TMI Blog2002 (7) TMI 220X X X X Extracts X X X X X X X X Extracts X X X X ..... mated figure of Rs. 13 lakhs was not submitted by the assessee. The provision for warranty expenses is held to be a contingent liability on an estimate basis and not on actual basis. The disallowance was accordingly made. 3. The CIT(A) was of the opinion that the assessee's provision for warranty obligations on the basis of certain percentage of sales was not correct in as much as the assessee was not engaged in the business of selling defective goods. According to him, the assessee did not mention in the sale bill that the sale price included specific cost of replacement of parts. The assessee's argument that the sale price included the warranty expenses, according to him, was not the fact. The learned CIT(A) further opined that in the sale of goods, the breach of stipulation collateral to the main purpose of the contract, gives rise to claim of a warrantly liability. According to him, the following conditions need to be fulfilled in respect of goods sold to create warranty liability: (a) Some defect in the goods sold should be detected after the sale of goods, and within the warranty period. (b) The purchaser should consider it worthy to bring it to the notice of the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ge of sales as provision for warranties. Although the assessee has provided this, the assessee compares this provision and debits the actual expenditure to the said provisional account and creates the year and provisions based on the sales made during the year. Any excess claimed over the year will get neutralised by way of actual debits to the account. The assessee drew our attention to p. 17 of the paper book as well as p. 51 of the paper book to impress upon the sales and services that were rendered to the parties. According to him, the sale prize includes cost of services that are provided. The assessee has accounted the liability on the matching principle of accountancy. The Department is only unjustified in treating the liabilities as contingent. The liability is certain and only the quantum is contingent. The learned counsel for the assessee drew our attention to the actual figure of expenditure and made a comparison with the figure of warranty expenses to impress upon us that the provisions claimed are not unduly excessive and they are more or less over a period of time equal. He relied upon the Accounting Standard-9 and also Accounting Standard-4 besides relying upon sever ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his case should have accepted the assessee's claim as following the method of accounting and as shown the basis for making such claims. The assessee has provided a meagre percentage of sale as provision for warranty claims during the period for which the assessee has produced the details of warranty claims. The claim shows that the warranty expenses claimed as deduction is not abnormally high and the gap between the warranty provisions and the warrant expenditure incurred have narrowed down over years and in fact, the detailed study of these expenses clearly shows that there is a perfect neutralisation between the expenditure incurred and the warranty claims claimed as deduction. In our view, the warranty liabilities are inbuilt in the sale price since all sales are with warranty liabilities. The liability towards warranty liabilities is certain and has accrued on the date of sale and only the ascertainment could be said to be contingent which the assessee has estimated based on its past experience and in our opinion, the claims made by the assessee in this regard are most reasonable and are supported by some plausible material. In our view, the Department is not justified in treat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cient to sustain the disallowance made by him 10. We have gone through the details provided by the assessee and considered the rival submissions. The discussions in para 10 of the CIT(A)'s order shows that even the CIT(A) has resorted to some estimation based on his own working for the asst. yr. 1991-92. Accordingly some relief was granted. The claim of the assessee before us is that the working of disallowance under r. 6D would involve substantial time and processing of the back records and it is very difficult to provide per trip details in every case. This only shows that the assessee prays for ad-hoc disallowance on per trip basis. The assessee has provided some of these details in pages 47 to 51 of the paper book. The assessee has himself substantially worked out a disallowance to the extent of Rs. 12,45,283 to take care of the plausible omissions and commissions. We direct the disallowance to be maintained at a sum of Rs. 1,50,000. 11. Before parting with this, we would like to deal with one of the contentions of the assessee that the disallowance is totally uncalled for on the ground that the rules themselves are amended to provide for higher rates of allowance under r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eligible units for the purpose of deduction under s. 80-IA of the Act. The assessee at pp. 16 to 20 of the paper book has given its working for deduction under s. 80-IA of the Act. We have carefully seen the working which shows that the materials consumed have been allocated directly to the eligible units. The direct expenses and depreciation in respect of manufacturing activity, royalty, amortisation and technical knowhow fees on the basis of treating them as direct cost of the respective units based on these services directly used by these units. In other words, in our opinion, there is no need for allocation of any expenses when the expenses are directly connected with period. What is required is the allocation of common expenses or indirect expenses which the assessee has shown the allocation at p. 20. The salaries wages, bonus and commission have been allocated. For e.g., the assessee adopted wages as the basis for allocating salaries, wages, bonus, commission, contribution to PF, gratuity, bonus, staff welfare, recruitment training expenses etc. In our view, wages is the proper base for allocating the indirect expenses of manufacturing. Similarly, transportation, insurance, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on as claimed by the assessee for the asst. yr. 1993-94 itself. The CIT(A) in para 15 of his order has given a direction to consider it as deduction for the asst. yr.1995-96. In view of the fact that we have accepted the assessee's claim for asst. yr. 1993-94, this direction of the CIT(A) for asst. yr. 1995-96 need not be followed by the AO. 18. The next dispute in the asst. yr. 1997-98 relates to computation of profit under s. 115JA. The learned counsel for the assessee pleaded that the computation of the liability under s. 115JA may be done after giving effect to our order. The AO after hearing the Departmental Representative on the disputed issue and going through the discussions in para 27 to 29.2 of the order of the CIT(A),(sic) we direct the AO to compute the income under s. 115JA, if found necessary, after giving effect to our order. The assessee before such computation shall be given an opportunity of being heard in the matter. 19. The next dispute in the asst. yr. 1991-92 relates to payment of Rs. 101.3 lakhs to M/s IGE (India) Ltd. hereinafter referred to as IGE, for short, and M/s Faridabad Investment Co. Ltd. (FIL for short) and payments to the extent of Rs. 74 la ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s Elpro International. The sum of Rs. 22.20 million to FIL was to be paid as follows: (a) First instalment of Rs. 7.4 million on or before 30th June, 1991, relevant to the asst. yr. 1992-93. (b) Second instalment of Rs. 7.4 million on or before 30th June, 1992, relevant to the asst. yr. 1993-94 and (c) Third instalment of Rs. 7.4 million on or before 30th June, 1993, relevant to the asst. yr. 1994-95. The assessee paid Rs. 28.80 lakhs to IGE by way of service charges and the balance out of Rs. 101.30 lakhs as miscellaneous expenses. These payments were claimed as deduction in the computation of business income. 22. The AO held that the payment of Rs. 101.30 lakhs was an intial outlay for initiation and extension of the business in the asst. yr. 1991-92. She held that such payment was made for acquiring or bringing into existence an asset of an enduring benefit to the business of the assessee that is carried on. She held it to be of capital in nature. As regards the sum of Rs. 28.8 lakhs paid to IGE for access to the latter's information base and assistance in the smooth transition of customer order filing, etc., the AO again held that such payment is for acquiring a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rmination of agency, yet, as far as the assessee is concerned, IGE was not its agent and the payment was not for termination of any agency granted by the assessee. Considering it as a case of payment to ward off competition in a new line of business, IGE competing with the assessee in the agency business of GE at the end of the three year period mentioned in the agreement dt. 2nd April, 1991, depended totally on whether the agency business is granted by GE to IGE at the end of the period of 3 years. By April 90, the relevant time of agreement, IGE had ceased to be in agency business in medical equipments and the assessee had been granted the agency business to the exclusion of IGE and there was no case for IGE competing with the assessee during the period of subsistence of the contract of agency of the assessee with GE. Therefore, it cannot be said to be a payment wholly and exclusively for the purpose of business of the assessee. If GE was to compensate IGE for termination of the agency business which was in existence up to 31st Dec., 1090, GE should have incurred the expenditure. The assessee bearing the expenditure may be as per the tripartite agreement but it is effectively a p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rmal course of business. The learned counsel pointed out that the sum of Rs. 50 lakhs was paid to IGE for continuation of access to the computer links division of IGE for a period of 3 years from the date of agreement. The sum of Rs. 28.8 lakhs was payable to IGE for giving accessee to information base and for assisting the smooth transition of customer order filing and access to transitional office and administrative facilities. It is also pointed out by the learned counsel for the assessee that the sum of Rs. 22.20 million to FIL was for a declaration on undertaking that FIL will desist from doing any business either directly or indirectly or in association with any other person, in medical diagnostic imagining save and except the subsisting arrangement FIL had with M/s Elpro Internatonal. The payment has been made since the assessee was desirous of pursuing the development of its medical diagnostic imaging apparatus and equipment business in collaboration with General Electric Co. and in the name and style of 'Wipro GE' to the exclusion of IGE and FIL. The assessee was also desirous of acquiring from IGE complete customer lists for the medical division, access to all books and r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he payment as capital in the light of the principle laid down by the Andhra Pradesh High Court in the case of CIT vs. Warner Hindustan Ltd. (1985) 48 CTR (AP) 231 : (1986) 160 ITR 217 (AP) and this decision, according to the learned counsel for the assessee has been reversed by the Hon'ble Supreme Court in the same case CIT vs. Warner Hindustan Ltd. (1999) 157 CTR (SC) 528 : (1999) 239 ITR 566 (SC). Therefore, the learned counsel pleaded that the decision of the authorities below, on this issue, requires to be reversed. 25. The learned counsel for the assessee also pleaded that the compensation of Rs. 22,50,000 paid towards 1/3 cost of voluntary retirement of the employees of IGE, can be treated as part of recruitment cost and the same is allowable as deduction since the payment was necessitated for business considerations. The payment made towards access to information base and for the transition of customer order filing etc. was absolutely necessary for the purpose of effectively running the business of the assessee. 26. Alternatively, the learned counsel for the assessee relied upon the order of the Tribunal in ITA No. 2315/Bom/95, dt. 26th March, 1996, in the case of IGE ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng compensation thereof, the assessee did not get any benefit of an enduring nature and did not acquire any capital asset at all. Therefore, in our opinion, this payment is part of regular business expenditure incurred by the assessee for the purpose of its business. The payment of Rs. 22,50,000 paid by the assessee is just like recruitment cost. The cost of recruiting the rest of the employees was necessary for the purpose of business. We, therefore, consider the compensation payment of Rs. 22,50,000 as revenue expenditure. As regards the payment made towards access to information base and for transition of customer order filing, this payment again, is for business consideration and we do not agree with the CIT(A) that the amount was paid for obtaining information useful for a long period and that the same could be treated as plant. There is no question of acquisition of any asset when the assessee made the payments and acquire the information about the customer base. That will help the assessee to carry on its business very efficiently and in a more profitable manner. The payment of Rs. 28.80 lakhs, in our view, is, therefore, a proper business expenditure allowable as deduction. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s : Sundry income 1,48,02,545 Balance : Other income has been Disallowed by the assessee 1,38,03,069 Deduction under s. 80HHE Export Turnover Total turnover 6,35,77,722 152,44,87,471 x 1,38,03,069 = 5,75,647" The CIT(A), however, accepted the export turnover at Rs. 6,35,77,722 but considered the total turnover of the entire business at Rs. 1,48,55,01,543 and computed the profits of the business at Rs. 1,14,39,002 and arrived at a smaller deduction under s. 88HHE of the Act. The AO had added excise duty and sales-tax to paid to arrive at the total turnover which the CIT(A) has directed to be excluded. 31. The learned counsel for the assessee vehemently opposed the determination made by the Departmental authorities. He drew our attention to pp. 48, 49, 50 51 of the paper book to impress upon us to the correctness of the assessee's claim under s. 80HHE. The learned counsel contended that the Department failed to understand, the difference between the provisions of s. 80HHC and 80HHE of the Act. The total turnover referred to in s. 80HHE cannot include the global turnover of the assessee from all goods and merchandi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion from India to a place outside India by any means and providing technical services outside India in connection with the development or production of computer software. What is an export turnover is again defined in s. 80HHE(5). Identical provision in s. 80HHC(4B) deals with goods and merchandise to which that section applies whereas the provisions of s. 80HHE(5) deals with consideration received in respect of computer software received in, or brought into, India by the assessee in convertible foreign exchange in accordance with sub-s. (2). The total turnover is defined not to include freight, telecommunication charges or insurance attributable to the delivery of the computer software outside India or expenses, if any, incurred in foreign exchange in providing the technical services outside India. What essentially s. 80HHE is dealing with is with reference to the turnover of computer software. The total turnover for the purpose of s. 80HHE can only mean the total turnover of the computer software both in India and outside India. Under the scheme of the said section, it is not correct to include any other turnover not connected with the computer software business. We are, therefor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rovision must be so construed, if possible that absurdity and mischief may be avoided. Where the plain literal interpretation of a statutory provision produces a manifestly absurd and unjust result which could never have been intended by the legislature, the Court may modify the language used by the legislature or even some violence to it, so as to achieve the obvious intention of the legislature and produce a rational construction." If the Department's computation is accepted, it would only result in manifest anomalies and arbitrariness. Therefore, in our view, for the purpose of deduction contemplated by s. 80HHE, the total turnover for the said section should not include turnover on account of manufacturing, trading etc. which is totally unconnected with the public software business. Therefore, in our considered view, the total turnover, for the purpose of s. 80HHE consists of turnover from computer software business and providing of technical services. Accordingly, we direct computation of deduction under s. 80HHE on the total turnover of the assessee which, in accordance with the view we have expressed, should be the basis as a denominator. 35. Adverting to the exclusion ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assumption of jurisdiction by the CIT(A) for all these years, both for want of valid notice under s. 251(2) and also enhancing the income. The assessee further disputes the direction by the CIT(A) for computing the deduction afresh. The CIT(A)'s letter dt. 19th Dec., 2000, which is placed at pp. 49 50 of the paper book for asst. yr. 1991-92 is extracted below. "Sub: IT Appeal No. ITA 271/CC-IV/CIT(A)-1/98-99 Asst. yr. 1991-92-Reg. While examining the IT records in connection with the appeal, it is noticed that your claim for deduction under s. 80-O is erroneous. 2. You have claimed deduction under s. 80-O to the tune of Rs. 15,29,878. The computation given at Annexure IV to the statement of computation of income filed with the return shows that the deduction claimed is at 50 per cent of Rs. 30,59,740 being the total of consideration received in foreign export services rendered during the previous year ended 31st March, 1994, given by you as follows: Software Rs. 26,21,021 Engineering Services Rs. 4,38,717 Total Rs. 30,59,740 The AO has allowed the claim as such in the assessment order appealed against without an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee had not been given a reasonable opportunity of showing cause for any such action which results in enhancement of reduction of the relief. Reliance was placed on the decision of the Full Bench of the Delhi High Court in the case of CIT vs. Sardari Lal and Co. (2001) 170 CTR (Del)(FB) 431 : (2001) 251 ITR 864 (Del)(FB), as regards want of jurisdiction in the matter. On merits, it was pointed out that the decision relied upon by the CIT(A) came much later to the date of framing the assessment which was between 1994 to 1998. The AO would not have had the benefit of this decision. Therefore, it is wrong, on the basis of this premise, to conclude that there is a non-application of the kind in deciding the issue by the AO. The learned counsel further pleaded that the decision of the Bangalore Bench of the Tribunal in the case of M.N. Dastur Co. Ltd. vs. Dy. CIT (1997) 58 TTJ (Bang) 748 : (1997) 62 ITD 113 (Bang) has been upheld by the Karnataka High Court inasmuch as reference has been dismissed on 4th June, 2001 in CP No. 580 of 1988. Consequent to this, the Tribunal is obliged to follow its own decision wherein it is held that deduction under s. 80-O should be allowed without a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on merits, the issue has to be decided in favour of the assessee in the light of the Karnataka High Court decision. Further, the same issue was considered in detail by the Tribunal in the case of Wipro Ltd. in ITA Nos. 651/Bang/94, 521 to 523/Bang/97, etc. The Bangalore Bench of the Tribunal in the case of M.N. Dastur Co. has held that deduction under s. 80-O is admissible after reducing expenses incurred abroad to earn the income and the proportionate expenses incurred in India is not required to be deducted for computing the income of the nature referred to in s. 80-O of the Act. What s. 80AB requires is that for the purpose of computing deduction under s. 80-O the amount of income of that nature computed in accordance with the provisions of the Act shall alone be deemed to be the amount of income of that nature which is derived or received by the assessee. Thus, in our opinion, only the direct expenses incurred by the assessee in earning the income of the nature referred to in s. 80-O is required to be deducted. There is no scope for reducing the income by estimating certain expenses as would have been incurred for earning such income. We, therefore, hold that the direct expen ..... X X X X Extracts X X X X X X X X Extracts X X X X
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