TMI Blog2020 (11) TMI 63X X X X Extracts X X X X X X X X Extracts X X X X ..... 6) of the Act against which he received positive confirmation from the agents regarding the transactions. Hence, the disallowance made by the Ld. AO is on mere surmise and conjecture and the order of Ld. CIT(A) in deleting the said addition is to be sustained. Accordingly, we dismiss the ground raised by the Revenue. Computation of MAT u/s 115JB - Addition on account of Provision for Doubtful Debt - computation sheet of book profit u/s. 115JB - AO was of the view that the above provisions as well as Interest u/s. 234C of the Act are required to be added back to the book profit as per Explanation below second proviso to section 115JB - HELD THAT:- We have gone through the order of ld CIT(A), it is a speaking order in respect of provision for doubtful debts/bad debts both under normal provision and section 115JB of the Act. Therefore, the reasoned order passed by the ld CIT(A) does not require any interference. That being so, we decline to interfere with the order of ld. C.I T.(A) in deleting the aforesaid additions. His order on these additions are, therefore, upheld and the grounds of appeal of the Revenue are dismissed. Computation of MAT u/s 115JB - Addition towards dela ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s directed against the order passed by the Commissioner of Income Tax (Appeals)-Kolkata, in appeal no. 211/CIT(A)-22/2004-05/14-15/Kol, which in turn arises out an assessment order passed by the Assessing Officer u/s. 143(3) of the Income Tax Act, 1961 (in short the 'Act'), dated 29.12.2006. 2. The grievance raised by the Revenue are as follows: 1. Whether on the facts and in the circumstances of the case and in law, the ld. CIT(A) was justified in holding that the expenditure for installation of an ERP package was capital in nature and also ignoring the fact that the Assessing Officer had little scope for verification? 2. Whether on the facts and in the circumstances of the case and in law, the ld. CIT(A) was justified in deleting the addition of ₹ 1,67,60,563/- made on account of commission? 3. Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) was justified in deleting the addition of ₹ 30,46,678/- on account of Provision for Doubtful Debt? 4. Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) was justified in deleting the addition of ₹ 12,45,123/- and ₹ 9,55 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he addition observing the followings: 06. DECISION: 3. I have carefully considered the action of the Ld. AO and the written submission filed by the appellant. The various documents filed, during the appeal, copies of which were also filed before the Ld. AO has also been examined. On careful consideration of all the documents, it is observed that the appellant had, incurred, certain expenditure for installation of an ERP package called SCALA, The SCALA ERP package was a failure since it failed to meet the requirements, of the appellant and the said project-was abandoned, midway. Hence, the cost incurred by the appellant on such project was written off in the hooks of accounts and claimed as deduction in the computation of total income treating it as revenue expenditure. This fact has not been disputed by the Ld. AO. The only contention of the Ld. AO was that the said expenditure is a capital expenditure which yields benefit for a longer period and hence disallowed the claim of deduction of the said expenditure made by the appellant. 4. The Appellant has brought my attention the judgment of Hon'ble jurisdictional High court in the case of Binani Cement Ltd. (supra) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uction for said expense stating that it is a capital expenditure which yields benefit for a longer period. However, AO allowed depreciation on the said expense @60%. On appeal, the Ld. CIT(A) vide its order dated 11-08-2017 allowed the claim of the assessee stating that expense incurred by the assessee should be treated as revenue expenditure relying on the decision of Hon'ble Kolkata High Court in the case of Binani Cement Ltd. (2015) 233 Taxman 340 (Cal).We note that during the previous year under consideration, the assessee recognized an expenditure of ₹ 28,18,250/- in its profit and loss account. The said amount pertained towards an unsuccessful attempt to install an ERP package called SCALA. The said package failed to meet the requirements of the assessee and hence the project had to be abandoned midway. The expenditure incurred on said package was recognized in profit and loss account and was claimed as a revenue deduction u/s. 37(1) of the Act. That being so, we decline to interfere in the order of ld CIT(A), his order on this issue is hereby accepted and the grounds of appeal raised by the Revenue is dismissed. 10. Ground No. 2 raised by the revenue relates ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amounting to ₹ 1,67,60,563/- was disallowed by assessing officer. 12. On appeal, the ld. CIT(A) deleted the addition observing the followings: 09. DECISION: 1. I have carefully considered the action of the Ld. AO and the written submission filed by the appellant/Ld. A.R. for the appellant-company. The various documents filed during the appeal, copies of which were also filed before the Ld. AO, have been examined. After careful consideration of the facts, it is observed that the Ld. AO has made disallowance of commission expense incurred by the appellant during the previous year under consideration on the ground that none of the agents to whom the amounts of commission were paid have produced any evidence to the effect that the service was actually rendered. Further, the Ld. AO has mentioned that payment made to M/s. Consolidated Construction Co. and M/s. SPS Metal Cast Allots Ltd. was also disallowed in the immediate preceding A.Y. 03-04 and confirmed by the Ld. CIT(A). The Ld. AO has recorded that as the fact involved in AY 04-05 i.e. the assessment year under consideration are similar to the facts of A.Y. 03-04, the disallowance should sustain. 2. The Ld. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d. AO to confirm from the agents whether the sum received by them has been appropriately offered to tax in their return. It is seen that the Ld. AO had issued notices to the agents who confirmed that they had entered into transactions with the agent. In the absence of any observation or recording by the Ld. Assessing Officer, it cannot be said, in my considered view that the Ld. AO has not rebutted the contentions of the appellant as made out before him during the scrutiny. It is also observed that the Ld. AO has not made any finding so as to suggest that the appellant has not made any payment to the various third parties referred above, or that any of the payments were bogus or not genuine. He went on to make the disallowance stating that the appellant has failed to furnish evidence of rendering of service by the commission agents; 5. It is pertinent that for the AY 05-06, which is also in appeal and being decided simultaneously, also the Ld. AO had required the Departmental Inspector to conduct enquiry in respect of payment of commission to M/s. Agnes Trade Commerce Pvt. Ltd., Consolidated Construction. Co, Agency-Ltd, Cindy Engg. Pvt. Ltd., Omega Venture Pvt. Ltd., SPS Me ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inal accounts or the final accounts themselves disclosed by the agents were not in accordance with the Returns of income which, they may have filed. It is difficult to believe that it did not occur either to the Assessing Officer, or to the CIT(A) that they could seek these information from their counterparts who may have been in seisin of the income tax files of the aforesaid two agents. Therefore, the only inference, which may be drawn, is that these facts were not contradicted because they were factually undeniable. Our attention was not drawn to any suggestion, far less any finding at any state to show that it was, even remotely suggested that the payment was collusive or the same was not genuine. The fact that the agents made themselves liable to recover the price of goods sold and delivered pursuant to the orders procured by them is apointer to show that they were del credere agents, well-known in the commercial world. This fact was not at all taken into consideration, nay, it did not occur to them when they held that no evidence has been brought-on record to show that any services were rendered by the said agents to the assessee. Moreover, reasonableness of a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssion put forth on behalf of the assessee along with the documents furnished and the case laws relied upon, and perused the fact of the case including the findings of the ld CIT(A) and other materials available on record. We note that the assessee made payment on account of commission to various agents for carrying out various activities as per the agreed terms. The Ld. AO disallowed the payment of commission to five agents amounting to ₹ 1,67,60,563/- stating that the assessee could not produce evidences of the services rendered by the agents. The Ld. AO relied on the assessment order of AY 2003-04 wherein similar disallowance for commission expense was made. On appeal, the Ld. CIT(A) relied on the decision of the Kolkata High Court in assessee's own case for AY 2003-04 and held that commission expense should be allowed as deduction. The Ld. CIT(A) also took note of the fact that in Assessment Year 2005-06, the Ld. AO after making enquiry on the agents regarding the genuineness of the commission expenses, did not make any disallowance for commission expense in the Assessment order for AY 2005-06. Hence, the Ld. AO has himself accepted that the deduction for commission ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his interest best. Further, the Hon'ble Supreme Court in the decision rendered in the case of Eastern Investments Limited vs. CIT reported in 20 ITR 1 (SC) has opined that the aspect of prudency of entering into a transaction and making an expenditure in connection therewith will have to be judged from the point of view of the businessman and not of the Department. The ratio of the said decision clearly emanates the view that one should not be concerned with the legality or propriety of a transaction or whether the result could have been achieved in another way. What one should be concerned with is whether the transaction was done in the ordinary course of business, however mistaken an assessee might have been. Attention in this regard may also be drawn towards the decision of the Hon'ble Supreme Court in the case of Sassoon J David Co. P Ltd. vs. CIT reported in 118 ITR 261 (SC) wherein it was held that It has to be observed here that the expression 'wholly and exclusively' used in section 10(2)(xv) of the Act of the 1922 Act, corresponding to section 37(1) of the 1961 Act, does not mean 'necessarily'. Ordinarily, it is for the assessee to decide ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... leave encashment and provision for gratuity is an ascertained liability. c) Provision for Bad Debt relates to decrease assets but not a provision towards liability. The ld AO held that Assessee's explanation is not tenable because of the following reasons: a) Interest u/s. 234C of the Act represents Income-tax liability, and Income-tax is not an allowable deduction/expenses either in normal computation or in book profit. b) The provision for gratuity and provision for leave encashment represent towards liability. Any provision for liability is to be added back to book profit as per Explanation below second provision to section 115JB. c) Regarding provision for Bad debt, it is to be noted that such provision, although is in respect of decrease in value of assets, this provision, in fact, goes to increase the liability from accountancy point of view. So provision towards decrease in assets ultimately result in increase in liability. In view of the above, Interest u/s. 234C, provision for gratuity, provision for leave encashment and provision for bad debt were added to book profit within the terms of Explanation below second proviso to Section 115JB of the Act. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ra) of this order, it has already been discussed and held that the Assessing Officer has erroneously treated the actual bad debt of ₹ 30,46,678/- as provision for bad debt. Hence, the very basis of the addition made by the ld. Assessing Officer was on an incorrect premise. Accordingly, the addition made on account of provision for bad debt amounting to ₹ 30,46,678/- while computing book profit u/s. 115JB of the Act is deleted. 19. Aggrieved by the order of the ld. CIT(A), the revenue is in appeal before us. 20. We have heard both the parties and carefully gone through the submission put forth on behalf of the assessee along with the documents furnished and the case laws relied upon, and perused the fact of the case including the findings of the ld CIT(A) and other materials available on record. We have gone through the order of ld CIT(A), it is a speaking order in respect of provision for doubtful debts/bad debts both under normal provision and section 115JB of the Act. Therefore, the reasoned order passed by the ld CIT(A) does not require any interference. That being so, we decline to interfere with the order of ld. C.I T.(A) in deleting the aforesaid addition ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... luation was considered to be a real liability. Respectfully following the judgment of Hon'ble Apex Court in the case of Bharat Earth Movers (supra) and Metal Box Company (supra) and considering the fact that provision for gratuity and provision for leave encashment are valued by actuary, it is held that both are provision for ascertained liability and accordingly addition made by ld. A.O. on these front while computing book profit is deleted. 24. Aggrieved by the order of the ld. CIT(A) the revenue is in appeal before us. 25. The ld. DR for the Revenue has primarily reiterated the stand taken by the Assessing Officer which we have already noted in our earlier para and the same is not being repeated for the sake of brevity and on the other hand, the ld. Counsel for the assessee has relied on the order of the ld. CIT(A). 26. We have heard both the parties and carefully gone through the submission put forth on behalf of the assessee along with the documents furnished and the case laws relied upon, and perused the fact of the case including the findings of the ld CIT(A) and other materials available on record. We note that during the previous year under consideration, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is observed that the appellant has paid effective rate of royalty @ 4.53% p.a, of sales to its AE, Landis+Gyr AG. It has been observed that the Ld. TPO has computed the effective rate of royalty as 4.74% wherein, in addition to considering the amount of royalty paid, he has also considered the amount of R D cess paid on such royalty for the purpose of royalty rate computation. The appellant, on the contrary, has not considered the R D cess on royalty paid as liability to pay such cess is always on the Indian company importing such technology. The appellant submitted that R D cess should not be considered while determining the effective rate of royalty paid by the appellant to its AE. The Ld. AR of the appellant has drawn support from ruling of Pune Tribunal: in case of Kirloskar Ebara Pumps Ltd. ([2011] 12 taxmann.com 241 (Pune))supporting the same view. 2. The appellant has 'bench marked the aforesaid' rate of royalty with 'the royalty rates for comparable, uncontrolled transactions based on search conducted in, Royalty Statonline database. The appellant has contended that basis the search, the average rate of royalty paid in comparable uncontrolled transactions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... light of the above discussion, the Ld. AO/TPO are directed to delete the adjustment of ₹ 12,21,683/- made on the transaction of payment of royalty. 30. Aggrieved the order of the ld. CIT(A) the revenue is in appeal before us. 31. The ld. DR for the Revenue has primarily reiterated the stand taken by the TPO/Assessing Officer which we have already noted in our earlier para and the same is not being repeated for the sake of brevity and on the other hand, the ld. Counsel for the assessee has relied on the order of the Ld. CIT(A). 32. We have heard both the parties and carefully gone through the submission put forth on behalf of the assessee along with the documents furnished and the case laws relied upon, and perused the fact of the case including the findings of the ld CIT(A) and other materials available on record. We note that the assessee has paid royalty @ 4% (net of taxes) on CM Meters and 5% (net of taxes on MM Meters). The total amount paid by the assessee by way of royalty for manufacturing of both the types of meters is ₹ 1,76,57,854/- plus income tax of ₹ 17,65,785/- (which is borne by the assessee). The assessee paid R D Cess of ₹ 8,82,893 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... etermining the royalty payment to AE since payment to Government of a sum which is the liability of the assessee does not fall within the ambit of international transaction as per the provisions of Transfer Pricing. Reference in this regard is invited towards Sec. 3 of The Research And Development Cess Act, 1986, which reads as follows: 3. Levy and collection of cess on payments made towards import of technology. -(1) There shall be levied and collected, for the purposes of this Act, a cess at such rate not exceeding five per cent, on all payments made towards the import of technology, as the Central Government may, from time to time, specify, by notification, in the Official Gazette. The cess shall be payable to the Central Government by an industrial concern which imports technology on or before making any payments towards such import and shall be paid by the industrial concern to any specified agency. On perusal of the aforesaid section, it may be noted that the liability for payment of R D Cess is that of the assessee and the same should not be covered within the contractual payment of royalty or as income of the foreign company. The Pune Tribunal in the case ..... X X X X Extracts X X X X X X X X Extracts X X X X
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