2020 (5) TMI 401 - AT - Income Tax

Disallowance being staff welfare expenses - Allowable business expenses - HELD THAT - We find that the assessee has incurred this expenditure under staff welfare expense on account of purchase of washing machine for director and umbrellas given to selected staff. Hence, this expenditure is in the name of gifts, which cannot be allowed as business expenses. We further observe that the Tribunal also confirmed such disallowance in the assessment year 2001-02 2009 (8) TMI 1255 - ITAT AHMEDABAD in the case of the assessee. In view of these facts, this ground of appeal is dismissed. Disallowance of sale promotion expenses - AO observed that the assessee has debited sale promotion expenses which inter-alia included expenditure on gift to foreign clients, organizer diary etc. claimed to have been incurred to develop the relationship with them accordingly disallowed 1/5th of the same also confirmed by CIT (A) - HELD THAT - Assessee submitted that such expenditure has been incurred for the purpose of business hence, same is allowable as deduction. Further, the issue is covered in favour of the assessee by order of Tribunal 2009 (8) TMI 1255 - ITAT AHMEDABAD . We find that the AO has disallowed the same on estimate basis without any justification. Hence, same are directed to be allowed. This ground of appeal is therefore, allowed. Characterization of receipt - transfer of technical know-how and for undertaking non-compete obligation - capital receipt or not? - HELD THAT - We find that the issue is now squarely covered in favour of the assessee by the judgement of Hon ble Jurisdictional High Court of Gujarat in the assessee s own case 2014 (4) TMI 168 - GUJARAT HIGH COURT wherein after considering the decision of Hon ble Supreme Court in the case of Guffic Chem (P.) Ltd. v. CIT 2011 (3) TMI 6 - SUPREME COURT which held that non-compete fees received for from refraining from carrying on business was capital receipt and non-compete fees received prior to 01.04.2003 was not taxable under section 28(va) of the Act and CIT v. Sapthagiri Distilleries Ltd. 2014 (11) TMI 1078 - SUPREME COURT it was held that compensation amount received towards loss of source of income and non-competition fees would only be treated as capital receipt and was not liable to tax, held in favour of the assessee. Assessee has received non-compete fees for non-compete obligation resulting in loss of source of income and further more non-compete fees is chargeable under section 28(va) from assessment year 2003-04 and not for assessment year under appeal, therefore, the non-compete fees in question amounts to receipt of capital in nature, not chargeable to tax for assessment year under consideration - Decided in favour of assessee. Non granting deduction u/s 80HHC on receipts by way of non-compete fees and on the receipts on transfer of technical know-how treated as royalty and assessed the income from business - HELD THAT - Since, we have allowed the appeal of the assessee in respect of Ground No. 5 6 of non-compete fees. As capital receipt as per judgement of Hon ble High Court. Therefore, the claim of deduction under section 80HHC becomes academic in nature and infructuous, hence, same is not being adjudicated hence, it is treated as dismissed. Deduction u/s 80-O on receipts treated as non-compete fees and assessed as business income purely on technical ground - revised certificate in Form No. 10HA is not filed - HELD THAT - Since, we have allowed the appeal of the assessee in respect of non-compete fees. As capital receipt as per judgement of Hon ble High Court. Therefore, the claim of deduction under section 80HHC becomes academic in nature and infructuous, hence, same is not being adjudicated hence, it is treated as dismissed. Not considering interest income as income from business for computing deduction under section 80HHC - HELD THAT - We find that the issue under consideration is squarely covered by the decision of full bench of Hon ble Rajasthan High Court in the case of Reliance Trading Corporation v. ITO 2015 (5) TMI 689 - RAJASTHAN HIGH COURT as against assessee. Non considering insurance claim received and miscellaneous income as income from business for the purpose of computing deduction under section 80HHC - HELD THAT - Insurance claim and misc. income have been received against business loss, hence, such receipt is not income derived from export business. However, an amount of ₹ 54,316 was received against damage, which is covered in favour of the assessee by the decision of Co-ordinate Bench of Tribunal in the case of the assessee in 2009 (8) TMI 1255 - ITAT AHMEDABAD . Hence, same is allowed. Thus, this ground of appeal is therefore, partly allowed. Not to exclude the amount of DEPB Credit from the profits eligible for deduction under section 80HHC - as per AO though the same has no direct nexus with the export activity of the assessee - HELD THAT - We have already decided this issue in favour of the assessee in a separate judgment in Topman Exports v. CIT 2012 (2) TMI 100 - SUPREME COURT and we have held that not the entire amount received by the assessee on sale of DEPB, but the sale value less the face value of the DEPB will represent profit on transfer of DEPB by the assessee. The first issue is, therefore, decided accordingly. Therefore, respectfully following same we do not find any infirmity in the order of CIT (A), accordingly, same is upheld. Accordingly, this additional ground of appeal of the Revenue is therefore, dismissed. Payments of PF and ESIC - Whether payment made before filing of return of income are eligible for deduction without considering the fact that the due date in the respective Acts for said payment is 15th and 21st of every months? - HELD THAT - We find that this ground of appeal was also come before us in A.Y. 2002-03 in the case of the assessee, wherein we have allowed the Revenue appeal, by following decision of Hon ble Gujarat High Court in the case of CIT v. Gujarat State Road Transport Corporation 2014 (1) TMI 502 - GUJARAT HIGH COURT . Therefore, following same, this ground of appeal is allowed in favour of the Revenue. Disallowance u/s 40A(2)(b) - payment made to related party for purchase of material was excessive as compared to other party - CIT (A) has deleted this ground by observing that the assessee has purchased the material for related parties at arm s length price and no excessive payment has been made and considering the business exigency - HELD THAT - AO has not brought on record any such facts. In view of this, we do not find any infirmity in the order of CIT (A), accordingly, it is upheld. This ground of appeal is dismissed. Profits eligible for deduction under section 80HHC - HELD THAT -Where interest income was received on investments, while interest paid on borrowings pertained to business expenditure, not 90 percent of gross interest , but 90 percent of net interest was to be reduced for computing section 80HHC deduction See GUJARAT NARMADA VALLEY FERTILIZERS CO. LTD. 2015 (1) TMI 1024 - GUJARAT HIGH COURT . For the purpose of computation of deduction under section 80HHC of manufacture and exporter of steel utensils, proceeds generated from sale of scrap would not be included in total turnover . Excise duty and sales would not be included in the total turnover while calculating the deduction under section 80HHC - HELD THAT - Issue is covered in favour of the assessee by the decision of Hon ble Supreme Court in the case of CIT vs. Laxmi Machine Works 2007 (4) TMI 202 - SUPREME COURT and also by the decision of Tribunal in assessee s case 2009 (8) TMI 1255 - ITAT AHMEDABAD Deduction under section 80-O disallowed - rendering of the commercial service and receiving commission in foreign exchange - HELD THAT - We note that the assessee has rendered technical service from India and are received in India from the foreign company in convertible foreign exchange. Hence, the rendering of the commercial service and receiving commission in foreign exchange by the assessee would entitle the assessee to the benefit of section 80-O. Foreign exchange earned is foreign exchange saved. The CBDT Circular No. 700 dated March 23, 1995 clarified section 80-O by stating that as long as the technical and professional services arc rendered from India and are received by the foreign Government or enterprise outside India, deduction under section 80-O of the Act would be available to the person rendering the service, even if the foreign recipient of the service utilizes the benefit of such services in India. In view of above facts, we are of the considered opinion that the assessee is entitled to claim of deduction under section 80-O of the Act. Accordingly, this ground is allowed.

Summary

Issues Involved:
1. Disallowance of staff welfare expenses.
2. Disallowance of sales promotion expenses.
3. Treatment of receipts from transfer of technical know-how and non-compete fees.
4. Deduction under section 80HHC on various receipts.
5. Deduction under section 80-O.
6. Validity of reopening assessment under section 147.
7. Disallowance of foreign travel expenses.
8. Disallowance of petrol and diesel expenses.
9. Treatment of interest income for deduction under section 80HHC.
10. Treatment of insurance claims and miscellaneous income for deduction under section 80HHC.
11. Treatment of DEPB credits for deduction under section 80HHC.
12. Disallowance of audit expenses.
13. Disallowance of telephone expenses.
14. Disallowance under section 40A(2)(b).
15. Inclusion of excise duty and sales tax in total turnover for deduction under section 80HHC.
16. Treatment of exchange rate difference and sale of scrap for deduction under section 80HHC.
17. Validity of reopening assessment based on change of opinion.

Detailed Analysis:

1. Disallowance of Staff Welfare Expenses:
The Tribunal confirmed the disallowance of ?29,242 for staff welfare expenses, as the expenditure was for gifts like washing machines and umbrellas, which were not considered business expenses.

2. Disallowance of Sales Promotion Expenses:
The Tribunal allowed the appeal regarding the disallowance of ?45,215 for sales promotion expenses, as the AO disallowed the expenses on an estimated basis without justification. The expenditure was incurred for business purposes, such as gifts to foreign clients and organizer diaries.

3. Treatment of Receipts from Transfer of Technical Know-how and Non-compete Fees:
The Tribunal held that the non-compete fees of ?14,55,41,760 received by the assessee were capital receipts and not taxable under section 28(va) for the assessment year under consideration. This decision was based on the judgment of the Hon'ble Gujarat High Court and the Supreme Court's decision in Guffic Chem (P.) Ltd. v. CIT.

4. Deduction under Section 80HHC on Various Receipts:
- Non-compete Fees: Since the non-compete fees were treated as capital receipts, the claim for deduction under section 80HHC became academic and was dismissed.
- Technical Know-how Receipts: The Tribunal dismissed the claim for deduction under section 80HHC on receipts from the transfer of technical know-how as the issue became academic due to the treatment of non-compete fees as capital receipts.
- Interest Income: The Tribunal upheld the exclusion of interest income from the profits eligible for deduction under section 80HHC, as the interest was earned from surplus funds kept with the bank and had no direct nexus with the manufacturing activity.
- Insurance Claims and Miscellaneous Income: The Tribunal allowed the claim for insurance claims received against business loss but excluded other miscellaneous income as it was not derived from export business.
- DEPB Credits: The Tribunal upheld the CIT (A)'s decision to grant deduction under section 80HHC without excluding DEPB credits, following the Supreme Court's decision in ACG Associated Capsules Pvt. Ltd. v. CIT.

5. Deduction under Section 80-O:
The Tribunal allowed the appeal for deduction under section 80-O, holding that the assessee was entitled to the deduction as the technical services were rendered from India and received by a foreign enterprise outside India, even if utilized in India. This was based on CBDT Circular No. 700 and the Delhi High Court's decision in CIT v. Inchcape India P. Ltd.

6. Validity of Reopening Assessment under Section 147:
The Tribunal upheld the CIT (A)'s decision that the reopening of assessment was not valid as it was based on a change of opinion. The original assessment had already considered the non-compete fees as revenue receipts, and reopening on the same facts was not permissible.

7. Disallowance of Foreign Travel Expenses:
The Tribunal upheld the CIT (A)'s decision to delete the disallowance of foreign travel expenses, as the AO had made the disallowance on an ad-hoc basis without any concrete evidence that the expenses were not for business purposes.

8. Disallowance of Petrol and Diesel Expenses:
The Tribunal upheld the CIT (A)'s decision to delete the disallowance of petrol and diesel expenses, as there cannot be any personal use of vehicles in the case of a limited company.

9. Treatment of Interest Income for Deduction under Section 80HHC:
The Tribunal upheld the exclusion of interest income from the profits eligible for deduction under section 80HHC, following the decision of the Rajasthan High Court in Reliance Trading Corporation v. ITO.

10. Treatment of Insurance Claims and Miscellaneous Income for Deduction under Section 80HHC:
The Tribunal allowed the claim for insurance claims received against business loss but excluded other miscellaneous income as it was not derived from export business.

11. Treatment of DEPB Credits for Deduction under Section 80HHC:
The Tribunal upheld the CIT (A)'s decision to grant deduction under section 80HHC without excluding DEPB credits, following the Supreme Court's decision in ACG Associated Capsules Pvt. Ltd. v. CIT.

12. Disallowance of Audit Expenses:
The Tribunal upheld the CIT (A)'s decision to delete the disallowance of audit expenses, as the AO had made the disallowance without any concrete findings.

13. Disallowance of Telephone Expenses:
The Tribunal upheld the CIT (A)'s decision to delete the disallowance of telephone expenses, as the assessee had already disallowed ?50,000 for personal use.

14. Disallowance under Section 40A(2)(b):
The Tribunal upheld the CIT (A)'s decision to delete the disallowance under section 40A(2)(b), as the AO had not brought any evidence to show that the payments were excessive.

15. Inclusion of Excise Duty and Sales Tax in Total Turnover for Deduction under Section 80HHC:
The Tribunal upheld the CIT (A)'s decision to exclude excise duty and sales tax from the total turnover for computing deduction under section 80HHC, following the Supreme Court's decision in CIT v. Laxmi Machine Works.

16. Treatment of Exchange Rate Difference and Sale of Scrap for Deduction under Section 80HHC:
The Tribunal upheld the CIT (A)'s decision to include exchange rate difference and sale of scrap in the profits eligible for deduction under section 80HHC, following the decisions of the Gujarat High Court and the Supreme Court.

17. Validity of Reopening Assessment Based on Change of Opinion:
The Tribunal upheld the CIT (A)'s decision that the reopening of assessment was not valid as it was based on a change of opinion. The original assessment had already considered the non-compete fees as revenue receipts, and reopening on the same facts was not permissible.

Conclusion:
The appeals were partly allowed for both the assessee and the revenue, with several issues being decided in favor of the assessee and others in favor of the revenue. The Tribunal upheld the CIT (A)'s decisions on various grounds, following relevant judicial precedents and legal principles.