Income Tax Appellate Tribunal - Delhi
Honda Siel Power Products Ltd., Uttar ... vs Assessee on 25 February, 2015
IN THE INCOME TAX APPELLATE TRIBUNAL
(DELHI BENCH ' C', NEW DELHI)
BEFORE SHRI GEORGE G. K., JUDICIAL MEMBER AND
SHRI T.S. KAPOOR, ACCOUNTANT MEMBER
I.T.A. No. 5157, 5158 & 1253/Del/2010
Assessment year : 1999-2000, 2005-06 & 2006-07 respectively
Honda Siel Power Products Ltd., Vs. Addl. CIT, Range 12,
Plot No.5, Sector 41, New Delhi
Kasna Greater Noida Indl. Area,
Gautam Budh Nagar, U.P.
GIR / PAN:AAACH8464L
I.T.A. No. 5809 & 5810/Del/2010
Assessment year : 1999-2000 & 2005-06
ACIT, Circle 12(1), Vs. Honda Siel Power Products Ltd.
New Delhi Plot No.5, Sector 41, Kasna Gr. Noida
Indl. Area, Gautam Budh Nagar, U.P.
(Appellant) (Respondent)
Appellant by : Shri Neeraj Jain, Adv.
Ms. Bhavita Kumar, Adv.
Respondent by : Shri Robin Rawal, Sr. DR
ORDER
PER BENCH:
This is a group of five appeals filed by assessee as well as by Revenue. I.T.A. No. 5157, 5158 & 1253/Del/2010 are the appeals filed by assessee against separate orders of Ld. CIT(A) dated 14.09.2010, 20.09.2010 and 08.11.2010 relating to Assessment Years 1999-2000, 2005-06 and 2006- 07 respectively. I.T.A. No. 5809 & 5810/Del/2010 are appeals preferred by Revenue against the order of Ld. CIT(A) dated 14.09.2010 and 20.09.2010 for Assessment Years 1999-2000 and 2005-06 respectively.2 ITA No.5157,5158,1253/Del/2010
I.T.A.No. 5809,5810/Del/2010
2. At the outset, Ld. A.R. submitted that the appeals are covered in favour of the assessee by various orders of Tribunal in subsequent years and he placed a chart depicting various grounds of appeal in these years along with relevant Tribunal orders by which they were covered. It was submitted that in Assessment Year 1999-2000, the assessee has also taken ground against reopening u/s 147 which he wanted to argue. Ld. D.R. fairly conceded that appeals on merits are covered in favour of the assessee but he contested the grounds against reopening as challenged by Ld. A.R. Arguing upon grounds No.1 & 1.1 in Assessment Year 1999-2000, the Ld. A.R. submitted that in this year, the assessment was completed u/s 143(1) and there was no perverse and external material relying upon which the A.O. had issued notice for reopening of the case. Ld. A.R. heavily relied upon the order of Hon'ble Delhi High Court in the case of Orient Crafts Ltd. 354 ITR 536 and submitted that in this case also, assessment was completed u/s 143(1) and Hon'ble High Court had held that the intimation u/s 143(1) cannot be disturbed until and unless ingredients u/s 147 were fulfilled and it was held that in reference to Section 143(1) vis-à-vis Section 147, the only ingredient was that there should be reason to believe that income chargeable to tax had escaped assessment. Ld. A.R. also relied upon Hon'ble Supreme Court order in the case of Kelvinator of India Ltd. 320 ITR 561 (S.C.) for the proposition that A.O. has no powers to review his own orders but he has the power to reassess and reassessment which has to be based on fulfillment certain precondition that there should be tangible material to come to the conclusion that there is escapement of income.
3. Ld. D.R. invited our attention to reasons recorded and submitted that the A.O. proceeded to reopen the case on the basis that in his opinion, there 3 ITA No.5157,5158,1253/Del/2010 I.T.A.No. 5809,5810/Del/2010 was overlapping of deductions claimed by assessee u/s 80HHC and 80-IA. He further submitted that the assessee had not challenged reopening as is evident form grounds No.1 and 1.1 of appeal. It was submitted that the assessee has challenged reassessment u/s 147 on the basis that for making additions A.O. had traveled beyond the reasons recorded. Ld. A.R. interpreted and submitted that since it being a legal ground, it can be taken at any stage of appellate proceedings. Ld. A.R. submitted that assessee had an industrial undertaking and export house and this fact was communicated in its return of income itself wherein as per the audit report full claim deduction u/s 80HHC and 80-IA was claimed for two separate units. He invited our attention to page 33 in support of his argument that under computation of deduction u/s 80-IA Pondicherry unit was mentioned.
4. Ld. A.R. also took us to page 305 where audit report for claiming deduction u/s 80HHC was placed. In view of above documents, it was argued that the complete facts were there in the return of income itself wherein assessee had stated that it had earned income from export as well as from industrial undertaking. No new fact had come to the notice of A.O. therefore, as per the judicial precedents relied upon by him, the reassessment itself was bad and void ab-initio.
5. We have heard rival parties and have gone through the material placed on record. We find that on merits the issues raised by assessee and revenue are squarely covered by various orders of the Tribunal in the case of assessee itself on which Ld. D.R. has also no doubt. Therefore, without adjudicating the ground No.1 in Assessment Year 1999-2000 we are proceeding to decide the issues on merits. The grounds in the appeals of assessee are disposed off as under:
4 ITA No.5157,5158,1253/Del/2010I.T.A.No. 5809,5810/Del/2010
i) The first issue raised by assessee is treatment of royalty technical guidance as revenue expenditure which is common in I.T.A. No. 5157, 5809, and 1253/Del/2010 and which is represented by ground No.2 in I.T.A. No. 5157 and ground No.1 in I.T.A. No. 5809 and 1253. On the same issue, against part relief given by Ld. CIT(A) the revenue is aggrieved in I.T.A. No. 5810. The A.O. had made additions on account of royalty holding these to be of capital nature and of enduring nature. We find that the Tribunal in Assessment Year 2007-08, 2008-09, had decided similar issue in favour of assessee. The relevant findings of the Tribunal in Assessment Year 2007-08 are reproduced as under:
"7.6 The Ld. Departmental Representative could not specifically point out substantive difference / variation in the clauses between both the agreements. In our view, the clauses in these agreements are pari materia. Hence, we are of the considered opinion that the issue stands covered by the decision of the Tribunal in the case of Hero Motocorp. Ltd. (supra) wherein the issue was considered as follows: "25. From the reading of the agreement, it is evident that various Clauses of the agreement 'do -not support the finding of the AO. The inference of the A.O. is that the payment under this agreement is for acquisition of technical know-how and technical information for manufacturing of two-wheelers and. therefore, he held the payment to be capital in nature for is acquisition of intangible asset and allowed depreciation @ 25 per cent thereon. While arriving at the conclusion. he has observed that the assessee has an exclusive right of manufacture, sale and distribution. However, from art 2 of the agreement, it is evident that the exclusive right is only against the third parties and not against HMSI. Article 17 of the agreement- clearly provides that the know-how, technical information and any other business information of licensor shall remain the sole and exclusive 'property of the licensor and shall be held in trust and confidence by the licensee. Article 18 of 'the agreement provides that the licensee (i.e., the assessee) shall not permit any third party to use the intellectual property right or the technical information provided under this license. Para 18.3 of the agreement provides that even in 5 ITA No.5157,5158,1253/Del/2010 I.T.A.No. 5809,5810/Del/2010 respect of Any inventions and improvements made by the licensee i.e . the assessee the licensee is required to disclose it to the licensor i.e .. HMSI and it is the HMSI who will have a transferable right to use such, inventions and improvements with right to sub-license. Therefore, not only the original information and know-how provided by the licensor is the property of the licensor and not the assessee but even any inventions and improvements made by the assessee would .·be transferred to the licensor , by the licensee. Para 18.4 dearly provides that the assessee shall not claim any title or property right in respect of any intellectual property rights, know- how technical information, etc. provided under this agreement. Article, 25 provides the consideration to be paid by the assessee for the use of -technical information provided to the assessee under this license. The consideration is in the form of model fee as well as the running royalty. Para 33.6 of the agreement provides that the licensee i.e. the assessee shall return to the licensor all documents and tangible property supplied by licensor in connection with' this agreement. This proves beyond doubt that the intangible property continues to be owned of the licensor and the assessee has not acquired any know- how or license by virtue of this agreement which can be said to be intangible asset of the assessee.
26. In the light of these facts let us examine the various decisions discussed above so as to arrive at the finding which of the decisions is applicable in the case of the assessee.
27. In our opinion, the facts of the assessee's case are identical to the facts in the case of Climate Systems India Ltd. (supra): In the case of Climate Systems India Ltd. (supra), the assessee company made the lump sum-payment and also the running royalty. The running royalty was calculated as a percentage of sales. The lump sum payment was treated as capital expenditure by the assessee company and the 'running royalty , was treated as revenue expenditure: The AO' disallowed the running royalty holding it to be capital expenditure which was confirmed by the learned CIT(A) as well as the Tribunal. The Hon'ble jurisdictional High Court allowed the appeal. The facts 'of the assessee's case are identical because the assessee also in the year 1984 entered into an agreement by which the assessee was provided with technical assistance for setting up of the plant and also for manufacture, assembly and service of the motorcycles. The assessee made lump sum payment of Rs.5,00,000/- for the technical 6 ITA No.5157,5158,1253/Del/2010 I.T.A.No. 5809,5810/Del/2010 assistance for construction of plant and paid a running royalty as a percentage of sales in respect of technical assistance for manufacture, assembly and service of the motorcycles. The running royalty which was paid annually was claimed as revenue expenditure and was disallowed by the AO treating the same as capital expenditure. Thus, the facts of the assessee's case are identical to the facts before the, Hon'ble jurisdictional High Court in the case of Climate Systems India Ltd. (supra).
28. Similar were the facts before the Hon'ble jurisdictional High Court in the case of Sharda Motor Industrial Ltd. (supra). In that case also, SMIL made a lump sum payment and also running royalty at a specified percentage based upon the production. The lump sum payment was treated as capital expenditure and running royalty was claimed as the revenue expenditure, The AO treated the royalty as capital expenditure and the Hon'ble jurisdictional High Court affirmed the views of the Tribunal that the payment of running royalty was revenue expenditure.
In this case, the Hon'ble jurisdictional High Court has considered the decision of Hon'ble apex Court in the case of Southern Switchgears Ltd. (supra) relied upon by the Revenue:
29 .. In the-case 'of Lumax Industries Ltd. (supra), the assessee was paying license fee .on year to year basis for acquisition of technical knowledge. The LIL claimed the said payment as revenue expenditure which was, disallowed by the AO holding that by virtue of the agreement the L1L had derived an asset of enduring nature. On appeal the CIT(A) allowed the assessee's claim and the Tribunal upheld the order of the CIT(A). On further appeal, the Hon'ble' jurisdictional High Court upheld the order of the Tribunal and has' also observed that even if the assessee had obtained the long-term advantage of enduring benefit that 'by itself would not convert any expenditure incurred by the assessee into capital expenditure. This decision of Hon'ble jurisdictional High- Court is after considering the decision of Hon'ble apex Court in the case of Jonas Woodhead & Sons (India) Ltd. (supra) relied upon by the Revenue. The decisions of Hon'ble apex Court in the case of Southern Switch Gear Ltd. (supra)' and Jonas Woodhead & Sons Ltd. (India) Ltd. (supra) have slightly .different facts because' in both the cases, there was' a collaboration agreement by which technical assistance was provided for setting -up of the factory and also manufacture and sale of product. The payment 7 ITA No.5157,5158,1253/Del/2010 I.T.A.No. 5809,5810/Del/2010 'of royalty was lump sum payment and, therefore, the Hon'ble apex Court uphold the view of the Revenue that 25 per cent -Bf the payment is capital in nature. In the case of the assessee also, the collaboration agreement was for grant of technical assistance for setting up of the factory and also for the manufacture and sale of the product. But the assessee made separate payment for the technical assistance for s4etting up of the factory which was $5,00,000. This sum was treated as capital expenditure by the assessee itself. The annual payment for the royalty was based upon the percentage of sale of the motorcycles. Thus, the facts in the case of the assessee are distinguishable than the facts before the Hon'ble apex Court. On the other hand, the facts of the assess'ee's case are identical to the facts before the Hon'ble jurisdictional High .Court in the case of Climate Systems India Ltd. (supra) and Sharda Motor Industrial Ltd. (supra) and also the decision of Tribunal in assessee's own case, cited supra. We, therefore, respectfully following the above decisions of Hon'ble jurisdictional High Court hold that the annual payment of royalty was Revenue expenditure. Accordingly, ground No. 6 of the assessee's appeal is allowed."
Therefore, following the above tribunal order in the case of assessee itself, we allow ground NO.2 in I.T.A. No. 5157 and ground No. 1 to 1.2 in I.T.A. No. 5809 and grounds No.1 to 1.3 in I.T.A. No. 1253. In view of the above, the grounds taken by Revenue in 5810 are dismissed.
iii) Deduction claimed u/s 80-IB reduced from calculation u/s 80HHC:
This ground of appeal is represented by Ground NO.2 in I.T.A. No. 5157 and in other appeals the assessee has not taken this ground. The Hon'ble Tribunal on similar facts and circumstances in Assessment Year 2003-04 in the case of assessee itself, vide para 9 has held as under:
"9. Now we shall deal with ground no.3 of the appeal of the assessee as well as ground no.3 of the appeal of the revenue relating to the issue of deduction under section 80HHC of Income-tax Act vis-a-vis 80IB of Income- tax Act.8 ITA No.5157,5158,1253/Del/2010
I.T.A.No. 5809,5810/Del/2010
10. In brief, the facts are that the CIT (Appeals) in the order held that the amount of deduction allowed under section 80IB of the Act is not required to be reduced from the business profits for the purpose of calculating deduction under section 80HHC of Income-tax Act. The CIT (Appeals), thereafter, held that higher of the deductions computed under section 80HHC of the Act amounting to Rs.2,03,22,0091- and under section 80IB of the Act amounting to Rs.3,75,42,983/- is to be allowed as deduction.
11. Now both the parties are in appeal before us aggrieved form the finding given by the CIT (Appeals) because as per the assessee the CIT (Appeals) was not justified in concluding that)1igneYof.the deduction computed under section 80HHC and under section 801B of the Act is to be allowed as deduction and the revenue is aggrieved because as per the department the CIT (Appeals) has ignored the provisions of section 80IA (9) read with section 80IB (13) which makes it clear that the amount of profit of the undertaking allowed as deduction under section 80IA I 801B will not be eligible for deduction under any other section under the heading 'C - deduction in respect of certain incomes' in Chapter VI-A meaning thereby that the amount of the profit of industrial undertaking allowed as deduction under section 801A I 801B has to be reduced from the business profits of an assessee for calculating the deduction under section 80HHC. Therefore, according to the revenue, the CIT (Appeals) was not justified in holding that the amount of deduction allowed under section 801B is not required to be deducted from the business profits for the purpose of calculating deduction under section 80HHC of the Act.
12. Both the parties were fair enough to concede before us that the issue involved in ground no.3 stands covered by the decision of ITAT, Special Bench 'C' New Delhi in the case of ACIT, Range-II, Moradabad Vis Hindustan Mint & Agro Products Pvt. Ltd., Chandausi etc. 119. ITD 107 (Delhi) (SB) = 315 ITR (AT) 401 (Delhi)[SB], wherein the Tribunal held that the deduction to be allowed under any other provision of Chapter VI-A with the heading with the heading "C" (which includes sections 80H, 80HHC, etc.) - is to be reduced by an amount of deduction allowed under section 80IA / 80IB of the IT Act. They further submitted that the issue involved in this ground of appeal of revenue as well as that of the assessee may be restored to the file of Assessing Officer to be decided afresh in the 9 ITA No.5157,5158,1253/Del/2010 I.T.A.No. 5809,5810/Del/2010 light of the decision of Special Bench in the case of Hindustan Mint & Agro Products Pvt. Ltd. (supra). In this view of the matter, we consider it appropriate to restore the issue involved in ground no.3 of the appeals of the parties to the file of Assessing Officer to decide the same afresh in the light of the decision in the case of Hindustan Mint & Agro Products Pvt. Ltd. (supra), of course after affording a reasonable opportunity of being heard to the assessee.
13. In view our finding recorded hereinabove, the orders of tax authorities below in this regard are set aside and the issue is restored to the file of Assessing Officer for compliance in accordance with our observations made hereinabove and consequent upon the same, ground no.3 of the instant appeals of the parties stands allowed for statistical purposes."
Following the above Tribunal order, we set aside ground No.2 in I.T.A. No. 5157 to the office of A.O. with the same observations and directions. Therefore, ground NO.2 in I.T.A. No. 5157 is allowed for statistical purposes.
iv) Disallowance of deduction u/s 80-IB on account of 'other income' This issue arises out of ground no.4 to 4.1 in I.T.A. No. 5155 and ground no.2 to 2.2 in I.T.A. No. 5158. We find that similar issue was dealt by Tribunal in Assessment Year 2000-01 to 2003-04 in the case of assessee itself and Tribunal has restored the issue back to the office of A.O. by holding as under:
"14. Now we shall deal with ground No.4 of the appeal of the assessee relating to the issue of allocation of gross head office expenses while computing deduction under section 80IB- of the Act in respect of Pondicherry Unit.
15. Briefly, the facts relating to the issue are that the tax authorities below did not reduce (I) dividend on mutual fund investment of 10 ITA No.5157,5158,1253/Del/2010 I.T.A.No. 5809,5810/Del/2010 Rs.53.79 lakhs; (II) miscellaneous income of Rs.31.87 lakhs; (III) interest receipt of Rs.123.89 lakhs; (IV) profit of sale of investment of Rs.417.41 lakhs, while allocating gross head office expenses of Rs.3395.08 lakhs in respect of the industrial undertaking at Pondicherry while computing deduction under section 80IB of Income-tax Act.
16. Both' the parties were fair enough to concede that the Tribunal in assessee's own case passed in ITA Nos.3711 & 3997IDell2003 assessment year 2000-01 restored the issue to the file of the Assessing Officer by holding that expenditure of head office having nexus with the earning of different items of Income under consideration have to be deducted, after necessary verification, for the purpose of allocation of expenditure of head office to the Pondicherry unit. In this view of the matter and respectfully following the decision (supra), this issue is restored to the file of the Assessing Officer for deciding the issue in accordance with the finding in the aforementioned decision (supra) of the Tribunal. Consequent upon the same, this ground no.4 of appeal taken by the assessees is allowed for statistical purposes."
Therefore, following the above ground No.4 to 4.1 in I.T.A. No. 5157 and ground No.2 to 2.2 in I.T.A. No. 5158 are allowed for statistical purposes.
v) Deduction u/s 80-HHC reduced by 90% of miscellaneous income:
This issue has been taken by assessee in I.T.A. No. 5157 vide ground No.5. This issue has been dealt by Hon'ble Tribunal in Assessment Year 2002-03 and it has restored the same to A.O. by holding as under:
" 8. The next issue raised is that the Ld. CIT(A) erred in upholding the action of the A.O. in reducing 90% miscellaneous income of Rs.42.55 lacs in terms of Explanation (baa) of Section 80HHC(4) of the Act.
8.1 In the course of assessment on this issue the A.O. held that the 90% of miscellaneous income of Rs.42.55 lacs was to be reduced while computing deduction u/s 80HHC. Since, it fall under Explanation (baa) section 80HHC of the Act.11 ITA No.5157,5158,1253/Del/2010
I.T.A.No. 5809,5810/Del/2010 8.2 Upon assessee's appeal, Ld. CIT(A) confirmed the same, following his earlier appellate order.
8.4 Before us the contention of the assessee is that the said miscellaneous income is actually Rs.44.53 lacs comprising of scrap sales of Rs.10.54 lacs and export incentive of Rs.27.18 lacs from 'profit of the business'.
8.5 As regards the scrap sales the assessee's contention is that the action of the authorities below is wrong on this aspect, as it is not disputed that that scrap sale of Rs.10.54 lacs has direct nexus arises in the course of business and the same is not in the nature of brokerage, commission, interest and rent etc. In this regard, reliance has been placed upon the following case laws:
CIT Vs Bangalore Clothing Co. 260 ITR 371 (Bom.) Alfa Laval India Ltd. Vs DCIT 266 ITR 418 Smt. Sujata Grover Vs DCIT 74 TTJ 347 (Del.) CIT vs Sundaram Industries Ltd. 253 ITR 396 Kadra Mills (CBE) Ltd. Vs JCIT 76 TTJ 38 (Chennai) 8.6 As regards the export incentive of Rs.27.18 lacs, it was submitted that in terms of proviso to sub-section (3) of Section 80HHC of the Act, profit of the business is to be increased by 90% of the export incentive in proportion to export turnover to total turnover. 8.7 We have head both the counsels and perused the records. We find that there is no detailed discussion on the impugned issue in the orders of the authorities below the assessee's argument is that there is direct nexus between the scrap sales and the assessee's export busies sand the same has to be allowed. However, there is no finding on this aspect y the authorities below. Hence, in the interest of justice, in our opinion, this aspect is to be remitted to the files of A.O. to examine the nexus between the scrap sales and the assessee's business and accordingly consider the issue, in the light of the case laws cited above. As regards the export incentive, the nature thereof is not brought out in detail nor there a speaking order on the issue. However, it is undisputed that the same has to be dealt with in accordance with the provisions of the Act embodied in Section 80HHC(3). We also note that the ITAT Special Bench (Mumbai) had also an occasion to deal with the question of export incentive under section 80HHC in the case of Tompan Exports Vs ITO. Accordingly, this issue is remitted to the files of the A.O. to consider the same ass per law.12 ITA No.5157,5158,1253/Del/2010
I.T.A.No. 5809,5810/Del/2010 Following the above, Ground no.5 in I.T.A. No. 5157 is allowed for statistical purposes.
vi) Excluding interest income from profits for computing deduction u/s 80HHC by treating it as income from other sources.
This ground is represented by ground no.5.1 in I.T.A.No. 5157. Similar issue was dealt by Hon'ble Delhi High Court in the case of Shri Ram Honda Power Equipments, which is reported in 289 ITR 475. The Hon'ble Delhi High Court vide para 35 onwards has dealt the issue as under:
"35 Turning to the submissions in the present cases, as regards the first of the categories, viz., the parking of surplus funds, there should be no difficulty at all. In view of the large number of the decisions of the Hon'ble Supreme Court in the context of section 56 and section 57 and those of the Kerala High Court in the context of section 80HHC itself, we are unable to accept the contention of the assessee is based on Snam Proghetti [1981]132 ITR70 (Delhi) that interest earned on parked surplus funds should qualify as business income. Clearly, Snam Proghetti [1981] 132 ITR 70 (Delhi) was not rendered in the context of section 80HHC and cannot but be confined to the facts of that case. Circular No. 564, dated July 5, 1990 (see [1990]184 ITR (St.) 137), can also not help in interpreting section 80HHC which is a "stand alone" provision. We are, therefore, of the view that where surplus funds are parked with the bank and interest is earned thereon it can only be categorized as income from other sources. This receipt merits separate treatment under section 56 of the Act which is outside the ring of profit and gains from business and profession. It goes entirely out of the reckoning for the purposes of section 80HHC. To give effect to this proposition, the Assessing Officer while computing profits of the export business will have to remove from the "debit' side of the profit and loss account the corresponding interest expenditure that has been laid out to earn such income from other sources. Otherwise this will depress profits by an amount which is out of the 'reckoning of section 80HHC, a consequence not intended to be brought about.
36 The other category is where the exporter IS required to mandatorily keep monies in fixed deposit in order to avail of credit 13 ITA No.5157,5158,1253/Del/2010 I.T.A.No. 5809,5810/Del/2010 facility for the export business. The argument on behalf of the assessee is that but for such a stipulation by the bank there was no need for the exporter to keep the money in fixed deposit and therefore the income earned from such fixed deposits bears a direct nexus to the business activity itself. Given the repeated affirmation by the Hon'ble Supreme Court of three judgments of the Kerala High Court on the same issue, we are inclined to follow the view expressed by the Kerala High Court on each of these occasions. We accordingly hold that interest earned on fixed deposits for the purposes of availing of credit facilities from the bank, does not have an immediate nexus with the export business and therefore has to necessarily be treated as income from other sources and not business income. Question (a) and issue
(i) are answered accordingly.
However, we must add a caveat here. This holding of ours will apply 37 only where there is a specific finding by the Assessing Officer that interest income is not business income. However, if in a given case the Assessing Officer has held that the interest income is business income, and this has not been challenged by the Department' thereafter] then that question ought not to be permitted to be reopened and the only question then will be if netting should be allowed. There are cases before us where the Assessing officer has held that 38 the interest income is business income and this has' not been reopened or questioned thereafter by the Department or when this court has not formulated such a question while admitting the appeal, Therefore, the only question that arises in such cases is whether having held such income to be business income, the Assessing Officer would be justified in denying netting of interest. This is the question we proceed to address next.
Netting Clause (baa) of the Explanation to section 80HI4C envisages a two- step process in computing profits derived from exports. First, the Assessing Officer is required to apply sections 28 to 44 in order to compute the profits and gains of business or profession. In doing so, the Assessing Officer may find that certain incomes, which have no nexus to the export business of the assessee, are not allowable and, therefore, ought to be treated as income from other sources. Once the Assessing Officer computes what is business income then he proceeds to the next step of deducting 90 per cent. of the receipts referred in; clause (baa) of the Explanation to section 80HHC in order to arrive 14 ITA No.5157,5158,1253/Del/2010 I.T.A.No. 5809,5810/Del/2010 at the profits derived from profits. It is at this stage that questions (b) and (c) arise. To recapitulate these are:
(b) Does the expression "interest" in Explanation (baa) connote net interest, i.e., the gross interest income less the expenditure incurred by the assessee for earning such income, or does it connote gross interest?
(c) If the expression "interest" implies net interest, then should netting not be allowed where the interest income is computed to be business income?"
The A.O. has to decide the issue of exclusion of interest income for computing deduction u/s 80HHC in the light of above decision of Hon'ble High Court, therefore, the issue is restored to A.O. to decide the same afresh as per law. In view of the above, ground No.5.1 in I.T.A. No. 5157 is allowed for statistical purposes.
vii) Disallowance u/s 14A read with Rule 8D:
This issue arises out of ground No.3 to 3.1 in I.T.A. No. 5158. The Hon'ble Tribunal in Assessment Year 2000-01 in the case of assessee has held as under:
" 7. We have considered the submissions of both the parties arid have perused the record of the case. Admittedly, for the relevant assessment year 2000-01, Rule 8D was not applicable, therefore, the disallowance made by applying the same cannot be sustained.
8. We find that ld. CIT(A) has specifically considered the interest paid by assessee on various loans and has recorded a specific finding as regards interest on cash credits of Rs. 25,86,2901- as noted earlier. We are in agreement with ld. CIT(A)'s finding that apart from part interest on cash credit, no other interest was relatable to earning of exempt income. As far as interest on cash credit of Rs.25,86,290/- is concerned, the same needs to be bifurcated between the earning of exempt income and for use in business. The entire interest expenditure cannot be allocated for earning of exempt income. We, therefore, restore the matter to the file of AO for deciding this issue de novo on 15 ITA No.5157,5158,1253/Del/2010 I.T.A.No. 5809,5810/Del/2010 reasonable basis, in view of the decision of Hon'ble Jurisdictional High Court of Delhi in the case of Maxopp Investment 247 CTR 162, subject to aforementioned observations with respect to disallowance relating to interest.
9. In the result, department's appeal is dismissed and the assessee's appeal is partly allowed for statistical purposes."
Following the above, we restore ground No.3 to 3.1 in I.T.A. No. 5158 to the office of A.O. for readjudication.
viii) Disallowance of export commission u/s 40(a)(i) treating it as royalty / FTS. Alternatively, held as capital expenditure not allowable u/s 37(1):
This issue arises out of ground No.4 to 4.4 in I.T.A. No. 5158 and ground No.2 to 2.10 in I.T.A. No. 1253. Similar issue has been dealt by Hon'ble Tribunal in the case of assessee itself in Assessment Year 2007-08 and 2008-09. The findings of Tribunal in Assessment Year 2007-08 as contained in para 7.8 onwards are reproduced below:
"7.8 Ground Nos. 5 to 5.7 are on the disallowance made on payment of export commission u/s 40(a)(i). after hearing rival contentions, we find that the issue in question has been considered by the Delhi "C"
Bench of the Tribunal in the assessee's own case in I.T.A.No. 5130/Del/2010 (supra).
7.9 The Tribunal in the case of Hero MotoCorp Ltd., (supra) at para 71. P.65 of the order held as follows:
"We have carefully considered the arguments of both the sides and perused the material placed before us, While considering the adjustment made by the TPO in, respect of export agreement. we have discussed both these agreements, The technical know-how agreement was entered into between the assessee and HMCL in the year 1984 which was renewed in the year 1994 and then in 2004. Under the technical mow-how agreement the assessee was permitted to manufacture, assemble, sell and distribute the products within the territory which was defined as Republic of India. Thus, since 1984 to 2004, the assessee was not allowed to export any product.16 ITA No.5157,5158,1253/Del/2010
I.T.A.No. 5809,5810/Del/2010 The export agreement was entered into with HMCL only on 21st , June, 2004 by which HMCL gave its consent for export of the goods to the designated countries on the 'payment of export commission. Therefore, the contention of the Revenue that cumulative effect of the agreements is to be considered cannot be accepted. Both agreements were entered into in different parts of time one in year 1984 and the other in the year 2004, and both the agreement operate under different fields, by the first agreement HMCL provided technical know-how for manufacture and sale of two-wheelers within the territory of India. By the export agreement HMCL permitted the assessee to .export the' designated, 'goods to the' designated countries outside-India. Therefore, bath the agreements are to be interpreted independently. On the perusal of the export agreement, we are unable to agree with the Revenue that the export agreement is in the nature of royalty or fees for technical services. We find that the Authority for advance Rulings has considered the issue of TDS on the export commission in the case of Spahi Project (P) Ltd. (supra). In that case, the facts are, that, the assessee. an ' Indian company engaged in the manufacturing and supply of industrial pesticides proposed transactions with Zaikog, a non-resident company incorporated in South Africa, which promoted and distributed various products. Zaikog offered its services to promote and market a product for termite control and for this, Zaikog was to receive. a commission of 3 per cent an every completed transaction. The role of Zaikog was to communicate the details of the 'interested parties to the app1icant which would pursue the proposal for confirmed orders which were to be executed directly by the applicant. The sale consideration was to be received in India by the applicant and the commission was payable to Zaikog in India. On these facts, the assessee sought the ruling of the Authority on the following questions, inter alia:
(a) whether the amounts proposed 10 be paid by the applicant to Zaikog were subject to deduction of tax at source under s. 195 or the IT Act, , 1961?
(b) whether the amounts to be -paid by the applicant to Zaikog were taxable in the hands of Zaikog, which did not have a permanent establishment in India ?; and
(c) whether, the amount payable to Zaikog would be taxable as fees for technical services in India, 17 ITA No.5157,5158,1253/Del/2010 I.T.A.No. 5809,5810/Del/2010 On these facts, the authority ruled as under:
(i) That in view of Circular No. 23. dt. 23rd July. 1969. and 'No. 786 dt. 7th Feb., 2000 [(2000) 241 ITR (St.)132], which reiterated that circular issued by the CBDT the payments made to Zaikog towards commission for services rendered by it abroad were not liable to be taxed in India either under the IT Act, 1961 or under the Double Taxation Avoidance Agreement between India and South Africa, (DTAA). Consequently, the applicant was not liable to deduct tax at source under s.195 of the Act. Viewed from the angle of s.9(1) of hte Act, Zaikog did not earn any ,income or' account of business connection in India. Nor could Zaikog be, subjected to tax in India in the absence of a permanent establishment in India.
(ii) That Zaikog would not be rendering services of a managerial, technical or consultancy natured New Delhi, therefore, liability to tax could not be fastened on it by invoking the provisions dealing with fees for technical services.
72. The ratio of the above decision of AAR would be squarely applicable to the case of the assessee. Even otherwise, as per the provisions of the I T Act the export commission paid by the assessee would not fall within the ambit of either royalty or fee for technical services, the royalty has been defined in Explanation 2 after s.9(1)(vi) of the I Tact, which reads as under:
Explanation 2:- For the purposes of this clause, Royalty means, consideration (including any lump sum consideration but excluding any consideration which could be the income of the recipient chargeable under the head Capital gains ) for -
(i) the transfer 6f all or any rights (including the granting of a licence) in respect of a patent invention, model, design, secret formula or process or trade mark or similar property;
(ii) the imparting of any information concerning the working of, or the use of, a patent, invention, model, design, secret formula or process or trademark, or similar property;18 ITA No.5157,5158,1253/Del/2010
I.T.A.No. 5809,5810/Del/2010
(iii) the use of' any patent invention, model, design, secret formula or process or trademark or similar property; .
(iv) the imparting of any information, concerning technical, industrial, commercial or scientific knowledge, experience or skill; ((iva) the. use or right to use any industrial, commercial or 'scientific equipment but not 'including the amounts referred to in s. 44BB;
(v) the transfer of all or any rights (including the granting: of a licence) in respect of any copyright literary. artistic or scientific work 'including films or video tapes for use in connection with television or tapes for use in connection with radio broadcasting. but not including consideration for the sale, distribution or exhibition of cinematographic films; or
(vi) the rendering of any services in connection with the activities referred to in sub-cls. (0 to (iv). (iva) and [v].' 73, Similarly, 'fee for technical services' has been defined by way of Expln.2after s. 9(1)(vii) of the IT Act. From a plain reading of the above definitions of 'royalty' as well as 'fee for technical services',' it would be evident that the payment of export commission would not fail in any 'of the above definitions. By way of technical agreement, the assessee received the technical know-how to manufacture, assemble, sell and distribute the two-wheelers within .the territory of India. The payment made in pursuance to such agreement was royalty and has been treated by the, assessee-itself as royalty. By way of second agreement i.e., export "agreement," HMCL, permitted the assessee, to' export the specified two-wheelers to the specified Countries. Therefore, by export agreement, the assessee has not been transferred or permitted to use any patent, invention, model, design or secret formula. Similarly, HMCL, by way of export agreement, has not rendered any managerial, technical or consultancy services. In view of the above, we hold that export commission was neither royalty nor fee for technical services and therefore, the assessee was not required to deduct tax at source on the payment of export fee. once, the assessee was not required to deduct the tax at source, it cannot be said that the assessee failed to deduct tax at source so as to apply Section 40(a)(ia).
19 ITA No.5157,5158,1253/Del/2010I.T.A.No. 5809,5810/Del/2010
74. 'While considering the disallowance made by the TPO by way of transfer pricing adjustment. we have discussed at- length and have arrived at the conclusion that the export agreement was for the benefit of the assessee and not detrimental to the assessee. Therefore, the finding of the AO that the expenditure incurred by the assessee by way of export agreement was not incurred for the purpose of business of the assessee cannot be upheld. We hold' that the export commission paid by the assessee was for the purpose of assessee's business.
75. The AO has alternatively held the payment of export commission to be capital expenditure. After considering the arguments of both the sides and the facts of the case, we are unable to accept this view of the AO. By way of export agreement, HMCL has only permitted the assessee to export the specified goods to the specified countries, that too, subject to running payment of the export commission. The assessee has not acquired any asset or even the intangible right in the nature of a capital asset. The AO has disallowed the royalty payment paid by the assessee by way Of technical know-how agreement holding the same to be capital expenditure. From para No.7 to para No. 29, we have discussed at length and have come to the conclusion that the' payment of running royalty cannot be said to be capital expenditure. While doing so, we have also relied upon several decisions of Hon'ble jurisdictional High Courts at pp. 17 to 24. For the sake of brevity, we are not reproducing the same again but we reiterate that the ratio of those decisions in the cases of Lumax Industries Ltd. (supra), Shriram Pistons"& Rings Ltd. (supra), Sharda Motor industrial Ltd. (supra). J.K. Synthetics Ltd. (supra). Climate SysLelfls1ndia Ltd. (supra) and MurJja[ Showa Ltd. (supra} would also be applicable so as .to arrive at, the conclusion,' that the payment of running export commission paid as a percentage of export amount every year cannot be said to be capital expenditure. In view of the above, we delete the disallowance of export commission made by, way of transfer pricing adjustment and also by way of general provisions of the IT Act."
8. Respectfully, following the same we allow these grounds of the assessee. As the contentions of the assessee that payment of royalty, payment of technical guidance fee as well as export commission are 20 ITA No.5157,5158,1253/Del/2010 I.T.A.No. 5809,5810/Del/2010 held". to be in the revenue field, the question' of adjudication of the alternate contention of the assessee that depreciation be granted in case the expenditure is held .to be in the capital field, does not arise. In the result; these grounds of the assessee are allowed."
Following the above, we allow ground No.4 to 4.4 in I.T.A. No. 5158 and ground No.2 to 2.10 in I.T.A. No. 1253.
Now, we take up Revenue's appeals in I.T.A. No. 5809 and 5810. Grounds of appeal in I.T.A. No. 5810 has already been dismissed while adjudicating the issue of royalty and technical guidance in assessee's appeals. Therefore, the only issue remains to be adjudicated is in I.T.A. No. 5809 which relates to non refundable advances towards tooling development treated as capital expenditure:
The above issue is squarely covered by the order of Hon'ble Delhi High Court in the case of Assessee itself reported at 300 ITR 56. The findings of the Hon'ble Curt as contained from para 3 onwards are reproduced below:
"3. The following substantial questions of law arise for consideration :
"(a) Whether the Tribunal was correct in law in holding that the payment of Rs.23,21,865 made by the assessee as an advance to the suppliers for manufacturing tools and dies was a revenue expenditure?
(b) x x x x
4. Printing of paper books is dispensed with. With the consent of learned counsel for the parties, the appeal is finally heard.
5. The facts relevant to question (a) are that the assessee company manufactures portable generator sets in technical collaboration with Honda Motor Company of Japan. Prior to the assessment year, that 21 ITA No.5157,5158,1253/Del/2010 I.T.A.No. 5809,5810/Del/2010 js 1992-93, the assessee was amortizing the advances made by it to the manufacturer of tools and dies on the basis of the actual quantity of the components used. in the production of generator sets. The case of the assessee is that the payment made as advance ('tooling advance') was non-recoverable and the ownership of the tools and dies remained with the manufacturer. The benefit to the assessee was that it had an indigenous source of supply of tools and dies for the components of the generator sets. The advance was charged to P&L alc in the year of advance.
6. The AO found that for the assessment year in question the assessee had claimed the tooling advance as revenue expenditure but did not produce any evidence to show why it had departed from the past practice of amortization.
He accordingly held that the changed method of claiming the amount paid as tooling advance as revenue expenditure was not a standard method and further that the assessee had not showed that the change was bona fide. The AO disallowed the deduction and directed that the amount of Rs. 23,21,865 would be added to the income of the assessee. On this aspect, the Commissioner of Income-tax (Appeals) ['CIT(A)'] rejected the appeal of the assessee concurring with the findings of the AO.
7. In the further appeal filed by the assessee; the Tribunal followed the order passed by it in ITA No. 2852/Dell1999 for the asst. yr. 1995- 96 in which it was held that the tooling advance was for facilitating the trading operations of the assessee and further that the tools and dies continued to remain the property of the manufacturer. The Tribunal held this to be revenue expenditure and allowed the assessee's appeal. It directed the AO to allow the claim of the assessee as a deduction.
8. Appearing for the Revenue, Ms. Prem Lata Bansal, learned senior standing counsel submits that the expenditures on tools and dies have always been treated as a capital expenditure. The nature and character of such expenditure cannot be chanced merely because the tools and dies are not owned by the assessee. She further contends that where the assessee itself amortized the expenditure in the previous assessment year there was no justification for a change in 22 ITA No.5157,5158,1253/Del/2010 I.T.A.No. 5809,5810/Del/2010 the pattern which resulted in the expenditure being treated as a revenue expenditure.
9. Replying to the submissions, Mr. Ajay Vohra, learned counsel appearing for the assessee, submitted that even in the earlier years the amount paid towards' tooling advance was claimed as revenue expenditure on amortized basis. It was not as if the nature of the expenditure had changed as was sought to be made out by the Revenue. He relied upon the judgment of the Hon'ble Supreme Court in Empire Jute Co. Ltd. VS. CTR (1980) 17 CTR (SC) 113 : (1980) 124 ITR 1 (SC) as well as the recent judgment of this Court in CIT VS. Saw Pipes Ltd. (2007) 208 CTR (Del) 476.
10. This Court finds that the factual position of the assessee not being the owner of the tools and dies is not disputed by the Revenue. The question whether the expenditure is of revenue nature or capital nature is no longer res integra. The test in this regard has been reiterated by the Hon'ble Supreme Court in Bharat Earth Movers vs. CIT (2000) 162 CTR (SC) 325 : (2000) 245 ITR 428 (SC) and Empire Jute Co. Ltd VS. CIT (supra). The recent judgment of this Court in err VS. Saw Pipes Ltd. (supra) follows these decisions. It appears from the above decisions is that in order to treat an item of expenditure as a capital expenditure it will have to be shown that the asset in question, for which the tooling advance has been paid, is actually in the ownership of the assessee.
11. In Saw Pipes Ltd. (supra) this Court noticed that the service line in question had been laid in the assessee's premises to enable it to carry out business more efficiently. It was held that the service line belonged, to the Maharashtra State Electricity Board and the ownership of the service line was not with the assessee. In those circumstances it was held that the money paid by the assessee in that case for laying the service line was to be treated as a revenue expenditure. Likewise in CIT VS. Excel Industries Ltd. (1980) 14 CTR (Bom) 44 : (1980) 122 ITR 995 (Bom) it was held that the service lines laid for the benefit of the assessee, which although owned by the Gujarat Electricity Board, did not mean that the assessee had acquired any capital asset. The amount spent by the assessee in that 23 ITA No.5157,5158,1253/Del/2010 I.T.A.No. 5809,5810/Del/2010 case on laying the service line was treated as a revenue expenditure and therefore, an allowable deduction.
12. The Tribunal has referred to the decision of the Hon'ble Supreme Court in Empire Jute Co. Ltd. (supra) to hold that even if the expenditure was incurred for obtaining an advantage or benefit of an enduring nature it might still be a revenue expenditure. In Empire Jute Co. Ltd. (supra) it was held that the test of' enduring advantage is not conclusive and should not be blindly followed. A reference may also be made to the decisions of the Hon'ble Supreme Court in CIT VS. Madras Auto Service (P) Ltd., Etc. (1998) 147 CTR (Mad) 514 :
(1998) 233 ITR 468 (Mad) and of the Madras High Court in CIT VS.
T. V. Sundaram Iyengar & Sons (P) Ltd. (1974) 95 ITR 428 (Mad). This Court's decision in Hindustan Times-Ltd. VS. eIT (1980) 122 ITR 977 (Del) is also on the same lines.
13. Reverting' to the facts on hand, we find that learned counsel for the assessee is right in his submission that at no point of time was such expenditure claimed as a capital expenditure by the assessee. That being the position, there was no justification for the AO to disallow the deduction of the tooling advance on the ground that the assessee, though not owing the asset in question, was deriving an enduring benefit from it. The fact that the moulds and dies continue to be remained the property of the manufacturer is decisive in determining the nature of the expenditure. The tooling advance paid to the vendors is also non-refundable. Not only is there an assurance of continued supply of components .but as a result of. this arrangement there is a price advantage. Earlier these components were imported and now there would be an indigenised source of supply. In these circumstances, the finding of the Tribunal was that the enduring advantage obtained by the assessee is only in the revenue field and not in the capital field cannot be faulted.
14. Question (a) herein is answered in the affirmative, in favour of the assessee and against the Revenue."
24 ITA No.5157,5158,1253/Del/2010I.T.A.No. 5809,5810/Del/2010 Following the above order of Hon'ble Delhi High Court, we dismiss the grounds raised by Revenue in I.T.A. No. 5809.
The above grounds of appeals are disposed off in the manner stated above. Order pronounced in the open court on 25th Feb., 2015.
Sd./- Sd./-
(GEORGE G. K. ) (T.S. KAPOOR)
JUDICIAL MEMBER ACCOUNTANT MEMBER
th
Date: 25 Feb., 2015
Sp
Copy forwarded to:-
1. The appellant
2. The respondent
3. The CIT
4. The CIT (A)-, New Delhi.
5. The DR, ITAT, Loknayak Bhawan, Khan Market, New Delhi. True copy.
By Order (ITAT, New Delhi).
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