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Deputy Commissioner of Income Tax, New Delhi Versus M/s. Lear Automotive India Pvt Ltd (Formerly Lear Seating Pvt Ltd)

Disallowance of compensation paid to M/s L&T - compensation for not honouring its commitment for procuring ‘seat frame’ and ‘trim covers’ from Vendors - revenue v/s capital expenditure - CIT(A) deleted the disallowance - Held that:- The nature of payment under settlement is with respect to supplies by vendors to the assessee which are inherently in revenue field. While we have noted that the A.O. has alleged that the assessee company was "certainly benefited by enduring nature" by the virtue of .....

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ayment is clearly revenue in nature. In these circumstances, unless there is any cogent material or evidence to demonstrate that the payment is capital field, the expenditure in question required to be treated as revenue expenditure. As we have mentioned earlier, there is nothing on record whatsoever, to suggest that the assessee derived any enduring benefit by making the payment for this compensation. Hence the payment in question having been made to enhance the supplies and in connection with .....

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the Income Tax Act, 1961 (hereinafter referred to as the Act ), for the assessment year 2004-05 on the following grounds :- 2. On the fact and in the circumstances of the case, the learned CIT(A) has erred in deleting disallowance of ₹ 4 Cr. claimed as compensation paid to M/s L&T for not honouring its commitment for procuring seat frame and trim covers from Vendors M/s L&T ignoring that the said payment is not admissible under section 37(1) and is capital expenditure in view of t .....

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to enter into the agreement because its account could have been settled on actual transactions/terms. e) By virtue of cessation of alleged business arrangements, the assessee company has eliminated competition, which is an enduring benefit. f) The terms of the arrangement are vague." 2. Briefly stated, the relevant material fats are like this. The assessee company, a wholly owned subsidiary of Lear Corporation, USA, is engaged in manufacturing/assembly of automotive seating and interior pa .....

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The A.O. also required the assessee to show cause as to why the said expenditure not be regarded as a capital expenditure. The reply filed in response to the show cause notice did not impress the A.O. as evident from his following observation in support of his stand that the amount so paid should be treated as capital expenditure rather than revenue deduction :- "4.3 Written submission was filed on 17.10.2006. A copy of agreement/settlement dated 18.06.2003 between Shri Mohan V. Kamat and .....

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ement reveals a few relevant facts. L&T was supplier of seat frames & trim covers to the assessee company. The business arrangement between the two parties was discontinued some time back. In pursuance of the agreement, L&T was under obligation to cease the use of intellectual property including trade mark of Lear, return all original documents, samples, publicity material to Lear. It was out of court settlement between the parties. The following facts emanate from the written submis .....

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rties. (c) The assessee company was certainly benefited of enduring nature by cessation of the agreement. (d) Had it been a simple discontinuance of business arrangements between the parties, there was no need to enter into the agreement because its account could have been settled on actual transactions/terms. (e) By virtue of cessation of alleged business arrangements, the assessee company has eliminated competition, which is an enduring benefit. (f) The terms of the agreement are vague In view .....

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enue expenditure. While holding so, the ld. CIT(A) observed as follows :- "Rival contentions have carefully been considered. After considering the rival submissions I find a substantial support in the contention of the ld. A.R. of the appellant. It is an undisputed fact that ₹ 4 crore has been paid by the assessee company to M/s L&T as a compensation which is business expenditure only. The only issue is to be decided whether the compensation amount is a capital expenditure or a re .....

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olding it as a capital expenditure are totally contrary to the facts and based on presumptions, assumptions and conjectures and surmises. The decision for suspending the procurement of the seat frames etc. from M/s L&T was a commercial decision in a view to have business advantage to the assessee company. The assumption by the Assessing Officer that by discontinuing the procurement of supplies from M/s L&T, the assessee company had assimilated all the manufacturing processes in its own u .....

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p;T, no new capital asset has been generated by the assessee company. There has not been any preservation of any capital asset on account of discontinuation of the Procurement Deed entered by the assessee company with M/s L&T. Therefore, the observation of the Assessing Officer that the discontinuation of the Deed has resulted into benefit to the assessee company of enduring nature, is contrary to the facts. Making a lump sum payment which would eliminate a disadvantageous payment can not be .....

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l property are concerned, same has been found for the reasons that these materials were given to L&T as per the technical specification required by the assessee company. However, such return by the supplier had not put any condition to restrict them in any manner to continue its business. The totality of all the facts and circumstances it appears the Assessing Officer had presumed hat the appellant after the cessation of business with M/s L&T has gone into manufacturing of the same item, .....

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ing the totality of all the facts and circumstances, I am of the considered view that the compensation for volume loss of ₹ 1.34 crore is a revenue expenditure only. Since the outstanding amount of ₹ 1.25 crores paid for supplies made by L&T and compensation for volume loss of ₹ 1.34 crores has been held as a revenue expenditure, the interest paid on these outstanding amount is also considered as a revenue expenditure only. In the conclusion, I am of the considered view tha .....

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fides and commercial expediency of the compensation having been paid to the erstwhile vendor. While the necessity and bonafides of expenditure is not in dispute, the only objection which has been taken by the A.O. in declining the deduction of this expenditure is that the said expenditure is capital in nature and, as such, does not constitute permissible deduction under section 37(1) of the Act. In this view of the matter, all that we required to adjudicate in this appeal is, whether or not expe .....

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ed at because the assessee had discontinued the business arrangement with the vendor and desired to enter into a complete settlement in respect of or arising out of such cessation of the business relationship on a full and final basis. It is thus beyond doubt that the payment was made with respect to obligation under an arrangement with the vendor. In this view of the matter, the nature of payment under settlement is with respect to supplies by vendors to the assessee which are inherently in rev .....

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