ITO, Bangalore V. M/s Wrench Solutions Pvt. Ltd., Bangalore

ITA 405/BANG/2014

• Counselvise Citation: [2017] 128 COUNSELVISE.COM (IT) 5496 (ITAT-BANGALORE)
• Duration Of Justice: 3 year(s) 28 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 21-04-2017
• Appeal Filed By: Department
• Order Result: Allowed
• Bench Allotted: A
• Next Hearing Date: 19-04-2017
• Assessment Year: 2008-2009
• Appeal Filed On: 24-03-2014
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Keywords: Capital expenditure

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL BANGALORE BENCH A, BANGALORE BEFORE SHRI A. K. GARODIA, ACCOUNTANT MEMBER AND SHRI VIJAY PAL RAO, JUDICIAL MEMBER ITA NO.405 (BANG) 2014 (ASSESSMENT YEAR : 2008-09) THE INCOME TAX OFFICER, NRUPATHUNGA ROAD, RASHTROTHANA BAHAVAN, BANGALORE APPELLANT VS M/S WRENCH SOLUTIONS PVT. LTD. NO.76, FACILE TOWERS, VICTORIA ROAD, BANGALORE PAN NO.AABCC1544P RESPONDENT AND ITA NO.458(BANG)/2014 (ASSESSMENT YEAR : 2008-09) (BY ASSESSEE) REVENUE BY : SHRI AR V. SREENIVSAN, JCIT ASSESSEE BY : SHRI D.S.VIVEK, CA DATE OF HEARING : 19-04-2017 DATE OF PRONOUNCEMENT : -04-201 7 O R D E R PER SHRI A.K.GARODIA, AM THESE ARE CROSS APPEALS FILED BY THE ASSESSEE AND THE REVENUE AND THESE ARE DIRECTED AGAINST THE ORDER OF THE LD. CIT(A)-I, BAN GALORE DATED 29-11-2013 FOR ASSESSMENT YEAR 2008-09. 2. THE GROUNDS RAISED BY THE ASSESSEE IN ITS APPEA L ARE AS UNDER; 1. T H E LD. CIT(A) HAS ERRED BY UPHOLDING THE ORDER OF TH E AO, DCIT 12(2) WHICH IS BAD IN LAW. ITA NOS.405 & 458(B)2014 2 2.THE.LD.CIT(A)HAS ERRED IN REDUCING A PORTION OF T HE WRENCH PRODUCT DEVELOPMENT FROM THE OPERATING COST OF THE BANGALORE UNIT BY MISINTERPRETING THE SUBMISSIONS MADE BY THE ASSESSEE WITHOUT PROPERLY EXAMINING WHETHER ANY SUC H COST WAS ACTUALLY INCURRED AT THE BANGALORE UNIT AND HAS APP ORTIONED THE SAME BASED ON THE RATIO OF TURNOVER OF THE 2 UNITS. 3. THE LD. CIT(A) ERRED IN NOT CONSIDERING THE RES PONSES FILED BY THE APPELLANT WHERE IN IT WAS DETAILED A ND ELABORATED ON THE NATURE OF BUSINESS DONE AT RESPECTIVE UNITS AND THE DETAILS OF THE WRENCH DEVELOPMENT COST BEING EXCLUSIVELY I NCURRED FOR EXPORT MARKET. 4. THE LD. CIT(A) HAS MIS-INTERPRETED THE SUBMISSIO NS OF THE ASSESSEE BY CONSIDERING ONLY THE REMUNERATION PAID TO THE DIRECTOR AND NOT THE SALARY EXPENSES ATTRIBUTABLE T O THE UNIT AS A WHOLE, CHARGED ON THE ACTUAL BASIS TO THE BANGALORE UNIT. 5. THE CIT(A)A HAS ERRED IN UNDERSTANDING THE FACT THAT THE DOMESTIC UNIT IS MAINLY ENGAGED IN PROVIDING AMC SE RVICES TO THE DOMESTIC CUSTOMERS ONLY AND SELLS THE OLD PRODUCTS DOMESTIC CUSTOMERS BY WRONG EXAMINATION OF THE PURCHASE ORDE RS SUBMITTED. 6. THE APPELLANT RESERVES THE RIGHT TO ADD ADDITION AL GROUNDS TO, OR ELABORATE ON THE ABOVE GROUNDS DURIN G THE APPEAL HEARING AS LONG AS IT IS IN RELATION TO THE ABOVE S UBJECT MATTER UNDER DISPUTE. 3. THE GROUNDS RAISED BY THE REVENUE IN ITS APPEAL ARE AS UNDER; 1. T H E ORDER OF THE LD. CIT(A) IS OPPOSED TO LAW AND FAC TS OF THE CASE. 2. ON T H E FACTS AND IN THE CIRCUMSTANCES OF THE CASE THE LD.CIT(A)ERRED IN LAW AND IN DIRECTING THE AO TO EX CLUDE THE ITA NOS.405 & 458(B)2014 3 EXPENDITURE INCURRED IN FOREIGN CURRENCY BOTH FROM THE EXPORT TURNOVER AS WELL AS FROM TOTAL TURNOVER FOR THE PUR POSE OF COMPUTATION OF DEDUCTION U/S 10AA, WITHOUT APPRECI ATING THE FACT THAT THE STATUTE ALLOWS EXCLUSION OF SUCH EXP ENDITURE ONLY FROM EXPORT TURNOVER BY WAY OF SPECIFIC DEFINITION OF EXPORT TURNOVER AS ENVISAGED BY SUB-CLAUSE (4) OF EXPLANAT ION 2 BELOW SUB-SECTION(*) OF SECTION 10A AND THE TOTAL TURNOVE R HAS NOT BEEN DEFINED IN THIS SECTION. 3. FOR THESE AND OTHER GROUNDS THAT MAY BE URGED AT THE TIME OF HEARING, IT IS PRAYED THAT THE ORDER OF THE CI T(SA) IN SO FAR AS IT RELATES TO THE ABOVE GROUNDS MAY BE REVERSED AND THAT OF THE AO MAY BE RESTORED. 4. THE APPELLANT CRAVES LEAVE TO ADD, ALTER AMEND A ND/OR DELETE ANY OF THE GROUNDS MENTIONED ABOVE. 4. REGARDING THE APPEAL OF THE REVENUE, LD. DR OF THE REVENUE SUPPORTED THE ASSESSMENT ORDER WHEREAS THE LD. AR OF THE ASSESSEE SUPPORTED THE ORDER OF THE LD. CIT(A). HE ALSO SUBMITTED THAT THIS ISSUE IS SQUARE LY COVERED IN FAVOUR OF THE ASSESSEE BY THE JUDGMENT OF THE HONBLE HIGH COURT OF KARNATAKA RENDERED IN THE CASE OF M/S TATA ELXSI LTD AS REPORTED IN 349 ITR 98. 5. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. WE FI ND THAT FOR THE PURPOSE OF COMPUTING DEDUCTION ALLOWABLE TO THE ASSESSEE U/S 1 0A OF THE IT ACT, 1961, THE AO EXCLUDED THE EXPENDITURE INCURRED IN FOREIGN CURREN CY FROM THE EXPORT TURNOVER WHEREAS THIS IS THE DIRECTION OF THE LD CIT(A), TO THE AO THAT THESE EXPENSES SHOULD ALSO BE EXCLUDED FROM THE TOTAL TURNOVER. AS PER T HE JUDGMENT OF THE HONBLE KARNATAKA HIGH COURT RENDERED IN THE CASE OF M/S TA TA ELXSI LTD., (SUPRA), IT IS ITA NOS.405 & 458(B)2014 4 HELD THAT THE TOTAL TURNOVER IS SUM TOTAL OF EXPORT TURNOVER AND DOMESTIC TURNOVER AND THEREFORE, IF AN AMOUNT IS REDUCED FROM THE EXP ORT TURNOVER THEN THE TOTAL TURNOVER ALSO GOES DOWN BY THE SAME AMOUNT AUTOMATI CALLY. SINCE, THE DIRECTION OF THE LD. CIT(A) IS IN LINE WITH THIS JUDGMENT OF THE HONBLE KARNATAKA HIGH COURT, WE DECLINE TO INTERFERE WITH THE ORDER OF THE LD. CIT( A) ON THIS ISSUE. 6. IN THE RESULT, THE APPEAL OF THE REVENUE IS DI SMISSED. 7. REGARDING THE ASSESSEES APPEAL, IT WAS SUBMITT ED BY THE LD. AR OF THE ASSESSEE THAT GROUND NO.1 IS GENERAL. REGARDING GRO UND NO.2 & 3, IT WAS SUBMITTED BY THE LD. AR OF THE ASSESSEE THAT THE EXPENSES INC URRED BY THE ASSESSEE ON WRENCH PRODUCT DEVELOPMENT SHOULD BE ALLOWED AS DED UCTION FROM THE PROFIT OF COCHIN UNIT AND BANGALORE UNIT ON ACTUAL BASIS AS H AS BEEN CLAIMED BY THE ASSESSEE INSTEAD OF APPORTIONMENT OF THIS EXPENSES IN THE RATIO OF TURNOVER OF THESE TWO UNITS AS HAS BEEN DONE BY THE AO. VARIOUS ARGUM ENTS WERE MADE BY THE LD. AR OF THE ASSESSEE BUT IN REPLY TO A QUERY RAISED BY T HE BENCH AS TO WHETHER THE ASSESSEE HAS BEEN ABLE TO ESTABLISH THE DIRECT NEXU S OF THE EXPENSES CLAIMED FOR BANGALORE UNIT WITH THE REVENUE SHOWN FOR BANGALORE UNIT, IT WAS SUBMITTED BY THE LD. AR OF THE ASSESSEE THAT NO SUCH DIRECT NEXUS WA S ASKED TO BE ESTABLISHED BY THE AUTHORITIES BELOW AND THEREFORE, THIS EXERCISE WAS NOT DONE AND THE RELEVANT FACTS ARE NOT READILY AVAILABLE. IN VIEW OF THESE FACTS, WE FEEL IT PROPER TO RESTORE THIS MATTER TO THE FILE OF AO FOR A FRESH DECISION WITH THE DIRECTION THAT THE ASSESSEE SHOULD ESTABLISH THE NEXUS BETWEEN THE EXPENSES IN RESPECT OF WRENCH PRODUCT DEVELOPMENT CLAIMED BY THE ASSESSEE FOR BANGALORE U NIT WITHT THE REVENUE SHOWN IN THAT UNIT AND IF THE ASSESSEE IS ABLE TO ESTABLI SH THE NEXUS OF ENTIRE SUCH ITA NOS.405 & 458(B)2014 5 EXPENSES CLAIMED FOR BANGALORE UNIT WITH REVENUE SH OWN IN BANGALORE UNIT THEN THE ENTIRE SUCH EXPENSES CLAIMED IN BANGALORE UNIT SHOULD BE ALLOWED IN COMPUTING THE INCOME OF BANGALORE UNIT WITHOUT APPO RTIONING ANY PART THEREOF TO COCHIN UNIT BUT IF THE ASSESSEE IS NOT ABLE TO ES TABLISH SUCH NEXUS OF ENTIRE SUCH EXPENSES THEN THE APPORTIONMENT MADE BY THE AO OF S UCH EXPENSES IN THE RATIO OF TURNOVER OF THESE TWO UNITS SHOULD BE ACCEPTED. WE ORDER ACCORDINGLY. GROUND NO.2 & 3 ARE ALLOWED FOR STATISTICAL PURPOSES. 8. REGARDING GROUND NO.4, IT WAS SUBMITTED BY THE LD. AR OF THE ASSESSEE THAT IT IS NOTED BY THE LD. CIT(A) IN PARA-4.5 OF H IS ORDER THAT THIS WAS THE SUBMISSIONS OF THE LD. AR OF THE ASSESSEE BEFORE HI M THAT IF THE AO HAS APPORTIONED AN AMOUNT OF RS.13,47,270/- TO THE BANGALORE UNIT T HEN HE SHOULD ALLOW DEDUCTION OF THAT EXPENSES IN THAT UNIT U/S 35 OF THE IT ACT, 1961 BECAUSE IT IS AN EXPENSE INCURRED FOR SCIENTIFIC RESEARCH ALLOWABLE U/S 35(1 )(IV) OF THE IT ACT EVEN IF IT IS OF CAPITAL NATURE. HE SUBMITTED THAT THIS ISSUE HAS B EEN DECIDED BY THE LD. CIT(A) AGAINST THE ASSESSEE ON THIS BASIS THAT THE ASSESSE E HAS NEVER CLAIMED THIS EXPENSES AS R&D EXPENSES AND THEREFORE, THE ORDER O F THE LD. CIT(A) ON THIS ISSUE IS NOT JUSTIFIED. AT THIS JUNCTURE, A QUERY WAS RA ISED BY THE BENCH THAT AS PER THE PROVISIONS OF SEC.35(1)(IV) OF THE IT ACT, DEDUCTIO N IS ALLOWABLE IN RESPECT OF EXPENDITURE OF CAPITAL NATURE ON SCIENTIFIC RESEARC H AND THEREFORE, THE ASSESSEE HAS TO FIST ESTABLISH THAT THIS EXPENSES ARE INCURRED O N SCIENTIFIC RESEARCH. THE BENCH ASKED THE LD. AR OF THE ASSESSEE TO POINT OUT THE E VIDENCE IN THIS REGARD. IN REPLY, THE LD. AR OF THE ASSESSEE DRAWN OUR ATTENTION TO P AGES 19-23 OF THE PAPER BOOK AND POINTED OUT THAT ON THESE PAGES IS THE DETAILS OF EMPLOYEES WITH THEIR NAMES, DESIGNATION, EDUCATIONAL QUALIFICATION AND PRIOR WO RK EXPERIENCE AND FROM THE ITA NOS.405 & 458(B)2014 6 SAME, IT CAN BE SEEN THAT ALL THESE PERSONS ARE TEC HNICALLY QUALIFIED PERSONS AND THEREFORE, IT HAS TO BE ACCEPTED THAT THE ASSESSEE HAS CARRIED OUT SCIENTIFIC RESEARCH AND THE EXPENSES CLAIMED ARE FOR SCIENTIFIC RESEARC H. FURTHER OBSERVATION WAS MADE BY THE BENCH THAT MERELY BY EMPLOYING TECHNICA L PERSONS, IT CANNOT BE SAID THAT THE ASSESSEE HAS ACTUALLY CARRIED OUT SCIENTIF IC RESEARCH UNLESS IT IS ESTABLISHED THAT IN FACT, SCIENTIFIC RESEARCH WAS C ARRIED OUT BY THE ASSESSEE. IN REPLY, NO FURTHER EVIDENCE COULD BE POINTED OUT BY THE LD. AR OF THE ASSESSEE TO ESTABLISH THIS ASPECT THAT IN FACT, SCIENTIFIC RESE ARCH WAS CARRIED OUT BY THE ASSESSEE. IN VIEW OF THIS FACTUAL POSITION, WE FIN D NO MERIT IN THIS CLAIM OF THE ASSESSEE THAT DEDUCTION OF THIS AMOUNT SHOULD BE AL LOWED U/S 35(1)(IV) OF THE ACT, 1961. ACCORDINGLY, GROUND NO.4 IS REJECTED. 9. REGARDING GROUND NO. 5 & 6, IT WAS SUBMITTED B Y THE LD. AR OF THE ASSESSEE THAT THESE GROUNDS ARE GENERAL IN NATURE, 10. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS P ARTLY ALLOWED FOR STATISTICAL PURPOSES. 11. IN THE COMBINED RESULT, THE APPEAL OF THE REVE NUE IS DISMISSED AND THE APPEAL OF THE ASSESSEE IS PARTLY ALLOWED FOR STATIS TICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON THE DATE MENT IONED ON THE CAPTION PAGE. (VIJAY PAL RAO) (A.K. GARODIA) JUDICAL MEMBER ACCOUNTANT MEMBER PLACE: BANGALORE: D A T E D : .04.2017 AM * ITA NOS.405 & 458(B)2014 7 COPY TO : 1 APPELLANT 2 RESPONDENT 3 CIT(A)-II BANGALORE 4 CIT 5 DR, ITAT, BANGALORE. 6 GUARD FILE BY ORDER, AR, ITAT, BANGALORE ITA NOS.405 & 458(B)2014 8 1. DATE OF DICTATION 2. , , DATE ON WHICH TYPED DRAFT IS PLACED BEFORE THE DICT ATING MEMBER .. 3. !' # . $ %# / $ %# # & DATE ON WHICH THE APPROVED DRAFT COMES TO THE PS/SR .PS. 4. ''() & * + DATE ON WHICH THE ORDER IS PLACED BEFORE THE DICTAT ING MEMBER FOR PRONOUNCEMENT 5. * . %# / # . . %# # + DATE ON WHICH THE ORDER COMES BACK TO THE PS/SR.PS .. 6 * !', + DATE OF UPLOADING THE ORDER ON WEBSITE .. 7. ! !', ' , - ) IF NOT UPLOADED, FURNISH THE REASON FOR DOING SO . 8. .% / 0 + DATE ON WHICH THE FILE GOES TO THE BENCH CLERK .. 9. * 1'2 / 34 & 5 + DATE ON WHICH ORDER GOES FOR XEROX &ENDORSEMENT 10. 0 6 / + DATE ON WHICH THE FILE GOES TO THE HEAD CLERK 11. * 7 & 0 8 + THE DATE ON WHICH THE FILE GOES TO THE ASSISTANT RE GISTRAR FOR SIGNATURE ON THE ORDER . 12. !) * 9() & 0 9() /#5 . + THE DATE ON WHICH THE FILE GOES TO DESPATCH SECTION FOR DESPATCH OF THE TRIBUNAL ORDER 13. * 9() + DATE OF DESPATCH OF ORDER .