TMI Blog2018 (1) TMI 1480X X X X Extracts X X X X X X X X Extracts X X X X ..... stitute a capital expenditure, the assessee itself capitalized the expenditure as an intangible asset in its books of account also confirmed by CIT-A - assessee argued that assessee paid license fees to leverage its strength and to expand business activities in Middle East market for incoming customer to India. The assessee paid the license fee for expanding its existing business in regions outside India - allowable business expenses u/s 37 - HELD THAT:- The Hon’ble Apex Court in case of CIT vs. IAEC (Pumps) Ltd.[1997 (4) TMI 14 - SUPREME COURT] held that license fee paid for use of patent and design was on revenue account. The fact of the said case was that under an agreement entered by assessee with a foreign company, the assessee was granted a license to use its patents and designs exclusively in India. The agreement was for duration of 10 years, with the parties having the option to extend or renew the agreement. The foreign company undertook not to surrender its patents without the consent of the assessee and to make available to the assessee any improvements, modifications and additions to designs. It had also undertaken to enable the assessee to defend any counterfeit by oth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsistent view that prior to insertion of Rule 8D, a reasonable disallowance is sufficient to meet the requirement of section 14A. Hence, we direct the AO to restrict the disallowance @ 2% of the exempt income for disallowance under section 14A, for the year under consideration. Deduction u/s 80HHD - addition in respect of training fees - whether training fees are derived in the course of business of Tour & Travels of the assessee and ought to be considered for the purpose of deduction under section 80HHD? - CIT(A) held that training fees form part of business income and has been assessed by AO under the head “Profit & Gain from Business and Profession” and therefore, said income is eligible deduction under section 80HHD - HELD THAT:- Co-ordinate bench of Mumbai Tribunal in ACIT vs. Eastern International Hotels [2005 (11) TMI 180 - ITAT BOMBAY-I] held that where interest income received by assessee had been assessed under the head “Profit & Gain from Business and Profession” same cannot be treated as non-business income for the purpose of deduction under section 80HHD of the Act. The co-ordinate bench relied upon the decision of Alfa Lavel India Ltd.[2003 (9) TMI 43 - BOMBAY HIGH ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... - BOMBAY HIGH COURT), held that exchange rate difference is allowable deduction under section 80IB of the Act which is directly related to the transaction involving the export of goods of eligible industrial undertaking. Exclusion of receipts passed onto other hoteliers and receipts being unrealized tour receipts for computing deduction under section 80HHD - HELD THAT:- By following the decision of Lotus Trans Travels [2010 (12) TMI 126 - DELHI HIGH COURT] wherein it was held that for the amounts, the assessee has issued certificate in Form 10CCAC cannot be treated as a receipt for the purpose of total business and accordingly directed the AO to exclude the receipt of ₹ 31,30,99,313/- passed on by the assessee to other hotel and travel agent. For second/other receipt of ₹ 66,39,877/- it was held that the said amount of foreign currency realized after 30.09.2009 have not entered the numerator i.e. receipt earned by assessee from rendering service to foreign tourist which would not enter the denominator in the formula and directed the AO to exclude the same. We have noted that finding of ld. CIT(A) in accordance with Explanation 1 to sub-section (2), sub-section (2) an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in respect of gains from foreign exchange fluctuation amounting to ₹ 1,85,88,507/- without appreciating the fact that foreign exchange fluctuation gain received by the assessee does not emanate from the services provided by the assessee to the foreign tourist . 5. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in directing the AO to re-compute the deduction allowable u/s 80HHD after excluding the receipts of ₹ 31,30,99,313/- passed on by the assessee to other hotels and travel agents from the total receipts in respect of which the assessee issued certificate in Form No. 10CCAE to the recipient to enable him to claim the deduction u/s 80HHD without appreciating the fact that to work out the proportionate amount correctly, both the numerator and denominator should be found out on a uniform basis and when the AO excluded the receipts passed on by the assessee to the hotels and travel agents from the numerator in formula given in section 80HHD(3). Therefore, these receipts are also required to be excluded from the denominator i.e. the total receipts of the business to work out proper deduction u/s 8OHHD. 6. On the facts and in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y to the facts of the case and against the provisions of law. (b) The Ld CIT (A) failed to appreciate that the income out of use of the brand name has been offered to tax. Hence the license fees paid to earn such income is allowable u/s. 37 (1) of the Act. (c) The Ld. CIT (A) ought to have allowed license fees paid for ₹ 1,05,00,000/- paid for the use of trade mark for a certain period of time. The Tour club brand has enabled it to enter new markets overseas (Middle East) and enhance its income and hence license fees are fully allowed u/s 37(1) of the Act. 3) Utilization of Reserve ₹ 88,37,9571-: (a) The Ld CIT (A) erred in law and facts in upholding the disallowance of utilization of Tourism Reserve ₹ 88,37,957/- utilized in accordance with the conditions laid down in Sec. 80HHD (4) (b) of the Act as per Sub Section (5) of the Section 80HHD. The reasons given by him for doing so are wrong, contrary to the facts of the case and against the provisions of law. (b) The Ld CIT (A) failed to appreciate the fact that amount of ₹ 78,01,588/- incurred for acquisition of New Cars as promoted in Sub Sec. 4 (b) of 80HHD and ₹ 10,36,369/- incurre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the provisions of law. The disallowance is made without any basis, evidence of expenses being incurred for earning taxfree income. (ii) The Ld. CIT (A) failed to appreciate the fact that these expenses are not incurred in relating to income not forming part of the taxable income and disallowance u/s 14A cannot be made on estimated, adhoc and arbitrary basis. These expenses were incurred wholly and exclusively for the business of the appellant hence the disallowance required to be deleted. 3. Brief facts of the case are that the assessee-company is engaged in the business of Tour Operator and Travel agent, filed its return of income for relevant AY on 28.12.2002 declaring total income of ₹ 12,13,39,305/-. Subsequently, a revised return was filed on 30.03.2004 declaring total income of ₹ 11,75,79,781/-. In the revised return, the assessee claimed the deduction of ₹ 6,89,17,108/- under section 80HHD. The assessment was completed on 17.03.2005 under section 143(3) of the Act. The Assessing Officer (AO) while framing the assessment order made the addition of ₹ 1,00,00,00/- by disallowing the amount of compensation to paid on account of non-compete fees (R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tor of Tour Club Express Travel Tour Pvt Ltd and the amount of ₹ 50 lacks was paid to her for not doing similar business for five years. The assessee claimed the said expenditure allowable under section 37 of the Act. The assessing officer disallowed the entire payment made to Anita Sorodkar considered this as valuable business right which is tangible asset allowing the depreciation under section 32 of the Act. The learned Commissioner (Appeals) upheld the disallowance on the ground that it is enduring benefit to the assessee and therefore Capital in nature and cannot be allowed as deduction. The assessee also entered with the agreement with Arjun Sharma who was employee of Tour Club Express Travel Tour Pvt. Ltd. and COO of its inbound division. This agreement put restriction on Anil Sharma for not carrying on the business in the area of Destination Management Services for two years and paid ₹ 50 lakh. The assessing officer disallowed holding that it is a capital expenditure and assessee would be entitled for depreciation. The AO further held that assessee entered into agreement with Arjun Sharma on 23rd of March 2002, appreciation is allowable only at the rate of 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 23.03.2002, hence, depreciation @ 12.5% was allowed. The ld. CIT(A) upheld the action of AO for payment of non-compete fee holding that it is giving enduring benefit to the assessee and therefore, capital in nature. For payment to Arjun Sharma, the ld. CIT(A) hold that non-competing fee was paid for two years and allowed deduction in two years i.e. 25,00,000/- every year. We have perused the non-compete agreement dated 30.06.2011 with Anita Shirodkar. Smt. Anita Shirodkar is one of the Director of Tour Club Express Travel and Tours Pvt. Ltd. As per Article-3, Smt. Anita Shirodkar received an amount of ₹ 50,00,000/- on account of non-compete consideration. As per Article-2 of the Agreement, Smt. Anita Shirodkar Director of the Tour Club Express Travel and Tours Pvt. Ltd. agreed not to directly or indirectly shall not own, manage, establish, engaging, operate or cause to be operate, consult or be employed in a competitive business, engaged in marketing and distribution services or carry on the competitive business or solicit any customer or target to the customer. She also undertook not to undertake directly or indirectly undertake any competitive business through relatives. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee. It is also necessary for the assessee to ensure that the faculty members do not compete with its business because that would affect the business. It cannot be disputed that the popularity and success of the learning centers run by the assessee is in a large measure due to the efficiency, knowledge and reputation of the faculty members. If the faculty members leave the assessee and decide to set up their own learning centers, that is most certain to affect the assessee's business. It was, therefore, in the interest of the assessee's business that it ensured that for some period of time, such faculty members do not compete with it in the same business. It is with this end in view that the assessee made the payment to 'V' and 'S'. The period for which these persons could not compete with the assessee has been found by the Tribunal to be a short period of 12 months. This is not an irrelevant consideration taken into account by the Tribunal. The fact that the payment was made in monthly instalments is not decisive of the question; even if it had been made in a lump sum, that would have made little difference to the conclusion, having regard to the short p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e has been terminated from the service and hence, as per the employment contract, he was paid compensation of 400000 USD in lieu of notice. Further he was paid 100000 USD as bonus. Further, under clause 4, the company may utilise the services of Mr. Parasrampuria and for that purpose he shall be paid a compensation of 100000 USD on August 31, 2008, with the condition that the process of acquisition of shares of Indorama takes place smoothly. In addition to the above, Mr. Parasrampuria was paid 200000 USD as compensatory indemnity under article 5. The said article 5 reads as under: In view of the international activities of the company, the executive director agrees that after termination of his employment with the company, he shall be prohibited, during the period and within the territory specified below, from exercising activities which could be in effective competition with the company during the prohibition period either by running a personal enterprise or by being hired by a competitor and having thus the opportunity to cause a prejudice to the company or its group by using for himself or for the profit of a competitor his knowledge of any practice specific to the compan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... intellectual property and the assessee-company has acquired the same. Hence, we are of the view that the learned Commissioner of Income-tax (Appeals) and the Assessing Officer were not right in taking the view that the assessee-company has paid the impugned compensation to acquire the intellectual property from the payee permanently. Such a view does not emanate from a careful reading of article 9. The territorial restriction prescribed in article 5, in our view, does not lead to a conclusion that Mr. Parasrampuria was carrying on any business in those area. On the contrary, he was only prohibited from exercising the activities prescribed in article 5 in those four countries. During the course of arguments, the learned authorised representative categorically submitted that the payee did not carry on business in those territories. Hence, in our view, the learned Commissioner of Income-tax (Appeals) has entertained the same only on surmises and presumptions. The foregoing discussions would show that all the three reasons cited by the learned Commissioner of Income-tax (Appeals) to confirm the addition has failed. We also notice that the period of prohibition/restriction is for a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ss right as intangible asset allowing depreciation. The ld. CIT(A) upheld the same without considering the relevant provision of law. In support of his submission, the ld. AR of the assessee relied upon the decision of Hon ble Bombay High Court in Alpha Laval India Ltd. vs. DCIT (266 ITR 418)and the decision of Hon ble Apex Court in CIT vs. IAEC (Pumps) Ltd. (232 ITR 316). On the other hand, the ld. DR for the Revenue supported the order of authorities below. The ld. DR argued that the assessee made the payment for use of brand for a period of 5 years. The agreement for use of brand name stipulates that assessee can take over the brand at a price which was determined on the basis of profitability. The payment for acquisition of brand is also an intangible asset. The ld. DR relied upon the decision of Hon ble Supreme Court in Madras Industrial Investment Corpn. Ltd. vs. CIT(225 ITR 802). 11. We have considered the rival submission of the parties and have gone through the orders of authorities below. There is no dispute about the payment of ₹ 1,05,00,000/- paid to Tour Club Express Travel and Tours Pvt. Ltd. for use of their brand Tour Club . The lower authority treated th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as revenue expenditure. The decision relied by ld. DR in Madras Industrial Investment Corpn. Ltd. (supra) has been considered by Hon ble Supreme Court in case of Taparia Tools Ltd. vs. JCIT 9372 ITR 605). Wherein the Hon ble Court has held that revenue expenditure incurred in a particular year is to be allowed in that year and the department cannot deny the same. It is only in case that assessee himself want to spread the expenditure over a period of ensuring year, it can be allowed to be spread over provided the principle of matching concept is satisfied. Thus, considering the above discussed factual and legal position, the expenditure incurred by assessee on a license fee is revenue expenditure. Hence, the ground no.2 raised by assessee is allowed. 12. Ground no.3 part of ground no. 4(iii) (Rs. 88,37,957/-) relates to disallowance on account of Mis-utilization of Tourism Reserve with reference to section 80HHD(4) of the Act. The ld. AR of the assessee argued that the assessee has utilized the amount of reserve created in earlier year for the purpose of purchases of coaches and car. As per section 80HHD(4)(b), reserve can be utilized for purpose of purchase of new car and new ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Tribunal have taken a consistent view of restricting the disallowance under section 14A in such cases 1 to 2% of exempt income being a reasonable disallowance. On the other hand, the ld. DR for the Revenue supported the order of authorities below. 16. We have considered the submission of parties and have gone through the orders of authorities below. During the year, the assessee earned tax free interest of ₹ 14,70,365/- and dividend income of ₹ 1,70,61,528/-. Before the AO, the assessee contended that only direct expenses incurred for earning exempt income can be disallowed. The contention of assessee was not accepted by AO. The AO worked out the disallowance on the basis of apportionment in the ratio of exempt income to total receipt of assessee and from Head Office Expenses, the AO calculated disallowance of ₹ 21,62,346/-. The ld. CIT(A) confirmed the action of AO holding that disallowance is quite reasonable. 17. The Hon ble Bombay High Court in Godrej Boyee Mfg. Co. Ltd v. Dy. CIT [2010] 194 Taxmann 203 (Bom) held that prior to assessment year 2008- 09, when rule 8D was not applicable, Assessing Officer had to enforce provisions of sub-section (1) of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... foreign tourist. The ld. CIT(A) held that training fees form part of business income and has been assessed by AO under the head Profit Gain from Business and Profession and therefore, said income is eligible deduction under section 80HHD of the Act. We have further noted that the co-ordinate bench of Mumbai Tribunal in ACIT vs. Eastern International Hotels (supra) held that where interest income received by assessee had been assessed under the head Profit Gain from Business and Profession same cannot be treated as non-business income for the purpose of deduction under section 80HHD of the Act. The co-ordinate bench relied upon the decision of Alfa Lavel India Ltd. (supra) on contest of interpretation of section 80HHC holding that where the AO had assessed interest received by assessee as a part of business profit under the head Profit Gain from Business and Profession , he cannot treat the said amount as Income from Other Sources so as to exclude it from the business profit. Thus, in view of the above factual and legal discussion, we do not find any illegality and infirmity in the order passed by ld. CIT(A). In the result, Ground no.2 of the appeal is dismissed. 21. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... exclude it from the business profit. Thus, in view of the above factual and legal discussion, we do not find any illegality and infirmity in the order passed by ld. CIT(A). In the result, Ground no.3 of the appeal is dismissed. 23. Ground no.4 relates to deduction under section 80HHD in respect of foreign exchange fluctuation of ₹ 1,85,88,507/-. The ld. DR for the Revenue relied upon the order of AO and argued that the foreign exchange fluctuation gain is not derived from the income earned in foreign exchange by providing services to foreign tourist. On the other hand, the ld. AR of the assessee argued that during the relevant FY, the assessee earned a sum of ₹ 1,85,88,507/- on account of foreign exchange gain. The assessee claimed deduction and calculated as percentage of profit derived from services provided to foreign tourist. The gain on account of foreign exchange fluctuation is a part of profit derived from services rendered to foreign tourist and cannot be excluded while computing deduction under section 80HHD of the Act. The ld. AR of the assessee relied upon the decision of CIT vs. Syntel Limited [ITA No.1974 of 2009 (Bom, HC)] dated 15.12.2009, CIT vs. Rac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ess profit * foreign tourist receipt/total receipt. The AO while computing total receipt (denominator) added a sum of ₹ 31,30,99,313/-, being the amount of certificate issued to other hotel and tour operator in Form 10CCAC and ₹ 69,83,040/-, the money not received till 30.09.2002. It was submitted that it is undisputed that the same should not be form part of tourist receipt (numerator). In support of his submission, the ld. AR of the assessee relied upon the decision of Hon ble Delhi High Court in case of Lotus Trans P. Ltd. and decision of Tribunal in case of M/s Sita World Travel (India) Limited vs. DCIT in ITA No. 1524/Del/2004. 26. We have considered the rival submission of the parties and have gone through the orders of authorizes below. The AO included first receipt i.e. ₹ 30.31 (approx) crore in receipt of business holding that there is not express provision in section 80HHD for exclusion from the total receipt. Receipt no.2 of ₹ 66.39 lakhs was included by AO holding that assessee is following mercantile system of accounting and these receipt accrued to the assessee during the previous year relevant to AY 2001-02. The ld. CIT(A) after examining t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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