ASIAN PAINTS LTD, MUMBAI v. ADDL CIT LTU, MUMBAI

ITA 7801/MUM/2010 | 2006-2007
Pronouncement Date: 29-10-2013 | Result: Partly Allowed

Appeal Details

RSA Number 780119914 RSA 2010
Assessee PAN AAACA3622K
Bench Mumbai
Appeal Number ITA 7801/MUM/2010
Duration Of Justice 2 year(s) 11 month(s) 16 day(s)
Appellant ASIAN PAINTS LTD, MUMBAI
Respondent ADDL CIT LTU, MUMBAI
Appeal Type Income Tax Appeal
Pronouncement Date 29-10-2013
Appeal Filed By Assessee
Order Result Partly Allowed
Bench Allotted K
Tribunal Order Date 29-10-2013
Date Of Final Hearing 02-09-2013
Next Hearing Date 02-09-2013
Assessment Year 2006-2007
Appeal Filed On 12-11-2010
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL K BENCH MUMBAI . . BEFORE SHRI P.M. JAGTAP ACCOUNTANT MEMBER AND SHRI AMIT SHUKLA JUDICIAL MEM BER . / ITA NO. 7801 / MUM./ 2010 ( / ASSESSMENT YEAR : 20 06 07 ) ASIAN PAINTS LTD. 6A SHANTI NAGAR SANTACRUZ (E) MUMBAI 400 055 .. / APPELLANT V/S ADDL. COMMISSIONER OF INCOME TAX LARGE TAX PAYER UNIT (LT U) 29 TH FLOOR WORLD TRADE CENTRE 1 CUFFE PARADE MUMBAI 400 005 .... / RESPONDENT . / PERMANENT ACCOUNT NUMBER AAACA3622K / ASSESSEE BY : DR. K. SHIVRAM / REVENUE BY : MR. AJIT KUMAR JAIN A/W MR. JITENDRA YADAV / DATE OF HEARING 0 2 .09.2013 / DATE OF ORDER 29.10.2013 / ORDER / PER AMIT SHUKLA J.M. THE PRESENT APPEAL H AS BEEN PREFERRED BY THE ASSESSEE CHALLENGING THE IMPUGNED FINAL ASSESSMENT ORDER DATED 7 TH OCTOBER 2004 PASSED BY THE ASSESSING OFFICER UNDER SECTION 143(3) R/W 144C OF THE INCOME TAX ACT 1961 (FOR SHORT 'THE ACT' ) IN PURSUANCE OF THE DIRECTIONS GIVEN BY THE DISPUTE ASIAN PAINTS LIMITED 2 RESOLUTION PANEL I FOR THE ASSESSMENT YEAR 2006 07 INTERALIA ON THE F OLLOWING GROUNDS HAVE BEEN RAISED BY THE ASSESSEE: (1) THE LEARNED ADDITIONAL COMMISSIONER OF INCOME TAX (LTU) MUMBAI ERRED IN MAKING AN ADDITION OF RS. 242.06 LACS W ITH RESPECT TO TRANSFER PRICING ADJUSTMENTS ON ACCOUNT OF GUARANTEE CHARGES FOR GUARANTEE GIVEN TO ASSOCIATED ENTERPRISE . 2) THE LEARNED ADDITIONAL COMMISSIONER OF INCOME TAX (LTU) MUMBAI ERRED IN DISALLOWING RS. 17L . 85 LACS BEING NOTIONAL INTEREST CAL CULATED ON INTEREST FREE LOANS GIVEN TO WHOLLY OWNED SUBSIDIARY .COMPANY M I S TECHNICAL INSTRUMENTS MANUFACTURERES (INDIA) LTD 3) THE LEARNED ADDITIONAL COMMISSIONER OF INCOME TAX (L TU) MUMBAI ERRED IN TREATING RS.120 LACS PAID TOWARDS PROFESSIONAL FEE S PAID TO SHRI JAYRAM NADKARNI AS CAPITAL EXPENDITURE AS AGAINST THE CLAIM MADE B Y . APPELLANT AS REVENUE EXPENDITURE. 4) THE LEARNED ADDITIONAL COMMISSIONER OF INCOME TAX (L TU) MUMBAI ERRED IN TREATING RS. 547 LACS PAID TOWARDS CORPORATE ADVERTISEMEN T EXPENDITURE AS CAPITAL EXPENDITURE OUT OF THE TOTAL ADVERTISEMENT & SALES PROMOTION EXPENSES OF RS . 9097.30 LACS CLAIMED B Y APPELLANT AS RE V ENU E E X PENDITURE . 5) THE LEARNED ADDITIONAL COMMISSIONER OF INCOME TA X (L TU) MUMBAI ERRED IN DISALLOWING RS. 36.27 LACS BEING 50% OF EXPENDITURE INCURRED ON ACCOUNT OF GIFT EXPENSES. 6) THE LEARNED ADDITIONAL COMMISSIONER OF INCOME TAX (L TU) MUMBAI ERRED IN MAKING AN ADDITION OF RS. 69.11 LACS U / S 14A OF THE INCOME TAX ACT READ WITH RULE 8D OF THE INCOME TA X RULES. 7) THE LEARNED ADDITIONAL COMMISSIONER OF INCOME TAX (L TU) MUMBAI ERRED IN TREATING RS. 207.80 LACS BEING REFUND RECEIVABLE FROM ANDHRA PRADESH GOVT ON ACCOUNT OF ENTRY TAX AS INCOME U / S 41 (1) OF THE INCOME TAX ACT 1961. 8) THE LEARNED ADDI TIONAL COMMISSIONER OF INCOME TAX (L TU) MUMBAI ERRED IN DISALLOWING LONG TERM CAPITAL LOSS OF RS. 64.33 LACS ON SALE OF PREFERENCE SHARES OF M I S MULTITECH PLAST CONTAINERS LTD. 9) WITHOUT PREJUDICE TO OUR CLAIM THAT SOFTWARE EXPENSES AND PHTHALIC REVAMP ING EXPENSES SHALL BE ALLOWED AS REVENUE EXPENDITURE IN ALL THE PREVIOUS YEARS THE LEARNED ADDL. COMMISSIONER OF INCOME TAX (LTU) MUMBAI HAS NOT GRANTED CONSEQUENTIAL DEPRECIATION ON SOFTWARE AND PHTHALIC REVAMPING EXPENDITURE TREATED AS CAPITAL EXPENDIT URE BY THE DEPARTMENT IN EARLIER YEARS. 2 . THE FIRST GROUND ISSUE RELATES TO TRANSFER PRICING ADJUSTMENT OF RS. 2 42 06 600 O N ACCOUNT OF GUARANTEE COMMISSION ON THE GUARANTEE GIVEN TO BANK ON BEHALF OF ASSOCIATED ENTERPRISES. DURING THE COURSE OF REFEREN CE ASIAN PAINTS LIMITED 3 MADE BY THE ASSESSING OFFICER UNDER SECTION 92CA(1) TO THE TRANSFER PRICING OFFICER (TPO) IT WAS OBSERVED THAT THE ASSESSEE HAD GIVEN GUARANTEE TO VARIOUS BANKS ON BEHALF OF ITS SUBSIDIARY ON THE LOANS TAKEN BY THEM. IT WAS STATED THAT THESE SUBSIDIARY HAD TAKEN LOANS FROM OVERSEAS BANKS FOR WHICH GUARANTEE HAD BEEN GIVEN BY THE ASSESSEE TO ITS CONSTITUENT BRANCH IN INDIA FOR WHICH THE ASSESSEE HAS CHARGED 0.20% OF THE GUARANTEE AMOUNT AS COMMISSION TO THE ASSOCIATED ENTERPRISE (A.E). IN THE CASE OF SOM E OF THE SUBSIDIAR IES WHERE THE ASSESSEE HAD NOT CHARGED GUARANTEE COMMISSION FROM THE A.E. IT HAD SUO MOTU OFFERED THE SAME TO TAX @ 0.20% OF THE GUARANTEE AMOUNT IN THE RETURN OF INCOME. THE ASSESSEE HAS GIVEN FOLLOWING CORPORATE GUARANTEE ON BEHALF OF THE FOLLOWING A.ES WHICH WAS OUTSTANDING AS ON 31 ST MARCH 2006: - SR. NO. NAME OF UNIT IN U.S. $ IN ` SINGAPORE / AUSTRALIAN DOLLARS 1. BERGER INTERNATIONAL LTD. SINGAPORE 1 05 00 000 46 83 90 000 1 70 00 000 SGD 2. BERGER INTERNATIONAL LTD. SINGAPOR E 80 30 000 35 82 10 000 1 30 00 000 SGD 3. ASIAN PAINTS (QUEENSLAND) PTY LTD. AUSTRALIA 8 50 000 3 79 20 000 12 00 000 AID TOTAL 1 93 80 000 86 45 20 000 3 . THE TPO MADE AN OBSERVATION THAT THE ASSESSEE (ASIAN PAINTS LTD.) ON ACCOUNT OF ITS FINANCIAL STRENGTH HAS TIDE UP FROM TIME TO TIME WITH MANY LARGE BANKS AND INSTITUTION S FOR CREDIT FACILITIES WHICH WOULD INVOLVE FUND AND NON FUND BASED LIMITS. THESE BANK GUARANTEES PROVIDE A BENEVOLENT ADVANTAGE TO THE A.ES IN OBTAINING CREDIT FACILITIES FROM THE BANK ON BETTER TERMS. WHILE GIVING THESE BANK GUARANTEES THERE IS A RISK EXPOSURE TO THE ASSESSEE BY THIS AMOUNT OF GUARANTEE GIVEN . SUCH A GUARANTEE HELPS THE A.E. IN A BENEFICIAL MANNER AND THEREFORE IN ARMS LENGTH SITUATION HOW AN INDEPENDENT ENTE RPRISE WOULD HAVE BEEN PAID A COMMISSION TO THE ENTERPRISE PROVIDING SIMILAR GUARANTEE TO ITS BANK OR THE CREDIT FACILITIES HAS TO BE BENCHMARKED . HE ALSO HELD THAT TRANSACTION RELATING TO PROVISION OF A ASIAN PAINTS LIMITED 4 GUARANTEE AND THE PAYMENT OF COMMISSION FOR SUCH SER VICE BY THE A.E. TO THE ASSESSEE WOULD FALL WITHIN THE DEFINITION OF THE TERM INTERNATIONAL TRANSACTION UNDER SECTION 92B AND SUCH TRANSACTIONS HAVE BEARING ON THE PROFITS INCOME OR ASSETS OF THE ASSESSEE. ACCORDINGLY HE HELD THAT THE PAYMENT OF 0.20% BY THE A.E. TOWARDS GUARANTEE FEE COMMISSION ARE NOT AT ARMS LENGTH AND EXTERNAL CUP METHOD SHOULD BE APPLIED FOR BENCH MARKING SUCH TRANSACTION S . AFTER MAKING ENQUIRY FROM HSBC BANK AND FROM THE WEBSITE OF ALLAHABAD BANK HE HAS TRIED TO BENCH MARK THE SAID PAYMENT OF GUARANTEE COMMISSION IN THE FOLLOWING MANNER: 5.6.1 THE ENQUIRY FROM HSBC LTD. MUMBAI REVEALED THAT THEY WERE CHARGING A RATE OF 0.15% TO 3% (ANNEXURE 1). 5.6.2 THE WEBSITE OF ALLAHABAD BANK ALSO SHOWS THAT THEY CHARGE RATE OF 0.75% PE R QUARTER I.E. 3% PER ANNUM (ANNEXURE 2). 5.6.3 IT HAS ALSO BEEN FOUND THAT A PUBLIC COMPANY WITH LIMITED LIABILITY IN WHICH 51% STAKE WAS HELD BY THE DUTCH STATE FMO (NEDERLANDSE FINANCIERINGS MAATSCHAPPIJ VOOR ONTWIKKELINGSLANDEN N.V) HAS CHARGED 2 .5% FOR FURNISHING GUARANTEE IN THE CASE OF RABO INDIA FINANCE PVT. LTD. FORBES BUILDING 2 ND FLOOR CHARANJIT RAI MARG FORT MUMBAI - 400 001. THE FMO AND RABO INDIA FINANCE PVT. LTD. ARE NOT RELATED ENTITIES. (AS DISCUSSED IN THE CASE OF RELIANCE INDUST RIES LTD FOR ASSESSMENT YEAR 2005 - 06). THE ABOVE EXAMPLES SHOW THAT THE BANKS AND COMPANIES ARE CHARGING RATES UP TO 3 % FOR PROVIDING THE GUARANTEES. THE COST OF RISK UNDERTAKEN IS NOT REFLECTED IN THIS RATE BECAUSE THESE GUARANTORS SECURE THEMSELVES FULL Y WHILE FURNISHING THE GUARANTEES. THESE RATES ARE QUOTED AFTER OBTAINING ADEQUATE SECURITY FOR COVERING THE RISK INVOLVED IN T E GUARANTEE. IN THE PRESENT CASE THE ASSESSEE AS NOT 0 TAMED ANY SECURITY FROM ITS AE. IT HAS JUST PROVIDED A BLANKET GUARANTEE. THEREFORE THE 'S LENGTH COMPENSATION SHOULD BE MUCH MORE THAN THE RATE CHARGED BY THE BANKS FOR THEIR COMMISSION. 5.7 A VALUATION OF THE ELEMENT OF RISK CAN BE MADE BY COMPARING THE COMPANY FIXED DEPOSITS WITH A BANK FIXED DEPOSIT. EVERYBODY KNOWS TH AT BY ITS VERY NATURE DEPOSIT MADE IN A PRIVATE LISTED COMPANIES U/S 58A OF THE COMPANIES ACT 1956 ARE TOTALLY UNSECURED. THEY DO NOT EVEN HAVE A COLLATE OR SECONDARY CHARGE ON THE ASSETS OF THE COMPANY. IN THE EVENT OF LIQUID ON OF THE COMPANY THEY RANK IN PAYMENT JUST PRIOR TO THE SHAREHOLDERS. THE AVERAGE RATE OF INTEREST OFFERED BY 86 COMPANIES ON SUCH DEPOSITS FOR A PERIOD OF 1 TO 3 YEARS WERE RANGING FROM 9.0% TO 9.8% ( HTTP://WWW.PERSONALFN.COM/FIXEDINCOME/PRODUCTARENA/CO - DEP1 - R.ASP ). ASIAN PAINTS LIMITED 5 ON THE OTHER HAND A FIXED DEPOSIT IN A SCHEDULED BANK IS CONSIDERED TO BE REASONABLY SECURE. IT IS BACKED BY THE INSURANCE (UP TO DEPOSIT OF RS.11AC) AND ALSO THE BACKING OF RESERVE BANK OF INDIA AND GOVERNMENT OF INDIA. THE AVERAGE RATE OF INTEREST OFFERED BY 44 BANK S ON TERM DEPOSITS RANGING FROM 1 YEAR TO 3 YEARS WAS 5.39% TO 5.25% (HTTP://WWW.MONEYCONTROL.COM/FIXEDINCOME/BANKRATES/BANKRATES.PHP?DR _DCOD E=3). THE ABOVE RATE STRUCTURE SHOWS THAT THE COST FOR THE RISK EMBEDDED IN THE TWO DEPOSITS IS NEARLY 3% TO 4% ( REFER ANNEXURE 3 & 4). 5.8 ANOTHER WIDELY USED METHOD FOR RISK EVALUATION IS BY COMPARING THE BANK RATE AND THE PLR RATE. THE BANK RATE IS THE RATE AT WHICH THE RESERVE BANK OF INDIA LENDS MONEY TO THE BANKS AND PLR REPRESENTS THE RATE AT WHICH BANKS 1 END THEIR MONEY TO CUSTOMERS. LENDING TO CUSTOMERS ENTAILS A GREAT DEAL OF RISK AS AGAINST LENDING IT TO RBI WHICH IS ENTIRELY RISK FREE. THEREFORE THE DIFFERENCE BETWEEN THE BANK RATE AND PLR RATE DOES SHOW THE ELEMENT OF RISK. THE BANK RATE DURING THE RELE VANT YEAR WAS 6% DURING THE RELEVANT YEAR WHILE THE AVERAGE PLR RATE WAS 10.5%. THIS SHOWS THAT THE RETURN FOR BEARING THE RISK WAS AROUND 4.5%. 5.9 CONSIDERING THE FACTS AND CIRCUMSTANCES AND IN ALL FAIRNESS OF THE ASSESSEE I BENCHMARK THE ARMS LENGT H PRICE FOR THE GUARANTEE AT 3% P.A. OF THE AMOUNT OF GUARANTEE. 4 . ACCORDINGLY HE HELD THE GUARANTEE OF 3% OF THE AMOUNT OF GUARANTEE GIVEN WOULD BE AT ALP AND MADE UPWARD ADJUSTMENT OF RS.2 42 06 600. THE DRP ALSO CONFIRMED ACTION OF THE TPO / AO ON THE GROUND THAT IT CANNOT BE DENIED THAT THE A.ES ARE SUBSTANTIALLY BENEFITED ON ACCOUNT OF GUARANTEE GIVEN BY THE ASSESSEE FOR RE SCHEDULING THE LOAN AND ALP IS REQUIRED TO BE SEEN ON SUCH TRANSACTION WHETHER THE ASSESSEE HAS CHARGED REASONABLE AMOUNT FROM T HE A.ES WHICH CAN BE SAID TO COMMENSURATE WITH THE RISK TAKEN BY THE ASSESSEE AND THE BENEFIT DERIVED BY THE A.ES. THUS 3% OF THE CHARGES OF THE TOTAL GUARANTEE OF RS. 86 CRORES WAS HELD TO BE A PROPER ADJUSTMENT. 5 . BEFORE US THE LEARNED COUNSEL FOR THE ASSESSEE DR. K. SHIVRAM SUBMITTED THAT THE ASSESSEE ITSELF HAD PAID 0.35% OF GUARANTEE COMMISSION ON THE GUARANTEE AMOUNT TO HSBC ON ITS LOAN IN THE ASSESSMENT YEAR 2005 06 AND NIL FOR THE ASSESSMENT YEAR 2006 07. I N THE FACT N O CHARGES WERE PAID TO DBS BANK SINGAPORE. IT HAS ALSO PAID 0.25% OF GUARANTEE AMOUNT TO CITI BANK IN THE ASSESSMENT YEAR 2004 05 AND NIL IN THE ASSESSMENT YEAR ASIAN PAINTS LIMITED 6 2005 06. IN THE EARLIER ASSESSMENT YEAR 2006 07 NONE OF THE BANKS HAVE CHARGED ANY COMMISSION FROM THE ASSESSEE ON SUCH KIND OF LOAN. THUS THE ASSESSEE WHO HAS CHARGED 0.20% AS GUARANTEE FROM ITS A.E. AND ALSO SUO MOTU HAS OFFERED 0.20% ON THE GUARANTEE GIVEN TO ITS A.E. SINGAPORE AND SIMILAR OFFER OF 0.20% FOR THE AUSTRALIAN A.E. EVEN THOUGH THE ASSESSEE HAS NOT CH ARGED ANY AMOUNT FROM THIS A.E. THUS LOOKING TO THE BACKGROUND AND THE FACTS OF THE ASSESSEES CASE WHERE THE BANKS IN CASE OF ASSESSEE ITSELF CHARGING ON GUARANTEE AMOUNT AT THE RATE OF 0.25% TO 0.35% OR NIL THEN 0.20% CHARGED FROM ITS A.E. ARE AT ARMS LENGTH. HE ALSO SUBMITTED THAT IN THE ASSESSMENT YEAR 2005 06 THE TRIBUNAL IN ASSESSEES OWN CASE (IN ITA NO.408/MUM./2010 AND 1937/MUM./2010) HAS DELETED THE EARLIER ADDITION MADE BY THE A.O. / TPO ON ACCOUNT OF SIMI LAR ADJUSTMENT MADE IN GUARANTEE COMM ISSION. THE REVENUE HAS ACCEPTED THIS ORDER OF THE TRIBUNAL AS NO QUESTION OF LAW ON THIS SCORE WAS RAISED. A COPY OF THE ORDER OF THE TRIBUNAL AND THE JUDGMENT OF THE HIGH COURT HAVE BEEN REFERRED TO US WHICH HAS BEEN PLACED IN THE PAPER BOOK. HE ALSO SUB MITTED THAT IN THE ASSESSMENT YEAR 2004 05 ON SIMILAR CORPORATE GUARANTEE GIVEN NO ADDITION WAS MADE BY THE TPO / A.O. THUS LOOKING TO THE FACT THAT THERE WAS INTERNAL CUP AVAILABLE IN CASE OF THE ASSESSEE ITSELF THERE WAS NO REQUIREMENT FOR GOING FOR EXTERNAL COMPARABLES. HE ALSO RELIED UPON THE DECISION OF THE CO ORDINATE BENCH IN CASE OF EVEREST KANTO CYLINDER V/S DCIT ITA NO.542/MUM./2012 ORDER DATE D 23 RD NOVEMBER 2012 WHEREIN 0.5% OF THE GUARANTEE COMMISSION CHARGED BY THE ASSESSEE FROM ITS SUBS IDIARY WAS HELD TO BE AT ALP. 6 . ON THE OTHER HAND THE LEARNED DEPARTMENTAL REPRESENTATIVE SUBMITTED THAT THE EARLIER YEARS ORDERS OF THE TRIBUNAL AND THE ASSESSMENT ORDER CANNOT BE HELD TO BE APPLICABLE BECAUSE AFTER THE EXPLANATION WAS ADDED TO SECTIO N 92B BY THE FINANCE ACT 2012 WITH RETROSPECTIVE EFFECT FROM 1 ST APRIL 2002 THE PAYMENT OF GUARANTEE FEE HAS BEEN INCLUDED IN THE EXPRESSION INTERNATIONAL TRANSACTIONS . EARLIER THERE WERE DIFFERENT VIEWS A S TO WHETHER SUCH A GUARANTEE F EE COMMISSION WAS INTERNATIONAL TRANSACTION OR NOT. HE FURTHER SUBMITTED THAT THE TPO HAS CLEARLY BROUGHT OUT THE RISK ASIAN PAINTS LIMITED 7 WHICH HAS BEEN UNDERTAKEN BY THE ASSESSEE FOR GIVING GUARANTEE ON THE LOANS TAKEN BY THE SUBSIDIARY AND ALSO THE CIRCUMSTANCES. IN SUCH A SITUATION T HE INSTANCES OF UNRELATED PARTY EXTERNAL CUP METHOD HAS TO BE APPLIED. HE THUS STRONGLY RELIED UPON THE FINDINGS RECORDED BY THE TPO. HE ALSO TRIED TO DISTINGUISH THE DECISION OF EVEREST KANTO CYLINDER (SUPRA) ON THE GROUND THAT CREDIT RATING AND RISK FA CTOR AS HIGHLIGHTED BY TPO IN THIS CASE CANNOT BE COMPARED WITH. IN SUPPORT OF HIS CONTENTION HE HAS RELIED UPON THE DECISION IN TECHNIMOUNT ICB PVT. LTD. V/S DCIT ORDER DATED 28 TH AUGUST 2013 IN ITA NO.6394/MUM./2012 WHEREIN 3% OF THE GUARANTEE COMMIS SION HAS BEEN CONFIRMED. 7 . WE HAVE HEARD THE RIVAL CONTENTIONS PERUSED THE RELEVANT FINDINGS OF THE ASSESSING OFFICER AND THE DRP AS WELL AS THE MATERIAL AVAILABLE ON RECORD. IN THE PRESENT CASE THE TPO HAD NOTED THAT THE ASSESSEE HAS GIVEN CORPORATE GUAR ANTEE AGGREGATING TO RS . 86.45 CRORES ON THE LOANS GIVEN BY THE BANKS TO THE A.E. IN SINGAPORE AND AUSTRALIA. THE ASSESSEE HAS CHARGED / OFFERED 0.20% OF THE GUARANTEE COMMISSION FROM THE A.E. T HE TPO HAS HELD THAT SUCH GUARANTEE FEE / COMMISSION IS AN INTE RNATIONAL TRANSACTION WHICH HAS TO BE BENCH MARKED WITH EXTERNAL COMPARABLES. HE ALSO HELD THAT THERE IS A HUGE RISK INVOLVED IN GIVING THE GUARANTEE O N THE LOAN TAKEN BY THE SUBSIDIARY AND ALSO IT GIVES HUGE ADVANTAGE AND BENEFIT TO THE A.E. IN GETTING TH E LOANS WHICH OTHERWISE WOULD HAVE BEEN DIFFICULT ON SUCH TERM S AND CONDITION S . WHILE ENQUIRING FROM HSBC BANK AND GETTING A GURANTEE FROM THE WEBSITE OF ALLAHABAD BANK HE NOTED THAT GUARANTEE COMMISSION IS BEING CHARGED IN THE CASE OF HSBC @ 0.15% TO 3% AND BY ALLAHABAD BANK @ 3% PER ANNUM. HE ALSO OBSERVED THAT EVEN THIS RATE DOES NOT REFLECT THE COST OF THE RISK UNDERTAKEN BECAUSE THE BANKS SECURE THEMSELVES FULLY WHILE TAKING THE GUARANTEE. HE HAS ALSO TRIED TO ANALYSE THE ELEMENT OF RISK BY COMPARI NG THE COMPANY FIXED DEPOSITS AND THE BANK FIXED DEPOSITS AND WORKED OUT THE COST OF RISK EMBEDDE D IN SUCH KIND OF TWO DEPOSITS AT NEARLY 3 TO 4%. ACCORDINGLY HE BENCH MARKED THE ALP FOR THE GUARANTEE @ 3% P.A. OF THE AMOUNT OF THE GUARANTEE. ASIAN PAINTS LIMITED 8 8 . FIRST OF A LL IF WE ANALYZE THE EXTERNAL COMPARABLE OF HSBC BANK IT IS NOTICED THAT THE BANK HAS GIVEN THE INFORMATION THAT I T HAS BEEN CHARGING 0.15% TO 3% OF THE GUARANTEE COMMISSION WHEREAS I N CASE OF ALLAHABAD BANK THE TPO HAS NOTED THE BLANKET QUOTE FROM THE WEBSITE WHICH GIVES THE GUARANTEE COMMISSION RATE OF 3%. HOWEVER THE TPO HAS NOT BROUGHT ANY DATA ON RECORD FIRSTLY FOR WHICH FINANCIAL YEAR THESE DATA BELONG TO; AND SECONDLY UNDER WHICH TERMS & CONDITIONS AND CIRCUMSTANCES THE BANKS HAVE BEEN CHAR GING GUARANTEE COMMISSION @ 3% . EVEN THE EVALUATION OF THE RISK UNDERTAKEN BY HIM BY COMPARING THE COMPANY F.DS AND THE BANK F.DS IT IS NOT CLEAR AS TO HOW SUCH A RISK CAN BE EVALUATED O N THE TERMS OF CORPORATE GUARANTEE. CHARGING OF GUARANTEE COMMISSION DEPENDS UPON THE TRANSACTION TO TRANSACTION AND MUTUAL UNDERSTANDING BETWEEN THE BANK AND THE PARTIES. THERE COULD BE INSTANCES WHERE ON THE EVALUATION OF VARIOUS PARAMETERS OF FINANCIAL CREDIBILITY AND STA K ES OF THE CLIENT THE BANK MAY NOT CHARGE ANY G UARANTEE COMMISSION WHICH COMPLETELY DEPEND S UPON ITS EVALUATION OF A PARTICULAR CLIENT. THIS IS ALSO EVIDENT FROM THE FACT THAT IN SOME OF THE YEARS IN ASSESSEES OWN CASE NO CHARGES HAVE BEEN PAID ON ACCOUNT OF GUARANTEE COMMISSION AS HAS BEEN SUBMIT TED BY THE LEARNED COUNSEL FOR THE ASSESSEE. SIMPLY RELYING UPON CERTAIN DATA FROM THE MARKET WITHOUT CARRYING OUT ANY COMPARABILITY ANALYSIS OF THE ACTUAL TRANSACTIONS UNDERTAKEN SUCH AN APPLICATION OF GUARANTEE COMMISSION RATE CANNOT BE APPLIED IN A BLA NKET MANNER IN ALL THE CASES . IN THE PRESENT CASE WHEN THERE WAS AN INTERNA L CUP IN THE FORM OF BANK GUARANTEE CHARGES CHARGED BY THE BANK FROM THE ASSESSEE THE SAME OUGHT TO HAVE BEEN FIRST ANALYSED AND EXAMINED WHEREIN THE GUARANTEE COMMISSION CHARGED R ANGED BETWEEN 0.25% TO 0.35%. IT IS ALSO AN UNDISPUTED FACT THAT IN THE EARLIER YEAR S THE TRIBUNAL HAS DELETED THE SIMILAR ADDITION AND NO QUESTION OF LAW ON THIS SCORE HAS BEEN RAISED BY THE DEPARTMENT. THUS UNDER THESE FACTS AND CIRCUMSTANCES WE HO LD THAT NO UPWARD ADJUSTMENT IN THE ALP IN RELATION TO ASIAN PAINTS LIMITED 9 CHARGING OF GUARANTEE COMMISSION OVER AND ABOVE 0.20% CAN BE MADE AND ACCORDINGLY THE ADJUSTMENT SO MADE BY THE TPO / A.O. IS HEREBY DELETED. 9 . IN GROUND NO.2 THE ASSESSEE HAS CHALLENGED THE DISALLOW ANCE OF NOTIONAL INTEREST OF RS . 1 71 85 000 ON THE GROUND THAT INTEREST FREE LOANS WERE GIVEN TO WHOLLY OWNED SUBSIDIARY M/S. TECHNICAL INSTRUMENTS MFG. CO. 10 . THE ASSESSING OFFICER DURING THE COURSE OF SCRUTINY PROCEEDINGS NOTED THAT THE ASSESSEE HAS AD VANCED INTEREST FREE LOANS OF RS . 14 32 10 000 TO M/S. TECHNICAL INSTRUMENTS MFG. CO. WHICH IS ONE OF THE SUBSIDIARIES OF THE ASSESSEE COMPANY. IN RESPONSE TO THE SHOW CAUSE NOTICE AS TO WHY INTEREST ON SUCH INTEREST FREE LOANS GIVEN TO THE SUBSIDIARY COMP ANY MAY NOT BE DISALLOWED AS WAS DONE IN THE EARLIER ASSESSMENT YEARS THE ASSESSEE SUBMITTED THAT OUT OF THE ABOVE LOANS LOANS AGGREGATING RS. 7.70 CRORES LOANS WERE GIVEN IN THE EARLIER YEARS AND THE SAID LOANS WERE GIVEN OUT OF INTERNAL GENERATION OF F UNDS WHICH WERE INTEREST FREE AND WERE NOT OUT OF ANY SPECIFIC BORROWINGS. THE LOANS WHICH WERE GIVEN IN THIS YEAR WERE PURELY FOR THE BUSINESS PURPOSE AND FOR COMMERCIAL EXPEDIENCY. THE DETAILS OF INTEREST FREE FUNDS IN THE RESPECTIVE YEAR OF GRANT OF INT EREST FREE LOANS WERE GIVEN AS UNDER: RS. IN LAKHS PARTICULARS F.Y. 2000 01 F.Y. 2001 02 F.Y. 2005 06 SHARE CAPITAL 6419 6419 9592 RESERVE & SURPLUS 34701 34637 52636 TOTAL INTEREST FR EE FUNDS 41120 41056 62228 INTEREST FREE LOANS TO SUBSI DIARIES 670 1777 1432 IN SUPPORT OF THIS CONTENTION R ELIANCE WAS ALSO PLACED ON THE DECISION OF THE HON'BLE JURISDICTIONAL HIGH COURT IN CIT V/S RELIANCE UTILITIES AND POWER LTD . [2009] 313 ITR 3 40 (BOM.) AND ALSO THE DECISION OF THE HON'BLE SUPREME COURT IN S.A. BUILDERS V/S CIT [2007] 288 ITR 001 (SC). ASIAN PAINTS LIMITED 10 11. IT WAS FURTHER SUBMITTED THAT THE ADDITIONAL AMOUNT OF ADVANCE WHICH WAS GIVEN IN THIS YEAR TO THE SUBSIDIARY COMPANY WAS FOR THE PURCHAS E OF LAND WHERE R&D LAB FOR THE ASSESSEE WAS TO BE SET UP. IT HAS BEEN SUBMITTED BEFORE US THAT S UBSEQUENTLY IN JUNE 2008 THE ASSESSEE HAD PURCHASED BACK THE LAND FROM THE SAID COMPANY AND CONSTRUCTED R&D LAB WHICH WAS USED BY THE ASSESSEE. THIS BUILDING IS ALSO APPEARING IN THE BLOCK OF ASSETS IN THE ASSESSMENT YEAR 2009 10 AND THIS MATTER HAS ALSO BEEN DISCUSSED IN THE ASSESSMENT ORDER FOR THE ASSESSMENT YEAR 2008 09. THUS THE LOAN WAS GIVEN FOR COMMERCIAL EXPENDING BY THE ASSESSEE . 12. THE ASSESSEE W AS ALSO REQUIRED BY THE ASSESSING OFFICER TO PRODUCE A COPY OF BANK STATEMENT THROUGH WHICH THE LOAN WAS ADVANCED TO THE SUBSIDIARY COMPANY. ON A PERUSAL OF THE ENTRIES OF THE COPY OF STATEMENT OF CASH CREDIT ACCOUNT WITH HDFC FOR THE MONTH OF FEBRUARY 2 006 HE NOTED THAT THE ASSESSEE HAS ADVANCED RS. 7.50 CRORES ON 2 ND FEBRUARY 2006 TO THE SUBSIDIARY COMPANY AND ON THE SAME DAY THE ASSESSEE HAS TAKEN CASH CREDIT OF RS. 3.10 CRORES AND RS. 7.50 CRORES FROM THE BANK. THEREFORE THE SOURCE OF THE LOAN ADVANC ED IS OUT OF THE BORROWED FUNDS ONLY AND NOT FROM THE ASSESSEES OWN FUNDS. THUS IT CANNOT BE HELD THAT THE LOAN HAS BEEN GIVEN OUT OF INTEREST FREE FUNDS. FURTHER THE FUNDS WHICH W ERE GIVEN TO THE SUBSIDIARY COMPANY WHICH HAS BEEN STATED FOR THE PURCHAS E OF LAND ALSO DOES NOT SERVE THE BUSINESS PURPOSE OF THE ASSESSEE COMPANY. ACCORDINGLY HE HELD THAT INTEREST HAS TO BE CHARGED ON SUCH AN ADVANCES AND HE WORKED OUT THE DISALLOWABLE INTEREST @ 12% ON THE LOAN OF RS. 14 32 10 000 FOR 12 MONTHS AND DISALL OWED SUM OF RS. 1 71 85 200. 13. EVEN THE DRP CONFIRMED THE ORDER OF THE ASSESSING OFFICER ON THE GROUND THAT ADVANCE GIVEN FOR PURCHASE OF LAND ON WHICH R&D LAB WAS TO BE ESTABLISHED WILL NOT BE FOR THE BUSINESS CONSIDERATION OF THE ASSESSEE AND THEREFO RE SUCH ADVANCE IS NOT WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF ASIAN PAINTS LIMITED 11 BUSINESS AND INTEREST ON THIS AMOUNT ALSO CANNOT BE ALLOWED AS DEDUCTION UNDER SECTION 37(1). 14. BEFORE US THE LEARNED COUNSEL FOR THE ASSESSEE DR. K. SHIVRAM SUBMITTED THAT IN THE EARL IER YEARS SIMILAR DISALLOWANCE ON ACCOUNT OF NOTIONAL INTEREST WAS MADE ON ACCOUNT OF ADVANCE GIVEN TO SAME SUBSIDIARY COMPANY. IN THE EARLIER YEARS THE TRIBUNAL HAS SET ASIDE THE ISSUE FOR EXAMINING THE INTEREST FREE FUNDS AND IN PURSUANCE OF SUCH ORDER S THE ASSESSING OFFICER HAS ACCEPTED THIS CONTENTION AND NO DISALLOWANCE OF INTEREST WAS MADE. A COPY OF VARIOUS ORDERS GIVING EFFECT TO THE TRIBUNAL ORDERS RIGHT FROM THE ASSESSMENT YEARS 2000 01 TO 2005 06 WERE FURNISHED IN THE PAPER BOOK . HE ALSO POINT ED OUT THAT IN THE ASSESSMENT YEAR 2007 08 THE LEARNED COMMISSIONER (APPEALS) HAS DELETED THE SIMILAR DISALLOWANCE OF INTEREST ON WHICH THE DEPARTMENT HAS NOT RAISED THIS ISSUE IN THE GROUNDS FILED BEFORE THE TRIBUNAL AND SIMILARLY THIS ISSUE HAS ALSO BEE N ALLOWED BY THE LEARNED COMMISSIONER (APPEALS) IN THE ASSESSMENT YEAR 2008 09. COMING TO THE MERITS OF THE ISSUE HE SUBMITTED THAT THE ASSESSEE IS A CASH RICH COMPANY AND DOES NOT HAVE ANY BORROWED FUNDS AT ALL WHICH IS EVIDENT FROM THE SCHEDULE C OF TH E BALANCE SHEET WHICH GIVES THE DETAILS OF SECURED AND UNSECURED LOANS WHICH WAS AT NIL . THE TOTAL INTEREST WHICH HAS BEEN DEBITED IN THE PROFIT & LOSS ACCOUNT DURING THE YEAR IS ONLY ` RS. 8 79 000 WHICH IS ON ACCOUNT OF CASH CREDIT ACCOUNT. HE ALSO DREW OUR ATTENTION TO THE BANK STATEMENT OF HDFC AND POINTED OUT THAT EVEN AFTER THE PAYMENT THERE WAS SUFFICIENT BALANCE AMOUNT IN THE CASH CREDIT ACCOUNT AND AT THE DATE OF PAYMENT ALSO THERE WAS A HUGE BALANCE LEFT. FURTHER THE ASSESSEE HAS SUFFICIENT INT EREST FREE FUNDS WHICH IS EVIDENT FROM THE FACT THAT THE ASSESSEES PROFIT ITSELF WAS VERY HUGE WHICH WAS MORE THAN RS. 338 CRORES AND R ESERVE S AND S URPLUS WERE MORE THAN RS. 526 CRORES. THUS THERE CANNOT BE A PRESUMPTION THAT THE ASSESSEE HAS GIVEN THE LOAN OUT OF CASH CREDIT ONLY. LASTLY HE SUBMITTED THAT THE ADVANCE WAS GIVEN TO THE SUBSIDIARY COMPANY FOR THE PURPOSE OF BUYING OF THE LAND FOR R&D PURPOSE ASIAN PAINTS LIMITED 12 USED FOR THE PURPOSE OF THE ASSESSEE ONLY. THUS THERE WAS A DIRECT CONNECTION OF PAYMENT BEING MA DE FOR COMMERCIAL AND BUSINESS EXPEDIENCY. HE ALSO SUBMITTED THAT THE SUBSIDIARY COMPANY ALSO GOT MERGED WITH THE ASSESSEE COMPANY BY THE ORDER OF THE BOMBAY HIGH COURT ON 24 TH JULY 2009 THIS ALSO GOES TO SHOW THAT THE ADVANCE WAS PURELY FOR THE PURPOSE O F THE ASSESSEE ONLY. ONCE THE ASSESSEE HAS HUGE INTEREST FREE FUNDS THE NORMAL PRESUMPTION IS THAT LOANS / ADVANCES HAVE BEEN GIVEN TO THE SUBSIDIARY COMPANY OUT OF INTEREST FREE FUNDS. IN SUPPORT OF THIS RELIANCE WAS PLACED ON THE DECISION OF THE BOMBAY HIGH COURT IN RELIANCE UTILITIES AND POWER LTD . (SUPRA). 15. ON THE OTHER HAND THE LEARNED DEPARTMENTAL REPRESENTATIVE STRONGLY RELIED UPON THE FINDINGS OF THE ASSESSING OFFICER AS WELL AS THE DIRECTIONS OF THE DRP AND FURTHER SUBMITTED THAT ONCE THE PAYMENT HAS BEEN MADE FROM THE BANK ACCOUNT AND ON WHICH DATE THE ASSESSEE HAD RECEIVED MONEY FROM THE BANK IN THE CASH CREDIT ACCOUNT THEN IT CANNOT BE SAID THAT THE PAYMENT HAS BEEN MADE OUT OF INTEREST FREE FUNDS AND THEREFORE INTEREST HAS RIGHTLY BE EN CHARGED BY THE ASSESSING OFFICER. 16. WE HAVE HEARD THE RIVAL CONTENTIONS PERUSED THE RELEVANT FINDINGS OF THE ASSESSING OFFICER AND THE AS WELL AS THE MATERIAL AVAILABLE ON RECORD. FROM THE RECORDS IT IS EVIDENT THAT A S ON 31 ST MARCH 2006 THE LOAN G IVEN TO THE SUBSIDIARY COMPANY STOOD AT RS. 14 32 06 043. AS ON 31 ST MARCH 2005 I.E. IN THE PRECEDING YEAR THE OUTSTANDING ADVANCE / LOAN GIVEN TO THE SUBSIDIARY COMPANY STOOD AT RS. 7 70 23 883. IN THE EARLIER YEARS SIMILAR DISALLOWANCE OF INTEREST ON S UCH ADVANCES STANDS SETTLED IN FAVOUR OF THE ASSESSEE AS AFTER GIVING EFFECT OF THE TRIBUNAL ORDER S THE RESPECTIVE ASSESSING OFFICER S HA VE ACCEPTED THE ASSESSEES CONTENTION THAT THE LOANS HAVE BEE N GIVEN OUT OF INTEREST FEE FUNDS. IN THIS YEAR THE ADDI TIONAL AMOUNT WAS ADVANCED FOR THE PURCHASE OF LAND WHEREIN R&D LAB WAS TO BE ESTABLISHED FOR THE PURPOSE OF THE ASSESSEE. IN FACT AS PER THE SUBSEQUENT ASIAN PAINTS LIMITED 13 RECORDS PLACED BEFORE US AS WELL AS BEFORE THE AUTHORITIES BELOW THE R&D LAB HAS BEEN ESTABLISHED A ND SUCH A BUILDING IS ALSO APPEARING IN THE BLOCK OF ASSET OF THE ASSESSEE. THUS THE MONEY ADVANCED CAN BE SAID TO HAVE DIRECT NEXUS FOR THE PURPOSE OF ASSESSEES BUSINESS AND THIS ASPECT FURTHER GETS STRENGTHEN BY THE FACT THAT IN THE SUBSEQUENT YEARS T HE LEARNED COMMISSIONER (APPEALS) HAS ACCEPTED THE ASSESSEE S CONTENTION AND DISALLOWANCE OF INTEREST HAS BEEN DELETED. FROM THE PERUSAL OF THE BALANCE SHEET IT IS EVIDENT THAT THE ASSESSEE HAS HUGE RESERVE S AND SURPLUS AND ALSO HUGE PROFIT (AS STATED A BOVE) A ND THEREFORE THE ASSESSEE HAS MORE THAN SUFFICIENT INTEREST FREE FUNDS AVAILABLE WITH IT. IT IS ALSO A FACT THAT THE ASSESSEE DOES NOT HAVE ANY LONG TERM SECURED AND UNSECURED LOANS AND THERE IS NOT MUCH EXPENDITURE ON ACCOUNT OF INTEREST PAYMENT ALSO . THE ONLY SUM OF INTEREST AGGREGATING TO RS. 8 79 000 IS ON ACCOUNT OF CASH CREDIT ACCOUNT. THUS ONCE THE CLAIM OF INTEREST IN PROFIT & LOSS ACCOUNT IS ONLY RS. 8 79 000 THEN SUCH A HUGE DISALLOWANCE OF INTEREST IS NOT JUSTIFIED . NOW COMING TO THE CO NTENTION OF THE REVENUE THAT THE ADVANCES HAVE BEEN GIVEN OUT OF CASH CREDIT ACCOUNT IT IS SEEN FROM THE PERUSAL OF THE SAID BANK STATEMENT THAT THE ASSESSEE HA D SUFFICIENT BALANCE AND AT NO POINT OF TIME THERE WAS ANY NEGATIVE BALANCE ON WHICH INTEREST C AN BE SAID TO BE CHARGEABLE. THUS IT CANNOT BE HELD THAT THE ASSESSEE HAS GIVEN ADVANCE / LOAN TO THE SUBSIDIARY COMPANY DIRECTLY OUT OF INTEREST BEARING FUNDS. THE DISALLOWANCE SO MADE BY THE ASSESSING OFFICER CANNOT BE SUSTAINED FIRSTLY ON THE GROUND THAT THE ADVANCE / LOAN GIVEN TO SUBSIDIARY WAS SOLELY FOR THE PURPOSE OF ASSESSEES BUSINESS AND SECONDLY THE ASSESSEE HAS HUGE INTEREST FREE FUNDS WITH IT AT THE TIME OF GIVING SUCH ADVANCE AND THEREFORE IN VIEW OF THE DECISION OF THE HON'BLE SUPREME COURT IN S.A. BUILDERS (SUPRA) AND RELIANCE UTILITIES AND POWER LTD. (SUPRA) SUCH A DISALLOWANCE OF INTEREST IS UNCALLED FOR. ACCORDINGLY SAME IS DELETED. THUS THE GROUND RAISED BY THE ASSESSEE IS TREATED AS ALLOWED . ASIAN PAINTS LIMITED 14 17. IN GROUND NO.3 THE ASSESSEE HAS CHALLENGED THE DISALLOWANCE OF ` RS. 1 20 00 00 0 BEING PROFESSIONAL FEES PAID TO ONE MR. JAYRAM NADKARNI AS CAPITAL EXPENDITURE. THE ASSESSEE HAS ALSO RAISED AN ADDITIONAL GROUND OF APPEAL WHEREIN IT HAS BEEN CONTENDED THAT IF SUCH EXPENDITURE IS TO BE T REATED AS CAPITAL EXPENDITURE THEN DEPRECIATION SHOULD BE ALLOWED. 18. BRIEF FACTS QUA THIS ISSUE ARE THAT THE ASSESSEE HAD ENTERED INTO AN AGREEMENT WITH MR. JAYRAM NADKARNI FOR PROVIDING TECHNICAL ADVISE ON MANUFACTURING PROCESS OF PAINT DESIGN IMPR OVEMENT USAGE AND APPLICATION INFORMATION IMPROVEMENTS / MODIFICATION FORMULATION CHANGES FOR COST R EDUCTION / PERFORMANCE IMPROVEMENT USAGE OF SUBSTITUTION OF ALTERNATE RAW MATERIAL WITH THE OBJECT OF REDUCING COST AND IMPROVING THE PROFITABILITY AND HO ST OF OTHER TECHNICAL KN O WHOW . AS PER THE PAYMENT TERMS GIVEN IN THE SAID AGREEMENT A N UPFRONT CONSULTANCY CHARGES OF RS. 1.20 LAKHS WAS TO BE MADE AT THE TIME OF EXECUTION OF AGREEMENT AND FURTHER RS. 12 LAKHS PER MONTH WAS PAYABLE EVERY MONTH FOR THE PE RIOD OF 21 MONTHS STARTING FROM 1 ST JANUARY 2006 TO 30 TH SEPTEMBER 2007 .BEFORE THE ASSESSING OFFICER A COPY OF THE AGREEMENT WAS FURNISHED WHEREIN THE DETAILS AND SCOPE OF TECHNICAL CONSULTANCY AND VARIOUS PROPRIETARY INFORMATION WAS TO BE GIVEN BY THE S AID CONSULTANT TO THE ASSESSEE. THE RELEVANT EXTRACT OF THE SAID AGREEMENT HAS BEEN INCORPORATED BY THE ASSESSING OFFICER FROM PAGE 7 TO 13 OF THE ASSESSMENT ORDER. IT WAS SUBMITTED BY THE ASSESSEE THAT SUCH A TECHNICAL ADVISE WAS OBTAINED FOR EXISTING LIN E OF BUSINESS AND FOR THE BETTERMENT OF PRODUCT AND THEREFORE IT IS AN ALLOWABLE RESERVE EXPENDITURE. RELIANCE WAS PLACED ON SEVERAL DECISIONS WHICH HAS ALSO BEEN INCORPORATED BY THE ASSESSING OFFICER AT PAGES 13 AND 14 OF THE ASSESSMENT ORDER. THE ASSES SING OFFICER HOWEVER REJECTED THE ASSESSEES CONTENTION ON THE GROUND THAT ALL THE CASE LAWS CITED BY THE ASSESSEE ARE PRIOR TO THE INTRODUCTION OF THE TERM TECHNICAL KNOWHOW AS AN ASSET I N EXPLANATION 4 TO SECTION 32(1) . NOW THE TECHNICAL KNOWHOW HAS BEEN DEFINED AND THIS INTER ALIA MEANS THAT IT IS IN THE NATURE OF CAPITAL EXPENDITURE. HE FURTHER HELD THAT THE ASIAN PAINTS LIMITED 15 TECHNICAL KNOWLEDGE PROVIDED BY MR. JAYRAM NADKARNI CONSISTS OF ENTIRE PACKAGE COMPRISING OF TECHNICAL DATA KNOWHOW FORMULATION OF PAINTS MANUFACTURING PROCESS WHICH HAVE BEEN HANDED OVER BY THE SAID CONSULTANT TO THE ASSESSEE COMPANY AND THIS HAS BECOME PROPRIETARY KNOWLEDGE OF THE ASSESSEE COMPANY THEREFORE SUCH AN EXPENDITURE IS TO BE HELD AS CAPITAL EXPENDITURE ONLY. 19. HE ACCORD INGLY DISALLOWED ALL THE PAYMENT AGGREGATING RS.1.56 CRORES. THE DRP HELD THAT INSOFAR AS THE PAYMENT OF RS. 1.20 CRORES IS CONCERNED THE SAME IS CAPITAL IN NATURE AND THE BALANCE PAYMENT WHICH WERE ON MONTHLY BASIS WAS ON ACCOUNT OF REVENUE EXP ENDITURE A ND THEREFORE ONLY SU M OF RS. 1.20 CROES WAS CONFIRMED AND BALANCE RS.36 LAKHS WAS DELETED. 20. BEFORE US THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE CONSULTANCY GIVEN BY THE AFORESAID PERSON WAS ON VARIOUS TECHNICAL ASPECT FIELDS RELATING TO THE ASSESSEES BUSINESS ONLY AND THIS DOES NOT LEAD TO ANY CREATION OF NEW ASSET. SUCH A TECHNICAL ASSISTANCE WAS SOLELY FOR THE PURPOSE OF IMPROVING THE EXISTING MANUFACTURING PROCESS AND NOT FOR ANY NEW BUSINESS. RELIANCE WAS PLACED BY HIM ON THE DECIS ION OF BOMBAY HIGH COURT IN CIT V/S KIRLOSKAR TRACTORS LTD. [1998] 231 ITR 849 (BOM.). 21. ON THE OTHER HAND THE LEARNED DEPARTMENTAL REPRESENTATIVE SUBMITTED THAT INSOFAR AS THE PAYMENT OF RS. 1.20 CRORES THE SAME IS CLEARLY FOR ACQUIRING OF TECHNICAL KNOWHOW FROM THE CONSULTANCY WHICH IS CAPITAL IN NATURE AND THE SAME HAS RIGHTLY BEEN DISALLOWED BY THE ASSESSING OFFICER AND THE DRP. HE STRONGLY RELIED UPON THE REASONING OF THE ASSESSING OFFICER AND ALSO REFFERED TO THE VARIOUS TERMS AND CLAUSES OF THE AGREEMENT. 22. W E HAVE HEARD THE RIVAL CONTENTIONS PERUSED THE FINDINGS OF THE ASSESSING OFFICER AND THE DRP AS WELL AS THE MATERIAL AVAILABLE ON RECORD. FROM THE PERUSAL OF THE SCOPE OF THE WORK AS GIVEN IN THE AGREEMENT IT IS ASIAN PAINTS LIMITED 16 SEEN THAT THE CONSULTANT MR. JAYRAM NADKARNI IS PROVIDING WHOLE RANGE OF TECHNICAL ADVICE/ INFORMATION WITH REGARD TO VARIOUS MANUFACTURING PROCESS OF P A INT DESIGN IMPROVEMENT IN THE QUALITY OF P A INTS TECHNICAL KNOWLEDGE PACKAGE F OR FORMULATION OF PAINTS CONTAINING VARIOU S INGREDIENTS OF CHEMICALS IN PERCENTAGE FORM AND HOST OF INFORMATION FOR THE BETTERMENT OF THE QUALITY OF PRODUCTS AND REDUCING THE COST. THE ENTIRE TECHNICAL KNOWLEDGE PACKAGE COMPRISED OF TECHNICAL DATA AND KNOWHOW OF PAINT MANUFACTURING WHICH HAS AN EN DURING A FFECT. THE SAID AGREEMENT ALSO PROVIDES THAT EVEN AFTER THE DEATH OF THE CONSULTANT HIS LEGAL HEIRS WOULD ALSO BE PAID 85% OF THE CONSULTANT FEE. THERE IS ALSO A CLAUSE FOR 3% ROYALTY OF NET SALES VALUE OF PAINTS PRODUCTS WHICH ARE PROCESSED USI NG CONSULTANCY / TECHNICAL ADVISE DURING THE TERM OF THE AGREEMENT. THUS THE ENTIRE AGREEMENT GOES TO SHOW THAT IT IS FOR PROVIDING INTELLECTUAL PROPERTY / PROPRIETARY INFORMATION IN THE FORM OF TECHNICAL KNOWHOW TO THE ASSESSEE WHICH IS PERMANENT AND HAS HUGE ENDURING VAL U E AND BENEFIT TO THE ASSESSEE IN CREATING AN ASSET. IT IS NOT MERELY A TECHNICAL CONSULTANCY FOR DAY TO DAY RUNNING OF THE MANUFACTURING PROCESS OR BUSINESS BUT THE WHOLE PACKAGE OF TECHNICAL KNOWHOW WHICH WILL HAVE ENDURING BENEFIT TO TH E ASSESSEE COMPANY AND WIL L GO TO CREATE AN INTANGIBLE ASSET AND THEREFORE IT IS DEFINITELY IN THE NATURE OF CAPITAL EXPENDITURE. THUS THE FINDINGS OF THE ASSESSING OFFICER AS WELL AS THE DRP TO THIS EXTENT ARE FACTUALLY AND LEGALLY CORRECT. ACCORDING LY WE UPHOLD THE DIRECTIONS OF THE DRP THAT TO THE EXTENT OF RS. 1.20 CRORES WHICH WAS A LUMP SUM PAYMENT IS IN THE NATURE OF CAPITAL EXPENDITURE WHEREAS THE BALANCE SUM OF RS. 36 LAKHS WHICH WAS ON ACCOUNT OF MONTHLY REMUNERATION AND WHICH HAS BEEN DELETED BY THE DRP IS AFFIRMED. THUS THE ADDITION MADE BY THE AO WOULD BE RESTRICTED TO RS. 1.20 LAKHS. THUS GROUND IS TREATED AS PARTLY ALLOWED. 23. NOW COMING TO THE ADDITIONAL GROUND RAISED BY THE ASSESSEE THAT DEPRECIATION SHOULD BE ALLOWED ON SUCH AN INTANGIBLE ASSET WE FIND THAT SUCH A CONTENTION OF THE ASSESSEE IS LEGALLY CORRECT BECAUSE ONCE THE PAYMENT ASIAN PAINTS LIMITED 17 HAS BEEN MADE FOR CREATION OF AN INTANGIBLE ASSET IN THE FORM OF TECHNICAL KNOWHOW THEN DEPRECIATION HAS TO BE ALLOWED ON SUCH CAPITAL ASSET. ACCORDINGLY WE DIRECT THE ASSESSING OFFICER TO ALLOW DEPRECIATION AS PER RULES. 24. IN GROUND NO.4 THE ASSESSEE HAS CHALLENGED THE DISALLOWANCE OF RS. 5 47 00 000 PAID TOWARDS CORPORATE ADVERTISEMENT EXPENDITURE AS CAPITAL EXPENDITURE. 25. THE ASSESSEE HAS INCURRED EXPENDITURE OF RS. 29 99 30 000 ON ACCOUNT OF ADVERTISEMENT ON TV THE CAPTIONWISE DETAILS OF SUCH ADVERTISEMENT EXPENDITURE WAS GIVEN BEFORE THE ASSESSING OFFICER WHICH HAS BEEN INCORPORATED AT PAGE 15 OF THE ASSESSMENT ORDER. THE ASSESSING OFFICER FROM THE SAID SUMMARY OF EXPENDITURE OBSERVED THAT THE ASSESSEE HAS INCURRED EXPENDITURE ON ADVERTISEMENT OF PRODUCT BRAND LIKE EXTERIOR PAINT BRAND ROYAL BRAND AND TRACTOR BRANDS WHICH FALL IN THE CATEGORY OF PRODUCT ADVERTISEMENT AND HENCE T HEY ARE REVENUE IN NATURE. HOWEVER THERE ARE CERTAIN EXPENDITURE WHICH HAVE BEEN INCURRED FOR CREATING A BRAN D IMAGE OF THE CORPORATE AND THE SE ARE ENDURING IN NATURE AND FALLS IN THE CATEGORY OF CAPITAL EXPENDITURE. AFTER CALLING FOR THE DETAIL SUBMISSIO NS FROM THE ASSESSEE HE HELD THAT CERTAIN EXPENDITURE INCURRED ON TV ADVERTISING RELATES TO CORPORATE BRAND IMAGE WHICH IS CAPITAL EXPENDITURE AND FOR COMING TO THIS CONCLUSION HE HAS RELIED UPON THE DECISION OF THE HON'BLE SUPREME COURT IN ASSAM BENGAL CEMENT CO. LTD. V/S CIT [1955] 27 ITR 34 (SC) AND CIT V/S JEOFFREY MANNERS & CO. LTD. [2009] 315 ITR 134. THIS HAS BEEN CONFIRMED BY THE DRP ALSO. 26. BEFORE US THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE ASSESSEE HAS BEEN INCURRING THESE EXPENSES EVERY YEAR WHICH HAS BEEN ALLOWED BY THE DEPARTMENT AND SECONDLY THE TOTAL ADVERTISEMENT AND PROMOTION EXPENSES IS ONLY 3.28% OF THE TOTAL SALES WHICH IS MUCH LESS . RELIANCE WAS PLACED BY HIM ON THE FOLLOWING DECISIONS: ASIAN PAINTS LIMITED 18 1 . CIT V/S GLOBAL HEALTHLI NE P. LTD. [2012] 19 ITR 298 (DEL.) (TRIB.) 2 . ITO V/S SPICE COMMUNICATION LTD. [2010] 35 SOT 78 (DEL.) 3 . SONY INDIA P. LTD. V/S DCIT [2008] 114 ITD 448 (DEL.) 4 . CIT V/S CITI FINANCIAL CONSUMER FINANCE LTD. [2011 TOIL 309 HC DEL IT) 5 . CIT V/S ADIDAS INDIA MARKET ING P. LTD. [2010] 105 TAXMAN 256 (DEL.) 6 . DCIT V/S WARNER LAMBERT (I) PVT. LTD. [2012] 143 TTJ 571 (MUM.)(TRIB.) HE FURTHER SUBMITTED THAT THE LEARNED COMMISSIONER (APPEALS) HAS ALLOWED THESE EXPENSES IN THE ASSESSMENT YEARS 2007 08 AND 2008 09. 27. THE LEARNED DEPARTMENTAL REPRESENTATIVE ON THE OTHER HAND RELIED HEAVILY UPON THE ORDER OF THE ASSESSING OFFICER AS WELL AS THE DRP . 28. WE HAVE HEARD THE RIVAL CONTENTIONS PERUSED THE RELEVANT FINDINGS OF THE ASSESSING OFFICER AS WELL AS THE MATERIAL AVA ILABLE ON RECORD. IT IS NOT DISPUTED THAT THE SAID EXPENDITURE ON THE ADVERTISEMENT HAS BEEN INCURRED IN THE RELEVANT ASSESSMENT YEAR ONLY AND IT IS FOR THE BUSINESS PURPOSE ONLY EXCEPT FOR THAT THE A.O. HAS TREATED PART OF IT AS CAPITAL EXPENDITURE. THE ASSESSING OFFICER HAS ALLOWED VARIOUS EXPENDITURES INCURRED FOR TV ADVERTISEMENT EXPENSES RELATING TO PRODUCTS AND HAS DISALLOWED THE ADVERTISEMENT EXPENSES ON CORPORATE BRAND THE DETAILS OF SUCH EXPENDITURE WERE AS UNDER: BRAND CAPTION EXPENSES (NET) TOTAL EXPENSES EXTERIORS CHOTE SARKAR 7 01 20 716 OTTAM THULLAL 38 09 870 TIME PROOF 3 52 07 073 10 91 37 659 CORPORATE CUTTING SHUTTING 4 42 00 096 APSS 11 05 000 CHEETAH 93 52 638 COLOUR WEEK VIGNETTE 1 23 250 5 46 57 734 ROYALE BIRTHD AY 2 38 05 182 PRECIOUS 3 74 12 626 6 12 17 808 ASIAN PAINTS LIMITED 19 TRACTORS COURIER 56 92 688 COURIER NEW 2 32 17 927 KIDS 21 01 688 SAHEB 40 47 520 SAHEB NEW 1 34 57 873 4 85 17 696 FROM THE AFORESAID DETAILS HE HELD THAT THE ADVERTISEMENT EXPENDITURE I NCURRED UNDER THE HEAD CORPORATE BRAND IS TO BE DISALLOWED AS IT RELATES TO ENDURING BENEFIT . S UCH A DISTINCTION MADE BY THE ASSESSING OFFICER IN OUR OPINION IS WHOLLY MISPLACED BECAUSE T HE EXPENDITURE ON ACCOUNT OF ADVERTISEMENT EVEN FOR THE PRODUCT B RANDS DOES HIGHLIGHT THE NAME OF THE COMPANY . THE BRAND NAME OF THE COMPANY IS EMBEDDED IN THE PRODUCT AND THE BRAND VALUE OF THE PRODUCT IS ALSO THE BRAND VALUE OF THE COMPANY WHO OWNS THE PRODUCT. IF ANY ADVERTISEMENT DOES NOT GIVE THE DETAILS OF THE P RODUCT THIS DOES NOT IPSO FACTO MEANS THAT IT IS NOT FOR THE PROMOTION OF PRODUCT . THE PRODUCT IN THE MARKET IS KNOWN BY ITS BRAN D WHICH IS OWNED BY THE COMPANY WHICH CREATES THE PRODUCT. MAKING SUCH KIND OF A DISTINCTION THAT PART OF THE ADVERTISEMENT IS FOR THE PRODUCT WHICH IS REVENUE IN NATURE AND PART OF THE ADVERTISEMENT FOR THE CORPORATE BRAND IS CAPITAL EXPENDITURE IS NOT APPROPRIATE . EVEN IF THERE IS A PROMOTION OF A CORPORATE BRAND IT DIRECTLY FACILITAT E S THE BUSINESS OF THE ASSESSEE AND IN THE RESULT HAS AFFECT ON THE SALES AND PROFITABILITY OF ASSESSEES BUSINESS. THE BRAND BUILDING OF THE CORPORATE IN SUCH ADVERTISEMENT IS INHERENT AND IT CANNOT BE INFERRED THAT SUCH AN ADVERTISEMENT GOES TO CREATE A FIXED CAPITAL. EVEN IF THERE IS SOME ENDURI NG BENEFIT ON ACCOUNT OF BRAND BUILDING THROUGH ADVERTISEMENT THEN ALSO IT CANNOT BE HELD THAT IT IS ON CAPITAL FIELD. IN THIS ERA ADVERTISEMENT CREATES ON IMPRESSION OF THE BRAND AND PRODUCT IN THE MIND OF THE CONSUMER AND IF THERE IS NO FREQUENT ADVERT ISEMENT OF BRAND OR THE PRODUCT IT IS VERY DIFFICULT TO PUSH SALES IN THE MARKET. THE ADVERTISEMENT ON THE TV WHETHER BE IT FOR THE BRAND OR THE PRODUCT ONLY GOES TO ENHANCE THE SALES AND PROFITABILITY OF THE ASSESSEE COMPANY AND HENCE THE SAME IS TO BE HELD AS ASIAN PAINTS LIMITED 20 REVENUE IN NATURE. ACCORDINGLY WE HOLD THAT SUCH AN EXPENDITURE INCURRED ON ADVERTISEMENT ON TV HAS TO BE ALLOWED AS REVENUE EXPENDITURE. 29. INSOFAR AS GROUND NO.5 7 AND 8 AS INCORPORATED ABOVE IT HAS BEEN ADMITTED BY BOTH THE PARTIES THA T BEFORE US THAT THESE GROUNDS HAVE NOT BEEN ADJUDICATED BY THE DRP AND THEREFORE SAME SHOULD BE REMANDED BACK TO THE DRP . CONSEQUENTLY WE RESTORE THESE GROUNDS TO THE FILE OF THE DRP FOR ADJUDICATING THESE GROUNDS AFRESH ON MERITS AFTER GIVING DUE AND EFFECTIVE OPPORTUNITY OF HEARING TO THE ASSESSEE. THUS THESE GROUNDS ARE TREATED AS ALLOWED FOR STATISTICAL PURPOSES. 30. IN GROUND NO.6 THE ASSESSEE HAS CHALLENGED THE ADDITION OF RS. 69.11 LAKHS ON ACCOUNT OF DISALLOWANCE MADE UNDER SECTION 14A R/W RUL E 8D.THE ASSESSING OFFICER AS WELL AS THE DRP HAS APPLIED RULE 8D EVEN FOR THE ASSESSMENT YEAR 2006 07 FOR THE PURPOSE OF MAKING DISALLOWANCE . 31. BEFORE US IT HAS BEEN ADMITTED BY THE LEARNED COUNSEL AND THE LEARNED DEPARTMENTAL REPRESENTATIVE THAT PRO VISIONS OF RULE 8D CANNOT BE HELD TO BE APPLICABLE FOR THE ASSESSMENT YEAR 2006 07 IN VIEW OF THE DECISION OF THE HON'BLE JURISDICTIONAL HIGH COURT IN GODREJ & BOYCE MFG. CO. LTD. V/S DCIT (2010) 328 ITR 081 (BOM.) . 32. IN VIEW OF THE SUBMISSIONS OF B OTH THE PARTIES AND ALSO IN VIEW OF THE JUDGMENT OF THE JURISDICTIONAL HIGH COURT CITED SUPRA WE SET ASIDE THIS ISSUE TO THE FILE OF THE ASSESSING OFFICER WHO SHALL DECIDE THIS ISS UE AFRESH AND TO WORK OUT THE SO ME O R REASONABLE BASIS FOR IDENTIFYING THE DISALLOWANCE AFTER EXAMINING THE ACCOUNTS OF THE ASSESSEE WITHOUT APPLYING RULE 8D AND ALSO GIVING OPPORTUNITY TO THE ASSESSEE TO EXPLAIN ITS CASE. ACCORDINGLY THIS GROUND IS TREATED AS ALLOWED FOR STATISTICAL PURPOSES. ASIAN PAINTS LIMITED 21 33. AS REGARDS GROUND NO.9 STATED ABOVE THE L EARNED COUNSEL FOR THE ASSESSEE CONTENDED BEFORE US THAT HE DID NOT WISH TO PRESS THIS GROUND. LEARNED DEPARTMENTAL REPRESENTATIVE ON THE OTHER HAND ALSO DID NOT OBJECT TO THE SUBMISSION MADE BY THE LEARNED COUNSEL FOR THE ASSESSEE. CONSEQUEN TLY THIS GROUND IS DISMISSED AS NOT PRESSED . 34. 34. IN THE RESULT ASSESSEES APPEAL IS TREATED AS PARTLY ALLOWED FOR STATISTICAL PURPOSES. 29 TH OCTOBER 2013 ORDER PRONOUNCED IN THE OPEN COURT ON 29 TH OCTOBER 2013 SD / - . . P.M. JAGTAP ACCOUNTANT MEMBER SD / - AMIT SHUKLA JUDICIAL MEMBER MUMBAI DATED : 29 TH OCTOBER 2013 / COPY OF THE ORDER FORWARDED TO : ( 1 ) / THE ASSESSEE ; ( 2 ) / THE REVENUE; ( 3 ) ( ) / THE CIT(A ) ; ( 4 ) / THE CIT MUMBAI CITY CONCERNED ; ( 5 ) / THE DR ITAT M UMBAI ; ( 6 ) / GUARD FILE . / TRUE COPY / BY O RDER . / PRADEEP J. CHOWDHURY / SR. PRIVATE SECRETARY / / (DY./ASSTT. REGISTRAR) / ITAT MUMBAI