TaxTMI 
TaxTMI 
TaxTMI 
2012 (4) TMI 373
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....dition to the 'Fixed Assets' amounting to Rs. 19,43,791/- being cost of 'Stools, Tables, Stainless Steal racks, SS cupboards, SS trolleys, SS trays etc (located in Factory premises) is not part of 'Plant and Machinery' and thereby confirming the depreciation a allowance thereon @ 10% (i.e. the rate applicable to furniture and fixtures) instead of allowing the same @ 25%(applicable to Plant & Machinery)" 4. In connection with the above ground the assessee submitted that the assessee engaged in the manufacture of the chemicals and vaccines and for this, the assessee has laboratories. Assessee purchased Stools, Tables, Stainless Steel racks, SS cupboards, SS trolleys, SS trays etc as part of the Plant and Machinery amounting to Rs. 19,43,791/- and claimed depreciation as per the rates applicable to the Plant and Machinery. During the assessment proceedings, AO held that they are not plant and Machinery and considered them as 'furniture' and granted the depreciation as per the rates applicable to the 'furniture. The CIT(A) confirmed the view point of the AO. Aggrieved with the same the assessee is in appeal before us. During the proceedings, the assesse....
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....l test to each of the disputed items. In a sweeping statement, the AO mentioned that the 'furniture items like stools, chairs, tables, racks, trolleys etc' used in the factory cannot be categorized as plant and machinery as they fail even on the 'functional test'. There is no discussion in the orders on the details of the said test. In our opinion, the functional test implies if the said items are necessary for the production of the product in the laboratory premises. In other words, if the Stools, Tables, Stainless Steel racks, SS cupboards, SS trolleys, SS trays etc are required for the laboratory purpose i.e. for the purpose of production or processing of the chemical tests in the laboratory premises leading to the production of the stocks, they must be categorized as plant and machinery. The impugned items like the case of 'fan' held as plant and machinery by the Jurisdictional High Court in the case of Park Davis (India) Ltd. (supra) have both factory and office functions depending on the place of use and the employees using them. If the scientist or lab technicians have used the impugned chairs or stools or racks or trays as part of the production of t....
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.... non compete fee for the AY 2000-01 and the same was debited to its P & L account as an allowable expenditure. The current AO also noted that the said issue was the subject matter of the scrutiny assessment in the case of M/s TVL by the then AO at Andhra Pradesh and the said amount was held by the revenue as a 'capital expenditure' and depreciation @ 30% was allowed on the said capital asset. The matter reached finality on this issue as stated by the Ld counsel at Bar before us. This issue is relevant for the AY 2000-01 and the assessee acquired by way of amalgamation, the said TCL Company for the year under consideration i.e. AY 2001-02 as a going concern with the revenue's stand that the impugned non compete fee of Rs. 2.1 cr (non compete fee of Rs. 2.4 cr - Rs. 30 lakhs of depreciation claim thereon for that year) is the depreciable intangible asset. 10. In the factual matrix of the above, the parties in the litigation made various submissions. The then CIT DR filed written submission dated 30.7.2008 with the limited objection that the 'non compete fee' is not eligible for depreciation vide para 4 to 7 of the note. The summary is given in para 7 of the note ....
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....uired. Such entry cannot be questioned in any subsequent year. In the present case the impugned intangible asset was acquired in the previous year relevant to A Y 2000-01 and has thus entered the block in that year. Secondly, in terms of 43(6)(i)(B) for the purposes of computing written down value, exist from a block of assets happens only when an asset is sold, discarded or demolished. For our said view we rely on the decision of Swati synthetics v. ITO 38 SOT 208 (MUM). Neither of this has happened in the present case so as to deny depreciation. Explanation 2 to section 43(6) provides for the manner of computing written down value of a block in case where the block is transferred by the amalgamating company to the amalgamated company. It provides that the written down value of the block in the case of the amalgamating company will be the written down value in the case of the amalgamated company. Here again there is no scope for existing from the block of assets transferred by the amalgamating company (TVL) to the amalgamated company Serum). Without prejudice to the factual position that the AO has not held the payment to be in the nature of non compete fees, we would like t....
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....ing depreciation on any capital asset included in the block of assets on which depreciation is not allowable as per the Income Tax Rules. The expenditure on compete fees is a capital expenditure and at the same time it is neither a part of the building, furniture and plant and machinery. There is no provision in the Income tax Act and Income tax Rules for allowing depreciation on capital expenditure incurred on non-compete fees. The claim of the appellant is therefore rejected." 12. Thus, as cab be seen from above, the CIT(A) has merely mentioned that the 'non compete fee is a capital expenditure and not that type of building, furniture and plant and machinery. CIT(A) is simply ignorant of the law that that the depreciation is allowable on the capital assets of intangible nature too with effect from 1.4.1999 and the AY under consideration is AY 2001-02. It is not known as to why the cited decision of the Chennai Bench, ITAT in the case of Asstt. CIT v. Real Image Tech (P) Ltd [2009] 177 Taxman 80 (Mag.). We find the said undisturbed decision is straight on the issue under consideration and it is relevant for the proposition that payment made under a non-compete agreement was c....
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....e term "or any other business or commercial rights of similar nature" has to be interpreted in such a way that it would have some similarities as other assets mentioned in cl. (b) of Expln. 3. The other assets mentioned are knowhow, patents, copyrights, trademarks, licenses, franchises, etc. In all these cases no physical asset comes into possession of the assessee. What comes in is only a right to carry on the business smoothly and successfully and therefore even the right obtained by way of non-compete commercial rights of similar nature" because after obtaining non-compete right, the assessee can develop and run his business without bothering about the competition. The right acquired by payment of non-compete fee is definitely intangible asset. Moreover, this right (asset) will evaporate over a period of time of five years in this case because after that the protection of non-competition will not be available to the assessee. This means, this right is subject to wear and tear by the passage of time, in the sense, that after the lapse of a definite period of five years, this asset will not be available to the assessee and, therefore, this asset must be held to be subject to depre....
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....ore us, Ld Counsel for the assessee submitted that the refund of sales tax arises mainly on account of determination, at the time of sales tax assessment, of a higher amount of sales tax set off. This set off is in respect of purchase tax paid on purchases and thus reduces the incidence of such purchase tax, which tax forms part of the purchase price of raw materials etc. and has therefore gone to reduce the business profits in the first place. Recoupment of part of the purchase cost should form part of the profits of the business for the purpose of section 80HHC. Further, it was submitted that the issue under consideration was already adjudicated by this Tribunal in the assessee's own case for the earlier AYs. On the other hand, Ld DR for the revenue relied on the orders of the revenue, which were decided based on the judgment in the cases of CIT v. K K Doshi & Co [2000] 245 ITR 849/112 Taxman 503 (Bom.) for the proposition that the 'profits of business' should be those receipts which had direct nexus to the export activities. 17. We have heard the parties and find the issue under consideration has reached finality at the level of the Tribunal and the issue of exclusi....
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....reciation of earlier AYs of TVL. At the outset, Ld Counsel mentioned that the said ground is not pressed. Accordingly, the same is dismissed as not pressed. 20. Ground 5(d) relates to reducing from the Profit eligible for deduction u/s. 80-HHC a sum of Rs. 6,40,80,683/- being deduction u/s.80-HHC of the Act a sum of Rs. 6,40,80,683/- being deduction u/s. 80-IA of the Act. During the proceedings before us, referring to the additional ground, Ld counsel mentioned that the said additional ground inter alia raises two related issues viz. (i) that the deduction claimed by the assessee under Section 80 IA Rs. 6,44,91,533/- be not excluded from the profits of the business at the time of applying the formula and computing deduction under Section 80 HHC in the light of the judgment of jurisdictional Bombay High Court in the case of Associated Capsules (P.) Ltd. v. Dy. CIT [2011] 332 ITR 42/197 Taxman 84/9 taxmann.com 63. This issue is covered in favour of the assessee in the light of the jurisdictional Bombay High Court decision cited (supra) and (ii) that Excise Duty collected Rs. 1,01,800/-and Sales Tax collected Rs. 1,77,85,482/- be excluded from the total turnover of the business of th....
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.... of 'deduction' in it and (ii) the judgment of the Hon'ble High Court judgment in the case of Hindustan Unilever Ltd. v. Dy. CIT [2010] 325 ITR 102/191 Taxman 119 (Bom.) which declared that the provisions of section 10B of the Act are deduction provisions and not of exemption. 22. For the first time vide letter dated 26/02/2009, assessee modified the said ground no.5(e) (renumbered as 6 in the said letter) and the modified ground with reference of 'inclusion of the export sales of EOU unit' reads as under "CIT(A) ought to have held on facts before him that the export sales of EOU should have been included in the export turnover of the assessee company while computing the deduction u/s.80HHC." 23. Subsequently, the said additional ground was further modified vide letter dated 30/04/2011 with special reference to the 'inclusion of profit of the EOU unit' and the said ground read as under: "on the facts and circumstances of the case and in law, for the purposes of Explanation (baa) to 80HHC, profits of the business should include profits derived by the 100% EOU notwithstanding the fact that such profits are to be deducted from the total income of the ....
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....C of the Act. The relevant revised Form No.10CCAC were already filed before the Tribunal along with the additional ground and the figures that appeared in the revised Form are mere consolidation of the figures of both EOU and DTI units of the assessee. Referring to the reasons for not raised in the ground before the authorities below the assessee mentioned that the assessee was under bona fide belief that the provisions of section u/s.10B of the Act are exemption provisions in nature and in such case, the profits of the EOU unit shall not enter the computation of income at all. However, there is now finality on the nature of the provisions of section 10B of the Act vide the binding judgment of jurisdictional High court of Bombay in the case of Hindustan Unilever Ltd. (supra) for the proposition that after the amendment by the Finance Act, 2000 and with effect from 1.4.2001, notwithstanding the fact that it continues to be located in Chapter III and not located in Chapter VIA of the Income Tax Act, 1961, section 10B of the Act is 'deduction' provisions and they are no longer the exemption provisions for A.Y.2001-02 onwards. These provisions of section 10B provide for 100% de....
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.... filed before the Tribunal for the first time; (3) There is need for investigation into the facts of this issue. Therefore, cited decision relied by assessee are inapplicable. 27. We heard both the parties on this preliminary issue of the admission of this additional ground as discussed in the preceding paragraphs. We have examined the orders and the paper available before us. Further, we have examined the binding decision of the said cited decision in the case of Hindustan Unilever Ltd. (supra) and find that there is clarity now after the said judgment dated 1/04/11 that Sec 10B is no longer an exempt provision at least for the computation in general and in matters relating to set off of loss of allowable units against the profit of the business in particular. Therefore, the assessee's timing for raising of the additional ground before us cannot be faulted for. So far as the legal nature of additional ground is concerned, we find that the said issue was already adjudicated by Hon'ble High Court thereby the legal nature of the additional ground cannot be questioned too. Finally, the other objection of the revenue relates the requirement of investigation into the facts re....
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....issed making clear that the decision was limited to the power of assessing authority to entertain claim for deduction otherwise than by revised return, and did not impinge on the power of Tribunal" 30. In view of the above judgment of the Apex court, it is evident that the filing of the revised return is not mandatory when an additional ground is made before the ITAT and the same is sprung from the binding jurisdictional High court's judgment in the case of Hindustan Unilever Ltd. (supra). Therefore, we admit said grounds of the assessee. Adjudication of the Additional Ground on its merits: 31. The issue raised in ground no.6 erstwhile 5(e) relates to inclusion of export turnover of EOU unit in the export turnover of the assessee for the purpose of computing the allowable deduction u/s. 80HHC of the Act. In the preceding paragraphs, we have already discussed that the said issue raised is admittedly linked to the ratio of the jurisdictional High Court judgment in the case of Hindustan Unilever Ltd. (supra), thereby, the Section 10B, though placed in chapter III of the Income Tax Act, is interpreted by the jurisdictional High court as a deduction provision like the ones alread....
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....ssessee has to be computed separately in accordance with the provisions of the Act but should thereafter be all put together and aggregated to arrive at the profits and gains taxable under the head profits and gains of business. e. Therefore, S 10B income will have to be computed under the head 'profits and gains of business' relevant provisions for which are contained in sections 30 to 43D. f. S 10B is an undertaking/unit specific deduction - Hindustan Unilever Ltd (supra) and Special Bench in the case of Scientific Atlanta 129 TTJ 273 (Chennai) g. S 80HHC is assessee specific. It does not distinguish between exports by an assessee and exports by a unit of the assessee. h. The only satisfying condition u/s 80HHC(1) is that the assessee should be engaged in the business of export of goods. i. In terms of s 80HHC(2) the section applies to export of all goods except those prohibited u/s 80HH(2)(b). j. It is not a pre-condition of the section that the exports should in fact result in profits. The export profits are merely derived or notional profits and not actual profits. The only requirement is a positive income under the head 'profits and gains of business&#....
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....n (baa) to s 80HHC y. S 80HHC(3) provides for computation of profits derived from export of goods to which this section applies; z. Since 10B profits would form part of profits of business in terms of Explanation baa as explained above, such profits would also qualify for deduction u/s 80HHC(1) aa. Since such profits qualify u/s 80HHC(1) the corresponding export turnover also qualifies for being included in the figure of ET under Explanation b to s 80HHC bb. Thus profits derived from export of 10B unit and DTA unit would both form part of the profits of business from export of goods referred to in S 80HHC(1). Correspondingly, since computation of deduction u/s 80HHC is to be done for the assessee as a whole, export turnover of the assessee as a whole needs to be taken as numerator. 12. Thus the claims raised by the Appellant vide modified Ground No. 6 and the Additional Ground find support in the scheme of s 10B as emerges on a reading of the decision of the Bombay High Court in the case of Hindustan Unilever Ltd." 32. The above essentially advocates for considering the EOU unit as belonging to the same genre of the DTA unit for the purpose of computation of allowable de....
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....eduction u/s80HHC... (ii) Export turnover of EOU will not be included in the export turnover for computation of deduction u/s 80HHC... (iii) Total turnover of EOU will be included in the total turnover for computation of deduction u/s80HHC ...as it denotes total turnover of the business and not only such export. For this proposition reliance is placed on the decision.... in the case of Tata BP Solar India Ltd...(139 TTJ 289) (dated 20.10.2010)......." 34. In the later paragraphs of his written submissions, Ld DR went on to mention that the in that case, the assessee did not include the profit of the EOU unit, Export and Total turnovers in the numerator and denominator of the formula devised for computation of deduction u/s 80HHC and the assessment was completed accordingly. CIT reviewed the same u/s 263 of the Act and directed the AO to include the export turnover of the EOU unit in the total turnover (denominator) of the formula. In the second appellate proceedings, Hon'ble ITAT confirmed the above view of the CIT under the circumstances (i) the provisions of section 10B are exempt provisions and not the deduction provisions; and (ii) the absence of the cited jurisdicti....
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....There the assessee had admitted that profits of the 10B unit had not been included in the profits to claim deduction u/s 80HHC since s 10B was an exemption section. This is contrary the scheme of the new s 10B as interpreted by the decision in the case of HUL." Second Part: Our Submissions: Decision in the case of Tata BP Solar distinguished 1. The appeal before the Honourable Tribunal had arisen out of order passed u/s 263 wherein the issue raised was confined only to the inclusion of Turnover of EOU enjoying deduction u/s 10 B in the total turnover of the assessee as a whole. The contentions of the assessee to also include profit and export turnover of the EOU enjoying deduction u/s 10 B on grounds of parity and weightage to the three variables in the prescribed formula were objected to by the DR in that case. 2. The decision has been driven by the erroneous assumption that Section 10 B was an exemption section and not deduction even after the amendment w.e.f. 1st April, 2001. The decision of Hon'ble Bombay High Court in the case of Hindusthan Unilever Ltd 325 ITR 102 was not cited before the Tribunal and therefore it could not have the benefit of the said decision in d....
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....Elxsi Ltd (supra) are relevant in this regard. At the end, Learned Counsel for the assessee summed up by stating that the - "(1) The export turnover definition explanation given in Section 80HHC is broad enough to cover the export sales of EOU undertakings as it refers to the expressions of any goods or merchandise to which this Section applies. (2) The restrictions mentioned in clause (b) of Section 2 of 80HHC are not applicable to the assessee's case. Therefore, the sub-section 2(a) supports the inclusion of export sales of EOU unit for computing deduction u/s.80HHC in which assessee's unit. (3) Inclusion of export sales EOU turnover is become the logical requirement for applying formula as profits of the EOU undertaking. (4) Ones the export sale of the EOU is included in the export turnover of the assessee in view of the principle of parity which is approved by various High Courts, Tribunal discussed above. The total turnover of the EOU unit shall also be included in the total turnover of the assessee." 39. Thus, there are number of changes legally after the 30.10.2010, the date of pronouncement of the decision in the case of the Tata BP Solar India Ltd. (supra)....
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....ken up on the succeeding paragraphs. (1) Scope of the provisions relating to (a) entry of the EOU related data into the computation of total income and (b) inclusions of profits and gains of EOU units in the profits of the business of the assessee for the purpose of Section 80HHC of the Act: 42. The provisions of section 10B of the Act are amended by the Finance Act, 2000 w e f 1.4.2001 and so are the provisions of Section 80A (4) w e f 1.4.2003. These amended provisions contains adequate expressions in them to infer and interpret that the provisions of section 10B are the 'deduction' provisions and no longer the exemptions provisions. The judgment in the case of Hindustan Unilever Ltd. (supra) is relevant in this regard as discussed in detail in the preceding paragraphs and it provided a stamp of seal on such interpretation. It is so notwithstanding the location of the section 10B in chapter III of the Income tax Act, 1962. As a consequence of the said judgment of the jurisdictional and binding judgment, the profits of EOU unit shall find its way into the computation of total income like any other business income of the assessee. Otherwise, no exempt income shall enter ....
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....ch is defined in Explanation (baa) to section 80HHC of the Act, which reads as follows:- "(baa) profits of the business" means the profits of the business as computed under the head "profits and gains of business or profession" as reduced by,-......." 45. Once impugned profits of the EOU unit of 10B form part of the 'profits of the business', the reductions if any are to be allowed only in accordance with Clause (1) and (2) of the said Explanation (baa). That is how the profits of the EOU unit enter the formula devised for computation of allowable deduction u/s 80HHC of the Act. However, in view of the provisions of section 80IA(9) of the Act as explained by the binding judgment of Bombay High court in the case of Associated Capsules (P.) Ltd. (supra), the quantity of deduction shall not exceed the profits and gains of such eligible business. In the instant case, the assessee mentioned during the hearing the deduction claim exceeds such limit if included and therefore, the claim of this kind is not raised before us. Therefore, the issues relating to inclusion of the profits of the EOU unit in the profits of the business is superfluous and we shall not spend much time on ....
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....ssee's level 'export turnover' needs to be considered. The expression is wide enough to include the export sales of the 'EOU unit'. Further, by the use of expression 'any' before 'goods and merchandise' all the goods and merchandise is covered. However, the restriction apply to such goods and merchandise, which are listed in clause (b) of Section 80HHC (2) i.e. Mineral oil and minerals and ores (other than processed minerals and ores specified in 12th Schedule to Act. 49. The reasoning given in the order of the tribunal in the case of Tata BP Solar India Ltd. (supra) is required to be mutated considering the subsequent decisions/judgment of the higher judicial fora. This decision of the Tribunal i.e. inclusion in total turn is ok and not okayed the inclusion in these export turnover is not in harmony with the well established 'principle of parity' strongly propounded by the Hon'ble Karnataka High court in the case of Tata Elxsi Ltd. (supra). We shall take up this principles at length in the subsequent paragraphs. 50. To summarise, the goods and merchandise exported by the EOU unit of the assessee are covered by the definition to ....
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....scussed decision in the case of ITO v. SAK Soft Ltd. [2009] 30 SOT 55 (Chennai) (SB), before coming to the conclusion for upholding the 'principle of parity' in favour of the assessee. Para 10- 11 of the said judgment of the Karnataka High Court are relevant and the same are reproduced as under (page 59 page 63 of the judgment), - " The formula for computation of the deduction under section 10A would be as under: Profits of the business x Export turnover / Total turnover From the aforesaid judgments, what emerges is that, there should be uniformity in the ingredients of both the numerator and the denominator of the formula, since otherwise it would produce anomalies or absurd results. Section 10-A is a beneficial section. It is intended to provide incentives to promote section. It is intended to provide incentives to promote exports. The incentive is to exempt profits relatable to exports. In the case of combined business of an assessee, having export business and domestic business, the legislature intended to have a formula to ascertain the profits from export business by apportioning the total profits of the business on the basis of turnovers. Apportionment of profi....
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....r means, then, when the total turnover includes export turnover, the meaning assigned by the legislature to the export turnover is to be respected and given effect to, while interpreting the total turnover which is inclusive of the export turnover. Therefore the formula for computation of the deduction under Section 10-A, would be as under: Profits of the business x Export turnover / (Export turnover + Domestic Turnover Total Turnover 11. In that view of the matter, we do not see any error committed by the Tribunal in following the judgments rendered in the context of Section 80HHC in interpreting Section 10-A when the principle underlying both these provisions is one and the same. Therefore, we do not see any merit in these appeals. The substantial question of law framed is answered in favour of the assessee and against the revenue." 53. The above extracts contains the in depth analysis as to the formula for determining the allowable deduction, numerator-denominator analysis and finally, they arrive at the need for maintaining the 'parity' of the constituents between the 'export turnover' and 'total turnovers'. On the impugned issue of inclusion/exclus....
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....ts support not only from the judgment of the Karnataka High Court in the case of Tata Elxsi Ltd. (supra) but also by the various decisions of the Tribunal including the decision by this Pune Bench. In the case of Patni Computers Systems Ltd for the Ay 2002-03 and 2003-04, the Tribunal came across a case of exclusion of profits and turnovers of the eligible unit u/s 10A of the Act for the purpose of determining the allowable deduction u/s 80HHF of the Act and the Tribunal upheld the principle of parity and decided the case in favour of the assessee. Considering the above and for want of consistency, we are of the opinion, the principle of parity should be maintained in matters of said inclusion or exclusion, as the case may be, of the constituents of the numerator and denominator. Thus, the assessee is entitled to inclusion of the export sales in the export turnover, numerator of appearing in the formula. Consequent to the said inclusion, as orally submitted by the Ld DR for the revenue, the said constituent has to be included in the 'total turnover', denominator of the formula too. We allow the said oral claim of the revenue. In so far as the inclusion of the profits of the....