EXEDY INDIA LTD (FORMERLY KN OWN AS CEEKAY DAIKIN LTD), MUMBAI V. DCIT CIR 1(1), MUMBAI

ITA 5082/MUM/2011

• Counselvise Citation: [2013] 120 COUNSELVISE.COM (IT) 4154 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 12 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 12-07-2013
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: E
• Next Hearing Date: 10-07-2013
• Assessment Year: 2005-2006
• Appeal Filed On: 30-06-2011
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: S J MEHTA
• Keywords: Opportunity of being heard; Rule of consistency; Earning of tax free income; Revenue expenditure; Capital expenditure
• Section: 14A

Judgement Text

, IN THE INCOME TAX APPELLATE TRIBUNAL E BENCH, MUMBAI . . , !'# , $ % BEFORE SHRI I.P. BANSAL, JM AND SHRI N.K. BILLA IYA, AM ./I.T.A. NOS.5082, 5083 & 5084/MUM/2011 ( & & & & / ASSESSMENT YEARS : 2005-06, 2006-07 & 2007-08 M/S. EXEDY INDIA LTD., NKM INTERNATIONAL HOUSE, 4 TH FLOOR, B.M. CHINAI MARG, MUMBAI-400 020 THE DCIT, CIRCLE 1(1), AAYAKAR BHAVAN, M.K. ROAD, MUMBAI-400 020 ' $ ./ () ./PAN/GIR NO. : AAACC 0641G ( '* /APPELLANT ) .. ( +,'* / RESPONDENT ) '* - / APPELLANT BY : ` SHRI S.J. MEHTA +,'* . - /RESPONDENT BY : SHRI RAJENDRA KUMAR . /0$ / DATE OF HEARING :10.07.2013 12& . /0$ / DATE OF PRONOUNCEMENT : 12.07.2013 3 / O R D E R PER N.K. BILLAIYA, AM: THESE THREE SEPARATE APPEALS BY THE ASSESSEE ARE PR EFERRED AGAINST THREE SEPARATE ORDERS OF THE LD. CIT(A)-1, MUMBAI D T.8.12.2010 PERTAINING TO A.YRS2005-06 TO 2007-08. AS COMMON IS SUES ARE INVOLVED IN ALL THESE THREE APPEALS, THEY WERE HEARD TOGETHE R AND DISPOSED OF BY THIS COMMON ORDER FOR THE SAKE OF CONVENIENCE AND B REVITY. ITA NO. 5082/MUM/2011 A.Y. 2005-06 2. GROUND NO. 1 IS GENERAL IN NATURE. ITA NO.5082 TO 5084/M/2011 2 3. GROUND NO. 2 & 3 RELATE TO DISALLOWANCE OF RS. 5 6,48,349/- BEING THE ROYALTY ON SALES PAID TO M/S. EXEDY CORPN. OF J APAN AS CAPITAL EXPENDITURE. 4. DURING THE COURSE OF THE SCRUTINY ASSESSMENT PRO CEEDINGS, THE ASSESSING OFFICER FOUND THAT THE ASSESSEE HAS PAID A SUM OF RS. 56,48,349/- TO ITS ASSOCIATED CONCERN I.E. M/S. EXE DY CORPN. JAPAN ON ACCOUNT OF THE ROYALTY ON SALES. THE ASSESSEE WAS ASKED TO EXPLAIN WHY THE SAME EXPENDITURE SHOULD NOT BE DISALLOWED AS CA PITAL EXPENDITURE. THE ASSESSEE FILED A DETAILED REPLY EXPLAINING THAT IT HAS PAID TECHNICAL KNOW-HOW FEES OF RS. 38,27,000/-UNDER CLAUSE NO. 8. 3 OF THE TECHNICAL ASSISTANCE AGREEMENT DT. 9 TH JUNE, 1999, WHICH IT HAS CAPITALIZED. IT WAS FURTHER EXPLAINED THAT UNDER THE SAME TECHNICAL AS SISTANCE AGREEMENT, THE COMPANY IS LIABLE TO PAY ROYALTY ON SALES FOR U SE OF TECHNICAL INFORMATION, LICENSE ETC. WHICH IS TO BE USED ON CO NTINUOUS BASIS FOR MANUFACTURE OF PRODUCTS OF THE COMPANY. THE ROYALT Y ON SALES PAID AND DEBITED TO PROFIT AND LOSS ACCOUNT FOR EARLIER PERI OD HAS BEEN ALLOWED. THE AO WAS OF THE FIRM BELIEF THAT ROYALTY PAYMENT IS IN LIEU OF TECHNICAL KNOW-HOW FROM FOREIGN COMPANY WHICH IS IN THE NATUR E OF ENDURING ADVANTAGE TO THE ASSESSEE COMPANY AND ACCORDINGLY HELD THAT THE ROYALTY PAYMENT IS CAPITAL EXPENDITURE AND DISALLOWED THE SAME. 5. THE ASSESSEE AGITATED THIS MATTER BEFORE THE LD. CIT(A) BUT FAILED TO CONVINCE THAT THE PAYMENT OF ROYALTY ON SALES IS A REVENUE EXPENDITURE. 6. BEFORE US, THE LD. COUNSEL FOR THE ASSESSEE RELI ED UPON THE DECISION OF THE HIGH COURT OF ALLAHABAD IN THE CASE OF CIT VS KANPUR CIGARETTES (P) LTD. 287 ITR 485. IT IS THE SAY OF THE LD. COUNSEL THAT FACTS OF THE CASE ARE IDENTICAL, THEREFORE, THE SAM E VIEW SHOULD BE ADOPTED. THE LD. COUNSEL FOR THE ASSESSEE FURTHER SUBMITTED THAT THE ITA NO.5082 TO 5084/M/2011 3 ASSESSEE IS PAYING ROYALTY SINCE 1999 AND THE SAME PAYMENT HAS BEEN ALLOWED IN PAST IN ALL ASSESSMENT YEARS, THEREFORE, THE AO OUGHT TO HAVE FOLLOWED THE RULE OF CONSISTENCY. 7. THE LD. DEPARTMENTAL REPRESENTATIVE SUPPORTED TH E FINDINGS OF THE LOWER AUTHORITIES. 8. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND PER USED THE ORDERS OF THE LOWER AUTHORITIES AND ALSO THE DECISIONS REL IED UPON BY THE LD. COUNSEL. WE FIND THAT THE ALLAHABAD HIGH COURT IN THE CASE OF KANPUR CIGARETTES (P) LTD. (SUPRA) HAS HELD THAT PAYMENT T OWARDS ROYALTY WHICH WAS DEPENDANT ON THE QUANTUM OF THE ITEMS MANUFACTU RED WAS A REVENUE EXPENDITURE. IN THE CASE OF THE PRESENT ASSESSEE, THE QUANTUM OF ROYALTY DEPENDS UPON THE SALES. SINCE THE ROYALTY IS PAID, AT A CERTAIN PERCENTAGE OF SALES, IT CANNOT BE SAID THAT IT GIVES AN ENDUR ING BENEFIT TO THE ASSESSEE, THE SAME IS TO BE ALLOWED AS REVENUE EXPENDITURE. A SIMILAR VIEW HAS BEEN TAKEN BY THE HONBLE SUPREME COURT IN THE CASE OF MEWAR SUGAR MILLS LTD. VS CIT 87 ITR 400 WHEREIN THE HONBLE SU PREME COURT HAS HELD THAT ROYALTY PAYMENTS PAID TO THE GOVERNMENT B ASED ON SALES ARE ALLOWABLE AS DEDUCTION U/S. 10(2)(XV) OF 1922 ACT. RESPECTFULLY FOLLOWING THE AFOREMENTIONED DECISION, IN OUR CONSI DERATE VIEW, THE ROYALTY PAYMENT BASED ON SALES ARE OF REVENUE IN NA TURE AND WE ACCORDINGLY DIRECT THE AO TO ALLOW THE CLAIM OF THE ASSESSEE. GROUND NO. 2 & 3 ARE ALLOWED. 9. GROUND NO. 4 IS NOT PRESSED. THEREFORE IT IS DI SMISSED AS NOT PRESSED. 10. GROUND NO. 5 RELATES TO DISALLOWANCE OF 50% O F RS. 17,21,814/- BEING EXPENSES INCURRED THROUGH THE CREDIT CARD BY EMPLOYEES FOR SUBSCRIPTION, HOTEL, LODGING AND OTHER EXPENSES. ITA NO.5082 TO 5084/M/2011 4 11. DURING THE COURSE OF THE SCRUTINY ASSESSMENT PR OCEEDINGS, AFTER CONSIDERING ANNEXURED OF FORM 3CD, THE AO SOUGHT EXPLANATION FROM THE ASSESSEE AS TO WHY THE EXPENSES OF RS. 17,21,81 4/- CLAIMED IN RESPECT OF PAYMENT MADE TO CLUBS SHOULD NOT BE DISALLOWED. THE ASSESSEE EXPLAINED THAT THE SAID EXPENSES ARE INCURRED DUR ING TRAVEL OUTSIDE THE PLACE OF WORK AND SEPARATE BREAK UP OF EXPENSES UND ER THE HEAD ENTRANCE FEES, SUBSCRIPTION AND HOTEL AND OTHER EXPENSES ARE GIVEN. AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE, IN THE LIGHT OF THE DETAILS AVAILABLE ON RECORD, THE AO WAS OF THE FIRM BELIEF THAT THESE EXPENSES ARE PURELY PERSONAL IN NATURE AND CANNOT BE CONSIDERED AS INCURRED WHOLLY AND EXCLUSIVELY FOR THE BUSINESS PURPOSE AND ACCORD INGLY DISALLOWED THE ENTIRE SUM OF RS. 17,21,814/-. 12. WHEN THE MATTER WAS AGITATED BEFORE THE LD. CIT (A), THE CIT(A) OBSERVED THAT THE MAJORITY OF THE EXPENSES ARE INCU RRED THROUGH CREDIT CARD AND ARE INCURRED IN MUMBAIS DIFFERENT CLUBS A ND FOR WHICH PURPOSE, THE PAYMENTS OF HOTEL LODGING WAS INCURRED OF WHICH NO DETAILS HAVE BEEN ADDUCED. THE LD. CIT(A) FURTHER OBSERVED THAT THE ASSESSEE COULD NOT SUBSTANTIATE ITS CLAIM THAT THE EXPENSES ARE INCURR ED ON OFFICIAL WORK. HOWEVER, AFTER CONSIDERING ALL THE ASPECTS, THE LD. CIT(A) WAS OF THE OPINION THAT THE EXPENDITURE OF PERSONAL NATURE CAN NOT BE OVER- RULED. HOWEVER, AT THE SAME TIME DIRECTED THE AO TO RESTRI CT THE DISALLOWANCE TO 50% AND ACCORDINGLY ADDITION OF RS. 8,60,907/- WA S CONFIRMED. 13. BEFORE US, THE LD. COUNSEL FOR THE ASSESSEE REI TERATED WHAT HAS BEEN STATED BEFORE THE LOWER AUTHORITIES. DRAWING OUR ATTENTION TO THE DETAILS ANNEXED WITH THE AUDIT REPORT, IT IS THE SA Y OF THE LD. COUNSEL THAT ALL THE PAYMENTS MADE TO CLUBS HAVE BEEN EXPLAINED TO BE INCURRED FOR THE PURPOSE OF BUSINESS. THE LD. COUNSEL FOR THE ASSESSEE RELIED UPON THE DECISION OF THE BOMBAY HIGH COURT IN THE CASE O F OTIS ELEVATOR VS ITA NO.5082 TO 5084/M/2011 5 CIT 195 ITR 682 AND ALSO ITAT, DELHI BENCH IN THE CASE OF SIMBHAOLI SUGAR MILLS LTD VS ACIT 17 SOT 90 (DEL). 14. THE LD. DEPARTMENTAL REPRESENTATIVE SUPPORTED THE FINDINGS OF THE LD. CIT(A). 15. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND PE RUSED THE ORDERS OF THE LOWER AUTHORITIES AND THE MATERIAL EVIDENCE BROUGHT ON RECORD. WE HAVE ALSO CONSIDERED THE DECISIONS RELIED UPON BY THE ASSESSEE. THE DECISION OF THE HONBLE BOMBAY HIGH COURT IN THE C ASE OF OTIS ELEVATOR (SUPRA) IS BASED ON DIFFERENT FACTS. IN THAT CASE , THE PAYMENT HAS BEEN CONSIDERED BY THE AO AS PERQUISITE FOR WHICH THE HO NBLE HIGH COURT HAS HELD THAT PAYMENT MADE TO CLUBS DO NOT COME UNDER T HE HEAD OF PERQUISITES. THE DECISION OF THE DELHI BENCH IN TH E CASE OF SIMBHAOLI SUGAR MILLS (SUPRA) ALSO DOES NOT FULLY SUPPORT THE CLAIM OF THE ASSESSEE AS THE ASSESSEE HAS NOT FILED COMPLETE DETAILS SO F AR AS CLUB FEES ARE CONCERNED. NOTHING HAS BEEN BROUGHT ON RECORD TO S HOW THE NATURE OF THE MEMBERSHIP , WHETHER THE ASSESSEE HAS TAKEN CORPORA TE MEMBERSHIP IN THE VARIOUS CLUBS OR THE INDIVIDUAL DIRECTORS/EMPLO YEES ARE MEMBERS OF THESE CLUBS , AS NO SUCH DETAILS ARE AVAILABLE ON R ECORD. WE FIND THAT THE LD. CIT(A) HAS ALLOWED THE CLAIM OF EXPENDITURE TO THE EXTENT OF 50%, THEREFORE, WE DO NOT SEE ANY REASON TO TAMPER WITH THE FINDINGS OF THE LD. CIT(A). GROUND NO. 5 IS ACCORDINGLY DISMISSED. 16. THE NEXT GRIEVANCE RELATES TO THE DISALLOWANCE OF RS. 50,000/- U/S. 14A OF THE ACT. THE AO NOTICED THAT THE ASSESSEE H AS SHOWN DIVIDEND OF RS. 4,82,464/- AND CLAIMED THE SAME TO BE EXEMPT FR OM TAX. THE AO FURTHER OBSERVED THAT THE ASSESSEE HAS NOT DISALLOW ED ANY PROPORTIONATE EXPENSES TOWARDS EARNING OF EXEMPT INCOME. THE AO G AVE AN OPPORTUNITY TO THE ASSESSEE TO EXPLAIN WHY PROPORTI ONATE EXPENSES ON THE ITA NO.5082 TO 5084/M/2011 6 DIVIDEND INCOME SHOULD NOT BE DISALLOWED U/S. 14A O F THE ACT. THE ASSESSEE EXPLAINED THAT IT HAS RECEIVED DIVIDEND FR OM UTI MASTER SHARES OF WHICH IT HAS INCURRED NO EXPENDITURE. THE AO WA S NOT CONVINCED WITH THE REPLY OF THE ASSESSEE. THE AO WAS OF THE FIRM BELIEF THAT THE ASSESSEE MIGHT HAVE INCURRED SOME EXPENDITURE OUT OF ADMIN ISTRATIVE AND OTHER EXPENSES DEBITED TO THE PROFIT AND LOSS ACCOUNT AND WENT ON TO MAKE AN ADHOC ESTIMATED DISALLOWANCE AT RS. 50,000/-. 17. THE ASSESSEE CARRIED THE MATTER BEFORE THE LD. CIT(A). THE LD. CIT(A) WAS CONVINCED THAT RULE 8D IS APPLICABLE FRO M ASSESSMENT YEAR 2008-09. HOWEVER, AT THE SAME TIME, THE LD. IT(A) DIRECTED THE AO TO CONSIDER THE DISALLOWANCE IN THE LIGHT OF THE DECIS ION OF THE HONBLE JURISDICTIONAL HIGH COURT IN THE CASE OF GODREJ & BOYCE MFG. CO. LTD. VS DCIT. 18. BEFORE US, THE LD. COUNSEL FOR THE ASSESSEE COU LD NOT BRING ANY EVIDENCE TO SUBSTANTIATE ITS CLAIM THAT THE ASSESSE E HAS NOT INCURRED ANY EXPENDITURE FOR EARNING THE EXEMPT INCOME. 19. THE LD. DEPARTMENTAL REPRESENTATIVE RELIED UPON THE FINDINGS OF THE AO. 20. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND PE RUSED THE ORDERS OF THE LOWER AUTHORITIES. IT IS NOW WELL SETTLED T HAT APPLICABILITY OF RULE 8D IS PROSPECTIVE AND IS FROM A.Y. 2008-09. HOWEVE R, AT THE SAME TIME THE JURISDICTIONAL HIGH COURT HAS ALSO MADE IT VERY CLEAR THAT A REASONABLE AMOUNT IS TO BE DISALLOWED TOWARDS EARNING OF EXEM PT INCOME. AS THE LD. CIT(A) HAS DIRECTED THE AO TO MAKE A REASONABLE DISALLOWANCE AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE, WE DO NOT FIND ANY REASON TO INTERFERE WITH THE FINDINGS OF THE LD. CIT(A). THE AO IS ACCORDINGLY ITA NO.5082 TO 5084/M/2011 7 DIRECTED TO DECIDE THE ISSUE AFRESH AFTER GIVING A REASONABLE OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. THIS GROUND OF THE ASS ESSEE IS ALLOWED FOR STATISTICAL PURPOSE. 21. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS PARTLY ALLOWED FOR STATISTICAL PURPOSE. ITA NO. 5083/MUM/2011 A.Y. 2006-07 22. GROUND NO. 1 IS GENERAL IN NATURE. 23. GROUND NO. 2 & 3 RELATE TO DISALLOWANCE OF RS. 1,03,40,162/- BEING ROYALTY ON SALES PAID TO M.S. EXEDY CORPN. OF JAPAN . THIS ISSUE HAS ALREADY BEEN DISCUSSED IN ITA NO. 5082/M/2011 FOR A .Y. 2005-06 AT PARAS 3 TO 8. THEREFORE, ON SIMILAR LINES, SIMILAR REASONS, THE GROUND RAISED BY THE ASSESSEE IN ITA NO. 5083/M/11 FOR ASS ESSMENT YEAR 2006- 2007 IS ALLOWED. 24. GROUND NO. 4 RELATES TO DISALLOWANCE OF 50% OF RS. 4,70,161/- BEING EXPENSES INCURRED THROUGH THE CREDIT CARD BY EMPLOYEES FOR SUBSCRIPTION, HOTEL, LODGING AND OTHER EXPENSES. T HIS ISSUE HAS ALREADY BEEN DISCUSSED IN ITA NO. 5082/M/2011 FOR A.Y. 2005 -06 AT PARAS 10 TO 15. THEREFORE, ON SIMILAR LINES, SIMILAR REASONS, THE GROUND RAISED BY THE ASSESSEE IN ITA NO. 5083/M/11 FOR ASSESSMENT YEAR 2 006-2007 IS DISMISSED. 25. THE APPEAL FILED BY THE ASSESSEE IS PARTLY ALLO WED. ITA NO. 5084/MUM/2011 A.Y. 2007-08 26. GROUND NO. 1 IS GENERAL IN NATURE. ITA NO.5082 TO 5084/M/2011 8 27. GROUND NO. 2 & 3 RELATE TO DISALLOWANCE OF RS. 1,08,70,000/- BEING ROYALTY ON SALES PAID TO M.S. EXEDY CORPN. OF JAPAN . THIS ISSUE HAS ALREADY BEEN DISCUSSED IN ITA NO. 5082/M/2011 FOR A .Y. 2005-06 AT PARAS 3 TO 8. THEREFORE, ON SIMILAR LINES, SIMILAR REASONS, THE GROUND RAISED BY THE ASSESSEE IN ITA NO. 5084/M/11 FOR ASS ESSMENT YEAR 2007- 2008 IS ALLOWED. 28. GROUND NO. 4 RELATES TO DISALLOWANCE OF 50% OF RS. 4,25,556/- BEING EXPENSES INCURRED THROUGH THE CREDIT CARD BY EMPLOYEES FOR SUBSCRIPTION, HOTEL, LODGING AND OTHER EXPENSES. T HIS ISSUE HAS ALREADY BEEN DISCUSSED IN ITA NO. 5082/M/2011 FOR A.Y. 2005 -06 AT PARAS 10 TO 15. THEREFORE, ON SIMILAR LINES, SIMILAR REASONS, THE GROUND RAISED BY THE ASSESSEE IN ITA NO. 5084/M/11 FOR ASSESSMENT YEAR 2 007-2008 IS DISMISSED. 29. THE APPEAL FILED BY THE ASSESSEE IS PARTLY ALLO WED. 30. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IN ITA NO. 5082/M/2011 IS PARTLY ALLOWED FOR STATISTICAL PURPO SE AND THE APPEALS FILED BY THE ASSESSEE IN ITA NOS. 5083 & 5084/M/201 1 IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 12.7.2013 . 3 . 2& $ 4 56 12.7.2013 2 . 7 SD/- SD/- (I.P. BANSAL ) (N. K. BILLAIYA ) /JUDICIAL MEMBER $ / ACCOUNTANT MEMBER MUMBAI; 5 DATED 12/07/2013 . . ./ RJ , SR. PS ITA NO.5082 TO 5084/M/2011 9 3 3 3 3 . .. . +/ +/ +/ +/ 8 &/ 8 &/ 8 &/ 8 &/ / COPY OF THE ORDER FORWARDED TO : 1. '* / THE APPELLANT 2. +,'* / THE RESPONDENT. 3. 9 ( ) / THE CIT(A)- 4. 9 / CIT 5. :7 +/ , , / DR, ITAT, MUMBAI 6. 7; < / GUARD FILE. 3 3 3 3 / BY ORDER, , / +/ //TRUE COPY// = == = / > > > > ( ( ( ( (DY./ASSTT. REGISTRAR) , / ITAT, MUMBAI