Income Tax Appellate Tribunal - Mumbai
Novaritis Enterprises Ltd., Mumbai vs Department Of Income Tax on 11 April, 2012
IN THE INCOME TAX APPELLATE TRIBUNAL,
MUMBAI BENCH 'L' BENCH
BEFORE SHRI B.R.MITTAL(JUDICIAL MEMBER) AND
SHRI J.SUDHAKAR REDDY (ACCOUNTANT MEMBER)
ITA Nos.2193/Mum/2003: Assessment Year: 1998-1999
ITA Nos.2194/Mum/2003: Assessment Year: 1999-2000
Dy. CIT, Spl. Range-23, Sandoz Private Limited
Aayakar Bhavan, M.K. Road, (formerly known as Novartis Enterprises Pvt.
Mumbai Ltd.,)
'A' Block, Shiv Sagar Estate, 6th floor,Dr.
Annie Besant Road, Worli,Mumbai-400 018
PA No.AAACS 9267 J
(Appellant) (Respondent)
ITA Nos.1893/Mum/2003: Assessment Year: 1998-1999
ITA Nos.1894/Mum/2003: Assessment Year: 1999-2000
Sandoz Private Limited Addl. CIT, Spl. Range-23,
(formerly known as Novartis Aayakar Bhavan, M.K. Road,
Enterprises Pvt. Ltd., Mumbai
'A' Block, Shiv Sagar Estate, 6th
floor,Dr. Annie Besant Road,
Worli,Mumbai-400 018
PA No.AAACS 9267 J
(Appellant) (Respondent)
Assessee by : Shri Nitesh Joshi
Revenue by: Shri Mahesh Kumar
Date of hearing: 11.4.2012
Date of pronouncement: 9. .5. 2012
ORDER
Per B.R.Mittal, JM:
The cross appeals filed by the department and the assessee are directed against separate orders both dated 10.1.2003 of the CIT(A)-XXIV, Mumbai for the assessment years 1998-99 & 1999-2000, respectively. Since most of the grounds and facts are common, we heard these appeals together and are being disposed of by this common order for the sake of convenience.
2 ITA Nos.1893,2193/Mum/2003: A.Y: 1998-1999 ITA Nos.1894,2194/Mum/2003: A.Y: 1999-2000
2. Firstly, we take up the appeal of the assessee for assessment year 1998-99 being ITA No.1893/M/2003 for our consideration.
3. In Ground No.1, the assessee has disputed the order of ld CIT(A) in confirming disallowance of Rs.1,57,18,000 incurred on advertisement and publicity under section 40(a)(i) of the Act.
4. The relevant facts are that assessee company is engaged in manufacturing and trading of pharmaceuticals bulk drugs and formulations mainly for exports and research and development in the field of pharmaceuticals. In the assessment year under consideration, assessee remitted towards advertisement expenses an amount of Rs.1,57,18,000 to M/s. Novartis Pharma Services Inc, Basel, Switzerland(hereinafter referred to in short 'NPS') in respect of advertisement campaign launched in Russia for introduction of medicine 'Dlianos". The Assessing Officer stated that assessee has not deducted TDS under section 195 before making the above remittance.
5. During the course of assessment proceedings, assessee stated that the expenses remitted towards advertisements were the cost of Press/TV/Outdoor advertisement and the cost of making of layouts, films, proofs and videos in connection therewith. Since no part of advertisement was released in India as the product is only for the export market, no income could be deemed to have accrued or arisen in India in the hands of the recipient to whom the payment was made; hence, there is no requirement to deduct TDS under section 195 of the Act. The Assessing Officer did not accept above contentions of the assessee. The Assessing Officer has stated that payment has been made by the assessee outside India with a view to avoid payment of tax in the Country. The AO considered CBDT circular No.742 dated 2.5.1996 and stated that even if the foreign telecasting company which are not having branch office or Permanent Establishment (PE) in India, tax has to be deducted at source in accordance with provisions of sections 195 of the Income Tax Act, 1961 by the persons responsible for paying or remitting the amount to them. The AO has further stated that as per registration certificate issued by Ministry of Health and Medical Industry of the Russian 3 ITA Nos.1893,2193/Mum/2003: A.Y: 1998-1999 ITA Nos.1894,2194/Mum/2003: A.Y: 1999-2000 Federation, the product 'Dlianos' has been registered for sale in the Russian Federation for a period of five years not in the name of the assessee but in the name of M/s. Hindustan Ciba Giegy Ltd which has subsequently been renamed as M/s. Novartis India Ltd (hereinafter to be referred in short 'NIL') in whose name, product is registered for launching the advertisement. The AO has stated that there is also no agreement between the assessee company and NIL debarring later from selling above product in Russia. The product 'Dlianos' itself is not manufactured by assessee. The same is purchased by the assessee during the previous year relevant to assessment year 1998- 99 entirely from NIL for export to Russia. He has stated that \ advertisements were launched in Russia Federation by various advertising agencies not under any instruction from the assessee company but at the behest of its Swiss parent company i.e. NPS. The Assessing Officer has stated that there is also no agreement between the assessee company and NPS regarding incurring or sharing of above expenditure. The Assessing Officer has stated that advertisement expenses have been incurred at the instruction of NPS and the amount has been recovered from the assessee company without any specific agreement towards its liability or any rights arising to the assessee company from such payment. He has further stated that there is no bar on NIL or NPS from directly exporting said products to Russia. Therefore, the expenditure incurred in this regard cannot be said to be wholly and exclusively for the purpose of assessee's business and the same is disallowed as being unrelated to assessee's business. The AO has further stated that the cost of advertisement for producing films as well as stickers, press TV and outdoor advertisement have a life span of number of years and, therefore, said expenditure on exhibiting the same by paying to various TV channels cannot be said to be revenue expenditure but it is a capital expenditure. In view of above facts, the AO has disallowed the claim of the assessee of Rs.1,57,18,000. Being aggrieved, assessee filed appeal before the first appellate authority.
6. On behalf of assessee, it was contended that the assessee company had sold the product 'Dlianos' in Russia in the assessment year 1998-99 to the tune of Rs.5 crores and it was at the initiative of the assessee to export 'Dlianos' to Russia. The product was not got registered in the name of the assessee as it was already under the name of M/s. Hindustan Ciba Giegy Ltd, now known as NIL and the registration process being 4 ITA Nos.1893,2193/Mum/2003: A.Y: 1998-1999 ITA Nos.1894,2194/Mum/2003: A.Y: 1999-2000 time consuming and cumbersome, therefore, in the meanwhile, the assessee company started the process of export to Russia. It was contended that the export of 'Dlianos' was entirely in Russia in assessment year 1998-99. It was also contended that for incurring advertisement expenditure, assessee applied permission for remitting advertisement expenses incurred towards launch of 'Dlianos' to Reserve Bank of India. It was contended that as the advertisement agencies required the payment in advance and RBI did not allow advance payment, assessee requested NPS to make the payment and, thereafter, reimbursed the same to NPS. It was contended that in subsequent years, the payment was directly made to advertisement agencies. It was contended that due to sustained efforts of strategies advertisement and sales promotion efforts, assessee was successful in creating public awareness of the product 'Dlianos' and was able to get repeat orders from the distributors in Russia. It was also contended that NPS only helped the assessee as they have an office in Russia by contacting the relevant advertisement agencies and whereas assessee does not have any office or place of business in Russia and in its absence they had a genuine difficulty in establishing contact with local companies for advertising their products. It was contended that there was no income which accrued or arose to NPS on account of undertaking said advertisement in Russia and assessee made reimbursement of the expenditure only incurred by NPS on behalf of assessee. It was also contended that NPS is a tax resident at Switzerland, the provisions of the Double Taxation Avoidance Agreement (DTAA) between India and Switzerland are applicable. It was also contended that even otherwise, it would constitute business profits of NPS and as per Article 7 of the Treaty, business profits would be charged in India if the non-resident has PE in India and the income is attributable to such establishment in India. Since NPS does not have any such PE in India, the payment is not taxable in India. It was contended that reliance placed by AO on CBDT circular dated 2.5.1996 is misplaced. The said circular is concerned with the case where Indian advertisers were making payments to foreign telecasting companies for releasing advertisements which could be viewed by audience in India. In the case of the assessee, no part of the advertisement is released in any Indian Publication Media and the telecasting companies have no operation of any nature whatsoever in India. Hence, there is no territorial nexus with India and, accordingly, no part of income accrue or arise in India as the product 'Dlianos' was advertised and solely sold in 5 ITA Nos.1893,2193/Mum/2003: A.Y: 1998-1999 ITA Nos.1894,2194/Mum/2003: A.Y: 1999-2000 Russia. It was contended that even if a view is taken that the payment may be regarded as a payment to a Russian company, there was still no obligation to deduct TDS as no part of the income accrued or arose or could be deemed to have been accrued to the Russian company in India. It was contended that even as per the provisions of DTAA between India and Russia, the income would not be chargeable to tax in India as the Russia company did not have any PE in India in respect of which its profits could be attributable.
6.1 It was contended that the expenditure incurred towards advertisement is for the purpose of publicizing and make the same to target the audience and, therefore, it is an expenditure for business purposes of the assessee and could not be construed as non- business expenditure.
7. Ld CIT (A) considered the above submissions of the assessee alongwith order of Assessing Officer. Ld CIT(A) confirmed the action of Assessing Officer by stating that the expenditure is in the nature of reimbursement and does not help the case of the assessee as income has accrued in the hands of the non-resident payees to whom this payment has been made without making tax deduction at source as per section 195 of the Act. Therefore, the advertisement expenditure which is otherwise an allowable expenditure becomes disallowable in view of section 40(a)(i) of the Act. Ld CIT(A) further stated that the said product 'Dlianos' with respect to which publicity drive was launched and expenditure is claimed by the assessee was not registered in the assessee's name in Russia and the advertising agency in Russia did the publishing work at the command of NPS and not that of the assessee which fact further renders the expenditure incurred as unrelated to the assesee's business. Ld CIT(A) has stated that it is for the Income tax Department to decide and not for the assessee to presume as per its own convenience that such payments are not covered by the provisions of Income tax Act. Therefore, the assessee should have applied to the AO for remitting this amount for deduction of tax at source as per the provisions of section 195 of the Act before actually making the payment. Considering the above facts, ld CIT(A) has held that expenditure of Rs.1,57,18,000 on account of advertisement and publicity has been 6 ITA Nos.1893,2193/Mum/2003: A.Y: 1998-1999 ITA Nos.1894,2194/Mum/2003: A.Y: 1999-2000 made without deducting TDS and, therefore, it is disallowable as per provisions of section 40(a)(i) of the Act. Hence, assessee is in further appeal before the Tribunal.
8. Learned A.R. submitted that the expenditure of Rs.1,57,18,000 reimbursed by assessee company to NPS is on account of advertisement campaign made on behalf of the assessee to promote the product 'Dlianos'. He submitted that NPS raised the bills on the assessee which were reimbursed with the approval of Reserve Bank of India. He submitted that copies of debit notes raised by NPS are placed at pages 1 & 2 of PB and on that basis, assessee made application to Reserve Bank of India to take permission to remit the fund, copies of which are placed at pages 3 to 5 of PB. Ld A.R. submitted that AO has disallowed the claim on the ground that income had accrued in India to recipients and, therefore, TDS was required to be deducted under section 195 of the Act. Ld A.R. submitted that services were rendered outside India and advertisement also took place outside India i.e. in Russia. He submitted that the advertising companies have had no business connection in India nor they were carrying any business activities in India. Therefore, no income has accrued in India requiring the assessee to deduct TDS. Ld A.R. further submitted that even if the amount remitted by assessee is considered that an income has arisen to Switzerland company and/or advertising companies of Russia, it would constitute their business profits. Since neither NPS nor Russian companies, through whom advertisement campaign took place in Russia have had PE in India, the payment is not taxable in India as per DTAA agreement entered into between NPS and Russia. . He further submitted that the reliance placed by the AO on CBDT circular dated 2nd May, 1996 is not relevant as it relates to foreign telecasting company for releasing advertisements which could be viewed by audience in India but in the case of the assessee, no part of advertisement is released in any Indian Publishing media and telecasting companies herein have had no operation of any nature whatsoever in India. Therefore reliance placed on the said circular is misplaced. Ld A.R. further submitted that the assessee company is in the same group of NIL which is manufacturing the product 'Dlianos' and the assessee has sold the product to the tune of Rs.5 crores in the assessment year 1998-99 and due to advertisement, the assessee received repeated orders from distributors in Russia. Therefore, the expenditure was 7 ITA Nos.1893,2193/Mum/2003: A.Y: 1998-1999 ITA Nos.1894,2194/Mum/2003: A.Y: 1999-2000 incurred for business purposes. Ld A.R. submitted that TDS is required to be deducted only if the remittance made by it is taxable in India. He submitted that Hon'ble apex Court in the case of GE India Technology Centre P.Ltd v. CIT, 327 ITR 456(SC) has held that TDS is required to be deducted u/s.195 of the Act only if the whole or part of the remittance is liable to tax in India If tax is not assessable, there is no question of deduction of TDS. Ld A.R. submitted that since the amount was only reimbursed for the actual expenditure incurred on behalf of assessee by NPS, no TDS was required to be deducted. Hence, provisions of section 40(a)(i) are not applicable.
9. On the other hand, ld D.R. supported the orders of authorities below. He submitted that NPS is only an intermediary between assessee company and Russian parties, who actually had undertaken the advertisement on behalf of the assessee for the product 'Dlianos'. He submitted that the services were wholly rendered by Russian parties to whom payments had been made by the assessee through intermediary NPS and, therefore, TDS was required to be deducted on the amount remitted by the assessee company. Ld D.R. relying on the decision of AAR dated 22nd February, 2012 in the case of SKF Boilers and Driers Pvt Ltd (A.A.R. No.983-984 of 2010) submitted that if income accruing or arising directly or indirectly through or from any business connection in India or source of income in India shall be deemed to accrue or arise in India. It was observed by AAR that if the commission is earned from business activity of the applicant company in India, it is chargeable to tax even if the agency rendered services abroad. He submitted that the said case squarely applies to the case of the assessee as in this case, Russian Advertising Company rendered service to the assessee company in Russia due to which they earned income. Therefore, the assessee was required to deduct TDS. Ld D.R. further submitted that the said expenditure is also not allowable as the product for which advertisement was made was not manufactured by assessee company nor it is registered in the name of the assessee company in Russia but in the name of NIL. Hence, said expenditure cannot be said to have been wholly incurred for the business purposes of the assessee. Ld D.R. also supported the action of AO to treat the said expenditure even otherwise as capital in nature as the said advertisements by way of film have created a brand name for which the benefit is of enduring in nature.
8 ITA Nos.1893,2193/Mum/2003: A.Y: 1998-1999 ITA Nos.1894,2194/Mum/2003: A.Y: 1999-2000
10. We have considered submissions of ld representatives of the parties and orders of authorities below carefully. We observe that the authorities below have denied the claim of the assessee on account of expenditure of Rs.1,57,18,000 on three counts, namely; (a) the remittance of the expenditure by assessee to non-resident companies is the income which has accrued to them in India and, therefore, assessee was required to deduct TDS u/s.195 of the Act, (b) that the said expenditure on advertisements create a brand awareness which remains in the minds of consumers for a long time, hence, it is capital in nature and (c) that the expenditure incurred by the assessee is not wholly and exclusively for purposes of assessee's business.
11. Firstly, we consider the first aspect as to whether the said amount remitted by the assessee aggregating to Rs.1,57,18,000 towards advertisements in Russia through advertising agencies who are admittedly non-resident is assessable as an income in the hands of those companies being the income accrued in India. There is no dispute to the fact that assessee remitted the amount towards expenses to the advertising agencies of Russia such as M/s. Haile Corporation Ltd., M/s. Headway Express Ltd., M/s. Sandoz Pharma Services (subsequently renamed as M/s. Novartis Pharma Services Inc) through its parent company NPS which is a resident of Switzerland. There is no dispute to the fact that the entire advertisement activity had been carried out outside India. There are no facts brought on record that NPS has a PE in India. Considering above facts and also the fact that there is a DTAA agreement between India and Switzerland and also between India and Russia, the said amount remitted by the assessee towards advertisements even if assessable could be assessed as business profits as per section 9 of the Act but having regard to the fact that these non-resident companies i.e. recipients and/or advertising companies have no PE in India, we agree with ld A.R. that the said amount could not be taxed in India under section 5(2) of the Act. Hon'ble apex Court has held in G.E. India Technology Centre Pvt Ltd. (supra) that TDS is required to be deducted u/s.195 of the Act, only if whole or a part of the remittance is liable to tax in India. If tax is not assessable, there is no question to deduct TDS. Therefore, we hold that the findings of authorities below that the assessee is liable to deduct TDS u/s.195 of the Act has no merit because the provisions of section 195 of the Act will be applicable only if an income is chargeable to tax under the Act. Therefore, reliance 9 ITA Nos.1893,2193/Mum/2003: A.Y: 1998-1999 ITA Nos.1894,2194/Mum/2003: A.Y: 1999-2000 placed by ld D.R. on the decision of AAR (supra) and Circular dated 2nd May, 1996 are not applicable to the assessee's case. Accordingly, Section 40(a)(i) of the Act does not apply. Hence, the authorities below were not justified to deny the claim of the assessee u/s.40(a)(i) of the Act as the assessee has not committed any default in not deducting TDS u/s.195 on the amount of Rs.1,57,18,000 remitted by it to NPS in respect of advertisement campaign launched in Russia.
12. Now we consider the second aspect as to whether the expenditure incurred on TV films and commercial and other promotional films is capital in nature or not. In this regard, Hon'ble Jurisdictional High Court in the case of CIT vs. Geoffrey Manners & Co. Ltd., 315 ITR 154(Bom) have considered the issue as to whether the expenditure incurred for promotion of films, slides and advertising films is a capital expenditure or revenue expenditure. Their Lordships have held that the said expenditure incurred in respect of ongoing products of the assessee is revenue expenditure. Further, in assessee's own case for A.Y. 1996-97, the Tribunal in I.T.A.No.2189/M/2003 vide order dated 29.6.2006 also held that the expenditure incurred on short film to advertise its product is revenue expenditure. The said order of the Tribunal was disputed by department in appeal before Hon'ble High Court in Income Tax Appeal No.1644 of 2007 and the Hon'ble High Court vide its order dated 26.2.2008 dismissed the appeal of the department. A copy of the said is also placed on record. Respectfully following the said judgment of Hon'ble Jurisdictional High court (supra), we hold that the amount spent by the assessee for the purpose of advertisement for marketing of 'Dlianos' is revenue in nature and not capital expenditure.
13. Now coming to the last aspect as to whether expenditure has been incurred by the assessee wholly and exclusively for the purposes of its business or not. We observed that the said product 'Dlianos' is not registered in the name of the assessee company but is registered in the name of NIL in Russian Federation. Ld A.R. has also not brought any documents on record that the said advertisement expenditure has been incurred by NPS for and on behalf of assessee to promote the said brand in Russia under the instruction of assessee or pursuant to any agreement entered into between assessee and NPS. Further, we observe that NPS raised invoices on the assessee claiming that expenditure has been incurred by it to promote the product in Russia and 10 ITA Nos.1893,2193/Mum/2003: A.Y: 1998-1999 ITA Nos.1894,2194/Mum/2003: A.Y: 1999-2000 assessee has reimbursed the amount to NPS without seeking details of the expenditures incurred. There is no material on record to establish that the said expenditure has been incurred for wholly and exclusively for the purposes of assessee's business. Section 37(1) of the Act provides that any expenditure incurred wholly and exclusively for the purposes of the business shall be allowed in computing the income chargeable under the head "profits and gains of business". Therefore, onus lies on the assessee to prove that the expenditure has been incurred wholly and exclusively for the purposes of its business. It is observed that said expenditure has been incurred by NPS and paid by assessee on the basis of invoices raised. Save and except these details, no document has been brought on record that the said expenditure was incurred by NPS at the instance of the assessee wholly and exclusively for the purposes of assessee's business. We are of the considered view that an expenditure cannot be allowed to have been incurred by the assessee for the purposes of its business unless assessee proves that expenditure was incurred in connection with assessee's business with some documentary evidences. Therefore, we consider it prudent that in the interest of justice this matter be restored to the file of the AO to decide afresh with the liberty to assessee to place such document as it may consider necessary to establish that said expenditure has been incurred by the assessee for the purposes of its business and if assessee establish that the expenditure has been incurred for the purposes of its business, AO will allow the claim of assessee as per law. Hence, we set aside the orders of authorities below & restore the issue to the file of AO to re-decide the claim of the assessee afresh after due opportunity to the assessee to prove that the said expenditure on advertisement has been incurred wholly and exclusively for the purposes of assessee's business and if assessee establishes the same, AO will allow the claim of the assessee as per law. Hence, Ground No.1 of the appeal of the assessee is allowed for statistical purposes.
14. In Ground No.2 of appeal, assessee has disputed the order of ld CIT(A) in confirming the disallowance of Rs.33,05,000 incurred on repairs to buildings which has been treated by Assessing Officer as capital expenditure.
11 ITA Nos.1893,2193/Mum/2003: A.Y: 1998-1999 ITA Nos.1894,2194/Mum/2003: A.Y: 1999-2000
15. The relevant facts giving rise to this appeal are that assessee incurred total expenditure of Rs.37,28,000 under the head "repairs", the details of which are as follows:
"Buildings" Rs.'000
Refurbishment of leased premises at Shivsagar Estate
Varma Brothers Civil/Plumbing work 402
Rehamatullah Ceiling modifications, plaster work 125
SP Controls Electrical work 671
Rosentique Partitions, modular work stations 591
H.S.Desigers Woodwork, partitions, cabins 1,344
Nimish Parekh Architects'1s fees for the above 172
Breaking walls, shifting equipments,
Removing ceilings, etc at site of R&D Centre,
at Kolshet. _86
3728"
16. The Assessing Officer has stated that except for an amount of Rs.86,000 spent for other repairs, balance expenditure of Rs.36,42,000 has been incurred by the assessee on account of major renovation work undertaken in respect of buildings. He has stated that out of it, expenses to the extent of Rs.33,05,000 relates to renovation of assessee's office at Shivsagar Estate, Worli and balance of Rs.33,402 relates to renovation of its R&D Centre at Kolshet. The Assessing Officer did not accept the contention of assessee that expenditure of Rs.33,05,000 represents expenses of revenue nature such as civil modifications, ceiling repairs, electrical modification, partitions, etc. The assessee also contended that the premises are leased for short period of 5 years and none of the expenditure could be utilized after vacating the premises. The AO stated that the said expenditure has been made for the purpose of renewal and restoration of office premises and not for the purpose of preserving or 12 ITA Nos.1893,2193/Mum/2003: A.Y: 1998-1999 ITA Nos.1894,2194/Mum/2003: A.Y: 1999-2000 maintaining an already existing asset. Therefore, the AO after considering the judicial cases mentioned therein, held that expenditure of Rs.36,42,000 is capital in nature and after allowing 10% as depreciation, disallowed net amount of Rs.32,77,800. Being aggrieved, assessee filed appeal before the first appellate authority.
17. Ld CIT(A) has stated that expenditure of Rs.3,37,000 relating to the repairs work at the assessee's R&D Centre is to be treated as allowable u/s.35 of the I.T.Act, 1961 but the balance amount is capital in nature. Accordingly, disallowed the claim of Rs.33,05,000. Hence, assessee is in further appeal before the Tribunal.
18. During the course of hearing, ld A.R. submitted that the said expenditure aggregating to Rs.33,05,000 disallowed by ld CIT(A) is on account of repairs of the buildings and no new asset has been created. Hence, it is revenue in nature. He placed reliance on the decision of Hon'ble Madras High Court in the case of Commissioner of Income-tax v. Ayesha Hospitals P. Ltd, 292 ITR 266(Mad) and the decision of Hon'ble Delhi High Court in the case of Commissioner of Income-tax v. Hi Line Pens Pvt. Ltd., 306 ITR 182(Del).
19. On the other hand, ld D.R. supported the orders of authorities below and submitted that AO has considered the decision of Hon'ble apex Court in the case of Balimal Naval Kishore & Anr vs CIT, 224 ITR 414(SC). He submitted that by incurring the said expenditure, details of which are given by Assessing Officer at pages 6-7 of the assessment order, has found that new and different assets have been created and, therefore, the case of assessee falls squarely in the domain of capital expenditure.
20. We have carefully considered the submissions of representatives of the parties and orders of authorities below. On perusal of details of expenditure, stated by Assessing Officer at pages 6-7 of assessment order and also by ld CIT(A) at pages 9-10 of the impugned order, we observe that by incurring the expenditure, no new asset has come into existence and only the existing asset has been repaired in respect of the buildings which is used by the assessee for its business purposes. We observe that the 13 ITA Nos.1893,2193/Mum/2003: A.Y: 1998-1999 ITA Nos.1894,2194/Mum/2003: A.Y: 1999-2000 repairs carried out by the assessee is to improve the bad conditions of the building and to prevent further deterioration. The repairs which have been carried out does not bring into existence any additional advantage or benefit of enduring nature nor change the nature, character or identity of the buildings itself. In this regards, we consider it prudent to refer the decision of Hon'ble Hon'ble Supreme Court in the case of Empire Jute Co. Ltd vs CIT, 124 ITR 10(SC), wherein, Their Lordships have held "there may be cases where expenditure, even if incurred for obtaining advantage of enduring benefit, may, nevertheless, be on revenue account and the test of enduring benefit may break down. What is material to consider is the nature of the advantage in a commercial sense and it is only where the advantage is in the capital field that the expenditure would be disallowable on an application of the above test". This principle was reiterated by the Supreme Court in the case of CIT vs. Associated Cement Companies Ltd., 172 ITR 257. Their Lordships held that what is material to consider is the nature of the advantage in a commercial sense and it is only where the advantage is in the capital field that the expenditure would be disallowable on an application of the above test. If the advantage consists merely in facilitating the assessee's trading operations or enabling the management and conduct of the assessee's business to be carried on more efficiently or more profitability while leaving the fixed capital untouched, the expenditure would be on revenue account, even though the advantage may endure for an indefinite future. Considering the above decisions of Hon'ble Apex Court and the decisions cited by representatives before us, we are of the considered view that the expenditure incurred by assessee under the head "repairs" is on the existing assets by renovating the buildings andis revenue in nature. Hence, we delete the disallowance of Rs.33,05,000 as the said expenditure is revenue in nature. Thus, ground No.2 taken by assessee is allowed.
21. Now, we take up department's appeal being I.T.A. No.2193/M/2003 for A.Y. 1998-99.
22. Ground Nos.1 & 2 are as under:
"1. On the facts and in the circumstances of the case and in law, ld CIT(A) erred in directing the AO to reduce the net receipts instead of 14 ITA Nos.1893,2193/Mum/2003: A.Y: 1998-1999 ITA Nos.1894,2194/Mum/2003: A.Y: 1999-2000 gross receipts in the R&D Services in computing the eligible profits for the purposes of working out deduction u/s.80HHC.
2. On the facts and in the circumstances of the case and in law, ld CIT(A) erred in ignoring the fact that the receipts from R&D Services were on account of exploitation of excess capacity for R&D work by the assessee."
23. At the time of hearing, it was conceded by ld D.R. that the issue is covered against the department by the decision of Hon'ble apex Court in the case of ACG Associated Capsules (P) Ltd vs. CIT, (2012) 247 CTR 382(SC). Accordingly, it was submitted by representatives of both sides that issue may be restored to the file of AO with the direction to work out the deduction u/s. 80HHC of the Act in the light of the said decision of Hon'ble Supreme Court i.e. by considering the net receipt. Hence, Ground Nos.1 & 2 of appeal taken by department are allowed for statistical purposes by restoring the issue to the file of AO with a direction to consider the net receipts while computing the deduction allowable u/s.80 HHC of the Act.
24. Ground No.3 of appeal is as under:
"On the fats and in the circumstances of the case and in law, ld CIT(A) erred in directing the AO to reduce the amount of Rs.78,99,236 out of direct cost in respect of trading goods for the purpose of computing deduction u/s.80HHC.
25. During the course of assessment proceedings, the Assessing Officer stated that the assessee has included an amount of Rs.1,19,06,264 while computing the figure of export turnover which was not received within the specified extended period. The AO stated that the said amount is to be reduced from the figure of export turnover. Being aggrieved, assessee filed appeal before the CIT(A). The CIT(A) accepted the contention of assessee that AO ought to have reduced direct cost of Rs.78,99,236 being the cost of trading goods in relation to the aforesaid amount of Rs.1,19,06,264 for the purpose of computing deduction u/s.80HHC of the Act. Hence, department is in appeal before the Tribunal.
26. Ld D.R. submitted that the assessee could not receive the export proceeds of Rs.1,19,06,264 even within the extended period and, therefore, as per Section 80 HHC(2) of the Income tax Act, 1961, AO reduced the said amount from the export 15 ITA Nos.1893,2193/Mum/2003: A.Y: 1998-1999 ITA Nos.1894,2194/Mum/2003: A.Y: 1999-2000 turnover while computing deduction u/s.80HHC of the Act. Ld D.R. submitted that clause (b) of the Explanation to Section 80 HHC (4C) defines export turnover and clause
(d) of the Explanation to Section 80 HHC(3) defines direct cost. He submitted that it is not stated that if export proceeds are not realized by the assessee within a period as prescribed and same is to be excluded, in that case direct cost proportionate to said amount has to be reduced. He submitted that export turnover specifically states that the sale proceeds received in, or brought into, India by the assessee in convertible foreign exchange in accordance with clause (a) of sub-section (2) of any goods or merchandise to which this section applies .... He submitted that no deduction of the direct cost proportionate to the goods for which export proceeds have not been realized by the assessee or brought into, in India within specific period has to be reduced while computing deduction allowable under section 80 HHC of the Act. However, ld A.R. supported the order of ld CIT(A) and submitted that direct cost should be relatable to export turnover and, therefore, same should be reduced if the export turnover is not considered in respect of those exported goods.
27. We have carefully considered the submissions of ld representatives of parties and orders of authorities below as also the relevant provisions of section 80 HHC of the Act. We find merit in the contentions of ld D.R. that clause (b) of explanation to Section 80 HHC (4C) defines 'Export Turnover' which means the sales proceeds received in, or brought into, India by the assessee in convertible foreign exchange in accordance with clause (a) of sub-section (2) of any goods or merchandise to which this section applies and which are exported out of India, but does not include freight or insurance attributable to the transport of the goods or merchandise beyond the customs station as defined in the Customs Act. Further, clause (d) of Explanation to Section 80 HHC(3) states "Direct costs" means costs directly attributable to the trading goods exported out of India including the purchase price of such goods. We observe that the assessee has not brought in sales proceeds of an amount of Rs.1,19,06,264 within the extended period which was granted to the assessee and same is to be reduced from export turnover as per clause (b) of Explanation to Section (4C) of Section 80 HHC of the Act., while computing the deduction to be allowed under section 80 HHC of the Act. We observe that Direct Cost is also defined in explanation of Sub-section (3) of Section 80 16 ITA Nos.1893,2193/Mum/2003: A.Y: 1998-1999 ITA Nos.1894,2194/Mum/2003: A.Y: 1999-2000 HHC, which means the costs directly attributable to the trading goods exported out of India including the purchase price of such goods. It does not state that the direct cost gives the cost attributable to the trading goods which were exported out of India should be excluded for which sales proceeds have not been realized. Hence, we do not agree with ld A.R. that direct cost in respect of which goods which have been exported but the sales proceeds have not been brought in India in specified period, should be reduced while computing the deduction u/s.80HHC of the Act. Accordingly, we confirm the action of AO by allowing Ground No.3 of appeal taken by department.
28. Now, we take up the appeals for the assessment year 1999-2000 filed by assessee and department.
29. First we take up the appeal of assessee being I.T.A. No.1894/M/2003.
30. In Ground No.1 of appeal, assessee has disputed the order of ld CIT(A) in confirming the action of AO to disallow Rs.78,25,236 being expenditure incurred on advertisements and publicity under section 40(a)(i) of the Act.
31. At the time of hearing, ld representatives of both parties submitted that the facts in the assessment year are similar to Ground No.1 of appeal for the assessment year 1998-99 with the additional fact that in A.Y. 1999-2000, exports were made by the assessee besides Russia to other countries namely, Ukraine and Kazakistan.
32. We have considered the orders of authorities below and submissions of representatives of parties. We observe that facts and reasoning given by authorities below are identical as in A.Y. 1998-99, which we have considered vide paras 4 to 7 hereinabove. We have also considered the submissions of representatives in details vide para 8-9 of the impugned order while considering this issue in A.Y. 1998-99. For the reasons mentioned hereinabove vide paras 10 to12, we consider it prudent to restore this issue to the file of AO to re-decide the same after giving opportunity to the assessee to establish as to whether the said expenditure has been incurred by the assessee wholly and exclusively for the purposes of its business and if so, the AO will allow the 17 ITA Nos.1893,2193/Mum/2003: A.Y: 1998-1999 ITA Nos.1894,2194/Mum/2003: A.Y: 1999-2000 same as per law. Hence, ground No.1 taken by the assessee is allowed for statistical purposes.
33. In Ground No.2 of appeal, assessee has disputed the order of ld CIT(A) in confirming disallowance of Rs.38,95,000 incurred on repairs to buildings which has been treated by AO as capital expenditure.
34. The facts and reasoning given by authorities below are identical to Ground No.2 of appeal considered by us for A.Y. 1998-99 which have been stated hereinabove in paras 15 to19 and for the reasoning mentioned hereinabove in para 20, we hold that the said expenditure is revenue in nature and, therefore, we allow Ground No.2 of appeal taken by assessee by reversing the orders of authorities below.
35. Ground No.3 of appeal is as under:
"Ld CIT(A) erred in holding that the loss suffered on the export of manufactured goods ought to be adjusted against both the profits of the traded goods as well as the export incentives."
36. At the time of hearing, ld A.R. fairly conceded that the above issue is covered against the assessee by the decision of Hon'ble Apex Court in the case of IPCA Laboratory Ltd. v. Deputy Commissioner of Income-tax, 266 ITR 521(SC), wherein, it was held that while arriving at profits earned from export of both self manufactured goods and trading goods, the profits and losses in both trades have to be taken into consideration and if after such adjustments there is a positive profit the assessee would be entitled to deduction under section 80HHC(1) of the Act. It was further held that if there is a loss the assessee would not be entitled to deduction. Hence, ld CIT(A) has rightly confirmed the action of Assessing officer that while calculating deduction u/s.80HHC of the Act, the loss suffered by the assessee on the export of manufactured goods have to be adjusted against profits of the trading goods as well as export incentives received by the assessee. Therefore, Ground No.3 of the appeal taken by assessee is rejected by confirming orders of authorities below.
37. Ground No.4 of appeal is as under:
18 ITA Nos.1893,2193/Mum/2003: A.Y: 1998-1999 ITA Nos.1894,2194/Mum/2003: A.Y: 1999-2000 "Ld CIT(A) ought to have held that the loss suffered on the export of the manufactured goods ought to be ignored while determining the deduction available under section 80 HHC and in any event the appellants ought to be allowed a deduction equivalent to 90% of the export incentives in terms of the first proviso to sub-section(3)."
38. At the time of hearing, ld A.R. conceded that if there is a profit after giving effect to ITAT's order, the deduction u/s.80HHC should be considered and to be allowed as per decision of Hon'ble Apex Court in the case of IPCA Laboratory (supra). Ld D.R. has no objection to the above submissions of ld A.R. In view of above submissions of ld representatives of parties, we restore this issue to the file of AO with a direction to consider to allow deduction u/s.80HHC of the Act as per law if there is a positive profit after giving effect to the order of ITAT. Hence, ground No.4 is allowed for statistical purposes.
39. Ground No.5 is as under:
"The CIT(A) erred in not appreciating the appellant's contention that an amount of Rs.16,24,563 on account of export proceeds not received should also be reduced from the total turnover while computing deduction u/s. 80HHC."
40. The issue involved and submissions of ld representatives of parties in regard to above ground is similar to Ground No.3 of appeal taken by department for A.Y. 1998-99. For the reasons mentioned hereinabove in para 27, we confirm the order of ld CIT(A)and reject Ground No.5 taken by the assessee.
41. Now we take up appeal filed by department for A.Y. 1999-2000 being I.T.A. No.2194/M/03.
42. Ground No.1 is as under:
"On the facts and in the circumstances of the case and in law, ld CIT(A) erred in directing the AO to exclude excise duty and sales tax from the total turnover for the purposes of computation of deduction allowable u/s.80HHC.'
43. At the time of hearing, ld D.R. conceded that the above issue is covered in favour of the assessee in view of decision of Hon'ble Apex Court in the case of CIT vs. 19 ITA Nos.1893,2193/Mum/2003: A.Y: 1998-1999 ITA Nos.1894,2194/Mum/2003: A.Y: 1999-2000 Lakshmi Machine Works , 290 ITR 667(SC). In view of this, we reject this ground taken by department.
44. Ground No.2 is as under:
"On the facts and in the circumstances of the case and in law, ld CIT(A) erred in directing the AO to reduce 90% of the net receipts of R&D Services as against the gross receipts, ignoring the fact that the gross receipts from R&D services were on account of exploitation of excess capacity for R&D Services of the assessee."
45. At the time of hearing ld D.R. conceded that the above issue is covered against the department by the decision of Hon'ble Apex Court in the case of ACG Associated Capsules Pvt Ltd (supra). Therefore, we uphold the order of ld CIT(A) and reject Ground No.2 taken by department.
46. In the result, appeals of the assessee for A.Y. 1998-99 and 1999-2000 are allowed in part and whereas appeal of department for A.Y, 1998-99 is allowed in part and appeal for A.Y. 1999-2000 is rejected.
Pronounced in the open court on 9th May, 2012
Sd/- Sd/-
(J.SUDHAKAR REDDY) (B.R. MITTAL)
Accountant Member Judicial Member
Mumbai, Dated 9th May, 2012
Parida
Copy to:
1. The appellant
2. The respondent
3. Commissioner of Income Tax (Appeals),XXIV, Mumbai
4. Commissioner of Income Tax, City-7 , Mumbai
5. Departmental Representative, Bench 'L' Mumbai
//TRUE COPY// BY ORDER
ASSTT. REGISTRAR, ITAT, MUMBAI