TMI Blog2012 (10) TMI 1001X X X X Extracts X X X X X X X X Extracts X X X X ..... penditure - Held that:- title of the ‘logo’ in question has not passed over to the assessee. Further, there is no acquisition of assets or part of any capital asset. Usage of logo by the assessee is only for displaying it on the product manufactured i.e. rubber contraceptives. That too, for a limited period as provided in the agreement in lieu of payment @ 2% of the gross sales. When we apply the tenor of the case law above cited to the facts of the instant case, we hold the instant ‘logo’ charges are also revenue expenditure within the meaning of Sec.37 of the Act in the nature of wholly and exclusively for the purpose of assessee’s business. Consequently, we see no reason to interfere in the findings of the CIT(A).- Decided in favour of the assessee. Reopening of assessment - Held that:- A perusal of the reasons recorded, makes it clear that there is no allegation against the assessee that there was any failure on its part in not disclosing full and true particulars regarding its claim of deduction under section 80HHC as necessary for the assessment. Therefore, the re-opening, in our opinion, does not withstand the test of first proviso of Sec.147. We also notice that neither ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... em it appropriate that the Assessing Officer shall re-examine the issue in accordance with law - Decided in favour of assessee for statistical purposes. - ITA Nos.1791 to 1796 /Mds./2011, ITA Nos.1826 to 1830 /Mds./2011, ITA No.2027/Mds/11 - - - Dated:- 31-10-2012 - SHRI ABRAHAM P GEORGE AND SHRI S.S.GODARA, JJ. For the Appellant : Shri R.Vijayaraghavan Advocate For the Respondent : Shri K E B Rengarajan Jr.Standing Counsel ORDER PER BENCH: ITA Nos.1791 1826/Mds/11(A.Y. 2002-03) These cross appeals; filed at the behest of the assessee and the Revenue respectively, emanate from common order of CIT(A)-III, Chennai passed in case No.585/08-09/A.III dated 29.08.11 for Assessment Year in proceedings under section 143(3) of the Income Tax Act, 1961 (In short the Act ). 2. The facts apropos are that the assessee is a company, engaged in the business of manufacturing rubber contraceptive i.e. condoms. On 28.10.02, it filed its return for Assessment Year 2002-03 declaring total income of ₹ 13,09,22,390/-. The Assessing Officer finalized summary assessment under section 143(1) of the Act on 04.07.2003. Thereafter, on 08.02.07, he issued a n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... obtain technical inputs in the nature of new formulations to upgrade quality of contraceptives with an entity, namely M/s.LRC Products of U.K. The royalty consideration; in lieu thereof was agreed @ 2% of the total sales in the shape of technical know-how fee, payable by the assessee for a period of five years. The A.O. did not agree and treated the royalty fee @ 2% as capital in nature and held that despite this factual position the assessee had calculated it on gross sales basis. 6. At the same time, the A.O. also considered the assessee s claim of logo charges. In his opinion, the assessee had agreed to pay its group concern, namely M/s.T.T.Krishnamachari Co. for license to use of its trade name and monogram ttk with regard to sale of its products after displaying monogram, trade mark etc with effect from 01.04.2000 by paying logo charges @ 2% of the total sales. In A.O s opinion, the said charges were also in the shape of capital expenditure being related to an intangible asset. 6.1. Accordingly, the A.O. added an amount of Rs. 2,35,90,677/- each for technical know-how fee and logo charges. At the same time, he also allowed depreciation on the same @ 25%. 7. Not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Miscellaneous income including scrap sales etc. 95,35,024 Provision no longer required written back 1,43,535 2,07,15,673 90% of 2,0715,673 1,86,44,106 Adjusted profits of business 28,35,33,290 Adjusted profits x ETO/TTO 28,35,33,290 x 79,19,97,610/1,18,36,96,370 =18,97,08,859 Hence 80HHC deduction allowable is 70% of 18,97,08,859 i.e. 13,27,96,201/- Hence, the total income is computed as under: Business income as returned 27,57,73,805 Add: Technical knowhow fees: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... UK(supra), the claim of revenue expenditure was as raised by the assessee is liable to be restricted to 75%. In this manner, the Assessing Officer s disallowance made has been upheld for balance 25% amount only. 9. Similarly, regarding logo charges(supra), the CIT(A) has held the it to be revenue expenditure after concluding that the claim of the assessee that logo agreement did not confer any ownership; wholly and partially in its favour, so the said plea contained merit. Further, the CIT(A) has also upheld the Assessing Officer s findings regarding assessee s claim under section 80HHC(supra) and its submission pleading exclusion @ 90% of the foreign exchange gains from business profits, miscellaneous income and DEPB gains have been allowed for statistical purposes by issuing necessary direction to the Assessing Officer. 9.1. It is in this backdrop of facts that both parties have preferred these appeals. The assessee s grounds impugne the CIT(A) s order confirming the Assessing Officer s findings on the issues of 80-IB, restricting its claim of royalty to the extent of 75%. ITA. 1791 to 1796 1826 to 1830 /Mds/11 9.2. On the other hand, the grievance of the Revenue i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee s favour. 13.1. On a query put up by the Bench as to whether the issue is covered by the decision of Co-ordinate Bench of Chennai ITAT in the case of M/s.MRF Ltd. dated 11.03.2011 in ITA Nos.1374 to 1377/Mds./2010 ( in which one of us Abraham P George A.M. was a Member of the Bench), the A.R. very fairly produced copy of this said decision and submitted that the same does not take into account the above said cases cited. 14. The Revenue in turn, has chosen to strongly rely upon the order of CIT(A) and reasons contained therein. 15. We have considered the issue at length and also perused the relevant findings as well as case laws cited. Admittedly, the assessee is a manufacture of rubber contraceptives,(condoms), who has claimed deduction under section 80-IB regarding its unit at Pallavaram, near Chennai. The A.O. as well as the CIT(A) have declined the claim on the ground the product falls under entries 27 28 of the Eleventh Schedule of the Act and the unit is located in a cantonment area. The CIT(A) has not specifically decided the latter objection and upheld the A.O. s first conclusion regarding Eleventh Schedule post of years applicability of the facts of the cas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... viously used for any purpose, if the following conditions are fulfilled, namely :- (a) Such machinery or plant was not, at any time previous to the date of the installation by the assessee, used in India; (b) Such machinery or plant is imported into India from any country outside India; and (c) No deduction on account of depreciation in respect of such machinery or plant has been allowed or is allowable under the provisions of this Act in computing the total income of any person for any period prior to the date of the installation of the machinery or plant by the assessee. Explanation 2 : Where in the case of an industrial undertaking, any machinery or plant or any part thereof previously used for any purpose is transferred to a new business and the total value of the machinery or plant or part so transferred does not exceed twenty per cent of the total value of the machinery or plant used in the business, then, for the purposes of clause (ii) of this sub-section, the condition specified therein shall be deemed to have been complied with; (iv) In a case where the industrial undertaking manufactures or produces articles or things, the undertaking employs ten or more work ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n, the products involved in the same were altogether different i.e. rubber stoppers, Cigarette filters, rubber compounds for utilization in rubber industries. Therefore, the same are not relevant qua adjudication of the instant issue. We also notice that in M/s.MRF Ltd case (supra), it had been observed as under:- 22. The last issue of this appeal is regarding withdrawal of 80IA benefits. The assessee has claimed deduction of ₹ 15,14,97,778/- under section 80IA of the Act. Initially, this was allowed but in re ITA. assessment proceedings this deduction was withdrawn because the company s products were not found to be eligible for deduction under section 80IA as it manufactures articles specified in Eleventh Schedule of the Act. Item 27 of Eleventh Schedules appended to the Income Tax Act, 1961 reads as under: Crown corks or other fittings of cork, rubber, polyethylene or any other material. 23. A bare reading of this schedule makes it amply clear that manufacture of tyres of rubber which falls under Item 27 which exclude the item from the benefit of section 80IA. In this schedule, crown corks, or other fittings of cork, rubber, polyethylene or any other material ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... licable. Further, he has also drawn support from the following cases:- 1. CIT Vs. IAEC Pump Ltd. in 232 ITR 316(SC) 2. CIT Vs. G4S Secutities System in 338 ITR 46 3. CIT Vs Panasonic Carbon India Ltd. in TC(A) No. 552 to 556/2010 dated 12.07.10 of Hon ble Madras High Court. 4. Order of Chennai Tribunal in India Japan Lighting P Ltd Vs. ACIT in ITA Nos. 676 to 678/Mds./2010 and ACIT Vs. India Japan Lighting in ITA 862/10 5. Order of Chennai Tribunal in the case of Panasonic Carbon India Ltd in ITA No.1968 to 1973/08 6. Order of Chennai Tribunal in the case of Nippo Batteries Co Ltd Vs. ACIT in 7 ITR (Trib) 303-2011 and prayed for acceptance of issue in favour of the assessee. 17. Opposing the assessee s argument, the Revenue has submitted that earlier, there was an agreement between assessee and M/s.LRC Products. After sometime, they rescinded the agreement and assessee started manufacturing contraceptives alone by paying non-compete fee to other entity for a period of five years. The D.R. emphasized that the Assessing Officer had rightly held the royalty in the shape of technical know-how as capital expenditure, which has been strongly upset by CIT(A). So, his ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to LRC together with all copies of written and graphic material and to retain no copies thereof and provide LRC with a certificate that no copies have been retained. WHEREAS both the parties hereto consider it necessary and expedient to record such terms and conditions in writing by this deed of agreement NOW THEREFORE, IN CONSIDERATION OF THE PREMISES AND OF THE MUTUAL COVENANTS AND OBLIGATIONS HEREIN CONTAINED, THE PARTIES HERETO AGREE AS FOLLOWS: 1. In consideration of the new formulations being made available by LRC, TTK LIG shall pay to LRC a technical knowhow fee, a sum equivalent to 2% (two percent) of the total annual sales turnover of the Company on quarterly rests, subject to deduction of tax at sources as applicable under the provisions of Indian Income Tax Act, 1961 and subject to approval under the Foreign Exchange Regulation Act, 1973 and other applicable Act and Regulations in India. 2. This Agreement shall be n force for a period of five years effective 1st April 2000 and may be renewed thereafter by mutual consent of both the parties. The renewal of this Agreement may be effected by both the parties hereto by exchange of letters signed by persons duly aut ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he foreign company and on the expiration or termination of the agreement the assessee was to return all the know-how obtained by it under the agreement. The payment of royalty was also to be on year to year basis on the net sales of the assessee and at no point of time was the assessee entitled to become the exclusive owner of the know-how and trade mark. Hence, the expenditure incurred by the assessee as royalty was revenue expenditure and was deductible under section 37(1) of the Income-tax Act, 1961. Accordingly we are of the view that the CIT(A) has not rightly deleted the disallowance of expenditure as made by the Assessing Officer to the tune of 25%. Therefore, we hold that the payment made by the assessee in the shape of technical knowhow fee by way of royalty @ 2% of the gross sales is Revenue expenditure. So, the issue is decided in favour of the assessee. Issue No.C 19. In support of this issue, the Revenue has drawn our attention to assessment order holding logo charges (supra) as capital expenditure and submitted that the CIT(A) has strongly upset the well reasoned assessment order. To buttress the plea, the D.R has reiterated the submissions raised in the gro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Licenses and for the purpose has approached TTK for license and permission to use the said monogram on or in relation to the goods manufactured and marketed by TTK LIG and in relation to other business activities of TTK LIG. WHEREAS TTK had acceded to the request of TTK LIG to grant license and permission to TTK LIG to use the said monogram, subject to certain terms and condition, which terms and conditions in writing by this Deed of Agreement. WHEREAS both the parties hereto consider it necessary and expedient to record such terms and conditions in writing by this Deed of Agreement. NOW THEREFORE, IN CONSIDERATION OF THE PREMISES AND OF THE MUTUAL COVENANTS AND OBLIGATIONS HEREIN CONTAINED, THE PARTIES HERETO AGREE AS FOLLOWS: 1. TTK hereby confirms having licensed and permitted theuse of the said monogram by TTK-LIG for a period of three years with effect from 1st April 2000, as per approval accorded by the Government of India vide letter No.2/M-7964 dated 3rd May, 2000. Copy of Government approval is annexed to this Agreement. 2. The License and permission granted by TTK in favour of TTK-LIG as aforesaid, shall entitle TTK-LIG, so long as this agreeme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m 1.4.2000. 2. The approval accorded in para 1 above is subject to the following conditions: (i) The contract shall be for a period of 3 years with effect from 1.4.2000 to 31.3.2003. (ii) The total value of services to be availed from the contractee party herein shall not exceed the limit mentioned in para 1 above during the contract period. (iii) The prices to be payable for the services to be obtained from the contractee party shall be reasonable and shall not be higher than the prevailing market rates. (iv) The company shall ensure that the contract with the contractee party is competitive and is not less advantageous to it as compared to similar contracts with other parties. 3. This approval has been accorded without prejudice to any action that may be required to be taken by the company under any other provisions of the Companies Act, 1956 or any other law in force. Dated at Chennai the 27th day of April 2000. There is hardly any dispute between the parties about the factum of payment made by assessee of logo charges @ 2% of the gross sales. The only strife is that per revenue, it is capital expenditure whereas the assessee s plea of treating it as a rev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nature primarily to bring it as capital expenditure. Taking cue from the same, we hold that in the instant case also, title of the logo in question has not passed over to the assessee. Further, there is no acquisition of assets or part of any capital asset. Usage of logo by the assessee is only for displaying it on the product manufactured i.e. rubber contraceptives. That too, for a limited period as provided in the agreement in lieu of payment @ 2% of the gross sales. When we apply the tenor of the case law above cited to the facts of the instant case, we hold the instant logo charges are also revenue expenditure within the meaning of Sec.37 of the Act in the nature of wholly and exclusively for the purpose of assessee s business. Consequently, we see no reason to interfere in the findings of the CIT(A). Therefore, the same are hereby upheld. 21. In view of our discussion, the assessee s appeal stands partly allowed whereas that appeal by the Revenue is dismissed. ITA Nos. 1792 2027/Mds./11 (A.Y. 2003-04) 22) These cross appeals; filed on behalf of the assessee and Revenue respectively, emanate from common order of CIT(A)- III, Chennai passed in case No.585/08-0 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessing Officer, upheld the assessee s claim on logo charges. However, regarding deduction under section 80HHC, the CIT(A) has affirmed findings of Assessing Officer. In this backdrop, the assessee is assailing the CIT(A) s order on legality of reopening, order restricting claim of royalty expenses to the extent of 75% only, order of CIT(A) confirming the Assessing Officer s order holding that profit on sale of DEPB entitlement is not eligible for deduction under section 80-IB of the Act and further confirming the exclusion of 10% of the interest income while computing deduction/s.80HHC of the Act and assessing the same under the head Income from Other Sources as well as enhancement of withdrawal of 80-IA by CIT(A). 24.1. On the other hand, the Revenue is aggrieved against the CIT(A s order in restricting the disallowance of royalty expenditure to 25% only of the amount disallowed by the A.O. and in accepting the assessee s claim of expenditure pertaining to logo charges. Both representatives have also re-asserted their respective grounds before us. Since parties are at variance in their respective stands qua correctness of CIT(A) s order, we frame following issues for our adj ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons 148 to 153, assess or reassess such income and also any other income chargeable to tax which has escaped assessment and which comes to his notice subsequently in the course of the proceedings under this section, or recompute the loss or the depreciation allowance or any other allowance, as the case may be, for the assessment year concerned (hereafter in this section and in sections 148 to 153 referred to as the relevant assessment year) : Provided that where an assessment under sub-section (3) of section 143 or this section has been made for the relevant assessment year, no action shall be taken under this section after the expiry of four years from the end of the relevant assessment year, unless any income chargeable to tax has escaped assessment for such assessment year by reason of the failure26 on the part of the assessee to make a return under section 139 or in response to a notice issued under sub-section (1) ofsection 142 or section 148 or to disclose fully and truly all material facts necessary for his assessment, for that assessment year: A bare perusal of the first proviso as incorporated in the Act makes it amply clear that an assessment finalized can be reope ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f CIT(A)-III, Chennai passed in case No.585/08-09/A.III dated 29.08.11 for impugned Assessment Year in proceedings under section 143(3) of the Income Tax Act, 1961 (In short the Act ). 31) In assessee s appeal, the following sole substantial ground is raised:- 2.The CIT(A) erred in confirming 25% of the royalty expenditure as capital expenditure and the remaining 75% as revenue expenditure. 31.1. Similarly, in Revenue s appeal, the substantive grounds raised read as under:- 2.1. The CIT(A) erred in holding that 75% of the royalty payment should be allowed as revenue expenditure and 25% of the royalty payment should be treated as capital expenditure. 3.1. The CIT(A) erred in holding that the expenditure incurred towards payment of logo charges was re in nature and deleting the addition. Both representatives appearing for the respective parties are in unison that the facts of the case are similar to those involved in ITA No.1791/Mds./11 decided herein above i.e. payment of royalty expenditure and that of logo charges. They further clarified that in assessee s appeal, the only ground is for accepting assessee s claim of royalty payment on technical know-how fee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld the disallowance made by the Assessing Officer. 4.3. The CIT(A) erred in holding that Rule 8D could not be invoked in respect of assessment years prior to Assessment Year 2008-09, relying on the decision of the Bombay High court in the case of Godrej and Boyce Mfg. Co (328 ITR 81). 4.4. The CIT(A) ought to have appreciated that the decision of the Bombay High Court in the case of Godrej and Boyce Mfg. Co (328 ITR 81) has not become final. We have perused the above said grounds. It transpires that apart from grounds Nos.4.1. to 4.4 of the Revenue (supra), rest of the grounds only pertain to the issues of royalty payment claimed as Revenue expenditure by the assessee, which has been accepted in part by CIT(A) @ 75% instead of disallowance made by the Assessing Officer at 100% and similar claim regarding logo charges as paid by the assessee; which was disallowed by the Assessing Officer by terming it as capital expenditure, but accepted by the CIT(A) as revenue expenditure. Even both the learned representatives have fairly stated that these grounds on legality as well as on merits stand adjudicated in ITA Nos.1791 1826/Mds/11 pertaining to Assessment Year 2002-03(supra) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Rs. Rs. 3,62,89,967/- Some amount of expenditure on tracking the investment, encashing the dividend warrants, bank charges, salary on personnel of treasury department as also common administration and general expenditure is required to earn the exempt income. It would be reasonable to estimate 2% of the exempt income as expenditure attributable to the dividend income/income from mutual fund. This is supported by the decisions of the Hon ble ITAT Chennai in the case of Sundaram Finance Ltd in ITA No.845 to 847/Mds./98 dated 02.12.2002 and Hon ble ITAT Mumbai in the case of Godrej Agrovet Ltd V ACIT [2010-TIOL-616-ITAT-MUM] Hence, the A.O is directed to disallow 2 percent as expenditure in earning the exempt income. This ground is partly allowed. Therefore, the Revenue is aggrieved. 38) Before us, the D.R representing Revenue has reiterated the submissions made in the grounds of appeal and prayed for restoring the A.O. s order. The A.R on the other hand has submitted that the Hon ble Bombay High Court in the case of Godrej and Boyce Mfg. Co. Ltd. in 328 ITR 81 has held that Rule 8D of the Income Tax Rules, 1962 is only applicable with effect from Assessment Year 2008-09 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) erred in restricting the disallowance under section 14A to 2% of the exempt income, placing reliance on the decision of the Hon ble ITAT, Chennai in the case of Sundaram Finance Ltd. in ITA No.845 to 847/Mds./98 dated 2.12.2002 and the Hon ble ITAT, Mumbai in the case of Godrej Agrovet Ltd V ACIT (2010 TIOL 616 ITAT MUM) 4.2. The CIT(A) ought to have appreciated that the issue has not become final and ought to have upheld the disallowance made by the Assessing Officer. 4.3. The CIT(A) erred in holding that Rule 8D could not be invoked in respect of assessment years prior to Assessment Year 2008-09, relying on the decision of the Bombay High court in the case of Godrej and Boyce Mfg. Co (328 ITR 81). 4.4. The CIT(A) ought to have appreciated that the decision of the Bombay High Court in the case of Godrej and Boyce Mfg. Co (328 ITR 81) has not become final. 43. Both the learned representatives have stated at the bar that our findings qua issue No.2 in ITA No.1791 and 1826/Mds./11 decided herein above cover ground No.2 of the assessee s appeal and grounds Nos.2.1 3.1. of the Revenue s appeal i.e. payments pertaining to royalty expenditure and logo charges which have ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ITAT, Mumbai in the case of Godrej Agrovet Ltd V ACIT (2010 TIOL 616 ITAT MUM) 4.2. The CIT(A) ought to have appreciated that the issue has not become final and ought to have upheld the disallowance made by the Assessing Officer. 4.3. The CIT(A) erred in holding that Rule 8D could not be invoked in respect of assessment years prior to Assessment Year 2008-09, relying on the decision of the Bombay High court in the case of Godrej and Boyce Mfg. Co (328 ITR 81). 4.4. The CIT(A) ought to have appreciated that the decision of the Bombay High Court in the case of Godrej and Boyce Mfg. Co (328 ITR 81) has not become final. 48. On behalf of the assessee, A.R has submitted before us that apart from ground No.4 in assessee s appeal, all other issues of royalty expenditure, logo charges and that of disallowance under section 14A sought to be raised in both appeals stand adjudicated against the Revenue by our conclusions herein above in ITA Nos 1791 1826/Mds./11 for A.Y. 2002-03. It is the submission of the A.R that in the above said lead case, we have already held the above expenditure to be revenue in nature. Thereafter, the A.R has referred to the sole issue framed and decid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... PB/Duty drawback are incentives which flow from the schemes framed by the Central Government or from section 75 of the Customs Act, 1962. Incentive profits are not profits derived from eligible business under section 80-IB : they belong to the category of ancillary profits of such undertaking. Profits derived by way of incentives such as DEPB/Duty drawback do not fall within the expression profits derived from industrial undertaking under section 80-IB. Respectfully following the above decision, the income from sale of DEPB entitlement is held as not eligible for deduction u/s 80-IB. Accordingly, the disallowance made by the AO is sustained and the ground is dismissed. It is in this backdrop that the assessee has raised its grievance. 53. By reiterating the plea raised in ground, A.R. has assailed the order of the CIT(A) in confirming the disallowance as made by the Assessing Officer and contended that the Hon ble Supreme Court in case of Topman Exports Vs. CIT [2012] 342 ITR 49 has held that profit on transfer of credit of DEPB is profit within the meaning of Section 28(iiib). It is further submitted by the A.R that since the A.O as well as the CIT(A) have not determined th ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
