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TMI Blog2016 (4) TMI 993X X X X Extracts X X X X X X X X Extracts X X X X ..... (A) and direct the Assessing Officer to allow the expenditure in entirety in the hands of assessee. - Decided in favour of assessee. Disallowance of expenses incurred on engineering services - Held that:- Before the CIT(A), the assessee had explained the nature of expenses that the said expenses were incurred for testing of flow through heat exchangers manufactured by the assessee under computer aided simulated conditions. The said testing is called as CFD Analysis. The assessee had undertaken the said testing to find out whether the product manufactured by it complied with the parameters laid down by the customer of the assessee. The said testing was done by CSM Software Pvt. Ltd. In another reply, the assessee further explained that from the invoice itself it was clear that the said charges were purely in the nature of engineering services as testing charges and no software was acquired by the assessee. The perusal of the above said details reflects that while incurring the said expenditure of ₹ 26,50,000/-, the assessee has not acquired any software perse. However, engineering services were provided by CSM Software Pvt. Ltd. in order to carry out the CFD Analysis of hoo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Since the assessee is following mercantile system of accounting, we find no merit in the claim of assessee and the said expenditure on rent relating to prior years, is not allowable as expenditure during the year. Accordingly, we confirm the addition - Decided against assessee. Disallowance of sales tax expenses - Held that:- Admittedly, the demand was raised against the assessee for the year 2001-02 and the said demand was disputed. However, under protest, the assessee deposited sum of ₹ 7,01,572/- during the year under consideration. Once the amount has been deposited by the assessee during the year and no deduction on this account has been taken by the assessee in any of the earlier years, then under the provisions of section 43B of the Act, such Sales Tax payment is duly allowable as deduction in the hands of assessee. However, the assessee had furnished a challan of Sales Tax payment of only ₹ 1 lakh before the CIT(A) and no challan of payment of ₹ 6,01,572/- was filed. Even before us, the assessee has failed to furnish the said challan. Accordingly, we remit this issue back to the file of Assessing Officer to allow the claim of assessee on satisfaction t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o error in the said directions given by the CIT(A) and confirm the same. - ITA No.1029/PN/2013, ITA No.1034/PN/2013, ITA No.1030/PN/2013, ITA No.1035/PN/2013, ITA No.1595/PN/2013, ITA No.1648/PN/2013, ITA No.1596/PN/2013, ITA No.1649/PN/2013 - - - Dated:- 18-3-2016 - MS. SUSHMA CHOWLA, JM AND SHRI PRADIP KUMAR KEDIA, AM For The Assessee by : Shri P.J. Pardiwalla, Ms. Puja Kushwa and Shri Sandip Navale For The Department by : Dr. Santosh Kumar ORDER PER SUSHMA CHOWLA, JM: Out of this bunch of four cross appeals, two cross appeals filed by the Revenue and the assessee are against consolidated order of CIT (A)-III, Pune, dated 30.04.2012 relating to assessment years 2006-07 and 2007-08 against respective orders passed under section 143(3) of the Income Tax Act , 1961 (in short the Act ). Another two cross appeals filed by the assessee and Revenue are against consolidated order of CIT (A)-III, Pune, dated 19.10.2012 relating to assessment years 2008-09 and 2009-10 against respective orders passed under section 143(3) of the Income Tax Act, 19 61 (in short the Act ). 2. This bunch of four cross appeals relating to assessment years 2006-07 to 2009-10 wer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , on the ground that such services also include software tools which provide enduring advantage to the appellant. 4. The learned CIT(A) erred in confirming the disallowance of expenses incurred on repairs to buildings amounting to ₹ 11,85,657. 5. The learned CIT(A) erred in confirming the disallowance of expenses on rent, crystalized during the year, amounting to ₹ 1,51,896. 6. The learned CIT(A) erred in confirming the disallowance of sales tax expenses, paid by the appellant, amounting to ₹ 7,01,572. 7. The learned CIT(A) erred in making the following observations: (a) ... But as admitted by the appellant itself, the above two installments were remitted to the Sales Tax Department under protest. To a specific query, the learned counsel also stated that the issue was eventually decided in favor of the appellant and the demand raised was cancelled ... (b) ... the liability is only a contingent liability and such contingent liability cannot be allowed as deduction u/s. 43B or otherwise ... The appellant objects to the above observations which are contrary to the facts of the case and in law. 8. Each one of the above grounds ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l against the said upholding of disallowance of ₹ 2,79,24,130/- and the Revenue is in appeal against the order of CIT(A) in directing the Assessing Officer to allow 25% of the administrative service charges to the extent of ₹ 93,08,043/-. 9. Briefly, in the facts of the present case, for the year under consideration the assessee had filed return of income declaring total income of ₹ 40,60,33,295/-. The assessee was engaged in the business of manufacturing and selling of aluminum radiators, aluminum intercoolers and heater cores. The assessee for the year under consideration had claimed administrative service charges amounting to ₹ 3.72 crores. The claim of the assessee was that it had entered into an Agreement with TACO and had made payments to the said concern on account of administrative support services taken from TACO. The Assessing Officer took note of Agreement between TACO TTR -SAP Consulting Implementation dated 17.11.2008 and Project Charter entered into between the assessee and TACO. During the course of assessment proceedings, the assessee had submitted copies of few e-mail correspondences between the employees of the assessee company and t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ition of ₹ 3.72 crores was made to the income of assessee. 10. The CIT(A) after perusing the terms and conditions of Administrative Support Agreement renewed on 13.04.2006, was of the view that the said terms and conditions in the Agreement talk of various activities, which broadly consist of support in activities during start-up phase and during operative phase. The assessee had agreed to pay for the services provided at an amount equal to 2% of Ex-factory selling price as fees for the support received. In addition to the said fees payable, the assessee was to bear all out of pocket expenses or any outsourced consultancy fees that may be incurred by TACO, especially in the provisions of such support services to the assessee. The CIT(A) further noted that the assessee company was incorporated in the year 1997 and the initial start-up phase of the company was already over and therefore, there was no question of availing any services by the assessee from TACO on account of start-up phase of the company. Further, there was no expansion in the company during the year and certain services were availed from TACO during start-up phase of the company. The CIT(A) thus, concluded th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , claim to the extent of 25% was allowed in the hands of assessee. The CIT(A) allowed the claim at ₹ 93,08,043/- and disallowed the balance expenditure of ₹ 2,79,24,130/- for the instant assessment year. 12. Both the assessee and the Revenue are in appeal against the order of CIT(A). 13. The learned Authorized Representative for the assessee after taking us to the facts of the case pointed out that identical issue of allowability of claim of expenditure arose before the Tribunal in cross appeals in Tata Johnson Controls Automotive Ltd. Vs. DCIT and vice-versa in ITA No.1450/PN/2011 and 1454/PN/2011, relating to assessment year 2006-07, order dated 09.12.2015. The learned Authorized Representative for the assessee pointed out that the CIT(A) while deciding the present appeal against the assessee had also referred to his order in Tata Johnson Controls Automotive Ltd. under para 3.2.8 at page 8 of the appellate order and had held that the expenditure claimed was restricted to 25% of the total expenditure claimed. The learned Authorized Representative for the assessee took us to the various paras of order of Tribunal, wherein all the aspects relating to allowability o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and the question of its deductibility has arisen by way of present grounds of appeal raised. The Assessing Officer was of the view that since TACO was a related party, in view of the provisions of section 40A(2)(b) of the Act, the said expenditure has to be looked into accordingly. The assessee furnished certain information before the Assessing Officer. However, the Assessing Officer was of the view tha t there was no justification in the claim of assessee since the assessee had established its administrative set up and was also incurring expenditure on professional services and other expenses and there was no merit in the claim of assessee vis - vis said expenditure being paid to TACO. The CIT(A) also referred to the provisions of section 40A(2)(a) of the Act and after considering the various evidences filed by the assessee, was of the view that certain services have been rendered by TACO and he was of the view that only 25% of the expenditure has to be allowed in the hands of assessee. Both the assessee and the Revenue are in appeal against the said order of CIT(A). 24. The first issue to be addressed in this regard is whether in order to judge commercial exigency of the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to be allowed as an expenditure in the hands of assessee. Though, under the Act, part of expenditure which is excessive or unreasonable having regard to the market value of the services, can be disallowed in the hands of assessee, but in order to invoke the said provisions of the Act, first step is to find out fair market value of the services, for such invoking of the powers, the Assessing Officer is not empowered to sit in the seat of businessman to decide the merits of quantum of claim to be allowed in the hands of assessee. The authorities below in the present case have not disputed the terms of agreement, but were of the view that remuneration paid at a percentage of turnover, in view of the assessee having established its business, was excessive. The contention of the assessee on the other hand was that for smooth running of its business, services were provided by TACO, which were as terms of the agreement. 26. We find similar issue of allowability of expenditure pursuant to agreement between the assessee and the third party, arose before Cochin Bench of Tribunal in Harrisons Malayalam Ltd. Vs. ACIT (supra) and the factual aspects of the case were as under:- 16. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpanies who are licensees availed, the expertise in the required field for the excellence in the corporate management as well as promoting business standards. He further submitted that if the assessee has to acquire this expertise, the cost of infrastructure will be 10 times more than the license fee paid and certainly it is in the nature of business expediency and the same is allowable. He further argued that the CIT(A) has not disputed the nature of the expenses as capital or revenue. The only reservation of the CIT(A) is that it is not an allowable expenditure. The Id. CA relied on the following precedents :- (i) CIT Vs. Delhi Safe Deposit Co. Ltd. (1982) 133 ITR 750 (SC) (ii) Sasoon J. David Co. Ltd. Vs. CIT (1979) 118 ITR 261 (SC) (iii) Bombay Steam Navigation Co. (1953) (P.) Ltdd. Vs. CIT (1965) 56 ITR 52 (SC) (iv) CIT Vs. Malayalam Plantations Ltd. (1964) 53 ITR 140 (SC) 17 . 18 . 19 . 20. The authorities below have not disputed the terms of the agreement but it appears from the reasons given by the CIT(A) that the said payment was not required at all. The concept of business is changing due to globalization. The market st ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to delete the additions. 27. In the facts of the case before Cochin Bench of Tribunal, the remuneration was also fixed at prescribed rate on turnover as referred to in para 16 of the decision. 28. Next aspect of the issue, where the payments have been made to TACO, on which taxes have been paid by TACO, disallowance made in the hands of assessee would result in double taxation. Admittedly, the concern TACO has furnished Nil return of income under normal provisions, but has paid taxes under section 115JB of the Act. The Hon ble Bombay High Court in CIT Vs. Indo Saudi Services (Travel) (P.) Ltd. (2008) 219 CTR 562 (Bom) have considered facts of that case, which read as under:- 3. The relevant facts giving rise to the present appeals are briefly set out hereunder:- (i) The assessee s business is that of being general sales agents of Saudi Arabian Airlines. The assessee earned commission @ 12 per cent from Saudi Arabian Airlines on the tickets booked/sold by them. The assessee appointed several agents including their sister concern, viz., M/s Middle East International and paid incentive commission to such agents, by way of handling charges. (ii) For the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be reasonable by the appellant. (iii) For asst.yrs. 1989-90 and 1990-91 the assessee had reduced the payment of handling charges to 9 1/2 per cent to its sister concern. The AO has considered the payment of commission to the sister concern in the asst. yr. 1989-90 and allowed the claim after due scrutiny. For asst. yr. 1990 -91 also the claim of the assessee @ 9 1/2 per cent has been allowed though the same has not been dealt with by the AO specifically in the order. (iv) For asst.yrs. 1993-94 and 1994-95 the assessment has been made by the AO under section 143(3) and handling charges paid to the sister concern @ 9.5 per cent have been considered to be reasonable and allowed. (iv) The sister concern of the assessee M/s Middle East International is also assessed to tax and income assessed for the asst. yr. 1991-92 is ₹ 9,38,510 and for asst.yr. 1992-93 is ₹ 14,65,880 and the said assessment orders have been placed on record. (v) Under the CBDT Circular No. 6-P, dated 6th July, 1968 it is stated that no disallowance is to be made under section 40A(2) in respect of the payments made to the relatives and sister concerns where there is no attempt to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dled the audit work and in any case the assessee has paid audit fees to external firm. Similarly, the Transfer Pricing Officer was of the view that the assessee had management experts on its rolls, and, therefore, global business oversight services were not needed. It is difficult to understand, much less approve, this line of reasoning. It is only elementary that how an assessee conducts his business is entirely his prerogative and it is not for the revenue authorities to decide what is necessary for an assessee and what is not. An assessee may have any number of qualified accountants and management , experts on his rolls, and yet he may decide to engage services of outside experts for auditing and management consultancy; it is not for the revenue officers to question assessee's wisdom in doing so. The Transfer Pricing Officer was not only going much beyond his powers in questioning commercial wisdom of assessee's decision to take benefit of expertise of Dresser Rand US, but also beyond the powers of the Assessing Officer. We do not approve this approach of the revenue authorities. We have further noticed that the Transfer Pricing Officer has made several observations to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... firmed . All these evidences were before the DRP, but there is not even a w hisper about what was the nature of these documents, why does the DRP find these documents to be not satisfactory, what is the kind of evidence that was necessary to prove the factum of services having been availed, and what precisely is the reason that these documents cannot be relied upon. The soul of an order is in its reasoning, and unless the reasons for coming to a conclusion in the order are not set out, it is not possible to do a meaningful scrutiny of the order, but we find no reasoning at all in the order passed by the DRP. We may in this regard refer to the observations made by Hon'ble Supreme Court in the case of Union of India v. MohanLal Capoor AIR 1974 SC 87, wherein Their Lordships have, inter alia, observed as follows: If the statute requires recording of reasons, then it is the statutory requirement and, therefore, there is no scope for further inquiry. But even when the statute does not impose such an obligation it is necessary for the quasi-judicial authorities to record reason as it is only visible safeguard against possible injustice and arbitrariness and affords protection ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orders of authorities below in invoking provisions of section 40A(2)(a) of the Act. Accordingly, we modify the order of CIT(A) and direct the Assessing Officer to allow the expenditure in totality in the hands of the assessee as the said expenditure has been laid down in terms of the agreement agreed upon between the parties and is for carrying on of the business of the assessee more efficiently and is allowable as business expenditure. The grounds of appeal No.2 and 3 raised by the assessee are allowed and ground of appeal No.2 raised by the Revenue is dismissed. 16. Admittedly, the issue arising before us is identical to the issue before the Tribunal in Tata Johnson Controls Automotive Ltd. Vs. DCIT (supra) and following the same parity of reasoning, we hold that the said expenditure is to be allowed in entirety in the hands of assessee being paid in accordance with the terms of the Agreement agreed upon between the parties and for the purpose of carrying on the business of assessee more efficiently. It may be pointed out herein that the assessee had initially entered into an Agreement with TACO in 1997 and the said expenditure had been allowed in the hands of assessee fro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for CFD Analysis. The CFD analysis was done for testing of flow through heat exchangers manufactured by the appellant under computer aided simulated conditions and to find out whether the product manufactured by it complied with the parameters laid down by the customer of the appellant. The engineering services provided for CFD analysis of under hood components also include software tools which provide enduring advantage to the appellant over a period of time and therefore, the expenditure incurred by the appellant for engineering services from CSM is rightly treated as capital expenditure by the Assessing Officer and depreciation was allowed at the rate applicable to software. 22. The assessee is in appeal against the finding of CIT(A). 23. The learned Authorized Representative for the assessee drew our attention to the copies of invoices placed at pages 197 and 198 of the Paper Book and pointed out that the assessee had not acquired any tools. However, the said concern while providing services to the assessee, had used tools and hence, expenditure was not capital expenditure. Reliance in this regard was placed upon the decision of Hon ble Bombay High Court in CIT Vs. Ray ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... more efficiently or more profitably, then such package software was not in the nature of profit making apparatus, and software expenditure was allowable as revenue expenditure. Though as mentioned by us in the paras hereinabove, the assessee had not acquired any software package, but had utilized the services of another concern, who in turn, has utilized its software to carry out the job work of the assessee. Following the principle laid down by the Hon ble Bombay High Court, we hold that in the alternate, in case the expenditure is said to be on acquisition of software package by the assessee, then the same is allowable as expenditure in the hands of assessee. Accordingly, we hold so. We direct the Assessing Officer to allow the expenditure of ₹ 26,50,000/- as revenue expenditure. The ground of appeal No.3 raised by the assessee is thus, allowed. 26. The issue in ground of appeal No.4 raised by the assessee is against the disallowance of expenses on repairs to building amounting to ₹ 11,85,657/-. 27. The perusal of the assessment order reflects the break-up of sum of ₹ 11,85,657/-, out of total debit to repairs to building account of ₹ 29,51,934/-. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e paid to Sun Interiors. The CIT(A) has given a finding that the amount was incurred for construction of scrap yard at new location and where the amount has been spent for bringing into existence a new asset, the same is definitely capital expenditure and is to be disallowed in the hands of assessee. 33. Now, coming to the stand of the learned Authorized Repr esentative for the assessee before us that, the Assessing Officer had disallowed sum of ₹ 4,42,775/- as against the expenditure considered by the CIT(A) at ₹ 4,59,804/-. The perusal of the details at page 27 of the appellate order reflects that the total of ₹ 4,59,804/- is including VAT. As referred to by us in the paras hereinabove, the assessee has booked the expenditure under the respective heads and any other levies or taxes have been booked by the assessee under separate heads. During the course of hearing also, the learned Authorized Representative for the assessee was asked to explain in this regard. Where expenditure is being disallowed in the hands of assessee, then even the said levies i.e. including VAT, Education Cess, etc. is to be disall owed in the hands of assessee. Accordingly, we find no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... remittance of ₹ 1 lakh. Since the assessee had paid the above two installments to the Sales Tax Department under protest and where the issue was eventually decided in favour of the assessee and the demand raised was cancelled, the CIT(A) was of the view that the liability was only a contingent liability and the same could not be allowed as deduction under section 43B of the Act or otherwise. 39. The assessee is in appeal against the order of CIT(A). 40. The learned Authorized Representative for the assessee pointed out that even under the provisions of section 43B of the Act, irrespective of the year to which the Sales Tax demand relates, the same is allowable in the hands of assessee only on payment. Since the assessee for the year under consideration has paid the above said amount, hence, the same was allowable in the hands of assessee. 41. The learned Departmental Representative for the Revenue placed reliance on the order of CIT(A). 42. We have heard the rival contentions and perused the record. The issue arising before us is in relation to the amount paid by the assessee to the Sales Tax Department against disputed demand relating to the year 2001-02. The ye ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... quiry, the learned Authorized Representative for the assessee stated that the amount of incentive paid to the employees after signing of tax audit report, but before filing the return of income, was claimed as deduction on payment basis. Since the assessee had failed to furnish any proof of payment, the Assessing Officer disallowed sum of ₹ 32,69,953/-. 45. Before the CIT(A), the assessee has raised two contentions that the provisions of section 43B of the Act were not applicable to the performance incentive paid by the assessee. Further, it was pointed out that sum of ₹ 32,69,953/- was paid before the date of filing the return of income and hence, same was allowable. The CIT(A) vide para 9.3 at page 36 of the appellate order noted the contentions of assessee and also the details furnished of payment to employees, which in turn, was appended as Annexure A to the appellate order. The CIT(A) was of the view that the details furnished by the assessee requires further verification with reference to relevant bank account extract of the assessee. Since these details were not furnished before the Assessing Officer, the CIT(A) directed the Assessing Officer to verify the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ar. However, in the proviso, it is further provided that in case the said amount is paid on or before due date of filing the return of income, then the same may be allowed as deduction in the hands of assessee. Under section 36(1)(ii) of the Act, it is provided that deduction on account of sum paid to an employee as bonus or commission for services rendered is to be allowed as deduction while computing the income under section 28 of the Act. In the facts of the present case before us, the assessee claims to have paid performance incentive to the employees which is covered by the term commission for services rendered and hence, we find no merit in the claim of the assessee in this regard. 50. Now, coming to the second aspect of the application of provisions of section 43B of the Act, we find that the CIT(A) has already directed the Assessing Officer to allow the claim of assessee after verification, in case the amount due to the employees has been paid by the assessee before due date of filing the return of income. The CIT(A) has directed the Assessing Officer to verify the said claim by seeing bank entries in the hands of assessee. We find no error in the said directions given b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lization charges amounting to ₹ 14,62,772/-. In view of the concession of the learned Authorized Representative for the assessee, we decide the present issue against the assessee, in turn, following the principal laid down by Special Bench of Tribunal. The ground of appeal No.4 raised by the assessee is thus, dismissed. 60. The issue in ground of appeal No.5 is with regard to the provision made on account of repairs to building amounting to ₹ 29 lakhs. 61. The Assessing Officer had disallowed the said provision made, which was confirmed by the CIT(A). The assessee before us has not furnished any details in this regard and in any case, provision made for the repairs is not allowable as expenditure in the hands of assessee. Accordingly, we confirm the disallowance of ₹ 29 lakhs and the ground of appeal No.5 is dismissed. 62. Now, coming to the appeal in ITA No.1649/PN/2013 relating to assessment year 2009-10. Besides the common grounds of appeal, the Revenue has also raised ground of appeal No.3, which reads as under:- 3. On the facts and in the circumstances of the case learned CIT(A) has erred in deleting the disallowance of ₹ 3,61,000/- and &# ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uthorized Representative for the assessee on the other hand, has referred to the Paper Book at serial Nos.10 and 11, wherein it is mentioned that the copy of details were submitted before the learned Addl.CIT for rent expenses in relation to repairs to machinery and in relation to selling and distribution expenses. All these details are furnished at pages 81 to 100 of the Paper Book. However, at the end of index, the assessee while certifying as to whether the documents attached in the Paper Book were furnished, has certified that pages 1 to 100 are filed before the CIT(A). The perusal of the details at pages 81 and 98 of Paper Book does not reflect whether these details were filed as no covering letter of furnishing the details before the Assessing Officer has been filed. In this regard, it is not clear as to whether the evidence has been filed before the Assessing Officer and in view of categorical order of the Assessing Officer that the assessee has failed to furnish the aforesaid details before him, we find merit in the claim of the Revenue. Under the provisions of Rule 46A of the Rules, the CIT(A) is empowered to admit additional evidence, however, with restriction that the sa ..... X X X X Extracts X X X X X X X X Extracts X X X X
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