Cars donated to Police Dept is CSR exp hence disallowable under section 37(1)

By | October 14, 2015

Expenditure incurred by car-manufacturer on gifts of cars to State police department was held not an eligible expenditure under section 37(1) as it was found not incidental to carrying on business and there was no commercial expediency in incurring this expenditure

donated

IN THE ITAT CHENNAI BENCH ‘B’ (THIRD MEMBER)

Hyundai Motor India Ltd.

v.

Deputy Commissioner of Income-tax, Large Tax Payer, Chennai

D. MANMOHAN, VICE-PRESIDENT (AS A THIRD MEMBER)
A. MOHAN ALANKAMONY, ACCOUNTANT MEMBER
AND V. DURGA RAO, JUDICIAL MEMBER

IT APPEAL NO. 2157 (MDS.) OF 2011
[ASSESSMENT YEAR 2007-08]

AUGUST  7, 2015

R.Vijayaraghavan and S.P. Chidambaram, Advocate for the Appellant. N. Rengaraj and Pathlavath Peerya, JCIT DRfor the Respondent.

ORDER

A. Mohan Alankamony, Accountant Member – This appeal is filed by the assessee, aggrieved by the order of the ld. Assessing Officer dated 31/10/2011 pursuant to the order of the T.P.O in accordance with the directions of the Learned Members of the D.R.P.

2. The Assessee has raised twelve elaborate grounds in its appeal however the crux of the issues are that:

Transfer Pricing Issues:—

(i) The assessee has challenged the show cause notice issued in respect to brand promotion activity undertaken by the assessee and advertisement expenses, which was treated as international transaction. (However, at the time of hearing the Ld. A.R. did not press this ground and therefore, it is dismissed as such.)
(ii) The Ld. Assessing Officer /DRP erred in confirming the order of the Ld. TPO who had held that the appellant ought to have received fees for brand promotion activity undertaken by the assessee to the extent of Rs. 82,12,54,41,380/- from its parent company viz. HMC Korea and the same was added to the income of the assessee under provisions of Section 92C of the Act.
(iii) Ld. A.O/DRP has erred in confirming the order of the Ld.TPO, who has held that the expenditure incurred on advertisement was in excess to the extent of Rs. 76.63 crores when compared with other comparable companies in an international transactions and thereby added the excess expenditure to the income of the assessee under provisions of section 92B of the Act.
(iv) Ld. A.O/DRP has erred in determining the ALP for royalty payable by the assessee to its AE at Rs. 265.50 crores as against the actual amount paid Rs. 369.77 crores, which was confirmed by the TPO and thereby addition to the extent of Rs. 104,27,36,417/- was made.
Corporate Tax Issues:—
(v) The DRP has erred in confirming the order of the Assessing Officer who had reduced the capital subsidy granted by SIPCOT from the cost of the assets of the assessee and consequently disallowed depreciation amounting to Rs. 7,91,060/-
(vi) The DRP has erred in confirming the order of the Ld. Assessing Officer in disallowing a sum of Rs. 5,29,910/- U/s. 14A of the Act by applying the provisions of Rule 8D of Income Tax Rules, 1961.
(vii) The DRP has erred in confirming the order of the Ld. Assessing Officer in disallowing expenditure of Rs. 5,20,97,000/- on providing 100 cars to the Tamilnadu Police Department.
(viii) The DRP has erred in confirming the order of the Ld. Assessing Officer in treating the export incentives on account of target plus scheme and focus market scheme amounting to Rs. 5,52,26,335/- and Rs. 3/- crores respectively as the income of the assessee for the assessment year 2007- 08, though the same has not accrued to the assessee during the relevant assessment year.
(ix) The DRP has erred in confirming the order of the Ld. Assessing Officer in disallowing the additional depreciation amounting to Rs. 8,52,500/- in respect of assets used in its regional offices.
(x) The Ld. Assessing Officer erred in not granting the credit for the tax deducted at source amounting to Rs. 39,90,609/-.
(xi) The Ld. Assessing Officer has erred in levying interest U/s. 234B & 234D of the Act.

3. The brief facts of the case are that the assessee is engaged in the business of manufacturing, selling and servicing of passenger vehicles and related spare parts/CKD parts in the domestic market as well as overseas. The assessee had field its e-return for the assessment year 2007-08 on 31.10.2007 declaring its total income as Rs. 815,75,84,340/-. Initially the return was processed U/s.143(1) of the Act and subsequently the case was taken for scrutiny and the assessment was completed U/s.143(3) read with section 92CA & 144C of the Act wherein the Ld. Assessing Office made the additions following the direction of the Ld. Members of the DRP.

Transfer Pricing issues:—

4.1. Ground No.2 – Upward adjustment due to brand promotion expense attributable to the assessee’s holding company being Rs. 82,12,54,41,380/- :—

The Ld.TPO analysed the issue of brand development services extended by the assessee company to its holding company by observing as under:—

“India is a vast market for auto makers. India has a huge percentage of middle and upper middle class population that has enough surplus income to buy such movable and immovable assets such as House, cars etc. Further banks have liberally sanctioned auto loans on equated monthly instatement basis to the buyers. It is also relevant to note that India has got a big percentage of population which is not only young but also earns handsome money especially soft ware boom in India. This section of the society is influenced by the brand name. In India in expanding auto market the share of Hyundai is increasing year after year. This has been discussed in Company Profile and Industrial over view given above. In this market, Hyundai brand and Logo has become quite popular. It is due to brand value development on account of efforts made by the assessee company. So far as the Hyundai technology is concerned it is the latest technology and it cannot be said that old technology has been dumped in Indian market. It has promising future that will earn the holding company in coming years huge income by way of royalty on know how supplied by it to the assessee company. It is not an old technology about which it may be said that it does not have bright future and hence the sales will decrease and therefore brand development will not be advantageous to the holding company. It would like to stay ahead of its competitors in the Indian market by ensuring the quality of product as well as by spreading the brand awareness. The Holding company has given to the assessee the exclusive rights of producing the cars in this territory. Each car produced by the assessee becomes the carrier of holding company’s brand name and logo. Holding company has neither engaged any other entity to provide the services for brand name and logo development in India nor spending any amount on its own for this purpose. On the other hand assessee-company is producing the quality product that is a must for brand development. It provides excellent after sales service to the satisfaction of the customers. As mandated by the Holding Company the assessee has agreed to use brand name and logo of the holding company on its products. It has not developed its own brand name and logo. The assessee could have developed its own brand name and the logo could have generated huge income by use of intangible asset owned by the assessee legally and economically. There is no piggy backing kind of strategy adopted by the assessee for development of its own Brand name and logo. Instead its entire efforts are devoted towards developing the brand value of the holding company. Assessee on one hand had sacrificed development of its own brand name and logo, on the other hand using its resources for the development of the Brand name and the logo that belongs to the Holding company.

Since the sale of the vehicle produced by the assessee company is ever increasing looking to the expanding market share of Hyundai produced in this territory even low rate of royalty on the net sales of cars would be a reasonable compensation to the assessee for providing the services of brand development services to the Holding company. Therefore, it would be reasonable to hold that the Holding Company must compensate the assessee company by paying an amount @ 1% of the sales made during the relevant previous years. The assessee company has made sales for Rs. 87,62,49,09,000/- during the relevant previous year and therefore, @ 1% of the sales, amount receivable is calculated at Rs. 87,62,49,09,000/-. Therefore, Arms Length Price of the International transaction is determined at Rs. 87,62,49,09,000/-. As nothing has been paid on this account by the Holding company to the assessee, addition of Rs. 87,62,49,09,000/- in total income of the assessee is called for in A.Y 2007-08.”

Thereafter the Learned Members of the DRP confirmed the contentions of the Ld.TPO, however, directed the TPO to exclude the revenue receipts of CKD/Spare parts from value of the sales while computing the notional brand fee @ 1% and thereby upheld the upward revision to Rs. 82,12,54,41,380/-.

4.2 The Ld. A.R. submitted before us that:—

(i) The assessee company did not undertake any brand promotion for its parent company M/s.HMC Korea.
(ii) The ad hoc rate of 1% on sales adopted by the Revenue is not an accepted method in transfer pricing matters.
(iii) The benefit of using the brand name “Hyundai” has resulted in increase of turnover of the appellant. Consequently the profits have also increased which have been offered to tax. The parent company M/s. HMC Korea did not maintain the appellant company to use their brand name as misconstrued by the Ld. TPO.
(iv) There was no contractual obligation between the appellant company and its parent company regarding any brand building services to be rendered by the assessee company.
(v) The appellant company had only incurred products specific advertisement expenses for promoting the sales of the vehicles manufactured by the assessee.
(vi) No expenses were incurred by the assessee company for promoting the brand of its Holding Company.
(vii) The agreement between the assessee company and its Holding Company only indicates that the appellant company has the right to use the brand name “Hyundai”.
(viii) There is no finding by the Ld. TPO that excess AMP expenses incurred by the assessee, which would suggest that the assessee has incurred brand promotion expenses benefitting the Holding Company.
(ix) The appellant also relied in the case of LG Electronics India (P.) Ltd v. Asstt. CIT [2013] 140 ITD 41/29 taxmann.com 300 (Delhi) (SB) and Ford India (P.) Ltd. v. Dy. CIT [2013] 59 SOT 221/34 taxmann.com 50 (Chennai)
(x) The only appropriate method that can be adopted to arrive at the brand promotion expense will be based on excessive AMP.

4.3 Ld. D.R reiterated the findings of the Ld.TPO and the learned Members of the DRP and argued in support of the same.

4.4 We have heard the rival submissions and carefully perused the materials available on record. The main grouse of the Revenue is that the appellant company being the user of the Holding Company’s brand name and logo indirectly benefits the Holding Company. The appellant company instead of promoting its own brand has been promoting the brand logo of the Holding company. Thereby the Holding Company is benefited because of the increase in sales of the appellant company. It was only due to the efforts put in by the assessee company and the relevant expenditure incurred for promoting its products the brand value of the Holding Company has proportionately increased. Therefore, the Revenue opined that one percent (1%) of sales excluding the sale of CKD/spare should be attributed for determining the Arm’s Length Price (ALP) in this international taxation issue and thereby made an upward adjustment towards brand promotion expense for Rs. 82,12,54,41,380/-. At this juncture we must say that as pointed out by the Ld. A.R, the Ld.TPO and the Ld. Members of the DRP has not adopted any of the five methods prescribed U/s.92C of the Income Tax Act in order to determine the ALP for brand fees which ought to have been received by the assessee company for the usage of the Holding company’s brand “Hyundai”. The 1% on sales adopted by the Revenue in determining the ALP is purely adhoc and without any basis. It is pertinent to mention here as pointed out by the Ld. A.R. that the Delhi Special Bench of the Tribunal in the case of LG Electronics India (P.) Ltd.(supra), mentioned supra has held that Bright-Line- Test (BLT) is the only method to be adopted to arrive at the value of brand development expense receivable by the assessee company from its Holding Company with respect to the promotion of brand of the assessee’s Holding Company.

4.5 The brief gist of the case is summarized herein below for reference.

Facts:

L.G. Electronics India Private Limited (“the assessee”) is a subsidiary of L.G. Electronics Inc., Korea (“the AE”). Pursuant to Technical Assistance and Royalty agreement, the assessee obtained a right from the AE to use technical information, designs, drawings and industrial property rights for the manufacture, marketing, sale and services of agreed products, for which it agreed to pay royalty @ 1 per cent. The AE allowed the assessee to use its brand name and trademarks to products manufactured in India “without any restriction”.
The Transfer Pricing Officer (“TPO”) concluded that the assessee was promoting LG brand as it had incurred expenses on AMP to the tune of 3.85% of sales vis-à-vis 1.39% incurred by a comparable. Accordingly, TPO held that the assessee should have been compensated for the difference.
Applying the Bright Line Test, the TPO held that the expenses in excess of 1.39 % of the sales are towards brand promotion of the AE and proposed a transfer pricing adjustment.
The Dispute Resolution Panel (“DRP”) not only confirmed the approach of the TPO, but also directed to charge a mark-up of 13 % on such AMP expenses towards opportunity cost and entrepreneurial efforts.

Issues:

Whether transfer pricing adjustment can be made in relation to advertisement, marketing and sales promotion expenses incurred by the assessee?
Whether the assessee ought to have been compensated by the AE in respect of such AMP expenses alleged to have been incurred for and on behalf of the AE?”

Observations & Ruling

The Tribunal has held as follows:

Confirmed validity of jurisdiction of the TPO by observing that the assessee’s case is covered u/s. 92CA(2B) of the Income Tax Act, 1961 (‘the Act’) which deals with international transactions in respect of which the assessee has not furnished report, whether or not these are international transactions as per the assessee.
The incurring of AMP expenses leads to promotion of LG brand in India, which is legally owned by the foreign AE and hence is a transaction. The said transaction can be characterised as an international transaction within the ambit of Section 92B(1) of the Act, since (i) there is a transaction of creating and improving marketing intangibles by the assessee for and on behalf of its AE; (ii) the AE is non-resident; and (iii) such transaction is in the nature of provision of service.
Accepted Bright Line Test to determine the cost/ value of the international transaction, in view of the fact that the assessee failed to discharge the onus by not segregating the AMP expense incurred on its own behalf vis-à-vis that incurred on behalf of the AE.
The transfer pricing provisions being special provisions, override the general provisions such as section 37(1) / 40A(2) of the Act.
For determining the cost/value of international transaction, selection of domestic comparable companies not using any foreign brand was relevant in addition to other factors.
The Supreme Court of India in Maruti Suzuki’s case examined the issue of AMP expenses where it directed the TPO for a de novo determination of ALP of the transaction. The direction by the Supreme Court recognises the fact of brand building for the foreign AE, which is an international transaction and the TPO has the jurisdiction to determine the ALP of the transaction.
The expenses incurred “in connection with sales” are only sales specific. However, the expenses “for promotion of sales” leads to brand building of the foreign AE, for which the Indian entity needs to be compensated on an arm’s length basis by applying the Bright Line Test.
With regard to the DRP’s approach, of applying a mark-up on cost for determining the ALP of the international transaction, on the ground that the same has sanction of law under Rule 10B(1)(c)(vi) of the Income Tax Rules, 1962 was accepted.
The case was set aside and the matter was restored to the file of the TPO for selection of appropriate comparable companies, examining effect of various relevant factors laid down in the decision and for the determination of the correct mark-up.’

4.6 Further, in the case Ford India (P.) Ltd cited by the Ld. A.R. (supra), the Chennai Bench of the Tribunal followed the Special Bench ruling in the case of LG Electronics India (P.) Ltd. (supra) in applying Bright line Test (BLT) to arrive at the adjustment towards excess AMP expenditure. The Tribunal also ruled that the expenditure directly in connection with sales had to be excluded in computing the AMP adjustment. Thereafter, the Tribunal deleted the hypothetical brand development fee adjustment computed at 1% of sale made by the TPO. The Tribunal has disregarded the concept of add on brand value on normal sales and add on brand value on additional sales brought by the tax department to justify two additions in relation to brand building, and deleted the brand development fees computed at 1% of sales.

4.7 Considering the facts of the case which is identical to the case decided by the Special Bench of the Tribunal and the Chennai Bench of the Tribunal cited supra, we hereby direct the Ld. Assessing Officer to delete the adhoc addition of 1% on sales which is treated as brand development fee by following the decision of the Tribunal cited supra. The aforesaid decisions of the Tribunal has also held that Bright Line Test would be the best method for determining developer of the intangible property, which the Ld. A.R. claimed that such test was made on the assessee by the Ld.DRP; however no additions were made because on the computation of the same it was found not warranted. The same was also not controverted by the Ld. D.R. Therefore, we hereby restrain ourselves from remitting back the matter for the computation of bright line test. Thus, this issue is decided in favour of the assessee.

5.1 Ground No.3 Addition on account of advertisement and sales promotion expenses which ought to have been receivable from the assessee’s holding company amounting to Rs. 76.63 crores U/s.92B of the Act.

The Ld. TPO had held that the assessee had incurred advertisement expenses on behalf of the parent company and therefore, considered the same as international transaction invoking the section 92B of the Act, in the same footing as the brand development expenses discussed supra. Accordingly, the Ld.TPO made comparison of the advertisement expenses incurred by the other five comparable companies in the same line of business and worked out the ratio of advertisement expenses to the total sales and determined the average ratio of the comparable at 2.566% as against 3.44% worked out by the assessee. Thus, the excess advertisement expenses incurred over and above the average of the comparables was determined at Rs. 76,63,00,000/- which the Ld. TPO held it to be recoverable from the assessee’s parent company.

5.2. Before the DRP, it was argued by the assessee that the advertisement expenses contains certain non advertisement relates expenses being trade discount and therefore, the same has to be excluded from the advertisement expenditure worked out by the Ld.TPO while arriving at the addition of Rs. 76.63 crores. In support of the argument the assessee relied on the Jurisdictional of Madras High Court in the case of CIT v. India Pistons Ltd. [2001] 250 ITR 279/119 Taxman 384 & in the case CIT v. Tuticorin Alkali Chemicals & Fertilizers [2003] 261 ITR 80/[2004] 136 Taxman 625 (Mad.). The Members of the DRP after considering the issue, held in agreement with the claim made by the assessee by observing as under:—

“104.3 The contention of the assessee is carefully considered. The trade and volume discount are essentially given to push the quantum of sales and as an incentive to dealers to increase sales. These discounts may or may not be passed on to the direct customers. Also, the very nature of volume and trade discount is not in the nature of advertisement expenses. In fact, as pointed out by the assessee, some of the companies chosen as comparables have netted out the trade discounts from the sales itself.

104.4. Also, we are examining the nature of advertisement expenses as those expenses that could be attributed to brand promotion and promotion of business of the parent holding company. Viewed in that context, the volume discount and trade discount can at best be attributed to the increase in business of the assessee and not to that of the parent holding company.

104.5 In view of the above, the Assessing Officer/TPO is directed to exclude volume discount and Trade discount from advertisement expenses, while working out the ratio of advertisement expenses to sales. The objection of the assessee is allowed.”

5.3 Subsequently, the Ld. TPO giving effect to the Order of the DRP deleted the addition of Rs. 76.63 crores with the following computation:—

Adjustment on account of Advertisement Expenses incurred by the assessee on behalf of AE:

The TPO in her order compared the ratio of advertisement expenses to the sales between the assessee and the comparables. This ratio in the case of the assessee is worked out at (Rs. 3,01,62,71,870/Rs. 87,62,49,09,000) = 3.44% (page 43 of TPO’s order). The break-up of advertisement expenses considered by TP (as in page 43 of TPO’s order) is as under:

Expenses in the nature of advertisement cost Rs. 155,59,99,015
Special Trade Discount Rs. 142,81,11,086
Volume Discount Rs. 3,25,81,721
Rs. 3,01,62,71,820

3.1. The DRP directed the TPO to recomputed the ratio of advertisement expenses to sales after excluding the volume discount and trade discount. The revised ratio is (Rs.155,59,99,013/Rs.87,62,49,09,000) = 1.776%. In view of the ratio being lower than that of the comparables considered by TPO at 2.566% (see page 50 of TPO’s order), no adjustment arises under this head.”

5.4. Before us the Ld. AR submitted that the Ld.TPO had adopted the Bright Line Test and thereby made addition of Rs. 76.63 crores towards excess advertisement and market promotion expenditure being expenses attributable towards Assessee’s Holding Company for the tangible benefit derived. Ld. A.R. further submitted that the Members of the DRP though agreed with the concept of such addition, directed the Ld.TPO to exclude volume discount and trade discount from advertisement expenditure while working out the ratio of the advertisement expenses to sales. The Ld. TPO subsequently giving effect to the order of the DRP had deleted the addition of Rs. 76.63 crores because the same was not warranted when the volume discount and trade discount were excluded from the advertisement expenses. Ld. AR further admitted that since the addition of Rs. 76.63 crores was deleted, this ground raised by the assessee need not be considered and dismissed as such. The Ld. D.R conceded to the aforesaid facts presented by the Ld. A.R.

5.5 After hearing both sides and perusing the orders of the Tribunal cited by the Ld. A.R supra, we hereby accept the concept of Bright Line Test (BLT) as held by our predecessors with respect to the concept of Bright Line Test for distinguishing between the routine and non-routine expenditure incurred on advertisement and brand promotion wherein advertisement and marketing promotion expenses to the extent incurred by uncontrolled comparable distributors is to be regarded within the “Bright Line Limit” of the routine expenses and the advertisement and market promotion expenses incurred by the distributors beyond such “Bright Line Unit” constituted non-routine expenditure resulting in creation of economic ownership in the form of marketing intangibles which belong to the owner of the brand. However, in this case even after computing the ALP by following the Bright Line Test the Ld.TPO has deleted the addition Rs. 76.63 crores. Accordingly, this ground raised by the assessee is dismissed.

6.1. Ground No.4 Disallowance of Rs. 104,27,36,417/- being royalty paid by the assessee to its Holding Company M/s.HMC Korea.

The appellant company had entered into technical knowhow agreement with its Holding Company for all the models of the cars manufactured by it. In view of this agreement, the appellant company paid royalty of 5% on its domestic sales and 8% on its export sales. The assessee company made an analysis under transfer pricing, since the payment of royalty was directly linked with its manufacturing activity and arrived at the method to be followed as Transaction Net Margin Method (TNMM). The assessee further justified the percentage of royalty paid to its Holding Company as it was approved by Reserve Bank of India (RBI). However, the Ld.TPO not accepting the justification of the percentage of royalty paid to the assessee’s Holding Company, held that, separate bench marking analysis should be made and arrived at the following analysis:—

Comparables Royalty expenses (Rs. Crore) Net Sales (Rs. Crore) Royalty/ Net sales
General Motors India Pvt Ltd. 31.37 1844.10 1.70%
Ford India Pvt Ltd 36.63 2,191.79 1.67%
Honda Siel Cars India Ltd 136.99 3,873.23 3.54%
Maruti Suzuki India Ltd 367.30 14,592.20 2.53%
Average 2.36%
HMIL 369.77 8,763 4.22%
Difference 1.86%

Thus arriving at the difference of 1.86%, the Ld.TPO recommended the disallowance of Rs. 165 crores as excess royalty paid to the Holding Company while deciding the ALP of royalty payment. When the matter reached the DRP, the Ld. Members of the DRP accepted the contention of the Ld. TPO that, separate bench marking analysis is necessary for determining ALP of royalty payment, by not accepting the argument of the assessee that the percentage of royalty payment made to the assessee’s Holding Company is justifiable since RBI has approved the transaction. However, the Ld. Members of the DRP rejected the comparables viz. General Motors Pvt Ltd & Ford India Pvt Ltd., because while selecting the comparables the Related Party Transactions (RPT) were more than 25% and accordingly directed the Ld.TPO to rework the adjustment after removing these two companies from the comparables. Thus, the addition was restricted to Rs. 104.27 crores as against Rs. 165.05 crores.

6.2 Ld. AR argued before us by stating as follows:—

(i) The Ld.TPO /DRP were not justified in holding that the royalty payment should be bench marked separately. It was contended that the appellants “whole entity” approach of bench marking royalty payments along with all other transactions by adopting TNM method at the entity level is justifiable.
(ii) Since the operating margin of the appellant company was 7.61% which is higher than the comparable companies selected in the TP study being 2.90%, there was no necessity for addition on account of excess royalty.
(iii) The royalty paid by the comparable company’s viz. Maruthi Suzki India Ltd., is only for ”imparting technology” while as the royal paid by the appellant company is for the use of “brand” as well as ”technology”.
(iv) The royalty paid at the rate of 5% on domestic sales and 8% on export sales by the appellant company is in accordance with the rules prescribed under Rule 10B (2)(d) of the Income Tax Rules and also as per the approval granted by RBI.
(v) The learned TPO in her TP study for adhoc adjustment on account of brand at the rate of 1% had herself observed that in automobile sector the average rate of royalty is 4.7%, which is higher than the appellant’s average rate of royalty being 4.22%. Therefore, royalty paid by the appellant should be accepted as arm’s length price.
(vi) The comparable companies selected by TPO which is further confirmed by the Ld. Members of the DRP viz; Honda Seil Cars India Limited and Maruthi Suzuki India Limited has controlled transactions therefore the benchmarking analysis’s made by the Ld. TPO is unreliable and requires to be rejected.
(vii) The Ld. TPO has taken into account of the royalty payment made by the assessee company which is inclusive of fee for technical know-how and use of brand whereas for comparable companies the Ld. TPO had selected was the royalty payment was only for use of technology.

6.3 The Ld. DR on the other hand relied on the orders of the Ld. TPO/DRP and argued in support of the same.

6.4 We have heard both the parties and carefully perused the materials available on record and decisions cited by the assessee viz. (i) Dy. CIT v. AIR Liquide Engineering India (P.) Ltd. [2014] 43 taxmann.com 299/[2015] 152 ITD 257 (Hyd.)(ii) Lumax Industries Ltd. v. ACIT [IT Appeal No. 4456 (Delhi) of 2012 (paper book page No.394) and (iii) ThyssenKrupp Industries India (P.) Ltd. v. Addl. CIT [2013] 33 taxmann.com 107 (Mum.) (paper Book page 433). Further the assessee has relied on the Rule 10B(2)(d) of the Income Tax Rules, 1962 which stipulates as under:—

“Rule 10B(2) For the purposes of sub-rule(1), the comparability of an international transaction with the uncontrolled transaction shall be judged with reference to the following, namely:—

(a) to (c)** ** **

(d) conditions prevailing in the 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.”

6.5 Further perusing the order of the Ld. TPO in page 40 in para Nos.25 & 26 the Ld. TPO herself observed that in respect of royalty payment in automotive sector from the study of 35 licenses, the average works out to 4.7% and the median works out to 4% which is higher than the appellant’s average rate of royalty payment of 4.22%. Further the Ld. TPO has observed that the assessee company has been bestowed with the latest technology by its Holding Company and it cannot be said that old technology has been dumped in the Indian market (para 27 of the TPO’s order). The relevant portion of the Ld. TPO’s order is extracted herein below for reference:—

“26 In the table given above it is seen that in automotive sector on study of 35 licenses in respect to royalty payment minimum royalty payment was 1% maximum was 15% royalty payment. Average comes to 4.7% and the median royalty rate was 4.0%.

27. In the case of the assessee what will be the right percentage of royalty that would compensate the assessee suitably. In this connection it is relevant to discuss certain relevant facts. As discussed earlier, India is a vast market for auto makers. India has a huge percentage of middle and upper middle, class population that has enough surplus income to buy such movable and immovable assets such as House, cars etc. Further banks have liberally sanctioned auto loans on equated monthly installment basis to the buyers. It is also relevant to note that India has got a big percentage of population which is not only young but also earns handsome money especially soft ware boom in India. This section of the society is influenced by the brand name. In India is expanding auto market the share of Hyundai is increasing year after year. This has been discussed in Company Profile and Industrial over view given above. In this market, Hyundai brand and Logo has become quite popular. It is due to brand value development on account of efforts made by the assessee company. So far as the Hyundai technology is concerned it is the latest technology and it cannot be said that old technology has been dumped in Indian market. It has promising future that will earn the holding company in coming years huge income by way of royalty on know how supplied by it to the assessee company. It is not an old technology about which it may be said that it does not have bright future and hence the sales will decrease and therefore brand development will not be advantageous to the holding company. It would like to stay ahead of its competitors in the Indian market by ensuring the quality of product as well as by spreading the brand awareness. The Holding Company has given to the assessee the exclusive rights of producing the cars in this territory. Each car produced by the assessee becomes the carrier of holding company’s brand name and logo – – – – – – – – – – – – – – – – – – – – – – – – –

** ** **”

Facts being so, it is apparent that the Ld. TPO has herself accepted the high-tech technology passed on to the assessee company by its Holding Company and also after details study of 35 licenses arrived at a conclusion that the royalty payment of 4.7% is prevalent in the automotive sector. Therefore from these circumstances, we do not find it appropriate on the part of the Revenue to make addition on account of ALP of royalty payment. Therefore, we hereby delete the addition of Rs. 104,27,36,417/- made by the Ld. TPO following the directions of Ld. Members of the DRP.

Corporate Tax Issues:—

7.1 Ground No.(v) Disallowance of depreciation on capital subsidy amounting to Rs. 7,91,060/—

It was observed by the Ld. Assessing Officer that the assessee has received 100 lakhs subsidy from State Industries Promotion Corporation of Tamilnadu (SIPCOT) during the previous year 2003-04. The assessee claimed that the subsidy was not related to any fixed assets; however the assessee has not produced the purpose for which the above subsidy was received. Therefore, the explanation offered by the assessee was not accepted by the Ld. Assessing Officer in the relevant previous year and also for the earlier previous years. Accordingly, the Ld. Assessing Officer reduced the capital subsidy granted by SIPCOT from the cost of the assets installed in the plant and allowed depreciation only on the reduced WDV for all the earlier years. Similarly for the relevant assessment year also, the Ld. Assessing Officer disallowed the depreciation amounting to Rs. 7,91,060/-.

7.2 Before us, the Ld. A.R. submitted that for the assessment year 2003- 04 the Ld. CIT (A) has directed the Ld. Assessing Officer to re-examine the issue in the light of Supreme Court decision Sahney Steel & Press Works Ltd. v. CIT [1997] 228 ITR 253/94 Taxman 368 and CIT v. P.J. Chemicals Ltd. [1994] 210 ITR 830/76 Taxman 611 (SC). Ld. A.R. further submitted that as on date the Ld. Assessing Officer is yet to give effect to the order of the Ld. CIT (A). Therefore Ld. A.R pleaded that for the relevant assessment year also the matter may be remitted back to the file of Ld. DRP with similar direction. Ld. D.R strongly opposed to the submissions of the Ld. A.R. and relied on the orders of the Ld. Members of the Ld. DRP and the Ld. Assessing Officer.

7.3 After hearing both sides, we are of the opinion that the matter requires a categorical finding as to how the cash received as subsidy from SIPCOT has been utilized by the company in order to address merits of the case. Therefore, we hereby remit the issue back to the file of Ld.DRP in order to examine the complete facts of the issue in the light of the various decisions cited by the Ld. A.R and pass appropriate order as per merits and law.

8.1 Ground No.(vi) Disallowance U/s.14A of the Act for Rs. 5,29,910/-.

The assessee had contested before the Members of the Ld. DRP against the disallowance of Rs. 5,29,910/- U/s. 14A of the Act by applying the provisions of Rule 8D of the Income Tax Rules, 1962. The argument put up by the assessee before the Revenue was that the assessee had made investment out of its revenue reserves of 1709.22 crores and therefore disallowance was not called for. It was further contended that the Rule-8D would not be applicable as it had come into force only w.e.f assessment year 2008-09 and not retrospectively. However, the Ld. DRP found the view of the Ld. Assessing Officer to be fortified by the decision in the case of ITO v. Daga Capital Management (P.) Ltd. [2009] 117 ITD 169/26 SOT 603 (Mum.) (SB) wherein it was held that the sub-section (1) of Section 14A is only a clarificatory and retrospective. Before us, the Ld. A.R relied on the order of the Chennai Bench of the Tribunal in the case of EIH Associated Hotels Ltd. v.CIT [IT Appeal No.1503(Mds.) of 2012] Paper book Page Nos.465 & 466. On perusing the order of the Tribunal, we find that in that case the Tribunal had come to such conclusion because the investment was made by the assessee in its subsidy company. However, in the present case before us, the details of investment made were not brought before us. But as pointed out by the assessee Rule 8D was introduced by the Income Tax Fifth Amendment Rules, 2008 with effect from 24.03.2008. Therefore, it would not be applicable to the case of the assessee for the assessment year 2007-08. Moreover under such circumstances, various judicial authorities have held that 2% to 5% of the dividend earned may be disallowed in order to justify the provisions of Section.14A of the Act. However, in the present case before us, the Ld. A.R. has claimed that the assessee had not received any dividend during the year, which has not been rebutted by the Ld. D.R. Therefore, we hereby hold that disallowance of Section 14A of the Act for Rs.5,29,910/- is not warranted and accordingly, we direct the Ld. Assessing Officer to delete the same.

9.1 Ground No.(vii) Disallowance of expenditure of Rs. 5,20,97,000/- towards 100 cars given to Police Department

The assessee had contested before the Revenue for disallowance of expenditure of Rs. 5,20,97,000/- being the cost of 100 cars gifted by the assessee to the Tamil Nadu Police Department. The assessee had justified the action as fulfilment of obligation towards “Corporate Social Responsibility”. It was further claimed that the use of these vehicles by the Police Department would help the assessee to assess the reliability of the vehicles and also help the public at large. It will also help the assessee as an advertisement to promote sales and also assistance to the Research & Development Department of the assessee company. Considering these aspects it was argued that these expenditures may be treated as allowable expenses U/s. 37(1) of the Act. However, the Ld. Members of the Ld. DRP relying on the decision of the Tribunal case in MRF Ltd.v. Dy. CIT [IT Appeal Nos. 1374 to 1377(Mds.) of 2010, dated 11-3-2011] wherein it was held that the expenditure incurred to the tune of Rs. 1.59 crores for the promotion of MRF Phase Foundation which is a body promoting and grooming pace bowlers in India were disallowed, since the same could not be treated as expenditure for business activity. However we do not agree with this view of the Ld. Members of the DRP in the present case before us. In the case relied upon by the Ld. DRP the issue was with respect to expenditure incurred by M/s.MRF Ltd, a tyre manufacturing company, towards promotion of Cricket Spot which is not a related activity with the business of the assessee. In the case of the present assessee before us, the assessee has provided with 100 cars to the Police Department by which the public at large would be benefited. In fact, the taxes earned from the Revenue of the assessee company by various government authorities are only spent for the benefit of the public at large. Moreover by extending such gestures by the assessee company would directly or indirectly obtain the following benefits as pointed out by the Ld. A.R.

(i) It will help the assessee company to test the performance of the cars manufactured by it.
(ii) The extensive usage of the vehicles manufactured by the assessee company will be noticed by the public at large and it will build up the image of the assessee and also Act as advertisement for its products.
(iii) The Police Department being over burdened by the large traffic movement in and around the assessee’s factory will be at ease for being provided with fast moving vehicles by the assessee company and that will also enhance their efficiency and also soothen the discomfort cause to the public.
(iv) It will also help the assessee to fulfil its obligations towards “Corporate Social Responsibility”.

9.2 Further the assessee has also relied on the decision of Hon’ble Apex Court in the case of Sri Venkata Satyanarayana Rice Mill Contractors Co. v. CIT [1997] 223 ITR 101/[1996] 89 Taxman 92 wherein it was held that:

“The principles for determining whether the payment of the kind made by assessee could be regarded as a business expenses are well settled. What is to be seen is not whether it was compulsory for the assessee to make the payment or not but the correct test is that of commercial expediency. As long the payment which is made is for the purposes of the business, and the payment made is not by way of penalty for infraction of any law, the same would be allowable as a deduction. The contribution which was made by the assessee could under no circumstances be regarded as illegal payments or payments which were opposed to public policy. This was not a case where the assessee was paying any bribe to any person nor is this a case where money was being contributed to any private fund or for the benefit of any individual which could be regarded as a form of illegal gratification. By a voluntary scheme, with which the District Collector was associated, the District Welfare Fund had been established for the benefit of the general public. The payment to such a fund which was openly made by all the millers and which fund was being used for public benefit could not be regarded as being opposed to public policy. Requiring payment to be made for a just cause which would entitle a businessman to obtain a license or permit cannot be regarded as being against the public policy. Any contribution made by an assessee to a public welfare fund which is directly, connected or related with the carrying on of the assessee’s business or which results in the benefit to the assessee’s business has to be regarded as an allowable deduction U/s. 37(1). Such a donation whether voluntary or at the instance of the authorities concerned, when made to a Chief Minister’s Drought Relief Fund or a District Welfare Fund established by the District Collector or any other Fund for the benefit of the public and with a view to secure benefit to the assessee’s business, cannot be regarded as payment opposed to public policy. It is not as if the payment in the present case had been made as an illegal gratification. There is no law which prohibits the making of such a donation. The mere fact that making of a donation for charitable or public cause or in the public interest results in the Government giving patronage or benefit can be no ground to deny the assessee a deduction of that amount U/s. 37(1) when such payment had been made for the purpose of assessee’s business. Therefore, the payment made by the assessee in the instant case was allowable as deduction.”

9.3 In these circumstances, we are of the opinion that such gestures of the corporate houses have to be appreciated and encouraged which will benefit the public at large. Further, since these expenditures have directly or indirectly benefitted the assessee company for its image building and promotion of sales of its products, it should be treated as allowable expenditure U/s. 37(1) of the Act because of the existence of commercial expediency in the conduct of the assessee. Therefore relying on the decision of Hon’ble Apex Court supra, we hereby direct the Ld. Assessing Officer to allow the expenditure of Rs. 5,20,97,000/- incurred by the assessee for providing 100 cars to the Tamil Nadu Police Department.

10.1 Ground No.(viii) Addition on account of export incentives accrued to the assessee on target plus scheme Rs. 5,52,26,335/- and focus market scheme Rs. 3 crores.

On examining the P&L a/c for the relevant to assessment year it was observed by the Ld. Assessing Officer that the assessee had shown income by way of export incentives towards target plus scheme amounting to Rs.5,52,26,325/- and focus market scheme Rs.3 crores, however while computing tax the assessee had excluded these amounts. On query by the Ld. Assessing Officer, the assessee explained as follows:—

“The objective of the scheme is to accelerate growth in exports by rewarding Star Export Houses who have achieved a quantum growth in exports. High performing Star export houses shall be entitled for a duty credit based on incremental exports substantially higher than the general annual export target fixed.

HMIL has accrued for Rs.26 crores as on 31.03.2006 pertaining to exports benefits under the target plus scheme for the financial year 2005-06 exports. This amount was revised during the current financial year i.e. in 2006-07 to Rs.31.52 crores and accordingly, a further accrual of Rs.5.52 crores pursuant to filing the application with the authorities for the same. Therefore, an amount of Rs.31.52 crores was shown as export benefits under the loans and advances for the financial year ending 31.03.2007. The License for the above amount has not yet been received by HMIL as at 31.03.2007.

HMIL has also further estimated and accrued Rs.3 crores as export benefits under the Focus Market Scheme for the financial year 2006-07 exports. As on 31.03.2007, the company was in the process of applying for the license. As on the date of balance sheet, HMIL has neither applied nor received or utilized the above license.

Based on the principle fo commercial prudence, since the target plus license was received in the financial year 2007-08 and license for the focus market scheme was received in the financial year 2008-09, we have correctly excluded the above amount from the computation of total income for the financial year 2006-06.”

The Ld. Assessing Officer after examining the reply of the assessee rejected the same because of the following reasons:—

” (i) It is observed from the details of exports incentives like Duty Draw Back and DFCE Benefits, Target Plus Scheme, Focus Market Benefits, which have been accrued to the assessee at the time of exports and its subsequent realization that the assessee has received entire exports incentives accrued without any adjustment/reduction by the Central Excise and Customs Department. (The detail of the same is enclosed as per annexure-1) Therefore, the contention of the assessee that, the above said export incentives cannot be considered as income unless relevant licenses received from the concerned authorities cannot be accepted.
(ii) It is noticed that the assessee has been claiming the expenditure on warranty on provision basis by relying on the decision of Hon’ble Supreme Court in the case of M/s. Rotark Control India Private Ltd. v. CIT whereas, in the issue of export incentive scheme, even though the same has been accrued, the same has not been offered to the tax even though the same was received completely in the subsequent year.
(iii) Reliance is also placed on the ratio laid down by the Hon’ble Kerala High Court in the case of CIT v. Southern Cables & Engineering Works (289 ITR 167). The relevant part of the decision is being reproduced as under:—
“We are of the view since the assessee was following the mercantile system of accounting, the assessee should have accounted for the penalty by deducting in the accounting year 1989-90 itself to maintain a claim. The Kerala State Electricity Board had made a deduction towards penalty from bills for delayed supplies and the penalty deduction related to the accounting year 1989-90 relevant to assessment year 1990-91. The fact would show that the Kerala State Electricity Board had deducted a sum of Rs.4,24,851/- from supply bills for delay in supply during the year 1989-90. Subsequently, the Board refunded a sum of Rs.2,18,529/- to the assessee during the accounting period 1990-91. The liability for the penalty accrued during the accounting period 1989-90 relevant to the assessment year 1990-91. Even if it is true that part of the amount was refunded by the Electricity Board, the actual liability relates only to the assessment year 1990-91. The assessee was following the mercantile system of accounting. Hence, the assessee should have claimed the same in the year 1989-90. The contention that the assessee was trying their best to get the penalty waived by the Kerala State Electricity Board and only after exhausting all steps the assessee could claim deduction cannot be sustained. Mere protest or opposition by a subject to the levy of tax or other duties payable to the Government cannot carry with it the implication that there is no proper levy legally recoverable till such protest or opposition ceases or is silenced. So long as the assessee is following the mercantile system of accounting, in our view, the assessee should have claimed deduction in the year 1989-90 accounting year. Therefore, the Tribunal was not justified in interfering with the order passed by the appellate authority. Consequently, the appeal is allowed and the order of the Tribunal is set aside to that extent.”

For the above said reasons, the Ld. Assessing Officer opined that the export incentives received towards target plus scheme and focus market scheme has to be treated as income accrued to the assessee for relevant to assessment year. The Ld. Members of the DRP confirmed the view of the Ld. Assessing Officer and thereafter, the Ld. Assessing Officer finalized the draft assessment order treating the same as the income accrued to the assessee during the relevant to assessment year.

10.2 The Ld. A.R. cited the decision of the Hon’ble Supreme Court in the case of CIT v. Excel Industries Ltd. [2013] 358 ITR 295/219 Taxman 379/38 taxmann.com 100 and argued stating that the export incentives received has to be tax in the year when the license was received and not in the year the export was made. Ld. D.R. relied on the orders of the Revenue and argued in support of the same.

10.3 We have heard both the parties and carefully perused the materials available on record. In the case cited by the Ld. A.R supra, the advance license benefit receivable by the assessee being the entitlement of Duty Free import of raw materials under the import and export policy were excluded from the total income by the assessee in its statement for computation of income since it was opined by the assessee that such income cannot be treated as accrued until the imports were made by the assessee and consumed. However, the Ld. Assessing Officer treated the same as the income of the assessee while framing the assessment. When the matter came up before the Apex Court, the issued was decided in favour of the assessee. The relevant para of the order is reproduced herein below for reference:—

’19. This Court further held, and in our opinion more importantly, that income accrues when there “arises a corresponding liability of the other party from whom the income becomes due to pay that amount.”

20. It follows from these decisions that income accrues when it becomes due but it must also be accompanied by a corresponding liability of the other party to pay the amount.

Only then can it be said that for the purposes of taxability that the income is not hypothetical and it has really accrued to the assessee.

21. In so far as the present case is concerned, even it if it is assumed that the assessee was entitled to the benefits under the advance licenses as well as under the duty entitlement pass book, there was no co9rresponing liability on the customs authorities to pass on the benefit of duty free imports to the assessee until the goods are actually imported and made available for clearance. The benefits represent, at best, a hypothetical income which may or may not materialize and its money value is therefore not the income of the assessee.

22. In Godhra Electricity Co. Ltd. v. Ld. CIT [1997] 225 ITR 746 (SC) this court reiterated the view taken in Shoorji Vallabhdas & Co.(supra) and Morvi Industries Ltd.(supra)

23. Godhra Electricity is rather instructive. In that case, it was noted that the High Court held that the assessee would be obliged to pay tax when the profit became actually due and that income could not be said to have accrued when it is based on a mere claim not backed by any legal or contractual right to receive the amount at a subsequent date. The High Court however held on the facts of the case that the assessee had a legal right to recover the consumption charge in dispute at the enhanced rate from the consumers.

24. The Court did not accept the view taken up by the High Court on facts. Reference was made in this context to Ld. CIT v. Birla Gwalior (P) Ltd. [1973] 89 ITR 266 (SC) wherein it was held, after referring to Morvi Industries that real accrual of income and not a hypothetical accrual of income ought to be taken into consideration. For a similar conclusion, reference was made to Poona Electric Supply Co.Ltd v. Ld. CIT [1965] 57 ITR 521 (SC) wherein it was held that income tax is a tax on real income.

25. Finally a reference was made to State Bank of Travancore v. Ld. CIT [1986] 158 ITR 102(SC) wherein the majority view was that accrual of income must be real, taking into account the actuality of the situation; whether the accrual had taken place or not must, in appropriate cases, be judged on the principles of real income theory. The majority opinion went on to say:

‘What has really accrued to the assessee has to be found out and what has accrued must be considered from the point of view of real income taking the probability or improbability of realization in a realistic manner and dovetailing of these factors together but once the accrual takes place, on the conduct of the parties subsequent to the year of closing an income which has accrued cannot be made ‘no income”.

26. This Court then considered the facts of the case and come to the conclusion (in Godhra Electricity) that no real income had accrued to the assessee in respect of the enhanced charges for a variety of reasons. One of the reasons so considered was a letter addressed by the Under Secretary to the Govt. of Gujarat, to the assessee whereby the assessee was ‘advised’ to maintain status quo in respect of enhanced charges for at least six months. This Court took the view that though the letter had no legal binding effect but ‘one has to look at things from a practical point of view’. (seeR.B.Jodha Mal Kuthiala v. Ld. CIT [1971] 82 ITR 570(SC). This Court took the view that the probability or improbability of realization has to be considered in a realistic manner and it was held that there was no real accrual of income to the assessee in respect of the disputed enhanced charges for supply of electricity. The decision of the High Court was, accordingly, set aside.

27. applying the three test laid down by various decisions of this Court, namely, whether the income accrued to the assessee is real or hypothetical; whether there is a corresponding liability of the other party to pass on the benefits of duty free import to the assessee even without any imports having been made; and the probability or improbability of realization of the benefits by the assessee considered from a realistic and practical point of view(the assessee may not have made imports), it is quite clear that in fact no real income but only hypothetical income had accrued to the assessee and Section 28(iv) of the Act would be inapplicable to the facts and circumstance of the case. Essentially, the Assessing Officer is required to be pragmatic and not pedantic.

28. Secondly, as noted by the Tribunal, a considered view has been taken in favour of the assessee on the questions raised, starting with the assessment year 1992-93, that the benefits under the advance licenses or under the duty entitlement pass book do not represent the real income of the assessee. Consequently, there is no reason for us to take a different view unless there are very convincing reasons, none of which have been pointed out by -the learned counsel for the Revenue.

** ** **

32. Thirdly, the real question concerning us is the year in which the assessee is required to pay tax. There is no dispute that in the subsequent accounting year, the assessee did make imports and did derive benefits under the advance license and the duty entitlement pass book and paid tax thereon. Therefore, it is not as if the Revenue has been deprived of any tax. We are told that the rate of tax remained the same in the present assessment year as well as in the subsequent assessment year. Therefore, the dispute raised by the Revenue is entirely academic or at best may have a minor tax effect. There was, therefore, no need for the Revenue to continue with this litigation when it was quite clear that not only was it fruitless (on merits) but also that it may not have added anything much to the public coffers.’

10.4 In the case of the assessee, the export incentive towards target plus scheme is bestowed as a reward in order to encourage the accelerating growth in exports. The incentive on target plus scheme is also nothing but an entitlement for a duty credit based on incremental exports which should be substantially higher than the general annual export target that is fixed. The incentive on focus market scheme is to offset high freight cost and other externalities to select international market with a view to enhance India’s export competiveness in these countries. It is pertinent to note that the assessee will be entitled to such benefit only after verification of the claim of the assessee by the relevant Govt. authorities and issuance of the license by such Government authorities. Therefore, the facts of the assessee’s case are similar to the facts of the case decided by the Hon’ble apex Court cited supra. Therefore, respectively following the decision of the Hon’ble apex Court we hereby hold that the notional income computed by the assessee cannot be treated as taxable income of the assessee during the relevant to assessment year, however the same shall be taxed in the previous year in which the assessee has received the licenses and derived such income. Thus, this issue is also decided in favour of the assessee.

11.1 Ground No.(ix) – Disallowance of additional depreciation amounting to Rs. 8,52,500/- in respect of assets used in regional offices.

During the course of assessment, the Ld. Assessing Officer observed that the assessee claimed additional depreciation towards its fixed assets of Rs. 42,64,535/- which was procured during the relevant assessment year for the purpose of the assessee’s regional offices. The Ld. Assessing Officer opined that as per provisions of section 32(1)(iia) of the Act the additional depreciation is allowable only on the asset which has been utilized by the assessee for its manufacturing activity. The Ld. Members of the DRP also accepted the view of the Ld. Assessing Officer. Accordingly, the Ld. Assessing Officer in his final assessment order disallowed the additional claim of depreciation of Rs. 8,52,500/-.

11.2 The Ld. A.R before us argued stating that as per provisions of Section 32(1)(iia) of the Act, the assessee will be entitled to the claim of additional depreciation since the assessee is engaged in the business of manufacture of production of any article or thing. He further submitted that the “Act” has not distinctly provided that the assets have to be utilized in the factory or office by the assessee. He therefore requested that the addition made in this regard may be deleted. Ld. D.R on the other hand relied on the orders of the Revenue and argued in support of the same.

11.3 We have heard both the parties and carefully perused the materials available on record. Section 32(1)(iia) of the Act stipulates as under:—

“Section 32(1)(iia): in the case of any new machinery or plant (other than ships and aircraft), which has been acquired and installed after the 31st day of March, 2005, by an assessee engaged in the business of manufacture or production of any article or thing [ or in the business of generation or generation and distribution of power], a further sum equal to twenty per cent of the actual cost of such machinery or plant shall be allowed as deduction under clause(ii):

Provided. ……………….

Provided …………………”

From the above it is evident that the assessee is entitled to additional depreciation if it has satisfied the condition that it is engaged in the business of manufacture or production of any article or thing. There is no condition stipulated in the Act that additional depreciation shall be allowed only if the asset is deployed in the factory of the assessee and not the office of the assessee. Therefore, we accept the argument of the Ld. A.R. and reject the observations of the Revenue on this regard and accordingly direct the Ld. Assessing Officer to allow the claim of additional depreciation of Rs. 8,52,500/- if the other conditions of the Act remains satisfied.

12.1 Ground No.(x) The Ld. Assessing Officer erred in not granting the credit for the tax deducted at source amounting to Rs. 39,90,609/-.

During the course of hearing, the Ld. AR submitted that the Ld. Assessing Officer had denied giving credit to the full value of TDS certificates produced by the assessee. He therefore pleaded that the matter may be remitted back to the file of the Ld. Assessing Officer to examine the certificates and pass speaking orders as per merits and law. Ld. D.R stoutly opposed to the submissions of the Ld. A.R. After hearing both sides and perusing the orders of the Revenue, we do not find any mention about the disallowance of the TDS. Moreover, the Ld. A.R. has also not furnished the details of the TDS claimed by the assessee and the amount disallowed by the Revenue. Therefore, in the interest of justice we remit this matter back to the file of the Ld. Assessing Officer for examining the relevant documents furnished by the assessee and pass appropriate speaking order as per merits and law after giving opportunity to the assessee of being heard. We further make it clear that the assessee is at liberty to produce before the Revenue any relevant documents supporting its claim.

13.1 Ground No.(xi). The Ld. Assessing Officer has erred in levying interest U/s. 234B & 234D of the Act.

The charging of interest U/s. 234B & 234D is consequential in nature and dismissed as such.

14. In the result, the appeal of the assessee is partly allowed for statistical purposes.

V. Durga Rao, Judicial Member – I have carefully gone through the order of ld. Accountant Member. Despite discussion and deep study of the order, though, I am fully agreed with the observations and conclusions drawn by the ld. Accountant Member with regard to ground Nos. (i) to (vi) & (viii) to (xi), I am unable to persuade myself and agree with his views & conclusions drawn with respect to the only Ground No. (vii) Disallowance of expenditure of (f.5,20,97,000/- towards 100 cars gifted to Police Department. Hence, I am giving my findings and conclusions as under:

16. The brief facts of the case are that during the year under consideration, the assessee has donated 100 cars of Hyundai Accent Model to the Police Department of the Tamil Nadu State Government. The same has been quantified by the tax auditor in the tax audit report filed by the assessee along with the return of income. The assessee has shown that it has given 100 cars worth of Rs. 5,20,97,000/- to the Tamil Nadu Police Department as an advertisement and sales promotion expenditure. The Assessing Officer has asked the assessee to explain as to why the same should not be disallowed as per the provisions of section 37 of the Income Tax Act, 1961 [hereinafter called as “Act”]. In response to the above, the assessee has explained before the Assessing Officer that in India, Police Department does not use car for patrolling and surveillance purposes and the usage of cars for road safety, removal of traffic bottleneck, reaching the accident spot in time, surveillance, chasing and catching of culprits needs to be addressed and tested. The Hyundai Motor India Ltd. [HMIL in short] has offered 100 Hyundai Accent cars to Tamil Nadu Police Department to test the car market. These patrol cars fitted with the latest electronic equipments would be very useful in controlling crimes and protecting the valuable life of citizens. This expenditure on test marketing has been incurred wholly and exclusively for the purpose of the business of HMIL to find out the new segments of car market. It was also submitted that the expenditure incurred by the assessee was wholly and exclusively for the purpose of business and it is allowable under section 37 of the Act. Further, the assessee has stated that it was also incurred for commercial expediency and relied on the decisions in the case of Sree Meenakshi Mills Ltd. v. CIT[1963] 49 ITR 156 (Mad.), CIT v. Birla Cotton Spinning & Weaving Mills Ltd. [1971] 82 ITR 166 (SC).

17. After considering the reply filed by the assessee, the Assessing Officer has observed that the cars given to the Police Department cannot be equated as an advertisement and sales promotion expenditure of the assessee. The cars have been given by the assessee to the Tamil Nadu State Police Department only as a part of goodwill gesture. So far as test market is concerned, the Assessing Officer has asked the assessee to provide information on the usage, effectiveness and improvement of the said vehicles donated. The assessee has not provided any information to the Assessing Officer, whether the assessee has obtained the information from the Police Department with regard to the usage of the cars. The Assessing Officer has further observed that the donated cars to the Police Department are not being used with any advertisement features of the assessee company. Further, it was nothing different from other vehicles [vehicles like Bolero & Scorpio of Mahindra & Qualis of Toyota] which are being used by the same Tamil Nadu Police Department for the patrolling and surveillance purposes. Therefore, the Assessing Officer has observed that the cars donated to the Police Department were not for advertisement purposes. The Assessing Officer, further observed that the assessee has been incurring huge expenditure for the purpose of its R&D facility every year in order to ascertain and evaluate the usage, effectiveness and improvement of the cars manufactured by the assessee. The Assessing Officer has denied that 100 cars donated by the assessee to the Police Department was not real as to ascertain and evaluate the usage, effectiveness and improvement of the cars manufactured by the assessee. According, the claim made by the assessee under section 37 of the Act was denied by the Assessing Officer.

18. On appeal, before the ld. DRP, the assessee has submitted that the expenditure incurred by the assessee was towards Corporate Social Responsibility, testing the market for the cars and towards larger end of improving road safety and facilitating surveillance by the Tamil Nadu Police Department and the expenditure incurred by the assessee was fully allowable under section 37 of the Act. However, the ld. DRP has confirmed the order passed by the Assessing Officer.

19. On being aggrieved, the assessee carried the matter in appeal before the Tribunal.

20. The ld. Counsel for the assessee has submitted that the expenditure incurred by the assessee is for the purpose of advertisement and also corporate social obligation, which is fully allowable under section 37 of the Act.

21. On the other hand, the ld. DR has submitted that the Police Department is being using cars of other companies such as Bolero & Scorpio of Mahindra & Qualis of Toyota. There was nothing special in using the Hyundai Accent cars. Therefore, it cannot be said that the expenditure incurred is for the purpose of advertisement.

22. Both parties have been heard, perused the materials on record and gone through the orders of authorities below. In this case, the assessee has donated 100 cars to Police Department of Tamil Nadu State Government. It is not a case of the assessee that the Tamil Nadu Police Department has requested the assessee to donate the cars for any particular purposes. The assessee has voluntarily donated these cars to the Police Department. The assessee has chosen to whom the cars have to be donated and accordingly, it has delivered the cars to the Police Department. It is a facility provided by the assessee to the servants of the Government i.e., Police Department. It is also not correct to say that the Police Department was not using any vehicles. It is the duty of the State Government to decide what facilities are to be provided to their servants and to discharge their duties effectively. Corporate bodies like the assessees’ are not allowed for stepping into the duties of the State Government, to choose the Department and provide facilities accordingly. This is against the public policy. It is the prime duty of the State Government to provide proper protection to the public, maintain law and order and control the crimes. Simply providing 100 cars to the Police Department, it cannot be termed as Corporate Social Responsibility and therefore, it cannot be treated as an allowable expenditure. The assessee has failed to explain as to how donating cars to the Police Department can be treated as an advertisement to the assessee company. In so far as to ascertain and evaluate usage and effectiveness of cars manufactured by the assessee is concerned, after donating the cars to the Police Department, it appears that the assessee has not made any enquiry with the Police Department as to how efficiently the cars are working. The assessee has failed to file such report either before the Assessing Officer or before the ld. DRP or before the Tribunal. Therefore, it cannot be said that cars given to the Police Department for the purpose of evaluating the usage, effectiveness and improvements of the cars.

23. So far as case law relied on by the assessee before the Assessing Officer in the case of Sree Meenakshi Mills Ltd. (supra), the Hon’ble Madras High Court has considered the allowability of expenditure under section 37(1) of the Act and held that the facts are entirely different from assessee’s case. The Hon’ble Madras High Court has held that the legal expenses incurred in unsuccessful attempts to get released yarns of the assessee seized by the Textile Commissioner for evaluation of Cotton Cloth and Yarn (Control) order 1945 are not allowable business expenditure.

24. The case law relied on by the assessee in the case of Birla Cotton Spinning & Weaving Mills Ltd. (supra), the Hon’ble Supreme Court has considered the allowability of expenditure under section 37(1) of the Act and held as under:

“The expression for the purpose of the business is essentially wider than the expression for the purpose of earning profits. It covers not only the running of the business or its administration but also measures for the preservation of the business and protection of its assets and property. It may legitimately comprehend many other acts incidental to the carrying on of the business.”

In the present case, the cars given by the assessee to the Police Department is not an incidental to the business of the assessee. Therefore, it is not allowable expenditure under section 37 of the Act.

25. In the case of CIT v. Malayalam Plantations Ltd. [1964] 53 ITR 140, the Hon’ble Supreme Court has held as under:

“The expression ‘for the purpose of business’ in section 10(2)(xv) of the 1922 Act [corresponding to section 37(1) of the 1961 Act] is wider in scope than the expression ‘for the purpose of earning profits’. Its range is wide; it may take in not only the day-to-day running of a business but also the rationalisation of its administration and modernisation of its machinery, it may include measures for the preservation of the business and for the protection of its assets and property from expropriation or coercive process; it may also comprehend payment of statutory dues and taxes imposed as a precondition to commence or for carrying on of a business; it may comprehend many other acts incidental to the carrying on of a business. However wide the meaning of the expression may be, its limits are implicit in it. The purpose shall be for the purpose of the business, that is to say, the expenditure incurred shall be for the carrying on of the business and the assessee shall incur it in his capacity as a person carrying on the business. It cannot include sums spent by the assessee as agent of a third party, whether the origin of the agency is voluntary or statutory; in that event, he pays the amount on behalf of another, and for a purpose unconnected with the business.”

In the present case, the assessee has voluntarily donated cars to the Police Department. It is a facility provided by the assessee to the servants of the State Government. It is a prime duty of the State Government to provide necessary facilities to its servants. The assessee has undertaken the duty of the State Government. The expenditure incurred by the assessee by donating 100 cars to Police Department is unconnected with the business of the assessee. The above judgment of the Hon’ble Supreme Court in the case of Malayalam Plantations Ltd. (supra) squarely applies to the facts of the present case. Therefore, it cannot be said that the cars donated by the assessee is for the purpose of business.

26. Further, the assessee has failed to prove that the cars donated by the assessee to the Police Department is wholly and exclusively for the purpose of the business. It has also failed to prove that there is nexus between the expenditure and business of the assessee.

27. In view of the above, keeping in view of the facts and circumstances and the above judgment of the Hon’ble Supreme Court, I am of the opinion that the claim of the assessee cannot be allowed. Accordingly, the ground raised by the assessee stands dismissed.

REFERENCE UNDER SECTION 255(4) OF THE INCOME-TAX ACT, 1961

 

As there is difference of opinion between the Members constituting the Bench with regard to one issue, following question is formulated and referred to the Hon’ble President for nominating Third Member:

“1. Whether, the expenditure incurred by the assessee by giving 100 cars to the Police Department of Tamil Nadu is an eligible expenditure under section 37 of the Income Tax Act or not?”

THIRD MEMBER ORDER

 

D. Manmohan, Vice-President (As a Third Member) – On account of difference of opinion between the Hon’ble Accountant Member and Hon’ble Judicial Member, the following question was formulated and referred to the Hon’ble President for nomination of Third Member under section 255(4) of the Income Tax Act, 1961:—

“Whether the expenditure incurred by the assessee by giving 100 cars to the Police department of Tamil Nadu is an eligible expenditure under section 37 of the Income Tax Act or not”

The Hon’ble President, ITAT was pleased to nominate me as Third Member in the instant case which was listed for hearing on 19th June, 2015.

2. Before adverting to the arguments of both the parties, the facts necessary for disposal of the issue may be stated in brief. As could be noticed from the assessment order the assessee is engaged in the business of manufacture and sale of motor vehicles and its components. During the previous year relevant to the assessment year under consideration the assessee donated 100 cars of Hyundai Accent model to the police department of Tamil Nadu State Government. The total worth of 100 cars was of 5,20,97,000/- which was shown under the head ‘advertisement and sales promotion’ (including retail discounts); at page 15 of the paper book (notings below the schedule forming part of accounts), it is stated that the cars were given free of cost to the police department and shown under the head ‘advertisement and sales promotion’. During the course of assessment proceedings, the Assessing Officer noticed that the cars were given free of cost and there is no value involved in presenting the cars to police department and hence issued show cause notice, calling upon the assessee to furnish explanation as to why the same should not be disallowed as per the provisions of section 37 of the Income Tax Act.

3. In response thereto, the assessee replied that in India police department does not use cars for patrolling and surveillance purposes. The usage of cars for road safety, removal of traffic bottlenecks, reaching the accident spot in time, surveillance, chasing and catching of culprits need to be addressed and tested. The assessee-company therefore offered 100 Hyundai Accent model cars to police department to test the car market. It was also stated that these cars were fitted with latest electronic equipments which are useful in controlling crimes and protecting valuable life of citizens. Since it was an expenditure incurred on test market, it has to be considered as expenditure wholly and exclusively for the purpose of business, i.e. to find out new segment of car market. The assessee also relied upon several case law in support of its contention that the expression “wholly and exclusively” signify that it should be intended for the purpose of business so long as commercial expediency is proved. In other words, the expression “for the purpose of business” is wider than the expression ‘for the purpose of earning profits’ and it can be any expenditure incurred, incidental to carrying on of the business.

4. Since the assessee had to support the claim with evidence, the Assessing Officer called upon the assessee to furnish agreement with the police department and other details. At this stage, the assessee-company admitted that there is no formal agreement with the police department. However, a copy of letter, stated to have been addressed to Home Secretary, Government of Tamil Nadu, was furnished (page 218 of the paper book) which reads as under:—

“The Home Secretary,

Government of Tamil Nadu,

Fort St. George,

Chennai-600 009.

Dear Sir,

Ref : Patrol Cars – Market Research.

Hyundai Motor India sells cars in many countries across the world and the Group is seventh largest automobile manufacturer in the world. The cars sold by us used by the Police and other security agencies for the purpose of patrolling, surveillance, security and safety related activities.

In India, Police Department does not use cars for patrolling and surveillance purposes. The usage of cars for road safety, removal of traffic bottleneck, reaching the accident spot in time, surveillance, chasing and catching of culprits needs to be addressed and tested. These Patrol Cars fitted with the latest electronic equipments would be very useful in controlling crimes and protecting valuable life of citizens.

In this direction, we propose to test the market by offering vehicles to Tamil NaduPolice. We request your goodselves to kindly accept our offer of 100 suitably modified Accent cars and provide us with your valuable information on the usage, effectiveness and improvement.

We will proceed further on hearing from you.

Yours faithfully,

For Hyundai Motor India Ltd.

Sd/-

Executive Director-Administration”

Though there is no reply from the police department in writing and no promise made with regard to their report to be submitted on the effectiveness and improvements made in the cars, the assessee provided 100 cars to the police department.

5. It is not the case of the assessee that any Board Meeting of the assessee- company had taken place. In fact the counsel of the assessee was called upon to furnish evidence, if any, to show that the management had collectively taken a decision by recording the same in writing in the form of minutes of meeting etc. But it was stated that no such information is on record. However, it was stated that the assessee has gifted cars only as part of goodwill gesture and they were given for the purpose of patrolling and surveillance purpose with latest electronic equipments which are useful in controlling crimes and protecting valuable life of citizens.

6. In the backdrop of these facts, the Assessing Officer observed that the assessee could not furnish any information received from the police department with reference to effectiveness, usage and improvement of cars donated to the Tamil Nadu police department. Despite several opportunities, no evidence could be furnished by the assessee in this regard. Therefore, the Assessing Officer was of the view that expenditure was not incurred for the purpose of business and the same is not an allowable expenditure, as per provisions of section 37 of the Act. He further observed that donated vehicles are not used with any advertisement features of the assessee-company and it is nothing different from other vehicles namely Bolero, Scorpio and Qualis etc. which are already in use by the Tamil Nadu police department for patrolling and surveillance purposes. The Assessing Officer further noticed that assessee had been incurring huge expenditure for the purpose of research and development facility every year in order to ascertain and evaluate the usage, effectiveness and improvement of the cars manufactured by the assessee and therefore, it is not understandable as to what kind of inputs the police department could have given. In other words, the purpose and object of donating 100 cars is not real as stated by the assessee and the so called object is remote or illusionary. In this regard, the Assessing Officer referred to the decision of Hon’ble Andhra Pradesh High Court in the case of CIT v. Vazir Sultan Tobacco Co. Ltd. [1998] 169 ITR 139/[1987] 35 Taxman 294wherein the Court observed that even though an expenditure is incurred by an assessee voluntarily, but not obligatory, it can be allowed if it is ultimately designed to further the objects and purposes of the assessee and the object should be real and not remote or illusionary. Reliance was also placed upon the decision of Chennai Bench of the Tribunal in the case of Tamil Nadu Minerals Ltd. v. Jt. CIT [2005] 95 ITD 294. Thus, the claim of the assessee under section 37(1) of the Act was rejected by the Assessing Officer.

7. When the matter was placed before the Division Bench of the Tribunal, it was contended on behalf of the assessee that it was fulfilling its “corporate social responsibility” in the form of gifting cars to the Tamil Nadu police department. It was further claimed that usage of the vehicles by the police department would help the assessee to assess the reliability of the vehicles and help the public at large apart from helping the assessee as advertisement to promote sales. The assessee placed reliance on the decision of the Hon’ble Supreme Court in the case of Sri Venkata Satyanarayana Rice Mill Contractors Co.(supra), wherein the Court observed that in order to consider as to whether the expenditure falls within the ambit of section 37(1) of the Act, the correct test is that of commercial expediency; as long as the payment is made for the purpose of business and not by way of penalty for infraction of any law, the same is allowable as deduction. In the aforementioned case, as per the voluntary scheme agreed between the District Collector and the Rice Millers Association, the members of the association have to deposit an amount of 0.50 paise per quintal of rice, if they propose to export rice from Andhra Pradesh. In order to export rice, the members of the Rice Millers Association deposited the stipulated amount in District Welfare Fund and accordingly collected permits. The Hon’ble Court observed that expenditure was wholly and exclusively incurred for the purpose of business as the payment is not opposed to public policy.

8. Summary of the arguments of the assessee are: —

(a) Gift of cars will help the assessee-company to test the performance of cars manufactured by it.
(b) Extensive usage of vehicles will be noticed by the public at large and it will build the image of the assessee and also act as an advertisement for its products.
(c) The police department being over burdened by large traffic movement, in and around assessee’s factory, vehicles provided by the assessee-company will enhance their efficiency and also soothen the discomfort caused to the public/assessee.
(d) It will help the assessee to fulfill its obligations towards ‘corporate social responsibility’.

9. The learned Accountant Member accepted the plea of the assessee by observing that such gestures of the corporate houses have to be appreciated and encouraged which will benefit public at large. The learned Accountant Member further observed that this expenditure directly or indirectly benefits the assessee- company, for its image building and its promotion/sales of products and hence the expenditure is allowable as deduction under section 37(1) of the Act because of existence of commercial expediency.

10. Learned Judicial Member was, however, unable to agree with the view taken by the learned Accountant Member and hence passed a separate order on this aspect, wherein he observed that the assessee initially claimed it as advertisement and sales promotion expenditure by stating that police department does not use cars for patrolling and surveillance etc. and the usage of cars for road safety, removal of traffic bottleneck, reaching accident spot in time, catching culprits equally needs to be addressed and tested and hence the cars were provided to Tamil Nadu police department to test the car market. The learned Judicial Member also recorded the plea of the assessee that these ‘patrolling cars’ are fitted with latest electronic equipments which are very useful in controlling crimes and protecting the valuable life of citizens.

11. However, the learned Judicial Member opined that donation of cars has no nexus with the business of the assessee. So far as the test market is concerned, the learned Judicial Member noticed that assessee has not provided any information with regard to usage, effectiveness and improvement of the said vehicles donated and in fact, no information was obtained from the police department with regard to usage of cars. The cars donated were not being used with any advertisement banners, etc. of the assessee-company. Further, it was nothing different from other vehicles such as Bolero, Scorpio & Qualis which are being used by the Tamil Nadu police department for its patrolling purposes. He also noted the fact that assessee incurred huge expenditure for the purpose of research and development facility every year in order to evaluate usage, effectiveness and improvement of cars and therefore the cars donated to the Tamil Nadu police department though meant to be for deciding its effectiveness, the reason was not real.

12. As regards the plea that expenditure was incurred towards corporate social responsibility, learned Judicial Member observed that Tamil Nadu police department never requested the assessee to donate cars for any particular purposes and they were in fact, already utilising similar cars and thus there was no need to donate cars to police department, since such facility would be provided by the State Government. It is for the State Government to decide as to what facility has to be provided to their officers whereas corporate social responsibility is a concept which concerns the liability which otherwise could have been provided by the Government but not provided; in this case cars were provided by the state government wherever required and hence ‘corporate social responsibility’ has no role here. The Government has already taken a decision to provide vehicles as per the requirement. Therefore, the principle of corporate social responsibility does not come into play. On the contrary, supply of cars would be against the public policy and hence cannot be allowed as business expenditure.

13. The learned Judicial Member particularly emphasised the fact that assessee failed to prove what is the advertisement value that the assessee-company obtained by donating cars to the police department when the assessee had not made any enquiry with the police department as to how efficiently the cars donated were working. Learned Judicial Member relied upon the decision of the Hon’ble Supreme Court in the case of Birla Cotton Spinning & Weaving Mills Ltd. (supra) wherein the Court observed that the expression ‘for the purpose of business’ is wider in its ambit and may not be limited to expenditure incurred for the purpose of earning profits but such expenditure should be incidental to carrying on of the business. Since, in the instant case, the cars given to the police department is not incidental activity for the purpose of business of the assessee, learned Judicial Member concluded that the expenditure is not allowable as deduction under section 37 of the Act.

14. Learned Judicial Member has also taken into consideration the ratio of the judgement of Hon’ble Supreme Court in the case of Malayalam Plantations Ltd. (supra) wherein the Court observed that though the words “for the purpose of business” are wider enough to comprehend many other acts incidental to the carrying on of the business, its limits are implicit in it, i.e. for the purpose of business, i.e. to say, expenditure incurred shall be for carrying on of business and the assessee shall incur it in its capacity as a person carrying on the business and cannot include the sums spent as an agent of a third party. The learned Judicial Member also observed that the assessee failed to prove that cars donated by the assessee to police department were wholly and exclusively for the purpose of its business since there was no nexus between the expenditure and business of the assessee.

15. On account of difference of opinion, as already stated hereinabove, the point of difference was framed by Members of Division Bench with a request to Hon’ble President to nominate a Third Member to resolve the issue in dispute and accordingly, the Hon’ble President was pleased to nominate me as Third Member.

16. Learned counsel appearing on behalf of the assessee adverted my attention to the relevant observations of the learned Accountant Member as well as page 15 of the paper book to submit that the impugned expenditure was included under the head “advertisement and sales promotion expenditure”. The counsel adverted my attention to page 218 of the paper book to submit that assessee-company addressed a letter to the Home Secretary, Government of Tamil Nadu mooting the proposal that they would intend to test the market by offering vehicles to Tamil Nadu police and hence they would like to offer 100 suitably modified Hyundai Accent cars to police department. Learned counsel, therefore, submitted that the main purpose was to test the market i.e., Market Research since it benefits the assessee in many ways and also enable the assessee to claim cost of cars as business expenditure inasmuch as the cars tested by police department would be useful in getting a proper feedback for improvement and also satisfy the conditions of advertisement since the cars would be used by police department which will be in the notice of the public at large and going by speed and effectiveness of the cars, company’s sales may increase.

17. Another facet of his argument is that it can also be termed as ‘corporate social responsibility’ of the assessee-company; presenting the cars to police department who are ill equipped in the matter of surveillance, chasing and catching of culprits because police department does not use cars. It was mainly submitted that the term ‘business expenditure’ has to be tested from the businessman’s point of view and it is not for the Revenue to analyse the concept by sitting in an armed chair. In other words, the main test is whether the expenditure was wholly and exclusively incurred for the purpose of business though it is voluntary in nature and it may not enable the assessee to immediately gain profit, commensurate to the expenditure. He further submitted that it can also be treated as goodwill gesture between the assessee-company and the police department which will go a long way since the assessee can be insulated from unnecessary litigation if they maintain goodwill with the police department. He placed reliance upon the decision of the Hon’ble Madras High Court in the case ofCIT v. Madras Refineries Ltd. [2004]266 ITR 170/138 Taxman 261 to submit that expenditure on social welfare of local residents is a goodwill gesture and monies spent by the assessee for establishing water facilities cannot be regarded as wholly outside the ambit of the business concerns of the assessee. He also relied upon the following decisions in support of his contention that expression ‘wholly and exclusively’ does not include the expression “necessarily” and thus even the expenditure incurred voluntarily, in the interest of business, can be considered as expenditure incurred for the purpose of business; even though it may not yield benefit to the assessee, such expenditure can be considered as incidental to carrying on of the business:—

(i) Patnaik & Co. Ltd. v. CIT [1986] 161 ITR 365/27 Taxman 287 (SC)
(ii) L.H. Sugar Factory & Oil Mills (P.) Ltd. v. CIT [1980] 125 ITR 293/4 Taxman 5 (SC)
(iii) CIT v. Coats Viyella India Ltd. [2002] 253 ITR 667/ 124 Taxman 797 (Mad)
(iv) CIT v. Infosys Technologies Ltd. [2014] 360 ITR 714/223 Taxman 469/43 taxmann.com 251 (Kar.)
(v) CIT v. Kamal & Co. [1993] 203 ITR 1038/[1994] 76 Taxman 565 (Raj)
(vi) CIT v. Rajasthan Spg & Wvg. Mills Ltd. [2006] 281 ITR 408/[2005] 147 Taxman 131 (Raj)
(vii) CIT v. T.V. Sundaram Iyengar & Sons (P.) Ltd. [1990] 186 ITR 276 (SC)
(viii) Addl. CIT v. Kuber Singh Bhagwandas [1979] 118 ITR 379 (MP)(FB)

18. Learned counsel for the assessee submitted that it was also a corporate social responsibility – on the part of the assessee – to help the needy, be it Government organization or private personnel, and so long as it is incidental to carrying on of the business, the same is allowable as deduction under section 37(1) of the Act. He thus strongly relied on the order passed by the learned Accountant Member. Further, he submitted that learned Judicial Member was not justified in taking into consideration the ratio laid down by the Supreme Court in the case of Malayalam Plantations Ltd. (supra) since the decision was rendered in peculiar facts of the said case, whereas similar case was discussed by the Hon’ble Madras High Court in the case of CIT v. Amalgamations Ltd. [1995] 214 ITR 399/[1996] 84 Taxman 50 (pages 431 & 432) wherein the Court observed that though the judgement in the case of Malayalam Plantations Ltd. (supra), at a first glance, appears to support the Revenue, but the Hon’ble Supreme Court, in the aforesaid case, proceeded on assumption that the assessee paid estate duty to the State as an agent which could not be recovered from the legal representative of the deceased and in that context the expression ‘for the purpose of such business’ was analysed to hold that expenditure incurred for the purpose of business cannot include sums spent by the assessee as an agent of the third party . He also relied upon the decision of ITAT., Calcutta, Special Bench, in the case of Jt. CIT v. ITC Ltd. [2008] 112 ITD 57 wherein the Special Bench observed, in the context of expenditure incurred in connection with sponsorship of various events in order to promote its different cigarette brands, that it is for the businessman to decide what gives him benefit and merely because there may be a benefit to the third party, so long as there is no such evidence, the same cannot be disallowed. He thus, strongly relied upon the order passed by the learned Accountant Member.

19. On the other hand, learned Departmental Representative submitted that police department in Tamil Nadu have no dearth of vehicles and the Government, in its wisdom, has decided to provide vehicles only to those officers who are in need of vehicles i.e., it identified the persons and provided vehicles to them so as to effectively deal with the law & order problems and accordingly provided number of vehicles such as Bolero, Scorpio and Qualis etc. and hence it is not correct to state that police department does not have vehicles. The corporate social responsibility is a new concept which has emerged recently whereas in the assessment year under consideration this concept has not gained momentum. Even otherwise, corporate social responsibility refers to an obligation on the part of the Government but not fulfilled i.e., in the event of inability on their part to render proper services, corporates can step in and share government’s responsibility as part of their corporate social responsibility. Whereas, in the instant case, how many cars are to be provided to the officers is left to the wisdom of the police department and the assessee cannot assume that police department is unable to provide cars and hence, in the garb of corporate social responsibility, they are not supposed to provide cars. In this regard, he referred to the observations of the learned Judicial Member to submit that incidental to carrying on of the business means and implies that the assessee satisfies that object of expenditure was for business and not illusory.

20. In the instant case, the initial plea of the assessee was that it has given vehicles to test efficacy of the vehicles. If that is their main plea then the onus is on the assessee to prove that they have made reasonable efforts with the police department to obtain feedback whereas no such paper could be filed at any stage of the proceedings. It is also not in dispute that cars did not carry any kind of advertisement features on the cars donated to the police department. In addition to this the assessee has a robust research and development wing, wherein substantial amounts have been spent on yearly basis and thus the purpose, in the instant case, cannot be said to be real and effective, in which event it cannot be said that assessee has incurred expenditure wholly and exclusively for the purpose of business or expenditure is incidental to the carrying on of the business and, in fact, no direct or indirect benefit was obtained by the assessee. The case law relied upon by the learned counsel of the assessee are distinguishable on facts. The Departmental Representative relied upon the decision of Delhi Bench of the Tribunal in the case of Oil Industry Development Board v. Asstt. CIT [2010] 123 ITD 67/[2009] 31 SOT 226wherein the Bench observed that the essential condition of allowance is that the expenditure should have been laid out or expended wholly and exclusively for the purpose of such business i.e. to enable a person to carry on and earn profit in that business. It is not enough that disbursements are made in the course of or arise out of or are concerned with or made out of profits of the business, but that must also be for the purpose of running of business, though actual profits may not be obtained on account of such expenditure. In the aforesaid case, certain expenditure was incurred by the assessee as per direction of the Central Government, in the interest of public, but the Bench observed that mere direction given by the Central Government does not fulfill the criteria as laid down in section 37 so as to consider it as an allowable expenditure. In the aforementioned case, the Tribunal has taken note of several rulings of the Supreme Court as well as the High Courts on this issue before analysing the facts of the present case. Learned Departmental Representative also relied upon the decision of the Hon’ble High Court of Orissa in the case of CIT v. Industrial Development Corpn. of Orissa Ltd. [2001] 249 ITR 401/115 Taxman 626, wherein the Court observed that if a State owned corporation donates an amount of rupees one lack to Chief Minister’s Relief Fund it cannot be treated as expenditure incurred wholly and exclusively for the purpose of business. In this regard, the Court observed that initial onus is upon the party, who claims deduction, to prove that the expenditure was incurred wholly and exclusively for the purpose of business i.e. payment was made with a view to secure benefits for its business. Since there is nothing on record to establish that the donation amount of rupees one lakh to Chief Minister’s Relief Fund was related to carrying on of its business, the Hon’ble Orissa High Court observed that the expenditure is not allowable as deduction under section 37(1) of the Act. The High Court had taken note of the decision of Supreme Court in the case of Sri Venkata Satyanarayana Rice Mill Contractors Co. (supra) to clarify that in the aforecited decision the assessee association obtained permits from the District Collector after paying contribution, pursuant to the scheme framed by Rice Millers Association, and there is a direct link with the business carried on by the assessee, whereas, in the instant case, there is nothing on record to establish that the delivery of 100 cars was directly or indirectly connected with the carrying on of its business. The learned Departmental Representative thus, strongly submitted that in the instant case, expenditure incurred by the assessee was not allowable as deduction under section 37(1) of the Act.

21. Joining the issue, learned counsel for the assessee submitted that the case law relied upon by the Departmental Representative are distinguishable on facts.

When called upon to furnish evidence as to whether there is any letter in writing from the police department or Home Secretary mentioning about shortage of cars or need for more cars, learned counsel submitted that there is no such material on record. He merely stated that letter dated 14th August, 2006 addressed to Home Secretary, Government of Tamil Nadu, Chennai proves that assessee sought permission before providing suitably modified Hyundai Accent cars. But the assessee-company did not either obtain a letter in writing or feedback after the usage of cars; still the assessee presented 100 cars on the assumption that they are discharging corporate social responsibility or it carries advertisement value which helps the research and development wing of the assessee-company in understanding the effectiveness of the vehicles for future improvements. He also fairly admitted that police department has not given any report with regard to condition of vehicles and improvements, if needed, for effective use of cars. He also admitted that the plea of corporate social responsibility was taken only at a later stage, since the claim was not made on that count before the Assessing Officer, but quickly submitted that allowability of deduction can be justified on any other ground and in the instant case the assessee pleads it is a corporate social responsibility, apart from gaining goodwill image which would help the assessee in carrying on its business in Tamil Nadu smoothly and thus it can be considered as an expenditure wholly and exclusively incurred for the purpose of business or at least incidental to carrying on of the business.

22. When called upon to explain as to whether the management has taken any specific decision in the form of making it as one of the issues in the Board meeting or whether there is any communication between the top management and middle level management, learned counsel submitted that there is no such record available and in fact was not produced before the tax authorities. He also admitted that assessee has not even made any effort till date to draw attention of public by mentioning in their advertisements that cars manufactured by them are “best cars designed to protect the interest of public at large and used by police personnel”. With regard to additional fittings for the specific use of the police personnel, no material was placed on record; the counsel merely contended that every car will have its logo ‘Hyundai’ and that itself will have advertisement value.

23. I have carefully considered the rival submissions and perused the record as well as the relevant case law on the subject. The expression “wholly and exclusively incurred for the purpose of business”, used in section 37(1) of the Act, was subject matter of interpretation by various forums and the Apex Court also had several occasions to explain the meaning of that expression in the context in which it was used under the Income Tax Act. In others words, it is a vexed question of law and the ratio laid down by several courts have to be considered in the backdrop of the facts of this case.

24. In the case of Sassoon J. David & Co. (P.) Ltd. v. CIT [1979]118 ITR 261/1 Taxman 485 the Apex Court observed that the expression “wholly and exclusively” does not mean “necessarily” and even a voluntary payment can be considered for claim of deduction so long as it is incurred for the purpose of business. There need not be a direct link between earning of profit and the expenditure incurred. But, at the same time, the expression ‘wholly and exclusively’ needs to be given an appropriate meaning and in that context the courts have held that the expenditure should be incidental to carrying on of the business and the object should be real. In other words, there should be either a direct or indirect relationship between the expenditure and the object of the business, though it was incurred voluntarily.

25. It is well settled that with regard to any expenditure claimed as deduction the onus is upon the assessee to prove that it was incurred wholly and exclusively for the purpose of business. In the instant case the assessee-company initially claimed that it has donated 100 cars to the Police Department to test the efficacy of their vehicles and to obtain feedback, as could be seen from the letter addressed to the Home Secretary (letter dated 14th August, 2006). In the schedule forming part of the accounts it was treated as “advertisement and sales promotion expenditure”. There is nothing on record to suggest that the Police Department was running short of vehicles. Though the assessee-company put up a proposal to the Home Secretary, Government of Tamil Nadu has not responded to the same and the state government did not indicate that there was shortage of cars for performance of their duty effectively. In other words, the proposal was never accepted by the Government of Tamil Nadu which is reinforced by the fact that they never choose to give the report with regard to the effectiveness of the vehicles and the improvement, if any, required. Thus the plea of the assessee that the cars were given for market research fails. In fact the assessee never made even a faint attempt to obtain the feedback in writing. When the cars worth more than 5 crores are given, a decision has to be taken at a major level and such a decision can be taken in a Board meeting followed by minutes of the meeting. No such evidence was furnished at any stage.

26. This apart the company has a robust market research wing and it claims that the cars sold by them were used by the Police and other security agencies elsewhere in which event there was no need to give the cars free of cost to the Police Department in Tamil Nadu. In this background it can be seen that the assessee having claimed to have sold the cars to the Police and other security agencies in other countries/places, the feedback, if any, could have already been obtained and there was no need for the assessee to incur such huge expenditure by giving the cars free of cost to the Police Department of Government of Tamil Nadu, more particularly when the proposal was not accepted in writing and neither the assessee called for their feedback nor did the Police Department deem it fit to give any feedback.

27. Since the assessee reported the expenditure under the head ‘advertisement and sales promotion’ it may be seen whether the expenditure has helped in advertisement of their cars – if the cars were given free of cost to the Police Department. The case of the learned Judicial Member is that wherever it requires the Police Department was using identical cars of different brands such as Bolero, Qualis, etc. This fact was not disputed. It is not the case of the assessee that the cars display, in any manner, any slogan that the cars presented to the Police Department by the assessee were more efficient in several respects as compared to the other cars. Mere logo in every car cannot be considered as having any advertisement value since it does not attract the attention of common man or the potential buyers. It is also not the case of the assessee that they have given any advertisement on any subsequent occasion that the cars donated to the Police Department were specially fitted with certain features for speed and efficiency.

28. Though an expenditure voluntarily incurred can be classified as business expenditure, it is subject to fulfilling the essential condition that it is wholly and exclusively incurred for the purpose of business even though the assessee has not gained immediate benefit by incurring such expenditure. In other words, business nexus has to be established. In this case the assessee tried to establish business nexus on the ground that it helped in market research and it has advertisement value. In my humble opinion, the assessee could not effectively prove that the cars were given for market research and the manner in which the cars were given also did not indicate that there is any advertisement value.

29. At a later stage the assessee-company raised a new plea that it fulfills the corporate social responsibility. In my humble opinion, the expression “corporate social responsibility” should be given a rational meaning bearing in mind the idea of the Legislature while bringing out this concept. Wherever there is responsibility on the part of the Government and it was not able to extend its arm in fulfilling its social responsibility and if a corporate can fill that gap, it can be considered as corporate social responsibility. In the instant case this concept has no application. It is for the Tamil Nadu Government to decide as to which officers are entitled to cars for patrolling purposes. It is not the case of the assessee that an officer, who is entitled to a car for patrolling purpose, was not provided with such facility. In such an event of the matter it is not appropriate on the part of the corporate to grab the opportunity to provide luxuries to officials even when not required. For example, a Police Inspector, under law, is provided a motorcycle which can be used effectively to cruise through the busy roads in India whereas the assessee might feel that even a Police Constable should enjoy the luxury of a car and in the garb of allowing them to have more number of cars for patrolling it may gift cars which cannot be equated to corporate social responsibility. In short, it is for the assessee to prove that the cars were provided genuinely under the impression that it is incurring the expenditure as its corporate social responsibility. The assessee could have furnished the relevant data from the government websites or news paper clipping that the Police Department in Tamil Nadu were suffering on account of lack of number of cars for effective discharge of their duties. No such material could be furnished at any stage of the proceedings. Even otherwise Explanation 2 to section 37(1) clarifies the legal position that CSR expenditure cannot be claimed as business expenditure under section 37(1) of the Income Tax Act, 1961.

30. Though the company claimed that the cars were provided to get feedback about the efficiency of the cars, the letter furnished before the Tribunal clearly indicates that they have already sold the cars to Police Departments and other security agencies which are discharging similar functions and there was no need for them to give further cars to do market research only in Tamil Nadu when the Government has not shown any interest in giving any feedback. It could thus be seen that though the assessee claims that the expenditure was wholly and exclusively incurred for the purpose of business the real object is only to appease the police personnel and it has nothing to do with the business carried on by the assessee. In other words, the expenditure incurred by the assessee was not incidental to carrying on the business.

31. Having regard to the case law relied upon by both the parties and the ratios laid down therein, I am of the view that there is no commercial expediency in incurring this expenditure and therefore the view taken by the learned Judicial Member deserves to be upheld and I hold accordingly.

32. Registry of the Tribunal is directed to list the matter before the Division Bench for passing orders in accordance with majority view.

ORDER

A. Mohan Alankamony, Accountant Member – There was a difference of opinion between the Hon’ble the Accountant Member and the Judicial Member on the issue whether the expenditure incurred by the assessee by giving 100 cars to the Police department of Tamil Nadu is an eligible expenditure u/s.37 of the Income Tax Act or not. The Hon’ble Vice President, sitting as the Third Member has agreed with the Hon’ble Judicial Member and has held that the expenditure incurred by the assessee was not incidental to carrying on the business and there is no commercial expediency in incurring this expenditure and therefore, the view of the learned Judicial Member is upheld. Therefore by the majority view, this ground raised by the assessee is dismissed.

2. In the result, the appeal of the assessee is partly allowed for statistical purposes.

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