2015 (9) TMI 1615 - AT - Income Tax

Addition of interest attributable to capital work in progress - Whether the interest attributable to capital work in progress are hundi discount charges for material purchases? - Held that - Assessee had generated Rs. 229.51 crores from its operating activities - against this investments in fixed assets and capital work-in-progress was only Rs. 122.81 crores which means that assessee had more than sufficient own funds for financing the capital work-in-progress - also there were no loans raised by the assessee during the relevant previous year - interest disallowance was only presumptive without any basis. - thus appeal by revenue is dismissed. Disallowance of provision of warranty - Held that - Provisioning should be for the present obligation arising from past events which is expected to result in out-flow of resources in respect of which reliable estimate is possible for the amount of obligation - assessee could not furnish evidence for the actual warranty expenditure debited in P/L account and could not give historical data for showing that the warranty provisioning was done on a scientific basis - Issue requires a fresh look by the AO - thus allowed for statistical purpose. Nature of royalty paid on sales - revenue out go or a capital out-go? - Held that - Just because the consideration was calculated as a percentage applied on net ex-factory selling price we cannot say that it was a revenue outgo - assessee was free to use the technical knowhow obtained by it from HCCL even after the period of agreement - the agreement between the parties resulted in an enduring benefit to the assessee and thus the consideration paid by the assessee to HCCL was a percentage of the sale value still it retained all qualities of a capital out go - addition made by the AO is reinstated.

Summary

Issues Involved:
1. Deletion of addition as interest attributable to capital work-in-progress.
2. Provision for warranty expenses.
3. Classification of royalty payment as revenue or capital expenditure.

Detailed Analysis:

Issue 1: Deletion of Addition as Interest Attributable to Capital Work-in-Progress
- Ground 2: The Revenue contested the deletion of Rs. 4,97,44,319/- as interest attributable to capital work-in-progress, arguing that the hundi discount charges incurred by the assessee were for material purchases.
- Facts: The assessee, a manufacturer, had shown Rs. 91,02,00,000/- as capital work-in-progress and claimed interest expenditure of Rs. 4,98,17,000/-. The AO disallowed this, arguing the assessee had sufficient surplus funds and relied on the judgment of CIT v. Tin Box Co.
- CIT (A) Decision: The CIT (A) found that Rs. 4,97,44,398/- of the interest expenditure was actually hundi discounting charges and that the assessee had sufficient cash inflow from operations to fund the capital work-in-progress.
- Tribunal Decision: The Tribunal upheld the CIT (A)'s decision, noting that the cash flow statement indicated sufficient funds from operating activities, and no loans were raised during the relevant year. The interest disallowance was deemed presumptive and without basis. Ground 2 was dismissed.

Issue 2: Provision for Warranty Expenses
- Ground 3: The Revenue challenged the CIT (A)'s decision to allow the provision for warranty expenses, arguing that it was not substantiated by scientific basis or actual expenditure details.
- Facts: The assessee had charged Rs. 38 lakhs towards warranty in its profit and loss account. The AO found discrepancies in the opening warranty provision and actual expenditure, leading to a total disallowance of Rs. 44,63,000/-.
- CIT (A) Decision: The CIT (A) allowed the claim based on the precedent set in the assessee's own case for A.Y. 2006-07 and the judgment of Rotork Controls India P. Ltd.
- Tribunal Decision: The Tribunal found that the assessee failed to provide details of actual warranty expenditure or the scientific basis for provisioning. The CIT (A) allowed the claim without verifying these facts. The issue was remitted back to the AO for fresh consideration. Ground 3 was allowed for statistical purposes.

Issue 3: Classification of Royalty Payment as Revenue or Capital Expenditure
- Ground 4: The Revenue argued that the royalty payment, being 1% of sales, should be considered capital expenditure as it conferred an enduring benefit to the assessee.
- Facts: The assessee paid Rs. 91,06,005/- as royalty to Hitachi Construction Co. Ltd for the right to use technical knowhow and intellectual property. The AO classified this as capital expenditure, arguing that the technical knowhow provided an enduring benefit.
- CIT (A) Decision: The CIT (A) considered the royalty payment as revenue expenditure, relying on judgments from various High Courts and the nature of the agreement.
- Tribunal Decision: The Tribunal found that the technical knowhow provided an enduring benefit, allowing the assessee to continue manufacturing even after the agreement period. The Tribunal set aside the CIT (A)'s order and reinstated the AO's addition, classifying the royalty payment as capital expenditure. Ground 4 was allowed.

Conclusion:
The Tribunal dismissed Ground 2, allowed Ground 3 for statistical purposes, and allowed Ground 4, thereby partly allowing the Revenue's appeal. The order was pronounced on 23rd September 2015.