2006 (12) TMI 262 - AT - Income Tax

Deductions u/s 80HH - Profits of the new industrial undertakings - HELD THAT - The term derived from is narrower than the term attributable to as settled by the in the case of CIT v. Sterling Foods 1999 (4) TMI 1 - SUPREME COURT , therefore, it is only the profits of an industrial undertaking which are eligible for deduction u/s 80HH. The assessee may be engaged in multiple business activities and the profits from such activities cannot become eligible for deduction u/s 80HH merely because these are the business profits. The assessee has placed strong reliance on the decision in the case of CIT v. Bangalore Clothing Co. 2003 (1) TMI 89 - BOMBAY HIGH COURT , which, in our opinion, does not render any assistance to the cause of the assessee because that is in the context of section 80HHC where the scheme and language deployed is different as compared to section 80HH of the Act. Further, the marketing activities carried on by the assessee are independent of the activities of the industrial undertaking. Thus, the net marketing receipts i.e., gross receipts less expenses incurred/allocable to earning of such marketing receipts have been rightly excluded from the profits and gains of industrial undertaking by the learned CIT(A). Hence, we confirm the order of the learned CIT(A) on this issue. Hence, the appeal of the assessee on this ground fails and dismissed. Deduction u/s 80HHC - exclusion of marketing receipts from the profits of the business - HELD THAT - In our humble opinion, in that case the Hon ble jurisdictional High Court found that the export activities and the labour charges carried by the assessee were identical, hence, the Hon ble Court extended the deduction u/s 80HHC in a very limited manner; however the Court did not overrule the earlier decisions in the case of CIT v. Kantilal Chhotalal 2000 (7) TMI 41 - BOMBAY HIGH COURT , Ravi Ratna Exports (P.) Ltd. 2000 (7) TMI 42 - BOMBAY HIGH COURT . Thus, in our opinion, the receipts which can be eligible for deduction u/s 80HHC must have a nexus with the export. Exclusion of marketing receipts from the profits - We find that these receipts have been earned by the assessee in respect of products of foreign principal marketed by the assessee in India, therefore, these have got no connection with the export activities of the assessee, especially when no material has been brought on record to show that the assessee s exported products and these products are the same and assessee got these marketing rights only because of export of its own products. As the learned CIT(A) has directed to exclude only 90 per cent of net marketing receipts i.e., gross receipts as reduced by direct expenditure incurred by the assessee to earn the same as per clause ( baa ) of Explanation to section 80HHC, the same is liable to be upheld. We order accordingly. We further hold that such gross marketing receipts would also not form part of total turnover. Thus, the appeal of the assessee on this ground fails and dismissed. Disallowance of non-compete fees - Nature of payment - short-term advantage in marketing of Nitroglycerine formulations - HELD THAT - It is not in dispute that the information generated by M/s Lyka Labs Ltd. by investing substantial resources is connected with the marketing of the products (as mentioned in the agreement), which necessarily implies the incurrence of expenditures of revenue nature such as salaries, travelling, collection of statistical data through various Government/business associations, trade associations, etc. All these expenses are basically of revenue nature and incurred in a regular course and as such are allowable. Hence, one time payment made by the assessee company to M/s Lyka Labs Ltd. does not alter the basic nature of these expenses particularly in the context of present business environment where various activities are being outsourced and various entities undertake such activities on contract basis or on its own and sell such informations and data like any other goods which can be used by other business entities as raw material or support services to carry out it s operations or expand it s activities. To further elaborate some entities work like knowledge centres like M/s Lyka Labs Ltd. in the present case and derive revenue by selling knowledge to the other party who, in turn, by purchasing the same attains it s objective of becoming bigger faster. Thus, the information, if looked upon in an integrated manner, is no more than the facilitation of profit-earning process. In our considered view, in substance the agreement though refers to non-disclosure of information by the assessee and M/s Lyka Labs Ltd. and non-competition by M/s Lyka Labs Ltd. for specified period, payment- is for of information regarding clinical data, scientific details and valuable market information only. Further, even if some of the consideration is attributed towards non-competition, the assessee s case finds support from the decision in the case of Smartchem Technologies Ltd. 2005 (7) TMI 280 - ITAT AHMEDABAD-C wherein the Tribunal followed the decision of the case of Empire Jute. Ltd. 1980 (5) TMI 1 - SUPREME COURT in concluding that the expenditure to avoid competition was dictated by the business necessity and commercial expediency and the benefit derived out of it was directly related to enhancement of its profitability; hence, the said expenditure was of revenue nature. Thus, we are of the view that the decision of the learned CIT(A) is not correct in law and reverse the same and direct the Assessing Officer to allow the expenditure as revenue expenditure. Disallowance paid under the orders of the Company Law Board (CLB) - family dispute between the two warring groups of the family - HELD THAT - The facts brought on record clearly show, as we have mentioned in para 70 of the order that the assessee was ranking 23rd in December, 1994. Subsequently from December, 1995 to December, 1998 it was lagging somewhere between 30 to 36. In December, 1999, immediately after the settlement, its rank went up to 23 and by April, 2000, it was 19, which itself shows that the settlement has taken the assessee out of the trouble period. The contention of the learned counsel recorded vide para 68 is also relevant in this context. Assessee was approached by LIPHA, part of Merk Group and originator of bulk drug metformin for alliance but it was to be dropped because of the dispute; so also the talk with Larocare of Australia and. New Zealand for launching of skin care products. The negotiation with Alfa Wassermann was also dropped because of the disputes. These all indicate that the affairs of the company were not running well due to the disputes between the family members. Therefore, saying that the settlement is to control the assets of the company itself is oversimplification. Had these disputes not been settled, the company would not have revived well. It is not correct to say that reaching such a conclusion is out of context. Coming to the decision relied upon by the learned counsel, in the case of Dalmia Jain Co. Ltd. 1971 (7) TMI 2 - SUPREME COURT the Hon ble Supreme Court held where Iitigation expenses are incurred by the assessee for the purpose of creating, curing or completing the assessee s title to the capital, then, the expenses incurred must be considered as capital expenditure. But if the litigation expenses are incurred to protect the business of the assessee, they must be considered as a revenue expenditure. In the instant case of the assessee, the facts clearly show that the business of the assessee, due to infighting between the two groups of the family members, was in a difficult situation and the assessee lost many business opportunities for its growth. Even if the payments were to settle, this dispute but the determinate character is to protect the business as well and, therefore, this decision of the Hon ble Supreme Court supports assessee s case. Hence, the appeal of the assessee on this ground is allowed. However, we make it clear that a proportion of these business protection and development expenses would be allocated to section 80HH units and, therefore, we direct the Assessing Officer to recompute the deduction u/s 80HH as per law, after affording a reasonable opportunity of hearing to the assessee. In the result, appeal of the assessee stands allowed in part.

Summary

Issues Involved:
1. Disallowance of employer's and employees' contributions to PF/EPF/ESIC.
2. Disallowance of payment made to clubs for availing facilities.
3. Exclusion of net marketing receipts while computing profits for deduction under section 80HH.
4. Exclusion of interest while computing profits for deduction under section 80HH.
5. Allocation of expenses of independent research and development unit while computing profits for deduction under section 80HHC.
6. Reduction of 90% of marketing receipts while computing profits for deduction under section 80HHC.
7. Disallowance of payment to M/s Lyka Labs Ltd. under agreement.
8. Disallowance of payment made under the orders of the Company Law Board (CLB).

Detailed Analysis:

1. Disallowance of Employer's and Employees' Contributions to PF/EPF/ESIC:
The assessee objected to the disallowance of Rs. 3,79,876/- for employer's contribution and Rs. 4,05,635/- for employees' contribution to PF/EPF/ESIC paid beyond the grace period. The Tribunal remanded the matter to the Assessing Officer to verify if the payments were made within the grace period. If paid within the grace period, they should be allowed. For employer's contribution, if paid before the due date for filing the return, it should be allowed.

2. Disallowance of Payment Made to Clubs:
The assessee objected to the disallowance of Rs. 32,328/- paid to clubs for availing facilities. The Tribunal allowed the appeal, referencing decisions from various High Courts, including Otis Elevator Co. (India) Ltd. v. CIT, Gujarat State Export Corporation Ltd. v. CIT, and CIT v. Sundaram Industries Ltd., which justified the allowance of such claims.

3. Exclusion of Net Marketing Receipts for Deduction under Section 80HH:
The assessee objected to the exclusion of net marketing receipts while computing profits for deduction under section 80HH. The Tribunal upheld the CIT(A)'s decision to exclude the net marketing receipts, stating that the marketing activities were independent of the industrial undertaking's activities. The Tribunal confirmed that only net marketing receipts (gross receipts less expenses incurred) should be excluded from the profits of the industrial undertaking.

4. Exclusion of Interest for Deduction under Section 80HH:
The assessee did not press this ground, and hence it was dismissed as not pressed.

5. Allocation of Expenses of Independent Research and Development Unit for Deduction under Section 80HHC:
The Tribunal noted that this issue was raised before the CIT(A) but not dealt with. Therefore, the Tribunal remanded the issue back to the CIT(A) for fresh adjudication.

6. Reduction of 90% of Marketing Receipts for Deduction under Section 80HHC:
The assessee objected to the CIT(A)'s direction to reduce 90% of marketing receipts while computing profits for deduction under section 80HHC. The Tribunal upheld the CIT(A)'s decision, emphasizing that the marketing receipts were not related to export activities and should be excluded from the business profits. The Tribunal also held that such gross marketing receipts should not form part of the total turnover.

7. Disallowance of Payment to M/s Lyka Labs Ltd.:
The assessee objected to the disallowance of Rs. 6 crores paid to M/s Lyka Labs Ltd. The Tribunal allowed the appeal, reversing the CIT(A)'s decision, and directed the Assessing Officer to treat the expenditure as revenue expenditure. The Tribunal noted that the payment was made for obtaining scientific and marketing know-how, which facilitated the profit-earning process and was not for acquiring a capital asset.

8. Disallowance of Payment Made under the Orders of the CLB:
The assessee objected to the disallowance of Rs. 12.50 crores paid under the orders of the CLB. The Tribunal allowed the appeal, emphasizing that the payment was made to protect the business and ensure its smooth functioning. The Tribunal noted that the business was adversely affected by the disputes, and the settlement was necessary for the survival and growth of the company. The Tribunal directed the Assessing Officer to recompute the deduction under section 80HH, allocating a proportion of these expenses to section 80HH units.

Conclusion:
The Tribunal allowed the assessee's appeal in part, directing the Assessing Officer to verify and allow certain contributions, remanding some issues for fresh adjudication, and reversing the disallowance of payments made to M/s Lyka Labs Ltd. and under the orders of the CLB. The Tribunal upheld the CIT(A)'s decisions on the exclusion of net marketing receipts and reduction of 90% of marketing receipts for deduction under section 80HHC.