Income Tax Appellate Tribunal - Delhi
Shriram Pistons & Rings Ltd, vs Assessee
IN THE INCOME TAX APPELLATE TRIBUNAL
(DELHI BENCH 'G' NEW DELHI)
BEFORE SHRI RAJPAL YADAV, JUDICIAL MEMBER
AND SHRI K.G. BANSAL, ACCOUNTANT MEMBER
(i) I.T.A. No1861/Del/2008 -appeal of the assessee
Assessment year : 1998-99
Shriram Pistons & Rings Ltd., Vs. Asstt. CIT,
23, Kasturba Gandhi Marg, Circle-8(1),
New Delhi New Delhi
PAN No.AAACS 0229 G
(ii) I.T.A. No1752/Del/2008-appeal of the revenue
Assessment year : 1998-99
D.C.I.T., Vs. Shriram Pistons & Rings Ltd.,
Circle-8(1), 23, Kasturba Gandhi Marg,
New Delhi New Delhi
PAN No.AAACS 0229 G
(iii) I.T.A. No.213/Del/2008-appeal of the assessee
Assessment year : 2004-05
Shriram Pistons & Rings Ltd., Vs. D.C.I.T.,
23, Kasturba Gandhi Marg, Circle-8(1),
New Delhi New Delhi
PAN No.AAACS 0229 G
(iv) I.T.A. No.2860/Del/2008-appeal of the revenue
Assessment year : 2004-05
D.C.I.T., Vs. Shriram Pistons & Rings Ltd.,
Circle-8(1), 23, Kasturba Gandhi Marg,
New Delhi New Delhi
PAN No.AAACS 0229 G
2
(v) I.T.A. No.2081/Del/2008 -appeal of the assessee
Assessment year : 2005-06
Shriram Pistons & Rings Ltd., Vs. Addl. CIT,
23, Kasturba Gandhi Marg, Circle-8(1),
New Delhi New Delhi
PAN No.AAACS 0229 G
(vi) I.T.A. No.2461/Del/2008-appeal of the revenue
Assessment year : 2005-06
D.C.I.T., Vs. Shriram Pistons & Rings Ltd.,
Circle-8(1), 23, Kasturba Gandhi Marg,
New Delhi New Delhi
PAN No.AAACS 0229 G
(vii) I.T.A. No.2713/Del/2009 -appeal of the assessee
Assessment year : 2006-07
Shriram Pistons & Rings Ltd., Vs. Addl. CIT,
23, Kasturba Gandhi Marg, Circle-8(1),
New Delhi New Delhi
PAN No.AAACS 0229 G
(viii) I.T.A. No.2771/Del/2009-appeal of the revenue
Assessment year : 2006-07
A.C.I.T., Vs. Shriram Pistons & Rings Ltd.,
Circle-8(1), 23, Kasturba Gandhi Marg,
New Delhi New Delhi
PAN No.AAACS 0229 G
(ix) I.T.A. No.2562/Del/2010 -appeal of the assessee
Assessment year : 2007-08
Shriram Pistons & Rings Ltd., Vs. Asst. CIT,
23, Kasturba Gandhi Marg, Circle-8(1),
New Delhi New Delhi
PAN No.AAACS 0229 G
3
(x) I.T.A. No.3029/Del/2010-appeal of the revenue
Assessment year : 2007-08
D.C.I.T., Vs. Shriram Pistons & Rings Ltd.,
Circle-8(1), 23, Kasturba Gandhi Marg,
New Delhi New Delhi
PAN No.AAACS 0229 G
(Appellant) (Respondent)
Assessee by : Shri R.K. Kapoor, CA
Department by : Shri H.L. Dihana, CIT-DR.
ORDER
PER BENCH:
These appeals of the assessee and revenue for various years raised common grounds. Therefore, the appeals were argued in a consolidated manner by the learned counsel for the assessee and the learned CIT-DR. In view thereof, a consolidated order is passed.
(i) I.T.A. No.1861/D/08 - Appeal of the assessee:
(ii) I.T.A. No.1752/D/08 - Appeal of the revenue:
Assessment year: 1998-99
These cross appeals are in respect of the deduction of commission paid by the assessee. The rival parties have taken up one ground each in these appeals. The ground of the assessee is that the learned CIT(A) erred on facts and in law in restricting the deduction of commission @4.5% against the actual commission paid. In support thereof, it is mentioned that he should have allowed the full amount of the commission paid after finding that the assessee was entitled to the deduction for the 4 services rendered by the agents. As against the aforesaid, the ground in the appeal of the revenue is that the learned CIT(A) erred in directing the Assessing Officer to allow commission to the sales agents @4.5% in respect of services rendered by them for procuring orders from the association of State Road Transport Undertakings.
2. The learned counsel briefly summarized the facts of the case that the assessee has been manufacturing Automotive Pistons and Rings, which are sold to State Government Enterprises. It availed of the services of the agents to procure orders from the enterprise. In lieu of services rendered by them, commission was paid at different rates of the amount involved in orders varying between 3% to 5%. The Assessing Officer disallowed the payment of commission on the ground inter alia that there was no need to employ agents for procuring orders from the State Government Enterprises. However, the learned CIT(A) recorded a finding that the commission paid upto 4.5% was justified. Therefore, in cases where the commission exceeded 4.5% of the order, the excess amount was disallowed. In other cases, the commission was allowed. It is submitted that this issue has been arising in various assessments of the assessee. In respect of assessment years 2000-01 to 2003-04, the matter traveled upto the Tribunal. In the consolidated order for these years, bearing I.T.A. Nos.1761 and 1762/D/04; and 934 and 4005/D/06, the matter has been decided in favour of the assessee by mentioning that the commission paid by the assessee to the agents is deductible in full in computing the total income. Therefore, it is argued that the commission may be allowed in full in this year also. A copy of the consolidated order for these years has been placed in the paper book between page nos. 1 to 29. The Tribunal has noted that the commission has been paid not only for procuring orders but for rendering a number of services relating to completion of the sale and realization of 5 sale proceeds. The payment of commission is not against any public policy or an offence punishable by law. The commission varies between 4% to 5% of the sale proceeds. The agents are not in any manner connected with the assessee and they have transacted with it at arms' length. The commission cannot be said to be excessive. There is no evidence to show that the commission paid or a part thereof has come back to the assessee. In fact, genuineness of the payment is not any doubt. Therefore, the commission is deductible in full. For the sake of ready reference paragraph No.9 of the decision of the Tribunal is reproduced below:-
"9.We have examined the rate of commission paid by the assessee to various agents, which varies from agent to agent, but it is mostly within the range of 4 to 5%. The agents are not related or connected to the assessee but are independent party and the payment has been made on arm's length. The rate of commission paid to the parties in between 4 to 5% cannot be said to be excessive. It has not been proved and established by the Assessing Officer that the amount of commission paid to commission agents has been flown back to the assessee's coffers. The genuineness of the payment of commission by the assessee to commission agents is not in doubt. We, therefore, hold that the assessee's claim of payment of commission to various agents for rendering various services by them to the assessee in the course of supplying various goods to the State Road Transport Undertaking or other enterprises is an allowable deduction while computing the assessee's profit from business. We, therefore, direct the Assessing Officer to allow the assessee's claim. The orders of the authorities below on this point are reversed and the issue is decided in favour of the assessee."
2.1 In reply, the learned DR fairly submitted that the facts are similar and the issue stands covered by the decision of the Tribunal, referred to above.
2.2 As the matter stands covered by the decision of a co-ordinate bench of the Tribunal in the case of the assessee itself, the earlier decision obtains the nature of a 6 binding preceding. Respectfully following the decision, it is held that the assessee is entitled to the deduction of the whole of the commission paid to the agents.
(iii) I.T.A. No.213/D/08 - Appeal of the assessee:
(iv) I.T.A. No.2860/D/08 - Appeal of the revenue:
Assessment year:2004-05
3. Ground No.1 in the appeal of the assessee is similar to its ground no.1 in the appeal for assessment year 1998-99 (supra). Similarly, ground No.4 in the appeal of the revenue is similar to ground No.1 in its appeal for assessment year 1998-99. While the assessee is agitating deduction of the whole amount of the commission paid to the agents, the revenue is agitating that commission is not deductible in computing the total income at all. These grounds stand covered by our order for assessment year 1998-99 (supra). It has been held that the assessee is entitled to deduct the full amount of commission paid to the agents in computing its total income. Following the order, ground No.1 of the assessee is allowed and ground No.4 of the revenue is dismissed.
4. Ground No.2 is in respect of the computation of deduction u/s 80HHC. The facts in this connection are that the assessee received interest of `1,38,83,105/-, service charges of `37,19,856/-, and miscellaneous income of `2,24,99,834/-. The assessee had also written back provision for doubtful debts to the profit and loss account amounting to `4,74,973/-. The question raised in this ground is regarding inclusion of these items in the total turn over for computation of the deduction. The learned CIT(A) held that the miscellaneous income included a sum of `18,36,916/- arising on account of variation in the foreign exchange rate. This amount is to be included in the turn over as well as the total turn over for aforesaid purpose. The learned counsel for the assessee has not raised any dispute in the 7 matter. Further, the provision for doubtful debts written back amounting to `4,74,973/- has been excluded from the total turn over. Interest from fixed deposits has been considered separately and, therefore, such interest of `48,38,910/- has also been excluded from the total turn over. Thus, there is no dispute in respect of these three items. All other items have been included in the total turn over. The assessee has disputed this finding in this ground.
4.1 We may deal with miscellaneous income at the first instance. The income amounts to `2,24,99,834/-. Out of this amount, a sum of `18,36,916/-, arising out of fluctuation in foreign exchange rate, has been included in the total turn over. This issue, as treated earlier, has become final. In respect of the balance amount of `2,06,62,918/- (`2,24,99,834 - `18,36,916), the case of the learned counsel is that the composition of this part of miscellaneous income may be examined by the Assessing Officer. If the income is in the nature of turn over, the same may be included in the total turn over and if not, it may be excluded from the total turn over. The learned DR had no objection to remit this matter to the Assessing Officer for fresh adjudication in the light of aforesaid submission of the learned counsel. We have considered the facts of the case and submissions made before us. From the submissions of the learned counsel, it is obvious that no part of this income represents export turn over. Therefore, there is no question of including any part thereof in the total turn over as in the case of income arising on account of fluctuation in the rate of foreign exchange. Further, total turn over can only mean the receipts by way of sale of goods. Therefore, the composition of income is required to be examined by the Assessing Officer for including only that part of the income in the total turn over which represents consideration received for sale of goods. Accordingly, this matter is restored to the file of the Assessing Officer for taking fresh decision after hearing the assessee.
84.2 The assessee also received service charges of `37,19,956/-. It has been explained to us by the learned counsel for the assessee that the amount represents after sale service charges received from the customers to whom the goods are sold. However, the details of this income also are not available and, thus, the aforesaid submission has to be verified by the Assessing Officer in the same manner in which the details of misc. income have to be verified (supra). Therefore, this matter is also restored to the file of the Assessing Officer.
4.3 In so far as receipt of interest from customers on account of late payment, amounting to `66,40,365/- is concerned, the same is in the nature of sale proceeds. Therefore, the learned CIT(A) rightly included this amount in the total turn over.
4.4 The assessee also received interest on security deposit with the Government amounting to `5,01,797/-, interest on I.T. refund of `1,04,644/-, and interest on housing loan given to the employees of `17,97,389/-. Obviously, these receipts do not include any element of turn over. Therefore, these amounts have to be excluded from the total turn over.
4.5 Thus, ground No.2 is treated as partly allowed for statistical purposes.
5. Ground No.3 is in respect of the deduction u/s 80HHC on DEPB benefits. The findings of the learned CIT(A) are that undoubtedly the assessee has not fulfilled the conditions mentioned in the third proviso to section 80HHC(3). Thus, it is not proved that the assessee had an option to choose the benefit of DEPB scheme or duty draw back scheme, and that benefit under duty draw back scheme was higher 9 than the benefit under DEPB scheme. The Assessing Officer has denied the benefit to the assessee in so far as the case falls within the ambit of the third proviso. No other change has been made by the Assessing Officer in computation of the deduction of this ground. The learned counsel explained that the assessee has been using mercantile system of accounting under which the benefit is accounted for as soon as it accrues. Most of the licenses have been used by the assessee for importing raw material for its own consumption. Only a part of the licenses is sold, leading to the profit. In so far as import of raw material for self-consumption is concerned, no profit can be said to accrue to the assessee as such import of raw material has been for the purpose of its own production. However, sale of licenses does not lead to the profit, which has to be treated under the third proviso. It is fairly submitted that segregation as above was not submitted before the Assessing Officer or the learned CIT(A). Therefore, it is submitted that the matter may be restored to the Assessing Officer for examination. The learned CIT-DR had no objection to such verification. In the course of hearing, the decision of Hon'ble Bombay High Court in the case of CIT Vs. Kalpatru Colours and Chemicals (2010) 328 ITR 451, also came up for discussion. In this case, it has been held that the whole of the amount received on transfer of license amounts to profit and not the difference between sale consideration and the face value of the licence. The rival parties submitted that the matter may be remitted to the Assessing Officer for fresh decision after considering this decision of Hon'ble Bombay High Court. Accordingly, the ground is remitted to the file of the Assessing Officer for fresh decision in accordance with law. Thus, this ground is treated as partly allowed for statistical purposes.
6. Ground No.4 is regarding the treatment to be given to the interest received from bank on fixed deposits for computing deduction u/s 80HHC. The Assessing 10 Officer had treated the income as business income. However, the learned CIT(A), after following the due process of law, held that the interest is rightly taxable under the head "income from other sources". Thereafter, he applied the decision of Hon'ble Delhi High Court in the case of CIT Vs. Sriram Honda Power Equipment (2007) 289 ITR 475, and held that 90% of this interest income of `48,38,910/- is to be excluded from the profits of the business for computing deduction u/s 80HHC. The learned counsel harped upon the fact that the Assessing Officer had treated the interest income as business income. But he could not elaborate as to how the income was business income, connected with the operation of the business. On the other hand, the learned DR submitted that the issue stands squarely covered by the decision of jurisdictional High Court fin the case of CIT Vs. Sriram Honda Power Equipment (2007) 289 ITR 475 (supra). Having considered the submissions from both the sides, we are of the view that the order of the Assessing Officer merged with the order of learned CIT(A), which was arrived at after following the due process of law, namely, issuance of notice of enhancement to the assessee thereby giving him a reasonable opportunity of being heard. The assessee could not explain as to how the income was to be treated as business income. Therefore, we do not find any error in the order of the learned CIT(A), which requires correction from us. Accordingly, this ground is dismissed.
7. Coming to the appeal of the revenue, ground No.1 is against the finding of the learned CIT(A) that royalty expenses are revenue expenses. The finding of the Assessing Officer is that 25% of the expenses are capital in nature. The admitted position is that this ground stands covered by the decision of the Hon'ble High Court in the case of the assessee in ITR No.167/2008 for assessment year 2000-01. The first question before the court was whether, the ITAT was right in holding that entire royalty payment made by the assessee is revenue expenditure and 25% of it cannot 11 be regarded as capital expenditure? It is mentioned that this ground stands settled in favour of the assessee in its own case for assessment year 1980-81 in ITR No.70/1988 decided on 29.04.2008. The very same agreement in question in the present appeal was also in issue in that reference. Consequently, this question proposed at paragraph (a) does not require any further consideration and has already been decided in favour of the assessee. This decision has been placed in the paper book on page Nos.54 and 55. Further, the SLP filed before the Hon'ble Supreme Court has been dismissed as per decision placed in the paper book on page no.56 bearing No.CC 12154/2009 dated 03.11.2009. In view of this decision, ground No.1 is dismissed.
7.1 Ground No.2 is against the finding of the learned CIT(A) that the fees paid to foreign technician is revenue in nature. AS in the case of royalty expenses, the Assessing Officer had treated 25% of the fees as capital expenditure. It is a common case of both the parties that the issue stands covered by the decision of the Tribunal, referred to earlier, in which it has been held that the expenditure is revenue in nature. For the sake of ready reference, paragraph No.40 of the decision of the Tribunal is reproduced below:-
"Ground No.2 is directed against the CIT(A)'s order in deleting the addition of `4,00,590/- made by the Assessing Officer on account of foreign technicians fee. The issue is also covered by the earlier decision of Hon'ble High Court in earlier years and the Hon'ble High Court's order has been finalise4d on dismissal of departmental SLP filed by the revenue. The CIT(A) has also deleted this addition after following the Tribunal's order passed in assessment year 1998-99 that was followed in assessment year 2000-01. Since the issue is covered by the earlier decision of Tribunal which has been affirmed by the Hon'ble High Court, we reject this ground raised by the revenue."12
Respectfully, following this decision, it is held that the whole of the expenditure by way of fees is revenue expenditure. Accordingly this ground is also dismissed.
7.2 Ground No.3 is against the finding of the learned CIT(A) that the expenditure of `36,79,058/-, being capital expenditure on research and development, is deductible in computing the income. The Assessing Officer had disallowed the expenditure of `36,79,058/- on this ground. It is the common case of both the parties that the issue stands covered by the decision of the Tribunal, referred to above, in favour of the assessee. Paragraph Nos. 42 and 43 of that decision reads as under:-
"42.The assessee has claimed deduction of `1,87,53,790/- in respect of expenditure incurred on research & development. The Assessing Officer disallowed the expenses to the extent of `1,56,16,310/- by treating the same to be of capital in nature."
43.In the course of hearing of this appeal, it was pointed out that similar disallowance made by the Assessing Officer was deleted by the Tribunal in assessee's own case for the assessment year 1998-99 which has /been affirmed by the Hon'ble High Court, no substantial question of law arose. Reference made by the department was again rejected in assessment year 2000-01 by the Hon'ble High Court on this issue. The learned CIT(A) has deleted the addition by following the Tribunal's decision in assessee's own case in the assessment year 1998-99 which was followed in subsequent years. In the light of the fact that the decision of Tribunal in assessment year 1998-99 has become final and also been followed in subsequent assessment years 1999-2000 to 2002-03, we do not find any justification to interfere with the order of the CIT(A) in deleting the addition."
Respectfully, following the aforesaid decision, the order of the learned CIT(A) in this matter is upheld and the ground of the revenue is dismissed.
137.3 Ground No.4, regarding the deduction of commission, stands decided against the revenue when ground No.1 in the appeal of the assessee was decided (supra).
7.4. Ground No.5 is against the finding of the learned CIT(A) that the expenditure of `1,50,96,609/- incurred on account of new model development is revenue expenditure. Assessing Officer had treated the expenditure to be capital expenditure for research and development. The admitted position is that this issue also stands covered against the revenue by the decision of the Tribunal referred to above, in which research and development expenses amounting to `1,56,16,310/-, were disallowed by the A.O. by treating them to be capital in nature. Thus, this ground is similar to ground No.3 (supra). Accordingly, this ground is decided against the revenue.
7.5. Ground No.6 is against the finding of the learned CIT(A) that excise duty amounting to `39,59,37,563/- is to be excluded from the total turn over for the purpose of computing deduction u/s 80HHC. It is the admitted position that the ground has to be decided against the revenue and in favour of the assessee in view of the decision of Hon'ble Supreme Court in the case of CIT Vs. Lakshmi Machine Works, (2007) 290 ITR 667. The Hon'ble Court held that the excise duty and the sales tax do not form part of the total turn over u/s 80HHC(3), otherwise the formula becomes unworkable. Sales tax and excise duty do not have any element of turn over which is the position even in the case of rent, commission, interest etc. Respectfully, following this decision, this ground is also dismissed.
(v) i.T.A. No.2081/D/08-appeal of the assessee
(vi) I.T.A. No.2461/D/08-appeal of the revenue
Assessment year : 2005-06
14
8. The only ground in the appeal of the assessee and ground No.4 in the appeal of the revenue are regarding the deduction of commission expenditure, which stand covered by our decision in the appeal for assessment year 1998-99. Following the decision in that appeal, the ground of the assessee is allowed and the ground taken by the revenue is dismissed.
9. Ground Nos. 1 & 2 in the appeal of the revenue are in respect of the disallowance of 25% of the expenditure incurred as royalty expenses and foreign technicians fees, by holding the expenditure to be capital in nature. The learned CIT(A) held the expenditure to be revenue in nature. These grounds stand covered in the appeal of the revenue for assessment year 2004-05 (supra) against the revenue. Following this order, these grounds are dismissed.
9.1 Ground No.3 & 5 are in respect of disallowance of capital expenditure on R & D and new model development expenditure of 18,81,114/- and `1,95,30,323/- respectively. These grounds also stand covered in the appeal of the revenue for assessment year 2004-05. Following this order, these grounds are dismissed.
9.2 Ground No.6 is in respect of total productivity maintenance programme (TPM) expenditure of `43,24,565/-, and ISO-9001 certification expenses of `14,12,029/-. These expenses have been held to be capital in nature by the Assessing Officer, but allowed as revenue expenditure by the learned CIT(A).
9.3 The learned CIT(A) has dealt with these issues in various sub paragraphs of paragraph No.8. In respect of TPM expenditure, it is mentioned that the same was incurred for creating awareness in respect of the following matters.
15i) "Upkeep and maintenance of Plant & Machinery items.
ii) Identify model machines and then work on for improving operations based on the improvements done on TPM model machines.
iii) Training of workmen on various TPM activities for standardization of manufacturing operations at various stages.
iv) To keep the work place neat and clean.
v) To keep the things sorted out and in arranged waY."
9.4 The details of expenditure are mentioned as under:-
a) Fees paid to M/s Japan Institute of Plant Management (JIPM) on account of training provided on TPM activities.
b) TPM audit fees paid to JIPM
c) Expenditure incurred for printing banners, display sign boards, TPM slogans, flags etc. in the factory.
d) Expenditure incurred on training workshops under the TPM initiative.
9.5 It is mentioned that this expenditure is ongoing expenditure, incurred to improve the productivity levels of the workman. The ratio of the expenses to the total turn over in this and earlier two years has been 0.13%, 0.19% and 0.21% respectively. The finding of the learned CIT(A) is that the expenditure is in the revenue field as it has been incurred for increasing productivity of the staff, which leads to greater profitability of the business. On the other hand, the finding of the Assessing Officer had been that the expenditure grants the benefit of enduring nature to the assessee by upgrading the productivity of the labour.
9.6 Before us, the case of the learned DR is that the expenditure is of capital nature because it ennures benefit of enduring nature to the assessee. In this connection, reliance has been placed on the following cases:-
16i) Assam Bengal Cement Company Ltd. Vs. CIT, (1955) 29 ITR 34 (Supreme Court), in which it was held that `40,000/- paid to the lessor to prevent him from granting quarrying rights in neighbouring quarries to the competitors is an expenditure of capital nature;
ii) Hylam Limited Vs. CIT, (1973) 87 ITR 310 (AP), in which it has been held that fees paid to a foreign company for supplying technical information to be used for patented process of manufacture is of capital nature as the acquisition of knowledge in respect of new products would grant advantage of enduring nature to the assessee;
iii) Praga Tools Vs. CIT, (1980) 123 ITR 773 (AP) (FB), in which it has been held that the payment made to a foreign concern for supplying technical know-how which could be used even after expiry of the agreement amounts to capital expenditure, but the royalty paid at 5% of the production is revenue expenditure;
iv) Alembic Chemicals Works Company Ltd. Vs. CIT, (1989) 177 ITR 377 (Supreme Court), in which it has been held that the expenditure incurred on acquisition of know-how for producing higher yield and sub-cultures of high yielding strain of penciline constitutes of revenue in nature;
v) Jyoti Electric Motors Limited Vs. CIT, (1999) 237 ITR 280 (Guj.), in which it has been held that since a benefit of enduring nature was obtained by the assessee on receiving additional design, manufacturing designs and other information, therefore, the CIT lawfully exercised his power u/s 263 setting aside the assessment order and directing the Assessing Officer to take a fresh decision; and
vi) Voltas Limited Vs. DCIT (1998) 64 ITD 232 (Mum.Bench), in which it has been held that the amount of `3 lacs received on transferring the entire right, title and interest in jointly held trade mark "Rasna", was a receipt of 17 capital nature in view of the decision in the case of CIT Vs. B.C. Srinivasa Setty (1981) 128 ITR 294 (Supreme Court).
9.7 In reply, the learned counsel distinguished various cases relied upon by the learned CIT-DR regarding acquisition of technical know-how etc. by mentioning that the expenditure led to acquisition of an intangible asset which granted benefit of enduring nature to the assessee. He also distinguished the decision in the case of Arvind Mill Limited Vs. CIT, (1992) 197 ITR 422 (Supreme Court), relied upon by the Assessing Officer, by mentioning that the assessee had paid betterment charges in respect of premises owned by the assessee. In so far as the assessee is concerned, the expenses have been incurred on the employees for enhancing productivity levels. Thus, the expenses are in the nature of training expenses incurred in relation with the employees. These are revenue expenses.
9.8 We have considered the facts of the case and submissions made before us. The question-whether, an expenditure is revenue or capital in nature is a vexed question of facts and law. No single test is determinative of the issue. General speaking, an expenditure which leads to acquisition or creation of a new asset is capital in nature. The expenditure which results in benefit of enduring nature is also often held to be capital in nature. However, the test of "benefit of enduring nature"
breaks down in certain cases, especially when the expenditure is in the revenue field. In this case, the expenditure is in the revenue field, which enhances the capacity of the employees, leading to improvement of the productivity and profits. The expenditure has been incurred from year to year, and the ratio of the expenditure to the turn over has been decreasing from year to year. Accordingly, it is held that the expenditure is in the nature of training expenditure, deductible in computing the income.18
9.9 In so far as ISO expenses are concerned, the details are as under:-
"ISO 9001 ` 3,97,253
5 "S" ` 82,766
Safety expenses ` 9,32,010
Total `14,12,029
9.10 The expenditure has been incurred for the following purposes:-
i) "Maintain control over the manufacturing process by carrying out quality systems audits.
ii) Documentation of process of measurement and evaluation of the project using the quality control plan.
iii) Required validation of the products manufactured to ensure that the products continue to make customer satisfaction.
iv) Formulation of assessment for measurement of customer satisfaction.
v) Documentation of various manufacturing process carrying out in the plants."
9.11 The submissions of the rival parties as to whether the expenditure is revenue in nature are capital in nature or the same as in respect of TPM expenditure.
9.12 We have considered the facts of the case and submissions made before us. In so far as ISO-9001 expenses are concerned, the issue stands covered by the decision of Delhi Tribunal in the case of Climate Systems India (P) Limited Vs. ACIT in Appeal Nos.1684/D/09 and 2161/D/09 for assessment year 2004-05 dated 17.12.2009, in which it has been held that the expenditure of `95,254/- is revenue in nature. The relevant portion of the decision is reproduced below:-
"9. We have heard both the parties and gone through the material available on record. The ISO certification charges are annual payment as pleaded by theassessee. In the case of Tirupati Microtech (P) Ltd. (supra), it has been held that by making payments for obtaining ISO 9002 certification, the fixed capital of the assessee had not enhanced in any 19 manner. Rather it created a positive image of the product of the assessee for the smooth conduct of the business, therefore, the expenditure incurred by the assessee was in the nature of revenue expenditure. The Bench while arriving at this conclusion placed reliance on the decision of Hon'ble Supreme Court in the case of Empire Jute Manufacturing Co. Ltd. VS. CIT 124 ITR 1 = (2002-TIOL-238-SC-IT) wherein the test for determination of the nature of expenditure incurred has been prescribed. It has been held that if the advantage consists merely in facilitating the assessee's trading operations or enabling the management and conduct of the assessee's business to be carried on more efficiently or more profitably while leaving the fixed capital untouched, the expenditure would be on revenue account even though the advantage may endure for an indefinite future. Since the issue is covered by the decision of LT.A.T. Jodhpur Bench in the case of Tirupati Microtech. (P) Ltd. (supra), we hold that the amount of RS.95,254/- is allowable as revenue expenditure. Accordingly, we set aside the order of Id.CIT(A) and direct the Assessing Officer to allow the claim of the assessee on account of ISO certification charges."
9.13 Relying on this decision, it is held that the expenditure of `3,97,253/- incurred in relation to ISO-9001 is revenue in nature.
9.14 There are two more expenses of `82,766/- and `9,32,010/- debited in the books as 5-S expenses and safety expenses respectively. 5-S stands for sorting, systematic arrangement, keeping environment spic and span, standardization and self-discipline. These expenses are obviously in the nature of training expenses. The other expenses are also in the nature of training expenses of the staff and re- filling of fire extinguisher, printing of banners, awareness of safety and audit fees for ensuring compliance of safety standards. These expenses are also training expenses in nature. Therefore, all these expenses are deductible in full.
9.15 In result, ground No.6 is also dismissed.
(vii) I.T.A. No./2713/D/09-appeal of the assessee
(viii) I.T.A. No.2771/D/09-appeal of the revenue:
20
Assessment year : 2006-07
10. The only ground taken by the assessee is in respect of restricting the payment of commission to the agents at 4.5% against the actual amount of commission paid to them. Admittedly this ground stands covered against the revenue in the appeal for assessment year 1998-99 (supra). Therefore, the ground is decided in favour of the assessee.
11. The appeal of the revenue consists of four grounds regarding-
i) Capitalization of 2.5% of royalty expenses;
ii) Capitalization of R & D expenses on development of new models
amounting to `1,29,79,137/-, and the disallowance of depreciation amounting to `93,22,848/-;
iii) TPM and ISO-9001 expenses amounting to `43,24,565/- held to be capital expenditure by the Assessing Officer but revenue expenditure by the learned CIT(A); and
iv) Allowing commission to the agents upto 4.5%.
11. 1It is submission of both sides that all these grounds stand covered by the decision in the appeal of the revenue for assessment year 2006-07. In view of the decision in that year, all the grounds are dismissed.
(ix) I.T.A. No.2562/D/10-appeal of the assessee
(x) I.T.A. No.3029/D/10-appeal of the revenue:
Assessment year :2007-08
12. The appeal of the assessee contains only one ground regarding the restricting of payment of commission to agents at 4.5% of the sale values. On the other hand, the appeal of the revenue contains three grounds regarding two issues, 21 i.e., expenditure incurred on TPM and allowing the commission upto 4.5% of the sale values.
12.1 All these grounds in both the appeals stand covered by our decision for assessment year 2005-06 (supra). Therefore, the order for that year is made applicable to this year also.
13. In result:-
i) Appeal of the assessee for assessment year 1998-99 is allowed.
ii) Appeal of the revenue for assessment year 1998-99 is dismissed.
iii) Appeal of the assessee for assessment year 2004-05 is treated as partly allowed for statistical purposes.
iv) Appeal of the revenue for assessment year 2004-05 is dismissed.
v) Appeal of the assessee for assessment year 2005-06 is allowed.
vi) Appeal of the revenue for assessment year 2005-06 is dismissed.
vii) Appeal of the assessee for assessment year 2006-07 is allowed.
viii) Appeal of the revenue for assessment year 2006-07 is dismissed.
ix) Appeal of the assessee for assessment year 2007-08 is allowed; and
x) Appeal of the revenue for assessment year 2007-08 is dismissed.
This order was pronounced in the open court on 31.05.2011.
Sd/- sd/-
( RAJPAL YADAV ) ( K.G. BANSAL )
JUDICIAL MEMBER ACCOUNTANT MEMBER
Dt. 31.05.2011.
NS
22
Copy forwarded to:-
1. The Assessee.
2. The Department.
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).