2012 (8) TMI 421 - AT - Income Tax

Income deemed to accrue or arise in India - TDS u/s.195 of the Act DTAA agreement - expenditure on advertisements - assessee remitted the amount towards expenses to the advertising agencies of Russia through its parent company NPS which is a resident of Switzerland Held that - Entire advertisement activity had been carried out outside India. There are no facts brought on record that NPS has a PE in India. Considering above facts and also the fact that there is a DTAA agreement between India and Switzerland and also between India and Russia, the said amount remitted by the assessee towards advertisements even if assessable could be assessed as business profits as per section 9 of the Act but having regard to the fact that these non-resident companies i.e. recipients and/or advertising companies have no PE in India - amount could not be taxed in India under section 5(2) of the Act - assessee has not committed any default in not deducting TDS u/s.195 on the amount remitted by it to NPS in respect of advertisement campaign launched in Russia. Whether the expenditure incurred on TV films and commercial and other promotional films is capital in nature or not Held that - Onus lies on the assessee to prove that the expenditure has been incurred wholly and exclusively for the purposes of its business. It is observed that said expenditure has been incurred by NPS and paid by assessee on the basis of invoices raised - no document has been brought on record that the said expenditure was incurred by NPS at the instance of the assessee wholly and exclusively for the purposes of assessee s business - expenditure cannot be allowed to have been incurred by the assessee for the purposes of its business unless assessee proves that expenditure was incurred in connection with assessee s business with some documentary evidences matter restored to the file of the AO to decide afresh with the liberty to assessee to place such document Disallowance on account of repairs to buildings - renovation of R&D Centre - Assessing Officer did not accept the contention of assessee that expenditure represents expenses of revenue nature such as civil modifications, ceiling repairs, electrical modification, partitions, etc Held that - If the advantage consists merely in facilitating the assessee s trading operations or enabling the management and conduct of the assessee s business to be carried on more efficiently or more profitability while leaving the fixed capital untouched, the expenditure would be on revenue account, even though the advantage may endure for an indefinite future - expenditure incurred by assessee under the head repairs is on the existing assets by renovating the buildings and is revenue in nature disallowance deleted Disallowance of deduction under section 80 HHC of the Act - assessee has not brought in sales proceeds of an amount of Rs. 1,19,06,264 within the extended period which was granted to the assessee and same is to be reduced from export turnover as per clause (b) of Explanation to Section (4C) of Section 80HHC of the Act., while computing the deduction to be allowed under section 80HHC of the Act - direct cost in respect of which goods which have been exported but the sales proceeds have not been brought in India in specified period, should be reduced while computing the deduction u/s.80HHC of the Act addition confirmed In favor of revenue

Summary

Issues Involved:
1. Disallowance of advertisement and publicity expenses under section 40(a)(i).
2. Disallowance of repair expenses treated as capital expenditure.
3. Computation of deduction under section 80HHC.
4. Exclusion of excise duty and sales tax from total turnover for 80HHC deduction.

Detailed Analysis:

1. Disallowance of Advertisement and Publicity Expenses under Section 40(a)(i):
The assessee disputed the disallowance of Rs. 1,57,18,000 for advertisement and publicity expenses incurred in Russia. The Assessing Officer (AO) disallowed the expenses on the grounds that the assessee did not deduct TDS under section 195 before making the remittance to Novartis Pharma Services Inc. (NPS), and the expenditure was capital in nature. The CIT(A) upheld the AO's decision, stating that the expenses were unrelated to the assessee's business and were capital in nature.

Upon appeal, the Tribunal noted that the entire advertisement activity was carried out outside India, and there was no Permanent Establishment (PE) of NPS in India. Therefore, the remittance could not be taxed in India under section 5(2) of the Act. The Tribunal also referenced the Supreme Court decision in GE India Technology Centre (P.) Ltd. v. CIT, which held that TDS is required only if the remittance is taxable in India. Consequently, section 40(a)(i) did not apply, and the authorities were not justified in denying the claim under this section. However, the Tribunal found that there was insufficient evidence to prove that the expenditure was incurred wholly and exclusively for the assessee's business and remanded the matter back to the AO for fresh consideration.

2. Disallowance of Repair Expenses Treated as Capital Expenditure:
The assessee incurred Rs. 37,28,000 on repairs, out of which Rs. 33,05,000 was disallowed by the AO as capital expenditure. The AO argued that the expenses were for major renovations and not for preserving an existing asset. The CIT(A) upheld the AO's decision for Rs. 33,05,000 but allowed Rs. 3,37,000 as revenue expenditure under section 35.

The Tribunal, however, found that the repairs were to improve the condition of the buildings and did not bring any new asset into existence. Citing the Supreme Court decision in Empire Jute Co. Ltd. v. CIT, the Tribunal held that the expenditure was revenue in nature and deleted the disallowance of Rs. 33,05,000.

3. Computation of Deduction under Section 80HHC:
a. Net vs. Gross Receipts for R&D Services:
The department contended that the CIT(A) erred in directing the AO to reduce net receipts instead of gross receipts for R&D services in computing eligible profits for section 80HHC deduction. The Tribunal, referencing the Supreme Court decision in ACG Associated Capsules (P.) Ltd. v. CIT, remanded the issue back to the AO to compute the deduction considering net receipts.

b. Adjustment of Loss on Export of Manufactured Goods:
The assessee argued that the loss on the export of manufactured goods should not be adjusted against the profits of traded goods and export incentives. The Tribunal upheld the CIT(A)'s decision, referencing the Supreme Court decision in IPCA Laboratory Ltd. v. Dy. CIT, which mandates adjusting losses from both trades while computing deduction under section 80HHC.

c. Exclusion of Export Proceeds Not Received:
The department appealed against the CIT(A)'s decision to reduce Rs. 78,99,236 from direct costs for computing section 80HHC deduction. The Tribunal ruled that direct costs should not be reduced for export proceeds not realized within the specified period and confirmed the AO's action.

4. Exclusion of Excise Duty and Sales Tax from Total Turnover for 80HHC Deduction:
The department's appeal against the CIT(A)'s direction to exclude excise duty and sales tax from total turnover for section 80HHC deduction was rejected. The Tribunal cited the Supreme Court decision in CIT v. Lakshmi Machine Works, which supports the exclusion of these amounts from total turnover.

Conclusion:
The Tribunal allowed the assessee's appeals in part for the assessment years 1998-99 and 1999-2000, remanding certain issues back to the AO for fresh consideration. The department's appeal for the assessment year 1998-99 was allowed in part, while the appeal for 1999-2000 was rejected.