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2017 (4) TMI 293 - AT - Income TaxCapital expenditure or revenue expenditure - purchase of loaner and demo sets - AO treated them as capital asset against claim of the assessee as same were part of inventory - Held that - Hon ble Apex Court in the case of Empire Jute Company Limited Vs. CIT (1980 (5) TMI 1 - SUPREME Court) held that expenditure even if incurred for obtaining advantage of enduring benefit, may nonetheless, be on revenue account and the tests of enduring benefit may breakdown. It was held that if the advantage consists merely in facilitating, the assessee s trading operation or enabling the management and conduct of the assessee s business to be carried on more efficiently and more profitably while leaving the fixed capital untouched, the expenditure would be on revenue account, even though the advantage may endure for an indefinite future. In the case of the assessee, we find that admittedly loaner sets are made available to the doctors for the purpose of encouraging sale of implants and therefore, advantage to the assessee is to facilitate the trading operation of the implants. The loaner or demo sets are not instruments of earning income so as to qualify as capital asset but those are for encouraging the use of assessee s products in doctor community, which in turn would recommend for the sale of the products of the assessee. The loaner sets have been found to have average life of 36 months. In such circumstances, merely because the assessee has amortized the expenditure, it does not warrant the conclusion that such expenditure is capital expenditure. The assessee has consistently disclosed the said loaner sets as inventory and valued the same in accordance with the Accounting Standard-2 of ICAI, which prescribes an assessee to value the inventory at cost or net realizable value, whichever is lower. Moreover, the finding of the Ld. CIT-A that the claim of assessee is based on the principle of deferred revenue expenditure, is not correct. It is a case of valuation of inventory and the method of valuation has been consistently accepted by the Revenue. Moreover even otherwise expenditure on purchase of loaner sets is not capital expenditure and therefore eligible for deduction as revenue expenditure, which at the option of the assessee can be amortized over a period of years. Thus the amount treating loaner sets expenditure as capital expenditure was not in accordance with law - Decided in favour of assessee. Disallowance under the head advertisement and promotional expenses - Held that - We find that neither the Assessing Officer nor the Ld. CIT-A has disputed the genuineness of the expenditure. In such circumstances, once the genuineness of the expenditure is not in dispute, the commercial expediency cannot be rejected on the ground of suspicion. No material was led by the revenue to allege that the expenditure incurred in the course of business is not an eligible expenditure. We accept the contention of the Ld. counsel that it is not possible to get receipt of keychains either from the doctors or distributors distributed for the purpose of development of the business of the assessee . The entire action of the authorities below is based on suspicion and therefore found untenable.- Decided in favour of assessee. Disallowance expenditure under the head selling commission by treating it as prior period expenses - Held that - Since the aforesaid issue in dispute has already been allowed by the Ld. CIT-A subject to verification by the Assessing Officer, we are not inclined to interfere with the finding of the Ld. CIT-A and the ground of appeal is therefore rejected. TDS u/s 195 - Disallowance invoking section 40(a)(ia) - expenditure incurred on payment made by the assessee company to overseas education foundation for participation of selected Indian doctors for advance training course outside India - Held that - No such judicial interpretation exits that payments made to non-residents for rendering of services in India is taxable in India in absence of any business connection in India or PE in India and in the absence of any clearcut law, assessee cannot be held to be liable to deduct TDS. We observed that the payment was made to Overseas Education Foundation (OEF) for providing training to doctors. The OEF is a medically guided non-profit organization education body led by an international group of surgeons specialized in the treatment of trauma and disorders of the musculoskeletal system. The doctors attended the training in independent capacity, though the expenditure on such training was incurred by the assessee on account of commercial expediency, which aspect has not been disputed in this appeal. The payment was not paid for rendering any managerial, technical or consultancy services. In such circumstances, the expenditure incurred towards payment to the overseas education foundation, cannot be held as fee for technical services provided to the assessee - Decided in favour of assessee. Disallowance expenses on training of doctors in India - Held that - We find that the Assessing Officer has made disallowance on ad-hoc basis at the rate of 25% of the total expenses of ₹ 34,08,154/-. We also find that the assessee has claimed of reimbursing the expenses incurred by the doctors on their stay in hotels etc, while attending the conference seminars organized by the assessee or other organizers. However, we find that the assessee has not linked all the expenses with any particular conference or training course for the doctors or any specific event related to the business of the assessee. In such circumstances, we feel it appropriate to restore the issue to the file of the Assessing Officer directing the assessee to produce all necessary evidence in support of its contentions of incurring expenses for the purpose of business of the assessee company. With regard to the disallowance Ld. CIT-A observed that the assessee made general observation and submissions that the expenses were towards hotels stay and other expenses for the foreign faculty, and the Ld. AR of the assessee failed to justify the name of the person against whom the bill was raised. Before us, the Ld. counsel submitted that the assessee has already filed copy of receipts etc. and if required further documentary evidence in support of contention of incurring expenses for business purpose may be filed. In such circumstances, we restore the issue for reconsideration. Disallowance on account of recruitment and training expenditure - Held that - CIT-A has clearly held that no asset was created by incurring expenditure on recruitment and training and, therefore, there was no reason for treating this expenditure as capital expenditure. The finding of the Assessing Officer has not been found by the Ld. CIT-A in accordance with accounting principles. He also found the disallowance made by the Assessing Officer against the principle of consistency. In view of above, in our opinion, the order of the Ld. CIT-A on the issue in dispute is well reasoned and we find no justification to interfere with the aforesaid finding of the Ld. CIT-A - Decided against revenue.
Issues Involved:
1. Disallowance of deduction for 'loaner' and 'demo' sets. 2. Disallowance of advertisement and promotional expenses. 3. Disallowance of selling commission treated as prior period expenses. 4. Disallowance of provision for doubtful debts. 5. Disallowance of expenses for holding a sales conference. 6. Disallowance of expenses for training doctors outside India under section 40(a)(i). 7. Disallowance of expenses for training doctors in India. 8. Disallowance of professional fees under section 40(a)(ia). 9. Disallowance of recruitment and training expenditure. Detailed Analysis: 1. Disallowance of Deduction for 'Loaner' and 'Demo' Sets: The assessee's claim for deduction of ?50,33,418/- for 'loaner' and 'demo' sets was disallowed, treating them as capital assets instead of inventory. The Tribunal held that the principle of consistency should be applied, referencing the Supreme Court's judgment in CIT Vs. Excel Industries Ltd. The Tribunal found that the 'loaner' sets were part of inventory and not capital assets, as they facilitated the sale of implants. The disallowance was directed to be deleted. 2. Disallowance of Advertisement and Promotional Expenses: The assessee's claim for ?11,49,037/- out of ?22,98,075/- was disallowed for lack of proper documentation. The Tribunal held that there was no basis for ad-hoc disallowance and that the genuineness of the expenditure was not disputed. The disallowance was deleted, citing that commercial expediency cannot be rejected on suspicion. 3. Disallowance of Selling Commission Treated as Prior Period Expenses: The CIT-A directed the AO to verify the assessee's contention that the expenditure of ?2,08,711/- was a mistake apparent from the record. The Tribunal upheld this decision, as it was subject to verification by the AO. 4. Disallowance of Provision for Doubtful Debts: The CIT-A directed the AO to verify if the amount of ?7,07,209/- was already added back by the assessee. The Tribunal upheld this decision, subject to verification by the AO. 5. Disallowance of Expenses for Holding a Sales Conference: The assessee's claim for ?15,88,440/- was disallowed for lack of evidence. The Tribunal restored the issue to the AO for examination of the evidence supporting the claim that the expenses were for business purposes. The issue was allowed for statistical purposes. 6. Disallowance of Expenses for Training Doctors Outside India under Section 40(a)(i): The expenditure of ?17,83,914/- was disallowed, treating it as fee for technical services. The Tribunal held that the payment to the Overseas Education Foundation was not for rendering managerial, technical, or consultancy services to the assessee. The disallowance was deleted, following the precedent set in Holcim Services South Asia Ltd. Vs. DCIT. 7. Disallowance of Expenses for Training Doctors in India: The AO disallowed 25% of the expenses for lack of verification. The Tribunal restored the issue to the AO, directing the assessee to produce necessary evidence linking the expenses to specific business events. The issue was allowed for statistical purposes. 8. Disallowance of Professional Fees under Section 40(a)(ia): The assessee's claim for ?12,03,128/- paid to M/s SR Batliboi & Co. was disallowed. The Tribunal restored the issue to the AO for fresh adjudication, allowing the issue for statistical purposes. 9. Disallowance of Recruitment and Training Expenditure: The AO treated the expenditure as deferred revenue expenditure. The CIT-A deleted the disallowance, holding that no asset was created, and the expenditure should be treated as revenue expenditure. The Tribunal upheld the CIT-A's decision, dismissing the Revenue's appeal. Conclusion: The Tribunal allowed the appeals for the assessment years 2007-08 and 2008-09 partly for statistical purposes and dismissed the Revenue's appeal. The decisions were pronounced on 31st March, 2017.
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