Income Tax Appellate Tribunal - Chandigarh
Dsm Sinochem Pharmaceuticals , ... vs Assessee on 4 December, 2015
IN THE INCOME TAX APPELLATE TRIBUNAL
DIVISION BENCH, CHANDIGARH
BEFORE SHRI BHAVNESH SAINI, JUDICIAL MEMBER AND
MS. ANNAPURNA MEHROTRA, ACCOUNTANT MEMBER
ITA No.438/Chd/2015
Assessment Year:2010-11
DSM Sinochem Pharmaceuticals, Vs. The DCI T
India Private Limited Circle-1(1)
(Earlier Knows as DSM Anti Chandigarh
Infectives I ndia Limited)
Bhai Mohan Singh Nagar,
Toansa, District Nawanshahr
Punjab
PAN No. AABCM4314K
(Appellant) (Respondent)
Appellant By : Sh. K.M. Gupta, Sh. Sidharth Dadu
Sh. Harish Bisht, and Sh. Nitin Narang
Respondent By : Sh. Manjit Singh, Sh. Ajay Sharma
Date of hearing : 03/09/2015
Date of Pr onouncement : 04/12/2015
ORDER
PER ANNAPURNA MEHROTRA A.M. This appeal has been filed by the assessee against the order of the DCIT Circle 1(1), Chandigarh passed u/s 144C(13) r.w.s. 143(3) of the Income Tax Act, dated 25.02.2015. The assessee has raised the following grounds of appeal.
1. That the Ld. AO has erred both on facts and in law in computing the loss of the Appellant at Rs.23,72,41,227 as against the returned loss of Rs. 50,81,48,052. TRANSFER PRICING MATTERS
2. That on the facts and circumstances of the case and in law, the Ld. Dispute Resolution Panel ('DRP') / AO / Transfer Pricing Officer ('TPO') erred in determining/ confirming the Arm's Length Price ("ALP") of corporate service fees paid by the Appellant to its Associated Enterprises CAE's) at only 5% of the said transaction i.e INR 44,91,480/-, on an ad-hoc basis as against the total payment of INR 8,98,29,606/-.
3. That on the facts and circumstances of the case and in law,, the DRP / AO / TPO erred in making the adjustment on account of corporate service fees and in doing so have grossly :
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3.1. erred in alleging that the Appellant has received duplicative services under the CSC arrangement.
3.2. erred by holding that there was no need for such services thereby challenging the commercial wisdom of the Appellant in making such payments and thereby passing the order in contradiction with the judicial pronouncements pronounced by various courts and tribunals.
3.3. erred by ignoring the commercial rationale and expediency in availing the services from the AEs;
3.4. erred by holding that the services received are in the nature of shareholder services and no payment is required for the same.
3.5. erred by not appreciating the evidence submitted by the Appellant and undertaking an analysis with regard to cost of services to AEs and benefits received from services availed.
3-6. erred in holding that the Appellant has not identified payment for each and every service and that identification of separate payment for each service is necessary to determine the arm's length nature.
3.7. erred in holding that the cost incurred by AEs for providing services have been arbitrarily allocated to the Appellant using formulary apportionment. 3.8. erred in making statements in the order passed under section 92CA of the Act, based on his conjectures and surmises, which are not in accordance with facts of the case, thereby making a high pitched assessment.
4. That on the facts and circumstances of the case and in law, the DRP / AO / TPO erred in holding that the benchmarking done by the Appellant in respect of international transaction relating to payment towards corporate sendee fees is not in accordance with the law and in doing so have grossly erred by:
4.1. disregarding the ALP, as determined by the Appellant in the TP documentation maintained by it in terms of section 92D of the Income Tax Act.1961 read with Rule 10D of the Income Tax Rules,1962;
4.2. rejecting the selection of foreign AE as tested party based on frivolous grounds of non-availability of comparable data for foreign enterprises without rejecting TNMM which was adopted to benchmark the transaction pertaining to payment of Corporate Service Charges by the Appellant.
4.3. erroneously applying Comparable Uncontrolled Price ('CUP') method in contravention of the provisions of Rule 10B of the Income Tax Rules, 1962 the Rules') and Section 92C of the Act.
CORPORATE TAX MATTERS
5. That the Ld. AO/DRP erred on facts & in law in making a disallowance of Rs. 2,08,84,673 out of commission expenses for the year under consideration based on a view formed in the preceding assessment years on the following transactions:-
5.1. Disallowing sums of Rs. 1,16,203 and Rs. 63,13,871 paid as commission to Malachite Chemicals and Edward Keller (Phils) Inc. 5.2. Disallowing commission expense of Rs. 1,44,54,599 being excessive and unreasonable by arbitrarily fixing an average rate of commission paid to Indian agents at 3%.
6. That the Ld. AO/DRP erred on facts & in law in making a disallowance of expenditure of Rs. 18,82,264 by invoking the provisions of section 14A of the Act read with Rule 8D of the Income Tax Rules,1962.
6.1. That the Ld. AO/DRP erred in proposing an addition of lis. 18,82,264 to the book profit u/s 115 JB by invoking the provisions of section 14A of the Act read with Rule 8D of the Income Tax Rules, 1962.
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7. That the Ld. AO/DRP erred on facts & in law in making a adhoc disallowance out of personnel and operating expenses of Rs. 8,18,69,666 alleging that the same has been incurred as indirect expenses on new project. 7.1. Without prejudice to the above, the Ld. AO/DRP erred in not allowing appropriate 'amount of depreciation on the said amount treated to be in the nature of capital expenditure.
8. That the Ld. AO/DRP erred on facts & in law in making a disallowance of interest expenses of Rs. 1,56,26,683 alleging that the borrowed funds were utilised to undertake the capital expansion project on surmises and conjectures. 8.1. Without prejudice to the above, the Ld. AO/DRP erred in not allowing appropriate amount of depreciation on the said amount.
9. That the Ld. A.O. / DRP erred on facts and in law in making a disallowance of Rs. 21,03,419 on the alleged ground that ex-gratia is not covered under section 43B read with section 36(i)(ii) of the Act and also treating the same as a prior period expense.
9.1. Without prejudice to the above, the Ld. AO/DRP erred in not allowing Rs. 21,99,742 which had been suo moto disallowed by the appellant on account of non-payment, by applying the provisions of section 43B of the Act.
10. That the Ld. AO/DRP erred on facts & in law in making a disallowance of royalty of Rs. 2,53,72,500 incurred for the manufacturing of its product 'Purimox' treating the same to be capital in nature.
11. That the Ld. AO/DRP erred on facts & in law in making a disallowance of expenditure of Rs. 41,84,904 alleging that the appellant has failed to produce relevant bills and vouchers during the course of the assessment proceedings.
12. That the Ld. AO/DRP erred on facts & in law in making a disallowance of expenditure of Rs. 1,21,20,940 alleging that the appellant has failed to file satisfactory reply and the said bills pertain to either previous years or are unsupported with vouchers.
13. That the Ld. AO/DRP erred on facts & in law in making a disallowance of depreciation of Rs. 11,57,037 alleging that civil construction work should be considered as part of building and not Plant and Machinery and therefore entitled to depreciation at lower rate.
14. That the Ld. AO/DRP also erred in proposing to initiate penalty proceedings under section 271(1)(c) of the Act for concealment of income or furnishing inaccurate particulars of income.
2. Brief facts relating to the case are that the assessee is engaged in the business of manufacturing intermediaries and bulk drugs, which is undertaken at the manufacturing facility of the assessee located at Toansa Village, Distt. Nawanshahr, Punjab. During assessment proceedings it was noticed that the assessee had entered into international transaction with associated enterprises for an amount exceeding 15 Crores and the matter was referred to the transfer pricing office for determining the arms length price of the international transactions, who made an adjustment of Rs. 8,53,38,126/- to the transaction 4 after giving a relief of 5% amounting to Rs. 44,91,480/- on the basis of DRP Order. Further considering the assessees submissions during assessment proceedings a draft assessment order was passed on 26.03.2014. Thereafter the assessee approached the DRP and filed several objections in view of the variation in income proposed in the draft assessment order. The Ld. DRP-3, New Delhi after considering the grounds of objections of the assessee issued direction vide order No. FN DRP-3/Del./2014-15/ 122 dated 30.12.2014. Taking the directions of Hon'ble DRP into consideration, assessment was framed on the assessee vide order passed u/s 144C(13) r.w.s. 143(3) dated 25.02.2015 making additions to the income of the assessee on the following issues.
1. Commission expenses Rs. 2,08,84,673/-
2. Disallowance of u/s 14A Rs.18,82,264/-
3. Disallowance of interest attributable to capital work in progress u/s 36(1)(iii) of the Income Tax Act, Rs.1,56,26,683/-
4. Capitalization of expenditure incurred on new project Rs.8,18,69,666/-
5. Ex-gratia disallowed pertaining to earlier years Rs. 21,03,419/-
6. Royalty Rs. 2,53,72,500/-
7. Disallowance of expenses claimed without supporting bills / vouchers 41,84,904/-
8. Addition on account of capital expense being capital in nature 2,74,084/-
9. Disallowance Of depreciation 11,57,037/-
10. Addition on account of old bills and un-vouched expenses 1,21,20,940/-
11. Addition on account of TPO adjustment Rs.8,53,38,126/-
3. Aggrieved by the same the assessee filed the present appeal before us.
4. Ground No. 1 raised by the assessee being general in nature therefore no adjudication is required.
5Ground No. 2, 3, and 4
5. These grounds are against the adjustments made in relation to the arms length price of International transaction entered into by the assessee amounting to Rs. 8,53,38,126/-.
6. Brief facts relating to the issue are that during the impugned assessment year, the assessee had entered into various international transactions with its related parties. One of the transaction related to payment made towards corporate service charges amounting to Rs. 8,98,29,606. This payment was made to M/s DSM N.V. During audit proceedings, the learned TPO / DRP challenged the transaction pertaining to payment of corporate service charge by the assessee to its A.E. and determined the arms length price of the impugned international transaction at Rs. 44,91,480/- against the sum of Rs. 8,98,29,606 paid by the assessee during the impugned A.Y. On account of the same, adjustment was made to the income of the assessee to the amount of Rs. 8,53,88,126/-.
7. Aggrieved by the same, the assessee filed an appeal before us.
8. Ld. Counsel of the assessee submitted that the facts in the present case were identical to the facts in the assesses own case for AY 2007-08 and 2008-09 which have been decided by the Hon'ble ITAT in ITA No. 1139/Chd/2011 and 1290/Chd/2012 respectively. Ld. AR submitted that the Tribunal after going through various contentions in the earlier year had held that no adjustment should be made in respect of payment towards corporate service charges, since it was found by the Hon'ble ITAT that Corporate services had been rendered to the assessee on account of which benefits had been derived by the assessee and further that the transaction of the assessee was at arms length. Ld. AR further submitted that the Hon'ble Tribunal further held in para 110 of the aforesaid order that the amount paid for corporate services had to be reduced 6 by 50% of the benefit arising on account of financial services. Ld. AR stated that this finding was contrary to the findings recorded in para 95,98 and 102 of the order wherein it was held that no adjustment should be made in respect of the payment made towards corporate services. Ld. AR further stated that in the impugned AY no benefit had been passed to the A.E. Ld. AR also stated that no payment had been made on account of guarantee fee and no disallowance ought to be made in this respect. Ld. AR further stated that in any case increase in savings cannot resulted in increase in disallowance. Ld. AR therefore stated that no disallowance on account of corporate service charges paid by the assessee ought to be made.
9. On the other hand, Ld. DR admitted that the issue was covered by the order of the Tribunal in ITA No. 1139/Chd/2011 and 1290/Chd/2012 for A.Y. 2007- 08 & 2008-09. Ld. DR further stated that in view of findings given in para 95, 98, 102 & 110 of the aforesaid order the payment for corporate services had to be disallowed to the extent of 50% of the financial services benefit received by the assessee because the assessee had retained atleast 50% of the benefit on account of such financial services. Ld. DR further pointed out that assessee had moved a miscellaneous application also in this regard which the Tribunal had rejected giving the logic for this restriction vide para 5&6 of the application order. Ld. DR further submitted that this issue had been considered in its entirety in A.Y. 2009-10 also where on identical set of facts and after considering the assesses objection to the contrary findings in the order of AY 2007-08 & 2008-09 and further after considering the order passed on account of miscellaneous application filed by the assessee for the relevant assessment year, Hon'ble ITAT had upheld the restriction of payment for corporate services received to the extent of 50% of the benefit received by the assessee from these services. 7
10. We have considered the rival submissions and perused the orders of the authorities below. We find that the issue before us is the adjustment made on account of determination of ALP of corporate services received by the assessee from its Associate Enterprises(AE). We find that this issue has been adjudicated in AY 2007-08 and 2008-09 wherein the Hon'ble Tribunal held that the assessee was receiving corporate services from its AE's in the area of production and sales, market information, business intelligence, safety, health and investment and finance related strategic planning support. It was further held by the Tribunal that no adjustment was required to be made in respect of normal corporate services. We find that the Tribunal further held at para 110 of its order for AY 2007-08 and 2008-09 that on account of the financial services received by the assessee, regarding issuance of guarantee and sanctioning of various bank limits at lower interest rate, the payment on account of corporate services should be restricted upto 50% of the benefit received on account of these services. Thereafter, the assessee moved a miscellaneous application against the order of the Tribunal for both the year which was adjudicated vide Miscellaneous Application No. 6&7/Chd/2015 vide order dt. 19/02/2015 dismissing the Miscellaneous Application filed. The issue came up for consideration in AY 2009-10 also where in after taking into consideration the order of the Hon'ble ITAT in AY 2007-08 and 2008-09 and also the order of the Hon'ble Tribunal on the Miscellaneous Application filed by the assessee against the order for AY 2007-08 and 2008-09, the Hon'ble Tribunal gave a direction to allow payment on account of corporate services subject to the rider that 50% benefit received on account of financial services should be reduced from such payment.
The Hon'ble Tribunal held at para 12-14 of its order as follows:
"12. From the above paras it becomes clear that the Tribunal has given a direction to basically allow the payment made on account of corporate services 8 subject to the rider that 50% benefit received on account of financial services should be reduced from such payments.
13. This situation further becomes clear from the contentions made in the synopsis filed on 5.6.2014 in this appeal. The brief synopsis in this regard reads as under:-
• "The appellant also submitted that financial services forming part of the CSC also include provisioning of guarantee(s) by AE on behalf of DSP India (please refer to point b(iii) of Article 4 of the corporate service contract (placed at page 33 of the paperbook). In this regard, the assessee has also submitted the details of an unconditional and irrevocable guarantee provided by DSM N.V., an AE of DSM India, to the bank (Citibank International Plc.) on behalf of DSM India amounting to Euro 10 million (approx 68 crores) in connection with any overdraft, loan, credit facility etc. In this regard, a copy of the letter providing this inter-
company guarantee facility to DSM India has also been submitted by the assessee to the Ld. TPO as Appendix 6B to the submission dated August 16, 2012 (placed at pages 300 to 303 of paperbook). Furthermore a letter by Royal Bank of Scotland, providing the details of credit facilities existing for DSM India in various financial years wherein security has been provided by Koninklijke DSM NV, was also submitted with the Ld. TPO as appendix 6 to the submission dated September 17,2012(placed at page 338 of the paperbook). • The detailed benchmarking report along with credit rating analysis is provided as Appendix 2. It is respectfully submitted that as per the analysis conducted by the appellant, the credit rating was calculated in a scientific manner and the same was determined at B3.
• The results of the aforesaid benchmarking are as under:-
Nature of facility Amount of facility Equivalent INR Guarantee fee Benefit to the appellant(INR in Cr) Packing Credit EUR to million 68 Crores 2.56% 1.74 LC/Guarantee EUR 30 million 204 Crores 3.50% 7.14 Total 8.88 • Your honour would appreciate from the above that the services availed by DSM India resulted in benefit to the assessee and indeed added economic and commercial value to the business of the assessee. In case these services were not provided by the AEs the assessee would have left with no choice but to pay an independent enterprise (third party) for the activity performed for it or would have performed the activity in house for itself."
14. The above also clearly shows that how assessee has received the financial services which have led to the benefits to the assessee to the tune of Rs. 8.88 crores. Therefore, we set aside the order of Assessing Officer and direct him to re- compute the amount of adjustment by reducing 50% of Rs. 8.88 crores from the total Corporate service charges i.e. Rs. 7,99,31,741/- minus Rs. 4.44 crores (i.e. 50% of Rs. 8.88 crores) i.e. (Rs. 7,99,31,741 - Rs. 4,44,00,000) = Rs. 3,55,31,741/-. The Assessing Officer may also examine the amount of benefit calculated by the assessee and verify the amount if the conclusion is different, the Assessing Officer may decide the issue accordingly. Otherwise adjustment shall be made for Rs. 3,55,31,741/-. "
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Admittedly the facts in the present case are identical to those in the preceding year i.e; 2007-08, 2008-09 and 2009-10 wherein disallowance on account of corporate services was made for the same reason as in the impugned assessment year. Since this issue has already been adjudicated upon by the Hon'ble Tribunal in the preceding year, respectfully following the same in the impugned assessment year also, we remit the matter back to the file of the AO and direct him to compute the ALP of the corporate services charge paid by reducing 50% of the benefit if any received by the assessee from the financial services received. The AO is directed to examine the amount of benefit as calculated by the assesee and thereafter decide the issue as per the direction given.
11. This ground of appeal of the assesse is partly allowed.
GROUND NO.5
12. This ground raised by the assessee is against the disallowance of commission expenses amounting to Rs. 2,08,84,673/-
13. Brief facts relating to the case are that during the year the asessee had debited an amount of Rs. 82.33 million under the head commission. During assessment proceedings the assessee submitted details of commission paid during the year bifurcating the same between commission paid to intermediaries outside India, payments to distributors outside India and commission paid in excess of 3% of sales. Further the assessee submitted that in the past disallowance of commission expenses paid in excess of 3% had been made, alleging that the same are excessive and further commission paid to parties to whom sales were made were also disallowed. The assessee submitted that with respect to the commission paid in excess of 3%, the test applied by the A.O. was arbitrary and not supported by any positive evidence. The assessee submitted that the commission paid to various parties varied since there were 10 various factors which went to make a sale of a product. Depending upon the territory, product price, realization per unit, difficulty in realization of debtors and nature of end customers difference scales of commission to agents in different countries and different areas had been fixed by the assesssee. The assessee therefore, submitted that the entire commission expenses were allowable in accordance with the provision of section 37(1) of the Income Tax Act. In support of its above contention the assessee placed reliance on the decision of the Apex court in CIT vs. Walcand and Co. P. Ltd. (1997) 65 ITR 381 (SC), Sasoon J.
David & co. P. Ltd. vs. CIT 1997 118 ITR 261 (SC), SA Builders Ltd. vs. CIT(A) and Ors. 288 ITR 1 (SC), and various other decisions of the High Court and the Tribunal. The assessee further submitted that the payment of sale commission in excess of 3% totally unrelated transaction had been considered to be normal by the Hon'b'e Delhi High Court in the case of Rolls Roys & Co. vs. CIT (TS-515-SC-
2011) (Del.). As for the commission paid to the distributors the assessee submitted that the same actually represented discount give by the assessee to distributors.
The assessee stated that in certain cases in order to control or manage risk in foreign territory which is there in selling goods directly to third party customers, the assessee sold goods to distributors who in turn sold the goods to the third parties. Thus through this method the assessee submitted, it was ensured that its goods were sold to its end customers outside the country with minimal risk of any payment / debt turning bad. To make this arrangement acceptable to the distributor, discount was offered to them, which was turned as commission and booked in the account of the assessee, Ld. A.O. after considering the assessee's submissions held that an identical issue had arisen in the assessment proceeding in A.Y. 2006-07, 2007-08, 2008-09 and 2009-10, wherein the commission payments were disallowed for the reason that the assessee had not filed any confirmation from the commission agent nor any written agreement regarding payment of commission. It was also held that nature of services rendered by the commission 11 agents to the assessee were also not clear. Thus, the commission expenses were disallowed in the absence of any cogent material to substantiate the claim of the same. Further payment of commission in excess of 3% was disallowed for the reason that it was found to be unreasonably high. Ld. A.O. further found that in the preceding years the addition has been confirmed by the DRP. Following the same, Ld. A.O. found that in the impugned assessment year also the assessee had not filed any evidence to substantiate to its claim of commission paid and in view of the same proposed disallowance of commission expense amounting to Rs. 1,16,203/- and Rs. 63,13,871/- paid to Malachite Chemicals and Edward Keller (Phils) Inc. on the ground that transactions with them were on principal to principal basis and further disallowed an amount of Rs. 1,44,54,599/- being commissions paid in excess of 3%. The proposed addition was disputed before the DRP who upheld the disallowance by holding at para 3.7 of their order as follows:-
"The DRP has taken note of the above facts. The DRP sustained the disallowance in AY 2007-08, AY 2008-09 and AY 2009-10. As the matter was under consideration for earlier years before the higher appellate authorities and had not reached finality, the DRP respectfully does not fee inclined to intervene in the matter at this stage. Therefore, the objection is rejected."
Following the same, Ld. AO made disallowance of commission expenses of Rs. 2,08,84,673/-.
14. Before us Ld. Counsel for the assessee for the assessee reiterated the submissions made before the AO / DRP and further submitted that this issue had been decided by the Tribunal in earlier years and commission paid to foreign parties had been remanded back to the A.O. for fresh adjudication after establishing the relationship with the parties. Ld. AR further submitted that the payment made to Malachite Chemicals and Edward Keller (Phils) Inc. in the impugned year was in the capacity as agent/intermediary only and not as distributor. Ld. AR drew our attention to the detail of commission paid, filed during assessment proceedings, placed at PB 928-930, reflecting the aforestated 12 fact. Ld. AR further placed before us copies of certificates from Malachite Chemicals and Edward Keller (Phills) Inc. alongwith supporting invoices as additional evidence of payment of commission to them on principal to agent basis. Further an application for admission of additional evidences was also filed before us. Ld. AR argued that the commission paid to foreign parties was therefore fully allowable. Ld. AR further pointed that the domestic commission was fully allowable as per the order of the Hon'ble Tribunal in earlier years. Ld. AR therefore pleaded that the issue may be decided in terms of orders passed in A.Y. 2006-07 . On the other hand Ld. DR simply supported the order of AO. We have heard the rival submissions and perused the orders of the authorities below and also the documents placed before us.
15. On the issue of admission of additional evidences filed before us we find that no justifiable reason has been made out for admission of the same in terms of Rule 29 of the Appellate Tribunal Rules. We are therefore not persuaded to admit the additional evidences filed by the assessee before us. Further we find that the issue of disallowance of commission expenses has been adjudicated upon in assesses case in AY 2006-07, and the same has been followed in subsequent years upto AY 2009-10. In the order for AY 2006-07 in ITA No. 1455/Chd/2010, the Hon'ble Tribunal, while adjudicating the issue, has held at para 86-87 of the order as follows:
We have heard the rival contentions and perused the record. The issue raised vide ground No. 4 is against the disallowance of commission expenses totaling Rs.96.15,144/-. During the year under consideration, the assessee had claimed total expenditure of Rs.2.60 crores under the head 'commission '. The said commission included both commission paid on account of exports and also the commission paid on domestic sales. 'The case of the revenue is that the assessee had made sales to certain parties, to whom commission was also paid and the same being not relatable to the business of the assessee, was not to be allowed as an expenditure. However, the case of the assessee before us is that the said commission has been paid against the purchase orders booked by the said concern, who were engaged in trading and were also commission agents. The two transactions were claimed to be different and without any connection to each other. The assessee has placed on record the details of commission paid at pages 291 & 292 of the Paper Book. The abovesaid details reflect commission on 13 export sales paid of Rs.105.63,783/- and domestic commission of Rs.I55.27.I36/-. The assessee had further furnished the details of the parties alongwith the rates of commission, sales made to the said parlies and the total commission paid to the said parties, which are placed at pages 293 and 294 of the Paper Rook. As against the export commission, the assessee had paid a sum of Rs.695.475/- on sales of Rs.2.35 crores to M/s Edward Keller @ 2.950%. Further commission of Rs.40.97.199/- on sale value of Rs.13.80 crores has been paid to P.I. Mensangan Sakti. The next item of payment is to M/s Malachite Chemicals, which as per the assessee is Rs.885.880/- on sale value of Rs.2.98 crores @ Rs.2.966%. The Assessing Officer has adopted the commission paid to M/s Malachite Chemicals at Rs.455.257/-. The case of the assessee before us is that the commission agents are also traders of the drugs and are also acting as commission agents. The assessee is engaged in the manufacture of intermediaries and bulk drugs, which in turn are utilized by other concerns for the preparation of the final products. The assessee, through the said commission agents had sold the items manufactured by it to different concerns. The assessee has placed on record the confirmation from P.I. Mensangan Sakti in respect of receipt of commission of Rs.40,97.199/-. The said certificate is placed at pages 305 of the Paper Book. We find merit in the case of the assessee. However, the necessary details in this regard are not available, in particular the plea of the Assessing Officer that the assessee had made sales to the said parties on which commission had been paid. We, therefore, remit this issue to the file of Assessing Officer to verify the claim of the assessee that the commission paid to the said concern had no connection with the sales made to the said concerns and if the contention of the assessee is found to be correct, the Assessing Officer is directed to allow the claim of expenditure, booked on account of commission paid on export sales. Reasonable opportunity of hearing shall be afforded to the assessee to put forward its contentions. In view thereof, this issue is set aside to the file of Assessing Officer with our directions. "
The second aspect of ihe claim of expenditure under the head 'commission' relates to the commission paid on domestic sales. The Assessing Officer noted that the assessee had paid commission at varying rates starting from about 1% to 5%. The assessee has filed on record the details of the above said commission totaling Rs. 155,27,136/-The assessee has tabulated the names of the parties alongwiih the details of same value of sales, commission paid and the rates at which paid. The perusal of the said details reflect the commission @ 4.48% being paid to M/s Ace Corporation. The total amount paid to the said party is Rs.135J,250/-. The Assessing Officer, on the other hand, vide para 5.12 has noted that the commission to the said party has been made @ 6.6% vide para 5.12 at page 32 of the assessment order. The assessee. on the other hand, has furnished the details of commission at pages 291 and 292 of the Paper Book in which the commission to M/s Ace Corporation has been shown at Rs. 13,51,250/-. We are in conformity with the submission of the assessee that the rate of commission paid for the transaction cannot be interfered by the Assessing Officer as it is the understanding between the parties at the relevant time which determines the rate of commission tn be paid on a particular transaction. In view thereof, we reverse the order of Assessing Officer in restricting the rate of commission to 3% . In any case, the said restriction was made by the Assessing Officer observing that the rate of commission paid by the assessee was 6.6% whereas the assessee claims that it had paid commission @ 4.48%. The other two parlies to whom commission had been paid by the assessee and the same has been restricted by the Assessing Officer are M/s Integrated Technology and M/s Aakaar Engineering & Manufacturing Co. The commission to the said parties, as alleged by the Assessing Officer are paid @ 6.90% and 6.76% respectively. In line with our observations herein above, we find no merit in the disallowance made by the Assessing Officer restricting to rate of commission to 3% as against the rates agreed upon between the parties. Reversing the order of the Assessing Officer, we delete the addition of Rs.42.77,213/-. The Ground No. 4 raised by the assessee is. thus partly allowed. "14
Following the above order we set aside the issue regarding payment of commission to Malachite Chemicals and Edward Keller (Phils) Inc. amounting to Rs. 1,16,203/- and Rs. 6,31,3871/- respectively to the file of the A.O. for reexamination in terms of the direction contain in Para 86 of the order Tribunal for A.Y. 2006-07. The ground of appeal of the assesse on this issue is therefore allowed for statistical purposes. Further as far as disallowance of commission paid in excess of 3% is concerned, we delete the addition following the order of Tribunal vide para--86-87 for A.Y. 2006-07. This aspect is decided in favour of the asessee.
16. This ground of appeal of the assessee is therefore allowed in above terms. GROUND NO.6 & 6.1
17. These grounds raised by the assessee is against the disallowance of expenditure of Rs. 18,82,264/- u/s 14A of the Income Tax Act, 1961 read with Rule 8D of the Income tax Rules 1962 and also adjustment on account of the same to the book profit of the assessee u/s 115JB of the Act.
18. Brief facts relating to the case are that as per the records, it was found that the assessee was having investments of Rs.50 million in the shares of Hindustan Max GB Ltd., which was written off in earlier years by way of a book entry. Ld. A.O. observed that the company though had written off the investment in its books, it was still holding the same as on 31.03.2010. On being confronted with same the assessee submitted that no disallowance u/s 14A was warranted since the investments in the impugned shares were made by the company in the year 1996 while the interest expenses incurred during the year pertained to loan funds taken in the F.Y. 2003-04 and later years and which were used for the purpose of the business of the assessee company. The assessee stated that clearly the interest expense incurred by the assessee during the impugned assessment year did not relate to the investments made by the 15 assessee in Hindustan Max GB Ltd. The assesee further stated that there was no nexus between the interest expenditure incurred by the assessee during the impugned assessment year and the investment in Hindustan Max GB Ltd. and according no disallowance u/s 14A could be made. The assessee also submitted that the interest expense incurred by the assessee related to foreign currency term loan which was taken on 22.02.2006, foreign currency term loan from DSM Finance B.V., Netherland taken on 02.06.2003 and short term loans taken for working capital purpose from City Bank / RBS bank. The assessee therefore, stated that no expenditure had been incurred by the assessee for the purpose of earning exempt income and hence no disallowance u/s 14A could be made. The assessee placed reliance on the decision of Jurisdictional High Court in the case of CIT vs. Hero Cycles 323 ITR 518 (P&H), CIT vs. Winsom Textile Industries Ld. 316 ITR 204 (P&H) and various other decisions of the Tribunal in support of its above contention.
19. Ld. A.O. interpreting the provisions of section 14A of the Income Tax Act, held that all expenditure whether direct or indirect incurred in relation to an income which does not form part of the total income had to be disallowed u/s 14A regardless of the fact that positive exempt income had been earned or not. Ld. A.O. further stated that some expenditure is always incurred for earning an income and it is not possible that one can earn exempt income without incurring any expenses at all. Relying upon a number of decisions and further applying the ratio of P&H in the case Abhishek Industries 286 ITR 1. Ld. A.O. held that interest expenses were to be disallowed u/s 14A as per Rule 8D(ii) which was worked out at Rs. 16,32,264/- and further disallowances of a sum of Rs. 2,50,000 was worked out under Rule 8D (2)(iii), thus working out a total disallowance u/s 14A of Rs. 18,82,264/-. Further Ld. A.O. observed that in the preceding A.Y.'s 2006-07 to 2009-10 in the assessee's own case the DRP-1, New Delhi had confirmed the addition made on this account. Following the same Ld. 16 A.O. proposed a disallowance of Rs. 18,82,264/- u/s 14A of the Income tax Act. The assessee disputed the disallowance before the Hon'ble DRP who vide Para 4.19 of the order upheld the disallowance as follows:-
"The DRP has carefully considered the facts of the case. The DRP is not inclined to interfere in the matter following its own precedents set for earlier years. Accordingly, following the directions issued in the above regard by the DRP for assessment years 2009-10,2008-09, 2007-08 and 2006-07 the objection of the applicant is rejected.
Ld. A.O. following the direction of the DRP made a disallowance of Rs.
18,82,264/- u/s 14A and added the same to the income of the assessee.
20. Before us, Ld. Counsel for the assessee submitted that this issue has been decided in the assessee's own case for A.Y. 2006-07 to 2008-09 wherein the impugned disallowance was deleted by the Hon'ble ITAT. Ld. AR further submitted that the order of the ITAT in A.Y. 2006-07 has also been affirmed by the Hon'ble P&H High Court vide their order in ITA No. 118 of 2014(O&M), dated 28.11.2014. Ld. DR on the other hand placed reliance on the order of the Assessing Officer / DRP.
21. After considering the submissions made we find that this issue has been decided in favour of the asessee vide the order of Honble P&H High Court in ITA No. 118/2014, dated 28.11.2014 wherein it has been held as follows:-
"The last two questions pertain to the applicability of Section 14A of the Income Tax Act. The learned Tribunal has after a detailed consideration of the material on record held as follows:-
"The brief facts relating to the issue are that the Assessing Officer from the balance-sheet noted the investment of Rs.5 crores in shares of M/s Hindustan Max-GB Ltd. The said investment was made in the earlier years on which the assessee was earning interest. While deciding ground No. 3 of the present appeal, we have deliberated upon the issue of disallowance of interest relatable to such advances made by the assessee on which as per the Assessing Officer, no interest was charged as against the interest expenditure incurred by the assessee. It is an admitted position that the assessee was receiving interest on the said advances. The said investment was made for business purposes i.e. for the purchase of raw material from the said concern. However, as the said concern was in financial constraint, the application was made before the BIFR by the said concern and thereafter, no interest was being charged by the assessee on the said advances.
Admittedly, the said investment was not made during the year under consideration, as is apparent from the fact that the issue of disallowance of interest under Section 36(1)(iii) of the Act in relation to the said advance, arose 17 before the Tribunal in assessment year 2006-04 and thereafter. IN the totality of the abovesaid facts and circumstances, we are of the view that no disallowance is warranted under Section 14A read with Rule 8D of IT Rules as the said investment had been made by the assessee in a joint venture for business expediency. Accordingly, we direct the Assessing Officer to delete the addition of Rs. 12,40,501/-. Ground No. raised by the assessee is thus, allowed."
A perusal of these findings reveals that after failing to include the alleged interest received by the assessee under Section 36(l) (iii) of the Act, the Assessing Officer has by a sleigh of hand made an attempt to place this income under Section 14A of the Act. Admittedly the investment was made in the year 1996 and though the assessee may have received interest and dividend at one stage but for the last over a decade M/s HMGV is before BIFR and has not been paying any interest to the assessee. The investment as is apparent from the facts was made as a business expediency to procure raw material manufactured by M/s Hindustan Max GB Ltd. The Income Tax Appellate Tribunal, therefore, rightly deleted the addition made by the assessing officer, under Section 14A of the Act. The fourth and fifth questions are also answered against the revenue." In view of the above we, find that on identical set of facts the Hon'ble High Court has decided the issue in favour of the assessee. Following the same we delete the addition made by the Ld. A.O. u/s 14A of the Income Tax Act, amounting to Rs. 18,82,264/-. Further, since the disallowance made u/d 14A has been deleted nothing remains for making adjustment to the Book Profits u/s 115JB in respect of Section 14A. Therefore adjustment made to the Book Profit on account of disallowance u/s 14A is also deleted.
22. This ground of appeal of the assesee is therefore allowed. GROUND NO.7:
23. This ground raised by the assessee is against the disallowance out of personal and operating expenses of Rs 8,18,69,666/-holding the same to be indirect expenses on new project and hence capital in nature. Alternatively the assessee has agitated against the non allowance of depreciation on the said amount treated as capital expenditure.
24. Brief facts relating to the issue are that during the impugned assessment year the assessee had incurred expenses on new project. The A.O. found that the assessee had capitalized only direct expenses on fixed assets, though it had incurred both direct and indirect expense. Referring to the notes to the Account to the Balance Sheet at point no. XIII, the A.O. stated that the assessee 18 had itself admitted that only expense, which increased the value of fixed assets had been capitalized, while other indirect expense had not been capitalized. The A.O. held that since no bifurcation of the expenses incurred on new project had been given by the assessee, indirect expenses for the impugned period had not been allocated to the new project. The A.O. therefore, allocated the indirect expenses in the ratio of gross assets and computing the same at Rs. 8,18,69,666/- proposed a disallowance of the same u/s 37 of the Income Tax Act. The assessee disputed the proposed addition before the Hon'ble DRP, who upheld the disallowance made.
Following the direction of the DRP, Ld. A.O. enhanced the income of the assessee by Rs. 8,18,69,666/- on this account. Aggrieved by the same the assessee filed the present appeal before us.
25. Before us Ld. Counsel for the assessee contended that the assessee had capitalized both direct as well as indirect expenditure for undertaking capital expansion project during the year. Ld. AR contended that all direct and indirect expense which increased the value of the asset beyond its original standard of its performance had been considered for the purpose of capitalization in the project cost. Ld. AR drew out attention to page no. 1137 of the paper book, which was a certificate of the total cost incurred in the Tabla project of the assessee upto 31.03.2010 amounting to Rs.29,15,41,362.65. It was further certified that the project capitalized on 05.09.2009. Ld. AR further contended that it was only expansion of existing business which had been undertake during the year. It was further stated by the Ld. AR that the A.O. misread Note No. XIII in the Notes to the accounts appended to the Balance Sheet. Ld. AR stated that even as per Note no. XIII both direct and indirect expenses incurred for undertaking capital expansion project during the year had been capitalized during the year. 19 Ld. AR drew our attention to page no. 117 of the paper book where note no. XIII was reproduced as follows:-
"(xiii) Expenditure on new projects and substantial expansion All direct capital expenditure on expansion is capitalised. As regards indirect expenditure on expansion, only that portion is capitalized which represents the marginal increase in such expenditure involved as a result of capital expansion.
Both direct and indirect expenditure are capitalised only if they increase the value of the asset beyond its original standard of performance." Thus, Ld. AR pointed out that the AO. had misread note no. XIII and wherein it was clearly mentioned that both direct and indirect expense had been capitalized in the project cost.
Ld. AR further stated that while calculating the indirect expense to be apportioned to the project cost, the Ld. A.O. had taken the entire Personnel expenses amounting to Rs. 29,36,0000/- and the total Operating expenses amounting to Rs. 90,30,90000/- into consideration. Ld. AR contended that the aforesaid expense included the assesses regular day to day business expenditure and could not be considered as having been incurred on the new project. Ld. AR also contended that while allocating the indirect expenses to the new project by applying a gross asset ratio the A.O. had taken the addition on account of new project at Rs. 32,61,70000/- which in fact represented the addition made in all the asset during the year and did not represent the addition made to the capital expansion only. Ld. AR drew our attention to page 107 of the paper book, where the Schedule-IV to the Balance Sheet of the assessee company representing the fixed asset chart was reproduced showing addition made in all the blocks of the assets totaling 326.17 Crores. Ld. AR further submitted that the expenditure actually incurred by the asseesse in Tabla project amounted to Rs. 29,15,41,362/- only and thus, even as per the Ld. A.O.'s calculation the amount of indirectly expense to be attributed to the capital project was on the higher side. Ld. AR further contended that alternatively even if the indirect expenses are capitalized to the expansion project depreciation 20 ought to be allowed on the same since the project had been completed and capitalized on 05.09.2009. Ld. AR further placed reliance on the following case laws in support of its above contention Jay Engineering Work Ltd. vs. CIT Delhi-III, 311 ITR 405 (Del. )[2007], CIT vs. Oswal Spinning and Weaving Mills Ld. [1986] 160 ITR 426 (P&H), CIT vs. Sakthi Sugar Ltd. 339 ITR 400 (Chennai)(HC) , Alembic Glass Industries Ltd. [1976] 103 ITR 715 (Guj )(HC), Indo Rama Synthetic Ltd. vs. CIT 333 ITR 18 (Del.), CIT vs. Monnet Industries Ltd. 2009 176 taxmann 81 (Delhi), Kesoram Industries vs. CIT [1992] 196 ITR 845 , CIT v. Ashoka Marketing Ltd. [1990] 181 ITR 493 (Cal.)(HC) , CIT vs. Jamshedpur Eng. And Machine Manufacturing Co. Ltd. [1986] 157 ITR 730 (Patna)(HC)
26. Ld. DR on the other hand placed reliance on the order of the A.O.
27. We have heard the rival submissions and perused the materials on record placed before us.
The issue before us is the determination of the nature of indirect expenses, whether capital or revenue based on the facts before us.
The cardinal rule is that the question whether a certain expenditure is on capital or revenue account should be decided from the practical and business view part and in accordance with sound accountancy principles. It is trite law also that the test for identifying an expenditure as to whether it is revenue or capital is as under :
1. If the amount spent was for the purpose of bringing into existence a new asset or obtaining a new advantage, it would be a capital expenditure.
2. If on the other hand, it is not made for the purpose of bringing into existence any such asset or advantage but for running the business or working it with a view to produce the profits, it is a revenue expenditure.
Keeping the above in mind, we find that in the present case the contention of the assessee is that it had undertaken expansion of its existing business during the year. Note No. (Xiii) in the Notes to the Accounts, which is part of the 21 Balance Sheet of the assessee, substantiates this fact. We find that this contention of the assessee has not been rebutted by the AO / DRP. In the backdrop of this fact indirect expenditure incurred are to be treated for the purpose of carrying on business of the assessee and hence allowable. We find that the decision rendered by the Calcutta High Court in the case of Kesoram Industries & Cotton Mills Ltd. vs. CIT (1992) 196 ITR 854 squarely applies to the assessee case where in it was held as follows:
" The principles are well-settled. It cannot be disputed that if the expenses are incurred in connection with the setting up of a new business, such expenses will be on capital account. But where the setting up does not amount to starting of a new business but expansion or extension of the business already being carried on by the assessee, expenses in connection with such expansion or extension of the business must be held to be deductible as revenue expenses. One has to consider the purposes of the expenditure and its object and effect. The finding of the Tribunal in this case is that there was an expansion or extension of the existing business of the assessee. The assessee is a manufacturer of cement. In addition to its factory in Andhra Pradesh, it proposed to start another cement factory in Rajasthan. There is one business. Although the factory at Rajasthan was not set up in the previous year relevant to the assessment year, this fact, in our view, is not a relevant factor in determining whether the deduction is allowable or not. The expenses in this case are miscellaneous expenses and legal charges for the proposed cement factory project. This expenditure is not related to the setting up of a new factory, it pertains to exploring the feasibility of expanding or extending the existing business by setting up a new factory in the same line of business. The assessee, during the course of its business, may incur expenditure for obtaining a project report or legal opinion regarding the viability of such project. This cannot, in our view, be considered as capital expenditure as, in that case, any legal expenses incurred by an assessee for taking any opinion on the desirability or feasibility of expansion of the business will not be allowable as deduction. Such expenditure is unmistakably connected with the running of the business."
In view of the above it is held that indirect expenses would constitute revenue expenditure only and would not become capital merely for the reason that such expansion was termed as new project. Therefore we hold that the treatment given by AO to the sum of Rs. 8,18,69,666/- as capital is not in accordance with law and is hereby reversed. The calculation made by AO in this regard is inconsequential.
28. This ground of appeal of the assessee is therefore allowed. 22 Ground No. 8
29. This ground raised by the assessee is against disallowance of interest expenses on account of capital expansion.
30. Brief facts of the case are that during assessment proceedings it was noticed that there was an outstanding capital work in progress as on 31/03/2010 of Rs. 7.09 million and further it was found that the assessee had paid total interest of Rs. 123.78 million on loan of Rs. 1537.77 million. The assessee was asked why proportionate interest should not be capitalized. In response assessee filed various details and explanation which were rejected by the AO who thereafter proposed disallowance of proportionate interest in terms of provisions of section 36(1)(iii) amounting to Rs. 1,56,26,683/- by holding that the same was required to be capitalized. The Hon'ble DRP upheld the same and the disallowance was accordingly made by the AO.
31. Before us Learned counsel for the assessee pleaded that no interest bearing funds had been used for undertaking capital expansion project during the year. Ld. AR stated that the assessee had used its internal working capital and self generated funds for undertaking capital expansion project during the year. Ld. AR drew our attention to paper book page no. 916 which was the cash flow statement of the assessee for the year, to show that there were enough own funds with the assessee for undertaking the capital expansion. Ld. AR also referred to the Auditors Report at page no. 102 of the paper book wherein it was stated that no funds raised on short term basis had been used for long term investment. Ld. AR further stated that all long term loans appearing in the books of assessee were taken in earlier year and all interest pertaining to the amount utilised for capital expansion purposes had been duly capitalized towards the fixed assets in the relevant years. Ld. AR further submitted that during the impugned Assessment year the assessee company had undertaken capital 23 expansion projects to the tune of Rs. 7.09 million out of which the creditors outstanding is at balance sheet date amounted to Rs. 1.62 million. Ld. AR stated that in effect the cash outlay on account of capital work in progress during the year was Rs. 5.47 million as against which the assessee had sufficient cash amounting to Rs. 661.52 millions for making the impugned payments. Ld. AR drew our attention to the cash flow statement for the year showing that even after payment on account of capital work in progress and other payments the assessee had closing cash balance of 121.12 million. Ld. AR therefore pleaded that proportionate disallowance of interest was not justified. Ld. AR further stated that this issue has also been decided by the Tribunal in AY 2009-10 wherein the Hon'ble Tribunal agreed with the assessee's contention that where no particular loan has been taken for the asset shown or capital work in progress, no disallowance u/s 36(1)(iii) would be made.
32. Ld. DR on the other hand relied upon the order of the AO.
33. We have heard the rival contention and perused the orders of the authorities below and the documents placed before us. We find that on identical set of facts the Hon'ble Tribunal has adjudicated this issue in AY 2009-10 and has held that in the absence of nexus between interest borrowing funds and investment in capital work in progress, no disallowance u/s 36(1)(iii) can be made. The Hon'ble Tribunal has further remitted the issue back to the file of the AO for verification of utilization of interest bearing loans. The Hon'ble Tribunal at para 33 of the order has held as follows while deciding the issue.
33. After considering the rival submissions principally we find force in the submissions of Ld. Counsel for the assessee that if no particular loan has been taken for the asset which has been shown under the head 'capital work in progress' then disallowance could not have been made. However, each loan and its utilization requires fresh examination, therefore, we remand this issue to the file of Assessing Officer with a direction to ascertain details of various loans and how they were fully utilized and then only decide the issue in accordance with law.
24Respectfully following the same we hold that no disallowance u/s 36(1)(iii) can be made if no loan has been taken for investment in capital work in progress, and further for the verification of this fact, we remit the matter back to the file of the AO with a direction to ascertain the utilization of various loans taken by the assessee and thereafter decide the issue in accordance with law.
34. This ground of appeal of the assessee is therefore allowed. GROUND NO. 9:
35. This ground raised by the assessee is against the disallowance of Rs. 21,03,419/- being ex-gratia paid by the assessee and claimed as a deduction u/s 43B r.w.s. 36(1)(ii) of the Act.
The asseseee has also raised the ground that alternatively it should have been allowed deduction on account of ex-gratia provided during the year amounting to Rs. 21,99,742/-, which had been suo moto disallowed by the assessee on account of non-payment, by applying the provisions of section 43B of the Act.
36. Brief facts relating to the issue are that during the impugned assessment year the assessee had claimed deduction of Rs. 21,03,419/- from its taxable income on account of ex-gratia paid of earlier years in accordance with the provision of section 43B of the Act. r.w.s 36(1)(ii). During assessment proceedings the assessee stated that the ex-gratia paid by the assessee was in the nature of bonus expense. The assessee stated that the amount payable to the employees of the company as bonus to the extent covered and payable as per the provision of Bonus Act had been recorded under the expense head bonus and the amount of bonus exceeding the amount prescribed under the Bonus Act had been recorded as ex-gratia. Thus the assessee submitted that the nature of ex-gratia was bonus payable to the employees of the company and therefore 25 the assessee submitted that it was covered under the provision of section 43B of the Act, r.w.s 36(1)(ii) and deduction of the same was to be allowed on payment basis as prescribed in said section. The assessee further stated that section 36(1)(ii) nowhere prescribed that only bonus as prescribed under the Bonus Act, is covered under the section. It is any amount payable to employees by the assesse as bonus which is covered under the aforesaid provisions. The assessee further placed reliance on the decision in the case CIT Vs. Shaw Wallace & Co. Ltd. 190 ITR 455 (Cal.) in support of its contention that payment of bonus, by whatever name called in excess of bonus prescribed under the Bonus Act, would be allowable as per the provision of section 43B of the Act. The assesee further submitted that during the impugned assessment year the assessee had created a provision for ex-gratia Rs. 21,99,742/-and since the same had not been paid by the due date of filing of return, the said amount of ex- gratia had been added back to the taxable income of the assesse as per the provision of section 43B of the Act. The assessee stated that if the amount of ex- gratia relating to earlier years was not allowed on the ground that it was not covered u/s 43B of the Act, then on the same reasoning, the provision for the impugned year amounting to Rs. 21,99,742/- should be allowed to the assessee. Ld. A.O. rejected the assessee's contention and proposed addition of Rs. 21,03,490/- on account of ex-gratia paid during the year, following the order of the Hon'ble DRP in the assessee own case for A.Y. 2009-10. The asseseee disputed the proposed addition before the Hon'ble DRP who rejected the assessee's objection by holding as follows:-
"The DRP considered the facts of the matter. The bone of contention was whether the payment of ex-gratia was covered under the provisions of section 43B and section 36(l)(xi) of the Act. The DRP is of the considered view that the amounts paid as ex-gratia are not covered under the provisions of section 43B and section 36(1 )(ii) of the Act Accordingly the objection of the applicant is not allowed. As regards the alternate submission of the applicant to direct the AO to allow reliefofRs.21,99,742/'-disallowed suo moto by it u/s 43B of the Act during AY 2009-10, the DRP is of the. firm view that the said prayer of the applicant cannot be conceded in view of the fact that the subject year of consideration before the DRP is AY 2010-11 and not 2009-10 hence beyond the pale of consideration of the DRP."26
Ld. A.O., following the DRP direction made the addition on account of disallowance of ex-gratia of earlier year and added the same to the income of the assessee to the extent of Rs. 21,03,419/-.
37. Aggrieved by the same the assessee filed the present appeal before us.
38. Before us Ld. counsel for the assessee repeated the contention and arguments made before Ld. A.O. and Ld. DRP and further stated that an identical issue had been adjudicated by Hon'ble ITAT in the assessee's own case for A.Y. 2009-10 wherein it was held that ex-gratia could not be construed as part of bonus and ex-gratia was to be allowed on accrual basis as part of business expenditure. Ld. AR further pointed out that the matter was remitted back to the file of the A.O. for re-examination of the computation of the ex- gratia payment on accrual basis. Ld. DR on the other hand supported the order of the A.O.
39. After considering the rival submissions, we find that this issue had been adjudicated in the assesses own case in AY 2009-10 Para--43 of the order of the Tribunal in ITA No. 155/ Chd. / 2014 which reads as under-
"After considering the rival submissions we do not agree with the submissions that ex. gratia should be construed as part of the bonus. We have carefully perused the judgement of Hon'ble Calcutta High Court and in that case there is no such principle laid down. However, the Hon'ble Court has clearly held that ex-gratia payment made to employees which consists of bonus payment over and above the Bonus Act should be allowed as business expenditure. Therefore, if sum of the ex-gratia payment was payable for that year, the same was required to be allowed on accrual basis as part of the business expenditure. Since this aspect has not been examined by the Assessing Officer, therefore, we set aside his order and remand the matter back to his file for reexamination of the computation of the ex-gratia payment and if some of the ex-gratia payment pertains to the assessment before us i.e. Assessment year 2009-10, then the same should be allowed on accrual basis as business expenditure otherwise the issue may be decided in accordance with law".
Following the same, we hold that ex-gratia payment pertaining to the impugned year only is allowable as business expenditure and since this aspect has not been examined by the AO, we set aside the order and remand the 27 matter back to the file of the A.O. for re-examination in terms of the direction contained in para--43 of the order of Tribunal for A.Y. 2009-10.
40. This ground of appeal of the assessee is therefore allowed for statistical purpose.
Ground No. 10:
41. This ground raised by the assessee is against the disallowance of Royalty expenses of Rs. 2,53,72,500/- incurred by the assessee for the manufacture of its product Purimox.
42. Brief facts relating to the issue are that during the impugned A.Y. the assessee had claimed expenses amounting to Rs. 33.83 million on account of payment of Royalty during the year. When confronted with the same the assessee stated that the impugned Royalty had been paid in pursuance to a license agreement entered into with DSM Anti Infectives B.V. for the use of patents and technology for the production of a product namely Purimox. The assessee stated that as per the agreement a non-divisible, non-exclusive, non- transferable and non-sub licensable license had been granted to the assessee for the use of patent and technology for the manufacturing of Purimox. As per the terms of the agreement, payment of Royalty was subject to the assessee company achieving a minimum output of 1000 metric tonne which if not achieved the amount of Royalty would be re-negotiated. The assessee further stated that the ownership of the patent and technology for the manufacturing of Purimox remained with DSM Anti-Infectives B.V. The assessee stated that by virtue of the license agreement the assessee was entitled to use technology for the manufacturing and sale of Purimox product and was also entitled to updates / improvements in the same. The assessee was also entitled to support received towards implementation of the technology in the Purimox plant, training of employees of the assessee company and trouble-shooting activities. 28 The assessee stated the Royalty expenses were incurred by the assessee for the purpose of its business and was allowable as per the provisions of section 37(1) of the Act. The assessee also stated that the payment of Royalty was undertaken in accordance with the regulations and had met the Arm's length principle. The assessee also stated that by virtue of this expenditure no capital asset or benefit of enduring nature had been acquired by the assessee and thus the expenditure could not be treated to be capital in nature. The assessee further placed reliance on a number of decisions in support of its contention that the impugned expenditure had not resulted in any enduring benefit to the assessee and thus could not be treated as capital in nature. The assessee further stated that the Royalty agreement was not a sale agreement for the sale of technical know-how to the assessee. The assessee had only obtained a "Right to Use" technology by virtue of this agreement, since the ownership right and control over the technology were not transferred to the assessee. The assessee pleaded that the expenditure could not be said to be capital in nature. The assessee placed reliance upon a number of judicial decisions in support of the above contentions.
43. Ld. AO rejected the contentions of the assessee and proposed disallowance of expenditure on Royalty treating the same as being capital in nature for the reason that by virtue of this expenditure the assessee was entitled to enjoy full rights for using the patents and advanced technology for the production of its product giving enduring benefits to the assessee and for the reason that the payment was lumpsum in nature. Thereafter the assesssee filed objection to the DRP against the proposed disallowance who upheld the disallowance made and gave a further direction to allow depreciation on the same as follows:-
"The DRP considered the facts of the matter. It is an undisputed fact that the licence obtained by the applicant conferred an exclusive right on the applicant to manufacture the product Purimox(R). In a sense it enjoyed a monopoly in 29 respect of the product manufactured by it with the help of the technology of the M/s DIA BV. The patent alongwith any improvements made to it and the technology employed to produce the above said product was to remain the exclusive property of DIA BV in lieu of which the applicant company was made to pay royalty. The case laws cited by the applicant were also not applicable to the facts at hand. The advantage accruing to the applicant did not act as a mere facilitator of the applicant's trading operations or enabled it to manage and conduct its business to be carried on more efficiently or more profitably.
Rather the licence brought into existence a revenue generating asset of enduring advantage to the applicant. Therefore the royalty payment of Rs.3,83,30,000/- being an expenditure undertaken for the benefit of the business as a whole - an expense incurred for the acquisition of a source of profit or income and not for making the profit making structure work more efficiently. The DRP does not see any element of effectiveness, efficiency and profitability being won by the applicant on account of such royalty payment. However, the AO is directed to allow depreciation attributable to licences as per section 32 of the Act The objection s disposed off accordingly."
Following the same Ld. AO disallowed Royalty amounting to Rs. 3,38,30,000/- and added the same to the income of the assessee after allowing depreciation of Rs. 84,57,500/- being 25% of Rs. 3,38,30,000/- on the same.
44. Aggrieved by the same the assessee filed the present appeal before us.
45. Before us Ld. Counsel for the assessee reiterated the submissions made before AO/DRP and further submitted that this issue had been decided by the Tribunal in A.Y. 2009-10 and the payment of Royalty was held to be allowable expenditure.
46. After considering the submissions, we find that this issue has been adjudicated in the assesses case in AY 2009-10 at para 56 to 59 of the order of the Tribunal in ITA No. 155/ Chd. / 2014 dated 16.03.2015 wherein it was held as under:
"56. We have considered the rival submissions carefully. We find force in the submissions of Ld. Counsel for the assessee. The license agreement between the DAI BV and the assessee has been entered on 10.03.2006. Clause (2) of this agreement reads as under:-
"2. LICENCE 2.1 For the duration of this Agreement and subject to the terms and conditions contained herein, DAJBV herby grants DAI-INDIA hereby accepts from DAIBV, a non-dividable, non exclusive, non transferable and non-sublicensable the Patents and the Technology solely to use the patents and the Technology at the Purimox Plant for the manufacture of the product and for the subsequent sale of the product within the Territory.30
Any other use of the Technology by DAI-INDIA shall be deemed a material breach of DA I-INDIA hereunder and shall entitle DAIBV to terminate the Agreement pursuant to Article 8.3 below, in addition to any other remedies available to it by law.
Further some other important clauses are as under:-
"4. The title to the Patents and the Technology shall remain with DAIBV, Title to any and all improvements of the Patents and Technology shall vest exclusively in DAIBV."
5.1 DAI-INDIA shall pay a lump sum royalty for the License granted hereunder royalty payable in installments as follows:-
2006 : US$ 0 2007 : US$ 1.0 mio (one million) 2008 : US$ 1.0 mio (one million) 2009 : US$ 1.0 mio (one million)
57. The perusal of the license agreement and particularly the above clauses clearly shows that assessee has obtained the right to use the patent for production of purimox® and this right is not exclusive and cannot be used for other purposes other than the production of the particular product. Further, the ownership of the patent remains with the owner. Also for usage of this patent, a lumpsum payment in the form of royalty has been agreed for in terms of clause 5.1. Therefore, it is clearly a payment of royalty for use of the patent. In our opinion, this is clearly a case of revenue expenditure.
58. In the similar case which came up for the consideration of the Hon'ble Supreme Court in the case of CIT vs. I.A.E.C(Pumps) Ltd. (supra) wherein under an agreement the assessee was granted a license to use its patents and designs exclusively in Inidia. The agreement was for a duration of 10 years with the parties having the option to extend or renew the agreement. The foreign company undertook not to surrender its patents without the consent of the assessee and to make available to the assessee any improvements, modifications and additions to designs. It had also undertaken to enable the assessee to defend any counterfeit by others. The assssee was not to disclose to third parties any of the documents made available by the foreign company to the assessee without having received a written authorization from the foreign company. The High Court held that these features of he agreement clearly established that what was obtained by the assessee was only a license and what was paid by the assessee to the foreign company was only a licence fee and not the price for acquisition of any capital asset. On appeal by the Department to the Supreme Court it was held as under:
" Held, affirming the decision of the High Court, that the High Court had applied the proper principles of law and had rightly held that the expenditure incurred by the assessee was only revenue expenditure."
In our opinion the case of the assessee is identical to the above noted case of the Supreme Court and the principle laid down by Hon'ble Supreme Court is clearly applicable. Therefore, we set aside the order the Assessing Officer and hold that expenditure incurred for payment of royalty is allowable and therefore, delete the addition.
Following the above order we hold that the expenditure incurred by the assessee for the payment of Royalty of Rs. 3,38,30,000/- is allowable and we 31 further hold that the depreciation allowed thereon be withdrawn. We therefore, set aside the order of the AO and delete the addition made.
47. This Ground of Appeal of the assessee is therefore allowed in above terms. Ground No. 11:
48. This ground raised by the assessee is against the disallowance of expenditure of Rs. 41,84,904/- on the ground that the assessee had failed to produce relevant bills and vouchers during the course of assessment proceedings.
49. Brief facts relating to the case are that during assessment proceedings the assessee was asked to produce all bills/ vouchers in support of the expenses claimed under head Miscellaneous Expenditure. Ld. AO on scrutiny of the same found that certain expenses were not duly supported with bills while some of the bills pertained to earlier years. He therefore, proposed disallowance of a sum of Rs. 41,84,904/-. The assessee contested the proposed disallowance before the Hon'ble DRP who after considering the assessee submissions upheld the disallowance made by holding as follows at Para 12 of its order:
"Decision of the DRP:- During the hearing before DRP the applicant submitted that the AO at the stage of the assessment proceedings called upon it to produce the details of expenses under the head miscellaneous expenses which as done amounting to Rs. 1,78,00,000/-. However, upon scrutiny the AO discovered that supporting bills/ vouchers/explanations were not there. Now at this stage of DRP proceedings the AO seeks to tender fresh evidence in relation to such items as depicted below:-
The submission of the application in relation to the above was duly considered. The DRP is of the view that the request, of the applicant to admit fresh evidence at this stage merits no consideration for the reason that the applicant could not establish its case before the undersigned that there was paucity of time which prevented it from furnishing the evidence in respect of the above items of expenditure before the AO at the stage of assessment proceedings. Therefore, the objection of the applicant is rejected and the addition made by the AO is sustained."
50. Aggrieved by the same the assessee filed the present appeal before us. 32
51. Before us Ld. Counsel for the assessee submitted that this issue was taken up during the closing stages of the assessment proceedings and thus, due to paucity of time the assessee was unable to produce the relevant bills / supporting vouchers. The Ld. Counsel further submitted that all the documents and bills had been duly submitted before the Ld. DRP as additional evidence but the same were not considered. Ld. AR further submitted that as far as the issue of prior period expenses was concerned the same were allowable in the view of the fact that the expenditure had crystallized during the year itself. Ld. AR submitted that the assessee company maintains a SAP system and follows the matching principle of accounting as per which all expenditure pertaining to the year, the bills for which are received even after the year end, are provided in the books as provision. As per the SAP system, the provision created is reversed in the next year automatically and the bills received on account of the same are provided for in the books, resulting in NIL effect. Ld. AR pleaded that the expenses pertaining to Miscellaneous Expenditure incurred in earlier years had in fact been nullified by the provision reversed in this year. Thus, the Ld. AR stated that in fact no prior period expenses had been incurred by the assessee in the impugned A.Y. and thus there was no reason to make disallowance on account of the same. Ld. Counsel for the assessee also stated that both the soft copy and hard copy of the books of accounts had been submitted to the AO by the assessee during assessment proceedings alongwith copy of the ledger account of Miscellaneous Expenses. On the other hand, Ld. DR strongly supported the Assessment Order.
52. We have heard the rival submissions and have perused the documents placed before us.
33The issue before us in disallowance of miscellaneous expense amounting to Rs. 41,84,904/- for want of supporting vouchers and for the reason that some expenses pertained to earlier years.
The detail of the miscellaneous expense disallowed to reproduced at page no. 89-91 of the assessment order is as follows:
G/L Document Document Posting Text (As copied Amount in Remarks Account Number Date Date from the reply local submitted by currency assessee) 6429100 5100015156 3/31/2009 4/8/2009 Blank 258071.00 Old 6429100 5100015780 3/15/2009 4/23/2009 -do- 16097.00 Old 6429100 5100015805 3/15/2009 4/24/2009 -do- 123070.00 Old 6429100 5100017926 2/12/2009 5/26/2009 -do- 4500.00 Old 6406120 5100014922 3/22/2009 4/2/2009 -do- 1112.00 Old 6406120 5100014923 3/22/2009 4/2/2009 ANNUAL FEE-AMEX- 1112.00 Old VIKRAM 6406120 5100014925 3/22/2009 4/2/2009 ANNUAL FEE-AMEX- 1112.00 Old BINOD 6409100 5100014952 3/30/2009 4/2/2009 STATIONARY ITEMS- 46337.27 Old GGN OFF 6426100 5100015020 3/31/2009 4/6/2009 ELECT-GGN GH- 1890.00 Old MARCH09 6426100 5100015154 3/31/2009 4/8/2009 ELECT-GGN GH- 659.00 Old MARCH09-DSM INDIA 6426100 5100015167 3/24/2009 4/8/2009 SECURITY-ELECT-BBY 3330.00 Old OFF 6426100 5100015168 3/24/2009 4/8/2009 SECURITY- 11740.00 Old ELECTRICITY-BBY OFF 6429100 5100015553 3/30/2009 4/16/2009 Blank 50000.00 Old 6429100 5100015801 3/7/2009 4/24/2009 -do- 130080.00 Old 6429100 5100015803 3/31/2009 4/24/2009 -do- 31330.00 Old 6406120 5100015883 3/9/2009 4/27/2009 PHARMEXCIL- 21000.00 Old RCMC TOANSA 2009-10 MEMBERSHIP FEES 34 6406120 5100015885 3/9/2009 4/27/2009 PHARMEXCIL- 6500.00 Old RCMC TOANSA 2009-10 MEMBERSHIP FEES 6406120 5100016137 3/2/2009 4/29/2009 ANNUAL 35358.00 Old SUBSCRIPTION-
LEGAL
6429100 5100016791 3/24/2009 4/30/2009 Disposal charges to 90526.00 Old
Nimbua
6406120 5100022677 3/19/2009 8/24/2009 NSC-MEMBERSHIP 1200.00 Old
FEES APR09 TO
MAR10-NARANG
6406120 5100023266 3/3/2009 9/3/2009 REGISTRATION FEE 7000.00 Old
FOR HYD SUMMMIT
IN SEP 09- JAIRAJ
6406120 5100023266 3/3/2009 9/3/2009 REGISTRATION FEE 7000.00 Old
FOR HYD SUMMIT IN
SEP 09- BHUPIND
6406120 5100023266 3/3/2009 9/3/2009 REGISTRATION FEE 7000.00 Old
FOR HYD SUMMIT IN
SEP 09- GIRISH
6406120 5100034163 3/23/2009 2/1/2010 SUBSCRIPTION APRIL 50000.00 Old
TO MARCH 2010
ARUN MEHRA ICC
IN
6429100 5100025745 10.12.2009 10.12.2009 Labour Charges for 1010880.00 No
Capping Jobs voucher
6429100 5100025744 10.13.2009 10.13.2009 2268000.00 No
Voucher
TOTAL 4184904.27
A scrutiny of the above reveals that out of the same expenses of Rs. 9,06,024 relate to the month of March 2009. Copy of the invoices relating to these expenses were produced before us at page No. 519-564 of the paper book a perusal of which affirms the fact that the impugned expense relate to the month of March 2009, i.e; prior period.
53. We find that the claim of the assessee that it has not claimed any deduction in respect of impugned prior period expenses, has not been examined by AO or by DRP, despite the fact that specific argument was raised to this effect and books of accounts produced before the AO. Therefore, the AO is directed to verify this fact and if it is found that such amount has not been claimed as deduction during the year no disallowance can be made in respect of such non-claimed deduction. In case any such amount is claimed as deduction, plea of the assessee that liability in respect of such expenses has 35 capitalized in the year under appeal should also be examined as assessing officer has not dealt with this argument of the assessee though specifically raised. AO shall give opportunity of hearing to the assessee and decide the allowability of deduction in accordance with law and in the light of above mentioned direction.
As regards the other component of disallowance of Rs. 32,78,880/- on account of non-production of supporting documents, it is seen that AO did not give adequate opportunity to the assessee and when evidences were filed before DRP, DRP without assigning any reason, brushed aside the same which in our considered opinion is not justified. Therefore this issue is sent back to the file of AO to decide it after giving reasonable opportunity of being heard to the assessee.
54. This ground of appeal of the assessee is therefore allowed in above terms. Ground No. 12:
55. This ground raised by the assessee is against the disallowance of expenditure of Rs. 1,21,20,940/- for the reason that the assessee failed to file satisfactory reply and the said bills pertained to either earlier year or were unsupported with vouchers.
56. Brief facts relating to the issue are that during assessment proceedings it was found that certain expenses incurred by the assessee were either not duly supported by vouchers or pertained to earlier years as per the details provided in the Assessment Order. The issue was confronted to the assessee during the assessment proceedings and the Ld. AO, not satisfied with the explanation of the assessee, proposed a disallowance of Rs. 1,21,20,940/- of the following expenses.
36
EXPENSES AMOUNT (Rs.)
Business Entertainment Expenses 73,75,064
Travelling & Conveyance Expenses 14, 31, 671
Communication Expenses 5, 50,061
Printing & Stationery Expenses 49, 228
Workmen & Staff Welfare Expenses 27, 14,916
_____________
Total 1,21,20,940
============
The assessee disputed the proposed addition before the DRP who upheld the same by holding as follows:
Decision of the DRP:- During the hearing before DRP it was submitted by the applicant that the AO while scrutinizing the books of account of the applicant at the draft assessment stage called Upon it to furnish bills pertaining to previous years. Besides supporting vouchers were also required to be furnished. The applicant due to paucity of time could not submit the related bills and vouchers of various expenses. However, the ledger accounts of all such expenses were furnished to him vide submissions dated 9/1/2014, 14/03/2014 and 21/03/2014. Since the applicant failed to substantiate its claim with regard to the prior period expenses and un-vouched expenses, the AO was well within his rights in disallowing the said expenditure. Accordingly the objection of the applicant is rejected.
In view of the above, the Assessing Officer disallowed the expenditure.
57. Aggrieved by the same the assessee filed the present appeal before us.
58. We have heard the rival submissions and perused the orders of the authorities below as also the documents placed before us.
59. The issue before us is regarding disallowance of following expenses for the reason that they are not duly supported and pertain to earlier year as follows:-
S. No Particulars Amount Reason for disallowance
disallowed
1. a. Business Entertainment Cost a. Pertains to previous year
Customers 73,75,064.67
b. No bills / Vouchers
b. Business Entertainment Cost
c. No Proper bills /
c. Conference / Seminars vouchers shows the
combined bill from where
d. Brochures / Leaflets these figures cannot be
tallied.
2. Travelling Expenses 14,31,671.78 Previous year bills
3. Communication expenses 5,50,061.75 Previous year bills
37
4. Printing & Stationery 49,228.79 Previous year bills
5. Workmen & Staff Welfare 27,14,916.00 No bills / vouchers
We find that the disallowance has been made for several reasons and we shall now proceed to deal with each one of them.
60. Certain expenses have been disallowed for the reason that they pertain to preceding years.
Before us Ld. AR forwarded two fold arguments for the same Ld. AR stated that certain expenses relating to earlier years, but bills of which were received in the impugned year, were accounted for in the earlier year by way of creating a provision for the same, which on receipt of the bill in the current year was accounted for by reversing the provision. Ld. AR stated that such prior period expenses were not claimed by the assessee in the impugned year at all. Further ld. AR stated that with respect to certain other expenses relating to earlier years, the same were incurred by employees on duty towards traveling while on official trip and since bills relating to the same were submitted in the impugned year, the liability crystallized in the current year and was rightly accounted for in the impugned assessment year. Ld. AR relying upon the decision of the Gujarat High Court in the case of Saurashtra Cement and Chemicals Industries Ltd. vs CIT 213 ITR 523 stated that the impugned expenses could not be termed as prior period expenses, since liability of these expenses had crystallized during the impugned assessment year itself when the bills were submitted to the assessee. Ld. AR stated that these arguments were made before the Ld. A.O. during assessment proceedings and drew our attention to paper book page no. 1094- 1097 being letter submitted during assessment proceedings dated 23.03.2014 making the above submissions. Ld. AR further submitted that all books of accounts were produced during assessment proceedings and drew our 38 attention to paper book page no. 937 to 938, being letters submitted before A.O. producing both hard and soft copies of books of accounts of the assessee. Ld. DR on the other hand relied upon the order of the A.O. and stated that merely because bills were submitted during the impugned assessment year, the liability could not be said to have crystallized in the impugned assessment year. Ld. Dr argued that the claim of prior period expenses could not be allowed as per the provision of section 37(1) of the Income Tax Act, 1961. We find that the claim of the assesee that certain prior period expenses were not claimed as expense during the year, but were in fact routed through the "provision" account, by virtue of SAP system, has neither been considered nor examined by the authorities below. Therefore AO is directed to verify this fact and if it is found that such amount has not been claimed as deduction during the year no disallowance can be made in respect of such non-claimed deduction. In case any such amount is claimed as deduction, plea of the assessee that liability in respect of such expenses has capitalized in the year under appeal should also be examined as assessing officer has not dealt with this argument of the assessee though specifically raised. AO shall give opportunity of hearing to the assessee and decide the allowability of deduction in accordance with law and in the light of above mentioned direction. Certain expenses have been disallowed for want of supporting vouchers / bills. Ld. AR argued that due to paucity of time, the same could not be submitted before the A.O. and the assessee had requested for further time to submit the same. Ld. AR drew our attention to the letter with by the assessee to the A.O. asking for time to place the necessary vouchers at paper book page no. 1097. Ld. AR further submitted that all relevant vouchers are placed before the Hon'ble DRP as additional evidence which was not admitted without giving any reason at all. Ld. AR further submitted that all expenses pertained to the business 39 of the assessee and were allowable u/s 37(1) of the Act. Ld. DR on the other hand stated that since the expenses were not properly supported by bills, the claim of the assessee ought not to be entertained.
We find that on 25.03.2014 the assessee had asked the AO for more time to submit all vouchers and supporting bills which were found defective in this respect. Thereafter without giving any further opportunity to the assessee the draft order was passed on 26.03.2014. Before the Hon'ble DRP the assessee placed all the relevant voucher as additional evidence but we find that the Hon'ble DRP has not dealt with the admission of additional evidence at all in its order.
In view of the same we find that the adequate opportunity was not given to the assessee to produce the documents before the A.O., which may now be so produced and after examination thereof the issue of allowance of expenses may be adjudicated upon in accordance with law. We therefore remit this aspect also to the file of the A.O. for examining the same and thereafter decide the issue afresh in accordance with law.
Certain expenses have also been disallowed for the reason that the invoice amount does not tally with the supporting voucher. Ld. AR submitted that this issue was clarified to the A.O. wherein it was explained that in certain cases a single purchase order is made for materials /products / items required by different departments of the assessee and in pursuance to which the material is supplied by the vendor raising a single bill, sometimes without mentioning the PO reference no. The SAP system of the assessee, thereafter, posts the purchases in the respective ledger accounts wherein the purchases accounted for do not tally with the consolidated figure mentioned in the purchase order. Ld. AR stated that relevant purchase order and invoices were also placed before the A.O. 40 We find that despite the submissions and evidences placed by the assessee before the assessing officer, the same has neither been considered nor examined by him. Moreover we find that the DRP also failed to consider the submission of the assessee. In view of the same we find no justification in the order of the A.O. making the disallowance without appreciating the submissions made by the assessee and the evidences filed by it. But in the interest of justice we remit the matter back to the file of the A.O. to examine the issue afresh in the light of submissions and evidences placed by the assessee and thereafter adjudicate thereon in accordance with law. The assessing officer is directed to give adequate opportunity of hearing to the assessee in respect of the above issues.
61. In view of the above this ground of appeal of the assessee is allowed, in above terms.
Ground No. 13:
62. This ground raised by the assessee is against the disallowance of depreciation of Rs. 11,57,037 /-
63. Brief facts relating to the case are that during assessment proceedings while examining the details of addition to Fixed Assets made during the year, it was found that the assessee had capitalized certain civil construction expenses under the head Plant & Machinery amounting to Rs. 2,31,40,744 /- and claimed depreciation @ 15% on the same. On being confronted with the same the assessee submitted the civil construction work had been capitalized under head Plant & Machinery since the same had been incurred for building strong foundation and structure to the existing factory building for the purpose of installing new Plant & Machinery. The assessee submitted that the expenditure was incurred for incorporating particular features in the existing factories which was essential for installation for the functioning of Plant & Machinery equipment. 41 Thus, the assessee pleaded that the civil construction expenditure was an integral part of the Plant & Machinery. The assessee filed detailed submissions to this effect and further placed reliance on a number of judicial decisions in support of its above contention. Ld. AO rejecting the assessees contentions held that the civil construction work undertaken by the assessee was part of the building entitled to depreciation @10% and since the assessee had claimed depreciation @ 15 % holding the same to be Plant & Machinery, the excess depreciation of 5% was proposed to be disallowed by the AO equivalent to Rs. 11,57,037/-. The assessee disputed the proposed addition before DRP who rejected the objection of the assessee by holding as follows:-
" The DRP considered the facts of tiie matter. On a perusal of the submissions made by the applicant it was noticed that a mention of a "plan structure" of Tabla project obtained from M/s B. Mehatalia Consultants Pvt Ltd (Architect, Consulting Engineer and Interior Designers) was made therein. However, there was not a whisper of the same in the draft assessment order meaning thereby that the piece of evidence sought to be relied on by the applicant at this stage was not made available to the AO at the time of assessment proceedings.
Hence the arguments and the case laws relied on by the applicant are considered to be irrelevant to the facts and circumstances of the case. Besides the above the building structure in the instant case played no part in the carrying on of the business activities but merely constituted the place wherein they were carried on the building could not be regarded as a plant. Therefore, the expenditure incurred on account of the building was rightly not treated as expenditure on plant and machinery. Therefore, the objection of the applicant is rejected.
Following the same, Ld. AO disallowed depreciation of Rs. 11,57,037/-
64. Aggrieved by the same the assessee filed the present appeal before us.
65. Before us Ld. AR pleaded that the civil work expenditure incurred by the assessee was for the purpose of building strong foundation and structure to the existing factory building for the purpose of installing new Plant & Machinery. Ld.AR drew our attention to the plan structure of Tabla Project taken from B. Mehtalia Consultants Pvt. Ltd. (Architects, Consulting Engineering and interior designer) wherein description of structure in respect of foundation and ground work was given alongwith explanation for the aforesaid plan structure. Ld. AR 42 drew our attention to Page No. 1099-1102 wherein the impugned plan structure was placed. Ld. AR further drew our attention to PB 1082 - 1085 wherein detailed submissions were made before the AO explaining the nature of civil work capitalized in Plant & Machinery. Ld. AR pleaded that the building was expanded and the changes carried out in the existing building to install heavy Plant & Machinery to accommodate the Tabla Project. Ld. AR stated that the impugned expenditure had been incurred for the specific purpose of installing Plant & Machinery and did not result in the enhancement of value of building. Ld. AR further stated that the expenditure had been capitalized as per the prescribed method of accounting for Fixed Assets enunciated by the Institute of Chartered Accountants of India (ICAI) in Accounting Standard -10, which stated that all cost incurred towards site preparation and installation including special foundation for plant was to be treated as direct cost of such fixed asset. Ld. AR further placed reliance on the following judicial decisions in support of its contentions:
CIT v. Taj Mahal Hotel (1971) 82 ITR 44 CIT v. Karnataka Power Corporation (2000) 247 ITR 268 CIT v. Navodya (2004) 271 ITR 173 (Kar.) (HC) Nowrang roy Metal Ltd. V. JCIT (2003) 262 ITR 231 (Gau.) Airports Authority of India v. CIT (2011) 16 Taxmann.com 198 (Del.) CIT v. Dr. B. Venkata Rao (2000) 243 ITR 812 CIT v. Coromandel fertilizers Ltd. (1984) 18 Taxmann.com 451(AP) CIT v. Hotel Lucia 100 Taxman 438 (ker.) RC Chemicals Industries v. CIT 9 Taxman 181 43
66. We have heard the rival submissions carefully and perused the material on record placed before us.
The issue before us is whether the assessee has correctly treated the civil construction undertaken by it as "Plant" instead of "Building" as claimed by the AO for the purpose of claiming depreciation thereon.
It is not the law that any civil construction would always be treated as building, as seems to be the belief and approach of AO. A building which is not merely a space from where business is carried on, but a means for carrying on business and an apparatus or tool of the assessee, is to be treated as Plant. Where a building is constructed with a specific design keeping in view specified technical requirements without which the assesses business cannot be carried on, the building, without any doubt, qualifies to be treated as plant.
67. We find that the assessee had given a detailed explanation of the civil work capitalized in Plant & Machinery, specifying the exact nature of the modification carried out to the existing structure for building strong foundation and installing new Plant & Machinery. The explanation given by the assessee vide its letter dt. 23/03/2014 is reproduced hereunder:
"1. Details of civil work capitalized in plant and machinery.
In this regard, we respectfully submit that the Assessee has incurred civil work expenditure for building strong foundation and structure to existing factories building for the purpose of installation of new plant and machinery. In addition, it also extended the existing building wherein new construction was undertaken.
The company made certain modification in the existing building with particular specific features and standards so that heavy plants and machineries can be installed. The aim of the Tabla project was to introduce enzymatic technology for the production of Puricillin and Purimox in the erstwhile Jumbo plant. To install the equipments for this change over, the building had to be expanded as well as a lot of changes were carried out in the existing building. Some of the expansions / modifications which were carried out are as follows:
• Existing Ceph-C Building was modified for the installation of
1. Enzymatic reactor (PV101),
2. Buffer vessles (PV105 & PV106) ,
3. Recycle vessel (PV103, PV104),
4. Process Water system, 44
5. Process Water Storage tank (PT1501) For installation of these equipments, new foundations had to be created including piling, and new floor (106 meter) had to be created.
* Existing Jumbo building was modified for the installation of the following:
1. Aging vessel (PV303)
2. Crystallisers (PV 302 & PV 301)
3. Buffer Vessel (PV 801)
4. HCL, dosing tank (PT 201)
5. Sparkler filters
6. Causie tank (Pt 301)
7. Heat Exchangers
8. Static Mixer The floor at 108.5 meter was modified for the installation of these equipments-
• Room for installation of hoist to transfer raw materials from the ground floor to 110.65 meters.
• Stair case for access to equipment installed at 104 meter, 106 meter, 108 meter and 110.65 meter.
• Raw material charging room at 110.50 meter for installation of charging equipment and silo.
• Intermediate ML collection room at 100 level (Ground floor) for installation of ML tanks and transfer pumps.
• Raw Material storage room at 100 level (Ground floor).
• Packing material cleaning room at 100 level (Ground floor). It is used for cleaning the packing material before it goes to main process area to avoid entry of dust.
• Existing Jumbo building was modified for the installation of Liquid - Liquid extractors (104 meters).
• The building had to be finished up to pharma standards which includes epoxy flooring, Special doors with drop seals, Joint less Kota Stone, False Roof for avoiding dust and temperature so that the requirements of the pharmaceutical product are met.
• Invertor room for installation of Invertor Drives. • DCS Control Room for installation of the automation system for the plant.
As mentioned above, the company incurred civil works expenditure towards certain modification in the existing building and extension of existing building for the Tabla project. For this purpose, the company had issued a single contract for both installation of Plant & Machinery and extension of building and did not issue separate contracts for each of the assignments. The assessee Company allocated the expenditure incurred on foundation work and building cost towards P&M and Building on the basis of its major contractor's bills. Further, we would like to submit that entire foundation work was done to the existing building in order to accommodate the new P&M. Based on aforesaid, the company has allocated Rs. 35,357,828/- and 23,140,744 towards Building and Plant & Machiery respectively. We enclose the plan structure of Tabla project taken from B Mehtalia Consultants Pvt. Ltd. (Architects, Consulting Engineering and Interiors Designers) at Annexure-1 wherein description of structure in respect of foundation and ground work is given in detail. Further, to explain the aforesaid plan structure, we give below the explanation of each of the structure.
Mechanical - 103 m 104.5 m Model It is a layout drawing of the 3 meter and 4.5 meter levels. ON the top left of plan layout provides the details of equipment that were installed. Equipments like liquid - I liquid extractors, Process water tank, Enzymatic reactor (PV101), Invertor room for speed control of equipments, Other equipments like PV 301, PV 302, PV 303 etc were installed which can be seen in this drawing. Special foundations with piling were created to make the building strong enough to take the load of equipments.
Mechanical room Model 45 It is a layout drawing of the ground floor, on the top left list of equipment were installed. Raw material storage room, packing material cleaning room, ML transfer pump room, centrifuges, dryers, Hoist room were built. Some area has false ceiling in line with the product requirements.
Mechanical 110.65m Model It is layout drawing of the top floor in which the Raw Material Charging equipment, hoist which brings raw material from the ground floor, air locks, AHUs etc were constructed. The Raw Material charging room is made of special bricks and walls so that the weight of the building does not exceed the basic design. Mechanical 106 m 108.50 m Model It is a layout drawing of the 6 meter and 8.5 meter floors. On the top left list of equipment were installed.
We further provide that installation of plant and machinery would not be possible without the particular features incorporated in the existing factory. The company has allocated all expenditure incurred for construction of new building and capitalized the same under "building".
Further, we would like to reiterate that the company has certain modification in the existing building with particular specific features and standards solely for the purpose of installation of Plant & Machinery and has thus, capitalised the foundation expenses to Plant & Machinery. In this regard, we give below our legal submission and places reliance on the following judicial precedents wherein it has been held that structure with special features can be categorized under plant and machinery.
We find that the above detailed explanation of the assessee that the civil work undertaken pertained to building reinforced foundation for the purpose of installing new plant and machinery has not been rebutted much less with the help of any cogent basis. Therefore such reinforcement even to civil construction would be treated as installation cost of Plant and Machinery and would qualify for depreciation as Plant and Machinery. In view of the same, we allow depreciation amounting to Rs. 11,57,037/- on civil construction work in the facts of the present case as applicable to Plant and Machinery.
68. This ground of appeal of the assessee is therefore allowed. Ground No. 14
69. Through this ground the issue of initiation of penalty proceedings u/s 271(1)(c) has been raised.
46
70. Both the parties agreed that this is pre-mature and does not require separate adjudication. Therefore, we hold that this is premature issue and does not require any adjudication.
71. In the result appeal of the assessee is partly allowed.
Order pronounced in the Open Court.
Sd/- Sd/- (BHAVNESH SAINI) (ANNAPURNA MEHROTRA) JUDICIAL MEMBER ACCOUNTANT MEMBER Dated : 04/12/2015 AG
Copy to: The Appellant, The Respondent, The CIT, The CIT(A), The DR