TaxTMI 
TaxTMI 
2005 (8) TMI 301
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.... grievance of the assessee in this regard is projected in ground No. 1 to 1.9 in ITA No. 2823/Del/2004 and in ground Nos. 1 to 1.20 in ITA No. 819/Del/2005. The facts and circumstances giving rise to the aforesaid ground of appeal are as follows. The assessee is a company engaged in the business of manufacture and sale of various products viz., Eno, Crocin, Aquafresh toothbrush, etc. The assessee had incurred expenditure under the head administrative expenses paid to SBCH. In the previous year relevant to asst. yr. 2000-01, the assessee had claimed a sum of Rs. 22,97,46,564. In the previous year relevant to asst. yr. 2001-02, the expenditure claimed was Rs. 27,59,36,430. The assessee did not have any organisation or infrastructure to carry on the business activities. The assessee availed the services of SBCH for managing its business in the fields of inter aha, marketing, selling, distribution and administration. Originally under agreement dt. 18th Jan., 1996 and supplemental agreement dt. 26th April, 1996, it was agreed that the assessee would reimburse SBCH for the services rendered at cost + 5 per cent. The basis of billing as provided under these agreements were as follows: ....
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....a firm of chartered accountants, was appointed to conduct a study and suggest a suitable formula for recovery of cross charge between the SBCH and the assessee. M/s PWC gave a report dt. 20th Sept., 1997 determining the basis for the allocation of costs in respect of the services provided by SBCH. It is on the basis of such suggestion of PWC that the administrative expenses claimed by the assessee have been arrived at. 6. In the asst. yrs. 1998-99 and 1999-2000, the assessee had claimed deduction under the head 'administrative expenses' on the basis of allocation of the costs as suggested by PWC. The AO and the CIT(A) in those years, have held that the method followed by the assessee prior to the report of the PWC, was a sound method and accordingly, administrative expenses on the basis of the method followed earlier, was allowed. In asst. yrs. 2000-01 and 2001-02, the AO allowed administrative expenses only 7 per cent of the sales of the assessee and disallowed the claim for deduction of the remaining expenses. The order of the AO was confirmed by the CIT(A) and hence the present appeals by the assessee. 7. We have heard the submissions of the learned counsel for the....
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....he business, reasonableness of the expenditure has to be adjudged from the point of view of the businessman and not of the Revenue. It is open to the Tribunal to come to a conclusion either that the alleged payment is not real or that it is not incurred by the assessee in the character of a trader or that it is not laid out wholly and exclusively for the purpose of the business of the assessee and to disallow it. But it is not the function of the Tribunal to determine the remuneration which in their view should be paid to an employee of the assessee. An employer in fixing the remuneration of his employees is entitled to consider the extent of his business, the nature of the duties to be performed, and the special aptitude of the employee, future prospects of extension by the business and a host of other related circumstances. It is erroneous to think that increased remuneration can only be justified if there is a corresponding increase in the profits of the employer.' The aforesaid principle was reiterated and applied by the Hon'ble Supreme Court in the following cases: 1. J.K. Woollen Manufacturers vs. CIT (1969) 72 ITR 612 (SC) 2. Al....
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....ined by the CIT(A) for asst. yr. 2000-01 deserves to be deleted and the same is directed to be deleted. 9. As far as the asst. yr. 2001-02 is concerned, the facts are slightly different. In this assessment year, the AO made the disallowance out of administrative expenses by making a reference to the disallowance made in the earlier years. However, the CIT(A) had sustained the order of the AO by distinguishing the facts as prevailing in the asst. yr. 2001-02 from those prevailing in the asst. yrs. 1998-99 to 2000-01. The order of the Tribunal for asst. yrs. 1998-99 and 1999-2000 was also filed before the CIT(A) in the course of proceedings for asst. yr. 2001-02 and it was contended on behalf of the assessee that judicial proprietary demanded that the CIT(A) should follow the decision of the Tribunal. The CIT(A), however, rendered a finding that the facts prevailing in asst. yr. 2001-02 were different from the other years. Before the CIT(A), the AO filed a remand report in which he had raised certain issues which were as follows: (a) that PWC report was based on the information provided by SBCH and that PWC had not independently verified the information from records. It w....
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....regarding the merits of the allocation of costs as made by PWC was also reiterated. 11. On consideration of the rival submissions, the CIT(A) came to the conclusion that the decisions of the Tribunal in the earlier years were not final and that the principle of 'res judicata' did not apply to income-tax proceedings. The CIT(A) also made a reference to the fact that as against the decision of the Tribunal, the Revenue has gone in appeal before the Hon'ble High Court. We may mention here that, as already observed by us, the appeal of the Revenue has already been rejected by the Hon'ble High Court. The other findings and reasons given by the CIT(A) were as follows: (a) That the facts in the present assessment year were different and, therefore, required fresh consideration. (b) That the report of the PWC was not valid for the asst. yr. 2000-01. The fact that they were reputed firm of chartered accountants was not relevant and their report cannot be accepted at its face value. (c) SBCH and the assessee-company are part of the same group and owned by the same mother-company. As per the chart submitted by the assessee, SB plc UK owns 100 per ....
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....to the asst. yrs. 1998-99 to 2000-01, by the CIT(A) are correct. With regard to the finding of the CIT(A) that because of changed circumstances and facts in asst. yr. 2001-02, the earlier orders of Tribunal will not operate as res judicata, the learned counsel for the assessee submitted that the basis of allocation of expenses by PWC between the assessee and SBCH was based on a scientific method capable of taking care of all situations and, therefore, the decision of the Tribunal in the earlier years should equally apply to the present asst. yr. 2001-02 also. He brought to our notice that the principal objection of the AO was that the level of effort required for promotion of assessee's product was presumed to be greater than that required for promoting products of SBCH and, distribution of expenses on this presumption was not correct. According to the AO, the SBCH had during the previous year relevant to asst. yr. 2000-01, with a view to strengthen its share of nutrition drinks market, sought to acquire some brands of nutrition drinks from existing market players and even the managing director of SBCH had expressed the policy of SBCH to acquire brands in nutrition drinks segme....
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....ssessee's paper book. 15. With regard to the finding of the CIT(A) that the assessee and SBCH were not operating at arm's length, the learned counsel for the assessee submitted that it was not the case of the Revenue that the parties were related in the manner contemplated under s. 40A(2)(b) and, therefore, to conclude that the dealings between the assessee and SBCH were not at arm's length cannot be sustained. 16. The learned Departmental Representative relied on the order of the CIT(A). In particular it was submitted by him that even the assessee went back on the method of sharing of expenses suggested by PWC. The assessee paid much more than what was payable as per the report of PWC Reference was made to the letter of SBCH in this regard, a copy of which is placed at p. 74 of assessee's paper book. The learned Departmental Representative also took us through the various findings of the CIT(A) with regard to change in facts and circumstances in the present assessment year compared to the earlier years. It was further submitted by him that the assessee was a licencee entitled to use the brand name "Horlicks" and had granted a sub-license to SBCH, for which it....
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....ness nor can be distributed on the basis of an objective unit of measurement. For these expenses, the report has recommended charge based on the effort of human resources involved in the operations of the appellant rather than as a percentage of sales. The nature of expenses included in the category of assignable expenses undetermined relates to selling, marketing, exports, finance, information resources, human resources, legal managing director's office and consists mainly costs associated with human resources, i.e., salaries, bonus, staff welfare, etc. The same has been allocated in the ratio of the human resources that would have been employed by the appellant to carry these activities to the human resources actually employed by these business processes, which includes mainly employee costs. The factor for charging the payment based on the level of efforts which would go into managing the operations of the assessee are given in the report as under: Factor for charge (per business process) = SBAP Equivalent (b) SBCH (a) SBCH(a) SBAP(b) Basis for Allocation Works 360 -- SBAP utilizes the works of SBCH for the manufacture of Eno and the basis for char....
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.... operations and we consider that there should be equal allocation of costs. 19. The above basis of allocation of expenses has already been found by the Tribunal to be acceptable and correct method in asst. yrs. 1998-99 and 1999-2000. One of the distinguishing feature in asst. yr. 2001-02 pointed out by the CIT(A), is the fact that PWC's report was valid only for three years and the period of 3 years ended with asst. yr. 2000-01. This in our view was not a proper approach. As can be seen from the basis of allocation it takes into account the level of effort required for each item of activity and, therefore, the same would be valid even for asst. yr. 2001-02. The further reasoning of the CIT(A) has been that in a rapidly changing environment and product mix, the level of effort factor would not be a correct method of quantification of expenditure. As to what was the change in environment or product mix has not been spelt out by the CIT(A). The AO in his remand report filed before the CIT(A) has laid much emphasis on the fact that SBCH had acquired Viva and Maltova brands and promotion of these brands would involve huge expenditure. This is again a surmise of the AO. The assess....
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....penses made by the AO and sustained by the CIT(A) should be deleted and same is directed to be deleted. Grounds 1 to 1.20 in asst. yr. 2001-02 are allowed. 21. In ground Nos. 1.21 to 1.23 in ITA No. 819/Del/2005, the assessee has challenged the order of the CIT(A) whereby he upheld the disallowance of deduction of Rs. 67,75,476 being the difference of excise duty paid on closing stock and embedded in the opening stock and claimed as deduction under s. 43B of the Act holding that the same results in artificially bringing down tax liability. The facts in this regard are as follows. The assessee has consistently been claiming deduction in respect of excise duty of closing stock on payment basis, as per provisions of s. 43B of the Act. In the relevant previous year, the assessee claimed deduction of a sum of Rs. 1,76,68,848 being the difference of excise duty on opening stock (closing stock of the preceding year) of Rs. 2,95,61,634 and excise duty paid on closing stock of Rs. 4,74,30,482. The AO while completing the assessment made disallowance of the aforesaid deduction claimed under s. 43B of the Act alleging that the same resulted in deduction for the said amount twice, once as c....
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....heard the rival submissions. Sec. 43B of the Act provides a departure from the method of accounting followed by an assessee to allow deduction of statutory liability in the year of payment notwithstanding that liability in respect thereof may have accrued in another year. In other words, the provisions of s. 43B of the Act override the method of accounting consistently followed by assessee and mandate the deduction of statutory liabilities to be allowed in the year of payment thereof. The aforesaid proposition was accepted by the Gujarat High Court in the case of Lakhanpal National Ltd. vs. ITO. The relevant paras of the judgment of their Lordships are extracted below: "......... Under the mercantile method of accounting, as stated earlier, the moment the liability is incurred, it would be an admissible deduction. What s. 43B of the Act states is that irrespective of the fact that the liability is already incurred, that would be an admissible deduction only when the actual amount in that regard is paid. Therefore, it is clear that in the year 1983, when the goods including the raw material were imported and the finished goods lying at various depots were manufactured in th....
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....iew accepted by the Hon'ble Gujarat High Court in the case of Lakhanpal National Ltd. The AO had placed reliance on the decision of the Hon'ble Supreme Court in the case of Berger Paints wherein it had held that excise duty was to be included in the valuation of closing stock of finished goods. The AO has overlooked the fact that by including the excise duty in the valuation of the closing stock, deduction for the said duty is not allowed to that extent as required under s. 43B of the Act. The disallowance made by the AO and confirmed by the CIT(A) cannot be sustained and is, therefore, directed to be deleted. Ground Nos. 1.21 to 1.23 in ITA No. 819/Del/2005 are allowed. 24. The next issue that arises for consideration in both these appeals is against the order of the CIT(A) sustaining disallowance to the extent of 4/5th on consumer product research expenses holding that such expenditure would result in long-term benefit to the assessee. The grievance is projected in ground Nos. 2 to 2.1 in ITA No. 2823/Del/2004 and in ground Nos. 2 to 2.2 in ITA No. 819/Del/2005. The facts which are relevant for adjudication of this ground of appeal are as follows. In the asst. yr. 2000....
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....me Court as well as various High Courts on this issue. 28. Respectfully following the decision of the Tribunal referred to above, we set aside the additions made by the Revenue authorities in both the assessment years and direct the AO to decide these issues afresh in the light of the directions given by the Tribunal for the asst. yrs. 1998-99 and 1999-2000. The relevant grounds of appeals of the assessee are treated as allowed for statistical purposes. 29. The next issue for consideration is the disallowance of research and product development expenses of Rs. 8,46,182 by the Revenue authorities on the ground that the said expenditure resulted in a long-term advantage to the assessee and was, therefore, of the nature of capital expenditure. The grievance bf the assessee on this issue is projected in ground Nos. 3.1 and 3.2 in ITA 2823/Del/2004. On identical issue, the Tribunal in assessee's own case for asst. yrs. 1998-99 and 1999-2000 has set aside the order of Revenue authorities and remanded the same for fresh consideration by the AO. The basis on which the disallowance was made being the same as in asst. yrs. 1998-99 and 1999-2000, we deem it proper to set aside the o....
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....ct of trading goods to the total turnover." From a harmonious reading of definition of 'indirect cost' in Expln. (e) below sub-s. (3) of s. 80HHC and cl. (b) of that section it would be appreciated that only indirect cost attributable to the export is to be reduced for computing deduction from export of trading goods. Explanation (e) to sub-s. (3) of s. 80HHC cannot override the provision of cl. (b) of s. 80HHC(3). The Special Bench of Tribunal in Surendia Engineering Corpn. vs. Asstt. CIT (2003) 78 TTJ (Mumbai)(SB) 347 : (2003) 86 ITD 121 (Mumbai)(SB) held that indirect costs which are not attributable to export turnover of trading goods should not be taken into consideration. It is clear from the aforesaid order of the Tribunal that for the purpose of computing deduction under s. 80HHC, indirect costs related to the export of trading goods is to be apportioned and not all costs other than direct costs have to be prorated to arrive at the indirect costs that have to be reduced. It is only those costs which have some relation to the export of trading goods that need to be allocated. The AO is, therefore, directed to recompute the deduction under s. 80HHC of the Act in....
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....n the nature of profits and gains of business. The royalty income is not receipt of a similar nature as that of brokerage, commission, etc. The expression "of any other receipt of a similar nature" occurring in cl. (1) of Expln. (baa) has to be construed ejusdem generis with the words appearing immediately preceding that expression. The plea of the assessee also finds support from the decision of the Hon'ble Bombay High Court in the case of CIT vs. Bangalore Clothing Co. (2003) 180 CTR (Bom) 127 : (2003) 260 ITR 371 (Bom) and the Delhi Bench of the Tribunal in the case of Smt. Sujatha Grover vs. Dy. CIT (2002) 74 TTJ (Del) 347. The action of the Revenue authorities in excluding 90 per cent of royalty income cannot, therefore, be sustained. The AO is, therefore, directed to recompute the income under s. 80HHC by considering the royalty income as profits of the business. 36. The only other surviving ground in ITA 819/Del/2005 is the charging of interest under s. 234D of the Act. The provisions of s. 234D read as follows: "Sec. 234D: Interest on excess refund-(1) Subject to the other provisions of this Act, where any refund is granted to the assessee under sub-s. (1) o....