IN INCOME TAX APPELLATE TRIBUNAL BENCH, PUNE BEFORE SHRI R.K. PANDA, AM AND SHRI VIKAS AWASTHY, JM ITA No. 1081/PN/2013 Assessment Year : 2003-04 Mercedes-Benz India Pvt. Ltd., (formerly known as Daimler Chrysler India Pvt. Ltd.), E-3, MIDC Chakan, Phase-III, Chakan Industrial Area, Kuruli & Nighoje, Tal. Khed, Pune-410501 PAN : AABCM1789L Appellant V/s. Deputy Commissioner of Income Tax, Circle 8, Pune Respondent ITA No. 1082/PN/2013 Assessment Year : 2004-05 Mercedes-Benz India Pvt. Ltd., (formerly known as Daimler Chrysler India Pvt. Ltd.), E-3, MIDC Chakan, Phase-III, Chakan Industrial Area, Kuruli & Nighoje, Tal. Khed, Pune-410501 PAN : AABCM1789L Appellant V/s. Additional Commissioner of Income Tax, Range - 8, Pune Respondent 2 ITA Nos. 1081, 1082, 1108 & 1109/PN/2013 and CO Nos. 58 & 59/PN/2014 . ITA Nos. 1108 & 1109/PN/2013 Assessment Years : 2003-04 & 2004-05 Deputy Commissioner of Income Tax, Circle 9, Pune Appellant V/s. Mercedes-Benz India Pvt. Ltd., (formerly known as Daimler Chrysler India Pvt. Ltd.), Sector 15A, Chikhli, Pune-411018 PAN : AABCM1789L Respondent CO Nos. 58 & 59/PN/2014 Assessment Years : 2003-04 & 2004-05 Mercedes-Benz India Pvt. Ltd., (formerly known as Daimler Chrysler India Pvt. Ltd.), E-3, MIDC Chakan, Phase-III, Chakan Industrial Area, Kuruli & Nighoje, Tal. Khed, Pune-410501 PAN : AABCM1789L Appellant V/s. Deputy Commissioner of Income Tax, Circle 9, Pune Respondent Assessee by : Shri R.R. Vora, Shri Pramod Achuthan Revenue by : Shri Rajeev Kumar Date of Hearing : 26-09-2016 Date of Pronouncement : 30-09-2016 3 ITA Nos. 1081, 1082, 1108 & 1109/PN/2013 and CO Nos. 58 & 59/PN/2014 ORDER PER VIKAS AWASTHY, JM : ITA Nos. 1081 & 1082/PN/2013 for assessment years 2003-04 and 2004-05 are directed against order of Commissioner of Income Tax (Appeals)-IT/TP, Pune dated 12-03-2013 common for assessment years 2003-04 and 2004-05. Department has filed cross appeals in ITA Nos. 1108 & 1109/PN/2013 for assessment years 2003-04 and 2004-05, respectively against same order of Commissioner of Income Tax (Appeals). assessee has also filed cross objections i.e. CO Nos. 58 & 59/PN/2014 against appeals filed by Revenue. Since, issues raised in appeals and cross appeals by assessee and Revenue in impugned assessment years are common and are arising from same set of facts, these appeals and cross objections are taken up together for adjudication and are disposed of by this common order. 2. For sake of convenience we are taking facts from ITA No. 1081/PN/2013. brief facts of case as emanating from records are: assessee is company incorporated under Companies Act, 1956 and is engaged in manufacturing and sale of passenger cars. assessee filed its return of income for assessment year 2003-04 on 31-10-2003 declaring income of Rs.10,64,66,730/-under provisions of section 115JB of Income Tax Act, 1961 (hereinafter referred to as Act ). case of assessee was selected for scrutiny and accordingly first notice u/s. 143(2) was issued to assessee on 4 ITA Nos. 1081, 1082, 1108 & 1109/PN/2013 and CO Nos. 58 & 59/PN/2014 18-10-2004. During course of scrutiny assessment proceedings Assessing Officer made certain additions/disallowances in income returned by assessee and assessed total income at Rs.36,26,96,920/- under normal provisions of Act and assessed book profits u/s. 115JB of Act at Rs.28,17,75,970/-. assessee during period relevant to assessment years under appeal had undertaken international transactions for which reference was made to TPO. TPO made upward adjustment of Rs.14,400,330/- on account of payment of Royalty. Assessing Officer while making assessment disallowed Royalty payment as well. Aggrieved by assessment order dated 30-03-2006, assessee preferred appeals before Commissioner of Income Tax (Appeals). Commissioner of Income Tax (Appeals) partly accepted contentions of assessee and deleted some of additions / disallowances made by Assessing Officer during assessment proceedings. Now, assessee and Revenue, both are in appeal before Tribunal. 3. assessee has raised following grounds in appeal for assessment year 2003-04. Based on facts and circumstances of case, Appellant respectfully submits that learned CIT(A) has erred on following grounds, which are independent of and without prejudice to each other: 1. In computing book profits under section 115JB of Act, learned CIT(A) erred in considering provision for compensation payable to module suppliers of Rs.1,11,33,418 as not ascertained liability and thereby upholding addition made by learned Assessing Officer for computation of book profits under section 115JB of Act. 5 ITA Nos. 1081, 1082, 1108 & 1109/PN/2013 and CO Nos. 58 & 59/PN/2014 Appellant prays that above addition made in computation of book profit of Appellant be deleted for A.Y. 2003-04. 2. In computing book profits under section 115JB of Act, after correctly allowing deduction for octroi, wrongly added by learned Assessing Officer, learned CIT(A) erred in holding that amount of Rs.1,39,78,291 representing provision / expenditure towards octroi has been deducted twice by Appellant and thereby directing learned Assessing Officer to add amount of Rs.1,39,78,291 once in book profits for A.Y. 2003-04. Appellant prays that this erroneous addition in computation of book profits of Appellant for A.Y. 2003-04 be deleted. appellant prays leave to add, alter, vary, omit, substitute, amend or delete grounds of appeal at any time before, or at time of, hearing of appeal, so as to enable Hon'ble Tribunal to decide this appeal according to law. In assessment year 2004-05 additions were made by Assessing Officer in income returned by assessee on similar grounds. appeals of assessee for assessment years 2003-04 and 2004-05 were decided by Commissioner of Income Tax (Appeals) vide common order. assessee in its appeal for assessment year 2004-05 before Tribunal has raised solitary issue which is identical to ground No. 1 raised in appeal for assessment year 2003-04. appeals by assessee and Revenue are taken up in seriatim for adjudication. First appeals of assessee are taken up for adjudication, followed by appeals by Revenue and then cross objections. 6 ITA Nos. 1081, 1082, 1108 & 1109/PN/2013 and CO Nos. 58 & 59/PN/2014 ITA Nos. 1081 & 1082/PN/2013 (Appeals by Assessee) 4. Shri R.R. Vora and Shri Pramod Achuthan appearing on behalf of assessee submitted that assessee had entered into agreement with certain suppliers (Four in Numbers) whereby assessee was required to purchase minimum quantity of material used for manufacturing cars. In case of any shortfall in procuring assured minimum quantity, assessee was required to compensate suppliers for shortfall. As quantity purchased by assessee during assessment years 2003-04 and 2004-05 was less than minimum committed quantity, assessee made provision for compensation payable to suppliers. During scrutiny assessment proceedings Assessing Officer held that provisions created for payment of compensation to module suppliers is contingent liability and added back amount while calculating book profit u/s. 115JB of Act. During First Appellate proceedings, Commissioner of Income Tax (Appeals) confirmed addition made by Assessing Officer on ground that assessee has not submitted details in respect of actual payment made to suppliers and basis for creating such provision. Commissioner of Income Tax (Appeals) further observed that such amounts are mostly under dispute and are paid after resolution of dispute. Hence, liability is contingent in nature. observations made by Commissioner of Income Tax (Appeals) are against facts of case. There are four suppliers and assessee had given details of payments to all suppliers. 4.1 ld. AR submitted that assessee was liable to pay compensation to module suppliers, as per terms of 7 ITA Nos. 1081, 1082, 1108 & 1109/PN/2013 and CO Nos. 58 & 59/PN/2014 agreement entered into with respective module suppliers. assessee was liable to compensate suppliers in case of shortfall in procuring minimum agreed quantity. Thus, liability was contractual. payment made by assessee in discharge of liability has not been disputed by Assessing Officer. Auditors in Audit Report have not qualified liability as contingent in nature. ld. AR further submitted that assessee had made provision of Rs.1,11,33,418/-for assessment year 2003-04, Rs.78,37,457/- for assessment year 2004-05 and Rs.2,53,03,903/- for assessment year 2005-06 thus, total provision for 3 years created by assessee was Rs.4,42,74,778/-. Against said provision assessee made actual payment of Rs.4,69,19,753/-. Thus, actual payment made is higher than provision created by assessee. 4.2 ld. AR further referred to definition of 'Provision' and 'Reserve' as given in Item 7(1) of Interpretations forming Part III to Schedule VI of Companies Act, 1956 and asserted that provisions represent amount set-aside for known liability even if amount for same cannot be determined with substantial accuracy. Such amount is specifically excluded from definition of 'reserve'. In light of definition of Provision and Reserve given under provisions of Companies Act, 1956, provision for compensation to module supplier is provision as defined in Companies Act, 1956 and not contingent liability. ld. AR further submitted that in case of contractual liability where there is dispute with respect to quantum of liability and not with respect to incurrence of liability, Courts have held that if such liability has been estimated, at least provisionally 8 ITA Nos. 1081, 1082, 1108 & 1109/PN/2013 and CO Nos. 58 & 59/PN/2014 same may be allowed for deduction in year of claim, despite dispute is not settled. In support of his submissions ld. AR placed reliance on following decisions : i. Bharat Earth Movers Vs. CIT, 245 ITR 0428 (SC); ii. CIT Vs. Hewlett Packard India (P) Ltd., 314 ITR 55 (Del. HC); iii. CIT Vs. H.P. Tourism development corporation Ltd., 35 taxmann.com 450 (HP). 4.3 ld. AR further pointed that Assessing Officer has made such disallowance only in assessment years 2003-04 to 2005-06 only. Thereafter no disallowance has been made in subsequent assessment years on account of provision for compensation to module suppliers. 5. In respect of ground No. 2 raised in appeal for assessment year 2003-04, ld. AR contended that assessee had set up its manufacturing unit in area falling under Pimpri Chinchwad Municipal Corporation (PCMC). When assessee had established its unit area was backward and PCMC gave octroi concession to assessee. assessee was paying octroi @ 1.25%. In August, 2001 PCMC issued notice to assessee stating that classification of goods by assessee was incorrect and hence, octroi @ 2% is leviable from 4 April 2000. assessee disputed excess liability proposed by PCMC. However, assessee created provision of Rs.1,32,06,642/- till 31-03-2002 at rates mentioned by PCMC. provision was increased to Rs.1,39,78,291/- by creating additional 9 ITA Nos. 1081, 1082, 1108 & 1109/PN/2013 and CO Nos. 58 & 59/PN/2014 provision of Rs.7.71 lakhs in books of account for assessment year 2003-04. 5.1 During assessment proceedings Assessing Officer added back amount of provision for octroi in calculating book profits u/s. 115JB of Act by treating it as contingent liability. Further, Assessing Officer has separately added octroi expense recorded in Profit and Loss Account while calculating book profits u/s. 115JB as same was not paid till date of filing of return of income. Thus, there was double disallowance of same amount in assessment year 2003-04. In assessment year 2004-05 said provision was reversed and re-recorded at end of year. Such re-recorded provision was again disallowed in assessment year 2004-05. Thus, same amount got disallowed thrice. assessee filed rectification application for addition of expenditure/ provision of octroi made twice in assessment order, being mistake apparent from record. However, Assessing Officer rejected plea of assessee. In first appeal Commissioner of Income Tax (Appeals) agreed in principle that liability is ascertained but somehow got wrong impression that assessee has claimed double deduction. Commissioner of Income Tax (Appeals) failed to consider fact that assessee has passed reverse entry. 5.2 ld. AR contended that in view of fact that octroi expenditure has been debited to Profit and Loss Account only once in assessment year 2003-04 and net effect of entries passed by assessee in assessment years 2004-05 and 2005-06 is Nil, no 10 ITA Nos. 1081, 1082, 1108 & 1109/PN/2013 and CO Nos. 58 & 59/PN/2014 additional provision was created in assessment years 2004-05 and 2005-06. ld. AR submitted that Commissioner of Income Tax (Appeals) has rightly held provision for octroi to be deductible for purpose of calculation of MAT liability, however, due to some misunderstanding denied benefit to assessee. 6. On other hand Shri Rajeev Kumar representing Department submitted that assessee had not furnished complete details in respect of provision of compensation payable to module suppliers. In absence of compete documents Assessing Officer was not in position to ascertain, whether liability is contingent or ascertained. Further, there is no scientific basis for ascertaining liability. In respect of ground No. 2 relating to provision for octroi payment, ld. DR fairly admitted that there seems to be certain confusion in understanding gamut of payment and provision created by assessee. ld. DR submitted that issue can be remitted back to Commissioner of Income Tax (Appeals) for verification. 7. We have heard submissions made by representatives of rival sides and have perused orders of authorities below. We have also considered decisions on which ld. AR of assessee has placed reliance to support his contentions. first ground raised by assessee in appeal is with respect to provision for compensation payable to module supplier. question that has been raised before us for adjudication is; Whether provision for compensation made by assessee for making payments to module supplier is for contingent or 11 ITA Nos. 1081, 1082, 1108 & 1109/PN/2013 and CO Nos. 58 & 59/PN/2014 ascertained liability? It has been contended that assessee has created provision for compensation payable to module supplier on basis of agreement entered into between assessee and module supplier. As per agreement, assessee was required to purchase minimum agreed quantity of material from supplier. In case of any short fall in procuring assured minimum quantity, assessee was required to compensate supplier for shortfall. assessee has given details of actual payment made to module supplier as compensation during period relevant to assessment years 2003-04, 2004-05 and 2005-06. details of same are as under : Sr. No. Bank payment Date of Amount (Rs.) Document No. payment 1 1304053 01.09.2003 22,20,003 2 1303138 10.07.2003 24,63,213 3 1303138 10.07.2003 8,73,932 4 1302550 10.06.2003 8,45,776 5 1303273 16.06.2003 3,82,436 6 1303937 03.09.2004 29,90,114 7 1304506 13.10.2004 10,95,708 8 1304930 04.11.2004 4,07,021 9 1302150 17.05.2004 13,83,259 10 1302247 21.05.2004 19,90,739 11 1303282 30.07.2004 13,52,891 12 1303262 30.07.2004 17,56,553 13 1304688 28.10.2004 7,61,933 14 1302751 02.06.2005 45,33,741 15 1302805 07.06.2005 28,31,473 16 1303035 20.06.2005 73,19,702 17 1304166 30.08.2005 28,47,390 18 1305657 25.11.2005 3,35,550 19 1304450 13.09.2005 58,61,516 20 1304451 13.09.2005 42,52,793 21 1304166 30.08.2005 4,14,010 Total Payments (1 to 21) 4,69,19,753 assessee has created provision during assessment years under appeal on account of compensation payable to module suppliers as under : 12 ITA Nos. 1081, 1082, 1108 & 1109/PN/2013 and CO Nos. 58 & 59/PN/2014 Assessment year Amount 2003-04 Rs.1,11,33,418/- 2004-05 Rs.78,37,457/- 2005-06 Rs.2,53,03,903/- Thus, as against provision of Rs.4,42,74,778/- assessee has made actual payment of Rs.4,69,19,753/-. 8. ld. AR of assessee has drawn our attention to definition of Provision and reserve as defined in Interpretations forming Part III to Schedule VI of Companies Act, 1956. same are reproduced here-in-below : (a) expression provision shall, subject to sub-clause (2) of this clause, mean any amount written off or retained by way of providing for depreciation renewals or diminution in value of assets, or retained by way of providing for any known liability of which amount cannot be determined with substantial accuracy; (b) expression reserve shall not, subject as aforesaid, include any amount written off or retained by way of providing for depreciation, renewals or diminution in value of assets or retained by way of providing for any known liability; bare perusal of definition of provision would show that provision includes any amount set apart for any known liability. amount thereof may not have been determined with substantial accuracy but incurrence of liability is must. 13 ITA Nos. 1081, 1082, 1108 & 1109/PN/2013 and CO Nos. 58 & 59/PN/2014 9. In present case, liability for payment of compensation to module supplier has arisen out of agreement entered into between assessee and module supplier. Thus, liability to compensate is contractual in nature. Further, liability to compensate arises when assessee fails to procure minimum agreed quantity of material from supplier. Commissioner of Income Tax (Appeals) in impugned order has given finding that assessee has not furnished base on which provision was created. When ld. AR was confronted with this finding of Commissioner of Income Tax (Appeals), ld. AR admitted that if opportunity is afforded, assessee can produce all relevant documents available in support of assessee s claim. ld. AR fairly admitted that at time of assessment assessee could not furnish complete details in respect of module supplier. However, now assessee is in position to furnish complete material to substantiate its claim. We further find that Commissioner of Income Tax (Appeals) has remarked that such amounts are mostly under dispute and are paid after resolution of same. observation made by Commissioner of Income Tax (Appeals) in present case are generic and out of context. There is nothing on record to show that there was any dispute between assessee and module supplier. liability was ascertained and had to be discharged in view of agreement between assessee and module supplier. Hon'ble Supreme Court of India in case of Bharat Earth Movers Vs. Commissioner of Income Tax (supra) has held that if business liability has definitely arisen in accounting year, deduction should be allowed even if liability may not have been quantified and is discharged at future date. What should be certain is, incurring of 14 ITA Nos. 1081, 1082, 1108 & 1109/PN/2013 and CO Nos. 58 & 59/PN/2014 liability. Actual quantification of liability can be done at later date. 10. Thus, in view of facts of case we are considered view that this issue needs revisit to file of Commissioner of Income Tax (Appeals) to examine agreement between assessee and module supplier and determine veracity of payments made. In so far as nature of liability is concerned, we have already held that if it is arising from agreement same is ascertained. Accordingly, ground No. 1 raised in appeal by assessee is allowed for statistical purpose. 11. In ground No. 2 assessee has assailed findings of Commissioner of Income Tax (Appeals) in holding that amount of Rs.1,39,78,291/- representing provision towards octroi has been deducted twice. It has been asserted that Commissioner of Income Tax (Appeals) in principle has held that liability in respect of octroi payment is ascertained and is deductable for calculation of MAT liability. observations of Commissioner of Income Tax (Appeals) that assessee has claimed same amount as provision for octroi as well as expenditure for octroi on approval basis are against facts on record. ld. AR has contended that entry in respect of octroi creating provision in beginning of financial year has been reversed at end of financial year, thus, there is no double claim. ld. DR has also admitted that there seems to be some error in understanding issue by Commissioner of Income Tax (Appeals). 15 ITA Nos. 1081, 1082, 1108 & 1109/PN/2013 and CO Nos. 58 & 59/PN/2014 11.1 In view of submissions made by rival sides, we are of considered view that this issue needs revisit to file of Commissioner of Income Tax (Appeals). Commissioner of Income Tax (Appeals) shall decide issue de novo after verification and proper appreciation of facts and records. Accordingly, ground No. 2 raised in appeal by assessee for assessment year 2003-04 is allowed for statistical purpose. 12. In result, appeals of assessee for impugned assessment years are allowed for statistical purpose. ITA Nos. 1108 & 1109/PN/2013 (Revenue s Appeal) 13. Now, we proceed on to decide appeals filed by Revenue. grounds raised by Revenue in appeal for assessment year 2003-04 are as under : On issue of use of Controlled Transaction 1. Whether on facts and in circumstances of case and in law, Ld. CIT(A) was correct in law, i) when he implicitly rejected direct method of Comparable Uncontrolled Price under Rule 10B(1)(a) for evaluation of International Transaction of payment of Royalty & Seems to have preferred Aggregated Transaction Net Margin Method under Rule 10B(1)(e), indirect method while evaluating Arms Length Price, which was rejected by him for A.Y. 2005-06 (and in A.Y. 2008-09 as part of Dispute Resolution Panel); ii) by rejecting CUP, direct method for working out Arm's Length of international transaction and uncontrolled transaction; which provides for instant comparison of prices of products/services; 16 ITA Nos. 1081, 1082, 1108 & 1109/PN/2013 and CO Nos. 58 & 59/PN/2014 iii) when DECO guidelines in para 1.70 clearly suggests that 'an attempt should be made to reach reasonable accommodation keeping in mind imprecision of various methods and preference for higher degrees of comparability and more direct and closer relationship to transaction? On issue of Consistency. 2. Whether on facts and in circumstances of case and in law, Ld.CIT(A) was correct in law, i) when assessee company itself has provided separate benchmarking and detailed information regarding Royalty payment in later years; ii) when each year should be treated separately based on facts and documentation submitted; (as per ratio laid down in case of M/s. Onward Technologies vs. DCIT dated 30.04.2013, appeal No. ITA No. 7985/Mum/2010 of ITAT Mumbai) 3. Whether on facts and circumstances of case and in law, CIT(A) was justified in treating royalty payment of Rs.2,16,00,495/- as revenue expenditure when assessee has acquired enduring benefit as it was conferred manufacturing rights as well as copyrights for technical product documentation etc and further when Hon'ble DRP while deciding case for AY. 2007-08 has also upheld this treatment given to royalty payment i.e. has held that royalty payment is of Capital nature. 4. Whether on facts and in circumstances of case and in law, Ld.CIT(A) was justified in directing A.O. to allow Project Assistance Technical charges as deductible expenditure u/s. 37(1) of Act, when assessee has not been able to prove basis of such payment, nature of service rendered by expatriates and also when payment were not made in accordance with project assistance agreement dated 11/12/1994. 17 ITA Nos. 1081, 1082, 1108 & 1109/PN/2013 and CO Nos. 58 & 59/PN/2014 5. Whether on facts and circumstances of case and in law, CIT(A) was justified in deleting addition made on account of homologation expenses, without calling for such details in support of its claim and remanding matter to A.O. 6. Whether on facts and circumstances of case and in law, CIT(A) was justified in directing A.O. to verify evidences furnished before him and decide admissibility of claim of expenditure of capitalized cars, when assessee was given sufficient opportunity to furnish such details during course of assessment proceedings, and assessee could not produce any material evidence to substantiate use of car was fully and exclusively for business purpose. 7. appellant craves leave to add, amend or alter any of above grounds of appeal. In appeal for assessment year 2004-05 Revenue has assailed findings of Commissioner of Income Tax (Appeals) by raising similar grounds. 14. ld. DR in respect of ground Nos. 1 and 2 submitted that Commissioner of Income Tax (Appeals) has erred in rejecting CUP as most appropriate method for determining Arm s Length Price of international transaction in respect of payment of royalty. TPO had rejected TNMM adopted by assessee to benchmark its international transactions giving detailed reasons. reasons for rejecting assessee s working of ALP in respect of rate of royalty summarized by TPO are as under : (a) As mentioned in internal documents of company submitted during hearing of case, DC AG had proposed royalty rate of 3%. 18 ITA Nos. 1081, 1082, 1108 & 1109/PN/2013 and CO Nos. 58 & 59/PN/2014 (b) Maruti Udyog Ltd. is paying royalty @3%. (c) net profit margin earned by company is less than average of net profit margins earned by comparable companies. (d) submission of company that, revised royalty rate @5%, as against 2.75%, as per earlier agreement resulted into savings is not acceptable for reasons given in this order. (e) company did not submit royalty rates charged by DCAG from other associated entities/independent enterprises. It also did not submit transfer prices to other entities, in respect of imported components. In absence of these details filed by company, it is not possible to verify, whether double deduction is being allowed by DC India for provision of technology by DCAG. company is importing its major portion of raw material/component from Associated Entities only. Considering this, arm s length royalty rate is adopted at 3%, as against 5% of assessee. royalty payment @3%, works out to Rs.21,600,495/-, as against Rs.36,000,825/-. Under provisions of Income Tax Act it is well settled law that principle of res judicata does not apply. Each assessment year is to be considered separately and assessment has to be made on facts and documents available on record for each assessment year. ld. DR strongly defended order of TPO and prayed for reversing findings of Commissioner of Income Tax (Appeals) with respect to most appropriate method for determining ALP in case of assessee. In respect of other grounds raised in appeal ld. DR vehemently supported findings of TPO. 19 ITA Nos. 1081, 1082, 1108 & 1109/PN/2013 and CO Nos. 58 & 59/PN/2014 15. Per contra ld. AR contended that assessee adopted combined approach and selected TNMM as most appropriate method to benchmark its international transactions including payment of royalty. Before selecting TNMM as most appropriate method, assessee conducted research for selecting comparable companies on widely recognized commercial databases available in public domain. After selecting 7 comparables assessee computed weighted average margins of comparable companies which is 3.38% as against margin of assessee at 4.16%. Since, net profit margin earned by assessee was higher than weighted average margin of comparable companies, transactions including payment of royalty were concluded to be at arm s length price. ld. AR further submitted that similar addition was made in assessment year 2002-03. In first appeal Commissioner of Income Tax (Appeals) decided issue in favour of assessee. Department carried issue in appeal before Tribunal in ITA No. 1107/PN/2013. Tribunal decided this issue in favour of assessee. ld. AR further contended that in assessment year 2003-04 TPO has made disallowance of 2% of royalty based on rate of royalty paid by Maruti Udyog Ltd. (MUL) for assessment year 2002-03. MUL paid royalty @3% to Suzuki in assessment year 2002-03. TPO used royalty rate of 3% paid by MUL in assessment year 2002-03 to compare it with rate of royalty paid by assessee in assessment years 2003-04 and 2004-05. TPO should have used comparable databases for respective assessment years. Using data of earlier years for comparison is breach of transfer pricing rules. Ld. AR pointed out in assessment proceedings for assessment years 2007-08 to 2011-12 TPO and DRP has 20 ITA Nos. 1081, 1082, 1108 & 1109/PN/2013 and CO Nos. 58 & 59/PN/2014 accepted TNMM adopted by assessee to benchmark international transactions including payment of royalty. 16. In respect of ground No. 3 relating to recharacterization of royalty payment (post TP adjustment) as capital expenditure, ld. AR submitted that Tribunal in preceding assessment year in appeal by Department in ITA No. 1107/PN/2013 (supra) has decided issue in favour of assessee. Tribunal held that assessee has not acquired any enduring advantage by making royalty payment. Thus, payment of royalty was held to be revenue expenditure. 17. In respect of ground of No. 4 relating to deletion of disallowance of Project Technical Assistance Fees. ld. AR submitted that assessee had entered into Project Assistance Agreement with Mercedes- Benz Project Consult GmbH (in short MBPC ). assessee paid Project Technical Assistance Fees of Rs.6,64,84,000/- in assessment year 2003-04 and Rs.9,57,75,964/- in assessment year 2004-05 as per agreement. Assessing Officer held that technical services charges paid by assessee to MBPC is infact payment for technical know-how. payment made by assessee to MBPC on account of Project Technical Assistance Fees is in respect of deputation of various experts to assist assessee in development and quality assurance, design adoption, quality assurance, sales & marketing, after sales services etc. In year where no experts were deputed to assessee by MBPC, no technical service charges were paid. Thus, payment of technical service charges has correlation to services provided by MBPC to assessee in financial year. expenditure of technical service 21 ITA Nos. 1081, 1082, 1108 & 1109/PN/2013 and CO Nos. 58 & 59/PN/2014 charges is not for any initial outlay or extension of business, but is incurred in order to conduct business more effectively and profitably. fixed capital of assessee does not get increased or altered due to incurrence of this expenditure and no new asset or advantage/benefit of enduring nature comes into existence. Project Technical Assistance Fees is regarded as fee for technical services for tax withholding purposes. assessee debits fee paid in profit and loss account under head Technical Service Charges in Manufacturing Expenses Schedule. expenditure on Technical Service Charges is not in nature of Capital expenditure and Auditors in Audit report have not qualified expenditure as Capital. assessee is paying Service Tax on technical service charges under category Management Consultants under reverse charge mechanism since March, 2003. ld. AR further submitted that issue relating to Project Technical Assistance Fees- Whether capital or revenue in nature was raised by Revenue before Tribunal in ITA No.1107/PN/2003 in assessment year 2002-03. Tribunal held expenditure on account of Project Technical Assistance Fees to be revenue in nature. ld. AR further submitted that similar expenditure was allowed by DRP as revenue in assessment year 2007-08 in assessee s own case. Department has not preferred any appeal against said order of DRP. Further, from assessment year 2008-09 onwards no disallowance in respect of Project Technical Assistance Fees has been made during assessment proceedings. 22 ITA Nos. 1081, 1082, 1108 & 1109/PN/2013 and CO Nos. 58 & 59/PN/2014 18. In respect of ground No. 5 raised in appeal by Department, ld. AR submitted that TPO had made ad hoc disallowance of Rs.10,00,000/- from homologation expenditure by considering same to be of non-business/inflated expenditure. Ld. AR contended that as per Central Motor Vehicles Rules, it is mandatory for assessee to seek approval from agency designated by Government of India before introducing any new vehicle/ upgraded version of vehicle in market for commercial sale. designated agency in India for giving such approvals is Automotive Research Association of India ( ARAI ). process of getting approval from ARAI is called homologation of vehicle . In process of homologation, auto component as well as entire vehicle is provided to ARAI for testing purposes. After testing, ARAI issues certificate of homologation for particular vehicle/model. material returned by ARAI is scrapped from safety perspective and accordingly, cost of materials consumed in above process is debited to profit and loss account under head Homologation Expenses . Assessing Officer made ad hoc disallowance of Rs.10,00,000/- in relation to homologation expenses without seeking any details from assessee. Commissioner of Income Tax (Appeals) deleted adhoc addition made by Assessing Officer. 19. In respect of ground No. 6 raised in appeal relating to expenditure on Capitalized cars, ld. AR submitted that to promote sale of cars, it is required to keep cars for display in various events, photo shoots, road shows, tournaments and advertisement campaigns. Further, assessee provides cars to top management employees, as 23 ITA Nos. 1081, 1082, 1108 & 1109/PN/2013 and CO Nos. 58 & 59/PN/2014 well as for official use by other employees (car pool). perquisite value of such facility is brought to tax in hands of respective top management employees in accordance with provisions of Act. During assessment year 2003-04, assessee had capitalized 32 such cars for own use. During assessment proceedings assessee was asked to produce details in respect of capitalized cars. assessee furnished details. However, Assessing Officer observed that assessee has not been able to produce complete details of use and utility of capitalized cars for business purpose. Assessing Officer further observed that so many cars are not needed for top management and advertisement purposes. Assessing Officer made ad hoc disallowance of Rs.2,00,000/- out of repairs and maintenance expenses and Rs.5,00,000 out of power and fuel expenses. ld. AR contended that it is prerogative of assessee to decide number of cars required for advertisement purpose and for use of management. Assessing Officer cannot substitute his commercial judgment over needs and requirements of assessee. Assessing Officer in irrational and unjustified manner has made ad hoc disallowance which has been rightly reversed by Commissioner of Income Tax (Appeals). ld. AR in support of his submissions placed reliance on following decisions : i. Sayaji Iron & Engg. Co. Vs. CIT, 253 ITR 749 (Guj.); ii. Ador Technologies Ltd. Vs. DCIT, 112 TTJ 24, (Pune ITAT); iii. Bajaj Auto Finance Ltd. Vs. DCIT, 112 TTJ 437 (Pune ITAT); iv. Bajaj Finance Ltd. Vs. DCIT, ITA No. 1175/PN/2012 (Pune ITAT); 24 ITA Nos. 1081, 1082, 1108 & 1109/PN/2013 and CO Nos. 58 & 59/PN/2014 20. We have heard submissions made by representatives of rival sides at length and have perused orders of authorities below. As has been pointed out earlier, in both impugned assessment years Revenue has raised similar grounds. findings given in respect of grounds raised in ITA No. 1108/PN/2013 for assessment year 2003-04 would mutatis mutandis apply to respective grounds raised in appeal by Revenue for assessment year 2004-05. 21. first issue raised by Department in appeal is with respect to transfer pricing adjustment qua payment of royalty. assessee applied TNMM as most appropriate method to benchmark its international transaction including payment of royalty. TPO rejected method adopted by assessee and substituted TNMM with CUP as most appropriate method to benchmark ALP of royalty payment. ld. AR has pointed that similar adjustment was made by TPO in assessment year 2002-03. matter travelled up to Tribunal. Tribunal in appeal filed by Revenue in ITA No. 1107/PN/2013 (supra) decided issue in favour of assessee by upholding TNMM adopted by assessee as most appropriate method for benchmarking transaction. Further, Tribunal also emphasized on rule of consistency. relevant extract of findings of Tribunal on issue are as under : 73. We have considered rival arguments made by both sides, perused orders of AO and CIT(A) and paper book filed on behalf of assessee. We have also considered various decisions cited before us. We find assessee in instant case had entered into agreement dated 12-12-1994 with DCAG to pay royalty for technical knowhow received from DCAG in following manner : 25 ITA Nos. 1081, 1082, 1108 & 1109/PN/2013 and CO Nos. 58 & 59/PN/2014 (a) Lumpsum payment of DM 56.6 million, net of taxes payable in 4 instalments periodically from 1995 to 1998. (b) Running royalty @2.75% on value addition in India. 74. We find assessee and DCAG amended original agreement to pay royalty for technical knowhow received from DCAG. copy of revised agreement dated 21-12-1999 is enclosed at paper book page 557 to 586 according to which running royalty @5% on value addition in India to be paid and waiving of remaining 2 instalments of lumpsum royalty payment as per first agreement amounting to DM 19 million. For impugned assessment year assessee has paid royalty @5% to DCAG amounting to Rs.4,61,06,328/- for technical knowhow received. assessee adopted combined approach and selected TNMM as most appropriate method to benchmark its international transaction including payment of royalty in its TP study report. For application of TNMM, assessee had conducted search for comparable companies on widely recognized commercial information database for obtaining publicly available financial information. For purpose of margin of computation, in addition to financial data for relevant financial year, assessee also used data for 2 previous financial years as per TP study conducted on search of comparable. weighted average margin of comparable companies was 2.48% whereas margin of assessee company was 4.30%. Since net profit margin earned by assessee was higher than weighted average margins of comparable companies, assessee concluded that transactions including payment of royalty are at Arm s length. We find TPO did not accept application of TNM method for benchmarking payment of royalty transaction and considered CUP as most appropriate method to benchmark transaction by comparing royalty payment made by assessee @5% with royalty payment made by Maruti Udyog Ltd. to Suzuki, Japan @3%. According to TPO letter received from DCAG submitted during assessment proceedings referred to royalty rate of 3% and another 5%. Further Maruti Udyog Ltd. is paying royalty @3%. net profit margin earned by assessee company is less than average net profit margin earned by comparable companies. AO/TPO further held that royalty rates charged from other associated enterprises by DCAG was not submitted. Accordingly, TPO made downward adjustment of Rs.1,84,42,531/- for year under 26 ITA Nos. 1081, 1082, 1108 & 1109/PN/2013 and CO Nos. 58 & 59/PN/2014 consideration. 75. We find Ld.CIT(A) deleted above adjustment made by TPO on ground that TPO has compared royalty paid by Maruti Udyog Ltd. which is controlled transaction. According to him, transfer price determined by benchmarking controlled transaction with another controlled transaction cannot be considered Arm s length price because arm s length signifies transfer price without possibility of it being influenced by Associated Enterprise. Further, he noted that TPO is inconsistent in his approach on this issue. He observed that during assessment year 2007-08 and 2008-09 royalty payment @5% was held to be at Arm s length which is paid at same rate as that for years under consideration. 76. We do not find any infirmity in above finding of Ld.CIT(A). From various details furnished by assessee in paper book we find in consideration of use of technology and technical information received from DCAG for manufacturing activity assessee has to pay running royalty @5% of net value added for each contractual value. royalty is computed by considering net sales price of licenced vehicles, which is exclusive of excise duty and cost of standard brought out components and landed cost of imported materials used for manufacturing process. royalty in instant case is inextricably linked with production and sales activity. In absence of production and sales and sale of products there would be no question arising regarding payment of royalty. We find force in submission of Ld. Counsel for assessee that since royalty payment is not independent of sales and therefore cannot be examined on standalone basis. Therefore, assessee has adopted combined transaction approach using TNM method as most appropriate method to benchmark its international transaction including payment of royalty. 77. We find Delhi Bench of Tribunal in case of Lumax Industries Ltd. Vs. ACIT vide ITA No.5252/Del/2011 has observed as under : 33. TPO has made disallowance in question mainly on basis of benefit test. In this regard, it is seen that payment of royalty cannot be examined divorced from production and sales. Royalty is inextricably linked with these activities. In absence of production and sale of products, 27 ITA Nos. 1081, 1082, 1108 & 1109/PN/2013 and CO Nos. 58 & 59/PN/2014 there would be no question arising regarding payment of any royalty. Rule 10A(d) of IT Rules defines 'transaction' as number of closely linked transactions. Royalty, then, is transaction closely linked with production and sales. It cannot be segregated from these activities of enterprise, being embedded therein. That being so, royalty cannot be considered and examined in isolation on standalone basis. Royalty is to be calculated on specified agreed basis, on determining net sales which, in present case, are required to be determined after excluding amounts of standard bought out components, etc., since such net sales do not stand recorded by assessee in its books of account. Therefore, it is our considered opinion that assessee was correct in employing overall TNMM for examining royalty. TPO worked out difference in PLI of outside party (the assessee) at 4.09% and comparables at 7.05%. This has not been shown to fall outside permissible range. 78. We find Hon ble Delhi High Court in case of Soni Ericsson Mobile Communications Pvt. Ltd. (Supra) while deciding on issue of bundling of transactions and use of TNM method has observed that expression class of transaction , functions performed by parties in section 92C(1) of Act illustrates that meaning or definition of expression transaction does not prohibit clubbing of closely connected or continuous transactions. Hon ble High Court has held that in case tax payer is engaged in single line of business, there is no bar or prohibition from applying TNMM on entity level basis. It has further been held that once comparables pass functional analysis test and profit margins matches with comparables, it leads to affirmation of transfer price as arm s length price. After this it is not permissible to make comparison of particular item of costs without segregation of profits. 79. We further find force in submission of Ld. Counsel for assessee that for application of CUP it is necessary that transactions being compared should be controlled. In instant case TPO has compared royalty paid by Maruti Udyog Ltd. to Suzuki, vis-a-vis, royalty paid by assessee to DCAG. However, Maruti Udyog Ltd. and Suzuki are associated enterprises and controlled transaction cannot be used for benchmarking arm s length price. 28 ITA Nos. 1081, 1082, 1108 & 1109/PN/2013 and CO Nos. 58 & 59/PN/2014 80. We find Pune Bench of Tribunal in case of M/s. Bobst India Pvt. Ltd. Vs. DCIT vide ITA No.1380/PN/2010 order dated 09-10- 2014 has observed as under : 7.9 ..... Without prejudice to above we find that according to TPO / AO has not given cogent reasoning for rejecting TNMM identified-by Appellant as most appropriate method for benchmarking its international transactions pertaining to domestic operations. approach adopted by TPO i.e. using controlled transaction of Appellant itself (receipt of commission on marketing, of spares) for benchmarking international transaction pertaining to receipt of commission for marketing of machines is not appropriate as per Indian TP regulations. Accordingly international transaction of appellant pertaining to receipt of commission for marketing of machines benchmarked by assessee by aggregating same with other international transactions pertaining to domestic operations using TNMM should not be-rejected." 81. various other decisions relied on by assessee on this issue also support its case to proposition that TNM method applied by assessee is appropriate method and CUP method applied by TPO is not correct where he has used controlled transaction to benchmark payment of royalty. We further find assessee has obtained approval from Foreign Investment Promotion Board for original as well as revised agreement. It has also obtained specific approval from Department of Industrial Policy and Promotion (DIPP) for payment of royalty as royalty payment made by MB India is not covered under automatic route. It has been held in various decisions that FIPB approval, Government of India, RBI approval etc for royalty rates itself implies that payments are at Arm s length. 82. Mumbai Bench of Tribunal in case of M/s. Thyssenkrupp Industries Pvt. Ltd. Vs. ACIT vide ITA No.6460/Mum/2012 order dated 27-02-2013 for A.Y. 2008-09 has held that when payment is made after obtaining due approval from RBI, then such payment has to be considered at ALP. relevant observation of Tribunal at para 14.3 of order reads as under : 14.3. After considering rival submissions and perusing relevant material on record, we find that assessee entered into collaboration agreement with its AE for payment of 2% of contract value for 29 ITA Nos. 1081, 1082, 1108 & 1109/PN/2013 and CO Nos. 58 & 59/PN/2014 manufacturing, drawing and engineering services and 5% of selling price as royalty. assessee applied to RBI seeking approval in respect of payment of royalty and technical fee through Central Bank of India. copy of letter addressed by Central Bank of India to RBI dated 26.03.2008 is available on page 240 of paper book. Through this letter, Central Bank of India forwarded relevant documents along with copy of agreement. RBI vide its letter dated 21.04.2008 requested Central Bank of India to consider assessee s case in accordance with its AP(DIR Series) No.76 dated 24.02.2007. It is in pursuance to deemed approval by RBI under automatic approval scheme that assessee made payment of royalty and technical fee to its AE. It is relevant to note that such payment has been approved or deemed to have been approved by RBI. When payment is made after obtaining due approval from RBI, how its ALP can be computed at `Nil, is anybody s guess. fact of approval of payment by RBI has been succinctly recorded by TPO in his order as well. He still chose to propose adjustment in respect of full payment. In our considered opinion, when rate of royalty payment and fee for drawings etc. has been approved or deemed to have been approved by RBI, then such payment has to be considered at ALP. We, therefore, direct to delete addition of Rs.4.29 crore made by A.O. in this regard. 83. We further find in subsequent years also royalty payment has been benchmarked considering combined transaction approach in TNM method. No separate benchmarking was undertaken to determine ALP of Royalty. In A.Y. 2007-08 till A.Y. 2011-12 payment of royalty was held to be at ALP. We therefore find merit in submission of Ld. Counsel for assessee that in view of rule of consistency Cit(A) was justified in rejecting CUP method adopted by AO and accepting TNM method followed by assessee. 84. In view of above discussion and in view of detailed reasoning given by CIT(A) we find no infirmity in his order. Accordingly, same is upheld and grounds raised by revenue on this issue are dismissed. 22. ld. DR has not been able to controvert findings of Tribunal on issue. However, ld. AR contended that issue can be remitted back to file of Assessing Officer to re-examine 30 ITA Nos. 1081, 1082, 1108 & 1109/PN/2013 and CO Nos. 58 & 59/PN/2014 facts in light of decision of Tribunal. ld. AR has fairly accepted proposal made on behalf of Department. Thus, in view of statement made by representatives of rival sides we deem it appropriate to remit this issue back to file of Assessing Officer to re- examine issue in light of decision of Tribunal in assessee s own case in assessment year 2002-03. Accordingly, ground Nos. 1 and 2 raised by Revenue in appeal are allowed for statistical purpose. 23. ground No. 3 in appeal is with respect to characterization of royalty payment, whether revenue or capital in nature. assessee has treated payment of royalty as revenue expenditure, whereas Assessing Officer has held payment of royalty as capital in nature. It has been contended that payment of royalty has not secured any enduring advantage to assessee. ld. AR pointed that Tribunal in assessment year 2002-03 in assessee s own case has held payment of royalty as revenue in nature. We observe that Tribunal in assessment year 2002-03 has considered issue at length and after examining facts on record and various case laws has held as under : 97. We have considered rival arguments made by both sides, perused orders of AO and CIT(A) and paper book filed on behalf of assessee. We have also considered various decisions cited before us. We find assessee in instant case has paid royalty of Rs.4,69,06,328/- to parent company DCAG @5%. AO restricted such payment to 3% because of transfer pricing adjustment. AO, thereafter, treated balance amount of Rs.2,84,63,797/- as capital expenditure. He was of opinion that assessee has acquired absolute right over technical knowhow for assembly or manufacturing of cars and parts through which assessee has received enduring benefits. Hence, AO held that such 31 ITA Nos. 1081, 1082, 1108 & 1109/PN/2013 and CO Nos. 58 & 59/PN/2014 Royalty expenditure as capital in nature. We find in appeal Ld.CIT(A) deleted such addition made by AO on ground that assessee has not acquired any ownership of asset or rights for substantially long period and in absence of same payments made by assessee have character of royalty. Since there is no enduring benefit received from it CIT(A) treated royalty expenditure as revenue and accordingly deleted addition made by AO. 98. We find no infirmity in above decision of Ld.CIT(A). From various terms and conditions of agreement, we find assessee has neither acquired any asset on outright basis nor secured any enduring advantage. We find force in argument of Ld. Counsel for assessee that benefit secured by assessee is essentially licensed right to use knowhow for period of agreement. Therefore, royalty expenditure in this regard, in our opinion, is revenue in nature. Further royalty being annual recurring expenditure, directly linked to number of vehicles sold in financial year, in our opinion, is revenue expenditure fully deductible in computing taxable income of assessee. 99. We find Hon ble Supreme Court in case of CIT Vs. IAEC Pumps Ltd. reported in 232 ITR 316 has held that amount paid by assessee to collaborator for using its patents and design under agreement was only license fee and constituted revenue expenditure. Hon ble Bombay High Court in case of CIT Vs. Essel Propack Ltd. reported in 325 ITR 185 has held that assessee did not acquire asset of capital nature by obtaining non-exclusive licence for five years restricted to territory of India to manufacture and use tube making machines as proprietary rights in patents continued to vest in licensor and therefore technical knowhow fees paid by assessee under terms of agreement is allowable as revenue expenditure. 100. We find Hon ble Delhi High Court in case of CIT Vs. G4S Securities System India Ltd. has held as under (Head notes) : Business expenditure Capital or revenue expenditure Payment of royalty for use of trade mark, technical know-how etc. Assessee company has paid royalty in lieu of technical know-how and trade mark for exclusive use for five years, which was extendable by five years All 32 ITA Nos. 1081, 1082, 1108 & 1109/PN/2013 and CO Nos. 58 & 59/PN/2014 rights and know-how, continued to vest in provider company and it was only right to use knowhow that was made available to assessee and that too based on its net sales At no point of time assessee was entitled to become exclusive owner of technical know-how and trademark Expenditure was therefore deductible as revenue expenditure. 101. We find Hon ble Bombay High Court in case of Antifriction Bearings Corporation Ltd. Vs. CIT reported in 114 ITR 335 has held that royalty paid to Foreign collaborator for provision of technical know- how in restricted manner for restricted use during agreement period, not resulting in absolute transfer of anything or acquisition of any asset of enduring character is revenue expenditure. 102. In view of above decisions and in view of detailed reasoning given by CIT(A) we find no infirmity in his order. Accordingly, same is upheld and ground raised by revenue on this issue is dismissed. 24. ld. DR has not been able to controvert findings of Co- ordinate Bench of Tribunal nor ld. DR has been able to show that there has been any change in facts and circumstances in assessment years under appeal. Thus, in view of findings of Co- ordinate Bench of Tribunal in assessee s own case in immediately preceding assessment year, we find no merit in ground No. 3 raised in appeal by Revenue. Accordingly, ground No. 3 is dismissed. 25. ground No. 4 in appeal by Department relates to payment of Project Technical Assistance Fees. assessee has claimed payment of charges as deductable u/s. 37(1) of Act whereas Assessing Officer has held same to be capital in nature. We find that this issue was also considered by Co-ordinate Bench of Tribunal in assessee s own case in ITA No. 33 ITA Nos. 1081, 1082, 1108 & 1109/PN/2013 and CO Nos. 58 & 59/PN/2014 1107/PN/2013. Co-ordinate Bench of Tribunal rejected ground raised by Department and upheld order of Commissioner of Income Tax (Appeals). relevant extract of findings of Tribunal on this issue reads as under : 49. We have considered rival arguments made by both sides, perused orders of AO and CIT(A) and paper book filed on behalf of assessee. We have also considered various decisions cited before us. We find AO disallowed part of Project Assistance Technical fees of Rs.1,96,31,398/- on ground that same is non business expenditure due to not being in consonance with original agreement. We find Ld.CIT(A) deleted disallowance on ground that these payments are neither capital expenditure nor personal in nature and there is no case for considering it to have been made for non business purpose. Further, he held that AO has not questioned regarding genuineness of payments made by assessee. We find no infirmity in order of CIT(A) deleting addition. submission of assessee that DRP in assessee s own case for A.Y. 2007-08 has allowed such project assistance technical fees as deductible business expenditure could not be controverted by Ld. Departmental Representative. We also find merit in submission of Ld. Counsel for assessee that when TPO has accepted that certain payment is at ALP, then AO has no power to disallow same during assessment proceedings. 50. Delhi Bench of Tribunal in case of Cushman and Wakefield India Pvt. Ltd. Vs. ACIT reported in 135 ITD 242 has held that once international transaction has been made subject to determination of ALP by TPO and he has found that transaction is at ALP, then it is not permissible for AO to re-examine that transaction and make disallowance under normal provisions of Act. 51. We further find from submission of Ld. Counsel for assessee that in TP assessment and corporate tax assessment proceedings of subsequent years, tax authorities have accepted revised agreement entered into in May 2005 with retrospective effect from 01-01-2002 which included even Category D employees as well as 34 ITA Nos. 1081, 1082, 1108 & 1109/PN/2013 and CO Nos. 58 & 59/PN/2014 revised charges as per agreement for respective years. Under these circumstances when DRP in assessment order for A.Y. 2007-08 has directed to allow project assistance technical fees as deductible business expenditure and revenue has accepted same and when in subsequent years tax authorities have accepted revised agreement entered into in May 2005 with retrospective effect from 01-01-2002 and since genuineness of payments has not been doubted by AO in body of assessment order, therefore, we find no reason as to why part of such project assistance technical fee should be disallowed. In view of above discussion and in view of reasoning given by CIT(A) we uphold order of CIT(A) on this issue. ground raised by revenue is accordingly dismissed. 26. We observe that facts leading to payment of Project Technical Assistance Fees are identical in assessment years under appeal. Assessing Officer has not disputed payment of charges. only dispute is with regard to nature of expenditure. Co-ordinate Bench of Tribunal has held expenditure as revenue in nature. ld. DR has not been able to controvert findings of Tribunal. Thus, we do not find any merit in ground raised by Department. By applying aforementioned decision of Coordinate Bench in assessee s own case, we dismiss ground No. 4 raised in appeal by Revenue. 27. ground No. 5 raised by Department in appeal is with respect to deleting of addition made on account of homologation expenses. In assessment year 2003-04 assessee has incurred expenditure of Rs.75,44,101/- towards homologation. Assessing Officer has made ad hoc disallowance of Rs.10,00,000/-. Similarly, in assessment year 2004-05 assessee has incurred expenditure of Rs.63,10,716/- towards homologation. Assessing Officer made ad 35 ITA Nos. 1081, 1082, 1108 & 1109/PN/2013 and CO Nos. 58 & 59/PN/2014 nhoc disallowance of Rs.10,00,000/- in assessment year 2004-05 as well. disallowance has been made by Assessing Officer on ground that assessee has not furnished specific bills etc and details of stock submitted to ARAI during course of assessment proceedings. On other hand contention of assessee is that all relevant details were furnished before Assessing Officer yet Assessing Officer made ad hoc disallowance of Rs.10,00,000/- in each of impugned assessment years. Commissioner of Income Tax (Appeals) has observed that there was no basis for making ad hoc disallowance without giving any opportunity of hearing to assessee to furnish further details and deleted addition. We are of considered view that this issue needs revisit to file of Assessing Officer for re-consideration and appreciation of relevant material relating to homologation charges. Assessing Officer after considering material furnished and affording sufficient opportunity of hearing to assessee shall decide this issue afresh in accordance with law. Accordingly, ground No. 5 raised by Revenue in appeal is allowed for statistical purpose. 28. ground No. 6 raised by Department in appeal is with respect to claim of expenditure on capitalized cars. assessee in cross objections for assessment year 2003-04 has filed additional ground on this issue which reads as under : learned Commissioner of Income Tax (Appeals) has erred in not deleting ad-hoc disallowance made by learned Assessing Officer in respect of certain expenses incurred on capitalized cars and instead remanding back matter to learned Assessing Officer. 36 ITA Nos. 1081, 1082, 1108 & 1109/PN/2013 and CO Nos. 58 & 59/PN/2014 29. Commissioner of Income Tax (Appeals) has remitted matter back to file of Assessing Officer to consider additional evidence filed by assessee. relevant extract of findings of Commissioner of Income Tax (Appeals) are as under : 2.6.6 Appellant has submitted that there is no case for disallowance in case of cars, which were used by top management executives. company has taxed this benefit in hands of respective employees. Considering explanation offered, I agree with Appellant that there is no case for disallowance in hands of company as far as cars used top management executives are concerned. This is because in hands of company, expenditure on capitalised car has been incurred for employees and is incurred for purpose of its business and hence deductible. 2.6.7 With respect expenditure incurred on balance cars, it is submitted that such cars were either used in car pool for all employees or were used for purpose of business in events such as exhibition etc. learned AO has stated that Appellant has not furnished any documentary evidence to substantiate that cars were used wholly and exclusively used for purpose of business. Appellant has stated before me that it has all necessary evidence in support its claim. In view of this assertion, I direct learned AO to verify evidence -and decide admissibility of claim on basis of evidence furnished before him. I consider fit to remit matter to learned AO rather than admitting same as additional evidence before me and sending same to AO for verification under IT Rule 46A. 30. After considering submissions of rival sides and perusing impugned order, we find no error in findings of CIT(A) in remitting matter back to AO. We are of considered view that AO should reexamine issue denovo. Here, we would like to point out that AO shall not substitute his judgement over that of assessee to determine need and quantum of expenditure. Assessing Officer after considering documents furnished by assessee shall 37 ITA Nos. 1081, 1082, 1108 & 1109/PN/2013 and CO Nos. 58 & 59/PN/2014 decide this issue afresh, in accordance with law after affording opportunity of hearing to assessee. Accordingly, ground No. 6 raised by Revenue in appeal as well as additional ground raised by assessee in Cross Objection for A.Y. 2003-04 are allowed for statistical purpose. 31. ground No. 7 raised by Revenue in its appeal is general in nature hence, requires no adjudication. 32. In result, appeals of Revenue are partly allowed for statistical purpose. CO Nos. 58 & 59/PN/2014 (Assessee s Appeal) 33. assessee has filed cross objections CO Nos. 58 & 59/PN/2014 in appeals filed by Department for assessment years 2003-04 and 2004-05, respectively. assessee has raised two grounds in cross objection for assessment year 2003-04 which reads as under : On facts and in circumstances of case Hon'ble Commissioner of Income Tax-IT/TP ( learned CIT(A) ): 1. has erred in not adjudicating ground on issue relating to denial of deduction under section 80IB of Act, including admissibility, in relation to certain items of income, in calculation. 2. Without prejudice to our contention that payment made for royalty be treated as revenue expenditure, in case Tax Department s ground that same is capital expenditure succeeds, then depreciation under section 32 of Act should be allowed on capitalized royalty. 38 ITA Nos. 1081, 1082, 1108 & 1109/PN/2013 and CO Nos. 58 & 59/PN/2014 Respondent craves, to consider each of above ground of cross objections without prejudice to each other and craves, leave to add, alter, delete or modify all or any of above grounds of cross objections. assessee has filed additional ground in cross objections which has been reproduced in para 29 above and has been adjudicated along with ground No. 6 raised by Department in its appeal. 34. ld. AR of assessee submitted at outset that he is not pressing ground No. 2 raised in cross objections. In so far as ground No. 1 ld. AR contended that assessee commenced manufacture of cars in 1995, as new industrial undertaking. assessee fulfilled all conditions for claiming deduction u/s. 80IB(3) of Act and was thus, eligible to claim deduction u/s. 80IB(3) for period of 10 years starting from assessment year 1995-96. assessee had no taxable income during financial year ended on 31-03-2002 and hence no deduction u/s. 80IB(3) was claimed in return of income. In notes to return of income for assessment year 2003-04 assessee had specifically mentioned that if during assessment proceedings positive income is determined, then assessee would claim deduction u/s. 80IB of Act. ld. AR giving sequence of events pointed that on 18-10-2004 return filed by by assessee was selected for scrutiny and notice u/s. 143(2) was issued to assessee. assessee participated in assessment proceedings and furnished requisite details as required by Assessing Officer from time to time. Assessing Officer passed assessment order u/s. 143(3)on 30-03-2006 disallowing certain expenditure as well as set off of brought forward losses claimed 39 ITA Nos. 1081, 1082, 1108 & 1109/PN/2013 and CO Nos. 58 & 59/PN/2014 by assessee in return of income for assessment year 2003-04, thereby determining positive taxable income of assessee. Further, Assessing Officer rejected claim of deduction u/s. 80IB(3) on basis that Audit Report in prescribed form was not filed in return of income. On 30-08-2006 assessee filed rectification application u/s. 154 of Act. Assessing Officer passed rectification order on 28-02-2007 accepting claim of deduction u/s. 80IB of Act. However, while allowing application for rectification, Assessing Officer re-worked deduction claimed by assessee u/s. 80IB separately. Thereafter, reassessment proceedings were initiated vide notice dated 31-03-2009 and deduction granted u/s. 80IB was disallowed. assessee filed appeal against initiation of reassessment proceedings. Commissioner of Income Tax (Appeals) dismissed same. assessee carried matter in appeal before Tribunal and Tribunal quashed reassessment proceedings. On appeal filed by assessee before Commissioner of Income Tax (Appeals) against assessment order dated 30-03-2005, assailing deduction u/s. 80IB due to non-filing of Audit Report along with return of income, Commissioner of Income Tax (Appeals) did not grant deduction u/s. 80IB of Act. CIT(A) held that issue relating to grant of deduction has become infructuous on account of subsequent withdrawal of deduction under reassessment proceedings. Commissioner of Income Tax (Appeals) has erred in not considering fact that Tribunal has already quashed reassessment proceedings. Thus, order allowing deduction u/s.80IB by Assessing Officer in rectification proceedings stands confirmed. Further, while computing quantum of 40 ITA Nos. 1081, 1082, 1108 & 1109/PN/2013 and CO Nos. 58 & 59/PN/2014 deduction in rectification proceedings Assessing Officer has disallowed deduction u/s. 80IB on following income : Income Amount (Rs) .: Lease income on lease of cars 34,61,000 Trading income on sale of spares and CBU cars 6,22,53,329 Commission income on sale of CBU cars 2,12,04,526 Miscellaneous income 1,48,74,203 Interest income 14,70,09,346 35. ld. AR contended that deduction u/s. 80IB is allowable on aforesaid incomes excluding interest income for following reasons : a. Lease income - MB India is in business of manufacturing cars for sale as well as lease. Hence leasing income is "derived" from its industrial undertaking only and same should be eligible for deduction under section 80-IB. b. Trading income on sale of spares and CBU cars - As part of manufacturing activity, import of spare parts is necessary to ensure availability of spare parts for providing after sale services and warranty commitments to customers. Further, Your Honours would appreciate fact that if after sales service and warranty is not provided by MB India, customers would no longer be willing to purchase cars and there is probability that MB India may lose its market share. Therefore import of spare parts is interlinked with its manufacturing activity. Further, import and sale of CBUs is important for assessing market condition for particular range of cars which could be targeted for manufacturing by MB India in future or to bring in niche models which will be sold in few numbers and will never be economically viable to manufacture in India. Further, CBU imports are made to bring new products available with AE as CBU, but will take time to supply same in SKD/CKD/Parts level and also some times to bridge sudden gap of demand and manufacturing capacity. 41 ITA Nos. 1081, 1082, 1108 & 1109/PN/2013 and CO Nos. 58 & 59/PN/2014 Hence trading income is "derived" from its industrial undertaking only and same should be eligible for deduction under section 80-IB. Reliance in this regard is placed on Ashok Leyland Ltd [1997] 224 ITR 122 (SC) (Refer page 821 to 823 of Paper book- II) which held that profits and gains from trading of spares cannot be disassociated from main activity carried on by assessee, viz, manufacture and sale of truck and same is intimately connected with its business, hence, deduction under section 80EI 80-1 of Act. Separately, in relation to trading of spares, Appellant also wishes to place reliance on decision of Bangalore Tribunal in case of Toyota Kirloskar Motors Pvt Ltd vs ACIT (ITA No 828/Bang/2010) (Refer page 824 to 825 of Paper book-II), wherein it was held that: "In instant case of assessee, sale of spares is triggered as result of manufacturing activities, including warranty commitments. Therefore, we are of view that it would not be in fitness of things for sale of spare parts and components to be considered in isolation from sale of manufactured goods". c. Commission income on sale of CBU cars - As part of above trading activities, as per arrangement between MB India and Daimler AG, certain sales in India (eg sales to Government or Foreign Embassies or certain customers based on their specific request) were undertaken by Daimler AG only and MB India facilitates support activities in connection thereto, for which it received commission income. In line with trading income, commission income is also "derived" from its industrial undertaking only and same should be eligible for deduction under section 80-IB. d. Miscellaneous income - In support of its claim for deduction under section 80-IB on miscellaneous income, MB India submits that miscellaneous income comprises of sale of scrap, write-back of trading liabilities, insurance receipts for damage in transit etc which are all intricately related to business operations of MB India. Detailed break-up of miscellaneous expenses is provided below: 42 ITA Nos. 1081, 1082, 1108 & 1109/PN/2013 and CO Nos. 58 & 59/PN/2014 Description Total (Rs.) Sale Of Wooden and Other Scrap 41,62,458 Income From Vehicle Servicing And Royalty Receipt 10,11,565 Write off of sundry balances (housing deposit, (29,87,047) customs duty claim not received) Other receipts (Interest on Income-tax, Sales tax 31,92,264 refund etc.) Creditors written back 62,96,491 Insurance Claim Received For Loss In Transit Claims 17,62,874 And Motor Policies Provision for interest payable on booking amount 14,35,599 reversed Miscellaneous Income Total 1,48,74,203 36. ld. DR submitted that this issue can be remitted back to file of Assessing Officer for reconsideration as Tribunal has already quashed reassessment proceedings. 37. Both sides heard. It is admitted fact that reassessment proceedings initiated against assessee in assessment year 2003-04 to disallow benefit of deduction u/s. 80IB of Act has already been set aside by Tribunal in appeal filed by assessee. Thus, Commissioner of Income Tax (Appeals) ignorant of order of Tribunal has erred in holding that in reassessment proceedings deduction granted u/s. 80IB has been disallowed. Without commenting on merits, we are remitting this issue back to file of Commissioner of Income Tax (Appeals) for denovo adjudication, in light of fact that reassessment proceedings have already been quashed by Tribunal and position as of now is that order 43 ITA Nos. 1081, 1082, 1108 & 1109/PN/2013 and CO Nos. 58 & 59/PN/2014 passed by Assessing Officer in rectification proceedings is live. Therefore, ground No. 1 raised by assessee in cross objections is allowed for statistical purpose. 38. assessee has filed cross objections in assessment year 2004- 05 on similar grounds. findings given by us in assessment year 2003-04 would mutatis mutandis apply to grounds raised in cross objections for assessment year 2004-05. 39. In result, cross objections filed by assessee are partly allowed for statistical purpose. Order pronounced on Friday, 30th day of September, 2016. Sd/- Sd/- ( R.K. Panda) ( Vikas Awasthy) ACCOUNTANT MEMBER JUDICIAL MEMBER Pune; Dated : 30th September, 2016 RK Copy of Order forwarded to : 1. Appellant. 2. Respondent. 3. CIT(A)-IT/TP, Pune 4. DIT (TP/IT) , Pune 5. DR, ITAT, Bench, Pune. 6. Guard File. True Copy// BY ORDER, Private Secretary, ITAT, Pune Mercedes-Benz India Pvt. Ltd., (formerly known as Daimler Chrysler India Pvt. Ltd.) v. Deputy Commissioner of Income Tax, Circle 8, Pune