Income Tax Appellate Tribunal - Pune
M/S. John Deere Equipment Pvt. Ltd.,, ... vs Assessee on 31 March, 2015
IN THE INCOME TAX APPELLATE TRIBUNAL
PUNE BENCH "A", PUNE
BEFORE SHRI G.S. PANNU, ACCOUNTANT MEMBER
AND MS. SUSHMA CHOWLA, JUDICIAL MEMBER
ITA No.30/PN/2012
Assessment Year : 2005-06
M/s. John Deere Equipment Pvt. Ltd.,
(Formerly known as L & T John Deere Pvt. Ltd.
now merged with John Deere India Pvt. Ltd.,)
Tower IV, Cybercity, Magarpatta City,
Hadapsar, Pune - 411028
PAN: AAACL7331A .... Appellant
Vs.
The Dy. Commissioner of Income Tax,
Circle 11 (1), Pune .... Respondent
ITA No.275/PN/2012
Assessment Year : 2005-06
The Asstt. Commissioner of Income Tax,
Circle 11 (1), Pune .... Appellant
Vs.
M/s. L&T John Deere Pvt. Ltd.,
(Now M/s John Deere Equipment Pvt. Ltd.),
Gat No.166-167 & 271-291,
Off Pune Nagar Road, Sanaswadi,
Tal. Shirur, Pune - 412 208.
PAN: AAACL7331A .... Respondent
Assessee by : Shri Nikhil Pathak
Department by : Shri Sandeep Gang, CIT
Date of hearing : 17-03-2015
Date of pronouncement : 31-03-2015
ORDER
PER SUSHMA CHOWLA, JM:
The cross appeals filed by the assessee and Revenue are against the order of CIT(A)-I, Pune, dated 25.07.2011 relating to assessment year 2005-06 passed under section 143(3) of the Income Tax Act, 1961. 2
ITA Nos.30 & 275/PN/2012
2. The cross appeals filed by the assessee and Revenue were heard together and are being disposed of by this consolidated order for the sake of convenience.
3. The assessee in ITA No.30/PN/2012 has raised the following grounds of appeal:-
1] The learned CIT(A) erred in confirming the disallowance of product development expenses of Rs.38,91,232/- as capital expenditure.
1.1] The learned C1T(A) failed to appreciate that the above expenditure was purely revenue in nature as no new capital asset was acquired by the assessee and thereby ought to have allowed the same as revenue expenditure.
1.2] Without prejudice to Ground Nos. 1 & 1.1 the learned CIT(A) erred in not appreciating that the expenditure incurred by the assessee was allowable u/s 35(1)(i) or section 35(1)(iv) since the expenditure was in the nature of scientific research expenditure.
1.3] The learned CIT(A) erred in holding that the above expenditure incurred by the assessee was not in the nature of scientific research.
2] The learned CIT(A) erred in holding the sale tax / purchase tax subsidy of Rs.14,08,96,000/- received by the assessee from SICOM as a revenue receipt on the ground that the subsidy given was for increasing the profitability of the assessee.
2.1] The learned CIT(A) ought to have appreciated that the subsidy given in the form of exemption from sales tax / purchase tax was for setting up of an unit in a backward area and hence, in view of the Supreme Court decision in the case of Ponni Sugar & Chemicals Ltd. [306 ITR 392] and Special Bench decision in the case of Reliance Industries Ltd. [88 ITD 273 (SB)], the same was a capital receipt not chargeable to tax. 3] The appellant craves leave to add, alter, amend or delete any of the above grounds of appeal.
4. The Revenue in ITA No.275/PN/2012 has raised the following grounds of appeal:-
01. On the facts and circumstances of the case, the Learned Commissioner of Income-tax (Appeals) has grossly erred in holding that the payment paid to L & T Infotech Ltd. as annual maintenance charges to be treated as revenue expenditure.
02. On the facts and circumstances of the case, the Learned Commissioner of Income-tax (Appeals) has grossly erred in deleting the disallowance made by the A.O. on the ground that expenditure incurred on annual maintenance services was capital in nature.3
ITA Nos.30 & 275/PN/2012
03. On the facts and circumstances of the case, the Learned Commissioner of Income-tax (Appeals) has grossly erred in holding that the expenditure incurred on technical know-how was capital in nature.
04. On the facts and circumstances of the case, the Learned Commissioner of Income-tax (Appeals) has grossly erred in holding that the expenditure on technical know-how had been incurred in day to day running of the business and was allowable u/s 37(1) of the Income-tax Act, 1961.
05. On the facts and circumstances of the case, the Learned Commissioner of Income-tax (Appeals) has grossly erred in deleting the disallowance on account of deferred sales tax equalization liability.
5. The Ld. Authorized Representative for the assessee pointed out that the issues raised in the cross-appeals were covered by the orders of the Tribunal in assessee's own case in earlier years.
6. The Ld. Departmental Representative for the Revenue, on the other hand, placed reliance on the order of the CIT(A)/Assessing Officer.
7. We have heard the rival contentions and perused the record. First, we take-up the appeal filed by the assessee in ITA No.30/PN/2012. The first issue raised vide ground of appeal Nos.1 and 1.1 is against the disallowance of product development expenditure of Rs.38,91,232/- on the ground that it was a capital expenditure. Briefly, the facts relating to the issue are that the assessee company was engaged in the manufacture of tractors of various variants. During the year under consideration, assessee had incurred expenditure in relation to the development of 35 Hp tractors. For which purpose, it had integrated the ventures jointly with Eicher Motors which was in the same line of business. However, the said project was later abandoned since it did not give the desired results. The assessee had incurred research and development expenditure to the tune of Rs.38,91,232/- in respect of the said project, which was claimed as a revenue expenditure. However, the Assessing Officer rejected the claim of the assessee on the ground that the purpose of the expenditure was to bring into existence a new product and therefore the same was capital in nature. He 4 ITA Nos.30 & 275/PN/2012 further placed reliance on similar disallowance having been made in the earlier year which was confirmed by the CIT(A). The CIT(A) upheld the order of the Assessing Officer in view of the decision of his predecessor against the assessee in assessment years 2003-04 and 2004-05. The Tribunal in ITA No.1416/PN/2006 in an appeal filed by the assessee relating to assessment year 2003-04 vide consolidated order in bunch of appeals with lead order in ITA No.830/PN/2008 relating to assessment year 2003-04, vide order dated 14.05.2012 held the said expenditure incurred on the development of new products was revenue expenditure and hence entitled to be claimed as product development expenditure. The Tribunal placed reliance on the ratio laid down by the Pune Bench of the Tribunal in the case of Renu Electronics Pvt. Ltd. vs. DCIT in ITA No.1694/PN/2005 relating to assessment year 2002-03, order dated 30.04.2009 and further reliance was placed on the ratio laid down by the Amritsar Bench of the Tribunal in the case of CIT vs. Max India Ltd., 105 TTJ 1002 (Amritsar). The expenditure under consideration vide ground of appeal Nos.1 and 1.1 is similar to the expenditure claimed by the assessee in the earlier years and following the same parity of reasoning, we hold that the assessee is entitled to the claim of expenditure on account of product development amounting to Rs.38,91,232/-. Consequently, we direct the Assessing Officer to allow such expenditure in the hands of the assessee. The ground of appeal Nos.1 and 1.1 raised by the assessee are thus, allowed.
8. The Authorized Representative for the assessee pointed out that once ground of appeal Nos.1 and 1.1 are allowed then the ground of appeal Nos.1.2 and 1.3 which was alternate plea raised by the assessee become infructuous. Accordingly, we dismiss the ground of appeal Nos.1.2 and 1.3 as infructuous. 5
ITA Nos.30 & 275/PN/2012
9. The issue in ground of appeal Nos.2 and 2.1 is in relation to the claim of the sales tax subsidy amounting to Rs.14,08,96,000/-.
10. The claim of the assessee before the authorities below was that the said sales tax subsidy received by the assessee was a capital receipt and was not taxable in the hands of the assessee. But the authorities below held the same as a revenue receipt following similar issue in the earlier years.
11. The Ld. Authorized Representative for the assessee pointed out that the said issue is covered in favour of the assessee by the decision of the Tribunal in the assessee's own case relating to assessment year 2006-07 wherein the said subsidy has been held to be capital in nature.
12. The Ld. Departmental Representative for the Revenue, on the other hand, placed reliance on the order of the CIT(A) as well as the Assessing Officer.
13. On the perusal of the record, we find that the Tribunal in ITA No.1476/PN/2010 in appeal filed by assessee, relating to assessment year 2006- 07 vide order dated 20.02.2012 had elaborately considered the claim under which the assessee became eligible to the sales tax subsidy received from SICOM for establishing a unit in notified backward area i.e. Sanaswadi. Under this Scheme, the assessee was eligible for either exemption from sales tax and purchase tax or deferment of sales and purchase tax collected for a period of 15 years. Initially, the assessee had opted for the Deferral Scheme under which the assessee was authorized for collection of sales tax but payment was to be made after 15 years to the Government but subsequently from the month of September, 2001, the assessee decided to opt for Exemption Scheme and shifted from the Deferral Scheme under which the assessee was exempted from 6 ITA Nos.30 & 275/PN/2012 payment of sales tax as well as purchase tax on its purchase. As per the Package Scheme, 1993, there was a ceiling on the benefit of the exemption to the extent of its capital investment. The assessee, during the year under consideration, treated the sales tax subsidy of Rs.14,08,96,000/- as capital receipt which was assessed as revenue receipt in the hands of the assessee.
14. The Tribunal in assessee's own case relating to assessment year 2006-07 (supra) deliberated upon the issue at length and considered the various legal proposition on the said issue and observed as under :-
"8. We have heard the rival submissions of the parties and perused the record. The main plank of the argument of the Ld. AR is that the assessee become eligible for the sales tax subsidy as it complied with the terms and conditions of "1993 Package Scheme of Incentives" introduce by the Govt. of Maharashtra for encouraging the industrialization of the backward area and dispersal of industries from the developed area. He referred to the "1993 Package Scheme of Incentives" and submits that the Package Scheme of Incentive introduced by the Govt. of Maharashtra has been examined by the Hon'ble ITAT, Special Bench, Mumbai in the case of Reliance Industries Ltd. (supra). He submits that the matter was carried before the Hon'ble High Court of Bombay in the case of CIT Vs. Reliance Industries Ltd. 339 ITR 632 and the decision of the Hon'ble ITAT, Special Bench, Mumbai has affirmed by holding that the sales tax subsidy received by the assessee in the said case partakes character of the capital receipt. He submits that in the case of Reliance Industries Ltd. (supra), the Package Scheme of Incentives 1979 introduced by the Govt. of Maharashtra was before the Hon'ble Special Bench, ITAT, Mumbai.
He submits that so far as "1993 Package Scheme of Incentive" is concerned, the basic object and purpose for giving the benefit to industries are the same as per Package Scheme of 1979 and those are for developing the industries in the backward area to remove imbalance and to maintain the regional economic growth. He submits that "1993 Package Scheme of Incentive" is only the extension of original scheme with minor modification but otherwise the object and purpose for giving the incentives are the same. He also placed his reliance on the following precedents:
a. Ponni Sugar & Chemicals Ltd. 306 ITR 392 (SC).
b. Reliance Industries Ltd. 88 ITD 273 (SB) (Mum).
c. Ford India Pvt. Ltd. ITA No. 2089/Mds./2011.
d. Birla VXL Ltd. 90 DTR 376 (Guj) (HC).
e. Munjal Auto Industries Ltd. 90 DTR 369 (Guj) (HC).
9. He submits that it is true that the assessee had in the preceding year declared the said subsidy as a revenue receipt but before the ITAT, Pune the assessee took the additional ground and hence, the matter was set aside to the 7 ITA Nos.30 & 275/PN/2012 Assessing Officer. He argues that it is a purely legal issue and it can be decided in this year also. He submits that even though in the preceding year the matter has been set aside, doctrine of estoppel is not applicable to the legal issue and moreover, the issue is seized with the authorities below for deciding the same afresh as per directions of the Tribunal in the preceding year. We have also heard the Ld. DR, who supported the order of the DRP and Assessing Officer.
He reiterated the reasons given by the Assessing Officer as his argument to support impugned order and pleaded for confirming the addition.
10. In the case of Reliance Industries Ltd. (supra) the said assessee was exempted from payment of the sales tax as per 1979 Package Scheme of the Govt. of Maharashtra, for setting up a new industrial unit in the notified backward area of Patalganga in Raigarh district. It was claimed by the assessee that the amount of sales tax exemption/subsidiary should be treated as a capital receipt in the hands of the assessee. The assessee was covered for getting the said incentive under the Package Scheme of Incentive 1979 declared by the Govt. which was notified in the GR dated 05-01-1980. It was a contention of the said assessee that the earlier incentive schemes were fine-tuned to make 1979 Package Scheme so as to make them more effective, employment oriented and to encourage economic growth of backward areas. It appears that there was a conflicting decision on this issue decision in the case of M/s. Bajaj Auto Ltd. (ITA No. 49/Bom/91 and 1101/Bom/91) dated 31.12.2002 and matter was referred to the Special Bench. The operative part of the discussion and finding of the Hon'ble ITAT, Special Bench in Reliance Industries Ltd. (supra) is as under:
"35. Coming to the facts of the case, they have all been adverted to in the Tribunal's orders, both for the asst. yrs. 1984-85 and 1985-86. When the assessee applied for the subsidy on 16th Dec., 1980, it did not have any industrial unit in the State of Maharashtra, but was running a synthetic textile mill at Naroda, Ahmedabad. It has been observed by the Tribunal that the assessee had taken possession of the land in June, 1980 in Patalganga Industrial area and spent Rs.1.40 crores for that purpose. It had also obtained registration from the Ministry of Industry, Government of India, for the manufacture of polyester filament yarn with licenced annual capacity of 10,000 tons. The assessee informed the implementing agency (SICOM) that the estimated cost of the project was Rs.66.21 crores and it was proposed to be met by various means of finance. On 27th Jan., 1981, SICOM issued a letter of intent in which the assessee was directed to ensure that the unit commenced commercial production on or before 26th Jan., 1984. When the first phase of the unit had commenced production on 24th March, 1983, SICOM issued eligibility certificate on 6th June, 1983 under the 1979 Scheme which was valid for a period of 5 years from 8th June, 1983 to 7th June, 1988. Since the unit had undergone huge expansion, another eligibility certificate was issued on 22nd Oct., 1983, which was valid upto 30th Sept., 1993, by way of deferral and from 1st Oct., 1993 to 30th June, 1997, by way of exemption. It has been found by the Tribunal that the incentive was thus given in several instalments depending on the setting up and expansion of the industrial unit. It was also one of the conditions of the eligibility certificate originally issued that in the matter of employment of personnel for the unit, candidates from Scheduled Castes and Scheduled Tribes and local people should be given preference. All these facts have not been disputed before us. The Departmental authorities have relied on the assessment and appellate order for the earlier years they have not 8 ITA Nos.30 & 275/PN/2012 brought any new fact or material on record. Even before us, with respect to counsel who appeared for both the sides, no new arguments were advanced other than the arguments which had been advanced by the assessee and the Department before the Tribunal in the appeal for asst. yr. 1985-86. The preliminary argument of the Department before us that the assessee did not collect any sales-tax and therefore there is no question of any exemption or incentive being given is an argument which has been advanced before the Tribunal both in the asst. yrs. 1984-85 and 1985-86. In fact, in para 74 of its order for the asst. yr. 1985-86, the Tribunal has referred to this aspect of the matter and after noting that the argument has already been found against the Department in the order for the asst. yr. 1984-85, further observed that no fresh material was brought to their notice either in the course of the arguments or in the orders of the Departmental authorities. The position before us, with respect, is the same. Even with regard to the other question as to whether the Tribunal erroneously interpreted the judgment of the Supreme Court in Sahney Steel (supra), the arguments of the Department were the same in the sense that even in the appeal before the Tribunal for the asst. yr. 1985- 86, as we find from the order of the Tribunal, the arguments were focused upon the pivotal point that the ratio laid down by the Supreme Court in Sahney Steel (supra) was that if the subsidy is received after and conditional upon the commencement of production, irrespective of the object for which the subsidy is given, it constitutes a revenue receipt in the assessee's hands. This argument has been rejected by the Tribunal in its order for the asst. yr. 1985-86 for reasons which we have already discussed in some detail and the same arguments have been pressed into service before us also. Additionally, the order of the Tribunal in Bajaj Auto Ltd. (supra) was also heavily relied upon. We have already expressed our inability to share the view expressed in Bajaj Auto Ltd. that the Tribunal in the case of RIL for the asst. yr. 1985-86 erroneously interpreted or appreciated the ratio laid down in Sahney Steel (supra). We have also given reasons for our view. Therefore, no separate discussion of the arguments on this point before us is considered necessary.
36. However, some recent decisions which were cited before us on behalf of the Department require to be considered. The first is the judgment of the Madras High Court in Tamil Nadu Sugar Corporation Ltd. vs. CIT (2001) 165 CTR (Mad) 276 : (2003) 130 Taxman 348 (Mad). In this case, the assessee, a sugar factory owner, received purchase tax subsidy equivalent to the quantum of purchase tax, from the State Government for a period of 5 years from the date of commencement of production. It returned the subsidy as business income for the asst. yrs. 1986-87 and 1987-88 but later filed revision applications before the CIT under s. 264 of the IT Act contending that the subsidy should be treated as capital receipt. The applications were rejected by the CIT, against which the assessee moved the Madras High Court by way of writ petitions. The Madras High Court held that a fair reading of the Government order showed that the subsidy was given by way of assistance to the sugar factories on the commencement of production and not for the setting up of the factories and it was given only to tide over the difficulties that might be experienced by the management in the actual running of the sugar factories. It was further held that though the amount of subsidy is equivalent to the quantum of purchase tax, the object behind the grant of the subsidy is not to set up a new sugar factory, but to run the 9 ITA Nos.30 & 275/PN/2012 factory efficiently. In other words, the subsidy is given so that the management may not be in trouble in running the factories in the initial year. In this background of facts, the Madras High Court applied the decision of the Supreme Court in Sahney Steel. In doing so, the High Court noted that in Sahney Steel's case, the payments were made directly or indirectly not for the setting up of the industries, but were made only after the production was commenced. It was therefore held, applying the ruling of the Supreme Court, that the subsidy received by the assessee, which was not for the setting up of the sugar factory, is a revenue receipt. In the other judgment, which is of the Madhya Pradesh High Court in CIT vs. S. Kumar's Tyre Manufacturing Co. (2003) 183 CTR (MP) 590, the subsidy was expressly given to meet expenditure on power. The Madhya Pradesh High Court held, following the judgment of the Supreme Court in Sahney Steel (supra) and in CIT vs. Rajaram Maize Products (supra) that since the subsidy is given for the purpose of meeting a part of the expenditure on power, it was revenue receipt in the assessee's hands. In both the cases, the object of the subsidy was not to encourage the setting up of factories or for industrialization of any particular area of the State. The object was to assist or lend a helping hand to the concerned assessees after they commenced production so that they tide over the initial difficulties in running the factories. The subsidy in both the cases was an operational subsidy. The facts in these two cases being different from the facts of the present case, they are not applicable.
37. In the paper book filed by the Department containing the above judgments, we noticed a judgment of the Madras High Court in CIT vs. Ponni Sugars & Chemicals Ltd. (2003) 179 CTR (Mad) 477 : (2003) 260 ITR 605 (Mad). In this case, the assessee received two types of subsidies. One was under a Scheme of the Government framed with the object of augmenting indigenous sugar production and to provide incentives to new sugar factories and expansion products. The Scheme enabled the entrepreneur to initially fund the capital cost by obtaining loans from public financial institutions and discharging them with the help of the incentives after the commencement of production. The incentives were provided exclusively for the purpose of repayment of loans for meeting the capital costs. These incentives were held by the High Court to be capital in nature. The other type of incentives was the subsidy which was linked to the purchase tax and was in no way linked to the expenditure incurred in setting up the sugar industry. The object of the subsidy was to give a concession to the assessee for meeting the cost of running the business after production. There was also no condition to the effect that the subsidy shall be used for a particular purpose only. In these circumstances, the High Court held that this subsidy was a trading receipt in the hands of the assessee. This case emphasises that the object with which the subsidy is given is the prime or foremost consideration while determining the nature of the receipt. The High Court held as under:
"The nature of the receipt of the incentive, therefore, has to be examined in the light of that object. Law has to keep up with the newer devices and methods adopted in the world of business as also in the several schemes that policy makers draw up from time to time to ensure the desired development in the different sectors of industry. If the Government found it convenient to adopt a policy of enabling the entrepreneurs to initially 10 ITA Nos.30 & 275/PN/2012 fund the capital cost of the project by obtaining loans from the public financial institutions by inducing the entrepreneur and the lender institution to rely upon the incentives provided under the Scheme for discharging such loans, it cannot be said that the incentive given being post production, though meant exclusively for meeting the capital cost, the amount of the incentive would be a trading receipt in the hands of the recipient. The fact that the time of payment is subsequent to the commencement of production would not in the larger perspective make a difference. As observed by the Supreme Court in the case of K.C.P. Ltd. vs. CIT (2000) 162 CTR (SC) 320 : (2000) 245 ITR 421 (SC), it is not the name given by the assessee or even the Revenue or anyone else that matters, but it is the true character of the receipt that determines its taxability and being regarded as falling with the capital field or out of it. If the true character of the incentive here is to enable the assessee to meet the capital cost, then that true character must be given full recognition and the fact that the receipt was subsequent to the commencement of production (can) not be allowed to stand in the way of its proper treatment as a receipt in the capital field meant to meet a capital cost. The line separating "capital" from "revenue" is a line which is not fixed and unalterable, but one which shifts from time to time depending upon the peculiar facts of a given case. It is the sum total of all the relevant facts of a given case, which will determine the ultimate decision as to whether a particular item of receipt or expenditure is to be regarded as being in the capital or in the revenue field..................... The purpose and object of the Scheme, therefore, is of vital significance and decided cases which turn upon the special facts cannot pre- determine the outcome of another case merely on the ground that post production receipts are normally regarded as trading receipts."
The Madras High Court also referred to the judgment of the Supreme Court in Sahney Steel (supra) and held that the Supreme Court "clearly recognised the possibility of the payments being made not directly but indirectly for the setting up of the industries" and that since in the case before the Supreme Court the payments "had been made post-production and were in no way linked to the steps that had been taken by the assessee therein in setting up the industry, it was observed that the incentives had been given only after production had commenced". These observations of the Madras High Court (at p. 612 of the report) recognise the possibility, depending upon the nature and object of the Scheme, of even post-production payments being linked, albeit indirectly, to the steps taken by the assessee to set up the industry. The High Court also observed earlier at p. 611 of the report, which we have extracted above, that what is of vital significance is the purpose and object of the Scheme and that the decided cases which turn upon the special facts cannot predetermine the outcome of another case merely on the ground that post-production receipts are normally regarded as trading receipts. In other words, the High Court has held that merely because the monies are received after production commences, it cannot be said, irrespective of the purpose and object of the Scheme, that the receipt is of revenue nature. This observation of the Madras High Court and the manner in which the judgment of the Supreme Court in Sahney Steel (supra) has been explained at p. 612 of the report also show that the Tribunal in the case of RIL for the asst. yr. 1985-86 correctly interpreted the judgment of 11 ITA Nos.30 & 275/PN/2012 the Supreme Court in Sahney Steel (supra). The observations of the Madras High Court lend support to the view that the purpose and object of the Scheme under which the subsidy is given is of more fundamental importance than the fact that the subsidy was received after the commencement of production or conditional upon it. Therefore, in our view and with respect, the Tribunal in the case of RIL had correctly interpreted and understood the ratio of the judgment of the Supreme Court in Sahney Steel (supra).
38. In this view of the matter, we answer the question referred to us in the affirmative. Since there are other grounds in the appeal of the assessee and since there is also an appeal by the Department, they will go back to the Division Bench for being disposed of in accordance with law."
11. It is pertinent to note here that the Hon'ble Special Bench, ITAT has considered the decision of the Hon'ble Supreme Court relied on by the Assessing Officer in the case of Sahaney Steels and Press Work Ltd. (supra). It is also pertinent to note here that the said issue was further carried by way of appeal by the revenue before the jurisdictional High Court and the Hon'ble High Court has affirmed the order of the ITAT, Special Bench, Mumbai in case of Reliance Industries Ltd. (supra) by holding that the subsidy is clearly on the capital account. We have also considered the "1979 Package Scheme of Incentives"
and as well as Package Scheme of 1993 introduced by the Govt. of Maharashtra. As rightly argued by the Ld. AR the object and purpose for which the incentive by way of sales tax subsidy is given are the identical in both the Incentive Schemes. It is true that in the preceding years the Tribunal has set aside the issue to the file of the Assessing Officer for the fresh adjudication but in our opinion as the issue has been settled by the jurisdictional High Court on the identical subsidy, we do not consider it necessary to again set aside the issue to the file of the Assessing Officer and to create the complexity of the litigation. We, therefore, following the decision of the Reliance Industries Ltd. (supra) hold that the sales tax subsidy availed in "Package Scheme of Incentives 1993" is a capital receipt and cannot be taxed as a revenue receipt in the hands of the assessee. Accordingly, Ground No. 3 is allowed."
15. The issue arising before us is identical to the issue before the Tribunal in assessment year 2006-07 and following the same parity of reasoning, we direct the Assessing Officer to treat the sales tax subsidy of Rs.14,08,96,000/- as capital receipt in the hands of the assessee. The ground of appeal Nos.2 and 2.1 raised by the assessee are allowed.
16. In the result, the appeal of the assessee is partly allowed. 12
ITA Nos.30 & 275/PN/2012
17. Now, coming to the appeal of the Revenue in ITA No.275/PN/2012, wherein by way of ground of appeal Nos.1 and 2, Revenue has raised the issue of allowability of payments made to M/s L&T Infotech Ltd. on account of annual maintenance charges.
18. In brief, the facts relating to the issue are that, the assessee had incurred SAP maintenance and other system expenses totaling to Rs.24,37,500/-. During the year under consideration, the said expenditure was incurred on use of SAP R/3 i.e. System Applications and Products, ERP package for day-to-day efficient functioning and controlling of various operations by implementing different types of SAP modules for Finance, Sales & Distributions, Material Management and Product Planning, etc.. The said expenditure was being incurred since 1999 and pertained to the services provided by L&T Infotech Ltd. for day-to-day technical and functional support in all types of modules. The claim of the assessee was that these were purely maintenance support charges paid to L&T Infotech Ltd.. The authorities below disallowed the said expenditure in view of similar expenditure having been disallowed in assessment years 2003-04 and 2004-05.
19. The Tribunal in ITA No.145/PN/2002 relating to assessment year 2003-04 in an appeal filed by the Revenue vide a consolidated order decided on 14.05.2012 with lead order in ITA No.830/PN/2008 relating to assessment year 2003-04, held that the said expenditure was revenue in nature as it cannot be said to have brought in enduring benefit. The expenditure claimed by the assessee, during the year under consideration, was similar to the expenditure claimed in the earlier years and following the same parity of reasoning, we hold that the annual maintenance charges of Rs.24,37,500/- paid to L&T Infotech Ltd. is to be allowed as a revenue expenditure. The ground of appeal Nos.1 and 2 raised by the Revenue are thus, dismissed.
13
ITA Nos.30 & 275/PN/2012
20. The issue in ground of appeal Nos.3 and 4 raised by the Revenue is in relation to the expenditure incurred on technical know-how i.e. reimbursement of salary, etc. to John Deere India Pvt. Ltd. amounting to Rs.42,18,456/-. The said disallowance was made in the hands of the assessee following the earlier years starting from assessment year 2001-02.
21. We find that the Tribunal in assessee's own appeal relating to assessment year 2006-07 had considered the issue and also the decision of the Tribunal in assessee's own case in earlier years and observed as under :-
"3. The ground Nos. 1 is in respect of payments made to John Deere India Pvt. Ltd. (in short "JDIPL"). The facts which revealed from the record are as under. The assessee company is engaged in the business of manufacturing and selling agricultural farm equipments like tractors, aggregates, part and components. The assessee was a joint venture company between Larsen & Turbo Limited (L&T), India and Deere & Co. Both joint venture partners had an equal stake in assessee company. Subsequently, there was changed in the L&T's stake in the assessee company and it became a wholly owned subsidiary of John Deere India Pvt. Ltd. which is a wholly owned subsidiary of Deere & Co. USA. So far as issue before us is concerned, in this year the assessee has claimed the expenditure of Rs.1,62,80,699/- which was in respect of professional fees to JDIPL. It is claimed by the assessee that the said expenses represents the reimbursement of the salary payable for the John Deere Expatriates in India. Moreover, those payments were made towards the services of CEO, Quality Manager and Manufacturing Engineer. The assessee also stated that an identical addition was made in the preceding years i.e. A. Yrs. 2002-03 to 2005- 06 and Ld. CIT(A) has given the relief to the assessee and the Revenue had carried the issue before the ITAT, Pune. It was pleaded before the Assessing Officer that no addition can be made. The Assessing Officer made the addition by giving the reason that as the Department has not accepted decision of Ld. CIT(A) and took issue before the ITAT, Pune.
4. We have heard the parties and perused the record. The Ld. Counsel submits that the issue stands covered in favour of the assessee by the decision of the Hon'ble ITAT, Pune in the assessee's own case in preceding year i.e. A.Y. 2001-02. The assessee also filed the copy of the Tribunal's order in ITA No. 1658/PN/2004 dated 30-11-2009. We find that the identical issue has come for the consideration in the assessee's own case in the A.Y. 2001-02 and the issue was decided in favour of the assessee confirming the order of Ld. CIT(A) allowing the relief to the assessee in that assessment year. The operative part of the decision is as under:
"6. On hearing me submissions of both the sides we have found that the nature of expenditure pertained to the year under consideration of "technical consultancy fees" was made in accordance of an agreement dated 31-03-2000 which was signed by one MD of John Deere India Pvt.14
ITA Nos.30 & 275/PN/2012 Ltd. On the other hand; from the side of the assessee it was signed by one Deputy CHO. The said agreement had provided as per the terms for reimbursement of monthly salary. Our attention has also been drawn on the bills which were raised by John Deere wherein as well there was a reference of reimbursement of expenses. It has also been produced on record that the company had entered into an agreement dated 10-02- 1998 with its joint venture company i.e. John Deere India Pvt. Ltd. and that agreement was for rendering know how and other activities related to manufacturing of tractors. There was a clause as per the said agreement that in consideration of technical consultancy services rendered or to be rendered by the consultant a lumpsum payment of Rs.4 lakhs to be made by the assessee company for the period from the date of incorporation up to 31-03-1998. Therefore it was argued that after the said period i.e. 31- 03-1998 the payment was nothing but reimbursement of salary to expatriate. Considering all these evidences such as the terms of the agreement, bills raised etc. it clearly indicates that the expenditure was towards reimbursement of salary hence the view taken by Ld CIT(A) that it was revenue in nature deserves to be affirmed. We uphold the said view and dismiss this part of ground of the Revenue."
4.1 We, therefore, following the decision of the Tribunal in the asseessee's own case in the A.Y. 2001-02, we reverse the order of the Ld. CIT(A) on this issue in this year and allow the Ground No. 1."
22. In view of the ratio laid down by the Tribunal in assessee's own case from year to year, we find no merit in the ground of appeal Nos.3 and 4 raised by the Revenue and hold that the expenditure incurred on technical know-how i.e. reimbursement of salary payable to the John Deere India Pvt. Ltd. is an allowable expenditure. Upholding the order of the CIT(A), we dismiss the ground of appeal Nos.3 and 4 raised by the Revenue.
23. The issue in ground of appeal No.5 raised by the Revenue is against the order of the CIT(A) in allowing the deferred sales tax equalization liability amounting to Rs.12,66,14,233/-.
24. The said disallowance was made in the hands of the assessee in view of the order of the Tribunal in assessee's own case relating to assessment year 2002-03. The brief facts relating to the issue are that, Larsen & Toubro Ltd. had sales tax liability which was payable by it over various years. As per the SICOM 15 ITA Nos.30 & 275/PN/2012 scheme, sales tax collected by L&T from its customers was required to be paid to authorities after a period of 10 years in 5 equal installments i.e. M/s Larsen & Toubro Ltd. had availed the benefit of deferral sales tax scheme. Against this, L&T had assigned deferral sales tax amount to LTJD, by discounting @ 12.5% per annum, the future value of L&T's repayments (i.e. deferral amounts) to the sales tax authorities. Later on, the assessee company had entered into a tri- partite financial arrangement dated 31.01.2002 with M/s Larsen & Toubro Ltd. and M/s L&T Finance Ltd.. Vide this agreement, the assessee company had undertaken an obligation of Larsen & Toubro Ltd. for payment of its sales tax liability of Rs.215.89 crores over a period of few years on receiving Rs.85.99 crores from L&T Finance Ltd., which had earlier accepted this liability from L&T Finance Ltd.. For the financial year 2004-05, the assessee company had accrued discounting charges of Rs.12,66,14,233/- in its books of account in respect of the liability of L&T Ltd. and the said was claimed as business expenditure by the assessee company while computing the total income. The assessee company had incurred the expenditure by way of discount and had worked out its proportionate liability in respect of the aforesaid discount, i.e. Rs.12,66,14,233/- and the same was claimed as deduction. The assessee claims that for every year starting from March, 2002 onwards, the assessee had accrued discounting charges in its books of account being the liability payable over the year and the said expenditure was allowable as business expenditure. The Assessing Officer following the observation in the earlier assessment orders for assessment years 2002-03 to 2004-05 had disallowed the expenditure by way of discount arising on account of deferred tax equalization of Rs.12,66,14,233/-. The CIT(A) allowed the claim of the assessee following his predecessor's order relating to assessment years 2002-03 to 2004-05.
16
ITA Nos.30 & 275/PN/2012
25. We find that before the Tribunal in an appeal filed by the Revenue in ITA No.1508/PN/2005 relating to assessment year 2002-03 vide a consolidated order dated 14.05.2012 with lead order in ITA No.830/PN/2008 relating to assessment year 2003-04, following ground was raised by the Revenue, which reads as under :-
"2. On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in holding that the provision of Rs.5,88,952/- created by the assessee, is to be considered as interest pertaining to the loan taken from M/s L & T Ltd."
26. While deciding the said issue, the Tribunal considered the deferral sales tax payment scheme which was availed by Larsen & Toubro Ltd. and assignment of the liability to the assessee vide tri-partite agreement. However, in assessment year 2002-03, the issue was only with regard to the provisions of Rs.5,88,952/- as interest in the books of account of the assessee which was claimed as revenue expenditure. The allowability of the entire amount under the said scheme as a deduction was not before the Tribunal. The Tribunal held as under :-
"15. The relevant facts are that Larsen & Toubro Ltd. (L & T) had availed the deferred option of payment of Sales Tax to the Government of Maharashtra. As per this option, L & T had collected Sales Tax and was required to pay Rs. 215.89 Crores to the Sales Tax Department. This liability was assigned by L & T to the assessee company in a tripartite agreement, a copy whereof has been made available at page Nos. 1 to 3 of paper book (Vol. 2). Accordingly, the assessee received Rs. 85.98 Crore and had to repay Rs. 215.89 Crores to L& T after 10 to 15 years. The assessee made a provision of Rs. 5,88,952/- as interest in its books and the said amount was claimed as revenue expenditure while computing the income. The A.O disallowed the said amount on the ground that the assessee had undertaken the sale tax liability of L & T and hence the same can be allowed as a deduction only when the same is actually paid as per Sec. 43B of the Act. The Ld CIT(A) has held that the amount of Rs. 5,88,952/- represents interest. He has further stated that the assessee had taken a loan from L & T which was to be repaid after agreed years and therefore, the amount is nothing but interest. The Ld CIT(A) has accordingly deleted the disallowance.
16. Before the Tribunal, the Ld D.R. submitted that the payment was made to the State Government at the behest of the assessee. The Ld CIT(A) did not appreciate that beneficiary was L& T and not the assessee. The revenue is 17 ITA Nos.30 & 275/PN/2012 aggrieved with the observation of Ld CIT(A) that it appears to be a loan arrangement. The ld. D.R submitted that it is only presumption of the Ld CIT(A) . He was thus not justified in deleting the disallowance.
17. Ld. A.R., on the other hand, tried to justify the first appellate order. He submitted that L & T was liable to pay Sales Tax to the Department and in the event of assessee defaulting, L & T had to make the payment. It is also to be noted that proceedings u/s. 201/201(1A) were initiated against the assessee and in those proceedings, the A.O has treated the said amount as interest and demanded tax, interest and penalty from the assessee. Thus, the A.O was not justified in disallowing said amount u/s. 43 B of the Act. In alternative, the ld. A.R. submitted that the amount is allowable as a business deduction since the assessee had incurred business liability. He pointed out that this issue stands covered by the decision of Pune Bench of the Tribunal in the case of Satyendra Investment Pvt. Ltd. Vs. ACIT, ITA No. 94/PN/98 (A.Y. 1996-97), order dated 30th March 2007. He also placed reliance on the decision of Hon'ble Bombay High Court in the case of CIT Vs. Shree Nirmal Commercial Ltd. 213 ITR 361 (Bom.) He also referred the contents of para no.7 of the order dated 30th November 2011 of the Pune Bench of the Tribunal in the case of John Deere Equipments (P.) Ltd. Vs. ITO (TDS), ITA Nos. 1006 to 1010/PN/2006 (A.Ys. 2001-02 to 2005-06).
18. The Ld. D.R. in rejoinder submitted that TDS wing of the Department is an independent wing than the A.O."
27. The Tribunal thus held that the assessee was entitled for deduction of interest as a business liability incurred by it.
28. The Tribunal further in the said consolidated order also adjudicated the appeal in ITA No.145/PN/2007 filed by the Revenue relating to assessment year 2003-04 wherein the ground of appeal Nos.3 and 4, read as under :-
"3. The learned CIT(A) erred in deleting the disallowance of Rs.10,75,57,361/- on account of deferred sales tax equalization liability.
4. The learned CIT(A) erred in holding that the arrangement entered into by the assessee with M/s. Larsen & Tubro Ltd. was purely a loan agreement and the amount of Rs.10,75,57,361/- represents the interest on the loan taken by the assessee."
29. The Tribunal while deciding the issue observed as under :-
"47. The A.O has disallowed deferred Sales Tax equalization liability to the extent of Rs.10,75,57,361/-. The Ld CIT(A) has deleted the disallowance following decision of its predecessor on an identical issue under similar facts in the appeal for A.Y. 2002-03. The ld CIT(A) held that the arrangement entered into by the assessee with M/s. Larsen & Tubro was purely a loan arrangement 18 ITA Nos.30 & 275/PN/2012 and it may be stated that the assessee had availed a loan of Rs.85,98,69,933/- and it was to pay a total sum of Rs.215.89 Crores over a period of time and this amount consisted of principal amount with interest accrued thereon. He accordingly held that the sum of Rs.10,75,57,361/- represents the interest component pertaining to the loan taken at Rs.85,98,69,933/-. The ld. CIT(A) held further that the Sales Tax liability of Larsen & Tubro first remained the Sales Tax liability of M/s. Larsen & Tubro only and assessee could not be held liable for clearing the dues of Sales Tax and liability of assessee will be towards the amount taken as loan from Larsen & Tubro together with the interest accrued thereon. The Ld CIT(A) accordingly held that the provision created in respect of Rs. 5,88,952/- for the immediately preceding A.Y., which for the present year is Rs.10,75,57,361/- would only be considered as the interest pertaining to the loan taken by the assessee from M/s. Larsen & Tubro and has to be allowed as an deduction u/s. 36 of the Act.
48. Parties have adopted similar arguments as advanced by them on an identical issue under similar facts in the appeal for the A.Y. 2002-03.
49. We have already decided the issue involved under similar facts in the appeal for the A.Y. 2002-03 hereinabove. Following the decision taken therein, we concur with the finding of the Ld CIT(A) in this regard. The same is upheld. The grounds are thus rejected."
30. Further, in ITA No.1077/PN/2007 in an appeal filed by the Revenue relating to assessment year 2004-05, similar issue was raised vide ground of appeal Nos.3 and 4, which are identical to ground of appeal Nos.3 and 4 in appeal of the Revenue vide ITA No.145/PN/2007 relating to assessment year 2003-04 wherein the claim of the assessee was allowed.
31. In the present captioned assessment year the disallowance was made by the Assessing Officer following the earlier assessment orders passed in assessment years 2002-03 to 2004-05. The CIT(A) had allowed the claim of the assessee following the appellate orders passed in the appeals relating to assessment years 2002-03 to 2004-05. The issue arising in the appeal before us is identical to the issue before the Tribunal (supra) in the earlier years and following the same parity of reasoning, we uphold the order of the CIT(A) in allowing the claim of the assessee and holding the amount paid represents the interest on the loan taken by the assessee. Consequently, the ground of appeal No.5 raised by the Revenue is dismissed.
19
ITA Nos.30 & 275/PN/2012
32. In the result, the appeal of the Revenue is dismissed.
33. Resultantly, whereas the appeal of the assessee is partly allowed that of the Revenue is dismissed.
Order pronounced on this 31st day of March, 2015.
Sd/- Sd/-
(G.S. PANNU) (SUSHMA CHOWLA)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Pune, Dated: 31 st March, 2015.
Sujeet
Copy of the order is forwarded to: -
1) The Assessee;
2) The Department;
3) The CIT(A)-I, Pune;
4) The CIT-I, Pune;
5) The DR "A" Bench, I.T.A.T., Pune;
6) Guard File.
By Order
//True Copy//
Assistant Registrar
I.T.A.T., Pune