TaxTMI 
TaxTMI 
2013 (9) TMI 522
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.... 5 Payment to Azb & Partners for Project Ganesh/International Trucks 87,96,804 B Expenses incurred in connection with proposed acquisition of Tractorul UTB S.A.Brasov -Romania. 3,48,12,788 (Break up of Expenses attatched) C Expenses incurred for other acquisitions 2,35,65,648 1 Foreign travel expenditure 3,274,953 2 KPMG Fees provided - Stokes 881,600 3 Fee For Technical Serv To Stokes Forgings WaIlsall 234,300 4 Prof Fess Flexion Review & Acquisition $ 896 39,684 5 Tds-Eur [email protected] & Tax Due Deligence 6,562 6 Prof.Chrgs. Due Diligence Of Stokes Group 71,48,331 7 Stokes Forgings Matter-Legal Due Diligence 33,63,579 8 Advisory Fees-Plexion Technologies 22,68,603 9 Acturial Valuatn.-Pension On Stokes-Project Auto 10,24,400 10 Consultancy Services Acquisition Stokes Group 2,77,520 11 Consultancy Services : Acquisition Stokes Group 250,000 12 Consultancy Services : Acquis....
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.... and therefore were allowable as deduction.Without prejudice to the above, the Appellant contends that the DCIT should have allowed depreciation thereon at the appropriate rate. Without prejudice to the above, the Appellant contends that the DCIT should have allowed depreciation thereon at the appropriate rate. 2. Expenses in connection with development of engine Rs. 1,00,83,026/- On the facts and in the circumstances of the case and in law the Appellant contends that the DCIT erred in not allowing deduction in respect of development expenses of Rs. 1,00,83,026/- incurred towards consultancy fees and other revenue expenses as revenue expenditure u/s 37(1) and instead allowing only depreciation thereon of Rs. 25,20,756 under section 32 of the Act treating same as capital expenditure. Without prejudice to the generality of the above ground the DCIT ought to have allowed the above sum of Rs. 1,00,83,026 in its entirety under section 35 of the Act. 3. Development expenses - compact project for tractors Rs. 1,89,58,986/- On the facts and in the circumstances of the case and in law the Appellant contends that the DCIT erred in not allowing deduction in respect of develo....
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....s 35DDA for only 1/5th (iRs.9,77,591) of the amount of provision made for liability of Rs.48,87,957/- on account of special pension based on the valuation provided by the Appellant rejecting the contention of the Appellant that the provisions of the said section were not applicable to the facts of the case and accordingly the entire amount of Rs.48,87,957 was allowable in the year under appeal. 9. Provision for Warranties - Rs. 16, 19,08,000 On the facts and in the circumstances of the case and in law the Appellant contends that the D.C.I.T. erred in treating the provision for warranties made as at 3 103 2006 as inadmissible expenditure on the ground that this provision is in the nature of contingent liability and hence not an ascertained liability. 10. Provision for pending labour demand- Rs. 78,45,000/ On the facts and in the circumstances of the case and in law the Appellant contends that the D.C.I.T. erred in not allowing deduction of Rs.78,45,000/ being the provision, representing minimum liability, made by the Appellant towards pending labour demand totally disregarding the fact that the said liability was a certain liability though only the ultimate quanti....
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..../-. On the facts and in the circumstances of the case and in law, the DCIT erred in adding a sum of Rs.1,26,51,602/- to the total income of the Appellant, being the amount of adjustment made in TPO's order u/s 92CA on account of the determination of Arm's Length Price (ALP) on international transactions with an Associated Enterprise. The addition be annulled. 16. Disallowance of capital loss on sale of R&D assets of Rs.1,85,21,865 On the facts and in the circumstances of the case and in law the DCIT erred in disallowing claim for deduction of capital loss on sale of R&D assets of Rs.1,85,2 1,865 and thereby not accepting the Appellant's contention that such loss was correctly claimed under the provisions of Act. 17. Consideration received on sale of LCV business in the form of non-compete covenant Rs.10,50,00.000 treated as business income On the facts and in the circumstances of the case and in law the Appellant contends that the DCIT erred in bringing to tax a sum of Rs.1050 lacs as income from business u/s 28(va) of the Act rejecting its contention that the said income by way of non-compete fees was taxable, at the highest, u/s 45 read with section 55 of the Act. ....
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....l expenditure amounting to Rupees to 20.04 Crores to the profit and loss account. When inquired the Appellant submitted that out of Rupees Rs.20.04 Crores,Rs.12.07crores were added back to the computation and the balance expenditure amounting to Rs.7.97Crores was claimed as revenue expenditure. 2.1.Before us, the Authorised representative (AR)submitted that expenditure incurred by the assessee-on account of i)consultancy fees, ii)proposed acquisition of Tractoral UTB SA, iii)acquisition of various Indian and foreign entities iv)bank charges-was revenue in nature. Departmental representative (DR) submitted that in the Audit report filed along with the return of income expenditure related to acquisitions was treated as capital expenditure, that the Appellant did not offer any explanation before the AO when Appellant was directed o file reasons for not treating the said expenditure as revenue expenditure, that overseas acquisitions were not made by the assessee, but acquisitions were carried out by a Mauritius company, that profits of Mauritius company were not offered for taxation in India. 2.2.We have heard rival submissions and perused the material submitted It is found th....
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....ge in a commercial sense on one hand and on the other to look in to the aim, intended object, effect of the expenditure and in the larger context of necessity and expediency. Legal rights secured in the process are also relevant in deciding the issue. iii).If the expenditure is related to the carrying on or conduct of the business or is intrinsically connected with the running of a business the expenditure is to be regarded as revenue expenditure even though the advantage may endure for some indefinite future. iv).A payment made with a view to obtain the benefit of technical assistance for running the assessee's business more efficiently so as to earn more profits and 'not by way of transfer of fruits of research once and for all', can be treated as an item of revenue expenditure v).Expenditure incurred in connection with the profit earning apparatus would be revenue expenditure. vi).Where the advantage is on the capital filed the expenditure would be treated a capital Expenditure. If the advantage leaves the fixed capital untouched, the expenditure would be on revenue account. vii).Expenditure in the acquisition of a concern would be capital expenditure; expenditure....
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....ily, the word capital expenditure refers to the expenditure which is of a permanent nature or for securing tangible or intangible property, corporeal or incorporeal right. 2.4.In the case under consideration the appellant had not produced copies of the acquisition agreements before any of the lower authorities. So, they had no occasion to decide as whether the transactions entered in to by the appellant were acquisition of a concern or carrying on of the concern? In absence of the agreements we are also unable to apply the tests, referred at point x) of the preceding paragraph, in this regard. 2.4.a.But from the available records, in our opinion, it transpires that the expenditure incurred for acquisitions referred at para 2.2 of page 8 was not for preserving and maintaining the existing asset of the appellant,rather it was incurred for securing tangible or intangible property and corporeal /incorporeal rights of the acquired entities. Acquisition of a complete unit of Tractor Manufacturing unit from a Chinese Company, brought into existence a new asset and the appellant obtained new advantage.Same thing is applicable to the acquisitions of Europe SRL, Stokes Group and Plexio....
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.... factors for deciding the issue under consideration. The issue has been decided after taking in to consideration the basic facts i.e. whether the expenditure was for running the business or not? We are of the opinion that expenditure amounting to Rs.7.97 Crores was spent for the purpose of bringing into existence a new asset /obtaining a new advantage. So, part A,B and C of the Ground No.1 are decided against the appellant. However, allowing the alternate ground of the appellant, we hold that the said expenditure was part of investment. 2.5. Part D of Ground 1 is about stamp duty (Rs.11.6 lakhs) paid for issuing bonus shares. AR submitted that issue regarding stamp duty has already been decided by the Apex Court in the case of General Insurance Co.(286 ITR232).We find that Hon'ble SC has held that assesses do not acquire any benefit or advantage of enduring nature by incurring expenditure for stamp and registration for issue of bonus shares. Respectfully following the apex court we decide the issue regarding payment of stamp duty in favour of the Appellant. 2.6. Ground 1.E.deals with expenditure incurred for issue of Foreign Currency Convertible Bonds(FCCB).AR submitted th....
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.... in 309 ITR 443,that the issue was covered in favour of the assessee(ITA/7845 and 8140/ Mum/2000 AY 1997-98, ITA /2523 and 3078/Mum/ 2005, AY1998-99). Alternatively, it was submitted that even if the said expenditure was held to be capital,it was allowable u/s.35(1) (iv)of the Act. Relying upon more than a dozen cases the AR submitted that expenditure incurred for up-gradation of the engine should be allowed as a revenue expenditure. DR strongly supported the order of the AO and submitted that the expenditure incurred was covered by the provisions of section 32, that section 37 or 35 were not applicable in the case under consideration. 3.2.Here,we would like to discuss cases referred to by the AR to arrive at a rational conclusion. i) In the case of Sakthi Sugars Ltd.(45DTR 134) the assessee in its return of income claimed expenses relating to the expansion of the sugar units. The AO held that the assessee's business and installed capacity had gone up, that the business was expanded in a different state and that the assessee could not claim the expenses incurred on the installation of new factories as revenue expenditure. Accordingly, the same was treated as capital expenditu....
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....officer treated the said expenditure as capital. Deciding the case, filed by the revenue, the Hon'ble High Court observed- "...the assessee entered into an agreement with a company by the name of registered in Republic of Mauritius, under which the licence granted to the assessee are non-exclusive license, restricted to the territory of India to manufacture and use tube making machines and the tools and parts thereof with the right to register the licence. The licensor was a registered proprietor and beneficial owner of certain patents for manufacturing tube making machines. Under the terms of the agreement the assessee obtained a nonexclusive license for a term of 2 years between 1st September,1997 and 13st August ,1999. Under the agreement, the sole proprietary right in the patents vested with the licensor.... On behalf of the revenue it was sought to be submitted that the acquisition of Know-how under a license would fall within the ambit of section 32 of the income tax act, 1961, as amended. On the finding of fact which has been arrived at by the CIT(A)and by the tribunal, it has emerged, from the record in the present case, that the assessee had as a matter of fact not acquire....
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....ght in law in holding the order of the CIT (A) in deleting the addition of Rs.72.6 lakhs on account of new project expenses holding the same to be of a revenue nature as against the admission of capital nature by assessee in its notes to an accounts, even though the assessee had identified Rs.72.64 diversification and expansion of new product range, including acquisition of machinery to add such expansion and the amount had been shown pending technical quantification under capital work in progress. CIT(A) as well as the ITAT decided the matter in favour of the assessee. Finalising the appeal filed by the Revenue Hon'ble HC observed as under- ".... we are of the view that by no stretch of imagination the expenditure incurred by the assessee-respondent could be regarded as capital expenditure ......Moreover, finding of the Tribunal that the expenditure and/or for business purpose, has not been challenged, nor there is any challenge to the finding that no capital asset has come in to existence. "Comparing the facts of the case with that of Denso (I) Pvt. Ltd. matter dismissed the appeal filed by Revenue vi).The Hon'ble Supreme Court mentioned the facts of the next case,i.e. Swaraj,....
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....e technical know-how and information and the intellectual property rights relating to the manufacture of Honda cars and did not secure any ownership rights over them. We, therefore, hold that the payment of the lump-sum fees for technical know-how and the royalty is allowable as revenue expenditure." viii). In the Engineering Innovation Ltd. matter (327ITR392)following substantial questions of law were before the Hon'ble High Court of Himachal Pradesh. "(i) whether, on the facts and in the circumstances of the case, the tribunal was right in holding that the definition of scientific research given in section 43(4) is not relevant to claim of expenditure u/s. 35? (ii) whether, on the facts and in the circumstances of the case, the terminal was correct in holding that expenditure of a capital nature was admissible as deduction when the expenditure was not incurred for existing business?" The Hon'ble High Court held that the activity of the assessee amounted to scientific research, and, therefore, the assessee was an titled to claim deduction u/s.s 35(1)(i)(iv). ix). Gannon Norton Metal Diamond Die Ltd.(163ITR606) is about capital/revenue expenditure as well as a....
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....red relates to process of manufacturing than the payment made for the same would have to be considered as an expenditure, since the acquirer does not obtain by the expenditure. Any asset of an enduring nature.... We are of the opinion that the payments made by the assessee in the instant case were fully allowable is revenue expenditure." x).In the case of Transweeigh (India) Ltd. decided by the ITAT, Mumbai, it was found by the AO that in the balance-sheet under the head fixed assets, research and development expenses to the tune of Rs.25.42 lakhs had been shown, which were claimed is revenue expenditure u/s. 35(1)of the Act in the computation of income for tax purposes, the AO also found that the main thrust of the development was on making off mixture-cum-dispenser for which the assessee had relevant know-how, in its possession, hence, there was no question of any further research and development. The AO also examined the technical cooperation agreement which revealed that said mixture was developed by virtue of engineering design provided by technical development, hence, development of prototype for the future sale of similar product did not tantamount to research and develop....
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....expenditure amounting to Rs.5.48 lacs to the P&L account under the head R&D expenses. The assessee claimed the same as revenue expenditure. The AO noted that expenditure incurred on design and development of tools was a part and parcel of the plant and machinery being used to manufacture the components, that expenditure incurred on designing of these tools give the assessee benefit of enduring nature and that the expenditure was capital in nature. You allow depreciation at the rate of 33.3% on the expenditure incurred. The tribunal decided as a matter in following words- "...the facts placed on record show that the assessee had debited the expenditure to the profit and loss account and claim deduction of the same u/s. 37 of the act. The submissions of the assessee both before the AO and the CIT(A) was that the expenditure was allowable as revenue expenditure u/s. 37 of the act. The assessee has neither claimed deduction u/s. 35 AB , nor such plea was ever raised before the authorities below. The facts of the case, clearly show that the assessee was already in the business of manufacturing automobile components. The expenditure was incurred on the designs and development of....
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....crores and on product development expense for new products 1.63 crores which was claimed as a revenue expenditure u/s.37 (1) of the Act. According to the AO expenditure resulted in providing the assessee with information on consumers needs, taste and bounds, based on which the assessee would be able to decide on the constituent of the new product, its pricing its target market, etc., which, in turn, would allow the assessee to build a product, brand and long-term strategy. CIT(A) upheld the disallowance made by the AO on the ground that the expense enable the assessee to introduce new products, which could be considered as venturing into a new line of business. He further observed that the expenses belong to capital field and were capital in nature. Tribunal decided the issue as under: "A bare perusal of the details of the expenditure incurred by the assessee shows of fact positions that the expenditure is in relation to the business of the assessee. This aspect has also not been disputed by the revenue, as is evident from the orders of the lower authorities..... It is a trite law that what is relevant is to evaluate the purpose of the outgoing, and its intended object and effec....
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....lity of the impugned expenditure is revenue expenditure is justified." xiii). In the matter of Munjal Showa Ltd.(2010-IT1-GJX-0411-DEL) revenue had placed following two questions is question of law before the Hon'ble High Court of DelhiITA "2.1. Whether learned ITAT correct in low in holding that the expenditure incurred by the assessee on account of design and drawing fees are revenue expenditure instead of capital expenditure? 2.2 whether learned at ITAT erred in holding that the fees paid to the foreign technetium for imparting training to Indian technetium is an expenditure instead of capital expenditure?" The assessee was engaged in the business of manufacture of shock absorbers used in automobile vehicles.It incurred expenses on travel and stay of foreign technical personnel of Showa Corporation, Japan and also on design and drying charges payable to show or Corporation.The assessee treated the same as deferred revenue expenditure in the accounts, but while filing the return it treated the expenses as revenue expenditure. After going through the definitions of terms know-how and technical services the tribunal held that the assessee was merely granted li....
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....iture is allowable as an expenditure." 3.3. In view of the above discussion, we are of the opinion that all the cases relied upon by the AR are about capital/revenue expenditure. They deal with a situation is when a particular expenditure can be considered capital/revenue expenditure. Mandate of section 32 (1)(ii) has not been considered in these cases, except in the case of Essel Propack Ltd. In the cases referred to by the AR issue of depreciation u/s. 32 (1)(ii) verses the allowability of expenditure u/s. 37 of the Act was neither argued not decided. Even in the case of Essel Propack Ltd. it was held that provisions of section 32(1)(ii) were applicable from the A.Y.1998-99 and that the issue to be decided was for A.Y.1997-98. Clearly, the cases relied upon by the AR are of no help in resolving the issue under consideration. 3.3.a. We have perused the agreement entered into by the assessee with an Austrian company. The Austrian company agreed that it would carry out the complete design and development of tooling set. 'Design, Development and Supply Agreement' between the parties define a few terms. As per the definition 1(a) Design and development shall mean design, develop....
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....ter April 1,1998 will be entitled for depreciation at a specified rate. We are of the opinion that appellant had acquired Technical know how from the Austrian Company. Technical Know-how has been defined as the 'knowledge which would enable a company receiving such know-how to do the project'. If we take note of the definition of Technical know-how it becomes clear that expenditure incurred by the assessee has rightly been considered as Technical know-how by the AO.As per the agreement IPR were to remain with the appellant and the final product was to be the exclusive property of the assessee. In these circumstances his decision of allowing depreciation on intangible assets u/s.32 was as per provisions of law. We are of the opinion that claim of the assessee that expenditure should be allowed u/s.35 also cannot be accepted. Expenditure incurred by the assessee was not for scientific research, it was for transfer of Technical know-how. We are of the opinion that expenditure amounting to Rs.60.44 Lakhs was not revenue in nature. As per the details available appellant had incurred an expenditure of Rs.40.39 lakhs on tools and spares. We are of the opinion that said expenditur....
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....rowing was allowable on time, that premium was neither capital nor contingent in nature, that issue of FCCB had been held to be revenue in appellant is own case for the assessment year 1997-98 (ITA/7845/M/2004).DR supported the order of the AO. In the matter of Crane software International Ltd. (ITA /741 and 742 Bangalore / 2010) issue of FCCB have been discussed as under - "...the expenses were incurred in connection with the issue of FCCB. As the bonds were convertible, the assessing authority treated the bond proceeds as increased to capital. Accordingly, he treated the expenditure of Rs.6.63 crores. As capital in nature is, it was incurred for raising the capital of the assessee company. The said expenditure was disallowed. Assessee claimed the expenses is deductible as the expenses were incurred to raise loan finance. The assessing authority held that the bond holders at the option to convert the bonds to equity shares, and therefore, the collection of funds for the issue of bonds needs to be treated as to increase the capital and, therefore, the connected expenses would be capital in nature and hands disallowed. We agree with the view of the CIT (A) that the expenses ar....
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....tion was allowable only if the assessee accepted disallowance in the year under consideration. In this regard the appellant made following submission before the AO- "Against the claim made in the assessment year 2005-06 of Rs.1303.52 lakhs, the bond holders. holding 64.73% have opted for conversion of the foreign currency convertible bonds into GDR's/shares of the company. Accordingly, is the amount of premium of Rs.873.76 lakhs is no longer payable in the same is offered to tax in the competition u/s.41(1) of the income tax act, 1961.," AO rejected the request made by the appellant for two reasons-first that the addition made in assessment year 2005-06 had not been accepted by the appellant and it had preferred an appeal against the same. Second argument of the AO was that claim should have been made in the original return or revised return should have been filed. The AR submitted that since the entire provision was disallowed not allowing deduction for a write back would mean taxing the same income twice that was not permissible by law, that the AO might be directed accordingly that for that purpose it was not required to give up, claim in those years. In short AR submit....
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....dit. But, it appears that he has not considered the data available on page number 131-134 of the paper book submitted during appellate proceedings. Even if he has considered the said data, he is not mentioned anything about it in the assessment order. We are of the opinion that, for arriving at a logical conclusion figures furnished by the assessee has to be considered and commented upon. In these circumstances, in the interest of justice we remit back the issue to the file of the AO. He is directed to give 'proper effect to stocks, purchases and sales' to arrive at a definite conclusion. 7.Ground no.7 pertains to Octroi subsidy received by the Appellant amounting to Rs.2050.92 lakhs. It was found by the AO that the appellant had claimed Rs.2050.92 lakhs as capital receipt not chargeable to tax.Although in computation of income the company had not reduced the amount of Octroi incentive from taxable income, yet it made a claim by way of letter filed with the signed copy of acknowledgement of return. Accordingly,the appellant claimed that Octroi incentives should be reduced while calculating taxable income. Vide his letter dated 27.10.2009 appellant made further submissions in thi....
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....evenue nature (332ITR91).But, we will not like to discuss these cases to decide the matter before us. We would like to deliberate upon facts of the case and principles propounded by the Hon'ble SC in this regard. In the case of Sahney Steel and Press Works Ltd.(228ITR253) it was held by the Apex Court that subsidies by way of refund of sales tax relief of electricity charges or water charges were given after commencement of production and hence they were operational subsidies, and were not capital subsidies. Hon'ble SC held : "If payments in the nature of subsidy from public funds are made to the assessee to assist him in carrying on his trade or business, they are trade receipts. The character of the subsidy in the hands of the recipient-whether revenue or capital-will have to be determined, having regard to the purpose for which the subsidy is given. The source of the fund is quite immaterial. However, if the purpose is to help the assessee to set up its business or complete a project the monies must be treated as having been received for capital purposes. But if monies are given to the assessee for assisting him in carrying out the business operations and the money is give....
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....dvanced for setting up new units/expansion of existing units only. Thus, in our opinion case of Ponni Sugar is of no help for the assessee. 7.3.As directed by the bench AR submitted the details of breakup of subsidy received by the appellant i.e. out of the total subsidy received how much related to revenue items and how much related to fixed assets. From the details filed by the appellant it transpires that for the period under consideration out of the total subsidy (19.7Crores)subsidy amounting to Rs.2.61Crores was referable to capital items, whereas subsidy of R.17.9crores was referable to revenue items. It is also found that subsidy was received for the period 01-09-1993 to 31- 08-1998. As per the appellant in the books of accounts,Octroi paid on said raw materials was accounted as a debit to the profit and loss account of the concerned years Government, by way of subsidy, paid back the Octroi to the assessee. Thus, part of the Octroi subsidy had the effect of reducing the costs for the purposes of determining the cost of production as well as for sales. It is a known fact that Octroi is the charge collected by the local bodies on commodities or things entering their loca....
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....ior to 01. 04.2004.Since the claim was in respect of actual real valuation of the pension liability (commuted and monthly), payable in future, payments could not be covered by the provisions of section 35 DDA, that at the relevant period section 35 DDA dealt with the expenditure at the time to voluntary retirement, that with effect from assessment year 2004-05,it referred to payment in connection with the voluntary retirement. DR supported the order of the AO. 8.2.We have gone through rival submissions. Before the introduction of section 35DDA, the legal dictum was very clear that the assessee could claim expenditure incurred on account of payment made for the VRS.It was also accepted legal position that payments to employees under the VRS. were in the nature of business expenditure and was deductible u/s. 37. Therefore, till the introduction of new provisions under section 35 DDA, the assessee could claim such expenditure as revenue expenditure. But, now assesses can claim deduction as per the new provisions. Section 35 DDA was introduced in the act with a specific purpose. After introduction also there were amendments in it.For the year under consideration section 35DDA, re....
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.... that that the provision relates to warranty made in respect of certain products, the estimated cost of which accrued at the time of sale. The products are generally covered under a free warranty period ranging from one year to 3 years." After considering the submissions of the assessee and directions of the DRP-II, Mumbai, the assessing officer held : "The contention of the assessee has been verified and found to be incorrect due to the following reasons: (i) The assessee has stated that it has adopted a scientific basis of the competition of the provision for the warranty based on the past years.' experiences. However, no submission has been made by the assessee regarding the method of the calculation of the same and the assessee has just relied on the decision of the Hon'ble CIT (A) in the earlier years in its favour. As per the directions of the Hon'ble DRP, the assessee has failed to establish as to how the provision for the warranty has been calculated by the assessee based on the scientific methods. As per the requirement is of the nature of the business is, the nature of the sales, the nature of the product manufactured and sold and historical trend and the number ....
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....r- (Rs.in lakhs) Division Provision for warranty made in the preceding year i.e. A.Y.2005-06 Provision for warranty for the year i.e. A.Y. 2006-07 Incremental provision for warranty Automotive div. 3293.74 4244.59 1558.30 Tractor division 1405.62 2061.60 36.37 Defence division 3.04 15.29 3.04 Total 4702.40 6321.48 1619.08 DR submitted that in light of the observation of the Hon'ble Supreme Court made while deciding the matter of Rotrok it could be said that assessee had not adopted a scientific basis, that in a group cases Mahindra Navy star (for AY 2007-08) assessee had admitted that provision for warranty was contingent in nature. 9.3.After hearing the rival submissions ,we would like to discuss the cases relied upon by the AR. In five cases relied upon by the AR principles, enumerated by Rotrok Controls India Pvt. Ltd.(Rotrok),have been followed or extensively quoted. Thus, Rotrok can be considered the touchstone for testing the merits of the case under consideration. So, before considering the facts and observations of the other cases, it would be appropriate that we refer to the case of Rotrok. i).Ro....
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....al trend and upon the number of articles produced. A provision is a liability which can be measured only by using a substantial degree of estimation. A provision is recognized when : (a) an enterprise has a present obligation as a result of a past event ; (b) it is probable that an outflow of resources will be required to settle the obligation, and (c) a reliable estimate can be made of the amount of the obligation. If these conditions are not met, no provision can be recognized. The principle is that if the historical trend indicates that a large number of sophisticated goods were being manufactured in the past and the facts show that defects existed in some of the items manufactured and sold, then provision made for warranty in respect of such sophisticated goods would be entitled to deduction from the gross receipts under section 37." Findings were summarised by the Hon'ble SC as under : "What is a provision ? This is the question which needs to be answered. A provision is a liability which can be measured only by using a substantial degree of estimation. A provision is recognized when : (a) an enterprise has a present obligation as a result of a past eve....
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....of the product. These aspects are important. As stated above, obligations arising from past events have to be recognized as provisions. These past events are known as obligating events. In the present case, therefore, the warranty provision needs to be recognized because the appellant is an enterprise having a present obligation as a result of past events resulting in an outflow of resources. Lastly, a reliable estimate can be made of the amount of the obligation. In short, all the three conditions for recognition of a provision are satisfied in this case. In this case, we are concerned with product warranties. To give an example of product warranties, a company dealing in computers gives a warranty for a period of 36 months from the date of supply. The said company considers. following options : (a) account for warranty expense in the year in which it is incurred ; (b) it makes a provision for warranty only when the customer makes a claim ; and (c) it provides for warranty at 2 per cent. of turnover of the company based on past experience (historical trend). The first option is unsustainable since it would tantamount to accounting for warranty expenses on cash basis....
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.... is robust then the question of reversal in the subsequent two years, in the above example, may not arise in a significant way. In our view, on the facts and circumstances of this case, provision for warranty is rightly made by the appellant-enterprise because it has incurred a present obligation as a result of past events. There is also an outflow of resources. A reliable estimate of the obligation was also possible. Therefore, the appellant has incurred a liability, on the facts and circumstances of this case, during the relevant assessment year which was entitled to deduction under section 37 of the 1961 Act. Therefore, all the three conditions for recognising a liability for the purposes of provisioning stands satisfied in this case. It is important to note that there are four important aspects of provisioning. They are- provisioning which relates to the present obligation, it arises out of obligating events, it involves outflow of resources and, lastly, it involves reliable estimation of obligation. Keeping in mind all the four aspects, we are of the view that the High Court should not to have interfered with the decision of the Tribunal in this case. We may add a caveat....
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....ctober 2002 toMarch,2003 had been recognized in the previous year ended on March 31,2003 and the assessee had incurred actual warranty expenses in the current year with regard to the same. Moreover, the actual warranty expenses had already been allowed by the AO and thus there was no reason to make a provision for warranty expenses for the sales of the previous year.Consequently, the Tribunal reduced the provision by the sum pertaining to sales for the period from October, 2002 to March 31, 2003. In the appeal filed by Revenue Hon'ble HC of Delhi held that there was no error in the impugned order of the Tribunal. From the above, it is clear that Tribunal had adopted a principal, and the Hon'ble High Court endorsed, it. Figures were made available and the Tribunal reduced some figures pertaining to earlier period and then crystallised the liability. iii).Ericssion Communications P. Ltd.(318ITR340) In this case the Hon'ble HC first referred to the issue before it in the appeal filed by Revenue as under - "The common issue which arose in the appeals from the order of the Tribunal was "Whether the assessee/respondent was entitled to make a provision for warranty charges ....
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....fference if there is a higher turnover, then there is a net additional provision inasmuch as the extent of provision made in the earlier year which is not paid of as warranty charges is to the extent of not utilised in payment of the warranty claims credited to the profit and loss account. Counsel, therefore, contended that it may appear that every year a huge figure is debited, however, that is in reality not the correct picture. Of course, we may note that even counsel for the Revenue does not dispute this position as, according to her, only the difference is being disallowed by the Assessing Officer . In response to the arguments and the preliminary contention of the respondent, counsel for the appellant/Revenue has by referring to a chart made for the assessment years 1997-98, (which is the first year of operation of the company) to 2001-02 strenuously contended that the huge differences in the provisions made and the actual payment for warranty charges indicates, that there is no scientific basis for making of the provision and relying on various observations of the Supreme Court in Rotork Controls India P. Ltd. [2009] 314 ITR 62 it is urged that it is only a reliable estim....
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.... this question of law and in view of above discussion answer the said question of law as under : " The assessee-company is entitled to make a provision for the warranty charges holding the same to be a definite business liability allow- able as a deduction during the years under consideration, since the same is based on a scientific basis and a consistent policy applied by the assessee-company throughout the world including India and that consistent application of the same principle over the years would remove any advantage which, according to the Revenue, the assessee may have by deferring of its income to the extent of warranty provision to the next year." iv). In Luk India (P) Ltd. question to be decided by the Hon'ble High Court of Madras was as under: "Whether the on the facts and in the circumstances of the case, the ITAT was right in holding that the provision for warranty was an allowable deduction, even though the provision had not been made on any scientific basis ensuring a fair degree of accuracy, thereby resulting in the deferment of revenue and the tax liability thereon?" While going through the order of the Hon'ble High Court we noticed that in this case fig....
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.... than 3 times the sale for assessment year 2002-03, whereas the provision for warranty was about one half. Further, the genuineness of the figures of the actual settlements has not been doubted by the AO . In view of these facts, the method of computation adopted by the assessee cannot be said to be arbitrary, and therefore, we see no reason to interfere with the conclusions reached by the CIT (A)." From the above discussion, it is clear that the working of liability in this case was based on a reasonable and scientific basis. Not only this, there was revaluation of the system of also. In the case under consideration the disallowance is not because the warranty liability was contingent or an unascertainable, but because no scientific method was followed to justify the claim amounting to Rs.44.2 Crores. v).In the matter of Nokia Siemens Networks India Pvt. Ltd facts were that the AO had allowed the provision for warranty amounting to Rs.2.83 crores. But, the CIT in his revisional jurisdiction held that warranty provision was a contingent provision and it would not constitute expenditure. Aggrieved by the order of the CI, assessee preferred an appeal before the Tribunal. In the....
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....sessee was reasonable or not? vii). In the case of Godrej Appliances Ltd. principles of Rotrok were neither referred to nor applied.In this matter, G Bench of the Tribunal ,has held as under - "We have heard the arguments of both the sides and also perused the relevant material on record. It is observed that a similar issue was involved in the assessee's own case for the earlier years and the same has been decided by the Tribunal consistently in favour of the assessee. In one of such decisions rendered by the Tribunal vide its order dated 5 July, 2005 past and ITA number 334/mum/02, Tribunal note of the decision of its coordinate bench at Bangalore, passed in the case of Wipro GE medical Systems Ltd (81TT J455),where in it was held while deciding a similar issue that the warranty liabilities are in built in sale price, since all sales are with warranty liabilities.It was also held that the liability towards warranty is certain and the same accrues on the date of sale itself. It was also held that the ascertainment of such liability can be done with reasonable certainty on the basis of experience. Following this decision of Bangalore bench of ITAT in Wipro GE medical Systems L....
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....led to prove that figures furnished by it are based on a 'sensible estimate' .We find that evidence of 'yearly reassessment of such estimates' were not produced. In other words appellant has not 'maintained data systematically'.In these circumstances, we are of the opinion that matter should be remitted back to the file of the AO to decide the matter, as per the guidelines discussed in the case of Rotrok. Assessee is directed to provide necessary figures to the AO to substantiate its claim. As far as the earlier orders of the Tribunal are concerned we are of the view that at that point of time principles of Rotrok were not available, so matters were decided considering prevalent circumstances. Now, we have a light house in form of Rotrok to guide us, so it is advisable to be wiser and follow the path indicated by the Hon'ble SC. 10.Ground number 10 is about to the provision for pending labour demand amounting to Rupees 78.45 lakhs. As per the AO provision for labour demand was under negotiation at certain locations of the company and ultimate settlement was contingent on the conclusion of the negotiations. As per the AO in the annual general body meeting said liability was ac....
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....hit by section 40A(9).AR admitted that the issue about disallowance made u/s. 40A(9)was set aside by the Tribunal for the assessment years 1996-97,1997-98 and 1998-99. 11.2.After hearing rival submissions we are of the opinion that it will be useful to refer to a few matters dealing with Sec.40A(9).One of them was matter of Raasi Cement Ltd (275 ITR 579).Hon'ble AP HC in the case of framed following question law with regard to section 40(A)(9) of the Act : "Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was correct in law in holding that the contributions made by the applicant in M/s. Raasi Cement Executives Welfare Trust was not deductible in computing the income of the applicant ? The brief facts of the said matter were that the assessee-company was engaged in the manufacture and generally to deal in all kinds of Portland cement, that the claim of the assessee pertained to the sum of Rs.1.5Crores which represented initial contributions made by it to Raasi Cement Employees' Welfare Trust and Raasi Cement Executives Welfare Trust, that expenditure debited to staff welfare expenses account was disallowed by the AO on the ground....
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.... copy of which was placed in the paper book on pages 6 to 11. Paragraph 14 of the order deals with this issue, wherein it is mentioned that this very issue was considered by the Tribunal in the case of the assessee for the assessment year 1995-96. In that order it was held that the deduction is not permissible in view of the pro-vision contained in section 40A(9) of the Act and, consequently, the appeals of the Revenue for the assessment years 1997-98 and 1998-99 were allowed. Respectfully following that decision, this ground is dismissed." iii).Similarly,in the matter of National Dairy Development Board ITAT, Ahmedabad 310ITR325(AT-Abd) dealt the matter as under "The Assessing Officer disallowed the claim of the assessee in view of the provisions of section 40A(9) of the Income-tax Act,1961 read with Circular No. 387 dated July 6, 1984 stating that deduction could not be allowed in respect of any sum paid as contribution to any fund. The Commissioner (Appeals) confirmed the addition observing that the expenses incurred by way of reimbursement to the employees' recreation club were not wholly and exclusively incurred for the purpose of business of the assessee. Held tha....
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....hare capital of the company and, therefore, the expenses being the difference between the market price and issue price necessarily relate to increase in the share capital of the company." 12.1.The AR submitted that the expenditure incurred in respect of ESOPs was neither capital nor contingent nor notional in nature,that the difference was allowable as business expenditure, that there was no fresh issue of capital in the year under consideration, the shares were issued in 2002, the appellant wanted to reward its employees, that ESOP was compensation for services rendered, that it was welfare cost to the assessee, that same was chargeable to Fringe Benefit Tax under section 115 WB of the Act. He relied upon the case of S.S.I Ltd (85 TTJ 1049),Accenture services (P) Ltd, Oil & Natural Gas Corporation Ltd.(322 ITR180), Reliance Industries Ltd.(88 ITR 273).DR supported the order of the AO and submitted that expenditure incurred on ESOP was not allowable under section 37 of the Act.He relied upon the order of the Ranbaxy Laboratories (Delhi ITAT) and VIP Industries (Bombay ITAT). 12.2.After hearing the rival submissions we are of the opinion that the facts of case under considerat....
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....the year under consideration and the balance amount of Rs.124.15 lacs claimed in the immediately succeeding year i.e. A.Y. 2006-07. In support of the claim made on this issue, reliance was placed on behalf of the assessee company before the A.O. on relevant SEBI Rules which specified that the difference between the market price and the price at which the option is exercised by the employees has to be debited in the P&L account as expenditure. It was contended that since there was no specific provisions contained in the Income Tax Act dealing with this issue, accounting practice suggested by the SEBI is required to be applied and adopted for tax purposes also. The matter was carried before the ld. CIT(A) ,but the submissions made on behalf of the assessee on this issue did not find favour with the ld. CIT(A) who confirmed the disallowance made by the A.O. on account of assessee's claim for deduction on account of ESOP expenditure." After considering the submissions of the AR and DR and the rejoinder of the AO Tribunal decided the matter (in paragraphs 19-21) in following words - "We have heard the arguments of both sides and also perused the relevant material on record. We ....
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.... is extracted from the held portion: " The assessee was to issue shares of face value of Rs.10 /- by receiving a sum of Rs.595/- per share from its employees. Thus the assessee was entitled to receive Rs.585/- towards premium on issue of shares. The market price at Rs.738.95 per share would have resulted in realization of higher share premium. The assessee has not accounted for the difference between Rs.738.95 and Rs.10/- as its income during the year. Thus there is no loss of income held to be taxable. What is loss to the assessee is by way of short receipt of share premium amount and not by way of any expenditure or incurring any liability for such expenditure. By issuing shares at below market price, the same does not result into incurring any expenditure. By issuing shares at below market price, the same does not result into incurring any expenditure rather it results into short receipt of share premium which the assessee was otherwise entitled to. Though the guidelines of SEBI requires the assessee to account for short receipt of share premium as employees compensation expense, for claiming such expense as allowable, the assessee has to qualify that expenses are incurred an....
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....ccounts as per direction of SEBI cannot be held to be conclusive for the purpose of allowing expenditure under s. 37. Unless the provision of s. 37 is complied with, the deduction is not permissible.- New India industries Ltd. Vs. asstt. CIT (2007) 112 TTJ (Del)(SB) 917 : (2008) 1 DTR (Del) (SB) (Trib) 247 and TVS Finance & services Ltd. Vs. jt. CIT (2009) 23 DTR (Mad) 33" 21. At the time of hearing before us, the ld. Counsel for the assessee has made an attempt to point out that certain aspects have not been considered by the tribunal while rendering its decision in the case of Ranbaxy Laboratories Ltd. (supra) on the similar issue. In our opinion, the said aspects pointed out by the ld. Counsel for the assessee, however, are not material enough to have any direct bearing on the well considered and well reasoned decision rendered by the Tribunal. As held by the Tribunal, any short receipt of share premium would only be a notional loss to the assessee and not an actual loss. As further held by the Tribunal, any benefit or income foregone by the assessee cannot be considered as an expenditure and since the assessee had not incurred any expenditure but had merely received lesser a....
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....s approved by SEBI. Hon'ble Supreme Court in the case of Southern Technologies Ltd. vs. CIT 320 ITR 573 has held that the guideline of any regulatory authority cannot over ride the specific provisions of the Income tax Act. In order to claim a deduction admissible under I.T. Act, the appellant must show the specific provisions under which the same is allowable under I.T. Act. In view of the discussion and decision of Hon'ble ITAT, Delhi in the case of Ranbaxy Ltd. (supra), I hold that the AO was fully justified in making disallowance of Rs.70,08,183/- on account of ESOP. I, therefore, uphold the disallowance made by the AO." 13.8.Coming to the issue of ESOP and ESPS, facts have been mentioned above. Respectfully following coordinate Bench of ITAT Delhi judgment in the case of DCIT Vs. Ranbaxy Laboratories Ltd. (2009) 124 TTJ (Del) 771;and Mumbai ITAT judgment in the case of VIP Industry (supra), we hold that the provision made by assessee without actually paying them to the employees cannot be allowed as deduction. This ground of the assessee is dismissed." 12.3.As the case relied upon by the AR- S.S.I Ltd. - has been considered in the later judgments by different benches of ....
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....dgments of the Hon'ble High Courts of Gujarat and Kerala in the matters of Gujarat State export Corporation Ltd. and Framatone Connector Oen Ltd. while deciding the issue. He is also directed to peruse the ratio laid down by M/s. New India Extrusion decided by New India Extrusions (P) Limited v ACIT 10 Taxmann.com 165 in this regard .One of us was party to said order of the New India Extrusions. Matter is set aside accordingly. 15.Next Ground is about adjustments made under section 92CA(3) of the act.In this regard decision of the AO is as under : "The reference as the provisions contained under section 92CA (1) of the I.T.Act,1961, was made to Transfer Pricing Officer on 27.9.2007 for computation of arm length price in relation to the international transactions mentioned in the audit report in form number ....... the TPO, as per para 5 of his order made an adjustment of Rs.1,26,51,602/-." The AO then referred to the directions issued by the DRP-II, Mumbai. DRP-II discussed the issue at length with regard to guarantees issued to the subsidiaries of the appellant within ambit of international transactions.The amount involved was Rs.29.18 lakhs. TPO had gathered informati....
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....referred to the page number 18 of the agreement entered into between the appellant and the distributor, i.e., the US company. He submitted that as per the agreement (para 40)appellant company had to be reimbursed for certain expenses. 15.5.AO has followed the directions of DRP in this respect. The directions issued by the DRP about payments made to the US company are as under - "The next issue for consideration is the transfer pricing adjustment of Rs.97, 32, 802/-on account of reimbursement of various expenses. It was stated by the assessee that H3 series of tractors. had to be recalled due to certain manufacturing defects. Those tractors. were, therefore, required to be stored at a separate location pending rectification of the defects for which USD 25,200 and USD93,480 were paid. Further insurance expenses for storage aggregated to USD 10,599. The inventory holding tax was also paid at USD 87, 534. It was stated that in the alternative, the assessee would have to incur huge expenses in bringing back the tractors. to India and to re-export the same to US, after rectification of the same. The expenses were reimbursed to Mahindra USA Inc. We have considered this issue. The....
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....connection therewith, satisfactory to and in accordance with the policies of the seller. Distributor shall also use its best efforts to actively promote and develop sale and service of the said products throughout the territory, gave prompt and efficient service to its customers/buyers and confirmed in all respects to the policies recommended by the seller, from time to time." Para 40. PAYMENT OF TAX "Distributor shall, as part of the expenses of its business, pay any tax duty, the or other charges that may be levied upon or against, or on account of such business or upon any product that has been delivered to a carrier for the distributor's account, or is in transit to the distributor, or that may be in the distributor's possession or in the territory for delivery to the distributor, and shall pay any taxes, duty, free or other charges that may be levied upon or against or incurred or paid by the seller on account of the manufacture or sale of any vehicle, part o or accessories delivered or to be delivered to the distributor and shall hold the seller harmless, there is from. In the event that the seller pays any such amounts, the distributor shall immediately reimburse the s....
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....nd unless special provisions exit in the statue. Hon'ble SC in the matter of Deepak Nitrite Ltd.( 199ITR43) has held-"There is a fundamental, though unwritten, axiom that no Legislature could have at all intended a double deduction in regard to the same business outgoing; and, if it is intended, it will be clearly expressed. In other words, in the absence of clear statutory indication to the contrary,the statute should not be read so as to permit an assessee two deductions." Secondly, section 35 is part of head 'Income from business,profession or vocation'-section 43 is part of the same heading. So,we are of the opinion that provisions of the head 'Capital Gains cannot be imported here to allow the assessee one more deduction. Ground no 16 is decided against the appellant. 17. Next ground of appeal is about consideration received on sale of LCV business in form of non compete covenant. During the year under consideration, the assessee sold its rights in LCV business to a separate subsidy for the below mentioned consideration- i) Intellectual property right 9.3 crores ii) Congeries of right 28.6 crores iii) Non-compete covenant 10.5 crores. The assessee consider....
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.... not the right not to carry on business) is taxable." 17.2.AR submitted that the assessee had sold the right to carry business and hence, section 55(2) would be applicable and not Section 28 as held by the AO. He referred to the non-compete agreement (page 220-231 of the PB) and further submitted that it was a capital receipt. He relied upon the case of Dr. B.V. Raju (ITA No. 1034/Hyd/2004).DR submitted that amount received by the assessee was in the nature of a revenue receipt ,that after the amendments to section 28 and 55 of the Act law had changed with regard to non-compete fees, that assessee had given up his right to continue his business and hence it was taxable under section 28(va). 17.3.We are of the opinion, that at this juncture, it will be useful to peruse the provisions of sections 28 and 55 because both the sections were argued extensively by the DR and the AR in favour and against the order of the AO. 28. Profits and gains of business or profession.-The following income shall be chargeable to income-tax under the head "Profits and gains of business or profession",- **(va) any sum, whether received or receivable in cash or kind, under an agreement for- ....
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....ase we will try to analyse the issue in question. Prima facie ,both the sections appear more or less same, yet there is subtle difference between them. Section 28(va) starts with a negative direction, and it talks of carrying out of any activity in relation to any business. On the other hand, proviso to the said section and section 55(2) talk of a right to 'carry on' any business and they are not in negative terms. As per the accepted principles of jurisprudence we have to presume that the legislature has not used any unnecessary words while amending the above referred to sections. So, if after the verb 'carry' the Parliament has used out and on words in respective sections ,it has to be presumed that there must be valid reasons for it. Secondly, if section 28 envisages conditions in negative perspective, then it should also be accepted that transaction covered under the said section are definitely of peculiar nature, i.e. different from the transactions covered under section 55. Non-compete fee is an old concept of business -world and taxation laws. There used to be a lot of disputes in respect of treatment to be given to it. Parliament by introducing amendments to section 28 and ....
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.... is only vide the Finance Act, 2002 with effect from April 1, 2003 that the said capital receipt is now made taxable (See section 28(va)). The Finance Act, 2002 itself indicates that during the relevant assessment year compensation received by the assessee under non-competition agreement was a capital receipt, not taxable under the 1961 Act. It became tax-able only with effect from April 1, 2003. .... In the present case, compensation received under the non-competition agreement became taxable as a capital receipt and not as a revenue receipt by specific legislative mandate vide section 28(va) and that too with effect from April 1, 2003. Hence, the said section 28(va) is amendatory and not clarificatory." As far as case of Dr. Raju is concerned, it relates to assessment year 2001-02,as pointed out by the DR,and hence, not applicable for deciding the issue under consideration pertaining to assessment year . After this, we would like to discuss the case of Ramesh Tainwala. In this case, the assessee had agreed not to compete with the new entity as per the provisions of the agreement entered into by both the parties. Deciding the issue Mumbai Tribunal held as under : "Agreeme....
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....ding, the appellant to be an assessee in default. Therefore, no disallowance could be made under section 40a(ia). He referred to page number 265 of the paper-book that gives details of provision on which TDS was not paid. As per the AR bills for the said expenditure were not received during the year under consideration. As per the AR, the appellant company would make year-end provisions based on services rendered by various lenders/professionals. These provisions represented cost of various activities carried out by the company during the relevant financial period. Since, the company was following the Mercantile system of accounting it was required to account for such expenses, even though the concerned parties had not submitted their bills or such bills were pending for approval based on the internal system. At that point of time, since bills from the contractors had not been raised though that was owed by the company in favour of any specific party. Such a debt would be owed only on receipt of the bills and after it had been passed following the procedure. Only at that point of time relationship of debtor and creditor was established and was also an obligation to pay that woul....
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....6 (7A) of the Income-tax Rules,1962.AR submitted that R&D facility was approved by DSIR under section 35 (2AB), that accounts of R&D centre had been audited, that the report containing the details of R&D had been filed with the AO, that claim had been denied only in view of the failure on the part of DSIR to submit a report to the Director-general (Exemptions).He further submitted that AO had denied the weighted deduction in respect of Kandivali, because the approval from DSIR pertained only to Nashik unit and form 3CM did not mention name of Kandivali unit. He relied upon the cases of Meco Instruments Pvt. Ltd, Sandan Vikas India Ltd.(326ITR251) Claris Life sciences. Ltd. AR further submitted that AO may be directed that as and when permission comes from DSIR consequential relief should be granted in respect of Kandivali unit, that the assessee was not at fault for non-communication of permission of DSIR to Income tax authorities, that weighted deduction in respect of Nasik unit should not be denied to the assessee. 20.2.As per the information available from the records and the documents submitted by the assessee, it transpires that DSIR had granted recognition for both of the ....