M/s. India Nippon Electricals Ltd., CHENNAI V. ACIT, CHENNAI

ITA 52/CHNY/2014

• Counselvise Citation: 5221714 RSA 2014
• Duration Of Justice: 1 year(s) 11 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-12-2015
• Appeal Filed By: Assessee
• Bench Allotted: D
• Next Hearing Date: 14-12-2015
• Assessment Year: 2009-2010
• Appeal Filed On: 07-01-2014
• Court: TRIBUNAL
• Department Lawyers: DR B NISCHAL
• Assessee Lawyers: R VIJAYARAGHAVAN
• Keywords: Depreciation; Earning of tax free income; Revenue expenditure; Capital expenditure
• Section: 14A; 80IB

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL D BENCH, CHENNAI , ! ' ! # . $ , % &' BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SHRI DUVVURU RL REDDY, JUDICIAL MEMBER ./ ITA NO. 52/MDS/2014 / ASSESSMENT YEAR : 2009-10 M/S. INDIA NIPPON ELECTRICALS LTD., THE ASSISTANT COMMISSIONER AALIM CENTRE, II FLOOR, OF INCOME-TAX, 82, RADHAKRISHNAN SALAI, V. COMPANY CIRCLE-II(3) , CHENNAI 600 004. PAN AAACI0921R APPELLANT) CHENNAI 34. RESPONDENT) / APPELLANT BY : SHRI R. VIJAYARAGHAVAN, ADVOCATE / RESPONDENT BY : DR. B. NISCHAL, JCIT ! / DATE OF HEARING : 14.12.2015 '# ! / DATE OF PRONOUNCEMENT: 31.12.2015 ( / O R D E R PER CHANDRA POOJARI, ACCOUNTANT MEMBER THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST THE ORDER OF THE COMMISSIONER OF INCOME-TAX(APPEALS) DATED 29 .10.2013 FOR THE ASSESSMENT YEAR 2009-10. - - ITA 52/14 2 2. THE FIRST GROUND TAKEN BY THE ASSESSEE IS THAT T HE CIT(APPEALS) ERRED IN CONFIRMING THE DISALLOWANCE O F 25% OF ROYALTY PAYMENT AMOUNTING TO ` 9,36,750/- AS CAPITAL IN NATURE. 3. THE FACTS OF THE CASE ARE THAT DURING THE FINAN CIAL YEAR 2008-09 RELEVANT TO THE A.Y. 2009-10, THE ASSESSE C OMPANY DEBITED IN ITS PROFIT AND LOSS ACCOUNT A SUM OF ` 12,49,000/- UNDER THE HEAD ROYALTY PAID TO M/S. KOKUSAN DENKI CO. LTD., JAPAN. THE ASSESSING OFFICER CONSIDERED THE SAID P AYMENT AS A CAPITAL EXPENDITURE AND DISALLOWED THE SAME. HOWEV ER, THE AO ALLOWED DEPRECIATION @ 25% ON THIS PAYMENT. AGGRIE VED, THE ASSESSE WENT IN APPEAL BEFORE THE CIT(APPEALS). 4. ON APPEAL, THE CIT(APPEALS) OBSERVED THAT AS EXP LAINED BY THE ASSESSEE, THERE ARE TWO TYPES OF ROYALTIES P AID TO KOKUSAN DENKI CO. LTD., JAPAN. ACCORDING TO THE CIT(APPEALS), THE FIRST CATEGORY IS A ONE TIME UP- FRONT PAYMENT OF ROYALTY AT THE BEGINNING OF THE AGREEMENT AND T HIS CATEGORY OF UP-FRONT ROYALTY FORM A CAPITAL EXPENDITURE BECAU SE THE BENEFITS OF THE PAYMENTS ACCRUES TO THE ASSESSEE FOR A PERIO D OF OVER 10 YEARS AND EVEN MORE. THEREFORE, HE OBSERVED THAT T HIS A CAPITAL EXPENDITURE AND THE ASSESSE HAD, IN FACT, CAPITALIS ED THIS AMOUNT - - ITA 52/14 3 IN ITS BOOKS AND CLAIMING DEPRECIATION AS PER THE P ROVISIONS OF THE ACT. 4.1 ACCORDING TO THE CIT(APPEALS), THE DISPUTE IS R EGARDING THE TREATMENT OF THE SECOND CATEGORY OF ROYALTY PAY MENT, WHICH IS ANNUAL PAYMENT IN NATURE TO BE CALCULATED @ 3% OF THE ASSESSEES MANUFACTURE AND THE AO TREATED THIS AS A CAPITAL EXPENDITURE BY FOLLOWING THE DECISION OF THE SUPREM E COURT IN THE CASE OF M/S. SOUTHERN SWITCH GEAR LTD. V. CIT ( 232 ITR 359). THE CIT(APPEALS) ALSO OBSERVED THAT THE FACTS OF TH E ASSESSEES CASE ARE IDENTICAL; TO THOSE INVOLVED IN THE CASE O F SOUTHERN SWITCH GEAR LTD. (SUPRA) AND HELD THAT IT IS SQUARE LY APPLICABLE TO THE ASSESSEES CASE. HE FURTHER OBSERVED THAT IN VIEW OF THE ABOVE, THE AO IS JUSTIFIED IN TREATING THE ROYALTY PAYMENTS OF RS. 12,49,000/- BEING 3% OF THE SALES OF THE YEAR, AS C APITAL EXPENDITURE AND DISALLOWING 75% OF THE SAME AFTER A LLOWING DEPRECIATION @ 25% AND CONFIRMED THE FINDING OF THE A.O. AGAINST THIS, THE ASSESSE IS IN APPEAL BEFORE US. 5. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE M ATERIAL AVAILABLE ON RECORD. IN OUR OPINION, THE SAME ISSUE WAS CONSIDERED BY THE TRIBUNAL IN THE CASE OF M/S. INDI A NIPPON - - ITA 52/14 4 ELECTRICALS LTD. V. ACIT IN ITA NO.1706/MDS/2014 DA TED 18.12.2015 WHEREIN IT WAS HELD AS UNDER : 5. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIAL AVAILABLE ON RECORD. WE HAVE CAREFULL Y GONE THROUGH THE JUDGMENT OF THE JURISDICTIONAL HIG H COURT IN THE CASE OF SOUTHERN SWITCH GEAR LTD (SUPR A). IN THAT CASE THE FOREIGN COMPANY WAS REQUIRED TO MAINTAIN THE ASSESSEES FACTORY IN INDIA. BEING SO , IT WAS HELD THAT THE ASSESSEE GOT THE ENDURING BENEFIT AND IT IS A CAPITAL EXPENDITURE. HOWEVER, IN THE PRESENT CASE, THOUGH THE AGREEMENT WAS FOR 10 YEARS , THE ROYALTY IS BASED ON THE QUANTUM OF SALES MADE BY THE ASSESSEE ONLY. BEING SO, THE ABOVE JUDGMENT CANNOT BE STRAIGHTLY APPLIED TO THE FACTS OF THE PR ESENT CASE. CONSIDERING THE FACTS OF THE CASE, IN OUR OPINION, THE JUDGMENT OF THE JURISDICTIONAL HIGH CO URT IN THE CASE OF CIT VS HITECH ARAI LTD, 368 ITR 577, IS APPLICABLE. IN THAT CASE, IT WAS HELD THAT WHERE T HE ROYALTY PAYMENT MADE BY THE ASSESSEE UNDER RENEWAL AGREEMENTS WERE FOR GRANT OF LICENSE TO AN EXISTING COMPANY FOR MANUFACTURE AND SALE OF AUTOMOBILE PART S AND COMPONENTS FOR SUBSEQUENT PERIODS, AFTER THE EXPIRY OF ORIGINAL PERIOD OF LICENSE AND IT WAS NOT TECHNICAL KNOW-HOW FOR SETTING UP A NEW PLANT OR F OR MANUFACTURING A COMPLETELY NEW PRODUCT WITH AID AND ASSISTANCE OF FOREIGN COMPANY, PAYMENT MADE WAS PURELY REVENUE IN NATURE, MORE SO, WHEN DEPARTMENT HAD FOR THE NINE EARLIER ASSESSMENT YEARS ACCEPTED THE FACT THAT THE PAYMENT MADE TOWARDS ROYALTY WAS REVENUE EXPENDITURE AND HAD NOT RAISED DISPUTE THEREON. FURTHER, SIMILAR VIEW WAS TAKEN BY THE MADRAS HIGH COURT IN THE CASE OF CIT VS PANASONIC CARBON INDIA COMPANY LTD IN TAX CASE APPEAL NOS. 552, 553, 554 AND 556 OF 2010, ORDER DATED 12.7.201 0. THE TRIBUNAL HAS ALSO TAKEN THE SAME VIEW IN THE CA SE OF M/S INDIA JAPAN LIGHTING P. LTD VS ACIT IN I.T.A.NOS.676 TO 678/MDS/2010, DATED 10.6.2011. ACCORDINGLY, IN OUR OPINION, THE ASSESSEES CLAIM H AS - - ITA 52/14 5 TO BE ALLOWED AND IT IS TO BE TREATED AS REVENUE EXPENDITURE ONLY. IN VIEW OF THE ABOVE ORDER OF THE TRIBUNAL, THIS GR OUND IS ALLOWED. 6. THE NEXT GROUND IS THAT THE CIT(APPEALS) ERRED I N CONFIRMING THE DISALLOWANCE OF THE EXPENSES OF ` 43,36,659/- RELATABLE TO EARNING THE DIVIDEND INCOME IN ACCORDA NCE WITH RULE 8D. 7. THE FACTS OF THE ISSUE ARE THAT THE ASSESSE COMP ANY IS FOUND TO HAVE INVESTED AN AMOUNT OF ` 99,61,87,000/- IN SHARES AS ON 31.03.2009, AS IT IS SEEN FROM THE INVESTMENT S (SCHEDULE- 5) OF THE BALANCE-SHEET AND EARNED A DIVIDEND INCOM E OF ` 5,86,10,135/- DURING THE FINANCIAL YEAR 2008-09. H OWEVER, THE ASSESSE HAS NOT SEGREGATED ANY EXPENDITURE ATTRIBUT ABLE TO SUCH INVESTMENTS AND EARNING OF DIVIDEND INCOME WHICH IS EXEMPT FROM TAX. HENCE, THE AO INVOKED THE PROVISIONS OF SEC.14A OF THE ACT READ WITH RULE8D AND DETERMINED THE EXPENDI TURE ATTRIBUTABLE FOR EARNING SUCH EXEMPT INCOME AT ` 43,36,659/- AND DISALLOWED THE SAME. AGGRIEVED, THE ASSESSE WENT I N APPEAL - - ITA 52/14 6 BEFORE THE CIT(APPEALS). 8. ON APPEAL, THE CIT(APPEALS) PLACED RELIANCE ON T HE SPECIAL BENCH DECISION OF THE TRIBUNAL IN THE CASE OF CHEMINVEST LTD. V. ITO (121 ITD 31) AND CONFIRMED T HE FINDING OF THE A.O. AGAINST THIS, THE ASSESSEE IS IN APPEAL B EFORE US. 9. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE M ATERIAL ON RECORD. WE FIND THAT THE SAME ISSUE WAS CONSIDE RED BY THE TRIBUNAL IN ITA NOS.2780 TO 2782/MDS/14 & 1276/MDS/ 15 ETC. IN THE CASE OF DCIT V. M/S. ACCEL FRONTLINE LTD., WHER EIN THE TRIBUNAL HAS HELD HAS UNDER: 11. COMING TO THE ASSESSMENT YEARS 2008-09 AND 2009-10, THE MAIN CONTENTION OF THE ASSESSEES COUN SEL IS THAT THE ASSESSEE HAS NOT INCURRED ANY EXPENDITU RE FOR EARNING EXEMPTED INCOME AND THE ASSESSEE HAS NOT USED ANY INTEREST BEARING FUNDS FOR INVESTMENT. ON THE CONTRARY, THE LD. DR SUBMITTED THAT THE ASSESSEE HA S GIVEN SUFFICIENT OPPORTUNITY TO EXPLAIN THAT THE EXPENDITURE WAS INCURRED FOR EARNING EXEMPTED INCOM E AND THE ASSESSEE HAS NOT PRODUCED NECESSARY EVIDENC E TO SUPPORT ITS CASE. IN OUR OPINION, THE DECISION OF THE MUMBAI BENCH OF THE TRIBUNAL IN THE CASE OF M/S. DA GA GLOBAL CHEMICALS PVT. LTD. IN ITA NO.5592/MUM/2012 DATED 1.1.2015 AND THE DECISION OF THE DELHI HIGH C OURT IN THE CASE OF JOINT INVESTMENTS PVT. LTD. VS. CIT IN ITA NO.117 OF 2015 DATED 25.2.2015 IS HAVING BEARING ON THIS ISSUE, WHEREIN IT WAS OBSERVED AS UNDER: 6. HEARD BOTH THE PARTIES. ON A PERUSAL OF THE ORD ER OF MUMBAI BENCH OF THE TRIBUNAL IN THE CASE OF M/S. DAGA GLOBAL CHEMICALS PVT. LTD. (SUPRA), WE FIND TH AT - - ITA 52/14 7 AN IDENTICAL ISSUE HAS BEEN DECIDED BY THE TRIBUNAL HOLDING THAT DISALLOWANCE UNDER SECTION 14A READ WI TH RULE 8D CANNOT EXCEED THE EXEMPT INCOME. WHILE HOLDING SO, THE TRIBUNAL OBSERVED AS UNDER:- 2. AT THE TIME OF HEARING, DR. K.SHIVARAM ALONG WI TH SHRI RAHUL HAKANI, LD. COUNSELS FOR THE ASSESSEE ADVANCED THEIR ARGUMENTS WHICH ARE IDENTICAL TO THE GROUND RAISED BY SUBMITTING THAT NO EXPENDITURE DIRECTLY OR INDIRECTLY WAS INCURRED BY THE ASSESSEE FOR EARNING EXEMPT INCOME AND FURTHER THE INVESTMENT IN SHARES WAS MADE IN EARLIER YEARS OUT OF OWN FUNDS A ND NOT OUT OF BORROWED FUNDS, THEREFORE, NO DISALLOWAN CE U/S 14A R.W. RULE 8D IS TO BE MADE. 2.1. ON THE OTHER HAND, SHRI AKHILENDRA YADAV STRON GLY DEFENDED THE CONCLUSION ARRIVED AT BY THE LD. COMMISSIONER OF INCOME TAX (APPEALS) BY CONTENDING THAT A WELL REASONED ORDER HAS BEEN PASSED BY THE L D. FIRST APPELLATE AUTHORITY AS APPORTIONMENT OF EXPENDITURE FOR EARNING THE DIVIDEND INCOME WAS DON E AS PER THE PROVISIONS OF THE ACT. IT WAS PLEADED TH AT SECTION 14A R.W. RULE 8D OF THE RULES IS CLEARLY APPLICABLE TO THE FACTS OF THE PRESENT APPEAL. 2.2. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL AVAILABLE ON RECORD. THE FACTS , IN BRIEF, ARE THAT THE ASSESSEE IS A LIMITED COMPANY, ENGAGED IN TRADING OF BULK AND FINE, CHEMICALS, SOL VENT AND PHARMACEUTICAL RAW MATERIALS DECLARED ITS INCOM E AT RS.74,40,000/- ON 26/09/2009. THE ASSESSEE CREDITED DIVIDEND INCOME OF RS.1,82,262/- IN ITS PR OFIT AND LOSS ACCOUNT. THE ASSESSING OFFICER WHILE FRAMI NG THE ASSESSMENT INVOKE SECTION 14A R.W. RULE 8D BY CONTENDING THAT ASSESSEE CLAIMED VARIOUS EXPENSES WHICH ARE RELATED TO EXEMPT INCOME IN ITS PROFIT & LOSS ACCOUNT AND DISALLOWED RS.14,58,412/-. ON APPEAL, BEFORE THE LD. COMMISSIONER OF INCOME TAX (APPEALS) BROADLY THE STAND TAKEN IN THE ASSESSMENT ORDER WAS AFFIRMED AGAINST WHICH THE ASSESSEE IS IN FURTHER - - ITA 52/14 8 APPEAL BEFORE THIS TRIBUNAL. THE TOTALITY OF FACTS CLEARLY INDICATES, AS CLAIMED BY THE ASSESSEE THAT NO BORROWED FUNDS WERE UTILIZED FOR EARNING THE EXEMPT INCOME BY THE ASSESSEE AND FURTHER THE DIVIDEND WER E DIRECTLY CREDITED IN THE BANK ACCOUNT OF THE ASSESS EE AND NO EXPENDITURE WAS CLAIMED. WHAT IT MAY BE, WE FIND THAT THE ASSESSEE ONLY RECEIVED RS.1,82,362/- AS DIVIDEND INCOME, THEREFORE, THERE IS NO QUESTION OF DISALLOWANCE OF RS.14,58.412/- BY INVOKING SECTION 14A R.W. RULE 8D UNDER THE FACTS AVAILABLE ON RECOR D. IT WAS ALSO EXPLAINED BY THE LD. COUNSEL FOR THE ASSES SEE THAT ON IDENTICAL FACT IN EARLIER YEARS, NO DISALLO WANCE WAS MADE. IN THE PRESENT ASSESSMENT YEAR ALSO, NO BORROWED FUNDS WERE INVESTED BY THE ASSESSEE FOR MAKING INVESTMENT IN SHARES OR FOR EARNING DIVIDEND INCOME . AT BEST, IF ANY DISALLOWANCE COULD BE MADE THAT CAN BE RESTRICTED TO RS. 1,485/- WHICH WERE CLAIMED AS DEMAT CHARGES. DISALLOWANCE U/S 14A R.W. RULE 8D CANNOT EXCEED THE EXEMPT INCOME. IN VIEW OF THIS FACT, WE FIND MERIT IN THE CLAIM OF THE ASSESS EE. THE APPEAL OF THE ASSESSEE IS THEREFORE, ALLOWED. FOLLOWING THE ABOVE DECISION OF THE MUMBAI BENCH OF THE TRIBUNAL, WE ARE OF THE OPINION THAT DISALLOWAN CE U/S.14A R.W. RULE 8D SHOULD NOT EXCEED THE EXEMPT INCOME. THE MUMBAI BENCH IN ITS ORDER SUSTAINED TH E DISALLOWANCE ON APPLICABILITY OF PROVISIONS OF SEC. 14A R.W. RULE 8D. HOWEVER, THE ALTERNATIVE CLAIM OF TH E ASSESSEE WAS THAT DISALLOWANCE IF AT ALL SHOULD BE MADE, IT SHOULD BE RESTRICTED TO EXEMPT INCOME EARNED AND NOT BEYOND THAT. ACCORDINGLY, THE AO IS DIRECTED TO LO OK AT THIS ISSUE ON THIS ANGLE AND DECIDE IT AFRESH IN TH E LIGHT OF THE ABOVE DECISION OF THE MUMBAI BENCH OF THE TRIBU NAL. ACCORDINGLY, THIS GROUND OF APPEAL IS PARTLY ALLOWE D FOR THE ASSESSMENT YEARS 2008-09 AND 2009-10. ACCORDINGLY, THIS GROUND IS REMITTED BACK TO THE A. O. FOR FRESH CONSIDERATION. - - ITA 52/14 9 10. THE NEXT GROUND IS THAT THE CIT(APPEALS) ERRED IN NOT ADJUDICATING/CONFIRMING THE DISALLOWANCE OF APPORTI ONMENT OF EXPENSES OF ` 70,95,143/- TOWARDS RESEARCH & DEVELOPMENT BETWEEN 80IB AND NON 80IB UNITS IN THE RATIO OF TURNOVER. 11. THERE IS NO ADJUDICATION BY THE CIT(APPEALS) TH OUGH THE ASSESSEE HAS RAISED THIS GROUND BEFORE THE CIT(APPEALS). IN OUR OPINION, THIS GROUND IS REQUI RED ADJUDICATION BY LOWER AUTHORITIES. ACCORDINGLY, WE REMIT THIS ISSUE TO THE FILE OF THE AO FOR FRESH CONSIDERATION AS EARLIER ISSUE IS GOING BACK TO THE AO. 12. THE NEXT GROUND IS THAT THE CIT (APPEALS) ERRED IN NOT ADJUDICATING/CONFIRMING THE GRANTING OF TDS CRE DIT ONLY TO THE AMOUNT OF ` 18,43,1201/ BY THE ASSESSING OFFICER. 13. THERE IS NO ADJUDICATION BY THE CIT(APPEALS) TH OUGH THE ASSESSEE HAS RAISED THIS GROUND BEFORE THE CIT(APPEALS). IN OUR OPINION, THIS GROUND IS REQUI RED ADJUDICATION BY LOWER AUTHORITIES. ACCORDINGLY, WE REMIT THIS ISSUE TO THE FILE OF THE AO FOR FRESH CONSIDERATION AS EARLIER - - ITA 52/14 10 ISSUE IS GOING BACK TO THE AO. 14. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS PA RTLY ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED ON THURSDAY, THE 31 ST OF DEC., 2015 AT CHENNAI. SD/- SD/- ( $ % . & '( ) ( ) * + , ) DUVVURU RL REDDY - ./012304556037- 8 9: /JUDICIAL MEMBER ! 9:;<<5=1>01>?@AB@3 )8 /CHENNAI, C9 /DATED, THE 31 ST DEC., 2015. MPO* 9D EFGF /COPY TO: 1. /APPELLANT 2. /RESPONDENT 3. H- /CIT(A) 4. H /CIT 5. FIJ K /DR 6. J(L /GF.