Income Tax Appellate Tribunal - Chandigarh
M/S Steel Strips Wheels Ltd.,, ... vs Department Of Income Tax on 18 September, 2013
IN THE INCOME TAX APPELLATE TRIBUNAL
CHANDIGARH BENCHES 'B' CHANDIGARH
BEFORE SHRI T.R. SOOD, ACCOUNTANT MEMBER AND
MS. SUSHMA CHOWLA, JUDICIAL MEMBER
ITA No. 975/Chd/2012
Assessment Year: 2009-10
M/s Steel Strips Wheels Limited .Vs. The Addl. C IT,
SCO 49-50 , Sector 26 Range V,
Chandigarh Chandigarh
PAN No. AACCS3003L
&
ITA No. 1019/CHD/2012
Assessment Year: 2009-10
The Addl. C IT, Vs. M/s Steel Strips Wheels Limited
Circle 5(1), SCO 49-50 , Sector 26
Chandigarh Chandigarh
PAN No. AACCS3003L
(Appellant) (Respondent)
Appellant By : Ms. Gurpreet Kaur
Respondent By : Shri Akhilesh Gupta
Date of hearing : 18/09/2013
Date of Pronouncement : 26/09/2013
ORDER
PER T.R. SOOD, AM
These appeals by the assessee and Revenue are directed against the order passed by the Ld. C IT(A) Chandigarh dated 2.7.2012.
ITA No. 975/Chd/2012:2. In this appeal the assessee has raised the following grounds:-
21. That the Ld. CIT(Appeals) has erred in confirming the disallowance of Rs. 6,65,19,673/- being notional sales tax liability on account of sales tax exemption / subsidy treating the same as revenue receipt, whereas, the same is a capital receipt. Therefore, the addition of Rs.
6,65,19,673/- may kindly be deleted.
2. That the Ld. CIT(Appeals) has erred in confirming the disallowance of the claim of depreciation on assets to the extent of Rs. 6,36,750/- holding that the subsidy received by the assessee should have been reduced from the block of assets, whereas, the subsidy did not form part of the actual cost of plant and machinery within the meaning of section 43 of the income tax act, 1961. Therefore, the addition of Rs. 6,36,750/- may kindly be deleted.
3. Ground No.1 : After hearing both the parties, we find that during assessment proceedings the Assessing Officer noticed that assessee has received a sales tax subsidy amounting to Rs. 6,65,19,673/- which was treated as capital receipt. On query, it was submitted that assessee had received sales tax exemption for a period of 10 years in terms of Punjab State Government Industrial Policy Incentive Code 1996. It was also contended that as per the decision of Hon'ble Punjab & Haryana High Court in the case of State v Si ya Ram Garg dated 14.12.2010 in ITA No. 679 of 2010, the subsidy has to be treated as capital receipt. However, the Assessing Officer observed that under similar circumstances, sales tax subsidy was held to be of Revenue nature by the Hon'ble Punjab & Haryana High Court in the case of Abhishek Industries Ltd (286 ITR 1).
4. On appeal, it was admitted before the Ld. C IT(A) that this issue has already been decided in the earlier years in favour of the Revenue by the 3 Tribunal. The Ld. CIT(A) following the order of the Tribunal decided the issue against the assessee.
5. Before us, the Ld. Counsel for the assessee admitted that issue has been decided in the earlier years against the assessee.
6. On the other hand, the Ld. DR relied on the orders of the CIT(A) and the Tribunal.
7. After considering the rival submissions, we find that this issue came up for consideration of the Tribunal in ITA No. 756/Chd/2011 for assessment year 2008-09 and the same was decided vide para 8 following the earlier order against the assessee. Para 8 of the said order reads as under:-
"8. We have perused the aforesaid order passed by this Tribunal. The operative portion reads as under :
14. It is agreed by the parties that the decision of the Commissioner of Income-tax (A) is contrary to the decision of the Jurisdictional High Court in the case of CIT Vs. M/s Abhisek Industries, 286 ITR 1. In this case, the Hon'ble High Court held that sales-tax subsidy quantified at percentage of fixed capital investment is a revenue receipt. Since the decision of the Commissioner of Income-tax (A) is contrary to the decision of the Jurisdictional High Court referred to above, we set aside his order on this issue and restore the addition of Rs.1,28,81,928/-."
8. Following the above, we decide this issue against the assessee.
9. Ground No.2: It was contended before the Assessing Officer that subsidy amount could not be reduced from the WDV of the assets. However, 4 the Assessing Officer did not accept the same by referring to the Explanation 10 to Section 43 and reduced the amount from the WDV of the assets and reduced the depreciation by Rs. 6,36,750/-.
10. On appeal, it was submitted that capital subsidy was granted for the expansion of the existing plant. It was submitted that subsidy was given with reference to the value of the fixed assets onl y as a measure of quantifying the amount of subsidy and it was not given for any specific purpose and, therefore, the same could not be reduced from the cost of assets. However, Ld. CIT(A) did not find force in the same in the light of the explanation 10 to Section 43(1) of the Act.
11. Before us, the Ld. Counsel for the assessee relied on the ground of appeal.
12. On the other hand, the Ld. DR supported the order of C IT(A).
13. After considering the rival submissions, we find that Explanation 10 to section 43(1) reads as under:-
"Explanation 10 - Where a portion of the cost of an asset acquired by the assessee has been met directly or indirectly by the Central Government or a State Government or any authority established under any law or by any other person, in the form of a subsidy or grant or reimbursement (by whatever name called), then, so much of the cost as is relatable to such subsidy or grant or reimbursement shall not be included in the actual cost of the asset to the assessee.
14. The above clearl y shows that subsidy has to be reduced from the cost of fixed assts, therefore, we find nothing wrong with the order of Ld. C IT(A) and confirm the same.5
15. In the result, assessee's appeal is dismissed.ITA No. 1019/Chd/2012:
16. In this appeal, the Revenue has raised the following grounds:-
1. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in allowing the appeal of the assessee without appreciating the facts of the case.
2. On the facts and in the circumstances of the case and in law, the Ld CIT(A) has erred in deleting the addition made by the AO by assessing the Die Tooling charges of Rs. 6,57,48,421/- as capital expenditure which was claimed by the assessee as revenue expenditure.
3. On the facts and in the circumstances of the case and in law, the Ld CIT(A) has erred in deleting the addition made by the AO by assessing the Technical know-how expenditure of Rs. 48,53,094/- as capital expenditure which was claimed by the assessee as revenue expenditure.
4. It is prayed that the order of the Ld. CIT(A) be set aside and that of the Assessing Officer may be restored.
17. After hearing both the parties, we find that during assessment proceedings the Assessing Officer noticed that assessee has claimed expenses on die & tooling charges amounting to Rs. 6,57,48,421/-. On a query, it was mainl y submitted that these expenses was incurred for development of die & tools to manufacture the automotive wheel rims. The expenditure was incurred with an objective of improving the existing products and to bring improvement in the components manufactured by the assessee. Reliance was placed on the order of the Tribunal in assessment 6 year 2004-05. However, the Assessing Officer did not find force in the same and disallowed the expenditure.
18. On appeal, the Ld. CIT(A) decided the issue by following the order of the Tribunal for assessment year 2008-09 in favour of the assessee.
19. Both parties were heard. After considering the rival submissions, we find that identical issue came up for consideration of the Tribunal in ITA No. 828/Chd/2011 and the same was decided vide para 12, which is as under:-
"12. As regards Ground No.2 taken by the Department, both the parties agree that the issue has already been considered and decided by this Tribunal in Department's appeal bearing ITA No. 341/Chd/2007 (A.Y. 2004-05) against the Department and in favour of the assessee. The issue under appeal has been disposed of by this Tribunal in the said appeal with the following observations :
"7. It is agreed by the parties that the issue is covered in favour of the assessee by the decision of the Tribunal in assessee's own case for assessment year 2001-02 (supra). The relevant discussion and findings on this issue contained in para Nos.12 and 13 of the order which are reproduced hereunder and adopted for the disposal of the ground of appeal raised by the Revenue :-
12. The next ground raised by the revenue is that the ld CIT(A) erred in treating the die Tooling charges as revenue expenditure as assessed as capital expenditure being of enduring nature. The ld DR supported the assessment order and placed reliance upon the decision in CIT vs Saraswati Industrial Syndicate ltd (166 ITR 366) and 78 ITD
327. On the other hand the contention of the learned 7 counsel for the assessee that for earlier assessment years, on identical fact, it was allowed as revenue expenditure. Reliance was also placed upon the decision in the case of CIT vs Madras Spinners Ltd (177 ITR 495) and 275 ITR 403.
13. We have considered the rival submissions and perused the material available on the file. The claim of the assessee before the ld assessing officer was as under:-
"The company has claimed die tooling charges of Rs.5579108/- as revenue expenditure whereas the same has been capitalized in the books of account but the company has not claimed any depreciation on the same in the income tax return. The company has incurred the above said expenditure for development of die toolings to manufacture the automotive wheel rims with an object of achieving the maximum output. The expenditure has been incurred with an object of improving the existing products already manufactured by the company and does not relate to setting up to altogether new product or for setting up of a new unit. The company by incurring such expenditure has only effected economy and efficiency in manufacturing of the existing products and obtained only business advantage. As the expenditure incurred is not of enduring nature to put it in the category of capital expenditure and hence, the same may please be allowed as revenue expenditure."
However, the ld assessing officer treated the impugned amount as capital expenditure which was deleted by the ld CIT(A) against which the revenue is in appeal before the Tribunal. We have found that the Tribunal in the case of DCIT vs Metalman Auto Private Ltd (78 ITD 327) Chandigarh, on identical fact, decided in favour of the 8 assessee. It was held to be revenue in nature since the expenditure were incurred for modernization of existing projects, which was already manufacturing the same products, and simply to increase the business more efficiently and more profitability, especially when the expenses were incurred for making technological changes. It is not the case of the revenue that new machinery was installed rather the assessee incurred expenses for the improvement of product and quality with an object of achieving maximum output by improving the already existing machinery, therefore, it cannot be said that it is setting up of altogether new business. The assessee company by incurring such expenditure has only improved the efficiency in manufacturing of existing products more economically for the purposes of getting maximum business advantage. In view of these facts, we have not found any defect in the conclusion of the ld CIT(A), consequently, this ground of the revenue is also dismissed.
8. Since the decision of the Commissioner of Income-tax (A) is in accord with the decision of the Tribunal in assessee's case referred to above, we find no justification to interfere with the order of the Commissioner of Income-tax (A). The ground of appeal raised by the Revenue is thus dismissed."
20. Following the above, we decide this issue against the Revenue.
21. Ground No.2: After hearing both the parties, we find that during assessment proceedings, it was noticed that assessee claimed expenses of technical know-how at Rs. 48,53,094/-. On a query, it was submitted that assessee has not acquired any new capital asset and the objective of the expenses on technical know-how was to effect econom y and efficiency in manufacturing activities. Reliance was placed in the order for assessment year 2004-05. However, the Assessing Officer did not agree with the same and disallowed the expenditure.
922. On appeal, the Ld. CIT(A) following the order of the Tribunal allowed these expenses.
23. Both parties were heard.
24. After considering the rival submissions, we find that this issue came up for consideration of the Tribunal in ITA No. 828/Chd/2011 for assessment year 2008-09 and the same was decided vide para 14 following the earlier order against the assessee. Para 14 of the said order reads as under:-
"14. Apropos Ground No.3 taken by the Department, both the parties submitted that the issue was covered by the order of this Tribunal in Department's appeal bearing ITA No. 341/Chd/2007 (A.Y. 2004-05) in favour of the assessee and against the Department. The Tribunal has decided the issue in favour of the assessee with the following observations :
"4. The parties agreed that the issue is covered in favour of the assessee by the decision of the Tribunal for assessment year 2001-02 in I.T.A.No. 750/Chandi/2005, order dated 30.7.2007. The said order has further been followed in assessment year 2003-04 in I.T.A.No. 897/Chandi/2006, order dated 30.7.2007. For the sake of ready reference and adopting the reasoning we reproduce para Nos.9 to 11 of the order of the Tribunal in I.T.A.No. 750/Chandi/2005 (supra) as under :-
"9. Next ground raised by the revenue is that the ld CIT(A) erred in allowing relief to the assessee on account of disallowance of expenses on technical know-how at Rs.58,44,711/- treating them as revenue as against capital expenditure as assessed by ld assessing officer. In nutshell, the ld Sr DR supported the assessment order. Reliance was placed upon the decision in 224 ITR 342 and 251 ITR 155. On 10 the other hand, the ld counsel for the assessee filed the copy of agreement by contending that it was expansion of the business. Reliance was placed upon 236 ITR 471, 269 ITR 369, ITA No.1469/Chd/95 and 236 ITR 314(SC).
10. We have considered the rival submissions and perused the material available on the file. The assessee paid a sum of Rs. 58,44,711/-, under technical collaboration agreement, to M/s Ring Tech Company. Japan. A sum of Rs. 25,53,906/- was paid under the original agreement for the period of 3 years from 23.6.97 to 22.6.2000 and Rs. 32,90,805/- was paid under the new agreement which is extension of original agreement from 23.6.2000 to 22.6.2002, for a period of 2 years. As per the assessee the main purpose of these agreements was to increase the productivity from present average level of 210 wheels pear hours to 340 wheels per hours and further for reduction of rejections substantially. Similarly, the main object of the second agreement was to improve productivity, resolution of licenses, chronic quality problems, reducing process rejection/rework and technical up-gradation in the existing car line and introducing of the manufacturing facility of tractor wheels. The contention of the revenue is that it should be assessed as capital expenditure. The observation of the ld assessing officer is reproduced herewith:
"Attention is invited to section 32(1)(ii) wherein know how is considered to be an intangible asset w.e.f. 1.4.99. It may be pointed out that the Technical Collaboration agreement signed originally on 23.6.1997 by the assessee's own admission has been renewed from 23.6.2000 and, is therefore, squarely covered under the said provision of the statute.
The case law cited as DCIT v Metalman Auto (P) Ltd (78 ITR 327) is not applicable to the instant case since the same pertains to assessment year 1991-92 when the Income Tax Act did not recognize technical know how as an intangible asset on which depreciation is allowable.11
Further, it is seen that the Technical Collaboration agreement has specific clauses regarding the training of engineers w.r.t specific items viz training in rims, training in discs and training in design etc. The venues fro training vary with the specific items as also training schedules. It has also been categorically specified in the technical collaboration agreement that the expenses towards the foreign and domestic travel of the technicians would have to be borne by the assessee. From the details of the foreign traveling expenses, it is noticed that the entire expenditure has been incurred towards to & fro travel between Japan and India for the purposes of training as per the technical collaboration agreement"
If the aforesaid conclusion of the ld assessing officer is analysed. it says that these expenses are linked to the expansion of the present unit and virtually it is a new unit, therefore, the expenses are of capital nature whereas the conclusion of the ld CIT(A) is as under:-
"The assessee was paying technical know how fees to M/s Ring Tech Co., Japan to increase the production and to reduce the rejections so as to improved the production quality and make the operation profitable. No capital asset as such has been acquired by the company, which could be considered to be of enduring nature. The object was to effect economy and efficiency in the manufacturing process. The acquisition of the knowledge has helped in substantial increase in production but in face of swift changes occurring in the technological world, it cannot be said that the changed method of the technology acquired by the appellant would be of permanent nature. The Hon'ble Supreme Court decision in the case of Alembic Chemical Works Co Ltd v CIT reported in 177 ITR 377 is applicable to the facts of the case. So also the decision of the Hon'ble ITAT, Chandigarh Bench in the case of DCIT v Metalman Auto P. Ltd 78 ITD 327. Taking into account all the above facts and following the above judgment, the 12 disallowance made on this account is held to be unjustified and the same is deleted."
11. If the facts of the case and the conclusion drawn by ld assessing officer/CIT(A) are analysed, the decision of the ld first appellate authority seems to be more reasoned one which is based on various judicial pronouncements identical to the facts of the present appeal . The assessee is further fortified by the decision of the Hon'ble jurisdictional High Court in the case of CIT vs Swaraj Engines Ltd (2006) 203 CTR 310(P&H). wherein the assessee claimed deduction for an amount of Rs. 26,65,340/- paid to M/s Kirloskar Oil Engines Ltd as royalty on the basis of agreement for the purposes of acquiring technical know how. It was decided in favour of the assessee by upholding the decision of the Tribunal. The Hon'ble Court has already considered the decision of the Hon'ble Apex Court pronounced in the case of Radha Swami vs CIT (193 ITR 321), CIT vs Wavin (India) Ltd (236 ITR 314) and various other decisions .
The Hon'ble Gujrat High Court in the case of CIT vs Mihir Textiles Ltd (2006) 287 ITR 232, on identical fact, decided in favour of the assessee by holding that technical service fee is deductible. While coming to this conclusion the Hon'ble Court followed the decision in CIT vs Ashoka Mills Ltd.(218 ITR 526)(Guj). The Hon'ble Apex Court in the case of Alembic Chemical Works Co Ltd v CIT (177 ITR 377) (SC), the Hon'ble Kerala High Court in the case of CIT v Madras Spinners Ltd (177 ITR 495) and the Hon'ble Andhra Pradesh High Court in the case of Vejan Hydrair (P) Ltd v CIT (177 ITR 552), on identical fact, held that the amount so paid under the agreement is revenue expenditure. However, the Hon'ble Apex Court in the case of Jonas Woodhead & Sons (India) Ltd vs CIT (224 ITR 342) wherein composite payment for supply of technical know how and services for setting up plant and manufacture of product, it was held that the expenditure is of enduring benefit to the assessee, therefore, is of capital nature. The Hon'ble 13 Calcutta High Court in the case of Shri Ram Bearings Ltd (251 ITR 155) wherein the assessee was allowed to use technical know how even after period of agreement, it was held that the benefit is of enduring nature, therefore, is of capital in nature. However, keeping in view the facts and circumstances and the latest decision of the Hon'ble jurisdictional High Court in the case of Swaraj Engines Ltd dated 18 t h May 2006 wherein the Hon'ble Court has already followed the decisions from the Hon'ble Apex Court in the case of Radha Swami Satsang vs CIT (supra) and Wavin India Ltd (supra), we uphold the stand of the ld CIT(A). Consequently, this ground of the revenue is also having no merit."
5. Respectfully following the above oroder of the Tribunal we uphold the view of the Commissioner of Income-tax (A) and dismiss the ground of appeal raised by the Revenue in this regard."
25. Following the above, Revenue's appeal is dismissed.
26. In the result, appeal of the assessee and Revenue are dismissed.
Order Pronounced in Open Court on 26.09.2013.
Sd/- Sd/-
(SUSHMA CHOWLA) (T.R.SOOD)
JUDICIAL MEMBER ACCOUNTANT MEMER
Dated : 26 t h September, 2013
Rkk
Copy to:
1. The Appellant
2. The Respondent
3. The CIT
4. The CIT(A)
5. The DR
By Order
Assistant Registrar,
ITAT Chandigarh