M/s. TVS Motor Company Ltd., CHENNAI V. Addl.CIT, CHENNAI

ITA 757/CHNY/2009

• Counselvise Citation: [2010] 135 COUNSELVISE.COM (IT) 7687 (ITAT-CHENNAI)
• Duration Of Justice: 1 year(s) 7 month(s) 1 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 22-12-2010
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: C
• Next Hearing Date: 07-12-2010
• Assessment Year: 2005-2006
• Appeal Filed On: 21-05-2009
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: TAPAS KUMAR DUTTA ITA
• Assessee Lawyers: R VIJAYARAGHAVAN
• Keywords: Business income; Depreciation; Double taxation relief; Services rendered outside India; Capital receipt; Revenue expenditure; Capital expenditure; Rule 8D

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL CHENNAI BENCH C BEFORE DR.O.K.NARAYANAN, VICE PRESIDENT AND SHRI HARI OM MARATHA, JUDICIAL MEMBER I.T.A. NOS.697 & 757/MDS/2009 ASSESSMENT YEARS : 2000-01 AND 2005-06 TVS MOTOR COMPANY LTD., NO.29, HADDOWS ROAD, CHENNAI-600 006. PAN AACS 7032 B VS. THE ASST. COMMISSIONER OF INCOME TAX, COMPANY CIRCLE III (2), AND THE ADDL. CIT, COMPANY RANGE-III, CHENNAI-600 034. (APPELLANT) (RESPONDENT) I.T.A. NOS.976 & 1017/MDS/2009 ASSESSMENT YEARS : 2000-01 AND 2005-06 THE ASST. COMMISSIONER OF INCOME TAX, COMPANY CIRCLE III (2), AND THE ADDL. CIT, COMPANY RANGE-III, CHENNAI-600 034. VS. TVS MOTOR COMPANY LTD., CHENNAI-600 006. (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI R.VIJAYARAGHAVAN RESPONDENT BY : SHRI TAPAS KUMAR DUTTA ITA 697, 757, 976 & 1017/09 :- 2 -: O R D E R PER DR.O.K.NARAYANAN, VICE PRESIDENT THESE ARE TWO SETS OF CROSS APPEALS FIL ED BY THE ASSESSEE AND THE REVENUE FOR THE TWO ASSESSMENT YE ARS 2000- 01 AND 2005-06. THE ASSESSMENT FOR THE ASSESSMENT YEAR 2000- 01 WAS COMPLETED U/S.143(3) READ WITH SEC.147 AND F OR THE ASSESSMENT YEAR 2005-06 IT WAS COMPLETED U/S.143(3) OF THE I.T. ACT, 1961. THESE CROSS APPEALS ARE DIRECTED AGAINS T THE ORDERS OF THE COMMISSIONER OF INCOME-TAX (APPEALS)-III AT CHE NNAI DATED 24.2.2009 AND 25.2.2009. 2. THE ASSESSEE-COMPANY IS ENGAGED IN THE BUSINESS O F MANUFACTURING TWO WHEELERS. IN THE COURSE OF ASSES SMENT PROCEEDINGS CERTAIN DISALLOWANCES AND ADDITIONS WER E MADE. IN FIRST APPEALS, THE COMMISSIONER OF INCOME-TAX (APPE ALS) GRANTED CERTAIN MODIFICATIONS TO THE ASSESSEE-COMPANY. THE ASSESSEE IS AGGRIEVED BY THE DISALLOWANCES AND ADDITIONS SUSTAI NED BY THE COMMISSIONER OF INCOME-TAX (APPEALS) AND THE REVENU E IS AGGRIEVED BY THE RELIEF GRANTED BY THE COMMISSIONER OF INCOME- TAX (APPEALS). THEREFORE, THESE CROSS APPEALS BEFO RE US. ITA 697, 757, 976 & 1017/09 :- 3 -: 3. FIRST WE WILL CONSIDER THE APPEAL OF THE ASSESSEE F ILED FOR THE ASSESSMENT YEAR 2000-01 IN I.T.A.NO.697/MDS/2009. 3.(I) THE FIRST ISSUE RAISED BY THE ASSESSEE IN TH IS APPEAL IS AGAINST THE INCLUSION OF SCRAP SALES IN THE TOTAL T URNOVER OF THE ASSESSEE-COMPANY FOR THE PURPOSE OF COMPUTING THE D EDUCTION CLAIMED UNDER SEC.80HHC OF THE ACT. THE HONBLE SU PREME COURT IN THE CASE OF CIT V. K. RAVINDRANATHAN NAIR (295 ITR 228) HAD CONSIDERED THE ISSUE OF VARIOUS SEGMENTS TO BE CONSIDERED WHILE COMPUTING THE EXPORT TURNOVER AND TOTAL TURNO VER IN THE CONTEXT OF DEDUCTION PROVIDED UNDER SEC.80HHC TO TH E EXPORTERS. THE COURT HAS HELD THAT SCRAP SALES AND LABOUR CHAR GES HAVE NO NEXUS WITH THE EXPORT BUSINESS CARRIED ON BY AN ASS ESSEE AND THEREFORE, THOSE RECEIPTS COULD NOT FORM PART OF TH E BUSINESS PROFITS. RELYING ON THE ABOVE JUDGMENT OF THE HON BLE SUPREME COURT, THE CHENNAI TRIBUNAL HAS HELD IN ASSESSEES OWN CASE FOR THE ASSESSMENT YEAR 2003-04 THAT SCRAP SALES AND LA BOUR CHARGES HAVE TO BE INCLUDED IN THE TOTAL TURNOVER, THROUGH THEIR ORDER DATED 22.5.2008 PASSED IN I.T.A.NO.792 AND 89 3/MDS/2007. IN THE LIGHT OF THE ABOVE SETTLED DECISION, WE HOLD THAT THE COMMISSIONER OF INCOME-TAX (APPEALS) IS JUSTIFIED I N CONFIRMING ITA 697, 757, 976 & 1017/09 :- 4 -: THE INCLUSION OF SCRAP SALES IN THE TOTAL TURNOVER OF THE ASSESSEE FOR THE PURPOSE OF COMPUTING DEDUCTION UNDER SEC.80 HHC. THIS ISSUE IS DECIDED AGAINST THE ASSESSEE. 3.(II) THE NEXT ISSUE RAISED BY THE ASSESSEE IS AG AINST THE INCLUSION OF 90% OF INTEREST INCOME, CUTTER-RE-SHAR PENING CHARGES AND EXPORT INCENTIVES FROM THE BUSINESS PROFITS OF THE ASSESSEE WHILE COMPUTING THE ELIGIBLE INCOME FOR DEDUCTION U NDER SEC.80HHC. THIS ISSUE ALSO WAS CONSIDERED BY THE T RIBUNAL IN ASSESSEES OWN CASE FOR THE ASSESSMENT YEAR 2003-04 IN THE REFERENCE GIVEN IN PARAGRAPH ABOVE AND HELD AGAINST THE ASSESSEE. FOLLOWING THE SAID ORDER OF THE TRIBUNAL , WE HOLD THAT THE IMPUGNED ASSESSMENT YEAR 2000-01 AS WELL THAT T HE LOWER AUTHORITIES HAVE RIGHTLY EXCLUDED SIMILAR INCOME FR OM THE BUSINESS PROFITS. THIS ISSUE IS ALSO DECIDED AGAINST THE ASS ESSEE-COMPANY. 3.(III) THE APPEAL FILED BY THE ASSESSEE FOR THE A SSESSMENT YEAR 2000-01 IS LIABLE TO BE DISMISSED. 4. NEXT WE WILL CONSIDER THE CROSS APPEAL FIL ED BY THE REVENUE FOR THE ASSESSMENT YEAR 2000-01 IN I.T.A.NO.976/MDS/2009. ITA 697, 757, 976 & 1017/09 :- 5 -: 4.(I) THE FIRST GROUND RAISED BY THE REVENUE IS TH AT THE COMMISSIONER OF INCOME-TAX (APPEALS) HAS ERRED IN T REATING THE REPLACEMENT COST OF DIES AND MOULDS AS REVENUE EXPE NDITURE AGAINST THE FINDING OF THE ASSESSING OFFICER THAT T HE REPLACEMENT EXPENSES WERE IN THE NATURE OF CAPITAL EXPENDITURE. 4.(II) THIS ISSUE WAS CONSIDERED BY CHENNAI TRIBUN AL IN ASSESSEES OWN CASE FOR THE ASSESSMENT YEAR 2003-04 THROUGH THEIR ORDER DATED 22.5.2008. THE TRIBUNAL HELD THA T DIES AND MOULDS CANNOT BE CLASSIFIED AS PLANT AND MACHINERY BECAUSE THEY THEMSELVES CANNOT BE EMPLOYED INDEPENDENTLY IN A MANUFACTURING PROCESS. SUCH DIES AND MOULDS ARE NO RMALLY ATTACHED TO MACHINERIES TO SUIT THE INDIVIDUAL REQU IREMENT OF A PARTICULAR PRODUCT. RELYING ON THE JUDGMENT OF THE HONBLE KARNATAKA HIGH COURT IN THE CASE OF MYSORE SPUN CON CRETE PIPE PVT. LTD. (194 ITR 159), THE TRIBUNAL HELD THAT THE COMMISSIONER OF INCOME-TAX (APPEALS) IS JUSTIFIED IN GIVING DIRE CTION TO ALLOW REPLACEMENT OF DIES AND MOULD AS DEDUCTION IN THE N ATURE OF REVENUE EXPENDITURE. THIS GROUND OF THE REVENUE IS REJECTED. 4.(III) THE SECOND GROUND RAISED BY THE REVENUE IS AGAINST THE ORDER OF COMMISSIONER OF INCOME-TAX (APPEALS) G RANTING ITA 697, 757, 976 & 1017/09 :- 6 -: 100% DEPRECIATION ON CIVIL WORKS CONNECTED WITH REV ERSE OSMOSIS PLANT AND CEILING AND PARTITION WORKS. THIS ISSUE ALSO WAS CONSIDERED BY THE CHENNAI BENCH IN THE CASE OF THE ASSESSEE FOR THE ASSESSMENT YEAR 2003-04 AS REFERRED IN THE ABOV E PARAGRAPH AND HAS HELD THAT THE ASSESSEE WAS ENTITLED FOR 100 % DEPRECIATION ON THESE ITEMS. 4.(IV) THE REVERSE OSMOSIS PLANT ERECTED BY THE AS SESSEE- COMPANY IS FOR THE PURPOSE OF TREATING EFFLUENTS DI SCHARGED BY THE ASSESSEE-COMPANY IN ITS MANUFACTURING PROCESS. THE PROCESS OF EFFLUENT TREATMENT HAS DIFFERENT STAGES OF FACILITI ES. THERE HAS TO BE EQUALISATION PROCESS WHEREIN EFFLUENT ARE COLLEC TED IN THE TANK TO MAKE CONCENTRATION OF THE LIQUID UNIFORM TO FEED INTO THE REACTION TANK. ONCE IT IS FED SO, THE REACTION TAN K CONVERTS THE IMPURITIES INTO SOLID STATE. THIS IS ACHIEVED THRO UGH PRECIPITATION PROCESS. THEREAFTER PRECIPITATES NEED TO BE PHYSIC ALLY SEPARATED THROUGH COAGULATION AND CLARIFICATION TO GET CLEAR WATER. THEREAFTER, THE SOLID PRECIPITATES ARE THICKENED FU RTHER FOR PRESSING IN FILTER PRESS THROUGH A STAGE KNOWN AS THICKENER. THEREAFTER, THE TREATED WATER IS STORED IN THE TANK. ALL THESE FAC ILITIES NEED A LARGER AMOUNT OF CIVIL WORKS LIKE CONSTRUCTION OF L ARGE UNDERGROUND ITA 697, 757, 976 & 1017/09 :- 7 -: CONCRETE TANKS ATTACHING PUMP BEDS, PANEL BEDS, FIL TER UNIT BEDS TO HOLD THE MOTOR AND PUMP IN A STURDY AND SECURE P OSITION. ALL THE ABOVE CIVIL STRUCTURES ARE FUNCTIONALLY INTEGRA L PART OF RO PLANT ERECTED BY THE ASSESSEE-COMPANY. OBVIOUSLY, IN ANY PROCESS OF RO PLANT, WATER HAS TO BE STORED IN SEPARATE TANKS BEFORE AND AFTER THE TREATMENT. IF THE VOLUME OF TREATMENT IS SMALL, SUCH TANKS COULD BE MADE UP OF PLASTICS, STEEL WITH ANTI CORROSIVE COATING, POLY PROPOLENE MATERIALS ETC. BUT IF THE CAPACITY OF THE TANK IS LARGE, IT IS NECESSARY TO ERECT UNDERGROUND TANKS SO THAT THEY CAN WITHSTAND THE PRESSURE. THE CEMENT CONCRE TE TANKS ARE GIVEN LINING WITH ACID PROOF TILES TO PREVENT DAMAG E OF THE CONCRETE BECAUSE OF THE PRESENCE OF CHEMICALS IN TH E FLUID. THEREFORE, EVEN THOUGH BY NATURE A MAJOR PORTION O F RO PLANT IS RELATING TO CIVIL STRUCTURES, IT DOES NOT CEASE TO BE AN EFFLUENT TREATMENT SYSTEM. IT IS IN THIS PERSPECTIVE THAT T HE TRIBUNAL HAS ALREADY HELD THE VIEW THAT THE ASSESSEE IS ENTITLED FOR 100% DEPRECIATION AS IN EFFECT WHAT HAS BEEN ERECTED BY THE ASSESSEE- COMPANY IS AN EFFLUENT TREATMENT PLANT IN THE NATUR E OF REVERSE OSMOSIS PLANT. ACCORDINGLY, WE CONFIRM THE ORDER OF THE COMMISSIONER OF INCOME-TAX (APPEALS) ON THIS POINT. THIS GROUND ALSO FAILS. ITA 697, 757, 976 & 1017/09 :- 8 -: 4.(V) THE APPEAL FILED BY THE REVENUE FOR THE ASSE SSMENT YEAR 2000-01 IS LIABLE TO BE DISMISSED. 5. NEXT WE WILL CONSIDER THE APPEAL FILED BY THE ASSESSEE-COMPANY FOR THE ASSESSMENT YEAR 2005-06 IN I.T.A.NO.757/MDS/2009. 5.(I) THE FIRST ISSUE RAISED BY THE ASSESSEE-COMPA NY IS THAT THE COMMISSIONER OF INCOME-TAX (APPEALS) HAS ERRED IN CONFIRMING THE ORDER OF THE ASSESSING AUTHORITY IN DISALLOWING THE ASEAN PROJECT EXPENSES INCURRED IN THE PREVIOUS YEA R RELEVANT TO THE IMPUGNED ASSESSMENT YEAR. 5.(II) THE ASSESSEE-COMPANY HAD INCURRED CERTAIN EXPENDITURE FOR ASSISTING AND PROVIDING SERVICES TO PT TVS MOTOR COMPANY, INDONESIA. THE SAID INDONESIAN COMPANY IS A SUBSIDIARY OF THE ASSESSEE. THE SAID SUBSIDIARY IS ENGAGED IN A PROJECT OF DEVELOPING MOTORCYCLES, COMPATIBLE TO TH E INDONESIAN REQUIREMENTS. THE CONTRIBUTION MADE BY THE ASSESSE E-COMPANY WAS TO PROVIDE ASSISTANCE IN DEVELOPING THE SAID IN DONESIAN PROJECT BY DEPLOYING ASSESSEES STAFF, OBTAINING TH E AID OF EXTERNAL ITA 697, 757, 976 & 1017/09 :- 9 -: AGENCIES AND PROVIDING IN-HOUSE AND OUTSIDE CONSULT ANCY SERVICES. 5.(III) THE EXPENDITURE INCURRED BY THE ASSESSEE-C OMPANY FOR THE ABOVE PURPOSES RELATED TO THE PREVIOUS YEAR S 2004-05, 2005-06 AND 2006-07. THE ASSESSEE ACCOUNTED THESE EXPENDITURE UNDER THE HEAD EXPENDITURE PENDING ALL OCATION. WHILE THE INDONESIAN PROJECT WAS IN PROGRESS, THE E XPENSES WERE DEBITED IN THE ABOVE ACCOUNT OF THE ASSESSEE-COMPAN Y, ULTIMATELY, FOR THE PURPOSE OF TRANSFERRING THE SAM E TO THE INDONESIAN COMPANY ONCE THE PROJECT WAS COMPLETED A ND PUT ON STREAM. 5.(IV) THE ASSESSEE INCURRED THE ABOVE EXPENDITUR E FOR THE SAID THREE PREVIOUS YEAR PERIOD AS FOLLOWS : (I) FINANCIAL YEAR 2004-05 ` 5,00,31,849/- (II) FINANCIAL YEAR 2005-06 ` 16,14,13,328/- (III) FINANCIAL YEAR 2006-07 ` 15,73,34,099/- TOTAL ` 36,87,79,276/- 5.(V) AS AGAINST THE ABOVE EXPENDITURE INCURRED BY THE ASSESSEE-COMPANY FOR THE PERIOD RELEVANT TO THE ASS ESSMENT YEARS 2005-06, 2006-07 AND 2007-08, A DEBIT NOTE WA S RAISED AGAINST THE INDONESIAN SUBSIDIARY IN THE PREVIOUS Y EAR 2006-07 ITA 697, 757, 976 & 1017/09 :- 10 - : RELEVANT TO THE ASSESSMENT YEAR 2007-08. THE TOTAL AMOUNT RAISED BY THE ASSESSEE-COMPANY WAS ` 39,70,06,142/- WITH A MARK UP AGAINST THE DUE AMOUNT OF ` 36,87,79,276/-. 5.(VI) THIS AMOUNT OF ` 39,70,06,142/- RECOVERED BY THE ASSESSEE FROM ITS INDONESIAN SUBSIDIARY HAS BEEN OF FERED AS INCOME FOR TAXATION IN ITS RETURN FILED FOR THE ASS ESSMENT YEAR 2007-08. 5.(VII) IT IS IN THE ABOVE FACTUAL BACKGROUND THAT THE DISPUTE AROSE AND THE ASSESSEE HAS RAISED THE GROUND THAT T HE LOWER AUTHORITIES HAVE ERRED IN DISALLOWING THE CLAIM OF EXPENDITURE INCURRED BY THE ASSESSEE-COMPANY TOWARDS PROJECT SE T UP BY ITS INDONESIAN SUBSIDIARY. 5.(VIII) IN THE COURSE OF THREE PREVIOUS YEAR PERIO D, WHEN THE EXPENDITURE WERE INCURRED BY THE ASSESSEE-COMPANY, THOSE EXPENDITURE WERE DEBITED IN THE ACCOUNTS OF THE ASS ESSEE- COMPANY UNDER THE HEAD EXPENDITURE PENDING ALLOCAT ION. THIS EXPENDITURE INCURRED BY THE ASSESSEE WAS CARRIED FO RWARD FROM YEAR TO YEAR TILL THE PREVIOUS YEAR 2006-07, IN WHI CH THE INDONESIAN PROJECT WAS COMPLETED. THE ASSESSEE DID NOT CLAIM THE AMOUNT AS EXPENDITURE AT THE POINT OF INCIDENCE . THE ALLOCATION FINALLY TOOK PLACE IN THE PREVIOUS YEAR 2006-07 RELEVANT ITA 697, 757, 976 & 1017/09 :- 11 - : TO THE ASSESSMENT YEAR 2007-08, WHEN THE ASSESSEE-C OMPANY RECOVERED THE MARK UP AMOUNT OF ` 39,70,06,142/- AS AGAINST THE INCURRED EXPENDITURE OF ` 36,87,79,276/-. THE REAL CHARACTER OF THE AMOUNT SPENT BY THE ASSESSEE-COMPANY IN ITS IND ONESIAN PROJECT WAS DETERMINED BY THE ASSESSEE-COMPANY AT T HAT POINT OF TIME. THIS IS PROVED BY THE FACT THAT THE ASSESSEE HAS TREATED THE RECOVERED AMOUNT OF ` 39,70,06,142/- FROM THE INDONESIAN COMPANY AS ITS INCOME AND OFFERED FOR TAXATION FOR THE ASSESSMENT YEAR 2007-08. WHEN THE ASSESSEE HAS OFF ERED THE RECOVERED AMOUNT AS ITS INCOME, IT IS QUITE RIGHTFU L IN ITS PART TO CLAIM THE EARLIER EXPENDITURE AS DEDUCTIONS IN COMP UTING THE INCOME ARISING OUT THE AMOUNT RECOVERED FROM INDONE SIAN SUBSIDIARY. THE ASSESSEE THOUGHT IT FIT TO CLAIM S UCH EXPENDITURE ASSESSMENT YEAR-WISE RATHER THAN CLAIMING FULL DED UCTION IN THE ASSESSMENT YEAR 2007-08 WHEN THE ENTIRE RECOVERED A MOUNT WAS OFFERED AS INCOME THE AMOUNT CLAIMED BY THE ASSESS EE BY WAY OF EXPENDITURE FOR THE ASSESSMENT YEAR 2005-06 IS ` 5,00,31,489/- THE ACTUAL AMOUNT SPENT BY THE ASSESSEE-COMPANY IN THE RELEVANT PREVIOUS YEAR. THIS HAS BEEN DISALLOWED BY THE ASS ESSING AUTHORITY AND CONFIRMED BY THE COMMISSIONER OF INCO ME-TAX (APPEALS). WHEN THE ASSESSEE-COMPANY WAS INCURRING THE ITA 697, 757, 976 & 1017/09 :- 12 - : EXPENDITURE TOWARDS ITS INDONESIAN PROJECT, THE REA L CHARACTER OF THE SPENDING WAS NOT DECIDED BY THE ASSESSEE-COMPAN Y. THAT IS WHY THE AMOUNTS WERE DEBITED AND KEPT UNDER THE HEA D EXPENDITURE PENDING ALLOCATION. THIS ACCOUNTING TREATMENT GIVEN BY THE ASSESSEE-COMPANY CAN BE JUSTIFIED FOR THE RE ASON THAT THE REAL CHARACTER COULD BE DECIDED ONLY WHEN THE ASSES SEE- COMPANY WAS ABLE TO RECOVER THE AMOUNTS FROM ITS IN DONESIAN SUBSIDIARY. ONCE THE RECOVERY WAS MADE NOT ONLY IN FULL BUT EVEN TO A MARK UP EXTENT, THE ASSESSEE-COMPANY ULTIMATEL Y DECIDED TO DECLARE ITS NATURE AS EXPENDITURE AND CORRESPONDING LY OFFERED THE AMOUNTS RECOVERED FROM THE INDONESIAN COMPANY AS IN COME. 5.(IX) WE DO NOT FIND ANY ACCOUNTING OR LEGAL INFI RMITY IN THE CLAIM OF DEDUCTION MADE BY THE ASSESSEE-COMPANY IN THE ABOVE BACKGROUND. WHEN THE ASSESSEE HAS OFFERED THE ENTI RE AMOUNT RECOVERED FROM ITS INDONESIAN SUBSIDIARY AS INCOME FOR THE ASSESSMENT YEAR 2007-08, NOTHING CAN PREVENT THE AS SESSEE FROM CLAIMING THE CORRESPONDING EXPENDITURE AS DEDU CTION IN COMPUTING ITS TAXABLE INCOME. THE ASSESSEES CLAIM IS IN ACCORDANCE WITH THE MATCHING PRINCIPLE OF ACCOUNTAN CY. THE REVENUE CANNOT INSIST THAT THE ASSESSEE HAD EARNED THE INCOME OF ` 39,70,06,142/- WITHOUT INCURRING ANY EXPENDITURE. THE ITA 697, 757, 976 & 1017/09 :- 13 - : REVENUE CANNOT HAVE A CASE THAT THE AMOUNT RECOVERE D BY THE ASSESSEE-COMPANY IN THE PREVIOUS YEAR 2006-07 AND O FFERED AS INCOME FOR THE ASSESSMENT YEAR 2007-08 WAS WINDFAL L. 5.(X) THEREFORE, WE FIND NO REASON OR RHYME TO REF USE THE LEGITIMATE CLAIM OF DEDUCTION MADE BY THE ASSESSEE- COMPANY. 5.(XI) NOW ACADEMICALLY SPEAKING THE ASSESSEE-COMP ANY HAD TWO ALTERNATIVES. FIRST ONE IS THE METHOD ADOP TED BY THE ASSESSEE-COMPANY. IT OFFERED THE ENTIRE RECOVERY A S INCOME FOR THE ASSESSMENT YEAR 2007-08 AND CLAIMED CORRESPONDI NG EXPENDITURE IN THE ASSESSMENT YEARS 2005-06, 2006- 07 AND 2007-08. THIS TREATMENT IS ON THE BASIS OF ACTUAL EXPENSES INCURRED IN THE RESPECTIVE ASSESSMENT YEAR. THE EX PENSES WERE CLAIMED EITHER ASSESSMENT YEAR WHEN THEY WERE INCUR RED; THE INCOME WAS OFFERED WHEN THE RECOVERY WAS ACTUALLY M ADE. THIS TREATMENT IS ON THE BASIS OF ACTUAL PAYMENT AND REC EIPT. THE NEXT ALTERNATIVE IS THAT THE ASSESSEE COULD SET OFF THE TOTAL EXPENDITURE OF ` 36,87,79,276/- AGAINST THE AMOUNT OF ` 39,70,06,142/- RECOVERED FROM THE INDONESIAN COMPANY AND OFFER THE BALANCE AMOUNT AS INCOME FOR THE ASSESSMENT YEAR 2007-08. BOTH METHODS ARE ACCEPTABLE IN LAW. ITA 697, 757, 976 & 1017/09 :- 14 - : 5.(XII) THE ASSESSEE HAS CHOSEN THE FIRST ALTERNAT IVE. THIS METHOD MAY BE MORE PRUDENT BECAUSE ULTIMATELY THE A SSESSEE HAS TREATED THE ENTIRE TRANSACTION IN THE NATURE OF A BUSINESS TRANSACTION OF ITS OWN BY OFFERING THE GROSS RECOVE RY AS ITS INCOME SO THAT THE CORRESPONDING EXPENDITURE ARE CLAIMED A S DEDUCTIONS IN THE YEAR IN WHICH THEY WERE ACTUALLY INCURRED. 5.(XIII) IN VIEW OF THE FACTS AND CIRCUMSTANCES AS STATED ABOVE, WE HOLD THAT THE ASSESSEE IS ENTITLED IN LAW TO CLAIM THE EXPENDITURE OF ` 5,00,31,849/- AS DEDUCTION IN COMPUTING THE TAXABLE INCOME OF THE IMPUGNED ASSESSMENT YEAR 2005 -06. THE BALANCE INSTALMENTS OF ` 16,14,13,328/- AND ` 15,73,34,099/- HAVE TO BE ALLOWED AS DEDUCTIONS IN THE ASSESSMENT YEARS 2006- 07 AND 2007-08 RESPECTIVELY. 5.(XIV) THIS ISSUE IS DECIDED IN FAVOUR OF THE ASSE SSEE AND THE ASSESSING AUTHORITY IS DIRECTED TO MODIFY THE C OMPUTATION OF INCOME ACCORDINGLY. 6. THE SECOND GROUND RAISED BY THE ASSESSEE IS AGAINST THE DISALLOWANCE MADE UNDER SEC.14A. IN THE COURSE OF ASSESSMENT PROCEEDINGS, THE ASSESSING AUTHORITY HAS DISALLOWED 2% OF THE EXPENDITURE AS PERTAINING TO EARNING OF DIVIDEND IN COME. EVEN ITA 697, 757, 976 & 1017/09 :- 15 - : THOUGH THIS DISALLOWANCE WAS RAISED BEFORE THE COMM ISSIONER OF INCOME-TAX (APPEALS) IN FIRST APPEAL, THE ISSUE WAS NOT PRESSED BEFORE HIM. BUT THE COMMISSIONER OF INCOME-TAX (AP PEALS) FOUND THAT THE DISALLOWANCE OF 2% MADE BY THE ASSESSING A UTHORITY WAS NOT CORRECT IN VIEW OF THE RULE 8D INTRODUCED SUBSE QUENTLY. THE COMMISSIONER OF INCOME-TAX (APPEALS) HELD THAT THE DISALLOWANCE SHOULD BE MADE IN ACCORDANCE WITH RULE 8D. ACCORDI NGLY, HE DIRECTED THE ASSESSING OFFICER TO ENHANCE THE QUANT UM OF DISALLOWANCE. THE HONBLE BOMBAY HIGH COURT IN THE CASE OF GODREJ & BOYCE MFG. CO. LTD. V. DCIT (234 ITR 1) HAS HELD THAT THE OPERATION OF RULE 8D IS ONLY PROSPECTIVE AND NO T RETROSPECTIVE. IN VIEW OF THAT JUDGMENT, RULE 8D DOES NOT APPLY TO THE IMPUGNED ASSESSMENT YEAR 2005-06. I.T.A.T., MUMBAI BENCH G IN THE CASE OF M/S. GODRAJ AGROVET LTD. V. ACIT (2010-TIOL -ITAT-MUM) HAS HELD THAT RULE IS PROSPECTIVE IN NATURE AND THE REFORE, CANNOT BE APPLIED IN RESPECT OF EARLIER ASSESSMENT YEARS. IN VIEW OF THE ABOVE, WE VACATE THE DIRECTION OF THE COMMISSIONER OF INCOME- TAX (APPEALS) AND CONFIRM 2% DISALLOWANCE MADE BY T HE ASSESSING AUTHORITY AND ACCORDINGLY ALLOW THIS GROU ND RAISED BY THE ASSESSEE. ITA 697, 757, 976 & 1017/09 :- 16 - : 6.(I) THE APPEAL FILED BY THE ASSESSEE FOR THE AS SESSMENT YEAR 2005-06 IS SUCCESSFUL. 7. NEXT WE WILL CONSIDER THE CROSS APPEAL OF THE REVENUE IN I.T.A.NO.1017/MDS/2009. 7.(I) THE FIRST FOUR ISSUES RAISED BY REVENUE IN T HIS APPEAL ARE AGAINST THE ORDER OF THE COMMISSIONER OF INCOME -TAX (APPEALS) GRANTING DEDUCTIONS TO THE ASSESSEE IN RE SPECT OF WORK- IN-PROGRESS UNDER SEC.35/35(2AB); REPLACEMENT OF DI ES AND MOULDS; ENTRY TAX AND 100% DEPRECIATION ON TEMPORAR Y CONSTRUCTION WORKS. 7.(II) OUT OF THE ABOVE FOUR ISSUES, THE QUESTION OF REPLACEMENT OF DIES AND MOULDS HAS ALREADY BEEN CON SIDERED BY US IN THE APPEAL FOR THE EARLIER ASSESSMENT YEAR 2 000-01 AND HAS UPHELD THE ORDER OF THE COMMISSIONER OF INCOME-TAX (APPEALS). THIS WAS DONE ON THE BASIS OF THE ORDER OF THE I.T. A.T., CHENNAI BENCH PASSED IN ASSESSEES OWN CASE FOR THE ASSESSM ENT YEAR 2003-04 THROUGH THEIR ORDER DATED 22.5.2008 IN ITA NOS.792 & 893/MDS/2007. ITA 697, 757, 976 & 1017/09 :- 17 - : 7.(III) SIMILARLY, THE OTHER THREE ISSUES OF WORK- IN-PROGRESS, ENTRY TAX AND 100% DEPRECIATION ALSO HAVE BEEN CONS IDERED BY THE I.T.A.T., CHENNAI BENCHES IN THE ABOVE ORDER AN D HELD IN FAVOUR OF THE ASSESSEE AFTER UPHOLDING THE ORDER OF THE COMMISSIONER OF INCOME-TAX (APPEALS) ON THESE ISSUE S. 7.(IV) THEREFORE, IN SHORT, WE UPHOLD THE ORDER OF THE COMMISSIONER OF INCOME-TAX (APPEALS) IN RESPECT OF THE ABOVE FOUR ITEMS AND REJECT THE GROUNDS RAISED BY THE REV ENUE. 8. THE NEXT ISSUE RAISED BY THE REVENUE IS TH AT THE COMMISSIONER OF INCOME-TAX (APPEALS) HAS ERRED IN D ELETING THE ADDITION MADE BY THE ASSESSING OFFICER TOWARDS DIFF ERENCE BETWEEN SALES TAX DEFERRAL LOAN AMOUNT AND THE SETT LEMENT MADE AGAINST THE LOAN ON NPV BASIS. 8.(I) IT IS THE CASE OF THE REVENUE THAT THE COMMI SSIONER OF INCOME-TAX (APPEALS) OUGHT TO HAVE SEEN THAT THE AS SESSEE NEITHER PAID SALES TAX COLLECTION TO THE GOVERNMENT NOR RETURNED THE AMOUNT TO THE CUSTOMERS WHEREBY THE SALES TAX C OLLECTION FORMED PART OF TRADING RECEIPTS OF THE ASSESSEE-COM PANY. ITA 697, 757, 976 & 1017/09 :- 18 - : 8.(II) THIS ISSUE HAS BEEN CONSIDERED BY THE I.T.A .T., MUMBAI BENCH E (SPECIAL BENCH) IN THE CASE OF SUL ZER INDIA LTD. V. JT. CIT THROUGH THEIR ORDER DATED 10.11.2010 IN ITA NOS.2944 & 2871/MDS/2007 REPORTED IN 6 ITR (TRIB) 604 (MUMBAI) [SB]. 8.(III) THE QUESTION RAISED BEFORE THE HONBLE SPE CIAL BENCH WAS AS FOLLOWS : WHETHER IN THE FACTS AND CIRCUMSTANCES OF THE CASE, THE REMISSION OF DEFERRED SALES TAX LIABILITY IS CHARGEABLE TO TAX AS BUSINESS INCOME OF THE ASSESSEE U/S.41(1) BEING REMISSION OF TRADING LIABILITY OR THE SAME IS EXEMPT FROM TAX AS CAPITAL RECEIPT BEING REMISSION OF LOAN LIABILITY. 8.(IV) ON GOING THROUGH THE FACTS OF THE CASE NARR ATED BY THE SPECIAL BENCH IN THE CASE OF SULZER INDIA LTD. V. J T.CIT 6 ITR (TRIB) 604 (MUMBAI), WE FIND THAT THE FACTS OF THE PRESENT CASE ARE ALSO EXACTLY SIMILAR. THE REVENUE HAS PLACED HEAVY RELIANCE BEFORE THE SPECIAL BENCH ON THE DECISION OF THE HON BLE BOMBAY HIGH COURT IN THE CASE OF SOLID CONTAINERS LTD. V. DY.CIT (178 TAXMAN 192) AND THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF COMMISSIONER OF INCOME-TAX V. T.V.SUNDA RAM IYENGAR AND SONS LTD. (222 ITR 344). THE SPECIAL B ENCH ITA 697, 757, 976 & 1017/09 :- 19 - : OBSERVED THAT THE HONBLE SUPREME COURT IN THE CASE OF T.V.SUNDARAM IYENGAR AND SONS LTD. (222 ITR 344) WA S EXAMINING THE NATURE OF CERTAIN UNPAID DEPOSITS AVA ILABLE IN THE HANDS OF THE ASSESSEE. IN THAT CASE CERTAIN DEPOSI TS WERE RECEIVED FROM REGULAR CUSTOMERS ALONG WITH TRADING ORDERS PLACED BY THEM WITH THE ASSESSEE WHICH WERE NOT CLAIMED BY THE CUSTOMERS AND WERE FINALLY WRITTEN BACK TO THE PROF IT AND LOSS ACCOUNT OF THE ASSESSEE. IN THE SET OF THOSE FACTS , THE HONBLE SUPREME COURT HELD THAT SINCE THE DEPOSITS REPRESEN TED TRADE ADVANCE PAYMENTS WHICH WERE ADJUSTED AGAINST FUTURE TRADE TRANSACTIONS, ANY SURPLUS ON SUCH ACCOUNT MUST BE R EGARDED AS A TRADE SURPLUS AND ASSESSABLE AS INCOME. THIS DECIS ION WAS APPLIED BY THE HONBLE BOMBAY HIGH COURT IN THE CAS E OF SOLID CONTAINERS LTD. V. DY.CIT (178 TAXMAN 192). AS IN THAT CASE ALSO, THE QUESTION WAS WITH REFERENCE TO A LOAN AVA ILED BY THE ASSESSEE FOR TRADING PURPOSES WHICH WAS PRESENTLY P AYABLE. THEREFORE, THE SPECIAL BENCH HELD THAT THOSE DECISI ONS DO NOT GOVERN THE PRESENT ISSUE CONSIDERED BY THEM. 8.(V) IN THAT CASE, THE SPECIAL BENCH FOUND THAT T HE LOAN HAS BEEN UTILIZED FOR CAPITAL PURPOSES, NAMELY, FOR FIXED CAPITAL ITA 697, 757, 976 & 1017/09 :- 20 - : INVESTMENT FOR SETTING UP A UNIT IN BACKWARD AREA. THE SPECIAL BENCH ALSO RELIED ON THE DECISION OF THE I.T.A.T., COCHIN BENCH IN THE CASE OF ACCELERATED FREEZ & DRYING CO. LTD. (31 SOT 442) WHERE IT HAS BEEN HELD THAT THE LOAN AVAILED IN CAP ITAL ACCOUNT CANNOT BE TREATED AS INCOME IN THE HANDS OF THE ASS ESSEE ON ITS REMISSION. THE BENCH HAD HELD THAT THERE IS NO EVI DENCE TO SHOW THAT IN SIMILAR CASES THERE HAS BEEN ANY REMISSION OR CESSATION OF LIABILITY BY THE STATE BANK OF INDIA. THE SPECIAL BENCH THEREFORE, HELD THAT ONE OF THE REQUIREMENTS SPELT OUT IN SEC. 41(1)(A) HAS NOT BEEN FULFILLED IN THE FACTS OF THAT CASE. 8.(VI) IN VIEW OF THE ABOVE SPECIAL BENCH DECISION , THE CLAIM OF THE REVENUE IS NOT SUSTAINABLE UNDER SEC.41(1) O F THE ACT. 8.(VII) THE SPECIAL BENCH HAS ALSO APPROVED THE DE CISION OF THE I.T.A.T., COCHIN BENCH IN THE CASE OF ACCELERAT ED FREEZ & DRYING CO. LTD. (31 SOT 442) DEALING WITH SEC.28(IV ). IN THE SAID CASE, THE COCHIN TRIBUNAL HELD AS UNDER : IT IS A TRITE LAW THAT THE NOMENCLATURE GIVEN BY A N ASSESSEE TO A PARTICULAR ACCOUNT IN ITS BOOKS OF ACCOUNT IS NOT THE SOLE TEST TO DECIDE THE REAL CHARACTER OF THAT ACCOUNT. THEREFORE, THE FACT THA T THE ITA 697, 757, 976 & 1017/09 :- 21 - : ASSESSEE HAD CREDITED THE LOAN WAIVER AMOUNT IN ITS GENERAL RESERVE ACCOUNT WOULD NOT INFLUENCE THE PROCESS OF DETERMINING THE EXACT NATURE OF THE ISSU E. SECTION 28(IV) SEEKS TO CHARGE THE VALUE OF ANY BENEFIT OR PERQUISITE, WHETHER CONVERTIBLE INTO MON EY OR NOT, ARISING FROM BUSINESS OR THE EXERCISE OF A PROFESSION, AS PROFITS AND GAINS OF BUSINESS OR PROFESSION. THEREFORE, WHAT IS TO BE EXAMINED IS WHETHER THE WAIVER OF LOAN WOULD AMOUNT TO A PERQUISITE SO AS TO BE TAXABLE, AS SUCH, UNDER SECT ION 28. THE BOMBAY HIGH COURT IN THE CASE OF MAHINDRA & MAHINDRA LTD. V. COMMISSIONER OF INCOME-TAX [2003] 261 ITR 501/128 TAXMAN 394, HAS EXPLAINED THAT SECTION 28(IV) SEEKS TO CHARGE THE VALUE OF AN Y BENEFIT OR PERQUISITE, MEANING THEREBY THAT THE BEN EFIT MUST BE IN KIND; THE COURT FURTHER HELD THAT WAIVER OF LOAN IS IN RESPECT OF MONEY TRANSACTION AND, THEREFORE, WOULD NOT BE IN NATURE OF ANY BENEFIT OR PERQUISITE AS CONSTRUED IN SECTION 28(IV). 8.(VIII) IN VIEW OF THE ABOVE FINDING OF THE SPECI AL BENCH IN THE CASE OF SULZER INDIA LTD., WE HOLD THAT THE REM ISSION OF SALES DEFERRAL PAYMENTS WOULD NOT BE IN THE NATURE OF INC OME EITHER UNDER SEC.41(1) OR UNDER SEC.28(IV). ITA 697, 757, 976 & 1017/09 :- 22 - : 8.(IX) THEREFORE, WE UPHOLD THE ORDER OF THE COM MISSIONER OF INCOME-TAX (APPEALS) ON THIS POINT. THIS ISSUE IS DECIDED AGAINST THE REVENUE. 9. THE NEXT ISSUE RAISED BY THE REVENUE IS AGAINST THE DECISION OF THE COMMISSIONER OF INCOME-TAX (APPEALS ) IN DELETING THE DISALLOWANCE MADE BY THE ASSESSING OFFICER IN R ESPECT OF PROCESSING FEE PAID TO NON-RESIDENTS, SETTING ASIDE THE DISALLOWANCE OF CONSULTANCY PAYMENT AND REMANDING T HE MATTER BACK TO THE ASSESSING OFFICER FOR EXAMINATION. 9.(I) IT IS THE CASE OF THE REVENUE THAT THE DISAL LOWANCE MADE BY THE ASSESSING OFFICER IN RESPECT OF PAYMENT S MADE TO REGIONAL CAPITAL PVT. LTD., SINGAPORE AND ASIA PAC IFIC PLC, UK SHOULD HAVE BEEN CONFIRMED. THE REVENUE ARGUES TH AT THE DISALLOWANCE OF ` 9,53,00,671/- WAS RIGHTLY MADE BY THE ASSESSING AUTHORITY AGAINST THE EXPORT AGENCY COMMI SSION FOR NON DEDUCTION OF TAX AS REQUIRED UNDER SEC.40(A)(I). 9.(II) THIS IS THE SAME ARGUMENT WITH REFERENCE TO THE PAYMENT OF ` 1,71,40,266/-. ITA 697, 757, 976 & 1017/09 :- 23 - : 9.(III) ON THE QUESTION OF DISALLOWANCE UNDER SEC. 40(A)(I), THE REVENUE HAS RELIED ON THE JUDGMENT OF THE HONB LE SUPREME COURT IN THE CASE OF TRANSMISSION CORPORATION OF AP LTD. V. CIT (239 ITR 587). 9.(IV) THE THREE AMOUNTS RAISED BY THE REVENUE IN ITS GROUNDS HAVE BEEN DISALLOWED BY THE ASSESSING AUTHO RITY UNDER SEC.40(A)(I) FOR NON DEDUCTION OF TAX AT SOURCE. T HOSE PAYMENTS RELATED TO EXPORT AGENCY COMMISSION AND CONSULTANCY PAYMENT. 9.(V) IN CIRCULAR NO.786 DATED 7.2.2000, THE CENTR AL BOARD OF DIRECT TAXES HAS DELIBERATED ON THE ISSUE OF DED UCTION OF TAX IN RESPECT OF EXPORT COMMISSION PAYABLE TO NON-RESIDEN T AGENT FOR SERVICES RENDERED ABROAD. AFTER EXAMINING THE SCHEM E OF SEC.195, THE BOARD HAS CLARIFIED THAT NO TAX IS DED UCTIBLE UNDER SEC.195 AND CONSEQUENTLY THE EXPENDITURE ON EXPORT COMMISSION AND OTHER RELATED CHARGES PAYABLE TO A NON-RESIDENT FOR SERVICES RENDERED OUTSIDE INDIA BECOMES AN ALLOWABLE EXPENDI TURE. 9.(VI) IN RESPECT OF OTHER ITEMS MADE BY THE ASSES SEE AS CONSULTANCY FEE ETC., THE PAYMENTS WERE MADE TO RES IDENTS OF SINGAPORE AND U.K. INDIA IS HAVING DTAA WITH BOTH OF THE ITA 697, 757, 976 & 1017/09 :- 24 - : COUNTRIES. AS PER THE TERMS OF DTAAS THE PAYMENTS MADE WOULD BE TREATED AS FEES FOR TECHNICAL KNOW-HOW AVAILABLE TO THE RESIDENT IN INDIA. THE COMMISSIONER OF INCOME-TAX (APPEALS) HAS CLEARLY EXPLAINED IN HIS ORDER THAT SUCH SERVICES H AVE NOT BEEN RENDERED BY THE NON-RESIDENT TO THE ASSESSEE IN IND IA. THEREFORE, THOSE PAYMENTS DO NOT PERTAKE THE CHARACTER OF FEES FOR TECHNICAL SERVICES. 9.(VII) WHEN SUCH PAYMENTS THUS FOUND NOT LIABLE T O TAXATION IN INDIA OR WHERE SUCH PAYMENTS DO NOT CONTAIN WHOL LY OR PARTLY ANY TAXABLE INCOME, NO DEDUCTION OF TAX AT SOURCE I S CALLED FOR. 9.(VIII) THIS ISSUE HAS BEEN RECENTLY SETTLED BY TH E HONBLE SUPREME COURT IN THE CASE OF GE INDIA TECHNOLOGY CE NTRE P. LTD. V. CIT (327 ITR 456). THE COURT EXAMINED THE EXPRE SSION CHARGEABLE UNDER THE PROVISIONS OF THE ACT. THE COURT HELD THAT THE EXPRESSION CHARGEABLE UNDER THE PROVISIONS OF THE ACT IN SEC.195(1) SHOWS THAT THE REMITTANCE HAS GOT TO BE OF A TRADING RECEIPT, THE WHOLE OR PART OF WHICH IS LIABLE TO TA X IN INDIA. IF THE TAX IS NOT SO ASSESSABLE, THERE IS NO QUESTION OF T AX AT SOURCE BEING DEDUCTED. THE HONBLE SUPREME COURT HAS EXPL AINED THE RATIO OF ITS EARLIER DECISION IN THE CASE OF TRANSM ISSION ITA 697, 757, 976 & 1017/09 :- 25 - : CORPORATION OF A.P. LTD. V. COMMISSIONER OF INCOME- TAX (239 ITR 587) THAT THE SAID DECISION DOES NOT IMPOSE A BLANK ET RESPONSIBILITY TO APPROACH THE ASSESSING OFFICER U NDER SEC.195(2) IN RESPECT OF EVERY PAYMENTS REMITTED OUTSIDE INDIA WITHOUT EXAMINING THE CHARACTER OF THE PAYMENTS. THE COURT IN ITS EARLIER DECISION WHAT WAS HELD IS THAT THE ASSESSING OFFICE R HAS TO BE APPROACHED UNDER SEC.195(2), TO DECIDE THE CORRECT AMOUNT OF DEDUCTION WHERE TAX IS DEDUCTIBLE AND NOT TO INVOKE SEC.195(2) INDISCRIMINATELY WITHOUT BOTHERING AND LOOKING INTO WHETHER THE PAYMENTS CONTAINED ELEMENT OF INCOME OR NOT. 9.(IX) IN VIEW OF THE FACTS AND LAW STATED ABOVE, WE FIND THAT THE DECISION ARRIVED AT BY THE COMMISSIONER OF INCO ME-TAX (APPEALS) ON ALL THE ABOVE ISSUES ARE JUST, PROPER AND SUSTAINABLE IN LAW. 9.(X) THESE ISSUES ARE ACCORDINGLY, DECIDED AGAINS T THE REVENUE. 9.(XI) THE APPEAL FILED BY THE REVENUE FOR THE ASS ESSMENT YEAR 2005-06 IS LIABLE TO BE DISMISSED. ITA 697, 757, 976 & 1017/09 :- 26 - : 10. IN RESULT, THE APPEAL FILED BY THE ASSESSEE FO R THE ASSESSMENT YEAR 2000-01 IS DISMISSED AND THE APPEAL FILED BY THE ASSESSEE FOR THE ASSESSMENT YEAR 2005-06 IS ALLOWED . THE APPEALS FILED BY THE REVENUE FOR THE ASSESSMENT YEA R 2000-01 AND 2005-06 ARE DISMISSED. ORDER PRONOUNCED ON WEDNESDAY, THE 22 ND OF DECEMBER, 2010. SD/- SD/- (HARI OM MARATHA) JUDICIAL MEMBER ( DR.O.K.NARAYANAN) VICE-PRESIDENT CHENNAI : 22 ND DEC.,2010 MPO* COPY TO: 1. APPELLANT 2. RESPONDENT 3. CIT(A) 4. CIT 5. DR