Income Tax Appellate Tribunal - Bangalore
Wipro Ge Medical Systems Ltd. vs Deputy Commissioner Of Income Tax on 8 July, 2002
Equivalent citations: (2003)81TTJ(BANG)455
ORDER
G.E. Veerabhadrappa, A.M.
1. These are appeals by the assessee and arise out of the orders of the CIT(A), dt. 22nd Feb., 2001, for the asst. yrs. 1991-92 to 1997-98 in all these appeals certain common issues are involved. We have heard them together and are being disposed of by this consolidated order.
2. The first common dispute in all these appeals relates to the claim for deduction of provision for warranty and office expenses. For the asst. yrs. 1991-92, the assessee debited a sum of Rs. 13 lakhs towards provision for warranty expenses in its profit and loss account. According to the AO this provision is merely a contingent liability. For this, he relied upon the notes on accounts, forming part of the statement of account and balance sheet filed by the assessee-company. In Clause (6), it has been stated that provision for warranty expenses in terms of sale is made as per management estimate. According to the AO, the basis for arriving at the estimated figure of Rs. 13 lakhs was not submitted by the assessee. The provision for warranty expenses is held to be a contingent liability on an estimate basis and not on actual basis. The disallowance was accordingly made.
3. The CIT(A) was of the opinion that the assessee's provision for warranty obligations on the basis of certain percentage of sales was not correct in as much as the assessee was not engaged in the business of selling defective goods. According to him, the assessee did not mention in the sale bill that the sale price included specific cost of replacement of parts. The assessee's argument that the sale price included the warranty expenses, according to him, was not the fact. The learned CIT(A) further opined that in the sale of goods, the breach of stipulation collateral to the main purpose of the contract, gives rise to claim of a warrantly liability. According to him, the following conditions need to be fulfilled in respect of goods sold to create warranty liability :
(a) Some defect in the goods sold should be detected after the sale of goods, and within the warranty period.
(b) The purchaser should consider it worthy to bring it to the notice of the assessee seller and claim damages.
(c) The seller should accept that it is a defect in the goods sold, and not caused by bad handling by the purchaser of the goods sold.
According to the CIT(A), in the present case, none of these conditions were present. The CIT(A) further proceeded to observe that the provision towards the claim of damages were not received or accepted by the assessee during the previous years in question. The liability arising on account of such claim is highly contingent and depending on the happening of all the events mentioned i.e., occurrence and detection of defects raising of claim by the purchaser within warranty period and acceptance of the same as genuine by the assessee. Unless the contingent events become certain, the assessee do not have any obligation for damages. To put it in other words, the warranty obligations for which the assessee has made provision is of contingent nature, as at the end of the previous year in which the sale is made. With these observations, the claims of the assessee were rejected and the assessee is in appeal before us.
4. The learned counsel for the assessee reiterated the stand he took before the CIT(A). According to him, the assessee has been making the provision for warranty claims in its accounts based on its own experience in dealing with those products for several years. Accordingly, the assessee created a provision as under:
Products Percentage X-ray 1% Computed tonography 2% Ultrasound 2% Imported Products 7% The provision for warranty was made on a scientific basis based on past experience and also that it had to discharge the warranty obligations in respect of sale effected by IGE (India) Ltd. when it was an agent. The learned counsel further pointed out that the assessee has been engaged in multinational business activity of trading in imported medical equipments, variety of equipments in medical field and technical services in India. The assessee provides one year guarantee for free service, preventive maintenance, guarantee replacements and repairs within the warranty period. Free maintenance is a certainty. At the time of provision, it was not sure of which part of the equipment requires replacements. Based on the experience of business and historical data, the assessee has been providing a fixed percentage of sales as provision for warranties. Although the assessee has provided this, the assessee compares this provision and debits the actual expenditure to the said provisional account and creates the year and provisions based on the sales made during the year. Any excess claimed over the year will get neutralised by way of actual debits to the account. The assessee drew our attention to p. 17 of the paper book as well as p. 51 of the paper book to impress upon the sales and services that were rendered to the parties. According to him, the sale prize includes cost of services that are provided. The assessee has accounted the liability on the matching principle of accountancy. The Department is only unjustified in treating the liabilities as contingent. The liability is certain and only the quantum is contingent. The learned counsel for the assessee drew our attention to the actual figure of expenditure and made a comparison with the figure of warranty expenses to impress upon us that the provisions claimed are not unduly excessive and they are more or less over a period of time equal, He relied upon the Accounting Standard-9 and also Accounting Standard-4 besides relying upon several Tribunal decisions in this regard as under:
(i) Kevin Enterprises v. Jt, CIT (2002) 74 TTJ (Ahd) 127 : (2001) 79 ITD 196 (Ahd)
(ii) Singhal & Co. v. ITO (1982) 1 ITD 476 (Chd)
(iii) ITO v. Wanson (India) Ltd. (1983) 5 ITD 102 (Pune)
(iv) Jay Bee Industries v. Dy. CIT (1998) 61 TTJ (Asr) 403 : (1998) 66 ITD 530 (Asr)
(v) Voltes Ltd v. Dy. CIT (1998) 61 TTJ (Mumbai) 543 The learned counsel for the assessee relied on the following decision of the Supreme Court in the case of Calcutta Co. Ltd. v. CIT (1959) 37 ITR 1 (SC) in this regard.
5. The learned Departmental Representative on the other hand pointed out that the liability claimed as warranty expenses is purely contingent in nature. No matter with what precision the actual expenditure incurred tallies with the provisions, the same cannot be allowed as deduction on the basis of the principles of mercantile accounting. He relied upon the decision of the Supreme Court of India in Metal Box Co. of India v. Their Workmen (1969) 73 ITR 53 (SC), wherein the apex Court clearly held that what are in the nature of contingent liabilities cannot be claimed as deduction.
6. We have carefully considered the rival contentions and gone through the records. The Bombay Bench of the Tribunal in the case of Vote Ltd. v. Dy. CIT (supra) was concerned with an identical situation, where the provision for trade guarantees during the warranty period in case of the assessee having scientifically worked out the anticipated the liabilities to be provided under mercantile system of accounting based on the past experience and in such a method of accounting, no adhocism is involved. The accounting method followed by the assessee ensures that the gaps between the provision and the actual expenditure are made good in subsequent years. In those circumstances, the disallowance was not held to be justified. Similarly, in the case of Jay Bee Industries v. Dy. CIT (supra), the Tribunal held therein that the provision for expenditures on replacement during the warranty period is based on an estimated cost of repairs at 2 per cent of transformers sold. The method of estimating the cost of repairs was held to be allowable on the ground that the liability to carry out repairs/replacement accrued on the date of sale agreement. Such estimated liabilities are to be treated as trading expenses and must be allowed. The Revenue in this case should have accepted the assessee's claim as following the method of accounting and as shown the basis for making such claims. The assessee has provided a meagre percentage of sale as provision for warranty claims during the period for which the assessee has produced the details of warranty claims. The claim shows that the warranty expenses claimed as deduction is not abnormally high and the gap between the warranty provisions and the warrant expenditure incurred have narrowed down over years and in fact, the detailed study of these expenses clearly shows that there is a perfect neutralisation between the expenditure incurred and the warranty claims claimed as deduction. In our view, the warranty liabilities are inbuilt in the sale price since all sales are with warranty liabilities. The liability towards warranty liabilities is certain and has accrued on the date of sale and only the ascertainment could be said to be contingent which the assessee has estimated based on its past experience and in our opinion, the claims made by the assessee in this regard are most reasonable and are supported by some plausible material. In our view, the Department is not justified in treating the liability as contingent. Following the principle laid down by several decisions of the Tribunal including that of the apex Court in (1969) 73 ITR 53 (SC) (supra) we hold that the claim of the assessee is in order and should be accepted. The AO shall ensure that the assessee shall not claim the deduction again based on the expenditure in respect of warranty and after sales in the books of account maintained. With these observations, the assessee's ground on this issue is to be treated as allowed.
7. One of the disputes in the asst. yr. 1992-93 relates to disallowance under Rule 6D in respect of travelling expenses. The assessee claimed travelling expenses of Rs. 1,41,21,049. The assessee added back a sum of Rs. 12,48,283 by applying the provisions of Rule 6D. The AO held that Rule 6D envisages that the disallowance is to be worked out separately with regard to each individual trip and does not permit the set off of excess expenditure incurred during one travel against the shortfall of another. The AO held that the disallowance made by the assessee was not sufficient under Rule 6D. He disallowed a sum of Rs. 5 lakhs. The CIT(A) based on his own reasoning in the asst. yr. 1991-92 gave certain directions in the matter of disallowance. The assessee is aggrieved and is in appeal before us.
8. The learned counsel for the assessee per se pointed out that he has no objection for the disallowance if made by applying Rule 6D, but the authorities below have grossly omitted to consider the change in the amount of allowable expenses. According to him, Rule 6D underwent change w.e.f. 1st April, 1992, as substituted by the Income-tax (Eighth Amendment) RuleSection 1992 to provide for the full allowance of the whole expenditure where the amount of such expenditure does not exceed Rs. 1,500 per day. This was as against Rs. 150 per day allowed earlier. The allowable expenditure has been increased tenfold. If that yardstick is applied, there will be no scope for making any disallowance. The assessee has provided the disallowance under Rule 6D at pp. 47 to 51 of the paper book and pleaded that the disallowance made by the AO as well as the CIT(A) are excessive and should be deleted or substantially reduced.
9. The learned Departmental Representative on the other hand strongly supported the disallowance sustained by the CIT(A). According to him, the reasons provided by the CIT(A) are sufficient to sustain the disallowance made by him.
10. We have gone through the details provided by the assessee and considered the rival submissions. The discussions in para 10 of the CIT(A)'s order shows that even the CIT(A) has resorted to some estimation based on his own working for the asst. yr. 1991-92. Accordingly some relief was granted. The claim of the assessee before us is that the working of disallowance under Rule 6D would involve substantial time and processing of the back records and it is very difficult to provide per trip details in every case. This only shows that the assessee prays for ad-hoc disallowance on per trip basis. The assessee has provided some of these details in pages 47 to 51 of the paper book. The assessee has himself substantially worked out a disallowance to the extent of Rs. 12,45,283 to take care of the fJlausible omissions and commissions. We direct the disallowance to be maintained at a sum of Rs. 1,50,000.
11. Before parting with this, we would like to deal with one of the contentions of the assessee that the disallowance is totally uncalled for on the ground that the rules themselves are amended to provide for higher rates of allowance under Rule 6D. We have gone through the relevant amendment brought in the rules which was reported in (1992) 195 ITR (St) 133. The Rules providing for enhanced limits have been made specifically effective from asst. yr. 1993-94 and subsequent years meaning thereby that the claim of the assessee for total collection of the disallowance is not tenable for the year under consideration.
12. The next dispute relates to the assessee's claim for deduction under Section 80-IA of the Act for the asst. yr. 1995-96. In the computation of income, the assessee claimed deduction under Section 80-IA at Rs. 1,09,36,333. The said deduction was from the profit for manufacturing which was arrived at Rs. 3,64,54,444. This was arrived at by deducting the materials consumed, direct expenses relating to manufacturing and share of indirect expenses, The AO and the CIT(A) did not accept the assessee's computation. The reading of para 4 of the assessment order along with paras 9 to 12 of the CIT(A)'s order shows that the impugned area of dispute is with regard to the allocation of direct expenses. According to the assessee, such expenses which are direct in nature need no allocation. But the Department seems to have allocated those expenses based on turnover. The assessee before us has pointed out that the Department has totally gone wrong and against the spirit of the provisions of Section 80-IA making resort to allocation of indirect expenses. Direct expenses need no allocation and indirect expenses have been allocated according to the well known principles of apportionment of expenses based on the records maintained by the assessee and such method of allocation has been accepted by the Department for the asst. yrs. 1996-97 and 1997-98 and the Department has only in this assessment year (sic) which will result in distortion of the assessee's claim. The learned counsel also pointed out that the basis for allocation adopted by the Department is against the well known principles of accounting or principles of costing. He, therefore, pleaded that the assessee's working of deduction under Section 80-IA should be accepted. The learned Departmental Representative on the other hand heavily relied upon the discussions in the assessment order as well as the CIT(A)'s order is support of the Departmental stand.
13. We have carefully gone through the records. The assessee is having units in Bangalore and Goa which are eligible units for the purpose of deduction under Section 80-IA of the Act. The assessee at pp. 16 to 20 of the paper book has given its working for deduction under Section 80-IA of the Act. We have carefully seen the working which shows that the materials consumed have been allocated directly to the eligible units. The direct expenses and depreciation in respect of manufacturing activity, royalty, amortisation and technical knowhow fees on the basis of treating them as direct cost of the respective units based on these services directly used by these units. In other words, in our opinion, there is no need for allocation of any expenses when the expenses are directly connected with period. What is required is the allocation of common expenses or indirect expenses which the assessee has shown the allocation at p. 20. The salaries wages, bonus and commission have been allocated. For e.g., the assessee adopted wages as the basis for allocating salaries, wages, bonus, commission, contribution to PF, gratuity, bonus, staff welfare, recruitment training expenses etc. In our view, wages is the proper base for allocating the indirect expenses of manufacturing. Similarly, transportation, insurance, repairs and maintenance of the building, advertisement and sales promotion and such other expenses have been apportioned on the basis of sales which in our opinion, is perfectly in order. This very basis adopted by the assessee in the asst. yr. 1995-96 has not been questioned in the asst. yrs. 1996-97 and 1997-98. We, therefore, direct the AO to accept the assessee's working in relation to the deduction under Section 80-IA of the Act.
14. The next dispute in the asst. yrs. 1996-97 and 1997-98 relates to deductions claimed under Section 80HHC of the Act. The learned counsel appearing for the assessee did not press this ground for those years on the plea that his grievance has been attended to by the CIT(A) subsequently. This ground for the asst. yrs. 1996-97 and 1997-98 are dismissed as not pressed.
15. The next common dispute in all the appeals relates to the levy of interest under Section 234B of the Act. Both the parties agreed that the said levies are purely consequential in nature. We, therefore, direct the AO to allow the consequences to follow :
16. The next, dispute relates to interest under Section 244A of the Act for the asst. yrs. 1992-93 and 1993-94. For the asst. yr. 1992-93, the issue was not pressed. For the asst. yr. 1993-94, interest under Section 244A, for the asst. yrs. 1992-93 amounting to Rs. 9,87,242 was received vide intimation under Section 143(l)(a), dt. 18th Jan., 1993. The assessee offered this amount to tax for the asst. yrs. 1993-94. However, when the assessment for the asst. yr. 1993-94 was completed vide order dt. 27th March, 1995, interest of Rs. 3,97,480 was withdrawn by the Department. The assessee requested the AO to reduce the income for this assessment year accordingly. The assessee contended that the interest withdrawn of Rs. 3,97,480 should be allowed as deduction in the computation of income for the asst. yrs. 1993-94, which the AO ignored.
17. We have heard both the parties at length. The assessment for the asst. yrs. 1993-94 was completed only on 25th March, 1996, by which date the interest was withdrawn. So the assessee should offer to tax in that assessment year, but has requested the AO to reduce the income to that extent in view of the subsequent development of the Departmental action in withdrawing the deduction. The AO was therefore, not right in ignoring the claim of the assessee. We, therefore, direct the AO to allow the deduction as claimed by the assessee for the asst. yr. 1993-94 itself. The CIT(A) in para 15 of his order has given a direction to consider it as deduction for the asst. yr. 1995-96. In view of the fact that we have accepted the assessee's claim for asst. yr. 1993-94, this direction of the CIT(A) for asst. yr. 1995-96 need not be followed by the AO.
18. The next dispute in the asst. yr. 1997-98 relates to computation of profit under Section 115JA. The learned counsel for the assessee pleaded that the computation of the liability under Section 115JA may be done after giving effect to our order. The AO after hearing the Departmental Representative on the disputed issue and going through the discussions in para 27 to 29.2 of the order of the CIT(A),(sic) we direct the AO to compute the income under Section 115JA, if found necessary, after giving effect to our order. The assessee before such computation shall be given an opportunity of being heard in the matter.
19. The next dispute in the asst. yr. 1991-92 relates to payment of Rs. 101.3 lakhs to M/s IGE (India) Ltd. hereinafter referred to as IGE, for short, and M/s Faridabad Investment Co. Ltd. (FIL for short) and payments to the extent of Rs. 74 lakhs in the asst. yrs. 1992-93 to 1994-95.
20. The facts relevant to this issue are that IGE is a trading company with 40 per cent of the shares held by General Electric Co. USA (hereinafter referred to as GE for short) and 60 per cent of the shares held by FIL. FIL is wholly under the control of M/s Dabriwallas (the Indian promoters of GE). IGE used to market the goods produced by GE and an Indian company. The assessee-company was incorporated in March, 1990 and it entered into an agreement with GE on 29th March, 1990. As per this agreement the assessee was appointed as the authorized canvassing representative for the medical systems equipment. Earlier, this agency was allotted to IGE which agreement ended on 31st Dec., 1989.
21. In order to facilitate the agency business with GE, the assessee felt that it would be in its interest to enter into an agreement with IGE and to serve- this purpose, a tripartite agreement, dt. 2nd April, 1990, was entered into by the assessee, GE and IGE. As per this agreement, the assessee would acquire from IGE, the complete computer links for medical division, and access to all books and records of this division of business of IGE. Further, IGE would not compete with the assessee for a period of 3 years (except for business with National Scan Centers) in the business relating to medical diagnostic imaging. For this, the assessee was required to pay Rs. 50 lakhs to IGE. IGE was also to be paid a sum of Rs. 28,80 lakhs by the assessee for giving access to the latter the information base and for the transition of customer order filing and access to transitional office and administrative facilities. Under the terms of the agreement a sum of Rs. 22.50 lakhs was to be contributed by the assessee towards 1/3 cost of voluntary retirement packages of the employee of IGE. Thus a total sum of Rs. 101.30 lakhs was to be paid to IGE. A sum of Rs. 2.20 crores was to be paid to FIL so that the latter would not compete with the assessee for a period of 3 years. GE also agreed to pay Rs. 22.50 lakhs to IGE towards 1/3 cost of voluntary retirement package of employees of IGE. The above payment was for a declaration and undertaking that FIL will desist from doing any business either directly or indirectly or in association with any other persons, in medial diagnostic imaging business save and except the subsisting arrangement FIL had with M/s Elpro International. The sum of Rs. 22.20 million to FIL was to be paid as follows :
(a) First instalment of Rs. 7.4 million on or before 30th June, 1991, relevant to the asst. yr. 1992-93.
(b) Second instalment of Rs. 7.4 million on or before 30th June, 1992, relevant to the asst. yr. 1993-94 and
(c) Third instalment of Rs. 7.4 million on or before 30th June, 1993, relevant to the asst, yr. 1994-95.
The assessee paid Rs. 28.80 lakhs to IGE by way of service charges and the balance out of Rs. 101.30 lakhs as miscellaneous expenses. These payments were claimed as deduction in the computation of business income.
22. The AO held that the payment of Rs. 101.30 lakhs was an intial outlay for initiation and extension of the business in the asst. yr. 1991-92. She held that such payment was made for acquiring or bringing into existence an asset of an enduring benefit to the business of the assessee that is carried on. She held it to be of capital in nature. As regards the sum of Rs. 28.8 lakhs paid to IGE for access to the latter's information base and assistance in the smooth transition of customer order filing, etc., the AO again held that such payment is for acquiring a capital asset in the form of information base of IGE for a new business undertaken by the assessee and held it to be of capital in nature. As regards the sum of Rs. 22.50 lakhs paid towards 1/3 of the cost of voluntary retirement of the employees of IGE, the assessee claimed that the payment was by way of commercial expediency and was incurred wholly and exclusively for the purpose of business. But the AO considered that the payment was not necessitated for business or commercial expediency. She disallowed the same by holding that the expenditure was not incurred for purpose of business of the assessee or dictated by commercial expediency.
23. Before the CIT(A), a copy of the order of the ITAT, Bombay Bench 'A', in the case of IGE, the recipient for the asst. yr. 1991-92, in ITA No. 2315/Bom/1995, dt. 26th March, 1996, was produced. The CIT(A), after extracting the discussions in the Tribunal's order in pp. 5 to 12 of his order, gave his finding as under :
7.2 If we look at the transaction from the side of the assessee with the above aspects in mind, it would be clear that the entire payment by the assessee to IGE was a part of a compromise agreement and in consideration of the assessee being given manpower and other resources employed by IGE and information which IGE had in the line of agency business carried on by it till 31st Dec., 1989, which was useful for the new line of business (agency business from GE) acquired from 2nd April, 1990). The payment was clearly for acquiring resources for a new line of business which were used by another person for running such a business earlier and which was of enduring value to the new line of business of the assessee. The payee was not a competitor to the assessee in the new line of business, as its ability to compete with the assessee depended on GE granting agency business to it and the agency had been terminated by 31st Dec., 1989, i.e., substantially prior to the assessee starting the new (agency) business. The Tribunal has held that Rs. 25 lakhs out of Rs. 50 lakhs received by IGE was to cover the restrictive covenant and the balance of Rs. 25 lakhs as receipt towards termination of agency and hence assessable under Section 28(ii) in the hands of the assessee. Though the sum of Rs. 25 lakhs is assessable in the hands of the recipient as income because the specific provisions of Section 28(ii) as a receipt for termination of agency, yet, as far as the assessee is concerned, IGE was not its agent and the payment was not for termination of any agency granted by the assessee. Considering it as a case of payment to ward off competition in a new line of business, IGE competing with the assessee in the agency business of GE at the end of the three year period mentioned in the agreement dt. 2nd April, 1991, depended totally on whether the agency business is granted by GE to IGE at the end of the period of 3 years. By April 90, the relevant time of agreement, IGE had ceased to be in agency business in medical equipments and the assessee had been granted the agency business to the exclusion of IGE and there was no case for IGE competing with the assessee during the period of subsistence of the contract of agency of the assessee with GE. Therefore, it cannot be said to be a payment wholly and exclusively for the purpose of business of the assessee. If GE was to compensate IGE for termination of the agency business which was in existence up to 31st Dec., 1090, GE should have incurred the expenditure. The assessee bearing the expenditure may be as per the tripartite agreement but it is effectively a payment to discharge the liability GE had to bear to terminate the agency of IGE and the payment by assessee is a payment made on behalf of GE to IGE, in connection with acquiring the agency from GE. Being a payment to acquire a new line of business it is of capital nature in the hands of the assessee, irrespective of the nature of the receipt in the hands of IGE, the recipient. There are decisions to the effect that the nature of the receipt in the hands of the recipient may not be the same as the nature of the payment in the hands of the payee.
7.3 The observations that Rs. 45 lakhs received by IGE (Rs. 22.5 lakhs from AGE and Rs. 22.5 lakhs from Wipro GE) (appearing at the last part of the order of the Hon'ble Tribunal and extracted above) was taxable in the hands of IGE under Section 28(ii) as it goes to reduce the liability of IGE to pay compensation to retrenched employees to that extent cannot be taken to mean that the payment of Rs. 22.5 lakhs is of revenue nature in the hands of that assessee is to be referred to now. As far the assessee is concerned, the payment is in connection with procuring resources for a new line of business, and which is of enduring nature. It is of capital nature, 7.4 A sum of Rs. 28.80 lakhs paid by the assessee to GE was for obtaining information about the customer base which would be useful for a long time for the new business. I am of the view that this amount can be treated as payment for obtaining information and knowledge useful for a long period. The information so obtained can be treated as plant. The assessee should be allowed depreciation at the rates applicable for plant in respect of this.
The assets acquired by other payments such as manpower resource, office and residential space are not assets or advantages which are depreciable but those which would continue or flourish with the progress of the new line of business. No depreciation is to be allowed on this item."
The assessee is aggrieved by these findings :
24. The learned counsel for the assessee reiterated the several contentions which were taken before the CIT(A) and the AO. The learned counsel for the assessee took us through the several clauses of the tripartite agreement, dt. 2nd April, 1990, a copy of which is filed in the paper book on behalf of the assessee at pp. 38 to 48. He pointed out that it is a valid trade agreement entered in the normal course of business. The learned counsel pointed out that the sum of Rs. 50 lakhs was paid to IGE for continuation of access to the computer links division of IGE for a period of 3 years from the date of agreement. The sum of Rs. 28,8 lakhs was payable to IGE for giving accessee to information base and for assisting the smooth transition of customer order filing and access to transitional office and administrative facilities. It is also pointed out by the learned counsel for the assessee that the sum of Rs. 22.20 million to FIL was for a declaration on undertaking that FIL will desist from doing any business either directly or indirectly or in association with any other person, in medical diagnostic imagining save and except the subsisting arrangement FIL had with M/s Elpro Internatonal. The payment has been made since the assessee was desirous of pursuing the development of its medical diagnostic imaging apparatus and equipment business in collaboration with General Electric Co. and in the name and style of 'Wipro GE'to the exclusion of IGE and FIL. The assessee was also desirous of acquiring from IGE complete customer lists for the medical division, access to all books and records of the medical division, assistance in selecting and making offers of employment to the present IGE medical division employees including access to personnel and salary records and for assisting in the smooth transition of customer order filing and access to the transitional office and administrative facilities. It was also agreed that FIL will not engage, for a period of three years with effect from the date of the agreement, in any manufacturing, commercial and other business activity, either on their own, jointly or severally, or through any firm, company or other firm of organization owned or managed or controlled by any or all of them, save and except its existing association with Elpro International, competing with the assessee in the produce lines covered by the Medical Division in general and in the X-ray and other medical systems currently traded by IGE. Clauses 6, 7, 8, 9 and 10 of the agreement were elaborately read out to impress upon us that the payments in question were made for business consideration and purely for commercial expediency and none of these payments have resulted in acquisition or any asset of benefit of an enduring nature. The learned counsel for the assessee pleaded that the expenditure incurred during the previous year prior to actual commencement of the business and attributable to business is an allowable deduction as held by the Karnataka High Court in the case of Gopal Films v. ITO (1983) 139 ITR 566 (Kar). He further placed reliance on the following case laws :
(a) CIT v. Coal Shipments (P) Ltd. (1971) 82 ITR 902 (SC),
(b) Alembic Chemical Works Co. Ltd. v. CIT (1989) 177 ITR 377(SC)
(c) CIT v. Saurashtra Cement & Chemical Industries Ltd. (1973) 91 ITR 170 (Guj)
(d) CIT v. Tata Engineering & Locomotive Co. (P) Ltd. (1980) 123 ITR 538 (Bom)
(e) Turner Morison & Co. Ltd. v. CIT (2000) 245 ITR 724 (Cal)
(f) CIT v. Late G.D. Naidu and Ors. (1987) 165 ITR 63 (Mad)
(g) Wellman Incandescent India Ltd. v. Dy. CIT (1997) 57 TTJ (Cal) 562 : (1997) 55 ITD 338 (Cal); and
(h) Sree Annapooma Gowrishankar Hotels (P) Ltd. v. Asstt. CIT (1991) 37 ITD 541 (Mad) The learned counsel for the assessee further pleaded that the AO as well as the CIT(A) have justified the treatment of the payment as capital in the light of the principle laid down by the Andhra Pradesh High Court in the case of CIT v. Warner Hindustan Ltd. (1986) 160 ITR 217 (AP) and this decision, according to the learned counsel for the assessee has been reversed by the Hon'ble Supreme Court in the same case CIT v. Warner Hindustan Ltd. (1999) 239 ITR 566 (SC). Therefore, the learned counsel pleaded that the decision of the authorities below, on this issue, requires to be reversed.
25. The learned counsel for the assessee also pleaded that the compensation of Rs. 22,50,000 paid towards 1/3 cost of voluntary retirement of the employees of IGE, can be treated as part of recruitment cost and the same is allowable as deduction since the payment was necessitated for business considerations, The payment made towards access to information base and for the transition of customer order filing etc. was absolutely necessary for the purpose of effectively running the business of the assessee.
26. Alternatively, the learned counsel for the assessee relied upon the order of the Tribunal in ITA No. 2315/Bom/95, dt. 26th March, 1996, in the case of IGE (India) Ltd. v. Dy. CIT, wherein the same agreement, dt. 2nd April, 1990, was the subject-matter of consideration by the Bombay Bench of the Tribunal. After discussing the issue in detail, the Tribunal has accepted that 50 per cent of the payment be treated as towards business purposes, A copy of the order of the Tribunal is placed by the assessee in the paper book filed on its behalf.
27. The learned Departmental Representative, on the other hand, strongly justified the disallowance in the light of the discussions in the impugned order. He vehemently contended that the expenditure in question was not for business consideration as the payments have resulted in benefit of enduring nature to the assessee. The learned Departmental Representative further contended that any expenditure incurred for the purpose of brining a source of income to existence is capital in nature and, therefore, pleaded that the orders of the authorities below should be upheld. For this purpose, the learned Departmental Representative relied upon the decisions of the Supreme Court in the case of Jonas Woodhead & Sons (India) Ltd. v. CIT (1997) 224 ITR 342 (SC) and CIT v. Jalan Trading Co. (P) Ltd. (1985) 155 ITR 536 (SC) and also on the decision of the Madras High Court in the case of CIT v. W.S. Insulators of India Ltd, (2000) 243 ITR 348 (Mad).
28. We have carefully considered the rival submissions and gone through the record. The payments in question, are made under a tripartite agreement and such agreement was entered into in the normal course of business. The entire payment was for the benefit of the assessee's business both in the short run and in the long run. As regards the compensation paid to retrenched employees, the payment is for business consideration and it is a part of recruitment expenses. The assessee, by virtue of the agreement with IGE, got a composite package covering even the employes who were manning the medical diagnostic equipment division and approximately 2/3rd of the total strength of that division aggregating to 150 in number were taken over by the assessee and to the extent remaining 69 employees the assessee and GE together contributed Rs. 45 lakhs as subsidy for the employees who were to be allowed to voluntarily retire from service. By terminating the employees of the erstwhile company and paying compensation thereof, the assessee did not get any benefit of an enduring nature and did not acquire any capital asset at all. Therefore, in our opinion, this payment is part of regular business expenditure incurred by the assessee for the purpose of its business. The payment of Rs. 22,50,000 paid by the assessee is just like recruitment cost. The cost of recruiting the rest of the employees was necessary for the purpose of business. We, therefore, consider the compensation payment of Rs. 22,50,000 as revenue expenditure. As regards the payment made towards access to information base and for transition of customer order filing, this payment again, is for business consideration and we do not agree with the CIT(A) that the amount was paid for obtaining information useful for a long period and that the same could be treated as plant. There is no question of acquisition of any asset when the assessee made the payments and acquire the information about the customer base. That will help the assessee to carry on its business very efficiently and in a more profitable manner. The payment of Rs. 28.80 lakhs, in our view, is, therefore, a proper business expenditure allowable as deduction.
29. Now coming to the other payments made to IGE, the Bombay Bench of the Tribunal while dealing with the recipients case of IGE, has held 50 per cent to be treated as capital and the balance of 50 per cent to be treated as revenue in nature. Following the same reasoning and keeping in view the principles laid down in the case laws relied upon by the learned counsel for the assessee, which are more elaborately discussed in the order of the Tribunal, we direct the AO to allow 50 per cent of the said payment to IGE as part of the revenue expenses and the balance of 50 per cent has to be created as capital in nature.
30. The next dispute in relation to asst. yr. 1997-98 relates to deduction under Section 80HHE of the Act. The dispute can be better understood by going into the computation made by the assessee, the AO and the CIT(A). The assessee, on its part, has arrived at the profits and gains of software business at Rs. 2,86,05,614 as under:
Rs.
Rs.
"Profits and gains from software business (excluding profits eligible under s. 10A of the IT Act) 28,610,698 Add : Depreciation as per books 715,170 29,355,868 Add (a) Travelling expenses Disallowed under r. 6D 3,465
(b) Entertainment expenses (considered separately) 239
(c) Gratuity provision 19,344 22,048 29,377,916 Less : Depreciation (s. 32) 763,861 Telephone/Telex Deposit Under Tatkal 8,202 Entertainment expenditure (s. 37(2)] 239 772,303 28,605,614 (B) 90 per cent of amounts specified in Explanation
(d) to s. 80HHE Agency commission Interest Sale of Advance Licence Total Profits of the business 28,605,614 Based on the above profits, the assessee recognized the total export turnover as at Rs. 6,35,77,772. Treating the same as total turnover of the business, the assessee claimed deduction under Section 80HHE of the Act. The AO, however, arrived at the deduction under Section 80HHE in the following manner:
Rs.
"Profits & Gains from Software Business as claimed 2,86,05,614 Less : Sundry income 1,48,02,545 Balance : Other income has been Disallowed by the assessee 1,38,03,069 Deduction under s. 80HHE Export Turnover 6,35,77,722X 1,38,03,069 Total turnover 152,44,87,471 = 5,75,647"
The CIT(A), however, accepted the export turnover at Rs. 6,35,77,722 but considered the total turnover of the entire business at Rs. 1,48,55,01,543 and computed the profits of the business at Rs. 1,14,39,002 and arrived at a smaller deduction under Section 88HHE of the Act. The AO had added excise duty and sales-tax to paid to arrive at the total turnover which the CIT(A) has directed to be excluded.
31. The learned counsel for the assessee vehemently opposed the determination made by the Departmental authorities. He drew our attention to pp. 48, 49, 50 & 51 of the paper book to impress upon us to the correctness of the assessee's claim under Section 80HHE. The learned counsel contended that the Department failed to understand, the difference between the provisions of Section 80HHC and 80HHE of the Act. The total turnover referred to in Section 80HHE cannot include the global turnover of the assessee from all goods and merchandise. What is referred to in Section 80HHE is deduction in regard to profits in respect of computer software. According to the learned counsel for the assessee, the total turnover referred to therein relates to the total turnover of the computer software business both local and export. It does not take in its hold anything not connected with the computer software business. The department was, therefore, totally unjustified in including all the turnovers of the assessee not connected with the computer software business and that is the reason why the deduction claimed by the assessee is highly distorted. According to him, this is not the intention of deduction under Section 80HHE of the Act, The learned counsel for the assessee relied upon the principle laid down by the Bombay High Court in the case of CIT v. Sudarshan Chemicals Industries Ltd. and Ors. (2000) 245 ITR 769 (Bom), He drew our attention to the provisions of Section 80HHC and also Section 80HHE of the Act to impress upon us that the provisions of Section 80HHC are concerned with deduction in respect of profits arising out of export business of goods and merchandise whereas the deduction under Section 80HHE is in respect of profits from export of software. Under the very scheme of these provisions, what is to be included as total income should be those kinds of receipts which are specified under Section 80HHE, viz., computer software or its transmission and providing technical services in connection with development or production of computer software. The eligible profits of the business, for the purpose of Section 80HHE have also not been computed by the authorities below properly, the learned counsel for the assessee pointed out. He contended that the AO is not justified in reducing the sundry income while arriving at the profits and gains from software business :
32. The learned Departmental Representative, on the other hand, strongly supported the impugned orders in the light of the discussions in the order of the AO as well as the CIT(A).
33. We have carefully considered the rival submissions and gone through the record. The provisions of Section 80-HHC and Section 80-HHE, although speak of deductions with reference to profits from export business, Section 80HHC provides for deduction in respect of profits retained for export business whereas Section 80HHE deals with export out of India of computer software or its transmission from India to a place outside India by any means and providing technical services outside India in connection with the development or production of computer software. What is an export turnover is again defined in Section 80HHE(5). Identical provision in Section 80HHC(4B) deals with goods and merchandise to which that section applies whereas the provisions of Section 80HHE(5) deals with consideration received in respect of computer software received in, or brought into, India by the assessee in convertible foreign exchange in accordance with Sub-section (2). The total turnover is defined not to include freight, telecommunication charges or insurance attributable to the delivery of the computer software outside India or expenses, if any, incurred in foreign exchange in providing the technical services outside India. What essentially Section 80HHE is dealing with is with reference to the turnover of computer software. The total turnover for the purpose of Section 80HHE can only mean, the total turnover of the computer software both in India and outside India. Under the scheme of the said section, it is not correct to include any other turnover not connected with the computer software business, We are, therefore, of the opinion, that the denominator adopted by the Department is wrong and is not in accordance with the scheme of deductions under Section 80HHE of the Act. If we approve the, calculation of the Department, the very object of intending and giving deduction under Section 80HHE is likely to be defeated if the assessee is having other turnover not connected with the computer software.
34. In this connection, it would be relevant to go into the legislative intent in the insertion of the new section, i.e., Section 80HHE of the Act which may be found in (1991) 190 ITR (St) 246, which is reproduced below :
"The proposed section seeks to provide that where an assessee, being an Indian company or a person (other than a company) resident in India is engaged in the business of export out of India of computer software or its transmission from India to a place outside India by any means or in providing technical services outside India in connection with the development or production of computer software, he shall be allowed a deduction in the computation of his total income of the profits derived by him in respect of such computer software is received in, or brought into, India in convertible foreign exchange within a period of six months from the end of the previous year or such extended period as the CIT may allow in this behalf. Profits derived from the aforesaid business shall be the amount which bears to the total turnover of the business carried on by the assessee."
Therefore, the total turnover under Section 80HHE can only mean the turnover of the software business alone and the same should not be treated as to include the turnover of the company totally unconnected with the business of computer software. When the numerator speaks of turnover of software business alone, the denominator should also be of similar nature, i.e., the turnover of the company from the business of computer software. In other words, the computer software business should be treated as an independent unit for the purpose of computing deduction under Section 80HHE of the Act. This view of ours is fortified by the decision of the Bombay High Court in the case of CIT v. Sudarshan Chemicals Industries Ltd.(supra) In this regard, it would be relevant to quote from the judgment of the Hon'ble Supreme Court in the case of K.P. Varghese v. ITO and Anr. (1981) 131 ITR 597 (SC):
"A statutory provision must be so construed, if possible that absurdity and mischief may be avoided. Where the plain literal interpretation of a statutory provision produces a manifestly absurd and unjust result which could never have been intended by the legislature, the Court may modify the language used by the legislature or even some violence to it, so as to achieve the obvious intention of the legislature and produce a rational construction."
If the Department's computation is accepted, it would only result in manifest anomalies and arbitrariness, Therefore, in our view, for the purpose of deduction contemplated by Section 80HHE, the total turnover for the said section should not include turnover on account of manufacturing, trading etc. which is totally unconnected with the public software business. Therefore, in our considered view, the total turnover, for the purpose of Section 80HHE consists of turnover from computer software business and providing of technical services. Accordingly, we direct computation of deduction under Section 80HHE on the total turnover of the assessee which, in accordance with the view we have expressed, should be the basis as a denominator.
35. Adverting to the exclusion of Rs. 1,48,02,545 representing sundry income from the profit of Rs. 2,86,05,614, we find that the sundry income has been earned from other activities. Since the sundry income has not been included in the profits and gains. We hold that the profits of the software business should also be adopted at Rs. 2,86 05.614. The AO will work out the deduction on the basis of these lines. In coming to this view, we have been guided by the principles laid down by the Supreme Court in the case of Bajaj Tempo Ltd. v. CIT (1992) 196 ITR 188 (SC) wherein it has been held that the provisions in the statute have to be liberally construed.
36. The next dispute common to asst. yrs. 1991-92 to 1996-97 relates to assessee's claim for deduction under Section 80-0 of the Act. The assessee has taken several alternative grounds before us which can be better understood by extracting the tabular statement for all these years.
Asst yr.
Receipts (A) Direct Expenses (B) OR Receipts-Direct Expenses (A-B) OR Net income after deduction of direct expenses and allocated common expenses 1991-92 3059740 320100 2739640 2228663 1992-93 16577578 940200 15637378 12663361 1993-94 31993637 2085021 29908616 25346323 1994-95 500220029 2593269 47428760 40575742 1995-96 52088574 4725601 47362973 40539370 1996-97 1280461 9404197 71876264 63106102 The assessee in all these years, has claimed deduction under Section 80-0 in respect of the net foreign exchange remitted to India. The AO, upto asst. yr. 1995-96 has accepted the claim whereas for the asst. yr. 1996-97, 20 per cent of the amount claimed was reduced and on the resultant figure 50 per cent was allowed as deduction. The assessee accepted the decision of the AO and no appeal was filed on the same. The record shows that the entire issue of deduction under Section 80-0 appears to have been looked into by the CIT(A) on his own and while disposing of the appeals the CIT(A) directed the AO to recompute the deduction which has resulted in substantial reduction in the deduction allowed by the AO. This, the assessee is agitating on the ground that the order of the CIT(A) was to the effect of enhancing the income. The assessee objects to the assumption of jurisdiction by the CIT(A) for all these years, both for want of valid notice under Section 251(2) and also enhancing the income. The assessee further disputes the direction by the CIT(A) for computing the deduction afresh. The CIT(A)'s letter dt. 19th Dec,, 2000, which is placed at pp. 49 & 50 of the paper book for asst. yr. 1991-92 is extracted below.
"Sub : IT Appeal No. ITA 271/CC-IV/CIT(A)-1/98-99 Asst. yr. 1991-92-Reg.
While examining the IT records in connection with the appeal, it is noticed that your claim for deduction under Section 80-0 is erroneous.
2. You have claimed deduction under Section 80-0 to the tune of Rs. 15,29,878. The computation given at Annexure IV to the statement of computation of income filed with the return shows that the deduction claimed is at 50 per cent of Rs. 30,59,740 being the total of consideration received in foreign export services rendered during the previous year ended 31st March, 1994, given by you as follows :
Software Rs.26,21,021 Engineering Services Rs.4,38,717 Total Rs.30,59,740 The AO has allowed the claim as such in the assessment order appealed against without any discussion.
Section 80-0 provides for deduction with reference to the income and not at 50 per cent of the receipts.
The decision of Special Bench of Tribunal, Mumbai A Bench in the case of Petroleum India International v. Dy. CIT(Mum) and various High Courts of the land CIT v. M.K. Raju Consultants (P) Ltd. (1999) 239 ITR 232 (Mad) CIT v. M.N. Dastur & Co. (P) Ltd. (2000) 243 ITR 10 (Cal) Reversing the decision in the case of M.N. Dastur & Co. relied by the assessee in support of its contention for deduction at 50 per cent of receipts, (refers in this relevance) are clear that the deduction is to be computed not with reference to the receipts, but with reference to the income included in the receipts.
3. You are requested to furnish the details of expenditure incurred for the software and its export of the same and also of Engineering services along with relevant evidence. If the details, of the expenditure incurred are not submitted, I would have to work out the expenditure on a proportionate basis multiplying the total expenditure with ratio of the relevant receipts to the total turnover.
4. It is brought to your notice that the case here is claim of deduction and it is the onus of the assessee to prove that the claim is correct. The AO does not appear to have applied his mind on the relevant provisions in respect of the deduction mentioned above. Claim of deduction which is erroneous and which affect the assessment of income is a matter arising from the order in appeal. As the first appellate authority, it is within my jurisdiction to consider and decicle any matter arising out of the proceeding in which the order appealed against was passed by virtue of Section 251(1) and explanation thereunder.
5. I am hereby giving an opportunity to present your case in this matter along with necessary details and evidence supporting the same by 12th Jan., 2001. The appeal is posted for hearing at 10 A.M. on that date."
Similar letters were issued for all the other years. The learned counsel for the assessee, drawing our attention to this letter of the CIT(A), pointed out that the CIT(A) has sought for enhancement and after the letter he has not issued any notice before enhancement. Therefore, according to the learned counsel the mandatory requirement of Section 251(2) are not satisfied, and the assessee had not been given a reasonable opportunity of showing cause for any such action which results in enhancement of reduction of the relief. Reliance was placed' on the decision of the Full Bench of the Delhi High Court in the case of CIT v. Sardari Lal and Co. (2001) 251 ITR 864 (Del)(FB),' as regards want of jurisdiction in the matter. On merits, it was pointed out that the decision relied upon by the CIT(A) came much later to the date of framing the assessment which was between 1994 to 1998. The AO would not have, had the benefit of this decision. Therefore, it is wrong, on the basis of this premise, to conclude that there is a non-application of the kind in deciding the issue by the AO. The learned counsel further pleaded that the decision of the Bangalore Bench of the Tribunal in the case of M.N. Dastur & Co. Ltd v. Dy, CIT (1997) 58 TTJ (Bang) 748 : (1997) 62 TTD 113 (Bang) has been upheld by the Karnataka High Court inasmuch as reference has been dismissed on 4th June, 2001 in CP No. 580 of 1988. Consequent to this, the Tribunal is obliged to follow its own decision wherein it is held that deduction under Section 80-0 should be allowed without any artificial allocation of expenditure. The Tribunal, in the said case, has held that deduction should be allowed on the net foreign exchange remitted to India. The learned counsel further pointed out that the decision of the Bangalore Bench of the Tribunal is based on the decision reported in the case of M.N. Dastur Co. Ltd. v. Dy. CIT (1997) 61 TTD 167 (Cal). It was brought to our notice that the Calcutta High Court has since dismissed reference application filed by the Department against the above order of the Tribunal, Copies of the order of the Calcutta High Court are placed on record. Relying upon these, the learned counsel pleaded that the computation made by the AO should not be disturbed. Alternatively, it was prayed that only direct expenses incurred by the assessee, as extracted above, should alone by reduced and not any other expenditure claimed by the assessee-company. It was brought to our notice that the CIT(A) has directed allocation of even manufacturing, administrative and marketing expenses which has no relation to the income earned by the assessee. In support of this, the learned counsel for the assessee relied upon the decision of the Supreme Court in the case of CIT v. Maharashtra Sugar Mills Ltd. (1971) 82 ITR 452 (SC) another decision of the Supreme Court in the case of CIT v. Indian Bank Ltd.
(1965) 56 ITR 77 (SC) and of the Calcutta High Court in the case of CIT v. United Collieries Ltd. (1993) 203 ITR 857 (Cal). Alternatively, it was contended that the net income after deduction of net expenses and allocated common expenses should alone the basis for allowing the deduction under Section 80-0 of the Act.
37. The learned Departmental Representative, on the other hand, vehemently supported the order of the CIT(A), He submitted that the decision of the CIT v. M.K. Raju Consultants (P) Ltd. (supra) and also the decision of the Calcutta High Court in the case of M.N. Dastur & Co. (supra) support the, action of the CIT(A). According to him, the decision of the Tribunal in the case of M.N. Dastur & Co. (supra) has been overruled by the Special Bench. In so far as the allocation of manufacturing expenses'is concerned. He submitted, that the same was done in the absence of proper information furnished by the assessee.
38. We have carefully considered the contentions of the rival parties on the. issues at length and find that in any event, on merits, the issue has to be decided in favour of the assessee in the light of the Karnataka High Court decision. Further, the same issue was considered in detail by the Tribunal in the case of Wipro Ltd. in ITA Nos. 651/Bang/94, 521 to 523/Bang/97, etc, The Bangalore Bench of the Tribunal in the case of MM Dastur & Co. (supra) has held that deduction under Section 80-0 is admissible after reducing expenses incurred abroad to earn the income and the proportionate expenses incurred in India is not required to be deducted for computing the income of the nature referred to in Section 80-0 of the Act. What Section 80AB requires is that for the purpose of computing deduction under Section 80-0 the amount of income of that nature computed in accordance with the provisions of the Act shall alone be deemed to be the amount of income of that nature which is derived or received by the assessee. Thus, in our opinion, only the direct expenses incurred by the assessee in earning the income of the nature referred to in Section 80-0 is required to be deducted. There is no scope for reducing the income by estimating certain expenses as would have been incurred for earning such income. We, therefore, hold that the direct expenses alone are required to be reduced from the gross receipts stated to be amount realized in convertible foreign exchange and, on the balance amounts, the amount is eligible for deduction at 50 per cent of such income. No estimated expenditure relatable to off shore revenue is to be deducted from such receipts for computation of deduction under Section 80-0, The AO is directed accordingly.
39. As regards the assessee's contention regarding the validity of the enhancement proceedings before the CIT(A), although we have serious reservations about the way the CIT(A) has proceeded to give these findings, without issuing a preliminary notice of hearing to the assessee as required under Section 251(2) of the Act, we are not inclined to expressly go into the same since the assessee succeeds on merits. This does not, in any way, mean that we are giving our approval to the methodology adopted by the CIT(A) in drawing these proceedings which have ultimately resulted in enhancement of the income.
40. In the result, all the appeals are to be treated as partly allowed.