TMI Blog2009 (1) TMI 13X X X X Extracts X X X X X X X X Extracts X X X X ..... efore the Tribunal the Revenue as well as the assessee, filed an appeal against the order of the Commissioner of Income Tax (Appeals) dated 26.04.2005 [hereinafter referred to in short as the "CIT(A)"]. 2. The Revenue being aggrieved has preferred the present appeal and proposed the following questions of law for consideration of this Court:- "(a) Whether ITAT was correct in law in allowing deduction of export commission of Rs 10,07,22,625/- to the assessee u/s 37(1) of the Act? (b) Whether order passed by ITAT is perverse in law when it allowed deduction to the assessee of export commission ignoring the relevant facts recorded by the Assessing Officer in the assessment order and contrary to the provisions of Section 40A(2) of the Act? (c) Whether ITAT was correct in law in allowing depreciation to the assessee on training fee of Rs 2,18,48,700/- paid to Guardian USA, that was capitalized by the assessee as part of Plant and machinery? (d) Whether ITAT was correct in law in allowing deduction of lump sum prepayment premium of Rs 8 crores paid by the assessee to IDBI? (e) Whether ITAT was correct in law in allowing entire prepayment premium of Rs 8 crores to the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oduction; failing which, the assessee would be subjected to a penalty. 5.1 It is also not disputed that for the purpose of setting up a plant to manufacture float glass in India, the assessee was also permitted to import machinery into the country under the Export Promotion Capital Goods (EPCG) Scheme at a concessional rate of duty. Under the EPCG Scheme it was stipulated that in the event the assessee failed to fulfill the export application undertaken by it, it would be required to pay the differential duty along with interest. 6. It is in this background that the assessee set up its plant which commenced commercial production on 01.03.1993. 7. At this stage it would be important to note two other aspects on which the Assessing Officer, as well as the Revenue, have laid great stress, which is, that as per the collaboration agreement dated 05.06.1990 the assessee was required to pay royalty to GIC at the rate of 3% on domestic sales and 4% on foreign sales. It seems that the financial institutions in India had an objection to the clause on payment of Royalty, which stood incorporated in the collaboration agreement. The financial institutions were of the view that the obl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cer that the assessee in exporting the goods was incurring a loss: observed that, in view of the explanation of the assessee, that the exports had to be made at the price prevailing in the international market even if it was less than the cost of production keeping in mind that the domestic demand for float glass in the country was low and the inventory with the assessee was piling, the said objection had no merit. As regards the second objection of the Assessing Officer that GGE had not rendered any service the CIT(A) noted; the fact that the collaboration agreement which was executed prior in point of time to the Export Sales Agency Agreement, itself provided for appointment of an agent for the purposes of carrying out exports. The agent under the collaboration agreement could have been the foreign collaborator itself i.e., GIC or any of its affiliates. The said foreign collaboration agreement also provided for payment of commission to such an agent albeit at the rate of 5% which had the approval of Government of India. The CIT(A) also returned a finding that there had been a promotion of exports which was amply demonstrated by the fact that the assessee had achieved an export tu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f CIT(A) as well, that the provisions of Section 40A(2) or Section 92 of the Act could be brought into play to restrict the claim of the assessee towards payment of agency commission at the rate of 5% on the ground that the same was excessive and unreasonable. It came to the conclusion that Section 40A(2) should be invoked only if the Revenue is able to establish that the expenditure in issue was excessive or unreasonable having regard to fair market value of the goods and services or facilities for which payment has been made or the legitimate needs of the business or provision of services or benefit derived by or accruing to the assessee from the said expenditure. In view of the fact that the Tribunal found that no evidence was placed by the Revenue as to what was the fair market value of the goods for which the assessee had paid commission, the claim of the assessee could not be restricted by resorting to the clause in the collaboration agreement in which the agency commission had been pegged at 5%, by treating the same as evidence of fair market value. The Tribunal also observed that Section 92 of the Act could not be invoked in the instant case as the Transfer Pricing Officer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hich is, that while the assessee's stand that services had been rendered, was acceptable, however, in so far as the rate of commission was concerned it was to be allowed only to the extent 5%. The Tribunal's dis-agreement with this line of reasoning adopted by the CIT(A), was broadly on the ground, that once it is accepted that services have been rendered by the agent the discretion as to what commission has to be paid is a business decision of the assessee which cannot be interfered with unless there is evidence to show that it is unreasonable is, in our opinion the correct approach. 11.1 The Tribunal in the impugned judgment has returned a finding of that no evidence had been produced by the Revenue that the agency commission paid by the assessee at the rate of 12.5% was unreasonable. The Tribunal also noted that the Transfer Pricing Officer in the assessment years 2002-03, 2003-04, 2004-05 had accepted the percentage of agency commission paid by the assessee confirmed to the arms length price. 11.2 In view of the aforesaid findings and the reasoning adopted by the Tribunal, we find no fault with the conclusion arrived at by the Tribunal in the impugned ju ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er. The assessee took the matter further, in appeal, to the Tribunal. The Tribunal in paragraph 28 of the impugned order observed, and in our view rightly, that the item of expenditure in question was admittedly incurred prior to the setting up of the plant and, therefore, had to be capitalized as part of plant and machinery. The Tribunal observed, the fact that, the payment had been made during the previous year or that tax at source had been deducted during the previous year would not convert a capital expenditure into one which is revenue in nature. It further observed that the provisions of Section 40(a)(i) are provisions which enable the Revenue to make a disallowance. The assessee cannot seek to rely on those provisions when the item of expenditure was admittedly a capital expenditure. The Tribunal thus permitted the training fee to be capitalized as part of plant and machinery with depreciation to be allowed to the assessee on the said capitalized amount. 12.2 We agree with the line of reasoning adopted by the Tribunal. It is well settled that pre-operative expenses incurred for setting up of a plant are to be capitalized. See observations in Challapalli Sugar Ltd vs C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oposed question of law which is extracted hereinabove it seems that the Revenue is aggrieved by the fact that the Tribunal admitted the additional ground raised by the assessee pertaining to claim of depreciation on actual cost of assets after they were adjusted for fluctuation in the rate of exchange, in terms of Section 43A of the Act. A bare perusal of paragraph 36 of the impugned judgment would show that the Tribunal as a matter of fact rejected the application of the assessee raising the additional ground for the reason that it did not arose out of the order of the CIT(A). All that the Tribunal has done is that, it has granted liberty to the assessee, to make its claim before the Assessing Officer who has been permitted to adjudicate upon the same in accordance with law. According to us this direction of the Tribunal cannot be found fault with. No substantial question of law has arisen for our consideration. Pre-payment premium 14. Briefly, the assessee in its profit and loss account has debited a sum of Rs 8 crores as pre-payment premium which is classified as an extraordinary item. The Assessing Officer sought justification from the assessee for claiming the entire amoun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation (supra) were not identical to the ones that obtained in the present case held that, the principle of law laid down in Madras Industrial Corporation (supra) is applicable to the present case and hence, did not find any error in the approach of the Assessing Officer in relying upon the said decision. The assessee carried the matter further, in appeal, to the Tribunal. The Tribunal in paragraph 31 of the impugned judgment has returned a finding of fact that the pre-payment premium paid by the assessee, in lieu of which IDBI reduced the rate of interest on the rupee term loan, represented present value of the differential rate of interest that would have been due had no restructuring of the loan had taken place. The relevant observations of the Tribunal are extracted hereinbelow:- "The prepayment premium paid by the assessee to IDBI is in lieu of IDBI agreeing to reduce the rate of interest on the rupee loan aggregating to Rs 170.76 crores. The same, in other words, represents upfront payment (present value) of differential rate of interest that would have been due on the loan if no restructuring of the debt had taken place. In terms of S. 36(1)(ii) read with S. 2(28A) of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s, according to us, erroneously sustained by the CIT(A). The ratio of the judgment of the Supreme Court in the case of Madras Industrial Corporation (supra) is not applicable to the present case. The facts of the instant case are different. Madras Industrial Corporation (supra) pertains to treatment of discount on debenture issued by the assessee. The Supreme Court's observations that a claim for deduction by an assessee be spread over as deduction in one year would distort the picture of profits, cannot be applied to the instant case, as the mechanism for claiming deduction on account of "interest" paid on loans obtained by the assessee from a public financial institution, is specifically provided for in the statute under Section 43B(d) of the Act. Therefore, in terms of Section 43B(d) once it is ascertained that the payment is in the nature of "interest" in terms of Section 36(1)(iii) read with Section 2(28A) of the Act, and the assessee fulfills the conditions provided in Section 43B(d), that is, it is the interest paid in respect of loans obtained from public institutions, it follows that, the interest will have to be allowed as a deduction only in the year of payment, notwiths ..... X X X X Extracts X X X X X X X X Extracts X X X X
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