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Maruti Suzuki India Ltd., Plot No.1, Nelson Mandela Road, Vasant Kunj, New Delhi. Vs. Addl. CIT, Range-6, CR Building, New Delhi.
August, 25th 2015
        IN THE INCOME TAX APPELLATE TRIBUNAL
             DELHI BENCHES : I-1 : NEW DELHI

 BEFORE SHRI R.S. SYAL, AM AND SHRI A.T. VARKEY, JM

                     ITA No.5120/Del/2010
                    Assessment Year : 2006-07

                     ITA No.2441/Del/2012
                    Assessment Year : 2006-07

Maruti Suzuki India Ltd.,       Vs. Addl. CIT,
Plot No.1, Nelson Mandela           Range-6,
Road,                               CR Building,
Vasant Kunj,                        New Delhi.
New Delhi.

PAN: AAACM0829Q

  (Appellant)                           (Respondent)


           Assessee By      :    Shri Ajay Vohra, Sr. Advocate;
                                 Shri Neeraj Jain & Shri Rohit Jain,
                                 Advocates; & Ms Tejasvi Jain, Shri
                                 Ramit Katyal, Shri Puneet Chugh,
                                 CAs.
           Department By    :    Shri Amrinder Kumar, CIT, DR.

        Date of Hearing             :   20.08.2015
        Date of Pronouncement       :   24.08.2015
                                                          ITA No.5120/Del/2010
                                                          ITA No.2441/Del/2012

                                 ORDER
PER R.S. SYAL, AM:
     The assessee has filed two appeals for the assessment year 2006-

07. First is the main appeal directed against the final order passed by the

Assessing Officer (AO) on 20.10.2010 under section 143(3) read with

section 144C of the Income-tax Act, 1961 (hereinafter also called `the

Act'). Second appeal, having only one issue, is against the order of the

AO passed u/s 154 read with sections 92CA(5)/143(3) of the Act on

12.4.2012, pursuant to the suo motu rectification proceedings taken up

by the Transfer Pricing Officer (TPO).

2.   Ground nos. 1 and 2 are general, which do not require any specific

adjudication.

A. DISALLOWANCES U/S 43B

3.   Ground no. 3 deals with disallowances made u/s 43B in respect of

certain items of excise duty and customs duty.




                                     2
                                                         ITA No.5120/Del/2010
                                                         ITA No.2441/Del/2012

I. Excise duty

4.1.    Firstly, we shall deal with all the items of excise duty

disallowances. The first amount of disallowance of excise duty is

Rs.30,75,821/-, being, the amount of excise duty paid on vehicles and

spare parts under PLA (Personal Ledger Account). The assessee paid

certain sum under PLA which is nothing, but, excise duty paid in-

account as advance, to be adjusted against actual excise duty required to

be paid at the time of removal of goods from bonded warehouse. At the

end of the year, there were three balances in PLA, consisting of

Rs.2,32,113/- towards excise duty on vehicles, Rs.7,29,595/- towards

R&D cess on vehicles and Rs.21,14,113/- towards excise duty on spare

parts. The assessee claimed deduction for these amounts u/s 43B on the

ground that these stood paid before the close of the financial year

relevant to the assessment year under consideration. The AO, following

his view taken in earlier years, refused to allow this deduction. The

assessee is aggrieved against such disallowance. It has been admitted on




                                    3
                                                           ITA No.5120/Del/2010
                                                           ITA No.2441/Del/2012

behalf of the Revenue that similar issue has been decided by the tribunal

in earlier years in favour of the assessee.

4.2. The next amount of disallowance of excise duty is the balance of

Rs.48,53,55,419/- at the end of the year in RG 23A Part II account. This

amount represents excise duty paid on raw material and inputs

purchased by the assessee for use in the manufacture of automobiles.

Under the central excise law, a manufacturer is entitled to claim Modvat

credit in respect of the amount of central excise duty paid on raw

material and inputs purchased for manufacture of excisable goods. The

amount in dispute is Modvat credit unutilized at the end of the year. The

assessee treated it as payment of tax and claimed deduction u/s 43B of

the Act. The AO refused to allow this deduction. It has been admitted

by both the sides that the tribunal in earlier years, following the dictum

of Special bench in Glaxo Smithkline Consumer Healthcare Ltd., (2007)

107 ITD 343 (SB) (Chd.), has decided this issue in favour of the

Revenue. The assessee is aggrieved against the addition.




                                      4
                                                           ITA No.5120/Del/2010
                                                           ITA No.2441/Del/2012

4.3. The last amount of disallowance of excise duty is Rs.45,00,000,

which was paid by the assessee under protest pursuant to additional

demand raised by the competent authority. Though the assessee disputed

such additional demand, but ended up paying the same under protest and

claimed a deduction for the same. The AO disallowed it on the ground

that the same was being contested and there was no finality regarding

the liability and further, such amount was not debited to the

Manufacturing, Trading, Profit and loss account (hereinafter called

`Profit and loss account' for convenience). The assessee is aggrieved

against such disallowance. It has been admitted by the Revenue that

similar issue has been decided by the tribunal in earlier years in favour

of the assessee.

4.4. We have heard the rival submissions and perused the relevant

material on record qua the above items of disallowances of excise duty.

The assessee claimed deduction for these sums u/s 43B, which the AO

refused to allow. In order to evaluate the rival submissions, it would be

apposite to note the relevant parts of section 43B, as under : -


                                     5
                                                                         ITA No.5120/Del/2010
                                                                         ITA No.2441/Del/2012

       `43B. Notwithstanding anything contained in any other provision of this Act, a
       deduction otherwise allowable under this Act in respect of--

       (a) any sum payable by the assessee by way of tax, duty, cess or fee, by
       whatever name called, under any law for the time being in force, or

       (b) to (f) ..............

       shall be allowed (irrespective of the previous year in which the liability to pay
       such sum was incurred by the assessee according to the method of accounting
       regularly employed by him) only in computing the income referred to in
       section 28 of that previous year in which such sum is actually paid by him :
       ......'.


4.5.         A perusal of the relevant parts of the above provision transpires

that it has the following essential elements in so far as the deduction on

account of excise duty is concerned : -


       i.       Deduction is permissible in respect any sum payable under

                any law for the time being in force by the assessee by way of

                tax, duty, cess or fee, etc.

       ii.      Deduction of tax or duty etc. is to be allowed only in

                computing the business income of that previous year in which

                such sum is actually paid by the assessee.




                                               6
                                                        ITA No.5120/Del/2010
                                                        ITA No.2441/Del/2012

iii.   Deduction is permissible in the year of payment irrespective of

       the incurring of liability in any previous year as per the

       method of accounting regularly employed by the assessee.

iv.    Deduction is allowable `only' once and that too in the year of

       payment. It cannot be allowed twice, that is, firstly in the year

       of incurring liability as per the method of accounting followed

       and if the date of payment is different from the year of

       incurring liability, then again in the year of payment. The use

       of the words `irrespective of the previous year in which the

       liability to pay such sum was incurred by the assessee

       according to the method of accounting regularly employed by

       him' before the word `only', leaves nothing to doubt that the

       deduction is permissible in the computation of income of the

       previous year in which such sum is actually paid by the

       assessee. If an amount of tax or duty is paid in the first year as

       advance for which specific liability is incurred in the second

       year, then deduction is to be allowed only in the first year.


                                  7
                                                           ITA No.5120/Del/2010
                                                           ITA No.2441/Del/2012

          Deduction, if any, getting claimed at the time of incurring of

          liability in the second year as per the method of accounting

          followed by the assessee, would require reversal.

    v.    Deduction of tax or duty etc. in the year of payment is

          permissible only if the same is otherwise allowable under the

          Act. In other words, if deduction for tax or duty etc. is

          otherwise not permissible, then section 43B cannot intervene

          to allow deduction at the time of payment of such otherwise

          non-deductible amount.

    vi.   Section 43B contains a non-obstante provision qua any other

          provision of the Act. It means it has an overriding effect over

          all other provisions of the Act. Further, the non-obstante

          clause used in the beginning of the provision is qua the year of

          deductibility and not the otherwise eligibility for deduction.

4.6. When a manufacturer pays excise duty on the goods manufactured

by it, the same forms a part of the cost of goods. When the goods are

sold, the manufacturer, charges excise duty separately in the invoice


                                     8
                                                           ITA No.5120/Del/2010
                                                           ITA No.2441/Del/2012

apart from the sale price of goods etc. To put it simply, excise duty at the

time of payment is otherwise deductible and its charging at the time of

sale, is liable to tax. Without interference of section 43B of the Act, an

assessee following mercantile system of accounting could claim

deduction for excise duty etc. at the time of incurring of its liability,

even without making actual payment. Now with the insertion of section

43B, an assessee can get deduction of excise duty only in the year of

payment and not with the mere incurring of liability without payment.

Thus, it is clear that if excise duty is paid in the year of incurring

liability itself, then deduction is allowed in such year. If, some part of

the excise duty for which liability has been incurred is not paid for one

reason or the other before the close of the year etc., then the paid part

gets deduction in the year of incurring of the liability but the unpaid part

becomes eligible for deduction in the later coinciding with the actual

payment. Whereas, in the first instance, full deduction is allowable in

year one itself, in the second instance, part of the amount not allowed in

the first year becomes eligible for deduction in the second year at the


                                     9
                                                          ITA No.5120/Del/2010
                                                          ITA No.2441/Del/2012

time of payment. There can be a converse situation as well in which

excise duty is paid in advance, though a specific liability is incurred

later. A manufacturer is sometimes obliged to deposit excise duty in

advance without availing its actual utilization. In such circumstances, the

obligation to pay such amount under the respective excise rules will

bring the case within the otherwise deductibility provision and the event

of actual payment will grant deduction in the year of payment

notwithstanding the fact that the goods have not yet been lifted from the

bonded warehouse at the end of the year. In such a case, section 43B

requires granting of deduction at the time of payment matching with the

incurring of general liability. However, the granting of deduction in the

year of payment in respect of goods not lifted till the end of the year,

simultaneously requires preventing the grant of deduction once again at

the time of removal of goods in the subsequent year on incurring of

specific liability. In such a situation, there arises a need to accordingly

increase the income of the subsequent year with the amount of deduction




                                    10
                                                              ITA No.5120/Del/2010
                                                              ITA No.2441/Del/2012

allowed in the preceding year, which once again gets claimed as

deduction on the event of incurring the specific liability.

4.7.   The ld. AR candidly admitted that the assessee has followed

`Inclusive method' of accounting for goods sold in domestic market and

`Exclusive method' for the goods exported. Whereas, under the

`Exclusive method', Purchases, Sales and Inventories (both opening and

closing) are taken without the effect of tax or duty etc., Purchases, Sales

and Inventories (both opening and closing) are taken inclusive of tax or

duty etc. under the `Inclusive method'. As the assessee has also followed

`Exclusive method', we shall firstly proceed to evaluate the points under

consideration as per the `Exclusive method'. Under this method, the

amount of tax or duty etc. paid does not does not get included in the

figures of purchase, sale and inventories, as these are recorded without

considering their effect. We have noticed above that section 43B

mandates that deduction of tax or duty etc. is to be allowed in the year of

payment.




                                     11
                                                         ITA No.5120/Del/2010
                                                         ITA No.2441/Del/2012

4.8.   We espouse the first item, being the amount deposited by the

assessee in PLA. This is the amount paid in-account by the assessee in

PLA which remained unutilized at the end of the year. It is in the nature

of advance payment of excise duty to be adjusted against the removal of

goods from bonded warehouse at a later point of time in subsequent

year. Normally, at the time of payment of excise duty, the amount goes

to the PLA, which is an item of asset appearing in the balance sheet.

When goods are removed from bonded warehouse, a corresponding sum

of excise duty is taken away from PLA and is carried to Profit and Loss

account as Excise duty. This can be understood with the help of an

illustration. Suppose an assessee pays a sum of Rs.10/- in PLA out of

which a sum of Rs.9/- is adjusted during the year against the excise duty

payable on the removal of goods from bonded warehouse.             Further

suppose that goods corresponding to the excise duty of Rs. 7 are sold

during the year and goods corresponding to the excise duty of Rs.2 are

still in stock. In such a situation, when the assessee originally pays

Rs.10/-, he will debit PLA and credit bank account with Rs.10/-. During


                                   12
                                                          ITA No.5120/Del/2010
                                                          ITA No.2441/Del/2012

the course of the year when excise duty of Rs.9/- is adjusted against the

advance paid under PLA, Excise duty account will be debited and PLA

credited with a sum of Rs.9/-. Amount of excise duty of Rs.9 debited in

the books of account will ultimately find its place in the Profit and Loss

account and become eligible for deduction, on which there is no dispute.

The assessee on sale of goods with corresponding excise duty of Rs.7,

out of total utilized to the tune of Rs.9, will show income of Rs.7 as part

of sales. In this way, the assessee gets deduction for Rs. 9 and shows

income of Rs.7 towards excise duty.      Thus it is seen that out of total

Rs.10 paid by the assessee in PLA, he has claimed deduction of Rs.9.

The controversy before us is w.r.t. to the unutilized amount in PLA at

the end of the year, being equivalent of Re.1/- in our example, which

was actually paid but could not be debited to the Excise duty account

and hence not going to the debit side of the Profit and loss account. The

assessee wants deduction for this amount as well. In our considered

opinion, the character of this amount in terms of section 43B is no

different from Rs.2 in our example, being the amount of excise duty on


                                    13
                                                          ITA No.5120/Del/2010
                                                          ITA No.2441/Del/2012

goods in stock. As section 43B requires deduction of tax and duty etc. at

the time of payment, naturally, this sum of Re.1 will also require

deduction as it has been paid during the year in question. In our

considered opinion, there can be no hindrance in allowing deduction of

Re.1 as per the mandate of section 43B. Concurrently, it is significant to

note that this unutilized amount of Re.1 appearing in balance sheet at the

end of the year would be actually utilized in the next year on the

removal of goods from the bonded warehouse. At that time, the assessee

will debit Excise duty and credit PLA account with Re.1. Such debit of

Re.1 in the excise duty account in the next year will eventually go to the

Profit and loss account and get deducted.. We have noticed above that

deduction for tax and duty etc. is allowable only once and not twice.

Since deduction of Re.1 got granted in the year of making payment u/s

43B, this would require add back in the computation of income of later

year on its utilization and getting debited to Profit and loss account

through Excise duty account. Similar will be position for the last year's

balance in PLA claimed as deduction u/s 43B, but adjusted against the


                                    14
                                                           ITA No.5120/Del/2010
                                                           ITA No.2441/Del/2012

goods manufactured in the current year. Such amount of deduction

allowed u/s 43B in the preceding year on account of unutilized PAL at

the end of the year, requires to be separately offered for taxation in the

current year. When this legal consequence of allowing deduction u/s

43B at the time of payment was confronted to the ld. AR, he stated that

the assessee has voluntarily added back the suitable amounts in the

computation of income of the current/subsequent years. He was fair

enough to accept that a suitable direction may be given by the Bench to

the AO for verification of this aspect of the matter, if needed.

4.9. It is further noticed that a Special Bench of the Tribunal in the case

of DCIT vs. Glaxo Smithkline Consumer Healthcare Ltd., (2007) 107

ITD 343 (SB) (Chd.), has held that the excess amount of excise duty

reflected in the account-current is nothing but actual payment of excise

duty even though mentioned as advance payment and, hence, allowable

as deduction u/s 43B of the Act in the year of payment. The Special

bench further clarified that the allowing of deduction on payment basis

should not result in double deduction under any circumstance. The


                                     15
                                                                 ITA No.5120/Del/2010
                                                                 ITA No.2441/Del/2012

tribunal in assessee's own case has also allowed deduction in the earlier

years on account of unutilized PLA at the end of the year. In view of the

above discussion, while we hold that the above referred sum of

unutilized amount in PLA at the end of the year u/s 43B under

`Exclusive method' qualifies for deduction, we also hold that this

amount cannot be allowed deduction once again in the immediately

succeeding year and also the similar amount allowed as deduction in the

preceding year u/s 43B requires to be included in the computation of

income of the current year.

4.10.       Having discussed the above position under the `Exclusive

method', which the assessee is following in respect of goods meant for

exports, let us see, if the adoption of `Exclusive method' is in

accordance with law? In this regard, it is noticed that the legislature

inserted section 145A by the Finance (No.2) Act, 1998 w.e.f. 1.4.199,

the relevant part of which reads as under : -


        "145A. Notwithstanding anything to the contrary contained in section
        145, the valuation of purchase and sale of goods and inventory for the
        purposes of determining the income chargeable under the head "Profits
        and gains of business or profession" shall be--
                                         16
                                                                   ITA No.5120/Del/2010
                                                                   ITA No.2441/Del/2012

         (a) in accordance with the method of accounting regularly employed
            by the assessee; and

         (b) further adjusted to include the amount of any tax, duty, cess or fee
            (by whatever name called) actually paid or incurred by the
            assessee to bring the goods to the place of its location and
            condition as on the date of valuation.

        Explanation.--For the purposes of this section, any tax, duty, cess or
        fee (by whatever name called) under any law for the time being in
        force, shall include all such payment notwithstanding any right arising
        as a consequence to such payment;"


4.11.     The above provision provides that notwithstanding anything to

the contrary contained in section 145, valuation of purchase and sale of

goods and inventory for the purposes of determining the income

chargeable under the head "Profits and gains of business or profession"

shall be      in accordance with the method of accounting regularly

employed by the assessee and further adjusted to include the amount of

any tax or duty etc. actually paid or incurred by the assessee to bring the

goods to the place of its location and condition as on the date of

valuation. Thus it is manifest that the command of section 145A is to

value purchase, sale and inventories with the element of tax or duty etc,

which is called `Inclusive method'. With the insertion of section 145A

w.e.f. assessment year 1999-2000, the hitherto optionally permissible
                                          17
                                                          ITA No.5120/Del/2010
                                                          ITA No.2441/Del/2012

`Exclusive method' is no more available to the assessee. Now, all the

assessees earning business income are required to follow only the

`Inclusive method' and under this method, purchase, sale of goods and

inventories (both opening and closing) are required to be adjusted to

include the amount of tax or duty etc. As the assessment year under

consideration is governed by section 145A, the assessee was under

statutory obligation to cast its Profit and loss account on `Inclusive

method', which it has not done. Under such circumstances, we cannot

approve the `Exclusive method' followed by the assessee. It goes

without saying that there can be no estoppel against the statute. We,

therefore, direct the AO to recast Profit and loss account on the basis of

`Inclusive method'. This would require adopting the figures of purchase,

sale and opening as well closing inventories as inclusive of tax or duty

etc.


4.12.    We have noted above that section 145A starts with a non-

obstante clause qua section 145 of the Act and section 43B starts with a

non-obstante clause qua `any other provision of this Act'. The effect of

                                    18
                                                          ITA No.5120/Del/2010
                                                          ITA No.2441/Del/2012

the non-obstante clause in section 145A is that even if the exclusive

method of valuing purchase, sale, opening and closing stocks may be

generally available, but the assessee will have to compute its `Business

income' by casting its Profit and loss account as per the `inclusive

method', meaning thereby, that the value of purchase, sale and

inventories must be accounted in the annual accounts as inclusive of tax

or duty etc. The effect of non-obstante clause in section 43B is that even

if deduction of tax or duty etc. may be admissible under the Act on the

incurring of liability, but such deduction will be subject to payment

alone. A harmonious reading of sections 145A and 43B of the Act brings

out that the `Business income' is firstly required to be mandatorily

computed by following the `Inclusive method', by loading the amount

of tax or duty etc. on purchase, sale and inventories and thereafter, if

some part of tax or duty is unpaid, that should be added back in the

computation of income. If in a converse situation, some amount of tax

or duty is paid as advance in current account, which has not been

included in the amount of purchase etc. and is lying unadjusted in the


                                    19
                                                           ITA No.5120/Del/2010
                                                           ITA No.2441/Del/2012

balance sheet, then the same should be separately deducted in terms of

section 43B. However, having allowed deduction on payment basis as

per section 43B, the computation of income of the succeeding year

determined under inclusive method as per section 145A, would require

enhancement with such amount of tax or duty etc. allowed as deduction

in the earlier year. In our considered opinion, it is the crux of reading of

section 145A in juxtaposition to section 43B of the Act.


4.13.   Under the `Inclusive method', the figures of purchase, sale and

inventories are required to be taken with the element of tax or duty etc.

Since the amount of unutilized balance of excise duty under PLA does

not form part of purchase, this amount will be eligible for separate

deduction u/s 43B. At the same time, the last year's unutilized PLA

getting deduction in that year due to the application of section 43B,

would be required to be added back to the income of the current year as

determined above. We, therefore, set aside the impugned order and

direct the AO to firstly recast the assessee's Profit and loss account on

inclusive basis and then make suitable deduction in respect of the

                                     20
                                                            ITA No.5120/Del/2010
                                                            ITA No.2441/Del/2012

amount of unutilized PLA at the end of the current year and also the

preceding year.

4.14.      Now, we come to the next item of disallowance, being a sum

of Rs. 48.53 crore towards Excise duty on inputs balance in RG 23A.

This amount is unutilized Modvat credit available to the assessee at the

end of the year. Under the Central Excise law, a manufacturer is entitled

to claim Modvat credit of the amount of excise duty paid by him on raw

materials and inputs purchased for consumption in the manufacture of

excisable goods.    The amount of duty paid to the supplier of raw

material is considered as the amount of central excise duty actually paid

by the assessee. Thus, a manufacturer of final product under

Modvat/Cenvat Scheme is allowed to get adjustment of excise duty paid

by him on any inputs received in the factory to be used in the

manufacture of final product. In the year under consideration, the

assessee purchased excise duty paid raw material and other inputs and as

per the excise rules became entitled to Modvat credit of the excise duty

paid on raw material eligible for set off against liability of excise duty on


                                     21
                                                          ITA No.5120/Del/2010
                                                          ITA No.2441/Del/2012

the finished goods at the time of removal of goods from bonded

warehouse.

4.15.     We have noticed above that the assessee is also following

`Exclusive method'. Under the `Exclusive method', the total amount of

excise duty paid by the assessee on purchase of inputs does not get

added to their purchase price, but appears as an asset with the

nomenclature of Modvat credit. When goods using the excise duty paid

raw material are manufactured, the manufacturer becomes entitled to use

Modvat credit against his liability of excise duty on finished products.

This utilized part of the Modvat credit goes to the Excise duty account in

the same manner as utilized PLA discussed above. Suppose, an assessee

has Modvat credit of Rs. 10 and has utilized duty paid raw material in its

production during the year for corresponding sum of Rs.9, out of which

finished goods corresponding to Modvat utilized of Rs.7 are sold and the

finished goods corresponding to Modvat utilized of Rs.2 are in stock.

The assessee will get deduction for Rs.9 under the exclusive method.

Simultaneously the assessee will offer income of Rs.7 embedded in the


                                    22
                                                          ITA No.5120/Del/2010
                                                          ITA No.2441/Del/2012

sale price.   It is the remaining amount of Re.1 which is unutilized

Modvat credit appearing as an asset in the balance sheet at the end of the

year, for which the assesse is now seeking deduction.

4.16. At the outset, we want to mention that the Special Bench of the

Tribunal in Glaxo Smithkline Consumer Healthcare (supra) has held that

unexpired Modvat credit before it is set off, cannot be treated as tax

paid. Accordingly the Special Bench held that the Modvat credit

available to the assessee as on the last date of the previous year does not

amount to payment of excise duty and is, hence, not allowable u/s 43B.

In earlier years, the Tribunal has followed the dictum of this Special

Bench verdict and upheld the disallowance. The ld. AR submitted that

there has been further articulation of law on this point. Referring to the

judgment of the Hon'ble Supreme Court in the case of CIT Vs. Shri Ram

Honda Power Equipment Ltd. (2013) 352 ITR 481 (SC), the ld. AR

submitted that the amount lying credited in the Modvat account at the

end of the accounting year has now become deductible u/s 43B as per its

ratio. We find that the Hon'ble Apex Court in Shriram Honda Power


                                    23
                                                          ITA No.5120/Del/2010
                                                          ITA No.2441/Del/2012

Equipment Ltd. (supra) has held that : `The Authorities below are right

in coming to the conclusion that MODVAT Credit is excise duty paid'.

The Hon'ble jurisdictional High Court in the assessee's own case in CIT

vs. Maruti Suzuki India Ltd. (2013) 255 CTR 140 (Del), after taking

note of the judgment of the Hon'ble Supreme Court in the case of Shri

Ram Honda Power Equipment Corporation (supra) has held that : `This

court also notices that the Supreme Court has upheld the view which

allows assesses to claim credits, such as Modvat, etc, falling within the

description of liability paid, to escape the mischief of Section 43-B.' In

view of this later development of law, the earlier contrary view taken by

the Special Bench in Glaxo (supra) on the question of unutilized

Modvat credit now needs to be properly aligned with the ratio decidendi

of the judgment in Shri Ram Honda (supra).

4.17. Armed with the above legal position, now the remaining amount

of Re.1 in our above example under the `Exclusive method', which is

unutilized Modvat credit in the balance sheet at the end of the year,

needs to be treated at `excise duty paid'. Since this amount is considered


                                    24
                                                          ITA No.5120/Del/2010
                                                          ITA No.2441/Del/2012

as excise duty paid, the same has to be allowed as deduction during the

year of payment as per section 43B. Caveat remains that deduction for a

sum of Re.1 in the current year, being the Modvat credit unutilized at the

end of the year under the exclusive method, also requires enhancement

of income of the succeeding year to this extent. In the like manner, the

corresponding amount allowed as deduction u/s 43B in the preceding

year, if any, also requires separate add back to the income of the current

year. It is so because deduction for payment of tax or duty etc. can be

allowed only once, and that too, at the time of payment. We, therefore,

hold that the amount of unutilized Modvat credit is deductible in the

computation of income for the current year under the exclusive method.

But such amount also requires add back in the computation of income of

the immediately next year and also the corresponding amount                of

unutilized Modvat credit of the preceding year, if allowed as deduction

in such earlier year, requires a separate addition to the income of the

current year. It is the treatment of Modvat credit under the `Exclusive

method'.


                                    25
                                                          ITA No.5120/Del/2010
                                                          ITA No.2441/Del/2012

4.18. We have noticed supra that the use of `Exclusive method' is no

more permissible in the year under consideration. As such, there is a

need to give effect to section 145A read with section 43B under the

`Inclusive method'.

4.19.    Before taking up this aspect, we would like to deal with the

judgment of the Hon'ble Supreme Court in Shri Ram Honda (supra),

relied by the ld. AR for supporting the claim of per se deduction without

any further adjustments as per section 145A. It is relevant to note that

the Hon'ble Supreme Court in Shri Ram Honda (supra) was dealing

with A.Y. 1995-96. While granting deduction for Modvat credit, the

Hon'ble Summit Court followed the judgment of the Hon'ble Bombay

High Court in CIT vs. Indo Nippon Chemical Co. Ltd., (2000) 245 ITR

384 (Bom), as affirmed by the Hon'ble Apex Court in (2003) 261 ITR

275, in holding that the same was squarely applicable and hence the

amount was deductible. The assessment year involved in the case of

Indo Nippon (supra) was 1989-90, which is again before the insertion of

section 145A. It is interesting to note that during the course of arguments





                                    26
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                                                          ITA No.2441/Del/2012

before the Hon'ble Bombay High Court, the ld. counsel for the

Department brought to the notice of Their Lordships that section 145A

stood inserted and, hence, the exclusive (net) method followed by the

assessee was impermissible. The Hon'ble High Court considered this

aspect in the last para of its judgment and observed that the insertion of

section 145A w.e.f. the AY 1999-2000 had no bearing as the assessment

year under their consideration was 1989-90. In the light of this position,

it becomes imperative to give effect to the provisions of section 145A of

the Act, which are applicable to the year under consideration and are

binding without any exception.

4.20.   Now we come to giving effect to sections 145A and 43B under

the `Inclusive method'. In line with our discussion made above while

dealing with PLA component of excise duty, we direct the AO to first

recast Profit and loss account of the assessee by taking the figures of

purchase, sale and opening and closing stocks at the value inclusive of

tax or duty etc., so as to give effect to the mandate of section 145A.

Once this is done, then it will be the turn of giving effect to the mandate


                                    27
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                                                         ITA No.2441/Del/2012

of section 43B, which requires the granting of deduction of tax or duty

etc. on payment basis. This can be done by allowing deduction for that

part of the Modvat credit separately u/s 43B of the Act, which has not

been finally deducted.

4.21. We have understood Modvat credit in three parts in the example

given above while discussing it under the exclusive method, viz., Rs.7

which is utilized Modvat and finished goods sold; Rs. 2 which is utilized

Modvat but finished goods in stock at the end of the year; and Re.1

which is unutilized Modvat at the end of the year. Now under the

`Inclusive method', the price of duty paid input/raw material will be

taken at full price inclusive of Rs.10. In that view of the matter, the

assessee can be said to have initially claimed deduction for Rs.10. Out

of total Modvat credit of Rs.10 received during the year, a sum of Rs.3

has two components, viz., Rs. 2 as a part of purchases of raw materials

and also simultaneously a part of the corresponding finished goods in

closing stock; and Re. 1 as a part of purchases of raw materials and also

simultaneously a part of the corresponding raw materials in closing


                                   28
                                                          ITA No.5120/Del/2010
                                                          ITA No.2441/Del/2012

stock. Though apparently it appears that the assessee gets deduction of

Rs.3 also by way of higher value of purchase of raw material, but the

reality is different. When the figures of closing stock of finished goods

and raw material also include Rs.3, then in fact, there is no deduction of

Rs.3, because debit to the Profit and loss account through increased

purchase value gets neutralized with the credit to the Profit and loss

account with increased value of closing stock. This enhanced value of

closing stock inclusive of Rs.3 will become opening stock of the

succeeding year, thereby obliterating the effect of deduction of Rs.3.

When such goods are sold or utilized and sold in the next year, the sale

price will be realized which will be inclusive of Rs.3 excise duty

component also. So in fact, there is no actual deduction of Rs.3 during

the year under consideration because of the increased purchase price

getting counterbalanced with the equal amount of loading in the value of

closing stock. After having increased the value of purchase and closing

stock in terms of section 145A with the amount of Modvat credit, now

there is a separate requirement of giving effect to the mandate of section


                                    29
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                                                          ITA No.2441/Del/2012

43B, which requires the granting of deduction of Rs.10 in the year of

payment. A sum of Rs.7 included in purchase value as a part of Rs.10,

gets eventual deduction because it is exhausted as the same is not taken

as an asset to the balance sheet, either directly as Unutilized Modvat, or

indirectly as part of closing stock. But in so far as the amount of Rs.3 is

concerned, it does not get final deduction because of the same being a

part of assets in balance sheet. Deduction for Modvat credit by means of

its inclusion in Purchase value of raw materials can be treated as allowed

by way of debit to the Profit and loss account only when it also gets

exhausted. If, even after a debit to the Profit and loss account, the

amount appears in balance sheet, in one form or the other, the deduction

cannot be said to have been actually allowed on payment, till it is

exhausted and gets removed from the balance sheet also. In such

circumstances, the amount of unexhausted (not necessarily only

unutilized) Modvat credit ­ i.e. which appears in balance sheet either in

the form of increased value of closing stock (Rs.2 in our example) and

increased value of raw material representing unutilized Modvat credit


                                    30
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                                                           ITA No.2441/Del/2012

(Re.1 in our example) - calls for separate deduction in terms of section

43B. We, therefore, set aside the impugned order and direct the AO to

first recast the assessee's Profit and loss account on inclusive basis, then

allow deduction for the equivalent amount of Modvat credit as

represented by Rs.3 in our example. The AO should also make sure that

the equivalent of Rs.3 allowed as deduction on payment basis u/s 43B in

this year should not get deducted in the next year and further, the

corresponding amount of deduction allowed u/s 43B in the preceding

year, should also be separately added to the income of the current year.

4.22.       The next item of disallowance u/s 43B in dispute is the

amount of excise duty paid under protest to the tune of Rs.45 lac. The

facts apropos this issue are that certain demand was created against the

assessee by the Excise Department. The assessee paid the same albeit

under protest by challenging the levy of demand. Deduction claimed for

such demand under exclusive method was disallowed by the AO on the

ground that the assessee was contesting this liability and there was no

finality regarding this liability.


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                                                          ITA No.2441/Del/2012

4.23. After considering the rival submissions and perusing the relevant

material on record, we find that the Tribunal, in the assessee's own case

for earlier years, has decided this issue in the assessee's favour which

position has been admitted by the Revenue vide the AO's letter dated

24.7.2015. We note that the Hon'ble Supreme Court in CIT vs. Bharat

Carbon and Ribbon Manufacturing Company Pvt. Ltd., (1999) 239 ITR

505 (SC), has held that a statutory liability accrues on issuance of

demand notice. It has further been held that raising of further dispute by

the assessee is not relevant. In view of this judgment, it becomes clear

that the issuance of notice of demand by the competent Excise authority

makes the amount otherwise deductible by means of incurring the

liability. This satisfies the condition of section 43B which provides for

deduction on actual payment in respect of an otherwise deductible

amount. Since the amount in question has been paid during the year, it

qualifies for deduction in terms of section 43B under the exclusive

method. Thus on one hand deduction for excise duty paid under protest

is available in the year of payment under the exclusive method, the same


                                    32
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                                                          ITA No.2441/Del/2012

amount cannot be allowed to get deducted once again on the finalization

of the dispute with the Excise department on its transfer to Excise duty

account. Simultaneously, the amount of excise duty paid under protest in

earlier years getting deduction u/s 43B calls for inclusion in the total

income of the current year on the removal of the amount from Excise

duty paid under protest account.

4.24. We have noticed above that section 145A is applicable to the year

under consideration and accordingly, income is required to be

determined by switching over to the `Inclusive method' and then

allowing deduction u/s 43B on payment basis. We, therefore, set aside

the impugned order and direct the AO to first recast the assessee's Profit

and loss account on inclusive basis, inter alia, by including the amount

of excise duty paid under protest to the purchase value of goods. If such

goods have been consumed during the year and corresponding finished

goods manufactured and sold, the matter will end there as it will amount

to grant of deduction. If however, the finished goods so manufactured

with the use of such protested excise duty paid raw material are in


                                    33
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                                                          ITA No.2441/Del/2012

closing stock or in the shape of raw material only, then apart from

enhancing the value of purchase and finished goods or raw materials, as

the case may be, the assessee will be entitled to separate deduction of

this amount u/s 43B. This will be done again with the same rider that in

the year of settlement of dispute, this amount of separate deduction

allowed in the current year, should be separately offered for taxation and

further the corresponding amount of duty paid under protest in earlier

years should be separately offered for taxation in the computation of

income for the current year, if such earlier disputes on which excise duty

was paid under protest, get resolved.

II. Customs duty

5.1. Now, we take up the disallowances u/s 43B on items of customs

duty. First is customs duty of Rs.8,65,07,635/- paid on import of

components for which exports had been made by the year end and

Rs.1,47,142/- for which exports had not been made by the year end.

These amounts claimed by the assessee as allowable u/s 43B of the Act,

were disallowed by the AO. It is common submission that the tribunal

                                    34
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                                                         ITA No.2441/Del/2012

has allowed deduction in respect of these amounts in the preceding

years.

5.2.     Here again it is noticed that the assessee has also followed

`Exclusive method'. In such circumstances, this method needs to be

substituted with `Inclusive method' as mandatorily required u/s 145A.

We, therefore, direct the AO to recast Profit and loss account as per

`Inclusive method' as discussed above and then allow deduction in

respect of the customs duty paid in accordance with section 43B, if not

getting deducted in such recast.     Customs duty paid on import of

components for which exports had/had not been made by the year end

under the inclusive method would now stand included in the value of

imports and accordingly get deducted. Customs duty of Rs.8,65,07,635/-

paid on import of components for which exports had been made by the

year end would not require any separate deduction as the same will be

debited to the Profit and loss account and also get exhausted. As regards

the other amount of customs duty for which exports had not been made

by the year end would represent the amount though debited to the Profit


                                   35
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                                                        ITA No.2441/Del/2012

and loss account by means of increased input cost but not getting

exhausted as the same also appearing in the balance sheet through the

enhanced value of closing stock. Separate deduction is required to this

extent u/s 43B of the Act. At the same time, we also direct the AO to

make sure that such amount separately getting deducted in this year does

not get deduction once again in the next year. In the like manner, the

last year's similar deduction separately allowed should be taxed in the

computation of income of the current year.

5.3.     Next item is customs duty (CVD) paid to be adjusted against

excise   duty   payable    on    finished    products   amounting        to

Rs.15,59,44,832/-.   Simultaneous with this, there is another item of

Rs.5,40,40,258/-, which is the amount of customs duties on goods in

transit/under inspection. The assessee claimed deduction for the above

amounts u/s 43B of the Act, which the AO denied.

5.4. We have heard the rival submissions and perused the relevant

material on record. The ld. AR contended that this issue has been

decided in earlier years in the assessee's favour by the Tribunal. He

                                   36
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                                                        ITA No.2441/Del/2012

further referred to the judgment of the Hon'ble Delhi High Court in CIT

vs. Samtel Colour Ltd. (2009) 184 Taxman 120 (Del) in which it has

been held that advance customs duty paid in the year in question is an

admissible deduction u/s 43B. In our considered opinion, there can be

no dispute on the otherwise availability of deduction of advance customs

duty paid by the assessee, which has to be allowed in the year of

payment. In this judgment also, the Hon'ble High Court has noticed

vide para 3 that the provisions of section 145A were not applicable as

the assessment year under consideration was 1995-96. In view of the

detailed discussion supra with reference to the applicability of section

145A to the year in question, there can be no escape from valuation of

purchase, sale and inventories under the inclusive method.            We,

therefore, direct the AO to recast Profit and loss account under

`Inclusive method' as per the mandate of section 145A, thereby, inter

alia, increasing the purchase value with the above customs duty. Then

the AO will allow separate deduction for the above referred sums to the

extent not getting eventually deducted separately by way of increased


                                   37
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                                                          ITA No.2441/Del/2012

purchase price, as has been discussed above. At the same time, we also

direct the AO to make sure that such amount separately getting deducted

in this year does not get deduction once again in the next year. In the

like manner, the last year's similar deduction separately allowed should

be taxed in the computation of income of the current year.

5.5.   Next item is Customs duty paid under protest amounting to

Rs.1,34,25,787. We have discussed similar issue supra while dealing

with `Excise duty paid under protest' by holding that first the Profit and

loss account be recast as per `Inclusive method' in terms of section

145A and then some adjustments as stated above be separately made.

Such directions are fully applicable pro tanto to the customs duty paid

under protest. The AO is directed to follow the same.

5.6. The last aspect of disallowance u/s 43B is customs duty included

in closing stock amounting to Rs. 22,52,46,693/-. The assessee claimed

deduction for this sum, which was denied by the AO. The ld. AR stated

that the assessee followed `Inclusive method' of accounting on this

issue. The claim of the assessee is that the amount of Rs.22.52 crore,

                                    38
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                                                          ITA No.2441/Del/2012

being the amount of customs duty paid on the import of raw

material/inputs, was included in the cost of material and also as a part of

closing stock, thereby levelling both the debit and the credit sides of the

Profit & Loss Account. The ld. AR contended that such amount of

customs duty is separately deductible in terms of section 43B of the Act.

He also submitted that this issue is settled in the assessee's favour in

earlier years.

5.7. We have elaborately discussed this aspect supra in the context of

excise duty included in the value of closing stock. In principle, we hold

that the amount of customs duty of Rs.22.52 crore is allowable in the

year in question, but, the AO is directed to first verify the argument of

following the `Inclusive method' and then allow deduction u/s 43B in

the manner discussed above, if the same did not get eventually allowed.

The AO should further make it is sure that no double deduction is

allowed on this score, either in the current year with the last year's

amount getting separately deducted u/s 43B or in the next year with the

current year's amount getting separate deduction.


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                                                         ITA No.2441/Del/2012

III. Adjustments on account of last year's disallowances u/s 43B.

6.1.   Now we take up ground no. 3.5 along with ground nos. 4 to 6.1.

The amount in dispute as per ground no. 3.5 is Rs.71,63,89,449

representing the amount of last year's unutilized Modvat credit which

was claimed by the assessee as deductible u/s 43B, but disallowed by the

AO and such disallowance came to be affirmed by the tribunal. While

allowing deduction for the current year's unutilized Modvat credit at the

end of the year amounting to Rs.48,53,55,419, we have noticed that the

position of law has undergone change and now this amount is deductible

for the year in question. The assessee contends that a sum of

Rs.71,63,89,449 is the amount of deduction claimed by it u/s 43B in

the preceding year and simultaneously offered for taxation in the current

year voluntarily. However, in view of the sustenance of disallowance of

this sum by the tribunal in the preceding year, the assessee claims that

the same amount offered for taxation in the current year, be

correspondingly reduced from its total income.




                                   40
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                                                          ITA No.2441/Del/2012

6.2.   We agree with the argument that since the amount of unutilized

Modvat credit stood disallowed in the preceding year by the tribunal on

the premise that the same before its set off cannot be treated as tax paid,

then the same should be excluded from the total income of the current

year, if voluntarily offered by the assessee for taxation. The AO is

directed to verify this aspect and allow deduction for this sum, if the

same was eventually disallowed in the preceding year and the assessee

once again offered it for taxation in the computation of total income for

the current year.

6.3.   Ground nos. 4 to 6.1 deal with a sum of Rs. 1,41,59,08,897, which

has been stated to be a total of certain amounts claimed by the assessee

as deductible in the preceding year u/s 43B as excise duty and customs

duty and voluntarily offered for taxation in the current year's income.

The ld. AR contended that since such deductions have been denied by

the AO, the corresponding offering of the same to tax in the current year,

be eliminated.




                                    41
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                                                          ITA No.2441/Del/2012

6.4.   We agree with the ld. AR that one amount cannot be taxed twice.

It is but natural that if an amount claimed as deduction by the assessee in

the earlier year has not been allowed, then on the assessee's suo motu

offering of it as an item of income for the current year on the strength of

deduction claimed in the earlier year, which finally stands denied,

should not be charged to tax. On being called upon to furnish the detail

of such amount, it was stated that it, inter alia, includes a sum of

Rs.71,63,89,449, which is subject matter of ground no. 3.5, that we have

discussed immediately hereinbefore.       We note that apart from the

sustenance of disallowance of Rs.71.63 crore in the preceding year, there

is no other disallowance u/s 43B which has been upheld by the Tribunal.

It is overt that all other disallowances made by the AO u/s 43B have

been deleted by the tribunal. The ld. AR could not furnish any detail of

the remaining amount of Rs.69.96 crore (Rs.141.59 crore minus

Rs.71.63 crore), allegedly finally disallowed u/s 43B of the Act by the

tribunal in the preceding year. It is simple and plain that if the tribunal

has allowed deduction for the amounts disallowed by the AO in the


                                    42
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                                                          ITA No.2441/Del/2012

preceding year, then the same are rightly chargeable to tax in the current

year. This ground is, therefore, dismissed, subject to our decision on

ground no. 3.5 in granting deduction of Rs.71,63,89,449, representing

last year's unutilized Modvat credit which was claimed by the assessee

as deductible u/s 43B but disallowed by the AO and also the tribunal.


B. ROYALTY

I. Transfer pricing adjustment of Royalty for licensed

trademark

7.1. The assessee has challenged the addition of Rs.1,27,19,59,816/-

made by the AO on account of transfer pricing adjustment.

7.2. Briefly stated, the facts of this ground are that the assessee

chose Suzuki Motor Corporation, Japan (SMC) as its partner in

1982 with SMC acquiring 26% equity stake in the company Maruti

Udyog Ltd. (MUL). In 1992, SMC increased its share to 50%.

SMC held 54.2% in the company in the previous year relevant to the

assessment year under consideration. The assessee, MUL, is
                                    43
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                                                      ITA No.2441/Del/2012

engaged in manufacturing of passenger cars primarily for sale in

Indian market. It also exports vehicles to other countries. The

assessee reported certain international transactions which have been

enumerated on page 18 of the order of the Transfer Pricing Officer

(TPO). The assessee selected the Transactional Net Margin Method

(TNMM) as the most appropriate method with the Profit Level

Indicator (PLI) of Operating Profit/Sales (OP/S).      The assessee

computed its OP/S at 11.19%, as against (-) 4.43% of certain

comparables chosen by it. The assessee is a licensed manufacturer

of cars in India. For use of the licence given by SMC, the assessee

paid a total royalty of Rs.254,39,19,633/- divided into two parts,

namely, Running royalty of Rs.250.84 and Lumpsum royalty of

Rs.3.57 crore. Apart from that, the assessee also paid Rs.20.00 crore

to its AE towards Technical/other services. The assessee treated

running royalty as revenue expenditure in its return of income.

Lumpsum royalty was initially treated as capital expenditure, but


                                 44
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                                                    ITA No.2441/Del/2012

during the course of assessment proceedings, the same was also

claimed as revenue expenditure. On a reference made by the AO for

determination of the arm's length price (ALP) of the international

transactions, the TPO observed that the assessee had undertaken

tremendous efforts and incurred huge expenditure on market

development and promotion of `Maruti' and `Suzuki' brands in

India over a period of time, but, had not received any compensation

from its AE for meeting huge expenditure incurred on the brand

development as well as market development. He further observed

that Suzuki trade mark (S) was registered in India several decades

ago, but, was not used and, hence, did not have any brand value. He

also noticed on page 27 of his order that the assessee carried out

huge R&D for development of its products in India and during the

year in question alone, a sum of Rs.67.10 crore was spent on it.

Since the assessee is only a licensed manufacturer, the TPO

observed that R&D activity should have been carried out by the


                                45
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                                                    ITA No.2441/Del/2012

licensor and not the assessee-licensee. On being called upon to

explain as to why the royalty expenses be not disallowed for the

reasons given in his order for the AY 2005-06, the assessee

submitted that the payment of royalty was made as per the licence

agreement which is an indivisible contract and the same does not

specifically spell out consideration for the use of technical know-

how and consideration for the use of trademark of SMC. The TPO

considered licence agreement dated 9.1.2001 between the assessee

and SMC. After reproducing relevant clauses from this Agreement,

he held that the assessee paid royalty to SMC towards licence for

manufacture, sale and after-sales services. He further noticed that

clauses 3.02 and 3.03 of the Agreement stipulate that improvement

and modification of the Products and Parts by the assessee shall be

treated as licensed information whose legal ownership will get

transferred to the SMC and the assessee will be compensated for

such improvements and modifications. He noticed that no such


                                46
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                                                      ITA No.2441/Del/2012

compensation was given despite the assessee incurring huge R&D

expenses. The TPO came to hold that `Suzuki' trademark of the AE

was piggybacked on `Maruti', the trademark of the assessee, without

any compensation to the assessee. After going through all the

relevant clauses of the Agreement, the TPO held that the total

royalty of Rs.254.39 crore paid by the assessee to SMC was for use

of both the `Licensed Information' as well as `Licensed trademarks'.

Since no bifurcation of royalty payment was given, he segregated it

into two equal parts, viz., Rs.127.195 crore towards manufacturing

licence, that is for the use of `Licensed information' and Rs.127.195

crore towards sale and after sale service licence, that is for use of

`Licensed trademark'. This 50:50 segregation was done on the

ground that both manufacturing and sale functions were equally

important for running a business. He took up the determination of

the ALP of the royalty paid for use of `Licensed trademark'. It was

noticed that the assessee used co-branded trade mark i.e., `Maruti-


                                 47
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                                                      ITA No.2441/Del/2012

Suzuki.' Considering the fact that the assessee's trademark of

`Maruti' has acquired status of a super brand, whereas `Suzuki' is

relatively weak brand in the Indian market, the TPO held that the

ALP of royalty paid to the AE was Nil. In his opinion, the assessee

ought to have been compensated by SMC for use of its trade mark

`Maruti' in a co-branded trademark, as against the AE charging

royalty of Rs.127.195 crore from the assessee for use of its `Suzuki'

brand in a co-branded trademark. That is how, the TPO proposed

transfer pricing adjustment of Rs.127.195 crore on account of

royalty payment for use of `Licensed trademark'. The Dispute

Resolution Panel (DRP) affirmed the view taken by the AO in the

draft order on this issue, which was based on the order of the TPO.

This led to the addition of Rs.127.195 crore, which has been

assailed before us. At this stage, it is relevant to mention that the

TPO did not dispute the ALP of royalty paid for `Licensed

Information', whose transacted value was computed by him at


                                 48
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                                                     ITA No.2441/Del/2012

Rs.127.195 crore. Instantly, we are taking up the ALP of the royalty

payment for use of `Licensed trademark', for which transfer pricing

adjustment has been made.

7.3.   The ld. counsel for the assessee contended that there is a

composite agreement between the assessee and SMC for use of the

licensed information and licensed trademark and royalty is also one

consolidated amount for use of both, which has been split in two

parts, namely, lumpsum royalty and running royalty. Taking us

through the Agreement between the assessee and SMC dated

9.1.2001 (a copy of which has been placed on page No.1301

onwards of paper book no. 4), it was pointed out that royalty is a

one merged payment for use of the licensed information and

licensed trademarks and the TPO was not right in artificially

splitting the same into two parts. Relying on the order dated

2.8.2013 passed by the Tribunal in the assessee's own case for the

AY 2005-06 (ITA No.5237/Del/2011), the ld. AR contended that in


                                 49
                                                     ITA No.5120/Del/2010
                                                     ITA No.2441/Del/2012

the preceding year also the TPO bifurcated total royalty payment

into two parts, namely, 50.58% for use of technology and remaining

49.42% for use of brand name, which view has been turned down by

the tribunal by holding that the entire payment of royalty under the

licence agreement was a consideration for use of both.

7.4.    Au contraire, the ld. DR vehemently justified the action of

the TPO in drawing a conclusion that 50% of total royalty payment

was for use of licensed information and the remaining 50% for use

of licensed trademark. He also took us through the same Agreement

dated 9.1.2001 and submitted that clause 1.06 provides that the

`Licensed Trademark' shall mean the trademarks owned by Suzuki

listed in Exhibit-B and other Indian trademarks which Suzuki may,

hereafter, obtain relating to the Products and Parts.          It was

contended that clause 2.03 of the Agreement provides for use of

`Licensed Trademarks' and co-branded trademark of `Maruti-

Suzuki.' It was, therefore, put forth that it is not only co-branded


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                                                      ITA No.2441/Del/2012

trade mark of `Maruti-Suzuki' which has been under the Agreement,

but also the `Licensed Trademarks', which exclusively belong to

Suzuki. Once the trademark of SMC has been allowed to be used to

the assessee on its products, either separately or as a part of co-

brand, and further a part of the royalty has been admittedly also paid

for the use of licensed trademark, he argued that it could not be said

that there was no separate consideration for use of licensed

trademark embedded in total royalty payment. It was stated that if

some part of royalty is relatable to the use of licensed trademark,

then that cannot be lost sight of. He insisted that the Agreement

impliedly provides for separate royalty for use of the licensed

trademark. This was corroborated by stating that the Agreement

itself divides payment of royalty as per Article 6 into two parts, the

first being lumpsum and the second being running royalty. He

emphasized that the `Lumpsum royalty' is a consideration

exclusively for the use of licensed information which, as per this


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Agreement, is 20 crore yen, payable in three instalments, namely,

the first instalment of 6.50 crore yen within 30 days of the effective

date; 6.5 crore yen to be paid not later than nine months after the

effective date or the day on which Suzuki transfers to Maruti a

substantial part of the documentation relating to such model of

products, whichever is later; and the remaining part of 7 crore yen to

be paid not later than 18 months after the effective date or `the date

of start of production of such model of products by Maruti,

whichever is later.' In the light of this clause, which is uniform in all

other Agreements entered into between the assessee and SMC, the

ld. DR contended that the `Lumpsum royalty' is exclusively towards

the use of licensed information, which is payable only on the

occasion of receipt of licensed information. He further stated that

apart from paying such lumpsum royalty for use of licensed

information, the assessee also paid a sum of Rs.20,00,29,488/- to

SMC towards `Technical/other services'. He still further pointed out


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                                                      ITA No.2441/Del/2012

that apart from paying such lumpsum royalty and technical fees, the

assessee also incurred huge R&D expenditure which, in the instant

year alone, stands at Rs.67.1 crore, which has gone into

development/upgradation of the licensed information whose

intellectual property rights also vests with SMC. He summed up his

position by stating that the three sums, namely, lumpsum royalty,

R&D expenses incurred by the assessee and the payment of

Rs.20.00 crore towards `technical/other services' pertain exclusively

to the use of `Licensed information' and Running royalty

exclusively pertains to the use of `Licensed trademark'. He thus

argued that the TPO was more than reasonable in apportioning

royalty of Rs.127.195 crore to the use of brand as against the actual

running royalty of Rs.250.81 crore paid by the assessee for use of

licensed trademark. In the alternative, he argued that if the tribunal

was not satisfied with 50:50 division of royalty by the TPO, then the

matter may be sent back for apportioning royalty for use of licensed


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                                                      ITA No.2441/Del/2012

trademark on some rational basis. The ld. DR contended that since

the assessee's own trade mark, namely, `Maruti' has much higher

brand value than the trade mark `Suzuki' of SMC, which is

relatively weak in India, the entire amount of royalty paid by the

assessee to its AE towards the use of `licensed trade marks' was

rightly disallowed by the AO as having Nil ALP.

7.5.    We have considered the rival submissions and perused the

relevant material on record. It can be observed that the TPO has

attributed a sum of Rs.127.195 crore towards royalty for use of

licensed trademarks, whose ALP has been determined at Rs. Nil. In

doing so, he relied on his order passed for the immediately

preceding year.   In such earlier year, the TPO bifurcated total

royalty into two parts, namely, 50.58% for use of licensed

information and 49.42% for use of licensed trade mark. It is not

disputed that all the Agreements under which the assessee paid

royalty to its AE during the year are identically worded. Clause 6 of


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                                                      ITA No.2441/Del/2012

the Agreement dated 25.3.2006 deals with the consideration to be

paid, which is in two parts, namely, Lumpsum royalty and Running

royalty. The bifurcation between lumpsum and running royalty is

not based on use of licensed information and licensed trademark. It

is a quid pro quo for use of both in a cumulative manner. The

finding of the tribunal in para 11 of its order for the immediately

preceding year is : `that royalty thus paid by the assessee to SMC

constitute a single/inseverable/indivisible contract/package which

provided the assessee the exclusive right and licence to manufacture

and to sell the licensed product for a specified limited duration'. In

para 13, the Tribunal observed that: `the TPO has rewritten the

agreement/transaction undertaken by the assessee by artificially

segregating the single transaction of payment of royalty into two

transactions of payment of royalty for use of brand name and for use

of technology.' In a nutshell, these paras indicate that the tribunal

has treated total royalty payment as a common consideration for use


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of both, namely, licensed information and licensed trademarks,

which is incapable of bifurcation. At the same time, it is also equally

true that some observations in the tribunal order give impression

that the Bench attributed the entire royalty payment to the use of

`Licensed information'. Given the face off between such

observations, we are more inclined to go with the finding about the

royalty attributable to the use of both the licensed information and

the licensed trademarks. It is so for the reason that the Agreement

also provides like that, which has been discussed elsewhere in this

order. The tribunal further noticed in para 9.2 of its order that the

co-branded trade mark, `Maruti-Suzuki' is being used since

inception of the company. In para 14, the tribunal agreed with the

assessee's submissions : `that Suzuki brand is an international

renowned global brand. This can be substantiated by the Report of

top 500 brands available on internet.' That is how in para 17, the

Tribunal deleted the disallowance made by the AO on the basis of


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the TPO's conclusion that the payment of royalty towards use of

licensed trademark was not warranted.

7.6.    Thus it is manifest that the tribunal in the immediately

preceding year has held two things. First that the payment of royalty

under the Agreement is both for the use of licensed information and

licensed trademark and there can be no division of royalty payment;

and second that brand Suzuki is valuable and not worthless as was

held by the TPO. In so far as the first aspect of bifurcation of royalty

payment into two parts is concerned, although we find that the

arguments put forth by the ld. DR are not absolutely without

foundation, yet, the principle of consistency, laid down by the

Hon'ble Supreme Court and Hon'ble High Courts in several

judgments, persuades us to go with the view taken by the tribunal in

its order for the A.Y. 2005-06, more specifically because the TPO

has also relied on his finding given for the AY 2005-06 in arriving

at the decision taken against the assessee in the extant year. As


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regards the second aspect, the ld. DR has not brought on record any

further material to demolish the finding given by the tribunal in the

earlier year about the brand `Suzuki' having substantial value and

the royalty payment at ALP.

7.7.   Addition on account of transfer pricing adjustment can be

made by making a comparison between the transacted value of an

international transaction and its ALP. Thus it is clear that the

availability of the transacted value of an international transaction is

sine qua non.     If such transacted value is either not separately

available or cannot be precisely determined from a combined value

of a number of international transactions, then the entire exercise of

determining ALP fails. Instantly, we are confronted with such a

peculiar situation. There is no separate value of the international

transaction of royalty for use of licensed trademark and the tribunal

has held in the earlier year that it is a payment of inseparable royalty

for use of both the licensed information and the licensed trademarks.


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In such circumstances and respectfully following the order of the

tribunal for the immediately preceding year, we order for the

deletion of the addition of Rs.127.195 crore on account of transfer

pricing adjustment of royalty for use of licensed trademark.

II.   Royalty   for   Licensed    information     whether       capital

expenditure?

8.1. The next issue is against the disallowance amounting to

Rs.95,98,09,735/- made by the AO on account of royalty paid. We

have noticed above that out of total royalty of Rs.254.39 crore paid

by the assessee during the year, the TPO attributed Rs.127.195 crore

to the use of licensed trade marks, for which he made transfer

pricing adjustment. This issue has been discussed hereinabove. The

remaining amount of Rs.127.195 crore was attributed by the TPO to

the use of licensed information, which was accepted at ALP.

However, the AO treated this amount as an expenditure of capital

nature. After allowing suitable depreciation, the AO made

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disallowance of Rs.95.98 crore. The assessee is aggrieved against

this addition.

8.2. We have heard the rival submissions and perused the relevant

material on record. It is noticed that in all the earlier years before

assessment year 2005-06, the AO has consistently considered

running royalty as deductible in full and capitalized the lumpsum

royalty subject to depreciation. The assessee also initially claimed

deduction for the running royalty and capitalized the lumpsum

royalty of Rs.3.57 crore. However, during the course of assessment

proceedings, it was claimed that the entire amount of royalty paid,

inclusive of lumpsum royalty, was of the revenue nature and, hence,

deductible in full. The AO also deviated from his earlier consistent

stand and treated the entire portion of the royalty for use of licensed

information as capital expenditure. Now, the question before us is

whether the amount of royalty on licensed information, consisting of

running and lumpsum royalty, is revenue or capital expenditure?


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8.3. Before reaching any conclusion in this regard, it is paramount

to note the relevant clauses of the Agreement entered into by the

assessee, under which payment of royalty for licensed information

has been made during the year in question.          Since all these

Agreements are, mutatis mutandis, identically worded, we take up

Agreement made by the assessee on 25.3.2006 with SMC, a copy of

which has been placed at pages 1405 onwards of the paper book.

First page of the Agreement provides that Suzuki has granted to

Maruti `licenses for manufacture and sale of certain models of

Suzuki four wheel motor vehicle, and whereas, Maruti has requested

Suzuki to grant a license for an additional Suzuki model called `

YL6', and Suzuki has agreed to do so pursuant to the terms and

conditions hereinafter set forth in this Agreement.' This indicates

that the Agreement is for grant of licence and not for outright sale.

Clause 1.04 defines `Licensed Information' to : `mean any and all

technical information, whether patented or not, including know-


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how, trade secrets and other data (including all drawings, prints,

machines and material specifications, engineering data and other

information, knowledge and advice) which Suzuki now has.....

relating to the engineering, design and development, manufacture,

quality control, of Products and Parts and which may be supplied

by Suzuki to Maruti ...'. This clause indicates that the Licensed

Information is for manufacturing of Product and Parts by the

assessee and not for setting up of factory by the assessee. Article 2

of the Agreement gives `Scope of license'. As per this clause,

Suzuki has agreed to provide technical assistance and licence

necessary for engineering, design, development and manufacture,

etc., of Products and Parts. It is further relevant to note that the use

of the Licensed Information to the assessee is a `non-exclusive

right.' This Article further provides that Maruti shall have the right

to sub-license the rights granted as per this Agreement to other

entities, who will manufacture parts for supplying them only to


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Maruti for the manufacture of Products of Maruti, and, that too, with

the prior written consent of Suzuki. This Article, therefore, makes it

clear that the licence given by Suzuki for use of licensed

information is on non-exclusive basis and further Maruti has no

authority to sub-licence the same except for getting the parts

manufactured by other entities for supply to Maruti alone for the

manufacture of Products in accordance with this Agreement. Clause

2.02 of the Agreement states that : `Maruti recognizes and

acknowledges Suzuki's ownership and validity of the Licensed

Information ....'. Article 3 of the Agreement provides that Suzuki

agrees to make available to Maruti such licensed information which

is to be utilized for manufacture of products. Clause 3.02 of the

Agreement deals with `Improvements by Maruti'. It states that if at

any time during the term of this Agreement, Maruti discovers or

acquires any improvement with respect to Products or Parts, it shall

give to Suzuki full information, instructions, knowhow and assign


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ownership of the same to Suzuki and the same shall be considered

as `Licensed Information'. This clause of the Agreement not only

stipulates that Suzuki will supply the licensed information only for

use by Maruti, but, also that any improvements to such licensed

information made by Maruti, will also vest with Suzuki. Clause

3.04 of the Agreement makes it clear that Maruti shall not use the

licensed information made available to it by Suzuki pursuant to this

Agreement directly or indirectly in connection with the manufacture

of any products other than the Products and Parts agreed under this

Agreement. Article 3.10 of the Agreement is a Confidentiality

clause which provides that all licensed information supplied to and

acquired by Maruti under this Agreement shall be kept by Maruti in

confidence and shall not disclose the same to any other party at any

time during the life of this Agreement. Clause 5.04 provides that

Maruti is not authorized to use nor shall Maruti use the word

`Suzuki' or any word similar thereto except as specifically


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authorized under this agreement.       Article 7 contains term of the

Agreement, which has been fixed at ten years and, further

extendable by a period of five years. Clause 7.05 of the Agreement

has been captioned as `Effect of termination.' It provides that upon

any expiration, termination or cancellation of this Agreement,

Maruti shall immediately return to Suzuki the licensed information

or shall destroy the same at Suzuki's instructions.

8.4. An overview of the above clauses of the Agreement makes it

patent that the Licensed Information is for manufacture of Products

and Parts and not for setting up of the assessee's factory. The use

of Licensed information has been allowed by Suzuki, which is non-

exclusive to the assessee and, further, the assessee cannot sub-

licence the same to a third party except for getting parts

manufactured to be used by it in manufacture of the Products. The

assessee has been simply given a licence to use the Licensed

Information for a period of ten years and the assessee recognizes


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                                                    ITA No.2441/Del/2012

Suzuki's ownership of the Licensed Information. The assessee is

not entitled to use the Licensed Information for any products other

than those stipulated in the Agreement and, further, there is a

Confidentiality Clause which prevents the assessee from disclosing

the Licensed Information to a third party. Upon termination, the

assessee is not entitled to the use of Licensed Information and is

obliged to return the same to Suzuki. All the above features of the

Agreement make it unequivocal that what the assessee has acquired

under this Agreement is a right to use the `Licensed Information'.

There is no outright purchase by the assessee of the `Licensed

Information'. In fact, such licensed information is required to be

returned to Suzuki upon termination of the Agreement. The `right to

use' the licensed information, has certain restrictions put on by

Suzuki, which the assessee cannot violate. The assessee is under

obligation to maintain confidentiality of the Licensed Information.

A bird's eye view of all the above clauses makes it vivid that the


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royalty payment is `for use of' the Licensed Information and not `for

acquisition as its owner'. In this view of the matter, there can be no

scope for treating the royalty paid for the `licensed information' as

a capital expenditure.

8.5.   The ld. DR has relied on certain decisions, which categorize

payment for use of technical know-how etc. as a capital expenditure.

Similarly, the ld. AR has also relied on certain decision which mark

such payment as a revenue expense. In all these decisions, the

dividing line is whether the consideration is for purchase of

technical   information,    know-how       information,    designs       and

drawings, etc., or for its use. If it is for use alone, then it is revenue

and vice versa. Recently, the Hon'ble jurisdictional High Court in

CIT vs. Hero Honda Motors Ltd. (2015) 372 ITR 481 (Del), on

consideration of the relevant clauses of the agreement before it,

which considerably match with the Agreement under consideration,

has held that the payments made for Model fee (which is equivalent


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of Lumpsum royalty in our case) and Running royalty are revenue

expenses. In this judgment, the Hon'ble jurisdictional High Court

has considered several judgments of the Hon'ble Supreme Court and

Hon'ble High Courts and on consideration of their cumulative

effect, it has come to the conclusion that both the amounts are

revenue in nature. The Hon'ble Delhi High Court in an earlier

judgment in Shriram Refrigeration Industries Ltd. vs. CIT (1981)

127 ITR 746 (Del), has held that the lumpsum royalty is a revenue

expenditure. After going through the relevant clauses of the

Agreement, we have noted that royalty paid by the assessee is for

use of licensed information and no part of the same is towards its

acquisition as an owner. In the light of the above discussion, it is

absolutely clear that the view canvassed by the AO in treating this

amount as capital expenditure, is not sustainable.

8.6.   Our above finding decides the nature of royalty payment for

use of licensed information as revenue expenditure and not its


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quantum part. We have noticed above that the tribunal in its order

for the immediately preceding year has also given some

observations, which prima facie indicate that the entire amount of

royalty is for the use of licensed information. Since we have held the

royalty for use of licensed information as revenue expenditure, the

quantification aspect becomes irrelevant. It is so because the TPO

has held royalty for use of licensed information at ALP. We,

therefore, hold that the amount of royalty considered by the AO as

capital expenditure should be allowed as a revenue expenditure. At

the same time, depreciation allowed by the AO on this amount

should be taken back.

III. R&D cess on royalty paid

9.    The next ground is disallowance of R&D cess paid amounting

to Rs.9,68,47,294/-. Relevant discussion has been made by the AO

on page 26 of his final order. The assessee treated the amount of

royalty and cess on royalty as revenue expenditure. The AO

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disallowed a sum of Rs.9.68 crore after proportionately allowing

deduction to the extent of depreciation allowed by him on royalty.

There is no dispute on the nature of cess, which is on royalty and

has been treated both by the assessee as well as the AO as part and

parcel of royalty and accordingly claimed/disallowed in line with

the treatment of royalty. Since we have allowed deduction for the

entire amount of royalty paid by the assessee during the year by

deleting the TP adjustment and also overturning the action of the

AO in treating the remaining half part as capital expenditure, the

consequential amount of cess on royalty payment automatically

becomes deductible. We, therefore, direct to allow deduction of

Rs.9.68 crore.

IV. Royalty paid to non-AE
10.1. The next issue raised through Ground No.18.14 is against the

transfer pricing adjustment in respect of royalty paid, inter alia, to

M/s Auto Chassis International purely for technology/know-how.


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The ld. AR contended that total royalty paid by the assessee

amounting to Rs.254.39 crore included a sum of Rs.1,09,45,172/-

towards licence fees paid to Auto Chassis International, which is a

non-associated enterprise. It was argued that such payment to non-

AE cannot be benchmarked u/s 92 of the Act.

10.2. After considering the rival submissions and perusing the

relevant material on record, we agree in principle that the ALP u/s

92 can be determined only of international transactions, which form

the basis for making addition towards transfer pricing adjustment.

Ordinarily, an international transaction is a transaction between two

or more AEs. If there is a transaction with non-AE that

automatically goes out of reckoning for the purposes of processing it

u/s 92 of the Act. Further, we do not consider it necessary to

consider this issue on merits because in earlier paras we have

deleted entire royalty addition made by the AO, comprising of

transfer pricing adjustment on account of international transaction of


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payment for use of `Licensed trademark'; and payment for use of

`Licensed information' treated by him as capital expenditure. The

net effect of this deletion is that even if the amount under

consideration is paid to AE, still it is deductible. Be that as it may,

we find that this ground is otherwise also not sustainable. The

reason being that the TPO made transfer pricing adjustment in

respect of royalty paid for use of licensed trademark. On the

contrary, this amount paid to M/s Auto Chassis International is

admittedly for use of know-how and not their trademark.

V.    Error of the AO in computing disallowable amount of

royalty

11.    Ground no. 10.5 of the assessee's appeal is against the

computation error made by the AO in determining the amount of

disallowance at Rs.95.98 crore towards royalty paid for the use of

licensed information. In view of our allowing deduction of royalty



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                                                      ITA No.2441/Del/2012

in full, this ground challenging the computation error made by the

AO in making disallowance, becomes infructuous.

C. SUBSIDY

12.1.     The next issue raised in this appeal is against treating

subsidy of Rs.32,25,70,213/- as revenue receipt as against the

assessee's claim of capital receipt. The assessee received sales-tax

subsidy in the form of 50% exemption of sales-tax. Though the

amount was initially treated as revenue receipt in the return of

income, but the assessee claimed it as capital receipt during the

course of assessment proceedings. The assessee submitted that it

was a capital subsidy allowed by the Haryana Government for

helping it in expansion of industry. In support of its claim of such

subsidy as capital receipt, the assessee relied on the judgment of the

Hon'ble Supreme Court in CIT vs. Ponni Sugars & Chemicals Ltd.

& Ors. (2008) 306 ITR 392 (SC). The AO treated this amount as






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                                                        ITA No.2441/Del/2012

revenue in nature and hence taxable. The assessee is aggrieved

against the treatment of sales-tax subsidy as revenue receipt.

12.2. We have heard the rival submissions and perused the relevant

material on record. Primary question for deciding the nature of any

subsidy, as a capital or revenue receipt, is to ascertain the object for

which it was given. The mode of its quantification or manner of its

disbursement, are irrelevant considerations. When the object of

subsidy is to encourage an assessee to set up or expand industry, it

assumes the character of a capital receipt. Such subsidy may be

given in any form, may be by financing investment in capital asset

or giving the amount in cash or by means of a waiver of sales-tax,

etc. for a particular period. But, when the object is not to encourage

industrialisation but to facilitate the carrying on an existing business

more efficiently post its set-up, then it becomes a revenue receipt,

irrespective of the form of disbursement. The Hon'ble Supreme

Court in Ponni Sugars (supra) has held that : `if the object of the


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                                                          ITA No.2441/Del/2012

assistance under the subsidy scheme was to enable the assessee to

set up a new unit or to expand the existing unit then the receipt of

the subsidy was on capital account'.


12.3.     At this juncture, it is imperative to note that the Finance Act,

2015, w.e.f. 1-4-2016 has further enlarged the definition of income

given u/s 2(24) by inserting sub-clause (xviii), which reads as

under:-


        `(xviii) assistance in the form of a subsidy or grant or cash
        incentive or duty drawback or waiver or concession or
        reimbursement (by whatever name called) by the Central
        Government or a State Government or any authority or body
        or agency in cash or kind to the assessee other than the
        subsidy or grant or reimbursement which is taken into
        account for determination of the actual cost of the asset in
        accordance with the provisions of Explanation 10 to clause
        (1) of section 43;'


12.4.      A reading of the above provision makes it explicit that now

subsidy given by the Central Government or a State Government or any

authority etc. for any purpose, except where it is taken into account for

determination of the actual cost of the asset under Explanation 10
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section 43(1), has become chargeable to tax. Even if a subsidy is given

to attract industrial investment or expansion, which is a otherwise a

capital receipt under the pre-amendment regime, shall be income

chargeable to tax, except where it has been taken into account for

determination of actual cost of asset in terms of Explanation 10 to

section 43(1). As this amendment is prospective, it cannot take effect

retrospectively to include the assessment year under consideration.


12.5.   Adverting to the facts of the instant case, we find that the

assessee was allowed subsidy under Industrial Policy 1999 of the

Government of Haryana, a copy of which is available at page 777 of

the paper book. The objective of the Industrial Policy has been set

out at page 779 which talks of increasing the share of industry by

`attracting new investments and growth of existing industry.'

Pursuant to this Industrial Policy, the assessee was given

Entitlement certificate under Rule 28C of Haryana Central Sales-tax

Rules 1975, a copy of which has been placed at page 871 of the

paper book. Para 7 of the Certificate puts condition for entitlement
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of subsidy by providing that: `incentive would be given only in

respect of vehicles rolled out of production capacity of 70000

vehicles added as a result of first expansion and not to the

production augmented by capacity addition of 30000 vehicles as a

result of second expansion.' When we consider section 25A along

with Rule 28C of Haryana General Sales-tax Act/Rules, it becomes

evident that the object of subsidy is in line with the Industrial Policy

of Haryana Government, being `attracting new investments and

growth of existing industry.' In our considered opinion, such

subsidy cannot be characterized as anything other than a capital

receipt. It has been brought to our notice that the Tribunal, for the

immediately preceding assessment year, has also treated similar

subsidy as capital receipt. This ground is, therefore, allowed.




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D. T.P. ADJUSTMENT OF AMP EXPENSES

13.1.   The next ground is against the addition on account of transfer

pricing adjustment towards advertisement, marketing and promotion

(AMP) expenses.

13.2.      Briefly stated, the facts of this ground are that the TPO

bifurcated AMP expenses into routine advertisement expenses and non-

routine advertisement expenses. Applying the bright line test, the TPO

considered three comparables, namely, Hindustan Motors Ltd. (Nil AMP

expenses), Mahindra and Mahindra (Rs.54.86 crore advertisement

expenses) and Tata Motors Ltd. (Rs.187.25 crore advertisement

expenses). He calculated percentage of AMP expenses to gross sales of

Hindustan Motors at `0', of Mahindra and Mahindra at 0.61%, and of

Tata Motors Ltd. at 0.77%.       Average of the percentage of AMP

expenses to gross sales of Mahindra and Mahindra and Tata Motors Ltd.

was determined at 0.69%. Since the assessee's percentage of AMP

expenses to gross sales stood at 1.53%, the TPO proposed TP adjustment

of Rs.124.24 crore. Thereafter, he passed an order u/s 154 on the ground

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that the average percentage of comparables was inaccurately worked out

by omitting 0% of Hindustan Motors Ltd. That is how, he passed order

u/s 154 by taking arithmetic mean of three comparables at 0.456% and,

recommending the TP adjustment of Rs.158.64 crore. The AO, giving

effect to the TPO's order and after going through the directions of the

DRP, finally made the said addition. The assessee is aggrieved against

the addition so made by the AO, which also covers the sole issue in the

appeal filed against the order passed u/s 154 due to enhanced TP

adjustment of AMP expenses.

13.3.   We have heard the rival submissions and perused the relevant

material on record. At the very outset, it was contended by the ld. AR

that the Tribunal, for the immediately preceding assessment year,

namely, AY 2005-06, has followed the Special Bench decision in the

case of LG Electronics India Pvt. Ltd. vs. DCIT (2013) 152 TTJ (Del)

273 (SB) and upheld the legal issues, namely, AMP expenses being an

international transaction, jurisdiction of the TPO in making TP

adjustment of AMP expenses and limitation, etc. against the assessee


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and thereafter sent the matter to the TPO for recomputation of transfer

pricing adjustment on account of AMP expenses to be done in

conformity with the Special Bench decision in LG Electronics India Pvt.

Ltd. (supra). The ld. AR submitted that the said decision of the Tribunal

for the immediately preceding assessment year has been challenged by

the assessee before the Hon'ble High Court and the hearing is under

way. It was, therefore, prayed that the matter of the TP adjustment of

AMP expenses for the instant year be sent back to the TPO/AO for

deciding it in conformity with the final view to be taken by the Hon'ble

High Court for the preceding year.      It was also submitted that the

judgment of the Hon'ble Delhi High Court in Sony Ericson Mobile

Communications India Pvt. Ltd. vs. CIT dated 16.3.2015 cannot be

applied as the facts of the cases considered in that batch of appeals are

different from the assessee.   In the opposition, the ld. DR strongly

recommended to follow the judgment of the Hon'ble Delhi High Court

in Sony Ericson Mobile Communications Ltd., in which there is

discussion about the TP adjustment to be made in the case of


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manufacturers. He further relied on the order passed by the Tribunal in

the case of Perfetti Van Melle India Pvt. Ltd. vs. DCIT (ITA

No.407/Del/2015) in which the Bench has discussed about the TP

adjustment of AMP expenses in the case of a manufacturer, as is the

case under consideration.

13.4.      We have heard the rival submissions and perused the relevant

material on record. It is an admitted position that the assessee before us

is a `Manufacturer' and not a `Distributor'. The Special Bench of the

Tribunal in the case of LG Electronics India Pvt. Ltd. Vs. ACIT (supra),

by its majority decision, without drawing any distinction between

manufacturers and distributors, has held, inter alia, that AMP is a

transaction and also an international transaction within the meaning of

section 92B of the Act and that the TPO has jurisdiction to compute the

ALP of this international transaction despite the same not having been

specifically referred to by the AO. On the question of determination of

the ALP of this international transaction, the Special bench approved the

application of bright line test for working out the amount of non-routine


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AMP expenses and held that the ALP of AMP expenses should be

determined on Cost plus method by treating AMP transaction as a

separate and distinct from other international transactions. It further held

that the selling expenses directly incurred in connection with the sales do

not lead to brand promotion and hence should not be brought within the

overall ambit of AMP expenses. The Special bench laid down certain

parameters to be taken into consideration for determining the ALP of

AMP expenses. In the ultimate analysis, the matter was sent back to the

TPO/AO for undertaking the exercise afresh in the light of its directions.

13.5.      Following the said special bench order, various benches of

the Tribunal decided several cases involving AMP expenses, restoring

the matter to the file of AO/TPO for deciding this issue in conformity

with the directions given by the Special Bench in          LG Electronics

(supra).   Several assessees as well as the Revenue preferred their

respective appeals before the Hon'ble High Courts against the tribunal

orders following the Special bench order. A batch of appeals in relation

to `Distributors' (not Manufacturers) led by Sony Ericson Mobile


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Communications India Pvt. Ltd. Vs. CIT has been disposed of by Their

Lordships of the Hon'ble Delhi High Court, delivering judgment on 16th

March, 2015, upholding the majority view of Special Bench in LG

Electronics (supra) treating AMP as an international transaction and also

conferring jurisdiction in the TPO to determine the ALP of the

international transaction of AMP expenses. Dealing with the

computation of ALP of such transactions by a Distributor, the Hon'ble

High Court has held, inter alia, that the international transaction of AMP

expenses should be bundled/aggregated with other international

transaction carried out by the assessee as a distributor, who either simply

acts an agent of manufacturer or purchases goods from the manufacturer

for resale at his own account. The Hon'ble High Court held that where

the TNMM has been applied as the most appropriate method by a

Distributor, which method has not been disturbed by the TPO, then, the

international transaction of AMP and distribution activities should be

clubbed. It further held that for determining the ALP of such

transactions under a combined approach, only such comparables should


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be chosen which conform to the AMP functions and other distribution

functions conducted by the assessee. If there is some difference in the

functions under these international transactions, including that of AMP,

between the assessee and the comparables, then, suitable adjustment

should be made to bring both the transactions at par. If probable

comparables are not performing similar functions as done by the

assessee and no adjustment is possible for bringing the international

transactions of the assessee in an aggregate manner at par with those

undertaken by the comparables, then, segregation should be done and

the international transaction of AMP spend should be separately

processed under the transfer pricing provisions for the purposes of

determining its ALP separately. In such a determination of ALP of

AMP expenses in a segregated manner, proper set off on account of

excess purchase price adjustment should be allowed. The view taken by

the Special bench of the Tribunal in segregating routine and non-routine

expenses on the basis of bright line test has been set aside by the

Hon'ble High Court. Further, the decision taken by the Special Bench to


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the effect that the expenses concerned with the sales, such as, rebates

and discounts etc., should be excluded from the ambit of AMP expenses,

has been upheld.

13.6.        We can summarize the relevant position emanating from the

judgment of the Hon'ble High Court, as under : -

        AMP expense is an international transaction [Paras 52 & 53 of

        the judgment] ;

        The TPO has jurisdiction to determine the ALP of the

        international transaction of AMP expenses [Para 50 of the

        judgment];

        Inter-connected international transactions can be aggregated and

        section 92(3) does not prohibit the set-off [Paras 80 & 81];

        AMP is a separate function. An external comparable should

        perform similar AMP functions. [Paras 165 &166] ;

        Bright line test cannot be applied to work out non-routine AMP

        expenses for benchmarking [Para 194(x)];



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ALP of AMP expenses should be determined preferably in a

bundled manner with the distribution activity [Paras 91, 121 &

others] ;

For determining the ALP of these transactions in a bundled

manner, suitable comparables having undertaken similar activities

of distribution of the products and also incurring of AMP

expenses, should be chosen [Paras 194(i), (ii), (viii) & others];

The choice of comparables cannot be restricted only to domestic

companies using any foreign brand [Para 120] ;

If   no comparables having performed both the functions in a

similar manner are available, then, suitable adjustment should be

made to bring international transactions and comparable

transactions at par [Para 194 (iii)] ;

If adjustment is not possible or comparable is not available, then,

the TNMM on entity level should not be applied [Paras 100, 121,

194(iii) & (vi)] ;




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      In the above eventuality, international transaction of AMP should

      be viewed in a de-bundled manner or separately [Paras 121&

      194(xi)] ;

      In separately determining the ALP of AMP expenses, the TPO is

      free to choose any other suitable method including Cost plus

      method [Para 194(xiii)];

      In so making a TP adjustment on account of AMP expenses, a

      proper set off/purchase price adjustment should be allowed from

      the other transaction of distribution of the products [Para 93] ;

      Selling expenses cannot be considered as part of AMP expenses

      [Paras 175 & 176 of the judgment].

13.7. The bright line test, disapproved by the Hon'ble High Court,

primarily concentrates on the quantitative aspects of the AMP expenses

alone. It overlooks the examination of the AMP functions carried out by

the assessee on one hand and the comparables on the other.                The

Hon'ble High Court in Sony Ericson Mobile (supra), has held that AMP

expense is a separate international transaction and also bright line test is


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not applicable for determining the ALP of AMP expenses. The manner

for the determination of the ALP of the distribution activity and AMP

activity has also been set out by the Hon'ble High Court to be

conducted, firstly, in a bundled manner by considering the distribution

and AMP functions performed by the assessee as well as the probable

comparables, and if probable comparables having performed both the

functions are not available, then to determine the ALP of AMP expenses

in a segregated manner. As such, it becomes immensely important to

separately examine the Distribution activity and AMP functions

undertaken by the assessee as well as probable comparables. It is vital to

highlight the difference between the AMP expenses and AMP functions.

Whereas the AMP functions are the means by which the AMP activity is

performed, the AMP expenses are the amount spent on the performance

of such means (functions). To put it simply, an examination of AMP

functions carried out by the assessee and the probable comparables is

sine qua non in the process of determination of the ALP of the

international transaction of AMP spend, either in a segregate or an


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aggregate manner. What Their Lordships have held is to bundle the

distribution activity with the AMP activity, being two separate but

connected international transactions, for the purposes of determination

of the ALP of both these international transactions in a combined

manner.

13.8.      The ld. AR argued that the assessee applied TNMM and

since the profit margin declared by the assessee from its international

transactions favourably compares with the average margin of the

comparables, which fact has not been disputed by the TPO, then no

adjustment should be made on account of AMP expenses because such

expenses stand subsumed in the overall operating profit. The argument

of the ld. AR, if taken to a logical conclusion, will make the AMP spend

a non-international transaction, which, in our considered opinion, is

contrary to the verdict of the Hon'ble Delhi High Court in Sony Ericsson

(supra). Once AMP expense has been held to be an international

transaction, it is, but, natural that the functions performed by the

assessee under such a transaction need to be compared with similar


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functions performed by a comparable case. If AMP functions performed

by the assessee turn out to be different from those performed by a

probable comparable company, then, an adjustment is required to be

made so as to bring the AMP functions performed by the assessee as

well as the comparable, at the same pedestal. If we concur with the

contention of the ld. AR that the addition on account transfer pricing

adjustment of AMP expenses be deleted without any examination of the

AMP functions carried out by the assessee as well as comparables, this

will amount to snatching away the tag of international transaction from

AMP expenses, which has been assigned by the Hon'ble High Court.

What Their Lordships have held in the judgment is that the distribution

activity and AMP expenses are two separate but related international

transactions. It is only for the purposes of determining their ALP that

these two should be aggregated. The process of such aggregation does

not take away the separate character of the AMP transaction, albeit

related.   An analysis and examination of the distribution and AMP

functions carried out by an assessee must be necessarily done in the first


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instance, which should be then compared with similar functions

performed by some probable comparables. If the distribution and AMP

functions performed by an assessee turn out to be different from those

performed by probable comparables, then, a suitable adjustment should

be made to the profits of the comparable so as to counterbalance the

effect of such differences.     If however differences exist in such

functions, but no adjustment can be made, then, such probable

comparable should be dropped from the list of comparables. If, in doing

this exercise, there remains no company doing comparable distribution

and AMP functions, then, both the international transactions are required

to be segregated and then examined on individual basis by finding out

probable comparables doing such separate functions similarly. For the

international transaction of AMP spend, this can be done by, firstly,

seeing the AMP functions actually performed by the assessee and then

comparing it with the AMP functions performed by a probable

comparable. If both are found out to be similar, then the matter ends and

a comparable is found and one can go ahead with determining the ALP


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of such a transaction. If the AMP functions performed by the two

entities are found to be different, then adjustment is required to be made

in the case of a probable comparable, so as to make it uniform with the

assessee. A particular assessee may have possibly done, say, four

different AMP functions as against the probable comparable having

done, say, only three. In such a scenario, again the adjustment will be

warranted. In another situation, the AMP functions performed by the

assessee and probable comparable may be similar but with varying

standards, which will also call for an adjustment. Crux of the matter is

that the AMP functions performed by the assessee must be similar to

those done by the comparable, in the same manner as such functions are

compared in any other international transaction. However, in computing

ALP of AMP spend, the adjustment or set off, if any, available from the

distribution function, should be allowed. The essence of the judgment in

the case of Sony Ericson Mobile (supra) is that the two international

transactions of Distribution and AMP should be examined on the

touchstone of transfer pricing provisions, but on an aggregate basis.


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Determining the ALP of two transactions in an aggregate manner

postulates making a comparison of both the functions of distribution and

AMP carried out by the assessee with the comparables, so that surplus

from the distribution activity could be adjusted against the deficit in the

AMP activity. The Hon'ble High Court has no where laid down that the

AMP functions performed by the assessee should not be compared with

those performed by the comparable parties. On the contrary, it turned

down the contention raised by the ld. AR urging for not treating AMP as

a separate function, which is apparent from the extraction from para 165

of the judgment : `On behalf of the assessee, it was initially argued that

the TPO cannot account for or treat AMP as a function. This argument

on behalf of the assessee is flawed and fallacious for several reasons.

There are inherent flaws in the said argument'. It held vide para 165 of

the judgment that : `An external comparable should perform similar

AMP functions.' Thus it is manifest that comparison of AMP functions

is vital which cannot be dispensed with. Let us we go a step further with

the alternative prescription of the judgment that if ALP of both the


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transactions of Distribution and AMP cannot be         determined in a

combined manner, then the ALP of AMP function should be separately

done. The submission advanced by the assessee of considering the

profit on an entity level without making comparison of AMP functions

done by the assessee as well as the comparable, will render this

alternative approach incapable of compliance. Canvassing such a view

as argued on behalf of the assessee amounts to treating AMP spend as a

non-international transaction, which is patently incapable of acceptance.

The fact remains that as per the verdict of the Hon'ble High Court, the

AMP spend is an international transaction, which is required to be

processed under Chapter X of the Act by taking into account the AMP

functions performed by an assessee and then comparing such functions

with those performed by comparable entities. This can be done only by

mandatorily making a comparison of the AMP functions performed by

the assessee and comparables and then making an adjustment, if any,

due to differences between the two, so that the AMP functions

performed by the assessee and comparable are brought to a similar


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platform. In fact, this is also the prescription of Rule 10B(1)(e), which

provides as under :-

        ` (e) transactional net margin method, by which,--
              (i) the net profit margin realised by the enterprise from an
        international transaction entered into with an associated enterprise
        is computed in relation to costs incurred or sales effected or assets
        employed or to be employed by the enterprise or having regard to
        any other relevant base ;
              (ii) the net profit margin realised by the enterprise or by an
        unrelated enterprise from a comparable uncontrolled transaction or
        a number of such transactions is computed having regard to the
        same base ;
              (iii) the net profit margin referred to in sub-clause (ii) arising
        in comparable uncontrolled transactions is adjusted to take into
        account the differences, if any, between the international
        transaction and the comparable uncontrolled transactions, or
        between the enterprises entering into such transactions, which
        could materially affect the amount of net profit margin in the open
        market ;
               (iv) the net profit margin realised by the enterprise and
        referred to in sub-clause (i) is established to be the same as the net
        profit margin referred to in sub-clause (iii) ;
              (v) the net profit margin thus established is then taken into
        account to arrive at an arm's length price in relation to the
        international transaction.'


13.9.          A perusal of the sub-clause (iii) of this Rule divulges that net

profit margin under a comparable uncontrolled transaction as determined


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under sub-clause (ii) should be: "adjusted to take into account the

differences, if any, between the international transaction and the

comparable uncontrolled transactions."     It is only such adjusted net

profit margin in sub-clause (iii) of Rule 10B(1)(e) which is compared

with the net profit margin realized by the assessee as per the mandate of

sub-clause (iv) of Rule 10B(1)(e).

13.10.     Sub-rule (2) of Rule 10B provides that `for the purposes of

sub-rule (1)', the comparability of an international transaction with an

uncontrolled transaction shall be judged with reference to the following,

namely -- (a) the specific characteristics of the property transferred or

services provided in either transaction ; (b) the functions performed,

taking into account assets employed or to be employed and the risks

assumed, by the respective parties to the transactions ; (c)              the

contractual terms (whether or not such terms are formal or in writing) of

the transactions which lay down explicitly or implicitly how the

responsibilities, risks and benefits are to be divided between the

respective parties to the transactions ; (d) conditions prevailing in the


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markets in which the respective parties to the transactions operate,

including the geographical location and size of the markets, the laws and

Government orders in force, costs of labour and capital in the markets,

overall economic development and level of competition and whether the

markets are wholesale or retail. Sub-rule (3) of Rule 10B stipulates that

an uncontrolled transaction shall be comparable to an international

transaction if    (i) none of the differences, if any, between the

transactions being compared, or between the enterprises entering into

such transactions are likely to materially affect the price or cost charged

or paid in, or the profit arising from, such transactions in the open

market ; or (ii) reasonably accurate adjustments can be made to

eliminate the material effects of such differences.

13.11.     A comparative study of sub-rules (1), (2) and (3) of Rule 10B

makes it palpable that the international transaction and the uncontrolled

transaction with which comparison is sought to be made for determining

the ALP, in the first instance, must have overall similar characteristics.

It is vivid that if the goods/services are different, then no effective


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comparison can be made. Once the goods/services under both the

transactions are broadly similar but there is a difference in them because

of certain specific characteristics; and/or the products/services in both

the transactions are identical, but still there are certain differences due to

the contractual terms or the geographical location etc., then, a

reasonably accurate adjustment should be made for eliminating the

material effects of such differences so as to bring the international

transaction and the comparable uncontrolled transaction on the same

podium. If due to one reason or the other, no reasonable accurate

adjustment can be made due to such differences, then, such uncontrolled

transaction should not be considered as a comparable transaction.

13.12.      It is discernible that the prescription of Rule 10B is in

complete harmony with the ratio of the judgment in the case of Sony

Ericson Mobile (supra),      to the effect that the AMP functions carried

out by the assessee are required to be necessarily compared with the

AMP functions carried out by a comparable entity in determining the

AMP of ALP expenses. Difference between the functions, if capable of


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adjustment, should be given effect to in the profit rate of the comparable

and if such difference cannot be given adjusted, then, the probable

comparable should be eliminated.

13.13.     We have noticed above that the assessee is a `Manufacturer'

and not a `Distributor'. The judgment in the case of Sony Ericson

Mobile (supra) primarily deals with a case of Distributor, though the

initial discussion about the character of AMP spend as an international

transaction and the jurisdiction of the TPO etc. are common to a

distributor and also a manufacturer. Similarly there are some other

observations in this judgment, which are common to both. Though this

judgment lays down at length some broader principles for the

determination of ALP of AMP expenses in the case of a `Distributor',

still certain principles dealing exclusively with the determination of the

ALP of AMP expenses in the case of a `Manufacturer', have also been

laid down. Such discussion has been made in para 92 of the judgment,

the relevant part of which is reproduced here as under : -




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`92. The majority judgment refers to an example where the Indian
AE may have earned actual profit of Rs.140/-, but returned reduced
net profit of Rs.120/- as the Indian AE had incurred brand building
expenses to the tune of Rs.20/- for the foreign AE, whereas the net
profit on sales declared by comparable uncontrolled transactions
was Rs.100/- only. Thus, it was observed that the costs including
AMP expenses are independent of cost of imported raw
material/finished products having some correlation with overall
profit. The example highlights the weakness of the TNM Method.
The reasoning would be equally valid, where no AMP or brand
building' expenses are incurred. (See paragraph 21.8 to 22.10 of the
majority decision). The net profit margins can be affected by
variation of operating expenses. Thus, the requirement to select
appropriate comparable and adjustment. It would be inappropriate
and unsound to accept comparables, with or without adjustment and
apply TNM Method, and yet conjecturise and mistrust the arm's
length price. TNM Method would not be the most appropriate
method when there are considerable value additions by the
subsidiary AEs. In paragraph 22.9, the majority decision has
observed that all costs including the AMP expenses are independent
of cost of material. This indicates that the observations have been
made with reference to manufacturing activities. It would not be
appropriate and proper to apply the TNM Method in case the
Indian assessed is engaged in manufacturing activities and
distribution and marketing of imported and manufactured products,
as interconnected transactions. Import of raw material for
manufacture would possibly be an independent international
transaction viz. marketing and distribution activities or functions.
We have earlier used the term `plain vanilla distributor'. When we
use the words `plain vanilla distributor' we do not mean plain
vanilla situations, but value additions and each party making
valuable unique contribution.'




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13.14.   It is discernible from the italicized part of the above para that

the application of TNM Method is not appropriate and proper in case

the assessee is engaged in manufacturing activities.               In such

circumstances, the import of raw material for manufacture would be an

independent international transaction viz. marketing and distribution

activities or functions. The core of the above para is that in the case of a

`Manufacturer', the international transactions concerned with the

manufacturing activity cannot be aggregated with the AMP activities as

both are separate and distinct. Once both are held to be separate and

TNMM is not to be applied, the only thing which remains is that the

AMP transaction should be separately and independently processed

under the Chapter X of the Act as per any suitable method (other than

TNMM) including Cost plus method, but by excluding the selling

expenses from the overall base of AMP expenses.

13.15.   Turning to the facts of the case, we find that the TPO/AO have

computed disallowance of AMP expenses on the basis of bright line test.

There is no discussion about the AMP functions carried out by the


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assessee or comparables. Now since the Special bench order has been

partly modified by the Hon'ble Delhi High Court, including the non-

applicability of the bright line test, and no material has been placed on

record by the ld. AR to, firstly, demonstrate the AMP functions carried

out by the assessee and then, to compare such functions with those done

by comparables, this issue cannot be decided at our end. Under such

circumstances, we set aside the impugned order and remit the matter to

the file of the AO/TPO for deciding it afresh as per law. In this fresh

exercise, the TPO will follow the parts of the judgment in Sony Ericson

(supra) as are common to both Manufacturers and Distributors; apply

the parts of the judgment as are applicable to a `Manufacturer'; and

ignore the parts of the judgment which pertain exclusively to a

`Distributor'. Needless to say, the assessee will be allowed a reasonable

opportunity of hearing in such fresh proceedings.

13.16.     Now we espouse the contention of the ld. AR to send the

matter back to the TPO/AO for deciding this issue in conformity with

the decision yet to be rendered by the Hon'ble High Court in its own


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case, for which hearing is still going on. This contention, in our

considered opinion, is devoid of any merit. It is axiomatic that there can

be no direction to follow a forthcoming judgment which is not in

existence at the time of giving direction. A direction can be given by a

higher authority to the lower authority to follow only such a decision

which is available for consideration at the time of giving direction by the

higher authority. There can be no direction to follow a decision, which

itself has not yet seen the light of the day at that point of time. Presently,

we have the benefit of the judgment of the Hon'ble Delhi High Court in

Sony Ericsson (supra), which has also dealt with the treatment to be

given in the context of a manufacturer. The Delhi bench of the tribunal

in some decisions including Perfetti Van Melle India (supra) has dealt

with the manner of computation of the ALP of the AMP expenses

incurred by manufacturers in the light of the judgment in the case of

Sony Ericsson (supra). No reasons, except the pendency of the matter in

the Hon'ble High Court in assessee's own case, have been given by the

ld. AR to claim departure from the view taken by the tribunal in earlier


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cases. We, therefore, turn down the request of the ld. AR in this regard.

With these observations, we send the matter back to the file of TPO/AO

for a fresh determination of the ALP of the AMP expenses in accordance

with our above observations. In view of our decision in restoring the

issue of calculation of ALP of AMP expenses to the TPO/AO, the

assessee's appeal against the order passed by the AO/TPO u/s 154,

enhancing the amount of TP adjustment, would automatically be taken

care of in such fresh proceedings. We want to clarify that in such fresh

proceedings, the assessee will be at liberty to lead any fresh evidence in

support of its case.

E. MISCELLANEOUS GROUNDS

I. Excess consumption of raw materials

14.1.       Ground nos. 7 to 7.4 are against the addition of Rs.4.48 crore

made by the AO on account of excess consumption of raw material and

components. The facts apropos these grounds are that the assessee is

following `Just-in-time' system for management and reorder of

inventory, in which inventories are ordered just in time when their
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requirement arises. The material so required is delivered straight to the

shop floor in the relevant department. As a result of this, though the

purchases are recorded as per actual bills upon the arrival of goods in the

premises, the inventories are procured by considering the standard

consumption of various raw materials for manufacture of vehicles. Due

to this difference in the making of entry in the books of account and

actual receipt of goods directly in the relevant department, which, in

turn, is based on standard quantity of material required for manufacture

of vehicles, sometimes there arises difference between the physical

inventory taken and the inventory as per books of account at the end of

the year. Some items of stock may be eventually under-consumed while

others over-consumed. The net effect of under/over consumption is

nothing, but, the deviation from the standard consumption. During the

year in question, the variation between physical stock and stock register

was Rs.4.48 crore negative, which means items where stock as per stock

register was more than physical stock and Rs.2.86 crore positive i.e.,

items where stock as per stock register was less than the physical stock,


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leaving the net difference of Rs.1.62 crore. The AO disallowed Rs.4.48

crore ignoring the excess amount of Rs.2.86 crore. The assessee is

aggrieved against this addition.

14.2.   It is manifest that the net difference of Rs.1.62 crore is nothing,

but, excess consumption over the standard consumption. Such shortage

of Rs.1.62 crore is only 0.018% of total consumption of material debited

to the Profit & Loss Account. In view of the fact that this amount has

actually been consumed in the manufacturing of goods, it cannot call for

any disallowance. There may be production efficiencies or inefficiencies

leading to under or over consumption of inputs vis-a-vis standard

consumption. Such under or over consumption becomes a part of the

cost of production. In our considered opinion, there can be no logic in

disallowing such amount, which is nothing but excess consumption of

inputs. Similar view has been taken by the Tribunal in the assessee's

own case for earlier assessment years including the immediately

preceding assessment year. This ground is allowed.




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II. Disallowance u/s 14A

15.1. The next ground is disallowance u/s 14A of the Act amounting to

Rs.10,44,83,860/-. The assessee received dividend income of Rs.72.00

crore which was claimed as exempt u/ss 10(34) and 10(35) of the Act.

The AO invoked the provisions of section 14A. Applying the mandate

of Rule 8D, he worked out the amount disallowable at Rs.10,44,83,860/.

This disallowance consists of three amounts. First is Rs.1.3 crore

towards interest. Second is Rs.4.6 crore, being ½% of the average value

of investments towards administrative expenses.       By mistake, once

again, the AO included a sum of Rs.4.6 crore towards ½% of

administrative expenses, thereby making total of disallowance at

Rs.10.44 crore. The assessee has assailed this disallowance.

15.2.    We have heard the rival submissions and perused the relevant

material on record. It is observed that the year under consideration is

AY 2006-07. The Hon'ble jurisdictional High Court in the case of

Maxopp Investments Ltd. vs. CIT (2012) 347 ITR 272 (Del) has held that

disallowance u/s 14A can be made as per Rule 8D only from assessment

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                                                         ITA No.2441/Del/2012

year 2008-09 as rule 8D is prospective. It has been further held by Their

Lordships that for earlier years, the disallowance should be made as per

`reasonable and acceptable method of apportionment.' In view of the

above discussion, it becomes clear that the AO's decision in applying

Rule 8D for making disallowance u/s 14A of the Act, cannot be

countenanced. It is noted that similar disallowance was made for the

immediately preceding year. When the matter came up for consideration

before the tribunal, the Bench held that the disallowance u/s 14A cannot

be made as per Rule 8D and               the question of computation of

disallowance u/s 14A has been remitted to the AO for doing it afresh as

per law. Respectfully following the precedent, we also set aside the

impugned order on this score and send the matter to the file of AO for

making disallowance u/s 14A, in accordance with the view taken by the

Tribunal in its order for the assessment year 2005-06.

III. Disallowance u/s 35DDA

16.1. The next ground is against the disallowance of Rs.38,63,64,348/-

made u/s 35DDA of the Act.

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16.2. Succinctly, the facts of this ground are that the assessee claimed

deduction for a sum of Rs.38.63 crore u/s 35DDA being the aggregate of

1/5th of payments made to its employees under VR Scheme during the

previous year relevant to the assessment year 2002-03 and 1/5th of the

payments made to employees under VR Scheme during the period

relevant to the assessment year 2004-05. The AO made disallowance on

the ground that the VR Scheme was not in accordance with Rule 2BA of

the Income-tax Rules, 1962. The disallowance has been challenged

through this ground.

16.3.      After considering the rival submissions and perusing the

relevant material on record, it is observed that similar issue came up for

consideration before the Tribunal in its order for the AY 2004-05. After

making a thorough discussion on the issue, the Tribunal has held that

Rule 2BA is relevant only for the purpose of availing exemption u/s 10

by employees and not for the purpose of allowing deduction to the

employer u/s 35DDA of the Act. Resultantly, the disallowance made by

the AO came to be knocked down by the tribunal. In the absence of any


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distinguishing factor having been pointed out by the ld. DR, respectfully

following the precedent, we direct to allow deduction u/s 35DDA for a

sum of Rs.38.63 crore.

IV. Disallowance of club membership fee

17.1. The next ground is against the disallowance of Rs.1,79,509/- on

account of expenditure incurred on club membership. Shorn of

unnecessary details, it is observed that the assessee paid the said amount

on account of club membership, which the AO disallowed. The assessee

is in appeal before us.

17.2.    In our considered opinion, this issue is no more res integra in

view of the judgment of the Hon'ble Supreme Court in CIT vs. United

Glass Manufacturing Company Ltd. (SC) 2012-TIOL-102-SC-IT in

which it has been held that no disallowance can be made for club

membership in respect of the employees of the company. Similar view

has been taken by the Tribunal in the assessee's own case for the earlier

assessment    years       including   the   immediately   preceding     year.



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Respectfully, following the above precedents, we order for the deletion

of this addition.

V. Depreciation on software expenses capitalized in earlier years

18.1. Ground no. 14 is against not allowing depreciation amounting to

Rs.9,26,418/- on written down value of software expenses capitalized by

the AO in preceding years. The factual matrix of this ground is that the

assessee claimed deduction for software expenses incurred in earlier

years, which was refused by the AO, who held it to be a capital

expenditure. The view taken by the AO was finally upheld by the

Tribunal. In the final computation of income, the AO refused to allowed

depreciation on the capitalized value of software expenses.

18.2. It is obvious that once the AO has refused to grant deduction of

software expenses claimed by the assessee and capitalized the same by

treating it as capital asset, then depreciation on the written down value of

such software expenses is required to be granted as per law. Since no

such detail is available about the written down value of software

expenses capitalized in earlier years, we set aside the impugned order
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and remit the matter to the file of AO for allowing deduction in respect

of the written down value of the software expenses capitalized in earlier

years.

VI. Charging of statutory interest

19.    Next ground is against the charging of interest u/ss 234B, 234C

and 234D of the Act. This ground is consequential and is, accordingly,

allowed except the charging of interest u/s 234C. The ld. AR argued

that the AO computed interest u/s 234C on the basis of income finally

determined as against the income-tax due on returned income. We find

force in the arguments put forth on behalf of the assessee that

computation of interest u/s 234C for deferment of advance tax is

required to be made on the basis of `tax due on the returned income' as

has been enshrined in the provision itself. We, therefore, direct the AO

to verify this aspect of the matter and compute interest u/s 234C as per

law.

20.    Ground no. 27, against the initiation of penalty u/s 271(1)(c), is

premature and, hence, dismissed.
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21.       In the result, the main appeal of the assessee is partly allowed and

the appeal against the order u/s 154 is allowed for statistical purposes.

          The order pronounced in the open court on 24.08.2015.

               Sd/-                                         Sd/-

    [A.T. VARKEY]                                   [R.S. SYAL]
  JUDICIAL MEMBER                              ACCOUNTANT MEMBER


Dated, 24th August, 2015.
dk
Copy forwarded to:
     1.   Appellant
     2.   Respondent
     3.   CIT
     4.   CIT (A)
     5.   DR, ITAT

                                                   AR, ITAT, NEW DELHI.




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