2017 (5) TMI 1546 - AT - Income Tax

Development expenditure allowability - Held that - We are restoring back the issue to the file of the AO and follow the direction of the Tribunal given for the AY 2006-07. First Ground stands partly allowed. Technical services fee paid to various parties - Nature of expenditure - Held that - Expenditure was of capital nature and the assessee should be allowed depreciation, as per rules. Staff cost incurred as part of development projects - allowable revenue expenditure Interest on IT refund - decided against assessee Disallowance made u/s. 14A - Held that - matter has to be restored back to the file of AO for fresh adjudication. There is no need to cite any authority to hold that the provisions of Rule 8D of the Rules would not be applicable for the year under appeal. The AO would decide the issue after hearing the assessee Premium on redemption of debenture - Held that - The issue stands covered against the AO by the judgment delivered in the case of Madras Industrial Investment Corporation (1997 (4) TMI 5 - SUPREME Court). Expenditure on implementation of SAP ERP system - Held that - Expenditure incurred on implementation of SAP ERP systems was revenue in nature. See Raychem RPG Ltd. (2011 (7) TMI 953 - Bombay High Court) Licence fees paid to SDRC India Private Ltd - allowable revenue expenditure Consultancy charges paid in connection with transport solution group - Held that - We find that the assessee had made payment in connection with transport solution group for consultancy. The AO has not brought on record anything to prove that the assessee had acquired any IPR/tangible assets. It was plain and simple consultancy. Therefore, there was no justification for the FAA to hold that expenditure was of capital nature. Depreciation on item sold as slum sale - Held that - It is were purely consequential claim following the orders of the Tribunal for the above-mentioned two AY. We find that to give consequential effect to the order of the Tribunal, the FAA directed the AO to exclude the sale proceeds of assets from block of assets while calculating depreciation. We are of the opinion that there is no need to disturb the finding given by the FAA. GOA-5A stands dismissed.

Issues Involved:
1. Development Expenditure
2. Technical Services Fee
3. Staff Cost
4. Development Expenditure for Diesel Engines
5. Prior Period Expenses
6. Employee Welfare Expenditure
7. Provision for Warranty Cost
8. Interest on IT Refund
9. Disallowance under Section 14A
10. Euro Issue Expenses
11. Payment to Clubs
12. Premium on Redemption of Debentures
13. Old Balance
14. Provision for Liability from Labour Demands
15. Remission of Liability on Prepayment of Trade Advances
16. Special Pension Liability
17. Expenditure on SAP ERP System
18. License Fees Paid to SDRC India Private Ltd.
19. Consultancy Charges for Transport Solution Group
20. Consultancy Charges for Business Customer Center
21. Depreciation on Item Sold as Slum Sale

Detailed Analysis:

1. Development Expenditure:
The assessee's appeal regarding development expenditure of ?12.22 crores was restored back to the AO following the Tribunal's directions for AY 2006-07. Similarly, for AY 2001-02, development expenditure of ?17.93 crores and ?8.10 crores were also restored back to the AO, and the expenditure was held as capital in nature, allowing depreciation.

2. Technical Services Fee:
The fee of ?28.98 crores for technical services was deemed capital in nature, allowing depreciation as per rules, following the Tribunal's decisions for AY 2006-07 and 2007-08. For AY 2001-02, ?34.17 crores was also treated similarly.

3. Staff Cost:
Staff cost of ?8.48 crores incurred as part of development projects was deemed revenue in nature, following the Tribunal's earlier decisions. For AY 2001-02, staff cost of ?3.49 crores and ?3.89 crores was similarly treated as revenue expenditure.

4. Development Expenditure for Diesel Engines:
The expenditure of ?9.14 crores was considered capital in nature, allowing depreciation, following the Tribunal's decision for AY 2006-07.

5. Prior Period Expenses:
Expenses of ?39.56 lakhs were sent back to the AO for fresh consideration, similar to earlier years. For AY 2001-02, ?11.03 lakhs was also sent back for fresh adjudication.

6. Employee Welfare Expenditure:
?13.47 lakhs for employee welfare was decided in favor of the assessee, following the Tribunal's earlier decisions for AY 1996-97 and 1998-99. For AY 2001-02, ?12.07 lakhs was also decided in favor of the assessee.

7. Provision for Warranty Cost:
?16.02 crores was restored back to the AO for fresh decision, similar to AY 2006-07 and 2007-08. For AY 2001-02, ?7.91 crores was also restored back to the AO.

8. Interest on IT Refund:
The issue of ?1.37 crores was decided against the assessee, following the Special Bench decision in the case of Avadh Trading. For AY 2001-02, ?4.14 crores was similarly decided against the assessee.

9. Disallowance under Section 14A:
The disallowance of ?21.87 crores was restored back to the AO for fresh adjudication, excluding the applicability of Rule 8D for the year under consideration. For AY 2001-02, ?7.85 crores was also restored back to the AO.

10. Euro Issue Expenses:
The ground was dismissed as not pressed by the assessee.

11. Payment to Clubs:
?59.97 lakhs was decided against the AO, following the Tribunal's decisions for AY 1997-98 and 1998-99. For AY 2001-02, the issue was similarly decided against the AO.

12. Premium on Redemption of Debentures:
?3.36 lakhs was dismissed against the AO, following the Supreme Court judgment in the case of Madras Industrial Investment Corporation.

13. Old Balance:
?4.11 lakhs was remitted back to the AO for fresh adjudication, following earlier years' decisions.

14. Provision for Liability from Labour Demands:
?11.77 crores was decided against the AO, following the Tribunal's decision for AY 2006-07.

15. Remission of Liability on Prepayment of Trade Advances:
?4.54 crores was dismissed against the AO, following the Tribunal's decision for AY 1999-2000. For AY 2001-02, ?3.97 crores was similarly dismissed.

16. Special Pension Liability:
?2.93 crores was decided against the AO, following the Tribunal's decision for AY 1999-2000. For AY 2001-02, ?2.97 crores was similarly decided against the AO.

17. Expenditure on SAP ERP System:
?1.08 crores was decided in favor of the assessee as revenue expenditure, following the Tribunal's decision for AY 1997-98.

18. License Fees Paid to SDRC India Private Ltd.:
?1.09 crores was decided in favor of the assessee as revenue expenditure, following the ratio of Raychem RPG Ltd.

19. Consultancy Charges for Transport Solution Group:
?1.73 crores was decided in favor of the assessee as revenue expenditure, as it did not result in acquisition of any IPR or tangible asset.

20. Consultancy Charges for Business Customer Center:
The expenditure was decided in favor of the assessee, following the decision for transport solution group consultancy charges.

21. Depreciation on Item Sold as Slum Sale:
The FAA's direction to exclude the sale proceeds of assets from the block of assets while calculating depreciation was upheld.

Conclusion:
The appeals filed by the assessee for both AYs were partly allowed. The appeal of the AO for AY 2000-01 was partly allowed, while the appeal for AY 2001-02 was dismissed.

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