2016 (8) TMI 1047 - AT - Income Tax

Non treating the receipts in foreign currency from M/s. Akorn Inc. USA towards development of the products as Income from Business for the purpose of allowing deduction u/s. 10AA - Held that - In the present case the assessee has claimed deduction u/s. 10AA of the Act on receipts from M/s. Akorn Inc. USA in lieu of granting exclusive marketing rights of its new product in North Central and South America. The said receipts are not in relation to export of its products. The meaning of expression derived from has got only a limited import and therefore the expression derived from as used in section 10AA must be understood as profit directly arising from the export of goods and not incidental to the export. Thus the expression derived from would exclude receipt from sources other than actual export of article or things or services. Thus from perusal of documents on record and the expression derived from the amount of Rs. 3, 87, 57, 400/- received by the assessee from M/s. Akorn Inc. USA cannot be held to be gain or profit derived from export of its product. Therefore the assessee is not eligible to claim deduction u/s. 10AA of the Act on the aforesaid receipts. We do not find any infirmity in the well reasoned findings of Commissioner of Income Tax (Appeals) in rejecting the claim of the assessee. Disallowance of deduction u/s. 10B with reference to export invoice for want of extension letter in spite of subsequent realization of export proceeds - Held that - We observe that in the assessment year under appeal disallowance has been made for similar reasons. No material has been placed on record to show any variation in the facts. Therefore respectfully following the order of Co-ordinate Bench we accept the prayer of the assessee and direct the Assessing Officer to allow deduction u/s. 10B on the aforesaid amount of delayed export realization. Provision for leave encashment pertaining to DTA unit decided against the assessee Disallowance of contribution towards Manjari Gram Panchayat s project for supply of drinking water where employees/workers of assessee company are also staying - Held that - The present case the contribution has been made by the assessee for the benefit of its employees/workers although in the process general public would also be benefited. The Govt. is seeking contribution from various corporate houses for strengthening infrastructure facilities by creating awareness of social corporate responsibility. - Decided in favour of assessee. Capitalization of expenditure incurred on purchase of Microsoft XP and Microsoft Office 2007 software - Held that - It is an undisputed fact that the softwares acquired by the assessee would require regular up-gradation in view of fast changing technology. The Hon ble Delhi High Court in the case of Commissioner of Income Tax Vs. G.E. Capital Services Ltd. (2007 (7) TMI 185 - DELHI HIGH COURT) has held that the software which requires regular up-gradation due to technology changes cannot be said to be the software or enduring in nature. The Hon ble High Court dismissing the appeal of the Department observed that the software MS Office which is not a custom built software of the assessee requires regular up-gradation. Therefore no error is committed by the Tribunal is treating the expenditure incurred on acquiring the same as revenue expenditure. Thus in view of the facts of the case and decision of Hon ble Delhi High Court we hold that expenditure incurred by the assessee for acquiring Microsoft XP license software and Microsoft Office 2007 license software is revenue in nature. No infirmity in the findings of Commissioner of Income Tax (Appeals) in accepting the product development expenditure as revenue in nature. Exclusion of freight and insurance charges both from export turnover and total turnover while allowing deduction u/s. 10B and 10AA of the Act. Expenditure on Cost Guard day function & seminar - whether allowable expenditure u/s. 37(i) - Held that - The assessee contributed Rs. 2, 00, 000/- towards celebration of Indian Cost Guard s 31 years of service to the Nation. The intention of celebrating Cost Guard Day is to spread awareness of the service which operates with Indian Navy during external aggression and independently guards Indian cost line from intruders during peace. The business motive behind contributing the fund was the assessee has taken godowns on lease from M/s. Sovereign Pharma Pvt. Ltd. at Daman for storage of vaccines and Indian Cost Guard has its huge base at Daman. The expenditure has been incurred towards discharge of corporate social responsibility. No infirmity in the order of Commissioner of Income Tax (Appeals) in allowing the expenditure.

Summary

Issues Involved:

1. Disallowance of Product Development Expenditure.
2. Disallowance of deduction u/s. 10AA on receipts from M/s. Akorn Inc., USA.
3. Exclusion of freight and insurance from total turnover while computing deduction u/s. 10B and 10AA.
4. Disallowance of expenditure u/s. 14A.
5. Provision for leave encashment.
6. Donations to Manjari Grampanchayat.
7. Expenditure towards license fees for Microsoft software.
8. Foreign Travel expenses of employees.
9. Disallowance of PMS fees.
10. Re-classification of 'Plant and Machinery' items as 'Furniture and Fixtures'.

Detailed Analysis:

1. Disallowance of Product Development Expenditure:
The assessee claimed Product Development Expenses of Rs. 19,96,93,543/- as revenue expenditure in the revised return, which was initially capitalized in the books. The Tribunal upheld the Commissioner of Income Tax (Appeals)'s decision, stating that the nature of the expenditure (salaries, testing charges, raw materials, etc.) was revenue in nature, despite the accounting treatment in the books. Reliance was placed on precedents that accounting entries are not conclusive in determining the nature of expenditure.

2. Disallowance of deduction u/s. 10AA on receipts from M/s. Akorn Inc., USA:
The assessee received Rs. 3,87,57,400/- from M/s. Akorn Inc., USA for exclusive marketing rights and claimed it as revenue for deduction u/s. 10AA. The Tribunal found no direct nexus between the receipts and the export of products, thus disallowing the deduction. The Supreme Court's interpretation of 'derived from' being narrower than 'attributable to' was applied.

3. Exclusion of freight and insurance from total turnover while computing deduction u/s. 10B and 10AA:
The Tribunal upheld the exclusion of freight and insurance from both export turnover and total turnover for computing deductions u/s. 10B and 10AA, following the Special Bench decision in ITO Vs. Sak Soft Ltd. and the Bombay High Court's decision in Gem Plus Jewellery India Ltd.

4. Disallowance of expenditure u/s. 14A:
The Tribunal remanded the issue back to the Assessing Officer to verify if interest-bearing funds were used for investments. The decision was to be made in light of the Bombay High Court's ruling in Commissioner of Income-tax v. Reliance Utilities and Power Ltd.

5. Provision for leave encashment:
The Tribunal dismissed the assessee's appeal, following its own earlier decision and the precedents set by the Calcutta High Court in Exide Industries Ltd. and the Bombay High Court in Universal Medicare Private Limited, which ruled against the assessee.

6. Donations to Manjari Grampanchayat:
The Tribunal allowed the deduction of Rs. 15,00,000/- contributed for water supply facilities, considering it as an expenditure under corporate social responsibility, benefiting the company's employees and the general public, following its earlier decision in the assessee's own case.

7. Expenditure towards license fees for Microsoft software:
The Tribunal held that the expenditure on Microsoft XP and Office 2007 software was revenue in nature due to the necessity of regular upgrades, aligning with the Delhi High Court's decision in Commissioner of Income Tax Vs. G.E. Capital Services Ltd.

8. Foreign Travel expenses of employees:
The Tribunal upheld the capitalization of foreign travel expenses of Rs. 25,77,069/- incurred for finalizing the purchase of machinery, consistent with its earlier decisions in the assessee's own case.

9. Disallowance of PMS fees:
The Tribunal allowed the deduction of PMS fees of Rs. 75,08,253/- from capital gains, following its own decision in the assessee's earlier appeal and the precedent set in KRA Holding & Trading (P) Ltd. Vs. DCIT.

10. Re-classification of 'Plant and Machinery' items as 'Furniture and Fixtures':
The Tribunal reclassified certain assets used in the laboratory (e.g., stainless steel tables, stools) as 'Plant and Machinery' based on the functional test, following its earlier decision in the assessee's own case.

Conclusion:
The Tribunal partly allowed the assessee's appeal and dismissed the Revenue's appeal, providing detailed reasons for each issue based on legal precedents and the specific facts of the case.