Income Tax Appellate Tribunal - Mumbai
Procter & Gamble Hygiene & Health Care ... vs Assessee on 17 January, 2012
IN THE INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCH "F",
MUMBAI
BEFORE SHRI N.V.VASUDEVAN(J.M) & SHRI R.K.PANDA (A.M)
ITA NO.1499/MUM/05(A.Y. 1999-2000)
ITA NO.1500/MUM/2005(A.Y.2001-02)
ITA NO.119/MUM/2009(A.Y.2001-02)
M/s. Procter & Gamble Hygiene and DCIT/ACIT Cir.7(1),
Health Care Limited, Aaykar Bhavan,
P&G Plaza, Cardinal Gracias Road, Vs. Mumbai - 20.
Chakala, Andheri (E),
Mumbai 400 099.
PAN :AAACP 6332M
(Appellant) (Respondent)
ITA NO.1241/MUM/2005(A..Y. 2001-02)
ACIT Cir.7(1), M/s. Procter & Gample Hygine
Aaykar Bhavan, and Health Care Limited,
Mumbai - 20. P&G Plaza, Cardinal Gracias
(Appellant) Vs. Road,
Chakala, Andheri (E),
Mumbai 400 099.
PAN :AAACP 6332M
(Respondent)
Assessee by : Shri Haresh G.Buch
Revenue by : Shri Subachan Ram
Date of hearing : 17/01/2012
Date of pronouncement : 25 /01/2012
ORDER
PER N.V.VASUDEVAN, J.M:
ITA No.1499/Mum/2005 is an appeal by the assessee against the
order dated 15/12/2004 of CIT(A)-19, Mumbai relating to assessment year 1999-2000. The grounds of appeal raised by the assessee read as follows:
2M/s. Procter & Gamble Hygiene and Health Care Limited, "GROUND I
1. The Learned Commissioner of Income Tax (Appeals)- XIX, Mumbai ["CIT (A)") erred in confirming the action of the Deputy Commissioner of Income Tax, Circle-7 (1), Mumbai ["A.O."] in making a reassessment u/s. 147.
2. The Appellant prays that the reassessment be quashed and treated as bad in law.
GROUND II
1. The CIT (A) erred in reducing an amount of Rs. 36,21,82,320/-, being the deduction u/s 801B, from the profits of the business for calculating the deduction u/s 8OHHC.
2. The Appellant prays that the deduction u/s 8OHHC in respect of profits from 801B units be calculated by reducing the amount of deduction u/s 801B from the deduction u/s 8OHHC and not from the profits of the business, which forms the basis for calculating the deduction u/s 8OHHC."
2. The assessee is a company, engaged in Manufacturing and marketing of consumer products. The assessee had filed its original return of income for the assessment year 1999-2000 on 22/11/1999 declaring Rs.12,65,86,090/-, as its income. The original assessment order u/s. 143(3) of the Income Tax Act, 1961 (the Act) was passed on 27/3/2002 assessing income at Rs. 37,50,03,400/-. The AO reopened the assessment u/s. 147 of the Act by issuing notice u/s. 148 on 12/06/2003 for the reason that while completing the assessment u/s.143(3) of the Act, the deduction u/s. 80 IB of Rs. 3,21,82,320/- has not been reduced from Profits of business while computing deduction u/s. 80 HHC.
3M/s. Procter & Gamble Hygiene and Health Care Limited,
3. In the reassessment proceedings, the AO held that the deduction u/s.80-HHC of the Act had been claimed by including in the profits of business profits from Honda Unit and Kundaim unit in respect of which the assessee has claimed deduction u/s. 80IA. According to the AO allowing such a claim would amount to allowing claim for double deduction. i.e. both u/s. 80IA and u/s. 80 HHC, in respect of the same profit. According to the AO, such a claim not only defies logic and common sense, but is also specifically prohibited in law as per the express provisions of sub-section 9 of section 80IA. The AO thereafter referred to the provisions of Sub-section 9 of section 801A which reads as under:
'Where any amount of profits and gains of an industrial undertaking or of an enterprise in the case of an assessee is claimed and allowed under this section for any assessment year, deduction to the extent of such profits and gains shall not be allowed under any other provisions of this Chapter under the heading C- Deductions in respect of certain incomes, and shall in no case exceed the profits and gains of such eligible business of industrial undertaking or enterprise, as the case may be.
The AO held that in view of the above clear-cut provisions, the profits admissible for deduction uls.8OlA are to be excluded in computing deduction u/s.8OHHC of the Act. The deduction u/s.8OlA has been determined at Rs.32,75,62,323/- and Rs. 3,46,19,997/- for Honda unit and Kundaim unit. The above amounts totaling Rs. 36,21,82,320/- were reduced from the profits of business for the purpose of deduction u/s.8OHHC and deduction u/s. 80 HHC which was earlier allowed to the assessee in the assessment order u/s.143(3) of the Act was reduced to Rs. 161,03,822/- as against the deduction allowed at Rs. 3,29,55,999/- in the original order u/s. 143(3).
4. On appeal by the assessee the CIT(A) confirmed the order of the AO. The assessee had also challenged the validity of initiation of reassessment 4M/s. Procter & Gamble Hygiene and Health Care Limited, proceedings under section 147 of the Act on the ground that the same was done purely on change of opinion. This was also rejected by the revenue authorities. Hence the above appeal by the assessee before the Tribunal.
5. We have heard the rival submissions. The issue sought to be canvassed by the assessee in Ground NO.II is no longer res integra and has been concluded by the Hon'ble Bombay High Court in the case of Associated Capsules Pvt. Ltd. Vs. DCIT 332 ITR 42(Bom) wherein the Hon'ble Bombay High Court held as follows:
"Section 80-IA(9) of the Income-tax Act, 1961, provides that the deduction to the extent of profits allowed under section 80-IA(1) would not be allowed under any other provisions. It means that the deductions allowable under other provisions under heading C of Chapter VI-A would be allowed to the extent of profits as reduced by the profits allowed under section 80-IA(1). The second part of section 80-IA(9) does not refer to the method of computing deduction under other provisions under heading C of Chapter VI-A. Thus, section 80- IA(9) seeks to curtail the allowance of deduction and not the computation of deduction under any other provisions under heading C of Chapter VI-A of the Act. The Legislature has used specific words whenever it intends to affect the computation of deduction. As the words used in section 80-IA(9) relate to allowance and not computation of deduction, it cannot be inferred that section 80-IA(9) was inserted with a view to affect computation of deduction under any other provisions under heading C of Chapter VI-A. Since section 80- IA(9) uses the words "shall not be allowed", the section seeks to restrict the allowance of deduction and not the computation of deduction under any other sections under heading C of Chapter VI-A of the Act. Therefore the reasonable construction of section 80-IA(9) would be that where the deduction is allowed under section 80-IA(1), then the deduction computed under other provisions under heading C of Chapter VI-A have to be restricted to the profits of the business that remain after excluding the profits allowed as deduction under section 80-IA, so that the total deduction allowed under the heading C of Chapter VI-A does not exceed the profits of the business.
5M/s. Procter & Gamble Hygiene and Health Care Limited, The Hon'ble High Court held, that the Tribunal was not right in holding that section 80-IA(9) of the Act, mandates that the amount of profits allowed as deduction under section 80-IA(1) of the Act have to be reduced from the profits of the business of the undertaking while computing deduction under any other provisions under heading C in Chapter VI-A of the Act. "
6. In the light of the decision of the Hon'ble Bombay High Court we are of the view that the reduction of allowance under section 80HHC made by the AO in the reassessment proceedings cannot be sustained. The same is hereby deleted. In view of the decision of the decision on merits, we are of the view that the validity of initiation of reassessment proceedings under section 147 of the Act is purely academic and calls for no adjudication.
7. In the result, the appeal by the assessee is allowed.
ITA 1241/M/05 & 1500/M/05:A.Y. 2001-02:
8. ITA No.1241/M/05 is an appeal by the revenue while ITA No.1500/M/05 is an appeal by the revenue. Both these appeals are directed against the order of CIT(A)-19 Mumbai, dated 30/11/2004 relating to assessment year 2001-02.
9. We will take up for consideration the Assessee's appeal viz., ITA No.1241/Mum/05:
10. Ground No.I & II raised by the assessee reads as follows:
"GROUND I
1. The Learned Commissioner of Income Tax (Appeals) -- XIX, Mumbai ["CIT (A)"] erred in confirming the action of the Deputy Commissioner of Income Tax, Circle-7 (1), Mumbai ["A.O."] in disallowing the depreciation of Rs.11, 46,803/- on office premises of the Appellant at Matulya Centre and further in taxing the rental compensation of 6M/s. Procter & Gamble Hygiene and Health Care Limited, Rs.1,08,00,000/- under the head 'Income from House Property' instead of 'Business Income'.
2. The Appellant prays that the disallowance of depreciation be deleted and that the rental compensation received in respect of office premises be considered as 'Business Income' as claimed by the Appellant.
WITHOUT PREJUDICE TO THE ABOVE GROUND II
1. The Learned CIT (A) erred in allowing deduction u/s. 24(1)(i) on a conditional basis thereby reverting the matter to the A.O. to verify the details of repairs expenditure incurred in connection with the house property and directing that the same be allowed only on furnishing of the relevant details.
2. The Appellant prays that deduction u/s. 24(1)(i) be allowed unconditionally."
11. The assessee is a company engaged in the business of manufacturing and sale of medicines and various personal health care products. The issue raised in Ground No.I is with regard to rental income from letting out of the property Matulya Center owned by the assessee. The assessee had given the aforesaid property to a group company M/s. Proctor & Gamble Home Products Ltd. for Rs. 1,08,00,000/- per annum. The assessee had claimed that income from letting was income from business and that depreciation on the aforesaid building should also be allowed as the asset was used for the purpose of business of the Assessee. The AO was of the view that income from aforesaid property should be assessed under the head income from house property and depreciation claimed by the assessee should not be allowed. He was of the view that rental income from the properpty has to be taxed in the hands of the assessee under section 22 of the Income Tax Act 1961(the Act) under the head income from house property. The AO 7M/s. Procter & Gamble Hygiene and Health Care Limited, accordingly disallowed the claim of the assessee for deprecation and further brought the rental income in question to tax under section 22 of the Act.
12. The plea of the assessee that the income from letting out of property had to be considered as income from business was based on the fact that the property was leased to a sister company of the Asssessee M/S.Proctor & Gamble Home Products Ltd. Under a business arrangement between the assessee and sister company whereby the sister company agreed to compensate the assessee for use of space. According to the assessee the premises in question was also occupied by the employees of the assessee and were functioning from the same premises and used the same set of infrastructure as is available is assessee's sister concern. The assessee further submitted it was the manufacturer and distributor of all its products upto March'1993. Thereafter, with a view to take advantage of the merits of specialization, the distribution task was allotted to a new company (namely Procter & Gamble Distribution Co. Ltd. "PGDC") in April'1993 and subsequently to PGHP in November'1998 when this business of PGDC was commenced by PGHP. One of PGHP's activity was that of distribution of the assessee's products. With a view that this activity is smoothly taken over and is carried on without any interruption, the assessee, in its own business interests, agreed to allow the use of its set infrastructure namely- premises computers, office equipments, telephones etc. for a composite consideration. According to the Assessee when a principal allows the use of its premises to its agent with the understanding that the same should be used entirely for the business of the principal only and for no other purpose whatsoever the compensation retains the character of business income. It was argued that the principal could either adjust the compensation in the margins or commission payable to the agent or could show them separately. If margins were to be adjusted, only the net expenditure would be claimable as 8M/s. Procter & Gamble Hygiene and Health Care Limited, business expenditure. The Assessee pointed out that there was no such adjustment. The Assessee argued that both the arrangements identical and in the circumstance it was not justifiable to treat expenditure as business expenditure and income as rental income. The rental income should be considered as an integral part of the business of the assessee when the PGDC deals in the products of the assessee and of none others.
13. The arguments did not find favour with the AO. On appeal by the assessee the CIT(A) confirmed the order of the AO. It is not in dispute before us that identical issue had come up for consideration in assessee's own case in ITA No.845/Mum/03 for AY 95-96 and this Tribunal held as follows:
"6.3 As regards the rental income, the case of the assessee is that the assessee had let out the building to Procter and Gamble Distribution Co. Ltd. for effective and smooth distribution of products and such letting out had advanced the business interest. Moreover, letting out the property was also one of the objects of the assessee company and accordingly it has been claimed that the rental income should be assessed as business income.
6.4 We have heard both the parties and considered the material carefully. There is no material to show that building has been let out by the assessee as part of any business arrangement so that the rental income could be considered as incidental business income. Merely because the building has been let out tj the distributor of the assessee, the rental income cannot be treated as business income in the absence of any material to show that letting out was necessary for the purpose of business. Similarly, merely because one of the objects of the assessee was letting out of the property, it cannot automatically lead to the conclusion that the assessee was actually doing business in letting out buildings. There is no material to show that the assessee was doing any organized activity of letting out buildings. Therefore, the claim of the assessee that the rental income should be assessed as business income cannot be accepted and the order of the CIT (A) is upheld."
9M/s. Procter & Gamble Hygiene and Health Care Limited,
14. Respectfully following the aforesaid decision of the Tribunal we hold that the income in question has to be assessed as income from other sources.
15. As far Ground No.II is concerned the same has to be dismissed in view of the conclusion that the income in question is to be assessed as income from other sources. Thus Ground No.I is partly allowed while Ground No.II is dismissed.
16. Ground No.III & IV raised by the assessee read as follows: III & IV.
"Ground III
1. The CIT(A) erred in confirming the action of the AO in respect of addition to the value of closing stock on account of unutilized MODVAT of Rs.1,51,02,496.
2. The Appellant prays that the addition to closing stock be deleted.
Ground IV:
1. The CIT(A) erred in rejecting ground No.VI before him on the alleged ground that no quantum relief be granted in respect of the Modvat element in opening stock.
2. The appellant prays that the matter of quantum be reverted back to the AO to verify the element of Modvat credit in the opening stock and grant appropriate relief."
17. In the course of assessment proceeding, the assessee was asked to furnish details of unutilized modvat relating to closing stock-in-trade. The assessee furnished the said details vide Annexure- 14 to its letter dt. 10.112003 as per which the unutilized modvat credit relatable to closing stock-in-trade works was Rs. 15,102,496/-. The assessee was asked to explain why the above unutilised modvat credit of Rs. 15,102,496/- should not be included in the valuation of closing stock as per the provisions of Sec. I45A of the Act. In response to the same, the assessee filed a copy of the tax audit report wherein it was mentioned that there was no impact on the Profit & Loss account due to the deviation from the method of valuation prescribed under Sec. 145A of the Act. The contention of the assessee was not 10M/s. Procter & Gamble Hygiene and Health Care Limited, accepted by the AO and he was of the view that as the provisions of Sec. 145A of the Act the amount of unutilized modvat credit had to be added in the value of closing stock. He held that the closing stock of the assessee company was undervalued to the extent of such non-inclusion of modvat credit of Rs. 15,102,496/- and the profit of the company was under-reported to the above extent. Therefore, an amount of Rs. 15,102,496/- was added to the value of dosing stock and the total income of the assessee company was enhanced to that extent.
18. On appeal by the assessee the CIT(A) confirmed the order of the AO. The issue raised in ground No.3 is no longer resintegra and has been decided by the Hon'ble Delhi High Court in the case of CIT vs. Mahavir Alluminium Ltd., 297 ITR 77 , wherein the Hon'ble Delhi High Court held that whenever adjustment on account of Modvat credit is made corresponding adjustment is also to be made to opening stock. The aforesaid view has also been accepted by the Hon'ble Bombay High Court in the case of Mahalaxmi Glass Works. 318 ITR 116 (Bom). The issue is therefore remanded to the AO to consider the same afresh in the light of the judicial pronouncement referred to above. The ld. Counsel for the assessee also relied on the decision of the Mumbai Bench of ITAT in the case Hawkins Cookers Ltd. vs. ITO in ITA No.505/Mum/04 dated 11/8/2008, wherein Hon'ble ITAT Mumbai Bench had also examined the issue in the light of the provisions of section 43B of the Act. We are of the view that even this aspect may be raised by the assessee before the AO and the AO is directed to consider the same. Thus ground No.III & IV are treated as allowed for statistical purposes.
19. Ground No.V raised by the assessee reads as follows:
11M/s. Procter & Gamble Hygiene and Health Care Limited, "GROUND V
1. The CIT(A) erred in restricting depreciation @ 25% Battery Operated Pallet Truck as against 100% as claimed by the Appellant.
2. The Appellant prays depreciation on Battery Operated Pallet Truck be allowed@ 100% as claimed by the appellant."
20. This ground of appeal can be conveniently decided together with ground No. 4 raised by the revenue in its appeal which reads as follows:
"On the facts and in the circumstances of the case and in law, the CIT(A) erred in directing the AO to allow depreciation @ 100% on Fork Lift ignoring the fact that depreciation @100% is to be allowed only on electrically operated vehicle and fork lift is not such a vehicle."
21. The assessee claimed 100% depreciation of Fork Lift Worth Rs. 16,55,740/- and Battery Operated Pallet Truck Worth Rs. 7,34,051/-. The assessee explained before the AO that the aforesaid two assets which fall under the sub-block (xiii) of block III(3) Schedule-I to the IT Rules, 1962 (Rules) of the Table of rates at which depreciation is admissible under Rule 5 of the Income Tax Rules, 1962. This sub-block (xiii) lists the "Renewal energy saving devices" which includes as item (o) "Electrically operated vehicles including battery powered fuel cell powered vehicles". The Assessee submitted before the AO that the two assets which the Assessee has included under the aforesaid head viz., a) afork4 lift and b) a batter operated pallet truck These assets were electrically operated in the plant warehouse for moving materials and finished goods. Hence these definitely qualify as electrically operated vehicles. The Assessee also pointed out that these assets are additions to such assets in the plant and could be in the nature of replacement of an existing old pallet truck. The Assessee also submitted that the aforesaid two items cannot be considered as vehicles because these assets are vehicles used in the manufacturing plant for the purpose of 12M/s. Procter & Gamble Hygiene and Health Care Limited, moving materials and finished goods which is an essential part of the manufacturing activity. Hence these assets have to be classified under the block "plant & machinery". The Assessee also submitted that the block of assets "motor cars" covers specifically Motor Cars as suggested by the name of the block and not vehicles in general. Hence these two assets cannot be classified under the block "motor cars".
22. The AO however did not accept the explanation of the Assessee and he held as follows:
"8.3 The explanation of the assessee is, however, not acceptable as the appendix-I talks about battery powered vehicles. The assessee has been using the fork lift and the pallet truck inside the factory for shifting of material. The fork lift & the pallet truck is not registered as a vehicle under the Motor Vehicles Act. Therefore, the claim of the assessee that the fork lift and the pallet truck is a battery powered "vehicle" is rejected and accordingly, the depreciation claimed at 100% rate is disallowed. Depreciation is, however allowed at 25% applicable to plant and machinery. In the result, depreciation to the extent of Rs.1,792,343/- is disallowed. Penalty proceedings u/s.271(1)(c) for furnishing inaccurate particulars of income are initiated separately.
23. On appeal by the assessee the CIT(A) was of the following view:
"9.3 I have carelly considered the matter. In my considered opinion, the appellant assessee is justified to claim deduction @100% in respect of the Fork Lifts. As per the definition of "vehicle as per section 2(28) of the Motor Vehicles Act, 1988, it does not include the vehicle of a special type adapted for use only in a factory or in any other enclosed premises or a vehicle having less than four wheels fitted with engine capacity of not exceeding 25 cubic centimeter. The vehicle means any mechanically propelled vehicle adapted for use upon roads whether the power of propulsion is transmitted thereto from an external or internal sources. The electric fork lift truck is four wheeled. It was purchased from Godrej. I have referred to the literature and find that it is covered by the definition of vehicles. However the position regarding the Pallet Trucks is different. The Pallet Trucks are battery operated but from the literature it is seen that it is a vehicle having 13M/s. Procter & Gamble Hygiene and Health Care Limited, less than four wheels. Depreciation, therefore, is allowable at the rate of 25% of the discussion made above, ground appeal No. 8 is partly allowed."
24. Aggrieved by the order of the CIT(A) allowing depreciation on Fork Lift at 100% revenue has raised Ground No.4 before the Tribunal. Aggrieved by the order of the CIT(A) in allowing depreciation only at 25% on Pallet Truck the assessee has raised Ground No.V before the Tribunal.
25. We have heard the rival submission. Appendix 1 III to the Income Tax Rules gives the depreciation allowable on machinery and plant. Appendix-1 III(3) gives a list of items of machinery and plant which are entitled to 100% depreciation. In clause (xiii) (renewable energy devices) are listed as plant and machinery which are entitled for depreciation at 100%. Below clause
(xiii) a list of renewable energy devices are given. Item -O in that list contained following descriptions:
" Electrically operated vehicles included battery powered or fuel cell powered vehicles"
The requirement of a vehicle being registered under Motor Vehicle At 1988 cannot be extended to the category of vehicles referred to item-O referred to above. We have to keep in mind that these vehicles operate within the Plant and do not ply on public roads. In our view the test would be whether they are renewable energy devices and they are vehicles in common parlance. The dictionary meaning of vehicle as given in Oxford English Reference Dictionary is " any conveyance for transporting people, good etc. especially on land". In our view the devices on which the assessee claimed 100% depreciation satisfy this requirement as they carried goods on land albeit within the factory. These provisions allowing depreciation at 100% being beneficial provision calls for broad interpretation. Apart from the above we 14M/s. Procter & Gamble Hygiene and Health Care Limited, also notice that battery operated vehicles plying in public roads was not in vogue at the relevant point of time when these provisions were introduced and, therefore, it cannot be said that these provisions intended to cover vehicle as per the Motor Vehicle Act 1988. We also find that these devices were battery operated and renewable energy saving devices. We according directed that depreciation at 100% should be allowed as claimed by the assessee.
26. Ground No.4 raised by the revenue is dismissed while Ground No.V raised by the assessee is allowed.
27. Ground No.VI raised by the assessee was not pressed and the same is dismissed as not pressed.
28. Ground No.VII raised by the assessee reads as follows:
"GROUND VII
1. The CIT (A) erred in disallowing the expenditure of Rs. 1,17,500/- incurred on split air-conditioners on the alleged ground that it is capital in nature.
2. The Appellant prays that disallowance be deleted."
29. The assessee had claimed deduction of a sum of Rs.1,17,500/- being expenditure incurred on installation of 2 ton & 1.5 ton Wall Mounted Split AC. This was claimed as part of the expenditure on repairs and maintenance of building which was to the tune of Rs. 1,23,12,229/-. The AO was of the view that it was an expenditure for acquiring capital asset. The office in which this was installed was rented premises. Despite the above the AO was of the view that the expenditure was capital expenditure incurred for acquiring capital asset and he disallowed the claim for deduction. On appeal by the assessee the CIT(A) confirmed the order of AO.
15M/s. Procter & Gamble Hygiene and Health Care Limited,
30. We are of the view that order of the CIT(A) on this issue has to be accepted. The expenditure in question was for acquiring independent items of Air Conditioners, which is capital asset. The same cannot be claimed as a revenue expenditure. The assessee was allowed depreciation on the same. We are of the view that the order of the CIT(A) is acceptable. Ground No.VII is accordingly dismissed.
31. Ground No.VIII raised by the assessee reads as follows:
"GROUND VIII
1. The CIT (A) erred in disallowing the expenditure incurred for replacement of modems at its office of Rs.5, 60,000/- claimed by the Appellant on the alleged ground that it is capital in nature.
2. The Appellant prays that disallowance be deleted."
32. The assessee had replaced Modems and the same was claimed as revenue expenditure. Modems are part of computers. The AO held that it was an independent item of plant and machinery and was a capital expenditure. AO allowed the depreciation at 25%. On appeal by the assessee the CIT(A) confirmed the order of the AO.
33. We have considered the rival submissions. A Modem is a part of the computer and not an independent item of a plant. Replacement of such part of computer has to be considered as revenue expenditure. The claim of the assessee is therefore, directed to be accepted. Ground No.VIII is accordingly allowed.
34. Ground No.IX raised by the assessee reads as follows:
"GROUND IX:
16M/s. Procter & Gamble Hygiene and Health Care Limited, "1. The CIT(A) erred in granting depreciation @ 25% on Moulds and Dies by rejecting the Appellants claim of amortization over a period of four years.
2. The Appellant prays that depreciation be allowed as claimed."
35. The assessee claimed as revenue expenditure deduction while computing income from business expenditure on moulds and dies. The assessee as already stated is in the business of manufacturing personal health care products. The products are sold in attractive plastic containers. The person who supplies the packing material makes moulds and dies for making packing material/containers. The assessee reimburses the cost of the moulds and dies to the supplier of packing material. According to the assessee because of change in consumer desires and pattern, the containers are used for a short period and are often changed. Therefore, the cost of moulds and dies were treated as revenue expenditure. Alternatively the assessee claimed as follows:
" Without prejudice to the above, we submit that if the alleged cost of acquisition of moulds and dies is to be treated as Fixed Asset the depreciation admissible on the same is @40% since the said assets fall under the head "Moulds used in rubber and plastic goods factories"
under sub-block ( 2(iii) of the block III (part A) - "Machinery and Plant"
of the Table of rates at which depreciation is admissible under rule 5 of the Income Tax Rules, 1962.
36. The AO rejected the claim of the Assessee for the following reasons:
"12.4 The explanation of the assessee is not acceptable as the assessee has paid for acquiring the moulds and dies and the moulds and dies are the property of the assessee and not of the suppliers as the assessee has been billed by the suppliers for the cost of the moulds and dies. It is an admitted fact that the moulds and dies are having a long life and the same are not in the nature of items required for day to day upkeep of the business of the assessee. The benefit derived by the assessee by acquiring the moulds & dies is one of an enduring nature. Therefore, the expenditure on moulds and dies is held to be in 17M/s. Procter & Gamble Hygiene and Health Care Limited, the nature of capital expenditure on which depreciation would be allowable as per the provisions of the I.T.Act. The assesee submitted the details of acquisition of moulds and dies from which it was noted that mould and dies to the extent of Rs.58,349,920/- have been acquired in F.Y.1999-00 and to the extent of Rs.8,577,640/- have been acquired in F.Y.2000-01. The assessee is in the fast moving consumer goods business and hence, depreciation cannot be allowed on the moulds and dies at the rate of 400/0 as alternatively claimed by the assessee. Depreciation is allowed at the general rate of 25°/o applicable to plant and machinery. The depreciation on the moulds and dies for A.Y.200 1-02 is worked out as under -
Particulars Rs.
Cost of acqusition of Moulds & Dies for 58,349,920
A.Y.2000-01
Depreciation for A.Y.2000-01 @25% 14,587,480
--------------
Opening W.D.V for A.Y.2001-02 43,762,440
Add: Acquired during the A.Y.2001-02 8,577,640
-------------
52,340,080
Depreciation for A.Y.2001-02 @ 25% 13,085,020
12.5 In the result, the depreciation on moulds & dies claimed at Rs.l6,73l,890/- as part of other expenses is disallowed and depreciation of Rs. 13,085,020/- is allowed as per the rates specified in the Income Tax Act/Rules. Penalty proceedings u/s.271(1)(c) for furnishing inaccurate particulars of income are initiated separately."
37. On appeal by the assessee the CIT(A) confirmed the order of the AO.
38. Before us the ld. Counsel for the assessee reiterated the submissions as were made before lower authorities. The ld. Counsel for the assessee submitted that the cost of molds and dies is actual cost of packing material consumed which should be charged to the P&L account in the year of 18M/s. Procter & Gamble Hygiene and Health Care Limited, acquisition but the assessee taking into account the fact that the molds and dies have a life of 4 years amortized the cost over a period of 4 years and claimed deduction as revenue expenditure over a period of 4 years. The learned D.R. relied on the order of the CIT(A).
39. Having considered the rival submissions we are of the view that the claim made by the assessee deserves to be accepted. Considering the fact that the dies and molds are actually acquired by the packing material supplier and considering the fact that the cost of such molds and dies are reimbursed by the assessee to the packing material supplier, the assessee cannot be said to have acquired a capital asset in the form of molds and dies. They have to be rightly treated as part of the cost of packing material in the year in which the assessee pays cost of the molds and dies to the supplier of packing material. The period of use of these dies and molds are also very little as the tastes and preferences of consumers keep changing and the Assessee has to change the design of the packing materials often. The test of enduring benefit is therefore not satisfied. The assessee on a conservative basis amortized such cost for a period of 4 years and claimed deduction in 4 years. In our view the claim made by the assessee is acceptable. The AO is directed to allow the deduction as revenue expenditure. In view of the above the question of allowing higher depreciation on molds and dies does not arise for consideration. Ground No.IX is accordingly allowed.
40. Ground No.X raised by the assessee reads as follows:
"Ground X
1. The CIT(A) erred in disallowing expenditure incurred on professional fees amounting to Rs. 89,92,014/- on the alleged ground that the expenditure was not a liability of the Appellant Company.
2. The appellant prays that the disallowance be deleted.
19M/s. Procter & Gamble Hygiene and Health Care Limited,
41. The assessee had claimed as deduction a sum of Rs. 89,92,014/- under the head professional fees. The break up of the aforesaid expenditure is as follows.
Nature of Expenditure Rs. Expenses on conducting raids on spurious and 619,691 counterfeit products Expenses on instituting and defending legal suits 7,719,974
(includes court fees, notices to manufacturers of spurious products and payments to counsels for advice and appearance in court) Expenses on brand registration 115,730 Payment to professionals for work related trade matters 536,618
42. The AO called upon the assessee to explain vide notice u/s.142(1) dt.10.12.2003 the need to incur such expenditure along with copy of agreement with the trademark owners and sample bills for these expenses The assessee filed an explanation vide letter dt.16.12.2003. The same is reproduced below:
"As is apparent from the details attached these are expenses incurred to fight court cases with the people who have been infringing the trademarks of the products of the assessee company and also the works of the firm which are involved in making such spurious and pass-offs of the products of the assessee company. The assessee company has been facing a lot of problems in selling the products of the company on account of these fake products, pass-offs, spurious products etc. In order to curb such growing issues and problems it was imperative and necessary for the company to take such steps to protect the business of the assessee company. Thus this expenditure is incurred to protect the business of the company and hence is an expenditure required for commercial expediency. Also as licensed users of the trademarks and brands the assessee company is responsible for the protection of the trademarks it is licensed to use."
20M/s. Procter & Gamble Hygiene and Health Care Limited,
43. The relevant part of clause 8.1 of the agreement for the product "Whisper" referred to by the assessee in its explanation is reproduced as under :
"clause -8.1 The User undertakes to being to the notice of the proprietor all cases of infringement and/or passing off of the said Trade Marks or registration or attempted registration of the said Trade Marks or of any Trade Marks similar thereto. In the event of the proprietor undertaking any opposition to or any action to restrain or punish such act or acts, the User agrees to co-operate fully and freely with the proprietor and if required by the proprietor shall permit the proprietor to undertake such opposition or action in the name of the User. The costs of any such action shall be borne by the parties in such proportion as may be mutually agreed upon."
44. As can be seen from the above clause, the cost of action for protection of the trademark as are to be borne by the assessee and the trade mark owner in such proportion as may be mutually agreed upon. The AO called upon the assessee to produce copy of user agreements with other trademark owners and to produce the copy of terms mutually agreed upon as per clause 8.1 of the user agreement for the trade mark 'Whisper'.
45. According to the AO, the assessee did not produce any other agreement for use of trademark and also did not produce any terms which were mutually agreed to as per clause 8.1 of the user agreement for the trademark whisper. The assessee filed a further explanation vide letter dt. 18.12.2003 and the same is reproduced below -
"In this respects, we submit that the expenditure incurred on protecting the trademark of products launched and sold in India, being a local issue which impacts the business of the assessee company only, is the sole responsibility of the assessee company being the licensed user of the trademarks in India. It will be clearly evident 21M/s. Procter & Gamble Hygiene and Health Care Limited, firm the sample invoices produced in the previous submission dated December 16,2003 and marked therein as Annexure 3(a) to 3(c) that the suits for trademark protection are instituted in the name of the assessee company and consequently, the assessee company is fully responsible for the protection of trademarks licensed to it in India. Further the expenses incurred on defending suits for trademark protection are reimbursed by Proctor & Gamble Co. Inc., USA only in cases where the matter involves trademark protection of brands not yet launched in India. This is the mutually agreed sharing of trademark protection expenses between the two parties in consideration. This is also logical and reasonable as there is no reason why the licensor should bear the cost of protecting trademarks which neither impact its own business nor impact any other income since the assessee company does not pay anything for the use of these trademarks."
46. The AO was of the view that it was apparent from the facts discussed above, that the assessee was not the owner of the trademarks in respect of which it has incurred expenditure to prevent infringement and misuse thereof. As per the only agreement for use of trademark which has been produced by the assessee, the expenditure on such legal action was to be shared on the basis of terms which were to be mutually agreed upon. No such mutually agreed terms were produced by the assessee despite being asked to do so. The AO therefore presumed that there are no such mutually agreed terms in existence. So the AO was of the view that the limited issue that arose for consideration was as to whether in such circumstances, the assessee had incurred the expenditure wholly and exclusively for the purpose of its business.
47. The AO held that the Assessee as part of the technical know-how agreement and royalty for know-how was paying the owner of the trade mark. He held that there was an indirect payment by the assessee for exploiting the commercial potential of such trademark. The AO was of the view that the expenditure does not satisfy the test of sec.37 of the I.T.Act as it cannot be said to be expenditure incurred wholly and exclusively for the 22M/s. Procter & Gamble Hygiene and Health Care Limited, purpose of the assessee's business. The claim of Rs.89,92,014/- by way of professional fees was , therefore, disallowed and added to the total income.
48. On appeal by the assessee the CIT(A) confirmed the order of the AO. We have considered the rival submissions. The ld. Counsel for the assessee brought to our notice the decision of the ITAT Delhi in the case of DCIT vs. Maruti Countrywide Auto Finance Pvt. Ltd., ITA No.2181 to 2183/Del/10 dated 29/4/11. The issue before the Hon'ble Delhi Bench of the Tribunal was that the assessee incurred expenditure on advertisement which resulted in benefits to Maruti Udyog Ltd. The disallowance was made by the revenue on the ground that the assessee was not obliged to incur these expenses and that the benefit of this expenditure goes to a third party. The Tribunal held as follows:
"14.We have carefully considered the rival submissions in the light of the material placed before us. The genuineness and the actual incurrence of these expenditures have not been doubted by the Assessing Officer. The reason assigned by the Assessing Officer to make the disallowance is that the assessee by incurring these expenditures has promoted the brand belonging to Maruti Udyog Ltd. In our opinion, the Assessing Officer is not right in holding so. The assessee has been authorized to deal, finance the automobile produced by the Maruti. The promotion of the brand name 'Maruti' will directly promote the business of the assessee. It cannot be said that the assessee for the purpose of benefiting Maruti Udyog Ltd. had incurred those expenditures. According to the case law relied upon by the assessee before the CIT (A), it has been clearly laid down that if the expenditures are incurred for the purpose of business of the assessee and if incidentally those expenditure benefit the other party, then also no part of those expenditures could be disallowed on the ground that the assessee did not incur such expenditure wholly and exclusively for the purpose of its business. Therefore, we find no infirmity in the order of the CIT (A) vide which the impugned disallowance has been deleted. We, therefore, uphold his order on this issue for both the years i.e., 20086 and 2006-07. The ground No.3 in respect of both these years are dismissed"
23M/s. Procter & Gamble Hygiene and Health Care Limited,
49. Apart from the above ld. counsel for the assessee relied on the following judicial pronouncements, wherein a view was taken that if an expenditure was incurred for the purpose of business, the fact that a third party derives benefit by reason of such expenditure would not be a ground to reject the claim for deduction.
1. CIT vs. Chandulal Keshavlal & Co., (38 ITR 6010(SC)
2. Sasson J. David and Co. P. Ltd. vs. CIT (118 ITR 261) (SC)
3. Star India (P) Ltd. vs. Addl. CIT (103 ITD 73) (ITAT Mumbai)(Mad)
50. The ld. D.R on the other hand relied on the order of the CIT(A).
51. We have considered the rival submissions. We have already seen clause (8)(i) of the User Agreement dated 7/8/2003 between the assessee and the owner of the trademark. It is clear from the said clause that the assessee had to bear the expenses for protecting the trademark and infringement thereof. We are of the view that the assessee would derive a benefit by any legal recourse taken by the proprietor of the trademark for protecting the trademark. If the Assessee does that on its own even that would protect the business interest of the Assessee. We are also of the view that the agreement clearly envisages that the assessee will bear cost as mutually agreed between the assessee and the owner of the trademark. We are of the view that there is no requirement for any further written agreement between the owner of the trademark and the assessee for sharing of cost. The genuineness of the payment and the purpose of the payment by the assessee is not disputed. As held in the decisions relied upon by the Assessee the fact that a third party also derives benefit by reason of incurring of expenditure by the Assessee is no ground to deny deduction of 24M/s. Procter & Gamble Hygiene and Health Care Limited, expenditure which is for the purpose of business of the Assessee. In such circumstances we are of the view that the claim made by the assessee for deduction has to be accepted. Ground No.X is accordingly allowed.
52. Ground No.XI raised by the assessee reads as follows:
GROUND XI
1. The CIT (A) erred in confirming the action of the A.O. of reducing the deduction u/s 801B in respect of Honda and Kundiam units ("eligible units") by allocating employee cost, depreciation, capital expenditure on R &D of Head office to the eligible units and thereby allowing it only at Rs. 16,32,20,354/- and Rs.39, 63,17,937/- as against Rs.
24,98,92,706/- and Rs. 48,54,31,689/- respectively claimed by the Appellant.
2. He further erred in confirming the action of the A.O. of reducing profits of eligible units by excluding certain items of other income from the profits of eligible units.
3. The Appellant prays that the deduction u/s 801A of the Act be allowed as claimed by the Appellant.
53. It is not in dispute before us that identical issue had come up for consideration in assessee's own case and this Tribunal in ITA No.845/M/03 for A.Y 1995-96 on identical issue held as follows:
"7. The dispute raised in ground no.6 is regarding claim of deduction u/s 8OHH, the Assessing Officer conputed deduction u/s 8OHH of Rs 4,58,01,456/-. The Assessing Officer noted that the assessee had incurred interest expenditure of Rs 382.31 lakhs and also research and development expenditure amounting to Rs 3,32,65,709/- and Rs 99,55,561/-. The assessee had not allocated any part of the above expenditure to M/s Medok Unit in respect of which deduction u/s 8OHH had been claimed. The Assessing Officer allocated the expenditure to Medok Unit in the ratio of the turnover of the Medok Unit to the total turnover. He also did not consider the income from other sources amounting to Rs 5,82,91,029/- in the computation of deduction u/s 8OHH. The assessee also claimed deduction u/s 8OHH in respect of amount added of Rs 1,99,06,216/- u/s 43B, which had 25M/s. Procter & Gamble Hygiene and Health Care Limited, been disallowed by the Assessing Officer. The Assessing Officer, thus allowed deduction u/s 8OHH at Rs 2,30,91,331/- in place of Rs 4,88,01,456/- claimed by the assessee. In appeal, the CIT (A) confirmed the order of the Assessing Officer, aggrieved by which the assessee is in appeal before the Tribunal.
7.1 We have heard both the parties perused the records and considered the matter carefully. The deduction u/s 8OHH is to be allowed in respect of business profit computed under the provisions of the Act. Therefore any addition made to the business income u/s 436 has to be considered as part of the business income for computation of deduction u/s 80H1-f. We, therefore, set aside the order of the CIT (A) in relation to disallowance of deduction on account of addition u/s 436 and the claim of the assessee is allowed.
7.2 As regards the allocation of interest expenditure to Medok Unit is considered, we find that this issue is covered by the decision of the Tribunal in the assessee's own case for the assessment year 1989-90 in ITA no.8280/Mum/1992 in which the Tribunal held that only the interest payable on the bank overdraft has to b' allocated towards the Medok Unit. We, therefore, following the said decision direct the Assessing Officer to verify this aspect and allocate interest to Medok Unit only in relation to interest attributable to overdraft. As regards the R&D expenses, in our view, only actual research & development expenditure incurred in relation to Medok Unit can be allocated. In this case, there is no material placed on record to show that any research and development expenditure had been incurred by Medok Unit. The allocation has been made on estimate on the basis of turnover, which in our view is not correct. The assessee had maintained separate accounts from which it could be easily found out whether the expenditure had been incurred or not but no material has been placed on record by the revenue to prove, that the assessee had incurred any such expenditure in relation to Medok Unit. Therefore, in our view, the expenditure cannot be allocated to the Medok Unit on estimate. This view is also supported by the judgment of Hon'ble Madras High Court in case of Brakes India Ltd (161 Taxman 47) on which the reliance has been placed by the Learned Authorized Representative. We, therefore, set aside the order of CIT (A) on this point and allow the claim of the assess."
26M/s. Procter & Gamble Hygiene and Health Care Limited,
54. Respectfully following the aforesaid decision of the Tribunal we direct the AO not to reduce the claim of deduction u/s. 80 IB of the Act by allocating Head Office expenses to profits derived from Honda unit and Kundaim unit.
55. Ground No. XII raised by the assessee reads as follows:
"GROUND XII
1. The CIT(A) erred in confirming the action of the A.O. in including the amount received on sale of scrap and disposal of empty containers as part of turnover for the purpose of calculation of deduction u/s 8OHHC.
2. He further erred in confirming the action of the A.O. of reducing eligible profits of business by excluding certain items of other income from the profits of the business for deduction u/s. 8OHHC
3. The Appellant prays that the deduction u/s 8OHHC be allowed as claimed by the Appellant."
56. As far as the claim to include the scrap sale and disposal of empty containers as part of the turnover for calculating deduction under section 80 HHC of the Act is concerned, we find that the Tribunal in assessee's own case for A.Y 1999-2000 and 2000-01 was pleased to hold as follows:
"13. Ground No. VI(1) pertains to including the amount received on sale of 4' scrap and disposal of empty containers as part of turnover for the purpose of calculation of deduction under section 8OHHC.
14. It was submitted that this ground is also covered in favour of the assessee by the decision of the Coordinate Bench. in assessee's on case in ITA No. 3216/Mum/2005 dated 14th November 2006 wherein the assessee has relied on the following decisions of the Tribunal for the proposition that the income generated from scrap sales cannot be held to be forming part of the total turnover: -
27M/s. Procter & Gamble Hygiene and Health Care Limited, i. ITO vs. Jagraon Exports 124 Taxman 220 (Chd.) ii. Coftab Exports vs. ITO ITA No. 918/Mum/ 1999 iii. BHD Industries Ltd. vs. JCIT ITA No. 2584/Mum/2000 iv. SKF Bearings vs. DCIT ITA No. 1858/Mum! 1998 Since the issue is similar, respectfully following the decision of the Coordinate Bench, the ground of the assessee is allowed."
57. Respectfully following the said decision we direct the AO to include the amount in question as part of the turnover for the purpose of calculation of deduction under section 80 HHC of the Act.
58. As far as other income is concerned the same is mainly on account of interest on surplus funds earned by the assessee. The Hon'ble Bombay High Court in the case of CIT vs. Asian Star Company Ltd., 326 ITR 56 (Bom), the Hon'ble High Court followed the decision of the Hon'ble Supreme Court in the case of Ravindranathan Nair, 295 ITR 228(SC). In the aforesaid decision the Hon'ble Bombay High Court considered the following question of law:
" Whether on the facts and in the circumstances of the case and in law, the Hon'ble Tribunal was correct in holding that net interest on fixed deposits in banks received by the assessee company should be considered for the purpose of working out deduction under section 80HH of the Act and not the gross interest ?"
The Hon'ble Bombay High Court after referring to the proviso below Explanation -baa of section 80 HHC of the Act held that receipts by way of brokerage, commission, interest are to be excluded from business profit for the purpose of computing deduction under section 80 HHC of the Act as these receipts have no nexus with the export activity. Since expenses incurred in earning income by way of interest, brokerage, commission etc. also go into computation of business profit Parliament thought it fit to exclude only 90% of the receipts in order to ensure that the expenditure 28M/s. Procter & Gamble Hygiene and Health Care Limited, which is incurred by the assessee in earning receipts which have gone into the computation of business profits is taken care of. The Hon'ble Court further held that the Parliament has approved adhoc deduction of 10% from such incomes on account of expenses incurred in earning the receipts. Once the Parliament has so legislated it cannot be said that 90% gross interest received by the assessee has to be reduced from the profits and gains of business for the purpose of computing deduction under section 80HHC and not the net interest. In CIT vs. Ravindranathan Nair (Supra) the Hon'ble Supreme Court equated processing charges derived by the assessee by processing cashew nuts for other exporters was not income of the nature referred to in the proviso to Explanation -baa of section 80 HHC of the Act and cannot be said to be profit derived from the business of export. Thus interest income was considered to be not related to export and therefore not to be considered as income from business for computing deduction u/s.80HHC of the Act. In view of the decision of the Hon'ble Bombay High Court in the case of Asian Star (Supra) the claim of the assessee cannot be accepted as the said interest income would be income not connected with the export activity and, therefore, outside the purview of profits of business.
59. Ground No.XIII raised by the assessee reads as follows:
"GROUND XIII:
1. The CIT (A) erred in reducing an amount of Rs. 55,95,38,291/-, being the deduction u/s 801B, from the profits of the business for calculating the deduction u/s 8OHHC.
2. The Appellant prays that the deduction u/s 8OHHC in respect of profits from 801B units be calculated by reducing the amount of deduction u/s 801B from the deduction u/s 8OHHC and not from the profits of the business, which forms the basis for calculating the deduction u/s 8OHHC."
29M/s. Procter & Gamble Hygiene and Health Care Limited,
60. The aforesaid ground has to be decided in favour of the assessee in view of the decision of the Hon'ble Bombay High Court in the case of Associated Capsules Pvt. Ltd. Vs. DCIT 332 ITR 42(Bom) which we have referred to in the appeal of the Assessee for AY 99-2000 in the earlier part of this order.
Consequently, the deduction u/s. 80 IB should not be reduced from the profits of the business on which deduction u/s. 80 HHC is allowed.
61. In the result, the appeal by the assessee is partly allowed.
ITA NO.1241/MUM/2005, A.Y.2001-02: (REVENUE'S APPEAL)
62. The revenue is in appeal against the order dated 30/11/2004 of CIT(A)XIX , Mumbai relating to the assessment year 2001-02. Ground No.1 raised by the revenue reads as follows:
"1(a) On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in directing the AO to allow the advertisement expenditure as revenue expenditure.
1(b) On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in holding that the facts of the case of CIT Vs. Patel International Films Ltd. 102 ITR 219 are altogether different from the case of the assessee.
1(c) On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in holding that the very nature of advertisement of films does not give any benefit of enduring nature as the same become useless in the very next year of creation of advertisement films even though the films are properties of the assessee and it may use them for advertisement purposes even after 5 or 10 years and erred in holding that the ratio of the decision of IAC Vs. Joshi Formulabs P.Ltd. 42 ITJ 259 wilIbe applicable in the case of the assessee."
30M/s. Procter & Gamble Hygiene and Health Care Limited,
63. Out of advertisement expenses claimed by the assessee for the year, an amount of Rs.9,237,230/- was incurred on production of Television films and commercials as per details furnished by the assessee vide Annexure 13 to its letter dated 10/11/2003. The details of such expenses are as under :
The AO held that the expenditure was of capital nature and accordingly disallowed the claim for deduction. On appeal by the assessee the CIT(A) following the order of the CIT(A) in assessee's own case in earlier year, whereby the expenditure was held to be revenue expenditure, deleted the addition made by the AO giving rise to Ground No.1 by the revenue before the Tribunal.
64. At the time of hearing it was brought to our notice that Hon'ble ITAT in assessee's own case in ITA No.4541 & 5009/M/04 for A.Y 1997-98 and 1998-99 similar issue had come up for consideration and this Tribunal held as follows:
31M/s. Procter & Gamble Hygiene and Health Care Limited, "10. Ground No. 4 pertains to addition of Rs.61,45,000/- in respect of expenditure incurred on production of films for advertising the products of the assessee.
11. It was the assessee contention that the expenditure was incurred for advertisement of products being manufactured/marketed by it in the ongoing business and no there is enduring benefit. The AO relied on the decision of CIT vs. Patel International Film LtdlO2 ITR 219 which was confirmed by the CIT(A). This issue is covered in favour of the assessec by the decision of the Hon'ble Bombay High Court in the case of CIT vs. M/s. Geoffrey Manner & Co. Ltd. 180 Taxman 87 where in the above decision was distinguished and held that expenditure was revenue in nature if the same was incurred in the ongoing business.
Respectfully following the said decision, the ground raised by the assessee is allowed."
Following the said decision we uphold the order of CIT(A) and dismiss ground No.1 raised by the revenue.
65. Ground No.2 raised by the revenue reads as follows:
"2. On the facts and in the circumstances of the case and in law, the Lcl. CIT(A) erred in deleting the addition of Rs. 10 lakhs made by the assessing Officer out of the foreign travel expenses of Rs. 36,598,998/- ignoring the fact that the assessee failed to furnish the purpose of the visit and such disallowance made in the earlier years was confirmed by the CIT(A)."
66. The assessee has incurred foreign travelling expenses of Rs.36,598,998/-. The assessee was asked to furnish the details of foreign travel expenses indicating the purpose of such foreign travel. In response to this, the assessee filed the details of foreign travelling expenses employee wise. According to the AO no submission was given regarding the purpose of the visit. He was of the view that in the absence of clear cut description of the purpose of the visit, it was not possible to know as to why these persons travelled abroad and how the foreign travelling was in connection with 32M/s. Procter & Gamble Hygiene and Health Care Limited, business purpose of the assessee company. The AO also noticed that in the Final Accounts that the assessee had imported capital goods during the year of Rs. 15,227,638/-. He was of the view that some persons must have visited abroad for the purpose of purchase of capital goods. The expenses incurred on purchase of a capital asset would also be in the nature of capital expenditure. Therefore, keeping the totality of all the facts and going by treatment given in earlier years on this issue, an amount of Rs. 1,000,000/- was disallowed on estimation out of foreign travel expenses as being capital expenditure.
67. On appeal by the assessee the CIT(A) held that the assessee furnished all the details and those details showed that the expenditure in question was revenue expenditure and was incurred for the purpose of business of the assessee. No defects have been pointed out in the claim made by the assessee. The addition has been made on adhoc basis and, therefore, the same cannot be sustained.
68. Aggrieved by the order of CIT(A) the revenue has raised ground No.2 before the Tribunal.
69. Before us it is not in dispute that similar issue had come up for consideration in assessee's own case for A.Y 1996-97 to 1998-99 in ITA No.3076/M/04 and this Tribunal held as follows:
"17. The AO disallowed about 5% of the expenditure on adhoc basis on the reason that the assessee has not furnished the exact purpose of the visit for each employee. The CIT(A) has confirmed that as a reasonable disallowance. It was the submission that assessee is a global MNC with operations in 160 countries and exports to many countries. All the expenditure was incurred on the employees for their foreign visit for the purpose of business and no capital expenditure was involved. It was further submitted that Tax Auditors also gave details but no disallowance was considered.
33M/s. Procter & Gamble Hygiene and Health Care Limited, 17.1 On consideration of the details and the facts on record we are in agreement with the assessee submissions. First of all no such disallowance was made in any of the earlier years and this claim was a recurring one. Secondly the expenditure was incurred on employees and the details of the trips and nature was furnished. Considering the business activity of the assessee and nature of expenditure we are of the opinion that any adhoc disallowance was not warranted. AO is directed to delete the same. Ground is allowed."
70. We are of the view that in the present year also the assessee furnished all the details regarding foreign travel expenses. The AO made the addition for the simple reason that the assessee had imported capital assets during the previous year and some of the foreign travelling expenses could be for purchase of capital goods. The AO proceeded purely on surmises. The AO has also relied on the disallowance made in the earlier assessment years which have already been deleted by the Tribunal. In view of the above, we hold that the addition was rightly deleted by the CIT(A). Ground No.2 raised by the revenue is dismissed.
71. Ground No.3 raised by the revenue reads as follows:
"3. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in directing the AO to allow the payment in foreign exchange for the purchase of software of Rs. 16,93,794/- without appreciating that payment is towards Royalty covered u/s.40(a)(i)."
72. As per the notes to accounts, the assessee has incurred expenses in foreign exchange to the extent of Rs. 11,386,868/- in respect of "other matters." Out of this amount, an amount of Rs.1,693,794/- was incurred on purchase of software. The assessee was asked to explain why tax has not been deducted at source. It was explained by the assessee vide letter dated 34M/s. Procter & Gamble Hygiene and Health Care Limited, 05.12.2003 that "there was no deduction on payments for the purchase of soft ware as this is purchase of software which does not warrant any tax deduction" The explanation of the assessee was not accepted by the AO. He was of the view that in any software acquisition, the purchaser merely, obtains a license to use the software. The payment for acquisition of the license to use the software would be in the nature of royalty and tax should have been deducted at source u/s. 195 by the assessee. He held that as the assessee has failed to do so, the payment in foreign exchange for the software of Rs. 1,693,794/- would be hit by the provisions of Sec.40(a) and the claim for deduction of the payment in question was disallowed. The amount of Rs. 1,693,794/- was, therefore, added to the total income of the assesseee.
73. On appeal by the assessee the CIT(A) deleted the addition made by the AO holding that the payment in question was not royalty and that the payee was a non resident and there is no finding by the AO that the payee has PE in India. Aggrieved by the order of the CIT(A) revenue has raised Ground No.3 before the Tribunal.
74. The ld. D.R submitted that the facts with regard to the nature of purchase by the assessee are not clear either from the AO's order or from the CIT(A)'s order and, therefore, the matter should be remanded to the AO for fresh consideration. The ld. Counsel for the assessee on the other hand relied on the decision of the Special Bench of ITAT, Delhi in the case of Motorola Inc. 96 TTJ 1(Del) (SB).
75. We have considered the rival submissions. We find that the exact nature of payment made by the assessee has not been properly spelt out either in the order of the AO or CIT(A) or before us. In the circumstances it 35M/s. Procter & Gamble Hygiene and Health Care Limited, would be just and proper to set aside the order of the CIT(A) on this issue and direct the AO to examine the issue afresh. The assessee is directed to give the exact nature of the software whether purchased outright or on mere license basis and the purpose for which the same was purchased. The AO will decide the issue after affording the assessee opportunity of being heard.
76. Ground No.4 has already been decided while deciding the ground No.5 raised by the assessee. For the reasons stated therein this ground of appeal is dismissed.
77. Ground No.5 raised by the revenue reads as follows:
"5. On the facts and in the circumstances of the case and in law the Ld. CIT(A) erred in deleting the disallowance of Rs. 27,91,962/- on account of destruction of obsolete stock in trade, following the decision in assessee's own case for A.Y. 1996-97 and the decision of assessee's sister concern, MIS. Procter & Gamble Distribution Co.Ltd., for the earlier year which has not been accepted by the department."
78. The issue raised by the revenue is identical to the issue which was considered by the Tribunal in assessee's own case in A.Y 1996-97. This Tribunal on identical issue in ITA No.6486/M/04 for A.Y 1999-2000 held as follows:
"37. Vide ground No. 3 the Revenue contends that the CIT(A) erred in deleting the disallowance of Rs.27,91,962/- on account of destruction of obsolete stock-in-trade. It was submitted that similar ground raised by the Revenue in ITA No. 3833/Mum/2004 for A.Y. 1996-97 has been rejected by the Tribunal holding that having regard to the fact that the deduction of obsolete stock works out to less than. 1% we are of the view that the claim of deduction is reasonable. Therefore we uphold the order of the learned CIT(A) on this issue. Respectfully following the above order of the Tribunal, as the issue is similar we reject the ground of the Revenue."
36M/s. Procter & Gamble Hygiene and Health Care Limited, Following the aforesaid decision we uphold the order of the CIT(A) and dismiss Ground No.5 raised by the revenue.
79. Ground No.6 raised by the revenue reads as follows:
"6. On the facts and in the circumstances of the case and in law the Ld. CIT(A) erred in directing the AO to grant depreciation @ 6O% on SRIS software ignoring the fact that there is no specific mention in the schedule to allow depreciation 60%."
80. The assessee claimed depreciation on acquiring SRIS Software at 60% at the rates applicable to computers. The AO treated the software as independent item of asset being a licence and restricted the claim of depreciation to 25%. The assessee explained before CIT(A) that SRIS software is a reporting system set up in the plant of the company to generate reports on inventory tracking and to identify misses. The assessee explained that the hardware required for SRIS software was treated as depreciable asset under block of computers and the software which is an integral part of the assessee was also capitalized and depreciation claimed at 60%. The CIT(A) held that software was depreciable asset only from 2003- 04 but was intangible asset. The CIT(A) held that since it was part of the computer it has to be treated as computers eligible for depreciation at 60%. Aggrieved by the order of the CIT(A) the revenue has raised Ground No.5 before the Tribunal.
81. We have heard the rival submissions. The issue as to whether depreciation has to be allowed at 60% or 25% for A.Y 2001-02 on software is no longer res-integra and has been decided by the Special Bench of the ITAT in the case of Amway India Enterprises vs. DCIT, 111 ITD 112 (Del), wherein it was held that depreciation on computer software has to be allowed at 25% prior to 1/4/2003 and that is only from A.Y 2003-04 37M/s. Procter & Gamble Hygiene and Health Care Limited, computer software are entitled to depreciation at 60%. The reasoning of the CIT(A) that software was part of the computer and had to be treated as computer in our view is contrary to the claim of the Assessee. The Assessee had itself claimed depreciation treating software as a separate and independent item of capital asset. In view of the aforesaid decision of the special bench, we reverse the order of the CIT(A) and restore the order of the AO. Ground No.6 raised by the revenue is allowed.
82. Ground No.7 raised by the revenue reads as follows:
"7. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in directing the. AO to exclude the sales tax from the total turnover for the computation of deduction u/s 8OHHC relying on the decision of the Bombay High Court in the case of Sudarshan Chemical Ltd. (245 ITR 769 ) which has not been accepted by the department."
83. The issue sought to be raised by the revenue in Ground No.7 no longer res- integra and has been now settled by the Hon'ble Supreme Court in the case of CIT vs. Laxmi Machine Works, 290 ITR 667 (SC), wherein it was held that Sales Tax has to be excluded from the total turnover for computing deduction under section 80 HHC of the Act. The decision of the Hon'ble Bombay High Court in the case of CIT vs. Sudarshan Chemical Industries Ltd. (supra) has been approved. In view of the above ground No.7 raised by the revenue is dismissed.
84. In the result, the appeal of the revenue is partly allowed.
ITA NO.119/MUM/2009: A.Y 2001-02:
85. This is an appeal by the assessee against the order of the AO imposing penalty on the assessee under section 271 (1)(c) of the Income Tax Act 1961 (the Act).
38M/s. Procter & Gamble Hygiene and Health Care Limited,
86. The facts and circumstances under which penalty under section 271(1)(c) was imposed on the assessee are as follows:
87. As we have already seen, the assessee is a company engaged in the business of manufacturing and sale of medicines and various personal health care products. The issue before the AO was as to whether rental income from letting out of the property Matulya Center owned by the assessee was to be considered as business income as claimed by the Assessee or income from house property which was the view of the Assessing Officer. The assessee had given the aforesaid property to a group company M/s. Proctor & Gamble Home Products Ltd. for Rs. 1,08,00,000/- per annum. The assessee had claimed that income from letting was income from business and that depreciation on the aforesaid building should also be allowed as the asset was used for the purpose of business of the Assessee. The AO was of the view that income from aforesaid property should be assessed under the head income from house property and depreciation claimed by the assessee should not be allowed. He was of the view that rental income from the property has to be taxed in the hands of the assessee under section 22 of the Income Tax Act 1961(the Act) under the head income from house property. The AO accordingly disallowed the claim of the assessee for deprecation and further brought the rental income in question to tax under section 22 of the Act.
88. The plea of the assessee that the income from letting out of property had to be considered as income from business was based on the fact that the property was leased to a sister company of the Asssessee M/S.Proctor & Gamble Home Products Ltd. Under a business arrangement between the assessee and sister company whereby the sister company agreed to compensate the assessee for use of space. According to the assessee the 39M/s. Procter & Gamble Hygiene and Health Care Limited, premises in question was also occupied by the employees of the assessee and were functioning from the same premises and used the same set of infrastructure as is available is assessee's sister concern. The assessee further submitted it was the manufacturer and distributor of all its products upto March'1993. Thereafter, with a view to take advantage of the merits of specialization, the distribution task was allotted to a new company (namely Procter & Gamble Distribution Co. Ltd. "PGDC") in April'1993 and subsequently to PGHP in November'1998 when this business of PGDC was commenced by PGHP. One of PGHP's activity was that of distribution of the assessee's products. With a view that this activity is smoothly taken over and is carried on without any interruption, the assessee, in its own business interests, agreed to allow the use of its set infrastructure namely- premises computers, office equipments, telephones etc. for a composite consideration. According to the Assessee when a principal allows the use of its premises to its agent with the understanding that the same should be used entirely for the business of the principal only and for no other purpose whatsoever the compensation retains the character of business income. It was argued that the principal could either adjust the compensation in the margins or commission payable to the agent or could show them separately. If margins were to be adjusted, only the net expenditure would be claimable as business expenditure. The Assessee pointed out that there was no such adjustment. The Assessee argued that both the arrangements identical and in the circumstance it was not justifiable to treat expenditure as business expenditure and income as rental income. The rental income should be considered as an integral part of the business of the assessee when the PGDC deals in the products of the assessee and of none others.
89. The arguments did not find favour with the AO. On appeal by the assessee the CIT(A) confirmed the order of the AO. While deciding the appeal 40M/s. Procter & Gamble Hygiene and Health Care Limited, of the Assessee we have already held that the income in question had to be assessed under the head "Income from other Sources" following the decision in assessee's own case by the Tribunal Mumbai in ITA No.845/Mum/03 for AY 95-96 wherein this Tribunal held as follows:
"6.3 As regards the rental income, the case of the assessee is that the assessee had let out the building to Procter and Gamble Distribution Co. Ltd. for effective and smooth distribution of products and such letting out had advanced the business interest. Moreover, letting out the property was also one of the objects of the assessee company and accordingly it has been claimed that the rental income should be assessed as business income.
6.4 We have heard both the parties and considered the material carefully. There is no material to show that building has been let out by the assessee as part of any business arrangement so that the rental income could be considered as incidental business income. Merely because the building has been let out tj the distributor of the assessee, the rental income cannot be treated as business income in the absence of any material to show that letting out was necessary for the purpose of business. Similarly, merely because one of the objects of the assessee was letting out of the property, it cannot automatically lead to the conclusion that the assessee was actually doing business in letting out buildings. There is no material to show that the assessee was doing any organized activity of letting out buildings. Therefore, the claim of the assessee that the rental income should be assessed as business income cannot be accepted and the order of the CIT (A) is upheld."
90. It is in respect of the disallowance of depreciation and treating the rental income as income from house property as against the claim of the assessee that it was business income that penalty was imposed on the assessee by the AO which was confirmed by the CIT(A). We find that the assessee had made complete disclosure of all the facts. The assessee had made a claim that rental income received was to be assessed as income from business based on the utility of the premises for the assessee's business also. On the same basis claim for depreciation was also made. The AO came to the 41M/s. Procter & Gamble Hygiene and Health Care Limited, conclusion that the income in question was income from house property. Ultimately the Tribunal held that the income in question was income from other sources. Thus it appears to us that there was no concealment of any particulars of income and it was a case on difference of opinion regarding the head of income under which rental income have to be assessed. It is also significant to note that the Tribunal in the quantum proceedings ultimately did not agree with the AO and it took the view that the rental income was income from other sources. In such circumstances we are of the view that the assessee cannot be said to have furnished inaccurate particulars of income. We, therefore, hold that it is not a fit case for imposing penalty under section 271(1)(c) of the Act. The penalty imposed is directed to be deleted. The appeal of the Assessee is allowed.
91. In the result, ITA No.1499/M/05 is allowed, while ITA No.1241 & 1500/M/05 are partly allowed, while ITA No.119/M/2009 is allowed.
Order pronounced in the open court on the 25TH day of Jan. 2012.
Sd/- Sd/- (R.K.PANDA ) (N.V.VASUDEVAN) ACCOUNTANT MEMBER JUDICIAL MEMBER Mumbai, Dated. 25th Jan.2012
Copy to: 1. The Appellant 2. The Respondent 3. The CIT City -concerned
4. The CIT(A)- concerned 5. The D.R"F" Bench.
(True copy) By Order
Asst. Registrar, ITAT, Mumbai Benches
MUMBAI.
Vm.