TaxTMI 
TaxTMI 
TaxTMI 
2012 (10) TMI 1001
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 08.02.07, he issued a notice to the assessee under section 148 read with Section 147 of the Act, reopening the assessment qua assessee's claim of expenditure regarding logo charges and royalty payment (technical know-how fees). 3. In the reassessment proceedings, the Assessing Officer examined the assessee's claim of deduction u/s 80-IB of the Act amounting to Rs. 2,93,65,335/-; royalty payment (technical knowhow fees) and logo charges which were treated as revenue expenditure by the assessee as well as issue of deduction under section 80HHC of the Act. 3.1. The assessee, in assessment, had claimed a sum of Rs. 2,93,65,335/- as deduction under section 80-IB of the Act regarding its unit at Pallavaram (near Chennai). In support of the claim, its contention before Assessing Officer was that the case was covered under Eighth Schedule of the Act and impugned Assessment Year was the eighth year of the claim @ 30% of the eligible profits derived. Further, regarding A.O.'s objection raised with reference to the qua assessee's claim on the ground that the same was covered within the meaning of entries at serial Nos.27 & 28 of the Eleventh Schedule of the 'Act', the assessee's clarificat....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 7. Not only this, as the record of the case reveals, in the reassessment proceedings, the Assessing Officer also took cognizance of assessee's claim of deduction under section 80HHC of the Act; wherein it had declared foreign exchange gain from the export proceeds as Rs. 1,99,99,305/-. While computing turnover, it had adopted value of sale proceeds inclusive of foreign exchange gains and FOB value of the proceeds were taken as Rs. 79,19,97,600/- after making deduction from profits under the head 'export profits', interest and incentives amounting to Rs. 41,31,182/-, Rs. 89,82,424/- and Rs. 4,52,225/- respectively i.e. total of Rs. 1,35,65,831/-. The Assessee had excluded 90% of the above amount i.e. Rs. 1,22,09,248/- for the purpose of computing income under section 80HHC of the Act. It had also included in its profit and loss account an interest amount of Rs. 89,92,424/-; foreign exchange gain of Rs. 1,10,37,114/- as well as miscellaneous income of Rs. 95,35,027/- and returned back provision as no longer required of Rs. 1,43,535/-. In A.O.'s opinion, the above said interest had to be assessed as income 'other sources'. Therefore, A.O. held in appropriate inclusion of....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ce made by A.O. under Sec.80-IB, royalty and logo expenditure and that of deduction under section 80HHC of the Act. 8. As we notice from the CIT(A)'s order, the finding of the AO regarding disallowance under section 80-IB have been confirmed. Regarding royalty fee, the CIT(A) has examined case law of Southern Switch Gear Ltd. in 232 ITR 359(SC) and CIT Vs. IAEC Pumps Ltd. in 232 ITR 316(SC) and held that since the Hon'ble Court had rendered decision in case of Southern Switch Gear Ltd. latter in point of time than the other judgement, therefore, the said judgement would be applicable qua this case as well. In the light thereof, the CIT(A) has concluded that since the assessee did not lead any evidence that it had already produced contraceptives without technical know-how having been obtained from M/s.LRC Products, UK(supra), the claim of revenue expenditure was as raised by the assessee is liable to be restricted to 75%. In this manner, the Assessing Officer's disallowance made has been upheld for balance 25% amount only. 9. Similarly, regarding logo charges(supra), the CIT(A) has held the it to be revenue expenditure after concluding that the claim of the assessee that logo agre....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ccordingly, our issue-wise findings are as under:- Issue(a) 13 a) In support of the issue, A.R. has vehemently argued on the basis of assessee's plea raised in the grounds of appeal and submitted that the Assessing Officer as well as CIT(A) have wrongly declined its claim of deduction under section 80-IB of the Act by relying on entries No.27 & 28 as well as by holding that since assessee's unit is established in a cantonment area, therefore, it is not allowed for deduction. To buttress the submission, following case laws have also been cited 1. 237 ITR 367(Bombay High Court); Shree Products Vs.CIT 2. 234 ITR 207(Bombay High Court); CIT Vs.Hind Filters Pvt. Ltd 3. 228 ITR 683(Kerala High Court); CIT Vs Kerala Rubber and Reclaims Ltd. and prayed for acceptance of the issue in assessee's favour. 13.1. On a query put up by the Bench as to whether the issue is covered by the decision of Co-ordinate Bench of Chennai ITAT in the case of M/s.MRF Ltd. dated 11.03.2011 in ITA Nos.1374 to 1377/Mds./2010 ( in which one of us Abraham P George A.M. was a Member of the Bench), the A.R. very fairly produced copy of this said decision and submitted that the same does not take into account the....
X X X X Extracts X X X X
X X X X Extracts X X X X
....y the transfer to a new business of machinery or plant previously used for any purpose; (iii) It manufactures or produces any article or thing, not being any article or thing specified in the list in the Eleventh Schedule, or operates one or more cold storage plant or plants, in any part of India : Provided that the condition in this clause shall, in relation to a small scale industrial undertaking or an industrial undertaking referred to in sub-section (4) shall apply as if the words "not being any article or thing specified in the list in the Eleventh Schedule" had been omitted. Explanation 1 : For the purposes of clause (ii), any machinery or plant which was used outside India by any person other than the assessee shall not be regarded as machinery or plant previously used for any purpose, if the following conditions are fulfilled, namely :- (a) Such machinery or plant was not, at any time previous to the date of the installation by the assessee, used in India; (b) Such machinery or plant is imported into India from any country outside India; and (c) No deduction on account of depreciation in respect of such machinery or plant has been allowed or is allowable under the provi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....over sexual organ for prevention of sexual transmitted diseases and unwanted pregnancies. Since the statute restricts the scope of the deduction provision, that too unequivocally that 'other fittings of rubber' are included in the list of articles or things manufactured, in the absence of any other explanation or so, we see no reason to interfere in the well reasoned findings of CIT(A). We reiterate that whether or not a rubber product is an 'article or thing' covered by Eleventh Schedule depends on the nature and characteristic of the product manufactured and not on the case laws settling legal principles as there cannot be any straight jacket formula defining its purview. So far as to the case laws cited by the A.R is concerned, in our opinion, the products involved in the same were altogether different i.e. rubber stoppers, Cigarette filters, rubber compounds for utilization in rubber industries. Therefore, the same are not relevant qua adjudication of the instant issue. We also notice that in M/s.MRF Ltd case (supra), it had been observed as under:- "22. The last issue of this appeal is regarding withdrawal of 80IA benefits. The assessee has claimed deduction of Rs. 15,14,97,7....
X X X X Extracts X X X X
X X X X Extracts X X X X
....total sales paid to M/s. LRC Products Ltd. as technical know-how fee is liable to accepted in toto instead 75% as upheld by CIT(A). The A.R has submitted that the assessee had only obtained few technical inputs from the entity concerned after paying consideration without transfer of any owner-ship of license. It is further argued that the payment is only in lieu of right of usage of advance technology made available by M/s.LRC Products and the assessee pays the remuneration @ 2% of the total sales. By referring to case law relied upon by the CIT(A), the A.R. has argued that the case law of Southern Switchgear(supra), is not applicable in present case. Per him, in this situation, case law of M/s.IAEC Pump Ltd.(supra) would be applicable. Further, he has also drawn support from the following cases:- 1. CIT Vs. IAEC Pump Ltd. in 232 ITR 316(SC) 2. CIT Vs. G4S Secutities System in 338 ITR 46 3. CIT Vs Panasonic Carbon India Ltd. in TC(A) No. 552 to 556/2010 dated 12.07.10 of Hon'ble Madras High Court. 4. Order of Chennai Tribunal in India Japan Lighting P Ltd Vs. ACIT in ITA Nos. 676 to 678/Mds./2010 and ACIT Vs. India Japan Lighting in ITA 862/10 5. Order of Chennai Tribunal in t....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... third party improperly. "LRC" includes any of its wholly-owned subsidiaries as defined by Section 736 of the U K Companies Act, 1985 UNDERTAKING BY TTK-LIG TTK-LIG hereby agrees - (a) to use the information solely for the purpose mentioned A above for which purpose it shall communicate the information solely to those of its employees who reasonably require the same for the purposes hereof and who are bound to TTK-LIG by like obligations as to confidentiality. (b) not otherwise to disclose the Information to any person firm or company without the prior written permission of LRC (c) upon conclusion of the purpose as aforesaid or sooner at LRC's request, to return all the Information to LRC together with all copies of written and graphic material and to retain no copies thereof and provide LRC with a certificate that no copies have been retained. WHEREAS both the parties hereto consider it necessary and expedient to record such terms and conditions in writing by this deed of agreement NOW THEREFORE, IN CONSIDERATION OF THE PREMISES AND OF THE MUTUAL COVENANTS AND OBLIGATIONS HEREIN CONTAINED, THE PARTIES HERETO AGREE AS FOLLOWS: 1. In consideration of the new formulations bei....
X X X X Extracts X X X X
X X X X Extracts X X X X
....non-compete clause was there wherein the foreign company concerned had agreed not to manufacture similar products in India and not to give rights of manufacture to others. The instant case is rather covered by case law of M/s.IAEC Pumps Ltd., wherein the license to use the intellectual know-how was for ten years with clauses for rescinding the agreement before the expiry of said time period as well. Similarly in the case of M/s.G4S Securities System, there was no exclusive use of the technical know -how and royalty was payable on year to year basis and the Hon'ble Delhi High Court had held that "the ownership rights of the trade mark and know-how throughout vested with the foreign company and on the expiration or termination of the agreement the assessee was to return all the know-how obtained by it under the agreement. The payment of royalty was also to be on year to year basis on the net sales of the assessee and at no point of time was the assessee entitled to become the exclusive owner of the know-how and trade mark. Hence, the expenditure incurred by the assessee as royalty was revenue expenditure and was deductible under section 37(1) of the Income-tax Act, 1961." According....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ity of the products and other services, as well as the stature of the organization. WHEREAS TTK is the owner of the copyright of the said monogram having secured a registration of the said copyright under No.A- 39006/83 under the Copyright Act, 1957. WHEREAS TTK - LIG, a company already in the business of Manufacture of Rubber Contraceptives is desirous of promoting and strengthening its business base by establishing a proper identity in the minds of public at large which will create a strong marketing base for the products of the company and reflect an immediate identity in the minds of the public with reference to the products services and stature of the Licenses and for the purpose has approached TTK for license and permission to use the said monogram on or in relation to the goods manufactured and marketed by TTK - LIG and in relation to other business activities of TTK -LIG. WHEREAS TTK had acceded to the request of TTK -LIG to grant license and permission to TTK -LIG to use the said monogram, subject to certain terms and condition, which terms and conditions in writing by this Deed of Agreement. WHEREAS both the parties hereto consider it necessary and expedient to record ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e of the powers delegated to the undersigned by the Government of India under section 637 of the Companies Act, 1956 in Notification No.GSR 563 E dated 19.08.93,I, the Regional Director, Department of Company Affairs, Chenai-6, do hereby approve under proviso to sub section (1) of section 297 of the Companies Act, for entering into contract with M/s.T.T.Krishnamachari & Co. for licensing use of trade name and logo thereof in consideration of payment of 2% license fee calculated on the total sales of the company for a period of 3 years with effect from 1.4.2000. 2. The approval accorded in para 1 above is subject to the following conditions: (i) The contract shall be for a period of 3 years with effect from 1.4.2000 to 31.3.2003. (ii) The total value of services to be availed from the contractee party herein shall not exceed the limit mentioned in para 1 above during the contract period. (iii) The prices to be payable for the services to be obtained from the contractee party shall be reasonable and shall not be higher than the prevailing market rates. (iv) The company shall ensure that the contract with the contractee party is competitive and is not less advantageous to it as c....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rdingly, it can be said that the assessee has not acquired any capital asset but has merely paid to the licensor for use of such trade-marks. Therefore, expenses are to be treated as revenue expenditure and not capital expenditure. The assessee was required to pay royalty every year. But for payment of royalty, every year the assessee could not continue receiving the license to use the licenses marks on the products manufactured by it. Thus making payment every year it cannot be said that the assessee received advantage of enduring nature primarily to bring it as capital expenditure." Taking cue from the same, we hold that in the instant case also, title of the 'logo' in question has not passed over to the assessee. Further, there is no acquisition of assets or part of any capital asset. Usage of logo by the assessee is only for displaying it on the product manufactured i.e. rubber contraceptives. That too, for a limited period as provided in the agreement in lieu of payment @ 2% of the gross sales. When we apply the tenor of the case law above cited to the facts of the instant case, we hold the instant 'logo' charges are also revenue expenditure within the meaning of Sec.37 of th....
X X X X Extracts X X X X
X X X X Extracts X X X X
....itlements for the purpose of deduction under section 80-IB of the Act, and levied interest under section 234B and Sec.234C of the Act vide order dated 31.12.10. 24) Aggrieved, the assessee preferred an appeal wherein it challenged the reassessment on the issue of legality as well as on merits. We notice that the CIT(A) has turned down assessee's plea of challenging the reopening on legality. On merits, the CIT(A) has enhanced and confirmed withdrawal of deduction under section 80-IA of the Act, restricted the royalty disallowance to 25% as made by Assessing Officer, upheld the assessee's claim on logo charges. However, regarding deduction under section 80HHC, the CIT(A) has affirmed findings of Assessing Officer. In this backdrop, the assessee is assailing the CIT(A)'s order on legality of reopening, order restricting claim of royalty expenses to the extent of 75% only, order of CIT(A) confirming the Assessing Officer's order holding that profit on sale of DEPB entitlement is not eligible for deduction under section 80-IB of the Act and further confirming the exclusion of 10% of the interest income while computing deduction/s.80HHC of the Act and assessing the same under the head ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ng an exporter, had claimed deduction under section 80HHC and filed all necessary particular before A.O. who had finalized the scrutiny assessment under section 143(3) of the Act on 14.02.06. The impugned Assessment Year is 2003-04 i.e. the period from 01.04.03 to 31.03.04. We deem it appropriate to reproduce the relevant provision of Sec.147 of the Act "Sec.147 If the [Assessing] Officer [has reason to believe] that any income chargeable to tax has escaped assessment for any assessment year, he may, subject to the provisions of sections 148 to 153, assess or reassess such income and also any other income chargeable to tax which has escaped assessment and which comes to his notice subsequently in the course of the proceedings under this section, or recompute the loss or the depreciation allowance or any other allowance, as the case may be, for the assessment year concerned (hereafter in this section and in sections 148 to 153 referred to as the relevant assessment year) : Provided that where an assessment under sub-section (3) of section 143 or this section has been made for the relevant assessment year, no action shall be taken under this section after the expiry of four years f....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... of the assessee and against Revenue. Issue No.(b) 29) Since the issue of validity of reopening in question has been decided in favour of the assessee, therefore, we do not deem it appropriate to decide the issue No.2 on merits as the same now enjoys academic importance only. 29) Accordingly, the appeal filed by the assessee is accepted and that of the Revenue is dismissed. ITA Nos. 1793 & 1827/Mds./11(A.Y. 2004-05) 30. These appeals filed by the assessee and the Revenue respectively, arise from common order of CIT(A)-III, Chennai passed in case No.585/08-09/A.III dated 29.08.11 for impugned Assessment Year in proceedings under section 143(3) of the Income Tax Act, 1961 (In short 'the Act'). 31) In assessee's appeal, the following sole substantial ground is raised:- "2.The CIT(A) erred in confirming 25% of the royalty expenditure as capital expenditure and the remaining 75% as revenue expenditure. 31.1. Similarly, in Revenue's appeal, the substantive grounds raised read as under:- "2.1. The CIT(A) erred in holding that 75% of the royalty payment should be allowed as revenue expenditure and 25% of the royalty payment should be treated as capital expenditure. 3.1. The CIT(....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ges was re in nature and deleting the addition. 4.1. The CIT(A) erred in restricting the disallowance under section 14A to 2% of the exempt income, placing reliance on the decision of the Hon'ble ITAT, Chennai in the case of Sundaram Finance Ltd. in ITA No.845 to 847/Mds./98 dated 2.12.2002 and the Hon'ble ITAT, Mumbai in the case of Godrej Agrovet Ltd V ACIT (2010 TIOL 616 ITAT MUM) 4.2. The CIT(A) ought to have appreciated that the issue has not become final and ought to have upheld the disallowance made by the Assessing Officer. 4.3. The CIT(A) erred in holding that Rule 8D could not be invoked in respect of assessment years prior to Assessment Year 2008-09, relying on the decision of the Bombay High court in the case of Godrej and Boyce Mfg. Co (328 ITR 81). 4.4. The CIT(A) ought to have appreciated that the decision of the Bombay High Court in the case of Godrej and Boyce Mfg. Co (328 ITR 81) has not become final." We have perused the above said grounds. It transpires that apart from grounds Nos.4.1. to 4.4 of the Revenue (supra), rest of the grounds only pertain to the issues of royalty payment claimed as Revenue expenditure by the assessee, which has been accepted in pa....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... from Assessment Year 2008-09. Hence, it is not applicable for the present Assessment Year 2005- 06. The Hon'ble Court has, however, held that the A.O. can apply sec 14A(1) on reasonable basis for the Assessment Years to which Rule 8D was not applicable. It is seen from the details that the Appellant had share capital and reserves of Rs. 146,17,54,663/-. On the other hand, the investment in the tax-free income territory was Rs. 46,86,10,627/- The appellant has earned tax free income of Rs. Rs. 3,62,89,967/- Some amount of expenditure on tracking the investment, encashing the dividend warrants, bank charges, salary on personnel of treasury department as also common administration and general expenditure is required to earn the exempt income. It would be reasonable to estimate 2% of the exempt income as expenditure attributable to the dividend income/income from mutual fund. This is supported by the decisions of the Hon'ble ITAT Chennai in the case of Sundaram Finance Ltd in ITA No.845 to 847/Mds./98 dated 02.12.2002 and Hon'ble ITAT Mumbai in the case of Godrej Agrovet Ltd V ACIT [2010-TIOL-616-ITAT-MUM] Hence, the A.O is directed to disallow 2 percent as expenditu....
X X X X Extracts X X X X
X X X X Extracts X X X X
....75% as revenue expenditure. 42.1. In the same manner, the substantial grounds in Revenue's appeal as agitated are also reproduced hereunder: 2.1. The CIT(A) erred in holding that 75% of the royalty payment should be allowed as revenue expenditure and 25% of the royalty payment should be treated as capital expenditure. 3.1. The CIT(A) erred in holding that the expenditure incurred towards payment of logo charges was re in nature and deleting the addition. 4.1. The CIT(A) erred in restricting the disallowance under section 14A to 2% of the exempt income, placing reliance on the decision of the Hon'ble ITAT, Chennai in the case of Sundaram Finance Ltd. in ITA No.845 to 847/Mds./98 dated 2.12.2002 and the Hon'ble ITAT, Mumbai in the case of Godrej Agrovet Ltd V ACIT (2010 TIOL 616 ITAT MUM) 4.2. The CIT(A) ought to have appreciated that the issue has not become final and ought to have upheld the disallowance made by the Assessing Officer. 4.3. The CIT(A) erred in holding that Rule 8D could not be invoked in respect of assessment years prior to Assessment Year 2008-09, relying on the decision of the Bombay High court in the case of Godrej and Boyce Mfg. Co (328 ITR 81). 4.4. The ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t should be treated as capital expenditure. 3.1. The CIT(A) erred in holding that the expenditure incurred towards payment of logo charges was re in nature and deleting the addition. 4.1. The CIT(A) erred in restricting the disallowance under section 14A to 2% of the exempt income, placing reliance on the decision of the Hon'ble ITAT, Chennai in the case of Sundaram Finance Ltd. in ITA No.845 to 847/Mds./98 dated 2.12.2002 and the Hon'ble ITAT, Mumbai in the case of Godrej Agrovet Ltd V ACIT (2010 TIOL 616 ITAT MUM) 4.2. The CIT(A) ought to have appreciated that the issue has not become final and ought to have upheld the disallowance made by the Assessing Officer. 4.3. The CIT(A) erred in holding that Rule 8D could not be invoked in respect of assessment years prior to Assessment Year 2008-09, relying on the decision of the Bombay High court in the case of Godrej and Boyce Mfg. Co (328 ITR 81). 4.4. The CIT(A) ought to have appreciated that the decision of the Bombay High Court in the case of Godrej and Boyce Mfg. Co (328 ITR 81) has not become final." 48. On behalf of the assessee, A.R has submitted before us that apart from ground No.4 in assessee's appeal, all other issues....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ly applicable to the facts of the appellant. The Hon'ble Supreme Court in the above case has held that duty drawback receipts and DEPB benefits do not form part of the net profit of industrial undertaking for the purpose of deduction u/s 80I/80-IA/80-IB of the Act. It was held that sec 80-IB and sec 80-IA are a code by themselves as they contain both substantive as well as procedural provisions. It was further stated that DEPB/Duty drawback are incentives which flow from the schemes framed by the Central Government or from section 75 of the Customs Act, 1962. Incentive profits are not profits derived from eligible business under section 80-IB : they belong to the category of ancillary profits of such undertaking. Profits derived by way of incentives such as DEPB/Duty drawback do not fall within the expression "profits derived from industrial undertaking" under section 80-IB. Respectfully following the above decision, the income from sale of DEPB entitlement is held as not eligible for deduction u/s 80-IB. Accordingly, the disallowance made by the AO is sustained and the ground is dismissed. " It is in this backdrop that the assessee has raised its grievance. 53. By reiterating....