TMI Blog2017 (12) TMI 570X X X X Extracts X X X X X X X X Extracts X X X X ..... ions under MSMED Act, 2006 for payment of interest to the MSME being penal in nature and having the overriding effect of Sections 15 to 23, we do not find any error or illegality in the orders of the authorities below in disallowing this claim of interest paid to the MSME. Addition on account of the amount received in respect of technical knowhow from M/s. Motogen under the head Business Income as against the claim of the assessee as 'Long Term Capital Gains (LTCG)' - Held that:- The assessee after taking permissions from the Bosch has sub-licensed the right to use of patented technology which has not resulted extinguishing right vested with the assessee. The transfer of capital asset is necessarily ceases the ownership or right in the property in the hand of the transferor and it gets vested in the hand of transferee. Therefore, in the case of transfer the right or ownership of transferor is completely extinguished and it is vested with the transferee. In the case on hand, the assessee is vested with the right to use the patented technical know how / technology under the license agreement and the subsequent sublicensing to M/s. Motogen is only the sharing of the said ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ability of interest free assessee's own funds and then decide this issue in the light of various binding precedents. As regards the indirect administration expenses, we find that the Assessing Officer has applied Rule 8D(2)(iii) without examining the actual expenditure attributable to the exempt income. the case on hand, the assessee has worked out the disallowance on account of indirect administrative expenses by taking the man hours of the higher administration in proportion of the tax free income and taxable income. Therefore in case the quantum of expenditure worked out under Rule 8D is exceeding the actual expenditure then the workings under Rule 8D fails. Accordingly, when the Assessing Officer has not made an attempt to first find out the expenditure which is attributable to the earning of the exempt income and has directly applied Rule 8D then the matter requires a proper verification and reconsideration. Hence, we set aside this issue to the record of the Assessing Officer to verify and consider the attributable expenditure which is debited to the profit and loss account and relatable to the exempt income. Disallowance of depreciation on intangible assets - Held ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessment Years 2007-08 2008-09. 2. First we take up the appeals filed by the assessee wherein the assessee has raised the common grounds except one ground which was raised for the Assessment Year 2008-09 only. Therefore the grounds raised for the Assessment Year 2008-09 are reproduced as under : 1. The learned Commissioner of Income-tax (Appeals), Large Tax payers Unit, Bangalore (for short CIT (A) LTU) erred in upholding the action of the Assessing Officer in not allowing a deduction for the provision made towards interest payable to Central excise dept amounting to Rs, 41,49,335 although the appellant has followed mercantile system of accounting. 2. The learned CIT (A) LTU erred in upholding the action of the Assessing Officer in disallowing the interest expenditure payable to Micro, Small and Medium Enterprises under Micro, Small and Medium Enterprises Development Act, 2006 (MSMED Act, 2006) amounting to ₹ 3,84,256. 3. The learned CIT (A) LTU erred in upholding the action of Assessing Officer in taxing the receipt towards second instalment in respect of Technical know-how from M/s Motogen under the head business income instead of long-term Capital gains, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ards of appeal no.8 is concerned, against the order of the CIT (A) in upholding the order of the AO in not allowing deduction for provision made towards interest payable to Central Excise Department and Sates Tax Department at ₹ 4,29,67,460/- the learned counsel for the assessee submitted that this issue is covered against the assessee by the decision of this Tribunal in assessee's own case for assessment year 2000-01 and 2001-02 which is placed at pages 3 to 58 of the case laws paper book filed before us. The Tribunal, at para-6 of its order, has observed that this issue stands covered by the decision of this Bench of the Tribunal in assessee's own case for assessment years 1994-05 and 1999-00 wherein the action of the CIT (A) on disallowing interest payable to Central Excise Department has been upheld by the Tribunal. Respectfully following the same, his ground of appeal (No.8) of the assessee is rejected . From the above Para, what is seen that this issue is covered against the assessee by the tribunal order in assessee's own case for the assessment years 2000-01 2001-02 and hence, this ground of the assessee is rejected by respectfully following this Tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aving overriding effect to the extent of any inconsistent provisions contained in any other law for the time being. We further note that as per the Section 15 of the MSMED Act, the liability of the buyer to make the payment to MSME within the period as agreed between the parties or in case there is a delay beyond 45 days from the date of acceptance or date of deemed acceptance the interest payable as per Section 16 shall be three times of the bank rate notified by the RBI. Thus as per Section 16 of the MSMED Act, the payment of interest on delayed payment is in the nature of penalty or it is penal interest. Therefore once the payment of interest on delayed payment to MSME is regarded as a penal in nature then the said expenditure is otherwise not allowable under Section 37 of the Income Tax Act, 1961 (in short 'the Act'). Hence, in view of the specific provisions under MSMED Act, 2006 for payment of interest to the MSME being penal in nature and having the overriding effect of Sections 15 to 23, we do not find any error or illegality in the orders of the authorities below in disallowing this claim of interest paid to the MSME. 8. Ground No.3 is addition on account ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s a property as per the definition of capital asset under Section 2(14) of the Act and therefore the profit on transfer of the said right to M/s. Motogen should be the capital gain. 11. On the other hand, the learned Departmental Representative has submitted that the assessee does not own any property, patent and technical know how as it was only given license by Bosch as per the terms and conditions of the agreement. The grant of license is only nonexclusive and non-transferable right to use know how, patent, etc. Thus the sub-license of the know-how or right to use of the patented technology does not amount to transfer of any property or asset as per section 2(14) of the Act. He has further contended that when the assessee is not having any ownership, then the question of transfer of ownership does not arise. He has relied upon the orders of the authorities below. 12. We have considered the rival submissions as well as the relevant material on record. There is no dispute that the assessee was granted license by parent company Bosch under the collaboration agreement for manufacturing of contract products. As per the terms of the agreement the license was granted for use of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d in not granting the deduction u/s 80JJAA in respect of the workmen who were employed by the appellant during the year but whose duration of working in that year was less than 300 days. 15.1 Out of the deduction claimed of ₹ 12,37,509/- u/s 80JJAA, the AO allowed only ₹ 4,68,078/- and disallowed the balance of ₹ 4,68,078/- on the ground that as per the definition of 'regular workmen' in Explanation(ii) to Sec.80JJAA, 'regular workmen' did not include 'any other workmen employed for a period of less than three hundred days during the previous year'. The appellant plea that this definition applied to only casual labourers and not permanent employees was rejected on the round that deduction u/s 80JJAA was restricted to additional wages paid to employees who have worked for more than 300 days during the relevant period irrespective of whether they were employed on a permanent basis or otherwise. The AO, accordingly, ascertained that additional wages paid to those who had worked for less than 300 days was ₹ 25,64,771/- 30% of which worked out to ₹ 7,69,431/- which was required to be disallowed. At the appellate stage, the appel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ees qualified as 'workmen' within the meaning of Sec.80JJAA or not should be examined from the point of view of tenure of work by the said employees within the meaning of the definition of the term 'regular workmen' contained in Explanation (ii) whereby those who were employed for a period of less than 300 days during the previous year were excluded from the definition. I am of the firm view that the AO has rightly denied the deduction to the extent it has been claimed for employees who have worked for more than 300 days in the previous year in contravention of Explanation (ii) to Sec.80JJAA. Consequently, ground 5 fails . 21. We find that the dispute in the present case is regarding allowability of deduction u/s 80JJAA and hence, we hereby reproduce the provisions of sec.80JJAA of the Act for the sake of ready reference; Section 80JJAA... [Deduction in respect of employment of new employees. (1) Where the gross total income of an assessee to whom section 44AB applies, includes any profits and gains derived from business, there shall, subject to the conditions specified in sub-section (2), be allowed a deduction of an amount equal to thirty pe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or (c) an employee employed for a period of less than two hundred and forty days during the previous year; or (d) an employee who does not participate in the recognised provident fund; (iii) emoluments means any sum paid or payable to an employee in lieu of his employment by whatever name called, but does not include- (a) any contribution paid or payable by the employer to any pension fund or provident fund or any other fund for the benefit of the employee under any law for the time being in force; and (b) any lump-sum payment paid or payable to an employee at the time of termination of his service or superannuation or voluntary retirement, such as gratuity, severance pay, leave encashment, voluntary retrenchment benefits, commutation of pension and the like. (3) The provisions of this section, as they stood immediately prior to their amendment by the Finance Act, 2016, shall apply to an assessee eligible to claim any deduction for any assessment year commencing on or before the 1st day of April, 2016.'. [(1) Where the gross total income of an assessee, [being an Indian company,] includes any profits and gains derived from the manufacture of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s then only because in the present year, working days are less than 300 days because he was employed after 66 days from the start of the previous year then no deduction will be available under this section in respect of such workers appointed or employed after that date and therefore, this approach of the AO is not correct. 23. In our considered opinion, as per provisions of section 80JJAA as reproduced above, the deduction is allowable for three years including the year in which the employment is provided. Hence, in each of such three years it has to be seen that the workmen was employed for at least 300 days during that previous year and that such work men was not a casual workmen or workmen employed through contract labour. Therefore, if some work men were employed for a period less than 300 days in the previous year then no deduction is allowable in respect of payment of wage to such work men in the present year even if such work men was employed in the preceding year for more than 300 days but in the present year, such work men was not employed for 300 days or more. In this view of the matter, we find no infirmity in the order of the ld. CIT (A) on this issue. 24. No ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... id order has followed the decision of Hon'ble jurisdictional High Court in the case of CIT Vs. Microlab 383 ITR 490 wherein the Hon'ble High Court has held that receipts credited to the profit and loss account are part of the normal sales and not to be reduced from the expenditure incurred by the assessee on carrying out scientific research for the purpose of deduction under Section 35(2AB) of the Act. The Learned Senior Counsel for the Assessee has further referred to the details of the income and computation of income and submitted that the assessee has offered the receipts of ₹ 21,19,59,000 to tax as part of the total income under the head Miscellaneous Income and therefore once the said receipt is part of the total income then it cannot be reduced from the expenditure incurred in respect of in-house R D centre. 18. On the other hand, the learned Departmental Representative has submitted that once the approval is granted by the competent authority i.e. DSIR giving the details of the expenditure then the Assessing Officer has no jurisdiction to tinker with the said details given in the approval. He has further contended that this Tribunal has also no jurisdicti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ology Government of India 239 Taxmann 480 has held that the competent authority while passing the order is exercising a quasi judicial function and therefore no unilateral action or determination would have been taken by the approval authority in reducing the amount of expenditure incurred on scientific research as against claimed by the assessee. Accordingly, the Hon'ble High Court has directed the authority to pass appropriate and speaking order after considering all the contentions raised by the assessee in this regard. Taking support of the said decision, the learned Departmental Representative has contended that in the case of assessee was aggrieved by the reduction of the receipt from the expenditure, the assessee could have raise the objection before the competent authority. 19. In rejoinder, the Learned Senior Counsel for the Assessee has submitted that there is no dispute regarding the expenditure incurred by the assessee and the receipts of the R D centre, the issue in the appeal is only regarding the computation of quantum of deduction under Section 35(2AB) of the Act which is in the domain of the Assessing Officer and not subject matter of the competent authorit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Years 2005-06 2006-07 vide order dt.17.8.2017. We further note that initially the tribunal passed an order dated 8.9.2016 which was recalled in the Misc. Petition Nos. 18 to 20/Bang/2017 and the matter was again fixed for hearing and decided this issue after considering the judgments relied upon by the assessee. The Tribunal has finally decided this issue in para 7 as under : 7. Second aspect of the matter is regarding the claim of deduction restricted by the Assessing Officer after reducing the income earned by the assessee from the R D Centre from the expenditure. There is no quarrel that Section 35(2AB) contemplates the deduction upto 150% of the expenditure incurred on in-house R D facility and therefore there is no scope of netting the said expenditure by any income earned by the said centre. However if the assessee has received the reimbursement of the expenditure incurred on the R D facility or received some grants in respect of the R D facility then for the purpose of computing the deduction under Section 35(2AB), such reimbursement or grant has to be adjusted against the expenditure because the reimbursement and grant are not recognized as revenue received or incom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and filing an application for a patent under the Patent Act, 1970. 12. From the above it is very clear that in the above sub-section the expression any expenditure on scientific research on in-house research and development as approved by the prescribed authority has been mentioned. Therefore, it is only the expenditure which has been incurred which is relevant in computing the weighed deduction and not the net expenditure after reducing any income earned as a result of such expenditure. Further the co-ordinate bench of this Tribunal in the case of DCIT Vs. Microlab Limited (supra) again had an occasion to consider this issue in paras 12 16 to 18 as under : 12. We have heard the submissions of the learned Departmental representative and learned counsel for the assessee and also perused the documents filed in the paper book. As we have already seen, the assessee carries on scientific research. It is in the business of manufacture of drugs and pharmaceuticals. It incurred expenditure on scientific research and the quantum of such expenditure on scientific research, which is a sum of ₹ 7,80,52,805, is not in dispute. The weighted deduction under section 35(2A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ientific research on which deduction under section 35(2AB) has to be allowed. We are, therefore, of the view that there is no merit in ground No. 2 raised by the Revenue and that the order passed by the Commissioner of Income-tax (Appeals) dated April 9, 2014 under section 154 of the Act cannot be sustained and the same is hereby reversed. Thus, I.T.A. No. 764/B/14 by the assessee is allowed, while ground No. 2 raised by the Revenue is dismissed. Therefore it is settled proposition as per the precedence of this Tribunal that the income earned by the assessee from the R D centre cannot be reduced from the expenditure for the purpose of allowing the deduction under Section 35(2AB) because the said income is part of the total income of the assessee. Accordingly, in principle, we decide this issue in favour of the assessee that the income earned by the assessee from the R D centre is not required to be reduced from the expenditure for the purpose of deduction under Section 35(2AB) of the Act. However, the nature of the receipt as claimed by the assessee being income from the R D centre has not been verified by the authorities below and therefore to that extent this aspect requires ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... om the expenditure for this purpose. There is no dispute about the nature of the receipts as it is manifest from the details given in the certificate issued by the DSIR and also not disputed by the Assessing Officer that these receipts are in the nature of fees and service charges and part of the total income of the assessee. Therefore in view of the binding precedent of the Hon'ble jurisdictional High Court in the case of CIT Vs. Microlabs Ltd. (supra) as well as the decision of the coordinate Bench of this Tribunal in assessee's own case for the Assessment Years 2005-06 2006-07, we hold that the receipts of the R D Centre which is in the nature of revenue/income being part of the total income of the assessee cannot be reduced from the gross expenditure of in-house R D Centre for the purpose of weighted deduction under Section 35(2AB) of the Act. Hence, we allow the claim of the assessee and set aside the orders of the authorities below qua this issue. 21. As regards not raising objections before the DSIR we note that when there is no discrepancy or dispute about the gross expenditure as well as the receipts as claimed by the assessee and accepted by the DSIR then t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for the Assessee has submitted that when the assessee's own fund is more than sufficient to meet the requirement of the investment then no disallowance is called for on account of interest under Section 14A of the Act. He has further contended that the Assessing Officer has applied Rule 8D for the purpose of disallowing the indirect administrative expenses without giving a finding as to how the computation of the assessee is incorrect. The Assessing Officer ought to have given a objective satisfaction in the assessment order that the claim of the assessee and the computation made by the assessee is not correct. In support of his contention, he has relied upon the decision of Hon'ble jurisdictional High Court in the case of CIT Vs. Microlabs Ltd. (supra) as well as the decision of Hon'ble Allahabad High Court in the case of CIT Vs. UP Electronics Corporation Limited 397 ITR 113. The Learned Senior Counsel for the Assessee has submitted that the Hon'ble High Court has specifically observed that when the assessee has shown interest free fund then even if the investment is made out of common pool of fund and non-interest bearing fund was more than the investment in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions as well as the relevant material on record. As regards the disallowance on account of interest expenditure, we find that the assessee has claimed interest free funds of more than ₹ 2,275 Crores in comparison to the total investment of ₹ 910 Crores. There is no quarrel on the point that if the assessee s own funds are more than investment made then no disallowance is called for on account of interest expenditure under Section 14A of the Act. The Hon'ble jurisdictional High Court in the case of CIT Vs. Microlabs Ltd. (supra) 383 ITR 490 while dealing with an identical issue has observed at page 496 para 5 as under : 5. For the second question, the observations made by the Tribunal in the impugned order reads as under: 32. Ground No.2 raised by the assessee reads as follows:- 2. The learned Commissioner of Income Tax (Appeals) has erred in sustaining the additions made by the assessing officer u/s. 14A read with rule 8D on the ground that the appellant has not produced the evidentiary support in relation to dispersal of loan and utilization of loan. Whereas the appellant has produced the evidence that the amount invested was out of pos ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... end, thus bringing the balance to Nil. 38. On consideration of the above submissions and on perusal of the relevant documents, the CIT(A) was of the view that the claim of the Assessee was not evidenced from the documents submitted in view of the loans and other sources of funds being mixed up in the common pool of funds. The CIT(A) further held that the burden of proof in this matter clearly continues to rest with the Assessee and that it was not enough to merely show that surplus funds were available or that bank loans had been availed for specific purposes including short term reasons. A one-to-one correlation must also be established to prove that the loans were absolutely utilized for the purpose for which they were claimed. The CIT(A) also held that there was no utilization certificate from the bank filed before the AO nor was such evidence furnished before the CIT(A). The CIT(A) also held that the documents submitted from the bank during the course of appeal only refer to the disbursal of the loan and even these specify certain conditions required to be met. The date-wise actual disbursal and utilization is not proved from the ledger copies as submitted. The CIT(A) al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... we concur, we do not find any substantial question of law would arise for consideration as canvassed. Accordingly, in case when the assessee s own fund is more than the investment made in the tax free securities then the disallowance on account of interest expenditure under Section 14A is not called for. Since the details filed by the assessee are pertaining to the F.Y. 2006-07 and not for the F.Y. 2007-08 relevant to the assessment year under consideration therefore, we set aside this issue to the record of the Assessing Officer for limited purpose of verification of relevant facts of availability of interest free assessee's own funds and then decide this issue in the light of various binding precedents. 28. As regards the indirect administration expenses, we find that the Assessing Officer has applied Rule 8D(2)(iii) without examining the actual expenditure attributable to the exempt income. There may be a case where the actual expenditure claimed by the assessee and debited to the profit and loss account which can be attributed to the exempt income would be less than the computation made by the Assessing Officer under Rule 8D being 0.5% of average investment. There ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... considered by this Tribunal in assessee's own case for the Assessment Year 2004-05. The CIT (Appeals) has allowed the claim of the assessee in para 9.1 as under : 9.1 While treating the claim of expenditure in terms of section 37 as revenue outflow in AY 2003-04 AY 2004-05 the AO in AY 2005-06 AY 2006-07 treated the expenditure as being in the nature of an intangible asset on which depreciation was allowed u/s 32. In the impugned AY 2007-08 this treatment was not followed. In the subsequent AY 2008-09 however, depreciation, once again, was allowed by the AO on this item. This is clearly a mistake for which the AO is directed to allow depreciation. In her appellate order for AY 2006-07 my predecessor has also confirmed the nature of the expenditure as being capital in nature on which depreciation is allowable. Thus it is clear that for the earlier assessment year the assessee claimed this expenditure as revenue in nature however, the Assessing Officer treated the same as capital in nature and allowed the depreciation which was confirmed by the Tribunal. Therefore, when the Assessing Officer itself has treated this expenditure as capital being intangible asset and a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Thus the Learned Senior Counsel for the Assessee has submitted that when the expenditure has not brought into existence any capital asset then the same cannot be treated as capital in nature. He has relied upon the decision of Hon'ble Madras High Court in the case of CIT Vs. Southern Roadways 304 ITR 84 as well as decision dt.29.11.2016 of the coordinate Bench of this Tribunal in the case of AXA Business Services Pvt. Ltd. Vs. DCIT in IT(TP)A No.334/Bang/2013 and others. 38. Having considered the rival submissions as well as relevant material on record, at the outset we note that the expenditure incurred by the assessee is in respect of application software . The Special Bench of the Tribunal in the case of Amway India Enterprises Vs. DCIT (supra) has laid down the guidelines on this issue in paras 59 60 as under : 59. Our conclusions on the issue under consideration thus can be summarized as under: - ( i) When the assessee acquires a computer software or for that matter the license to use such software, he acquires a tangible asset and becomes owner thereof as held above relying on the decision of Hon'ble Supreme Court in the case of TCS (supra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re incurred on computer software is capital or revenue depending upon its utility to the business man and how important and economic or fundamental role it plays in the business. Thus the Special Bench has observed that the functional test becomes more important and relevant because of the peculiar nature of the computer software and its possible use in different areas of business i.e. capital or revenue field or its utility to the business man. The Hon'ble Madras High Court in the case of CIT Vs. Southern Roadways (supra) has clearly laid down the rule that even if the expenditure incurred on software results in enduring benefit and if it has not resulted in bringing any new capital asset in existence then it cannot be treated as capital expenditure. The co-ordinate Bench of this Tribunal in the case of AXA Business Services Pvt. Ltd. Vs. DCIT (supra) has held in para 21 as under : 21. We have considered the rival submissions as well as the relevant material on record. The assessee has submitted the details and explanation regarding this expenditure before the authorities below which has been reproduced by the CIT (Appeals) in para 6 as under : The expenses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es when the expenditure in question has not resulted in bringing a new capital asset in existence then the same can be allowed as a revenue expenditure even if the expenditure can have the benefit to the assessee in the form of improvement in the efficiency. Hence we do not find any error or illegality in the order of CIT (Appeals) qua this issue. 39. For A.Y. 2008-09, the revenue has raised the following grounds : 1. The order of learned CIT (Appeals) is opposed to law and facts of the case. 2. The CIT (Appeals) erred in allowing the assessee's claim that expenditure on application software amounting to ₹ 4,03,67,157 is to be treated as revenue expenditure. 3. The learned CIT (Appeals) erred in remitting the issue of deduction under Section 43B to the Assessing Officer has the CIT (Appeals) does not have the power to remit back an issue. 4. For these and ;such other grounds that may be urged at the time of hearing. 40. Ground No.1 is general in nature and do not require any specific adjudication. 41. Ground No.2 is regarding expenditure on application software, this ground is common as in the A.Y.2007-08. In view of our finding for th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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