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2007 (10) TMI 322 - AT - Income TaxPayment of Commission - Services rendered by the agent - restricted allowance to 5 per cent as against 12.5 per cent - Disallowance under the provisions of s. 40A(2) or s. 92 - export sales agency agreement - collaboration agreement with GIC M/s GIC trained personnel of the assessee company in the operation and maintenance of float glass plant and also the manufacturing and marketing of float glass - Nature of Expenses - Capital Or Revenue - Expenditure incurred prior to setting up of the plant - Deduction u/s 43B - Prepayment premium paid to IDBI. Payment of Commission - Services rendered by the agent - HELD THAT - The services rendered by GGE as part of the Guardian Industries Corporation USA have already been enumerated in para 14 of this order. At pp. 81 to 91 and 190 to 224 there are several correspondences between the assessee and the various sales agents of the Guardian Group across the world. These correspondences are in the form of emails. The assessee has also placed in the paper book evidence regarding export sales in the form of invoice shipping bills etc. There are two realisation certificates of export products. In this realisation certificate issued by the bank the payment of export commission is duly reflected. In the light of the above documentary evidence on record we are of the view that there was sufficient evidence before the AO regarding services rendered by GGE for which export commission had been paid by the assessee. We therefore hold that the assessee has established that services were rendered by the agent justifying payment of commission. Restricting the disallowance to 5 per cent as against 12.5 per cent - HELD THAT - The submissions on behalf of the assessee have not been properly construed by the AO. We may also add here that once it is held that services have been rendered by the agent the quantum of commission that has to be paid is purely the discretion of the assessee and the Revenue cannot sit in judgment over the same. We therefore hold that there was no basis to restrict the Claim of commission at 5 per cent as against 12.5 per cent claimed by the assessee. Application of the Provisions of s. 40A(2) or s. 92 - HELD THAT - We do not find any evidence as to what is the fair market value of the services for which assessee paid commission. The percentage of 5 per cent agreed between the parties prior to 20th July 1993 agreement cannot be said to be the fair market value. The CIT(A) has proceeded on the basis that the same was the evidence of fair market value. Even on the question of application of s. 92 we notice that the Transfer Pricing Officer in asst. yrs. 2002-03 2003-04 and 2004-05 has accepted the percentage of commission paid by the assessee as one at arm s length price. In these circumstances we are of the view that even provisions of s. 92 were not attracted. We therefore hold that there was no justification in restricting the allowance of commission at 5 per cent by invoking provisions of s. 40A(2) or s. 92 of the Act. We therefore allow the grounds of appeal of the assessee on this issue and dismiss the grounds of appeal of the Revenue on this issue. We may also add that the Revenue has raised an issue regarding violation of provisions of r. 46A of the Rules. On this issue we find that the CIT(A) has afforded opportunity to the AO and there cannot be any complaint in this regard. The CIT(A) also has given a finding that the documents filed by the assessee were necessary to rebut the observations made by the AO against the assessee in the order of assessment. The CIT(A) has also held that the assessee was prevented by sufficient cause from placing the additional evidence during the course of assessment proceedings. Therefore the objections of the Revenue in this regard are without any basis. Nature of Expenses - Capital Or Revenue - Expenditure incurred prior to setting up of the plant - HELD THAT - We are of the view that the item of expenditure in question was admittedly incurred prior to setting up of the plant and therefore they were to be capitalized as part of plant and machinery. The fact that the payment was made during the previous year or that tax at source is deducted during the previous year will not convert the capital expenditure into the revenue expenditure. The provisions of s. 40(a)(i) are provisions enabling Revenue to make disallowance. The assessee cannot seek to rely on those provisions when the item of expenditure was admittedly capital expenditure. We however direct that the training fee be capitalized as part of plant and machinery depreciation be allowed thereon. Thus the above grounds are partly allowed. Deduction u/s 43B - Prepayment premium paid to IDBI - HELD THAT - The prepayment premium paid by the assessee to IDBI is in lieu of IDBI agreeing to reduce the rate of interest on the rupee loans aggregating to Rs. 170.76 crores. The same in other words represents upfront payment (present value) of differential rate of interest that would have been due on the loan if no restructuring of the debt had taken place. In terms of s. 36(1)(iii) r/w s. 2(28A) of the Act prepayment charges being interest paid on moneys borrowed for purposes of business are to be allowed deduction as revenue expenditure. The prepayment premium being revenue expenditure is to be allowed deduction in the year of accrual thereof since the Act does not recognize the concept of deferred revenue expenditure. The decision in the case of Overseas Sanmar Financial Ltd. vs. Jt. CIT 2001 (2) TMI 303 - ITAT MADRAS-C also supports the plea of the assessee. Besides the above s. 43B(d) also permits claiming deduction on actual payment. Even on this basis the claim of the assessee deserves to be accepted. Ground No. 3 is accordingly allowed. In the result the appeal by the assessee is partly allowed while the appeal by the Revenue is dismissed.
Issues Involved:
1. Disallowance of export commission exceeding 5%. 2. Admissibility of additional evidence under Rule 46A. 3. Deduction of training fees paid to Guardian USA. 4. Deduction of prepayment premium paid to IDBI. 5. Allowance of depreciation under Section 32. 6. Adjustment of actual cost of assets under Section 43A. Issue-wise Detailed Analysis: 1. Disallowance of Export Commission Exceeding 5%: The assessee claimed a deduction for export commission paid at 12.5% of the export sales to Guardian Glass Export Ltd. (GGE), which was disallowed by the AO, who allowed only 5%. The AO's disallowance was based on the lack of evidence of services rendered by GGE and the association with the foreign collaborator. The CIT(A) upheld the AO's decision, allowing only 5% commission, citing the inability of the assessee to justify the increase from 5% to 12.5%. The Tribunal found that the assessee had provided sufficient evidence of services rendered by GGE, including correspondence and other documentation. The Tribunal held that the quantum of commission is at the discretion of the assessee and cannot be restricted by the Revenue. The Tribunal also found no justification for invoking Sections 40A(2) or 92, as the AO did not establish that the expenditure was excessive or unreasonable. Thus, the Tribunal allowed the assessee's claim of 12.5% commission. 2. Admissibility of Additional Evidence Under Rule 46A: The Revenue objected to the CIT(A) admitting additional evidence during the appellate proceedings. The Tribunal found that the CIT(A) had afforded the AO an opportunity to comment on the additional evidence and that the CIT(A) had justified the admission of the evidence to rebut the AO's observations. Therefore, the Tribunal dismissed the Revenue's objections regarding Rule 46A. 3. Deduction of Training Fees Paid to Guardian USA: The assessee claimed a deduction for training fees paid to Guardian USA, which was incurred before the plant was set up. The AO disallowed the deduction, treating it as capital expenditure. The CIT(A) upheld the AO's decision, stating that the expenditure was incurred before the plant was operational and should be capitalized. The Tribunal agreed with the CIT(A) but directed that the training fees be capitalized as part of plant and machinery, allowing depreciation thereon. 4. Deduction of Prepayment Premium Paid to IDBI: The assessee paid a prepayment premium to IDBI for reducing the interest rate on loans and claimed it as a revenue expenditure. The AO allowed only 1/10th of the premium, treating it as deferred revenue expenditure. The Tribunal found that the prepayment premium was in the nature of interest and should be allowed as a revenue expenditure in the year of payment. The Tribunal allowed the assessee's claim in full, citing Section 43B(d) which permits deduction on actual payment. 5. Allowance of Depreciation Under Section 32: The assessee did not claim depreciation in the return but later requested its allowance. The CIT(A) did not adjudicate on this request. The Tribunal directed that depreciation be allowed, noting that depreciation had been allowed in subsequent years. 6. Adjustment of Actual Cost of Assets Under Section 43A: The assessee sought to raise an additional ground for adjusting the actual cost of assets based on exchange rate fluctuations under Section 43A. The Tribunal dismissed this additional ground as it did not arise out of the CIT(A)'s order but allowed the assessee to make this claim before the AO. Conclusion: The Tribunal partly allowed the assessee's appeal, granting the deduction of the 12.5% export commission, allowing the capitalization of training fees with depreciation, and permitting the full deduction of the prepayment premium. The Tribunal dismissed the Revenue's appeal and allowed the assessee to claim depreciation and make an additional claim before the AO regarding the adjustment of asset costs under Section 43A.
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