Income Tax Appellate Tribunal - Mumbai
Hadan International Group India Ltd. ... vs Assessee
IN THE INCOME TAX APPELLATE TRIBUNAL
MUMBAI 'H' BENCH
BEFORE SHRI R.V.EASWAR, [PRESIDENT]
AND SHRI T.R.SOOD, AM
I.T.A.NO1608/Mum/2001 - A.Y 1996-97.
Haden International Group India Ltd. Vs. The Joint Commissioner of I.T.,
[formerly known as Haden Josts Special Range 32,
Engg. India Ltd.], Mumbai.
Technosoft Knowledge Gateway,
1st Floor, Plot No.B-14, Rd.No.1,
Wagle Indl. Estate, Near Mulund
Check Naka, Thane [West] 400 604
PAN NO.AAACH 1459 D
(Appellant) (Respondent)
Assessee by : Shri F.V.Irani.
Revenue by : Shri S.K.Pahad , CIT.
ORDER
Per T.R.SOOD, AM:
Originally this appeal was disposed of vide consolidated order of the Tribunal dated 28th December, 2007 along with other appeals. However, later on, assessee moved a miscellaneous application and the Tribunal while adjudicating the assessee's M.A.No.311/M/2008 recalled the order of the Tribunal passed in I.T.A.No.1608/Mum/01 for A.Y 1996-97 in regard to the decision on ground No.2. The relevant para 4.2 of the Tribunal's order in M.A.No.311/Mum/2008 [arising out of I.T.A.No.1608/Mum/01] reads as under:
"4.2. In view of the mistake committed by the Tribunal in recording the fact, we recall the order only to the limited extent of our decision on ground No.2 passed by the Tribunal vide order dated 28th December, 2007 in I.T.A.No.1608/Mum/2001 for the assessment year 1996-97 and the registry shall post the matter afresh for disposing off only ground No.2 which is only recalled by this order." 2
In view of the above order, appeal had been posted for hearing and now we shall confine this hearing only to ground No.2, which is as under:
"2. The CIT[A] erred in confirming the disallowance of travelling expenses of foreign technicians of Rs.1,56,06,665/-, incurred by their foreign collaborators.
The Appellants submit that the CIT[A] had ignored the facts and circumstance under which the expenditure had been incurred and the submissions made in that regard.
The Appellants contend that the expenditure was wholly was exclusively incurred for the purpose of their business. The Appellants also submit that the expenditure had been incurred in terms of the Joint Venture Agreement approved by the Reserve Bank of India. The Appellants therefore submit that the CIT[A] be directed to allow deduction of Rs.1,56,06,665/-."
2. In this case appeal has been filed in the name of 'Haden International Group Limited', whereas in the assessment order and appellate order have been passed as 'Haden Josts Engineering India Limited'. In this connection, assessee has filed a copy of the certificate regarding change of name issued by the Registrar of Companies, Maharashtra, Mumbai vide Certificate No. 11-85467. It was pointed out that the fact regarding change of name has already been reported to the Assessing Authority vide letter dated December 2, 2000. The copy of the certificate issued by the Registrar of Companies as well as letter addressed to the AO, have been filed before us.
3. The ld. DR had no objection if request for change of name is allowed.
4. In view of the certificate issued by the Registrar of Companies regarding change of name, we allow the change of name of the assessee company as "Hayden International Group India Limited". 3
4. Brief facts of the case are as under:
The assessee company has been formed as a joint venture company between Josts Engineering India Limited [an Indian company] and Haden Drysys International Limited [hereinafter referred to as 'HDIL' ] [a foreign company]. In this joint venture, the Indian company was holding 49% of equity shares, whereas the foreign company was holding 51% of equity shares. This joint venture company was formed after obtaining permission from the Reserve Bank of India. The joint venture company, i.e. the assessee company entered into a license and technical collaboration agreement with HDIL on 28/7/1995 for providing the know-how, technical information and assistance in manufacturing of spray painting system and conveyors. As per Article7 of this license agreement, the foreign company was mandated to send technicians in order to assist the assessee company in regard to the design and manufacture of the product. As per various terms and conditions contained in this Article, the assessee company was required to bear all expenses in respect of travel and accommodation for the official duties of the technicians.
6. During the relevant year, the assessee company had incurred the travelling expenses amounting to Rs.1,56,06,665/-. Initially, this expenditure was debited to the accounts of the foreign company as the assessee company was of the view that such expenditure is the responsibility of the foreign company. In fact, the income tax returns were also filed accordingly and assessee has declared the income at Rs.1,32,20,050/-. Later on, when the foreign company did not agree to 4 bear these travelling expenses and pointed out that the assessee company was legally required to bear such expenses, then the assessee company claimed these expenditure in the next year from the foreign partner. However, as far as the income tax proceedings are concerned, return for this year itself was revised after making this claim and was filed declaring loss of Rs.4,19,240/-.
7. AO examined various documents in regard to formation of joint venture and other replies of the assessee and observed that though HDL was 51% partner in the joint venture, still assessee had agreed to bear the cost of travelling expenses of the technicians which appears to be an arrangement as if made with a third party, because, according to him, when HDIL was 51% partner in the joint venture, then they should have borne these expenses. He also observed that HDIL was charging for design and technical services in the form of royalty and design charges and during the year a sum of Rs.1,63,80,000/- was charged as design and technical charges. This shows that against equity of Rs.51 lakhs HDIL had already taken out large sum of Rs.1,63,80,000/- by way of design charges. According to him, when HDIL, being 51% partner was already charging royalty and design charges, there was no justification for charging the travelling expenses.
He also referred to the approval of the Reserve Bank of India and was of the view that royalty charges at 5% of domestic sales and 8% on export sales were allowed, which were inclusive of all taxes etc. and, therefore, there was no approval for incurring travelling expenses from R.B.I. He observed that this joint venture agreement did not inspire 5 confidence and, therefore, corporate veil had to be lifted. In this background, he disallowed the expenditure incurred on travelling expenses of foreign technicians.
8. Before the CIT[A] , it was mainly argued that liability for travelling and other expenses of technicians was the liability of the assessee company in terms of Artocle-7. The ld. CIT[A] asked for certain documents, like joint venture shareholding agreement, copy of the application filed before the R.B.I. for foreign collaboration etc. These documents were duly filed. The ld. CIT[A] analysed the shareholder's agreement dated 24/7/1995 and has extracted the following features:
"16. I have addressed myself carefully to the submissions made by the learned counsel on this score vis-à-vis the AO's order. Relevant case records and agreement entered into and the RBI's approval in respect thereof have also been carefully and dispassionately analysed. It is an admitted fact that the appellant company i.e. Haden Josts Engineering Ltd., [HJE] has been formed as a joint venture between Haden Drysys International Ltd., Swan Office Centre, Birmingham, U.K. [having 515 shares i.e. Rs.51,00,000/-] and Indian counterpart namely Josts Engineering Co. Ltd., Mumbai [having 49% shares capital i.e. Rs.49,00,000/-] as per the first shareholders agreement [SHA] dated 24/4/95. A critical look into the various clauses of the SHA dated reveals the following features:-
(i) Joint Venture has been formed to engage in the management and marketing of the business of designing, supplying and installing painting system. (ii) share pattern will be HDI - 51% and Josts - 49%.
(iii) as per clause [v] [i] of the SHA dated 24/4/95, no resolution will be passed by the Board or Committee in respect of the following matters unless the Directors appointed by HDI and Josts shall have voted in favour of such a resolution -
1 to 11
12) Enter into or vary any contract or arrangement [whether legally binding or not] with any of its directors or any shareholders or with any associate of a director or shareholder.
13) Incur any material expenditure or liability of a capital nature [including for this purpose the acquisition of any asset under lease or 6 hire purchase] save in respect of office machinery and equipment reasonably required in the ordinary course of its business.
14) Enter into any material contract or arrangement outside the ordinary course of its business or whereby any person would or might receive remuneration calculated by reference to its income or profits;
15) Enter into any agreement which cannot be terminated by it without penalty within 12 months of its commencement.
16) Pay any remuneration or expenses to any person other than as proper remuneration for work done or services provided or as proper reimbursement of expenses incurred in connection with its business."
According to him as per the above clauses the assessee company was not supposed to incur any material expenditure without a resolution from the board. However, no such resolution was passed. He further noted that though RBI has approved the shareholders agreement vide its letter No.ECCOF-III/518/A-27/93-94 wherein detailed terms and conditions have been prescribed. According to him, RBI allowed only payment of royalty @ 5% on domestic sales and 8% on export sales inclusive of taxes. Since this letter formed part of the technical agreement, according to him, no approval has been granted for reimbursement of travelling expenses of technicians. He also observed that in the instant case the expenditure in question has not at all been incurred by the assessee company and it was raised only by way of a debit note. He also found that there was no written communication to establish the fact that the said expenditure was later on decided to be borne by the assessee company and it was merely stated to have been agreed in a meeting held on October 2, 1996 in U.K. in which HDIL had declined to bear the expenditure of Rs.1.56 crores. After analyzing sec.37 he observed that the assessee company has failed to establish 7 that the said expenditure was incurred wholly and exclusively for the purpose of business. He also observed that the foreign collaborator i.e. HDIL had already taken back the amount of Rs.1,63,80,000/- by way of royalty and thus, taken maximum benefit out of the assessee company and, therefore, further claim of travelling expenses on account of technicians was only an after thought to get the tax liability reduced. Lastly, he observed that this transaction appears to be collusive transaction in colourable device and, therefore, decision of Hon'ble Supreme Court in the case of McDowell & Co. Ltd. was applicable and, accordingly, he confirmed the disallowance on account of travelling expenses of technicians made by the AO.
9. Before us the ld. counsel of the assessee Shri F.V.Irani referred to various documents in the paper book and pointed out that the assessee company came into existence as a joint venture between the Indian partners Josts Engineering Co. Ltd. and foreign partner Hyden Drysys International Ltd., whereby the Indian partner was to hold 49% of the equity and the foreign partner was to hold 51% equity. Later on, on 28-7-1995 the assessee company entered into the license and technical collaboration agreement with HDIL through which the assessee company had agreed to acquire the technical know-how from the HDIL for which the royalty @ 5% on domestic sales and 8% on export sales was agreed to be paid, which was in accordance with the permission from the RBI. He particularly invited our attention to Article- 7 whereby HDIL had agreed to assist the assessee company to design and manufacture of the product for which it was agreed that the HDIL 8 would send its technicians. However, it was specifically agreed that the assessee company would pay all the expenses of the technicians. Therefore, the liability to bear the expenses of such technicians was on the assessee company. For the year under consideration a total expenditure to the tune of Rs.1,56,06,665/- was incurred as travelling expenses on such foreign technicians. Initially the assessee company tried to claim this expenditure from the foreign partner i.e. HDIL and when such claim was refused by the foreign partner, then assessee had to bear the cost. He carried us through the assessment order and pointed out that it has not been disputed by the AO that such expenditure was not incurred. Therefore, merely because the assessee company had paid more royalty than the equity capital to the foreign company, the claim of the expenditure cannot be denied because the assessee company was liable to incur such expenses as per Article-7 of the license and technical collaboration agreement.
10. He also carried us through the CIT[A] 's order, particularly page-15, in which the CIT[A] has reproduced the various terms and conditions of shareholders agreement. He submitted that as far as the condition of board resolution as per item-12 is concerned, it was regarding variation in the terms of contract and the same is not applicable for this claim. The next condition to which the CIT[A] has referred is regarding incurring of capital expenditure. He again read out the conditions as reproduced by the CIT[A] and emphasized that few words cannot be read in isolation and the total clause has to be read to arrive at the full meaning. He submitted that incurring of 9 travelling expenses cannot be said to be in capital nature and, therefore, even this condition is not attracted for passing of the board's resolution. He then referred to condition No.14 which was applicable only when a material contract or arrangement was entered but that too was applicable when it was outside the ordinary course of its business and incurring of travelling expenses cannot be said to be outside the ordinary course of business. Similarly, clause No.16 refers to payment of remuneration other than the proper remuneration for the work done or services provided. Here again, travelling expenses are proper remuneration for which technicians have provided the services and this expenditure was incurred by way of reimbursement and, therefore, it cannot be said that such reimbursement was without any services. Therefore, the conditions relied upon by the CIT[A] for denying the travelling expenses by way of passing of board's resolution are not applicable. He vehemently argued that the condition regarding passing of board's resolution was an internal arrangement between the assessee company and foreign partner of the joint venture and, therefore, even if assuming that there was a need to pass a resolution, failure to pass such resolution, would amount to only contravention of the particular understanding with the foreign partner and allowability of an expenditure cannot be based on the basis of such an arrangement. He then referred to reverse side of page-6 of the paper book, which is a copy of the guidance note issued by the Government for drafting of foreign investment and technology transfer agreement. He particularly referred to para 39-C cl.(iv), wherein it is clearly provided that no 10 permission will be necessary for hiring of foreign technicians. Therefore, there was no need to obtain the permission of any government authority for inviting such foreign technicians and paying for the travelling and other expenses on account of services of such foreign technicians. While concluding his arguments, he submitted that he failed to understand as to how the decision of McDowell has been applied by the CIT[A] when no colourable devise is involved. It is a plain case of expenditure incurred on foreign technicians which was reimbursed by the assessee company and, thus, cannot be called a colourable devise.
11. On the other hand, the learned Senior CIT-DR, referred to page- 4 of the assessment order and pointed out that originally, expenditure on account of foreign technicians was debited to the foreign partner's account, which clearly shows that originally the intention was that such expenditure should have been paid for by the foreign partner. This is particularly true, because the assessee company is required to pay royalty to the foreign partner to the extent of 5% on domestic sales and 8% on export sales. He emphasized that the assessee company had already paid royalty of Rs.1,63,80,000/- and, therefore, there is no justification of further reimbursement of expenditure on account of foreign technicians. He then referred to pages 14 to 20 of the CIT[A] 's order and pointed out that the CIT[A] has clearly extracted the various conditions agreed upon by the assessee company with its joint venture foreign partner through which certain action could be taken only after passing of board's resolution. He referred to condition No.13 and 11 argued that the expression 'material expenditure' would refer to any significant expenditure to be incurred by the assessee company and this cannot be restricted to only expenditure of capital nature as argued by the ld. counsel of the assessee. Since the travelling expenses of technicians were of huge amount of approximately Rs.1.56 crores, it would constitute material expenditure and, therefore, board's resolution was necessary. Since, no board's resolution has been passed, the assessee company could not have incurred the liability for this expenditure. Similarly, condition No.11 also refers to the payment of remuneration of expenses to any persons, which would also be attracted because this is a case of reimbursement of expenses and board's resolution was, therefore, essential.
12. He further referred to the extracts of the shareholders agreement, which has been extracted by the CIT[A] and which provide that letter of approval would form part of collaboration agreement. He submitted that as per clauses 6 & 7, assessee was basically required to seek approval of the RBI for incurring of such expenditure and since no such approval has been taken, this expenditure was not allowable.
13. We have considered the rival submissions carefully in the light of the relevant material on record. We find that the assessee company made an application to the RBI on 12/4/1994 showing its intention to enter into a joint venture with the foreign company known as Haden Drysys International Ltd. [copy of this applicable is available at page-1 of the paper book]. Page 3 of the paper book which is a part of the 12 application to RBI shows that the foreign company would be holding 51% equity and the Indian company would hold 49% in such a joint venture. The approval was granted by the RBI vide letter dated 30th April, 1994. The only condition attached to the said approval as per RBI's letter has been described as standard conditions attached to the approval for foreign investment technology agreement which are as under-
1. "The total non-resident share-holding in the undertaking should not exceed the percentage[s] specified in the approval letter.
2.(a) The royalty will be calculated on the basis of the net ex-factory sale price of the product, exclusive of excise duties, minus the cost of the standard bought-out components and the landed cost of imparted components, irrespective of the source of procurement, including ocean freight, insurance, custom duties, etc. The payment of royalty will be restricted to the licensed capacity plus 25% in excess thereof for such items requiring industrial licence or on such capacity as specified in the approval letter. This restriction will not apply to items not requiring industrial licence. In case of production in excess of this quantum, prior approval of Government shall have to be obtained regarding the terms of payment of royalty in respect of such excess production.
(b) The royalty would not be payable beyond the period of the agreement if the orders had not been executed during the period of agreement. However, where the orders themselves took a long time to execute, then the royalty for an order booked during the period of the agreement, but executed after the period of agreement, would be payable only after a Chartered Accountant certifies that the orders in fact have been firmly booked and execution began during the period of agreement, and the technical assistance was available on a continuing basis even after the period of agreement.
© No minimum guaranteed royalty would be allowed.
3. The lump sum shall be paid in three installments as detailed below, unless otherwise stipulated in the approval letter:-
First 1/3rd after the approval for collaboration proposal is obtained from Reserve Bank of India and collaboration agreement is filed with the Authorised dealer in Foreign Exchange.
Second 1/3rd on delivery of know-how documentation. 13 Third and final 1/3rd on commencement of commercial production, or four years after the proposal is approved by Reserve Bank of India and agreement is filed with the Authorised Dealer in Foreign Exchange, whichever is earlier. The lump sum can be paid in more than three installments, subject to completion of the activities as specified above. Thus, it is clear that no condition for obtaining prior permission for payment to foreign technicians was prescribed by the RBI. We find from the note for Guidance of Entrepreneurs for Foreign Investment & Technology Transfer Agreement, which was issued by the Government of India, the government has issued various guidelines [copy of the same is available at pages 6 & 7 of the paper book].
14. Paragraph 39-C Clause (iv) reads as under-
"No permission will be necessary for hiring of foreign technicians, foreign testing of indigenously developed technologies. Payment may be made from blanket permits or free foreign exchange according to RBI guidelines."
Thus, the above clause and condition attached by RBI, clearly shows that no permission was required for hiring of foreign technicians. Therefore, the ld. CIT[A] was not correct in observing that since no RBI's permission has been taken, accordingly, the expenditure was not allowable. We further find that Article-7 of License and Technical Collaboration Agreement [copy of which is available at pages 13 to 38 of the paper book], reads as under:
"7.1 Subject to the requisite approvals, if required, and as may be agreed upon between the parties, HADEN shall send technicians as shall be agreed upon between the parties to the plant of the Company in order to assist the Company in regard to the design and manufacture of the Product. HADEN technicians shall be deputed to Indian upon the terms and conditions set out below and in particular that all costs, expenses and charges shall be to the account of the Company.14
7.2 Without limiting the provisions contained in Article7.1 hereof in respect of the Technicians deputed to India, the Company shall:
7.2.1 bear and pay air transportation charges of the technicians from the United Kingdom to India. The air ticket shall be paid for and arranged for by the Company sent to HADEN so as to arrive in the United Kingdom fifteen [15] days prior to the department of the technicians.
7.2.2 Provide first class accommodation with air-conditioning whenever possible, to the technicians during their stay in India.
7.2.3 Bear and pay travelling expenses in India either by plane or first class rail [air-conditioned sleeping cars whenever available] or air-conditioned automobile for the technicians travelling for their official duties under this Agreement:
7.2.4 Provide local transportation to the technicians for their official duties. If the Company is unable to place the necessary transportation at the disposal of the technicians, the technicians shall be entitled to arrange as agent of the Company travel, by air, train and/or hire car and the Company shall reimburse the technicians the expenses incurred by them without production of any voucher, provided such expenses do not exceed substantially from the expenses normally incurred by such transportation as available at the place of duty.
7.2.5 Provide and arrange for first class medical facilities for the technicians.
7.3 HADEN shall hold the Company free and harmless from and against any and all claims, actions and costs of any kind whatsoever which may be by and on behalf of, or against any of the personnel of HADEN deputed to the Company hereunder for compensation or damages incurred by reason of any accident, injury or other act of commission or omission suffered by HADEN personnel or suffered by any third party when caused or committed by any HADEN personnel while in the course of duties in India."
The above clause clearly shows that the responsibility for meeting the travelling and other expenses of foreign technicians was clearly that of the assessee company. Though initially the assessee company had debited this sum to foreign joint venture company and tried to claim it, but since the foreign partner declined to meet this liability, the assessee company had no choice but to incur such expenditure. It was clearly stated before the AO vide letter dated July 31, 2000 that since 15 HDIL declined to meet this liability, the assessee company had to agree to bear this expenditure and there was no written communication for this also. We are of the view that even if there is no written communication by the foreign partner to decline this liability, the situation would not change, because the assessee company was bound by the agreement to meet this liability. We further find that the ld. CIT[A] has extracted the following clauses from shareholders agreement dated 24/4/1995 at pages 14 & 15 of his order, which read as under:
(i) Joint Venture has been formed to engage in the management and marketing of the business of designing, supplying and installing painting system. (ii) share pattern will be HDI - 51% and Josts - 49%.
(iii) as per clause [v] [i] of the SHA dated 24/4/95, no resolution will be passed by the Board or Committee in respect of the following matters unless the Directors appointed by HDI and Josts shall have voted in favour of such a resolution -
1 to 11
12) Enter into or vary any contract or arrangement [whether legally binding or not] with any of its directors or any shareholders or with any associate of a director or shareholder.
13) Incur any material expenditure or liability of a capital nature [including for this purpose the acquisition of any asset under lease or hire purchase] save in respect of office machinery and equipment reasonably required in the ordinary course of its business.
14) Enter into any material contract or arrangement outside the ordinary course of its business or whereby any person would or might receive remuneration calculated by reference to its income or profits;
15) Enter into any agreement which cannot be terminated by it without penalty within 12 months of its commencement.
16) Pay any remuneration or expenses to any person other than as proper remuneration for work done or services provided or as proper reimbursement of expenses incurred in connection with its business."
We find that the ld. CIT[A] has mainly emphasized on clauses 13 & 16 to point out that the assessee was covered by these two clauses and 16 since no board resolution was passed, therefore, this expenditure cannot be allowed. We agree with the submissions of the ld. counsel of the assessee that clause 13 basically refers to capital expenditure and the words 'material expenditure' cannot be isolated from the expression 'liability of capital nature'. Similarly, clause-16 refers to payment or remuneration of expenses to any persons other than proper remuneration. According to us, this clause would deal with a situation if some payment is made which is not normal and cannot be attracted for incurring a genuine expenditure which the assessee company is legally obliged to incur in terms of license agreement. In any case, we agree with the submissions of the ld. counsel of the assessee that this can be construed only as an internal arrangement between the Indian partner and the foreign company and violation of the same could not have any impact on allowability of an expenditure which could be determined as per the provisions of the Act and in the present case such allowability of this expenditure is clearly provided in the license agreement under Article-7.
15. We also find force in the submissions of the ld. counsel of the assessee that this is not a case where the ratio of decision of the Hon'ble Supreme Court in the case of McDowell [supra] could be attracted because no colourable device has been used. It is simply a case of expenditure incurred on technicians who visited India and the assessee company was liable to pay such expenditure in terms of Article-7 of the agreement. In view of the above discussion, we are of the view, that the expenditure incurred on travelling of technicians 17 should have been allowed by the department, particularly, in view of the fact that nowhere it has been disputed by the AO or the CIT[A] that such expenditure was not incurred at all. In these circumstances, we set aside the order of the ld. CIT[A] and direct the AO to allow the travelling expenses incurred on visit of foreign technicians.
16. In the result, appeal of the assessee is allowed.
Order pronounced in the open Court on this 9TH day of July, 2010.
Sd/- Sd/-
(R.V.EASWAR) (T.R.SOOD)
President Accountant Member
Mumbai: 9th July, 2010.
P/-*