DCIT, CHENNAI V. John Crane Sealing Systems (I) Private Limited, CHENNAI

ITA 1914/CHNY/2015

• Counselvise Citation: [2016] 121 COUNSELVISE.COM (IT) 3901 (ITAT-CHENNAI)
• Duration Of Justice: 1 year(s) 2 month(s) 17 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 17-11-2016
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: C
• Assessment Year: 2010-2011
• Appeal Filed On: 31-08-2015
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: A V SREEKANTH
• Assessee Lawyers: S RAGHUNATHAN
• Keywords: Reopening of assessment; Depreciation; Cost of acquisition; Bad and doubtful debts; Difference of opinion; Royalty expenses; Reason to believe; Change of opinion; Revenue expenditure; Capital expenditure
• Section: 143(3); 234B; 37(1)

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL , C B ENCH, CHENNAI . . . , . , % BEFORE SHRI N.R.S.GANESAN, JUDICIAL MEMBER AND SHRI A.MOHAN ALANKAMONY, ACCOUNTANT MEMBER ./ I.T.A.NOS.1885 TO 1888/MDS/2015 ( / ASSESSMENT YEARS: 2008-09 TO 2010-11) M/S. JOHN CRANE SEALING SYSTEMS INDIA PVT. LTD., 1, GROUND FLOOR, CASA BLANCA. 6, CASA MAJOR ROAD, EGMORE CHENNAI - 600 008. VS THE DEPUTY / ASSISTANT COMMISSIONER OF INCOME TAX, COMPANY CIRCLE-II(3), CHENNAI-34. PAN:AAACJ2131J ( /APPELLANT) ( /RESPONDENT) & ./ I.T.A.NOS.1912 TO 1914/MDS/2015 ( / ASSESSMENT YEARS: 2008-09 TO 2010-11) THE DEPUTY COMMISSIONER OF INCOME TAX, COMPANY CIRCLE-II(3), CHENNAI-34. VS M/S.JOHN CRANE SEALING SYSTEMS INDIA PVT. LTD., 1, GROUND FLOOR, CASA BLANCA. 6, CASA MAJOR ROAD, EGMORE CHENNAI-600 008. PAN:AAACJ2131J ( /APPELLANT) ( /RESPONDENT) ASSESSEE BY : MR.S.RAGHUNATHAN, ADVOCATE REVENUE BY : MR. A.V.SREEKANTH, JCIT /DATE OF HEARING : 30 TH AUGUST, 2016 /DATE OF PRONOUNCEMENT : 17 TH NOVEMBER, 2016 / O R D E R PER A. MOHAN ALANKAMONY, AM: IN THE CASE OF THE ASSESSEE SEVEN APPEALS ARE FILED BOTH BY THE ASSESSEE AS WELL AS THE REVENUE AGGRIEV ED BY THE CONSOLIDATED ORDER OF THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) DATED 16.03.2015 AS DETAILED HEREIN BELOW:- 2 ITA NOS.1885 TO 1888/MDS/2015 & 1912 TO 1914/MDS/2015 APPEAL BY ITA NO. ASSESSMENT YEAR ORDER U/S. DATE OF AOS ORDER ASSESSEE 1886/MDS/2015 2008-09 250 R.W.S. 143(3) 23/12/2011 ASSESSEE 1885/MDS/2015 2008-09 250 RWS 143(3)/147 26/03/2014 REVENUE 1912/MDS/2015 2008-09 143(3) RWS 147 26/03/2014 ASSESSEE 1887/MDS/2015 2009-10 143(3) 20/03/2013 REVENUE 1913/MDS/2015 2009-10 143(3) 20/03/2013 ASSESSEE 1888/MDS/2015 2010 - 11 143(3) 26/03/2014 REVENUE 1914/MDS/2015 2010-11 143(3) 26/03/2014 2. THE ASSESSEE HAS RAISED SEVERAL GROUNDS IN ITS APPEALS, HOWEVER, THE CRUXES OF THE ISSUES ARE AS F OLLOWS:- ( ASSESSEES APPEAL) ITA NO.1886/MDS/2015 (A.Y.2008-09):- I) THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) HAS ERRED IN UPHOLDING THE ORDER OF THE LEARNED ASSESSING OFFICER FOR REOPENING THE ASSESSMENT MADE UNDER SECTION 143(1) OF THE ACT DATED 23.12.2011. II) THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) HAS ERRED IN UPHOLDING THE ORDER OF THE LEARNED ASSESSING OFFICER WHO HAD DISALLOWED THE CLAIM OF BAD DEBTS WITH RESPECT TO PSUS/GOVERNMENT DEPARTMENTS. ( ASSESSEES APPEAL) ITA NO.1885/MDS/2015 (A.Y.2008-09):- I) THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) HAS ERRED IN UPHOLDING THE REOPENING OF ASSESSMENT MADE BY THE LEARNED ASSESSING OFFICER UNDER SECTION 143(3) ONCE AGAIN BY INVOKING THE PROVISIONS OF SECTION147 R.W.S 148 OF THE ACT DATED 26.03.2014. 3 ITA NOS.1885 TO 1888/MDS/2015 & 1912 TO 1914/MDS/2015 II) THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) HAS ERRED BY TREATING 25% OF THE ROYALTY AS CAPITAL EXPENDITURE AND 75% AS REVENUE EXPENDITURE THEREBY DENYING THE DEDUCTION FOR THE ENTIRE EXPENDITURE TOWARDS ROYALTY AND ONLY GRANTING DEPRECIATION FOR THE 25% OF THE EXPENDITURE CAPITALIZED. III) THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) HAS ERRED IN CONFIRMING THE ORDER OF THE LEARNED ASSESSING OFFICER WHO HAD INCLUDED RS.1,52,24,383/- IN ARRIVING AT THE PROFIT OF THE ASSESSEE BEING THE FOREIGN EXCHANGE GAIN ON ECB. IV) THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) HAS ERRED IN NOT DIRECTING THE LEARNED ASSESSING OFFICER TO GRANT REFUND TO THE ASSESSEE. V) THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) HAS ERRED IN NOT DELETING THE LEVY OF INTEREST UNDER SECTION 234B OF THE ACT. ( ASSESSEES APPEAL) ITA NO.1887/MDS/2015 (A.Y.2009-10):- I) THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) HAS ERRED BY TREATING 25% OF THE ROYALTY AS CAPITAL EXPENDITURE AND 75% AS REVENUE EXPENDITURE THEREBY DENYING THE DEDUCTION FOR THE ENTIRE EXPENDITURE TOWARDS ROYALTY AND ONLY GRANTING DEPRECIATION FOR THE 25% OF THE EXPENDITURE CAPITALIZED. II) THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) HAS ERRED IN SUSTAINING THE ORDER OF THE LEARNED ASSESSING OFFICER WHO HAD DISALLOWED THE DEDUCTION UNDER SECTION 36(1)(VII) OF THE ACT 4 ITA NOS.1885 TO 1888/MDS/2015 & 1912 TO 1914/MDS/2015 IN REGARD TO THE DEBTS WRITTEN OFF WITH RESPECT TO ASSOCIATE COMPANIES FOR THE ASSESSMENT YEARS 2009-10. III) THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) HAS ERRED IN CONFIRMING THE ORDER OF THE LEARNED ASSESSING OFFICER IN REGARD TO DISALLOWANCE OF RS.22,79,636/- BEING THE PROVISION MADE FOR CUSTOMER OBLIGATION BY TREATING IT AS A CONTINGENT LIABILITY. ( ASSESSEES APPEAL )ITA NO.1888/MDS/2015 (A.Y.2010-11):- I) ) THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) HAS ERRED BY TREATING 25% OF THE ROYALTY AS CAPITAL EXPENDITURE AND 75% AS REVENUE EXPENDITURE THEREBY DENYING THE DEDUCTION FOR THE ENTIRE EXPENDITURE TOWARDS ROYALTY AND ONLY GRANTING DEPRECIATION FOR THE 25% OF THE EXPENDITURE CAPITALIZED. II) THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) HAS ERRED IN SUSTAINING THE ORDER OF THE LEARNED ASSESSING OFFICER WHO HAD DISALLOWED THE DEDUCTION UNDER SECTION 36(1)(VII) OF THE ACT IN REGARD TO THE DEBTS WRITTEN OFF WITH RESPECT TO ASSOCIATE COMPANIES FOR THE ASSESSMENT YEAR 2010-11. (REVENUE APPEALS) ITA NOS.1912 TO 1914/MDS/2015 (A.Y.2008- 09 TO 2010-11):- THE ONLY COMMON GROUND RAISED BY THE REVENUE IN THESE THREE APPEALS IS THAT THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) HAS ERRED IN HOLDING THE CLAIM OF ROYALTY PAYMENTS MADE TO FOREIGN COMPANY PARTLY AS 5 ITA NOS.1885 TO 1888/MDS/2015 & 1912 TO 1914/MDS/2015 CAPITAL EXPENDITURE AND PARTLY AS REVENUE EXPENDITURE. 3. BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE IS A PRIVATE LIMITED COMPANY ENGAGED IN THE BUSINESS OF MANUFACT URING AND TRADING OF MECHANICAL SEALS AND COUPLINGS AND P ROVIDING CAD BASED DESIGN AND DRAWING, FILED ITS RETURNS OF INCOME FOR THE RELEVANT ASSESSMENT YEARS. FOR THE ASSESSMENT Y EAR 2008-09 INITIALLY THE ASSESSMENT WAS COMPLETED UNDE R SECTION 143(3) OF THE ACT. THEREAFTER THE ASSESSMEN T WAS ONCE AGAIN REOPENED AND NOTICE UNDER SECTION 148 OF THE ACT DATED 26.02.2013 WAS ISSUED TO THE ASSESSEE. SUBSEQ UENTLY, THE ASSESSMENT WAS COMPLETED UNDER SECTION 143(3) R .W.S. 147 OF THE ACT. WHILE AS FOR THE ASSESSMENT YEARS 2009-10 AND 2010-11, ASSESSMENTS WERE COMPLETED UNDER SECTI ON 143(3) OF THE ACT SUBSEQUENT TO PROCESSING OF THE R ETURNS UNDER SECTION 143(1) OF THE ACT ON 23.12.2011 & 26. 03.2014 RESPECTIVELY. IN THE SCRUTINY ASSESSMENTS, THE LEAR NED ASSESSING OFFICER MADE SEVERAL ADDITIONS, AGGRIEVED BY WHICH THE ASSESSEE WENT BEFORE THE LEARNED COMMISSI ONER OF INCOME TAX (APPEALS). NOT SATISFIED WITH THE ORDER OF THE 6 ITA NOS.1885 TO 1888/MDS/2015 & 1912 TO 1914/MDS/2015 LEARNED COMMISSIONER OF INCOME TAX (APPEALS) THE ASSESSEE AND THE REVENUE NOW ARE BOTH IN APPEAL BEF ORE US. GROUND NO.1: VALIDITY OF REOPENING OF ASSESSMENT IN ASSESSEES APPEALS- ITA NOS.1886 & 1885/MDS/2015: 4.1 THE ASSESSEE HAS CHALLENGED THE REOPENING OF TH E ASSESSMENT FOR THE FIRST TIME AND ALSO REOPENING OF THE ASSESSMENT FOR THE SECOND TIME VIDE ISSUE OF NOTICE UNDER SECTION 148 OF THE ACT DATED 26.02.2013. AS REGARDS ASSESSMENT UNDER SECTION 143(3) OF THE ACT FOR THE FIRST TIME AFTER PROCESSING THE RETURN UNDER SECTION 143(1) OF THE ACT, WE DO NOT FIND ANY INFIRMITY IN THE ACTION OF THE L EARNED ASSESSING OFFICER BECAUSE ONLY SUMMARY ASSESSMENT W AS INITIALLY MADE AND THEREAFTER THE FILE WAS TAKEN UP FOR SCRUTINY WITHIN THE STIPULATED PERIOD PROVIDED UNDER THE ACT . FURTHER, AS REGARDS REOPENING OF THE ASSESSMENT UNDER SECTIO N 147 R.W.S 148 OF THE ACT, THE LEARNED COMMISSIONER OF I NCOME TAX (APPEALS) HAD MADE THE FOLLOWING OBSERVATIONS:- 4.1.4 IN THE PRESENT CASE, THOUGH THERE WAS AN ASSESSMENT ORDER UNDER SECTION 143(3) MADE EARLIER, THE ISSUES LIKE THE CLAIM OF DEDUCTION U/S.10B ROYALTY PAYMENTS, FOREIGN EXCHANGE GAIN ETC. WERE NOT EXAMINED BY THE AO. THEREFORE, THE PRESENT ACTION OF THE AO CANNOT BE TREATED AS A 7 ITA NOS.1885 TO 1888/MDS/2015 & 1912 TO 1914/MDS/2015 CHANGE OF OPINION. CHANGE OF OPINION COMES INTO PICTURE ONLY WHERE ALL THE DETAILS FILED BEFORE THE ASSESSING OFFICER HAVE BEEN EXAMINED BY HIM THEREAFTER TAKES A CONSCIOUS DECISION. ON THE OTHER HAND, WHERE THE DETAILS FILED BY THE ASSESSEE ARE INSUFFICIENT OR THE ISSUE WAS NOT EXAMINED BY THE ASSESSING OFFICER SUCH SITUATIONS WILL NOT AMOUNT TO CHANGE OF OPINION. FURTHER THE ASSESSMENT IS REOPENED WITHIN THE PERIOD OF FOUR YEARS FROM THE ENDS OF THE RELEVANT ASSESSMENT YEAR (2008-09).HENCE EVEN THE RESTRICTIONS IMPOSED BY THE PROVISO TO SEC.147 OF THE ACT WILL NOT COME TO THE RESCUE OF THE ASSESSEE. 4.2 SINCE THE ASSESSMENT IS REOPENED WITHIN THE PER IOD OF FOUR YEARS FROM THE END OF THE RELEVANT ASSESSMENT YEAR AND THE LEARNED ASSESSING OFFICER HAD REASONS TO BELIEV E THAT THE INCOME CHARGEABLE TO TAX HAS ESCAPED ASSESSMENT BEC AUSE THE ISSUES WITH RESPECT TO DEDUCTION U/S.10B OF THE ACT, ROYALTY PAYMENT, FOREIGN EXCHANGE GAIN ETC., WERE N OT CONSIDERED BY THE LEARNED ASSESSING OFFICER ON THE EARLIER OCCASION AND FAILED TO PASS SPEAKING ORDER UNDER SE CTION 143(3) OF THE ACT ON THOSE ISSUES, WE ARE OF THE CO NSIDERED VIEW THAT REOPENING OF THE ASSESSMENT UNDER SECTION 147 R.W.S. 148 OF THE ACT FOR THE SECOND TIME IS VALID IN LAW. WHILE ARRIVING AT THIS CONCLUSION, WE RELY IN THE DECISIO N OF THE 8 ITA NOS.1885 TO 1888/MDS/2015 & 1912 TO 1914/MDS/2015 HONBLE SUPREME COURT IN THE CASE ACIT VS. RAJESH J HAVERI STOCK BROKERS P.LTD., REPORTED IN 291 ITR 500(SC) W HEREIN THE HONBLE APEX COURT HELD AS UNDER:- THE EXPRESSION REASON TO BELIEVE IN SECTION 147 W OULD MEAN CAUSE OR JUSTIFICATION. IF THE ASSESSING OFFIC ER HAS CAUSE OR JUSTIFICATION TO KNOW OR SUPPOSE THAT INCO ME HAD ESCAPED ASSESSMENT, HE CAN BE SAID TO HAVE REASON T O BELIEVE THAT INCOME HAD ESCAPED ASSESSMENT. THE EXP RESSION CANNOT BE READ TO MEAN THAT THE ASSESSING OFFICER S HOULD HAVE FINALLY ASCERTAINED THE FACT BY LEGAL EVIDENCE OR CONCLUSION. WHAT IS REQUIRED IS REASON TO BELIEVE BUT NOT THE ESTABLISHED FACT OF ESCAPEMENT OF INCOME. AT TH E STAGE OF ISSUE OF NOTICE, THE ONLY QUESTION IS WHETHER THERE WAS RELEVANT MATERIAL ON WHICH A REASONABLE PERSON COUL D HAVE FORMED THE REQUISITE BELIEF. WHETHER MATERIAL WOULD CONCLUSIVELY PROVE ESCAPEMENT OF INCOME IS NOT THE CONCERN AT THAT STAGE. THIS IS SO BECAUSE THE FORMATION OF THE BELIEF IS WITHIN THE REALM OF THE SUBJECTIVE SATISFACTION OF THE ASSESSING OFFICER. 4.3 FOR THE ABOVE DISCUSSED REASONS, WE DO NOT FIND IT NECESSARY TO INTERFERE WITH THE ORDER OF THE LEARNE D COMMISSIONER OF INCOME TAX (APPEALS) ON THIS ISSUE. ACCORDINGLY, THE FIRST GROUND IN THE ASSESSEES APP EALS ITA NO.1885 & 1885/MDS/2015 IS HELD AGAINST THE ASSESSE E. GROUND NO.2 : BAD DEBTS WRITTEN OFF WITH RESPECT TO THE PUBLIC SECTOR UNDERTAKINGS FOR THE ASSESSMENT YEARS 2008-09 IN ITA NO.1886/MDS/2016: 5.1 IN THE COURSE OF ASSESSMENT PROCEEDINGS UNDER SECTI ON 143(3) OF THE ACT FOR THE FIRST TIME, IT WAS OBSERV ED BY THE 9 ITA NOS.1885 TO 1888/MDS/2015 & 1912 TO 1914/MDS/2015 LEARNED ASSESSING OFFICER THAT THE ASSESSEE HAD CLA IMED BAD DEBTS OF RS.35,50,686/- AGAINST THE DEBTORS WHO ARE REPUTED PUBLIC SECTOR UNDERTAKINGS. SINCE THE ASSESSEE COUL D NOT ADDUCE ANY EVIDENCE TO SHOW THAT THE DEBTS WERE BAD AND THE DEBTORS HAD REFUSED TO PAY THE DEBT, THE LEARNE D ASSESSING OFFICER OPINED THAT THE CLAIM OF THE ASSE SSEE IS NOT JUSTIFIED; THEREFORE, HE DISALLOWED THE CLAIM OF BA D DEBTS. 5.2 ON APPEAL, THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) RELYING IN THE DECISION OF THE HONBLE JU RISDICTIONAL MADRAS HIGH COURT IN THE CASE SOUTHERN INDIA SURGI CAL CO. LTD. VS. ACIT REPORTED IN 287 ITR 62 UPHELD THE OR DER OF THE LEARNED ASSESSING OFFICER. 5.3 AFTER HEARING BOTH THE SIDES, WE DO NOT FIND AN Y MERIT IN THE ORDERS OF THE REVENUE ON THIS ISSUE. THE HONBL E APEX COURT IN THE CASE TRF LTD. VS. CIT REPORTED IN 323 ITR 997 HAS CATEGORICALLY HELD THAT IT IS NOT NECESSARY FOR THE ASSESSEE TO ESTABLISH THE DEBT TO HAVE BECOME BAD A ND IRRECOVERABLE, IT IS ENOUGH IF THE DEBTS ARE WRITTE N OFF AS 10 ITA NOS.1885 TO 1888/MDS/2015 & 1912 TO 1914/MDS/2015 IRRECOVERABLE IN THE ACCOUNTS OF THE ASSESSEE. IN T HE CASE OF THE ASSESSEE, DUE TO VARIOUS COMMERCIAL FACTORS AND BUSINESS EXIGENCIES IT WAS DECIDED BY THE ASSESSEE THAT EITHER THOSE DEBT HAS BECOME BAD OR IT WOULD BE PRU DENT NOT TO RECOVER THOSE DEBT AND ACCORDINGLY WRITTEN OFF THE SAME IN ITS BOOKS OF ACCOUNTS. THEREFORE, FOLLOWING THE DEC ISION OF THE HONBLE APEX COURT, WE HEREBY DIRECT THE LEARNED AS SESSING OFFICER TO TREAT THE DEBT OF RS. 35,50,686/- AS BA D AND ACCORDINGLY GRANT DEDUCTION. THE DECISION RENDERED BY THE HONBLE JURISDICTIONAL HIGH COURT IN THE CASE OF SO UTHERN INDIA SURGICAL CO. LTD. REPORTED IN 287 ITR 63 AND THE DE CISION OF HONBLE PUNJAB & HARYANA HIGH COURT IN THE CASE SAT ISH KUMAR VS. CIT OF 329 ITR 396 CITED BY THE LEARNED D.R. IS OF NO RELEVANCE IN VIEW OF THE DECISION OF THE HON BLE APEX COURT. THUS, THE SECOND GROUND RAISED BY THE ASSESS EE IN ITA NO.1886/MDS/2015 IS ALLOWED IN ITS FAVOUR. GROUND : CLAIM OF ROYALTY AS REVENUE EXPENDITURE I N ITA NO.1885, 1887, 1888/MDS/2015 FOR THE ASSESSMENT YEA RS 2008-09, 2009-10 & 2010-11 RESPECTIVELY: 11 ITA NOS.1885 TO 1888/MDS/2015 & 1912 TO 1914/MDS/2015 6.1 DURING THE COURSE OF ASSESSMENT FOR THE SECOND TIME UNDER SECTION 143(3) R.W.S.147 & 148 OF THE ACT, TH E LEARNED ASSESSING OFFICER ASKED THE ASSESSEE TO FILE THE CO PY OF THE AGREEMENT ENTERED WITH M/S. JOHN CRANE UK IN ORDER TO VERIFY THE DETAILS ABOUT THE PAYMENT OF ROYALTY OF RS.1,78 ,00,292/- MADE DURING THE RELEVANT ASSESSMENT YEAR. ON SCRUTI NIZING THE DETAILS, IT WAS OBSERVED BY THE LEARNED ASSESSI NG OFFICER THAT THE ASSESSEE HAD MADE A LUMP SUM PAYMENT TOWAR DS ROYALTY. HENCE HE WAS OF THE VIEW THAT THE PAYMENT TOWARDS ROYALTY WAS FOR ACQUIRING ENDURING AND EXCESSIVE AD VANTAGE TO THE ASSESSEES BUSINESS AND THEREFORE IT AMOUNTS TO ACQUISITION OF INTANGIBLE ASSET WITH RESPECT TO TEC HNICAL KNOWHOW. ACCORDINGLY, THE LEARNED ASSESSING OFFICE R TREATED THE ENTIRE PAYMENT TO BE CAPITAL IN NATURE, HOWEVER GRANTED DEPRECIATION @ 25% VIZ RS.44,50,073/- BY VIRTUE OF SECTION 32(1) EXPLANATION 4 OF THE ACT AND THEREBY MADE ADD ITION OF RS.1,33,50,219/- (1,78,00,292 44,50,073) . 6.2 ON APPEAL, THE LEARNED COMMISSIONER OF INCOME T AX (APPEALS) WAS OF THE VIEW THAT WHEN ANNUAL PAYMENTS OF 12 ITA NOS.1885 TO 1888/MDS/2015 & 1912 TO 1914/MDS/2015 ROYALTY IS CALCULATED AND PAID AT A FIXED PERCENTAG E OF SALES MADE DURING THE YEAR, A PORTION OF THE PAYMENT AMOU NTS TO CAPITAL EXPENDITURE AS THE BENEFITS ARE ENDURING IN NATURE. HE FURTHER RELIED IN THE DECISION OF THE HONBLE JURIS DICTIONAL MADRAS HIGH COURT IN THE CASE M/S. SOUTHERN SWITCHG EAR VS. CIT REPORTED IN 148 ITR 272, WHEREIN IT WAS HELD AS FOLLOWS:- SECTION 37(1) OF THE I.T.ACT, 1961 CAPITAL OR REV ENUE EXPENDITURE. ASSESSEE COMPANY ENTERED INTO COLLABOR ATION AGREEMENT FOR 5 YEARS WITH A FOREIGN COMPANY FOR MANUFACTURE OF SWITCHGEAR ETC. EXCLUSIVE RIGHT GRA NTED TO ASSESSEE TO MANUFACTURE AND SELL SCHEDULED PRODUCTS IN INDIA - EVEN AFTER TERMINATION OF AGREEMENT METHOD OF PRODUCTION ETC COULD BE USED BY THE ASSESSEE ASSE SSEE PAID LUMP SUM TECHNICAL COLLABORATION FEES AND ROYA LTY BASED ON NET INVOICED PRICE WHETHER PART OF SUCH PAYMENTS COULD BE DISALLOWED AS BEING CAPITAL IN NA TURE HELD ON FACTS, YES. FACTS: THE ASSESSEE-COMPANY ENTERED INTO A COLLABORATION AGREEMENT WITH A FOREIGN COMPANY UNDER WHICH THE FOREIGN COMPANY AGREED TO PROVIDE TO THE ASSESSEE (I) TECHNICAL AID AND INFORMATION ON THE MANUFACTURE OF SWITCHGEAR, ETC., (II) THE EXCLUSIVE RIGHT TO SELL AND MANUFACTURE SUCH PRODUCTS IN INDI A, (III) TO KEEP THE ASSESSEE INFORMED OF THE LATEST DEVELOPMENTS IN THE FIELD OF MANUFACTURE OF SWITCHGEARS, AND (IV) TO TRAIN THE ASSESSEE'S PERSONNEL THE DURATION OF THE AGREEMENT WAS 5 YEARS. THE ASSESSEE AGREED TO PAY AS CONSIDERATION 20,000 STERLING PAYABLE IN FIVE ANNUAL INSTALMENTS BY WAY OF TECHNICAL COLLABORATION FEES, AS WELL AS AN ANNUAL ROYALTY DETERMINED AS A PERCENTAGE OF THE NET INVOICED PRICE OF THE SALES OF THESE ITEMS EFFECTED BY THE ASSESSEE. THE LTO DISALLOWED THE TECHNICAL COLLABORATION FEES IN FULL AND ONE-FOURTH OF THE RO YALTY PAID ON THE GROUND THAT AN ENDURING BENEFIT HAD ACCRUED TO THE ASSESSEE. ON APPEAL, THE AAC RESTRICTED THE DISALLOWANCE OF TECHNICAL AID FEES TO ONE-FOURTH OF THE GROSS PAYMENT IN THAT REGARD AND CONFIRMED THE DISALLOWANCE IN RESPECT OF 13 ITA NOS.1885 TO 1888/MDS/2015 & 1912 TO 1914/MDS/2015 ROYALTY. THE TRIBUNAL CONFIRMED THE ORDER OF THE AAC ON THE GROUND THAT WHAT THE ASSESSEE HAD OBTAINED THROUGH THIS AGREEMENT WAS AN ENDURING ADVANTAGE AND BENEFIT INSOFAR AS THE SAME WAS AVAILABLE TO TH E ASSESSEE FOR ITS MANUFACTURING AND INDUSTRIAL PROCESSES EVEN AFTER THE TERMINATION OF THE AGREEMENT. ON REFERENCE: HIGH COURT HELD - EVEN WITHOUT ACQUISITION OF AN ASSET, A RIGHT OF A PERMANENT ADVANTAGE COULD BE ACQUIRED AND THE COST OF ACQUISITION OF SUCH A RIGHT COULD BE TAKEN TO BE CAPITAL EXPENDITURE. IN THE INSTANT CASE, THOUGH TH E DURATION OF THE AGREEMENT WAS FIVE YEARS, ASSESSEE EVEN AFTER THE EXPIRY OF THE PERIOD; COULD USE THE METHODS OF PRODUCTION, PROCEDURE, EXPERIMENTS, IMPROVEMENTS WHICH HAD BEEN MADE AVAILABLE TO THEM IN PURSUANCE OF THE AGREEMENT. THUS, THE ASSESSEE HAD ACQUIRED KNOWLEDGE OF ENDURING NATURE. IN ADDITION TO THE ACQUISITION OF THE TECHNICAL KNOWLEDGE, THE ASSESSEE-COMPANY GOT AN EXCLUSIVE RIGHT TO MANUFACTURE AND SELL ITS ARTICLE S WITHOUT ANY OBJECTION FROM ANYONE INCLUDING THE FOREIGN COMPANY AND THIS WAS CLEARLY AN ADVANTAGE OF ENDURING NATURE. 6.3 THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS ) WAS OF THE VIEW THAT THE FACTS IN THE DECISION OF THE HONBLE MADRAS HIGH COURT CITED SUPRA IS IDENTICAL TO THE F ACTS OF THE CASE OF THE ASSESSEE AND ACCORDINGLY HELD THAT 75% OF THE ROYALTY EXPENSES TO BE TREATED AS CAPITAL IN NATURE AND 25% TO BE REVENUE IN NATURE. AGGRIEVED BY THE ORDER OF THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS), THE ASSESSEE IS NOW IN APPEAL BEFORE US. 14 ITA NOS.1885 TO 1888/MDS/2015 & 1912 TO 1914/MDS/2015 6.4 THE LEARNED AUTHORIZED REPRESENTATIVE SUBMITTED THAT THE ROYALTY PAID TO THE ASSESSEES PARENT COMPANY W AS 5.5% OF THE NET SALE PRICE OF THE PRODUCTS MANUFACTURED AND SOLD BY THE ASSESSEE AND THEREFORE, IT SHOULD BE TREATED AS REVENUE EXPENDITURE, WHILE AS, THE LEARNED DEPARTME NTAL REPRESENTATIVE RELIED IN THE ORDER OF THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS). 6.5 WE HAVE HEARD THE RIVAL SUBMISSIONS AND CAREFUL LY PERUSED THE MATERIALS ON RECORD. ON PERUSING THE A GREEMENT BETWEEN THE ASSESSEE AND ITS PARENT COMPANY, THE FO LLOWING FACTS EMERGE:- I) THE ASSESSEE IS GRANTED LICENSE TO USE THE LICEN SES IP. II) THE PARENT COMPANY ALSO MAKE AVAILABLE TO THE ASSESSEE KNOWHOW CONTINUOUSLY RELATING TO THE MANUFACTURE OF THE PRODUCTS. III) THE PARENT COMPANY ALSO PROVIDES PRODUCT SPECI FICATION, DESIGN, DEVELOPMENT, CODING, PRODUCT INFORMATION, T ECHNICAL INFORMATION, PRODUCT IMPROVEMENT ASSISTANCE SO ON A ND SO FORTH TO THE ASSESSEE COMPANY. 15 ITA NOS.1885 TO 1888/MDS/2015 & 1912 TO 1914/MDS/2015 6.6 FROM THE ABOVE, IT IS APPARENT THAT THE ASSESSE E COMPANY ACQUIRES SUBSTANTIAL KNOWLEDGE, TECHNICAL K NOWHOW ETC., FOR MANUFACTURING THE PRODUCT. THIS BENEFIT A CQUIRED BY THE ASSESSEE IS DEFINITELY OF ENDURING NATURE. THER EFORE, WE ARE ALSO OF THE CONSIDERED VIEW THAT THE DECISION O F THE HONBLE JURISDICTIONAL MADRAS HIGH COURT WILL BE SQ UARELY APPLICABLE TO THE FACTS OF THE CASE OF THE ASSESSEE . HENCE, WE DO NOT FIND IT NECESSARY TO INTERFERE WITH THE O RDER OF THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) ON THI S ISSUE. THUS THE SECOND GROUND IN ITA NO. 1885/MDS/2016 AND FIRST GROUND IN ITA 1887/MDS/2015 AND ITA NO.1888/MDS/201 5 IS DECIDED AGAINST THE ASSESSEE. GROUND NO(III): ADDITION OF FOREIGN EXCHANGE GAIN O N ECB RS.1,52,24,383/- (ITA NO.1885/MDS/2015): 7.1 DURING THE COURSE OF ASSESSMENT FOR THE SECOND TIME UNDER SECTION 143(3) R.W.S.147 & 148 OF THE ACT, TH E LEARNED ASSESSING OFFICER NOTICED THAT THE ASSESSEE HAD CRE DITED RS.1,56,40,720/- IN ITS PROFIT & LOSS ACCOUNT ON AC COUNT OF FOREIGN EXCHANGE GAIN. HOWEVER, WHILE COMPUTING THE TOTAL INCOME THE ASSESSEE HAD DEDUCTED A SUM OF 16 ITA NOS.1885 TO 1888/MDS/2015 & 1912 TO 1914/MDS/2015 RS.1,32,78,383/- AND ADDED RS.19,46,000/- AS UNREA LIZED EXCHANGE GAIN TO THE BLOCK OF ASSET VIZ., PLANT & MACHINERY (6,51,84,654/- + 19,46,000/-) AND CLAIMED DEPRECIAT ION @ 15% ON THE SAME. ON QUERY, IT WAS SUBMITTED BY THE ASSESSEE THAT THE ASSESSEE COMPANY HAD AVAILED FORE IGN CURRENCY LOAN FOR THE PURCHASE OF PLANT & MACHINERY AND ANY GAIN ON EXCHANGE FLUCTUATION IS TO BE REDUCED FROM THE COST OF THE MACHINERY. ACCORDINGLY, THE ASSESSEE COMPANY HA D REDUCED THE GAIN FROM THE COST OF THE MACHINERY AND CLAIMED DEPRECIATION ON THE BALANCE. HOWEVER, SINCE THE ASS ESSEE COULD NOT FURNISH THE DETAILS OF THE COMPUTATION, T HE LEARNED ASSESSING OFFICER ADDED BACK THE ENTIRE AMOUNT OF RS.1,52,24,383/- TO THE INCOME OF THE ASSESSEE. 7.2 ON APPEAL, THE LEARNED COMMISSIONER OF INCOME T AX (APPEALS) CONFIRMED THE ORDER OF THE LEARNED ASSESS ING OFFICER, HOWEVER BY OBSERVING AS UNDER:- 4.7.5 THEREFORE, IN THE CASES OF BORROWED CAPITAL FOR PURCHASE OF BUSINESS ASSETS (SAY PLANT AND MACHINERY), ANY INTEREST PAYMENTS INCURRED AFTER THE DATE OF PUTTING THE ASSETS TO USE, WILL BECOME REVENUE EXPENDITURE. SIMILARLY, ANY UNSPENT/UNUSED FUNDS BORROWED FOR PURCHASE OF ASSETS, IF DEPOSITED IN BANKS ETC AND 17 ITA NOS.1885 TO 1888/MDS/2015 & 1912 TO 1914/MDS/2015 EARNED INTEREST SUCH INTEREST WILL BECOME REVENUE RECEIPT AND BECOMES TAXABLE IN THE YEAR OF EARNING. THE SAME LOGIC APPLIES FOR ANY GAIN OR LOSS, LIKE EXCHANGE FLUCTUATIONS, WAIVERS ETC, ON ACCOUNT OF THE FUNDS BORROWED FOR PURCHASE OF ASSETS. IN THE PRESENT CASE, IT IS SITUATION OF GAIN ON EXCHANGE FLUCTUATION IN THE FOREIGN CURRENCY LOAN OBTAINED FOR PURCHASE OF PLANT AND MACHINERY. AS MENTIONED ABOVE, THE ENTIRE INTEREST AND THE LOSS/GAIN ON EXCHANGE FLUCTUATION OF THE BORROWED FUNDS UPTO THE DATE OF PUTTING THE ASSETS TO USE SHOULD GO INTO THE COST OF THE ASSETS. IN FACT THIS HAS BEEN FOLLOWED BY THE ASSESSEE, AND THE REVENUE ALSO HAS ALLOWED THIS POSITION, AND THE ASSESSEE HAS ALSO BEEN CLAIMING DEPRECIATION ON SUCH COST. THESE ASSETS ARE PUT TO USE IN THE FINANCIAL YEARS 2005- 06 AND 2006-07. THEREFORE, I.E. AFTER THE FINANCIAL YEAR 2006-07, ANY EXPENDITURE BY WAY OF INTEREST ON THESE FOREIGN CURRENCY LOANS IS A REVENUE EXPENDITURE, AND THE ASSESSEE IS ALSO CLAIMING THE SAME AS REVENUE EXPENDITURE, INCLUDING THE CURRENT A.Y.2008-09. HOWEVER, DURING THE CURRENT A.Y.2008-09, THERE WAS A GAIN ON EXCHANGE FLUCTUATION OF THE FOREIGN CURRENCY BORROWED. THE ASSESSEE IN ITS P&L ACCOUNT CREDITED THE GAIN, BUT IN THE COMPUTATION STATEMENT REDUCED THE SAME FROM THE INCOME BY CLAIMING THAT THE GAIN ONLY GOES TO REDUCE THE COST OF THE ASSETS. 4.7.6 THE ABOVE CLAIM OF THE ASSESSEE IS NOT JUSTIFIED. THE EXCHANGE FLUCTUATION GAIN FLOSS ON THE BORROWED FUNDS, UPTO THE DATE OF PUTTING THE ASSETS IS TO BE ADJUSTED AGAINST THE COST OF THE ASSETS. BUT ONCE THE ASSETS ARE PUT USE, THE EXCHANGE FLUCTUATION LOSS/GAIN 011 THE BORROWED FUNDS WILL BE REVENUE EXPENDITURE OR GAIN. THEREFORE, THE PRESENT EXCHANGE FLUCTUATION GAIN OF RS.L,52,24,383/- IN THE A.Y.2008-09, IS A REVENUE RECEIPT AND LIABLE FOR TAX. 4.7.6 IN VIEW OF THE ABOVE DISCUSSIONS, I AM OF THE CONSIDERED OPINION THAT THE ASSESSING OFFICER HAS RIGHTLY CONCLUDED THAT THE EXCHANGE FLUCTUATION GAIN OF RS.L,52,24,383/- FROM THE FOREIGN CURRENCY LOAN, IS AN ASSESSABLE INCOME OF THE YEAR 2008-09. THE ACTION OF THE ASSESSING OFFICER IS 18 ITA NOS.1885 TO 1888/MDS/2015 & 1912 TO 1914/MDS/2015 JUSTIFIED AND CONFIRMED. 7.3 WE HAVE HEARD THE RIVAL SUBMISSIONS AND CAREFUL LY PERUSED THE MATERIALS ON RECORD. AT THE OUTSET, WE FIND THAT THE ASSESSEE HAS NOT SUBMITTED THE DETAILS OF THE COMPUTATION OF THE FOREIGN EXCHANGE GAIN BEFORE THE LEARNED ASSESSING OFFICER DUE TO WHICH HE HAS ADDED THE SAM E TO THE INCOME OF THE ASSESSEE. FURTHER, WE FIND THAT THE L EARNED COMMISSIONER OF INCOME TAX (APPEALS) HAS OVERLOOKED THE PROVISIONS OF SECTION 43A OF THE ACT WHICH IS A SPE CIAL PROVISION WITH RESPECT TO CHANGE IN RATE OF EXCHANG E OF FOREIGN CURRENCY, WHICH MAY BE APPLICABLE TO THE CA SE OF THE ASSESSEE. THEREFORE, WE REMIT THE ENTIRE MATTER BAC K TO THE FILE OF THE LEARNED ASSESSING OFFICER FOR DE NOVO CONSIDERATION. THE ASSESSEE IS HEREBY DIRECTED TO F URNISH ALL THE DETAILS REQUIRED BY THE REVENUE FOR ITS PROCEED INGS FAILING WHICH THE REVENUE AUTHORITIES SHALL PASS APPROPRIAT E ORDER AS PER MERIT & LAW BASED ON THE MATERIALS ON RECORD . THIS GROUND OF THE ASSESSEE IS ALLOWED FOR STATISTICAL P URPOSES. 19 ITA NOS.1885 TO 1888/MDS/2015 & 1912 TO 1914/MDS/2015 GROUND NO.(IV) : GRANT OF REFUND (ITA NO.1885/MDS/2015) : 8. THE ASSESSEE HAS APPEALED BEFORE US STATING THAT TH E REVENUE HAS NOT GRANTED REFUND WHICH IS DUE TO IT. ON THIS WE HAVE NOTHING MORE TO SAY OTHER THAN DIRECT THE L EARNED ASSESSING OFFICER TO GRANT REFUND TO THE ASSESSEE, IF THE ASSESSEE IS ENTITLED FOR THE SAME. GROUND NO.(V) : LEVY OF INTERST UNDER SECTION 234B OF THE ACT (ITA NO.1885/MDS/2015): 9. THE ASSESSEE IS AGGRIEVED BY THE ORDER OF THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) IN UPH OLDING THE ORDER OF THE LEARNED ASSESSING OFFICER FOR LEVY OF INTEREST UNDER SECTION 234B OF THE ACT. SINCE LEVY OF INTERE ST UNDER SECTION 234B OF THE ACT IS CONSEQUENTIAL, THIS GROU ND RAISED BY THE ASSESSEE IS DISMISSED AS SUCH. GROUND NO.2 DISALLOWANCE OF BAD DEBTS WITH RESPEC T TO ASSOCIATE COMPANIES FOR THE ASSESSMENT YEARS 200 9- 10 & 2010-11: 10.1 DURING THE COURSE OF SCRUTINY ASSESSMENT UND ER SECTION 143(3) OF THE ACT, IT WAS NOTICED BY THE LE ARNED ASSESSING OFFICER THAT THE ASSESSEE HAD DEBITED RS.10,27,897/- AND RS.6,77,385/- AS BAD DEBTS IN IT S BOOKS OF 20 ITA NOS.1885 TO 1888/MDS/2015 & 1912 TO 1914/MDS/2015 ACCOUNT WITH RESPECT TO DEBTS RELATED TO ASSOCIATE COMPANIES. SINCE THE ASSESSEE HAD NOT FURNISHED PROPER REASON FOR CLAIMING THE BAD DEBT, THE LEARNED ASSESSING OFFICE R DISALLOWED IT AS ALLOWABLE DEDUCTION. 10.2 ON APPEAL, THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) CONFIRMED THE ORDER OF THE LEARNED ASSESS ING OFFICER BECAUSE EVEN BEFORE HIM, THE ASSESSEE HAS N OT ESTABLISHED AS TO WHY THE DEBTS WERE IRRECOVERABLE. 10.3 EVEN BEFORE US, AT THIS STAGE THE ASSESSEE HAS NOT FURNISHED ANY VALID REASON FOR CLAIMING BAD DEBTS R ELATED TO THE ASSESSEES ASSOCIATED COMPANIES. IN THESE CIRCUMSTANCES, WE CONCUR WITH THE VIEW OF THE LEARN ED COMMISSIONER OF INCOME TAX (APPEALS) WHO HAD OBSERV ED THAT, SINCE THE ASSESSEE HAS BETTER ACCESS TO THE MANAGEMENT OF THE DEBTOR IT WILL FAIRLY HAVE A GOOD CHANCE TO RECOVER THE DEBTS UNLESS THERE IS VALID REASON FOR NON- RECOVERING THE SAME. THEREFORE, IN THE INTEREST OF JUSTICE, WE REMIT BACK THE MATTER TO THE FILE OF THE LEARNED AS SESSING 21 ITA NOS.1885 TO 1888/MDS/2015 & 1912 TO 1914/MDS/2015 OFFICER FOR DE NOVO CONSIDERATION FOR BOTH THE ASSE SSMENT YEARS 2009-10 & 2010-11, THEREBY PROVIDING ONE MORE OPPORTUNITY TO THE ASSESSEE TO SATISFY THE REVENUE REGARDING THE IRRECOVERABLE NATURE OF THE DEBT. GROUND NO.3 : ITA NO.1887/MDS/2015 - DISALLOWANCE RS.22,79,636/- BEING PROVISION MADE FOR CUSTOMER OBLIGATION (A.Y. 2009-10): 11.1 DURING THE COURSE OF ASSESSMENT PROCEEDINGS I T WAS NOTICED BY THE LEARNED ASSESSING OFFICER THAT T HE ASSESSEE COMPANY HAS DEBITED RS.22,79,636/- TOWARDS PROVISION FOR CUSTOMER OBLIGATION IN ITS PROFIT & L OSS ACCOUNT. ON QUERY, THE ASSESSEE COMPANY HAS STATED AS FOLLOW S IN ITS REPLY:- 'GAS SEALS WERE SUPPLIED TO BHARAT HEAVY ELECTRICALS LTD, HYDERABAD (BHEL). THESE WERE FITTED IN THEIR COMPRESSORS AND SUPPLIED TO BHARAT PETROLEUM CORPORATION LTD (BPCL). DURING THE COMMISSIONING OF THESE COMPRESSORS AT BPCL SITE THERE WERE PRE- MATURE FAILURE ON THE PERFORMANCE OF THESE SEALS. BPCL REQUESTED US TO ATTEND TO THESE FAILURES AS THE SEALS WERE ORIGINALLY SUPPLIED BY US. WE GOT ORDER FOR RE-FURBISHING THESE SEALS AND IN VOICED THEM AND GO T PAID ACCORDINGLY. THE CAUSE FOR FAILURE COULD NOT BE ATTRIBUTED TO PERFORMANCE OF OUR SEALS. THERE WE RE REPEATED FAILURES EVEN AFTER REFURBISHMENTS. FINALL Y AFTER MAKING SOME MODIFICATIONS THESE SEALS WERE SUPPLIED BACK AND FITTED IN THE ORIGINAL EQUIPMENT THESE SEALS ARE FITTED IN THE COMPRESSORS WHICH ARE ENGAGED IN CONTINUOUS PROCESS IN REFINERIES. THE SEALS ARE OF SPECIAL TYPE AND HAVE A 22 ITA NOS.1885 TO 1888/MDS/2015 & 1912 TO 1914/MDS/2015 LIFE OF 5 YEARS. AS THESE ARE REFURBISHED AND REFITTED THE PERFORMANCE HAS TO BE OBSERVED. TILL SUCH TIME THE POSSIBILITY OF POTENTIAL CLAIM ON WARRANTY THE CUSTOMER CANNOT RULED OUT HENCE THE AMOUNT EQUIVALENT TO THE REFURBISHMENT CHARGES COLLECTED IS PROVIDED TOWARDS WARRANTY CLAIM'. 11.2 THE LEARNED ASSESSING OFFICER AFTER PERUSING T HE REPLY WAS OF THE VIEW THAT SUCH PROVISION ARE IN THE NATU RE OF CONTINGENT LIABILITY AND THEREFORE DISALLOWED THE S AME AS DEDUCTION. 11.3 ON APPEAL, THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) CONFIRMED THE ORDER OF THE LEARNED ASSESS ING OFFICER BY OBSERVING AS UNDER:- 4.4.2. I HAVE CONSIDERED THE ASSESSEE'S SUBMISSIONS CAREFULLY. THE ASSESSEE'S CLAIM OF 'PROVISION FOR CUSTOMER OBLIGATION' IS NOT SIMILAR TO THE 'PROVISIONS FOR WARRANTY'. PROVISIONS FOR WARRANTY, IS ALLOWABLE AS A DEDUCTION, IF IT WAS PROVIDED ON A SCIENTIFIC BASIS AND BASED ON THE PAST EXPERIENCE. WHEREAS, THE PRESENT 'PROVISION FOR CUSTOMER OBLIGATION' IS NEITHER BASED ON THE PAST EXPERIENCE NOR MADE ON SCIENTIFIC BASIS. THIS PROVISION WAS MADE BASED ON AN ISOLATED TRANSACTION. HENCE THE PRESENT CLAIM OF 'PROVISION FOR CUSTOMER OBLIGATION' CANNOT BE EQUATED WITH THE 'PROVISIONS FOR WARRANTY'. THEREFORE, I AM OF THE OPINION THAT THE ASSESSING OFFICER HAS RIGHTLY COME TO THE CONCLUSION THAT THE 'PROVISION FOR CUSTOMER OBLIGATION' IS ONLY A CONTINGENT LIABILITY AND HENCE NOT ALLOWABLE AS DEDUCTION. THE ACTION OF THE ASSESSING OFFICER IS JUSTIFIED AND CONFIRMED. THE ASSESSEE FAILS IN ITS APPEALS IN THIS REGARD. 23 ITA NOS.1885 TO 1888/MDS/2015 & 1912 TO 1914/MDS/2015 11.4 WE DO NOT SUBSCRIBE TO THE VIEW OF THE REVENU E. FROM THE FACTS OF THE CASE, IT IS EVIDENT THAT THE PROVI SION MADE BY THE ASSESSEE IS TOWARDS THE EXPENSES THAT MAY HAVE TO BE INCURRED FOR SERVICING, RECTIFICATION AND REFURBISH MENT OF THE PRODUCTS SUPPLIED BY THE ASSESSEE TO ITS CLIENTS DU RING THE RELEVANT ASSESSMENT YEAR. THEREFORE, THIS PROVISION WILL BE IN THE NATURE OF PROVISION FOR WARRANTY. HENCE, IT SHO ULD BE TREATED AS ALLOWABLE DEDUCTION PROVIDED THE ASSESSE E HAS FOLLOWED A SCIENTIFIC METHOD WHILE CLAIMING SUCH DE DUCTION. HENCE, IN THE INTEREST OF JUSTICE, WE REMIT BACK TH E MATTER TO THE FILE OF THE LEARNED ASSESSING OFFICER TO VERIFY WHETHER THE ASSESSEE HAS CLAIMED SUCH DEDUCTION ACCORDING TO SO ME GENUINE SCIENTIFIC BASIS AND IF FOUND SO, ALLOW THE SAME AS DEDUCTION. IT IS ORDERED ACCORDINGLY. REVENUES APPEAL IN ITA NOS. 1912 TO 1914/MDS/2015: GROUND : ROYALTY PAYMENTS TO FOREIGN COMPANIES PART LY HELD AS CAPITAL AS WELL AS REVENUE EXPENDITURE: 12. SINCE WE HAVE DECIDED THE ISSUE IN THE ASSESSEE S APPEAL HEREIN ABOVE UPHOLDING THE ORDER OF THE LEAR NED 24 ITA NOS.1885 TO 1888/MDS/2015 & 1912 TO 1914/MDS/2015 COMMISSIONER OF INCOME TAX (APPEALS), THIS GROUND R AISED BY THE REVENUE WILL NOT SURVIVE. 13. IN THE RESULT, APPEALS OF THE ASSESSEE IN ITA NO.1886/MDS/2015 IS PARTLY ALLOWED, ITA NO.1885 , 1887 & 1888/MDS/2015 ARE PARTLY ALLOWED FOR STATISTICAL PURPOSES AS INDICATED HEREINABOVE AND REVENUES APPEALS NOS. 19 12 TO 1914/MDS/2015 ARE DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON THE 17 TH NOVEMBER, 2016 SD/- SD/- ( . . . ) ( . ) (N.R.S.GANESAN) ( A.M OHAN ALANKAMONY ) ! # / JUDICIAL MEMBER # / ACCOUNTANT MEMBER ! /CHENNAI, ' /DATED 17 TH NOVEMBER, 2016 SOMU )* +* /COPY TO: 1. ASSESSEE 2. ASSESSING OFFICER3. , () /CIT(A) 4. , /CIT 5. * 0 /DR 6. /GF .