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TMI Blog2012 (8) TMI 421X X X X Extracts X X X X X X X X Extracts X X X X ..... penditure incurred on TV films and commercial and other promotional films is capital in nature or not – Held that:- Onus lies on the assessee to prove that the expenditure has been incurred wholly and exclusively for the purposes of its business. It is observed that said expenditure has been incurred by NPS and paid by assessee on the basis of invoices raised - no document has been brought on record that the said expenditure was incurred by NPS at the instance of the assessee wholly and exclusively for the purposes of assessee's business - expenditure cannot be allowed to have been incurred by the assessee for the purposes of its business unless assessee proves that expenditure was incurred in connection with assessee's business with some documentary evidences – matter restored to the file of the AO to decide afresh with the liberty to assessee to place such document Disallowance on account of repairs to buildings - renovation of R&D Centre - Assessing Officer did not accept the contention of assessee that expenditure represents expenses of revenue nature such as civil modifications, ceiling repairs, electrical modification, partitions, etc – Held that:- If the advantage consist ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 1,57,18,000 to M/s. Novartis Pharma Services Inc, Basel, Switzerland(hereinafter referred to in short 'NPS') in respect of advertisement campaign launched in Russia for introduction of medicine "Dlianos". The Assessing Officer stated that assessee has not deducted TDS under section 195 before making the above remittance. 5. During the course of assessment proceedings, assessee stated that the expenses remitted towards advertisements were the cost of Press/TV/Outdoor advertisement and the cost of making of layouts, films, proofs and videos in connection therewith. Since no part of advertisement was released in India as the product is only for the export market, no income could be deemed to have accrued or arisen in India in the hands of the recipient to whom the payment was made; hence, there is no requirement to deduct TDS under section 195 of the Act. The Assessing Officer did not accept above contentions of the assessee. The Assessing Officer has stated that payment has been made by the assessee outside India with a view to avoid payment of tax in the Country. The AO considered CBDT circular No. 742 dated 2.5.1996 and stated that even if the foreign telecasting company whic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e facts, the AO has disallowed the claim of the assessee of Rs. 1,57,18,000. Being aggrieved, assessee filed appeal before the first appellate authority. 6. On behalf of assessee, it was contended that the assessee company had sold the product 'Dlianos' in Russia in the assessment year 1998-99 to the tune of Rs. 5 crores and it was at the initiative of the assessee to export 'Dlianos' to Russia. The product was not got registered in the name of the assessee as it was already under the name of M/s. Hindustan Ciba Giegy Ltd, now known as NIL and the registration process being time consuming and cumbersome, therefore, in the meanwhile, the assessee company started the process of export to Russia. It was contended that the export of 'Dlianos' was entirely in Russia in assessment year 1998-99. It was also contended that for incurring advertisement expenditure, assessee applied permission for remitting advertisement expenses incurred towards launch of 'Dlianos' to Reserve Bank of India. It was contended that as the advertisement agencies required the payment in advance and RBI did not allow advance payment, assessee requested NPS to make the payment and, thereafter, reimbursed the sa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er the provisions of DTAA between India and Russia, the income would not be chargeable to tax in India as the Russia company did not have any PE in India in respect of which its profits could be attributable. 6.1 It was contended that the expenditure incurred towards advertisement is for the purpose of publicizing and make the same to target the audience and, therefore, it is an expenditure for business purposes of the assessee and could not be construed as non-business expenditure. 7. Ld CIT(A) considered the above submissions of the assessee alongwith order of Assessing Officer. Ld CIT(A) confirmed the action of Assessing Officer by stating that the expenditure is in the nature of reimbursement and does not help the case of the assessee as income has accrued in the hands of the non-resident payees to whom this payment has been made without making tax deduction at source as per section 195 of the Act. Therefore, the advertisement expenditure which is otherwise an allowable expenditure becomes disallowable in view of section 40(a)(i) of the Act. Ld CIT(A) further stated that the said product 'Dlianos' with respect to which publicity drive was launched and expenditure is cla ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ace in Russia have had PE in India, the payment is not taxable in India as per DTAA agreement entered into between NPS and Russia. He further submitted that the reliance placed by the AO on CBDT circular dated 2nd May, 1996 is not relevant as it relates to foreign telecasting company for releasing advertisements which could be viewed by audience in India but in the case of the assessee, no part of advertisement is released in any Indian Publishing media and telecasting companies herein have had no operation of any nature whatsoever in India. Therefore reliance placed on the said circular is misplaced. Ld A.R. further submitted that the assessee company is in the same group of NIL which is manufacturing the product 'Dlianos' and the assessee has sold the product to the tune of Rs. 5 crores in the assessment year 1998-99 and due to advertisement, the assessee received repeated orders from distributors in Russia. Therefore, the expenditure was incurred for business purposes. Ld A.R. submitted that TDS is required to be deducted only if the remittance made by it is taxable in India. He submitted that Hon'ble apex Court in the case of GE India Technology Cent. (P.) Ltd v . CIT [2010] ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... epresentatives of the parties and orders of authorities below carefully. We observe that the authorities below have denied the claim of the assessee on account of expenditure of Rs. 1,57,18,000 on three counts, namely; (a) the remittance of the expenditure by assessee to non-resident companies is the income which has accrued to them in India and, therefore, assessee was required to deduct TDS u/s.195 of the Act, (b) that the said expenditure on advertisements create a brand awareness which remains in the minds of consumers for a long time, hence, it is capital in nature and (c) that the expenditure incurred by the assessee is not wholly and exclusively for purposes of assessee's business. 11. Firstly, we consider the first aspect as to whether the said amount remitted by the assessee aggregating to Rs. 1,57,18,000 towards advertisements in Russia through advertising agencies who are admittedly non-resident is assessable as an income in the hands of those companies being the income accrued in India. There is no dispute to the fact that assessee remitted the amount towards expenses to the advertising agencies of Russia such as M/s. Haile Corporation Ltd., M/s. Headway Express Ltd ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... red in respect of ongoing products of the assessee is revenue expenditure. Further, in assessee's own case for A.Y. 1996-97, the Tribunal in I.T.A.No.2189/M/2003 vide order dated 29.6.2006 also held that the expenditure incurred on short film to advertise its product is revenue expenditure. The said order of the Tribunal was disputed by department in appeal before Hon'ble High Court in Income Tax Appeal No. 1644 of 2007 and the Hon'ble High Court vide its order dated 26.2.2008 dismissed the appeal of the department. A copy of the said is also placed on record. Respectfully following the said judgment of Hon'ble Jurisdictional High court ( supra ), we hold that the amount spent by the assessee for the purpose of advertisement for marketing of 'Dlianos' is revenue in nature and not capital expenditure. 13. Now coming to the last aspect as to whether expenditure has been incurred by the assessee wholly and exclusively for the purposes of its business or not. We observed that the said product 'Dlianos' is not registered in the name of the assessee company but is registered in the name of NIL in Russian Federation. Ld A.R. has also not brought any documents on record that the said a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the assessee as per law. Hence, Ground No. 1 of the appeal of the assessee is allowed for statistical purposes. 14. In Ground No. 2 of appeal, assessee has disputed the order of ld CIT(A) in confirming the disallowance of Rs. 33,05,000 incurred on repairs to buildings which has been treated by Assessing Officer as capital expenditure. 15. The relevant facts giving rise to this appeal are that assessee incurred total expenditure of Rs. 37,28,000 under the head "repairs", the details of which are as follows: "Buildings" Rs. '000 Refurbishment of leased premises at Shivsagar Estate Varma Brothers Civil/Plumbing work 402 Rehamatullah Ceiling modifications, plaster work 125 SP Controls Electrical work 671 Rosentique Partitions, modular work stations 591 H.S. Desigers Woodwork, partitions, cabins 1,344 Nimish Parekh Architects'1s fees for the above 172 Breaking walls, shifting equipments, Removing ceilings, etc at site of R D Centre, a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he case of Ballimal Naval Kishore v. CIT [1997] 224 ITR 414/90 Taxman 402. He submitted that by incurring the said expenditure, details of which are given by Assessing Officer at pages 6-7 of the assessment order, has found that new and different assets have been created and, therefore, the case of assessee falls squarely in the domain of capital expenditure. 20. We have carefully considered the submissions of representatives of the parties and orders of authorities below. On perusal of details of expenditure, stated by Assessing Officer at pages 6-7 of assessment order and also by ld CIT(A) at pages 9-10 of the impugned order, we observe that by incurring the expenditure, no new asset has come into existence and only the existing asset has been repaired in respect of the buildings which is used by the assessee for its business purposes. We observe that the repairs carried out by the assessee is to improve the bad conditions of the building and to prevent further deterioration. The repairs which have been carried out does not bring into existence any additional advantage or benefit of enduring nature nor change the nature, character or identity of the buildings itself. In t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the assessee." 23. At the time of hearing, it was conceded by ld D.R. that the issue is covered against the department by the decision of Hon'ble apex Court in the case of ACG Associated Capsules (P) Ltd v. CIT [2012] 205 Taxman 136 Mag.)/18 taxmann.com 137. Accordingly, it was submitted by representatives of both sides that issue may be restored to the file of AO with the direction to work out the deduction u/s. 80HHC of the Act in the light of the said decision of Hon'ble Supreme Court i.e. by considering the net receipt. Hence, Ground Nos. 1 2 of appeal taken by department are allowed for statistical purposes by restoring the issue to the file of AO with a direction to consider the net receipts while computing the deduction allowable u/s.80 HHC of the Act. 24. Ground No. 3 of appeal is as under: "On the fats and in the circumstances of the case and in law, ld CIT(A) erred in directing the AO to reduce the amount of Rs. 78,99,236 out of direct cost in respect of trading goods for the purpose of computing deduction u/s. 80HHC." 25. During the course of assessment proceedings, the Assessing Officer stated that the assessee has included an amount of Rs. 1,19,06 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r brought into, India by the assessee in convertible foreign exchange in accordance with clause (a) of sub-section (2) of any goods or merchandise to which this section applies and which are exported out of India, but does not include freight or insurance attributable to the transport of the goods or merchandise beyond the customs station as defined in the Customs Act. Further, clause (d) of Explanation to Section 80 HHC(3) states "Direct costs" means costs directly attributable to the trading goods exported out of India including the purchase price of such goods. We observe that the assessee has not brought in sales proceeds of an amount of Rs. 1,19,06,264 within the extended period which was granted to the assessee and same is to be reduced from export turnover as per clause (b) of Explanation to Section (4C) of Section 80HHC of the Act., while computing the deduction to be allowed under section 80HHC of the Act. We observe that Direct Cost is also defined in explanation of Sub-section (3) of Section 80HHC, which means the costs directly attributable to the trading goods exported out of India including the purchase price of such goods. It does not state that the direct cost gives ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f appeal considered by us for A.Y. 1998-99 which have been stated hereinabove in paras 15 to19 and for the reasoning mentioned hereinabove in para 20, we hold that the said expenditure is revenue in nature and, therefore, we allow Ground No. 2 of appeal taken by assessee by reversing the orders of authorities below. 35. Ground No. 3 of appeal is as under: "Ld CIT(A) erred in holding that the loss suffered on the export of manufactured goods ought to be adjusted against both the profits of the traded goods as well as the export incentives." 36. At the time of hearing, ld A.R. fairly conceded that the above issue is covered against the assessee by the decision of Hon'ble Apex Court in the case of IPCA Laboratory Ltd. v. Dy. CIT [2004] 266 ITR 521/135 Taxman 594, wherein, it was held that while arriving at profits earned from export of both self manufactured goods and trading goods, the profits and losses in both trades have to be taken into consideration and if after such adjustments there is a positive profit the assessee would be entitled to deduction under section 80HHC(1) of the Act. It was further held that if there is a loss the assessee would not be entitled to ded ..... X X X X Extracts X X X X X X X X Extracts X X X X
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