The Commissioner of Income Tax-IV v. M/S Denso India Ltd.

1. The revenue has preferred the present appeals against the impugned order of the Income Tax Appellate Tribunal (ITAT) dated 27.02.2013 in ITA No. 3014/Del./ 2009 (for Assessment Year 2002-03) and ITA NO. 887/Del./2010 (for Assessment year 2003-04). It urges that the Court should consider the following substantial question of law:

2. Brief facts are that the assessee was promoted by Denso Corporation, Japan. The latter holds 47.93% equity in the assessee and the assessee’s overall management and the control rests with Denso Japan. M/s Sumitomo a Trading Company holds 12.27% of the equity in the assessee. The assessee filed return for the year 2002-03, declared a total income of ₹19,44,45,442/which was subject to scrutiny assessment. The Assessing Officer (A.O.) assessed a total income of ₹27,17,76,470/-. The A.O. made certain additions on account of transfer pricing provision (which are not the subject matter of the present appeals). The additions, which were ultimately disallowed by the ITAT, (against which the revenue claims to be aggrieved) pertain to the payment of royalty, technical fee, the allowance made under [Section 32(1)] of the Income Tax Act and the payment to Denso Haryana, a sister concern, for availing intranet service. Question No.3

3. At the outset, learned counsel for the parties submit that so far as the question of technical fee is concerned, the question of law stands concluded ITA 767 &796/2014 Page 3 in favour of the respondent/assessee Denso India Ltd., in the judgment for A.Y.2001-02, in ITA No.16/2008 decided on 08.10.2010. This Court in that case in para 23 stated that the expenditure, claimed by the assessee was allowable, as a business expenditure under Section 37(1) of the Act. Question No.3 is accordingly answered against the revenue and in a negative. Question No.1.

4. The assessee in terms of its arrangement with parent company-Denso Japan had to remit loyalty at different rates. These were sought to be brought to tax on the ground that expenditure was not revenue but it was capital in nature as it would result in enduring benefit. The CIT (Appeals) disagreed and after analyzing the nature of the transaction held that the amounts paid correctly belonged to the revenue stream and for all the previous years the amount was treated as revenue expenditure, i.e. for A.Y. 1988-89 to 1997-98. In a previous year i.e. ITA No. 479/Del./2004 decided by the ITAT on 20.03.2008, it was held after an elaborate analysis of case law and agreement on the record that the royalty was revenue expenditure and could not be treated as capital expenditure. The extract of that decision appears in para 6 of the impugned order. It is not disputed that no new fact or development took place or was taken into account by the A.O. Considering that consistently for 12 years identical payments were treated as revenue expenditure and in fact are entitled to be treated as such this Court is of the opinion that the question of law has to be answered against the revenue and in favour of the assessee. ITA 767 &796/2014 Page 4 Question No. 2.

5. This pertains to payments made to M/s Denso Haryana by the assessee. Here again the amounts were treated as revenue expenditure for all the previous years. The A.O. had sought to include the amount paid to M/s Denso Haryana for use of intranet facility. Apparently the facility was a communication network known as “NICE NET”. The network was availed on cost sharing basis for reporting and communication, and changed to the Denso Group Companies world over. Since it was an actual payment in respect of the service availed by the assessee, the first Appellate authority was of the opinion that there could be no dispute in this regard. The CIT (Appeals), therefore, set aside the observations of the A.O., based upon his surmise that no service was in fact rendered and agreement was itself sham. This Court is of the opinion that findings of the ITAT affirming the conclusions of the CIT (Appeals) are reasonable. Apart from questioning the agreement, the A.O. had no material to say that in fact no service was provided by Denso Haryana for this purpose. This question of law is answered against the revenue and in favour of the assessee. Question No.4.

6. This pertains to the amounts paid as know-how fees by the assessee to Denso Japan. This was for the manufacturing technology, provided by Denso Japan. The ITAT noticed- in this context by its analysis of the findings of the CIT (Appeals)- that up to the period 1998-99, the assessee had claimed the benefit of Section 35AB but thereafter sought to avail provision of Section 31(1). ITA 767 &796/2014 Page 5

7. The assessee initially had sought to avail the benefit of Section 35AB. Once the initial period ended in 1988-89, it sought whatever benefits were permissible under Section 31(1). This position has been reflected by the ITAT in the impugned order in the following terms: