2020 (9) TMI 31 - AT - Income Tax

Nature of expenditure - Interest paid to Syndicate Bank - Revenue or capital expenditure - According to the assessee the money was used for repayment or to defray the capital cost already incurred and therefore it is not hit by the proviso of the section 36(1)(iii) - HELD THAT - According to proviso to section 36(1)(iii) , interest is required to be capitalized if it is borrowed for acquisition of capital asset for the period from the date of borrowing till the date on which such asset was first put to use. Such expenditure is not allowable as deduction u/s 36(1)(iii). In the present case, the date of borrowing is after the date of asset first put to use. This fact has not been denied or disputed by the revenue. In view of this, we are of the view that the disallowances made by the ld AO and the balance interest of ₹ 2,80,276/- is not warranted. Accordingly, ground No. 1 of the appeal is allowed and the ld AO is directed to delete the disallowances of interest paid to Syndicate Bank. Non compete fees - Revenue or capital expenditure - HELD THAT - As decided in SHARP BUSINESS SYSTEM 2012 (11) TMI 324 - DELHI HIGH COURT on the identical facts and circumstances, holding that non- compete fees is not eligible for depreciation u/s 32 of the income tax act, further, the above decision has considered the decision of the honourable Delhi High Court in case of Pitney Bowse ( I) Pvt Ltd 2011 (11) TMI 372 - DELHI HIGH COURT which is relied upon by the ld AR , we respectfully following that decision dismiss the alternative contentions of the assessee for the claim of depreciation. In view of this ground number 2 of the appeal of the assessee is dismissed. Deduction u/s 80HHC - Characterization of income - interest income earned treated as part of the business income - HELD THAT - The explanation given by the assessee clearly shows that energy meters are supplied to various electricity boards throughout the country and the supplies are made against open tenders and bank guarantees furnished to buyers against earnest money/ performance guarantees. The letter of credits is opened to import the materials required for manufacturing. Therefore, such interest income is related to letter of credit for import of the material for which various bank guarantees are obtained against the placement of fixed deposits and the National savings certificates. This itself shows that such interest income does not have any relation with the export turnover or export of goods. In view of this, we do not find any infirmity in the orders of the lower authorities in excluding 90% of the interest income for calculating eligible deduction u/s 80 HHC. If interest income is not considered as a income derived from export of goods then at least net of the interest received of the interest paid by the assessee should be excluded at the rate of 90% for working out deduction u/s 80 HHC - Assessee has received interest on margin money deposit for the purpose of letter of credit from various banks. It cannot be said that there is no relationship with the business of the assessee with the interest earned by the assessee. Interest has been received on Fixed deposits placed for enjoying letter of credit against which the assessee has imported the goods and therefore it is inextricably linked with the business of the assessee. Therefore above interest is chargeable to tax as business income of the assessee. The moment the above interest is held to be chargeable Under the head business income, the issue of netting of interest paid with interest received is squarely covered in favour of the assessee by the decision of ACG Associated Capsules (P.) Ltd. 2012 (2) TMI 101 - SUPREME COURT therefore we direct the learned assessing officer to consider 90 % of the interest after net of the interest received and paid for the purpose of working out of the deduction u/s 80 HHC. Deduction of ₹ 90% of the amount received towards common office and infrastructure facilities provided - CIT (A) has giving categorical finding that the above amount of receipt is rent from Crabtree by the assessee and the same finding has not been controverted by the appellant, we are not inclined to interfere with the finding of the lower authorities. Even otherwise, the assessee has neither produced the debit note issued to the Crabtree detailing what kinds of expenditures were reimbursed. The copy of the agreement is also entered into at the fag end of the accounting year. In absence of any detail of expenditure incurred, which was reimbursed by Crabtree to the assessee, the argument of reimbursement of expenses is also not tenable. Thus, we do not find any infirmity in the order of the lower authorities. Disallowance of sales incentive in respect of Shaenshah Scheme - HELD THAT - As decided in own case for assessment year 2006 07 provision is created on scientific basis. We, therefore, do not find anything illegal or irregular in the findings of the id. CIT(A) and no interference is warranted. We, therefore, dismiss the second ground of appeal of the Revenue. TDS u/s 195 - disallowance u/s 40(a) (i) - payment to various foreign entities towards testing fees and certification charges outside India - whether no income has accrued or arisen to them in India? - HELD THAT - As considered the order of the coordinate bench in Assessment Year 2005-06 in assessee s own case 2012 (5) TMI 449 - DELHI HIGH COURT wherein, payment with respect to CSA International USAis not held to be a fees for technical services according to article 12(4)(b) of the Act. Accordingly, the payment to CSA International USA on identically facts and circumstances cannot be disallowed u/s 40(a)(i) of the Act. With respect to payment made Kema Quality BB Netherland it is also covered in favour of the assessee at para No. 9 of the order of the coordinate bench in assessee s own case for Assessment Year 2006-07. Payment to 3 different parties of China Article 12 (4) of India - if the services available the assessee from various testing agencies are examined, they would specifically provides that would be with respect to the specific country, specific product, specific manufactured lot of the assessee, which is exported in that particular country whether it conforms with the standard specified in that country, therefore, cannot be said to be a standard facility provided by that particular agency to the assessee. The honourable High Court in assessee s own case have also stated that it is a specialized facility provided to the assessee for testing of its goods exported in that particular country. In view of this, the argument of the assessee that these are standard facilities does not hold water and is rejected. if the services available the assessee from various testing agencies are examined, they would specifically provides that would be with respect to the specific country, specific product, specific manufactured lot of the assessee, which is exported in that particular country whether it conforms with the standard specified in that country, therefore, cannot be said to be a standard facility provided by that particular agency to the assessee. The honourable High Court in assessee s own case have also stated that it is a specialized facility provided to the assessee for testing of its goods exported in that particular country. In view of this, the argument of the assessee that these are standard facilities does not hold water and is rejected. As decided in ASHAPURA MINICHEM LTD. VERSUS ADIT (INT L TAXATION) 2010 (5) TMI 523 - ITAT, MUMBAI China DTAA does not provide that services should be rendered in India to qualify as Fees for Technical services . Bona fide belief for non-deduction of tax at source on these testing charges paid to the foreign parties - in case of Kotak securities Ltd 2011 (10) TMI 24 - BOMBAY HIGH COURT , wherein the honourable High Court held that since both the Revenue and the assessee were under the bona fide belief for nearly a decade that tax was not deductible at source on payment of transaction charges, no fault can be found with the assessee in not deducting the tax at source in the assessment year in question and consequently disallowance made by the Assessing Officer under section 40(a)(ia) of the Act in respect of the transaction charges cannot be sustained. Before us, no evidences were produced before us that there was any bona fide belief for non-deduction of tax at source as revenue was constantly saying that the tax at sources are deductible on such payments. No evidences were produced before us that the assessee was under a bona fide belief that tax is not deductible on such testing charges - Not shown, even if there is a belief, whether the same was bona fide or not. The other decisions relied upon by the learned authorised representative all were related to the provisions of Section 201 of the income tax that where there is a specific exclusion for good and sufficient reasons for non-deduction of tax at source. Such provisions are absent under the provisions of Section 40 (a)(i) of the act. In view of this, this argument of the assessee is rejected. As we have refused to read the conditions prescribed u/s 40(a) (ia) of the act of disallowance at the rate of 30% in case the payment is made to a resident in Section 40(a) (i) of the act, the another argument of the assessee that it amounts to discrimination with respect to the payment made to non-resident compared to the payment made to a resident, also does not deserve any consideration. Even otherwise, both are different provisions to be applied in different situations. Undoubtedly, both the provisions are applicable with respect to the resident assessee only, who is the payer. Therefore, there are two different conditions one for payment made by a resident to a non-resident u/s 40(a) (i) and another by a resident to a resident u/s 40 (a) (ia) - No discriminatory treatment given to a non-resident entity. In fact a non resident assessee is not at all concerned with above payments and its disallowance in the hands of a resident payer. Therefore, there is no discrimation with respect to nationality. Decisions cited by ld AR does not support the contentions raised on this issue. Thus, this argument of the learned AR is also rejected. AR fairly agreed that in DTAA between India and China and India and Germany, in Article 12 of those treaties, there is no condition of make available for taxation of Fees For technical services . No other articles of DTAA were referred or pressed up on. In view of this with respect to the payment to China based agents and Germany based agents the disallowance is confirmed and the payment made to Kema and CSA International is deleted. Deduction u/s 80IC - exclusion of the loss of the eligible unit against the income of another eligible unit - Assessee did not filed revised return as hewanted to claim the share deduction - HELD THAT - Assessee did not revise its return of income. The decision of the Hon ble Supreme Court in Goetz India Ltd 2006 (3) TMI 75 - SUPREME COURT though applies to the ld AO but does not apply to the appellate authorities. The decisions cited by the ld AR are clearly support the above view. Thus, according to us the ld CIT (A) should have considered the claim of the assessee, though not made by the revised return. As it is a simple arithmetic calculation and there is no dispute about the sum involved, we direct the ld AO to allow the claim of the assessee u/s 80IC of the Act to the extent of profit earned by Unit No. 1 at Badi. The ld AO further directed to not to set off the loss incurred by Unit NO. 2, another eligible unit by reducing the deduction of section 80IC of the Act. Accordingly, ground No. 2 of the appeal is allowed.

Summary

Issues Involved:
1. Classification of interest paid to Syndicate Bank as capital or revenue expenditure.
2. Treatment of non-compete fees paid to GS Lighting Pvt. Ltd.
3. Classification of interest income earned as business income or income from other sources.
4. Deduction of 90% of reimbursement received from Crabtree India Ltd. for computation of deduction under section 80HHC.
5. Disallowance under section 40(a)(i) for payments made to foreign entities without TDS.
6. Enhanced claim of deduction under section 80IC without filing a revised return.

Detailed Analysis:

1. Classification of Interest Paid to Syndicate Bank:
The assessee claimed ?2,80,276 as revenue expenditure, arguing that the loan was used to repay earlier borrowings and not for new capital assets. The AO and CIT(A) treated it as capital expenditure, stating that the assets were not yet put to use. The Tribunal found that the loan was partly used for assets already capitalized and partly for assets not yet put to use. It held that the interest related to assets already capitalized should be treated as revenue expenditure. Therefore, the disallowance of ?2,80,276 was deleted.

2. Treatment of Non-Compete Fees:
The assessee paid ?5 lakh as non-compete fees to GS Lighting Pvt. Ltd., which was treated as capital expenditure by the AO and CIT(A). The Tribunal upheld this view, stating that the payment resulted in an enduring benefit and was part of acquiring the 'Polstar' business, thus constituting capital expenditure. The Tribunal also rejected the alternative plea for depreciation on the non-compete fees, citing the Delhi High Court decision in Sharp Business System, which held that non-compete fees do not qualify as depreciable intangible assets.

3. Classification of Interest Income:
The assessee claimed ?44,41,951 as business income, arguing it was inextricably linked to its business operations. The AO and CIT(A) classified it as income from other sources and reduced 90% of it for deduction under section 80HHC. The Tribunal found that the interest was related to margin money for business operations and should be classified as business income. It directed the AO to consider 90% of the net interest (after netting off interest paid) for deduction under section 80HHC.

4. Deduction of 90% of Reimbursement from Crabtree India Ltd.:
The AO and CIT(A) treated ?64,38,525 received from Crabtree India Ltd. for common office and infrastructure facilities as non-business income and reduced 90% of it for deduction under section 80HHC. The Tribunal upheld this view, stating that the amount was rent for leasing premises and not business income.

5. Disallowance under Section 40(a)(i):
The AO disallowed ?26,02,844 paid to foreign entities for testing and certification without TDS. The Tribunal partially allowed the appeal, deleting the disallowance for payments to entities in the USA and Netherlands, citing earlier decisions in the assessee's favor. However, it upheld the disallowance for payments to entities in China and Germany, as these were deemed to arise in India under the respective DTAA provisions.

6. Enhanced Claim of Deduction under Section 80IC:
The assessee filed a letter for an enhanced deduction under section 80IC without filing a revised return. The AO and CIT(A) rejected the claim, citing the Supreme Court decision in Goetz India Ltd. The Tribunal allowed the claim, stating that the CIT(A) should have considered it as it was a simple arithmetic adjustment and directed the AO to allow the enhanced deduction.

Conclusion:
The Tribunal provided a detailed analysis for each issue, allowing some claims and rejecting others based on legal precedents and the specific facts of the case. The decision emphasized the importance of proper classification of expenses and income, adherence to procedural requirements, and the interpretation of relevant tax provisions and treaties.