TaxTMI 
TaxTMI 
2020 (9) TMI 62
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....43A of the Act, which was netted against unrealized gain of the equivalent amount arising from foreign currency fluctuation relating to Capital Work in Progress. 2.1 That That the AO erred on facts and in law in holding that the appellant did not provide details I documentary evidence for the aforesaid gain of Rs. 53,05,919/-. 2.2. That the AO erred on facts and in law in failing to appreciate that the amount of Rs. 53,05,919 was a capital receipt not chargeable to tax and complete details in this regard were submitted before the AO vide submission dated 06.11.2017. 3. That the DRP/AO erred on facts and in law in disallowing expenditure of Rs. 10,45,249, which was debited under the head of corporate social responsibility (CSR) in books on the ground that the same were not incurred for the purpose of business. 3.1. That the Assessing Officer erred on facts and in law in holding that the expenses were not incurred for the purpose of business, more so since the same were debited under the head of CSR and not the other heads of business expenses in books. 3.2. That the Assessing Officer erred on facts and in law in holding that insertion of Explanation 2 to section 37 of the ....
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....ss expenses. 7.1. That the AO/ DRP erred on facts and in law in failing to appreciate that the said expenses were allowable deduction under section 37 of the Act since the same was incurred for the purpose of business, viz., to maintain prescribed standards and uniformity in advertising appellant's brand effectively across India. 8. That the AO/ DRP erred on facts and in law in holding that 25 percent of the total royalty expenses amounting to Rs. 94,45,04,266, incurred by the assessee during the relevant previous year in lieu of granting license / right to use the IPR/know-how under 'Royalty and Technical Knowhow Agreement was capital in nature, resulting in enduring benefit to the appellant and thereby making a net disallowance of Rs. 70,83,78,200 after allowing 25% depreciation thereon. 8.1. That the assessing officer erred on facts and in law in observing that the assessee received benefit of enduring nature under the Royalty agreement, since the appellant obtained exclusive right to manufacture and sell the products within the territory of India. 8.2. That the AO/DRP erred on facts and in law in observing that the royalty agreement is the extension of payment t....
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....rence u/s 92CA(1) of the Act was made and the TPO proposed certain upward adjustment which after the directions of the DRP were reduced to NIL. The Assessing Officer in the draft assessment order on the perusal of the financial statement noted that the assessee had claimed expenditure amounting to Rs. 2,16,47,192/- for foreign fluctuation loss in respect of fixed assets. It is further noticed that the assessee had disallowed the amount of Rs. 1,63,41,273/- only out of Rs. 2,16,47,192/- while computing the total income of the concerned assessment year. In respect of the same, the assessee was asked to explain the difference of Rs. 53,05,919/- (Rs. 2,16,47,192/- - Rs. 1,63,41,273/-). The assessee in reply explained that "an amount of Rs. 2,16,47,192/- is adjusted in computing the actual cost of assets for computing income tax depreciation on assets, as per provision of section 43A of the Act. Your goodself would appreciate that the assessee has voluntarily disallowed the amount arising on loss of foreign exchange and no further disallowance is to be made in the computation of income." 4. In the draft assessment order, the Assessing Officer proposed that "if the fixed assets has been....
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....pital account was Rs. 53,05,919/-. The net sum of Rs. 1.63 crores (approx.) was added back to the computation of income and offered to tax against which there is no dispute. The Ld.AR for the assessee stressed that in view of the provision of section 43A of the Act, realized loss of Rs. 2.16 crores (approx.) and realized gain of Rs. 53,05,919/- was on account of capital assets, the same were not allowable as revenue expenditure but were liable to be added to/reduced from cost of relevant assets in the year in which the liability in foreign currency is discharged as per the provisions of section 43A of the Act. Accordingly, loss of Rs. 2.16 crores (approx.) was added back and gain of Rs. 53,05,919/- was reduced from the taxable income in the computation of income by way of adding back net amount of Rs. 1.63 crores (approx.). It was also pointed out that the amount was disallowed in the absence of documentary evidence by the Assessing Officer but pursuant to the directions of the DRP, reconciliation as well as the evidences substantiating the aforesaid gain of Rs. 53.05 Lakhs has been filed which has been completely ignored in the final assessment order. Our attention was drawn to su....
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....ss. The Assessing Officer further alleged that Explanation (2) to section 37 of the Act inserted by Finance Act, 2014 w.e.f. 01.04.2015, which provides that CSR expenses shall not be deemed to be incurred for the purpose of the business, is clarifactory in nature and is applicable to as well. 11. The assessee is in appeal against the said disallowance made by the Assessing Officer. The Ld.AR for the assessee drew our attention to the documents placed in the Paperbook from page 734 to 861 and pointed out that the same were treated as CSR expenses. It was alleged that the same were incurred with a view to secure advantage to the assessee's business and could not be treated as not incurred for the purpose of business. It was further pointed out that Explanation 2 to section 37 of the Act has been held to be prospective by different Benches of the Tribunal, with special reference to the decision of Raipur Tribunal in Jindal Power Ltd. [ITA No.99/BLPR/2012] and Delhi Tribunal in National Small Industries Corpn. Ltd. vs DCIT (175 ITD 601). Our attention was drawn to the list of expenses tabulated for the purpose and it was vehemently stated that the expenditure incurred were for the be....
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....f composition fee amounting to Rs. 22,36,130/-. 16. Briefly in the facts of the case the assessee had paid the aforesaid amount of Rs. 22,36,130/- for regularizing deviations in building structure within the permissible limits. The Assessing Officer was of the view that the said expenditure was in the nature of penalty and is hit by Explanation 37(1) of the Act. After hearing both the Counsels and perusing the details of composition fee and evidences placed at page 731 of the Paperbook, the expenditure has been incurred by the assessee towards composition fee for regularizing the Naurangpur Building and issuance of Occupancy certificate. The regularizing undoubtedly would be within the permissible limits and in case of irregularity, the structure has to be broken down. So, we find no merit in the stand of the Assessing Officer in this regard. We further find that the Hon'ble Supreme Court in Prakash Cotton Mills vs CIT 201 ITR 684 (SC) had observed as under:- "Therefore, whenever any statutory impost paid by an assessee by way of damages or penalty or interest is claimed as an allowable expenditure under section 37(1) of the Income Tax Act, the assessing authority is required t....
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....replacement of existing assets, which did not result in acquisition of any new asset or enhancement in the existing profit earning apparatus of the assessee company. Therefore, the said expenditure incurred on repairs was allowable as deduction u/s 31(1) or section 37(1) of the Act. He placed reliance on the ratio laid down by Hon'ble Supreme Court in CIT vs Saravana Spinning Mills (P.) Ltd. 293 ITR 201 (SC) and many other cases and stressed that similar expenditure on repairs of existing assets/building/machines had been incurred by the assessee in the earlier years also, which has always been allowed as deduction by the department, in all the earlier assessment years. 21. The Ld.DR for the Revenue on the other hand placed reliance on the orders of the authorities below. 22. We have heard the rival contentions and perused the record. The issue which arises in the present appeal is whether the expenditure which has been incurred by the assessee on the repair/replacement of existing assets, can the same be allowed in the hands of the assessee. The Hon'ble Supreme Court in CIT vs Saravana Spinning Mills (P.) Ltd. (Supra) has laid down that in case the expenditure is incurred for c....
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....Ld. DR for the Revenue placed reliance on the orders of authorities below. 26. We have heard the rival contentions and perused the record. The expenditure was incurred on signage for display of the name of the assessee at the dealer's premises. However, once the same is fixed at dealers site then the Courts have held that it does not satisfy the test of ownership with the assessee and the expenditure is to be allowed as revenue expenditure. We find support from the ratio laid down by the Hon'ble Delhi High Court in CIT vs Honda Siel Power Products Ltd.(supra). Thus, we are of the view that the expenditure to the extent claimed by the assessee is to be allowed in the hands of the assessee and not the entire expenditure. Ground of appeal No.6 is thus partly allowed. 27. Now coming to the Ground of appeal No.7 raised by the assessee against the disallowance of sales tools expenses of Rs. 2,72,32,757/-. 28. Briefly in the facts of the case, the assessee incurred the said expenditure on sales tools expenses. The assessee explained that it required its authorized dealers to use specified quality of sales tools. fixtures at their showrooms which was to ensure that such exclusive author....
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....cord. We have perused the Agreement between the assessee and its dealer and Article 11.2 of the Dealership Agreement reads as under:- 11.2. "The company shall provide the necessary information, materials and such other assistance from time to time at the dealer's cost and expense, wherever applicable, which support the dealer's advertising and sales promotion efforts for the products, in accordance with the provisions of the policy, guidelines, and operations standards with regard to advertising issued by the Company from time to time. The company may at discretion, provide subsidy on the advertising material." 34. Clause 7.2 of the Dealership Agreement states as follows:- 7.2. "The Dealer agrees to comply at all times during the validity of this agreement with the minimum requirements concerning the dealership premises including interalia sales office, showroom, workshop, spare parts and accessories shop and other necessary equipment, machinery, tools specified by the company from time to time. The list of equipments, machinery and tools with detailed specifications and quantities based on dealer's sales/service capacity will be issued by the Company to the dealer from time t....
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....payment in lumpsum as well as variable was paid for acquiring asset of enduring benefit. The plea of the assessee was that the aforesaid payment was in respect of information of production process of product which included the planning sheet of production, control sheet of quality, flow chart of the production process and drawings, concept drawings brochures, jigs, assemble and inspection tools, information for quality control of the products etc. The Assessing Officer was of the view that the kind of knowledge which was shared by Honda Motor Company, Japan comprises the life cycle of the product i.e. starting from production process till the output of the final product. He further observed that this not only increases the goodwill of the assessee company in the market but also other intangibles, through which the assessee company got enduring benefit. Vide para 13.5 at page 35 of the assessment order, the Assessing Officer has enlisted the benefits arising to the assessee as Assessing Officer had show caused the assessee with regard to lumpsum payment of Rs. 110.45 crores (approx.) and Royalty of Rs. 378.20 crores (approx.) totaling to Rs. 488.65 crores (approx.). Relying on the f....
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....f the Assessing Officer. 41. The Ld.AR for the assessee pointed out that under same Agreement, the assessee had paid to Honda Motor Company, Japan two considerations i.e. one was the lumpsum Royalty on account of model fee and second was the recurring Royalty. He further pointed out that both the payments flowed from the same Agreement and the plea of the assessee was that there was no enduring benefit to the assessee vis-a-vis the recurring Royalty. The Ld.AR for the assessee pointed out that in earlier years, the same was allowed as revenue expenditure and only in the year under consideration, the same was disallowed. He referred to the order of Assessing Officer and who in turn relied on the decision of Hon'ble Supreme Court in Honda Siel Cars India Ltd. vs CIT [395 ITR 713] (SC) to disallow 25% of the expenses. The Ld.AR for the assessee pointed out that in the case of Honda Siel Cars India Ltd. vs CIT (supra) itself, in later years Tribunal has allowed entire Royalty expenses as revenue after considering the decision of Hon'ble Supreme Court (supra), on the ground that the Royalty payment was for availing know-how for new models. The Ld.AR for the assessee pointed out that in....
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.... the Agreement placed at pages 44 onwards of the Paperbook and he pointed out that the parent company was Japanese Company and 99% holding of the assessee was with Japanese company. He objected to the Ld.AR's statement that the facts were on record and pointed out that all the facts were not on record. He also stated that the plea of no knowledge was very much weak where best legal minds were available to the assessee. He relied on the decision of Hon'ble Delhi High Court in Manish Build Well (P.) Ltd. [2011] 16 taxmann.com 27 (Delhi) and the decision of Hon'ble Supreme Court in Keshav Mills Co.Ltd. vs CIT [1965] 56 ITR 365 (SC). 44. The Ld.AR for the assessee also pointed out that the issue stands covered by the decision of Hon'ble Supreme Court and strong reliance was placed on the observations of the Assessing Officer in this regard. The Ld.AR for the assessee in re-joinder pointed out that the sole argument of the Ld.DR for the Revenue was placing reliance on the decision of Hon'ble Supreme Court in the case of Honda Siel Cars India Ltd. vs CIT (supra), wherein the facts were different and hence that decision was not applicable to the facts of the present case. On an without p....
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....ficer to allow the running Royalty as business expenditure in entirety. Ground of appeal No.8 raised by the assessee is thus allowed. 47. Now coming to the next issue raised which is by way of additional ground of appeal. Since it is legal issue, it is admitted for adjudication. The assessee fairly pointed out that the lumpsum Royalty was capitalized in its books of accounts and also not claimed as an expenditure in the return of income. However, because of the settled position by way of the decision of the Jurisdictional High Court in CIT v. Hero Honda Motors Ltd. (supra), the same is being claimed as business expenditure. The relevant findings are as under:- "The Hon'ble ITAT in the appellant's own case for Assessment Year 2011-12 reiterated that the facts in the case of the appellant differ from the facts of Honda Siel Cars Ltd. (supra) because the amount expended is in relation to the running royalty and not for the purpose of setting up of plant. Further, reference is also made to the decision of the Delhi Tribunal in the case of Honda Cards India Ltd.vs DCIT : ITA No.4491/Del/2014 dated 18.08.2017 (pages 414-457 of the CLPB) and also confirmed by Hon'ble Delhi High Court....