TaxTMI 
TaxTMI 
2014 (12) TMI 680
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....t it was entitled to deduction u/s 37(1) for the entire amount of process know-how fees of Rs. 7,16,58,292/- instead of deduction, in a staggered manner u/s 35AB, as allowed by the Ld. Assessing Officer." 3. In this context, relevant facts are that in the computation of income assessee claimed a deduction of Rs. 7,16,58,292/- on account of process know-how fee paid. Whereas in the books of account, assessee had charged to the Profit & Loss Account only a sum of Rs. 2,29,97,486/- being 1/6th portion of the technical know-how fee. In the computation of income annexed with the return of income assessee claimed that the entire amount should be allowed as deduction u/s 37(1) of the Act. The Assessing Officer as well as the CIT(A) denied the assessee's claim for deduction u/s 37(1) of the Act and instead deduction has been allowed in terms of section 35AB of the Act as the expenditure was for acquiring the use of Process know-how. The aforesaid stand of the Assessing Officer as well as the CIT(A) is in terms their stand for the earlier years in the assessee's own case. This aspect of the matter is disputed by the assessee by way of the above Ground of Appeal No.1. 4. On thi....
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.... "2.1 On the facts and in the circumstances of the case, the Ld. CIT(A) erred in directing to allow deduction of 35AB in respect of lumpsum fee for know-how paid in earlier years, when in fact the present appeal lies for A.Y. 1998-99 only. 2.2 The CIT(A) ought to have restricted herself on the issues relevant for A.Y. 1998-99 only and ought to have not considered and decided the issues pertaining to earlier year which were not subject matter of appeal." 6. Since the aforesaid cross-grounds in the appeal of the assessee and the Revenue relate to assessee's claim for deduction of the process know-how fee paid, they are being taken-up together. 7. At the time of hearing, the Ld. Representative for the assessee quite fairly submitted that the plea of the assessee for deduction of expenditure incurred by way of process know-how fee u/s 37(1) of the Act is liable to be decided against the assessee following the judgement of the Hon'ble Supreme Court in the case of M/s Drilcos (India) Pvt. Ltd. vs. CIT, (2012) 348 ITR 382 (SC). Therefore, following the ratio of the judgement of the Hon'ble Supreme Court in the case of M/s Drilcos (India) Pvt. Ltd. (supra), the expen....
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....self. In-fact, it was a common point between the parties that so far as the claim of deduction of 1/6th cost is concerned, the same was allowed by the Assessing Officer in the respective years. In view of the aforesaid factual matrix, the direction of the CIT(A) is quite infructuous and in-fact was not called for. As a consequence, the decision of the CIT(A) on this aspect is set-aside as being infructuous. Thus for statistical purposes Grounds of Appeal No.2.1 & 2.2 of the Revenue are treated as allowed. 11. The Ground of Appeal No.2 raised by the assessee reads as under :- "2. The learned CIT (Appeals) erred in confirming disallowance of the Appellant's claim for provision made in respect of warranty obligation in the amount of Rs. 49,62,303/- being the difference between the closing provision of Rs. 3,45,59,744/- and the opening provision of Rs. 2,95,97,441/-." 12. In this context, relevant facts are that the assessee made a provision of Rs. 3,45,59,744/- on account of provision for warranty with respect to the products sold. Considering the opening balance of provision of Rs. 2,95,97,441/- the differential amount of provision amounting to Rs. 49,62,303/- was debite....
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....ties below on this aspect are upheld and assessee fails. 16. The next Ground of Appeal No.4 raised by the assessee reads as under :- "4. On the facts and in the circumstances of the case and in law the Ld. CIT (Appeals) erred in confirming addition of Rs. 4,00,71,000/- made by the Assessing Officer to the income of the appellant when in fact he should have deleted the same." 17. In this Ground, the primary dispute relates to the manner of recognizing income from the contract activity undertaken by the assessee. The assessee is a manufacturer of boilers and other heat transfer equipment. It takes-up such projects on contract basis and execution of such contracts are normally spread over a period of more than one year. The assessee is accounting for income of such projects on percentage completion method in cases where value of the project exceeds Rs. 20,00,000/-. The assessee was raising invoices on the clients as per the schedule of payments agreed with them. The income recognition on such project was, however, done on percentage completion method. It was found that the raising of bill as per the schedule of payments agreed with the clients was more than the income that wa....
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....cedents, the CIT(A) allowed the plea of the assessee. The CIT(A) held that (i) the assessee was entitled to recognize income from long term contracts by applying the percentage of completion method as mandated by AS-7 issued by ICAI; and, (ii) the revenue recognized by the aforesaid method was to be accepted by the Assessing Officer. Accordingly, the CIT(A) directed the deletion of Rs. 14,95,43,003/- which has been added by the Assessing Officer to the returned income. In coming to such conclusion, the CIT(A) noted that the assessee created a provision of Rs. 14,95,43,003/- on account of profit equalization and the opening provision of Rs. 12,30,07,582/- for the said purpose was written-back to the credit of the Profit & Loss Account. According to the CIT(A), only the differential provision of Rs. 2,65,35,431/- (i.e. Rs. 14,95,43,003/- minus Rs. 12,30,07,582/-) is charged to the Profit & Loss Account whereas the disallowance effectively made by the Assessing Officer was of the entire provision of Rs. 14,95,43,003/-, which was wrong. 19. The CIT(A) having upheld the stand of the assessee in-principle, differed with it on two aspects. According to the CIT(A), the following two adj....
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....ision of Rs. 14,95,43,003/-" for the reason that the opening provision of Rs. 12,30,07,582/- has not been found to be credited to Profit & Loss Account and only differential provision of Rs. 2,65,35,431/- has been added in the assessment order by the Assessing Officer. 6.3 The Ld. CIT(A) has erred in giving relief of Rs. 14,95,43,003/- while the addition made by the Assessing Officer is only for Rs. 2,65,35,431/-." 21. Since the aforesaid cross-grounds in the appeal of the assessee and the Revenue relate to a common issue of recognizing income from contract activity, they are being taken-up together. 22. On this aspect, it was a common ground between the parties that in assessment year 1997-98, the Tribunal vide its order dated 03.09.2014 (supra) in the assessee's own case has upheld the stand of the assessee by following the decision of the Pune Bench of the Tribunal on a similar issue in the case of Thermax Babcock & Wilcox Ltd. vs. DCIT vide ITA Nos.157 & 158/PN/1995 dated 11.05.2001 for assessment years 1990-91 & 1991-92. The Tribunal in its order dated 03.09.2014 (supra) noted that in the case of Thermax Babcock & Wilcox Ltd. (supra) which was a group company of t....
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....T(A) sustained the action of the Assessing Officer of treating it as a capital expenditure. For the second category of expenditure, the CIT(A) held that the same was more in the nature of consumables and did not result in any enduring advantage to the assessee and therefore he allowed it as a revenue expenditure. As a consequence, out of the total disallowance of Rs. 40,13,159/- made by the Assessing Officer, an amount of Rs. 22,16,107/- was retained as addition and the balance of Rs. 17,97,051/- was deleted. The assessee is in appeal before us agitating the addition sustained to the extent of Rs. 17,97,051/- whereas the Revenue in its cross-appeal has challenged the relief allowed by the CIT(A) to the extent of Rs. 22,16,107/- by way of Grounds of Appeal No.7.1 to 7.2, which read as under :- "7.1 On the facts and in the circumstances of the case, the Ld. CIT(A) erred in treating the expenditure of Rs. 22,16,107/- out of software as revenue expenditure, when in fact it is capital in nature. 7.2 The Ld. CIT(A) ought to have followed decision of Hon'ble ITAT Delhi 'A' Bench in case of Maruti Udyog Ltd. vs. DCIT (92 TTJ 987) where it is held that expenditure on acqui....
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....in sustaining the addition of Rs. 22,16,107/- is unjustified having regard to the judgement of the Hon'ble Bombay High Court in the case of Raychem Rpg. Ltd. (supra). Further, the CIT(A) has recorded a finding that expenditure to the extent of Rs. 17,97,051/- has been incurred on acquisition of routine standard softwares such as Windows 95, MS Office, etc. which are revenue in nature. Ostensibly, assessee's business is of manufacturing of boilers and other heat transfer equipment and the aforesaid softwares merely facilitate assessee's trading operations and/or enable conduct of its business more efficiently and the same are not in the nature of the profit-making apparatus of the assessee company. Therefore, in our view, the CIT(A) made no mistake in treating the expenditure of Rs. 17,97,051/- incurred on acquisition of routine standard software as a revenue expenditure. Moreover, the said decision of the CIT(A) is in line with the ratio of the judgement of the Hon'ble Bombay High Court in the case of Raychem Rpg. Ltd. (supra). In the result, the Ground of Appeal No.7 of the assessee as well as the Grounds of Appeal No.7.1 & 7.2 of the Revenue are dismissed. 31. ....
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....ds in the appeal of the assessee and the Revenue relate to the same issue, they are being taken-up together. 35. Now, we may first take-up assessee's claim for depreciation 100% with respect to the plant & machinery used in the manufacture of air/gas/fluid heating systems. In this context, it is clear noted that having regard to the entry 3(xiii)(r) read with 3(xiii)(e) of the Depreciation Table annexed to the Rules, plant & machinery used for the manufacture of air/gas/fluid heating systems is eligible for depreciation @ 100%. The plea of the Assessing Officer that other items in Entry in 3(xiii) contain a reference to 'solar' and therefore item (e) of Entry 3(xiii) should also be read to be referring to solar air/gas/fluid heating systems, in our view, is not justified. The Assessing Officer has attempted to read into the statute a word which is conspicuous by its absence. Therefore, in our view, having regard to the item (r) read with item (e) of Entry 3(xiii) of the Depreciation Table, the claim of the assessee has been rightly allowed by the CIT(A) and we find no force in the Ground of Appeal raised by the Revenue. 36. Now, with regard to assessee's claim....
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.... computed by applying the definition of export turnover contained in section 80HHC of the Act. The Assessing Officer as well as the CIT(A) have differed with the assessee on this aspect, against which assessee is in further appeal before us. 39. In our considered opinion, the stand of the assessee is quite reasonable and justified. The definition of expression "total turnover" in section 80HHC of the Act does not any prescription regarding the element of export turnover comprised in it. The profits eligible for deduction u/s 80HHC of the Act are computed as a proportion of the ratio of export turnover divided by the total turnover of the business. Therefore, if 'export turnover' forming part of numerator is calculated as per the definition contained in section 80HHC of the Act then it would be appropriate that a similar figure is taken as an element of the total turnover of the business which is the denominator. Thus, on this aspect assessee succeeds and the Assessing Officer is directed to re- compute the eligible deduction u/s 80HHC of the Act accordingly. 40. The next Ground of Appeal No.10 raised by the assessee reads as under :- "10. The Ld. CIT (Appeals) furt....
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....judicating afresh on this Ground as per law. Thus, on this aspect, assessee succeeds for statistical purposes. 42. In the cross-appeal of the Revenue, it has raised Ground of Appeal No.9.1, 9.2, 10.1 & 10.2 which also relate to the manner of computation of deduction u/s 80HHC of the Act, and the same read as under :- "9.1 On the facts and in the circumstances of the case, the Ld., CIT(A) erred in directing to exclude sale of scrap, claim of refunds - insurance, credit balance appropriated, bad debts/advance written back - exp. from the total turnover for the purpose of calculating deduction u/s 80HHC. 9.2 The Ld. CIT(A) is not correct in holding that the following items- (i) Claim of refunds - Insurance (ii) Credit balance appropriated (iii) Excess provision written back - Exp. have been decided in favour of the assessee by the ITAT, Pune in ITA No.907/PN/95 for A.Y. 1992-93 for the reason that in the said order, the Hon'ble ITAT, Pune Bench, Pune had occasion to consider and decide the following items only- (i) Sale of scrap (ii) Gain on exchange fluctuation (iii) Excise refund (iv) Sales tax refund (v) Bad Debts recovered Therefore, the ....
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....as confirmed by the CIT(A) has been a subject-matter of consideration by the Tribunal in assessment year 1997-98 and the same stands confirmed vide order dated 03.09.2014 (supra). In view of the aforesaid precedent, the action of the CIT(A) in restricting the disallowance to 2.5% of the gross income is hereby affirmed. Thus, assessee fails on this Ground. 47. The last Ground in the appeal of the assessee reads as under :- "12. The Ld. CIT (Appeals) erred in holding that the following items of income were not 'derived' from eligible undertaking and were accordingly not entitled to deduction u/s 80-I/80-IA : 1. Fluctuation in rate of foreign exchange 59.54 lakh 2. Premium on forward contract 1.93 lakh 3. Pro rata on sale of scrap and duty draw back 41.14 lakh 4. Miscellaneous receipts 00.10 lakh 48. In terms of the aforesaid Ground, the contention of the assessee is that the aforesaid items of income have been unjustly excluded from the profits eligible for the claim of deduction u/s 80-I/80-IA of the Act. 49. At the time of hearing, in so far as the exclusion of income by way of (i) Pro rata on sale of scrap and duty draw back - Rs. 41.14 lakh; and, (....
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....siness relating to the water treatment division was transferred on 29.03.1997 itself. However, due to certain procedural formalities like sales-tax registration, excise registration and other transfer of licenses, etc. the unfinished jobs though belonging to Thermax Culligan Water Technologies Ltd. were recorded as sales in the account books of the assessee along with the profit thereon. Such amount of profit computed at Rs. 90,00,000/- was transferred by assessee to Thermax Culligan Water Technologies Ltd. and claimed as an expenditure styled as 'commission'. The said expenditure styled as 'commission' was disallowed by the Assessing Officer because according to him the business transfer agreement dated 29.03.1997 did not provide for transfer of pending customer orders. He also noted that there was no agreement between the assessee and Thermax Culligan Water Technologies Ltd. as to how such commission was to be determined. In this context, the Assessing Officer referred to clause (3) of the business transfer agreement dated 29.03.1997, which reads as under :- "Subject to the conditions set out in this Agreement, government approvals (if any) and the receipt of e....
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....mmission of Rs. 90 lacs to a Group company called Thermax Culligan Water Technologies Ltd. The Appellant had transferred to the said Thermax Culligan its business of Water Treatment products. Due to certain delays in procedural formalities like sales tax registration, excise registration, etc. the business of the Water Treatment products division could not be carried on in the name of TCWTL but had to be carried out in the name of the Appellant though factually it was carried out by TCWTL. The commission represents profits accounted in the books of Thermax in respect of such unfinished jobs executed by TCWTL but factually booked in the accounts of the Appellant in view of the aforesaid procedural delays. This profit has been earned by TCWTL and has been transferred to it under the name of Commission. As rightly pointed out by the AR, the Business Transfer Agreement between the Appellant and the TCWTL provided for completion of unfinished jobs of the Appellant by the new company TCWTL. In my opinion, the absence of independent agreement for transfer of such profits was not necessary as the conduct of the parties coupled with the Business Transfer Agreement dated 29/3/1997 provide....
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....in terms of which there is no dispute on such factual aspects. In this background of the matter, we therefore find no reasons to interfere with the conclusion of the CIT(A) that the assessee was justified in claiming deduction for a sum of Rs. 90,00,000/- which represented transfer of profits to Thermax Culligan Water Technologies Ltd. for the interregnum period which rightly belonged to it. As a result, we hereby affirm the order of the CIT(A) and Revenue fails in its Grounds of Appeal Nos.3.1 & 3.2. 58. The next Grounds of Appeal Nos.4.1 & 4.2 raised by the Revenue read as under :- "4.1 On the facts and in the circumstances of the case, the Ld. CIT(A) erred in deleting the disallowance of bad debts of Rs. 14,82,798/-. 4.2 The Ld. CIT(A) is not correct in stating that "it is seen from the remand report submitted by the A.O. that these discrepancies have been made good and the necessary details have been furnished and examined. The A.O. has confirmed that these two bad debts were actually written off in the books as bad debts" for the reasons that no such categorical finding is given by the A.O. in his remand report dated 12.05.2003." 59. In this context, the relevant f....
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....;ble Supreme Court in the case of CIT, Bangalore vs. United Glass Mfg. Co. Ltd. (Civil Appeal No.6449 of 2012) dated 12.09.2012 also supports the aforesaid proposition. As a consequence, we hereby affirm the order of the CIT(A) on this aspect and Revenue fails accordingly. 64. The only other Ground remaining in the appeal of the Revenue is Ground of Appeal No.11, which reads as under :- "11. On the facts and in the circumstances of the case, the Ld. CIT(A) erred in holding that separate undertakings were set up by the assessee and deduction u/s 80-IA is allowable." 65. In this Ground, dispute pertains to the assessee's claim for deduction u/s 80-I/80-IA of the Act in respect of two industrial undertakings, namely, (i) Woodpac (manufacturing) - Rs. 21.84 lacs; and, (ii) Process Integrated Boilers- Rs. 138.06 lacs. The only reason weighing with the Assessing Officer to deny the deduction u/s 80-I/80-IA of the Act in respect of the two industrial undertakings was that similar claim was rejected in the re-assessment proceedings for assessment year 1992-93. Subsequent to assessment year 1992-93, and upto assessment year 1997-98 also the claim was disallowed by the Assessing....