimation of profits, he
must give facts and figures in that regard and
demonstrate to the Court that the impugned method of
accounting adopted by the assessee results in
underestimation of profits and is, therefore, rejected.
Otherwise, the presumption would be that the entire
exercise is revenue neutral. In the instant case, that
exercise had never been undertaken. The Assessing
Officer was required to demonstrate both the
methods, one adopted by the assessee and the other
by the department. In the circumstances, there was
no reason to interfere with the conclusion given by the
High Court.”
33 ITA No.9187/Del/2019
Hero Motocorp Ltd. vs. ACIT
7.20 The Hon’ble Supreme Court in the case of CIT vs.
Bilahari Investment P. Ltd. 299 ITR 1 (SC) held as follows:
“Every assessee is entitled to arrange its affairs and
follow the method of accounting, which the
Department has earlier accepted. It is only in those
cases where the Department records a finding that
the method adopted by the assessee results in
distortion of profits that the Department can insist on
substitution of the existing method.”
7.21 In the case of CIT vs. Jagatjit Industries Ltd. (2011)
399 ITR 382 (Del.), the Hon’ble Jurisdictional High Court
has held as follows:
“If a particular accounting system has been followed
and accepted and there is no acceptable reason to
differ with it, the doctrine of consistency would come
into play. The method of accounting cannot be
rejected. The assessee was following the mercantile
system of accounting. According to past business
practice, the expenditure spilled over the next year
and was debited in the second year and was allowed
by the Assessing Officer. The Assessing Officer for the
assessment year in question disallowed Rs.13,46,299
claimed as expenditure of prior period allowable in
the current year. The Commissioner (Appeals) deleted
the disallowance and this was upheld by the
Tribunal. On appeal to the High Court:
Held, dismissing the appeal, that the assessee had
claimed prior period expenses on the ground that the
vouchers for such expenses from the employees/
branch employees were received after March 31st of
34 ITA No.9187/Del/2019
Hero Motocorp Ltd. vs. ACIT
the financial year. It had branch offices throughout
the country. It debited the expenditure spill over the
subsequent years and the Assessing officer had been
allowing it in the past. The accounting practice had
been consistently followed by it and accepted by the
Revenue. Nothing had been brought on record to show
that there had been distortion of profits or that the
books of account did not reflect the correct picture. In
the absence of any reason whatsoever, there was no
warrant or justification to depart from the previous
accounting system which was accepted by the
Department in respect of the previous years.”
7.22 In the present case, the Revenue has rejected the
method of accounting which is consistently followed by the
assessee on the ground that there may be chance where in
a particular year, the method adopted by the assessee may
result in underestimation of profits. However, the Revenue
failed to demonstrate with facts and figures that the
impugned method of accounting may result in material
underestimation of profits. On the contrary, the assessee
has demonstrated that the change in the method of
accounting for year under appeal would result in loss to the
revenue as the opening stock would also require similar
adjustment and the cascading effect will be loss to
revenue. We observe that in many of the additions made in
this case by the revenue, the consistent method of
accounting is unnecessarily disturbed, though it has been
accepted in many years. In our view such tinkering with
the method is unjustified when the exercise does not
materially alter the profits. The facts and figures in many
additions demonstrate that the issue raised is revenue
neutral in the long run. Such petty additions should be
avoided on the ground of materiality, as AS-1 which talks
35 ITA No.9187/Del/2019
Hero Motocorp Ltd. vs. ACIT
about materiality, consistency, prudence etc. is part of the
I.T. Act after it is notified u/s 145(2).
7.23 In view of the foregoing and proposition laid down by
the Hon’ble Supreme Court and the Hon’ble High Courts,
we are of the opinion that adjustment of Rs. 31.18 lacs
made to total value of closing stock of Rs. 275 crores and
consumption of stocks of Rs. 7178 crores is uncalled for. If
valuation of closing stock is changed then the value of
opening stock should also be changed on the same basis or
method. The closing stock of a particular year is the
opening stock of the subsequent year. It is not the case of
the revenue that the method of valuation of closing stock is
materially affecting the accounts and profits disclosed by
the assessee. This adjustment sought to be made is
revenue neutral and at best may result in preponment or
postponement of revenue. The issue is whether such
exercise is at all required on the ground of materiality.
Materiality is a concept which is well recognized both in
accountancy and law. Accounting standards notified by the
CBDT u/s 145(2) mandate that the concept of materiality
be taken into consideration when finalizing the accounts of
an assessee.
7.24 Further, the Hon’ble Supreme Court in the case of
Berger Paints India Ltd. vs. CIT (2004) 266 ITR 99 at page
103(SC), has noted with approval, the observations of the
Special Bench of the ITAT in the case of Indian
Communication Network Pvt. Ltd. vs. IAC (1994) 206 ITR
(AT) 96 (Delhi). At page 114 it observed that:
“Before we part with the ground, we cannot help
feeling that the litigation between the parties could
have been avoided since it was quite immaterial,
whether full deduction was allowed in one year or
36 ITA No.9187/Del/2019
Hero Motocorp Ltd. vs. ACIT
partly in one year and partly in the next, since the
assessee is a company and rate of tax is uniform. The
gain to one and the loss to the other is illusory since
what is deferred in one year, would have to be
discharged in the next. In that sense, nobody has
won and nobody has lost.”
7.25 Even on this plea also, the assessee succeeds. We
have dealt with this issue elaborately as, in a number of
grounds, this issue would become applicable. In view of
above discussion, we allow this ground of the assessee.”
9.0.1 Thus, the issue stands squarely covered in favour of
the assessee by order dated 24.10.2016 passed by Tribunal in the
immediately preceding assessment years, i.e. AY 2010-11 and AY
2011-12 wherein identical addition made by the assessing officer
has been deleted. Before us, the Ld. Departmental representative
could not point out any changes in the facts and circumstances of
the case for this year compared to the year in which the Tribunal
has decided this issue. We also find that the Tribunal has in the
appeals for the assessment years 2009-10, 2012-13 and 2013-14,
decided the issue in favor of the assessee company following the
aforesaid order passed for assessment years 2010-11 and 2011-12.
37 ITA No.9187/Del/2019
Hero Motocorp Ltd. vs. ACIT
9.0.2 Therefore, Ground Nos. 3 to 3.1 are allowed in favour
of the assessee.
10.0.0 With respect to Ground Nos. 4 to 4.1 relating to
addition on account of cost of rejection of semi-finished goods and
obsolete items to the value of closing stock amounting to Rs. 3.95
lacs (net of addition of Rs.13.83 lacs after adjusting opening stock),
it was submitted that the aforesaid rejections comprised of abnormal
rejections arising in the course of manufacturing, like rejections on
account of obsolescence, etc. The Ld. AR submitted that according
to principles of accounting (AS-2), as also the consistent, regular
and accepted method of accounting, the assessee only considers
normal wastages arising in the course of manufacturing for the
purposes of allocation to closing inventory. Since, the aforesaid
expenditure comprised of abnormal wastages, it was not practically
feasible to segregate normal and abnormal wastages and, therefore,
the assessee, as per the consistent method of accounting, did not
consider aforesaid costs for purposes of allocation to closing
inventory. It was submitted that it is not practically possible for the
assessee to segregate normal and abnormal wastages embedded in
38 ITA No.9187/Del/2019
Hero Motocorp Ltd. vs. ACIT
the aforesaid costs and, therefore, the assessee, as per consistent
and regular method of accounting, which has been accepted by the
Revenue as such in the earlier years, did not consider the aforesaid
expenditure for the purposes of valuation of closing inventory of
finished goods. It was submitted that the Assessing Officer
disallowed this expenditure and added the same to the income of the
assessee.
10.0.1 The Ld. AR submitted that the aforesaid issue stood
decided in favour of the assessee by the order of the Delhi Bench of
the Tribunal in the assessee's own case for the assessment years
2007-08 and 2008-09 wherein similar adjustment made in that year
was deleted on the same ground. The Ld. AR pointed out that the
aforesaid issue has been decided in favour of the assessee by the
order of the Tribunal in assessment year 2010-11 and 2011-12
wherein the Tribunal had held that only normal loss is to be
loaded/added to the cost of closing inventory which was in
consonance with the Accounting Standards issued by the Institute
of Chartered Accountants of India (ICAI). It was further pointed out
by the Ld. AR that following the order of the Tribunal for AY 2010-11
39 ITA No.9187/Del/2019
Hero Motocorp Ltd. vs. ACIT
and 2011-12, the Tribunal has also decided the issue in favour of
the assessee in appellate orders passed for AYs 2009-10, 2012-13
and 2013-14.
11.0 The Ld. CIT-DR relied on the Assessment Order and
Order of the TPO, but could not distinguish the decision of the
Tribunal.
12.0.0 We have heard both the parties and perused the
material available on record. The Tribunal for A.Ys. 2010-11 and
2011-12 has held as under:
“16. We have carefully considered the rival contention and has
also perused the relevant provisions of the accounting standard
– 2 which has been relied by the Ld. assessing officer. We have
carefully perused the decision of the coordinate bench in the
appellant’s own case for assessment year 2007-08 wherein the
identical issue is dealt with as under:-
“8.9 The issue in question is whether the cost of abnormal
rejections have to be considered for the purpose of
valuation of closing stock. The assessee relied on
Accounting standard -2- Valuation of Inventories which is a
notified accounting standard by the Companies Act which
stipulates that abnormal wastages should not be
considered for valuation of inventory.
40 ITA No.9187/Del/2019
Hero Motocorp Ltd. vs. ACIT
8.10 It was submitted by the Ld. AR of the assessee that it
is in the manufacturing of precision and quality product
and in case of unfit material it has been consistently
following the method of changing the abnormal rejection of
material to its profit and loss account, without any
allocation to the value of closing inventory.
8.11 The assessing officer’s case is that cost of rejections
needed to be included in the value of closing stock.
Assessing officer worked out an amount of Rs. 9.24 lacs as
attributable to closing stock out of total expenditure of Rs.
12.49 crores and closing stock value of Rs. 275 crores. The
assessee as a consistent accounting policy has been
claiming the cost of abnormal rejections as revenue
expenditure for the previous years and this has been
regularly accepted by department in past.
8.12 The amount of Rs. 9.24 lacs attributed by the
assessing officer, in our view, is materially inconsequential
so as to warrant disturbing the regular method of valuation
of closing stock being followed by the assessee company.
The quantum of the addition of Rs. 9.24 lacs is less than
0.74% of the value of abnormal rejections. As a percentage
of total stocks / turn over / profits declared, this figure is
miniscule.
8.13 Accounting Standard-2 stipulates that abnormal
wastages should not be considered for valuation of
inventory. It reads as follows:
“16. Examples of costs excluded from the cost of
inventories and recognized as expenses in the period
in which they are incurred are:
a)Abnormal amounts of wasted materials, labour or
other production costs; storage costs, unless those
41 ITA No.9187/Del/2019
Hero Motocorp Ltd. vs. ACIT
costs are necessary in the production process before a
further production stage; administrative overheads
that do not contribute to bringing inventories to their
present location and condition; and selling costs.”
8.14 Keeping in view the treatment prescribed under AS-2
and the fact that the assessee has been regularly following
the same method of accounting for valuation of charging
such rejection to P&L A/c and its closing inventory, we are
of the view the addition in question is uncalled for. The
adjustment is not material adjustment. Further, for the
reasons staged by us on the issue of consistency, while
disposing around no. 2 to 2.2, we allow this ground of the
assessee.”
Both the parties have admitted that there is no difference in the
facts and circumstances of the case of the appellant in the
assessment year before us as well as the year for which the
order of the coordinate bench pertains to. On reading of the
assessment order as well as the direction of the Ld. Dispute
resolution panel it was not found that how the loss of the
assessee was found to be normal when the assessee submitted
that it is an abnormal loss incurred by it during the course of
manufacturing process. Further the Ld. dispute resolution panel
has also stated that both the cost of normal and abnormal losses
have to be loaded to the value of the closing stock is devoid of
any merit as it is contrary to the accounting standard issued by
the Institute of chartered accountants of India which has been
mandated by the Ministry of corporate affairs, which only says
that, only normal losses are required to be included and
42 ITA No.9187/Del/2019
Hero Motocorp Ltd. vs. ACIT
abnormal losses are required to excluded for the purpose of the
valuation of the closing stock of the finished goods and semi
finished goods. In view of the above, we respectfully following
the decision of the coordinate bench in the appellant’s own case
for the previous year allow ground no. 3 of the appeal of the
assessee.”
12.0.1 Thus, this issue is squarely covered in assessee’s
favour by the order of earlier assessment years. We also find that the
Tribunal has in the appeal for the assessment years 2009-10, 2012-
13 and 2013-14, decided the issue in favor of the assessee company
following the aforesaid order passed for assessment years 2010-11
and 2011-12.
12.0.2 Therefore, Ground Nos. 4 - 4.1 are allowed in favour
of the assessee.
13.0.0 With respect to Ground Nos. 5 to 5.4, relating to
disallowance of provision for increase in price of material amounting
to Rs.72.64 crores, the Ld. AR submitted that it can be seen that the
assessee had appointed various vendors for supply of material to be
used in the process of manufacturing of vehicles. It was submitted
that the assessee, at the time of issuing of purchase order,
negotiates the price at which the particular component/ components
43 ITA No.9187/Del/2019
Hero Motocorp Ltd. vs. ACIT
shall be supplied by the vendor. Subsequently, vendors are provided
supply of component schedule annually. It was submitted by the Ld.
AR that in the business of manufacturing vehicles, the assessee
purchases raw material from vendors with the express
understanding that the rates would be revised, if there is substantial
increase/decrease in cost of materials, at the agreed interval. It was
submitted that in the assessment order, the assessing officer held
that the aforesaid provision of 72.64 crores is not allowable business
expenditure. The assessing officer held that provisions emanating
from retrospective price amendments are contingent in nature and
thus, not an allowable business expenditure. It was further
submitted that the assessing officer also added back the aforesaid
total provision while computing ‘book profit’ under section 115JB,
holding the same to be an unascertained liability.
13.0.1 The Ld. AR submitted that the provision for the
material is worked out as under:-
(1)Provision for purchase orders issued for price amendment as at
31.3.2015: Rs. 24.79 crores: The aforesaid provision was made
on the basis of actual supplies made up to the end of the year
as per price amendments actually issued as on 31.03.2015.
44 ITA No.9187/Del/2019
Hero Motocorp Ltd. vs. ACIT
Therefore, the assessee has made provision of Rs. 24.79 crores
on the basis of actual POs issued to vendors for the change in
prices during the year and it involved no estimation.
(2)Provision made on best estimate basis of Rs.47.85 crores of
which price amendments were not finalized by the end of the
year: The provision for price increase of Rs.47.85 crores was
made on the basis of per vehicle increase / decrease in metal
cost during 3rd/ 4th Quarter multiplied by actual dispatch
during the corresponding period.
13.0.2 The Ld. AR submitted that in assessment year 2008-
09, the Tribunal deleted the disallowance holding that similar
disallowance of provision was made by the assessing officer in
complete disregard of the findings of the assessing officer in the
preceding assessment year, viz. Assessment Year 2007-08 as also
the consistent method followed by the assessee. In that year, the
Delhi Bench of the Tribunal, vide order dated 13.06.2014 passed in
the assessee’s own case for assessment year 2008-09 was pleased to
delete the disallowance made by the assessing officer keeping in
view the principle of materiality and consistency followed by the
assessee. Further, the Ld. AR submitted that the Delhi Bench of the
Tribunal, vide consolidated order dated 24.10.2016, passed in
45 ITA No.9187/Del/2019
Hero Motocorp Ltd. vs. ACIT
assessee’s own case for assessment year 2010-11 and 2011-12, has
decided the aforesaid issue in favour of the assessee holding that the
provision was made on scientific basis and the transaction is
revenue neutral. It was further pointed out by the Ld. AR that
following the order of the Tribunal for AYs 2010-11 and 2011-12,
the Tribunal has also decided the issue in favour of the assessee in
appellate orders passed for AYs 2009-10, 2012-13 and 2013-14.
Further, in the order passed for assessment year 2009-10, the
Tribunal has also held that the since the provision for increase in
price of material was an ascertained liability made on an actual and
scientific basis, assessing officer erred in making adjustment to
book profit in accordance with the adjustments provided in the
Explanation to section 115JB of the Act.
14.0 The Ld. CIT - DR relied upon the Assessment Order
and Order of the TPO, but could not distinguish the decision of the
Tribunal.
15.0.0 We have heard both the parties and perused the
material available on record. This Tribunal, for A.Ys. 2010-11 &
2011-12, has held as under:
46 ITA No.9187/Del/2019
Hero Motocorp Ltd. vs. ACIT
“20) We have carefully considered the rival contentions and also
perused order of the coordinate bench in the appellant’s own
case for earlier years. We have also perused the page no. 1130
to 1140 of the paper book volume 3 submitted by the assessee
before the Ld. assessing officer in pursuance of direction of the
Ld. dispute resolution panel. The parties before us have
confirmed that there is no change in the facts and circumstances
of the case for this year compared to the year for which the
tribunal has decided this issue in favour of the appellant. The
coordinate bench in assessee’s own case for assessment year
2007-08 has decided this issue as under:-
“12.11 The addition in question is on account of provision
for increase in price of material. When there is an excess
provision on account of price revision made during the year,
the assessee reversed the same in subsequent year i.e.
when the actual figures are known. Similarly, when there
is a short provision for increase in price of raw material
supplied in immediately preceding year, the balance is
recognized as expenditure during the year. A claim is made
based on ascertainment of actual liability. The assessing
officer disallowed the reversals of provision on ground that
this was a prior period expenditure.
12.12 When provisions are made, what is to be seen is
whether the assessee has done a bona fide and genuine
exercise to estimate its liability with reasonable certainty.
The term reasonable certainty means that the provision in
question might be slightly higher or lower than the actual
figure. When the provision is higher, it is reversed in
subsequent year, when the actual figures are known.
47 ITA No.9187/Del/2019
Hero Motocorp Ltd. vs. ACIT
Similarly, when the provision is lower, the same is claimed
in the latter assessment year. It cannot be said that these
are prior period expenditure. The actual liability in question
is ascertained only during the year and hence the liability
crystallizes during the year. Estimation of an expense has
to be considered in contradiction to actual ascertainment of
the expenses. Once the actual expense has been
ascertained, the liability accrues in that year to the extent
not provided in the earlier year and is to be allowed as
revenue expenditure in the year of crystallization. Concepts
of going concern, accrual and consistency have to be taken
into account by the revenue authorities while evaluating
such provisions and making such adjustments. The
assessee is disputing the figures of disallowance and the
DRP is also expressing its inability to correct the figures. In
our view the DRP is not helpless and could have directed
the assessing officer to verify the figures and correct the
mistakes, if any. In view of the above discussion, we allow
this ground of assessee for statistical purpose and direct
the assessing officer to properly verify the figures and
allow the claim of the assessee.”
Subsequently for the assessment year 2008-09 when the similar
disallowance was made by the Ld. assessing officer the
coordinate bench vide its order dated 13.04.2014 has held
deleted the disallowance made by the assessing officer keeping
in view the principle of materiality and consistency followed by
the appellant. On the ground that the mention has been made in
the purchase order that there cannot be any revision of the
prices subsequently and the prices mentioning the purchase
order of final based on which the Ld. assessing officer has relied
48 ITA No.9187/Del/2019
Hero Motocorp Ltd. vs. ACIT
very heavily we are of the view that that these are the general
terms and conditions of the purchase order claimed by the
appellant upon its various vendors and there is no prohibition in
the said purchase orders that subsequently the prices cannot be
revised. Many times the prices are dependent upon the cost of
the raw material such as metal etc of the vendors which is
highly fluctuating, which may result into subsequent price
revision. Further when the actual payments are made to the
vendors on the basis of such retrospective increase in price of
material supplied, which is accepted and allowed as revenue
expenditure, the provision made for such are revenue neutral.
Accordingly there is no justification in sustaining the aforesaid
disallowance. Accordingly, we reverse the action of the
assessing officer and allow the ground no. 4 of appeal raised by
the appellant.”
15.0.1 Following the aforesaid order, the Tribunal in AY 2013-14
decided the issue in favour of the assessee while holding as under:
“It is observed that it is common trade practice to contract with
vendors on such express terms for payment of arrears in the
event of substantial increase/ decrease in cost, in order to
maintain continuous supply of raw materials without being
affected by market fluctuations, especially in light of the volume
of purchases made by the assessee. In the absence of such
understanding/ contract with the vendors, the assessee would
not be able to operate and continue manufacturing operations
49 ITA No.9187/Del/2019
Hero Motocorp Ltd. vs. ACIT
without disruption. This same process is followed when there is
reduction in cost elements of component prices, company informs
the vendors for reduction in price of components. Accordingly,
while price revisions are pending or negotiations are on, the
vendors keep on supplying the material provisionally at the
agreed rates, with the understanding that pursuant to
negotiations being finalized, the arrears of the amount due to
them would be paid to them retrospectively. Such price revisions,
being an accrued liability at the time of purchase of raw
materials, are recorded in the books of accounts by the
assessee. At the year end, the company estimates the additional
liability on account of price revision under negotiation and
makes upward/downward provision, as the case may be, in
relation to material supplied until the end of the relevant year.
Thus, the Assessing Officer was incorrect in disallowing this
claim.”
15.0.2 We also find that the Tribunal has in the appeal for the
assessment years 2009-10 deleted the adjustment by the AO under
section 115JB of the Income Tax Act, 1961 by holding as under:
“From the records it can be seen that the provision for the
material is worked out in respect of price amendments which
were already issued on 31.03.2009 which was made on the
basis of actual supplied made upto the end of the year as per
price amendments actually issued on 31.03.2009. The provision
was made on the basis of actual PO issued to the vendors for
50 ITA No.9187/Del/2019
Hero Motocorp Ltd. vs. ACIT
change in the prices during the year and thus, does not involved
any estimation. Therefore, the Assessing Officer was not right in
making adjustments which are not consistent with the
explanation to Section 115JB of the Income Tax Act, 1961. In the
present Assessment Year also the facts are similar and are
squarely covered with the decision of the Tribunal for A.Ys.
2010-11, 2011-12, 2012-13 and 2013-14. Hence Ground Nos.
15 to 14.3 are allowed.”
15.0.3 In the present Assessment Year also the facts are similar
and are squarely covered with the decision of the Tribunal for A.Ys.
2009-10 to 2013-14.
15.0.4 Therefore, Ground Nos. 5 to 5.4 are allowed in favour of
the assessee.
16.0.0 The Ld. AR submitted that Ground No. 6 is relating to
disallowance of cost of scrap material amounting to Rs.3.78 lacs. It
was submitted that in the course of the business of manufacturing,
the process generates some scrap on account of rejection of
components, obsolescence of components, etc. In the course of
manufacturing process, scrap is generated mainly on account of
grinding scrap in machining process of various components. Such
51 ITA No.9187/Del/2019
Hero Motocorp Ltd. vs. ACIT
scrap generated in the course of manufacturing is not separately
debited to the profit and loss account but is claimed as the part of
cost of material consumed in the course of manufacturing. The Ld.
AR submitted that the wastage generated in the manufacturing
process is negligible compared to the overall consumption of
material during the year. Further, such wastage is normal and
inherent in the manufacturing process and in any case, within
tolerable limits. Scrap generated in the aforesaid manner is
transferred to scrap yard with proper approval of respective ‘Shop
head' and 'Process Planning & Control department' in the
manufacturing unit and is sold after necessary processing (e.g.
crushing of components), if any. The Ld. AR further submitted that
the sale proceeds from sale of scrap is directly credited to the profit
and loss account and is shown as income. It was submitted that
having regard to the nature of scrap/wastage generated during the
course of business i.e. empty oil drums, corrugated wooden boxes,
plastic bags, etc., it is not possible to maintain scrap register at the
shop floor containing item wise details of scrap generated. However,
the assessee maintains record/register of each item of scrap sold
52 ITA No.9187/Del/2019
Hero Motocorp Ltd. vs. ACIT
during the year. The sale proceeds from sale of scrap is directly
credited to the assessee’s Profit & Loss A/c and is shown as income.
The Ld. AR submitted that the assessee realized Rs. 22.92 crores
from sale of scrap generated in the course of manufacturing, which
was credited to the profit and loss account and shown as income. It
was submitted that in the assessment order, the assessing officer
has observed that the assessee has erred in not estimating the value
of scrap lying in the factory premises as on the last date of the
previous year viz. 31.3.2015 which should have been credited to
profit and loss account as part of the closing stock. The assessing
officer estimated the value of such scrap at an amount of
Rs.3,78,400/- (computed on the basis of average scrap sales in the
last 15 days of the relevant year and first 15 days of next year, vis-a-
vis, after reducing the scrap sale as on the last days of the relevant
year) and made addition of the same to the closing stock and
consequently to the income of the assessee.
16.0.1 The Ld. AR submitted that the aforesaid issue has
been decided in favour of the assessee in order passed by the
Tribunal in assessee’s own case for the assessment years 2010-11
53 ITA No.9187/Del/2019
Hero Motocorp Ltd. vs. ACIT
and 2011-12, wherein the Tribunal accepted the method as followed
by the assessee of accounting income on sale of scrap on a
consistent basis and deleted the impugned addition on the ground
that the assessee was not dealing in scrap and/or holding the scrap
as inventory, and, thus, was not required to value the closing stock
after taking into account the value of scrap. The Ld. AR submitted
that the Tribunal, in coming to the aforesaid conclusion, laid
emphasis on the fact that such transaction was revenue-neutral and
held that considering the size of the assessee company, it could not
be expected to keep quantitative tally of miniscule items. The Ld. AR
pointed out that the Tribunal in assessee’s own case for the AYs
2007-08 and 2008-09 had restored the matter back to the file of the
assessing officer to compute the value of closing stock on consistent
basis, as per method to be followed by the assessing officer in the
set-aside order. The Ld. AR submitted that the assessee had filed an
appeal against the aforesaid order of the Tribunal, which was
admitted by the High Court vide order dated 19.1.2015 as involving
substantial question of law. It was further submitted that the AO in
the set aside proceedings for AY 2007-08, vide order dated
54 ITA No.9187/Del/2019
Hero Motocorp Ltd. vs. ACIT
31.10.2014, confirmed such disallowance on an ad- hoc basis by
estimating the average of scrap lying in the closing stock as a
proportion of scrap sales for the last 15 days for the ended
31.03.20007 and the first 15 days of the subsequent year and the
Ld. CIT (A), vide order dated 01.02.2018, deleted the disallowance
made by the AO in the set aside order. However, the Ld. AR pointed
out that the aforesaid disallowance sustained by the Tribunal in
assessment years 2007-08 and 2008-09 has been categorically
distinguished by the ITAT in the AY 2010-11 (referred supra),
wherein the Tribunal held that the earlier orders were passed
without due consideration of AS-2 and application thereof to scrap
generated during manufacturing process has not been examined. It
was further pointed out by the Ld. AR that following the order of the
Tribunal for AY 2010-11 and 2011-12, the Tribunal has also decided
the issue in favour of the assessee in appellate orders passed for AYs
2012-13 and 2013-14.
17.0 The Ld. CIT DR relied upon the Assessment Order and
Order of the TPO as well as on the Tribunal’s decision for A.Y. 2007-
08 and 2008-09.
55 ITA No.9187/Del/2019
Hero Motocorp Ltd. vs. ACIT
18.0.0 We have heard both the parties and perused the
material available on record. On the issue under consideration, a co-
ordinate Bench of the Tribunal, for A.Y.s 2010-11 and 2011-12, has
held as under:
“24. We have carefully considered the rival contentions.
Accounting standard 2 notified by the Ministry of corporate
affairs it provides that inventory is required to be valued at the
end of the year for determining the true and fair profit or loss of
the financial period of an enterprise. According to that the
inventory is required to be valued according to accounting
standard 2 in case it is held for the sale in the ordinary course of
the business. In the present case the assessee is not holding
scrap as an inventory in the ordinary course of its business. It is
also not the dealer in scrap. The inventory that it holds in the
ordinary course of its business at the raw materials semi
finished goods and they finished goods of the company.
Therefore, it is incorrect to hold that assessee should have
valued the scrap at the end of the year. Furthermore the
accounting policy of the company also states that the scrap is
accounted for at the time of its disposal. Therefore, according to
us it is not mandatory for an assessee to value scrap as at the
end of financial period for working out the true and fair profit or
losses of the company. More so as in the previous year this
accounting policy of the company has been accepted by the
56 ITA No.9187/Del/2019
Hero Motocorp Ltd. vs. ACIT
revenue without disturbing the profit on this count. Further,
while rendering our decision in the preceding ground of appeal,
following the decision of honourable High Courts and Supreme
Court, we have held that adjustment should not be made in the
assessment order on issues, which are revenue-neutral. The
impugned addition under consideration is purely revenue-neutral
in as much as addition of the estimated value of the scrap to
closing stock would be debited as opening stock in the profit and
loss account of immediately succeeding year. Further, the
assessing officer will need to carry out the similar exercise in the
last year, to estimate stock of scrap which would become
opening stock of this year. There is, thus, no escapement of
Revenue on the basis of the impugned addition made by the
assessing officer in the assessment order. We have already held
in multiple grounds supra that no adjustment should be made to
returned income on issues, which are revenue neutral. Having
held as above, it is difficult to take any different view for the
issue under consideration, which is also purely revenue neutral,
especially considering that if similar adjustment (which has not
been carried out by the assessing officer) is made to the opening
stock, no additional tax liability would delve upon the appellant
It could also be seen that the addition of Rs.3.02 lacs is
miniscule having regard to the size of the company, which has
declared turnover of Rs.16,000 crores (approx.) during the year
under consideration and net profit of Rs.2232 crores. The
aforesaid renders force in the arguments taken by the Ld.
57 ITA No.9187/Del/2019
Hero Motocorp Ltd. vs. ACIT
Counsel that an assessee engaged in the business of
manufacturing, especially that of the size of the appellant,
cannot be expected to keep quantitative tally of miniscule items
like nuts and bolts lying in the scrap yard. In view of the
aforesaid, keeping in mind the principle of materiality, we find
that there is no error in the system and regular practice followed
by the appellant of not estimating the value of scrap lying in the
scrap yard and accounting for sale as and when such scrap is
sold and removed from the factory premises. For the aforesaid
cumulative reasons we do not find any justification in sustaining
the addition of Rs.3.02 lacs made by the assessing officer in the
assessment order. As regards the decision of the Tribunal in the
earlier two assessment years, we draw support from the various
decisions, wherein it has been held that since doctrine of res
judicata is not applicable to income tax proceedings, the Tribunal
can deviate from earlier orders passed in the assessee’s own
case as in those earlier decisions the provisions of the
accounting standard A-S to with respect to valuation of
inventories were not considered and whether they apply to the
scrap generated in a manufacturing process by the company.
Furthermore there is no evidences brought on record by the Ld.
assessing officer that the assessee has sold scrap out of the
books. Furthermore the amount of addition working out by the
Ld. assessing officer was also on the estimate basis without any
quantitative details of the scrap. It is also not the case of the
assessee that compared to the earlier years the scrap sold by
58 ITA No.9187/Del/2019
Hero Motocorp Ltd. vs. ACIT
the assessee is lesser during the year. In view of the above, the
addition made by the Ld. Assessing officer on account of
estimating the value of scrap lying in closing stock amounting to
Rs. 3.02 lakhs is deleted and ground No. 5 of appeal raised by
the assessee is allowed.”
18.0.1 In the present Assessment Year also the assessee is not
dealing in scrap, and/or holding the scrap as inventory, and, thus,
was not required to value the closing stock after taking into account
the value of scrap. This Tribunal, for A.Y.s 2010-11 and 2011-12,
while coming to the aforesaid conclusion, laid emphasis on the fact
that such transaction was revenue-neutral and held that
considering the size of the assessee company, it could not be
expected to keep quantitative tally of miniscule items. We also find
that the Tribunal has in the appeal for the assessment years 2012-
13 and 2013-14, decided the issue in favor of the assessee company
following the aforesaid order passed for assessment years 2010-11
and 2011-12. The facts are identical in the present year as well.
18.0.2 Therefore, Ground No. 6 is allowed in favour of the
assessee.
59 ITA No.9187/Del/2019
Hero Motocorp Ltd. vs. ACIT
19.0.0 With respect to Ground Nos. 7 to 7.2, relating to
disallowance of prior period expenses amounting to Rs. 7.64 crores,
it was the contention of the Ld. AR that the assessee is a large size
manufacturing company which receives services from several
vendors, running into hundreds. The Ld. AR submitted that the
assessee had made reasonable attempt to quantify the liability
incurred towards expenses during the relevant previous years and
provided for it. It was submitted that it is not humanly possible to
consider and provide for all expenses, in absence of relevant
details/material/information for various reasons like, non-receipt of
bills/invoices from the vendors, the contract terms with vendors not
being settled, disputes in relation to bills received, services
contracted by zonal/regional/branch officers not intimated to the
head office, etc. Accordingly, the assessee claimed deduction for
miscellaneous expenses aggregating to 7.64 crores pertaining to
prior period. The Ld. AR submitted that in the assessment order, the
assessing officer has disallowed the aforesaid expenses, on the
ground that same pertained to prior period and are not allowable
revenue expenditure against income of the relevant year.
60 ITA No.9187/Del/2019
Hero Motocorp Ltd. vs. ACIT
19.0.1 The Ld. AR submitted that the aforesaid issue is
covered by the order passed by the Tribunal in the assessee's own
case for Assessment Year 2008- 09, wherein, the Tribunal had taken
into consideration the finding of the Ld. DRP deciding the issue in
favor of the assessee and remanded the matter to the file of the
Assessing Officer for correcting calculation errors. It was further
submitted that the aforesaid issue has been decided in favour of the
assessee by the order of the Tribunal for assessment years2009 to
2013-14.
20.0 The Ld. CIT-DR relied on the Assessment Order and
Order of the TPO, but could not distinguish the decision of the
Tribunal.
21.0.0 We have heard both the parties and perused the
material available on record. This Tribunal, in A.Y. 2010-11 and
2011-12, has held as under:
“201. We have heard the rival contentions. We note that similar
issue relating to disallowance of prior-period expenses was
deleted by the Tribunal in the assessee’s own case for
assessment year 2008-09. The relevant observations of the
Tribunal for assessment year 2008-09 are as under:
61 ITA No.9187/Del/2019
Hero Motocorp Ltd. vs. ACIT
“5. On careful consideration of above contention and
submissions of both the parties and careful perusal of the
record placed before us, inter alia decision in assessee's
own case for AY 2007-08 (supra), we observe that the
same issue was decided by coordinate bench of this
Tribunal in favour of the assessee with following findings
and conclusions:-
"61.10. The issue herein is year of deductibility.
Additional ground of appeal was filed for A. Y. 2006-
07 before the Tribunal and this additional ground
was not disposed of Misc. application is pending. The
assessee's contention is that the correct amount is Rs.
23.86 lakhs and not Rs. 643.05 lakhs as mentioned
by the A.O. Details are given in the paper book we
find that the D.R.P. has directed the assessing officer
to verify the price. This working given by the assessee
is not properly verified by the A.O. The AO should
have verified the claim of the assessee. We direct the
assessing officer to verify the claim of the assessee.
Be it as it may, the genuineness of the expenditure is
not in doubt and as it is a question of excess/ short
provision of discount in respect of sales effected, we
are of the considered opinion that method of
accounting followed by the assessee need not to be
disturbed as it is being consistently followed over the
years and as the revenue has accepted the same. The
assessee's claim that the amount of Rs. 23.86 lakhs
is not prior period expenses is not seriously disputed
by the revenue. As to the balance amount Rs. 90,000
under the festival offer scheme, it was marginal
variation that arose due to estimation of liability
towards sales discount to be given to dealers. Thus
the disallowance cannot be sustained both on the
grounds of materiality as well as consistency. Similar
issues were dealt by us while disposing of ground
62 ITA No.9187/Del/2019
Hero Motocorp Ltd. vs. ACIT
nos. 7 and 7.1. Consistent with the view taken
therein, we allow this ground of the assessee for
statistical purposes.”
6. During the argument, both the parties fairly agreed that
the assessee claimed deduction for following miscellaneous
expenses aggregating to Rs.7,09,31,076 but in the
assessment order, the amount of Rs.7,15,91,826 has been
incorrectly reported on account of totaling expenses. From
page no. 14-16 of DRP order, we observe that the DRP has
also pointed out mistake of totaling. At the outset, we
observe that the Assessing Officer has nowhere disputed
the genuineness of the expenditure claimed by the
assessee and if assessee is denied deduction, then it
would never get deduction for such expenses. From DRP
Order, we also observed that the DRP has followed its
decision in respect of immediately preceding year. At the
same time, we observe that the mistake of totaling and the
working given by the assessee has not been properly
verified at the end of Assessing Officer and the same
should have been verified by the Assessing Officer. Under
above circumstances, we hold that the issue is squarely
covered in favour of the assessee by the decision of Hon'ble
ITAT 'C' Bench in assessee's own case for AY 2007-08
(supra) and we direct the Assessing Officer to allow the
claim of the assessee after proper examination and
verification. Accordingly, going consistent with the view
taken by this Tribunal in assessee's own case for the
immediately preceding year to the year under consideration
in this appeal, we hold that ground no. 1 of the revenue
being devoid of merits deserves to be dismissed and we
dismiss the same.”
63 ITA No.9187/Del/2019
Hero Motocorp Ltd. vs. ACIT
The Ld. departmental representative could not point out any
change in the facts and circumstances of the case of the
appellant as compared to the assessment year in which the
above issue is decided by the coordinate bench. No other
contrary decision was also pointed out therefore, respectfully
following the decision of the coordinate bench in the appellant’s
own case for the earlier years. We dismiss ground No. 3 of the
appeal of the revenue.”
21.0.1 It can be seen that the facts are identical in the
previous Assessment Years 2009-10 to 2013-14 and squarely
covered in favour of the assessee. Therefore, Ground Nos. 7 to 7.2
are allowed in favour of the assessee.
22.0.0 With respect to Ground No. 8 to 8.3 relating to
provision of Head office expense reversed in succeeding year
amounting to Rs.11.80 crores, the Ld. AR submitted that at the end
of year, the assessee had made provision for various expenses
incurred during the year on the basis of reasonable estimate, since
in the absence of receipt of bills/invoices from the vendors, which
are received in the succeeding year, the exact amount payable there
against was not ascertainable. In the succeeding year, on receipt of
bills from vendors, exact amount payable to vendors was
64 ITA No.9187/Del/2019
Hero Motocorp Ltd. vs. ACIT
ascertained. The amount of provision in excess of actual amount
payable was reversed in the books of account. In case of shortfall,
the profit and loss account was debited with the amount of shortfall.
The Ld. AR submitted that the aggregate provision for advertisement
expenses incurred at the head office made at the end of the relevant
previous year, which was reversed in succeeding year amounted to
Rs. 11.80 crores. In the assessment order, the Assessing Officer
disallowed the provisions made at the end of the year of Rs. 11.80
crores which were reversed in the succeeding year on receipt of bills
from the vendors on conclusion of negotiations with the vendors, on
the ground that the provisions to that extent were excessive and
represented contingent liability, which was not allowable deduction.
That apart, the assessing officer also added back the aforesaid total
provision while computing ‘book profit’ under section 115JB,
holding the same to be an unascertained liability.
22.0.1 The Ld. AR submitted that the provision for
advertisement expenses, in the year under consideration as well,
has been made on the basis of actual Purchase orders and
agreements and, thus, has been made on reasonable and scientific
65 ITA No.9187/Del/2019
Hero Motocorp Ltd. vs. ACIT
basis. Detail of provisions for advertisement was submitted before
the authorities. The Ld. AR submitted that the Tribunal, in the
immediately preceding assessment years, viz. AYs 2010-11 and
2011-12, has decided the issue in favour of the assessee by following
the order for assessment year 2008-09 holding that the provision
was made on a rational and scientific basis, and, thus, the same
was to be allowed as business deduction, notwithstanding that part
thereof was reversed in the succeeding year. It was submitted that
the Tribunal, in coming to the aforesaid conclusion, also held that
the disallowance cannot be made on issues which are revenue
neutral. It was further submitted that this issue is also covered in
favour of the assessee by the decision of the Tribunal in assessee’s
own case for the assessment year 2008-09, wherein the Tribunal
reversed the action of assessing officer in disallowing provision on
the ground that the amount reversed there against in the succeeding
year exceeded 15% of the amount of provision. The Tribunal held
that the said approach followed by the AO had no valid basis and
was purely ad-hoc. The Tribunal also held that the Assessing Officer
was bound to follow the practice and stand taken by the Department
66 ITA No.9187/Del/2019
Hero Motocorp Ltd. vs. ACIT
on this issue in the earlier years and, accordingly, restored the
matter back to the file of the Assessing Officer to reconsider the
issue, having regard to the method of making provisions followed by
the assessee and accepted by the Revenue in preceding years. The
Ld. AR further submitted that the Assessing Officer, in the set-aside
proceedings, vide order dated 26.02.2015, accepted the claim of the
assessee and allowed relief on the aforementioned identical issue by
observing that the assessee had computed the provision on the basis
of actual Purchase Orders, which was scientific and logical in
nature.
22.0.2 It was further pointed out by the Ld. AR that following
the order of the Tribunal for AYs 2010-11 and 2011-12, the Tribunal
has also decided the issue in favour of the assessee in appellate
orders passed for AYs 2009-10, 2012-13 and 2013-14. Further, in
the order passed for assessment year 2009-10, the Tribunal also
held that the provision for advertisement expenses was also
allowable while computing book profit under section 115JB of the
Act.
67 ITA No.9187/Del/2019
Hero Motocorp Ltd. vs. ACIT
23.0 The Ld. CIT-DR relied upon the Assessment Order and
Order of the TPO, but could not distinguish the decision of the
Tribunal.
24.0.0 We have heard both the parties and perused the
material available on record. On the issue under consideration, this
Tribunal, in its orders for A.Ys. 2010-11 and 2011-12, has held as
under:
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
are revenue neutral, having no impact on the overall tax liability
of an assessee. While following the aforesaid principles, we
68 ITA No.9187/Del/2019
Hero Motocorp Ltd. vs. ACIT
observe that the present disallowance is also revenue-neutral,
since the impugned amount of provision, as also admitted by the
assessing officer itself, was reversed in the succeeding year and
consequential offered to tax in that year. If such provision is
disallowed in this year, the corresponding reduction would need
to be made in the return of the succeeding year, neutralizing the
entire tax liability on the appellant company. For the aforesaid
cumulative reasons, we hereby delete the disallowance made by
the by the Ld. Assessing officer of Rs. 1 9658 1820/– in respect
of provision for advertisement expenses incurred at the head
office made at the end of the relevant previous year which were
reversed in the succeeding year and allow the ground No. 7 of
appeal raised by the assessee.”
24.0.1 In the present Assessment Year, detail of provisions for
advertisement was submitted before the lower authorities. Further,
the Assessing Officer, in the set-aside proceedings for A.Y. 2008-09,
vide order dated 26.02.2015, accepted the claim of the assessee and
allowed relief on the aforementioned identical issue by observing
that the assessee had computed the provision on the basis of actual
Purchase Orders, which was scientific and logical in nature. Thus,
the Assessing Officer was not right in disallowing the said expenses
and also adding back the same while computing book profit, holding
69 ITA No.9187/Del/2019
Hero Motocorp Ltd. vs. ACIT
the same to be unascertained liability. Thus, the issue is squarely
covered by the orders the Tribunal in A.Ys. 2008-09 to 2013-14.
24.0.2 Therefore, Ground Nos. 8 to 8.3 are allowed in
favour of the assessee.
25.0.0 The Ld. AR submitted that Ground Nos. 9 to 9.4
relate to disallowance of alleged excessive purchases from related
parties as per AS-18 amounting to Rs. 29.14 crores. It was
submitted that in the course of business of manufacturing two
wheelers, the assessee, inter alia, procures certain critical
components like shock absorbers, carburetors, etc., which are fitted
in the two- wheelers manufactured by the assessee, from a single
vendor, having the requisite technology to manufacture the same, in
accordance with the specifications given by the assessee. The
assessee, does not procure such components from any other vendor.
The Ld. AR submitted that the purchase price of components which
are purchased from various suppliers are based upon negotiations
with such vendors and are different due to various factors, like level
of automation of vendor, amount of investment by vendor, age of the
plant, capacity utilization (impacting fixed cost recovery), volume of
70 ITA No.9187/Del/2019
Hero Motocorp Ltd. vs. ACIT
supply, geographical differences (which could impact cost of freight,
labour, power), lead time, indirect tax Costs (CST Vs VAT) etc.
Further, the assessee also prefers purchasing material from certain
suppliers, due to business/commercial expediency, viz., de-risking
the supply chain to reduce dependence, inability of existing supplier
to meet demand increase, etc. The Ld. AR submitted that the said
parties are not related to assessee in terms of the provisions of
section 40A (2)(b) of the Act. In addition to above, the assessee, in
the course of manufacturing two wheelers, places purchase orders
on vendors of certain customized intermediary products like wheel
assembly, seat assembly, etc. The assessee, while placing aforesaid
purchase orders to the vendors, also specifies the specifications of
the raw materials/components to be used in manufacture of
customized intermediary products as also the name of suppliers
from whom the former vendor would purchase such
materials/components at prices predetermined by the assessee. It
was submitted that the AO after comparing purchase price of certain
products, which were purchased from the aforesaid related parties
as also from unrelated parties, held that the purchase price from
71 ITA No.9187/Del/2019
Hero Motocorp Ltd. vs. ACIT
related parties was excessive in order to reduce the taxable income.
The AO also held that the assessee had conducted itself in such a
manner that the parties do not qualify as ‘related party' under
section 40A (2) of the Act, even though said parties were related to
assessee in terms of AS- 18. Accordingly, the AO computed excessive
purchase price at Rs.9.73 crores in respect of purchases from
related parties for which internal comparable of similar products
purchased from related parties were available. In respect of other
category of purchases from related parties for which no internal
comparable was available, the AO worked out an amount of Rs.
19.41 crores in the same proportion as that of purchases for which
internal comparable were available alleging the same to be excessive.
Thus, the AO made total disallowance of Rs.29.14 crores out of
purchases.
25.0.1 The Ld. AR submitted that the aforesaid issue is
squarely covered in favour of the assessee by the decision of the
Delhi Bench of Tribunal in the assessee’s own case for Assessment
Years 2007-08 and 2008-09, wherein identical disallowance made in
that year was deleted on the ground that since in the first place, the
72 ITA No.9187/Del/2019
Hero Motocorp Ltd. vs. ACIT
parties were not related to the assessee company in terms of section
40A (2), disallowance on ground of excessive purchase price could
not have been made under that section. Further, the Tribunal held
that the transactions were entered by the assessee on account of
commercial expediency and when the recipients had paid tax on
payments received from the assessee company, disallowance could
not be made by applying provisions of section 40A (2) of the Act. The
Ld. AR pointed out that similar disallowance made in the
immediately preceding two Assessment Years, viz. AY 2010-11 and
2011-12 was also reversed by the Tribunal, following the
aforementioned order of the Tribunal for assessment years 2007-08
and 2008-09. It was further pointed out by the Ld. AR that following
the order of the Tribunal for AYs 2010-11 and 2011-12, the Tribunal
has also decided the issue in favour of the assessee in appellate
orders passed for AYs 2009-10, 2012-13 and 2013-14.
26.0.0 The Ld. CIT-DR relied upon the Assessment Order
and Order of the TPO, but could not distinguish the decision of the
Tribunal.
73 ITA No.9187/Del/2019
Hero Motocorp Ltd. vs. ACIT
27.0.0 We have heard both the parties and perused the
material available on record. On identical issue, this Tribunal in its
order for A.Ys. 2010-11 and 2011-12 has held as under:
“55. We have carefully considered the rival contention and
perused the relevant records placed before us. It was submitted
by the parties that there is no change in the facts and
circumstances of the case in the present assessment year
compared to the assessment year for which the coordinate bench
is decided this issue in the favour of the appellant for
assessment year 2007 – 08 and 2008 – 09 wherein this issue
has been decided by the coordinate bench as under:-
“13.14. The basic requirement for the applicability of
section 40A(2) of the Act is that the payment should be
made to a related person i.e. to a person referred to in
clause (b), of sub-section (2) of section 40A of the Act.
13.15. In the present case, it is an undisputed fact that the
payments are not made to a person mentioned in clause (b)
of section 40A (2) of the Act.
13.16. Clause (a ) of sub-section (2) of section 40A of the
Act provides that where the assessee incurs any
expenditure in respect of which payment has been or is to
be made to any person referred to in clause (b) of the sub
section and the Assessing Officer is of the opinion that such
expenditure is excessive or unreasonable having regard to
the fair market value of the goods, services or facilities for
which the payment is made or the legitimate needs of the
business or profession of the assessee or the benefit
74 ITA No.9187/Del/2019
Hero Motocorp Ltd. vs. ACIT
derived by or accruing to him there from, so much of the
expenditure as it so considered by him to be excessive or
unreasonable, shall not be allowed as a deduction. The
object of section 40A (2) is to prevent diversion of income.
An assessee who has large income and is liable to pay tax
at the highest rate prescribed under the Act often seeks to
transfer a part of his income to a related person who is not
liable to pay tax at all or liable to pay tax at a rate lower
than the rate at which the assessee pays the tax. In order
to curb such tendency of diversion of income and thereby
reducing the tax liability by illegitimate means, section 40-
A was added to the Act by an amendment made by the
Finance Act, 1968. Clause (b) of section 40A (2) gives the
list of related persons.
13.17. In the present case, it is an undisputed fact that
none of the parties fall within the persons specified as
defined under clause (b) of section 40A (2) of the Act.
Related parties are to be considered in terms of provisions
of sec. 40A (2) of the Act and not as mentioned in AS-18
issued by the Institute of Chartered Accountant. Thus, we
are of the view that the provisions of section 40A (2) do not
apply to the present case. Further, there is no provision
under the Act which authorizes the Assessing Officer to lift
the corporate veil and disallow an expenditure on the
ground of reasonableness and commercial expediency
unless it is established that the transaction is primarily
devised to evade tax.
13.18. In the present case, it was submitted by the learned
AR of the assessee that the related parties are profit-
making companies and are subject to tax to at some less or
the same rate of tax. Thus, there is no loss of Revenue. This
submission of the assessee has not been controverted
75 ITA No.9187/Del/2019
Hero Motocorp Ltd. vs. ACIT
before us by the learned DR. Tax benefit alleged is
factually wrong as the other compared assesses are profit
making companies/assessees. There is no loss to the
revenue if only the excess payment of price is taken, but
this situation is not considered by the Revenue. Except for
allegation that excess price is paid to reduce profit, no other
evidence is gathered by assessing officer to prove that the
assessee had in fact evaded or saved tax by such exercise.
The argument of the Revenue fails. The allegation that the
assessee has structured his associate concern so as to
avoid sec. 40A (2) is also devoid of merit, as the revenue
has failed to demonstrate as to how it has come to such a
conclusion. The allegation means that profit is transferred
to third parties, where the share holding of the assessee is
not a major share holding. The allegation means that the
assessee is distributing profits to companies with majority
holding by unrelated parties for the purpose of reducing
taxes. Such wild allegation cannot be endorsed by us.
13.19. The assessee does not dispute the fact that certain
purchases are made at a rate higher than the rate paid to
certain other parties for the same periods. The assessee at
pages 1523 to 1523.18 of the paper book also furnished
instances where purchases were made from these parties
at price lower than the purchases made from unrelated
parties. Further, the disallowance was made on adhoc
basis without setting any benchmark for the disallowance.
13.20. Notwithstanding the above view, even assuming for
a moment that the provisions of the section 40A (2) would
apply to the present case, then the following propositions
laid down by various courts have to be considered.
76 ITA No.9187/Del/2019
Hero Motocorp Ltd. vs. ACIT
13.21. The Hon’ble Bombay High Court in the case of CIT v.
Indo Saudi Services (Travel) (P.) Ltd. [2009] 310 ITR 306
relying on CBDT Circular No. 6-P, dated 6-7-1968 held that
no disallowance should be made under section 40A(2) of
the Income-tax Act in respect of the payments made to the
relatives and sister concerns where there is no attempt to
evade tax.
13.22. Having held that the provisions of section 40A (2) of
the Act does not apply to the facts of the case. We now
proceed to answer whether the action of the Assessing
Officer in disallowing the expenditure on the ground of
commercial expediency is justified.
13.23. The Hon’ble Supreme Court in the case of CIT vs
Walchand & Co [1967] 65 ITR 381 in the context of
deductibility of expenditure under Section 37(1) of the
Income-tax Act, 1961 [Corresponding to section 10(2)(xv) of
the Indian Income-tax Act, 1922] held as under:
“In applying the test of commercial expediency for
determining whether the expenditure was wholly and
exclusively laid out for the purpose of the business,
reasonableness of the expenditure has to be adjudged
from the point of view of the businessman and not of
the revenue”.
13.24. Further, reference is also drawn to the decision of
the Hon’ble Supreme Court in the case of S.A. Builders Ltd.
v. CIT (Appeals) [2007] 288 ITR 1 (SC) , where in it was
held as under:
"....that once it is established that there was nexus
between the expenditure and the purpose of the
business (which need not necessarily be the business
of the assessee itself), the revenue cannot justifiably
claim to put itself in the arm-chair of the businessman
77 ITA No.9187/Del/2019
Hero Motocorp Ltd. vs. ACIT
or in the position of the board of directors and assume
the role to decide how much is reasonable
expenditure having regard to the circumstances of the
case. No businessman can be compelled to maximize
his profit. The income-tax authorities must put
themselves in the shoes of the assessee and see how
a prudent business man would act. The authorities
must not look at the matter from their own view point
but that of a prudent businessman...."
13.25. It is a well settled principle that Commercial
expediency cannot be judged by the Revenue from its point
of view. In the present case, we are of the view that the
assessing officer has made this disallowance based on
surmises and conjectures without properly examining the
facts on record and without bringing any evidence that the
purchases were made at an excessive price compared to
fair market value to evade tax.
13.26. In view of the above discussions, and bearing in
mind entirety of the case, we are of the considered view
that the impugned disallowance was indeed uncalled for
on the facts of this case. Hence, we uphold the grounds of
the assessee.”
In view of the above about decision of the coordinate bench in
appellant’s own case and further failure on part of the revenue
to controvert any of the findings in the earlier order of the
tribunal or pointing out any contrary decisions on this issue, the
respectfully following the order of the coordinate bench to not
inclined to uphold the disallowance made by the Ld. Assessing
officer on account of the purchases of Rs. 7 2.40 crores made
from the parties who are related parties in terms of accounting
standard 18 issued by the Institute of chartered accountants of
78 ITA No.9187/Del/2019
Hero Motocorp Ltd. vs. ACIT
India but not in terms of provisions of section 40A (2) of the
income tax act. In the result ground No. 11 of the appeal of the
assessee is allowed.”
27.0.1 Admittedly, the issue is squarely covered by the order
of the Tribunal for A.Ys. 2010-11 and 2011-12. We also find that the
Tribunal has in the appeals for the assessment years 2009-10,
2012-13 and 2013-14, decided the issue in favor of the assessee
company following the aforesaid order passed for assessment years
2010-11 and 2011-12.
27.0.2 Therefore, Ground Nos. 9 to 9.4 are allowed in favour
of the assessee.
28.0.0 As regards Ground Nos. 10 to 10.3 relating to payment
received on behalf of Hero Honda Fin Corp. Ltd. (HFCL) deemed as
dividend under Section 2(22)(e) amounting to Rs.22.26 crores, the
Ld. AR submitted that Hero Fin Corp. Ltd. (HFCL) is a related
company which is engaged primarily in the business of financing of
vehicles. It was submitted that in pursuance of the said business
HFCL extends to the dealers of the assessee company, facility of
financing vehicles purchased by the dealers from the assessee
company. The dealers on purchase of vehicles from the assessee, get
79 ITA No.9187/Del/2019
Hero Motocorp Ltd. vs. ACIT
the bill of purchase raised by the assessee, discounted from HFCL
and remit payment to the assessee. The dealers are required to
make payment of aforesaid discounted bills to HFCL on maturity
thereof. Subsequently, when payments by dealers to HFCL are due
to the dealers, due to convenience of facility of collection centers of
the assessee available all over India, make payment into the
assessee's bank account, for and on behalf of HFCL, which is in turn
remitted by the assessee to HFCL in 2-3 days. It was submitted that
the Assessing Officer held that the aforesaid amount received by the
assessee from dealers was loan/advance given by HFCL to assessee
and consequently deemed the same as dividend under section
2(22)(e) of the Act. It was further observed that the aforesaid
advances were not given by HFCL to the assessee in the ordinary
course of business since the aforesaid payments were given by
customers of HFCL and not by HFCL directly.
28.0.1 The Ld. AR submitted that in AY 2007-08, the
Tribunal decided the issue in favour of the assessee by holding that
assessee’s intention did not reflect that the amount was received as
loan or advance so as to attract the provisions of section 2(22)(e) of
80 ITA No.9187/Del/2019
Hero Motocorp Ltd. vs. ACIT
the Act. The Tribunal further held that the assessee was holding the
money as a custodian and the amount would be exempted in terms
of clause (ii) section 2(22)(e) since the amount was given in the
ordinary course of business. It was also submitted that in
assessment years 2008-09 to 2013-14, the Tribunal followed the
order for Assessment Year 2007-08 and deleted the disallowance.
29.0 The Ld. CIT-DR relied upon the Assessment Order and
Order of the TPO, but could not distinguish the decision of the
Tribunal.
30.0.0 We have heard both the parties and perused the
material available on record. The Tribunal in A.Ys. 2010-11 and
2011-12 held as under:
“214) We have heard the rival contentions. We note that similar
issue relating to addition of deemed dividend was deleted by the
Tribunal in the assessee’s own case for assessment year 2007-
08 which was followed in assessment year 2008-09. The
relevant observations of the Tribunal for assessment year 2007-
08 are as under:
“16.27. Section 2(22)(e), is a deeming section and it is well
settled that it should be strictly interpreted. In the present
case, the intention of the parties did not reflect that it was
an advance or loan so as to attract section 2(22)(e). The
81 ITA No.9187/Del/2019
Hero Motocorp Ltd. vs. ACIT
assessee in this case was holding the money received from
dealers as custodian of HHFL. There is no privity of
contract between the assessee and HHFL. There is no
positive act of granting loan or advance given by HHFL to
the assessee. There is neither a stipulation for payment of
interest or period of repayment. Further, the assessee has
not used the funds for its own purposes, as admittedly the
assessee is a cash rich company, not requiring loans. This
fact is not disputed by the Revenue. The assessee was
used as channel for remittance of money by the dealers to
HHFL for the purpose of convenience and from assessee’s
a standpoint this is business expediency. We are unable to
appreciate the conclusions drawn by the assessing officer
that this is a deemed loan. In our view, by no stretch of
imagination it can be said that there was any amount of
advance or loan given by HHFL to the assessee.
16.28. Even assuming that the transaction is in the nature
of loan, we have to agree with the arguments of the Ld. AR
of the assessee that the transaction cannot be deemed as
dividend in terms of exemption provided in clause (ii) of
section 2(22)(e) of the Act, since the loan would be
considered as given by HHFL, which is engaged in the
business of money lending, in the ordinary course of its
business. Therefore, the amount cannot be deemed as
dividend in the hands of the assessee. The arguments of
the Ld. DR that since no interest was charged/ chargeable
thereon from the assessee, the aforesaid loan cannot be
said to be given in the ordinary course of business of HHFL
is taken to its logical conclusion, supporting our view that
this is not a loan or advance.
82 ITA No.9187/Del/2019
Hero Motocorp Ltd. vs. ACIT
16.29. Considering the decision of the Hon’ble Delhi High
Court and the intent of the Legislature in introduction of
Section 2(22)(e) of the Act, we are of the view that the
transaction in question would not fall within the provisions
of section 2(22)(e) of the Act. Accordingly, this ground of the
assessee is allowed.”
The Ld. departmental representative could not point out any
change in the facts and circumstances of the case of the
appellant as compared to the assessment year in which the
above issue is decided by the coordinate bench. No other
contrary decision was also pointed out therefore, respectfully
following the decision of the coordinate bench in the appellant’s
own case for the earlier years. We dismiss ground No.6 of the
appeal of the revenue.”
30.0.1 This issue is also squarely covered by the order of the
Tribunal for A.Ys. 2010-11 and 2011-12. We also find that the
Tribunal has in the appeals for the assessment years 2009-10,
2012-13 and 2013-14, decided the issue in favor of the assessee
company following the aforesaid order passed for assessment years
2010-11 and 2011-12.
30.0.2 Therefore, Ground Nos. 10 to 10.3 are allowed in
favour of the assessee.
83 ITA No.9187/Del/2019
Hero Motocorp Ltd. vs. ACIT
31.0.0 As regards Ground Nos. 11 to 11.4 relating to TDS
on quarterly targets and turnover discount and Sales Discount
amounting to Rs. 46.31 crores, it was the contention of the Ld. AR
that during the relevant year, the assessee incurred expenditure of
Rs.154,35,32,553/- on account of various incentives/discounts
offered to dealers under various schemes on purchase of spare
parts/vehicles from the assessee. Out of the aforesaid expenditure,
Rs.100,84,49,593/-relates to amount of discounts offered by the
company in various stockists/dealers, on purchase of spare parts
made by the latter in accordance with sales incentive/discount
scheme prevalent during the relevant previous year. The assessee
has further given trade discount amounting to Rs.53,50,82,960/- to
the dealers on the sales invoice at the time of sales. It was submitted
that the Assessing Officer held that the assessee was liable to deduct
tax from aforesaid discounts/incentives under section 194H of the
Act since the payments made were on the basis of performance of
dealers and targets achieved by dealers which was not in the nature
of "discount” as the same was not given at the time of taking delivery
of goods by the dealers but was given subsequently. The Assessing
84 ITA No.9187/Del/2019
Hero Motocorp Ltd. vs. ACIT
Officer held that incentive paid by the assessee to dealers was not in
the nature of discount, but fell within the meaning of the term
‘commission’ as defined in section 194H of the Act and, thus, the
assessing officer disallowed 30% of the entire expenditure of Rs.
1,00,84,49,593/- under section 40(a)(ia) of the Act.. Further, the AO
also disallowed 30% of total trade discount of Rs.53,50,82,960/-
crores given to dealers on sales invoice at the time of sale while
alleging that the same was based on achievement of turnover targets
which represented commission on which TDS under section 194H
was liable to be deducted.
31.0.1 The Ld. AR submitted that the Tribunal in Assessment
Year 2007-08 decided the issue in favour of the assessee relying on
the decision of Hon’ble Delhi High Court in the case of CIT vs.
Mother Dairy Ltd. (ITA No. 1925/2010) and Jai Drinks Pvt. Ltd. (336
ITR 383), holding that the discount in question is not in the nature
of commission but an incentive for higher sale targets. The Ld. AR
further submitted that the aforesaid finding was followed by the
Tribunal in the AYs 2008-09 to 2013-14 wherein similar
disallowance made by the Assessing Officer was deleted.
85 ITA No.9187/Del/2019
Hero Motocorp Ltd. vs. ACIT
32.0 The Ld. CIT-DR relied upon the Assessment Order and
Order of the TPO, but could not distinguish the decision of the
Tribunal and the Hon’ble High Court.
33.0.0 We have heard both the parties and perused the
material available on record. The Tribunal for A.Ys. 2010-11 and
2011-12 held as under:
“75) We have heard the rival contentions. As dealership
agreement entered between the appellant and dealers is on a
principal-to-principal basis and dealers do not act as agents of
the appellant while purchasing and further selling the vehicles.
Accordingly, the incentives offered at the time of purchase of
vehicles do not fall within the meaning of commission u/s 194H
of the Act. Further, the issue is squarely covered by the decision
of the ITAT in assessee’s own case in AY 2008-09 wherein
following the ITAT decision in assessee’s own case for the year
AY 2007-08, it was observed as under –
“148. From the bare reading of the decision of the Tribunal
in assessee’s own case for AY 2007-08 (supra), we observe
that after dealing with rivals submissions and contentions
of both the parties, the tribunal reached to the following
finding and conclusion deciding the issue in favour of the
assessee. The relevant operative part of the order of the
Tribunal for AY 2007-08 in assessee’s own case (supra)
read as under-
86 ITA No.9187/Del/2019
Hero Motocorp Ltd. vs. ACIT
“45.11. The facts of this case clearly demonstrate that
what is given to the stockiest/ dealers is discount on
the purchase price and not any commission. The
stockiest/ dealers purchase spare parts/ vehicles
from the assessee. They are not commission agents.
Sale consideration is paid by these parties to the
assessee. As a matter of incentive for higher sale the
assessee grants discount if the stockiest/ dealers
achieve a particular volume of transaction. Thus, in
our view the discount in question is not in the nature
of commission or the brokerage which attracts sec.
194H. In the case of CIT Vs. Mother Dairy Ltd. (ITA
no. 1925/2010(Del) the Hon’ble Delhi High Court was
considering similar case and held as follows:
“3. The assessee explained in writing that it sold
the products to the concessionaires on a
principal to principal basis, that the
concessionaires buy the products at a given
price after making full payment for the
purchases on delivery, that the milk and other
products once sold to the concessionaires
became their property and cannot be taken back
from them, that any loss on account of damage,
pilferage and wastage is to the account of the
concessionaires and that in these circumstances
the payment made to the concessionaires cannot
be treated as “commission” for services rendered
and consequently there was no liability on the
part of the assessee to deduct tax. It is irrelevant
that the concessionaires were operating from the
booths owned by the Dairy and were also using
the equipment and furniture provided by the
Dairy. That fact is not determinative of the
relationship between the Dairy and the
concessionaires with regard to the sale of the
87 ITA No.9187/Del/2019
Hero Motocorp Ltd. vs. ACIT
milk and other products. They were licensees of
the premises and were permitted the use of the
equipment and furniture for the purpose of
selling the milk and other products. But so far as
the milk and the other products are concerned,
these items became their property the moment
they took delivery of them. They were selling the
milk and the other products in their own right as
owners. These are two separate legal
relationships. The income tax authorities were
not justified or correct in law in mixing up the
two distinct relationships or telescoping one into
the other to hold that because the
concessionaires were selling the milk and the
other products from the booths owned by the
Diary and were using the equipment and
furniture in the course of sale of the milk and
other products, they were carrying on the
business only as agents of the Diary.”
45.12. The Hon’ble High Court held that in such
circumstances S.194H is not attracted.
45.13. In the case of Jai Drinks (P) Ltd. 336 ITR 383
(Del.), the Hon’ble Delhi High Court has held as
follows:
“Held, dismissing the appeal, that a perusal of
the agreement showed that the assessee had
permitted the distributor to sell its products in a
specified area. The distributor was to purchase
products at a pre- determined price from the
assessee for selling them. Both the assessee
and the distributor had been collecting and
paying their sales tax separately. The CIT(A)
88 ITA No.9187/Del/2019
Hero Motocorp Ltd. vs. ACIT
and also the Tribunal rightly held that the
payments being made by the assessee to the
distributor were incentives and discounts and
not commission.”
45.14. Respectfully following the propositions laid
down in the aforementioned cases we allow this
ground of the assessee.”
76) In that view of the matter, the Ld. departmental
representative could not point out any decision contrary to the
above finding of the coordinate bench or change in the facts and
circumstances of the case, therefore respectfully following the
decision of the coordinate bench in the appellant’s own case for
assessment years 2007-08 and 2008-09 discussed supra, we
delete the disallowance made by the Ld. assessing officer on
account of expenditure of Rs. 3 6880 2598 towards the quarterly
target on turnover discount on trade discount of Rs. 2 7744 7608
given to the dealers. In the result ground No. 15 of the appeal of
the assessee is allowed.”
33.0.1 Thus, this issue is also covered in favour of the
Assessee by the Tribunal order for A.Ys. 2010-11 and 2011-12 as
well as the decision of the Hon’ble High Court in case of Mother
Dairy Ltd. (supra). We also find that the Tribunal has, in the appeals
for the assessment years 2009-10, 2012-13 and 2013-14, decided
89 ITA No.9187/Del/2019
Hero Motocorp Ltd. vs. ACIT
the issue in favor of the assessee company following the aforesaid
order passed for assessment years 2010-11 and 2011-12.
33.0.2 Therefore, Ground Nos. 11 to 11.4 are allowed in
favour of the assessee.
34.0.0 The Ld. AR submitted that Ground Nos. 12 to 12.3
relate to the issue of TDS of on legal and professional charges
amounting to Rs.1.94 lacs. It was submitted that during the relevant
year, the assessee had incurred legal and professional expenses,
amounting to Rs.6,46,644/- on account of reimbursement of actual
expenses towards conveyance, air fare, out of pocket expenses, taxi
charges, lodging etc. incurred and claimed by various persons on
cost to cost basis. The details of said expenses were submitted
before the authorities. The Assessing Officer disallowed 30 % of the
aforesaid expenses amounting to Rs.1.94 lacs, invoking section
40(a)(ia), for the failure of the assessee to deduct tax at source there
from under section 194J of the Act.
34.0.1 The Ld. AR submitted that the aforesaid issue is
squarely covered in favour of the assessee by the decision of Delhi
Bench of Tribunal in the assessee’s own case for the Assessment
90 ITA No.9187/Del/2019
Hero Motocorp Ltd. vs. ACIT
Years 2007-08 and 2008-09, wherein disallowance of expenditure on
account of re-imbursement of out-of-pocket expenses incurred by
professionals/vendors under section 40(a)(ia) was deleted on the
ground that same did not have any element of income in the hands
of the recipient. It would also submitted that similar disallowance
made in the draft assessment order, but subsequently deleted by the
Ld. DRP, was challenged in Revenue’s appeal for AY 2010-11 and
2011-12. However, the Tribunal upheld the order of the Ld. DRP and
confirmed the deletion of disallowance on account of non-deduction
of tax on reimbursement of expenses following the order for
assessment years 2007-08 and 2008-09. It was further pointed out
by the Ld. AR that following the order of the Tribunal for AYs 2010-
11 and 2011-12, the Tribunal has also decided the issue in favour of
the assessee in appellate orders passed for AYs 2009-10, 2012-13
and 2013-14.
35.0 The Ld. CIT - DR relied upon the Assessment Order
and Order of the TPO, but could not distinguish the decision of the
Tribunal.
91 ITA No.9187/Del/2019
Hero Motocorp Ltd. vs. ACIT
36.0.0 We have heard both the parties and perused the
material available on record. The Tribunal held in A.Ys. 2010-11 and
2011-12 as under:
“222) We have heard the rival contentions. We note that similar
issue relating to disallowance relating to re-imbursement of
professional expenses was deleted by the Tribunal in the
assessee’s own case for assessment year 2007-08 which was
followed in assessment year 2008-09. The relevant observations
of the Tribunal for assessment year 2007-08 are as under:
“35.8. It is the case of the assessee that it had reimbursed
the expenses incurred by various consultants and vendors
on travelling and out of pocket expenses. It is also claimed
that out of an amount of Rs. 10.68 lacs expenses to the
extent of Rs. 6.01 lacs were made after verifying the
supporting vouchers for claims raised by the vendors.
Balance amount of Rs. 4.66 lacs were based on self
certification. In our view such reimbursement of
expenditure has no element of income embodied in it. Thus,
we apply the following decisions wherein it is held that
payer is not obliged to deduct tax at source from
reimbursement of expenses:
- United Hotels Ltd. Vs. ITO 93 TTJ 822;
- Karnavati Co-op. Bank Ltd. Vs. DCIT 134 TTJ 486 (Ahd.).
35.9. Respectfully following the same, the ground is
allowed in favour of the assessee.”
92 ITA No.9187/Del/2019
Hero Motocorp Ltd. vs. ACIT
The Ld. departmental representative could not point out any
change in the facts and circumstances of the case of the
appellant as compared to the assessment year in which the
above issue is decided by the coordinate bench. No other
contrary decision was also pointed out therefore, respectfully
following the decision of the coordinate bench in the appellant’s
own case for the earlier years, We dismiss ground No.8 of the
appeal of the revenue.”
36.0.1 In the present Assessment Year, the Assessing Officer
disallowed the aforesaid expenses, invoking section 40(a)(ia), for the
failure of the assessee to deduct tax at source there from under
section 194J of the Act. But, it is pertinent to note here that the
Assessing Officer did not doubt that the payment was made by
assessee towards reimbursement of expenses. It was still held that
assessee was liable to deduct tax at source under section 194J of
the Act. Thus, the issue is squarely covered by the order of the
Tribunal for A.Ys. 2010-11 and 2011-12. We also find that the
Tribunal has, in the appeals for the assessment years 2009-10,
2012-13 and 2013-14, decided the issue in favor of the assessee
company following the aforesaid order passed for assessment years
2010-11 and 2011-12.
93 ITA No.9187/Del/2019
Hero Motocorp Ltd. vs. ACIT
36.0.2 Therefore, Ground Nos. 12 to 12.3 are allowed in
favour of the assessee.
37.0.0 With respect to Ground Nos. 13 to 13.2 relating to
gains from sale of investments income treated as business income
amounting to Rs.319.87 crores, it was the submission of the Ld. AR
that the assessee invests surplus funds arising in the course of
business under various modes of investment like mutual
funds/PMS, shares, etc. The gains realized from sale of such various
instruments, amounting to Rs. 319.87 crores during the relevant
previous year, were disclosed under the head ‘capital gains.’ The
Assessing Officer held that, having regard to the magnitude/volume
of total turnover from sale of investments, the aforesaid income was
taxable under the head 'business income’.
37.0.1 The Ld. AR submitted that the aforesaid issue is
squarely covered in favour of the assessee by the decision of the
Delhi Bench of the Tribunal in the assessee’s own case for the AYs
2007-08 and 2008-09, wherein after considering the legal position
and intention of the assessee company, the Tribunal came to the
conclusion that income from sale of shares/mutual funds/PMS etc.
94 ITA No.9187/Del/2019
Hero Motocorp Ltd. vs. ACIT
would be taxable as capital gains, instead of business income
brought to tax by the assessing officer on the basis that the assessee
(a) was not a trader in stock; (b) had no intention of holding the
shares as stock; (c) sales were effected by delivery (d) that the
department had itself in earlier years taxed such transactions under
the head capital gains. The Ld. AR pointed out that the Tribunal,
vide order dated 24/10/2006, passed in the assessee’s own case for
AY 2010-11 and 2011-12, reversed the action of AO in changing the
head of income and held that in cases where an assessee treats
investments made in shares as capital assets, in view of Circular
6/2016 of the Board, gains/profits on sale of such investments shall
be treated as capital gains and not income from
business/profession. It was further pointed out by the Ld. AR that
following the order of the Tribunal for AYs 2010-11 and 2011-12,
the Tribunal has also decided the issue in favour of the assessee in
appellate orders passed for AYs 2009-10, 2012-13 and 2013-14.
38.0 The Ld. CIT- DR relied upon the Assessment Order and
Order of the TPO, but could not distinguish the decision of the
Tribunal.
95 ITA No.9187/Del/2019
Hero Motocorp Ltd. vs. ACIT
39.0.0 We have heard both the parties and perused the
material available on record. The Tribunal for A.Ys. 2010-11 and
2011-12 held as under:
“99) We have heard the rival contentions. We have gone through
the order passed by the Tribunal for the assessment year 2007-
08, which was followed in appeal order for AY 2008-09. The
Tribunal in that year went through the entire facts, which are
similar to the year under consideration, and the legal position
before coming to the conclusion that the gains arising from
investment of surplus funds in shares/mutual funds/PMS as
part of cash management policy cannot lead to the conclusion
that the appellant was carrying on business to bring to tax such
income under the head “business” as against ‘capital gains’
offered by the appellant. The Ld. Departmental representative
could not point out any change in the facts and circumstances of
the case of the current assessment year compared to the
assessment year for which the tribunal is decided in the
appellant’s own case for earlier years. No other judicial
precedent was also cited by which we could deviate from the
order of the coordinate bench in the earlier years in the
appellant’s own case. The relevant observations in the appeal
order for AY 2007-08 are as under:
96 ITA No.9187/Del/2019
Hero Motocorp Ltd. vs. ACIT
“65.20. The issue that emerges for consideration is whether
the gains that arose to the assessee from investment in
debt mutual funds/PMS/ shares are to be taxed under the
head “business income” or under the head “capital gains”.
....................
65.28. Now, we proceed to analyze the facts of the present
case in the light of the principles laid down by the Courts
(Supra) for determining the nature of the transaction vis a
vis capital gains vs. business income:
Intention of the assessee at the time of the purchase of
shares:
65.29. The business of the assessee is not to deal in
shares and securities. The investment was made with a
view to earn capital appreciation and to use the spare fund
optimally instead of keeping it in the banks. For the year
under appeal, the assessee earned dividend income of
Rs.22.61 crores from investments held in shares and
mutual funds.
Treatment in the books of accounts:
65.30. It is an undisputed fact that the assessee had
treated the transaction as investment in its books of
accounts and not as stock in trade. The assesse has
shown the investments in shares both at the beginning and
closing of the year as an investment only and not as stock
in trade.
65.31. The assessee has valued the investments at cost as
per Accounting standard 13- Accounting for Investments
and not in accordance with Accounting Standard –2 which
deals with valuation of inventories.
97 ITA No.9187/Del/2019
Hero Motocorp Ltd. vs. ACIT
65.32. The assessee has been holding the securities/
shares as investments from year to year and consistently
following the same method of accounting for the purpose of
disclosure and valuation. This treatment by the assessee
was accepted by the Revenue for the past years.
65.33. The assessee had earned income from both long
term and short term capital gains which means the
assessee has also held shares for a period of more than 12
months.
Whether the investments are made out of borrowed funds
65.34. The investments were made from surplus funds of
the assessee and there were no borrowings. The
investments were made to optimally utilize the spare funds
instead of keeping the same idle in the bank accounts. The
investments were made in mutual funds (debt and liquid
funds) and through portfolio management schemes/ IPOs.
65.35. The co-ordinate bench of the Delhi ITAT in the case
of Narendra Gehlaut vs. JCIT [ITA No 1648/ Del/ 2010]
held that despite borrowing, gains on shares assessable as
Short term capital gains and not business profits. The
decision is rendered considering the CBDT Circular No
4/2007 and various judicial precedents on the subject.
Frequency of the transactions
65.36. Out of the total sale value of Rs 13,690.84 crores
realized from the investments, an amount of Rs 12,330.33
crores relates to sale of short term debt mutual funds and
liquid funds in which the transactions are effected on daily
basis (i.e. surplus amounts are invested and the
withdrawals are made in a short span depending on the
98 ITA No.9187/Del/2019
Hero Motocorp Ltd. vs. ACIT
business needs of the assessee). These funds were
invested mainly into money market instruments, short-term
corporate deposits and treasury. Most schemes have a
lock-in period of a maximum of three days to protect
against procedural (primarily banking) glitches, and offer
redemption proceeds within 24 hours.
65.37. The Assessing officer has brought the transaction to
tax under the head “Business income” mainly on the
ground that the volume of the transaction of such
investments was high and the assessee is undertaking the
trading of stocks and mutual funds regularly and
systematically. However, we observe that there is not much
frequency in sale/purchase of investments, from analysis
carried out at page 526 of objections in Form 35A. It is not
the case that the assessee has indulged in regular trading
in shares on day to day basis.
65.38. The Mumbai Bench of the ITAT in the case of Janak
S. Rangwala (11 SOT 627) observed that mere volume and
magnitude of transaction will not alter the nature of
transaction if the intention was to hold the shares as
investment and not in stock in trade.
Investments in mutual funds –
65.39. Out of the total income earned from mutual funds,
almost 67.34% of the total income earned from investments
made in mutual funds was for a period of more than one
year.
Investments in shares –
65.40. Investment in shares was primarily made either
through PMS or under Initial Public Offer. Under PMS, the
company advances funds to the Portfolio Manager, who in
99 ITA No.9187/Del/2019
Hero Motocorp Ltd. vs. ACIT
turn makes investment in various shares. In substance the
investments under PMS are similar to investment in mutual
funds. The assessee, reiterated that it is only interested in
the return on funds invested and does not act as a
dealer/trader, so as to be regarded as being engaged in
business activity.
65.41. In view of the above factual matrix it emerges that
assessee is:
(i) not a trader in stocks
(ii) Intention of holding the shares as investment/ stock is
manifest.
(iii) Sales are effected by delivery.
(iv) Department has itself in earlier years taxed such
transactions under the head “Capital Gains”.
65.42. Considering these facts and applicable judicial
precedents on the issue, we are of the considered opinion
that the income in question can be taxed only under the
head “Capital Gains” and not under the head business
income. This ground of the assessee is allowed.”
100) In addition to the aforesaid observations, the appellant in
this year also has benefit of the recent Circular No.6 of 2016
dated 29.2.2016 issued by the CBDT, wherein with an idea to
reduce litigation on this issue of classification of the head of
income arising from sale of shares / mutual funds, etc., the
CBDT has opined that gains arising from sale of such
shares/securities held for a period of more than 12 months and
shown as capital gains by the assessee should not be disputed
100 ITA No.9187/Del/2019
Hero Motocorp Ltd. vs. ACIT
by the assessing officer. Having regard to the aforesaid intent of
the Circular where a consistent method has been followed by an
assessee to treat the investment as on capital account
corroborated with disclosure in balance sheet as investment, the
same consistent stand should not be disputed by the assessing
officer. It is also not disputed by the Ld. assessing officer that
the capital gains arising on the various investments are held for
less than 12 months and are not longterm capital gain. In view
of the aforesaid reasons also, while respectfully following the
appeal orders for AY 2007-08 and 2008-09, we reverse the
action of the assessing officer in changing the head of income
surplus arising from sale of shares/mutual funds, etc. therefore
ground No. 20 of the appeal of the assessee is allowed.”
39.0.1 In the year under consideration, the issue is identical to
the AYs 2010- 11 and 2011-12 wherein the Tribunal allowed this
issue in favour of the assessee. We also find that the Tribunal has in
the appeals for the assessment years 2009-10, 2012-13 and 2013-
14, decided the issue in favor of the assessee company following the
aforesaid order passed for assessment years 2010-11 and 2011-12.
39.0.2 Therefore, Ground No. 13 to 13.2 are allowed in favour
of the assessee.
101 ITA No.9187/Del/2019
Hero Motocorp Ltd. vs. ACIT
40.0.0 The Ld. AR submitted that Ground Nos. 14 to
14.7 are relating to disallowance under Section 14A as per Rule 8D
amounting to 1.65 crores. It was submitted that during the relevant
previous year, the assessee company had earned dividend/interest
income of Rs. 14.49 crores from investments in shares, bonds, and
mutual funds, which was exempt under section
10(34)/10(35)/10(15)(iv)(h) of the Act. In view of the provisions of
section 14A of the Act, the assessee had suo moto disallowed
Rs.66.88 lacs in the return of income, being salary of two employees
of the company who were involved in treasury function along with
portfolio management fee. It was submitted that in the assessment
order, the Assessing Officer, did not accept the method of
disallowance computed by the assessee under section 14A and made
further disallowance of Rs. 1.65 crores invoking provisions of Rule
8D of the Rules after reducing the suo moto disallowance made by
the assessee in the return of income. It was submitted that in the
assessment order, the assessing officer, while computing `book
profit’, made an adjustment of Rs.1.65 crores computed under
102 ITA No.9187/Del/2019
Hero Motocorp Ltd. vs. ACIT
section 14A read with Rule 8D of the Rules, without assigning any
reason.
40.0.1 The Ld. AR submitted that as per section 14A(2),
disallowance under that section as per Rule 8D can be made only if
the Assessing Officer records satisfaction/finding as to the
incorrectness in the method of disallowance followed by the
assessee. In the absence of any satisfaction recorded in the
assessment order, the disallowance as per Rule 8D needs to be
deleted. Reliance in this regard was placed on the following
decisions:
- CIT vs. Walfort Share & Stock Brokers 326 ITR 1(SC)
- Godrej & Boyce Manufacturing Company Ltd. VS. DCIT: 394 ITR
449(SC)
- Maxopp Investment Ltd: 347 ITR 272 (Del.)- Affirmed by the
Hon’ble Supreme Court in 402 ITR 640
- CIT v. Essar Teleholdings Ltd.: 401 ITR 445 (SC)
- PCIT v. Vedanta Ltd.: [2019] 261 Taxman 179 (Delhi)
- H.T. Media Limited v. PCIT: 399 ITR 576 (Del)
- Eicher Motors Ltd. vs. CIT: 398 ITR 51 (Del)
- PCIT vs. U.K. Paints (India) (P.) Ltd.: 392 ITR 552 (Del.)
- CIT v. Abhishek Industries Ltd.: 380 ITR 652 (P&H)
- CIT vs. I.P. Support Services India (P) Ltd: 378 ITR 240 (Del)
103 ITA No.9187/Del/2019
Hero Motocorp Ltd. vs. ACIT
- Joint Investments (P.) Ltd. v. CIT: 372 ITR 694 (Del)
- CIT v. Taikisha Engg. India Ltd.: 370 ITR 338 (Del.)
40.0.2 It was further submitted by the Ld. AR that even
otherwise, there is no nexus of expenses, like interest expenditure
and other administrative expenses with investments, warranting
disallowance u/s 14A.
40.0.3 On the issue of interest expenditure, the Ld. AR
submitted that the assessee is a cash rich company, which does not
borrow funds for making investment. The marginal interest
expenditure of Rs. 2.10 crores was incurred on other temporary
loans/dealers deposit, having nexus with main business function. It
was further argued that no direct nexus of interest expenditure with
investments or earning of dividend income was established by the
assessing officer, for which the initial burden was on the assessing
officer. The Ld. AR submitted that the assessee had substantial free
reserves of Rs 2,946.30 crores at the beginning of the relevant
previous year and had also generated substantial surplus/interest
free funds of Rs. 814.51 crores during the year, which were
sufficient to make net investment of Rs. 669.19 crores during the
104 ITA No.9187/Del/2019
Hero Motocorp Ltd. vs. ACIT
year. In such circumstances, it is to be presumed that only interest
free funds have been utilized for making investments during the
year. Reference, in this regard, was made to the following decisions:
- East India Pharmaceutical Works Ltd. v. CIT: 224 ITR 627 (SC)
- CIT v. Reliance Industries Ltd.: 410 ITR 466 (SC)
- CIT v. UTI Bank Ltd.: 215 Taxman 8 - The Supreme Court
dismissed the revenue’s SLP in Civil Appeal No. 468/2014
- Woolcombers of India Ltd. v. CIT: 134 ITR 219 (Cal.)
- PCIT v. Basti Sugar Mills Co. Ltd.: ITA No. 205 of 2018 (Del HC)
- PCIT v. Reebok India Company: [2018] 259 Taxman 100 (Delhi)
- Indian Explosives Ltd. V. CIT: 147 ITR 392 (Cal.)
- Alkali & Chemicals Corp of India Ltd. v CIT: 161 ITR 820 (Cal)
- CIT v Radico Khaitan Ltd : 274 ITR 354 (All)
- CIT v Dhampur Sugar Mills Ltd : 274 ITR 370 (All)
- CIT v. United Collieries Ltd. : 49 Taxman 227 (Cal)
- CIT v. Enamour Investment Ltd.: 72 Taxman 370 (Cal)
- CIT v. Caroline Investment Ltd.: 87 Taxman 238 (Cal)
- CIT v. Kanoria Investment (P) Ltd.: 232 ITR 7 (Cal)
- CIT vs. Hotel Savera: 239 ITR 795 (Mad)
- Smt. Chanchal Katyal v. CIT: 298 ITR 182 (All.)
- CIT v. Reliance Utilities and Power Ltd.: 313 ITR 340 (Bom)
- CIT v. HDFC Bank Ltd.: 284 CTR 414 (Bom.)
- Hero Honda Finlease Ltd vs. ACIT: ITA No. 3726 &
6102/Del/2012 (Del)
105 ITA No.9187/Del/2019
Hero Motocorp Ltd. vs. ACIT
40.0.4 Reliance was also placed on the following cases,
wherein, the Courts have repeatedly held that interest expenditure
cannot be disallowed under section 14A of the Act, where the
assessee had sufficient surplus funds and there was no finding by
the assessing officer of any direct nexus of borrowed funds with
investments:
- Godrej & Boyce Manufacturing Company Ltd. VS. DCIT: 394 ITR
449(SC)
- Pr. CIT vs. GMM Pfaulder Ltd.: ITA No. 506 of 2017 dated
31.07.2017 (Guj)
- CIT v. Max India Ltd.: 388 ITR 81 (P&H)
- CIT vs. Suzlon Energy Ltd.:[2013] 215 Taxman 272 (Gujarat)
- CIT vs. M/s. Ashok Commercial Enterprises: ITA No. No.2985 of
2009 (Bom)
- Lubi Submeribles Ltd.: ITA No.868 of 2010 (Guj)
- CIT vs. K. Raheja Corporation Pvt Ltd: ITA No.1260 of 2009
- Gujarat State Fertilizers and Chemicals Ltd : Tax Appeal No. 82
of 2013 (Guj HC)
- Hero Honda Finlease Ltd vs. ACIT: ITA No. 3726/Del/2012 (Del)
- Eimco Elecon (India) Ltd. v. Addl. CIT: 142 ITD 52 (Ahd.)
40.0.5 As regards Administrative expenses, the Ld. AR
submitted that all the expenses, other than the suo-moto
106 ITA No.9187/Del/2019
Hero Motocorp Ltd. vs. ACIT
disallowance by the assessee, related to main business function of
manufacturing of vehicles. The Ld. AR pointed out that the Tribunal
in the assessee's own case for the assessment years 2007-08 and
2008-09 had set aside the matter to the file of the Assessing Officer
to be decided afresh as per law, having regard to the satisfaction to
be recorded qua correctness of the suo-moto disallowance made by
the assessee in the return of income. It was submitted that the AO,
in the set aside proceedings for assessment year 2007-08, vide order
dated 30.10.2014 passed under section 254/143(3) of the Act did
not make any disallowance in respect of interest expenses since
there was no nexus between the income and such expenditure. The
AO, however, made disallowance of such administrative expenses
under section 14A in the proportion the total profit before tax bears
to tax free income, which was upheld by the Ld. CIT (A) vide order
dated 01.02.2018. The Ld. AR further submitted that the Tribunal,
vide consolidated order dated 24/10/2016 passed in ITA Nos.
1545/Del/2015 and 914/Del/2016, in assessee's own case for the
immediately preceding assessment years AY 2010-11 and 2011-12,
decided the issue in favor of the assessee on the ground that there
107 ITA No.9187/Del/2019
Hero Motocorp Ltd. vs. ACIT
was no reason/satisfaction recorded by the Assessing Officer under
section 14A(2)/(3) of the Act while proceeding with disallowance
made under section 14A of the Act. The Tribunal also held that there
was nothing to demonstrate that any additional expenditure had
been incurred by the assessee for earning exempt income and that
the assessee had surplus funds/idle funds for making investment.
40.0.6 It was further pointed out by the Ld. AR that the
Tribunal, vide recent order dated 31.05.2018, while dismissing the
appeal of the Revenue for assessment year 2006-07, held that the
assessing officer is bound to record satisfaction qua the
incorrectness of the suo moto disallowance made by the assessee. It
was submitted that in the relevant assessment year also, the
assessing officer failed to record the mandatory satisfaction qua the
incorrectness of the suo moto disallowance made by the assessee in
the return of income.
40.0.7 Further, in all fairness, the Ld. Counsel pointed out
that the Tribunal, while deciding the issue in the assessment years
2009-10, 2012-13 and 2013-14 restored the matter to the file of the
assessing officer to decide the issue afresh after taking into
108 ITA No.9187/Del/2019
Hero Motocorp Ltd. vs. ACIT
consideration the decision of the Hon’ble Supreme Court in the case
of Maxopp Investment Ltd. vs. CIT: 402 ITR 640.
40.0.8 The Ld. AR further submitted that insofar as
disallowance of Rs. 1.67 cores made under section 14A read with
Rule 8D of the Rules was concerned, it cannot be added while
computing book profits under section 115JB of the Act. It was
submitted that section 14A contained in Chapter IV of the Act
begins with the phrase – “For the purposes of computing the total
income under this Chapter…….”. Being so, section 14A has
application only for the purposes of Chapter-IV. Income under the
normal provisions of the Act is computed under the five heads
specified in section 14 of the Act. Provisions relating to computation
of income under different heads are contained in sections 14 to 59
forming part of Chapter IV of the Act. In other words, Chapter IV
provides for computation of income of an assessee under the normal
provisions of the Act. It was submitted that as a necessary corollary,
provisions of section 14A cannot be extended to any Chapter, other
than Chapter IV of the Act, i.e., while computing income under the
normal provisions. It was further submitted that Section 115JB
109 ITA No.9187/Del/2019
Hero Motocorp Ltd. vs. ACIT
finds place under Chapter XII-B of the Act. Being so, provisions of
section 14A contained in Chapter IV cannot be imported and
incorporated under section 115JB, more so when clause (f) to
Explanation 1 to the said section contains no reference to section
14A of the Act. Reliance in this regard was placed on the decision of
the Hon’ble Delhi High Court in the case of PCIT v. Bhushan Steel
Ltd.: ITA No. 593/2015, dated 29.09.2015, wherein, the Hon’ble
Court upheld the decision of the Tribunal that disallowance under
section 14A read with Rule 8D could not be added while computing
book profits as per section 115JB and declined to frame question of
law. Further, reliance was also placed on the decision of the Special
Bench of the Delhi Tribunal in the case of ACIT vs. Vireet
Investments (P.) Ltd: 165 ITD 27 (Del Trib.), wherein the Tribunal
inter alia, placing reliance on the judgment of Hon’ble Delhi High
Court in the case of Bhushan Steel Ltd. (supra), likewise, held that
computation under clause (f) of Explanation 1 to section 115JB (2) of
the Act is to be made without resorting to computation as
contemplated under section 14A read with rule 8D of the Rules. The
Ld. AR also relied upon the following decisions:
110 ITA No.9187/Del/2019
Hero Motocorp Ltd. vs. ACIT
- Quippo Telecom Infrastructure Ltd v. ACIT: ITA
No.4931/Del/2010 (Del ITAT)
- Beach Minerals Company (P.) Ltd. v. ACIT: ITA No.
2110/Mds/2014 (Chennai ITAT)
- Shriram Capital Ltd v. DCIT (ITA. Nos.512 &513 /Mds/2015)
(Chennai ITAT)
- Scope Private Ltd. v. ACIT : ITA No. 8934/Mum./2010
- Reliance Industrial Infrastructure Ltd. v. ACIT: ITA Nos. 69 &
70/Mum/2009
- JCIT v. Reliance Capital Ltd.: ITA No. 3037/Mum/2008
- Bengal Finance and Investment (P) Ltd. v. CIT: ITA No.
5620/Mum/2010
- Essar Teleholdings Ltd v. DCIT : ITA 3850/Mum/2010
- Nahar Capital And Financial v. ACIT: ITA No. 1120/Chd/2011
- ACIT vs. Spray Engineering Devices Ltd: (2012) 53 SOT 70
(Chd.) (URO.)
- GMM Pfaudler Ltd. v. JCIT : ITA Nos. 2627 & 2923/Ahd/2008
& 3280/Ahd/2010
- Cadila Healthcare Ltd. v. ACIT: 21 Taxmann.com 483 (Ahd.)
- Reliance Petroproducts (P) Ltd. v. ACIT : ITA No.
2324/Ahd/2009
- Jindal Steel and Alloy Ltd. v. ACIT : ITA Nos. 961 &
962/Mum/2009
111 ITA No.9187/Del/2019
Hero Motocorp Ltd. vs. ACIT
40.0.9 In view of the above, the Ld. AR submitted that
applicability of provisions of section 14A is confined to computation
of tax liability under the five heads of income enumerated in section
4 under normal provisions contained in Chapter-IV of the Act. The
said section 14A cannot be extended and read into section 115JB
falling under Chapter XII-B of the Act.
41.0 The Ld. CIT - DR relied upon the Assessment Order and
Order of the TPO.
42.0.0 We have heard both the parties and perused the material
available on record. This Tribunal, in A.Ys. 2010-11 and 2011-12,
had deleted the disallowance under section 14A of the Act on the
ground of valid satisfaction not having been recorded by the
Assessing Officer. Similarly, in assessment year 2006-07 the
disallowance was deleted. However, we note that the aforesaid
decision was not followed by the Tribunal in the recent decision for
the assessment year 2013-14, wherein the issue was restored back
to the file of the AO to record satisfaction. The relevant observations
are as under:
“It is observed in the present case that the assessee has suo
moto disallowed expenses under Section 14A of the Act. The
112 ITA No.9187/Del/2019
Hero Motocorp Ltd. vs. ACIT
Hon’ble Apex Court in case of Maxopp Investment Ltd. vs. CIT
(2018) 402 ITR 640 (SC) held that:
“40) We note from the facts in the State Bank of Patiala
cases that the AO, while passing the assessment order,
had already restricted the disallowance to the amount
which was claimed as exempt income by applying the
formula contained in Rule 8D of the Rules and holding that
section 14A of the Act would be applicable. In spite of this
exercise of apportionment of expenditure carried out by the
AO, CIT (A) disallowed the entire deduction of expenditure.
That view of the CIT (A) was clearly untenable and rightly
set aside by the ITAT. Therefore, on facts, the Punjab and
Haryana High Court has arrived at a correct conclusion by
affirming the view of the ITAT, though we are not
subscribing to the theory of dominant intention applied by
the High Court. It is to be kept in mind that in those cases
where shares are held as ‘stock-in-trade’, it becomes a
business activity of the assessee to deal in those shares as
a business proposition. Whether dividend is earned or not
becomes immaterial. In fact, it would be a quirk of fate that
when the investee company declared dividend, those
shares are held by the assessee, though the assessee has
to ultimately trade those shares by selling them to earn
profits. The situation here is, therefore, different from the
case like Maxopp Investment Ltd. where the assessee
would continue to hold those shares as it wants to retain
control over the investee company. In that case, whenever
dividend is declared by the investee company that would
necessarily be earned by the assessee and the assessee
alone. Therefore, even at the time of investing into those
shares, the assessee knows that it may generate dividend
income as well and as and when such dividend income is
113 ITA No.9187/Del/2019
Hero Motocorp Ltd. vs. ACIT
generated that would be earned by the assessee. In
contrast, where the shares are held as stock-in-trade, this
may not be necessarily a situation. The main purpose is to
liquidate those shares whenever the share price goes up in
order to earn profits. In the result, the appeals filed by the
Revenue challenging the judgment of the Punjab and
Haryana High Court in State Bank of Patiala also fail,
though law in this respect has been clarified hereinabove.
41) Having regard to the language of Section 14A(2) of the
Act, read with Rule 8D of the Rules, we also make it clear
that before applying the theory of apportionment, the AO
needs to record satisfaction that having regard to the kind
of the assessee, suo moto disallowance under Section 14A
was not correct. It will be in those cases where the
assessee in his return has himself apportioned but the AO
was not accepting the said apportionment. In that
eventuality, it will have to record its satisfaction to this
effect. Further, while recording such a satisfaction, nature
of loan taken by the assessee for purchasing the
shares/making the investment in shares is to be examined
by the AO.”
Though the Assessing Officer did not accept the method of
disallowance computed by the assessee under section 14A and
made further disallowance of Rs. 66,35,000/- invoking
provisions of Rule 8D of the Income Tax Rules, 1962 after
reducing the suo moto disallowance of Rs. 65.23 lakhs made by
the assessee in the return of income. But the Assessing Officer
has not given the proper calculation to that effect. Therefore, the
matter is restored back to the file of the Assessing Officer. We
direct the Assessing Officer that after taking cognizance of the
114 ITA No.9187/Del/2019
Hero Motocorp Ltd. vs. ACIT
the Apex Court decision, pass the appropriate order. Needless to
say, the assessee be given opportunity of hearing by following
principles of natural justice. Therefore, Ground No. 16 to 16.7 are
partly allowed for statistical purpose.”
42.0.2 Similarly, in assessment years 2009-10 and 2012-13
the matter was set aside. We have given a thoughtful consideration
to the issue. As noted above, this Tribunal had restored the issue of
computation of disallowance u/s 14A to the file of the Assessing
Officer in Assessment Years 2006-07, 2009-2010, 2012-13 as well
as in assessment year 2013-14 on identical facts. Therefore, it is our
considered opinion that ends of justice would be met if in this year
also, the issue is re-examined by the Assessing Officer in light of
judgment of the Hon’ble Apex Court in the case of Maxopp
Investment Ltd. vs. CIT (supra). Accordingly, the matter is restored
to the file of the Assessing Officer. We direct the Assessing Officer to
pass appropriate orders in accordance with law after duly
considering the judgment of the Hon’ble Apex Court in the case of
Maxopp Investment Ltd. vs. CIT (supra) after giving proper
opportunity to the assessee to present its case.
115 ITA No.9187/Del/2019
Hero Motocorp Ltd. vs. ACIT
42.0.3 As regard the addition of disallowance of Rs. 1.67
cores made under section 14A read with Rule 8D of the Rules while
computing book profits under section 115JB of the Act, we find that
the said issue is squarely covered in favour of the assessee by the
order of the Hon’ble Delhi High Court in the case of PCIT v. Bhushan
Steel Ltd.: ITA No. 593/2015 and by the order of the Special Bench
of the Tribunal in the case of ACIT vs Vireet Investments (P.) Ltd:
165 ITD 27 (Del Trib.), accordingly the addition made in this regard
is deleted.
42.0.4 Therefore, Ground Nos. 14 to 14.7 are allowed
for statistical purposes.
43.0.0 It was submitted by the Ld. AR that Ground
No. 15 relates to depreciation on Model Fee amounting to Rs. 39.5
lacs. It was submitted that the assessee manufactures two-wheelers
under technical collaboration agreement entered into with Honda
Motor Co. Ltd., Japan (‘Honda’). In accordance with the above
collaboration agreement, the assessee pays model fee to Honda to
obtain design/know-how to manufacture a new model of two-
wheeler. The said expenditure is incurred prior to commencement of
116 ITA No.9187/Del/2019
Hero Motocorp Ltd. vs. ACIT
production of the new model. It was submitted that the assessing
officer held that the expenditure incurred by the assessee towards
model fee is directly related to manufacture of new models of two-
wheelers and. therefore, needs to be attributed to the value of
closing stock of finished goods of two-wheelers. Accordingly, the
assessing officer, on proportionate basis, worked out a sum of
Rs.39,50,000/- out of depreciation on model fee debited to the profit
and loss account, as attributable to the value of closing stock and
made addition of the said amount to the income of assessee.
43.0.1 The Ld. AR submitted that the aforesaid issue is
squarely covered in favour of the assessee by the decision of the
Delhi Bench of the Tribunal in assessee’s own case for assessment
years 2010-11 and 2011-12 wherein following the order for
assessment year 2008-09, similar disallowance of depreciation on
model fee was deleted by the Tribunal on the ground that
expenditure was incurred on new model fees prior to commencement
of production of new models of two wheelers, and even otherwise
this exercise would be revenue neutral in a broader perspective as
the same adjustment would be required to be made to the opening
117 ITA No.9187/Del/2019
Hero Motocorp Ltd. vs. ACIT
stock of finished goods for the year under consideration. It was
further pointed out by the Ld. AR that following the order of the
Tribunal for AYs 2010-11 and 2011-12, the Tribunal has also
decided the issue in favour of the assessee in appellate orders
passed for AYs 2009-10, 2012-13 and 2013-14.
44.0 The Ld. CIT-DR relied upon the Assessment
Order and Order of the TPO, but could not distinguish the decision
of the Tribunal.
45.0.0 We have heard both the parties and perused
the material available on record. This Tribunal had held in A.Ys.
2010-11 and 2011-12 as under:
“112) We have carefully considered the rival contentions. In
absence of any change in the facts and circumstances of the
case or any contrary decision, We have heard the rival
contentions. We find that the similar issue was raised in the
assessment order for AY 2008-09, which was decided in favour
of the appellant by the Tribunal in appeal order for that year by
observing as under-
“219. On careful consideration of above submissions of
both the parties, we are of the view that if the closing stock
of the year under consideration is to be varied, then similar
adjustments would need to be made in the opening stock
also and corresponding adjustments would also need to be
118 ITA No.9187/Del/2019
Hero Motocorp Ltd. vs. ACIT
carried out in the opening stock of the succeeding year and
if any addition is made in this regard, would be revenue
neutral if seen in a macro perspective. From the orders of
the authorities below, we clearly observe that the AO has
not disputed the mode of valuation of inventory made by
the assessee during preceding years and if any kind of
adjustment is held to be attributable to the value of
finished closing stock, then the said corresponding
amount/adjustment would need to be made in the opening
stock of the succeeding year and in a broader sense, such
kind of adjustment/addition would be revenue neutral. On
specific query from the Bench, the DR submitted that the
treatment given by the revenue authorities on the issue in
the preceding year is not known to him and in this
situation, we hold that the / department has not disputed
the claim of the assessee in the preceding years.
220. It is well accepted legal proposition that when the
department has taken a particular stand on a particular
issue, then the department cannot take a deviated stand
on the issue in the succeeding year without any sound,
justifiable and cogent reason. The department has not
disputed the fact that impugned expenditure was incurred
prior to commencement of production of new model and the
same was neither incurred during the manufacturing of
new model nor model fee expenditure is directly related to
manufacture of new models. In this factual aspect and
circumstances, we hold that the assessee incurred
expenditure on new model fees prior to commencement of
production of new models of two wheelers, even otherwise
this exercise would be revenue neutral in a broader
perspective as the same adjustment would be required to
be done in the opening stock of finished goods for the year
under consideration. More so, when the assessee has
119 ITA No.9187/Del/2019
Hero Motocorp Ltd. vs. ACIT
followed a particular mode of accounting for this
expenditure which was accepted by the Revenue, then the
department cannot take a different stand in the succeeding
year to make an addition in this regard. We are unable to
see any valid ground to 'accept' a deviated stand of the
Revenue on the issue, which in a broader sense, is revenue
neutral, then no adjustment is called for in this regard. We
hold that findings of the AO are not sustainable and we set
aside the same.
Hence, we allow ground no.58 to 58.1 of the assessee.”
Accordingly, respectfully following the aforesaid decision, we
decide the issue in favour of the appellant. Accordingly, the
ground number 23 of appeal stands allowed.”
45.0.1 The facts of the present Assessment Year and the
earlier Assessment Year are not different. In the present year also ,
the expenditure was incurred on new model fees prior to
commencement of production of new models of two wheelers, thus,
this action is revenue neutral in a broader perspective as the same
adjustment would be required to be made to the opening stock of
finished goods for the year under consideration. Thus, this issue is
covered in favour of the assessee by the decision of the Tribunal for
A.Ys. 2010-11 and 2011-12. We also find that the Tribunal has in
the appeal for the assessment years 2009-10, 2012-13 and 2013-14,
decided the issue in favor of the assessee company following the
120 ITA No.9187/Del/2019
Hero Motocorp Ltd. vs. ACIT
aforesaid order passed for assessment years 2010-11 and 2011-12.
45.0.2 Therefore, Ground No. 15 is allowed in favour of the
assessee.
46.0.0 Regarding Ground No. 16 relating to disallowance of
reimbursement of foreign travelling expenses to directors/employees
amounting to 7.38 crores, the Ld. AR submitted that the
disallowance was made on the ground of non-submission of
evidence/proof of actual expenses incurred by employees. It was
submitted that in the course of discharge of official duties, the
employees of the company are required to travel abroad and incur
incidental expenses in foreign currency like local conveyance,
boarding and lodging expenses, telephone expenses etc. The
assessee had introduced a policy fixing per diem allowance payable
to employees, depending upon the grade/category of the employees
and the place/country of travel. The employees are not entitled to
any extra allowance in the event the actual expenditure incurred by
the employee is in excess of such per diem allowance. It was
submitted that for payment of per diem allowance, as per policy, the
assessee does not require the expenses to be necessarily supported
121 ITA No.9187/Del/2019
Hero Motocorp Ltd. vs. ACIT
/backed by bills considering the practical difficulties/impossibilities
in producing invoices for petty expenses like local conveyance,
telephone bills, etc. The employees are only required to submit
details of expenditure incurred in specified form, on basis of which
travel bill is settled. It was submitted that in the assessment order,
the AO made disallowance of Rs.7,38,27,378/- (comprising of Rs.
2,28,58,951/- in respect of Dharuhera, Gurgaon, Haridwar and
Neemrana plants and Rs. 5,09,68,426/- in respect of head office
expenses) out of expenditure incurred towards re-imbursement of
foreign travel expenses incurred by employees, on the ground that
declaration furnished by the employees was not a sufficient evidence
to establish the incurrence of actual expenses, which were required
to be supported with bills/invoices of factual expenditure incurred
by the employees.
46.0.1 The Ld. AR submitted that the aforesaid issue is
squarely covered in favour of the assessee by the decision of Delhi
Bench of the Tribunal in the assessee's own case for the AYs 2007-
08 and 2008-09, wherein the Tribunal held that disallowance
cannot be made merely on the basis that vouchers were not
122 ITA No.9187/Del/2019
Hero Motocorp Ltd. vs. ACIT
produced by the employees, which has been reaffirmed by the
Tribunal in the order dated 24.10.2016 passed for the assessment
years 2010-11 and 2011-12. It was further pointed out by the Ld.
AR that following the order of the Tribunal for AYs 2010-11 and
2011-12, the Tribunal has also decided the issue in favour of the
assessee in appellate orders passed for AY 2009-10, 2012-13 and
2013-14.
47.0 The Ld. CIT-DR relied upon the Assessment Order
and Order of the TPO, but could not distinguish the decision of the
Tribunal.
48.0.0 We have heard both the parties and have perused
the material available on record. The Tribunal, in assessee’s own
case, has held in A.Ys. 2010-11 and 2011-12 as under:-
“226) We have heard the rival contentions. We note that similar
issue relating to disallowance relating to re-imbursement of
foreign travelling expenses to directors/employees was deleted
by the Tribunal in the assessee’s own case for assessment year
2007-08 which was followed in assessment year 2008-09. The
relevant observations of the Tribunal for assessment year 2007-
08 are as under:
123 ITA No.9187/Del/2019
Hero Motocorp Ltd. vs. ACIT
“51.15.The assessing officer in this case has not doubted
the fact that employees/ directors of the company travelled
abroad and the fact that they have incurred incidental
expenses in foreign currency. The reason for disallowance
is that employees have not furnished to the assessee
evidence in support of the fact that they have incurred
conveyance, boarding and lodging expenses etc. When
reasonable amount of daily allowance is fixed as per the
rules of the company and when these D.A. rules are
followed by the assessee, in our view, the incurring of
expenditure by the employees is not to be doubted. Even in
cases where officers of the government of India travel
abroad, daily allowance is given and vouchers for such
expenditure are not insisted because of practical difficulties
in submitting bills/ vouchers of petty expenses. In such
circumstances, what is to be examined by the assessing
officer is the reasonableness of the expenses incurred as
compared to the general rates of expenses and allow the
same. The assessee submits that the fixed per diem
allowance payable to employees depending on the grade is
reasonable. When such rates are reasonable the question
of disallowance does not arise unless the revenue
demonstrates that the rates are excessive. In this case it is
not that the expenses are not incurred for the stated
purpose nor is it that the rates are unreasonable. The
disallowance in question in our view on the sole ground
that vouchers are not produced by the employees cannot be
sustained. In the result this ground of the assessee is
allowed.”
The Ld. departmental representative could not point out any
change in the facts and circumstances of the case of the
appellant as compared to the assessment year in which the
124 ITA No.9187/Del/2019
Hero Motocorp Ltd. vs. ACIT
above issue is decided by the coordinate bench. No other
contrary decision was also pointed out therefore, respectfully
following the decision of the coordinate bench in the appellant’s
own case for the earlier years, we dismiss ground No. 9 of the
appeal of the revenue.”
48.0.1 Thus, this Tribunal in A.Ys. 2010-11 and 2011-12
and earlier years has held that disallowance cannot be made merely
on the basis that vouchers were not produced by the employees. We
also find that the Tribunal has in the appeal for the assessment
years 2009-10, 2012-13 and 2013-14, decided the issue in favor of
the assessee company following the aforesaid order passed for
assessment years 2010-11 and 2011-12. As, the facts have not
changed in this year as well, therefore, the issue is squarely covered
by the decision of the Tribunal for earlier Assessment Years.
48.0.2 Therefore, Ground No. 16 is allowed in favour
of the assessee.
49.0.0 The Ld. AR submitted that Ground Nos. 17 to
17.2 relate to disallowance of Royalty Expenditure amounting to
Rs.95.61 crores on the ground of being capital in nature. It was
submitted that the assessee company has been manufacturing two
125 ITA No.9187/Del/2019
Hero Motocorp Ltd. vs. ACIT
wheelers in India since 1985 on the basis of technology provided by
M/s. Honda Motors Co. Ltd., Japan ("HM") and has so far launched
various models of motorcycles by obtaining the technology provided
by that company. However, during AY 2011-12, on account of
commercial considerations, HM decided to exit the joint venture.
Consequently, a Memorandum of Understanding (‘MOU’) dated
16.12.2010 was entered into between the assessee and HM and the
license agreement was mutually terminated. It was further
submitted that in terms of the MOU, two new license agreements
dated 06.07.2011 and 08.01.2011, License 'A' agreement and
License ‘B’ agreement, were entered into between the assessee and
HM. It was submitted that in terms of the license agreement for
License ‘A’ Products, the assessee received the following rights:
(i) Rights to use the technology, design and drawings for
manufacture of 18 specific models of motor cycles till
perpetuity
(ii) Right to make modifications to the technology, design and
drawings
(iii) Unrestricted right to export such products in the overseas
markets.
126 ITA No.9187/Del/2019
Hero Motocorp Ltd. vs. ACIT
49.0.1 It was further submitted by the Ld. AR that the
assessee, subsequently had entered into a new License Agreement
(for License B products) dated 22.01.2011 for the purpose of
providing the assessee with transitional support and under the said
agreement the assessee was provided right to manufacture 4 new
models (namely (a) Passion XPRO, (b) Ignitor, (c) Maestro and d)
Impulse) using the technology provided by HM on payment of lump
sum model fee and royalty. Since the right to manufacture the
aforesaid 4 models of motorcycles was not included in the License A
agreement, therefore, in order to be able to manufacture the said
models of motorcycles the assessee had to enter into separate
agreement for manufacture of License ‘B’ products. The Ld. AR
submitted that the assessee, after separation from Honda Motors
Corporation, Japan, was not in a position to independently develop
and launch new models of motorcycles immediately. Therefore, in
order to survive in a highly competitive market, the assessee
requested the associated enterprise to provide right and technology
for manufacture of four new models of motor cycles. Accordingly, the
assessee and the associated enterprise entered into license B
127 ITA No.9187/Del/2019
Hero Motocorp Ltd. vs. ACIT
agreement allowing the assessee the right to manufacture a) Passion
XPRO, (b) Ignitor, (c) Maestro and d) Impulse models of motorcycles.
49.0.2 It was further submitted by the Ld. AR that
during the relevant previous year, in terms of the aforesaid license B
agreement, the assessee booked Rs. 127.48 crores as royalty, to
Honda, which was claimed revenue deduction. The aforesaid
payments were made after deducting tax at source @10% being the
rate of tax applicable in relation to payment of royalty and fees for
technical services under Article 12 of Indo-Japan DTAA. It was
further submitted that the AO treated the aforesaid expenditure
incurred by way of royalty paid to Honda as capital expenditure, by
following the orders for the earlier year(s) on the ground that:
• The assessee had received benefit of enduring nature inasmuch
as exclusive right was available with the assessee to manufacture
and sell the products within the territory of India;
• The assessee was entitled to continued use of information
supplied by Honda even after termination of agreement;
• The benefit under the agreement had a degree of perpetuity since
the agreement was renewed and was extended year after year and
did not, therefore, remain a short term agreement.
• The assessee had acquired asset in the nature of intellectual
property rights and patents from Honda.
128 ITA No.9187/Del/2019
Hero Motocorp Ltd. vs. ACIT
49.0.3 The Ld. AR submitted that the assessing officer
treated the aforesaid expenditure incurred by way of royalty paid to
Honda as capital expenditure on the ground that the assessee had
received benefit of enduring nature and had accordingly, disallowed
Rs. 95.61 crores out of total expenditure of Rs. 127.48 crores on
account of royalty after allowing depreciation @ 25% thereof,
amounting to Rs. 31.87 crores.
49.0.4 The Ld. AR submitted that Royalty was not capital
expenditure. There are no ownership rights but only limited right to
use in License B Products Agreement. It was submitted that during
the currency of the agreement, the assessee only had a limited right
to use the technology of Honda. Ownership/proprietary rights in the
technical know-how continued to vest in Honda and the assessee
was not authorized to transfer, assign or convey the know-
how/technical information to any third party as the assessee only
acquired limited right to use and exploit the know-how. As regards
to Non-exclusive license, the Ld. AR submitted that the said right
vested with the assessee was not exclusive in as much as, in terms
of Article 2 and article 9 of License B agreement, Honda reserved the
129 ITA No.9187/Del/2019
Hero Motocorp Ltd. vs. ACIT
right to provide technology to its affiliates to manufacture
motorcycles. The Ld. AR further submitted that aforesaid limited
rights were available to the assessee and the fact of such rights
being not exclusive can be gathered from the following clauses of the
agreement:-
i) ARTCLE 2 - Grant of License and Exclusivity
ii) ARTICLE 3-No sublicense
iii) ARTICLE 9 - Use and Disclosure of Technical Information
iv) ARTICLE 13 - Terms of agreement (upto 30.06.2007)
v) ARTICLE 21/22 Termination/Effect of Expiry and
Termination
vi) ARTICLE 25/26 Certain Prohibitions/Maintenance of
Secrecy
49.0.5 The Ld. AR further submitted that payment under the
agreement is allowable revenue expenditure. It was submitted that
as per the various clauses of the agreement, it would be appreciated
that the royalty payable to Honda is only for the purpose of use of
technical assistance in the manufacture and sale of products and
the assessee has not acquired any capital asset, much less in the
nature of intellectual property rights or patents belonging to Honda,
which, in unequivocal terms, as provided in the agreement vested in
130 ITA No.9187/Del/2019
Hero Motocorp Ltd. vs. ACIT
absolute ownership of Honda at all times. Further, on perusal of
Article 22 of the License B product agreement, it would be
appreciated that on termination/expiration of the agreement, the
assessee was required to return all the documents and materials to
Honda and promptly discontinue the use of trademarks licensed by
Honda and the assessee did not have any right to continue using
such know-how. It was submitted that, thus, it is clear that there is
no explicit or implied intention to transfer or create ownership in the
technical knowhow/ technical information to the assessee. On the
contrary, it is unequivocally agreed to between the parties that the
know-how should at all times remain the property of Honda. It was
further submitted that the conditions in the agreement as to non-
assignability, confidentiality and the secrecy of the know-how also
indicate that the assessee had merely obtained the right to use the
know-how during the currency of the agreement. Reliance in this
regard was placed on the following decisions wherein it has been
held that where payment is made to simply use the technical know-
how/knowledge provided by the foreign collaborator as opposed to
131 ITA No.9187/Del/2019
Hero Motocorp Ltd. vs. ACIT
acquisition of ownership rights therein, the payment made would be
regarded as revenue expenditure:
• CIT v. Ciba India Ltd.: 69 ITR 692 (SC)
• CIT vs. British India Corp. Ltd. [1987] 165 ITR 51 (SC)
• Alembic Chemical Works Co. Ltd. v. CIT: 177 ITR 377 (SC)
• Shriram Refrigeration Industries Ltd. v. CIT: 127 ITR 746 (Del
HC)
• Triveni Engineering Works Ltd. vs. CIT : 136 ITR 340 (Del)
• Addl. CIT vs. Shama Engine Valves Ltd. : 138 ITR 217 (Del)
• CIT vs. Bhai Sunder Dass & Sons P. Ltd. : 158 ITR 195 (Del)
• CIT vs. Lumax Industries Ltd. : 173 Taxman 390 (Del)
• Shriram Pistons & Rings Ltd. vs. CIT : 171 Taxman 81 (Del)
• CIT vs. Shri Ram Pistons and Rings Ltd. : 220 CTR 404 (Del)
• Goodyear India Ltd. vs. ITO : 73 ITD 189 (Del)(TM)
• ITO vs. Shivani Locks : 118 TTJ 467 (Del)
• Climate Systems India Ltd. vs. CIT: 319 ITR 113 (Del-HC)
• CIT vs. Sharda Motor Industries Ltd: 319 ITR 109 (Del-HC)
• CIT vs. Essel Propack 325 ITR 185 (Bom)
• CIT v. Modi Revlon (P) Ltd: (2012) 9 TMI 48 (Del.)
• Mafatlal Denim Ltd. V. DCIT: 2011 (12) TMI 351 (Mum.)
• Climate Systems India Ltd. vs. CIT: 319 ITR 113 (Del-HC)
• Goodyear India Ltd. vs. ITO : 73 ITD 189 (Del)(TM)
• CIT v. Avery India Ltd. 207 ITR 813 (Cal)
• CIT v. Bhai Sunder Dass & Sons P. Ltd.:158 ITR 195 (Del)
132 ITA No.9187/Del/2019
Hero Motocorp Ltd. vs. ACIT
• CIT v. DCM Ltd.: ITA No. 87-89/1992 (Del.)(HC)
• CIT v. Denso India P. Ltd.: ITA 16/2008 (Del.) (HC)
• CIT v. Eicher Motors Ltd.: 293 ITR 464 (MP)(Indore Bench)
49.0.6 The Ld. AR submitted that since no proprietary rights
in the know-how vested in the assessee and the assessee being a
mere licensee with limited rights to use the technical assistance
during the currency of the agreement, there is no explicit or implied
intention to transfer or create ownership in the technical know-how
/technical information in the assessee. It was argued that the
expenditure by way of royalty incurred by the assessee was
allowable revenue deduction since-
• payment was made for limited license to use the know-how
provided by Honda, as the proprietary and ownership rights in
the same continued to remain vested with Honda at all times
and, therefore, there was no absolute parting of know-how in
favour of the assessee resulting in acquisition of any asset,
• no benefit of enduring nature in the capital field accrued to the
assessee, even if the license to manufacture and sell products in
India is assumed to be exclusive, except for grant of license to
HMSI,
133 ITA No.9187/Del/2019
Hero Motocorp Ltd. vs. ACIT
• the subject payment made did not cover consideration paid for
setting up of the manufacturing facility in India,
• On termination of the agreement, the assessee was required to
return all the documents and materials to Honda and promptly
discontinue the use of trademarks licensed by Honda and the
assessee did not have any right to continue using such know-
how.
49.0.7 The Ld. AR further pointed out that the aforesaid
issue is covered in favour of the assessee by the decision of the
Tribunal in assessment years 2000-01, 2001-02, 2002-03, 2006-07,
2007-08, 2008-09, 2009-10 and 2010-11 wherein the Tribunal has
held that annual payment of royalty was allowable revenue
expenditure. It was submitted that the aforesaid orders of the
Tribunal relating to assessment years 2000-01 to 2002-03 have
been affirmed by the Hon’ble Delhi High Court in the assessee’s own
case reported as CIT v. Hero Honda Motors Ltd.: 372 ITR 481.48. It
was also submitted that in orders passed by the Tribunal for
assessment years 2011-12 to 2013-14, the royalty paid in terms of
license B agreement has been held to be an allowable revenue
deduction.
134 ITA No.9187/Del/2019
Hero Motocorp Ltd. vs. ACIT
50.0 The Ld. CIT - DR relied upon the Assessment Order
and Order of the TPO but could not distinguish the order of the
Tribunal for A.Ys. 2010-11 and 2011-12.
51.0.0 We have heard both the parties and perused the
material available on record. This Tribunal, on identical issue, has
for A.Y.s 2010-11 and 2011-12 held as under:
“95) We have heard the rival contentions. We have gone through
the orders in the assessee’s case for the earlier assessment
years as was pointed out by the Ld. Counsel. Both the parties
admitted before us that there is no change in the facts and
circumstances of the case as well as the agreement under which
the payments have been made by the assessee. The Ld.
departmental representative also could not point out any other
judicial precedent on this issue of the higher forum. In this event
we are duty bound to follow the order of the coordinate bench
passed in the case of the assessee for the beer years. For the
sake brevity, we reproduce hereunder the finding in the appeal
order for AY 2007-08, which was followed in the order for AY
2008-09 as under:
“57. The issue whether the expenditure in question is in the
capital field or the revenue field has been decided in favour
of the assessee by the ITAT in assessee’s own case for
earlier assessment years 2000-01, 2001-02, 2002-03 and
2006-07. The ITAT Delhi Bench ‘C’ in assessee’s own case
135 ITA No.9187/Del/2019
Hero Motocorp Ltd. vs. ACIT
for A.Y. 2006-07 in ITA no. 5130/Del/2010 vide order
dated 23- 11-2012 has held that the annual payment of
royalty was a revenue expenditure. In doing so the ITAT
has relied on various judicial pronouncements including the
decision of Jurisdictional High Court in the case of Climate
Systems India Ltd. and Sharda Motors Industrial Ltd. No
change in facts and circumstances has been pointed out by
the ld. DR. Therefore, respectfully following the same, we
allow this ground of the assessee.”
Therefore respectfully following the above decisions of the
Tribunal and High Court in the assessee’s own case, we reverse
the order of the Ld. Assessing officer in holding the above 3
payments as capital expenditure. In the result ground No. 19 of
the appeal of the assessee is allowed.”
51.0.1 We also find that the Tribunal has in the appeal for
the assessment years 2009-10, 2012-13 and 2013-14, decided the
issue in favor of the assessee company by following the aforesaid
order passed for assessment years 2010-11 and 2011-12. The
Tribunal, in its order passed for AY 2012-13, after examining the
terms of license B agreement, held the royalty paid to be an
allowable revenue deduction. The relevant observations of the co-
ordinate Bench of the Tribunal are as under:
“It is pertinent to note that no proprietary rights in the know how
vested in the assessee, the assessee being a mere licensee with
136 ITA No.9187/Del/2019
Hero Motocorp Ltd. vs. ACIT
limited rights to use the technical assistance during the currency
of the agreement, there is no explicit or implied intention to
transfer or create ownership in the technical know-how
/technical information in the assessee. In view of the aforesaid,
expenditure by way of royalty, technical guidance fee and model
fees incurred by the assessee was allowable revenue deduction
as held in the decision given by the Tribunal for A.Ys. 2010-11
and 2011-12. The issue is squarely covered by the said decision.
Therefore, Ground No. 32 to 32.6 are allowed.”
51.0.2 Respectfully following the orders passed by the
Tribunal in earlier years, in assessment years 2011-12 to 2013-14,
the royalty paid in terms of license B agreement is held to be an
allowable revenue deduction.
51.0.3 Therefore, Ground Nos. 17 to 17.2 is allowed in
favour of the assessee.
52.0.0 Ground Nos. 18 to 18.6 are relating to disallowance
u/s 80IC on account of profit attributable to the brand value and
marketing network amounting to Rs. 173.41 crores. It was
submitted by the Ld. AR that in the business of manufacturing and
selling two-wheelers, including goods manufactured at eligible unit,
the assessee was required to incur marketing expenses. The said
137 ITA No.9187/Del/2019
Hero Motocorp Ltd. vs. ACIT
expenses were incurred by the Head Office at Delhi. The common
expenses, including advertisement/brand creation expenses, etc.
incurred at Head Office were allocated to various manufacturing
units of the assessee-company, including the unit eligible for
deduction under section 80IC, on a rational and scientific basis. The
expenses on brand /advertisement, etc. incurred at Head Office were
duly allocated to manufacturing units and have been deducted,
while computing profits of the unit eligible for claim of deduction
under section 80IC of the Act. It was further submitted that the
price realized on sale of the products, i.e., two wheelers, is credited
to the profit and loss account and direct and indirect expenses,
including advertisement expenses, incurred in relation to sale of the
products are reduced there from for purpose of computing profits of
the eligible unit and corresponding claim of deduction under section
80IC of the Act. It was submitted that the AO held that profits are
derived by the assessee-company on account of three assets, viz., (1)
manufacturing assets, (2) brand assets and (3) marketing assets
whereas deduction under section 80IC is available only on profits
derived from business of manufacturing of specified articles or
138 ITA No.9187/Del/2019
Hero Motocorp Ltd. vs. ACIT
things. It was further observed by the AO that the manufacturing
and marketing activities were carried out at Head Office and,
therefore, the brand developed was not owned by the eligible unit,
which came into existence much later than the existence of the
assessee-company as a whole. Thus, as per the AO, part of the
profits earned by eligible unit should have been attributed to
advertisement/marketing activities carried out by head office. In
order to attribute profits to marketing/advertisement activities, the
AO computed rate of net profit for the financial year 1984-85, being
the first year of operations of the assessee company, at 6.85% on an
arbitrary basis and applied the same to arrive at the profit solely
attributable to the manufacturing activity of Haridwar unit. It was
submitted that on the basis of above, the assessing officer computed
profit attributable to the manufacturing activity at Rs. 213.15
crores. Accordingly, deduction under section 80IC qua remaining
profit of Rs. 173.41 crores, allegedly attributable to marketing and
advertisement activity was disallowed.
52.0.1 The Ld. AR submitted that the issue is squarely
covered in favor of the assessee by order dated 24.10.2016 passed
139 ITA No.9187/Del/2019
Hero Motocorp Ltd. vs. ACIT
by the Tribunal for assessment years, i.e. AY 2010-11 and AY 2011 -
12, wherein identical disallowance made by the AO has been
deleted. It was submitted that the Tribunal, in coming to the
aforesaid discussion, reiterated that the head office is not a separate
profit centre and, therefore, no profit is to be separately attributed to
such activity. It further observed that, for the purpose of working
out eligible deduction under section 80-IC of the Act, actual
expenses incurred at the head office are to be allocated between
various profit centers on a rational and scientific basis. It was
further pointed out by the Ld. AR that following the order of the
Tribunal for AYs 2010-11 and 2011-12, the Tribunal has also
decided the issue in favour of the assessee in appellate orders
passed for AYs 2009-10, 2012-13 and 2013-14.
53.0 The Ld. CIT - DR relied upon the Assessment Order and
Order of the TPO, but could not distinguish the decision of the
Tribunal.
54.0.0 We have heard both the parties and perused the
material available on record. The Tribunal in A.Ys. 2010-11 and
2011-12 has held as under:
140 ITA No.9187/Del/2019
Hero Motocorp Ltd. vs. ACIT
“154) We have heard the rival contentions. We have already
discussed the aforesaid issue at length while disposing the
ground of appeal No. 31 to 31.2 supra, wherein we have dealt
with that head office is a separate cost centre and expenses
incurred thereat needs to be allocated to various profit
centers/manufacturing units on a rational and scientific basis,
without any element of profit/markup. The issue raised by the
assessing officer in the present ground of appeal is categorically
similar to that raised in the aforesaid ground. Accordingly
following our findings stated above, we reverse the action of the
assessing officer and delete the disallowance made under
section 80IC. Accordingly, the ground No. 33 of appeal is
allowed.”
54.0.1 Thus, the issue is squarely covered in favor of the
assessee by the order dated 24.10.2016 passed by the Tribunal for
immediately preceding assessment years, i.e. AY 2010-11 and AY
2011 -12, wherein identical disallowance made by the AO has been
deleted. The Tribunal, in coming to the aforesaid discussion,
reiterated that the head office is not a separate profit centre and,
therefore, no profit is to be separately attributed to such activity. It
further observed that, for the purpose of working out eligible
deduction under section 80-IC of the Act, actual expenses incurred
141 ITA No.9187/Del/2019
Hero Motocorp Ltd. vs. ACIT
at the head office are to be allocated between various profit centers
on a rational and scientific basis. We also find that the Tribunal
has, in the appeal for the assessment years 2009-10, 2012-13 and
2013-14, decided the issue in favor of the assessee company
following the aforesaid order passed for assessment years 2010-11
and 2011-12.
54.0.2 Therefore, Ground Nos. 18 to 18.6 are allowed in
favour of the assessee.
55.0.0 Ground Nos. 19 to 19.1 are relating to disallowance
u/s 80IC on account of other income amounting to 1.17 crores on
the ground that such incomes were not derived from the business of
manufacture of specified articles or things. During the relevant
previous year, the eligible unit at Haridwar earned the following
other incomes, which were credited in the Profit and Loss Account of
that unit:
142 ITA No.9187/Del/2019
Hero Motocorp Ltd. vs. ACIT
S.No Name /Type of Other Amount
Income (in Rs.)
1 Interest on loan given at 16,06,615
subsidized rates to the
employees
2 Interest on loan provided for
working capital support to 1,01,15,207
vendors
TOTAL
1,17,21,822
55.0.1 The Ld. AR submitted that in the return of
income, the assessee claimed deduction under section 80IC on the
aforesaid ‘other incomes’ since the said receipts had direct and
immediate nexus with the business of manufacturing and selling of
specific articles or things. The assessing officer, without considering
the nature of each of the aforesaid receipts, held that the aforesaid
incomes were not derived from the business of manufacturing of
articles or things and were, therefore, taxable under the head
“income from other sources”. Accordingly, the assessing officer
disallowed deduction under section 80IC by an amount of Rs
1,17,21,822/-.
143 ITA No.9187/Del/2019
Hero Motocorp Ltd. vs. ACIT
55.0.2 The Ld. AR submitted that similar disallowance
made by the assessing officer in preceding assessment years, i.e. AY
2010-11 and AY 2011-12 has been deleted by the Tribunal vide
consolidated order dated 24.10.2016. The Tribunal, after examining
the nature of the aforesaid incomes, held that other incomes in the
nature of Interest on loan to employees, interest on loan to vendors
for working capital support, freight recovery, sundry sales, cash
discounting from vendors and exchange fluctuation gain, etc. earned
by a unit eligible for deduction under Section 80IC of the Act shall
be considered as incidental to the activity of carrying out
manufacturing and were, thus, eligible for deduction under that
section. It was accordingly submitted that the aforesaid issue stands
squarely covered in favour of the assessee. It was further pointed
out by the Ld. AR that following the order of the Tribunal for AYs
2010-11 and 2011-12, the Tribunal has also decided the issue in
favour of the assessee in appellate orders passed for AYs 2009-10,
2012-13 and 2013-14.
144 ITA No.9187/Del/2019
Hero Motocorp Ltd. vs. ACIT
55.0.3 The Ld. CIT - DR relied upon the Assessment Order
and Order of the TPO, but could not distinguish the decision of the
Tribunal.
56.0.0 We have heard both the parties and perused the
material available on record. The Tribunal in A.Ys. 2010-11 and
2011-12 has held as under:
“158) We have heard the rival contentions. Our findings on the
various issues raised by the assessing officer are given in
seriatim hereunder:
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
145 ITA No.9187/Del/2019
Hero Motocorp Ltd. vs. ACIT
operations carried on by the eligible unit. The appellant is
engaged in the business of manufacturing two-wheelers and is
not engaged in the activity of giving loans and advances to earn
interest income. It is not the case of appellant or the assessing
officer that surplus funds were given to the employees to earn
interest income. The loans/advances to employees under
consideration was a measure of incentive / perquisites to the
employees involved in carrying on the business of
manufacturing. The source of such income is, thus, not the
activity of giving loan, but benefit extended to employees
engaged in the business. The first-degree nexus of such income,
in our view, is the eligible business carried on by the appellant.
Therefore, such income would be eligible for deduction u/s 80IC
of the Act. The action of the assessing officer on this account is
thus reversed.
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.
……………………………………………………………………….
Accordingly the action of the assessing officer on this ground is
reversed and we hold that assessee is eligible for deduction
146 ITA No.9187/Del/2019
Hero Motocorp Ltd. vs. ACIT
under section 80 IC of the income tax act on interest on loans
given at subsidized rates to the employees of Rs. 162975/–,
interest on loans provided for working capital support to vendors
Rs. 6626854/–, freight recovery from customer Rs.
935418395/–, sundry sales of Rs. 924103150/–, cash discount
received from the vendor is Rs.56732831/– and exchange
fluctuation of Rs. 24167060/–. In the result ground No. 34 of the
appeal of the assessee is partly allowed.”
56.0.1 Similar disallowance made by the assessing officer
in assessment years 2010-11 and 2011-12 has been deleted by the
Tribunal vide consolidated order dated 24.10.2016. The Tribunal,
after examining the nature of the aforesaid incomes, held that other
incomes in the nature of interest on loan to employees, interest on
loan to vendors for working capital support earned by a unit eligible
for deduction under Section 80IC of the Act shall be considered as
incidental to the activity of carrying out manufacturing and, thus,
eligible for deduction under that section. Accordingly, the aforesaid
issue stands squarely covered in favour of the assessee. We also
find that the Tribunal has in the appeal for the assessment years
2009-10, 2012-13 and 2013-14, decided the issue in favor of the
147 ITA No.9187/Del/2019
Hero Motocorp Ltd. vs. ACIT
assessee company following the aforesaid order passed for
assessment years 2010-11 and 2011-12.
56.0.2 Therefore, Ground Nos. 19 to 19.1 are allowed in
favour of the assessee.
57.0.0 Ground Nos. 20 to 20.3 relate to allowability of
weighted deduction of Rs.74,31,13,902/- under section 35(2AB) of
the Act with respect to scientific research and development expenses
incurred during the year. The Ld. AR submitted that the aforesaid
claim of weighted deduction has been disallowed in the assessment
order on the ground that the said claim was not raised by the
assessee in the return of income filed for the relevant year, which is
being disputed by the assessee. The Ld. AR submitted that the facts
relating to the aforesaid claim are as under:
1. That the assessee had set up a dedicated in-house research
and development (“R&D”) centre at 69 K.M., Stone, Delhi Jaipur
Highway, Dharuhera, Rewari, Haryana which was established in the
year 1987, purely for the purposes of research activities. Having
regard to substantial increase in R&D expenses, the assessee
applied for recognition of the said R&D centre before the Department
148 ITA No.9187/Del/2019
Hero Motocorp Ltd. vs. ACIT
of Scientific and Industrial Research (‘DSIR’) vide application dated
29.12.2014. The DSIR, after considering the application and
verifying the R&D activities carried on by the assessee in the past
and those proposed in future, granted recognition and registration
vide letter dated 18.03.2015 for the period from 26.02.2015 to
31.03.2017.
2. That subsequently, post receipt of the aforesaid
recognition/registration, the assessee vide application dated
30.03.2015 applied for obtaining approval from DSIR under section
35(2AB) in Form 3CK, which was granted to the assessee vide Form
3CM dated 17.07.2015 stating the period of approval as 26.02.2015
to 31.03.2017.
3. That on the basis of the aforesaid approval in Form 3CM, the
assessee claimed weighted deduction of Rs. 11,69,47,165/- under
section 35(2AB) with respect to R&D expenses (revenue and capital)
incurred at the centre after 26.02.2015 in the return form filed for
the relevant assessment year.
4. That it is the contention of the assessee that, while in the
return form only the undisputed claim of Rs.11,69,47,165/- was
149 ITA No.9187/Del/2019
Hero Motocorp Ltd. vs. ACIT
made, the additional claim for weighted deduction of Rs.
74,31,13,902/- with respect to R&D expenditure (both revenue and
capital) incurred at the centre during the period 01.04.2014 to
25.02.2015, was raised through note appended to the computation
of income, which should be deemed to have been filed alongwith the
return form for the relevant year. The copy of acknowledgement of
return of income alongwith computation of income for assessment
year 2015-16 was enclosed at page nos. 1-4 of PB.
5. That the note given in the computation of income appended
with the return of income, as reproduced in the assessment order
reads as under:
“During the relevant previous year, the assessee company’s in-
house R&D facility at Dharuhera, in the state of Haryana, was
approved by Department of Scientific & Industrial Research
(‘DSIR’) for the purposes of section 35(2AB) of the Act vide Form
3CM dated 17.07.2015. Although there is no requirement in
section 35(2AB) read with prescribed Form 3CM to state the
period of approval, the DSIR, however, stated the period of
approval as 26.02.2015 to 31.03.2017.
During the relevant year, the assessee company incurred
following expenses (both capital and revenue, other than land
and building,) at the aforesaid in-house R&D centre:
150 ITA No.9187/Del/2019
Hero Motocorp Ltd. vs. ACIT
01.04.14 to 26.02.15 to
Particulars 25.02.15 31.03.15 Total 2014-2015
A. Revenue Expenditure
Electricity 3,01,89,809 31,01,068 3,32,90,877
Cutting tools 53,64,864 2,45,096 56,09,960
Indirect tools 12,79,201 26,39,080 39,18,281
Salary - of technical employees 56,99,90,817 6,58, 63,200 63,58,54,017
Any other expenditure directly
related to R & D 3,55,59,632 1, 77,42,465 5,33,02,097
TOTAL – A 64,23,84,323 8,95,90,908 73,19,75,231
B. Capital Expenditure
Data Processing Equipment 2,11,680 20,58,000 22,69,680
Equipments 6,73,65,693 1,65,57,341 8,39,23,033
Office Equipments 8,65,904 - 8,65,904
Softwares 2,32, 17,580 83,04,475 3,15,22,055
Vehicles 90,68,722 4,36,441 95,05,163
TOTAL – B 10,07,29,579 2,73,56,257 12,80,85,836
GRAND TOTAL – A+B 74,31,13,902, 11,69,47,165 86,00,61,067
In view of the approval in Form 3CM granted from 26.02.2015 to
31.03.2017, the assessee has claimed weighted deduction
under section 35{2AB) for revenue and capital expenditure
incurred at in-house R&D centre after 26.02.2015 amounting to
Rs.11,69,47,165. The assessee was, however, legally advised
that, notwithstanding the period of approval stated in Form
151 ITA No.9187/Del/2019
Hero Motocorp Ltd. vs. ACIT
3CM, the company is eligible for weighted deduction of entire
expenses incurred at the approved R&D centre of Rs.
86,00,61,067, including the expenditure incurred during the
period from 01.04.2014 to 25.02.2015, as detailed above.
In view of the above, although in the return of income the
assessee has claimed weighted deduction @ 200% of
Rs.11,69,47,165 under section 35(2AB), the company, however,
through this note to the return of income/computation of income
is preferring the enlarged claim for weighted deduction @ 200%
of Rs.86,00,61,067 under section 35(2AB) with regard to entire
revenue and capital expenses incurred at the approved in-house
R&D centre during the year under consideration.”
6. That during the course of assessment proceedings, the
assessee vide reply dated 18.12.2018 justified the aforesaid
additional claim of deduction of Rs.74,31,13,902 incurred at
approved R&D facility prior to 26.02.2015, which was supported
with the following decisions, wherein it was held that weighted
deduction under section 35(2AB) is available to the centre approved
by DSIR dehors the date of recognition accorded in the approval:
• CIT v. Claris Lifesciences Ltd.: 326 ITR 251(Guj) - Special Leave
Petition (‘SLP’) filed by the Revenue against the aforesaid
decision of the Gujarat High Court was dismissed by the
152 ITA No.9187/Del/2019
Hero Motocorp Ltd. vs. ACIT
Supreme Court vide order 4.8.2009, bearing CC
No.10181/2009
• CIT vs Sandan Vikas India Ltd.: 335 ITR 117 (Del) – SLP
dismissed by the Supreme Court vide order 09.01.2012,
bearing CC No.21706/2011
• Maruti Suzuki India Ltd v. Union of India & Anr (397 ITR 728) -
The Special Leave Petition of the Revenue was dismissed by the
Hon’ble Supreme Court vide order dated 11.05.2018 in SLP No.
32458/2017.
• CIT vs. Wheels India Ltd.: 336 ITR 513 (Mad)
• Banco Products (India) Ltd. vs. DCIT (ITA No. 1057/2017)(Guj.)
• DCIT vs. International Tractors Ltd.: ITA No. 5817/ 6071 of
2010 (Del);
• ACIT vs Meco Instruments (P) Ltd.: ITA No. 4246/Mum/2009
(Mum.)
• DCIT vs. Famy Care Ltd: 67 SOT 85 (Mum)
• ACIT vs. Wockhardt Limited: ITA No.71/Mum/2007
7. That after considering that the aforesaid reply of the assessee,
the assessing officer accepted the aforesaid claim of the assessee in
principle, observing at para 22.3 of the final assessment order as
under:
153 ITA No.9187/Del/2019
Hero Motocorp Ltd. vs. ACIT
“22.3 The reply of the assessee has been considered and is
being discussed as under:-
On going through the claim of the assessee alongwith various
judicial precedence we have found force in assessee argument
that notwithstanding the period of approval stated in Form 3CM,
the company is eligible for weighted deduction of entire
expenses incurred at the approved R&D centre of Rs.
86,00,61,067, including the expenditure incurred during the
period from 01.04.2014 to 25.02.2015. However, since assessee
has not claimed deduction in its return of income, therefore
same cannot be allowed in assessment.”
8. That in view of the above, in the assessment order while the
assessing officer accepted the claim in principle, but denied the
same on the ground that the same was not made in the return form.
The aforesaid finding was also approved by the DRP, observing as
under:
“22.5 DRP Directions:
Having considered the submission of the assessee and the
AO's draft order (para
22), it is noted that the AO after considering the assessee's
submission noted that the assessee's argument for
additional weighted deduction of Rs. 86,00,61,067/- on
154 ITA No.9187/Del/2019
Hero Motocorp Ltd. vs. ACIT
account of expenditure of Rs. 74,31,13,902/- could not be
allow as the same has been claimed in the return of
income, notwithstanding the period of approval stated in
Form 3CM. It has also been noted by the AO that the R&D
facility at Dharuhera was approved by DSIR for the
purposes of Section 35(2AB) in Form 3CM dated 17-07-
2015 for the period 26-02-2015 to 31-03-2017. The
assessee claimed to have incurred expenditure of Rs. 74.31
crores from 01-04-2014 to 25-02-2015 and another Rs.
11.69 crores from 26.02-2015 to 31-03-2015. The assessee
claimed weighted deduction @200% of the entire amount of
Rs. 86.00 crores.
Having considered the submission of the -asses see, and
considering the fact that no deduction u/s 35(2AB) was
claimed in the return of income or by way of revised valid
return of income, AO has rightly rejected the claim.
Assessee's objection is rejected."
9. That the aforesaid findings have been challenged by the
assessee vide ground of appeal no. 20 to 20.3, contending that the
claim through note in the computation of income, should be
considered as raised in the return form.
57.0.1 It was argued by the Ld. AR that notes to computation
of income form an integral part of return of income and, therefore,
155 ITA No.9187/Del/2019
Hero Motocorp Ltd. vs. ACIT
any claim made in such notes is deemed to have been made in the
return of income itself. In the present case, the applicant, it is
submitted, claimed deduction of research and development expenses
to the extent of Rs.74,31,13,902/- by way of notes to the
computation of income, which formed integral part of the return of
income and therefore, was allowable under section 35(2AB) of the
Act. Reliance for the aforesaid was placed on the decision of the
Hon’ble Delhi High Court in the case of CIT vs. Nav Sansar Agro
Products: 392 ITR 399 and Hon’ble Punjab and Haryana High Court
in the case of Amritsar Transport Co. (P.) Ltd. vs. CIT: 272 ITR 403
wherein it was held that notes to the computation of income
attached with the return of income formed integral part of the return
form.
57.0.2 Analogy for the aforesaid proposition was also drawn
from the following cases wherein it has been held that notes to
accounts formed integral part of the accompanying financial
statements:
156 ITA No.9187/Del/2019
Hero Motocorp Ltd. vs. ACIT
• CIT vs. Sain Processing & Wvg. Mills (P) Ltd.: (2010) 325 ITR
565 (Del)
• CIT vs. Khaitan Chemicals & Fertilizers Ltd: 307 ITR 150
(Del)
• Kanoi Paper Industries Ltd. vs. CIT: ITA No. 298 of 2004
(Cal)
• K.K. Nag Ltd. vs. ACIT: 52 SOT 381(Pune)
• Hindustan Shipyard Ltd. vs. DCIT: 130 TTJ
213(Vishakhapatnam)
• Shivalik Venture (P.) Ltd. v DCIT: 173 TTJ 238 (Mum)
• B & B Infotech Ltd. v ITO: 155 ITD 1040 (Bang)
• J.K. Lakshmi Cement Ltd. vs. ACIT: ITA No. 1275/Kol/2010
(Kol)
57.0.3 The Ld. AR also our drew attention to Rule 12(2)
of the Rules which provides that return of income filed electronically
should not be accompanied by a statement showing the
computation of the tax payable or proof of tax
claimed/deducted/collected at source or advance tax. Thus,
computation of income was not required to be filed with the return
of income and, therefore, the same was to be furnished during the
course of assessment proceedings. Accordingly, under the scheme of
e-filing of return of income, all the accompanying documents
157 ITA No.9187/Del/2019
Hero Motocorp Ltd. vs. ACIT
including computation are deemed to be filed at the time of filing of
return of income itself. The Ld. AR pointed that, section 139(9)
provides that if the return of income is not accompanied by
computation of income, Tax Audit Report, etc., the same would be
considered as a defective return. Accordingly, it was argued that, in
the e-filing scheme, by virtue of the specific embargo to not file these
documents, they are to be deemed as filed along with the return of
income, if the same are furnished subsequently. It was submitted
that in the present case, since these documents were filed after
receiving the notice, computation of income is to be deemed to be
filed along with return of income and notes therein are to be read as
integral part of the return of income. It was submitted that the
assessee was to be considered as having made the impugned claim
of weighted deduction under section 35(2AB) of the Act in the return
of income itself and non-grant of claim by the assessing officer was
completely erroneous in law, which deserves to be reversed and
claim ought to be allowed.
57.0.4 Without prejudice to the above, the Ld. AR also made
additional submissions, that if notes to computation of income were
158 ITA No.9187/Del/2019
Hero Motocorp Ltd. vs. ACIT
not to be considered as forming part of the Return, even then since
all the facts relating to the aforesaid claim were before the AO, which
were accepted at Para 22.3 of the assessment order, the impugned
claim was not a completely new claim, but revision/modification of
the existing claim already taken in the return form, for which the AO
was under a bounden duty to allow while passing the assessment
order as per mandate contained in Article 265 of the Constitution.
Reliance in this regard was placed on the following decisions:
Chokshi Metal Refinery vs. CIT: 107 ITR 63 (Guj)
CIT vs. Geo Industries and Insecticides (I) Pvt Ltd: 234 ITR 541
(Mad)
Subhash Chandra Sarvesh Kumar v. CIT: 132 ITR 619 (All.)
CIT v Simon Carves Ltd.: 105 ITR 212 (SC)
Anchor Pressings (P) Ltd. vs. CIT and Ors.: 161 ITR 159 (SC)
CIT v Bharat General Reinsurance: 81 ITR 303 (Del)
CIT vs. Hiranand: 136 Taxman 66 (Raj)
CIT v. Ahmedabad Keiser-e-Hind Mills Co. Ltd.: 128 ITR 486 (Guj.)
CIT v Archana R. Dhanwatay: 136 ITR 355 (Bom.)
Sneh Lata Jain vs. CIT: 140 Taxman 156 (J&K)
PCIT v. Oracle (OFSS) BPO Services Ltd.:[2019] 102 taxmann.com
396 (Del.)
CIT v. Bharat Aluminium Co Ltd: 303 ITR 256 (Del)
CIT v. Ramco International : 332 ITR 306 (P&H)
159 ITA No.9187/Del/2019
Hero Motocorp Ltd. vs. ACIT
Raghavan Nair vs. ACIT: 304 CTR 96 (Ker)
JCIT v. Hero Honda Finlease Ltd.: 115 TTJ 752 (Third Member).
SNC-Lavalin Acres Inc.: 110 TTJ 13 (Del ITAT)
ACIT v. Pushpons International in ITA No. 814/Del/1998 (Del ITAT)
Mit Mohan Singh Kahlon v. DCIT: 61 SOT 93 (URO)/ ITA No.
57/Chd/2012. (Chd. ITAT)
Emerson Net Work Power India (P) Ltd. v. ACIT 2009122 TTJ 67
(Mum ITAT)
Aishwarya Rai: ITA No. 1159/Mum/04 (ITAT Mum)
Ogilvy and Mather (P) Ltd. v. Addl. CIT: ITA No. 925/Mum/2009
(ITAT Mum)
DCIT v. Tata Asset Management Ltd.: ITA No. 4665/Mum/2010
(ITAT Mum)
57.0.5 In view of the above, the Ld. AR argued that the action
of the AO in not allowing the claim needs to be reversed and the AO
needs to be directed to allow the said claim.
57.0.6 Without prejudice to the above, the assessee has also
raised additional ground of appeal vide Ground No.21, to contend
that if the action of the AO is held to be correct, then the Tribunal is
empowered to admit and allow the same as an additional ground of
appeal, in view of plenary power vested in the Tribunal, as per the
decision of the Hon’ble Supreme Court in the case of National
160 ITA No.9187/Del/2019
Hero Motocorp Ltd. vs. ACIT
Thermal Power Company: 229 ITR 383 (SC). The Ld. AR also made
submissions in support of the aforesaid ground of appeal.
58.0 The Ld. CIT - DR refuted the aforesaid submissions
made by the assessee and supported the assessment order. It was
argued that the claim made by way of note in the computation of
income cannot be considered as a claim made in the return of
income, since the tax liability is computed and discharged as per the
claim made in the return form and not on the basis of notes in the
computation of income. The Ld. CIT - DR also relied upon the
decision of the Hon’ble Supreme Court in the case of Goetze (India)
Ltd. v. CIT: 284 ITR 323, wherein it was held that the AO is not
bound to entertain a claim made by the assessee otherwise than
through return of income filed under section 139(1) or revised return
of income under section 139(5) of the Act. The Ld. CIT (DR) also
referred to the provisions of section 80A (5) of the Act which barred
the assessee to raise additional claim otherwise than through that
taken in the return of income. As regards the additional ground of
appeal, the Ld. CIT (DR) argued that when the AO was not
161 ITA No.9187/Del/2019
Hero Motocorp Ltd. vs. ACIT
empowered to allow the claim, the Tribunal cannot indirectly allow
the claim through additional ground of appeal.
59.0 In the rejoinder, the Ld. AR pointed out that the
decision of the Hon’ble Supreme Court in the case of Goetze (India)
Ltd. (supra) relied upon by the Ld. CIT - DR was not applicable to
the facts of the present case since the same was applicable to a
situation where a claim was not made in the return of income at all
and was raised for the first time during the course of assessment
proceedings, whereas the plea of the assessee herein is that, the
impugned claim was raised in the return of income, albeit through
notes in the computation of income, which constituted integral part
of return of income. It was argued that even otherwise the aforesaid
decision only bars completely new/fresh claim and not modification
/enlargement of an existing claim already made in the return form.
Thus, on both the aforesaid accounts, it was argued that the
decision of the Hon’ble Supreme Court in the case of Goetze India
supra was not applicable to facts of assessee’s case. As regards
section 80A (5) referred by the Ld. CIT - DR, it was argued that the
same shall not applicable to the claim of deduction under section 35
162 ITA No.9187/Del/2019
Hero Motocorp Ltd. vs. ACIT
(2AB) and had restricted scope of specific sections mentioned
therein. As regards the power of the Tribunal to entertain the
additional ground of appeal, the Ld. Counsel argued that the
decision of the Hon’ble Supreme Court in the case of Goetze India
(supra) only prohibited power of the AO to entertain a new claim and
there was a specific finding in that decision, that the said embargo
does not impinge upon the power of the Tribunal to entertain an
additional ground as laid down by the Hon’ble Supreme Court in the
case of NTPC (supra). For the aforesaid proposition the Ld. Counsel
also relied upon the decision of the Hon’ble Delhi High Court in the
case of CIT vs. Jai Parabolic Springs Ltd: 306 ITR 42 and the
decision of the Special Bench of Tribunal in the case of Allcargo
Global Logistics Ltd vs. DCIT: 137 ITD 26.
60.0.0 We have heard both the parties and have perused
the material available on record. We find that the entire facts
relating to the aforesaid claim were before the AO and after
examining the same, the AO did not dispute the allowability of claim
on merits. The sole issue raised by both the AO and the Ld. DRP is
that the said claim is not allowable, since the same was not raised in
163 ITA No.9187/Del/2019
Hero Motocorp Ltd. vs. ACIT
the return form whereas the contention of the assessee is that a
claim through note in the computation of income forms integral part
of return form and, therefore, the same should have been
entertained and allowed by the AO. We find that the return of
income in the present case was filed through electronic/digital
mode. Prior to the shifting of practice of filing the return of income to
the electronic mode, it was an accepted practice that the return form
be accompanied by various supporting documents like accounts,
challans, tax audit report etc. including computation of income. In
that regime, it was an accepted position that notes given in the
computation of income was to be read as forming integral part of the
return of income. The support for the aforesaid accepted position
can be drawn from the following decisions brought to our notice by
the assessee:
(1) In the case of CIT vs. Nav Sansar Agro Products: 392 ITR 399
(Delhi), the Hon’ble Delhi High Court held that notes in the
computation of income formed part of the return of income. The
relevant observations of the Court are as under:
“This Court has considered the submissions. The note appended
to the computation of income file along with the return by the
assessee in this case clearly stated that interest and legal
164 ITA No.9187/Del/2019
Hero Motocorp Ltd. vs. ACIT
charges were excluded on the basis of the Income Tax
Department's stand in other group cases that they could be
included in the case of land and were done by way of "abundant
caution" as a disallowance.”
(2) Similarly, the Hon’ble Punjab and Haryana High Court in the
case of Amritsar Transport Co. (P.) Ltd. vs. CIT: 272 ITR 403, while
dealing with the issue of jurisdiction of assessing officer under
section 154 of the Act, held that notes forming part of computation
of income formed integral of the return of income and any oversight
thereof while framing assessment is rectifiable under section 154 of
the Act. The relevant observations of the Court are as under:
“5. After hearing the counsel for the parties and having perused
the orders of the authorities below, we are satisfied that it is a
clear case of mistake apparent from the record which could have
been rectified under section 154 of the Act. The assessee itself in
the computation of income had given the note requesting the
Assessing Officer to consider the payment of interest under
section 244(1A) of the Act which appears to have escaped the
notice of the Assessing Officer when he framed the original
assessment. In view of this matter, there is possibly no question
of this issue being termed as debatable.”
165 ITA No.9187/Del/2019
Hero Motocorp Ltd. vs. ACIT
60.0.1 On shifting of the regime of filing the return form from
physical mode to electronic mode, Rule 12(2) specifically bars an
assessee to file any document along with the return of income. Such
documents are to be filed after receiving the notice under section
143(2)/142(1) selecting the return for scrutiny. The corollary of the
aforesaid procedure is that the accompanying documents are
deemed to have been filed along with the electronic return of income.
If that was not to be the case, then the return of income would have
been treated as a defective return under section 139(9) of the Act.
Accordingly, when the assessee receives notice for assessment and
is asked to file the documents in support of the return of income
including computation of income, such documents and computation
of income are deemed to have been filed at the time of filing the
original return of income, rendering the original return to be a valid
return and not a defective return under section 139(9) of the Act. In
view of the same, computation of income is deemed to be filed along
with return of income and notes of such computation of income as
per the undisputed practice and ratio laid down by the aforesaid
decisions are to be deemed as forming integral part of the return of
166 ITA No.9187/Del/2019
Hero Motocorp Ltd. vs. ACIT
income, which are required to be considered by the assessing officer,
while completing the assessment of an assessee.
60.0.2 In view of the aforesaid legal position, on the facts of
the present case, especially considering that the AO after examining
the facts and legal position with respect to the impugned weighted
claim of deduction under section 35(2AB), did not dispute the same
on merits, erred in not granting the benefit to the assessee merely
on the ground that the same was made through note to computation
of income and not in the return form. Accordingly, we reverse the
action of the AO and direct him to allow the weighted deduction to
the assessee. Considering that, we have allowed the claim on the
principal contention raised by the assessee, alternate contentions as
well as the additional ground of appeal are rendered academic in
nature.
60.0.3 We, therefore, allow ground of appeal No. 20 to 20.3
and dismiss ground of appeal No.21 as being academic in nature.
61.0.0 The assessee has also raised the following by way of
additional ground of appeal:
“1. That on the facts and circumstances of the case,
depreciation @ 25% on leasehold rights acquired in lands at
167 ITA No.9187/Del/2019
Hero Motocorp Ltd. vs. ACIT
Haridwar (Rs.9,79,51,067) and Neemrana (Rs.3,27,49,678),
aggregating to Rs.12,42,62,467/- be allowed under section
32(1)(ii) of the Act in accordance with the orders passed by the
Hon’ble Tribunal for earlier assessment years viz., AYs 2009-10
to 2011-12 and 2013-14.”
61.0.1 In relation to the aforesaid additional ground, the Ld.
AR submitted that the assessee had taken certain lands on lease for
the purposes of constructing factory (ies) and carrying on business
operations thereon. The land at Haridwar was purchased in the
earlier year on payment of premium. From the assessment year
2009-10 i.e., the year in which commercial production begun on
factory constructed on said land, the assesse claimed deduction for
the proportionate amount of premium paid for acquiring lease as
amortised revenue expenditure. It was further submitted that in
assessment years 2010-11 and 2011-12 the assessing officer
disallowed the aforesaid claim holding the premium paid to be
capital expenditure. On further appeal, the Tribunal (ITAT) upheld
the aforesaid action of the AO, but accepted alternate plea of the
assessee that the aforesaid premium paid resulted in acquisition of
an intangible asset in nature of a ‘business or commercial rights’,
168 ITA No.9187/Del/2019
Hero Motocorp Ltd. vs. ACIT
which is eligible for depreciation under section 32(1)(ii) of the Act. It
was further submitted that following the aforesaid order of the
Tribunal, the consequential claim of depreciation was allowed by the
Ld. DRP/ITAT in the assessment year 2009-10 and 2013-14.
61.0.2 The Ld. AR submitted that in the impugned
assessment order, the assessee inadvertently forgot to raise the
claim in the return of income or in the course of assessment
proceedings and has, therefore, raised the consequential claim by
way of additional ground of appeal. Apart from the claim of
depreciation on the premium paid on land at Haridwar in the earlier
year, it is stated that during the relevant year the assessee had paid
additional premium for land taken on lease at Neemrana for a period
of ninety nine years from RICCO.
61.0.3 The Ld. AR drew our attention to the facts relating
to the aforesaid land at Neemrana, as stated in the application for
additional ground of appeal. They are reproduced hereunder:
“The assessee was, vide allotment letter
dated 06.07.2005 allotted land at Neemrana by Rajasthan
State Industrial Development and Investment Corporation Ltd.
169 ITA No.9187/Del/2019
Hero Motocorp Ltd. vs. ACIT
(RICCO) on lease for a period of 99 years. The aforesaid lease
was granted on payment of premium cum development charges
of Rs. 12,34,50,000/-. The total amount capitalized in the books
of accounts was Rs. 13,09,98,710/- which included premium
cum development charges, security deposit, registration and
stamp duty and other miscellaneous charges. In addition, the
assessee was also required to pay annual rent of Rs.19,735 (Rs.
237 per acre per annum). The industrial unit at Neemrana began
commercial production on 25.06.14. The assessee submits that
akin to the legal position of leasehold rights in respect of land at
Haridwar, the leasehold right in the land at Neemrana acquired
on payment of premium cum development charges is covered
within the meaning of ‘business or commercial right’ eligible for
depreciation under section 32(1)(ii) of the Act. In the return of
income filed for the relevant assessment year, the assessee,
however, inadvertently, did not claim depreciation of
Rs.3,27,49,678 on the aforesaid amount of
premium/development charges paid for acquiring leasehold
rights in the said land.”
61.0.4 In support of the aforesaid ground of appeal, the Ld. AR
explained the facts and relied upon the finding of the Tribunal, in
the order for AY 2010-11 and 2011-12.
170 ITA No.9187/Del/2019
Hero Motocorp Ltd. vs. ACIT
62.0 The Ld. CIT (DR) pointed that the Department has not
accepted the aforesaid order has challenged the same in further
appeal before the High Court.
63.0.0 We have heard both the parties and have perused the
material available on record. Though this claim was not made before
the lower authorities, we find that the additional ground raised by
the assessee raises a pure question of law, facts for the same are on
record. We accordingly admit the additional ground of appeal raised
by the assessee following the decision of the Hon’ble Supreme Court
in the case of National Thermal Power Co Ltd vs CIT: 229 ITR 383
(SC).
63.0.1 We also find that the issue on merits is squarely
covered in favour of the assessee by the order dated 24.10.2016
passed by Tribunal in the preceding assessment years, i.e. AY 2010-
11 and AY 2011-12 wherein the Tribunal held that lease premium
charges were not allowable revenue deduction. However, the
Tribunal allowed the alternate plea raised by the assessee company
and held the premium paid for acquisition of leasehold rights to be
171 ITA No.9187/Del/2019
Hero Motocorp Ltd. vs. ACIT
an intangible asset, independent from the land itself, eligible for
depreciation under Section 32(1)(ii) of the Act.
63.0.2 Accordingly, we hold that the assessee is eligible for
depreciation at 25% on lease hold rights acquired in Haridwar and
Neemrana. As regards the land at Haridwar, the AO is directed to
allow the claim of depreciation as per opening WDV carry forward
from the earlier years. In so far as the depreciation of land at
Neemrana is concerned the same shall be allowed after verification
of the relevant payments claimed to have been made by the
assessee.
64.0 In the final result, the appeal of the assessee is partly
allowed.
Order pronounced on 13/04/2021
Sd/- Sd/-
(O.P. KANT) (SUDHANSHU SRIVASTAVA)
ACCOUNTANT MEMBER
Dated: 13/04/2021 JUDICIAL MEMBER
*Dragon
Copy forwarded to:
1. Appellant
2. Respondent
3. CIT
172 ITA No.9187/Del/2019
Hero Motocorp Ltd. vs. ACIT
4. CIT(Appeals)
5. DR: ITAT
ASSISTANT REGISTRAR
ITAT NEW DELHI
|
