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TMI Blog2021 (4) TMI 1021X X X X Extracts X X X X X X X X Extracts X X X X ..... u/s 143(3) of the Act on 21/03/2013, determining the total income of the assessee at Rs. 155,42,46,330/- interalia disallowing the claim of the assessee of loss incurred on foreign exchange and making disallowance on depreciation on lease assets, disallowance of charges paid to PWC firms and making additions on account of disallowance of non- compete fee and non-refundable grant. 2.1. Aggrieved the assessee carried the matter in appeal without success. The ld. First Appellate Authority gave detailed reasons as to why he has agreed with the order of the Assessing Officer. 3. Further aggrieved, the assessee is in appeal before us. 4. We have heard rival contentions. On careful consideration of the facts and circumstances of the case, perusal of the papers on record, orders of the authorities below as well as case law cited, we hold as follows:- 5. Ground Nos. 1 to 1.2: DISALLOWANCE OF LOSS OF Rs. 84,40,93,680/- ARISING FROM FOREIGN CURRENCY FLUCTUATION IN RESPECT OF FOREIGN CURRENCY HEDGING CONTRACTS: 6. We find that the issue is squarely covered in favour of the assessee by the decision of the Co-ordinate Bench of the ITAT Kolkata in the assessee's own case for the Assessment Y ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me Court in the case of Woodward Governor India (P) Ltd. (supra) has observed at p. 265 para 17 that the Central Government has made AS-11 mandatory. During the course of first appellate proceedings that the CIT-A noticed that the AO allowed the loss of Rs. 85,70,425/- for 2010-11 which supports to show that the assessee has been following consistently accounting standards and the liability has been accrued for a pending obligation for every year i.e the difference was arising for more than one accounting period. 26. We, accordingly, hold that disallowance made by the AO treating the impugned amount of Rs. 54,23,955/- for A.Y 2009-10 as contingent and notional loss is not justified and that the loss incurred to the assessee on account of five unexpired forex forward contracts on the last date of the accounting period i.e. before the date of maturity of the forward contract is not contingent and it is a actual loss, is allowable. Thus, respectfully following the observations made by the Special Bench supra, the ground no -2 raised by the assessee Revenue fails and the order of CIT-A is justified, consequently ground no-2 is dismissed." 8. Further, reliance was also placed on the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ire tax exempt income is Rs. 48,90,000, the disallowance ultimately directed works out to nearly 110 per cent of that sum, i.e., Rs. 52,56,197. By no stretch of imagination can s. 14A or r. 8D be interpreted so as to mean that the entire tax exempt income is to be disallowed. The window for disallowance is indicated in s. 14A, and is only to the extent of disallowing expenditure "incurred by the assessee in relation to the tax exempt income". This proportion or portion of the tax exempt income surely cannot swallow the entire amount as has happened in this case." (Emphasis ours) 12. Consistent with the view taken therein, we restrict the disallowance u/s 14A of the Act to the extent of exempt income earned by the assessee company during the year. The argument that the Assessing Officer has not recorded satisfaction before the invoking Rule 8D of the Income Tax Rules, 1962 ('Rules'), is not factually correct. On a reading of the assessment order, we find that he Assessing Officer has recorded his satisfaction. In the result, ground of the assessee is allowed in part. 13. Ground Nos. 3 to 3.2: DISALLOWANCE OF NON-COMPETE FEE OF Rs. 10,00,00,000: 13.1. The ld. Counsel for the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. By a process of amalgamation, the assessee had acquired the business of the amalgamating companies. However, for the fruitful exercise of its business as a business proposition, the assessee thought it fit to enter into a non-compete agreement with a person who had the knowledge of the entire operations, so as to get the full yield of the amalgamated company's business. In that context, rightly, the assessee took a commercial decision to pay non-compete fee to U. Mohanrao and going by the decision of the Apex Court, particularly the decision in Coal Shipments (P.) Ltd.'s case (supra), that the payment was in respect of the performing of the business of the assessee, we have no hesitation in holding that the expenditure is only on revenue account and not on capital account. In the circumstances, we accept the case of the assessee, set aside the order of the Tribunal and allow the Tax Case." The Mumbai Tribunal in the case of DCIT vs. Intervet (India) Ltd. [ITA No. 315/Hyd/2003, order dt. 19 October 2012], , on similar facts and following the ratio laid by the Madras High Court in the case of Carborandum Universal Ltd. (supra), has held the payment of non-compete fee to b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the share in the assets, (b) the share of the goodwill, and (c) for the restrictive covenant and that the part of the amount referable to the acquisition of the share in the assets and the share of the goodwill would be on capital account as it was in the nature of an initial outgoing and the payment towards the restrictive covenant was on revenue account and it would not amount to an acquisition of an advantage of an enduring nature. The Tribunal was also right in its view that the amount received by the recipients was not liable to tax either as income or capital gains. No question of any liability to penalty would also arise in the instant case, because the assesses were merely contending for a particular position contrary to the view taken by the Income-tax Officer which would not call for any penalty." In view of the aforesaid decision, it can be straight-away held that if the restrictive covenant given in the non-compete agreements is for a period of five years, then it is on the revenue account." Similar propositions of law has also been laid down by the Hon'ble Madras High Court in the case of Asianet Communications Ltd. CIT [(2018) 96 taxmann.com 399)] - On similar fa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ant, but it was neither permanent nor ephemeral. In that sense, the advantage was not of an enduring nature. The Hon'ble Supreme Court dismissed the SLP filed by the Department against the decision of the Hon'ble Delhi High Court (312 ITR(st.) 333). In view of the above discussion, if the non-compete payment does not result in bringing into existence of any capital asset or an advantage which is of enduring nature, then such payment would be revenue in nature. 14. The Assessing Officer relied on the judgment in the case of Pitney Bowes India Pvt. Ltd. vs. CIT (2012) 204 Taxmann 333(Del), and ld. CIT(A) has relied on the judgments in the case of Sharp Business System v. DCIT [2011] 15 taxmann.com 144 (Delhi) and Tecumesh India (P.) Ltd. v. Addl. CIT [2010] 127 ITD 1 (Delhi) (SB). We find that these cases are distinguishable on facts :- - Pitney Bowes (Supra): In this case, the taxpayer had acquired going concern on lumpsum consideration. Under the Business Transfer Agreement, there was no bifurcation of the consideration for non-compete and other tangible and intangible assets so acquired. Thus, the taxpayer had bifurcated the total consideration paid for acquisition of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee's case, Thus, the payment in question is revenue in character and hence allowable as an expenditure. 16. In view of the above discussion, we delete the disallowance made on account of compete fee. 17. Ground Nos. 4 to 4.2: Disallowance of depreciation on leased assets of Rs. 4,36,03,330 and non-grant of claim of principal portion of lease rentals amounting to Rs. 5,37,68,623/- 17.1. The issue is covered in favour of the assessee by the order of the Hon'ble Tribunal in appellant's own case for AY 2003-04 in [ITA No. 1521/Kol/2013], wherein the coordinate Bench of the Hon'ble Kolkata Tribunal dismissed the Revenue's appeal and upheld the order of the CIT(A) by holding that the lease rentals (net of interest element) should be allowed as deduction. The Tribunal held as follows:- "4.4. The Ld DR stated the claim of lease rental was not made by the assessee in the return of income. He vehemently relied on the order of the ld AO. In response to this, the ld AR argued that the ld AO had allowed the lease premium in the next succeeding asst year 2004-05 in section 143(3) proceedings for which he placed a copy of the assessment order dated 28.12.2006. 4.5. We have heard the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lti functional consultancy services as a group entity of PWCDA organization based in Netherlands. Learned counsel has also filed before us relevant assessment records with regard to the payee entity pertaining to the impugned assessment year itself accepting the returned income without making any addition. Necessary reference regarding Firm Services Agreement is also made to paper book pages 6304 and 6305. It emerges that this Tribunal's decision in DCIT vs. Ernst & Young (P) Ltd. 49 taxman.com 386 (Kol) also holds that no TDS is deductible in case of such firm services agreement payments not including any income component but only reimbursement of expense on cost allocation formula. We take into account all these facts as well as judicial precedents to delete impugned disallowance of Firm Services expenditure payment amounting to Rs.150,046,130/-." 19. The ld. D/R, could not controvert the submissions of the assessee that the issue is covered by this above referred order. Respectfully following the propositions of law laid down by the co-ordinate bench of the Tribunal in the assessee's own case, referred above, we allow this ground of the assessee. 20. Ground Nos. 6 to 6.2: ADDI ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly for determining its taxability. 23. The ld. CIT(A) upheld the order of the ld. AO. It was held that the appellant had business connection with PwC Services BV from which the appellant receives various services and hence the non-refundable grant arose from the business of the assessee. He further held that agreement itself shows that at least part of the fund is purely for maintenance of the resources and capabilities of PwC India which is revenue in nature. Accordingly, he held that the grant received by the assessee is taxable under section 28(iv) of the Act, by placing reliance on the decision of the Hon'ble Madras High Court in the case of CIT vs. Ramaniyam Homes (P.) Ltd. [(2016) 384 ITR 530]. 24. The ld. Sr. Advocate, Shri C.S. Agarwal, submits that provisions of section 28(iv) does not apply in the present case as the receipt of Rs. 19.83 crores is in the nature of cash or money. It is well settled that what is taxable u/s 28(iv) is the value of benefit or perquisite, whether convertible in money or not, and not the monetary amount itself, which has been received. 25. Section 28(iv) of the Act is reproduced below for reference: "28. The following income shall be char ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... preme Court in the case of Mahindra & Mahindra (supra). 29. The ld. Sr. Advocate submitted that, the instant grant was received for the specific purpose of funding the cost of acquiring the shares of ECS Limited (i.e. to meet a capital expenditure) and such an obligation/purpose for which the grant is given could never be delinked from the receipt of the grant, since such obligation is the basic foundation based on which the nature of the grant may be determined. The Hon'ble Supreme Court in the case of Sahney Steel (supra), reproduced hereunder : "18 If any subsidy is given, the character of the subsidy in the hands of the recipient - whether revenue or capital - will have to be determined by having regard to the purpose for which the subsidy is given. If it is given by way of assistance to the assessee in carrying on of his trade or business, it has to be treated as trading receipt. The source of the fund is quite immaterial. 19. For example, if the scheme was that the assessee will be given refund of: ales tax on purchase of machinery as well as on raw materials to enable the assessee to acquire new plants and machinery for further expansion of its manufacturing capacity in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he subsidy was on capital account. Therefore, it is the object for which the subsidy/assistance is given which determines the nature of the incentive subsidy. The form of the mechanism through which the subsidy is given is irrelevant. ....................... One more aspect needs to be mentioned. In Sahney Steel & Press Works Ltd.'s case (supra) this Court found that the assessee was free to use the money in its business entirely as it liked. It was not obliged to spend the money for a particular purpose. In the case of Seaham Harbour Dock Co. (supra) assessee was obliged to spend the money for extension of its docks. This aspect is very important. In the present case also, receipt of the subsidy was capital in nature as the assessee was obliged to utilize the subsidy only for repayment of term loans undertaken by the assessee for setting up new units/expansion of existing business." (Emphasis supplied) 30. Reliance is also placed on the decision of the jurisdictional Calcutta High Court in the case of CIT vs. Stewarts & Lloyds of India Ltd. [(1987) 165 ITR 416]. 31. The ld. D/R, could not factually controvert these submissions. In view of the above discussion, based on th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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