TMI Blog2014 (12) TMI 680X X X X Extracts X X X X X X X X Extracts X X X X ..... ince assessee itself was debiting only 1/6th of process know-how fee in the Profit & Loss Account and what the AO was rejecting was the claim of the assessee made in the computation of income that the full amount should be allowed in the first year itself - In-fact, it was a common point between the parties that so far as the claim of deduction of 1/6th cost is concerned, the same was allowed by the AO – thus, the order of the CIT(A) is set aside – Decided in favour of revenue. Disallowance of provision of warranty – Difference between closing and opening provision – Held that:- The assessee made a provision on account of provision for warranty with respect to the products sold - Considering the opening balance of provision, the differential amount of provision was debited to the Profit & Loss Account of the year - The provision was made by the assessee on account of the fact that it is under an obligation to provide warranty for a period of one to two years on the products sold by it on account of any manufacturing defect found later - assessee was obliged to replace the product or repair the product free of cost during the period of warranty - thus, the AO is directed to allow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t used in the manufacture of heat pumps is not eligible for depreciation @ 100% as it does not find a place in any of the items in the Depreciation Table which is entitled for depreciation @ 100% - thus, the order of the CIT(A) is upheld – Decided against assessee. Deduction u/s 80HHC – Inclusion of export turnover – Exclusion of 90% of items from profits – Held that:- The stand of the assessee is quite reasonable and justified - The definition of expression "total turnover" in section 80HHC of the Act does not any prescription regarding the element of export turnover comprised in it. The profits eligible for deduction u/s 80HHC are computed as a proportion of the ratio of export turnover divided by the total turnover of the business - Therefore, if 'export turnover' forming part of numerator is calculated as per the definition contained in section 80HHC of the Act then it would be appropriate that a similar figure is taken as an element of the total turnover of the business which is the denominator - Thus, on this aspect assessee succeeds and the AO is directed to re- compute the eligible deduction u/s 80HHC – the matter is remitted back to the AO to allow the claim of assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2,29,97,486/- being 1/6th portion of the technical know-how fee. In the computation of income annexed with the return of income assessee claimed that the entire amount should be allowed as deduction u/s 37(1) of the Act. The Assessing Officer as well as the CIT(A) denied the assessee's claim for deduction u/s 37(1) of the Act and instead deduction has been allowed in terms of section 35AB of the Act as the expenditure was for acquiring the use of Process know-how. The aforesaid stand of the Assessing Officer as well as the CIT(A) is in terms their stand for the earlier years in the assessee's own case. This aspect of the matter is disputed by the assessee by way of the above Ground of Appeal No.1. 4. On this aspect, another issue relates to the manner in which the Assessing Officer allowed the deduction to the assessee u/s 35AB of the Act. The Assessing Officer determined the deduction allowable u/s 35AB of the Act with reference to the amounts actually paid during the year under consideration. Before the CIT(A), it was asserted by the assessee that if the deduction u/s 35AB of the Act was to be allowed instead of section 37(1) of the Act, then the amount of deduction u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce the aforesaid cross-grounds in the appeal of the assessee and the Revenue relate to assessee's claim for deduction of the process know-how fee paid, they are being taken-up together. 7. At the time of hearing, the Ld. Representative for the assessee quite fairly submitted that the plea of the assessee for deduction of expenditure incurred by way of process know-how fee u/s 37(1) of the Act is liable to be decided against the assessee following the judgement of the Hon'ble Supreme Court in the case of M/s Drilcos (India) Pvt. Ltd. vs. CIT, (2012) 348 ITR 382 (SC). Therefore, following the ratio of the judgement of the Hon'ble Supreme Court in the case of M/s Drilcos (India) Pvt. Ltd. (supra), the expenditure incurred by the assessee for acquiring process know-how fee is to be allowed amortization in terms of section 35AB of the Act. Therefore, in-principle, the stand of the Revenue on this aspect is upheld and the assessee fails in its Ground of Appeal. 8. In so far as the Ground of Appeal No.1 of the Revenue relating to the CIT(A)'s decision to allow determination of deduction u/s 35AB of the Act not only with reference to the amounts actually paid but also ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Revenue are treated as allowed. 11. The Ground of Appeal No.2 raised by the assessee reads as under :- 2. The learned CIT (Appeals) erred in confirming disallowance of the Appellant's claim for provision made in respect of warranty obligation in the amount of ₹ 49,62,303/- being the difference between the closing provision of ₹ 3,45,59,744/- and the opening provision of ₹ 2,95,97,441/-. 12. In this context, relevant facts are that the assessee made a provision of ₹ 3,45,59,744/- on account of provision for warranty with respect to the products sold. Considering the opening balance of provision of ₹ 2,95,97,441/- the differential amount of provision amounting to ₹ 49,62,303/- was debited to the Profit Loss Account of the year under consideration. The said provision was made by the assessee on account of the fact that it is under an obligation to provide warranty for a period of one to two years on the products sold by it on account of any manufacturing defect found later. In such a situation, assessee was obliged to replace the product or repair the product free of cost during the period of warranty. The Assessing Officer a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e manner of recognizing income from the contract activity undertaken by the assessee. The assessee is a manufacturer of boilers and other heat transfer equipment. It takes-up such projects on contract basis and execution of such contracts are normally spread over a period of more than one year. The assessee is accounting for income of such projects on percentage completion method in cases where value of the project exceeds ₹ 20,00,000/-. The assessee was raising invoices on the clients as per the schedule of payments agreed with them. The income recognition on such project was, however, done on percentage completion method. It was found that the raising of bill as per the schedule of payments agreed with the clients was more than the income that was liable to be recognized on the basis of the project completion method. Therefore, such excess amount received as per the invoices raised was not treated as an income. The assessee made requisite adjustments by creating a provision styled as 'contribution equalization provision'. During the year under consideration, assessee created an additional provision of ₹ 2,65,35,431/- for the profit equalization in terms of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s been added by the Assessing Officer to the returned income. In coming to such conclusion, the CIT(A) noted that the assessee created a provision of ₹ 14,95,43,003/- on account of profit equalization and the opening provision of ₹ 12,30,07,582/- for the said purpose was written-back to the credit of the Profit Loss Account. According to the CIT(A), only the differential provision of ₹ 2,65,35,431/- (i.e. ₹ 14,95,43,003/- minus ₹ 12,30,07,582/-) is charged to the Profit Loss Account whereas the disallowance effectively made by the Assessing Officer was of the entire provision of ₹ 14,95,43,003/-, which was wrong. 19. The CIT(A) having upheld the stand of the assessee in-principle, differed with it on two aspects. According to the CIT(A), the following two adjustments made by the assessee to the income while applying the percentage of completion method were not justified which had the effect of reducing the total income; such aspects were (a) scaling down of revenue for different stages of completion; and, (b) non-recognition of revenue till the contracts have progressed to the extent of 25% of contract value. As per the CIT(A), under the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... while the addition made by the Assessing Officer is only for ₹ 2,65,35,431/-. 21. Since the aforesaid cross-grounds in the appeal of the assessee and the Revenue relate to a common issue of recognizing income from contract activity, they are being taken-up together. 22. On this aspect, it was a common ground between the parties that in assessment year 1997-98, the Tribunal vide its order dated 03.09.2014 (supra) in the assessee's own case has upheld the stand of the assessee by following the decision of the Pune Bench of the Tribunal on a similar issue in the case of Thermax Babcock Wilcox Ltd. vs. DCIT vide ITA Nos.157 158/PN/1995 dated 11.05.2001 for assessment years 1990-91 1991-92. The Tribunal in its order dated 03.09.2014 (supra) noted that in the case of Thermax Babcock Wilcox Ltd. (supra) which was a group company of the assessee, the Tribunal upheld the allowability of provision for profit equalization while recognizing incomes on application of percentage of completion method in the case of long term contracts in the light of the AS-7 issued by the ICAI. In view of the decision of the Tribunal in the assessee's own case in the preceding asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nce, out of the total disallowance of ₹ 40,13,159/- made by the Assessing Officer, an amount of ₹ 22,16,107/- was retained as addition and the balance of ₹ 17,97,051/- was deleted. The assessee is in appeal before us agitating the addition sustained to the extent of ₹ 17,97,051/- whereas the Revenue in its cross-appeal has challenged the relief allowed by the CIT(A) to the extent of ₹ 22,16,107/- by way of Grounds of Appeal No.7.1 to 7.2, which read as under :- 7.1 On the facts and in the circumstances of the case, the Ld. CIT(A) erred in treating the expenditure of ₹ 22,16,107/- out of software as revenue expenditure, when in fact it is capital in nature. 7.2 The Ld. CIT(A) ought to have followed decision of Hon'ble ITAT Delhi 'A' Bench in case of Maruti Udyog Ltd. vs. DCIT (92 TTJ 987) where it is held that expenditure on acquisition of computer software is capital expenditure. 27. Since the aforesaid cross-grounds in the appeal of the assessee and the Revenue relate to the same issue, they are being taken-up together. 28. Before us, the Ld. Representative for the assessee submitted that the CIT(A) ought to have allowe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion of routine standard softwares such as Windows 95, MS Office, etc. which are revenue in nature. Ostensibly, assessee's business is of manufacturing of boilers and other heat transfer equipment and the aforesaid softwares merely facilitate assessee's trading operations and/or enable conduct of its business more efficiently and the same are not in the nature of the profit-making apparatus of the assessee company. Therefore, in our view, the CIT(A) made no mistake in treating the expenditure of ₹ 17,97,051/- incurred on acquisition of routine standard software as a revenue expenditure. Moreover, the said decision of the CIT(A) is in line with the ratio of the judgement of the Hon'ble Bombay High Court in the case of Raychem Rpg. Ltd. (supra). In the result, the Ground of Appeal No.7 of the assessee as well as the Grounds of Appeal No.7.1 7.2 of the Revenue are dismissed. 31. The next Ground of Appeal No.8 of the assessee reads as under :- 8. On the facts and in the circumstances of the case and in law the Ld. CIT (Appeals) erred in confirming disallowance of Appellant's claim for depreciation @ 100% in respect of the items of plant and machinery inst ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... context, it is clear noted that having regard to the entry 3(xiii)(r) read with 3(xiii)(e) of the Depreciation Table annexed to the Rules, plant machinery used for the manufacture of air/gas/fluid heating systems is eligible for depreciation @ 100%. The plea of the Assessing Officer that other items in Entry in 3(xiii) contain a reference to 'solar' and therefore item (e) of Entry 3(xiii) should also be read to be referring to solar air/gas/fluid heating systems, in our view, is not justified. The Assessing Officer has attempted to read into the statute a word which is conspicuous by its absence. Therefore, in our view, having regard to the item (r) read with item (e) of Entry 3(xiii) of the Depreciation Table, the claim of the assessee has been rightly allowed by the CIT(A) and we find no force in the Ground of Appeal raised by the Revenue. 36. Now, with regard to assessee's claim for allowance of depreciation @ 100% in respect of plant machinery used in the manufacture of heat pumps is concerned, the same has been appropriately denied by the lower authorities. The CIT(A) has rightly pointed out that machinery plant used in the manufacture of heat pumps is no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee is quite reasonable and justified. The definition of expression total turnover in section 80HHC of the Act does not any prescription regarding the element of export turnover comprised in it. The profits eligible for deduction u/s 80HHC of the Act are computed as a proportion of the ratio of export turnover divided by the total turnover of the business. Therefore, if 'export turnover' forming part of numerator is calculated as per the definition contained in section 80HHC of the Act then it would be appropriate that a similar figure is taken as an element of the total turnover of the business which is the denominator. Thus, on this aspect assessee succeeds and the Assessing Officer is directed to re- compute the eligible deduction u/s 80HHC of the Act accordingly. 40. The next Ground of Appeal No.10 raised by the assessee reads as under :- 10. The Ld. CIT (Appeals) further erred in confirming following items as falling within the scope of Explanation (baa) of 80HHC and excluding 90% of such items from profits of the business :- 1 Brokerage receipt not taken 1,81,432 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d as under :- 9.1 On the facts and in the circumstances of the case, the Ld., CIT(A) erred in directing to exclude sale of scrap, claim of refunds - insurance, credit balance appropriated, bad debts/advance written back - exp. from the total turnover for the purpose of calculating deduction u/s 80HHC. 9.2 The Ld. CIT(A) is not correct in holding that the following items- (i) Claim of refunds - Insurance (ii) Credit balance appropriated (iii) Excess provision written back - Exp. have been decided in favour of the assessee by the ITAT, Pune in ITA No.907/PN/95 for A.Y. 1992-93 for the reason that in the said order, the Hon'ble ITAT, Pune Bench, Pune had occasion to consider and decide the following items only- (i) Sale of scrap (ii) Gain on exchange fluctuation (iii) Excise refund (iv) Sales tax refund (v) Bad Debts recovered Therefore, the items held to be covered by the order of Hon'ble ITAT, Pune by the Ld. CIT(A) is not correct. 10.1 On the facts and in the circumstances of the case, the Ld. CIT(A) erred in directing to exclude sales tax and excise duty from the total turnover for the purpose of calculating deduction U/s. 80HHC. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by affirmed. Thus, assessee fails on this Ground. 47. The last Ground in the appeal of the assessee reads as under :- 12. The Ld. CIT (Appeals) erred in holding that the following items of income were not 'derived' from eligible undertaking and were accordingly not entitled to deduction u/s 80-I/80-IA : 1. Fluctuation in rate of foreign exchange 59.54 lakh 2. Premium on forward contract 1.93 lakh 3. Pro rata on sale of scrap and duty draw back 41.14 lakh 4. Miscellaneous receipts 00.10 lakh 48. In terms of the aforesaid Ground, the contention of the assessee is that the aforesaid items of income have been unjustly excluded from the profits eligible for the claim of deduction u/s 80-I/80-IA of the Act. 49. At the time of hearing, in so far as the exclusion of income by way of (i) Pro rata on sale of scrap and duty draw back - ₹ 41.14 lakh; and, (ii) Miscellaneous receipts - ₹ 00.10 lakh is concerned, the same was not pressed by the Ld. Representative. Accordingly, on these two aspects, the action of the income-tax authorities of excluding such incomes from the profits eligible for the deduction u/s 80-I/80-IA of the Act is hereby affirmed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es Ltd. were recorded as sales in the account books of the assessee along with the profit thereon. Such amount of profit computed at ₹ 90,00,000/- was transferred by assessee to Thermax Culligan Water Technologies Ltd. and claimed as an expenditure styled as 'commission'. The said expenditure styled as 'commission' was disallowed by the Assessing Officer because according to him the business transfer agreement dated 29.03.1997 did not provide for transfer of pending customer orders. He also noted that there was no agreement between the assessee and Thermax Culligan Water Technologies Ltd. as to how such commission was to be determined. In this context, the Assessing Officer referred to clause (3) of the business transfer agreement dated 29.03.1997, which reads as under :- Subject to the conditions set out in this Agreement, government approvals (if any) and the receipt of entire consideration as specified in Article 4 below, on the Effective Date, the Transferor shall transfer and the Company shall acquire the current running ongoing Business of the Water Treatment Product Division of the Transferor consisting of the assets (free and clear of all liens and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stration, etc. the business of the Water Treatment products division could not be carried on in the name of TCWTL but had to be carried out in the name of the Appellant though factually it was carried out by TCWTL. The commission represents profits accounted in the books of Thermax in respect of such unfinished jobs executed by TCWTL but factually booked in the accounts of the Appellant in view of the aforesaid procedural delays. This profit has been earned by TCWTL and has been transferred to it under the name of Commission. As rightly pointed out by the AR, the Business Transfer Agreement between the Appellant and the TCWTL provided for completion of unfinished jobs of the Appellant by the new company TCWTL. In my opinion, the absence of independent agreement for transfer of such profits was not necessary as the conduct of the parties coupled with the Business Transfer Agreement dated 29/3/1997 provided sufficient support and justification for the transfer of such profits, by way of commission. The AO in the remand report has confirmed that the necessary invoice-wise details and calculation of commission has been verified and found to be in order. 56. Before us, Revenue ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ented transfer of profits to Thermax Culligan Water Technologies Ltd. for the interregnum period which rightly belonged to it. As a result, we hereby affirm the order of the CIT(A) and Revenue fails in its Grounds of Appeal Nos.3.1 3.2. 58. The next Grounds of Appeal Nos.4.1 4.2 raised by the Revenue read as under :- 4.1 On the facts and in the circumstances of the case, the Ld. CIT(A) erred in deleting the disallowance of bad debts of ₹ 14,82,798/-. 4.2 The Ld. CIT(A) is not correct in stating that it is seen from the remand report submitted by the A.O. that these discrepancies have been made good and the necessary details have been furnished and examined. The A.O. has confirmed that these two bad debts were actually written off in the books as bad debts for the reasons that no such categorical finding is given by the A.O. in his remand report dated 12.05.2003. 59. In this context, the relevant facts are that assessee had claimed bad debts in respect of the two parties totaling to ₹ 14,82,798/-. The assessee had claimed that the irrecoverable balances from two parties, M/s SM Dyechem and M/s Dhar Cement amounting to ₹ 14,82,798/- were actually ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... evenue fails accordingly. 64. The only other Ground remaining in the appeal of the Revenue is Ground of Appeal No.11, which reads as under :- 11. On the facts and in the circumstances of the case, the Ld. CIT(A) erred in holding that separate undertakings were set up by the assessee and deduction u/s 80-IA is allowable. 65. In this Ground, dispute pertains to the assessee's claim for deduction u/s 80-I/80-IA of the Act in respect of two industrial undertakings, namely, (i) Woodpac (manufacturing) - ₹ 21.84 lacs; and, (ii) Process Integrated Boilers- ₹ 138.06 lacs. The only reason weighing with the Assessing Officer to deny the deduction u/s 80-I/80-IA of the Act in respect of the two industrial undertakings was that similar claim was rejected in the re-assessment proceedings for assessment year 1992-93. Subsequent to assessment year 1992-93, and upto assessment year 1997-98 also the claim was disallowed by the Assessing Officer. 66. On this aspect, the CIT(A) noted that assessment year 1992-93 was the first year when the assessee had made such a claim in respect of the aforesaid two undertakings as they were claimed to have been setup in the preceding ..... X X X X Extracts X X X X X X X X Extracts X X X X
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