2013 (5) TMI 729 - AT - Income Tax

Commission income disallowed - Held that - While the assessee is agitating deduction of the whole amount of the commission paid to the agents the revenue is agitating that commission is not deductible in computing the total income at all. These grounds stand covered by order for assessment year 1998-99 wherein held that the assessee is entitled to deduct the full amount of commission paid to the agents in computing its total income. In favour of assessee. Computation of deduction u/s 80HHC - whether miscellaneous income be included in in the total turn over for computation of the deduction - Held that - From the submissions of assessee it is obvious that no part of this income represents export turn over. Therefore there is no question of including any part thereof in the total turn over as in the case of income arising on account of fluctuation in the rate of foreign exchange. Further total turn over can only mean the receipts by way of sale of goods. Therefore the composition of income is required to be examined by the AO for including only that part of the income in the total turn over which represents consideration received for sale of goods. Accordingly this matter is restored to the file of AO for taking fresh decision after hearing the assessee. Receipt of service charges - Held that - As submitted by assessee that the amount represents after sale service charges received from the customers to whom the goods are sold. However the details of this income also are not available and thus the aforesaid submission has to be verified by the AO - matter is restored to the file of AO for taking fresh decision. Receipt of interest from customers on account of late payment - Held that - As the same is in the nature of sale proceeds. Therefore CIT(A) rightly included this amount in the total turn over. Interest on security deposit with the Government interest on I.T. refund and interest on housing loan given to the employees - Held that - Obviously these receipts do not include any element of turn over. Therefore these amounts have to be excluded from the total turn over. Deduction u/s 80HHC on DEPB benefits - Held that - The decision of CIT Vs. Kalpatru Colours and Chemicals (2010 (6) TMI 63 - BOMBAY HIGH COURT) came up for discussion wherein held that the whole of the amount received on transfer of license amounts to profit and not the difference between sale consideration and the face value of the licence. The rival parties submitted that the matter may be remitted to the AO for fresh decision after considering this decision of Hon ble Bombay High Court thus remitted. Treatment given to the interest received from bank on fixed deposits for computing deduction u/s 80HHC - CIT(A) held that the interest is taxable under the head income from other sources excluding 90% from the profits of the business for computing deduction - Held that - the order of the Assessing Officer merged with the order of learned CIT(A) which was arrived at after following the due process of law namely issuance of notice of enhancement to the assessee thereby giving him a reasonable opportunity of being heard. The assessee could not explain as to how the income was to be treated as business income. No error in the order of CIT(A). Royalty expenses - Fees paid to foreign technician - Research and development expenses - new model development expenses - revenue v/s capital - Held that - This ground stands settled in favour of the assessee in its own case for assessment year 1980-81 2008 (4) TMI 273 - DELHI HIGH COURT treating it as revenue expenditure. Excise duty whether excluded from the total turn over for the purpose of computing deduction u/s 80HHC - Held that - Ground has to be decided against the revenue in view of the decision of CIT Vs. Lakshmi Machine Works (2007 (4) TMI 202 - SUPREME Court) wherein held that the excise duty and the sales tax do not form part of the total turn over u/s 80HHC(3) otherwise the formula becomes unworkable. Sales tax and excise duty do not have any element of turn over which is the position even in the case of rent commission interest etc. Training expenditure - revenue v/s capital - Held that - The expenditure is in the revenue field which enhances the capacity of the employees leading to improvement of the productivity and profits. The expenditure has been incurred from year to year and the ratio of the expenditure to the turn over has been decreasing from year to year. Accordingly it is held that the expenditure is in the nature of training expenditure deductible in computing the income. ISO-9001 expenses - Held that - The issue stands covered by the decision of Climate Systems India (P) Limited Vs. ACIT 2009 (12) TMI 699 - ITAT DELHI in which it has been held that the expenditure is revenue in nature. 5-S and safety expenses - Held that - 5-S stands for sorting systematic arrangement keeping environment spic and span standardization and self-discipline. These expenses are obviously in the nature of training expenses. The other expenses are also in the nature of training expenses of the staff and refilling of fire extinguisher printing of banners awareness of safety and audit fees for ensuring compliance of safety standards. These expenses are also training expenses in nature. Therefore all these expenses are deductible in full.

Summary

Issues Involved:
1. Deduction of commission paid to agents.
2. Computation of deduction under Section 80HHC.
3. Deduction under Section 80HHC on DEPB benefits.
4. Treatment of interest received from bank on fixed deposits.
5. Classification of royalty expenses and foreign technicians' fees.
6. Classification of research and development expenses.
7. Exclusion of excise duty from total turnover.
8. Classification of Total Productivity Maintenance (TPM) and ISO-9001 certification expenses.

Issue-wise Detailed Analysis:

1. Deduction of Commission Paid to Agents:
- 1998-99: The assessee appealed against the restriction of commission deduction to 4.5%, while the revenue contested any deduction. The Tribunal followed its earlier decision allowing full deduction, stating the commission varied between 4-5%, was at arm's length, and genuine.
- 2004-05: Similar grounds were raised, and the Tribunal allowed the full deduction of commission following the precedent set in 1998-99.
- 2005-06, 2006-07, 2007-08: The Tribunal consistently followed its earlier decision, allowing full deduction of commission.

2. Computation of Deduction under Section 80HHC:
- 2004-05: The assessee received various incomes (interest, service charges, miscellaneous income) and disputed their inclusion in total turnover. The Tribunal remitted the matter to the Assessing Officer for fresh adjudication to determine the nature of the income.
- Interest from late payments: Included in total turnover as it is in the nature of sale proceeds.
- Interest on security deposits, IT refunds, and housing loans: Excluded from total turnover as they do not represent turnover.

3. Deduction under Section 80HHC on DEPB Benefits:
- 2004-05: The Tribunal remitted the issue to the Assessing Officer to segregate the DEPB benefits used for self-consumption and those sold, following the Bombay High Court decision in Kalpatru Colours and Chemicals.

4. Treatment of Interest Received from Bank on Fixed Deposits:
- 2004-05: The Tribunal upheld the CIT(A)'s decision that interest income from fixed deposits is taxable under "income from other sources" and 90% of this income should be excluded from business profits for Section 80HHC deduction, following the Delhi High Court decision in Sriram Honda Power Equipment.

5. Classification of Royalty Expenses and Foreign Technicians' Fees:
- 2004-05, 2005-06: The Tribunal followed the High Court's decision, treating these expenses as revenue in nature.
- 2006-07: Consistent with earlier years, the Tribunal treated these expenses as revenue.

6. Classification of Research and Development Expenses:
- 2004-05, 2005-06: The Tribunal followed its earlier decision, treating R&D expenses as revenue in nature.
- 2006-07: Consistent with earlier years, the Tribunal treated these expenses as revenue.

7. Exclusion of Excise Duty from Total Turnover:
- 2004-05: The Tribunal followed the Supreme Court decision in Lakshmi Machine Works, excluding excise duty from total turnover for Section 80HHC deduction.

8. Classification of TPM and ISO-9001 Certification Expenses:
- 2005-06: The Tribunal treated TPM expenses as revenue, incurred to improve productivity levels, and ISO-9001 expenses as revenue, following the Delhi Tribunal's decision in Climate Systems India (P) Ltd.
- 2006-07, 2007-08: Consistent with earlier years, the Tribunal treated these expenses as revenue.

Judgment Summary:
- 1998-99: Assessee's appeal allowed, revenue's appeal dismissed.
- 2004-05: Assessee's appeal partly allowed for statistical purposes, revenue's appeal dismissed.
- 2005-06: Assessee's appeal allowed, revenue's appeal dismissed.
- 2006-07: Assessee's appeal allowed, revenue's appeal dismissed.
- 2007-08: Assessee's appeal allowed, revenue's appeal dismissed.

Pronouncement: The order was pronounced in the open court on 31.05.2011.