Income Tax Appellate Tribunal - Pune
Deputy Commissioner Of Income-Tax,, vs Daimler Chrysler India Pvt. Ltd.,, Pune on 8 August, 2018
आयकर अपीलीय अिधकरण,
अिधकरण पुणे यायपीठ "ए
ए" पुणे म
IN THE INCOME TAX APPELLATE TRIBUNAL
PUNE BENCH "A", PUNE
ी डी.
डी क णाकरा राव , लेखा सद य
एवं ी िवकास अव थी,
अव थी याियक सद य के सम
BEFORE SHRI D.KARUNAKARA RAO, AM
AND SHRI VIKAS AWASTHY, JM
आयकर अपील सं. / ITA No.1381/PUN/2003
िनधा रण वष / Assessment Year : 1998-09
Daimler Chrysler India Private Limited,
(Formerly known as Mercedes Benz India Ltd.,)
Section 15A, Chikhali Village,
Pimpri, Pune - 411 018
PAN : AABCM1789L .... अपीलाथ /Appellant
Vs.
DCIT, Circle-8,
Pune .... यथ / Respondent
आयकर अपील सं. / ITA No.1325/PUN/2003
िनधा रण वष / Assessment Year : 1998-09
DCIT, Circle-8,
Pune .... अपीलाथ /Appellant
Vs.
Daimler Chrysler India Private Limited,
(Formerly known as Mercedes Benz India Ltd.,)
Section 15A, Chikhali Village,
Pimpri, Pune - 411 018
PAN : AABCM1789L .... यथ / Respondent
C.O.No.50/PUN/2004
(Arising out of ITA No.1325/PUN/2003
A.Y. 1998-1999
Daimler Chrysler India Private Limited,
(Formerly known as Mercedes Benz India Ltd.,)
Section 15A, Chikhali Village,
Pimpri, Pune - 411 018
PAN : AABCM1789L .... Cross Objector
Vs.
DCIT, Circle-8,
Pune .... Respondent
Assessee by : Shri Pramod Achuthan
Revenue by : Shri Rajeev Kumar, CIT
सुनवाई क तारीख / घोषणा क तारीख /
Date of Hearing : 18.06.2018 Date of Pronouncement: 08.08.2018
2
आदेश / ORDER
PER D. KARUNAKARA RAO, AM :
There are 3 appeals under consideration for the common A.Y. 1998-1999. ITA Nos.1381 and 1325/PUN/2003 are the cross appeals filed by the assessee and the Revenue. C.O. No.50/PUN/2004 is filed by the assessee.
2. The issues raised in the Cross Objection are identical to the issues raised in the appeal of the assessee. Therefore, as per Ld. Counsel for the assessee, the cross objection filed by the assessee becomes infructuous. Accordingly, the said C.O. is dismissed as such. That leaves the Cross appeals filed by the assessee and the revenue for adjudication.
3. The grounds raised by the Revenue as well as the Assessee in the appeals are extracted here as under :
Grounds by Revenue :
"1. On the facts and in the circumstances of the case, the Ld.CIT(A) erred in deleting the addition of Rs.37,80,388/- made on account of relocation expenses, as it is in the nature of enduring benefit to the assessee and does not partake the character of revenue expenditure.
2. On the facts and in the circumstances of the case, the Ld.CIT(A) erred in deleting the disallowance of Rs.47,71,593/- made out of travelling expenses, as it is not verifiable that the entire expenditure has been incurred wholly and exclusively for the purpose of assessee's business.
3. On the facts and in the circumstances of the case, the Ld.CIT(A) erred in deleting the entire addition of Rs.10,000/- lakhs (sic) made out of telephone expenses since the personal use of telephone cannot be ruled out.
4. The order of the CIT(A) may be vacated and that of the AO be restored.
5. The appellant craves leave to add, amend or alter any of the above grounds of appeal."3
Grounds by Assessee :
"1. On the facts and in the circumstances of the case the CIT(A)-III, Pune has erred in :
1. Disallowing Rs.12,55,52,666/- towards portion of the Technical Know-how expenses paid in kind and claimed by the assessee under section 35AB of the Income Tax Act, 1961.
2. Disallowing expenditure of Rs.9,79,25,959/- in respect of write off CWIP due to discontinuation of MB car model series W 124
3. Disallowance Rs.25,600/- paid towards membership fee of Poona Golf Club & Hyatt Regency New Delhi, paid for Managing Director & other executives as expenditure not for the purpose of business.
4. The appellant craves leave to add, amend or alter any of the above ground(s) of appeal.
5. The appellant may be given an opportunity for personal hearing before deciding the issue."
4. Briefly stated relevant facts are that the assessee is engaged in the business of manufacture and sale of Mercedes Benz passenger cars in India. Assessee filed the return declaring loss of Rs.85.28 crores (rounded off). At the end of the assessment proceedings u/s.143(3) of the Act, the AO reduced the said loss. The assessee's loss is determined at loss of Rs.54,90,17,409/-. AO made various additions and the details of additions are extracted here as under :
Net loss as per Profit & Loss A/c. 124,61,48,833 Profit on sale investment 28,45,218 Add : i) Depreciation as per books 284,812,204 ii) Wealth Tax 2,291,391 iii) Product warranty expenses 30,656,095 iv) Misc. expenses written off 5,037,402 v) Leave Equalization reserve 2,02,71,804 vi) Provision for gratuity 7,82,750 vii) Cash payment 40A(3) 51,622 viii) Custom duty payable 4,15,19,739 ix) Provision for bad debts 1,08,67,587 x) Provision for write off on 19,13,60,149 material/finish goods √ xi) Excess interest provision reversed 1,72,87,043 xii) Donation 35,500 xiii) Stamp/Registration charges on 68,47,448 increase in share capital xiv) Provision for unrealized loss on 1,76,52,992 Foreign Exchange 4 xv) Assets written off √ 4,98,93,086 xvi) Disallowance Capital Loss 9,79,25,924 xvii) Loss on sale of assets 1,76,88,375 xviii) Reallocation of expense √ 37,80,388 xix) Interest payment of Daimler Benz 2,32,28,218 xx) Renovation expenses 21,78,402 xxi) Payments to clubs √ 1,67,600 xxii) Out of travelling expenses √ 47,71,593 xxiii) Out of telephone expenses √ 10,00,000 83,01,07,312 41,60,41,521 Add : Depreciation 9,56,75,000 Deduction u/s.35D 81,966 Deduction u/s.35AB √ 3,63,88,653 Warranty expenses 36,75,487 13,58,21,106 Business Income/Loss 55,18,62,627 Income from short term capital gain 28,45,218 Total income/loss 54,90,17,409
√ : denotes the disputed additions in these cross appeals.
Out of the above additions, the additions u/s.35AB of the Act, write off of capital work in progress qua Mercedes Benz India's Car of Model W124, club expenses, relocation expenses, other adhoc disallowances on account of travel and telephone expenditure are the contentions/issues before the Tribunal by both the parties.
5. During the First Appellate proceedings, assessee raised various issues and the CIT(A) partly allowed the appeal of the assessee. While the issues relating to disallowance u/s.35AB of the Act, capital work in progress and the club expenses are decided against the assessee, the other issues on account of relocation expenses, adhoc expenses on account of travel and telephone expenses are allowed in favour of the assessee. Accordingly, both parties are in appeal by virtue of the cross appeals before the Tribunal.
6. We shall take up the appeal-wise adjudication in the following paragraphs. Firstly, we take up the appeal of the Revenue. 5 ITA No.1325/PUN/2003 - By Revenue
A.Y. 1998-1999
7. From the grounds extracted above, there are three issues which are agitated by the Revenue and summarized as under :
a. Deletion of disallowance of relocation expenses made by the AO considering the same to be personal expenses.
b. Deletion of adhoc disallowance of travelling expenses made by the AO considering the same to be non-business expenditure. c. Deletion of adhoc disallowance of telephone expenses made by the AO considering the same to be non-business expenditure.
Issue-wise adjudication
8. Disallowance of relocation expenses amounting to Rs.37,80,388/-: The facts relating to that the assessee employs specialists/expatriates in various fields from Daimler Chrysler Project Consultant (DCPC). There is an agreement in this regard. According to the agreement, assessee is under contractual obligation to pay the expenses on travel to the said specialists/expatriates and their families as well as transportation of their furniture etc. to and fro from India. These expenses which are borne by the assessee are in the nature of salary paid to the expatriates. These payments are taxable in their hands according to the provisions of the Income Tax Act. The expenses incurred on travel and transportation constitutes Revenue expenditure. Therefore, the same is debited to the profit and loss account as they are incurred wholly and exclusively for the purpose of business of the assessee. However, the AO did not allow the said claim for want of evidence and held that in the absence any material evidence to show that the same were incurred wholly and exclusively for the purpose of business, the same constitutes personal expenses. However, during the First Appellate proceedings, assessee furnished requisite information 6 before CIT(A). On perusal of the same and considering the submissions of the assessee, the claims of the assessee were allowed in favour of the assessee. In the process, the CIT(A) relied on the finding of his predecessor for the subsequent A.Y. 1999-2000. Aggrieved with the relief granted by the CIT(A), the Revenue is in appeal before us with the grounds extracted above.
9. Ld. DR for the Revenue relied on the order of AO dutifully.
10. Before us, at the outset, Ld. Counsel for the assessee filed written submissions stating that the decision of the CIT(A) in granting relief to the assessee on this account for the A.Y. 1999-2000, was affirmed by the ITAT in its order dated 31-03-2009. Copy of the said order is placed in pages 1056 to 1062 of the paper book. In the written submissions, assessee submitted that similar claim was allowed in the subsequent assessment years 2001-02 and 2002-03 as Revenue expenditure. In this regard, Ld. Counsel for the assessee pleaded for confirming the relief granted by the CIT(A) on the issue of enduring benefit of relocation expenses as Revenue income.
11. On hearing both the sides on this issue, we perused the order of Tribunal in assessee's own case in ITA No.936/PN/2003 and C.O.No.27/PN/2004, dated 31-03-2009 for the A.Y. 1999-2000. The Tribunal vide the discussion given in Para No.5 of the said order dismissed the ground raised by the Revenue and held the issue in favour of the assessee. Therefore, we find it appropriate to extract the finding given by the Tribunal here as under :
"5. We have heard both the parties and perused the materials available on record. It is seen that the assessee incurred the relocation expenses in respect of experts coming from abroad to work with it for a period of 2 to 3 year and travelling and the expenses relating to transfer, lodging and boarding were borne by the assessee as per the agreement 7 of service employment with such experts. These expenses were for the purpose of business and were part of the cost of employees services. No enduring benefit had accrued to the assessee either in the capital field and there was no creation of any capital asset nor it affected the fixed capital of the assessee. The experts who came for the period of 2 to 3 years returned after the contract period was over. Therefore, it is not correct to say that any enduring benefit accrued to the assessee which could be held as disallowable as capital expenditure. The services of such experts were undertaken only for the contact and improvement of the business. In this view of the matter, we do not find any infirmity in the order of the CIT(A) in deleting the impugned addition. The ground No.1 raised by the revenue is thus rejected."
Revenue has not brought anything on record to demonstrate the facts of the issue for the year under consideration are anyway different. Considering the above, we are of the opinion that the order of CIT(A) is fair and reasonable and it does not call for any interference. Accordingly, Ground No.1 raised by the Revenue is dismissed.
12. Issue No.2 relating to adhoc disallowance on account of Travel expenses - Rs.47,71,593/- and Telephone Expenses (Rs.10,00,000/-). Facts relating to this issue include that the assessee claimed traveling expenses and conveyance expenses amounting to Rs.47,71,593/- and debited the same to the profit and loss account. AO found the absence of third party vouchers and therefore, on adhoc basis, i.e., 10% of the claim, was disallowed. Similarly, out of telephone expenses claimed amounting to Rs.1,84,14,978/-, an adhoc sum of Rs.10 lakhs was disallowed. In the First Appellate proceedings, the CIT(A) granted relief relying on the order of his predecessor in the assessee's own case for the A.Y. 1999-2000.
13. Ld. DR for the Revenue relied on the order of the AO.
14. Before us, Ld. Counsel for the assessee submitted that the claim of expenditure on account of travelling expenses/conveyance expenses as well as the telephone expenses are genuine and adopting the adhoc manner of making disallowance is unsustainable in law. He submitted 8 that the assessee has scrupulously maintained the requisite evidences after due process of internal audit system and therefore, no disallowance is called for on this account. The fact that Tribunal disapproved the manner of making such disallowance in the assessee's own case for the A.Y. 1999-2000 was demonstrated by bringing our attention to the decision of Tribunal, copy of which is placed at pages 1056 to 1062 of the paper book.
15. After hearing both the sides and on perusal of the order of Tribunal in assessee's own case for the A.Y. 2009-10 (supra), we find the Tribunal has not approved the system of making adhoc disallowance adopting the flat rate of 10%. Contents of Para No.9 of the order of Tribunal are relevant. For the sake of completeness, the said para is extracted as under :
"9. We have heard both the parties and perused the material available on record. It is seen that all the expenses were incurred for the purposes of business and the details thereof were furnished before the AO. The expenses were booked against vouchers which were duly supported by tickets and other bills incurred by the employees of the company for the purpose of travelling. The AO has not pointed out any instance as to in which sit could be termed as personal or not incurred for the purpose of business. The adhoc disallowance of 10% was arbitrary and without any basis. The assessee is a private limited company having large turnover and for that reason and considering the nature of business of the assessee the expenses on travelling are also quite large. In such a situation, adhoc disallowance is not called for. The AO has not found even a single instance to show that any part of the travelling expenses was not incurred for the purpose of business. In this view of the matter, we do not find any infirmity in the order of the CIT(A) in deleting the impugned addition."
Revenue has not brought anything on record to demonstrate the facts of the issue for the year under consideration are anyway different. Considering the above, we are of the opinion that the assessee's claim for allowing the travelling and conveyance expenses is allowed in favour of the assessee. To that extent, the order of CIT(A) is fair and 9 reasonable and it does not call for any interference. Ground No.2 raised by the Revenue is dismissed.
16. Further, the issue of adhoc disallowance on account of telephone expenses, is raised for the first time in this year. AO made disallowance of a portion of expenditure on adhoc basis. There is no finding of fact why such disallowances are called for in this assessment year, when the claim of the assessee is allowed in the earlier assessment years. However, it is the claim of the assessee before us that the very fact the manner of making disallowance on adhoc basis is not approved by the Tribunal, therefore, the approach of the AO resorting to such adhoc disallowance of the claim on account of telephone expenses should also be not approved by the Tribunal.
17. On hearing both the sides, we find it relevant to extract the finding of CIT(A) given in Para No.8.3 of his order and the same is reproduced as under :
"8.3 The submissions have been considered. I agree with the Appellant's Representative that the adhoc disallowance is not supported by any material to show that any such part of the expenses was not incurred for the personal use. Similar issue was considered in the appellant's own case for A.Y. 99-00 (supra) and disallowance made by the Assessing Officer was deleted. The fact being similar, following that decision, the addition is deleted."
Considering the above of the Tribunal against the adhoc disallowance in assessee's own case and the decision of CIT(A) on this issue, we are of the opinion that the disallowance made by the AO on this telephone expenses cannot be sustained. Accordingly, Ground No.3 raised by the Revenue is dismissed.
18. In the result, the appeal of the Revenue is dismissed. 10
We shall now take up the appeal of the assessee.
ITA No.1381/PUN/2003 - Assessee
A.Y. 1998-1999
19. Following issues need adjudication in this appeal :
a. Denial of deduction u/s.35AB of the Act in relation to technical know- how fees paid in kind.
b. Disallowance of expenditure in relation to write off of capital work in progress (CWIP) due to discontinuation of MB India Car Model W 124. c. Disallowance of payment towards membership fees for Poona Golf Club and Hyatt Regency New Delhi, for Managing Director and other executives of the company considering the same as non-business expenditure.
Issue wise adjudication :
20. Denial of Claim of deduction u/s.35AB of the Act - Facts :
Regarding the denial of deduction u/s.35AB of the Act in relation to the technical know-how fees paid in kind amounting to Rs.12,55,52,666/-, the background facts include that the assessee was incorporated on 22-11-1994. Assessee (DCIPL) also called as MB-India or MBIPL is a joint venture involving Daimler Benz AG (DBAG) and Tata Engineering and Locomotive Company Ltd. (TELCO) at the time of incorporation. As per the Joint Venture agreement, the 'Contribution Agreement' was entered in June 1994 between Daimler Benz AG, Mercedes Benz AG (MBAG) and TELCO. According to which, MBAG-a subsidiary of DBAG, was to provide DCIPL the Indian Company, the technical know-how for manufacture of passenger cars in India. DBAG had an option to convert the sum payable by DCIPL as its capital contribution.
Accordingly, being the Ist installment, DBAG the Panchayat Germany was allotted 3,72,42,800 equity shares worth Rs.37,24,28,000/- (DM 18.8 million) in November 1995. In this connection, the AO granted 11 NOC for such allotment and the TDS amounting to Rs.8.05 crores (rounded off) was done as per the rules on the said allotment. A TDS certificate was issued in the name of MBAG who supplied the technical know-how to the assessee. Subsequently, the second instalment was recorded as payable in the A.Y. 1996-97 and allotted shares worth Rs.42.30 crores. In this connection, assessee made TDS of Rs.8.43 crores (around) as per the rules in this regard. It was informed that two other instalments of the payment were waived. A table showing the details of payment of instalments and the quantitative details of Rs.16,19,41,319/- is given as under :
Particulars First Instalment Second Total (Rs.) (Rs.) Instalment (Rs.) Shares allotted 37,24,28,000 42,30,00,000 79,54,28,000 TDS 8,50,13,600 8,43,36,800 16,93,50,400 Less : TDS refund (1,05,28,000) -- (1,05,28,000) R&D Cess 2,36,14,680 2,53,66,840 4,89,81,520 Total 47,05,28,280 53,27,03,640 1,00,32,31,920 The total amount of Rs.1,00,32,31,920 was claimed as a deduction over the assessment years AY 1995-96 to AY 2001-02 AY Deduction Deduction Deduction under Claimed (Rs.) Allowed (Rs.) dispute (Rs.) 1995-96 8,01,76,046 8,01,76,046 0 1996-97 16,89,59,987 3,63,88,653 13,25,71,334 1997-98 16,89,59,987 3,63,88,653 13,25,71,334 1998-99 16,19,41,319 3,63,88,653 12,55,52,666 1999-00 16,72,05,320 3,46,33,986 13,25,71,334 2000-01 16,72,05,320 3,46,33,986 13,25,71,334 2001-02 8,87,83,941 1,82,83,944 7,04,99,997 Total 1,00,32,31,920 27,68,93,921 72,63,37,999
21. In the year under consideration, assessee claimed deduction in respect of technical know-how fee u/s.35AB of the Act amounting to Rs.16,19,41,319/- for the A.Y. 1998-99 in the return of income filed u/s.139(1) of the Act (Ref. table above). Out of this amount, Rs.3,63,88,653/- was paid by way of TDS and there is no dispute about 12 the allowing of claim of deduction in this regard. However, the balance amount of Rs.12,55,52,666/- (Rs.16,19,41,319 - Rs.3,63,88,653) in the subject matter of litigation now. During the assessment proceedings, the said manner of payment towards the liability of technical know-how supplied by MBAG to assessee was not accepted by the AO. AO is of the opinion that the said allotment of shares towards capital contribution in DCIPL-the Indian company, does not amount to expenditure at all to become eligible for claim of deduction u/s.35AB of the Act. AO relied heavily on the judgment of Hon'ble Supreme Court in the case of CIT Vs. EIMCO & KCP Ltd. 242 ITR 659. CIT(A) upheld the said disallowance following his order later for the A.Y. 1999-2000.
22. Status of similar issue in earlier A.Yrs. (A): An attempt was made by the Revenue to deny the claim us.35AB of the Act in the A.Yrs.
1995-96, 1996-97 and 1997-98 either under the provisions of section 148 or u/s.263 or u/s.154 of the Act, as the case may be. In all these 3 years, the proceedings were quashed for one reason or the other on technical grounds. In effect, this issue is not yet decided conclusively by the Tribunal or any other judicial body on merits. Therefore, the issue raised in this year requires to be adjudicated for the first time on merits.
(B) Further, it is also relevant to note that similar addition was made in the A.Y. 1999-2000 and the matter reached the Tribunal. The Tribunal remanded the issue to the Revenue authorities. In the second round of the proceedings, the issue again reached the Tribunal, which will have to be decided based on the outcome or the issue in this assessment year. Further also, it is mentioned that AOs continued to deny the claim of deduction for the later A.Yrs. 2000-01 and 2001-02 too.
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23. During the Assessment/First Appellate proceedings, as evident from the orders of the AO and the CIT(A), it is evident that the claim of the assessee is not allowed for the reason that the allotment of equity shares towards the liability does not amount to "paid" and further, such squiring up of liability falls short of the meaning of the expression "lump sum consideration" or it does not amount to "consideration" too. It is the reasoning of the AO that the allotment of shares does not amount to incurring of any expenditure or payment of lump sum consideration. Consequently, as per AO, the assessee is not entitled to deduction u/s.35AB of the Act on account of technical fee for transfer of technical know-how. AO relied heavily on the judgment of Supreme Court in the case of CIT Vs. EIMCO & KCP Ltd. (supra). Further, the CIT(A) dismissed the appeal of the assessee on this issue after considering the submissions made by the assessee's counsel before the CIT(A)/AO in connection with the adjudication of the same issue in A.Y. 1999-2000. (Para 2 and its other paragraphs are relevant). Nothing much is discussed by the CIT(A) in his order for this year.
"2.2 The Appellant's Representative reiterated the arguments given before the Assessing Officer and this issue was also decided in appeal in respect of A.Y. 1999-2000 in the case of the appellant vide appellate No. dated and the issue was considered against the appellant and the disallowance made by the Assessing Officer was confirmed. Following that order being on the same issue the disallowance made by the Assessing Officer is confirmed and the ground of appeal is rejected."
24. Aggrieved with the same, the assessee is in appeal before the Tribunal.
BEFORE THE TRIBUNAL
25. AR's Arguments : Shri Pramod Achuthan, Ld. Counsel for the assessee along with his partners appeared before us and filed a written 14 note on this issue giving various propositions. To sum up, it is the case of the Ld Counsel for the assessee was critical of AO relying on the judgment of Supreme Court in the case of CIT Vs. EIMCO & KCP Ltd. (supra) and held that the same is inapplicable to the facts of the present case. According to Ld. AR, therefore, the claim of the assessee should be allowed.
Further, referring to the judgment of Bombay High Court in the case of CIT Vs. Paul Brothers 216 ITR 548, Ld. Counsel for the assessee submitted that when the claim of deduction u/s.35AB is undisturbed in the first assessment year of the claim of deduction u/s.35AB of the Act, the AO cannot disturb the similar claim in the subsequent years. On merits of the provisions of section 35AB of the Act, Ld. Counsel analysed the provisions of the said section and mentioned that the meaning of expressions "paid" and "lump sum consideration" are met in substance. Further, differentiating the expressions, i.e. "expenditure" and "consideration", Ld. Counsel submitted that the expression "consideration" is not similar in meaning to the "expenditure" as referred to by the AO in his order. Expanding the same, Ld. Counsel submitted that "expenditure" restricts itself to something; whereas the expression "consideration" can be in the nature of mandatory payment or Act or Abstinence from doing something at the desire of the parties. He also relied on the judgment of Supreme Court in the case of Chandroji Rao Vs. CIT 77 ITR 743 which differentiates the terms "expenditure" and "consideration". Applying the same principle to the facts of the present case, Ld. Counsel for the assessee submitted that the expression "consideration" is already defined by the provisions of section 2(d) of the Indian Contracts Act, 1872 and submitted that the word "expenditure" is undefined. He also drew our attention to the 15 provisions of section 269A of the I.T. Act and submitted that the "apparent consideration" is defined and the said definition helps the assessee's line of arguments. On the meaning of "consideration" qua the Indian Contracts Act, 1872, Ld. Counsel relied on various decisions which are extracted in para 27 of the written note. Ld. Counsel relied on the judgment of Supreme Court in the case CIT Vs. Nainital Bank Ltd. 62 ITR 638 stating that the term "expenditure" includes the payment in kind. It is the argument submitted before us without prejudice to the other arguments. In this regard, stating that the provision of section 35AB of the Act, being a deduction provision needs to be interpreted liberally and for this, Ld. Counsel relied on the decision of Delhi Bench of the Tribunal in the case of All India Lakshmi Commercial Bank Officer's Union and others 150 ITR 1 for the proposition on liberal interpretation. He further submitted the heading of section 35AB of the Act states "Expenditure and know-how" and there is no such requirement in the section that what can be deducted has to be necessarily "expenditure". The term "consideration" used in section 35AB of the Act is understood to have a wider meaning than "expenditure". He submitted that, while expenditure restricts itself to something which is paid out of the pockets of the assessee, the 'consideration' can be in the nature of monetary payment or any act or abstinence from doing something at the desire of concerned parties. He further submitted that the term "consideration" would include payment in kind and swapping of shares for the liabilities. For this proposition, he relied on various decisions. H submitted that meaning of the term "lump sum" used in section 35AB of the Income Tax Act include payment of consideration in instalments if the same is fixed upfront and relied on various decisions.
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Further, Ld. Counsel relied on the decision of Pune Bench in the assessee's own case for the A.Yrs. 1996-97, 1997-1998 and mentioned that the Tribunal made some references to the issues under consideration though the re-assessment orders/revisions orders was quashed on technical grounds. Ld. Counsel mentioned that, in the context of the observation of the Tribunal in own case, it is simply a method of accounting, mode of payment the allotment of shares to clear the debt definitely has not changed the character of payment of "lump sum consideration" (para No.37 of the written note) paid for acquisition of the technical know-how. Therefore, the claim of deduction u/s.35AB of the Act is allowable.
Further, on the application of Supreme Court judgment in the case of CIT Vs. EIMCO & KCP Ltd. (supra), Ld. Counsel submitted that the said judgment is inapplicable to the facts of the present case and the details are given in Para No.39 and 40 of the written note. He also furnished rebuttal to the conclusions in the order of CIT(A) for the A.Y. 1999-2000 in his note.
Referring to the expression term "Paid" used in the sub-section (1) of section 35AB of the Act, Ld. Counsel for the assessee submitted that the said expression was defined in section 43(2) of the Act, which means "actually paid" or incurred according to the method of accounting upon the basis of which profits and gains are computed under the head Profit and Gains of Business or Profession". Referring to the provisions of section 35ABA of the Act, Ld. AR further submitted that wherever the legislature intended the payment by transfer of money, it has provided so, i.e. 'actually paid' and, in absence of such specific language the provisions of section 35AB of the Act cannot be interpreted against the 17 assessee. Applying the said definition, Ld. Counsel reasoned that the moment the shares are allotted by the assessee to clear the debt, the payment is completed and therefore, it is a case of "actually paid" and in that case, the conditions specified in the sub-section (1) of section 35AB stands met. Further, elaborating the term "Paid", Ld. Counsel for the assessee relied on the Bombay High Court Judgment in the case of CIT Vs. Raymond Ltd., judgment of Karnataka High Court in the case of Amco Power Systems Ltd.(supra) and the decision of Pune Bench of the Tribunal in the case of Kalyani Steels Ltd. DCIT 59 TTJ 316 (Pune). Ld. Counsel for the assessee made the following prayer :
"Further, where accounts are settled by way of entries in the books of accounts and not 'actually paid by way of money', the same should also be treated as 'paid' or incurred'. In this regard, reliance is placed on the decision in case of Teletherm Instruments Co (P.) Ltd. Vs ACIT (1993) 45 ITD 203 (Mad) (refer page 981 to 984 of the Paper Book) where the definition of the term 'paid' as given under section 43(2) was applied in the context of section 35AB to mean that on execution of the agreement entire amount can be said to have been 'paid' as per the mercantile method of accounting.
Hence, based on the aforesaid judicial precedents, it is our humble submission that the term 'paid' does not require actual payment in cash. The term 'paid' includes even incurrence of liability as per the mercantile method of accounting and the same also includes adjustment by way of accounting entries without actual cash outflow. Accordingly, where the liability towards technical know-how fee is incurred by MB India upon signing the technical know-how agreement with MBAG, and further the said liability is settled by issuing shares to DBAG, the same should be considered to have satisfied the term 'paid' for section 35AB."
It is the argument of the Ld. Counsel for the assessee that, by allotment of shares, by the assessee to Daimler Benz AG at the instance of MBAG who supplied the technical know-how to the assessee as per the contractual agreement, the conditions relating to the "lump sum consideration" and "paid" are met. Therefore, the claim of the assessee relating to deduction u/s.35AB of the Act is allowable. 18
Further, he submitted that these provisions of section 35AB of the Act, being beneficial one there is a requirement of interpreting the provisions in favour of the assessee. For this proposition, he relied on the following judgmental laws :
1. Bajaj Tempo Ltd. Vs. CIT 196 ITR 188
2. CIT Vs. M/s.Vegetables Products Ltd. 88 ITR 192
3. Gannon Dunkerly & Co. Ltd. Vs. CBDT 159 ITR 162 (Bom.) Ld. Counsel for the assessee submitted that once the assessee incurs any cost towards acquisition of know-how, the deduction for the same was always intended to be allowed to the assessee. In this regard, he referred to amendment of section 32 by the Finance Act, 1998 which allows the depreciation on the intangible assets, such as know-how acquired on or after 01-04-1998. He submitted that the MB India issued shares in lieu of genuine pre-existing debt and the same should be considered for consideration in cash. In this regard, he submitted that, as per the Company Law provisions, the issue of shares against a genuine debt is held to be "issue of shares for cash".
Ld. Counsel further submitted that mere discharge of liability by way of allotment of shares would not change the character of lump sum consideration "paid" for acquisition of technical know-how. Ld.Counsel relied on the decision of ITAT, Pune in the assessee's own case for the A.Yrs. 1996-97 and 1997-98.
Ld. Counsel distinguished the decision relied on the Revenue authorities for denying deduction u/s.35AB of the Act in the case of CIT Vs. EIMCO KCP Ltd. 242 ITR 659 (SC). The reasons are given below :
a. In the EIMCO case the assessee claimed the deduction under section 37(1) whereas in MB India's case, the deduction is claimed under section 35AB which was introduced later in the point of time due to change in intention of the Government (to attract flow of technology into 19 India) to allow deduction for such payments.
In MB India's case, the transfer of technical know-how for consideration (between MB India and MBAG) and allotment of shares (by MB India to DBAG) are two separate transactions entered after incorporation of the company. However, in EIMCO where there was only a single transaction I obligation of contribution of capital by the subscribers, which was made by EIMCO by way of contribution of technical know-how. b. Supreme Court decision in EIMCO was in the context of deduction under section 37, which required an item to be "expenditure" in order to be deducted as compared to words "Iumpsum consideration" used in section 35AB which is wider than the term "expenditure" . c. It should be noted that in MB India's case, it was much after incorporation and date of the technical know-how agreement that Daimler Benz AG exercised its option to contribute to share capital in kind by taking over MB India's liability to MB AG towards technical knowhow. However, in case of EIMCO, the subscribers to the memorandum of association at the very outset agreed that share capital would be contributed in kind as a part of subscription capital. d. Reliance is also placed on the judicial pronouncement of the Hon'ble Delhi High Court in the case of Commissioner of Income Tax vs Reinz Talbras Pvt. Lid. (2001) 252 ITR 637 (Del) (refer page 968 to 970 of the Paper book). While interpreting the ratio of EIMCO decision, the Hon'ble High Court held that the amount attributable to technical know- how which is discharged by way of issue of shares by a new company was not revenue expenditure, but it is to be treated as capital expenditure. Thus, the Delhi HC has not treated technical know-how as contribution towards share capital but a capital expenditure. e. Hon'ble ITAT in MB India's own case for AY 1996-97 and AY 1997-98 has also rightly observed that the Supreme Court decision in EIMCO (supra) is not applicable to the facts of MB India. f. Hon'ble Madras High Court in EIMCO's case itself refers to payment of technical know-how as a consideration in two separate places in its order.
He further submitted that AO issued NOC to MB India Ltd., in order to issue equity shares towards remittance of technical know-how fees. Thus, the AO agreed to pay the technical know-how fees by way of issue of equity shares. Also, MB India Ltd. deducted requisite taxes at source while making the said payment. The fact of deduction of TDS evidences the same.
Ld. Counsel referred to the Budget Speech 1985 for explaining the purpose of provisions inserted by Finance Act, 1985 and relied on 20 couple of decisions. Thus, Ld. Counsel for the assessee prayed for allowing deduction u/s.35AB of the Act to the assessee.
26. DR's Arguments : Per Contra, Ld. DR for the Revenue made the following submissions :
"3. The first installment of this lump sum consideration for the technical know-how was payable in MB India's books in the FY 1994-95, i.e. AY 1995-96 and Daimler AG opted to contribute this sum payable by MB India to MBG as its capital contribution and accordingly, was allotted 3,72,42,800 equity shares on 27th November, 1995 (i.e. AY 1996-97). The second installment of this lump sum consideration for the technical know-how was payable in MB India's books in the FY 1995-96 i.e. AY 1996-97 and Daimler AG opted to contribute this payable by MB India as its capital contribution and accordingly was allotted 4,23,00,000 shares on 16th March, 1996, i.e. AY 1996-97.
4. MB India claimed deductions u/s 35AB of the IT Act for Rs.16,72,05,320 for the AY 1999-2000 out of which Rs.13,25, 71,334/- was disallowed and Rs.3,46,33,986/ - paid in cash was allowed.
5. The contention of the Assessing Officer(now referred as AO) was that technical know-how fees discharged by way of allotment of shares does not amount to 'expenditure' in view of the decision of the Hon'ble Supreme Court in the case of EIMCO K.C.P. Ltd. V. CIT [2000] 109 Taxman 151(SC). Thus the Revenue heavily relied on the above referred judgement and therefore, the reliance is placed on the orders of the AO and the Ld. CIT(A) in this regard by the undersigned.
6. The Ld. CIT(A) vide order dated 29th May, 2003 upheld the disallowance u/s. 35AB. The Hon'ble ITAT vide appeal 968/PN/03 remanded back the matter to the AO stating that adjudication on admissibility of the said deduction can only be done in the first year of the deduction. Now the first year i.e. the FY 1994-95 relevant to the AY 1995-96 the AO reopened the assessment proceedings u/s 147, which was quashed by the Hon'ble ITAT on account of technical grounds as the reassessment proceedings were not held to be valid. The contention of the Revenue therefore, is that adjudication on admissibility on deduction u/s.35AB could not be examined on merits and, therefore, deduction u/s. 35AB cannot be said to have been allowed in the AY 1995-96 i.e. the first year on merit. During the course of the hearing before the Hon'ble ITAT, the judgement of the Hon'ble Supreme Court in the case of DCIT Bangalore Vs ACE Multiaxes System Ltd. [(2017) 88 taxmann.com 69 (SC) was relied upon to make a proposition that each assessment year is a different assessment year, except for block assessment. The Hon'ble Supreme Court on the issue of liberal interpretation has held that construing liberally does not mean ignoring conditions for exemption. The copy of the impugned case law has already been submitted before the Hon'ble Bench during the course of the argument made by the undersigned.
7. During the course of the argument, the undersigned had also relied on the decision of the Hon'ble High Court of Bombay in the case of CIT vs Triumph International Finance (I) Limited [2012] 22 taxmann.com 138 (Born.) to make a proposition that where loan deposit has been repaid merely debiting account through journal 21 entries the assessee has contravened the provisions of section 269T of the Income Tax Act, 1961. During the relevant Assessment Year it was observed that instead of repaying loan and receiving sale price of shares both parties had agreed that the said amount i.e. a loan and sale consideration to be set off in their respective books by journal entries. In the impugned case before us the assessee has the technical know-how fees has been discharged by way of allotment of shares by merely entering into journal entries and therefore cannot be termed as "lump sum consideration" for payment of technical know-how as per the provision of section 35AB of the I T Act, 1961. The referred order has already been submitted by the undersigned during the course of the hearing.
8. The argument of the Ld. Counsel for the appellant that the word 'consideration' used in section 35 of the Income Tax Act, 1961 includes payment in cash or in kind is difficult to be accepted for the simple reason that heading of section 35AB itself is 'expenditure on know-how'. From the perusal of language of the section 35AB(1) which is reproduced here :
.................................
.................................
it can be clearly seen that consideration has to be paid in cash and not in kind as claimed by the appellant. The wording in the section 'paid' and amount 'so paid' is quite clear as amount cannot be used in kind.
9. The above issue is also supported by the Hon'ble High Court of Bombay in the case of CIT vs Bharat Bijlee Ltd.(2014) 46 taxmann.com 257 (Born.). The Hon'ble Bombay High Court held that consideration determined by parties in terms of allotment or issue of bonds / preferential shares was not a sale and it was a case of exchange. The copy of the judgement delivered by the Bombay High Court is enclosed."
DECISION OF THE TRIBUNAL
27. We heard both the parties on this legal issue of allowability of deduction u/s.35AB of the Act. We have also perused the written submissions as well as the case laws placed before us by both the representatives. In fact, some of the paragraphs of the written submissions from both the sides are extracted in this order considering the immediate relevant of the same. Therefore, we proceed to adjudicate this issue as per the contents in the succeeding paragraphs. A. The provisions of section 35AB : The provisions of section 35AB of the Act relating to 'expenditure on know-how is extracted here as under :
22
"35AB(1) Subject to the provisions of sub-section (2), where the assessee has paid in any previous year [relevant to the assessment year commencing on or before the Ist day of April, 1998] any lump sum consideration for acquiring any know-how for use for the purpose of his business, one-sixth of the amount so paid shall be deducted in computing the profits and gains of the business for that previous year, and the balance amount shall be deducted in equal instalments for each of the five immediately succeeding previous years."
Explaining of the provisions : The above provision provides for allowing deduction equivalent of 1/6th of the amount paid by the assessee for acquiring know-how for use for the purpose of his business in any previous year specified in the sub-section (1). The said deduction is allowable in six equal instalments on fulfillment of the basis of 'paid' and 'any lump sum consideration'. Expression 'paid' and 'so paid' becomes significant. The balance of the amount, so paid, shall be deductible in equal instalments for each of the five immediately succeeding previous years. In the instant case, the above provisions need to be applied in the factual matrix where assessee acquired the know-how from MBAG, a Germany based 100% subsidiary of the DBAG, a flagship company of the group. The consideration involved is DM 56.6 Million. After considering the sum waived of by the supplier, for unspecified reasons, the assessee was to pay DM 18.8 million before 01-04-1995. In terms of Indian Rupees (INR) the total amount payable by the assessee to the supplier of know-how is Rs.100.32 crores. Assessee discharged this liability for issuing the shares worth Rs.47,05,28,280/- in the first instalment and the shares worth Rs.53,27,03,640/- in the second instalment. Discharge of the liability did not happen in terms of actual payment of money in cash or bank to the actual supplier of the know-how. Instead, assessee allotted shares to the flagship company after making requisite TDS worth of amount Rs.17 crores (rounded off) out of total sum payable of Rs.100.32 crores. 23 This amount is credited to the Government too as per the TDS provisions. There is no dispute about it. It is not known as to why assessee did not allot shares to the supplier of the know-how, i.e. MBAG and instead, allotted the shares to the DBAG, the flagship company? Assessee could not demonstrate before us specifying the reasons as to why the assessee did not allot shares to the supplier of the know-how. It is also not known as to under what circumstances, the MBAG mandated the assessee to allot the shares to DBAG. Further, it is not known if the liability of MBAG is discharged or not till day. Ld. Counsel could not file the book entries if any on this issue in the books of account of the supplier of the know-how. In any case, the assessee failed to actually pay the money to MBAG and the liability was not discharged by way of payment of actual money to the MBAG. Further, it is also not known as to why MBAG waived of part of the consideration payable in the context of acquiring of the know-how. DM 19 million was waived of for some unknown reasons and net amount is Rs.100.32 crores only. Assessee considered the same as deduction u/s.35AB of the Act, deductible in various assessment years commencing from 1995-96 onwards. The following chart shows the transaction among MB India Ltd., MBAG and DBAG :
DBAG MBAG, Germany
(100% subsidiary of MBAG) (supplier of technical know-how)
worth
Shares allotted
Rs.100.32 cr
worth Rs.110.32
cr.
Assessee or MB India Ltd. or
DCIPL
With this legal and factual background of the issue, we proceed to explain if the expression "paid" used in the sub-section (1) of section 35AB covers this arrangement of assessee in not paying the money at 24 all to the supplier MBAG and allotting of shares equivalent of Rs.100.32 crores to the DBAG, the flagship company of the assessee. B. Meaning 'Paid', 'Actually paid' Etc.: During the proceedings before us, Ld. Counsel for the assessee submitted that the expression 'paid' used in the sub-section (1) of section 35AB is broad enough to include the transactions under scrutiny involving the element of shares to the DBAG who is not the actual supplier of the know-how. Know- how is actually supplied by the MBAG. It is an admitted fact that the assessee did not make the payment in cash/banking channels to the MBAG, the supplier of the know-how. It is also an admitted fact that the assessee did not allot any shares leave alone worth of Rs.100.32 crores to the supplier of the know-how. The allotment is done to the DBAG. Nothing is brought to our notice to demonstrate the reasons for making this kind of allotment to DBAG.
Interpreting the meaning of the expression 'paid', Ld. Counsel submitted that the said expression is generic in nature and wide enough to accommodate the above transactions under consideration. It is the case of the Ld. Counsel for the assessee that wherever the actual payment of money/banking channel is involved, the expression 'actually paid' is used in other sections of the Act. In this regard, he brought our attention to the provisions of section 35ABA, relating to 'expenditure for obtaining the right to use spectrum for rendering services'. In the section, the following expression is used when it came to allowing the claim of deduction, i.e. '..................... for which the payment has actually been made to obtain a right to use spectrum.' Further, he brought our attention to the provisions of section 43 relating to 'definitions of certain terms relevant to income from profits and gains of 25 business or profession' and submitted that clause (2) defines the term 'paid' and the same is extracted here as under :
(2) " paid" means actually paid or incurred according to the method of accounting upon the basis of which the profits or gains are computed under the head" Profits and gains of business or profession"
This definition of 'paid' is applicable to the provisions of section 35AB of the Act. Relying on various decisions including the decision of Kalyani Steels Ltd. Vs. DCIT reported in 59 TTJ 316 and others, Ld. Counsel for the assessee submitted that 'paid' means 'actually paid' or 'incurred' according to the method of accounting.
28. On the other hand, the case of the Revenue is that the expression 'paid' always means 'actually paid' or 'incurred' refers to squiring up the liabilities by way of book entries. In the assessee's case, as per the AO, the amount is not 'actually paid' to the supplier or incurred on accrual basis involving the supplier. The allotment of shares is done to the DBAG who has nothing to do with the supply of the know-how to the assessee. Further, it is the case of the Revenue that even if it is deemed as shares allotted to the MBAG, supplier of the know-how, it is a case of 'exchange' of technical know-how against the allotment of shares and the same is outside the scope of the expressions 'paid' or 'actually paid', as the case may be.
29. On hearing both the sides on the meaning of the expression 'paid', we are of the opinion that the expression 'paid' is already defined in the statute which means 'actually paid'. The use of the expression 'actually paid' in section 35ABA of the Act is necessary in the context of actual payment and not otherwise. Therefore, the expressions used in section 35AB and the expression 'actually paid' in section 35ABA has to be interpreted after considering the definition specifying the said 26 expression 'paid' in section 43(2) of the Act. If the same is considered, in our view, the shares so allotted by the assessee cannot be considered as allotted towards the liability to the MBAG, the supplier of the company. Ld. Counsel for the assessee could not demonstrate as to why the shares were allotted to the DBAG and if the said allotment was done for squaring up of any liabilities between MBAG to DBAG. On this issue, it is a failure to discharge the onus from the assessee's side. Notwithstanding the same, we also find if the allotment of shares constitute exchange of shares against acquisition of know-how. Normally, the exchange occurs between the parties with reference to the goods. It may involve money worth and certainly not the money alone. In effect, the payment becomes relevant issue only with reference to the money wherever the squaring up of the entries are involved on accrual basis, the expression 'incurred' was used in the provisions of section 43(2) relating to definition 'paid'. In the instant case, the assessee has neither paid nor allotted shares to the supplier of the know-how. Therefore, we are of the opinion that the arguments raised by the Ld. Counsel for the assessee are not legally sustainable on this issue. Accordingly, the same are dismissed.
C. Any Lump sum consideration :Coming to the meaning of the expression 'any lump sum consideration" used in the provisions of section 35AB of the Act, the assessee relies on the provisions of section 269A relating to the definition of 'apparent consideration'. The said definition was given in relation to any immovable property transferred or exchange or taken on lease etc. The same does not imply to define the expression 'any lump sum consideration' used in the provisions of section 35AB of the Act. Further, Ld. Counsel referred to the definition 'consideration vide the Contract Act, (supra) and we find the same is 27 different qua the expression 'expenditure' within the meaning of 'any lump sum consideration' if it covers the impugned transaction of allotment of shares to the DBAG, who is the sister concern. It is a case where assessee never paid money directly to the supplier of the technical know-how or allotted equivalent value of shares to the supplier. In our view, it is not a straight case of making payment/allotting shares to the supplier of the technical know-how. The expression 'consideration' is not synonymous with the word expression 'expenditure' used in section 37(1) of the Act despite the fact the title of section 35AB refers to the word expression 'expenditure'. D. Liberal Interpretation : Regarding the arguments linked to the liberal interpretation of the provisions of section 35AB of the Act, it is our observation that the said provisions are obviously deduction oriented provisions. The onus is on the assessee to demonstrate the facts leading to the applicability of the said section. As detailed in the preceding paragraphs of this order the information relating to the relationship between the DBAG and MBAG are not coming forth from across the borders. It is an admitted fact that the reasons are absent as to why the shares were allotted to the non supplier of the technical know-how. We understand had the assessee eventually allotted the shares directly to the supplier, our inference could have been different. The payment by way of allotment of shares is never to the supplier of the technical know-how in this case which makes inapplicability of the principle of liberal interpretation to the facts of the present case. The transactions between the assessee on one side and the MBAG and DBAG on other side are not transparent so far as the transactions between the MBAG and DBAG are concerned.
28E. Judgment in the case of EIMCO K.C.P. Ltd. : Further, the applicability of the decision of Hon'ble Supreme Court in the case of EIMCO KCP Ltd., reported in 242 ITR 659 (SC), we find the Ld. Counsel for the assessee is right in stating that the said decision was delivered in the context of the provisions of section 37(1) of the Act qua the 'expenditure' and the 'revenue expenditure'. Facts of this case include that the said company was floated originally by the American company as well as Indian company. The technical know-how was supplied to the Indian company against which shares were allotted by the Indian company directly to the Foreign company in lieu of transfer of technical know-how. Allotment was not for the sister concern of the American company. The facts of this case are not applicable to the case on hand where the distinguishable facts include (1) the applicability of provisions of section 35AB of the Act; (2) the shares were allotted to the other group concern (DBAG) of the supplier (MBAG) and not to the supplier of the technical know-how; (3) absence of facts/information leading the supplier of the know-how to allot the shares by the assessee company to the DBAG etc. In any case, this decision was relied upon by the AO out of context. Therefore, it is our categorical finding that the AO and the CIT(A) erred in relying on this judgment which is delivered in connection with the 'expenditure' or otherwise and the 'Revenue expenditure' or otherwise.
Further, on the application of ratio of Judgment of Hon'ble Karnataka High Court in the case of Amco Power Systems Ltd., Judgment of Hon'ble Bombay High Court in the case of Raymond Ltd. and the order of the Tribunal in the case of Kalyani Steels Ltd. (supra), we find these decisions were delivered in the context of payments to the supplier of the technical know-how whereas the facts of the present 29 case differ in principle as the shares were allotted not to the supplier of the company but to group concern of the supplier. Further, there is no information on the reasons which led the assessee to make allotment of shares to DBAG and not to the supplier MBAG.
F. Regarding the Ld. Counsel's observation about linking the issue to the Tribunal orders for the A.Yrs. 1996-97 and others are concerned, we find the observation linked to the method of accounting is a casual observation and it does not provide any conclusive ratio which is useful for adjudication of the present appeal. Therefore, the same are dismissed as infructuous.
From the above analysis from various angles, i.e. (a) the provisions of section 35AB of the Act; (b) the meaning 'paid' and 'actually paid'; (c) any lump sum consideration; (d) liberal interpretation; (e) judgment in the case of EIMCO K.C.P. Ltd.; and (f) linking the issue to the Tribunal orders for A.Y. 1996-97 and others, we find the facts relating to not squaring up the liability directly with the supplier-MBAG and allotment of shares to the DBAG are peculiar to the factual matrix of this case. In effect, the supplier did not receive any payment literally to its account either in the form of cash or in the form of kind from the assessee. As such, it is the admitted position that there is no direct case law on any one of the issues discussed in (a) to (f) above. Therefore, we are of the opinion that despite the laborious arguments made by the Ld. Counsel for the assessee, the ground No.1 raised by the assessee need to be dismissed. Accordingly, the Ground No.1 of the assessee's appeal is dismissed.
30. Issue relating to write off of the Capital Work-in-progress :
During the assessment, assessee wrote off an amount of 30 Rs.9,79,25,979/- as an allowable capital work in progress. The same relates to disallowance of expenditure in relation to write off of capital work in progress due to discontinuation of India Car Model W-124.
Relevant facts include that the assessee (MB India) is engaged in the manufacturing and sale of Mercedes Benz passenger cars in the Indian market. Various cars were brought through semi knocked down (SKD) or completely knocked down (CKD) condition to be assembled and sold in India. There was a Joint Venture agreement between Daimler Chrysler AG and TELCO in F.Y. 1994-95 in this regard and the assessee planned to introduce W 124 series cars. The machinery required for setting up of the manufacturing activity were imported and assessee commenced the activity of manufacturing of the vehicles to some extent.
Necessary approvals from the Director General of Foreign Trade were also obtained. However, part of the machinery remained to be installed and the same was not done. Meanwhile, due to uncertainty of demand in the market for Model No. W-124, the assessee could not meet the targets. Assessee approached the Ministry of Industry to amend its project import certificate for procuring the remaining assets. The part machinery, which was remained to be installed, were discarded and the project was aborted after obtaining permission from the regulatory authorities. Thus, a sum of Rs.9,79,25,929/- was written off considering the same as deduction while computing the total income of the assessee for the year under consideration. The said write off was certified by the Tax.
31. The AO denied the decision on the ground that the said loss constitutes a capital loss and not allowable as deduction. AO rejected the contention of the assessee that the write off should be considered as capital loss u/s.45 of the Act eligible to be carried forward for set off in 31 future. The CIT(A) upheld the disallowance on the basis that expenditure incurred with a view to acquire a capital asset and therefore, needs to be treated as capital expenditure.
32. Before the Tribunal in this regard, Ld. Counsel for the assessee made various arguments and filed the written submissions. For the sake of completeness, the relevant parts are extracted as under :
"72. Income under the head "Profits and Gains of Business or Profession" is to be computed as per provisions of section 28 of the Act (i.e. the charging section). It has been principally held in numerous judicial precedents that expenditure/losses incurred in connection with business operations are deductible in deriving profits/income of that business even in cases where the same may not be explicitly provided in the Act.
73. Hon'ble ITAT in its order dated 21 January 2009 in case of MS India for AY 1999-00, in relation to similar matter of write off of factory layout expenses due to abandonment of the plans for new factory, had observed that the decision for writing off of expenses of a new plant was based on commercial expediency of the Appellant. Hence, the same has to be treated as business loss deductible under section 28 of the Act. The relevant observations of the Hon'ble ITAT are reproduced below : (Refer Pages 690 to 754 of the Paper Book):
"Such a claim can at best be examined on the touchstone of principles regarding admissibility of business losses, but that exercise has not been done by any of the authorities below.......he claim of deduction arose when the expenses were written off, and as such business loss was incurred, on the ground of commercial expediency - an act which certainly happened in the financial year relevant to the assessment year before us. However, there is no material before us to support the factual contentions embedded in the stand of the assessee, nor have the related facts been ascertained by any authorities below. Therefore, we consider it fit and proper to remit this issue also to the file of the Assessing Officer for adjudication de novo in the light of our above observations. Let the Assessing Officer examine all the factual contentions and legal pleas of the assessee by way of speaking order in accordance with the law and after giving due opportunity of hearing to the assessee. This issue is also accordingly remitted to the file of the Assessing Officer." (Emphasis supplied) (Refer Para 105 on Page 752 of the Paper Book).
74. Similarly, in the present case, with the initial plan to manufacturing 20,000 cars per year, MS India had planned to establish a new factory for W 124 model. However, due to uncertainty in the market environment, the W 124 series of models was unable to penetrate the market and generate the targeted sales. As a result, MB India decided to alter its product profile and introduce a new model in the market with a lower sales target of 6,000 cars per year. Such low volume of 6000 cars per year and change in model did not justify the implementation of industrialization phase primarily due to the following reasons:
Higher investment in building and infrastructure for a volume of 6,000 units were unjustifiable Installing five times the capacity than required (100/day as 32 against 20/day) would have resulted in underutilization of capacity which would lead to inefficiency and losses More manpower to run and maintain the assembly line (Proposed 82 workstation as against the required 25 work station) Excessive cycle time due to low volume as it would require to pass 82 workstation taking 24 minutes as against 7.2 minutes per operator.
Modification and installation cost were very high (around Rs 2 crores). This required change in the power grid from 380 volts to 415 volts etc. Further the installation demanded major modification to accommodate change of line from W124 series to W 210 series.
In view of the above commercial expediency and to avoid future business losses, MB India decided to discard the parts of the machinery, forming part of CWIP, procured for industrialization phase. Thus, due to abandonment of the plans for industrialization, the parts of the machinery could not have been of any use to result in enduring benefit for the Appellant. Hence, it is our humble submission that the same should be treated as business loss of the Appellant incurred due to commercial expediency.
33. In support of his submissions, Ld. Counsel for the assessee placed his reliance on the following judgmental laws giving brief details of the findings in those cases :
1. M/s. Binnal Cement Ltd. Vs. CIT - Income Tax Appeal No.265 of 2009 (Cal.)
2. CIT Vs. Anjani Kumar Co. Ltd. 259 ITR 114
3. Excel Industries Ltd. Vs. DCIT 86 TTJ 840 (Mumbai)
4. Lawkim Ltd. Vs. JCIT 1 SOT 908 (Mum.)
5. CIT Vs. M/s. Idea Cellular Ltd. - Appeal No.516 of 2015 (Bombay High Court) Thus, it is the case of the Ld. Counsel for the assessee that in a case where assessee had a proposal to expand business into different product lines of manufacturing of Cars, i.e. W-124 and when the project has to be aborted for the reasons of business operations of the assessee, such expenditure although capital in nature, is required to be allowed as business expenditure for the year under consideration. The said expenses are allowable u/s.37(1) of the Act. Referring to the cases referred above, he submitted that in all those cases aborted expenses, 33 which may be capital in nature, are found as allowable deduction u/s.37(1) of the Act.
34. Per Contra, Ld. DR for the Revenue relied heavily on the orders of AO/CIT(A). Essential core argument of the Revenue is that the said expenses being capital in nature are not allowable expenses against the business income of the assessee. Otherwise, Ld. DR did not submit that the car services W-124 is not part of the business of the assessee.
35. We heard both the sides on this issue and perused the orders of the Revenue as well as the decisions relied on by the Ld. Counsel for the assessee. Essentially, the case of the revenue is that the expenditure of Rs.9,79,25,979/- related to the car series of W-124, constitutes the capital expenditure with enduring nature. CIT(A) held it so as per the reasoning given in Para No.3.3 of his order. The details are extracted as follows :
"3.3 The submissions have been considered. Admittedly the expenses incurred by the appellant was for plant and machinery (capital asset) for the use in the proposed new factory. The expenses no doubt was capital in nature. An expenditure incurred with a view to acquire capital asset must be treated as a capital expenditure. In Fancy Corpn. Ltd. Vs. CIT 162 ITR 827 (Bom.) it was held that the mere fact that attempt to acquire capital asset failed, would not change the capital nature of the expenditure. The decision in Alembic Chemical Works Ltd. 177 ITR 377 (SC) relied upon by the Appellant's Representative is not applicable to the facts of the case. In that case the decision was in regard to the improvisation in the process and technology which was supplemented to the existing business. In the case of the appellant it is a direct expenses for acquiring new capital asset. In 196 ITR 845 (Cal.) the expenditure on miscellaneous expenses and law charges incurred on proposed factory project was held as deductible expenses. But in the case of the appellant the expenses was squarely incurred for the purchase of machinery for the production of W 124 series of Mercedese Benz Cars. This is beyond doubt expenditure incurred for capital asset. Therefore, the claim of the deduction of capital expenses is not allowable is therefore rejected."
However, the above finding is given by the CIT(A) against the assessee without considering the following legal propositions existing at the relevant point of time. It is the case of the assessee that the Project 34 Industrial Production Phase, i.e. starting a new factory for manufacturing passenger car series W-124 model was abandoned as it could not penetrate the market and generate the targeted sales. Further, the assessee's counsel cites that when the assessee wrote off the factory layout expenses in the A.Y. 1999-2000, the same was finally allowed by the Tribunal vide order dated 21-01-2009. The write off of the said sum of Rs.9,79,25,979/- constitutes business loss. Relying on the various decisions, Ld. Counsel demonstrated that the said claim is allowable as the project failed to take off eventually. Referring to the Calcutta High Court judgment in the case of M/s. Binani Cement Ltd. Vs. CIT ( a case of construction of a new facility which is abandoned at the work in progress stage), CIT Vs. Anjani Kumar Co. Ltd. 259 ITR 114 (Raj.) (a case where assessee made advance for purchase of agricultural land for setting up a broiler factory which is eventually abandoned and therefore advance became irrecoverable), Excel Industries Ltd. Vs. DCIT 86 TTJ 840 (Mumbai) (a case of incurring of project expenses on a new project which is abandoned claimed as allowable expenses), Lawkim Ltd. Vs. JCIT 1 SOT 907 (Mumbai) ( a case of acquiring technical know- how for manufacturing of new line of products which was later abandoned, CIT Vs. M/s. Idea Cellular Ltd. Appeal No.516 of 2015 - Bombay High Court ( a case of claim of capital expenditure on project for setting up of construction of a cell tower which was abandoned due to non-suitability) etc. Ld. Counsel submitted that in all these cases, the expenditure was claimed u/s.37(1) of the Act and the same were allowed eventually. Drawing our attention to the facts of expenditure of part of machinery, Ld. Counsel submitted that the said machinery was never installed and capitalized and the same indicates that the asset never came into existence cannot have any enduring benefit. 35
36. On considering the submissions of both the parties, we find the decision of CIT(A) given in Para No.3.3 of his order is not complete in all respect which includes that the CIT(A)/AO never discussed the details of the said expenditure on one side and applicability of the relevant legal propositions on the other while deciding the issue by the CIT(A). It is understood that every case has its peculiar facts but the philosophy relating to the decision to describe particular expenditure as capital or revenue is already discussed by the Hon'ble jurisdictional High Court as well as Hon'ble Apex Court. The legal propositions described by other High Courts also contribute to the evolution of thought on this issue. Therefore, in our view, there is requirement of remanding this issue to the file of AO for want of a decision on facts as well as application of legal propositions. As such, we never had the benefit of knowing the details of expenditure amounting to Rs.9,79,25,979/- aggregated under the head "capital work in progress". It is relevant to know what are the details of break-up of the expenditure on one side and the genuineness of the same on the other. Neither the AO nor the CIT(A) has examined this angle of the claim of the assessee. Therefore, in the set-aside proceedings, AO is directed to examine the same and decide the issue afresh after giving reasonable opportunity of being heard to the assessee. Accordingly, relevant ground raised by the assessee is allowed for statistical purposes.
37. Allowability of Club Expenditure : Coming to the last issue raised by the assessee towards membership fee for Poona Golf Club and Hyatt Regency New Delhi, for the Managing Director, AO disallowed the same as non-business expenses and made addition of Rs.25,600/- and the same was confirmed by the CIT(A).
36
38. Before us, Ld. Counsel for the assessee filed the written submissions and submitted that Para No.79 to 86 contain the relevant discussion, decision of the AO/CIT(A) as well the assessee's contentions.
39. Relevant facts of the case include that assessee made payment of Rs.1,67,600/- to various clubs and hotels for conducting meeting/conferences for the employees of the assessee. Assessee claimed the said expenses as business expenses. AO disallowed the said expenses treating the same as personal in nature and not wholly for the purpose of business of the assessee. CIT(A) gave part relief to the assessee and restricted the disallowance to Rs.25,600/-.
40. On this issue, Ld. Counsel filed the written submissions and the same are reproduced here as under :
"83. The company had also incurred expenses for obtaining membership in the Poona Club golf course and Hyatt Regency hotel, Delhi, for benefit of the employees and for conducting meeting and conferences in the hotels.
84. Thus, the above expenditure are incurred purely to serve business purpose of the Appellant.
85. The appellant wishes to rely on the following decisions, where club expenses are allowed as business expenditure:
Otis Elevator Co. (India) Ltd vs CIT (1992) 195 ITR 682 (Bom) (Refer pages 1014 to 1017 of the Paper Book) CIT vs. Lubrizollndia Ltd (2013) 218 taxmann 69 (Bom) (Refer pages 1018 to 1020 of the Paper Book) Intervalve (India) Ltd vs ACIT (ITA NO.1812 & 1813/PN/13) (Pune ITAT) (Refer pages 1021 to 1032 of the Paper Book) Thermax Limited vs. Addl. CIT (ITA No. 1245/PN/2005) (Pune ITAT) (Refer pages 1033 to 1038 of the Paper Book) Tata Technologies Limited vs JCIT (ITA Nos. 18 & 19/PN/2012, ITA Nos. 36 & 37/PN/2012, ITA Nos. 2114 & 2115/PN/2013, ITA No. 2083/PN/2013) (Pune ITA T) (Refer pages 1039 to 1055 of the Paper Book) CIT vs. Upper India Steel Manufacturing & Engg. Co. Ltd (2014) 227 taxmann 173 (P&H) CIT vs. Groz Beckert Asia Ltd (2013) 351 ITR 196 (P&H - FB)
86. Further, in case of a company which is an inanimate person, there could be no justification for disallowance on the ground of personal or non-business component. In support of this, the Appellant would like to place reliance on the following decisions:37
Sayaji Iron & Engg Co. Vs. CIT (2002) (253 ITR 749) (Guj) (Refer pages 1063 to 1067 of the Paper Book) Ador Technologies Ltd v DCIT (112 TTJ 24) (Pune ITAT) (Refer pages 1068 to 1083 of the Paper Book) Bajaj Auto Finance Ltd. v DCIT (112 TTJ 437) (Pune ITAT) (Refer pages 1084 to 1090 of the Paper Book) Bajaj Finance Ltd vs DCIT (ITA No.1175 and 1273/PN/2012) (Pune ITAT) (Refer pages 1091 to 1100 of the Paper Book)
41. On the other hand, Ld. DR for the Revenue submitted that the order of the CIT(A) is reasonable and the same may be confirmed.
42. On hearing both the sides on this limited issue of allowability of club expenses, we find that the assessee claimed Rs.1,67,600/- in the account and the CIT(A) granted part relief to the assessee confirming the sum of Rs.25,600/- only. On considering the above, we find there is no dispute on the fact of claim of club expenses of Rs.1,67,600/- in the account. AO disallowed the same suspecting the personal nature of the expenditure. AO placed his reliance on the Auditors Report (Para No.8 of the assessment order). As per the discussion given by the CIT(A) in Para No.5 and its sub-paras, we find CIT(A) restricted the disallowance to Rs.25,600/- (Golf Course fee of Rs.14,600/- for Dr. Volkar and Shri Leoffler) and other payment of club membership in respect of Mr. Thomas Weigand and Dr. Till Becker Defreitas. Considering the appearance of individual names of the employees, the CIT(A) held that these are in the nature of personal expenditure. Contents of Para No.5.3 are relevant. On perusal of the note given by the Ld. Counsel for the assessee which is extracted above, we find the facts of the decisions cited by the Ld. Counsel for the assessee are distinguishable. It is not the case of the assessee that the employees were not benefitted and the expenditure is wholly and exclusively for the business purposes of the assessee. For the sake of completeness, we reproduce the finding given by the CIT(A) in Para No.5.3 of his order and the same reads as under : 38
"5.3 The submissions have been considered. The expenditure incurred for the annual subscription of the Poona Golf Course of Dr. Volkar and Shri R. Leoffler is clearly the personal expenses of the employees and it has no connection with the business of the appellant. Similar were the expenses in regard to the membership of the two executives for Hyatt Regency, Delhi which are the personal expense of the executives not connected with the business of the appellant but incurred by the appellant. Therefore, the sum of Rs.7,300/-; Rs.7,300/- & Rs.11,000/- are not for the purpose of the business of the appellant and therefore are not an allowable expenses. In regard to the membership of the appellant with Telco Senior Officials Club paid at Rs.10,000/- p.m. is in regard to the sports and recreation facilities availed by the German expatiate employees working for the appellant. Therefore, it is held as expenditure incurred for the staff welfare. The membership of the Chambers with Taj Mahal Hotel, Mumbai is for availing facilities of the hotel in the area called 'The Chambers' where the hotel was providing facilities for business assistance and meetings and therefore even that is held as incurred for the purpose of business. The appellant shall get part relief on this ground."
Considering the above, we find the order of the CIT(A) is fair and reasonable. Accordingly, this part of ground raised by the assessee is dismissed.
C.O.No.50/PUN/2004
Arising out of ITA No.1325/PUN/2003 A.Y.1998-99
43. The captioned Cross Objection was raised with three issues; (1) relocation expenses amounting to Rs.37,80,388/-; (2) travelling expenses amounting to Rs.47,71,593/-; and (3) Telephone expenses amounting to Rs.10 lakhs.
44. Assessee raised these issues merely to support the relief granted by the CIT(A). Revenue is already in appeal on these three issues. We have already adjudicated them vide ITA No.1325/PUN/2003 and dismissed all the three issues raised by the Revenue and in favour of the assessee. Considering the same, we are of the opinion that adjudication of these issues raised by the assessee becomes an academic exercise. Therefore, the cross objections raised by the assessee are dismissed as academic.
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45. In the result, the cross objection of the assessee is dismissed.
46. To sum up, the appeal ITA No.1381/PUN/2003 of the assessee is partly allowed for statistical purposes. The appeal ITA No.1325/PUN/2003 of the Revenue as well as the Cross Objection No.50/PUN/2004 of the assessee are dismissed.
Order pronounced on this 08th day of August, 2018.
Sd/- Sd/-
(VIKAS AWASTHY) (D. KARUNAKARA RAO)
याियक सद य /JUDICIAL MEMBER लेखा सद य / ACCOUNTANT MEMBER
पुणे Pune; दनांक Dated : 08th August, 2018
सतीश
आदेश क ितिलिप अ ेिषत/Copy of the Order forwarded to :
1. अपीलाथ / The Appellant
2. यथ / The Respondent
3. The CIT(A)-III, Pune
4. The CIT(A)-IV, Pune
5. िवभागीय ितिनिध, आयकर अपीलीय अिधकरण, "A Bench" Pune;
6. गाड फाईल / Guard file.
आदेशानुसार/ BY ORDER,स स यािपत ित //True Copy// Senior Private Secretary आयकर अपीलीय अिधकरण ,पुणे / ITAT, Pune