9911796707
TMI Blog2011 (7) TMI 401X X X X Extracts X X X X X X X X Extracts X X X X ..... er of the Tribunal in Procter and Gamble Home Products Ltd. Versus JCIT (2010 -TMI - 207147 - ITAT, Mumbai) hold that the expenditure of Rs.12,26,40,000/- is in the nature of capital expenditure not allowable as revenue expenditure under section 37(1) of the Act. - ITA No. 3596/Mum/2003, ITA No. 3661/Mum/2003 - - - Dated:- 29-7-2011 - D.K. Agarwal, J. Sudhakar Reddy, JJ. Yogesh A. Thar and Haresh G. Buch for the Appellant Subachan Ram for the Respondent ORDER D.K. Agarwal: These cross-appeals by the assessee and Revenue are directed against the orders dated 26.2.2003 read with order under section 154 dated 28.3.2003 passed by the Learned Commissioner of Income Tax (A) for the assessment year 1997-98. Both these appeals are disposed of by this common order for the sake of convenience. 2. Briefly stated facts of the case are that the assessee company is engaged in the marketing, selling and distribution of consumer products including detergent, toilets soaps, toiletries etc. The assessee company was formed as a joint venture between P and G Group and Godrej Group in 1993. This joint venture was terminated in July 1996 and the shareholdings, as we ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l following the decision of the Special Bench of the Tribunal (supra) vide paragraph 2.4.2 of the order has held as under: "2.4.2 We have perused the records and considered the matter carefully. In the case of Tecumseh, USA, a leading Global compressor manufacturer, the assessee had purchased the compressor related operations of Whirlpool India, a leading refrigerator manufacturer in India, for Indian compressor market. The assessee had paid the price of Rs.52.5 crores which included a sum of Rs.2.65 crores to be paid as non-compete fees. The issue was whether non compete fees which was in force for 5 years, could be allowed as revenue expenditure. The Special Bench after detailed examination held that the expenditure was capital in nature. It placed reliance on the judgment of Hon'ble Supreme Court in CIT vs Coal Shipment Pvt. Ltd. (82 ITR 902) in which it was held that payment to ward off completion in business to a rival dealer would constitute capital expenditure if the object of making that payment was to derive an advantage by eliminating competition over some length of time. The Special Bench also observed that non compete period of five years had been considered as suff ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h has been expended wholly and exclusively for the business should be allowed under section 37(1) of the Act. However, the AO after considering the assessee's reply and the Trade Mark Licence Agreement observed that in the assessment years 1994-95 to 1996-97, the claim of the assessee of Licence Fees was examined and it was held therein that it was not an allowable claim being the expenditure in the nature of capital. Alternatively, it was held therein that Licence Fee paid is for the use of Trade Mark and is therefore covered by the section 35A of the Act, since, this expenditure incurred on acquisition of patent rights, trade marks by the assessee, expenditure to the extent of 1/14th of the expenditure can only be allowed as per section 35A of the Act. Therefore, following the findings recorded in the assessment order for Assessment years 1994-95 to 1996-97, the AO disallowed the claim of the assessee of Rs.25 lakhs. On appeal, the learned Commissioner of Income Tax (A) following the appellate order for the assessment year 1996-97 upheld the disallowance made by the AO. 10. At the time of hearing, the learned counsel for the assessee submits that this issue is covered in favo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der section 195 of the Act @ 55% of the 10% of remittance after May 1996 as per the provisions of Circular No.742 issued by the CBDT on 2.5.1996. But on the remittances made upto May 1996 of Rs.20,39,899/- to foreign telecasting companies, the assessee has neither deducted tax at source nor paid to the Central Government. The assessee was asked to explain. It was interalia submitted by the assessee that no part of the services in connection with the said advertising were rendered by Asia Today Ltd. in India, the said fee cannot be deemed to accrue or arise to Asia Today Ltd. in India. However, the AO was of the view that the assessee company is giving advertisements to Asia Today Ltd. to telecast on Zee T.V. Advertisement revenue is earned by foreign company which is doing the telecasting for Zee T.V. The income is deemed to accrue/arise to Asia Today Ltd. in India. Therefore the assessee was required to deduct tax at source under section 195. The assessee has failed to do so. The AO disallowed the deduction under section 40(a)(i) and made the addition of Rs.20,39,899/- to the total income of the assessee. On appeal, the learned Commissioner of Income Tax (A) following the appellat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the Revenue, we respectfully following the order of the Tribunal (supra) set aside the orders passed by the Revenue authorities on this account and restore the issue to the file of the AO for examination afresh in the light of the directions given by the Tribunal in the said order (supra) and according to law after providing reasonable opportunity of being heard to the assessee. The Ground No.II(1 and 2) are therefore partly allowed for statistical purposes. 18. Ground No.III(1and 2) are against the sustenance of disallowance of Rs.12,26,40,000/- paid on termination of Joint Venture Agreement and other agreements. 19. Brief facts of the above issue are that from the Profit and Loss Account, the AO noted that the assessee company has spent an amount of Rs.12,26,40,000/- paid to Godrej Soaps Ltd. on termination of Joint Venture as revenue expenditure. The assessee was asked to file full particulars of payments, method of working of the amount payable, copy of the agreement and in case any valuation was got done to assess the amount payable, to file copy of such reports and also to justify the claim of deduction of Rs.12,26,40,000/-. In response, the assessee company has su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... king out the figure of compensation of Rs.11.264 crores and Rs.1 crore for termination of agreements and also to furnish reasons which resulted into termination of Joint Venture. 10.5 In response to the above, assessee vide its letter dated 25th January, 2000 submitted as under: "Your good self has desired to know the reasons for the termination of the JV. In this respect we would like to state that it was a business and commercial agreement to terminate the JV. The amount of Rs.11.264 crores paid to Godrej Soap Ltd. towards termination of the Manufacturing Agreement between the two companies and Rs.1 crore paid towards annulment/termination or causing the annulment/termination of the other Joint Venture Agreements and all other agreements is an amount negotiated between the two parties." 10.6 The assessee was once again given an opportunity vide note sheet entry dated 7.3.2000 to furnish the details on the basis of which amount of compensation of Rs.11.264 crores was determined and circumstances and reasons which resulted into termination of Joint Venture. The assessee was also asked to explain how it was commercially expedient to terminate the agreement and to make th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ivity of the assessee was clearly of a revenue nature and therefore an allowable deduction under section 37(1) of the Income tax Act. Similarly, in G Scammel's case, the expenditure incurred for termination of disadvantageous trading relationship and the related litigation expenses have been held to be of a revenue nature and therefore allowable as deductions. In the case of the assessee company, as is evident from the copy of the Termination of JV Agreement which is enclosed and marked as Annexure I, the compensation was paid to GSL for its loss of sales and profits which had resulted from the termination of the said Manufacturing Agreement as a result of the termination of a disadvantageous trading relationship, which in turn had arisen due to the changes in the toilet soaps market in India. Due to the early termination of the Manufacturing capacity for any other customer also. As such, you will appreciate that the payment of Rs.11.264 crores to GSL was a business expenditure of revenue nature and is accordingly allowable fully as deduction as claimed. Re: termination of other agreements of JVA: This amount was paid to GSL to compensate for the loss on account of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erial has finally held that the payments for termination of agreements was capital expenditure vide finding recorded as under (Page 23 of AO): "It is pertinent to note that agreement at Sr.No.2,3,5,6,9 and 10 are the agreements which were not entered exclusively between the assessee company (PGG) and GSL. It is not understandable as to how it was the liability of the assessee company to compensate the GSL for termination of these agreements wherein the assessee company was not a party. This itself shows that the payment was not made for commercial expediency of the assessee company. It may also be mentioned here that as per Clause 3.3 (a) of Joint Venture Agreement quoted above, equity shares were allotted to PGFE of Rs.100/- each at a premium of Rs.457.50 per share at the time of entering into Joint Venture. But at the time of termination of agreement, the family members of Godrej Group transferred the shares to the companies of PandG Group @ 230/- per share only. It is also pertinent to note that GSL has been showing huge losses carry forward in its Income Tax return and even after receiving payments from the assessee company, GSL was not liable to pay any income tax. Thus, i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xtracts from "Business India" Edition of July 1997, stating that i) PandG had no control over costs under the agreement as it was Cost + fixed margin contract. There were no Cost caps or incentives for Cost efficiencies in the JV Agreement. ii) Costs were increasing and market shares was reducing. iii) Sales were falling behind targets resulting in Idle capacity resulting in higher overheads. iv) Pursuant to JV, GSL had enhanced its manufacturing facilities resulting in burden of high Interest and Depreciation since 50% of capacity remained unutilized. v) Godrej's processing costs were well above the market rates by as much as Rs.10,000 per tone. vi) The JV was 'adversely affecting the brands of GSL. Summary chart based on financials showing that after termination of JV, Operating costs as a % to sales reduced to 57% in FY 1996-97 as against 89% in FY 1995-96 and in FY 1994-95 is as under: Proctor and Gamble Distribution Company Limited Previous year 1996-97 Assessment year 1997-98 (Rs.in crore) Particulars Financial Year 1996-97 1995-96 1994-95 a. Sales 175.08 364.55 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re, the same should not be admitted. The learned D.R. further submits that in view of the findings recorded by the AO, the learned Commissioner of Income Tax (A) and the Tribunal in the case of M/s PGHPL (supra), the learned Commissioner of Income Tax (A) was fully justified in rejecting the claim of the assessee and therefore the disallowance made by the AO be upheld. 24. We have carefully considered the submissions of the rival parties and perused the material available on record. We find that the facts are not in dispute inasmuch as it is also not in dispute that there was an "indemnification" clause in the said Agreement which reads as under: "INDEMNIFICATION 19. In the event of the expiration or termination of this Agreement, none of the parties shall be liable to the other parties for any loss of anticipated sales or prospective profits or because of expenditures related to the performance of this Agreement." 25. As regards the admission of additional evidence, we find that there is no dispute that the extract of Board Resolution and Articles published in the magazines are for the relevant assessment year but the same were not filed before the AO as observed b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Trilo brand and it was one of many such agreements by the assessee for manufacture of different products. The termination did not therefore have any impact on the profit earning apparatus and the advantage derived from the assessee was only in the revenue field. It has been pointed out that after the termination, sales and profit both had improved. Accordingly it has been urged that the expenditure should be allowed as revenue expenditure. 2.5.5 In our view for deciding the nature of expenditure, it is first necessarily to ascertain the real purpose of payment. It is clear from the reading of the clause 14.6 of JVA that in case of termination of the JVA, all other agreements entered into under the provisions of JVA would automatically cease to exist. There is no dispute that the manufacturing agreement had been entered into under the provisions of the clause 9.3 of the JVA. There is also no dispute that the JVA had been terminated by both the parties on 23.7.96 and therefore on the said date the manufacturing agreement had ceased to exist. There was thus no need to enter into a separate termination agreement. The termination agreement dated 30.7.96 was only a formality. Ther ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... none of the terms and conditions of the JVA had been violated by either of the parties. Thus the JVA provided for a long term business framework and profit earning apparatus of the PandG group. With the termination of the JVA, the JV company as well as other manufacturing agreements automatically ceased to exist. The termination of JVA was thus obviously a part of restructuring and reorganization of the profit earning apparatus of the PandG group. Therefore the termination had impact on the profit earning apparatus of the group and the payment was therefore in relation to change in profit earning apparatus of the PandG group and not for termination of manufacturing agreement which had already ceased to exist. 2.5.7 We have now to consider the nature of the said expenditure. It is a settled legal position that in case an expenditure is incurred for better working of the existing profit earning apparatus, it will be revenue in nature but in case the expenditure relates to any change in the profit earning apparatus the expenditure would be capital in nature. The said view is supported by the judgment of Hon'ble Supreme Court in case of Empire Jute Co. (124 ITR 1). We have already ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mmercial vehicle. After the assessee stopped manufacturing Austin cars, the managing agency had become redundant. Thus the termination of managing agencies did not relate to the profit earning apparatus of the assessee and by termination the assessee could only gain advantage in the revenue field by way of saving of unnecessary expenditure. The case of the assessee is different as in this case payment was for termination of JVA which had impact on the profit earning apparatus. 2.5.9 In case of Western India Oil Distributing Co. India vs CIT (77 ITR 140) the assessee had an agreement for 10 years for obtaining aggregate loan of Rs.10 lacs. The assessee had agreed to pay interest @ 6% per annum on Rs.10 lacs whether or not the finance was taken. The assessee was also required to pay commission on import of goods, whether finance was taken or not, even after expiry of agreement. Subsequently the assessee revoked the agreement in a consent decree on payment of Rs.3 lacs in five equal installments. The issue was the nature of expenditure incurred. Obviously, the agreement was only in connections with obtaining finance required for the purpose of business and any payment in connectio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted out earlier the payment had been made for termination of JVA which was not a mere trade agreement. It provided for long term business framework and profit earning apparatus for the P and G group and therefore the termination did affect the profit earning apparatus. 2.5.12 In case of CIT vs Glaxo Laboratories (India) Pvt. Ltd. (114 ITR 110), the assessee had an agreement for the purpose of distribution of products. The agreement could be terminated by either party at one month's notice. The agreement obviously did not have anything to do with the profit earning apparatus as it only related to the sale and distribution of the products and it could be terminated any time after one month's notice. The expenditure for termination was held to be allowable as revenue expenditure. The case is obviously distinguishable from the present case in our view of the discussion made earlier. 2.5.13 In view of the foregoing discussion and for the reasons given earlier we see no infirmity in the orders of the authorities below holding the expenditure as capital expenditure. The order of CIT (A) is accordingly upheld." 27. As regards the decision of the Hon'ble Supreme Court in Senaira ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on the various decisions held that the provision for accrued leave encashment of Rs.11,99,828/- is not allowable and hence he rejected the claim of the assessee. On appeal, the learned Commissioner of Income Tax (A) following the decision of the Hon'ble Supreme Court in the case of Bharat Earth Movers Ltd. V/s CIT (245 ITR 428), wherein it has held that the provisions made for leave encashment is not the contingent liability and the same is allowable expenditure, deleted the disallowance of Rs.11,99,828/-made by the AO. 34. At the time of hearing, the learned D.R. supports the order of the AO. 35. On the other hand, the learned counsel for the assessee submits that this issue is covered in favour of the assessee by the decision of the Tribunal in assessee's own case for the assessment years 1995-96 and 1996-97 (supra), wherein the assessee has allowed the similar claim to the assessee. 36. Having carefully heard the submissions of the rival parties and perusing the material available on record we find merit in the plea of the learned counsel for the assessee that the Tribunal in assessee's own case (supra) following the decision of the Hon'ble Apex Court in Bharat Eart ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... spare parts relating to such obsolete machines do not have any market value and there is no market equipment." Respectfully following the same and keeping in view the rule of consistency, we uphold the order of the learned Commissioner of Income Tax (A) in deleting the disallowance made by the AO. The Ground No.2 taken by the revenue is, therefore, rejected. 43. Ground No.3 is against the deletion of addition of Rs.2,50,000/- made by the AO under section 37(2A) of the Act. 44. Brief facts of the above issue are that the AO observed that the assessee has claimed welfare expenses of Rs.57,14,811/-. The AO was of the view that all the expenses cannot be allowed. The AO in view of the finding recorded in the earlier year i.e. for the assessment year 1996-97 estimated Rs.5,00,000/- as expenditure incurred in the nature of entertainment. The AO after giving statutory deduction of Rs.2,50,000/- made the disallowance of Rs.2,50,000/- and added the same to the income of the assessee. On appeal, the learned Commissioner of Income Tax (A) following the appellate orders for the assessment years 1994-95 to 1996-97, wherein he has deleted the similar disallowance, deleted the disallowanc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ance in the said relevant assessment years, directed the AO to reduce the amount of Rs.18,14,08,561/- from the income of the assessee. 50. At the time of hearing, the learned D.R.supports the order of the AO. 51. On the other hand, the learned counsel for the assessee submits that since the provisions has been allowed in the relevant assessment years, therefore, in view of the assessee's own case for the assessment year 1996-97, the order passed by the learned Commissioner of Income Tax (A) be upheld. 52. Having carefully heard the submissions of the rival parties and perusing the material available on record we are of the view that the learned Commissioner of Income Tax (A) has allowed the claim of the assessee on the ground that the said amount has been subjected to disallowance in the relevant assessment years and taxing the same in the year under consideration will be subjected to double addition. In the absence of any contrary material against the finding of learned Commissioner of Income Tax (A), we are inclined to uphold the order of the learned Commissioner of Income Tax (A) in accepting the claim of the assessee and accordingly the ground No.4 taken by the Reve ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
