2019 (4) TMI 2142 - ITAT AHMEDABAD

Addition u/s 40A(9) v/s 37(1) - payment to Prasanna trust for the training of the employees - assessee claim it as revenue expenditure u/s 37(1) - as per assessee expenditure had been incurred on three to four days of the carrier training program conducted by Presanna trust for the development and growth of the employee. Hence the above-stated expenditure is allowable u/s 37(1) as expenditures were incurred wholly and exclusively for the business - AO rejected the contention of the assessee by observing that the above-stated payment has been made for setting up and formation of the trust other than the fund as covered under section 36(1)(iv) and section 36(1)(v) - HELD THAT:- There is no evidence brought on record by the AO that the assessee has made payment for setting up or formation of trust. Admittedly the assessee made the payment to the trust, but the payment to the trust does not mean that it is not a business expense. As such if the expenses are incurred in connection with the business, then it is eligible for deduction u/s 37(1) of the Act provided the same is not in the nature of capital and personal expenses.

In the case on hand the AO has not brought on record whether the expenditures are capital or personal nature. The AO has not doubted the genuineness of the transaction. AO did not call any information regarding the transaction from the trust by using his power given under section 133(6) of the Act. Thus this expenditure should be allowable as business expenditure u/s 37(1) of the Act. Accordingly, we dismiss the ground of appeal raised by the Revenue.

Nature of expenditure - expenditure made to associates enterprises for the use of technological know-how - Assessee has debited sum as fee for technical know-how in respect of its DTA units and claimed that such fee represents the royalty payment determined as a percentage of net sales under the terms of the collaboration agreement - as per AO said expenditure incurred in respect of technical know-how fees was capital in nature - HELD THAT:- At the outset we find that in the identical facts and circumstances in the own case of the assessee, the ITAT in the AY 2002-03 and 2003-04 has deleted the addition made by the AO after having reliance on the order of the ITAT in the AY 2001-02 [2011 (9) TMI 851 - ITAT AHMEDABAD] by holding that impugned expenditure as revenue in nature.

We also find that the Hon’ble supreme court case of Ambika Parsad Mishra Vs. State of U.P. and Others [1980 (5) TMI 100 - SUPREME COURT] has taken the similar view - Accordingly, we direct the AO to delete the addition made by him. Hence the ground of appeal of the Revenue is dismissed.

TP Addition on account of royalty payment and margin of DTA unit - TPO compared the PLI/margin of the assessee for its DTA segment with the PLI/margin of the comparables by observing that margin of DTA segment as calculated by the assessee is 6.97% only which is less than with industry margin 10.66% - HELD THAT:- As decided in own case [2014 (11) TMI 552 - ITAT AHMEDABAD] there is no fault can be found from the order of the ld.CIT(A) so far as restricting the addition on account of differential operating margin to the international transactions is concerned. However, the figure of Rs. 8,43,42,316/- as worked out by the ld.CIT(A) is not correct, therefore this issue is required to be restored to the file of ld.CIT(A) for recomputation of the international transactions - also CIT(A) and TPO were not justified in adopting the CUP method and, therefore, we direct the ld.CIT(A) to adopt the method of TNMM for determination of the ALP and recompute the ALP in respect of the royalty

In view of the above and the precedent in the own case of the assessee as discussed above, we restore both the issue, i.e., adjustment in the DTA segment and the royalty payment to the file of Ld.CIT (A) for fresh adjudication.

Addition for the allocation made by the AO towards the depreciation on data processing machine and advertisement expenses deleted and addition made by the AO regarding the depreciation on the car confirmed. The AO is directed accordingly to delete/ confirm the addition made by the AO.

Depreciation on residential quarters - As Revenue for AY 2003-04 [2017 (4) TMI 1633 - ITAT AHMEDABAD] has not raised any ground against the action of the Ld.CIT (A) for deletion of allocation of depreciation on residential quarters between DTA and EOU unit. Thus it is clear that once the Revenue has not challenged the action of the Ld.CIT (A), then the order of the Ld.CIT (A) reaches its finality. As such it is settled law that the Revenue cannot challenge the same in the subsequent year until & unless there was some change in the facts and circumstances. Admittedly there was no change in the facts and circumstances regarding the claim of the assessee for the depreciation in respect of residential quarters and its allocation thereof. Therefore we are of the view, that there cannot be any disallowance on account of allocation of the depreciation of the residential quarters. In this regard we find support and guidance from the judgment of Hon’ble supreme court in case of Radhasoami Satsang vs. CIT [1991 (11) TMI 2 - SUPREME COURT] - thus we hold that there cannot be any allocation of the depreciation claimed by the assessee in respect of its residential quarters towards the DTA unit.

Allocation of the depreciation on SAP R3 expenses and renovation of the building - SAP R3 expenses and renovation expenses on the building have been treated as revenue expenditure by us earlier in this order. Thus the question of allocating the depreciation thereon does not arise.

As important to note that the AO has not disputed allocation of the expenses of SAP R3 and renovation of the building expenses in his order. As such the AO treated such expenses as capital in nature and accordingly the same was disallowed. But the AO allowed the depreciation on such expenses which was allocated between DTA and EOU unit of the assessee. Thus the issue for the allocation of SAP R3 expenses remained untouched by the AO. Thus the question arises whether such expenses need to be allocated between DTA and EOU unit. For this limited purpose, we are of the view that the justice will be served to both the assessee and the Revenue if the matter is restored back to the file of AO for fresh adjudication.

Negating the exclusion of 90% of the income from writing back of credit balance and gain from foreign exchange fluctuation - HELD THAT:- Admittedly the impugned income is arising in the course of the business of the assessee. We also note that the AO in his assessment order has also not treated the impugned income as income from other sources. Therefore the same cannot be treated as income from other sources and accordingly the same is eligible for deduction under section 80HHC of the Act. ITAT Mumbai in case of Extrusion Process (P) Ltd. [2006 (6) TMI 261 - ITAT MUMBAI] has also held that the assessee is entitled to deduction under section 80HHC of the Act in respect of the impugned income - No reason to interfere in the order of the Ld.CIT-A. Hence the ground of appeal of the Revenue is dismissed.

Gain on forex - assessee submitted that the income from the foreign currency fluctuation is part of export turnover which represents the additional sale price - HELD THAT:- Admittedly the impugned income is arising in the course of the business of the assessee. We also note that the AO in his assessment order has also not treated the impugned income as income from other sources. Therefore the same cannot be treated as income from other sources and accordingly the same is eligible for deduction under section 80HHC of the Act. In holding so, we find support and guidance from the judgment of Hon’ble Bombay High Court in the case of Alfa Laval India Ltd. [2003 (9) TMI 43 - BOMBAY HIGH COURT].- In addition to the above, we also note that the Delhi ITAT in case of Smt. Sujata Grover [2001 (11) TMI 232 - ITAT DELHI-E] where in it was held that the assessee is entitled to deduction under section 80HHC of the Act in respect of the impugned income - Decided in against revenue.

Deduction under section 80HHC - Service income, scrap sales, handling charges, and GEB - HELD THAT:- The word "interest" in clause (baa) of the Explanation connotes "net interest" and not "gross interest". Therefore, in deducting such interest, the Assessing Officer will take into account the net interest, i.e ., gross interest as reduced by expenditure incurred for earning such interest.

Where, as a result of the computation of profits and gains of business or profession, the Assessing Officer treats the interest receipt as business income, the deduction should be permissible in terms of Explanation (baa) of the net interest, i.e., the gross interest less the expenditure incurred for the purposes of earning such interest. The nexus between obtaining the loan and paying interest thereon (laying out the expenditure by way of interest) for the purpose of earning the interest on the fixed deposit, to draw an analogy from section 37, will require to be shown by the assessee for application of the netting principle.

Sale of scrap and insurance claim and handling charges - Admittedly the impugned income is arising in the course of the business of the assessee. We also note that the AO in his assessment order has also not treated the impugned income as income from other sources. Therefore the same cannot be treated as income from other sources and accordingly the same is eligible for deduction under section 80HHC of the Act. In holding so, we find support and guidance from the judgment of Alfa Laval India Ltd [2003 (9) TMI 43 - BOMBAY HIGH COURT] wherein the issue was decided in favour of the assessee.

In addition to the above, we also note that the ITAT (Chennai Bench) in the case of JCIT v/s Kadri Mills (CBE) Ltd. [2002 (3) TMI 242 - ITAT MADRAS-A] has also held that the assessee is entitled to deduction under section 80HHC of the Act in respect of the impugned income.

Interest income from GEB and Income from investment and income from UTI - Deduction u/s 80HHC is available to the assessee in respect of export of the goods. The provisions of this section do not speak about the deduction in respect of interest income from GEB. Therefore in our considered view, the assessee is not entitled to the deduction under section 80HHC in respect of such income. However, the assessee is entitled to the deduction for the expenses incurred by it against such income. Therefore we direct the AO to reduce the expenses incurred by the assessee from the interest income as discussed above. Thus the AO will reduce 90% of the balanced interest income for working out the profit of the business eligible for deduction under section 80 HHC of the Act. As such the AO will consider only the net income of the assessee before reducing 90% of the interest income while working out the deduction under section 80HHC.

Freight recovered, Insurance claim/sale tax claim/CST refund - Admittedly the impugned income is arising in the course of the business of the assessee. We also note that the AO in his assessment order has also not treated the impugned income as income from other sources. Therefore the same cannot be treated as income from other sources and accordingly the same is eligible for deduction under section 80HHC.

DEPB income - Admittedly the impugned income is eligible for deduction under section 80HHC(3) of the Act. We also note that the issue involved in the instant case stands covered in favor of the assessee by the judgment of Hon’ble Apex court in the case of CIT Vs. Avani exports [2015 (4) TMI 193 - SUPREME COURT]. Accordingly, we direct the AO to consider the aforesaid amount for working out the deduction under section 80HHC of the Act.

Discount of early payment of suppliers bill - Admittedly the impugned income is arising in the course of the business of the assessee. We also note that the AO in his assessment order has also not treated the impugned income as income from other sources. Therefore the same cannot be treated as income from other sources and accordingly the same is eligible for deduction under section 80HHC of the Act. We direct the AO to consider the aforesaid amount for working out the deduction under section 80HHC of the Act.

Octroi refund, reversal of the provisions, for the excise duty and for the testing charge - Admittedly the impugned income is arising in the course of the business of the assessee. We also note that the AO in his assessment order has also not treated the impugned income as income from other sources. Therefore the same cannot be treated as income from other sources and accordingly the same is eligible for deduction under section 80HHC.

Small amount accruing during the normal course of the business - We note that the Ld. AR before us has not advanced any argument suggesting that income is arising in the course of the business. Thus in the absence of any information contrary to the finding of the Ld.CIT (A), we are inclined to uphold the same. Hence the ground of appeal of the assessee is dismissed.

Including the profit & export turnover of EOU units eligible for tax holiday u/s 10B of the Act in the computation of deduction u/s 80HHC - As decided in own case [2017 (4) TMI 1633 - ITAT AHMEDABAD] expression "such" before the expression export turnover only means that the export turnover referred to is the turnover of the goods manufactured whose profits are being computed under s. 80HHC(3)(a). Therefore, we find that while computing deduction under section 80HHC the profits of s. 10B unit will not enter the computation of total income at all. In view of above facts and legal findings, we reverse the decision of the CIT(A) and confirm the findings of the assessing officer and direct to compute the deduction u/s 80HHC accordingly as per the direction given in the judicial pronouncement of ITAT Mumbai in the case of TATA BP SOLAR INDIA limited. [2010 (9) TMI 1083 - ITAT MUMBAI]

Nature of expenses - repair expenses in the building carried out by the assessee - revenue or capital expenditure - HELD THAT:- There is no allegation of the revenue that any new asset has come into existence out of such expenditure. As such the repairing expenses were incurred to the existing building. Thus, we are of the view that such expenditure cannot be termed as capital in nature merely on the ground that it will generate enduring benefit to the assessee.

The case law relied upon by the AO i.e. Ballimal Naval Kishore & another [1997 (1) TMI 3 - SUPREME COURT] is distinguishable from the present facts of the case as observed that there was a total renovation of the theatre. New machinery, new furniture, new sanitary fittings and new electrical wiring were installed besides extensively repairing the structure of the building. However in the instant case before us, there was mere repair on the existing building. There was no change brought to our notice about the structural in the existing building out of such expenses. Accordingly we direct the AO to delete the addition made by him by treating the repairing expenses as capital in nature.

Disallowing the expenditure on scientific research claimed u/s 35(1) - HELD THAT:- As assessee has conducted the scientific research activity and therefore the assessee is eligible for deduction in respect of capital expenditure under section 35 of the Act. However, the onus lies on the assessee to prove on the basis of documentary evidence that it has carried out the scientific research activity. As such we note that, the Ld.AR for the assessee before us has not brought any iota of evidence suggesting that the assessee has carried out any scientific research activity. Thus in the absence of sufficient documentary evidence, we do not find any reason to disturb the finding of the Ld.CIT (A). Hence the ground of appeal of the assessee is dismissed.

Addition of the unutilized CENVAT Credit in the valuation of closing stock - As we note that the assessee has been recording its transactions of purchase, sales, and valuation of inventories, net of CENVAT consistently. Thus, if the inventory of closing stock is enhanced by the amount of CENVAT credit attributable to it, then the amount of corresponding purchases should also be increased by the said amount which will result in tax neutral exercise. Thus, in our considered view, the Assessing Officer erred in enhancing the value of closing stock without giving effect to the purchases.

Reimbursement of Insurance Expenses - As there is no ambiguity that the assessee cannot claim the deduction of the insurance expenses paid to the foreign insurance companies. Therefore we do not find any merit in the case of assessee. Hence the ground of appeal of the assessee is dismissed.