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2020 (11) TMI 63 - AT - Income TaxInstallation of an ERP package - Nature of expenses - revenue or capital expenses - HELD THAT - As during the previous year under consideration, the assessee recognized an expenditure in its profit and loss account. The said amount pertained towards an unsuccessful attempt to install an ERP package called SCALA. The said package failed to meet the requirements of the assessee and hence the project had to be abandoned midway. The expenditure incurred on said package was recognized in profit and loss account and was claimed as a revenue deduction u/s. 37(1) of the Act. That being so, we decline to interfere in the order of ld CIT(A), his order on this issue is hereby accepted and the grounds of appeal raised by the Revenue is dismissed. Disallowance of commission - main point to be satisfied is Rendering of service - CIT(A) deleted the addition - HELD THAT - During the course of assessment proceedings, the appellant duly furnished all the details of commission expense alongwith documentary evidence. Further, the Ld. AO also verified the transactions by issuing notice u/s. 133(6) of the Act against which he received positive confirmation from the agents regarding the transactions. Hence, the disallowance made by the Ld. AO is on mere surmise and conjecture and the order of Ld. CIT(A) in deleting the said addition is to be sustained. Accordingly, we dismiss the ground raised by the Revenue. Computation of MAT u/s 115JB - Addition on account of Provision for Doubtful Debt - computation sheet of book profit u/s. 115JB - AO was of the view that the above provisions as well as Interest u/s. 234C of the Act are required to be added back to the book profit as per Explanation below second proviso to section 115JB - HELD THAT - We have gone through the order of ld CIT(A), it is a speaking order in respect of provision for doubtful debts/bad debts both under normal provision and section 115JB of the Act. Therefore, the reasoned order passed by the ld CIT(A) does not require any interference. That being so, we decline to interfere with the order of ld. C.I T.(A) in deleting the aforesaid additions. His order on these additions are, therefore, upheld and the grounds of appeal of the Revenue are dismissed. Computation of MAT u/s 115JB - Addition towards delayed payment of gratuity and leave encashment - HELD THAT - AO added back provision for gratuity and leave encashment to the book profits of the assessee stating that provision for liability is to be added back while computing book profit - CIT(A) held that in computation of book profit only provision for unascertained liability is required to be added back. Provision for gratuity and leave encashment, being ascertained liabilities are not required to be added back to book profits u/s. 115JB of the Act. CIT(A) relied on the judgment of Bharat Earth Movers vs CIT 2000 (8) TMI 4 - SUPREME COURT , therefore we do not find any infirmity in the order of ld CIT(A).That being so, we decline to interfere with the order of C.I T.(A) in deleting the aforesaid additions. His order on these additions are, therefore, upheld and the grounds of appeal of the Revenue are dismissed. TP adjustment on account of payment of Royalty by considering the payment of Royalty by the assessee @ 4.53% of the net sales - HELD THAT - Liability for payment of R D Cess is that of the assessee and the same should not be covered within the contractual payment of royalty or as income of the foreign company. Tribunal in the case of Kirloskar Ebara Pumps Ltd. 2009 (7) TMI 862 - ITAT, PUNE held that since research and development cess liability is payable by the assessee who imports technology no adjustment in the same can be made in the computation of arm's length price for royalty. Therefore, as the amount of cess could not be considered as an income for the foreign company, it should accordingly not be considered while computing the amount of royalty paid to the foreign company by the assessee. Considering the facts narrated above and the case law applicable to the facts we note that order of the CIT(A) does not require any interference. That being so, we decline to interfere with the order of ld. C.I T.(A) in deleting the aforesaid additions. His order on these additions are, therefore, upheld and the grounds of appeal of the Revenue are dismissed.
Issues Involved:
1. Expenditure for installation of an ERP package. 2. Addition on account of commission. 3. Addition on account of Provision for Doubtful Debt. 4. Addition on account of delayed payment of gratuity and leave encashment. 5. Transfer Pricing adjustment on account of payment of Royalty. 6. Consideration of R&D Cess in the computation of Royalty. Detailed Analysis: 1. Expenditure for Installation of an ERP Package: The Assessing Officer (AO) classified software expenses of ?28,18,250/- as capital expenditure, allowing depreciation at 60%. The Commissioner of Income Tax (Appeals) [CIT(A)] deleted the addition, noting the ERP package was abandoned midway, thus not providing enduring benefits. The CIT(A) relied on the jurisdictional High Court's rulings in Binani Cement Ltd. and Graphite India Limited, which allow such expenditure as revenue expenditure if it does not result in a capital asset. The Tribunal upheld the CIT(A)'s decision, agreeing that the expenses should be treated as revenue expenditure since the ERP package was not installed and provided no enduring benefit. 2. Addition on Account of Commission: The AO disallowed ?1,67,60,563/- in commission expenses, questioning the rendering of services by agents. The CIT(A) deleted the addition, noting that the agents confirmed the transactions and services rendered. The CIT(A) also observed that similar disallowances in earlier years were reversed by the High Court. The Tribunal agreed with the CIT(A), highlighting that the AO did not dispute the transactions' genuineness and had accepted similar expenses in subsequent years. The Tribunal emphasized that the commercial expediency of such expenses should be judged from the businessman's perspective. 3. Addition on Account of Provision for Doubtful Debt: The AO added back ?30,46,678/- to the book profit under section 115JB, treating it as a provision for doubtful debts. The CIT(A) deleted the addition, noting that the amount was actually written off as bad debt, thus allowable under section 36(1)(vii). The Tribunal upheld the CIT(A)'s decision, referencing the Supreme Court's ruling in T.R.F Ltd., which allows bad debt deductions if written off in the books. 4. Addition on Account of Delayed Payment of Gratuity and Leave Encashment: The AO added back provisions for gratuity and leave encashment to the book profit under section 115JB. The CIT(A) deleted the additions, classifying them as ascertained liabilities based on actuarial valuation, supported by the Supreme Court's rulings in Bharat Earth Movers and Metal Box Company. The Tribunal upheld the CIT(A)'s decision, agreeing that such provisions are ascertained liabilities and should not be added back to book profits. 5. Transfer Pricing Adjustment on Account of Payment of Royalty: The AO made a transfer pricing adjustment of ?12,21,683/- on royalty payments, considering the effective rate of 4.74% including R&D Cess. The CIT(A) deleted the adjustment, noting that R&D Cess is a liability of the Indian company and should not be included in the royalty rate. The Tribunal upheld the CIT(A)'s decision, agreeing that the effective royalty rate of 4.53% falls within the arm's length range and should not include R&D Cess. 6. Consideration of R&D Cess in the Computation of Royalty: The AO included R&D Cess in the royalty computation, resulting in a higher effective rate. The CIT(A) excluded R&D Cess, noting it is a liability of the Indian company, not the foreign entity. The Tribunal upheld this view, referencing the Pune Tribunal's ruling in Kirloskar Ebara Pumps Ltd., which excludes R&D Cess from royalty computations for transfer pricing purposes. Conclusion: The Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s decisions on all grounds, including the treatment of ERP expenses as revenue expenditure, allowance of commission expenses, exclusion of bad debt provisions from book profit, and correct computation of royalty payments excluding R&D Cess.
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