TMI Blog2009 (2) TMI 242X X X X Extracts X X X X X X X X Extracts X X X X ..... um of 90 per cent of export incentive Rs. 5,18,932, training receipt Rs. 57,77,024, liabilities written back Rs. 11,63,256 and license fee Rs. 1,53,433 aggregating to Rs. 76,12,645, being Rs. 68,51,380 and determined business profit for the purposes of deduction under s. 80HHC at Rs. 12,35,49,592 (Rs. 13,04,00,973-Rs. 68,51,380). He computed deduction under s. 80HHC as under: BP x ET + (90% of EI x ET -- --- TT TT) BP=Business Profits : ET=Export Turnover TT = Total Turnover : EC = Export Incentives 12,35,49,592 x 9,02,90, 920 + (90% of 5,18,932 x 9,02,90,920) --------------------------- ------------------------------- 1,29,76,71,303 1,29,76,71,303) = 85,96,480 + 32,496 = 86,28,976 Deduction under s. 80HHC @ 50% of Rs. 86,28,976 at Rs. 43,14,488. 4. It was against deduction under s. 80HHC claimed by the assessee at Rs. 49,00,005. 5. The deduction under s. 80HHE was computed after deducting 90 per cent of the above receipts and the allowable deduction was computed at Rs. 94,092 being 50 per cent of Rs. 1,88,104 the profit (Rs. 12,35,49,592) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sultancy Ltd. (2000) 163 CTR (Bom) 593 : (2000) 245 ITR 854 (Bom) again in the case of CIT vs. Kantilal Chhotalal (2000) 163 CTR (Bom) 476 : (2000) 246 ITR 439 (Bom) the Bombay High Court held "In fact, the legislature have clarified that receipts like interest, commission, etc., have no nexus with export activity and by including such receipts in the business profits the existing formula became unworkable. Hence, by the amendment, such receipts were excluded." 7. The AO observed that the assessee has made a total sales of Rs. 129.76 crores out of which the export turnover is only Rs. 9.02 crores. The training school receipts that the assessee charges from its client is for providing training to the customer with regard to operation of the system/product sold by the assessee. Thus, the nature of the training school receipt does not have any element of "turnover". Further, out of the total sale of Rs. 129.76 crores the assessee has made an export of finished goods of an amount of Rs. 7.13 crores only which shows that not only the training school receipts do not have any nexus with the export, it has no direct nexus with the export business. The training school receipts are not der ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... om the export business of the assessee. The receipts are only incidental to the main business of the assessee. Thus, the receipts are neither part of the turnover nor they are derived from the export business of the appellant. After considering the facts and circumstances of the case, I also incline to agree with the opinion of the AO that the license fees for product of the company is merely a charge in the form of fees collected by the company from the user of his license. The license fees is neither part of the turnover nor they can be said to have been derived from the export business of the appellant. In regard to liabilities and provision, the appellant had not provided the details of the nature of expense which are written back. Therefore, it is not proved that the expenses had any direct nexus with the export profit or not, or whether these are part of the turnover. Therefore, the AO has considered this amount as falling under Expln. (baa) to s. 80HHC. In view of the above discussion and after considering the facts and circumstances of the case, the training school receipts, license fees and liabilities and provisions written back are considered as charges or any other rece ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g school receipt is inextricably linked to the business and therefore, the entire earnings through the training school are the profits of the business of the assessee as they are derived from the business of the company. 13. As regards license fees, he submits that the assessee is a licensed user for Sprecher + Schuh (S + S) products which it had outsourced its right to use the above licences to one of its suppliers LECS for manufacture and supply of one of the products-industrial switchgears, in return for a certain fee. It was this fee collected from LECS which has been classified as 'license fee for products of the company'. LECS, in turn, manufactured the products on behalf of the assessee and the total items manufactured were supplied to the assessee only. The license fees so collected is a business receipt which arises out of the business operations of the company and is therefore eligible for deduction under ss. 80HHC and 80HHE of the Act. 14. As regards liabilities and provisions written back, it is submitted that during the year under consideration the assessee wrote back liabilities and provisions and considered them as business income. The said liabilities and provis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed to assessee from the business activity. Because training school receipts are received from the customers, who require certain stimulated exercises for using equipment. Therefore these services have direct nexus with main business of the appellant manufacturing and sale of equipments. Similarly, license fees for products of the company is not the charge, as stated by the learned AO, but the license fee collected from the company, who manufacture and supply the products i.e. industrial switchgears. Therefore, the license fee received by the assessee is not incidental to main business rather it has direct nexus to the turnover and related to main business of the appellant company. In respect of provisions written back it is abundantly clear that they were offered to taxed under s. 41(1) in the year under consideration, under the scheme of s. 41(1) the amount offered to tax were the amounts which were charged from profits of the earlier years. 17. The assessee placed reliance on the decision of SKF Bearing India (P) Ltd. 4 SOT 534 (Mum) wherein it is held that technical services are not in the nature of brokerage, commission, rent or interest. The main business of the assessee is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for export incentive under s. 80HHC(3) in his return filed for the asst. yr. 1993-94. He did not include processing charges (receipts) in his total turnover. In his business profits at Rs. 1,94,08,220 processing charges (receipts) amounting to Rs. 1,54,68,811 were included but these processing charges were not included in his total turnover. The AO did not agree as according to him the gross total income of the assessee was Rs. 1,94,08,220 from which an amount of Rs. 1,74,13,200 (90 per cent) was to be deducted in terms of cl. (baa) to the Explanation to s. 80HHC to arrive at the business profits. 20. The dispute which arose for determination was: whether the Department was right in including the processing charges, amounting to Rs. 1,54,68,811, in the total turnover while arriving at export profits under s. 80HHC(3) of the Act, as it stood at the material time. The Supreme Court held: "Under s. 80HHC(1) of the IT Act, it was, inter alia, provided that in computing the "total income" a deduction of the profits derived by the assessee from the export of goods shall be made. That, that the words "profits derived from exports" in the said sub-section was substituted for the words ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... indicates that the formula in s. 80HHC(3) of the IT Act provided for a fraction of the export turnover divided by the total turnover to be applied to business profits calculated after deducting 90 per cent of the sums mentioned in cl. (baa) to the said Explanation. That, profit incentives and items like rent, commission, brokerage, charges, etc., though formed part of gross total income had to be excluded as they were "independent incomes" which had no element of export turnover. That, the said items distorted the figure of export profits. In our view, for the above reasons, the said processing charges, which was part of gross total income, was an independent income like rent, commission, brokerage, etc., and, therefore, 90 per cent, of the said sum had to be reduced from the gross total income to arrive at the business profits and since the said processing charge was an important component of business profits, it also had to be included in the total turnover in the said formula to arrive at the business profits in terms of cl. (baa) to the said Explanation. One point still remains for consideration. On behalf of the assessees it has been vehemently urged that the abovementioned pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... receipts by way of brokerage. commission, interest, rent, charges, etc., formed part of gross total income being business profits. But for the purposes of working out the formula and in order to avoid distortion of arriving at the export profits, cl. (baa) stood inserted to say that although incentive profits and "independent incomes" constituted part of gross total income, they had to be excluded from gross total income because such receipts had no nexus with the export turnover. Therefore, in the above formula, we have to read all the four variables. On reading all the variables it becomes clear that every receipt may not constitute sale proceeds from exports. That, every receipt is not income under the IT Act and every income may not be attributable to exports. This was the reason for this Court to hold that indirect taxes like excise duty which are recovered by the taxpayers for and on behalf of the Government, shall not be included in the total turnover in the above formula [CIT vs. Lakshmi Machine Works (2007) 210 CTR (SC) 1 : (2007) 290 ITR 667 (SC)]. In the present case, the processing charges were included in the gross total income from cashew business. That, even accordin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rs requires certain stimulated exercises to upgrade the reflexes of the user, else it may lead to damage to the equipment and loss of production. But these are independent receipts and not a condition precedent for the supply. We have seen some of the bills of the supply and the training receipts. They do not have any correlation. There are supplies without any such training and there are receipts without the supply of the product. These are no doubt business receipts but independent to the main supply and therefore rightly excluded under the provision of the Expln. (baa) to s. 80HHC of the Act. These are therefore to part of the turnover as well in the light of the Supreme Court aforesaid. 22. Similarly the license fees for product of the company is merely a charge in the form of fee collected for the use of its license and is neither part of turnover nor they are derived from the export business of the assessee. This also is independent income of the assessee and was rightly excluded from the business profits by virtue of Expln. (baa) to s. 80HHC of the Act. 23. With regard to liabilities and provision written back the assessee has not given details of the nature of expenses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. 32 of the IT Act unambiguously stipulates that where the business of the assessee is carried on a premises not owned by it but leased, any capital expenditure incurred by the assessee by way of renovation, extension, improvement, will be considered as being incurred on its own premises and the assessee would be entitled to depreciation on that expenditure. This being the express condition in law, the assessee's method of amortising the leasehold improvement expense is an incorrect method. The assessee's reliance on the Supreme Court decision of Madras Industrial Investment Corporation Ltd. vs. CIT is not relevant as it is on different facts and issues where no express provisions of law was existing to determine the taxability of amount. The reliance on the Delhi High Court in the case of CIT vs. Dalmia Promoters Developers (P) Ltd. also does not help the assessee as the assessee has blatantly not followed the express provisions of the IT Act under s. 32. There are several decisions of the Supreme Court which say that res judicata do not apply to the income-tax proceedings and each year is separate year. Further the Supreme Court in the case of CIT vs. British Paints India Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce of debentures over the maturing period. Ordinarily, revenue expenditure which is incurred wholly and exclusively for the purpose of business must be allowed in its entirety in the year in which it is incurred. It cannot be spread over a number of years even if the assessee has written it off in his books over a period of years. In the said judgment, the Hon'ble Supreme Court held that the word "expenditure" covered "a liability which the assessee has incurred in praesenti although payable in futuro" and would also cover not just one time payment but a liability spread over a number of years. A particular type of revenue expenditure whose benefit extends over some years which is claimed by the assessee can be spread over that period. But nevertheless the facts of the above case cannot be of any help to the case at hand. There is no certainty of matching of expenses with the benefit to be obtained in the ensuing years. In view of the discussion made above, in my considered opinion, the assessee is not entitled to spread over the expenses as claimed. The AO has correctly disallowed the same and, therefore, the action of the AO on this ground is confirmed and the appeal of the appel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o the building, it is to be assumed as if the said structure or work is a building owned by the assessee. The case of Madras Industrial Investment Corporation Ltd. vs. CIT cannot be applied to the case of the assessee as the nature of expenses in the said case was of revenue in nature whereas in the present case of the assessee the expenditure is of capital in nature which is deemed to be a building owned by the assessee. A revenue expenditure whose benefit extends over some years which is claimed by the assessee can only be spread over that period. The AO in our opinion, is right in disallowing the same. Therefore, the disallowance by the CIT(A) and the AO is upheld. 30. In the Delhi High Court decision in CIT vs. Dalmia Promoters Developers (P) Ltd. it is observed that "The question in the above backdrop is whether the Tribunal was justified in upholding the order passed by the CIT(A) on the principles of consistency. In Radhasoami Satsang vs. CIT, the apex Court declared that although the principles of res judicata do not apply to income-tax proceedings, each assessment year being a unit by itself, yet in cases, where a fundamental aspect permeating through different assessmen ..... X X X X Extracts X X X X X X X X Extracts X X X X
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