TMI Blog2005 (8) TMI 301X X X X Extracts X X X X X X X X Extracts X X X X ..... the benefit derived or accruing to an assessee has to establish that the person to whom the payment is made is a person falling within the provisions of s. 40A(2)(b). Admittedly, SBCH, the recipient, is not a person falling within the ambit of provisions of s. 40A(2)(b) of the Act. Therefore, the finding with regard to the dealings between assessee and SBGH not being at arm's length is neither correct nor sustainable and was irrelevant while sustaining disallowance made by the AO. The fact that the recipient viz., SBCH had duly shown the sums received from the assessee as its receipts is also not in dispute. In such circumstances, we are of the view that disallowance of expenses was not warranted. The allegation against the assessee that the charges paid by the assessee to SBGH was excessive is without any basis. We, therefore, conclude that none of the reasons assigned by the CIT(A) to conclude that the decision of the Tribunal for asst. yrs. 1998-99 and 1999-2000 is not applicable to the facts as it existed in asst. yr. 2001-02 can be sustained and, therefore, the said decision of Tribunal will apply to this assessment year i.e., the asst. yr. 2001-02 also. Respectfully foll ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g of interest u/s 234D is compensatory and the provisions of s. 234D are clarificatory and, therefore, applicable retrospectively. According to the learned Departmental Representative, the provisions being purely procedural and machinery provisions can be applied to pending assessment proceedings. In our view, the law dealing with imposition of interest is substantive and not procedural law and, therefore, interest u/s 234D cannot be charged in respect of assessment years prior to coming into force of these provisions. The levy of interest u/s 234D is, therefore, directed to be deleted. The 5th ground of appeal of the assessee is allowed. In the result, both the appeals are partly allowed. - HON'BLE PRADEEP PARIKH, A.M. AND N.V. VASUDEVAN, J.M. For the Appellant : Ajay Vohra, Adv. For the Respondent : Gopal Kamal, Adv. ORDER N.V. Vasudevan, J.M.: 1. ITA No. 2823/Del/2004 is an appeal by the assessee against the order dt. 5th March, 2004 of learned CIT(A)-XV, New Delhi, relating to the asst. yr. 2000-01. ITA No. 819/Del/2005 is an appeal by the assessee against the order dt. 25th Jan., 2005 of learned CIT(A)-XV, New Delhi, relating to the asst. yr. 2001-02. 2. Common issues ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al consumer sales and would be debited to assessee at cost + 5 per cent of cost basis. (iv) The same principle of cost + 5 per cent would be applied by SBCH while determining the administrative expenses to be debited to assessee-company. (v) A list of expenditure heads to be considered for cross charge was also part of the agreement. 4. SBCH is a multi-product, multi-unit company. It was not possible to separately ascertain the cost incurred for providing the aforesaid services to the assessee. Accordingly, a rule of thumb approach was evolved to ascertain the cost by allocating the expenses in the ratio of turnover of the assessee to the aggregate of the combined turnover of SBCH and the assessee. On that basis, SBCH recovered a sum of Rs. 2.30 crores as cross charge for the services rendered by SBCH to the assessee during the previous year relevant to the asst. yr. 1997-98. 5. Later on the assessee and SBCH felt that this method of allocation of expenses was not scientific. It was, therefore, felt necessary to appoint an independent professional firm of repute to carry out an exercise to determine an appropriate formula for segregation and allocation of expenses incurred by SBCH ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... disallowing the expenses incurred in marketing of its products. Admittedly, the assessee-company does not have any infrastructure of its own and, therefore, it had entered into an agreement with SBCH under which SBCH was required to provide the entire network for marketing the assessee's products. It was felt by both the parties that reimbursement of expenditure coupled with commission on sale were not adequate to cover the entire expenditure and, therefore, it was decided to ascertain the suitable criteria for reimbursement of the expenses incurred by SBCH. Accordingly, PWC was appointed to make an in-depth study to find a suitable criteria in respect of the expenditure incurred by SBCH. It is on this basis, PWC made the study and prepared a report along with the formula under which suitable payments were to be made by the assessee to SBCH regarding the marketing of assessee's products. In our opinion, this was a bona fide exercise made by the parties. Under such circumstances, the question is whether the AO could reject such report and determine the expenditure which the assessee ought to have paid to SBCH. At this stage, it would be appropriate to refer to the judgment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erial on record to show that such provisions could be attracted. On the contrary, the CIT(A) has rejected the case of the assessee by stating that it would make no difference even if s. 40A(2) was not applicable to the facts of the present case. Therefore, even on this ground, the amount incurred by the assessee could not be disallowed. Further, it is not the case of the Revenue that such expenditure was not incurred wholly and exclusively for the purpose of business. Therefore, considering from any angle, we are of the view that no disallowance was warranted by the AO on this ground. 8. It was also further submitted by the learned counsel for the assessee that the further appeal of the Revenue to the High Court against the order of the Tribunal for the asst. yrs. 1998-99 and 1999-2000 has also been dismissed. A copy of the order of the Tribunal is placed at page Nos. 17 to 34 of assessee's paper book. A copy of the order of Hon'ble High Court; has also been filed before us. In view of the above, we are of the view that the disallowance made for the asst. yr. 2000-01 was not called for. The basis on which the disallowance was made by the AO and confirmed by the CIT(A) in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re any extraordinary efforts for promotion. The AO also pointed out that SBCH had acquired Maltova and Viva and was marketing them and, therefore, extra efforts were required in the financial year 2000-01. (d) the AO also pointed out that the formula suggested by PWC based on level of effort would be subjective and not measurable in mathematical terms. The AO has also pointed out on the disproportionate allocation of conversion charges, selling expenditure and distribution expenses and marketing expenses. (e) even if the provisions of s. 40A(2) did not strictly apply to the facts of the case, there was no denial that a close connection between the SBCH and the assessee did exist and therefore the dealings between them could not be considered as one which has taken place at arm's length. 10. The assessee in reply to the remand report of the AO contended that the issue was fully covered by the earlier decision of the Tribunal. The assessee also contended that the report of the PWC, a reputed independent consultant, cannot be disregarded. The assessee also pointed out that marketing of health drinks such as Horlicks and marketing of pharma products (being products of the assessee) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -day management are undertaken by the employees of SBCH. That the same mother-company. SB plc UK exerts managerial control over both SBAP and SBCH. The assessee was truly only a technical/legal entity which for all practical purposes an adjunct of SBCH as far as management control is concerned. The CIT(A), therefore held that the assessee and SBCH would not have dealt at arm's length principle. (d) that the formula suggested by PWC was not reflective of a true measure of the fee to be paid by the assessee and that the same cannot be validly applied for taxation and even for accounting purposes. (e) it was true that the Revenue cannot sit in judgment over the quantum of expenditure incurred by the assessee but was certainly entitled to go into the reasonableness of the expenditure with a view to ascertain whether it was in connection of the business of the assessee or not. For the aforesaid reasons, the CIT(A) upheld the order of the AO. Hence, the present appeal by the assessee. 12. We have heard the rival submissions. The learned counsel for the assessee at the outset submitted that the decision of the Tribunal for the asst. yrs. 1998-99 and 1999-2000 should hold good for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see also pointed out the higher sales of these products during the previous year compared to earlier years. 13. With regard to acquiring of a market share in the malt drinks (nutrition drink) market and consequent purchase of Viva and Maltova brands by SBCH, the learned counsel for the assessee pointed out that these brands were primarily acquired only to kill competition in the market for the assessee's brand of Horlicks and, therefore, there was no special effort, and expenditure necessary to keep up the market share in these two brands. In this regard, he drew our attention to p. 189 of assessee's paper book where sales of Viva and Maltova have declined from Rs. 3,900.40 lakhs and 3,317.50 lakhs for financial year 1997-98 to Rs. 1,368.70 lakhs and 2,546.90 lakhs for financial year 2003-04. 14. It was further submitted by the learned counsel for the assessee that there was no motive to divert income and, therefore, the approach of the Revenue authorities was not correct. In this regard, the learned counsel for the assessee submitted that SBCH was showing the entire reimbursement as its receipts. He also brought to our notice that even the Revenue has accepted this fact in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... allocation, the learned counsel for the assessee submitted that the same was on mutual agreement between the parties and on a consideration of the realities of the situation and keeping in view the broad principle of apportionment of cost as suggested by PWC. 18. We have considered the rival submissions. The basis of allocation of expenses as suggested by PWC is as follows: - All expenses are divided into three categories, i.e., allocable expenses, assignable expenses determined, and assignable expenses undetermined. The expenses and their basis of allocation is discussed as below. - Allocable expenses, includes those expenses which can be identified to the user of services at the time they are incurred. - Assignable expenses determined, includes those expenses, which can be charged to a business unit on the basis of an objective unit of measurement. A list of these expenses and the basis of distribution has been elaborated earlier (See for example, bank charges have been rightly allocated in the ratio of collections made for the appellant as compared to SBCH, whereas freight is allocated based on transporter's bills). - Assignable expenses undetermined, includes those expenses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... identifiable and are charged to SBAP and have accordingly been considered as allocable expenditure. Finance 49 16 No identified resources exists for the SBAP activities and SBAP utilizes the resources at all the four regional offices and head office. We consider that these level of resources are needed for the current level of SBAP operations Information Resources 11 04 Human Resources 16 -- This activity is utilized by all the processes equally and hence its costs are charged in the ratio of resources required for SBAP operations to total organizational resources available with SBCH (see below). The staff training costs are also allocated on the same basis. Legal 10 03 No identified resource exists for the SBAP activities and it utilizes SBCH resources for its requirements. We consider that these level of resources are needed for the current level of SBAP operations. Purchases 14 05 MD office 04 02 SBAP has no whole-time directors and all the directors of SBCH are also managing its day-today operations. Also, all the directors and MD office provide equal importance to both the company's operations and we consider that there should be equal allocation of costs. 19. The above ba ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ttedly, SBCH, the recipient, is not a person falling within the ambit of provisions of s. 40A(2)(b) of the Act. Therefore, the finding with regard to the dealings between assessee and SBGH not being at arm's length is neither correct nor sustainable and was irrelevant while sustaining disallowance made by the AO. 20. The fact that the recipient viz., SBCH had duly shown the sums received from the assessee as its receipts is also not in dispute. In such circumstances, we are of the view that disallowance of expenses was not warranted. The allegation against the assessee that the charges paid by the assessee to SBGH was excessive is without any basis. We, therefore, conclude that none of the reasons assigned by the CIT(A) to conclude that the decision of the Tribunal for asst. yrs. 1998-99 and 1999-2000 is not applicable to the facts as it existed in asst. yr. 2001-02 can be sustained and, therefore, the said decision of Tribunal will apply to this assessment year i.e., the asst. yr. 2001-02 also. Respectfully following the order of the Tribunal, we direct that the disallowance of expenses made by the AO and sustained by the CIT(A) should be deleted and same is directed to be del ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the above discussion, I hold that excise duty contained in the closing stock is not a debitable expense for a second time at the end of the financial year and the argument of the appellant is rejected. 23. The learned counsel for the assessee reiterated submissions as were made before the Revenue authorities. The learned counsel for the assessee placed reliance on the following decisions in support of his claim for deduction in respect of excise duty embedded in of closing stock: (a) Lakhanpal National Ltd. vs. ITO (1986) 54 CTR (Guj) 241 : (1986) 162 ITR 240 (Guj) (b) CIT vs. Cadila Chemicals (P) Ltd (1998) 144 CTR (Guj) 663 : (1998) 230 ITR 885 (Guj) (c) Decision of the Special Bench of the Tribunal in the case of Indian Communication Network (P) Ltd. vs. IAC (1994) 48 TTJ (Del)(SB) 604 : (1994) 206 ITR 96 (Del)(SB)(AT) (d) CIT vs. Bharat Petroleum Corporation Ltd. (2001) 169 CTR (Bom) 119 : (2001) 252 ITR 43 (Bom) (e) Berger Paints India Ltd vs. CIT (2004) 187 CTR (SC) 193 : (2004) 266 ITR 99 (SC) We have heard the rival submissions. Sec. 43B of the Act provides a departure from the method of accounting followed by an assessee to allow deduction of statutory liability in the ye ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty as well as excise duty would be a permissible deduction in the year 1983, and particularly when the payment thereof is made under s. 43B of the Act. Under the circumstances, we do not find any merit in any of the contentions raised by Mr. Shelat, and for the same reasons we accept the contentions raised by Mr. J.P. Shah, appearing for the petitioner-assessee . In the case before the Gujarat High Court, the assessee had debited the entire amount of customs/excise duty paid and claimed deduction from the value of closing stock from the element of customs duty/excise duty included therein in order that full deduction could be availed under s. 43B for the customs duty/excise duty paid during the year. The aforesaid view of the Gujarat High Court had been consistently followed by the Bombay High Court in the case of BPCL and also by the Hon'ble Supreme Court in the case of Berger Paints. In the present case, the assessee has made a claim for deduction which was in conformity with a view accepted by the Hon'ble Gujarat High Court in the case of Lakhanpal National Ltd. The AO had placed reliance on the decision of the Hon'ble Supreme Court in the case of Berger Paints where ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e head consumer product research of Rs. 2,85,36,594 was allowed as deduction by the AO in the asst. yr. 2001-02 which was confirmed by the CIT(A). 27. It is not in dispute before us that similar issue had come before the Tribunal in assessee's own case for the asst. yrs. 1998-99, 1999-2000 in ITA No. 2645/Del/2002 and ITA No. 1316/Del/2003, the Tribunal had set aside the orders of the Revenue authorities on the issue and restored the matter to the file of the AO for fresh adjudication. The Tribunal expressed its opinion that the Revenue authorities had made the disallowance without making any reference to the nature and impact of the expenditure incurred by the assessee vis-a-vis the running of the existing business and in the context of s. 37 of the Act. The Tribunal, therefore, directed the AO to ascertain the nature and impact of the expenditure incurred by the assessee and thereafter decide the issue in accordance with the decisions rendered by the Hon'ble Supreme Court as well as various High Courts on this issue. 28. Respectfully following the decision of the Tribunal referred to above, we set aside the additions made by the Revenue authorities in both the assessment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e export out of India is of goods or merchandise manufactured or processed by the appellant and of trading goods, the profit derived from such export shall,- (ii) in respect of trading goods, be the export turnover in respect of such trading goods as reduced by the direct and indirect costs attributable to export of such trading goods. Profit from the export of trading goods is to be determined by reducing from the export turnover of such trading goods, direct cost and indirect costs attributable to such export. The terms direct cost and indirect cost have been defined in cl. (d) and cl.(e) of Explanation below s. 80HHC(3) of the Act as under: (d) 'direct costs' means costs directly attributable to the trading goods exported out of India including the purchase price of such goods. (e) 'Indirect costs' means costs, not being direct costs, allocated in the ratio of the export turnover in respect of trading goods to the total turnover. From a harmonious reading of definition of 'indirect cost' in Expln. (e) below sub-s. (3) of s. 80HHC and cl. (b) of that section it would be appreciated that only indirect cost attributable to the export is to be reduced for com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 39; means the profits of the business as computed under the head 'Profits and gains of business or profession' as reduced by- (1) ninety per cent of any sum referred to in cls. (iiia), (iiib) and (iiic) of s. 28 or of any receipts by way of brokerage, commission, interest, rent, charges or any other receipt of a similar nature included in such profits; and............. In view of the said Explanation for computing profits of the business , 90 per cent of receipts by way of brokerage, commission, interest, rent, charges or any other receipt of a similar nature has to be reduced from the income computed under the head 'profits and gains of business or profession'. From a reading of the aforesaid provisions, it is clear that royalty income is not income of the nature of brokerage, commission, interest, rent or charges. The royalty income is clearly in the nature of profits and gains of business. The royalty income is not receipt of a similar nature as that of brokerage, commission, etc. The expression of any other receipt of a similar nature occurring in cl. (1) of Expln. (baa) has to be construed ejusdem generis with the words appearing immediately preceding that expr ..... X X X X Extracts X X X X X X X X Extracts X X X X
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